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by 82_28 » Wed Sep 26, 2018 4:11 pm
by JackRiddler » Wed Sep 26, 2018 4:51 pm
by 82_28 » Thu Sep 27, 2018 6:44 am
by Belligerent Savant » Thu Sep 27, 2018 10:34 am
In high finance, a few arenas are subject to some light and
transparency—regulated stock exchanges like the NYSE and the
NASDAQ, for example, places fit for day traders and suburban retirees
and other such PG-rated softies. But for the most part, high
finance is a night game where anything goes. This is the legacy of a
generation of brilliant lawyers who’ve turned Wall Street into a perfect
black box, the industry surrounded by the legal equivalent of
tinted windows.
In the crash era, one story towers above the rest as a perfect example.
The collapse of the Lehman Brothers investment bank and
its subsequent lightning-speed, past-midnight-hour sale to the
British banking giant Barclays was a sweeping two-act crime drama
that overwhelmed the imagination of American law enforcement.
Regulators simply couldn’t see through those tinted windows to
make out the monstrous frauds, robberies, and conspiracies that
were raging out of control within both companies. And afterward
the courts were too overwhelmed by the scale of it to do anything
but acknowledge what had taken place.
This story began with simple, dumb greed and irresponsibility,
progressed to frank illegality, and ended with a brilliant corporate
mutiny and late-night merger that one former Lehman lawyer calls
“the greatest bank robbery in history.” The two firms involved,
Lehman and Barclays, were at the centers of both the 2008 crash
and the worldwide LIBOR interest-rate-rigging scandal that exploded
into public view four years later, making this the ultimate
cautionary tale. If regulators at any point had stopped to take a
really close look at either company, multiple disasters might have
been averted.
But nobody looked into either of those black boxes, at least not
until it was too late. Lehman’s collapse ruined thousands of institutions
and individual investors around the world. A too-late lawsuit
failed to recoup the lost money, meaning the only thing left in the
end was a long, twisting tale of testosterone-fueled catastrophe buried
in a mountain of paper—case No. 12-2322, U.S. Court of Appeals
for the Second Circuit, In re: Lehman Brothers Holdings, Inc.
If you want to understand not only why Wall Street isn’t policed
but why many believe it can’t be policed, you need only look carefully
at this case. You can’t police what you can’t see, and you can’t
see in the dark.
...
Imagine an ordinary low-level swindle. A con man comes to a town
and opens a store. He then buys lavishly from all the local merchants,
on credit, to stock his shelves. For a few weeks he does a
booming business, selling his swag for cash. But suddenly, before
his bills come due, he flees town with the cash, stiffing the local
hayseeds who’ve been gullible enough to give him credit. The huckster
shopkeeper who bilked his creditors by “fraudulent conveyance”
was a common enough character in small-town American
crime that some states had to adopt felony laws against that sort of
thing.
The Lehman story is exactly the same story, only the “town” here
is the planet Earth, and the flight was an absurdly complex escape
mechanism, a getaway so convoluted that some of the best lawyers
in the world had trouble following it.
First, Lehman executives ran up a $700 billion tab engaging in
almost indescribably reckless and antisocial behaviors, borrowing
on a grand scale to create and sell products so dangerous that they
very nearly collapsed the world economy in 2008. But before the
bank itself went bankrupt that same year, the hucksters who ran the
shop quietly sucked the cash out of the company, leaving tens of thousands
of people and institutions to which Lehman owed money—
from foreign orphanages to the city of Long Beach, California—high
and dry.
The hucksters took the money out of the company in two ways.
First, some of the principals who had helped ruin the company simply
paid themselves hefty bonuses on the way out the door. Then,
some of them came up with an even more inspired mechanism:
they sold themselves to another big bank, the British firm Barclays.
In this second part of the deal, key parts of which were executed
literally in the middle of the night, billions of dollars were quietly
moved into the coffers of Barclays and out of the reach of Lehmans
creditors. Simultaneously, the insiders from Lehman who had come
up with the idea took lucrative jobs at Barclays, taking hundreds of
millions in future bonus payments to do so.
This is a hard story to follow. But if you keep that one image
in mind, of a shopkeeper fleeing town in the middle of the night
with borrowed profits, the collapse of Lehman Brothers—one of the
great unpunished swindles of all time—starts to make sense.
...
Meanwhile, as the weekend of September 13-14,2008, began, a series
of meetings kicked off across town, at the offices of the New
York Fed, that would dramatically reshape not just the American
economy but the economy of the entire world. Hundreds of bankers
and lawyers from most every bank and major Wall Street law firm
in the city gathered at the regal, marble-floored building to hammer
out a rescue of the insurance giant AIG, which like Lehman was
also spiraling toward collapse and ruin.
The rescue of AIG that those men and women cooked up, in
which the government assumed AIG’s debts in full, had the
consequence of saving AIG customers like Goldman and Deutsche
Bank from billions of dollars that they would otherwise have
lost. Moreover, the Fed and the U.S. Treasury, in the persons of
Timothy Geithner and Hank Paulson, would shortly thereafter
allow both Goldman and Morgan Stanley to convert themselves
into commercial bank holding companies, thereby gaining access
to billions of dollars of emergency financing from the Federal
Reserve.
The deals the government and Wall Street worked out that weekend
to save the likes of AIG, Goldman, Deutsche Bank, Morgan
Stanley, and Merrill Lynch were unprecedented in their reach and
political consequence, transforming America into a permanent oligarchical
bailout state. This was, essentially, a formal merger of Wall
Street and the U.S. government.
Only one actor was left out of the party: Lehman Brothers. When
Fuld proposed that the government let Lehman make the same
move to become a commercial bank, giving it the same life-giving
access to the Fed’s billions, Paulson told him to stuff it.
By Sunday morning, Fuld was ready to do Diamond’s humiliating
“sell yourself for free” deal. But when he tried to crawl from his knees
into Diamond’s lap, he found out even that deal was now impossible.
It turned out that an obscure British regulatory provision prevented
Barclays from taking over Lehmans trading obligations without a
shareholder vote, nixing any immediate mano-a-mano Barclays deal.
When the British financial regulator, the Financial Services Authority
(FSA), refused that weekend to provide a waiver for that requirement,
the original Barclays fire-sale buyout proposal—which came
to be known as “Barclays One”—was basically dead.
Beyond desperate now, Fuld called Paulson that Sunday and
begged him to call British prime minister Gordon Brown to intervene.
Paulson said he was busy. Fuld then begged Paulson to ask
George Bush to call Brown. Same thing—no dice. Fuld even thought
about reaching out to Jeb Bush to induce George to call Gordon
Brown, but that idea, too, somehow collapsed.
Wearily, Fuld then ended where he’d begun, trying to sell himself
to John Mack at Morgan Stanley one last time. Mack told Fuld he
had enough problems of his own.
By the next morning, Fuld was out, stepping down when the last
hope of avoiding bankruptcy vanished. A new group, led by the
aforementioned “best risk taker,” Bart McDade—a Lehman official
with a reputation for integrity, a man who had once publicly questioned
Fuld’s subprime strategy—and a few dozen executives loyal
to him, stepped in to take over. This new group faced the same devastating
financial reality that Fuld had, but they had one thing going
for them: the absence of Fuld. Without having to worry about propping
up Lehman long enough to save Fuld’s reputation, they were
free to make one final, brilliantly ice-cold deal to save themselves.
What would they do?
...
The Lehman bankruptcy swindle was singular because of its sheer
size, and also because of the extraordinary circumstances surrounding
that chaotic September week when the deal took place. (“The
whole world is melting down out there” is how one Lehman executive
described the week of the sale in court.)
But in another sense, it was a thoroughly common occurrence.
Every day on Wall Street, money is stolen, embezzled, burgled, and
robbed. But the mechanisms of these thefts are often so arcane and
idiosyncratic that they don’t fit neatly into the criminal code, which
is written for the dumb crimes committed by common stick-up artists
and pickpockets.
Wall Street crime, in part, is a confidence game in which the
criminal justice system itself is the mark. Much like common street
grifters, who bank on the victim’s feelings of shame and guilt preventing
him from going to the police, Wall Street criminals bank on
the terminal intellectual insecurity of their regulators. They dare
prosecutors to call what they’ve done crimes, knowing they’ll be
hesitant to disagree with the hotshot defense lawyers from New
York and Washington who make forty or fifty times what they do.
So a foreign bank steals billions of dollars from dozens of American
towns like Long Beach, but when the bank’s lawyers call the
transaction not theft but “clarification,” American law enforcement
is mesmerized by the semantics. It then declares the issue a civil
matter and kicks the problem to the civil courts, where the best
hope for the victims now is not for justice but mere remuneration.
