Squids Go Criminal

Baltic Dry Index. 3329 +126 (April 28.)

LIR Gold Target by 2019: $3,000.

A permanent Governor of the Bank of England would be one of the greatest men in England. He would be a little `monarch` in the City; he would be far greater than the `Lord Mayor.` He would be the personal embodiment of the Bank of England; he would be constantly clothed with an almost indefinite prestige. Everybody in business would bow down before him and try to stand well with him, for he might in a panic be able to save almost anyone he liked, and to ruin almost anyone he liked. A day might come when his favour might mean prosperity, and his distrust might mean ruin.

Walter Bagehot. Lombard Street. 1873.

We open this morning for our May Day holiday weekend, with news that the great vampire squid is now under criminal investigation in America. News sure to increase Goldie’s problems in Europe, once Caesar Rompuy and the myriad of bureaucrats return to work sometime around mid May. Paranoia moves up several notches at the home of the squids. Who’s wired, who’s cooperating, and which phones are safe to use? Did everyone declare all on their taxes? For the clients of course, it’s a double edged sword. While the prospect of Goldman wrongdoing creates the chance that Goldie’s clients might get some of their embarrassing billion dollar losses back, a criminal investigation might mean some or all of them are on tape.

The whole history of civilization is strewn with creeds and institutions which were invaluable at first, and deadly afterwards.

Walter Bagehot.

APRIL 29, 2010, 9:41 P.M. ET
Criminal Probe Looks Into Goldman Trading
Federal prosecutors are conducting a criminal investigation into whether Goldman Sachs Group Inc. or its employees committed securities fraud in connection with its mortgage trading, people familiar with the probe say.

The investigation from the Manhattan U.S. Attorney's Office, which is at a preliminary stage, stemmed from a referral from the Securities and Exchange Commission, these people say. The SEC recently filed civil securities-fraud charges against the big Wall Street firm and a trader in its mortgage group. Goldman and the trader say they have done nothing wrong and are fighting the civil charges.
http://online.wsj.com/article/SB10001424052748703572504575214652998348876.html?mod=WSJ_hps_MIDDLETopStories

While Greece leads Europe boldly into the brave new age of austerity, both Germany and Britain, among others, will be cutting back and raising taxes starting in the second half of 2010 and into 2011, in the USA a million are about to lose their unemployment benefits, with Goldman estimating that soon that will rise by 400,000 a month. Bad things lie directly ahead, I suspect. Why bailout the banksters and not me, will soon be a populist rallying cry that’s hard to rebut in the face of a Roman style mob. Below, Bloomberg covers the worrying story. The recovery that isn’t, is on the edge of a precipice on both sides of the Atlantic.

Poverty is an anomaly to rich people; it is very difficult to make out why people who want dinner do not ring the bell.

Walter Bagehot.

More Than a Million in U.S. May Lose Jobless Benefits
April 29 (Bloomberg) -- Since the U.S. recession began in December 2007, Congress has extended the length of unemployment benefits for the jobless three times. Now, the lawmakers may have reached their limit.

They are quietly drawing the line at 99 weeks of aid, a mark that hundreds of thousands of Americans have already reached. In coming months, the number of those who will receive their final government check is projected to top 1 million.

It’s a deadline that has rarely been mentioned in recent debates over jobless benefits, in which Republicans have delayed aid because of cost concerns. The deadline hasn’t been lost on Teauna Stephney, a 39-year-old single mother from Bothell, Washington, who said she could become homeless once her $407 weekly checks stop in June.

“What are people like me supposed to do?” said Stephney, who said almost two years of benefits haven’t proved long enough for her to find work after she lost her last job in August 2008. Referring to lawmakers, she said, “I would like them to come and talk to me and spend a day in my shoes.”

-----“We have study after study that shows people are more anxious to get a job after they run out of benefits,” said Representative John Linder of Georgia, the top Republican on the Ways and Means subcommittee with jurisdiction over the unemployment program. “Continuing to extend this isn’t helping them or us.”

Allowing the ranks of those who lose their aid to swell carries risks for Democrats in November’s elections.

