Month: January 2014

Promises, Promises!

By

Cognitive Dissonance

 

Even when we know otherwise we still tend to think about big picture problems (i.e. The Fed’s money printing, out of control US Government debt, student loan bubble/defaults, corporate/governmental corruption etc) as if they are being rained down upon us and not as if we are in any way responsible for the problems or the solutions. In other words we tend to see the world and its troubles from the point of view of a victim rather than a participant, let alone a partially responsible party.

There is no doubt that the sociopaths are now running the insane asylum and that we are entering the parabolic blow off phase of social and financial dysfunction. And I would also agree that sociopaths in general are an opportunistic lot and will actively seek out and exploit strife, stress and social dysfunction wherever they can find or foment it. Simply put they strike while the iron is hot and light fires when it is not.

But there are always sociopaths lurking in the shadows of society waiting to pounce whenever there is an opening. Even during the best of times they are salted throughout business, academia, government and politics, always working people and situations to their advantage. That’s just who they are and what they do. So why do we seem to have a bumper crop growing amongst us at this point in time?

It is said that power abhors a vacuum, that in the absence of an expressed or perceived form of ‘leadership’ (it doesn’t matter in what structure it presents, albeit monarchy, republic, dictatorship etc) one will quickly form or appear to fill the void. The same might be said for sociopaths filling the (increasing) void, but what exactly is this so called ‘void’ and how does it form?

Codependent dysfunction

Several weeks back I returned to the Northern Virginia/DC area on business and stopped to visit an elderly family friend who was recovering in a rehabilitation center after falling and severely injuring herself. For the sake of clarity and flow let’s call my friend Diane.

When I visited Diane she was three weeks removed from her accident and rehabbing well……or at least as well as can be expected from someone in her mid 80’s with a multitude of chronic health issues. But she was in good spirits and her only real complaint was with the food and a few less than attentive nurses.

However she was quite concerned about her daughter (let’s call her Sue) who has been visibly and openly angry with Diane over the circumstances of her fall. Without going into details while Sue might be factually correct regarding her mother’s fall and fading cognitive facilities, Sue’s continuing angry response appeared a bit irrational and misdirected. After talking to my friend for a while and reading between the lines I felt I better understood the underlying issue behind Sue’s anger.

It seems that well over twenty years ago Sue made a solemn promise to her mother, one that was repeated often both publically and privately. Sue promised she would never allow her mother to be sent to a nursing home to live out her remaining days and that she would always take care of her mother. Of course, Sue’s promise was made when Sue and Diane were both in good health, totally independent and self sufficient.

But times and circumstances have changed dramatically for mother and daughter, in particular because Diane and Sue are both struggling with health and financial issues. With it now clear that Diane can no longer safely live alone it is time for Sue to keep her promise and take her mother under her wing. And to her credit Sue was already taken steps to do precisely that when her mom is released from rehab in a few weeks. But it seems the tension between the two is thick and unsettling.

In my opinion the issue was obvious though neither really wanted to talk about it to the other. And the solution, or at least the only solution they could see, was unthinkable to both parties. Since neither could go there, both were triggered by what neither wanted to talk about. To be fair Diane was fairly coherent in her thinking, at least when she was discussing this with me. As well, I was not able to speak privately with Sue to sound her out. But I suspect that given the chance Sue would also unburden herself and speak plainly and frankly with me. Of course I wasn’t the one she needed to talk to.

The End Game

From my point of view the dysfunctional energy was coming from both sides. While Sue was sincere when her promise was made (and constantly reaffirmed) all those years ago, and her intention to honor it now is equally sincere, the strain to do so is at times psychologically and emotionally overwhelming. While she believes she wants to keep her promise (because that’s what you do when you make a solemn oath, especially to a loved one) in truth she doesn’t really desire to do so because of her own serious personal issues.

Worse, the amount of the ‘due bill’ has been building for years as her mom’s health steadily declined and the need for Sue to ‘pay off’ on her promise became ever more apparent. Simultaneously with Diane’s increasing ‘need’ Sue’s ability to ‘pay’ declined as the years progressed. And both parties recognized this, both on a conscious and subconscious level.

When the promise was made to Diane all those years back, while she was grateful and a bit relieved since she was single with no plans to remarry, she still had many years ahead of her and didn’t seriously consider the gravity of the promise made. However as the years progressed she began to count on Sue being there when she needed her.

In fact, knowing that her daughter’s safety net was there allowed Diane to splurge quite a bit more beyond her original plans during her late 60’s and 70’s and travel around the USA and several foreign countries. I suspect she spent more money than she would have if Sue’s safety net had never been offered.

So here we are at the end game. Diane is now at that point in her life where she needs ever increasing assistance with several aspects of daily living. While she informed me that it would be OK if she did not move in with her daughter she did not have all the financial resources to pay for the care she needed. She didn’t wish to be a burden, but either she moved in with another family member or friend or she required additional financial assistance to purchase the care she needed from professionals.

The bottom line was that Diane really did want her daughter to keep her promise since Diane had counted on it being kept. Sue was facing the pressure created by her promise and the added stress from this predicament was enormous when added to her ‘normal’ daily issues. These cognitive disconnects were creating a growing neurosis within both of them which if not settled now, would only grow and fester until it blew up and out.

