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The Fed is Fighting the Wrong Battle Again… And Creating Yet Another Crisis | Zero Hedge

The Fed is Fighting the Wrong Battle Again… And Creating Yet Another Crisis | Zero Hedge.

A critical element for investors to consider is that the Fed is not forward thinking when it comes to monetary policy. Indeed, if we reflect on the last 15 years, we see that the Fed has been well behind the curve on everything.

First and foremost, recall that Alan Greenspan was concerned about deflation after the Tech Crash (this, in part is why he hired Ben Bernanke, who was considered an expert on the Great Depression).

Bernanke and Greenspan, both fearing deflation (Bernanke’s first speech at the Fed was titled “Deflation: Making Sure It Doesn’t Happen Here”), created one of the most extraordinary bouts of IN-flation the US has ever seen.

From 1999 to 2008, oil rose from $10 per barrel to over $140 per barrel. Does deflation look like it was the issue here?

Over the same time period, housing prices staged their biggest bubble in US history, rising over three standard deviations away from their historic relationship to incomes.

Here are food prices during the period in which Greenspan and then Bernanke saw deflation as the biggest threat to the US economy:

The message here is clear, the Greenspan/ Bernanke Fed was so far behind the economic curve, that it created one of the biggest inflationary bubbles in history in its quest to avoid deflation.

Indeed, by the time deflation did hit (in the epic crash of 2007-2008), the Fed was caught totally off guard. During this period, Bernanke repeatedly stating that the subprime bust was contained and that the overall spillage into the economy would be minimal.

Deflation reigned from late 2007 to early 2009 with the Fed effectively powerless to stop it. Then asset prices bottomed in the first half of 2009. From this point onward, generally speaking, prices have risen.

The Fed, however, continued to battle deflation in the post-2009 era, unveiling one extraordinary monetary policy after another. They’ve done this at a period in which stocks and oil have skyrocketed:

 

Home prices bottomed in 2011 and have since turned up as well (in some areas, prices now exceed their bubble peaks):

 

 

Which brings us to today. Inflation is once again rearing its head in the financial system with the cost of living rising swiftly in early 2014.

 

Rents, home prices, food prices, energy prices, you name it, they’re all rising.

 

And the Fed is once again behind the curve. Indeed, Janet Yellen and Bill Evans, two prominent members what is now the Yellen Fed (Bernanke stepped down in January), have both recently stated that inflation is too low. They’ve also emphasized that rates need to remain at or near ZERO for at least a year or two more.

 

Investors should take note of this. The Fed claims to be proactive, but its track record shows it to be way behind the curve with monetary policy for at least two decades. Barring some major development, there is little reason to believe the Yellen Fed will somehow be different (Yellen herself is a huge proponent of QE and the Fed’s other extraordinary monetary measures).

 

Which means… by the time the Fed moves to quash inflation, the latter will be a much, much bigger problem than it is today.

 

For a FREE Special Report on how to protect your portfolio from inflation, swing by

www.gainspainscapital.com

 

Best Regards

Phoenix Capital Research

The Fed is Fighting the Wrong Battle Again… And Creating Yet Another Crisis | Zero Hedge

The Fed is Fighting the Wrong Battle Again… And Creating Yet Another Crisis | Zero Hedge.

A critical element for investors to consider is that the Fed is not forward thinking when it comes to monetary policy. Indeed, if we reflect on the last 15 years, we see that the Fed has been well behind the curve on everything.

First and foremost, recall that Alan Greenspan was concerned about deflation after the Tech Crash (this, in part is why he hired Ben Bernanke, who was considered an expert on the Great Depression).

Bernanke and Greenspan, both fearing deflation (Bernanke’s first speech at the Fed was titled “Deflation: Making Sure It Doesn’t Happen Here”), created one of the most extraordinary bouts of IN-flation the US has ever seen.

From 1999 to 2008, oil rose from $10 per barrel to over $140 per barrel. Does deflation look like it was the issue here?

Over the same time period, housing prices staged their biggest bubble in US history, rising over three standard deviations away from their historic relationship to incomes.

Here are food prices during the period in which Greenspan and then Bernanke saw deflation as the biggest threat to the US economy:

The message here is clear, the Greenspan/ Bernanke Fed was so far behind the economic curve, that it created one of the biggest inflationary bubbles in history in its quest to avoid deflation.

Indeed, by the time deflation did hit (in the epic crash of 2007-2008), the Fed was caught totally off guard. During this period, Bernanke repeatedly stating that the subprime bust was contained and that the overall spillage into the economy would be minimal.

Deflation reigned from late 2007 to early 2009 with the Fed effectively powerless to stop it. Then asset prices bottomed in the first half of 2009. From this point onward, generally speaking, prices have risen.

The Fed, however, continued to battle deflation in the post-2009 era, unveiling one extraordinary monetary policy after another. They’ve done this at a period in which stocks and oil have skyrocketed:

 

Home prices bottomed in 2011 and have since turned up as well (in some areas, prices now exceed their bubble peaks):

 

 

Which brings us to today. Inflation is once again rearing its head in the financial system with the cost of living rising swiftly in early 2014.

 

Rents, home prices, food prices, energy prices, you name it, they’re all rising.

 

And the Fed is once again behind the curve. Indeed, Janet Yellen and Bill Evans, two prominent members what is now the Yellen Fed (Bernanke stepped down in January), have both recently stated that inflation is too low. They’ve also emphasized that rates need to remain at or near ZERO for at least a year or two more.

 

Investors should take note of this. The Fed claims to be proactive, but its track record shows it to be way behind the curve with monetary policy for at least two decades. Barring some major development, there is little reason to believe the Yellen Fed will somehow be different (Yellen herself is a huge proponent of QE and the Fed’s other extraordinary monetary measures).

 

Which means… by the time the Fed moves to quash inflation, the latter will be a much, much bigger problem than it is today.

 

For a FREE Special Report on how to protect your portfolio from inflation, swing by

www.gainspainscapital.com

 

Best Regards

Phoenix Capital Research

FOURTH TURNING: THE PEOPLE vs BIG BROTHER « The Burning Platform

FOURTH TURNING: THE PEOPLE vs BIG BROTHER « The Burning Platform.

 

“The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort – in other words, a total war. Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind’s willingness to use it.” – Strauss & Howe – The Fourth Turning

 

 

 

“In the need to develop a capacity to know what potential enemies are doing, the United States government has perfected a technological capability that enables us to monitor the messages that go through the air. Now, that is necessary and important to the United States as we look abroad at enemies or potential enemies. We must know, at the same time, that capability at any time could be turned around on the American people, and no American would have any privacy left such is the capability to monitor everything—telephone conversations, telegrams, it doesn’t matter. There would be no place to hide.

 

If this government ever became a tyrant, if a dictator ever took charge in this country, the technological capacity that the intelligence community has given the government could enable it to impose total tyranny, and there would be no way to fight back because the most careful effort to combine together in resistance to the government, no matter how privately it was done, is within the reach of the government to know. Such is the capability of this technology.

 

I don’t want to see this country ever go across the bridge. I know the capacity that is there to make tyranny total in America, and we must see to it that this agency and all agencies that possess this technology operate within the law and under proper supervision so that we never cross over that abyss. That is the abyss from which there is no return.” – Frank Church on Meet the Press regarding the NSA – 1975

 

Ever since Edward Snowden burst onto the worldwide stage in June 2013, I’ve been wondering how he fits into the fabric of this ongoing Fourth Turning. This period of Crisis that arrives like clockwork, 60 to 70 years after the end of the previous Fourth Turning (Civil War – 66 years after American Revolution, Great Depression/World War II – 64 years after Civil War, Global Financial Crisis – 62 years after World War II), arrived in September 2008 with the Federal Reserve created collapse of the global financial system. We are now five and a half years into this Fourth Turning, with its climax not likely until the late-2020’s. At this point in previous Fourth Turnings a regeneracy had unified sides in their cause and a grey champion or champions (Ben Franklin/Samuel Adams, Lincoln/Davis, FDR) had stepped forward to lead. Thus far, no one from the Prophet generation has been able to unify the nation and create a sense of common civic purpose. Societal trust continues to implode, as faith in political, financial, corporate, and religious institutions spirals downward. There is no sign of a unifying regeneracy on the horizon.

 

The core elements of this Fourth Turning continue to propel this Crisis: debt, civic decay, global disorder. Central bankers, politicians, and government bureaucrats have been able to fashion the illusion of recovery and return to normalcy, but their “solutions” are nothing more than smoke and mirrors exacerbating the next bloodier violent stage of this Fourth Turning. The emergencies will become increasingly dire, triggering unforeseen reactions and unintended consequences. The civic fabric of our society will be torn asunder.

 

In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. The catalyst will unfold according to a basic Crisis dynamic that underlies all of these scenarios: An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. If foreign societies are also entering a Fourth Turning, this could accelerate the chain reaction. At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability – problem areas where America will have neglected, denied, or delayed needed action.” – The Fourth Turning – Strauss & Howe

 

Debt

 

The core crisis element of debt is far worse than it was at the outset of this Crisis in September 2008. The National Debt has risen from $9.7 trillion to $17.5 trillion, an 80% increase in five and half years. It took 215 years for the country to accumulate as much debt as it has accumulated since the start of this Crisis. We continue to add $2.8 billion a day to the National debt, and the president declares it is time for this austerity to end. The total unfunded liabilities of the Federal government for Social Security, Medicare, Medicaid, government pensions and now Obamacare exceeds $200 trillion and is mathematically impossible to honor. Corporate debt stands at an all-time high. Margin debt is at record levels, as faith in the Federal Reserve’s ability to levitate the stock market borders on delusional. Consumer debt has reached new heights, as the government doles out subprime auto loans to deadbeats and subprime student loans to future University of Phoenix Einsteins. Global debt has surged by 40% since 2008 to over $100 trillion, as central bankers have attempted to cure a disease caused by debt with more debt.

