A ton of today’s links come from Lambert, including the antidote. If it’s interesting and not attributed to a reader, assume it was due to Lambert.

Yes you were right Charles: Plants really can communicate with one another In the Stone Age, when the Wall Street Journal was available only in print, in one section, and had its center column devoted to human interest stories, it has a story on a scientist measuring plant reactions (I don’t remember how, but this was a real study). Someone came in the room and shredded up one plant in front of the others. They “fainted.” Every time he came in the room after that, they all “fainted” again.

Vermont inmates hide pig in official police car decal Reuters

How Globalization Nearly Exterminated the Buffalo Conservable Economist

Rare snowfall blankets Rome Associated Press. The pictures are cool.

Drug addiction ‘may be hereditary’ Daily Mail (hat tip reader May S)

FBI probes Anonymous intercept of US-UK hacking call BBC

High-Tech US Corporations Deny Skilled American Workers Jobs Through Abuse of Visa Loophole BuzzFlash (hat tip reader May S)

‘The vice president of the U.S. is… Bill Clinton!’ Shocking video shows high school students are woefully uninformed Daily Mail (hat tip reader May S). To quote David Einhorn: No matter how bad you think it is, it’s worse.

Khmer Rouge jail chief gets life for his ‘factory of death‘ Independent

Yakuza labor structure formed base of nuclear industry Asahi Shimbun

Bird numbers plummet around stricken Fukushima plant Independent :-(

Church of England doubles hedge fund investments Financial Times

Syria Live Blog Aljazeera

Bradley Manning Case: Army Officer Orders Court-Martial For Manning In WikiLeaks Case Associated Press

U.S. Skies Could See More Drones Wall Street Journal

Atheism in America Financial Times. Living in godless NYC, I can’t relate to this sort of thing, but if I were surrounded by aggressive Christians, I imagine being a non-believer would be mighty uncomfortable. It seems that the path of least resistance is to call oneself a Unitarian, since Unitarians believe in at most one god.

Let them game the model mathbabe

The Non-Farm Payrolls Report: Air Brushing History – Nominal Work Force for Nominal GDP Jesse (hat tip Scott). A must read.

Great jobs report, but what about the long-term unemployed? Fortune

Real US Corporate Tax Rate Falls to 12.1 Percent, the Lowest Level Since 1972 Wall Street Journal (hat tip reader May S)

Goldman to face mortgage debt class-action lawsuit Reuters

As the Plutonomy Powers Ahead, the “Realonomy” Remains in Recession Truthout (hat tip reader May S)

Foreclosure Accord Said to Ensure Same Terms for All 50 States Bloomberg (hat tip reader Deontos). This seems to be an affirmation of an earlier leak.

We’re More Unequal Than You Think Andrew Hacker, New York Review of Books

Antidote du jour. You can read about this rabbit here.

Yves here. As much as the overall thrust of this guest post has merit, I’m always leery of forecasts that amount to “trees grow to the sky.” I’ve evaluated a lot of tech deals (really weird ones) and I’ve found almost without exception that people get too caught up in the investors’ world view and spend too much time focusing on the technology aspects of the deal (and sometimes the patents too) and not enough on the business side. The critical questions in tech deals that often don’t get enough scrutiny are: 1. How much will customers have to change behavior to adopt the new technology? 2. Have the principals defined who their competition is accurately? (almost always, they define competition from a tech standpoint rather than a user standpoint, and forget the “do nothing” option) 3. If the investment involves making a product, how quickly do they assume they get manufacturing scale efficiencies? (again, without exception, too quickly).

I’m sure readers will have other points of view, but this MacroBusiness post mentions in passing that Ray Kurzweil predicts that medicine will be “transformed” in about 16 years (hah, it could be “transformed” in a negative way, but that does not seem to be what he means).

