![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/images/quotes_7a.gif)
How Much Does Your State Government Depend on Federal Funds?
Tad DeHaven
This week the Indianapolis Star published an op-ed I wrote on Indiana state government’s reliance on federal funds. I said that “Most Hoosiers would be surprised to know that under [Gov. Mike] Pence’s first budget proposal, federal funds would have accounted for around 35 percent of total state spending.” I intended to look at the other 49 states because I imagine most citizens would be surprised at how much of the money their state government spends originates in Washington. However, the Tax Foundation beat me to the punch in this week’s “Monday Map”:
_0.png)
As I explained in my op-ed, state politicians like “free” federal money. The problem is the money isn’t free:
The appeal of federal funds to governors is obvious: They get to spend additional money without having to raise taxes on their voters to pay for it. A problem with this arrangement is that it creates a fiscal illusion — state taxpayers perceive the cost of government to be cheaper than it really is. In effect, the federal money and a large part of the annual budget appears to be “free.”
But Hoosiers should be mindful that every dollar Washington sends to Indianapolis is a dollar taken from taxpayers in Indiana and the other states. (The return is actually less than a dollar since the federal bureaucracy takes its cut). The situation is no different when the federal dollars go instead to, say, Sacramento. In addition, economists have found that federal subsidies to the states lead to higher state taxes and spending in the long-run because the federal “seed money” creates a demand for more government.
See this Downsizing Government essay for more on federal subsidies to the states.
View full post on Cato @ Liberty
Whom Does the Beach House Bailout Benefit? Hedge Funds, Venezuelan Expats, Russian Oligarchs
The bailouts have benefited those closest to the fiat money spigots. Those in banking and in government around the world have seen their wealth rocket up thanks to loose money from the central banks. Times have been very good for the connected, and they’re buying mansions hand over fist in South Florida turning that fiat money into little pieces of coconut palm lined paradise.
Now comes a new bailout for our lucky friends who may not now have to pay market rates for insurance premiums. In Florida and many other places this is serious money, which will soon be the responsibility of the US taxpayer.
(From RStreet.org)
With Sen. Bill Nelson, D-Fla., expected any day now to reintroduce his proposal to have federal taxpayers backstop the risk of state catastrophe funds, it bears examining just who it is that would benefit from the cheaper property insurance rates his legislation promises.
Proponents of the legislation have floated a study suggesting it would save homeowners some $11.8 billion in premiums. Notably, ClimateWire today reported that one of the study’s authors claims a major hurricane could cost the federal cat fund as much as $138 billion, with little guarantee that those funds would ever be repaid. But taking the estimate for granted that shifting insurance risk onto taxpayers would save someone billions of dollars…just who might that someone be?
View full post on AgainstCronyCapitalism.org
American • Re: Homeland Security seizes funds at main Bitcoin exchange
US Government seizes accounts of the world’s largest Bitcoin exchange
by SIMON BLACK on MAY 16, 2013
In another demonstration that the United States is no longer the Land of the Free, the Department of Homeland Security has just seized the US bank accounts belonging to Mt. Gox, the world’s largest Bitcoin exchange. This certainly underscores the importance, once again, of diversifying internationally.
The Department of Homeland Security issued a seizure warrant to Dwolla, a US e-commerce company that provides online payments, for the money in Mt. Gox’s Dwolla account. The seizure of funds was triggered by an alleged failure of the company to comply with US financial regulations.
This is just another reminder of how governments operate when the going gets tough– they regulate, monitor, confiscate, restrict, and steal.
http://www.sovereignman.com/important-i … nge-11873/
Statistics: Posted by yoda — Thu May 16, 2013 10:34 am
View full post on opinions.caduceusx.com
American • Homeland Security seizes funds at main Bitcoin exchange
By Jeff John Roberts 2 hours ago
May. 14, 2013 – 5:09 PM PDT Summary:
The US Government has taken its most serious action yet against the popular cyber-currency Bitcoin by shutting down transfers between payment provider Dwolla and a Japanese exchange where the currency is traded.
?tweet thisThe U.S. government has reportedly shut down a prime source of liquidity for Bitcoin by seizing an account connecting a Japanese currency exchange, Mt. Gox, and payment services provider Dwolla.
The action by Homeland Security, reported by Betabeat, appears to be timed to send a clear message, coming during a week when Google Ventures and others announced major new investments in the popular cyber currency. The seizure itself is described in a screenshot posted by OKCupid cofounder Chris Coyne (see it below). It shows a message from Dwolla stating that Homeland Security has executed a “seizure warrant” against its account with Mt. Gox — the exchange where many people buy and sell Bitcoins.
