OTC

How The U.S. Will Become a 3rd World Country (Part 2)

The United States increasingly resembles a 3rd world country in terms of unemployment, lack of economic opportunity, falling wages, growing poverty and concentration of wealth, government debt, corporate influence over government and weakening rule of law. Federal Reserve monetary policies and federal government economic, regulatory and tax policies seem to favor the largest banks and corporations over the interests of small businesses or of the general population. The potential elimination of the middle class could reshape the socioeconomic strata of American society in the image of a 3rd world country. It seems only a matter of time before the devolution of the United States becomes more visible. As the U.S. economy continues to decline, public health, nutrition and education, as well as the country’s infrastructure, will visibly deteriorate. There is little evidence of political will or leadership for fundamental reforms. All other things being equal, the U.S. will become a post industrial neo-3rd-world country by 2032.

A Hedge Fund Insider Explains Why Retail Investors Should Flee The Stock Market

Regular readers know that ever since 2009, well before the confidence destroying flash crash of May 2010, Zero Hedge had been advocating that regular retail investors shun the equity market in its entirety as it is anything but "fair and efficient" in which frontrunning for a select few is legal, in which insider trading is permitted for politicians and is masked as "expert networks" for others, in which the government itself leaks information to a hand-picked elite of the wealthiest investors, in which investment banks send out their "huddle" top picks to "whale" accounts before everyone else gets access, in which hedge funds form "clubs" and collude in moving the market, in which millisecond algorithms make instantaneous decisions which regular investors can never hope to beat, in which daily record volatility triggers sell limits virtually assuring daytrading losses, and where the bid/ask spreads for all but the choicest few make the prospect of breaking even, let alone winning, quite daunting. In short: a rigged casino. What is gratifying is to see that this warning is permeating an ever broader cross-section of the retail population with hundreds of billions in equity fund outflows in the past two years. And yet, some pathological gamblers still return day after day, in hope of striking it rich, despite odds which make a slot machine seem like the proverbial pot of gold at the end of the rainbow. In that regard, we are happy to present another perspective: this time from a hedge fund insider who while advocating his support for the OWS movement, explains, in no uncertain terms, and in a somewhat more detailed and lucid fashion, both how and why the market is not only broken, but rigged, and why it is nothing but a wealth extraction mechanism in which the richest slowly but surely steal the money from everyone else who still trades any public stock equity.

Hank Paulson Tipped Off The Goldman-Led "Plunge Protection Team" About Fannie Bankruptcy 7 Weeks In Advance

Today, BusinessWeek's Michael Serrill and Jonathan Neumann have released a blockbuster report based on a FOIA response by the Treasury, which proves that in America rules are only for little people, that this country has been a banana republic for years, that Animal Farm was spot on, and gives excruciating detail of how Hank Paulson tipped off a select group of Goldman diaspora hedge fund managers about the eventual failure of Fannie and Freddie 7 weeks ahead of this information becoming public knowledge. The report basically is a summary of a meeting that took place at the offices of Eton Mindich's Eton Park headquarters on July 21, 2008, 7 days after his famous '“If you have a bazooka, and people know you have it, you're not likely to take it out," speech and 7 weeks before both GSEs effectively filed for bankruptcy and were put into conservatorship. Now if it only ended there it would have been fine - a case of potential criminal collusion between the government (although nothing specific against Paulson as he didn't actually trade: he just made sure his former Goldman colleagues made money), and the 0.00001% in the face of a few multi-billionaires who most certainly did trade on material non-public information sourced by Hank. Where it however gets worse is when one considers the actual role of one Eric Mindich in the hierarchy of the Asset Managers' committee of the President's Working Group on Capital Markets, better known of course as the PPT: a topic we discussed first back in September 2009 when we asked "What Is Goldman Alum Eric Mindich's Role As Chair Of The Asset Managers' Committee Of The President's Working Group?" Back then we did not get an answer. Luckily, courtesy of a few answered FOIA requests, some real investigative journalism, and not reporting for the sake of brown-nosing just so one can get soundbites for their next name dropping "blockbuster" and straight to HBO movie, we are starting to get the full picture of just how high in US government the Goldman Sachs controlled "crony capitalist" adminsitration truly runs.

$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months

While everyone was focused on the impending European collapse, the latest soon to be refuted rumors of a quick fix from the Welt am Sonntag notwithstanding, the Bank of International Settlements reported a number that quietly slipped through the cracks of the broader media. Which is paradoxical because it is the biggest ever reported in the financial world: the number in question is $707,568,901,000,000 and represents the latest total amount of all notional Over The Counter (read unregulated) outstanding derivatives reported by the world's financial institutions to the BIS for its semi-annual OTC derivatives report titled "OTC derivatives market activity in the first half of 2011." Said otherwise, for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high. What is probably just as disturbing is that in the first 6 months of 2011, the total outstanding notional of all derivatives rose from $601 trillion at December 31, 2010 to $708 trillion at June 30, 2011. A $107 trillion increase in notional in half a year. Needless to say this is the biggest increase in history. So why did the notional increase by such an incomprehensible amount? Simple: based on some widely accepted (and very much wrong) definitions of gross market value (not to be confused with gross notional), the value of outstanding derivatives actually declined in the first half of the year from $21.3 trillion to $19.5 trillion (a number still 33% greater than US GDP). Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the (previously) $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows. Because derivatives in addition to a core source of trading desk P&L courtesy of wide bid/ask spreads (there is a reason banks want to keep them OTC and thus off standardization and margin-destroying exchanges) are also terrific annuities for the status quo. Just ask Buffett why he sold a multi-billion index put on the US stock market. The answer is simple - if he ever has to make good on it, it is too late.

