Newest Fed Reserve Bank President Backs Sanders' Bank Breakup Plan

The headline in the 'Money & Investing' section of Wednesday's  Wall Street Journal was 'Fed Official Backs Bank Breakups' (p. C1) which must have given all the investor class and banksters new heart palpitations that if Bernie is elected they have much to fear - and they will.   ( See e.g. Wall Street Journal  'Populists Reject Economic Orthodoxy' where author Greg Ip alerts us to the trepidation now felt by investors,  terrified because well, Bernie Sanders appears quite serious in his determination to break up the big banks.)

As the earlier cited WSJ piece notes (and let's please bear in mind the Journal is no "radical" publication):

"The Federal Reserve's newest bank president, a Republican who served as a top Treasury Department official during the financial crisis, called Tuesday for policy makers to consider breaking up big banks to prevent future government bailouts."

This is especially a crucial issue to those of us invested in money market funds as opposed to the volatile stock market. Many may not recall that in the wake of the 2007-08 disaster Bernanke's Fed was actually considering limiting any protection of money market funds, monies. . In 2010, the SEC actually started to run with the idea of allowing money markets to "float" as opposed to having a fixed $1 net asset value (NAV).

In The Financial Times of January 28, 2010 ('Markets & Investing' section, page 23) - about a third of the way down the page - there appeared a nondescript four column story under the header: 'Curbs on Money Market Funds'. As readers may be well aware, at the apex of the credit meltdown and banking crisis there was a veritable flood of investors toward safety, after seeing their investments in equities cratered. The first destination was money market funds, which are also the safest instruments available for most people with IRA or 401k holdings.

The FT article also pointed out:

"The SEC is to evaluate the merits of requiring a floating net asset value for money market funds rather than the stable $1 mark. Such action would involve substantial changes to the money market fund industry."

But WHY do that? This would introduce the very element of phantom or variable asset value (that exists in stock holdings) to now intrude into the "safe" money sphere. It would also let money market fund companies and managers off the hook, since if the share value is permitted to float, there will simply not be the same commitment  to adhere to the $1 value at all.

Untold was the underlying theme that this gimmick was in fact a hidden means of bailout for the bankster gamers and gamblers. Because of the risk of a new credit crisis (now increasing with student loan debt) we who hold safe investments would be required to aid in the next bailout. This, of course, is bullshit.

Getting back to the Minneapolis Fed bank chief (Neel  Kashkari's)  remarks and  contrary to Hillary's bloviations: "the 2010 Dodd Frank law did not go far enough".  He added that (ibid.): "the law hasn't ended the problem of banks so big that their collapse would endanger the financial system and economy forcing the government to rescue them in a crisis."

 Indeed, and those of us who've been paying attention have noted how the Reepos and their Maul Street lobby pallies have been gradually tweaking Dodd- Frank downward.  In the most recent (Dec., 2014) iteration, the Repukes snuck a last minute poison pill amendment into a critical  $1.1 trillion spending bill to keep the gov't open. The amendment allowed risky derivatives to be insured by Federal Deposit Insurance Corporation thereby setting the stage for a pre-emptive bailout if the CDS market goes south. See e.g. WSJ, A Warning Signal Flashes' (Feb. 12, p. C4), noting the market for credit default swaps - the same buggers that nearly crashed our financial system in '08 - are now on the rise again.  According to the Journal (ibid.):

"At the end of June the global CDS market was $14.6 trillion as measured by the total amount of default protection outstanding according to the Bank for International Settlements"

Do voters really want to risk another financial shit storm, and recession to make the last look like a jamboree? This is  the threat to which what Sanders is trying to awaken citizens. 

What are Kashkari's prescriptions for bank reform? According to the WSJ piece, "policy makers need to give serious consideration to":

- Breaking up large banks into smaller, less connected, less important entities

-  Regulating large banks like a public utility, or

- Taxing leverage through the financial system to reduce systemic risks wherever they may be

The Fed bank chief added, in a talk at the Brookings Institution (ibid):

"The financial sector has lobbied hard to preserve its current structure and thrown up endless objections to fundamental change. And in the immediate aftermath of the crisis when the Dodd-Frank Act was passed the economic outlook was perhaps too uncertain to take truly bold action. But the economy is stronger now and the time has come to move past parochial interests"

Indeed, and no surprise that Sen.  Sanders released a campaign statement after the speech saying he was "delighted" with Mr. Kashkari's position. Other citizens should also be once they wake up to what Sanders is saying, and repeating. (Well, as a former prof, if you repeat something often enough eventually it sinks into the student's cranium).

