Hedge Funds, Junk Bonds, Ponzi Schemes

As I have said here the current trend in capitalism is not production or even productivity, that is the job of the working class, the capitalist class is busy investing capital to make more capital. And whether or not they succeed they get their rewards.

Or as Marx put it M-C-M, which spells Bubble, as in South Sea Bubble.

Capitalism now is one large Ponzi scheme fraud is to capitalism as apple pie is to America. Remember Junk Bonds..... Contrary to the predictions of the politicians and their consultants, though, junk bonds soon revived and became a staple of American finance.

And the lastest fraud being perpetrated is the unregulated Hedge fund and Private equity market financing.


"The upper class is now serviced by a vast and growing industry, loosely called Private Equity.

The job of the private-equity investor is -- again, speaking loosely -- to exploit the idiocy of the ordinary investor, and the corporate executives and mutual-fund managers who purport to serve him."

~ Michael Lewis, Bloomberg News, 12 December 2006

Tipping Point for the Ministry of Truth?

"Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another." - Warren Buffet

Here we learn that hedge funds account for 32 percent of credit-default swap sellers and 28 percent of buyers, up from 15 percent and 16 percent in 2004, according to a British Bankers' Association report last month. They are second to banks in each category. Pension funds and mutual funds make up 7 percent of the sellers and 4 percent of the buyers.

The Cozy Hedge Fund-Pig Man Relationship

Readers know that I have developed a theory that suggests hedge funds (Riskloves) and possibly foreign central banks (FCBs) have been the key facilitators of, and will ultimately be the bag holders for, the securities and credit bubble. The key to understanding this relationship as it pertains to Riskloves is to recognize that most of their incentives are front loaded and geared towards extreme risk taking. When a Ponzi unit security is created or securitized that’s the moment that fees are generated for the financial sphere (Pig Men). The Pig Men also collect more soft dollars “doing business” with the Riskloves. The Riskloves (and increasingly the FCBs) then take the securities. Then once the security is created, it enters into the never never land of Ponzi toxic waste, where it is blessed by another cozy player, the credit agencies. Once blessed, then these securities can be pawned off on pension and public funds, in what can only be described as a circle jerk.

A Minsky-like Restatement of Keynes Market Irrationality Warning

"The market is a complex, adaptive social system, is therefore not prone toward equilibrium, but instead subject to phase shifts, cycles, and transfomation. Groups of people who play in the market are prone to cycles of irrational exuberance and irrational pessimsim."

While You Were Watching Consumer Debt

A rising stock market encouraged investors to go into debt to trade stocks, leading to an increase in the level of so-called margin debt in 2006.

Such debt is accumulated by investors who trade "on margin" with funds borrowed from their brokers. As tracked by the New York Stock Exchange, margin debt rose to $270.52 billion in November from $221.66 billion at the end of 2005, the first time in more than six years that margin debt has topped $270 billion. December numbers will be available later this month.

The Big Trend 2007

Money will pour into the same places it did in 2006--hedge funds, private equity, emerging markets. As they are in a Ponzi scheme, returns will be stellar as long as investors believe. When they no longer do, returns will collapse. Things could get ugly. Even if they don't, 2007 will be the fourth year in a row that hedge funds will post returns that are about as good (or bad) as the overall market's. Investors will begin to realize they are getting very little for the huge fees they pay.

Financial Tornados 2006

Hedge funds, with more than $1 trillion of capital, have invested altogether unwisely and covered their losses through profits on the "carry trade," which have distorted the government debt market beyond recognition. Expect huge losses of capital in this sector should long term rates go above 61/2%

Please Do Not Buy Hedge Funds

From a few hundred funds managing some $40 billion in 1990, there are now perhaps 10,000 funds managing more than $1 trillion. The funds pursue many different strategies: Equity market neutral. Long/short sector equity. Convertible arbitrage. Emerging markets. Merger arbitrage. Distressed securities. Global macro. Because hedge funds usually come with high risk and steep minimum investment sizes, moreover (circa $1 million per fund), vehicles designed to make it easier and safer to invest in them—aka, funds of funds—have also exploded in popularity. So now, even average investors are advised to take the hedge-fund plunge

Lots of Dollars, Little Sense

Call me dense, but I'm having an awfully hard time understanding the investment world these days.

