Growth Industry 2009: Criminal and Constitutional Law

It’s going to be all lawsuits all the time, as filings and indictments come fast and furious after January 20. In fact, a number are in the works already.

From the perspective of Wall St. crime, it will be interesting to see what Elliot Spitzer and Rudy Giuliani do. Keeping his hand in by writing for Slate, Spitzer’s wounded and has nothing to lose. Giuliani has got to smell blood and a loyal-to-the-point-of-absurdity Republican he is not.

Let’s start with . . .

Criminal Law

There’s a big one pending of the type that made the reputations of Spitzer and Giuliani in their US Attorney days—Insider Trading! As you remember, Giuliani’s high-profile conviction was Ivan Boesky and Spitzer’s was Martha Stewart. (No disrespect intended. What comes to mind when you think of Spitzer . . . let me qualify that, during his days as a US Attorney?)

Conveniently domiciled in their former district, Robert Rubin—former co-Chairman of Goldman Sachs, former Treasury Secretary under Clinton and on the board of, counsel to and briefly Chairman of Citigroup— was on the short list to be Treasury Secretary again. What happened?
When you want the low down, the New York Post is the paper of record. On December 4 it reported: "A new Citigroup scandal is engulfing Robert Rubin and his former disciple Chuck Prince for their roles in an alleged [CDO-related] Ponzi-style scheme that's now choking world banking. [The two] are named in a federal lawsuit for an alleged complex cover-up of toxic securities that spread across the globe, wiping out trillions of dollars in their destructive paths.” However—and here’s the indictable offense—before Citi's stock collapsed, Rubin and other top insiders cashed out of more than $150 million in "suspicious stock sales" according to the lawsuit filed on behalf of investors. They never know when to stop, do they.

An Astounding Conflict of Interest

The disposition of this case is going to set quite a precedent. Apparently, stealing investors’ money is a crime.

Bernard Madoff, former head of the NASDAQ, surrendered to the FBI on December 11, after having been turned in by his sons Mark and Andrew for running a several-decades-long Ponzi scheme. Investors have been wiped out to the tune of $50 billion. What makes this case interesting is not only Madoff’s insider status, but that Mary Schapiro, nominee for SEC Chairman, has recently announced the appointment of Mark Madoff to a prominent role with the security-industry oversight agency. And there’s more.

According to the FBI, the SEC and other regulatory bodies received several written complaints about Madoff over the years, which were never pursued. It now has been learned that “Ms Schapiro, currently chief executive of the Financial Industry Regulatory Authority (Finra), employed (son) Mark Madoff to serve on the board of the National Adjudicatory Council — the division that reviews disciplinary decisions made by Finra,” according to the UK TimesOnline on December 18.

Madoff père is currently confined to his Park Avenue apartment awaiting trial.

Strange Treatment of Small Fry
This next case is small in terms of money—what’s a few hundred mil these days—but has an interesting twist. In another action by federal prosecutors of the Southern District of New York, they have arrested attorney Marc Dreir for stealing at least $380 million in “a brazen swindle of some of New York’s savviest investors by one of New York’s more accomplished lawyers,” as reported in the New York Times on December 14. Another $35 million is missing from escrow accounts at his 250-member law firm.

Why this case stands out is that the accused is actually in jail being held without bail. Can you believe it. He must be really dangerous. Or he lives in New Jersey.

Constitutional Law
This should be getting more ink, imo.

On December 10, the WSJ reported that the Fed “is considering issuing its own debt for the first time . . . which . . . would provide the central bank with more flexibility to tackle the financial crisis.”

Ordinarily, when short of cash the Fed turns to the Treasury. The Treasury can no longer fund the Fed because of its own massive borrowings set for 2009 and debt limits imposed by congress.

Issuing debt is not in the Fed’s charter. According to the Constitution as it is currently written, only congress through the Treasury has the power to borrow against the credit of the United States. What’s proposed by the Fed would give it extra-legal authority to exceed the debt ceiling set by congress. It also would usurp powers of congress and the Treasury and transfer them to the Fed, which is a private entity owned by member banks.

Paul Volker would be turning in his grave if he were dead.

mg

Fed Implode-o-Meter Update

At the end of October (see Fed Implode-o-Meter October 31), it looked like the Fed had spent about $3.8 trillion in the year to date. Not even three weeks later, that figure is now up to $4.28 trillion. According to CNBC, “To put it in perspective that’s . . . more than what was spent on WW II.” Funny choice of comparison; the Iraq war, the longest-running conflict in the history of the US, has also cost more and the final tab won’t be in for years. Anyway . . .

