The Continuing Rhyme of History: "The Order of the Star Spangled Banner"

"As late as 1850, the two party system was, to all outward appearances, still healthy. Both the Democrats and Whigs were able to attract support in every section and neither party was able to win more than 53 percent of the popular vote. Then, in the space of just five years, the two-party system disintegrated in response to two issues: foreign immigration and the reemergence of the issues of slavery expansion.

A massive wave of immigration from Ireland and Germany after 1845 led to an outburst of anti-foreign and anti-Catholic sentiment. Between 1846 and 1855, three million foreigners arrived in America. Nativists, ardent opponents of immigration, capitalized on deep-seated Protestant antagonism toward Catholics and working-class fear of economic competition from cheaper immigrant labor.

Nativists charged that Catholics were responsible for a sharp increase in poverty, crime, and drunkenness, and were subservient to a foreign leader, the Pope.

In 1849, native-born Protestant workingmen formed a secret fraternal organization, "The Order of the Star-Spangled Banner," which became the nucleus of a new political party known as the Known-Nothing or American party.

The party received its name from the fact that, when members were asked about the party's workings, they were supposed to reply, "I know nothing."

The Know Nothings attracted support not only from nativists, but from large numbers of northern free soilers and southern Whigs. By 1855, the party had captured control of all New England except Vermont and Maine and was the dominant opposition party to the Democrats in New York, Pennsylvania, Maryland, Virginia, Tennessee, Georgia, Alabama, Mississippi, and Louisiana.

The party platform included a 21-year residency period before immigrants could become citizens and vote, limitations on office-holding to native-born Americans, and restrictions on the sale of liquor.

One Northerner who spoke out against the Know Nothings was Abraham Lincoln, who eloquently argued that the party's nativist platform was a violation of the country's republican principles."

From US Digital History.


Abraham Lincoln, Letter to Joshua Speed, 1855

"I am not a Know-Nothing. How could I be? How can any one who abhors the oppression of Negroes be in favor of degrading classes of white people? Our progress in degeneracy appears to me pretty rapid. As a nation we began by declaring "all men are created equal."

We now practically read it, "all men are created equal, except Negroes." When the Know-Nothings get control, it will read "all men are created equal, except Negroes, and foreigners, and Catholics."

When it comes to this I should prefer emigrating to some country where they make no pretense of loving liberty--to Russia, for example, where despotism can be taken pure and without the base alloy of hypocrisy."

Silver: 'Banging the Close' of the Comex Session

There was a fairly heavy-handed smackdown of silver into the close of the Comex day session.

Maybe four or five years from now the CFTC will do something about it as they did with the MF Global trader, who had been 'banging the market close' for a couple of years, when they wanted to show they were finally doing something about the markets.

Except he was just 'one of the usual suspects', and not too big to prosecute. And he was banging the metals up, which is counter to 'The Plan.'

Mind you, I'm not necessarily complaining. Just keeping the record straight, and making sure you all know about it so you can't say no one ever told you. And so when what happens, happens, you will know why.

Oh, you believe this price action?

And now, The Muppet Show.

Martin Luther King: 'It Is Time For All People of Conscience To Call America To Come Home'

"...A true revolution of values will soon cause us to question the fairness and justice of many of our present policies. On the one hand, we are called to play the Good Samaritan on life's roadside, but that will be only an initial act. One day we must come to see that the whole Jericho Road must be changed so that men and women will not be constantly beaten and robbed as they make their journey on life's highway. True compassion is more than flinging a coin to a beggar.

A true revolution of values will soon look uneasily on the glaring contrast of poverty and wealth with righteous indignation. It will look across the seas and see individual capitalists of the West investing huge sums of money in Asia, Africa, and South America, only to take the profits out with no concern for the social betterment of the countries, and say, "This is not just." It will look at our alliance with the landed gentry of Latin America and say, "This is not just."

The Western arrogance of feeling that it has everything to teach others and nothing to learn from them is not just. A true revolution of values will lay hands on the world order and say of war, "This way of settling differences is not just." This business of burning human beings with napalm, of filling our nation's homes with orphans and widows, of injecting poisonous drugs of hate into the veins of peoples normally humane, of sending men home from dark and bloody battlefields physically handicapped and psychologically deranged, cannot be reconciled with wisdom, justice, and love...

A nation that continues year after year to spend more money on military defense than on programs of social uplift is approaching spiritual death. We are presently moving down a dead-end road that can lead to national disaster. America has strayed to the far country of racism and militarism. The home that all too many Americans left was solidly structured idealistically; its pillars were solidly grounded in the insights of our Judeo-Christian heritage. All men are made in the image of God. All men are brothers. All men are created equal. Every man is an heir to a legacy of dignity and worth. Every man has rights that are neither conferred by, nor derived from the State--they are God-given.

Out of one blood, God made all men to dwell upon the face of the earth. What a marvelous foundation for any home! What a glorious and healthy place to inhabit. But America's strayed away, and this unnatural excursion has brought only confusion and bewilderment. It has left hearts aching with guilt and minds distorted with irrationality.

It is time for all people of conscience to call upon America to come back home. Come home, America. Omar Khayyam is right: "The moving finger writes, and having writ moves on." I call on Washington today. I call on every man and woman of good will all over America today. I call on the young men of America who must make a choice today to take a stand on this issue. Tomorrow may be too late. The book may close.

And don't let anybody make you think that God chose America as his divine, messianic force to be a sort of policeman of the whole world. God has a way of standing before the nations with judgment, and it seems that I can hear God saying to America, "You're too arrogant! And if you don't change your ways, I will rise up and break the backbone of your power, and I'll place it in the hands of a nation that doesn't even know my name. Be still and know that I'm God."

Now it isn't easy to stand up for truth and for justice. Sometimes it means being frustrated. When you tell the truth and take a stand, sometimes it means that you will walk the streets with a burdened heart. Sometimes it means losing a job...means being abused and scorned. It may mean having a seven, eight year old child asking a daddy, "Why do you have to go to jail so much?" And I've long since learned that to be a follower of Jesus Christ means taking up the cross.

And my bible tells me that Good Friday comes before Easter. Before the crown we wear, there is the cross that we must bear. Let us bear it--bear it for truth, bear it for justice, and bear it for peace. Let us go out this morning with that determination. And I have not lost faith. I'm not in despair, because I know that there is a moral order. I haven't lost faith, because the arc of the moral universe is long, but it bends toward justice.

I can still sing "We Shall Overcome" because Carlyle was right: "No lie can live forever." We shall overcome because William Cullen Bryant was right: "Truth pressed to earth will rise again." We shall overcome because James Russell Lowell was right: "Truth forever on the scaffold, wrong forever on the throne." Yet, that scaffold sways the future.

We shall overcome because the bible is right: "You shall reap what you sow." With this faith we will be able to hew out of the mountain of despair a stone of hope..."

