This highly regarded and prestigious steakhouse in midtown is adapting to the changing times. Now you can buy your excellent steak in exchange for stock. I guess the barter system is partially back. For instance one share of Citigroup will buy you 1/2 an order of creamed spinach. But a share of JP Morgan will get you a lobster tail. Hm a new valuation tool?

New stories about the latest proposal being mulled over within the chambers of the White House pop up every day. Here’s some of the proposals being thrown around:

• Securitization: A proposal to limit the number of tranches allowed in mortgage-securitization transactions as well as for originators to keep skin in the game by keeping more of the securities on their books.
• Privatization of GSEs: The House Financial Services Committee plans to hold hearings to discuss privatization of Fannie and Freddie, which is a step towards taxpayers not having to be liable for funding government bailouts of too big to fail institutions.
• Bank tax: Obama has proposed a 10-year tax on the country’s largest banks to cover a projected $117 billion shortfall in the fund set aside for government bailouts.
• Bonus caps: As many of the banks that received TARP money pay back the loans and become free of federal compensation regulations, the Obama administration would like to see a more permanent, consistent way of regulation compensation.
• Other grandiose promises: forming one streamlined committee that would oversee and monitor system risk in the banking industry and have executive power over myriad government-financial agencies, like the SEC, the Fed, the Treasury, etc.

And only a few weeks ago, there was some commotion over Obama’s potential ban on proprietary trading at investment banks. Whatever came of that? …Whether prop trading will really be banned or not still remains to be seen, depending on how successfully the proposal passes through Congress.

Basically, whatever comes of ANY of these proposals depends on how successfully they get through Congress. And given the track record of financial reform proposals, it doesn’t look like many of them will. Only the other week, Senator Chris Dodd, head of the Senate Banking Committee, complained of the “army of lobbyists” being sent to Washington from Wall Street firms “whose only mission is to kill the common-sense financial reforms”. With the likes of banks like Goldman Sachs protesting every governmental effort to regulate the Street, like they did with the prop trading ban, Congress remains in deadlock. We won’t even mention Congress’s long-time incestuous relationship with Wall Street (Every election cycle, financial institutions pour loads of campaign money into politician’s coffers). Maybe, just maybe, that could serve to illuminate why financial reform simply hasn’t happened.

Senate Banking Committee head Chris Dodd (R) blames Congress's financial reform failures on the Street's refusal to cooperate

During the New Deal, when FDR created a new regime to regulate the banking system, the FDIC renewed confidence in the banking system, the formation of the SEC gave protection to public investors, and the Glass-Steagall Act separated federally insured commercial banks from the investment banks. His sweeping reforms may very well have saved capitalism, let alone the nation itself. Right now, I’m not seeing the same kinds of drastic changes that need to be made in order to protect the integrity of the national/global financial system. I’m only seeing a deadlocked Congress, and a lot of rosy reform proposals that don’t go anywhere. Until our good ol’ cronies on Pennsylvania Avenue stop bickering amongst each other and figure out a way to wiggle free from the clutches of Wall Street, I’m going to take all these proposals with a grain of salt.

Since the founding of the British arm’s firm (appropriately N M Rothschild & Sons) in 1811, the family’s influence in London and the surrounding European nations has grown considerably. The family firm is about to make a change and it’s related to its historical nepotistic policies, in which only family members hold leadership positions. For the first time ever, to modernize its operations, the firms CEO will not hold the last name of de Rothschild, but Higgins. Nigel Higgins, has been with the firm for 27 years, and yet it should come as a shock, considering the power that this family, with it’s five original branches held over the world of finance. They even financed the Suez Canal . . .

What I’m getting at is that times are changing. People’s careers are being made, while others are falling apart. Pay attention to what is going on around you, because here you have an extraordinarily powerful and intelligent group of individuals admitting that they need leadership to conquer the current financial minefield.

http://www.ft.com/cms/s/0/92795dda-15e3-11df-b65b-00144feab49a.html

Greek Debt Crisis
How Goldman Sachs Helped Greece to Mask its True Debt

By Beat Balzli
Greek Finance Minister George Papaconstantinou speaking at a conference in January.
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Greek Finance Minister George Papaconstantinou speaking at a conference in January.

Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit.

Greeks aren’t very welcome in the Rue Alphones Weicker in Luxembourg. It’s home to Eurostat, the European Union’s statistical office. The number crunchers there are deeply annoyed with Athens. Investigative reports state that important data “cannot be confirmed” or has been requested but “not received.”

Creative accounting took priority when it came to totting up government debt.Since 1999, the Maastricht rules threaten to slap hefty fines on euro member countries that exceed the budget deficit limit of three percent of gross domestic product. Total government debt mustn’t exceed 60 percent.

The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics. One time, gigantic military expenditures were left out, and another time billions in hospital debt. After recalculating the figures, the experts at Eurostat consistently came up with the same results: In truth, the deficit each year has been far greater than the three percent limit. In 2009, it exploded to over 12 percent.

Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought. “Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future,” one insider recalled, adding that Mediterranean countries had snapped up such products.

Greece’s debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.

Fictional Exchange Rates

Such transactions are part of normal government refinancing. Europe’s governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn’t show up in the Greek debt statistics. Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives. “The Maastricht rules can be circumvented quite legally through swaps,” says a German derivatives dealer.

In previous years, Italy used a similar trick to mask its true debt with the help of a different US bank. In 2002 the Greek deficit amounted to 1.2 percent of GDP. After Eurostat reviewed the data in September 2004, the ratio had to be revised up to 3.7 percent. According to today’s records, it stands at 5.2 percent.

At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.

The bank declined to comment on the controversial deal. The Greek Finance Ministry did not respond to a written request for comment.

Let’s take a look at this in a more objective manner. Here are a few my thoughts on the fact

- Greece is indeed in a bad fiscal situation, but what has happened is far from unique

- Greece accounts for a mere 3% of the Eurozone GDP

- The last time I checked, the beautiful state of California is in a similar situation with a budget gap of $22.2 billion

- Remember, CA is the world’s 8th largest economy (the size of France!) while Greece ranks #33

- How come no one is talking about the CA crisis???

- There is simply no way the EU will allow Greece to exit the Euro, a bailout of some sort will be in order

- Most likely, help will come in the form of a debt guarantee through the ECB after demanding a pound of flesh from the Greek government in terms of fiscal reform

- The market is NOT hyperventilating about the actual dollar amount or what actually occurred in Greece but the larger implications of such a bailout

- A bailout for Greece will spur requests for aid from other struggling Eurozone countries

- For years the EU has allowed the PIIGS (Portugal, Italy, Ireland, Greece, Spain) lots of leeway in terms of fiscal policy despite their prior commitment to contain deficit to 3% of GDP upon joining the Eurozone. The PIIGS routinely ran double digit deficits.

- Investors are concerned about the grand experiment that the Euro essentially is: can a group of countries with independent fiscal policies but a common monetary policy form a common currency??

It’ll be interesting to see how this plays out.

For the rest of the world though, is banking losing its shining luster? Will NYU Stern’s golden reputation mean nothing as the “dream careers” cycle back to law and medicine? The economic power of the banking industry is nothing but marvelous, but will it shrink? What will happen to these massive “too-big-to-fail” firms? For instance, I recently read that Goldman Sachs should go private again to get out of the spotlight and have control over employee pay again. These questions we all want answers to, the same way we want to know where we’ll all be in ten years, and I want to know one thing: will banking be the right career choice for me?

In other economics news, John Sexton apparently moderated at Davos, Felis Rohatyn, André Meyer’s (as in Meyer Hall) controversial successor at Lazard Frères, and the G-d of M&A has returned as an advisor, and the City budget was presented in the Blue Room today!

At the Economic Club of New York, Volcker was quoted as saying, “The point is that they present added risk and virtually unmanageable conflicts of interest with more essential customer relationships.” And moreover, Obama in his January 20th address stated, “My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary.” Thus, with the best interest of Joe the Plumber (is that term still kosher?) in mind, Obama has deemed the current financial services industry unfit to exist in its current state. And as such, Obama is dramatically restructuring the present financial landscape.

This proposal addresses two essential issues: limiting the scope and limiting the size. To limit the scope, Obama plans to “work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.” And to limit the size, Obama plans to “place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.”

So, with the economy in the state that it is- are we ready to put such a heavy burden on the financial industry? Like Obama said, that these investment firms cannot lend out even though they are realizing record profits, how would they perform under these unrelenting restrictions? And if the banks cannot loan out apt amounts of money, what are the grander implications on the recovery of the U.S. economy?

And on an unrelated tangent…

http://pragcap.com/the-ultimate-guide-to-2010-investment-predictions-and-outlooks

A good read for those with time

• A main support for the rally was increasing risk appetite evident in a falling USD. Uncle Buck has been on a tear recently against EUR
• Decent corporate earnings have already been MORE than priced in. Case in point, check out Goldman’s record earnings, only to see its stock aggressively sold off
• China – the much talked about global engine for growth – is now on a tightening cycle. The People’s Bank of China is concerned about the country’s economy from overheating and has aggressively clamped down on credit expansion (much more effective than raising interest rates).
• Bullish investor sentiments are approaching levels last seen in 2007 – before the onset of the credit crisis
• Unemployment still getting worse with no speedy recovery in sight
• Team Obama-Volcker spells trouble for investment banks’ future profitability
• Uncle Ben’s reappointment is facing increasing uncertainty in Congress

From a technical analysis standpoint, pundits are talking about the major support for the S&P at 1078. In this view, the coming week will then be a do or die week for the US market. However in truth, these resistance and support lines are more of an art than science. Take it with a grain of salt and let’s see what happens.