Tag Archives: federal reserve

7 Ways The Investment Banking Industry Is Built On Fraud, Lying, And Stealing

1 Jun

The asymmetry of information in research, mergers and acquisitions, trading volumes and patterns, buy-side and sell-side orders provides investment banks with vast resources of information that they leech to drive profitability. This should be vexing everyone in the country right now and yet we don’t even see. Banks blowing their own smoke were behind the curve and they represent the very core of our systemic economic problems. The deception continues. Although this article focuses on hedge funds it is more relevant to investment banks. Via disinfo.com:

1. Insider Trading. If the Feds could tape every hedge fund we’d get an earful of how hedge funds use “expert networks” to transfer bits of illegal information that provide hedge fund managers with knowledge of events that are sure to move markets and make them a bundle.

2. Ponzi Schemes. Madoff isn’t the only one. Hedge funds and Ponzi schemes are made for each other since the funds are designed to evade so many disclosure regulations. It’s virtually a sure thing that every new year will reveal another Ponzi scheme through which a hedge fund steals money from investors and then uses new investor money to pay returns to the old investors.

3. Tax Evasion. No surprise here. Wherever you find billionaire financiers, you’ll find schemes to move money around the globe to dodge taxes. Fortunately, Rudolf M. Elmer, a Swiss banker, has blown the whistle on an international web of rich investors, banks and hedge funds that evade taxes by illegally shifting money to low-tax jurisdictions. There’s something particularly slimy about hedge fund tax dodging, given that they only pay a 15 percent federal tax rate no matter how much they make.

4. Front-running trades. With their high-speed trading systems and algorithms that sense ever so slight market moves, the biggest hedge funds and banks are able to trade just a fraction of a second before the rest of us do. The SEC is also worried that brokers leak information about large trades by institutional investors to hedge funds so that favored hedge funds can pull off the trade just a split second sooner, thereby earning a quick, easy, and illegal profit.

5. Late Trading. When Eliot Spitzer was New York Attorney General (and earned the handle, “Sheriff of Wall Street”), he uncovered hedge funds maneuvering around trading rules like a Ferrari speeding around the hapless shmoes stuck in midtown traffic. In violation of all rules, hedge funds were allowed by mutual fund managers to jump in and out of mutual funds many more times than normal investors, enabling them to score high returns at the expense of regular mutual fund customers. They even got away with booking trades hours after the market closed for the day—a real perk, since market-moving announcements often are made right after closing.

6. Accounting Irregularities. Boring stuff, but the stuff of big money. Hedge funds and banks cook the books to avoid showing losses and to artificially inflate profits. Hedge funds are also deeply involved in helping other companies—like Enron and WorldCom—bend their books. According to a study by Bing Liang at the University of Massachusetts, as of 2004, 35 percent of all hedge funds cited no dates for their last audit. Hmmm.

7. Setting up bets that can’t fail. I just can’t get enough of how banks and hedge funds collude to rig securities so that they are designed to fail. The best part is that in order to win their negative bets, they have to market the securities to chumps as if they were pure gold. This ploy always seems to involve a big investment bank and a hedge fund. You have Goldman Sach’s dancing with Paulson and Company, and then there’s JP Morgan Chase doing a two-step with Megatar.

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30 Apr

Why debt matters and you know it does

26 Apr

If you want the long and the short of it then basically debt matters and we have 5000 years of recorded history to affirm that. It seems that we have a dichotomy of beliefs: those who are aware of the deficit and the urgency required in dealing with it, and those who deny it or by their actions negate an acknowledgment of  it. It is naive to assess debt purely in a historical context and to assume that if we have maintained similar debt-to-GDP ratios prior, we can therefore withstand high levels of indebtedness again, and again. This is making a wholly wrongful assumption that the micro and macro environment has remained constant. Adam Smith stated that nations trade with one another to economise on different comparative advantages and that global trade is a reflection of that. Seismic shifts in the world economy have damaged that idyllic thesis.

Debt historically was tempered by enduring the pain and affliction that accompanied it. The payment of high interest rates instituted discipline. Our liberal attitude towards debt and the pedestrian pace with which we are dealing with it infers that we view it more as a longer term issue rather than an immediate one. It seems almost ironic that Wall St and Main St seem to view everything else in the short term, but have a more relaxed and long-term perspective on indebtedness.  In order to see how much debt a nation can withstand history does offer some useful parameters. Rogoff and Reinhardt suggest that nations with above 90% debt-to-GDP ratios are highly more susceptible to economic collapse and turmoil.

GDP as a measure of economic output is fraught with inaccuracies and composition errors. A better measure is to either discount those errors, which in itself becomes more of a subjective exercise, or more prudently just to look at the revenues and expenses of a nation. Whatever measure is employed current debt burdens have now become clinical.  The almost unbelievable irony is that interest rates remain unchecked at historical lows in an environment of deep stimulus, and where the Fed is purchasing the overwhelming majority of treasuries. We know debt matters and we have 5000 years of recorded history to affirm that.

We see events in Ireland, Spain, Greece and Portugal but we think because we are the USA or hold the world reserve currency we have acquired some sort of divine favour to borrow, spend and consume while the rest of the world saves, invests and forgoes current consumption; and somehow that equates to economic progress and growth. This is what we do. The disconnect and cognitive dissonance of it all is truly an enigma. Clearly while the fundamentals remain awful for the US economy everything is about timing and perception. Something holds values because we perceive it to hold value, but once that blanket perception changes, we can now see in spite of our previously anchored views, that things have changed; seeing is different from hearing.

The idea of government and the state being different to the common man or woman, or somehow being intrinsically distinctive, is one of the most elegant frauds being perpetuated today; a true disconnect.  The belief that we cannot make the same baseline comparisons to government debt in the same way as businesses for example, or that we cannot view deficits as losses as governments are not businesses, helps to sustain incompetent financial behaviour and practices.  It is reminiscent of those preachers who hold their masses and claim that the individual by themselves cannot understand God’s word; you need to go through Mr Holy and he is holier than thou and the monopoly of truth. Prior to investment banking I had a career in bankruptcy and corporate insolvency.  I am struggling to find out why the papers have not been filed against USA Inc.

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