Back in the old days (pre-1980s), the term systemic risk did not refer to contagion of illiquidity within the financial sector alone. Back then, when the real economy was much more important than low margin, unglamorous banking, it was understood that the really scary systemic risk was the risk of contagion of illiquidity from the financial sector to the real economy of trade in real goods and real services.
If you think of it, every single non-cash commercial transaction requires the intermediation of banks on behalf of – at the very least – the buyer and the seller. If you lengthen the supply chain to producers, exporters and importers and allow for agents along the way, the chain of banks involved becomes quite long and complex.
When central bankers back in the old days argued that banks were “special” – and therefore demanded higher capital, strict limits on leverage, tight constraints on business activity, and superior integrity of management – it was because they appreciated the harm that a bank failure would have in undermining the supply chain for business in the real economy for real people causing real joblessness and real hunger if any bank along the chain should be unable to perform.
As the “specialness” of banks eroded with the decline of the real economy (and the migration globally of many of those real jobs making real goods and providing real added-value services to real people), the nature of systemic risk was adjusted to become self-referencing to the financial elite. Central bankers of the current generation only understand systemic risk as referring to contagion of illiquidity among financial institutions.
They and we all are about to learn the lessons of the past anew.
We are now starting to see the contagion effects of the current liquidity crisis feed through to the real economy. We are about to go back to the bad old days. Whether the zombie banks are kept on life support by the central banks and taxpayers of the world is highly relevant to whether the zombie bank executives pay themselves outsize bonuses and their zombie shareholders outsize dividends with taxpayer money. It appears sadly irrelevant to whether the banks perform their function of intermediating credit and commercial transactions in the real economy along the supply chain. The bailout cash and executive and shareholder priorities do not seem to reach so far.
The recent 93 percent collapse of the obscure Baltic Dry Index – an index of the cost of chartering bulk cargo vessels for goods like ore, cotton, grain or similar dry tonnage – has caused a bit of a stir among the financial cognoscenti. What is less discussed amidst the alarm is the reason for the collapse of the index – the collapse of trade credit based on the venerable letter of credit.
Letters of credit have financed trade for over 400 years. They are considered one of the more stable and secure means of finance as the cargo is secures the credit extended to import it. The letter of credit irrevocably advises an exporter and his bank that payment will be made by the importer's issuing bank if the proper documentation confirming a shipment is presented. This was seen as low risk as the issuing bank could seize and sell the cargo if its client defaulted after payment was made. Like so much else in this topsy turvy financial crisis, however, the verities of the ages have been discarded in favour of new and unpleasant realities.
The combination of the global interbank lending freeze with the collapse of the speculative, leveraged commodity price bubble have undermined both the confidence of banks in the ability of a far-flung peer bank to pay an obligation when due and confidence in the value of the dry cargo as security for the credit if liquidated on default. The result is that those with goods to export and those with goods to import, no matter how worthy and well capitalised, are left standing quayside without bank finance for trade.
Adding to the difficulties, letters of credit are so short term that they become an easy target for scaling back credit as liquidity tightens around bank operations globally. Longer term “assets” – like mortgage-back securities, CDOs and CDSs – can’t be easily renegotiated, and banks are loathe to default to one another on them because of cross-default provisions. Short term credit like trade finance can be cut with the flick of an executive wrist.
Further adding to the difficulties, many bulk cargoes are financed in dollars. Non-US banks have been progressively starved of dollar credit because US banks hoarded it as the funding crisis intensified. Recent currency swaps between central banks should be seen in this light, noting the allocation of Federal Reserve dollar liquidity to key trading partners Brazil, Mexico, South Korea and Singapore in particular.
Fixing this problem shouldn't be left to the Fed. They aren't going to make it a priority. Indeed, their determination to accelerate the payment of interest on reserves and then to raise that rate to match the Fed Funds target rate indicates that the Fed are more likely to constrain trade finance liquidity rather than improve it. Furthermore, the Fed may be highly selective in its allocation of dollar liquidity abroad, prejudicing the economic prospects of a large part of the world that is either indifferent or hostile to the continuation of American dollar hegemony.
.
If cargo trade stops, a whole lot of supply chain disruption starts. If the ore doesn’t go to the refinery, there is no plate steel. If the plate steel doesn’t get shipped, there is nothing to fabricate into components. If there are no components, there is nothing to assemble in the factory. If the factory closes the assembly line, there are no finished goods. If there are no finished goods, there is nothing to restock the shelves of the shops. If there is nothing in the shops, the consumers don’t buy. If the consumers don’t buy, there is no Christmas.
Everyone along the supply chain should worry about their jobs. Many will lose their jobs sooner rather than later.
If cargo trade stops, the wheat doesn’t get exported. If the wheat doesn’t get exported, the mill has nothing to grind into flour. If there is no flour, the bakeries and food processors can’t produce bread and pasta and other foods. If there are no foods shipped from the bakeries and factories, there are no foods in the shops. If there are no foods in the shops, people go hungry. If people go hungry their children go hungry. When children go hungry, people riot and governments fall.
Everyone along the supply chain should worry about their children going hungry.
When that happens, everyone in governments should worry about the riots.
Controlling access to trade finance determines who loses their jobs, whose children go hungry, who riots, which governments fall. Without dedicated focus on the issue of trade finance and liquidity from those in the emerging world most interested in sustaining the growth of recent years, little progress can be expected.Trade finance is rapidly communicating the stress on bank liquidity to the real economy. It presents a systemic risk much more frightening than the collapsing value of bits of paper traded electronically in London and New York. It could collapse the employment, the well being and the political stability of most of the world’s population.
The World Trade Organisation hosted a meeting on trade credit in Washington Wednesday to highlight the rapid and accelerating deterioration in trade finance as an urgent priority for public policy.
I look at the precipitous collapse of the Baltic Dry Index and I wish them Godspeed.
Further reading:
WTP warns of trade finance ‘deteriorating’ amid financial crisis
Cost of some trade finance deals up sixfold – WTO
Shipping holed beneath the water line
Shipowners idle 20 percent of bulk vessels as rates collapse
Sunday, November 14, 2010
Friday, October 8, 2010
Turbulence and Trends
A trend is a trend is a trend.
