London Calling
“The most effective way to destroy people is to deny and obliterate their own understanding of their history.” - George Orwell
By J.M. Hamilton (2-3-12)
Let’s face it. As much as central banks, and their bankers, like to say they’re looking out for the public, their core constituency and the masters they serve are the Banking Cartel. The Feds mandate is stable prices and maximum employment; but a closer look at the Fed’s policies and its results reveals the opposite has in fact happened, since the crisis in 2008, to the benefit of Wall Street (the 1%) and to the detriment of the public (the 99%).
And to show you what I mean, the Chancellor of the Exchequer, George Osborne, was making the rounds at Davos and lobbying on behalf of both his country’s interests and the Banking Cartel’s position: namely, the Volcker Rule must be abolished or significantly watered down. At issue the Volcker Rule requires that U.S. banks not gamble with public/taxpayer money, and the same rule also means that same should no longer hold foreign debt, at least not to gamble with. (Sovereign debt is no longer what it once was, bulletproof, and in more than an uncomfortable number of European instances as of late, it has become highly speculative.) Mr. Osborne, or perhaps it’s Sir Osborne, hails from the U.K. and more precisely London.
London, of course, is where all that is “whack” (please excuse the slang) goes down in world financial affairs.
“But J.M.,” you reply, “you’re kidding…. Wall Street is the epicenter of all things financial, both catastrophic and magnificent.”
Not any longer. And here’s why.
As reported in Bloomberg this week in a piece entitled, Goldman Sachs among Banks Lobbying to Exempt Half the Swaps from Dodd-Frank, penned by Ms. Silla Brush, we learn that the majority of swaps are now transacted overseas, possibly in the hopes of skirting future swaps regulation under Dodd Frank. And where exactly is “overseas?” Per Ms. Brush, “New York-based Goldman Sachs’s largest counterparty for credit derivatives on the eve of the credit crisis in June 2008 was Deutsche Bank AG (DB)’s London branch; its third-largest interest-rate derivatives counterparty was JPMorgan’s London branch; and its largest counterparty for currency products was Royal Bank of Scotland Plc’s London branch, according to a 2010 report from the Financial Crisis Inquiry Commission, a U.S. panel that investigated the crisis.”
So London appears to be the prime destination for the derivatives trade, which are rogue insurance products that the American taxpayer reinsures, and the Banking Cartel profits from; that is to say, the banks keep the premiums, and you, Dear Ninety-Nine, pay for the losses when things go bust. To drive my point on “The City” a little further, please recall it was London that housed Mr. Joseph Cassano and the fabled AIG Financial Products Unit. This was the unit that was taken down by Goldman Sachs in 2008, and demonstrated to the world what systematic risk truly was… a lesson that we are still learning to this very day.
It has been rumored and speculated that some of the $1.2 billion in missing MF Global client money has vanished around London environs, quite possible pledged as collateral in Repo transactions. Repos are the very same accounting transactions that are said to have fooled business partners, lenders, exchanges, and regulators, when both Lehman Brothers and MF Global went down. (Repos can be off balance sheet transactions.) Repos involve transferring risky assets, for some period of time, off one’s financial statements and sending them quite often to London, where for a fee, the client is given cash or more warmly received/perceived assets.
Sort of a duplicitous accounting bait and switch…. if you will.
Depending upon the duration of the transaction, and the maturation date of the instrument, and with proper timing, a Repo may even be posted as sales revenue.
Repos are nasty enough, but what happens next to the collateral in London is altogether insane, because under British law, rules and regs, the collateral can be pledged and re-pledged, used and reused, in a process called Rehypothecation. Reusing collateral, again and again, is risky enough in good times, but throw into the mix some volatility, add a dash of uncertainty, with equal measures panic and default, and poof, collateral/client money all gone. Rehypothecation is, conveniently, an off balance sheet transaction.
Ultimately, where I’m going with this is…. U.S. bank regulation in today’s global economy is only as strong as its weakest link. And the weakest link in the financial world today, the king daddy of systematic risk, and moral hazard, is London. There’s a reason why so many banks set up shop there, and so many derivative/swaps counterparties operate in London. It’s called regulatory capture and regulatory arbitrage, or London by any other name.
If U.S. lawmakers and policymakers want to avoid a repeat of the mother of all financial crises, then pressure must be brought to bear, and applied directly to London’s financial district. Perhaps the tables should be turned and Mr. Geithner should be lobbying Mr. Osbourne for U.K. banking regulatory reform?
On a historical note, the nickname for London at one time was “Old Smoke,” perhaps the new nickname should be “Old Smoke and Mirrors.”
