Dancing with the Devil: A Breach of Trust

Yet again, the Golden Child of Wall St. is revealed as a fox in sheep’s clothing.
I was engaged in a debate about the role Goldman Sachs may have played in the downfall of Greece’s economy with a relative (through marriage) who migrated from Greece to the United States when she was 10. My research on the near collapse of the US financial market clearly points to the gradual deregulation and the unethical banking practices. There are a number of factors that contributed to the fiscal crisis, particularly the securitization of subprime Housing Loans, re-packaged and sold Globally as “A” rated paper. Regardless of the fact that the underlying debt was “C” rated, banks had the audacity to sell the mortgage-backed securities as “A” rated, low risk bonds. Of course, we can’t ignore the rampant Securities and Banking fraud, which generated hundreds of charges and investigations by the SEC against Banks and Hedge Funds.
I’ve written numerous articles about the Euro crisis. Like many economists, I believe the U.S. fiscal crisis precipitated the downward spiral of a number of EU members. This is mainly because of large quantities of foreign investment in U.S. Housing securities, which went sour. Much to my surprise, in the process of gathering data surrounding the global crisis, I learned that EU members; Greece, Italy, Spain and France, carried out non-transparent, accounting practices for over a decade. No doubt the high debt ratios hidden by accounting loop-holes would have eventually brought the weakest EU members to fiscal ruin at some point anyway.Although, our financial calamity accelerated the timeline of the reveal. America's financial troubles was the equivalent of lighter fluid, igniting the masked problems of the EU’s weakest links.

Apparently the Greek-American community seem to have a different slant on how Greece's economy found itself engulfed in a fiscal and political battle for stability. The lack of transparency and debt-to-revenue ratio was certainly taking its toll on the weakest EU members. This was made worse when changing leadership was blind-sighted by the urgency of country’s debt portfolio – particularly the derivative-structured debt owed to Goldman Sachs. When the housing market collapsed, interest rates increased, drastically increasing the debt service on the Goldman/Sardelis deal
My Greek-American in-law (who shall remain nameless), vehemently contends that Goldman Sachs is the monster that brought her beloved country to its knees. This is hardly the case, since Greece's debt was already 127% of its GDP by 2009. Also, by that time, Greece was seeking a bailout for over 300 billion Euros. Nevertheless, She was referring to a secret transaction between Goldman and the Managing Director of Public Debt Management Agency (Christoforos Sardelis), back in 2001, where a masked loan of $2.8 billion Euros was signed, sealed and delivered. Executed completely under the radar. The loan, which was thought to be earmarked for the preparation of hosting the 2004 Olympics, was later revealed not to be the case. Although I admit, the unholy alliance with Goldman was a financial set back, it was not the smoking gun.

The under-the-radar transaction executed by Sardelis and Goldman was a Currency Swap. Given the variable rate structure, there was mounting debt service, as interest rates increased, making it difficult for Greece to contain. I appears that Greece’s Debt Management Agency didn’t thoroughly analyze the deal to determine the long-term impact of this type of debt structure for Greece, given their compromised economy. A simple “what if” analysis would have helped them to analyze the impact of increasing interest rates. The Currency Swap transaction belongs to the derivative family, which are always complicated to quantify or analyze given the fluctuating market, currency and structure. These are highly risky transactions, and certainly not recommended for unstable municipalities suffering from high debt, declining GDP, and 25% unemployment.

The secret deal between Sardelis and Goldman could be classified as irresponsible given the size of the debt, and the fact that it was tied to fluctuating interest rates. The operative word being, “fluctuating”. Regardless of Sardelis’ good intentions, “it takes two to tango”. Therefore, Sardelis is equally at fault. My Greek-American in-law may be reluctant to accept it, but the blame has to be shared.

Since 2010, when I initially started writing about the Euro crisis, I learned that Sardelis was motivated by the Maastricht Treaty, requiring all EU members to show “improvement” in their public finances. This Goldman swap was a "dance with the devil" and simply a desperate attempt to “hide” the debt from the country’s books to comply with the Maastricht Treaty. These swaps were one of several techniques that European governments used to meet the terms of the treaty. There were certainly alternatives techniques available, so why did Goldman push this particular structure? Whatever the case, Sardelis was out of his element, and out smarted by his trusted Bankers. It was reported in the Wall St. journal that Goldman served up fictitious, historical exchange rates for the transaction, which earned them $760 million in U.S. fees.

Attemps to Implement Austerity Measures Lead to Violent Protests.

By the time Spyros Papanicolaou took over the Public Debt Management Agency in 2005, the loan had ballooned to over 5 billion Euros. Given the role that Goldman played in the fiscal unraveling of the housing market, which sent trimmers across the globe, you would think that their CEO, Blankfein, would consider a forgiveness of some portion of the debt. Goldman and Papanicolaou did get around to restructuring the debt, but I’d be willing to bet there was no forgiveness of debt.

Goldman Sachs may soon be faced with a public image dilemma, but until then I supposed they’ll continue to carryout their Mission to squeeze clients for every possible dollar.