For reasons that aren't exactly clear, the supposedly smart people with all the money -- pension funds, university endowments and wealthy investors -- have decided it no longer makes sense for them to look for undervalued public companies, or promising new companies looking to go public. Instead, they prefer to put their money into private equity funds, which charge outrageous fees to look for undervalued public companies, or promising new companies looking to go public, and buy them up at a price 20 percent higher than the current stock-market price.

Of course, buying whole companies can get expensive, especially when you're talking about an energy giant such as Morgan Kinder or HCA, the country's largest hospital chain, just to give two recent examples. So to finance the deals, private equity managers have their newly acquired company issue lots of junk bonds, at high interest rates. These bonds are then bought by hedge funds, which also charge outrageous fees and also raise most of their money from pension funds, university endowments and wealthy individuals.

In a few instances, private equity funds have also begun to raise capital by issuing common stock, which also tends to be snatched up by the very same hedge funds, pension funds, university endowments and wealthy individuals.

And to top things off, the new owners invariably offer fat new pay packages to the managers of the company they've just acquired -- in most cases, the same managers who were running the company when it was public. The idea is to give them even greater incentive to maximize the value of the company, so it can be taken public again.

Now, if this sounds to you like a giant, circular Ponzi scheme, it's only because it is. As far as I can figure out, the winners will be the fund managers and their highly paid enablers, the investment bankers. And let's not forget the corporate managers, who have the chance to become fabulously wealthy if they are successful in stealing the company from public shareholders to whom they presumably owed a fiduciary duty, and later selling it back to public shareholders at a higher price.

Jocks and Geeks Theory of Financial System Dysfunction

So it goes today with so-called hedge funds, what I call USIPs (Unregulated Speculative Investment Pools, because true hedge funds of old were hedged, long one thing and short a correlated other, whereas many so-called hedge funds today are merely long and are hedged only insofar as they have taken out some insurance in the form of some kind of derivative that is supposed to protect their bets from catastrophic losses).

SEC officials nod their heads in agreement with representatives of the hedge fund industry, acquiessing to the idea that regulation isn't required because it will be "bad for investors" or "bad for the industry" or "bad for the world" and "there are enough laws on the books already" and "it's all so complicated... we don't know how." And, blah, blah, blah. Even as they cheer the SEC's wisdom to abdicate their responsibility as regulators, I can see a hedge fund manager eating dinner in the back yard of his Norwalk, Connecticut estate this weekend, and after a couple of glasses of wine, leaning forward to get closer to one of his guests who is an investor in his fund, and whispering, "I can't believe we're getting away with this."

No conspiracy but certainly a system, and a process. At this point, the hedge fund bubble system is going through a several stage process of collapse. So is the housing bubble, although the two are not directly related. One is the rich man's bubble, the other the every-man's bubble.

Brings us back to the question of motive. Why allow these systems to develop? Why did the SEC allow all those dot coms to go public? Why is 27 year old Zachary R. George of Pirate Capital allowed to bully the 55 year old CEO of Cornell Companies? Is that really good for the country? Why is it fair to use public funds to bail out LTCM when the payees had no opportunity to reap any of the benefits?

As I See It: Manipulating Money

Money manipulation was the primary reason that IBM was able to grow its earnings five times faster than revenues. To grow earnings per share, you can do one of two things: either generate more revenue or buy back your own shares to take them out of circulation. From 1995 through 2001, IBM spent a bank-breaking $44 billion buying back its own stock. "To put that in perspective," our own Timothy Prickett Morgan says, "that's almost as much money as IBM has generated selling AS/400s since 1988. They could have given away the systems and still had money left over."

IBM's other favorite profit enhancer is counting pension fund investment income. While well-managed pension funds are laudable and the income derived from them looks good on the books, they have nothing to do with shareholders. Pensioners, not investors, profit from the fund, so critics argue the income should not be used to inflate a company's stock value.

Creative accounting is not new, but the difficult lessons it teaches are quickly forgotten. A decade ago, Andersen gave its seal of approval to Charles Keating's infamous Lincoln Savings and Loan, which bilked the elderly of their life savings. Only the scale has changed and now threatens to disrupt the nation's entire economy.

Simmering--if not outright cooking--the books is so pervasive that at least one study concluded the Dow Jones Industrial Average was overvalued by 2,500 to 5,000 points. Financial reporter Dave Lindroff writes: "The London think tank reports that after comparing the earnings reports of companies listed in the New York Stock Exchange with statistics from the U.S. Commerce Department's Bureau of Economic Analysis (in which some of the more commonly used accounting 'adjustments' are pared away), it appears that U.S. corporate profits in 2001 were overstated by 27 percent, or about $130 billion."

