Shorting America

Ain't that a kick in the head.
-- Dean "Dino" Martin

The FT has an Op/Ed by Dino Kos about shorting(betting against) US Treasuries. Mr. Kos asks, "Should traders and investors short the US Treasury market?" He briefly lays out the pro-case, but then spends the rest of the article making the con-case, concluding the time's not yet right, at least as Dino states in "the medium term." And for Dino, the medium term is the "next several quarters." Webster defines several as, "more than two but fewer than many." So, lets say Dino's giving us three or four quarters, Phew, being able to rely on stable money for only three or four quarters ain't much of a way to run a railroad, or country for that matter, nonetheless.

So why does Dino, get to speculate on US creditworthiness in the FT? Well, he worked for the Fed, the Reserve Bank of New York no less. In fact, his resume shows he went to work for the Fed in 1985, that would be right before the Fed's salad days and the splendorous papal reign of Mr. Greenspan. Dino's bio shows a curios timing, he left the Fed in the summer of '07, right when things began to get interesting. When he left, Dino was the Executive Vice President of the Market Groups with "responsibility for all the trading activity of the Federal Reserve including repo, government securities, foreign exchange and foreign reserves management." Upon his hiring in '07, Morgan Stanley stated, “Dino’s extensive experience in this market, combined with his proven leadership abilities, will enable him to make a significant contribution to the growth of our business as we further develop our Central Bank and Sovereign Wealth Fund capabilities."

Now today, Dino opines on US creditworthiness and the dollar, one would certainly want to know what his thoughts on the matter were in 2007. Did he flee the Fed cause he was worried about the future workload? Remember, when Dino left the Fed their balance sheet was at $800 billion, a little over a year later it would be over two-trillion! Since Dino left, they've been some trading S-O-Bs down there at the Fed. Or was he just leaving in that grand American Wall Street tradition of cashing in on his years of public service? Whatever the case, his tenure at MS wasn't long and now he's an analysis at Portales Partners, which doesn't seem as heady as Managing Director and Head of Central Banks and Sovereign Wealth Funds at Morgan Stanley.

I don't mean to be picking on Dino personally here, he's probably a swell guy, but we need to understand the background of the folks out there these days putting the dollar and other global currencies into play. How do you run a country in any long term capacity if you can't have stable money supply? We've been in Afghanistan and Iraq for almost ten years now, how do you run a war if you can't rely on stable money? Or better, how do you build energy or transportation infrastructure? How do you listen to a guy who was at the Fed when policies were predominately for the overwhelming benefit of quarterly Wall Street profits, undermining the long term sustainability of the American economy?

liberalism

Michael Sandel has a short, but excellent, post on liberalism. He gives a brief history of liberalism in the 20th century, though leaving out the story of its abandonment by many after its association with Michael Dukakis in 1988. However, the most important shift in the definition of liberalism occurred in the 1930s. The New Deal reforms abandoned one of the most important tenets of the American system, the Jeffersonian principle that democracy was inherently decentralized. Sandel suggests, and I think quite rightly, we must re-embrace this principle if we are to effect reform of our political economy.

With the growth in power of the major industrial corporations at the turn of the 19th and 20th centuries, a major liberal/progressive response was to break them up. Louis Brandeis became a major advocate of bringing Jefferson's 18th century thinking on the undemocratic nature of concentrated power into the 20th century. Brandeis referred to it as "the curse of bigness". Anti-trust, the breaking up of the new corporate structures, never gained much power, but as Sandel points out, after a brief flirtation, the New Deal abandoned anti-trust and what emerged was a hybrid-balance between, big government, big labor, and big corporations. Over the years, big corporations took over big government, destroying big labor. Today's liberals cling to the notion that somehow they are going to get bigness to work.

