July 25, 2012 7:54 pm
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The banking firemen won’t prevent fires breaking out
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Ingram Pinn illustration




Nearly four years after the Wall Street bailout, the beneficiaries of the US government’s support are battered and unpopular, but still in business. Meanwhile, the regulators that rescued them are in trouble.




The Libor affair is the latest scandal to affect the already low reputation of the big banks. It adds to most taxpayers’ feeling that they were forced to support a set of institutions that did not deserve it. “They should be enraged by the broken promises to Main Street and the unending protection of Wall Street,” writes Neil Barofsky, the former special inspector general of the troubled asset relief programme.



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Mr Barofsky’s book Bailout renews his lengthy grudge match with Tim Geithner, the US Treasury secretary, whom he saw as over-sympathetic to Wall Street. “I find that deeply offensive,” Mr Geithner complained haughtily to Charlie Rose of PBS this week when faced by the notion that, as former president of the New York Federal Reserve, he was too close to the industry.




Mr Geithner protests too much. His own description of the New York Fed – “the fire station of the financial system” – encapsulates the difficulty. Since 2008 (and before), regulators have faced conflicts between their dual mandates of disciplining banks and keeping the financial system running. Their immediate priority is to put out the fire, not to catch and punish the arsonists.





His mantra in the 2008 financial crisis was “first, do no harm” – keep Wall Street and small banks solvent before turning to the question of regulating and controlling them more effectively. The combination of the European financial crisis and the Libor scandal threatens a similar pile-up of principles.




The Libor abuse, shocking even to those who have followed the banking industry for years, could easily culminate in criminal prosecutions of the traders involved – and even a US indictment of a European bank. That would be carried out by the US Department of Justice, with the Fed fretting on the sidelines.





The Fed is already worried by the effect on financial stability of severe disruption at institutions that are integral to US marketsBarclays, for example, is a large trader in US Treasury bonds. If a big European bank failed, it would cause chaos at US money market funds and ripple through the system.


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One doesn’t have to believe Mr Barofsky’s view that the relationship between the Fed, the Treasury – and central banks and regulators elsewhere – and the financial industry is inherently corrupt to identify a problem. Any oversight that is biased towards preserving stability will often shy from making life too difficult for banks.





In theory, there is no conflict between the two: it is just a matter of timing. While a regulator has to go soft on banks during financial crises for fear of making things worse, it can – and shouldget tough before and after the crisis.





In practice, the latter has not impressed. This crisis never quite goes away, moving seamlessly from US mortgages to the slow-motion break-up of the euro. The big banks remain too big to fail – even Sandy Weill, architect of the dismantling of the Glass-Steagall Act at Citigroup, called on Wednesday on CNBC for its reinstatement – and the financial system remains fragile.





The only way to curb the conflict in the long term would be for bank supervisors to prevent banks from taking excessive risks and adopting inadequate business models, such as Northern Rock’s heavy over-reliance on impermanent wholesale funding. They could then crack down on banks’ practices before the next crisis made it awkward.





Most supervisors admit that they were too lax in the past, taking an efficient markets view of banking – their job was to identify risks, and bring them to the attention of bank executives, but not to tell them what to do. “You can’t keep on analysing risks,” says one European supervisor. “You have to take action.”





Apart from a general reluctance on the part of modestly paid and under-resourced supervisors to battle with wealthy, assertive bankers, they were held back by a philosophy that trading was a professionals’ market in which everyone knew how to take care of themselves. Various scandals have disproved that.





As Adair Turner, chairman of the UK Financial Services Authority, said this week, it is possible for a banker “to make huge amounts of money out of a multi-step chain which connects ill-informed investors in one country to ill-informed subprime borrowers in another, and still go home believing [he is] a fine upstanding member of society”.




A good point, but how much faith can we have that supervisors will be noticeably more effective? I am sceptical, not because they will not try, but because it is a difficult job and history is against them. Although 2007-08 was an extreme episode, regulators have never prevented periodic banking crises.



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“The reality is that regulators are all over the banks at the moment, as you’d expect,” says one executive. “But neither bank CEOs nor supervisors have ever been good at catching the next problem.”





Some regulators talk of altering their own incentivesimposing rules and triggers that would stop them fussing around too long when they are worried and instead spring into action. But they will always be heavily outnumbered – the Fed has only about 50 on-site examiners at a bank that employs more than 100,000 people and manages trillions in assets.





While supervisors grapple with big, complex institutions filled with bankers who are encouraged not only to take unwise risks but also to break the basic rules of conduct, they will struggle. Every so often, the priority of institutions such as the Fed will be to extinguish fires that were preventable.






