Tuesday, July 17, 2012

Are the bankster myths collapsing

The evolving story of bankers as bad guys has been a work in progress for decades.  In 1978 when the bankers went on a capital strike in their attempt to get usury laws repealed, I was at a party full of Louis Rukeyser-watching yuppies.  When I suggested that if the bankers were successful, the middle class as we knew it was doomed, they looked at me as if I were a barking lunatic.  The moneychangers were considered both trustworthy and magical.  Their status was that of a Master of the Universe.  So it has been a long slide for them into their present status where a big-name economist like Roubini suggests that we need to see some banksters hanging in the streets.

So now we see a story of a small Iowa commodity brokerage the "lost" $220 million in customer money.  This was operating capital for agriculture that was stolen so this makes a big difference to the surrounding area.

UH-OH: $220 Million May Be Missing From Brokerage Whose CEO Reportedly Tried To Commit Suicide

Rob Wile | Jul. 9, 2012

Earlier, we told you about an Iowa-based brokerage CEO who'd been hospitalized after attempting suicide, prompting the National Futures Association to investigate account irregularities at his firm.

Now, via ZeroHedge, we have the details of the complaint: The NFA claims that at a fund wholly owned and directed by the CEO, Russ Wasendorf, executives may have lied about a $220 million shortfall in customer segregated accounts.

Peregrine Financial Group Inc., which Bloomberg's Matthew Leising reports is owned by Iowa-based PFGBest's Russ Wasendorf, was required to maintain $400 million in segregated funds as of July 6, according to the complaint, from the National Futures Association, PFG's regulator.

Then, today, per the complaint: "NFA made an inquiry with U.S. Bank and learned that rather than the $225 million that PFG had reported being on deposit at U.S. bank just days earlier, PFG had only approximately $5 million on deposit at U.S. Bank."

The NFA also found PFG's $200 million shortfall may date back as far as February 2010.  PFG has been suspended from all trading activity.

The complaint does not cite Wasendorf by name.

Earlier this year, PFG was sued after ignoring signs one of its customers had been running a Ponzi scheme, Leising writes, adding that the CFTC is also investigating.

The Wall Street Journal is also citing a compay spokesman saying " 'employees across the United States' are at risk of losing their jobs." more
Finance has been subject to regulations for good reasons.  We could have simply taught our children what those reasons were.  But instead, we chose to deregulate (to the cheers of the educated classes) so now everyone can learn anew how important it is to regulate the moneychangers.

Firm With Money At Collapsed Brokerage PFG Launches Blistering Attack On Failure Of Regulators

Rob Wile | Jul. 10, 2012

We've been keeping up with the developing story of the Chicago and Iowa-based brokerage firm, Peregrine Financial Group, whose assets have been frozen and whose CEO has been hospitalized after attempting suicide as federal authorities launch an investigation into a $200 million shortfall in customer-segregated accounts.

Now via Josh Brown, another Chicago firm, Attain Capital, some of whose assets were managed by PFG has published a lengthy note blasting PFG, its regulator the National Futures Association and the NFA's overseer the CFTC.

"...it has become abundantly clear that our regulators are asleep at the wheel. The NFA answers to the CFTC, and the CFTC is to answer to Congress. Yet, the CFTC clearly failed to monitor NFA responses to the MF Global crisis, and we saw in the MFGlobal Congressional proceedings that our elected officials are more interested in political grandstanding than thorough investigation and effective questioning. Perhaps more importantly, they have little to no understanding of the way the markets they regulate over oversee operate.

..."Let us make this clear- we are positively irate. We feel we have been betrayed by our business associates, regulators and government. We know the best course of action is to be level headed and deal with the facts as they come in, but the Chicago in us isn’t about to take this laying down.

