TOO GOOD TO LET PASS

Throughout the years there have been a lot of stories which I have not covered usually because I have no knowledge of the issues involved, no understanding of the same or simply because they're not fun. This goes into the category of "all of the above" but it's simply too good to pass up.  Total credit to the Wall Street Journal whence this comes and I pass it on because in my mind it spells out in the clearest possible terms Why People Hate Banks.

It has hardly been a secret that Credit Suisse has had a bit of difficulty as of late.  At least that portion of the venerable institution that was formed with the amalgamation of the investment banking guys of the bank and First Boston Corp. 20-odd years ago.  The problem with a merger such as that one is the prime assets of the acquired company--unless they are really happy about the deal--can walk out the door overnight which is what the First Boston guys did in droves as soon as the period covering their "stay at home" bonuses ran out.  CSFB as it was known, had a difficult birth.

Things perked up, but the fortunes of the firm were always a roller coaster ride and finally the whole kit and caboodle was folded into Credit Suisse (where it should have been in the first place) where the  American management that was the old CSFB  wound up running the whole show which if the truth be known was never particularly well received by the Swiss mob who, while probably peaking at least four languages themselves, never really enjoyed dealing with the barbarians from across the pond who spoke only one and it wasn't Suisse-Deutsche.  This was never a match made in heaven.

Anyway, the years past and Credit Suisse (First Boston having been abandoned) got hammered in the Great Crash just like everybody else but took a particularly hard hit as their business was--shall we say- a bit more cutting edge than some of their compatriots.  They survived but with multiple changes at the top culminating last years with a gent named Tidjane Thiam who came from them from Prudential Ltd., the Brit Insurer which, by the by, is no relation of The Rock, where he was CEO.  Now Mr. Thiam is a serious guy.  He is a citizen of the Ivory Coast and also holds French citizenship.  He was admitted to the Ecole Technologic (sp?) from which EVERY mover and shaker in France must graduate.  Among a host of big powered jobs he was a European star at McKinsey & Co. in their financial services business.  He came to Credit Suisse in June of last year.  The guy is a major international hitter.

Well, if you have ever had any contact with McKinsey, Booze Allen or any of the other consultants to the stars you probably know that whenever faced with a sticky situation, the first thing they advise is to reorganize and lo and behold they usually will present you with a tried and true template for the reorganization.  Sometimes it's even the same template they have presented to another organization  as happened with an organization with which I was associated some time ago but that's another story.  Anyway, in comes Tidjane and the reorg begins.

As the WSJ tells it one of the first top line guys to be replaced was a chap named Gael de Boissard, who, from his base in London ran all of Credit Suisse's global markets...that's fixed income, stocks--the usual suspects--and replaced him with a chap named Tim O'Hara who was based in New York.  That occurred on Oct. 21 of last year.   As the story goes, Mr. O'Hara immediately began to reorganize. Somewhere in heaven the founders of McKinsey & Co. smiled.

Between October and the end of the year, Global Markets managed to lose somewhere around $1 billion.  True to all McKinsey training it appears present management continually blamed the unit's previous management for the debacle.  And the losses mounted and become public earlier this year.  OK. these things happen and that's why poor Gael isn't there any more (he's been skiing for five months).  Only problem is, according to the WSJ, during the period in which the losses were occurring Gael had no responsibility, for the unit, reported to no one, made no decisions and was only involved in corporate activities when he attended his bank sponsored bye-bye party in New York in December.  Oops, does that mean Tim O'Hara was a mistake?  Well, we'll never know because during the loss period, Tim was reorganizing and not really managing anything.

To make a long story short, it appears that a global business at one of the world's prestige financial institutions was being managed by no one as it managed to lose over a billion dollars in what might come as no surprise in areas such as energy, junk bonds and restructured debt.  I assume they are still restructuring.

Now the average Joe on the street would probably shake his head in disbelief wondering how any sane parent could leave his kid alone at home with a box of matches--and he would be right.  Think of the reaction from people like Crazy Lizzy or Big Tony who come to the party with a wee chip on their shoulders with which to begin.  Sometime even I find it hard to blame them for demanding that the child be placed in protective custody.  And then you start to think about how the good, hard working employees of Credit Suisse are going to react when they hear a story like this about the people chosen to lead them...but it gets worse.