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Doin' the Twist: The Federal Reserve Steps in to Spur the Economy

In the beginning of the year, the Federal Reserve indicated their plan was to let the economy stand on its own. By the end of last month, however, the Feds broke down and reduced long-term interest rates in a program they refer to as Operation Twist. In this program, the Feds would drive down interest rates to encourage business activities, such as borrowing and hiring. According to a Wall Street Journal article by Peterson and Hilsenrath, the Federal Reserve officials announced that Operation Twist will be extended through the end of the year, but they’re “poised to do more”.

At the end of the 1st Quarter, the Feds indicated that there was no need for their help. The economic picture appeared brighter following a strong 4^th Quarter, and encouraging jobs report.

By the time the we turned the corner into the 2^nd Quarter, the economic storyline began to change amid heightened pressures from overseas. The market, which had anticipated S&P downgrades for Spain and France, could no longer withstand the push-back stemming from the European Union’s fiscal and political upheaval. Globalization has its rewards, but this isn’t one of them. When the EU sneezes, we are going to get the sniffles, as if the distance were non-existent.

As the Euro fiscal storm brewed, the dismal jobs report and Facebook IPO did its part to shrivel up any confidence Investors might have had left. The market uncertainty lingers, regardless of good economic news. This  depicts the profile of weary investors - possibly suffering from Post-Traumatic Stress Disorder.  Being the eternal optimist, I’m hoping Operation Twist will have us all dancing in the isles by the end of the year.

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Financial Fraud Strikes Again

Haven't we had enough of financial scandals? Of course not, here we go again. This time it is with a boutique futures trading broker - Peregrine Financial Group, also known as P.F.G.. On July 9, 2012, the National Futures Association (NFA) - the industry wide, self-regulatory organization for the U.S. futures industry, made an inquiry with U.S. Bank and learned that out of the $225 million in customer segregated funds that P.F.G. had reported to the NFA as being on deposit at the Bank just days earlier, only approximately $5 million was actually on deposit. The NFA also learned that, although P.F.G. submitted confirmations that U.S. Bank account balances as of February 2010 and March 2011, were reported to be approximately $207 million and $218 million, respectively, P.F.G.'s actual balances were less than $10 million for each one of these months.

On top of the reported financial fraud, a day earlier, the chairman and chief executive, Russell Wasendorf Sr., tried to commit suicide outside of the firm’s offices in Cedar Falls, Iowa .The Federal Bureau of Investigation is investigating the matter, according to a spokeswoman for the Omaha office, Sandy Breault. Ms. Breault indicated that the Chicago office of the agency might also get involved.

The Commodity Futures Trading Commission (C.F.T.C.) is seeking a restraining order against P.F.G., to prevent the destruction of any information that may be needed in the course of the investigation. The C.F.T.C. is also asking a federal court to appoint a receiver for the firm and freeze its assets.

This feels a lot like a curtain call for MF Global, where $1.6 Billion is still missing. (refer to a prior article in this blog for more information about MF Global). Similarly in this case, as the complaint states: “P.F.G. and Wasendorf have used customer funds for purposes other than those intended by its customers, and consequently, have misappropriated these funds”. “The whereabouts of the funds is currently unknown".

Needless to say, the operations of the firm have been halted. Unfotunately, I am one the many victims. For two years, I was an active futures trader with the company which offered  proprietary trading platforms to small retail customers like myself with unique and robust features that were not available from other brokerage houses. Although it has been several years since I day traded, due to time constraints, I still kept a funded account with P.F.G.. I contacted the NFA today and registered my name as an account holder. I urge all others affected to do the same. It may not amount to much but at least it is better to take some kind of action and to make your voice heard.

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To Be or Not To Be: EU Shows signs of cracking

Twenty years ago, when the idea was circulating about a unified currency in Europe, it seemed like such a brilliant concept, based upon sound economic and political arguments. Today, it almost seems like an impossible dream. Landon Thomas of the New York Times asks in his article "Can they muster the will and resources to keep the euro zone from breaking apart?

As the world looks on, and markets take defensive positions, the Euro crisis unfolds like the climax of a mystery novel. Greece's dramatic elections - where the people ousted Sarkozy, opting for an unlikely candidate, François Holland. The outcome of the election was a clear sign that the people were not ready for the strict austerity measures needed to turn their economy around. Bailout alone was not going to save Greece, it was only expected to buy them time to pull their policies, and fiscal plan together. The political and civil unrest in Greece, gave little hope for a turnaround. Instead the notion of Greece leaving the European Union resurfaced with somber overtones of reality.

By the end of May, Spain had decided to pump 19 billion Euros into its struggling Lender, Bankia, SA, as a strategy to illustrate stability, and quell any notion that the crisis continues for its financial sector, in light of Greece's downward slide. This is a prop-up strategy that is effective in influencing perception, which is crucial in the realm of investors and financial markets. The US equivalent of $24 billion, was a rich injection that is twice the amount Spain spent in the recent past to straighten out the banking sector during US housing market collapse - causing a global rippling affect. Spain is swiftly reacting to mitigate a repeat of the fiscal mayhem stemming from billions of dollars lost in toxic mortgage-backed securities.

