The Market Ticker

Remember what was said about Madoff when people started looking at his operation?

There were only two possible explanations for the firm's apparently never-losing trading: They were either front-running or cheating in some other fashion, or the entire thing was a gigantic ponzi scheme.

We later learned that #2 was the case.

But is there an example of #1 somewhere?  Hmmmm....

Aug. 5 (Bloomberg) -- Goldman Sachs Group Inc. made more than $100 million in trading revenue on a record 46 separate days during the second quarter, or 71 percent of the time, breaking the previous high of 34 days in the prior three months.

Trading losses occurred on two days during the months of April, May and June, down from eight in the first quarter, the New York-based bank said today in a filing with the U.S. Securities and Exchange Commission. The company made at least $50 million on 58 of the 65 trading days during the quarter, or 89 percent of the time.

Just two days of losses in the entire quarter?

There are a lot of very good traders in the world, but nobody has that sort of record on any sort of consistent basis unless they've managed to rig the game.

You can be "the smartest guys in the room" but nearly-perfect records at the poker table are almost always an indication that someone has managed to figure out a way to peek at the other side's hole cards.

Oh, and they're gambling (or cheating?) with your money too - not their own:

Banks such as Goldman Sachs are benefiting from lower borrowing costs after the Federal Deposit Insurance Corp. in October started guaranteeing bank debt issues that mature within three years. Goldman Sachs said in today’s filing it had $25.1 billion of debt guaranteed by the FDIC under the agency’s Temporary Liquidity Guarantee Program. The bank sold about $30 billion of the FDIC-backed securities between November and March, according to company filings.

Is this an example of "heads we win, tails you lose, and we're peeking at your hole cards"?

Inquiring minds want to know.

I can't agree that this report shows "green shoots":

While the rate of decline has slowed the fact remains that we are nowhere near "turning the corner" in terms of job loss, and yet the mantra is "green shoots, green shoots!"

Here it is "in pictures":

Note that while goods-producing layoffs have dropped materially, the services side of the economy has basically flat-lined.  That is, the goods-producers have drawn down inventory (a cycle that may be nearing completion) and as such their need to lay off people has waned - however, the services side is still seeing contracting demand and that contraction appears to have flat-lined from May going forward instead of continuing to improve in June and July.

Continuing contraction in the services portion of the economy is not positive no matter how you slice it, and the improvement from the January and February time frames for services appears to have stalled in June and July.

It appears that the market was looking for a significant positive surprise; there were even estimates that we'd see job gains this month in the ADP report.  That obviously is not the case.

ADP's report is an actual count from their customers, where the BLS' numbers contain their "adjustments" in the form of a guess in the formation of small business jobs through their "birth/death model"; as such the two are not really comparable.  While ADP only picks up their customer activities, it is nonetheless more reliable than the BLS cooked statistics, and therefore has to be respected as a trend indicator.

The biggest threat to recovery at the present time is the overhang of debt that remains in the economy.  Pulled-forward demand such as the "Cash For Clunkers" deal sounds good but is fleeting; sustainable economic growth requires growth in income and earnings power, and I will be studying the Non-Farm Payroll report out later this week for clues as to the direction of consumer earnings power - the only true indicator of impending economic recovery.

The ADP report strongly suggests that any belief in a trend change - a change that one would expect to be reflected in services employment - is misplaced.

ISM Non-Manufacturing came in weaker than expected - gee, who could have predicted that given the graph above?  (snicker)

Have you ever wondered why The Federal Reserve feels perfectly free to break the law as set forth in Sections 13 and 14, buying assets such as CDOs from Lehman and Bear Stearns, or not-really-full-faith-and-credit MBS from Fannie and Freddie, even though doing so is in fact prohibited by The Federal Reserve Act?

Have you ever wondered why, although Prompt Corrective Action (PCA) demands that two big regional banks that have negative Tier Capital Ratios (they call this "critically undercapitalized"; the common word is bankrupt) be shut down the FDIC has refused, thus far, to act as required by law?

Have you ever wondered why an OTS insider, part of our government, would conspire with IndyMac to shift deposit dates in an attempt to prop up its capital picture as seen by the government, an act now alleged by the government itself and a contributor to the horrific loss the FDIC took when they were shut down last year?

There are dozens of additional examples from the last two years and even more going back further.

Ever wonder why?

The reason is rather simple: there is no "or else."

Here's an example of a law that has an "or else":

(a) Whoever, by force and violence, or by intimidation, takes, or attempts to take, from the person or presence of another, or obtains or attempts to obtain by extortion any property or money or any other thing of value belonging to, or in the care, custody, control, management, or possession of, any bank, credit union, or any savings and loan association; or

Whoever enters or attempts to enter any bank, credit union, or any savings and loan association, or any building used in whole or in part as a bank, credit union, or as a savings and loan association, with intent to commit in such bank, credit union, or in such savings and loan association, or building, or part thereof, so used, any felony affecting such bank, credit union, or such savings and loan association and in violation of any statute of the United States, or any larceny—

 

Shall be fined under this title or imprisoned not more than twenty years, or both.

There's a law with a big fat "or else."

Now here's a law without an "or else":

a) Resolving problems to protect Deposit Insurance Fund

(1) Purpose

The purpose of this section is to resolve the problems of insured depository institutions at the least possible long-term loss to the Deposit Insurance Fund.

 

(2) Prompt corrective action required

Each appropriate Federal banking agency and the Corporation (acting in the Corporation’s capacity as the insurer of depository institutions under this chapter) shall carry out the purpose of this section by taking prompt corrective action to resolve the problems of insured depository institutions.

Note the "shall", but if you read that paragraph (and the rest of that section of law) you will not find an "or else".

If you're wondering why we can't seem to find a cop anywhere, no matter how bad The Bezzle gets in Washington DC, the reason is found right there.

There are a whole host of laws on the books that allegedly regulate the conduct of various government agencies, compelling certain actions and forbidding others, but none of the compelled or forbidden actions have an "or else" associated with them.

What's worse is that the courts have repeatedly held that being a taxpayer does not give one standing to bring civil action (that is, a lawsuit) to compel adherence with the law.  That is, even though it's your money that is lost and/or robbed when the law is intentionally ignored, you do not have the right to appear in court and force the government to obey the very law they claim governs their actions, even by civil enforcement means.

It is my opinion that any law that lacks an "or else" is in fact no law at all.  Government continually passes "laws" that allegedly compel or forbid various actions by various portions of the government, but never in those laws will you find the all-important "or else", making such laws nothing more than a waste of perfectly good paper at the GPO and The Federal Register, floor time for debate in the House and Senate, and ink in the President's signing pen.

Bank robbery (the first example) would be very popular but for the existence of the "or else", as proved by the fact that the FDIC has repeatedly refused to enforce the law allegedly compelling it to take "Prompt Corrective Action" and The Federal Reserve's blatant and continuing refusal to obey the strictures in Section 14 for asset purchases.

Bank robbery by gun is (relatively) rare, while bank (and taxpayer) robbery by failure to enforce Prompt Corrective Action and the printing of "new bank reserves" to support the purchase of forbidden assets by The Fed has literally become a daily occurrence.

The difference in the effectiveness of those two laws is the presence or absence of two little words: OR ELSE.