Financial Regulation

One of the central tenants of Farcism as a doctrine is the promotion and use of layers of opacity and complexity to empower regulators via their ability to mitigate red tape and compliance costs and to conceal this power under a cloak of (for example) promoting the "American Dream of Home Ownership."  It will be seen that Farcism has imbued the halls of regulatory power, particularly in financial services, for decades.  Zero Hedge readers are invited to opine on the impact this realization has on prospects for a financial reform bill that puts more power in the hands of these parties.

In this connection, back in November of last year we explored the nuances of the "foreign regulatory capital" credit default swap portfolio of the besieged Financial Products group at AIG.  We pointed out that $172 billion in notional exposure (well, it seemed like a big number for a potential loss before Fannie Mae actually lost $145 billion in eleven consecutive quarterly losses, wiping out its combined profits for the prior 35 years and still leaving about $80 billion in red ink to spare) remained outstanding, that deteriorating credit markets may force AIG to recognize additional losses on the portfolio, but that AIG expected the swaps mostly to be terminated by the first quarter of 2010 (please please please please?).  We also noted that the implicit backing of the Federal Reserve might be one of the key (only?) elements permitting these swaps to perform their desired function: permitting European banks to reduce their regulatory capital requirements (read: boost their leverage).

This is Part III of a multi-part series on global rise of Farcism.  Part I, "The Silver Curtain" can be viewed here. Part II "On the Pensioning of Roman Veterans" can be viewed here.

If anyone has been curious why the Fed, banks and politicians have all been pushing for the "consumer protection" portion of the Financial Regulation bill, it appears we may have the answer. As CNSNews.com reports, the bill "would create the Bureau of Consumer Financial Protection and empower it to “gather information and activities of persons operating in consumer financial markets,” including the names and addresses of account holders, ATM and other transaction records, and the amount of money kept in each customer’s account. The new bureaucracy is then allowed to “use the data on branches and [individual and personal] deposit accounts … for any purpose” and may keep all records on file for at least three years and these can be made publicly available upon request." And quoting verbatim from the Bill: "[T]he Bureau shall have the authority to gather information from time to time regarding the organization, business conduct, markets, and activities of persons operating in consumer financial services markets." Goodbye privacy, hello 1984.

There is a new war underway between two forms of capitalism. Western style multinationals are currently on the defensive. Look what happened to Google. An in depth interview on Hedge Fund Radio with Ian Bremmer, president of the Eurasia Group, one of the top independent political research and analytics firms in the world. A tour de force of the global investment landscape. Buy China, avoid the US, and kiss Europe and the euro goodbye. (GOOG), (SPX), (EZU), (FXI), (FXE), (EWA), (EWC), (EWY), (EWT), (THD), (IDX), (EWS), (EWZ), (ECH), (EWW), (RSX)

"Here’s what I have in mind. Suppose that, for every relevant financial institution, the government issues a “rescue bond.” The rescue bond pays a variable coupon equal to 1/1000 of the transfers made from the taxpayer to the institution or its stakeholders. (I pick 1/1000 out of the air; any fixed fraction will do.) Much of the time, this coupon will be zero, because bailouts aren’t necessary and so the firm will not receive transfers. However, just like the institution’s stakeholders, the owners of the rescue bond will occasionally receive a large payment. In a well-functioning market, the price of this bond is exactly equal to the 1/1000 of the expected discounted value of the transfers to the firm and its stakeholders. Thus, the government should charge the financial firm a tax equal to 1000 times the price of the bond." Minneapolis Fed President Kocherlakota

We now know that the European Union, as part of its most recent ridiculous idea for a global eurozone bailout, is planning on soon issuing its own bonds and thus becoming a defacto Treasury. How the hell it plans on doing this is simply beyond comprehension, but it certainly involves a lot of "financial innovation"... ergo - enter Goldman Sachs, from whom it would need a ringing endorsement to proceed with its plan. Alas, the just released note from Erik Nielsen is anything but favorable: "All in all this is good news, but it is unlikely in itself to calm markets; its all too “slow-burner” stuff." (and yes title is a ref: Douglas Adams - the EU has the answer, if only they could find the question now).

Please call NOW ...

There’s a surfeit of instructionals on the secret to investing, ranging from Investing for Dummies to The Intelligent Investor. My bookshelves at home are full of them, and I’ve learned or at least absorbed something from many. Experience is a great teacher, but the foundation of civilization, and too investing, is also dependent upon the capsulization of the experiences of others and that is where books have played a formative part in my own career. Still, there’s never been a book called “Common Sense for Dummies,” which would be required reading in my investment class if either existed. That’s an oxymoron to begin with, though, which points to the obvious – that common sense cannot be taught. It’s like sex appeal – you either have it or you don’t, although both are subject to relative judgments of the observer. What is commonsensical to one investor may seem ludicrous to someone else. And even in cases where history has validated the irrationality of one investment idea or another – the subprime frenzy being perhaps the most recent – there are questions of timing. Michael Lewis’s book The Big Short is not only a tale of the validation of common sense, but of its delicate shelf life. Most of Lewis’s heroes were almost all closed out by their own clients before their logic blossomed and their profits multiplied. - Bill Gross

Bloomberg reported that crude oil open interest was 1.41 million contracts, the highest since June 11, 2008. Some analysts think the high level of open interest raises concerns about whether the market is overvalued relative to fundamentals and whether the upward price trend can continue.

Paging, Teddy Roosevelt ...

"Too Big to Fail is Too Big to Regulate"

These nominees are prominent members of the Washington-Wall Street-Academia Economics Complex, whose members shift between government, Wall Street, and academia. All of the nominees are Keynesian economists. They are known as regulators, technocrats, and inflationists.

Meet your latest group of Fed doves. The pass fail criterion was: ZIRP __ Yes __ No.

• Brazilian policy makers poised to raise borrowing costs at the fastest pace since 2003.
• China may use capital requirements for developers as policy tool to cool property market.
• Cost of insuring Greece's debt against default soared to a new record.
• Portugal suffering Greek debt contagion puts pressure on EU's bond markets.
• Republicans joined in the Senate to block Democrats' overhaul of financial regulation.
• Shanghai shares down 2.1%, with real estate stocks down on policy concerns.
• Trend in U.S. home prices may have been positive for first time since 2006

• Euro, Asian finance stocks fall on Greece concerns.
• Eurostat agency suggested Greece's debt crisis is worse than investors believed.
• Geithner harnesses G-20 behind Yuan push as India, Brazil raise pressure.
• Greece may seek Euro-region bridge loan as $11.3B redemption looms.
• Japan's bank minister not too keen on financial regulation.
• Air China swings to profit in 2009 of $709.4M on fuel hedging gains.
• Amazon.com's Q1 profit jumped 68% to $299M on a 46% rise in revs to $7.13B.

I don't believe that things happen by accident. It is all orchestrated. My thoughts on the SEC timing re GS.