Paranoia Reigns in Congress Over an International Financial Cabal

By Pam Martens and Russ Martens: March 30, 2015

The Plenary: Governing Body of the Financial Stability Board

The Plenary: Governing Body of the Financial Stability Board

It’s tough to keep up with the conspiracy theories that run rampant from day to day in the hallowed halls of Congress. But one that is gaining traction is that the U.S. Treasury Department’s Financial Stability Oversight Council (whose acronym is pronounced F-SOC) is the handmaiden of an international finance cabal and is obediently marching to its beat instead of the mandates of Congress.

These suspicions were on display at the Senate Banking Committee hearing last Wednesday and the House Financial Services Committee hearing the week before where U.S. Treasury Secretary Jack Lew, who Chairs F-SOC, was pummeled with thinly veiled, and not so thinly veiled, accusations.

F-SOC was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. It is charged with the early identification of emerging risks to the financial system. Every major regulator of Wall Street banks has a seat.

The conspiracy theory that foreign hot shots are really controlling decisions at F-SOC is not without roots. The international equivalent of F-SOC is the Financial Stability Board, which is run by a Plenary of central bankers and finance ministers from around the globe, along with organizations like the International Monetary Fund (IMF), World Bank and Basel Committee on Banking Supervision. The United States has three members on the Plenary: Nathan Sheets, the Undersecretary for International Affairs at the U.S. Treasury; Daniel Tarullo, a member of the Board of Governors of the Federal Reserve; and Mary Jo White, Chair of the SEC. Mark Carney, the Governor of the Bank of England is the current Chair of the Financial Stability Board.

The simmering conspiracy took wings on February 5 of this year when Mark Carney issued what appeared to be marching orders from the Financial Stability Board to G20 members, which includes the United States. One portion of the document reads as follows:

“At the Brisbane Summit, two crucial elements of the policy framework to end too-big-to-fail were agreed:  a proposal for a common international standard on the total loss-absorbing capacity that globally systemic banks must have; and an industry agreement that will prevent cross-border derivative contracts from being terminated disruptively in the event of a globally systemic bank entering resolution. In 2015, we must bring this progress to finalisation. By the Antalya Summit: The FSB will finalise the international standard for total loss-absorbing capacity of global systemically important banks; FSB members will take measures to promote industry adoption of contractual provisions recognising temporary stays on the close-out of financial contracts when a firm enters resolution.”

This certainly sounds like the FSB is calling the shots.

At the Senate Banking hearing on Wednesday, it became clear that the conspiracy theory has spread to at least one trade group, the American Council of Life Insurers. Gary Hughes, the Executive Vice President and General Counsel of the trade group submitted written testimony that included this excerpt:

“FSOC’s determinations should be independent of international regulatory actions…the lack of transparency in FSOC’s designation process and the thinly-reasoned explanations in its designation decisions support the concern voiced by some that FSOC’s designations have been preordained by actions of an international regulatory entity, the Financial Stability Board (FSB).  The member of FSOC with insurance expertise, Roy Woodall, expressed this concern in his dissent to the Prudential designation.

“The U.S. Department of Treasury and the Federal Reserve Board are both important participants in the FSB, which in 2013, issued an initial list of insurance companies that the organization considered to be ‘global systemically important insurers.’ AIG, Prudential, and MetLife were all on the FSB’s list. Those companies’ designations as SIFIs should have been based on the statutory requirements of the Dodd-Frank Act, which differ meaningfully from the standards FSB has said it applies. Yet, there is ground for concern that leading participants in FSOC were committed to designating as systemic under Dodd-Frank those companies that they had already agreed to designate as systemic through the FSB process. FSOC should not be outsourcing to foreign regulators important decisions about which U.S. companies are to be subject to heightened regulation…”

The conspiracy theory that an international financial cabal is supplanting the legislative will of Congress has an important competing theory. That is, that a Wall Street cabal of lobbyists, deep-pocketed bank CEOs and hedge fund billionaires are pulling the strings in our Congress behind a dark curtain. The fact that Citigroup was able to gut a key portion of Dodd-Frank’s reform of derivatives recently by sneaking the measure into a critical funding bill to keep the government operating, would appear to prove the point.

And there is yet a third theory. This one goes like this: Wall Street is perceived by our foreign allies to so completely control Congress that foreign financial markets simply do not trust U.S. regulators to rein in Wall Street abuses or prevent another systemic financial collapse. The Financial Stability Board feels it must look over Wall Street’s shoulder because it can’t trust Congress or the Federal Reserve to do their job.

What If Janet Yellen Is Dead Wrong on the Strength of the U.S. Economy?