“They’re damned if they do and damned if they don’t,” said Stuart Rothenberg, publisher of the Rothenberg Political Report. Voters are “sensitive these days to spending and deficit issues and yet there are going to be people who need help, and if the administration ignores them, they’ll look rather callous.”

Negative ‘Atmospherics’

Baucus said extension legislation would fail in the Senate because of both the deficit and the negative “atmospherics” of lengthening the weeks of aid into triple digits.

“The best thing to do is get this economy turned around” to create jobs, said Baucus.

-----Since the recession began, aid extensions added 53 weeks of assistance to the 46 weeks that had been in place. About 11 million Americans, roughly 70 percent of the nation’s jobless, in March received unemployment checks averaging $320 per week.

The challenge for lawmakers is that while benefits have reached record lengths, so has long-term unemployment. According to the Bureau of Labor Statistics, 44 percent of the jobless have been out of work for at least six months, the biggest share since the government began keeping track in 1948.

3.4 Million

About 3.4 million Americans -- approximately the population of Connecticut -- have been out of work for more than a year, according to a study by the Pew Fiscal Analysis Initiative.
The states, not the federal government, track how many exhaust their unemployment benefits, said U.S. Labor Department spokesman Matthew Wald.

Interviews with state officials found that in New York, 57,000 people have received their last check. In Florida, 130,000 are no longer eligible as are about 30,000 Ohioans.

Those numbers will grow, according to Goldman Sachs Group Inc., which projects that more than 400,000 may soon begin losing benefits every month.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a8qJXfNS3RaQ&pos=7

King: Election winner will be out of power for a generation
By Edmund Conway Economics Last updated: April 29th, 2010

Whichever party wins this election will have to inflict such painful austerity measures on the British population that they will soon find themselves out of power for a generation. Not my words, the words of Mervyn King, Bank of England Governor.

Or so says American economist David Hale, who says King confided this with him over lunch last week.

To be precise, he said: “I saw the Governor of the Bank of England last week when I was in London and he told me whoever wins this election will be out of power for a whole generation because of how tough the fiscal austerity will have to be.” Ouch.

Now, based on precedent, the chances are that King will deny these remarks (and be pretty furious that Hale has blurted them out in an interview in Australia). Moreover, I happen to know King was out of London most of last week (first on holiday, then at the G20 meetings in Washington) so quite when this lunch happened is unclear. Though I understand they certainly have met.

However, leaving this inconsistencies aside, the comments do seem plausible: King has said repeatedly that the Government will need to impose far more ambitious cuts on the deficit than it currently plans. The comments ought to stand as a reminder that although the focus of the election has switched away to bigotgate, and the economic focus worldwide to the eurozone malaise, Britain faces a decade of hurt in the wake of its decade of debt.

The Institute for Fiscal Studies spelt it out earlier this week in typically frank terms. Labour and the LibDem plans imply the biggest squeeze on public services since the 1970s, when the IMF was in town. The Tory plans imply the biggest set of cuts since records began in 1948.
http://blogs.telegraph.co.uk/finance/edmundconway/100005270/king-election-winner-will-be-out-of-power-for-a-generation/

Next, the ex Bank of England Dutchman, Willem Buiter, now dancing away at Citi, suggests that the Fed is the most likely central bank to try "inflationary monetisation of public debt and deficits." Stay long gold and silver, but far from the reach of Uncle Sam and John Bull. That’s a polite way of saying the fiat money, dollar reserve standard is about to end in the Great Inflation. Below Zero Hedge covers Mr. Buiter’s scary analysis. Below that, the link to where it can be found on the new LIR blogsite.

Willem Buiter Issues His Most Dire Prediction Yet: Sees "Unprecedented" Fiscal Crises, US Debt Inflation And Fed Monetization
Submitted by Tyler Durden on 04/29/2010 08:48 -0500

