Wednesday, June 17, 2009

Deterrence is Still Lacking in the Financial System

A new deck has been started in the back of the house, and that is going to be very good indeed. Is tomorrow really Thursday? This week has gone by in S-l-o-w motion! Great comments sections as of late. Never fear, any well thought out rant or opinion is welcomed here so post away!

Bearer Bonds Breaking Out
I told you I am not going to quit on this story, and it just gets more weird every day.

First off, even the mighty Bloomberg ventured a piece, and this is the first mainstream media sighting:
Suitcase With $134 Billion Puts Dollar on Edge: William Pesek
June 17 (Bloomberg) -- It’s a plot better suited for a John Le Carre novel.
Two Japanese men are detained in Italy after allegedly attempting to take $134 billion worth of U.S. bonds over the border into Switzerland. Details are maddeningly sketchy, so naturally the global rumor mill is kicking into high gear.
Are these would-be smugglers agents of Kim Jong Il stashing North Korea’s cash in a Swiss vault? Bagmen for Nigerian Internet scammers? Was the money meant for terrorists looking to buy nuclear warheads? Is Japan dumping its dollars secretly? Are the bonds real or counterfeit?
The implications of the securities being legitimate would be bigger than investors may realize. At a minimum, it would suggest that the U.S. risks losing control over its monetary supply on a massive scale.
The trillions of dollars of debt the U.S. will issue in the next couple of years needs buyers. Attracting them will require making sure that existing ones aren’t losing faith in the U.S.’s ability to control the dollar...
This is still a story with far more questions than answers. It’s odd, though, that it’s not garnering more media attention. Interest is likely to grow. The last thing Geithner and Federal Reserve Chairman Ben Bernanke need right now is tens of billions more of U.S. bonds -- or even high-quality fake ones -- suddenly popping up around the globe.

Maybe this will light a fire under so called "serious" journalists.

Clusterstock has not let the tale drop, and has this tidbit to add today:
The Japanese Bond Smugglers Are Missing
At least the Japanese press is still interested in story of the two Japanese men caught with some $134.5 billion in (presumably fake) US bearer bonds.
We can't read Japanese, and Google Translate isn't particularly helpful, but a reader informs us that the gist of this story is that a newspaper sent a reporter to Como, Italy and found that the men had been released, with their whereabouts unknown.
Now, the easiest, most-benign explanation for this whole thing is that it's just a counterfeiting scheme. Fine, but then why do you let them go without tracking their whereabouts.

I am sure it is standard Italian police procedure to release two people that are caught holding counterfeited bearer bonds, even is it is 135 Billion, by far and away the largest such crime in the history of the world. I am sure they would let me go if I counterfeited a few thousand bucks then. OK.

Gold ATM's - Sure Sign of a Top?
This Financial Times story about Germany deploying gold vending ATM's was widely seen as marking a monster top for the yellow metal. The story made Kevin Depew's "5 Things You Need to Know" today as number three.

I have a few thoughts about this. First off, I would prefer the precious metal space stay relegated to fools like me that love the stuff. Right now the distribution of metals as an investment is an almost nonexistent fraction of what most people have "invested" in various forms. I like that. Most investors are panic driven, fearful, and quick to make poor decisions. I say stay the heck away form gold and silver and let the few of us buy it all over the next decade or so.

That said, the instant pairing of a gold ATM and a top in gold is curious. I would say it could indeed be a reflection of a saturated gold market at the end of its run. This will hold if the small gold sales do not catch on. And this is a key point.

Is it so hard to see a scenario where gram sized slivers of gold become a hot item? Supermodels have been asking to be paid in Euros and not dollars, how about a few ounces of gold? I can see small gold pieces becoming a sort of "cool" thing to have, and an entire new money economy coming to life where these little babies get traded for various things. Cover charge for a nightclub? Two grams please. A bottle of tequila for the table? $75 dollars, or 3 grams please.

My personal preference is for that not to happen, but you just never know. Holding real gold (even gram sized bullion) is just so different from holding jewelry. let us hope it does not catch on.

Deterrence is Still Lacking in the Financial System
Loyal reader Gawain's Ghost had a great write up that featured this take away point:
Deregulation, securities, infectious greed, stupidity, the Fed, all had their hand in this debacle. But for my money, the overwhelming cause was the prevalence of fraud. Lending fraud, appraisal fraud, brokerage fraud, I mean, it just got out of hand.

I think Gawain's is correct and this relates to tonight's main point.

Unchecked, people will try to get away with the maximum amount that they can short of getting in real trouble. This can be summarized as Deterrence, which Wikipedia tells us:
Deterrence is but a theory from behavioral psychology about preventing or controlling actions or behavior through fear of punishment or retribution

The legal manifesto of Deterrence:
Deterrence is often contrasted with retributivism, which holds that punishment is a necessary consequence of a crime and should be calculated based on the gravity of the wrong done.
Deterrence can be divided into three separate categories.
Specific deterrence focuses on the individual in question. The aim of these punishments is to discourage the criminal from future criminal acts by instilling an understanding of the consequences.
General or indirect deterrence focuses on general prevention of crime by making examples of specific deviants. The individual actor is not the focus of the attempt at behavioral change, but rather receives punishment in public view in order to deter other individuals from deviance in the future.

While many are wrangling about how new regulations can best protect the banking system going forward, what of the regulations we have had in place? With no enforcement regulations are just lines in a book someplace and not real controls.

I think of the cases of all the "pump and dumpers" of the tech bubble era who were so fraudulent in their calls for Cisco Systems to go to $1000 a share that many had to pay fines and suffered some loss of employment.

