JPMorgan Chase & Company has a proposition for the mutual funds and pension funds that oversee many Americans’ savings: Heads, we win together. Tails, you lose — alone.
Here is the deal: Funds lend some of their stocks and bonds to Wall Street, in return for cash that banks like JPMorgan then invest. If the trades do well, the bank takes a cut of the profits. If the trades do poorly, the funds absorb all of the losses.
The strategy is called securities lending, a practice that is thriving even though some investments linked to it were virtually wiped out during the financial panic of 2008. These trades were supposed to be safe enough to make a little extra money at little risk.
JPMorgan customers, including public or corporate pension funds of I.B.M., New York State and the American Federation of Television and Radio Artists, ended up owing JPMorgan more than $500 million to cover the losses. But JPMorgan protected itself on some of these investments and kept millions of dollars in profit, before the trades went awry.
How JPMorgan won while its customers lost provides a glimpse into the ways Wall Street banks can, and often do, gain advantages over their customers. Today’s giant banks not only create and sell investment products, but also bet on those products, and sometimes against them, putting the banks’ interests at odds with those of their customers. The banks and their lobbyists also help fashion financial rules and regulations. And banks’ traders know what their customers are buying and selling, giving them a valuable edge.
Some of JPMorgan’s customers say they are disappointed with the bank. “They took 40 percent of our profits, and even that was O.K.,” said Jerry D. Davis, the chairman of the municipal employee pension fund in New Orleans, which lost about $340,000, enough to wipe out years of profits that it had earned through securities lending. “But then we started losing money, and they didn’t lose along with us.”
Through a spokesman, JPMorgan’s chairman and chief executive, Jamie Dimon, declined a request for an interview. The spokesman, Joseph Evangelisti, said that JPMorgan had a long record of success in securities lending, and that the losses represented only a small fraction of the funds in the program.
Moreover, Mr. Evangelisti said, all of the investments had been permitted under guidelines negotiated with the bank’s clients. JPMorgan, he said, did not take undue risks.
“We have powerful incentives to take only prudent investment risks,” Mr. Evangelisti said. If customers lose money that they have entrusted with the bank, he said, that “can lead to a loss of clients and can affect the reputation of the business.”
The financial regulation bill that Congress just passed, after fierce lobbying by banks, is aimed at curtailing some of the practices that caused the financial crisis. But much of Wall Street has mostly gone back to business as usual. Nowhere are the potential conflicts more apparent than on the trading floors, where executives must balance their pursuit of profits and their duty to customers.
In addition to losing money for New Orleans workers and others, securities lending also played a central role in the near-collapse of the American International Group. Through securities lending, pensions and mutual funds borrow money to make trades, adding to the risks within the financial system.
Lawsuits are flying against JPMorgan and others, including Northern Trust. Clients say that they were not warned of the risks associated with this practice and that the banks breached their fiduciary duty. Wells Fargo lost such a suit over the summer and was ordered to pay four institutions a combined $30 million. The State Street Corporation, which took a $414 million charge in July to cover some of its customers’ losses, faces suits from other clients.
Representatives for these banks said the companies had acted appropriately and that they intended to fight the suits.
Despite such troubles, the securities lending business has rebounded after plummeting during the crisis. Today shares with a combined value of $2.3 trillion are out on loan, according to SunGard, which provides technology services to financial companies. In 2007, before the bubble burst, the total on loan was worth $2.5 trillion.
The quick revival of securities lending raises concerns about whether banks and their pension customers have learned any lessons.
“What happened was the banks got greedy and they looked at the return they were getting on the collateral and said, ‘Why don’t we go further with this?’ ” said Steve Niss, the managing partner at the NFS Consulting Group, an executive search firm specializing in investment management. “But the clients got greedy right along with the banks.”
In what universe is an economy with 39.68 million Americans on food stamps considered to be a healthy, recovering economy? In fact, the U.S. Department of Agriculture forecasts that enrollment in the food stamp program will exceed 43 million Americans in 2011. Is a rapidly increasing number of Americans on food stamps a good sign or a bad sign for the economy?
According to RealtyTrac, foreclosure filings were reported on 367,056 properties in the month of March. This was an increase of almost 19 percent from February, and it was the highest monthly total since RealtyTrac began issuing its report back in January 2005. So can you please explain again how the U.S. real estate market is getting better?
The Mortgage Bankers Association just announced that more than 10 percent of U.S. homeowners with a mortgage had missed at least one payment in the January-March period. That was a record high and up from 9.1 percent a year ago. Do you think that is an indication that the U.S. housing market is recovering?
With the U.S. Congress planning to quadruple oil taxes, what do you think that is going to do to the price of gasoline in the United States and how do you think that will affect the U.S. economy?
Do you think that it is a good sign that Arnold Schwarzenegger, the governor of the state of California, says that “terrible cuts” are urgently needed in order to avoid a complete financial disaster in his state?
But it just isn’t California that is in trouble. Dozens of U.S. states are in such bad financial shape that they are getting ready for their biggest budget cuts in decades. What do you think all of those budget cuts will do to the economy?
In March, the U.S. trade deficit widened to its highest level since December 2008. Month after month after month we buy much more from the rest of the world than they buy from us. Wealth is draining out of the United States at an unprecedented rate. So is the fact that the gigantic U.S. trade deficit is actually getting bigger a good sign or a bad sign for the U.S. economy?
Considering the fact that the U.S. government is projected to have a 1.6 trillion dollar deficit in 2010, and considering the fact that if you went out and spent one dollar every single second it would take you more than 31,000 years to spend a trillion dollars, how can anyone in their right mind claim that the U.S. economy is getting healthier when we are getting into so much debt?
The U.S. Treasury Department recently announced that the U.S. government suffered a wider-than-expected budget deficit of 82.69 billion dollars in April. So is the fact that the red ink of the U.S. government is actually worse than projected a good sign or a bad sign?
According to one new report, the U.S. national debt will reach 100 percent of GDP by the year 2015. So is that a sign of economic recovery or of economic disaster
Monstrous amounts of oil continue to gush freely into the Gulf of Mexico, and analysts are already projecting that the seafood and tourism industries along the Gulf coast will be devastated for decades by this unprecedented environmental disaster. In light of those facts, how in the world can anyone project that the U.S. economy will soon be stronger than ever?
The FDIC’s list of problem banks recently hit a 17-year high. Do you think that an increasing number of small banks failing is a good sign or a bad sign for the U.S. economy?
The FDIC is backing 8,000 banks that have a total of $13 trillion in assets with a deposit insurance fund that is basically flat broke. So what do you think will happen if a significant number of small banks do start failing?
Existing home sales in the United States jumped 7.6 percent in April. That is the good news. The bad news is that this increase only happened because the deadline to take advantage of the temporary home buyer tax credit (government bribe) was looming. So now that there is no more tax credit for home buyers, what will that do to home sales?
Both Fannie Mae and Freddie Mac recently told the U.S. government that they are going to need even more bailout money. So what does it say about the U.S. economy when the two “pillars” of the U.S. mortgage industry are government-backed financial black holes that the U.S. government has to relentlessly pour money into?
43 percent of Americans have less than $10,000 saved for retirement. Tens of millions of Americans find themselves just one lawsuit, one really bad traffic accident or one very serious illness away from financial ruin. With so many Americans living on the edge, how can you say that the economy is healthy?