And going full circle back to the topic of central banks, Mr. Randall Forsyth, of Barron’s Magazine, paraphrased Ms. Stephanie Pomboy this week as stating (he also detected a similar note from Mr. Bill Gross of PIMCO fame): “…the ‘transmission’ for monetary policy is broken. Easy Fed policy lifts prices but, owing to consumers’ reluctance or inability to borrow, doesn’t translate into spending increases.”
Which is a nice way of saying Fed policy is great at servicing the Cartel, but the Cartel no longer serves the American public, no, in fact, the Cartel serves, you guessed it, only themselves. But what else would one expect from an oligopoly? Ms. Pomboy goes on to note: “That suggests the counter-intuitive conclusion: expansionary monetary policy could be restraining the economy." I believe what these three wise persons are driving at is that the paltry less than one percent interest the Fed pays out (the Fed can get away with this because the Euro is trashed, and the Fed is monetizing U.S. debt) is providing zero relief for consumers, savers, or the economy, because the banks are not lending the money out…. No Wall Street is either investing in commodities, the stock market, T-Bills, or the carry trade (or in the case of European banks, placing the money back into central banks or sovereign debt). Meanwhile retirees and savers are not earning a dime in interest income, and are being squeezed hard by fiscal austerity, higher headline inflation, and declining property values.
Nor are the Fed’s policies exactly good for corporations or multi-nationals, who would like to see: wealthier consumers, an increase in consumer spending, a resulting rise in top line growth, and an increase in profits.
It seems that Wall Street banks don’t want to soil themselves with untidy residential lending, and they have been off loading illiquid and impaired CDOs and MBS onto the Fed’s and the nation’s balance sheets ever since the 2008 crisis began. The Fed into the breach, once again, to bail out the Cartel, but Mr. and Mrs. John Q. Public will just have to cope. Of course the near zero percent interest rate the Fed charges banks, also enables the Leviathan to hold illiquid and damaged assets on their financial statements, such as CDOs and MBS. That is until, the Fed can take it off their hands.
After all with essentially free money, courtesy of the Fed, the banks have no incentive to mark residential mortgages to market, which would spur refinancing, begin the residential housing recovery in earnest, and ignite the economy.
Why oh why would the Cartel want to refinance mortgages and kick start a U.S. economic recovery? After all, Wall Street banks have a Democratic President they need to run out of office.
But wait, it gets darker, because, as we learned this week, there may be yet another reason why the Fed is keeping interest rates at zero percent. Both ProPublica and NPR put out a joint piece this week, entitled Freddie Mac Bets Against Homeowners. (Shucks, it might as well have been titled: Taxpayer bailed out Institution $cr@ws Americans and the American Dream.) Per the article, it seems as if this GSE has taken out some sophisticated bets, which wager that much of the U.S. residential market will not be refinanced. Of course, with the GSEs essentially controlling the nation’s residential market portfolio, it’s sort of a guaranteed win. For Freddie that is.
And the wider the spread between the Fed’s interest rate, and the rates U.S. homeowners pay, the more money Freddie makes off its bet: “The inverse floaters carry another risk. Freddie gets paid the difference between the high mortgages rates, such as the Silversteins are paying, and a key global interest rate that right now is very low. If that rate rises, Freddie’s profits will fall.”
Hmmm… sounds like the Fed has yet another reason to keep interest rates low, and that’s so Freddie (and possibly other institutional investors?) can make a killing off inverse floaters, while Americans – the 99% – pray the stuttering nascent economic recovery, this time, is for real.
Isn’t that special?
So just to get this straight, the U.S. economy is being held back – homes are not being refinanced – so that taxpayer funded/taxpayer bailed out/taxpayer owned institution, named Freddie, can make profit from CDOs and the MBS the banks off loaded on to the tax payer at list price; and this same publicly owned institution, Freddie, has wagered/doubled down – through highly leveraged and speculative instruments called inverse floaters – that homeowners and the economy won’t heal, so that they can make a mint.
Moreover, this is a bet that Freddie controls, as one of the largest suppliers and reinsurers of U.S. residential mortgages.
And who sold Freddie these exotic products? My educated guess is the Wall Street Cartel.
Meanwhile, the Fed pledged in late January to keep interests rates at their super low values for yet another year. Seems that the FMOC is worried, terribly worried, about the economy.
Thank you FHFA Director Edward DeMarco! Thank you Chairman Bernanke!
Perhaps “Old Smoke and Mirrors” isn’t so slippery after all.
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