BACK TO BASICS

...with one small interruption.  Obama was in Greece today and the presser with the Greek Prime Minister Alex Tsipras, was something to behold.  I never thought I would say it but Alex was the only one on the stage with a remote grasp of reality.  The other guy...



Anyway back to basics.  Things slowed down a bit today with the 10 year slipping slightly which was of course to be expected.  Yet the two year closed over 1.00%  and everything around the world was coming back into positive yields being dragged along by the U.S. market.  Up were equities again with the NASDAQ the star performer as the rotation continues into the "Trump Economy" although if you really try to pin people down as to just what that may be things get a bit mushy except that everyone seems to agree that financials and especially banks are the place to be as the regulatory picture we almost certainly appear far brighter.

A harbinger for that view came today in the audit report on the Fed's "stress tests" requested by the House Banking and Finance Committee whose Chairman may just wind up as Secretary of the Treasury.  While not as damning as some might have expected (or hoped), the report none-the-less did highlight that the Fed was far from transparent in it's approach.  This is going to be argued for weeks but let's boil it down to what is really important.  The objective measurements of the stress test are really no problem despite what the banking lobby would have you think.  Basically, they concerned with capital adequacy and to be honest while some might think that the levels may be set too high the banks really have no problem in meeting anything that might be required.  Do they infringe upon ROE?  Sure, of course but not to the extent as do some of the other regulations  in Dodd/Frank.  But the subjective tests...ah, that's another deal entirely.

To say that the Fed can make these up as it goes along is very close to the truth.  To begin, the banks have little idea as to what they are and NO idea as to the methodology by which these things have been invented.  They are unique to each individual bank and can be as subjective as to the distribution of the risk assets.  That is bad enough but think of it in the context of a nut job like Big Danny Tarullo running the show with crazy Lizzy looking over his shoulder.  Subjective means subjective: if he doesn't like you, tough nuggies.  This is exactly what happened to Citibank two years ago.  You see, Danny doesn't like international exposure whether he understands it or not, and guess who is the only real international bank in his small world.

Bad?  Yep, but it's not the biggest problem.  As administered, what the Fed has supplied to itself is a legislatively approved power to--if they were so willing--distribute credit through the regulatory process..."We don't like this in your portfolio; we would like to see more of...say...non-prime housing loans, or green energy projects, or loans to make widgets."  Now where have we seen that before?  Do we really want these guys to--as we allowed Barney Frank to do while spitting all over the House conference room, "Roll the dice on this one?"  A thought for your day.

And before we close a thought for the President Elect.  Be careful for what you wish.  China, your bete noir when it comes to currency manipulation announced today that they expect the Yuan to be in the 6.90 range by year end.  A boon to Chinese exports?  You bet.  Currency manipulation?  Only if one considers a Trump victory to be a manipulative tool in creating a roaring Dollar market.  This stuff gets complicated, Donald.  Don't move too fast.

STANLEY HAS SPOKEN

In a conference hosted by the Central Bank of Chile of all people, Stanley Fisher revealed that in  his opinion it looked as though it was about time for a gradual rise in interest rates.  So much for uncertainty.  The Fed will raise in December and continue to raise until...well, until it catches up with the market.  Oh, the 10 year closed at 2.15% today..  From the standpoint of economic meddling, the Fed is dead and I would bet that the happiest guy in the room is Stanley.

What we are looking at in the near future is exactly what Stan Fisher has been quietly calling for and hoping for:  if there is to be stimulus let it be of the fiscal kind and with it let there be a restructuring of economic governance in taxes, regulation and alike that has been so long needed in this and other western economies.  I don't know what are Mr. Fisher's politics---frankly, I don't know if anyone does--but I suspect he is appreciative of how the markets are responding to Mr. Trump's election and taking the Fed out of a nasty little corner into which they had put themselves.

They are not out of the woods of course.  There is a little matter of $4 Trillion on their balance sheet that they have to work off and there are rather clear signs that inflation is afoot the containment of which is their primary (some think otherwise--some are wrong) mandate through monetary governance.  Spilling their balance sheet into the world is not exactly compatible with controlling inflation but this was always going to happen and one can only hope that there have been a few good folks thinking about this.  And while we are on the subject of thinking, think about the greatest reversal of sentiment we have ever seen.  From stated fears of total destruction of all things in the event of a Trump win we have seen the Masters of the Universe turn on a dime and buy the DOW to an all-time record close in the space of three days.  Who the hell in their right mind would give their money to these guys to manage?

From now the tale will become how much of the Obama "legacy" will be dismantled in the next six months.  Big Danny Tarullo will probably, in an operational sense wind up sleeping with the fishes if he doesn't decide to slip out the back door into the loving arms of Crazy Lizzy who, believing she is Ms. Clinton's natural sucessor, will want no part of him (she needs money...Wall Street has money...Wall Street hates him).  Dodd/Frank will catch a good kicking but not entirely disappear which may not be a bad thing although how they are going to fix it is beyond my poor powers of comprehension.  Somebody had better start thinking about the BIS meetings at which risk accountability will be a primary topic and since the meetings start on January 9, all we have is a very lame duck bunch of bankers and regulators to carry the flag.  Not good.  There had better be quick thought and even quicker action on the part of the Trumpsters in getting a message Over There and finding the right people to do it.  Hint: Lael Brainard is not one of those people.  I can supply a few names if anyone is interested.  This could get ugly...more on that at a later time.  There is so much more.

But the really great thing to watch in the coming months will be the interplay between the Trumpsters and Chuck Schumer in the Senate.  Chuck replaces that most odious of creatures, Harry Reid, and while he will become the leader of the "loyal opposition," Chuck has always known on which side his bread is buttered and that is the side that reads "Wall Street."  He's a nasty piece of political work but he's in a tough spot.  Lizzy on his left, the Street (now) on his right, and his buddy The Donald in the White House..oh yes, they are good friends.  This could be better than "Hamilton."  The happiest guy around?  Why me of course!  I have material for at least...two years?

Have a great weekend!

CONSENSUS EMERGING?

Whether it is a correct view or not, the markets seem to be ready to convince themselves that there will be a change in global central bank policy with, if not an across-the-board tightening (is 1/4% tightening?) then certainly a slow-down in liquidity creation which has been going on for the past ten years.  Consequently, bond took a hit again today with the ten year actually reaching 1.82% before falling back and the Bund is continued positive territory for a good solid stretch now.  But, at the prospect of having the champaigne pump turned off, equities suffered despite a couple of decent earnings reports from entities other than banks in what has been an otherwise disappointing earnings season.

What will be interesting this week will be what signals we get from the Bank of England who, having been on the wrong side for most of the summer may, it seems, be ready to indicate that a continuation of Mark's Mound of Money Making just may slow considerably despite what was indicated just before BREXIT and reiterated since then.  If this is the case, things could really begin to move rate-wise which will be good for.....who...or is it whom?

Well, I as you might guess, fells it will be good for everybody provided the central banks get out and stay out of this thing so that some real values might be identified.  Problem is there will be a few disruptions, particularly in the equities markets, but coming after the election is determined will have less political influence except for the fact that whoever wins will feel the immediate need to fill the space with fiscal stimulus which is of course even worse than the monetary kind---OK, we can argue that--and which deafens any cry and hence need for the economic restructuring that is so desperately needed everywhere.  By this time next year the United States will owe in  public securities well over $21 Trillion and that is a lot of jack, Jack.  Will there be a reaction in markets?  Little Paulie says no.  Me. I'm not so sure but I don't have a Nobel.  Then again, Lil' Paulie has been telling us that Obama Care is a roaring success for the past seven years.  He has been silent on the subject lately and the President of Colombia just won the Peace Prize for a deal his people rejected.  So you tell me?  Who has more creds around this place?

