Archive for November, 2012

My Case for Jumping Off the Fiscal Cliff

96 | By Shah Gilani

“I saw my problems and I’ll see the light

“We got a lovin’ thing, we gotta feed it right

“There ain’t no danger we can go too far

“We start believin’ now that we can be who we are.

“Grease is the word…”

That’s the opening verse of the Bee Gees’ title track from the movie “Grease.”

They go on to sing “Grease is the way we are feeling.” Well, if you change the spelling of the word to “Greece,” that’s how I’m feeling about America’s debt. Both Greece and the U.S. are on a slippery slope, greased by too much debt.

And, like the song says, we are both in danger of thinking that because we see the problems, we see the light. We are both feeding it right – our debt, that is. We’re similarly deluded in believin’ there ain’t no danger we can go too far.

But that’s wrong. The danger is incredible.

You see, something just happened in Greece – something that is going to happen here and, in fact, is already happening, but doesn’t have to. We can still stop it. In fact, what’s brilliant is that Greece is an easy lesson for us. We now know how to solve the riddle about how to fix the debt mess we’re in and what exactly to do about the dreaded fiscal cliff.

Jump off of it.

That’s right. Man up, get behind it, and stop “believin’ now that we can be who we are.” We already are who we are – hopelessly in debt.

Let me haircut this for you right here: We aren’t going to fix our debt and spending problems in the next couple of weeks, or in January, or by the first quarter of 2013, or next year. We aren’t going to fix them by the next mid-term elections.

So let’s all hold hands and jump off the fiscal cliff.

Don’t be afraid. Yes, it’s a long way down, and we may never hit bottom. In fact, there is no bottom. We won’t get there. We will feel our stomachs rise in our throats on the way down, and we may even vomit a bit. But once that passes, something remarkable will happen. Something thousands of Wall Street Insights & Indictments readers tell me they want more than almost anything.

I’ll get to that.

But first: Here’s the reality about Greece. They’re “you-know-what” (rhymes with “screwed,” kind of). They can’t get past the debt they’ve accumulated. They keep adding to it, in fact. The ECB, the Eurozone euro currency group, the IMF, and Europe’s banks are all playing the “extend and pretend” game with Greece. As if the country is going to pay back its debt. Newsflash: It can’t – EVER.

Greece’s debt-to-GDP ratio is now more than 170% (the U.S. ratio is around 102%). By now it was supposed to be down to about 140%. Who are they kidding?

What happened is that politics intervened. Politics and another thing called reality – which is kind of like politics, only not as surreal.

After several rounds of bailouts, and restructurings of those bailouts, and the buying back of new debt that Greece issued by Greece itself at a discount (which means the buyers of that debt got screwed), so they had less debt outstanding (for a second), so they could issue a ton more debt (at lower interest rates, of course), so their debt burden and debt-to-GDP ratios would fall… all because they had to fall to meet IMF and ECB and lender criteria to be able to borrow more in the future (because by then, of course, they would be a better bet to pay back what they were then going to borrow), after all that jockeying of debts and bailout loans, and even after two general elections and a lot of political backstabbing…

Guess what.

Greece hasn’t done anything to meet the criteria that its lenders demanded for them to get any more loans.

So, what happened? Consequences? The end of the road?

No. Greece just got approved for another bailout tranche. It starts now and runs through March.

There’s no need to get into the specifics. It’s always the same. The banks that borrow the money from central banks (who print it or say they have promises of member governments to pony up the money if the central banks get into their own trouble with all their lending) buy the debts that Greece and the other sick Eurozone countries vomit up to keep the extend and pretend game going so they don’t all end up insolvent, which technically most of them are. How so? Because they don’t have anything near to the amount of money they’ve lent out and never will. That’s not how they work. They work on the belief system. You know, if you believe they have it, they are safe and solvent. Yep, it’s kind of like: “We start believin’ now that we can be who we are, grease is the word…”

So here’s what we have to learn from Greece.

The extend and pretend game sucks the life out of everyone. Except the bankers, of course, they get a permanent reprieve, kind of like a perma-stay of execution for their criminal lending policies.

Greece has been in a recession for seven years. That’s what’s ahead for us (or worse).

The U.S. had a more diversified economy, to be sure. But so does Japan, and look what happened there. They’re well into their second “lost decade.” The funny thing that isn’t funny is that Japan ended up where it is because of what happened there. What’s not funny is that what happened to Japan is exactly what is happening to us.

First, an uncontrollable housing and property boom made people feel rich. So they borrowed against their property to invest in the stock market, which, of course, rose with all that money chasing rising share prices. Then the bubble popped and the markets collapsed, both of them, the stock market and the property market.

The same thing happened here in the U.S. The only difference here is that the Fed pumped so much money into the banks – which has gone into the stock market – that the stock market recovered. And now the property market looks like it’s starting to recover. So far, so good.

But then there’s all this debt. We’re looking like Greece, playing a never-ending game of extend and pretend.

But it does need to end.

So I say let it end here. Let’s jump off the fiscal cliff.

Our politicians make Greek politicians look like Greek Gods. There’s no way our federal fools are going to get us out of this without getting themselves into a position to be elected or re-elected. It’s about them, not us.

So let’s all be the brave Americans we are and jump together.

If we do, again, we won’t ever hit bottom. We will find a cloud somewhere on the way down that will break our fall and we will start floating. Why? Because here’s the amazing silver lining… and the thing so many of you readers tell me you want.

Once we stop stupid spending, once we raise enough revenues, our debt problems will diminish. They won’t go away completely. But if we go over the cliff, do you really think we’re not all going to look at our politicians, all of them, and take them all to the woodshed?

This could be our chance to change the way we are governed.