What this means in practical terms is that Bitcoin traders are now shut off from one of the few ways to supply and receive funds from Mt. Gox. The Japanese exchange doesn’t work with mainstream banks — it only accepts funds via wire transfers and a handful of shadowy e-currencies.
Homeland Security typically executes seizure warrants in connection with criminal investigations, and Coyne’s screenshot refers to actions in the US District Court of Maryland. A search of court records, however, comes up empty — which could mean the records are under seal. The US government has yet to issue a statement.
Tuesday’s development is likely to provide a blow to the fledgling currency, which is mined by computers and is beyond the authority of any central bank. Last month’s Bitcoin crash, which saw its value fall from $266 to $105 in a single day, is believed to have been set off by liquidity problems at Mt. Gox. U.S.-based exchanges like Coinbase, which last week received a $5 million investment from Fred Wilson’s Union Square Ventures, provide a means to change dollars for Bitcoin, but only permits trades of up to $100.
Dwolla, which has raised more than $20 million in funding from investors including Andreessen Horowitz, Village Ventures, Thrive Capital and Union Square Ventures, offers a free web-based software platform that lets users send, receive and request funds from any other user. It says it now has 250,000 account holders.
The Homeland Security actions comes amid uncertainty about the US government’s regulatory powers over Bitcoin, which appears to be beyond the purview of the SEC.
If you want to learn more about the possibilities — and the perils — of Bitcoin, come join us at GigaOM’s free meet-up in San Jose on Thursday between 6 p.m and 9 p.m. We’ll be chatting with the CEOs of Expensify and Lemon, and engineers from Facebook and Google. There will be cocktails too, courtesy of our friends at Ribbit Capital.
http://gigaom.com/2013/05/14/homeland-s … ge-report/
Statistics: Posted by yoda — Tue May 14, 2013 8:21 pm
View full post on opinions.caduceusx.com
Tolerate “Any” Unwelcome Campus Sex Talk, Lose Federal Funds
Walter Olson
My colleague Andrew Coulson has already briefly noted this story, but its constitutional and policy implications — which go well beyond the higher education context — merit a more detailed look.
For more than two years civil rights enforcers at the federal Department of Education and Department of Justice have been readying a crackdown on colleges and universities that they view as excessively lax, lenient, or observant of due process toward the accused in charges of unwelcome sexual conduct. Now, in a letter and resolution agreement sent to administrators at the University of Montana, the enforcers finally seem to have tipped their hand as to how far they’re prepared to go. And the answer is: really, really far.
- The “unwelcome conduct of a sexual nature” that colleges and universities must discipline is to include “verbal conduct,” better known as “speech.”
- To be subject to discipline, speech or conduct won’t have to be objectively offensive to a reasonable person, merely subjectively so to the particular complainant.
- Disciplinable speech or conduct also won’t have to be severe or pervasive enough to do actual damage to a complainant’s environment for learning or employment or research, a departure from the standard that courts have developed for liability in areas like workplace hostile-environment law. This ensures there will be more and tougher discipline handed out for offenses such as, say, posting desk photos of beach-clad spouses or playing a “shock jock” show on a dorm radio.
- The feds say universities are not just free, but affirmatively obliged, to take “protective” action against future harassment — kicking an accused student out of a class might be one such step — before affording a hearing at which that person might defend himself or herself.
Among those outraged: FIRE, or the Foundation for Individual Rights in Education, which calls the development a “shocking affront” to the Constitution’s First Amendment; CEI’s Hans Bader (Washington is now demanding that colleges institute speech codes much broader than many already struck down as overbroad by federal courts), and prominent education blogger Joanne Jacobs (rule could stifle education about sexuality as well as both sides of campus debates on related issues).
FIRE president Greg Lukianoff says the new speech prohibitions are “so broad that virtually every student will regularly violate them… it is time for colleges and the public to push back.”
View full post on Cato @ Liberty
Agriculture • ‘Firestorm of selling’ in grains burns hedge funds
‘Firestorm of selling’ in grains burns hedge funds
Hedge funds have been badly burned by the continuing slump in grain and oilseed futures prompted by US crop inventory data, having bet on the stocks statistics sparking a surge in prices.
Managed money, a proxy for speculators, raised their net long position in Chicago corn futures and options to more than 192,000 lots in the week to last Tuesday, according to data from the US Commodity Futures Trading Commission.
Grain, oilseed prices at 07:30 Chicago time (13:30 UK time)
Kansas wheat: $7.21 a bushel, -0.8%
Chicago soybeans: $13.80 ¾ a bushel, -1.1%
Chicago wheat: $6.80 a bushel, -1.1%
Chicago corn: $6.63 a bushel, -4.6%
The net long position – the extent at which long positions, which profit when prices gain, outnumber short ones, which benefit when values fall – was the highest in nearly five months, and extended a hefty switch towards more bullish positioning during March.