 

All of this debt accumulation is compliments of Bernanke/Yellen and the Federal Reserve, who have produced this new debt bubble with their zero interest rate policy and quantitative easing that has driven their balance sheet from $935 billion of mostly Treasury bonds in September 2008 to $4.2 trillion of toxic mortgage garbage acquired from their owners – the insolvent Too Big To Trust Wall Street banks. This entire house of cards is reliant upon permanently low interest rates, the faith of foreigners in our lies, and trust in Ivy League educated economists captured by Wall Street. This debt laden house of cards sits atop hundreds of trillions of derivatives of mass destruction used by the Wall Street casinos to generate “riskless” profits. When, not if, a trigger ignites this explosive concoction of debt, the collapse will be epic and the violent phase of this Fourth Turning will commence.

 

Civic Decay

 

The core crisis element of civic decay is evident everywhere you turn. Our failed public educational system is responsible for much of the civic decay, as a highly educated critical thinking populace is our only defense against a small cabal of bankers and billionaires acquiring unwarranted influence and control over our country. Our children have been taught how to feel and to believe government propaganda. The atrocious educational system is not a mistake. It has been designed and manipulated by your owners to produce the results they desire, as explained bluntly by George Carlin.

 

 

 

 

 

“There’s a reason that education sucks, and it’s the same reason it will never ever ever be fixed. It’s never going to get any better, don’t look for it. Be happy with what you’ve got. Because the owners of this country don’t want that. I’m talking about the real owners now, the big, wealthy, business interests that control all things and make the big decisions. They spend billions of dollars every year lobbying to get what they want. Well, we know what they want; they want more for themselves and less for everybody else. But I’ll tell you what they don’t want—they don’t want a population of citizens capable of critical thinking. They don’t want well informed, well educated people capable of critical thinking. They’re not interested in that. That doesn’t help them. That’s against their interest.”

 

The urban ghettos become more dangerous and uninhabitable by the day. The inner cities are crumbling under the weight of welfare spending and declining tax revenues. The very welfare policies begun fifty years ago to alleviate poverty have hopelessly enslaved the poor and ignorant in permanent squalor and destitution. The four decade old drug war has done nothing to reduce the use of drugs. It has benefited the corporate prison industry, as millions have been thrown into prison for minor drug offenses. Meanwhile, millions more have been legally addicted to drugs peddled by the corporate healthcare complex. The culture warriors and advocates of new rights for every special interest group continue their never ending battles which receive an inordinate amount of publicity from the corporate media. Class warfare is simmering and being inflamed by politicians pushing their particular agendas. Violence provoked by race and religion is growing by the day. The fault lines are visible and the imminent financial earthquake will push distress levels beyond the breaking point. Once the EBT cards stop working, all hell will break loose. Three days of panic will empty grocery store shelves and the National Guard will be called out to try and restore control.

 

Global Disorder

 

The core crisis element of global disorder is evident everywhere you turn. The false flag revolution in the Ukraine, initiated by the U.S. and EU in order to blunt Russia’s control of natural gas to Europe, has the potential to erupt into a full blown shooting war at any moment. The attempt by Saudi Arabia, Israel and the U.S. to overthrow the Syrian dictator in order to run a natural gas pipeline across their land into Europe was blunted by Russia. Iraq is roiled in a civil war, after the U.S. invaded, occupied and destabilized the country. After 12 years of occupation, Afghanistan is more dysfunctional and dangerous than it was before the U.S. saved them from the evil Taliban. Unrest, violent protests, and brutal measures by rulers continue in Egypt, Turkey, Thailand, Venezuela, Bahrain, Brazil, and throughout Africa. American predator drones roam the skies of the world murdering suspected terrorists. The European Union is insolvent, with Greece, Spain, Italy and Portugal propped up with newly created debt. Austerity for the people and prosperity for the bankers is creating tremendous distress and tension across the continent. A global volcanic eruption is in the offing.

 

It is clear to me the American Empire is in terminal decline. Hubris, delusion, corruption, foolish disregard for future generations and endless foreign follies have set in motion a chain of events that will lead to a cascading sequence of debt defaults, mass poverty, collapsing financial markets, and hyperinflation or deflation, depending on the actions of feckless bankers and politicians. There is no avoiding the tragic outcome brought on by decades of bad choices and a century of allowing private banking interests to control our currency. The “emergency” QE and ZIRP responses by the Federal Reserve to the Federal Reserve created 2008 financial collapse continue, even though the propaganda peddled by the Deep State tries to convince the public we have fully recovered. This grand fraud cannot go on forever. Ponzi schemes no longer work once you run out of dupes. With societal trust levels approaching all-time lows and foreign countries beginning to understand they are the dupes, another global financial crisis is a lock.

 

The Snowden Factor

 

With ten to fifteen years likely remaining in this Fourth Turning Crisis, people familiar with generational turnings can’t help but ponder what will happen next. Linear thinkers, who constitute the majority, mistakenly believe things will magically return to normal and we’ll continue our never ending forward human progress. Their ignorance of history and generational turnings that recur like the four seasons will bite them in the ass. We are being flung forward across the vast chaos of time and our existing social order will be transformed beyond recognition into something far better or far worse. The actual events over the coming decade are unknowable in advance, but the mood and reactions of the generational archetypes to these events are predictable. The actions of individuals will matter during this Fourth Turning. The majority are trapped in their propaganda induced, techno distracted stupor of willful ignorance. It will take a minority of liberty minded individuals, who honor the principles of the U.S. Constitution and are willing to sacrifice their lives, to prevail in the coming struggle.

 

Despite fog engulfing the path of future events, we know they will be propelled by debt, civic decay, and global disorder. Finding a unifying grey champion figure seems unlikely at this point. I believe the revelations by Edward Snowden have set the course for future events during this Fourth Turning. The choices of private citizens, like Snowden, Assange, and Manning, have made a difference. The choices we all make over the next ten years will make a difference. A battle for the soul of this country is underway. The Deep State is firmly ingrained, controlling the financial, political and educational systems, while using their vast wealth to perpetuate endless war, and domination of the media to manipulate the masses with propaganda and triviality. They are powerful and malevolent. They will not relinquish their supremacy and wealth willingly.

 

Snowden has revealed the evil intent of the ruling class and their willingness to trash the Constitution in their psychopathic pursuit of mammon. The mass surveillance of the entire population, locking down of an entire city in pursuit of two teenagers, military training exercises in major metropolitan areas, militarization of local police forces by DHS, crushing peaceful demonstrations with brute force, attempting to restrict and confiscate guns, molesting innocent airline passengers, executive orders utilized on a regular basis by the president, and treating all citizens like suspects has set the stage for the coming conflict. Strauss & Howe warned that history has shown armed conflict is always a major ingredient during a Fourth Turning.

 

“History offers even more sobering warnings: Armed confrontation usually occurs around the climax of Crisis. If there is confrontation, it is likely to lead to war. This could be any kind of war – class war, sectional war, war against global anarchists or terrorists, or superpower war. If there is war, it is likely to culminate in total war, fought until the losing side has been rendered nil – its will broken, territory taken, and leaders captured.” – The Fourth Turning – Strauss & Howe -1997

 

It appears to me the Deep State is preparing for armed conflict with the people. Why else would they be utilizing Big Brother methods of surveillance, militarization of police forces  and Gestapo like tactics of intimidation to control the masses? This doesn’t happen in a democratic republic where private individuals are supposed to know everything done by public government servants, not vice versa. They know the cheap, easy to access energy resources are essentially depleted. They know the system they have built upon a foundation of cheap energy and cheap debt is unsustainable and will crash in the near future. They know their fiat currency scheme is failing.They know it is going to come crashing down.  

 

They know America and the world will plunge into an era of depression, violence, and war. They also know they want to retain their wealth, power and control. There is no possibility the existing establishment can be purged through the ballot box. It’s a one party Big Brother system that provides the illusion of choice to the Proles. Like it or not, the only way this country can cast off the shackles of the banking, corporate, fascist elites, and the government surveillance state is through an armed revolution. The alternative is to allow an authoritarian regime, on par with Hitler, Stalin and Mao, to rise from the ashes of our financial collapse.This is a distinct possibility, given the ignorance and helplessness of most Americans after decades of government education and propaganda.       

 

The average mentally asleep American cannot conceive of armed conflict within the borders of the U.S. War, violence and dead bodies are something they see on their 52 inch HDTVs while gobbling chicken wings and cheetos in their Barcalounger. We’ve allowed a banking cartel and their central bank puppets to warp and deform our financial system into a hideous façade, sold to the masses as free market capitalism. We’ve allowed corporate interests to capture our political system through bribery and corruption.

 

We’ve allowed the rise of a surveillance state that has stripped us of our privacy, freedom, liberty and individuality in a futile pursuit of safety and security. We’ve allowed a military industrial complex to exercise undue influence in Washington DC, leading to endless undeclared wars designed to enrich the arms makers. We’ve allowed the corporate media and the government education complex to use propaganda, misinformation and social engineering techniques to dumb down the masses and make them compliant consumers. These delusions will be shattered when our financial and economic system no longer functions. The end is approaching rapidly and very few see it coming.

 

Glory or Ruin?

