New York Fed’s Conference Evokes Thoughts of Violence Against Wall Street

By Pam Martens and Russ Martens: October 23, 2014

Occupy Wall Street Protesters Outside the New York Fed, September 17, 2012

Occupy Wall Street Protesters Outside the New York Fed, September 17, 2012

What the New York Fed attempted to pull off this past Monday with its full-day conference for the execs of wayward Wall Street banks was a public relations stunt to switch the national debate from its culture to Wall Street’s culture. Styled as a “Workshop on Reforming Culture and Behavior in the Financial Services Industry,” the event came less than a month after ProPublica and public radio’s “This American Life” released internal tape recordings made by a former New York Fed bank examiner, Carmen Segarra, revealing a regulator with no bark or bite.

ProPublica’s Jake Bernstein wrote that the tapes and a confidential report by an outside consultant demonstrated the New York Fed’s “history of deference to banks.”

But there is far more to this story. Wall Street banking executives, who elect two-thirds of the Board of Directors of the New York Fed and have frequently served on its Board, have structured the institution to be its sycophant. Consider the fact that Jamie Dimon, CEO of JPMorgan Chase, sat on the Board of the New York Fed from 2007 through 2012 as the regulator failed to follow through on three separate staff recommendations that JPMorgan’s Chief Investment Office undergo a thorough investigation, as reported this week by the Federal Reserve System’s Inspector General.

JPMorgan’s Chief Investment Office in 2012 finally owned up to losing $6.2 billion of bank depositors’ money in wild bets on exotic derivatives in London.

A Wall Street regulator, like the New York Fed, which has staff positions called “relationship managers” that are considered senior to, and can bully and intimidate, their bank examiner colleagues, is in no position to be lecturing Wall Street on its culture. Indeed, the culture on Wall Street of “it’s legal if you can get away with it,” grew out of its cozy, crony relationships with its regulators like the New York Fed, an enshrined revolving door at the SEC, self-regulatory bodies delivering hand slaps and its own private justice system to keep its secrets shielded from the public’s view.

To suggest that a one-day conference and a few speeches are going to make a dent in a structure intentionally created to deliver heads we win, tails you lose on behalf of Wall Street interests is deeply insulting – especially coming from the New York Fed, the target of future Senate hearings on its own culture.

The seriousness with which disciplinary lectures by the New York Fed are taken by the big Wall Street players is evidenced by those who snubbed Monday’s conference – namely, the CEOs of the serial miscreants. Not in attendance, according to the participant list released by the New York Fed were: JPMorgan CEO, Jamie Dimon; Citigroup CEO Michael Corbat; and Goldman Sachs CEO Lloyd Blankfein.

William Dudley, President of the New York Fed, whose wife receives $190,000 a year in deferred compensation from JPMorgan where she was previously employed as a Vice President, sized up the loathsome regard that Wall Street now holds in the public mind as follows:

“Since 2008, fines imposed on the nation’s largest banks have far exceeded $100 billion. The pattern of bad behavior did not end with the financial crisis, but continued despite the considerable public sector intervention that was necessary to stabilize the financial system. As a consequence, the financial industry has largely lost the public trust. To illustrate, a 2012 Harris poll found that 42 percent of people responded either ‘somewhat’ or ‘a lot’ to the statement that Wall Street ‘harms the country’; furthermore, 68 percent disagreed with the statement: ‘In general, people on Wall Street are as honest and moral as other people.’ ”

Further cementing that public distrust, the media was barred from attending Monday’s conference at the New York Fed. Press members who nonetheless reported on the event evoked a recurring theme of violent acts to deal with incorrigible actors.

Aaron Elstein at Crain’s New York used an analogy comparing the Fed to the 15th century Vatican which dealt with a problem it was having by calling a big conference and burning alive the outlier and casting his remains into the Rhine.

This thought about the conference constituted the first paragraph of Bartlett Naylor’s reporting at Huffington Post: “The Roman army responded to desertion by randomly executing a tenth of those soldiers remaining. They called it decimation, derived from the word ‘tenth.’ This discipline, of course, prompted all soldiers to police against desertion so as to save their own skins.”

Jon Hilsenrath at the Wall Street Journal was thinking along similar lines. Hilsenrath reflected on the book, Manias, Panics, and Crashes, which carries a chapter by University of Chicago Professor Robert Aliber in its revised sixth edition. Hilsenrath quotes as follows from the book: “At the time of the South Sea Bubble, (Lord) Molesworth, then a member of the (British) House of Commons, suggested that parliament should declare the directors of the South Sea Company guilty of parricide and subject them to the ancient Roman punishment of that transgression – to be sewn into sacks, each with a monkey and a snake, and drowned.”

