Friday, October 12, 2012

Fact vs. Fiction

"I'm Dave In Denver and I approve this blog post"

JP Morgan reported its much-anticipated 3rd quarter earnings this morning.  Naturally the headline number was boastful and resplendent.  I was going to do a full-blown, in-depth analysis showing why JPM's headline numbers were misleading and somewhat fraudulent, but it's a lot of work and I don't get paid to write this blog.

Instead, I did a quick "drive-by" look-see at JPM's 8-K filing.  The 8-K is a filing that reports "material" events as required by the SEC.  The 8-K will be filed to report quarterly results prior to  the more complete 10-Q.  Often the Statement of Cash Flows is not included in the 8-K, especially with banks.

At any rate, JPM's earnings growth, despite the grand proclamations issued by the CEO - supported by "smoothed out" GAAP numbers reported for each business segment - were a product primarily of two events:  1) significantly increased fees from mortgage origination and mortgage sale activity and 2) a paper income generating accounting reversal in their "allowance for loan losses."

Let me quickly elaborate.  JPM reports $5.7 billion in net income this quarter, vs $4.96 billion in Q2 '12 and $4.3 billion in Q3 2011.  Nice growth, right?   But of that increase, $600 million of the $1.4 billion increase over Q3 last year is accounted for by its mortgage activity.  The bulk of the mortgage activity is refinancings that are either subsidized by taxpayer funded Government programs or by taxpayer supported Federal Reserve interest rate and QE policy.  JPM takes a fee on the refinancing, takes a small profit flipping the mortgage into a mortgage investment trust and gets a fee on any servicing rights it retains.  You can read about that here:  LINK

As for the balance sheet loan loss reserve reversal.  This is more of the same game JPM and all of the banks have been playing with GAAP accounting and fraudulent risk assessment for the past 2+ years.  For this quarter vs. the last quarter, JPM reduced its loan loss reserve by $967 million dollars.   This means close a $1 billion of JPM's $5.7 billion net income this quarter was an accounting maneuver.  If you strip this accounting chicanery out, JPM reports a decline in net income this quarter vs. last quarter.  If you assume the mortgage activity income is not sustainable, the true quality of JPM's earnings come into serious question.  I'd bet my last nickel that this was not mentioned on CNBC, Bloomberg or Fox Biz.  This is fictitious income predicated on JPM's CFO being accurate on his risk assessment of all of JPM's loan and trading positions.  Given what recently happened in London, I'd bet against this.  Here's JPM's latest 8-K in case you get bored this weekend:  LINK

In fact, let's look at another truth to see how confident the CFO is in the numbers he's reporting to investors and to the world.  Most of you are aware that the Fed is conducting "stress" tests of the big bank balance sheets (all of the banks but it's the big banks that count because that's where bulk of the risk is in the system).  The data sent to the Fed is essentially the same data used to compile bank financial statements.  Specifically and critically, it's the data used to price and account for assets as reported on the above-linked 8-K.  Interestingly - no, shockingly - if you read through this article about the stress test procedure, LINK, the CFO's do not have to sign off on and attest to the accuracy of this data.  I nearly fell of my chair when I read about this.  Bottom line:  the numbers being used to prepare the big bank earnings and financial statements, used by the entire financial world, may or may not be accurate.   Given the reluctance of CFO's to sign off on this data, I would bet the data is inaccurate to outright fraudulent.  Think about that one...


  1. Go O's! Death to the NY empires.

  2. The Rich Get Richer Explained
    An explanation of the growing disparity between the poor and the rich in America.

  3. Financial Crime in London’s “Parasites Paradise”, Or the Best Sanctuary Money Can Buy
    Crime Wave Sweeps City of London

    A veritable crime wave1 has invaded the City of London, where millionaire investment bankers cook the books for billionaire clients and bilk the Treasury to pay their fines and flout the Law. Courses in business ethics are obligatory at Oxford and Cambridge since it has become standard operating procedure for mega-swindlers to plead guilty, to pay a fine and avoid jail and to solemnly promise to never, ever, flout the law… until the next mega-deal.

