Guest Post: Miligate: Geishas, Courtesans And Groupies


Submitted by Ben Tanosburn,

Congress, particularly that uppity Senate club of multi-millionaires, seems always ready to remind us – the hoi polloi citizenry – that it is much more than the legislative, law-making branch of government.  At some historic point, or perhaps at a series of evolving points, this august body became self-appointed guardian of both America’s national security and American morals.

If only the nation’s Founding Fathers could see us now!  A Supreme Court totally gone wild, de facto legislating and imposing its will; a Congress, lair of lazy career politicians and self-serving scoundrels; and an Executive, wearing reversible togas colored blue and red, running the nation as an empire, and using the country’s military as police force for multi-national predatory capitalism… subsidized by taxpayers from America’s lower and middle classes.  [Yes, the lower classes, contrary to how Romney and the Thug-elite view them, do pay taxes (indirectly) when their labor is not properly compensated.]

It is now beginning to look as if the nation’s economic problems, the “fiscal cliff” that Congress imposed earlier in the year in lieu of compromise –a powder keg set to explode by year’ end – might have to share in importance with an investigation of extracurricular behavior exhibited by top military brass.  It could potentially become a new tantalizing distraction being brought to the American coliseum by an irresponsible Congress and an equally irresponsible corporate media.

Are we at the embryo stage of a major military scandal… a Miligate?

Many of us would interpret the word “miligate” as a misspelling of mitigate; that is, unless we capitalize the M and use it in the context of recent behavior exhibited by top military brass, flag officers commanding our empire’s legions: two field marshals of expeditionary campaigns… for now.  Perhaps we should be asking the question, are some members of Congress in a salacious or sexually aroused mood to bring about Miligate?

The US military has almost a thousand flag officers (950 +/-), wearing from one to four stars, commanding the activities of a million and a half souls, nearly 80 percent 35 years of age or younger… at times referred to as warriors, other times as heroes.  Of course, those terms are for home (US) consumption, while the epithets assigned to them in foreign lands tend to be at the opposite end of the flattery spectrum.

Now two elite 4-star officers, David Petraeus and John Allen are under the gun – Petraeus, the military genius [by Washington accounts] who took on directorship of the CIA a year ago – and from which he has recently resigned; and his replacement at the helm of the Afghanistan black hole, and recently nominated to assume command of NATO – nomination now on-hold, the marine “monk,” John Allen.

Petraeus and Allen are two Samson-characters who availed their modern day Delilah(s) with a razor-sharp lack of common sense. Gen. Allen, from all current accounts, is likely to withstand the tempest, only his judgment perhaps scathed, and a back down on his nomination to the NATO command.  For Petraeus, it will be a horse of a different color, tarnishing past accomplishments and a sterling reputation.

Intellectual generals such as David Petraeus are hard to come by, but as successful as he was in Princeton defending his dissertation [The American Military and the Lessons of Vietnam: A Study of Military Influence and the Use of Force in the Post-Vietnam Era] his poor judgment will always precede and preamble any glory he might have otherwise earned.  No, not his poor judgment in the affaire with Paula Broadwell, assuming that national security was never at risk, but his incredibly poor judgment in writing a recommendation – to a judge – for Natalie Khawam, Jill Kelley’s twin sister; someone he hardly knew on a child custody matter of which he knew little or nothing.

Paula Broadwell, Jill Kelley and Natalie Khawan are neither geishas, nor courtesans… perhaps more of a groupie-variety around the military, with aspirations and personal needs – you may include morals – that are none of our business; nor Congress’ business once the investigation confirms that national security was not at risk.  Whatever the nature or level of investigation, such investigations, while in progress, should not be the public’s salacious concern fed by a self-serving media.

Let’s all be concerned with pressuring the politicians to defuse the “fiscal cliff,” and wait until appropriate investigations are concluded to determine whether there is a Miligate.

The Four Charts That Corporate Bond Managers Fear The Most


Much is made of the ‘apparent’ bubble in Treasury bonds – a 30-year or so relatively consistent trend in government bonds (through thick and thin) and yet allocations remain minimal compared to our increasingly similar Japanese friends have experienced. It would seem to us, thanks to Bernanke’s ‘visible’ hand that the real bubble is in spread product – as rates are so compressed, investors seemingly oblivious to the word ‘risk’ (unintended consequence) have flooded into ever-increasing yield/spread products – with high-yield bonds now dominated by these technical inflows (as we noted in the close today). If ever the combination of anchoring bias, ‘dance while the music is playing’, and herding was evident, it is in corporate credit. To wit, the total disengagement from reality (both real ‘micro’ earnings and ‘macro’ economic uncertainty) that a flood of money has created in this increasingly crowded (and increasingly-er illiquid) market. Managers are well aware that the liquidity tsunami has moved the maturity mountain (as Citi’s Matt King notes) but has helped the weeds as well as the roses.