Truth and Reconciliation

Earlier I mentioned that power abhors a vacuum. In the case of Diane and Sue the term vacuum or void is better conceptualized if we see it as an unbalanced equation or energy level. If Diane did not need ‘help’, starting from this point right up to when she eventually died, there would be no ‘need’ for Sue (or anyone else for that matter) to fill, no vacuum or void to equalize. It is Diane’s ‘need’ that creates the imbalance in the present status quo, in the level of power, in the equation. That giant sucking neurosis was air rushing into the vacuum to equalize the pressure.

It is this powerful imbalance that is creating (or more accurately fanning the flames of) the cognitive dissonance in both of them, this desire both to do and not to do what each feels compelled by conflicting desires to follow. This in turn is fostering the neurosis that presents as anger and psychological discord. Left to fester in this state for too long, serious dysfunctional behavior eventually expresses. What is rarely discussed is how this core cognitive dissonance affects in ways large and small nearly all aspects of a person’s ability to live a happy and healthy life.

We cannot ‘make’ another person ‘willingly’ change (the only type of change that is transformative and lasting) without their consent. We can force their body and condition their mind, but a true metamorphosis only occurs when we willing participate for our own inner reasons. However, we can be a catalyst for another person’s change, especially if we are part of the problem. But this requires that first we transform ourselves and most importantly our transformation cannot be initiated for others or with the intent to influence others.

What Diane and Sue are unable to see is that they are both locked into a narrow behavioral range; their choices are limited by the promise. Since neither can ‘change’ the other, the only way out is to make the decision to break out of the box and face what they are both avoiding. Neither can fundamentally change the fact that Diane is elderly and unable to fully care for herself. The only thing they can ‘change’ is how they perceive and then react to this reality.

Once they cease pounding on the locked door directly in front of them and look around they will find dozens of others doors unlocked and available…..including the formerly locked door they were just pounding on. These alternatives have been there all along; it is our narrow range of perceptual vision that blinds us to the blatantly obvious and sorely needed.

Free Yourself

After Diane had finished unburdening herself to me she fell silent for a moment, and then quietly asked what I thought she should do. Instantly I knew what to say, but hesitated for a moment because I did not expect my answer to be welcomed. “You must release your daughter from her promise. Only you can do this. I know it’s difficult and unfair, but Sue is unable to find the courage to ask to be released and the burden of the promise is too great for her and you to carry.”

I paused and waited for Diane to protest, but she remained silent, seemingly willing to hear more. “It will be extremely difficult for both of you. Sue will insist that she keep her promise; you must insist that the promise has already been discharged so there is nothing to keep. Most likely Sue will not accept your release and that’s OK, since the real purpose of your release is not to free Sue, but to free yourself from the burden of the false hope that what was promised can and will still be delivered.”

Once again I paused and this time Diane replied. “But I’ve told her several times that she doesn’t have to take me in, that I could find somewhere else to live.”

Her facial expression was almost childlike, hoping that her answer was enough to satisfy me while at the same time knowing it would not. It was a response I was expecting. False hope binds us to impossible situations and accepting that we are not being, and have not been, truthful with our ‘self’ often dies a hard and painful death.

I slowly took a deep breath, gathered up my own courage and pressed on. No one wants to tell anyone what they don’t want to hear. “Was it a sincere offer? Were you ready and willing to find another place if she accepted or were you simply saying it to help both of you feel better about the burden you believe you’re placing on her?” Diane winced when I said that and I immediately wished I had been gentler. Honesty was needed, but bluntness was not and being so can at times be cruel.

“Before you say anything to Sue you must be completely settled with yourself on this matter and be willing to accept any and all consequences of your actions, even if that means moving into a state paid nursing home or seriously damaging the relationship with your daughter. I paused to gauge her response, and then continued on when she said nothing.

If you cannot find peace with this before speaking with her you will not be able to fully and completely release yourself, and by extension her, from the damaging hold the promise has on both of you. You must become willing and able to do what at this moment you are unwilling to do. Consider how much power this has over you if you can’t bring yourself to release its grip. Then consider how free you will be once you have dismissed the promise that binds you to your distress.”

After a few moments of silence I gently changed the subject. Diane will have plenty of time to wrestle with her demons after I am gone. No sense forcing the issue anymore. Truth is instantly recognizable for its self evident nature. The difficulty isn’t in knowing what to do; the difficulty lay in doing what needs to be done.

Self Betrayal

During my six hour drive home I had plenty of time to mull over my visit and what I had said. I was struck by the parallels between Diane and Sue and the promises made by society to society, oftentimes hidden in the guise of public government or private corporation’s promises to “We the People”.

Regardless of whether the promises come in the form of financial, governmental, regulatory, judicial or political, they have not and will not be fully kept from this point on. We cannot force those who have no intention to keep them or can’t keep them to perform even if they actually wanted to do so. Nor would shaking awake the slumbering majority to the approaching crisis force the promises to be kept. If anything that would just accelerate the crisis since the entire system operates as a confidence game. Shake confidence and you break the game board.

The exponentially increasing Federal government’s (and private corporation’s) spying on its own citizens, public and corporate corruption and crony capitalism, glaring judicial injustice, blatant police state tactics and escalating social safety net breakdowns are the symptom, not the disease. ‘We the People’ have known for decades, or should have known if we had not outsourced our own personal responsibility to know what was being done (or not done) in our name, that promises were being made that could not be kept.

