Get ready for the Greatest Show on Earth. I’m not kidding!
The circus opens today in Washington at the big-top U.S. Court of Federal Claims.
That’s where insurer Starr International is suing the United States for essentially ripping off American International Group Inc. (NYSE: AIG) and its shareholders. Starr is an insurance company controlled by Maurice “Hank” Greenberg, the former CEO of AIG, not long ago the largest insurance company in the world.
Starr International Co. Inc. v. United States will feature clowns, both the frightening variety and the funny kind… lions and tigers and bears, oh my… death-defying high-wire acts… human cannonballs… and bare-naked ladies.
Here’s what it comes down to. Did the Federal Reserve and the U.S. Department of the Treasury have the right to confiscate 80% of AIG’s common stock during the 2008 bailout, in the process costing AIG shareholders $40 billion?
You heard me right.
Starr is suing for $40 billion. No wonder the circus is coming to town…
Grab Some Popcorn
Everyone knows AIG got an almost $180 billion bailout. But what very few people know is what the Fed and the Treasury actually did to AIG to cause it to need $180 billion.
No doubt the New York-headquartered but London-based AIG Financial Products Group was stupid to sell insurance in the form of credit default swaps to a whole bunch of giant banks, guaranteeing them payment in full if the mortgage-backed securities they were stockpiling ever defaulted.
While they were stupid, they were most likely also duped. But that’s another story.
When the mortgage crisis hit, the credit default swaps AIG wrote came back to haunt them.
Here is not the place to get into the particulars, though I know them intimately. Why not here? Because if we’re lucky – and we may get lucky this time – the truth about the particulars will come out at the trial.
If you know some of what really happened, you’ll be following the trial to find out why Goldman Sachs Group Inc. (NYSE: GS) did what it did to AIG in the first place and why AIG had to pay Goldman $14 billion when at the time it owed it $8 billion, at most.
Why did other banks, including several giant foreign banks, get paid 100 cents on the dollar on claims they made against AIG when they were only entitled to market-value amounts of what was owed to them? And that’s assuming they even had a right to collect in the first place, which was in dispute at the time.
Why did the Fed charge AIG 14% on the money it lent it and 8.5% on the money it was going to lend to it but it didn’t need, when it was charging big banks between 2.5% and 5%?
Why did the government take almost 80% of AIG’s equity and controlling voting shares when it didn’t take any voting shares from any other bailout customers it coddled?
There are a lot more questions to be answered.
Some of the clowns who were deposed privately (on videotape) will also testify in open court. They include then-Federal Reserve Bank of New York President Timothy Geithner; then-Treasury Secretary Henry Paulson (another Hank), formerly the head of Goldman Sachs; then-Fed Chairman Ben (aka “Benny” the jet helicopter pilot) Bernanke; and lot of other movers and shakers who bobbed and weaved behind the scenes to extract money from AIG to send to faltering favored sons to save them.
This really is going to be the Greatest Show on Earth because it’s going to expose the criminality of the system that bailed out some of the biggest crooks in the world, who then leveraged taxpayers and economies to make ungodly sums of money with the de facto understanding that the Fed and the Treasury had their backs.
Hurry, hurry, hurry – step right up!
I’ll be here twice a week to let you know how it’s all unfolding. I’m going to slice and dice this theatrical spectacular for you, one julienne fry at a time.
Defense stocks have had a good run so far this year. Shah appeared on Fox Business yesterday afternoon advocating taking profits on three of the biggest firms that have reached all-time highs recently.
With the rise of lower cost energy alternatives like natural gas, major coal producers – including Alpha Natural Resources and Peabody Energy – have seen a massive decline over the past 5 years. Is it time to sell or buy more at these extremely low levels? Shah tells us what to do.
He also gives his best natural gas pick that’s poised to be a $140 billion enterprise company. “And the prospect for dividends is tremendous,” says Shah. The dividend yield will more than likely start around 5% but he expects it to go a lot higher.
And Shah calls Alibaba “a go-to stock for the next decade or two.” Find out what his buy-in price is by watching the video below.
You as an individual are at risk. Your bank account is at risk. Your credit is at risk. You’re at risk in ways you never thought about.
Merchants are at risk, maybe to the tune of tens of billions of dollars.
Banks are at risk. In fact, the whole financial system could be at risk.
And we hate to think about it, but the entire country is at risk.
And then there’s the security implications of breaches of critical U.S. infrastructure imply. And the global geopolitical implications of cyberwar.
We know that’s all out there, but today I’m going to put a single data breach under a microscope.
So, put on your lab coats and let’s get started…
The E-Castle Walls Are Coming Down
Today, I’m focusing on basic credit and debit transactions.
They’re not basic anymore.
The electronic world we’ve constructed isn’t impenetrable. In fact, it’s pretty porous.