And it came ahead of a US Department of Agriculture grain stocks report which had been expected by analysts to show a year-on-year slump of some 1bn bushels in domestic corn inventories as of March 1, thanks to resilient consumption of last year’s drought-diminished harvest.
‘Firestorm of selling’
However, the report, on Thursday, showed corn inventories falling by a more modest 600m bushels year on year – meaning less thin supplies than investors had thought, and less need for buyers to bid up to secure supplies.
Speculators’ net longs in grains and oilseeds, Mar 26, (change on week)
Chicago corn: 192,561 (+47,026)
Chicago soybeans: 112,352 (+12,428)
Chicago soymeal: 41,997, (-8,511)
Kansas wheat: 2,966 (+1,298)
Chicago wheat: -21,782 (+11,675)
Chicago soyoil: -31,548, (+17,628)
Sources: Agrimoney.com, CFTC
Chicago corn prices, which immediately after the report slumped the maximum daily amount allowed by the exchange, tumbled further on Monday, reaching $6.51 ½ a bushel at one point for the benchmark May contract, a 10-month low for a spot contract. (US markets were closed on Friday.)
That brought the two-day decline to more than $0.80 a bushel, or 11.4%, wiping more than $4,000 from the value of each Chicago corn contract.
And the "firestorm of selling", fuelled by fund sales of an estimated 40,000 corn contracts on Thursday alone, may yet have further to go, with Kim Rugel at Benson Quinn Commodities warned.
"Generally, money flow liquidation tends to take three day so it could be midweek before the market finds a bottom," Ms Rugel said.
Soybeans slide
Hedge funds also positioned themselves poorly in soybean futures and options, raising their net long position by more than 12,000 contracts in the week to last Tuesday, the data showed.
Speculators’ net longs in New York softs, Mar 26 (change on week)
Cotton: 68,017, (-7,062)
Cocoa: 11,653, (+79)
Arabica coffee: -28,769 (+1,393)
Raw sugar: -42,199, (-31,766)
Sources: Agrimoney.com, CFTC
Soybeans, for which US inventories were also larger than forecast, shed a further 1.2% in Chicago on Monday to take their two-session losses to a little under 5%.
Prices have gained some support from sowings data released separately on Thursday showing farmers intend to plant less of the oilseed than had been expected.
Wrong-footed on hogs too?
On wheat, speculators also missed out by cutting the short positions which have proved profitable bets in the last two sessions, during which the grain has lost some 8% in Chicago.
Speculators’ net longs in Chicago livestock, Mar 26, (change on week)
Live cattle: 13,620, (+153)
Feeder cattle: -3,550, (-439)
Lean hogs: -9,623, (-2,239)
Sources: Agrimoney.com, CFTC
And hedge funds may have compounded their poor positioning by increased their net short position on Chicago futures and options in lean hogs above 9,000 lots, the biggest in nearly four years.
Lean hog prices rose on Thursday, lifted by ideas of cheaper corn prices boosting the profitability of livestock operations, and so demand for animals.
However, a separate USDA briefing released after the close of markets showed the US hog and pig herd rising 1.5% over the year to March 1, a bigger increase than the 0.7% forecast by analysts, and potentially a depressant to prices.
http://www.agrimoney.com/news/firestorm … -5677.html
Statistics: Posted by yoda — Mon Apr 01, 2013 8:00 am
View full post on opinions.caduceusx.com
Other • Broke Public Pension Funds And Exotic Boondoggles
Broke Public Pension Funds And Exotic Boondoggles
Thursday, February 28, 2013 at 8:14PM
That state and local government pension funds are going broke isn’t a new problem. That it’s much worse than reported by those pension funds isn’t a new problem either. Last June, when Moody’s Investors Services proposed four fund accounting adjustments, it determined that the already dizzying unfunded pension liabilities were actually three times higher than reported. But now there is a new problem: how trustees across the country blow money that their squeezed pension funds don’t have on an exotic boondoggle.
Moody’s wants to cut through the smoke and mirrors of pension-fund accounting. Hence, its four adjustments. Though it can’t force governments to change their accounting practices, it can lower their credit ratings. So here in financially challenged California, John Dickerson (www.yourpublicmoney.com) applied these adjustments to the pension fund numbers as reported by the six counties in the Bay Area and the North Coast with independent pension funds. I’ll use one of them, Contra Costa County, as an example (PDF) because it will crop up again in our boondoggle story.
The pension fund reported total unfunded liabilities of $1.215 billion. After Moody’s adjustments have been applied, they explode to $3.519 billion. It gets worse. To paper over pension deficits, governments issue Pension Obligation Bonds (POB), which are often not reported as liabilities by pension funds. Pension funds grab the cash, governments hold the debt. When Contra Costa County’s $516 million in POBs are included, total unfunded pension liabilities rise to $4.037 billion—over 3.3 times the reported amount.