But professions with restricted entry tend to be slow to adopt new technologies (readers have heard me rant about mammograms; thermal imaging is a better diagnostic and has been around for at least a decade, but radiologists don’t want to give up their installed base of equipment). And just as Max Planck said that science advances funeral by funeral, I suspect the same is true of medicine. Look at how resistant the medical community was to the idea that bacteria caused ulcers. I even recall reading a story around the time a Nobel Prize was awarded for this discovery (2005) that something approaching 1/3 of the doctors in the US still treated ulcers as if they were a stress related ailment.

Nevertheless, if you accept the premise that exponential returns sometimes do operate, it creates a set of interesting problems for investors.

By Sell on News, a global macro equities analyst. Cross posted from MacroBusiness

A talk by the futurist Ray Kurzweil was recently played on the ABC in which he talked about the accelerating rate of innovation when it becomes part of what is broadly termed the information technology industry. He argues that in the future medicine, biology, economy and social relationships will be subject to information technology and the law of exponential return. His contention is that whereas in other sectors innovation tends to be advance in a linear fashion, information technology behaves quite differently. For instance, he predicted that the human genome project would succeed within the desired time frame. When it was halfway through and only 1% of the genome had been mapped, he was told that he was going to be proved wrong. He replied that on the contrary it was right on track, exactly in line with the exponential growth curve. It came in one year ahead of schedule. Using the same logic, he says, solar power will dominate world energy supply in about 16 years. Medicine will be transformed in about the same time frame. We have already seen the phenomena in areas like the internet and social media.

My first thought listening to it is how difficult it makes investment, because it simultaneously creates great uncertainty in industry structures — see, for example, how social media has changed conventional media, or file sharing has changed the conventional music industry — while making timing excruciatingly important. It is not enough just to pick the new sectors, on exponential curves investment timing has to be just right. For most of us, it will be wrong. The dot.com boom is a case in point in going too early.

My second thought is that this exponential IT curve has already hit finance, and it explains an awful lot of the problems now being witnessed. The explosion of derivatives, now a startling $700 trillion, well over half the capital stock of the world, has been driven by IT geeks and rocket scientists. The explosion of high frequency trading, which is similarly startling, is also a geek domain. Finance is no longer a discrete industry, it is now part of the IT juggernaut. And it is not going back.

This creates, in my view, far more problems than it solves. In fact, it is downright dangerous, because it leads to self referring, feedback loops that do not occur in other industries. If the energy industry starts to become an IT industry, as Kurzweil predicts is occurring with solar power, then the outcome will be more energy capacity at a lower cost. If the medical industry becomes an IT industry, then the outcome will be much cheaper and new medical treatments. The music industry has been transformed by IT, reducing the cost of recorded music to levels that are negligible, and, in many cases, removing the cost completely.

Now how are these innovations measured, in terms of their impact? By price, or the amount of money required to get a certain outcome. So if the same thing occurs in the financial system, which it has, then how do we measure its effects? We measure the change in the volume and range of monetary instruments by price, or an amount of money. In other words, we measure it by itself. And because something cannot be measured by itself, then we have lost the most important role of money — its function as a store of value. To measure the value of something effectively, by definition you have to have something else with which to measure it. You cannot measure the value of something with itself. Grab your shoelaces as hard as you like and you will still not be able to lift yourself off the ground.

Such self referentiality is, I suppose, a characteristic of the post-modern, post industrial world. But no one is in any doubt about how dangerous financial “innovation” is to the architecture of the global economy. Innovation is entirely different in the finance sector to other industry sectors (I am even sceptical about calling finance an industry, although I suppose it is). Innovation in this area results in tampering with the rules on which everything depends, money being in the first instance rules about value and obligation. In 2008, we saw what that means.

The IT revolution cannot be unwound; finance is now an IT industry. But it MUST be seen as a special case, requiring much more intense governance and sensible thinking about risk control, as opposed to the circularities of models like value at risk, or the Ayn Rand inspired nonsense prosecuted by Greenspan, in which pure self interest was always and in every case beneficial. More specifically, you have to measure the effect of monetary innovation with something other than money. That means looking at things outside money, such as, perish the thought, morality, or, if that is all too hard, at least social utility.