By Pam Martens and Russ Martens: March 26, 2015

GDPNow ForecastYesterday, economists at the Atlanta Fed’s Center for Quantitative Economic Research notched down their forecast for real GDP growth – the seasonally adjusted annual rate – to a tepid 0.2 percent for the first quarter of 2015. The revision from the earlier forecast of 0.3 percent followed yesterday’s durable goods report that showed a dramatic decline of 1.4 percent in February on a seasonally adjusted basis. Durable goods are products like refrigerators, washing machines or computers, items expected to last for at least three years. Because durable goods carry higher price tags than most other consumer outlays, a weakening in durable goods can be a warning of a tapped out or retrenching consumer.

This first quarter forecast stands at odds with the Federal Reserve Board’s FOMC statement of March 18, 2015 which singled out “strong job gains” and rising household spending.

One notable area of Federal Reserve myopia appears to be the credit tightening impact of a rising U.S. Dollar. As of mid March, the greenback has risen by more than 22 percent on a trade-weighted basis over the past year. This creates serious headwinds in a number of areas. First, U.S. goods priced in dollars become more expensive and thereby less competitive in foreign markets. That hurts the earnings of the big U.S. based multi nationals and leads to job cuts. It can also hurt smaller businesses that rely on exports for a significant part of their earnings.

The rising dollar also raises the very real danger that the U.S. begins to import deflation. As foreign goods reach our shores priced in the cheaper currency, consumers are likely to opt for the best price, thus bringing down further the already subpar rate of inflation. At the end of last year, ten of our trading partners were in the throes of outright deflation while another seven registered inflation of less than one-half of one percent.

The “strong job gains” assessment announced by the Federal Reserve in its FOMC statement on March 18 came against a torrent of job cut announcements in the thousands since mid December of last year. Those included: American Express, 4000; Coca Cola, 1600 to 1800; IBM, at least 2000 with rumors suggesting the number is far higher; Schlumberger, 9000; Baker Hughes 7000; U.S. Steel 750; Halliburton 6400.

On February 3, Jim Clifton, the Chairman and CEO of Gallup, the polling organization, penned a statement on the company’s web site calling the official unemployment rate “The Big Lie.” Clifton made these salient points:

“Right now, we’re hearing much celebrating from the media, the White House and Wall Street about how unemployment is ‘down’ to 5.6%. The cheerleading for this number is deafening. The media loves a comeback story, the White House wants to score political points and Wall Street would like you to stay in the market.

“None of them will tell you this: If you, a family member or anyone is unemployed and has subsequently given up on finding a job — if you are so hopelessly out of work that you’ve stopped looking over the past four weeks — the Department of Labor doesn’t count you as unemployed. That’s right. While you are as unemployed as one can possibly be, and tragically may never find work again, you are not counted in the figure we see relentlessly in the news — currently 5.6%. Right now, as many as 30 million Americans are either out of work or severely underemployed. Trust me, the vast majority of them aren’t throwing parties to toast ‘falling’ unemployment.

“There’s another reason why the official rate is misleading. Say you’re an out-of-work engineer or healthcare worker or construction worker or retail manager: If you perform a minimum of one hour of work in a week and are paid at least $20 — maybe someone pays you to mow their lawn — you’re not officially counted as unemployed in the much-reported 5.6%. Few Americans know this.

“Yet another figure of importance that doesn’t get much press: those working part time but wanting full-time work. If you have a degree in chemistry or math and are working 10 hours part time because it is all you can find — in other words, you are severely underemployed — the government doesn’t count you in the 5.6%. Few Americans know this.”

Since Clifton wrote his essay, the U.S. Labor Department reported that the official unemployment rate fell further — to 5.5 percent on March 5.

There is rising concern that if the Federal Reserve and Fed Chair Janet Yellen turn out to have been dead wrong on the prospects for the U.S. economy, then they’ve created not one, but two, bubbles – the stock market and the U.S. Dollar. Wagers on the continued climb in the Dollar have become a very crowded bet around the globe. If everyone heads for the exits at the same time, it could get very messy.

US DOLLAR-Graph

Draghi’s ECB: Quantitative Easing or Cash for Trash?

By Pam Martens and Russ Martens: March 25, 2015

Bloomberg News is carrying an article today that raises the question as to whether cash for trash may be the comeback kid at the European Central Bank. That, in turn, leads to speculation as to how long it will be before the comeback kid leaps across the pond and nestles into the  arms of the U.S. Federal Reserve.

