The Honorable Dr. Janet Yellen, Chair of the Federal Reserve, testified before the Senate Banking Committee yesterday in a ceremony that her predecessor, Dr. Bernanke, must have come to dread towards the end of his tenure.
Of course, towards the end, Dr. Bernanke’s tenure had been marked by the largest economic downturn in memory for most and he found himself shouldering much of the blame. Bodies such as the Senate Banking Committee often took the opportunity to grill Bernanke on the latest financial headlines or the direct complaints from their constituents stemming from various financial debacles that had unfolded during his tenure. Be it Lehman Brothers, MF Global, or the troubled housing market, Bernanke could count on questions ranging from the dangerous to the ridiculous from committee members who were, in many cases, further removed from reality than Dr. Bernanke himself.
So it was that Yellen took the hot seat that her predecessor had dreaded yesterday before a new set of faces in order to explain what she sees in her economic crystal ball.
From what could be gathered from the mostly scripted exchange between the parties, there seems to be a range of lingering worries in the minds of policy holders as to the health of the US economy, which recently clocked in at an underwhelming 0.1% annual growth rate in Q1 of 2014. The worries, which are no doubt rooted in recent history, range from the continued drop in labor force participation rates and what many see as a stalled out recovery in the housing market.
The US Q1 GDP number can be summed up in a phrase that Red Green was fond of, “It is winter.” Housing markets invariably slow down over the winter months, which are generally a drag on GDP as households recover from the Q4 holiday spending binge.
Labor market participation, which surfaced as a primary concern during yesterday’s hearing, is a much more complex problem, for deep down it validates the fears of nearly every thinking economist, that the US is following in the footsteps of Japan’s demographic and economic precedent.
The real problem with the US economy was not addressed directly at this hearing, nor is it likely to ever be addressed in such a forum: The extraordinary measures employed by the Fed back in 2008 in an effort to prop up the international banking system have forever altered the mode of transmitting credit into the economy. This has caused a broad based reset of the banking food chain at a time when the US economy could least afford for such a change to occur.
These extraordinary measures will be with us until the US Dollar hits its breaking point, and the inevitable currency reset begins to pick up steam. When this occurs, Dr. Yellen and the Senate Banking Committee are likely to be the last to know.
The virtual currency known as the Bitcoin has achieved what has become a badge of honor in the finance industry, it has become the subject of a Senate hearing.
Senate hearings have, in the past, starred noble characters such as MF Global and its lead actor, John Corzine, who still roams free after punting roughly $1.6 Billion USD to another Wall Street leading man, Jamie Dimon, who remains the head of JP Morgan, who added a $13 Billion fine to its list of greatest hits related to its dealings with other entities during what has become known as the Financial Crisis of 2008.
And who can forget the Gorilla, Lehman’s Richard Fuld, who starred in one of the earliest versions of such hearings and gave us the phrase, echoed by insolvent bankers throughout the world, “why us?”
As the Bitcoin has no central authority to speak of, the Senate Committee on Homeland Security and Government Affairs called Jennifer Calvary, head of the Financial Crimes Enforcement Network, Edward Lowery of the Secret Service, and Mythili Raman of the Justice Department to testify on its behalf.
As may be expected by three persons who are cast in the role of antagonist to anything offering anonymity to private citizens, a privilege that the government refuses to recognizes, they expressed concern about “what could happen” and “who may be using” virtual currencies such as Bitcoin.
However, the antagonists did show a measure of empathy for their crypto-foe, the same way viewers feel empathy for characters like John Q or Walter White. While taking the government line that what people may do with Bitcoins may be bad, the Bitcoins themselves are generally harmless and, in fact, may provide a great benefit to society.
As pageantry that generally accompanies a finance related Senate hearing unfolded, the Bitcoin market went ballistic, touching $900USD before the elevator moves inherent in the Bitcoin/USD (or any other debt based currency) market took hold and thrust it back to $600, it is now climbing past $700 as we write.
While it is interesting for Senators to listen to how various branches of government propose to regulate Bitcoins, it is clear that, while they may have a glimmer of a chance of understanding the technological framework of Bitcoins, they have no clue what it means in the monetary realm, for they do not understand money.
Alas, much of humanity is in the dark as to monetary theory. It is for this reason that we started The Mint, to explore this deep “mystery” that lies in the wallet of each and every one of us.
To be sure, Bitcoins have an Achilles heel, but it is not what many people think, want to know what it is and when to get out of Bitcoins? Someday we will give them away, for now, it will cost you $0.99 USD, or 0.00141 BTC to find out. Please pick up our hastily written guide to Bitcoins, which, to our knowledge, is the only one that has examined Bitcoins through the lens of monetary theory with clarity and coherence.