Business media is not the only source pondering violence against Wall Street scoundrels. This summer, venture capitalist, Nick Hanauer, worried aloud to his fellow plutocrats in Politico Magazine about when public anger might spill over into pitchforks. Hanauer writes:

“What everyone wants to believe is that when things reach a tipping point and go from being merely crappy for the masses to dangerous and socially destabilizing, that we’re somehow going to know about that shift ahead of time. Any student of history knows that’s not the way it happens. Revolutions, like bankruptcies, come gradually, and then suddenly. One day, somebody sets himself on fire, then thousands of people are in the streets, and before you know it, the country is burning. And then there’s no time for us to get to the airport and jump on our Gulfstream Vs and fly to New Zealand. That’s the way it always happens. If inequality keeps rising as it has been, eventually it will happen. We will not be able to predict when, and it will be terrible—for everybody. But especially for us.”

There are currently a stunning 8,477 comments under the article. The following two, listed together, capture the current divide between Main Street and Wall Street:

Betsarama: “Thank you! Exactly. My father had a saying with regard to how much he charged and what his company earned, and that was ‘Enough.’ People loved him for his intelligence, simplicity and hard work. That’s American. Being filthy stinking rich — what is there to admire?”

Crapulous Mass responds: “One of the beauties to being filthy stinking rich is really not having to care what others think of you.”

This might well explain why Dimon, Corbat and Blankfein snubbed the lectures on Monday.

How High Up Did the London Whale Criminality Go at JPMorgan?

By Pam Martens and Russ Martens: October 22, 2014 

JPMorgan BuildingYesterday the Inspector General of the Federal Reserve System released a highly abbreviated report on the New York Fed’s supervision of JPMorgan’s Chief Investment Office (CIO) that spawned the $6.2 billion in exotic derivative losses in 2012 – using hundreds of billions of dollars in FDIC insured deposits to make those wild bets. The debacle became known as the London Whale since the outsized trades were conducted in London.

The four page summary report that was sanitized for the public includes two bombshells for those who took the time to read the report carefully. First, the Inspector General specifically notes that “we selected July 2004 through April 2012 as the time period for our evaluation. July 2004 marked JPMC’s merger with Bank One Corporation (Bank One), and JPMC created the CIO in 2005.”

What is the relevance of that nugget? We learn for the first time that no Chief Investment Office existed at JPMorgan until after the Bank One merger which brought Jamie Dimon on board JPMorgan for the first time. Dimon was CEO of Bank One at the time of the merger in 2004. The deal included the terms that Dimon would immediately become President and Chief Operating Officer of the combined firms and step into the role as CEO in 2006.

Next we are told by the Inspector General that New York Fed staff recommended no less than three examinations of the Chief Investment Office – in 2008, 2009 and 2010. But the examinations just never came to fruition.

The report offers three extremely wussy explanations for why there was no comprehensive review of what was going on in the Chief Investment Office by the New York Fed: “FRB New York did not conduct the planned or recommended examinations because (1) the Reserve Bank reassessed the prioritization of the initially planned activities related to the CIO due to many supervisory demands and a lack of supervisory resources, (2) weaknesses existed in controls surrounding the supervisory planning process, and (3) the 2011 reorganization of the supervisory team at JPMC resulted in a significant loss of institutional knowledge regarding the CIO.”

Pure poppycock. We can think of a far more realistic explanation for why no meddling into high risk trading at JPMorgan using depositors’ savings was ever conducted in 2008 through 2010: Jamie Dimon sat on the Board of Directors of the New York Fed – his bank’s regulator –  from 2007 through 2012.

And while all of this was happening, William Dudley was serving as the President and CEO of the New York Fed while his wife, Ann Darby, a former Vice President at JPMorgan, was receiving approximately $190,000 per year in deferred compensation from JPMorgan – an amount she is slated to receive until 2021 according to financial disclosure forms.

Senator Carl Levin has previously hinted that skullduggery went back a number of years in the Chief Investment Office at JPMorgan. When Senator Levin appeared on May 13, 2012 on Meet the Press, host David Gregory asked Levin what should be the price for what occurred at JPMorgan.  Levin said:

“In terms of past activities, that’s in the hands of people who are assessing whether there was any criminal wrongdoing.  That’s still in the hands, as far as I know, of the Justice Department and the New York prosecutors.”

