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A Less Than Equitable Arrangement
Yesterday I received from an old friend and partner the document below. As most of you, if not all, maintain accounts at both banks and brokers, or at least one or the other, it should be of interest to understand to what extent the financial community is permitted to speculate with your funds for its own benefit and, perhaps, your loss.
The article is complex, so for those of you who are otherwise too busy to read it, I will sum it up.
UNDER CURRENT LAW AND PRACTICE, YOUR FUNDS MAY BE USED, IN TOTAL, TO FINANCE THE SPECULATIONS IN VARIOUS DERIVATIVES BY BOTH BANKS AND BROKERS. THIS APPEARS TO BE A LESS THAN EQUITABLE ARRANGEMENT.
Submitted by Jeff Snider, President & CIO of Atlantic Capital Management:
MF Global Shines A Light On Monetarism's Incapacity To Enhance The Real Economy
The temptation to compare any financial institution’s failure to those that preceded the 2008 crisis and panic are reasonable. It is easy to classify MF Global as 2011’s “Lehman” event, just as it was to use the same term to describe Dexia a few weeks ago. The use of the term “this year’s Lehman” is somewhat misplaced simply because its users are looking for an event that kicks off another crisis or panic. Instead of using “Lehman” to describe a potential inflection point that propels the crisis into panic, it might be better to see MF Global as AIG.
The comparison to AIG is not to say that MF Global was as interconnected, that its failure will be as devastating, or that it is the straw that breaks the European camel’s back. The urge to see the past in the present is historically valid, but it will never be exactly alike (Mark Twain had this right). Rather I think the comparison is useful in that AIG taught the wider world what was really rotten at the core of modern finance, namely hidden risks that were shockingly existential. MF Global’s failure importantly shows that none of the lessons have been heeded in the days since, providing a somewhat unique window into the real dangers that still lurk hidden in the shadows. More than that, though, MF Global demonstrates an obvious shortcoming of the financial system as it relates to the real economy.
ZeroHedge posted the bankruptcy affidavit of MF Global’s President and Chief Operating Officer Bradley I. Abelow, drawing attention to Section E, item 33 on page 13. Mr. Abelow makes the following statement under oath:
“On September 1, 2011, MF Holdings announced that FINRA informed it that its regulated U.S. operating subsidiary, MFGI, was required to modify its capital treatment of certain repurchase transactions to maturity collateralized with European sovereign debt and thus increase its required net capital pursuant to SEC Rule 15c3-1.”
The transaction in question was a “repo-to-maturity” financing deal, collateralized with the troubled sovereign European debt that everyone has been talking about in the past few days. What is particularly striking about this is that a “repo-to-maturity” deal is accounted for as a sale, meaning that what is essentially an ongoing collateralized loan is, surprise, hidden off the balance sheet. Maddeningly, MF Global likely booked a profit up front at the transaction’s consummation using obviously faulty mathematical expressions of those “reasonable” expectations of profit, thus avoiding the need to post any liability to the balance sheet.
This makes a lot of sense, then, in why FINRA “demanded” it change its capital treatment of the transaction. Though it was “properly” accounted for according to convention, the risks of collateralizing a loan with questionable debt means that MF Global has ongoing liquidity risk attached to it. As the value of the European debt collateral is questioned, or falls, the lender/cash owner counterparty will ask for additional collateral posting as it applies a stricter haircut to that original, troubled collateral. So, even though this transaction has fully cleared MF Global’s books, the company is still on the hook should it be required to post additional collateral or cash (which ended up with the company in bankruptcy, just like AIG).
"The stink here is that this is not an isolated case of cheating (aside from MF Global’s use of client funds). It is a pervasive shadow element to the modern financial system, fully allowed by accounting conventions and regulators."
The stink here is that this is not an isolated case of cheating (aside from MF Global’s use of client funds). It is a pervasive shadow element to the modern financial system, fully allowed by accounting conventions and regulators. Just like AIG, MF Global was not brought down by bad debt per se, it was brought down by the hidden liquidity risk of the deterioration of off balance sheet arrangements that were allowed by accounting standards. The fact that it was classified as a sale was completely inappropriate in terms of describing the overall liquidity risk of the company, as FINRA belatedly recognized.
MF Global was expressing a bet that it could earn a spread, essentially risk free, on the rate it paid on the repo transaction (the lowest borrowing rate around) and the interest it received on the Euro sovereigns (among the highest rates of the sovereign class), all the while counting on the European politicians and the ECB to provide enough “support” to maintain a relatively constant debt price in order to fool the marketplace into complacency about real risks. So the risk hidden but embedded within the transaction appears long before there is a default, hitting the company once the repo counterparty devalues the collateral (the market was apparently not fooled enough by the ECB’s attempts at price stability). This is the essential financial misrepresentation of the age. Repo accounting is responsible for so much hidden risk, yet it has become central to the ongoing survival of the system as it is currently constituted.