The mayor of Detroit says that the real unemployment rate in his city is somewhere around 50 percent. So can the U.S. really be experiencing an economic recovery when so many are still unemployed in one of America’s biggest cities?
Gallup’s measure of underemployment hit 20.0% on March 15th. That was up from 19.7% two weeks earlier and 19.5% at the start of the year. Do you think that is a good trend or a bad trend?
One new poll shows that 76 percent of Americans believe that the U.S. economy is still in a recession. So are the vast majority of Americans just stupid or could we still actually be in a recession?
The bottom 40 percent of those living in the United States now collectively own less than 1 percent of the nation’s wealth. So is Barack Obama’s mantra that “what is good for Wall Street is good for Main Street” actually true?
Richard Russell, the famous author of the Dow Theory Letters, says that Americans should sell anything they can sell in order to get liquid because of the economic trouble that is coming. Do you think that Richard Russell is delusional or could he possibly have a point?
Defaults on apartment building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter of 2010. In fact, that was almost twice the level of a year earlier. Does that look like a good trend to you?
In March, the price of fresh and dried vegetables in the United States soared 49.3% - the most in 16 years. Is it a sign of a healthy economy when food prices are increasing so dramatically?
1.41 million Americans filed for personal bankruptcy in 2009 – a 32 percent increase over 2008. Not only that, more Americans filed for bankruptcy in March 2010 than during any month since U.S. bankruptcy law was tightened in October 2005. So shouldn’t we at least wait until the number of Americans filing for bankruptcy is not setting new all-time records before we even dare whisper the words “economic recovery”?
Regarding Point 7: "Dozens of U.S. states are in such bad financial shape" ...
EconomicPolicyJournal.com has learned that 32 states have run out funds to make unemployment benefit payments and that the federal government has been supplying these states with funds so that they can make their payments to the unemployed. In some cases, states have borrowed billions.......
Prosecutors have since obtained notes written by a PwC auditor from a November 2007 meeting that appear to show Mr. Cassano informed the auditor about the adjustment and its potential positive impact, according to people familiar with the matter. That would make it difficult to bring a strong criminal case against Mr. Cassano, these people said.
Federal investigators have found no evidence that Cassano lied to his bosses or shareholders about AIG's financial problems, sources told CBS News, according to the exclusive story posted online.
So why is it good news that charges weren't filed?
Because, despite crawling all over AIG for two years, Federal prosecutors apparently didn't find enough evidence to hang criminal charges on. And, to their great credit, they didn't go ahead and file charges anyway, which would have been the far more popular move. So the good news is that our justice system still appears to be focused on enforcing the law, rather than bending to popular opinion.
Moolah: yeah, I can undertstand why no criminal charges...
Cynics will say that the reason the Feds didn't find evidence of crimes was that Cassano, et al, were smart enough not to leave any tracks. And that's always possible. But it's also possible that, as at other financial firms, there was no evidence of crimes because no crimes were actually committed. Being short-term greedy, betting the farm, and destroying your firm, it turns out, wasn't against the law.
Moolah: That's the sad thing. It wasn't a law for being short-term greedy, betting the farm, and destroying your firm!
Given that taxpayers were (and are) on the hook for those bets, of course, it SHOULD BE against the law to recklessly gamble with other people's money (namely, ours). But at the time it wasn't. And, at least in part, we can thank two decades of de-regulation for that.
Now, not being guilty of crimes, of course, doesn't mean that Cassano and his colleagues at AIG weren't guilty of something else--gross negligence. Cassano & Co. gambled so recklessly that they destroyed their entire firm and forced taxpayers to step in with a ~$150 billion bailout. They also got paid hundreds of millions of dollars to do this--because AIG's incompetent management and board of directors applauded their every move.
Moolah: Posted last year: Joe Cassano: The Man Who Crashed The World. I fully agree that it is totally insane and outrageous and charging with Blodget that Cassano & Co should be charged with gross negligence!!!
That the management and board of AIG got paid so well to fail so miserably is outrageous.Their conduct may not have been against the law, but it was against every principle of duty, prudence, and responsibility. AIG shareholders--and the American public who eventually had to clean up the mess--deserved better.
If there were any real justice here, AIG shareholders would be able to claw back every penny of the hundreds of millions of dollars that Cassano & Co. and the AIG board were paid to gamble recklessly at our expense. That we can't do that--or won't--is a crime.
Hhhm, are investigations disappearing into the night just like FDIC resolutions, Friday night massacres so as not to upset the great unwashed public?
Joe Cassano, head of AIG’s Financial Products Group and individual most responsible for the insurer’s collapse, will not be prosecuted. Per the Wall Street Journal:
Federal prosecutors will not bring criminal charges against current and former American International Group Inc. executives for their role surrounding financial contracts that nearly brought down the insurer about two years ago
Yves here. Now how could this possibly have come to pass? Wellie, if you rope your advisors like your accounting firm into signing off on your stupid or possibly even criminal behavior, then you get off scot free:
But after a series of meetings with the targets of their probe, prosecutors obtained information about Mr. Cassano’s disclosures to AIG senior executives and AIG’s outside auditor, PricewaterhouseCoopers LLP. That changed the course of the investigation, these people said.
Yves here. Now why hasn’t the bright spotlight been turned on PwC? They are too big too fail. Now that there are only four accounting firms deemed capable of auditing Fortune 500 companies, no one in the officialdom is about to launch an action against them that might lead to their demise, no matter how well deserved it might be. Francine McKenna has has written at considerable length about the fact that PwC was auditor to both Goldman and AIG, and was clearly signing off on valuations of the SAME instruments at DIFFERENT prices at each firm:
Why didn’t PwC speak up, act more strongly to match mismatched valuations between entities like AIG and Goldman Sachs, raise their hand and shout fire, or at least warn of suffocating black smoke obscuring woefully inadequate risk management and of pricing “models” strung together like so many holiday lights electrical cords, faulty wiring and all, ready to blow the circuits?
Was it the fees?
Well, there’s certainly $230 million plus reasons in 2008 to play nicey-nice between the two clients. But that explanation would be too simple.
Another little problem which has been completely missed in our rush to get Potemkin financial reforms in place is that prosecutors often cannot pursue lawyers and accountants even when they play a key role in perpetrating dubious or even criminal conduct. As we wrote in ECONNED:
Legislators also need to restore secondary liability. Attentive readers may recall that a Supreme Court decision in 1994 disallowed suits against advisors like accountants and lawyers for aiding and abetting frauds. In other words, a plaintiff could only file a claim against the party that had fleeced him; he could not seek recourse against those who had made the fraud possible, say, accounting firms that prepared misleading financial statements. That 1994 decision flew in the face of sixty years of court decisions, practices in criminal law (the guy who drives the car for a bank robber is an accessory), and common sense. Reinstituting secondary liability would make it more difficult to engage in shoddy practices.
Another perverse aspect is that the fact that AIG as a company, as opposed to individuals, may have engaged in criminal conduct is deemed to be moot. The attitude seems to be, “AIG is a ward of the state, why bother?” But that misses the point. UBS, which was rescued by the Swiss government, had to have outside investigators prepare a report of what went wrong. Why hasn’t every other bailed-out entity been required to make similar reports? The public, and more important, regulators and legislators would have a much better understanding of why the financial system went off the rails. And in the case of AIG in particular, there is ample evidence the company at a minimum had poor accounting and controls (recall the scenes in Andrew Ross Sorkin’s Too Big to Fail, where the AIG top brass has only a dim idea of how bad its cash shortfall is, and at a very advanced stage, discovers a $20 billion leak in its securities lending operation).
