Hillary’s Erased Emails May Still Exist; Meet the Folks Who Might Have Them

Employees of Datto, Inc., a technology firm hired to backup data for Hillary Clinton, have some fun at the office, singing Carly Rae Jepsen’s “Call Me Maybe.”

By Pam Martens and Russ Martens: October 7, 2015 

Hillary Clinton just can’t catch a break. After making the admitted poor choice of using a private server for her emails during her time as Secretary of State instead of one protected by the U.S. government and its security octopus, Hillary has told the public that she turned over all work-related emails from her time as Secretary of State to the government and erased all of her 31,000 personal emails from that period.

Datto Shows the Indestructibility of Its Backup System by Subjecting It to Thermite

Datto Shows the Indestructibility of Its Data Backup System by Subjecting It to Thermite

Now it turns out that a company called Datto Inc., which routinely makes demos of setting fire to equipment to show how indestructible its data backup system is, may have a stash of Hillary’s emails. Its founder and CEO, Austin McChord, was named this year as one of Forbes “30 Under 30,” a prestigious list of technology entrepreneurs under the age of 30.

To make matters even more alarming for the Presidential candidate who is slated for her first Democratic debate next Tuesday, Datto Inc. has confirmed that it has handed over its Hillary backup contents at the request of the FBI after obtaining her permission and that of the firm that hired it to do the backups, Platte River Networks.

Hillary left her post as Secretary of State in February of 2013 but the State Department did not request her work emails until October 28, 2014. It is believed that Datto has performed backup of her data since June 2013, prior to her turning over the material to the State Department. Hillary has stated that none of the emails on her private server were marked as classified, but intelligence agencies have since said there were at least 400 emails that contained classified information, including two that were “Top Secret,” a classification of material that only top levels of government officials are allowed to see after passing comprehensive background checks. The FBI is investigating the matter.

It is not presently known if Datto Inc. was cleared to store classified government material or if it had classified material on its system.

The latest uproar is a result of a letter written to Datto by Senator Ron Johnson, Chair of the Committee on Homeland Security and Governmental Affairs on Monday. The letter was obtained by McClatchy Newspapers which broke the story.

In addition to revealing the involvement of Datto, Johnson discloses in his letter that an employee of the primary server provider, Platte River Networks, sent an email to a colleague expressing concern about a request from the Clinton office to “trim” the duration period for storing data to 30 days. The employee wrote: “Starting to think this whole thing really is covering up some shaddy s**t….I just think if we have it in writing that they told us to cut the backups, and that we can go public with our statement saying we have backups since day one, then we were told to trim to 30days [sic], it would make us look a WHOLE LOT better.”

Johnson raises concern in his letter as to why Hillary would request cutting back the duration of the backups after the State Department had requested copies of her work emails. Hillary is expected to testify before a House Committee on October 22 where the email matter is expected to be raised.

Austin McChord, who graduated from the Rochester Institute of Technology with a degree in Bioinformatics in 2009, started Datto in his parents’ basement. It has grown exponentially since then. Datto recently stated that it is the “leading provider of comprehensive data backup, recovery and business continuity solutions with nearly two million customers and 8,000 partners worldwide.”

There may be an important moral to this story for McChord and other data backup companies. Just as Wall Street has a requirement for brokers to “know your customer,” to prevent getting sucked into FBI investigations, data backup firms may want to get to know their customers better in order to steer clear of people potentially transmitting classified material.  This would prevent young, entrepreneurial businesses from becoming embroiled in time-consuming distractions – especially when the U.S. economy is desperate for these innovative, job-growing companies. 

Bernanke Tries to Rewrite the Financial Crisis in New Book

By Pam Martens and Russ Martens: October 6, 2015 

Former Fed Chair Ben Bernanke: What Did He Know and When Did He Know It

Former Fed Chair Ben Bernanke: What Did He Know and When Did He Know It

Will the American people ever get an honest writing of the 2008-2009 Wall Street collapse? If you think it is to be found in the new book released on Monday by former Fed Chairman Ben Bernanke (which we seriously doubt you are thinking) you will be disappointed.