Those “past activities” were apparently enough to trigger a criminal investigation by the FBI. Three days after Senator Levin appeared on Meet the Press, the Senate Judiciary Committee took testimony from FBI Director Robert Mueller on unrelated matters. Senator Richard Blumenthal decided to inquire into the JPMorgan investigation. (Blumenthal was previously Connecticut’s Attorney General for five terms as well as a former U.S. Attorney for the Justice Department.)

The exchange went as follows:

Senator Blumenthal: “I would like to ask first about the JPMorgan Chase investigation. Can you tell us what potential crimes could be under investigation, without asking you to conclude anything or talk about the evidence. Would  it be false statements to the Federal government or what area of criminal activity?”

FBI Director Mueller: “I’m hesitant to say anything other than what is available under Title 18 or available to the SEC would be the focus of any ongoing investigation.”

Senator Blumenthal: “Can you talk at all about the timing of that investigation?”

FBI Director Mueller: “All I can say is we’ve opened a preliminary investigation and, as you would well know, having been in this business for a long time, it depends on a number of factors.”

Senator Blumenthal: “And, I’m not going to press you further but I would just encourage you – without your needing any encouragement I’m sure – to press forward as promptly and aggressively and expeditiously as possible because I think that the American public really has lost faith in many other enforcement agencies partly because of the delay and lack of results and I think that the FBI’s involvement is a very constructive and important presence in this area.”

Other than bringing criminal charges against two traders for lying about losses on the London Whale trades – traders whom the Justice Department cannot seem to extradite to this country for trial – none of the higher ups at JPMorgan involved in approving these trades or using insured deposits to make them have been charged.

Now, coming on the heels of the recent exposure of the Carmen Segarra tapes showing how the New York Fed tiptoes around its Wall Street charges, the Inspector General’s revelation that three recommended examinations of JPMorgan’s high risk Chief Investment Office were never conducted, simply adds to the public disgust and assessment that Wall Street operates outside the law with a wink and a nod from its regulators.

IBM Has to Pay a Foreign Government $1.5 Billion to Unload a Business?

By Pam Martens and Russ Martens: October 21, 2014

IBM Stock ChartIn 30 years of observing Wall Street, we can’t remember a headline like the one that appeared yesterday at Reuters: “IBM to Pay GlobalFoundries $1.5 Billion to Take Chip Unit.” When one can’t even give a business away that includes thousands of patents, IBM engineers and two operating factories, times are tough. The market thought so also; by the closing bell yesterday, IBM’s stock was down $12.95, or 7 percent, to $169.10.

The acquirer of the IBM semiconductor business, GlobalFoundries, is headquartered in Silicon Valley. Its parent is Advanced Technology Investment Company (ATIC), which is owned by the Abu Dhabi government’s investment arm, Mubadala Development Company. In May, ATIC announced it was changing its name to Mubadala Technology.

Abu Dhabi likely drove a very hard bargain with IBM in this deal because it has good reason to question promises made by American businessmen. As we reported in 2012, Abu Dhabi’s sovereign wealth fund, ADIA, previously leveled a $4 billion fraud charge against Citigroup for taking it to the cleaners in a stock deal. That deal began with a hand shake from none other than former U.S. Treasury Secretary, Robert Rubin, who was serving as Citigroup’s interim Chairman at the time.

The two manufacturing facilities that come with the IBM deal are located in East Fishkill, New York and Essex Junction, Vermont. The $1.5 billion that IBM will pay GlobalFoundries will be spread over three years and is likely to help defray costs of facility upgrades. IBM has also agreed to a 10-year deal in which GlobalFoundries will be its exclusive provider of certain chipsets.

The trajectory of IBM’s stock price and its writeoffs are starting to bring back memories of the bad hand it dealt investors in the 90s. The stock is down from a price of more than $190 in September. Yesterday, in addition to the curious “pay-to-sell” deal, IBM also announced it was taking a $4.7 billion pre-tax charge in its third quarter and reported a 4 percent drop in revenues.

Over its more than a century of operations, IBM has repeatedly reinvented itself. That reinvention, however, has meant that investors have had long spells of dead money. The worst episode in IBM’s business history came in January 1993. The company announced it had lost $5 billion in 1992 and that it would slash its dividend to 54 cents from $1.21. Its stock had declined from $120 a share in 1990 to $48 and change at the time of the announcement.

Lou Gerstner was brought in from RJR Nabisco Holdings to replace longtime Chairman John Akers. The transition was not without pain. By the second quarter of 1993, IBM reported an additional $8 billion loss and announced it would be sacking tens of thousands of workers. The dividend was cut again, this time in half.

The 1990s reinvention of IBM has had a dramatic, negative impact on the long term total return of its stock and the wealth building capability of its long-term shareholders.

