Signs of the Times:
"Sandy Weill,
whose creation of Citigroup ushered in the era of U.S. banking conglomerates
a decade before the financial crisis, said it is time to dismantle the
nation's largest lenders."
This is Bloomberg's July 25th
article, and the Wall Street Journal had the headline: "Sandy
Weill Regrets Breaking Glass".
Weill is quoted "What we
should do is go and split up investment banking from banking."
He was instrumental in the 1998
merger of Citicorp and Travelers Group, which was the deal that required the
repeal of Glass-Steagall. And, as the saying goes
"The rest was history", as Citi stock collapsed from 515 in 2007 to
9.70, repeat 9.70, in 2009. The best on the rebound was 51.50 in January
2011.
It is always fascinating to see
examples of how the culture of finance changes from the habits of probity
learned in the previous depression to "anything goes" in a new
financial era. And, eventually, back to probity, for which Weill seems to be
an agent.
It should be emphasized that in the
early 1930s most in the establishment understood that the depression was
caused by the financial collapse inevitable to a bubble. Since the 1950s too
many academics believe that the post-1929 crash was due to the policy error
of raising the discount rate from 5 percent to 6 percent in early August of
that fateful year.
On the certain knowledge that the
boom caused the bust, Glass-Steagall split ordinary
banking from Wall Street banking. It made sense, as did the formation of the
SEC with the mandate to prevent a repeat of the "Roaring Twenties".
Well, with 2007 recording most of the features of a great bubble the SEC
failed on its mandate. Also, one of the promoters of the SEC Act boasted that
it "would put a cop on the corner of Wall and Broad Streets".
The Madoff fraud had a number of
whistle-blowers and the SEC did not act on the biggest Pozni
Scheme in history.
Glass-Steagall
was thrown out in 1998 as part of another cultural change to reckless
financial speculation. Now one of the key agents of change is exploring
remorse and repentance.
Perhaps, the SEC will try to assume
the mantle of responsibility and accountability that it was originally
charged with.
Attached is a copy of our "Book
Report" of September 7, 2007. The Ropespinner
Conspiracy is a satire published in 1987 on the corruption of banking
by "modern" concepts, otherwise known as borrowing short and
lending long.
"The European
Central Bank is edging toward a bond-buying program that investors say could
end up printing money, echoing efforts by the Federal Reserve and other
central banks to fix a credit crisis nearing its sixth year."
- Bloomberg, August 3
The article did not include that the
Bank of Japan has been similarly aggressive since around 1991. Some of this
summer's interns in the BoJ's research department could
have been born after their Great Depression began.
Perspective
Fortunately, the "good
vibes" have appeared again. Stock market action has been
"choppy" and the latest rush has moved the S&P to 1407. This
compares to the natural high of 1422 at the end of March and the test of that
high at 1415 at the beginning of May. Unfortunately, trading breadth is
deteriorating. We are watching for some ending action - seasonally and dynamically.
This has been supported by similar
swings in commodities that are beginning to look tired. Other support has
been provided by continued narrowing of the Ted Spread. The weekly RSI has
traded from very overbought with last fall's
financial pressures to rather oversold this week. The swing is big enough to
be significant.
Longer-dated corporate spreads have
narrowed significantly since early July.
Credit Markets
Since the high on July 26 the long
bond has set a downtrend to 147.5. While declining with the joy of risk
elsewhere, the key thing is that the top has been made.
Since the first of the month,
investment grade corps (LQD) have rolled over, and
the emerging market bonds (EMB) have declined a little.
The point is that long treasuries
have been leading the action as lower-grade issues continued to party. Over
the past week, the yield for Baa has increased from 3.54% to 3.63% as junk
declined from 11.46% to 11.23%. Such divergences are typically found at
important tops for the whole bond market.
And really in the party mode,
sub-prime mortgage bonds have soared to new highs for the move. The one we
monitor set a low of 38 in October and rallied to 52.6 in February. After
slumping to 48 in early June, it rallied to 54 three weeks ago. The set back
was to 52.5 and now it is at 56. The latest surge is getting compulsive.
This celebration of risk could expire
within a few weeks.
The reversal could lead to serious
dislocations in bond sectors that have yet to be hammered by the great global
contraction.
Currencies
Today is interesting. The dollar and
most commodities have been firm. The stock market has been firm to steady.
On the near term, the DX could rise
for a few trading days and that would stall out the rally in orthodox
investments.
This could be brief as the good vibes
could run for up to a couple of weeks.
Otherwise, the Dollar Index is in a
solid uptrend. As troubles appear in the fall the dollar could take out
resistance at the 89 level. That was set with high momentum as the financial
crash completed in March 2009.
Using a different model, the ChartWorks has had a target of 90.
September 2007
The Ropespinner Conspiracy
The Ropespinner Conspiracy is a novel by
Michael M. Thomas, a former investment banker who writes enjoyable novels
about high finance.
The title relates to Lenin's
observation the "Capitalism will sell us the rope with which we
hang it". Published in 1987 the story is about a brilliant but
insidious Soviet conspiracy to infiltrate the U.S. banking system and corrupt
it to its own destruction.