---- Which is why we were very surprised when we read Willem Buiter's latest Global Economic View (recall that he works for Citi now). In it the strategist for the firm that defines the core of the establishment could not be more bearish. In fact, at first we thought that David Rosenberg had ghost written this. Once the apocryphal truthsayers such as Buiter become mainstream within the mainstream, it is only a matter of time before the marginal opinion shifts to match that of those who have been prognosticating doom all along (for all the right reasons). In the below piece, Buiter presents a game theory type analysis, which concludes that the US and other sovereigns will soon be forced into fiscal austerity. Among his critical observations (we recommend a careful read of the entire 68 pages), are that the US is highly polarized, and that the Fed, which is "the least independent of leading central banks" would be willing to implement "inflationary monetisation of public debt and deficits than other central banks." The next step of course would be hyperinflation. And Buiter sees America as the one country the most likely to follow this route. Most troublingly, Buiter predicts that a massive crisis is the only thing that can break the political gridlock in the US in order to fix the broken US fiscal situation. Must read.
http://www.zerohedge.com/article/willem-buiter-issues-his-most-dire-prediction-yet-sees-unprecedented-fiscal-crises-rampant-u

Soveregn Debt Problems in Advanced Industrial Countries.
http://londonirvinereport.blogspot.com/p/intraday-news.html

We end for the week with those dodgy Swiss. No it’s not UBS again, playing fast and loose with America’s optional laws, this time it looks like an open and shut case of plagiarism. Heidi is really Adelaide and German, but at least she wasn’t Australian I suppose.

April 29, 2010
The greatest blow to Swiss national pride: Heidi may be German
Switzerland’s international image has been taking a battering. Banking secrecy is a thing of the past. The traditionally tolerant nation has voted to ban minarets. Even Swiss army knives, the Alpine republic’s contribution to global security, are confiscated and binned at airports.
But the Swiss have always been able to count on Heidi. The frisky fictional orphan has been hopping and skipping down mountain slopes ever since Johanna Spyri wrote her children’s book in 1880 — Heidi’s innocence and love of the Alps, her modesty and her love of her grandfather are regarded as quintessentially Swiss.

“Heidi is the most prominent Swiss brand in the world,” says the film producer Lukas Hobi, who is making a 3D film about the pig-tailed heroine, a kind of Avatar with goats.

The problem is that Heidi may in fact be German. According to the German (but Zurich-based) researcher Peter Buettner, Johanna Spyri may have lifted some of the ideas, phrasing and narrative structure from the work of Hermann Adam von Kamp, a 19th-century German from Mülheim, now a smokey un-Heidiesque place. His Adelaide, the Girl from the Alps, was written fifty years earlier and even angry Swiss critics admit that Spyri may have read the book.

“I immediately noticed the same narrative structure: a little girl brought up by her grandfather, who left her homeland and grew unhappy abroad until she could come home,” says Mr Buettner. The name Heidi derives from Adelaide or Adelheid. Some of the vocabulary is very similar. Adelaide picks violets. Heidi gathers up unspecified flowers. Adelaide’s cheeks “glow red”. So too do Heidi’s.

And at least one key scene from the German work re-surfaces in the Swiss classic. In the German version Adelaide is offered a bag of money by her grandfather.

“O, keep it for yourself, said Adelaide. I don’t go shopping. And you give me so much.”

The Swiss classic has an almost identical exchange.

“I really don’t need it grandfather, said Heidi ... take it, take it and put it in the cupboard, you will surely need it.”

Naturally Swiss parents linger on this passage when reading to their children: it may just have been the last time that a Swiss child turned down a cash present from a relative.

So is Heidi about to go the way of other Swiss icons, devalued by the Germans, their more powerful northern neighbours? Tensions are already running high. It has been the Germans who have been most active in cracking open Swiss banking secrecy, buying up apparently stolen files of numbered accounts belonging to tax-dodging German clients. One German minister suggested that Berlin’s role was to act as the US cavalry riding out to bring order among the Apaches. The Swiss did not like the image.
http://entertainment.timesonline.co.uk/tol/arts_and_entertainment/books/article7111662.ece


Oh what a tangled web we weave…..

Sir Walter Scott.

At the Comex silver depositories Wednesday, final figures were: Registered 51.17 Moz, Eligible 63.83 Moz, Total 115.00 Moz. The bean counters seem to be on a bender again.

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Crooks & Scoundrels Corner.

The bent, the seriously bent, and the totally doubled over.

Yes it’s the great vampire squid again. One pre inquisition, held over article from the infamous Michael Lewis at Bloomberg. Well worth clicking on for the whole hilarious article. The other post inquisition peeling apart the smoke and mirrors aka deception.

