SECTION TWO, PART FOUR

Children of a Lesser God: What I Didn't Tell You. I still haven't forgotten that I promised a European part to the Children of a Lesser God series, but I had another component to my favourite Wall Street house, and we (Australia) had the misfortune of having Lloydy in the country, pontificating on something, this week and he was picked up by the news with the sound-bite that it was risk aversion which was holding back economic growth. I couldn't leave that one on the table without some riposte! Lloydy built his line career skills in the commodities division of Goldmans, and I think specifically in the forex department. In the 80's there was a much more cavalier ( cowboy? ) reputation to the forex markets, where spoofing the market ( by falsely appearing to be a buyer, when really a seller; or spreading research/rumours when you were really in the other side to the transaction; or front running orders...which was even illegal then, but almost unenforceable due to the detection skills of the regulators, which relied almost exclusively on tattle-tails to be willing to adduce evidence) was the quick way to build dis-reputable profits. I suspect Lloydy was exemplary in assisting Goldies, otherwise he wouldn't have mounted the organisational ladder to his current position. I would have thought that risk aversion was a by-product of market participants trying to avoid dealing with Goldies, but there are too many chapters to be filled with those stories. The theme of the "lesser god" series is where lack of access to proper information/regulation, or deliberate use of legal jurisdictional elements create a differing and disproportionately slanted relationship between buyer and seller. Fair enough in the dog-eat-dog world of institutional investing, but what is totally imponderable is why did the regulators let such an egregious abuser as Goldmans escape Scott-free with a banking licence in September 2008, and not Lehmanns, without imposing controls on their prior or subsequent behaviour. The Goldmans diaspora must be a partial explanation, but it cannot be an complete one. The importance of the diaspora in a general sense cannot be underestimated, but the driver will always be money. The Children of a Lesser God moment which I wish to relate is, a number of years ago, the Capital Introductions team at Goldmans were doing a roadshow to raise institutional investor money, of around $1 billion, for a Merger/arbitrage/management buy-out fund called ESL Llc. Now ESL is the acronym of its founder, Eddie Lampert, part of the Goldman's diaspora. At the time of the raising, ESL had a significant holding in Sears, but you had the feeling that Eddie's business was already beginning to struggle, and he was wishing to right size his bets. Forget that the new capital raised was effectively helping Eddie do this; forget that Goldmans were going to receive significant capital raising fees; forget that Goldmans probably had Partners' funds in ESL, and were also downsizing. What I do know, is that as a privately determined unit price, struck just before Sears took a big bath, that anyone buying into that capital raise was going to be a chump....no disclosure/no honesty....who cares, it's a dog eat dog world. And Lloydy wonders why we haven't returned to the halcyon days of 2006 mindless risk taking. Maybe, just maybe, Lloydy, they got sick of the standard practice of two pages of legal disclaimer, without the honesty which should also accompanying dealing with clients...what did fabulous Fab, and Paulson cook up, which wasn't illegal, but certainly was immoral. Maybe, just maybe, Lloydy the clients now want relationships, not just "transactions ". But principally, Lloydy, maybe they just don't trust anymore. When groups behave appallingly, never show remorse, use their diaspora to arbitrarily advantage themselves, and then lobby to maintain an outrageous business positioning, maybe they don't deserve to exist...they have forfeited their social licence to operate, and when the regulators continue to allow that group to operate, they ( the regulators) also need to be replaced with someone/something that understands social obligations. Sure as hell, even in Australia, I am bearing some direct or indirect impost for the taxpayer guarantee that Goldmans received, and I am beginning to think that no taxation without representation is a more than reasonable clarion call. Lloydy, its time to repent! Society deserves better.