A talk by the futurist Ray Kurzweil was recently played on the ABC in which he talked about the accelerating rate of innovation when it becomes part of what is broadly termed the information technology industry. He argues that in the future medicine, biology, economy and social relationships will be subject to information technology and the law of exponential return. His contention is that whereas in other sectors innovation tends to be advance in a linear fashion, information technology behaves quite differently. For instance, he predicted that the human genome project would succeed within the desired time frame. When it was halfway through and only 1% of the genome had been mapped, he was told that he was going to be proved wrong. He replied that on the contrary it was right on track, exactly in line with the exponential growth curve. It came in one year ahead of schedule. Using the same logic, he says, solar power will dominate world energy supply in about 16 years. Medicine will be transformed in about the same time frame. We have already seen the phenomena in areas like the internet and social media.

My first thought listening to it is how difficult it makes investment, because it simultaneously creates great uncertainty in industry structures — see, for example, how social media has changed conventional media, or file sharing has changed the conventional music industry — while making timing excruciatingly important. It is not enough just to pick the new sectors, on exponential curves investment timing has to be just right. For most of us, it will be wrong. The dot.com boom is a case in point in going too early.

My second thought is that this exponential IT curve has already hit finance, and it explains an awful lot of the problems now being witnessed. The explosion of derivatives, now a startling $700 trillion, well over half the capital stock of the world, has been driven by IT geeks and rocket scientists. The explosion of high frequency trading, which is similarly startling, is also a geek domain. Finance is no longer a discrete industry, it is now part of the IT juggernaut. And it is not going back.

This creates, in my view, far more problems than it solves. In fact, it is downright dangerous, because it leads to self referring, feedback loops that do not occur in other industries. If the energy industry starts to become an IT industry, as Kurzweil predicts is occurring with solar power, then the outcome will be more energy capacity at a lower cost. If the medical industry becomes an IT industry, then the outcome will be much cheaper and new medical treatments. The music industry has been transformed by IT, reducing the cost of recorded music to levels that are negligible, and, in many cases, removing the cost completely.

Now how are these innovations measured, in terms of their impact? By price, or the amount of money required to get a certain outcome. So if the same thing occurs in the financial system, which it has, then how do we measure its effects? We measure the change in the volume and range of monetary instruments by price, or an amount of money. In other words, we measure it by itself. And because something cannot be measured by itself, then we have lost the most important role of money — its function as a store of value. To measure the value of something effectively, by definition you have to have something else with which to measure it. You cannot measure the value of something with itself. Grab your shoelaces as hard as you like and you will still not be able to lift yourself off the ground.

Such self referentiality is, I suppose, a characteristic of the post-modern, post industrial world. But no one is in any doubt about how dangerous financial “innovation” is to the architecture of the global economy. Innovation is entirely different in the finance sector to other industry sectors (I am even sceptical about calling finance an industry, although I suppose it is). Innovation in this area results in tampering with the rules on which everything depends, money being in the first instance rules about value and obligation. In 2008, we saw what that means.

The IT revolution cannot be unwound; finance is now an IT industry. But it MUST be seen as a special case, requiring much more intense governance and sensible thinking about risk control, as opposed to the circularities of models like value at risk, or the Ayn Rand inspired nonsense prosecuted by Greenspan, in which pure self interest was always and in every case beneficial. More specifically, you have to measure the effect of monetary innovation with something other than money. That means looking at things outside money, such as, perish the thought, morality, or, if that is all too hard, at least social utility.

Above my pay grade. The problem has been solved by splitting the site across two servers.

Here is the brief version:

Memory usage in server spiked multiple times.

See that blue chart above 4Gb line? That is when server starts heavily swapping and then load accumulates and it become unresponsive.

I was pretty pleased with my Friday posts, so if you got tired of trying then, I hope you will read them now.

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for Feb 3, 2012. (table is sortable by assets, state, etc.)