Martin Luther King, Full Sermon at Ebenezer Baptist Church, April 30, 1967

Melin and Koutoulas: Did JP Morgan 'Loot Accounts' At Lehman and MF Global As Bankruptcy Tactic

It is one thing for an organization to use its privileged position to seize assets in a firm that it knows is going to go bankrupt. That is certainly a possible crime under the fraudulent conveyance laws, as well any violations of fiduciary responsibility.

If a lawyer, for example, knows that a client is going to go bankrupt because of their privileged view of the situation, do they have the right to seize any and all of their client assets for themselves, to secure any outstanding obligations the customer may have with them? Does this include escrow accounts and assets held on behalf of other parties and creditors?

But beyond this, what compounds the situation is any subsequent obstruction of justice, and racketeering with regard to concealing the discovery of those looted funds and assets that were taken extra-legally under some self-serving rationale, and the perversion of the process of the law as a result of this effort.

Remember, it was the concerted attempt to conceal a 'third rate burglary' that finally brought Nixon crashing down.

But I have to admit, this occurred at a time when the nation and its representatives still had an active conscience, that could be repelled in disgust at the trampling of the Constitution. It is not so clear that the soul of the nation has not been deadened by years of deceit and excess, dulled by propaganda and self-serving relativism.



The powerful always snicker, reveling at the height of their reign. They murder the messengers and prophets, to maintain their delusion. And they abuse justice, and the cries of the oppressed rise to heaven.

And then it may not be man's law but God's justice that prevails, and that will be a terrible chastisement indeed, the inevitable downfall, der untergang, of a group of wealthy people driven mad by the will to power and the illusion of their own exceptionalism. And then they will be broken in default and disgrace, as a sign to the faithful.

"For the oppression of the poor, for the groans of the much abused, now will I arise, says the LORD. I will set them in safety from those that sneer at them. The words of the Lord are pure words: as silver tested in a furnace purified seven times.

You shall keep them safe, O Lord, you shall preserve them from this generation of vipers forever, where the wicked prowl on every side, where vile men are exalted." Psalm 12:5-8

The US Government Is Where Everybody, Every Policy, Everything Is Now For Sale At the Right Price

Tim Price puts things in perspective, and includes an extended quote from Doug Noland's excellent Credit Bubble Bulletin.

"I have no problem with the staff of Goldman Sachs earning millions...I have no problem with their clannish, hubristic, insular culture, having never wanted to work for the Moonies.

My main problem with Goldman Sachs is that if it operated like any other business in the world, when it and its business model effectively failed in 2008 it should have been allowed to fail properly, and closed down. But that is not what happened.

Despite self-serving articles like that from Nader Mousavizadeh in this weekend‘s FT ('[the bank] navigated the crisis with far greater skill and discipline than its rivals (and at a far lower cost to taxpayers'), the reality is that Goldman Sachs was almost certainly just as bust as Lehman Brothers in those dark days of 2008. The difference is that Lehman Brothers wasn‘t allowed to convert itself into a bank holding company and borrow emergency funds directly from the Federal Reserve. Goldman was, despite not being a bank in any conventional sense of the word. But that is only to be expected, given that Goldman Sachs and its alumni have managed to infiltrate themselves into every branch of the US administration...

When you look at Taibbi‘s original article, the more recent criticism voiced by...former Goldman employee Greg Smith (readable here) is a vicarage tea party by comparison.

But as I say, I have no problem with Goldman Sachs per se, other than that it shouldn‘t exist, or that it displays the uniquely biddable qualities of US government: everybody, every policy, everything is for sale at the right price...

Tim Price, Muppets 1, Gollums 0
PFP Wealth Management
19 March 2012

Working hard and being smart does not bother anyone. It is the lying, cheating, and stealing, that is most disturbing, especially when it involves corrupting the fundamental processes of the nation like the banking system and the money supply.

And that, ladies and gentlemen, is what is commonly known as corporatism, à la mode Américaine.

From what I can tell money corruption was taken from a long standing but largely personal, almost petty, retail political sideline into a well-organized, wholesale, industrial scale art form by the Clintons and, given the current climate of campaign funding wherein it  has proved so successful at raising enormous funds, that it has become increasingly en vogue, if not de rigueur.

In times of general corruption, when one is dancing they all must keep dancing, whether bankers or pols, until the music stops.


Read the rest here.

Gold Daily and Silver Weekly Charts - New Moon, New Year, Dollar Oil

A slam in the early morning, a sharp rally on much higher volume, and then sideways on light volume all afternoon.

Over at KWN The London Trader reminds us that:

“This is when you see things turn and the manipulators rip it to the upside. There are buy stops on the upside that are attractive for them to target at this point.

Traders are also watching the US dollar now because tomorrow the Iranians are scheduled to start trading oil in currencies other than the dollar. This is clearly an attack on the dollar by the Iranians.

That statement by the London Trader struck me as odd, because it is also New Year in the Persian Gulf, celebrated as NowRuz. I would have thought that there would be more of a holiday.

Reader Marcel from Canada reminds me that the dark of the Moon falls on the 22nd.

Let's see how the week progresses.

SP 500 and NDX Futures Daily Charts - Another Low Volume Drift Higher for Equities

The point gain in the SP futures was equal to the point gain in the DJIA.

End of quarter coming. We'll probably go down at least once before they start the end of quarter tape painting, assuming nothing else happens.

Net Asset Value Premiums of Certain Precious Metal Trusts and Funds

Opening the Fraud Gates: New JOBS Bill 'A Colossal Mistake of Historic Proportions'

"The premise is that the economy and startups are being held back by regulation, a favorite theme of House Republicans for the past 3 ½ years – ignoring completely the banking crisis that caused the recession...

The bill’s proponents point out that Initial Public Offerings (IPOs) of stock are way down. That is true – but that is also exactly what you should expect when the economy teeters on the brink of an economic depression and then struggles to recover because households’ still have a great deal of debt."

I think this is just what America needs: many more IPO's from the financial sector with much less disclosure and transparency, and the weakening of Sarbanes-Oxley and what few investor protections still remain.

Even though Obama chooses not to enforce them, and investigate and prosecute very little, regulations still have a mild dampening effect on the predatory frenzy that we enjoyed in the 1990's under Bill Clinton and the tech bubble, and under Bush II with the Housing and derivatives bubble.

So the solution to unemployment, debt, and fraud is -- wait for it -- more debt and more fraud. And even though it won't gain many new jobs outside of the boiler rooms and penny stock hustlers let's call it JOBS.

This is in case you were under the illusion that the Democrats were any more committed to reform than the Republicans. These jokers are only bipartisan when it comes to taking their marching orders from their masters on Wall Street.

The White House is putting its chips on the CEO defense, and is feigning uninvolvement with the process, being too busy on other matters to be concerned with the very reason that his supporters elected him.  

Personally I cannot understand why people don't just vote most of the incumbents out of office, essentially firing them for non-performance, and let them go find real jobs.

We have learned nothing. And it will happen again. And it will be worse.