From there it’s just math. The civil battle almost always devolves
into a war of resources, and here, inevitably, the richer party wins.
by Belligerent Savant » Thu Sep 27, 2018 1:57 pm
THE LOST WEEKEND
Sunday, September 21. Time was running out for Saul Burian. He
was supposed to play a key role in one of the biggest transactions in
the history of investment banking, a deal the whole world was
watching, and yet he couldn’t get anyone on either side of the deal
to talk to him or to anyone else on his team. It was late on a Sunday
night, and the deal was closing before the start of business on a
Monday. It was like manning center field, with a World Seriesending
fly ball screaming right at you, but nobody’s given you a
glove.
“You’re standing there, and you’re the least informed people in
the room,” he says. “And this is a deal that has enormous importance
not just for thousands of employees, but for people around
the world. I’d say it was unsettling, yes.”
Burian was the managing director of the restructuring division
of Houlihan Lokey Howard & Zukin Capital, the investment bank
that the Lehman Brothers creditors’ committee had hired to oversee
the firm’s bankruptcy. In lay terms, Burian and his small team of
Houlihan bankers were the financial advisers to everyone around
the world who was owed money by the dying megafirm.
That was a lot of people.
Burian represented, as another lawyer put it to me, the “great unwashed”
of Lehman’s unsecured creditors. And on the weekend of
September 20-21, 2008, it was his job to oversee the historic, lastminute
sale of what was left of Lehman to the British banking giant
Barclays, which had emerged the week before as Lehman’s wouldbe
savior, gallantly (in true British fashion, one might say) stepping
in to buy the cratering investment bank. In the process, Barclays
was also, perhaps, preventing a global financial tsunami, by keeping
the first in a series of great corporate dominoes from falling over
completely.
Burian and some other Houlihan employees, as well as lawyers
from Milbank, Tweed, the law firm hired by Lehman’s creditors’
committee, had been invited into the skyscraper offices of Weil,
Gotshal & Manges, the powerful international firm that represented
Lehman Brothers—not the banks creditors, but the actual bank—
to participate in the negotiations.
But for now the creditors were still being treated like a third
wheel, literally on the outside. The Houlihan/Milbank teams that
weekend were left to sit in separate conference rooms, away from
the action, twiddling thumbs, while the real meetings went on all
around them in other rooms, other floors. “We were at best an annoyance,”
Burian said later.
What was going down in that skyscraper that weekend was a momentous,
unprecedented transfer of wealth and property. Essentially
Barclays was staging the ultimate episode of Storage Wars,
trying to both price and buy the cargo of one of the world’s largest
banking institutions in just a few frenzied meetings, with time playing
a key role—it all had to be done before the start of business on
Monday, September 22, 2008.
As one of the worlds leading investment banks, Lehman Brothers
was more than just a few thousand hotshots throwing big tips at
strippers in Lower Manhattan. The bank was also a major cog in the
worlds financial infrastructure, a middleman for deals in practically
every territory of every country on earth. It was the banker
to unions and pensions, to great nations and to little towns, to
boutique hotels and to giant hedge funds, to charities and to Arab
princes.
More than 76,000 institutions and individuals would subsequently
surface, claiming losses when Lehman collapsed. I would
call dozens of the names on that list, speaking to Australian Boys’
Clubs, missionaries in Africa, a hotel developer in Washington
State, a lawyer representing a wine workers’ union that lost $180,000
in pension money, and a string of officials in towns in the American
Northwest. Even Bill Maher, the HBO star comedian, got no special
status as a celebrity—he was somewhere down the list in the enormous
line of Lehman losers.
The saddest story of all came from Robert Shannon, the city attorney
for Long Beach, California. “Our town invested almost
twenty million dollars with Lehman two weeks before its collapse,”
he said, laughing darkly. “Two weeks.”
Shannon hadn’t had anything to do with that deal, so when he
saw the news on TV that September announcing that Lehman had
collapsed, he was mostly just curious. “I thought it was just an interesting
story,” he said. A few hours later his phone rang, and someone
from the city’s finance department was on the other line. In
about a minute, Shannon was white with panic. “That was when I
realized how serious this was.”
When the bad news hit that crucial September weekend, all those
creditors—the wine workers’ unions and Long Beaches of the
world—had everything riding on companies like Houlihan and
Milbank, and on Burian in particular. After all, the best (and perhaps
only) hope to save any value at all for the Lehman creditors
was to safely move the cargo off the Lehman-Titanic and onto the
sturdy balance sheet of Barclays, a storied European bank whose
very name carried the soothing implication of soundness, honesty,
and old-world stability.
But there was a catch: if the deal to sell the Lehman cargo were
put together in a way that was lopsided in Barclays’s favor, then
all those Long Beach firemen and African missionaries and Australian
Boys’ Clubs, and even the sheikhs running the Abu Dhabi
Investment Authority—whose exposure to Lehman was somewhat
greater than the mean, an incredible $609 million—would all lose
out, as there would be less left over for those thousands of creditors
to split up.
Unfortunately, from the start, the Lehman-Barclays deal was an
awesomely complicated fix.
Again, in the days before its purchase of Lehman’s assets, Barclays
had quietly hired on all the key Lehman personnel who were
involved with evaluating those assets. In exchange, Lehman deal
makers jiggered the numbers of the deal in Barclays’s favor to the
tune of billions of dollars.
Those insiders had spent much of the chaotic week leading up to
that weekend in the skyscraper negotiating the details of the secret
discount. The insiders had smartly already presented the deal to a
bankruptcy court without the discount figured in, and got the
courts approval that Friday afternoon, just as Judge James Peck was
about to take off for the weekend. The only hint of what was to come
was Lori Fife’s offhand comment about a “clarification letter.”
The game then moved to the Central Park skyscraper offices of
Weil, Gotshal, where the insiders would spend that fateful weekend
“clarifying” the approved deal to move billions of extra dollars to
the Lehman-Barclays insiders.
This was the arrangement being hammered out in the rooms
from which Burian and the Milbank lawyers were excluded. None
of the creditors’ representatives had any clue as to what was going
on, and their panic increased all weekend. Most of the team arrived
mid-Saturday (Burian, who is Sabbath-observant, arrived after sundown)
and failed repeatedly to get an audience with anyone involved
with the deal. Houlihan and Milbank personnel even camped
out strategically in different parts of the building, hoping for a
chance to pull someone aside.
“Every once in a while,” Burian said, “I’d catch someone in the
hallway, in the bathroom, you know, getting coffee, you know, what’s
going on?”
All weekend long, phones rang and men and women rushed in
and out of conference rooms. Big groups broke into little groups,
while little groups scratched out side deals and rushed to rejoin big
groups. The main action took place in a huge square-shaped conference
room on the twenty-fifth floor. From outside that room, Burian
said, he could occasionally hear spirited discussions going on,
while officials from the Fed and the Treasury chimed in from a
ceiling-mounted speaker system that applied an almost mystical
aura to the proceedings. “You could hear, you know, like the voice
of God,” he said, “people on conference calls, coming through the
ceiling.”
But all day Saturday and then most of Sunday passed without the
creditors’ reps getting anything like a complete answer to a pair of
very simple questions: What exactly was Lehman selling to Barclays,
and for how much?
The lack of information coming the creditors’ way from the
Lehman-Barclays negotiators presented two distinct possibilities to
Burian, both of them dire and deeply concerning. “Either they genuinely
didn’t have answers,” he says, “or else they were refusing to
show us stuff, and that got us pretty nervous.”
A conference call between the Houlihan and Milbank folks and
creditors all around the world had been scheduled for noon that
Sunday, but that call was bumped to two p.m., then four, then six.
Then it was eight o’clock, and then ten. And then finally a call actually
happened at 11:30 p.m., a call in which Burian had to explain
to exasperated creditors in places as far away as Japan that the
committee, despite its frantic efforts at calculating the value of the
deal, still basically had no idea what the hell was going on, what was
in the deal and what wasn’t. “It wasn’t a pretty call,” Burian later
said.
It was after that call, after more “stomping around” and more
stalking of coffee machines, that Burian finally lost it. He approached
Harvey Miller, one of the Weil, Gotshal lawyers, who was
standing outside a conference room where the deal was being negotiated.
He told Miller the delay was ridiculous and that it was inconceivable
that the largest transaction ever was about to be closed and
nobody had time to inform the creditors’ committee.
Miller sighed, told Burian to wait a minute, and then walked five
or six feet to another executive named Michael Klein, who happened
to be standing nearby.
None of the people on the creditors’ committee knew that Michael
Klein, as recently as a few weeks before, did not work for either
Lehman Brothers or Barclays, or even have an inkling that he
might ever do so. In fact, he had been at Citigroup for more than
twenty years, from 1985 through July 2008, where he held the title
chairman of international clients. Barclays CEO Bob Diamond had
hired him just over a week before, and he would ultimately be paid
the incredible sum of $10 million, essentially for his work on this
one deal. “He was a mercenary” is how one lawyer described him to
me later.
