About Those MBS Purchases in Option Expiry Week

Several readers were kind enough to write in with more material about this correlation as noted in the ContraryInvestor as I had requested.

If the Fed is buying in the TBA portion of the MBS, it is clear that this is a cross-correlation, since both this market and option expiration have similar dates.

Friend Lee Adler over at the Wall Street Examiner has also been tracking this and notes:

"Jesse (whose work I greatly respect or I wouldn't feature it) is wrong on this count in my view, but correct in that the MBS purchases do have an impact on stocks, as does any liquidity pumping. But that impact is far less than the direct impact of open market operations directly with the Primary Dealers, as was the case in the direct Treasury purchases, and the GSE purchases. When the MBS liquidity is withdrawn it will have an impact, but mostly on the Treasury market. The impact on stocks will be secondary, and not pretty, I might add."

He specializes in this area, and his analysis seems to be 'spot on.' But I have to add to this that Jesse is not the Contrary Investor, although I would be glad to be the author of his databases and excellent analysis on the markets, on the whole, week in and week out. And I often rely on information and perspectives from a variety of connoisseurs of financial data, who add immeasurably to the daily fare here.

Here is what JESSE said.

"The data is intriguing to say the least. As you may recall, option expiration in the US stock indices occurs on the third Friday of every month. We have pointed out in the past that this monthly event is often the occasion of some not so subtle racketeering by the funds and prop trading desks of the banks in separating the option players from their positions, and pushing prices around to maximize the pain.

Why would the Fed wish to provide extra liquidity, to the tune of $60 billion or so, for the banks during that week? There must surely be other ways to support the equity markets. Such as buying the SP futures in the thinly traded overnight session. I am not aware of a strong correlation for stock selloffs or extraordinary weakness in option expiry weeks per se.

It might not be a coincidence, but there could be some unrelated event in the mortgage markets that also occurs on the third Friday or Thursday of each month. We are not aware of it, but that does not mean it does not exist. They might also be making the purchases more randomly, but reporting them on some schedule as the Fed does its H.41 reports, for example. Anyone who might know of such a cross correlation would be kind to let us know of it."

And here is my addendum from today.

Addendum 22 Jan: Several readers have written to suggest that the Fed is buying
in the TBA markets, new issues, and that they have fixed settlement dates that
roughly coincide with stock options expiration. That does not remove the
potential material effect of providing liquidity in options expiry week, but it
certainly does nullify the imputation of deliberation. I think the front running
as noted in the blog today in Treasuries is more obvious and plausible."

I was intrigued but skeptical of the meaning of this correlation, confessed my lack of specific knowledge, AND suggested an unrelated cross-correlation, with a request for input from readers. It was just too obvious and did not seem to have a point. Option expiry is a week of back and forth manipulation and not a substantial ramp. It also goes against my basic model that the Fed minds the bond market, and the Treasury, as head of the Working Group on Markets and the Exchange Stabilization Fund, keeps it eye on stocks via the SP futures. And a defendant will have gone to prison on weaker circumstantial evidence than that which supports the case for central bank manipulation in the precious metals markets.

"Jesse" is often on the edge in his inquiry, and asks a lot of questions, reads lots of material, but always seeks the data, and cuts it with a skeptical eye. That is the method of preparation in Le Cafe.

Related, here is some additional information on how MBS Analysts Watch the Fed's Every Trade.

I think the real question does remain, "What happens when the Fed stops buying?" and of course, "Is someone front running the Fed's purchase in the Treasury markets (and perhaps MBS for that matter)?"

Audit the Fed, and we will know much more.

Why Are 86% of the NY Fed's MBS Purchases Occurring During Option Expiration Weeks?

My friends at ContraryInvestor have published some remarkable data this evening in their twice weekly (subscription) analysis of the economy and the markets. This is one of the best analysis sites we follow, and highly recommend that you at least take advantage of their complimentary monthly newsletter.

This data suggests that the Fed's purchases of Market Backed Securities serves not only to artificially depress mortgage rates and the longer end of the yield curves. The purchases occur, with a remarkably high correlation of 86%, during monthly stock market options expiration weeks in the US.

"...since July, there has only been one options expiration week whereby the Fed did not buy at least $60 billion of MBS during the options expiration week itself, providing instant and meaningful liquidity during options expiration weeks that have historically had an upward bias anyway! Talk about timing of liquidity injections to get maximum effect in the equities market."