Apparently, not all the folks at the Bank were asleep at the switch.  It is reported that the risk management folks figured out that they had a problem and began hedging positions as fast as they could.  They were good; so good that the netting effect of the hedges was to reduce the loss to a mere $300 million.  OK you say, we can report that.  Uh huh.  Tidjane and his guys opted to report the  gross positional loss, not the net loss.  Why?  I'm really not sure nor do I understand under the accounting rules under which we used to operate how that could be done.  Of course being naturally suspicious, it's always good to have a BIG loss on which people can focus while a lot of other little things aren't going quite as one would like.  Sure makes it easier to cut bonuses as well.  But a McKinsey guy wouldn't think of those sort of things would he?  I mean assets can walk out the door any time right?  Why risk that?  I mean he ran a financial company...he ran Prudential Ins...........

As I keep saying, you can't make this stuff up.

THE TALE THAT NEVER ENDS

To the surprise of no one, talks between the Argies and the Hedgies broke off last week,  although they are still hanging around in B.A.  Of course the President, Mrs. Kretchner, a dumb a woman who has ever held public office anywhere is benefiting from this mightily in the eyes of public opinion and will therefore continue to do anything to alleviate the situation.  Not only that, she once again borrowed reserves from the Central Bank to pay the country's debts owed to official institutions such as the IADB. What remains is some $25 billion which may seem like a lot but for a country the size of Argentina really isn't.  One must also remember that the country benefited enourmously in the past few years in the commodity boom which for soy beans still continues but which can't go on forever.  Inflation continues to rise…not at past levels to be sure…but on a worrisome trend.. Argentines are as adept at getting out of Pesos and into anything else as they are a playing soccer so one can expect the reserve drain to continue.  Not a good prognosis.

As a corollary to this dismal picture, it appears that, as predicted, the mediator appointed by Judge Griesa, Daniel Pollack, has worked out less than well--as also expected.  The Argentines asked that he be removed weeks ago and the good judge refused, also as expected.  Now you might remember, I suggested at the start of the appointment I didn't think the guy was qualified to deal with this mob no matter what is reputation might lead one to believe, and this apparently was so.  Even parties on the plaintiff's' side in this case have remarked that Mr. Pollack was not a clever choice for the job.  And so, the battle rages in the dueling newspaper adds in public proclamations and in a dozen courtrooms all at enormous expense to the benefit of no one.  There is a complete absence of comity and trust.  So, just in case anyone is listening, Judge Griesa, do everybody a favor and replace your present arbiter with Terry Checki, formally of the New York Fed.  All parties know him as the last totally honest man left standing and no party will refuse to deal with him as to do so would automatically label them as the spanner in the works.  Pay him whatever, and get on with this thing.  Even I am beginning to lose interest.


…And then there is Debit Suisse.  Remember when we said there were internal dealings within the Espirito Sancto organization that probably contributed to the collapse because there always are in such cases?  Well, it turns out that our Suisse buddies were right in the middle of this mess having created securities of special purpose companies of Group members in order to finance the same and then selling the paper on to Bank clients as being akin to deposits of all things, only carrying a higher yield!  I had an Uncle from New England at one point and he said to me, "George (for some reason he called me George), at some point a man is going to walk up to you and ask you to buy a two pound mess of crap (he used a different word) in that there one pound bag he was carrying.  Do not do that because a sure as s---'s manure, you will have two pounds of crap on your shoes the minute you pay him…"  The depositors of Espirito Sancto obviously never met my Uncle Buck.  But he sure had met Debit Suisse.

I'M LOST

No, not on the road.  We made it home just fine.  But I got the papers this morning and front page was the tale that Credit Suisse had pleaded guilty to the crime of conspiracy in enabling American citizens to beat the taxman and would pay a near-$3 billion fine.  Trumpets and applause.  We nailed em! and everybody from Eric Holder to the odious holders of public office in New York took a bow as well as the Fed, Treasury and anyone else who was passing by as the kluge lights went on.

Now back in the day, I made a pretty good buck and I paid every dime in taxes that I owed.  My late friend Joe used to tell me not to bemoan the amount of taxes I was paying but to be thankful for the amount I was making which is damn good advice when you think about it.  So I have no remorse for either the tax absconders or their enablers--although there is some question as to whether the bank is going to roll over on their clients and release name in contravention of Swiss law--which bothers me quite a bit because they were the true crooks in this deal while the Swiss were…well, they were being Swiss.  But that's not what got me lost.  As I was reading about it all and watching the bows being taken on the early morning show something occurred to me.   "Hang on" said I.  "The bank is being fined $3 billion for admitting to a criminal offense…a criminal offense!  Just a few months ago, J. P. Morgan got fined $12 billion for being stupid!  WHATUPWITDAT?   So the Yodel Boys stroll around town and knowingly help out citizens break our laws and wind up with a sixth of the damage our home-grown bank gets smacked with a real shareholder's event and an urgent rethink as to the kind of business it wants to do in the future lest it gets whacked again.  Somehow, it seems we're on the wrong page of Map Quest but I guess that's just me being difficult again.

