Archive for October, 2014

Blowout at the Bank of Japan

13 | By Shah Gilani

Holy trick or treat!

The Bank of Japan, Japan’s central bank, just tricked global markets by lavishing them with an awesomely sweet Halloween treat.

There’s only one question. Will all this fake sweetener stuff end in a global heart attack?

Keep reading. Your heart is going to pound…

Back From the Grave

The Bank of Japan (BOJ) brought “Abenomics” back to life this morning by announcing it was amping up efforts to treat, treat and treat the economy to some more sugar-laced stimulus on steroids. (Abenomics is the tag hung on Prime Minister Shinzo Abe‘s and his central bank’s stimulus efforts.)

This was a three-way lick ’em and stick ’em bonanza.

First, the BOJ promised to triple the pace of its purchases of stocks and property funds. Second, the bank said it’s going to extend the maturities (buy longer-dated issues) of bonds it’s stockpiling by three years, to an average maturity of 10 years. And third, the bank is going to raise the ceiling of its annual government bond purchases by 30 trillion yen ($267.56 billion) to 80 trillion yen ($713.5 billion).

And if that triple threat wasn’t enough, Japan’s gigantic public pension fund – the largest in the world – said it is going to start buying more global stocks and exchange-traded funds (ETFs) to jolt its returns.

Holy sugar shack.

Equity markets are soaring higher on the news.

It’s simple math. If you want to make money on this news, you buy, buy and buy stocks and more stocks.

And you keep on dancing until the music stops.

That’s because central bank stimulus is sweet music to equities.

Of course, there’s just one little problem.

Eventually, all that sweet stuff will give global markets a heart attack or cause equities to vomit up their inflated gains when their heroin is withdrawn.

In the meantime, take this treat and shove it.

I’ll tell you when the party’s over and it’s time to slim down on stocks and short everything.

Your Top Five Money Questions – Send ‘Em In

24 | By Shah Gilani

When it comes to making money, there is one singular, sad truth.

Growing up, we weren’t taught a thing about it.

Why is that?

Of all the things we need to learn in order to achieve a decent standard of living, money, markets and investing is No. 1. As they say, money can’t buy happiness, but money is what makes a happy life and retirement possible.

But most people are ignorant about money.

I don’t want you to be most people.

That’s why today I’m asking for your top five questions about money: how it comes into being, what it really is and how to value it.

So, if you have any questions about money, about stock markets and other trading venues or about investing and trading, I want you to send them to me right away.

Just keep reading to find out how…

Let’s Make Some Money

When it comes to ignorance about money, I was no different.

Besides a few facts about “greenbacks” and “assumption” of colonists’ Revolutionary War debts, I never learned a single thing about money growing up.

And those were just historical facts – just pieces of U.S. history – and they totally lacked context.

I knew nothing about money, markets or investing growing up. Nor did any of my friends. Nor did my parents.

I didn’t have any “advantages” growing up. There was no family business I was going to work in or inherit. And my parents provided me no direction about career paths.

So I had to figure my future out on my own.

I determined fairly early on, very fortunately for me, I wanted to make money. And having none to start with led me quickly to figure out how to make money starting with none.

I’d have to use OPM – other people’s money.

Only I didn’t know how to do that.

Then, by chance, I met the father of a girl in school. He was a stockbroker, and he explained to me what a stockbroker did.

Wow! That was an epiphany. Here was a way to make money with OPM.

No, I never became a stockbroker. But knowing there was a career path that would allow me to make money without having any to start with was a godsend.

While other kids were reading comic books, I was buying The Wall Street Journal. When my friends were busting out early on Friday nights, I made sure I was in front of the TV watching Wall Street Week With Louis Rukeyser.

I went to UCLA to study economics. I wanted to learn about money, about what it is and how to make it. That led me to trading. That was 1982.

Now I want to help you make money, keep it and grow stacks of it.

I want you to know how the markets really work – and how you can work them to your benefit.

Is that something you want to learn how to do?

I thought so.

To get in on this conversation, just send me your top five questions about money, investing and the markets.

Just click here and start typing – or leave your questions in the comments below.

I’ll be back soon with some answers.

