DAVID
KOTOK: LIBOR-Gate Will Take Down Many More Bankers, And The Claims
Will Spiral Into The Trillions
7
July, 2012
Markets
reacted to this crazy week of discredited, ADP-based employment
forecasts, LIBOR revelations and central bank fizzle. The result is
plain ugly.
In
Europe, post-ECB, credit spreads widened. Good-guy yields declined;
bad-guy yields rose. See our updated EU contagion series at
www.cumber.com. Note how Swiss yields are negative until the 5-year
maturity (which is a whopping 7 basis points). For new readers, see
our archives on why the Swiss 10-year government bond is now the de
facto benchmark for the eurozone. The European Central Bank
demonstrated too little, too late. This week’s Draghi Q&A did
not help matters. We continue to underweight Europe. It is still
too soon to bottom fish.
In
the US, the employment statistics release shows an ongoing but
weakening, very slow recovery. A plus 80 thousand nonfarm jobs is
better than minus 80 thousand. We see nothing to alter this slow but
marginally positive growth outlook.
The Fed’s additional “Twist”
is a whimper, not a shout. In fact, that is probably a good thing,
since monetary policy has its limits, and we are near them. We
expect no more from the Fed for the rest of this year unless there is
a seriously negative event. In our US ETF accounts we are still
holding a cash reserve. In managed taxable and tax-free bond
accounts we are slowly bringing in duration and using tactical
hedging where appropriate. Our newly launched US high-yield debt
strategy is developing well.
LIBOR-gate,
as Michael Lewitt titled it, is a mess. It is potentially huge. We
expect more ugly revelations. Other institutions may be implicated.
Critics of emerging-market governance standards need to look in the
mirror. The so-called developed markets now exude a rising stench.
We
will end this weekend missive with an email exchange.
Steve
wrote, “David, Do you have any insight into this article? To what
degree is it true / false?” He furnished this link to a Business
Insider piece that discusses corruption in China.
My
answer follows.
Steve,
we have continuing questions about reporting from China. It takes
on-site anecdotes to gain a picture that reveals trends. We do that
by obtaining data from sources we know and trust. For example, one
can count containers on ships or coal inventories or financial
holdings at public institutions.
But
why is the writer looking at China?
Business
Insider penned this opening: “[Other articles have described the]
widespread fraud that has become apparent, both in mainland and US
listed Chinese companies…..an extraordinary number of the Communist
Party and the military cadre had massive unexplained wealth …”
Let’s
take a different approach. I have rewritten his sentence into a
different context. Suppose you, Steve, were an honest Chinese
observer, reading the following sentences about the United States.
“Widespread
fraud has become apparent in the Mainland US and among US-listed
financial firms. Extraordinary numbers of political figures and
public appointees have massive wealth. Examples include (1) Dick
Fuld, who was a director of the Federal Reserve Bank of NY until his
firm, Lehman Brothers, went into bankruptcy. He has not been charged
with any crime. He denied knowledge of any accounting
irregularities. (2) Former US Senator Jon Corzine’s firm was a
Federal Reserve primary dealer before it failed. Huge balances of
client funds are unaccounted for at MF Global. Corzine says he does
not know what happened. (3) No one knows the counterparties of the
transactions that cost JPM billions. (4) Members of Congress and
their staffs trade on insider information and are not violating US
law because of the congressional exemption that Congress legislated
for itself.”
Steve,
I could lengthen this but you get my point.
I
will stop with my own personal observation about the LIBOR scandal.
My colleagues Michael Lewitt, Bob Eisenbeis, and Bill Witherell have
written about it this week. (www.cumber.com)
The
LIBOR rigging is systemic. For evidence see a Bloomberg report from
May 29, 2008, under the headline, "Libor Banks Misstated Rates,
Bond at Barclays Says." (Yes, the article ran more than four
years before Barclays's $453 million settlement last month with U.S.
and U.K. authorities for manipulating Libor.)
Steve,
this scandal is going to take down many more than just Barclay’s
leaders. The claims are likely to be in the trillions.
Imagine
the board meeting at Barclays. The general counsel says, “I have a
settlement proposal. We can pay 1/2 billion in fines to the US and
UK authorities now; and you, Mr. Chairman, and you, Mr. CEO, and you,
Mr. COO, will resign at once. Others will also resign or be
dismissed. Gentlemen, I can make this deal right now and settle it
or we can have a prolonged investigation. In my opinion, paying the
half billion now and taking the resignations early is the cheapest
way out of this mess.” The board votes yes.
Steve,
the insiders on that board know the facts. Watch out for what is
coming. It may dwarf allegations about Chinese corruption.
The
US and UK systems were once the models for the world. They are now
sick and corrupt. We are five years into a financial crisis and
nothing has changed. Who are we to throw stones at others?
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