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One short tweet for a whale, one giant victory over organized financial crime.
Tomorrow’s Q&A is cancelled. Bad Idea. Back to the drawing board.
— J.P. Morgan (@jpmorgan) November 14, 2013
… on the other hand, everyone can rest assured that JPM just bought CDS on everyone who mocked it.
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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/s6JNnGzP2Dk/story01.htm Tyler Durden
One short tweet for a whale, one giant victory over organized financial crime.
Tomorrow’s Q&A is cancelled. Bad Idea. Back to the drawing board.
— J.P. Morgan (@jpmorgan) November 14, 2013
… on the other hand, everyone can rest assured that JPM just bought CDS on everyone who mocked it.
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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/s6JNnGzP2Dk/story01.htm Tyler Durden
When a tin-foil-hat-wearing digital dickweed points to record volumes of cov-lite loans, insatiable demand for Ugandan bonds, and the disconcerting disconnect between record-high median leverage and almost-record-low credit spreads, the mainstream can scoff at their obsessions… but when the NY Fed – once again – highlights the potential froth in credit markets and compares it to the South Sea Bubble of 1720… maybe it’s time to get the hint…
Via The NY Fed Liberty Street Economics blog,
In 1720, the South Sea Company offered to pay the British government for the right to buy the national debt from debtholders in exchange for shares backed by dividends to be paid from the company’s debt holdings and South Sea trade profits. The Bank of England countered the proposal and the two then competed for the right to buy the debt, with South Sea ultimately winning through bribes to the government. Later that year, the government moved to divert more capital to South Sea shares by hampering investment opportunities for rival companies in what became known as the Bubble Act, and public confidence was shaken. In this edition of the Crisis Chronicles, we explore the rise and fall of the South Sea Company and offer a cautionary look at the current reach for yield.
A Rogue’s Guide to Repackaging Debt: Start with Insider Trading . . .
Two key events predate the South Sea Bubble. First, around 1710, the Sword Blade Bank offered to exchange unsecured government debt issued by army paymasters for Sword Blade shares. But it did so only after having secretly amassed large holdings of the debt, which traded at a deep discount given investor uncertainty that Britain could pay its debts. Knowing the price of the debt would rise with the announcement of the debt-to-shares exchange, the Sword Blade Bank made a significant profit on its debt holdings in what would today be called insider trading.
The second key event was the formation of the South Sea Company in 1711, for the purpose of rivaling the East India Company in trade. But a unique feature included in the formation of the company was the exchange of shares for government debt, no doubt influenced by the prior Sword Blade Bank deal; five of the directors of the South Sea Company were from the Sword Blade Bank. By 1713, the peace treaty at Utrecht brought an end to war with Spain, but the British gained only limited access to trading stations in the Americas. Consequently, the trading operations never proved profitable and the South Sea Company became a financial enterprise by default. In 1715, and then again in 1719, the South Sea Company was allowed to convert additional government debt into shares. In April 1720, South Sea won approval to buy the remaining government debt and to issue stock in exchange. The once-burdensome debt had been cleverly repackaged into a valuable commodity.
Then Pay Bribes . . .
Investors in South Sea shares now anticipated both a 5 percent annual dividend payment in addition to the hope of lucrative profits from trade with the Americas. But on the announcement of approval to buy the remaining government debt on April 7, 1720, the South Sea share price fell from £310 to £290 overnight. South Sea directors were eager to pump up the stock price and spread rumors of even greater riches to be earned from South Sea trade. Later that month, South Sea offered to new investors its First Money Subscription of £2 million in stock at £300 a share with 20 percent down and the remaining payments to be made every two months. So successful was the first offer that a Second Money Subscription followed later that same April with equally generous terms that allowed participants to borrow up to £3,000 each. Nearly 200 new ventures were launched that year under similar schemes, increasing the competition for investor capital. In the short term, shares soared across most companies. But South Sea stock sale proceeds were needed to pay dividends and bribes to the government for favorable treatment, as well as to buy its own shares to support its stock price. Consequently, a Third Money Subscription was launched later that year with even more generous terms at just 10 percent down with installment payments over four years and the second payment not due for a year.