What you will find in Bernanke’s book are photos of his grandparents, a photo of the Time Magazine cover with himself named “Man of the Year,” a photo of Bernanke with the masterminds of the repeal of the investor protection act known  as Glass-Steagall (Robert Rubin, Alan Greenspan, Larry Summers), a photo of the grand double staircase in the Federal Reserve building, and so forth.

What you will not find is an honest accounting of how the Fed allowed Citigroup to grow into a financial Frankenstein and then quietly and secretly shoveled trillions of dollars into the firm to keep it afloat.

You won’t find any of that because on March 3, 2009, former Fed Chairman Ben Bernanke testified under questioning from Senator Bernie Sanders that “the Federal Reserve lends to healthy firms on a collateralized basis…” In reality, Citigroup was a financial basket-case at that point. Its stock closed that day at $1.22. It would take a court battle launched by Bloomberg News and legislation pushed by Senator Bernie Sanders to unearth from the Fed the fact that it had funneled over $16 trillion in cumulative loans to save the financial system. Citigroup was the largest recipient of those loans, with a take of over $2.5 trillion cumulatively, on top of $45 billion in TARP funds and over $306 billion in asset guarantees.

Bernanke’s account in his new book, The Courage to Act: A Memoir of a Crisis and Its Aftermath, attempts to resuscitate the bogus scenario that it was the collapse of Lehman and AIG that set the crisis in motion, not mega banks weakened by lax regulation by the Fed and the repeal of the Glass-Steagall Act, a decision supported by the Fed. (Lehman Brothers, an investment bank, and AIG, an insurance company, were not overseen by the Federal Reserve at that time.)

Sheila Bair, head of the FDIC during the crisis, has already revealed that Citigroup was far from a healthy institution when the Fed was secretly shoveling $2.5 trillion in cumulative loans into the firm, many at below 1 percent interest rates. Bair wrote in her own book, Bull by the Horns, the following: 

“By November [2008], the supposedly solvent Citi was back on the ropes, in need of another government handout. The market didn’t buy the OCC’s and NY Fed’s strategy of making it look as though Citi was as healthy as the other commercial banks.  Citi had not had a profitable quarter since the second quarter of 2007.  Its losses were not attributable to uncontrollable ‘market conditions’; they were attributable to weak management, high levels of leverage, and excessive risk taking.  It had major losses driven by their exposures to a virtual hit list of high-risk lending; subprime mortgages, ‘Alt-A’ mortgages, ‘designer’ credit cards, leveraged loans, and poorly underwritten commercial real estate.  It had loaded up on exotic CDOs and auction-rate securities. It was taking losses on credit default swaps entered into with weak counterparties, and it had relied on unstable volatile funding – a lot of short-term loans and foreign deposits.  If you wanted to make a definitive list of all the bad practices that had led to the crisis, all you had to do was look at Citi’s financial strategies…What’s more, virtually no meaningful supervisory measures had been taken against the bank by either the OCC or the NY Fed…Instead, the OCC and the NY Fed stood by as that sick bank continued to pay major dividends and pretended that it was healthy.”

The Fed had also stood by and allowed Citigroup to hold massive amounts of Structured Investment Vehicles (SIVs) off its balance sheet in the Cayman Islands. Bair wrote in her book: “For reasons that still today remain a mystery to me, they were allowed by their regulators – the Fed and the OCC – to keep the investments off balance sheet…”  Citigroup was not required to hold capital or reserve against those assets to absorb losses.

Bair exposes the likely reason that Citigroup was bailed out – it would have been a major embarrassment to the U.S. in foreign markets if Citigroup had failed because Citigroup held only $125 billion in U.S. deposits with the vast majority of its deposits being owned by foreigners – much of that without insurance on the deposits. The low base of U.S. deposits was in spite of Citigroup listing $2 trillion in assets on its balance sheet and $1 trillion off balance sheet.

