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EYE-BALL Guru on – The GFC … the right of reply … the right to question …

June 15, 2012
The GFC –
… the right of reply … the right to question …
15th June 2012.
The GFC:
The GFC has forced the Global Financial Markets to reset investment decisions, and more importantly – forced investors to change the way they set their parameters and policy when making investment choices.  Within all this altering and mirrored landscape – there are many gaps – and within these gaps all monopolies are doing what they do best – rip off consumers.

The Regulatory Authorities are not even aware of what is happening out there in the real market – they have no idea where to look or to begin to understand how markets evolve and move on.  For the players the GFC was opportunity – for the rest of the world it was devastation, changed lifestyles and forever altered dreams.  Nobody waits for the shock and awe of what the GFC represents, or is now inflicting around the globe.

The catch phrase is – “Money Never Sleeps” – Oliver Stone’s second installment of the “Wall Street” movie series – its full title “Wall Street – Money Never Sleeps” was very apt and he was not wrong.

There has been two movies that have attempted to expose the truth – the other was ‘Margin Call’ released late 2011.  The plot of both these movies – be it via changed names of the major players and instigators of the GFC meltdown – is in how the global financial markets proved they could go a ‘bridge too far’ – that they can and did cause a financial ‘nuclear holocaust’ that the world is now struggling to cope with.

There is no single reason – nor a single person responsible – the GFC was a collaborative effort between Financial Markets and the Regulators who played their ‘cat and mouse’ game – it proved once and for all that the regulators have no idea what is happening out there in ‘money world’.

The GFC has ruined many well respected Regulators – Alan Greenspan the ex Fed Reserve Chairman through the 80’s, 90′, and into the 2000’s is out there trying to convince all and sundry that it was not his fault.  Yet Greenspan as history will expose – was yet another Regulator who thought he had the Financial Markets in the palm of his hand.

He felt that he knew best – yet we all now know that whilst he sat in his ‘Scrooge’ tower playing and pretending at being the Financial Markets God – what was happening on the street was smart and savvy market operators practising and developing financial products that Greenspan had never heard of – nor thought that the markets would develop outside his knowledge or regulatory base.  There were many regulators like Greenspan – all of them bare some responsibility.

All the new derivatives including CDS’s and the like, may have been above Greenspan’s check list – i.e. it was established in the aftermath of the GFC crash that there was no register of CDS’s and all the other ‘swap’ derivatives – nobody had any idea how big this market really was – but in areas where Greenspan should have had base knowledge was in how the Banks were growing their off balance sheet assets, and how the risk profile attached to this growth was at odds with what Banking represents to American and their Global responsibility.

This Regulatory oversite was of their own making – they were aware the Banks were growing their off-balance sheet activities, and as a consequence where their majority of their profits were being derived from.  The first ‘tell’ in this Regulatory responsibility should have been the massive executive remuneration packages being announced, and done so in an egotistical way in that it became a competition between rival Bank executives to strive for bigger bonus to prove better Banking reputations.  The poaching war was on.

It’s a different way of looking at the ’cause and effect’ of the GFC – the warning signals were there all the time and from as early at the late 80’s and early 90’s.

The Regulator’s knew about the growth in the Banks ‘risk profile’ – but as a collective group through G7 Finance Ministers meetings – they all elected to let it go unchallenged.  The general consensus was – ‘what was wrong with ‘smart guys’ making lots of money’ – what harm could they do if everybody was making money … including the Regulators who were profiting for the equity market surge around the globe, and the multiply factor in property.

Nobody stopped to think about who was paying for these excessive and ‘moral hazard’ bonuses’ – or how they were being put together.

The Regulators were asleep at the wheel and in the time since 2008-9 when the GFC first busted itself and began its impact on Global markets – not a single senior Banker has gone to jail or been grilled over the GFC cause and its fallout.  Small fry in the form of Bernie Madoff and other fringe players have been exposed – but mainstream ‘Wall Street’ have been left alone.

This GFC was a long time coming – there were several warnings – market meltdowns in ’87 and the aftermath of 9/11 – were in fact tremors warning of the massive earthquake that was to follow.  Many smart people were fooled and it was all allowed to happen in the name of ‘greed’, and still more ‘greed’.

As this GFC fallout process moves to the next stage of recouping the bailouts – the rest of the world is to pay the price.  It is easy to see who will pay the price.  Yet, the global priority and approach by Governments when the GFC first hit was to bail out the Banks.  Now it is time to pass the cost of the Banks bailout onto the world’s population through Governments recouping the bailout loans via taxes increases and diminishes services as Governments are forced to cut back.

