1.87 billion shares of Citigroup exchanged hands on Friday. That’s easily a record, not just for Citi, but for any stock in the history of the New York Stock Exchange. Shares in the company dropped almost 40%, to $1.40.

The former record holder WorldCom traded 1.5 billion shares on July 1, 2002. The S&P 500 set a bottom three months later.

But on this snowy Monday, during the winter of our discontent, a bottom seems unlikely anytime soon. The Dow opened down 100 points today, breaching the 7,000 level for the first time since 1996. On this leg down, if the Dow goes back to Greenspan’s original proclamation of “irrational exuberance,” it will hit 6,500. He first said those words on Dec. 5, 1996.

If the Dow continues to follow the Japanese example, a 27-year low would bring it all the way back to 1,000 during the life of this bear market.

“I don’t think the market appreciates,” says Dan Amoss, “how much the TALF could help restart lending.

“Last fall’s screeching halt in bank lending was greatly exacerbated by the crisis of confidence in securitization. Prior to the crisis, many of the consumer, business and mortgage loans originated by banks were sold into asset-backed securities and mortgage-backed securities.

“Securitization was abused to the point that it exacerbated the lending bubble; banks quickly reopened the lending capacity of their balance sheets as soon as they securitized loans and sold them to investors.

“Securitization lies at the root of the collapse in lending standards, but that’s another story for another time. Longtime Strategic Investment readers will recall my view, starting over two years ago, that reckless securitization would lead to major problems once investors noticed the toxicity of the asset-backed securities they were buying. It was the primary reason I recommended the UltraShort Financials ETF in July 2007.

“The comparison is not perfect, but depending on its success, the TALF could provide stability to the securitization market, or “shadow banking system,” much in the way that the FDIC guarantees stabilized the banking system during the Great Depression. This could lead to a rally in economically sensitive stocks that have been sold down to distressed levels.”

Considering Friday’s debacle for Citigroup, we’re not surprised to hear Abu Dhabi is “carefully assessing” its $7.5 billion investment in the bank.

The wealthiest of the UAE’s emirates, Abu Dhabi’s got a bit of a dilemma on its hands: Its billions in convertible bonds will convert to shares this time next year. Once the date comes, the bonds will convert between $31-37 a share… just a bit higher than Citi’s current $1.50 bid. That’s assuming, of course, that the U.S. government won’t wipe out all the shares by then via sudden nationalization. Either way, should add an interesting twist for the world’s largest sovereign wealth fund… and fifth largest petroleum exporter.

The mood in the market is as grim as our most famous investor. When he participated in the panel following the premiere of I.O.U.S.A., Warren Buffett shocked many of the film’s makers by playing the token Pollyanna. He all but dismissed the possibility that the U.S. faces a crisis of any kind.

Today, a scant six months later, Mr. Pollyanna is singing a different tune:

“The economy will be in shambles throughout 2009,” Buffett wrote in his annual letter to shareholders over the weekend, “and, for that matter, probably well beyond.”

The above is certainly the most headline worthy quote of his latest missive, and the one that’s got most Buffett disciples running for cover. But of course, there were plenty of little nuggets of wisdom in his yearly letter. Here are a few:

– “In poker terms, the Treasury and the Fed have gone ‘all in.’ Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.”

– “Our long-avowed goal is to be the ‘buyer of choice’ for businesses –  particularly those built and owned by families. The way to achieve this goal is to deserve it. That means we must keep our promises; avoid leveraging up acquired businesses; grant unusual autonomy to our managers; and hold the purchased companies through thick and thin (though we prefer thick and thicker).”

– “Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified.

“Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.”

– “The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms.”

– “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.

“Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long.”

Yet the U.S. government pumped $30 billion more taxpayer dollars into AIG this morning. The injection came as the doomed insurer announced a $61.7 billion quarterly loss.

That’s a record for any publicly traded American company and even bigger than the group anticipated a few weeks ago.

Last year, AIG lost just under $100 billion. That’s around $3,200 for every second of the year. We’re impressed. Losing that much money that fast takes talent.

Today’s injection brings Uncle Sam’s AIG tab up to $180 billion. In exchange, you own almost 80% of the company… that you’ll never see.

Two more banks failed over the weekend. The 15th and 16th failure of 2009 will nick another $100 million notch in the FDIC’s belt.

Consumer spending in the U.S. registered a surprise gain in January, the Commerce Dept. said today. After falling a record six months in a row, spending popped up 0.6% during the month.

At the same time, personal savings in the U.S. has shot up to 5%. That’s the highest level since 1995.

Hmmn….

The climbing savings rate explains this phenomenon too. The dollar index, still the ultimate flight to “safety” (sic) is just below 89 — its highest level since April 2006.

Investors are showing commodities no mercy during today’s sell-off. Oil is down $4 a barrel, now just clinging to $40. Even gold can’t withstand the pressure… it’s down almost $30, to $933.

“The U.S. had better start looking for someplace else to store its high-level nuclear waste,” declares Byron King, with today’s energy opportunity. “Because they won’t be storing the waste at Yucca Mountain, Nev. This week, the Obama administration announced that it will not support the 20-year-long, $10 billion project to store waste at Yucca Mountain, located about 100 miles northwest of Las Vegas.

“The new administration had better start an alternative soon, and move fast. Almost every one of 104 operating U.S. nuclear power plants are either out of room for on-site storage or nearly so. And then we have to deal with the many forms of nuclear waste generated in government labs and everyday nongovernment industry.

“This ranges from the U.S. nuclear weapons complex to the medical arena and things like metallurgical testing and oil well logging. The nuclear waste that comes from these activities presents a serious problem, with no solution in sight. Lack of storage is a key roadblock to the expanded use of nuclear power in the U.S. Every nuclear-related project needs to show how it will handle nuclear waste from cradle to grave. So what happens when there’s no grave?

“Canceling the Yucca Mountain project may feel good to longtime critics. Indeed, canceling Yucca Mountain may even be the right thing to do. We’ll find out over the next century or so. But right now, we have a problem. Where else to store large volumes of high-level nuclear waste? Any volunteers? No, I didn’t think so. All the wise heads at DOE and in the U.S. nuclear industry had better get their thinking caps on. And whoever figures it out will probably make some serious money.”

For more from Byron, be sure to check out his latest special report: How to Buy Gold for a Penny per Ounce.

“Your reader complains ,” writes a reader, “that letting the big banks fail will be more than ugly, that it will be Armageddon. I have spent hours a day online reading about this crisis, and have found not a single article explaining in any significant detail how this conclusion is reached. The Fed and Treasury refuse to disclose the extent of the problem for two reasons: 1) fear of spreading panic, and 2) fear of disclosing the banks’ ‘trade secrets.’ We’re even denied the knowledge of how our money has already been spent. Bloomberg and Fox News have both filed FOIA lawsuits that the Fed is fighting.