 

The front-running risk-averse yield-seeking flood of money into corporate bonds has technically crushed spreads…

 

But it has reached epic proportions of disconnection in recent quarters as ‘micro’ earnings have missed expectations (inverted on scale below – presented as distance from pre-season expectations we have had 5 quarters in a row of misses) but spreads continue to compress…

 

and given the massive (almost unprecedented) levels of ‘macro’ policy uncertainty, the flow of safe-haven-but-yield-chasing cash has broken the link between the reality of risk and the pricing of risk…

 

and has therefore removed signaling-effects from this critical market. More importantly, the wall of liquidity that has been squeezed into a relatively small market has lifted all boats and enabled the entire maturity structure of corporate debt to be kicked down the road – unfortunately enabling the dead to live ‘unproductively’ far longer than they ever should – necessarily dragging mal-investment in at every turn…

So this leaves corporate bond managers ‘dancing while the music plays’ yet fully aware that the market simply cannot bear the type of exit that will occur should reality ever seep back into the market’s pricing (say by a fiscal shock?). As Dory would say “Just keep swimming…” as Bernanke has interfered with nature…

 

Charts: Citi

With Over 100,000 Supporting Texas Secession, Ron Paul Weighs In


With just 5 days needed for the Texas secession petition to surpass 100,000 signatories, all is not well with the Union…

… actually, not only are things not well with the Union, things are getting worse by the minute, as American society splinters into diametrical opposites to a degree not seen in decades, a process which in itself virtually assures there will be no cliff compromise before the opportunity cost of ending the stand off becomes far too great. And with the option of the Mr. Chairman “getting to work” to fix things, one wonders – is even the market a motivating enough factor given a 20, 30 or even 50% drop in the rearview mirror: after all as the Fed has demonstrated, there is no need for a fiscal compromise to get the S&P to just shy of all time highs. Certainly, even America’s politicians are very much aware of this by now (of course, this assumes that Bernanke is still in charge of the market: something we have claimed for two months is very much in question).

Regardless, with the topic of secession on everybody’s lips, here is what none other than Ron Paul has said about this suddenly very volatile issue.

Ron Paul: Secession Is an American Principle

 

Ron Paul: This weekend I got a couple of calls from the media asking me questions about Rick Perry, our governor here in Texas and the statements he made about possible secession. Now, he didn’t call for secession, but he was restating a principle that was long held and at least in the original time of our country, and that is that there was a right to secession.

Actually, after the Civil War, nobody believes there is a so-called right to secession, but it is a very legitimate issue to debate because all of the states that came into the Union before the Civil War believed they have a right to secede and New England in the early part of the 19th century actually considered it, and nobody questioned them about whether they had the right to do it or not.

Since the Civil War, it’s been sort of a dead issue, but he brought it up. It stirred the media and believe me, it really stirred some of the liberal media where they started really screaming about what is going on here. “This is un-American”, I heard one individual say, “This is treasonous to even talk about it.”

Well, they don’t know their history very well because if they think about it, it’s an American tradition. It’s very American to talk about secession. That’s how we came into being. Thirteen colonies seceded from the British and established a new country, so secession is very much an American principle.

What about all the strong endorsements we have given over the past decade or two of those republics that seceded from the Soviet system? We were delighted with this. We never said, “Oh no. Secession is treasonous”.

No. Secession is a good principle. Just think of the benefits that would have come over these last 230-some years if the principle of secession had existed. That means the federal government would always have been restrained, not to overburden the states with too much federalism, too many federal rules and regulations.

But since that was all wiped out with the Civil War, the federal government has grown by leaps and bounds and we have suffered the consequences, and we need to reconsider this. It’s not un-American to think about the possibility of secession. This is something that’s voluntary. We came together voluntarily. A free society means you can dissolve it voluntarily. That was the whole issue was about.

Just remember one of the reasons that Wilson drove us in unnecessarily into World War I. He talked about what we have to give, have every country in the world the benefit of self-determination, a good principle. Of course, I don’t think he really believed that. But self-determination is a good principle. It’s a very American principle, so to me it’s a shame that we can’t discuss this.

You know, it’s interesting that so many of us have been taught for so many years, and as long as I can remember from the first grade on up taking the pledge of allegiance that we have a republic that’s “indivisible” and we have been preached that and preached it. So therefore, there is no contest, no question since the Civil War that we have even the thought that this could happen.

But you know what a lot of people don’t talk about and they really don’t even know about is who wrote the pledge to the flag. The pledge to the flag came from, for instance, Bellamy, an avowed Socialist who wanted to put into concrete in the pledge this principle of being indivisible, and he did it, you know, for the celebration ironically 400 years of the celebration of the landing of Christopher Columbus, so it was in 1892.

