There has been some debate as to whether The Federal Reserve and Treasury Department deserve praise or condemnation for their handling of the credit crisis. A lot may depend on how close you believe we were — and possibly still are — to a total economic collapse of Great Depression type magnitude. There is quite a bit of evidence that this nightmare scenario was possible, that it didn’t occur is
When is a bottom a top? A bottom is a top when it occurs in the markets. While no one can say for certain that a long-term bottom hit in March 2009 for equities and in November for the dollar, the reversals have been dramatic.
Judge rejects SEC/Bank of America settlement: In a surprise, Judge Jed Rakoff refused to sign off on a $33 million deal between the Securities and Exchange Commission (SEC) and Bank of America based on SEC allegations that BofA lied to its shareholders regarding $5.8 billion in bonuses paid out to Merrill executives prior to the close of the merger of the two banks.
For years we have been reading stories about big firms or big traders accepting multi-million dollar penalties from regulators, while maintaining their innocence and basically being free to carry on with their activity.
Judge Rakoff laid bare this folly in rejecting a consent judgment he calls, “neither fair, nor reasonable, nor adequate.” He points out, “It does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the bank’s alleged misconduct now pay the penalty for that misconduct,” and he noted the SEC did not pursue charges against bank management or the lawyers allegedly responsible.
He added the judgment left the impression it “was a contrivance designed to provide the SEC with the façade of enforcement and management of the bank with a quick resolution…The proposed consent judgment in this case suggests a rather cynical relationship between the parties.”
Where would we be if that logic was applied across the board to the financial crisis of the last few years?
AT WHAT COST?
While an economic catastrophe may very well have been averted, the means of achieving that has been the same problematic policies that got us in the predicament in the first place: Over spending and maintaining low interest rates for extended periods of time. This is a recipe for inflation, perhaps even hyper inflation that some economists had predicted when deficits were measured in the mere hundreds of billions not in the trillions.
The unemployment rate grew to 10% in 2009 and the economy is still shedding jobs, albeit at a slower rate than a year ago.
The more we hear, the less we know
The decisions made regarding TARP and the ongoing bailout of the financial sector will be debated for decades, but it is becoming apparent that neither we, nor the folks allocating our money, knew all of the details.
Goldman Sachs bonanza
• Traders at Goldman Sachs recorded only one daily loss in the third quarter, according to the FT. GS made more than $100 million on 36 of 65 days.
• Goldman was to be paid $1 billion, while U.S. taxpayers lost $2.3 billion if commercial lender CIT failed (it did).
• Goldman Sachs and other banks continued handing out huge bonuses.
Perhaps the government should be officially outsourced to GS to run. Maybe then the U.S. government could operate with a profit.
Here is something for everyone to remember, particularly congressmen, presidents and journalists: While emergencies may require quick action, they also require more due diligence not less, (i.e., The Patriot Act, TARP).
Big Brother Alert
• Terra Nova Financial, a Chicago-based broker was fined $400,000 by the Financial Industry Regulatory Authority (Finra) for unauthorized payments to a client. Payment to hedge fund customers included covering the cost of visits to gentleman’s clubs. If they also treated regulators, at least we would know where Finra was when it wasn’t investigating Bernie Madoff.
•To curb Wall Street bonus excesses, the White House hired a “pay czar” to watch over this process, which prompted Wall Street to pay back the loans as fast as possible.
Stumble out of the gate
The new Obama administration offered promise in volatile times but some appointees were more of the same.
• Mary Schapiro faced tough questioning as new SEC chair as she served as CEO of the Financial Regulatory Authority since 2006 and previously was president of NASD, the main regulators of Mr. Madoff. She promised to “act like our hair is on fire.” She wouldn’t need to if she did a better job in the last decade.
• Treasury Secretary Tim Geithner was greeted with a U.S. dollar rally when his appointment was announced. But then he had to answer questions about why he skipped paying a previous tax bill and why, when he was head of the New York Fed, he didn’t ask AIG counterparties to take a haircut at the end of the year.
• CFTC Chairman Gary Gensler’s nomination was held up for months by Senators angry over his support for keeping OTC trading free from regulation. He promised to change and has, as he has been one of the biggest proponents of stronger OTC regulation. He also has listened to those who would blame futures speculators for the 2008 spike in crude oil and is prepared to place hard positions limits on the industry in 2010.
