WSJ – How to Punish Auditors Behaving Badly.pdf

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There’s only one way to combat the next financial crisis 

The Daily Reckoning, James Rickards
 Oct 26, 2016 | 6:02 PM ET

James Richards was chief counsel for Long Term Capital Management.

In my forthcoming book The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, I make a very simple point: In 1998 we were hours away from collapse and did everything wrong following that. In 2008, we were hours away from collapse and did the same thing. Each crisis is bigger than the one before.
The stock market today is not very far from where it was in November 2014. The stock market has had big ups and downs. A big crash in August 2015, a big crash in January 2016. Followed by big rallies back both times because the Fed went back to “happy talk,” but if you factor out that volatility, you’re about where you were 2 years ago.

People are not making any money in stocks. Hedge funds are not making money. Institutions are not making money. It’s one of the most difficult investing environments that I’ve ever seen in a very long time.

Again, the 2008 crisis is still fresh in people’s minds. People know a lot less about 1998, partly because it was almost 20 years ago. I was right in the middle of that crash. It was an international monetary crisis that started in Thailand in June of 1997, spread to Indonesia and Korea, and then finally Russia by August of ’98. Everyone was building a firewall around Brazil. It was exactly like dominoes falling.

Think of countries as dominoes where Thailand falls followed by Malaysia, Indonesia, Korea and then Russia. The next domino was going to be Brazil, and everyone (including the IMF and the United States) said, “Let’s build a firewall around Brazil and make sure Brazil doesn’t collapse.”

The Next Domino

Then came Long-Term Capital Management. The next domino was not a country. It was a hedge fund, although it was a hedge fund that was as big as a country in terms of its financial footings. I was the general counsel of that firm. I negotiated that bailout. I think a many of my readers might be familiar with my role there. The importance of that role is that I had a front-row seat.

I’m in the conference room, in the deal room, at a big New York law firm. There were hundreds of lawyers. There were 14 banks in the LTCM bailout fund. There were 19 other banks in a one billion dollar unsecured credit facility. Included were Treasury officials, Federal Reserve officials, other government officials, Long-Term Capital, our partners. It was a thundering herd of lawyers, but I was on point for one side of the deal and had to coordinate all that.

It was a 4 billion dollar all-cash deal, which we put together in 72 hours with no due diligence. Anyone who’s raised money for his or her company, or done deals can think about that and imagine how difficult it would be to get a group of banks to write you a check for 4 billion dollars in 3 days.

Those involved can say they bailed out Long-Term capital. They really bailed out themselves. If Long-Term Capital had failed, and it was on the way to failure, 1.3 trillion dollars of derivatives would’ve been flipped back to Wall Street.

The banks involved would’ve had to run out and cover that 1.3 trillion dollars in exposure, because they thought they were hedged. They had one side of the trade with Long-Term and had the other side of the trade with each other. When you create that kind of hole in everyone’s balance sheets and everyone has to run and cover, every market in the world would’ve been closed. Not just bond markets or stock markets. Banks would’ve failed sequentially. It would’ve been what came close to happening in 2008.

Very few people knew about this. There were a bunch of lawyers there, but we were all on 1 floor of a big New York law firm. The Fed was on the phone. We moved the money. We got it done. They issued a press release.

It was like foaming an airport runway. You’ve got a jet aircraft with a lot of passengers and 4 engines on flames, and you foam the runways. The fire trucks are standing by, and somehow you land it and put out the fire. Life went on.

Financial Crisis

After that, the Federal Reserve cut interest rates twice, once at a scheduled FOMC meeting on September 29, 1998, and again at an unscheduled meeting. The Fed can do that. The Fed doesn’t have to have a meeting. They can just do an executive committee-type meeting on the phone, and that’s what they did. That was the last time, in October 15, 1998, that the Fed cut interest rates outside of a scheduled meeting. Though it was done to “put out the fire.” Life went on.

Then 1999 was one of the best years in stock market history, and it peaked in 2000 and then crashed again. That was not a financial panic. It was just a stock market crash. My point is that in 1998, we came within hours of shutting every market in the world. There were a set of lessons that should’ve been learned from that, but they were not learned. The government went out and did the opposite of what you would do if you were trying to prevent it from happening again.

What they should’ve done was banned most derivatives, broken up big banks, had more transparency, etc. They didn’t. They did the opposite.

The government actually repealed swaps regulations, so you could have more derivative over-the-counter instead of trading them on exchanges. They repealed Glass-Steagall so the commercial banks could get into investment banking. The banks got bigger. The SEC changed the rules to allow more leverage by broker-dealers rather than less leverage.

