Zohran Mamdani’s Victory in NYC Rattles Wall Street

...Lawrence Summers, the former Treasury Secretary and president of Harvard University, also expressed his distaste Mamdani’s nomination.

“I am profoundly alarmed about the future of the [Democratic National Committee] and the country, by yesterday’s NYC anointment of a candidate who failed to disavow a ‘globalize the intifada’ slogan and advocated Trotskyite economic policies,” Summers said in a post on X.

Part of the stock market has already felt the pain from the prospect of a Mamdani-led NYC. Shares of New York regional bank Flagstar, with exposure to the New York real estate market, sank nearly 4% Wednesday. Office-focused real estate stocks also suffered, with SL Green Realty down more than 6% and Vornado Realty Trust down nearly 7%.

Mamdani advocates for universal rent control, and the New York City mayor has the power to appoint representatives to the regulatory board that oversees rent-controlled and rent-stabilized apartments. A pause on rent increases would hurt the profits of multi-family rental properties.

Roughly one million New York City apartments are rent stabilized but only about 20,000 are still rent controlled.

“It appears that NYC is electing to commit suicide by Mayor,” Jim Bianco, president and macro strategist at Bianco Research, said in a post on X Tuesday evening.

Read the rest here.

Meanwhile on Wall Street

As the nation appears to be collapsing into an economic depression (see previous post) Wall Street has been singing its favorite song. After the initial panic of late February and March, the stock market has been rallying. The S&P 500 has recovered around half of its losses as investors seem determined to ignore the steady stream of bad news. Are they right? How long will this last? Hmm...

The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

On Thursday, knowing that a three-day Easter weekend was coming and the attention of the public would be elsewhere, the Federal Reserve announced that it would allow two of its emergency lending programs to begin buying junk bonds. Those are bonds with less than an investment-grade credit rating, meaning they have a greater likelihood of defaulting. The Fed is not simply accepting junk bonds as collateral for loans, it will actually be buying junk bonds — potentially hundreds of billions of dollars of them. 

Two of the popular junk bond ETFs, iShares iBoxx High Yield Corporate Bond ETF (symbol HYG) and SPDR Bloomberg Barclays High Yield Bond ETF (symbol JNK) closed the trading day on Thursday up 6.55 and 6.71 percent, respectively, on the announcement. Those ETFs had been plunging in price for most of the month of March. 

For years now, prudent investors have been forgoing risky investments like junk bond ETFs and accepting a much tinier yield on U.S. Treasury securities. Now, high rollers like hedge funds that bought junk bonds and junk bond ETFs and received the higher yields, are getting bailed out of these risky bets. The markets will now, going forward, price junk bonds on a closer plane with Treasury securities, assuming the Fed will not let them fail. 

This is effectively killing the pricing mechanism of Wall Street. A U.S. Treasury note has the unconditional guarantee of the U.S. government to make the timely payment of interest every six months and pay the principal at maturity. Junk bonds are backed by nothing more than deeply-indebted corporations, which can, and do, frequently file for bankruptcy protection, making their bonds sometimes sell for pennies on the dollar. But going forward, junk bond ETFs will be priced on the premise that the Fed may ride to the rescue.

Read the rest here.

Get ready for the recovery of the 1%

There were two important economic events on Thursday. The government reported that 6.6 million Americans filed for unemployment, an all-time record. And the Federal Reserve announced a new program to flood the economy and financial markets with $2.3 trillion in liquidity — including buying up junk bonds from debt-laden companies.

Which one moved the market? The Fed move, driving the Dow Jones Industrial Average up 500 points by midday.

The market jump, unemployment surge and Fed rescue efforts all converged to form a new split in the economy, between the asset-rich and the rest of America.

Much like the early days of the financial crisis recovery, the wealthy (or the top 10% who own more than 85% of the stocks and financial assets) were quickly saved by the Federal Reserve and Congress.

In 2009, the stock market jumped more than 50% from its low, thanks to the TARP program and other Fed and government support. It took the rest of American almost a decade to recover lost wages and their home values.