Baseline Scenario
A Colossal Mistake of Historic Proportions: The “JOBS” Bill
By Simon Johnson
March 19th, 2012

From the 1970s until recently, Congress allowed and encouraged a great deal of financial market deregulation – allowing big banks to become larger, to expand their scope, and to take on more risks. This legislative agenda was largely bipartisan, up to and including the effective repeal of the Glass-Steagall Act at the end of the 1990s. After due legislative consideration, the way was cleared for megabanks to combine commercial and investment banking on a complex global scale. The scene was set for the 2008 financial crisis – and the awful recession from which we are only now beginning to emerge.

With the so-called JOBS bill, on which the Senate is due to vote Tuesday, Congress is about to make the same kind of mistake again – this time abandoning much of the 1930s-era securities legislation that both served investors well and helped make the US one of the best places in the world to raise capital. We find ourselves again on a bipartisan route to disaster.

The Senate needs to slow down and do its job – we have two legislative bodies for a reason and the Senate’s historical role is partly to serve as a check on enthusiasms that may suddenly sweep the House. To pass this legislation on Tuesday would be a grave mistake.

The idea behind the JOBS bill is that our existing securities laws – requiring a great deal of disclosure – are significantly holding back the economy.
 
The bill, HR3606, received bipartisan support in the House (only 23 Democrats voted against). The bill’s title is JumpStart Our Business Startup Act, a clever slogan – but also a complete misrepresentation.

The premise is that the economy and startups are being held back by regulation, a favorite theme of House Republicans for the past 3 ½ years – ignoring completely the banking crisis that caused the recession...

Where are the supposed guardians of our financial system?

The White House is reportedly taken with the idea of crowd-financing and wants a quick political win in the form of legislation; the Obama administration is poised to concede too much to financial sector interests, again. The Treasury Department likes to claim it provides “adult supervision” for all matters financial, yet it is conspicuously absent from serious conversation around this legislation. And he much-vaunted Financial Stability Oversight Council turns out, again, to be a meaningless paper tiger.

The securities industry special interests are naturally out in force – strongly supported by Senator Charles Schumer of New York and Majority Leader Harry Reid. Reports of the death of Wall Street lobbying power have been greatly exaggerated.

Financial deregulation was the result of decades-long delusion and bipartisan consensus. A major undermining of our securities law seems likely to take place on Tuesday – in a rushed moment of legislative madness.

Read the rest here.

Labor and Dividend Income From 1959 - 2011

This is what some of the US industrialists and Wall Street have defined as 'Perfect Capitalism.'

The implications of this model are mercantilism and neo-colonialism, for the obvious reason that the process of subordinating wages to narrow profits erodes domestic market demand.

The only sort of schemes that must keep expanding in order to maintain their sustainability are essentially Ponzi schemes.

Source: Geographics at the Council on Foreign Relations

Damning the Demimonde: Thomas Frank Versus the Oligarchs' Enablers

The defense being offered for Goldman Sachs, and Wall Street, is that since they are serial cheaters and everyone knows it, the victims should only blame themselves for thinking otherwise, and doing business with them, and being cheated.

I have heard this one quite a bit lately. When someone from the Street offers this defense it is a bit ironic and almost funny.

If you are a member of a fraternity of self-confessed cheaters and liars, your public statements may not be as credible and compelling as you think. Unless you are talking to hardcore muppets of course. 'Trust me, this time I am NOT lying. But if it goes wrong, I was and you should have known better.'

It is as hypocritical as the CEO defense, wherein these titans command outrageous salaries for their superior performance, but when crimes are discovered, it turns out they have progressive dementia, and are barely aware of what goes on in the businesses that they supposedly lead.

Are these people children? Or is anyone who takes them seriously merely a gullible idiot?

What about the politicians, economists, and the media that rise to their defense, and serve their interests, time after time? Are they merely dupes, useful idiots?

Thomas Frank reflects on the serial failures of the country's thought leaders in the following essay. Frank leans a bit left, and I thought the criticisms which he levels could be spread around much more liberally, if you know what I mean.

I can remember arguing with certain prominent 'progressive economists' about the growing bubble some years ago, and more recently the moral hazards of TARP, and being shut down as effectively as any reformer on financial television.

It is not a right or left thing anymore. It is what Lord Action called, 'the people versus the Banks.'

More broadly, it is about equal protection under the law, the primacy of the democratic republic versus the tyranny of the oligarchs and their enablers, the statists of both left and right.

Too Smart to Fail
Notes On an Age of Folly
By Thomas Frank

In the twelve hapless years of the present millennium, we have looked on as three great bubbles of consensus vanity have inflated and burst, each with consequences more dire than the last.

First there was the “New Economy,” a millennial fever dream predicated on the twin ideas of a people’s stock market and an eternal silicon prosperity; it collapsed eventually under the weight of its own fatuousness.

Second was the war in Iraq, an endeavor whose launch depended for its success on the turpitude of virtually every class of elite in Washington, particularly the tough-minded men of the media; an enterprise that destroyed the country it aimed to save and that helped to bankrupt our nation as well.

And then, Wall Street blew up the global economy. Empowered by bank deregulation and regulatory capture, Wall Street enlisted those tough-minded men of the media again to sell the world on the idea that financial innovations were making the global economy more stable by the minute.

Central banks puffed an asset bubble like the world had never seen before, even if every journalist worth his byline was obliged to deny its existence until it was too late.

These episodes were costly and even disastrous, and after each one had run its course and duly exploded, I expected some sort of day of reckoning for their promoters...

But what rankles now is our failure, after each of these disasters, to come to terms with how we were played. Each separate catastrophe should have been followed by a wave of apologies and resignations; taken together— and given that a good percentage of the pundit corps signed on to two or even three of these idiotic storylines mandated mass firings in the newsrooms and op-ed pages of the nation...

The day Larry Kudlow apologizes for slagging bubble-doubters as part of a sinister left-wing trick is the day the world will start spinning in reverse. Standard & Poor’s first leads the parade of folly (triple-A’s for everyone!), then decides to downgrade U.S. government debt, and is taken seriously in both endeavors. And the prospect of Fox News or CNBC apologizing for their role in puffing war bubbles and financial bubbles is no better than a punch line: what they do is the opposite, launching new movements that stamp their crumbled fables “true” by popular demand.

The real mistake was my own. I believed that our public intelligentsia had succumbed to an amazing series of cognitive failures; that time after time they had gotten the facts wrong, ignored the clanging bullshit detector, made the sort of mistakes that would disqualify them from publishing in The Baffler, let alone the Washington Post.

What I didn’t understand was that these were moral failures, mistakes that were hardwired into the belief systems of the organizations and professions and social classes in question...
[big snip]

“The main lesson we should take away from the Efficient Market Hypothesis for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles,” announced Chicago school economist Robert Lucas from amid the ruins in 2009. “If these people exist, we will not be able to afford them.”