Then Basel 2, coming out of the Bank for International Settlements in Basel, Switzerland, changed the bank capital rules so they could use these flawed value-at-risk models to increase their leverage. Everything, if you had a list of things that you should’ve done to prevent crises from happening again, they did the opposite. They let banks act like hedge funds. They let everybody trade more derivatives. They allowed more leverage, less regulation, bad models, etc.

I was sitting there in 2005, 2006, even earlier, saying, “This is going to happen again, and it’s going to be worse.” I gave a series of lectures at Northwestern University. I was an advisor to the McCain campaign. I advised the U.S. Treasury. I warned everybody I could find.

This is all in the my upcoming book, The Road to Ruin. I don’t like making claims like that without backing it up, so if you read the book, I tell the stories. Hopefully, it’s an entertaining and readable, but it’s serious in the sense that I could see it coming a mile away.

Now, I didn’t say, “Oh gee, it’s going to be subprime mortgages here,” the kind of thing you saw if you saw the movie “The Big Short.” Obviously, there were some hedge fund operators who had sussed out the subprime mortgage. To me, it didn’t matter. When I say it didn’t matter, the point that I was looking at was the dynamic instability of the system as a whole.

I was looking at the buildup of scale, the buildup of derivatives, the dynamic processes and the fact that one spark could set the whole forest on fire. It didn’t matter what the spark was. It didn’t matter what the snowflake was. I knew the whole thing was going to collapse.

Too Big To Fail

Then, we come up to 2008. We were days, if not hours, from the sequential collapse of every major bank in the world. Think of the dominoes again. What had happened there? You had a banking crisis. It really started in the summer of ’07 with the failure of a couple of Bear Stearns hedge funds, not Bear Stearns itself at that stage but these Bear Stearns hedge funds that started a search.

There was one bailout by the sovereign wealth funds and the banks, but then beginning in March 2008, Bear Stearns failed. In June, July 2008, Fannie and Freddie failed. Followed by failures at Lehman and AIG. We were days away from Morgan Stanley being next, then Goldman Sachs, Citibank followed by Bank of America. JPMorgan might’ve been the last one standing, not to mention foreign banks (Deutsche Bank, etc.).

They all would’ve failed. They all would’ve been nationalized. Instead, the government intervened and bailed everybody out. Again, for the second time in 10 years. We came hours or days away from closing every market and every bank in the world.

For the everyday investor, what do you have? You’ve got a 401k. You’ve got a brokerage account. Maybe you’re with E-Trade or Charles Schwab or Merrill Lynch or any of those names. You could run a pizza parlor, an auto dealer. You could be a dentist, a doctor, a lawyer, anyone with a small business. You could be a successful investor or entrepreneur.

You’ve got money saved and you’re looking at all of that wealth being potentially wiped out as it almost was in 1998 and in 2008.

How many times do you want to roll the dice? It’s just like playing Russian Roulette. One of these times, and I think it’ll be the next time, it’s going to be a lot bigger and a lot worse.

To be specific, I said in 1998 the government, regulators and market participants on Wall Street did not learn their lesson. They did the opposite of what they should do. It was the same thing in 2008. Nobody learned their lesson. Nobody thought about what actually went wrong. What did they do instead? They passed Dodd-Frank, a 1,000-page monstrosity with 200 separate regulatory projects.

They say Dodd-Frank ended “too big to fail.” No, it didn’t. It institutionalized “too big to fail.” It made “too big to fail” the law of the land, because they haven’t made the banks smaller. The 5 biggest banks in the United States today are bigger than they were in 2008. They have a larger percentage of the banking assets. They have much larger derivatives books, much greater embedded risk.

People like to use the cliché “kick the can down the road.” I don’t like that cliché, but they haven’t kicked the can down the road. They’ve kicked the can upstairs to a higher level. From hedge funds to Wall Street, now the risk is on the balance sheet of the central banks.

World Money

Who has a clean balance sheet? Who could bail out the system? There’s only one organization left. It’s the International Monetary Fund (IMF). They’re leveraged about 3 to 1. The IMF also has a printing press. They can print money called Special Drawing Rights (SDR), or world money. They give it to countries but don’t give it directly to people. Then the countries can swap it for other currencies in the SDR basket and spend the money.

Here’s the difference. The next time there’s a financial crisis they’ll try to use SDR’s. But they’ll need time to do that. They’re not going to do it in advance and they’re not thinking ahead. They don’t see this coming.

What’s going to come is a crisis, and it’s going to come very quickly. They’re not going to be able to re-liquefy the system, at least not easily.