The massive shortage means that the fund won’t be able to pay the benefits it has promised its employees. Benefits will have to be cut, belts around retirees tightened. Taxpayers and employees will have to pay more. Taxpayers may have to bail out retirees outright. Municipalities have gone bankrupt in order to sort out this mess.
So, California Watch shocked us with its report that four independent municipal pension systems, including Contra Costa County Employees’ Retirement Association, are paying for up to five trustees each to attend a conference. Not in Los Angeles or San Francisco or Berkley. But thousands of miles away, in … Hawaii. For six days in May, at the Hilton Hawaiian Village Waikiki Beach Resort, with plenty of time off to play, surf, roll around the beach, or stare, sweating glass in hand, at the chicks by one of the five pools.
Well actually, this being California, it didn’t shock us. But it’s not just here. The National Conference on Public Employee Retirement System marketed the shindig across the country. It expects about 1,000 attendees, including 800 trustees. Registration fees can run over $1,000, plus airfare, 5 or 6 nights at the hotel, and other expenses. The money comes from taxpayers, employees, and retirees whose pensions are at risk because there isn’t enough money.
Contra Costa County is sending five trustees. The pension funds of the city of Los Angeles, Los Angeles County, and San Diego County will also send trustees. Combined, they reported $17.5 billion in unfunded pension liabilities. And based on Moody’s adjustment, reality could be three times higher, so perhaps over $50 billion.
Expecting resistance, the conference offers a “2013 Attendance Justification Tool Kit“ for trustees who have trouble finding the right words to explain exactly why that trip to Hawaii and six nights at the Hilton Hawaiian Village Waikiki Beach Resort are essential for the survival of the strung-out fund and its billions in unfunded liabilities. The Justification Tool Kit includes a well-written “sample justification letter,” a Word document that you can download and “edit to personalize your message.” Or you can just fill in the blanks.
There are also “7 Tips for Building Your Case for Attending the Annual Conference”—crucial things to do and say to bamboozle everyone into agreeing that that expense is the best investment the fund ever made. “Focus on the issue at hand,” is the first recommendation. Truly an excellent Justification Tool Kit.
Other pension plans send their trustees to in-state seminars, which are a lot cheaper and fulfill any educational requirements just as well. “It’s real easy to keep it in California,” explained Greg Frank, a management analyst at the San Joaquin County Employees’ Retirement Association.
Given that the funds are short billions, the expenses for this boondoggle don’t even amount to a rounding error. But when taxpayers and employees have to pay more, and when retirees have to accept smaller pensions, or watch their fund blow up or get restructured in bankruptcy, then it would be appropriate for trustees to display a crisis mentality. Because a crisis it is. And a shindig in Hawaii isn’t going to solve it.
When Moody’s Investors Services, based on its adjustments, begins recalculating the effect of these unfunded pension liabilities on credit quality, it will eventually result in across-the-board slashing of municipal-bond credit ratings and numerous municipal bankruptcies in California.
http://www.testosteronepit.com/home/201 … ggles.html
Statistics: Posted by yoda — Fri Mar 01, 2013 12:22 am
View full post on opinions.caduceusx.com
Other • Pension Funds Become Hedge Funds, Roll the Dice on Exotic I
Pension Funds Become Hedge Funds, Roll the Dice on Exotic Investments
by John Rubino on January 28, 2013
Running a pension fund used to be one of the easier jobs in finance. The money came in steadily and predictably from member contributions, and you invested it conservatively (in investment grade bonds and blue chip stocks) to meet a modest annual return target of around 8%. It was cook-book money management, nice and cushy and low-stress.
But today’s pension funds have, in effect, two sets of criminally incompetent bosses making incompatible demands. At the national level the US borrows too much and lets its banks run wild, causing a debt crisis to which it responds by lowering interest rates to levels where investment-grade bonds yield next to nothing. At the state and local level, governors and mayors – loath to raise taxes or cut benefits to bring pension plans into balance – pressure funds to keep making their traditional 8% even though, with interest rates way down, that is now wildly optimistic.
So pension fund managers, forced to meet unrealistic goals in an inhospitable environment, have begun acting like hedge funds by turning to dangerous, sure-to-eventually-blow-up strategies like the this:
Pensions Bet Big With Private Equity
AUSTIN, Texas—On the 13th floor of a sleek downtown office building here, the trading desks are manned overnight. The chief investment officer favors cowboy boots made of elephant skin. And when a bet pays off, even the secretaries can be entitled to bonuses.
