The early stock rise faltered towards the closing bell sounded as the Dow posted only a modest gain.
A good article below by Charles Kadlec from Forbes on the failure of Greece and the failure of Keynesian economics in general.
Who knows how the UBS brain surgeon in England thought he was going to get away with his scam with all the different layers of auditing.
Here are the top financial stories of the day:
1) Uncertainty Zaps Early Stock Rally-From The Wall Street Journal
A rally in U.S. stocks largely evaporated late in Tuesday's session following reports that Greece's negotiations with international inspectors may drag out, and could still fall apart.
The Dow Jones Industrial Average ended 7.65 points higher, or 0.1%, at 11408.66, although the blue-chip measure had gained as much as 148.91 points midsession. The measure came within half a percentage point of breaking even for 2011 before the afternoon selloff.
The Standard & Poor's 500-stock index lost 2 points, or 0.2%, closing at 1202.09, for its second consecutive loss. Defensive utility and health-care stocks led the measure's gainers while materials and industrial stocks led decliners. The technology-oriented Nasdaq Composite ended down 22.59 points, or 0.9%, at 2590.24.
Stocks reversed their early rally on reports that the so-called troika of the International Monetary Fund, European Commission and European Central Bank were expected to return to Athens in October, with The Wall Street Journal reporting that Greece's ongoing talks with inspectors could still fall apart. Greece's finance ministry said that it had made "satisfactory" progress in the negotiations but added that the talks would continue over the weekend.
The reports suggested that there would be no immediate assurance against a disorderly Greek default.
The lack of certainty led investors to sell and await the next cycle of news from continental Europe.
"There have been so many different headlines about Greece that investors aren't really sure what's rumor and what's the truth," said Jonathan Corpina, senior managing partner of NYSE floor broker Meridian Equity Partners.
Trading ahead of a much-awaited Federal Reserve policy statement Wednesday played a role in the early-session rally, though it wasn't enough to carry through to the close of trading.
"It looks like the market is baking in an announcement of some kind of quantitative-easing strategy," said Deirdre Dennehy, portfolio manager at Rockland Trust. "[But] for them to announce a QE3, I'm not sure how impactful that's going to be. The more times they do that, the less the effect in the market."
2) Greece And The Crisis Of The Governing Elite-From Forbes
Europe’s governing elite – and those who believe in the superiority of government in the management of the economy – is in crisis. Their visions of a more just society and economic security are being shredded by the stark reality that the governments they run are running out of money.
The looming Greek default and the nascent financial crisis in Europe is a symptom of this crisis of the governing elite. At risk is the background consensus that supported the expansion of government to the point that public spending now accounts for roughly half of all economic activity among the 17 nations in the eurozone. A destruction of that consensus would imply a massive loss of power by the elites who for decades have declared that given the power, they could produce an economy with less risk and more fairness than free market capitalism.
The pending failure of the governing elites to deliver on their most basic promises is setting off alarm bells in Washington. Treasury Secretary Timothy Geithner, former Treasury Secretary Larry Summers, and World Bank President Robert Zoellick have admonished the Europeans to move forcefully to resolve the European debt crisis lest it threaten the already meager U.S. economic recovery. Unsaid is the concern that Europe’s failure will tarnish America’s governing elite, providing additional energy to the Tea Party’s call for restoring limited, constitutional government in the U.S.
There is no one to blame for Europe’s debt crisis other than its political class. They are the ones who borrowed extravagantly with the pretense that good intentions trumped fiscal responsibility, who set the rules that require banks to hold zero capital against government debt, and who permitted the European Central Bank to buy billions of euros of that debt from banks. That has endangering the euro itself, which has fallen 20% against gold since the beginning of the year, signaling that higher inflation and increased economic turmoil in the euro-zone may lie ahead.
In the absence of the next, 8 billion euro loan from its European partners and the IMF, the Greek government will soon simply run out of money to pay public sector wages and pensions. That reality last week triggered a run by dollar depositors on European banks with exposure to government debt prompting the U.S. Federal Reserve to make emergency loans to the European Central bank so it, in turn, could provide dollar liquidity to its member banks.
