Waiting for the SEC to do the right thing

Just in case it wasn't obvious the comment below comes from a US senator:

America was founded on the principle of equal opportunity. While we should keep encouraging the kind of commercial ingenuity that fuels the prosperity of our financial markets, we must ensure that technology is not employed to advantage one small group over the rest. The SEC must deliver on investor protection to restore the integrity and credibility of America's financial markets.

He is referring to that very same SEC that failed to take the slightest notice of several warnings about the largest Ponzi scheme - just to be clear that's the Madoff one.

US equities living dangerously again

It is starting to feel frothy again. US equities came hurtling out of the gate on the open yesterday and it looked as though 1000 might be achieved in the first hour of trading after market traders saw more rosy news on the global recovery story. The S&P Cash index peaked at about 997 and then the market drifted in anticipation of the results from the 7 year note auction.
Results of the auction were certainly a lot healthier than those seen in Wednesday’s five year auction but the devil is in the details and some still have their concerns about the refunding still to come.

After the auction the market tried to rally again but seemed to lack the dynamism of the first ten minutes of the session.

There is a lot of anticipation of the GDP numbers to be released today and we could be in for some more fun at the beginning of the session. The 1000 level has been a target of mine for some time and I would expect some congestion to arise in this vicinity. Are we moving towards a blow off top? - I think so.
But it would not surprise me if there were some more high-wire drama first.

By nature I am an optimist and even though the Armageddon merchants looked to be in the ascendancy over the last few months the evidence now is clearly pointing to the fact that having come to the abyss and gone beyond there are many in the markets who think it’s back to business as usual.

The IMF has recently published some sobering news for the realists however and the BBC News website has captured the "highlights" (if that is an apt description).

The global credit crunch has cost governments more than $10 trillion, the International Monetary Fund (IMF) says.

The IMF says that rich countries have provided $9.2tn in government support for the financial sector, while emerging economies spent $1.6 tn.

Around $1.9tn represents up-front expenditure, while the rest is made up of guarantees and loans.

Governments are likely to recover most of these sums when the world economy recovers, but big deficits will stay.

The financial bail-out costs include:

* Capital injections: $1.1tn
* Purchase of assets: $1.9tn
* Guarantees: $4.6tn
* Liquidity provision: $2.5tn

The IMF estimates - prepared ahead of the G20 summit of world leaders in Pittsburgh in September - also show how much long-term damage the crisis is doing to public finances.

It estimates that by 2014, government debt will reach 239% of GDP in Japan, 132% in Italy, 112% in the US, and 99.7% in the UK.

Proportionately, however, the rise in the UK is the biggest - with debt more than doubling from 44% in 2007.

Rating agencies have recently warned that a UK debt of 100% of GDP would force them to consider downgrading the credit rating of UK government bonds.

Of the major indices yesterday, the one which registered the most striking shooting star candlestick was that for the Nasdaq 100 index (NDX).
On the chart below I have indicated the 50% retracement level from the multi-year highest close at 2238.98 on the last trading day of October 2007 and the lowest close from November 20, 2007 at 1035. The exact level for the fib 50 retracement is at 1633 which was more or less tagged as the intraday high yesterday.

We could steam through this without hesitation but even the most ardent believers of the V shaped recovery may be getting just a little breathless. Things may be a little clearer by the end of today’s session.

The next target for the bulls would be the 61.8% fib level which is at 1774. It is unlikely that we could get there today - but perhaps that’s the number that the algorithms have been told to target!



I shall repeat my call from yesterday that the US Dollar index looks to be basing and could be preparing for a decisive move upwards.
Yesterday’s inside day on the UUP chart, as well as an Ichimoku crossover and the momentum dynamics, suggest that the long side is the right place to be on this sector fund.



The Russell 2000 (RUT) index went into the early July doldrums more rapidly than the larger cap indices but now is mounting an heroic charge in the vanguard of the current advance.
For a bullish continuation play the target on the chart below for the equivalent 50% retracement move to that discussed for the Nasdaq 100 is 600.
It is worth reminding ourselves that the Russell 2000 has a higher beta than the S&P 500 or even the Nasdaq 100 which means it will outperform when markets get racy and under-perform when they slump.