Changes and comments from surferdude808:
Quiet week for the Unofficial Bank List with no closings, one voluntary liquidation, and one addition. The list is unchanged at 958 institutions but assets increased by nearly $600 million to $389.6 billion. The First National Bank of Ordway, Ordway, CO ($45 million) underwent a voluntary liquidation in late January. The sole addition was Community West Bank, National Association, Goleta, CA ($643 million Ticker: CWBC) after the OCC issued a Consent Order against the bank. The only other change was a Prompt Corrective Action order issued by the Federal Reserve against Bank of Bartlett, Bartlett, TN ($371 million). Next week will likely be quiet as well.Earlier Employment posts:
• January Employment Report: 243,000 Jobs, 8.3% Unemployment Rate
• Graphs: Unemployment Rate, Participation Rate, Jobs added
• Employment Summary, Part Time Workers, and Unemployed over 26 Weeks
• Construction Employment, Duration of Unemployment, Unemployment by Education and Diffusion Indexes
• All Employment Graphs

Submitted by JM

Treasury Bears and Extinction Events

The real meaning of a treasury bear market may not be a flight out of treasuries into another asset class. Rather it real import could be the lack of liquidity available anywhere for nearly any asset class.

History seldom repeats precisely, but it does rhyme as they say.  And there are different types of bear markets:  bear steepening and bear flattening. Despite the complications, history and imagination are our only guides.

Bear Market in Treasuries

First for some rough context, monthly yield curves for the 1977-1982 Bear market are shown against the yields curves of January 1977 and December 1986 (in red).  What you see is a massive sell-off across the curve combined with flattening and inversion of the short end.

See the close up below for something more digestible.  There was serious volatility, mostly at the wings.  Yields on the 1Y exploded from 8.16% in June 1980 to 16.52% in September 1981.  Yields on the 30Y moved from 9.17% in August 1979 to 14.68% in September 1981. 

 

Takeaways

This section is premised on ample liquidity.  It is all I’ve ever known in Treasuries, but it may not be appropriate.  

• Roll-down wasn’t possible at the mid-curve, but it was possible to get roll-down on the front end.  It was a high-risk play, because the volatility was amazing and would rip your face off.  In just a couple of months, the whole curve could invert on you.
• You could make money shorting 20s30s, but I can’t imagine anybody doing that more than as a punt.  I don’t know if traders then bought or sold things like a 10s20s30s butterfly.
• A major point is that you really had to stick your neck out to make money in Treasuries.  The “old” adage now is nobody ever got fired for buying treasuries—although it isn’t quite true.  Seems that there was likely an even older adage about treasuries and how awful they were. 

Presumptions of Liquidity

Liquidity acts in a financial system like ample water, ambient temperature, and clean air act in an ecosystem.  It makes trading strategies proliferate.  Further, it makes meaningful intermediation possible, fostering the growth in high yield bonds and marketable loans.  Yes, derivatives like vanilla stock options and others too.

A financial system without liquidity is like a tropical ecosystem dried into a desert.  Without liquidity, it is an open question whether the arbitrage pricing revolution will outlast the antiquated mark-ups of reinsurers.  Liquidity makes random processes stationary, which is crucial to make the probabilistic foundations of risk neutral pricing work.  Is it intuitively possible to price (and even more buy and sell) credit and interest rate risk without some liquidity in the underlying?  How can a bank generate carry when the curve is flat and there is no appreciable differential anywhere that has a minimum tolerance of liquidity?

I put together an impressionistic schema to convey my point about liquidity.  It not only demonstrates instruments stop functioning, but even wholesale trading strategies have to be abandoned.  Traders will not only have a limited palette of instruments; for survival, they will also have to simplify trading strategies to those that are proven across extremely wide environments.  In financial markets, liquidity is what makes innovation possible.  Innovation adds complexity and diversity to an ecosystem, but it doesn’t make the system robust.  Even miniscule changes in environment cause life to revert back to sparsely populated rhythms.