Posted in Q&A

Meet the New Mortgage Rules – They’re the Same as the Old Ones

9 | By Shah Gilani

And you thought the federal government was getting out of the mortgage guaranteeing and backstopping business.

In fact, the feds are not only not getting out of the mortgage business, but they’re already blowing up the next bubble.

As a result, the Great Recession – spawned by the credit crisis, easy-money mortgages and low interest rates – is going to make a comeback.

We already have artificially low interest rates, so check that box. All we have to do now is start dishing out easy mortgages again.

Well, we can now check that box, too…

Private Money

Now when I say “federal government,” I mean asinine legislators directing equally asinine regulatory agencies.

And here are a few of those “august” agencies now.

The U.S. Federal Reserve, the U.S. Securities and Exchange Commission and the U.S. Department of Housing and Urban Development all just signed off on new mortgage rules.

Originally, in the aftermath of the mortgage meltdown, here’s what was supposed to happen.

Lenders in the private-money mortgage origination and securitization game (“private” meaning not guaranteed by the federal government in some way) were going to have to demand a 20% down payment from borrowers. Or they were going to have to retain 5% of the mortgages they made on their own books if they wanted to securitize those loans and sell them to investors.

However, here’s what showed up in the final version of the long-awaited mortgage rules.

Our stalwart government lackeys bent over backward on behalf of banks and said, “Fuhgettaboutit! You don’t need to get a 20% down payment, and don’t bother keeping some of that crappy risk you’re taking on your books.”

Basically, here are the new rules: Check the borrower’s ability to repay (which means check for a pulse and a job), and make sure they don’t have more than 43% debt-to-income levels. Then, have at it all you want.

Of course, not everyone in government is an idiot or on some bank’s payroll. Two out of five SEC commissioners voted against the lenient rules. Republican commissioners Daniel Gallagher and Michael Piwowar strongly objected.

Gallagher said, “Today’s rule-making takes the untenable housing policy that injected irrational exuberance into mortgage lending and, as a result, caused a catastrophic financial crisis and chisels that failed policy into the stone tablets of the code of federal regulations.”

Now, the private-money mortgage game is a tiny slice of the whole game. Last year, private mortgages amounted to $27.8 billion out of $1.58 trillion in total mortgage loans (including refinancings).

The idea was to tighten up rules in the private (nongovernment-backed) market first and then get the government out of the mortgage business.

So much for that idea.

Public Money

Legislators and regulators caved in to lenders on these rules, in part, because they’re seeing the housing market start to slip again on account of heightened lending standards. And the way to strengthen the housing market, of course, is to make it easier for people to borrow to buy houses.

The private mortgage market isn’t ever going to replace the public market as long as the government keeps growing its backstopping engines: the Federal Housing Administration, Freddie Mac and Fannie Mae.

You remember Fannie and Freddie. They were the private companies (with lots of stockholders and bondholders)/government-sponsored enterprises taken over by the government in 2008 before they imploded the United States into a hole we may never get out of.

They guaranteed trillions of dollars of mortgages and bought pools of them so they could reap the interest income from them. That is, until the game came crashing in on them.

Well, they’re bigger than ever. Between Fannie and Freddie and the FHA, the federal government backs (in some way) more than 95% of all mortgages now created in the United States.

That’s right. We’re headed right back where we just came from.

I’m all for loosening up lending standards – but not for taxpayer backing.

Government idiots are all about slathering voters with easy mortgage money avenues, and the Fed is all about slathering banks with profit-making opportunities.

Together, they are cooking up another you-know-what stew.

It’s Time to Smash the Student Loan Debt Trap

55 | By Shah Gilani

Beleaguered and desperate student loan borrowers need immediate help.

There is a way out for them. That same way out could also rein in college costs.

But it’s blocked by law. Obviously, the law has to be changed.

It can be done in just one step.

And today, I’ll tell you how we can get there…

Bad Law

The wrongheaded law, which the financial industry pushed hard for, of course, is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

BAPCPA basically says the courts cannot wipe out any student loan debt – federal or private – in bankruptcy unless the borrower can prove repaying the loan would cause “undue hardship.”