XLI Industrial Select Sector SPDR

I would not advocate shorting this current rally as there are some unusual dynamics at work at present and machines may not suffer from vertigo in the same way that human traders might begin to contemplate after the recent parabolic rise.

Amongst those sector funds that I would have on the radar for eventual short plays would be XLI, which is a sector fund for the industrials.

Betting against the house and OTC credit default swaps

John Galt in a comment at SeekingAlpha sums up the "clearing house" problem with over the counter credit default swaps very nicely with this simple allegory

If I have a 100 Billion dollar bet on Red with Caesars Palace, and a 100 Billion dollar bet on Black with the Bellagio ( and there's no green 0 & 00), then yes, it isn't as bad as it "sounds".

BUT, what happens if I have to pay out my losing bet to the Bellagio with my winnings from Caesars Palace but Caesar's Palace goes out of business and doesn't pay me?

Being stuck paying out your losers but not collecting your winnings could destroy companies. That's why the former Goldman Sachs people in the government wanted to protect AIG so hard.

Simon Johnson on Peak Finance

As is often the case Simon Johnson has a way of distilling complex financial ideas into simple and digestible nuggets. In an article from his blog which is re-published at SeekingAlpha Johnson lays out the case for what he terms Peak Finance . It is exemplified by, in his opinion, the inability of financial luminaries and policy makers such as Larry Summers to grasp the big picture and structural implications of the systemic bubble which burst ingloriously last year.

He distinguishes three kinds of bubbles in the article:

1. A short-run bubble. Think about 17th century Dutch Tulip Mania: spectacular, probably disruptive, but not a major reason for the decline of the Netherlands as a global power.
2. A distorting bubble. In this case, the increase in asset prices contributes to a reallocation of resources across sectors. Think of the Dot-com Bubble: fortunes were made and lost, the collapse was scary to many, and – at the end of the day – you’ve built the Internet and some good companies.
3. A political bubble. Here rising asset prices generate resources that can be fed into the political process, through bribes, building politicians’ careers, and lobbying of all kinds. Bubbles in Emerging Markets often generate resources that impact the political process, sometimes in good ways – but most often in bad ways, which eventually contribute to a collapse.

Summers seems to think that bubble #1 is a satisfactory explanation for the events of Q4, 2008 and Johnson believes that a proper explanation discards the transient nature of #1 and vitally requires inclusion of elements from both his second and third characterization of bubbles.

This leads him to conclude that the mindset which Summers personifies and its incapacity to see the underlying dynamics is indicative of a dysfunctional view of the role of finance in the economy. A sea change will be required in the status currently afforded to the role of the financial technocracy and one positive consequence of this would be a relative diminution of the size of the finance sector in terms of total GDP. This would mark the passing of the era which has given rise to too many bubbles and the term Peak Finance becomes appropriate for this, in a similar manner to the way that the term is used with respect to the transformations ahead for the energy sector.

I concur with this line of reasoning but doubt whether we will witness the sea change required in the philosophy of finance in a timely and undramatic fashion. Here is the comment that I have made in connection with the article.

The inability of Larry Summers to fully see the big picture reasons behind the collapse of the credit bubble highlights the dissonance that is endemic amongst this generation of the financial elite.
Assuming that we don't have another meltdown like experience (which is by no means a wise assumption to make) we will require another generation of differently educated individuals to provide better financial policy and leadership.

The question however is - are there enough educators at the top business schools who see the bigger picture and structural reasons behind asset price bubbles and can amend the curricula accordingly?

Goldman's last stand and the fading of an era of market timing

Financial innovation has become more or less synonymous with what might be called meta-market activities. That is where much of the day to day movements of markets and the activities of traders is based upon information derived directly from the market's internals and not from the "real" economy. To a large extent it could simply be called market timing. It is an activity which Goldman Sachs excels at.