“It’s not enough to describe the situation as a ‘house of cards.’ Let’s open the process to daylight, bring in outside persons who are likely to question our existing authorities (I’d nominate Buffett, Roubini, Taleb and Santelli to start). Have this group perform the ‘stress test,’ not the idiots who couldn’t and didn’t see this coming. An audit by the people who are to blame for the problem is NOT going to restore public confidence, any more than would a urine test by Barry Bonds’ trainer.

“Indeed, when I saw the stress test parameters issued yesterday by the Fed, I concluded that Geithner has already peed in Citigroup’s cup.”

The 5: Charming.

At least we’re not in Europe, eh? This miniature Hooverville is parked outside the capital in Kiev.

We saw what happened to the rest of Europe last month when Russia and Ukraine had their little pipeline tiff… hard to imagine the energy crisis that would result from total economic failure.

“Central Europe’s refinancing needs in 2009 could total 300 billion euro, 30% of the region’s GDP,” declared Hungarian Prime Minister Ferenc Gyurcsany. He said over the weekend that the richer EU members should set up a $200 billion fund to help keep union alive. Germany has already rejected the bailout… France and Italy will likely follow.

“A significant crisis in Eastern Europe would trigger political tensions and immigration pressures. With a Central and Eastern European population of 350 million, of which 100 million are in the EU, a 10% increase in unemployment would lead to at least 5 million unemployed people within the EU…

“We should not allow that a new Iron Curtain should be set up and divide Europe.”

Across the English Channel, Europe’s biggest bank is in dire straits too. HSBC was forced to raise over $17 billion today after announcing its 2008 income crashed 68%. The bank will issue over 5 billion new shares, Britain’s biggest ever rights issue. The mega bank also announced a 29% dividend cut.

Source: A Bottom in Sight? Buffett Wisdom, Energy Crisis, Eastern Europe and More!

The Risk Takers have crawled back under rocks and into the walls again, as Risk Aversion weighs heavily on the currencies… I saw a headline this morning that made me laugh out loud… Some writer believes that the “Dollar Is Best Looker in Ugly-Currency Parade”… Hmmm, apparently he didn’t take the time to look at Norwegian krone! Now, here’s my version of Mirror, mirror on the wall…

Long time readers know my affection for the Surplus / Positive Balance of Payment countries and their respective currencies… Norway, always drifts to the top of those discussions, and then last night I came across a report by the research team at HSBC that graded the currencies… Their pick for Best Currency? Norway… Now, I can’t give you all the results of their report (It’s THEIR REPORT!) but, the note that was on the internet is up for grabs, so lets listen in to the research team at HSBC….

“The world is in total flux and, as such, we have released our new interim forecasts for the global economy today. Based on these numbers, which make depressing reading, we look at who comes out the best amongst the G10. We give all the variables an equal weight. We could have quite easily given CDS spreads a higher weight, which we believe is a key driver of the FX market at the present time, but even with equal weights the answer is still the same – Norway wins hands down. In addition, the JPY and the CHF are both losing their safe haven status and the best safe haven currency is the NOK. The NOK is our preferred G10 currency where we expect a sustained appreciation over the next 18 months.”

OK… NOK is Norwegian krone, JPY is Japanese yen, and CHF is Swiss francs… Just to make that clear…

So… I my colors are already pinned to Norway’s mast… Has been, and will continue to be, until something changes…

Now that I’ve said all that, I will say this just to make the Legal Beagles happy with me (yeah, like they’re ever happy with me!) And that is, simply this is a fundamentals choice, and has been… You can go back to the start of 2006, when we issued a 20 year anniversary for World Markets newsletter, and in it, I talked about the Surplus countries being at the top of my Hit Parade… And which Surplus Country was the first one I mentioned then? Norway… But to carry on with the Legal stuff… Again, this is a fundamental choice, there are times the markets do NOT follow fundamentals, and fundamental choices do NOT perform.

And with a currency like Norway… It really needs the euro to be underpinned for the krone to outperform the single unit… So… All, I’m really saying here is that the dollar isn’t the “Best Looker” in my opinion… That claim to fame would be Norwegian krone!

Whew! That was a long talk, and my fingers are tired… I’ll have to give them a break here for a minute… Hold on, I’ll be right back!

OK, I’m back now! Hope you didn’t miss me! HA! This morning, the euro saw some selling based on a rotten German Business Confidence report that was issued by the think tank, IFO… The rot on the German Business Confidence vine wasn’t that bad compared to last month, as the index fell from 83 to 82.6, but it was enough, when added with the fact that the Eurozone bond idea fell apart, to kick some sand in the euro’s face this morning. It was also a 26-year low for the report…

In further evidence that Japanese yen is losing its grip on the claim of “best performing currency”, the yen has fallen to a 12-week low this morning of 95.60… I began writing about the possible end of the Carry Trade Unwinding a couple of weeks ago… And since then more and more evidence to prove that thought has come about. Some traders and writers believe the yen’s weakness has to do with it losing it’s “safe haven allure”… While that’s all fine and dandy, I truly believe it has more to do with the end of the Carry Trade unwinding…

Now, here’s a guy that’s been reading the Pfennig and probably the Review & Focus, and might even subscribe to my “pay for” newsletter, The Currency Capitalist, for listen in to what he’s saying and see if any of it sounds familiar… It should! This story appears on Bloomberg…

“LGT Bank in Liechtenstein (Singapore) Ltd., part of the bank for the wealthy owned by Liechtenstein’s royal family, is favoring gold and shunning Treasuries because of the risk inflation will quicken.

U.S. government and Federal Reserve efforts to snap the recession in the world’s biggest economy will push up prices for goods and services, said Hans Goetti, who oversees $10 billion in Asia as LGT’s chief investment officer. President Barack Obama’s spending plans will force the government to borrow more, another reason to stay away from Treasuries, he said.

We are setting ourselves up for inflation maybe 12 to 18 months from now, Goetti said. The borrowing requirement will go up. There’s no doubt. I cannot see bond yields staying at these levels.”

>>>>> Hmmm… Yep, he’s a “reader”!

OK… I’ve been on the soapbox many times on this bailout of AIG that happened last year… Well, as a taxpayer, you had better get pretty darn upset with this latest news… A reader sent me this story so I wouldn’t miss it!

“American International Group Inc., the insurer bailed out by the U.S., may restructure its rescue package for the second time in four months as the recession forces down the value of the firm’s assets.

AIG may announce that it is converting the government’s preferred shares into common stock to relieve pressure on the New York-based firm’s liquidity, a person familiar with the situation said. AIG pays a 10 percent dividend on preferred stock, and none on common shares.”

OK… So, AIG wants to bleed slower than the current pace… So… The Gov. owns the preferred shares, but would see their return reduced by 10%, if AIG converts their preferred shares to common shares… Doesn’t this just tick you off? Oh, and before I go on… Sources close to the company (AIG) said the loss (when reported next week) will be near $60 billion due to write downs on a variety of assets including commercial real estate. That number, if it prints at $60 Billion will se a record for the largest loss in U.S. Corporate History!