All we can say for the moment is that Bitcoin is a buy, you can sort out the details later.
As for the government’s concerns regarding Bitcoin’s inherent anonymity in the monetary realm, we propose the following Quid pro quo. Rather than the public being obligated to respond to the straw man argument of “If you have nothing to hide, what are you worried about?” what if the public’s retort to the government became a universal, “if you have nothing to fear, what are you worried about?”
Today, Jamie Dimon, CEO of JPMorgan, made his courtesy appearance before the home team, the Senate Banking, Housing, and Urban Affairs Committee earlier today.
It was, for the most part, a constructive exercise. Mr. Dimon had been called to explain something alarming, a $2 billion loss due to hedges gone awry in what is essentially the banks internal treasury operations. Alarming as it may be, the losses fell entirely on the backs of JPMorgan’s shareholders.
It was a stark contrast to the lambasting that Jon Corzine, former bureaucrat and MF Global chief, recieved by committees from both the House and Senate after his firm “lost” $1.6 billion of client funds. As JPMorgan was the counterparty to the transfer of a portion of those funds, it was only natural that a few questions with regards to the infamous event would find their way to Mr. Dimon today.
Generally, Mr. Dimon gave an impressive show in front of the home team crowd. As the largest bank on the planet and a Treasury Primary Dealer, JPMorgan may be one of the largest direct and indirect purchasers of US Bond issues. For the most part, the Senators were kind to their biggest customer. You can see the entire testimony here.
Some observations from The Mint:
Mr. Dimon knows what he is doing.
There is a reason that JPM is the banker and/or key liquidity provider of many smaller banks and sovereign nations.
It was brought up that loans are the riskiest investments that a bank makes, and JPMorgan is no exception.
The term “hedging” is widely misunderstood. Most take it to mean a trade made to eliminate risk, when in practice hedging has the effect of diversifying a portfolio of investments, often using leverage to do so.
Mr. Dimon’s brief response about the need for fewer regulations which are enforced rather that a myriad of regulators which lack expertise and authority was a brilliant appeal to common sense which mostly fell on deaf ears.
The US fiscal cliff will not wait until December 31, 2012 to produce derogatory effects for the economy. Individuals and businesses will begin to take actions to protect themselves long before the deadline approaches.
One of the Senators observed that the US Treasury ran a loss of $4 billion per day, twice the amount that Mr. Dimon’s firm had lost on its renegade trades.
Most of the Senators, while well intentioned, are absolutely clueless about the inner workings of a modern banking entity. Which begs the question, what qualifies them to regulate one?
JPMorgan is not to big to fail, rather, it is too big to save were it to fail.
One cannot apply the hedging and investment strategies of the world’s largest bank to the entire banking industry.
JPMorgan is in a league of its own, and thus is required to take risks on the scale that is difficult to fathom.
Mr. Dimon places little faith in financial models, which at best are a reflection of the immediate past and generally useless for future decision making.
New regulation costs as a result of the legislation inspired by the financial crisis for JPMorgan were estimated to be upwards of $1 billion.
It is not below the Senate to play the “US Taxpayer is on the hook” card when speaking with a banker, incorrectly implying that the US Taxpayer somehow thought that TARP and everything after was necessary and stands ready to take similar actions should another large bank get into trouble.
Much of the testimony was peppered with the common theme from the Senators which can be summed up in the phrase “how should we regulate you?”
While Mr. Dimon took the opportunity to point out that the so called Volcker rule was a bad idea, which is what has dominated headlines about today’s hearing, He did point out that JPMorgan’s survival was not dependant upon TARP and other bailouts, as has been suggested.
The message? Don’t regulate us and don’t save us.
In the end, isn’t that what true capitalism is all about?
Today the Agricultural committee of the US Senate played host to what has become the political and financial spectacle of the year: The Hearings on the MF Global collapse. We have equated these hearings to professional wrestling. While high in entertainment value, the spectators are left to wonder how much of it is real and how much of the action is staged.
Today, Jon Corzine, MF Global’s former CEO, the ultimate insider who has become the poster boy for the corporate and political corruption that seems to rule the day, was joined by Bradley Abelow, former President and COO of MF Global and Henri Steenkamp, who is still acting as the firm’s CFO.
Jon Corzine takes a quick thumb to the eye at MF Global’s Wrestlmania
It appears that the addition of two more members of MF Global’s senior management team was intended to give the illusion that there may be more information forthcoming at this hearing than at the earlier hearing held by the House Agricultural Committee. That illusion was quickly dispelled as soon as each of them opened their mouths.