“The current political-economic system is simply unsustainable; no economy can afford to pay for four giant zombie financial institutions, two substantial military adventures, a zombie-driven housing market, an exploding health-care bill and Goldman Sachs partners' lifestyle aspirations.”

Martin Hutchinson. November 23 2009.

Bond Market Will Never Be the Same After Goldman: Michael Lewis
April 22 (Bloomberg) -- If you happen to be sitting on the Goldman Sachs bond-trading floor life must feel horribly unfair.

You did nothing worse than live by the ethical assumptions of your market -- any money-making event short of obviously illegal is admirable -- and now your own grandfather thinks you’re some kind of monster. Your world feels upside down: What was right is now wrong; what was good is now bad; what once felt like winning now feels like losing.

You are probably wondering: What next? What will the angry rabble -- all those ordinary people who can never really understand your business -- now demand that you explain to them, so they can disapprove of you all over again?

A few possibilities:

No. 1 -- Full knowledge of the inner workings of your proprietary trading desk.
In particular: the moment-to-moment dealings of your correlations traders from late 2004 (when they first exploited American International Group’s idiotic willingness to sell cheap insurance on pools of subprime mortgage loans) until the end of 2007, when they would have taken most of their profits from the total collapse of the subprime bond markets.
Your bosses claim to have lost almost $100 million on the Abacus trade for which your firm is being sued. This seems, to put it mildly, disingenuous. In March 2007, the time of this particular Abacus trade, your prop traders were already short the subprime market. Would they really have taken a naked long position in a deal you helped to construct precisely so that it would fail without offsetting in some other way on their books?

Ritual Sacrifice

Sadly, it will not suffice to offer up Fabrice Tourre as a ritual sacrifice. No one is going to accept a then 27-year-old Frenchman, whose job was apparently to keep sweet the patsies on the other end of your trades, as the world’s authority on your trading positions.
His name isn’t even on the top of the list of Goldman traders listed on the $2 billion Abacus deal for which you are being sued. The name on top of that document is Jonathan Egol. Egol appears to have been the bond trader at the center of your Abacus program. The same Jonathan Egol who told fellow traders in 2006 -- a year before this transaction -- that the subprime market was doomed.

The public eventually will ask: Who is Jonathan Egol and what exactly was his game?

No. 2 -- A far better understanding of your relations with the inaptly named “CDO manager.”

Clearly Clueless

In this case the manager was ACA Management, but there were other CDO managers at least as pliable as ACA. The SEC suit charges you with using ACA as a shill: the end investors in your CDO assumed that it was ACA’s job to figure out whether the bonds inside the CDO were intelligent investments.

But ACA quite clearly had no idea what it was doing -- and you quite clearly understood that.
The telling details here are the e-mails between your French salesman and ACA, in which ACA feels it needs to understand exactly what John Paulson’s interest are in this new CDO. Paulson, who had done a great deal of analysis on the underlying bonds, was of course picking the ones he wanted to see inside the CDO. (Hard to understand why it didn’t disturb you that he was even in the room, by the way, but that’s another conversation.)

The SEC accuses you of lying to ACA, by suggesting Paulson was a long investor in the deal when he was in fact selling the deal short.

Good From Bad

But what’s interesting here is what you appear to take for granted: that ACA has no talent for evaluating the bonds picked by Paulson. After all, if ACA was doing its job it wouldn’t have cared one way or the other what Paulson (then a little-known hedge fund manager) was up to. ACA would have known which bonds were good and which were bad, and picked the good ones.

In their anxiety about Paulson’s motives we can all glimpse their incompetence. They want to know that Paulson has an interest in picking the good ones because they themselves have no clue which ones they are.

But if a CDO manager had no independent ability to select the bonds inside a CDO what, please explain to us, was his financial function? Why did you select ACA to manage your deal?

No. 3 -- A far better sense of why, and when, you ceased completely to concern yourself with the consequences of your actions.

