Have we come too far too fast? Could momentum carry stocks higher than they are now – or are we heading toward a dip? Shah appeared on Fox Business this week to discuss the possibility of a very volatile New Year.
Have we come too far too fast? Could momentum carry stocks higher than they are now – or are we heading toward a dip? Shah appeared on Fox Business this week to discuss the possibility of a very volatile New Year.
The madness of the manipulation machinery on Wall Street knows no bounds.
Remember credit default swaps (CDS)? They’re the risky financial derivatives traded among Federal Deposit Insurance Corp. (FDIC)-insured banks that, during the 2007-’08 financial crisis, took down Lehman Bros. and almost bankrupted giant insurer AIG Inc. (NYSE: AIG).
Well, they never went away. And now they’re making a comeback, and Wall Street is using them in ever more maniacal ways.
They’re back partly because the recently passed federal spending bill reversed a Dodd-Frank rule that said big gambling banks had to separate CDS into units not guaranteed by the FDIC (aka taxpayers).
While I may come back to that, I’m not writing about Congress‘ latest gift to Wall Street today.
Today, I’m going to show you how Wall Street manipulators are using CDS and a false front of “activism” to make huge profits from troubled companies – and why that’s becoming routine.
This is about outright, legitimized (as in it’s not only legal – it’s business as usual) manipulation.
Think of CDS as a kind of insurance. Companies issue debt, and investors buy their obligations to collect interest and expect their principal to get paid back at maturity.
But sometimes debtors get into trouble. CDS sellers offer the holders of debt insurance against the debtor defaulting.
That’s not a bad idea. In fact, it’s a good product.
But, Wall Street being Wall Street, that good idea became a great way to gamble. That’s because there’s no limit on how many “insurance policies” can be written on any company’s debts.
For example, RadioShack Corp. (NYSE: RSH) has about $1.4 billion in outstanding debt (bonds and loans), and so the storied retailer is in trouble. Speculators betting on RadioShack defaulting, however, have bets that add up to about $23.5 billion.
That’s like everyone in your neighborhood taking out fire insurance on your house. These gamblers would be hoping your house burnt down so they could collect.
Sooner or later, someone might toss in a match to light the pile of potentially profitable bets.
Of course, that’s happening on Wall Street.
The RadioShack story is complicated. To keep it simple, today I’m going to let you know about a less known but less complex example of CDS manipulation.
In 2013, the Spanish gambling company Codere SA (BME: CDR) was in financial trouble.
Moreover, its managers didn’t know that GSO Partners, the debt-trading arm of Blackstone Group LP (NYSE: BX), had amassed a pile of CDS, betting that the company would default. Then, Codere received an offer of help, in the form of a desperately needed loan, from another Blackstone unit.
That’s weird, right?
Not if you’re the Blackstone Group.
The loan came with a provision. For Codere to get the loan, it first had to default on its outstanding debt.
That’s right: Codere got a loan from a Blackstone unit to avoid default. However, to get the loan, Codere first had to agree to delay interest payments on its other debts. Not paying that interest constituted a default. That made the CDS bets winners.
In other words, “activist” investors are now targeting companies and playing them like pawns.
Another such deal saw a trio of hedge funds buy CDS protection on a company’s debts and, at the same time, buy enough shares so they could vote down a plan the company had to merge with a stronger company.
How’s that for manipulation?
The company outsmarted the hedge funds by setting up a poison pill, so it could sell itself.
Now, with Dodd-Frank being eviscerated, we’re going to see many more of these bets. It’s another way to make money – and Wall Street loves to make money.
I warned about CDS back on September 25, 2008, before the credit crisis reached its zenith. CDS were a big part of what caused the credit crisis. Of the 15 points in my How to End the Credit Crisis at No Cost to Taxpayers, No. 4 was:
It’s that simple.
Then again, it’s just as simple for Wall Street and its moneymaking madness to manipulate Congress, the White House and the financial regulators.
Sit down before you read this.
It’s going to make your head spin and, worse, change the way you think about what’s real in America.
Christmas came early this year, for the market that is, by way of a gift from the U.S. Bureau of Economic Analysis.
However, this branch of the U.S. Department of Commerce, didn’t put its gift under anybody’s tree. They put it over all of us.
