Eric Sprott on the Economy, the Markets, and the PHYS Gold Trust

UBS Shareholders Vote to Hold Top Management Personally Responsible for Losses

This is the way to start putting some 'teeth' into financial reform.

Bank managers must be held accountable for their actions, preferably by shareholders. The Swiss are showing the way on this.

SwissInfo.CH
UBS has “witnessed a Waterloo”
By Time Neville
Apr 15, 2010

Swiss newspapers on Thursday morning were full of praise for UBS shareholders who voted to hold 2007 executives partially responsible for the bank’s near collapse.

Commentators say the decision not to exonerate former CEO Marcel Ospel and other top managers of allowing the bank to suffer record losses and reputational damage is nothing short of historic.

“Shareholders yesterday preferred honesty over immediate profit,” the Geneva-based Le Temps newspaper said in an article titled, “Shareholder courage”.

“It was a courageous and responsible decision.”

During the big bank’s annual shareholder meeting in Basel, some 4,700 stockholders representing 1.7 billion shares, voted by a margin of 53 per cent to reject recommendations by the current board to absolve executives from all responsibility for the bank’s staggering subprime losses that prompted a SFr 60 billion federal bailout.

The decision means former managers are now exposed to potential lawsuits.

“This is something that no one for a long time thought possible,” said Blick. “By standing up to the board, the owners of UBS have written economic history.”

Shareholder democracy

The Tages-Anzeiger newspaper said the vote serves as a “slap” to top executives and represents a turning point that the bank cannot deny.

“With this ‘no’ chairman of the board Kaspar Villiger and UBS have witnessed a Waterloo,” the paper wrote. “Although this means little to nothing in concrete terms, symbolically it means much.”

The paper went on to say the vote is a “triumph for shareholder democracy”, and notes it was the first time shareholders of a large public company succeeded in going against the will of the executive board “not only to send a signal” but also in doing so with a majority of votes.

“Imagine: Managers selling their own shares worth SFr150 million at high market conditions through the summer…and then presenting SFr50 billion in losses. To absolve them of that, that’s too much for even the most good-natured shareholder,” the paper said.

That may be true but it was no knee-jerk reaction, countered the Neue Zürcher Zeitung.

“By agreeing with most of the board’s recommendations – such as 85 per cent agreeing that the current UBS top brass should be absolved of responsibility – the majority of shareowners are implying they do not want to hobble the bank despite their displeasure.”

What next?

“And now?” asked Le Temps.

The NZZ says the bank would be “well advised” not to go back to business as usual.

The Tages Anzeiger argues that to “really draw a line under the past”, Villiger must consider whether to prepare a case against former managers. At best, it’s a job for a “neutral judge” to decide whether "the old UBS" broke the law, it said.

“That way, [Grübel and Villiger] can take care of the new UBS uninhibited.”

Le Temps says it seems “unimaginable” that the board would stick to the status quo, after a vote akin to “the mutiny of the Bounty”.

“Yesterday’s vote will have consequences beyond the bank,” it argued, saying the era of powerful shareholder democracy has been crowned “with spectacular force”.

“But be careful,” it warned. “Shareholder democracy can’t regulate everything, in particular in the banking realm, where the central question of systemic risk remains intact.”

The paper’s cross-town rival, the Tribune de Genève, put it more bluntly. It shot down an argument that Ospel and company would never go before a civil or criminal court because such a suit would be too expensive or an exercise in futility.

“Whatever!” it said. “The penalty imposed yesterday has a symbolic significance far greater than all the judgments of the convoluted world. Swiss economic democracy has finally succeeded in overthrowing a regime. For that it is thanked.”

Jim Rickards: Possible Run on the Gold Bank, Fed Insolvent, Currency Endgames in US Debt Crisis

"Somewhere ahead I expect to see a worldwide panic-scramble for gold as it dawns on the world population that they have been hoodwinked by the central banks' creation of so-called paper wealth. No central bank has ever produced a single element of true, sustainable wealth. In their heart of hearts, men know this. Which is why, in experiment after experiment with fiat money, gold has always turned out to be the last man standing." Richard Russell

The interview is refreshing because Mr. Rickards lays his thoughts out clearly and without excessive jargon. I found his rationale for China's desire to increase its gold holdings to be intriguing. The price objective of $5,000 - 10,000 is somewhat arbitrary, but directionally correct if it is not accompanied by a reissuance of the currency, which I think is much more probable. Essentially it works out to be the same, since the new currency is likely to be a factor of 1 for 100 exchange for current dollars. If this seems outlandish, it should be kept in mind that this is not all that far removed from the fairly recent post-empire experience of the Soviet Union.