The office’s occupant isn’t a highflying hedge fund but the Teacher Retirement System of Texas, a public pension fund with 1.3 million members including schoolteachers, bus drivers and cafeteria workers across the state.
It is a sign of the times. Numerous pension funds are still struggling to make up investment losses from the financial crisis. Rather than reduce risks in the wake of those declines, many are getting aggressive. They are loading up on private equity and other nontraditional investments that promise high, steady returns in the face of low interest rates and a volatile stock market.
The $114 billion Texas fund has hit the trend particularly hard. It now boasts some of the splashiest bets in the industry, having committed about $30 billion to private equity, real estate and other so-called alternatives since early 2008. That makes it the biggest such investor among the 10 largest U.S. public pensions, according to data provider Preqin Ltd. Those funds have an average alternatives allocation of 21%.
Including all assets, the pension’s annual return from Dec. 31, 2007, to Dec. 31, 2012, was 3.1%—better than the median preliminary return of 2.46% among large public funds, according to Wilshire Trust Universe Comparison Service.
Texas pension officials say private equity helped offset declines in its other investments. Britt Harris, the pension’s chief investment officer, says he aims to “smash” the stereotype that government pension funds are on the losing end of most investments.
In November 2011, the Texas fund made one of the largest single commitments in the private-equity industry’s history, investing $3 billion in KKR and another $3 billion in Apollo Global Management APO. Three months later, Texas teachers bought a $250 million stake in the world’s biggest hedge-fund firm, Bridgewater Associates—a first such equity stake for a U.S. public pension.
For the fiscal year ended Aug. 31, the Texas teachers fund had a 7.6% return, and pension officials say they expect their bet on alternatives can help the fund hit its 8% annual target return over the long term. Over a ten-year period ending Aug. 31, 2012, the fund has had an annual fiscal year return of 7.4%.
And this:
Money Magic: Bonds Act Like Stocks
Pension funds across the U.S. are desperate to overcome low interest rates and churn out returns big enough to pay future retirees.
Now some hedge funds and money managers are pitching something they see as a Holy Grail: a strategy that often uses leverage to boost returns of bonds that usually occupy the low-risk, low-return portion of pension-fund investment portfolios.
Leverage relies on borrowing money or using derivatives to make large investments while putting up less cash. The tactic’s widespread use helped inflate the world-wide debt bubble that burst during the financial crisis, and it was blamed for ruinous losses at banks and securities firms.
But money managers such as Bridgewater Associates, the world’s largest hedge-fund firm, and a growing number of pension funds say this type of leverage is different. By using leverage through derivatives, such as bond futures, and by investing in commodities, some pension funds believe they can reduce their typically large exposure to the turbulent stock market and still earn solid returns.
Other proponents of this strategy, known as “risk parity,” include AQR Capital Management and Clifton Group, a Minneapolis-based investment firm.
Adding leverage to bonds, you can ‘lower your risk in your overall portfolio,’ Mr. Dalio says.
In Virginia, officials at the Fairfax County Employees’ Retirement System have revamped the entire $3.4 billion portfolio around a risk-parity approach. About 90% of the pension’s portfolio now is exposed to bonds, when factoring in leverage.
“We think we can improve returns while reducing the risk level of the portfolio,” says Robert Mears, the pension fund’s executive director.
Pension officials that employ risk parity say they are using a modest amount of leverage, and nowhere near what investment banks used leading up to the crisis. They also are trading in large, liquid markets, and say they have ample liquidity should they ever need to settle trading losses with cash.
Bridgewater is known as a pioneer of risk parity. Executives from the Westport, Conn., firm have pitched the idea to pension trustees across the U.S., even making a documentary-style online video about risk parity featuring founder Ray Dalio.
Pension funds and other institutional investors typically take most of their risks in the stock market. Mr. Dalio says risk parity spreads the risk to a pension’s bonds and other holdings.
“Ironically, by increasing your risk in the bonds you are going to lower your risk in your overall portfolio,” he said in an interview.
A core tenet of risk parity is that when stocks are falling, bond prices typically rise. By using leverage, bond returns can help make up for losses on stocks. Without leverage, bond returns in a typical pension portfolio of 60% stocks and 40% bonds wouldn’t be large enough to compensate for low stock returns.
Some thoughts
One of the tell-tale signs of a late-stage bubble is the ease with which tried-and-true business practices get tossed aside in favor of “innovations” that are really cons designed to maintain the deal flow. Day trading during the tech stock bubble and house flipping during the housing boom, for example, were hailed as genius at the time and revealed to be impossible (or at least too hard for amateurs) when those bubbles burst. Loading up on equities (private or public) or using leverage (inherently, unavoidably risky) to goose a portfolio of bonds simply creates a portfolio that behaves more like equities, which is to say far more erratically than bonds. Just like all go-long-the-bubble strategies, it’s brilliant while the markets are going the right way and catastrophic when they turn.