The gift was headline news that the “third revision” of third-quarter gross domestic product (GDP) showed the U.S. economy grew at a whopping 5% annualized rate, not the 3.9% rate posted in the “second revision.”
That sounds like good news, right?
Well, here’s what’s scary…
“Ho! Ho! Ho!” said the stock market. Good news is now good news on top of bad news being good news for stocks.
And so, with just enough time before Christmas for the stock markets to react, we got a 5% “print” from the BEA, which pushed the Dow Jones Industrial Average above 18,000 while the S&P 500 made yet another all-time high.
Too bad the BEA is a Bad Santa. The latest revision was a “put-on.” The folks at the BEA put it over on all of us.
What they did to get to that 5% number – to make us all feel gifted by a robustly recovering economy, to get us to go out and spend spend spend, to get stocks to soar – was pure prestidigitation. It was pure legerdemain.
It was pure BS.
I’ll prove it to you. Here’s what the BEA posted on its website:
“The increase in real GDP in the third quarter primarily reflected positive contributions from PCE, nonresidential fixed investment, federal government spending, exports, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.
“The acceleration in the percent change in real GDP reflected a downturn in imports, an upturn in federal government spending, and an acceleration in PCE that were partly offset by a downturn in private inventory investment and decelerations in exports, in state and local government spending, in residential fixed investment, and in nonresidential fixed investment.”
In the second paragraph, the BEA says the increase “primarily reflected positive contributions from PCE, nonresidential fixed investment, federal government spending, exports, state and local government spending, and residential fixed investment.” Then in the very next paragraph, it says that “an upturn in federal government spending, and an acceleration in PCE that were partly offset by a downturn in private inventory investment and decelerations in exports, in state and local government spending, in residential fixed investment, and in nonresidential fixed investment.”
How can you have an increase in PCE and the other stuff that was “partly offset by a downturn” in the same stuff the BEA said had increased?
I’ll tell you what’s going on.
The increase in personal consumption expenditures is all that matters. The BEA increased that number so much in the revision that nothing else matters.
Of course, its double-talk matters, but that’s just minor rubbish.
What the BEA gift-givers did in their revisionist juggling act was knock down personal savings by revising savings down over previous months by almost 20% and magically put all that money, about $140 billion, to work in the economy.
And presto, we had 5% GDP growth.
It gets funnier and freakier.
They said most of the increase in spending was on Obamacare. How many people do you know who bought into Obamacare last month?
They said last month we increased our gasoline and energy consumption by a whopping 4.1%. However, I recall oil prices falling almost 50% and gas prices falling more than 20% since late summer.
And about that PCE increase. We whooped it up spending on what? Christmas presents in July, August and September, long before Black Friday sales and Cyber Monday?
Maybe we did spend $140 billion earlier than we planned to spend on the holidays. Because we sure didn’t spend much on them.
According to most analysts, we saw disappointing Black Friday sales. And ShopperTrack had expected a $10 billion Super Saturday this year, but according to that analyst, sales on the last Saturday before Christmas were up only 0.5% from last year’s $9.1 billion.
RetailNext just said spending at specialty stores and large footprint retailers was down 8.9% over the weekend before Christmas versus a year ago. And traffic was down 10.2%.
We better be shopping online!
Okay, that’s getting ahead of the third-quarter numbers I’m talking about. But you get the point. How could we have spent $140 billion more in Q3 before the holiday season when the holiday season looks like a mini-bust?
Don’t even get me started on home sales.
Just say “Ho! Ho! Ho!” and enjoy the market rally while it lasts. The fabricators in our government bureaus are beholden to the powers that manipulate us all.
If it’s a feel-good feeling they want us to have, mission accomplished.
Happy holidays… suckers.
The truth about crony capitalism, at the highest level, is being laid bare right before our eyes.
I’m talking here about Goldman Sachs Group Inc. (NYSE: GS) as the husband of global investment banking prowess with the U.S. government as its mistress puppet.
But here’s what is happening…
The public is finally getting a look inside the black box where the titans of Wall Street and their inside-jobbers in Congress and at the highest levels of the U.S. government plot their profiteering and pilfering schemes.
Remember Starr International 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.
I told you about it back in September.
Apparently, this closely watched 37-day trial that was supposed to have ended in November, is far from over.
Greenberg’s lawyers just got more than 30,000 new documents they were denied before.
And, oh boy, are they a powder keg!