The diverging fortunes of the haves and have-nots led to a massive, post-crisis backlash against the wealthy. It gave rise to the Occupy Wall Street Movement, the Tea Party, anti-establishment politicians and a roaring debate over inequality.

Now, while the root cause of the crisis is vastly different, and no one is talking about greedy sub-prime bankers who brought the trouble on themselves, the coronavirus and response is likely to lead the country down a similar anti-elite path...

Read the rest here.

Jack Bogle: Putting Clients Second

THE Trump administration recently announced that it intends to review, and presumably overturn, the Obama-era fiduciary duty rule that is scheduled to take effect in April. The administration’s case was articulated by Gary Cohn, the new director of the National Economic Council.

Mr. Cohn, most recently the president of Goldman Sachs, called it “a bad rule” and likened it to “putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” Comparing healthy and unhealthy food to healthy and unhealthy investments is an interesting analogy.

The now-endangered fiduciary rule is based on a simple — and seemingly unarguable — principle: that in giving advice to clients with retirement funds, stockbrokers, registered investment advisers and insurance agents must act in the best interests of their clients. Honestly, it seems counterproductive to go to war against such a fundamental principle. It simply doesn’t seem like a good business practice for Wall Street to tell its client-investors, “We put your interests second, after our firm’s, but it’s close.”

Read the rest here.

Too Big to Fail - Too Big to Jail

“We have never hesitated to investigate and prosecute any individual, institution or organization that attempted to exploit our markets and take advantage of the American people,” Attorney General Eric H. Holder Jr. proclaimed this month when the Justice Department announced that Standard & Poor’s, the ratings agency, had agreed to pay $1.375 billion to settle civil charges that it inflated ratings on mortgage-backed securities at the heart of the financial crisis.

And this week, he pledged a renewed effort to bring cases against individuals responsible for financial fraud, calling on federal prosecutors to “try to develop cases against individuals and to report back in 90 days.”

Forgive me if I don’t hold my breath.

Read the rest here.

I have been beating this horse for at least six years. Nice to see some people agreeing with me.

Republican Congress Plans to Dilute Regulation of Wall Street

WASHINGTON, Jan 7 (Reuters) - The U.S. House of Representatives expects to vote Wednesday on legislation retooling a series of financial regulations, an early sign that Republican leaders will attack President Barack Obama's Wall Street reforms this year.

Scaling back reforms including the so-called Volcker rule on banks is a top Republican priority as stated on the website of House Majority Leader Kevin McCarthy of California

.

The proposal is one of the first votes House lawmakers will take this year after the Republican Party formally took control of both chambers of the U.S. Congress this week following last November's congressional elections.

Read the rest here.

Ignoring the fact that this is just plain wrong, it's also stupid politics. The GOP is playing into the hands of Obama. The mega  banks are as crooked as my dog's hind legs and pretty much everybody knows it. Obama will veto anything along the lines of what the GOP is planning thus coming across as a hero for the folks on Main Street who are sick of the preferential treatment that the Wall Street banksters get.

Wall Street Predicts $50 Billion Bill to Settle U.S. Mortgage Suits

Tony West, the associate attorney general, helped broker the government’s settlement with JPMorgan Chase.

Wall Street could pay nearly $50 billion to buy peace from federal authorities who are taking aim at the banks over their role in the mortgage crisis, according to interviews and a confidential analysis of the industry’s potential legal exposure.

Bracing for a potential reckoning, the banks and their outside lawyers are quietly using JPMorgan Chase’s record $13 billion mortgage settlement in November to do the math and determine just how much each bank might have to pay to move beyond the torrent of government mortgage litigation that has dogged them since the financial crisis. Such calculations, people briefed on the matter said, have gained particular urgency among the banks’ board members.

Read the rest here.

In the face of rampant criminal fraud that nearly brought down the global economy and destroyed countless lives, a fine. And it will not even be the banksters who will pay the fine. It will be shareholders. Excuse me while I throw up.

Banks are the enemy!