Nations like Greece are but a festered pimple compared with the ‘boil-bursts’ still to follow – whatever happens to Greece you can expect far worse as the GFC impact pushes further into the heart of the Global Financial Markets – Wall Street, London, and the like.

To put things in perspective – Bernie Madoff was sentenced to 110 years for what was a US$ billion dollar fraud of America’s rich and wealthy.  Yet the Goldman Sachs play on the ‘sub-prime’ mortgage securitisation market cost the world many US$ Trillions in real net worth value, i.e. stock market value losses all precipitated as a result of the ‘sub-prime’ ’cause and effect’.

Poor Bernie – all he did was use a Ponzi scheme to strip some greedy rich investors all too lazy to use their wealth and invest in industry to make a bob for themselves – they left it to Bernie to make them richer – in many ways they got what they deserved.  Wealth is a privilege – and it should be used – not tucked away to allow the privileged to live off its interest income.

Who’s paying for the GFC fallout?

Here is a bold statement – the worlds poorest are about to be levied costs and taxes to pay for the mistakes of the worlds wealthiest!

Since the 70’s the consumer cost of doing Banking have risen exponentially.  WIthin the ‘market games’ played between Banks and other Financial Institutions – all the speculative trading over and above normal banking operations amounts to a ‘zero-sum’ game.  If someone wins, then someone else has to lose – the monies won are simply transferred from the Bankers who lost.

In that equation the Banking or Financial Institution who lost tries to recoup their losses from new market trading – but at the end of whatever period – the loses are simply passed on to customers as the wheels of commerce prevail.  As costs increase – i.e. losses are termed ‘costs’ – the price of goods and services has to rise – and so it is for Banks – the very wheels of commerce turn in favour of providers and business who service the public.   This all means that consumer costs to do their Banking rise for every Bank customer around the world.   The increase comes in the form of higher fees, wider spreads on bank transactions, lower deposit interest rates,  higher interest rates on loans, and for existing customers these mortgage increases pressure their loan arrangements undertaken before the new cost increases.

The Banks revenue stream from fees and non-interest income has increased to almost 50% of all Bank revenues since the 70s.

Let there be no mistake – the Banks control the World – Politicians need Banks more than Banks need Politicians.  Without Banks out there lending to create commerce and growth – Government revenues dry up and force Governments into greater borrowing requirements to sustain their economies and that all important ‘growth’ factor as measures against GDP.

The evidence in this Bank dominance is in the proposed second Greek bailout – the Banks who lent to the first bailout package were all about to do their money cold if Greece defaulted.  Enter the 2nd Bailout package structure and it required that the 2nd tranche of Banks bail out the 1st tranche of Bankers as a priority to a much higher value than would otherwise been received.  The Greek politicians have no choice – either agree to the bailout arrangements or see their Nation descend into the Third World abyss of having to survive on IMF handouts.

Enter the 1st Greek election result where the people said ‘fuck-off’ to the proposed bail-out package …

Now the EuroZone ‘management’ for want of a better term, but largely Germany and France – have to convince the rest of the EuroZone to help save Greece.  Every economist, or financial commentator sees no other option to help save Greece – the view is that Greece will be booted from the EuroZone and from there it will be a Nation carve up, and the Greek people will never again be able to look the world in the eyes and claim their historic heritage as an ongoing existence.

Are The BANKS solely to blame?

Did the Banks cause this? The straight answer is no – everybody has the choice to make – do I take the loan under the Banks terms – or do I look for or wait for a better deal.

The ‘sub-prime’ asset bubble burst when everybody took the assets on board basis their yield as opposed to what supported the security.  If anybody looked at the asset and realised what class of mortgage supported the security – they would have been ‘junk-bond’ rated.  Of course Moody’s and the like play their role in rating then ‘AAA’ – and that was criminal in intent, and how bribes were offered and paid for the rating to be confirmed is still to be discovered.  AIG and a few others are all involved and how this ‘ratings’ ranking was achieved will all be revealed at some time in the future.

Again Goldman Sachs will be at the head of that enquiry when it comes to witness lists.  The movie ‘Margin Call’ was all about the GFC meltdown and the ‘firm’ who played god in the markets was based on the actions of Goldman Sachs when they realised that their ‘sub-prime’ market was about to collapse. To prove the mercenary mantra of what makes Goldman Sachs tick – they unloaded these worthless securities on a market and then went short the very same market.  They knew the securities were toxic – and the traders who bought were buried.

All Goldman Sachs did was accelerate the GFC crisis that was coming anyway – maybe a decade away – but the ’87 crash and the fixes applied to fix it so markets could not sell off freely were always going to cause problems down the track.