What was covered up when the U.S. government and the Federal Reserve Bank of New York bailed out AIG (as the Fed and the government called it) was how Goldman Sachs inserted one of its directors, Edward Liddy, into the top position at AIG when the government saved it from itself.
Only no one knew how deep the Goldman connection went. No one knew how Liddy, the former CEO of Allstate Corp. (NYSE: ALL), helped push through the bailout with the AIG board – without giving shareholders a chance to vote on it.
The problem for the New York Fed, the U.S. government and Goldman Sachs was that Greenberg’s stock position was enough to kill the bailout if he had a chance to vote his shares. He never got the chance.
It wasn’t enough that Goldman’s former CEO was Hank Paulson, the then-Secretary of the U.S. Treasury, and that Goldman got bailed out itself when the Fed and the U.S. government gave it a windfall of profits right out of AIG’s pocketbook for some credit-default swaps that weren’t even worth anywhere near what the government paid Goldman for them. That was theft, plain and simple.
But, hey, it’s not theft if its government sanctioned.
So, we’re finding out now how deep the rabbit hole is.
The best report I’ve read so far is the New York Times account of it.
For the most part, the trial was a sleeper. Not anymore. These new revelations change everything.
At least, we hope they do.
Wall Street Insights & Indictments: The $40 Billion Circus Has Arrived.
In a brand-new conversation with Money Map Press Executive Editor Bill Patalon, Shah made the case for a New Year rally in stocks – and a rebound in crude that could turn Big Oil into a true “Black Gold.”
Listen in and tell us what you think.
We’ve got a spending bill, folks!
The government of the United States will remain open for business thanks to the usual suspects in Congress being open to being bought.
Sometimes it only takes a few phone calls from a deep-pocketed giant bank CEO to remind legislators who butters their bread.
According to Sunday’s Financial Times, bread-butterer par excellence Jamie Dimon, chairman and CEO of mega-fat JPMorgan Chase & Co. (NYSE: JPM), worked the phones hard last week. He called on his legion of congressional peeps and perps to pass the $1.1 trillion spending bill as written.
Read on and I’ll tell you what I think – and I’ll show you what it means for all of us going forward…
Dimon desperately wanted the spending bill passed as written because its language was music to his ears. After all, JPMorgan’s partner in crime, Citigroup Inc. (NYSE: C), had written some mutually self-serving, screw-the-public language into the spending bill.
In the most important bill, coming at the most important time, before a recess, Citigroup and its lobbyists wrote a little provision into the bill that reversed new rules that the Dodd-Frank financial reform legislation passed in 2010 called for.
It’s not important anyway. It was just a stupid rule that should have been reversed.
I mean, how idiotic is it that Congress passed a law to make giant banks trade their IEDs (improvised explosive derivatives) in separate entities that were not guaranteed by the FDIC (an acronym that means “taxpayers”)?
Oh, the humanity! Imagine poor buttermilk banks not being able to skim off profits on leveraged derivatives trades on their own. That’s crazy.
If they had to do it on their own, they’d have to raise tons of capital. And that, of course, would impact their profitability.
So, I’m all for holiday gifts to the likes of JPMorgan and Citi. Thanks to the spending bill being passed as written, they can continue using depositor funds to leverage themselves up and swing for the fences.
And who thought a few phone calls to Congress would fall on deaf ears?
Maybe next time we all should call ourselves.
WASHINGTON, D.C. – A tense battle between warring political parties erupted in Washington yesterday when Wall Street-backed Jihadist demands surfaced in the 1,600-page omnibus spending bill – threatening to first take the U.S. House of Representatives hostage, then all of America.
Intelligence services (obviously not Washington-based) initially identified the financial terrorists as Beltway lobbyists, but later revealed them to be a Big-Bank sleeper cell embedded in God-hating Dodd-Frank legislation, universally decried by the faithful as blasphemous.
In what was meant to be a stealth operation, the plastique-laden provision inserted into the bill aiming to roll-back certain Dodd-Frank rules, instead exploded prematurely.
And it shows us how financial terrorism continues to escalate…
The shape charge was supposed to destroy the regulatory safeguards forcing big banks to separate atomic derivatives trading operations from bank operations backed by U.S. Federal Deposit Insurance Corp. (FDIC) guarantees. Instead, it was detected by an Elizabeth Warren drone and, not-so-remotely, detonated.