Rather than step forward and demand accountability from our so called ‘leadership’, something that also demands accountability from ourselves for believing the lies of the sociopaths that it will all work out if we just leave it to them (when obviously it would not), ‘We the People’ pursued a policy of don’t ask, don’t tell and narcissistic naval gazing while growing fat and increasingly unhappy. The neurosis feeds upon itself in a positive feedback loop until it reaches the blow off phase and the social organism collapses. This is the disease.

The runaway train has now reached the terminal fascism phase and the collective and individual courage to step onto the tracks and meet the problem head on is lost and nowhere to be found. The general public, including you and me (I do not exclude myself from blame) have resigned ourselves to our lot in life and are hunkering down (or exploiting the final frenzy for personal gain) to wait out the explosive destruction with the hope of surviving to live another day. Once again it is selfish pursuits that stand in the way of solutions.

In the face of mass self betrayal, all you and I can hope to do is work towards releasing ourselves from ourselves. We must release ‘them’ from the false promises they have made so that we may release ourselves from the anger, resentment and false hope that currently has us all tied up in neurotic knots and dysfunctional depression. We must release ourselves from the past in order to move each other forward into the future.

It all begins within.

 

01-07-2014

Cognitive Dissonance  

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/FbbBoN_mRrw/story01.htm Cognitive Dissonance

One of the biggest mistakes we can make, Saxo Bank's CEO warns, is to assume that rationality will prevail, that just through superior economic performance, freedom will capture enough peoples' hearts in a democracy to win the day. In the last of his three-part series (part 1 and part 2), Lars Seier Christensen focuses on the broader relevance of Ayn Rand in society today, noting that she remains among the few that recognised with crystal clarity, that we will not win the battle through just proving that freedom and capitalism works. This, he warns, creates a major problem for those of us that like to argue rationally, rather than emotionally.

Excerpted from Saxo Bank CEO, Lars Seier Christensen's blog,

…

[The current irrational world] creates a major opportunity for politicians that intuitively know that in a rational world, there would be little demand for their services. Only in an irrational, emotional universe, where opportunists can gain access to media and visibility to express “feelings” and try to take the moral high ground, no matter how unfounded in reality it is — only in such an environment can you survive without having to produce practical, productive results, and instead prosper and benefit from empty talk and third-rate acting performances.

This tendency, unfortunately, has only strengthened during the recent crisis. There is often a complete disconnect between the reality and the words used to describe it, the actions pretending to deal with it. In particular, this is very noticeable in the Eurozone these days.

…

Ayn Rand has gained renewed relevance and attention, because her predictions have been fulfilled in many different areas.

First, the politicians assign ever greater powers to themselves, as they manage to convince the citizens of the need for even more interference, although the problems are created by interference in the first place.

There are endless examples of this in both the US and the Eurozone, where one mistake invariably leads to call for even more powers, leading to new mistakes.

Second, freedom and capitalism, the only real answer to the current crisis, gets ever more restricted and prevented from working efficiently, meaning that the underlying strength of human ingenuity and creativity is stopped from working and becomes increasingly powerless to pull us out of the morass we are in.

Another of Rand's predictions of business people using government favours in return for giving up their independence, has sadly been confirmed better than anywhere else in my own industry. It is embarrassing to see the extent the banking industry has relied on support from governments, and how ruthlessly it is currently exploiting the offers of cheap money available from the central banks.

Very little of the bailouts filter down to the real economy…

…

Pick-a-winner, corporate social responsibility, employment rules, affirmative action, the creation of fictional jobs and plain political popularity and obedience will then rule who prospers and survives in all industries, not just banking. Beware of this development, it is poison to capitalism, growth and to prosperity for all of you.

…

In fact, the undemocratic, power-grabbing, emotional, populistic Washington that takes over in Atlas Shrugged is today most closely resembled by the EU and the Eurozone in the real world.

…

In France, we now have a President that by his own admission, hates the rich. So much so that he is trying to circumvent his own constitution to introduce punitive taxes on them, although illegal.

…

Well, it seems that the rich also hate their president, judging by the number of them leaving — famously spearheaded by Gerard Depardieu — for places like Belgium, that amazingly actually acts as a tax haven for the French in spite of all the EU rhetoric, or Switzerland, where inflows of new immigration requests are, according to my sources, at record highs, particularly from Scandinavia, UK and France. Depardieu, of course, chose Russia, which speaks volumes as to the deep trouble Western Europe is in.

…

This leads to a very interesting question, a question full of hope. Is there indeed also a solution to the problem, such as the one Ayn Rand foresaw with the flight to Galts Gulch? It will be difficult to find a place entirely outside of the reach of aggressive governments eager for tax dollars, as Switzerland has learned to its misfortune.

…

So nowhere seems safe from populism and irrationality any longer. It is difficult to see the necessary reforms forthcoming, and sadly, we may have to go through a much more severe economic collapse before change will be forced upon us. Unfortunately, that change may also be totalitarian in nature, of course. In fact, that is the more likely outcome in the short run.

I don't believe the battle will be won by economic rationality. This goes out the door, once more than 51 percent of the voters live off the government — and probably even long before.