Muddy Waters Releases 80 Page Report Disclosing Latest "Strong Sell" Target: Focus Media (Nasdaq: FMCN)

If Sino Forest is any indication, the $3 billion market cap company is about to have a B -> M market cap transition. The reason: Muddy Waters just said FMCN could be the next Olympus: "FMCN has been fraudulently overstating the number of screens in its LCD network by approximately 50%. This is similar to China MediaExpress Holdings, Inc. (OTC: CCME), which we reported is a fraud on February 3, 2011. We therefore question whether FMCN’s core LCD business is viable."  From the report: "Muddy Waters rates Focus Media Holding Ltd. (NASDAQ: FMCN) shares a Strong Sell because of significant overstatement of the number of screens in its LCD network and its Olympus-style acquisition overpayments. The $1.1 billion in write-downs from its acquisitions exceed one-third of FMCN’s enterprise value, making FMCN’s acquisitive behavior more destructive than Olympus’s to shareholder value. FMCN insiders have sold at least $1.7 billion worth of stock (two-thirds of FMCN’s enterprise value) since FMCN’s IPO. At the same time, the insiders and their business associates further enrich themselves by trading in FMCN assets, while costing FMCN shareholders substantial sums of money."

Print, Rally, Then What?

The demand that the ECB becomes the lender of last (and only) resort has reached a crescendo.  Virtually everyone in the world is pleading with Germany to allow the ECB to print money and buy massive amounts of Spanish, Italian, Portuguese, Irish, Belgium, and possibly Austrian debt.  But as far as I can tell, the analysis doesn’t go beyond buy and the problem will be solved.Before taking the step to print, all that we can hope for is that someone will actually do some serious analysis of the potential consequences, beyond the immediate relief rally.It may be the best solution, but until I see some real analysis convincing me the consequences of printing have been thought out, we will remain in the camp that letting some defaults, break-ups, write-downs, is the best longer term solution in spite of short term pain.

Dark Pool Flush: Game Over Pipeline; Next Up Goldman's Sigma X?

For years Zero Hedge has been exposing the persistent fraud that goes on behind the trading scenes, not only in High Frequency Trading, but also in various dark trading venues, known better as dark pools where exchanges, typically the banks themselves get to match buyers and sellers without any indication of a trade having occurred, until much later if at all. Recently, and very much as we expected, trading firm Pipeline was smacked down by the SEC for gross violation of customer orders, an offense which can be summed up simply as: frontrunning. We now learn that, as the Wall Street Journal reports, Pipeline is pretty much finished after the Chairman and CEO have both quietly left the sinking ship. The WSJ adds: "The case was the SEC's first enforcement action involving dark pools, and it shocked the trading community, according to traders and other operators of electronic-trading systems. People who know Messrs. Berkeley and Federspiel said they were highly regarded among their peers. Mr. Berkeley was a former president and vice chairman of the Nasdaq Stock Market. Mr. Federspiel once worked at the Los Alamos National Laboratory as a nuclear physicist." Well, we certainly were not shocked, having predicted the demise of dark pools as early as the summer of 2009.  What will shock the trading community, however, even more is if the SEC decides to go after not some tiny unknown firm, but the real dark pool transgressors, the biggest one of which is and has always been Goldman's Sigma X. Of course for that to happen, Mary Schapiro would actually have to do her job. And that, unfortunately, ain't happening.

ISDA CEO Stepping Down

Wait, what's that? CEO leaving after his CDS-(non) triggering determination practices brought down the Eurozone? What a stunner:

  • ISDA CEO STEPPING DOWN
  • ISDA SAYS VOLDSTAD WILL BE REPLACED AS CEO BY PICKEL

Luckily, since this is a voluntary action, no CDS written on Voldstad will be triggered and thus no severance will be due and payable. Right? In all seriousness, this means that the idiotic no-trigger determination will be reversed right? We can't wait for the snarky post on the ISDA blog explaining this debacle.

Guest Post: Too Big to Fail: Championing the Slow Decline

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The recent implosion of MF Global has reignited the debate over Too Big to Fail (TBTF) and the adequacy of U.S. regulatory safeguards. It has also contributed to a broader decline in investor sentiment, many of whom believe the market structure does not afford them sufficient protection and fair competition. Many MF Global clients still have assets frozen and even if they ultimately recover the money, the short-term consequences can be devastating.  Historically, when firms fail to generate a profit or when one division damages the revenue stream of the whole firm the unprofitable assets are divested.  Companies that can’t operate under the weight of their own size end up spinning off the parts that caused the pain. This is normal in the business cycle. The government has disrupted the business cycle of creative destruction by championing TBTF firms over a more competitive market.

Dexlexia, Scrabble Countries, And Humpty Dumpty

After another weekend on headlines coming out of Europe stock futures are up nicely and credit, while better, isn’t performing quite as well and sovereign debt yields are up across the board.  After a quick glance at the credit markets and the headlines, it seems once again that equities have gotten ahead of themselves.