Meanwhile, two weeks ago, S&P downgraded Bankia, and several other Spanish Banks, causing worldwide concern. The rating agency made matters worse by painting a gloomy near-term forecast for the region, citing their belief that Spain is heading toward a double dip recession. S&P also noted that there was a reasonable expectation of an increase in troubled assets. On the heels of Frances downgrade, and Spain’s fiscal concerns, the question becomes, was this unified currency such a sound economic and political move in the first place. Friday, the DOW closed 300 points lower, illustrating investor sensitivity to the Euro Crisis - although, it should be noted that market anxiety was further stimulated by the soft jobs report.

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BFF: Ballad of the Facebook Fiasco

Countless individual investors, and some intrigued "average Joes" thought that the Facebook IPO was going to be the atom bomb of Silicon Valley. The Golden Egg of the privately held tech companies, and its fearless leader, Zuckerberg, was sure to deliver. As the highly anticipated IPO jettisoned into history, as being the most anticipated offering of the millennium - I too thought FACEBOOK would be the IPO not to be missed. "get in now", I thought, "or you will regret it". Of course, I truly expected that the offering would be priced in the mid-teens, $13 or $15 per share. At the very least, it would be priced at a level commensurate with the "value", of a company that has no PRODUCT, who depends solely on Advertising. Advertising as a revenue source is not at all bad, but when you take into consideration that revenue growth on an ongoing basis would mean continued popularity, increased memberships and usage. Now, therein lays the rub. Allow me to offer MySpace into evidence, as how quickly a popular "hang out" can just as quickly shift into decline. MySpace, which was somewhat of a pioneer, is now valued at approximately $1 million, and struggling to stay relevant. That said, the pricing geniuses at Morgan Stanley had to be confusing FB stock with a commodity; you know... one of those limited resources that the world could not do without. How else would you explain a $38 opening price.

When a new popular issue is priced in the teens, it has no place to go but up. Sure it would fluctuate during the course of the day, but normally it would wind up quite a bit higher than the initial price. On the other hand, if you come into the market at $38, you are already at a premium, there is no place to go but down. Of course the speculation as to why the issue was priced so high, created underlying tension and uncertainty. By the end of the following day, reports of unethical matters surrounding the handling of the new issue began to surface. What a Fiasco this turned out to be! A sad, and bitter reality hit as news broke of possible insider trading. It is alleged that the lead bankers handling the FACEBOOK account at Morgan Stanley had tipped off their clients with confidential information. This information was in essence a warning not to purchase the stock at the opening price. Was this a setup, designed specifically to make million on the short sale of Facebook shares. An article in Business Insider reported that Morgan Stanley provided a select few classified information about FACEBOOK's weaker than expected forecast. Within 48 hours, news circulated of an SEC and FINRA investigation into what really happened. Whatever the case, Finance Reform obviously didn't go far enough.

Selective dissemination of "material" information concerning a cut in forecast estimates for the company would cause institutions to lose interest, which generated investor uncertainty among the small investors who weren't privy to this insider information. From the savvy individual investors, down to the average Joes jumping in to get a piece of the Facebook pie, this scandal put investors at an unfair disadvantage. The whole matter created a unprecedented IPO fiasco, leading to untold losses, and a decline of market confidence, which we could have done with out.

Adding insult to injury, Nasdaq had a fair share of technical problems which only added to the mayhem. Thousands of trades were stuck in limbo for individual investors. This may actually be a blessing, giving them the opportunity to either pick up shares at a steep discount, or back out completely. Ultimately, FB shares ended up about 30% lower than its initial price, with occasional ticks upward and downward. We're not likely to see stability in this stock price until the dark cloud of confusion is lifted, legally or otherwise.

My plans to purchase a hand full of shares immediately fizzled when I heard the price. A conversation with a few hopelessly optimistic friends convinced me that I should go ahead and pick up a couple shares just to be a part of the historic IPO. I never expected it would become the Fiasco of the decade.

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Economic Stability: Still in Question in the U.S. & EU

The mixed economic indicators have been a source of much debate among analysts. The softer than expected Jobs Report, along with the spiking gas prices have turned the optimistic economic forecast on its head. An article in the Wall Street journal indicated the industries that were previously driving the economic recovery in the past year have slowed, noting that others economic indicators have stepped up their place. I'd say that's as accurate observation and interesting fodder for economists. For example: the housing market appears to be gaining a good deal of traction, and consumer spending has been consistently growing, and gaining momentum. Experts say that the up-beat consumer spending data is linked more to the unusual warm Winter, and thus not so much a real indication of a positive consumer outlook. The market has fluctuated in the last quarter of 2011, but it cannot be disputed that the DOW has flourished in spite of the slow economy to its highest levels above 13, 000. It also appears that the market seems to be a lot less sensitive to the news across the Atlantic than last year. The Ratings agency, S&P downgraded Spain's debt in January and again in March, but the market barely responded to the news. This is somewhat surprising considering the impact the Euro crisis would have on our economy if things were to spiral out of control. Perhaps the market had already compensated for the news in the last quarter of 2011, since the downgrade for France and Spain had been anticipated.