After non-collapse

Those lower interest rates worked exactly as they were supposed to. For corporations and households with debts at adjustable rates -- those periodically changed in line with prevailing market rates of interest -- found their required interest payments shrinking, often quite dramatically. Creditworthy firms and households were also able to refinance their debts -- pay off the old ones with the proceeds of new ones, except at lower rates of interest -- and ease their burden. This freed up enormous amounts of money. At the end of 1989, according to estimates by Federal Reserve staff economists, households devoted over 18% of their after-tax income to debt service, that is, interest and principal payments; at the end of 1993, that figure had fallen below 16%. In 1990, firms were devoting nearly 40% of their profits before interest payments and taxes to interest; that figure is now below 30%. Also, lower interest rates allowed the banking system to rebuild itself. Rates paid for loans didn't fall anywhere near as much as rates paid on deposits, and long-term interest rates didn't fall anywhere near as much as short-term ones. Both developments allowed banks to rake in billions effortlessly. The first part of the mechanism is simple enough: if one year you pay your depositors 8% and your borrowers have to pay 12%, a spread of four points, and the next year you pay your depositors 3% and your borrowers pay 10%, a spread of seven points, you're a much happier banker. The second part is similar: if you take in money at 3% and invest these deposits in government bonds paying 8%, you can make 5% on your money without exercising a single brain cell. And finally, lower rates launched a tremendous rally in the stock market, which allowed corporations to sell new stock to pay off old loans. A study by the Federal Reserve Bank of New York showed that most of the money raised in the early 1990s on the stock market was devoted to the retirement of debt rather than new investments -- contrary to mainstream economic theory, by the way, which views the stock market mainly as synonymous with real investment.

While the S&Ls and junksters have disappeared, new players moved into the vacuum -- like the vast pools of speculative capital called hedge funds, who generally borrow $10 for every real dollar they have to their name, and who speculate in every market around the world. Also, lower rates have led to despair among individual investors, who have plunged into various highly speculative markets unaware of the risks involved. Should rates rise much more, and the Wall Street rout develop into something on the order of the 1973-74 bear market, when stocks lost nearly half their value, these individuals will see a lifetime of savings dwindle if not vanish. Those who are not wiped out will likely pull in their horns and stop spending money, and the marvelous carousel of consumption will creak and sputter.

Classic Financial and Corporate Scandals - part 2

White Collar Crime Report Index-Summary

Wall Street Fraud

See:

CEO's

Criminal Capitalism


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hedge funds, ponzi, risk, capitalism, bubble, Junk bondsF

RCMP Needs A Union

Here is why the RCMP needs to be unionized.
Lack of Health and Safety, lack of a grievance procedure, lack of support from the Federal Labour Relations board.

I wonder what the Mayerthorpe families will say about this since they were so gung ho to call for tougher laws. What about workers rights?

The RCMP has wrapped up a workplace safety review of the March 2005 incident that saw four young Mounties shot dead outside of Mayerthorpe, Alta.

Due to the deaths, the RCMP was obligated to perform a review of the incident and forward any resulting recommendations about officer safety to Human Resources and Social Development Canada.

Those recommendations have been sent, but haven't been released to the public. They may be released in the future, said Cpl. Wayne Oakes.

"I would think in some manner, either from HRSDC or the RCMP, there will likely be a discussion of those recommendations,"Oakes said.

The federal government's human resources department decided last March that no Canada Labour Code charges will be brought against the RCMP in connection to the tragedy.

And another reason to put it under civilian oversight. As if another reason was needed.

See

RCMP




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CN in the News, Again

Back in the news is our privatized American CN railway....again.

Another accident and workers left hanging from the train above a precipice in B.C. After they promised, promised, to improve their safety record. Yep this looks a lot safer.....

A private report paid for by CN, objective that, said there would be no long term ecological impacts on the Lake Wabamum that suffered from toxic poisioning after a CN spill last year. It is being contested by the first nations peoples living off the lake.

The Paul First Nation is taking aim at a new report that suggests there will be no lasting damage to Wabamun Lake from a 2005 CN oil spill.

The report, prepared for the railway by Golder Associates Ltd., fails to properly consider the impact of the spill on traditional uses of the lake by band members, said Barry Hochstein, an environmental consultant hired by the Paul reserve.

After all the only thing CN cares about is the bottomline.

