Archive for October, 2012

The Junk Credit Bubble

11 | By Shah Gilani

There’s a big storm brewing.

Not Hurricane Sandy. She’s coming, for sure; it’s just a matter of where and when she’ll whack a good portion of the northeastern United States. That storm is being widely watched and getting massive news coverage.

I’m talking about another storm I see brewing – a storm that no one is talking about. In fact, the media is blind to it.

But this storm could be a lot bigger and do a lot more damage.

I subscribe to a lot of “inside the ropes” kinds of publications. Mostly they’re industry-specific newsletters, magazines, and deal books. Two of them, Leveraged Finance News and Structured Finance News’ Asset Securitization Report, are taking me longer and longer to read every day.

That’s because the number of “leveraged” and “structured” deals that have been coming to market has truly exploded.

Let me show you what I mean, and why it matters to all of us.

Big Bank Protectionism: A Success Story

84 | By Shah Gilani

If you’re reading today’s headlines, you know Bank of America Corp. (NYSE:BAC) is in trouble. It could be in really big trouble.

Thank goodness they’re so big!

Thank goodness all the big banks in America are all much bigger now than they were a few years ago, before the financial crisis brought them to their knees, by their own doing, of course.

Don’t you just love it when a plan comes together?

Yeah, it’s all part of “The Plan” to eliminate pesky banking competition.

Let me show you how nicely it’s working…

The Plan was hatched a long time ago. Back in 1913, as a matter of fact. That’s when Congress devised the Federal Reserve System for eliminating competition and making sure U.S. taxpayers would be the lender of last resort to big bankers.

It has taken a while, 100 years, in fact. But it is working.

The first sign it was working came in the 1980s and ’90s, when the savings and loans got into serious trouble playing the greed game. They weren’t covered by the Federal Reserve System. So they were shut down, or rolled up by government-backed insiders (Congress’ puppet-masters), and later sold to big banks for sweet profits.

Anyway, they’re gone. No more pesky competition from S&L associations.

Now look who’s next on the chopping block…

Why Nothing Has Changed Since Black Monday

23 | By Shah Gilani

Friday was the 25th anniversary of Black Monday – October 19, 1987, when the stock market fell some 23% in one day.

And it was a hard anniversary to escape.

Not only was it written about in most mainstream newspapers and talked about on all financial news channels on Friday, benchmark stock indexes nodded their remembrance to that special day too, by promptly falling between 1.52% (S&P 500) and 2.19% (Nasdaq).

Maybe stocks fell as a wink and a nod to the past repeating itself, or maybe it was a nod to the future of Europe being muddled once again.

Either way, there are plenty of lessons to be had from what happened back in ’87 and what’s happening now. Let’s take a look.

Twenty-five years ago, computer-generated trading was taking root.

There were lots of newfangled computer-driven trading “models” being tried out. One of them, a scheme started by Kidder Peabody (don’t worry, they’re out of business now) had the cool and important-sounding name “Portfolio Insurance.”

If markets started to fall, and you were smart enough to have bought Portfolio Insurance from Kidder (and some other clowns, I mean clones), they would automatically sell S&P 500 futures short for you, to offset your losses on your big portfolio of stocks.

The thing is, the scheme was self-fulfilling.

As stocks dropped, more and more futures were being sold as “insurance” protection. But whoever was bold enough to buy the futures contracts that were being sold – eventually hand over fist – were hedging themselves by also shorting baskets of stocks to offset their long futures positions. And as more stocks were sold and markets went down further, more insurance was needed, so more futures were sold. Now do you see what happened?

Portfolio Insurance got a bad name, fancy that, and went bye-bye.

Good thing we learned from that.

But not really…

Poor Old Vikram

26 | By Shah Gilani

The only big deal about Vikram Pandit “stepping down” as Citigroup Inc. (NYSE:C) CEO and his removal from the board is that it didn’t happen sooner.

On Tuesday, the morning news flow was all clogged up with revelations that Pandit had stepped down. Rather abruptly, in fact.

The truth is he didn’t leave voluntarily. He was given an ultimatum by the “new” board of directors: resign or be fired.

Poor old Vikram. This was a setup from the start.

He ended up at Citigroup when the mega-bank bought his Old Lane hedge fund for more than $800 million. Poor old Vik pocketed about $165 million in the sale and continued to run the fund, some say into the ground, until Citi shut it down.