They also go into detail about how to reform the market, and call for Congressional inquiries into the NFA's and CFTC's failings. more
Government agencies are finally waking up to the fact that those bond lizards that come out of the woodwork every time a budget needs passing are NOT working in the public's interest.  Nor do they have any intention of selling you something that actually solves your problems.
TUESDAY, JULY 10, 2012

Are the Mice Starting to Roar? Municipalities Turn Defiant with Wall Street

Municipal finance has long been a cesspool. States, towns, hospitals, transit authorities, all have long been ripe for the picking. Sometimes local officials are paid off (anything from cold hard cash to gifts to skybox tickets), but much of the time, there’s no need to go to such lengths, since preying on their ignorance will do. As we’ve pointed out, even though these bodies often hire consultants, those advisors are often either not up to the task (how can people who don’t know finance vet an expert?) and/or have bad incentives (more complicated deals, which are generally more breakage prone, tend to produce higher consulting fees).

Dave Dayen highlighted one example yesterday: the city of Oakland has decided rather than pay $15 million in termination fees to get out of an interest rate swap deal gone bad:

The council voted to demand Goldman Sachs to negotiate with the city to get out of a 1998 interest rate-swap deal without having to pay a $15 million penalty. Currently, because of the locked-in rates, the deal is costing the city $4 million a year. Oakland estimates they have lost $17.5 million on the deal so far, and even though the underlying bonds were sold back four years ago, because of that $15 million penalty, the city will have to continue losing money on the deal until 2021.

So the City Council simply voted to terminate the deal. And if Goldman Sachs won’t let Oakland out, the city will stop doing any business with the bank, per the resolution.

In other words, the headline is: “Oakland to Goldman: Drop Dead.” I sincerely doubt that Goldman would litigate to get Oakland to pay the termination fee, but it will probably instead enlist enforcers, meaning the rating agencies, to issue the usual threats about how Oakland will be downgraded and shunned by investors for daring to press hard to have a transaction renegotiated. Funny how it’s OK in our society to break contacts with individuals over their pensions funds, but not with financial firms, when ZIRP (a tax on savers implemented to prop up the banks that wrecked the economy) is making many of these municipal swaps profitable beyond their wildest dreams.

But the case I like best so far is wee Moberly, Missouri. The New York Times got up in arms last month that a town of 14,000 is repudiating a bond guarantee that it was rushed into by a state authority:
Moberly, where the biggest employer is a state prison, had responded eagerly to a pitch by the Missouri Department of Economic Development to host the project, hoping for hundreds of jobs. The company, Mamtek International, was said to have a sucralose plant in Fujian Province producing a sweetener called SweetO, for use in drinks, candy and pharmaceuticals. Most of the authority debt, to go toward building and equipping the plant, was issued under a federal stimulus program allowing private investors to use tax-exempt municipal financing.

But when a bond payment came due last August, with the building still unfinished, Mamtek officials said they didn’t have the money. Construction stopped; the handful of employees in Moberly were laid off. Weeks of confusion followed, with subpoenas from the Securities and Exchange Commission, rumors of a split between the Chinese company and its United States subsidiary, reports that the plant would be liquidated and fears that the bond proceeds were gone forever.

When the city’s guarantee was called, the Moberly City Council issued a statement saying: “The city’s taxpayers, under these circumstances, should not bear the burden of Mamtek’s failures or be asked to ‘bail out’ their shareholders or investors.” more
And now we are beginning to see the real reason LIBOR is going to grow into a major scandal in USA—the little banks and investors are PISSED because real interest rates are low and have been for a long time.  The big guys have ways of making money no matter what the interest rates are.  The guy trying to retire by clipping coupons off a bond doesn't have those options.  Like in so many things in life, size matters in the world of finance.

Thousands Of Small Banks Could Sue Wall Street Giants Over LIBOR

Tom Hals, Reuters | Jul. 16, 2012

The thousands of community banks have often said their much larger counterparts have trampled on them. Now some hope the latest Wall Street scandal could give them ammunition to strike back.