Klein was worth every penny. On the Saturday before the sale
was completed, Klein personally sent an email to Diamond, bragging
that he’d found more money to take from creditors and move
to the Barclays side of the deal. “Great day,” Klein said, of that Saturday.
“We clawed back three billion dollars more.”
So it was this Michael Klein who, in the wee hours of Monday,
September 22, felt a tug in the skyscraper hallway. Lehman lawyer
Harvey Miller had tapped his shoulder, whispered in his ear, and
pointed to Burian. At the sight of Burian, Klein sagged like he was
taking a bullet but, seeming resigned, motioned to Burian to follow
him into a conference room.
It was inside that conference room that the $ 10-million-man
Klein treated Burian, and by extension every firefighter, wine
worker, African missionary, and Australian Boys’ Club creditor on
earth, to a demonstration of sheer chutzpah.
Klein understood that he was being asked to explain the contours
of this gigantic transfer of wealth not to anyone with real
juice on Wall Street, but to the representative of people whose only
leverage was that they held a huge stack of paper claims against
Lehman.
So Klein, showing what was apparently all due respect, scanned
the room looking for a sheet of paper to write on. His eyes settled
on “a credenza or somewhere on the table” where there happened to
sit a stack of manila folders. He paused, took one of those folders,
and for a few minutes, scribbled on it.
When he was finished, he showed Burian the following picture:
Burian stood back in amazement. Michael Klein had essentially
diagrammed the biggest asset purchase in the history of finance on
a manila folder. It was like submitting a design for a nuclear bomb
to the Pentagon via a ballpoint drawing on the back of a napkin.
Burian stared at Kleins scribblings. He would testify later that he
was awestruck by the moment, overwhelmed by the fact that he was
participating in something so historically important. He was also
relieved. Unlike almost everyone else in the world, he understood
what Kleins picture meant. The manila folder contained a crude list
of assets and liabilities, and a small set of calculations, but more
than anything, it contained, at the very least—after all those days
and hours of waiting—an answer, an explanation.
The manila folder asked the entire universe of Lehman creditors
to accept on faith that the deal that had been reported to the court
had changed, but only because the assets being transferred had
since lost value in the market.
“We were relieved that there was an agreement,” Burian said. As
for what that agreement was, he told the negotiators that he believed
them, of course, but that he would have to check it all out
later. “It was trust but verify,” he says.
Still, the absolute certainty with which the deal was explained to
him acted like a balm on his nerves. They all seemed so sure. “I
turned to all of them and said, ‘If this is what’s happening, then so
be it,’ ” he said.
In truth, Klein in handing that manila folder over had acted as
the getaway driver, the man responsible for delivering the Big Lie,to
Lehman’s creditors.
The lie was couched in a pair of those feverishly
etched lines:
Pre Mark 49.9
Post Mark 44-45.
In essence, Klein was telling Burian—whom he professed later
not to even remember, testifying only that there was a “guy with
glasses” at the meeting, where he had “grabbed a manila thing” and
had a “recollection of drawing boxes”—that the Lehman assets had
dropped from $49.9 billion in value when the deal was struck to
“44-45” in current value, just due to market forces.
The “44-45” notation was a piece of great showmanship. Like a
car salesman who throws in a new set of radials to close the deal,
Klein was telling Burian that Barclays was actually rounding things
up about a billion dollars in Lehman’s favor—that the assets were
actually probably only worth $44 billion now, but Barclays was
going to give them credit for $45 billion. For good measure, you
know, as a show of good faith. “They were going to cut us a break,”
Burian testified later.
Something didn’t feel quite right to the lawyers for the creditors,
the whole weekend didn’t feel quite right, but there was no time to
do anything about it. Houlihan and Milbank had no choice but to
take Kleins word about the deal. The sale closing was hours away.
There was no conceivable way to do due diligence (or to “diligence
it,” to use the verb form favored on Wall Street) in the hours remaining,
and leverage-wise, there was no move left to make. If
Lehman’s creditors balked, the Barclays sale might collapse, and
Lehman itself might be worth pennies in a matter of hours. There
was nothing to do but take Klein’s word on the math.
Burian quietly scooped up the manila folder, shoved it into a
briefcase, and went home. He had no idea he had just witnessed the
misappropriation of at least $5 billion.
And billions more were about to disappear in the final sale,
through a variety of mechanisms so ingeniously conceived that it
would take several years, dozens of lawyers, and hundreds of depositions
to sort it all out.
The creditors ultimately did not object to the sale that next morning.
They didn’t support it, either. It was, they felt, the only move
they could make under the circumstances.
“The reason we’re not objecting is really based on the lack of a
viable alternative,” said Luc Despins, one of the Milbank counsel,
that Monday afternoon of September 22, the day of the sale. “We
did not support the transaction because there had not been enough
time to properly review it.”
In the months and years to come, the representatives of Lehman’s
creditors would unearth stunning details about just exactly what
had gone on behind all those closed doors. The first part of that
process of discovery would unfold like a classic detective story, in
which clues slowly revealed themselves until the truth gradually
came into focus. There would come a time when the Lehman creditors
would be able to see the contours of the whole heist. They
would have documents, emails, admissions even. But almost precisely
at that moment of evidentiary victory, they were politically
and legally checkmated. The creditors were thrust face-first into the
immovable principle that underlies everything modern that Wall
Street does: if a crime is complicated enough, and sanctified by
enough “reputable” attorneys and accountants, then American law
enforcement will inevitably be too slow or too weak to stop it.
by Elvis » Tue Oct 23, 2018 5:41 am
As treasury secretary in the Obama administration, Timothy F. Geithner condemned predatory lenders. Now he is president of Warburg Pincus, a New York firm that controls a private equity fund that owns Mariner Finance. (Andrew Harrer/Bloomberg News)
‘A way of monetizing poor people’: How private equity firms make money offering loans to cash-strapped Americans
By Peter Whoriskey
July 1
The check arrived out of the blue, issued in his name for $1,200, a mailing from a consumer finance company. Stephen Huggins eyed it carefully.
A loan, it said. Smaller type said the interest rate would be 33 percent.
Way too high, Huggins thought. He put it aside.
A week later, though, his 2005 Chevy pickup was in the shop, and he didn’t have enough to pay for the repairs. He needed the truck to get to work, to get the kids to school. So Huggins, a 56-year-old heavy equipment operator in Nashville, fished the check out that day in April 2017 and cashed it.
Within a year, the company, Mariner Finance, sued Huggins for $3,221.27. That included the original $1,200, plus an additional $800 a company representative later persuaded him to take, plus hundreds of dollars in processing fees, insurance and other items, plus interest. It didn’t matter that he’d made a few payments already.
“It would have been cheaper for me to go out and borrow money from the mob,” Huggins said before his first court hearing in April.
Most galling, Huggins couldn’t afford a lawyer but was obliged by the loan contract to pay for the company’s. That had added 20 percent — $536.88 — to the size of his bill.
“They really got me,” Huggins said.
A growing market
Mass-mailing checks to strangers might seem like risky business, but Mariner Finance occupies a fertile niche in the U.S. economy. The company enables some of the nation’s wealthiest investors and investment funds to make money offering high-interest loans to cash-strapped Americans.
Mariner Finance is owned and managed by a $11.2 billion private equity fund controlled by Warburg Pincus, a storied New York firm. The president of Warburg Pincus is Timothy F. Geithner, who, as treasury secretary in the Obama administration, condemned predatory lenders. The firm’s co-chief executives, Charles R. Kaye and Joseph P. Landy, are established figures in New York’s financial world. The minimum investment in the fund is $20 million.
Dozens of other investment firms bought Mariner bonds last year, allowing the company to raise an additional $550 million. That allowed the lender to make more loans to people like Huggins.
“It’s basically a way of monetizing poor people,” said John Lafferty, who was a manager trainee at a Mariner Finance branch for four months in 2015 in Nashville. His misgivings about the business echoed those of other former employees contacted by The Washington Post. “Maybe at the beginning, people thought these loans could help people pay their electric bill. But it has become a cash cow.”
The market for “consumer installment loans,” which Mariner and its competitors serve, has grown rapidly in recent years, particularly as new federal regulations have curtailed payday lending, according to the Center for Financial Services Innovation, a nonprofit research group. Private equity firms, with billions to invest, have taken significant stakes in the growing field.
Among its rivals, Mariner stands out for the frequent use of mass-mailed checks, which allows customers to accept a high-interest loan on an impulse — just sign the check. It has become a key marketing method.
The company’s other tactics include borrowing money for as little as 4 or 5 percent — thanks to the bond market — and lending at rates as high as 36 percent, a rate that some states consider usurious; making millions of dollars by charging borrowers for insurance policies of questionable value; operating an insurance company in the Turks and Caicos, where regulations are notably lax, to profit further from the insurance policies; and aggressive collection practices that include calling delinquent customers once a day and embarrassing them by calling their friends and relatives, customers said.
