By Chan Akya
The liar's punishment is not in the least that he is not believed but that he cannot believe anyone else. - George Bernard ShawEvents like those of the past week remind one of the fundamental issues of trust and confidence that have, since the beginning of 2007, bedeviled the markets so much that it may yet turn out in history for this current financial crisis to be called the "Liars' Downturn". But that would be getting well ahead of the story. For now, it would be apposite to consider a few of the recent stories that made me guffaw into my cornflakes.
Greeks bearing gifts
Barely a couple of weeks after writing Oedipus wrecks (Asia Times Online, February 13, 2010) and The blame game (Asia Times Online, March 6, 2010), I am forced to regurgitate the Greek story, due to the most recent developments that move distinctly from the "news" category firmly into the "entertainment" mode of things. Here is a sample of headlines on the Greek debt crisis over the past few days:
1. Berlin shifts stance on IMF role in Greece: Senior German official says Fund support a possibility
2. Papandreou prefers European solution: 'We are part of the eurozone and I want to show the world Europe can act together in a co-ordinated way'
3. Greece Woes Weigh on European Stocks: Both the euro and stocks drifted lower on Thursday on concern of a resurgent crisis in Greece
4. Protests in Greece turn violent
5. S&P Affirms Greece Ratings
6. Governing coalition collapses in Latvia: Largest party pulls out of the center-right coalition over disagreements on how to handle the country's recession - the deepest in Europe
All this is a bit troublesome for Greece, and more importantly, about the deeply unstable operations of the European Union. It isn't much of an article of faith that the Germans would much rather have the International Monetary Fund supervise the Greeks implementing an austerity plan than trust the generally toothless European Commission or the derelict European Central Bank to do the same.
The Germans have enacted more than one or two camouflage maneuvers in their financial system (remember those "highly-capitalized" Landesbanks?), and probably recognized a kindred spirit in the Greek government and its efforts to hide a bunch of fibs in the annual debt figures. Ergo, it made a lot of sense not to have one of "their" own people look over the Greeks when any austerity measure was to be implemented. Enter the IMF.
The French have been opposed to any IMF role in Greece not so much because of any putative notions of European unity being compromised by an external body but due to a simple happenstance of personalities. Namely that the head of the IMF, one Dominique Strauss-Kahn, is billed as the most likely opponent of the increasingly unpopular French President Nicolas Sarkozy in the upcoming French presidential elections. The easiest way in politics to get rid of an opponent is not to have one in the first place.
Why did this drama erupt this week? The reason most often cited is the European Union meeting in which a bailout for Greece may be agreed next week. This has prompted all manner of brinkmanship by the various constituents in the negotiations. The other side of this is the little detail of the billions needed by Greece in the April-May period for borrowing. Without a deal in place that could help support about 30 billion euro (US$41 billion) in issuance at the very least, there is widespread fear that buyers will desert Greece and push up bond yields not just for the country but also for all of Europe.
Lehman lied. Really?
Eerily setting a parallel for the pack of lies that are being bandied about as official statistics of Greece comes news of the widely circulated report on the Lehman collapse, by the US court-appointed Special Examiner, Anton Valukas.
Summarizing a 2,200-page report is arguably outside the scope of this article. Hence, the easy way out is to selectively quote the work done by other authors on the subject: Select paragraphs from Yves Smith of the wonderful nakedcapitalism.com blog (since re-quoted by another blogger, normxxx.blogspot.com):
Quite a few observers ... have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman ... The unraveling isn't merely implicating [Lehman chief executive officer Richard] Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus [formerly New York Federal Reserve president, now US Treasury Secretary] Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox [Sarbanes-Oxley Act, covering public company accounting regulations] violations ...And here is the bit that goes back to the title of this article, namely what happens when those who lie are also the ones in charge. Again, from the above mentioned two sites:
We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed's review of Lehman's solvency. If, as things appear now, Lehman was allowed by the Fed's inaction to remain in business, when the Fed should have insisted on a wind-down …..
... at a minimum, the NY Fed helped perpetuate a fraud on investors and counterparties. This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.
And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately.
The Examiner [that's Valukas] questioned Lehman executives and other witnesses about Lehman's financial health and reporting, [and] a recurrent theme in their responses was that Lehman gave full and complete financial information to Government agencies, and that the Government never raised significant objections or directed that Lehman take any corrective action.There was a time when a statement such as the one above would have filled anyone connected with financial markets with a degree of dread and disgust that seems virtually unimaginable today, when the regulators appear to have almost as many issues telling the truth as the people they are putatively responsible for supervising.
So get this: even though Lehman dressed up its accounts for the great unwashed public, it did not try to fool the authorities. Its games playing was in full view to those charted with protecting investors and the financial system.
So what transpired? The SEC [Securities and Exchange Commission] (which has never had much expertise in credit markets - a major regulatory problem) handed assessing Lehman over to the Fed, which bent over backwards to give it a clean bill of health.