The data is intriguing to say the least. As you may recall, option expiration in the US stock indices occurs on the third Friday of every month. We have pointed out in the past that this monthly event is often the occasion of some not so subtle racketeering by the funds and prop trading desks of the banks in separating the option players from their positions, and pushing prices around to maximize the pain.

Why would the Fed wish to provide extra liquidity, to the tune of $60 billion or so, for the banks during that week? There must surely be other ways to support the equity markets. Such as buying the SP futures in the thinly traded overnight session. I am not aware of a strong correlation for stock selloffs or extraordinary weakness in option expiry weeks per se.

It might not be a coincidence, but there could be some unrelated event in the mortgage markets that also occurs on the third Friday or Thursday of each month. We are not aware of it, but that does not mean it does not exist. They might also be making the purchases more randomly, but reporting them on some schedule as the Fed does its H.41 reports, for example. Anyone who might know of such a cross correlation would be kind to let us know of it.

Addendum 22 Jan: Several readers have written to suggest that the Fed is buying in the TBA markets, new issues, and that they have fixed settlement dates that roughly coincide with stock options expiration. That does not remove the potential material effect of providing liquidity in options expiry week, but it certainly does nullify the imputation of deliberation. I think the front running as noted in the blog today in Treasuries is more obvious and plausible.

See Also About Those MBS Purchases in Option Expiry

But otherwise, it would be a good question to ask of the Fed. Are they in fact supplying extra liquidity to the banks at certain intervals to support a manipulation of the market to boost their prop trading results?

Perhaps at the next occasion of Ben's visit to Congress. Or maybe the SEC can pick up the phone and call NY Fed CEO Bill Dudley, formerly of Goldman Sachs. Federal Reserve Bank of New York Tel: (212) 720-5000.

ContraryInvestor is one of the more 'squared away' analysts we follow, and they do go to some pains to stress their reluctance to ever take the conspiratorial route. There may be a perfectly innocent reason why the Fed buys the MBS when it does. Some correlation based on the calendar.

Inquiring minds would like to hear all about it, Revelations-wise.

"...in trying to follow the money we know the bulk of Fed money printing has gone to support the mortgage markets with the Fed buying up a huge swath of MBS since March of last year. From the summer of 2008 until the present, the Fed has been a huge help in getting conventional 30 year mortgage paper costs from the mid-6% range to the high 4% range. Quite the accomplishment.

But if you take a very careful look at the character of the Fed balance sheet since the big time money printing effort started in March of 2009, you'll see that their buying of MBS has been a bit of a multi-use exercise. Without trying to sound conspiratorial, we believe they have also used the MBS buying program to help "support" equity prices by essentially providing liquidity to the aggregate financial market at quite the opportune times...

You may have seen that recently Charley Biderman at MarketTrimTabs has been suggesting that he cannot account in aggregate for just who has been buying equities since March of last year. He suggests that although he cannot prove it, the Fed may indeed be a key buyer. MarketTrimTabs is the keeper of the records of the kingdom when looking at equity mutual fund flows, etc. We even did a bit of this ourselves in a discussion a while back by documenting that traditional equity buyers that have been households and corporations (buybacks) were essentially nowhere to be found in 2009.

In fact, households were selling and on a net basis corporations were issuing equity, not buying it back. That leaves institutions, banking sector prop desks, the hedge community, etc. as the key provocateurs of equity price movements in the rally to date. No wonder Charley is scratching his head a bit and wondering just how we could have scaled the largest 10 month rally in market history without households and corporations playing along. But like Charley, we can prove nothing about the Fed actually acting to buy equities or futures, etc.

But there just happens to be one thing we can prove when we “follow the money” that the Fed has been doing. And it ties right back to their purchasing of MBS in the marketplace. Remember, when the Fed buys a mortgage backed security from the financial sector, it provides liquidity that can 1) be lent out, 2) reinvested in other mortgage backed securities (not a chance), 3) used to buy bonds, or 4) used in prop desk trading. We already know the lending is not happening, MBS purchases have been the province of the Fed with few other buyers, banks have bought bonds, but in moderation, and finally banks are announcing “record trading profits” as per their prop desk activities. Get it? Of course you do. The prop desk destination has been a liquidity magnet.