. . . And Ban Rivals
Later that summer, the government moved to ban the new ventures—South Sea’s rivals for investor capital—in passing the “so-called” Bubble Act, which jolted public confidence. Companies impacted by the ban saw their stock prices plummet and leveraged investors were forced to sell South Sea shares to pay off debts, which put downward pressure on South Sea’s stock price as well. To prop up the company, South Sea launched the Fourth Money Subscription in August with a promise of a 30 percent year-end dividend and an annual dividend of 50 percent for ten years. But the market didn’t view the offer as credible and the South Sea share price continued to fall through mid-September. Liquidity constraints in London were further compounded by the concurrent Mississippi Bubble and bust in Paris, which we’ll cover in our next post. The South Sea Company was forced to turn to the Bank of England for help with the Bank ultimately agreeing to support the company but not its banker, the Sword Blade Bank.
Recall from our last post on the “not so great” re-coinage of 1696 that after the re-coinage, silver continued to flow out of Britain to Amsterdam, where bankers and merchants exchanged the silver coin in the commodity markets, issuing promissory notes in return. The promissory notes in effect served as a form of paper currency and paved the way for banknotes to circulate widely in Britain. So when panicked depositors flocked to exchange banknotes for gold coin from the Sword Blade Bank (the South Sea Company’s bank), the bank was unable to meet demand and closed its doors on September 24. The panic turned to contagion and spread to other banks, many of which also failed.
The Return of Repackaged Debt
As we’ll see in upcoming posts, financial innovation—in this case the repackaging of debt—is a recurring theme in our review of historic crises. In this case, the South Sea Company structured the national debt in a way that was initially attractive to investors, but the scheme to finance the debt-for-equity swap ultimately proved to be noncredible and the market collapsed. Now fast-forward to 2013 and the five-year anniversary in September of Lehman Brothers’ failure. As Fed Governor Jeremy Stein pointed out in a recent speech, a combination of factors such as financial innovation, regulation, and a change in the economic environment, can sometimes contribute to an overheating of credit markets. Asset-backed securitization and collateralized debt obligations have returned with a bang—or perhaps a boom—and are on pace to exceed pre-crisis levels, perhaps fueled by investors’ reach for yield. And remember from our introduction to the Crisis Chronicles series that “lessons learned often last only a lifetime and are easily forgotten.” So, will the current reach for yield lead to ever more complex, leveraged investments and the next credit market bubble? Or will the lessons from the Great Recession last at least a lifetime?
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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/KjZnpsqby9M/story01.htm Tyler Durden
We noted last year:
An international treaty being negotiated in secret which would not only crack down on Internet privacy much more than SOPA or ACTA, but would actually destroy the sovereignty of the U.S. and all other signatories.
It is called the Trans-Pacific Partnership (TPP).
We also noted that even Congressmen are furious that the bill was being kept secret from the American public.
And that the TPP is an anti-American power grab by big corporations.
Wikileaks has now leaked the intellectual property chapter of the secret treaty … and it’s as bad as we feared.
Public Citizen explains how the TPP would limit people’s access to affordable medicine.
And International Business Times explains:
The TPP’s chapter on IP deals with a host of issues, but its potential impacts on basic Internet freedom and usage are perhaps the ones that would directly impact the most people in the short term. One of the biggest concerns about the agreement raised by the Internet freedom advocacy group the Electronic Frontier Foundation centers around the concept of “temporary copies.” Here’s the text of the relevant section of the TPP’s intellectual property chapter leaked Wednesday:
“Each Party shall provide that authors, performers, and producers of phonograms have the right to authorize or prohibit all reproductions of their works, performances, and phonograms, in any manner or form, permanent or temporary (including temporary storage in electronic form).”
The EFF wrote in a July analysis of the language – which has not been amended in the intervening months — that the provision “reveals a profound disconnect with the reality of the modern computer,” which relies on temporary copies to perform routine operations, during which it must create temporary copies of programs and files in order to carry out basic functions. This is particularly so while a computer is connected to the Internet, when it will use temporary copies to buffer videos, store cache files to ensure websites load quickly and more.