And you can pretty much forget demonstrating undue hardship unless you suffer from a severe disability.

BAPCPA lumps student loan debt in with child support and criminal fines as types of debt that can’t be discharged in bankruptcy.

While the “Bankruptcy Abuse Prevention” part of the law is obvious, one wonders where the “Consumer Protection” part of BAPCPA resides.

It’s in there, but to find it, you have to understand how bull(you know what) is spun into colorful yarn and woven into legislation.

Financial industry lobbyists pushed BAPCPA by promising cheaper student loans and more of them.

“Cheaper” didn’t happen, but “more” certainly did.

In 2010, student loan debt in the United States surpassed credit card debt for the first time. And thanks to BAPCPA – let’s call it the “Protection Racket Act” – lenders are sticking it to students for life.

Student loan debt now exceeds $1.3 trillion, according to the U.S. Federal Reserve.

Private lenders, however, say they’re only a small part of that big number and are wrongly being pummeled. That’s not exactly true.

It is true that only about 10% of the $1.3 trillion of student loan debt is strictly private. But according to the U.S. Department of Education, about 33%, or $403 billion, of the total is private debt backed by government guarantees.

It doesn’t matter what form student loan debt takes – BAPCPA says it cannot be wiped out during bankruptcy.

First Step

Obviously, the law is a bad one, foisted on us by bad actors – the usual suspects.

BAPCPA has to be changed or struck down.

Declaring personal bankruptcy is not an easy or desirable path for beleaguered borrowers. But it is a way out of indentured servitude to lenders who have no legal obligation to work with borrowers.

If lenders had to write off bad loans discharged in bankruptcy, no doubt they’d be less inclined to shovel out money to borrowers without doing better repayment calculations.

That would reduce the amount of easy money flowing into the student loan borrowing arena. And that would be a good thing.

Not everyone who borrows a fortune to get a degree ever gets a degree. And those who do get degrees lately, for almost the past decade, can’t find work.

As long as there’s money to spread about because BAPCPA requires lenders get paid back, college costs will keep rising.

Have you priced an education lately?

It sure looks like colleges, universities and, especially, for-profit schools of almost every stripe are in cahoots with lenders. It’s become a nationalized, legitimized duplicitous and ruinous Ponzi scheme.

It’s got to stop. Making student loans dischargeable is the first step.

Will the Dow Continue to Plunge?

0 | By Wall Street Insights and Indictments Staff

Last week, the Dow dipped 317 points and the 10-Year Treasury yield reached a low of 2%.

Is this a time to sell or buy? Will the Dow continue to plummet? Shah joined Varney & Co Wednesday to let us know where this volatile market is headed – and what you should be doing.


Markets Get Ugly – and May Be Getting Uglier

17 | By Shah Gilani

Understanding what happened to the stock market last week is really, really important.

That’s because we’re at a place in time where it’s possible for time to go backward…

Markets Heading Toward Time Warp

We may not be heading back into the clutches of the Great Recession, which lot of middle-income and poor people never got out of. But if markets can’t rally from here, there’s a better than 50/50 chance we will fall back into an ugly time warp.

The importance of the market at this juncture has to do with the U.S. Federal Reserve’s prescription to get us out of the Great Recession in the first place.

The Fed told us that its zero-interest rate policies (ZIRP) would lead to higher stock prices, creating a “wealth effect.” The Fed hoped to push the economy along enough to let real GDP gather momentum and become the tailwind the economy needs for liftoff.

About that “wealth effect.” It never made sense to me. After all, if you don’t have any stock-market investments, you’re not going to feel better about other people’s wealth.

It certainly doesn’t make sense to the millions of people who can’t find a decent job, never mind a career. Or to the people who are so distraught after years of looking for work that they’ve given up.

And it especially doesn’t make sense to the millions of students who borrowed billions of dollars to get a degree to make themselves more attractive to prospective employers. Now, these students not only don’t have stock-market investments… they not only don’t have jobs, but they are shackled to the dirty, greasy, come-on loans that for-profit and not-for-profit schools peddled to them as another kind wealth-effect drug.