Jim Rickards audio interview on King World News

Highlights (aka Cliff's Notes):

• There is obviously not enough gold and silver to cover the physical demand if holders of paper certificates in unallocated accounts demand delivery, and most likely only a small fraction could be covered with the practical supply available. Cash settlement will be enforced in the majority of cases.
• Cash settlements would be for a price as of a 'record date' which is likely to be much less than the current physical price which would continue to run higher
• There is more here than meets the eye - if you holding metal in an unallocated account you are likely to be considered an unsecured creditor
• 100:1 leverage is reckless no matter commodity or asset it involves - little room for error
• There is no way to pay off the existing real US debt without inflating the currency in which the debt is held, to the point of hyperinflation
• If the Fed's mortgage assets were marked to market the Fed itself would be insolvent
• Anything involving paper claims payable in dollars (stocks, bonds) are a 'rope of sand,' a complete illusion that is fraught with risk
• $5,500 per ounce of gold would be sufficient to back up the money supply (M1) as an alternative to hyperinflation and a reissuance of the currency. Target price is 5,000 - 10,000 per troy ounce in current issue US dollars
• The break point will be when the US debt can no longer be rolled over. US will not be able to finance its debt without taking drastic action on the backing or nature of the currency
• China needs to have about 4,000 tonnes of gold, and only has 1,000 tonnes today
• China cannot fulfill this goal by taking even all of its domestic production for the next 10 years. The Chinese people are showing a strong preference to hold gold themselves.
• From 1950 to 1980 the US gold supply declined from 20,000 to 8,000 tonnes, basically moving from the US mostly to Europe.
• The Chinese are frustrated that they cannot obtain sufficient gold at reasonable prices as Europe did, to withstand the currency wars and the reworking of international finance
• Holding your gold in a bank correlates you to the banking system, the very risks which you are trying to avoid

I was gratified to see that Mr. Rickards has come to the same conclusion as I had that the limiting factor on the Fed's ability to monetize debt will be the value and acceptance of the bond and the dollar.

I should add that although it is possible that some event might precipitate a series of events that could accelerate this, the scenario will otherwise take some years to play out. These types of changes happen slowly. The rally in precious metals has been going on for almost ten years now, and it might take another five to ten years for the resolution of these imbalances into a new equilibrium barring some precipitant, or 'trigger event.'

Mr. James G. Rickards is Senior Managing Director for Market Intelligence at Omnis, an applied research organization. He is also co-head of the firm's practice in Threat Finance & Market Intelligence and a member of the Board of Directors. Mr. Rickards is a senior counselor, investment banker and risk manager with extensive experience in capital markets including portfolio and risk management, product structure, financing and operations.

Prior to Omnis, Mr. Rickards held senior executive positions at "sell side" firms (Citibank and RBS Greenwich Capital Markets) and "buy side" firms (Long-Term Capital Management and Caxton Associates). Mr. Rickards has been a direct participant in many significant financial events including the 1981 release of U.S. hostages in Iran, the 1987 Stock Market Crash, the 1990 collapse of Drexel and the LTCM financial crisis of 1998 in which he was the principal negotiator of the government-sponsored rescue. He has been involved in the formation and successful launch of several hedge funds and fund-of-funds. His advisory clients have included private investment funds, investment banks and government directorates. Since 2001, Mr. Rickards has applied his financial expertise to a variety of tasks for the benefit of the national security community.

Mr. Rickards holds an LL.M. (Taxation) from the New York University School of Law; a J.D. from the University of Pennsylvania Law School; an M.A. in international economics from the JHU /SAIS, and a B.A. degree with honors from The Johns Hopkins University.

SP 500 Daily Chart Looking Toppy, Regulators Looking Sloppy

The SP 500 Chart is looking rather 'toppy' here as the rally extends higher, running on monetary inflation and technical trading, squeezing the shorts.

Make no mistake, if enough specs try to front run this to the short side the hedge funds and Wall Street Banks like JPM can run it higher, since selling volume has not yet picked up. And the government and the Fed are only too happy to facilitate a reflating of a stock bubble as a means of 'soft' market intervention.

This is a factor in how the Banks are making their substantial trading revenues these days, in a return to leverage and subsidized regulatory and monetary easing. Although the example presented here is with regard to commodities and ETFs, the principle applies very well to stock index ETFs.

"Much of this happens because the government is too stupid to see the inherent conflict of interest in what a broker-dealer does. Regulation will not stop gaming the law. Ethics do, and not everybody has ethics. So best you can do is prevent situations of conflict of interest, like the existence of Broker-dealer type entities. Either you trade for yourself, or you trade for others. Period...

You can never know intentions, and no one is bigger than the market, but the consequences of a lack of transparency and the free reign in which banks can tell half-truths to investors is a big factor in enabling strong hands to fleece weak hands with little market risk. It’s all a con game."

In defense of the stupidity of government, quite a few economists, analysts, and even bloggers do not 'get' the inherent conflict of interests involved in the current structure of the broker dealers, or do not care to see it for a variety of personal reasons. Stupidity can often be willfully obtained, bu always for a price. Some of the arguments against financial reform that I have seen appear to be similar to arguments that would be in favor of armed robbery because it stimulates the velocity of money.

The inherent problem with the dealer playing his own hand at the same table with the players, using the house bankroll, and looking at the cards as he deals them, would seem to be pretty much common sense, unless the casino is staffed with very restrained and scrupulous individuals, and some uncommonly good regulators equipped with the right equipment and a willingness to use effective deterrents.

But Wall Street banking is about as bad as it gets when it comes to ethical considerations and self-restraint. The regulators are too busy surfing porn, and the top politicians like Rahm Emmanual are compromised by free wheeling financiers and outrageously weak campaign contributions laws. That is why these lunatics need a strait-jacket like Glass-Steagall. The culture of greed is epidemic and overcomes all other considerations.

So for an opportunity to short this market, wait for it.

And as for serious financial reform, the Republicans are as bad or even worse than the Democrats. Mitch McConnell makes Chris Dodd look like Mahatma Ghandi, so don't hold your breath.