Anyway, back to banks and perhaps another consensus thought.  The big boys, Citi, B of A and JPM all be the street estimates by a rather healthy margin whilst the Savings and Loan Stagecoach got whacked as expected.  The interesting thing, however, is the WHY not the WHAT that caused the success which caused so many sighs of relief and a rediscovered confidence in the system.  Trading.  Yep, that awful business that Dodd/Frank and Crazy Lizzy & Co. wish to obliterate.  We'll talk more about that later but for the moment do you think that there might be a way to build a consensus that maybe--just maybe--trading ain't a bad thing.  In fact, in more ways than one it might be a very good thing.  Perhaps we'll start tomorrow.

AS DARKNESS FALLS

I was going to close out the week yesterday but two items came up just as everything was shutting down in typical Washington fashion.  If you have something going that you suspect some folks might not like, make it public when few are sure to be watching.  Ever see Hilliary Clinton's E-mails released on Monday morning?  Never.  On a Friday after business hours hopefully before a three day weekend?  Always.  We had two incidences yesterday which will bear continuous monitoring.

It appears that the "claw-back" demands contained in Dodd/Frank, many of which have been implemented by the largest financials institutions in various ways have not passed muster with the regulators.  They have therefore let it be known that they will compel their "clients" to undertake far more harsh rules regarding executive compensation AND expand the categories of those who fall under these rules.

I'll wait to see what is proposed but little by little, we are getting closer and closer to the nationalization of the financial industry...which by the by, one candidate running for the Democratic nomination  for President has proposed...which in other jurisdictions has been proven to be not a particularly good thing.  Aside from that, the best and the brightest tend to go where there is more not less, so it gives me some difficulty in trying to figure out why regulators would wish to limit the attraction of talented people to those institution they regulate.  Or to put in simpler terms, to quote a former colleague, "You pay peanuts, you get monkeys."  There are massive difficulties in attempting to implement such a program as opposed to the one notion in its favor:  big compensation encourages bad behavior thru the taking of inordinate risk.  Somewhere along the line this became the fashionable reason for the crash of 2008 and the even-more fashionable reason for avoiding responsibility on the part of those who clearly shared the responsibility.  Which brings me to our second incident.

If there was ever responsibility to be taken for the mortgage crisis, a lot of it could be laid at the front doors of Fanny and Freddy and the politicians who allowed them free rein throughout our financial marketplace.  Remember the attempt to reform both in 2006, killed stone cold dead by the refusal of Barnie Frank to deal with the issue memorialized in his wondrous lisping and saliva spitting decision of "I tink I'll roll da dise on tis one?"  Came up craps didn't it Barney, but you skated.

These two disasters waiting to happen were at the time publically owned corporation but they benefited from the "implied" guarantee of the U.S. Government.  Some implied.  There are now in "conservorship" (what ever that means) with a pile of crap on their books and forced to pay over to the government all of their profits.  This does two things: it allows the government to say "Look at all the money we are making!" and it delays the day of reckoning for the accounting of portfolio losses until all the capital runs out.  What to do?

In the middle of Holy Week, comes the announcement that a number of D.C. whizzes--all Democrats by the by and all connected to Ms. Clinton--have come up with a solution to what at some point will become a monumental embarrassment.  A Brand New Corporation!  This one will take up the rolls of BOTH Freddy and Fanny going forward, absorb much of it's predecessor's portfolios and......ready for this.......WITH THE EXPLICIT GUARANTEE OF THE U.S. OF A.  Don't need no damn "implicit" stuff for this baby! In short, this will repeat all the stupidity of the past with the added bonus that with the government ownership, the political allocation of credit is a sure thing accomplished by a bunch of political hacks to whom risk will be no object.  God!  you just have to love the sheer audacity of it.  Know what?  It just might pass through Congress because of the number of asses this will cover and the political favors available to those who get on the band wagon.  In the dead of night.

May you have a lovely Easter Weekend.

DO GET ALONG MR. GRIFFIN

Ken Griffin is among the richest guys in the country.  From friends who have worked for him, I understand he is a really nice guy.  He is obviously a really smart guy.  So with all of these things going for him, I have been trying to figure out what precipitated the article in the WSJ yesterday on the subject of liquidity in the marketplace.

In a nutshell, what Mr. Griffin in arguing is that the concern is pretty much made up by banks who having been once the Kings of the Hill in the Treasury market are now forced to compete on a newly-level playing field as a result of regulation, notably Dodd/Frank.  Level playing field?  Rubbish.  The pendulum has swung far the other way; it is now banks who have seen their competitiveness removed as a result of the new regulations.  The capital requirement for a T-Bill is the same as a loan to ME!  Deposits have cost attached!  Solution: no inventory, no loans.  Think Citadel worries about such mundane matters?

Well, so what?  If there are replacements, why not?  And as he says, non-bank participants are the majority of participants in the on-the-run Treasury market.  He points to the October crash of 2014 as proof of this fact and the liquidity that was provided.  In fact, he goes so far as to say that Banks stopped making markets whilst non-banks continued to do so with even tighter spreads as the day progressed.

Now it has been a long time since I was involved in this and I admit that my days were like those of John Henry hammerin' away knowing damn well that the steam engine of today's markets, the computer, would probably win in the end.  Mr. Griffin would probable write a program for life and have a computer run it if he could and in some cases it might do a better job.  But things have NOT changed so much that you can convince me that what the bright guys like to call a "10-Sigma Event" that took place on October 15, 2014 occurred despite a surfeit of liquidity provided by Mr. Griffin and his colleagues.  You can't do that especially when Mad Max tells me there were no damn bids and not a soul with whom I have spoken has told me much different.  And you sure can't tell me that when as we all know the boys and girls at the Fed were shaking.  Nope, not on.

So why an article like this.  Well, folks who know him say he was just having a little fun at the banks' expense.  Just a laugh among the boys.  Not quite, say I.  Unfortunately, we live in a world where a certain genius is assigned to people who have a lot of money--which Mr. Griffin certainly does--and heads are nodded sagely at every pronouncement of the Anointed Ones.  I'm not speaking out of jealousy, it's just the way things are these days.

If you can go back far enough in your memory I can tell tales of those "vast pools of liquidity" represented by the OPEC States that, when tapped, would provide unimagined benefit to the entire world.  Or the almost giddy pronouncements of the benefits of the "new sources of market liquidity" from Messrs. Greenspan and Bernanke in the late nineties and 2000-on.  Now there are a number of us who can tell you about those things and some lessons that might be learned (don't take Saudi money and "recycle it" by lending to Latin America or whence cometh the liquidity for the liquidity providers), but when Ken Griffin speaks nothing else is heard.  Nothing has changed, really it hasn't.  The oldest line in the intelligence business is "who spies on the spies?"  In the financial business it remains "who provides liquidity to the suppliers of liquidity?"   May I humbly suggest to Mr. Griffin that this is not a subject with which to have a bit of fun with the banks...certainly not on the op-ed page of the leading financial publication in the United States.  For people who didn't understand what they were doing while they were writing legislation will take it as a sign that what they did was correct...it wasn't.  They will also forget that there are firms out there with enormous exposure in not fully understood products (are you happy with trillion-dollar positions in ETFs?) who essentially have no supervisory body looking over their shoulder and as such are NOT, by definition, too big to fail...until they do.  One must ask to whom at that point does one turn.  It used to be the banks:  it no longer is.

