Monday, July 2, 2012

Today's links

Today's quote:  “The illusion of freedom will continue as long as it’s profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way and you will see the brick wall at the back of the theater.” – Frank Zappa

1--Massive Furor in UK Over Libor Manipulation; Where’s the Outrage Here?, naked capitalism

Barclays traders attempted to influence the bank’s submissions in order to try to benefit their own desks’ trading position. This is, of course, wholly inappropriate behaviour. Barclays submissions should reflect the cost of interbank borrowing rather than individual traders’ positions. The interventions in question were typically on the short term one and three month rates relevant to the wholesale markets and not the longer term rates used to set, for example, retail mortgages. It is also important to note that these traders had no way of knowing whether or not their actions would ultimately benefit or detriment Barclays overall. They were operating purely for their own benefit.

This inappropriate conduct was limited to a small number of people relative to the size of Barclays trading operations, and the authorities found no evidence that anyone more senior than the immediate desk supervisors was aware of the requests by traders, at the time that they were made....

And consider this remark from a Guardian article by Will Hutton:

Investment banking is an organised scam masquerading as a business. It is defined by endemic conflicts of interest, systemic amoral behaviour and extreme avarice. Many of its senior figures should be serving prison sentences or disgraced – and would have been if British regulators had been weaned off the doctrine of “light touch” regulation earlier and if the Serious Fraud Office’s budget had not been emasculated by Mr Osborne. It is a tax on wealth generation and an enemy of honest endeavour – the beast that is devouring British capitalism.

2--Barclays fine suggests Libor collusion, IFR

The Libor fixing scandal, which last week cost Barclays US$453m in fines to the US and UK authorities, highlights widespread industry collusion and a failure of corporate governance across the banking sector.

The FSA‘s damning report laid bare an open dialogue between derivatives traders and submitters as they sought to game the system to boost the profits on deals (and therefore their own remuneration). But more worrying are the clear attempts by the bank (and the industry as a whole) to submit artificially low Libor levels, at the height of the financial crisis, to ward off any negative attention on liquidity issues.

The episode casts a shadow over the reputation of Barclays’ management – CEO Bob Diamond in particular – as well as the credibility of one of the industry’s most important benchmarks.

“The lack of management control is breathtaking. Looking at the extent of the communication between submitters and traders, how on earth they [Barclays’ management] managed not to pick this up is completely shocking,” one senior banking adviser told IFR...

Barclays’ actions may prove to be merely the tip of the iceberg, as the way in which Libor is calculated makes it impossible for a single bank to game the system to a significant extent.

3--Teacher’s Wages Garnished as U.S. Goes After Loan Default, Bloomberg

Lawyers drained Linda Brice’s bank account and seized a quarter of her take-home pay, or more than $900 a month. Brice, a first-grade teacher and Coast Guard veteran, begged for mercy, saying she couldn’t afford food, gas or utilities.

Brice’s transgression: she defaulted on $3,100 she had borrowed more than 30 years ago to pay for college. The chief federal judge in Los Angeles took her side, ruling that Brice should pay only $25 a month. The law firm of Goldsmith & Hull -- representing the federal government -- then withdrew $2,496 from her bank account.

4--Libor scandal: How I manipulated the bank borrowing rate, Telegraph

An anonymous insider from one of Britain's biggest lenders – aside from Barclays – explains how he and his colleagues helped manipulate the UK's bank borrowing rate. Neither the insider nor the bank can be identified for legal reasons...

What the trader told us was that the bank could not be seen to be borrowing at high rates, so we were putting in low Libor submissions, the same as everyone. How could we do that? Easy. The British Bankers' Association, which compiled Libor, asked for a rate submission but there were no checks. The trader said there was a general acceptance that you lowered the price a few basis points each day.

According to the trader, "everyone knew" and "everyone was doing it". There was no implication of illegality. After all, there were 20 to 30 people in the room – from management to economists, structuring teams to salespeople – and more on the teleconference dial-in from across the country.

5--Study Casts Doubt on Key Rate, (from the archive), WSJ

WSJ uncovers Libor fixing in 2008
6--Doomsday for Lehman, counterpunch (from the archive)

Even before Lehman had failed, Bernanke started slashing rates and setting up lending facilities to provide assistance to ailing financial institutions. But now, the Fed chairman began to drain billions of dollars of liquidity from the system to increase the stress in interbank lending and push Libor higher. Bernanke and Paulson were deliberately exacerbating the crisis to force congress into passing Paulson’s $700 billion bailout package, the Troubled Asset Rescue Plan, aka–TARP. Economist Dean Baker sums up Bernanke’s role like this in an article titled "Ben Bernanke; Wall Street’s Servant":