“Since it’s technically necessary to download a temporary version of everything we see on our devices, does that mean—under the US proposed language—that anyone who ever views content on their device could potentially be found liable of infringement?” the EFF wrote. “For other countries signing on to the TPP, the answer would be most likely yes.”
And see this.
TPP would literally act to destroy the sovereignty of the U.S. and the other nations which sign the bill.
Postscript: Will the powers-that-be renew their labeling of Wikileaks as criminals for leaking an anti-American bill which would gut our nation’s sovereignty?
Bonus:
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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Rl9YJQ0AmrU/story01.htm George Washington
Authored by Dambisa Moyo, originally posted at Project Syndicate,
Last month’s US government shutdown – the result of a partisan standoff in congressional budget negotiations – epitomizes the polarization that prevails in modern economic-policy debates.
On one side, John Maynard Keynes’s cohort argues that government intervention can help any economy grow its way out of crisis by spurring aggregate demand and, in turn, raising the employment rate. A country’s government, Keynesians contend, has the capacity – and responsibility – to solve many, if not all, of its economic problems.
On the opposite side, followers of the Austrian School of economic thought, especially the ideas of Friedrich Hayek, assert that limited government and free enterprise form the only viable path to liberty and prosperity. The market is the best arbiter of how to allocate scarce resources, and thus should serve as an economy’s main driver.
In recent years, this long-running debate has become increasingly contentious – and the costs of stalemate are mounting. In order to restore growth in developed economies, while sustaining strong GDP growth and reducing poverty in the developing world, a more unified approach to economic policymaking that draws from both traditions is needed.
Official responses to the global economic crisis highlight the interventionist model’s merits, proving that decisive government action can help to enhance efficiency and clear unbalanced markets, thereby protecting the economy from the demand shortfall caused by falling investment and rising unemployment. But the free market also has a crucial role to play, with longer-term, incentive-based policies catalyzing scientific and technological advancement – and thus boosting economies’ growth potential.
In determining how to promote innovation without sacrificing social protection, economists and policymakers should take a lesson from the field of physics. For nearly a century, physicists have attempted to merge the competing ideas of the field’s titans, including Wolfgang Pauli, the first physicist to predict the existence of neutrinos (the smallest particles of matter), and Albert Einstein, who explained the curvature of space-time. The so-called “theory of everything” would reconcile the inconceivably small with the unimaginably large, providing a comprehensive understanding of the universe’s physical properties.
Policymakers should be working to unite seemingly disparate theories to align policy decisions with the business cycle and the economy’s level of development. Such an approach should seek to protect economies from the destabilizing impacts of politically motivated policy changes, without impeding governments’ ability to correct dangerous imbalances. Officials must be at least as vigilant about reducing expenditure and withdrawing stimulus measures during periods of growth as they are inclined to introduce such policies during downturns.
To the extent that this approach reflects the view that policymaking is an art, not a science, that is a good thing: the world needs more flexibility in economic policymaking. But some might consider it a cause for concern, especially given growing suspicion of incentive-based economic policies in the wake of the global economic crisis.
Many blame the crisis on the decades-long ascendancy of a laissez faire approach to economic policymaking, and rightly credit government intervention with facilitating recovery. The tremendous economic success of countries like China, where hundreds of millions of people have escaped abject poverty in a single generation, has reinforced support for state-led systems.
In developed countries, too, many advocate a greater role for the state, in order to ensure that promised social benefits are delivered to rapidly aging populations. In fact, in many countries, the government’s capacity is already strained. As German Chancellor Angela Merkel has pointed out, though Europe is home to just 7% of the world’s population and produces 25% of the world’s wealth, it accounts for 50% of global welfare payments. When the United States is included, 11.5% of the global population receives 88% of the world’s welfare payments.
But relegating free-market principles to the past would simply create a new set of imbalances. Rather than allow extremists to continue to hijack economic-policy debates, policymakers must work to bridge competing schools of thought. Only then will productive discourse – the kind that does not end in government shutdown – be possible.
Keynes once wrote that he agreed with “almost all” of Hayek’s ideas. And Hayek found it “reassuring” to know that he and Keynes agreed “so completely.” This raises the question: What is really preventing economists and policymakers from devising – or even seeking – a unified theory of economics?