And the main lesson we should take away from the Efficient Market Hypothesis for our purposes is the utter futility of economics departments like the one that employs Robert Lucas.

A second lesson: if economists— and journalists, and bankers, and bond analysts, and accountants— don’t pay some price for egregious and repeated misrepresentations of reality, then markets aren’t efficient after all. Either the gentlemen of the consensus must go, or their cherished hypothesis must be abandoned. The world isn’t gullible enough to believe both of them any longer.

Read the rest here.

Things will change, but it is going to take some time. As Charles Mackay observed, a people do not go mad overnight, and they only come back to their senses slowly, one by one.

And history has shown that a minority of 10 to 20 percent may remain true believers to an ideology after it is thoroughly discredited and even vilified.  I was astonished to find Russians who in 1997 still longed for the days of Stalin, and of older Germans and Italians who even today have a sentimental wistfulness for a strong leader with a firm hand, and would welcome the return of der Führer.

I think this is because their ideas are founded not in reason, but in the realms of schadenfreude, a burning hole in their being that craves filling with the misery of others, or a natural obesiance to autocracy born out of a slavish dependence on the will of dark leaders who relieve them of the burden of thinking.

A Nation of Princelings and Paupers

Max Keiser has made a simple but absolutely brilliant observation about crony capitalism.

There is a certain prevailing attitude being broadly promoted that if a person can pay for something, then they should have it, and if they cannot pay for it, then they can't have it.

This is a fundamentally valid idea for ordering the discretionary aspects of an economy. Like most principles it is based on a number of assumptions including opportunity, honesty, and fairness of remuneration.

Having spent the better part of my working life traveling the world, flying hundreds of thousands of miles in a year at times. I became used to different classes of travel, and special clubs for frequent and professional travelers. I have no problem with that, even now that I don't travel in that manner much anymore.

But such differentiation has its limits. Evil is not only the absence but often the misapplication of virtue, an excess of zeal and a lack of proportion.

One can easily see how this principle of wealth as differentiation and rationing is now being applied to healthcare. By arguing with extreme examples of 'luxury treatments,' and widening the definition of what is discretionary, in fact basic healthcare can be cut back and even denied to those who cannot afford it, or afford it only with great difficulty, so that even questions of life and death can become a matter of the ability to pay.

What if this principle of the primacy of wealth is applied to the law? To justice? To go about one's business without official harassment?

It has gotten so bad that we have recently seen an instance showing that if you can afford the best lawyers available, you can steal the money of your clients, and you can openly keep that money, and get away with it.

The very principle that made America different, that made America a great beacon of light in history, is the the idea that 'all men are created equal, and that they are endowed by their Creator with inalienable rights.'

America was intended to be a classless society, in which peoples' fundamental value as human beings was to be judged not by gender, or faith, or color of skin, or even their relative ability to spend money on luxury items, but by their fundamental worthiness and rights as citizens, sufficient in itself, because that value was given not by the State, but inalienably by God.

Yes those rights are limited, but they are also sacred and inviolate.  And that does not mean that you have the right to equal protection under the law, to be considered fully a human being, but only if you can pay for it.

This will spread to all aspects of civil interaction as we become a nation of princelings and paupers via financial segregation.
Posted on March 17, 2012 by maxkeiser

■ Pay the TSA $100 and Bypass Airport Security

As the TSA spreads to trains and highways imagine a ‘bypass’ card applied in these instances as well. Pay a fee and drive in separate lanes, sit in separate train carriages, park in reserved parking, even walk on segregated sidewalks.

Financial Jim Crow laws are no longer a theory, they’re here.

How America Avoided A Fascist Coup in 1933

The plot was exposed by a highly decorated Marine Corps veteran and war hero, Major General Smedley Butler.



BBC Documenary on 'The Business Plot' of 1933 in which a powerful group of wealthy Americans attempted to set up an organization patterned on the French fascists and German Storm Troopers and overturn democracy and the Constitution.



If they had succeeded, and formed an alliance with the industrialists and bankers backing the corporatism of Mussolini and Hitler, then the world might appear very differently than it does today.



The Corporatists: Mussolini, Hitler, Mosley

The history of man is the history of crimes, and history can repeat. So information is a defence. Through this we can build, we must build, a defence against repetition.

What connects two thousand years of genocide? Too much power in too few hands.

Simon Wiesenthal

Harvard Business Review: Psychopaths on Wall Street

I think that the salient point in all this, the technical details of percent and depth of psychopathy in the US financial industry aside, is that self-regulation is at best a vulnerable strategy in any human concern involving trust, but is absolute folly in an industry where the emphasis and incentives are based on the ruthless pursuit of performance at any cost, and where such behaviour is lauded.

There is little doubt that strong personality types such as even marginal psychopaths can hijack an organization, a party, or even a sub-culture given the right environment of moral relativism and complacency. And if successful, they bring more of the morally ambivalent and weak-willed along with them.

"I may have made an error in judgement...but one thing is beyond dispute: the man was able to work his way up to leader of a people of almost 80 million... His success alone proved that I should subordinate myself to him."

Adolf Eichmann

The efficient market hypothesis is more a clever cover story than a legitimate scientific observation worthy of consideration in public policy discussions.   Transparency and oversight are absolutely essential in all financial matters.

The financial system, and their amoral enablers in politics and the media, have done enough damage to the world. It is time to have a stop.

Harvard Business Review
Psychopaths on Wall Street
by Ronald Schouten, MD, JD
Wednesday March 14, 2012

Psychopaths are the subject of endless fascination. We tend to apply that term loosely to people who engage in bad acts, ranging from pathological lying and repeated deception to major fraud and serial killing. Psychopaths rival pedophiles in the panoply of those we despise and fear. Given this fascination with psychopathy, and the public's current negative view of Wall Street (see Greg Smith's op-ed column in The New York Times about his resignation from Goldman Sachs), it is no surprise that Twitter, the blogosphere, and traditional media have been buzzing about "The Financial Psychopath Next Door," an article in CFA Magazine by Sherree DeCovny (subscription required).

The headline-grabbing factoid in the article was an estimate that 10% of people in the financial services industry are psychopaths. And that's a conservative estimate, according to Christopher Bayer, a Wall Street psychotherapist cited by DeCovny.

DeCovny describes "financial psychopaths" as individuals who seek thrills, lack empathy, don't care about what others think, are charming and intelligent, and are skilled at lying and manipulation. Citing Richard Peterson, managing partner of MarketPsych (a firm that provides psychological and behavioral finance training for the industry), DeCovny notes that these are some of the traits that also predict success on Wall Street.

To understand the implications of all this, it helps to define psychopathy. It is a psychological condition based on well-established diagnostic criteria. These include glibness and superficial charm, conning and manipulative behavior, lack of remorse and empathy, refusal to take responsibility for one's behavior, and others.

Determining whether a person is a psychopath is generally done using a test like the Psychopathy Checklist-Revised (PCL-R), developed by Robert Hare and his colleagues. People who are "normal" invariably score a few points on such scales. True psychopaths score in the top 25%.