The pliability of how the system is allowed to “book” and account for risk is certainly the driving force making repos so vital to modern banking. For instance, a gold or silver lease arrangement is essentially the same as a repo-to-maturity transaction, yet it is accounted for in exactly the opposite way. A gold lease is really a sale transaction since the physical metal is literally removed from the custody of the gold owner, yet it is accounted for as a collateralized loan where the gold remains on the owner’s books as if it is really there (since it technically involves a repurchase agreement on the back end, even though these deals are simply rolled over in perpetuity and the repurchase never takes place, nor is it intended to). Both gold leasing and the repo-to-maturity transaction are forms of collateralized loans, yet they receive far different treatment so that they accomplish exactly what the banks want to accomplish, which is disguising the real nature of each transaction. The gold lease presents risks in that metal may not be where everyone thinks it is, and the sale treatment of the repo-to-maturity removes haircut and liquidity risks from what are supposed to be transparent statements of condition.
That is why this system has to change at some point. It is exactly designed to be misleading, and the reason is so very simple. In any fractional system there will be a desire to amplify that fraction to the maximum degree. But in doing so, participants recognize that the process of maximization entails creating negative human emotions and perceptions since history is not really that kind to this manner of fractionalization. So the system has institutionalized, abetted by the very regulators that are supposed to cap fractions and leverage, these methodologies of hiding just how much financial entities have engaged in maximizing themselves under the cover of mathematical precision. Trillions in derivatives are no problem because there are powerful and elegant equations to net and hedge them.
Without any sort of exogenous anchor to credit production and banking, risks are theoretically nearly infinite (since the slightest disruption to expected haircuts renders firms utterly bankrupt!), while at the same time there are multiple avenues for misdirection and disguising those realities. The Panic of 2008 was supposed to correct these excesses and remedy the fact that risks have not been accurately priced for decades. Yet the system has resisted every effort, simply settling for redefining the appearance of safety yet again. Somewhere in that mathematical pursuit of maximum fractions, the very goal of finance changed, as if traditional banking was no longer sufficient to support the pursuit’s ever-growing ambitions. So the financial economy has broken away from the real economy, using the ironic cover story of enhancing price discovery to the process of intermediation –complexity is good!
Intermediation is supposed to be about matching the wider (real) pool of savings to worthwhile economic projects that have a real, productive impact on the real economy. MF Global’s repo-to-maturity transaction cannot be fairly classified as real intermediation since the firm knowingly advanced credit to an economically unfeasible obligor with the expectation that the price would never reflect that reality (how’s that for enhancing price discovery). This crystallizes, I believe, just how far the financial system has moved away from real intermediation and reflects the biggest part of the real problems in the real economy – money is no longer productive in economic terms and has not been for decades.
"This crystallizes, I believe, just how far the financial system has moved away from real intermediation and reflects the biggest part of the real problems in the real economy – money is no longer productive in economic terms and has not been for decades."
The Occupy Wall Street crowd sees this as a problem with capitalism. I believe that they are correct in their target, but wrong in their diagnosis. This is not a problem of capitalism since Wall Street is a practitioner of monetarism. A real capitalist system works through real intermediation creating positive opportunities for productive enterprises (scarce money is actually vital here). Our current system of repo-to-maturity and gold leasing is nothing but empty monetarism’s habit of regularly forcing the circulation of empty paper. And when the system begins to doubt itself, as it did in 2008, the answer is always about finding a way to restart the fractional maximization process yet again, which means disguising the real risks inherent to that process. There is no real mystery as to why prices and values have seen such a divergence, and why that is a big problem to a system that depends on appearances.
The fact that money is disconnected from the real economy never enters the consciousness of monetarists since money is always the answer. But make no mistake, the primary reasons for this global malaise are that money has lost its productive capacity and its proper place as a tool within the system, not as the ultimate object of that system. MF Global’s failure is an apt demonstration of just how far modern finance has strayed, just as AIG was three years ago.
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The father of all giant sea bugs was recently discovered off the coast of Java.
- A new species of isopod with a resemblance to a certain Sith lord was just discovered.
- It is the first known giant isopod from the Indian Ocean.
- The finding extends the list of giant isopods even further.
Humanity knows surprisingly little about the ocean depths. An often-repeated bit of evidence for this is the fact that humanity has done a better job mapping the surface of Mars than the bottom of the sea. The creatures we find lurking in the watery abyss often surprise even the most dedicated researchers with their unique features and bizarre behavior.
A recent expedition off the coast of Java discovered a new isopod species remarkable for its size and resemblance to Darth Vader.