Digging through archived Fed data, we previously reported that Bernanke and the Fed had gotten a heads up about Citigroup’s condition as early as August 2007. That was more than a full year before the failure of Lehman and the bailout of AIG. On August 20, 2007, the Fed quietly took an unprecedented action. It gave Citigroup an exemption that would allow it to funnel up to $25 billion from its FDIC insured depository bank to mortgage-backed securities speculators at its broker-dealer unit. The Fed notes in this letter that the bank “is well capitalized.” (Federal Reserve Exemption to Citigroup to Loan to Its Broker-Dealer, August 20, 2007)

Bernanke does concede this in his book: “I did agree with Sheila [Sheila Bair] that Citi was being saved from the consequences of its own poor decisions.” He also quotes a revealing email he received from Bair about the condition of Citigroup. Bair wrote: “Can’t get the info we need. The place is in disarray. How can we guarantee anything if citi can’t even identify the assets.”

In the video linked below, Senator Bernie Sanders gets to the core of the hubris at the Fed. (Sanders is now running for President on a platform that includes the restoration of the Glass-Steagall Act.) Sanders wants to know the names of the banks that received over $2 trillion from the Fed in loans. (That number would grow to $16 trillion when the Fed was forced to cough up an honest accounting by the courts, legislation and an investigation by the General Accountability Office.) Sanders also asks Bernanke how it can be that the Fed is loaning money to the big banks at almost zero percent while they continue to charge credit card customers – the very taxpayers who lent them their money — as much as 25 or 30 percent interest.

Finally, Sanders asks Bernanke: “Do you think that repeal of Glass-Steagall was a tragic mistake.” Bernanke responds, “No, I don’t think so.”


Adam Posen Calls Financial Stability Oversight in U.S. “a Mess”; Speech Goes Missing

By Pam Martens and Russ Martens: October 5, 2015 

Adam Posen Testifying Before the Senate Banking Committee, July 8, 2015

Adam Posen Testifying Before the Senate Banking Committee, July 8, 2015

Last week we wrote about the invisible hand’s removal of a negative paragraph on the financial industry from the Pope’s speech before a joint session of Congress and some bizarre shenanigans with Fed Chair Janet Yellen’s highly anticipated speech in Amherst, Massachusetts. This past Saturday, Adam Posen, the President of a powerful think tank, the Peterson Institute for International Economics, delivered a speech at a conference sponsored by the Federal Reserve Bank of Boston, calling the U.S. Financial Stability Oversight Council (FSOC) “a mess.” That speech has gone missing from online access.

FSOC is the body created under the Dodd-Frank financial reform legislation of 2010 to reassure the American people that Wall Street would never again be able to take the U.S. economy, the financial system, and the housing market to the cleaners and then get a multi-trillion dollar bailout. FSOC is chaired by the U.S. Treasury Secretary, Jack Lew (an alumnus of the biggest bailout recipient, Citigroup), along with the heads of every other major U.S. financial regulator.

According to Bloomberg Business, in his conference remarks on Saturday, Posen also said that what individual financial institutions are able to do with discretion from regulators was “huge.” (That two of the mega banks in the U.S., JPMorgan Chase and Citigroup, admitted to criminal felony counts in May for rigging foreign currency markets along with other banks and that serial findings of collusion among the mega banks in multiple markets has now achieved epic dimensions, Posen’s comments would hardly seem an overstatement.)

The New York Times added more gravity to Posen’s remarks with this quote from him at the Saturday conference: “The current U.S. institutional setup is likely to fail in a crisis and will do less to prevent a crisis than it should, and we are likely to suffer from this.”

There are two places one would expect to find such a remarkably candid speech. At the official conference site where other speeches are posted or at Dr. Posen’s official page of speeches and publications at the Peterson Institute. We could not find the speech at either site, nor could we find it elsewhere on the Internet.

The speech by the controversial President of the New York Fed, William (Bill) Dudley, which was also delivered at the conference and throws a lot of cold water on Posen’s positions, is readily available just where one would expect it to be.

Dudley, who was himself the subject of a Senate hearing last November for hubristic regulation, offered these comforting words to the conference audience:

“…we should take considerable solace from the fact that we have made the financial system more resilient to shocks.  We may not be able to anticipate the next area of excess. But with higher capital and liquidity requirements and the use of stress tests to assess emerging vulnerabilities, I think we are much better placed than we have been in the past.”

