Welcome to Capital Account. The IMF lowered growth forecasts and warned of a world-wide recession in its World Economic Outlook report. This was the IMF's bleakest assessment of global growth prospects since the 2009 recession, according to the Wall Street Journal. Is the IMF late to the party? It upgraded growth prospects for only one major nation from its previous forecast: the US! Did the IMF take into account that the US is in a QE induced coma? We talk to Mike Shedlock about the meaning behind the IMF's report.
Also, the US jobs numbers released by the BLS last week are still making headlines. The downturn in the unemployment rate during the election season prompted some high profile people, such as former GE CEO Jack Welch, to suggest that President Obama's team manipulated the data. Our guest, Mike Shedlock, Investment Advisor for Sitka Pacific Capital, is here to dispel the conspiracy theories around the drop in unemployment.
In 2003 Austan Goolsbee, who later became an Obama aide, argued that in previous economic downturns "the unemployment rate has been low only because government programs, especially Social Security disability, have effectively been buying people off the unemployment rolls and reclassifying them as not in the labor force.'' He cites the loosening of the standards to qualify for disability payments in the 1980s and 1990s as a reason for the increase of those in the disability system, a form of 'invisible unemployment.' The trend of rising disability insurance has continued in this recent economic downturn. We talk to Mike Shedlock, author of the popular blog Mish's Global Economic Analysis, about factors that cloud and complicate the unemployment picture.
Plus, Angela Merkel is in Athens offering words of support for her Greek counterpart. Talk is cheap, far more expensive are the conditions for more bailouts and debt write-downs! Words of support don't pay the bills or reignite a stalled economy. Lauren and Demetri look at how the mainstream media has misrepresented the problems in Greece. Also, Iran faces hyperinflation...or does it? Lauren and Demetri discuss the economic impact of sanctions and price controls in today's "Loose Change."
Welcome to Capital Account. The first US vice presidential debate of the 2012 presidential race is a few days away. During the 2008 Obama administration's post-election transition, Biden called former Senator, Governor, and CEO of Goldman Sachs and MF Global, Jon Corzine, for advice. Corzine was at the helm of one of the largest bankruptcies in US corporate history: the bankruptcy of brokerage firm MF Global. Customer money is still missing from MF Global and not a single person has been held accountable. It was a year ago this month that the brokerage collapsed. We welcome James Koutoulas, co-founder of the Commodity Customer Coalition (CCC) and CEO of Typhon Capital Management, back onto the program to give us a long over-due update on MF Global, Jon Corzine, and the status of that 1.6 billion dollars that so popularly "vaporized."
Vaporized indeed. Many contend that customer money was actually stolen to meet margin calls on Corzine's risky European bond trades after the firm's credit rating was downgraded. Others believe that these funds were being used on a regular basis to cover margin calls months in advance of the firm's collapse. Gary Gensler, former Goldman Sachs banker, recused himself and the CFTC from handling the bankruptcy, letting SIPC handle it instead, even though there were only 100 million dollars in securities accounts versus $6.4 billion in futures. We tell you about the safe harbor provision that allows derivatives to cut the line in bankruptcy court. We break it down in Word of the Day!
And last but not least, the Merchants of Venice want to secede from Italy. Lauren and Demetri banter about the latest calls for independence from Italy by Venetian separatists in "Loose Change." Indipendenza Veneta, a newly-founded pro-independence movement, held a rally in the ancient city on Saturday, calling for an urgent referendum to be held on the issue. Separatists want to carve out a new country in north-eastern Italy which would comprise Venice, the surrounding region of Veneto and parts of Lombardy, Trentino and Friuli-Venezia Giulia. The "Repubblica Veneta", as it would be known, would encompass about five million people. A poll conducted by Corriere della Sera in September found that 80 per cent were in favor of independence.
Given our discussion about MF Global with James Koutoulas, the word of the day is Safe Harbor. So what exactly is Safe Harbor?
Safe Harbor protections in the Bankruptcy Code include:
Provisions that protect nondebtor counterparties from the normal course in bankruptcy. Many transfers of cash or securities made in the final weeks before a bankruptcy, for example transfers used to meet margin calls on OTC derivatives, are not subject to clawbacks, as long as the parties involved claim they had no knowledge of fraud.