 

The scenario I envision is a collapse of our debt saturated financial system, with a domino effect of corporate, personal, and governmental defaults, exacerbated by the trillions of currency, interest rate, and stock derivatives. Global stock markets will crash. Trillions in paper wealth will evaporate into thin air. The Greater Depression will gain a choke-hold around the world. Mass bankruptcies, unemployment and poverty will sweep across the land. The social safety net will tear under the weight of un-payable entitlements. Riots and unrest will breakout in urban areas. Armed citizens in rural areas will begin to assemble in small units. The police and National Guard will be unable to regain control. The military will be called on to suppress any and all resistance to the Federal government. This act of war will spur further resistance from liberty minded armed patriots. The new American Revolution will have begun. Leaders will arise in the name of freedom. Regional and local bands of fighters will use guerilla tactics to defeat a slow top heavy military dependent upon technology and vast quantities of oil. A dictatorial regime may assume power on a Federal level. A breakup of the nation into regional states is a distinct possibility.

 

With the American Empire crumbling from within, our international influence will wane. With China also in the midst of a Fourth Turning, their debt bubble will burst and social unrest will explode into civil war. Global disorder, wars, terrorism, and financial collapse will lead to a dramatic decrease in oil production, further sinking the world into depression. The tensions caused by worldwide recession will lead to the rise of authoritarian regimes and global warfare. With “advances” in technological warfare and the proliferation of nuclear warheads, this scenario has the potential to end life on earth as we know it. The modern world could be set back into the stone-age with the push of a button. There are no guarantees of a happy ending for humanity.

 

The outcome of this Fourth Turning is dependent upon the actions of a minority of critical thinking Americans who decide to act. No one can avoid the trials and tribulations that lie ahead. We will be faced with immense challenges. Courage and sacrifice will be required in large doses. Elders will need to lead and millennials will need to carry a heavy load, doing most of the dying. The very survival of our society hangs in the balance. Edward Snowden has provided an example of the sacrifice required during this Fourth Turning. How we respond and the choices we make over the next decade will determine whether this Fourth Turning will result in glory or ruin for our nation.

 

“Eventually, all of America’s lesser problems will combine into one giant problem. The very survival of the society will feel at stake, as leaders lead and people follow. The emergent society may be something better, a nation that sustains its Framers’ visions with a robust new pride. Or it may be something unspeakably worse. The Fourth Turning will be a time of glory or ruin.” – Strauss & Howe – The Fourth Turning

 

Click these links to read the first two parts of this three part series:

 

Do No Evil Google – Censor & Snitch for the State

 

Google, China, the NSA and the Fourth Turning

2 Charts Explain Slowest Economy In History – STA WEALTH

2 Charts Explain Slowest Economy In History – STA WEALTH.

Written by Lance Roberts | Thursday, March 06, 2014

Earlier this week I discussed the expectations for an increase in reported earnings of 50%over the next two years:

“Currently, according to the S&P website, reported corporate earnings are expected to grow by 20.26% in 2014, and by an additional 20.28% in 2015.  In total, reported earnings are expected to grow by almost 50% ($100.28/share as of 2013 to $147.50/share in 2015) over the next two years.

However, as I also noted, the rise in corporate profitability has come from accounting magic and cost cutting along with a healthy dose of share buybacks.  Since there is “no free lunch,”the drive for greater corporate profitability has come at an economic expense.  Since 1999, the annual real economic growth rate has run at 1.94%, which is the lowest growth rate in history including the “Great Depression.”  I have broken down economic growth into major cycles for clarity.

GDP-Growth-ByCycle-030614

As I discussed previously:

“Since 2000, each dollar of gross sales has been increased into more than $1 in operating and reported profits through financial engineering and cost suppression.  The next chart shows that the surge in corporate profitability in recent years is a result of a consistent reduction of both employment and wage growth.  This has been achieved by increases in productivity, technology and offshoring of labor.  However, it is important to note that benefits from such actions are finite.”

The latest report on unit labor costs and productivity produced the following two charts which underscore this point and suggests that the current rate of economic growth is unlikely to change anytime soon.

stated previously, that in in 2013 reported earnings per share for the S&P 500 rose by 15.9% to a record of $100.28 per share.  Importantly, roughly 40% of that increase occurring in the 4th quarter alone.  The chart of real, inflation adjusted, compensation per hour as compared to output per hour shows a likely reason why this occurred.  The sharp increase in output per hour combined with the sharp decline in compensation costs is a direct push to bottom line profitability.

Productivity-employment-030614

However, it was not just a decrease in compensation costs but in total labor costs as well which includes benefits and other labor related costs.  This suggests that the drop off in hiring in the 4th quarter was more than just “weather” related.

Compensation-UnitLaborCosts-030614

Labor costs are one of the largest detractors from net profitability on any income statement.  The problem with cost cutting, wage suppression, labor hoarding and stock buybacks, along with a myriad of accounting gimmicks, is that there is a finite limit to their effectiveness.

I say this because of something my friend Cullen Roche recently pointed out:

We’re in the backstretch of the recovery.  We’re now into month 47 of the current economic recovery.  The average expansion in the post-war period has lasted 63 months.  That means we’re probably in the 6th inning of the current expansion so we’re about to pull our starter and make a call to the bullpen.  The odds say we’re closer to the beginning of a recession than the beginning of the expansion.  That puts the Fed in a really odd position and not likely one where they’re on the verge of tightening any time soon.”

This is a very important point.  While the Fed’s ongoing interventions since 2009 have provided support to the current economic cycle, they have not “repealed” the business cycle completely.  The Fed’s actions work to pull forward future consumption to support the current economy.  This has boosted corporate profitability at a time when the effectiveness ofcorporate profitability tools were most effective.

However, such actions leave a void in the future that must be filled by organic economic growth. The problem comes when such growth does not appear.  With the economy continuing to “struggle” at an anaemic pace, the effects of cost cutting are becoming less effective.

This is not a “bearish” prediction of an impending economic crash, but rather just a realization that all economic, and earnings, forecasts, are subject to the overall business cycle.  What the unit labor costs and productivity report suggest is that economic growth remains very weak.  This puts current forward expectations of accelerated economic and earnings growth at risk.  With asset prices extended, valuations rich and optimism at extremes, such a combination has historically become a rather toxic brew when exuberant expectations fail to align with reality.

HAA HAA: Will Another Creditanstalt Be Revealed Once The Hypo Alpe Aldria “Black Box” Is Opened? | Zero Hedge

HAA HAA: Will Another Creditanstalt Be Revealed Once The Hypo Alpe Aldria “Black Box” Is Opened? | Zero Hedge.

Recall that the bank which precipitated the first Great Depression was Austria’s Creditanstalt, which declared bankruptcy on May 11, 1931 and which resulted in a global financial crisis, after its failure waterfalled into the chain-reaction of bank failures that marked the first systemic financial collapse. As part of CA’s rescue, Chancellor Otto Ender distributed the share of bailout costs between the Republic, the National Bank of Austria and the Rothschild family (and as a bit of historic trivia, following the Austrian Anschluss to Nazi Germany in 1938, Creditanstalt-Bankverein was targeted for a variety of reasons, leading to the arrest of Louis Nathaniel Rothschild and his imprisonment for the losses suffered by the Austrian state when the bank collapsed. Aggrieved, he emigrated to the US in 1939 after more than one year in custody).

A little over 80 years later, while the world is knee deep in explaining how snow during the 4th warmest January on record is the culprit for an abrupt and dramatic slowdown in world growth, and is following the geopolitical developments out of Crimea with great attention, the real action may once again be taking place in the small, quaint and quiet central European country, where yet another bank may be sowing the seeds of further financial mayhem.

Presenting Hypo Alpe Aldria (or “HAA” although certainly not funny as in funny HAA HAA: more shortly), a bank which in reality has been in the news for years following its nationalization in 2009 by the Austrian government to prevent a bank collapse. In fact, just last week, Austrian Chancellor Werner Faymann said the government is right to avert the collapse of Hypo Alpe-Adria-Bank International AG, as he cited the precedent of Creditanstalt, whose crash helped trigger the 1930s depression. “The crash of Creditanstalt in 1931 caused economic meltdown,” Faymann told parliament’s lower house in Vienna today. “There was a consensus in 2009 to act where necessary, to avoid the mistakes of the 1930s, to avoid a collapse by nationalizing and by installing protection measures at the European level.”

As a follow up, as Bloomberg also reports, the fate of HAA – whatever it ends up being – may have significant political consequences for the Austrian government. Again Bloomberg reports that “support for Austria’s ruling coalition is slipping five months after it won a narrow majority as inaction over the nationalized Hypo Alpe-Adria Bank International AG lifts backing for protest parties. Latest polls suggest voters are losing trust in Social Democratic Chancellor Werner Faymann and People’s Party Vice Chancellor Michael Spindelegger and warming to the euro-skeptic Freedom Party before May’s European Parliament elections. The Green and Neos parties also stand to gain, said Hubert Sickinger, a political scientist at the University of Vienna.”

“The ruling parties have a problem,” Sickinger said in an interview. “They postponed the Hypo Alpe ‘dead bank’ problem hoping that the economy would change but they’ve known since early 2013 that this wouldn’t help.”

One party that has been quite vocal on the issue of HAA is the Austrian Freedom Party nationalists, who seek to restrict immigration, and which has the most to gain from detouring the status quo as they would finish first in the EU parliamentary election, according to a Feb. 14 Gallup poll commissioned by the Oesterreich newspaper. The Freedom Party under deceased leader Joerg Haider helped build Hypo Alpe from a regional lender into one of the biggest banks in the Balkans.

“The European elections will be payback day” over the government’s handling of Hypo Alpe, said Franz Schellhorn, director of Agenda Austria, a Vienna-based research group.