But the question is, will it bend?
Will it alter its course
through some unforeseen force
and come to a premature end?
-- Sir Alec Cairncross
I’ve had a lot of meetings this week, and very little time to reflect on fast moving events. This entry may be light on cites and hyperlinks as I’m in a bit of a rush today. It will also lack much in the way of perspective or insight as I find it impossible to distance myself just now from the swirling turbulence around me.
Here in Britain, several banks were offered partial nationalisation as an alternative to private recapitalisation. Strangely, this seems to have encouraged them to more strenuous efforts to recapitalise. The plan is now being held up as a model as it seems to force managements to confront their undercapitalisation as a problem that they can solve to their advantage or that will be solved for them to their heavy personal cost.
Iceland collapsed. It was more of a hedge fund than a country, with it’s 200,000 population supporting a massive leveraged position in financial markets via risk loving bankers and financiers. There were approximately 200,000 British depositors in accounts offered by Icelandic banks. Local authorities (municipalities) and charities were also big investors, exposed for more than £700 million. As a result, the government has frozen Icelandic-owned assets in the United Kingdom – using terrorism legislation, naturally – to provide the basis for a partial recovery of the losses likely to be incurred. This is causing more stress between the two island nations than they have known since the Cod Wars of the 1980s. Also causing tension is a rumour that Russia might bailout Iceland with $4.5 billion of credit, leading to speculation that the Russians may be eying the vacant airbase formerly used by Americans. This is problematic as Iceland is a member of NATO, and so has spurred efforts toward finding European alternatives.
Europe continues to call for collaboration while each country unilaterally defines and acts on its self-interest. That is the way it should be, and I approve heartily. I would rather not have the European Union making hasty decisions or holding such concentrated powers that it can force a uniform resolution across all member states. Either the EU builds consensus for action in the common interest, or it remains impotent. Either is preferable to too much concentration of power in Brussels.
In an attempt to shut just one stable door in a barn full of bolting horses, the Treasury has laid legislation before Parliament to reform the treatment of UK bank insolvencies and deposit insurance arrangements. Roughly described, the Financial Services Authority will decide if a bank is bust, the Bank of England will be responsible for overseeing its resolution and ensuring financial stability of the system, and the Treasury will oversee a new deposit insurance scheme that no one can currently describe but will make permanent the rise in protection to £50,000 per depositor. Despite the massive failure of Lehman, and the huge losses incurred by investors and hedge fund prime brokerage clients in London, the legislation is completely silent on the insolvencies of investment banks and broker-dealers and other institutions of systemic importance to financial markets. My fear is that the failure to address the systemic issues as a whole will be a vulnerability exploited by US banks and authorities as they try to undermine London as a financial centre, gaming the fragile global markets.
There is still a touching confidence among many in the City that the US authorities will provide the “leadership” to reinforce collapsing markets. As John Plender of the Financial Times quipped, “Gaul votes for Rome to take the strain.” This seems to me to display a total incomprehension of the way US authorities operate to externalise pain and loss to the greatest extent possible in times of crisis. Gaul, after all, was an occupied state that was militarily and economically exploited to Rome’s advantage for centuries before Rome’s collapse. Saving Gaul was never a high priority once Rome was threatened.
Elsewhere in the world, bureaucrats continue to show up at the office in the morning and check to make sure all boxes are ticked, all forms are correctly ordered, and all initiatives in progress continue their stately way forward unimpeded by global chaos. I find this comforting, although much of their efforts will ultimately prove futile and failed.
Finally, an optimistic note. I was reminded yesterday that the vast bulk of “wealth” created during the Greenspan/Bernanke bubble years accrued to the very top percentiles of population – with many in the OECD middle class and lower class either stagnating or getting poorer as they mired themselves in unsustainable debt. While opportunity and employment grew strongly in emerging countries, there too the elites gained disproportionately as income inequalities surged. The crash of global financial markets therefore will have disproportionate effect on the elites, impoverishing them to a far greater extent, although it will be felt throughout society as employment, pensions, investments and public services contract.
Once we hit bottom of this downturn, some years hence in all probability, we may experience a democratisation of wealth and opportunity like none seen since the end of World War II when education reforms and unionisation laid the groundwork for the rise of the American and OECD middle classes. Those who have lost economic and political power during the boom years, are likely to organise and retake authority within economic and political systems during the bust years. The collapse of concentrated wealth in Wall Street will spur more collaborative capital formation and investment throughout the economy. This could provide reorientation of economic progress toward more equitable, sustainable and democratic outcomes in coming generations. I hope so, it’s the only bright spot of the week.
But the question is, will it bend?
Will it alter its course
through some unforeseen force
and come to a premature end?
-- Sir Alec Cairncross
I’ve had a lot of meetings this week, and very little time to reflect on fast moving events. This entry may be light on cites and hyperlinks as I’m in a bit of a rush today. It will also lack much in the way of perspective or insight as I find it impossible to distance myself just now from the swirling turbulence around me.
Here in Britain, several banks were offered partial nationalisation as an alternative to private recapitalisation. Strangely, this seems to have encouraged them to more strenuous efforts to recapitalise. The plan is now being held up as a model as it seems to force managements to confront their undercapitalisation as a problem that they can solve to their advantage or that will be solved for them to their heavy personal cost.
Iceland collapsed. It was more of a hedge fund than a country, with it’s 200,000 population supporting a massive leveraged position in financial markets via risk loving bankers and financiers. There were approximately 200,000 British depositors in accounts offered by Icelandic banks. Local authorities (municipalities) and charities were also big investors, exposed for more than £700 million. As a result, the government has frozen Icelandic-owned assets in the United Kingdom – using terrorism legislation, naturally – to provide the basis for a partial recovery of the losses likely to be incurred. This is causing more stress between the two island nations than they have known since the Cod Wars of the 1980s. Also causing tension is a rumour that Russia might bailout Iceland with $4.5 billion of credit, leading to speculation that the Russians may be eying the vacant airbase formerly used by Americans. This is problematic as Iceland is a member of NATO, and so has spurred efforts toward finding European alternatives.