Already, interest rates are rising, which must be causing havoc with those leveraged bond portfolios.
Pension funds, because of their conservative institutional character, tend to be among the last to be pulled into the really crazy stuff, right before it all falls apart. They are, along with small retail investors, the market’s dumb money. Go back to the middle of the last decade and you’ll find stories (some of which I wrote) chronicling the innovative pension funds then loading up on alternative investments – and outperforming their peers in the short run. Most of them got creamed in 2009.
http://dollarcollapse.com/investing/pen … vestments/
Statistics: Posted by yoda — Tue Jan 29, 2013 2:48 pm
View full post on opinions.caduceusx.com
Other • Goldman Sachs And The Big Hedge Funds Are Pushing Leverage T
Goldman Sachs And The Big Hedge Funds Are Pushing Leverage To Ridiculous Extremes
By Michael, on January 14th, 2013 As stocks have risen in recent years, the big hedge funds and the "too big to fail" banks have used borrowed money to make absolutely enormous profits. But when you use debt to potentially multiply your profits, you also create the possibility that your losses will be multiplied if the markets turn against you. When the next stock market crash happens, and the gigantic pyramid of risk, debt and leverage on Wall Street comes tumbling down, will highly leveraged banks such as Goldman Sachs ask the federal government to bail them out? The use of leverage is one of the greatest threats to our financial system, and yet most Americans do not even really understand what it is. The following is a basic definition of leverage from Investopedia: "The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment." Leverage allows firms to make much larger bets in the financial markets than they otherwise would be able to, and at this point Goldman Sachs and the big hedge funds are pushing leverage to ridiculous extremes. When the financial markets go up and they win on those bets, they can win very big. For example, revenues at Goldman Sachs increased by about 30 percent in 2012 and Goldman stock has soared by more than 40 percent over the past 12 months. Those are eye-popping numbers. But leverage is a double-edged sword. When the markets turn, Goldman Sachs and many of these large hedge funds could be facing astronomical losses.
Sadly, it appears that Wall Street did not learn any lessons from the financial crisis of 2008. Hedge funds have ramped up leverage to levels not seen since before the last stock market crash. The following comes from a recent Bloomberg article entitled "Hedge-Fund Leverage Rises to Most Since 2004 in New Year"…
Hedge funds are borrowing more to buy equities just as loans by New York Stock Exchange brokers reach the highest in four years, signs of increasing confidence after professional investors trailed the market since 2008.
Leverage among managers who speculate on rising and falling shares climbed to the highest level to start any year since at least 2004, according to data compiled by Morgan Stanley. Margin debt at NYSE firms rose in November to the most since February 2008, data from NYSE Euronext show.
So why is this so important?
Well, as a recent Zero Hedge article explained, even a relatively small drop in stock prices could potentially absolutely devastate many hedge funds…
What near record leverage means is that hedge funds have absolutely zero tolerance for even the smallest drop in prices, which are priced to absolute and endless central bank-intervention perfection – sorry, fundamentals in a time when global GDP growth is declining, when Europe and Japan are in a double dip recession, when the US is expected to report its first sub 1% GDP quarter in years, when corporate revenues and EPS are declining just don’t lead to soaring stock prices.
It also means that with virtually all hedge funds in such hedge fund hotel names as AAPL (the stock held by more hedge funds – over 230 – than any other), any major drop in the price would likely lead to a wipe out of the equity tranche at the bulk of AAPL "investors", sending them scrambling to beg for either more LP generosity, or to have their prime broker repo desk offer them even more debt. And while the former is a non-starter, the latter has so far worked, which means that most hedge funds have been masking losses with more debt, which then suffers even more losses, and so on.
By the way, Apple (AAPL) just fell to an 11-month low. Apple stock has now declined by 26 percent since it hit a record high back in September. That is a very bad sign for hedge funds.
But hedge funds are not the only ones flirting with disaster. In a previous article about the derivatives bubble, I pointed out the ridiculous amount of derivatives exposure that some of these "too big to fail" banks have relative to their total assets…
According to the Comptroller of the Currency, four of the largest U.S. banks are walking a tightrope of risk, leverage and debt when it comes to derivatives. Just check out how exposed they are…
JPMorgan Chase
Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)
Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)
Citibank
Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)
Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)
Bank Of America
Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)
Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)
Goldman Sachs
Total Assets: $114,693,000,000 (a bit more than 114 billion dollars – yes, you read that correctly)
Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)
Take another look at those figures for Goldman Sachs. If you do the math, Goldman Sachs has total exposure to derivatives contracts that is more than 362 times greater than their total assets.