“Anger is growing,” Schellhorn said in an interview today. “This black box has to be opened to see what is going on inside.”

It is the “opening of this black box” that suddenly has the entire investment community on edge, even if most of them hope the story simply goes away as it has for the past five years. Only this time it may be impossible to once again kick the can, er, box.

And while the legacy story of the post-bail out HAA may be known, it is the recent developments that are largely unknown and where the risks lie. This can be seen in the recent dramatic drop in HAA bond prices.

So why should people care about HAA? Bank of America explains:

The real surprise of the Hypo Alpe Adria (HAA) situation is not that bondholders may lose money, but the sight of the third richest country in Europe by per capita income apparently looking for ways out of paying what are clearly guaranteed debts of a 100% nationalized bank, for HAA debt is guaranteed by the Austrian State of Carinthia under a deficiency guarantee. The Austrian Finance Minister may be targeting a contribution from bondholders, according to reports on Bloomberg on Friday, We would consider it an astonishing turn of events if this actually ever came to pass, with wide-ranging negative implications for investors in not just Austria but potentially Europe as a whole.

What are the other implications from a potential HAA fallout? Here are the cliff notes:

  • Direct impacts: other Austrian banks?

Erste Bank and RBI will likely trade as proxies in any negative newsflow which could pressure their spreads. They aren’t really affected, though, in our view.

  • Indirect: negative for marginal banks

The Carinthia guarantee is a throwback to a very different banking world – when banks enjoyed implicit and explicit institutional support. Those days are over. We underline
that we have moved to a bail-in regime where investors will contribute to the costs of bank clean-up. This has implications for other very marginal banks e.g. the Cooperative Bank in the UK which we think is struggling.

  • Why the fuss? Who pays for HAA?

The European Commission in its decision on State Aid (dated 3rd Sept 2013) puts the capital need at €5.4bn in a stressed scenario. Liquidity needs are put at up to €3.3bn, meaning that the total outlay could be as high as an extra €8.7bn, in addition to the billions that have already been committed by the current and former shareholders. HAA’s total assets as of June 2013 were ‘only’ €31.3bn, recall.

  • What kind of outcomes for HAA?

We struggle to see how those positing bondholder losses get around the guarantee from Carinthia and all that implies. However, with lower cash prices in many of the bonds, perhaps the way forward opens up for e.g. substitution (of Austria for Carinthia) at a discount. There may also be the time value of return of principal to factor in.

  • Negative outcomes: maybe tough to do

If the Austrian Government decides to be tough, then the negative scenarios for HAA bondholders are potentially many. The Government may be somewhat hampered however by the fact that HAA bonds under the 2006 Prospectus are issued under German Law.

* * *

For the extended, and must read, notes on what Hypo may lead to, here is the full note from Bank of America’s Richard Thomas:

Funny HAA HAA or funny peculiar? Implications of Hypo Alpe Adria

HAA – the implications

The emerging crisis re: how to resolve Austria’s Hypo Alpe Adria (HAA) looks like it’s already one destined for the textbooks.

It has been rumbling around in our ‘bank peripheral vision’ for years as a problem child but now seems to be coming to a head because of what appears to be increased political pressure for a solution that potentially involves the imposition of senior bondholder losses in the mix. As such, we need to look at it to see what read-across, if any, there is to other European banks, as it seems to represent a hardening of attitudes to bank resolution amongst one of Europe’s richest countries.

We do not express an opinion or investment recommendation on the securities of HAA itself. Using conventional bank analysis, we believe that HAA is potentially uninvestable not only because of its evident non-viability and the lack of appetite to save it but also because of the allegations of past misconduct, as widely reported in the press, and what appears to be ongoing incompetence e.g. leasing invoicing ‘irregularities’ in Italy provided against as recently as in 1H13 numbers. The outcome for bondholders will ultimately be based on Austria’s view of its obligations and how it deals with the Carinthia guarantee, in our view. We expect that prices will therefore trade according to the last comment from someone important – highly unpredictable. For example, they were down on Friday following comments from the Austrian FinMin, but up this morning on comments over the weekend from the Head of the Austrian Central Bank. A final decision on what happens could be many months out.

For us, the shock of the current situation is not so much about bail-in being applied in the case of a failed bank – like most credit investors, we are used to this by now. The real surprise of the situation is the sight of the third richest country in Europe by per capita income apparently trying to manoeuvre out of paying what are clearly guaranteed debts (HAA debt is guaranteed by the State of Carinthia). We would consider it an astonishing turn of events if this actually ever came to pass, with wide ranging negative implications for investors in not just Austria but Europe as a whole.

Direct implications?

The read across from HAA to other banks is weak, in our view. However, there are a few implications to highlight which may impact spreads.

  • The most directly impacted bank would seem to be Bayerische Landesbank (BYLAN), former owner of the bank and where there is still some outstanding exposure. BofAML analyst Jeroen Julius talked about this in his note on BYLAN last week here. We remain Underweight-70% the BYLAN 5.75% T2 bonds. There is still an outstanding line of €2.3bn from BYLAN to HAA of which we understand €1.8bn was due at end 2013 – by March (if not sooner) then this will need to move to an impaired classification. HAA is saying that these monies are an equity substitute and are trying to claw back €2.3bn already repaid. Our view is that BYLAN may sacrifice some of the outstanding amount in  any settlement but seem unlikely to have to pay back the repaid amount. In the meantime, it seems that they do have a say in some of the levers which Austria may want to use in resolving HAA, so their negotiating stance looks solid.
  • Other widely traded banks where spreads could come under pressure are Erste Bank and RBI. We will likely see these banks trade as proxies in any negative newsflow which could pressure their spreads – their illiquid CDS is probably already trading some 10-15bps wider in senior and ~13bps wider in sub CDS. These banks should be much more sensitive to negative news from Central and Eastern Europe rather than Austria though, in our view, given their focus on emerging economies.
  • RBI’s exposure to Austria reflects its domicile and the corporate ties between Austrian companies and the EE corporates where most of RBI’s operations are placed. It does not have direct exposure to the Austrian complex in the way that e.g. BAWAG or Erste Bank have. The RBIAV 6% is probably down a point from its highs in the last week or so. We see the impact on RBI as quite tangential: if Austria takes a tough stance with bondholders, it’s more negative for sentiment on the banks, given that it implies a reduced sovereign exposure – so hardly negative for the sovereign from e.g. higher debt levels, albeit lower contingent liabilities.
  • About half of Erste Bank’s credit risk exposure is to Austria. It is therefore more of an ‘Austrian’ bank than RBI but that’s not really the problem here, in our view.
  • We are still very comfortable with RBI at this point, especially given the recent capital increase. However, we recommend reducing risk by switching into lower cash priced bonds versus higher cash price bonds. That means out of e.g. the 6.625% bond with a cash price of about €113 into lower cash priced bonds like the 6% (€106.5) or the 5.163%, though this is a much more illiquid security. We downgrade the 6.625% bonds to Underweight-30%.

Indirect implications?

The wider implications of what happens in the HAA case include:

  • If we do move to some kind of forced loss imposition from Austria on these bonds, then it probably isn’t a good moment for bank risk (or indeed European risk). However, as we explain, in this case loss imposition is rather tricky to do, given the existence of the guarantees from Carinthia.
  • Whatever happens, we see the HAA situation as reflecting a growing impatience with marginal and near-failing banks and that a hard line is likely to be followed in resolving them. It underlines that we have moved to a bail-in regime where investors will contribute to the costs of bank clean-up. This has implications for other very marginal banks e.g. the Cooperative Bank in the UK which we think is struggling. Underweight-70% the 11% T2 bonds of the Coop Bank at £123.
  • The Carinthia guarantee is a throwback to a very different banking world – when banks enjoyed implicit and explicit institutional support. Those days are over. Such support often allowed excessive expansion on the back of cheap funding – we can point to the continued need for adjustment in the Landesbank sector for evidence of that.
  • One final point: in our view there would be a negative read-across to the German Landesbanken more generally if a way was found around the deficiency guarantee in this case. The Landesbanken heavily rely on State guarantees. For example, HSH Nordbank has a €10bn guarantee (that helps its capital position) form Hamburg and Schleswig- Holstein.

Funny HAA HAA or funny peculiar?

A special case?

We think there is a good argument for saying that HAA is a special case amongst European banks. One can read its downfall and subsequent full nationalization as a familiar juxtaposition of overexpansion (in the former Yugoslavia) without sufficient risk controls being in place as a result of too cheap funding, owing to its funding guarantee from the Austrian State of Carinthia (currently rated A2 by Moody’s). Yet the narrative is worsened by allegations of serious past misconduct involving money laundering, fraud and possibly murder. See for example The Economist, Sept 9th 2010 or the New York Times, October 20th 2010.

Whilst mismanagement may well have been a feature of some European banks before the crisis; we would hesitate to attribute this level of alleged misconduct, however, to even many of the most stressed European banks. The nature of the allegations, in our view, serves to underline Austrian public antipathy for taxpayers having to pay for the continuing losses at the bank. It also differentiates it sharply from other European, and of course Austrian, banks. HAA’s situation and alleged misconduct is simply too severe to have systemic implications for other Austrian banks, in our view.

Could there be a haircut? Wait!

Bloomberg reports that two thirds of the Austrian public is against the use of further public monies being used to prop up the bank. With such a powerful consensus against such a move and elections next year, it’s not surprising that recently the rhetoric has turned firmly towards finding solutions for HAA that involve imposing losses somewhere – anywhere – other than at the door of the Austrian taxpayer. Hence, the comments from the Finance Minister Spindelegger on Feb 21 that Austria was looking at ways to get bondholders to contribute.