No one who is paying attention believes “we are much better placed than we have been in the past.” Wall Street has simply been allowed, once again, to hide the extent of its excesses and abuses under the nose of its lapdog regulator, the New York Fed.

This is not the first time that Posen has had some choice words about the Financial Stability Oversight Council. In testimony before the Senate Banking committee on July 8 of this year, Posen had this to say: 

“I would be remiss in my duty to this Committee, however, if I did not point out that other countries can legitimately expect better US behavior and practice to emerge from international regulatory coordination as well.  Our regulators, supervisors, banks, and other financial institutions did not cover themselves in glory with their practices in the run-up to the financial crisis of 2008-10.  At a minimum, having the US financial regulators and supervisors be confronted with international questions and standards should reduce the cognitive capture of that community by a set of blinders, as I have argued played a critical role in causing the US financial crisis…

“Arguably, the domestic Financial Stability Oversight Council [FSOC] within the US is if anything primed to be more biased towards lowest common denominator or group think leaving gaps in the US financial regulatory framework than the international Financial Stability Board [FSB]. So, the FSB is a useful check and occasional corrective to the US FSOC process.”

In other words, the U.S. financial system needs an international nanny because we only have wet nurses on this side of the pond.

They’re Shouting from the Rooftops About Junk Bond Dangers – $2.2 Trillion Too Late

BlackRock Corporate High Yield ETF, August 1 to September 30, 2015

BlackRock Corporate High Yield ETF, August 1 to September 30, 2015

By Pam Martens and Russ Martens: October 1, 2015

An uncanny number of people woke up this week with the same thought – it’s time to panic over the size, structure and illiquidity of the junk bond market. (Not to put too fine a point on it, but Wall Street On Parade made the warning in 2013 and again on August 18 of this year.)

On Tuesday morning, it was both Carl Icahn, the famous hostile takeover artist and hedge fund billionaire, along with the more staid academics at the International Monetary Fund (IMF), who issued junk bond warnings. (Junk bonds are corporate debt with ratings below investment grade, also known as “high yield” bonds.)

Carl Icahn Blames Janet Yellen and BlackRock for Junk Bond Problems in This Cartoon In His Video

Carl Icahn Blames Janet Yellen and BlackRock for Junk Bond Problems in This Cartoon In His Video

Icahn released a video (see clip below) assigning blame to companies like BlackRock which have bundled illiquid junk bonds into Exchange Traded Funds (ETFs), listed them on the New York Stock Exchange, and sat back and watched as millions of mom and pop investors were sold a bill of goods that these are liquid investments that can be exited at any time during the trading day. The danger, says Icahn, is that liquidity dries up when everyone heads for the exits at the same time. Icahn includes a graph in his video showing that the U.S. junk bond and leveraged loan market has grown from $1 trillion in 2007 to $2.2 trillion today.

Icahn pulled no punches in his assignment of blame, showing a cartoon of Fed Chair Janet Yellen and BlackRock CEO Larry Fink pushing a party bus filled with high yield revelers off a cliff, headed for impact against a “big black rock.” Icahn blames Yellen for keeping rates so excruciatingly low for so long that it created this imprudent search for yield without an appropriate assessment of risk.

The IMF also came out on Tuesday with a warning on junk bonds that carried a brain stumper title: “Market Liquidity Not in Decline But Prone to Evaporate.” Check out the plunge line on August 24 in the above chart for one of BlackRock’s junk bond ETFs to grasp the nuance of that title. August 24 is the day the Dow Jones precipitously dropped 1089 points shortly after the open, closing down 588 points on the day.

The IMF report notes the following:

“ ‘In recent years, factors such as investors’ higher risk appetite and low interest rates have been masking growing underlying fragilities in market liquidity,’ said Gaston Gelos, Chief of the Global Financial Stability Analysis Division at the IMF…

“If financial conditions worsen or investors become weary of a particular asset class or financial market, market liquidity can quickly evaporate. Furthermore, swings in market liquidity in one asset class seem to spill over to other asset classes more frequently, and high-yield and emerging market bonds show some signs of deterioration in market liquidity. As spillovers between asset classes increase, it becomes more likely for a liquidity shock in one market to spread to other markets, possibly leading to a shock to the global financial system, as was the case in 2008.”