Indications That support Optimism

Consumer spending has been a great influence on the economy, having a direct impact on the retail industry revenues. It should be noted that two thirds of national GDP is made up revenues from consumer spending. Consumer spending is indeed an important aspect of analyzing the economic forecast. The Housing market is showing signs of life, as housing purchases in the first quarter increased 19%. More dramatic statistics have been coming out of Miami and New York, but it’s still too soon to exhale

Indications That support Pessimism

The rising oil prices have become an unavoidable threat to the recovery, but for some inexplicable reason consumers are taking advantage of the prices and low financing interest rates. The jobs report came in at 120,000 new jobs, which is the lowest number in several months. This could indicate that employers are not completely convinced that the economy is on the road to solid footing. Let's face it the perception of the economy is the most important aspect of the forecast. Economists and analyst can talk endlessly, but if the investors' perceptions do not concur, they stay out of the market, or get out.

The fact is there are both positive and negative influences at work, making it more challenging to decipher the indicators. If I had to take a stab at analyzing the economic indicators, I'd be likely to lean toward an optimistic forecast because of the sheer impact that consumer spending has on the GDP, and the deep discounts in the housing values which have spurred buying. Also, the earning reports illustrated that banks are thriving amid restrictive finance reforms, and retailers are reporting positive earnings that beat analysts' expectations. Tourism in the country reached an all-time high amounting to billions in added revenues in New York alone. We will just have to wait ad see, it could really go either direction in the coming months.

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Stimulus-Interuptus: Feds Take Away the Punch Bowl

The economic indicators are all signaling a stabilizing, recovering economy. However, the disappointing jobs report may indicate that we’re not quite ready to pop the Champaign. In a March meeting held by the Federal Reserve, the published minutes show the feds believe that the economy is strong enough to stand on its own. No need to intervene to help it along. In the meantime, the markets reacted in a bag way.

The market sell off last week, was a response to the Federal Reserve taking the position that the economy no longer needs their assistance, which means no “stimulus”. A Chief Market Analyst, Doug Cote, was quoted as saying that the Feds were “taking away the punch bowl, the markets don’t like these punch bowls being taken away”. You can glean from this statement that the economic punch bowls were heavily spiked over the past 4 years to get up to this point. In fact, since the beginning of the U.S. Deep Recession, the government worked feverishly to steer the economy away from the cliff it was headed for. This meant the Federal Reserve and the White House actively propping up the financial market and the economy by implementing a cocktail of fiscal and monetary policies, which included numerous rounds of stimulus packages for various faltering industries.

The Bush Administration, followed by the Obama Administration pulled out all the stops to get the Country back on solid footing with programs which included; the bailout of Banks and the big three auto makers, tax payers stimulus refund, the homeowners’ assistance and first home buyer programs, and even forgiveness of old student loans - the list goes on. Now, the market has to go “Cold turkey”, and function without a safety net. This was obviously an unpleasant reality when the news send trimmers throughout the investment community, sending the DOW and other major indices in a mild tailspin.

The next quarter will be a critical benchmark for forecasting where the economy actually is, and what that means for Main Street, and the rest of the world

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Goldman Sachs: Filing for Moral Bankruptcy

The investment Banking community was stunned by the hard hitting statements made by Goldman’s former executive, Greg Smith. Smith's scathing, but heartfelt remarks, published in the OpEd section of the New York Times, was the topic of lively debates and criticism around the globe this week.
After reading Smith’s behind-closed-doors account of what’s really going on at Goldman, it would seem that Wall Street’s gold plated, celebrated investment bank of 143 years has somehow lost its core values on which they built their brand of “Trust” and “Integrity”. Goldman Sachs was once an awe inspiring investment bank, whose brain trust is referred to as “the best and the brightest”, but they have certainly suffered from a leadership deficiency. Strong leadership or the lack thereof, is the basis of the rise and fall of many businesses – regardless of their size. It is the “leadership” of Steve Jobs who, upon returning to Apple, was able to bring the company from the brink and take it to quintessential plateau, far beyond anyone’s imagination. That’s leadership.

Mr. Smith’s commentary might have easily been dismissed as a disgruntled employee, were it not for the fact that he was a highly regarded executive director, who has spent over a decade of his career there. From my perspective, Smith gains credibility for his tone, and the manner in which he described the pride he felt being a part of Goldman, and praised the company that once was. He was convincing because of his effort to be constructive in his criticism - disclosing examples of the troubling shift away from providing investment advice in the best interest of the client. Rather than simply throw destructive daggers and below-the-belt punches that serve only to damage the company, his rant was respectful but unyielding. Smith had the power to do a lot more damage than he did. Keep in mind, never once did he accuse Goldman of fraudulent practices.
Mr. Smith’s piece focused on Morals, Ethics and Integrity, which was summarily lacking, apparently much like the leadership. Smiths cited his leaving the company because he could no longer stomach the Goldman that has emerged. The shift in focus from Client-centered investment services to, revenue-driven “elephant hunting” (Smith, 2012) has eroded the company’s code of ethics to the bare bones. Having developed an unnatural preoccupation with taking every allowable advantage of the client, Goldman Sachs is left morally bankrupt.

