Posts Tagged ‘Lehman’
China Joins The Broken “Keynesian Multiplier” Club
Tuesday, 18 June 2013 13:24
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A week ago we showed a chart from Charles Gave which does a terrific job at explaining why the modern economic “science”, in conjunction with the Fed’s negative rate environment, have failed at their ultimate stated mission – to stimulate growth. The reason: the Keynesian multiplier, which has tracked the nominal US GDP 7yr average change with a very high correlation, is now negative. From Gave: “shows that the marginal efficiency of public debt, at least in the US (public spending in emerging markets from a low base usually improves productivity) has been declining structurally since 1981. And it seems that this marginal efficiency has now reached a negative level.”

(Read more…)

The good news, at least over the past two decades, is that for all the failings of globalization, there were other developing countries and regions around the world, that had the credit capacity to inject debt momentum into their and, in an infinitely fungible world, the global economy. This is why China was so instrumental as a growth counterweight during the great financial crisis following the Lehman failure.

There is, however, a problem: as the chart below shows, China now has a Keynesian multiplier problem of its own. Even as the Chinese politburo and the PBOC have been injecting an ever increasing amount of credit into the private sector – the primary source of Chinese growth – the incremental GDP growth has been trending lower, and lower, and lower…

  • The good news: unlike in the US, the multiplier is not yet negative, as there still is some GDP reaction in response to every “credit impulse.”
  • The bad news: each successive GDP response is weaker and weaker, even as the credit injection has no choice but to be larger and larger.

Which begs the question: is this why the PBOC has been so hesitant to ease once more, even as the inflation in the real estate market largely courtesy of foreign central bank liquidity injections by the Fed and BOJ which wash ashore on the mainland, well-aware such liquidity injections would have to be far greater than any before to achieve the same economic growth results?

And what happens to global inflation rates once China, which will ultimately have to ease to prevent the complete collapse of its banking sector, does proceed with proving that it is precisely the negative Keynesian multiplier that will be the great undoing of the Keynesian school of economics?

Luckily, once the BOJ’s reflation experiment fails, and after China repeats the soaring inflation days of 2011 only to tighten all over again, there is still Europe. The only problem with Europe is that as we showed recently, credit creation is already record low and absent the ECB openly monetizing debt to inject reserves and boost stocks, there is little hope.

Finally, if Bernanke is indeed on the way out, which even more dovish ex-Goldmanite will replace Mario Draghi, as the onslaught for the final reflation attempt reaches its climax?

    



 
Following Surge In “Fails To Deliver” To Two Year Highs, Treasury Market Finds A Brief Respite
Monday, 17 June 2013 09:37
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Our “silver lining” concluding remark to last week’s lackluster 10 Year bond reopening auction was that “the good news is that with the reopening, dealers should have some additional collateral for a while, or at least until the Fed monetizes it. Look for this CUSIP – VB3 (On The Run) to remain on the POMO exclusion lists for white a while.” Sure enough, following the Friday settlement of this auction, things in the Treasury repo market have normalized somewhat after hitting very dangerous levels. How bad did it get? The following chart of failures to deliver from the NY Fed shows just how acute the shortage of “high quality collateral” (where the 10 Year is the fulcrum instrument) got in the past two months, with the total rising to $129 billion, or the biggest freeze in the (Read more…) market since the debt-ceiling crisis in the summer of 2011 when this number hit $280 billion.

In the grand scheme of things, however, the recent move is tiny by complete market lock up measures: one need only recall that during the height of the Lehman failure crisis, virtually the entire $3 trillion repo market had locked up and not a single Treasury was being delivered or received in repo (this is somewhat apples to oranges as the Fed revised its methodology of tracking primary dealer data at the end of March).

But perhaps the best indicator of just how bad the Treasury market had gotten until the settlement of last week’s 10 Year reopening, is the repo rate, which had plunged deep inside special territory in the first week of June and was consistently at the penalty rate of -3% (established in 2009), and slightly special for far longer. This means that those seeking to borrow 10 Year paper have had to pay up to 3% on an annualized basis: hardly a sustainable IRR in the ZIRP new normal.

This was also reflected in the General Collateral rate which recently dropped to as low as 0.04% or the lowest since July 2011, and which popped back to double digit territory, or 0.11% according to ICAP, as of this morning.

That said, don’t expect the renormalization in 10 Year repo rates to last: if anything, last week’s auction showed just how thin the liquidity and collateral availability in shadow banking really is: if just a $7.7 billion allottment to Primary Dealers (as per the 10 Year reopening) can send the repo rate from -3% to positive, then the action on the margin is truly unprecedented.