…

If we don’t succeed in changing the values and direction of at least the next generation, I fear the full prediction of Atlas Shrugged will become reality and while that may hold some promise for the distant future, it is not something that I think people of my age feel like going through if we can avoid it.

 

Read Christensen's full Ayn Rand discussion here (Part 1, Part 2, and Part 3)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/GyGmJq4SaSs/story01.htm Tyler Durden

One of the biggest mistakes we can make, Saxo Bank's CEO warns, is to assume that rationality will prevail, that just through superior economic performance, freedom will capture enough peoples' hearts in a democracy to win the day. In the last of his three-part series (part 1 and part 2), Lars Seier Christensen focuses on the broader relevance of Ayn Rand in society today, noting that she remains among the few that recognised with crystal clarity, that we will not win the battle through just proving that freedom and capitalism works. This, he warns, creates a major problem for those of us that like to argue rationally, rather than emotionally.

Excerpted from Saxo Bank CEO, Lars Seier Christensen's blog,

…

[The current irrational world] creates a major opportunity for politicians that intuitively know that in a rational world, there would be little demand for their services. Only in an irrational, emotional universe, where opportunists can gain access to media and visibility to express “feelings” and try to take the moral high ground, no matter how unfounded in reality it is — only in such an environment can you survive without having to produce practical, productive results, and instead prosper and benefit from empty talk and third-rate acting performances.

This tendency, unfortunately, has only strengthened during the recent crisis. There is often a complete disconnect between the reality and the words used to describe it, the actions pretending to deal with it. In particular, this is very noticeable in the Eurozone these days.

…

Ayn Rand has gained renewed relevance and attention, because her predictions have been fulfilled in many different areas.

First, the politicians assign ever greater powers to themselves, as they manage to convince the citizens of the need for even more interference, although the problems are created by interference in the first place.

There are endless examples of this in both the US and the Eurozone, where one mistake invariably leads to call for even more powers, leading to new mistakes.

Second, freedom and capitalism, the only real answer to the current crisis, gets ever more restricted and prevented from working efficiently, meaning that the underlying strength of human ingenuity and creativity is stopped from working and becomes increasingly powerless to pull us out of the morass we are in.

Another of Rand's predictions of business people using government favours in return for giving up their independence, has sadly been confirmed better than anywhere else in my own industry. It is embarrassing to see the extent the banking industry has relied on support from governments, and how ruthlessly it is currently exploiting the offers of cheap money available from the central banks.

Very little of the bailouts filter down to the real economy…

…

Pick-a-winner, corporate social responsibility, employment rules, affirmative action, the creation of fictional jobs and plain political popularity and obedience will then rule who prospers and survives in all industries, not just banking. Beware of this development, it is poison to capitalism, growth and to prosperity for all of you.

…

In fact, the undemocratic, power-grabbing, emotional, populistic Washington that takes over in Atlas Shrugged is today most closely resembled by the EU and the Eurozone in the real world.

…

In France, we now have a President that by his own admission, hates the rich. So much so that he is trying to circumvent his own constitution to introduce punitive taxes on them, although illegal.

…

Well, it seems that the rich also hate their president, judging by the number of them leaving — famously spearheaded by Gerard Depardieu — for places like Belgium, that amazingly actually acts as a tax haven for the French in spite of all the EU rhetoric, or Switzerland, where inflows of new immigration requests are, according to my sources, at record highs, particularly from Scandinavia, UK and France. Depardieu, of course, chose Russia, which speaks volumes as to the deep trouble Western Europe is in.

…

This leads to a very interesting question, a question full of hope. Is there indeed also a solution to the problem, such as the one Ayn Rand foresaw with the flight to Galts Gulch? It will be difficult to find a place entirely outside of the reach of aggressive governments eager for tax dollars, as Switzerland has learned to its misfortune.

…

So nowhere seems safe from populism and irrationality any longer. It is difficult to see the necessary reforms forthcoming, and sadly, we may have to go through a much more severe economic collapse before change will be forced upon us. Unfortunately, that change may also be totalitarian in nature, of course. In fact, that is the more likely outcome in the short run.

I don't believe the battle will be won by economic rationality. This goes out the door, once more than 51 percent of the voters live off the government — and probably even long before.

…

If we don’t succeed in changing the values and direction of at least the next generation, I fear the full prediction of Atlas Shrugged will become reality and while that may hold some promise for the distant future, it is not something that I think people of my age feel like going through if we can avoid it.

 

Read Christensen's full Ayn Rand discussion here (Part 1, Part 2, and Part 3)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/GyGmJq4SaSs/story01.htm Tyler Durden

As was well-known in advance, today JPMorgan entered into a deferred prosecution agreement with the DOJ, whereby Jamie Dimon’s enterprise, where legal fees and litigation charges are no longer “non-recurring” items but a cost of doing business, paid $1.7 billion (non tax-deductible) to settle all criminal charges that it was aware well in advance that Madoff was a ponzi scheme and did nothing to alert authorities or the general public. What was less known is just how acutely JPM was aware of the developments at Madoff’s pyramid scheme, and that while apparently JPM was not convinced enough of Madoff’s criminality to alert regulators using “Suspicious Activity Reports”, it had seen enough to quietly reduce its exposure with the Ponzi from $369 million at the beginning of October 2008, or just after the Lehman collapse, to just $81 million at the time of Madoff’s arrest.