    London has become the center of global financial capital by engaging in long term large scale active collaboration with multi-billion pound drug, arms, people smuggling and sex-slave cartels. The “Brits” specialize in laundering funds from the Mexican, Colombian, Peruvian, Russian, Polish, Czech, Nigerian narco-kings. Albanian white slavers have their ‘private bankers’ at prestigious City banks with a preference for graduates of the London School of Economics. Bi-lingual Greek kleptocrats, lifelong billion dollar tax evaders, fleeing from their pillaged homeland have their favorite real estate brokers, who never engage in any sort of naughty ‘due diligence’ which might uncover improper tax returns. The City Boys with verve and positive initiative, aided and abetted by the hyper-kinetic “Tony” Blair’s open door policy to swindlers and saints of all colors and creeds, welcomed each and every Russian gangster-oligarch-democrat, especially those who paid cash for multi-pound ‘Olde English’ landmark estates’.

    The London Sanctuary for the world’s richest plunderers and parasites offers unprecedented services, especially protection from extradition and criminal prosecution at the site of their crimes. Impartial British legal and judicial officials are experts in citing constitutional precedents that, in strict regard for the established legal order, uphold the denial of extradition, denying the legal and justice systems of every pillaged country and the cries of justice of the impoverished Irish, Russians, Greeks and Spaniards.

    Unfortunately, the British legal system is not merely protective of overseas billionaire swindlers, it is also accommodative, supremely vindictive and bending over frontward when it comes to requests for extradition from its “Special Partner” in Washington. Let it be an Islamic religious figure or an Australian whistleblower (Assange) and, in due haste, with the extradition papers in hand, “the bobbies” are ready to break embassy doors to facilitate compliance.
    London: Pimping for Parasites

  4. Laurence D. Fink's Redefinition of Education: Convincing Young People to Ignore Inconvenient Truths About Financial Markets
    Mr. Fink’s editorial begins with the assertion that investors are hesitant to invest because “markets are missing the two components essential for confidence: trust and certainty.” Mr. Fink goes on to name the following cures to this predicament:

    Educating young people in such a way so as to convince them to invest in equities so that they can realize what he asserts will be annualized 8% returns,
    Action from the financial sector and government that convinces individuals that the financial sector’s interests align with those of investors, and that the financial sector is part of the solution to what ails our markets, and
    Addressing the complexity and ambiguity in our tax code, and improving transparency in the financial sector.
    Mr. Fink’s idea of “education” entails convincing young people to invest in “the markets” which, he asserts, will deliver 8% annualized returns and a secure retirement. Mr. Fink states that five years of “doom and gloom headlines” have left potential investors believing that the “markets are stacked against them”. According to Fink, if we “educate” these young people to again have confidence in markets, and to believe that financial sector interests align with those of investors, it will mean a better future for them and for our economy.

  5. Riots & Money Fleeing The Euro Into Gold & Silver

    October 13, 2012 (King World News) - This is further evidence of how disconnected the political elite has become from the people. I wonder what the citizens of troubled EU countries feel about a peace prize being awarded to a technocratic elitist project that has practically tied the hands and feet of any sovereign fiscal response to the ongoing crises by governments in countries such as those of Greece and Spain. I can only hope they are laughing. The troika's demand for cuts and slow and painful structural reforms, in exchange for further indebtedness, does not create peace in Europe -- quite the opposite. This is evident in the streets, where riots and protests are growing in intensity.
    The chairman is also currently the general secretary of the Council of Europe. Although not a part of the EU's institutions, the council invented what is now the EU's flag, which we all have learned to associate with the union, the blue flag with the 12 stars. I want King World News readers to know that this decision is not supported by the majority of Norwegian citizens, who have opted out twice from joining the EU, but mostly by the political elite, which is often spared from the consequences of their economic decisions. In a poll released today 75 percent of the Norwegian people surveyed disagreed with the decision. Again we see this completely out-of-touch-with-reality mentality amongst politicians. This mentality is characteristic of the sovereign fiscal crises.

