Goldman Sachs Set for Record Profits, Largest Bonuses Ever

As they say in the States, "in your face."

Or just some 'getting out of town money' ahead of a financial collapse?

The outsized financial sector, with its exorbitant fees, represents a serious tax and a growing threat to the real economy.

We may have, at best, the illusion of a recovery based on the increasing monetary inflation and monetization of debt as shown in the money supply figures, as compared to real GDP growth. Price, Demand and Money Supply

It will be a selective recovery at best, and damaging to the political fabric of the United States. It is a drain on the world economy while the US dollar is the reserve currency.

It is seigniorage on a grand scale, unprecedented tax on productivity not seen since the decline of colonialism, perhaps even feudalism.

Until the financial system is reformed there can be no sustainable recovery.

The Guardian
Goldman to make record bonus payout
Surviving banks accused of undermining stability

Phillip Inman
The Observer
Sunday 21 June 2009

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.

Staff in London were briefed last week on the banking and securities company's prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever. Figures next month detailing the firm's second-quarter earnings are expected to show a further jump in profits. Warren Buffett, who bought $5bn of the company's shares in January, has already made a $1bn gain on his investment.

Goldman is expected to be the biggest winner in the race for revenues that, in 2006, reached £186bn across the entire industry. While this figure is expected to fall to £160bn in 2009, it will be split among a smaller number of firms.

Barclays Capital, Credit Suisse and Deutsche Bank are among the European firms expected to register bumper profits, along with US banks JP Morgan and Morgan Stanley following the near collapse and government rescue of major trading houses including Citigroup, Merrill Lynch, UBS and Royal Bank of Scotland.

In April, Goldman said it would set aside half of its £1.2bn first-quarter profit to reward staff, much of it in bonuses. It is believed to have paid 973 bankers $1m or more last year, while this year's payouts are on track to be the highest for most of the bank's 28,000 staff, including about 5,400 in London.

Critics of the bonus culture in the City said the dominance of a few risk-taking investment banks is undermining the efforts of regulators to stabilise the financial system.

Vince Cable, the Liberal Democrat treasury spokesman, said: "The investment banks more than any other institutions created the culture of excessive leverage, excessive risk and excessive bonuses that led to the downfall of the financial system. Now they are cashing in and the same bonus culture has returned. The result must be that we are being pushed to the edge of another crash."

Goldman Sachs said it reviewed its bonus scheme last year and switched from a system of guaranteed rewards that were paid over three years to variable payments that tied staff to the firm. It told employees last year that profit-related bonuses would be delayed by 12 months.

Until the release of its first quarter profits in April, it seemed inconceivable that a firm owing the US government $10bn would be looking to break all-time records in 2009.

David Williams, an investment banking analyst at Fox Pitt Kelton, said: "This year is shaping up to be the best year ever for investment banks, or at least those that have emerged relatively unscathed from the credit crisis.

"These banks are intermediaries in the bond markets where governments and companies are raising billions of pounds of new money. There is also a lack of competition that means they can charge huge sums for doing business."

Last week, the firm predicted that President Barack Obama's government could issue $3.25tn of debt before September, almost four times last year's sum. Goldman, a prime broker of US government bonds, is expected to make hundreds of millions of dollars in profits from selling and dealing in the bonds.

The Alternatives to Uncle Buck Being Considered

China Stakes
BRIC, SCO Discuss "Super-Sovereignty" Currency, USD Alternatives
By Scott Zhou
June 16,2009
Shanghai

China continued to consider a “super-sovereignty” currency among the countries of Shanghai Cooperation Organization (SCO), an intergovernmental mutual-security organization that met today in the Russian city of Yekaterinburg, in the Urals at the division of Asia and Europe. Members include China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan, with India as one of its four observers.

Right after the SCO meeting, the BRIC country (Brazil, Russia, India and China) leaders met formally for the first time. It is not merely coincident that three of them have expressed a desire to adjust their foreign exchange reserve portfolios by reducing the share or volume of US dollar assets.

China has just halted the increase its holding of US Treasury debt. By the end of April, China held $763.5 billion of it, a fall of $4.4 billion, month on month, the first time China has reduced its Treasury holdings. Since May, 2008, China has increased its holding by $260 billion.

Inside China, USD is a hate-more-than-love story. Analysts have long argued that China should be very cautious on buying US government bonds since dollar is bound to weaken. Others hold that US treasury debts are still the best and first choice for China's near $2 trillion foreign exchange reserve.

In March, Madam Hu Xiaolian, the chief of China's State Administration of Foreign Exchange and a deputy governor of the People's Bank of China, China's central bank, said that investing in US national debt is an essential part of China's reserve management. But while continuing to buy US national debt, China is concerned about the risk of the fluctuation in value of its assets.

China has announced that it would buy up to $50 billion in bonds issued by the International Monetary Fund (IMF). Meanwhile, Russia and Brazil have said they are planning to buy up to $10 billion in IMF bonds, which would mean selling Treasury bonds. India has expressed the same interest. In April, China, Russia, and Brazil all reduced their holdings of US treasury debt.

China now believes that a long-term dollar decline is inevitable, and the risk to the value of its $2 trillion foreign exchange reserve has become realistic, if not imminent.

China has been a huge beneficiary of the order of the world economy and a monetary system with the US dollar as the reserve currency. China's economy has been anchored by a stable dollar exchange pegged by China's currency, RMB.

But the financial crisis has given China a wake up call that the present monetary system is not sustainable, and neither is China's foreign exchange regime and mode of economic growth, which has been largely based on relentless exporting.