The wealth effect was supposed to make us all feel better as we watched asset prices rise, especially the stock market. If you feel wealthier, or at least you feel you could become wealthier, even if that must means getting a job, you’ll go out and spend, spend, spend.

And to spend, you’ll borrow. All that borrowing (at low rates, thank you, Federal Reserve) and spending will stimulate production, and more people will be hired to work factories and restaurants as demand for goods and services wafts us into the ether of economic nirvana.

Well, we’re not there.

The strong growth has never materialized. There are plenty of reasons for that, and the Fed knows them all.

What did work was the pumping up of the stock market.

Now, whether there’s been any wealth effect is about to be tested. If there’s panic-selling and stocks drop precipitously, stock investments will get hit hard, of course – and the whole economy could tip over into a massive double-dip Greater Recession.

Last week was a warning. The Dow Jones Industrial Average dropped 273 points on Tuesday, and a lot of people freaked out. Then Wednesday came along, and the Dow gained 274 points. So a lot of people figured, “That was scary, but it’s already over.”

Too bad Wednesday was methadone day. What sparked the market to erase the huge loss on Tuesday were the Fed minutes. The Fed said it was worried about the strong dollar and decelerating global growth. The market was relieved that there was no chance the Fed would let interest rates rise, and off it went.

Too bad the week doesn’t end on Wednesdays.

On Thursday, the Dow dropped 330 points. On Friday, markets tried to rally, but the Dow ended down another 100 points.

The average daily volume last week was 7.9 billion shares. That’s the highest daily volume in any one week since November 2011. In other words, not only were there more sellers than buyers, but those sellers were selling a lot more shares than usual.

Here Comes Trouble

Technically, as in “technical analysis,” all the major stock indexes are in trouble.

A week like last week doesn’t just happen out of nowhere. Forces congeal for a while before triggering bouts of selling. Last week, those forces were over in Europe. European stocks got killed last week, and U.S. markets traded off them.

What’s bad about that is that a lot of people expected sellers in a weakening European environment to park their money in U.S. stocks – but they didn’t. They still might down the road, but they didn’t last week and they certainly won’t this week.

As far as today – where’s the bounce? Europe bounced, at least some.

But there’s no bounce in the Dow as I write this at 10 a.m.

We opened higher, and there was a sigh of relief. But that sigh has turned into an audible whisper of worry.

Where the stock market is – that’s a big deal.

If the wealth effect evaporates, confidence in the Fed’s policies will go up in smoke, too. So will confidence in all the central banks’ abilities to engineer the world out of slowing global growth.

The Fed and the globe’s other central banks built dykes wherever there was water rushing into Great Recession sinkholes. Their pumping schemes seemed to dry things out.

But, “If it keeps on rainin’, levee’s going to break.”

Yep, I’m going to keep singing that Led Zeppelin line to you, ’cause I think it’s coming.

The Contagion Worse than Ebola?

2 | By Wall Street Insights and Indictments Staff

Global growth is going the wrong way. The lynchpin? Europe. “The U.S. is the cleanest dirty shirt in the laundry once again,” says Shah. In fact, he joined Varney & Co. to report the issues facing Europe will cause contagion in the U.S. In fact, Shah believes the markets are headed for a major swoon and pinpoints where most of the selling will inevitably occur.

Shah also weighs in on one of the most shocking bankruptcy filings of the week and shares which stock he believes is “hugely overrated.”


Fear Is Making the Markets Go Crazy

7 | By Shah Gilani

It’s no surprise to you that here at Wall Street Insights & Indictments I like indicting the crooks and con artists that slither around Wall Street.

But as much as I like the indictments part, Wall Street insights are increasingly important.

It’s fun to ferret out rodents on the Street, but making money there is even more fun.

Right now it’s time for some insights on what’s happening in the market. Because it matters – a lot…

A Wild Ride

Volatility is back with a vengeance. And until it calms down, which right now it’s in no mood to do, volatility is likely going to increase.

The triple-digit moves in the Dow Jones Industrial Average we’re seeing almost daily are telling.

They’re telling us that markets are nervous, very nervous. The constant jumping out with both feet and jumping back in with both feet is indicative of nervousness. Investors are jumping out because they don’t want to get caught in a correction, and they’re jumping back in because they don’t want to miss the next leg up.

