The Final Result of the Wikileaks?

Private Bradley Manning is behind bars. Apparently he was the source of the information that was disseminated by WikiLeaks in three batches since July of this year, originating in military intelligence offices, including thousands of "cables" from State Department sources. The reaction to the internet disclosures has been essentially identical to the publication of the Pentigon Papers back during the Vietnam War. The author of the Pentigon Papers, Daniel Elsberg was vilified and attacked as a traitor. After the smoke cleared it became evident that there was nothing in the papers that had not appeared in the press or could be easily deduced from the facts. In other words, the truth.

The smoke is still thick and the vilification is rampant following WikiLeaks disclosures. Representative Peter King [R] of New York wants the State Department to designate WikiLeaks a terrorist organization. Senator Dianne Feinstein [D] is asking for espionage charges be brought against Julian Assange, the founder of the WikiLeaks website and Senator Joe "what's my party Lieberman" is calling for an investigation of the New York Times because the paper published part of the leaks. Hillary Clinton, Secretary of State, is in a ratsnit. It may be many months before the smoke clears and it becomes evident to anyone who reads any reasonably responsible news source that all we are reading is a hefty dose of the truth--what President Wodrow Wilson wanted to achieve in his dictum to foreign policy makers, "Open covenents, openly arrived at".

What happens to WikiLeaks and who gets prosecuted and when may be in the end the least important result of the WikiLeaks Affair. According to the New York Times [Dec. 12, 2010, Week In Review], The Defense Department is "scaling back information sharing, which its leaders believe went too far after information hoarding was blamed for the failure to detect the Sept 11 plot". What we are learning is that there will be a constricution of information sharing in the intellegence community, and that means something we all may not realize. The fact is that 80% off all US intellegence funding goes to the military meaning the Pentigon. Caarried to a undesired extreme, we might as a nation, find ourselves being provided with information from essentially only one source. If this does not approach the warnings from an Orwellian world, I do not know what does. Frankly it frightens me more than any meaning from the leaks themselves.

We will all watch with great interest what justice be provided in the case of Private Manning. As for Julian Assange who is as of today free on bail in London awaiting the outcome of charges of rape by two Swedish women. How outrageous if it turns out that secret military intellegence paid for setting up the charges in Sweden. See how paranoid you can get when information cannot be trusted? Just imagine the uproar had the leaks come from the State Department and not the Department of Defense.

Bottom Line! A United States government fed only military intellegence is the ultimate danger, not WikiLeaks.

Flash Crash--Still Without a Diagnosis

In the August 30 issue of Barron's magazine, columnist Jim McTague entitled his essay, "Was the Flash Crash Rigged?" The term "flash crash" refers to the sudden drop in stock prices in a short period of time on May 6, 2010. Mary L. Schapiro, Chairman of the U.S. Securities and Exchange Commission in testimony before Congress on May 11, 2010 gave the chronology of trading as follows:

On Thursday May 6, the stock market Dow Jones Industrial Average [DJIA] declining 161 points, or approximately 1.5.% by 2:00pm [ET]. Shortly after 2:30 pm, however, the market decline began to steepen and by 2:42 pm, the DJIA was at 10,445.84, representing a decline of approximately 3.9%. The DJIA then suddenly dropped an additional 573.27 points, representing an additional 5.49% decline in just five minutes of trading, hitting 9,872.57 at 2.47 pm, for a total drop of 9.16 percent from the previous day's close [insufficient to trigger a circuit breaker trading halt].

Similar declines were seen in the S&P index and the CBOE Volatility Index [VIX], a widely followed measure of market volatility sometimes known as the "fear index", climbed above 40, a level not reached in over a year.

As quickly as the market dropped, it suddenly and dramatically reversed itself, recovering 545 points in approximately a minute and a half to 10,415.65. By 3:00pm, the total daily decline in the DJIA had been reduced to 463.05 points [4.26%]. The DJIA ended the day at 10,520.32, down a total of 3347.80 or 3.2% from the prior day's close. This represented a significant down day for the markets, but the closing numbers belied the markets' dramatic moves down and then up during approximately 20 minutes of trading in mid-afternoon. In addition, many individual securities experienced much larger swings in their trading activity. For example, two DJIA components--Procter&Gamble and 3M--experienced declines of approximately 37 and 21% respectively. In addition, certain stocks were executed at absurdly low prices, such as one stock which opened above $40, was traded at one point at a penny, and then closed the day above $40.