In contrasting say the economies of the US and China, where the latter has far less developed capital markets and is building its economy the old fashioned way, it seems very unlikely that an economy which tries to prosper based upon a market timing investment philosophy is going to prevail in the coming years.

In some ways the success of Goldman in recent quarters may be the last hurrah for an era of financial wizardry.

Government Tab for Crisis Could Hit $23.7 Trillion - WSJ

Some news items just leave one speechless such as this from the Wall Street Journal

WASHINGTON--Government support aimed at cushioning the effects of the financial crisis in the U.S. could reach $23.7 trillion, a special inspector general overseeing U.S. bailout efforts planned to tell Congress on Tuesday.

In prepared testimony for a hearing of the House Committee on Oversight and Government Reform, Special Inspector General Neil Barofsky said the figure included spending and commitments for several agencies that have implemented programs aimed at supporting the economy and the U.S. financial system.

"TARP does not function in a vacuum," he said, referring to the government's $700 billion Troubled Asset Relief Program--its most visible effort to counter the financial meltdown.

The top Republican on the oversight committee, Rep. Darrell Issa of California, blasted the figure provided by Barofsky, saying "If you spent a million dollars a day going back to the birth of Christ, that wouldn't even come close to just $1 trillion--$23.7 trillion is a staggering figure."

Mr. Barofsky provided a breakdown of the government's TARP expenditures in his testimony, saying Treasury has disbursed $441 billion of the nearly $700 billion authorized under TARP legislation.

The government has called the programs investments, but officials have conceded that some of those investments--such as $2.3 billion provided to CIT Group Inc., which is seeking last-minute rescue financing from bondholders--could result in losses for taxpayers.

When Yellowstone Explodes

The following comes from an article in August issue of the National Geographic.

Beneath Yellowstone Park a monstrous plume of hot rock is causing the earth to heave and tremble. Past volcanoes have erupted with a thousand times the power of Mount St. Helens. The future is anybody’s guess.

Derivatives and the political dance

The following comments from Mark Mobius highlight the fact that the real challenge for better oversight of derivatives comes back to, as always, the compromises made by politicians in having to pay attention to the lobbying groups and special interests that fund their campaigns, and their principal and primary interest which is to hang on to office.

LONDON (MarketWatch) -- Mark Mobius, executive chairman of Franklin Templeton Investments, said Friday he fears the U.S. and other countries will fail to regulate derivatives properly, setting the stage for a repeat of current financial turmoil in a few years.

"I'm afraid that the political pressures on politicians in the U.S. and other countries will be so great that they will be unable to make the proper changes in regulations," Mobius said in an interview Friday at Franklin Templeton's London offices.

Derivatives, complicated financial agreements that derive their value from underlying commodity prices or interest rates, are at the heart of the current financial crisis, Mobius said.
Mark Mobius on 20 years in emerging markets

Mark Mobius, executive chairman of Franklin Templeton Investments, talks to MarketWatch's Tom Bemis about the changes in emerging markets investing over the past two decades and his outlook for China and for frontier markets in Africa, Latin America and Asia.

"Derivatives can be a good thing, but if they're not properly regulated they can be very destructive," Mobius said. 'This will all come home to roost again,' he said.

UK opposition wants to shut down FSA and will cut public services

The following are some indications found in the UK media on Sunday from the man who might well become the next Chancellor of the Exchequer.

A Conservative government would abolish the Financial Services Authority and hand regulation back to the Bank of England, George Osborne has confirmed.

The shadow chancellor told BBC One's Andrew Marr show the system of banking regulation set up by Gordon Brown had "patently failed".

According to The Sunday Times, Mr Osborne may float the idea of separate markets regulator, along the lines of the US Securities and Exchange Commission, in addition to the Bank of England's supervisory role.

Mr Osborne has said he believes some banks were allowed to become too big - and he could set out plans to allow the Bank of England to break up banks whose size threatens the stability of the wider economy, the newspaper adds.

On public spending, he told Andrew Marr there had to be a culture change across government - starting with the cabinet - to take account of the fact the "cupboard is bare".