The bigger and underlying problem attributed to the Banks and the debt they peddle stems from Government tenure and policy that is endemic in all Western Nations.

Liberal/Conservative politics have the reputation of being better economic managers and lean to employers, whereas Socialist/Labour politics are more concerned with social welfare and the employee workforce.  In the last 40 years both sides of Politics have moved towards the middle ground.

However, the scope in how Democratic Politics has mitigated this balancing move toward an ever increasingly educated electorate has been to try and buy votes to retain Government.  The by-product of this very short-sighted election policy sell is that Banks now have a very large say at the table of any Government that is indebted beyond their capacity to repay – i.e. Greece and many more to follow …

Do you think the Banks did this deliberately – by opportunity the answer is YES – by design, the obvious answer is NO – the Governments could have said no to borrowing programs and lived within their means.  This is the problem now facing the largest economies in the World – the USA and the EuroZone – they are so indebted that they are now closing in on the same category as third world economies when it comes to Debt/GDP ratios.

The BANKS were the only concern Governments had when the GFC started – they lent them trillions in cheap funds to stave off Bank failures … this was not a band-aid fix as was the ’87, and 9/11 crashes.  This was heart attack stuff with the risk of survival very low.  This motivated Governments in ways that allowed the Banks to dictate terms – i.e. if we fail it’s all over – these are our demands.  The Banks have controlled the world ever since.

Just how that position is destroyed without sending the world into a decades long depression that would make the 1929 crash and burn look like a picnic – is the global question that no-one has an answer for.

There is a way out!

The word ‘speculation’ is at the grass-root level of why the GFC happened in the first place. Speculation and ‘managed risk’ as Bankers call it – has turned investment decisions into timeframe decisions that the world commerce cannot come to grips with.

Everybody wants the inside scoop – something that will return them 10-20% in days or weeks – annualised into 100’s% … how can a world survive when this speculative drive comes and goes – Nation to Nation across the globe is having its currency hammered and then reversed as global fund managers tort their business around the globe looking for their next ‘quick-fix’.

Its a traders adrenalin rush that has gone amuck … Global Leaders have to get their heads around how to stop this rampant speculation delivering Bank and their off-balance sheet operations massive profits and also exposing then to massive losses.

The recent JP Morgan $2 – $3 billion loss is an example of a ‘punt’ gone wrong. JP Morgan CEO Mr Jamie Dimon – God to most people working on ‘Wall Street’ had to face a Congressional Hearing on the reported losses. This would never have been made public prior to the GFC – it would have been in-house and included in the years result without explanation.

Mr Dimon’s appearance before the Congressional hearing was widely reported – read the ‘Huffington Post’ story here.

It is produced in part below.

Jamie Dimon Avoids Hard Questions At Senate Hearing

| Date: 06/13/2012 | by: mark.gongloff@huffingtonpost.com | Link to On-Line story. |

There were lots of remarkable questions during Jamie Dimon’s Senate Banking Committee hearing — remarkable mainly for how easy people were on the head of the largest bank in the United States.

Dimon was called onto the downy soft carpet of the Senate Banking Committee on Wednesday to explain JPMorgan Chase’s loss of somewhere between $3 billion and $8 billion, depending on who’s counting, in a bad trade on credit derivatives.

In the end, Dimon revealed very little about the trade and not much more about his knowledge of it. He refused to discuss details of it, lest he reveal secrets to competitors — who already know all about the trade and have been hammering JPMorgan on it, adding to the bank’s losses. But the committee didn’t challenge him on that, even after he turned down an offer to close the hearing to the public.

And there were some aggressive initial questions that were not followed up by senators, who had just five minutes each to complete their questioning. Instead, much of the hearing was spent letting Dimon and some Republican senators rail against Congress’ efforts at regulatory reform after the financial crisis. Those reforms include the Volcker Rule, which prohibits banks with federally insured deposits from taking the sort of chances Dimon’s own bank took.

“They had a congressional hearing to find out what happened, and he refuses to tell them,” said Bill Black, an associate professor of economics and law at the University of Missouri-Kansas City. “And they all say, ‘Sorry we even asked you.'”

Preparing questions should have been an easy job for the Senate: In the weeks before the hearing, lots of observers, from the banking-unfriendly (Occupy The SEC) to the banking-friendlier (Andrew Ross Sorkin), had compiled long lists of questions the senators could ask Dimon. Several of those questions were not asked.