So far, so straightforward: the only problem is that the bulk of HAA senior bonds enjoy a deficiency guarantee from the State of Carinthia. This complicates the burden sharing. We note, by the way, that the EC ruling on State Aid for HAA made no mention of senior bondholder losses at all. Is it really possible to get around the deficiency guarantee and impose losses?

Our understanding is that the deficiency guarantee is not quite like other guarantees. It’s this ‘gap’ that allowed Moody’s to downgrade HAA to Baa2 from A1 on Feb 14. It means that a creditor must have attempted in vain to satisfy his or her claims against (in this case) HAA first before he can use the guarantee, though not if bankruptcy proceedings were already started. Non-payment alone may not be sufficient to invoke the guarantee, absent due process. Even so, it still looks to us that it’s just a matter of time before creditors could ask Carinthia to satisfy their claims. It seems doubtful that the State could afford to perform on the guarantee however with the €12.3bn or more of bonds being many multiples of Carinthia’s income, according to Moody’sIt seems hardly credible that we could be looking at bankruptcy of a Federal State of one of the richest countries in Europe.

Hence, the dilemma. This really would be a new departure for a European country – we’ve had bondholder haircuts before, but not on instruments guaranteed by a governmental entity like Carinthia.

What’s the size of the hole at HAA?

The European Commission in its decision on State Aid (dated 3rd Sept 2013) puts the capital need at €5.4bn in its stressed, or worst case, scenario. Similarly, the liquidity needs are put at €3.3bn in the stressed scenario, assuming that the above capital is provided in cash, meaning that the total outlay could be as high as €8.7bn, in addition to the billions that have already been committed by the current and former shareholders. HAA’s total assets as of June 2013 were ‘only’ €31.3bn, remember, and of this, €3.5bn was already earmarked as for disposal – giving a pro forma number of €27.8bn. To put this in further context, existing capital resources at HAA (equity plus sub debt) are €3bn, and provisions existing already are €3.5bn. Loans net of provisions are ~€17bn.

The now former Chairman of the Bank, Mr. Liebscher, has previously commented that HAA could require up to €4bn of further capital (‘only €400mn a year over 10 years’). Capital needs could vary considerably if assets were transferred out of the regulatory capital environment e.g. to an asset management company, since these require much less capital. We note too that Weiner has reported that the loss for the year at HAA may have grown to €1.8bn (from the €0.8bn at half year 2013) – we think it’s likely that is already reflected in the EC’s numbers though we’re not completely sure.

The €5.4bn of capital needs calculated by the EC could be higher or lower therefore but let’s use it as a basis for thinking about outcomes. Are there any offsets? Certainly,
HAA believes so. It is claiming that €4.6bn of funds extended to the bank in 2008 by BayernLB is an equity substitution under Austrian Law. €2.3bn of this is still outstanding (it’s not being serviced by HAA) but HAA has applied to the Munich Regional Court for a return of amounts that they’ve already paid back. Our core case is that BayernLB will lose some of this money (if only to settle the case) but we have no real idea how much they and HAA would settle at, of course, or if they will settle at all.

How (much) could bondholders pay?

Is it conceivable that the senior bondholders could be expected to contribute a sizeable chunk of the €5.4bn? As of end-June 2013, issued bonds at HAA totaled €11.1bn (we exclude Pfandbriefe); we don’t have data for any redemptions in 2H13. We do however know that there is a very substantial redemption of senior debt on March 17th of €750m (the HAA 3.75% bond). Again, the interim financials showed a cash balance of €2.6bn at the bank which on its own should comfortably cover the repayment. We are more skeptical about HAA’s liquidity, given the continued deterioration of its financial position implied by the reported further €1bn loss in 2H13. Perhaps it is this that is focusing the attention of Austrian policymakers on bondholders.

Repaying this bond would be a substantial cash outflow from the bank and bondholders would be getting par – these bonds are currently quoted at a mid-cash price of ~€96 but the bid/offer is something like 5 points, underlining the huge uncertainty. But it would also probably be taken as a pointer towards future treatment of bonds and so, if repaid, would likely positively impact prices.

The €5.4bn additional capital need would imply a forced senior bondholder haircut of anything from 20% upwards in our view depending on what is considered the pool of bailin-able liabilities, though admittedly we find it quite hard to believe this will be the actual outcome at this point. This number could be kept down not least by any  settlement with BayernLB – and we can’t really imagine that Austria will make a zero contribution here. Even the €5.4bn total capital needs number calculated by the EC is ‘only’ about 2% of Austrian GDP.

We also struggle to see how those positing bondholder losses get around the guarantee from Carinthia and all that implies. It’s this, we think, that is the really interesting part for European bank bondholders. We have seen headlines suggesting that the Republic of Austria would substitute itself as guarantor for the bonds, subject to bondholders agreeing to a substantial haircut.When the bonds were at par, that looked really unlikely, but with e.g. the 2016 and 2017 bonds having traded down so dramatically in the last few days (currently quoted with a cash price at around €85-86), perhaps the conditions are beginning to evolve for this type of liability management.

Ultimately, we think it’s unlikely that Carinthia could pay back bondholders and remain solvent itself – as Moody’s highlights in its downgrade of the State on Feb 14 2014, the debt outstanding is some six times Carinthia’s 2013 budgeted operating revenue. Recall that HAA is 100% owned by the Republic of Austria – it seems unlikely that the shareholder would enforce the insolvency of a regional State without acting itself.

We also wonder if there is some leeway in terms of the timing difference implied by the final payment under the deficiency guarantee – how prompt might this be? Months? Years? Longer? If it could be demonstrated that bondholders would have to wait many years before getting any of their principal back, then perhaps there is the basis for an offer that gives investors liquidity today, albeit at a discounted price.

What could induce bondholders to agree to any changes?

We suspect that this is currently under consideration – there likely is little limit to the scenarios that could be conceived, but it all depends on the view the Republic takes of itself in the markets and its concerns about any likely fallout from its actions. Freezing the liabilities of the bank and the guarantee? Rescission of the guarantee? Anything is possible but perhaps some of these worst scenarios are not the most probable. However, what is clear is that the outcome for bondholders, as we have seen before in these haircut scenarios, is highly unpredictable and politicized.

In spite of the Austrian Finance Minister’s comments to the contrary, we are of the view that most HAA bonds are still with the original, investment grade, investor base. We believe that the rotation into ‘trader’ or ‘hot money’ hands is probably only still at the beginning – only recently have we heard that blocks of bonds have been coming out, rather than the trading of very small amounts. This could change rapidly in the coming weeks if Austria decides to step up the bondholder loss rhetoric of course but at this point, it would be ordinary money managers, we think, who would be absorbing most of the losses, not hot money or speculators.

As an added twist, we note that HAA bonds issued under the August 2006 Prospectus are under German Law (rather than Austrian). Again, this points in the direction of either repayment of the bonds under the guarantee, or a negotiated settlement with bondholders, rather than the imposition of an arrangement by the Austrian Government, since legally they may not have the flexibility to do much else.

* * *

In conclusion all we have to add is that it would indeed be supremely ironic if the “strong” foreign law bond indenture would be tested, and breached, not by Greek bonds, as so many expected in late 2011 and early 2012, but by one of the last contries in Europe which is still AAA-rated. We would find it less ironic if the next leg of the global financial crisis was once again unleashed by an Austrian bank: after all history does rhyme…

G-20 Agrees To Grow Global Economy By $2 Trillion, Has No Idea How To Actually Achieve It | Zero Hedge

G-20 Agrees To Grow Global Economy By $2 Trillion, Has No Idea How To Actually Achieve It | Zero Hedge.

Apparently all it takes to kick the world out of a secular recession and back into growth mode, is for several dozen finance ministers and central bankers to sit down and sign on the dotted line, agreeing it has to be done. That is the take home message from the just concluded latest G-20 meeting in Syndey, where said leaders agreed that it is time to finally grow the world economy by 2% over the next 5 years.

The final G-20 communiqué announced its member nations would take concrete action to increase investment and employment, among other reforms. “We will develop ambitious but realistic policies with the aim to lift our collective GDP by more than 2 percent above the trajectory implied by current policies over the coming 5 years,” the G20 statement said.

Australian Treasurer Joe Hockey, who hosted the meeting, sold the plan as a new day for cooperation in the G20.

“We are putting a number to it for the first time — putting a real number to what we are trying to achieve,” Hockey told a news conference. “We want to add over $2 trillion more in economic activity and tens of millions of new jobs.

And to think all it took was several dozen of politicians sitting down for 2 days in balny Syndey and agreeing. So over five years after the start of the second great depression the G-20 has finally agreed and decided it is time to grow the economy: supposedly the reason there was no such growth previously is because the G-20 never willed it…

There is only one problem: the G-20 has absolutely no idea how to actually achieve its goal of boosting global output by more than the world’s eighth largest economy Russia produces in a year. Nor does it have any measures to prod and punish any laggards from this most grand of central planning schemes. From Reuters:

There was no road map on how nations intend to get there or repercussions if they never arrive. The aim was to come up with the goal now, then have each country develop an action plan and a growth strategy for delivery at a November summit of G20 leaders in Brisbane.

 

“Each country will bring its own plan for economic growth,” said Hockey. “Each country has to do the heavy lifting.”

 

Agreeing on any goal is a step forward for the group that has failed in the past to agree on fiscal and current account targets. And it was a sea change from recent meetings where the debate was still on where their focus should lie: on growth or budget austerity.