Given that AIG had a dubious and contested relationship with a sister firm, C.V. Starr (controlled by Hank Greenberg), which appears to have served as an executive enrichment vehicle, the sloppy accounting may have served as a cover for other types of executive-wallet-flattering activities. But the decision has clearly been made to pull a veil over AIG, to the detriment of the interest of taxpayers who are paying for its lapses.
The unprecedented step saw the euro sink to a four-year low after Germany said that from midnight shorting of credit default swaps of any European government would be banned. The prohibition is an attempt to counter speculators that Berlin believes are trying to destabilise the region's sovereign bond market.
Traders greeted the move by BaFin, the German regulator, with a mixture of anger and astonishment. One bond trader said he expected Wednesday's trading session to be one of the most volatile in living memory: "It will be complete chaos, I really don't know what the Germans think they are doing."
One immediate effect was that the cost of insuring European government debt fell as markets were hit by a so-called "short squeeze" where investors with short positions are forced to offload their holdings and buy the bonds, causing the price to increase.
This is certain to please the German authorities, who have waged an increasingly hostile war of words with supposed speculators.
BaFin said the ban was being introduced due to "extraordinary volatility in debt securities issued by eurozone countries".
In a statement, it said short-selling had led to excessive price movements "which could have led to significant disadvantages for financial markets and have threatened the stability of the entire financial system". However, traders said that the measures, which will also prohibit the naked short-selling of shares in major German financial institutions, such as Allianz. Commerzbank, and Deutsche Bank, could lead to an immediate backlash from investors around the world.
They added that the ban was likely to be effectively unenforceable. It will not stop traders from shorting the bonds and shares using other European markets.
"Without the two-way flow the German market is likely to become utterly dysfunctional," said one London-based bond trader. "Nobody ever thought they'd do this in a million years and it raises the long-term question of who is now going to want to buy their debt."
Germany, like other European governments, must raise hundreds of billions of euros by selling new bonds, but banning short-selling could jeopardise demand.
Analysts at Bank of America Merrill Lynch summed up the mood with a note titled What's Germany going to ban next? Rainy days, harsh words, the Macarena?
US shares fell as traders began to assess the consequences. After an early rally, the Dow Jones closed down more than 100 points, despite a day of gains for European markets.
The German authority's actions echo those taken by many major Western governments in the wake of the financial crisis in late 2008 following the collapse of US investment bank Lehman Brothers. Britain and the US both temporarily banned shorting bank shares, fearing that speculators could cause the collapse of other major financial institutions.
Speaking to Reuters, Lawrence Glazer, managing partner of Boston-based Mayflower Advisors, said: "The motive is probably more towards limiting volatility and trying to prevent some sort of raid on debt, or equities. We have seen this before, but whenever you see any type of regulatory changes it is worth paying attention."
Politicians cannot battle markets and expect to win. Wage price controls do not work. The Bazooka ploy failed a dozen times, and the ban on short selling financials in the US failed miserably....
All these short sale restrictions are going to do is create a vacuum. Once the shorts are driven out these shares will plunge.
If history is any guide, there will be a brief rally in German banks, followed by a collapse of unknown duration. Politicians are not bigger than the markets, no one is.
However, politicians can and do frequently exaggerate the existing trend. In this case, the trend is down. Short sellers are not the problem, if anything, short sellers are the cure, exposing problems and failed policies that politicians refuse to address.
Sadly but true.
One DO NOT GO SHORT without any justification. Why? That's suicidal.
Germany should seriously ask themselves if the shorties have a very strong reasoning to do what they are doing.
And naturally the Euro is getting whacked silly... (them Euro shorties are laughing yet again to the bank, eh? )
TOKYO (Dow Jones)--The euro fell to a fresh four-year low against the dollar in Asia Wednesday, as investors in the region dumped the common currency on the view that new German financial regulations will complicate managing the risk of holding the currency.
The new rules announced overnight may make both short-term and long-term investors increasingly eager to further trim their euro holdings. The regulations are also likely to weigh on European equities later in the global day, further hurting the risk-sensitive currency, dealers said.
In morning trade in Tokyo Wednesday, the euro dropped to $1.2143, its lowest level since April ... source
“If you don’t feel like you can sell bonds and equities in Europe, you’re left with selling the euro to express a negative view,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney. The German ban “creates a view that the authorities sense bigger problems than what may appear on the surface, creating more nervousness and fear.”
“The regulatory step in Germany did little to soothe speculative selling on the euro and rather underscored the lack of solidarity in the euro zone,” said Mitsuru Saito, chief economist in Tokyo at Tokai Tokyo Securities Co. “No one can dismiss entirely the worst-case scenario in which the single currency will fall apart.”
As BaFin has yet to provide details of the naked short ban, here is the best "incomplete" analysis of today's events, written by BofA's Jeffrey Rosenberg.
Cleaning up the spill without stopping the leak
Today’s actions by the German Financial Regulator BaFin prohibiting naked short selling continues a long simmering approach to the European sovereign debt crisis that we believe mistakes financial market uncertainty for the cause of the crisis rather than its effect. Drawing an analogy to the other major headlines of the day, attempts to curtail the sovereign debt crisis through curtailing trading activity is like trying to clean up the Gulf oil spill without stopping the leak. Budget deficits are the leak in this analogy and are similarly extremely difficult to fix. By confusing the cause for the effect the policy response exacerbated rather thanameliorated market uncertainty and with concern over the loss of ability to hedge long positions, investors sold what they could with the declines in the Euro leading risk markets lower and US Treasuries higher in a flight to quality.
Creating confusion: the BaFin ban
Today, the BaFin announced a series of short-selling bans aimed at reducing financial system risk. The bans will begin at midnight tonight (18th-May) and last until 31 March 2011 (10.5 months). The ban will apply to naked short-selling of credit default swaps and Euro-area government bonds. In addition, the ban will apply to naked short-selling in shares of 10 German banks and insurers. The 10 names are: Allianz, Deutsche Bank, Commerzbank, Deutsche Boerse, Deutsche Postbank, Munich Re, Hannover Re, Generali Deutschland Holding, MLP and Aareal Bank.
So what does that mean?
We have more questions than answers at this point. First, naked short selling is well defined for cash markets – stocks and government bonds. It bans the selling of those when the seller can not deliver the asset to the buyer (within a proscribed period of time). These bans were put permanently in place for example in the US during the credit crisis. For CDS, “naked short-selling” is not well defined. There is no delivery of an underlying instrument in a short risk position in CDS (buying protection), hence some other definition of what “naked” means for CDS will be required. How “naked” is defined could render market making difficult or impossible. Enforcement is unclear as well as the jurisdiction of trading to which the BaFin ban applies. That latter point could become moot were FSA and othernational regulators to follow suit with similar bans. Finally the scope of what “Euro area” debt means remains undefined.....
And I wonder.. how much time do they have? I really wonder.
ECB: $1 trillion rescue package only buys time By JUERGEN BAETZ (AP) – 15 hours ago
BERLIN — The euro750 billion ($1 trillion) rescue loan package only bought euro zone countries more time, but didn't resolve the continent's underlying debt problem, German Chancellor Angela Merkel and a European Central Bank official said.
