Moody’s pays $864 million to U.S., states over pre-crisis ratings

Moody’s Corp has agreed to pay nearly $864 million to settle with U.S. federal and state authorities over its ratings of risky mortgage securities in the run-up to the 2008 financial crisis, the U.S. Department of Justice said on Friday. The credit rating agency reached the deal with the Justice Department, 21 states and the District of Columbia, resolving allegations that the firm contributed to the worst financial crisis since the Great Depression, the department said in a statement.

S&P Global’s Standard & Poor’s entered into a similar accord in 2015 paying out $1.375 billion. Standard and Poor’s is the world’s largest ratings firm, followed by Moody’s. Moody’s said it would pay a $437.5 million penalty to the Justice Department, and the remaining $426.3 million would be split among the states and Washington, D.C.

Moody’s settlement on Friday resolved the Justice Department probe without a federal lawsuit. In the Standard & Poor’s case, resolution was reached after the U.S. filed a $5 billion fraud suit.

Connecticut’s lawsuit claimed that Moody’s ratings were influenced by its desire for fees, despite claims of independence and objectivity. It also accused Moody’s of knowingly inflating ratings on toxic mortgage securities.

— source

Government Settlement With Goldman Sachs Is No Real Punishment

the U.S. Department of Justice, including the attorneys general of New York and Illinois, as well as the Federal Home Loan Banks of Chicago and Seattle and the National Credit Union Administration, reached agreement with the investment bank Goldman Sachs. The firm will pay approximately $5 billion to resolve state and federal investigations into its fraudulent mortgage-backed housing securities, which helped cause the 2008 financial crisis.

This is a $5 billion settlement to resolve wrongdoing that cost the national economy $20 trillion. Goldman Sachs has admitted it was a key link in the chain of wrongdoing that led to the 2008 crash and the Great Recession. But eight years after the crash, there are still no criminal prosecutions of either the Big Banks themselves or their executives.

The Department of Justice says this settlement will hold Goldman Sachs accountable. Unfortunately, that’s not so. Without criminal prosecution, there’s not even the illusion of accountability. This settlement, like others involving Goldman Sachs and the rest of the Wall Street perpetrators of the wrongdoing that led to the Great Recession, does virtually nothing to advance the objectives of deterrence, punishment or compensation for victims. The real message is, whether due to size, complexity or privileged access to politicians, Goldman Sachs and Wall Street remain above the law.

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Global economic downturn linked with at least 260,000 excess cancer deaths

The economic crisis of 2008-10, and the rise in unemployment that accompanied it, was associated with more than 260,000 excess cancer-related deaths–including many considered treatable–within the Organization for Economic Development (OECD), according to a study from Harvard T.H. Chan School of Public Health, Imperial College London, and Oxford University. The researchers found that excess cancer burden was mitigated in countries that had universal health coverage (UHC) and in those that increased public spending on health care during the study period.

The study will be published May 25, 2016 in The Lancet.

— source

Business Bankruptcies Soar 38%

Something funny happened on the way to the bank: In August, commercial and industrial loans outstanding at all banks in the US fell for the first time month-to-month since October 2010, which had marked the end of the collapse of credit during the Financial Crisis.

In October 2008, the absolute peak of the prior credit bubble, there were $1.59 trillion commercial and industrial loans outstanding. As the Great Recession chewed into the economy, C&I loans plunged. Many of them were cleansed from bank balance sheets via charge-offs. But then the Fed decided what the US needed was more debt to fix the problem of too much debt, thus kicking off what would become the greatest credit bubble in US history. By July 2016, C&I loans had surged to $2.064 trillion, 30% above their prior bubble peak.

But in August, something stopped working: C&I loans actually fell 0.3% to $2.058 trillion, according to the Federal Reserve Board of Governors. That translates into an annualized decline of 3.8%, after an uninterrupted six-year spree of often double-digit annualized increases. Note that first month-to-month dip since October 2010:

It’s still too early to tell how significant this dip is. It’s just the first one. It could have occurred because companies borrow less because they need less money as there’s less demand, and expansion is no longer on the table. Or it could have occurred because banks are beginning to tighten their lending standards, with one hand on the money spigot. And all this is occurring while banks write off more nonperforming loans (and thus remove them from the C&I balances) that have resulted from mounting defaults and bankruptcies by their customers.

The ugliest credit stories in terms of bonds, according to Standard & Poor’s Distress Ratio, are the doom-and-gloom categories of “Energy” and “Metals, Mining, and Steel.” Next down the line are two consumer-facing industries: brick-and-mortar retailers and restaurants.

But these metrics by credit ratings agencies are based on companies that are big enough to be rated by the ratings agencies and that are able to borrow in the capital markets by issuing bonds. The 18.9 million small businesses in the US and many of the 182,000 medium size businesses don’t qualify for that special treatment. They can only borrow from banks and other sources. And they’re not included in those metrics.

But when they go bankrupt, they are included in the overall commercial bankruptcy numbers, and those numbers are getting uglier by the month.

In September, US commercial bankruptcy filings soared 38% from a year ago to 3,072, the 11th month in a row of year-over-year increases, according to the American Bankruptcy Institute.