Finally, Mariner enforces its collections with a busy legal operation, funded in part by the customers themselves: The fine print in the loan contracts obliges customers to pay as much as an extra 20 percent of the amount owed to cover Mariner’s attorney fees, and this has helped fund legal proceedings that are both voluminous and swift. Last year, in Baltimore alone, Mariner filed nearly 300 lawsuits. In some cases, Mariner has sued customers within five months of the check being cashed.
The company’s pace of growth is brisk — the number of Mariner branches has risen eightfold since 2013. A financial statement obtained by The Post for a portion of the loan portfolio indicated substantial returns.
Mariner Finance officials declined to grant interview requests or provide financial statements, but they offered written responses to questions.
Company representatives described Mariner as a business that yields reasonable profits while fulfilling an important social need. In states where usury laws cap interest rates, the company lowers its highest rate — 36 percent — to comply.
“The installment lending industry provides an important service to tens of millions of Americans who might otherwise not have safe, responsible access to credit,” John C. Morton, the company’s general counsel, wrote. “We operate in a competitive environment on narrow margins, and are driven by that competition to offer exceptional service to our customers. . . . A responsible story on our industry would focus on this reality.”
Regarding the money that borrowers pay for Mariner’s attorneys, the company representatives noted that those payments go only toward the attorneys it hires, not to Mariner itself.
The company declined to discuss the affiliated offshore company that handles insurance, citing competitive reasons. Mariner sells insurance policies that are supposed to cover a borrower’s loan payments in case of various mishaps — death, accident, unemployment and the like.
“It is not our duty to explain to reporters . . . why companies make decisions to locate entities in different jurisdictions,” Morton wrote.
Through a Warburg Pincus spokesman, Geithner, the company president, declined to comment. So did other Warburg Pincus officials. Instead, through spokeswoman Mary Armstrong, the firm issued a statement:
“Mariner Finance delivers a valuable service to hundreds of thousands of Americans who have limited access to consumer credit,” it says. “Mariner is licensed, regulated, and in good standing, in all states in which it operates and its operations are subject to frequent examination by state regulators. Mariner’s products are transparent with clear disclosure and Mariner proactively educates its customers in every step of the process.”
Equity firms' stakes
Over the past decade or so, private equity firms, which pool money from investment funds and wealthy individuals to buy up and manage companies for eventual resale, have taken stakes in companies that offer loans to people who lack access to banks and traditional credit cards.
Some private equity firms have bought up payday lenders. Today, prominent brands in that field, such as Money Mart, Speedy Cash, ACE Cash Express and the Check Cashing Store, are owned by private equity funds.
Other private equity firms have taken stakes in “consumer installment” lenders, such as Mariner, and these offer slightly larger loans — from about $1,000 to more than $25,000 — for longer periods of time.
Today, three of the largest companies in consumer installment lending are owned to a significant extent by private equity funds — Mariner is owned by Warburg Pincus; Lendmark Financial Services is held by the Blackstone Group, which is led by billionaire Stephen Schwarzman; and a portion of OneMain Financial is slated to be purchased by Apollo Global, led by billionaire Leon Black, and Varde Partners.
These lending companies have undergone significant growth in recent years. To raise more money to lend, they have sold bonds on Wall Street.
“Some of the largest private equity firms today are supercharging the payday and subprime lending industries,” said Jim Baker of the Private Equity Stakeholder Project, a nonprofit organization that has criticized the industry. In some cases, “you’ve got billionaires extracting wealth from working people.”
Exactly how much Mariner Finance and Warburg Pincus are making is difficult to know.
Mariner Finance said that the company earns a 2.6 percent rate of “return on assets,” a performance measure commonly used for lenders that measures profits as a percentage of total assets. Officials declined to share financial statements that would provide context for that number, however. Banks typically earn about a 1 percent return on assets, but other consumer installment lenders have earned more.
The financial statements obtained by The Post for “Mariner Finance LLC” indicate ample profits. Those financial statements have limitations: “Mariner Finance LLC” is one of several Mariner entities; the statements cover only the first nine months of 2017; and they don’t include the Mariner insurance affiliate in Turks and Caicos. Mariner Finance objected to The Post citing the figures, saying they offered only a partial view of the company.
The “Mariner Finance LLC” documents show a net profit before income taxes of $34 million; retained earnings, which include those of past years, of $145 million; and assets totaling $561 million. Two independent accountants who reviewed the documents said the figures suggest a strong financial performance.
“They are not hurting at least in terms of their profits,” said Kurt Schulzke, a professor of accounting and business law at Kennesaw State University, who reviewed the documents. “They’ve probably been doing pretty well.”
New management
As treasury secretary, Geithner excoriated predatory lenders and their role in the Wall Street meltdown of 2007. Bonds based on subprime mortgages, he noted at the time, had a role in precipitating the panic.
“The financial crisis exposed our system of consumer protection as a dysfunctional mess, leaving ordinary Americans way too vulnerable to fraud and other malfeasance,” Geithner wrote in his memoir, “Stress Test.” “Many borrowers, especially in subprime markets, bit off more than they could chew because they didn’t understand the absurdly complex and opaque terms of their financial arrangements, or were actively channeled into the riskiest deals.”
In November 2013, it was announced that Geithner would join Warburg Pincus as president. Months earlier, one of the firm’s funds had purchased Mariner Finance for $234 million.
Under the management of Warburg Pincus, Mariner Finance has expanded briskly.
When it was purchased, the company operated 57 branches in seven states. It has since acquired competitors and opened dozens of branches. It now operates more than 450 branches in 22 states, according to company filings.
Twice last year, Mariner Finance raised more money by issuing bonds based on its loans to “subprime” borrowers — that is, people with imperfect credit.
Ex-workers share qualms
To get a better idea of business practices at this private company, The Post reviewed documents filed for state licensing, insurance company documents, scores of court cases, and analyses of Mariner bond issues by Kroll Bond Rating Agency and S&P Global Ratings; obtained the income statement and balance sheet covering most of last year from a state regulator; and interviewed customers and a dozen people who have worked for the company in its branch locations.
Mariner Finance has about 500,000 active customers, who borrow money to cover medical bills, car and home repairs, and vacations. Their average income is about $50,000. As a group, Mariner’s target customers are risky: They generally rank in the “fair” range of credit scores. About 8 percent of Mariner loans were written off last year, according to a report by S&P Global Ratings, with losses on the mailed loans even higher. By comparison, commercial banks typically have suffered losses of between 1 and 3 percent on consumer loans.
Despite the risks, however, Mariner Finance is eager to gain new customers. The company declined to say how many unsolicited checks it mails out, but because only about 1 percent of recipients cash them, the number is probably in the millions. The “loans-by-mail” program accounted for 28 percent of Mariner’s loans issued in the third quarter of 2017, according to Kroll. Mariner’s two largest competitors, by contrast, rarely use the tactic.
Mariner generally targets people who have imperfect credit scores, according to the bond rating agencies. After a mailed check is cashed by a recipient, a Mariner rep follows up and solicits more information about the borrower — this helps in collections — and sometimes proposes additional lending. About half of the loans that begin with an unsolicited check are later converted into conventional loans.
“Our customer satisfaction rates with this product are exceptional,” wrote Morton, the company’s general counsel. He said that only about .02 percent of the mailed loan accounts lead to complaints.
Ten of the 12 former employees whom The Post contacted, however, expressed qualms about the company’s sales practices, describing an environment where meeting monthly goals seemed at times to rely on customer ignorance or distress. Those interviewed worked in branches across five states where Mariner is especially active: Virginia, Maryland, Tennessee, Pennsylvania and Florida.
“I didn’t like the idea of dragging people down into debt — they really make it a big deal to call and collect and not take no for an answer,” said Asha Kabirou, 28, a former customer service representative in two Maryland locations in 2014. “If someone started to fall behind on their payments — which happened a lot — they would say, ‘Why don’t we offer you another $200?’ But they wouldn’t have the money the next month, either.”
“Were there a few loans that actually helped people? Yes. Were 80 percent of them predatory? Probably,” said one former branch manager who was at the company in 2016. He spoke on the condition of anonymity, saying he did not want to antagonize his former employer. “I’m still embarrassed by some of the things I did there.”
“The company is here to make money — I understand that,” said Mauricio Posso, 28, who worked at a Northern Virginia location in 2016 and said he viewed it as valuable work experience. “At the same time, it’s taking advantage of customers. Most customers do not read what they get in the mail. It’s just little tiny type. They just see the $1,200 for you. . . . It can be a win-win. In some situations, it was just a win for us.”
While Mariner and industry advocates note that consumers can simply decline a loan if the terms are onerous, at least some of them may lack the time, English skills or other knowledge to shop around. Some are acutely in need of cash.