This could lead to the revolution we need to throw all the bums out, to shut down the Federal Reserve (so it doesn’t keep printing money for the banks to get into more and more trouble that we end up having to bail them out again by, guess what, having the Fed stuff them with more money), and to revisit what kind of America we want for the future of all our children and their children, and the world.

There, I said it. Let’s all go jump off a cliff.

Who’s with me?


The SEC is All Over These Two Cases… Right?

17 | By Shah Gilani

I’ve got two good ones for you today.

First, SAC Capital Advisors LP. That’s a hedge fund managed by Steven A. Cohen (the SAC in the fund’s name), a real big shot in the hedge fund world. It has $14 billion under management. About $8 billion of that is Stevie’s pot.

Now – but not for the first time – the SEC and federal prosecutors are accusing a trader at an SAC affiliate of insider trading.

The complaint alleges that Little Stevie (without naming him, but referring him to as the “owner” and “portfolio manager A”) must have been aware of what his associate did (the insider trading), since they had a 20-minute conversation about a drug that wasn’t going to see the light of day, and motivated some folks to dump the huge position the firm had built up and even short a ton of the same stock of the poor firm that was about to get the FDA’s backhand.

The details are fun, but not important.

Here’s what you need to know.

Mathew Martoma, the guy who supposedly used the inside information to tell Stevie that the FDA was going to say fuggedaboutit to the drug actually got his information from a University of Michigan professor.

The neurology professor, Dr. Sidney Gilman, was a paid consultant ($100,000 worth) of an “expert network” firm that introduced him to Mathew so they could talk drugs and, apparently, about FDA findings.

What’s not important is the fact that the professor was fingered and rolled over with a tight little non-prosecution agreement under his lab coat, then ratted on Mathew, who was just trying to make his boss and himself (he got $9 million that year) some scratch. (By the way, Mathew Martoma no longer works at SAC, because supposedly he wasn’t that good at regular trading.)

What is important is that these “expert network firms” are a cesspool of crap-slinging intermediaries setting up sharp-elbowed traders with less-than-filthy-rich (like them) “consultants” trying to make a living doing God’s work in their labs and elsewhere, where they slave for pennies, not billions.

I’m interested to see what happens behind the scenes here. Will the all seeing SEC Cyclops see that it’s these “expert networks” that are the crap stirrers, or will that little side street be overlooked in the GET STEVIE mania that’s breaking out and makes for good headlines?

We’ll see. In the meantime, it’s good to know that the SEC is all over all this stuff. It just warms my heart.

Check out what else they’re “all over”…

Second, Knight Capital Group Inc. It’s a powerhouse Wall Street firm.

You may not be familiar with it. But if you trade through any number of well-known retail brokerage firms (think TD Ameritrade, Fidelity, etc.), you probably have a connection to them, or rather, they have your number.

See, Knight has a big market-making operation. Big discount brokerage firms route their customers’ (you’re their customers) trading orders to Knight’s trading desk in Jersey City, New Jersey, so their market-makers can execute your orders.

Your big discount brokerage firm doesn’t have a market-making operation. They don’t take the other side of your trades. They don’t take trading risks. They re-route your orders to trading firms like Knight, who pays them for “order flow.”

That’s right. Knight pays your brokerage firm to get your orders sent to them.

Here’s the deal. The more order flow you see as a market-maker, as a trading desk, the more you can “see” in terms of where stocks might be heading. What you want to “see” is stuff like: how many shares are being bid for or offered at what range of prices? where are the stop-loss orders? what are the standing limit orders? and most importantly, what is the order flow telling you about momentum and trend?

Of course, today, human market-makers aren’t doing all that “seeing.” That would be hard in a world with billions of bytes of information constantly flowing. Computers do that now; they see what the naked human eye can’t see.

As far as those computers that see, the best of them reside over on high frequency trading (HFT) firms’ desks, or in their server rooms. They are looking at all the same kinds of order flow information that Knight looks at. They are even looking at Knight’s orders.

Well, it turns out that Knight, which is nothing more than a seemingly respectable HFT operation, had some trouble back in August when its new computer seeing-eye systems went haywire and cost the firm $461 million in errant trades. They’re still around because they got an infusion of $400 million from some saviors to not go belly-up.

Well, now some of those saviors want their pound of flesh from Knight. They want to buy Knight.

The two firms that last week surfaced as potential acquirers are Getco LLC and Virtu Financial LLC. And what do those two private firms do? Quick, see if you can guess. Okay, time’s up. They are high frequency trading firms.

Both of them have private equity backers. Blackstone, which also ponied up money to bail out Knight, is a Getco backer, and private equity powerhouse Silver Lake Partners is a Virtu backer. Another private equity firm, General Atlantic LLC, also ponied up money to backstop Knight, presumably to ultimately get into the HFT game, if it isn’t already.

Now, the SEC is still investigating Knight over its August fiasco and looking hard at how the HFT crowd got all its preferential access to the exchanges and what good or bad they do. (Hint, hint, to you SEC clowns, you let the dogs out!) So, let’s just see if the SEC is going to let a private HFT operation with private equity money and clout behind it buy Knight and turn what’s left of the public’s order flow into the private seeing-eye dog of one of the Street’s big insider Dogs.

This is going to be interesting.


Tech Stocks Go On Sale – Is Shah Buying?

1 | By Shah Gilani

The Jon Corzine Report

50 | By Shah Gilani

Here it is, the quote of the week!

Choices made by Jon Corzine during his tenure as chairman and CEO sealed MF Global’s fate.”

No, sorry, that’s not it. Here it is, the quote of the week!

All of the firm’s significant business decisions were subject to review, debate and approval by MF Global’s board. At all times, Mr. Corzine acted in good faith and did what he believed was necessary to turn around MF Global.”