CN and CPR exceed Western grain revenue caps for crop year 2005-2006


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Harpers Senate Reform

PM Stephen Harper has elected to appoint another Senator as a part of his Cabinet. This time Senate House Leader Marjorie LeBreton as Secretary of State in charge of Seniors. A portfolio that has fiscal responsibilities that are crucial for being addressed by parliament, but won't be. Another example of Harpers Senate Reform.

Canada's new government is acting to address the needs of seniors through the introduction of a series of important measures that include:

- A proposed change in tax policy for seniors, beginning in 2007, permitting income splitting for pensioners;

- Bringing forward legislation to make it easier for seniors to apply for and receive the Guaranteed Income Supplement;

- Increasing the Pension Income Credit from $1,000 to $2,000 per year - putting almost $900 million back in the hands of seniors over the next two years; and

- Introducing a Tax Fairness Plan that will increase the age credit by $1,000 (from $4,066 to $5,066) effective this tax year.

Overlooked in the fawning over the appointment Marjorie Lebreton is the fact she is up to her neck in the MADD scandal. So much for accountability and transparency.

Under Andy Murie's leadership MADD Canada has lost credibility and needs reorganization at the top, to regain its focus and the public trust. It is also important to look beyond Mr. Murie to the board of directors who approved the shift in focus away from the grassroots and victim services.

They have overseen the misrepresentation of the allocation of funds to both the public and Revenue Canada, despite repeated attempts by local chapters to address these issues and more. In particular, Senator Marjorie LeBreton, as Chairman of the Board, must be held accountable.

See

Marjorie LeBreton

Minister of Class War

Harpers Most Dangerous Cabinet Minister

Harpers New Green Guy


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Minister of Class War

The second most dangerous appointment Harper made for workers and unions in Canada was Vic Toews as Treasurery Board president. In charge of the public service. Uh oh.

Mr. Toews also takes over the job at a time when federal unions are gearing up for another round of collective bargaining in 2007 when contracts for more than 130,000 workers expire. Mr. Harper said he picked Mr. Toews, whom he called "an economic conservative" because he wanted a skilled politician who has the skills to grasp the details and 'big picture' of such a complex portfolio

Outgoing Treasury Board President John Baird spent most of his time sucking up to the public sector unions in his riding, speaking out on their behalf when he was in opposition. So he was tainted.

His job done, in getting the accountability act passed, he is moved out as the Government begins negotiations with PSAC.

And so it looks like Harper is preparing for class war in Ottawa.

Something the MSM has overlooked just as it has with Monte Solbergs appointment.

In the reams of pre-cabinet shuffle speculation the nation's newspapers published over the last 10 days, there was not so much as a mention of Vic Toews' name... Although Toews' departure from justice is every bit as significant as Ambrose leaving environment, there had been absolutely no warning of the move, which once again illustrates Harper's masterful handling of the media.

See:

Vic Toews



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Albanian Atlantis

In response to my article Lost Tsunami Lost Atlantis where I said; Could this have been the origin of the Atlantis mythos/meme?

I got this response at Digg.

It sure could be. The eruption of the Etna volcano 8000 years ago caused the tsunami and destroyed many cities in the Mediterranean. Also, recently there have been some findings in Albania, that along the seacoast might have been a city in the form of a circle, which could have been destroyed from the tsunami at that time. Photographs from the satellite show that along the seacoast of Albania, near the city of Durres, there is shape of a perfect circle. And the most interesting fact is that the natives call the place "Taulantis", which derives from the Illiyrian tribe that lived in the region, Taulants.

Could this perhaps mean that the lost city of Atlantis was located in the nowadays Albanian seacoast, and its real name was Taulantis?

Would this maybe reveal the truth about the Atlantis (Taulantis)?

Here is a link that shows some photographs from the satellite and the perfect circle shape: http://www.atlantisinalbania.blogspot.com/

So now we can add Albania to our growing list of possible Atalantian sites.

See:

Atlantis

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Harpers Most Dangerous Cabinet Minister

The most important change in the Harper Cabinet shuffle, which was overlooked by the MSM , is the decision to put Monte Solberg in charge of HRSDC. This is a logical step and a dangerous one for workers and the trade union movement in Canada.

“It doesn’t matter whether you’re in Camrose or Calgary, Edson or Edmonton, ‘Help Wanted’ signs are everywhere,” Solberg said “And you know, when it starts to affect our ability to go to Tim Horton’s and get a double-double, it ceases to be a laughing matter. It’s a serious issue.”