Alright, I had better stop there… You see what I keep talking about though? You apply a tourniquet to a bleeding company, and sooner or later they’ll come back and need more…

Speaking of tourniquets… The stock markets of the world need one badly… Here in the U.S. yesterday, the DOW fell to its lowest closing level since May 1997 as stocks dropped across the board on fears that the recession will worsen. The S&P 500 dropped 3.5% to its lowest close since April 1997.

Personal wealth is falling down a hole… And suddenly people look up and say…”if I had only saved more money instead of trying to be the next Warren Buffett!” Things are falling apart all around… Clowns to the left of me, jokers to the right…

A month or so ago I went off on a tangent about how I felt a lot of all this mess with financial instruments that have failed, came about… And my words pale in comparison to those of former Fed Chairman, Paul Volcker, who summarized this failure of these instruments in a recent speech… Here’s Paul Volcker…

“There was so much opaqueness, so many complications and misunderstandings involved in very complex financial engineering by people who, in my opinion, did not know financial markets. They knew mathematics. They thought financial markets obeyed mathematical laws. They have found out differently now. You know, they all said these events only happen once every hundred years. But we have “once every hundred years” events happening every year or two, which tells me something is the matter with the analysis.”

That’s right! That’s my feelings in a nutshell! And it’s such a shame… OK, I’ve got to get to something that lifts my spirit this morning… YES! Let’s talk about Gold!

As I signed off yesterday, Gold was trading down on the day at $986… The shiny metal then rallied on the day back to $995, but has seen more profit taking overnight to $990… And now $989, as I glance at the screen. Recall when I kept mentioning and even gave the “wink, wink” that Gold was “still” trading below $900? Well… A couple more days of this below $1,000 trading, and I’ll be tempted to wink again!

Currencies today 2/24/09: A$ .6490, kiwi .5110, C$ .80, euro 1.2790, sterling 1.4525, Swiss .8640, rand 10.0725, krone 6.8120, SEK 8.8250, forint 233.40, zloty 3.6690, koruna 22.2325, yen 95.80, sing 1.5270, HKD 7.7530, INR 49.86, China 6.8375, pesos 14.97, BRL 2.3810, dollar index 87, Oil $38.50, Silver $14.44, and Gold… $989.60

Source: Shrove Tuesday!

But the moment the traders on the Comex started their day, gold got hit for about $13 and never recovered after that.

click to enlarge

For silver, it was a different story. Although it, too, was hit at the beginning of Globex trading on Friday morning…it began to rally just before lunch in London…and with the odd pause, continued its winning ways right until the end of Comex trading in New York.

click to enlarge

Of all the precious metals, only gold showed a loss on the day. Silver finished up 1.78%, platinum was up 2.77%…and the star was palladium, up a whopping 5.50%. Despite gold’s poor performance, the stocks finished in the positive column again yesterday, with the HUI up 2.12%

Open interest changes for Thursday’s trading in gold and silver are as follows. Gold o.i. rose another 2,462 contracts to 348,899. Whereas silver o.i. fell 240 contracts to 93,699. There were no changes in either the GLD or SLV yesterday…and I thank Gene Arensberg for kindly providing the two graphs for this report.

And now for this week’s Commitment of Traders report for positions held at the close of trading on February 3rd. Once again, this will be the Reader’s Digest version of the stats. In silver, there weren’t a lot of changes. The tech funds in the Non-Commercial category increased their net long position by 1,457 contracts…and the bullion bank(s) in the Commercial category increased their net short position by 978 contracts. In gold, there was more deterioration, which was no surprise. The tech funds in the Non-Commercial category continued to pile in on the long side, increasing their net long position by a substantial 14,192 contracts, while the bullion bank(s) in the Commercial category went net short an even more substantial 19,213 contracts. The link to this week’s COT report is here.

In a nutshell…it’s the same old, same old routine as we’ve seen for the last decade or so. The ‘4 or less’ traders in the Commercial category [U.S.bullion banks] continue to take the short side of virtually every long trade. They do it because there are no willing free-market participants that are stupid enough to take the short side of the trade at these prices for either gold or silver. If the bullion banks weren’t there to take the other side of the trade, the prices for both metals would already be at the outer edges of the known universe…which is exactly what the U.S. government, the Fed and the U.S. bullion banks don’t want to happen…as their precious US$ would disappear in the blink of an eye.

Well, you say, how am I so sure it’s the U.S. bullion banks that are involved. A couple of things. The first is called the monthly Bank Participation Report [BPR] which, coincidentally, was also issued yesterday…and also for positions held at the end of trading on February 3rd…the same as the latest COT. Both are snapshots of positions held at the exact same point in time…the close of business on Tuesday. So let’s see what it says about what the U.S. bullion banks are up to. Firstly, silver…where it reports that two [or less] U.S. banks are short 27,189 contracts. The two [or less] U.S. banks have zero long positions. [As a comparison, there are thirteen non U.S. banks that are long 8,416 contracts and short 1,871 contracts.] Now…in the Commitment of Traders report yesterday, the silver net short position in the Commercial category was reported to be 33,173 contracts. So, by straight division, two [or less] U.S. bullion banks are short 82% of the net silver short position in the Commercial category on the Comex!!! Any questions?

Now in gold, the Bank Participation Report [BPR] says that three [or less] U.S. bullion banks are short 111,190 contracts (a record high by a long shot!). They are long 3,629 contracts…so net, they are short 107,561 contracts. [As a comparison in gold, there are twenty-three non U.S. banks that are long 33,434 contracts and short 42,335 contracts.] In Friday’s Commitment of Traders, the gold net short position in the Commercial category was reported to be 177,589 contracts. So, once again by straight division, three [or less] U.S. bullion banks are short 60% of the net gold short position in the Commercial category on the Comex. And if you remove all spreads in both metals, these short positions by these U.S. banks go from obscene to grotesque! Yet the CFTC says they’re still studying the issue. The link to the Bank Participation report is here…and you’ll have to scroll down a bit.

Two paragraphs ago, I said that there were a couple of things that proved it was U.S. banks that were responsible for these huge concentration numbers. Here’s the last thing. I’ve mentioned it before, but I’ll bring it up again…so it can put into the context of both the COT and BPR I’ve already spoken of…the ‘final nail in the coffin’ so to speak. Two weeks ago, the third quarter derivatives report was issued by the Office of the Comptroller of the Currency [OCC]. I don’t have the report at hand, so my numbers may be off a bit, but they’re close enough for the purposes I need them for. In the precious metals report, it showed that 97% of all these precious metals derivatives were held by the following U.S. banks….Citigroup (NYSE:C) 2%, HSBC USA 8%…and JPMorgan (NYSE:JPM) a whopping 87%. The other 3% of the derivatives were held by the other 597 reporting U.S. banks. So, let’s guess who the ‘3 or less’ or ‘2 or less’ U.S. bullion banks are [as stated in the BPR] that are short all that gold and silver on the Comex. I hope you’re straight on this now.