So here’s the important issue regarding the Fed's MBS purchases relative to equity market outcomes. It’s the timing of the Fed’s MBS purchases that has been the key support to equity prices. And we see it that way when we analytically follow the money. Ok, the chart below chronicles ALL Fed purchases of MBS by the week since March of last year. The blue line is the ongoing level of Fed ownership of MBS as this position has been accumulated over the last 10 months. It’s an almost perfect stair step higher pattern. Although it may seem random, the dates we input into the chart happen to be the weeks ending on a Friday. Friday's of options expiration weeks. Notice a pattern here?



Of course you do. It’s blatantly obvious. To the bottom line, the Fed has been very significantly goosing its purchases of MBS during equity options expiration weeks. In fact, since July, there has only been one options expiration week whereby the Fed did not buy at least $60 billion of MBS during the options expiration week itself, providing instant and meaningful liquidity during options expiration weeks that have historically had an upward bias anyway! Talk about timing of liquidity injections to get maximum effect in the equities market.

Folks, this is right out in the open. No mysteries and fully disclosed on the Fed’s own balance sheet. And guess what? It gets better. The second largest weekly period for Fed purchases of MBS outside of the expiration week itself? You guessed it - month end week. Another maximum effect week where we usually see institutions engage in a bit of window dressing. Nothing like providing a few extra chips "on the house", no?



To put a little summation sign around this section of commentary, the chart below breaks down the timing of Fed purchasing of MBS since June of last year. Yes, 86% of all Fed purchases of MBS since that time occurred directly in equity options expirations weeks. Another 7.8% of total MBS purchases occurred in final weeks of each month. And an overwhelming 5.8% of total Fed purchases of MBS occurred at other times.

In following the money, this is the only thing we can prove in terms of actual Fed actions relative to the equity market itself. A mere coincidence? Not a chance. As we see it, the Fed printing of dough to buy back MBS has had a dual purpose. The ultimate new age definition of cross-marketing? Yeah, something like that.

Now that we have covered this data, the question of "what happens when the Fed stops printing money in March?" takes on much broader meaning and significance. Of course the Fed has not directly been buying equities with their clever and clearly very selective timing of MBS purchases, but they sure as heck were providing the immediate and sizable liquidity for "some one else" to do so during equity periods where they could achieve "maximum effect".

Wildly enough, at least as of last week's option-ex, the Fed was still purchasing $60B in MBS. So, as we stand here today, there are now two more options expirations weeks prior to us theoretically reaching the end of the game for Fed printing and MBS buying. You already know we'll be watching, errr.. following the money that is.

When/if the Fed stops printing to buy MBS, do we also lose an options expiration week and month end equity liquidity sponsor? Something we suggest you think about as we move forward. See why we suggest following the money is a key theme?

Goldman Expects to Keep Cake, Eat Same, Stick Public with Tab

Dick Bove says that Obama's proposal will be good for Goldman Sachs because it will take away the prop trading from banks that have deposits, but will not affect Goldman Sachs who will once again eliminate more competition.

So buy the stock. Hard to imagine anything short of Armageddon that would cause the word 'sell' to emanate from his bloviateness when he is talking his book.

And Goldman Sachs says that it is 'unrealistic' to take away their place at the Fed's teats as a subsidy sucking bank holding company.

"Goldman Sachs Chief Financial Officer David Viniar said it’s “unrealistic” to imagine the firm won’t be a federally supervised bank, even as new regulatory proposals cast doubt on that status."

Perhaps they will lobby for a special category of bank. Some banks are more equal than others? The public might be dumb enough to buy it, but doubtful Lloyd's peers on the Street would not raise a fuss.

More likely that the corrupt Congress takes this idea of Volcker's, and leads it up a blind alley, and strangles it with delays, transitions, and deceptions, and grandiose discussion of new regulatory architectures, rather than simple but elegant focus on primary mission, and the elimination of conflicts of interest.

The threats of 'lack of competitiveness,' 'stifling the recovery,' and 'portfolio diversity' are already resounding from the canyons of Wall Street and their pond skimming sibyls on financial television.

Bloomberg
Goldman Will Benefit From Obama’s Proposal, Bove Says
By Rita Nazareth

Jan. 21 (Bloomberg) -- Goldman Sachs Group Inc. will benefit from President Barack Obama’s proposal to limit Wall Street risk because it may force deposit-taking banks to unwind trading operations, Rochdale Securities analyst Dick Bove said.