So who is the mastermind behind this grand plan? Why the IMF of course: “The growth plan borrows wholesale from an IMF paper prepared for the Sydney meeting, which estimated that structural reforms would raise world economic output by about 0.5 percent per year over the next five years, boosting global output by $2.25 trillion.”

The same IMF whose “forecasts” can best be summarized in the following chart (which will be revised lower shortly to account for all the snow in the Northeast US):

 

Aside from this idiocy, the other topic under boondoggle discussion was the fate of the taper, and specifically how emerging markets will (continue to) suffer should the Fed continue to withdraw liquidity. Here, once again, the developed nations won out, leaving the EMs, and particularly India’s Raghuram Rajan – who has been pleading for far more coordination between central banks in a time of globla tightening – high and dry.

  • RBI’S RAJAN: POLICY TIGHTENING MUSTN’T UPSET GLOBAL ECONOMY
  • RAJAN SAYS INFLATION IS HURTING GROWTH
  • INDIA’S RAJAN SAYS BRINGING DOWN INFLATION BIGGEST CHALLENGE
  • RAJAN: DEVELOPED, EM NATIONS AGREE ON NEED TO CALIBRATE POLICY

What inflation? As for coordination, here is what the G-20 did agree on: whatever Yellen says, goes:

Financial markets had been wary of the possibility of friction between advanced and emerging economies, but nothing suggested the meeting would cause ripples on Monday. “The text of the communiqué indicates that the standard U.S. line that what is good for the core of the world economy is good for all seems to have won out,” said Huw McKay, a senior economist at Westpac, noting there was nothing that could be taken as “inflammatory” about recent volatility in markets.

 

There was a nod to concerns by emerging nations that the Federal Reserve consider the impact of its policy tapering, which has led to bouts of capital flight from some of the more vulnerable markets.

 

“All our central banks maintain their commitment that monetary policy settings will continue to be carefully calibrated and clearly communicated, in the context of ongoing exchange of information and being mindful of impacts on the global economy,” the communiqué read. There was never much expectation the Fed would consider actually slowing the pace of tapering, but its emerging peers had at least hoped for more cooperation on policy.

 

Hockey said there had been honest discussions among members on the impact of tapering and that newly installed Fed Chair Janet Yellen was “hugely impressive” when dealing with them.

Indeed, in the three weeks that Yellen has been Chairmanwoman, she has been truly hugely impressive. It’s the next three years that may be more problematic.

“The Pig In The Python Is About To Be Expelled”: A Walk Thru Of China’s Hard Landing, And The Upcoming Global Harder Reset | Zero Hedge

“The Pig In The Python Is About To Be Expelled”: A Walk Thru Of China’s Hard Landing, And The Upcoming Global Harder Reset | Zero Hedge.

By now everyone knows that the Chinese credit bubble has hit unprecedented proportions. If they don’t, we remind them with the following chart of total bank “assets” (read debt) added since the collapse of Lehman: China literally puts the US to shame, where in addition to everything, the only actual source of incremental credit growth over the same time period has been the Fed as banks have used reserves as margin for risk purchases instead of lending.

 

Everyone should also know that like a metastatic cancer, the amount of non-performing, bad loans within the Chinese financial system is growing at an exponential pace.

 

Finally, what everyone learned over the past month, is that as the two massive, and unresolvable forces, come to a head, the first cracks in the facade are starting to appear as first one then another shadow-banking Trust product failed and had to be bailed out in the last minute.

However, as we showed last week, and then again last night, the default party in China is only just beginning as Trust failures in the coming months are set to accelerate at a breakneck pace.

 

The $64K question is will the various forms of government be able to intercept and bail these out in time, as they have been doing so far despite their hollow promises of cracking down on moral hazard: after all, everyone certainly knows what happened when Lehman was allowed to meet its destiny without a bailout – to say that the CNY10 trillion Chinese shadow banking industry will not have far more dire consequences if allowed to fall without government support is simply idiotic.

But what could be the catalyst for this outcome which inevitably would unleash the long-overdue Chinese hard landing, and with it, a new global depression?

Ironically, the culprit may be none other than the Fed with the recently instituted taper, and the gradual, at first, then quite rapid unwind of the global carry trade.

Bank of America explains:

QE and the Emerging Markets carry trade

 

The QE channel has worked through Emerging Markets and China is a key vehicle. By lowering the US government bond yields to a bare minimum, and zero –ish at the short end, a search for yield globally ensued. Emerging market banks and corporates have gone on an international leverage binge, yet another carry trade, the third in 20 years. The first one was driven by European banks, financing East Asian capex – that ended in 1997. The second one was global banks and equity-FDI supporting mainly capex in the BRICs. That ended in 2008. This time, it is increasingly non-equity: commercial banks and more importantly, the bond market – often undercounted in the BoP and external debt statistics that conventional analysis looks at.

 

Chart 9 shows the rise of EM external loans and bond issuance (both by residence and nationality). Since, end-3Q2008 to end-3Q2013, external borrowing from banks and bonds has risen USD1.9tn. Bank loans have risen by USD855bn and bond issuance in foreign currencies by nationality is up USD1,042bn. In the prior five-year period (i.e. end-3Q2003 – end-3Q2008), forex bond issuance rose only USD432bn. Clearly, the importance of external bond issuance is rising. See Table 5 for details.

 

In China, since, end-3Q2008 to end-3Q2013, outstanding external borrowing from banks and bonds has gone from USD207bn to USD849n – a net rise of USD655bn. Outstanding bank loans are up from USD161bn to USD609bn – a net rise of USD464bn. Bond issuance in foreign currencies by nationality is up from USD46bn to USD240bn – a net rise of USD191bn. In the prior five-year period (ie, end-3Q2003 – end-3Q2008), forex bond issuance rose only USD28bn in China. Clearly, the importance of external bond issuance is rising in China.

 

 

There is more to this story.

 

As mentioned earlier, for externally-issued bonds, USD1,042bn has been raised by the nationality of the EM borrower since end-3Q 2008, but USD724bn by residence of the borrower – a gap of USD318bn, or 44%. This undercount is USD165bn in China, USD100bn in Brazil, USD62bn in Russia, and USD37bn in India. The carry trade this time around was helped substantially by access to the bond market, especially from overseas affiliates of EM banks and corporations.

 

There are a lot of moving parts in the balance of payments that finally affect the change in international reserves at any EM central bank – eg, the current account, portfolio equity investment and direct equity investment, and debt flows – both from the bond market and lending from banks. We focus on the link between these debt flows and the international reserves in China. As Table 5 below shows, China’s external debt – from bond issuance and forex borrowing from banks – rose USD655bn during 3Q08-3013.

 

 

We posit that this large rise was in part driven by the carry trade offered up by QE – China banks and corporates issued substantial forex-denominated bonds, and borrowed straight loans from international banks. We recognize the caveat that correlation does not imply causation. The USD655bn rise in China debt issuance is highly correlated to the Fed’s balance sheet since late-2008. As Chart 11 shows, the rise in China debt issuance of USD 655bn has (along with FDI and the C/A surplus), boosted international reserves by USD1,773bn since late-2008. Also, as Chart 11 shows, the USD1,773bn rise in China international reserves mirrors the rise of USD2,585bn in the EM monetary base. Lastly, the rise of China’s monetary base of USD2,585bn correlates well with the USD10.9tr rise in China’s broad money expansion.

 

 

 

As the Fed tapers, and the size of its balance sheet stabilizes/contracts, we should expect this sequence to reverse. Confidence is a fragile membrane. Not only does the Fed’s balance sheet matter as a source of funds, but we believe so does the attractiveness of the recipient of the carry trade – and the trust in its collateral. As Gary Gorton puts it…

 

The output of banks is money, in the form of short-term debt which is used to store value or used as a transaction medium. Such money is backed by a portfolio of bank loans in the case of demand deposits, or by collateral in the form of a specific bond in the case of repo. The backing is designed to make the bank debt as close to riskless as possible — in fact, so close to riskless than nobody wants to really do any due diligence on the money, just transact with it. But the private sector cannot produce riskless debt and so it can happen that the backing collateral is questioned. This typically happens at the peak of the business cycle. If its value is questioned, it loses its “moneyness” so no one wants it, and cash is preferred. But as we know, if everyone wants their cash at the same moment, their demands cannot be satisfied. In this sense, the financial system is insolvent. (interview with the FT) 

 

What makes sense for an individual carry trade – borrow low, invest at higher rates – falls prey to the fallacy of composition, when too many engage in the same carry trade. And eventually question the underlying collateral, now huge, and potentially suspect. China is a case in point. If our colleagues David Cui and Bin Gao are right, the trust sector in Chinacould create rollover risks that reverse a gluttonous carry trade within China, but partly financed overseas. In China’s case, this trade was between low global interest rates, low Chinese deposit rates, expectations of perpetual RMB appreciation on the one hand, and higher investment returns promised by Trusts on the other. A part of the debt funds raised overseas, we suspect were put to work in this Trust carry trade. The HK-based banks are big participants in intermediating the China carry trade – as Chart 12 shows, their net lending to China went from 18% of HK GDP in 2007 to 148% in late-2013.

 

There are always fancy names given to carry trades – financial liberalization of capital accounts, the Bangkok International Banking Facility, currency internationalization, etc. We remain skeptics of these buzzwords.

 

 

 

The potential consequences of Trust defaults and a China carry trade unwind

 

1. If the EM carry trade diminishes as a consequence of a changed Fed policy and/or less attractive risk-adjusted returns in EMs as collateral quality is questioned, the sources of China’s forex reserve accumulation will need to change. Perhaps to bigger current account surpluses, more equity FDI and portfolio investment through privatization and more open equity markets. If that does not happen, expanding the Chinese monetary base might require PBOC to increase net lending to the financial system and/or monetize fiscal deficits (this last part has not worked so well in EMs).