I think you can begin to see why the CFTC is having such a hard time bringing this silver and gold price management scheme to an end, as they are up against all the power and all the money in the world…three big U.S. banks, the Fed, the Treasury…and the U.S. government itself. The CFTC and the SEC have known this for decades and have stonewalled every effort to get at the truth. They are, themselves, complicit. And it’s actually worse than that. To use legal terminology…they are ‘aiding and abetting’.

Before leaving this subject, I feel it necessary to point out that the red flags are flying for gold, because the bullion banks in the Commercial category are now short 17.8 million ounces of gold…well into the danger zone of a possible price correction. Will we get one right away? Beats me. We could tack on another couple of hundred bucks or so and drive the open interest [and short position] to even higher levels before the pin gets pulled. There’s no feeling of froth or ‘irrational exuberance’ anywhere in the gold and silver markets that I can sense. The other thing that is strange is that the short position in silver is so low compared to gold. The dichotomy between the two is enormous. But with all the bad economic, financial and monetary news out there…I’m still ‘all in’.

In other news, I see that John Williams over at shadowstats.com says that “January job losses were actually 716,000 net of concurrent seasonal factor bias…instead of the ‘official’ 598,000 loss.” And also…based on his stats, the current unemployment rate is 18%.

The first story today is from California. In what is sure to become a nation-wide problem in very short order, “counties in California say they’ve had enough – and they aren’t going to take it anymore. In what amounts to a Boston Tea Party-style revolt against the state Capitol, they’re threatening to withhold money.” The story, from The Sacramento Bee is headlined “Revolt brews in counties”…and the link is here.

And in a Reuters story, which doesn’t need much explanation, is this headline…”Inflation specter has some investors pining for gold”…and the link is here.

The problem with socialism is that you eventually run out of other people’s money. — British Prime Minister Margaret Thatcher

Today’s ‘blast from the past’ doesn’t need any introduction whatsoever. Just turn up your speakers and click here.

What the rally in the equity markets was all about yesterday sure beats the hell out of me. Where was the good news? I must have slept through it. And I see, as I put this report to bed, that a story just posted at Bloomberg quotes the IMF saying that the advanced economies are already “in depression.” There’s that “d” word again. Expect to see it everywhere from now on.

Enjoy the rest of your weekend…and I’ll see you on Tuesday morning.

Source: And Then There’s This…Monday, February 9th, 2009

Of all the articles covering the scandal, that title from the Financial Times sums it up best. The opening of the piece is pretty good too:

Nothing stupefies like money. Even the savviest investors tend to look the other way when extraordinary returns are being made. This unfortunate human trait is the fuel behind speculative bubbles and the magic behind all financial scams.

No one, it seems, has exploited this as blatantly in recent times as Wall Street bigwig Bernard Madoff, a former Nasdaq chairman arrested this week for allegedly running the biggest dollar Ponzi scheme of all time.

The scale of the fraud is staggering. Tens of billions have been lost – perhaps as much as $50 billion over many years. Wealthy families, numerous charities, and even college trusts have been all but wiped out.

The Palm Beach Country Club, where Madoff recruited many of his victims – er, investors – is said to be in a panic. Perhaps the largest private victim is Carl Shapiro and family, who had known Madoff for 50 years and had $545 million invested.

A number of large players were caught in the scam too. Britain’s HSBC Bank may have lost as much as $1 billion. Banco Santander had more than $3 billion in exposure through its money management arm. Even the State of Massachusetts had skin in the game… the list goes on and on.

The Biggest Red Flag

There were plenty of red flags, but Madoff’s reputation gave him a pass with investigators and regulators alike.

As far back as 1999, forensic whistleblowers had reported Madoff to the SEC as a fraud. Barrons ran an article in 2001 openly wondering how Madoff did it when no one else could. In hindsight there were many small things… skeptics had been asking questions for years, but they were always waved off.

The biggest red flag of all, from a trading point of view, was the silky-smooth consistency of Madoff’s returns.
The steady gains with virtually zero losses were exactly what enthralled Bernie’s clients, when they should have been warned away.

Charles Gradante, founder of hedge fund consulting firm Hennessee Advisors, is one of the skeptics who steered clear.

“He only had five down months since 1996,” Gradante notes. “There’s no strategy in the world that can generate that kind of performance. But when people would come to him and say, ‘How did I make money this month?’ he didn’t like it. He would get upset with people who probed too much.”

In the real world, returns just don’t go up in a nice straight line. Mother nature is messy… markets are messy… and nothing works 100% of the time. But people will pay big bucks to avoid facing up to that truth.

Some of the biggest losers in this mess will prove to be the “funds of funds” – investment pools that allocate money to traders on behalf of their clients. The funds of funds who put billions with Madoff all claimed to be practitioners of deep due diligence. Now they look like useless fools.

On one of my trips to New York two years or so ago, I asked a fund of funds manager what their ideal trader looks like. “The best guys are the ones who deliver that steady 1 to 2 percent a month like clockwork,” he told me.

I thought the idea was dangerous even then, and wrote as much to readers that it would all end in tears. But a clockwork 1 to 2 percent is what the funds of funds wanted… so that’s what Bernie Madoff delivered.

Variations on a Theme

When I first read of Bernie’s loss-defying equity curve, four other exercises in smoothing folly came to mind:

• Ralph Cioffi and Matthew Tannin, managers of the Bear Stearns “High Grade Structured Credit Strategies Fund” and, even more laughably, the “High Grade Structured Credit Strategies Enhanced Leverage Fund.” These guys made money every month for something like 40 months in a row. Then they blew up. Then Bear Stearns blew up.
• Jack Welch, the hero CEO of General Electric whose legacy was later tarnished by the reveal of his “massaged earnings” technique. Under Welch, GE managed to hit growth targets with bull’s eye precision year after year after year. The Street loved it… later it was revealed that Welch had more than a little help from GE Credit (the creative finance arm) of the sort that would be frowned upon today.
• Victor Neiderhoffer, a naked options seller who blew up his clients not once, but twice within a decade. For much of the 1990s, Niederhoffer was rated the top hedge fund manager in the world… until the Asian financial crisis blew him up in 1997. A few years later Vic got back in the game… again posted award winning returns… and blew up in 2007 for a second time, to the tune of 75%.
• Long Term Capital Management, perhaps the most arrogant hedge fund of all time. LTCM had not one but two Nobel laureates on staff. Their strategy was self-described as vacuuming up nickels all over the world that others weren’t smart enough to see. What they were really doing, it turns out, was snatching nickels from the path of bulldozers.

In all these cases, the strategies in question worked smoothly and superbly for quite a long time – until one day they didn’t. It’s like the old trader’s saying… you can take your volatility in small doses, or you can take it all at once. Which one is up to you.

Fraud Prevention is the Easy Part

In keeping with human nature, people will likely draw the wrong lesson from the Madoff fiasco. They’ll focus on the fraud part – the importance of making sure whoever manages their money is not a charlatan.

