Reader Threatens To Sue Fed After Losses Incurred By Going Long Inverse Leveraged ETFs

Remember when double and even triple inverse leveraged ETFs were all the rage? That all occurred in the brief period of time before it became clear that Bernanke would first take down the global financial system before he let Citi get back to $1/share again. Apparently one reader recalls it all too well: "In 2008 at the bottom of the market I sold positions I owned in physical gold and banks stocks such as Bank of America (BAC), Citigroup (C) and also non financial companies such as Ford (F). I used these proceeds to purchased inverse ETF’s such as NYSE: FAZ (Direxion Financial 3x Short) and NYSE:SRS (Proshares Real Estate 2x Short). Since making these purchases, these ETF’s have suffered significant drops in value as reflected in their price. In fact NYSE: FAZ has plummeted from $1100 per share to $11 per share and SRS has reduced in price from $1000 per share to $19.50 per share. It is now apparent that the Fed spent trillions of dollars to raise the price of bank stocks and to inversely suppress the price of these inverse ETFs." Yet is this nothing but a case of fippers' remorse? Is there legal precedent for an actual claim? Was the Fed in breach of duty "by allowing investors to make investments into funds such as FAZ and SRS and other inverse ETF’s, while the Fed was performing transactions that the Fed knew or should have known would severely harm the investors in these publicly traded fund." Will Bernanke cave and make whole everyone who dared to put money into the market, even if it meant betting on a broad market decline? After all the whole purposes of the latest propaganda campaign is to get people to put money in the market with no fear of loss whatsoever: whether one is bullish or bearish (and as the lack of participation shows, most are certainly still bearish). Which is where it gets interesting: "Therefore, I appeal to your office to make due and just compensation in treble damages amounting to $__ million dollars for a full and good faith settlement of this matter. If this is agreeable, I am prepared to enter into a confidential good faith settlement." In our ridiculous bizarro world, in which nothing makes sense following each recurring Fed intervention, perhaps the Fed making whole those who lose money regardless of their bias, is just what is needed to break the 33 weeks of outflows...

David Rosenberg On Perception Versus Reality

We have already broadly discussed the recent euphoria in the market which especially in the Nasdaq has hit 5 year+ extremes. And as always in times of such irrational exuberance, the disconnect between perception and reality is truly astounding. David Rosenberg presents his views on the latest developments in the market's ongoing fight with manic-depressive disorder.

Rosenberg On Why Fighting The Fed In Real Terms Has Been Very Successful

Today, David Rosenberg has some good commentary which proves that those who say to not fight the Fed, may be 100% wrong when it comes to fighting adjusted for inflation, or as the case may be - deflation (conveniently, few talk about what bothers even seasoned hedge fund managers such as David Einhorn - i.e., "corn and oil"). And Rosie is spot on: the deflation in all credit-intensive purchases is accelerating, and will accelerate because the only thing that matters, as we have claimed for over a year, is the shadow capital/credit contained in the shadow banking system. That is the number that is collapsing at a rate of more than half a trillion per quarter. No matter what Bernanke does to M2 will even remotely offset this deleveraging deluge. Which is why we have long claimed that the only trump card Bernanke has is to devalue the dollar (both relative to other currencies and absolutely - relative to gold) to the point that its fate as a reserve currency is imperiled, ostensibly leading to a monetary crisis. One is free to name the resulting chaos in dollar denominated prices as one sees fit. But the bottom line is that as long as the shadow banking system continues to contract, which it will for years as the bulk of the funding came from European and Japanese banks: both of which are now gripped in austerity, and not really flooded with leveraged depositor money, everything else is merely a short-term blip on a long-term decline in both economic output and market terms. Also known as noise.

Vitaliy Katsenelson's picture

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. … the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

Frederic Bastiat (1801-1850)

Value Expectations's picture

The third annual ranking of the chief executive/applied finance group wealth creators—and destroyers—sees new contenders surface and several that sustained performance through tough times.
Now in its third year, the wealth creation index developed by Chief Executive, Applied Finance Group and Great Numbers! attempts to identify those business leaders who have performed best in creating true economic value—as opposed to mere accounting value—as measured by GAAP metrics.

Daily Highlights: 11.4.2010

  • BOJ confronts two-decade land slump with planned purchase of REITs, ETFs.
  • U.S. sales of cars and light trucks rose 13.4% in October from a year ago.
  • AES's Sept. net income declines from $185M to $114M.
  • Aetna's net rose 53% on invt gains, lower costs. Ups 2010 EPS view to $3.60 (prev $3.05-3.15).
  • Alcatel-Lucent Falls on lower-than-expected operating margin
  • Amdocs sees Q1 EPS at $0.49-0.58 (cons $0.60); revs of $760-780M (cons $774.39M).
  • Becton Dickinson reports in line; posts Q4 EPS of $1.24, Revs up 1% at $1.87B.
Reggie Middleton's picture