Do you receive a tax deduction for the interest paid on your mortgage or for the taxes you pay to your state and local governments? Would you think about those deductions in the same way if instead of seeing a reduction in taxes for those items the federal government instead simply sent you a check [...]

This morning I testified before the Senate Budget Committee on our annual Budget and Economic Outlook, which was released on Tuesday. As I did in my testimony before the House Budget Committee, I highlighted many of the points that were included in Tuesday’s blog post. In today’s post, I want to discuss in more detail [...]

The Wall Street Journal has just published an article entitled “Congress’s Number Cruncher Comes Under Fire.” Here’s our view: CBO is responsible for providing nonpartisan and thoughtful analysis to the Congress, and we are proud that our success in carrying out that mission, for more than 35 years, is widely acknowledged both on and off Capitol [...]

This morning I testified before the House Budget Committee on our annual Budget and Economic Outlook that was released yesterday. My testimony highlighted many of the points that were included in yesterday’s blog post. One point I want to emphasize is the following: The combination of tax and spending policies that the nation has been accustomed [...]

We have received many questions about whether potential reductions in spending for overseas contingency operations (OCO), such as U.S. military operations in Afghanistan, can be considered as offsets to reductions in taxes or additional spending for Medicare or other programs. In this blog post, I will try to explain the issues involved.  One of the complexities [...]

This morning CBO released the Budget and Economic Outlook: Fiscal Years 2012 to 2022.  Each January, CBO prepares “baseline” budget projections spanning the next 10 years. Those projections are not a forecast of future events; rather, they are intended to provide a benchmark against which potential policy changes can be measured. Therefore, as specified in law, those [...]

The federal government employs 2.3 million civilian workers, or 1.7 percent of the U.S. workforce, in over 700 occupations and spent about $200 billion in fiscal year 2011 to compensate them. Recently, concern about the federal budget and about equity between the public and private sectors has focused greater attention on the costs that the [...]

In the past two decades, Medicare’s administrators have conducted demonstrations to test two broad approaches to enhancing the quality of health care and improving the efficiency of health care delivery in Medicare’s fee-for-service program. Disease management and care coordination demonstrations have sought to improve the quality of care of beneficiaries with chronic illnesses and those [...]

Raising the ages at which people can begin to collect Medicare and Social Security benefits would be one way to lower federal outlays, raise revenues, and reduce long-term fiscal imbalances. A CBO issue brief released today reviews how ages of eligibility affect beneficiaries under current law and how delaying eligibility would affect beneficiaries, the federal [...]

Currently, the federal government and state and local governments face calls for more and better highways but confront budgetary constraints in providing them. Some analysts have suggested that public-private partnerships might supply at least a portion of that capacity by providing additional financing for road projects and improving the efficiency of a highway’s construction and [...]

Some readers sent me a link to some terrible analysis that argued over 1 million people left the labor force in January. I pointed out the error. Apparently Rick Santelli at CNBC made the same mistake and reads the wrong blogs!

The Bonddad blog points out the error: No Rick Santelli and Zero Hedge, One Million People Did Not Drop Out of the Labor Force Last Month (CR note: I never read zero).

This does bring up an important point: The BLS updated the population estimates today based on the 2010 Census. I mentioned this in the preview yesterday and in the posts this morning. For whatever reason, the Census Bureau doesn't go back and revise the earlier population estimates, but they do provide analysis of the changes in several key numbers if the population estimate hadn't been changed.

Below is the table from the BLS:

With the 2010 population controls, the "not in labor force" appeared to have increased by 1.2 million in January, and the working age population jumped 1.7 million. That didn't happen last month; the numbers changed because of the new population estimate. This does suggests there are 1.2 million more people out of the labor force than we originally thought, but that is because the working age population is larger than previously estimated.

As the BLS points out, without the population change the "not in labor force" actually declined.

A couple other key points:
1) The decline in the participation rate was entirely due to the population change.
2) The employment-population ration would have increased 0.3 (good news) without the population change.