Using formal diagnostic criteria, researchers have estimated that about 1% of Americans — about 3 million people — are psychopaths. Based on statistics alone, there are some true psychopaths on Wall Street, as there are in all walks of life. The odds increase further when we consider the competitive advantage that some of the characteristics of psychopathy, including willingness to take risks, can provide in the field.

Psychopathy is mistakenly regarded as an all or nothing affair: you either are a psychopath or you aren't. If that were the case, saying that 10% of people on Wall Street are psychopaths could actually be somewhat comforting, since it implies that the remaining 90% are not and so shouldn't cause us any concern...

But there is good news. First of all, it is possible to screen out almost and full-blown psychopaths during the hiring process and after. Some of the key indicators are:

Glibness and superficial charm
Lack of empathy
Consistent decisions in their self interest, even where it is ethically questionable
Chronic, sometimes transparent lies, even with regard to minor things
Lack of remorse
Failure to take responsibility for their actions, and instead blaming others
Shallow emotions
Ignoring responsibilities
Persistent focus on gratifying their own needs at the expense of others
Conning and manipulative behavior

The only way to deal with a true psychopath is to get him or her out of the organization as fast as possible. While full-blown psychopaths are not deterred by fear and do not learn from punishment, "almost psychopaths" can get the message that adverse consequences will follow misconduct. As a result, strictly enforced firm policies can be effective in deterring those who may be tempted to engage in illicit conduct. As long as the firm wants to deter them.

Read the entire article here.

What I find most disturbing is that checklist sounds like a screening tool for political candidates.

When the Abuse of Insider Information and Control Grows So Large as to Become the Market

"This is a ‘bubble ready’ financial system, and will continue to produce bubbles until it is reformed. The financial sector is primarily a wealth transference mechanism. And with the productive economy foundering because of gross mishandling over the past twenty years or more, the sector is transferring wealth from the future of the economy in the form of Treasury debt to the monied interests on Wall Street in the form of asset bubbles, bonuses and fees."

Jesse, Enjoying Coffee In the Lodge with Jesse by Ilene

I started to think along these lines a few years ago, during the long stock and housing bubble expansion in the stock market that led up to the financial collapse. And we must certainly thank Mr. Greenspan and his Fed for that, as it is clear they knew exactly what was happening. And rather than fulfill their pledge to stop it, they aided and actually promoted it.

What is shocking is that these are no longer rogue operations, no statistical outliers, no isolated dirty dealings by obscure hedge funds.

The moral hazard and decay has progressed so far, has tainted so much, that the US markets are not even worthy to be called casinos, much less captial management and efficient allocation mechanisms.

They have become abattoirs where the real wealth of the nation is taken and slaughtered. These fellows produce nothing, create nothing, except for fraudulent conveyance to take other people's wealth.

There is no better example of this than MF Global, but you can trust your instinct, that there will be more. The blood feast has only begun.

Wait until the wiseguys start skinning their own, those who think they are going to profit from this because they are smarter and better than the rest, and on board. Then you will real some real howls of outrage. I just wonder if there will be anyone left to care.

"Indeed, the market backdrop has regressed to little more than a “money” game. Speculative dynamics rule, and those that play (or associate with those that play) the game the best attain unimaginable financial wealth. How can one reasonably do analysis these days when so much depends on the extent to which global central bankers will proceed further down the path of unlimited “money” creation?

Do you want to bet that the Fed (and ECB, BOE, BOJ, PBOC, etc.) is largely through its crisis-induced money creation operations? Or is the Fed’s balance sheet on the way to $10 TN? Those provide two altogether different scenarios to contemplate.

Clearly, with central bankers propping up markets with Trillions of liquidity injections, one can toss traditional analysis (and market participant behavior) out the backdoor."

Doug Noland, Credit Bubble Bulletin

Are the Regulators Allowing Banks To Act on Privileged Information with MF Global Customers?

Francine McKenna writes the blog, Re: the Auditors. I like her writing quite well, as it is clear and concise, and enjoy the depth of understanding of the accounting profession she brings to bear on the issues of the day.

In this guest post at the blog BankThink of The American Banker she illuminates the ongoing mistreatment of the MF Global customers whose money was stolen three times: once by MF Global, a second time by MF Global's Banker, and a third time by Banks and Funds with special access to information through the financial system.

What she is adding to what others, including myself, have said is the linkage she draws between the Banks and the MF Global collapse via their common auditors.

I suppose we cannot blame the Big Wall Street Banks, because as the recent Greg Smith resignation incident has shown,  they are in the business of cheating their customers at every opportunity.   In fact, one could say that cheating through the hiding and manipulation of information and the subversion of the rules is their stock in trade.

Although as the financial press was quick to point out it can't be called cheating because everyone who is not a naive fool should know what they are doing, and keep both hands on their wallets, and trust nothing that the Banks or Wall Street, or their enablers in the press and the government, say.  The favorite rationale of last resort on the Street is your own foolish trust.  After all, no one made you do business with them.  No one made you buy that fraudulent instrument.  No one made you deposit your money with a proto-criminal enterprise.   So be a good muppet and shut up and pay up.

They are doing God's work. It was our mistake to assume that we knew which god it was that they are serving. They serve Mammon, and themselves, for they would be as gods.

The real shame of this is with the regulators, who were hired by the customers to protect them. Not by the industry, not by the corporations, but by the people, for it is still a government of, by, and for the people, at least on paper and for now.

That is what they are paid to do, and the oath which they have sworn to uphold.

BankThink
Banks with Inside Track Take Advantage of MF Global Mystery
By Francine McKenna
March 16, 2012

...All parties have practiced misdirection. The trustees, the regulators, and the investigators from the FBI and U.S. Attorney's office dole out anonymous updates to reporters with the goal, I suppose, of attracting more information, buying time, or preparing customers for the worst.

There is one thing we know for sure. Some banks must know where the missing customer funds are.

Otherwise why would they be so sure that customer claims will be paid in full and paid soon that they're bidding as much as 90% of face value for the claims?

"These banks are so confident that they’re buying the claims for their own account, not resale," says Barry Slotnick, a white-collar defense lawyer and a partner at Buchanan Ingersoll & Rooney PC who's not involved in the case.

The New York Times has reported that Barclays, the Royal Bank of Scotland and Seaport Group, a firm that specializes in distressed assets, "are all scrambling to buy MF Global customer claims." Barclays has agreed to purchase most claims for 90% of face value and RBS says it will pay 91% for the claims of institutions (but not those of individuals). Seaport is adding something else: $200,000 to help fund the Customer Commodity Coalition, a group of MF Global clients led by attorney James Koutoulas, who negotiated the offers. Other banks willing to buy claims include Credit Suisse, which was offering more than 80%, and Deutsche Bank, offering 89%.

I think the banks know something the rest of us don't know. They certainly have windows on the situation not available to the general public.