Feds pretend to crack down, Wall Street pretends to care

The government today announced a probe into the possible mispricing of mortgage bonds leading up to and during the financial crisis of 2008. “We hope to end this probe with a series of fines and a press conference during which one or more officials will offer a brief summary of the offenses,” revealed an unnamed official.

Not really on the quote. I made that up entirely because in all candor it’s become very difficult to take these investigations seriously at this point. Yesterday it was announced that ex-Goldman Sachs (GS) V.P. Fabulous Fabrice Tourres was denied a new trial in his conviction on charges of being dumb enough to send an email overstating his role in the sale of a convoluted product also related to the pricing of mortgage bonds.

As Breakout’s Matt Nesto and I discuss in the attached clip, both of today’s headlines were dramatically overshadowed by the roughly $2 billion in fines paid by JPMorgan (JPM) for its part in the collective effort to ignore Bernie Madoff’s enormous Ponzi scheme for more than a decade.

I’ve taken some personal heat for referring to the endless series of fines paid by JPMorgan as examples of the government systemically “extorting” JPMorgan on Daily Ticker with Aaron Task earlier this week. That criticism is fair. Extortion is the criminal act of forcing a person or entity to pay out money through coercion. In return for said payments the person or entity dishing out the cash would avoid harm of some sort.

JPMorgan shares are hitting all-time highs despite the financial juggernaut having spent more than $31 billion in fines and legal fees since 2009. Clearly investors don’t see a credible threat of harm coming JPMorgan’s way anytime soon.

“Justice” certainly doesn’t work to describe what’s happening to JPMorgan. Justice suggests a punitive action that would dissuade future criminal acts and/or the righting of an egregious wrong committed against an aggrieved party. JPMorgan is dishing out shareholder money but shares are at record highs. Shareholders are happier than pigs in slop.

JPMorgan’s relationship with the government is more of a partnership or licensing deal. JPMorgan pays fines, the government gets funded, politicos get to say mean things and claim victory, and no one goes to jail.

In terms of stopping the criminal behaviors in question that happened by itself long ago.  C’mon. Do you really think anyone is buying or selling mortgage backed securities anymore? Wall Street moved on to other hustles years ago.

Read the rest here.

Quote of the day

"It's a racket. Those guys are all crooked."
-Al Capone explaining why he stayed away from Wall Street and the stock market

What a surprise!

Soon after Congress approved the largest overhaul of financial regulation in generations, the Securities and Exchange Commission moved to enforce what it considered one of the simpler parts of a mammoth and complicated law.

The provision required companies to disclose how much more their chief executives made than other employees. All the agency had to do was write a rule telling firms how to comply.

Nearly three years later, the rule remains unfinished, with no sign of when it will be done.

Read the rest here.

Wall Street Rolling Back Another Key Piece of Financial Reform

Wall Street lobbyists are awesome. I’m beginning to develop a begrudging respect not just for their body of work as a whole, but also for their sense of humor. They always go right to the edge of outrageous, and then wittily take one baby-step beyond it. And they did so again last night, with the passage of a new House bill (HR 2827), which rolls back a portion of Dodd-Frank designed to protect cities and towns from the next Jefferson County disaster.

Jefferson County, Alabama was the most famous case – the city of Birmingham went bankrupt after being bribed and goaded into taking on billions of dollars of toxic swap deals – but in fact it was just one of hundreds of similar examples of localities being duped into suicidal financial deals by rapacious banks and financial companies. The Denver school system, for instance, got clobbered when it opted for an exotic swap deal pushed by J.P. Morgan Chase (the same villain in Jefferson County, incidentally) and then-school superintendent/future U.S. Senator Michael Bennet, that ended up costing the school system tens of millions of dollars. As was the case in Jefferson County, the only way out of the deal involved a massive termination fee that might have been even more destructive than the deal itself.

To deal with this problem, the Dodd-Frank Act among other things included a simple reform. It required the financial advisors of municipalities to do two things: register with the SEC, and accept a fiduciary duty to respect the best interests of the taxpayers they are advising.

Sounds simple, right? But Wall Street couldn’t have that. After all, if companies are required to have a fiduciary responsibility to cities and towns, how in the world can they screw cities and towns? The idea was a veritable axe-blow to the banks’ municipal advisory businesses.