The attempt starts in the late 1930s
with a brilliant young economist who fell for Keynes' persuasions in more
ways than one. Waldo Chamberlain becomes a Harvard economics professor and
rises to pre-eminence. He is also KGB controlled. The plan is implemented
through his bright and presentable nephew, Mallory, whose successful career
takes him to the top of a big New York bank. Altogether, the trio introduce a number of "new" concepts to
banking.
The KGB controller is knowledgeable
and quotes Bagehot in describing the scheme -
"But error is
far more formidable than fraud: the mistakes of a sanguine manager are far
more to be dreaded than theft by a dishonest manager."
The young protégé,
Mallory, rises with his bank until -
"There was no
question that he and CertBank had been the
pathfinders. Man and institution had combined to transform the face and
nature of banking and, with it, the face and nature of whole economies, of
nations. Mallory and CertBank had perceived markets
and opportunities . . . and had grasped the business of banking might be
redirected, its nature irrevocably, irresistibly altered."
The Ropespinner
plan was to take the banks, then set midway between Main Street and Wall
Street, and return them to Wall Street.
The Glass-Steagall
Act of 1933 separated commercial banking from investment banking. Beyond
that, it was another example of post-bubble recriminatory legislation. The
anti-bubble act (England) with the South Sea disaster of 1720 was taken off
the books just in time for the bubble that blew out in 1772.
Glass-Steagall
was passed in 1933 and repealed in 1999, which belatedly acknowledged that
commercial banking had already embraced Wall Street.
"The problems
were to legally find a way around the Fed's grip: How to "dehabituate" the relationship between banks and
their depositors: how to engineer a massive increase in money supply (almost
impossible to have a financial cataclysm otherwise); how to destabilize
exchange rates, perhaps eliminate the gold standard; how to ignite a
commodity-driven inflation, each was so rich in possibility."
This was to be implemented by Certbank's rising star, Mallory, who would -
"Then set the
Cert's shoulder to the shiny new wheel and proclaim and propagate the new
gospel from the podium of the bank's eminence, other banks would follow the
lead, frequently hasty, since reflection and competitiveness were ill-matched
bedfellows, and within weeks the new gimmick would be as accepted and
widespread in American banking as if it had been proven over the years and
certified from heaven by Morgan himself."
Preston marveled,
'The lad's the best talker of claptrap I ever heard, better than FDR!' "
The novelist develops the
"new" banking ideas in a readable manner. Starting with negotiable
CDs, EuroDollars, banks as
a "growth" industry leading to the struggle for "market
share", and total commitment to "total return", all the major
changes in banking are placed in perspective.
Waldo plants the idea of negotiable
CDs and, as the market for them developed, a traditional banker wonders:
"If a
short-term obligation could successfully be renewed time after time, should
it not be viewed as truly long-term capital and as a legitimate source for
funding longer-term loans?
Waldo listened to
these arguments and nodded sagely, and smiled inwardly. If ever there was a
surefire recipe for banking disaster, it was to borrow short and lend
long."
A book reviewer at the New York Times
described "Ropespinner" as "a
sophisticated piece of work - the story generates plenty of tension, and it
is anchored in a series of well-documented and well-described settings."
It is a parable of our era and a more timely read now than in 1987. As far as plausibility
goes, it's not too far off the mark.
Innovative banking always seems to go
with experiments in currency. It's fascinating that there are two different
views on arbitrary expansion of currency. Orthodoxy claims that it is an
essential tool of policy making but military intelligence has used it for
destructive purposes.
The Brits have been masters of
"war by other than gentlemanly means". In order to destabilize the
colonial economy, the British, during the American War of Independence,
invidiously introduced huge amounts of counterfeit colonial currency.
American inflation was sufficient to raise short interest rates to 10,000%.
At other times inordinate amounts of
currency were clandestinely introduced into an enemy's country with hopes of
destabilizing their economy and ability to fund their war effort.
It was done during World War II as
well as to Argentina during the Falklands War in 1982.
In the post-bubble contraction of the
early 1980's two Wall Street economists, nicknamed by the street as "Dr.
Death" and "Dr. Doom", were pleading that the Fed should
"open the taps" or something worse would happen.
Obviously the understanding of
credit/currency expansion by spooks in intelligence is vastly different to
that of academics and Wall Street economists.
The fictional Waldo, Mallory, and the
KGB controller would be pleased with today's "new" banking
practices.
Bob Hoye
Institutional Advisors
The opinions in
this report are solely those of the author. The information herein was
obtained from various sources; however we do not guarantee its accuracy or
completeness. This research report is prepared for general circulation and is
circulated for general information only. It does not have regard to the
specific investment objectives, financial situation and the particular needs
of any specific person who may receive this report. Investors should seek
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understand that statements regarding future prospects may not be realized.
Investors should note that income from such securities, if any, may fluctuate
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Neither the information nor any opinion expressed
constitutes an offer to buy or sell any securities or options or futures
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Copyright © 2003-2008 Bob Hoye
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