Fabrice Tourre, Scapegoat

Posted on April 16, 2010 by Mike

Today’s civil fraud charges against Goldman were a surprise, but the devil is in the details, and the case against the firm doesn’t look particularly strong. Goldman claims to have actually lost $90M by investing in the ABACUS CDO (Bloomberg), and lead investor (and major loser) ACA actually had ultimate authority over the securities selected and knew of short-seller Paulson & Co’s involvement in the selection process (though not that they were shorting) as pointed out in an excellect article by Henry Blodget :

In reality, however, to make this case, ACA is going to have to make the embarrassing admission that knowing what Paulson & Co was going to do affected its judgment with respect to the transaction. This information should NOT have affected ACA’s security selection process. It should also not have affected ACA’s decision to go forward with the deal. ACA is an independent firm staffed with experienced professionals paid millions of dollars to evaluate securities by themselves. What Paulson was or wasn’t planning to do, therefore, should have been irrelevant.

We also know that Goldman knew in advance about the SEC’s plans, and that the man picked out for a public stoning, Fabrice Tourre, is a Frenchman who was only 27 or 28 at the time of the misdeeds in question. The CDO business was the cash cow of the bubble years and a prime focus from the executive suite on down. Was this kid really that important in the scheme of things?

Tourre admitted in emails that he didn’t even understand CDOs very well. It is just a joke that this is the best scapegoat that they could come up with. Did Goldman bring civil charges against itself on a weak and obscure point via minions (like Adam Storch) at SEC in order to create a safe outlet for the mounting public outrage? It certainly looks that way from here.

Wake me up when a Goldman employee or alumnus over 40 with a net worth over $100m goes to jail.

The myth of the evil short-seller lives on

Posted on March 25, 2010 by Mike

Bloomberg’s Jonathan Weil writes a good column. Here he digs into the falacy often cited by executives of failing companies and politicians that short-sellers are responsible for drops in price:

Still Believing

So I asked a Morgan Stanley spokesman, Mark Lake, this week if the company’s executives still believed what Mack said in September 2008 about short sellers to be true. And if so, based on what evidence? No comment, he said. Mack wouldn’t talk either.

I got the same response at a conference in Phoenix last weekend when I posed similar questions to the SEC’s enforcement- division director, Robert Khuzami, who joined the agency about a year ago from Deutsche Bank AG. How are his staff’s short-seller investigations going? Found anything significant yet? No comment, he said. Cuomo’s office didn’t comment either.

My guess for why they have nothing to say is that the whole thing was a farce to begin with. Yet this same urban legend — that mysterious, unnamed short sellers and speculators somehow are to blame whenever markets plunge — still lives on.

In Greece, Prime Minister George Papandreou has tried to blame his country’s budget crisis on speculators who profited by buying credit-default swaps on Greece’s sovereign debt. Actually, it turns out Greece was shorting itself.

Paulson’s Evidence

One of the largest buyers of such swaps was the state- controlled Hellenic Postbank SA, which made a $47 million profit last year after it sold its $1.2 billion position, the Athens newspaper Kathimerini reported a few days ago. The bank’s former chairman later said Hellenic was just protecting Greek bonds it owns against a possible default, not speculating, though that doesn’t change the economics of the trade.

In his memoir, “On the Brink,” Paulson writes like a true believer. “Short sellers were laying the bank low,” he said, describing Mack’s plight a year and a half ago. “But John and his team weren’t about to go down without a fight.” What facts did Paulson cite in support of the notion that short sellers were harming Morgan Stanley, or that they had the capability to do so? None, of course.

Paulson mentioned only one short seller by name in his book, David Einhorn of Greenlight Capital, who shorted Lehman’s stock and warned other investors that the bank’s books were probably cooked. In that instance, however, Paulson said Einhorn was proven right, a point echoed in the findings of this month’s report by Lehman bankruptcy examiner Anton Valukas. (Paulson’s book didn’t name anyone who had shorted Morgan Stanley.)

Wrong Target

Einhorn also was right when he tried to warn the SEC in 2002 about the accounting practices of a business-development company called Allied Capital Corp. The SEC responded by turning around and investigating him, at Allied’s urging, without any basis for believing he’d done anything improper, as SEC Inspector General David Kotz’s office chronicled in a report released this week. Eventually, the SEC let the company off without any penalty, in spite of what the report called “specific, detailed allegations and evidence of wrongdoing by Allied.”

Here’s another idea for Kotz. How about investigating whether the SEC had any reasonable basis for believing Mack’s short-seller story in September 2008 when it acted on his pleas, and whether Mack had any plausible grounds to believe the story himself? Now there’s a probe that might turn up something.

Read the whole article here.