Let us all be reminded of the Senate hearings, and the SEC investigations of 2010 and 2011, which resulted in fines and a multi-million dollar settlement. Meanwhile, the public has barely had a chance to digest the law suits that have come from international companies claiming Goldman mislead them about the rouge mortgage-backed securities they purchased from Goldman, without so much as a warning.
The firm’s Chief Executive Lloyd Blankfein and Chief Operating Officer Gary Cohn issued a statement more than 24 hours after the OpEd sent global shockwaves throughout the investment community. As expected, they were essentially denying the allegations made by Smith. Unfortunately, it was too little, and about $2.2 billion too late, as the value of the company took a dramatic hit after Smith's public resignation letter went viral. The stock recovered all but $800 million in value the following day, due to investor excitement about positive economic statements from the Federal Reserve, and stronger than expected retail data. Still, intangible losses are mounting where trust, good will, and brand are concerned. For this reason, many question the wisdon behind the delayed reaction from Goldman. It's too early to tell what the fall out will be, and Goldman's overall Damage Control Strategy is yet to be seen.

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Anonymous said......

Great article Katherine! The Goldman crew only needed 10 BILLION dollars (place pinky to corner of mouth)to stay afloat after the greatest heist on the planet by these guys: http://projects.propublica.org/bailout/list
It only took Goldman (Gold,man!)a couple of years to repay 10 Billion dollars... what does that tell me about how easy money comes to them?
At least one of them is admitting being morally bankrupt! It's about time!
We should have done what Iceland did instead of screwing over the people.
Now what?
http://projects.propublica.org/bailout/entities/237-goldman-sachs
Chris G / Mar 18, 2012 05:17 PM

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K. Reilly said......

Hey Chris G., thanks for your comment. I also checked out the propublica.org link, which I enjoyed scanning through. Sorry for the delayed response. :)

Crimes & Misdemeanors: FBI Closes in on Large Wall St. Funds

The FBI has arrested key members of a ring woking out of several states, including New York. Similar to the Galleon Group, these guys traded information concerning publicly traded companies in an apparent conspiracy to commit insider trading fraud. This ring was so productive, they were able to generate financial gains that rival the Galleon Hedge fund, who's founder recently received an 11 year sentence for insider trading. One of the hedge funds involved, Level Global Investors, raked in over $50 million in gains alone. The court documents state that a ring of traders and analysts, who formed an insider trading club, swapped information that resulted in over $60 millions in illegal profits.

As the voices of "Occupy Wall Street" draw attention to the stark imbalances of the privileged 1%, the fraud saga continues. According to the , Wall Street Journal the government has already prosecuted 63 people on charges of insider trading, yielding 56 guilty pleas or convictions. This marks an unprecedented number of cases procsecuted concerning insider trading in a three year period. Judging by this unrelenting onslought of crimes and Misdemeanors, it would appear that the Finance Reform Act is about as valuable as wall paper. That is not to demean the efforts of law makers or the Obama Administration, its merely a commentary on the industry's commitment to an "any means necessary" approach to capitalism. The only consolation is that the Feds and the SEC seem to be paying closer attention to the activities and trade patterns of hedge funds and other financial institutions that engage in trading. There's fresh optimism about the economic forecast, as job reports and other market indicators send a strong message of recovery. Neverthless, with the reluctance traders, money managers and banks to change their habits to avoid a repeat of a financial collapse, sends another message altogether: They still don't get it, and its likely that they never will.

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France's nightmare realized:Is there life after downgrade for the EU

It is likely the one thing that kept France’s Prime Minister up at night. Protecting France’s credit rating was to become Sarkozy’s greatest challenge of the past 4 months, nevertheless, Sarkozy saw it coming. France and the other EU leaders were hoping to slide under the radar for a bit longer, before S&P focused its attention on the financially stressed members.

I’m sure that the historic downgrade of the US’s debt last year, made it all the more realistic for France. Well, last Friday was the day of reckoning for the Euro-zone, as members suffered downgrades on their debt. This was inevitable given the unresolved financial crisis which has consumed the EU in the past 18 months. Standard & Poor’s swooped down and left France and Austria stripped of their pristine Triple-A rating. It did not stop there, seven others EU members were downgraded including Italy, Portugal. Germany is the EU’s # 1 economy, and it was able to retain its triple-A rating. The anticipated, but dreaded downgrade of France’s debt, being EU’s #2 economy, will undoubtedly create a huge dilemma for the EU’s bailout plan.

As the downgrade of the European Union's #2 economy sinks in in the next couple of days, global perception of the European Union’s ability to bail itself out, leaves potential investors concerned. This of course translates to higher cost of borrowing. The entire bailout plan is in hinging on the EU’s ability to bounce back from this downgrade and swiftly move toward executing the bailout plan. The sooner the wheels begin turning toward resolving the issues, the better.

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Europe's Deficit Deal Takes Shape: Uncertainty Lingers

The highly anticipated Euro-zone deal, which we thought would positively impact the market failed to do so. There was a knee-jerk reaction to the news with a slight up-tick in the DOW, which indicates bolstered confidence - but this was short lived. As it turned out, before the end of the trading day the Euro had fallen, along with a tripple digit drop in stocks. Uncertainty rippled through the markets creating a domino effect, that finally resulted in a rise in borrowing costs for Italy and Spain alike. Ultimately, it appears that investors were decidedly unimpressed with the Summit deal to control the Europe's fiscal crisis. Economists believe the market rally was deflated due a resurgence of uncertainty surrounding the bailout pact, as it did not include unlimited backstop for the Euro currency.