The market turmoil will only calm down if the 16 member states of the euro zone reform their economies and reduce their deficits, ECB chief economist Juergen Stark told the Frankfurter Allgemeine Sonntagszeitung newspaper on Sunday.
Stark was quoted as saying about the loan package that "We bought time, not more than that." The euro was not in danger "but in a critical situation," he added.
Merkel on Sunday defended the loan package as the right step to stabilize the currency, but she also acknowledged it only bought time.
"We didn't do more than buy time to get the differences in competitiveness and budget deficits of euro-zone countries in order," she said at a conference of the Confederation of German Trade Unions in Berlin.
In the past few days, Merkel has repeatedly urged euro-zone countries to trim their budget deficits. She also called for greater cooperation in financial and economic policy across Europe to ensure the currency's long-term stability.
"The underlying problem are the high budget deficits in the euro-zone countries," she told daily Sueddeutsche Zeitung on Saturday.
Defending the latest bailout package — which is unpopular among German voters — Merkel said it's not only the currency's stability that is at stake, but the European idea as a whole.
"Because we know if the euro fails, then more is failing," the paper quoted her as saying.
In the wake of Greece's debt crisis, the euro has come under intense pressure because of fears about problems spreading to other heavily indebted euro-zone countries. The euro sank to near a four-year low against the dollar on Friday in late New York trading, buying $1.2355.
Another top German top banker, meanwhile, expressed doubts about Greece's ability to repay its huge debts in an orderly fashion.
Dekabank's chief economist Ulrich Kater on Sunday told German news Web site Handelsblatt that he shares the doubts voiced by Deutsche Bank AG's chief executive Josef Ackermann.
"It will be very, very difficult for Greece to orderly repay its debt," he was quoted as saying.
He said Greece's new austerity measures and its lack of competitiveness were dooming its prospects for economic growth, making debt reduction difficult.
Ackermann, CEO of Germany's biggest lender, caused outrage and nervousness on already jittery markets by publicly doubting Greece's ability to repay its debt and mentioning the possibility of a debt restructuring.
In Athens, Greek Prime Minister George Papandreou said he is not ruling out taking legal action against U.S. investment banks for their role in creating the spiraling Greek debt crisis.
"I wouldn't rule out" going after the U.S. banks, he said in a CNN interview aired Sunday.
The government and many Greeks have blamed international banks for fanning the flames of the debt crisis with comments about Greece's likely default.
The Greek leader also said a parliamentary investigation will soon examine the rapid swelling of Greece's debt and the country's banking practices.
The European Union and the International Monetary Fund have approved a euro110 billion ($136 billion) bailout package for Greece.
In an interview with German news weekly Der Spiegel to be published Monday, the European Central Bank president said Europe's economy "is in its most difficult situation since World War II or perhaps even since World War I."
Jean-Claude Trichet said the euro zone's debt crisis had provoked a market reaction similar to that at the height of the global financial crisis in 2008.
"The markets didn't function anymore, it was almost like in the wake of the Lehman (Brothers) bankruptcy in September 2008," Trichet was quoted as saying.
Trichet also urged European leaders to take further action to address the crisis' underlying problems, calling for a "quantum leap" in control of financial and economic policy across the 16-nation currency zone.
"We need improved structures, to avoid and sanction wrongdoing," Trichet was quoted as saying.
Stark also urged European Union leaders to swiftly introduce new rules to increase stability and growth, stressing the need for new automatic sanctions for countries that don't abide by the EU's debt rules. "The process has to be depoliticized," he said.
Forget the wolf pack – the ongoing euro crisis was caused by EMU
Jean-Claude Trichet tells us the world faced a second Lehman crash in the days and hours before EU leaders launched their €720bn (£612bn) defence fund. If the European Central Bank’s president is correct, we are in trouble. The EU-IMF package is already unravelling. What will the West do for its next trick?
By Ambrose Evans-Pritchard Published: 5:37PM BST 16 May 2010
Mr Trichet was ash-white at the Brussels summit a week ago. He distributed charts of credit stress to every eurozone leader. By the time he had finished his hair-raising discourse, everybody round the table finally understood what they faced.
“The markets had ceased to function,” he told Der Spiegel. “There is still a risk of contagion. It can happen extremely fast, sometimes within hours
The spreads on Greek, Iberian, and Irish bonds have, of course, dropped since the ECB stepped in with direct purchases. But the euro rally fizzled fast, to be followed by a fresh plunge to a 18-month low of $1.24 against the dollar. European bank stocks have buckled again. Spain’s IBEX index fell 6.6pc in capitulation fever on Friday.
Geneva professor Charles Wyplosz said EU leaders made the error of overselling up their “shock and awe” package before establishing any political mechanism to mobilise such sums. “The fund is an empty shell,” he wrote at Vox EU. “Worse still, crucial principles have been sacrificed for the sake of unconvincing announcements.”
Brussels was unwise to talk of smashing the “wolf pack” speculators and defeat the “worldwide organised attack” on the eurozone. As Napoleon said, if you set out to take Vienna, take Vienna. Besides, the language of the EU priesthood – ex-ECB board member Tomasso Padoa-Schioppa talks of the advancing battalions of the “anti-euro army” – frightens Chinese and Mid-East investors needed to soak up EU debt. These metaphors are a mental flight from the issue at hand, which is that vast imbalances – masked by EMU, indeed made possible only by EMU – have been decorked by the Greek crisis and now pose a danger to the entire world.
One can only guess what Mr Trichet meant when he said we are living through “the most difficult situation since the Second World War, and perhaps the First”. Is this worse than Credit Anstalt in the summer of 1931, the event that brought down central Europe’s banking system and tipped Europe into depression?
Or was Mr Trichet alluding to something else after witnessing the Brussels tantrum by President Nicolas Sarkozy? According to El Pais, Mr Sarkozy threatened to pull France out of the euro and break the Franco-German axis at the heart of the EU project unless Germany capitulated. To utter such threats is to bring them about. You cannot treat Germany in that fashion.
Chancellor Angela Merkel has put the best face on a deal that has so damaged her leadership. “If the euro fails, then Europe fails and the idea of European unity fails,” she said. Too late, I think. The German nation is moving on. I was struck by a piece in the Frankfurter Allgemeine proposing a new “hard currency” made up of Germany, Austria, Benelux, Finland, the Czech Republic, and Poland, but without France. The piece entitled The Alternative says deflation policies may push Greece to the brink of “civil war” and concludes that Europe would better off if it abandoned the attempt to hold together two incompatible halves. “It can be done,” the piece says.
What makes this crisis so dangerous is not just that Europe’s banks are still reeling, with wafer-thin capital ratios. The new twist is that markets are no longer sure whether sovereign states are strong enough to shoulder rescue costs. The IMF warned in last week’s Fiscal Monitor that the tail risk of a “widespread loss of confidence in fiscal solvency” could no longer be ignored. By 2015 public debt will be 250pc in Japan, 125pc in Italy, 110pc in the US, 95pc in France, and 91pc in the UK.
There is a way out of this crisis, but it is not the policy of wage deflation imposed on Ireland, Greece, Portugal, and Spain, with Italy now also mulling an austerity package. This can only lead to a debt-deflation spiral. The IMF admits that Greece’s public debt will rise to 150pc of GDP even after its squeeze, and that Spain’s budget deficit will still be 7.7pc of GDP in 2015.