Obama called for limiting the size and trading activities of financial institutions as a way to reduce the risk of another financial crisis. The proposals would prohibit banks from running proprietary trading operations solely for their own profit and sponsoring hedge funds and private equity funds.

He also proposed expanding a 10 percent market-share cap on deposits to include other liabilities such as non-deposit funding as a way to restrict growth and consolidation.

“Banks with large deposit bases have distinct advantages in certain sectors of the market,” Bove wrote in a report today. “If the banks are told they cannot use deposits in this fashion in the future, it ‘levels the playing field’ for companies like Goldman Sachs. This is not a time to sell this stock, it is a time to buy it.”

Goldman Sachs shares erased an early advance as Obama prepared to outline his proposal. The shares lost 4 percent to $161.15 in New York at 2:56 p.m. after rising as much as 1.9 percent at the start of trading.

Bonus Pool Slashed

Goldman, the most profitable securities firm in Wall Street history, reported record earnings that beat analysts’ estimates as the bank slashed its bonus pool. Net income of $4.95 billion, or $8.20 per share, for the three months ended Dec. 31 compared with a loss of $2.12 billion, or $4.97 a share, for the same period in 2008. The average estimate of analysts in a Bloomberg survey was $5.18 a share.

The record profit came as Goldman Sachs, facing criticism from politicians and labor unions for near-record compensation, set aside $16.2 billion to pay employees, the smallest portion of revenue since the firm went public in 1999.

“The adjustment of compensation lower leaves more money for shareholders,” Bove wrote.

Bove said that if the bank had not slashed its bonus pool, earnings may have been only about 3 cents to 5 cents a share in the quarter, “under certain assumptions concerning compensation,” because of a slowdown in trading.

“Investors are reacting sharply to the fourth quarter results at this company,” Bove wrote. “However, all indicators -- M&A, new financings, increasing volatility in a number of markets, growth in the money supply -- all suggest that this quarter may be a one-time event.”

Goldman Sachs Chief Financial Officer David Viniar said it’s “unrealistic” to imagine the firm won’t be a federally supervised bank, even as new regulatory proposals cast doubt on that status.

Obama Proposes to Restrain the Banks from Speculation

A good first move, but almost a year late.

It still remains to be seen if it can pass with any teeth in it through a deeply conflicted and compromised Congress. The devil is in the details, loopholes, and exceptions.

Allowing the banks to speculate for their own accounts in the markets inexorably intermingles their risks with those of the broader financial system. It is also a tilt to the playing field to allow these market makers with access to proprietary information, very favorable positioning with the exchanges, and the Fed discount window and special programs to sit at the same table with other investors and funds.

This is so basic a move that one has to wonder why Obama waited so long to propose it. Or rather to listen to Paul Volcker who has been advising it, and largely unheeded.

Goldman and perhaps Morgan Stanley will give up the charade of commercial banking to become a full time investment bank, aka hedge fund, again. One positive outcome is that the next time they get into trouble they are on their own. And given their blind greed it won't be all that long before they do.

It is nice to see Paul Volcker gaining a voice in an administration dominated by Wall Street sychophants.

Let the threats, whining, tales of doom, financial media spin, and an army of lobbyists now go forth from Wall Street to try and stop this very basic reform.

It's a beginning. Barney Frank is already talking about putting a five year transition period on the change. Ludicrous really considering the banks that just grabbed their charters. Barney is part of the problem. A bigger part than most people probably suspect.

A good next step would be fire Larry Summers and Tim Geithner, and to permit Bernanke to gracefully step aside and go back to grading term papers. Obama needs to nominate someone with a stronger practical experience profile in that job. Volcker could do quite well.

National Post
Wall Street reels over plan to ban prop trading
Jeff Mason and Kevin Drawbaugh, Reuters
January 21, 2010

WASHINGTON -- President Barack Obama proposed stricter limits on financial institutions' risk-taking Thursday in a new populist-tinged move that sent bank shares tumbling and aimed to shore up the president's political base.

Mr. Obama, a Democrat who is just starting his second year in office, laid out rules to prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund.

He also called for a new cap on the size of banks in relation to the overall financial sector that would take into account not only bank deposits, which are already capped, but also liabilities and other non-deposit funding sources.

"We should no longer allow banks to stray too far from their central mission of serving their customers," Mr. Obama told reporters, flanked by his top economic advisors and lawmakers.

"Too many financial firms have put taxpayer money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward."