HAPPY BIRTHDAY

Dodd/Frank is five years old today.  Infanticide was called for but like so many truisms of the past six years I suppose that this creature is going to remain around in some perverse form until the next crisis which will prove it to be totally useless very much like the IMF...which brings me to friend Carter.

Carter asks "why is the IMF useless," pointing to the fact that it outed the BS quotient in the Greek drama as to the impossibility of the paying of Greece's debts.  Hell, Carter, I told everybody that 3 years ago and nobody listened then either, so if that is the value of this clown show why not pay me 10% of the billions that it takes to run that place and let's get on with it.  I'm funnier than Mme. Legarde as well.  Anyway, let's get serious.

The international Monetary Fund was founded at the Bretton Woods conference in 1946, just after the close of the Big One.  The first thing one should ask is, "where in the hell is Bretton Woods." and one will find that paradoxically no one knows.  So, for the record, Bretton Woods is in the state of New Hampshire, USA, the state motto of which is, "Live free or die," and is noted primarily for, in the summertime, the densest concentration of viciously-biting black flies and mosquitoes of any place on earth save for the Alaskan tundra.  Moose have been known to commit suicide to stop the torment.  Moose.  SUICIDE!  Anyway, that's is where the economic leaders of the world gathered back then to create an organization that would insure the monetary stability of the world's currencies and to avoid the killing devaluations that accompanied the Great Depression.  I kid you not.  As an American politician said a few years back, "How's that working out for ya?"  I mean like, can you say, "Quantitative Easing?"No?  Well, how about, "Screw your neighbor or trading partner."  Funny, it is pronounced the same way in English, German, Japanese, Chinese and any other country's national language that comes to mind.  Hell it's more understood and recognized than Coke Cola.

It's not that it wasn't a good idea, it's just that no one cares anymore and the organization is focused on that most natural of all animal endeavors, self preservation.  Part of doing that is making yourself look as though you are needed, hence the brilliant expose of the real state of Greece's financial condition.   Problem is it was never about Greece, it was about the EZ, the Euro, the reputations of a couple of hundred politicians, the stability of the banking system and when all of these things are what really count, don't screw things up at the last minute by pointing out what everybody already knows except for the Great Unwashed who may, somehow, queer the entire deal in a fit of pique from having been conned all along.  This mob is also known as "voters."  Dumb, truly dumb.  For whether one agrees or not, this exercise was really about some important things

Now why would the IMF do something like that you might ask?  I did and I led you wrong last week. Chrissie was up to her wonderful Gaelic nose in this one.  Chrissie wants out and the next job is Madame Le President.  And Chrissie wants to be able to say that she always spoke the truth.  And so from its storied and bug-infested beginnings, the Fund is now the launching pad for a run at the Elysee Palace.  Maybe this one works.  I am sure Chrissie will not succumb to base instincts like her predecessor.  Alons enfants!

And finally, thanks to Carter, who of course knew all of this but made damn sure he was going to keep me honest...and give me a topic.  We need more like him.  I need more like him.  I'm pretty sure of that.

MAY DAY

That's when the Russians show off all their new pretty equipment with which to kill people.  It's also a lovely month in the fly-over zone.  It's also a universal distress call meaning immediate assistance required.  Pick a scenario and you're covered.

Janet Yellen laid a big one on the market today.  Channeling Alan Greenspan, she expressed the view that equity prices are quite generous.  A bit short of irrational exuberance, but good enough to scare a bunch of people.  Janet should know.  After all the valuations in the equity markets are a direct result of the world's central banks irrational exuberance in tearing down rain forests to print money, creating single shop shopping for the investor; there is no place else to put it.  Nevertheless, it is extraordinary that so smart a woman can come up with such a dumb statement at a time when it would appear that a healthy dose of reassurance is or will soon be needed.

I've been writing about this for a while but finally it is beginning to catch on.  More and more commentators are looking at the state of the fixed income market and not liking what they see--in particular, U.S. Treasuries.  The 10 year closed at a 2.24% yield today.  Why?  Who knows for sure but it's now trading above it's recent range.  Is it the movement that has produced the liquidity squeeze of which we have spoken or is it the lack of liquidity that has provoked the move?  You may well have noticed that for the first time in a long while Japan has replaced China as the largest holder of U.S. debt.  The Chinese have been sellers.  Who have been the buyers?  Amazingly, there were a couple of tales floated that it was the Belgians.  That's crap.  Certainly not the EU.  Not the Fund.  Not the ECB.  Then who?  Actually, that is not the mystery; that remains with the Chinese.  It's not the buyers it's the sellers and the reason for the sales.

We have also spoken of the need created by Dodd/Frank for the banks to hold a greater percentage of liquid assets in their asset pool and the additional requirement to reduce "market making" in their trading operations.  Now once again, bonds are not like loans; bond valuations change day-to-day based on prices.  Yield goes up, price comes down.  If the yield goes way up...on a daily valuation you can lose your shirt.

Well, then, what does a girl do?  A smart girl says, "I'm getting the hell out of this position...GIVE ME A BID!"  But there are no bids...and today there are no bids.  Of course the harder our gal tries to find a bid the lower goes the price and if the price lowers, the loss increases until...

Well, you have to take your medicine at some point in order to live to fight another day, but suppose instead of a more-or-less orderly market reversal you have an "event" that moves everything  l i k e   r i g h t  n o w.   One of those 10-sigma moves that the quants love to talk about.  A Lehman,...or to make it simpler, the Chinese or the Russians jumping up really ugly with one of their neighbors.  Or a Greek exit from the EU.  Or--God forbid--a terrorist success in the United States.  And suddenly, the every assets mandated to protect the solvency of the system turn into weapons of mass destruction, because if that market collapses, all markets collapse.

But, it's a glorious day here, and I'm not going to worry about it; I'll leave that to Janet--she knows about these things.  I'll also leave her with something else she might be able to use   ...  ---  ...   Any port in a storm.


Addendum:   The Greeks are seriously buggered in so many ways there in no point in writing about it any more.  Let's just see what happens and if they can pull it out.

JAMIE AND JEFFREY

Diamon and Immelt, that is, the respective CEOs of J.P. Morgan and General Electric.  They were the big story of the last two days...note I said story because they said one in the same thing.

In a letter to shareholder of Thursday, Jamie rightfully pointed out that as a result primarily of Dodd/Frank, the banking business was stinko with even more to come in the future.  Whole business lines had been greatly curtailed and as a result the net result of the legislation may have been to make the business even more risky in some respects; i.e. the dramatic reduction in liquidity in capital markets which in case you missed it, it was our capital markets, unmatched by any in the world, that has allowed for the recovery that we have experienced...such as it is.  Problem is Jamie runs a bank and when you are regularly blackmailed, over regulated, threatened with criminal prosecution unless you pay up (funny, there has NEVER been a successful prosecution), confronted with conflicting rule and nut cases (Crazy Lizzy) at every turn makes doing your job rather difficult.  Now I have taken Jamie to task in the past but this time I have to give him high marks for, well, telling the truth and having the guts to do so.  We should have more like him and we should have had them earlier both within and without the government.  As is well known, Jamie faced his biggest foe a year ago in the Big C and seems to have come out on top inn that battle.  Hope he does as well in this one.  Good on ye, mate.