Almost every day businesses are attacked by hackers, by malware, by criminals intent on stealing proprietary information, trade secrets and customer information. They’re going after our payment card numbers, passwords, addresses – anything they need in order to steal or make money.
Corporate and government data breaches are so common now that there’s a website dedicated to what’s happening: www.DataBreachToday.com.
The data breaches that have garnered the most media attention recently are the Target Corp. (NYSE: TGT) and the Home Depot Inc. (NYSE: HD) thefts.
The more recent Home Depot breach dwarfs the one last year at Target. So let’s zero in on what happened at the hardware giant and what’s going to happen in the future.
Home Depot’s more than 2,000 North American stores were all affected. Some 56 million Home Depot customers’ payment cards were exposed – about 40 million Target customers’ cards were breached.
Needless to say, the lawsuits are starting to fly.
One lawsuit, which is seeking class-action status, was filed on behalf of Home Depot customers even before the retailer admitted its systems had been breached. That suit anticipated the eventual admission and points to the fact that Home Depot knew about the breaches and didn’t come clean, which would have helped customers who were subsequently affected protect themselves in some way.
Now banks are getting on the sue-Home Depot bandwagon. Two credit unions are suing and seeking class-action status, claiming unspecified losses related to refunding fraudulent charges, reissuing cards, opening and closing accounts, stopping or blocking payments, notifying customers, increasing fraud monitoring and lost revenues from a drop-off in accounts.
Whether banks can sue merchants for losses related to data breaches is about to be ruled on by a judge in a Target lawsuit. In that suit, Target is trying to derail a consolidated class action by a group of banks claiming the retailer is responsible for their losses. One estimate of Target’s liability to the banks suing it is a cool $18 billion.
If the banks prevail, merchants’ liability in the future will be staggering.
Between banks and customers suing, merchants are going to face charges of breach of confidence, privacy, fiduciary duty, negligent misrepresentation and outright negligence. In short, the plaintiffs are accusing the merchants of failing to meet their legal obligation to protect customers and customers’ banks.
Sometimes, as may be the case with Home Depot, there may be obvious (at least in my mind) culpability. And it may be clear that obligations were not met where they could be reasonably expected.
Apparently, Home Depot knew about the breaches at least five months before going public about it. An outside data security firm warned the retailer about “using out-of-date malware detection” systems. And a former Home Depot information securities manager has said he warned the company about its out-of-date antivirus software on its point-of-sales systems.
It was the point-of-sales systems that were compromised at both Target and Home Depot.
In fact, the U.S. Department of Homeland Security, based on U.S. Secret Service findings, warned Home Depot about Mozart (the name of the malware that infected the retailer’s systems) infiltrating its checkouts.
Data security experts think Mozart to be a customized malware designed to attack Home Depot’s point-of-sale systems. In other words, whoever designed Mozart understood, or knew how to get around, Home Depot’s safety systems. Mozart was “customized” to the retailer’s technology. And it was running for at least five months before anyone detected it.
In a nutshell, the malware used a “RAM scraper” to capture a customer’s card and related information between the time – just milliseconds – it was swiped and the time it took Home Depot’s systems to encrypt the customer’s information.
Home Depot encrypted its customers’ information – but Mozart stole the data before encryption occurred.
What will the eventual costs to Home Depot be? What will merchants be responsible for in the future? What was the Secret Service doing looking into Home Depot’s systems? What’s out there in cyberland that we have yet to face, defend ourselves against and combat?
All I know is that technology is a double-edged sword.
My mailbox is still bulging with all your questions about everything I’ve been writing about recently. So I’m delving back in today to answer a few more.
Last week, I took on your “looming catastrophes” and “what-if” scenarios and told you what I would do – and what I hope our leaders in Washington and Wall Street will do. (Don’t hold your breath…)
Today, you’ve got questions about the Federal Reserve’s inflationary policies, the price of gold and the eventual stock-market correction.
Q: The Federal Reserve has printed up trillions of new dollars to provide liquidity and prop up the economy. How does it plan to take that money out of the economy at the right time in order to not create runaway inflation? It can’t mop that money up by selling bonds – there are already too many out there. What options are at the Fed’s disposal? Thanks. -David T.
A: The Fed historically mops up excess liquidity by selling bonds. It sells bonds to the “primary dealers” who have to buy them from the Fed and into the open market through the federal funds market.
In this process, the Fed goes into the open market and executes repurchase agreements. A repurchase agreement is when a party – the Fed for our purposes – sells collateral (usually government bills notes and bonds) to banks and simultaneously agrees to repurchase that collateral at a future date. (The banks take money out of the system because the Fed is selling bonds and banks are paying for them with cash and credit.)
Repos can be overnight or can be “term” repos for any amount of time or term that both parties agree to. There’s nothing stopping the Fed from doing that if it wants to soak up credit. The central bank can also pay banks interest to park additional reserves at the regional Federal Reserve banks.
