Manufacturing and corporate profits are both in recession mode, even though the rest of the U.S. economy continues to limp along.» Read More
*Update: The FBI raided two hedge funds run by former SAC Capital employees, according to a report. A third hedge fund has also been raided, although it is unclear right now if there is any connection to SAC Capital.*
It’s been clear for nearly a year that the government has been targeting Steve Cohen’s SAC Capital in its insider trading dragnet. But it seems like the government keeps coming up empty.
The Federal Bureau of Investigation’s Special Agent B.J. Kang—the guy who arrested Bernie Maddoff and Galleon founder Raj Rajaratnam—first investigated allegations of trading irregularities at SAC three years ago, although the inquiry concluded with no charges being filed against the firm. Reuters investigative reporter Mattew Goldstein first reported the investigation in 2009 .
Kang’s 2007 investigation sprang from a lawsuit filed a year earlier by Fairfax Financial Holdings, a Canadian insurance company, against 20 or so hedge funds—including SAC Capital—and stock analysts alleging the defendants were part of a scheme to sell the company’s stock short, have negative analyst reports published, then profit when the stock dropped. Critics of the lawsuit described it as a way of attempting to chill criticism of the company.
The mortgage documentation mess keeps getting stickier.
The latest is this: Countrywide Financial, now owned by Bank of America , appears not to have properly transferred necessary mortgage documents when it sold loans to other banks, which then in turn created residential mortgage backed securities (RMBS) from the loans.
The documents Countrywide failed to provide are critical to the owners of the RMBS because without them homeowners can question the legal right of banks to foreclose on their homes.
What's new here? Based upon testimony delivered in a New Jersey bankruptcy court, this may have been a matter of policy at Countrywide—not just a case of a one-off error.
Based on Bank of America's current ownership of Countrywide Financial, it is possible that the largest bank in America, when ranked by deposits, may potentially be held liable for the problem.
Perhaps the biggest challenge in grasping the nature of the problem is that the details can overwhelm our ability to see the forest for the trees, so let's walk through it one step at a time.
Why did Eurozone officials push so hard for a bailout of Ireland?
On the face of it, it was a very strange dynamic. Irish government officials had been insisting that they were well-funded through at least the first quarter of next year. Without any current need to roll debt, Ireland could afford to be indifferent as its spreads blew out. The yields on Irish debt may have blown out, but it wasn’t costing Ireland anything.
The pressure for a bailout of Ireland did not come from Ireland itself—it came from Eurozone officials. If anything, Irish Finance Minister Brian Lehnihan’s announcement over the weekend that Ireland would seek a bailout was a concession to its European Union friends.
So why would the Eurocrats demand a bailout of Ireland when Ireland insisted it didn’t need one?
Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation, according to people familiar with the matter.
The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say.
The investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in U.S. financial markets, including new ways nonpublic information is passed to traders through experts tied to specific industries or companies, federal authorities say.
Peter Lattman’s NYT story provides some perspective, noting that Justice and the SEC “have taken an increasingly aggressive — and public — stance in pursuing insider trading” and that the prosecutor in the latest case (as in the Galleon case), Manhattan U.S. attorney Preet Bharara, is among those taking the “hardest line.”
Lurking just below Peter Lattman’s report of the broad federal dragnet apparently underway against insider trading, you can faintly make out the outlines of a new theory of criminalizing insider trading.
Lattman, who covered the legal beat and later private equity at the Wall Street Journal before moving over to the New York Times, provides an especially informative report on the campaign, which is being led U.S. Attorney Preet Bharara.
“Illegal insider trading is rampant and may even be on the rise,” Lattman quotes Bharara as saying in a speech last month. “Disturbingly, many of the people who are going to such lengths to obtain inside information for a trading advantage are already among the most advantaged, privileged and wealthy insiders in modern finance. But for them, material nonpublic information is akin to a performance-enhancing drug that provides the illegal ‘edge’ to outpace their rivals and make even more money.”
The idea that insider trading is a “performance-enhancing drug” could merely be an attempt to ramp-up public anger at insider-trading by analogizing it to the drug-scandals in professional and Olympic sports.
Economists Hold Mixed Views on Inflation Risks (CNBC via Reuters) The debate about whether deflation or inflation is a bigger risk to the U.S. economy isn't merely political: "About a third of NABE [National Association for Business Economics] panelists view the Fed's second asset purchasing program as somewhat lessening the risks of deflation, while another 33 percent saw the step as risking inflation." While that may seem less than definitive, note the following: "Still, they forecast the Fed's preferred measure of consumer inflation—the personal consumption expenditures price index excluding food and energy —to rise to 1.5 percent by the end of 2011 from a projected 1.0 percent this year." That range would be "below the Fed's considered comfort zone between 1.7 percent and 2.0 percent." One imagines that those who see inflation as the bigger threat may quibble with the exclusion of more volatile food and energy prices from the sample.
Is China's Reserve Rate Hike a Countermove to QE2? (New York Times) As widely reported today: "Commercial banks were ordered to transfer an additional 0.5 percent of their assets by Nov. 29 to very low-yielding accounts at the central bank, the People’s Bank of China." How could that be viewed as a countermove against the Fed?
Perhaps the most interesting part of Ben Bernanke's speech today was his claim that the Fed is not conducting quantitative easing at all.
Paul Krugman and Gauti Eggertsson of the New York Fed have a new paper out arguing that the recession and persistent unemployment could have been ameliorated by aggressive government spending. It'll be getting lots of attention, I suspect, so you might as well start reading it now.
Bryan Kaplan asks an important question about Ben Bernanke's policy choices:
As Sumner keeps telling us, all of Bernanke's research prescribed a simple solution : Maintain nominal GDP, and let the other chips fall where they may. This might have meant quantitative easing instead of targeting short-term interest rates, but that's it. Instead Bernanke became a key accomplice for the disgraceful series of bailouts, fiscal stimulus, and obfuscation about the zero nominal bound. The latest round of quantitative easing makes Bernanke's doublethink plain; if he thinks it's going to work in 2010, why wouldn't it have worked in 2008? And if it would have worked in 2008, why did he join Paulson and Bush's stampede?
In the end, Bernanke's behavior baffles me. He abandoned his own intellectual positions without explanation, humiliated himself, sparked a terrible recession, set a long list of dangerous precedents, and pushed the U.S. and the world down the road to serfdom. My best guess is that he simply didn't have the backbone to tell people like Paulson and Bush that they didn't know what they were talking about. Whatever the reason, though, the crisis forced me to rethink my optimism about the Fed. Bernanke and company ignored their own research, got predictably bad results, and pleaded impotence. Instead of playing the voice of reason, they acted like they'd believed in bailouts and fiscal stimulus all along. I expected better. I was wrong.
If there's any doubt the Fed is targeting December for its first rate hike, just look at the bond market.
Italy plans to launch a series of bad bank-style measures as early as the end of the year, the FT reports.
Hillary Clinton's close ties to Wall Street is an image she can't seek to shake, The New York Times reports.