In summary, they are very, very sorry. They are aware that this situation has undermined confidence in the markets. They do not know where the $1.2 billion of missing client funds are. They are pretty sure that the funds went missing from their treasury group, where the funds are held.
Strangely, the Patriot Act of 2001, in addition to steamrolling the US Constitution, included provisions which required every banking institution in the US to “know their customer,” which in practice means that no transfer from US accounts could have taken place without the authorities being able to quickly track who the money went to. This provision, which on its face would make theft and money laundering in US Financial institutions impossible, makes “not knowing” who the money went to an untenable defense.
Nonetheless, Corzine and his cohorts stated again and again that they have no idea where it went.
The only revelation, apart from the names of a few MF Global employees who were offered as sacrificial lambs before the inquisition style questioning, was that the CFO of North American division was apparently on vacation when the funds went missing.
They never mentioned whether or not this individual had returned.
Corzine went as far to say that nothing he said, such as “I don’t care where you get the money, we have to make this margin call,” for example, “should have been construed” as permission to transfer client funds into MF Global operating accounts and then out to counterparties. He is obviously slipping towards a plea and hoping to do time with his Goldman buddies at a posh jail in Manhattan.
By the end of the morning, nothing that was said, either by a member of the Senate or former MF Global executive, served to instill any measure of confidence.
The afternoon, however, looked promising. The regulators who were on the case and had their noses close to the ground were set to testify. CME Group Executive Chairman Terrence Duffy, MF Global Trustee James Giddens and CFTC Commissioner Jill Sommers sat down before the committee and took the obligatory oath.
Mr. Giddens lead off, restating the obvious. He is in charge of ensuring that MF Global assets are liquidated and that the proceeds distributed to the creditors based on the criteria laid out in the US Bankruptcy code. He would later state that efforts to recover assets abroad had been blocked by sovereign governments (those across the Atlantic), who are likely protecting their banks from what would be a devastating clawback of funds.
Then, just as we thought that the afternoon would be a snoozefest, Mr. Duffy of the CME Group dropped a bombshell.In his opening remarks, he stated that he was “in the room” when a CME employee was on the phone with an MF Global employee who stated that Mr. Corzine had direct knowledge that client funds were missing (or in industry parlance, “loaned out”) well before the weekend of October 31st.
This directly contradicted Mr. Corzine’s testimony under oath in which he stated that he had “no knowledge” of the missing client funds until that fateful weekend.
Et tu, Brute?
The diversion only lasted for a moment. The committee then proceeded to flagellate Mr. Duffy and the CME Group for defending the idea that their exchanges can properly self regulate themselves.
Mrs. Sommers of the CFTC was then flagellated by the committee for the failure of the government agency to regulate entities such as the CME Group and MF Global which are supposed to, if we understand correctly, self regulate themselves.
As today’s chapter of the spectacle came to a close, there were more questions than answers. Like the old WWF, no scores were permanently settled and we will have to tune in Friday to see how the next stage in this drama unfolds. It promises to be exciting, as the committee includes none other than Ron Paul (R-TX), the one man in Congress who may actually understand what happened.
For those who have not been following, the MF Global situation is extremely important because a number of things that investors have been able to count on have been called into question. A brief list of these now invalid assumptions:
– Client funds are properly segregated from a brokerage company’s operating funds.
– Exchanges such as the CME Group will backstop (make whole) clients in the event that one of their approved brokerage firms goes bankrupt.
– Exchanges will halt trading in the event of a bankruptcy until any missing client funds can be accounted for and that trades from customers of the bankrupt brokerage can be executed.
– Once a brokerage firm declares bankruptcy, all assets must be handed immediately over to a trustee who from that moment on has a fiduciary duty to sell the bankrupt firms assets to the highest bidder to satisfy as many creditors as possible.
– Regulatory agencies such as the CFTC have controls and monitoring in place which will prevent clients from suffering losses if a brokerage firm misappropriates their funds.
– Sarbanes Oxley has effectively eliminated corporate fraud.
– The commodity exchanges, such as the CME Group, can effectively self regulate.
– Theft is illegal.
Every day which passes in which there is not a full recovery of the client funds held by MF Global adds to the list of questions. And every day that passes serves to call further into question the ability of all brokerage houses, exchanges, and government regulators to make good on their promises.
The MF Global situation is not simply about the bankruptcy of a large brokerage, it is about whether or not the rule of law can be trusted to operate in the financial markets of the United States of America.
For all of the bankruptcies and bank seizures that have occurred in the wake of the 2008 financial crisis, in most cases there has been confidence that the framework of the markets could be trusted, and that the myriad of regulatory entities which are supposed to make Capitalism safe for all have everyting under control.
After MF Global, one has to question whether any asset, paper or physical, entrusted to a financial institution is safe.