“I wanted to go to my mother’s funeral — I needed to go to Laos,” Keo Thepmany, a 67-year-old from Laos who is a housekeeper in Northern Virginia, said through an interpreter. To cover costs, she took out a loan from Mariner Finance and then refinanced and took out an additional $1,000. The new loan was at a rate of 33 percent and cost her $390 for insurance and processing fees.
She fell behind, and Mariner filed suit against her last year for $4,200, including $703 for attorney fees. The company also sought a court order to take out money from her wages.
Barbara Williams, 72, a retired school custodian from Prince William County, in Northern Virginia, said she cashed a Mariner loan check for $2,539 because “I wanted to get my teeth fixed. And I wanted to pay my hospital bills.”
She’d been in the hospital with three mini-strokes and pneumonia, she said. Within a few months, Mariner suggested she borrow another $500, and she did. She paid more than $350 for fees and insurance on the loan, according to the loan documents. The interest rate was 30 percent.
“It was kind of like I was in a trance,” she said of her decision to borrow from Mariner. She paid back some of the money but then fell behind, and Mariner sued. The company won court judgment against her in April for $3,852, including $632 in fees for Mariner’s attorney.
A lucrative addition
The other pool of Mariner Finance revenue comes from selling insurance polices.
Mariner pitches the insurance policies to customers as a way of paying off a loan in case of mishaps: There is a life insurance policy that promises to make the loan payments if you die, an unemployment policy that makes the payments if you lose your job, and an accident and disability policy in case of those possibilities.
Mariner also sells a car club membership that covers the cost of repairs.
These can add several hundred dollars to a loan.
The insurance policies provide “tangible benefits” for customers whose financial arrangements are vulnerable to life’s interruptions, the company said.
Customers are supposed to be informed that the insurance policies are optional. Several former employees alleged that some salesmen tacked on these products and waited for customers to object. They likened it to the add-ons that pad the bill when buying a car.
“If you sold a car club membership, you were like a god,” said a former assistant branch manager in Pennsylvania.
When Mariner salesmen were closing a loan and “went to print out the loan contract, they would just automatically add the insurance on there — every time,” Kabirou, the customer service representative said. “Clients would say, ‘Do I really need it?’ And the person would say, ‘Yes, you need to be covered.’ ”
In response, the company said steps are taken to make sure that customers understand that the insurance is optional.
The company has “numerous safeguards in place to make sure that all of our products are sold in a responsible manner. . . . Our audit teams regularly visit branch locations and monitor loan closings to ensure that our employees are explaining all products correctly. And we call a randomly selected subset of new customers every day to make sure they understand the terms of the loans.”
Mariner makes money from the insurance sales in two ways.
First, Mariner gets a commission from the insurance companies for selling the policies.
Mariner sells insurance policies issued by Lyndon Southern and Life of the South, and these two companies often give sales commissions of as much as 50 percent of the premium price, according to statistics filed with the National Association of Insurance Commissioners.
Mariner Finance officials declined to say how much of a commission Mariner receives on insurance policies it sells.
The second way that Mariner profits from the insurance sales is through its insurance company registered in Turks and Caicos. That company, too, earns money on policies issued by Life of the South and Lyndon Southern.
Essentially, it works like this: Mariner sells the insurance policies written by the two companies. Those two insurance companies, in turn, buy reinsurance from Mariner’s offshore affiliate, called MFI Insurance. Last year, those two insurance companies ceded $20 million in premiums back to MFI, according to documents filed in Delaware, where Lyndon Southern is based, and from Georgia, where Life of the South is.
Mariner declined to discuss its offshore insurance company. According to a Turks and Caicos financial regulator, it is the ease of doing business there — not laxity of regulation — that attracts companies to set up shop there.
“We have a risk-appropriate regulatory framework,” said Niguel Streete, managing director of the Turks and Caicos Islands Financial Services Commission.
But numerous business experts have advised U.S. insurers to set up shop in Turks and Caicos to avoid regulation.
“Much of the appeal of an offshore reinsurer is the modest regulatory climate,” according to a guidebook published by an insurance consulting agency known as CreditRe. Many such reinsurers “were developed as a legal mechanism to generate potential total income in excess of the [state-mandated] commission caps.”
The trouble with the insurance policies like the ones that Mariner sells to borrowers is that they devote so little money to covering claims, said Birny Birnbaum, executive director of the consumer advocacy organization Center for Economic Justice, which has issued reports on the credit insurance industry. He formerly served as the Texas Department of Insurance’s chief economist.
“At the end of the day, these lenders take far more in profit from the insurance premium than the amount paid in benefits for the consumer,” Birnbaum said.
Some regulators call for insurers to allocate at least 60 percent of premiums collected for covering customer claims; by contrast, some of the policies from Life of the South return as little as 20 percent to consumers; the policies from Lyndon Southern offer as little as 9 percent on average, according to the NAIC statistics.
Take, for example, the unemployment policy that Huggins bought from Lyndon Southern. The insurance cost Huggins a total of $172.
The average Lyndon Southern unemployment policy gives half of the premium back to the seller as a commission, according to the NAIC statistics. Less than 9 percent of premiums goes to covering customer claims, an extraordinarily low number, insurance experts said.
Life of the South and Lyndon Southern did not respond to requests for comment. Neither did the parent company of the insurers, known as Fortegra.
So far, Huggins’s unemployment policy hasn’t done him much good. He thought he was covered when he became unemployed last year and informed Mariner Finance. Instead, Mariner Finance summoned him to court.
Huggins said he’s worried about how disruptive the court case may be. He’s lost a day or two from work. More ominously, while he had hoped to raise his credit score enough to buy a house, a legal judgment against him could undo those plans. He and his stepkids are renting a place from a friend for now.
“Who sends someone $1,200 in the mail that they don’t know nothing about except maybe their credit score?” he said. “It was postdated, good for a month. I guess they give you a month to sit around and look at it and everything else until you just convince yourself you really need that money. . . .
“You think they’re helping you out — and what they’re doing is they’re sinking you further down,” he said. “They’re actually digging the hole deeper and pushing you further down.”
Clarification: Huggins said he told the company by phone of his unemployment insurance policy and asked to be sent any required paperwork. He said he was informed that the loan payments would be "taken care of," but didn't initially receive any forms. A Mariner representative in April declined comment on the case. After publication of this story, the company said that it had no record of any call from him regarding unemployment and that Huggins had not filed an unemployment claim form with the company. Huggins said he was given the claim form in late May. On July 23, he said he had not yet filed the claim form, but planned to do so.
Jon Gerberg contributed to this report.
by seemslikeadream » Wed Aug 14, 2019 9:00 am
YIELD CURVE INVERTS: Recession indicator flashes red for first time since 2005
https://finance.yahoo.com/news/yield-cu ... 34083.html
Dow tumbles 800 points after bond market flashes a recession warning
https://www.cnn.com/2019/08/14/investin ... index.html
Bloomberg, last week, published an alarming story featuring this lede: “The latest eruption in the U.S.-China trade dispute pushed a widely watched Treasury-market recession indicator to the highest alert since 2007.” Experts are directly linking Trump’s trade war with the threat of another recession. Yields on 10-year bonds fell by the largest amount “since the lead-up to the 2008 crisis.” Indeed, it was a drop in yields, nearing an all-time low, that led to Monday’s 400-point stock market decline.
Bank of America forecasted that the chance of recession within the next 12 months has risen to around 30 percent. This week, Morgan Stanley forecasted a recession in early 2020, due to the trade war. Goldman Sachs is saying the same. That’d be all Trump.
The Wall Street Journal reported this week that middle-class debt is skyrocketing again. “Unsecured loans are back in vogue,” according to the report. Student debt, auto debt and housing debt are on the rise, too. In fact, in the first quarter of 2019, 5.7 percent of personal income was used to finance debt — the same level as 2009, when unemployment was nearly 10 percent.
Trump is driving us toward a big recession: It will be ghastly — but is it deliberate?
A 2008-style crash may not be far away. It could even be worse — and once again, Republican delusions are to blame
Bob Cesca
Americans suffer from frustratingly short attention spans and even shorter memories. Case in point: Following the dark ride of the George W. Bush years, during which there were two wars, apocalyptic terrorist attacks in New York and Washington, torture as national security policy, warrantless eavesdropping and the most catastrophic economic crash since the Great Depression, I was foolish enough to believe Americans would banish the Republican Party to the hinterlands of our politics for a good long while.
I was horribly wrong. Eight years later, 62 million voters recklessly ignored the lessons of 2001 to 2009 by installing an even more incompetent, dangerous and unstable Republican administration in the White House. Donald Trump’s ascendancy isn’t so much a win for him as much as it’s a win for the propaganda efforts of Fox News, talk radio and Russian internet memes, collectively suckering "conservative" voters by bathing them in enough counterfactual nonsense to "neuralyze" all memories of what happened last time around.