He added: "I have not ruled out tax rises... but I do think after a decade of over-spending, people should not be over-taxed because of that mistake.

"The bulk of the strain in dealing with this debt crisis has to be cutting public spending, restraining public expenditure growth."

Exactly how Mr. Osborne would break up banks that are too big to fail and how this would be affected by supra-national banks that operate in the UK is left for later.
What does seem clear is that the Conservatives are now prepared to admit that their focus will be on public spending cuts.

Meanwhile Mr. Brown will do his utmost with weasel words to pretend that Labour policy would not result in spending cuts. Let's see if S&P are keeping an eye on this from the point of view of revising their outlook on the rating of the public finances.

Paulson's underwhelming testimony before Congress

Former Secretary of the Treasury Hank Paulson was interrogated by a congressional panel about the events surrounding the Bank of America/Merrill Lynch merger, but during the course of the hearing, which necessarily contains a lot of repetition, there are several moments when the performance of this master of the universe is particularly underwhelming.

The hearing in its entirety, more than three hours can be watched on CSPAN:

Economists fail at Physics 101

The Economist magazine has a rather mediocre article entitled What went wrong with Economics? which unsurprisingly does not answer its own question. However there are some very good comments posted by readers of the piece. I particularly like this one:

The problem I discovered in my introductory economics class can be summed up with this fictious analogy from physics:

"Let us assume that there is no friction, that there is complete combustion of all gases, and that there is excellent alignment of the guidance system..."

In short, economists make assumptions that DO NOT WORK IN THE REAL WORLD and then expect the world to conform to their postulates. Economists (as has been alluded to by other comments) do not know the working definitions of much of the jargon they employ, and do not realize which of the various processes they are ignoring are nontrivial.

Modern Economics is trying to be the equal of modern physics without having gone through the equivalent intellectual phase of thermodynamics or quantum mechanics.

Economists are often overcompensated pretentious bores who could not get more than a $10/hr job in the real world, if they had to get by on any talent beyond the art of memorization.

The fact that many economists have been able to earn substantially more than $10/hr, run and advise governments and central banks, run and ruin commercial banks etc. could well turn out, in the history books of the future, to be considered as perverse as the credibility given to medieval doctors who advised bloodletting as a panacea for most ailments.

Manhattan retail vacancy rate rises above 12%

More evidence that rampant consumerism is over from this report from Bloomberg.

Manhattan shopping strips from the Upper East Side to SoHo are flooded with empty storefronts. The borough’s second-quarter vacancy rate rose to 12.4 percent and now stands at the highest since 2001 as rising unemployment and the recession curb spending, according to data compiled by Faith Hope Consolo, chairman of the retail leasing and sales division at Manhattan- based Prudential Douglas Elliman Real Estate.

“The consumer just stopped shopping,” Consolo said.

More than 15 percent of the 185 stores on Madison Avenue between 57th and 72nd streets are vacant or about to lose tenants, according to New York-based broker Cushman & Wakefield Inc. In SoHo, 11 percent of the 551 stores are listed as available for lease. About 9 percent of the 265 stores on the Upper West Side are without tenants or soon will be.

The Goldman web

Net foreign purchases of long-term US securities in May were negative $19.8 billion.

WASHINGTON – The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for May 2009. The next release, which will report on data for June 2009, is scheduled for August 17, 2009.

Net foreign purchases of long-term securities were negative $19.8 billion.

Net foreign purchases of long-term U.S. securities were $7.9 billion. Of this, net purchases by private foreign investors were $31.3 billion, and net purchases by foreign official institutions were negative $23.4 billion.

U.S. residents purchased a net $27.7 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been negative $37.2 billion.

Full details can be found here .

Another take on moral hazard

As a financial institution, when you're too big to fail the exact procedures and techniques used for risk management and VaR calculations, will have a tendency to become just a charade to make it look like you are being prudent.

California's plight - all things must pass

The following article has a gloomy view of the future for both California in particular and for the US in general

Sacramento might have followed Washington down a blind alley, but it was first to hit the wall. When the central bank can no longer keep the federal government on life support, California's troubles will be America's. Watch the painful process of spending cuts that California is undertaking, as it portends our collective future.