China is stuck with us
In February, a month after President Obama accused China of manipulating its currency to boost exports, Chinese banking official Luo Ping was quoted in the FT: “Once you start issuing $1-2 trillion…we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”
Off The Charts
• Electro shock therapy? Reuters reported that a new device, the Rationalizer, senses traders’ stress levels so they can call time out. The prototype created by Netherlands-based Philips Electronics and ABN AMRO allowed users to wear the “EmoBracelet,” which detects stress and makes a accompanying “EmoBowl” change color from yellow to red as stress levels rise.
• Shhh… Transparency is one of the basic tenets of capital markets. Publicly traded companies have a legal obligation to disclose material facts about the value of their company. Unless the Federal Reserve and Treasury Department muzzle them, that is. In April, the Wall Street Journal reported that Bank of America CEO Ken Lewis was prompted by Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson not to discuss the financial woes of Merrill Lynch as BofA negotiated its government-backed purchase of Merrill.
• Fog follies: In mid-December, President Obama held a summit on how the banking industry could help the ailing economy. But the CEOs from Goldman Sachs, Morgan Stanley and Citigroup failed to show up. Their excuse? Their flights were delayed due to foggy weather. Despite other available transportation options, including trains that run to and from New York and Washington, D.C. several times a day, execs chose instead to join the meeting via teleconference. Talk about “phoning it in.”
• Citi cancels jet order: In the midst of public outrage over banks receiving bailouts in one door while handing out bonuses from another, Citi, one of said banks, was ready to receive delivery of a new $50 million executive jet. The order was cancelled after pressure from the government and Citi executives had to resort to traveling on the old jet(s).
• Man sues BofA for $1,748 billion, trillion dollars: No this isn’t John Thain trying to get his bonus (we think, it could be an alias). The man, Dalton Chiscolm (yeah right) apparently was unhappy with his customer service. The figure written out would be 1, followed by 21 zeroes.
• Little help from above? FaithShares Trust launched three exchange-traded funds addressing the investment needs of Christian investors. They are the first ever Christian-based ETFs, according to FaithShares, though there are several Christian-based mutual funds. Each fund — FaithShares Catholic Value Fund (FCV), FaithShares Methodist Value Fund (FMV) and FaithShares Christian Values Fund (FOC) — will be tailored to each denomination’s teachings and include 100 stocks of large well-known companies, but exclude companies from specific industries considered to be objectionable industries by a specific denomination. FaithShares plans on adding a Baptist and Lutheran-based ETF. Sound like an interesting arbitrage opportunity.
• Et tu Barack? Past administration officials constantly responded to international concerns over the falling dollar with the trite comment, “We have a strong dollar policy,” despite policies, particularly on interest rates, that weakened the dollar. In November, Treasury Secretary Geithner continued the annoying tradition.
• A very good year: While oil speculators continued to be under siege in Washington, five of the world’s largest oil trading houses reaped bumper earnings, according to the FT. The group of five trades has close to 15% of the world’s crude and oil products output. Together they made about $4 billion.
Signs Of The Times
• Sausage making: Proposed regulatory changes in the futures industry kept coming and coming in 2009. Countless bills regulating over-the-counter (OTC) derivatives were bandied about the House and Senate. After his swearing in as CFTC chairman on May 26, Gary Gensler testified before the House and Senate seven times from June through October. On Dec. 11, the House passed the Wall Street Reform and Consumer Protection Act of 2009, which calls for all standardized swap transactions between dealers and major swap participants to be cleared and traded on an exchange or electronic platform. Regulatory reform is sure to be a major issue for the futures industry in 2010.
• BYOB or move down under: The number of firms holding holiday parties in 2009 dropped to 62% from 77% in 2008 and 90% in 2007 according to a survey from Challenger, Gray and Christmas Inc. Conversely, Reuters cites a IBIS World forecast that the number of Australian companies that will have holiday parties will increase to 92% in 2009 from 67% in 2008. The survey expects Australian companies to spend 560 million Aussie dollars, an increase of 76%, on year-end events.
• Ph.D. in financial journalism: Former Lehman executive Lennie Fuller is considering creating a Ph.D. track for financial journalism at the University of Stirling in Scotland, according to Felix Salmon’s blog. Fuller is a qualified Scottish chartered accountant. We don’t know what role he played in Lehman’s troubles, if any, but it seems they had a whole bunch of people with the proper certification, as did all of the investment banks.
• How the mighty… Richard Rubin, an economic stalwart of the Clinton Administration and exalted Goldman Sachs alum, left Citigroup, which received more bailout money than any other existing investment bank, with a diminished reputation.