This is accentuated by both the Fed’s ongoing monetizations in the 10 Year space which actively withdraws securities from the private market, as well as the aggressive shorting of 10 Year paper, both as an outright bet on interest rates, and as a need to hedge rate risk in pair trades with corporate bond purchases.

Keep an eye on the repo market: with such pronounced collateral shortages, and with the Fed repeatedly expressing its concerns with the shadow banking system, Bernanke may be ignoring all signs of bubbles in the traditional markets, but he has no choice but to take the signals sent by the shadow market seriously. And if he indeed does not taper, this means that even more eligible OTR collateral will be withdrawn from the market, repo rates will continues to be punitive, and sooner or later this will have a substantial impact on downstream liquidity channels, first at the Primary Dealer community, and then everywhere else.

Source: NY Fed

    



 
From 9/11 To PRISMgate – How The Carlyle Group LBO’d The World’s Secrets
Monday, 10 June 2013 20:20
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The short but profitable tale of how 483,000 private individual have “top secret” access to the nation’s most non-public information begins in 2001. “After 9/11, intelligence budgets were increased, new people needed to be hired, it was a lot easier to go to the private sector and get people off the shelf,” and sure enough firms like Booz Allen Hamilton – still two-thirds owned by the deeply-tied-to-international-governments investment firm The Carlyle Group – took full advantage of Congress’ desire to shrink federal agencies and their budgets by enabling outside consultants (already primed with their $4,000 cost ‘security clearances’) to fulfill the needs of an ever-more-encroaching-on-privacy administration.

Booz Allen (and other security consultant providing firms) trade publicly with a cloak of admitted opacity due to the secrecy of their government contracts (“you may not have important information concerning our (Read more…) which will limit your insight into a substantial portion of our business”) but the actions of Diane Feinstein who promptly denounced “treasonous” Edward Snowden, “have muddied the waters,” for the stunning 1.1 million (or 21% of the total) private consultants with access to “confidential and secret” government information.

Perhaps the situation of gross government over-spend and under-oversight is summed up best, “it’s very difficult to know what contractors are doing and what they are billing for the work — or even whether they should be performing the work at all.”

First, Diane Feinstein’s take on it all…

“I don’t look at this as being a whistleblower. I think it’s an act of treason,” the chairwoman of the Senate Intelligence Committee told reporters. The California lawmaker went on to say that Snowden had violated his oath to defend the Constitution. “He violated the oath, he violated the law. It’s treason.”

So how did all this get started?… (via AP)

The reliance on contractors for intelligence work ballooned after the 9/11 attacks. The government scrambled to improve and expand its ability to monitor the communication and movement of people who might threaten another attack.

 

“After 9/11, intelligence budgets were increased, new people needed to be hired,” Augustyn said. “It was a lot easier to go to the private sector and get people off the shelf.”

 

The reliance on the private sector has grown since then, in part because of Congress’ efforts to limit the size of federal agencies and shrink the budget.

Which has led to what appears to be major problems.

But critics say reliance on contractors hasn’t reduced the amount the government spends on defense, intelligence or other programs.

 

Rather, they say it’s just shifted work to private employers and reduced transparency. It becomes harder to track the work of those employees and determine whether they should all have access to government secrets.

 

“It’s very difficult to know what contractors are doing and what they are billing for the work — or even whether they should be performing the work at all,”

… And to the current PRISMgate whistleblowing situation:

Of the 4.9 million people with clearance to access “confidential and secret” government information, 1.1 million, or 21 percent, work for outside contractors, according to a report from Clapper’s office.

 

Of the 1.4 million who have the higher “top secret” access, 483,000, or 34 percent, work for contractors.

 

…

 

Because clearances can take months or even years to acquire, government contractors often recruit workers who already have them.

Why not – it’s lucrative!!

Snowden says he accessed and downloaded the last of the documents that detailed the NSA surveillance program while working in an NSA office in Hawaii for Booz Allen, where he says he was earning $200,000 a year.

Analysts caution that any of the 1.4 million people with access to the nation’s top secrets could have leaked information about the program – whether they worked for a contractor or the government.

For individuals and firms alike.

Booz Allen has long navigated those waters well.

 

The firm was founded in 1914 and began serving the U.S. government in 1940, helping the Navy prepare for World War II. In 2008, it spun off the part of the firm that worked with private companies and abroad. That firm, called Booz & Co., is held privately.