The only viable policies – short of breaking up EMU or imposing capital controls – is to offset fiscal cuts with monetary stimulus for as long it takes. Will it happen, given the conflicting ideologies of Germany and Club Med? Probably not. The ECB denies that it is engaged in Fed-style quantitative easing, vowing to sterilise its bond purchases “euro for euro”. If they mean it, they must doom southern Europe to depression. No democracy will immolate itself on the altar of monetary union for long.
In U.S. dollar terms, the rescue package is worth approximately $1 trillion. In euro terms, the EU/IMF have agreed to a EUR750 billion plan that would involve up to EUR440 billion in loan guarantees, EUR60 billion in emergency funding from the European Union and EUR250 billion from the IMF. The ECB also started to buy government bonds but failed to provide any specifics. Although 27 different nations are involved in the bailout, most of the money will come from the 16 members of the Eurozone.
What was announced?
In a nutshell, the following was announcements were made:
1. New EU Special Purpose Vehicle to distribute the new loans – this is where the big questions remain (see below)
2. New Swap Lines with Fed, BoE, SNB and BoC to ease liquidity – in other words, the Fed will ease demand for dollars by reopening the spigot vis a vis other central banks.
3. ECB Government Bond and Corporate Debt Purchases ¬– Undermines credibility of central bank
The EUR60 billion in emergency funding will be made available immediately but it could be sometime before the larger loan guarantee package is made available.
According to the ECB:
In view of the current exceptional circumstances prevailing in the market, the Governing Council decided:
1. To conduct interventions in the euro area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments which are dysfunctional.
2. To adopt a fixed-rate tender procedure with full allotment in the regular 3-month longer-term refinancing operations (LTROs) to be allotted on 26 May and on 30 June 2010.
3. To conduct a 6-month LTRO with full allotment on 12 May 2010, at a rate which will be fixed at the average minimum bid rate of the main refinancing operations (MROs) over the life of this operation.
4. To reactivate, in coordination with other central banks, the temporary liquidity swap lines with the Federal Reserve, and resume US dollar liquidity-providing operations at terms of 7 and 84 days. These operations will take the form of repurchase operations against ECB-eligible collateral and will be carried out as fixed rate tenders with full allotment. The first operation will be carried out on 11 May 2010.
What are the unanswered questions?
With Angela Merkel’s Party losing majority, it will take a few days if not a few weeks to get the rescue plan through the upper and lower houses of Parliament. We saw how long it took to get to get the Greek bailout plan approved and we can only imagine how long it will take for this plan to be passed.
1. What will be the exact mechanics behind how the Special Purpose Vehicle that will provide the loan guarantees to member states? What are the rules and terms of contribution and aid?
2. How long will it take before the SPV is approved by individual nations?
3. Will Greece accept these terms? Will they amend it?
4. Can all of the Eurozone countries afford to contribute to the plan and will the countries seeking aid be able to handle the tough conditions that may accompany the loans?
5. The IMF supposedly has $268 billion left, where are they getting the rest of the money? Most likely U.S. taxpayers!
6. What is the size and scope of the ECB’s bond purchases?
What are the implications for the EUR/USD?
Considering that the ECB’s decision to buy government and corporate bonds is akin to Quantitative Easing, it offsets some of the positive impact on the euro. The ECB has pledged to sterilize the intervention which would neutralize the monetary policy impact but complete sterilization may be more of a medium term goal than a near term one. Comments from ECB member Weber suggests that he may be one of the critics voting against government bond purchases as he warned of the significant risks. In the near term, the rescue plan will help to limit losses in the euro and we believe that Thursday’s low of 1.2521 in the EUR/USD will become the currency pair’s near term bottom. However gains should limited until some of the above questions are answered. Don’t forget, in early September 2008 when US Treasury Secretary Hank Paulson put the “bazooka” on the table by effectively nationalizing Fannie and Freddie hoping the markets would calm down but just days later Lehman collapsed and the entire financial system went into a tail-spin.
To defend the Euro, the ECB now is committed to throw up to $1 trillion at interventions in public and private debt.
What's next? Direct intervention in the stock market?
Bear in mind when this fails (which I guarantee you it will but I cannot state the timeframe), these clowns will think the reason was they did not throw enough firepower at it.
Step back for a second. The problems are too much debt, too much government spending, and a massively unbalanced global economy. None of these actions address any of the fundamental issues.
Short Squeeze Coming
Judging from the action in futures this evening, shorts are going to be forcibly ejected Monday, perhaps for several days.
This will create a huge air pocket underneath. We saw this action once before, in Fannie Mae and financials..... While the timeframe is unknown, these attempts to "defend the Euro" are highly likely to hasten its demise.
John Hussman: Looking at the current state of the world economy, the underlying reality remains little changed: there is more debt outstanding than is capable of being properly serviced. It's certainly possible to issue government debt in order to bail out one borrower or another (and prevent their bondholders from taking a loss). However, this means that for every dollar of bad debt that should have been wiped off the books, the world economy is left with two - the initial dollar of debt that has been bailed out and must continue to be serviced, and an additional dollar of government debt that was issued to execute the bailout.
Meredith Whitney: "Here's a statistic that I find fascinating. This is just for the top four banks. If you look at nonperforming assets - that's loans that haven't paid over 120 days - the size of that is 1.5 times all of the chargeoffs that banks have incurred since 2005. So you think credit has stabilized, mortgages have stabilized? .... "There's huge growth in non-performing assets. These are numbers, apples-to-apples, on the four big banks. The issue is when does that stuff that's not paying come to market, and when do banks recognize the chargeoffs? I think you're going to see more of that in the second quarter and the third quarter. Does the supply move in the second quarter and then you report it in the third quarter? The timing may be weighted more to the third quarter. I just don't know. I think you see a huge leg down in asset prices when you see the supply reach the market. So no, it's not factored into valuations. No, it's not factored into bank guidance. And yes, I think it's going to be a big problem for the banks."
Bill Cara: If these so-called public servants were schooled in economics and not politics they would understand that shifting a debt burden from one group to another does not eliminate the burden. The owners of capital – the ones who hold unencumbered assets – are today asking themselves how long will such insanity last?
Caroline Bum: There is no question we live in an interconnected world. Subprime mortgage defaults by homeowners in Irvine, California, infected banks in Europe and Asia, thanks to the miracle of securitization.... So yes, European banks that hold Greek debt are vulnerable to losses. The interbank lending market is showing signs of stress. And the austerity measures required in Europe’s peripheral countries may spill over into reduced U.S. exports. That’s not the kind of contagion we keep hearing about. On the other hand, it would be a mistake to interpret the flight-to-quality into U.S. Treasuries last week as a sign of immunity. The U.S. is already infected with the debt virus. It’s still in its incubation period.
BC: But when private debt growth and associated increasing returns to financial capital have been the primary source of growth since the early '80s to early to mid-'70s, increasing government borrowing and spending to make up for the loss of debt growth in the private sector only results in government debt eventually growing faster than exponential vs. incomes, production, and GDP, setting the stage for fiscal insolvency atop private sector debt-deflation.
No EMU country will be allowed to default, whatever the moral hazard. Mrs Merkel seems to have bowed to extreme pressure as contagion spread to Portugal, Ireland, and -- the two clinchers -- Spain and Italy. "We have a serious situation, not just in one country but in several," she said.