Europe continues to call for collaboration while each country unilaterally defines and acts on its self-interest. That is the way it should be, and I approve heartily. I would rather not have the European Union making hasty decisions or holding such concentrated powers that it can force a uniform resolution across all member states. Either the EU builds consensus for action in the common interest, or it remains impotent. Either is preferable to too much concentration of power in Brussels.
In an attempt to shut just one stable door in a barn full of bolting horses, the Treasury has laid legislation before Parliament to reform the treatment of UK bank insolvencies and deposit insurance arrangements. Roughly described, the Financial Services Authority will decide if a bank is bust, the Bank of England will be responsible for overseeing its resolution and ensuring financial stability of the system, and the Treasury will oversee a new deposit insurance scheme that no one can currently describe but will make permanent the rise in protection to £50,000 per depositor. Despite the massive failure of Lehman, and the huge losses incurred by investors and hedge fund prime brokerage clients in London, the legislation is completely silent on the insolvencies of investment banks and broker-dealers and other institutions of systemic importance to financial markets. My fear is that the failure to address the systemic issues as a whole will be a vulnerability exploited by US banks and authorities as they try to undermine London as a financial centre, gaming the fragile global markets.
There is still a touching confidence among many in the City that the US authorities will provide the “leadership” to reinforce collapsing markets. As John Plender of the Financial Times quipped, “Gaul votes for Rome to take the strain.” This seems to me to display a total incomprehension of the way US authorities operate to externalise pain and loss to the greatest extent possible in times of crisis. Gaul, after all, was an occupied state that was militarily and economically exploited to Rome’s advantage for centuries before Rome’s collapse. Saving Gaul was never a high priority once Rome was threatened.
Elsewhere in the world, bureaucrats continue to show up at the office in the morning and check to make sure all boxes are ticked, all forms are correctly ordered, and all initiatives in progress continue their stately way forward unimpeded by global chaos. I find this comforting, although much of their efforts will ultimately prove futile and failed.
Finally, an optimistic note. I was reminded yesterday that the vast bulk of “wealth” created during the Greenspan/Bernanke bubble years accrued to the very top percentiles of population – with many in the OECD middle class and lower class either stagnating or getting poorer as they mired themselves in unsustainable debt. While opportunity and employment grew strongly in emerging countries, there too the elites gained disproportionately as income inequalities surged. The crash of global financial markets therefore will have disproportionate effect on the elites, impoverishing them to a far greater extent, although it will be felt throughout society as employment, pensions, investments and public services contract.
Once we hit bottom of this downturn, some years hence in all probability, we may experience a democratisation of wealth and opportunity like none seen since the end of World War II when education reforms and unionisation laid the groundwork for the rise of the American and OECD middle classes. Those who have lost economic and political power during the boom years, are likely to organise and retake authority within economic and political systems during the bust years. The collapse of concentrated wealth in Wall Street will spur more collaborative capital formation and investment throughout the economy. This could provide reorientation of economic progress toward more equitable, sustainable and democratic outcomes in coming generations. I hope so, it’s the only bright spot of the week.
Saturday, October 2, 2010
Financial Eugenics: The Paulson Plan for Survivor Bias
As I write this I don’t know the outcome of the attempt to ram through legislation for looting the US Treasury of $700 billion before the end of the Bush administration. I suspect that Congress will force the passage of the bill in some form because the media and political narrative on the necessity of the measure is unremitting and so horribly biased.
No alternatives will be considered.
No constraints on the unilateral executive authority of Hank Paulson will be considered.
No assurances that funds will be used to unlock credit markets or promote lending to the real economy (as opposed to the financial robber barons) will be considered.
Instead, the bill will get laden with an additional 300 pages of pork to sway the dissenters, adding to the tab imposed on the American taxpayer.
Having listened to all 42 minutes of the late night Treasury briefing of investment banks on Sunday, there is no doubt in my mind that this legislation represents the sort of federal largesse for Goldman Sachs, Morgan Stanley, Citibank and JPMorgan Chase that the Iraq war provided for Halliburton and Blackwater.
The most cynical moment in the call is when the Treasury official confirms, ”our preference would be to help the healthy banks become even healthier” rather than helping troubled banks or illiquid banks.
America is now a centrally planned economy where the Treasury will determine which firms survive and prosper through allocation of scarce capital to an undercapitalised financial sector.
Clearly what is going on here has nothing to do with kick starting the credit markets or stabilising the equity markets or restoring depositor confidence in banks. (Treasury official: “No provision in the legislation that mandates re-lending.”) What is going on here is a blatant attempt to provide government funds to a select cadre of firms (not all banks) which are chosen to be the survivors feasting off the carcasses of their less fortunate and less well-connected brethren as the downturn intensifies in the years to come.
The crash in equities will still happen. The debt deflation of the economy leading to mass commercial and consumer credit defaults will still happen. The collapse of many national, regional and local financial institutions will still happen. The bankruptcy of many municipalities and shortfalls in state budgets will still happen.
This bill is about engineering survivor bias to friends of the Bush administration so that they profit disproportionately from the collapse of these markets using the funds provided by the taxpayer via the unreviewable and unconditional authority of the Secretary of the Treasury.
The basic plan is to set up a federal money laundering operation. Bad assets come in, get laundered by the Treasury and put in a new AAA “wrapper” (as it’s termed on the call), and good assets go out, issued as Treasury guaranteed securities. Whether the final value of the legislation this week is $700 billion or $150 billion is irrelevant as long as the laundering operation can accommodate the throughput, as that number is only a cap on total extensions at any one time.
The SEC will support the plan and survivor bias by relaxing FASB 157 on mark to market accounting. If there is no agreement on what an asset is worth, it is worth whatever the firm holding it says in its Level 3 accounts or the Treasury Secretary accepts in buying it.
