themadgreek's Open Salon Blog

WHAT'S WRONG WITH RON PAUL?

Fri, 4 Nov 2011 10:11:39 -0400

I venture to guess this philosophical and rhetorical question will never reach the heights of the catamount in Shakespearian literature. But it may rank a close second soon enough. And it’s been my obligatory response, asking this question of friends, family and associates who have responded somewhat sideways to my “Vote Ron Paul Once For All” efforts. I hear such missives as “He’ll never win the Republican Primary” or “He’s not electable” or “He’s too old” (which is my personal favorite of those who decry the valor of civil liberties, the ADA, or revile the fabric of discrimination). I guess on that note, perhaps Noah should have built himself a two seater speed raft instead of an Ark. And good old Luke Skywalker should have easily outdueled Zen Master Yoda. I believe it was President Lincoln who once said, “I do not think much of a man who is not wiser today than he was yesterday.” So there it is. And in true form to the anathema that the GOP has become to its own legacy, it’s no wonder today carousel seems to resemble the worst of Abraham Lincoln’s fears and trepidations.

In a recent article from The Week, titled “The GOP’s Desperate Hunt for Anyone but Mitt Romney”. The author Robert Shrum wrote, “Romney’s slouching his way towards the nomination – and a disgruntled party will finally surrender to him unless a new Perry emerges who transcends bromides and buffoonery on the stump and befuddlement in the debates.”

It quickly reminded me of an old Italian saying, “It’s better to have a smart enemy than a stupid friend.” Dr. Ron Paul, is the smartest enemy the GOP knows, and he calls himself by his elected party line. Ron Paul is a Republican. He’s been elected as a Congressman from Texas as a Republican since 1976. For this, the GOP hates him. They hate the fact that he was right when he turned away from irrational party line politics during the Bush Administration, all the while they gave George W. Bush carte blanche. In fact, if John Kerry weren’t so much the same, much the way Mitt Romney reflects a subtle image of Barack Obama, the cowboy from Austin would have been tossed with the rest of the party in 2004. Nevertheless, the GOP hates Ron Paul. Hell, they hated Ronald Reagan before he took the primary at the ripe old age of seventy. Maybe there’s something to this old and wise combination.

Shrum’s characterizes the party list of hucksters, including Romney, as “slouching”, filled with “bromides and buffoonery on the stump and befuddlement in the debates”. In the article Shrum runs down every candidate in and every one that hit the wood chipper early, even the too late to call Gov. Chris Christie. Shrum managed to separate one candidate from the rest of the inveterate sot – Ron Paul by describing him as a “cult”. Shrum wrote, “Ron Paul is a cult, entirely out of step with Republicans on foreign policy. (John McCain might have to endorse Obama.)”

Shrum states that “unless a new Perry emerges who transcends the bromides and buffoonery…” But he, Ron Paul, is here now. And it seems that everyone is taking a page out of his 2008 playbook and trying to steal away at his sensibility on domestic and foreign affairs, copying just enough of his party line politics and plan and diluting his message just to gain a slice of greater populist support.

And we go back to the age old adage of “better to have a smart enemy than a stupid friend”. The GOP has lost its guts and sensibility. The center has gotten so massive that it attracts all sorts of oddball cult-like language and epithets like “John McCain might have to endorse Obama.” And this is where you see how Shrum can come to characterize the GOP field of contestants and their abhorrent behavior. They, like the Democrats have come to love the game of zookeeper for the United States of Animal Farm and love to play towards that center of flip-floppiness has also infected President Obama and has avoided his most important party line mantra that brought him to the White House – “…Ending the wars in Iraq and Afghanistan immediately”. So it seems that bi-partisan politics are bi-polar politics and Americans have, as Ron Paul has suggested are “tired of it all.”

Yet in spite of Americans’ collective will and dissatisfaction, the circus at Animal Farm continues as the GOP, like their counterparts, are not fond of relinquishing the kind of control the Government which has thoroughly enjoyed itself and its existence at the expense of American taxpayers for decades. And there it is. It is this dividing line that Ron Paul is not willing to cross. He is not willing to cross over to this dark side of politics that has kept America in a dead heat tug of war for decades. Instead, to the GOP’s collective consternation, Ron Paul wants to dispense of it, all of it now. And with it, he intends to trash a forty year legacy of adverse selection processes and most importantly, the unconstitutional taking of American civil liberties and capital.

His platform and plans to Restore America are contrary to the neo-con centrist party line politics that tie all of the other GOP candidates to George W. Bush, a President who was obviously far more a Democrat than a Republican. Even a blind observer could hear the giant sucking sound of spending and the draining currency under Bush clearly met the standard of a spender who inflated the size of government through Homeland Security, the TSA, the Patriot Act, Sarbanes-Oxley and meddling in foreign affairs.

Out of step? It seems that the fabulous nine, including Mr. 9-9-9 himself, are and have been out of step themselves. But they’re dancing or at least trying to dance to the beat of Ron Paul’s drum. Each have been busy peeling away at what Ron Paul has gained popularity on – the downsizing government, ending wars, lowering taxes, and reducing regulation. With respect to the debates, both the media and the candidates seem to want to ignore him into non-existence largely because nobody has any basis for cross-examination of any sort during the debates. For “how can anyone enter a strong man’s house and carry off his possessions unless he first ties up the strong man?” The GOP can’t indict Ron Paul. Even Bill Maher, the grand daddy hater of all GOP haters walked away smiling and bemused by the number of issues both he and Ron Paul seemed to agree upon. The bottom line is the GOP hates him. Democrats hate him even more. It’s probably a good nexus of reasoning behind the media’s overt ignorance of Ron Paul’s existence in citing straw poll results where they count first, second, and fourth, and the rest of the field, excluding Ron Paul, comfortably sitting in third and waiting for the final turn into the stretch run for the roses. The GOP can’t argue with him because his platform is absolute, with no retreat or centrist compromise that has caused this colossal quagmire of American disintegration in the first place. All of them, these GOP huckster candidates compromised with Bush. Yet Ron Paul didn’t. He was an outspoken critic of the war effort that drained $1 Trillion out of the American economy with no return. And the continued mix of laissez-faire monetary policies mixed with Keynesian vomit that brought down the housing market and savings in America. More classic bridges to nowhere.

That is what sets him apart. That, and he’s a magnet for service men and women in the category of fund raising. He's out gaining all of the GOP candidates collectively and has been donated twice the amount by military service men and women that what has been received by the present Commander-In-Chief. Wow, wow, and wow. His popularity with Americans of all age, creed, color, gender, religion and profession has made him a widely followed, respected and recognized Presidential candidate. Yet Shrum characterized Ron Paul as a “cult”. That’s a new one. Well, for starters, a “cult” is not a person, neither can it be a person. A cult generally has a small non-diverse group of sycophants and members. The millions of Americans supporting Ron Paul hardly make them a cult group. I think it best to describe Ron Paul simply as a man. Something tells me that’s what he would want to be referred to, a man. He is also an American hero who served his country for five years as a flight surgeon in the United States Air Force during the Vietnam War. After his tour of duty, Dr. Paul practiced medicine as an obstetrician and gynecologist, delivering more than 4,000 new born children before beginning his service as a Republican Congressman in 1976. He currently serves on the House Committees on Foreign Affairs and Financial Services and has served our country well by his standard of upholding the Constitution and telling the truth, even though that truth is something no one on either party line wanted to hear.

Clearly Shrum has it all wrong. Ron Paul isn’t a cult. The real cult is this American Nightmare that millions of Americans tune into daily like that early 1970’s vampire soap opera Dark Shadows. Only this soap opera is the longest running cult in America, the TV and media woven charade of convincing Americans that the Government knows what is best for them. That, like Jonestown is what happens when “absolute power corrupts absolutely.” Ron Paul a cult? Why, because he snapped the smelling salts and broke the barriers of party line politics across race, creed, color, gender, religion and profession? Why, because he teaches personal sovereignty, not group immolation? Why, because he’s a champion of personal excellence and he believes like millions of Americans that working hard to achieve goals is the best form of building foundations for the future? Why, because he believes in using wisdom, learning for past mistakes, and subscribing to sense and sensibility is better than forming and believing lies? Why, because he’s been telling everyone for years what has been going on regarding the collapse of our economy and nobody likes to hear the truth?

So when I ask my friends, family and associates, “Why do you say that he can’t win? What’s wrong with Ron Paul?” Each and every one of them answered, “Nothing.” So I ask, “Isn’t there anything you don’t like about him?” Each and every one of them answered, “No, I like him.”