This is important obviously. But the fraud aspect is actually one of the easiest things to prevent, once one learns to pay attention.

There were many working parts to the setup, but one was absolutely vital. Madoff was only able to pull off the scam because he cleared his own trades. He acted as his own broker-dealer and used a three-person accounting firm holed up in a strip mall to handle the firm’s books. When you’re running $17 billion in assets, that’s insane.

Any normal hedge fund would have been set up with a “prime broker” – a respected third party custodian to handle the assets and book the trades. That would have made it impossible to commit fraud the way Madoff did. When a legit third party holds the assets, there’s no way to falsify the results.

This is probably why Madoff never registered as an outright hedge fund. He knew that doing so would prevent him from carrying out the scam in full.

If Madoff’s returns were real, he could have made hundreds of millions of dollars in “2 and 20″ incentive fees every year, instead of leaving those fees on the table and merely collecting commissions. But as a full-blown hedgie, his books would also have been subject to more scrutiny… so Bernie took a pass on hedge fund status in order to maintain a low profile.

In passing up those huge fees, Madoff’s lack of greed was the dog that didn’t bark. Funny old world innit.

And furthermore in that respect, it’s ironic that hedge funds could get the most political heat from this whole deal. If anyone should be tarred and feathered, it’s the SEC, who had ample reason to check out Madoff through the years and never did.

Know the Risks

The more subtle-yet-vital lesson from this whole Madoff fiasco, in my opinion, is the importance of understanding the strategy.

If you can understand how a trading or investing strategy makes money – the guts of how it really works, good and bad, warts and all – then you can also understand the risks.

The most robust trading and investing strategies are logical. They don’t take rocket science or complicated math or a PhD in physics to understand.

And yet, Madoff’s investors didn’t apply this simple rule of thumb. They took his explanations at face value, even when those explanations didn’t make sense. The strategy was laid out in simple fashion, but the returns literally didn’t add up.

A few savvy investors, knowing the official line had to be bogus, figured Madoff must have been doing something he didn’t talk about… maybe even something illegal… but they figured it was no problem as long as their profits were safe. Call that the most cynical trade of all.

My one hope from all this is that the Wall Street love affair with silky-smooth returns and artificial stability comes to an end (or at least goes into remission for a good long while).

On a larger scale, we run into the same type of “smoothing” problems when our government tries to iron out the natural fluctuations in a free market economy. And what bigger Ponzi scheme exists than social security… but I’d better end here before going too far down that road.

The sooner we realize there’s no free lunch – and no such thing as investing without healthy ups and downs – the better off we’ll be.

Source: Thanks for the Memories (and the $50 Billion)

From there, gold got sold down until London closed. Then it rose, but did not make it over $740 for the rest of the Comex session. Tuesday was options expiry on the Comex, so I’m sure that the JPM and HSBC didn’t want any more of those lovely options to expire in the money than was necessary.

But as bad as the price management was in gold, in silver it was the most blatant I have ever seen. They aren’t even trying to hide anymore. Silver peaked at the London open…got absolutely hammered to a new low price of around $8.40…which was the Hong Kong close. From there it rose until shortly after the London silver fix. Then the price managed to hold its own until the London p.m. gold fix…but then the dealers once again pulled their bids…with the bottom being (as usual) the close of business in London. Silver wasn’t allowed to close over $9.00. After that, silver was allowed to rise right into the close of trading on the Globex in New York at 5:15 p.m. Everything in both gold and silver yesterday had to do with options expiry and allowing JPM/HSBC to cover more silver shorts while they were at it. I said on Friday that the gold bottom was in after that take-down in the wee hours of Friday morning. Well, I think we’ve seen the bottom for silver now as well. Here’s yesterday’s Kitco silver chart. There’s nothing free market about any of yesterday’s silver price action…or gold for that matter. They don’t call the Comex, the Crimex, for no reason.

click to enlarge

I note that the big early Wednesday morning rallies in both gold and silver in the Far East got stopped dead in their respective tracks at exactly 8:00 p.m. New York time last night, after gold had the audacity to break through $750 again…and these rallies have now been totally reversed as I write this. It’s options expiry in the OTC market today, so we could see this price capping action by the boyz until we’re past that. Then there’s first day notice on Friday. We’ll see if they can keep a lid on it for that long.

On Monday, gold open interest fell another 3,619 contracts to 314,297. Silver o.i. actually rose a bit…up 174 contracts to 93,898. It will be interesting to see what Tuesday open interest change shows in silver, considering how ruthlessly JPM/HSBC went after that market. Those numbers will be reported later this morning and I’ll have them for you in my rant tomorrow.

In other gold-related news yesterday, the usual NY gold commentator had this to say…”The ECB (European Central Bank) weekly statement of condition indicated that one captive CB (central bank) sold E1Mm of gold (0.05 tonnes). Last week the amount was 2.16 tonnes. Clearly the ECB group does not wish to seem involved in what is happening in gold.” (Of course it’s not the Europeans…it’s ‘2 or 3′ US bullion banks…and we know who they are! – Ed). In a noworldsystem.com story, the headline reads “Gold Runs Out in Germany”….”Risk-averse Germans are turning to gold in troubled times – but there’s none left. German gold dealers say demand has skyrocketed this past week to 10 times normal so no more orders can be taken for the foreseeable future.” And lastly, from gulfnews.com, the headline reads “Dubai runs out of gold on Diwali”…”A massive rush at jewellery shops has led to a shortage of gold at some outlets, prompting some shopkeepers to overcharge customers…Shopkeepers said the rush, a combined result of the Hindu festival and lower prices, has resulted in a shortage of gold bars.” Shortage??? The good folks in Dubai don’t know the meaning of the word. Look at what Tulving is paying for gold and silver right now. Click here and then scroll down. Oh yeah, I almost forgot…Dennis Gartman added another “unit” to his gold position yesterday.

In other news headlines…”US home prices plunge record 16.6% in August”…”The Conference Board Consumer Confidence Index Plummets to an All-Time Low”…from 61.4 in September to 38.0 in October. “Chicago Fed Midwest factory index falls to 5-year low”…”US public pension funds face big loses”…”Citigroup (C) Won’t Make It”…”GLG chief Emmanuel Roman warns thousand of hedge funds on brink of failure”…”Britain may need 0% interest rate to avoid a depression, leading economist warns”…”PM Putin suggest Russia, China ditch dollar in trade deals”. Yep…everything is fine.

Three stories again today. The first is a story from the British paper, the Financial Times. The article is about the financial goings-on in Russia…as it to, teeters at the brink. The headline reads “Onward to 1998: Russia” and the link is here.

The next story is from Germany…spiegel.de…and is entitled “JOUSTING EGOS: Germany and France Compete for Role of Financial Saviour”. The headline says it all, and the link is here.

The last story is one I referred to in a prior paragraph. It’s from The Telegraph in London and is entitled “GLG chief Emmanuel Roman warns thousands of hedge funds on brink of failure”…and the link is here.