The Federal Reserve will support the plan by relaxing the definition of “control stake” in US banks and bank holding companies to allow secretive cabals to hold through private equity and offshore hedge funds. No one knows the beneficial owners of these ill-transparent private equity investors, and so it is the ideal way to reward loyal and helpful insiders, legislators and officials – as well as cede further ownership of American assets to foreign stakeholders who would be politically unacceptable if publicly acknowledged. Many foreign creditors are irate at the losses their funds, banks and pensioners have sustained from investments in the United States, and this plan provides a secret way to buy them off and keep them lending and investing as their own economies are roiled by the deflation to come.
For the past year the survivor bias has been orchestrated from the Federal Reserve, with its extension of innovative credit facilities and selectively engineered rescues or forced mergers. That has been very useful, but that well is now dry. The Fed has no more good assets to trade for the bad assets the banks can offer. And the supply of bad assets just keeps growing as market illiquidity spreads further from the core of the mortgage backed securities market. Instability is now leading to a realistic threat that the Fed and Treasury could lose control of the deflationary process.
Part of the reason the Paulson Plan is so attractive is that it recapitalises the Fed by promoting the unwinding of repos and lending facilities which left the Fed holding toxic assets. As the repos and credit facilities gradually unwind, these toxic assets can now be taken back by the banks and exchanged for good cash. The Fed gets its balance sheet Treasuries and cash back to restore its flexibility to intervene anew.
Favoured private equity and insiders who swap US dollars for equity in the banking system will presumably be aware of the survivor bias being engineered on their behalf. Sovereign wealth funds, investment funds and private equity investors ripped off in the first round of recapitalisation may be willing to come back in once it is clear to them that the next round will benefit from official favouritism. Warren Buffett’s timely stake in Goldman Sachs is clearly linked to his confidence the Paulson Plan will benefit them disproportionately.
A factor which is probably critical but has received little discussion is that literally thousands of Bush administration apparatchiks will need jobs come January, and a fair selection of GOP House and Senate legislators and their aides too. What better way to enahance their CVs in their final months in power than to distribute $700 billion or so in pre-Christmas largesse to the most remunerative employers in the world? And what better way to ensure the corporate largesse is returned to the GOP to win back the White House and Congress in 2012 as the recession fuels public anger?
And then there is a huge arbitrage opportunity as well so that everyone makes money for years to come. According to the conference call, the pricing on offer from the Treasury will be a bit below Level 3 pricing. The toxic assets will be repackaged and resold with a new AAA wrapper, possibly priced well below what the Treasury paid, assuring a huge profit on both immediate liquidation by the banks and ultimate maturity by investors. The Fed gets its cash and Treasuries back; the banks make huge profits; the foreigners and off-shore tax avoiders get disguised ownership of the American financial system; the taxpayer gets ripped off. What’s not to love?
Think back to Fisher’s Theory of Debt Deflation in Great Depressions. Dollars become “bigger” as deflation takes hold because each dollar can buy more assets as assets deflate. That means that as these clowns crash the markets, their $700 billion of liquid cash funnelled to their friends and recycled through the Treasury laundrymat can progressively buy up the rest of the pieces on the gameboard at low discount prices. Game over with those who caused the crash and robbed the bank winning.
Deflation is going to happen – globally. Either we can use the course of deflation to shape healthy economies that will provide growth and employment and productive returns on investment in future, or we can allow deflation to further enrich those miscreants whose irresponsible policies led to the violent financial collapse we are about to experience.
There is a fundamentally healthy economy in America – somewhere underneath all the financial excess and chicanery and all the financial/oil/military/healthcare/developer corruption of local, state and federal politics. It will be a painful and slow process to kill off the metastasising cancerous growths on the economy, but if Americans achieved that, they could embrace a healthier and more productive and more prosperous future.
I would like to believe Americans expressed the courage to change over last weekend when they 25 to 1 rejected an unconstrained and unconditional bailout of Wall Street in favour of cold turkey deleveraging of the economy. I wish I could believe that it mattered in the political calculus, but the result of the House vote on the bill will tell us that.
Fight the survivor bias. It’s not your survival they’re engineering.
No alternatives will be considered.
No constraints on the unilateral executive authority of Hank Paulson will be considered.
No assurances that funds will be used to unlock credit markets or promote lending to the real economy (as opposed to the financial robber barons) will be considered.
Instead, the bill will get laden with an additional 300 pages of pork to sway the dissenters, adding to the tab imposed on the American taxpayer.
Having listened to all 42 minutes of the late night Treasury briefing of investment banks on Sunday, there is no doubt in my mind that this legislation represents the sort of federal largesse for Goldman Sachs, Morgan Stanley, Citibank and JPMorgan Chase that the Iraq war provided for Halliburton and Blackwater.
The most cynical moment in the call is when the Treasury official confirms, ”our preference would be to help the healthy banks become even healthier” rather than helping troubled banks or illiquid banks.
America is now a centrally planned economy where the Treasury will determine which firms survive and prosper through allocation of scarce capital to an undercapitalised financial sector.
Clearly what is going on here has nothing to do with kick starting the credit markets or stabilising the equity markets or restoring depositor confidence in banks. (Treasury official: “No provision in the legislation that mandates re-lending.”) What is going on here is a blatant attempt to provide government funds to a select cadre of firms (not all banks) which are chosen to be the survivors feasting off the carcasses of their less fortunate and less well-connected brethren as the downturn intensifies in the years to come.
The crash in equities will still happen. The debt deflation of the economy leading to mass commercial and consumer credit defaults will still happen. The collapse of many national, regional and local financial institutions will still happen. The bankruptcy of many municipalities and shortfalls in state budgets will still happen.
This bill is about engineering survivor bias to friends of the Bush administration so that they profit disproportionately from the collapse of these markets using the funds provided by the taxpayer via the unreviewable and unconditional authority of the Secretary of the Treasury.
The basic plan is to set up a federal money laundering operation. Bad assets come in, get laundered by the Treasury and put in a new AAA “wrapper” (as it’s termed on the call), and good assets go out, issued as Treasury guaranteed securities. Whether the final value of the legislation this week is $700 billion or $150 billion is irrelevant as long as the laundering operation can accommodate the throughput, as that number is only a cap on total extensions at any one time.