According to the article, the European Central Bank is buying up billions of Euros in asset-backed securities made up of things like Spanish auto loans, Portuguese home loans, and legacy deals that have been stuck on the balance sheets of European banks since the financial crisis of 2008 and 2009. The article notes that the ABS market is down from a peak of 524 billion Euros in annual issuance in 2006 to a paltry 77 billion Euros in annual average issuance over the past five years.

Now let’s face it, European Central Bank President Mario Draghi is not buying 60 billion Euros a month of European sovereign debt and asset-backed securities because things are going swimmingly in Europe’s economy. Europe hopes to skirt another financial crisis and the headwinds of deflation.

There’s a ring of familiarity to all of this. Back on September 21, 2008, one week after the failure of Lehman Brothers and the shotgun marriage of Merrill Lynch to Bank of America, Paul Krugman wrote in his New York Times column that “Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system ‘cash for trash.’ ”

At the time, Paulson was U.S. Treasury Secretary in the administration of President George W. Bush. Krugman noted that the Paulson plan called “for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities” while Paulson demanded “dictatorial authority, plus immunity from review ‘by any court of law or any administrative agency…’ ”

By March 22, 2009, Krugman was worrying aloud in his column that newly elected President Obama, through his Treasury Secretary, Tim Geithner, was going to resurrect Paulson’s “cash for trash” plan. Krugman wrote insightfully:

“Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets.

“As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.

“That’s what Sweden did in the early 1990s. It’s also what we ourselves did after the savings and loan debacle of the Reagan years. And there’s no reason we can’t do the same thing now.

“But the Obama administration, like the Bush administration, apparently wants an easier way out. The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.”

As Krugman and much of the press fretted over the potential for the $700 billion Troubled Asset Relief Program to become a cash for trash program, an alphabet soup of lending programs operating primarily through the Federal Reserve was secretly bailing out the banks. In a study by James Felkerson released by the Levy Economics Institute of Bard College in December 2011, the gargantuan price tag of both the lending and asset purchase program was  $29 trillion. One of the largest programs was the Primary Dealer Credit Facility. Felkerson writes:

“The Fed officially announced the Primary Dealer Credit Facility (PDCF) on March 16, 2008…Initial collateral accepted in transactions under the PDCF were investment grade securities. Following the events in September of that year, eligible collateral was extended to include all forms of securities normally used in private sector repo transactions.”

Felkerson’s study comes to the same conclusion as that recently raised by Senator Elizabeth Warren in a Senate hearing: of the $9 trillion doled out under the Primary Dealer Credit Facility, $6 trillion of that went to just three institutions: Merrill Lynch, Citigroup, and Morgan Stanley, effectively bailing out their shareholders.

The Fed stridently refused to turn over the details of its massive lending programs, prompting Congress, with leadership from Bernie Sanders, to order the Fed to provide data. Bloomberg News was also forced to wage a multi-year court battle under the Freedom of Information Act for further details.

This month marks the seventh anniversary of the collapse of Bear Stearns. Should the global financial system still be this weak or are the global banks just too big and too leveraged to allow a financial recovery?

Borrowing from the Fed Under the Primary Dealer Credit Facility (In Percentages): Levy Economics Institute of Bard College

Borrowing from the Fed Under the Primary Dealer Credit Facility (In Percentages): Levy Economics Institute of Bard College

Questions Swirl Around the Death of Wall Street Journal Reporter, David Bird

By Pam Martens and Russ Martens: March 23, 2015

David Bird, Wall Street Journal Reporter, Specialized in the Oil Markets

David Bird, Wall Street Journal Reporter, Specialized in the Oil Markets

Wall Street Journal oil reporter, David Bird, set out from his New Jersey home for a brief walk on January 11, 2014 and disappeared without a trace. Last Wednesday, 14 months after his disappearance and the very same day David Bird’s family had launched a web site to urge the public to help them locate their beloved husband and father, Bird’s body was found in the Passaic River. It was conclusively identified through dental records.

A search had been underway for Bird since the evening of his disappearance. He had left his home on Long Hill Road in the Millington section of Long Hill Township, New Jersey to take a short walk. The circumstances were inconsistent with someone who intended to disappear: he was wearing a bright red jacket with yellow zippers; he was a recipient of a liver transplant and did not take the anti-rejection, prescription medicine that he was required to take daily to stay alive.

The Morris County Prosecutor’s office released a statement on the discovery of the body last Wednesday, indicating that “at approximately 5:00 pm two (2) men canoeing in the Passaic River came across a red jacket located near branches…” More than a dozen neighboring police, fire and rescue departments were called in. Search boats were supplied by the Whippany Fire Department, Millington Fire Department and Berkeley Heights Fire Department. The Denville Dive Team was also called in according to the official statement. The body of Bird was located the same evening in the Passaic River, about 20 feet from the shoreline according to NJ.com.