More here on how CDS traders are being used as a scapegoat for a well-deserved decline in Greek debt.

Manuel Asensio’s Sold Short tells the story of a small hedge fund that sought out frauds to short and was eventually pushed out of the business by high-priced lawyers paid for with cash from pump-and-dumps.

Prechter in the morning (King World News interview)

Posted on March 24, 2010 by Mike

Eric King is one of the best financial interviewers out there, so he gets the best guests of anyone I know.

Listen to the MP3 here, recorded last Saturday, March 20.

Take-aways:

The last of the bears are capitulating, just as the last of the bulls turned bearish last winter. Everybody loves stocks after a 73% rally, and there is huge psychological pressure to be bullish.

The market only gives away free money for so long (unbroken strings of up days often come near the end, as in Spring 1930).

The last two times that the market made a double top (July/Oct 2007 and the 2000 top), the Nasdaq surged at the very peak, leaving the Dow and SPX behind. SPX has just barely made a new high, but it feels like it’s much higher than in January.

GDP expansion is very weak compared to the stock rally, bank lending and jobs are still trending negative.

This is not a recession that has ended. This is a depression that has had a big countertrend rally.

States are all bankrupt, because they always spend too much. Governments always go bankrupt in the end. (Interesting factoid: Nebraska’s constitution outlaws borrowing by the state, so they are in the best shape).

All of the dollar-denominated IOUs are going to be worthless in the end. The government’s backstop has delayed this, but the debt will still go bad. The central banks will not take on all the bad debt, so the governments are trying, but they will ultimately default themselves.

Hyperinflation is not an option with all this debt. Default (deflation) is inevitable. Government defaults are deflationary.

Cycles are part of the human social experience. Muni defaults haven’t happened since the 1930s, but that is only because that was the last time we were at this point of the debt cycle. Munis will end up as wallpaper — no way the states can pay them off.

Conquer the Crash was released in 2002, but the stock market rose for 5 more years and the credit bubble got even crazier before finally topping in 2007, but the extra debt is just making things worse now that we’re at the point of no return.

We have a return of confidence. AAII (American Association of Individual Investors) survey shows about 25% bears, same as October 2007 and May 2008 tops. This is not a good buying opportunity.

Every investing group (individuals, pensions, mutual funds, etc) has been overinvested for 12 years. Mutual funds are only holding 3.5% cash. They have never given up on stocks, even in March 2009, which was nothing like in the 1970s and early 1980s.

Very few people think we can end up like Japan, and keep breaking to new lows for 20 years. Everybody always has a “story,” a narrative as to why the market is going to keep going down (at bottoms) and up (at tops). (Story today, IMO: PPT manipulation and money printing will drive stocks up forever). The story is often exactly wrong at the top and bottom.

Interest rates do not drive stocks. Lower rates are not bullish (just look at the 1930s or 2007-2008). Rates went up from 2003 – 2007 as the market rallied. People’s logic is always incorrect at the turns. Nor do earnings drive prices: stocks fell 75-80% in real terms from 1966-1982 as earnings rose.

Oil and stocks have a correlation that comes and goes – sometimes none, sometimes very positive, sometimes very negative. No predictive power.

Markets have a natural ebb and flow that arises from herding processes in a social setting. Reasoning about causation is a waste of time.

Economists jabber on about all kinds of causation, but they never offer statistics that pass muster.

Bond funds are going to slaughter the masses. The public always buys the wrong thing at the wrong time, and a wave of defaults is coming.

The dollar is likely starting a major rally (up 9% since fall, 11% vs euro). Prechter was early on that call but it still was a good one. Might be the start of a renewed wave of deflationary pressures.

The message in the new edition of Conquer the Crash remains, “get safe.” Find a safe bank, hold T-bills or treasury-only mutual funds, cash notes, and some gold and silver. No downside to safety.

Max Keiser on Greece: No alternatives to higher taxes? How about insurrection?

Posted on March 21, 2010 by Mike

Kaiser’s not one to hold back (he comes in about 3:20):

Best line in here is when he asks those Greek economists who favor higher taxes, “Why are you selling your countrymen down the road?”

“Get rid of the financial terrorists from your country.”

He could have done a better job here by keeping his cool and more clearly advocating repudiation, but maybe his approach is better suited for the state of Greek temperment at the moment.

The best idea out of Washington in ages.

Posted on March 16, 2010 by Mike

Maybe legislators are finally ditching Keynesianism for some real solutions, while acknowledging the reality of what is likely to be a decades-long slump:

WASHINGTON—In a bold new measure intended to address unemployment among young professionals, lawmakers from across the political spectrum agreed on legislation Tuesday to subsidize the cryogenic freezing of recent college graduates until the job market recovers.