One of the reasons our American politics and government is dysfunctional is because power was never meant to be so concentrated. Power from the beginning was checked and balanced, separated, and distributed not just in the three branches of the federal level, but also from the federal level with power in the states, and separated and balanced from the states with power in the counties and local governments, and finally from the county and local with power in the individual. The evolution of power across the 20th century was the antithesis to this system, with ever greater concentrations of power in DC and our mega-corporations. In part, the system isn't working because it was never designed to work like this in the first place.

We need to reform our political economy and the only way we're going to do that is by breaking-up power. We need to revitalize the American system by embracing the notion of equality and distributed power. Most interesting, over the last few decades, we have learned more about the ability to sustain order from the bottom up using distributed networks. The Internet is the best example, showing distributed networks can be very stable, distributing power as opposed to hierarchical centralization. In many ways, this is not in anyway foreign to the first American system. In reforming our political economy, it would serve us well to think about how we revitalize the American system, at the same time evolving it for the 21st century.

Econned

The result has been a massive transfer of wealth, with its centerpiece the greatest theft from the public purse in history. This campaign has been far too consistent and calculated to brand it with the traditional label, “spin”. This manipulation of public perception can only be called propaganda. Only when we, the public, are able to call the underlying realities by their proper names—extortion, capture, looting, propaganda—can we begin to root them out. -- Yves Smith, Econned

When we dropped political from economy, we made a grave and what might prove fatal error. We made the republic subservient to mega—corporations and allowed the dominance of crackpot pop-economic theories to trample over the millenia-old hard won wisdom of self-government. For example, how many economic theories have been written on the importance of the First Amendment's freedom of the press to the vitality of the American political economy -- not many, if even one?

Yet, a vigorous free press is essential to every aspect of American prosperity. So, as our newspapers folded and consolidated and our broadcast media became handmaidens to corporate power, we witnessed a tremendous decline in journalism, particularly investigative journalism, which had a long and important tradition in this republic's vitality. The mother of investigative journalism, particularly concerning corporate power, is Ida Tarbell, who a century ago wrote, The History of the Standard Oil Company, documenting the manipulations, thefts, grafts, and other criminal activities of John D. Rockefeller and his cohorts in their monopolization of the oil industry.

While we have lost the great tradition of a hearty journalism in our old media, it is rising again across the new medium of the Internet, and it has been utilized in helping shed light on the underlying scandal of the financial crisis. In the tradition of hard hitting, no bullshit investigation, Yves Smith has written Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.

Econned is the story of how our financial system has become a mass ruse, allowing Wall Street and the largest banks to become predatory, treating their clients as lambs to be fleeced and fatted calves to be slaughtered. It is the story of how a very small group of people gained complete control over the American, and much of the global economy, driving it into the ground, then walking away with trillions of more dollars, while the economy remains on life-support.

How did this happen? Econned tells the story, starting with the greatest problem of contemporary economics, an economics stripped of politics, so it might pretend to be a science. Smith goes through the litany chanted by our economic priesthood for the past several decades – efficient market theory, free markets, and mathematically modeling the future – the equivalent of economic hokum that allowed Wall Street and the banks to dismantle New Deal regulations which kept their worst abuses in check for a half-century.

Once establishing the intellectual foundations, Smith explains the great scaffolding of fraud erected on top of it. She documents the roles of Bankers Trust, Salomon Brothers, JP Morgan, Citi and others as they “innovated” their way out of regulation and into their clients' pockets with derivatives, securitization, and other “efficiencies.” All along, right beside them, stood our elected officials and regulators, such as Fed Chiefs Greenspan and Bernanke, Treasury Secretaries Baker, Rubin, Summers, and Paulson, SEC chiefs, congresspeople, and presidents -- all co-conspirators.

In the final third of the book, Smith details the pinnacle of the great con and how it all came crashing down. Then, the government stepped in to help an orderly looting of the public purse worth trillions of dollars and counting, thus insuring a crippled economy for many years to come.