 

Booz Allen was then acquired by the Carlyle Group, an investment firm with its own deep ties to the government. In November 2010, Booz Allen went public.  The Carlyle Group still owns two-thirds of the company’s shares.

Or, a full-majority stake.

Curiously once public, The Booz Allens of the world still operate like a psuedo-private company, with extensive confidential cloaks preventing the full disclosure of financial data. But don’t worry – we should just trust them. Via Bloomberg’s Jonathan Weil.

Psst, here’s a stock tip for you. There’s a company near Washington with strong ties to the U.S. intelligence community that has been around for almost a century and has secret ways of making money — so secret that the company can’t tell you what they are. Investors who buy just need to have faith.

 

To skeptics, this might seem like a pitch for an investment scam. But as anyone who has been paying attention to the news might have guessed, the company is Booz Allen Hamilton Holding Corp.

 

…

 

“Because we are limited in our ability to provide information about these contracts and services,” the company said in its latest annual report, “you may not have important information concerning our business, which will limit your insight into a substantial portion of our business, and therefore may be less able to fully evaluate the risks related to that portion of our business.”

 

This seems like it would be a dream arrangement for some corporations: Not only is Booz Allen allowed to keep investors uninformed, it’s required to. I suppose we should give the company credit for being transparent about how opaque it is.

And while the media and popular attention is currently focused on who, if anyone else, may be the next Snowden struck by a sudden pang of conscience, perhaps a better question is what PE behemoth Carlyle, with a gargantuan $170 billion in AUM, knows, and why it rushed to purchase Booz Allen in the months after the Bear Stearns collapse, just when everyone else was batting down the hatches ahead of the biggest financial crash in modern history.

From Bloomberg, May 2008:

Carlyle Group, the private-equity firm run by David Rubenstein, agreed to acquire Booz Allen Hamilton Inc.’s U.S. government-consulting business for $2.54 billion, its biggest buyout since the credit markets collapsed in July.

 

The purchase would be Carlyle’s biggest since it agreed to buy nursing-home operator Manor Care Inc. last July for $6.3 billion. Deal-making may be rebounding from a 68 percent decline in the first quarter as investment banks begin writing new commitments for private-equity transactions. Buyouts ground to a halt last year because of a global credit freeze triggered by record U.S. subprime-mortgage defaults.

 

The Booz Allen government-consulting unit has more than 18,000 employees and annual sales of more than $2.7 billion. Its clients include branches of the U.S. military, the Department of Homeland Security and the World Bank.

 

Carlyle, based in Washington, manages $81.1 billion in assets [ZH: that was 5 years ago - the firm now boasts $170 billion in AUM]. Rubenstein founded the firm in 1987 with William Conway and Daniel D’Aniello. The trio initially focused on deals tied to government and defense.

 

Carlyle and closely held Booz Allen have attracted high-level officials from the government. Carlyle’s senior advisers have included former President George H.W. Bush, former British Prime Minister John Major, and Arthur Levitt, the ex-chairman of the U.S. Securities and Exchange Commission.

 

R. James Woolsey, who led the U.S. Central Intelligence Agency from 1993 to 1995, is a Booz Allen executive. Mike McConnell, the U.S. director of national intelligence, is a former senior vice president with the company.

…

 

Carlyle last year sold a minority interest in itself to Mubadala Development Co., an investment fund affiliated with the government of Abu Dhabi, capital of the United Arab Emirates.

And in addition to the UAE, who can possibly forget Carlyle’s Saudi connection. From the WSJ circa 2001:

If the U.S. boosts defense spending in its quest to stop Osama bin Laden’s alleged terrorist activities, there may be one unexpected beneficiary: Mr. bin Laden’s family.

 

Among its far-flung business interests, the well-heeled Saudi Arabian clan — which says it is estranged from Osama — is an investor in a fund established by Carlyle Group, a well-connected Washington merchant bank specializing in buyouts of defense and aerospace companies.

 

Through this investment and its ties to Saudi royalty, the bin Laden family has become acquainted with some of the biggest names in the Republican Party. In recent years, former President Bush, ex-Secretary of State James Baker and ex-Secretary of Defense Frank Carlucci have made the pilgrimage to the bin Laden family’s headquarters in Jeddah, Saudi Arabia. Mr. Bush makes speeches on behalf of Carlyle Group and is senior adviser to its Asian Partners fund, while Mr. Baker is its senior counselor. Mr. Carlucci is the group’s chairman.