German Chancellor Angela Merkel accused the financial industry of playing dirty. "First the banks failed, forcing states to carry out rescue operations. They plunged the global economy over the precipice and we had to launch recovery packages, which increased our debts, and now they are speculating against these debts. That is very treacherous," she said. "Governments must regain supremacy. It is a fight against the markets and I am determined to win this fight".
For now, the world has avoided a financial cataclysm that would have been as serious and far-reaching as the collapse of Lehman Brothers, AIG, Fannie and Freddie in September 2008, and perhaps worse given the already depleted capital ratios of banks and the growing aversion to sovereign debt
The judges have denied an immediate injunction on aid to Greece, saying that it would to be too "dangerous" to take such a step on limited facts, but it has not yet decided whether to hear the case. The battle has escalated in any case. The new EU rescue mechanism is to be permanent and no longer just bilateral help, if Mr Sarkozy is right. The professors have been given an open goal. One almost suspects that the Kanzleramt in Berlin is so weary of this dispute that it has given up worrying about lawsuits. If the judges block an EU debt union, be it on their heads.
Nor is this rescue fund any more than chemotherapy for the cancer eating away at the foundations of monetary union. It is not a cure. The rot set it when the South joined EMU before it was ready to cope with ultra-low interest rates or match German wage-bargaining. The ECB made matters worse by gunning M3 at an 11pc rate during the bubble. Club Med lurched from credit boom to bust. It is now trapped in debt deflation at an over-valued exchange rate, like Argentina with its dollar peg in 2001 until air force helicopters rescued President De La Rua from the roof of the Rosada.
The answer to this -- if the objective is to save EMU -- is for Germany to boost its growth and tolerate higher `relative' inflation. This would allow the South to close the gap without tipping into a 1930s Fisherite death spiral. Yet Europe will have none of it. The weekend deal demands yet more belt-tightening from the South. Portugal is to shelve its public works projects. Spain has pledged further cuts. As for Germany, it is preparing fiscal tightening to comply with the new balanced budget amendment in its Grundgesetz.
While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union. Stephen Lewis from Monument Securities says Europe's leaders have forgotten the lesson of the "Gold Bloc" in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal. We all know how it ended.
What is your sense? Do you think that the Eurozone is going to shrink because of what we are witnessing in Portugal, Greece and Spain?
Eventually the euro is unfortunately going to break up. I am afraid because it keeps weakening itself from within. If they would let Greece go bankrupt, for instance, it would strengthen the euro, and it would strengthen the Eurozone because people would know you have to maintain a sound economy, you have to maintain a sound currency and everybody would jump in and buy the euro. I would buy more if that would be case. Weakening from within and continuing to lend money and paper over problems is not a solution for a sound currency. I do own the euro, don’t get me wrong, but I do not think this is the proper approach.
We are also seeing the impact of the crisis on most commodity markets. Do you think that this is just temporary and commodity is still the place for investors to be?
Yes, gold is making all time highs in some currencies. So some currencies are doing well during this period of time. But to your bigger question, if the world economy gets better then obviously commodities are going to do better because the world would use more and there are shortages developing. But let’s assume the worst, let’s assume the world economies does not get better, the things continue to get there, then I would rather be in commodities in most things because governments are going to print even more money, and whenever you’ve had to print money throughout history, it led to higher prices for real goods whether it is silver or natural gas, whatever it happens to be. So, I would rather own commodities over the next two or three years.
When a central bank turns to buying the bonds in order to support their price, or more properly the interest rate paid, this is the beginning of the end, the point at which the national currency becomes little more than a Ponzi scheme, creating more money to pay the interest on the old money.
Now both the US Federal Reserve the Bank of England, and the ECB have fallen into this. We are seeing the controlled demolition of the fiat currencies of the developed world. This will resolve itself no later than 2018, and probably before that. For that is the outer bound of when the US will be unable to service its debt without at least a selective default, a draconian diktat, or resort to hyperinflation.
So not only are Americans bailing out our own too big to fail banks, but we're bailing out foreign mega-banks as well. Even though bailing out Europe might make sense if America was flush with cash, things are different now. As Congressmen Kucinich and Filner wrote last June: Our country and this body cannot afford to spend American tax payer dollars to bail out private European banks.
"Look at what Soros did to the Bank of England in 1992 - he went after them, they had a finite amount of dollars, he was selling sterling and taking the dollars, and they were buying the sterling and selling the dollars to defend the peg. All he had to do was sell more than they had and he wins. But he needed real money to do that. Today you can break a country, you don't need money you just need synthetic euroshorts or CDS. A trillion dollar bailout: Goldman can create 10 trillion of euroshorts. So it just dominates whatever governments can do. So basically Goldman can create shorts faster than Europe can create money."
There’s a lot of talk about some fat-fingered trades and technical issues causing that steep drop but I think that’s masking deeper, fundamental issues. Currencies were trading wildly all day, well before the 2:30 debacle in the stock market. Even Dennis Gartman said he’d seen nothing like those currency moves in his 30+ years of trading. I watched a lot of CNBC tonight and most of the talk is about what can be done regulation-wise to prevent the kind of slide we saw today. It made me flash back to October 2008.
The idea that a fat-fingered trade out of Citi was the cause has been denied by the bank. The downdraft did have the look of a monster sell order, but the more credible explanation is that it was either a sudden rise in yen or the euro hitting the magic number 1.225 to the dollar that set off algorithmic traders. And enough of them look to similar indicators and technical levels that it isn’t hard to see this as the son of program trading, mindless computer-driven selling when the right triggers are hit.
But another side effect of today’s equity market gyrations is further distrust in the markets, particularly by retail buyers. I am told that various retail trading platforms were simply not operating during the acute downdraft and rebound. I couldn’t access hoi polloi Bloomberg news or data pages then either. The idea that the pros could trade (even if a lot of those trades are cancelled) while the little guy was shut out reinforces the perception that the markets are treacherous and the odds are stacked in favor of the big players (even though we all understand that, it isn’t supposed to be this blatant).
Here's another version:
Fil Zucchi at Minyanville:
'Since everyone has an opinion on yesterday's 5 minute plunge, let me offer this:
•We've oft discussed that a tell-tale sign of risk withdrawal is a rising JPY/USD •Currency movements are measured in 1/100 of a cent •Between 10:50 and 14:00 yesterday, the JPY/USD rose 307 bps.; that's the kind of move people usually position for over a year period, not 3 hours •Between 14:00 and 14:10 the JPY/USD gained another 100 bps. ; the S&P 500 (SPX) fell a modest 6 points in that time frame •The plunge in the equity markets began in earnest at 14:10, after traders were already disorderly buying JPY/USD • After 14:10 the JPY/USD gained another 150 bps. And that's when the SPX went into a tail-spin
Interpret the data as you wish, but the JPY/USD signaled crash-like risk aversion before the SPX went off the cliff. Maybe panic caused a "fat finger", but to these tired eyes, the selling was no mistake.'
Oh ye crazed randomwalkers, no doubt some revisionist rationale will be provided as to why the models don't, can't, and won't explain this latest 'reality' show.
The initial mongering (PHD and the like) crowd will hold up as a sticks-and-glue proof, that the bubbles in your soda pop do in fact explain the bubbles in your portfolio, something called the Generalized Auto-Regressive Conditional Heteroskedasticity Model and its variations. Seriously, you can look it up!