The SEC will support the plan and survivor bias by relaxing FASB 157 on mark to market accounting. If there is no agreement on what an asset is worth, it is worth whatever the firm holding it says in its Level 3 accounts or the Treasury Secretary accepts in buying it.
The Federal Reserve will support the plan by relaxing the definition of “control stake” in US banks and bank holding companies to allow secretive cabals to hold through private equity and offshore hedge funds. No one knows the beneficial owners of these ill-transparent private equity investors, and so it is the ideal way to reward loyal and helpful insiders, legislators and officials – as well as cede further ownership of American assets to foreign stakeholders who would be politically unacceptable if publicly acknowledged. Many foreign creditors are irate at the losses their funds, banks and pensioners have sustained from investments in the United States, and this plan provides a secret way to buy them off and keep them lending and investing as their own economies are roiled by the deflation to come.
For the past year the survivor bias has been orchestrated from the Federal Reserve, with its extension of innovative credit facilities and selectively engineered rescues or forced mergers. That has been very useful, but that well is now dry. The Fed has no more good assets to trade for the bad assets the banks can offer. And the supply of bad assets just keeps growing as market illiquidity spreads further from the core of the mortgage backed securities market. Instability is now leading to a realistic threat that the Fed and Treasury could lose control of the deflationary process.
Part of the reason the Paulson Plan is so attractive is that it recapitalises the Fed by promoting the unwinding of repos and lending facilities which left the Fed holding toxic assets. As the repos and credit facilities gradually unwind, these toxic assets can now be taken back by the banks and exchanged for good cash. The Fed gets its balance sheet Treasuries and cash back to restore its flexibility to intervene anew.
Favoured private equity and insiders who swap US dollars for equity in the banking system will presumably be aware of the survivor bias being engineered on their behalf. Sovereign wealth funds, investment funds and private equity investors ripped off in the first round of recapitalisation may be willing to come back in once it is clear to them that the next round will benefit from official favouritism. Warren Buffett’s timely stake in Goldman Sachs is clearly linked to his confidence the Paulson Plan will benefit them disproportionately.
A factor which is probably critical but has received little discussion is that literally thousands of Bush administration apparatchiks will need jobs come January, and a fair selection of GOP House and Senate legislators and their aides too. What better way to enahance their CVs in their final months in power than to distribute $700 billion or so in pre-Christmas largesse to the most remunerative employers in the world? And what better way to ensure the corporate largesse is returned to the GOP to win back the White House and Congress in 2012 as the recession fuels public anger?
And then there is a huge arbitrage opportunity as well so that everyone makes money for years to come. According to the conference call, the pricing on offer from the Treasury will be a bit below Level 3 pricing. The toxic assets will be repackaged and resold with a new AAA wrapper, possibly priced well below what the Treasury paid, assuring a huge profit on both immediate liquidation by the banks and ultimate maturity by investors. The Fed gets its cash and Treasuries back; the banks make huge profits; the foreigners and off-shore tax avoiders get disguised ownership of the American financial system; the taxpayer gets ripped off. What’s not to love?
Think back to Fisher’s Theory of Debt Deflation in Great Depressions. Dollars become “bigger” as deflation takes hold because each dollar can buy more assets as assets deflate. That means that as these clowns crash the markets, their $700 billion of liquid cash funnelled to their friends and recycled through the Treasury laundrymat can progressively buy up the rest of the pieces on the gameboard at low discount prices. Game over with those who caused the crash and robbed the bank winning.
Deflation is going to happen – globally. Either we can use the course of deflation to shape healthy economies that will provide growth and employment and productive returns on investment in future, or we can allow deflation to further enrich those miscreants whose irresponsible policies led to the violent financial collapse we are about to experience.
There is a fundamentally healthy economy in America – somewhere underneath all the financial excess and chicanery and all the financial/oil/military/healthcare/developer corruption of local, state and federal politics. It will be a painful and slow process to kill off the metastasising cancerous growths on the economy, but if Americans achieved that, they could embrace a healthier and more productive and more prosperous future.
I would like to believe Americans expressed the courage to change over last weekend when they 25 to 1 rejected an unconstrained and unconditional bailout of Wall Street in favour of cold turkey deleveraging of the economy. I wish I could believe that it mattered in the political calculus, but the result of the House vote on the bill will tell us that.
Fight the survivor bias. It’s not your survival they’re engineering.
Monday, September 20, 2010
Florida Arrests Alleged Citizens Property Scammer
Florida Chief Financial Officer Alex Sink today announced the arrest of Aylin Hernandez, 23, of Miami, for fraudulently diverting mail and stealing payments intended for Citizens Property Insurance Corporation.
Hernandez was arrested this morning and booked into the Turner Guilford Knight Correctional Center in Miami-Dade County on charges of organized fraud and grand theft. The arrest results from an investigation by the Division of Insurance Fraud, with assistance by Citizens Property Insurance Corporations' Special Investigations Unit. If convicted, Hernandez faces up to 45 years behind bars.
"This fraudster is getting exactly what she deserves—serious jail time," said Sink, in a statement. "I am grateful for the work of my investigators and Citizens' Special Investigations Unit for working together to put her behind bars. Would-be scammers out there need to know that this kind of action will not be tolerated."
Working with investigators from Citizens Property Insurance Corporation, the Division of Insurance Fraud established that Hernandez created her own corporation named Citizens Property Insurance, Inc., and opened an account under that name at Check Cashing USA.
Using information she obtained while working as a clerk in several local insurance agencies, Hernandez sent invoices to various law offices and title companies, which were handling homeowners insurance escrow and service payments. The victims, believing their payments were going to the legitimate Citizens Property Insurance Corporation, sent eight checks totaling over $12,000, which were then cashed by Hernandez.