A bear market rally is all we had yesterday. Will it last until election day? It matters not…just like it doesn’t matter who is the next president. And whatever interest rate cut we get today…that won’t matter either. As I said yesterday, nobody (including either one of them) can stop the great unwinding. Doug Casey is right…the “Greater Depression” is exactly what it’s going to be.

Source: And Then There’s This Wednesday, October 29, 2008

This time gold got sold off on the London a.m. fix. There was a spike bottom a few dollars below the $700 mark at 9:00 a.m. in New York. From there, gold rose quickly to about $726 right through the London p.m. fix…before running into the ‘usual suspects’ at the London close. There was huge price volatility yesterday, with inter-day price swings of $20 or $30…unheard of only months ago.

Then there’s silver. The silver low came at precisely the same time as gold’s…no surprise there. Silver really took off at the London p.m. gold fix. Its high for the day occurred at the London close. Then either JPMorgan (NYSE:JPM) or HSBC, USA hammered the price. Thursday was a hugely volatile day for silver too.

I’m not really sure what to read into one day’s worth of trading. Normally this kind of price volatility occurs at major tops and bottoms, but with ‘2 or 3′ US bullion banks supervising PM prices while the world’s financial system implodes many times faster than the world’s central banks can print money, it’s really hard to make a call. Since today is Friday…and anything can, and probably will, happen…I’d rather reserve judgement until my Saturday rant.

The gold open interest for Wednesday fell 3,546 contracts to 315,926 contracts…which is 45% off its highs. The gold price (which is being caused by spec long liquidation on the Comex) is collapsing in the face of record investment demand. As for silver, it’s o.i. actually rose 57 contracts…which is unbelievable since the price got smoked between Tuesday’s and Wednesday’s close! This mystery won’t be solved until next Friday…Hallowe’en…when the relevant information from Wednesday will be in the COT report. Today’s report will be out at 3:30 Eastern time and I’ll have it for you on Saturday.

Not a lot of gold news today except what you saw in the price action. I see that Dennis Gartman is back into the gold market going long ‘one unit’ of gold. The last time he went long, it lasted a couple of hours. The usual NY commentator said…”On recent form, whatever stops set in this trade (Gartman) will make a short-term low in the gold price.” Let’s see how he makes out this time. GLD liquidated about 8 tonnes of gold yesterday and the SLV remained unchanged…again.

To show you how bad things really are, here’s a graph of the Baltic Exchange Dry Index. I’ve been watching it every day for the last couple of weeks, but decided to post it today, because it has now fallen over 90% since its peak six months ago. That should tell you a lot about world trade.

click to enlarge

I have three stories today. The first one is from France, where “French president Nicolas Sarkozy has pledged “massive” state intervention to support his country’s industry…defiantly ignoring European Union competition rules in the biggest shift in ideology in 40 years.” The proposal received a chilly welcome in Berlin. The story is linked here.

The situation in Russia is said to be even more dire…where the next article says that “Russia’s financial crisis is escalating with lightning speed.” This story, like the previous one, is from The Telegraph in London. The headline reads “Russian default risk tops Iceland as crisis deepens” and the link is here.

The third story is also out of London. Rob Mackinlay of Financial Express, a financial information service, has taken detailed note of GATA’s work in his report “Gold Conspiracy: Can You Afford to Ignore It?” There’s lots of disagreement about that in the story as well, which is linked here.

Up to this point in this deflationary implosion, I thought I had a pretty decent handle on how things were unfolding. But as I read the above three stories yesterday, I began to realize that events are now moving so rapidly world-wide, that it’s impossible for any one person, country, or government “leader” to either comprehend the situation…or do anything about it even if they could. That goes for the banking and monetary system as well. This has become a self-reinforcing negative feedback loop that’s quickly spiralling down to total destruction in all directions.

As I hit the send button to my editor, I note that the US dollar is screaming to the upside, the Nikkei closed down 812 points, European markets are down hard…and the S&P futures are as ugly as they can get. Seat belts fastened and crash helmets on!

See you tomorrow.

Source: And then there’s this…Friday, October 24th, 2008

So… now the world’s two biggest mortgage companies AND the world’s largest insurer are the property of the U.S. government?

Velcom to Amerika.

Here’s the quick and dirty of the Fed’s terms for the AIG bailout:

• Fed will offer up to an $85 billion 2-year loan to (AIG)

• In exchange, the Fed assumes 80% ownership of the firm

• All money borrowed is to be repaid at 3-month Libor, plus 850 bps… about 11% interest rate

• AIG will conduct an “orderly” sale of its assets until the loan is repaid.

Nice deal for the Fed, eh?

“I just loaned $283 to AIG,” declares Eric Fry, “I and every other American. And the funny thing is no one asked our permission. The Federal Reserve simply took our money and handed it to a group of individuals who have demonstrated the ability to lose billions of dollars faster than almost anyone on the planet.

“I would rather have tossed the money in a wishing well…not only for the wishes, but also because the wishing well will repay the loan sooner. The Fed’s $85 billion ‘investment’ in AIG is just the latest chapter of the American financial tragedy — a sordid tale that begins with the extreme greed of a few and ends with the widespread suffering of the many.

“The Fed did what it had to do. It protected the millions of individuals and institutions who relied on the insurance policies of one of the world’s largest insurance companies. But let’s hope the tragedy does not end with an $85 billion bailout. Let’s hope our sordid story contains a few more tragic chapters, like ones that feature tales of AIG’s executive officers shedding tears of remorse on their prison dungarees.”

Heh, amen. For more from Eric, read your daily Rude Awakening.

“Why save AIG and not Lehman?” Dan Denning asks from down under. “AIG was a major seller of credit default swaps (CDS). It was easy money for a while. You sell default insurance on mortgage-backed bonds. You collect the premium and never have to make good on the default… because… you know… what are the chances of that?

“These are unprecedented financial times. Lehman is also a major counterparty in the credit default swap market. Yet the Fed judged AIG’s role as a major seller of CDS more critical to the financial system. Why?

“One answer is that most of AIG’s customers are overseas. Not only would a bankruptcy trigger chaos is the CDS market, but many foreign customers insured by AIG would be in doubt about the value of their normal insurance policies. Just like with Fannie and Freddie, foreign creditors may have again forced the hand of the Treasury to use American taxpayer dollars to guarantee the value of their financial investments in the U.S.”

Dan forwarded us this picture of a line in front of an AIG subsidiary in Singapore this morning:

That’s a three-hour line queuing up in front of an AIG customer service center. Courtesy of The Straits Times.

An AIG bankruptcy would have cost the global financial industry at least $180 billion, chimed in RBC Capital Markets. AIG insured over $441 billion in fixed-income investments, many of which were held by the world’s biggest governments and organizations. Nearly $60 billion of those “investments” insured by AIG were subprime-related securities.