That bottomless slagheap of propaganda convinced Trump’s base that the steadily improving economy of the Barack Obama administration was “American carnage,” requiring a return to the stewardship of Republicans who had been responsible for a $1.4 trillion deficit, the collapse of the stock market, more than 800,000 jobs lost in a single month and the near disintegration of both the housing market and America’s auto industry, to name two sectors.
Sure, why not? Let’s do all that over again — you know, to own the libs.
Per the aggrieved insistence of these forgetful voters, Trump came along and deregulated everything, weakening the post-Great Recession laws meant to curb Wall Street abuses, and punctuated his Bush-era linkage by also authorizing a massive tax cut for the wealthiest Americans without paying for a goddamn cent of it.
Worst of all, Trump has clumsily staggered beyond the ludicrous economic policies of the Bush years to further destabilize financial markets, including your 401k accounts and the future security of your employment. Specifically, the president’s trade war of choice against China has turned a steadily rising Dow Jones average, through 2017, into an unstable sawtooth pattern with massive single-day declines that are now tempting a full-on 2008-style collapse.
If you don’t believe me, check out the markets from January to March of 2018, during the months immediately following Trump’s tax cut. Normally, a tax cut would drive the financial markets upward. But in March of 2018, just a few months after the bill was signed, Trump stupidly launched his trade war by announcing 25 percent tariffs on steel and 10 percent tariffs on aluminum, applied to all of our trading partners. From those months onward — including today, as I write this article — the Dow, S&P and Nasdaq have been unstable messes.
At risk of burying the lede, I have a theory that Trump and his cronies may be manipulating and shorting the markets, reaping vast profits off the declines. Every time Trump tweets or blurts new tariff threats or economic bellicosity aimed at China, the market takes a dump. As we all know, Trump hasn’t divested from his business interests. We also know that Trump has manipulated the markets before, based on a massive investigation in the New York Times indicating that Trump engaged in a scheme with his dad, Fred Trump, known as “greenmailing.”
During the 1980s, Donald Trump became notorious for leaking word that he was taking positions in stocks, hinting of a possible takeover, and then either selling on the run-up or trying to extract lucrative concessions from the target company to make him go away. It was a form of stock manipulation with an unsavory label: “greenmailing.” The Times unearthed evidence that Mr. Trump enlisted his father as his greenmailing wingman.
Seriously, ask around. Even some of his supporters have to concede that Trump is entirely capable of exploiting the bully pulpit to enrich his family fortune, not to mention the fortunes of his buddies. If he wasn’t interested in all that, he would have divested from his business. He didn’t. Now his tweets move the entire market up or down on a predictable and routine basis, making Wall Street ripe for exploitation.
For example: Just before he tweets something incendiary about China, it’s entirely possible he gives his boys a subtle heads up, triggering brokers to swing into action, betting against the market with short positions on whatever could take the most damage from his trade-war posturing. Not only does it drive down those stock prices, but the entire market, including your retirement savings, takes a colossal hit.
Trump’s financial disclosures don’t provide enough detail to know what’s really going on, obviously. The documents show that he owns a long list of mutual funds and ETFs, many of which happen to include short positions. While Trump always makes things worse for Trump, it’s unlikely he’d reveal any breadcrumbs in those disclosure forms, and it’s possible that his manipulations and short sales are made through trusted third parties. A serious investigation by the FTC or the House of Representatives might be in order, especially given that Trump could be betting against the American economy. Why else would he so gratuitously destabilize the markets with his trade war?
Bottom line: Trump’s tweets and pronouncements do, in fact, trigger market movement. The open questions are: Is it intentional, and does he profit from it? Perhaps the House Financial Services Committee, chaired by Rep. Maxine Waters, D-Calif., should take a look.
Meanwhile, while Trump brags about the strength of the economy, grabbing up credit for the wins while blaming everyone else for the losses, all the familiar signs we observed before the Great Recession are boiling back to the surface.
Bloomberg, last week, published an alarming story featuring this lede: “The latest eruption in the U.S.-China trade dispute pushed a widely watched Treasury-market recession indicator to the highest alert since 2007.” Experts are directly linking Trump’s trade war with the threat of another recession. Yields on 10-year bonds fell by the largest amount “since the lead-up to the 2008 crisis.” Indeed, it was a drop in yields, nearing an all-time low, that led to Monday’s 400-point stock market decline.
Bank of America forecasted that the chance of recession within the next 12 months has risen to around 30 percent. This week, Morgan Stanley forecasted a recession in early 2020, due to the trade war. Goldman Sachs is saying the same. That’d be all Trump.
The Wall Street Journal reported this week that middle-class debt is skyrocketing again. “Unsecured loans are back in vogue,” according to the report. Student debt, auto debt and housing debt are on the rise, too. In fact, in the first quarter of 2019, 5.7 percent of personal income was used to finance debt — the same level as 2009, when unemployment was nearly 10 percent.
Elsewhere, GDP remains roughly where it was under Obama. Returning to Trump’s inaugural framing of the Obama economy as “American carnage,” it’s worth noting that average GDP growth in 2018 was 2.9 percent, the exact same number as the 2015 average under Obama. If that was carnage, what the hell’s this?
Germane to the aftermath of a forthcoming recession is the fact that Trump and the congressional Republican majorities have presided over a spike in the federal budget deficit from $585 billion to a projected $1.1 trillion by the end of 2020. For the sake of contrast, the last Bush-era deficit, for fiscal 2009, was $1.2 trillion. During the Obama stewardship of the economy, the deficit dropped by nearly a trillion dollars. Trump’s 2020 shortfall, however, will essentially return the deficit to where it was during the worst part of the Great Recession, making it nearly impossible to pass any kind of economy-rescuing stimulus should we end up back in a recessionary hole.
Again, 62 million Americans apparently blanked out on which gang was in power the last time the economy tanked, not to mention which gang is in power now — in other words, which gang rescued the economy, and which gang is driving it into the ground again. Are Trump’s tariffs helping American consumers? Nope. We’re paying the price. And we’ll pay an even heavier price when the economy grinds to a metal-on-metal halt, possibly next year.
And before any Trumpers rappel down into the comments to accuse me of cheerleading for a recession, here's some full disclosure: The 2008-9 recession destroyed me financially. Losing my house to foreclosure was perhaps the least stressful of the downsides I experienced.
Nevertheless, I and many others who also suffered haven’t forgotten was what going on during the latter half of the 2000s. The events of the past couple of years look awfully familiar, thanks in part to Trump, the Republican Party and millions of apparent amnesiacs whose glitchy memories and nearsightedness appear to be driving us into another brick wall.
If there’s any upside to this impending catastrophe, it could this: Maybe enough Americans will snap out of their collective torpor in time to vote accordingly next year.
Bob Cesca is a regular contributor to Salon. He's also the host of "The Bob Cesca Show" podcast, and a weekly guest on both the "Stephanie Miller Show" and "Tell Me Everything with John Fugelsang." Follow him on Facebook and Twitter. Contribute through LaterPay to support Bob's Salon articles -- all money donated goes directly to the writer.
https://www.salon.com/2019/08/13/donald ... eliberate/
by BenDhyan » Fri Aug 16, 2019 12:32 am
by seemslikeadream » Mon Oct 21, 2019 11:07 am
WALL STREET
“THERE IS DEFINITE HANKY-PANKY GOING ON”: THE FANTASTICALLY PROFITABLE MYSTERY OF THE TRUMP CHAOS TRADES
The president’s talk can move markets—and it’s made some futures traders billions. Did they know what he was going to say before he said it?
BY WILLIAM D. COHAN
OCTOBER 16, 2019
donald trump
BY ZACH GIBSON/BLOOMBERG/GETTY IMAGES.
In the last 10 minutes of trading at the Chicago Mercantile Exchange on Friday, September 13, someone got very lucky. That’s when he or she, or a group of people, sold short 120,000 “S&P e-minis”—electronically traded futures contracts linked to the Standard & Poor’s 500 stock index—when the index was trading around 3010. The time was 3:50 p.m. in New York; it was nearing midnight in Tehran. A few hours later, drones attacked a large swath of Saudi Arabia’s oil infrastructure, choking off production in the country and sending oil prices soaring. By the time the CME next opened, for pretrading on Sunday night, the S&P index had fallen 30 points, giving that very fortunate trader, or traders, a quick $180 million profit.
It was not an isolated occurrence. Three days earlier, in the last 10 minutes of trading, someone bought 82,000 S&P e-minis when the index was trading at 2969. That was nearly 4 a.m. on September 11 in Beijing, where a few hours later, the Chinese government announced that it would lift tariffs on a range of American-made products. As has been the typical reaction in the U.S. stock markets as the trade war with China chugs on without any perceptible logic, when the news about a potential resolution of it seems positive, stock markets go up, and when the news about the trade war appears negative, they go down.