In 2007, my favorite Goldman Sachs (NYSE:GS) ex-CEO Robert Rubin (who after pandering to all the big banks in the country as Secretary of the Treasury in Bill Clinton’s administration, then pimped himself to Citigroup after allowing Citibank to merge with Sandy Weill’s Travelers insurance conglomerate (that owned Salomon Smith Barney) in an illegal deal that required Congress to kill prudent banking laws (Glass-Steagall) to make it legal) actually handpicked Vikram to run the bank.

Super richboy Bob Rubin, of course, had nothing to do with running Citibank after making it the mega-bank it became as a result of the merger; he was merely a special consultant to the board, or some B.S. like that.

But here’s what really happened.

How Wall Street Hijacked America and Became Master of the Tradable Universe

68 | By Shah Gilani

Today I’m going to make a blanket indictment, and I’m going to back it up. No doubt some of you will see it my way, and some of you will tell me I’m just plain wrong. Either way, bring on the comments!

I ended Thursday’s WSII post – “Why High-Frequency Trading is a Scam” with this comment and threat: “There’s nothing redeeming about high-frequency trading. Nothing. Maybe I should write a real article on why it’s a bunch of crap and who’s really behind it? Oh, I’ve done that. I did it two-and-a-half years ago, at Money Morning. Guess it’s time to do it again. Maybe I’ll call it my new high-frequency muckraking series on HFT B.S. (Think my publisher will go for that?)”

Well, my editor over at agreed that it’s important to tell the world the truth about this scam, how it actually works, and what should be done about it.

So, tomorrow (Monday) and Tuesday, in a two-part series, you can read exactly how HFT players play their game, what B.S. they lay on us to justify their moneymaking schemes, how it can blow us all up, and what steps we should be taking to defuse the bomb.

But first, here and now, I’m going to tell you how high-frequency trading was allowed to happen in the first place – and, by extension, how what looks like the unintended consequences of past rules and regulations changes, which manifested multiple Wall Street scams, were never “unintended” at all.

Buckle up…

Why High-Frequency Trading is a Scam

29 | By Shah Gilani

Let me make this perfectly simple…

High-frequency trading is a scam. It should be outlawed.


Regulators, namely the pimps and panderers at the Securities and Exchange Commission, and the exchanges, all of them, are in on the game.

The game, known as HFT, isn’t arbitrage, isn’t fair, isn’t consistent with the keeping of “fair and orderly markets,” and so should be illegal.

In case you don’t know, here are the rules of the game…

Conspiracy Theories

83 | By Shah Gilani

Can we talk?

Can we talk about unemployment in the U.S.? Can we talk about conspiracy theories?

I thought you’d say “yes.” I can almost hear you saying, “Hell yeah, bring it on!”

So, let’s have at it.

Let me say my piece, and then you chime in.

I’ll start by saying I don’t think there’s any conspiracy to manipulate the unemployment numbers.

You know, the numbers that came out on Friday and freaked everybody out.

Somehow, right before the election and right after President Obama fell flat on his face, after Mitt Romney knocked the champ (don’t get mad, he’s not my champ, he’s the champ because he’s the incumbent) down almost for a ten-count, the bloodied champ bounds off the canvas and stands on the ropes proclaiming victory over economic malaise because the unemployment rate fell below 8%.

Well, what’s freaky about the unemployment number, the U3 number, the most widely watched and reported measure of unemployment in the country, maybe even the world, is that it fell from 8.1% in August to 7.8% the September.

What’s got folks in an uproar (folks that aren’t so folksy when it comes to the champ) is that it looks pretty conspiratorial that unemployment hasn’t been below 8% in 43 months, not since Obama got into office. And all of a sudden it drops in August to 8.1% from July’s 8.3%, and far more freakily, drops to 7.8% (that’s below 8% for you non-math types) in September from 8.1% in August.

Before I give you my thoughts on why I don’t think there’s a conspiracy…

Q&A: October 2012

51 | By Shah Gilani

I’ve got some more Q&A for you today.

Remember, you can share your own comments and questions with me by posting them to the bottom of any article, or emailing them to I may not be able to respond to everybody, but I read everything you have to say.

Let’s start with your very interesting response to “How Our Markets Got So Politicized.” A lot of you offered solutions.

Q: To me, there’s one answer and one answer only. A tax revolt, no taxes being paid to any level of government. And it has to be led by someone knowledgeable like you, Shah, along with others with courage and credibility. ~ Art

A: I love that you’re a revolutionary, Art. But I don’t think stopping the wheels of government and commerce by cutting off the government (including state and municipal governments) is in all our best interests. We’d be more disrupted than we can handle.