I mean, the pledge of allegiance has not been here, you know, all our history. So I think it’s worth of discussion. I think people should discuss this because right now, the American people are sick and tired of it all and I think the time will come when people will consider it much more seriously is when the federal government can no longer deliver. That time will come when the dollar collapses.

No matter what they do and how many promises they have and how many bailouts they have, they can’t do it if the money doesn’t work. So then, the independence of the states will come back and it doesn’t mean that you’ll be un-American to even contemplate what might have to be done once the dollar crashes.

While this video was originally recorded on 4/19/2009, Ron Paul spokeswoman Rachel Mills confirmed earlier today (11/13/2012) that Ron Paul “feels the same now” about secession as he did in this video.

House Republicans Find Corzine Guilty Of MF Global Collapse, Missing Funds; Democrats Refuse To Endorse Findings


It appears that these days not even the Corzining of client money can happen without it being split across furiously polarized party lines. As it turns out hours ago, the Committee on House Financial Services released an advance glimpse into a report to be released in its entirety tomorrow, which puts the blame for the collapse of not only MF Global, but also the disappearance of millions in client money, right where it belongs: the firm’s then CEO Jon Corzine.

As Bloomberg summarizes, “The summary reflects conclusions reached by Republicans, who hold a majority on the panel and were in contact with Democrats during the investigation, according to Jeff Emerson, spokesman for the Financial Services Committee. The investigation included three congressional hearings, more than 50 interviews and a review of documents from MF Global, former brokerage employees and regulators, according to the summary.”

Yet that Corzine corzined millions, leaving clients scrambling in bankruptcy court in an attempt to recover what should have been segregated money from the very beginning, and also just happened to blow up one of the 21 Fed-anointed Primary Dealers, is not surprising: this has been long known by everyone. Those who need a refresher are urged to recall the Honorable’s testimony before the House… or maybe not: after all it is not as if Corzine himself could recall a whole lot. Where it gets interesting is that the former Democratic governor, and senator, not to mention primary bundler for president Obama, is, in the eyes of the members of the committee, innocent: All the democrats on the Investigations Subcommittee refused to sign off on the findings, meaning that to them, Corzine is completely innocent. That this is purely a political move is glaringly obvious. It is also abhorrent, because as long as political ideology gets in the way of pursuing and imposing justice, the Banana States of America will remain just that.

From The Committee on Financial Services:

Subcommittee Investigation Reveals Decisions by Corzine Led to MF Global Bankruptcy and Missing Customer Funds 

Full report of Financial Services Oversight and Investigations Subcommittee
to be released Thursday

 

WASHINGTON – Decisions by Jon Corzine to chart a radically different course for MF Global and try to turn the 230-year-old commodities broker into a full-service investment bank were the cause of the firm’s bankruptcy and failure to protect customer funds, Republican members of a congressional subcommittee will report this week.

The House Financial Services Subcommittee on Oversight and Investigations, chaired by Rep. Randy Neugebauer, will release the full results of its year-long staff investigation into the collapse of MF Global on Thursday.

 

“Our investigation is essentially an autopsy of how MF Global came to its ultimate demise and what can be done to prevent similar customer losses in the future,” said Chairman Neugebauer.

 

Corzine, a former co-chairman of Goldman Sachs who later became a U.S. senator and governor of New Jersey, resigned from MF Global on November 4, 2011, almost 20 months after becoming the firm’s Chairman and CEO.  The brokerage had declared bankruptcy four days earlier and its collapse revealed a $1.6 billion shortfall in customer funds. 

 

“Choices made by Jon Corzine during his tenure as chairman and CEO sealed MF Global’s fate,” Chairman Neugebauer stated.   “Farmers, ranchers and other customers may never get back over $1 billion of their money as a result of his decisions. Corzine dramatically changed MF Global’s business model without fully understanding the risks associated with such a radical transformation.”

 

The Subcommittee’s staff investigation of MF Global involved three hearings, more than 50 witness interviews, and the review of more than 243,000 documents obtained from MF Global, its former employees, federal regulators and other sources.

 

“By expanding MF Global into new business lines without first returning its core commodities business to profitability, Corzine ensured that the company would face enormous resource demands and exposed it to new risks that it was ill-equipped to handle,” the subcommittee report states.

 

In order to generate the revenue needed to fund MF Global’s transformation, Corzine invested heavily in the sovereign debt of struggling European countries.  These investments, which carried enormous default and liquidity risks, were a “prime focus” of Corzine’s attention and he failed to develop a corporate strategy for managing the risks, the subcommittee majority staff found.

 

Authoritarian atmosphere

 

Those risks were exacerbated by an authoritarian atmosphere Corzine created at the firm where “no one could challenge his decisions,” the subcommittee report reveals. 

 

Corzine made significant changes to MF Global’s senior management, including the hiring of Bradley Abelow, his former gubernatorial chief of staff, as the firm’s chief operating officer.