The bill, expected to swiftly pass in both houses, would facilitate the subzero preservation of any graduate of a two- or four-year educational institution. Sponsors of the initiative said that with the national unemployment rate at just under 10 percent, it only made sense for young job-seekers to temporarily enter a state of supercooled stasis.

“Finding employment is extremely difficult for today’s college graduate,” Sen. Kay Bailey Hutchison (R-TX) said. “Our current economy offers few options for the millions of young men and women desperate to join the workforce.”

“Were we to freeze these graduates at the height of vigor and ambition, however, there’s a chance we could revive them during a more prosperous time,” Hutchinson continued. “When the economy finally bounces back—10, 20, even 30 years from now—we’ll have an entire generation thawed out and ready to contribute.”

Continued…

Listen to Mish: Public unions and their pensions have bankrupted your city and state.

Posted on March 15, 2010 by Mike

I don’t care where you live, odds are that your local politicians have put you and your fellow taxpayers on the hook for unpayable quantities of debt, mostly to fund government salaries and benefits that are way out of line with the private sector. This is a huge issue, and the only people who cover it in detail are the blogger Mish Shedlock and author Stephen Greenhut.

This is exactly what has happened in Greece and the rest of the GIPSI states in Europe, and for that matter the US Treasury since FDR introduced the Keynesian the welfare/stimulus state to those shores.

The only ethical solution to the problem is a swift, honest default. Public debt is a racket, the advance sale of stolen goods (interest, extorted at gunpoint) and just another capital transfer from producers to lazy government workers, politicians, bankers, government contractors and other moochers. The alternative to default is a slow death by debt slavery, all to prop up a corrupt system that will fail in the end anyway.

As Murray Rothbard responded to the idea that public debt is ok because “we owe it to ourselves,” the problem is “who’s the we, and who’s the ourselves?”

See more here: Default, Greece, Default

Murray Rothbard on repudiating the public debt (mises.org)

Sarkozy: Greek bailout will be good for the Euro

Posted on March 7, 2010 by Mike

Of course this man doesn’t care a whit for the truth, so he is either an economic ignoramous (quite probable for a French lawyer and politician) or just plain lying when he makes statements like the following:

“If we created the euro, we cannot let a country fall that is in the eurozone,” said Sarkozy yesterday before a meeting with Papandreou in Paris today. “Otherwise there was no point in creating the euro. We must support Greece because they are making an effort.”

EU leaders have so far refused to give financial aid to Greece and have ordered the government to cut its budget deficit, the EU’s highest, on its own. While Papandreou says steps taken this past week to slash the shortfall warrant more help from the EU, German Foreign Minister Guido Westerwelle said yesterday that his country is “not going to write a blank check.”

Of course, a Greek default would strengthen the euro, since billions in balances would go poof, thus increasing the worth of the remainder. A bailout here will lead to bailouts in every Mediteranean country, quite possibly including his own. Pray tell, how will creating hundreds of billions more euros firm up their value? On the other hand, if every nation in the eurozone but Germany defaulted and then quit the euro for their old pesos, lire, francs and drachmae, it would be very strong and the Germans would just rename it Deutschemark.

Papandreou is visiting Berlin, Paris and Washington after his government passed a 4.8 billion euro ($6.5 billion) austerity package on March 5. A poll published in To Vima newspaper today showed 51.9 percent of voters support him even after the cuts, compared with 47.5 percent who don’t.

Sarkozy, who didn’t say financial support would be forthcoming, will meet Papandreou in the Elysee Palace around 6 p.m. local time. They will brief reporters afterwards.

Watch out, Americans. You don’t suppose that this American-born, Harvard-groomed oligarch is trying to take your money to prop up his racket, do you?

Final Resort?

Papandreou is indicating that Greece may still need financial support and is prepared to turn to the IMF if necessary, calling it a “final resort” on March 3.

That prompted a rebuff from European Central Bank President Jean-Claude Trichet a day later because finance officials fret such a move would signal the EU isn’t capable of solving its own problems. Italian Finance Minister Giulio Tremonti is nevertheless refusing to rule out a role for the IMF in any aid package.

“The IMF should act as a bank” in any rescue, he told reporters in Venice yesterday. “We finance the IMF so it can use the funds around the world. Why not use that capital with the IMF acting as a bank with its know-how?”

Tremonti also said that the EU could issue “eurobonds” or coordinate the sale of euro-denominated government bonds to better counter “financial speculation.”

Sounds like a bit of a turf war there between the IMF and the ECB, each vying with the other to administer the bailout and control the situation for their respective backers. The IMF gets much of its funding from the US, so let’s root for the Frenchman here.