Let's take a look at one of the ways it has been used: In the case of MF Global, when more than 1.6 billion dollars of customer money went missing from customer accounts, one would assume that the money would go back to the customers once properly discovered right? Not necessarily under the safe harbor provisions. Companies that received hundreds of millions in transfers of MF Global customer funds in their final days may simply get to keep that money! And they would be within their legal right to do so! Also, any collateral MF Global posted with counterparties before the bankruptcy, those counterparties may get to keep! These assets are beyond the reach of creditors.
This would be as if you bought a car you didn't know was stolen, and when the owner of the car came to take back the car, the Safe Harbor would be used to protect you from having to return the car to its rightful owner. So, unlike what would happen to ordinary citizens outside of their dealings with banks, creditors and customers can sail into safe harbors when they are dealing with stolen assets by saying they didn't know they were stolen.
The Safe Harbor provisions are supposedly intended to avoid a financial ripple effect, where a large firm's bankruptcy infects the market as a whole by providing immunity to other market entities. However if counterparties are not incentivized to perform due diligence on each other, and instead rely on the ability to liquidate the other's collateral upon bankruptcy, a large counterparty failure easily leads to a fire sale of all posted collateral. So much for the systemic risk argument!
The provisions were first introduced into the Bankruptcy Code in 1982, in a very limited manner, safe harbors have since been expanded over the years, most recently in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The 2005 act extended safe harbor provisions to include repo and swap agreements, in addition to futures contracts and securities agreements.
And who were some of the biggest lobbyists for this act? Bank of America, CitiGroup, JP Morgan, Merrill Lynch, and the American Banker's association. These 5 entities spent over 6 million dollars to get this bill passed. The poorly named Bankruptcy Abuse Prevention and Consumer Protection Act arguably neither prevents abuse nor protects consumers. And the big losers today may be customers who are trying to recover funds such as those at MF Global that sunk with the ship and are in a so called safe harbor. And now you know what it is.
This is a Capital Account, web-extra from our Thursday, September 27th interview with former NYMEX board and executive committee member David Greenberg; a 25-year veteran crude oil trader. David lectures at major universities around the country and is a frequent guest lecturer for the finance program at both Hofstra University and the Whitman School of Management at Syracuse University. He also teaches a course on the transition to electronic trading at the Museum of American Finance.
In this web-extra, David Greenberg (www.greenbergcapital.com) breaks down exactly how and why algorithmic trading can create price vacuums in markets that, given the right of circumstance, could create dramatic price drops unlike anything that one could expect to see in a market where sell and buy orders are filled by humans and not machines. The Flash Crash of March 2010 is a perfect example.
Welcome to Capital Account. The ECB plans to use its unlimited bond buying program, known as OMT, to buy sovereign bonds for one or two months and then suspend purchases during an assessment period, according to Reuters. Attempts to reflate the global credit supply have truly reached new levels. The central bank has gone from traditional monetary policy of setting interest rates, to buying US treasuries and government agency debt, to then buying mortgage backed securities to bolster the housing market. All this is done under the guise of the Fed's "dual mandate" of promoting full employment and price stability. And yet, the only thing central bankers have managed to achieve as they break the laws of physics is to inverted time and space and suck whatever duration is left out of the bond market. To help us contemplate life after the death of interest rates and the credit system, we talk to Chris Martenson, author of "The Crash Course." Among other things, we ask Dr. Martenson how he thinks the issue of credit expansion is compounded by global energy resource depletion and population growth.
Meanwhile, August consumer credit rose more than forecast according to the Fed. The 18.12 billion dollar rise, the most in three months, was driven by borrowing for education and automobiles. We ask Chris Martenson, if this a sign that the credit bubble is reflating or if we are we past the deflationary point of no return.
And the unemployment rate dipped to 7.8 percet, with a massive 873,000 jump in jobs reported by the household survey, the largest gain in almost a decade. However most of the job gains were involuntary, part-time positions. We talk to Chris Martenson about what the numbers really mean and how to factor in exponential population growth as an unaccounted for headwind to employment going forward.
Two more heads of international business meet to exchange ideas.
Kathleen Taylor, chief executive of Canada's Four Seasons luxury hotel group, is credited with taking the company outside its traditional markets and jumpstarting the largest expansion in its history.
David Neeleman made his name in the airline business, founding US low-cost airlines Morris Air and JetBlue. The Brazilian-born American entrepreneur then founded Brazilian carrier Azul in 2008, seeing good opportunities in South America's fastest-growing economy.
The United States has sent military troops to the Jordan-Syria border to help build a headquarters in Jordan and bolster that country's military capabilities in the event that violence escalates along its border with Syria. (Oct. 10)
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