So, where’s all the money going? Here’s a list (hat tip to CNBC) of what has been made public:

Federal Reserve
(TAF) Term Auction Facility.................................................................$900.0bn
Discount Window Lending
Commercial Banks.................................................................................... $99.2bn
Investment Banks.......................................................................................$56.7bn
Loans to buy ABCP.....................................................................................$76.5bn
AIG .............................................................................................................$112.5bn
Bear Stearns .................................................................................................$29.5bn
(TSLF) Term Securities Lending Facility...............................................$225.0bn
Swap Lines..................................................................................................$613.0bn
(MMIFF) Money Market Investor Funding Facility...........................$540.0bn
Commercial Paper Funding Facility.......................................................$257.0bn
(TARP) Treasury Asset Relief Program...............................................$700.0bn
Other:
Automakers.................................................................................................$25.0bn
(FHA) Federal Housing Administration 300.0bn
Fannie Mae/Freddie Mac........................................................................$350.0bn
Total.................................................................................$4,284.5bn


The Telegraph UK quotes Paul Volcker, former chairman of the US Federal Reserve and short-list candidate for Treasury Secretary, as saying, “. . . it is already too late to avoid a severe downturn even if the credit markets stabilize over coming months. I don't think anybody thinks we're going to get through this recession in a hurry. The economic slump has begun to metastasize after a shocking collapse in output over the past two months . . . normal monetary policy is not able to get money flowing. The trouble is that even with all this [government] protection, the market is not moving.” Further, "What this crisis reveals is a broken financial system like no other in my lifetime," the 81 year old Volker told a conference at Lombard Street Research in London. Normal monetary policy can't restart economic activity because credit is contracting at a faster pace than new money is coming into the system. Fractional reserve lending can’t work unless banks lend.

Through all of this, the Fed is still taking as collateral illiquid, mark-to-model assets, presumably at notional value, from the banks. In return, the banks receive brand-new treasuries that, in principle, could be lent out. At this point, most, or probably all, of the Fed’s general collateral is comprised of toxic waste. Currently, the Fed does not even have enough reserves to cover dollars in circulation.

Good thing we’re only talking about Monopoly money. If it were real money we’d be in big trouble.

There are a number of grass-roots efforts trying to put an end to the Fed’s out-of-control borrowing. One of them, End the Fed.us is having a meet-up on November 22 in 39 cities. Mish of Global Economic Trend Analysis is putting together another email, fax, and phone-call campaign to stop further auto company bailouts. Chances are slim that the brakes will be put on before the end of the year. However, with a new administration coming in, 2009 could be another story.

mg

Just how much money has the Fed, aided and abetted by the Treasury, spent this year? Numbers are all over the place, but it could be around $3.8 trillion. They spent $650 billion in the last six weeks alone. And it’s all money they don’t have, by the way. And it has yet to be financed; that’s ahead of us.

The $700 billion authorized by Congress—to buy illiquid securities from banks—has been spent. Not on illiquid assets, though. It’s been spent on: capital infusions to large US banks, whether they want it or not; regional banks, they’ve all want it; US insurance companies, whether they “need” it or not; and on short-term funding including commercial paper for US industrial GE. This week’s brand-new recipients of the Fed’s largesse are the central banks of emerging market countries, plus the central banks of New Zealand, Australia and the EU. Yes, that’s right, further direct lending from the Fed to foreign central banks. The only thing this group has in common is credit risk so high that only the Fed will lend to them.

This bill, the Emergency Economic Stabilization Act of 2008, was passed by Congress less than a month ago and they are about to go back to the well for another $600 billion.
On Oct. 30 Bloomberg reported that the Fed “agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations. The Fed also created a $15 billion swap line with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia's central bank last month and then tripled it to $30 billion.

“The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than'' the Fed's rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. “It's a step in the right direction and prevents things from getting worse.”

Worse than what; these actions reveal a previously unthinkable level of desperation.
Last week banks borrowed $368 billion per day, up from $188 billion per day the week before (source: Federal Reserve Bank of St. Louis via http://www.itulip.com/forums/showthread.php?p=52281#post52281).