Hernandez was arrested this morning and booked into the Turner Guilford Knight Correctional Center in Miami-Dade County on charges of organized fraud and grand theft. The arrest results from an investigation by the Division of Insurance Fraud, with assistance by Citizens Property Insurance Corporations' Special Investigations Unit. If convicted, Hernandez faces up to 45 years behind bars.
"This fraudster is getting exactly what she deserves—serious jail time," said Sink, in a statement. "I am grateful for the work of my investigators and Citizens' Special Investigations Unit for working together to put her behind bars. Would-be scammers out there need to know that this kind of action will not be tolerated."
Working with investigators from Citizens Property Insurance Corporation, the Division of Insurance Fraud established that Hernandez created her own corporation named Citizens Property Insurance, Inc., and opened an account under that name at Check Cashing USA.
Using information she obtained while working as a clerk in several local insurance agencies, Hernandez sent invoices to various law offices and title companies, which were handling homeowners insurance escrow and service payments. The victims, believing their payments were going to the legitimate Citizens Property Insurance Corporation, sent eight checks totaling over $12,000, which were then cashed by Hernandez.
Monday, September 13, 2010
Departure of Insurer from Florida Points Up Fraud Problem
With a letter sent out a few weeks ago, Explorer Insurance announced that it will no longer write private automobile policies in Florida because there is too much fraud.
"The company is taking this action in light of poor ongoing business results in Florida, particularly in the area of private passenger automobile no-fault coverage, in which loss fraud has been rampant with no signs of abatement," Explorer vice president, Steve Frisina, said in the letter to Florida's Office of Insurance Regulation.
The letter said Explorer intends to send termination notices to agents who sell its coverage within a week of the Office's acceptance of its plan. Policy holders will begin receiving non-renewal notices also within one week. And, by January 2012, no Explorer policies will remain in effect.
The Office has deferred accepting Explorer's plan for the time being present, until the company can fix some of the details of its exit.
In the meantime, however, Explorer has severely restricted the number of policies its agents are allowed to write and has told agents it is no longer paying commissions as of this week, according to a Tampa agent.
"They were going to be over $100,000 in premiums for us this year," said John Guthrie, of the John Guthrie Agency, Tampa. He has had severe restrictions on the number of policies he can write for Explorer since May.
Guthrie said that fraud is a big problem that is chasing many auto insurance carriers out of the market. Last year at this time, his agency represented 16 or 17 carriers, he said. Now the agency is down to three.
"The companies are all just pulling out or they are making underwriting so restrictive that you can't get the people through the approval," he said.
In May, the National Insurance Crime Bureau released a report that said that Florida has led the nation in suspected staged auto accidents the last three years in a row. According to the report, Florida had 3,006 suspicious claims from 2007 to 2009, and that was almost twice as many as the two states with the next most suspicious claims, New York and California.
The worst place in Florida was Tampa, the report said. Previously the worst place had been Miami and South Florida. But, in 2009, there were 487 questionable claims related to staged accidents in Tampa, while there were only 258 such claims in Miami.
Guthrie said he and some of his fellow agents in Tampa's Hillsborough County have gotten so frustrated by the situation, and by the lack of government action to crack down, that they have begun collecting petition signatures from new policy and renewal clients and forwarding that petition on to the Department of Financial Services, which houses the Division of Insurance Fraud.
"They need to do something about this fraud," he said.
Jack McDermott, a spokesperson from the Office of Insurance Regulation, said that fraud was not the responsibility of his agency so they do not know much about it. But "We have heard, anecdotally, from other companies that they have been having trouble with fraud," he said.
Explorer, which is based in Santa Clarita, Calif., is a member company of the ICW Group, San Diego. Until now, it has sold automobile policies only in California and Florida.
As of the end of July, the company had 16,576, in-force policies in the private passenger automobile insurance line in Florida, with direct written premiums of $16.1 million and a loss ratio of 124.2.
Eileen Beaudette, an agent in Naples who has been an Explorer representative, said that in her area fraud and staged crashes are not a big problem and she has not had carriers stop writing. But she has been aware that it is a big problem in Tampa and on the east coast of the state.
"We've been lucky," said Beaudette, of A Auto Buyers Insurance. "We still have a lot of carriers writing."
Beaudette said that Explorer was never a very big part of her agency's business because their rates were not very good.
"The company is taking this action in light of poor ongoing business results in Florida, particularly in the area of private passenger automobile no-fault coverage, in which loss fraud has been rampant with no signs of abatement," Explorer vice president, Steve Frisina, said in the letter to Florida's Office of Insurance Regulation.
The letter said Explorer intends to send termination notices to agents who sell its coverage within a week of the Office's acceptance of its plan. Policy holders will begin receiving non-renewal notices also within one week. And, by January 2012, no Explorer policies will remain in effect.
The Office has deferred accepting Explorer's plan for the time being present, until the company can fix some of the details of its exit.
In the meantime, however, Explorer has severely restricted the number of policies its agents are allowed to write and has told agents it is no longer paying commissions as of this week, according to a Tampa agent.
"They were going to be over $100,000 in premiums for us this year," said John Guthrie, of the John Guthrie Agency, Tampa. He has had severe restrictions on the number of policies he can write for Explorer since May.
Guthrie said that fraud is a big problem that is chasing many auto insurance carriers out of the market. Last year at this time, his agency represented 16 or 17 carriers, he said. Now the agency is down to three.
"The companies are all just pulling out or they are making underwriting so restrictive that you can't get the people through the approval," he said.
In May, the National Insurance Crime Bureau released a report that said that Florida has led the nation in suspected staged auto accidents the last three years in a row. According to the report, Florida had 3,006 suspicious claims from 2007 to 2009, and that was almost twice as many as the two states with the next most suspicious claims, New York and California.
The worst place in Florida was Tampa, the report said. Previously the worst place had been Miami and South Florida. But, in 2009, there were 487 questionable claims related to staged accidents in Tampa, while there were only 258 such claims in Miami.
Guthrie said he and some of his fellow agents in Tampa's Hillsborough County have gotten so frustrated by the situation, and by the lack of government action to crack down, that they have begun collecting petition signatures from new policy and renewal clients and forwarding that petition on to the Department of Financial Services, which houses the Division of Insurance Fraud.