DIGRESSION 2A - STAND YOUR GROUND

Children of the Lesser God, Regulatory Failure: An essence of the social contract is that we all agree to the framework, including those assessing the application of regulation. Using the Medieval model, the village/town works because we all accept it. There is no king, or god, or any ruling deity....we exist within this boundary, because we define this boundary. Life following art, the thesis of the current TV concept of "the Dome", society totally self defined, implies that all power is endogenous and does not brook outside influences. But there seems something broadly inevitable about regulators failing to carry out their tasks at present. Case in point, the Fed saying that it will be reviewing the policy on banks' ownership of commodity trading, and related warehousing entities. Unlike FERC, no hairy chested disgorgement action here. Just an examination of the five year grace period as it applies to the investment banks who had received the tax-payer funded lifeline of the banking licence which hadn't been extended to Lehmans. What grace period? The policy that banking entities could not equally own commodity manipulation businesses. If someone had said to me that "you are under a grace period", particularly since my very existence has been preserved through arbitrary largesse of the extension of a banking licence, I would take that to mean I am being granted grace in relation to any commodity related businesses that I had owned PRIOR TO 2008, i.e. the granting of that licence. If I then decided to abuse the privilege by subsequently buying a business which is the subject of some complaints of market manipulation, the I would expect that the benevolent regulator would pull me to one side, and quietly ask me to stop, and to also dispose of my subsidiary. I have abused the benevolence which has been shown to me. BOTH Goldmans and Morgan Stanley are guilty here of buying these types of businesses, post 2008. There is nothing short of regulatory failure here. The Fed has to stand up here, and enforce the social contract. Anything less would mean that not only does the Fed not have the ability to feel sorry for past regulatory oversight, but that when confronted with a policy clear and present danger, it refuses to Stand its Ground. It is a pity that Trayvon Martin was not confronted by similar people.

SECTION TWO, PART THREE

Children of a Lesser God, Crime and Punishment: One of the premiere features of Dostoyevsky's character, Rashkolnikov, was that his gnawing sense of guilt could only be purged by receiving some "proper" punishment, almost in keeping with some social obligation. With almost the fifth anniversary of September/October 2008 upon us, it would be worthwhile to see if punishment has been correctly metered to some of the financial disaster perpetrators, or at least that there would be elements of demonstrable remorse floating around. With four elements of news this week, it seems social obligation has been slaughtered like the old woman, rather than embraced as an appropriate reconciliation. Those four elements are a legal suit against Barclays, legal case against Tourre, Bernanke's testimony to the House, and Wall Street profit announcements. Firstly, Barclays. They are under an action in the US for market manipulation of energy prices in the 2006 to 2008 period, with the remedy sought being a fine, and repayment of "unjust profits". I have no beef about the action, but I find that there seems to be an unequal expectation within this framework that market manipulation seems to be variably defined within the US. They still do not see high frequency trading and dark pools as fundamental to market manipulation, and broadly exercised by all the systemically important banks in the US. If only the punishment of disgorgement of unjust profits has been routinely sought, and enforced. Which brings us to the SEC case against Fabrice Tourre. It should be remembered that the Fab worked for Goldman Sachs, and was seen as instrumental in the Paulson fiasco which constructed products which were deliberately sold to investors, without them being told that the investments were meant to fail. The investors lost over $1 billion, but Goldmans settled for half. Nothing new here, Goldmans have a history of profiting by huge sums, but settling with regulators for part of the "gouge". They don't admit liability, and the regulator does not remove their license......I am not sure where the true corruption is here, but I am sure Barclays could learn a few tricks here from Goldmans. The offensive part to all this, is that we are now five years down the track, and we are getting close to Statute of Limitation restrictions to laying claims against the crooks. Is that a deliberate strategy by the regulators...so that they do not have to adduce evidence in legal actions that they were either negligent, or just too dumb, to properly supervise the financial markets. An "unjust profits" action against Goldmans would be a truly astronomic amount, particularly if it could be back-dated. I would love to see Lloydy in sack-cloth, as much as his operation has imposed on a significant number of clients. Which brings us to the primary regulator, the Fed. Bernanke's testimony was truly embarrassing...the regulator of banks, owned by banks, printing money without knowing how to reverse that policy, imposing the ultimate pain for this (as government debt) on the taxpayers...and his policy: we will keep doing this. Wrong statements, wrong policy targets, and completely adversarial to their sole goal of the preservation of the value of the currency. He talks about mandates, but does not have one...and his research says "you need to keep away from the zero bound". Since when is the sole role of the central bank to create a carry margin for the banks, and then not regulate those banks behaviour. How else can you explain the criticisms by Bernanke himself that some of the last two month sell off in credit markets is caused by leveraged positions. Isn't that what put us here? Which has never been controlled? Does the population not know how appalling they are being treated. My one comfort is that because the US refuses to rein in gun control, that maybe, rather than shoot kids, someone will train their sights on some really uncontrollable bad people who seem to think that they do not have to answer for their theft. And it would all be correct because, under the social contract, there has to be a reciprocal obligation to honour the legal systems, and the burdens that is contained therein...this is the rule of law, but some do not think it applies to them. Which brings us to Wall Street bank announcements. Some of the "surprise" arises from investment profits. With proprietary trading being banished, where do the investment profits come from....oh! Of course, security value assessment. Any Tier 3 stuff here? Profits on long bond securities? Leveraged positions? This is absolutely amazing stuff. When will the world wake up and see that the asset inflation of the last few years is false, with no theoretic foundation. All false! Without being conspiratorial, does anyone think that either recategorising, or lying about economic statistics would be perfectly consistent with the myth of economic improvement, if asset price movement is the sole objective of economic policies. As commented previously, social cohesion is vital, given the track record of previous historical examples of the printing of money. It was the desire for social cohesion which suggested to the Chinese authorities that they encourage such huge financial expansion in 2007/2008, and from this false floor level, countries like Australia were ble to benefit from a massive injection of mineral demand, which through flexible exchange rates, has destroyed -Australian manufacturing. The transmission mechanisms are multiple, and manifest, and still not fully understood or calibrated. BUT, the social contract has, and continues to be, poorly met, because the just and the arbitrary has not been reconciled. Maybe a Truth and Reconciliation Tribunal is required. And it needs to be global. Go on Barclays....you should not feel hidebound by the false legal system that the US projects.