The lesson is that Washington is a bad influence and a bad mentor. Our trust is placed where the governments' behavior justifies it: fast-developing countries, such as Brazil, India and China, as well as major natural-resource suppliers such as Canada, Australia, and New Zealand (collectively known as BIC-CAN).

The BIC-CAN countries offer very appealing investment opportunities, especially in the fixed-income world. Meanwhile, California and U.S. Treasury bonds are just too big a risk.

To take liberty with some well known lyrics, it certainly does seem that the land of dreamers, schemers and telephone screamers seems to be running on empty now.

However this week's Economist magazine claims that just as before California will re-invent itself as part of the great American experiment.

The BIC-CAN economies will find it hard to flourish if the sixth largest economy in the world is heading for a terminal decline and I certainly would not hold out hope for the de-coupling thesis if the US follows suit as well.

In one respect there is some similarity between the Goldman envy which I have discussed here and the envy which has existed for many years regarding the Golden state and which comes primarily from residents of other US states. The difference with Goldman is that, at present they are booming, so the envy is growing whereas for California the envy has transformed into a kind of schadenfreude where there is a callous delight from some quarters at the economic plight of the state.

Just to return to song lyrics for a moment, for California and for Goldman Sachs, there is some wisdom in George Harrison's lyric that All things must pass

Getting a piece of the Goldman action

Reuters has calculated that the average salary for nearly 30,000 employees of Goldman Sachs this year will be $1 million.

NEW YORK, July 14 (Reuters) - The average Goldman Sachs Group Inc (GS) employee is within striking distance of $1 million in compensation and benefits this year, just nine months after the bank received a $10 billion U.S. government bailout.

The figure will likely fuel criticism of the politically connected bank, especially amind the widening recession and rising unemployment. In addition to the bailout, Wall Street's biggest surviving securities firm also benefited from several other government schemes during the depths of last year's financial crisis.

Goldman on Tuesday said money set aside for pay surged 75 percent in the second quarter. Compensation and benefits costs were $6.65 billion, up 47 percent from the equivalent quarter in 2008.

Given a 16 percent reduction in staff from last year, to 29,400, the bank set aside an average $226,156 per employee in the second quarter, up from $129,200 in a year ago.

If the quarterly figure is annualized, it comes to $904,624 per employee.

Just a few other pertinent factors to consider:

1. The stock has tripled since late last year.
2. Bullish forecasters are calling for it to surpass its historic high above $250 per share within a year or so.
3. Goldman's access and influence within the US Administration is without equal.
4. Goldman envy is rife amongst finance professionals, no matter how much they protest about its privileged position.
5. Hatred of Government Sachs is rife in the blogosphere.
6. Goldman can make more in a nano-second than most people would earn in several lifetimes.
7. All asset classes are traded by the firm and they can flip from being long to short (or both) and back faster than it took the folks at Bear and Lehman to clean out their desks.
8. It is hard to imagine a scenario in which Goldman wouldn't survive a financial Armageddon but where its principal client, the US Treasury, would.
9. If you believe in buy and hold, and like to buy dips this seems like the right place to be looking when the baby's being thrown out with the bathwater.
10. Warren Buffet is extraordinarily enthusiastic about the company

It's hard to resist the conclusion that if you can't beat them then you simply have to join them. Not literally of course, you wouldn't be invited to unless you're exceedingly smart, because, as the alumni will attest, they only hire the very brightest people on the planet.
But one can of course get a piece of the action by hitching a ride with the stock.
So, even if the thought of making a million dollars this year seems like a remote fantasy a program of gradual and judicious accumulation seems like a no-brainer.

[These musings are neither a solicitation nor an offer to buy or sell securities. You should be fully aware of the risks of trading in the capital markets. You are strongly advised not to trade with capital you cannot afford to lose. ]

It is reassuring that there still is some wisdom behind that old fashioned idea which encourages the public to participate in equity markets. Who knows, one day the smart folks at Goldman will probably figure out how to do a reverse takeover of the global financial system, and for those who bought the stock while it was still cheap, that could really add sizzle to their retirement plans.

