The Haiku of Finance for 02/13/16

Rig a floating rate
Dumb banks get caught and punished
Fix Libor worldwide

Financial Sarcasm Roundup for 02/13/16

Most people go out for fun on Saturday nights. Staying home to publish sarcasm is my idea of fun.

Apple is about to throw new versions of its hottest products at consumers. I believe Apple's most fervent customers are the same kinds of too-rich, too-dumb people I meet at San Francisco VIP events. Only a moron pays a premium every 18 months for an updated product with only incremental capability upgrades. Young urban trendies have to show off shiny gadgets because they live for today. They will have no retirement portfolio for tomorrow.

More banks will face Libor manipulation action. The ones that were too dumb or too greedy to settle early with regulators are going to bite the bullet. Only dummies and crooks try to rig markets anyway. The lack of Libor transparency cries out for an international regulatory solution. The World Bank and IMF are welcome to call me anytime if they want my help.

Greece's weak pension plan jeopardizes its chance for more bailouts. The story never ends. Greece ran out of game theory options last year and is now prostrate. Angry farmers who don't like contributing more to their pension funds will be even angrier when their future pensions won't even buy a gyro. I don't mind making jokes about gyros because the rest of the world makes fun of American hot dogs and hamburgers.

Sunday may shape up to be even more sarcastic than Saturday.

Financial Sarcasm Roundup for 03/17/14

Here's a shout-out to all of the stupid losers who think a happy Saint Patrick's Day is about getting plastered as fast as possible.  True geniuses like Yours Truly know how to enjoy public festivals responsibly.

The Transatlantic trade pact partners are still yapping about what a great deal they're going to get.  Talk is cheap.  It's a good thing the US typically names political donors and trust fund babies as its ambassadors to Europe.  Those folks have the contacts to reach back to the US business community and ask for negotiating instructions.  This trade pact will be a boon if it makes German chocolate and Italian salami cheaper to buy in San Francisco.

The FDIC begins its legal pursuit of Libor manipulation.  This is more than a year after London regulators realized how tough it would be to bring large banks to heel.  Don't think this is going anywhere.  Regulators have to go through the motions and levy wrist-slap fines so they can find future employment with the same miscreant banks.

New York just knocked London off its pedestal as the world's top financial center.  Go USA, red / white / blue and all that jazz.  Maybe a bunch of Russian "oily-garchs" decided to move some business out of London last year.  I can't believe San Francisco isn't in the Big Four.  What's wrong with this town?  We've got plenty of cash laying around.  Silicon Valley billionaires are doing their part for M&A by adding more app makers to their ecosystems.

Low-income Americans are stuck in poverty.  These people are like that old TV commercial where that old lady says she's fallen and can't get up.  There are plenty of reasons why the poor can't find decent-paying work.  The minimum wage, illegal immigration, and health care mandates make it too expensive for small businesses to hire more workers.  Poor folks will have to take multiple part-time jobs to raise their living standards.  If it's any consolation, that's also the future of work for most of the highly-skilled middle class.

St. Patrick's Day means some leprechaun is stumbling towards a pot of gold with a drink in hand. Now is the time to follow him.

Really Dumb Alternative Income Hedges

I frequently gripe about the nearsightedness of fixed-income portfolio managers and their investors.  It seems to me that the best they can do is eek out minimalist returns with ZIRP distorting credit markets.  Hanging on at the top of a bond market is dangerous when the only place interest rates can go is up.  Holding long-duration fixed income investments of any kind is suicidal on the cusp of hyperinflation.  Money managers look for alternatives to conventional credit products, like in Index Universe's ETF Report article on alternatives in fixed-income for October 2013.  They're not looking hard enough to impress me.

No way will I look at bonds, loans or notes that float with Libor.  That rate is still subject to manipulation and a few fines aren't fixing anything.  The World Bank should give me a call if it ever takes note of my GIBOR concept and wants to implement it worldwide.