In addition, a large number of Exchange Traded Funds [ETFs] traded for short periods of time with massive intraday price swings. The shares of more than 25% of all ETFs experienced temporary price declines of more than 50 % from their 2 pm market prices.

At a later point in her testimony, she said, "We believe that it is critical to understand the causes and effects of this event so that we can work to ensue that it does not occur again". Although too early to draw conclusions, the chairman pointed to a focus on:

1. Absence of professional liquidity providers.

2. Disparate exchange practices.

3. Other factors including, thinly traded stocks and ETFs, stop loss market orders in an illiquid market that triggered automated selling that resulted in executions at aberrant prices and finally so called stub orders that trigger at or near a penny.

4, The complexity of the new National Market Structure including the multiplicity of trading centers , highly automated trading systems and high-frequency trading.

In spite of circuit breakers in place, the chairman pointed out that."none of the NYSE Rule 80B thresholds was triggered on May 6, despite the severe disruption in trading in many stocks". What was worse, some erroneous trades were cancelled and others were not causing great consternation.

In summary, the SEC like all of us who trade, knows what happened and promises to find out why. In the meantime, McTague in his article suspects that high speed traders pay the exchanges hundreds of thousands of dollars a month for direct feeds to their trading floors which allow them to see information headed for the Consolidated Quote System in advance. The CQS is the modern version of the "tape" that the stock-buying public sees. It only takes a few mili-seconds and as McTague points out, you have the modern Wall Street version of The Sting.

The real bottom line is that until we have a plausable diagnosis of the cause of the flash crahs and can establish order and trust to our markets, they are not to be trusted. Progression of this situation will result in instability and possibly chaos.

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Gulf Mess a Tipping Point?

The British Petroleum [BP] oil "volcano" in the Gulf of Mexico has generated what may become one of the prominent tipping points in the history of the United States. It will be a true tipping point if it convinces the body politic to act decisively to turn our full effort to free our dependence on oil and accelerate a drive to all forms of alternate energy sources. From this day--the 51st day of the spill, the probability of this happening seems to depend upon the public reaction to the environmental devastation. The press coverage of the environmental impact has been impressively prominent with photos of the invasion of the oil into fragile wetlands along the outer Louisiana delta, the depressing death and impairment of large birds coated with crude and early shore drift of oil blobs on the beaches along the Florida panhandle. With the closing of major fishing and shrimping areas, the economic loss in these industries is coupled with speculation of the effect of the oil on the marine life itself. The adverse impact on larger sea life and the toxic effect of the oil and possibly the dispersant that is being employed is also being noted in press and TV stories. The possibility of extensive damage from oil looping out of the Gulf and into Atlantic waters is expanding the fear of more widespread environmental damage. Finally, the fact that containment is not possible until emergency side wells can seal the source in late August, makes any comprehensive environmental assessment premature.
The tipping point may be real if the economic impact becomes more acute. If further jobs are lost in the fishing, oystering and shrimp industries with an unknown time for recovery, this economic impact could build. Progressive drift of oil on vacation beaches could see a sharp drop in tourism. A moratorium on deep water drilling for six months could adversely affect employment in the drilling industry itself. Noxious plums of sub-surface oil may have lasting economic damage to all marine based industries for years to come. The cost to state and federal governments mounting the clean-up effort will a economic repercussions far into the future. Again, all economic bad news may be only a rough estimate.
Notice that in spite of the enormous environmental and economic distress, I said that the oil mess MAY become a tipping point. I sincerely hope that it does. I fervently hope that the American people get the message and quickly get behind the Obama administration's policy to direct all our efforts to abandon our fossil fuel economy. My read of our political scene, however, leads me to think otherwise. All of the economic loss in aggregate is not going to alter the public's "drill, baby, drill" mantra. Law suites will fly against BP and partners, and civil and criminal suites will pay off the vocal. The oil lobby will spend millions to keep us from changing course. As far as punitive damages against BP, forget about it. The Supreme Court excused Exxon from paying $5 Billion in such damages, some fifteen years after the Prince Edward Sound disaster. Remember, Judge Sam Alito recused himself because he owned Exxon stock. With this precedent, there will hardly be a judge from Texas to Florida that will be available to hear a case.
As far as environmental damage is concerned, this country only pays lip service to saving the planet. Even the statement that this is the largest environmental disaster in the history of the world is not likely to have much impact on the American public inured to the poisoning of our air and waters for two centuries. Chesapeake Bay was nearly destroyed in the mid-twentieth century and we still cannot find funding to do the recovery work. I cannot eat fish out of Lake Ontario, where I live. A country that does not care about the overfishing to extinction of the world's oceans is not likely to care a wit about oil in the Gulf of Mexico.
And conservation? Not once have I heard one word about any measure to conserve gas. President Nixon's 55 mile speed limit to conserve is an historical joke. So, the Gulf mess is depressing, but more depressing is my conclusion that we are not going to change course, not with the fall elections coming up and the Tea Party gathering steam. I doubt this will be any tipping point.