The mathematics used by economists is "rather useless" - Nicholas Taleb

In an article in the Financial Times today about the core notion that the world is drowning in debt, Nicholas Taleb, drops this little grenade into the mix.

Non-linearity makes the mathematics used by economists rather useless. Our research shows that economic papers that rely on mathematics are not scientifically valid. Not only do they underestimate the possibility of “black swans” but they are unaware that we do not have any ability to deal with the mathematics of extreme events. The same flaw found in risk models that helped cause the financial meltdown is present in economic models invoked by “experts”. Anyone relying on these models for conclusions is deluded.

For me, it is the consequences of this fetish by the financial elite for mathematical techniques which are basically "useless" that is more scary than the debt crisis itself. Few of our financial leaders would either agree with, or perhaps even understand the proposition that Taleb is asserting, and when you couple that with the obsequious respect paid to financial technocrats by other parts of the cultural establishment, one can be sure that no significant lessons will have been learned from the recent mishaps.

US congressman claims Bank of America got something for nothing

The following report from Bloomberg illustrates once again how quickly those in the upper echelons of banking have forgotten those awkward moments of just a few months back when a great big safety net was provided with so little asked in return.

Sadly, it would seem that BAC don't have to worry about the fact that any ingratitude shown now will be remembered should they need another helping hand, as it is all too apparent that they are right near the top of the Too big to fail league.

Bank of America Corp. is trying to avoid paying billions of dollars in fees to U.S. taxpayers for guarantees against losses at Merrill Lynch & Co., saying the rescue agreement was never signed and the funding never used.

Regulators contend Bank of America owes at least part of a $4 billion fee it agreed to pay in January -- even without a completed legal document -- because the company benefited from implied U.S. backing on about $118 billion of Merrill Lynch assets, such as mortgage-backed bonds, people familiar with the matter said. The Charlotte, North Carolina-based bank says it owes the Treasury nothing, according to the people, who declined to be identified because the negotiations are confidential.

Bank of America, ranked first by assets and deposits in the U.S., “got a moral commitment for insurance without tendering a check, so it appears they got something for nothing,” said Representative Brad Sherman, a California Democrat on the House Financial Services Committee. “If the government takes the risk, the government needs to be paid.”

The congressman's accusation somehow fails to shock. To slightly change the metaphors - imagine a top banker who didn't want to have his cake and eat it too.

GM emerges from bankruptcy in 40 days

I guess the swift emergence of GM from bankruptcy is good news?
But then again we were all reliably informed at the time that they went into bankruptcy that it was n't bad news.

So one less thing to worry about (that's if you were worried about it)

Of course the markets had discounted both the bankruptcy and the swift emergence about six months ago.

Why should we pay attention to G8 meetings?

Is this a case similar to the one that Keynes described with regard to judging a beauty contest? The thinking goes that we don't vote for the person we prefer but the person that we believe that average opinion will prefer.
So to translate it back to the G8 meetings - we think that the average investor thinks that somehow they are important, which is why we take the time to glance at the headlines and listen to the sound bites, even though our own opinion is that they are just a sideshow on the world stage.

How shocking would it be to audit the Federal Reserve?

Cerberus never sought out deals which would attract bad publicity

The New York Times has the following story regarding the troubles being faced by the previously omnivorous Cerberus fund that never saw a deal that it didn't want to have a look at.

Cerberus Capital Management, the secretive investment firm run by Stephen A. Feinberg, is restructuring amid a wave of requests from clients who want their money back.

But, like many hedge funds that have been hit with losses, Cerberus is not allowing investors to pull their cash from the fund just yet. Investors who have submitted redemption requests will have their assets moved into a new fund that will be liquidated as market conditions improve, Mr. Feinberg said in letter to clients last Friday. Investors in the new vehicle have been told they will not pay management fees, one investor said.