There appears to be no way out. The economic policies imposed on Greece by the governing elite have made things worse. The combination of spending cuts and massive tax increases slammed the economy, which shrank 7% in 2010, and 5% in the year ending June 2011. As a consequence, tax revenues last year fell by 2 billion euros, or 8.3%, instead of rising 3.3 billion euros to 27 billion euros. Social spending rose as unemployment jumped from around 9% to 16%, and the government’s debt became an even greater percentage of a now smaller GDP.
Italy, Portugal and Spain are headed down the same destructive path. Last week, Italy increased the value added tax a full percentage point to 21%. Portugal has increased its value added tax by 1 percentage point across all categories, while increasing the top marginal tax rate by 1.5% on top earners and by 2.5% on corporations. Spain just announced it would reinstate a wealth tax on approximately 160,000 taxpayers with more than 700,000 euros ($972,000) in declared assets in hopes of raising a little over a billion euros in revenue.
Awakened to Bastiat’s warning by these tax hikes, individuals are rioting in Athens and Rome, diving into the underground economy thereby starving the state of revenue, and rebelling at the polls. All of this is especially galling to Germans, who can’t help but notice the fundamental unfairness of the welfare state writ large. In reaction to German Chancellor Angela Merkel‘s support of the Greek bailouts, which effectively punish German taxpayers in favor of irresponsible governments in southern Europe, her party has been handed significant electoral defeats in 6 out of 7 state elections in the past year.
Finnish voters have prompted their government to require collateral in exchange for any additional loans to Greece, further complicating efforts to cobble together a package in time.
The governing class’s response is a call for yet more power through a centralized European government, or institutions that would be able to exert direct control over the budgets of the zone’s member states. Treasury Secretary Timothy Geithner’s advice is for the Europeans to borrow more money by permitting the existing European bailout fund to use leverage to increase its own lending capabilities.
Others call for Greece to withdraw from the euro so it can devalue its currency. But a plummeting Greek currency would rapidly reduce the government’s revenue in terms of the euro, guaranteeing a massive default on its outstanding euro denominated debts.
All of these proposals are desperate measures designed to cover up the fundamental failure of the underlying political economic model, which assumes that those who govern can provide free goods and services to the population at large, lavish pensions for government employees, impose rigidities onto labor markets and otherwise achieve social goals through their management of the economy. What we are now seeing is that good intentions are and never were sufficient. That so-called “rights” to jobs, health care, housing and pensions require real resources that cannot be conjured out of nothing by a good speech or a government decree, but must be taken from those who produce in the private sector.
Yet, the taxes and other exactions used to take those resources have reduced economic activity and income so much that the private sector can no longer fund current government outlays. Now that investors are less willing to lend money, a rapid, jarring adjustment in which expenditures are brought down into alignment with receipts seems unavoidable.
The promises broken during this adjustment will betray the fundamental belief by many in the wisdom of the governing elites and the benevolence of government. The result may be a new background consensus that recognizes the limits of what governments can do, and the cost of empowering them to do more. Or, supported by mobs in the streets, the governing elite may declare a state of emergency and seize businesses and property, consuming capital in the name of the greater good. Either way, the European experience is sure to influence the U.S. political debate swirling around 2012 presidential election.
3) Scandal at UBS Tilts Talk on Rules-From The Wall Street Journal
Now you have your answer.
Just when bankers, analysts and even some regulators were wondering whether to slow down the burst of postcrisis banking overhauls in light of the perilous state of the global economy, along came news of UBS AG's $2.3 billion trading loss to provide a resounding "no" to that question.
The events have turned Kweku Adoboli into a well-known figure in financial circles and not because of his penchant for cerulean sweaters. On Friday, the 31-year-old UBS trader, in his sweater, was charged by U.K. authorities with fraud and false accounting. (He hasn't entered a plea, although he isn't required to at this stage.) A day earlier, the Swiss bank had disclosed a $2 billion loss—later raised to $2.3 billion—as a result of unauthorized activities by one of its traders.