As the saying goes; "the devil is in the details". The Euro-zone deficit deal has been structured, but economists, investors and stakeholders know its only the beginning. According to Frances's President, Sarkozy, the legal parameters and compliance for the new accord to reinforce the bailout rules are expected to be worked out before Christmas. The longer it takes to put this put this chapter behind them, the more chance for erosion of confidence, currency, and credit rating.

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Sarkozy's New Challenge: Protecting France's Credit Rating

Given the fact that the European Union's recovery is riding on the full faith and credit of a select few of the strongest union members. Sarkozy ia facing yet another challenge as guardian of France’s credit rating. Particularly in light of fact that France is the primary guarantor for the bailout program.

Hope for an improved fiscal outlook for both Greece and Italy, allowed markets to exhale this month. This was fueled by the progress Greece made toward naming a new president, and the new bail-out plan. Many markets have already made back much of the losses over the past few months, but volatility continues to be a concern. Attention was temporarily transferred away from Greece, and the growing concern about Italy after S&P erroneously issued a warning that they may downgrade France’s rating. In an instant, the overly sensitive market reacted, resulting in higher bond yields for France’s debt, marking a 4 month high.

For the bailout to work, the euro-zone requires other triple -A nations to step up and increase their guarantees. The bailout fund is structured to hold a triple-A-rating, but this is based on the underlying strength of France’s credit rating. France is the second largest economy in the European Union, following German. However, as far as the resolution to the EU fiscal crisis, France is the blue-chip guarantor - representing the Union’s ability to navigate themselves out of the financial hole. Accordingly, a reduced rating France, will undoubtedly have an impact on the firepower of the fund.

Frances President, Sarkozy, has made it his mission to protect France’s credit rating. The Wall Street Journal reported that Sarkozy’s has made guarding their Triple-A credit rating a “battle ground for the coming presidential elections in the spring” Sarkozy unveiled, not one, but two austerity packages since late august in an effort to signal to investors that France can and will meet its deficit targets.

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Corzine's Blind Ambition: The Collapse of MF Global

MF Global is essentially in ICU, and nothing short of a miracle will save the company as we know it. Who was at the wheel when the company crashed and burned last week? Corzine. Corzine, former governor of New Jersey, who was once the head of Goldman Sachs, went back to his roots on Wall Street to head MF Global. As CEO of MF Global, Corzine, built the company to $41 billion business. It sounds like another Wall Street dream, but this success story, quickly turned into a nightmare, for the company and for its CEO.

The announcement came Thursday, November 3rd, that Corzine is stepping down as CEO on the heels of an investigation of the company’s unraveling. Their troubles started when the European crisis began to impact the company’s bottom line, since MF Global was heavily invested in European bonds.

MF Global is the first big financial company to tank at the hands of the Euro -crisis. The company’s Partners pulled back with increased concerns about their Euro bond exposure, which descended into a severe cash deficiency. MF Global’s investment in Spain, Italy and Portugal bonds had amassed to $6 billion in debt. The firm’s stock declined 66% last week when the company reported its worst quarterly losses ever. Meanwhile,the transatlantic continent’s gloomy future is hanging in balance, and sure to bring MF Global to its knees. The swift sell-off of its stock precipitated the company filing for bankruptcy. To put this horror story in perspective according to bankruptcydata.com, the MF Global bankruptcy filing is the 8th-biggest financial institution in the US, placing them over Chrysler, (in 2009), but smaller than Lehman Brothers.

It is beginning to appear that Corzine set out to redefine MF Global's Business Model, and aggressively redirect the company’s focus and trading objectives in an effort to create his own Goldman Sachs. He wanted to build an international empire, only he failed to consider the global economic mayhem, and particularly the crisis unfolding across the Atlantic, where Corzine wanted to heavily invest. The financial discord in Europe was no secret, so what was he thinking? A cocktail of insatiable greed and ambition tends to have a blinding effect on the soul.

Behind the scenes, the Wall Street Journal reported that MF Global was seeking investors or buyers to alleviate the cash crunch. But alas, there were no takers and unfortunately no alternatives emerged before the regulators’ deadline. The company was subsequently delisted. This is a classic case of an overly eager, unethical CEO with his own agenda. The level of ambition and arrogance was so steep, it apparently impaired his ability to lead with the company's best interest at heart. Meanwhile, nearly a thousand people will be out of work in a couple of weeks, just in time for Thanksgiving. The bright side is that many of the employees will continue with their lives and eventually find stability, but Corzine is finished - both politically and professionally.

Given the anti-Wall St. sentiment, I was not surprised to learn that Corzine declined a $12 million severance pay. No matter how you choose to spin this fact, his decision to walk away from millions of dollars he was entitled to, speaks volumes.


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$700 Million Bank Heist: SEC Investigates Citibank

Did Citbank swipe $700 million from investors? Well according to an SEC filing, which alleges that Citibank sold securitized housing bonds, which they knew were sub-standard, and bet against them, something is definitely amiss. It’s easy to see why Banks are no longer seen as a safe place to invest your money, as a depositor or shareholder.