The first quote is from written remarks penned by Rep. Randy Neugebauer, a Republican from Texas and the chairman of the oversight panel of the investigative subcommittee of the House Financial Services Committee, which just last week issued its 100-page “report” on what happened at MF Global over a year ago.

The latter quote is from some PR (that’s public relations) hack representing Jon Corzine.

Now, look, I’m not going to waste time talking about what’s really important here. Sure, you guys seem to care a lot about the facts, but I’m not going to muck up this opinion space with any. Facts clearly aren’t that important.

Because if they were, I would be talking about how the bankruptcy trustee overseeing the charred carcass of MF Global already said – back in his June report – that it was Mr. Corzine’s aggressive trading strategy and a lack of internal oversight that led to MF Global’s downfall.

Or maybe I’d be talking about how the firm’s lack of internal oversight was caused by Corzine stripping the company’s chief risk officer, who formerly reported directly to Corzine, of his ability to monitor Corzine’s giant European sovereign debt trades. And how the CEO punted oversight of his trades to the board of directors (of which he was chairman), who he handpicked to sleep on the job.

Or I’d be talking about how Corzine strong-armed his outside auditors Pricewaterhouse Coopers to account for his trades in such a way that hid their potential to reduce the firm’s profitability.

Or that Corzine exploited a loophole in CFTC rules to “use customer money like an A.T.M” to finance his massively leveraged, speculative bets on the always uncertain outcome of which direction European sovereign instruments are going to trade.

Or I’d even be pointing out that Corzine started making these huge side-pocket bets even while MF’s core commodity business was struggling and unprofitable.

No, I’m just not going to waste your time with indisputable facts that don’t tell the whole story. Because here’s the whole story, according to the new House report…

It wasn’t all Jon Corzine’s fault…

If the regulators had their act together, none of this would have had to happen.

It was the regulators who “dunnit.”

After all, the Federal Reserve Bank of New York bestowed on MF Global its imprimatur of excellence and unabiding faith in 2011. That’s when it granted MF “primary dealer” status. That coveted position, in a tiny club, let MF Global deal directly with the NY Fed when they conducted their open market trading operations. And if the Fed says you’re cool, no one is going to bully you or say you aren’t obviously a flush insider, darling.

After all, it was the CFTC that hid, I mean had, the loophole through which MF sucked its customers’ money to finance its own trading book.

It was also the CFTC that instructed MF to plug a $220 million hole in its customer accounts – which somehow wasn’t anything like the $1.6 billion of customer money that’s still unaccounted for.

No – and this is not just my opinion, which is all that’s important here – it’s the opinion of the House subcommittee that if the regulators had been better at their jobs, then poor old Jon Corzine wouldn’t have been in a position to make these bad judgment calls. Because, after all, he was the chairman and CEO and prone to being human. But darn it, if the regulators had just caught his mistakes in time, all would be right with the world, and poor Jon Corzine would now be on top of the president’s list to sit on the throne marked “Secretary of the Treasury.”

At least now we know, thanks to the report, that there’s something wrong with the regulators running the regulatory bodies here in the U.S.

As far as Jon-boy, he is just the poster boy for ineffectual regulation. And I’m sure that his board of directors will eventually come clean and admit that they missed the opportunity to catch the falling knives they didn’t see stabbing their poor chairman in the back.

Thank goodness for the truth sometimes mysteriously enshrined in the ether of opinion.

So… what’s your opinion on how the regulators screwed up poor Jon’s political ambitions?


With the Fed Out of “Bullets,” A Market Crash Will Really Hurt

22 | By Shah Gilani

Hang onto your hats. It’s getting windy out there. Stuff is blowing all over the place.

Oh, that’s not wind! That’s a giant fan.

Well then, that must be why this “stuff” stinks so bad.

What stuff?

How about the Dow Jones Industrial Average falling more than 1,000 points from multi-year highs reached only a few weeks ago?

Or that the Dow has nosedived 5%, ever since the fateful morning last week when we found out that polls don’t mean anything, that Republicans don’t have memories like elephants, and that Obamarama is still the game we’re playing?

Or that the Nasdaq – you know, that tech bellwether index that a lot of analysts believe is our economic canary in the coalmine – is down 10.6% (technically in “correction” territory) since reaching its highs back in late September? Or that it’s down 5.5% since the elation, I mean election?

That’s not only stinky stuff; it is scary stuff.

Supposedly the reason the market is going down is that we’re nearing the fiscal cliff and may be heading over it. But that outcome doesn’t worry me.

My colleague Martin Hutchinson – a brilliant banker – isn’t worried about it either. He just came out this morning with the following reality check: “Contrary to all of the media caterwauling, [the fiscal cliff is] not a dreadful fate. In fact, it is exactly what we ought to be doing, since it solves 77% of the deficit problem in one fell swoop.”

You can follow Martin’s argument for facing the fiscal cliff right here.

Even Warren Buffett said yesterday that going over the fiscal cliff wouldn’t be as bad as everyone is making it out to be, and that if we go over it we’ll bounce back like we’re attached to a giant bungee cord. That’s comforting – to Warren, that is. That’s because he likes to buy when things hit bottom. He’s a clever one, that Warren.

Here’s a heads-up for you: The biggest “cliff” we have to worry about is the market falling.

After all, the market has been the primary instrument of interest and intention, as far as the Federal Reserve’s articulated policy of pumping it up with cheap money (that’s also known as leverage, people), so we all feel good about our pensions and 401(k)s and all our investments. Then, when we’re brimming with confidence, we will all go out and consume again, and again, and again, and borrow to do it – kind of exactly like what our government does.

And then there’s the Fed’s other policy prescription: massive giveaways to banks to buy the government’s debts. (Hey, isn’t that what they’re doing over in Europe?)

