Juggling Dynamite

Former Federal Deposit Insurance Corp. Chairman Sheila Bair talks about efforts by some U.S. banks to limit the reach of the Volcker Rule and market regulations. Bair, is now a senior adviser at Pew Charitable Trusts. Here is a direct video link.

The issue is very simple: investment banks who do not like observing the rules and controls that serve and protect the public purse, should step away from tax-payer backing and live and die by their own risk management.

It is the insidious underwriting of financial firm profits with public funds that has been a fatal flaw undermining democracy and free market forces the past 20 years. This cord must be cut.

Student loans are one of several socially significant areas where government subsidized guarantees on for-profit-loans from banks are enabling debilitating impacts on young people, household formation, the birth rate and the stability of our economy as a whole. See why here: Fed Student loan focus shows recognition of growth risks

This just in, now here’s a real shocker…(yes sarcasm, sorry):

Wall Street traders may be manipulating a key derivatives market and front running Fannie Mae and Freddie Mac, hurting the US-owned mortgage giants in the process, according to an FBI intelligence bulletin reviewed by Reuters.

Using what Federal Bureau of Investigation agents described as “unsophisticated tradecraft,” such as hand signals and special telephone ring tones, some traders are conspiring to rig rates on large orders submitted by Fannie Mae and Freddie Mac, or front running them in the interest rate swaps market, the document says.

The FBI said in the bulletin that the information came from a former high-level employee at a U.S. bank and an employee at a Canadian Bank, plus interviews with other bank workers conducted in 2012 and 2013. The former high-level employee at the U.S. bank estimated the front running had resulted in profits of $50 million to $100 million for the bank, the FBI said. See: FBI suspects front running of Fannie and Freddie in SWAPS market

Marc Faber, publisher of the Gloom, Boom & Doom report, talks about the impact of Federal Reserve policy on the global economy, Bitcoin and financial markets. Here is a direct video link.

An additional thought I would add to Faber’s comments. It does seem likely that the global economy will register another year of disappointing growth in 2014 (as the global deleveraging process continues post-credit-bubble). It is also probable that North American growth will officially recess at some point, as 6 years after the last, a recession is historically due any time. But it is important to understand that an economic recession is not necessary in order to experience a bear market for stocks. As an example, in 2001 the US economy recessed only mildly and Canada did not at recess at all, and still both stock markets dropped by 50% as the market bubble burst. The extent to which asset valuations become overstretched is the most defining factor for future returns. Equity valuations that over the past couple of years have been bid up to wildly over price reasonable future growth expectations, can also wildly undershoot to deliver negative returns even in the face of still positive growth trends. Too good to be true returns are always borrowed, never permanent.