"They need to do something about this fraud," he said.
Jack McDermott, a spokesperson from the Office of Insurance Regulation, said that fraud was not the responsibility of his agency so they do not know much about it. But "We have heard, anecdotally, from other companies that they have been having trouble with fraud," he said.
Explorer, which is based in Santa Clarita, Calif., is a member company of the ICW Group, San Diego. Until now, it has sold automobile policies only in California and Florida.
As of the end of July, the company had 16,576, in-force policies in the private passenger automobile insurance line in Florida, with direct written premiums of $16.1 million and a loss ratio of 124.2.
Eileen Beaudette, an agent in Naples who has been an Explorer representative, said that in her area fraud and staged crashes are not a big problem and she has not had carriers stop writing. But she has been aware that it is a big problem in Tampa and on the east coast of the state.
"We've been lucky," said Beaudette, of A Auto Buyers Insurance. "We still have a lot of carriers writing."
Beaudette said that Explorer was never a very big part of her agency's business because their rates were not very good.
Monday, August 30, 2010
AIG Settlement Covers $60 Million of Ex-CEO, Ex-CFO Costs
Former longtime AIG chief Maurice ''Hank'' Greenberg and another former executive will get $60 million from the company's insurers to cover legal and other costs as part of a proposed settlement of investor lawsuits, court papers show.
The payouts to Greenberg and former Chief Financial Officer Howard Smith are in addition to $90 million that American International Group Inc.'s insurers, as previously reported, will pay directly to the company as part of the proposed settlement.
The $150 million of payouts were revealed in an Aug. 25 agreement filed in Delaware Chancery Court, and obtained Friday by Reuters.
They stem from litigation in which investors accused more than 20 onetime AIG executives and directors of poor oversight and allowing improper bonuses. The Delaware lawsuit was filed by investors on behalf of AIG.
Greenberg left AIG in March 2005 after nearly four decades at the helm.
AIG in November 2009 said it had resolved all litigation with Greenberg, and agreed to reimburse him and Smith for as much as $150 million of legal fees and expenses, according to an agreement filed with U.S. regulators.
The $60 million payout by insurers is separate from that agreement, and Greenberg and Smith represented in the earlier agreement that no one else other than the insurers was obligated to indemnify them for the relevant costs.
AIG had $200 million of insurance for directors and officers, the Delaware agreement shows. None of the sums being paid go to investors, and Greenberg and Smith are also not responsible to pay out money in connection with the agreement.
In emailed statements, AIG said it was pleased the matter has been resolved, as did Lee Wolosky, a partner at Boies, Schiller & Flexner LLP who represents Greenberg.
A lawyer who signed the Aug. 25 agreement on behalf of Smith did not immediately return a call seeking comment.
The Delaware agreement requires approval of Vice Chancellor Leo Strine of the Delaware court. A settlement will be made final upon the dismissal of similar litigation in Manhattan federal court, the agreement shows.
Based in New York, AIG in September 2008 narrowly averted collapse after becoming overexposed to risky debt. It accepted a federal bailout that grew to $182.3 billion and left taxpayers owning a nearly 80 percent stake.
Six weeks ago, AIG agreed to pay $725 million to settle a shareholder class-action lawsuit led by Ohio Attorney General Richard Cordray, who accused it of accounting fraud and trying to manipulate its stock price.
AIG still faces shareholder class-action litigation in Manhattan federal court. Greenberg has sought to dismiss a civil fraud lawsuit by New York Attorney General Andrew Cuomo over a sham reinsurance transaction.
The case is In re: American International Group Inc Derivative Litigation, Delaware Chancery Court, No. CA 769.
The payouts to Greenberg and former Chief Financial Officer Howard Smith are in addition to $90 million that American International Group Inc.'s insurers, as previously reported, will pay directly to the company as part of the proposed settlement.
The $150 million of payouts were revealed in an Aug. 25 agreement filed in Delaware Chancery Court, and obtained Friday by Reuters.
They stem from litigation in which investors accused more than 20 onetime AIG executives and directors of poor oversight and allowing improper bonuses. The Delaware lawsuit was filed by investors on behalf of AIG.
Greenberg left AIG in March 2005 after nearly four decades at the helm.
AIG in November 2009 said it had resolved all litigation with Greenberg, and agreed to reimburse him and Smith for as much as $150 million of legal fees and expenses, according to an agreement filed with U.S. regulators.
The $60 million payout by insurers is separate from that agreement, and Greenberg and Smith represented in the earlier agreement that no one else other than the insurers was obligated to indemnify them for the relevant costs.
AIG had $200 million of insurance for directors and officers, the Delaware agreement shows. None of the sums being paid go to investors, and Greenberg and Smith are also not responsible to pay out money in connection with the agreement.
In emailed statements, AIG said it was pleased the matter has been resolved, as did Lee Wolosky, a partner at Boies, Schiller & Flexner LLP who represents Greenberg.
A lawyer who signed the Aug. 25 agreement on behalf of Smith did not immediately return a call seeking comment.
The Delaware agreement requires approval of Vice Chancellor Leo Strine of the Delaware court. A settlement will be made final upon the dismissal of similar litigation in Manhattan federal court, the agreement shows.
Based in New York, AIG in September 2008 narrowly averted collapse after becoming overexposed to risky debt. It accepted a federal bailout that grew to $182.3 billion and left taxpayers owning a nearly 80 percent stake.
Six weeks ago, AIG agreed to pay $725 million to settle a shareholder class-action lawsuit led by Ohio Attorney General Richard Cordray, who accused it of accounting fraud and trying to manipulate its stock price.
AIG still faces shareholder class-action litigation in Manhattan federal court. Greenberg has sought to dismiss a civil fraud lawsuit by New York Attorney General Andrew Cuomo over a sham reinsurance transaction.
The case is In re: American International Group Inc Derivative Litigation, Delaware Chancery Court, No. CA 769.