Banks then “repo” that debt (that’s short for “repurchase agreement,” which is when you lend your treasury bills and bonds and get cash, and agree to repurchase your collateral later to close the loan) to get more money to buy more treasuries, and so on and so on. Oh, and sometimes they lend out some of their money. After all, they are banks, not hedge funds, you silly people.

So what happens if the market does fall off a cliff? What’s the Fed going to do then to build up our confidence? Are they going to pay off the margin calls we get when our brokers call us for more dope because we were on dope when we believed the Fed could engineer a rising market with leverage but no downside?

The Fed is out of bullets. If the market crashes, we are in deep doo-doo.

You know what else stinks? This $100 billion shortfall at the FHA.

The Federal Housing Administration (FHA) – speaking of a canary in a coalmine – is in dire straits. That spells another round of trouble for real estate. No, we’re not out of those woods yet.

When the mortgage crisis hit and Fannie Mae and Freddie Mac had to be bailed out, the whole game of the government backstopping, aiding, and abetting mortgage origination and dissemination came to a grinding halt.

Things were so bad that the government decided to do something about it. So they punted all the problems Fannie and Freddie created, but couldn’t stomach, over to the FHA.

The FHA doesn’t lend money. It insures lenders against borrowers defaulting on the mortgages they get. Since lenders weren’t able to originate mortgages and sell them off to Fannie and Freddie, everyone was afraid there would be no mortgage money and, therefore, no homebuyers. So the FHA was told to take in the poor, tired, and broke potential homebuyers by insuring lenders who gave them money to buy homes.

What’s interesting about the FHA is that they are there to insure mortgages for people who have a hard time getting mortgages. Which happens to be pretty cool now that everyone has a hard time getting a mortgage.

You only have to put down 3.5% when you get an FHA-insured mortgage. And you don’t have to have a good credit score, either. It used to be you could get away with a 550 FICO score. (It’s a little higher now.) That’s what I call a score! But, best of all, new legislation allowed the FHA to raise the amount of a loan they can insure from the previous level of $362,790 to a new total of $729,750.

I want my MTV and my McMansion!

Anyway, the FHA has been insuring lenders right and left. They have insured something like $1.1 trillion worth of mortgages. But, alas, now it seems that close to 10% of the mortgages that the FHA insures are seriously (90 days and more) delinquent.

Let’s see, 10% of $1.1 trillion is a little more than $100 billion, right? So the FHA could potentially have to back lenders to the tune of how much, $100 billion? And how much do they have in their reserve tank? Oh, that would be about zero. They’re supposed to have at least 2% in reserves, but they haven’t had that in more than four years now.

Don’t worry, the FHA can borrow as much as they want from the Treasury, so they’re cool. Don’t you feel better already?

But what is happening with delinquencies on new mortgages is not cool.

The FHA hitting the spotlight, in a dark way, brings into question once again what the heck the government is doing in the mortgage business in such a big way when they have no idea how to fix, sell, or dismantle Fannie and Freddie. And it could put another dagger into the back of housing… just as it tries to climb out of the hole it’s been in.

This all stinks. And there’s more. But this column is getting long, and you’re getting scared.

You should be.

P.S. I promised I’d follow up with you soon on prepaid cards and the like… and I will. I haven’t forgotten. It’s just that this other stuff hitting the fan is more important right now.

Politics, Polls, and Big Bank Buybacks

36 | By Shah Gilani

Today I want to talk about a few things I’ve been scratching my head over lately.

First, about those polls leading up to the presidential contest.

How come they were so wrong? How come the candidates were inches apart right up to the finish line, and then it’s like a “tortoise and the hare” kind of ending?

Did Romney even finish? Is he finished? Is the Republican Party finished?

Maybe the problem is the questions that they ask, the pollsters, that is, or the way they ask them. Maybe they ask questions like a lawyer leading a witness would.

You have to wonder who pays for those polls, too. Survey says: the Super PACs – or is that the stupid hacks? Don’t you wish they’d post the questions they asked along with the “Survey Says” results?

And, how stupid are the markets, make that investors, you know who you are. The day of the election, the market was anticipating a Romney victory, after all the polls said it was more than possible, so we got a smart little rally.

Then reality set in. Four more years of this crap! And you think it’s going to get better?

Here’s something else to chew on. If you think the Republicans are going to roll over and play dead, now that they are dead, think again. The only way to fight back when you’re dead is to kill the other guy, so you’re both dead. Then, of course, you say, I was dead first, I couldn’t have killed the economy, I couldn’t have driven us over the cliff, they did it!

It looks like the market is saying, OMG (that’s Oh My God, for you non-texters), we’re going over the cliff and there’s no stopping us.

Trust me on this one, that cliff everyone’s been talking about – it ain’t the only cliff. There are a few others, one of which is a really big one, maybe bigger than the “fiscal cliff.” You can read about it tomorrow morning in Money Morning, and guess who wrote it.

Let’s move on, I hate talking about politics.

So, who do you think should be the next Secretary of the Treasury?

If you like the way things have been going on Wall Street and for the economy, then you might want to get behind Jon Corzine. I hear he’s making a bid for a comeback, and after all, he’s got experience, don’t you know. You know who he is, right? He was the top gun over at Goldman Sachs before he became a public servant, which was before he ran that little house of horrors MF (you know what that stands for, don’t you?) Global.

Corzine has all the qualifications, you know. Oh, wait, he may not be available. He’s hiding out until that seat at the head of the table over at the Federal Reserve is open. After all, after Goldman Sachs, only the Federal Reserve will do.

Me, I like Sheila Bair. But her chances at Treasury are exactly in-between slim and none.

Like I said, I hate politics.

Let’s talk about something else I hate. The big banks. Let’s talk about one in particular.