My retort? Got fractals?
What has been will be again, what has been done will be done again; there is nothing new under the sun.
The Band of the Hand can only create a Potemkin demand...
As in, the Atlanta Fed confirming that the major contributor to income growth during the past several months has been transfer payments.
As in, that birth death model... it ain't payin' no taxes!
Bread and Circuses divert folks from staring at the 'chickenless' pot...
As in , no Fed audit, no breakin' up the banks, but hey we might limit ATM fees to 50 cents!
And soon coming to the cineplex near you, the horror film, 99 Weeks Later.
They will inflate until they can’t. Inflation rewards those that have their wealth first. All roads lead to deflation. The stock market will bottom when no one cares. Much like the aristocracy when the barbarians are at the gates… you save the silver (banks) first. They will destroy the village (dollar and markets) in order to save it. After the deflation is overwhelmed, the West will never be the same.
In 1982 S&P bottomed at 6.6 P/E, a 15% earnings yield...
In 1974 S&P bottomed at 7.9 P/E, a 12.66% earnings yield...
In 1932 S&P bottomed at 5.6 P/E, a 17.86% earnings yield...
And 2012 is 40 days and 40 nights from 1932 dontchaknow...
History ingeminates and the truths you hold to be most dear are lies told to you by liars.
Having seen the capitulation unfold second by second and then listen to CNBC come up with every excuse under the sun just got under my skin. I've decided to chart some of our one second analytics charts of the capitulation unfolding on our screens. The chart below (more to follow) captures the moment of the final capitulation, before the reversal today. The idea that it was a 'fat finger' error is ludicrous; unless the fat finger hit every market in the world virtually simultaneously. Liquidity simply left the world financial markets for about four minutes this afternoon. The bids just vanished. And what else vanished? Remember the vaunted supplemental liquidity providers, led by Goldman Sachs. Remember that they are paid to "provide liquidity" through their predatory high-frequency algos, they are not required to do so. So when the S@#$T hit the fan they just disappeared. In one second more or less someone (and yes, under these circumstances, human beings take control of the machines) made the decision to pull the bids on every equity in the S&P, every financial futures contract, every FX contract in every market in the world. This kind of thing just doesn't happen in a pure auction environment; there just isn't a tight enough communication link between the parties to allow the decisions to propagate within the same second -- even with HFT algorithms. No. Some human made the decision to pull the bids; all of them, all at once. If that is not a condemnation of the concentration of financial power and the systematic risk it engenders I don't know what is.
As you look from the top to the bottom of this chart (1 second histograms) you will see first the TICK of all US securities falling rapidly; then as it hit -3700 (that's a record 3700 stocks ticking down vs up), look down the chart and see what happens. The markets freeze; there are no bids anywhere. There is virtually no trading, no shares changing hands (e-mini time and sales will show 8 or 10 contracts at each level for some moments here, but that is virtually nothing).
The next graph is the ESM10 e-mini contract. At 1444 and change it just drops like a stone. The EURJPY below it goes into free fall at exactly the same second. The USDJPY below it drops but then holds steady for nearly a minute (carry unwinders are at this point looking for dollars ANYwhere, even against the YEN).
At about the same moment the 10yr US treasury futures contract catches air; the money has to go somewhere. Gold ironically does is behind the 10yr futures in getting rocketed. This is the kind of thing we take a couple of hours to deconstruct; more on this in a follow-up post. But notice that we have the same phenomena here: there are suddenly no offers for either the treasuries or gold. (note I am comparing apples and oranges here; GLD vs 10yr FUT; this bears further analysis; if the lag bears out, but then switches out at some other point in the (near) future we would find this extremely significant)
Now, next you see Procter & Gamble. I included this because it was the focus of the idiotic (and I mean this with all the love in my heart for the CNBC 'analysts'; it must be tough when you don't have a teleprompter). Supposedly there was a 'glitch' that caused PG to trade hugely down. In reality it simply behaved in unison with every other instrument in the entire global market at that moment.The bids were gone. Nevermind that the NYSE didn't trade that low; they only control a quarter of the action anyway; ask someone what their supplemental 'liquidity providers' were doing at that moment.
You can see by looking at the $TICK above that not all stocks traded quite the same. There are courageous (read foolish) retail traders out there that actually put a bid in when they disappeared everywhere else and got hit.
Otherwise, in every other market, NOTHING got hit until nearly SIMULTANEOUSLY the bids were back in the market, albeit at a hugely lower price (vice versa for GLD and treasuries). At this point, in most (non retail markets) there was such a huge spread that it took nearly 3 minutes (minutes!) for the bids to find someone to buy from -- at this point the sellers, algos watched by humans, are anticipating a snap-back and are not going to sell cheap. The drop into the abyss is over and 'normal' trading resumes, on about 14:48. Volumes, and the order book flow were a sight to behold. Hopefully it was a once in a lifetime event; but don't hold your breath.
Finally notice that the EURUSD and AUDUSD are slightly late to the game to recover. Although the auction resumes about the same time, they continue to print precipitously longer. This is all the confirmation of Cluesix' AUD analysis I need. No one is talking about it today, but after Asia tonight they will; Asia (and even China) are next
"We've seen a crisis start in a country—Greece—become regional, impact the whole of the Euro zone and is on the verge of truly going global," said El-Erian, CEO of the world's biggest bond fund.
He said the debt is a "transmission mechanism to go from country to region to global. So we should take this very seriously."
"We are not Greece. We have more time. But what the Greek crisis tells you is debt and deficits matter," El-Erian said. "The structure of your deficits matter and the US doesn't have much flexibility."
"Don't underestimate how quickly this can happen," he added. "There are structural headwinds out there and we better get our act together before those structural headwinds become overwhelming."
"What you see is the system slowly starting to have cascading failures. It's like a pipe that you need to be free-flowing and it starts to clog, and that's a concern," El-Erian said. "This is a shock to the system and it's going to have an impact on valuation."
Two comments on the article also caught my interest.
One trader who spoke on condition of anonymity said fixed-income desks in Europe shut down early for the day and that "European banks are halting lending now."
Anonymous trader but if what's said is true.. hello liquidity crisis!
About an hour or so after El-Erian spoke, global stocks sold off sharply with major US averages shedding more than 3 percent.
For starters, let's all keep in mind that these things don't happen in a healthy tape. The jitters from Greek rioting and possible contagion were the necessary preconditions for a crash like that.
The "Fat Finger" thing is nonsense. Maybe someone made a sizable error, but one cannot deny the fact that the algo-driven tradebots poured gasoline on the fire. The machines were triggering stops and wrecking everything in sight before human beings with qualitative senses could get a handle on what was happening. Congress is planning the hearings as we speak.
For me to enter a sell order for a retail brokerage client of 500 shares of Microsoft ($MSFT), I need to go through 3 screens of verification and order confirmation. How is it possible that someone with the clearance to sell 16 billion shares of the S&P Spider could even have a typo? If I have 3 screens to confirm a trade, how much order verification does he have?
Look at your keyboard...the "M" for million is not even next to the "B" for billion. There's an "N" in between the two keys. Dude, how fat is your finger?
If you were intentionally trying to chase the last of the individual investors from this market you couldn't have written a better script than "accidental trade vaporizes trillions in value from US stocks". People are just disgusted already.