For the first nine months of 2016, commercial bankruptcy filings jumped 28% compared to the same period in 2015, to 28,789. Most of those are not the bankruptcies we hear about in the financial media. Most of them are small businesses that go that painful route – painful for their creditors too – in the shadows of the hoopla on Wall Street.

By comparison, just over 100 oil and gas companies in the US and Canada have gone bankrupt since the beginning of 2015. About a dozen retail chains have filed over the past year, along with about 12 restaurant companies, representing 14 chains.

Commercial bankruptcy filings skyrocketed during the Financial Crisis and peaked in March 2010 at 9,004. Then they fell on a year-over-year basis. In March 2013, the year-over-year decline in filings reached 1,577. Filings continued to fall, but at a slower and slower pace, until November 2015, when for the first time since March 2010, bankruptcy filings rose year-over-year. That was the turning point. Note that there is no “plateauing”:

In September this year, bankruptcies exceed those from a year ago by 855 filings – the 38% jump. March and May saw similar year-over-year increases. So this looks like it’s the beginning of a new and long trend that is not going to fit into the rosy scenario.

Rising bankruptcies are an indicator that the “credit cycle” has ended. The Fed’s policy of easy credit has encouraged businesses to borrow – those that could. But by now, this six-year debt binge has created an ominous debt overhang that is suffocating these businesses as they find themselves, against all promises, mired in an economy that’s nothing like the escape-velocity hype that had emanated from Wall Street, the Fed, and the government.

— source

Still Feeling the Great Recession?

Do you enjoy riding on roller coasters? Do you like rising, screaming, and then suddenly plummeting, never quite knowing exactly what scary sensation lurks around the next bend?

Many folks crave that sort of experience. Many others don’t. And if you fall in the latter category, you don’t have to worry about roller coasters — because you have a choice. You can choose not to ride. You can avoid all the precipitous ups and downs.

In our modern market economies, we have no such choice. Ups and downs — booms and busts — come with the territory.

Over recent years, in the United States, we’ve lived the angst of this reality. In fact, we still haven’t fully recovered from the Great Recession.

Why not? A global team of economists recently took the time to ponder that question. And their answer revolves around a key choice that — even in a market economy — we can make. We can choose to be more equal. The more equal an economy, the less severe and long-lasting economic downturns will be.

How does inequality make downturns worse? The Great Recession offers a telling case study, and the new research from Stockholm University’s Kurt Mitman, the University of Pennsylvania’s Dirk Krueger, and the University of Minnesota’s Fabrizio Perri walks us through it.

In 2007, the year the Great Recession officially began, the United States was experiencing its highest level of household economic inequality since the 1930s. America’s poorest 40 percent of households had more debts than assets. Taken together, these households essentially held 0 percent of the nation’s wealth.

The richest 20 percent of households, by contrast, held 82.7 percent of America’s wealth.

Household income figures told that same basic inequality story. The bottom two fifths of households were taking in 19.9 percent of national income. The top one fifth was pulling down over double that share, 41.2 percent.

But the story changes a bit when we look at consumption. The richest fifth may have had over 80 percent of the nation’s wealth. But their personal spending made up only 37.2 percent of what the nation consumed.

The poorest two fifths of households, on the other hand, may have had zero wealth. But they did have income, and they were spending almost all that income, month after month, on the goods and services they needed to get by. Their personal spending accounted for nearly a quarter of the nation’s total consumption, 23.7 percent.

All these consumption numbers matter. In an economic downturn, consumption levels determine how rapidly and how well an economy will recover. If people aren’t spending, businesses aren’t going to be hiring.

So what happened after the Great Recession hit? People with little or no wealth started spending less. Households in the bottom fifth decreased their spending at twice the rate of households in the top fifth.

In their new research, economists Mitman, Krueger, and Perri take pains to emphasize why exactly poorer people spend less when an economy goes south. The reason that at first glance might appear to be the most obvious — that poorer households in hard times simply have less income to spend — turns out not to be the key driver.

Yes, low-wealth households that have lost jobs and paychecks will spend less when hard times hit. But low-wealth households that have not lost jobs and paychecks will also spend less. They’ll spend less because they don’t have the resources, as Mitman, Krueger, and Perri put it, “to self-insure against idiosyncratic risk.”

In other words, low-wealth households don’t have enough cash available to tide them over if they lose a paycheck. So these households, once hard times arrive, “drastically reduce their expenditure rates, even if their income has not dropped yet.”

The more low-wealth households in a society, the more devastating the impact of these spending reductions on the economy as a whole, the longer downturns linger.

If, on the other hand, we had a more equal distribution of wealth in the United States, more households would be able to keep spending at the onset of a downturn. The rough times would end sooner.

So what should we do? Short-term, we ought to be doing our best to give poor households more income security. Our woefully inadequate system of unemployment insurance needs a total makeover. Families need to see that the loss of a job will not mean a devastating loss of income.

And in the longer term? We simply need to become more equal. We need a total makeover of the policy decisions — on everything from taxes and trade to labor rights and business regulation — that have left the distribution of household wealth in the United States so incredibly top-heavy.