JP Morgan Chase & Co. (NYSE:JPM) just got permission from the Fed to buy back $3 billion of their stock. They came out on Thursday and said so.

They said, look at us, look how well we’re doing. We’re making so much money that we are going to return more of it to our shareholders.

What? Or, if you are a texter… WTF?

At the same time they announced they were able to continue to buy back shares (they wanted to buy back $12 billion worth this year, but a little $2 billion loss that CEO Jamie Dimon declared they were dealing with in London, back in May, turned out to be $6 billion and counting), they quietly also said their projected litigation-related costs, which includes payouts for getting caught mooning the public, rose in the past three months from $5.3 billion to $6 billion.

And they want to buy back more shares?

Why don’t they just declare a special dividend if they really want to give money back to shareholders?

Why are they trading their stock? At the end of the day, they could spend $12 billion buying back stock, and the stock price doesn’t go anywhere. They spent $11 billion in 2011. Look how well that worked. Not.

The bank game of buying back stock to reduce shares outstanding and to support the stock price (for bonuses and options grants and stuff like that) is bogus. Yeah, it’s supposed to make earnings per share better, so what. It’s just a game to reduce the pile of shares now, so they can sell more shares for capital later, when they need it and it’s expensive.

Why don’t regulators just make the big banks hold all that money they’re making so they never get into trouble again? And when they have so much money sitting around, we can break them up into hundreds of smaller banks who will actually benefit the economy and not soak us all when they have to play their giant economies of scale revenue-gathering schemes to line their deep pockets.

I hate big banks even more than I hate politics (make that politicians).

Why Today Matters More than the Election

57 | By Shah Gilani

It’s the day after the day after Election Day.

And while Election Day itself was exciting enough (well, maybe not for everyone) and yesterday was exciting, if not excruciating, for long equity investors, today is even more important than either of those days.

We’ve had a chance to exhale after digesting the election results (though it felt more like indigestion for some), as well as the market’s immediate reaction to them, and now we can inhale (hopefully you’ve got something in your pipe) and talk about what it all means.

But first, thank you for all your comments on Sunday’s article about prepaid cards. I will follow up on that piece next Thursday, as promised.

The most surprising thing, for me, about the President winning re-election, was that he won by such a wide margin in the Electoral College.

I went to college, but apparently I need to go back to college to figure out how the Electoral College really works and what that kind of electoral college education says about the supposed higher education of the delegates. Have you seen them at those conventions?

It baffles me that the “popular vote” (wonder why they call it that?) can be so close, or worse, result in an inverse decision in the deciding balance, but not count. I guess it’s just not a popular measure of real popularity.

Or maybe it’s another of those checks and balances things. Kind of like, well, you won the election by a wide margin in the Electoral College, but you lost the popularity contest, so, that mandate you think you have… think again.

But I digress.

What else was surprising (at least superficially) was that all the polls implied it would be a super close presidential race and that it might even end up looking like the race in 2000 and very possibly end up in recounts or at the steps of the Supreme Court.

It didn’t.

Market participants immediately voted on the outcome of the election. They voted overwhelmingly to get out of the market. And that’s what really concerns me.

Markets are a lot of things, mostly a mystery, but they do make sense of things before we can fully digest them and understand whether the economy’s moving parts are getting greased or grinding.

Yesterday they pronounced them, the moving parts that is, as probably grinding to a halt.

That’s why today is so important. As a market participant, watcher, student, slave, and sometimes savant, I’m glued to the action like a freak staring at an accident scene. My guess is that you are too. We want to see up close what the damage is and, hopefully, that everyone survived.

Here’s what we’re looking at today…

The markets thought that Romney had a good chance. They were wrong, and a lot of “Romney trades” came off yesterday, and more will come off in the days ahead.

The first thing I’m looking to find out today is, will there be more urgent selling of the stocks that would have seemingly benefited by a Romney victory? If there is more pronounced selling today, that’s what’s happening, first and foremost.

Second, the fiscal cliffhanger thing is more precarious now than if Romney had won. Why? Because, I’m betting – and I am a betting man – that the Republicans are going to take the Democrats to the mat, maybe make them cry Uncle, let them get up and declare that they’re going to prevail, and then take them down from behind and hold them in a full Nelson until the 12th of never.

In other words, there ain’t going to be any easy compromise, there ain’t going to be any happy medium.


Sure, House Speaker John Boehner came out yesterday saying he wants to avoid the fiscal cliff. But if you think that got anyone excited, think again. Again, watch the markets today. If they dump, then no-one got a rise out of that patently cheeky soft-sell speech.

But here’s the bad news. There’s nothing that’s going to happen between now and January 1, 2013, to calm the markets in any way, shape, or form. So tighten your stops and make sure you are in a defensive crouch.

Why’s that? Because while the fiscal cliff is the only cliff everyone is focusing on, it’s far from the only cliff we have to worry about.

There are two other intersecting events that are about to happen (one by year-end and the other rolling off that event immediately into 2013, through the first quarter and probably beyond) that makes solving the fiscal cliff look like a kid’s bike at Christmas that has to be put together.

About that bike; it can be done, everyone knows that. It’s just a matter of who will do it and when. But that other stuff under the tree, it’s the kind of stuff you might expect to find coming out of Pandora’s Box.

What’s in the box? Hint: It’s not that Europe is imploding again, that’s already out there.

Stay tuned. You know I can’t wait to tell you.

In the meantime, no kidding, make sure you have those stop-loss orders in place.

The Truth About Prepaid Cards

44 | By Shah Gilani

It’s hard to believe how destructive Hurricane Sandy was. That witch (switch the w to a B, if you like) was wicked.

We are far from out of the woods, especially if the weather turns much colder.

Everyone is doing what they can; of course it’s never enough at times like these. But, we’ll get it done, together.