However, things aren’t exactly what they seem to be. The jumping in and out isn’t being done by individual investors – it just looks that way. And that itself is even more telling, but of something completely different.

Here’s the truth about the new volatility. First of all, it’s part of the system now. Second, volatility will always increase when markets head south or when nervousness pervades.

Volatility has many meanings, and how you slice it and dice it or measure it is another conversation, and a long and complicated one. But there’s a simple understanding of volatility that you absolutely must grasp and not let go of. All other means of describing volatility are part and parcel to the essence of the new volatility.

The “new volatility,” which I’m coining here and now, refers to the big moves (with “big” always being relative) that stocks make. Stocks come first. There is no “market” without individual stocks.

Stocks all have a bid and ask. In normal times, there are investors and traders bidding for (wanting to own) shares at prices they want to buy them at. And there are offers, prices that investors and traders want to sell shares or short-sell shares at. The difference between a bid and an offer, meaning the two prices, is called the spread.

Whenever there is nervousness, especially when a stock, stocks, or the market is going down, spreads “widen.”

The reason spreads widen is straightforward.

Say you’re an investor, or a trader, or a market-maker (I’ll get to market makers) and you are bidding for stock and prices are falling. You’re not going to be so anxious to put up a price at which you are willing to buy shares if you think you can pull your bid and buy shares lower as the price falls.

Because sellers still want to sell and buyers are getting out of the way, when a bid shows up at a lower price, sellers will quickly “hit that bid” (meaning sell to that bid) to unload their stock, or short the stock if they think prices are going lower.

Market makers (and I made markets on the floor of the Chicago Board Options Exchange and as an “upstairs” trader in stocks and other instruments) are designated (subject to regulators) traders in certain stocks. A market maker’s job is to always post a bid and offer in the stocks he or she makes a market in.

Specialists on the New York Stock Exchange are market makers, too. If you get that, you know that market makers have to be willing and able to both buy and sell the same stock at the prices they’ve posted. They have to.

Now, if you’re a market maker and the stock you make a market in is falling, are you going to keep bidding for stock and keep buying stock as the price falls? Of course not.

So what do you do? You widen your spread, making it as wide as you can within the rules that govern those parameters (wink, wink).

Welcome to the New Normal

The new volatility comes from wide spreads that are inherent in the new normal market. The new normal market has wider spreads than anyone really sees – until panic occurs, and then everyone sees how wide they get.

That’s because there just aren’t a lot of bidders and sellers lining up anymore. When I say they are not lining up, that doesn’t mean they’re not there – it means they aren’t putting down their orders anywhere.

We now have 14 exchanges here in the United States, where we once had one, the NYSE, then two with the American Stock Exchange (AMEX), then some other little ones, and finally three big ones when the Nasdaq Stock Market computerized exchange came online. On all these exchanges, investors and traders can send their orders – mostly to places that will pay them to execute in their houses.

And because stocks now trade in increments or a single penny, investors and traders don’t put down orders and just leave them out there.

The advent of decimalization on top of an increasing number of trading venues and what the confluence of those two had on volatility is a remarkable story, one for another time. But suffice it to say, they resulted in more inherent volatility.

Even when the spread in a stock looks tiny, and you think that means there’s a lot of liquidity there, you’re being fooled. What’s more important than the actual spread is the “depth of the market” or how many shares are being bid for at that bid price and how many shares are being offered at that offer price. That’s what’s important.

That seemingly “tight” spread can widen in a nanosecond if there aren’t any bidders lining up to buy stock.

That’s where volatility comes from. The big moves aren’t necessarily the result of a lot of volume of shares being traded (though that certainly adds to volatility at times).

The new volatility inherent in the system results from the fact that spreads widen really quickly. Both on down days when investors are anxious to get out at any price and on big up days when investors will pay up to get into a stock.

Volatility moves stocks quickly in either direction. The new volatility means that, even on the quietest days, volatility can spring to life in a nanosecond.

What the recent volatility, meaning the triple-digit moves in the Dow, means is that investors and traders are nervous and don’t know what the market’s next direction will be.