 

2. Potential asset deflation is a risk, as the carry trades diminish/unwind. Property prices are at risk – the collateral value for China’s financial systems. This is not a dire projection – it simply seeks to isolate the US QE as a key driver of China’s monetary policy and asset inflation, and highlights the magnitudes involved, and the transmission mechanism. Investors should not imbue stock-price movements and property price inflation in China with too much local flavor – this is mainly a US QE-driven story, in our view.

 

3. Currently, China’s real effective exchange rate is one of the strongest in the world. Concerns about China’s Trust sector, and its underlying collateral value, sees some of this carry trade unwound, the RMB could be under pressure.

 

 

4. Given HK’s role in the China carry trade, HK property prices and its banking system should be watched carefully for signs of stress.

 

5. UK, US, and Japan banking systems have been active lenders to China since QE. They should be on watch if the Trust rollover risk materializes and creates a growth shock in China. See Chart 15.

 

 

 

6. Safe haven bids for DM government bonds, overseas property and precious metals might emerge from China.

 

Could the party go on? Yes, if for some reason a significant deterioration in the US labor market, or a deflationary shock from China, or any other surprise that could lead to a cessation of the US tapering could prolong this carry trade. This is not the house base case. We believe it is better to start preparing for a post-QE world. As one of our smartest clients told us: “the main theme in the past five years was QE. If that is coming to an end, investments and themes that worked in the past five years must therefore be questioned.” We agree.

* * *

Yes, Bank of America said all of the above – every brutally honest last word of it.

The question, however, in addition to “why”, is whether the Fed also agrees with BofA’s stunningly frank, and quite disturbing conclusion, perhaps finally realizing that aside from the US, the biggest house of cards that would topple once the “flow”-free emperor is exposed in his nudity, is that of the world’s largest “growth” (and credit) dynamo of the past two decades – China.Because, as noted above, if Lehman’s collapse was bad, a deflationary collapse brought on by Chinese hard landing coupled with a full unwind of the global carry trade, would be disastrous and send the world into a depression the likes of which have never before been seen.

Finally, for those who want the blow by blow, here is BofA’s tentative take of what the preliminary steps of the next global great depression will look like:

If we do experience a sizable default, the knee-jerk market reaction will be cash hoarding since it will strike as a big surprise. Thus, we expect the repo rate to rise first, while the long term government bond would get bid due to risk aversion flows.

 

However, what follows will be quite uncertain, aside from PBoC injecting liquidity and easing monetary policy to help short term rate come down. It has been proven again and again the Chinese government will get involved and be proactive. The bond market reaction will be different depending on the government solution.

Alas, at that point, not even the world’s largest bazooka will be enough.

At this point one should conclude that reality – through massive, unprecedented liquidity injections – has been deferred long enough. It is time to let the markets finally return to some semblance ofuncentrally-planned normalcy: there is a reason why nature abhors a vacuum. Even if it means the eruption of the very painful grand reset, washing away decades of capital misallocation, lies and ill-gotten wealth, so very overdue.

Ponzi World (Over 3 Billion NOT Served): Buy The Fucking Collapse (BTFC)

Ponzi World (Over 3 Billion NOT Served): Buy The Fucking Collapse (BTFC).

Aside from the totally asinine and impossible strategy of attempting to borrow the global economy out of a debt crisis, we currently face a staggering array of risks unprecedented in modern history. Fortunately, the Idiocracy is fat and happy, comforted by the abiding assumption that printing money is the secret to effortless wealth…

 

MAXIMUM RISK
 
The Log Periodic Bubble formation called for a top by mid-January, which is exactly when the current top occurred in the S&P 500 (even earlier in the Dow – see below).
 
The maximum reading in the Greedometer, confirms the log periodic wave formation. 
 
And then there are all of the other risk factors simmering in the background (NYSE margin at record high, carry trades unwinding, Fed tapering, bullish sentiment @26 year high, lack of hedging, IPO speculation, earnings valuation, sector correlation, low volume, HFT glitches) etc. etc. 
 
The Week In Review: Still Buying the Dip with Both Hands
Once the HFT bots figured out that Friday’s weak employment report may mean a slowing of Fed tapering, they ramped the futures, driving massive short-covering and the obligatory sell-off in Japanese Yen.
Still, for the week, the markets were just barely positive and by no means recovered overall losses for the past two weeks. Bulls have expended a huge amount of firepower to basically get them back at the same level they were at last Friday. It took a mere 8 trading days to wipe out 3 and half months of upside gains, as volume doubled on the down days.
Dow Casino: 
The Dow hit its 200 DMA (red line) for only the second time in a year. It’s currently still well below the 50 DMA (blue line)
Russell 2000
The R2K small cap index was the leading market index since 2009. It is now dramatically underperforming and the past week’s rally barely made a dent.
Emerging Markets Death Cross
The 50 DMA crossing over the 200 DMA
The Fadebook Indicator: 100 P/E stock trading @ the whim of teenage girls
Facebook is still leading the market. Unbelievable
These are early days for this market “sell-off”:
 
 
Full Casino In the Casino
Go All In @WYNN
Walmart can’t meet estimates, but casinos are rocking…
 
 
Much Ado About Nothing
Here is some perspective for those getting all lathered up about this rally. The Nasdaq is still over a thousand points below where it was @Y2K. Unbelieveable. 
Skydiving Without a Parachute
CBOE Index Put/call ratio (50 DMA)
The reason why this collapse will go further and faster than anyone can predict
It’s hard to put a parachute on in mid-air…
 
It’s still going down…
 
BitCasino
Not This Again !
 
Lurching Towards the Minsky Moment
Of course, the stock market is merely a side show – a barometer of social mood and risk appetite. The real money is in the bond (credit) markets. As the various speculative excesses unwind during this collapse, one by one we will find out who has been taking the fullest advantage of 0% interest rates and printed money. Like dominoes falling, it will start in one region and spread like an epidemic. Asset “re-pricing” will reveal underlying insolvency that has been papered over solely by asset price levitation.
 
The Elliot Straight Down Wave (ESDW)
– “In the broadening top formation five minor reversals are followed by a substantial decline.”
– “most of the selling is completed in the early stage by big players and the participation is from general public in the later stage.”
– “It is a difficult formation to trade in” [No shit, thanks for sharing]
 
Of course we can only be certain that it’s a broadening top, if the market pierces the floor which is below 666 SPX (i.e. the Lehman Low)…
 

Is the Stock Market Repeating the 1929 Run Up to the Great Depression? Washington’s Blog

Is the Stock Market Repeating the 1929 Run Up to the Great Depression? Washington’s Blog.

Is History Repeating … Or Throwing a Head-Fake?

Chart courtesy of Tom McClellan of the McClellan Market Report (via Mark Hulbert)

Hulbert notes that the chart “has been making the rounds on Wall Street.”

On the other hand, Martin Armstrong predicts that a worsening economy – and bank deposit confiscation – in Europe will cause people to flood into American stocks as a “safe haven” for a couple of years.

And the Fed has more or less admitted that propping up the stock market is a top priority.

JPMorgan Sued For Crony Justice – Presenting “A Decade of Illegal Conduct by JP Morgan Chase” | Zero Hedge

JPMorgan Sued For Crony Justice – Presenting “A Decade of Illegal Conduct by JP Morgan Chase” | Zero Hedge.

Earlier today, the non-profit organization Better Markets did what so many others have only dreamed of doing – they sued JPMorgan.

Specifically, as they disclose in the fact sheet posted on their website, they are “challenging the historic and unprecedented $13 billion settlement agreement between the U.S. Department of Justice and JP Morgan Chase (“Agreement”).  Better Markets alleges in its complaint that the DOJ violated the Constitution and laws of the United States by using a mere contractual agreement to resolve claims of historic importance without subjecting the Agreement to independent judicial review.  In effect, the DOJ acted as investigator, prosecutor, judge, jury, sentencer, and collector, without any check on its authority or actions, even though the amount is the largest in the 237 year history of the United States. Because the DOJ has declared its intention to use the Agreement as a “template” in future similar cases, it is imperative that the DOJ’s unlawful and secretive approach in the settlement process be subjected to judicial review.

We wish them the best of luck, as in a “crony jsutice” system as corrupt as this one – perhaps best described, paradoxically enough by the fictional movie The International – where the same DOJ previously implicitly admitted it will not prosecute “systemically important” firms like JPM to the full extent of the law and instead merely lob one after another wrist slap at them to placate the peasantry, any hope for obtaining true justice is impossible.

That said, the key aspects of the Better Markets lawsuit deserve attention. They are broken down as follows:

For years leading up to the financial crisis of 2008, JP Morgan Chase allegedly engaged in pervasive fraud in the packaging and sale of thousands of mortgage-backed securities to investors.  Those securities were stuffed with subprime loans that failed to meet applicable underwriting criteria.  Employees, managers, and potentially high-level executives of JP Morgan Chase knew that the securities were riddled with toxic loans, but they allegedly concealed the truth from investors when they marketed and sold the securities.  Investors lost huge but still unknown sums of money as a result of the fraud, and the bank’s illegal conduct contributed directly to the biggest financial crash since 1929 and the worst economy since the Great Depression of the 1930s.

After negotiating the Agreement in complete secrecy, the DOJ announced the $13 billion deal on November 19, 2013, claiming that it was holding JP Morgan Chase accountable for its illegal activities.  Under the Agreement, DOJ grants JP Morgan Chase broad civil immunity in exchange for a $2 billion civil penalty, along with $4 billion in “consumer relief” for the benefit of homeowners with problem mortgages.  The Agreement also allocates $7 billion to eight other agencies or states to resolve their claims against JP Morgan Chase.