I am sick and tired of hearing about variable demand rate obligations (VRDOs).  Those instruments were among the first to freeze in value during the 2008 financial crisis and most investors sold out of them in frustration as soon as they could.  I tried pitching them when I was a financial advisor in 2005-6 and none of the so-called fixed-income experts at my firm could ever give me consistent answers on how they were priced or how they paid interest.  Brokerages were labeling them as "cash alternatives" simply because they were subject to auctions that had not failed . . . until 2008.  The fine print of a VRDO prospectus mentions that the instruments' viability in auctions is backed by a credit facility known as a standby bond purchase agreement.  If an investment bank is unwilling to lend in support of such an agreement, the VRDO auction fails and the investor is stuck holding what becomes de facto a long-term bond.  That will be dangerous during the onset of hyperinflation.

International bonds might work if they originate in countries that have a strong rule of law orientation, a significant hard asset sector, and a low propensity to hyperinflate.  That rules out anything except bonds from Australia, Canada, New Zealand, and Switzerland (which lacks the hard assets of the other three, unless you consider Swiss chocolate).  I tune out the remaining China bulls who think dim sum bonds are China's ticket to reserve currency status.  That makes me LOL.  Investors who ignore China's debt-laden shadow banking system deserve what's coming if they love dim sum bonds so much.

I've blogged about BDCs before.  They work great in normal times by providing asset-secured loans to companies that can't qualify for low-interest bank loans but aren't in such distress that they need investment banks to underwrite high-yield debt.  These aren't normal times.  Hyperinflation will enable debtor companies to repay BDCs with less valuable future currency.  I expect the market value of BDCs to plummet in hyperinflation unless they supplement their loan portfolios with standby equity distribution agreements.

Fixed-income investments remain a minefield for many reasons.  Rising US interest rates will lower bond valuations.  Hyperinflation will destroy bonds altogether.  Fiscal cliff wrangling makes non-US institutional investors more likely to dump US dollar bonds at any moment.  Very few coupon-based securities are going to tempt me to chase yield under these conditions.

Pricing Credit With a Global Interbank Offered Rate - GIBOR

Bankers can be as stupid as all get-out.  That should have been obvious after the recent revelations of collusion among bankers who fixed LIBOR to cook their own books and skim some quick profits.  There must be a more effective way to price short-term lending and assess credit risk among counterparties.  Let's go exploring.

Credit default swap (CDS) spreads are premiums that investors pay as insurance against the default of debt issued by an underlying company.  This is in effect a derivative bet on a company's solvency.  CDS data isn't available from conventional media sources or retail brokerages.  Investors would have to subscribe to a data service like Bloomberg Professional to get access.  That's probably a bridge too far for most folks and not every company will have debt that traders will want to exchange in CDS deals.  Companies with daily presence in credit markets need something uncomplicated and universally applicable.  I may have a satisfactory answer.

There are several widely available amalgamated borrowing rates that large investors use to price credit.  I'm thinking of LIBOR, HIBOR, SIBOR, TIBOR, and Euribor.  If I were evaluating the credit risk of a borrower, I'd use a simple average of all of these rates.  It just needs a catchy name . . . GIBOR.  That stands for global interbank offered rate.  You heard it here first.

GIBOR could even assess the health of the global financial system in the same manner as the Ted spread and LIBOR-OIS spread.  In this case, GIBOR would be the numerator and an average of several central banks' overnight lending rates (approximating a global version of a risk-free rate) would be the denominator.  A higher spread in basis points between the two means a rising price for short-term credit and increasing stress on the global financial system.

I wouldn't adjust the weight of each of the interbank offered rates by the size of their respective capital markets.  I'd weight them equally on the premise that a single overnight loan or issue of a debt security may be packaged for offer in any of those rates' jurisdictions simultaneously.  That means the issue could be immediately subject to any or all of the IBORs without regard to each market's size.  Capital markets are liquid and global.  Investment banks have the ability to reach across them instantaneously with offers.

I haven't worked out the kinks of this idea yet but it's worth a shot.  The individual IBORs are subject to manipulation but so is everything else in our modern world.  It would be much more difficult, but not totally impossible, for a participating bank to manipulate or front run all of them.  The advantage of my proposed method is that it removes credit risk from the impenetrable darkness of proprietary analytical methods or CDS data trapped in dark pools of liquidity.  Using all of the IBORs together brings credit risk into the light of day, for those with eyes to see.  Let's go GIBOR!

