The anti-establishment trend has picked up its pace this morning, showing no signs of abating. Around 2:30 a.m. New York time, Wall Street traders were stunned by the news that U.K. voters had backed leaving the European Union by 51.9 percent versus a remain vote of 48.1 percent in the anxiously anticipated Brexit referendum held yesterday.
The outcome slammed markets – leaving many wondering if big banks and hedge funds were going to take heavy losses this morning for placing wrong way trades. Futures markets were doing little to reassure that this wasn’t the case with futures on the Dow Jones Industrial Average showing a loss of over 553 points before the market opened and major Wall Street banks like Citigroup, Morgan Stanley, Bank of America, and JPMorgan Chase off by 6 to 7 percent in premarket trading.
In times of crisis, the still untamed mega Wall Street banks serve as proxies of all that remains wrong with global finance: lack of transparency; lack of a competent regulator; trillions of dollars in opaque derivatives; serial frauds against the investing public which have no end in sight, as the charges of outrageous abuses against its customers brought by the SEC against Merrill Lynch yesterday made clear.
The Wall Street banks are also tanking this morning because their stealthy outposts in the City of London (the equivalent of Wall Street in the UK) which has allowed a lot of pillaging of the globe beyond the gaze of U.S. regulators (think JPMorgan’s London Whale fiasco where it used U.S. bank deposits to gamble in exotic derivatives and lose $6.2 billion along the way) may no longer provide the access it once did to the whole of Europe under European Passporting rules.
As the miscreant banks of global finance were soundly trounced, safe haven assets like gold and the ten-year U.S. Treasury were the beneficiaries. As the price of the 10-year Treasury soared, its yield dropped to 1.52 percent from more than 1.7 percent yesterday.
The British currency also took heavy losses, with the pound shedding as much as 10 percent after the vote tally was announced but later trimming its losses to single digits. At 9:19 a.m. New York time, the pound was trading at 1.37 to the U.S. dollar, a loss of 7.80 percent.
A sharp selloff in oil was also driving stock markets lower across Europe and Asia, with U.S. domestic crude, West Texas Intermediate, trading down 5 percent at $47.59 and Brent down over 5 percent at $48.31 minutes before stocks were set to open in New York at 9:30. At 9:27 a.m., Dow futures were showing a loss of 530 points.
As if all of this wasn’t enough for markets to digest, U.K. Prime Minister David Cameron announced after the vote that he will be stepping down by October so that someone more aligned with the outcome of the referendum could lead the U.K. forward. Cameron had waged a battle for the U.K. to remain in the European Union and likely made a strategic mistake by campaigning on the issue alongside President Obama and JPMorgan’s brash talking CEO, Jamie Dimon, who actually threatened his U.K. workers’ jobs if they voted in favor of Brexit.
And for the final ounce of pain to the markets, U.S. durable goods orders for May were announced at 8:30 a.m., showing a decline of 2.2 percent.
Fed Chair Janet Yellen Testifying Before the House Financial Services Committee on June 22, 2016
Millions of Americans think that Congressional Republicans are in conspiracy with groups like the U.S. Chamber of Commerce, Cato Institute, Koch brothers, and the Mercatus Center to advance an agenda of increasing corporate profits while sacking the needs of the poor and middle class. That doesn’t mean, however, that Republicans can’t sometimes spot a conspiracy on the part of others.
Yesterday, four Republicans on the House Financial Services Committee, during the semi-annual monetary policy testimony by Fed Chair Janet Yellen, presented a persuasive argument that it’s really the Federal Reserve (which was flattered by many House Democrats at the hearing) that’s sacrificing the poor and middle class in order to benefit the rich and “the Goldman Sachs CEOs of the world.”
Congressman Ed Royce, Republican from California, said that he was “concerned that the Federal Reserve has created a third pillar of monetary policy, that of a rising and stable stock market.” Royce said that Yellen’s predecessor, Fed Chair Ben Bernanke, had told the Committee that the goal of quantitative easing was to increase asset prices like the stock market in order to create a wealth effect.
Royce raised the specter that the Fed is actually being held hostage by the stock market and Wall Street, stating:
“Every time in the last three years when there has been a hint of raising rates and the stock market declined accordingly, the Fed has cited stock market volatility as one of the reasons to stay the course and hold rates at zero.”