DIGRESSION TWO - REGULATION

Children of the Lesser Gods - Regulation, and its social role. An interesting part of the current debate on the extent and quality of financial market regulation is the way it's sheriffs are themselves non-plussed about the nature of its effectiveness. I have commented previously about the multiple entities which regulate some elements of the Australian system, and those same features - multiple entities for the regulation and control of components of the financial markets - exist in almost all economies. The regulations themselves are legion, from Basel III, to Dodd-Frank, and FATCA, to the clearing house requirements for derivatives. This is, however, all superceded if we have the perpetuation of the globally significant banks/ too big to fail rubric which swamps all of the regulations. The regulation of national financial systems, and arbitrary assessments of what represents national significance, too often invade globally-relevent decisions. The ability of the US, either through its legal systems, or its regulatory system to impose burdens outside its geographic borders has created a cascade of copy-cat inflictions on dispossessed minorities. How else can the dire Cypriot decisions to impose effective penalties against normal bank depositors be otherwise interpreted than as a " who dares, wins" mentality which should over-shadow confidence for a generation. All because the European Union at least has one regard for the solidarity which is required to preserve the value of its currency, and the policy consequences which must flow from that. No such policy in both the USA and, for that matter Australia, where they would rather pass "dire" direct to the taxpayer....while letting the offending banks continue to give outrageous financial rewards to their executives. This is the regulatory effect of the deposit insurance or deposit guarantees for account holders....why, oh why, Australia did you give guarantees to corporate deposits, whilst at the same time those same banks also prevailed upon the Future Fund to take a slab of their wholesale funding needs ( did David Murray, as Chair of the Future Fund, influence any of these investments; why do we let the arrogant ANZ CEO carry on if and when his bank benefited from this 2008 largesse). Taxpayers were potentially on the hook any number of ways....where was the regulatory control here. Where does it exist now! By their nature, regulations are meant to moderate, and give effect to, legislative policy or powers. They tend to be hidden from the public's gaze, because they are technical, or detailed. But the public has a right to expect that they will not be so exercised as to massively increase the burden on those taxpayers without proper inspection, or at least, an appropriate review. The Fed already stands accused of being Semitic.... I leave the taxpayers to assess whether this is the Semitism they wish to pay for. But I, for one, wish to solely ensure that taxpayers have the social contract that they were born into. We did not agree to give unfettered support to banks, especially since they do not feel that they have any social obligation to pay homage to their fall-back options. Regulators have an obligation to be honest....I suspect too many have had " free tickets to the football " from their banking confrederes to properly regulate.