Also on Tuesday, the Wall Street Journal added to the angst with this report:

“As of mid-September, nearly 15.7% of the roughly 1,720 bonds rated below investment grade traded at distressed levels, the biggest share since 2011, according to Standard & Poor’s Ratings Services. Such bonds were trading with yields at least 10 percentage points over comparable U.S. Treasurys. Yields on bonds rise when prices fall.

“Companies with distressed bonds may not be able to refinance or access other forms of capital, said Diane Vazza, an S&P managing director.”

Jesse Colombo, an economics contributor at Forbes, wrote yesterday: “I believe that junk bonds have experienced a speculative bubble in the past several years thanks to record low interest rates and quantitative easing, which pushed investors into these risky assets in order to earn higher returns. I also believe that a terrifying day of reckoning is ahead when the junk bond bubble ultimately pops.”

On top of mushrooming concerns over distressed U.S. corporate debt, there are growing concerns over foreign corporate debt owed to U.S. banks by struggling companies in emerging markets. Christine Lagarde, Managing Director of the IMF, delivered a speech yesterday in Washington, D.C. to the Council of the Americas which delineated the problem. Lagarde stated:

“…many emerging and developing economies responded to the global financial crisis with bold counter-cyclical fiscal and monetary actions. By using these policy buffers, they were able to lead the global economy in its time of need. And over the past five years, they have accounted for almost 80 percent of global growth.

“These policy actions generally went together with an increase in financial leverage in the private sector, and many countries have incurred more debt – a significant portion of which is in U.S dollars.

“So rising U.S. interest rates and a stronger dollar could reveal currency mismatches, leading to corporate defaults – and a vicious cycle between corporates, banks, and sovereigns.”

Lagarde is referring to the fact that the currencies of emerging market countries have declined dramatically against the U.S. dollar as the U.S. Fed has talked up the dollar with persistent predictions that it would be raising interest rates this year. That has caused the amount of the debt owed by emerging market companies to mushroom, since it takes more of their local currency to pay back the debt in U.S. dollars.

This raises another serious question. Would the benefit to U.S. mega banks from a Fed rate hike (allowing them to increase their loan rates) be more than offset by defaults of emerging market debt that resides quietly at present on their books?

Bloomberg Business has a story out this morning suggesting that there will not be a rational resolution to this problem. Japan’s $1.2 trillion government pension fund has announced it plans to invest in junk bonds.

Is Stock Investing for Suckers?

By Pam Martens and Russ Martens: September 30, 2015

Nasdaq Index Chart Since 1988

Nasdaq Index Chart Since 1988

On March 10, 2000 the Nasdaq stock market, which is supposed to hold the technology and startup companies that will keep America globally competitive in the future, closed at a high of 5,048.62. Yesterday, more than 15 years later, it closed at 4,517.32, a decline of 10.5 percent from its level of March 2000.

To fully grasp the unprecedented nature of the Nasdaq bubble of 2000, one has to look at where the three big stocks are today that made that 5,000 mark possible 15 years ago. Just three stocks, Microsoft, Cisco, and Intel, were valued at a market cap of $1.89 trillion in 2000. As of yesterday’s close, those three stocks had a combined market cap of $616.137 billion – a shrinkage of 67 percent after more than 15 years.

Much of the hype, as well as the money, that surrounded Microsoft, Cisco and Intel in early 2000, has moved to Apple today, which also trades on the Nasdaq. As of yesterday’s close, Apple commands a market value of $621.9 billion.

Back on March 19, 2000 the Silicon Valley Business Journal reported that one analyst was predicting Cisco was headed toward a market cap of $1 trillion. (Its market cap at yesterday’s close was $129.7 billion, down 80 percent from 2000.)