Econned is an excellent read and needs to be read by all. It is the story of a criminal class, who have separated themselves from the majority to seek their own profits. It is the story of how our political economy is broken. In the end, it is a call to the American people, in the great tradition of this republic, to step-up and fix it. Yves Smith is a citizen and patriot, she deserves our gratitude.

make markets be markets

Wednesday, I attended a conference initiated by the Roosevelt Institute on the financial mess. The conference's speakers included people with experience on Wall Street, the banking industry, government and academia. At two and half hours, it was relatively short, giving each speaker the opportunity to make their points and providing a sharp focus. One underlying theme of the event was fraud, the great elephant in the room, that neither the press or our government officials acknowledge, though it is a fundamental element to the financial crisis and its solutions.

Joe Stiglitz started the conference and stated how reducing transparency and hiding information was an essential element to the crisis. Stiglitz concluded, "Innovation was regulator and tax arbitrage." Wall Street and the banks deliberately added opacity and complexity to confuse clients and consumers. Elizabeth Warren pointed out, “complexity made a lot of profits," for example, she showed how the average credit card contract in 1980 was one page, today it is thirty.

This opacity and complexity helped make the financial industry predatory against their clients and customers. Not only did government regulatory agencies fail in stopping this confidence game of historical magnitude, but so did markets. NYU's Lawrence White pointed out the credit agencies such as Moody's and S&P, whose role is to provide independent analysis, essentially became co-conspirators as their business model changed from being paid by investors to being paid by the Wall Street issuers, making it against their interests to issue dour ratings on investments.

The only truly rigorous aspect of economics is accounting. It's no surprise that as the banks and Wall Street sought opacity and confusion through complexity, their greatest target would be the accounting system. There were various elements of "accounting innovation", but the largest, most notorious, and completely incredulous was the practice of "off balance sheet" accounting. One of the greatest elements of this off-book accounting was secularization—simply, the practice of taking existing debt, be it mortgages, student loans, or even credit card debt, bundling it together, then selling it as a completely different product. Josh Rosner, who called the Fannie and Freddie accounting scandal in 2001 and the housing peak in 2005 stated:

"Poorly developed and opaque securitization markets drove excess liquidity and irresponsible lending and borrowing...securitization markets too often operate in a "Wild West" environment where the rules are more often opaque than clear, standards vary, and useful and timely disclosures of the performance of loan level collateral is hard to come by. Asymmetry of information, between buyer and seller is the standard."

While Mr. Rosner pointed to the problems of securitization, Frank Partnoy went after the greatest scam, the derivatives markets. Mr Partnoy pointed out there is currently $600 trillion in derivative positions on a global economy of $60 trillion. Derivatives are another off-balance sheet innovation, in which speculators may take pure gambling positions, allowing them to take positions on matters in which they have no stake. It was in paying-off derivatives that a $185 billion of tax-payer money flowed through AIG. Today, then New York Fed head Timothy Geithner, Treasury Secretary Hank Paulson, and Fed Chair Ben Bernanke all claim they didn't authorize this payout, the check seemingly magically sent.

To make his point even clearer, Mr. Partnoy put up Citi's official balance sheet, saying it was a "fictional balance sheet", representative of an industry in which financial innovation made the most basic accounting, the one thing which can offer real insight into a company's health, just another part of an elaborate scam.

Michael Greenberger of the University of Maryland made the important point that most of what we all call financial innovation is simply the resurrection of many old practices, outlawed in the 1930s, now dressed in new garb. He pointed specifically to the 1936 Commodities Exchange Act as representative of all New Deal financial reform. It insured transparency, open exchanges, anti-fraud, and anti-manipulation. He contrasted this to the 2000 Commodities Futures Modernization Act which gave modern derivatives and open field. Greenberger noted the Act was supported vigorously by then Fed Chair Alan Greenspan, SEC Chairman Arthur Levitt, and Treasury Secretary Larry Summers. The law turned derivative markets into history's largest casino and its proponents knew exactly what was coming and preempted state gaming laws, thus derivative gambling could be completely unfettered.