Much of the affair remains shrouded in mystery, but this much is clear: The scandal will strengthen the hand of politicians and regulators who want to tighten their grip on the global banking industry. In the U.S., those on Wall Street and in Congress who wanted to repeal or roll back the Dodd-Frank law will have a hard time making inroads now.
Forget the nuances—that fraud, if this is what it is, is always difficult to spot no matter how tough rules are; that $2.3 billion isn't actually that much for a banking giant like UBS; and that, apparently, its clients didn't lose money.
Regardless of whether the charges against Mr. Adoboli prove founded, the fact that UBS lost more than $2 billion on unauthorized trades leaves the impression that, once again, a member of the global banking elite has been unable to police itself, keep a close eye on its highly paid staff and avoid unnecessary risks. Proponents of stricter regulation could hardly have asked for a better assist.
The timing of UBS's announcement—on the third anniversary of the bankruptcy of Lehman Brothers—made it almost irresistible to conclude that Wall Street has learned nothing from past mistakes.
James Dimon, for one, disagrees with the notion that some of the new rules are needed. The J.P. Morgan Chase & Co. chief didn't address the UBS situation but told me that he regards regulations such as the U.S. plans to require big banks like his to carry extra capital as "irrational and contrived."
"I am not asking regulators to be cheerleaders," he said on Friday. "I am asking them to be right and fair. Some of these things are unfair, and they should have never been agreed" on.
Fair or not, the fact is that regulation will shape the future of the financial industry for decades to come.
Take the U.K. as an example. Last week, an independent commission proposed "ring-fencing" retail activities from riskier operations such as investment banking at an estimated cost to the industry of as much as £7 billion ($11.1 billion).
"Increasing regulation…is the single-largest driver of postcrisis bank profitability in the U.S. and Europe," argues management consultancy McKinsey & Co. in its annual banking review released Monday. The report estimates that Basel III capital rules alone will force U.S. and European banks to find $1.5 trillion in additional capital by 2015.
The combustible combination of an unstable economic environment and more regulation is leading to a radical rethink of how banks work.
Three seismic shifts are already in motion:
1) European banks are changing from huge lending machines to facilitators of capital-markets flows on behalf of companies and investors. Unlike the U.S., where companies get most of their funding from equity and debt markets, European corporations rely on bank loans for the bulk of their financing.
That worked well until banks were able to finance their huge lending efforts by borrowing on short-term debt markets.
But as that type of capital was made more expensive both by the sovereign crisis and new rules aimed at curtailing banks' reliance on flighty investors, that business model is fast becoming unviable.
That, in turn, is prompting banks to shrink their loan books and build up their capital-markets business.
The catch here is that such a radical change in strategy might take years to complete and, even then, not work at all, especially if companies don't adjust their funding expectations accordingly and/or U.S. banks prove more adept at the capital-markets business than Europeans.
2) Cost cutting among Western banks will continue apace. Last year, U.S. and European banks' average returns on equity were below their cost of equity, according to McKinsey, meaning that they weren't able to put their capital to profitable use.
With sluggish economic growth and additional capital requirements on the horizon, returns will have to be boosted by cutting information technology, staff and infrastructure expenditures.
3) The rise of emerging-markets banks. Once dismissed as unsophisticated in comparison with the big boys from the developed world, national champions of fast-growing countries such as China and Brazil are establishing themselves on the international-banking stage.
Emerging markets accounted for around 40% of global industry profits in 2010, more than double the level in 2006. With the demographics and macroeconomic wind at their back, local behemoths are perfectly placed to capture an ever bigger slice of that expanding pie.
The question for the likes of Industrial & Commercial Bank of China and Brazil's Itau Unibanco Holding is whether they can take on European and U.S. rivals outside their home markets. It doesn't look feasible at the moment, but the struggles of their peers in developed markets could make it easier in the future.
These three trends could, of course, push banks toward a game plan often used when profits sag: taking on more risk in less regulated areas in order to turbocharge profits. Let's hope, for all our sakes, it doesn't come to that.
Quote of the Day from Dave Ramsey.com:
Matthew 5:16 — In the same way, let your light shine before men, that they may see your good deeds and praise your Father in heaven.
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