Let's also bear in mind Mr. Kashkari isn't some detached observer. During the financial crisis he ran the  $700 billion Troubled Asset Relief Program, an effort aimed at stabilizing the financial system by pumping capital into banks.

From this perspective of his experience, he likened big banks to nuclear reactors whose meltdown would be catastrophic and compared bank regulators to Transportation Security Administration workers checking shoe x-rays to thwart terrorist attacks. Kashkari is so concerned about the next big fail, that he's called for immediate proposals (such as those from Sanders) to attack big bank risk and to hold conferences and recommendations by year's end.

Are people, citizens paying attention? Or are Kashkari's and Bernie's calls for banking reform and the financial structure too abstract for most people to grasp and attend to?  They had better attend to it soon, and vote with their brains as opposed to believing more fake promises from pols who only want to get elected to "make history".

Losing in the Stock Market? Blame the Flash Traders for Wall Street Being RIGGED!

High frequency traders plan their next move - to see the 'buy' orders of millions a fraction of a second before they can be placed.

Author Michael Lewis ('Flash Boys') described in detail this morning (CBS Early Show) how flash traders- using the high frequency trading (HFT) gambit are able to see milliseconds ahead of your buy orders to get there before you can, buy the stock and raise the price - so you don't come out as far ahead as you thought. Also, the same applies to sell orders. They can get there first, and you get much less than you originally thought you would.

Lewis, who originally appeared on '60 Minutes' last night, emphasized the flash traders often trade on fractional share values but these pile up. Billions can be made off the backs of poor ordinary suckers, who trust that when they place buy or sell orders no shenanigans or secret advantages are afoot. But alas, this isn't the case. It only takes a tiny fraction of a second of flash trader advantage for them to see slightly ahead - to what you're intention is - and doing it before you do.

Incredibly, none of this seems to be illegal,  though New York AG Eric Schneiderman said this morning (on the same Early Show) that:

"There are two things we have to do. One is to investigate the Commodities Futures Trading Organization, and the SEC has to investigate whether there's anything currently illegal and second, we have to inquire whether this requires new laws and reforms to catch up with technology".

Which means that in the meantime the ordinary investor is a sitting duck, at the mercy of these high frequency traders and their flash trade computer algorithms.

Readers may recall HFT first came to light in the May 6, 2010  “flash crash” of over 500 points. This event brutally demonstrated the perils of so –called “flash trading”. Then we first learned of the high speed computers which use special algorithms to detect large buy and sell orders then adjust their trades to take advantage. Since the high speed computers can act in nanoseconds( to either buy or sell) with the flash information, they inevitably get the better of the more conventional (slower) investors. The “flash crash” likely occurred because a number of flash computers processed information too quickly or inaccurately inciting a mass sell off.

What’s the little guy investor to do? Not much, and as I’ve repeatedly stated before, no little guys belong in the Wall Street scene, especially if they have lots of money (say in 401ks or IRAs) they are depending on for retirement. The reason is not just flash trading but many other gimmicks, including market timing, mutual fund or stock hyping, and misrepresentations, e.g. of "5 year annualized returns".

For example, the 5 -year annualized return (without dividends) at the end of 2012 showed negative 0.6 percent. But at the end of 2013 it showed 15.4 percent, and you'd have been kicking yourself for not being in the market. But hold strain! The reason for the difference is that for the latter 5- year stats the dismal 2008 stats were entirely wiped off the books from the standpoint of the "five year return", especially the S&P 38.5 percent drop without dividends.

How influential is flash or high frequency trading? According to The Wall Street Journal (‘Fast Traders Face Off with Big Investors over ‘Gaming’, June 30, 2010, p. C1) it accounted for two-thirds of total stock market volume. All other things being equal, that meant unless one had access to a flash trade system or algorithm himself, he had a 2 in 3 chance of being victimized by flash trades, if even peripherally. Today, some four years later, that HFT volume exceeds  90% and the little guy is in a perilous position unless he also has access to such trades. In most cases, as AG Schneiderman observes, it is large institutional investors who use them to gain advantage for their members.

Let’s look at one example of how HFT works. Say a flash trade system or firm, using its high frequency computer, detects a large buy order for a stock listed initially at $20 a share. Then - with milliseconds advantage - the flash trade firm will immediately begin scarfing up the stock – driving up the share price – say to $25 or $30 a share or more before you can buy it. The large (institutional) investors then buy it at the lower price, and the flash firm makes a killing,  while the ordinary  "Joe Schmoe"  loses out, paying more.