The theory is that if the Fed sells bonds into the marketplace, interest rates would start rising and rising rates would slow the velocity of money. The problem the Fed has is that rates can rise without central bankers “managing” them rising at some reasonable pace. If rates rise quickly because the Fed can’t soak up excess funds fast enough, prices could start rising (inflation) as producers try to offset the higher cost of manufacturing and production because their financing costs are rising.
The global worry over inflation is that central banks in the United States, in Europe – everywhere – have flooded the world with money. And all that money can’t be soaked up fast enough to offset coming inflation. However, because global growth is so slow, inflation hasn’t been a problem. That could change, and it could change quickly.
We’ll see if that happens and how adept the Fed will be at doing repos and paying banks to just park their money.
Q: I would like to know your opinion of the repo market’s recent and dramatic increase in “fails” (as reported by the Financial Times last month). What will the impact be on all financial markets? -Stan R.
A: The problem with the high level of “fails” is that they represent a liquidity problem in the making, and possibly a really big one. It is worrisome. First of all, a “fail” is shorthand for “fail to deliver.” When banks do repurchase agreements, meaning they lend each other money overnight or on a term basis, the party borrowing the money sells collateral (almost always government treasuries) to the party lending them money.
The repo is an agreement to later repurchase that collateral. The collateral has to be “delivered” by settlement date. Settlement date is the day the collateral is due to be delivered.
A fail to deliver, or “fail,” happens when the collateral isn’t delivered. Fails also happen in stock transactions. The problem with fails in the Treasury collateral marketplace is that the Fed has soaked up so many Treasury bills, notes and bonds that banks aren’t flush with them. Banks have to keep “reserves” at all times, and those reserves are usually stockpiles of Treasuries.
Because the Fed has taken inventory offline and banks still have to maintain reserves, the fact that they don’t deliver the collateral they promise (hence the “fail to deliver”) in a repo is because they can’t part with the Treasuries they have on account of the fact that they need them to count toward their “reserves.” It’s not a problem as long as counterparties believe the collateral is there and forthcoming. Or if they don’t get in and the money they lend is returned, it’s all well and good.
However, if fails mount, reserves get really tight and another panic ensues, meaning banks don’t trust each other’s solvency or that they will ever give over collateral they’ve promised, they could stop lending to each other. That happened in 2008. Banks just stopped lending to each other after overnight repo interest rates went through the roof. Banks figured it didn’t matter how much interest they were charging each other. If they weren’t going to get their collateral back, no amount of interest was worth it, so they stopped lending to each other.
Banks rely on short-term funding to survive. That’s why the increasing number of fails is worrisome. If the problem gets big enough, we could experience a bank liquidity crisis.
Q: You and others have made a case for rapidly rising gold prices. Yet gold has slowly been falling for more than a year. Do you have any idea why it’s been falling? -Stan S.
A: As the dollar rises, the price of gold generally falls. The same is true of oil and other commodities priced in dollars. Money watchers expect the dollar to continue to strengthen, and that’s one reason gold has fallen in price.
But investors seem to be thinking that there won’t be any currency wars, or major devaluations, or runaway inflation, or general debasement of fiat sovereign obligations. And so they may be selling gold, which they bought to hedge against all of those things.
They are wrong. All of those things are coming to pass, and maybe sooner rather than later.
That said, a lot of hedge funds stockpiled gold and are now selling it on account of it not having gone to $1,500 where they (me, too) expected it to get to. I believe gold is a “buy” here and would add to my position if it goes lower.
Q: Here’s my favorite head scratcher: “What legal or technological issue prevents a debit card denominated in precious metal from being issued in the United States?” I don’t mind Federal Reserve notes being the medium of exchange in our country – I just don’t want to store value in them. If I can use my dollar-denominated debit card overseas to buy something in euros, yen or whatever, surely we should be able to figure this out. -John B.
A: There are no legal or technological reasons, but there is a mechanical reason. We can’t figure that out because it’s not feasible. No private credit company or bank is ever going to back its customers or itself with gold or any precious metal. Precious metals prices are too easy to manipulate, and their fluctuating value (unless they are pegged) would make transacting in any medium based on them impossible to manage or hedge.
Q: Volume of derivatives has reached $710 trillion. How is it possible to generate that amount of money out of a world gross domestic product of only $72.5 trillion? -Bernard P.
A: It’s all about contracts. Derivatives have nothing to do with GDP. They’re agreed-to bets. You and I make up a bilateral contract, and it is real. We’ve added to the notional value of outstanding derivatives. They are based on nothing more than “reference” indexes, other securities, differences in spreads or whatever we as parties to a derivative contract agree to bet on.