Amidst screams of “All Of Big Banks Are Da Greatest” it was determined that the bankster-backed group’s spending-bill provision – which, if not passed, will shut down the government – was dangerous enough to exploded in public view.
From an undisclosed location – believed to be a cavern deep beneath Wall Street – unnamed sources (who said they weren’t authorized to speak on behalf of their lying, cheating, greedy monster masters) who were later identified as Citigroup foot-soldiers, claimed the provision was only meant to improve the economy and that Dodd-Frank “does absolutely nothing to create a safer financial system.” They also alleged the derivatives regulation instead creates “undue costs and burdens on U.S. financial firms.”
At stake in the stand-off is the future of the U.S. financial system.
With hostages being held on both sides, it remains to be seen if demoralized and deluded Democrats have the will and guts to tear a page from the bible of their Republican pulpit-pounding counterparts and threaten to shut down the government themselves.
Sadly for the American people – who don’t know there are still trillions of dollars of bankster IEDs (improvised explosive derivatives) planted along all our economic highways and byways – the standoff in Washington may appear as just another hostage situation that may or may not matter.
The truth is, financial terrorism always matters.
How do you make money on this? That’s what Shah tackles during his latest appearance on Fox Business Wednesday.
Why are oil, gas and big bank stocks tumbling? Who should you be wary of? Where is the safest place to invest your money right now? Shah has the answers.
Remember when banks used to make it worth your while to deposit cash with them?
Thanks to U.S. Federal Reserve policies that are holding market rates down near zero, you’re getting just a few basis points in interest (a basis point is one one-hundredth of a percentage point) on your cash deposits – and haven’t been for several years.
It’s bad enough that you’re getting practically no yield on your savings. But now the big banks – those greedy fellows that we taxpayers bailed out from a crisis that they actually caused – are about to start charging you to deposit money with them.
I’m not kidding.
There’s so much money floating around that the biggest banks that are sitting on the most of it and can’t – or refuse to – lend it out for any number of selfish reasons, now don’t want it stuffing their vaults.
So big depositors – who already weren’t earning anything on the savings they’ve asked big banks to hold and safeguard for them – will soon have to pay a fee for that questionable privilege.
There’s a litany of disturbing elements to this tale. But the most galling is this: It won’t be long before you and I are receiving notices of this unseemly new Big Bank tariff.
Welcome to the Brave New World of Central Bank Tyranny!
Sycophant central bankers here in the U.S. and over in Europe (and everywhere else, for that matter) have artificially manipulated interest rates down to nothing. That makes it possible for their masters – the big banks – to rack up record profits: They borrow from each other at one basis point and then go out and buy massive quantities of higher-yielding government bonds, cashing in on the “spread.” The United States, European countries, Japan, China and everyone else is happy, since they can keep running huge deficits.
In that equation, the banks don’t need to make loans to us.
Still, we need a place to park our money.
But now the big banks are saying that they have too much cash and can’t lend it fast enough. Of course, what they’re not saying is that they don’t want to lend it out to us at current low rates because, when rates rise, those loans will be “under water.”
The banks are fat and happy making so much on their risk-free government loans (that’s what them buying government bonds is all about; those bonds are nothing but cheap loans to profligate governments) that the extra money they have on deposit is starting to cost them profitability.
Yeah, you heard that right.
Here’s where it gets a tad technical.
Deposits are “liabilities” for banks. That’s because that depositor cash can be withdrawn at any moment. Loans are “assets” because banks are getting paid interest on them. When big banks’ deposit liabilities get too big they become a problem because they have to keep “reserves” against those deposits. Banks, especially with new banking laws and regulations, have to hold certain “assets” (usually U.S. Treasury bills, notes and bonds) in reserve against all those deposits that could leave in a flash if there is any kind of banking panic.
Big banks don’t have enough U.S. Treasuries to hold against deposits as reserves and at the same time use their stash of Treasuries to lend out overnight to other banks as collateral for overnight loans of more cash, so they can use that cash to buy – you guessed it – more risk-free Treasuries.
And why are there not enough Treasuries in the almost-$14 trillion world of U.S. Treasury securities? That would be because the Federal Reserve has been buying trillions of dollars’ worth of them from the big banks that have been buying them up to sell to the Fed, for a nice profit, thank you. And other central banks around the world have been buying Treasuries, too, for different reasons, but all good ones for them.
