Archive for 2012

The SEC is All Over These Two Cases… Right?

17 | By Shah Gilani

I’ve got two good ones for you today.

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

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

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

The details are fun, but not important.

Here’s what you need to know.

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

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

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

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

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

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

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

The Jon Corzine Report

50 | By Shah Gilani

Here it is, the quote of the week!

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

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

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

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

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

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

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

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

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

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

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

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


It wasn’t all Jon Corzine’s fault…

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

22 | By Shah Gilani

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

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

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

What stuff?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Politics, Polls, and Big Bank Buybacks

36 | By Shah Gilani

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Like I said, I hate politics.

Let’s talk about something else I hate.

The big banks.

Why Today Matters More than the Election

57 | By Shah Gilani

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

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

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

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

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

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

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

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

But I digress.

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

It didn’t.

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

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

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

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

Here’s what we’re looking at today…

The Truth About Prepaid Cards

44 | By Shah Gilani

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

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

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

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

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

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

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

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

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

American Express? As if it’s a bank.

Wait a minute…

Q&A: November 2012

17 | By Shah Gilani

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

Posted in Q&A

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…