Citibank, being charged with fraud, is fighting the charges, but Recommended settlement of $285 million is likely going to stick. The SEC asked a federal judge to approve the amount, citing that $285 million would not unfairly punish the shareholders, who were essentially victims of the bank's unethical acts. Of the $285 million, the settlement breaks down as follows: $95 million is the fine, $160 million in for ill-gotten profits and $30 million in interest. We're about 18 months post signing of the Finance Reform Bill, and we're still unraveling the spoils of unbridled greed.

The national Occupy Wall Street Protest was founded on just this type of offensive conduct. I had a feeling that the near collapse of our financial markets in 2008 was the tip of the iceberg, and so far it has proven to be true.

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Horror on Wall St.- Rated PG:

Another Finance Industry Horror Begins to Unfolds

Like a bad horror film, relentless slashing is imminent, and likely resulting in a blood bath of Wall Street employees, running for cover(unemployment line). Thousands of innocent victims scattered on the street as a result of massive Wall St. cuts....you get the idea. In all seriousness though, this will be a living nightmare for those hard working employees who will lose their jobs in the coming months.

As trading remains lackluster, the impact on returns have forced Banks to consider another merciless round of trimming. Certainly many perceived that the Market's continuous climb past DOW 12,000 meant it was going to be safe from a repeat of the economic trauma that plagued 2008. Well, from my standpoint, Wall St. may not revisit the lows and panic of 2008, but the Market is far from being “safe”.

Although the economy has managed to gain traction over the past 18 months, and bring the unemployment rate below 10%, it has not stabilized substantially enough - at least not in the way we had hoped. The monetary and fiscal policies of the Obama Administration and Federal Reserve have not had the impact on the economy that they anticipated either. This comes at a bad time for the President and the Democrats as they gear up for next year’s elections.

In the last 3 years, businesses have been sleeping with one eye open, if they're sleeping at all. Let’s face it, the economy is just not recovering fast enough. If you combine bank losses from the first 6-months of last year, and the first 6-months of 2011, it is estimated at $20 billion globally. That number only represents the lost revenues of 9 of the top banks. The Wall St. Journal Article “Wielding the Ax” quoted Michael Karp of Options Groups as saying “banks are cutting a lot of deadwood and live wood”. Based upon the word on the Street, this apears to be a statement of truth.

Banks have taken just about all they can stand from the Wall Street slump, and report plans to take steps toward trimming down the staff. A few of the tops Banks are ready to make severe cuts in annual expenses, as early as this week. Austerity is not limited to the borders of Europe, J.P. Morgan, alone, is preparing to trim nearly a billion in annual expenses. Credit Suisse Group laid off investment banking employees, as part of the planned layoff of 400-600 jobs, while Barlcays is expected to cut additional jobs - on top of the 600 jobs eliminated in January. Goldman Sachs' annual Survival-of-the-fittest program ( 5% annual reductions) wont be enough this year, therefore deeper cuts can be expected. Surprisingly though, Goldman still plans to add jobs in Brazil, India and Singapore.

There's a saying; When Wall St. sneezes, the rest of us catch a cold. That said, prepare for the worst, and hope forthe best.

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Myspace: Down but Not Out

Presently down, but in no way out of the game, Myspace, which is currently owned by News Corp, has hired investment banking firm Allen & Company to sift through the nearly two dozen firms interested in an acquisition or merger with the social networking site. Although Myspace’s popularity has been edged out by Facebook in recent years, it still has over a quarter of a million users. Since the social networking pioneer is free to it members, advertisers and affiliate contracts has been the main source of income, thus revenues began to take off by '2005. We’ve reported how well Facebook’s Mark Zuckerberg made out with a recent infusion of $1.5 billion via creative financing put together by Goldman Sachs. The Goldman-Zuckerberg finance documents indicated a Facebook value of an astounding $50 billion.

To put it in perspective, of the growing number of social networking sites, Myspace is ranked 3rd - just under Facebook and Twitter. So, what is the likely valuation? By the 2nd quarter of 2007, Myspace was on track to surpass the expected $500 million in revenues, but has since seen revenues decline steadily with intense competition stemming from Facebook and Twitter.

The Wall Street Journal Reported that News Corp is open to merging Myspace with another business in exchange for cash or equity in the merged firm. Myspace is a longway from the solid financial footing of Facebook, but New Corp realizes there is untapped potential in the Myspace brand. Considering the reported 4th quarter losses amounting to over $150 million, how can this, still viable, business be restructured, and re-marketed to emerge profitable once again? I suppose that will be for the winning bidder, and their business strategists to determine.

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US Dollar: A Safe Haven Reversal

The US Dollar is generally a safe-haven when the global markets are volatile. This was illustrated this past summer, during the EU financial crisis, when the dollar rose nearly 10%. According to the WSJ, the dollar actually rose 24% against major currencies during the financial crisis, which had a global rippling effect. But alas, the Dollar has hit a snag, as political unrest in Africa and the Middle East sends the dollar in the other direction. Investors are likely concerned over regions in turmoil prices overshadow the foreign exchange markets. The key difference is the attention to our heavy reliance on energy, as we watch the oil prices climb. This is what is driving the currency downward against other major currencies.
Even though America’s overall reliance on oil has declined in recent years, oil remains our capital weakness. US Consumption is still much higher than Europe and Japan, whose currencies are not as impacted by the mid-east fallout. There is a saying: “One man’s loss, is another man’s gain”: as the US Dollar suffers declines as a result of anticipated Oil price surge, other currencies, such as the Swiss Franc, the Norwegian Krone, and Canadian Dollar have seen gains. In contrast to the Unites States, the latter two countries are large oil exporters, with lower consumption than the US. France’s consumption is also much less than the US, which perhaps explains the currencies jump to high levels against the dollar last Thursday. As for the US Dollar; Fasten your seat belts, this is going to be a bumpy ride.