• Clean energy?: In November, Netherlands-based power company Essent announced the opening of the Eco Zather power plant. The fancy name belies that it will power homes through fermenting cow manure from nearby farms.
Bernie Madoff was sentenced to 150 years in prison in June for operating the biggest Ponzi scheme (not including the Federal Reserve) ever. No word on any sentence for the regulators who failed to do anything about it, despite being handed a detailed analysis of the fraud a decade earlier.
Former Merrill Lynch CEO John Thain managed to redecorate his office, including an $87K area rug, and pass out $5.8 billion in bonuses to Merrill executives in 2008 before handing over the reins of Merrill to BofA CEO Ken Lewis. Lewis showed Thain — who could win the title of all-time clueless greedy corporate executive — the door in 2009.
Lewis would leave as well after he acknowledged he was bullied by the Fed and Treasury to close the Merrill deal despite revelations of fourth quarter losses that were not shared with shareholders.
In early 2009, deaf people became the latest victims of financial fraudsters. In February, CNBC reported that the SEC stopped an alleged Ponzi scheme by Billions Coupons, a firm in Hawaii that raised more than $4.4 million from deaf investors. Billions Coupons reportedly raised the cash by holding investment seminars for investors who were deaf, and then the firm’s CEO pocketed the profits.
Our biggest rogues, once again, are the political leaders who failed to protect us from those gaming the system. They are the ones that removed depression era regs, and the ones who signed off on the bailouts without the sense of making sure any profits derived from our generosity be returned to us.
The Naughty Aughties
The end of 2009 does not merely bring to an end a year of significant happenings but also the end of the first decade of the 21st century. And it seems like just yesterday we were writing about Y2K.
While today it seems like so much ado about nothing, the preparation for Y2K probably helped prevent 9/11 from becoming a greater tragedy, as a lot of disaster recovery and contingency planning that happened to prevent computer breakdowns relative to Y2K helped us through 9/11.
A decade of electronic trading was just in its infancy in the United States in 2000 and only covered the new E-mini stock index markets and overnight trading. Its success led to efficiencies, lower execution and brokerage costs, the creation of new trading strategies and successive record-breaking volume years stopped only by the recent credit crises.
The terrorist attacks of 9/11 that brought down the World Trade Center towers and did significant damage to the Pentagon hit our industry particularly hard, with Carr Futures and Cantor Fitzgerald losing many employees in their New York offices. Also the trading floor of the New York Board of Trade was reduced to rubble in the attack.
Two equity market crashes, one dollar
Technicians may argue that dollar weakness (see “The lost decade") distorted what really has been one long bear trend, but either way it has been a tough decade for the buy and hold crowd to explain. And despite our “strong dollar policy,” it was not a good decade for the greenback.
Enron, Worldcom, Bear Stearns, Lehman, AIG, bankk solvency crisis, TARP etc.
Not friendly for savers
During this lost decade, investment banks had the benefit of a friendly central bank as the Fed maintained accommodative Fed funds rates, 4% or less, for roughly 65% of the decade.
Then & now…
• The Commodity Futures Modernization Act of 2000 (CFMA) was hailed as breakthrough legislation that would end confusion regarding OTC swaps regulation and allow for the trading of single stock futures. Today it is be being cited as a culprits for the credit crises that nearly sent us into another depression. Turns out zero regulators are too few for OTC swaps and two are too many for single stock futures.
• In 2000, the Chicago Mercantile Exchange set a volume record of 231.1 millions contracts; the Chicago Board of Trade did slightly more volume but was down for the year. By the end of the decade, CME bought CBOT along with the New York Mercantile Exchange and traded approximately 2.7 billion contracts in 2009.
• In 2000, electronic trading volume at the CME accounted for 15% of total exchange volume. In 2009, it was above 90%.
• Chicago Board Options Exchange set a record of 326.4 million contracts in 2000. In 2009, it traded more than 1.13 billion.
• A decade ago, a new era of lighter, smarter regulation was underway. Today Congress is working on rebuilding a regulatory structure that failed to detect enormous systemic risk.
A decade ago…
• Nearly all futures prices were discovered through open outcry and most futures contracts were only traded via open outcry.
• No one used the term “social media” or used Facebook, Twitter, or LinkedIn.
• What we knew of the Internet had more to do with Al Gore’s vision than as an indispensible part of how we live and do our jobs.