Were it as simple as removing Mr Geithner from his post and appointing someone to Mr Barofsky’s taste, then life would be simpler. The unpalatable truth is that he was doing a large part of his job.



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Copyright The Financial Times Limited 2012.


July 24, 2012
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Euro’s Medicine May Be Making Greece’s Symptoms Worse
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By RACHEL DONADIO and SUZANNE DALEY





ATHENSOnly a month after Greece installed a new government, the country is facing renewed peril. Its official lenders are signaling a growing reluctance to keep paying the bills of the nearly bankrupt nation, even as the government is seeking more leniency on the terms of its multibillion-euro bailout.


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Adding to the woes, there is little agreement within either side. The Greek government is itself a motley coalition of conservatives and Socialists, and the leaders of the European Commission, the International Monetary Fund and the European Central Bank, known as the troika, are increasingly divided among themselves. That is creating even more uncertainty as Greece and the rest of Europe head for yet another showdown, renewing doubts about how long Athens can remain within the euro zone.


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Even as fears mount in Europe about the rapidly worsening situation in Spain, Greece’s problems are far from solved. The president of the European Commission, José Manuel Barroso, is expected to make his first visit to Athens since 2009 on Thursday to meet with Prime Minister Antonis Samaras as the troika begins yet another assessment of how well the country has complied with a spate of harsh austerity measures imposed as the price for loans. Greece’s lenders say they will not finance the country any further unless it meets its goals. But many experts say that the targets were never within reach and that pushing three increasingly weak Greek governments to comply has only profoundly damaged the economy.



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“We knew at the fund from the very beginning that this program was impossible to be implemented because we didn’t have anyanysuccessful example,” said Panagiotis Roumeliotis, a vice chairman at Piraeus Bank and a former finance minister who until January was Greece’s representative to the International Monetary Fund. Because Greece is in the euro zone, he noted, the nation cannot devalue its currency to help improve its competitiveness as other countries subject to I.M.F. interventions almost always are encouraged to do.



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At the same time, Mr. Roumeliotis and others note, the troika underestimated the negative effect its medicine would have on the Greek economy.



.“The argument that is used usually by the troika in order to criticize Greece — and to ignore their mistakes — is that the deep recession is because of the nonimplementation of the structural reforms,” Mr. Roumeliotis said. While Athens has fallen woefully short on that front, he conceded, the bigger problem is that the severe cuts contributed to the downward spiral by decimating economic demand within Greece.


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It remains to be seen whether the troika is prepared to force Greece to default. Much of the talk on both sides is aimed at extracting concessions in negotiations. But while Greece has been pushed to the edge before, it now appears to be running out of time because its European partners, however complicit in Greece’s current plight, appear to be running out of patience.


.On Monday, the European Commission reaffirmed that the next tranche of aid to Greece would probably not be disbursed until September, putting the country at greater risk of running out of money to pay salaries and pensions.



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At the end of last week, the European Central Bank cut off a crucial source of cash for Greek banks, saying that it would stop accepting Greek government bonds as collateral for low-cost loans until the troika completes its report, which is not expected until late August at the earliest. Greek banks must now borrow from the Greek Central Bank at a higher interest rate, from a fund with limited means; if it runs out, Greece would have to start printing drachmas.


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Mr. Samaras’s government will try to persuade the lenders keeping it on life support that the targets they set are off base because Greece’s economy keeps contracting as a result of the tax increases and spending and wage cuts mandated by the troika. Greece’s economy shrank 3.5 percent in 2010 and 6.9 percent in 2011 and is expected to contract 7 percent this year, a decline reminiscent of the Great Depression of the 1930s. Unemployment is at 22.5 percent and expected to rise to 30 percent, while Greece’s main retailers’ association warned on Monday that sales were expected to drop 53 percent this year.




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The original plan called for Greece to return to financing its debts on the open market in 2014, an idea that one European official, speaking on the condition of anonymity, now calls a “fiction.”



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Complicating matters is the fact that the troika’s institutions have different mandates and constituencies. “The troika is not one homogeneous bloc,” said Guntram B. Wolff, the deputy director of Bruegel, a public policy research institute in Brussels. “They have different views.”


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Some experts say that the I.M.F. has been quietly pushing to ease the austerity terms while European leaders have mostly been trying to satisfy Germany’s demands to keep Greece on a tight leash to persuade its own voters to support the bailouts.



In an interview, former Prime Minister George Papandreou, a Socialist who was in power when Greece asked for a bailout in 2010, said Athens was given nearly impossible targets at the outset because Germany wanted to send a message to other European countries of what could await them if they asked for the same, a reality now spreading across southern Europe.