The rules, which must be agreed by Congress, would also bar institutions from proprietary trading operations, unrelated to serving customers, for their own profit.

Proprietary trading involves a firm making bets on financial markets with its own money, rather than executing a trade for a client. These expert trading operations, which can bet on stocks and other financial instruments to rise or fall, have been enormously profitable for the banks but also increase market volatility.

The White House blames the practice for helping to nearly bring down the U.S. financial system in 2008.

Mr. Obama's move is the latest in a series to crack down on banks and comes as he reels from a devastating political loss for his Democratic Party in Massachusetts on Tuesday, when a Republican captured a U.S. senate seat formerly held by the late Democratic senator Edward Kennedy.

Bank shares slid and the dollar fell against other currencies after Mr. Obama's announcement.

JPMorgan Chase & Co fell 5.8%, helping push the Dow Jones Industrial average lower.

Citigroup Inc fell 6.36% and Bank of America Corp fell 7% while Goldman was down 5.5% despite posting strong earnings Thursday.

"This is going to have a tremendous impact on big-name brokerage firms like Goldman Sachs and JPMorgan," said Ralph Fogel, investment strategist at Fogel Neale Partners in New York.

"If they stop prop trading, it will not only dry up liquidity in the market, but it will change the whole structure of Wall Street, of the whole trading community."

Mr. Obama targeted banks for taking big risks while assuming taxpayers would bail them out if they failed.

"When banks benefit from the safety net that taxpayers provide, which includes lower-cost capital, it is not appropriate for them to turn around and use that cheap money to trade for profit," Mr. Obama said.

"That is especially true when this kind of trading often puts banks in direct conflict with their customers' interests," he said.

Before the announcement, Mr. Obama met with Paul Volcker, the former Federal Reserve chairman who heads his economic recovery advisory board and who favors putting curbs on big financial firms to limit their ability to do harm.

The House approved a sweeping financial regulation reform bill on Dec. 11.

The House bill contains a provision that empowers regulators to restrict proprietary trading by financial firms subjected to stricter oversight because they are judged to pose a risk to the stability of the financial system.

The Senate has not yet acted on the matter, but the Senate Banking Committee continues to seek bipartisan agreement on financial regulation reform.

Employment Numbers Surge (at the New York Fed) To Manage Its Bank Subsidy Programs

It is good to see that the downturn in employment is being counteracted by robust hiring and promotion in the cost-plus, quasi-governmental, financial service sector, or more specifically, a bull market in central banks managing subidies to the banking sector.

It appears that this flurry of promotions and hiring is for the new group that will oversee the bank's investments in Maiden Lane III and of course, AIG.

Ah, to be employed in a cost plus monopoly. What a sinecure.

NY Fed
New York Fed Creates New Group and Names Sarah J. Dahlgren Executive Vice President and Head of Group
January 21, 2010

NEW YORK—William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York, announced today the formation of a new Special Investments Management Group. The Bank’s board of directors promoted Sarah J. Dahlgren to executive vice president and named her as head of the new group. She will also become a member of the Bank’s Management Committee.

This move represents an additional enhancement to the Bank’s governance and risk management in light of the tremendous expansion of the Bank’s balance sheet over the past eighteen months by separating out the management of the new investments from the Bank’s financial risk management. Among the Group’s responsibilities will be managing the Bank’s credit extension to AIG and its Maiden Lane LLC portfolios.

Ms. Dahlgren has been the senior vice president in charge of the AIG relationship since September 2008. Prior to that, Ms. Dahlgren was responsible for the relationship management function in the Bank Supervision Group, with oversight responsibility for the Group’s portfolios of domestic and foreign banking organizations. Previously, Ms. Dahlgren was responsible for the Bank Supervision Group’s information technology and payments systems exam programs, as well as its Year 2000 readiness efforts....

NY Fed
New York Fed Names Seven Senior Vice Presidents and Ten Vice Presidents
January 21, 2010

NEW YORK – The Federal Reserve Bank of New York announced that its board of directors has approved the promotion of seven senior vice presidents and ten vice presidents.

NY Fed
New York Fed Names 11 Assistant Vice Presidents and 29 Officers
January 21, 2010

NEW YORK—The Federal Reserve Bank of New York announced that its board of directors has approved the promotion of eleven officers to assistant vice president and named twenty-nine new officers at the Bank.