Under law, the Fed’s two primary pillars of monetary policy are to promote the goals of maximum employment and stable prices. Yellen denied that the Fed has a third pillar of shoring up the stock market.
Royce is clearly on to something. When the stock market tanks, the share prices of the big Wall Street banks plummet to a greater degree than the overall market because of the trillions of dollars (yes trillions) in derivatives they hold and the lack of transparency as to whether the counterparties on the other side of these trades will be solvent in a plummeting market.
The Federal Reserve is in no position to quietly sit back and watch the equity capital of its most dangerous banks melt away in a stock market selloff when it is desperately attempting to boost capital levels at these same mega banks.
Secondly, a stock market selloff impacts the confidence of the fragile consumer, millions of whom have at least a little money in their 401(k) plan in the stock market. This is another reason for getting rid of 401(k) plans and returning to corporate pension plans known as defined benefit plans so that the worker can advocate for his own interests instead of the stock market’s. (See related article below on the psychology behind the “ownership society.”)
Congressman Scott Garrett, Republican from New Jersey, said that the super low interest rates targeted by the Fed have raised the value of the stock market and he asked Yellen pointedly who the beneficiaries of this happen to be. Without waiting for an answer, Garrett cited a Gallup poll which showed that “90 percent of households with incomes over $75,000 own stock. Only 21 percent of households earning under $30,000 own stock.”
In fact, it’s actually the super rich who own the vast majority of the stock market. According to the most recent 2013 Federal Reserve “Survey of Consumer Finances,” which is conducted every three years, the rate of direct or indirect stock ownership by the very top income group “increased 3.9 percentage points from 2010 to 2013, reaching 92.1 percent, slightly above the 91.7 percent found in the 2007 survey.”
Garrett stated curtly to Yellen: “Who are you benefitting? The rich. Who are you hurting? The poor.” Finishing with the ultimate insult, Garrett asked Yellen why she needed to benefit “the Goldman Sachs CEOs of the world.”
Congressman Steve Pearce, a Republican from New Mexico, said that seniors who had the majority of their money not in the stock market but in savings accounts had borne the brunt of the financial crisis by watching their interest rates plummet to almost zero as the Fed has pursued a zero interest rate policy since December of 2008. (The Fed hiked its Federal Funds rate this past December to a measly 0.25 to 0.50 percent and the stock market proceeded to stage a tantrum in January.)
Michigan Republican, Congressman Bill Huizenga, suggested that the Fed itself has become a Global Systemically Important Bank (G-SIB) with a balance sheet of over $4 trillion, representing almost 25 percent of U.S. GDP. He said the Fed has also increased its risk profile by doubling the maturity of its assets from about 5 years to 10 years. Huizenga asked if the Fed was running a stress test on itself, along with the other mega banks.
To the amazement of many in the room, Yellen said the Fed did run a stress test on itself.
Talk about bad timing. Tomorrow, while the Brexit vote takes place in the U.K. and is guaranteed to whipsaw markets through the Friday morning open when the results of the vote are expected, the Federal Reserve plans to add to market jitters on Thursday by announcing the results of its stress tests on the biggest banks — while withholding the final leg of the results until the following Wednesday.
The stress tests are an annual Fed exercise which are meant to reassure the public and Congress that the mega banks are holding adequate capital for even an extreme economic downturn; in other words, that another epic taxpayer bailout of insolvent banks won’t sneak up on the Fed like it did in 2008.
Unfortunately, according to the Federal agency established under the Dodd-Frank financial reform legislation to provide ongoing research on potential systemic risks within the U.S. financial system, the Office of Financial Research (OFR), the Fed’s annual stress tests fail to measure the biggest problem in the current U.S. financial structure – the unprecedented concentration of counterparty risk.
The OFR researchers, Jill Cetina, Mark Paddrik, and Sriram Rajan, say the problem is not what would happen if the largest derivatives counterparty to a specific bank failed, as the stress tests currently measure, but what would happen if that counterparty happened to be the counterparty to other systemically important Wall Street banks.