  6. Questions From a Bailout Eyewitness
    But perhaps the most telling anecdote is from early October 2008, when Henry M. Paulson Jr., the Treasury secretary, summoned Ms. Bair to his office. No reason was given for the meeting. When she arrived, Ben S. Bernanke, the Federal Reserve chairman, was already there. Timothy F. Geithner, then the president of the New York Fed, was on the phone.

    Handed a piece of paper, Ms. Bair saw that she had been ambushed. It was a script, prepared for her by the Treasury and the Fed, stating that the F.D.I.C. was moving to guarantee all the liabilities in the financial system. Astonishingly, the guarantee would cover all bank depositors and even protect unsecured claims against institutions. In short, the F.D.I.C. was being asked to back “everybody against everything in the $13 trillion banking system,” Ms. Bair writes.

    Dumbfounded, she told the men she had to discuss the plan with the F.D.I.C. board. Over a few days, they came up with a better, less costly plan.

    If she had gone along, Ms. Bair said in an interview last week, “everyone who held bank debt would have immediately gotten a windfall profit,” as their bonds and other bank securities rose in value on the F.D.I.C. backing. “Of course, I wasn’t going to do that,” she adds, “and we ended up with a program that only guaranteed the renewal of expiring debt, which is where the problem was. And we charged a fee.”

    The other disturbing theme in Ms. Bair’s book involves favored treatment given to Citibank and its parent by top regulators. Even as the bank racked up billions in losses on its mortgage and derivatives businesses in 2007 and 2008, Ms. Bair writes, no meaningful supervisory measures were taken against Citi by either the Office of the Comptroller of the Currency or the New York Fed, its main regulators.

    “A smaller bank with those types of problems would have been subject to a supervisory order to take immediate corrective action, and it would have been put on the troubled bank list,” Ms. Bair writes. “Instead the O.C.C. and the New York Fed stood by as that sick bank continued to pay major dividends and pretended that it was healthy.”

  7. A Cyber-False Flag?

    We will see what happens when the "tail wags the dog" in a fragile market structure dominated by HFT algo drones making mirage markets when all these ETF inflows try to unwind at once (it’s fair to say that people have moved out of mutual funds and into ETFs for an easy speedy exit), especially those junk bond ETFs. Maybe we’ll see a flash crash and they'll call it a "cyber attack", or maybe they’ll engineer a false flag cyber attack and use it as the reason for the crash and a reason to enact bank holidays. Who knows, maybe even postpone the election. Why not? They'll most definitely blame it on Iran and use it as an excuse to go to war with them finally, which we all know they’re angling for. They’ll also use it as an excuse to clamp down on informational internet freedom once and for all…for our “protection” of course…with an internet version of the Patriot Act (see CISPA, SOPA, PIPA). What better way to build public consensus for war than by blaming the destruction of everyone’s wealth on a “rogue country”, while simultaneously distracting their attention from the central bank's disaster and epic policy failure? Multiple birds, one stone. Blame Iran, shut down the internet, the Fed's lab experiment maintains credibility ("it wasn't us!"), and now we have an excuse to bomb Iran.

  8. Romney’s Medicaid shell game

    Mitt Romney is lambasting federal aid in his campaign for the presidency, including derisive comments against those who receive government assistance. But he pulled all the stops to pursue federal aid as governor of Massachusetts, even hiring “revenue maximization” contractors to scour federal programs for every possible penny — and using financial schemes to maximize and then divert the aid from his needy constituents.

    His strategies are akin to tax schemes using offshore bank accounts — but instead of avoiding federal taxes, seeking to pilfer the federal treasury. The Wall Street Journal labeled such financing mechanisms “Medicaid Money Laundering” and a “swindle.”
    Medicaid is a matching grant program. If a state with a 50 percent match rate like Massachusetts spends $50 on qualifying services, the federal government will provide an additional $50 so there is $100 total for Medicaid services. The federal match payment is much higher in some states, such as Mississippi where its almost 75 percent.
    Unfortunately, some states concocted budget shell games, often with private consultants, providing an illusion of state spending to claim federal matching funds, when no state spending has occurred. As governor of New Hampshire, Judd Gregg developed such a practice labeled “Mediscam.” Gregg taxed hospitals serving the poor, routed the money into an “uncompensated care fund” which he sent right back to the hospitals, and used the round-trip of money to claim federal matching funds. Then, the swindle gets worse, because he routed the federal Medicaid funds into his general coffers rather than for Medicaid services.
    Romney’s schemes were similar to Gregg’s.
    In such strategies, health care facilities serving the poor are used to claim federal funds to help the poor. But the health care facilities and the poor may get nothing, as the state diverts the federal aid to general coffers — and revenue maximization contractors reap millions in contingency fees. Romney used such private companies to help carryout his strategies.