What, then, is the role RMB can play in the future? Russia has been urging China for years to settle their bi-lateral trade in their respective currencies. Brazil intends to trade with China by RMB and the real. Recently Russia suggested making RMB convertible to become an international reserve currency.

China can not challenge US directly. The BRIC summit is a convenient platform for China and the other BRIC powers, set to become the 4 of the 6 largest economic entities by 2050, to put a bit of pressure on the US. Held before the first China-US Strategic and Economic Dialogue in late July in Washington DC, the BRIC summit may give China some leverage in dealing with the US.

Russia is ready to use its exchange reserve to buy securities issued by BRIC countries. In return, Russia hopes the others will be willing to buy financial instruments issued by Russia. The leaders discussed increasing of the share of settlement currencies for trade among them. They also discussed adjusting their reserve assets portfolio in a coordinated way.

At the SCO meeting held just before the BRIC summit and attended by China, Russia and India, China proposed to research the feasibility of using a super-sovereignty currency among SCO member countries.

Kazakhstan president Nursultan Nazarbayev proposed that trade among SCO countries be settled by currencies of member countries. He also suggested that a super-sovereignty currency used inside the SCO eventually become a SCO reserve currency. Russian President Dmitry Medvedev also supported the idea.

SP Futures Hourly Chart

This is a quad witch option expiry week. The futures front month is rolling over but we have not yet made the change to September futures.

Volumes remain remarkably light even for June.

Support is obvious.

Keep a close eye on the VIX volatility.

And the Winner Is.... the SDR?

This is a significant development.

It appears clear now that the preferred alternative to the US dollar reserve currency regime for international transactions is going to be the Special Drawing Rights (SDR) units from the International Monetary Fund. We have seen indications that this was going to be the alternative, as compared to the euro, but it was not so confident a probability as it seems today.

Now it seems to be. And those SDR units will be an adjusted basket of commodities and currencies that will be more reflective of the current global economic picture. This may be phased in over time if the US and its political supporters have their way.

This is important because it is feasible, a realistic alternative, much more practical than the complete replacement of the US dollar by something else like the euro for example. We may also see more bilateral agreements based on local currencies.

Achieving the concurrence of the Saudis and other US client states will be important, because the dollar reserve strength has been largely based on its political connection to oil and military power. Most commentators and analysts miss this, but it is essentially at the heart of the matter. History may look back on this as a period of neo-colonialism since it has been so pervasive and uneven in its geopolitical relationships, especially since the 1970's: a Pax Americana.

This is not to say that the IMF's SDRs will be THE solution. They may very well falter. But if one is looking for a politically and financially palatable alternative to break the Big Dollar cartel, this looks likely to us. If it falters, it will be replaced with something else, most likely after some 'tinkering' with the basket composition first.

Let's keep an eye on this. But it is our judgement that the US dollar will continue to decline in signficance, in a relatively orderly fashion for the forseeable future, looking out perhaps over the next ten years, barring a major exogenous event, most likely of a geopolitical or military nature.


Russia calls for revision of SDR currency basket
By Gleb Bryanski
Tue Jun 16, 2009 3:58pm IST

YEKATERINBURG, Russia (Reuters) - The International Monetary Fund (IMF) should expand the basket of Special Drawing Rights to include the Chinese yuan, commodity currencies and gold, a senior Kremlin official said on Tuesday.

The SDR is an international reserve asset allocated to member countries with its exchange rate determined by a basket of currencies, at the moment including dollar, euro, yen and sterling. A review of the basket is due in November 2010.

"The rouble, yuan deserve to be included in the SDR basket," Kremlin economy aide Arkady Dvorkovich told a news conference ahead of the first summit of Brazil, Russia, India and China, known as BRIC, in the Russian city of Yekaterinburg.

"It is important that the composition of the basket also reflects the role of commodities in the global economy," Dvorkovich said, naming Australian and Canadian dollars as possible candidates.

"We also think that gold has a potential as a possible participant. The price of gold has a negative correlation to the dollar. Therefore it is beneficial to tie these two instruments into one so that investors feel safer," he said.

Dvorkovich said he doubted Russia would complete its transition to an inflation-targeting regime which implies a freely floating exchange rate for the rouble next year when the IMF basket's review takes place, as announced by the central bank.

Dvorkovich said BRIC leaders will discuss new reserve currencies at the summit but called for caution in the currency debate, saying it was in no-one's interest to ruin the dollar.

Russia rattled financial markets last week when a central bank official said Moscow will cut the share of U.S. Treasuries in its forex reserves in favour of IMF bonds and bank deposits.

Finance Minister Alexei Kudrin played down this statement over the weekend saying the dollar's status as the world's main reserve currency would unlikely change in the near term. Dvorkovich said new reserve currencies were inevitable.

"The world economy will grow... In the future we are sure growth will resume. This growing pie should be divided in a fairer way. We are not talking about excluding the dollar but the share of other currencies should increase," he said.

He said BRIC leaders will discuss investing their reserves, which are among the seven largest in the world, in each other's currencies, settling bilateral trade in domestic currencies and striking currency swap agreements.

"It would make sense for us if our partners agreed to place some of their reserves in Russian roubles," Dvorkovich said.

He said BRIC countries had a common position regarding the reform of the International Monetary Fund while a decision by China, Brazil and Russia to purchase SDR-denominated bonds issued by the IMF would boost the role of SDRs.

"Any expansion of the IMF's resource base implies ... strengthening of SDRs' role in the international currency system," Dvorkovich said.