 

Osama is one of more than 50 children of Mohammed bin Laden, who built the family’s $5 billion business, Saudi Binladin Group, largely with construction contracts from the Saudi government. Osama worked briefly in the business and is believed to have inherited as much as $50 million from his father in cash and stock, although he doesn’t have access to the shares, a family spokesman says. Because his Saudi citizenship was revoked in 1994, Mr. bin Laden is ineligible to own assets in the kingdom, the spokesman added.

…

People familiar with the family’s finances say the bin Ladens do much of their banking with National Commercial Bank in Saudi Arabia and with the London branch of Deutsche Bank AG. They also use Citigroup Inc. and ABN Amro, the people said.

 

“If there were ever any company closely connected to the U.S. and its presence in Saudi Arabia, it’s the Saudi Binladin Group,” says Charles Freeman, president of the Middle East Policy Council, a Washington nonprofit concern that receives tens of thousands of dollars a year from the bin Laden family. “They’re the establishment that Osama’s trying to overthrow.”

…

A Carlyle executive said the bin Laden family committed $2 million through a London investment arm in 1995 in Carlyle Partners II Fund, which raised $1.3 billion overall. The fund has purchased several aerospace companies among 29 deals. So far, the family has received $1.3 million back in completed investments and should ultimately realize a 40% annualized rate of return, the Carlyle executive said. But a foreign financier with ties to the bin Laden family says the family’s overall investment with Carlyle is considerably larger. He called the $2 million merely an initial contribution. “It’s like plowing a field,” this person said. “You seed it once. You plow it, and then you reseed it again.”

 

The Carlyle executive added that he would think twice before accepting any future investments by the bin Ladens. “The situation’s changed now,” he said. “I don’t want to spend my life talking to reporters.”

We can clearly see why. We can also clearly see why nobody has mentioned Carlyle so far into the Booz Allen fiasco.

A U.S. inquiry into bin Laden family business dealings could brush against some big names associated with the U.S. government. Former President Bush said through his chief of staff, Jean Becker, that he recalled only one meeting with the bin Laden family, which took place in November1998. Ms. Becker confirmed that there was a second meeting in January 2000, after being read the ex-president’s subsequent thank-you note. “President Bush does not have a relationship with the bin Laden family,” says Ms. Becker. “He’s met them twice.”

 

Mr. Baker visited the bin Laden family in both 1998 and 1999, according to people close to the family. In the second trip, he traveled on a family plane. Mr. Baker declined comment, as did Mr. Carlucci, a past chairman of Nortel Networks Corp., which has partnered with Saudi Binladin Group on telecommunications ventures.

As one can imagine the rabbit hole just gets deeper and deeper the more one digs. For now, we will let readers do their own diligence. We promise the results are fascinating.

Going back to the topic at hand, we will however ask just how much and what kind of confidential, classified, and or Top Secret information is shared “behind Chinese walls” between a Carlyle still majority-owned company and the private equity behemoth’s employees and advisors, among which are some of the most prominent political and business luminaries currently alive.  The following is a list of both current and former employees and advisors. We have used Wiki but anyone wishing to comb through the firm’s full blown roster of over 1,000 employees and advisors, is welcome to do so at the firm’s website.

Business

Political figures

North America
Europe
Asia
  • Anand Panyarachun, former Prime Minister of Thailand (twice), former member of the Carlyle Asia Advisory Board until the board was disbanded in 2004  
  • Fidel V. Ramos, former president of the Philippines, Carlyle Asia Advisor Board Member until the board was disbanded in 2004  
  • Peter Chung, former associate at Carlyle Group Korea, who resigned in 2001 after 2 weeks on the job after an inappropriate e-mail to friends was circulated around the world    
  • Thaksin Shinawatra, former Prime Minister of Thailand (twice), former member of the Carlyle Asia Advisory Board until 2001 when he resigned upon being elected Prime Minister.  

Media

  • Norman Pearlstine – editor-in-chief of Time magazine from (1995–2005), senior advisor telecommunications and media group 2006-

and across the entire globe?

Here is Carlyle, straight from the horse’s recently IPOed mouth, courtesy of its most recent public presentation:

Perhaps Bloomberg’s Jonathan Weil sums it up best:

There’s no easy solution here, aside from the obvious point that the government keeps way too many secrets.

So what happens when one corporation, owned and controlled by the same government’s former (and in some cases current) top power brokers, potentially has access to all of the same government’s secrets?