TBTF Banks Winning Legal Libor Challenges

The notion that large banks face enormous legal liabilities for their actions during and after the financial crisis is overblown.  A U.S. federal judge just dismissed major portions of a complex pile of lawsuits against banks that manipulated Libor.  The small chance that the remainder of the lawsuits will end in settlements means banks once again absorb illegal behavior as an overhead cost.  This is very normal behavior in a crony capitalist system and indicates very clearly that large banks are increasingly able to operate with impunity beyond legal controls.

I can't connect the dots between a bank's lobbying effort, an appointed regulator's instructions to auditors that water down stress tests, and a judge's decision to ring-fence banks from civil penalties.  Nothing is ever that easy.  The actors in each phase of that cycle probably don't even know each other.  That does not prevent me from seeing which way the wind is blowing.  The troika's actions in Cyprus are a waypoint for rules and norms that will soon apply to every advanced economy.  The applications in the U.S. will differ in details but not in spirit.

Financial Sarcasm Update for 10/29/12

This is an exciting week thanks to an unpredictable presidential election and a big 'ole storm headed for the Eastern Seaboard.  I'm going to make it even more exciting with some financial sarcasm.

U.S. markets are closed for extremely bad weather.  This is more than a puncture wound to the self-made myth of Wall Streeters as indestructible masters of the universe.  It's a sign of how vulnerable equity markets are to the physical isolation of a single city block.  There is no substitute market if the NYSE were forced to shut indefinitely after a physical catastrophe.  The dark pools of liquidity sponsored by major asset managers are not sufficiently transparent to substitute immediately for an open market.  The internal crossing networks of major asset managers are pretty robust but firms like BlackRock and State Street would be reluctant to immediately open them without strong-arming from the SEC.  This country is in serious trouble without a decentralized equity trading market, but unfortunately that's just the way our mandarin class wants to treat us.

US and UK regulators are ready to sweep the Libor scandal under the rug with a few slaps on the wrists at money-center banks.  Business as usual!  The fraud and rigging will continue so insiders can keep getting rich at the expense of outsiders.  Read my blog articles from some months ago.  I predicted this outcome.

If the above items haven't got you depressed, the next phase of Great Depression 2.0 will do the trick.  The fiscal cliff's negative impact on the economy will be exacerbated by reduced consumer spending.  Call it the flip side of the marginal propensity to consume; poor folks spend proportionately more of their income and will have less of it to spend once layoffs really get rolling in first quarter 2013.

We've finally hit the peak of the junk bond curve.  Companies with deteriorating credit quality can issue more high yield debt than ever and investors just eat it all up.  How stupid can hedge funds be?  They're the ones driving this nonsense because their market-lagging returns push them farther into losing territory.  They'll reach for extra yield even if it means reaching for junk bonds that should default.  Most hedge funds should just close up shop rather than chase each other over a cliff, but I'll enjoy watching them hit the wall.  Maybe the biggest intellects really do gravitate to private equity, since they're driving this junk bond issuance to extract the last drop of dividend juice from their portfolios before the big collapse.

Wild pursuit of dividends for their own sake can make any investor dumb.  Money managers are actually considering special dividend payouts as a type of special situation investment.  That's really dumb.  Experienced investors should know that exchanges reduce the price of a stock on the dividend payout date by the dividend's amount, with no guarantee that the share price will recover in subsequent trading.  These portfolio managers will have to explain to their clients why they went for the amateur's trick of "trading dividends" (a tactic I outgrew years ago, thank you, after a run of good luck).  The fiscal cliff will do a lot more than force temporary changes in corporate dividend policies.  It will hammer the prices of stocks that investors bought on the cusp of a recession.

I can't let myself feel sad about all of this pending misfortune.  Professional investors have access to all of the information I have and then some, and they still buy the wrong investments at the wrong times for the wrong reasons.  I am very happy that hard times will flush these people out of finance and put their assets on sale just for me.