Should 41 = 51?

Senator Evan Bayh of Indiana decided not to run for re-election this fall. In a Sunday Opinion in the New York Times last week, he cited the failure of the United States Senate to conduct business because of the filibuster rule.

"The Senate should reform a practice increasingly abused by both parties, the
filibuster. Historically, the filibuster was employed to ensure that momentous
issues receive a full and fair hearing. Instead, it has come to serve the
exact opposite purpose--to prevent the Senate from even conducting routine
business."

According to the historian of the Senate, the term filibuster has origins from the Dutch word meaning pirate. In the early days of the republic, both houses allowed unlimited debate. As House membership grew it was abandoned, but remained in the Senate. In 1917, senators adopted rule (Rule 22), at the urging of President Woodrow Wilson, that allowed the Senate to end debate with a two-thirds majority vote, a procedure called "cloture". The new Senate rule was first put to the test in 1919, when the Senate invoked cloture to end a filibuster against the treaty of Versailles. The late J. Strom Thurmond of South Carolina holds the record of 24 hours 18 minutes against the Civil rights Act of 1957.

Filibusters are becoming more frequent. Last fall they were used to stall the legislation to extend unemployment insurance. Now the simple threat of a filibuster from one senator can halt progress on any legislation. Today, we have ideological gridlock over health care financing legislation. The 60 vote "supermajority " of the Democrats has been lost with the election of Senator Brown of Massachusetts, so that the threat of filibuster by the Republican minority can stop a vote and eventual passage of bills already passed by both houses of Congress. So a majority does not rule! Forty-one(41)votes obstructs the more than a majority fifty-nine(59) votes.

But is the game over? The answer is fortunately "NO". Again rules can be made to trump rules. There is an arcane rule in the Senate call the "budget reconciliation" rule. The rule will, after differences in the house and Senate bills have removed differences by compromise, allow passage by a simple majority in the Senate and House. This rule was passed in the 1974 Congressional Budget Act. This rule applies in the Senate to all legislation affecting the budget, and the health legislation would certainly qualify. The same act also limited debate in both houses to 20 hours and in the Senate, NO FILIBUSTERS ARE ALLOWED. Somebody was thinking. It should be pointed out that, Congress has used the reconciliation rule to apply to non-budget issues as the Republicans did in 1996 to pass major welfare legislation. In fact it has been used 19 times to get President Clinton's budgetary policies through in 1994, and the tax package cuts of President George W. Bush.

So if 59 can really beat 41, who not do it and do it now? If the people have spoken in the last election and there is a clear majority, why not do what the people's representatives have decided? The argument seems to be that the passage would be bullying the minority and that the majority is not listening to the minority. The idea that the minority can upon occasion be right is being offered as argument. Critics are also harping on the sol-called "sweet" deals. Summing it up at the bipartisan session at Blair House today, using the reconciliation rule, according to Senator Lamar Alexander, would be "jamming through in a partisan way".

What is the prospect? As long as the minority decides to obstruct the majority from governing, as long as campaigning continues after an election, as long as there is no real debate, there will be not only no progress on health care finance legislation, but none on Wall Street reform, none on ending wars, and none on reversing our bankruptcy trajectory.

Please, talk to your legislators about talking to each other. If we are not willing to revoke the filibuster rule, then let us invoke the reconciliation rule and move on.

Why Not Adopt The Volcker Rule?