Big banks' alleged manipulation of interest rates has become the subject of a deepening global investigation by regulators. It has also led one small bank in Wisconsin to file a lawsuit accusing JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc and other major banks of colluding to set rates artificially low.

The Community Bank & Trust of Sheboygan -- a town on the shores of Lake Michigan about 60 miles north of Milwaukee -- is claiming manipulation of the benchmark London interbank offered rate, commonly known as Libor, has kept its interest margins artificially low.
Determined in London by the world's biggest banks, the Libor is used to set interest rates on everything from credit cards to student loans and mortgages.

Charles Tompkins of Boston law firm Shapiro Haber & Urmy filed the lawsuit in late May on behalf of the 11-branch bank, which has assets of about $554 million. It seeks class-action status so other community banks can join the litigation.

While it is unclear whether many small banks will do so, the legal action is further evidence that the scandal is reverberating well beyond the confines of Wall Street and the City of London. Big banks are already facing an array of Libor-related lawsuits by some big investors and local governments, such as the city of Baltimore.

Tompkins, whose class-action firm has handled securities, antitrust and consumer lawsuits, said U.S. community banks might have lost more than $1 billion over four years on loans to small businesses at artificially low rates. more


  1. It was less than a month ago when I posted this comment on one of your excellent pieces drawing attention to the bankster bubble--
    "They have created a too-big-to-bailout market, so the next market failure will require nationalization and an entire industry liquidated as if it never existed.

    Banking must be destroyed so as to save banking. The best part is common people need to do nothing--no marching in the streets, no subversive actions by anarchists, no campaigns or boycotts to organize--do nothing, because these masters of the universe will completely destroy themselves with their folly, greed, and lack of wisdom or understanding.

    Oh, it won't be pretty. It will be ugly, their death throes will be clumsy and they will drag down any foolish lifeguard who tries to pull them out of the whirlpool they have created. But when it is over and they are gone, they will be history and it will be a better world."

    --and so we are heading into the first death throes, no? The 'free market' is making a 'market correction' as we speak. Calling all lawyers! There is blood in the water!

    How soon before there is a run on the banks? How soon before people rush to put their 401k into something ANYTHING that is not run through Wall Street...and when they learn nothing isn't, and then learn all the tax rules were written to force you to hold your funds in the Wall Street Casino or suffer a 20% early withdrawal penalty--20%!!!

    Or in other words--it costs more to withdraw your 401k money (before it implodes into nothing) than Wall Street types pay in income taxes. This is the success of the Capitalism system...it defeats itself with corruption and greed without any need of enemy armies or insurgent protesters.

    But oh the humanity...I think people are going to get a serious lesson in the value of community and local sustainability, because when every institution of mankind is bankrupt, who feeds you and how do you pay for it.

  2. Mike,

    I agree that the banking system has failed. The only problem is they have successfully destroyed all other alternatives. Even if the banks are nationalized, the same bankers will be running the show. Only difference will be that they will have access to limitless capital.

    A while back everyone was talking about US dollar being replaced by some other basket of currencies as the global currency. It all died out after people realized that there is no other stable alternative. Euro is in a big mess.

    I personally feel that despite all its shortcomings, US is in better shape compared to the rest of the world.


  3. Thank you both!

    Zak, you would make a great Institutionalist (If you don't already call yourself one.) Why? Because, of course you are correct—bankers will always act like bankers.

    But here's the difference. When bankers work for an Institution like the State Bank of North Dakota, the still act like bankers but they do different things because their mission has been redefined. Bankers and investment brokers also acted differently when they were heavily regulated in the Golden Age of the Keynesians. One of the good side effects of deregulation was that it demonstrated just how good the guys who erected the regulatory apparatus really were. They knew bankers were going to act like bankers so they limited their regulatory efforts towards those situations where bankers will jump the rail and go rogue. Just remember, we only threw out Glass Steagall in 1999 and it took remarkably little time for the problems that caused the Great Depression to return.

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