  9. Hi,
    Will you please post a link to your Blog at The Precious Metals Investing Community? Our members will appreciate it!
    Members include: Gold, Silver and Platinum Investors, Precious Metals Investing Firms, Experts, etc.
    It's easy to do, just cut and paste the link and it automatically links back to your website. You can also share Articles, Photos, Videos and Classifieds if you like.
    Email me if you need any help or would like me to do it for you.
    Please feel free to share as often and as much as you like.
    The Precious Metals Investing Community:
    I hope you consider sharing with us.
    Thank you,
    James Kaufman, Editor

  10. The Self-Destruction of the 1 Percent

    IN the early 14th century, Venice was one of the richest cities in Europe. At the heart of its economy was the colleganza, a basic form of joint-stock company created to finance a single trade expedition. The brilliance of the colleganza was that it opened the economy to new entrants, allowing risk-taking entrepreneurs to share in the financial upside with the established businessmen who financed their merchant voyages.
    Venice’s elites were the chief beneficiaries. Like all open economies, theirs was turbulent. Today, we think of social mobility as a good thing. But if you are on top, mobility also means competition. In 1315, when the Venetian city-state was at the height of its economic powers, the upper class acted to lock in its privileges, putting a formal stop to social mobility with the publication of the Libro d’Oro, or Book of Gold, an official register of the nobility. If you weren’t on it, you couldn’t join the ruling oligarchy.

    The story of Venice’s rise and fall is told by the scholars Daron Acemoglu and James A. Robinson, in their book “Why Nations Fail: The Origins of Power, Prosperity, and Poverty,” as an illustration of their thesis that what separates successful states from failed ones is whether their governing institutions are inclusive or extractive. Extractive states are controlled by ruling elites whose objective is to extract as much wealth as they can from the rest of society. Inclusive states give everyone access to economic opportunity; often, greater inclusiveness creates more prosperity, which creates an incentive for ever greater inclusiveness.

    That was the future predicted by Karl Marx, who wrote that capitalism contained the seeds of its own destruction. And it is the danger America faces today, as the 1 percent pulls away from everyone else and pursues an economic, political and social agenda that will increase that gap even further — ultimately destroying the open system that made America rich and allowed its 1 percent to thrive in the first place.
    You can see America’s creeping Serrata in the growing social and, especially, educational chasm between those at the top and everyone else. At the bottom and in the middle, American society is fraying, and the children of these struggling families are lagging the rest of the world at school.

  11. michael schumacherMonday, 15 October, 2012

    "may or may not be accurate"...

    Good one...they have not been accurate for over 20 years. Just like the BLS #'s that the right are just now realizing...guess that didn't matter until now too.


  12. The reason they are not going to lend and lead a recovery is because that is not what banking is about. Helping recoveries is what governments might chose to try and do but it is not what banking is about. Banking is about making maximum profit for those who own the banks (shareholders), those to whom the banks owe money (The Bond holders) and increasingly the senior staff whose bonuses depend not on how much the bank has helped anybody, but on how much money the bank has made. And the fact of our present predicament is that the banks can make much more money, more more rapidly by playing, even deepening, this recession than they can by trying to help us out of it.

    This is an unpalatable truth, so it is important that there are lies to distract from us from realizing it. Thus we have been subjected to a multi trillion dollar lie that has been repeated on every news programme and in every financial column of every newspaper for the last four years.