Category Dec.-Jan. change, as published2012 population control effect Dec.-Jan. change, after removing the population control effect1 Civilian noninstitutional population1,6851,510175 Civilian labor force508258250 Participation rate-0.3-0.30 Employed847216631 Employment-population ratio0-0.30.3 Unemployed-33942-381 Unemployment rate-0.20-0.2 Not in labor force1,1771,252-75 1This Dec.-Jan. change is calculated by subtracting the population control effect from the over-the-month change in the published seasonally adjusted estimates.
Earlier Employment posts:
• January Employment Report: 243,000 Jobs, 8.3% Unemployment Rate
• Graphs: Unemployment Rate, Participation Rate, Jobs added
• Employment Summary, Part Time Workers, and Unemployed over 26 Weeks
• Construction Employment, Duration of Unemployment, Unemployment by Education and Diffusion Indexes
• All Employment Graphs

While Marc Faber shares the usual stock of insightful market commentary, together with timing inflection points, and extended thoughts in the attached Bloomberg TV clip, it is the fact that he has officially joined Bill Gross, and so many others, in supporting the candidacy of Ron Paul as president. It is rather sad that only those who see beyond the surface of the current pyramid scheme facade, are bold enough to endorse the only man who is right for the White House. Fast forward to 15 minutes into the video to hear Marc Faber: "Ron Paul would be a very good president."

Other recent Ron Paul endorsements:

• Nassim Taleb: "Ron Paul Is The Only One I Trust"
• Bill Gross: "I Am A Little Ron Paulish" 
• Jim Rogers: "I Am Jim Rogers And I Support Ron Paul"
• Peter Thiel
• Stephen Colbert

and of course,

• Snoop Dogg

To mark the second Citizens United anniversary, we lit up the Supreme Court with giant dollar signs to send a message: rights are for PEOPLE, not corporate “persons.”

Employment growth accelerates along several dimensions: nonfarm payroll, an alternative measure of nonfarm payroll, private employment, hours, and civilian employment (report here). However, JEC vice chairman Brady (JEC-Republicans) states in a press release: "Job Numbers Mask Underlying Job Weakness."

Figure 1: Nonfarm payroll employment from January release (blue), and from December release (dark red), and civilian employment adjusted to conform to NFP concept (green), 000’s, seasonally adjusted. NBER defined recession dates shaded gray. Source: BLS via FRED, BLS, and NBER.

Not only did NFP employment increase by 243,000, benchmark revisions going back four years (although important revisions were for the last year) raised the December 2011 estimated employment by 266,000. Trend employment continued to rise. This upward shift was also reflected in the research series that is calculated by using household data to generate a series conforming to the NFP concept; the changes are largely due to the application of new population controls (see BLS, Appendix). More on the distinction between the official and research series at here.

With the government shedding jobs, it is perhaps more useful to refer to private employment for underlying labor market trends.

Figure 2: Log private employment (dark blue), and log aggregate weekly hours index in private sector, series AWHI (red), seasonally adjusted, rescaled to 2007M12=0. NBER defined recession dates shaded gray. Source: BLS via FRED, NBER and author’s calculations.

Aggregate weekly hours continue to grow more rapidly than employment; by January, aggregate hours had regained ground such that both employment and hours are now about 4.5% below peak (2007M12) levels.

While private employment continues to grow, government employment continues to fall; the decline is most pronounced at the state and local level (Wisconsin is a good example of the contractionary impact of such measures [1] [2]). However, civilian Federal government employment is also declining.

Figure 3: Twelve month change in government local employment (blue), in state employment (red), and government employment ex.-temporary Census workers (geen), 000’s, seasonally adjusted. NBER defined recession dates shaded gray. Source: BLS via FRED, NBER and author’s calculations.

Finally, it’s useful to examine the trends in multiple labor market series as once. Figure 4 presents one view.