There is much more on the sequence of events in JPM’s realization that Madoff was a fraud (see filing below), but the punchline is the following extract from lengthy internal email in October 2008 by a JPM trading analyst that raised concerns about Madoff’s investment returns, and which explains why frauds are never caught until it is too late: “The October 16 Memo ended with the observation that: “[t]here are various elements in the story that could make us nervous,” including the fund managers “apparent fear of Madoff, where no one dares to ask any serious questions as long as the performance is good.… personnel at one feeder fund seem[ed] very defensive and almost scared of Madoff. They seem unwilling to ask him any difficult questions and seem to be considering his ‘interests’ before those of the investors. It’s almost a cult he seems to have fostered.”

And there you have the biggest failing of modern capital markets in a nutshell: nobody dares to ask any serious questions as long as the performance is good, and where there a cult-like following of the ringleader (see Central Banks). By the time the performance turns bad, and all the overdue questions are finally asked, it is always too late, and the cult blows up.

What is strangely missing in today’s action by the DOJ, which slams JPM (rightfully), is any mention of the SEC, you know – the regulators – those people whose job it was to catch Madoff in the act. Because while pocketing $1.7 billion from JPM may be an enjoyable exercise in populist propaganda for an administration that suddenly realizes it has created an unprecedented social class hatred schism and needs to punish bankers on a recurring, monthly basis, where is there any mention of the SEC’s fault for being completely oblivious to what JPM uncovered on its own? And yes, JPM did not alert the authorities, but at the end of the day its fiduciary obligations are first and foremost to its shareholders, which it executed, and not to a gullible public which opted for yet another “get rich quick” scheme, hoping foolishly that the SEC has some idea what it is doing.

Finally, we can’t help but wonder: when the current bubble to end all bubbles implodes, who will be punished for failing to point out that the emperor is naked, and that it is the cult of the Federal Reserve and its central bank peers around the globe, that have created the biggest Ponzi scheme the world has ever seen?

For those curious about the details of how JPM succeeded in realizing what the SEC failed to grasp, despite numerous vocal warnings from Harry Markopolos, read on.

From U.S. v. JPMorgan Chase – Deferred Prosecution Agreement Packet, Exhibit C

October 2008: JPMC Concludes In A Report To U.K. Regulators That Madoff s Returns Are Probably Too Good To Be True

In mid-September 2008, following the collapse of Lehman Brothers and growing concerns about counter-party risk, JPMCs Head of Global Equities directed investment bank personnel to substantially reduce JPMC’s exposure to hedge funds, which had increased following JPMCs March 2008 acquisition of Bear Stearns. This directive was reiterated by the Investment Bank Risk Committee on October 3, 2008. Acting at the direction of the Head of Global Equities, the Equity Exotics Desk began analyzing which hedge funds to reduce exposure to, including by directing the Desk’s due diligence analyst (the “Equity Exotics Analyst”) to scrutinize investments in various hedge funds, including the Madoff feeder funds. The Equity Exotics Analyst conducted this due diligence by, among other things, analyzing the reported strategy and returns of Madoff Securities, speaking to personnel at Madoff feeder funds and financial institutions administering Madoff feeder funds, and unsuccessfully seeking from the feeder funds and administrators documentary proof of the assets of Madoff Securities.

On October 16, 2008, the Equity Exotics Analyst wrote a lengthy e-mail to the head of the Equity Exotics Desk and others summarizing his conclusions (the “October 16 Memo”), The October 16 Memo described the inability of JPMC or the feeder funds to validate Madoff s trading activity or custody of assets. The October 16 Memo noted that the feeder funds were audited by major accounting firms, which had issued unqualified opinions for 2007, but questioned Madoff s “odd choice” of a small, unknown accounting firm. The October 16, 2008 Memo reported that personnel from one of the feeder funds “said they were reassured by the claim that FINRA and the SEC performed occasional audits of Madoff,” but that they “appear not to have seen any evidence of the reviews or findings,” The October 16 Memo also questioned the reliability of information provided by the feeder funds and the willingness of the feeder funds to obtain verifying information from Madoff. For example, the memo reported that personnel at one feeder fund “seem[ed] very defensive and almost scared of Madoff. They seem unwilling to ask him any difficult questions and seem to be considering his ‘interests’ before those of the investors. It’s almost a cult he seems to have fostered.” The Equity Exotics Analyst further wrote that there was both a “lack of transparency” into Madoff Securities and “a resistance on the part of Madoff to provide meaningful disclosure.”

The October 16 Memo ended with the observation that: “[t]here are various elements in the story that could make us nervous,” including the fund managers “apparent fear of Madoff, where no one dares to ask any serious questions as long as the performance is good.” The October 16 Memo concluded: “I could go on but we seem to be relying on Madoff s integrity (or the [feeder funds’] belief in Madoff s integrity) and the quality of the due diligence work (initial and ongoing) done by the custodians . . . to ensure that the assets actually exist and are properly custodied, If some[thing] were to happen with the funds, our recourse would be to the custodians and whether they had been negligent or grossly negligent.”

The Head of Due Diligence responded by complimenting the Equity Exotics Analyst on the October 16 Memo, making reference to other long-running fraud schemes, and suggesting in a joking manner that they should visit the Madoff Securities accountant’s office in New City, New York to make sure it was not a “car wash.”