Solberg was in charge of liberalising Canada's temproray worker program under his Immmigration portfolio, now he can see it to its logical conclusion under HRDC. That means more flexibility for the employers in the oil patch to hire temporary workers for Alberta. Something they and the Alberta Government have been lobbying long and hard for.

British Colombia, Alberta and Saskatchewan will benefit from a government program designed to ease regulations concerning foreign workers coming into Canada.

"Canada's new government has been listening to employers in Alberta and British Columbia, and they are truly having a hard time finding enough workers. The improvements we are announcing today are making it easier, faster, and less costly for employers to hire temporary foreign workers," said the Minister of Citizenship and Immigration Monte Solberg.

Temporary workers are not allowed the same rights as other workers, including immigrant workers. They are subject to exploitation by the state and employers while being used to undermine wages and working conditions, through no fault of their own.

Already scandals around exploitation of Polish Workers in the oil patch have come to light.

Polish welders sue employers, college for $5.5 million

A group of 30 Polish welders who say they were brought to work in Canada under false pretences are suing an energy services company, Lakeland College and three individuals for more than $5.5 million.

The lawsuit, filed in Edmonton's Court of Queen's Bench on Monday, makes two main claims:

- That the men believed they were being hired by Kihew Energy Services Ltd. to work in Alberta as full-time welders, not full-time students as their visas said.

- And that once here, they received inadequate pay for their work, earning $10 to $12 an hour from Kihew while four companies contracted with Kihew paid up to $28 an hour for their services.

The court action comes one month after Alberta's Auditor General raised questions around Lakeland College's involvement in the program where the college collected more than $200,000 in tuition from Kihew to educate students who attended virtually no classes.

Auditor General Fred Dunn said in his report on Lakeland's contracting practices that the former general manager and three people who reported to him also failed to follow the college's policy about who can issue letters to Citizenship and Immigration Canada verifying international student registration. As many as 158 letters were sent to the federal agency.

And in B.C. guest workers have also been exploited by contractors. Guest Worker Contract Dubious Alleges Union Lawyer

And while Solberg cracked down on 'illegal' workers in Canada, in particular Portugese workers in Toronto's Construction industry, he did not declare a general amnesty as was done in the eighties, quite successfully, rather he deported them. In preparation to replace them with a formal temporary worker program.

March 21, 2006 – Illegal workers in Toronto's underground economy are being deported as the new Conservative government abandons a Liberal amnesty plan, immigration lawyers and consultants say. Some families who have been in Canada five years or more are given less than two weeks to pack up and leave. Toronto's Portuguese community – with up to 15,000 undocumented members, working mainly in the booming construction industry – is especially concerned.

And our laws in Canada still allow for indentured servitude, a polite term for slavery, of some foreign temporary workers especially farm workers and nannies.


Canada is one of the preferred countries of destination for Filipinos aiming to work and live abroad. But life for migrant workers and overseas Filipinos is not all that rosy in the “Land of the Free,” a motto coined and patented by Canada.


Monte's riding was the site of last years long ugly labour dispute between Tysons and its largely immigrant unionized workforce. A strike Monte didn't bother to comment on.

Placing Monte in charge of HRDC is a reward to the Alberta government and its Big Oil partners in an attempt to undermine the building trade unions in Alberta. It can only mean more confrontations between the Feds, Big Oil, the Alberta Government and the labour movement.


See:

Alberta's Free Market In Labour

The Labour Shortage Myth

AFL Agrees With Me

Monte Solberg




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Harpers New Green Guy

The headlines read John Baird set to be Tories' 'green guy' maybe that should be 'teal' guy.

The real news out of Ottawa isn't about his appointment as Environment Minister but that he has another job, boy toy to Mrs. PM.

Has John Baird finally been outed by the Globe and Mail?

John Baird, 'first consort of the first lady'

Does that make her a 'fag hag? '?

Or perhaps a 'progressive' conservative.

We will never know since the Harper Conservatives have a don't ask don't tell policy.

I thought social conservatives opposed polyamory. So Mrs. PM has a husband and a mistress. Good thing that's ok in Ontario now.

Well at least she can dress up her consort, unlike her stiff necked husband. And he does look dashing in a tux.

"I love John," Mrs. Harper said yesterday. "He is a great guy, he is fun to be around, he looks good in a tux and he is a great date. "

Kinky happenings at 24 Sussex to be continued.

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