They can be weapons of mass destruction because of how banks use them to “hedge” (change the accounted for value of what’s on a bank’s balance sheet or off the balance sheet) and due to how much exposure counterparties are subject to.
Q: Many experts are saying that stock markets are in for a correction. What is your opinion? -John M.
A: Oh, it’s coming. I wish I knew the date, but I don’t. I just know if it looks like a duck, walks like a duck and quacks like a duck, we’re ducked.
Thanks for all your questions, folks. I enjoyed answering them.
I’ll be back with a regular column on Thursday. See you then.
For the past few days, I’ve been asking you all to send me your questions about everything I’ve been writing about.
And you all responded with a lot of great questions about “looming catastrophes,” “what-if” scenarios and a lot more.
So let’s jump right into it…
Q: You’ve written a lot about the pressures that the market is up against for the coming months and perhaps years. I’ve read all of it and sometimes wonder how CEOs and money managers are prepared for the looming catastrophes. They’ve had time and plenty of warning. Would their preparations have a minimizing or limiting effect on the worst-case market scenario? Usually, fearful money ends up in precious metals or some kind of resource holdings, and that’s not happening. Why aren’t the big-money people fearful? Or if they are fearful how are they hedged? -Michael F.
A: Michael, as far as CEOs are concerned, if they’re heads of non-trading companies, in any business, be they a service business, retailing, manufacturing, any business that doesn’t “trade” in any markets, their CEOs don’t hedge in the markets and generally don’t prepare for “looming catastrophes.”
That’s not their job – it’s not in their “portfolio” of duties.
The best, or most, some CEOs can do is to stockpile cash, reduce inventories, pare back on personnel and do whatever they feel they have to in order to “prepare.” But, the truth is, their job isn’t about preparing for anything “looming” in the markets. Their job is to run their businesses in spite of what markets do.
The only CEOs that do any hedging are those with business elements exposed directly to markets. In other words, importers and exporters that have to exchange currencies to do business around the globe. They might hedge their currency exposure to some degree.
But CEOs who dabble in the markets to prepare for anything looming and get it wrong will lose their job pretty quickly, because their job isn’t about speculation in any markets.
Money managers, on the other hand, sometimes do try to prepare for looming catastrophes. But no one has a crystal ball. And if you’re managing any pool of assets – and you’re a “long only” manager, which by far and away most are – and you “prepare” and what’s “looming” doesn’t come, you’ve wasted assets “speculating” on your fears.
The long and short of it is, most money managers DO NOT prepare, and as a result, when the dirt hits the fan they all choke on what the markets throw at them. (Most hedge funds play any and all sides of markets. But they’re the exception.) Therefore, when trouble hits, market disruptions can quickly manifest themselves through companies and the economy.
Big-money people are probably very fearful. But anyone who has been fearful since 2009 and consistently hedged themselves fully, or been sidelined out of fear, has paid a devastating price in the face of this raging bull market. And that’s why most money managers and hedge funds, no matter how fearful they are, are still long this market. The great bottom line for them all is that the Federal Reserve is here, and they expect it to continue to be there.
However, markets don’t follow every script that’s written for them. The Fed has boosted the markets, and central banks around the world have done their part. But there are still cracks all over the place. And some of them, the ones that have been evident all along, are getting a bit wider, in spite of central bank stimulus and liquidity pandering.
Mr. Market has a mind of his own. He is like the dog that goes mad. He’s been your best friend, but for no apparent reason, one day he bites you, hard, or attacks you to kill you. Maybe he has a bad gene. Maybe he snapped from some mental illness you never knew he had. Maybe it’s because he descends from wolves, and no matter how domesticated you believe him to be, it’s just the nature of the beast.
Q: We have heard a great deal about how we got here and the demons that surround us (thank you for contributing to this enlightenment). But place yourself as one of the top decision makers just prior to all begins to unravel and put on your best “save the situation before it happens” cap. Now tell us what you see. What would you be doing to prevent the events (not how would you react to them occurring? What are the signposts along the way – the action steps that you expect to happen in sequence? What steps are already in place that will be activated, and when in the sequence will they be activated? If the outcome is as probable as everyone seems to think, I’m sure the leaders of this nation have created a “what-if” sequence of events and reactions. What is yours? -Jim L.
A: Wow, Jim, that’s quite a challenge. I’ve never actually thought that all through before. Let’s assume everything is as it is now and there’s nothing about the past, even yesterday, that I could have changed. Here’s what I see. And here are the actions that, I believe, would get us out of harm’s way, which is right where we’re headed.
We need to “unwind” the Federal Reserve over a period of five years or so and eliminate it altogether. We need to break up all the too-big-to-fail banks at the same time by spreading them out into regional powerhouses with “local” branches that understand and serve local markets.