Figure 4: Three month annualized growth rates in nonfarm payroll employment (blue), in civilian employment (red), private sector employment (purple), private sector hours (green), and civilian employment adjusted to conform to NFP concept (orange), all calculated as 3 month log differences, seasonally adjusted. NBER defined recession dates shaded gray. Source: BLS via FRED, BLS, NBER and author’s calculations.

So, for now the trend is positive, but there are clouds on the horizon [Madigan/WSJ RTE]. For more coverage, see [Rampell/Economix] Norris/Economix] [Lahart/WSJ RTE] [Evans/WSJ RTE] [Free Exchange] [Tim Duy] [CR]. A roundup of economist views available from [Izzo/WSJ RTE].

Despite improvement in the labor market, it is clear more needs to be done to accelerate closing the output gap. JEC vice chairman Brady (R) argues:

...It’s time to change course away from higher deficits and higher taxes that are creating fewer jobs and lower expectations for America. Instead, we need to restore confidence by businesses on Main Street to make the new investments in buildings, equipment, and software to create millions of jobs.

Brady and House Republicans continue to push for a balanced budget, fairer tax code, more balanced regulation and reforms to make Social Security and Medicare solvent for the long term.

This perspective shares intellectual lineage with the underpinnings of the Ryan plan, examined here the JEC expansionary contractionary fiscal scenario here. An examination of the other propositions of equal empirical deficiency -- regulation reduction and growth, and regulatory uncertainty reduction and growth -- examined here and here, respectively.

In my opinion, Representative Brady's prescriptions will, like the contractionary fiscal policies implemented in Wisconsin [3] [4], reverse rather enhance the employment recovery seen thus far [5] (i.e., textbook macro applies).

DOJ's Latest "Beat Down" on Swiss Banks

Courtesy of Bruce Krasting

 

 

Wow! The Department of Justice took an extraordinary step yesterday. It indicted Swiss private bank, Bank Wegelin, for aiding and abetting in US income tax fraud. 

This is a big deal. 

I’ll try to keep this fascinating story brief.

Bank Wegelin (W) has been around for 270 years. In Switzerland, it is referred to as a “Private Bank”. There are dozens of Private Banks in the country (less every week). 

 

 

Private Banks do private things and charge big fees. Up until four years ago, the Swiss Private Banks were doing private things for private clients from all over the world, including many US names.

The DOJ sued the big Swiss bank, UBS, over this private business. UBS folded when the DOJ threatened a criminal complaint. (UBS would have had to close all its US businesses had a criminal complaint prevailed.) It ended up costing the bank $780 large and, for the most part, the DOJ got the “names” it was after.

Having blown UBS to smithereens, the DOJ set its sights on the other Swiss Banks. It targeted eleven Private Banks. W was on the list.

Talk of a settlement, including big buck fines and the release of more "names", has been in the press for a few months. Treasury Secretary Geithner met with Eveline Widmere-Schlumpf (Swiss Finance Minister) in Davos last week. It seemed like progress was being made on the thorny problem of the private banks:  

 

 

 

Widmere-Schlumpf:

“We’re hoping that we’ll reach an agreement with the U.S. within the next couple of months”

 

 

I was surprised when the non-USA assets of W were “sold” to Notenstein Private Bank on January 27. Notenstein is 100% owned by Raiffeisen Bank (R). This sale should have been a tip off that the conversation between Geithner and Widmere-Schlumpf was not as friendly and optimistic as the public comments suggested.

 

The Senior Managing Partner of W, Konrad Hummler (KH), commented on the sale of his bank: (Apparently he was surprised too)

 

 

 

“I never could have imagined that we, as owners of Switzerland’s oldest bank, would have ever considered selling”

KH was clear that the sale was a reaction to the pending DOJ hammer blow:

“The extraordinarily difficult situation and threat to the bank brought about by the legal dispute with the US”.

With the non-US assets stripped out of W, the DOJ suit is functionally against a dead person.

Note: Wegelin had no physical assets in the USA. It did have a bank account in the US holding $16.2mm. That was seized yesterday. But that amount is peanuts. The DOJ wants much, much more.