Read the original article on The Daily Reckoning. Copyright 2016.

The Big Winner From London’s Brexit Exodus Isn’t Even in Europe – Bloomberg

New York capital, expertise, regulation key to luring talent

Banks may move non-essential staff to U.S., says one executive

The ultimate winner if Brexit forces banks to flee London may lie 3,500 miles away, far beyond the borders of Europe.

New York, even more than Frankfurt or Paris, is emerging as a top candidate to lure banking talent if London’s finance industry is damaged by Britain’s divorce from the European Union, according to politicians and industry executives.

That’s because the largest U.S. city, rather than European finance hubs, is the place that rivals the depth of markets, breadth of expertise or regulatory appeal boasted by London. Continental Europe will win some bank operations to satisfy regional rules ensure time-zone-friendly access to its market, but more may eventually shift across the Atlantic to the only other one-stop shop for business.

“There is no way in the EU there is a center with the infrastructure or regulatory infrastructure to take the role London has,” particularly in capital markets, John Nelson, chairman of Lloyd’s of London, said in an interview. “There is only one city in the world that can, and that is New York.”

For many global investment banks, London is their largest or second-biggest headquarters. If the benefits of scale are diminished by having to move roles to Europe, banks may look to shrink their London operations even further by moving any workers able to do their job just as well from a different time zone, including global-facing roles in merger advisory, trading and back-office technology and finance.

Clearing Business

Additional jobs may move as specific trading activities seek a new epicenter. London Stock Exchange Group Plc Chief Executive Officer Xavier Rolet was blunt, saying that if Brexit strips London of the ability to clear euro derivatives trades, the entire business would move to the only other city able to clear all 17 major currencies: New York.

“The big winner from Brexit is going to be New York and the U.S.,” said Morgan Stanley CEO James Gorman said at a conference in Washington this month. “You’ll see more business moving to New York.”

One major Wall Street bank has already begun reallocating U.K. headcount, and probably will end up moving many non-essential staff out of Europe altogether to the U.S. or Asia, said a senior banker at the firm, who asked not to be identified because the plan is private. New York, now mainly a hub for dollar-denominated securities, could lure trading desks that had used London as a base for macro trading, speculating on currencies, bonds and economic trends around the world, the executive said.

Lost Hope

Bank bosses have given up hope that British Prime Minister Theresa May will be able to strike a post-Brexit deal that preserves the right to sell goods and services freely around the EU, according to three people with knowledge of their contingency plans.

The problem they face is that it’s hard to match London’s advantages. Most local EU regulators are unlikely to be able to cope with an influx of investment-bank license applications, and many locations lack the necessary real estate, infrastructure or quality of life. When London this year topped the Z/Yen Group’s index for financial centers based on their attractiveness to workers in the sector, New York came second, ahead of 19th-place Frankfurt and Paris ranking 29th.

If the finance industry does leave London for elsewhere in the EU, it’s likely to fragment. That’s a particular problem for U.S. banks, which spent more than two decades centralizing European operations within the so-called Square Mile. The U.K. is home to 87 percent of U.S. investment banks’ EU staff and 78 percent of the region’s capital-markets activity, according to research firm New Financial.

Liquidity Trap

“The minute you move some businesses somewhere — create a legal entity someplace — you trap capital, you trap liquidity,” said Viswas Raghavan, JPMorgan Chase & Co.’s deputy CEO for Europe, the Middle East and Africa, said last month at Bloomberg Markets Most Influential Summit in London. “That brings inefficiencies. That drags down” profitability.

There are limits to a wholesale transplant of London’s finance industry. A big one is the need to be inside the European Economic Area to sell goods and services to its more than 450 million citizens. Another is time. It’s 3 a.m. on the Eastern seaboard when European markets open, and 9 p.m. in London when the New York Stock Exchange rings the closing bell.

Transplant Challenges

Culture also matters. A foreign bank may struggle to convince regional companies that it understands their businesses better than a domestic firm. Some companies would have little reason to raise capital or issue debt in dollars. And Asian financial hubs like Singapore and Hong Kong will also try to attract business at London’s expense.

Not all firms want to start spreading the news. One U.S. bank says it won’t be moving people back to the U.S. after Brexit, with an executive there saying it can win more business by maintaining its European presence as other lenders pull back.

Chancellor of the Exchequer Philip Hammond has cautioned European governments that attacking London’s financial heft in the Brexit talks could end up costing them by driving financial services elsewhere. Bank of England Deputy Governor Jon Cunliffe also last week listed New York as an attractive place to do business outside of Europe.