Rob Johnson of the Roosevelt Institute was the last speaker and talked about the final arbitrage, which is "too big to fail." It is the arbitrage of the republic by looters who have created a system so rife with fraud that it brought down the American economy, throwing millions out of work, paying the very perpetrators trillions of dollars and counting. These very same people bought and sold our elected officials so often in the past several decades, that today DC might very well be deemed the one functional market. You actually get what you pay for.

The conference put out a very excellent report available here. If we're going to get our economy up and running again, the first thing we're going to have to do is end the fraud.

as the debt world turns

The UK Telegraph has an interesting article(tx pat) on the thoughts of Mr. Dimon of JP Morgan:

Mr Dimon told investors at the Wall Street bank's annual meeting that "there could be contagion" if a state the size of California, the biggest of the United States, had problems making debt repayments. "Greece itself would not be an issue for this company, nor would any other country," said Mr Dimon. "We don't really foresee the European Union coming apart." The senior banker said that JP Morgan Chase and other US rivals are largely immune from the European debt crisis, as the risks have largely been hedged.

Oh California! The state and local governments are going to soon run out of things to sell, what then? Of course, the more interesting note is Mr. Dimon says their risk on Europe is hedged. We saw how that worked over the past two years, you dear tax payer are the final hedge. Now Goldman has taken a lot flack, but Morgan is more culpable. They are the derivatives factory that helped pump the debt bubble to its greatest girth. I did like how a couple weeks ago at the Financial Commission, Mr Dimon sat back and let Mr. Blankfein do all the talking, "You tell em LLoyd!" Smart.

Meanwhile, Bill Gross has his latest financial outlook up and he writes:

Twenty years of accelerated globalization incrementally undermined the real incomes of most developed countries’ workers/citizens, forcing governments to promote leverage and asset price appreciation in order to fill in what is known as an “aggregate demand” gap – making sure that consumers keep buying things. When the private sector assumed too much debt and asset prices bubbled (think subprimes and houses, or dotcoms/NASDAQ 5000), American-style capitalism with its leverage, deregulation, and religious belief in lower and lower taxes reached a dead end.

People like Bill Greider and others have been writing this for twenty years, while people the debt peddlers have been advocating the win, win, win situation of corporate globalization. Now the writing is on the wall and PIMCO and the rest of the debt aristocracy want all the debt they sit on and they no business peddling in the first place made good.

Mr Gross' piece does a good job in laying out the parameters of the current debate on debt. Simply, one side says its time for the profligates to meet austerity and repent by spending the next twenty years working to pay their debt down, good for our financial aristocracy anyway. The other side says simply more debt will allow the economy to grow again and eventually make good on the debt. Neither side is very palatable.

Right now we are spiraling down to an ever more simplistic debate on this that will in the end serve no one well. The debt reveals imbalances in the global economy that must be addressed. Mr. Gross is right that the American and global economy of the last several decades is unsustainable, it makes no sense to pile up more debt continuing the status quo. The pro-debt folks are also correct that it makes no sense to simply cut off the blood supply and lose a few limbs to save the body.

We need to split the difference. Call it the new centrism. We need to destruct a great deal of the debt created in the past ten years, we can start with all the derivatives sitting at JP Morgan and write down mortgages, lowering payments to keep people in their houses. Secondly we can create more debt, but it needs to go in transforming the economy down a sustainable path, for example not more money to buy cars, but to build public transportation. The debate right now is about cutting or spending to sustain an unsustainable status quo.

"Markets poised to punish Spain"

Well it's the lay of the land, my son.

The FT warns Spain today as the currency crisis gathers steam. The first paragraph states:

Miguel Angel Fernández Ordóñez, governor of the Bank of Spain, needed only one sentence to summarise the daunting scale of the challenges facing his country. “Unfortunately,” he told a conference last week, “we find ourselves at a historic moment.”