God bless all of you (you know who you are: Tara, Mary, Barney, all the firemen everywhere, especially you, Johnny, pulling people from burning homes in your bare feet, all the policemen, emergency services people, the innumerable other workers, friends, neighbors, and strangers) who make America what it is, the greatest country in the world.

Now, onto something that’s got the potential to undermine our financial future…

It’s about those prepaid cards, and the games that are being played with them that you may not know about.

Prepaid cards have lots of benefits, especially for the “unbanked.” These are the people who more or less may live paycheck to paycheck, or don’t have jobs but need a “card” because both credit and debit cards are how we pay for most things these days.

A lot of people are rebelling, and rightfully so, against the higher and higher fees that banks are charging on checking accounts (and for all their other “services”) and are turning to prepaid cards as an alternative means of paying for goods and services.

Now, American Express is partnering with Walmart to offer Bluebird cards. The cards are being pushed through Walmart stores and are ostensibly backed by American Express.

American Express? As if it’s a bank. Wait a minute…

It is a bank.

That’s because back on November 10, 2008, at the height of the credit crisis, American Express had to become a bank (actually a bank holding company) so it could take money from the Federal Reserve to stay alive. You forgot that, didn’t you?

And Walmart, well, they have been trying to become a bank in several end-around ways.

Now, they’ve come together. The “bank” status of American Express and its 100-year history of issuing Travelers Checks (the first prepaid cards, really) and the marketing power and reach of Walmart, into the pockets of the less than wealthy and notably underbanked, has yielded a Bluebird capable of flying in the face of safe banking.

There are lots of problems with the prepaid card game. My biggest problem is that there are plenty of fees attached to these types of cards. They’re NOT free. A lot of the time folks aren’t even aware of the fees they’re paying. They just know that bank fees are higher, or at least they think they are higher, which most of the time, they are.

Then along comes Bluebird with its no-fee prepaid cards. Sounds good, right? It is for now. But, mark my words; there will be fees down the road.

So, why are American Express and Walmart partnering to offer free prepaid cards that they hope to eventually become a lot of folks’ new checking account-type service?

Because they get paid “interchange” fees every time you swipe one of their Bluebirds.

There was just a law passed that broke interchange fees (the fees that merchants get charged when you use a card at their establishments) into different categories, with different costs per swipe, depending on the type of card (credit, prepaid, debit) you use; and guess what end of the interchange fee structure the no-fee cards will feed off of?

Of course, the Bluebird card will garner the highest interchange fee. That’s where they (American Express and Walmart) will initially make their money. That is, until millions of customers and consumers start flying high with their Bluebird cards, then they’ll inch into more fees.

Oh, don’t worry that Walmart is paying the higher interchange fee (if you caught that). Not only will they eat off American Express’ plate of those fees, they will pass along the higher interchange fees to their loyal customers, the ones who go there for low prices all the time.

The whole argument for lowering the interchange bank fee monopoly in the first place was because higher fees were being passed along to consumers by the merchants who were being charged by the processors and banks. See how some things come full circle? Or as Dave Mason sang, “It’s Like You Never Left.”

But, that’s not my problem with these prepaid and new-fangled bank-alternative cards.

The problem is that the money you use to pay for your card, which goes to the card company, isn’t insured. There is no FDIC insurance on the money you give card companies, on the money sitting there that you haven’t spent by swiping your card yet.

They could go under. American Express was closer than you think. And you don’t think it could happen again?

What will happen if that happens? Will the government bail out all the prepaid card companies, most of whom aren’t banks? Will the Federal Reserve bail them out, like it did American Express?

Where are we going with this?

It’s frightening because people don’t know. There are no answers right now.

There is only one thing for sure, where we’re going is ineluctably towards another cliff.

Why? Think about it. Comment here about what you like or don’t like about prepaid cards and where you think this non-bank, uninsured depository scheming track is taking us. I want to hear from you.

And, next week, I’ll tell you the rest of what you don’t probably know.