Read the rest here.

No Criminal Case Likely For MF Global

A criminal investigation into the collapse of the brokerage firm MF Global and the disappearance of about $1 billion in customer money is now heading into its final stage without charges expected against any top executives.

After 10 months of stitching together evidence on the firm’s demise, criminal investigators are concluding that chaos and porous risk controls at the firm, rather than fraud, allowed the money to disappear, according to people involved in the case.

The hurdles to building a criminal case were always high with MF Global, which filed for bankruptcy in October after a huge bet on European debt unnerved the market. But a lack of charges in the largest Wall Street blowup since 2008 is likely to fuel frustration with the government’s struggle to charge financial executives. Just a few individuals — none of them top Wall Street players — have been prosecuted for the risky acts that led to recent failures and billions of dollars in losses.

Read the rest here.

Banks are the enemy.

Was Oil Manipulated Too?

Concerns are growing about the reliability of oil prices, after a report for the G20 found the market is wide open to “manipulation or distortion”.

Traders from banks, oil companies or hedge funds have an “incentive” to distort the market and are likely to try to report false prices, it said.

Politicians and fuel campaigners last night urged the Government to expand its inquiry into the Libor scandal to see whether oil prices have also been falsely pushed up.

They warned any efforts to rig the oil price would affect how much drivers pay at the pump, which soared to a record high of 137p per litre of unleaded earlier this year.

Robert Halfon, who led a group of 100 MPs calling for lower fuel prices, said the matter “needs to be looked at by the Bank of England urgently”.

Read the rest here.

US Mulls Criminal Charges Against Banks In Rate Fixing Scandal

(Reuters) - The U.S. Justice Department is building criminal cases against several financial institutions and their employees related to the manipulation of interest rates, The New York Times reported on Saturday.

Citing government officials close to the case who spoke on condition of anonymity, the Times said traders at Barclays Plc were among the individuals against whom Justice was building cases. Authorities expect to file charges against at least one bank later this year, the newspaper reported.

Read the rest here.

Wall Street sleaze keeps growing

Just when you thought Wall Street couldn't sink any lower - when its excesses are still causing hardship to millions of Americans and its myriad abuses of public trust have already spread a miasma of cynicism over the entire economic system - an even deeper level of public-be-damned greed and corruption is revealed.

Sit down, and hold on to your chair.

Consider the most basic services banks provide you: You put your savings in a bank to hold in trust, and the bank agrees to pay you interest on it. Or, you borrow money from the bank and agree to pay the bank interest on the loan.

We trust that the banking system is setting interest rates based on its best guess about the future worth of the money. And we assume that guess is based, in turn, on the cumulative market predictions of lenders and borrowers all over the world (including central banks) about the future supply and demand for the dough.

But suppose our assumption is wrong. Suppose the bankers are manipulating the interest rate so they can place bets with the money you lend or repay them - bets that will pay off big for them because they have inside information on what the market is really predicting, which they're not sharing with you.

Read the rest here.

It must be a chilly day in the sulpherous pit because I actually agree with Robert Reich about something. I supported the repeal of Glass Steagall back in the 90's because it was anti-free market. I now accept that I was wrong. Institutions that are as big and powerful as the major banks have become are a threat to liberty and the financial security not just of the United States but quite possibly of the world. Glass Steagall needs to be reinstated and existing antitrust legislation needs to be strengthened to allow the Feds to break up any bank or other corporation that is "too big to fail."

The banks in particular have in just the last four years demonstrated an absolutely breathtaking disregard for the law, and have suffered almost no significant consequences. There has been a shocking parade of one bank related scandal after another. At some point one must conclude that we have a systemic problem when such  institutions are permitted to operate with near impunity while thumbing their noses at the law.

Enough! Reinstate Glass Steagall and break up the mega banks.

Survey: 1 in 4 on Wall Street believe you need to cheat to get ahead

Nearly one-fourth of financial services professionals feel it’s at least sometimes necessary to do illegal or unethical things to be successful, and many are motivated to do so by fat bonuses and other compensation.