And that too is the problem for the GOP. There’s nothing wrong with Ron Paul.

Perhaps if he were a dashing version of George Clooney in a tuxedo, twenty-five years younger, we could all use the classic American vanity tool of mirror-mirror to fool ourselves that this guy Dr. Ronald Ernest Paul looks Presidential. Well, for me, I don’t quite care what he looks like other than looking like the winner that he is. Ron Paul is a winner. He’s earned that title the old fashioned way. He’s taken the long, consistent and painful road and scored the many years of wisdom that Americans deserve to have bottled up for use by their Commander-In-Chief and not some self-aggrandizing, ever morphing “bromine of change” that makes a Chinese Trigrams in the I-Ching look like child’s play. Because if I’ve learned one thing about the concept of “change” in America that I’ve come to believe in, is that the more they say things change, the more they definitely stay the same.

So as long as this rocket man septuagenarian keeps out running his rivals on news casts, guest appearances, debates and all the while still manages to meet his voting obligations and debt of service in Congress, I’ll take this winner over any other GOP loser buffoon who dares to flip-flop his way to the center of the divide that conquers. For that center, that used to be a mere line in the sand for a playful tug-o-war, has now become a cavernous divide. And that cavern has gotten far wider and more ravenous in the midst of a dangerous battleground – this present day one-party political cult-like system that continues to draw American lemmings into the abyss from both sides.

DOWN TO THE PIG

Mon, 31 Oct 2011 14:10:32 -0400

In the aftermath of what looks like Enron all over again, the pundits on CNBC are asking “How, in the face of the high risk of Euro Zone debt could he think of taking a $6 billion unhedged risk position in Europe.” Read carefully to understand that it isn’t a financial risk that Jon Corzine was betting on, it was political risk from the process that President Obama, Timothy Geithner and Ben Bernanke started to avert Chinese saber rattling on currency and trade; and prop up a badly drunken sailor, our European counterparts. It’s that simple. Despite the simplicity of it, the financials for MF bear looking into for the depths of depravity. So here’s a snap shot of the victim before the car was driven off the cliff. And how apropos that we don’t need midnight for smashed pumpkins on Halloween.

As I am treated to this morning’s news of MF Global in the BK broiler, I can’t help but focus on the acronym – MF. As I recall, before he was taken by leave for better service to the city of Chicago, Rahm Emanuel, the former White House Chief of Staff, was constantly chided by the President for using this neo-classical urban term of art that calls on the same acronym – MF. It’s probably been uttered a few billion times today in the Windy City by the thousands of former employees of Mr. Corzine’s pig trough when their CBOT electronic swipe cards failed. You know the words. Everybody knows them and has used them at one time or another. And so another MF’er bites the dust. But not before the great swirling tornado of puke and ponzi mania made its impact on unsuspecting tuna buyers who stepped up to buy the scraps after all the fine fatty toro was stealthily hewn from the big eye giant.

Just a side note, before getting into the Halloween spirit, MF Global Ltd. filed its F-1 Registration statement with the SEC in 2007, a relatively new entity. Here’s how they described themselves.

“We are the leading broker of exchange-listed futures and options in the world. We provide execution and clearing services for exchange-traded and over-the-counter, or OTC, derivative products, as well as for non-derivative foreign exchange products and securities in the cash market. We provide our clients with access to many of the largest and fastest growing financial markets throughout the world. We believe that we are the largest “specialty” broker operating in our markets.” “For the three months ended March 31, 2007, based on data provided by the respective exchanges and based on the volume of executed or cleared transactions, we ranked first on the Chicago Mercantile Exchange, the Chicago Board of Trade, the New York Mercantile Exchange, Commodity Exchange, Inc., a division of the New York Mercantile Exchange, Euronext.Liffe and Eurex.”

It’s beginning to sound a lot like Enron. Isn’t it?

Apparently not to Jeffries & Co. In August 2011, Jeffries, the well known investment bank, underwrote more vomit for this modern day Enron called MF to the tune of short run securities totaling $325 million with a coupon of 6.25% due 2016. We all know now that the money was used to pay bills and reserve Mr. Corzine’s $100 million parachute to 1500 Pennsylvania Avenue NW, just down the block from 1600. We’ll that isn’t going to happen now. I mean the appointment. The parachute will probably work for the money though.

As for the deal of the century, completely subordinated pari passu to other vomit on the balance sheet, unsecured, no guarantees, subject to rate adjustment on ratings adjustments and loaded with 101% repo terms on change of control. We’ll here’s a news flash. They’ve become a debtor in possession in the U.S. Bankruptcy Court Southern District of New York. Does that qualify?

How about the use of proceeds? I’ve heard of public bailouts like TARP for private companies like GM, but you have to really love the kinsmanship among megalodons like Richard Handler, Chairman and CEO of Jeffries and Jon Corzine. Jeffries underwrote MF’s last vomit of primordial slag with a use of proceeds to “repay outstanding indebtnedness under its [our] liquidity facility.”

So, in other words, credit lines and liquidity facilities are only confident when the borrower is solvent and are generally called when there’s trouble. Is there any other way to read this disaster? Or better yet, the conflicts of interest on the cover which purport that:

“Affiliates of certain of the underwriters of this offering may receive 5% or more of the net proceeds of this offering by reason of the repayment of outstanding indebtedness under our liquidity facility. Accordingly, those underwriters may have a “conflict of interest” within the meaning of FINRA Rule 5121, and this offering will be conducted pursuant to the requirements of that rule.”

How about, they shouldn’t have the ability to offer the securities period.

Who Moved The Zuccotti Cheese?

But to a mouse or a rat, “Thy wee-bit housie, too, in ruin!” Or yet by another “For all sad words of tongue or pen, the saddest are these: ‘It might have been.’” Burns or Whittier, take your pick.

As for the MF mouse’s house, 3,200 1%’er MF employees now in the 99% in the Windy City. This morning, the exchange officials of the CBOT barred MF employees, mind you risk traders that are responsible for trading out of the vomit trough. Another ingenious idea. Freeze them out in the cold until they get picked up roadside like starving Mexican day laborers. Not to worry, Jeffries and Interactive Brokers will take the pick of the litter and leave the rest to join the lines of the unemployed in Zuccotti Park or some other carnival square looking for a barrage of tear gas canisters and rubber bullets.

Speaking of rubber, here’s a nice look at MF (and let’s emphasize Rahm Emanuel’s version of the urban assault vernacular) Global Holdings Ltd. rubber financial statements and debt. MF is a company who’s sequential annual revenues, mostly made up of commissions from trades had steadily declined from $2 billion in 2008 to $1.38 billion in 2010, without the proverbial uptick from the drop in 2009 for all financial entities across the board. Compensation remained at a frothy $668 million for 2010 despite the 30% decline in revenues from 2008. And only as a fixture of a percentage of revenue would speak to such sickness, in 2010 it was approximately 49% of revenue versus the 44% during their hay day. Talk about your 1% disasters of the universe! As for their last tranche of crap, who in their right mind would buy such rotten tuna? Jeffries and all the other cohorts of course.

The Real Rats of Zuccotti Park

In the supplement to MFs prospectus originally dated February 24, 2010, which supplement was filed August 3, 2011, the sole book running manager Jeffries, along with, co-managers, BofA Merrill Lynch, BMO Capital Markets, COMMERZBANK, Nataxis, Lebenthal & Co., LLC, Sandler O’Neill + Partners, L.P. and U.S. Bancorp all stepped up to drill investors to the tune of $325 million in 6.25% Senior Notes due 2016. Jeffries taking the whopping $284 million for their feeding trough pigs. This pool ranks equal in right to payment and repayment of current and future (there’s a laugher) senior unsecured and unsubordinated indebtedness.

Here’s the balance of their other debt:

1.875% Convertible Senior Notes due 2016 - $288 million

9.00% Convertible Senior Notes due 2038 – 188 million

3.375% Convertible Senior Notes due 2018 – $325 million

On top of which, MF Global carried $96 million of 6% Cumulative Convertible Preferred Stock and $34 million of 9.75% Non-Cumulative Convertible Preferred Stock. The debt service and dividends alone are enough to choke the Giant of Thermopylae and the Kraken all at once.