And if all that ignorance of credit’s inevitable limit and to-ing and fro-ing made you nauseous… the following may help…
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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/C7CZW67fA_8/story01.htm Tyler Durden
Just because very few actually understood the severity of the Cisco earnings guidance, in which the company forecast an 8-10% drop (let’s call it 9%) in quarterly revenues when Wall Street was expecting a 4% increase, we have compiled and presented in chart form the historical and projected quarterly revenue data for CSCO to show today’s preannouncement in all its gruesome context.
A few points:
And while another massive buyback is just what the adjusted EPS doctor ordered, should CSCO experience just one more quarter such as the forecast, things will get very ugly not just for revenue, which it is quite obvious is no longer growing anywhere, but for the bottom line.
In short: while the markets may not represent it, because the markets stopped reflecting reality some time in 2009, something is suddenly seriously broken not only with the global demand picture, but the entire world economy as well.
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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/fzzYYcLwfNc/story01.htm Tyler Durden
With Janet stealing the limelight, we really don’t expect any market-moving fireworks from the lame-duck Bernanke’s town hall presentation to US educators this evening. Discussing the Fed’s 100-year history and his efforts to bring greater transparency to the central bank’s actions, Bernanke will also take questions (which may well be much more interesting than the speech itself). But, to ensure some ‘fair-and-balanced’ coverage, we offer an alternate history of the Fed’s 100-year war against gold (and economic common sense).
Bernanke’s 100-Year History Of The Fed – Live Stream:
Live streaming video by Ustream
Nick Barisheff’s alternate 100-Year History of the Fed’s War Against Gold And Economic Common Sense…
Federal Reserve Centennial Anniversary_Executive Summary_Final_Formatted_12 11 13.pdf
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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/BYJ8tE9hueg/story01.htm Tyler Durden
With Janet stealing the limelight, we really don’t expect any market-moving fireworks from the lame-duck Bernanke’s town hall presentation to US educators this evening. Discussing the Fed’s 100-year history and his efforts to bring greater transparency to the central bank’s actions, Bernanke will also take questions (which may well be much more interesting than the speech itself). But, to ensure some ‘fair-and-balanced’ coverage, we offer an alternate history of the Fed’s 100-year war against gold (and economic common sense).
Bernanke’s 100-Year History Of The Fed – Live Stream:
Live streaming video by Ustream
Nick Barisheff’s alternate 100-Year History of the Fed’s War Against Gold And Economic Common Sense…
Federal Reserve Centennial Anniversary_Executive Summary_Final_Formatted_12 11 13.pdf
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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/BYJ8tE9hueg/story01.htm Tyler Durden
You know it’s bad when…
A man with the eye-catching name Batman bin Suparman has been jailed on theft and drugs charges.
The 23-year-old man, Batman bin Suparman (bin means “son of”), has been given a prison sentence of 33 months by a court in Singapore. Batman was arrested after being caught stealing money from a shop, as well as using his brother’s cash card to withdraw money. Far-fetched as it seems, this unusual name does appear to be entirely genuine!
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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Ss2booEnH70/story01.htm Tyler Durden
With gold down 10 of the last 11 days, Peter Schiff tells CNBC that this temporary downswing is due to “the fantasy of a US recovery,” that so many actually believe and thus, due to this ‘recovery’ the Fed will taper back its quantitative easing. “It’s not gonna happen,” Schiff explains, “we have a phony recovery,” and the Fed will more likely increase the amount of QE in order to sustain it, “which is very bullish for gold.” Crucially, Schiff clarifies that he “doesn’t think a taper is inevitable,” as many believe, “but an end to QE won’t happen by the Fed’s choice – the market will force them to tread on the brakes as the USD collapses.” As we noted earlier, Schiff also believes there is an attempt to do “whatever it takes” to pull the EUR down to maintain the USD – but as today’s price action shows, it’s not working… “Long-term, the fundamentals have never been better for gold.”
Schiff goes on to explain why he believes Yellen’s first act will be to raise QE…(which she somewhat confirmed after hours in her early pre-released testimony)
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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/6cB7FaOEFtE/story01.htm Tyler Durden