"This is not the first time that Bernanke has done Wall Street’s bidding. When Goldman, Citigroup and the rest were on the edge of bankruptcy, Bernanke deliberately misled Congress to help pass the Troubled Asset Relief Program (TARP). He told them that the commercial paper market was shutting down, raising the prospect that most of corporate America would be unable to get the short-term credit needed to meet its payroll and pay other bills. Bernanke neglected to mention that he could singlehandedly keep the commercial paper market operating by setting up a special Fed lending facility for this purpose. He announced the establishment of a lending facility to buy commercial paper the weekend after Congress approved TARP. Of course, the whole crisis stems directly from the Fed and Bernanke’s fealty to Wall Street." ("Ben Bernanke; Wall Street’s Servant", Dean Baker, Industry

While it’s clear that Bernanke allowed credit conditions to deteriorate, the larger question remains: Did Lehman jump or was it pushed? Keep in mind, that Bear Stearns was stripped of its toxic assets and bundled off to JP Morgan with a clean bill of health. That same precedent should have applied to Lehman as well. So, when the bankruptcy was announced on the morning of the 15th–and the Fed did not intervene–all hell broke loose. But, then, Bernanke and Paulson really had no other choice. Either they take advantage of the crisis to wrangle the $700 billion out of congress or they walk away empty-handed. And, if they walked away empty-handed, the rest of the big 5 investment banks–including Paulson’s former employer, Goldman Sachs–would have folded overnight. It was "do or die". ...

nearly $14 trillion worth of complex-securitized products were created" on top of just "$1.4 trillion" of subprime loans." The Fed and Treasury committed the nation’s wealth to support a shadow system which most Americans don’t even know exists. (much more on repo etc)
7--Weaker data everywhere, The Big Picture

Chinese official PMI fell to 50.2 in June, from 50.4 in May, according to the Chinese statistics bureau, better than the 49.9 forecast....
The data confirms that China is slowing and that most analysts will have to reduce their forecasts of GDP growth lower than the 8.0% average forecast. – some have Credit Suisse, JPM for example. Personally, I believe that unless China embarks on a larger stimulus programme (which I believe they will, though through a series of measures, rather than 1 headline grabbing announcement), achieving 7.0% GDP growth this year is going to be a problem ie a hard landing in Chinese terms;

Its early days, but there is some evidence that Chinese property prices are stabilising. Chinese new home prices rose (OK by just +0.1%) for the 1st time in 10 months in June. The recent interest rate cut, lower mortgage rates for 1st time buyers and a policy of encouraging home purchases by a number of provinces is having an impact, though few expect property prices to increase significantly;

EZ June final manufacturing PMI came in at 45.1, unchanged from May’s reading, though above expectations of 44.8....

US ISM manufacturing in June came in at 49.7, much weaker than May’s 53.5 and below expectations of 52.0. Not good news.

However, US June construction spending came in at +0.9% MoM as opposed to +0.2% expected and the previous (upwardly revised) +0.6%

8--Economy headed nowhere, WSJ

Economists and others weigh in on the unexpected contraction in the U.S. manufacturing sector.

–If you haven’t heard the news: stay on vacation, no reason to hurry back. This economy is going nowhere according to the purchasing managers at manufacturing firms. The latest reading from the Institute of Supply Management is saying the economy’s engines have gone into reverse at the start of the summer. –Christopher Rupkey, Bank of Tokyo-Mitsubishi

–The fall in June’s ISM manufacturing index to below 50 for the first time since the last recession is the surest sign yet that the US is catching the slowdown already underway in Europe and China. But the index does not suggest that another recession is looming. –Paul Dales, Capital Economics

–We never expected anything like the magnitude of the decline in the new orders index in June. The drop of 12.3 points in the orders index is the largest since October 2001 (when, in the wake of 9/11, the index dropped 12.4 points) and the second largest decline since December 1980. Thus we are dealing with an event that occurs in roughly one in 100 reports. The question, which we cannot answer at this point, is does this represent volatility reflecting fears over Europe (the export order index fell six points) and will orders bounce back (as the orders index did in November 2001) or is it a slide into something more worrying? –RDQ Economics

9--Summertime, and the Consumer Is Queasy, WSJ

Consumers–who for the most part are workers–have responded by turning cautious. According to April and May data reported Friday, real consumer spending is barely growing this quarter. Households earned more in April and May, but they chose to save rather than spend the extra cash.

Since household outlays account for the bulk of U.S. economic activity, the slowdown suggests second-quarter real gross domestic product isn’t growing any faster than its 1.9% annual rate of the first quarter. While not a recessionary pace, it doesn’t signal boom times either.

More ominously for the outlook, consumers are more fearful this month despite the steep drop in energy prices. The Thomson Reuters/University of Michigan‘s sentiment index fell sharply to 73.2 at the end of June from 79.3 at the end of May.