Until yesterday, AIG had $1.1 trillion in assets, 116,000 employees and 74 million clients in 130 nations. They insured people, property and businesses. They were in the consumer finance industry. Retirement management. Annuities. Money management. Risk management (ha!). Mutual funds. Private banking. They even leased airplanes.

“I’m afraid we are not through it at all,” commented George Soros yesterday. “In some ways, we are still heading into the storm, rather than heading out of it. We are at a very precarious moment.”

Finance has “grown too big, it has taken up too big a share of the world’s resources. Now it is shaking, and I think when it becomes once again regulated, it will be less profitable.”

“From an options trading perspective,” notes our options analyst Wayne Burritt, “the recent market-forced consolidation around Wall Street is a good thing: Weaker companies that make over-the-top bets are being weeded out and the risk they absorbed spread out. That provides buying companies with low-priced quality assets — such as asset management units — and should provide more systemic stability in the long run.

“That said, the fact is the subprime mess is going to weigh heavy on investors and markets until things get straightened out. And while no one has a crystal ball, my feeling is once the key real estate metrics begin to recover — including housing starts and existing home sales — we’ll begin to breathe a sigh of relief.”

Wayne was well insured for AIG’s blowout. His readers sold their S&P 500 SPDR Depository Receipts puts Tuesday for 150% gains… in just 14 days. Have Wayne help you survive this volatile market by trading options, here.

Housing starts in the U.S. plummeted 6% in August, to a fresh 17-year low.

At the current rate, “only” 895,000 homes will be built in the U.S. this year. Housing starts haven’t been that slow since 1991… when there were nearly 50 million fewer Americans

Yet mortgage applications skyrocketed last week. The Mortgage Bankers Association’s index of purchase or refinance applications shot up 33% last week, to the highest level since May.

Refis alone jumped 88%, the biggest gain since 2001. Again, you can thank Uncle Sam for that one. The average 30-year fixed loan fell from 6% to a five-month low of 5.8% after Fannie and Freddie were nationalized.

In the stock market, “investors” were somehow emboldened yesterday by the Fed’s decision to do nothing to lending rates. Immediately after the FOMC’s decision, markets surged into the black… the Dow and Nasdaq finished up 1.3%, and the S&P 500 shot up 1.7%.

Heh. You can’t beat the logic. Last year, lowering rates created a buying opportunity because they “showed that the Fed was worried about the market.” Today, holding rates steady is a buying opportunity, because it “shows that the Fed isn’t worried about the market.”

Right.

The dollar continues to defy logic itself. Despite all the shenanigans by the Fed and AIG and Merrill and Goldman and the Treasury… the dollar index remains stalwart, at just under 79.

But our other big national deficit is creating a different problem, as well as the potential for one low-risk, high-return investment opportunity. Here’s the bottom line…

Because the United States has run such a large and persistent trade deficit for so many years, other countries – like China – have been able to run up large current account surpluses. These surpluses, in turn, have enabled them to accumulate substantial foreign exchange reserves.

For years, this money was invested in the world’s safest securities: U.S. Treasuries. But the returns from these securities haven’t been so hot lately. Especially when you’re a foreign investor watching the greenback wilt like last week’s roses.

Many world governments are now putting their money to work elsewhere. (Can you blame them?) Sovereign Wealth Funds are their vehicle.

Sovereign Wealth Funds are the financial assets of a country – usually part of the national savings – that are owned and organized into a state-controlled fund. These funds are increasingly moving money into global equity markets. And the sums involved are fairly staggering.

Current assets controlled by Sovereign Wealth Funds are estimated to be $3 trillion. They are expected to reach at least three times this amount over the next five years.

This is a bit scary to some investors, because these funds are entirely secretive. There is no world body to which they have to disclose what they are buying or when.

But here’s a common sense insight. They aren’t buying small or mid-cap companies. There isn’t enough liquidity in these to allow them to enter or exit their positions efficiently.

No, these funds must invest in the world’s biggest companies. As an individual investor, you might benefit from picking up giant companies like General Electric or British Petroleum or HSBC.

Or you can do it the easy way, by plunking for a few shares of the Dow Jones Global Titans Fund (AMEX: DGT).

This exchange-traded fund (ETF) holds 30 of the world’s largest publicly traded companies. It also pays a 2.5% dividend, 25% more than the average money market is paying right now.

Its major holdings include the companies I mentioned above, plus other market bellwethers like AT&T, Johnson & Johnson, Nestle, Microsoft and Proctor & Gamble.

The Global Titans Fund has several advantages. It is well diversified, liquid, and gives you instant foreign currency diversification. (60% of the holdings are in the United States, the rest are in international markets.)

It also uses a passive indexing approach, so it is both cost-effective and highly tax-efficient. Annual expenses are only one half of one percent.

This fund was originally brought to my attention by Eric Roseman, the Sovereign Society’s savvy Investment Director. (To read Eric’s views and learn more about international money flows, global investing and financial privacy, I suggest you check out the Sovereign Society’s Off Shore A-Letter. It’s quite good – and it’s free.)

In sum, the Dow Jones Global Titans Fund is holding exactly the mega-cap global companies that Sovereign Wealth Funds are likely to plow money into for many years to come.

My suggestion? Pick up a few shares now. And let the world’s most powerful creditors push your shares higher in the weeks and months ahead.

Good investing,

Alex

Source: How to Turn Sovereign Wealth Into Personal Wealth

“Inflation is a long-term problem because there is no long-term will to solve it,” Chief Executive Officer Michael Geoghegan said during an informal shareholders meeting in Hong Kong.

He went on to criticize central banks that have kept interest rates low in response to curtailed economic growth and weak housing markets. But due in part to low interest rates, inflation has escalated as costs for food and energy soar, dampening consumer spending in such markets as the United States – and causing major food shortages in other markets around the world.

Geoghegan also said he expects that it will take three years for HSBC to return its U.S.-based consumer-lending unit to a profit. Its U.S. operations, acquired from Household International, was heavily exposed to the subprime-lending market and resulted in HSBC taking a $3.2 billion dollar write-down in the first quarter of 2008. That’s on top of a $4.6 billion dollar write-down in the fourth quarter last year.

Back in November 2006, HSBC was the first bank to acknowledge losses on subprime mortgages.

The world’s biggest banks have suffered about $383 billion in write-downs and credit losses since the subprime crisis began in earnest last year, and have raised about $270 billion to replenish capital, Bloomberg News reported today.

Over the weekend, UBS AG (UBS) – the Swiss banking giant seeking to raise $15.6 billion from shareholders to replenish a capital base eviscerated by such write-downs – revealed that it faces more losses from its mortgage-related holdings in both the global and U.S. markets, Bloomberg said.

In a prospectus for the rights offering that was posted on its corporate Web site, the Zurich-based UBS said it had losses on non-U.S. residential and commercial real- estate securities in 2007 and in the first quarter of this year and said those losses “could increase in the future,” the Bloomberg report stated.

In the United States, lending remains tight and home foreclosures are at a record high, as overextended homeowners are having difficulty obtaining favorable refinancing terms.