By focusing on “bank-level solvency” instead of the system as a whole, the Fed may be ignoring the real problem of systemic risks in the system according to the report. The researchers write:
“A BHC [bank holding company] may be able to manage the failure of its largest counterparty when other BHCs do not concurrently realize losses from the same counterparty’s failure. However, when a shared counterparty fails, banks may experience additional stress. The financial system is much more concentrated to (and firms’ risk management is less prepared for) the failure of the system’s largest counterparty. Thus, the impact of a material counterparty’s failure could affect the core banking system in a manner that CCAR [one of the Fed’s stress tests] may not fully capture.” [Italic emphasis added.]
The study raises further red flags by noting that just six banks make up the “core” of the U.S. financial system. That’s six banks out of a total of 6,172 commercial banks in the U.S. Those banks are: Bank of America Corp., Citigroup Inc., Goldman Sachs Group, Inc., JPMorgan Chase Co., Morgan Stanley, and Wells Fargo & Co.
The researchers further undermine the idea that the kind of systemic risk that brought down the financial system in 2008 has been eradicated with this one paragraph:
“The resilience of the core may be overstated in systemic stresses. In particular, shared counterparties may pose large risks to the core even if they are not the most significant on a firm-by-firm basis. Large and collectively shared counterparties, under stress, may concurrently transmit shocks to banks in the core. By identifying the largest collectively shared, or largest core counterparties, one may better differentiate systemic from firm-specific risks.”
Now comes the big question: does any regulator actually know what financial institution is lurking out there as the next AIG? In 2008, AIG collapsed when it was discovered that a small unit within the giant insurer had guaranteed to pay hundreds of billions of dollars of credit derivatives to Wall Street and foreign banks without setting aside capital to do so. AIG was rescued by the taxpayer to the tune of $182 billion, with half of that amount going to pay off its obligations to the banks on derivatives and security loans. In effect, it was as much a rescue of Wall Street banks as it was a rescue of AIG.
There actually could be, right now, some insurance company or other type of financial institution loaded up to the eyeballs with risky credit derivatives that could bring down the system while the Federal Reserve is stress testing the wrong measurement. According to the OFR study, regulators may not be getting their hands on the “granular” data they need. The report states:
“Systemic concentration risks are not possible to infer when supervisors examine bilateral exposures that lack granular data such as contract details.”
“Contract details” refers to the fact that the vast majority of derivatives are still traded over-the-counter, privately between financial institutions. This reality flies in the face of the promise by the Obama administration under the Dodd-Frank reform legislation to push derivatives into the sunlight by moving them onto exchanges or central clearinghouses.
On March 30, the Office of the Comptroller of the Currency, the regulator of national banks, released its derivatives report for the last quarter of 2015. It showed the following:
“In the first quarter of 2015, banks began reporting their volumes of cleared and non-cleared derivatives transactions, as well as risk weights for counterparties in each of these categories. In the fourth quarter of 2015, 36.9 percent of the derivatives market was centrally cleared.”
After the greatest financial crash since the Great Depression, 63.1 percent of derivatives are still traded over-the-counter with a complete lack of transparency while the President of the United States seriously misled the press and the public on this point on March 7 of this year.
The OFR report suggests that there is another ticking time bomb like AIG hiding behind some dark curtain. The study shows that between 2013 and 2015 bank holding companies “have moved from being net sellers of protection to net buyers. This change suggests a shift of risk from the banking sector to nonbanks.”
At 10 a.m. this morning, Federal Reserve Chair Janet Yellen will take her seat before the U.S. Senate Banking Committee to deliver her semi-annual testimony on monetary policy. She’ll perform the same task tomorrow before what is likely to be a far more hostile House Financial Services Committee, based on the fireworks that were flying in her last testimony there in February.
There will be a shadow wafting over Yellen at both hearings. The shadow is being cast by Neel Kashkari, who took the reins as President of the Federal Reserve Bank of Minneapolis this past January and has effectively transferred the debate on too-big-to-fail banks from the hands of Yellen to his own regional institution. Kashkari has been conducting symposiums and delivering speeches on the issue and has promised a formalized plan to deal with the problem by the end of this year.