We decided to compare the performance of a cyclical computer company like IBM on a total return basis (share price appreciation plus dividend reinvested) from July 28, 1980 to October 17, 2014 versus the same period for Procter and Gamble, a household products company famous for iconic brands like Crest toothpaste and Ivory soap. We used the calculators available on the web sites of IBM and Procter and Gamble to make the calculations.

IBM delivered a total return of 1,460.62 percent over the period versus 3,104.82 percent for Procter and Gamble.

Janet Yellen: Average Net Worth of 62 Million U.S. Households is $11,000

By Pam Martens and Russ Martens: October 20, 2014 

Janet Yellen, Federal Reserve Chair

Janet Yellen, Federal Reserve Chair

It took 200 years of hard data in a bestselling book by Thomas Piketty, awesome graphs and charts in Robert Reich’s documentary, “Inequality for All,” and years of scolding from Wall Street on Parade, but Fed Chair Janet Yellen has finally, and correctly, arrived at the idea that the nation’s economic ills are deeply rooted in the fact that U.S. “income and wealth inequality are near their highest levels in the past hundred years.” That was the message Yellen delivered on Friday in a speech at the Federal Reserve Bank of Boston, replete with stomach-churning figures from the Fed.

Make no mistake about it, coming at the end of a week that saw dramatic up and down spikes in the stock market – Yellen was sending a pivotal message to the Wall Street wealth hoarders – your billionaire standing could be as ephemeral as a day lily if we don’t fix this income and wealth gap.

Yellen quieted the crowd with this opener: “The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression.” Using data from the Fed’s Survey of Consumer Finances, Yellen punctuated her message with these hair-raising figures:

“The wealthiest 5 percent of American households held 54 percent of all wealth reported in the 1989 survey. Their share rose to 61 percent in 2010 and reached 63 percent in 2013;

“The lower half of households by wealth, held just 3 percent of wealth in 1989 and only 1 percent in 2013. To put that in perspective…the average net worth of the lower half of the distribution, representing 62 million households, was $11,000 in 2013.”

“This $11,000 average is 50 percent lower than the average wealth of the lower half of families in 1989, adjusted for inflation.”

A “major source of wealth for many families is financial assets, including stocks, bonds, mutual funds, and private pensions…the wealthiest 5 percent of households held nearly two-thirds of all such assets in 2013…”

Franklin D. Roosevelt, President During the Great Depression

Franklin D. Roosevelt, President During the Great Depression

Unfortunately, being the head of a Federal Reserve system that relies on goodwill with the big Wall Street firms to carry out its open market operations, Fed Chair Yellen apparently felt it would be impolitic to mention that this vast wealth inequality is coming from an institutionalized wealth transfer machine operated by Wall Street and supervised by a Fed that is regularly reviled for its wussiness when it comes to cracking down on blatant corruption by its charges.

What is particularly noteworthy is that Yellen specifically references the Great Depression but does not seem to comprehend where the slack in the U.S. economy is coming from. Franklin Delano Roosevelt, running for President in 1932, had no such difficulties.

In a speech at Oglethorpe University in Atlanta on May 22, 1932, in the midst of the Great Depression, Roosevelt made the following remarks:

“raw materials stand unused, factories stand idle, railroad traffic continues to dwindle, merchants sell less and less, while millions of able-bodied men and women, in dire need, are clamoring for the opportunity to work…

“our basic trouble was not an insufficiency of capital. It was an insufficient distribution of buying power coupled with an over-sufficient speculation in production. While wages rose in many of our industries, they did not as a whole rise proportionately to the reward to capital, and at the same time the purchasing power of other great groups of our population was permitted to shrink…

“Do what we may have to do to inject life into our ailing economic order, we cannot make it endure for long unless we can bring about a wiser, more equitable distribution of the national income…

“It is well within the inventive capacity of man, who has built up this great social and economic machine capable of satisfying the wants of all, to insure that all who are willing and able to work receive from it at least the necessities of life. In such a system, the reward for a day’s work will have to be greater, on the average, than it has been, and the reward to capital, especially capital which is speculative, will have to be less.”

Until Fed Chair Yellen is prepared to do more than give lip service to income and wealth inequality, her command over monetary policy will be sorely challenged.

Hedge Funds Get Pummeled: Shades of Long-Term Capital Management L.P.

By Pam Martens and Russ Martens: October 16, 2014

Dow -458If you happened to be sitting behind a trading screen on Wall Street in late August and September 1998, you’ve likely been having some déjà vu over the past seven trading sessions. Intraday rallies continue to fail; there is a thundering stampede into Treasuries; rumors are buzzing about hedge funds in trouble; waves of selling pressure suggest wholesale dumping to meet margin calls.