As Greece calls for more help, Merkel on March 5 turned her focus to restricting the use of derivatives to halt “speculators” from exploiting countries’ budget deficits. Greece has done its work and Europe and the U.S. must now ensure that financial-market speculators aren’t allowed to inflict further damage on Greece or on other countries, she said.

Merkel shows she’s not above the dishonest game of shifting blame to the markets for having the gall to recognise that Greece’s credit risk might a tad bit elevated.

Strikes and nonsense from Greek unions.

Posted on March 5, 2010 by Mike

From Bloomberg:

Striking Greek workers shut down transport and tried to storm parliament as lawmakers passed 4.8 billion euros ($6.5 billion) in budget cuts, including wage reductions, needed to trim the region’s biggest budget deficit.

Police with riot shields fired tear gas at demonstrators outside parliament in Athens today as lawmakers approved the measures, which Finance Minister George Papaconstantinou said will show European Union allies and investors that Greece is making good on its deficit pledges. Socialist Prime Minister George Papandreou has a 10-seat majority in the legislature.

“We didn’t create this crisis but now we have to pay for it,” said Manthos Adamakis, who was protesting with other catering workers outside the five-star Grande Bretagne Hotel on Syntagma Square in downtown Athens.

Tram, rail, subway and bus services shut in Athens and other cities as employees rallied against cuts to bonuses and holiday payments. A walk out by air-traffic controllers forced the cancellation of all 58 flights to and from Athens International Airport between midday and 4 p.m. and the rescheduling of another 135, according to a spokeswoman.

“We didn’t create this crisis but now we have to pay for it,” the union member says! Of course they created it, by striking and threatening strikes to demand raise after raise with ever greater benefits. Unions are paying for none of it — their fellow citizens are. And how screwy is the Greek economy that the government sets the wages of hotel caterers, if that is indeed the case?

Most Greeks oppose plans to cut wages and increase value- added tax, according to the first opinion poll published since the austerity moves were announced on March 3.

Seventy-two percent of 530 people surveyed by Public Issue for Skai Television said they disagreed with a drop in bonus- vacation payments, while 68 percent opposed a value-added tax increase. Sixty-two percent said Greece will see social unrest in the next year, according to the poll broadcast yesterday.

The additional budget cuts aim to save 1.7 billion euros through a 30 percent reduction to three bonus-salary payments to civil servants, a 7 percent overall decrease in wages at wider public-sector companies and a pension freeze. The reductions are accompanied by an increase to 21 percent from 19 percent in the main VAT tax as well as in alcohol and tobacco duties.

Further Strikes

Teachers are also striking, closing some schools, and workers at the Public Power Corp SA, the country’s biggest electricity company and controlled by the state, have also called a 24-hour strike today.

ADEDY, which has already held two 24-hour strikes this year after the government backtracked on pledges to grant civil servants a wage increase, is considering holding another 24-hour strike next week.

It seems like everyone in Greece is on the dole, but I believe only 20% of employment is government work.

Where are the taxpayer protests telling these extortionists to go to hell and demanding that parliament repudiate the debt? Majority or minority, the victims in this racket sure are silent. It’s as if they think the money grows on trees (or as if Greece still can print Drachmas!).

The “austerity measures” and tax hikes are sure to fail. The debt is simply unpayable, so default is the only option if Germany is not willing to bail out Greece, Italy, Spain, Portugal, Ireland and maybe even France. What are the odds of that? What happens in those volitile, socialist, economically ignorant countries if the government gravy train dries up? We haven’t seen anything yet.

Germans want Greeks to sell their islands!

Posted on March 5, 2010 by Mike

This from CNBC.

Greece should consider selling some of its islands as one option to reduce debt, two members of the German parliament in Chancellor Angela Merkel’s centre-right coalition said.

Josef Schlarmann, a senior member of Merkel’s Christian Democrats, and Frank Schaeffler, a finance policy expert in the Free Democrats, were quoted on Thursday as saying that selling islands and other assets could help Greece out of its crisis.

“Those in insolvency have to sell everything they have to pay their creditors,” Schlarmann told Bild newspaper. “Greece owns buildings, companies and uninhabited islands, which could all be used for debt redemption.” …

… “The chancellor cannot promise Greece any help,” Schaeffler told Bild in a story under the headline: “Sell your islands, you bankrupt Greeks! And sell the Acropolis too!”

I suggest the Greeks reply by saying, “yeah, we’re sorry we owe you money, but that’s your problem now.” In a word, default.

It’s the ethical thing to do, and entirely precidented in history. Just get it over with and clean the slate. Why stay debt slaves to the Germans (who invaded Greece during the war, as I’m sure most Greeks do not forget), so that some overpaid union workers can stay fat and happy?

Sovereign Speculator

Thoughts on the markets and economics from a lone, wandering participant.

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