Quoting from President Obama's remarks on financial reform on January 22, 2010 "This economic crisis began as a financial crisis, when banks and financial institutions took huge, reckless risks in pursuit of huge profits and massive bonuses". There is not a single economistin the western world who would argue with the observation that excessive leverage was a root cause of the financial crisis. Take Bear Stearns as an example. They were leveraged 100 to one on the weekend that they failed. That meant simply that they were in a situation where they had borrowed to the max--that they had made a bet putting up all of their money so that a 1% maarket drop would result in loosing 100%. Not even the most reckless bookie in Vegas would ever do such a dumb thing. Venerable and supposedly brilliant Lehman Brothers was hardly any better or smater, failing with leverage over 80%.
What the president was saying was that the banks were playing in the same game, their trading desks in the risky game of subprime mortgages, derivatives, and credit default swaps plus gambling in the oil futures markets. They were funding hedge funds, and trading themselves like hedge funds. It is obvious that we need a limit on risk taking in the name of stability, reliability and future growth.
Now the House of Representatives has passed the necessary financial reform to curtail this risk taking under the leadership of Rep. Barney Frank and the Senate is now working to follow through under the chairmanship of Senator Dodd. It was before his Senate Banking Committee that former chaiar of the Federal Reserve, Paul Volcker testified yesterday.
Volcker appeared before the congress on February 2nd. His public testimony held that high risk trading such as hedge fund acvtivigties should not be part of standard commercial banking. Banking licenses should not be given to institutions that cause failures through extraordinary risk. Excessive leverage and inadequate capital to support liquidity should not be allowed. The idea is to have procedural safeguards that step in to cause bankruptcy rather than allowing such banks to become too big to fail.
The President's current proposal provides for an authority that would intervene and prevent excesses of proprietary trading[translate casino activities using depositors' money]. Conflicts of interest such as between bank brokerage activities and the brokerage "research" should not be allowed to provide leverage whch such an authority would limit or eliminate. Banks should not be trading for themselves and sustaining losses that undermine their stability and their central mission. Such inside funds should not be able to profit from knowledge of customer business. Attempted separation ("Chinese walls")eventually do not work. There is plenty for banks to do without going beyond commercial community needs. Commercial banking should be clearly defined and fundamentally conservative as they were meant to be. This in the end brings good competition and a stronger system.
All this was undermined by the majority leader of the committee, Senator Richard Shelby of Alabama, who appeared on CNBC Financial the same afternoon and held that we have all the regulation we need, and that the Volcker Rule was unnecessary and he would not support it. After the greatest financial disaster in more than a century, I would hope that the Senate does not follow his lead. I can only assume that Senator Shelby would allow banking firms to continue to run hedge funds and any leverage they please while running a bank backed by the US Taxpayer.
Let's adopt the Volcker Rule. Let us take the casino out of the commercial banks and never require such bailouts again.

Scanners Make Profiling Unnecessary?