There's an unusual part to this which I find curious. W had an ‘old school’ way of doing business. To give assurances to its private customers that the bank was solid, and their money was safe, the Board of Directors of W assumed personal liability for the affairs of the bank.

No one has lost a Franc in the account transfers from W to R, so it would appear that those directors are now free from any liability. However, the DOJ has named EXECUTIVE X as a plaintiff in the charges files yesterday. So it would appear that Konrad Hummler’s (KH) problems are not over.

It just so happens that KH is also the Chairman of the Neue Zuricher Zeitung (NZZ), an influential Swiss rag. KH has a long history in Swiss banking. He used to run Swiss Bank Corp., which he later sold to UBS. He was the former head of the Swiss Private Bankers Association. He was an adviser to the Swiss National Bank for seven years!  (He lost that job in April, 2011 as the DOJ noose was getting tighter.) This guy is wired.

The DOJ might also pursue the former assets of W. This could be problematic. The timing (and the surprise) of the sale of W's non-US assets to Raiffeisen Bank (R) might have pissed off the folks at the DOJ. There are (unconfirmed) reports in the Swiss press that the sale price for W's non-US assets was CHF 700mm ($725mm). That might explain the actions DOJ took. That’s a lot of loot.

Will the DOJ go after R? This would seem unlikely. R has a very big presence in Switzerland. It is a retail bank with three million customers and branches all over. It is affiliated with Raiffeisen Bank International (RI).  RI is a very big bank in Eastern Europe with 13mm customers . Of further interest is that both R and RI are part of Unico Banking Group. 

 

 

 

This consortium includes the big Dutch bank, Rabo and also the French bank, Credit Agricole. Maybe I’m nuts, but I don’t see the DOJ messing with a hornets' nest this size.

I think the DOJ's steps yesterday were just “shock and awe”. This puts more pressure on the remaining Private Banks. The DOJ blew up W in a rather spectacular fashion. Other Swiss bankers in the DOJ's cross-hairs must be crapping in their pants. Many of them are gathering up client dossiers - and getting ready to write big checks.

The DOJ is like a Rhinoceros. It's not very good looking, and when it puts its head down and charges into the brush, it tramples anything in its way. Nothing can stop it.

This matter will come to a head pretty soon. If it doesn’t, the DOJ will knock off the next Private Bank on the list. 

Fines will get paid. Names will be turned over. Some individuals will be prosecuted. The “names” have some explaining to do. At the top of this list is the good old IRS. Other interested parties will include creditors, wives, ex-wives, ex-wives’-lawyers, current-wives’-lawyers, business partners, employers, the press, relatives and friends.

After a while, this will all be forgotten. Sort of. The door for Americans to hide money away from the IRS is closed. Sort of. The foreign banks won’t want American customers; it’s too much of a hassle. If you do find a Banca di..... outside of the USA, you will have to plunk down a SS card, and agree to have info given to the IRS. 

The door is closed for all electronic money. But the door is not completely closed. This story is as old as the Egyptians. Folks have been cheating their partners, wives and the taxman forever. It’s not likely to stop. 

I understand that cash boxes are filling up with bills in some locations. In a zero interest rate environment, that makes some sense. Sort of. It makes infinite sense if rhinos are around. 

On second thought, this episode will not be forgotten. Many people have already been trampled. More are in harm's way. Such is life. It has left a scar on the US image in some of the financial centers. The US played hardball and won. You don’t win many friends playing hardball. But this had nothing to do with friends. (Switzerland was once a friend of the USA.) It was always about the money.

There are many pieces of this story that would make for a good movie. For the life of me, I can’t figure out who are the good guys. Maybe that's the point.

. Note: Tyler Durden sent me a note with a link to a ZH piece from 2009. This is a rant by Konrad Hummler, the "Boss" at Wegelin. ZH was three years ahead of the curve on this one. http://www.zerohedge.com/article/farewell-america-switzerland