There should be some kind of “collectivization” of big regionals so they can easily syndicate big loans to huge borrowers in order to effectively compete globally, but still have limited exposure to any one borrower, industry or group of counterparties. All banks should have higher reserve requirements, probably in the 20% to 25% range, and much lower leverage rations, probably half what they are now.
Why not make banks more like utilities?
We need term limits and to eliminate all the special exceptions and advantages that members of Congress have legislated for themselves. They shouldn’t have a single perk that the public doesn’t have.
We need to throw out the tax code and go to a flat consumption tax. I like a progressive flat tax on income based on gross. Something like up to $50,000 you pay 15%; for every $10,000 after that up to $1 million you pay an additional one-tenth of 1 percent. So, at $1 million your flat tax rate would be 24.5%. Over $1 million, maybe the increments change to $100,000 from $10,000. So, if you made $5 million, you get taxed at 28.5%, and so on up to a maximum of 35%.
Corporate taxes would be flattened, too. But I’d have to do a lot of work to come up with what they should be.
Markets would be remade to be free, fair, orderly and 100% transparent. There should be position limits that trigger additional margin on a scaled basis.
Those changes would change the course of the United States for the better, for everyone. But none of that is in the works.
As far as what actions are unfolding now, we all can see what’s happening. No one is preparing for the direction we’re headed in. Our government representatives are blinded by their own greed. They don’t see how they are undermining America’s future.
So, I’m not hopeful. In fact, I’m afraid that the path we’ve been put on will send us into a hole from which we might only ascend by some sort of revolution… really.
Q: What key legislative changes would you implement to get the U.S. economy growing and improving? And yes, I expect this plan to be long and to take at least two years to bear fruit and another five to seven to really get the economy “humming.” -JD
A: In addition to what I just proposed to Jim above, I would like to revisit the U.S. healthcare system through the prism of insurance company policies and profits.
I’m a free-market capitalist. But I also believe healthcare and banking need to be more like utilities than other industries. That’s because they are the two most important industries in our lives. They speak to our health and prospects for a better life.
There’s plenty of money to be made in healthcare insurance without destroying peoples’ lives making it. Why not limit the profits insurance companies make? Why not “force-manage” insurance companies to make healthcare affordable – as in cheap. Why shouldn’t we be the beneficiaries of healthcare and not corporations? It can be done. Obamacare‘s biggest flaw, and there are many, is that it is a gift to insurance companies.
As far as board compensation and executive pay, like I said, I’m a free-market guy. I don’t think there should be limits. What I do think there should be is accountability and the ability of shareholders to claw back compensation from board members and executives. Shareholders should be able to easily sue (with the corporation paying shareholders’ legal bills) boards.
Q: I am trying to reconcile the building worldwide financial threats, the “overdue” market correction, and the election cycle. From what I understand, election years are usually very positive for stockholdings between October and January. Being a new investor this year, I don’t have much margin for error (my stop losses too often are being calculated from my original purchase). -Patricia D.
A: Election cycles do affect markets, but I generally don’t follow election-cycle market trends or trade against them based on past patterns. There are patterns because a lot of basic economic issues subject to political forces are themselves cyclical. Because you don’t have much margin for error, Patricia, I wouldn’t make bets on what the market might do based on election-cycle analysis or prognostication.
That said, if you believe the Republicans are going to come out winners and Republican policies are better for businesses and the economy, then maybe you should consider riding this bull market higher. Just keep a sharp eye on your stops. That’s how I would play it.
Of course, I also am worried about market-valuation metrics, cracks in Europe and China, and what could happen to emerging markets if U.S. interest rates rise beyond the Fed’s ability to control them.
I love a bull market, but they all come to an end. I believe this market will correct to get the excesses out, which means it will correct hard. Then, I think we’re going to see a global recovery, after all the excesses are wrenched out, that will be beyond anything the world has ever seen.
Q: If the dollar crashes, how long do you think it would take for things to stabilize? I’m a teacher. What impact do you think these events would have on public education? Do you think states would still be able to pay retirement benefits? -Anne W.
If the dollar crashes – as in an uncontrolled devastating crash (losing 25% to 50% of its value relative to other currencies) – it would take years and maybe decades to recover. But depending on the speed of any crash, stability would probably return at some lower level of valuation within a couple of quarters after a crash.
Currency markets adjust quickly. The devastation would be there, but markets would digest the damage and stabilize in due course. Education wouldn’t be affected much because it’s “domestic.” Pensions, on the other hand, would be devastated.
Inflation would follow a rapid deflation, and grossly reduced buying power would crush retirement funds. Let’s hope any decline in the dollar is gradual and controlled. Unfortunately, I see it happening in the years ahead, but not anytime soon. Maybe in another 5 to 10 years it may start.