Open Europe’s Vincenzo Scarpetta echoed such warnings. In a report released today, he and colleagues urge the government to give banks maximum certainty about the future and show EU governments how they benefit from the City of London. 

“It’s not certain if banks move, they will move to another European hub,” said Scarpetta, a senior policy analyst at the London-based think tank. “New York, in particular, is a much bigger hub than Paris. If this happens Europe is worse off as a whole. This should be in everyone’s interest to avoid in the upcoming negotiations.”

* London * Brexit * Europe * New York

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Here is an Overview of Machine Leaning

http://www.superdatascience.com/2

Data Science and Machine Learning is somethings we all should be aware of. Attached is a podcast with a course overview I am taking to get started.

Instrutor Bios are below

 

Instructors

Kirill Eremenko
Data Scientist & Forex Systems Expert
My name is Kirill Eremenko and I am super-psyched that you are reading this!

I teach courses in two distinct Business areas on Udemy: Data Science and Forex Trading. I want you to be confident that I can deliver the best training there is, so below is some of my background in both these fields.

Data Science

Professionally, I am a Data Science management consultant with over five years of experience in finance, retail, transport and other industries. I was trained by the best analytics mentors at Deloitte Australia and today I leverage Big Data to drive business strategy, revamp customer experience and revolutionize existing operational processes.

From my courses you will straight away notice how I combine my real-life experience and academic background in Physics and Mathematics to deliver professional step-by-step coaching in the space of Data Science. I am also passionate about public speaking, and regularly present on Big Data at leading Australian universities and industry events.

Forex Trading

Since 2007 I have been actively involved in the Forex market as a trader as well as running programming courses in MQL4. Forex trading is something I really enjoy, because the Forex market can give you financial, and more importantly – personal freedom.

In my other life I am a Data Scientist – I study numbers to analyze patterns in business processes and human behaviour… Sound familiar? Yep! Coincidentally, I am a big fan of Algorithmic Trading 🙂 EAs, Forex Robots, Indicators, Scripts, MQL4, even java programming for Forex – Love It All!

Summary

To sum up, I am absolutely and utterly passionate about both Data Science and Forex Trading and I am looking forward to sharing my passion and knowledge with you!
Hadelin de Ponteves
Data Scientist
Hello ! Je m’appelle Hadelin de Ponteves et je suis un data scientist passionné !

Etant particulièrement sensible au domaine de l’éducation, je suis déterminé à y apporter de grandes contributions. J’ai déjà investi beaucoup de mon temps dans la sphère de l’éducation, à étudier et enseigner divers sujets scientifiques.

Aujourd’hui, je suis passionné de data sciences, d’intelligence artificielle et de deep learning. Et je ferai de mon mieux pour vous transmettre mes passions. Car c’est en étant passionné que l’on réussit le mieux dans un domaine, et que l’on est le plus heureux dans notre travail au quotidien.

J’ai acquis beaucoup d’expérience en data sciences. J’ai effectué mes études à l’école Centrale Paris, où j’ai suivi le parcours Data Sciences, en parallèle d’un master de recherche en machine learning à l’Ecole Normale Supérieure. Ma page étudiante s’est enchaînée avec une expérience chez Google où j’ai fait des data sciences pour résoudre des problèmes business. Puis j’ai réalisé que je passais la plupart de mon temps à analyser et je développais petit à petit un besoin de créer. Donc pour nourrir ma créativité, je suis devenu un entrepreneur.

Et justement, mes cours vont tous combiner ces deux dimensions d’analyse et de créativité, grâce auxquelles vous intégrerez toutes les compétences à avoir en data sciences, en les appliquant à des idées créatives.

J’ai hâte de vous retrouver dans mes cours et de partager mes passions avec vous !

Hi ! My name is Hadelin de Ponteves. Always eager to learn, I invested a lot of my time to learning and teaching, covering a wide range of different scientific topics. Today I am passionate about data science, artificial intelligence and deep learning. I will do my very best to convey my passion for data science to you. I have gained diverse experience in this field. I have an engineering master’s degree with a specialisation in data science. I spent one year doing research in machine learning, working on innovative and sexy projects. Then a work experience at Google where I implemented some machine learning models for business analytics. Eventually, I realised I spent most of my time doing analysis and I gradually needed to feed my creativity. So I became an entrepreneur. My courses will combine the two dimensions of analysis and creativity, allowing you to learn all the analytic skills required in data science, by applying it on creative ideas. Looking forward to working together !

Hadelin de Ponteves