If you needed any more evidence that there is some serious stuff going on behind the scenes on Wall Street, you got it in yesterday’s stock market open. Within minutes the Dow Jones Industrial Average had plunged 370 points in a panic selling spree as buyers went on strike. The Dow was down as much as 458 points in early afternoon before trimming its loses before the final bell to close at a minus 173 points.

It’s all so reminiscent of late August and September 1998 when the five year old hedge fund Long-Term Capital Management L.P., replete with two Nobel laureates on board feeding exotic mathematical formulas into computers, had levered up to the eyeballs in reversion-to-the-mean bets using massive amounts of money borrowed from the major firms on Wall Street. The reversion-to-the-mean thesis was based on the idea that the widened yield spread between risky securities and safer ones would narrow, i.e., revert to the mean.

This was all in the thick of the currency and debt crisis in Russia which dictated, through plain ole common sense, that as that crisis worsened spreads would widen further, not shrink. Which is exactly what they did, causing Long-Term Capital to become Short-Term Capital. The New York Fed had to sit the Wall Street big boys down in its conference room and get agreement on a multi-bank bailout of the teetering hedge fund.

Flash forward to today. U.S. hedge funds have invested billions of dollars in the stock of Dublin-based drugmaker Shire on speculation that U.S. drugmaker, AbbVie, would consummate its buyout of the company, delivering hefty profits to the hedge funds. But the trades have gone seriously awry with Shire losing 29 percent of its value over the past two days on speculation the deal is in trouble.

Early this morning, Reuters has confirmed the hedge funds’ worst nightmare with news that AbbVie “has pulled the plug on its plan to buy Dublin-based Shire, recommending shareholders vote against the proposed $55 billion takeover…”

On top of this harbinger of margin calls are concerns that some hedge funds have made wrong-way bets on the direction of interest rates – putting leveraged money on speculations that rates would rise while now watching them plumb historic record lows around the globe amid rising concerns that we are seeing slowing growth and deflationary forces at work.

There are further reports that hedge funds have suffered additional losses from bets on Fannie Mae and Freddie Mac securities which were delivered a blow in late September when a Federal judge dismissed a lawsuit that would have required the U.S. government, which had to take over the failed firms during the 2008 financial crisis, to share the companies’ profits with shareholders.

Hedge funds are also known to make large, leveraged bets in the oil futures markets and Saudi Arabia’s gambit to effectively launch an oil price war, driving down crude oil prices to four year lows, has caught many oil speculators flat-footed.

Yesterday, Hall Commodities LLP, a hedge fund which manages approximately $100 million in oils and metals, was reported to be shuttering its doors due to poor performance. The largest hedge funds, by comparison, manage billions of dollars, not millions.

Yesterday, Nathan Vardi of Forbes reported that John Paulson’s hedge funds are the second-biggest shareholders of Shire stock, whose price decline “comes at a particularly bad time for Paulson. His main hedge funds performed poorly in September and are down for the year. For example, Paulson’s Advantage Plus Fund fell by about 11% in September and is now down 14% this year. His Advantage Fund was down 13% in the first nine months of the year and his Recovery Fund had lost 6% for the year.” Typically, such performance data is quite stale by the time it gets into the public’s hands.

John Paulson, Hedge Fund Manager, Is Praised in the 2010 Spring/Summer Issue of the Alumni Magazine of the Stern School of Business

John Paulson, Hedge Fund Manager, Is Praised in the 2010 Spring/Summer Issue of the Alumni Magazine of the Stern School of Business at NYU

Paulson is that infamous character who helped Goldman Sachs construct the 2007 ABACUS deal, designed to fail so he could make $1 billion betting that it would fail while Goldman Sachs sold it to its clients as a good investment. On April 16, 2010, the SEC had this to say in assessing Paulson’s business morals: “The SEC alleges that one of the world’s largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.”

According to the SEC’s complaint, by October 2007, 83 percent of the bonds in the portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded. The SEC estimated that investors lost more than $1 billion in the deal.

Goldman got off the hook by paying $550 million to settle the charges in 2010. Fabrice Tourre, the young Goldman investment banker and scapegoat involved in the deal, was tried in a civil court case by the SEC and found liable in March of this year for defrauding investors. Tourre paid $825,000 in fines.

Paulson was never charged. Around the time of the allegations, Paulson donated $20 million to NYU and got his name enshrined on the auditorium of its business school – delivering the sickening message to the next generation of business leaders that it’s legal if you can get away with it.