Tag Archives: U.S. Securities and Exchange Commission

Too Big To Jail

One might certainly wonder what the EU regulators want to achieve with their  probe into the big global bank’s shady CDS activity. They can’t launch a criminal investigation anyway. The banks in question – once “too big to fail” – are also “too big to jail”.

Credit rating agencies would weigh in with ponderous warnings, which would scare sources of capital from participating.”

As pointed out in my last post, I’m not sure what’s really going on with the European Commission and the launching of two separate probes into the shady CDS trading of 16 major global banks. Perhaps they’re trying to fill up the bailout-bin with some juicy cash settlements?

That is acctually all the EU Commission can hope for.
Whatever the findings of the CDS investigation might be, there will never be a criminal case against banks like Goldman Sachs, JP Morgan Chase or Bank of America.
Never.
It’s exactly one year since the US Security and Exchange Commission charged Goldman Sachs with fraud related to the subprime disaster.
Two months later, Goldman and the US authorities agreed on a cash settlement of USD 550 million, or – roughly – equal to 3,4% of the banks bonus pool…
And this was supposed to be the biggest crackdown on financial crime – ever!
All the major banks have been facing similar or other criminal charges, but none – I repeat; none – have so far been given more than a slap on the wrist and a cosy little fine.
Unfair? Absolutely. But the fact is, however, there’s nothing else to do.
As Robert Lenzner at Forbes.com points out; a criminal  case would threaten these banks status as an authorized dealers in government securities and would in effect put such a cloud over its role in  buying and selling US Treasury securities that it would damage that gigantic and  crucial marketplace.
Besides, a criminal case, before it was tried or settled, would severely hinder the banks’ ability to borrow money in global markets, as many financial institutions would place it on a restricted list.
“Credit rating agencies would weigh in with ponderous warnings, and most likely scare sources of capital from participating,” Lenzner writes in his comment on the latest Goldman-bashing by the US Senate.
And this, in turn, would drastically reduce these banks ability to trade corporate debt, common stocks, currencies or commodities.
This process would feed on itself even before any sense that the firm was criminal or not.
Additionally, the central bankswould become quite wary of having any of these firms as a counterparts on any transaction.
So would all other market participants.

About 90% of all the derivative transactions in the world are handled by these firms with each other as the counterparts.

And now we have a handful of US banks that are “too big to jail,” a bunch of European banks that are “too stressed to test” and those who once was classified as “too big to fail” are now labeled as “systemically important.”

Honestly? I’m deeply impressed!



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US Hedge Funds Raising Bets On Recovery, Ditching Gold

US hedge fund managers are still keeping the champagne on the cooler as they’re now raising bets on the US economic recovery, the latest flow report by TrimTabs/BarclayHedge show. About 23% aim to increase leverage in the coming weeks, the largest share since May, while only 12% plan to lever down. The survey also reveal that the fund managers see precious metal as the most overbought asset class, and are turning to bonds and US dollar.

“Hedge fund managers are bearish on Treasuries and worried about public deficits, while mom and pop poured a gargantuan $641 billion into bond funds between January 2009 and October 2010.  These are just a few of the reasons why we believe bonds are in the beginning stage of a secular bear market.”

Vincent Deluard


The sophisticated investors are using all kinds of measures to pinpoint the next directions of the markets. Like the statistics for search word on Google.  According to Executive Vice President Vincent Deluard at TrimTabs, has searches for “economic depression” plummeted in the past 18 months, while searches for “double-dip recession” have virtually disappeared since August 2010 and searches for “green shoots’” spiked in January.

Hedge fund managers are upbeat on US equities but less bullish than a month ago, according to the TrimTabs/BarclayHedge Survey of Hedge Fund Managers for January 2011, released yesterday.

About 37% of the 91 hedge fund managers the firms surveyed are bullish on the S&P 500, down from 46% in January, while 26% are bearish, up from 19%.

“Less upbeat forecasts are somewhat surprising in that hedge fund managers performed exceptionally well in the final four months of 2010,” says Sol Waksman, founder and President of BarclayHedge in a statement. “Nevertheless, the January bullish reading is the second-highest since the inception of our survey in May 2010, while the bearish reading is the second-lowest.  Hedge fund managers still have plenty of skin in the game,” he adds.

Hedge fund managers remain downbeat on the 10-year Treasury note, although they are less bearish than a month ago, while they shifted to neutral from bullish on the US dollar index.