Ain't that the truth. Those who romanticize history too often forget the very heavy lifting involved in epics of change, and for a modern world addicted to convenience, there's the matter of simple fitness in rising to the challenge. The first matter at hand is to begin taking off the blinders and destructing the myths which have led us to down a path that has come to an end. Unfortunately, it doesn't look like the FT will be of much help here.

The first myth we need to destruct is the one called "markets", particularly when it is used in relation to the financial system. Some might feel a little indignant that those who created the whole mess, the "financial markets" are now calling the tune for the supposed solutions. Let's understand, the "financial markets" are an extremely small group of institutions. Five giant corporations control the majority of the US banking system, add a few more players, such as Goldman, the Fed, and a handful of institutions in Europe and Asia, and you pretty much have the aristocracy of finance the FT and the WSJ like to call "the financial markets."

Let's remember, in the past two years, the system these institutions created failed at every level, and the only reason any of them exist today is because the massive infusion of your tax dollars that continues to flow into their coffers. So when they tell the little people of Europe and across the globe that's its time for them to live within their means, there really is only one response, "Bullshit!"

Nonetheless, our financial overlords are in full blown hypocritical arrogance. The FT states:

The bad news for Mr Zapatero and other deficit-burdened European prime ministers is that the markets, impersonal yet fickle, do not give a damn about paradoxes or who was to blame yesterday for a problem today.

Yes indeed, the same institutions who over the past couple decades couldn't create enough garbage debt, now want it to be made good. The FT itself, not above editorializing in its stories states:

Spain must, for its own sake and that of the eurozone, implement the measures announced with unwavering determination – and make them even tougher if the recession lasts longer than expected.

At some point, we're going to have conclude the path we've been on for the past couple decades has ended. We have to dethrone our financial overlords and the way to begin doing that is destructing the debt to which they have us chained. Of course, that's only the first step. It also means each of us are going to have to change how we do things. We can do that and still live better, but not the way we do now. Then In the future, people can gratefully romanticize our unfortunate historic times.

Robert Rubin

Robert Rubin is going to be in front of the Financial Commission next week. What can be said? Mr. Rubin has done more damage to this republic than pretty much anyone of the past three decades, and that includes Reagan, both Bush, Greenspan, the Clintons, Rumsfeld and Cheney. He should be on trial, charges: looting of the public purse and treason. Yet instead, he sits upon stacks of money he changed the laws to acquire while holding public office, and his spawn infest our republic's institutions.. Watch Mr. Rubin and keep in mind there's plenty of people serving five to ten for pushing over a gas station or market, Mr. Rubins heist, in the trillions and counting.

Yves Smith, whose important book Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, comes out this week--review soon--puts forth a few of the charges on the long list of Rubin indictments:


Rubin to be Grilled by Financial Crisis Inquiry Commission
Yves Smith

Bloomberg reports that former Treasury Secretary and Citigroup board member Robert Rubin will be summoned before the Financial Crisis Inquiry Commission in April, with Alan Greenspan and Chuck Prince likely to be tapped as well.

On the one hand, it’s a welcome sign that the FCIC will be interviewing many of the major figures responsible for the crisis. On the other, the Q&A format is almost certain to prove mighty unsatisfying. Although Angelides has been more effective a questioner than expected, none of the committee members is a litigator (as in practiced in dealing with witnesses in public forums) and it shows. Imagine what these hearings would be like if David Boies, who was devastatingly effective in the Microsoft antitrust trial, had a go at the likes of Bob Rubin, who bears far more responsibility for the crisis than most realize.

Greenspan, while a key actor, is unlikely to provide new information. He has been grilled repeatedly over his record; he has defended it verbally and in print; he therefore has already been subjected to every major line of attack and has practiced responses. Prince never seemed up to the task of managing Citi; a year into his tenure, he was having difficulty asserting control over the sprawling bank.