    Goebbels and A.H. said that if you repeat a big enough lie often enough people will come to believe it. What this maxim leaves out is ‘how’ people come to believe something they once knew, or at least suspected, was a lie. Why does a big lie work better than a small one? I think the mechanism is not forgetting or the over-writing of truth with lies, but relies on escalating mental dissonance. A small lie leaves the rest of reality untouched. The unmasking of a small lie does not require any great re-adjustment of the rest of your beliefs or your grasp of reality.

    A big lie, a very big lie, however, ties in to itself so much of the rest of your judgment of what is real and reliable that to question it becomes a painful mental act. It requires you pull the rug out from beneath yourself. It requires you undermine the very ground upon which you stand. That ground which you used to feel, still need to feel, is solid and firm.

  13. What type of capitalism do we have today and to what extent does it need to be reformed?

    The version of capitalism that is prevalent in the world today is globalized, oligopolistic, crony and blind to its own crisis of legitimacy.

    It was given impetus by the likes of Milton Friedman and the ‘Chicago School’ in the 1960s and 1970s. They cherry-picked the ideas of the enlightenment thinker Adam Smith, and with the help of political followers such as Ronald Reagan, Margaret Thatcher and their successors spread their market fundamentalism throughout much of the rest of the world. Sadly however such people focused exclusively on Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations (1776), ignoring his earlier work, The Theory of Moral Sentiments (1759)

    As a consequence, a ‘winner takes all’ or ‘feral’ version of capitalism became the norm. In this version of capitalism which the historian Eric Hobsbawm has described as “a pathological degeneration of the Adam Smith line” companies focused so relentlessly on short-term profit maximisation that responsibility and civilised values — including caring for customers, caring for their staff and caring the environment — were jettisoned.

    Once this sort of capitalism takes root, a race to the bottom generally ensues. Indeed, the pre-crisis frauds in the banking sector, including the manipulation of Libor and rackets such as payment protection insurance and interest-rate swaps sold to SMEs, suggest that, under this version of the capitalism, banks thought it perfectly acceptable to swindle billions of dollars from their own customers and counterparies.

    Central banks then compounded the problem. The US Federal Reserve, European Central Bank and Bank of England further distorted markets, patched up bubbles that should have been allowed to deflate and increased inequalities by printing money, keeping interest rates artificially low and pumping liquidity into the system.

    The scope for ‘moral hazard’ and corruption when the government rescues failed banks and ends up owning whole swathes of the banking sector is immense (for example, the ownership of banks gives the government a vested interest in ensuring that their past and indeed current wrongdoing is swept under the carpet, and in generally whitewashing the sector through any number of wilfully blind “reports” and “inquiries”).

    In a free market, corrupt and failed institutions would have been allowed to go bust. The people who drove them into the ground would have lost their shirts and perhaps gone to jail. But apart from a couple of scapegoats, they have now been largely exonerated, with many carrying on as directors and members of the “great and the good”.

  14. ETF “Costs and Liabilities” Sees Investors Migrating to Physical Allocated Gold

    The head of industrial and precious metals trading at Barclays, Cengiz Belentepe, has told Bloomberg that investors are selling their investments in gold ETFs and opting for the safety of allocated physical gold.

    According to Barclays, gold holdings in ETF products are growing at a slower pace than in 2004-2009 because some investors may be moving to physical bullion after initial purchases of an ETF.

    Gold holdings in ETPs have increased 9.6% this year to a record 2,582.98 metric tons, data compiled by Bloomberg show. They rose 7.9% last year and 19% in 2010. Growth in gold ETP holdings has exceeded 35% from 2004 to 2009, the data show.

    Barlcay’s Belentepe said “the question is whether the pace of buying has slowed, or whether the people have become a bit more sophisticated in recognizing the costs and liabilities.”

    ‘‘We’ve seen instances of people coming in, whose first step is to buy an ETF, second step is to get educated on how the market works, third step — I’m going to shift this in direct gold purchase and storage, fourth step — let me allocate this metal into these locations. It’s the early step they are all migrating through, expressing the same view but in different ways.”

    One would have to be cautious here as Barclays have been aggressively marketing their new precious metal storage solution. Barclays may be attempting to capture some of the large capital flows that have flowed into the ETFs in recent months and continue to do so.