Hey Jon, Bernard Madoff ain’t got nothing on you pal. Eat your heart out Bernie. At least these colossal schemers at MF had the sense to actually make a losing trade out of leverage. One thing is for certain, everybody loves a consistent loser like that high brow Corzine. It makes laying off the junk so much easier. And that is exactly what J.P. Morgan did with their $1.2 billion in unsecured paper. If Jon Corzine wasn’t so connected to the idiots in Washington DC, I’d say he wins the prize for The Cooler. Just watch what he does and do the opposite.

JP Morgan sold off all but $100 million of its $1.2 billion to a syndicate. Smart guys over at JP Morgan. They used MF Global for a day trade and swaps. On that note, there won’t be any Nick Leeson lessons or Jerome Kerviel SoGen follies or Kweku Adoboli currency confetti canons to speak of at JP this week. No, this week, it’s Jon Corzine. If it was Con Jorzine, he’d be in handcuffs right now.

The Mouse that Roared

In this post-Lehman world of saber rattling and political demagoguery fired at the likes of Wall Street, it is purely an insane proposition to note that as close as Jon Corzine is to President Obama and Timothy Geithner, that MF (again using Rahm Emanuel’s favorite term), has done exactly what this Administration and Government has decried insane. They leveraged beyond their ability to pay. Worse, every firm that underwrote their crap essentially violated FINRA NTM 10-22 regarding due diligence and the qualified independent opinion that is required in delivering a prospectus. “Lose all your money” risk factors be damned. Everybody uses it the catch all, but not everybody gets to play master of the collapsing universe leveraging the notional and booking it under FASB 159 “Fair Value Option”. Give me a break. And just so I can make a few more enemies here, let Bernie Madoff out of jail as well while you’re at it. Then perhaps all of this insanity will finally make sense, once and for all.

All this from a company sporting on June 30, 2011 total assets of $46 billion of which $11.5 billion were listed as securities owned, $4.9 billion of securities borrowed, $12 billion of securities purchased under repo agreements (there’s that nasty little game that Lehman played on the Repo 105), leaving $709 million in cash and cash equivalents and $11 billion in restricted cash. An idiot can see the leverage here on assets. Now let’s look at the liabilities. $44 billion, including $13.5 billion in customer accounts and another $18 billion in fails to deliver (securities sold under agreements to repurchase – here they are only upside down by $6 billion with only $709 million in cash to cover.

Here’s the meltdown… bet the Euro zone long… but not long enough for time to be relevant.

MF Collateral… Damage

The captions in quotations are excerpts taken from MF’s last 10-Q FPE June 30, 2011.

“The Company enters into collateralized financing transactions and matched book positions principally through the use of repurchase agreements and securities lending agreements. In these transactions, the Company receives cash or securities in exchange for other securities, including U.S. and European governments, government sponsored entity and federal agency obligations, corporate debt and other debt obligations, and equities. The Company records assets it has pledged as collateral in collateralized borrowings and other arrangements on the consolidated balance sheets when the Company is the creditor as defined in accordance with the accounting standard for transfers and servicing of financial assets. The Company obtains securities as collateral principally through the use of resale agreements, securities borrowing agreements, customer margin loans and other collateralized financing activities to facilitate its matched book arrangements, inventory positions, customer needs and settlement requirements. In many cases, the Company is permitted to sell or repledge securities held as collateral. These securities may be used to collateralize repurchase agreements, to enter into securities lending agreements or to cover short positions. As of June 30 and March 31, 2011, the fair value of securities received as collateral by the Company, excluding collateral received under resale agreements, that it was permitted to sell or repledge was $12,044,793,000 and $9,932,017,000, respectively. The Company sold or repledged securities aggregating $13,385,394,000 and $13,090,024,000, respectively. Counterparties have the right to sell or repledge these securities. See Note 3 for a description of the collateral received and pledged in connection with agreements to resell or repurchase securities.”

So, in other words, it borrows from Peter to pay Paul until the music stops. I thought only the Federal Reserve could do that into perpetuity. Look at these numbers. All from his holiness’ holy name, Jon Corzine. He could probably convince Nigerians to give up the 419 scam if they knew a little bit about the notional leverage scam. New Jersey residents hate this guy. Now I know why. Not that I care for Henry Paulson at any length, but I suspect Hank Paulson reviled this magnanimous turd.

Collateralized Financing Transactions

“Certain of the Company’s securities borrowed and securities loaned transactions are accounted for as collateralized financing transactions and are recorded at the amount of cash collateral advanced or received. Securities borrowed transactions facilitate the settlement process and require the Company to deposit cash or other collateral with the lender. In securities loaned transactions, the Company receives cash or other collateral in an amount generally in excess of the market value of the applicable securities loaned. The Company monitors the market value of securities borrowed or loaned on a daily basis, with additional collateral obtained or refunded as necessary. Generally, securities borrowed are collateralized with U.S. Treasury and agency securities, mortgage backed securities, equities, and investment grade corporate bonds. In securities borrowed transactions, credit counterparties are central clearers, banks, broker-dealers and can also include insurance companies and pension funds.”

The Company monitors billions of dollars of potentially toxic and systemic risk? What a relief!!!

“Credit risk can arise from collateralized financing transactions when the collateral value falls below the value of the receivables and counterparties fail to provide additional collateral. As of June 30, 2011 and 2010, no provision has been recorded against resale agreements or securities borrowed transactions, as amounts were deemed collectible.”

REALLY?!?!, what fiction of the trough of PIIGS, PIBS or other EURO animal acronyms have been deemed collectible by virtue of the CDS spreads denoting sovereign going concern.

“As of June 30, 2011, the market value of collateral received under resale agreements was $56,999,296,000 of which $516,646,000 was deposited as margin with clearing organizations. As of March 31, 2011, the market value of collateral received under resale agreements was $48,665,649,000 of which $256,288,000 was deposited as margin with clearing organizations. The collateral is valued daily and the Company may require counterparties to deposit additional collateral or return collateral pledged, as appropriate. As of June 30 and March 31, 2011, the market value of collateral pledged under repurchase agreements was $68,404,867,000 and $61,088,346,000 respectively. As of June 30 and March 31, 2011, there were no amounts at risk under repurchase agreements or resale agreements that are accounted for as collateralized financing transactions with a counterparty greater than 10% of Equity.”

What a farce, 10% of equity? What the hell is concentration of risk when there’s negative equity? By the way, look at these numbers, $68 billion in risky assets.

“Resale and repurchase transactions that are accounted for as collateralized financing transactions are presented on a net-by-counterparty basis when the requirements for balance sheet offsetting are satisfied. As of June 30 and March 31, 2011, the Company had securities purchased under agreements to resell of $12,057,793,000 and $9,499,768,000 respectively, which includes the impact of netting for resale agreements classified within segregated securities. Segregated securities are presented on a gross basis on the consolidated balance sheets.”

Look at these insane numbers!

“The Company also enters into certain resale and repurchase transactions that mature on the same date as the underlying collateral (“reverse repo-to-maturity” and “repo-to-maturity” transactions, respectively). These transactions are accounted for as sales and purchases and accordingly the Company de-recognizes the related assets and liabilities from the consolidated balance sheets, recognizes a gain or loss on the sale/purchase of the collateral assets, and records a forward repurchase or forward resale commitment at fair value, in accordance with the accounting standard for transfers and servicing. For these specific repurchase transactions that are accounted for as sales and are de-recognized from the consolidated balance sheets, the Company maintains the exposure to the risk of default of the issuer of the underlying collateral assets, such as U.S. government securities or European sovereign debt. The forward repurchase commitment represents the fair value of this exposure and is accounted for as a derivative. The value of the derivative is subject to mark to market movements which may cause volatility in the Company’s financial results until maturity of the underlying collateral at which point these instruments will be redeemed at par. At June 30 and March 31, 2011, securities purchased under agreements to resell of $5,233,156,000 and $1,495,682,000 respectively, at contract value, were de-recognized, of which 94.2% and 72.0%, respectively, were collateralized with European sovereign debt, consisting of Italy, Spain, Belgium, Portugal and Ireland. At June 30 and March 31 2011, securities sold under agreements to repurchase of $16,548,450,000 and $14,520,341,000 respectively, at contract value, were de-recognized, of which 69.3% and 52.6%, respectively, were collateralized with European sovereign debt, consisting of Italy, Spain, Belgium, Portugal and Ireland.”

Somebody ought to re-make the movie Repo Man, and call it Reverse Repo Man, a movie about the post-apocalyptic era of blowing through the U.S. dollar like shit through a giant 150 foot tall radio active goose. Also note the term of de-recognizes regarding cork screw reverse repos and books according to fair value – Lehman be damned again.