— source By Sam Pizzigati

Cryptocurrency Crash

One of the more profitable trades this year was in the cryptocurrency Bitcoin.

For those unfamiliar, Bitcoin is a digital asset and payment system — a virtual currency. It’s considered a cryptocurrency because it doesn’t require a central bank to handle its transactions. It’s all self-contained through technology that encrypts and records a ledger over a distributed computer system. This technology is called the blockchain.

The benefit of blockchain technology comes from its transparency. Everyone can see every transaction. The whole system is also decentralized. There’s no single institution or bank that controls the transferring of assets back and forth. This (advocates claim) removes the possibility of corruption, theft, and a whole host of other common problems that come with your standard financial system.

Bitcoin and its fellow cryptocurrencies (a number have been launched since) have become popular as alternatives to the standard fiat currencies of governments around the world. In some ways they’re treated in a similar way to gold and other precious metals. Don’t trust the government? Scared of inflation or other market problems? Then pile into these alternative currencies.

Our team at Macro Ops likes the idea of these virtual currencies. Their technology is impressive and can be used in a variety of different applications.

But the advocates of these currencies have come to the point of pushing fantasies. Their long-term goal is to create a system completely free of human intervention — with machines operating everything. In their minds, the humans are the problem and rigid automation is the solution to create a “perfect” system.

A large percentage of cryptocurrency investors believe in this vision to some extent. And this belief is part of what fuels massive speculative runs and subsequent crashes in the prices of these assets.

We saw this happen just recently in the Ethereum market, another cryptocurrency.

The story of the crash starts with the creation of a new “revolutionary” kind of venture capital firm — the Decentralized Autonomous Organization (DAO). Its goal? To be the first VC with no executives. Computers would manage everything.

The firm used Ethereum technology to run its operations. Investors would join the fund by submitting Ether, and once they bought in, they would receive voting rights in proportion to their investment. Companies that wanted to be funded by the VC would submit their proposals which all DAO investors would vote on. Whichever proposal won the voting round would be accepted and funded. All this was facilitated through Ethereum technology.

It was a decentralized, democratic system with full transparency — a brand new kind of investment firm. Investors considered it a beautiful extension of the technology that undermined cryptocurrencies. It excited them. And they piled in. DAO quickly raised $152 million from investors around the world.

But then the unthinkable happened. The fund was robbed. A hacker exposed weaknesses in DAO’s Ethereum construct and stole over $50 million.

The hacking successfully put an end to the DAO, and what’s more, it casted doubt on the security and durability of the entire Ethereum system. The beliefs of cryptocurrency investors took a beating. And that beating transferred to virtual currency prices. The price of Ether was nearly cut in half from the incident.

But soon after the DAO robbery, Ethereum developers were actually able to catch the hacker and freeze the funds he stole.

Great… problem solved right?


This caused a giant debate to erupt among the Ethereum community. Returning the stolen money to investors would require a manual change to Ethereum’s underlying technology. This is a huge deal because it would require human intervention which would defeat the whole purpose of a completely autonomous system. It would ruin the sanctity of the currency and fly in the face of the principles it was built on. This made the decision a polarizing one. It’s ironic because the community is now stuck in political battle, just the kind they hate and created cryptocurrencies to avoid.

There’s a few lessons to be learned from this. One is in the need for regulation.

Cryptocurrency creators believed that a completely machine-based system wouldn’t need regulation liked standard banks. This would lead to fewer costs and far better efficiency, creating a new and improved financial system.

This is a nice sentiment. But in reality, regulation is necessary. Now we agree overregulation is bad, which is what much of the financial system is suffering from now, but zero regulation is just as dumb. To think cryptocurrencies could somehow avoid any type regulation is stupid. It goes back to cases of fraud and stolen assets. There needs to be rules in place so that the right people are prosecuted and victims compensated.

It’s funny because the cryptocurrency community is starting to realize this. They’re starting to see why the original banking system is there in the first place with all its rules. It turns out not all parts of the system are worthless and in need of “disruption”. Surprise, surprise…

We’ve now seen various members of the cryptocurrency community call for the SEC to step in, claiming that “the current “wild-west” environment presents dangerous pitfalls for potential investors, as the DAO attack has shown”.

Back to regulation we go…

The second lesson here is in the unrealistic expectations of investors causing booms and busts. A lot of the price run-ups in these virtual currencies have been due to investors’ beliefs in utopian fantasies of perfect financial systems without regulations. When beliefs stretch that far out into left field, any small trip up in the investment narrative (such as a system hack) will cause prices to come tumbling down.

This is why we’ve seen multiple large crashes in these cryptocurrencies in just the few years of their existence. These are dangerous markets and investors should be wary of getting involved. They may be a good investment in future, but now is not the time. It would be best for most investors to sit on the sidelines and wait for the numerous problems that come with the creation of a new currency to be solved before jumping in. By Alex M., Macro Ops.

Investors are in for a lot of pain as the Sharp Ratio reverts to mean.

— source By Alex M.