* * *

JPMC’s Redemptions From Madoff Feeder Funds

On October 16, 2008 — the day of the October 16 Memo — an Equity Exotics empl
oyee requested by e-mail a “list of all external trades and the exact counterparty trade” for each of the Madoff-related feeder funds, noting that “[t]le list needs to be exhaustive as we may be terminating all of these trades and we cannot afford missing any.” The Equity Exotics Desk, which had already placed redemption orders for approximately $78 million from the Madoff feeder funds between October 1 and October 15, thereafter sought to redeem almost all of its remaining money in the Madoff feeder funds.

In addition to redeeming its positions in the Madoff feeder funds, JPMC sought, with the assistance of legal counsel, to cancel or otherwise unwind certain of the structured products issued related to the performance of the Madoff feeder funds. In an attempt to unwind these transactions, JPMC told the distributors of the Madoff notes that it was invoking a provision of the derivatives contract that enabled it to de-link the notes from the performance of the Madoff feeder funds if JPMC could not obtain satisfactory information about its investment. For example, in a letter dated October 27, 2008, JPMC warned that it would declare a “Lock-In Event” under the terms of the contract unless the recipient — a distributor that the Equity Exotics Analyst had spoken to as part of his due diligence underlying the October 16 Memo — could provide the identity of all of Madoff Securities’ options counterparties by 5:00 PM the following day.

In the Fall of 2008, the amount of JPMC’s position in Madoff feeder funds fell from approximately $369 million at the beginning of October 2008 (which was down slightly from its high-water mark of $379 million, in July 2008) to approximately $81 million at the time of Madoff s arrest, on December 11, 2008 — a reduction of approximately $288 million, or approximately 80% of JPMC’s proprietary capital invested as a hedge in Madoff feeder funds. During the same period, JPMC spent approximately $19 million buying back Madoff-linked notes and approximately $55 million to unwind a swap transaction with a Madoff feeder fund that eliminated JPMC’s contractual obligation with respect to those structured products. When Madoff was arrested, JIPMC booked a loss of approximately $40 million, substantially less than the approximately $250 million it would have lost but for these transactions.

At the same time, the Equity Exotics Desk also held through the time of Madoff s arrest a gap note providing JPMC with $5 million in protection if the value of a Madoff feeder fund collapsed completely. In a November 28, 2008 e-mail, an Equity Exotics banker declined a third party’s request to buy this protective gap note from JPMC, and described the gap note as being “as of today. . . very valuable” to JPMC.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/dbJpdXnWYB8/story01.htm Tyler Durden

As was well-known in advance, today JPMorgan entered into a deferred prosecution agreement with the DOJ, whereby Jamie Dimon’s enterprise, where legal fees and litigation charges are no longer “non-recurring” items but a cost of doing business, paid $1.7 billion (non tax-deductible) to settle all criminal charges that it was aware well in advance that Madoff was a ponzi scheme and did nothing to alert authorities or the general public. What was less known is just how acutely JPM was aware of the developments at Madoff’s pyramid scheme, and that while apparently JPM was not convinced enough of Madoff’s criminality to alert regulators using “Suspicious Activity Reports”, it had seen enough to quietly reduce its exposure with the Ponzi from $369 million at the beginning of October 2008, or just after the Lehman collapse, to just $81 million at the time of Madoff’s arrest.

There is much more on the sequence of events in JPM’s realization that Madoff was a fraud (see filing below), but the punchline is the following extract from lengthy internal email in October 2008 by a JPM trading analyst that raised concerns about Madoff’s investment returns, and which explains why frauds are never caught until it is too late: “The October 16 Memo ended with the observation that: “[t]here are various elements in the story that could make us nervous,” including the fund managers “apparent fear of Madoff, where no one dares to ask any serious questions as long as the performance is good.… personnel at one feeder fund seem[ed] very defensive and almost scared of Madoff. They seem unwilling to ask him any difficult questions and seem to be considering his ‘interests’ before those of the investors. It’s almost a cult he seems to have fostered.”

And there you have the biggest failing of modern capital markets in a nutshell: nobody dares to ask any serious questions as long as the performance is good, and where there a cult-like following of the ringleader (see Central Banks). By the time the performance turns bad, and all the overdue questions are finally asked, it is always too late, and the cult blows up.

What is strangely missing in today’s action by the DOJ, which slams JPM (rightfully), is any mention of the SEC, you know – the regulators – those people whose job it was to catch Madoff in the act. Because while pocketing $1.7 billion from JPM may be an enjoyable exercise in populist propaganda for an administration that suddenly realizes it has created an unprecedented social class hatred schism and needs to punish bankers on a recurring, monthly basis, where is there any mention of the SEC’s fault for being completely oblivious to what JPM uncovered on its own? And yes, JPM did not alert the authorities, but at the end of the day its fiduciary obligations are first and foremost to its shareholders, which it executed, and not to a gullible public which opted for yet another “get rich quick” scheme, hoping foolishly that the SEC has some idea what it is doing.

Finally, we can’t help but wonder: when the current bubble to end all bubbles implodes, who will be punished for failing to point out that the emperor is naked, and that it is the cult of the Federal Reserve and its central bank peers around the globe, that have created the biggest Ponzi scheme the world has ever seen?