“Certain of the Company’s resale and repurchase agreements are carried at fair value as a result of the Company’s fair value election. The Company elects the fair value option for those resale and repurchase agreements that do not settle overnight or do not have an open settlement date, based on the original maturity term stated in the contract, or that are not accounted for as purchase or sale agreements. The Company has elected the fair value option for these instruments to more accurately reflect market and economic events in its earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. Changes in the fair value of these transactions are recorded in Principal transactions in the consolidated statement of operations. The Company has not specifically elected the fair value option for certain resale and repurchase agreements that are settled on an overnight or demand basis as these are carried at contract value, which approximates fair value. At June 30, 2011, the fair value of these resale and repurchase agreements was $11,974,402,000 and $8,667,980,000 respectively. At March 31, 2011, the fair value of these resale and repurchase agreements was $11,898,502,000 and $7,232,434,000 respectively. Changes in the fair value of these transactions are recorded in Principal transactions in the consolidated statement of operations. During the three months ended June 30, 2011, the amount of losses and gains related to resale and repurchase agreements were ($2,335) and $3,099, respectively. During the three months ended June 30, 2010, the amount of gains and losses related to resale and repurchase agreements were $4,854 and ($1,902), respectively.”

But here again is the big grand daddy of the grape juice manufacturing factory… the fair value option in full force and effect. Look at the marginal gains and losses on these classifications. It’s as if there is nothing going on other than humongous over leverage with very little re-pricing or valuation or marking to the market of these securities based on observable inputs. If the gains and losses were so little, why the bankruptcy then?

But What’s the Real Deal Here?

Is it about making bad ideological bets, buying villas in Lake Como or saving the mold infected Blarney Stone or the Acrapolis (yes, the a-crap-o-lis)? Not from my perspective. Just like Enron, hubris is just a catalyst to make certain the train runs off the tracks. As Dr. Hannibal Lechter quipped, to Agent Starling’s wrong response of what makes Buffalo Bill chose his victims, “No, that is incidental. What does he covet, Clarice?”

From my perspective the centerpiece of MF-BK it isn’t about Con Jorzine or Jon Corzine or the 50% write down in Greece last week that became the nail in the coffin for this Obamanite’s worst nightmare. Nor is it the nightmare to any trader thinking they can rely on a CDS market, including the empty promises of the ISDA. For what is truly a default? Its about Jon Corzine, Treasury Secretary and keeping Tim Geithner and Ben Bernacke’s Euro Rescue Mission alive and well in the face of Chinese saber rattling. It isn’t arms for hostages, but its close. Using the already broken American capital markets system to hoist more bad business on a burning heap of unemployment and horrendous risk modeling, the academic economists of the beltway still have their claws in major Wall Street players like Con Jorzine. He will be well rewarded for his efforts and he will get a job in Washington, DC very, very soon and you can bet the farm on that one.

So, here’s the real dope here on MF and Jon Corzine. As for me, I connect the dots and say, well, let’s follow Jon’s best friend Tim Geithner as he muddled through the Euro Zone panic with Ben Bernanke’s printing press, saving one bank at a time with U.S. taxpayer supported funds from the Fed. Now let’s look at Jon Corzine’s rationale. He said on CNBC almost a year ago that he believed in the Euro Zone success despite the alarming warning signs and continued to buy sovereign debt nevertheless. But that’s too much to believe. Especially from a guy who used to co-chair Goldman Sachs with of all people, Henry Paulson. And let’s say that Jon Corzine’s mantra for going long the Euro Zone, in the blatant face of default, is as hard to believe that any reasonable person could or even would stake his or her entire career and reputation on such tomfoolery. Let’s go even further and say that such person is responsible for making that bet in the land of vomiting, rioting and debt loads exceeding GDP by orders of magnitude over the norm. Just what was Jon Corzine thinking as he walked the room of Damocles? I’ll tell you what he was thinking. The same thing the Administration and Tim Geithner is thinking, keep the broken carousel spinning and make sure nobody touches our failures because we’re bigger than TARP, Solyndra, Fannie Mae, Sallie Mae, Lehman, Merrill, BofA, MF Global and all the other MFing scandals that are just waiting to come to light through the newly formed Super Committee on Global Financial Disasters.

What Jon Corzine was thinking was a spot as Secretary of Treasury. Corzine for Geithner? Before this disaster, and in concert with the Key Man risk outlined in the $325 million MF pig vomit, Jon Corzine was rumored to replace Tim Geithner. And why not? President Obama recruited Corzine to raise funding for his RE-ELECTION campaign from where? From the 1%’ers of the banking industry. According to Bob Holt of New Jersey News Room, Jon Corzine had met with Barack Obama secretly, on and off over the last few months. Does this coincide with Tim Geithner’s wife and son hightailing it back to New York City for the benefit of family and schooling of the younger Mr. Geithner? Possibly.

According to the revised Prospectus on MFs last tranche of pig vomit, “[T]he interest rate applicable to the notes will be subject to an increase of 1.00% upon the departure of Mr. Corzine as our full time chief executive officer due to his appointment to a federal position by the President of the United States and confirmation of that appointment by the United States Senate prior to July 1, 2013.”

Here’s one final thought that ought to get Dylan Ratigan out of his chair again regarding the concomitant ills of mixing politics and capital markets. In May 2010, Elise Young reported for NJ.com regarding Jon Corzine’s campaign contributions, “[T]hat The former governor also stopped contributions to candidates in 13 congressional districts facing Election Day in November. A spokesman said that Corzine, defeated for re-election in November after spending $27 million of his personal fortune, is researching whether the pay-to-play orders he signed as governor could conflict with his new role as CEO of MF Global Holdings, which may have business ties to New Jersey government. ‘He hasn’t taken his wallet and gone home,’ spokesman Josh Zeitz said. ‘MF Global is a large firm that has a huge list of clients. We need to make sure that we aren’t somehow bound up with a client who does business with the state. We need to make sure there’s no relationship, for instance, between the pension fund and any of our clients.’”

I have two words for this kind of crap, Adverse Selection. It is a virus that has invaded the United States all the way back to Affirmative Action and has found its way into our financial markets. Dylan Ratigan and Jimmy Williams have said it best. Get money out of politics any way you can. It is and has become the anathema to our very way of life. Don’t believe me? Just ask 3,200 newly unemployed MF’ers in Chicago who will be heading straight to Zuccotti Park without their swipe cards, ready to join the ranks of the 99’ers.

Time to De-Regulate the Regulators

Sun, 9 Oct 2011 14:10:26 -0400

You have got to be kidding me!!!

“Regulators Clamping Down on High Speed Stock Trades”.

It’s the regulators and regulation that caused this problem in the first place. One need not go too far back in time to a place called Irrational Exuberance. A fantasy land of never ending money making by blind monkeys on Main Street circa 1990s. Yes, the same blind monkeys that are currently protesting today, without knowledge, across business districts and Wall Street. Yes, the same blind monkeys who were part of a collective of odd lot self-aggrandizing sycophants that believed they could compete in a world of traders by throwing darts while blindfolded at the broad side of a barn. Sure they could do no wrong.

The 90’s. The Roaring 90’s. Where have I heard that before? It’s the same insanity as the Roaring 20’s which lead us straight to the Great Depression. It was a period and decade of increased consumer spending and economic growth fed by supply side economic policy. It should sound familiar to most but we have short term memory and a lack of knowledge of history. Not to digress into the pattern of vomit and waves, but the facts are facts. And the Roaring 20’s were exactly the Roaring 90’s.

Irrational exuberance indeed. In my article “Black Hole Sun”, I describe the failures of Federal Reserve Chairman Alan Greenspan in continuing ad naseum, a monetary policy that extended globalization, increased American debt as a percentage of GDP, did nothing to tighten and upend the moral hazard that awaited blind monkeys and that which wiped out two trillion in net worth and pension from 2000 to 2002. The list goes on as a result of poor decision making.

And it is just that. Poor decision making by the so-called experts. Experts like Alan Greenspan, and Arthur Levitt, who were appointed, not elected, by our political intelligencia, who themselves have admittedly, next to no clue about the importance of a balanced think tank or the ability to judge a so-called experts' acumen and more importantly, follow through. One need only look at the Supreme Court blunders made by U.S. Presidents to get a glimpse of the head slapping cry of “Did he/she just decide to…” Yes, they all did. Including, Ret. Justice David Souter.