Stanford Execs Deny Key Role in Alleged Fraud Cited by Lloyd's
Lawyers for Texas financier Allen Stanford and two accounting executives who worked for him sought to distance their clients Friday from the alleged financial wrongdoing insurer Lloyd's of London cites as a reason to void a policy covering their defense fees.
"Mr. Stanford was not really a hands-on guy,'' Robert Bennett, Stanford's attorney, said during closing arguments after four days of hearings in federal court. "Mr. Stanford was not at the center of anything illegal or wrong.''
The nondisclosure of a nearly $2 billion unsecured loan to Stanford, misrepresentations to investors and phony accounting are all grounds to stop paying claims under a directors and officers policy, the British insurer said.
Stanford, accounting executives Mark Kuhrt and Gilbert Lopez and Chief Investment Officer Laura Holt have sued Lloyd's of London over payment of the fees. But that policy has a money laundering exclusion, so Lloyd's must prove to U.S. District Judge Nancy Atlas in Houston that the plaintiffs committed that act.
Holt struck a deal with the insurer before the start of the hearings last Tuesday. She and the three other plaintiffs in this case are accused of participating in an alleged $7 billion Ponzi scheme centered around fraudulent certificates of deposit (CDs) issued by Stanford's offshore bank in Antigua.
"It is clear that the money collected for the CDs was criminal property as defined by the policy,'' said Barry Chasnoff, an attorney for Lloyd's. "There was no evidence offered to the contrary.''
BLAME DAVIS
Lawyers for Stanford and the accounting executives have placed a lot of the blame on James Davis, the former chief financial officer of Stanford International Bank Ltd. (SIB) who pleaded guilty last August to three felony counts related to the scheme.
Davis had the final sign-off on numerous financial documents from SIB, the institution the government claims is at the center of the alleged scheme, lawyers and witnesses said.
"I believe that Mr. Kuhrt and Mr. Lopez were middle-level accounting managers and it was Mr. Davis' responsibility to deal with the auditors on these issues,'' Alan Westheimer, an accountant hired by Kuhrt and Lopez as an expert witness, testified.
Stanford also relied on Davis -- his former No. 2 man at the company and former classmate from Baylor University -- as well as on the professional advice of accountants and lawyers, Bennett told the hearing.
Still, Atlas told the hearing it was clear to her that Lopez and Kuhrt "were close to the top,'' and were close to Davis.
She said she had a suspicion that Lloyd's would not be fronting legal fees to the men after the hearings.
Lloyd's has advanced as much at $6 million to pay for Stanford's attorneys, many of whom have left the case or been fired by their client.
Stanford, who is 60 and is in jail awaiting a January trial, faces one count of conspiracy to commit money laundering as part of a 21-count June 2009 indictment.
The hearings were seen as a preview of Stanford's criminal case. Many people involved in the case, including Stanford and Lopez, invoked their Fifth Amendment right and did not testify, so much evidence centered on documents that are part of the government's civil and criminal case.
The case is Laura Pendergest-Holt, R. Allen Stanford, Gilbert Lopez and Mark Kuhrt v Certain Underwriters at Lloyd's of London and Arch Specialty Insurance Co, U.S. District Court, Southern District of Texas, No. 09-3712.
"Mr. Stanford was not really a hands-on guy,'' Robert Bennett, Stanford's attorney, said during closing arguments after four days of hearings in federal court. "Mr. Stanford was not at the center of anything illegal or wrong.''
The nondisclosure of a nearly $2 billion unsecured loan to Stanford, misrepresentations to investors and phony accounting are all grounds to stop paying claims under a directors and officers policy, the British insurer said.
Stanford, accounting executives Mark Kuhrt and Gilbert Lopez and Chief Investment Officer Laura Holt have sued Lloyd's of London over payment of the fees. But that policy has a money laundering exclusion, so Lloyd's must prove to U.S. District Judge Nancy Atlas in Houston that the plaintiffs committed that act.
Holt struck a deal with the insurer before the start of the hearings last Tuesday. She and the three other plaintiffs in this case are accused of participating in an alleged $7 billion Ponzi scheme centered around fraudulent certificates of deposit (CDs) issued by Stanford's offshore bank in Antigua.
"It is clear that the money collected for the CDs was criminal property as defined by the policy,'' said Barry Chasnoff, an attorney for Lloyd's. "There was no evidence offered to the contrary.''
BLAME DAVIS
Lawyers for Stanford and the accounting executives have placed a lot of the blame on James Davis, the former chief financial officer of Stanford International Bank Ltd. (SIB) who pleaded guilty last August to three felony counts related to the scheme.
Davis had the final sign-off on numerous financial documents from SIB, the institution the government claims is at the center of the alleged scheme, lawyers and witnesses said.
"I believe that Mr. Kuhrt and Mr. Lopez were middle-level accounting managers and it was Mr. Davis' responsibility to deal with the auditors on these issues,'' Alan Westheimer, an accountant hired by Kuhrt and Lopez as an expert witness, testified.
Stanford also relied on Davis -- his former No. 2 man at the company and former classmate from Baylor University -- as well as on the professional advice of accountants and lawyers, Bennett told the hearing.
Still, Atlas told the hearing it was clear to her that Lopez and Kuhrt "were close to the top,'' and were close to Davis.
She said she had a suspicion that Lloyd's would not be fronting legal fees to the men after the hearings.
Lloyd's has advanced as much at $6 million to pay for Stanford's attorneys, many of whom have left the case or been fired by their client.
Stanford, who is 60 and is in jail awaiting a January trial, faces one count of conspiracy to commit money laundering as part of a 21-count June 2009 indictment.
The hearings were seen as a preview of Stanford's criminal case. Many people involved in the case, including Stanford and Lopez, invoked their Fifth Amendment right and did not testify, so much evidence centered on documents that are part of the government's civil and criminal case.
The case is Laura Pendergest-Holt, R. Allen Stanford, Gilbert Lopez and Mark Kuhrt v Certain Underwriters at Lloyd's of London and Arch Specialty Insurance Co, U.S. District Court, Southern District of Texas, No. 09-3712.
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