However, we definitely need a tax revolt! I’m 100% with you there. The problem, maybe the biggest one we face, is the inequity inherent (on purpose) in the tax code. There’s a reason the tax code is as thick as it is; all those rules and regulations are there to be manipulated. The more rules we have, the more loopholes there are to be created. That’s the game. That’s why “the strong seem to get more, while the weak ones slave.”

A flat tax is the way to go. It can be a flat and progressive tax. I like federal rates of 5% on gross income of less than $20,000, 7% on gross between $20K and $30k , 9% on gross between $30k and $40k, 11% on gross between $40k and $50k, 13% on gross between $50k and $75k, 15% on gross between $75k and $1m, and 17% on anything greater than ordinary income of more than $1m. I like a flat corporate rate of 20% after expense deductions. I’d like to see dividends be allowed to be 100% deducted as an expense to any company paying them and have dividends taxed at half everyone’s ordinary income rate.

That’s my starting point to what would be a long discussion. The rest of it would be all about limiting the growth of government spending and having balanced budgets… or else.

Q: If you want to reduce the problem in this situation, you don’t need to re-write or amend the Constitution. Instead, you need to follow it. This would result in elimination of the Federal Reserve and the abolition of legal tender laws. These two steps would result in the end of control of the money-men on our society. ~ Kevin B.

A: Right on, Kevin! Especially eliminating the Federal Reserve ring around our necks!

Q: The only answer is to limit all elected officials, including the President, to one term only in order to attract individuals who will make fair and honest decisions and not waste time and our money on re-election issues and campaigns. Let’s bring back “Throw the Bums Out” on Election Day. Unfortunately for the few good ones, they have to go too. It’s time for them to get another job like the rest of us. ~ Linda

A: On the surface, as a kindred revolutionary, I like your thoughts. But there are some good people who get into government for the right reasons and do the right things. Granted, I don’t see too many of them these days. While it sounds reasonable to turn over the soil regularly when planting future expectations, it would be incredibly disruptive to have all new people learn what has to be done, how to do it, and get it done in a single term. Term limits sound better to me.

And we should definitely take the money out of electioneering. Corporations should be limited to what they can give to any candidate, maybe something like $25,000 at most. And if any corporation gives to any candidate who wins, any legislation that that elected official has anything to do with that serves any of their corporate benefactors, should be disclosed as to what benefit the corporation (or any business, for that matter) derives from it. Individuals should be able to give up to the same $25,000. We should have a $5.00 tax on all tax filers (with a flat, progressive tax) to pay for campaigns. The collected amounts should be equally distributed to all candidates, who can only draw on the money for defined expenses. What isn’t spent gets redistributed to candidates still in the race after certain expiration dates. Sure, this plan needs work, but you get the idea.

Q: Forget the politicians and head to where the real problem is, and that is Wall Street! The pols are puppets, and it won’t matter who is in there. A little vigilante pressure on the “movers and shakers” who actually run this country may be the answer to their self-serving ways. We need to stand up for ourselves, not expect some elected official to do it. ~ R.

A: I agree that pressure on the “movers and shakers” is absolutely necessary. If you want to kill the snake, you cut off its head. The head is without a doubt the Federal Reserve System. You’re going to hear a lot more from me on the Fed. It is the problem. The Federal Reserve System is the scamming mechanism by which the banks are afforded their cover. It covers them when they blow themselves up in pursuit of their greedy games and completely distort free markets by eliminating moral hazard. The Fed deserves to be dead. If we cut off the head of the banking cartel, the movers and shakers have to resort to slithering around where we can see them – and stomp on them, as they deserve.

Q: Everyone is still chatting about one more patch on the old ship. If we look at the current Arab Spring and the fall of most previous empires, we should understand that the new “power structure” will have few of the same participants as the old one. The rich and powerful are targeted and replaced, and it can happen very fast. Think about 150 to 200 million gun owners without food. Even if you want to run, there is already a refugee camp where ever you want to go. It is decision time. ~ Ed

A: Ed, if it comes to the public waging war on our military, because they back the government, we’re going to lose, all of us, the whole nation, the whole American experiment. We need the armed forces to demand the Constitution be upheld. We need their leaders and ours to face open tests of honesty, integrity, and be accountable to the rule of law that we’re all supposed to obey.

Let’s keep going…

Posted in Q&A