Because the market system has embedded new-volatility characteristics that will cause prices to gap up and gap down, we should all take the increasing volatility as an early warning sign.

Whenever markets are this nervous, it’s time to be cautious and make sure you have an exit plan, or at least a strategy to hedge any positions you have.

Let’s Watch as the Big Bank “Fixers” Scramble and Flee

12 | By Shah Gilani

If you can’t beat ’em (or manipulate ’em), then don’t join ’em.

That’s the new Wall Street mantra, as evidenced by happenings in the “fixing” world.

Talk about irony. “Fixing” or “fix” are Wall Street terms used to describe how benchmarks are priced on hundreds of instruments, from the Libor and other foreign currency exchange rates to gold, silver and swaps.

In all fairness, “fix” didn’t start out as a Wall Street term.

It’s been around, but Wall Street eagerly joined ’em.

Now, join me as I tell you all about this fix we’re in…

Price Fixing’s Downfall

Most stocks trade on exchanges, and their prices are determined by those trades, and so the closing price of a stock is generally the last price at which it traded. On the other hand, benchmarks (not including stock-market benchmarks) are “fixed.”

Take the Libor, for example – it’s fixed. The London Interbank Offered Rate is actually a series of interest-rate benchmarks in different currencies for different durations.

The Libor is the most widely used interest-rate benchmark in the world. Interest rates on all kinds of loans are based on Libor plus some additional “spread” above the base Libor rate.

But Libor itself isn’t determined on any exchange, or where loans are traded over the counter, or necessarily by any actual transactions. Libor is fixed by a fixing panel.

That means the select, small panel of bankers who trade Libor (interest-rate traders) get together, through computers (for some instruments, sometimes by phone), and fix, which means determine or price, benchmarks. Those benchmarks are then used for valuation purposes, including pricing trade blotters and balance sheet assets; for loan pricing purposes; and to trade against.

While the methodologies used to determine fixes are different, in all cases where benchmarks are fixed by panels, the input of the bankers is what results in the output.

When panels are convened to determine the fixed price of an instrument, and the panelists also make markets, hold as assets, and/or trade those instruments, panel participants may have an agenda in determining price outcomes.

Say, for example, you’re on a panel that determines the price of silver. Maybe your boss comes to you and says, “We have stockpiled silver, and the quarter is coming to an end. We need the price of silver to be as high as you can make it because the value of silver will impact our quarterly earnings.”

Or, say you’re a trader who has a big short position in silver, it’s almost the end of your fiscal year and your bonus will be determined as of the last trading day this week. Because you’re short silver, if you manipulate the price of silver down (by influencing the panel’s outcome), you’ll get a bigger bonus.

The problem with these panels is that they can and have manipulated benchmarks they are charged with determining, presumably in a fair and honest manner.

Big banks responsible for fixing Libor were regularly manipulating rates. So far, a group of them have paid more than $6 billion in fines for their dirty work.

Member banks of panels that determine fixings on foreign currency exchange rates have manipulated them and will end up paying billions of dollars in fines to settle those charges. And there are other ongoing investigations where regulators are looking at other instruments whose prices are determined by panels.

Well, now that the big banks are subject to huge fines for their manipulations, they are packing up their panel positions and closing shop.

That’s right. Banks that got away with manipulation for years and probably decades – and got caught – are getting out of the business of being on panels.

Several big banks, including Deutsche Bank AG (NYSE: DB), JPMorgan Chase & Co. (NYSE: JPM), UBS AG (NYSE: UBS) and Citigroup Inc. (NYSE: C), have looked at the cost of those fines and dropped out of panels.

I guess the old saying works in reverse: “If you can’t beat and cheat ’em, leave ’em.”

How’s that for a slap in the face?

These banks obviously feel that they can’t be honest, or that they can’t control the greed of their traders or higher-ups, who all like their big-fat bonuses, to any degree that they can stop the manipulation that’s become part of the fabric of the soiled cloth they’ve woven. Because they can’t make money cheating, they’re packing up their knitting needles.

First Comes Silver

I say good riddance to you lying, cheating manipulating bonus junkies.