Just yesterday, Kashkari spoke at the Peterson Institute in Washington, D.C. and shot full of holes Yellen’s plan to shore up big bank capital with convertible debt (the so-called Total Loss-Absorbing Capacity or TLAC plan). Kashkari, who worked at the U.S. Treasury during the 2008 financial crisis and oversaw the Troubled Asset Relief Program (TARP), offered this critique yesterday on why the convertible debt plan will not prevent more taxpayer bailouts of the mega banks:
“Do we really believe that in the middle of economic distress when the public is looking for safety that the government will start imposing losses on debt holders, potentially increasing fear and panic among investors? Policymakers didn’t do that in 2008. There is no evidence that their response in a future crisis will be any different….
“A policy analyst recently asked me if we really could resolve a large bank during a crisis. I responded by asking him if he thought we could dismantle an aircraft carrier in the middle of a hurricane. It’s not a perfect analogy, but he got my point…
“I object to this approach for two reasons. First, it immediately reinforces my concern about complexity. Second, this approach assumes that all-knowing, well-intentioned regulators, seizing a bank earlier, will somehow reduce the total losses the bank ultimately faces. I vividly remember the collapse of Bear Stearns in March 2008. In a couple of weeks, Bear Stearns went from normal operations to insolvency.”
The only quibble we have with Kashkari on the above point is that he had a much more powerful bank meltdown to offer. Citigroup, a banking monster compared to the diminutive Bear Stearns, melted away in one week, not a couple of weeks. Here’s how we reported the vaporization of Citigroup in the midst of the 2008 financial crash:
“Citigroup’s five-day death spiral last week was surreal. I know 20-something newlyweds who have better financial backup plans than this global banking giant. On Monday came the Town Hall meeting with employees to announce the sacking of 52,000 workers. (Aren’t Town Hall meetings supposed to instill confidence?) On Tuesday came the announcement of Citigroup losing 53 percent of an internal hedge fund’s money in a month and bringing $17 billion of assets that had been hiding out in the Cayman Islands back onto its balance sheet. Wednesday brought the cheery news that a law firm was alleging that Citigroup peddled something called the MAT Five Fund as ‘safe’ and ‘secure’ only to watch it lose 80 percent of its value. On Thursday, Saudi Prince Walid bin Talal, from that visionary country that won’t let women drive cars [Saudi Arabia], stepped forward to reassure us that Citigroup is ‘undervalued’ and he was buying more shares. Not having any Princes of our own, we tend to associate them with fairytales. The next day the stock dropped another 20 percent with 1.02 billion shares changing hands. It closed at $3.77.
“Altogether, the stock lost 60 per cent last week and 87 percent this year. The company’s market value has now fallen from more than $250 billion in 2006 to $20.5 billion on Friday, November 21, 2008. That’s $4.5 billion less than Citigroup owes taxpayers from the U.S. Treasury’s bailout program.”
Here’s what it took eventually from taxpayer to shore up this serially mismanaged mega bank: $45 billion in equity infusions, over $300 billion in asset guarantees, and more than $2 trillion in secret, cumulative revolving loans from the Federal Reserve at below market interest rates.
By one Reuters analysis, Citigroup had an astronomical 280x leverage ratio at the peak of the crisis in 2008, $2 trillion in assets on its books, and $1.2 trillion off its books, despite the fact that it was overseen by five Federal regulators at the time.
Kashkari’s rolling symposiums and refrain that Dodd-Frank did not end too-big-to-fail are getting a lot of angry pushback from the big Wall Street banks. Kashkari stated in his speech yesterday that “not surprisingly, we have received significant criticism from big banks and their lobbyists who would like to discredit this important initiative.”
The one concern about Kashkari is that in an earlier incarnation he worked at Goldman Sachs, which transformed itself into a bank holding company during the 2008 crash in order to get its share of taxpayer bailouts and cheap loans from the Fed. Goldman Sachs is predominantly an investment bank and has only a small presence in commercial banking. Kashkari has also floated the idea of capping a bank’s asset size. That would tend to help Goldman Sachs compete better against the much larger Wall Street banks that own massive commercial banks as well as investment banks and retail brokerage firms.
What Kashkari isn’t pounding the table for is the restoration of the Glass-Steagall Act which would entirely separate the commercial banks holding taxpayer-backstopped insured deposits from the high-risk-taking investment banks and brokerage firms. Until Kashkari opens that debate for a full airing, it would be wise to remain skeptical about his agenda.