For example, nobody asked Sorkin’s question about the bank being “too big to hedge” — which gets to the heart of the Volcker Rule. Dimon argued that banks have to be able to buy credit derivatives to hedge the risks that they take in lending money to support the economy. But as Sorkin points out, JPMorgan’s chief investment office had such a huge position in derivatives that it dominated the market for them, making the hedge impossibly dangerous. If such a massive trade is necessary for hedging, then maybe the bank is a bit too big.

Update: Another big question is why this “hedging” was done in risky, hard-to-trade derivatives, if indeed it was hedging and not just gambling, as Bob Menendez (D-N.J.) put it.

And nobody asked Dimon whether he thought his seat on the board of the New York Federal Reserve, a key financial regulatory arm, is a conflict of interest.

When he was asked tough questions, Dimon did not always give satisfying responses. For example, he never really answered when Sen. Jeff Merkley (D-Ore.) pressed him repeatedly about a Bloomberg report that Dimon said the JPMorgan unit that made the risky trade should ramp up its risk-taking. Instead, a visibly angry Dimon growled that he didn’t believe everything he read, and maybe the senator shouldn’t either.

When pressed further, Dimon said he “didn’t know” what Bloomberg’s source meant and would have to investigate the details of the story. Nobody asked the follow-up question: You mean you haven’t already investigated the details of that story, which Dawn Kopecki and Max Abelson wrote nearly a month ago?

New stories by Bloomberg and the Wall Street Journal Wednesday morning put responsibility for the firm’s risk-taking even more firmly in Dimon’s pocket, and suggested he knew about it much earlier than he let on in the hearing. Senators did not ask him about those stories, either.

Sen. Jack Reed (D-R.I.) did ask about the bank’s eyebrow-raising decision to change the chief investment office’s risk model in January to allow it to take on more risk. But Dimon’s explanation for that change — that the bank wanted to comply with new international capital rules — makes no sense, points out Peter Eavis of The New York Times. In fact, a desire to comply with capital rules would have led to the bank taking less risk.

The market seems to believe that Dimon handled the hearing well: JPMorgan stock was up nearly 2 percent recently, while the rest of the stock market is falling. Still, the fact that only a few senators pressed Dimon should maybe not be surprising: This is a group of members of Congress to whom Dimon’s bank has delivered “a boatload” of money since the financial crisis, as Business Insider puts it.

And the public may not ultimately be satisfied with what MarketWatch’s David Weidner described as Dimon’s open disdain for the entire process or for his need to be answering questions at all.

Mr Dimon knows he is safe – the Congress members who questioned him realise that the world financial markets hang by a thread and to ‘witch-hunt’ and make an example of Dimon would cause another ‘belly-drop’ market moment.  It is neither the time nor the place, nor will it happen in the public eye – Dimon could dump on the Congressional enquiry if he felt they were targeting him in any other way than to have him explain that this won’t happen again.  If it does happen it will be out of sight of the mainstream media and public view.

The way out for Global Leaders is to learn from the example of how this loss occurred – ‘speculation’ is solely responsible – they have to strive to drive the Banks into accepting they make a choice about who they want to be – Banking or Derivatives Speculation – not both.  The Government then has to draw up policies that tax all speculators on their profits/capital gains.  Make it a time limit deal – make it heavy to discourage investment outlook of less than 1-2 years.

If you make the speculator/investor think whether the tax cost of any short-term investment play is worth the risk – the heat is gone from the market.  You won’t have quick or speculative recovery in equity markets – but then that will be good to allow markets to consolidate and for Companies to shore up their capital positions independently and away from the Banks.  Have the markets return itself to a conservative approach to investment choices.  It is just that simple.

The EYE-BALL Guru …

  1. david the pragmatist
    June 15, 2012 at 8:31 pm

    An excellent article extremely well written and well understood by anyone with capital markets experience.
    I have just watched a one off episode of West Wing season 7 episode 7 entitled “the debate”
    this show was probably made approximately 10 years ago and if you were listening to the debate you could say it could have been now! (US politics) .

    Great points were made by both sides and the republican argument centred on the “market” being the great equaliser.
    It was a true statement then and in a fundamental sense it is equally true statement now. Except for one thing!
    The market has been highjacked away from the truth of it essence.i.e. it has not been allowed to operate as the equaliser because of the manipulation of greedy corporate individuals, wether they be hedge funds in cahoots with banks or governments.
    The governments were hoodwinked by the greed of power, the banks by the greed of money and the regulators by their lack of understanding of how all the different parties operated.
    Throw in a justice system that admits there is no justice and a media that has no integrity with the truth and you have the mess we are in now.