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“There was the moral hazard idea: ‘We can’t give Greece money too cheaply,’ ” Mr. Papandreou said. “There was a sense: ‘Punish them. We have to be careful that if we make it too easy for a bailout, others will want similar things.’ ”



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While Greek officials say they were set up for failure, the mood in Germany has grown less sympathetic and calls for a Greek exit from the euro zone have escalated. Alexander Dobrindt, the general secretary of the Christian Social Union, the Bavarian sister party of Chancellor Angela Merkel’s Christian Democratic Union, said provocatively on Monday that the Greek government should now pay half its wages and pensions “in drachmas,” Greece’s former currency.



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Meanwhile, Germany’s economy minister, Philipp Rösler, said on television last weekend that “for me, a Greek exit from the euro zone has long since ceased to be a frightening prospect.”


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As Germans sharpen their statements, in Greece the cuts have come at a steep political cost: the more the economy contracts, the less consensus the government has to carry out the fundamental changes needed to help restart growth.


Despite the obstacles, Greece has made substantial strides. From 2009 to 2011, it slashed government spending before interest payments by 20 billion euros, or 18 percent — a feat even Greece’s critics concede would be challenging for any government. It is also expected to reduce the number of civil servants it had in 2009874,000 — by more than 100,000 by the end of the year.


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Today, the coalition is divided over how to identify an additional 11.5 billion euros in cuts from 2013 to 2014 without causing a total collapse in basic services. In the coming days, it is expected to announce the merging of state entities and cuts to social welfare payments. Athens has said it will not lay off state workers, but reduce them through attrition and early retirement. And it has set a ceiling of around 2,400 euros a month for pensions.


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But some of the government’s gain in reducing its deficit has come from not paying its bills to Greek companies, making things worse for the economy when thousands of such companies are going out of business.


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“A reform needs two things: time and trust,” said Anna Diamantopoulou, a minister in the governments of Mr. Papandreou and Lucas Papademos. “We needed time to persuade people, but we did not have it.” 



      
“If you want to restructure a small company, that takes two years,” she added. Can you restructure a country in two years?” 



      

Reporting was contributed by Dimitris Bounias from Athens, Nicholas Kulish from Berlin, Paul Geitner from Brussels and Jack Ewing from Frankfurt.


How To Position Yourself For A 10 Year Pattern Breakout
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July 24, 2012
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By The Technical Traders




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As mentioned last Friday just before things took a dive on the weekend, a look at the major market indices did not look promising. If we take an even longer term look and examine the monthly charts we can see that The S&P 500 as well as the Dow Jones have been approaching multi-decade rising channel resistance lines. Further, they also appear to be forming bearish rising wedge patterns.

Monthly Long Term Chart Analysis & Thoughts:

Monthly SPX Index Trading


As many of my longer term subscribers can attest to, I always preach that technical analysis is one part art and one part science: you can never be completely certain on what the outcome of a pattern is going to be. However, we can use historical analysis to make better investments. The great American Novelist Mark Twain probably said it best in that “history does not repeat itself, but it rhymes”. 



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Regarding a rising wedge pattern, we know that roughly two-thirds of the time they will break to the downside. This also means that one-third of the time they break to the upside.





In accomplishing our goal of capital growth we must do a number of things. We must make returns on our investments, we must protect our investments, and we must limit our losses. While all three aspects work in tandem with each other, there are times when focus must be allocated to one specific approach.





Regarding the current technical setup, I’m not so focused on the 67% chance that these wedges will break to the downside, but more so the impact of each outcome on the average Joe’s portfolio and mom and pop businesses. The S&P 500 and the Dow are approaching long term resistance lines that have been in place for decades. If we do break to the downside, which I suspect we will, there could be a very significant sell off with consequences that no one can predict at this point though I mention some things in the chart above. Alternatively, there is significant overhead resistance in the various indices, and I don’t believe an upside break would be too monumental.




That being said, I always like to keep an open outlook and wait for the right opportunity. I’m trying to think of scenarios that would prelude further upside action and I really am not coming up with much. As evidenced by the completion of the recent 5 wave uptrend on the S&P that coincided nicely with the various quantitative easing policies, Ben Bernanke and the fed have had less and less impact. I truly can’t see many fiscal developments that would prompt any significant bullish action.




The only scenario I really think that could pump up equities is a series of positive earnings announcements. A lot of expectations, earnings numbers, guidance, etc… have been revised downwards over the last couple of quarters, so there is the opportunity for some positive surprises that could lead to some bullish price action. In absence of such a scenario, I really can’t think of much else that would prompt a run up.




Look at these charts of positive and negative earnings surprises and the dates and remember what happened following this negative data.