Andrew Ross Serkin, writing for the New York Times on March 15, is even more direct in his commentary titled "At Lehman, Watchdogs Saw It All":
Indeed, it now appears that the federal government itself either didn't appreciate the significance of what it saw (we've seen that movie before with regulators waving off tips about Bernard L Madoff). Or perhaps they did appreciate the significance and blessed the now-suspect accounting anyway.This is jaw-dropping stuff. Not only did the regulators of Lehman actually know about its accounting shenanigans, they may have actually blessed them in order to sort out a "smooth" sale. This also explains why US regulators may not have been overly keen for an American buyer of Lehman to emerge, but instead pinned all their hopes on Barclays, a bank from the United Kingdom.
Oddly, when the bankruptcy examiner asked Matthew Eichner of the SEC, who was involved with supervising firms like Lehman, whether the agency focused on leverage levels, he answered that "knowledge of the volumes of Repo 105 transactions would not have signaled to them ‘that something was terribly wrong,' " according to the examiner's report. [Repo 105 is an accounting term relating to transactions of the sort Lehman used to remove about US$50 billion from its assets in 2008.]
There's a lot riding on the government's oversight of these accounting shenanigans. If Lehman Brothers executives are sued civilly or prosecuted criminally, they may actually have a powerful defense: a raft of government officials from the SEC and Fed vetted virtually everything they did.
On top of that, Lehman's outside auditor, Ernst & Young, and a law firm, Linklaters, signed off on the transactions. The problems at Lehman raise even larger questions about the vigilance of the SEC and Fed in overseeing the other Wall Street banks as well.
Perhaps tellingly, there is no evidence that Lehman kept two sets of books or somehow tried to hide what it was doing from regulators. The bankruptcy examiner spent over a year searching through virtually every e-mail message at the firm and didn't say he found any evidence of a cover-up.
That may explain why so few at the firm seemed to think that what they were doing was wrong, based on the e-mail traffic reviewed by the examiner. They talked openly about Repo 105. And while some apparently felt queasy about it, they also repeatedly said that it was legal.
Perhaps unfortunately for those playing this high-stakes game of "Liar Liar", the other side of the party were the British, who had just uncovered a whole bunch of other jiggery-pokery at their domestic banks, such as Northern Rock and Royal Bank of Scotland (RBS). For them, perhaps, the Lehman package smelled of something they would be doing themselves if ever the likes of RBS needed to be sold. It is at this juncture that the UK government expressed "concern" about a Barclays takeover of Lehman Brothers that in turn allowed the firm to go bust.
Export route to growth
Have the lies stopped? Not by a long march, they haven't. As I look around at the factors that allegedly "explain" rising valuations for stocks around the world, the one explanation that keeps cropping up is "rising demand from Asia".
Fair enough, I say; demand from Asia is indeed rising, but it isn't likely to explain the rosy projections being made by everyone ranging from shoe manufacturers to those making earth-moving equipment for their GLOBAL sales.
Then you look around and you find that the primary factor that argues for rising economic growth around the world is - EXPORTS. That's the same story in all the following economic areas:
a. The United States: indeed, President Barack Obama has an explicit target of doubling the country's exports in the next few years.
b. Europe: forecasts for European growth have been lifted because of the recent weakness of the euro, which "experts" believe will help the continent to increase its exports.
c. China: the government hopes to reduce its infrastructure spending and cool down property speculation, expecting rising exports to pick up the slack.
d. Japan: same story, with the government having to cut down on its spending as debt worries increase and instead leave the onus of economic growth to - you guessed it - exports.
e. Various other countries ranging from Russia to Brazil have seen their forecasts for economic growth rise on the back of rising exports that are expected to continue all through this year.
f. Rising oil prices have fueled hopes that Middle Eastern economies will benefit from rising exports of fuel, thereby propelling economic growth.
You know something is wrong when over three-quarters of the world's economies (by size if not number) expect to grow by exporting their way out of a recession. That number is, simply, arithmetically impossible. Yet, stock markets have continued their meteoric rise on the hopes of precisely this eventuality coming through.
If I were an adviser on investment planning, here would be my favorite trades today (note for readers: it is extremely dangerous to follow the advice of someone you know well, and much more so when you try to follow the advice of a pseudonymous author writing for an online publication, ie me. Take your independent advice in attempting to follow any of these ideas through):
1. Get rid of government bonds issued by Group of Seven countries and in particular anything that you own in the US, UK and Japan.
2. Sell pretty much all your stocks across all sectors, except those offering services to the unhealthy and the dead.
3. Distribute your bank balances across as many banks as possible.
4. Buy (directly) any local businesses that you actually understand - for example, your local baker - but do so without any leverage and only as long as "working capital" needs are minimal.
5. Buy as much physical gold, platinum and silver as you can safely store.
6. Stop watching financial news channels except as "entertainment".
7. Sit back and consider if perhaps all of the above trades could be lies too (after all, I show above a complete lack of trust in everyone else ... )