And then there is Jeffrey.  Jeffrey has tried desperately for ten years to convince people that he is the CEO of a manufacturing company.  No one bought it.  He ran a bank...and a pretty good one as a matter of fact.  GE Capital still contributes about 40% to the bottom line if I am not mistaken, but running a bank and remaining a good friend of Il Duce (he signed up as AK #1 at the beginning along with Buffet) is a really hard thing to do.  So today, Jeff called it quits.  He announced that for all intents and purposes, GE Capital will be sold.  Stock market loved it; GE was up almost 10%.  Now it's going to cost a touch.  To begin, he's bringing money back home on which he will pay Il Duce's button men in the IRS about $6 Billion.  Then he's on one side of the market so you know he's going to get low-balled.  Then he's promising to buy back $50 Billion worth of shares of a company that just sold 40% of its earnings undoubtedly a discount in order to keep his EPS up there and which benefits...to the greatest extent, Jeffrey Immelt et Cie.   But Duce will be happy.  Betcha Jeff gets a shout-out on Twitter and maybe that is good for the shareholders.  Of course they could use some love; in ten years the stock hasn't moved an inch.  You know, maybe he should have kept GE Capital and sold GE.  Buying Citigroup or JP Morgan a few years back might have been a better trade, but it just goes to show one the effect of regulation, stupidly enacted and stupidly applied.  To wit, stupid results.

Back to The Masters.


Our regular reader, Denny, dropped a line to ask whether yesterday's effort confirmed his thoughts that Russia was a buy (he's long the RFK).  Having thought about it, the answer is probably yes if you can put stops in (I haven't a clue) because the volatility of the situation--not the market--is such that everything can move in gigantic leaps...and if you can afford the loss.  I cannot.  However, keep in mind that the Greek populous does not wish to leave the EZ, a situation which we have not discussed.  One can bet one's boots that any interim measures to keep Greece alive will surely include an agreement that Greece will join in a common policy towards Russia.  Leave the Zone and Alexis has big time trouble with the voter.

"CAN THE ISLAND OF TOBAGO PASS A LAW TO BIND THE ENTIRE WORLD"

That is the question posed in one of the most famous conflict of laws cases the title of which I, of course, cannot remember.  It was back in 1840or there abouts and even I wasn't born yet but the principal is well-asked today as we go fumbling around trying to make believe that if we bark, all others will jump.

Dodd/Frank is once again highlighted as how not to write legislation in what could be an important and dangerous disagreement between the U.S and the Euros concerning swaps and derivatives--you know, those things that no one understands and everyone hates.  Granted, it might not have been a good idea to have these contracts floating about without any real idea of the value of individual positions and the requirement that they now be traded through a clearinghouse might be a good one (more on that later), but when you realize that this business is not solely an American one and therefore if you try to pass legislation that attempts to govern the entire world, somebody might get upset.  The requirement that anybody doing business in the U.S.--not just being physically present mind you, but trading into and out of as well--be bound by the the rules of the U.S. clearing house and thereby subject to all U.S. laws pertaining to the same as Dodd/Frank so states, did in fact get the Euros upset and we are now at a stalemate as to how to proceed.

It is all so silly, really.  Like the Queen of Hearts, Congress has produced a verdict before the trial and run around screaming "off with their heads" in response not to market requirement but, like the rest of that garbage law, to political pandering.  Unfortunately, this is not a simple as throwing a bunch of lawyers together in a room and demanding language on which both sides can agree.  Oh no.  Now we are talking about the right of nations and sovereign egos and that is a very different thing indeed.  And then of course is the substance of the thing which the pols will claim was fully discussed and which I can assure you was never fully understood.  The clearinghouses themselves.

You see, the concern was that in the crisis, no one knew what exposures were where, or to put it another way, who was on the other side with Lehman and for how much.  Now a clearinghouse takes that concern away, or at least it appears to, as the clearinghouse guarantees the fulfillment of obligations traded through it.  There is one small problem, however.  Who spies on the spies or who guarantees the clearinghouse?  No one loses sleep over facing Third-Fifth National, but if it is DeutscheBank?  As the former manager of Man United used to say, "Squeaky bum time, lads."  And so we go into the future with not exactly the lame leading the blind, but certainly with the creation of problems that could have been avoided if some people had paid a bit more of attention to the business in hand rather that to howling of the Crazy Lizzys of the world who now, unfortunately, find themselves with even more power to expand the rubbish heap which they produced.


Eric Holder, the Attorney General of the United States, announced his intention to resign today.  Holder is a race-baiting, lying, malfeasant, extorting thug.  Aside from that, I don't like him very much.

THE GODFATHER

There is that wonderful scene in Part I when Don Vito says to his son, Michael;

"I didn't want this for you.  I wanted something better…I lawyer, maybe.  Yeah, a lawyer.  A lawyer with a briefcase can steal more money than the entire organization."

Don Vito never met today's Capo di Tutti Capi, Don Eric Holder and the underbosses he has running rampant through the financial system of the United States, but he would have been impressed.  Holder and his mob are running the biggest extortion racket ever seen with the  latest target being the Bank of America being hit  up for $16 or $17 billion or whatever the number is primarily for the actions of Countrywide and Merrill Lynch prior to their acquisition by B of A.  I'm not going to get into the arguments pro and con, or who got conned and who didn't (poor Ken Lewis was never the sharpest knife in the drawer whilst Thaine was) and Mazillo was as close to be a crook as one could find but a very well politically connected one.  Lewis didn't have the stones to say "no" when the Feds were all over him to bail them out, but of course the only people who get hut in this official corruption are once again the present shareholders who sure as hell had nothing to do with anything.  To say once again that Eric Holder is a disgrace is to repeat myself but he is a disgrace.  He belongs in a really special ring that perhaps his paisan, Dante, can build for him.  Accidente!

Meanwhile, the substantially more honest but probably considerably dumber mob that looks after the well-being of our nation's financial service industry at the Fed and FDIC, announced this week that they were not at all satisfied with the submissions of "living will" from the systemically important banks as required by Dodd/Frank.  Holy mackerel, Andy, who would have thunk it.  It's been said so many times but it bears repeating; this is an exercise in futility and stupidity perpetuated by a lack of understanding of what happens in a "systemic" event.

Let's start once again with banking 101 that despite constant review, no one still seems to understand.  Banks  get  sick  on   the  asset   side  of  their  balance  sheet;   they  die  on  the  liability   side.    Got it?  OK, now try to understand that a will--any will--is designed to set out a series of events that will facilitate the difficulties involving a death, be it of an individual or of a corporation such as a bank.  One has a will to insure that the heirs don't fight over the estate and to insure the prompt and orderly wind-down of businesses.  A will allow all involved parties to remain calm and rest assured that their claims on the assets of the estate will be properly decided.  It is therefore a plan, but as that great American financier and philosopher, Mike Tyson, once stated: "Everybody's got a plan until you get hit in the mouth."

If an institution the size of, say, Goldman Sachs gets in trouble it is because the market loses--for whatever reason--confidence in its ability to service its obligations, the first of which is its deposits…  if that occurs, YOU HAVE NO TIME because the liquidity is gone in an instant and when that happens the first question EVERYBODY asks is "will I have a chair when the music stops" not "let's see, how are we going to wind up poor ol' Goldie?"  And that sportsfans, is systemic risk and no "living will" solves that.  What solves it is central banks stepping in  and saying, "you're covered," and quite frankly that is the one, serious reason for having central banks in the first place. If we all told the truth and if everyone understood this we would be far better off.  Or sure, we need regulators and rule makers and market watchers but we sure as hell don't need legions trying to solve the unsolvable; far better we work harder at stopping the event before it occurs and that is the strongest argument for and independent central bank as opposed to the hodge-poge of political reaction entities floating about today.