Expert Analysis is Anal at Best

All of the so-called experts who have put their “oh-no” idealistic mark on failure have also failed to admit their mistakes. It is as important a phenomenon as the mistake in letting a leading administrative or monetary expert in the hen house without additional oversight. The reason, as we all know, that it is a bigger mistake to let a failed policy go un-reformed as it leads to the long term damage we see in today's marketplace. In the world of finance, adverse selection can become a mutating virus that starts with one rule and completely goes unbound, tearing asunder an entire market or eco-system. Regulation ATS did just that. Laissez-faire economic policy (supply side on heroin) did just that. Failed oversight by the only authority other than Congress to rectify a poor choice, did nothing.

All in the name of the Roaring 90’s, globalization and fear of inflation.

Get to the Point in a Flash

In December 2009, I wrote, in the article “Gone In Sixty-Milliseconds or Less*” that,

“To give rise to the phenomenon of high-frequency trading, otherwise known as “flash trading”, one need look no further back to the future during the Arthur Levitt administration of the Securities and Exchange Commission and the information age Executive Branch of the Clinton/Gore administration. Just prior to the birth of Regulation FD, along the same ideology of protecting the investment community and another market popping pin, Regulation ATS was a congenital twin to FD, born and giving life to modern day velociraptors– fast moving, spread snapping machines called ECNs (Electronic Communication Networks). The birth of ECNs and the regulation that spawned this ideal was born by the same administration attempting to provide a parallel cure to a two headed monster. Selective Disclosure was certainly unfair and the margin of profit to information potentially unlimited. Yet, in reviewing this solution for narrowing “unfair” spreads and measured profits on risk-taking for traders, Regulation ATS, has instead, lead to an unlimited and unfair margin that can never be closed by investors. Prior to Regulation ATS, fixed spreads of .0612 to upwards of .25 made the efficiency of a trade and the risk to carry far more expectant and therefore, more rational in a supply-demand driven market. After being routed off the playing field for ten straight years, the individual investor’s ability to compete in a day-trade based and short-term risk modeled market begged for a return of a thousand shares buy/sell of Intel ‘up or down a teeny’”.

In the mid 90’s towards the rising peak of a mountain of irrational exuberance, blind monkeys throwing darts at winning trades like Cisco going from 10 to 75 and other rocket ships were the lemmings of Main Street. It fanned the flames of lemming mania and cliff diving that drew in the rest of middle class America in your friendly neighborhood of foreclosure. Yes, that America, that once had a love affair with belonging to and imbibing at the luxury lounge called the New York Stock Exchange and Wall Street.

Finally, the middle class ship came in and docked at Pier 17 and the individual investor had the opportunity to come aboard the good ship lollipop and ride the crest of a wave. It became painfully obvious that the odd lot had power and the top trading firms and their so-called proprietary traders had an army of competition. Nothing made sense, including Amazon.com. The power of mass was in full force and effect. And so it went, in the mid to late Roaring 90’s, fostered by the salty dehydrating preservative of idealism, former SEC Commissioner Arthur Levitt, decided that all of the nouveau riche on Main Street needed a champion of the ‘steenth.

“Unfair spreads and pricing”, cried Levitt. Traders were making illicit spreads like a sixteenth of a dollar per share of stock purchased or sold. That spread is between the bid (what a trader is willing to pay to buy from the marketplace) and the ask (what a trader is willing to pay to purchase from the marketplace) of a stock price. That’s the equivalent of $.0625 or one half of an eight ($.125), that’s twelve and one half cents. The eights and sixteenths of a dollar were the charge of the regulators and Arthur Levitt to provide individual investors with a fair shake at getting best price on their trades through a regulatory scheme called Regulation ATS, born to merge off floor trading competition through machines and merged with decimalization, right down to the penny or fraction thereof.

It scared the daylights out of the big firms and their proprietary trading desks as they were no longer interested in making good on 1,000 share lots for the risk premium of even a thirty-second (1/32, not half a minute) or $.03125, half of a ‘steenth. Who benefitted? ECNs; big trading firms like Knight and the outgrowth to the birth of today’s dark pools and flash trading megaliths. Back in the Roaring 90’s, the regulatory argument was that the spread that was captured by the “market makers” and traders of the open outcry pits across America, was “unfair”. It breached the hull of “just and equitable principles of trade.” Right. Sure. Another idealistic bomb shot straight up and just like the Hindenburg, straight down. As for “just and equitable”, go try making that unfair spread argument to a sports bookie who takes in a portion of over 20,000,000 Americans’ bets on any given Sunday. When the market has certainty on the supply and demand side without fear of huge swings and such, it has less fear of participation, hence normalized supply and demand mechanics are at work, hence and perhaps a more normalized wealth accumulation effect without the elements of over-crowding out?

One need not see the outgrowth of man vs. machine as also having given birth to what Jeffery Sachs, noted economist from Columbia University confirmed today on Maria Bartiromo’s Wall Street Journal Report and that is that the percent of income share of the top 1% earners in America is 23% versus a historical average of 9%. I’ve mentioned this fact many times in the past year and it is a fact that comes out of adverse selection. Adverse selection has its roots in poor policy and administration. Poor policy and idealistic administration are externalities that have long range and damaging effects. Worse if they are compounded by poor congressional oversight, failure to correct abhorrent pronouncements and derisive regulatory schemes, and of course fruitless trillion dollar war boondoggles. Put them altogether and you have the worst parade of horribles since the Great Depression.

Spreads of Certainty for the Masses

Try walking into a bar and telling a guy who just finished a ten hour shift in a steel mill…

Oh, sorry about that. By count I believe we only have one steel mill left in the U.S. called Nucor and run by the brilliant American CEO, Dan DiMicco (but that’s another story for another day). Let’s try this.. Back to the guy who finished a ten hour shift stocking shelves at Walmart. Try telling that guy he shouldn’t drink that third cold beer on a hot summer day. Or better yet, how much of his hard earned money should go to the bartender for pouring out such fine libation and relief. That’s an example of sheer unadulterated opinionated interference. Try telling someone what’s good for them or not. See where it gets you. Try walking into a Best Buy and tell some woman on line at the check out counter that she shouldn’t pay $299 for Playstation3 for her son’s or daughter’s special birthday. Explain to them the virtues of cheap labor as she overpays for trans-shipping and price fraud. Get the picture? Try telling America about the evil spreads that men make or care to spend on what men make in order to keep a market efficient through human intervention or inefficiency. Do it today after the ether wears off and the average investor can understand what regulation gave us. Proselytize 1998’s story today. Do it and I bet they’ll string you up right quick.

I pause to think, if Werner Heisenberg were still alive he’d probably decry our failure to let our faults be the catalyst of fault tolerance and, ironically, the reduction of uncertainty. His theory on uncertainty is complex, yet very simple… “the more precisely one property is measured, the less precisely the other can be controlled, determined, or known.” So, let’s now say that the overcrowding of trading on the floor of the global stock exchanges and commodities pits are precisely measured by perfect machines and trading algorithms that have taken out human imperfection and replaced it with preciseness. How’s that working out lately?

In other words, its our imperfection(s) which makes us perfect and I dare say, probably keeps uncertainty out of the range of birthing black swans (severe market crashes). It’s our differences that make us the same and allows us to talk to one another, negotiate with one another (standing post on a trading floor with open outcry), and, at times, be on the right or wrong end of a skewed benefit of a bargain. But that’s what makes it a horse race and the cost of betting in it. That’s risk. That’s Wall Street. That’s the whole concept behind investing… risk. Whether it’s a stock or a football game, risk is placing a bet in an attempt to gain from taking that risk.

Thus, in that human interaction filled with minor imperfections lay the true art of a “just and equitable” trade. In that imperfection is the principle that completes the “just and equitable principles of trade”. Beyond that, there is the principle of being human. That man vs. machine is a losing battle fought on the ideal of protecting us from ourselves. I think Dr. Heisenberg may agree that we are human and our imperfections are the balancing beams to uncertainty. It took machines and an adversely selected market born from over regulation to cause the outgrowth of the most uncertain and most volatile capital market in the history of modern man. At the apex of exhausting risk and “unfair” pricing, the mountain of perfection has crashed on us, not once (2000-2002 tech crash), not twice (2008-2009 total crash), but three times (May 6, 2010 – for no good reason but a fat finger).

When machines manage the over concentration of wealth, the movements in the market can be death defying. What once was an army of blind monkeys, who could care less if a sloth ate a banana from a bunch, are no longer. Where are these market participants who were such the main concern of Arthur Levitt in 1998? Many have been camping outside the NYSE for the last 22 days. Many of the sloths (the market makers and floor traders) are working at Walmart today. We’ve lost touch with our ability to understand the unreasonableness of a proposition that is painted on the walls of sheer regulatory idealism and demagoguery.