How a veteran reporter for the Wall Street Journal set out for a brief walk and ended up in the Passaic River is now the subject of an ongoing investigation. The cause of death will be released at a future date by the Medical Examiner’s office.

Wall Street On Parade emailed the Morris County Prosecutor’s office to make a number of inquiries, one of which was what the two men were doing in the canoe at 5 pm. Temperatures in the Northeast were quite cold last week. The prosecutor’s office responded that “The canoers information on what they were doing could not be released.”

David Bird was one of the most knowledgeable oil reporters in business media. On the discovery of his body, Gerard Baker, Editor-in-Chief of the Wall Street Journal, a part of Dow Jones, which is, in turn, owned by Rupert Murdoch’s News Corp, wrote the following in a memo to staff:

“David was among the most respected energy journalists anywhere – a must-read for energy-market professionals, known as an acute observer and commentator on the global oil market…He first joined Dow Jones more than three decades ago and eventually became the deputy managing editor of the Dow Jones Energy Service. He was instrumental in the expansion of energy coverage at Dow Jones in the 1990s, leading its coverage of OPEC and energy markets and building a team regarded as among the best in business. He later launched a highly regarded column on the topic.

“Well-sourced among the world’s most influential oil ministers, David would regale younger reporters with stories about what went on behind the scenes at some of the most historic OPEC meetings. His ability to navigate the vast troves of public oil data was unmatched. At 10:30 a.m. on Wednesdays, he could often be seen hunched over his computer, sifting through spreadsheets and crunching numbers just released by the Energy Information Administration. He was often the first to gain insight into important energy-market trends.”

That type of asymmetric knowledge about the massive data banks of the Energy Information Administration and OPEC trends, led Bird to make prescient observations in 2013 on the very situation the U.S. finds itself in today in terms of an oil price collapse, a rising U.S. Dollar constricting global growth, the Federal Reserve’s role in the strength in the Dollar, and the disarray in OPEC.

Less than five months before his disappearance, Bird wrote in a Wall Street Journal article on August 21, 2013 when oil was trading at over $103, more than twice where the price is today, that “Crude-oil futures fell after the minutes from the Federal Reserve’s latest policy meeting heightened concerns that less economic stimulus could hit demand for the fuel. Traders are worried that the end of the $85 billion-a-month bond-buying program will cause dollar-based crude prices to rise in local-currency terms, choking off economic growth in India, Indonesia and other emerging markets that has fueled a rise in global oil consumption in recent years.”

In the same article, Bird wrote that Bill O’Grady, the Chief Market Strategist at Confluence Investment Management, was concerned about a steep drop in oil prices after Labor Day. The quote from the article reads as follows: ” ‘All this tapering talk is absolutely deadly for emerging markets’ because of its effect on the dollar, Mr. O’Grady said. ‘We could see [oil] demand really tail off.’ ”

Today, oil prices have collapsed, emerging markets are feeling the economic pain of a rising U.S. Dollar, OPEC has lost its control of oil prices in the face of macroeconomic forces, and global growth estimates for this year continue to be ratcheted downward.

On December 2, 2013, the month prior to his disappearance, Bird wrote an article headlined “OPEC Faces Challenges to Maintain Oil-Market Stability.” In the article, Bird noted that “circumstances could test the limits of OPEC’s ability to hold prices steady over the next 1,000 days.”

Bird raised the possibility that the only prop under the price of oil as far back as 2013 was tumult in the Middle East and other potential supply disruptions like talk of the Iran embargo. Bird wrote: “The 1,000-day average of the basket price belies broad swings in the measure of 12 grades of OPEC crude, from a low of $66.84 in May 2010 to a peak of $124.64 in March 2012, when the Iran embargo was being considered.”

Bird noted in the same article that “Oil supply from the U.S. and Canada has grown by a combined 4 million barrels a day in the period. Growth in non-OPEC supply is expected to top the rise in global demand next year, meaning OPEC would need to pump less or risk a price drop.”

David Bird is survived by his wife of 23 years, Nancy Fleming Bird and their children, Alexander and Natasha, both teenagers. According to the family’s newly launched web site, visitation hours are from 4:00 to 8:00 p.m. this coming Wednesday, March 25, at the Church of St. Vincent de Paul, 249 Bebout Avenue, Stirling, New Jersey. The funeral will be conducted by the Reverand Richard Carton on Thursday, March 26, at 11:00 a.m., also at the Church of St. Vincent de Paul. Interment will be private.