Key Allegations in the Complaint

The Agreement was struck under the most extraordinary circumstances.  For example—

  • THE HISTORIC CLAIMS:  The Agreement resolved claims of pervasive fraud that contributed to the worst financial crash since 1929 and the worst economy since the Great Depression of the 1930s.
  • THE LARGEST AMOUNT EVER:  The settlement amount was the largest in U.S. history from any single entity by more than 300%.
  • THE BIGGEST BANK:  JP Morgan Chase is the largest, richest, and most well-connected Wall Street bank in the United States.
  • THE HIGHEST-LEVEL NEGOTIATORS: The Attorney General and other senior DOJ political appointees negotiated directly and entirely in secret with the CEO of JP Morgan Chase, someone who was considered a possible Treasury Secretary just a few years ago.
  • THE $10 BILLION PHONE CALL:  The cellphone of DOJ’s third highest ranking official rang with the “familiar” phone number of JP Morgan Chase’s CEO, who called to offer billions of dollars to stop DOJ from holding a press conference and filing a lawsuit in just a few hours.  The call worked, and the press conference and lawsuit were both called off.
  • THE UNPRECEDENTED AGREEMENT:  DOJ gave complete civil immunity to JP Morgan Chase for defrauding thousands in exchange for $13 billion, via a contract that was negotiated and finalized in secret without any review or approval by a federal court.

?Notwithstanding the historic nature of the settlement, the Agreement was never subjected to judicial review, so there has been no independent evaluation of its terms.  Furthermore, the vague settlement documents fail to disclose critically important information about every aspect of the deal.  For example, the Agreement fails to identify or explain—

  • THE LOSSES:  How much did JP Morgan Chase’s clients, customers, counterparties, investors, and others lose as a result of its fraudulent conduct?  $100 billion?  $200 billion?  More?
  • THE PROFITS:  How much revenue, profits, and other benefits did JP Morgan Chase receive as a result of its fraudulent conduct, and was it all disgorged?  $10 billion?  $20 billion?  More?
  • THE BONUSES:  Who received what amount of bonuses for the illegal conduct?
  • THE INVESTIGATION:  What was the scope and thoroughness of the investigation that provided the basis for the Agreement?
  • THE FRAUD:  What are the material facts of the illegal conduct by JP Morgan Chase and the specific violations of law that were committed?
  • THE CULPRITS: What exactly did the individual executives, officers, managers, and employees involved in the illegal conduct actually do to carry out the fraud, and do any of them still work for the bank?
  • THE CORRECTIVE ACTION:  Why did the contract fail to impose on JP Morgan Chase any obligation to change any of its business or compliance practices, which are standard conduct remedies that regulators routinely require?  And how can the sanctions effectively punish and deter JP Morgan Chase, given its wealth and its extensive history of lawless conduct?
  • THE LACK OF ADMISSIONS:  Why are there no admissions of fact or law by JP Morgan Chase, and what, if any, are the concrete legal implications of their so-called “acknowledgment”?

By entering the Agreement without seeking any judicial review and approval, the DOJ violated the Constitution and laws of the United States.

  • The Executive Branch, acting through the DOJ, violated the separation of powers doctrine by unilaterally striking a bargain with JP Morgan Chase to resolve unprecedented matters of historic importance, without seeking any judicial review and approval of the Agreement.
  • The DOJ violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) by failing to commence a civil action in federal court so that the court could, among other things, assess the civil penalty.
  • The DOJ acted arbitrarily and capriciously by, among other things, entering the Agreement without seeking judicial review and approval.

* * *

But perhaps the most informative aspect of the lawsuit fact sheet is simply stepping back and observing the relentless illegal transgressions by Jamie Dimon’s firm. Better Markets summarizes them best as follows:

Highlights From A Decade of Illegal Conduct by JP Morgan Chase

  • United States v. JPMorgan Case Bank, NA, No-1:14-cr-7 (S.D.N.Y. Jan 8, 2014) ($1.7 billion criminal penalty); In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-13-109 (Jan. 7, 2014) ($350 million civil penalty); In re JPMorgan Chase Bank, N.A., Dept. of the Treasury Financial Crimes Enforcement Network Admin. Proceeding No. 2014-1 (Jan. 7, 2014) ($461 million civil penalty) (all for violations of law arising from the bank’s role in connection with Bernie Madoff’s Ponzi scheme, the largest in the history of the U.S.);
  • In re JPMorgan Chase Bank, N.A., CFTC Admin. Proceeding No. 14-01 (Oct. 16, 2013) ($100 million civil penalty); In re JPMorgan Chase & Co., SEC Admin. Proceeding No. 3-15507 (Sept. 19, 2013) ($200 million civil penalty); In re JPMorgan Chase & Co., Federal Reserve Board Admin. Proceeding No. 13-031-CMP-HC (Sept. 18, 2013) ($200 million civil penalty); UK Financial Conduct Authority, Final Notice to JP Morgan Chase Bank, N.A. (Sept. 18, 2013) (£137.6 million ($221 million) penalty); In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-2013-75, #2013-140 (Sept. 17, 2013) ($300 million civil penalty) (all for violations of federal law in connection with the proprietary trading losses sustained by JP Morgan Chase in connection with the high risk derivatives bet referred to as the “London Whale”);
  • In re JPMorgan Chase Bank, N.A., CFPB Admin. Proceeding No. 2013-CFPB-0007 (Sept. 19, 2013) ($20 million civil penalty and $309 million refund to customers); In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-2013-46 (Sept. 18, 2013) ($60 million civil penalty) (both for violations in connection with JP Morgan Chase’s billing practices and fraudulent sale of so-called Identity Protection Products to customers);
  • In Re Make-Whole Payments and Related Bidding Strategies, FERC Admin. Proceeding Nos. IN11-8-000, IN13-5-000 (July 30, 2013) (civil penalty of $285 million and disgorgement of $125 million for energy market manipulation);
  • SEC v. J.P. Morgan Sec. LLC, No. 12-cv-1862 (D.D.C. Jan. 7, 2013) ($301 million in civil penalties and disgorgement for improper conduct related to offerings of mortgage-backed securities);
  • In re JPMorgan Chase Bank, N.A., CFTC Admin. Proceeding No. 12-37 (Sept. 27, 2012) ($600,000 civil penalty for violations of the Commodities Exchange Act relating to trading in excess of position limits);
  • In re JPMorgan Chase Bank, N.A., CFTC Admin. Proceeding No. 12-17 (Apr. 4, 2012) ($20 million civil penalty for the unlawful handling of customer segregated funds relating to the bankruptcy of Lehman Brothers Holdings, Inc.);
  • United States v. Bank of America, No. 12-cv-00361 (D.D.C. 2012) (for foreclosure and mortgage-loan servicing abuses during the Financial Crisis, with JP Morgan Chase paying $5.3 billion in monetary and consumer relief);
  • In re JPMorgan Chase & Co., Federal Reserve Board Admin. Proceeding No. 12-009-CMP-HC (Feb. 9, 2012) ($275 million in monetary relief for unsafe and unsound practices in residential mortgage loan servicing and foreclosure processing);
  • SEC v. J.P. Morgan Sec. LLC, No. 11-cv-03877 (D.N.J. July 7, 2011) ($51.2 million in civil penalties and disgorgement); In re JPMorgan Chase & Co., Federal Reserve Board Admin. Proceeding No. 11-081-WA/RB-HC (July 6, 2011) (compliance plan and corrective action requirements); In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-11-63 (July 6, 2011) ($22 million civil penalty) (all for anticompetitive practices in connection with municipal securities transactions);
  • SEC v. J.P. Morgan Sec., LLC, No. 11-cv-4206 (S.D.N.Y. June 21, 2011) ($153.6 million in civil penalties and disgorgement for violations of the securities laws relating to misleading investors in connection with synthetic collateralized debt obligations);
  • In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-11-15, #2011-050 (Apr. 13, 2011) (consent order mandating compliance plan and other corrective action resulting from unsafe and unsound mortgage servicing practices);
  • In re J.P. Morgan Sec. Inc., SEC Admin. Proceeding No. 3-13673 (Nov. 4, 2009) ($25 million civil penalty for violations of the securities laws relating to the Jefferson County derivatives trading and bribery scandal);
  • In re JP Morgan Chase & Co, Attorney General of the State of NY Investor Protection Bureau, Assurance of Discontinuance Pursuant to Exec. Law §63(15) (June 2, 2009) ($25 million civil penalty for misrepresenting risks associated with auction rate securities);
  • In re JPMorgan Chase & Co., SEC Admin. Proceeding No. 3-13000 (Mar. 27, 2008) ($1.3 million civil disgorgement for violations of the securities laws relating to JPM’s role as asset-backed indenture trustee to certain special purpose vehicles);
  • In re J.P. Morgan Sec. Inc., SEC Admin. Proceeding No. 3-11828 (Feb. 14, 2005) ($2.1 million in civil fines and penalties for violations of Securities Act record-keeping requirements); and
  • SEC v. J.P. Morgan Securities Inc., 03-cv-2939 (WHP) (S.D.N.Y. Apr. 28, 2003) ($50 million in civil penalties and disgorgements as part of a global settlement for research analyst conflict of interests).

Did we mention that nobody from JPM has gone to prison, and instead as of late last week, one of the biggest JPM culprits was set to become a member of the CFTC’s advisory panel before the people and not the regulators, were forced to step in? Why? #AskJPM

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