The United States is said to have the most progressive and satiable capital markets in the world. Yet the volume of risk trading and investing from individuals who were sovereign to make their own blindfold decisions in the 90s (by reasoning of right or wrong – intuitive or fundamental or otherwise) has disappeared. Hence, the regulations born to make it safer did nothing of the sort. It has just kept Main Street where it is today… camped on Wall Street like the starving ready to bash in the Bastille.

And with that sovereignty has lost its virtue, such as trading one’s own stock brokerage account without fear of the machines born from irreverent regulation caused to interfere with a human to human, Party A to Party B transaction. It is long gone. And perhaps too, will be a quick clip and a slip of a blackjack bottle opener or the cling of a glass to a tap for a cold one. We keep going at this rate of denial and even bars may some day soon will soon be dispensing Norm’s brew from chilled automotons.

So lift your glasses to the architects of adverse selection. Here’s to Arthur, Harvey, Chris and Mary. You’ve all done a great job protecting against the former masters of the universe who gave a solid quote of 1,000 shares of anything for the risk of the spread. None have reversed the mistakes of the past and given Wall Street, the capital markets and investor confidence what it lacks and needs more than anything, the human thinking element.

“There can be no argument that machines evolve faster than man. Yet it is mankind’s imperfections that run aground the highest and best use of improving productivity for but for the want of yacht fleets to a single water skier. And thus is the game of Oligopoly, to further develop tools and use them to whatever advantage suits the Darwin resolve. Given the ultimate weapon of performance, survival of the fittest knows no bounds to equitable trade or fair market competition. The abuses uncovered in the latest Wall Street scandal – flash trading – has pointed directly to behemoths the likes of Goldman Sachs who continue to break with the very regulation that has been used to stifle smaller competition. For what is a speeding ticket to the Governor’s son?”

Dean Petkanas, Gone in Sixty Milliseconds or Less*, December 16, 2009

The Classic Definition of a Depression is...

Tue, 4 Oct 2011 14:10:12 -0400

The Great D beats the Best O

In the world of American style football, it is often said that a great D always beats a fantastic O.

In this example the great D here is called a Great Depression which beats a Fantastic Opulence, which is what has transpired in the transference and velocity of wealth.

Time Magazine published an article on Monday, September 19… 1938 called “Concentrated Wealth”.

The article stated:

“Piqued by the saying that there was increased concentration of wealth, Dr. Rufus Stickney Tucker, rumbly-voiced associate economist for General Motors, year ago began studying The Distribution of Income among Income Taxpayers in the U. S., 1863-1935. His chief conclusions, which he presents in a mass of charts: There is a great concentration of wealth, but it is far less than it once was, for "persons with incomes equivalent in purchasing power to between 4,000 and 10,000 1929 dollars have become a much larger proportion of the population since 1916, and those with incomes equivalent to $50,000 or more have become a smaller proportion.”

In the soon to be released October 10, 2011 Time Magazine, author Jeffrey D. Sachs writes:

“America was once the great middle-class society. Now we are divided between rich and poor, with the greatest degree of inequality among high-income democracies. The top 1% of households take almost a quarter of all household income--a share not seen since 1929. An economy this lopsided cannot prosper. The poor and working classes are squeezed. The rich are increasingly absenting themselves from the country's troubles. Their businesses sell goods and outsource jobs to China; their homes are behind gated walls; much of their corporate income is in offshore tax havens.”

Forget Gov. Rick Perry’s insensitivity, in modern times, as a young American of the Civil Rights era, ever thinking of endorsing or using the “N” word on a commercial establishment. The number one forgotten word, ironically proposed as the rationale for having Ben Bernanke in charge of the Federal Reserve in the first place. “D”epression.

It is the taboo of the airwaves, boob-tube and political pundits, be it the incumbent President and the veritable loons in the GOP, save Rep. Ron Paul and Gov. Gary Johnson, that refuse to call IT what IT is… an "F-styled" DEPRESSION. Ok, it’s not a complete F-styled yet. But it is a depression with a capital “D” and it’s getting ready to become a classic F-styled Depression at any given time, given the instability of socio-economic variables that surround the so-called recovery.

Eight months ago, on Valentine’s Day, in the midst of our so-called “economic recovery” the following are market comparisons of the debt, equity and commodities leading indicators for the capital markets compared with today.

Starting with the U.S. Treasury yield curve, one might say it looks rather normal with short run maturities occupying the lower end of yields and longer run occupying the upper band of risk free rates.

A closer inspection however shows that the slope and grade of returns that would compound over time couldn’t feed a mouse farm from anti-biotic tainted rotting grain stock.

Ten years ago, post 9-11 and post tech market crash, at the beginning of 2002, headlong into a recession and a yield trough, rates still reflected a marginal risk free return and the impetus to lend to small business.

Keep in mind that the VIX is the volatility index on the S&P 500, or better known as the fear index. Also keep in mind that oil, not gold, is a harbinger for inflation, consumption, industrial production and output, has slipped dramatically from year to date highs of $113 in April 2011.

By the classic definition is “a severe and prolonged recession characterized by inefficient economic productivity, high unemployment and falling price levels. In times of depression, consumers’ confidence and investments decrease, causing the economy to shut down. The classic example of this occurred in the 1930’s when the Great Depression shook the global economy.”

Liquidations

Run, run, run away and live to steal another day.

The real story is the difference between 2002 and today. The last 8 months have been a colossal disaster in terms of asset liquidations:

Gold up from 1,365 to 1,900 and down sharply to 1,600;

Oil up from 84.81 to 113 and down sharply to 77;

Dow Jones Industrial Average up from 12,680 to 12,800 and down to 10,500, down 17% along with every other major stock market index, while the fear index, the VIX soared over 177%.

Yet in all of the glory of growth… all market averages are flat to slightly higher than nearly 10 years ago! That is an astounding loss of compound wealth, kneecapped by a jaw dropping loss in real property values.

Add this to a downward slopping yield curve and if these numbers compounded by a loss of resources and high unemployment don’t spell... D-E-P-R-E-S-S-I-O-N, then it is truly a loss of American intellect and understanding as to what is really going on in the United States of Depression.

It’s no wonder the top 1% of the wealthy in America have gotten 23% of all new wealth created and/or transferred in the U.S. in the last ten years versus the historical average of 9%.

If the wealthy are hiding their money, I can’t say I blame them.

If they’re keeping competition at bay by the contrarian support and saber rattling against illicit regulatory burdens that kill small business but only hurt big business, it suits big business just fine the way things are going. Less employment, means less cost burdens, means higher productivity, means better earnings, but ultimately, given the risk return metrics of this market about to turn itself off, means cannibalism.

Here’s the liquidation tale of the tape:

Gold selling off into liquidation – Bubble Pop Bubble Gum Blow Off Winner of 2011.

Oil selling off into deflation and depressed global economic condistions – 2^nd Place

Treasuries, the modern day mattress money bank of the 2^nd millennium – 3^rd Place.

Stock Market Indicies down again – 4^th Place.

A Treasury Trove of Vomit

At zero, where do you spring hope eternal? Yields are flat and getting flatter as a result of Project Twister, the Federal Reserve’s latest and greatest trick to tame inflation and support a low rate regime for lending.

Lending? Is that the joke of the decade?

What lending?

This country is in a depression. I didn’t cause it, I’m just depressed by it like everyone else trying to create new jobs through an entrepreneurial spirit that has been capsized by idealism in a new age communal ideology that taxes should pay for walking zombies like banks, the unemployed and new government jobs that pay the highly innovative and upwardly mobile creators of tomorrow’s economic growth with today’s line employee capacity to stand around and do nothing.

Lift your glasses and toast! Here’s to the great recession once again and if you catch someone pressing their tongue to their teeth to spout the big D… shoot first, censor and stop them before they spread common sense.

The Sacking of America

Sat, 24 Sep 2011 21:09:19 -0400

An open letter to the SEC, DTC, and FINRA

(in advance of the SECs October 17, 2011 Roundtable on Microcap Stocks)

September 24, 2011

From: Dean Petkanas

To: The SEC; DTC; and FINRA

The Chinese Have Our Interesting Times In Excess Reserves

It is rare in sanguine times to have need for a ballast of change. However, as recent history has given us, we are hardly of sanguine times, although they are quite interesting to say the least. Today’s American economic plight is filled with such gravitas as there is great and substantial need for structural change to the way we conduct our commercial affairs at home. For again, not more than two years removed from a devastating GDP crater and fiscal collapse, we are again teetering backwards into negative territory on top of a crater that was formed by our hubris.