The ocean depths are home to many creatures that some consider to be unnatural.
According to LiveScience, the Bathynomus genus is sometimes referred to as "Darth Vader of the Seas" because the crustaceans are shaped like the character's menacing helmet. Deemed Bathynomus raksasa ("raksasa" meaning "giant" in Indonesian), this cockroach-like creature can grow to over 30 cm (12 inches). It is one of several known species of giant ocean-going isopod. Like the other members of its order, it has compound eyes, seven body segments, two pairs of antennae, and four sets of jaws.
The incredible size of this species is likely a result of deep-sea gigantism. This is the tendency for creatures that inhabit deeper parts of the ocean to be much larger than closely related species that live in shallower waters. B. raksasa appears to make its home between 950 and 1,260 meters (3,117 and 4,134 ft) below sea level.
Perhaps fittingly for a creature so creepy looking, that is the lower sections of what is commonly called The Twilight Zone, named for the lack of light available at such depths.
It isn't the only giant isopod, far from it. Other species of ocean-going isopod can get up to 50 cm long (20 inches) and also look like they came out of a nightmare. These are the unusual ones, though. Most of the time, isopods stay at much more reasonable sizes.
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During an expedition, there are some animals which you find unexpectedly, while there are others that you hope to find. One of the animal that we hoped to find was a deep sea cockroach affectionately known as Darth Vader Isopod. The staff on our expedition team could not contain their excitement when they finally saw one, holding it triumphantly in the air! #SJADES2018
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What benefit does this find have for science? And is it as evil as it looks?
The discovery of a new species is always a cause for celebration in zoology. That this is the discovery of an animal that inhabits the deeps of the sea, one of the least explored areas humans can get to, is the icing on the cake.
Helen Wong of the National University of Singapore, who co-authored the species' description, explained the importance of the discovery:
"The identification of this new species is an indication of just how little we know about the oceans. There is certainly more for us to explore in terms of biodiversity in the deep sea of our region."
The animal's visual similarity to Darth Vader is a result of its compound eyes and the curious shape of its head. However, given the location of its discovery, the bottom of the remote seas, it may be associated with all manner of horrifically evil Elder Things and Great Old Ones.
It could lead to a massive uptake in those previously hesitant.
A financial shot in the arm could be just what is needed for Americans unsure about vaccination.
On May 12, 2021, the Republican governor of Ohio, Mike DeWine, announced five US$1 million lottery prizes for those who are vaccinated. Meanwhile, in West Virginia, younger citizens are being enticed to get the shot with $100 savings bonds, and a state university in North Carolina is offering students who get vaccinated a chance to win the cost of housing. Many companies are paying vaccinated employees more money through bonuses or extra paid time off.
The push to get as many people vaccinated as possible is laudable and may well work. But leading behavioral scientists are worried that paying people to vaccinate could backfire if it makes people more skeptical of the shots. And ethicists have argued that it would be wrong, citing concerns over fairness and equity.
As a behavioral scientist and ethicist, I draw on an extensive body of research to help answer these questions. It suggests that incentives might work to save lives and, if properly structured, need not trample individual rights or be a huge expense for the government.
In the United States, incentives and disincentives are already used in health care. The U.S. system of privatized health insurance exposes patients to substantial deductibles and copays, not only to cover costs but to cut down on what could be deemed as wasteful health care – the thinking being that putting a cost to an emergency room visit, for example, might deter those who aren't really in need of that level of care.
In practice, this means patients are encouraged to decline both emergency and more routine care, since both are exposed to costs.
Paying for health behaviors
In the case of COVID-19, the vaccines are already free to consumers, which has undoubtedly encouraged people to be immunized. Studies have shown that reducing out-of-pocket costs can improve adherence to life-sustaining drugs, whether to prevent heart attacks or to manage diabetes.
A payment to take a drug goes one step further than simply reducing costs. And if properly designed, such incentives can change health behaviors.
And for vaccination in particular, payments have been successful for human papillomavirus (HPV) in England; hepatitis B in the United States and the United Kingdom; and tetanus toxoid in Nigeria. The effects can be substantial: For example, for one group in the HPV study, the vaccination rate more than doubled with an incentive.
For COVID-19, there are no field studies to date, but several survey experiments, including one my group conducted with 1,000 Americans, find that incentives are likely to work. In our case, the incentive of a tax break was enough to encourage those hesitant about vaccinations to say they would take the shot.
Even if incentives will save lives by increasing vaccinations, there are still other ethical considerations. A key concern is protecting the autonomous choices of people to decide what they put into their own bodies. This may be especially important for the COVID-19 vaccines, which – although authorized as likely safe and effective – are not yet fully approved by the Food and Drug Administration.