Cramer was so money today. Whatever you think about him in general, he's the guy that came on CNBC down 1000 and told you that these were fake quotes, to go buy Proctor & Gamble ($PG) down 20 points. He was cool, calm and perfect in that slot.
We still don't know whether or not any of the trades from that session will be unwound by broker/dealers. There were a ton of stop loss orders hit and people missed fills entirely in many cases. We should hear about that soon. Let the bickering begin!
Anyone who told you he bought down 1000 is lying to you. Bids were raised off those levels in seconds.
There’s a lot of talk about some fat-fingered trades and technical issues causing that steep drop but I think that’s masking deeper, fundamental issues. Currencies were trading wildly all day, well before the 2:30 debacle in the stock market. Even Dennis Gartman said he’d seen nothing like those currency moves in his 30+ years of trading. I watched a lot of CNBC tonight and most of the talk is about what can be done regulation-wise to prevent the kind of slide we saw today. It made me flash back to October 2008.
So back to the more fundamental stuff… The focus really needs to be on what’s going on in Europe and the possibility of global contagion. This afternoon CNBC had live coverage of a stand-off between Greek police and protesters of Greece’s newly passed austerity package. It seemed to me that as soon as the police surged to disperse that particular crowd is when the selling really got going. That’s what got the Dow from down 150 to down 300 or so. It’s anybody’s guess as to what caused the rest of that 10% slide. But let’s not celebrate because we ended down *only* 3%. Serious technical damage was done today. There’s also some talk that the market will *have to* test today’s lows based on what’s happened in the past. So this is certainly a time to stay on your toes — long or short. Fast market situations like today can be quite treacherous.
Worden was in rare form in tonight’s report, so I thought I’d share what he had to say. (Emphasis is mine): The Computers Did It!?!? I suggest you forget all this nonsense about the glitches in computers and software being the true culprits behind today’s near collapse. Today’s mentality would lead to charging the NYSE with fraud. The market has been waiting for something like this to happen since the bottom in March of 2009 occurred, over a year ago. Why? Because this is the way primary bear markets end. The market has to prove itself before a bear can advance into a bull market once again. It can only prove itself by going up and down a number of times until it becomes clear that it has the strength to go on to better things. It does this by providing comparisons with preceding trends in the opposite direction.
I should point out that the capitulation we saw today could be followed by repeated shakeouts of the same type. The first shakeout is almost invariably followed by at least one more shakeout. A series of shakeouts eventually form themselves into any one of many possible bottom formations, and the breakout above that designates that the bear is dead.
Standard & Poor's cut its ratings on Spain by one notch to AA from AA-plus Wednesday, saying a longer-than-expected period of low growth could undermine efforts to cut the budget deficit.
The outlook is negative, reflecting the possibility of another downgrade if Spain's fiscal position worsens more than S&P currently expects, the agency said in a statement.
"In our opinion, Spain is likely to have an extended period of subdued economic growth, which weakens its budgetary position," Standard & Poor's said.
"We now project that real GDP growth will average 0.7 percent annually in 2010-2016, versus our previous expectations of above 1 percent annually over this period," S&P said.
Spain is on track to bring its public deficit within an EU limit by 2013, its finance minister said on Wednesday after ratings agency Standard & Poor's cut the country's credit rating.
"We have a plan to reduce the deficit, we are putting it in place, we are meeting one by one all the timelines which we have set," Elena Salgado said during an interview with public television TVE.
"I believe the markets will evaluate the situation this way. When the situation in Greece is resolved, I believe things will return to their right place," she added....
With the help of Uncle Google's language translation: here
An error by the National Institute Estadísitca (INE) provided further insights on the morning of yesterday, for a few minutes, unemployment data from the Labour Force Survey (LFS) for the first quarter of 2010 to be made public on Friday.
According to those who had access to the paper, the unemployment rate in the first quarter rose to 20.05%. Es It is the first time since 1997 that exceeds the benchmark rate of 20%. The clarification came in the early hours of the morning.
The EPA in the first quarter of 2010 indicates that the number of unemployed persons was 4.6127 million, ie more than 286 200 end of 2009 (4.3265 million). .....
Citigroup has just released a forecast which is very troubling in regards to employment and growth in the Spanish economy. With unemployment already having hit 17.9%, Citigroup expects layoffs to increase this to 22% in 2010....
Basically, things are looking bleak in Spain despite the positive spin some are putting on today’s numbers. Hopefully my last two posts on Spain, House price declines accelerate in Spain and Hypo Real Estate need for 10 billion also reveals huge problems in Spain, give you a sense that there is more downside to come for Spain’s property sector and its banking sector. This very definitely will negatively impact the employment market in Spain. Zapatero should feel lucky he was re-elected last year or he too would soon find himself unemployed.
MADRID—Spain's worsening financial crisis remains a strangely low-key affair. One in five people here are out of work, but generous unemployment benefits, strong family support networks and a bustling informal economy are helping maintain people's lifestyles. Bars and restaurants in the city center are doing brisk business.
"It seems to me the situation here is less bad than in Greece," says Manuel Herrera, a 30-year-old Peruvian immigrant, who has seen the recent images of angry mobs protesting in Athens. "Here in Spain, the crisis is not so noticeable: People still go out for beers, to buy cigarettes, whatever."
But the Asian-restaurant chain he works for as a cook has closed down four of its 12 restaurants, and Mr. Herrera says he sees a sense of hopelessness setting in that could point to prolonged economic stagnation.
"The Spanish were not ready for this crisis," he says. "The situation's not getting any worse, but it's not getting any better either."
For years, Spain was one of the euro zone's biggest success stories. Membership in the common currency in 1999 brought historically low interest rates that fueled a credit and construction boom, which transformed the country into one of Europe's chief growth engines. Through 2007, Spain created more than one-third of all euro-zone jobs and absorbed four million immigrants.
The global financial crisis brought that crashing down. Spain is grappling with 20% unemployment and a double-digit budget deficit that threatens to land the country in a Greek-style financial crisis.
Though the government expects the economy to return to growth in the first quarter, that follows contractions in six consecutive quarters.
On Wednesday, Standard & Poor's cited low growth prospects resulting from mounting banking-system stress, high household debt levels and low export capacity as primary factors behind its decision to downgrade Spain's sovereign debt.
Thirty-year-old Eduardo lost his job as a computer programmer a year ago and says many of his friends are also out of work. He still isn't ready to take just any job: "There are jobs out there, but most of them don't pay to well, or they require higher levels of experience."
Until recently, the government of Socialist Prime Minister José Luis Rodríguez Zapatero has focused on anticrisis measures to cushion the pain of the unemployed by extending benefits, cutting taxes and taking measures to create short-term jobs for construction workers. It has gone to great pains to maintain good relations with unions.
But the government has changed gears amid mounting pressure from international investors to show it can pull the economy out of the doldrums and get its debt levels back on a sustainable path. It has announced plans to cut the public-sector wage bill, push back the retirement age and reform Spain's rigid labor market. The plans are vague thus far and have yet to ruffle many feathers.
The government is counting on a quick agreement on a support package for Greece to contain the euro-zone financial crisis and buy Spain more time to get its fiscal house in order. In an interview, Deputy Finance Minister José Manuel Campa said Spanish bond spreads have been blown out to "exceptional" levels that he believes are temporary. "Considering that they have been affected by the Greek situation, the sooner it is resolved, the better," he said.
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