 

When MF Global’s chief risk officer disagreed with Corzine about the size of the company’s European bond portfolio, Corzine directed him to report to Abelow rather than to MF Global’s board of directors.  “This change effectively sidelined the most senior individual charged with monitoring the company’s risks and deprived the board of an independent assessment of the risks that Corzine’s trades posed to MF Global, its shareholders and its customers,” the report declares.

 

Corzine insulated trading activity from review process

 

In addition, the subcommittee’s report reveals that Corzine acted as MF Global’s “de facto chief trader” and insulated his trading activities from the company’s normal risk management review process.  This enabled Corzine to quickly build the company’s European bond portfolio “well in excess of prudent limits without effective resistance.”

 

Rather than hold the European bonds on MF Global’s books, which could expose the company to earnings volatility, Corzine chose to use these bonds as collateral in repurchase-to-maturity (RTM) transactions.  This permitted the company to book quick profits while keeping the transactions off its balance sheet.

 

Failure to initially disclose extent of risks

 

Since MF Global did not initially disclose the full extent of its European bond holdings, federal regulators and the investing public were not aware of all the risks facing the company. 

 

The belated disclosure in October 2011 of its extensive European RTM portfolio – which amounted to 14 percent of MF Global’s total assets – combined with poor earnings news prompted credit rating agencies to downgrade the company’s credit rating to junk status. 

 

The downgrade set off a “run on the bank” by MF Global’s investors, customers and counterparties that created a liquidity crisis during what would turn out to be the company’s final days.  

 

Because Corzine had failed to integrate systems and controls for managing the company’s liquidity and protecting customer funds, the company could not fully assess and anticipate its liquidity needs during the crisis, nor could it coordinate its cash management, liquidity monitoring and regulatory compliance functions.

 

Liquidity crisis prompts withdrawal of customer funds

 

“As the company struggled to find additional liquidity,” the subcommittee reports, “company employees identified excess company funds held in customer accounts.  However, because they did not have an accurate accounting of the amount of customer funds the company held, they withdrew customer funds as well as company funds.”

 

The subcommittee notes that it will be up to prosecutors and regulators to determine whether MF Global or its employees violated laws or regulations when these withdrawals of customer funds were made.

 

‘Dereliction of duty

 

“However, the responsibility for failing to maintain the systems and controls necessary to protect customer funds rests with Corzine,” the report maintains.  “This failure represents a dereliction of his duty as MF Global’s chairman and CEO.”

 

In its report, the subcommittee recommends that Congress consider legislation to impose civil liability on the officers and directors of futures commission merchants (FCMs) like MF Global who sign financial statements or authorize transfers from customer segregated accounts.  Such legislation could “restore investor confidence in the derivatives markets and ensure that an FCM does not misuse customer funds in the future,” the Subcommittee report said.

 

Other findings of investigation to be released

 

In addition to its findings that Corzine’s decisions led to MF Global’s downfall, the Subcommittee report is expected to address regulatory agencies’ failure to share critical information with each other about MF Global, failures by credit rating agencies to sufficiently review MF Global’s public filings, and concerns about the New York Federal Reserve’s decision to designate MF Global as a “primary dealer” despite the company’s troubled financial situation.

Greenlight Capital And Third Point September 30 Holdings Summary


With the star (and legend) of John Paulson long dead and buried, and his Disadvantage Minus fund an embarrassment, wrapped in a monkeyhammering, inside a humiliation, there are few “groupied” HF managers left. One of them is Dan Loeb, who still manages to generate positive Alpha regardless of how Beta does, another one used to be William Ackman (not so much anymore, especially not with the whole JCP fiasco), some others are David Tepper, Seth Klarman, and a few others, but nobody has quite the persistent clout and following of young master, and poker maestro, David Einhorn, and his fund Greenlight. Below we breakdown his latest just released 13F, which as a reminder shows, his holdings as of September 30. Key changes: Einhorn cut his holdings in Best Buy, Carefusion, Compuware, Expedia, Hess and UnitedHealth, and started new, small, positions in Yahoo, Babcock and Wilcox, Aecon and Knight Capital. More importantly, he cut his top position, Apple, by nearly 30% from 1.45 million to 1.09 million shares, cut modestly his second biggest position Seagate, added materially to GM, making it his third position, added to Cigna at #4 and added modestly to the GDX Gold Miners ETF. Sad to say, unless he has changed his portfolio dramatically since September 30, Einhorn is likely not doing too hot, especially in the last week or two.

Source: SEC

And as a bonus here is Dan Loeb’s Q3 equity holdings. Obviously this does not include bond positions such as his (not quite so) recent foray into Portugal, and (his far more recent) purchase of Greek bonds on hopes of either a distressed buy back (not happening) or an OSI cramdown (Germany just said 9-9-9).


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