On boarding an airplane, all a passenger wants to know is that there is no bomb on boaard, either in baggage or concealed on another passenger. Mental detectors and thorough luggage searching has made a gun in the aircraft cabin a practically zero probability. That had been the main concern until the fear of a bomb became an emerging reality. Bomb fear replaced hijacking fear. The placing or carrying on of a bomb became a form of terrorist activity of organized Islamic fundamentalists who declared war on Israel and the West.
The Lockerbie crash by a luggage bomb changed international policy for package and luggage security. The exposure of Al Qaeda actions to blow up multiple transatlantic flights together with the famous shoe bomber, Richard Reid, tightened airport security around the world by more thorough scrutiny of each passenger and a new limit on the amount of "liquids" allowed. The emergence of Islamic martyrs willing to die for the cause, heightens the extent to which security efforts need to be improved to attain an absolute level of security. The 23 year-old Nigerian Christmas bomber, Abdul Farouk Umar Abdulmutallab, represents the resourcefulness of the enemy in researching the chemistry of bomb technology, and the status of security in the air, particularly on international flights entering the United States.
Fortunately, countering the threat is the develoopment of whole body scanners. Whole-body scanners use different systems, but there are two main competing technologies: Backscatter x-ray and millimeter-wave. Both of these use radiation that penetrates clothing. Backscatter technology (Z Backscatter X-ray system) can detect objects that regular X-ray scanners and metal detectors can't pick up very well, like ceramic knives, drugs and liquid explosives. They produce a near life-like image, which is causing all the uproar over privacy, charging prurient intent on the part of the TSA and engaging the ACLU. The images can be blurred by computer altering techniques, but the more distortion, the less the value; for example detecting an explosive tapped to the body. The other concern has nothing to do with privacy, but with the amount of radiation absorbed by the backscatter technology. Without going into details, the fact is that it would take 5000 scans a year to reach the limit of safety.
The alternate system is the millimeter-wave or MMW system. This system, pioneered by the defense and security firm Qintiq, uses millimeter wave (MMW) technology that was first developed to enable helicpoter pilots to see through the smoke of a battlefield. The system uses a cylindrical holographic imaging technology to conduct a 360-degree whole-body scan in 1.5 seconds. It bounces low-powered, non-ionizing millimeter waves off a person, penetrating clothing and reflecting off the body. Reflected signals are collected by the arry/transceiver and sent to a high-speed image processing computer, which forms a high-resolution three-dimensional image of the body and any hidden objects. The system provides a safe, fast and effrective alternative to metal detectors, X-ray machines and pat-down searches at security checkpoints.
As a member of the traveling public, I say get whatever scanner as fast as possible into every airport in the world. I do not want to depend upon the "dot connectors" or the sixteen intelligence agencies in the federal government, however hard working and well intentioned they may be in sorting out their "no fly llist". I will not exempt Congress either as they have not yet implemented the necessary recommendations of the 911 Commissioin. Let's get to the next level of security as quickly and efficiently as possible.
But does this mean we should do away with profiling? The answer is no! The enemy will continue to try to subvert the system. We must use whatever means we can to attempt ot identify the enemhy, the unstable or otherwise suspicious security risk in the travelers' space. As for the traveler who does not wish to participaate in the new security option, take the boaat--or train--or drive to your destination with your ACLU lawyer.

When Are Banks Going To Make Cars?

It is obvious that General Motors is not only a failed car maker, but also a failed bank. TARP money to the tune of $3.8B was released this week to "stabilize" GMAC Financial Services as it attempts to recover from heavy loses. [GMAC has already received $12.5B]. The original purpose of GMAC was to finance its customers who buy cars and trucks from General Motors Corporation. Recognize that the practice of funding car loans is in direct competition with banks, including your local community bank. To make matters worse, GMAC was in trouble, not just because of its financial practices, but because they compounded their greed by playing in the sub prime mortgage casino. Where were the regulators or were there any? As the poet Ogden Nash once observed in an applicable quip, "In the land of mules, there are no rules".
All this got me thinking. If car makers can create their own banks, why can't banks create their own cars? Why not pool their resources and produce cars to beat the gang of three in Detroit that still doesn't get the message and are returning to their "brand names", perpetuating our dependency on oil. A consortium of major and even regional banks could build a hydrogen car along with the system of refueling. They could even name the models after the sponsoring banks, like the Morgan or the Citi or the Wells Fargo--gosh they even have a stage coach logo in the mix--how prophetic.
So how is the transition from fossil fuel to renewable energy made? The gigantic oil lobby isn't going to sit about without a war on change. The answer is federal legislation that would add one penny of tax per gallon per month to the price of gasoline. People would make book in Vegas as to which would come first--the conversion from oil dependency or the payment of the national debt.
And don't forget the most important consequence of such a simple plan; no more oil money to fund the Islamic extremists currently backed by our frenemies in the Middle-East [frenemies are friends who sell us oil but are enemies who who fund Al Qaeda Islamic Fundamentalists]. If successful, the banks might then think of setting up shop to make GE light bulbs and expensive X-Ray scanners and so possibly even cut the cost of health care.
But wait just one Washington, DC minute! Weren't the banks into trying a new business when we got into this financial mess? They decided that the best business to try was the casino business using high leverage in the mortgage securitization and the multi-variant derivatives markets, and that is the very reason that they needed TARP money as well. It is high time to return the Glass-Steagall Act*, prevent banks from going into the casino business which should be left to Las Vegas and surviving high leverage players like Goldman Sachs.Recall please, that it was leverage that did in Lehman Brothers and Bear Stearns. So to prevent leverage in the car business, add a provision that prevent, corporations from owning their own banks.
Car makers that can't make money by making cars should not be in banking. Banks that can't survive by their core business of lending should not make cars or light bulbs and certainly not casinos.
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*Glass-Steagall Act [The Banking Act of 1933, repealed by the Republican Congress and signed by President Clinton in 1999].