The Haiku of Finance for 07/25/12

Libor bankers lie
Fed allowed them to do it
They won't go to jail

Why There Will Be No Serious Prosecution Of Libor Fraud

The latest brew-ha-ha in the news is the revelation that hot shots at TBTF banks colluded to suppress published rates for Libor.  The nonsense you may hear about prosecutions is much ado about nothing.  There will be no serious prosecutions of anyone above mid-level supervisor on a handful of trading desks.  Those trading desks that are targeted will be those that are not central to the government's funding needs; i.e., Goldman Sachs and JPMorgan Chase are certainly exempt.  Those few low-level traders that are indicted will be thrown under the bus by colleagues because they are not members of pedigreed families and did not join the proper social clubs at Ivy League schools.  No senior bank executive will ever face jail time for collusion, price fixing, restraint of trade, or any other flavor of securities-related criminality.

You may be wondering how I can make this claim.  It's simple.  Read today's news that the Secretary of the Treasury knew of Barclays' participation in Libor fixing while he ran the New York Fed.  Building a case for widespread, top-level collusion would require law enforcement agencies to subpoena the sitting Treasury Secretary (and perhaps his predecessor) and force him to testify against his peers in banking.  That is not going to happen.  No one with intimate ties to the Fed can be prosecuted for financial wrongdoing in plutocratic America.  That would strike at the heart of the Fed's credibility, and the Fed is the one bedrock institution whose credibility cannot be in question as the U.S. economy heads into the second inning of Great Depression 2.0.  It will need every ounce of trust it can finagle out of the markets to execute QE3 within the short window of opportunity presented by a severe equity market crash and foreign run on the dollar.  I can question the Fed because I don't matter to our ruling elite.

Fed and Treasury officials have the equivalent of get-out-of-jail-free cards as long as the TBTF insolvency crisis goes without resolution.  The same goes for senior executives at those banks; they are part of our country's ruling class and are therefore irreplaceable.  After all, who would take their places in the local country club dining rooms if they could no longer attend caviar tastings due to incarceration?  It certainly won't be you, dear reader.  

The Haiku of Finance for 07/22/12

Libor arrests near
A few traders will get hit
Fraud will continue

The Haiku of Finance for 07/19/12

Group settlement comes
No Libor prosecutions
There is no justice

The Haiku of Finance for 07/17/12

Barclays pays a fine
Just a slice of net income
See, I told you so

Financial Sarcasm Roundup for 07/16/12

It's Monday.  That means it's time to bust out of your workday boredom and pay attention to my bitterness.

Federal prosecutors are supposedly making a criminal case against bankers over Libor.  I don't believe for a minute that DOJ is serious about prosecuting bankers who fudged Libor.  This is the same DOJ that could find no criminal wrongdoing in the financial crisis of 2008 or bankers' extortion of municipalities though interest rate swaps.  They haven't even indicted John Corzine for his theft of billions from MF Global clients.  Puh-lease.  Let's get real.  Government prosecutors won't prosecute the heads of banks who will employ them in the future for corporate legal work.  Expect a few eight-figure settlements later this year and nothing at all afterwards.  Only smaller players get caught and punished, like the CEO of now-busted Peregrine Financial Group.

I was embarrassed when the U.S. government elected to keep GM and Chrysler alive with pre-packaged bankruptcies and bailouts.  The government still hasn't been made whole on those deals.  Now France is heading down pretty much the same road if it decides to save Peugeot.  Automaking gravitates to lower-cost locales, which now even includes the non-unionized southern states of the U.S.  Keeping high-cost producers alive keeps their products priced artificially high, ensuring an endless cycle of government bailouts and business failure.  Unionized automakers will continue in this zombie pattern until the taxpayer has had enough and allows them to fail.

It's funny that we Americans think we have the right to criticize other countries' restrictions on foreign investment.  The U.S. has placed so many reporting requirements on foreign-domiciled banks that they are refusing to open accounts for American citizens who want to do business overseas.  The U.S. has also declined to adopt international accounting standards that would enable investors to compare financial results across national borders.  I remember the debate about U.S. GAAP versus international standards from my MBA studies a decade ago, and back then the switch to international standards seemed imminent.  I can only shake my head at the wrong turns the U.S. has taken since then, with SarBox and other stuff.  Doing the right thing used to be so easy.