The article noted that “Thirty-seven investment banks recommend either a ‘buy’ or a ‘strong buy.’ None recommend a ‘sell’ or even a ‘hold.’ ”

On March 23 of this year, an analyst at Cantor Fitzgerald made the same frothy market prediction that Apple would hit a $1 trillion market cap. It’s lost $122 billion in market cap since that call.

The Federal government has two decades of evidence that the integrity of Nasdaq as a stock market has been repeatedly compromised. Yet it does nothing material to rein in the abuses.

The excesses leading up to the crash of 2000-2002 and the crash of 2008-2009 resulted from a highly orchestrated wealth transfer machine on Wall Street that was allowed to operate with impunity from the Federal regulators. As we reported in 2008:

[Regarding the Nasdaq boom of the late 90s] “First, Wall Street firms issued knowingly false research reports to trumpet the growth prospects for the company and stock price; second, they lined up big institutional clients who were instructed how and when to buy at escalating prices to make the stock price skyrocket (laddering); third, the firms instructed the hundreds of thousands of stockbrokers serving the mom-and-pop market to advise their clients to sit still as the stock price flew to the moon or else the broker would have his commissions taken away (penalty bid). While the little folks’ money served as a prop under prices, the wealthy elite on Wall Street and corporate insiders were allowed to sell at the top of the market (pump-and-dump wealth transfer).

“Why did people buy into this mania for brand new, untested companies when there is a basic caveat that most people in this country know, i.e., the majority of all new businesses fail? Common sense failed and mania prevailed because of massive hype pumped by big media, big public relations, and shielded from regulation by big law firms, all eager to collect their share of Wall Street’s rigged cash cow.

[Regarding the 2008 market]“The current housing bubble bust is just a freshly minted version of Wall Street’s real estate limited partnership frauds of the ‘80s, but on a grander scale. In the 1980s version, the firms packaged real estate into limited partnerships and peddled it as secure investments to moms and pops. The major underpinning of this wealth transfer mechanism was that regulators turned a blind eye to the fact that the investments were listed at the original face amount on the clients’ brokerage statements long after they had lost most of their value.

“Today’s real estate related securities (CDOs and SIVs) that are blowing up around the globe are simply the above scheme with more billable hours for corporate law firms.

“Wall Street created an artificial demand for housing (a bubble) by soliciting high interest rate mortgages (subprime) because they could be bundled and quickly resold for big fees to yield-hungry hedge funds and institutions. A major underpinning of this scheme was that Wall Street secured an artificial rating of AAA from rating agencies that were paid by Wall Street to provide the rating. When demand from institutions was saturated, Wall Street kept the scheme going by hiding the debt off its balance sheets and stuffed this long-term product into mom-and-pop money markets, notwithstanding that money markets are required by law to hold only short-term investments. To further perpetuate the bubble as long as possible, Wall Street prevented pricing transparency by keeping the trading off regulated exchanges and used unregulated over-the-counter contracts instead. (All of this required lots of lobbyist hours in Washington.)”

S&P Returns 2000 to Present With Dividends Reinvested and Adjusted for Inflation

S&P Returns, March 2000 to Present With Dividends Reinvested and Adjusted for Inflation

You are likely thinking that Nasdaq doesn’t reflect the performance of the broader market. You will likely be shocked to see the performance of the Standard and Poor’s 500 index of stocks starting from March 2000 to September 2015, courtesy of this handy online calculator. Even with dividends reinvested, the S&P has delivered a paltry 1.715 percent annualized return since March 2000 on an inflation adjusted basis. And that’s before paying taxes on dividends.

Even if you are invested in diversified, actively managed stock mutual funds, over a working lifetime you are likely to lose two-thirds of your money because of the management fees, according to a PBS Frontline report.

This would also be a good time to remember that stock market performance following epic financial crashes that ravage the economy can be hazardous to your wealth. Following the 1929 crash, the stock market did not set a new high until 1954 – 25 years later.

Yesterday, the Securities and Exchange Commission announced that it will hold a hearing on October 27, open to the public, on the stock market’s structure. The SEC has had 15 years since the revelations of the rigged market of 2000 and 7 years since the worst market collapse since the Great Depression to actively engage in reining in the abuses. Yesterday’s announcement was decidedly too little too late.