WorldCom

Now that The Show is over, we are left with the equivalent of a Sunday morning hangover following a binge of promises and lies. After the Supreme Court upheld the PPACA, a spate of mergers rippled through the managed health care realm, to ostensibly cope with smaller profit margins and  ‘compliance costs.’  But really, it’s because each firm wants to corner as much as possible of the market, in as many states as it can, to garner more premiums and control more disbursements and prices at the upcoming insurance ‘exchanges.’ Meanwhile the more hospitals are viewed as profit centers, the more their Chairmen will cut costs to maximize returns, and not care quality. They will seeks ways to sell underperforming assets, programs or services and reduce the number of nonessential employees, burdening those that remain. And if insurance companies can manage doctors directly, they can control not just costs, but treatment – our treatment. It’s not an imaginary government takeover anyone should fear; but a very real, here-and-now insurance company takeover, to which no one in Washington is paying attention.

The departure of Vikram Pandit as CEO of Citigroup (C) should come as a relief to the markets, regulators and customers – indeed, just about everybody besides the volatility junkies who like to trade this very liquid, very unstable stock.

For anyone who had doubts that the JPM CIO debacle was only just starting, the just broken news by Bloomberg that the firm has hired former SEC enforcement chief William McLucas "to help respond to regulatory probes of the firm’s $2 billion trading loss" should put all doubts to rest. Because the last thing JPM needs now is to be perceived as engaging in even more regulatory capture (its current general counsel was also previously a head of enforcement at the SEC) . Yet because it is doing precisely this, means that the offsetting cost, namely the fallout that will be associated with the CIO unwind if and when completed (and we will know for sure when the Q2 earnings are released at the latest), will be fast and furious.

Enron --> Worldcom --> Adelphia --> Lehman --> MF Global --> Greece --> Sino Forest --> ????
We would rank these as some of the more notorious bankruptcies. These weren't normal course of business bankruptcies. These were dark and deviant. They have many similarities. Opaque and convoluted accounting and finances are common to them all.  Whether it was Jedi for Enron, repo 105 for Lehman, or off-market swaps with Goldman for Greece, they all used every trick in the book to keep debt off balance sheet and to obfuscate the risk. It is hard to watch what is going on in Europe and not believe that Greece is just the first of many. Countries and their banks. Countries and their regions. Countries and EU programs. Banks and their national central banks. Banks and the ECB. It is hard to pin down the fatal flaw, but for us it is harder to believe that there is nothing to see there and we should happily move along.

This cannot be the right course for us to take in the wake of such a widely recognized crisis. The lack of purposeful outrage is deafening. We cannot restore lasting stability to our economy and society unless we are willing to face up to what we did wrong, right it, and throw out the bums who put us there. Without that, the pattern of ever escalating crisis and interventionist, market-distorting solutions will surely lead to a bigger crisis still ahead... Perhaps the most important symbol of our failure to address reform are the pictures accompanying much of the coverage of Greg Smith’s letter, those of a power-posing Blankfein and Cohn, who without the Government’s accommodation might be striking a very different pose, indeed. You want to sign on to Mr. Smith’s army in joint distaste for Goldman’s lost culture? Please, be my guest. But more deserving of your enmity is the insidious co-option of the core premise of capitalism by a handful of people to ensure the banks’ undeserved survival, and their managers’ really nice lifestyle.

Until the Congress rectifies the current bankruptcy laws and allows trustees to claw back payments made to secured lenders and other counterparties, there is no reason for any rational personal to allow a broker dealer to hold securities in custody.

Trust Bloomberg's Jonathan Weil to put two and two together, and to remember that everything new is just well forgotten old. In this case Bank of America. And we are not talking comparisons to Lehman (or even SocGen) - those are boring. No, it is much more fun to compare the insolvent bank to another world con, in this case WorldCom. As Weil reminds us, the news that Moynihan's last stand was considering a tracking stock reported earlier by the WSJ, as a means to demonstrate to the Fed its "viability", is nothing short of the comparison of WorldCom's last ditch in kind method, which none other than a WorldCom director likened to, well, horseshit.

In any period of ‘reaching for yield’ the market sees a gradual shift as investors move out the curve, purchase weaker credits, or dabble in structured products. These are not their usual “comfort zone” of investing. Someone used to investing in 3 year risk, is not used to the volatility of investing in 10 year bonds. The investment grade investor may not fully understand the convexity of callable high yield bonds, not the impact of secured loans above you in the capital structure. Worst of all, the straight bond investor who takes a punt on some structured assets may not fully understand the asset and over estimate the liquidity in bad times by orders of magnitude. These shifts are generally very gradual. It takes investors awhile to get comfortable with the increased risk. As the asset class performs, the investor is more confident in their decision making, and likely has even more need to reach for yield, so they add more money to areas outside of their core competency. Then, one day, almost out of nowhere, something sparks a sell-off. It is almost as though one day the asset class is great, the investor is smart, and the next day, the market is selling off and the investor has no idea why. If it was an area they were experts in they might assess the market carefully and decide to retain their position, or even add. But in a market that they don’t have much experience, the declining price creates fear, and ultimately, it is impossible for the investor who reached for a few extra bps to bury the sensation that they could lose far more money than they hoped to make. Those few extra bps, which the investor viewed as so important, just a short while ago, were only available because this investment was MORE risky. That risk now becomes too much and the investor joins the selling parade, creating a sharp sell-off.