The news was viewed positively. The S&P index moved swiftly on September 11 to 2996, up nearly 30 points. That same day, President Donald Trump said he would postpone tariffs on some Chinese goods, and the S&P index moved to 3016, or up 47 points since the fortunate person bought the 82,000 e-minis just before the market closed on September 10. Since a one-point movement, up or down, in an e-mini contract is worth $50, a 47-point movement up in a day was worth $2,350 per contract. If you were the lucky one who bought the 82,000 e-mini contracts, well, then you were sitting on a one-day profit of roughly $190 million.
A week earlier, three minutes before the CME closed on September 3, someone bought 55,000 e-mini contracts, with the index at about 2906. At around 9 p.m. in New York—9 a.m. in Hong Kong—the market started moving and kept rallying for the next six hours or so, reaching 2936. Around 2 p.m. in Hong Kong—2 a.m. in New York—Carrie Lam, the Hong Kong leader, announced that she would be withdrawing the controversial extradition bill that had been roiling the city in protest for months. Whoever bought those e-mini contracts a few hours earlier made a killing: a cool $82.5 million profit.
But these wins were peanuts compared to the money made by a trader, or group of traders, who bought 420,000 September e-minis in the last 30 minutes of trading on June 28. That was some 40% of the day’s trading volume in September e-minis—making it a trade that could not easily be ignored. By then, President Trump was already in Osaka, Japan—14 hours ahead of Chicago—and on his way to a roughly hour-long meeting with China’s President Xi Jinping as part of the G20 summit. On Saturday in Osaka, after the market had closed in Chicago, Trump emerged from his meeting with Xi and announced that the intermittent trade talks were “back on track.” The following week was a good one in the stock market, thanks to the Trump announcement. On Thursday, June 27, the S&P 500 index stood at about 2915; a week or so later, it was just below 3000, a gain of 84 points, or $4,200 per e-mini contract. Whoever bought the 420,000 e-minis on June 28 had made a handsome profit of nearly $1.8 billion.
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Traders in the Chicago pits have been watching these kinds of wagers with an increasing mixture of shock and awe since the start of the Trump presidency. They are used to rapid fluctuations in the S&P 500 index; volatility is common, of course. But the precision and timing of these trades, and the vast amount of money being made as a result of them, make the traders wonder if all this is on the level. Are the people behind these trades incredibly lucky, or do they have access to information that other people don’t have about, say, Trump’s or Beijing’s latest thinking on the trade war or any other of a number of ways that Trump is able to move the markets through his tweeting or slips of the tongue? Essentially, do they have inside information?
Theoretically, market regulators are supposed to be keeping an eye on big trades such as these, to try to figure out whether they are just happy coincidences or whether there is something more nefarious afoot. And they say they do. But calls to the Chicago Mercantile Exchange, where the trades takes place, the Securities and Exchange Commission, which regulates the equity markets, and to the Commodity Futures Trading Commission, which regulates futures contracts, such as e-minis, were answered in different ways. Christopher Carofine, at the SEC, declined to comment. The CFTC did not respond to my inquiries, while a spokeswoman for the CME says the trades in question did not originate from a single source and they were of no concern.
There is no way for another trader, let alone an outsider such as me, to know who is making these trades. But regulators know or can find out. One longtime CME trader who has been watching with disgust says he’s never seen anything quite like these trades, not at least since al-Qaida cashed in before initiating the September 11 attacks. “There is definite hanky-panky going on, to the world’s financial markets’ detriment,” he says. “This is abysmal.”
In the case of Trump, market manipulation also yields political dividends. Perhaps the most obvious example dates to late August, when Trump, desperate to reignite trade talks with China, boasted during the G7 summit that his counterparts in Beijing had come back to the table. “We’ve gotten two calls—very, very good calls,” he told reporters. “They mean business.” The market rose more than 900 points over the next few days. But a spokesperson for the Chinese foreign ministry said he was not aware of any such calls. An editor at the Global Times, the state-controlled newspaper, tweeted that he knew of no calls made in the days leading up to the G7 meeting and that “China won’t cave to US pressure.” Two U.S government officials later told CNN that Trump misspoke and “conflated” comments from China’s Vice Premier Liu He with direct communication from the Chinese. According to CNN, the officials said Trump was “eager to project optimism that might boost markets.”
Indeed, this single Trump lie briefly inflated domestic markets by hundreds of billions of dollars. “What this describes is, quite literally, market manipulation that constitutes criminal violations of the Securities Exchange Act of 1934,” commented George Conway, the conservative attorney and Trump critic.
Whether Conway is right or wrong is a matter of legal opinion, but given how fishy and coincidental the trading in e-minis seems to be these days, the SEC or CFTC would be doing a great service (and their job) for the American people by investigating who is behind these lucrative trades, and what they knew before they placed them. At the moment, what we’re getting from them is an indifferent shrug.
Federal regulators might start here: In the last 10 minutes of trading on Friday, August 23, as the markets were roiling in the face of more bad trade news, someone bought 386,000 September e-minis. Three days later, Trump lied about getting a call from China to restart the trade talks, and the S&P 500 index shot up nearly 80 points. The potential profit on the trade was more than $1.5 billion.
https://www.vanityfair.com/news/2019/10 ... aos-trades
by liminalOyster » Tue Jun 23, 2020 7:40 pm
by JackRiddler » Sat Jan 30, 2021 6:16 pm
JackRiddler » Sat Jan 30, 2021 4:54 pm wrote:Handsome B. Wonderful » Sat Jan 30, 2021 3:46 pm wrote:So Gamestop is a good thing to happen, I gather?
At this point I think mixed as a thing, but with a revelatory function that is much bigger than the thing itself.
Whatever gets more people correctly viewing Wall Street and "the markets" as one big destructive set of interlocking scams and frauds with no social or economic benefit and plainly destructive for the vast majority of humans is a good thing. Even when the good guys and the bad guys in a given conflict are not as clear-cut as we may want to imagine.
Yves for example says that about Wall Street generally while pouring water on the liberation angle. Agree or disagree with given points, her analysis is weighty. If you can get past the headline...www.nakedcapitalism.com | naked capitalism
The Fatuous Uproar About Robinhood and GameStop
Posted on January 29, 2021 by Yves Smith
https://www.nakedcapitalism.com/2021/01 ... estop.html
Not only is your humble blogger not feeling well and in no mood to write,
uh ohbut due to the uninformed and misguided hyperventilating about Robinhood and the outrage about Reddit touts being deprived of their trading fix and possibly some gains, I nevertheless feel compelled to weigh in.
I can muster the teeniest bit of sympathy for media frenzy over this story. It’s a happy bit of nostalgia, a reminder of the innocent days of the flash crash, before Trump and Covid. Plus the financial press must be happy to be getting some attention again. First Leon Black, now wild stock gyrations and lots of finger-pointing. They might be on a roll.
But let’s put the atmospherics to the side. This episode, including the grotesquely disproportionate amount of attention it is getting, is an indictment of American capitalism.
I'd say the latter, definitely. So let's welcome the attention. Too many indictments go unnoticed, after all.First, the spectacle of the Senate wasting its time, in the middle of a pandemic, on some trading junkies maybe having not made as much money as they felt entitled to, is pathetic.
Well, it's Melvin and Citadel and Co. who are aggrieved that they didn't make the money they feld entitled to make by bombing some random retail chain from the sidelines for sport and profit. And this was just as big the day before Sherriffofnotingham lived up to its nameIt shows how warped the priorities of our putative elites are. This is secondary market trading in one bloody stock. Secondary market trading is societally unproductive (more on that shortly) and should be discouraged by increasing transaction costs (this is one of the big reasons to push for a financial transactions tax, not for revenue purposes, although that’s a nice side bennie, but to shrink the financial casinos).
The company is unimportant. The parties on both sides are competitors in a beauty contest between Cinderella’s ugly sisters: clueless new gen day traders versus clumsy shorts, many of whom look inept at the basic survival requirement of managing trading risk.
I'd say a classic case of so much impunity enjoyed that they forgot what getting caught is, or as they say, "those who win a rigged game, get stupid."And as we’ll address in due course, the real bad guy, the SEC for promoting such a socially unproductive market, has yet to receive the criticism it deserves. It’s simply bizarre that cheap market liquidity is being treated as some sort of right.
The focus has been the traders on Robinhood, a free trading platform, although some of the bigger low-cost services also had some trading halts in GameStop. These punters are surprised that a free service might not give them the best, or any execution in a bad market? Did they not work out that they were the product and having their order flow to Citadel might not be a great position to put themselves in?1
When you put it that way, hard to disagree. A genuine insight I didn't realize until Yves pointed it out. Citadel does the clearance for RH, and Citadel also does HFT. Golly.Or as Financial Times reader AM put it:Providing zero commission retail investing is only viable with an inflexible and highly optimised execution model.
It’s no surprise that the execution model fails for small single name stocks when their market goes haywire.