But already people are often paid to participate in clinical trials for drugs that have not yet been approved by the FDA. Ethicists have worried that such payments may be “coercive" if the money is so attractive as to override a person's free choices or make them worse off overall.
One can quibble about whether the term “coercion" applies to offers of payment. But even if offers were coercive, payments may still be reasonable to save lives in a pandemic if they succeed in greater levels of immunization.
During the smallpox epidemic nearly 100 years ago, the U.S. Supreme Court upheld the power of states to mandate vaccines. Compared with mandating vaccination, the incentives to encourage vaccines seem innocuous.
Exploitation and paternalism
Yet some still worry. Bioethicists Emily Largent and Franklin Miller wrote in a recent paper that a payment might “unfairly" exploit “those U.S. residents who have lost jobs … or slipped into poverty during the pandemic," which could leave them feeling as if they have “no choice but to be vaccinated for cash." Others have noted that vaccine hesitancy is higher in nonwhite communities, where incomes tend to be lower, as is trust in the medical establishment.
Ethicists and policymakers should indeed focus on the poorest members of our community and seek to minimize racial disparities in both health outcomes and wealth. But there is no evidence that offering money is actually detrimental to such populations. Receiving money is a good thing. To suggest that we have to protect adults by denying them offers of money may come across as paternalism.
Some ethicists also argue that the money is better spent elsewhere to increase participation. States could spend the money making sure vaccines are convenient to everyone, for example, by bringing them to community events and churches. Money could also support various efforts to fight misinformation and communicate the importance of getting the shot.
The cost of incentives
Financial incentives could be expensive as a policy solution. As in Ohio, lottery drawings are one way to cap the overall cost of incentives while giving millions of people an additional reason to get their shot.
The tax code could also allow for a no-cost incentive for vaccination. Tax deductions and credits are often designed to encourage behaviors, such as savings or home ownership. Some states now have big budget surpluses and are considering tax relief measures. If a state announced now that such payments would be conditional on being vaccinated, then each person declining the shot would save the government money.
Ultimately, a well-designed vaccination incentive can help save lives and need not keep the ethicists up at night.
Geologists discover a rhythm to major geologic events.
- It appears that Earth has a geologic "pulse," with clusters of major events occurring every 27.5 million years.
- Working with the most accurate dating methods available, the authors of the study constructed a new history of the last 260 million years.
- Exactly why these cycles occur remains unknown, but there are some interesting theories.
Our hearts beat at a resting rate of 60 to 100 beats per minute. Lots of other things pulse, too. The colors we see and the pitches we hear, for example, are due to the different wave frequencies ("pulses") of light and sound waves.
Now, a study in the journal Geoscience Frontiers finds that Earth itself has a pulse, with one "beat" every 27.5 million years. That's the rate at which major geological events have been occurring as far back as geologists can tell.
A planetary calendar has 10 dates in red
Credit: Jagoush / Adobe Stock
According to lead author and geologist Michael Rampino of New York University's Department of Biology, "Many geologists believe that geological events are random over time. But our study provides statistical evidence for a common cycle, suggesting that these geologic events are correlated and not random."
The new study is not the first time that there's been a suggestion of a planetary geologic cycle, but it's only with recent refinements in radioisotopic dating techniques that there's evidence supporting the theory. The authors of the study collected the latest, best dating for 89 known geologic events over the last 260 million years:
- 29 sea level fluctuations
- 12 marine extinctions
- 9 land-based extinctions
- 10 periods of low ocean oxygenation
- 13 gigantic flood basalt volcanic eruptions
- 8 changes in the rate of seafloor spread
- 8 times there were global pulsations in interplate magmatism
The dates provided the scientists a new timetable of Earth's geologic history.
Tick, tick, boom
Credit: New York University
Putting all the events together, the scientists performed a series of statistical analyses that revealed that events tend to cluster around 10 different dates, with peak activity occurring every 27.5 million years. Between the ten busy periods, the number of events dropped sharply, approaching zero.
Perhaps the most fascinating question that remains unanswered for now is exactly why this is happening. The authors of the study suggest two possibilities:
"The correlations and cyclicity seen in the geologic episodes may be entirely a function of global internal Earth dynamics affecting global tectonics and climate, but similar cycles in the Earth's orbit in the Solar System and in the Galaxy might be pacing these events. Whatever the origins of these cyclical episodes, their occurrences support the case for a largely periodic, coordinated, and intermittently catastrophic geologic record, which is quite different from the views held by most geologists."
Assuming the researchers' calculations are at least roughly correct — the authors note that different statistical formulas may result in further refinement of their conclusions — there's no need to worry that we're about to be thumped by another planetary heartbeat. The last occurred some seven million years ago, meaning the next won't happen for about another 20 million years.