Positive Earnings Surprise

Earnings Positive Surprises
Earnings Positive Surprises

Negative Earnings Surprise

Earning Negative Surprises



That being said, I am recommending two courses of action. For those steadfast bulls, lock in some profits and/or buy some protection. Missing out on some of the upside is a lot better than losing some of the gains you have fought so hard for over the past couple of years. For the more aggressive traders and investors, start following my updates a little more regularly as I foresee many shorting opportunities coming up in the future. As many of you know, sell-offs are often quick and abrupt, and timing is extremely important when playing the downside.



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Further, trading could get very volatile in the near future. Historically, and even more so looking forward as August and September have been very costly for the average investor. Our focus will be in taking the highest probability trades that offer the best risk to reward scenarios. There will be times when we miss trades, and times when they’re not timed perfectly. But, as those who have been with me for a while can attest to, patience pays off in the long run.

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07/25/2012 03:33 PM
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Spreading Euro Fire
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Economists Warn EU on 'Threshold of Catastrophe'
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The construction site for the new European Central Bank headquarters in Frankfurt: While you're at it, economists are suggesting, you should build a new euro zone.


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The euro crisis has returned with a vengeance this week, with Greece potentially facing bankruptcy, Spain teetering towards a bailout and even Germany at risk of losing its top credit rating. A group of prominent economists are calling for a radical restructuring of Europe and the euro zone to prevent a disaster of "incalculable proportions."



A panel of respected European economics experts are ringing the alarm bell this week over the euro crisis -- direly calling on all European leaders to move swiftly to deploy the most powerful tools available to halt the currency's downward spiral.





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"We believe that as of July 2012, Europe is sleepwalking toward a disaster of incalculable proportions," the New York-based Institute for New Economic Thinking (INET) stated in a report warning leaders they need to move faster and more decisively to save the common currency. Otherwise it could very well disintegrate.





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The study's publication on Tuesday couldn't be any timelier, given the recent dramatic developments in the euro crisis. Greece's recession is proving to be far worse than previously expected, it is getting tougher for Spain to raise money on the markets (on Tuesday, interest rates on 10-year Spanish bonds rose to an unsustainable 7.6 percent) and Germany's top triple-A rating is also at risk.







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In recent weeks, the situation in the more highly indebted euro-zone states has intensified dramatically, write the experts, who include Peter Bofinger and Lars Feld of Germany. As members of the Council of Economic Advisors, they are part of a respected panel that advises the German government on such issues.


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The study's authors also include Beatrice Weder di Mauro, a former member of the panel who recently left to work for Switzerland's UBS bank. The experts wrote that the crisis is the result of flawed design, construction and implementation of the finance and currency system. In order to rescue it, the economists are calling for a radical restructuring. "The sense of a never-ending crisis, with one domino falling after another, must be reversed," they wrote.






Among other proposals, the economists are calling for:




  • tighter integration of the financial system with a strong institution at the European Union or euro-zone level that would make stabilizing the banks a matter for all of Europe;




  • the permanent euro rescue fund, the European Stability Mechanism, to be provided with a banking license as a lender in order to give it the "firepower" that it needs;




  • the European Central Bank to better use all the tools at its disposal (both conventional and unconventional) in order to bolster the currency union.




The economists write further that the restructuring "does not mean that the costs of the crisis should be socialized across euro-zone citizens: systemic failure does not absolve from responsibility inviduals, banks and supervisors who took or oversaw imprudent lending and borrowing decisions."




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It does, however, "mean that the extent to which markets are currently meting out punishment against specific countries may be a poor reflection of national responsibility, and that a successful crisis response must be collective and embody some burden sharing across countries. Absent this collective constructive response, the euro will disintegrate," they warn.




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But the report's authors also stress that the structural reforms they recommend "would be sufficient to put the euro zone on a firm footing" only if they are accompanied by the reduction of national deficits and if countries also restore their competitiveness.



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OECD Chief Says ECB Should Buy Spanish Bonds





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The head of the influential Organization for Economic Cooperation and Development (OECD) offered support on Tuesday for one key aspect of the proposal. OECD Secretary General Angel Gurria told Bloomberg TV that the ECB should reactivate its government bond-buying program "more decisively and with bigger numbers" as "you have to stabilize the yields." He said there was no reason why Italy and Spain should be paying yields of 7.5 percent.
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He also said a Spanish rescue would be "totally unnecessary" if Europe were to deploy all of its instruments, "but mostly the ECB. There is a bazooka."





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Currently, the ECB is holding previous bond purchases in its books valuing a total of €211.5 billion ($256 billion). However, the ECB has put its bond-buying program on ice since mid-March.