SECTION TWO, PART TWO

children of the lesser god; the ROOL of law: There is a seeming six degrees of separation between an issue ( almost ANY issue ) in the US at the moment, and somebody invoking the phrase "rule of law " as some form of talisman to justify some view, or form of, of action. Using some contemporary issues this week...two explicit, one implicit. Firstly, we should look at the current charge of subversion against Edward Snowden, a former technical exponent at the National Security Agency (NSA), who is seeking political asylum in almost any country. US spokespeople have been quoted as warning prospective grantors that Snowden is a citizen of a country which follows the rule of law, and by implication, he would naturally be treated fairly { and by subtext, you will be aggravating the US if you grant the leaker/whistleblower his request, given that he is accused of leaking material about the US's surveillance efforts against it European allies .... That is, the US's national interest is more important than other national interests }. To escalate the invocation, we have the President of the US suggesting that Egypt should return to the rule of law as quickly as possible. Of course the issue here is that Egypt is struggling to deal with multiple social challenges, one of which....the government voted in last year, has now fallen foul of not delivering to public perceptions, and after social protest, the military has asked the leader to step down while a new arrangement is put in place. Part of the process is that the government was being too slow at combatting entrenched special interest corruption. Of course, at the heart of this is...What is the rule of law? This is the social construct which organises society so that, under the faith system that says fairness/equality/justice/trust/honesty are exercised by government/institutions/courts, then I will exercise my control, and live in this society. I will not seek retribution against my neighbour for physical or financial harm, but rely on the legal system to deliver appropriate remedy or punishment for any wrongs, either arbitrary or negligent. Now for the implicit one: a number of banks in the US are complaining that the currently proposed capital requirements are unfair, because it will place them at a competitive disadvantage to the international system, because it gives them less to loan to potential customers. Not to be cute, let's name a few of those banks who are classified as globally significant: JP Morgan, Citigroup, State Street, Goldman Sachs, Morgan Stanley,etc. The global significance classification must be some strange USA definition....I do not understand it. The only significance seems to be the largesse that they received a few years ago......didn't Goldmans get a belated banking licence, so that they didn't have to follow Lehmans: didn't JP Morgan get classified as the agent provocateur for the merger/acquisition will to power of the FDIC/Department of the Treasury, by taking over Bear Stearns, and Washington Mutual: didn't State Street arbitrarily decide that cash funds can impose redemption freezes despite the dumb investments being by them, not their clients ( maybe the clients were the dumb ones after all!): didn't Morgan Stanley launch some highly leveraged wholesale funds: didn't Citigroup get nationalised in everything but name. Aren't a lot of these globally significant banks also being challenged by the European Union because they were trying to stop competition a few years in the trading of Collateralised Debt Securities by the exchanges.....these were the price-by-appointment securities which destroyed bank and other investor balance sheets a few years ago. But the real ROOL of law is this. Washington Mutual was one of those almost missed features of those particular hectic weeks of September 2008, where contingency over-ruled equity. Didn't JP Morgan get, effectively, a national retail banking network, at a time when retail deposits were better than gold.....(who did take their deposits out of WaMu in that final fatal few weeks?): did Goldman's have any short positions in WaMu prior to both its demise, and the freeze on short positions in financial stocks came into force. Didn't both the equity holders and the senior debt owners in WaMu take horrendous losses? Was the Bank of Ireland one of those debt holders.? Hadn't the Irish Government guaranteed their banking sector debts. So does that mean that the potato growers , and Corrs lovers, indirectly sponsored the acquisition of a cheap national retail branch network by JP Morgan. How silly of me..that must be what is meant by globally significance..able to gouge globally, while being laxly monitored by an unaccountable Federal Reserve system, whose sole role is to undermine its own currency, and create massive moral hazard for policies it does not know how to reverse. A number of seriously bad decisions were made in 2008/2009, for which no apology has been made, but which seem to have been treated as If they never happened. How could Dimon get away with the justification about their trading losses last year? The USA seems to think that subversion is a government owned concept - ask Indonesia, when despite whether they thought it a good idea, the US disagreed with that country's toying with communism last century. When the rule of law has no relevance, then it is replaced by the law of the jungle. Children of Lesser Gods shouldn't only exist in countries other than the USA. Social cohesion seems poorly served at present.