Jeffrey Bezos, Billionaire Buyer of the Washington Post in 2013
An article in the Washington Post yesterday continued the paper’s unrelenting efforts to marginalize Senator Bernie Sanders and his effort to press forward on his call for a political revolution in America. The Post article brandished its most preposterous cudgel yet: the cost of Senator Sanders’ continuing protection by the Secret Service, which it suggested was a drain on taxpayers. Calling Sanders the “now-vanquished Democratic presidential candidate,” the Post’s John Wagoner laments that even though “Hillary Clinton has clinched the party’s nomination,” Sanders is still receiving Secret Service protection which could be costing taxpayers more than $38,000 a day.
In fact, Clinton hasn’t clinched anything until there is an official vote taken at the Democratic National Convention in Philadelphia, July 25-28, no matter how much corporate media might wish otherwise. And since there has never been a Presidential candidate like Clinton, who is under an active criminal FBI investigation for violating State Department policy and transmitting classified material over a private server in her home, anything is possible before the July convention — or thereafter.
To put that $38,000 a day Secret Service cost into perspective, in a report released this past February by the non-partisan investigative arm of Congress, the Government Accountability Office, the U.S. government flunked its audit for 2015 because “34 percent of the federal government’s reported total assets as of September 30, 2015” could not be reconciled. That 34 percent represents $1.08trillion – perhaps a larger worry than spending $38,000 a day to safeguard a man now regarded as a national treasure and the only Presidential contender with any hope of restoring the confidence of young people in their government and the political process.
What was particularly outrageous about the Post writer raising the cost issue of a security detail is that it came at the end of a week when an elected member of the British Parliament, Jo Cox, was brutally murdered over her political beliefs and at a time in the U.S. when attacks by assault-weapon toting mass murderers are becoming a regular occurrence.
If this was an isolated smack down of Sanders at the Washington Post, it wouldn’t trigger speculation about an underlying agenda. But it comes on the heels of an endless series of efforts to marginalize Bernie Sanders at the newspaper.
On March 8, the media watchdog, FAIR, reported that in “what has to be some kind of record,” the Washington Post had published “16 negative stories on Bernie Sanders in 16 hours,” a period which included the “crucial Democratic debate in Flint, Michigan.”
The FAIR report noted that billionaire Jeff Bezos, the CEO of Amazon, the online retailer, had purchased the Washington Post in 2013. It called attention to reasons Bezos might wish to send another establishment candidate to the White House:
“…Bezos has enjoyed friendly ties with both the Obama administration and the CIA. As Michael Oman-Reagan notes, Amazon was awarded a $16.5 million contract with the State Department the last year Clinton ran it. Amazon also has over $600 million in contracts with the Central Intelligence Agency, an organization Sanders said he wanted to abolish in 1974, and still says he “had a lot of problems with.”
John Spaid of TheStreet.com says Amazon (like the government’s own books) is known “for its fairly opaque accounting practices.” Spaid also says the success of Amazon’s stock “has been based on slim or nonexistent profits” and punctuates his overall analysis with this: “Amazon’s unusual and obtuse financial presentations should be a very bright red flag to all investors….”
In January of this year, the Editorial Board of the Washington Post launched an assault on the accuracy of Senator Bernie Sander’s talking points, calling them “his own brand of fiction.” The editorial specifically called out Sanders for creating the “tale” that Wall Street is playing a pivotal role in why “working Americans are not thriving.” It says Sanders needs a “reality check” because “Wall Street has already undergone a round of reform, significantly reducing the risks big banks pose to the financial system.”
It’s actually the Washington Post’s editorial board that needs a reality check. It’s among a tiny minority that thinks Wall Street risks have been adequately constrained. A poll conducted by Greenberg, Quinlan Rosner Research in mid 2014 found that nearly 90 percent of voters believe the Federal government has failed to rein in Wall Street. The poll was conducted among voters across the political spectrum. The poll also found that 64 percent of all voters and 62 percent of voters that own stock believe that “the stock market is rigged for insiders and people who know how to manipulate the system.”