For time and again, in memoriam, our great nation did buckle to the repressive illogic of misguided imbalances in civil and labor inequalities. Now, today, we have washed ashore of fiscal imbalances that have obviously occurred by a Federal Reserve hell bent on globalization and taming the shrew of inflation, despite the warning signs of consecutive bubbles ranging from the stock market’s irrational exuberance to the real estate collapse of recent lore. Our regulatory arms of action and congressional leadership along the way were clearly over their proverbial heads as most, if not all, lack the knowledge and alacrity to step in to a fray or worse step on the status quo toes of political and administrative continuity. In this process of extending the ways and means of a broken system built on the architecture of a club called “Too Big To Fail”, our country has succumbed to an inexhaustible pile of debt; a dichotomy of wealth that has lead to vituperative rhetoric over “class warfare” and the most horrible in a parade of horribles, the institution of the black cloud of fear in reprisals. Fat cats and jet flying lunatics be damned! Ha.

Politics and failed administration be damned. For if it were left to no one’s devices to invent a billion dollar gift left on a street corner, why wouldn’t anyone simply take it? For the last 20 years, the very policies of a bi-partisan government that has held to its administrative appointments, and the prospect of globalization, has created this voodoo chasm of differences in the proportion of wealth. Now, in its twentieth year of reigning supreme, the mass which continues to absorb, for those well fixed, is a continuous extraction of larger swaths of wealth, even still. Again, don’t blame the fat cats and banks and hedge funds and too big to fail interests. Don’t blame Wall Street either. They’re just taking what the marketplace gives them. The data do tell the story. In the past ten years the accumulation of wealth has had a delta of 23% vs. 9% (the historical average of a percent of each new dollar in wealth created or transferred).

Furthermore, and most ironically when given the current party line logic that has spurred the “class warfare” comparisons, this velocity of wealth accumulation has been brought on in continuum, by repressive regulations, recessions and recriminations. For the more the saber rattles, the less the wealthy will seek to take risk. Thus, not only have the banks become zombies under the same conditions, but high net worth investors and funds have taken to the high ground of the hibernation caves.

Time to De-regulation Regulation or at Least Regulate It with a Regulator

What has become of America? Do we need a new czar? How about an oligarch who retires as an oligarch that can become the new new czar of the light speed millennium. Can someone find a Secretary of Commerce in America that understands how to address our domestic commercial problems? We have closed our markets in on ourselves in such manner as to suffocate our industrial capacity and our entrepreneurial spirit. We’ve allowed all of this in the name of regulation. It is a strange dichotomy of circumstances. For how could such regulation heretofore mentioned be good for our great nation, but other regulation be so bad?

This economy is dead. I didn’t kill it. Don’t blame me. It was dead just about the time I got here 40 some odd years ago. We just didn’t know it. For even if the Fed does this, and the Dollar does that and the President does the infrastructure thing, the economy would still be dead. You know why? Over indulgence. Political obsolescence. Same old terminologies. Just like Rome was already set to burn before its fateful ending, we too are in the furnace consumed by a fire that ravaged our nation at least since 1998 and gone parabolic in 2000. September 11, 2001 brought on a new wave of insanities compounded by more regulation that did nothing but cordon off competition and let the repeal of Glass-Steagall do its job in creating the to big to fail model of inefficiency. We do remember 2007 through 2009, correct?

We are face to face again with the need for bold and swift action. Not the kind of promises that shift our attention away from the status quo by prestidigitation of hand and tongue and return us to the same bowl of cottage cheese, but the kind of action that relieves the injunction of regulation upon the not big enough to breath. Small business in America is on life support. We were once a perennial first round choice going into the NFL draft. That is all gone now and that strapping college athlete has gotten mononucleosis and has shriveled into the size of a pre-mie (premature baby) needing life support. Regulation and inverted logic from our political leaders seeking re-election riding high on the hump of corporate demagoguery have created a chasm of adverse selection that hardly cripples the “too-bigs”, forms a basis for them to spend on chasing audits versus hiring productivity and causes an impossible hurdle for pre-mies to clear just to stay in the game.

Why Fix What Wasn’t Broken?

In history, despite our unwillingness to be offended by a change to a parade of horribles, be it civil, labor or fiscal inequities (which today is dangerously close to being called the status quo), we nevertheless made way for such impertinences as the Thirteenth and Nineteenth Amendments; the Glass-Steagall Act of 1933; the Securities Act of 1933; the Securities Exchange Act of 1934; the National Labor Relations Act of 1935 and the Civil Rights Act of 1964. How troublesome! We saw fit to change the things that were needed to be changed and to deregulate those that needed to create more open and competitive markets here and abroad. While I, for one, abhor the very nature of big government and over regulation, those described above are time tested canons of American sensibility. But even sensibility needs a hair cut and a trim every now and then. Fixing what isn’t broken by removing that which has brought about sensible commerce or liberty (i.e. – Glass-Steagall vs. the repeal of Glass-Steagall; or just the CRA vs. the CRA on steroids call Affirmative Action) is part of the problem that results in failed governance and why the first order of cross hairs on the game hunt of too big to fail should be pointed squarely at the U.S. Government and collaborative administrative agencies.

It goes by way of a lack of understanding of history. Americans, including the President and Congress, by in large have become myopic and short in memory. It’s as if we’ve become an army of nearsighted carpenter ants with attention deficit disorder and fiscal deficit disorder and GDP deficit disorder and commercial deficit disorder. All in the name of bi-partisan efforts to extend the mountain of big through such incredible troves of regulatory responses such as Regulation ATS; Regulation FD; The Patriot Act; Sarbanes-Oxley; Regulation SHO; Regulation NMS; and Dodd-Frank (collectively “The Sacking of America”). And yet, one article of regulation, Glass-Steagall, which seemed to have it right all along for 65 years, was ripped from the spine of sanity to create the sum and substance of the progeny which had grown to big and has failed. Yes, its true. We have closed our markets in on ourselves. And yet, in the face of adverse selection formed through a process I will call the Sacking of America, a process which altogether was formulated to “save us from…” We’re saved alright. It has done nothing of the sort. It has merely caught schools of dolphins in tuna nets to save the crown of righteousness in the name of demagoguery, populism, political survival and appointment.

The Securities and Exchange Commission should be roundly ashamed of itself. Shame on the SEC. Yes, shame on them. But not for missing the screaming signals of shiftless accounting conjured up by the robber barons of the new millennium, or even the Madoff styled sociopaths who followed in lock step. But shame on them for pounding more tree pulp into styled pronouncements that now kill everything for the sake of showing its repentance for its own failed missives, but only to preserve its hegemony. The SEC has become a classical contradiction of its own terms, like a dog chasing its tail and they’re doing it in grand new millennium style. They’re breaking their own rules and regulations in the process and worse yet, allowing the too biggest to fail clan of the major investment banks, the Federal Reserve and Depository Trust Corporation to break its rules as well. There’s an old saying. It goes as follows: “You can’t have it both ways.”

More often than not, the knee jerk responses to outliers and anomalistic singularities (the Bernard Ebbers’, Ken Lays’, Bernard Madoffs’ and such other sundry characters and hucksters yet to be born out of reality TV) is what makes matters worse. For instance, adverse selection doesn’t mysteriously appear somewhere. It is causal. In the case of the securities industry, as of recent (last 15 years) it has been produced by a process that includes GAAP accounting loopholes for big companies forged by the impositions of the Tax Reform Act of 1986; the Federal Reserve Act of 1913 and the Sixteenth Amendment (in other words, the need to use a dilapidated and over burdensome tax system); failed oversight (notice oversight has nothing to do with regulation as regulation needs oversight in order for it to have value and order in the first place); idealistic and lavish regulatory responses from the SEC and Congress that has brought small business to its knees. The crooks will still be there even if you quantized, exponentially, the regulatory schemes in the marketplace.