Barclays, for example, is audited by PricewaterhouseCoopers, which happens to have been MF Global’s auditor. The British bank is also no stranger to the problem of keeping customer assets secure. The U.K. Financial Services Authority recently fined Barclays Capital £1.12 million for failing to protect and segregate client money held in sterling money market deposits.

Credit Suisse, meanwhile, is audited by KPMG, the professional services firm that is also running the MF Global bankruptcy in the U.K., Canada and Singapore.

Deutsche Bank is a creditor in the MF Global Chapter 11 proceedings due to its role as the indenture trustee for four different bond issues. Next to JPMorgan Chase, Deutsche Bank is the most important non-customer creditor of MF Global. As a member of the creditors committee, Deutsche is privy to information customers do not have....

Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.

Read the rest here.

Gold Daily and Silver Weekly Charts - the 'Five Point Palm Exploding Heart Technique' of Pai Mei.

"The failure was and is of the entire market and the rules upon which it is built. For the Liabilities side of each bank is connected to and to a large extent made up of the assets side of all the other banks. And the Assets side of every bank is tied to and, in large part, made from from the liabilities side of all the others. When people talk of ‘the Market’ it is an abstraction only. There is no even larger, daddy organization called ‘THE MARKET’.

To return for a moment to my original analogy each bank is a hugely unstable tank of water, built like an upside down pyramid constantly being strained by the huge in and out flow pipes that feed and drain it. In this analogy ‘The Market’ is just the abstract summation of all the flow in all the connecting pipes that is hurtling from one bank to another at any given instant.

So it is silly to somehow imagine the market is a huge reservoir of stability separate from the banks and other institutions themselves. It is simply the sum of them. So if each bank is stupid, greedy, unstable and blind to the risks of its own construction and functioning – then ‘The Market’ is simply the sum of all that stupidity, greed and disastrous design.

The market is not the cavalry. There is no cavalry."

Golem XIV, Propaganda War: Our Version - The Banker's Mexican Standoff

The implication is that the western financial system has already failed. The failure has just not yet been realized, while the system remains confident that it is still alive.

The massive insolvency will not affect us if we believe that the currency retains its value, and life can go on as before. Extend and pretend.

It is like the death blow called Dim Mak 點脈. The recipient takes the blow, and may walk away, and then collapse. This was parodied in the movie Kill Bill 2, as the 'Five Point Palm Exploding Heart Technique' of Pai Mei.

The liquidity seizure that gripped the markets was merely the shock of the bankers' realization that they and their peers were utterly insolvent. But with the assistance and encouragement of the Fed and the ECB they have stepped forward, one foot after another.

The emperors are not only naked, they are the walking dead.

When does a bubble finally end? When did the French realize that the Banque Générale of John Law was insolvent?

Men may go mad in a crowd, but they come to their senses slowly, one at a time.

The unavoidable fact is that the financial system is insolvent. Eventually it will have to be nationalized and then recreated. Those with a share in the system will receive some form of 'payout.'

It may be based on the decimalization of their holders, say 1 new dollar for every 100 or even 1000 dollars presented as in the case of the Russian ruble, or it may be a bit more arbitrary as in the manner of the bankruptcy of MF Global.

I am not sure I buy into this line of thinking, but it is an interesting thought experiment.

See you Sunday evening. Watch out for falling bankers.

SP 500 and NDX Futures Daily Charts - Triple Witching Calm Before Next Weeks CDS Auction

An exceptionally calm triple witching day. They took the market to the levels that they wanted and left them there.

I have now rolled over the futures charts to the new front month of June. So some of the levels may be a bit different.

The SP 500 futures finished just below 1400. There was a negative divergence in tech.

Have a pleasant weekend.

Lessons from a Master Investor

Throughout his career, Roy Neuberger was eager to share what he knew, including his "rules of investing":

1 Be flexible. It is imperative that you be willing to change your thoughts to meet new conditions.

2 Take your temperament into account. Recognize whether you are by nature very speculative or just the opposite.

3 Be broad-gauged. Diversify your investments, make sure that some of your principal is kept safe, and try to increase your income as well as your capital.

4 Always remember that there are many ways to skin a cat. Each [great investor] has been successful in his own way.

5 Be skeptical. To repeat a few well-worn useful phrases: Dig for yourself. Be from Missouri. If it sounds too good to be true, it probably is.

Episodes of Hyperinflation from Diocletian to Bernanke - How It Might Unfold Today

Both hyperinflation and protracted deflation are extraordinary economic events. And it is telling that they are much more common in the 20th century and after than in all preceding recorded history. Ah, the joys of modernity.

While prices can certainly increase based on fluctuations in supply and demand, by my definition 'a general price inflation is an increase in the money supply without a corresponding increase in real output causing an increase in general price levels.'

War and other natural disasters and dislocations can cause temporary bouts of severe inflation and deflation, but endogenous episodes of hyperinflation or deflation are almost always the result of policy error in a genuinely sovereign currency, that is, not contingent on an external entity. Although that policy error can be precipitated as a response to some external stimulus, very often unfunded war debts for example.

War is a spectacularly unproductive expenditure, and a nation that engages in continual wars is almost always brought to eventual economic ruin, if for nothing else than overreach.

Hyperinflation is generally considered to be an increase of over 50% in price levels based on a monetary phenomenon. This increase is caused by decisions on the part of the central bank to increase the money supply at a high rate leading to a loss in its value.

Although it is a low probability event I have said that a hyperinflation, since it is a policy decision, is certainly possible in the US dollar. I have spent quite a bit of time trying to assess the probabilities, and in order to do that, one must understand the actual mechanism by which it would occur. I had been unable to find that described elsewhere, except in the most general of terms and the piling on of anecdotal evidence.

Based on my own thinking, the most likely cause of it would be an inappropriate response to a threat to the banks because of an event in the derivatives market which is a major credit bubble, intricately interlocking almost all financial institutions.  Critical Mass: The Mispricing of Derivatives Risk and How the Financial World Ends.

I think there is sufficient room for doubt that the Fed, the President and the Congress would 'do the right thing' for the public rather than their crony capitalists when it comes down to it. They are caught in a credibility trap, and are unable to police or reform the system without indicting themselves.

I have even entertained the thought that a few of the Banks have used their own precarious positions as leverage, a sort of soft extortion, or mutually assured destruction, to fundamentally do as they please. I am not alone in this. Mr. Max Keiser calls them 'financial terrorists,' and in his highly expressive way he may be right.    That was certainly evident in the passage of the TARP.

I would be prepared to say that most of the very powerful businessmen and politicians I have met, with a few notable exceptions, are not very nice people, and as they would themselves proudly attest, not ordinarily human. They tend to the emotional and spiritual depth of salamanders, or gekkos to borrow a meme. Hard to say where they might fit on Maslow's hierarchy. On par with toasters?

It is funny how often a society confuses the accumulation of wealth and power with wisdom and virtue, when history shows it to be most often quite the opposite.