So the big banks got what they needed, to get bailed out. And they got what they wanted, to make record profits – yet again. And we all get hosed because the big banks aren’t lending to little people.
And soon enough now, we’ll have to pay them out of our own pockets to hold our money so we can write checks against our deposits and conduct normal banking transactions.
It’s Central Bank Tyranny. It’s the tail wagging the dog. The whole world has become one giant banana republic – with central bankers acting as militant officers enforcing the profitability schemes of the oligarchy of bankers that are the real dictators of our future.
Absolute power corrupts absolutely.
And we’re absolutely toast.
In Monday’s Wall Street Insights & Indictments column “What Happens When There’s Nowhere Left to Run,” I detailed the dangers posed by the scary move the U.S. Treasury bond market made back on Oct. 15.
My cautionary tale was totally justified.
Indeed, in yesterday’s Wall Street Journal, the lead article in the Global Finance portion of the “Money & Investing” section was “Watchdog Warns of Risk in Markets.”
Apparently the Office of Financial Research, the watchdog team created out of Dodd-Frank legislation under the “watchful” eye of the U.S. Treasury Department, observed the same move that I did – and found it just as rattling.
According to The Journal, the OFR warned that “the system is vulnerable to repeats of what occurred in October when tumult in the trading of U.S. Treasury securities spread broadly to futures, swaps and options markets.”
The watchdog group’s just-released third annual report soberly noted that “although the dislocation that peaked in mid-October was fleeting, we believe there is a risk of a repeat occurrence,” and further warned that resulting volatility “raises a host of financial stability questions.”
That’s not what you want to hear. Let me tell you why…
What’s worrying the Office of Financial Research is its finding that “swings could be exacerbated by computerized trading and algorithms, as high volumes of transactions are executed automatically, deepening instability.”
Figured that out all by yourselves, did you?
I’m not annoyed by this…
And with good reason: It angers me to no end that everything that’s been allowed to infiltrate our capital markets that’s problematic – but egregiously enriches greedy banks and their trading lackeys – undermines transparency, and safety, of those markets.
It’s really touching that the new watchdog research group is worried that their research (which amounts to observing after-the-fact market swings) leads them to be worried.
Please, somebody pass me an airsick bag.
Where’s the real research?
Where’s the research, analysis and truth about the May 2010 “Flash Crash?”
Where’s the research on why we’re still seeing mini-flash crashes all the time (like the mini-Flash Crash in Apple Inc. (Nasdaq: AAPL) we had on Monday)?
Where’s the research on why stock options move up and down before earnings announcements are made or before mergers-and-acquisitions announcement are made public?
Where’s the research on the real impact on liquidity posed by high-frequency traders?
Where’s the research on how high-frequency trading (HFT) was aided and abetted by the exchanges to benefit the people who pay massive fees for those HFT trades to the exchanges that pick off profits from the public and ignorant institutional investment houses like the mutual funds that shepherd most of the “little peoples'” money?
Where’s the research on how the Securities and Exchange Commission – which knows exactly what the HFT shops are up to – benefits by the additional profits companies and exchanges it’s supposed to be making sure are fair and transparent donate to lobbyists and legislators who control the SEC commissioners, and their pay and their budgets?
Where’s the research on the revolving door that spins compliant regulators out into the waiting arms of the banks, private-equity companies, hedge funds and trading shops that hire them to coddle the friends that remain back at the regulatory ranch (and who are merely biding their time before getting their own private sector interviews)?
Indeed, where’s the real research on how and why our capital markets got to be so manipulated by so few to the detriment of so many?
The Office of Financial Research has a right to be worried. If those supposed watchdogs ever overstep their boundaries and maybe actually research something from within the bowels of the machine and pronounce it as stinking to high heaven, they’ll be worried because the Treasury Department will hear it from its bosses, the lobbyists and legislators getting fat making sure the skids are greased for their bank constituents and masters to make money.
And that will be the end of their “research.”
It’s already happening. The new watchdog is already being choked back.
And the capital markets? Don’t worry, they’re safe. After all, how could they not be with all these regulatory bodies and watchdogs and all the Dodd-Frank legislation that lets us all sleep well at night.
It’s all good.
That is, until it isn’t.