Q: In light of the obvious destruction of our economy, how do we preserve our assets to be able to continue the “good fight” for America, freedom and economic stability? You have suggested a few foreign currency bonds, but how do we actually protect real estate and the rest of our “stuff”? I think this is most of your audience’s No. 1 concern. -Wayne R.
A: In a meltdown, hard assets are the only assets that matter. I wouldn’t trust foreign bonds. And I wouldn’t want to own any stocks or have any money in any markets that would be disrupted or subject to banking, counterparty or clearinghouse failures.
If anything, I’d park whatever cash I had in U.S. government bonds. But, if I knew there was an economic meltdown coming, I’d want to have hard assets that I own outright (not mortgaged or margined assets) and at least enough cash in a safe place (in a safe) to continue to pay any outstanding mortgages so as to not lose the equity I’ve built up.
Finally, to protect ourselves, we should always have stops to get out of the way of falling markets.
Q: I enjoy your brave and eloquent commentary on Wall Street banks, etc. With respect to the issue of so many bullets being ordered, a simple way to determine the legitimacy of such orders is to examine whether similar amounts had been ordered by these departments in recent years or is this something unprecedented. Perhaps some research or Freedom of Information Act requests to the various departments can clarify whether this is something sinister or routine? -Fayyaz A.
A: Some of the orders are seriously unprecedented. That’s why red flags are being raised. Some others from data that I’ve seen seem large, but aren’t out of line with past orders or relatively large when divided up between the actual number of “persons” in some of the forces buying ammo.
No government departments or officials would ever tell us if they are worried about civil unrest, an invasion or anything sinister in our midst that they are part of. Call me paranoid if you want, but there’s just something not right about some of it.
Thanks, to all of you, for your great questions. I plan to answer more of them next week.
If you haven’t had a chance to submit a question yet, there’s still time. Just click here and type away.
There’s a new twist in an ongoing U.S. Securities and Exchange Commission (SEC) probe.
For months now, the SEC has been investigating whether anyone in the federal government leaked inside information to a Washington-based investment research firm.
While that was pretty juicy already, those investigators are now looking at up to 44 hedge funds that may have traded on that inside information.
If you already thought our public servants were greedy, dirty and corrupt, well, this helps prove your case.
If, on the other hand, you think our folks in D.C. are pure, altruistic angels, today I’m going to convince you otherwise…
A Revealing Timeline
At 3:42 p.m. on April 1, 2013, more than 150 investor clients of Height Securities were sent an email predicting that the federal Centers for Medicare and Medicaid Services (CMS) would reverse course on planned funding cuts for private insurance plans.
Based on the “prediction,” the hedge funds now under investigation bought shares of insurance companies that would benefit if CMS did in fact reverse its stance.
And wouldn’t you know it, at 4:22 p.m. that same afternoon, the folks at CMS announced they were reversing themselves. In afterhours trading and over the next several days, insurance company stocks soared.
The SEC investigators believe the Height Securities analysts told the hedge-fund traders – immediately after the initial email was sent to Height’s 150 clients – that Height’s information was based on a “credible source” in the federal government.
If the credible source was leaking inside information, or the traders even thought that Height’s tip was inside information, and they acted on it, those hedge funds could be charged.
It’s all well and good that the SEC is looking into who made what on their trading. But what’s far more interesting and important is who the credible source was.
Was he or she paid? Was he or she given the inside information by anyone in the government who was paid?
Whether we find all this out or not may be based on an upcoming judge’s ruling.
That’s because the credible source, Brian Sutter, a top House of Representatives healthcare aide, has refused to comply with an SEC subpoena in the matter. Sutter ignored the subpoena based on advice of congressional lawyers.
That prompted the SEC to file a federal lawsuit seeking to force Sutter to turn over his communications and records to investigators. The judge hearing the case is expected to rule any day now.
What is known to have happened, based on email and phone records, is that Sutter spoke to healthcare lobbyist Mark Hayes, who previously worked for Height Securities. And within 10 minutes, Hayes communicated CMS’s change of course to someone at Height, citing a “credible source.”
The SEC, to its immense credit, is actually investigating the Washington political-intelligence industry. That the investigators have been stymied by House lawyers is indicative of something.
Some D.C. watchers say it’s indicative of the separation-of-powers issues that come up when the executive branch investigates the legislative branch.
I say poppycock. It’s indicative of a cover-up.
Here’s what I want to know.
Are people in and around Congress making money directly (envelopes of cash) or indirectly (campaign donations) by channeling inside information to hedge funds?
The divide between haves and have-nots is widening every day.
There are fewer and fewer good jobs and careers to be had.
And maybe worst of all, according a survey by the non-profit Employee Benefit Research Institute and Greenwald and Associates, about 36% of workers have less than $1,000 in savings and investments that could be used for retirement (not counting their primary residence or defined benefit plans and traditional pensions), and 60% of workers have less than $25,000.