I have often wondered at their propensity to collect beautiful things. Did J P Morgan really enjoy his wonderful collection of manuscripts? Did William Randolph Hearst rise to ecstasy with his art collection? I am sure that I understand Mr. Dennis Kozlowski's enjoyment of his $15,000 umbrella stand. I do have children you know.

Here is a list of some of the more famous episodes of hyperinflation throughout history.

Episodes of Hyperinflation - San Jose State University

Here is my own list of of Serious Inflations Since WW II.

For the specific feel of a hyperinflation, there are few better books than When Money Dies: The Nightmare of the Weimar Collapse by Adam Fergusson. This is a link to an online copy of the book.

Some Common Fallacies About Inflation and Deflation is also worth reading if for nothing else than to find out 'what works' best in such circumstances as a hyperinflation.

And lastly there are my own recollections of a country on the cusp of a hyperinflationary episode, Moscow Memories of 1997.

If there is such a hyperinflationary episode in the US, it will almost certainly be a massive theft of wealth, under cover of some false flag episode or similar story, blaming it on China or Iran, or some natural disaster, for example.

The Fed and the monied interests are unlikely to voluntarily accept responsibility for the disaster, for the same reasons that they are unwilling to engage in genuine reform. The way that the theft of customer funds at MF Global was handled may give you some idea of how it might unfold, except on a much larger scale. You would be fortunate to tithe only ten percent to the monetary powers, the dark rulers of this world, and spiritual wickedness in high places. Their only response is 'more.'

One Half of Italy's New Sales Tax Receipts Go Directly to Morgan Stanley in New York

Complex derivatives deal from the 1990s backfires on Italy.

Bankers win.  The people pay.

One of my less scrupulous bosses once told me, "The way I like to win a race is to punch the other guy in the stomach and then yell, 'Let's race.'"

And I replied, "Well that may be all well and good, but if the guy you punch is Italian or Greek, I would not stop running at the finish line."

He was a Irish lad,  who having enjoyed a temporary run of luck, was left terribly over his head, pretty much in everything.  And as you might suspect, he ended badly, and took a lot of his type, whom he had gathered into his contrivances, down with him.  Its the little things that make life worth living.

No wonder the American derivatives dealers are leaving Europe.   They are probably just a few steps ahead of the pitchforks and torches.  Europeans keep a ledger of wrongs that never expires until the debts are paid.

The bad news is that they are coming home.

These Wall Street hooligans remind me of an old acquaintance of German descent, (nice fellow although a bit cheap, confirmed bachelor, good card player, but an unbearable drunk), who had been banned from so many pubs around his modest country home that we used to have to go over forty kilometers to get a drawn beer on the weekend. It got so bad that he finally gave up drinking altogether, just to save on gas. Found a nice woman, or rather I think she discovered him, and got married at fifty. Found his happiness. True story.

Bloomberg
Italy Said to Pay Morgan Stanley $3.4 Billion
By Nicholas Dunbar and Elisa Martinuzzi
Mar 16, 2012 10:10 AM ET

When Morgan Stanley (MS) said in January it had cut its “net exposure” to Italy by $3.4 billion, it didn’t tell investors that the nation paid that entire amount to the bank to exit a bet on interest rates.

Italy, the second-most indebted nation in the European Union, paid the money to unwind derivative contracts from the 1990s that had backfired, said a person with direct knowledge of the Treasury’s payment. It was cheaper for Italy to cancel the transactions rather than to renew, said the person, who declined to be identified because the terms were private.

The cost, equal to half the amount to be raised by Italy’s sales tax increase this year, underscores the risk derivatives countries use to reduce borrowing costs and guard against swings in interest rates and currencies can sour and generate losses for taxpayers. Italy, with record debt of $2.5 trillion, has lost more than $31 billion on its derivatives at current market values, according to data compiled by the Bloomberg Brief Risk newsletter from regulatory filings.

“These losses demonstrate the speculative nature of these deals and the supremacy of finance over government,” said Italian senator Elio Lannutti, chairman of the consumer group Adusbef.

The transaction may prompt regulators to push for greater transparency and regulation of how governments use derivatives, said the head of the European Parliament panel that deals with market rules.

“This latest revelation shows that we need to know a lot more,” Sharon Bowles, chairwoman of the economic and monetary affairs committee, said in an interview today. “I’m reluctant to have quite as many exemptions for central banks and countries” from transaction-reporting rules, she said.

Morgan Stanley said in a Jan. 19 filing with the U.S. Securities and Exchange Commission that it “executed certain derivatives restructuring amendments which settled on January 3, 2012” and reduced its Italian exposure by $3.4 billion.

Mary Claire Delaney, a spokeswoman for the New York-based firm, declined to comment further. Officials at the Italian treasury in Rome declined to comment on the contracts...

Barclays and Others Seeks Bulk Claim Purchases from MF Global Customers

I have spoken to one customer of MF Global who has already accepted an offer of 91 1/2 cents on the dollar for his claims. He could no longer bear the waiting and the uncertainty, and wanted to move on. Others have indicated that they are going that to accept offers as well.

Although the sums of money involved may not seem substantial to those on Wall Street and in Washington, to the retail customers and their families it represents a significant amount of their savings and liquid net worth.

It was weighing heavily on their minds.

While I am glad to see the customers obtaining their funds, I cannot again help but note the disgraceful manner in which the government, the exchange, and the regulators, the CFTC and the SEC, allowed this theft of customer funds to unfold, especially the manner in which the Banks twisted the aftermath to their own advantage.

And Jon Corzine and his good friend Barack Obama should be ashamed.

Reuters
Barclays, Seaport eye bulk buys of MF Global claims
By Nick Brown and Ann Saphir
Mar 15, 2012 9:26pm EDT

(Reuters) - Barclays PLC and the Seaport Group have separately begun working to group together thousands of MF Global customer claims with an eye toward acquiring the claims in bulk, according to an attorney, and to a term sheet obtained by Reuters.

Barclays and Seaport, which have been in talks with customer groups to acquire claims at more than 90 cents on the dollar, are looking at ways to bundle smaller claims to make bigger bulk purchases, according to a term sheet from customer advocate group the Commodity Customer Coalition.

The coalition, which negotiated the offers, sent the term sheet to thousands of customer constituents this week, saying offers from Seaport and Barclays were contingent on the size of the claim.

Seaport has said it will only take on claims worth $100,000 or more, according to the sheet.

Trace Schmeltz, an attorney for the coalition, told Reuters on Thursday his firm, Barnes & Thornburg, will work with Seaport to find ways to bundle.

"They asked if we'd do it, and we have a team in place to help them," Schmeltz said.

Meanwhile, Barclays this week cold-called R.J. O'Brien, the futures broker with the most former MF Global clients, to seek the firm's help in reaching potential sellers.