It’s high time we replace panels of poseurs with transparent, real-world, market-based inputs. We’ve had the technology for years now. The old system is antiquated, and the only reason it’s still so predominant is that it’s so easily manipulated.

Silver was the first to get a makeover. Gone is the 117-year-old London Silver Fixing Market and its panel pricing methodology.

It was killed off in the middle of August this year when a new system for determining the silver fix was implemented. The new fix, the London Bullion Market Association Silver Price, is determined by actual transactions. And where there aren’t enough transactions, meaning 300,000 ounces of silver trading hands, an algorithm takes over that looks at price and volume transactions and comes up with a dirty-hands-off, free-market fix.

In case you’re wondering why silver went that route, it was because Deutsche Bank, one of the three panel members who “fixed” silver (I used quotes there, because, well, you figure it out) very publicly pulled out of the panel.

Why did they pull out? Who knows?

Maybe they were just tired of getting caught up, or caught, in the fixing game.

Here’s What the Secret Goldman Sachs Tapes Really Mean

9 | By Wall Street Insights and Indictments Staff

Here’s how screwed we really are.

The economy is growing – imperceptibly

It’s like trying to watch grass grow, but it’s growing.

How do you feel about that?

And we’re being told that unemployment has been falling, steadily, like sap from a maple tree in winter. That is, unless you consider how many people aren’t included in the headline number because they’re not looking for work anymore, or that the newly employed are mostly part-timers because they’re cheaper to hire, easier to fire, and don’t have to be covered by healthcare plans.

Still, unemployment is down. How do you feel about that?

Before you give me your answers, keep reading, because I’ve got many more questions…

It’s All on Tape

Interest rates are down. They were cut to the quick and quickly, there’s no disputing that. So, how do you feel now that you’re older and have shifted your savings out of equities and into fixed income, so your retirement future would be less subject to the market’s volatility and comfortably accumulating all that safe interest?

How do you feel about the stock market rising to the moon because low interest rates allowed speculators to leverage up their risk exposure and allowed companies to borrow cheaply to buy back their shares to lift their stock prices? After all, you’re mostly out of the market because you were shaken out or wiped out back in 2008.

How do you feel about getting back into the market? You did get back in, didn’t you?

You were supposed to. The Federal Reserve told all of us to do so. It openly articulated a zero-interest rate policy, commonly known as ZIRP.

Da ZIRP was designed, so they say, to drive investors out of saving and into the malls and into equities to lift the stock market.

Why drive investors into the stock market, you ask?

You knucklehead. It was obviously to make everybody rich by means of the extraordinarily brilliant policy prescription known as the “wealth effect.”

So, are you feeling wealthy yet? Are you any wealthier? Or is this all a dream?

Here’s where I give you all good news I’m famous for delivering.

You’re screwed. We’re all screwed.

That’s because the folks at the Fed, the kingmakers and economy breakers who run the country, who are the emperors of our time, have no clothes.

These naked fools have exposed us to a leveraged-up stock market, lifted on the backs of broke savers whose forsaken paydays were shifted over to hedge funds, big banks once again, and corporate CEOs and CFOs who ZIRPed markets higher in spite of economic realities.

And now we’re about to see how naked they really are and how exposed we are.

The Fed is the primary regulator of the players in the wealth feeling stealing game. And, not that we didn’t already know it, but once again, they are demonstrating that it’s not us they’re here to protect.

They’re protecting Wall Street‘s moneymaking machinery.

Two not-so-little items will prove my point about how screwed we are.

First, there’s “The Goldman (Sachs) Tapes,” which were first broadcast on NPR’s This American Life last week. Carmen Segarra, a former Fed examiner in the bowels of Goldman Sachs, secretly recorded some of the goings-on there.

Here’s what USA Today said about the tapes:

    What these tapes depicted were bank regulators who were timid and equivocating, deferential in the extreme to the bank they were supposed to keep in line, especially after Wall Street’s flagrant disregard for law and ethics led to the financial crisis that crippled the world economy.

    The New York Fed is the lead regulator for the main Wall Street banks and even has supervisors embedded in the offices of Goldman Sachs and others.