Now in fairness, it appears that not all of the speculators involved in the short squeeze were plucky retail investors up against big bad Wall Street pros; some have suggested that there were hedge funds on both sides of this play. But the press is still running uncritically with the “little guys get the better of professional money” spin, no matter how well it actually fits what happened.
However, another wee problem with the little good guys versus big bad Wall Street narrative is that the retail traders might be deemed to have engaged in price collusion or market manipulation.
Nothing comparable to the scale of what Melvin did, though. And they're working with publicly available market info and pointing to it on message boards.Bloomberg’s Matt Levine walked very carefully around the issue and said he couldn’t conclude either way. But his arguments to try to exculpate the Reddit-maybe-colluding longs all hinged on the trades being one big lark. So why should Congresscritters come to their defense if it’s not clear that their activity was legal, and it is clear that they were speculating, not investing?
Because it's clear that Melvin & Co's activity was unscrupulous and SHOULD be illegal, but isn't?You live by that sword, you can die by it too.
The shorts are depicted as hedgies, when short sellers are arguably the least pernicious financial speculators. They do the unloved and risky work of finding badly managed, overhyped, or even outright fraudulent companies, then betting on their views and trying to educate other investors that they are being had at current price levels.
Oh come on.
Turn that around and WSB could more credibly argue it in their own defense: "They do the unloved and risky work of finding badly managed, overhyped, or even outright fraudulent TRADES, then betting on their views and trying to educate other investors that they are being had at current price levels."However, the GameStop shorts look like an awfully inept bunch. Even though at a remove, they appear to be correct about their views of the company’s valuation, if you are a short, you never want to take a position that is so large you can’t get out of it pretty quickly, as in out of proportion to regular trading volumes.
Bet they got away with it so many times they forgot anything like that applies to them. That's what was so wonderful about the WSB move.This is the same rookie’s mistake that brought down LTCM, which managed to make a outsized bet in the interest rate swaps market. From Ghostrider2014:Firstly, contrary to what WSBers think, there is no sympathy in any corner (wall street or main street) for the HFs who in their infinite wisdom shorted over 100% of free float – that is just dumb and they deserve to lose in the squeeze.
I'd point out the notable exception of all the paid-for sympathy they are getting from some of their lackeys and useful idiots in the press, especially on CNBC, which is no surprise (and which no one may take seriously any more except to mock it).Secondly, there is no way the long is driven solely by retail demand – there is over $15bn of trading every day for the past 4-5 days and that has to be institutional money. So this is HF vs HF most likely.
Or HF "versus" allied HF engaging in repeated back and forth trades of the same chunks of shares with the design of driving the price down against those who bought and are holding.Finally, brokerages have no incentive to halt trading unless they have capital/margin requirements from the clearing houses. So this conspiracy theory of wall street banding together doesnt make sense.
Second, the reporting on the Robinhood and other trading halts in GameStop has been abysmal. Some of them were circuit-breaker-type interruptions due to the speed of the price moves. But that big uptick in price volatility in turn led the clearinghouses imposing higher margin requirement on brokers trading in GameStop, hitting Robinhood, proportionally most exposed, the hardest. Mind you, I’m not saying that Robinhood handled its customers very well when this happened, but the underlying cause isn’t nefarious. Robinhood is likely to be revealed as incompetent, which is still a very bad look someone handling other people’s money.
See the discussion by the WeBull CEO starting at 1:20 on the big increase of DTCC margin requirements and how that affected brokers:
https://www.youtube.com/watch?v=vd394QWUL0g
The simplified version from DSC at the pink paper:RH has capital requirements for that activity and in extreme vollitality/elephant herd of orders it’s easy to see how that got smashed and how it might have been reasonable for RH to liquidate non margin but RH funded positions
Third, while this story has entertainment and perhaps even educational value,
Oh come on, it's definitely educational, and a good kind of entertainment. But what she follows with is really important.the fact that it’s getting any traction in DC is confirmation of how backwards our priorities are. Since the crisis, there have been boatloads of economic studies on secular stagnation and other ills of advanced economies. Despite the joke, “You can lay economists end to end and never reach a conclusion,”: a surprisingly large number depict overfinanicialization as a drag on growth.
Not to mention any hope of reaching the "other world that's possible," with or without the present model of "growth."Even the IMF concluded that the country representing the optimal level of financial “deepening” was Poland circa 2015, and more financialziation was productive only if regulations were strict. Those conditions haven’t been operative in the US for quite a while.
On top of that, the most unproductive activity is secondary market trading and asset management. The US stock market has a very high level of secondary market activity compared to primary investment, as in companies selling stock to the public to raise new funds to expand their business. You don’t need anything approaching this level of liquidity for companies to be able to price and sell new shares, as the success of large (by the the standard of the day) IPOs and stock offerings of seasoned issuers back in the stone ages of high priced stock commissions attests. The fact that it’s twice as easy to become a billionaire in asset management as in tech shows the degree to which money manipulation is sucking activity and talent away from Main Street to Wall Street.
Oh Yves, did you really just group "tech" in with Main Street against Wall Street?
Anyway, larger point taken: the big show is a fucking casino on the sidelines of anything that could be sold as remotely productive. (The difference between betting against the Patriots -- erm, sorry, I mean the Buccaneers, fucking Tom Brady -- in the Super Bowl, however, is that no matter how much I convince myself that my mind-power is going to help make the bet pay off, it will have no effect on the outcome of the game. Whereas shorting 140 percent of Game Stop's available shares does have an effect on the price of GME. Since a short involves selling the share before buying it later. It's as if, every time I bet against the Bucs, I was also delivering a kick to Tom Brady's shin.)Fourth, and related to our third point above, is how the SEC has actively promoted speculation and poorly functioning markets. Since my childhood on Wall Street, the agency has relentlessly pushed for lower and lower stock trading costs, as if that were somehow a good in and of itself. In fact, it has largely fostered speculation and the worst sort of liquidity, the kind that is there when you don’t need it and goes poof when you do. It’s a complete disgrace that SEC hasn’t stopped high frequency trading, which is destabilizing in bad markets, which it could easily do by revoking Rule NMS, which on top of making the world safe for high frequency traders, dark pools, and also gave American the worst possible market structure. As recovering derivatives trader Craig Heimark and we explained in 2014:Perversely, much of the regulation of the last twenty years has been nominally in the interest of “market efficiency” but has come at the expense of market integrity. Far too many of the arguments and studies saying the promotion of competition among exchanges (and dark pools) has led to greater efficiency look at the efficiency as measured by the bid ask spread (plus fees) only of trading in the top stocks (because if they are trade weighted so that is where all the volume is). But this greater efficiency comes at the expense of no reciprocal liquidity obligation (witness the flash crash) as well as reduced liquidity in less frequently traded stocks.
The societal benefit of trading is to reduce cost to raise capital for actual companies. Does anyone really think that narrowing the spread on Google by a penny or two makes any difference to its weighted average cost of capital? In contrast, incidents like the flash crash and the feeling the market is rigged keep many small investors away from the market. The penalty for reduced liquidity in small stocks may actually be material to small company capital formation.
And these small investors are right to be concerned. The old exchange system was a hub and spoke model, which was a stable system architecture. The internet was an outgrowth of a DARPA project to make a communication system so decentralized that it could not be taken out by a nuclear strike. Hub and spoke models are stable, but subject to an outage, say by a nuclear bomb or electrical failure. What chaos theorists have found is that highly decentralized networks are stable, as are single node networks (like exchanges), but that slightly decentralized networks are fragile. And that is what we have now thanks to the SEC’s misguided efforts to “modernize” the stock market via Regulation NMS.
Had to look up Regulation NMS.
https://www.investopedia.com/terms/r/regulation-nms.asp
tl;dr a set of four SEC directives in 2005 designed to make trading of any kind easier, faster and lower-cost, in keeping with the neoliberal ideology that speed and competition are always going to yield the best outcome and be more "efficient"So I am bracing myself for some particularly painful, as in misguided, Congressional hearings and follow on upset. It’s really disturbing to see the Congresscritter eagerness to score points on this nothingburger (in the larger scheme of things) on Twitter and in the press, when late 2019 House hearings on private equity abuses produced an embarrassing amount of Big Finance pom pom waving on both sides of the aisle.
I do think she's getting this part wrong, though the political grandstanding can easily go wrong or obscure what matters.And while I would be delighted to be proven wrong, the odds of anything good coming out of this controversy look vanishingly small.
____
1 Just to be clear, the order flow buying part of Citadel swears up and down it has a firewall between it and the hedge fund part of Citadel, which translates into, “Don’t you accuse us of front-running.”
This entry was posted in Banana republic, Free markets and their discontents, Hedge funds, Investment management, Regulations and regulators on January 29, 2021 by Yves Smith.
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So I'd love to hear from WombaticusRex on all this, if you're still reading anything on this site.
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