Well, nothing in the world got better today.  Hamas started lobbing rockets again so it's game on in Gaza.  Putin is keeping everyone guessing and The Leader, recognizing some moral responsibility--although that is tough to figure out as he is becoming more and more non-understandable--dropped a few bombs on ISIS.  European economies look weaker and weaker and today Super Mario made it very clear that his policy is bugger thy neighbor by driving the Euro down against the world.  The Bund is at 1.06% and the 10 year at @ 2.43% with the Bund keeping it there.  The world remains awash in dollars so what should one expect?  Why, for the DOW to close UP 200 points!  I mean it could be worse.

THE SILLY SEASON

That's what this time of year is called in the UK, probably because football is done for a full month and there is nothing on which they can concentrate.  Strange things happen and are said.  It kinda holds true Over Here as well especially if you have congressional testimony from the Chairman of the Fed and Crazy Lizzy Warren is around.

Janet Yellen gave folks a whole lot to chew on not the least of which was her advisory warning that certain segments of the market had perhaps gotten ahead of themselves and some decent discussion of where the Fed was and where it was going, not to mention that in her view the jobs picture was not quite as good as some had made it out to be.  Good, solid Central Bank testimony, called for by statute, mostly unexciting but sufficient to satisfy the requirement without putting anybody to sleep. Up rose ol' Crazy Lizzy then, not the least bit interested in all of that monetary stuff but focused solely on whether J.P. Morgan & Co. had presented to the Fed a "living will" as required by the legislative disgrace known as Dodd/Frank and whether Ms. Yellen and her colleagues had accepted it.  Further, if they had not accepted it, then she inquired, why hadn't The Fed exercised the remedies granted to it and broken up J.P Morgan?  Ms. Yellen hung in there long enough so that time ran out on Warren.

Now, one could simply dismiss all this by saying, "stupid is as stupid does," but let's face it the woman is a U.S. Senator and has a hell of a lot of power and influence not to mention her lap dog on the Fed Board of whom we have spoken in the past.  There aren't five people in that august body who believe that a living will could ever work but she is clever enough to recognize that the real lever she has is the possibility to begin reducing the size of financial institutions, as you can be damn sure that a plan, outlined in some 10,000-odd pages covering a financial institution of over $2 trillion in assets under constantly changing markets and conditions will ever be accepted by the Fed. Nobody is that stupid.  But what we saw yesterday is the opening salvo it what is going to become a constant bombardment on the regulatory apparatus and the public to "solve" the "too big to fail" problem by reducing the size of the institutions that fit that category according to the Gospel of St. Lizzy.  And it's going all the way through to 1916 because Lizzy has her sights set on far higher office having now been convinced by the left wing of her party that Hillary must be stopped.

The result will not be success in either the acceptance of her views or her quest, but she has the ability to sure as hell stop the financial legislative process dead in it's tracks.  When recognized, I think we will see the industry itself begin to shrink as a result of this pressure and also as a result of the inability to produce a proper return on the amount of capital required to support a substantial balance sheet.  Once again, I shall be bold in my prediction that within the industry we will see its own form of "inversion"--not for tax reasons but simply to get the hell out from under.  What we shall also see is the migration of corporate financings  from today's institutions to an entirely new breed of financial intermediaries…or principals for that matter…who are far less subject to overall financial regulation or oversight.  The growth of the Blackstones of this world will continue even more unabated.

Perhaps that is a good thing.  I know I'm not smart enough to figure that one out, but it troubles me.   What troubles me even more is that Crazy Lizzy thinks she is.  That's not silly.  That's downright…well…crazy.

THEY ARE NUTS

No, not the Argies.  The Federal Reserve Board.  What a show that was today.  The headline is that the Fed will continuing with the tapering, knocking another $10 billion off monthly purchases and keeping the accommodative monetary policy in place for the foreseeable future.  Then Janet got up to explain all this...or not, as the case may be.

For the first time that I can remember, the Chairperson of the Fed essentially admitted she had no idea what the hell is going on, our guess is as good as hers and therefore, why change anything? She also said the economy was getting better, the job picture was getting better and there was no sign of any inflation to cause worries.  Absolute horse crap on all accounts.

Inflation is rapidly rising on all things that human beings need to stay alive.  Food, fuel, clothing, air fare and just about anything else one can think of.  What isn't going up are all the things in the Fed's little basket which nobody can name because nobody needs them.  It is a joke.

The job number is precisely the same as it was at the end of 2007.  Only problem is the country has 16 million more people.  The job participation rate, however, is down from approximately 67% to 62% which means a bunch of people have simply given up.  Wages are stagnant, wage growth is slow.  Oh by the way, Janet, the reason for this is that the economy stinks and why does it stink?  Well, not because of you Bubbala, but you can't fix it either despite how much money you leave floating about in Fed Nation.  It stinks because The Leader is out there talking about oceans with this DiCaprio guy who apparently earned his expertise on the subject by drowning on the Titanic.  It stinks because all you geniuses passed Dodd/Frank which means the banks wont take a risk.  It stinks because the morons in the Patent Office decided today that they are the guardians of morality as to what one names his franchise, never for a moment believing that if a name is offensive the product will not be bought.  The country is rudderless as the latest opinion polls indicate and the Fed can't fix it.

What you can do, however, and are doing (along with Super Mario) is creating the most God-awful bubble in equities and crap fixed income, much of which is sovereign and none of which is sustainable.  Of course when everyone decides at the same time to unload, where is the bid going to be to maintain an orderly market?  Not at the banks as in the past because you see, they can't do that any more and wont that be a lovely war!  You are also putting a severe hurt on those of us living on a fixed income who sit and watch your non-inflation beat the crap out of our savings and income.  And in the big picture none of this has helped and it never will.  And yet you press forward with the same nonsense policies, clearly indicating that you are clueless.  Oh while, we are at it, you might call to mind the definition of insanity about doing the same thing and believing the result is going to be different.  Insanity:  that's a step or two above nuts.

 Oh yeah, in case you're interested Spain went out of the Cup losing 2-nil to Chile.  More people care about that than what you had to say today.

MIXED EMOTIONS

No, not the watch-a-busload-of-economists-go-over-a-cliff-and-realize-that-two-seats-are-empty kind.  It's the wake up in the morning and tell the world, "I told you so" kind.  You love to be right but in so being, bad things are going to happen

Today was a two-fer.  Pfizer announced that it was prepared to make a bid for Sandoz of $100 billion.  Yeah, $100 Billion.  Whether the proposed merger made any sense from a business standpoint I haven't the slightest idea, although one can assume that deals such as this are not announced on a whim, what will catch the headlines is that if the transaction is concluded Pfizer will switch from being an American company to one whose corporate domicile is in the United Kingdom.  Why?  Taxes.

Pfizer has beaucoup dollars stashed away offshore which, if repatriated, would be subject to the U.S. rate of 35%.  BUT, if Pfizer completes the transaction and shifts its corporate nationality, the funds can be used to fund its operations in the U.S. with zero tax liability.  In addition, the U.K. has a corporate rate of 21% as opposed to the afor-mentioned 35%.  They also speak English Over There.