The masses will be curious to know, for instance, how you became blinded to the very simple difference between right and wrong. The more moralistic among them will ask the question mainly to fuel their own outrage; the more tactical will ask the question because they sense that the financial system doesn’t function unless you have the incentive to think in these terms - - and you clearly do not.
http://www.bloomberg.com/apps/news?pid=20601039&sid=aWUolZvh4qmE

How Goldman offloaded its toxic assets
Apr 28, 2010 17:38 EDT
Chris Nicholson finds a particularly damning email in the mountains of evidence released by the Senate investigations committee. It’s written by someone on Goldman Sachs’ European sales desk:

Real bad feeling across European sales about some of the trades we did with clients. The damage this has done to our franchise is very significant. Aggregate loss of our clients on just these 5 trades along is 1bln+. In addition team feels that recognition (sales credits and otherwise) they received for getting this business done was not consistent at all with money it ended making/saving the firm.

Clearly Goldman’s clients aren’t buying what Lloyd Blankfein is selling: the idea that they’re just arm’s length counterparties who know what they want to buy and are just looking for the best price. Illiquid things like CDOs are sold as much as they’re bought, and Goldman’s highly-paid sales team was aggressively going out and selling instruments which were at one point on Goldman’s balance sheet and which wound up cratering in value.

The effects were twofold: firstly, the Goldman clients who got stuck with this nuclear waste when the music stopped were understandably none too impressed with Goldman. And secondly, Goldman managed to stick the losses on those instruments to its clients, rather than taking those losses itself, and as a result its profits were billions of dollars higher than they would otherwise have been.

Was the hit to Goldman’s franchise value a hit worth taking, given the billions of dollars it saved? Probably yes, until the SEC and Carl Levin came along. But clearly the European sales team which was responsible for successfully offloading this nuclear waste wanted to see some part of those billions of dollars in savings for itself. Because, like all Wall Streeters, they care more about their annual bonus than they do about their employer’s franchise value.

Here’s a question, though. Let’s say you work at an investment bank and you’re in charge of a book which includes a $1 billion barrel of toxic nuclear waste. You know that barrel is going to zero sooner or later, and you manage to sell it to some European dupes just in time, for full face value, saving your bank from $1 billion in losses. How much of a bonus, if any, should you get on that deal, and where should the money come from? And should you feel bad about avoiding the losses and sticking them to your clients instead?
http://blogs.reuters.com/felix-salmon/2010/04/28/how-goldman-offloaded-its-toxic-assets/

Again, it may be said that we need not be alarmed at the magnitude of our credit system or at its refinement, for that we have learned by experience the way of controlling it, and always manage it with discretion. But we do not always manage it with discretion. There is the astounding instance of Overend, Gurney, and Co. to the contrary. Ten years ago that house stood next to the Bank of England in the City of London; it was better known abroad than any similar firm known, perhaps, better than any purely English firm. The partners had great estates, which had mostly been made in the business. They still derived an immense income from it. Yet in six years they lost all their own wealth, sold the business to the company, and then lost a large part of the company`s capital. And these losses were made in a manner so reckless and so foolish, that one would think a child who had lent money in the City of London would have lent it better. After this example, we must not confide too surely in long-established credit, or in firmly-rooted traditions of business. We must examine the system on which these great masses of money are manipulated, and assure ourselves that it is safe and right.

Walter Bagehot. Lombard Street. 1873.

Another delightful weekend and in most of Europe a holiday weekend too. For those who can get out into the UK’s countryside, a rare chance to see all kinds of late flowers and blossoms all out at the same time. Our carpets of bluebells are passing their peak. Sadly, in the Gulf of Mexico the ecological disaster seems about to become a catastrophe. We can only hope that God intervenes to drive the oil away from the vulnerable coasts. More on that over the weekend. Starting next week we will begin the daily update of the Dunkirk and the Battle of France page. 70 years ago in 1940, civilization fell to Nazis socialism in a blitzkrieg campaign lasting 37 days. Have a great weekend everyone.


Why A UK Hung Parliament is Likely. Stay long precious Metals.
http://www.ukpollingreport.co.uk/blog/


The monthly Coppock Indicators finished March:

DJIA: +168 UP. NASDAQ: +370 UP. SP500: +196 UP. The great Bull market goes on with the all three continuing higher in positive numbers.

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