The Republicans Have Taken the Massachusetts Senate Seat

Morgan Paying Out 62% of Revenues in Bonuses and Pay While Average Families Face 'Years of Pain'

One has to wonder how much of that 'revenue' is merely the result of artificial mark to market accounting and prop desk speculation, and not real cash flow from commercial banking operations.

That is not the pay method for a bank. That's a hedge fund. And that would be all very well and good if they were a hedge fund and responsible for their own failures and successes, but they are obtaining the discount window and federal guarantees and subsidies from the taxpayers as though they were a commercial bank.

This highlights the problem with this 'trickle down' approach that characterizes neo-liberal stimulus versus the approach of, let's say, the Roosevelt administration, that of putting people to work and keeping their savings safe as the first priority.

The US and UK are packing the banks with public money to 'save the system.' Their hope seems to be that as the banks recover, they will start lending to the private sector again, and eventually this money will trickle down to the public as real wages generated by organic economic activity.

Another approach would have been to guarantee the people's savings in banks and Credit Unions, the cash value of insurance policies, and money market funds, up to let's say $2,000,000 per individual and $5,000,000 per couple.

Keeping the people whole, the government would have then been able to effectively place the banks in receivership as required, and work them through the resolution of their problems, handing out some stiff losses to shareholders and speculators and the debt-holders.

No mechanism to do this? They could have nationalized the banks temporarily with a single executive order, as readily as it took Hank Paulson and Tim to type up a ten page document to give away $700 billion. The guarantees on all savings and private investments would have prevented a panic from the public, but quite a few more bankers and hedge funds might have taken the hard results of their recklessness.

This would have placed all the bailout money in the hands of the people, who could have chosen where they wished to place it after the nationalization process as the banks were either shuttered or restored. We would have ended up with fewer big banks, but more regional banks with real depository bases.

As it is now, the money being given to the banks is being 'taxed' at a fairly stiff rate by the unreformed bonus system, and the problems are not being resolved, since the bankers have every incentive to keep the money and not write down their losses, which is the great lie in this 'profit' picture being spun for the bailouts.

This is not over, not by a long shot. And if the bankers keep taking 50+% of all the cash that touches their hands from the public subsidy, then what trickles down to the people won't accomplish anything. Years of zombie-like stagflation look to be the prognosis.

As Bank of England Governor Mervyn King said, "Families face years of pain...The patience of UK households is likely to be sorely tried over the next couple of years" as inflation cuts into their meager wages in order to pay for this. Families Face Years of Pain - UK Telegraph. Don't expect such honesty from the US Federal Reserve or the government. The realization of how bad stagflation is going to be will sift slowly down through the smug layers of the stuporati.

The economic hitmen and the corrupt politicians are taking their pay, and the people and their children and most likely grandchildren will be stuck with unpayable debts. Just like a third world nation, which is what the US will look like when they get done cutting health, infrastructure, education, and basic services to pay for this.

Daily Mail UK
Morgan Stanley ignores calls for restraint and doles out £8.8bn to bankers
By Simon Duke
20th January 2010

Wall Street giant Morgan Stanley has defied the growing calls for restraint after doling out huge rewards to its staff.

The salary and bonus pot at the bailed-out U.S. firm jumped 31per cent to £8.8billion last year (about $14.4 Billion), despite turning a profit of just £705million (about $1.15 billion) in 2009, it revealed today. An astonishing 62 per cent of revenues were set aside for pay - the highest level in at least a dozen years and nearly twice the 33 per cent level earmarked by rival JP Morgan.

Under Morgan Stanley's Premier League-style wage structure, an average employee will have banked £144,500 ($235,400) in salary and bonuses for their efforts last year. However, many of its high-flying traders and rain-makers will have 'earned' seven- and eight-figure pay days.

In 2008, the average Morgan Stanley worker took home £150,000. The company, which employs around 5,000 staff in the City, added 15,000 to its global workforce after buying the Smith Barney brokerage from ailing rival Citigroup.

The lavish payouts are likely to anger taxpayers on both sides of the Atlantic, who will have to pay for the cost of the mammoth banking bailout for many years to come.

President Barack Obama last week slammed the 'obscene' rewards dished out on Wall Street at a time when many 'continue to face real hardship in this recession'. The U.S. government is now planning to hit American banks with a punishing levy to help re-coup the estimated £72billion US taxpayers have lost from bailing out its financial industry.