You might remember that in 2009, I wrote extensively of The Leader's appointment of a blue ribbon panel to explore the overhaul of the tax code.  The result was actually a thoughtful, intelligent and accurate review of where we stood and where we could go and the benefits that could be attained if the outlined path was followed.  Oh no one expected it to be adopted immediately, but it presented more than simple discussion points: it was a road map.  It was at the time and up to today completely ignored by The Leader and at the time I said that unless we got our code in order and recognized that there was competition out there we could well see the shift in the domicile of our corporations, it already having occurred with Transocean.

The trickle is about to become a full-running stream and the reaction will of course be outrage at the level of The Leader and Congress with calls for legislation to stop this "stealing from the taxpayer." Under what chapter of the law this can be accomplished is something I haven't quite figured out as of yet but it will be proposed.  What will not be proposed is the reform of our tax code which will of course require bi-partisan agreement.  Can't have that when the mantra for years has been inequality among the haves and the have-nots.   Whose next, Exxon?

The other I-told-you-so event was a squib in the WSJ speculating that the major financial institutions who are leaders in the SWAPS business are not-so-quietly education their client that this business will soon be shifted to locations outside of the U.S.--probably London--where the implementation of new rules and regs governing the business will not be in place before 2016 and even then will probably be considerably less onerous and simpler with which to comply than those Over Here.  Gee did I predict that too?  If this is the case, that wipes out 250 pages of Dodd/Frank to which the reaction will be "good riddens."  Mind you, such an act would come with the understanding that any overseas affiliate engaged in this business would not enjoy the explicit guarantee of the parent company.  "How about implicit" you may ask?  To be fair, for many years financial subsidiaries were deemed to be implicitly guaranteed by their parent in many situations and markets operated under these assumptions.   But today, the numbers are far bigger and given the added risk, the business may shrink to hedging operations for which the products were originally designed and much of the trading for fun and profit may be greatly reduced.  That may not be such a bad thing if you think about it.  But what is a bad thing is what is, and will become a greater effort to avoid the crushing regulatory oversight by switching other product lines to regulatory safe-havens.  London is one thing: the off-shore banking center of the Island of Peilu is quite another.  I'll let you know when that happens.

BACK ON STATION

Not a lot of fun getting hit in the face with a blast from a leaf blower.  Even less fun when you realize what must be hanging around in the residue from the fall when you eye blows up like a balloon inside of three hours from an infection and not from mere trauma.  Washed the damn thing out as well not five minutes after the event.  From now on I wear gloves when working in the garden.

There was a wonderful little vignette in the Times today about the N.Y. City A.G. bringing an action against some firm for improperly charging clients for loans made.  Sounded like a good idea given the reported facts but the funny part was that the authorities just realized that they could bring such an action only because of Dodd/Frank.  What a kick and where is Nancy Pelosi when you need her?
Somebody actually read this 2000 page piece of rubbish unlike Obama Care which nobody read.  Of course they read it sometime after it became law but, hey, that's the way we do things these days. Onward and upward.

Meanwhile, Over There, our friends were quite pleased to have announced that for the first time in quite some time the Union has met it's target for deficits coming in overall at 3% which had been the bogie at the very formation of the currency union but hardly ever met--or for that matter enforced--throughout these many years.  Of course the manner of achievement, the draconian cuts in governmental spending which has led to near-economic collapse in some states cannot be overlooked.  Nor can the identity of the one member that stands far apart from complying with the fiscal accords; yep, you guessed it, France again.  It's all great fun, really, but it is not far from the truth when one says that European recovery cannot be achieved without France and France is in a bad case right now.  Of course, she is well-capable of sending one of her leading economists on the road to hump his book proclaiming the joys of a wealth tax under the adoring eye of Little Paulie, ignoring of course that solely as a result of France's tax laws, there are more Frenchmen in London than in Lyon; a perfect reversal of the situation of 6-8 years ago when the Brits were moving in droves to France.  Memo to Jacob/Jack: taxes do matter.

Another item in the fun department that occurred during my recovery was the Argies getting there first shot before the Supreme Court  in a case that only a lawyer could love.  You might remember that they got the crap knocked out of them in the Second Circuit on really what was a contract law decision with an overlay of sovereign immunity and nonsense regarding the "safety of the system" if the plaintiffs should prevail.  That decision is under review as a writ of Ceritorari has been asked to be granted but in putting the cart before the horse, the Supremes overheard arguments as to the lengths the creditors could go to seek out and find Argentine assets of any size, shape or color anywhere in the world.  As I said, it's a wonderful case for lawyers only, involving the Sovereign Immunity Act of 1976 and vast reaches of international conflict of law issues but that does not mean it is unimportant.  Indeed it is very important, but why decide this if you haven't decided to hear the argument in the case which brings this to the fore?  Maybe because Cert will not be granted meaning the Argies lose?  Or signals are being sent to the tune of, "common guys, settle this."  We shall soon know.  Don't forget about it.  As Joe Biden would say, "This is a big ^%$*)*^ case."

BACK TO BASICS?

All quiet on the Euroland front which does me no good and them neither.  Soooooo....

I've been meaning to get back to commenting on the state of banking regulation here and there but to be perfectly honest I really don't understand the state of play and everytime I ask someone supposedly in the know they claim not to know anything either.  One thing we do know is that  piece of rubbish known as Dodd/Frank, which was supposed to be up and running in July remains in the drafting room with a miriade of problems not the least of which is "the Volker Rule" which, as anticipated and predicted, has tured into a lawmakers nightmare.  Definitionally, it was always bound to be difficult but despite claims that "we're almost there" and "it will be ready by the end of the year" it has fallen afoul of the classic D.C. syndrome of the "Turf War."  You see, no less than five different entities are claiming ownership of this piece of business and while the banking boys (Fed, FDIC & Treasury) claim there are of one mind, they are not.  Lay over that the Commodities lot led by the dreadful Gensler and the SEC which is being proven to be increasingly incompetent and you have a perfect crap-storm instead of the needed cooperation.  Not that the banks care, mind you.  The longer this goes on the better for them as any solution will arrive as a result of sheer exhaustion and not as a result of meaningful compromise. To be fair, this is an almost impossible task as was suggested when this stupidist of all legislation was passed and at some point if there is a God for banks this will be recognized.

 If one really wants to limit the amount of market risk taken by governmentally insured institutions ban securities transactions entirely.  If the institution still wishes to engage in such business have it be located in a seperately capitalized subsidiary, ban funding from the parent company regulate it as just another securities firm.  While one is at it, change the status of the Goldmans and Morgan Stanlies of this world, get them the hell away from the discount window and have the compete on an equal basis with the new entities...funding from the market at market rates and NOT from their parent or sister companies..  Oh, a clear statement from the git-go that these firms are NOT too big to fail will do more to insure proper risk management than anything else.  Remember, banks die on the liability side: no funding, no bank.  If lenders are convinced there is no bail out they we act accordingly and do their homework.

Now this is going to result in probably far lower profits but hey, you can't have everything.  There is, however, the issue of the (mostly) European universal banks and the competative advantages they could have if regulation of this sort were adopted.  This is real, but it is real in a far broader context than what has been explored here.  Basel III for instance which I plan to introduce tomorrow...unless Euroland gives me an opening.  Fat chance of that.

FED WATCHING

And seeing nothing.  Barely changed the language from the last time around and certainly had nothing good or encouraging to say about the economy.  So now it's ECB and Minister watching as the Euroboys have their get together tomorrow.  The silence out of Euroland today was deafening and I'm not even going to speculate as to what mighr occur.  Que sera, sera...that's Spanish.  Very appropriate.