Just this past April, the Wall Street Journal reported that exit polls following the New York primary found that 63 percent of Democrats and 49 percent of Republican voters “said Wall Street hurts the economy more than it helps.” And that’s in a state that Wall Street calls home.
It should also be noted that Bezos has multiple reasons to want to kick to the curb any candidate that poses a threat to his financial enablers on Wall Street. Wall Street banks have underwritten over $8 billion of Amazon debt offerings. The same banking behemoths have analysts on their payroll that can make or break a company with a buy or sell stock rating. For example, Morgan Stanley has been an underwriter of Amazon debt dating back to at least 1999. Last November, Morgan Stanley’s research analysts suggested that Amazon’s stock price could reach $800 (the stock opened at $663.25 that day). Morgan Stanley reaffirmed its “overweight” rating on the stock. Morgan Stanley, which took over the retail brokerage firm Smith Barney, has over 15,000 retail brokers that can, and frequently do, push the stocks that the firm is recommending.
Rigged Wall Street research was a key component leading to the dot.com bubble bust in 2000 that erased about $4 trillion from investors’ brokerage statements. In 2001, Fortune Magazine published a highly critical analysis of Morgan Stanley research analyst, Mary Meeker, and her deeply conflicted role, writing:
“Today, Meeker, 41, has become something else entirely: the single most powerful symbol of how Wall Street can lead investors astray. For the past year, as Internet stocks have crumbled and entire companies have vaporized, Meeker has maintained the same upbeat ratings on her companies that characterized her research reports in the glory days. For instance, of the 15 stocks Meeker currently covers, she has a strong buy or an outperform rating on all but two. Among the stocks she has never downgraded are Priceline, Amazon, Yahoo, and FreeMarkets – all of which have declined between 85% and 97% from their peak. For this she has been duly pummeled in the press, accused of cheerleading for Morgan Stanley’s investment banking clients.”
In one year alone, 1999, Morgan Stanley paid Meeker $15 million. But after all the hand-wringing back then about corrupted analysts on Wall Street, the same practices continue today. President Obama’s Dodd-Frank reform legislation left Wall Street banks able to underwrite stocks and bonds for their corporate clients while their analysts put buy ratings on the company’s stock. One can also be assured that Hillary Clinton, who has promised to follow in the footsteps of Obama, won’t be touching this sacred cash cow on Wall Street either.
Amazon stock is also traded in dark pools (unregulated quasi stock exchanges) run by major Wall Street banks which have participated in underwriting debt deals for Amazon. This practice is allowed by the Securities and Exchange Commission (SEC). The SEC is headed by Mary Jo White, who came to the SEC from one of Wall Street’s major go-to law firms, Debevoise and Plimpton. Between White and her husband, John White, who works for law firm Cravath, Swaine & Moore LLP, every major Wall Street bank has been a client of one or the other’s firms. Under Federal regulations, the conflicts of the spouse become the conflicts of the Federal agency head. None of this stopped President Obama, who enjoyed heavy campaign funding from Wall Street law firms, from nominating Mary Jo White to lead the Wall Street watchdog.
The Washington Post’s January editorial stated that “Mr. Sanders’s success so far does not show that the country is ready for a political revolution.” In fact, his success shows exactly that. As Senator Sanders told his supporters in a live-streamed video (see below) last Thursday evening:
“During this campaign, we won more than 12 million votes. We won 22 state primaries and caucuses. We came very close – within 2 points or less – in five more states. In other words, our vision for the future of this country is not some kind of fringe idea. It is not a radical idea. It is mainstream. It is what millions of Americans believe in and want to see happen…
“In virtually every state that we contested we won the overwhelming majority of the votes of people 45 years of age or younger, sometimes, may I say, by huge numbers. These are the people who are determined to shape the future of this country. These are the people who are the future of this country.”
Sanders’ rallies around the country frequently had in excess of 5,000 people in attendance and at times, over 20,000. Hillary Clinton’s rallies were mostly attended by hundreds – not thousands — of supporters.
This election will decide not only the future of the Democratic Party but the future of democracy in America. Billionaires have every reason to fear Bernie Sanders; regular Americans have every reason to listen carefully to his message as presented directly by him and not through the self-serving lens of billionaire-owned media outlets.