"They asked to have a meeting with us to share with us the plan that they have in mind," the broker's chief executive, Gerald Corcoran, told Reuters at the Futures Industry Association's annual meeting in Boca Raton, Florida, on Tuesday. "If we can do it, we will facilitate" communication between Barclays and customers interested in selling their claims, Corcoran said.

Some $1.6 billion of customer funds originally parked with MF Global went missing after the broker's failure last October. James Giddens, the trustee charged with recovering client funds, has paid back about 72 percent of the money in commodity trading accounts.

Customers with foreign exchange claims have so far received nothing from the trustee.

More than 27,000 clients have filed claims with the trustee to retrieve the balance in their accounts, and it is these claims Barclays and others are after.

A spokesperson for Seaport did not return a call seeking comment. A Barclays spokesman declined to comment.

According to the coalition's term sheet, Seaport has offered 91.25 cents on the dollar to acquire claims for customers who traded on U.S. exchanges, and 66.25 cents for claims belonging to customers who traded on foreign exchanges.

Barclays has offered 91 cents and 66 cents, respectively, for U.S. exchange and foreign exchange claims belonging to institutions. It has offered 90 cents and 65 cents, respectively, for U.S. exchange and foreign exchange claims belonging to individuals.

Royal Bank of Scotland has made an offer for institutional accounts equal to Barclays', but the coalition is not touting RBS' offer to customers because the bank refused to take on individual accounts, according to the sheet.

A spokesperson for RBS could not be immediately reached on Thursday.

Bill Moyers Journals: 'Crony Capitalism' Part Two with Gretchen Morgenson

Here are a few of the reasons why there is no genuine financial reform, and as a consequence, no robust, sustainable recovery.



This is part of the same show in which Bill interviewed David Stockman.

I was looking at some figures today, and the Obama recovery is very weak compared to the performance of the Roosevelt Administration for example.

But this makes sense. Obama is more Hoover than Roosevelt, a moderate Republican, moreso than a progressive Democrat.

If Obama is a radical in the manner of Saul Alinsky, then Tim Geithner is a mathematician in the manner of Albert Einstein.

Tavakoli: An Anecdotal Peek at the Mispricing of Counter Party and Derivatives Risk

Here is an entertaining excerpt from Janet Tavakoli, Collateralized Debt Obligations & Structured Finance, John Wiley & Sons, 2003. She reiterates the incident in the expanded second edition, Structured Finance, 2008.

This is a nice example of the mispricing of risk and the related fallacy of netting in the derivatives markets which I discussed the other day, Critical Mass: The Mispricing of Desrivatives Risk and How the Financial World Ends.

It makes the assumption about risk in Black-Scholes look like a firecracker.

Not everyone has a Tavakoli-class analyst watching their back. I suspect that there are a lot of unintended bagholders blissfully walking around out there. They are one flick of a button away from financial evisceration. They just don't know it.  The implosion of MF Global was just a taste.

And that is what keeps the Fed and the ECB awake at night.

"One well-known, well-respected, American investment bank asked me to consider protection from one of their “transformer” vehicles. They asked if the bank I worked for would intermediate a credit default swap transaction. Requests for intermediation are common. Many banks need an OECD bank counterparty for regulatory capital purposes. If the structure is right, the intermediation fee can allow the intermediary bank to earn a reasonable return on the minimal capital required, and all parties are satisfied.

The investment bank sent over their documentation. It was a paltry two-page document, whereas monolines will send a small booklet and make their lawyers available to discuss language details. When I looked at the document, I realized that the transaction was unsuitable. The following diagram shows the gist of the proposal, without embarrassing those who should be.

The investment bank assured me they would give me proper credit default swap documentation incorporating whatever language I wanted. If a credit event occurred, the bank would look to the SPE to make payment under the terms of the credit default swap, and I could design the terms.

I declined.

The investment bank invited me to a meeting at their offices. Four tailored Armani suits or better appeared at the meeting. If life were a fashion war, the investment bankers would be winning. They were confident and took victory postures. They attempted to persuade me to do the transaction. I continued to decline. I could sense their building frustration. They couldn’t understand why they weren’t getting my agreement. After all, they were taller, they were louder, and they were in the majority.

So what was the problem?

I picked up a cookie – the meeting didn’t have to be a total loss - and explained. I didn’t want to play their shell game. The problem was that my counterparty for the credit default swap protection would have been the SPE, a shell corporation. The only asset of the SPE was an insurance contract. The SPE would only receive a credit default payment after the insurance company determined its actual recovery after taking the matter through bankruptcy proceedings. The SPE had no way of assuring timely payment under the terms of the credit default swap confirmation.

The transformer wasn’t even worth the price of the child’s toy of the same name for the purpose they were suggesting. Sure, the SPE would have ultimately got paid and the bank would ultimately have received payment, but that wasn’t the point.

The point was that the SPE did not have the resources to perform under the terms of its transaction with the bank. It could not pay on a timely basis, no matter how cleverly crafted the credit default swap confirmation. If a credit event occurred, the bank would have to fund the credit default payment to the ultimate protection buyer until the SPE finally received its payment from the insurance company. The investment bank only offered the usual credit default swap intermediation fee, but the bank had additional risk beyond the credit default swap agreement.

It’s possible that the well-dressed guys weren’t aware of this until I pointed it out. The implications of that are ugly enough. But if they were aware, the implications are even uglier."

I hear that the bankers in question were annoyed because they were just doing God's work.

Coyle: I want to tell you my secret now.  I see dead people.

Malcolm: Dead people like, in graves? In coffins?

Coyle: Walking around like regular people. They don't see each other. They only see what they want to see. They don't know they're dead.

Gold Daily and Silver Weekly Charts - A Rendezvous With Destiny

"In this world of ours, in other lands, there are some people who, in times past, have lived and fought for freedom. And they seem to have grown too weary to carry on the fight. They have sold their heritage of freedom for the illusion of a living. They have yielded their democracy.

I believe in my heart that only our success can stir their ancient hope. They will begin to know that here in America we are waging a great and successful war. It is not alone a war against want and destitution and economic demoralization. It is more than that; it is a war for the survival of democracy. We are fighting to save a great and precious form of government for ourselves and for the world...

There is a mysterious cycle in human events. To some generations much is given. Of other generations much is expected. This generation of Americans has a rendezvous with destiny."

Franklin D. Roosevelt, 1936


“I am the victim of an error of judgement.

Now that I look back, I realize that a life predicated on being obedient and taking orders is a very comfortable life indeed. Living in such a way reduces to a minimum one's need to think.”

Adolf Eichmann

SP 500 and NDX Futures Daily Chart

“While the financial crisis destroyed careers and reputations, and left many more bruised and battered, it also left the survivors with a genuine sense of invulnerability at having made it back from the brink. Still missing in the current environment is a genuine sense of humility.”

Andrew Ross Sorkin

As a reminder, tomorrow is the March triple witch.

Deutsche Bundesbank's External Position in the EU: Saving Buba

External Position of the Deutsche Bundesbank in the EU

Source: Deutsche Bundesbank