Reggie Middleton with the rather animated Max Keiser (the guy actually had a Lloyd Blankfein action figure for waterboarding) on the Keiser Report Discussing Banks, Oligarchs, Fraudclosure & Derivative Exposure. Also included - how Britain is avoiding confrontation with suicide bankers who took down the financial system "for kicks". If you guys think I'm offensive, you ain't seen nothing yet. Regular ZHers will probably enjoy the whole thing. Those in the banking industry should just fast forward to my portion so you can just harshly disagree vs being thoroughly offended :-)

Japan Decision To Allow BOJ To Monetize ETFs, REITs And BBB-Rated Bonds Sends Yen Higher, Gold Spikes

Earlier, the Japanese government approved the BOJ decision to monetize in addition to the traditional JGB securities, also ETFs, REITs, and BBB and higher-rated bonds. In other words, the BOJ is now permitted to do what the Fed will have authority to do with a few months: buy virtually all risk assets, as buying ETFs is the same as buying the general market courtesy of the most traded security in the world, SPY, to push and pull the entire market in whatever direction it goes. There are two questions at this point: is the BOJ allowed to buy foreign (read US) assets that fall under the above buckets, and whether the FX currency swap line recently established with the BOJ will allow the Fed to use Japanese proxies to monetize various US assets. Or will the Fed first seek input from the BOJ on how to proceed with sending the Dow to 36k.

MERS Fraud Impact On CMBS: Up To $280 Billion Per Barclays

Two weeks ago we first touched upon a key tangential topic of the whole mortgage mess, namely the implication of what potential MERS fraud means for Commercial Mortgage Backed Securities. Well, the topic which has so far avoided broad media attention to the benefit of all CMBS holders may be about to go mainstream. As part of our initial inquiry, we asked: "If residential mortgage foreclosures are being halted and if the very fabric of the MBS securitization architecture is put into question, when will someone ask whether MERS® Commercial allowed such pervasive title fraud as is now apparently ubiquitous in the residential space, to take the CMBS space by storm, and how many billions in dollars will Banc of America Securities, Bear Stearns (d/b/a JP Morgan), GE Capital Real Estate, GMAC Commercial, John Hancock and Wells Fargo be forced to buy back loans that were fraudulently certified." Our question is now being reiterated by Barclays Capital. Next up Bloomberg, Ratigan, and everyone else.

Moody's Commercial Property Price Index Drops 3.3% In August, At Lowest Level Since 2002

Luckily the banks don't care about that $3 trillion footnote on their balance sheets known as CRE. Because if they did, they would all be insolvent: the Moody's REAL/Commercial Property Price Index index dropped by 3.3% in August, and is now 45.1% lower compared to the October 2007 peak. The attached chart says it all, or almost all - it actually says nothing about why banks are still trading at positive equity values.

Goldman Warns On The (Hyper)Inflationary Consequences Of A Successful QE2

One of the more devious consequences of QE2, is that it carries the seeds of its own destruction with it. Namely, if after flooding bank basements with another $2 trillion in excess reserves, and if bank lending picks up, suddenly the amount of currency in circulation will explode by over 300% from under $1 trillion to around $4 trillion. And while a comparable increase in wages is certainly not guaranteed to occur concurrently, what this explosion in the free money will do is lead to a very rapid and drastic destabilization in the concept of a dollar-based reserve currency. The only thing that could prevent this are the Fed's mechanisms to extract liquidity from the system. Alas, the IOER process is very much unproven, and should animal spirits kindle at the peak of the biggest liquidity tsunami in history, that money will inevitably make its way to Main Street, not Liberty 33. All this has made Goldman's Ed McKelvey warn that should increased bank lending be the end result of QE2 (and ultimately that is precisely what it should be, as that would be indicative of a healthy economy), then, to put it so everyone will get it, "this would cause too much money to chase too few goods." And, as liquidity extraction then would likely be impossible, it would be the beginning of the end: "The obvious risk to this last point is if inflation expectations surge. In a stronger growth environment than now prevails, such a surge could prove difficult to control. It would require Fed officials to remove the liquidity quickly, which is why they will concentrate on purchases of Treasuries (easier to sell back into the market) and remind us continually of the tools they have developed to withdraw the liquidity (by periodically using them in small size)." Too bad the Fed will soon be forced to buy MBS (again), REITs, ETFs and pretty much everything else.

Reggie Middleton's picture

Before I release my opinion of JPM's most quarterly results, I want to demonstrate the risk that banks take in releasing provisions to boost accounting earnings in this environment. After reading this in its entirety, JPM shareholders should be infuriated at JPM management's actions, which are sure to be reversed in the near to medium term. It is not as if the accounting earnings boost has fooled anyone and lifted the stock, which is currently down on an up day.

Econophile's picture

The recovery of the economy depends on several important factors, but the recovery of the real estate market is near the top of the list, especially commercial real estate (CRE) because most of America's banks are loaded down with CRE debt. Here is a current assessment of the state of the CRE market.