Meanwhile, off in Fed-land the talk started that tightening would begin sooner rather than later and the equity markets tanked admidst poooh-poohing that what the Fed would do really had no bearing on anything at all, Yada, yada.  It didn't help that the Brits reported month-on-month inflation of 1.8%  which Over There is a hell of a lot more real number that the one Over Here or haven't you noticed the price of hamburger the last three times Madame hauled you off to the local grocery.  Things are getting a touch dicey for the trading boys these days but then again I called Mad Max and according to his partner he had taken a Loooong weekend and was happy as could be.  That seemed to be taking Sell in May and Go Away to extremes but, hey, that's Max.  But one thing that still seems to be hot, hot hot is high yield according to the blats,  and even ETFs of bank loans.  We've seen this show before as well; everybody chasing yield at the bottom of what turns out to be a bubble and the ending is for mature audiences only.  Anyway, we're here for a while, the weather is great, the tomatoes and Basil are in the ground and now we just wait for the bounty of the earth.  Keep on truckin.'

WHAT HAPPENED?

Well, there I was sitting right in front of the TV at 2:15 yesterday afternoon, pencil in hand…and nothing happened.  Oh yes, the Fed announcement arrived precisely on time and contained absolutely nothing so everything about which I had dreamed writing evaporated and as a result I wrote nothing. I must admit that things aren't much better today, but there was one report that caught my eye that deserves some consideration in today's effort.

Way back in 2007, just before everything went to hell in a hand cart, an ongoing investigation began to reveal the extent to which various foreign banks, but especially BNP Paribas and Credit Suisse (or Debit Suisse as they have been known for years) had been systematically avoiding U.S. laws in regard to tax evasion in Credit Suisses' operations involving U.S. citizens and the avoidance of U. S. economic sanctions against a number of countries but especially Iran.  In both cases we're talking about a hell of a lot of money being involved but most folks can't get too fired up about skipping out on paying taxes, especially Europeans who have raised this activity to a pure life form, but trading with the enemy, so to speak..ah, that's a different thing altogether.  And so, it is the Frenchies who are catching most of the press as an entirely new development was reported today.

It seems our street thug turned Attorney General, Eric Holder, has been quietly been pressuring all involved in this case to drop the hammer on BNP and bring criminal proceedings against them, which of course Justice could do on their own but even here I'm told Holder would like a bit of bi-agency support as the ramification could be quite something.

Just as everyone knew that the Swiss banks were enabling tax evasion, everyone knew that the ignoring of U.S. sanctions was occurring and if there was anybody to point to directly it would probably be  a French entity as the Gaels have a visceral hatred of interference in their business with any creature of the night of their choosing.  This is not an institutional thing; this is a cultural thing.  Everybody, and especially the government hates it, and when the Americans are involved, Sacre Blue, it is foaming at the mouth time!  But this is also a very serious thing.  If a criminal charge were to be brought and proved, there is much speculation as to the fall-out.  There should not be.  BNP would be out of business in the United States.  In fact, I'm not even sure BNP could survive the indictment.  My problem is that I don't think anyone has thought this thing fully through to the end-game much less Holder who appears ready to do anything to nail another bank in the political march to financial chaos and there may be no one out there prepared to attempt to stop him.  The compromise might be what the legal guys call a deferred prosecution agreement in which the government stands still and the bank agrees to sin no more for a monitored period of time.  Problem is you have those pesky French politicians whose reaction to such a cram-down might well be considerably less than a sigh of relief.

In the end, we should try to keep in mind that it is just not CMOs that can result in a crisis in the world's financial system.  We are all inextricably interlinked with one another at this point in time and let us not assume that the guy with the different opinion of our actions is going to act rationally when he is convinced that our actions are irrational.  I go back to my little get-together in New York where there was the recognition that as things unravelled, the must common question asked was, "How did this happen?"  Things happen because no one was paying enough attention.  With emotions where they stand today, someone had better be paying attention.