That is utter insanity, but we haven’t had a derivatives crash yet so everyone just keeps pretending that the emperor actually has clothes on.
When the derivatives crisis happens, things in the financial markets are going to fall apart at lightning speed. A recent article posted on goldsilverworlds.com explained what a derivatives crash may look like…
When one big bank faces some kind of trouble and fails, the banks with the largest exposure to derivates (think JP Morgan, Citygroup, Goldman Sachs) will realize that the bank on the other side of the derivatives trade (the counterparty) is no longer good for their obligation. All of a sudden the hedged position becomes a naked position. The net position becomes a gross position. The risk explodes instantaneously. Markets realize that their hedged positions are in reality not hedged anymore, and all market participants start bailing almost simultaneously. The whole banking and financial system freezes up. It might start in Asia or Europe, in which case Americans will wake up in the morning to find out that their markets are not functioning anymore; stock markets remain closed, money at the banks become inaccessible, etc.
But for now, the party continues. Goldman Sachs and many of the big hedge funds are making enormous piles of money.
In fact, according to the Wall Street Journal, Goldman Sachs recently gave some of their top executives 65 million dollars worth of restricted stock…
Goldman Sachs Group Inc. GS -0.76% handed insiders including Chief Executive Lloyd Blankfein and his top lieutenants a total of $65 million in restricted stock just hours before this year’s higher tax rates took effect.
The New York securities firm gave 10 of its directors and executives early vesting on 508,104 shares previously awarded as part of prior years’ compensation, according to a series of filings with the Securities and Exchange Commission late Monday.
And the bonuses that employees at Goldman receive are absolutely obscene. A recent Daily Mail article explained that Goldman employees in the UK are expected to receive record-setting bonuses this year…
Britain’s army of bankers will re-ignite public fury over lavish pay rewards as staff at Goldman Sachs are expected to reward themselves £8.3 billion in bonuses on Wednesday.
The American investment bank, which employs 5,500 staff in the UK, will be the first to unveil its telephone number-sized rewards – an average of £250,000 a person – as part of the latest round of bonus updates.
The increase, up from £230,000 last year, comes as British families are still struggling to make ends meet five years after banks brought the economy to the brink of meltdown.
Wouldn’t you like to get a "bonus" like that?
Life is good at these firms while the markets are going up.
But what happens when the party ends?
What happens if the markets crash in 2013?
When you bet big, you either win big or you lose big.
For now, the gigantic bets that Wall Street firms are making with borrowed money are paying off very nicely.
But a day of reckoning is coming. The next stock market crash is going to rip through Wall Street like a chainsaw and the carnage is going to be unprecedented.
Are you sure that the people holding your money will be able to make it through what is ahead? You might want to look into it while you still can.
http://theeconomiccollapseblog.com/arch … s-extremes
Statistics: Posted by yoda — Mon Jan 14, 2013 7:50 pm
View full post on opinions.caduceusx.com
Goldman Sachs And The Big Hedge Funds Are Pushing Leverage To Ridiculous Extremes
As stocks have risen in recent years, the big hedge funds and the “too big to fail” banks have used borrowed money to make absolutely enormous profits. But when you use debt to potentially multiply your profits, you also create the possibility that your losses will be multiplied if the markets turn against you. When the next stock market crash happens, and the gigantic pyramid of risk, debt and leverage on Wall Street comes tumbling down, will highly leveraged banks such as Goldman Sachs ask the federal government to bail them out? The use of leverage is one of the greatest threats to our financial system, and yet most Americans do not even really understand what it is. The following is a basic definition of leverage from Investopedia: “The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.” Leverage allows firms to make much larger bets in the financial markets than they otherwise would be able to, and at this point Goldman Sachs and the big hedge funds are pushing leverage to ridiculous extremes. When the financial markets go up and they win on those bets, they can win very big. For example, revenues at Goldman Sachs increased by about 30 percent in 2012 and Goldman stock has soared by more than 40 percent over the past 12 months. Those are eye-popping numbers. But leverage is a double-edged sword. When the markets turn, Goldman Sachs and many of these large hedge funds could be facing astronomical losses.
Sadly, it appears that Wall Street did not learn any lessons from the financial crisis of 2008. Hedge funds have ramped up leverage to levels not seen since before the last stock market crash. The following comes from a recent Bloomberg article entitled “Hedge-Fund Leverage Rises to Most Since 2004 in New Year“…
Hedge funds are borrowing more to buy equities just as loans by New York Stock Exchange brokers reach the highest in four years, signs of increasing confidence after professional investors trailed the market since 2008.
Leverage among managers who speculate on rising and falling shares climbed to the highest level to start any year since at least 2004, according to data compiled by Morgan Stanley. Margin debt at NYSE firms rose in November to the most since February 2008, data from NYSE Euronext show.