For those curious about the details of how JPM succeeded in realizing what the SEC failed to grasp, despite numerous vocal warnings from Harry Markopolos, read on.

From U.S. v. JPMorgan Chase – Deferred Prosecution Agreement Packet, Exhibit C

October 2008: JPMC Concludes In A Report To U.K. Regulators That Madoff s Returns Are Probably Too Good To Be True

In mid-September 2008, following the collapse of Lehman Brothers and growing concerns about counter-party risk, JPMCs Head of Global Equities directed investment bank personnel to substantially reduce JPMC’s exposure to hedge funds, which had increased following JPMCs March 2008 acquisition of Bear Stearns. This directive was reiterated by the Investment Bank Risk Committee on October 3, 2008. Acting at the direction of the Head of Global Equities, the Equity Exotics Desk began analyzing which hedge funds to reduce exposure to, including by directing the Desk’s due diligence analyst (the “Equity Exotics Analyst”) to scrutinize investments in various hedge funds, including the Madoff feeder funds. The Equity Exotics Analyst conducted this due diligence by, among other things, analyzing the reported strategy and returns of Madoff Securities, speaking to personnel at Madoff feeder funds and financial institutions administering Madoff feeder funds, and unsuccessfully seeking from the feeder funds and administrators documentary proof of the assets of Madoff Securities.

On October 16, 2008, the Equity Exotics Analyst wrote a lengthy e-mail to the head of the Equity Exotics Desk and others summarizing his conclusions (the “October 16 Memo”), The October 16 Memo described the inability of JPMC or the feeder funds to validate Madoff s trading activity or custody of assets. The October 16 Memo noted that the feeder funds were audited by major accounting firms, which had issued unqualified opinions for 2007, but questioned Madoff s “odd choice” of a small, unknown accounting firm. The October 16, 2008 Memo reported that personnel from one of the feeder funds “said they were reassured by the claim that FINRA and the SEC performed occasional audits of Madoff,” but that they “appear not to have seen any evidence of the reviews or findings,” The October 16 Memo also questioned the reliability of information provided by the feeder funds and the willingness of the feeder funds to obtain verifying information from Madoff. For example, the memo reported that personnel at one feeder fund “seem[ed] very defensive and almost scared of Madoff. They seem unwilling to ask him any difficult questions and seem to be considering his ‘interests’ before those of the investors. It’s almost a cult he seems to have fostered.” The Equity Exotics Analyst further wrote that there was both a “lack of transparency” into Madoff Securities and “a resistance on the part of Madoff to provide meaningful disclosure.”

The October 16 Memo ended with the observation that: “[t]here are various elements in the story that could make us nervous,” including the fund managers “apparent fear of Madoff, where no one dares to ask any serious questions as long as the performance is good.” The October 16 Memo concluded: “I could go on but we seem to be relying on Madoff s integrity (or the [feeder funds’] belief in Madoff s integrity) and the quality of the due diligence work (initial and ongoing) done by the custodians . . . to ensure that the assets actually exist and are properly custodied, If some[thing] were to happen with the funds, our recourse would be to the custodians and whether they had been negligent or grossly negligent.”

The Head of Due Diligence responded by complimenting the Equity Exotics Analyst on the October 16 Memo, making reference to other long-running fraud schemes, and suggesting in a joking manner that they should visit the Madoff Securities accountant’s office in New City, New York to make sure it was not a “car wash.”

* * *

JPMC’s Redemptions From Madoff Feeder Funds

On October 16, 2008 — the day of the October 16 Memo — an Equity Exotics employee requested by e-mail a “list of all external trades and the exact counterparty trade” for each of the Madoff-related feeder funds, noting that “[t]le list needs to be exhaustive as we may be terminating all of these trades and we cannot afford missing any.” The Equity Exotics Desk, which had already placed redemption orders for approximately $78 million from the Madoff feeder funds between October 1 and October 15, thereafter sought to redeem almost all of its remaining money in the Madoff feeder funds.

In addition to redeeming its positions in the Madoff feeder funds, JPMC sought, with the assistance of legal counsel, to cancel or otherwise unwind certain of the structured products issued related to the performance of the Madoff feeder funds. In an attempt to unwind these transactions, JPMC told the distributors of the Madoff notes that it was invoking a provision of the derivatives contract that enabled it to de-link the notes from the performance of the Madoff feeder funds if JPMC could not obtain satisfactory information about its investment. For example, in a letter dated October 27, 2008, JPMC warned that it would declare a “Lock-In Event” under the terms of the contract unless the recipient — a distributor that the Equity Exotics Analyst had spoken to as part of his due diligence underlying the October 16 Memo — could provide the identity of all of Madoff Securities’ options counterparties by 5:00 PM the following day.

In the Fall of 2008, the amount of JPMC’s position in Madoff feeder funds fell from approximately $369 million at the beginning of October 2008 (which was down slightly from its high-water mark of $379 million, in July 2008) to approximately $81 million at the time of Madoff s arrest, on December 11, 2008 — a reduction of approximately $288 million, or approximately 80% of JPMC’s proprietary capital invested as a hedge in Madoff feeder funds. During the same period, JPMC spent approximately $19 million buying back Madoff-linked notes and approximately $55 million to unwind a swap transaction with a Madoff feeder fund that eliminated JPMC’s contractual obligation with respect to those structured products. When Madoff was arrested, JIPMC booked a loss of approximately $40 million, substantially less than the approximately $250 million it would have lost but for these transactions.