A net 8% of managers aim to increase leverage in the coming weeks, down from 11% last month.

Meanwhile, a host of other sentiment gauges reveals that investors of all stripes are especially bullish on domestic stocks.

“Even Google search trends underscore the expectation of higher stock prices and stronger economic growth,” Vincent Deluard, executive vice president at TrimTabs, notes.

“Searches for “economic depression” plummeted in the past 18 months.  Also, searches for “double-dip recession” have virtually disappeared since August 2010, when the FED announced QE2, while searches for “green shoots” have spiked in January.”

The share of managers that cites large public deficits in the US as the biggest risk to global economic growth  – 33% – is identical to the share that cites sovereign debt problems in Europe.

Also, 41% of managers do not know what to expect from the Fed in the wake of QE2, but 67% expect bond prices to fall after it ends in June.

“Policymakers have proven wildly successful at keeping market participants guessing about what they will do after QE2 ends,” Deluard says.  “But we feel another round of QE is unlikely to alter the bond landscape.  Yields across the curve stand between 30 and 100 basis points north of the 2010 lows despite heavy Fed Treasury purchases.  Hedge fund managers are bearish on Treasuries and worried about public deficits, while mom and pop poured a gargantuan $641 billion into bond funds between January 2009 and October 2010.  These are just a few of the reasons why we believe bonds are in the beginning stage of a secular bear market.”

This is the main findings in the first hedge fund survey of the year:

1. Hedge fund managers have turned very upbeat on U.S. equities. About 46% of the 92 managers we • surveyed in December are bullish on the S&P 500, while only 19% are bearish. These readings are the highest and lowest (respectively) since the inception of our survey in May.

2. A host of other sentiment gauges – the Merrill Lynch Bank of America survey of institutional investors, • the AAII survey of retail investors, the Investors Intelligence survey of investment advisors, and the VIX – show that investors of all stripes have turned extremely optimistic on domestic stocks.

3. Forecasts for the 10-year Treasury yield and the U.S. dollar index reflect the expectation of a strong • economic recovery. About 54% of hedge fund managers are bearish on the 10-year note, while only 14% are bullish. These readings are the highest and lowest (respectively) since May. Meanwhile, about 39% of managers are bullish on the greenback, while only 13% are bearish. These readings are also the highest and lowest since May.

4. Hedge fund managers reveal that they plan to bet aggressively on the economic recovery. About 23% • aim to increase leverage in the coming weeks, the largest share since May, while only 12% plan to lever down.

5. Managers expect Treasury yields to keep increasing. Only 11% think yields will not continue to rise, • and 42% expect them to increase the most at the long end of the curve. About half (46%) of managers attribute higher yields to expectations of higher inflation and stronger economic growth. Only 4% cite the debt implications of the Bush tax cuts.

6. Hedge fund managers cite precious metals (32%) as the most overbought asset. Emerging markets • equities and Treasuries (23% for each) are tied for second. We are a little surprised to see precious metals top the list because inflation expectations are still high and mutual fund flows suggest bonds and REITs are much more overbought than metals.

Signs of Complacency?

Multiple sentiment gauges show that investors of all stripes have turned extremely optimistic, the report says.

A net 16% of the 302 institutional investors surveyed by Bank of America Merrill Lynch in December are overweight U.S. equities.

In addition, 44% believe global growth will prove stronger in 2011, up from 35% in November and 15% in October. Investors Intelligence reports that 56.8% of advisors are bullish, the highest level since the market top in October 2007 and nearly triple the 20.5% who are bearish.

The American Association of Individual Investors reports that “mom and pop” are bullish to the tune of 50.2%, nearly double the bearish figure of 27.1%. Meanwhile, the VIX tumbled to 16.11 on December 17, the lowest level since April.

Let me just remind you of Bob Farrell’s famous 10 rules of investing, rule number nine; “when all analysts agree, the opposite is going to happen.”

 

Anyway – the hedge fund Managers reveal they plan to bet aggressively on the economic recovery.

About 23% aim to increase leverage in the coming weeks, the largest share since the inception of our survey in May, while only 12% plan to lever down.

However, the most interesting finding in the January hedge fund survey is perhaps the fact  that most managers see precious metals, like gold, as the most overbought asset class at the moment.

(And here’s a copy of the report.)