Bear in mind here 401ks are typically invested in mutual funds comprised of a body of stocks, maybe ten or so. The flash traders’ capability with their high speed system is such that it can control the numbers for all the stocks of a particular fund, though true, there are some funds (e.g. Vanguard Group) which offset some of the effects by systematically lowering trading costs. This is often done by narrowing the spread between what investors pay to buy and sell shares.

Other funds don’t fare as well since the flash traders’ systems “front run” them. Thus, a stock’s orders (or many stocks in a fund) get “picked off” by the flash traders’ computers that detect the orders, then adjust to benefit. This may well be why mutual funds are being decimated as reported in MONEY magazine ('Mutual Funds Gone Down the Drain', March, p. 19).  According to the piece, citing a Morningstar report: "of all the traditional funds operating a decade ago, 4 in 10 shut down before 2014."

Why should you care? As the article notes:

"Even though you can cash out, costs rise and performance falls as the end nears."

This is all the more reason flash trading needs to be brought under control. Readers who seek to lean more should get hold of Michael Lewis' book, 'Flash Boys'.

More on Stock shams: The Short Sellers

In two previous entries, I discussed the lure of stocks and why people were unjustifably invested in what can only be called "phantom money". The example was given of Joe Schmoe who seemingly lost over $174,000 but the bulk of that ($139,000) didn't even exist as hands-on cash, but as inflated share value. When the "money" was lost, Schmoe didn't actually "lose" anythng real - only the hard money he actually used to purchase shares.

The winners of the stock game, then, are precisely those able to "time the market" and cash out while most are still in. In this way they can reap real rewards, meaning converting the phantom money on paper into real money in the bank, given there are many more "buy and hold" investors to support the cashout.

Thus, like many recent scams in the news (Bernie Madoff, Shawn Merriman etc.), the stock market is also a giant Ponzi scheme, in which the lucky few who time out on the high share end benefit from those buying in (violating the buy low - sell high mandate) and other who simply have surrendered to the "buy and hold" mantra - hoping for some magical stock redemption windfall just before retirement.

But wait, apart from phantom money another financial shark lurks in the backwaters of Wall Street! It is none other than the "naked short seller"! These denizens have the ability to purchase shares they don't really own, then drive stock prices down by betting on their demise.

These "traders" - if they can be called that - typically bet against certain stocks by borrowing money from a brokerage then using it to bet against the stock's shares, forcing the selling of millions of shares they themselves don't own (And you thought phantom money was bad!) This selling of shares not truly owned is known in the Wall Street parlance as "naked short selling").

As a result of it done en masse (to targeted stocks) stock share value plummets, and the long term investors lose even more money (Okay, at least their paper money!). Look at what has transpired with the big banks such as Citibank the past few months.

The short seller game is simple: Borrow money to buy shares of what is perceived as a weak stock, then sell the borrowed money shares betting they can be replaced with shares bought at a lower price.

Thus, Company XYZ sells shares at say, $10 each, and a short seller borrows 100,000 shares, thus $1 million worth on paper. He then unloads all those shares on the market, bringing down the share price precipitously, since obviously that much selling will have a negative, or downside effect. All the other investors who are legit then lose.

As the share price plummets, to let's say $5 a share- when he clocks out, the short seller has effectively made $500,000 [($10 - $5) x 100,000 shares).] Since the share price of XYZ has collapsed, in effect, then the actual money owed for the borrowed shares is now only $500,000. The short seller pays back the borrowee the half mil, then keeps the half mil from his trickery. Meanwhile, millions of proper investors hoping to pay for Janie's college or Pop's retirement get shorted.

The effect is even more pernicious with naked short sellers who bet against stocks to depress prices by selling millions of shares they have not even borrowed. Thus can they wreak unmitigated havoc on stock share prices while the legitimate holders remain blissfully unaware. Critics have rightfully pointed out that - via the assistance of brokerages - these short sellers incept delivery failures by shorting stocks without first borrowing shares, thereby flouting securities law.

Thankfully, the future of this aspect of the stock shllling game may at least be soon over. The SEC (Securities and Exchange Commission) has begun at last to stymie the ability of short sellers to depress stock share prices by using money to sell millions of shares they don't actually own. Part of this stymie ability will likely include reinstatement of the "uptick rule". Until 2007 that rule had required short sellers to wait for a rise or "uptick" in a stock's share price before betting on its decline.

Finally, some sanity is evidently going to return but not in time for the many millions who have lost half or more of their money (okay, phantom money) in the Maul Street Casino.