At the same time, the Equity Exotics Desk also held through the time of Madoff s arrest a gap note providing JPMC with $5 million in protection if the value of a Madoff feeder fund collapsed completely. In a November 28, 2008 e-mail, an Equity Exotics banker declined a third party’s request to buy this protective gap note from JPMC, and described the gap note as being “as of today. . . very valuable” to JPMC.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/dbJpdXnWYB8/story01.htm Tyler Durden

Submitted by John Cochran, via the Ludwig von Mises Institute,

In his The General Theory of Employment Interest and Money, John M. Keynes criticized, without citing or mentioning him explicitly, Hayek’s (Austrian) primary policy recommendation: the best way to avoid a bust is prevention. Hayek knew that avoiding the credit-created boom prevents the associated malinvestments and over-consumption while boom-bust cycles will be avoided through prevention or significant reductions in credit creation. Keynes, however, thought differently:

Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.

A good interpretation of the Bernanke Fed monetary central planning since the end of the “Great Recession” with its near zero-interest rate policy coupled with multiple rounds of quantitative easing (QE) driven by apoplithorismosphobia, is that the Fed has been attempting to follow Keynes’s advice. The way to avoid a new slump is to keep interest rates low for as far as the eye can see as a way to overcome a lack of “animal sprits” and thus sustain a quasi-boom. As long as inflation is low, no harm, no foul. In fact, as the thinking goes, a little more inflation might be beneficial.

Comments by Peter Schiff in Reaction to the Federal Reserve Policy Statement “following the Fed’s announced limited tapering of QE III support this interpretation of Fed intentions.” Schiff points out, “There can be little doubt that today’s Fed announcement is an epic attempt at rhetorical audacity. The message they hope to convey is that they are tightening monetary policy by loosening it.” He then points out, “There is little evidence to suggest that the trends are self-sustainable. But seemingly strong data had made the arguments in favor of continued QE increasingly untenable. As they could no longer stay the course the Fed had to do something. Ultimately they decided to play it both ways.” Schiff then explains what is unstated, but between the lines — continued ease is the Fed’s intent:

But these “Open Mouth Operations” likely represent the full inventory of the Fed’s policy options. I suspect that when the economic data begins to disappoint, the Fed will quickly reverse course and increase the size of its monthly purchases. In fact, today’s Fed statement was careful to avoid any commitments to additional tapering in the future. It merely said that further changes in the amount of purchases will be dependent on the data. This means that QE could go in either direction.

If yields move much higher I feel that the Fed will have to intervene to bring them back down. In other words, the Fed will find it much harder to exit QE than it was to enter.

Austrians long ago showed the folly in such policies. Hayek’s lead essay in Profits, Interest and Investment (1939) provides an early Austrian response to Keynes’s nonsense. In what is one of Hayek’s most difficult articles, Hayek explicitly argues that such a policy will ultimately not only fail to achieve its stated objective, but will lead to significant long-run harm to the economy. The policy might temporarily appear to increase employment, but the effect is an illusion. Credit creation and artificially low interest rates, even if applied to an economy with currently unused resources still misdirects production leading to boom-bust episodes and higher future unemployment. Adrián O. Ravier updates these arguments in his two excellent QJAE articles, “Rethinking Capital-Based Macroeconomics” and “Dynamic Monetary Theory and the Phillips Curve with a Positive Slope”. In the first, Ravier provides

an explanation of why expansionary monetary policies fail in the longer term to solve the unemployment problems associated with recessions. This extension provides a fresh perspective on the debates between Hayek and Keynes in the 1930s and over “quantitative easing” today.

In the second article, Ravier shows:

While it is true that after the boom and bust the economy returns to the natural rate of unemployment, the crucial point is that the “natural rate” at the end of the cycle is quite different from the one evident at the start. This requires an “Austrian” Phillips curve with a positive slope.

During an artificial boom, employment may initially decline. However after a return to “normalcy,” unemployment may actually be higher than what would have been the norm before the policy-induced boom.

Joe Salerno cautions that besides the long run risks discussed above, an artificial low interest rate environment based on deflation fears may actually be preventing a healthy recovery. Salerno points out:

For recovery to begin again, there needs to be a steep rise in the “real,” or inflation-adjusted, interest rate observed in financial markets. High interest rates do not stifle the recovery but are the sure sign that the readjustment of relative prices required to realign the production structure with economic reality is proceeding apace. The mislabeled “secondary deflation,” whether or not it is accompanied by an incidental monetary contraction, is thus an integral part of the adjustment process. It is the prerequisite for the renewal of entrepreneurial boldness and the restoration of confidence in monetary calculation. Decisions by banks and capitalist-entrepreneurs to temporarily hold rather than lend or invest a portion of accumulated savings in employing the factors of production and the corresponding rise of the loan and natural rates above some estimated “true” time preference rate does not impede but speeds up the recovery. This implies, of course, that any political attempt to arrest or reverse the decline in factor and asset prices through monetary manipulations or fiscal stimulus programs will retard or derail the recession-adjustment process.

Current Fed policy is a policy of illusion, or better yet, of delusion.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/LFuibwSYQkE/story01.htm Tyler Durden