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At The End of Another Decade

New Years Eve 2010 (around midnight): It’s not only another year, it’s also the beginning of a new decade. Looking back at the past 10 years, the stage is set for a mind-blowing decade of technological breakthroughs that have the potential to change or lives completely. unfortunately, we’re probably also in for a long period of financial instability and high levels of unemployment.

“It is possible that we are facing one of the most important decades in a very long time.”

econotwist


I remember New Years eve of 2000; dot-com-mania, emerging markets,Y2K. However, I also remember 1990; deregulation, digital revolution and another collapse in our financial system. I think I’ve detected two major screw-ups over the last two decades.

I covered the stock market crash in 1987, as one of my first assignments as a financial reporter.

By 1989 economists and politicians had declared the troubles were over, the major  global economies was back on track, producing new jobs.

In my mind, the most memorable from headlines from 1991 was delivered by the Swedish newspaperDagens Industri.”

Like the page 2 editorial:

“Dear God, please cool down our economy.”

And the – now historical – headline from the day the Swedish bank central bank kicked up its key interest rate to 500%:

“Good Night, Sweden”

This was about six months before the crisis hit the Scandinavian banks like a Norwegian heat-seaking Penguin missile, and forced the governments in both Sweden, Denmark and Norway to take public control over the private banks.

They were downsized, sliced up, sold out and merged, and the result was five, six   major banks who orderly divided the Nordic home markets between them, and have so far managed to keep any serious competition out of the region.

All three governments still holds significant ownership in the Nordic banking sector.

The Scandinavian banking crisis was recently held up as an example on how to handle a crisis in the financial industry.

Well, we now have five or six banks in three small countries that have become so “systemically important” that they are “too big to fail,” and will have to be bailed out of “no matter what.”

On a global scale; the creation of financial companies that are of “systemically importance” so they cannot be allowed to default must be (at least one of the) “Biggest Screw-up of the Decade – 1990/2000.”

As for the decade now ending, not keeping up with the developments in the financial industry, allowing it to become an invisible, almost uncontrollable, monster, and not putting a stop to it, is a really heavy regulatory blunder.

In the aftermath of 2001, several financial companies and their executives were accused or convicted of fraud for misusing shareholders’ money, and the U.S. Securities and Exchange Commission fined top investment firms like Citigroup and Merrill Lynch millions of dollars for misleading investors.

Thinking back, it seems like we’ve been moving around in a circle.

Systemically we’re right back where we was in 1992, financially we’re in even deeper trouble.

The new international regulations, as they emerge in the final reports from the Basel Committee (Basel III), doesn’t provide anything that will make any significant and systemically changes.

So, my guess is that we’ll have to struggle with a dysfunctional financial market, debt and “systemically important”banks for still a long time – perhaps another decade.

Sadly, this means that the much debated economic recovery, in form of a helluva lot of new jobs, probably not is going to happen anytime soon.

I’m afraid it could take about another decade to get where we would like to be last year, in terms of labor market conditions.

But I’m also sure the next decade will bring a boom in one particular sector:

On this new years eve, we have more people using Facebook than Google, 60.000 new pieces of malware released on the internet every 24 hours and the banks are setting up high frequency information systems, with super fast connections from major central banks, financial authorities and government offices directly into their high frequency trading machines.

It’s all set for another golden age for computer engineers.

As far as the financial industry goes, it reflects the new market conditions imposed by law makers worldwide.

It’s not that amusing to engineer new financial derivatives, so the focus have shifted to the technical side.

The danger is that the financial markets grows even more complex and unpredictable, tied together in an unofficial, unregulated intranet of dark fiber cables.

And this goes beyond the markets and the economy.

Judging by the rapid pace of development over the last 10 years, the next 10 is definitively not gonna be slower.

With the so-called quantum computers just three to five years away, the computer technology, and our whole way of life, is destined for another evolutionary quantum leap, practically.

It is possible that we are facing one of the most important decades in a very long time.

I wish you all the very best.

Happy New Year!

PS:

I’d like to add a special greeting to all new readers/follower in 2010. Thanks for all your encouraging comments.

This summer the econotwis’t blogs (Swapper and Econotwist’s) blasted above  20.000 unique readers per month.

Many of you follow my Twitter, and I’m specially honored to welcome among my followers; the State of Israel, US Homeland Security and the EU Council.

Now that I got your attention; will you please tell the State of Kuwait to stop trying to hack into my computer!?

.

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