Those investors who want to stick with Cerberus will also see their assets moved into a new fund with reduced fees. The firm’s main hedge fund lost 24.5 percent last year and has dropped an additional 3 percent through May 31.

“We are embarrassed and disappointed by our 2008 performance, and we feel an obligation to you to turn this around,” Mr. Feinberg said in the letter. “But we just don’t know when and how much pain we must take before that happens.”

His comments differ markedly from his confident tone last September when he told investors that, “none of our problem positions are large enough to create a real return problem for the fund.”

Those “problem positions” included high-profile bets on Chrysler, GMAC and the residential mortgage company, ResCap.

The most amusing part of what is a sad story - at least for those investors who would like to exit the fund sooner rather than later - was Mr. Feinberg's remark, in a letter to the unhappy fund participants, that “we never intended to receive the publicity surrounding those investments,”

Bankslaughter and recovering bankers' bonuses

James Kwak from Baseline Scenario outlines here a more plausible version of bankslaughter which is an idea doing the rounds in the blogosphere.

Kwak makes the very good point that rather than seeing this as a criminal matter i.e. making managers/directors of banks that made bad business decisions potentially liable for charges of criminal negligence or culpability, far better would it be to see this as a matter for civil law.

It is worth reading the piece in full but the following would seem to be a probable shortcoming in the proposal and which motivated my following response.

You seem to be advocating that precedents need to be set for motivating more class action lawsuits through the civil courts which would find managers/directors liable to repay bonuses and other compensation from poor decisions in the running of a bank.

In comparing that to (say) class action suits against tobacco companies one would need to establish that there exists a body of independent evidence that shows categorically that risk management tools and methods are inherently dangerous.

Whilst intellectually that is a very appealing notion (at least to me) one could also understand the reluctance of "experts" from academia or the financial establishment who would provide such testimony.

The Goldman Saga: Fictional heroes and notional taxpayers

An analyst at Bank of America (BAC), Guy Moszkowski, put out a very positive note on Goldman Sachs today which, according to a Bloomberg report included reference to Goldman's "unmatched risk-taking/risk-management skills in a market that strongly rewards these because of a decline in competitor risk appetite.”

Maybe it's just my unusual imagination, but on reading these words images were conjured up of rugged individualists surviving in a Darwinian jungle fraught with risk and danger with only the meanest and leanest, the almighty GS, fighting its way to the top to rule over the dominion.

But the real accolades in all of this iconography should really be going to the notional taxpayer who has provided the cover for acts of extraordinary generosity with public money to preserve the mythology of the capitalist hero.

Not only is the hero a phantom from a Burbank back lot but so is the notional taxpayer.

Chartreuse shoots from Mr Bond

Some time ago I wrote a piece about Tim "Chartreuse Shoots" Bond, the eternal optimist who heads up the global asset allocation group at BarCap.
In his latest deliberations Mr. Bond is becoming even more euphorically bullish about the coming quarter and in so doing, like many who inhabit the bubble planets to be found at Canary Wharf and on Wall Street, finds much to celebrate about the recent employment data released last Thursday.

The June payrolls report, contrary to market perception, was entirely consistent with the recovery story. The return to positive growth, whether in output, profits or employment, is in the process of occurring right now, with the “turning point” covering the June-September period.

This is quite an assertion and, on the one hand, we are told to pay attention to the data points because that is where the evidence for this major turning point is to be found, and on the other hand, that historical data cannot really guide us.

And since we are in the midst of the cyclical turning point, historic data is of very little relevance to the actual state of the economy. We reiterate our advice to use the current pause in the cyclical asset rally to add to long exposures.

So that's all perfectly clear then.

I would keep an eye on Barclays and Barcap as these guys are the Masters of the Universe in waiting. Unlike Ian Fleming's hero, who always seemed to get himself out of a tight corner, Barcap's Mr. Bond may not have the panache to keep spinning the forecasts the way Mr. Diamond wishes.

How would Goldman Sachs know that the stolen code could be used to manipulate markets?