Looking further to regulatory schemes that have backfired, one need not look any further than Regulation ATS which has given birth to ECNs; Dark Pools; High Frequency Trading. Where on earth can one find a day trader with an abacus to compete against such elements? Yet it was born of ATS. And why? Because of an ideal held by one person and his staff to bring about fair access, best execution and price discovery. Beyond the algorithmic value of a Laffer curve of inefficiency or neutrality, there is no fair access, best execution and price discovery when the market participants are terminators equipped with predictive models that make the market timing cases of the early part of the decade look like child’s play. ATS has gone well beyond the point of diminishing returns for its purpose and has found great advocates like Goldman Sachs / Citadel; the NYSE and NASDAQ, all whom enjoy the concomitant relationship of bubble volume in trading equities and other asset classes.

Jobs, Jobs, Jobs… Where is Jobs?

Some say Apple. Well, from apples to oranges, I don’t think I can find any small business owners that are calling this economy a peach of a morning. Check it. Our internal industrial and entrepreneurial failure continues amidst proprietary trading and other zombie banking tricks which prefer the risk free model of burying money in a mattress the size of the U.S. Treasury, swimming in riskless dark pools of filled with high frequency economic algorithms, and other fantastic derivative structures which altogether fly in the face of the SECs mantra of just and equitable principles of trade. To wit, joblessness and the dearth of corporate finance in America has met its number one enemy – a closed market built on the towering inferno of adverse selection supported by a mountain of regulation. It is incendiary at mere sight to gaze upon the mountains of paper that destroyed trees faster than the great fire of 1910 in order to proclaim the mad pronouncements in the Sacking of America.

To Hell With Small Business, Who Needs Them Anyway

How does that saying go again? “You can’t have it both ways.” The SEC has passed regulation time and again that was meant to create a level playing field for Main Street, spur small business finance (through Rule 144 and Regulation D) and has conveniently intervened against its own regulation, siding with DTC, FINRA and congressional leaders who have popularized the broad sweeping attack against Wall Street. The downside is the trickle down effect that assures the bottom run of corporate America, small cap and micro cap companies become the kindling wood for the SECs ash filled ornamental urn of justice. On September 19, 2011, the SEC announced its Roundtable on Microcap Securities to take place at its offices in Washington, DC on October 17. The Commission claims that it will feature in-depth discussions of key regulatory issues including: anti-money laundering monitoring; compliance challenges; and potential changes to the regulatory framework. Panelists will include representatives from Depository Trust Company (DTC), broker-dealers, and the Financial Industry Regulatory Authority (FINRA). The purpose of the roundtable is to enable Commission staff to gather ideas and request input for regulatory measures surrounding the execution, clearance and settlement of low-priced securities. What an incredible revelation! On that note, I might add that since 9-11, I have never had the pleasure of meeting more American terrorists and money launderers in my entire life. I just so happens to be everyone I meet these days.

Regulation NMS

Regulation NMS, the latest salvo in the arsenal of demagoguery and chaos. It should read Regulation No More Stupidity, please. SEC Regulation has its place as was the case in 1933 and 1934 and a few spots along the way, like the Insider Trading Act of 1988 and thus and so. However, just because it has its hand on the pen and the pen to paper, doesn’t mean all is good in the land of Oz. They don’t always get it right. That is a fact that has never been admitted to by the SEC and Congress. They never admit when they’ve made regulatory mistakes and worse, have done nothing, nada, zippo to reverse the effects of a train that has run off the tracks.

Regulation NMS is yet another SEC manuscript instituted in 2005. This five hundred page paper tiger addresses three components, arguably vital to small business in America; liquidity in the capital markets and the golden rule… just and equitable principles of trade need be applied. According to the SEC, “In addition to redesignating the nation market system rules previously adopted under Section 11A of the Securities Exchange Act of 1934 (the ‘Exchange Act’), Regulation NMS includes new substantive (emphasis added) rules that are deigned to modernize and strengthen the regulatory structure of the U.S. Equities markets.”

Getting back to the old saying, “You can’t have it both ways.” Well apparently you can, as long as you are a horde of 800lb gorillas in a banana factory. As the regulatory action continued on page one, “First the ‘Order Protection Rule’ requires…”, then “Second, the ‘Access Rule’ requires…”, and finally “Third, the ‘Sub-Penny Rule’ prohibits market participants from accepting, ranking, or displaying orders, quotations, or indications of interest in a pricing increment smaller than a penny, except for orders, quotations, or indications of interest that are priced at less than $1.00 per share.”

Based on my retarded mathematical skills and all of the issues surrounding Regulation ATS and the call for decimalization (European standards), that would make ninety-nine cents look something like $.9900, assuming it was simply 99 pennies stacked in a tower or 99 bottles of beer on the wall. For if there were in fact 100 bottles and one broke in half it would then look like $.9950. But if it were a fractional shard greater by a factor of 5% of that fractional amount, give or take a mil, it would look like .9975 bottles of beer. I suspect in glass value it probably amounts to about $.9975 in total, no matter how you slice the stock.

Well, then here we are at the end of our tale of woe and as we have traversed the market’s inefficient maze of over-regulation and wonder, we reach the chamber doors of the Kraken. We are now face to face with DTC (aka DTCC) – Depository Trust & Clearing Company. This larger than life, post-trade (emphasis added) financial services company was established in 1999 as a holding company to combine the Depository Trust Company (DTC) and National Securities Clearing Corporation (NSCC), was set up to provide an efficient and safe way for buyers and seller of securities to make their exchange, and thus “clear and settle” transactions. Oh, and by the way, also provide a central custody of securities (including those that provide another layer of liquidity for big players in the lending and borrowing of securities in street name, better known as CEDE). DTCC provides custody and asset servicing for 3.5 million securities issues, mostly stocks and bonds, from the United States and 110 other countries and territories, valued at $40 trillion, more than any other depository in the world. In 2007, DTCC settle the vast majority of securities transactions in the United States, more than $1.86 quadrillion in value, a thousand trillions (that’s 10¹⁵ long scale peta or your garden variety 1,000,000,000,000,000). The good news is that at $1.86 quadrillion, it’s only one fifth the way to a full light year in miles.

Accordingly, pursuant to my open letter, kindly accept these panel questions in advance of the roundtable discussions on October 17, 2011. Considering the open letter issues raised and the fact that all securities trading under $3.00 are not eligible for credit towards margin requirements and are not credited to margin buying power under Federal Reserve margin requirements; and considering that a buyer is making complete delivery of payment on trade date (cash) to cover a settlement of T+3, and do so on trade date as is required (cash to cover the trade), my questions are as follows:

PANEL QUESTIONS

1.) THREE PART QUESTION FOR DTCC TO ANSWER:

(a.) How is additional margin below $.01 to the sell side justifiable when 100% of the risk is out of the settlement when at the same time, all requisite compliance on Rule 144 and/or registration has been met by the sell side?; (b.) How does this additional margin (a demand by DTCC for that value between the sub-penny market price of a security purchased with cash below $.01 – two decimal points) form just and equitable principles of trade and/or an efficient market?; and (c.) What safe harbor, Constitutional or otherwise, does DTC rely upon to avoid interference with Regulation NMS, the Securities Act, Rule 144, and Sherman-Clayton Federal Anti-Trust Acts?

2.) TWO PART QUESTION FOR THE SEC TO ANSWER:

(a.) How does the recent spate of FINRA and political pressure upon Broker-Dealers and Clearing Firms to avoid all sell side transactions by impugning fictional motives upon market participants despite their complete compliance the Securities Act, The Patriot Act and Rule 144?; and (b.) What are you doing to remove such obstacles that avoid compliance with the above referenced?

3.) TWO PART QUESTION FOR FINRA TO ANSWER:

Considering that there is a clear and distinct model of adverse selection, even in this sub-penny microcap space (case in point is Client A is a high net worth individual who can not open a prime brokerage account or show billions or hundreds of millions in liquidity, but yet makes an investment in a microcap company on the same basis as a hedge fund – yet the hedge fund with a prime brokerage account can easily liquidate these securities, but for lack of FINRA oversight), (a.) How does it benefit Client A if your regulatory actions in this regard make for UNjust and INequitable principles of trade, adverse selection and/or failure to provide equal protection under the 4^th, 5^th, and 14^th Amendments of the Constitution?; and (b.) How does clamping down on market participants and registered FINRA broker-dealers and agents provide for efficient markets?

4.) A FOUR PART QUESTION FOR ALL TO ANSWER:

How does interfering with just and equitable principles of trade, imposing market restrictions beyond the scope and policy of SEC Regulations and Federal Reserve requirements for participants and causing such fear among registered agents and principals as to avoid the process and service of client needs (a.) good for business; (b.) good for commerce; (c.) good for the movement of capital for small business; and/or (d.) good for the creation of jobs and reduction of unemployment?