Too Small to Survive: Impact of the Recession on Neighborhood Banks

The impact of the recession could not be more devastating than it has been for the banking industry. While Bear Stearns and Merrill Lynch were able to narrowly escape extinction, there were hundreds of local banks that struggled to survive the volatility stemming from the steep recession. Since 2007, when the recession is alleged to have begun, as many as 348 banks have failed. That translates to over $651 billion in aggregate assets, and a staggering $76.1 billion in FDIC payouts to depositors.
In 2010 alone 157 neighborhood banks across the country were forced to shut their doors, accounting for over 45% of the total number of banks that have failed during this recession. Apparently by default, they were too “small to succeed”. Totally passed over for TARP bail outs distributed to banks identified as “too big to fail”, the small and midsized banks were left to sink or swim, with little or no support from the Federal Government.

It may appear to the layman, that neither the Bush, nor the Obama administration saw a need to include the little guys when they were passing out survival kits in the form of Cash. While it is primarily the small commercial banks, who make up over a half a trillion dollars in assets now lost. Meanwhile, politicians and lawmakers fail to realize that the small, neighborhood banks are the backbone of communities throughout the country. It is the small bank that often provides construction and mezzanine loans for housing development projects and small businesses that make up a more than 50% of our GDP. Although the economists proclaimed the recession was officially over in 2009, this year has already seen 23 banks shut down, and we are only in the first quarter.

Given the role of Banks in the near collapse of the financial markets, it is difficult to defend their position, particularly when they continued to distribute huge bonuses in the wake of the crisis. Nevertheless,it is not realistic to perceive that the small commercial banks were involved in packaging and selling large volumes of toxic collateralized loans (one of the key causes of the financial crisis).

Neighborhood banks are a vital part the economic vitality of the communities they serve. They are responsible for fostering business development and growth, while stimulating the local economy. This is an unfortunate fallout from the recession that is clearly a travesty, but surprisingly remains under-reported. Without a small bank association, lobbyist or public figure advocating for the plight of the small bank, there has not been much attention drawn to this matter.
See interesting article about Small Banks being co-dependent.

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K. Reilly
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Too Small to Succeed: Neighborhood Banks Becoming Extinct

There were hundreds of local banks that have struggled to survive the volatile economic wave over the past two years. Since 2008, 238 banks have failed. That translates to 613.2 billion in assets, not to mention the amount of losses that had to be covered by the FDIC for depositors. In 2009 alone, 140 neighborhood banks across the country were forced to shut their doors, accounting for nearly 60% of the total number of banks that have failed during this recession. Apparently, they were too small to succeed. Totally passed over by the TARP bail outs distributed to banks identified as “too big to fail”, the small and midsized banks were left to sink or swim, with little or no support from the Federal Government. It may appear to the layman, that neither the Bush, nor the Obama administration saw a need to include the little guys, who made up over a half a trillion dollars in assets. Meanwhile the small banks are the backbone of many communities throughout the country. It is the small bank that often provides construction loans, and mezzanine loans for housing development projects and small businesses that make up a more than 50% of our GDP. This year has seen 73 banks close, and we are only in the second quarter. I am not a big fan of banks, given their unsavory role in the near collapse of the financial makets, but I always take a stand for the overlooked and underserved.

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K. Reilly
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Goldman: Polishing Off the Tarnish

After over 140 years in business, the prestigious investment bank that has long been the envy of many companies that have come and gone. Goldman continues to make all kinds of money irrespective of the scandal launched by the SEC investigation this past Spring, which precipitated a hearing on Capital Hill. This was to be only the beginning of a bad year for the gold plated maverick, at least where their reputation is concerned.

Not long after the SEC investigation ended in a $500 million settlement, a German bank; Landesbank Baden-Wurttemberg (LBBW), filed a suit claiming the firm knowingly sold $660 million of subprime mortgage-backed securities to a subsidiary of LBBW.
As to be expected, Goldman began to take action to buff off the tarnish derived from the unbecoming headlines of greed and deception. To this end the company formed a Business Standards committee, which is headed by Goldman’s chairman and vice chairman, Jerry Corrigan and Michael Evans, respectively. The Business Standards committee will review strategies to rebuild its once stellar reputation.

A series of surveys conducted by Goldman’s Business Standards Committee revealed that their clients believe that Goldman will make them money, but do not feel that they are trustworthy. If the Goldman committee approaches this “perception” issue the way it aggressively approaches its other business strategies, this will soon be a vague memory.

K. Reilly
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___________Comments

Kirsten said...

Goldman has been able to escape criticism for a century. I saw a documentary about GS that talked about how many of the good old boys from the firm went on to work for presidents, so they have been essentially "untouchable" until now. It makes you wonder if they have been doing transactions like this all along
OCTOBER 28, 2010 7:03 AM