What the heck happened?
The Federal Reserve System is killing America. It has destroyed the economy. It has undermined savers and retirees. It is even responsible for the corruption in Congress.
We have to kill the Federal Reserve before it kills America for good.
There’s nothing in the Constitution about a central bank. There’s nothing “free-market” about a central bank. There’s no reason for a central bank – with omnipotent power over the creation of money and credit, over employment (which is an absolute joke), over the entire economy, and over Congress – to exist. No reason.
Okay, there is one reason…
The Only Reason the Fed Exists
The Federal Reserve, America’s central bank, exists to serve big banks and Wall Street.
There is no other reason for the existence of the Fed. None.
Central banks exist to backstop banks. They were all created by bankers to serve them.
When banks get into financial trouble (for any number of reasons, all of them having to do with their bad management and greed), if there is no backstopping angel with unlimited (completely made up out of thin air) resources to bail them out, they would shut down.
And they should shut down. Sure, there would be losses. Equity owners would lose, creditors would lose, and some depositors would lose money, too, if they aren’t covered by FDIC insurance.
But if banks were allowed to fail, if they were each on their own insignificant enough to the financial system, to the whole economy, that they could fail without doing economic damage, they should be allowed to fail. Small banks are still allowed to fail based on this exact principle.
But clever bankers, the masters of the biggest banks in any system (in the U.S. it was a group of the most powerful banks in the U.S. and allied banking interests in Europe in 1913) figured out that if they got so big that any one of their failures would result in contagion and undermine the financial system and the economy, then they could convince governments to create central banks to safeguard systems and economies.
The Federal Reserve was legislated into existence in 1913 precisely to backstop America’s biggest banks. The history of exactly how the Fed came about and who was involved in the secret meetings at JPMorgan’s private island to design the “System” (they didn’t use the term bank because they wanted to imply a safety “system” and not raise the ire of the public, who were fearful and skeptical of the big banks that were already running the country) is one of America’s greatest cloak-and-dagger stories.
The true tale is laid bare in an extraordinarily well researched and documented book “The Creature from Jekyll Island” by G. Edward Griffin. Read it.
Without getting into the weeds on how they mechanically do it, it’s instructive enough to know what the Federal Reserve does. In a nutshell, all their “regulatory” duties aside, the Fed prints money and gives it to banks.
That’s right, the Fed – not the U.S. Treasury – creates dollars. The Treasury actually prints dollars and mints coins, but they only do enough of that to keep a certain amount of currency in circulation. The creation of money comes from the Federal Reserve System.
Look at your dollars, any bills in your wallet. They don’t technically belong to the Treasury. They say right up top: “Federal Reserve Note.” It’s Federal Reserve money. But the Fed doesn’t have to have the Treasury print money to give it to banks. They just credit banks electronically. And, like magic, banks have money when they need it.
Here’s How the Fed is Killing America
They backstop banks, all the too-big-to-fail banks, not littler, less important banks that are allowed to fail because they’re not politically important, all the big banks. And they backstop Wall Street speculation.
Banks are speculators, and they are part of what we call “Wall Street.” Wall Street makes money by shuffling paper, by playing in and manipulating what are supposed to be free-market capital markets. When they over-leverage and their paper juggling, hot-potato money-making schemes implode, they would fail (Bear Stearns and Lehman Brothers did, and so did Merrill Lynch and Goldman Sachs and Morgan Stanley and Citigroup, all of them imploded, to one degree or another, in 2008) and be wiped out.
But the Federal Reserve can save any of them, or which they want to save, and it did just that in 2008. They saves their own and let a few institutions be absorbed by bigger institutions so they could become more systemically important. And in doing that the Fed saved the financial system.
Good for them. And good for us, right?
No. The Fed plays god with the financial system. It plays god with the economy. And it rules over Congress and is responsible for our massive debt.
By backstopping banks and Wall Street speculation, the Fed has increased the “financialization” of the American economy. Our economy is more about moving paper assets around to create wealth than it is about producing and manufacturing real goods and services.
That’s why the divide between the haves and have-nots is getting wider. If you have financial assets, you’ve benefited by the Fed’s zero interest rate policies (or ZIRP). That’s because speculators know the Fed won’t let Wall Street down, they won’t let markets drop. That’s great if you’re a financial paper punter.
But, while the Fed has lowered interest rates to zero for banks and speculators to borrow cheaply to leverage up their paper financial assets (in rigged capital markets), those low rates have destroyed savers pocketbooks. Savers aren’t punters. They park their money in fixed-income investments to earn a yield.
Savers have been destroyed by the Fed.
And the deficit? That’s the Fed’s fault. Congress doesn’t have to tax the public to keep spending. The Treasury issues all the bills, notes, and bonds it wants to raise money, and the banks buy most of their paper obligations. Then the Fed buys those bills, notes, and bonds from the banks with the money they “print” electronically. That’s why there’s no accountability in Congress.