Q&A: November 2012

17 | By Shah Gilani

We’ve got some really good Q&A today, thanks to some really good comments and questions from you folks.
But before we dive in, I want to say something about the storm that hit the U.S. this week.
Personally, I was lucky: Hurricane Sandy only brushed by my home in the Northeast.
But there are so many individuals, families, and businesses that weren’t so lucky. They are dealing with everything from serious inconveniences to horrific tragedies.
My heart and prayers go out to all of you who are trying to recover from this truly devastating storm. I especially feel for those of you who lost family members, friends, partners in life, and your beloved pets.
I’ve had a glimpse of the devastation you’re feeling. My girlfriend’s amazing mother, sister, family members, and many, many dear friends live in Breezy Point and in the Rockaways. I was just there for her brother Johnny’s wedding. The home on the beach I stayed in is flattened. Her mother’s house is a wreck. And many, if not most, of their other family members’ and friends’ homes burned to the ground, were flattened, or drifted out to sea. Between the loss of lives and the horrific devastation, there’s nothing much left of this once beautiful community where everyone knows everyone else and no-one locks their doors.
Breezy and the Rockaways will rebuild. That’s what New Yorkers do. They fight for their neighbors, their communities, their city, their state, and America. Their citizens will come together as neighbors and friends to help each other.
Because that’s what Americans do. This is who we are.
In the meantime, I send my sincerest regards and deepest sympathies to those of you suffering tragic losses.
Okay. Now let’s get started with your comments on “Big Bank Protectionism.”
Q: What happened to our antitrust laws? ~ Ron
A: Good question, Ron. They are there to be used when competition is deemed to be in the public’s best interest. In the case of big banks, “too big to fail” is what’s in the public’s interest – at least, if you go by what politicians are doing, as opposed to what they are saying. Get it? They’re all for big banks because those monsters pay them monster amounts of hush money to leave them alone.
Q: You may not have heard Romney [in the presidential debates], but he specifically stated the small banks are getting squeezed out and need help to stay afloat. He is very much aware and wants to amend some of Dodd-Frank to help them out. ~ Mike (and Jim, who pointed this out too)
A: I’m not impressed with what any politician says; I have to see them act before I believe they’ll make effective changes. If Romney gets elected, we’ll see then if his crusade to help small banks really helps small banks, or if it is more rhetoric to thin out or eliminate anything that might be good in Dodd-Frank to benefit the big banks who pay for their puppets’ campaigns. It’s easy to champion small banks, but not easy challenging large banks, whose objective is to cut their competition to the quick. Be careful of that kind of political prestidigitation.
Q: I was once on the bandwagon to eliminate the Fed, but then I realized our CONgress would take over the responsibility. This is like choosing between Stalin and Hitler to be your best man at your wedding. So, I now believe the Fed should remain, but its powers diminished and very detailed. ~ Ray
A: Well said, Ray, I totally agree. Sometimes the devil you know is better than the devil you don’t know. In this case, both are creatures from Hell. But you’re right, it would be a lot easier to have the Fed taken over by academics (preferably accounting professors), the dual mandate eliminated, and their powers greatly diminished.
Q: Shah, I always learn from you and you have a high level quality of reader comments, too. Don’t always agree, but again, always learn. This is democracy, right here. ~ Mary Jane
A: Thanks, Mary Jane. I’m not always right, so not agreeing with me is sometimes a good thing. After all, I remember the one time I was wrong. And as far as reader comments, I agree totally. There are a lot of really smart and engaged people making our conversation a lot better for everyone, especially for me.
Q: FOOD, WATER, AMMO!! ~ Jeffrey H.
A: Yeah, but you might have to reverse that order.

Let’s keep going…
Q [re: “The Junk Credit Bubble“]: The question is, what is left to screw up? It should have all died back with bank liquidity problems. Tech bubble, oil/gas bubble, real estate, you name it. Phony gold, blocks of collateralized companies, is there a straw that will break the camel’s back? Cause I’d like to go short… ~ Ed
A: There are always straws that will break the collective public’s back. That’s because the public, being the proverbial camel, is always ripe to be humped. Why? Because schemes will keep coming and get through the threadbare protective net of insufficiently motivated regulators employing an overly complex regulatory wet blanket with no real heat applied to crooked pinstriped creeps.
If you want to go short, there are plenty of bubbles forming. Pick one, or two. Just keep in mind, timing when they’re going to pop is anything but easy.
Next up: “Why Nothing has Changed Since Black Monday.”
Q: I was under impression (perhaps wrong) that it is better to lend bailout money to European countries, instead of directly supporting troubled banks there. What is the difference, and does it matter? ~ Dimi C.
A: You are right, it is better to lend (if you have to) to countries as opposed to private banks. Banks can go belly-up, and if you’re a creditor you get in line to pick up what’s left. When a country gets in trouble, it can always (maybe not always) borrow more, because people believe that their taxing power will be enough to pay them back. The long theory is that even if they (sovereigns) do default, they will continue to exist, so they will have to prove that they are, or will be, credit-worthy again, and so will eventually pay off old debts, or most of them. The difference does matter.
Q: What would happen if all the CDS players got in a room and cancelled all their contracts by calculating the value and settling up? Would the combined net value be positive negative or zero? ~ D.A.P.
A: That is actually done, to a small degree, at times. Usually it’s when counterparties are in trouble and in the arms of regulators or trustees, who force a netting-out of positions to make their jobs easier. On their own, players won’t net out with each other, because as long as their positions are open, they stand to make money if their speculative bets go their way. So why eliminate all that leverage when leverage is the name of the game… if you’re on the right side.
Q: I have thought this for some time, why not just WIPE OFF debts and everyone start over again? ~ Felix
A: Felix, I hope you were kidding, or fanaticizing. If we did that, the sanctity of all contracts would forever be null and void, and moral hazard would be the new order of all things, wouldn’t it?
Q: WHY do you have some [portfolio insurance] to sell? I thought you were smarter than that! ~ S.
A: It was a joke. I don’t have anything to sell, except this little bridge I own in Brooklyn. Want it?
The laundry is for dirty clothes
It cleans them good as new
Some water and a little suds
Will make your dreams come through
But debts are quite a different mess
They just won’t go away
You dump them, and go bankrupt
Or hide them where you may
But someone always finds them
and wants to be repaid
So now the game is over
And you’re as good as dead!
~ Kevin D.