The defense bubble I've been warning about for years is about to pop.  Wall Street is finally pricing in the likelihood that forced budget cuts will hurt the earnings of major federal contractors.  This is good news for cheap analysts like yours truly, because there are some decent defense stocks I'd like to pick up at a discount.  It's bad news for all of the Pentagon watchers and players who are still in denial about the inevitable end of major contingency operations.  I've known plenty of people on active duty who were counting on jobs with contractors as second careers.  They really need to switch gears now and make other plans.

I've had enough for one Monday.  

The Limerick of Finance for 07/15/12

The banks that fudged Libor don't care
That their quotes were picked out of thin air
They won't face the law
Though this scandal is raw
Prosecutions will prove to be rare

Financial Sarcasm Roundup for 07/09/12

Prepare yourselves.  I'm about to spew more bile on the business world.  Here we go.

One Eurocrat wants to outlaw Libor manipulation in the wake of revelations from Barclays et alia that they were playing games with interest rates to avoid going bankrupt.  Outlawing interest rate manipulation by bankers would be kind of like outlawing the breathing of air.  It's what bankers do.  It's such a natural state of affairs that central bankers give it a wink and a nod.  Here's a better idea:  Instead of restricting Libor's bidding process, make it transparent by putting in on the European Central Bank's website in real time.  That way no one's in the dark.  

Europe has more to worry about than fallout from this Libor debacle, like how to pay bondholders while sticking it to their taxpayers.  A bunch of Continental ministers are going to meet one more time to pretend to solve their countries' insolvency woes.  I think they just get together for the great food and champagne, and to reminisce about past World Economic Forum junkets where Bono hectored them on economic development.  Germany knows that Spain and Italy can't afford to raise more debt but they don't want any net importing countries kicked out of the euro.  That's Germany's problem in a nutshell, and that's why every German politician of note has been using double-talk to stall for time.  The "Davos culture" of transcontinental elitism may survive in salon format but its inability to solve real world problems makes me wonder whether it's worth going that far just to eat steamed lobster.  

Meanwhile, here in America, things are also going down the tubes.  The Administration wants to extend tax cuts for the bottom 99%.  That's okay but I wish it could be accompanied by serious tax code simplification.  It's smart politics to get this out of the way now so raising the debt ceiling doesn't get hung up by Election Day.  What's not okay is that corporate earnings are about to get a lot worse if pre-release guidance is accurate.  This isn't just the usual CFO parlor game of lowering expectations just to beat Wall Street's estimates.  There are real headwinds now from slowing European growth, Chinese inflation, and anemic job growth here in the U.S.  I don't pay attention to Wall Street analysts anyway but they should pay attention to me.  

Finally, Dr. Doom weighs in on the approaching perfect storm.  This storm has been brewing through decades of debt-induced overspending, infrastructure malinvestment, and unsustainable middle-class entitlements.  I say bring it on.  My Alpha-D portfolio can navigate the mightiest of macroeconomic winds, unlike the asset allocations of many whiz-kid hedge funds that will probably be wiped out.  Many fortunes were made in the first Great Depression by people who stayed solvent and bought at the bottom.  

Have a nice day!  :-)

The Haiku of Finance for 06/27/12

Barclays pays a fine
Not cool to fool with LIBOR
Don't quote a false rate

Schwab's LIBOR Lawsuit Aims At TBTF Banks

I like Charles Schwab (SCHW), both the man and his brokerage.  He persevered against all odds and built a major brokerage from nothing.  The established Wall Street firms opposed his ambitions at every turn.  Now his brokerage is once again taking on the big players.  SCHW is suing U.S. banks for their manipulation of the LIBOR lending benchmark.  Banks that are too big to fail think they are too big to be sued for antitrust violations because regulators have ignored their transgressions.  Think again, big shots. 

Charles Schwab hasn't forgotten what it's like to be a small investor.  That's probably why SCHW hardly faced any regulatory trouble or lawsuits in the aftermath of the credit crunch.  The MBA preppies in TBTF land never knew what it means to be accountable for one's actions.  This lawsuit is a rare example of a moral good in the financial services wilderness.  Go Chuck! 

Full disclosure:  No positions in SCHW or any other financial stock at this time.  I do use SCHW as my brokerage.