New York-based Morgan Stanley was rescued from the edge of oblivion with a £6.1bn taxpayer handout in late 2008. Although it has since re-paid the loan, it still operates with an effective guarantee of the taxpayer.

Morgan Stanley's pay-outs came as rival Goldman Sachs prepared to publish its 2009 financial results tomorrow. Wall Street's most profitable firm is expected to reveal a dramatic bounce in the bank's profits thanks to the colossal economic packages implemented across the world.

The earnings bounce is expected to see Goldman raise its total pay pool to more than £12 billion. This equates to a pay and bonus of nearly £400,000 for each every worker of the firm, which employs around 5,500 people in London.

However, Goldman has delayed telling its staff how much they'll receive for their efforts in 2009 in the wake of Obama's planned raid on Wall Street.

US Dollar (DX) Longer Term Charts

Here is the longer term view of the US Dollar as measured by a basket of currencies.

Can it 'break out' here? Yes, certainly. Europe and Japan have their problems, and in the world of fiat, the grading of the paper is done 'on a curve.' The central banks and their mavens, who intervene at least indirectly in the currency markets with a certain obsessiveness these days of non-stop financial engineering, like to shove their manipulation around the plate as well. They don't 'tweak' the economy; they are the economy, at least at the margins.

Can it also fail and break down here? Yes, certainly. A stronger dollar will step hard on the weak US economic recovery. It will serve to lower import prices, but dampen exports, which is what they call 'bad news' when your domestic demand is slack.

There is the fundamental detail an enormous amount of dollars being held overseas that are not in circulation so to speak. At some point they, like the swallows of Capistrano, will return, and have trouble finding a place to comfortably roost.

But the market does not care about our theories, or even the charts. They are just rough estimates of a very complex reality. This is a disclosure that all pundits should place on their prognostications.

And in these days of thin markets and bank prop desks as a major source the income, the fundamentals are less relevant than the short term reality of the squid's need to feed.

Let's see what happens. Then we will know something actionable.

There Can Be No Bubble in China and the Madness of the Nobility

Just now on Bloomberg Television Peter Levene, the former Lord Mayor of London and distinguished chairman of Lloyds of London, said that there is no bubble in China because "China is so big, their domestic markets are so big, you cannot have bubbles there."

A sincere interpretation of the theoretical underpinnings of this statement would be that the potential demand in China is so great, there can be no possible bubbles there because they are incapable of excess. Interesting theory. Perhaps the US relief effort in the Caribbean is on the right track but insufficient. They can ship their excess and foreclosed housing for the poor souls there. Think of the demand gap that exists between sub-Saharan Africa and Europe. Well perhaps not.

My God, could this be a variant of Efficient Markets Theory? Or a cousin of Too Big To Fail? Apparently the logic in 'The bigger they come the harder they fall" has been repealed.

Of course China is in a financial bubble. It has been caused by years of pegging their currency at an artificially low rate to stimulate exports, multiplied by a state banking system that acted with command and control subsidies. And of course the US can been exporting monetary inflation for years through its dollar reserve currency. Someone had to absorb it.

But it is what China does next, how they react to the bubble, how they manage the consequences of their financial engineeering, that matters. The US has been in several bubbles of late, and is handling them rather badly, as a result of their tolerance for Mad Hatters like Larry, Tim, and Ben in key policy positions.

To be fair, Chairman Greenspan came out with his own howlers of this caliber, and was accepted by many intelligent people in the States for years. In fact, a whole industry was based on ideas and falsified evidence about the impossibility of a housing bubble in the US that in retrospect seems like barking madness.

Come to think of it, both of these fine men are nobility, KBE, Knights of the British Empire. Perhaps it is something deleterious, or even contagious, that occurs when one is subsumed into nobility? Caligulitis? Did the Queen give them a concussion in the ceremony?

I suspect Lloyds is exposed rather badly to China, and m'Lord is talking his book. What is Greenspan's excuse? Whose book was he talking?

This is why the banks and financial organizations must be retrained, because they seem to be peopled by an ersatz nobility that is disposed to spectacular flights of self-serving fantasy. Come to think of it, there is room in the asylum for the government as well.

The US needs a political system that is not so amenable to soft bribery in campaign contributions, and the world needs a reserve currency that is not controlled by the Anglo-American banks. Control the currency, control the world.

And as for the bubbles that keep taking down the developing nations, well, here is their mother.







When these trends break, and they will as all Ponzi schemes do, it will be notable.