Oh, should mention one thing.  The government lost a big one yesterday.  Brian Stoker, a Citigroup executive, had a civil jury rule in his favor in a case brought by the SEC relating to the creation and sale of a large CDO back in 2007.  Imentioned two years ago how difficult it was going to be to bring civil if not criminal actions against individuals in regard to these transactions but in another face-saving exercise the SEC moved against Mr. Stoker nonetheless.

I don't know Mr. Stoker nor do I know anything about this case but why I call it important is that I hope it spells the end to this money-wasting, face saving meaningless exercises which simply steals time from the real task of figuring out out to keep this stuff from happening again.  Memo to the SEC and all concerned: Dodd/Frank aint the solution.  Try again.

Yesterday was also the 10th anniversary of SOX, the first in a long line of stupidities which has accomplished little more than the reduction of the new issue business here in the United States by approximately 70%, not to mention the vastly increased costs that it has brought to small and medium size businesses across the country.

Tune in tomorrow to see if we still have Euroland.

...FUTURE CONTINUED

THERE IS A SURFEIT OF LIQUIDITY ON WALL STREET.  IT GENERATES FEES AND SHORT TERM GAINS BUT HAS LITTLE SOCIAL WORTH.  IT IS THE OPPOSITE OF USEFUL. IT DISAPPEARS WHEN MOST NEEDED AS IN THE 'FLASH CRASH' OF 2010, THUS EXACERBATING COLLAPSES."  So wrote Mr. Eisinger and what he wrote is really important except he hadn't a clue.

The problem with folks like he they start their writing from a premise which is uniquely their own and all then follows whether correct or not.  They are not reporters or educators in any sense but lecturers which is perfectly ok except when someone tries to apply like concepts to solve the wrong problem.  Let me digress for just a bit to illustrate thepoint.

In late 2007, I called an old regulator buddy, since retired, on the subject of Goldman Sachs and their liquidity position.  He told me that at the time he believed that Goldman had spare liquidity of over $100 billion dollars in committed facilities, meaning they were paying some sort of fee to insure availability.  My comment was, "Until they need it."  "Yeah," said he, "but nobody understands that."  I don't think that Mr Eisinger does either because this little tale is merely the tip of the iceberg.

I've said something like this before but it bears repeating.  Banking, at it's core is a pretty simple business.  A bank takes deposits and makes loans profiting from what ever interset rate diffenential they can obtain.  There is an old saying that banks "borrow short and lend long" meaning the duration of their deposit base is always shorter than the duration of the loan portfolio, and because of the duration difference they can borrow money (accept deposits) and a cheaper rate than that at which it is loaned back out.  Of course that means that banks have to constantly roll over deposits for they fund the business and if they are smart, they put into place liquidity facilities to insure that they always have funding.

Over the centuries the business of banking has changed with new products, new business lines, even entirely new business, but what has not changed is that banks have to borrow money to fund all of these things and theydo BUT there are, today a hundred--well, perhaps not that many--way for banks to obtain funding.  No longer does the banker rely upon Ma and Pa Kettle with their checking account, savings accound, certificate of deposit or Christmas Club.  Today, bankers get their deposits from people and entities thousands of miles away and, if done through a broker or a money fund, people they do not know and will never meet.  Whereas Ma and Pa's money was pretty much always there the duration of today's funding is often overnight and highly unreliable during any period of concern.  But what of liquidity facilities such as the one over at Goldman you ask?   When people get scared and you try to use them, committed or not, they aren't there.  "But I Paid a Fee!" say you.  "Sue Me," says the provider.  Welcome to October 2008.

What Mr. Eisinger missed in his very interesting piece is the most important thing of all.  The Volker Rule, indeed the whole pile of nonsense that is Dodd/Frank is supposed to regulate a multi-trillion dollar international banking system that is funded in exactly the same manner as was The Bank of New York at its founding in 1784!  This is the risk on the street and not a word is devoted to it in Dodd/Frank.  Good luck.



                                                  ---------------------------------------------------



Little Paulie Krugman was at it again in the Times this morning.  Desperate to justify an increase in the national debt by $5 trillion in the past 3 years, he has been arguing that fiscal dicipline is the wrong way to go...just look at Europe.  A few weeks ago he was effusive in his prais for Mario Draghi in opening the ECB with its version of Free Money For Everybody in order to stimulate the economy.  Today, he tried to quote every Republican economist he could think of to support his case.  Readers of this space will no doubt remember my opining that the real reason for Paulie's desperation was that the democratic socialism model of western Europe was about to end and with it The Leader's dreams for the U.S.  Poor Little Paulie.  While he was babbling away in the Times, Super Mario gave his first inerview in the Wall Street Journal.  What did he say?  Only that the European model had to end.  Oops.

TOLD YOU...

...two things as a matter of fact.

First, the gang is just leaving Davos (there are always a few that stay the weekend or who head to Paris) so as I told you nothing done on Greece today.  The future of 330 million Europeans?  We'll deal with it, not to worry.  The tv interviews all reflect a great deal of optimism that sort of goes like this:

"We will have an agreement shortly."

"Why?"

"Because we have to."

"Why do you have to?"

"Because..."

See, told you there wasn't a thing to worry about.

Now the other thing I told you about some time back and continuously since then, is that Dodd, and the newly engaged Frank, is a disaster.  In confirmation thereof, the WSJ today ran a story concerning the Euro and japanese reaction to the so-callrd "Volker Rule" which bans banks taking deposits from the public from engaging in "proprietary trading" or prop trading as it is known in the trade meaning using one's capital to trade for one's own account.  How to impliment this has been the subject of 9 months of discussions between all of the various agencies involved and now it turns out the Euros don't like it one bit.  Here's why.

Many moons ago,  there lived a giant by the name of Billy Solomon who ran an Investment bank with his brothers and a guy called Hutzler.  In those days these entities were partnerships and Solly& Hutzler was about the best in the business.  Now the business formation known as a partnership derives it's capital from it's general partners who are responsible joint and severally for the entire firm and some limited partners whose responsibility is generally limited to the amount of their investment.  So, when it's YOUR money and you decide that trading is your business you better be damn good at it otherwise...Billy and his partners were damn good at taking risk.

Billy had a belief that  he made public; "You can't sell it if you don't own it," And Solly owned it.  You would love to deal with Solly because if you REALLY had to sell it Solly would buy it; there was ALWAYS a bid in whatever they made markets.  Maybe you didn't like the price, but there was always a bid.  Billy made a lot of money and took a lot of risk and made a lot of markets and had the biggest stones on the Street.  But Billy was making bets with HIS money.  If they got it wrong, nobody but Billy and his partners lost.

There are few partnerships today and Tall Paul, like many of us old guys, regret that.  Now, it's other people's money at risk, and depositors' money as well.  Problem is the trading business hasn't changed that much except for the speed at which it is conducted as a result of technology and the number of instruments traded also as a result of technology.  But at the end of the day, there is a bid and an offered and market makers who make the whole thing work.

To implement Dodd/Frank in the manner intended by those two jerks would require the trading business to essentially return to the modern day Solomon Bros. & Huxler...except there aren't any.  Enter the Euros.

They have lately figured out that take the American market makers out of the picture and the market suddenly becomes very dicey for Euro issues--especially sovereign issues--as while the legislation specifically exempts U.S. Govvies, not so for Euroland.  Ditto the Japanese.  When liquidity vanishes, prices change and yields go up making this bunch hopping mad.  Needless to say, the capital markets no where else in the world have the depth and capacity of those in the U.S.  It is not that this issue has not been raised; it has and was ignored by you-know-who.  And now their response is, "Oops," and leaving some of us to say, "I told you so."