So why is this so important?
Well, as a recent Zero Hedge article explained, even a relatively small drop in stock prices could potentially absolutely devastate many hedge funds…
What near record leverage means is that hedge funds have absolutely zero tolerance for even the smallest drop in prices, which are priced to absolute and endless central bank-intervention perfection - sorry, fundamentals in a time when global GDP growth is declining, when Europe and Japan are in a double dip recession, when the US is expected to report its first sub 1% GDP quarter in years, when corporate revenues and EPS are declining just don’t lead to soaring stock prices.
It also means that with virtually all hedge funds in such hedge fund hotel names as AAPL (the stock held by more hedge funds – over 230 – than any other), any major drop in the price would likely lead to a wipe out of the equity tranche at the bulk of AAPL “investors”, sending them scrambling to beg for either more LP generosity, or to have their prime broker repo desk offer them even more debt. And while the former is a non-starter, the latter has so far worked, which means that most hedge funds have been masking losses with more debt, which then suffers even more losses, and so on.
By the way, Apple (AAPL) just fell to an 11-month low. Apple stock has now declined by 26 percent since it hit a record high back in September. That is a very bad sign for hedge funds.
But hedge funds are not the only ones flirting with disaster. In a previous article about the derivatives bubble, I pointed out the ridiculous amount of derivatives exposure that some of these “too big to fail” banks have relative to their total assets…
According to the Comptroller of the Currency, four of the largest U.S. banks are walking a tightrope of risk, leverage and debt when it comes to derivatives. Just check out how exposed they are…
JPMorgan Chase
Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)
Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)
Citibank
Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)
Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)
Bank Of America
Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)
Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)
Goldman Sachs
Total Assets: $114,693,000,000 (a bit more than 114 billion dollars – yes, you read that correctly)
Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)
Take another look at those figures for Goldman Sachs. If you do the math, Goldman Sachs has total exposure to derivatives contracts that is more than 362 times greater than their total assets.
That is utter insanity, but we haven’t had a derivatives crash yet so everyone just keeps pretending that the emperor actually has clothes on.
When the derivatives crisis happens, things in the financial markets are going to fall apart at lightning speed. A recent article posted on goldsilverworlds.com explained what a derivatives crash may look like…
When one big bank faces some kind of trouble and fails, the banks with the largest exposure to derivates (think JP Morgan, Citygroup, Goldman Sachs) will realize that the bank on the other side of the derivatives trade (the counterparty) is no longer good for their obligation. All of a sudden the hedged position becomes a naked position. The net position becomes a gross position. The risk explodes instantaneously. Markets realize that their hedged positions are in reality not hedged anymore, and all market participants start bailing almost simultaneously. The whole banking and financial system freezes up. It might start in Asia or Europe, in which case Americans will wake up in the morning to find out that their markets are not functioning anymore; stock markets remain closed, money at the banks become inaccessible, etc.
But for now, the party continues. Goldman Sachs and many of the big hedge funds are making enormous piles of money.
In fact, according to the Wall Street Journal, Goldman Sachs recently gave some of their top executives 65 million dollars worth of restricted stock…
Goldman Sachs Group Inc. GS -0.76% handed insiders including Chief Executive Lloyd Blankfein and his top lieutenants a total of $65 million in restricted stock just hours before this year’s higher tax rates took effect.
The New York securities firm gave 10 of its directors and executives early vesting on 508,104 shares previously awarded as part of prior years’ compensation, according to a series of filings with the Securities and Exchange Commission late Monday.
And the bonuses that employees at Goldman receive are absolutely obscene. A recent Daily Mail article explained that Goldman employees in the UK are expected to receive record-setting bonuses this year…
Britain’s army of bankers will re-ignite public fury over lavish pay rewards as staff at Goldman Sachs are expected to reward themselves £8.3 billion in bonuses on Wednesday.
The American investment bank, which employs 5,500 staff in the UK, will be the first to unveil its telephone number-sized rewards – an average of £250,000 a person – as part of the latest round of bonus updates.
The increase, up from £230,000 last year, comes as British families are still struggling to make ends meet five years after banks brought the economy to the brink of meltdown.
Wouldn’t you like to get a “bonus” like that?
Life is good at these firms while the markets are going up.
But what happens when the party ends?
What happens if the markets crash in 2013?
When you bet big, you either win big or you lose big.
For now, the gigantic bets that Wall Street firms are making with borrowed money are paying off very nicely.
But a day of reckoning is coming. The next stock market crash is going to rip through Wall Street like a chainsaw and the carnage is going to be unprecedented.
Are you sure that the people holding your money will be able to make it through what is ahead? You might want to look into it while you still can.
View full post on The Economic Collapse