Almost two-thirds of U.S. banks have raised their lending standards for mortgages, even to their most creditworthy borrowers, Bloomberg reported. For those with limited or bad credit history – the so-called subprime borrowers – three-fourths of banks have raised lending requirements, according to a U.S. Federal Reserve survey of senior loan officers published May 5.

Lending also remains tight in the United Kingdom, where mortgage approvals continued to be low in April, the British Bankers’ Association announced today.

Home mortgage approvals increased to 38,704 in April from March’s historic low of 35,546, however, approvals remain below the 42,000 six-month average.

“March was the record low and April is the second lowest ever, so you cannot call that a recovery,” Michael Saunders at Citigroup Inc. (C) told Reuters.

Added Saunders: “The housing market remains extremely weak.”

A Changing Industry

Inflation isn’t the only problem facing the financial industry, according to the HSBC chief executive.

“The investment-banking model is flawed,” Geoghegan said. “If banks aren’t strong, they should be restructured or taken over.”

HSBC has been able to weather the subprime crisis better than some of its competitors due to its heavy focus on the Asian and emerging markets. The London-based lender has only had to dismiss 90 employees, or 0.1% of its total staff, as a result of the global credit crunch, according to Bloomberg-compiled data.

The European lending firm’s employee retention stands in stark contrast to The Bear Stearns Cos. Inc. (BSC), which has had to let 66% of its employees go as it eliminated 9,160 jobs in the process of being acquired by JPMorgan Chase & Co. (JPM).

Traditional financial centers such as New York, London and Tokyo are shedding jobs, while up and coming cities like Dubai and Hong Kong continue to add to their financial ranks.

Credit Suisse Group (CS), Deutsche Bank AG (DB), Morgan Stanley (MS) and Citigroup have all relocated top rainmakers to Hong Kong as investment bankers look to cash in on the large number of sovereign wealth, private equity and corporate deals occurring in Asia.

China and the other emerging Asian economies haven’t been as adversely affected by the global credit crunch. While deals are slowing down in the United States and Europe, the pace of business is still fast and furious in the Pacific Rim.

“Investment bankers follow the money,” Scott Moeller, a professor at the Cass Business School and former executive with Deutsche Bank and Morgan Stanley, told BBC News.

And even with the many job cuts and losses the financial industry has already suffered, some think the worst is still to come.

“We’ve never seen write-downs like we’re seeing now and such big losses,” John Challenger, chief executive officer of Chicago-based outplacement firm Challenger, Gray & Christmas Inc., told Bloomberg. “More job cuts will come. Even with the market’s optimism recently, I don’t think we can safely say that we’re out of the woods yet.”

Source: HSBC Chief Calls for Tougher Inflation Fight, Industry Changes

Take this one…

According to “new analysis” from mform.co.uk, those still mad enough to want to get on the housing ladder but finding it hard to do so “can still beat the credit crunch by teaming up” with their friends, siblings or even (via websites such as sharedspaces.com) with complete strangers to get a mortgage.

It seems that up to 42 home loan providers, i.e. around 46% of lenders, ranging from regional building societies to major names such as Abbey, HSBC, Woolwich and Cheltenham & Gloucester, are still allowing multiple borrowers to apply jointly for a loan, with four people the typical maximum. And amazingly, some lenders set no limit on how many people can make the application, says the online adviser.

We hope that anyone tempted to join in such an arrangement exercises more common sense than this mixed bag of loan providers. When everything was going well, there might have been a tenuous case for jumping on the ‘property ladder’ using the multiple application route – even if based on the greater fool theory that there’s always someone more stupid who’ll pay a higher price. At least if it all went wrong the shared space in question could have been flogged to a greater fool fast.

But now, as house prices have started to tumble…forget it! The moment that negative equity raises its ugly head how likely is it that one-time friends, let alone strangers, are going to agree to remain trapped together in a starter home? Just watch those payment defaults rise and forced sales start to mount.

And who will be the winners in the battles about when to sell, how to sell and who owns what? The lawyers, of course. Though any applicants for this kind of mortgage won’t be the only idiots in the deal: the fact that such schemes are still being touted shows that too many of our big lenders still haven’t accepted the fact that house prices are heading south in a big way, for a long time.

How to chuck the UK’s financial credibility out of the window

That is, of course, assuming the economy isn’t bailed out with huge doses of extra liquidity. The next scary story comes from Peter Spencer, chief economist of Ernst & Young’s Item Club. He’s just warned that the Bank of England will “crucify” consumers unless the Treasury lets it abandon its current 2% target for the consumer price index (CPI).

If the 2% CPI target stays in place, interest rates won’t be able to fall, the Bank won’t be able to pump any more cash into the system to bail out the multiple application nitwits and Britain, says Spencer, will face an unnecessarily deep and painful economic slump.

According to the Telegraph, Professor Spencer feels that controlling the volatile elements of the CPI is too big a task for the Bank. So it should instead be left to focus only on “core inflation”, which excludes volatile (read rising) items such as food and energy prices.

This might sound compelling – and it would certainly make the Bank’s job easier – but it isn’t. This wouldn’t just move the goalposts but relocate the whole pitch somewhere else.

That doesn’t mean it hasn’t been done before, of course. It has. Only in 2003 did the Treasury alter the target from RPIX (the Retail Price Index excluding mortgage interest payments) to the European-harmonised CPI, which doesn’t reflect housing costs.

That caused trouble enough – it set the stage for the low interest rate environment, the personal debt crisis and the house price bubble of the last few years – but to change the target again would be to just chuck what little financial credibility the UK has left out of the window. As it is, long-term index-linked bonds now imply that CPI’s heading for 3.7% and staying there. We might as well give up any pretence of trying to maintain the value of pound sterling right now.

The answer to the dodgy debt problem: rig the prices

And talking of value, here’s today’s final shocking story. Remember all those bankers who blew more billions than most people can imagine on a load of bets on dodgy debt?

Well, their spokesmen have come up with another wizard wheeze. And this time it’s to do with something called ‘marking-to-market’, in other words, the system of valuing any assets they hold at prevailing market prices rather than at their cost price.

The Institute of International Finance (IIF), whose board comprises 20 Western institutions including most of the biggest losers in the crisis, says that while marking-to-market as a system has “generally proven highly valuable”, it isn’t any more. Instead it is responsible for creating a downward spiral in asset prices.

So the IIF wants to do some of its own goalpost shifting, proposing that, in “disrupted markets”, banks should be allowed to value instruments using their own models or at book value. The IIF wants “stable valuations” that “increase market confidence”. It also wants lenders to have the flexibility to move assets from trading books onto banking books, where mark-to-market rarely applies.

In short, the IIF thinks that market pricing is far too basic for the titans of high finance. So they want to ignore the market and its unstable prices, and to be able to value their mistakes at whatever figure looks best. Unbelievable! We’ll be keeping an eye on this one.

Source: Three Shocking Examples of the Financial Plight We’re In