A: Kevin, please keep posting your poems, they are funny, right on the mark, and really good! I love them.
Q [re: “Poor Old Vikram“]: I’m still perplexed that the Obama administration, after all their yammering about the crimes of Wall Street, has not succeeded in any prosecutions of those they claim are at fault (even though they never name names). Could it be that they all share the same political party affiliation? ~ Kevin B.
A: If by “affiliation” you mean “greed,” then you’re right.
A lot of you misunderstand me when I’ve said I supported Obama when he got elected. I didn’t vote for him. I believe in supporting every new president who is supposed to change what isn’t working in our country. I stopped supporting him when he almost immediately turned his back on what caused the financial crisis he inherited, and, instead of standing up to and crushing the moron bankers that rule Congress, lined his pockets with their money. Obama screwed the country by pointing to healthcare as the problem that needed immediate fixing, and not fixing the cause of repeated financial crimes and attacks on the American public by the bankers he “yammers” about.
Where are the prosecutions? Why is Jon Corzine still walking around? And the rest of them?
Q: Once again I am reminded this subscription is the best money ever spent. Someone needs to snap you up and put you where you can do some damage (politically, that is). ~ M.A.D.
A: M.A.D., this is free… but if you want to pay up for another subscription, I’ll send you my bank account number. Kidding!
Q [re: “Conspiracy Theories“]: I have one for ALL of you – WHO HAS EVER BEEN CALLED BY THE BLS TO SEE WHO IS WORKING IN YOUR HOUSEHOLD? I’ve been in the workforce since 1968, and NO ONE from the BLS has ever called me or anyone I know or have known. How’s that for some “statistics”?? ~ John P.
A: Does anybody out there know anybody who has ever been called? I’m curious. I asked and I don’t know of a single soul.
Q: Every one of the last 60 plus employment reports have later been changed to worse that first reported – not one in the other direction that would not be in Obama’s favor. And you do not think that there is mischief afoot in this organization. ???? I am losing faith in your opinion. ~ P.L.D.
A: Don’t lose faith. I have my opinions too, which I believe you’ve been exposed to. But I try and take the objective, non-conspiratorial approach to how things might be serendipitously the way they are.
Now for your thoughts on “How Wall Street Hijacked America.”
Q: So essentially what you are saying is that the stockbrokers in the past were “somewhat” working for us, and we could make a few bucks, but now they are working for themselves with our money and now they are skinning us alive. Sweet. ~ J.S.
A: Stockbrokers are mostly low-level pawns gathering “assets” so the sheep can be shorn by the managers and leveragers of those assets. It’s always about playing with OPM, other people’s money. The managers and leveragers are the ones doing the trading and expanding that universe so they can wish upon the stars they control for the yachts and islands they buy with the fruits of their trading labors.
Q: Wall Street did not hijack America, it only did what it was allowed to do. America hijacked America. ~ Peter
A: I don’t think America is to blame for what makes America great, which is letting people figure out ways to make money. What did get hijacked is our government’s ability to protect the public from the harm they cause by being part of the greed-is-good creed crowd.
Q: Since all trades have to be reported, why not institute a tax of 95% on any trade with a holding period of less than 5 days? Doing this would not generate another layer of bureaucracy. ~ R.W.N.
A: In theory, I get where you’re coming from. But the nature of effective risk-transference and realizing effective liquidity demands that markets be free. Five days is like being in jail when a trade is going against you. A one-second hold time is fine, really, whatever it is, we should all just have equal access, and “fake” bids and offers shouldn’t be allowed.
Let me make something clear here. I used to put down “fake” bids and offers to make a stock look stronger or weaker, there’s nothing wrong with that. That’s because, as a market-maker, I had an obligation to honor those bids and offers. Many times they did get hit or taken, and I might end up with a 10,000 or 50,000 share position that I really didn’t want. That’s market-making; that’s trading in a fair market. But putting in fake bids and offers that have no chance of ever being hit or exposing to you to taking a position, and being able to manipulate the field that way because you pay for faster access to do that, that is sickening.
I don’t blame the traders. I blame the exchanges and the SEC for fostering it. They screwed the markets up; traders are just playing within the rules they’ve helped widen.
Q: Shah, is the system used for HFT code named PROMIS? Recently I read an article in the Malaysian Press with regard to this “mythical” PROMIS system in which it was pointed out that the system had the capability of monitoring the global Internet for ALL Monetary transaction & movements of Securities & Currency’s in real time. Supposedly, as described in the article, the PROMIS system was not limited to just Financial Transactions online in real time, but could be used for tracking all forms of communications whether email, Zipped Packet Data, and Dedicated Point to Point Networks. To my thinking this PROMIS system, if it exists is a far more lethal weapon than the use of nuclear weapons in wartime. The ability to be aware of all traffic on the internet and disseminate that information in real time, breaches any and all Net-Privacy Regulations and if the system was in the wrong hands and has the capability as described it alone could have the power of life and death for much, much more than Financial Markets control over the Globe. Can you shed any light on this?? ~ Michael
A: I’ve never heard of PROMIS, but I believe it. I will look into it. As far as net privacy, I don’t buy it, never did. Google not doing evil? Don’t buy it. How can the type of information flow across the Internet not be a top priority of governments? Oh, it is. Especially financial information. Follow the money and you can tax and take it. As much “freedom” as the Internet is giving us, it is also gives governments the power to control us and to jail us.
Finally, “Why High-Frequency Trading is a Scam.”
Q: I have a question… Is this what is commonly known as “day trading” with several computers set up? ~ Z.
A: No, HFT is not the same as day trading. Not even close. Day trading is to HFT as a minnow is to a shark.
Q: The Tobin tax would fix this abuse immediately. ~ Chris S.
A: There’s merit in the Tobin tax approach.
Q: Is it out of the realm of reality to suggest a class-action lawsuit on behalf of the class of investors who have no access to HFT? Besides ending the practice, any monetary recovery can go to a designated charity for medical research of lethal diseases or to children’s hospitals. ~ Franco F.
A: I like it. I’ll call some lawyer friends of mine.
Q: [High-frequency trading] probably is illegal if you bring an action under the RICO Statute. Which broadly defines fraudulent actionable conduct as any scheme or device intended to deceive some person or persons out of his her money. It is a catch all net and very inclusive. Someone with money and legal talent could really upset the industry maybe even bring a class action unless the courts have been bought which is not unheard of. You could even sue the regulatory agencies and make them co-conspirators. That would upset a lot of bureaucrats. Have fun. ~ Ashley G.
A: Where’s that class action lawyer’s phone number? Someone pass me my black book.
Q: Maybe we should hire some good hackers, like Anonymous, to attack HFT computers, or have someone launch a DNS attack on their machines. Oh, that would be illegal wouldn’t it? ~ Joe W.
A: Joe, Joe, Joe… two wrongs are better than one, no, I mean, two wrongs don’t make a right.

Posted in Q&A