But Rubin was either the architect or the moving force behind so many of the flawed policies and practices that fed the crisis that it is difficult to come up with a complete list. For starters, he was an advocate of a finance-centric view of the economy and ultimately of US interests (notice how often trade negotiations have made opening financial markets a priority item. It’s due to the near certainty that American firms would easily secure a significant share. Just look at the inroads they made in the UK and Europe). He was a persistent advocate of a strong dollar policy (and he meant it; his stance represented a 180 degree change from earlier Clinton Administration efforts to weaken the dollar to put pressure on Japan). One of the reasons is that prolonged currency weakness was believed to be unfavorable to the standing of financial centers.

Rubin also pioneered covert banking bailouts. US financial firms were heavily exposed to the 1994 peso crisis. Congress rejected a rescue package for Mexico. Rubin then raided the Exchange Stablilzation Fund, a large kitty created in the Depression and under Treasury’s control, to do exactly what Congress had nixed, which was help the banks (a motive not openly discussed) by assisting Mexico.

Surprising as it amy seem, Rubin also bears considerable responsibility for global imbalances. In the 1997 Asian crisis, Japan wanted to lead a rescue effort within Asia, relying primarily on Asean. Rubin and his protege Larry Summers beat that back aggressively and insisted the IMF lead the rescue efforts (which by the way, all called for greater opening of capital markets, when hot money inflows had been the proximate cause of the Thai and Indonesian booms and busts). And the overly aggressive, inappropriate measures imposed on Thailand, Indonesia, and South Korea left a strong impression on all countries in the region: never never get in the position where you might need help from the IMF. That led them all to peg their currencies low in order to build up large foreign exchange reserves. If you look at charts showing the level of private debt to GDP in the US, the increase goes parabolic starting roughly in 1999.

Rubin was also famously the leader of the successful fight against Brooksley Born’s efforts to regulate credit default swaps.

Yet Rubin somehow has the aura of being untouchable. From Bloomberg:

Rubin, 71, has been perceived as “bullet-proof” because his Citigroup job was “framed as if he was only there to give advice,” said Charles Geisst, author of “Wall Street: A History” and a finance professor at Manhattan College in Riverdale, New York. “Unless they’ve actually got some stuff where he advised on some surreptitious deal that went bad or his advice was purposely misleading, they’re going to have a very difficult time with him.”

Yves here. Ahem, the problem isn’t that there probably isn’t dirty laundry, it’s that Rubin normally limits his interventions to those at a similarly lofty level who will therefore never rat him out. And no one will go in and demand a data/e-mail dump. Rubin did call Treasury to try to get it to intercede to avoid a downgrade of Enron, and the press for the most part politely ignored this hot potato. Similarly, Rubin repeatedly pushed Citi management to take MORE risk in the credit markets. So even the little we can see of Rubin’s record at Citi is far from clean.

Mind you, I am not suggesting he did anything criminal, and that it the problem with the standard that the FCIC and SIGTARP seem to be using. Reader Andrew Dittmer describes why “Were crimes committed?” is the wrong question to be asking:

A substantial fraction of financial services industry activity over the last couple of decades has been directed toward “financial innovation” in the sense of Martin Mayer: “finding legal ways to do things that used to be illegal under the old rules.” The periodic blowups have been dealt with by producing a scapegoat whose misbehavior was so blatant that it could be punished under the criminal code. The result is actually to support a framework in which enormous rewards are granted to people who devote their lives toward freeing corporate organizations from the pain of democratic supervision. I don’t think any compromise is possible on this point – if Congress resolves the tension through symbolically punishing a couple of egregious offenders, that would signify a step backwards on the road towards a non-predatory financial system.

The only way to get out of this trap is to focus attention on what it means to maintain a sector that is addicted to finding ways to turn the rules that bind it into dead letter, and to supplying this skill to others as a paid service.

Yves here. In other words, we need to come up with standards of what should be unacceptable behavior. Rather than focusing on what was legal, which gives an industry that devised overly lax rules an easy out, we need to identify what products and practices were destructive. If they happened to be legal, that is prima facie evidence that we need new rules.