“Falling gasoline prices are helpful, but consumers cannot live on gasoline prices alone,” said Chris Christopher, senior economist at IHS Global Insight. “Americans are looking for better job prospects, a more stable global outlook, an effective legislative and executive government, and higher wage growth before they start spending more and feeling more confident.”

Indeed, one explanation for the gain in savings is that consumers are taking precautionary steps against future financial uncertainty.

According to the Michigan report, the entire drop in the June sentiment index was in households with incomes above $75,000.

10--This time is different? Paul Krugman, NYTimes

What would it really take to save Europe’s single currency? The answer, almost surely, would ... involve both large purchases of government bonds by the central bank, and a declared willingness by that central bank to accept a somewhat higher rate of inflation. Even with these policies, much of Europe would face the prospect of years of very high unemployment. But at least there would be a visible route to recovery.

Yet it’s really, really hard to see how such a policy shift could come about.

Part of the problem is ... that German politicians have spent the past two years telling voters something that isn’t true —... that the crisis is all the fault of irresponsible governments in Southern Europe... — ... now the false narrative stands in the way of any workable solution.

Yet ... even elite European opinion has yet to face up to reality. ... So will Europe save itself? The stakes are very high, and Europe’s leaders are, by and large, neither evil nor stupid. But the same could be said ... about Europe’s leaders in 1914. We can only hope that this time is different.

11--Spanish bailout saves German pain, IFR

German lenders will be among the biggest beneficiaries of a Spanish bank bailout, with rescue funds helping to ensure they get paid back in full for poor lending decisions made in the run-up to the financial crisis, and helping politicians in Berlin avoid a politically sensitive bank bailout of their own.

German lenders were among Europe’s most profligate before 2008, channelling the country’s savings to the European periphery in search of higher profits. Spanish banks borrowed heavily to finance a property boom, and still owe their German peers more than €40bn, according to the Bank for International Settlements.

German banks were facing deep losses linked to potential Spanish bank failures. However, a bailout of Spanish banks – backed initially by Spanish taxpayers and potentially later by the European Stability Mechanism – will ensure creditors won’t take losses, making the bailout effectively a back-door bailout of reckless German lending....

Among European lenders, those in Germany are by far the most exposed to Greece, Ireland, Portugal, Spain and Italy, with outstanding loans worth €323bn at the end of last year, according to BIS data. Bankers say little has changed since then, with lenders unable to sell or hedge those loans. German lenders’ exposure to Spanish banks, corporates and governments amounts to €113bn; their Italian exposure is €103bn....

Total periphery exposure equates to about 4% of the €7.3trn of assets held by German banks and almost an eighth of the country’s annual GDP. Perhaps because of the size of the exposure, Germany has continually pushed against private sector losses – and was initially hostile to writing down Greek government debt....

German banks are the most leveraged in the Western world with a tangible assets to tangible common equity ratio of 28, according to the IMF’s Global Financial Stability Report published in April. This compares with just 11 in the US.

“Germany, by lending money to the peripheral countries, is trying to prevent its fragile and leveraged banks from getting hit, effectively orchestrating a back-door recapitalisation of its own banking system,” said Stephanie Kretz, private banking investment strategist at Lombard Odier....

If you have a potentially big problem, you are very careful not to draw too much attention to it,” added Rahbari. “The cost of cleaning up the German banking system could be enormous and politicians are conscious of that.”

12--Libor manipulation and the invisible whistle, FT Alphaville
There was a piece in the Telegraph on Sunday that may well sum up the thoughts on the Libor scandal of many who worked, or are still working, in banks. It’s called “Libor scandal: How I manipulated the bank borrowing rate“. It gives a sense of how it is that a hell of a lot of people didn’t question the manipulation of the rate.

Frankly, anyone with a Bloomberg terminal in 2008 would have been in on this, as one could see that the rates various banks had submitted did not reflect where they could fund. Deals were getting torn apart all over the place because no one could ramp up funding at a decent rate, despite what those screens said.

People knew how Libor was constructed, that it was a survey with barely a disciplinary mechanism in sight (other than being kicked off a panel, which seemed a ridiculous threat when so many were lowballing rates at the same time).

But it was just accepted. A great number of people didn’t even clock that there was a whistle to blow. Why might that be? We’d posit it’s because they didn’t even perceive what was going on to be wrong, and that it probably has a lot to do with social conformity (within the sphere of banking).

13--The China OMG moment, FT Alphaville

...this eye-catching quote from Jim Chanos:

“I’m being conservative when I say that the coming bust in China‘s real-estate market will be a thousand times that of Dubai,”

14--China’s inventory-building masking a bigger demand slump, FT Alphaville
15--Satyajit Das: “Super Brussels” Saves The World, Again, Maybe!, naked capitalism

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