Joe Wiesenthal at Clusterstock draws attention to a statement made in relation to the code stolen from Goldman Sachs, which raises awkward questions for that hallowed institution. Assistant U.S. Attorney Joseph Facciponti speaking on behalf of Goldman Sachs yesterday is reported as follows:

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways"

One obviously awkward consequence of this remark is - How would Goldman Sachs know that the code could be used to manipulate markets?

Bankers are the tail wagging a sick dog

One of the most astute observers of the financial world, Simon Johnson, has a very good posting which underscores the astounding hubris of the American Bankers Association.
In Johnson's blog, which is also available here he provides the following quote from a recent ABA press release.

"It is now widely understood that the current economic situation originated primarily in the largely unregulated non-bank sector,” he said. “Banks watched as mortgage brokers and others made loans to consumers that a good banker just would not make and they now face the prospect of another burdensome layer of regulation aimed primarily at their less-regulated or unregulated competitors. It is simply unfair to inflict another burden on these banks that had nothing to do with the problems that were created."

This extraordinarily inept remark completely fails to take into account, as Simon Johnson points out, the fact that it is the rescue of the banking industry by taxpayers the world over, which explains why economic stagnation and possibly worse will be with us for years to come.

The quote provided from the ABA press release is indicative of an industry that not only has no shame but one that seems to have learned nothing from the near meltdown last fall.

The banking sector is the tail wagging the sick dog which is better known as the global economy.

Do the banks own the US government?

Here are the views of a Guardian journalist, Dean Baker, who thinks they do:

Last month, when the US Congress failed to pass a bankruptcy reform measure that would have allowed home mortgages to be modified in bankruptcy, senator Dick Durbin succinctly commented: "The banks own the place." That seems pretty clear.

After all, it was the banks' greed that fed the housing bubble with loony loans that were guaranteed to go bad. Of course the finance guys also made a fortune guaranteeing the loans that were guaranteed to go bad (ie AIG), and when everything went bust, the taxpayers got handed the bill. The cost of the bailout will certainly be in the hundreds of billions, if not more than $1tn when it is all over.

More importantly, we are looking at the most severe economic downturn since the Great Depression. The cumulative lost output over the years 2008-2012 will almost certainly exceed $5tn. That comes to more than $60,000 for an average family of four. This is the price that we are paying for the bankers' greed, coupled with incredible incompetence and/or corruption from our regulators.

Under these circumstances, it would be reasonable to think that the bankers would be keeping a low profile for a while. That's not the way it works in Washington. The banks are aggressively pushing their case in Congress and Obama administration. Not only are we not going to see bankruptcy reform, but any financial reform package that gets through Congress will probably contain enough loopholes that it will be almost useless.

US dollar holdings are "a problem for us" says Indian official

The ongoing campaigning within the BRIC economies for a serious rethinking of the need to replace the US Dollar as the global reserve currency appears now be to be gaining momentum as the Indian government are now taking the matter seriously at the highest levels with one senior adviser to the Indian PM saying that -- "The major part of Indian reserves is in dollars -- that is something that’s a problem for us"

In the following piece it is reported by Blomberg that India is now joining for calls at the upcoming G8 and G20 meetings for the first steps in establishing an auxiliary unit of account which will ease the dependency of major creditor nations on the currency of the largest debtor nation.

Suresh Tendulkar, an economic adviser to Indian Prime Minister Manmohan Singh, said he is urging the government to diversify its $264.6 billion foreign-exchange reserves and hold fewer dollars.

Singh is preparing to join leaders from the Group of Eight industrialized nations -- the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia -- at a summit in Italy next week which is due to tackle the global economy. China and Brazil will also send representative to the summit.

As the talks have neared, China and Russia have stepped up calls for a rethink of how global currency reserves are composed and managed, underlining a power shift to emerging markets from the developed nations that spawned the financial crisis.

Also from the July 4 Bloomberg news story, it is becoming increasingly apparent that the Chinese government are not going to let this issue get kicked into the long grass, no matter how awkward it will become for President Obama and his cronies in the major Wall street firms - nor for that matter Mr Brown who is keen to protect the dominance of London in traditional forex trading