Now we see that banks were lending money through channels never ending to people that they knew would never pay it back. Here, the real estate fraud in lending, appraisals and other areas mentioned by Gawain's comes into play.

And through is all we still do not have credible deterrence.

CEO of a huge bank, say mythical Bank of the United States? Lose more money than you made in 10 years on bad loans? No worries. Bail outs and you can keep your job.

Say you are the FED head and have overseen a system that was on the brink of collapse that can be directly attributed to easy money policy and lack of understanding of the real estate market? No problem, reappointment is assured.

And it goes down the line.

I am not saying that all these kinds of players need to be put in jail for 100 years or anything. But real deterrence can be had if those that missed what was going on are removed from their posts. So far we have 1, ONE, indictment against Angelo Mozilo to serve as a warning for poor lending standards. What we need is wholesale firings of entire boards and removal from office of the Treasury and the FED. If failure is not punished, nothing ever changes.

And this was my central argument for not bailing out the banks. Left on their own many would have failed and those lessons would not have been lost. Instead what we have is this lesson;
Lose tons of money, get bailed out and have new cash ready to deploy at great terms for your bank. Maybe even engage withe the government in an orchestrated market rally to help things along.
Great lesson.

Have a good night.


Anonymous said...

NEW YORK, June 17 (Reuters) - A leading financial market industry group, the American Securitization Forum, on Wednesday backed the Obama administration's plans to reform the securitization market, a key source of consumer funding.

They should it's exactly what their lobbyist wanted. Other then a lot of smoke and mirros there is basicaly NO CHANGE!

The said...

An excellent post, GYC, and an apt summary.

These bearer bonds are freaking me out! I mean, really, what, do you think you can just walk into a bank and have someone hand you over $134 billion for these bonds? The whole thing is absurd.

Something really strange is going on, and I have no idea what it is, but whatever it is nothing good will come of it. If they're conterfeit, that's a problem. If they're real, that's an even bigger problem.

Where did they come from? How did these two guys get their hands on them? What were they planning on doing with them? And where are these guys now?

Too many questions, with no answers. It's a mystery.

Still, the US needs to get a handle on this situation, or all hell is going to break loose.

Not that I hold out much hope for that. Seriously, this government can't even balance a budget, much less rein in banks gone wild.

Sigh. I guess there's just not enough fraud to go around.

Anonymous said...

President Barack Obama faces growing concerns among voters over government spending, the auto industry bailout and other economic policies, according to two opinion polls released on Wednesday.

Hopefully the peeps are waking up the the fleecing they have taken.

Ilargi said...

Bloomberg ran an earlier piece on the bonds. And Pesek, like everyne else has nothing either.

Why do people accept so easily that those who can carry a smaller rich country's entire GDP are too stupid not to get caught, and have no protection, no diplomatic passports, etc etc? Doesn't that raise any eyebrows?

Anonymous said...

Six Minutes with the Renegade Economist - Michael Hudson



Anonymous said...

Night Moves

I awoke last night to the sound of thunder
How far off I sat and wondered
Started humming a song from 1962
Ain’t it funny how the night moves
When you just don’t seem to have as much to lose
Strange how the night moves
With autumn closing in

Nice thunderstorm here tonight. I can't help but think of this song and how damn old I'm getting in a country that soon isn't going to be ap place for old men.


GawainsGhost said...

You know, whenever I post comments on the various sports blogs I frequent, I use the pseudonym The Soothsayer. Everywhere else I use Gawain's Ghost. For some reason, Google confused my username and logged me in under my sports pseudonym. Although why it only printed "The" is beyond me.

Howbeit, I am still freaking out over these bearer bonds. I sent the Bloomberg story to my friend Aaron, and he said he thinks the Japanese are behind it. Well, that would certainly explain why the two Japanese guys were released and allowed to disappear, the need to avoid embarrassment and all that.

It would appear that there is a concerted effort, particularly between Brazil, Russia, India, and China, to move the world off the dollar as the reserve currency. And now the Japanese are trying to dump their US bonds, assuming of course they are real.

I don't think the world will move off the dollar standard in the near future, but the trend to do so is deeply troubling and does not bode well for the US economy.

Of course, if we would stop trying to be the policemen of the world, shut down foreign bases or at least demanded payment for security protection (cost plus 10%), and concentrated on protecting and defending the homeland, rather than far away places, we wouldn't be in this mess.

It's long past time for the rest of the world to stand up and provide it's own security. This bankrupting of the American taxpayer to defend people who refuse to defend themselves has got to come to an end. We simply don't have the money or the manpower to perpetuate this sham hegemony.

And the rest of the world is starting to notice. So this next decade is going to be perilously interesting, or interestingly perilous, to say the least. In the end though I cannot imagine a world in which the US loses its place as the last, best hope of mankind. We're just going to have to figure out how we're going to pay for it.

By the way, I forgot to mention the role of the ratings agencies in the financial debacle in my diatribe the other day. Let's talk about fraud and conflict of interest, shall we?

We need serious reforms. Not that I expect any from this rotating caurosel of clowns that habitate Washington and Wall Street like so many hobby horses.

It is staggering to me, but I have been witness to the dissolution of America in my lifetime. I grew up in an era when men were men, football was football, business was business, and a handshake was as good as a written contract. Those days are gone forever.

watchtower said...

I heard Glenn Beck talking about the bearer bond situation this morning on the radio.
I don't know if this will have an impact or not but I'm betting money that black swan season is upon us.

GawainsGhost said...

Oh, and by the way, GYC, today is Paul McCartney's birthday. Just another little Beatles gig to be a thorn in your side.

GawainsGhost said...

Here is the latest on the bearer bonds. Apparently they're fake.