Finally, with about a two year delay, popular opinion has finally caught up with the fact that America has an Attorney General, and that Attorney General is not getting paid $186,600 a year merely to conduct medical research on the dangers of carbonite freezing. In its headline article "Prosecutors Faulted for Not Catching Credit-Crunch ‘Bandits’" Bloomberg has done what every other media was supposed to do years ago, namely ask the well-rested Eric Holder what the hell is the reason that not a single criminal investigation being launched against an entire generation of criminal and corrupt bankers (granted, not all of them....just the multi-millionaires). "In November 2009, Attorney General Eric Holder vowed before television cameras to prosecute those responsible for the market collapse a year earlier, saying the U.S. would be “relentless” in pursuing corporate criminals. In the 18 months since, no senior Wall Street executive has been criminally charged, and some lawmakers are questioning whether the U.S. Justice Department has been aggressive enough after declining to bring cases against officials at American International Group Inc. (AIG) and Countrywide Financial Corp." It is stunning that this is only the first time someone in the mainstream media has had the temerity to actually wonder why nobody had previously thawed Holder from his resting place deep in the nether regions of Jaba's barge where his carbonite statue is publicly presented for all to enjoy.

Maybe it’s all the rain lately but my funny bone is tingling. This week the FOMC conducts a two day meeting whereby Fed officials will clarify intentions regarding the perceived closure (or not) of QE2 and the policy body will also address growing concerns (or not) about inflation. To mark a new era in Fed communications, Chairman Bernanke will hold a press conference at the conclusion of the FOMC on Wednesday. This conference has all the makings of its predecessor, historically volatile semi-annual Humphrey Hawkins testimonies on monetary policy in front of Congress. It’s a good thing since in the past month alone sixteen different Fed policymakers (did you know there were that many?) have given more than forty formal addresses, in addition to television, newspaper and newswire interviews. And Congress isn’t in this week.

The confrontations in Wisconsin and other states are the opening salvo of a political blame game -- who is responsible for the gigantic public pension fund deficits that threaten states' solvency and workers' retirement savings?

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer. "Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that." I put down my notebook. "Just that?" "That's right," he said, signaling to the waitress for the check. "Everything's fucked up, and nobody goes to jail. You can end the piece right there." One has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month term, and all this bullshit would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."

If you don't know the stories of LTCM, Enron, Tyco, Worldcom, Adelphia, Global Crossing, the S&L Crisis, how portfolio insurance contributed to the 1987 crash, or countless other investing lessons going back centuries, then you have no business investing your or anyone else's money. Now, it looks like China MediaExpress Holdings is about to become another one of these lessons.

The benchmark for documented mortgage originators' lies is getting higher and higher. First it was the Allstate lawsuit, finding massive fraud in most Countrywide/Bank of America loans, then it was quantified at 70% after Wells Fargo sued JPM's EMC division, now it is all the way up to 91% after a just released lawsuit by the bulk of the world's biggest insurance companies has been made public, in a fresh lawsuit again Bank of America/Countrywide over "Massive mortgage fraud." 

The fact that looking at market performance on a nominal basis (i.e., unadjusted for the decline in purchasing power, or the increase in hard asset prices) is foolish, has recently been understood by even some of the most garish financial tabloids. That said, Ben Bernanke could not be happier if the general public remained broadly dumb about the so-called Zimbabwe phenomenon: i.e. when the stock market goes up by a billion percent, yet purchasing power drops by a trillion. Which is why today we present a visual projection by Sean Corrigan of Diapason Securities, which looks at the S&P on a trade weighted basis, and which looks at the various market cycles not so much from a stock/PE boom-bust basis, but from the view of monetary strength of the underlying currency backing the US stock market, namely the dollar. Corrigan says: "Remember that it never does to get carried away by nominal prices, meaning one should always try to adjust for either or both of currency changes and alterations in the purchasing power of the cash in which an asset is quotes. On that first reckoning, asll you triskaidekaphobes might want to review the prospects for the S&P500, where a 50% loss of dollar-adjusted value over the next year or two, would just be neurologically exact for words." Why 50%? As the chart below shows, a 50% real retracement in stock prices is precisely where the downward channel of the lower lows of the S&P would take us. What that wouold mean is that by October 2012, the S&P will hit approximately a 20 year low. Considering all the monetary fornication that the chairman has embarked on vis-a-vis the middle class and the US currency, we will be lucky if in 2 years the market IS down just 50% adjusted for the amount of KY poured down (or as the case may be, up) the appropriate middle class orifice.