    What emerges in the tapes is that the team embedded in Goldman is the very definition of regulatory capture – when regulators become more oriented to the institution they are supervising than to representing the public interest.

    These sessions were taped by a member of that Fed team, Carmen Segarra, who was fired after seven months on the job and is suing the Fed, claiming it was her refusal to go along with this timorous form of bank supervision that led to her dismissal.

    In one session on tape, as the examining team was discussing tactics for probing a Goldman deal one of them characterized as “legal but shady,” this timidity was on full display.

    “I think we don’t want to discourage Goldman from disclosing these types of things in the future,” said one male participant who remained unidentified in the transcript, “and therefore maybe you know some comment that says don’t mistake our inquisitiveness, and our desire to understand more about the marketplace in general, as a criticism of you as a firm necessarily. Like I don’t want to, I don’t want to hit them on the bat with the head [sic], and they say screw it, we’re not gonna disclose it again, we don’t need to.

How’s that for comfort?

Fed examiners are coddling the biggest, baddest Wall Street titan of all time. The richest, most powerful investment bank the world has ever known – whose awesome moneymaking prowess is only outdone by the audaciousness of its global scheming to make mountains of money – in a very real sense, owns the Fed.

And Goldman Sachs isn’t the only owner. All the big banks are part owners of the Federal Reserve System, literally.

The Leverage Bubble

Secondly, there’s the whole leveraged loan thing.

Last year the Fed demanded big banks, including Goldman Sachs, to tighten up on the “leveraged loans” they were making, issuing and selling to investors.

Leveraged loans are loans made to companies that already have relatively high debt loads. In other words the borrowing companies are already leveraged. These are relatively high-interest rate loans (relative is a relative term), which means investors want to buy them, because they can get better yields on the pass-through of those interest payments, many of which are floating-rate loans.

Floaters have the interest rates that float higher as an underlying benchmark rises. (Can you say Libor? As in the famously manipulated London Interbank Offered Rate.)

Leveraged loans, because they are in such demand by yield-hungry investors, are increasingly “covenant lite” loans. Borrowers tell investors: If you want the interest my loan affords you, come and get it, but I’m not going to give you any of the standard protections usually embedded in loan agreements. You’ll be at higher risk, but, hey, you want the yield, don’t you?

The Fed gave the banks it sent letters to 30 days to comply with its supervisory requests that the banks not make loans to companies where subsequent leverage would exceed six times earnings before interest, taxes, depreciation and amortization (EBITDA).

The banks in turn gave the Fed the finger.

Not only are 70% of leveraged loans made this year covenant-lite loans, according to Barclays – incidentally, one of the banks that got the Fed’s letter. Debt-to-EBITDA levels on leveraged loans have risen steadily. In the first half of 2014 the average debt-to-EBITDA multiple was 5.89x. In the third quarter it rose to 6.26x. Standard & Poor’s notes that compares to the 6.23x on leveraged loans in 2007.

Those are averages. One deal TravelClick leveraged itself on over a $560 million loan came out to 9.7x. Another deal Acosta Sales & Marketing did on a $2.7 billion term loan came out at more than 8x.

What was the money being raised for?

For private equity companies Thoma Bravo and Carlyle Group, respectively, to buy out the companies.

That’s right. The companies leveraged themselves up with loans to give the money to private equity buyers to buy them. Who bought the leveraged loans? Why investors in mutual funds and exchange-traded funds (ETFs) and institutional investors, of course.

Here’s a small extraction from an American Banker article: “‘Terms and structures of new deals have continued to deteriorate in 2014,’ Todd Vermilyea, senior associate director at the Fed Board’s Division of Banking Supervision and Regulation, said in a May 13 speech in Charlotte, North Carolina. ‘Many banks have not fully implemented standards set forth in the inter-agency guidance.'”

Of course they haven’t. They know the Fed is naked, so they just kick it where they want.

The Fed is afraid to regulate their masters, who have been leveraging up markets with the ZIRP money the Fed has fed them for six years now.

And we’re supposed to be comfortable with the high stock market and the wealth effect we’re supposedly feeling?

We’re screwed, again.