    Quite simply if the inmates are smarter than the regulators who do think is going to run the asyum? the same goes for our politicians who quite simply are not as smart as the people they are trying to govern. Why? what intelligent person would want to be a politician?

    Powerful people with intelligence do not stay long in politics because they are not welcome by the meagre genre of politicians who out number the intelligent and are threatened by the majority of the mediocre. Hence the exit or outcasting of our better politicians and why we a left with labour’s union hacks and Liberals nethandernol conservatives, enter Gillard and Abbot as the examples.
    Thats not to mention the financial genius of Qld’s political wizards that made up Anna Blyth’s government. I will state categorically that M/s Blythe could not run a small business with 10 people let a lone the 3rd most populous state in the Country.

    Yes Eye Ball your article is spot on and we as a people have to wear the result. The really bad thing is that none of this is going to change for a long time to come, the incoming generations are arguably worse than the incumbents. I am 60 years old and I fear for my children and grandchildren and if I can last the 27 years longer that my father lived without falling into abject poverty I will be surprised.

    The thing is, I am a very philosophical person, I love philosophy, but I cannot be philosophical about anything that is happening to change the upcoming events other than to hope we can survive with some dignity and our children find a miracle saviour…I do have” hoped” for faith in Spiritism and maybe its the lesson we all have to have, to go to the next level?

    I find it remarkable that we produce so few leaders in the current environment and when one emerges ie Obama (remember the opening paragraph), we as human beings criticise him for the impossible task he undertakes!
    Phew!! now that was “Philosophical” …… I’m back!! Hang on the glass is half full not half empty! We can do it!!!!

  2. June 15, 2012 at 10:17 pm

    Read this and be amazed – will Governments never learn …

    Read it on line here …

    Banking: King hits panic button

    The Governor of the Bank of England and the Chancellor of the Exchequer last night announced measures designed to prevent a new credit crunch that would push Britain’s economy deeper into recession. The move was a clear sign that the Governor and the Treasury are alarmed by the prospects for the economy in the face of potential financial shocks from the eurozone.

    Speaking at the annual Mansion House dinner in the City of London, the Governor, Sir Mervyn King, and George Osborne said the Bank and the Treasury were working on a liquidity operation – a “funding for lending” scheme – which would provide private banks with cheap funding in exchange for a commitment from lenders to provide cheap loans to ordinary businesses and households.

    Sir Mervyn said he expected the scheme to be up and running “within a few weeks”. Last night, the Treasury said it hoped the measures would increase annual lending flows to the economy by about 5 per cent, or £80bn.

    The scheme would permit private British banks to pledge their existing, illiquid loans as collateral at the Bank of England in exchange for highly liquid UK government bonds, which they could then sell on. In return for this cheap financing, banks would be required to commit to using the proceeds to increase the volume of loans to businesses and households, and to make that lending cheaper than it otherwise would have been.

    Sir Mervyn said the eurozone crisis had created a “black cloud” over the financial sector and instilled “extreme uncertainty”, which was pushing up banks’ funding costs and crushing lending to the real economy.

    The operation would be similar to the £200bn Special Liquidity Scheme, established in April 2008 during the financial crisis, in which the Bank of England (BofE) allowed lenders to swap mortgage-backed securities for UK sovereign bonds in order to ease the flow of lending to households.

    The SLS was wound down this year, but the International Monetary Fund advised the BofE last month to re-establish something similar in order to boost the economy.

    Sir Mervyn and Mr Osborne said another scheme intended to ease funding pressures on banks – the Extended Collateral Term Repo Facility – would activate shortly. Sir Mervyn said the BofE would start auctioning six-month sterling loans to help UK banks to weather any shocks emanating from Europe.

    The Chancellor said the new measures showed the Government and the BofE were not standing idly by waiting for the eurozone crisis to hit Britain. “We are not powerless in the face of the eurozone debt storm,” he told financiers and dignitaries at the Mansion House. “Together we can deploy new firepower to defend our economy from the crisis on our doorstep… We are rolling up our sleeves and doing everything possible to protect British families and firms.”

    Mr Osborne confirmed that the new Financial Policy Committee – the “super-regulator” based at the BofE – would be given a mandate to support growth as well as ensuring financial stability. Some City figures have complained that new capital requirements being imposed on banks by the Government and regulators are choking off lending to the real economy.

    The Chancellor said he supported a eurozone banking union, but reiterated his pledge that Britain would not allow the UK to be bound by it.

  3. June 15, 2012 at 10:20 pm

    Wonderful response given I’m a big West Wing fan. The ‘debate’was full of realism … and your comments are appreciated.

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  1. June 16, 2012 at 12:39 am
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