Related Article:

A Rash of Deaths and a Missing Reporter – With Ties to Wall Street Investigations

Shhh! We Can’t Talk About the Dollar’s Flash Crash on Wednesday

By Pam Martens: March 20, 2015

Eric Hunsader of Nanex

Eric Hunsader of Nanex

One would think we had asked for missile launch codes when we reached out to the futures exchanges to find out what caused the precipitous plunge in the U.S. Dollar’s futures contract at 4:04 P.M. Wednesday afternoon – long after the Federal Reserve’s market moving news had been digested by traders.

If currencies are now the new weapons of mass destruction – maybe we were asking for the equivalent of missile launch codes.

Our curiosity was piqued when the intrepid Eric Hunsader of market data firm, Nanex, published amazing charts showing a precipitous plunge in the U.S. Dollar just after the equity markets had closed in New York. Hunsader wrote:

“On March 18, 2015 between 4:02 and 4:09 PM Eastern Daylight Time, the U.S. Dollar flash crashed, losing over 3% of its value in just under 4 minutes, then gaining most of it back over the next 3 minutes.”

If that isn’t a Flash Crash, I don’t know what is. (Both Wall Street On Parade and Hunsader know a thing or two about Flash Crashes.) But no mainstream business media reported the event as a Flash Crash or even alluded to the 4-minute bungee jump and retracement in any  explicit terms.

The Wall Street Journal reported the next morning that “For a few minutes on Wednesday, the lack of dollar buyers caused a short-term freeze in electronic trading platforms, according to a New York-based trader at a major currency-dealing bank. ‘There was a lot of shouting on the desk, a lot of nervousness,’ the trader said…”

This morning, the Wall Street Journal is using stronger language, calling it a “wild ride” in currencies on Wednesday and quoting a currency trader who said it “was like a zoo,” with traders “struggling to fill orders” and “screaming and yelling for the fill.” (The “fill” means to have their currency order “filled,” that is, the transaction completed.)

One business writer who did quickly capture the magnitude of the plunge was Barron’s Chris Dieterich, who reported at 4:26 P.M. on Wednesday that the dollar “was down a whopping 3.6% versus the euro in recent trading, according to FactSet.”

There is no question that there is an extremely crowded trade in bullish bets on the U.S. Dollar by hedge funds around the world. In just the past year, the U.S. Dollar has gained 29 percent against the Euro on talk from the Fed of a strengthening U.S. economy and plans for an interest rate hike. But what made this move unusual was that the plunge didn’t happen right after the Fed’s FOMC statement release at 2 P.M., alluding to the potential for a delayed hike in interest rates, or during Fed Chair Janet Yellen’s press conference at 2:30 P.M. It happened at 4:04 P.M. Eastern time.

We went to the source for clarification: the CME and ICE exchanges which trade currency futures. A courteous spokesperson for CME told us the following via email:

“Around 15:04 CT [central time] we saw circuit breaker events in the Euro Futures, British Pound Futures, and Swiss Franc Futures. Each contract triggered its 1st level (400 point) circuit breaker 5 minute monitoring period. We have a number of protections in place to ensure the integrity of our markets, including Circuit Breakers; which worked as designed. They are automated functionality that limit price moves but will expand after a brief monitoring period. In some scenarios, trading can halt for 2 minutes.”

The “400 point” reference above actually means PIPs. One PIP, Point in Percentage, equals 0.0001. Followup questions to CME went unanswered. Our emails to ICE elicited no meaningful response as to whether they imposed trading halts in their currency contracts on Wednesday afternoon.

This dramatic price move in the Dollar came just one day after the U.S. Treasury’s Office of Financial Research released a report warning of the potential for “quicksilver markets” that “change rapidly and unpredictably.” That report followed by a day a warning from Hyun Shin, Economic Advisor and Head of Research for the Bank for International Settlements (BIS), who cautioned as follows:

“While liquidity in the sovereign bond market is back to conditions seen before the crisis, this is not the case in other segments of the fixed income market. For instance, corporate bond markets seem to be less liquid than in the past. Bid-ask spreads have returned to something close to pre-crisis levels, but there are residual doubts on how well the market would cope with large transactions, particularly when many traders want to shed risky holdings at the same time.

“We have seen examples of large price changes in markets that are normally very deep and liquid. One instance was in the US Treasuries market last October, and another recent example was the sharp movements in the Swiss franc in January. Fortunately, neither of these events had lasting repercussions for financial stability, but what happens in financial markets does not always stay in financial markets, and we would do well to be on the lookout for any potential economic impact from financial market disruptions.”

If you’re an investor not inclined to go on “wild rides,” “flash crashes,” or take your money to visit the “zoo,” it’s time to exercise caution.