That’s according to a new survey of 500 U.S. and British fund managers, bankers, asset managers and other financial services professionals. It was conducted in June on behalf of the law firm Labaton Sucharow, which specializes in whistleblower cases.

Twenty-four percent of respondents said if you work in financial services you must at times engage in unethical or illegal activity to be successful.

Read the rest here.

What a surprise!

Banks are the enemy

...Nobody ever seems to have to give up anything, and nobody ever seems to lose a job, and nobody ever seems to even get prosecuted, provided they are bankers. It's like the job gives them immunity for all but insider trading, and they would probably have immunity from that, too, if we didn't have a tough and fair U.S. attorney for the Southern District of New York.

This immunity is just one more injustice, not unlike the immunity that all of the bankers at Lehman or Bear Stearns or AIG or Countrywide received. It's not unlike the immunity the bankers received from the robo-signings. These bankers were the proximate cause of so many of our ills, yet somehow they evaded the law.

That's because banking is a lawless profession. To me these people are embezzlers, fraudsters and perhaps even gangsters in pinstripes. Their immunity makes a mockery of justice, and it explains why so many simply calculate that it's worth it, because even if they get caught, all that happens is shareholders pay. What a sweet deal they have on the rest of us.

-Jim Cramer from here.

Eliot Spitzer on Facebook's IPO

 Round 1: The price! Pegged at $38 by Morgan Stanley, the lead underwriter, the stock opened late for trading because the exchange malfunctioned, and then the price bobbed and weaved before slipping over the course of the week. Was this, as most said, a huge black eye for the underwriter Morgan Stanley? It shouldn't be. Because what it reflects is that the company raised as much money as it could, instead of leaving money on the table for those lucky enough to have been given selective access to the initial offering.

If a company sells 1,000 shares at $15, and they then jump to $20, the company raises and receives $15,000, but the initial purchasers immediately gain $5,000—an easy and unjustified windfall. If the IPO had been priced at $20, the company would have received $20,000—and there would be no windfall for the initial purchasers. The IPO in the second example is better for the company, because it raises more capital while selling the same number of shares. That is, of course, the purpose of the IPO. That is what Facebook did.

Part of the reason underwriters love to see a stock “pop” is that they have used the opportunity to give access to the IPO shares as candy to their favored customers. This helps the underwriter curry favor, can make their favorite customers—often CEOs who can throw them business—even richer, but does not help the company. There has been massive corruption in the stock allocation process over the years, and the fact that Facebook’s stock dropped means that those favored customers didn’t get their unfair profits, which is an improvement on what usually happens.

Round 1 goes to Morgan Stanley for doing a better job pricing than they are being given credit for, and to Facebook for maximizing its raise.

Round 2: The selective disclosure! There are allegations that the underwriters told only certain favored clients about information regarding Facebook’s future declining earnings and about their belief that the company would not hit certain financial benchmarks included in the prospectus. If those allegations are true, small retail investors should never trust Wall Street again.

Given all we have been through over the past decade, from the investigations of analysts back in 2002 to the crisis of 2008, this would be a breach of faith that would be totally without defense. If Morgan Stanley didn’t think Facebook was going to hit certain targets set out in the underwriting documents, they had an obligation to tell everybody. If the underwriting documents were wrong, you have to tell the entire marketplace not just the big guys who throw business to you. If they told only some clients, and let small investors trade on the false impression that the prospectus was accurate, then Morgan Stanley should be held civilly and perhaps criminally liable.

The defenses I have heard proffered so far are about as persuasive as the ones they tried a decade ago: We are not as bad as the competition. They’re hinting that it is common practice to share information selectively. It may have been common practice years ago to trade on inside information, but that doesn’t make it sensible, legal, or moral.

Read the rest here.

A tough day on Wall Street

French voters effectively reject austerity; Holland's government collapses. Crude oil and gold fall. Netflix shares tumble after hours. Wal-Mart shares slump on Mexican bribery allegations. Apple falls ahead of earnings.

Read the rest here.