This is only another in a long line of stupidities of this bill that has come up for discussion.  As a general comment, I have said that when one makes markets I haven't the slighest idea how one seperates inventory (as Billy called it) held for prop trading from that which is held to facilitate client business.  Unfortunately, it is even more true today what with the speed of today's marketplace that many times, depending on the product, you have to own it in order to sell it.  You sure as hell can't regulate it because it is a subjective call.  So what has been happening is that the prop desks are being shut down--even by the likes of Goldman Sachs--rather that being forced to go out and hire 50 Jesuits or Talmudic Scholars to explain the damn thing.  The result?  Seen Goldman's earnings lately?  And I thought we wanted the banks profitable and well-capitalized.  Oh, and will customer service suffer?  Probably.  And as for the breath and depth of the greatest capital market in he world?  Hey, it's politics, that's what counts.  We'll leave it to other people to figure out how to make it work.

Speaking of Goldman and Morgan Stanley for that matter, I haven't looked lately but if I wanted to open up a checking or savings account, could I?  What's that you say?  If it's for $10,000,000 it's O.K.?
Well then, why are they considered to be "deposit taking institutions" with access to the Fed's Discount Window?  What's that?  Don't ask those questions?  But...oh, I get it, it's politics.  Silly me.  I think I'll stick to Greece.  That makes sense.

WHEN WILL THEY EVER LEARN

The Grauniad announced today that the EU rescue facility would be leveraged to upwards of 2 trillion Euros. A typo no doubt, then again the newspaper gets it wrong so many times that one thinks it must be affiliated with The Times with whom it shares a unique view of the world from the far left.  Unaware of the reputation of the source, the stock boys bought everything in sight and reversed a dreadful daily performance to a 140 point DOW gain at the close.  For the life of me I simply don't understand how this mob on Wall Street has any credability left.  Alost makes one want to pull out one's bell-bottom, psychedelic-dyed, 1969 bottoms, get stoned and join the sit in at Zuccotti Park.  Radical, Dude. Maybe these guys are right...now we just gotta figure out what they're right about but aint it fun?

Come to think of it, the take over Wall Street movement has a lot in common with the Street's reaction to the events in Europe: neither mob has the slightest idea of what the hell is going on.  What astonishes me is the complete absence of any comment from the Exchange executives condemming the "trading on rumor" activities of the past few sessions for, after all, this is real money we're talking about here.  It is clear that no thought is going into this thing at all with key words and the push of a button (or however the hell they do it) moving markets by 300 points in the blink of an eye.  They all seem to have bought their algorithms from the same vendor as well because once it starts it's one way traffic from then on.  I wonder if there is anything about this in Dodd/Frank?

Speaking of that legislative jewel, I have spent more than a few hours pouring over it and for the life of me I have never reaad a more confusing, inpenatrable, improbable mis-mash in my life.  It's so bad the the high priced and high powered firm of Jones, Day, Reavis & Pogue have actually developed a web site to walk interested parties through the morass and developments in the formation of laws to implement the legislation.  Unless you are getting tired of self-flagelation, don't go there.  Stick with the whips, chains or whatever you have handy.  If away from home, poke yourself in the eye but DON'T GO THERE!  Aside from the fact that the legislation was written in large measure to score political points and extract a pound of flesh, what is worse it seems to have been written with really very little thought or actual knowledge of the activities it seeks to regulate.

The latest argument and the one receiving the most press primarily because of its sponsor is that over the "Volker Rule" which seeks to ban trading on the part of deposit takers for one's own account or in the acronym, "Prop Trading."  A number of institutions have already shut down their prop trading desks in anticipation of the rules being written but was has recently occurred has been a disagreement as to what constituties prop trading not just beetween the industry and the rule-writers but among the rule-writers and enforcers as well.  What, for example is the best way to fill a client's order?  To operate essentially in the "spot" market or to pre-position product that as a result of the relationship with the client creats the awareness of a future demand?  Does that constitute prop trading?  To an extent part of the problem is that the Fed doesn't like Treasury, Treasury doesn't like the commodity boys and they all loath the FDIC which is in part a legacy of The Bair of Very Little Brain.  It also is a reflection of how poorly the legislation was drafted in the first palce...which is of course a microcausim of the mess that is Washington is at the present moment.  As a result of all of this, I've decided that I simply can't comment on how issuess should be resolved--I have neither the resources nor the time--but reserve my efforts to commentary as to the manner in which they are resolved and the possible future effect these decisions will have.  To the extent I can offer suggestions I shall, but allow me to express my apologies for the self-imposed limitations of a solitary comintator.  Dodd/Frank has beaten me.  I have the solice of being certain I will not be alone.  Later, dudes.

THE FIRST TO FALL

Dexia, a Belgian bank with French interests was intervened today by the French and Belgian authorities with a pledge of support from Luxembourg.  No pussy-footing, no messing about.  Finis.  Good bank, bad bank solution for the institution which has been under pressure for some time as a result, among other things, of it's exposure to Greece.

Now if you asked 100 people on Wall Street,"What is Dexia" you would get about 95 blank looks but it's a pretty big institution and by some measures the largest in Belgium.  The interesting thing is that in 2008 Dexia was in  deep do-do partly because of its ownership of FSA and mostly because their portfolio was rubbish.  In fact, at one point they were into the Fed for, if memory serves, around $60 billion which aint chump change.  Well, here they are again and that is the story rather than their failure.

Dexia is symptomatic of what ails Euro banking: after the crash they never got their act together and were not pressed to do so by the banking regulators in each country.  Dexia is just the first of what I believe is going to be a severe restructuring of European banking but the good news in this case is that the French and the Belgians moved with great dispatch to put a lid on the situation.  Whether that lid stays on over the coming weeks is anybody's guess but it was welcome to see such a quick reaction.  Our guys put out a notice today that they are prepared to assist the Euros in any way possible (read, dollar funding) but I suspect that at this stage little will be needed.  I have no way of knowing but I suspect that the Euros are running as fast as possible to a Euro book which if things get nasty will put a huge strain on the ECB and it's anti-inflation obsession as they will be putting out Euros to the system as fast as they can be printed.Nobody said it would be easy.

Meanwhile, on this side of the pond, Sen. Richard Durbin of Illinois made one of the stupidist speeches on the floor of the Senate yesterday in a career filled with stupid speeches.  You might remember as we noted last week, the "Durbin Admendment" to the Dodd/ Frank monstrosity was the proximate cause of the banks raising fees on dubit cards quite dramatically.  Stung by the fact that half the world was blaming him for the banks' actions, he decided that he needed to stike back.  Never one to miss an opportunity to kick an man when he is down, Sen. Durbin decided to pick on everybody's favorite target, Bank of America, by forcefully suggesting that everybody doing business with Bank of America just walk right in and withdraw all their deposits.

Now Durbin has never been accused of being the brigest bulb in the room but one would hope that as a member of the Senate Finance Committee he was aware of the James Rule that banks get sick on the asset side but die on the liability side.  No such luck.  The one great thing about the B of A is that they have the most stable deposit base of probably any bank in the world but up pops this idiot and to deflect attention from his own stupidity he tries to change all that.  Anything, ANYTHING that might cause any adverse affect on the liquidity of the system in times like these is pure madness.  But with men like this in the highest seats of power is it any wonder that we are in a spot of trouble financially? These jerks are simply not to be believed.  As I have said, it's for times like this that the Good Lord made wiskey.  Guess where I'm headed.