Far worse, the bankers, with their fat profits, lavish money on Congress to get what they want. There’s no one in Congress, no one, who doesn’t take campaign money one way or another from some financial system player. Wall Street owns Congress and they get their money to buy their puppets from the Fed’s backstopping.
There’s no need for a Federal Reserve if the TBTF banks are split up into hundreds of regional banks. If no single bank failing would cause contagion, or harm the economy, they should be allowed to fail.
If we want to take back America from the bankers and the Wall Street machinery that soaks up economic capital for their paper-pyramiding wealth-minting factories, and disadvantages savers, producers and workers, then we have to kill the Federal Reserve Bank.
Whether it’s photos of nude celebrities hacked from the iCloud, hacked credit cards at Home Depot, hacking attacks on JPMorgan Chase, or the National Security Agency’s hacking all of us, the truth is that we’re all hackable – because we’re all on servers somewhere.
Servers – whether in our own PCs, in our workplace’s IT “closets” or in the “cloud” – provide essential services and hold huge amounts of our important information.
And it doesn’t matter where your server is. If you’re on a server – and you are – you can be hacked…
Apple’s Bad Week
There are many ways we can be hacked, and lots of ways companies and server farms and clouds can be hacked.
According to Apple, the nude celebrity photos stolen from the iCloud didn’t result from a breach of the iCloud (though it did). According to Apple, they were stolen (through the iCloud) from the individual accounts of the celebrities.
Apparently, “brute force” was used to run thousands of possible passwords before coming up with winning entries that yielded access to the stacks of stored photos.
If you’re wondering how the public felt about the breach… well, some of you probably enjoyed the photos. However, a lot of you sold Apple stock yesterday.
The big drop in the stock, traceable to the iCloud hack, comes at nearly the precise moment Apple is likely to introduce its new “mobile wallet” along with the launch of the new iPhone 6.
Talk about bad timing.
Just when we’re supposed to lock ourselves further into the Apple ecosystem and consider giving up our plastic cards for a “secure” mobile wallet, the same iCloud where our digital money and credit will be shepherded… it gets sheared.
Then there’s the Home Depot hack. Though the hack occurred back in April or May, we don’t know much yet, because the DIY retailer isn’t saying much. But it looks like 2,200 stores were affected, which means millions of customers’ data was probably spilled.
Clean up on aisles 7, 8, 9 and 10 – and on the servers.
How big could the HD hack be? Bigger than the Target hack that affected 40 million credit card numbers and compromised 70 million addresses and phone numbers and other personal information.
Even scarier is the recent hack of JPMorgan Chase, only the largest bank in the United States. Who did what? No one is saying, because it’s a bank and there are national implications.
National implications? Yep.
Here’s what the retired four-star Army General Keith B. Alexander, formerly director of the NSA and head of U.S. Cyber Command, had to say. In an interview with Bloomberg yesterday, Alexander said the JPMorgan Chase hack may have been orchestrated by Russia as a warning to the United States over its Ukraine-related sanctions.
Vladimir Putin‘s message: “If you mess with us, we will undermine your financial system.”
We know the math whizzes at the NSA, courtesy of hero/traitor Edward Snowden‘s revelations, are hacking everyone here at home. Yeah, that means you and me.
And they’re hacking into our friends’ and allies’ “secure” communications networks. And they’re spying on them in their offices and in their bedrooms – and they’re probably looking at their nude photos, too.
We know it, and now our pissed-off friends know it, too.
There’s hacking going on in “them thar hills,” and big national governments – ours and Russia’s – are behind a lot of it.
All those hills are alive with the sound of hackable humming servers. So, are we all headed over some technology cliff that’s going to land us in some open field where we’re all nude and vulnerable to being terrorized?
It could be.
Storm Clouds Gathering
And just when we thought the cloud was going to be the next big thing, Timothy D. Naegele is speaking up.
In an online comment posted to American Banker‘s Tuesday story about the iCloud breaches, the highly respected financial attorney and former counsel to the Senate Banking Committee wrote, “The cloud is a mistake. No one’s data is safe. It is vulnerable to hackers, terrorists and others. Anyone who tells you differently is mistaken.”
Take this as a warning.
If you can activate or turn on multifactor authentication requirements on your stuff stored on servers, do it. If you have your passwords and/or log-on information stored in any cloud anywhere or on a server at home, take them offline and store them in an old-fashioned paper (remember paper?) notebook.
If you have apps that access and store stuff in the cloud, what’s in that cloud can be traced back to your computer, tablet or cellphone – which may not be such a “smart” phone, after all.
Whatever you can do to make your digital footprint scarce, do it. Get off grid before your own nude photos go online… because I really don’t want to see them.