Thoughts from the Frontline

Gambling in the House?

By John Mauldin

July 28, 2012

Choose your language

There Is Gambling in the House? I Am Shocked…
Opacity and Credit Default Swaps
No Access for Spain
Denver, Maine, and Carlsbad

Rick: How can you close me up? On what grounds?
Captain Renault: I'm shocked, shocked to find that gambling is going on in here!
– From the classic scene in Casablanca, made in 1942

The latest scandal du jour seems to be about what is now called LIBORgate. But is it a scandal or is it really just business as usual? And if we don’t know which it is, what does that say about how we organize the financial world, in which $300-800 trillion, give or take, is based on LIBOR? This is actually just the second verse of the old song about derivatives, which is a much larger market. Which of course is a problem that was not solved by Dodd-Frank and that has the potential to once again create true havoc with the markets, whereas LIBOR can only cost a few billion here and there. (Sarcasm intended.)

The problem is the lack of transparency. Why would banks want to reveal how much profit they are making? The last thing they want is transparency. This week I offer a different take on LIBOR, one which may annoy a few readers, but which I hope provokes some thinking about how we should organize our financial world.

There Is Gambling in the House? I Am Shocked...

Let’s quickly look at what LIBOR is. The initials stand for London InterBank Offered Rate. It is the rate that is based on what 16 banks based in London (some are US banks) tell Thomson Reuters they expect to pay for overnight loans (and other longer loans). Thomson Reuters throws out the highest four numbers and the lowest four numbers and then gives us…

Discuss This

8 comments

We welcome your comments. Please comply with our Community Rules.

Comments

Jim Pope

July 30, 2012, 9:37 p.m.

John, the larger issue of trust, and how it is the only thing that make make civil society work, was dealt a body blow by the recent supreme court ruling that lies are protected speech. This was in the context of the ‘stolen valor; case, but the court ruling took the broad road declaring lies are protected free speech.
So, if the justice system condones lying, how can we expect bankers to be truthful?

Thomas deLackner

July 29, 2012, 11:33 a.m.

By the way, my financial advisor was betting on the rate moving down to 1.5% and now he’s holding his bets with a goal of 1% in mind.
But on the current subject, I do believe, John, that you are close to getting it.  If our capitalist system was based on both sides of Adam Smith’s thinking we would not have this problem.  There would be a moral imperative to align personal good with societal good.  This requires more than a rule of law.  At the moment I think it requires a young Benjamin Franklin to teach us how cooperation can make our society function better.  Until then we have merely the rule of greed, the belief that just plain greed is good and the willingness to back up that belief with sufficient money from lobbyists moving in the right direction to buy very large profits for their business and industries. No reforms by congress will correct these problems unless laws are enforced. 

We can see in China how the central government is unable to rein in the greed they have unleashed, but we don’t seem to have a clue how we could rein in greed in our own country.  Perhaps we need to bring back the ancient punishment of banishment without a cent if we are so embarrassed at sending our profiteers to prison

Thomas deLackner

Alan Harris

July 29, 2012, 6:52 a.m.

Im beginning to think that the clarity and openness everyone is calling for is the root of all evil (or perhaps the lion in the grass). Will it make the banks more profitable if their every move can be scrutinised? Will we all become richer or just knee deep in the syrup of regulations. Wont it just become a straight jacket that chokes industry and competition? People keep secrets to gain an advantage. If everyone knows everything…... wheres the advantage??? Its always been the people who dont play by the rules that have moved mankind forward.

Ted Schultz

July 29, 2012, 2:41 a.m.

This is the best Mauldin newsletter since I’ve been reading them—short, to the point, straight talk.

On the other hand, the video at the other end of the Casey Research link is pure agenda-driven propaganda.  If this is any indication of its quality, I wouldn’t attend this conference if they were paying me to do so.

harry martz

July 29, 2012, 1:35 a.m.

I’d like to second the ‘nice piece’ comment and buy a round of indictments on the rocks for our distinguished bankster friends, and make ‘em doubles Sascha.
The chowder IS thickening, isn’t it? Some timing on that Thursday Friday Mario Draghi speech and trade. The sturm und drang show will likely be Obie worthy. I hope I’m sitting comfortably, reading “The Gilded Age” by Charles Dudley Warner and Mark Twain. It’s subtitled “A Tale of Today,” and is about the use of ‘beautiful credit’ for land speculation, an historic saga. Where are the honest pillories and fruit when we need them? Are there no clawbacks?! Is this the end of RICO?
While in Maine, try to get time with your son in a boat on a smallmouth bass lake, and tease the fish with Heddon Tiny Torpedoes in frog finish. Naturalized or yellow belly ones both work fine. Them ol’ brown fish just hate ‘em. Cast them close to weedy or rocky shorelines, anywhere there might be minnows or crayfish, don the life jackets, and be ready for a fight. They’re fine lures out of the box if you’re keeping some to eat. For catch and release I like to swap out the trebles for single hooks with pinched barbs. For fly fishing I’ve tried big streamers, but haven’t had much success. I hear that frog poppers of cork or deer hair have their moments. Maine in August is delicious. Enjoy.

Biene Vallee

July 28, 2012, 7:31 p.m.

Because I am not an investor, I paid no attention to the financial markets-UNTIL I saw Frontline and Brooksley Born in Nov. 2009. I had no clue as to what derivatives were and why she was so upset. I then watched “The Wizard of Oz” and contemplated on the wrong color shoes. I began to read and suddenly found myself up to my ears in FRAUD. THEFT. LIES. CRAZY BANKING LAWS and REPEALS. I saw what had happened to my country while I was out to lunch - because I do not invest, and would not be watching my money!
Thank you for the letters.  The long ones are good, but this one was a sweetie. I finally learned about derivatives! I might still be moneyless, but I don’t feel so stupid any more. And now I know that the trillions being poured into the sewer ARE MY MONEY!

Henry Mortimer

July 28, 2012, 2:55 p.m.

You will get a lot of comments on this letter.

James Housel

July 28, 2012, 11:58 a.m.

The market mechanism of LIBOR seems remarkably similar to the LBME gold “fixing” twice a day. Is it rigged? Well, sort of. What SHOULD amaze us is how negligent our regulatory bodies have been (I’m looking at you, Timmie!). Captured by the bodies they are supposed to rule over, like…Captain Renault. At least he turned out to be a good guy in the end.

As for derivatives…we are doomed. WMDs in the hands of morons.

© 2013 Mauldin Economics. All Rights Reserved.

Thoughts from the Frontline is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.MauldinEconomics.com.

Please write to subscribers@mauldineconomics.com to inform us of any reproductions, including when and where copy will be reproduced. You must keep the letter intact, from introduction to disclaimers. If you would like to quote brief portions only, please reference www.MauldinEconomics.com.

To subscribe to John Mauldin's e-letter, please click here: http://www.mauldineconomics.com/subscribe

To change your email address, please click here: http://www.mauldineconomics.com/change-address

Thoughts From the Frontline and MauldinEconomics.com is not an offering for any investment. It represents only the opinions of John Mauldin and those that he interviews. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with, Mauldin's other firms. John Mauldin is the Chairman of Mauldin Economics, LLC. He also is the President and registered representative of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states, President and registered representative of Millennium Wave Securities, LLC, (MWS) member FINRA and SIPC, through which securities may be offered. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB) and NFA Member. Millennium Wave Investments is a dba of MWA LLC and MWS LLC. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article. Mauldin companies may have a marketing relationship with products and services mentioned in this letter for a fee.

Note: Joining The Mauldin Circle is not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for investors who have registered with Millennium Wave Investments and its partners at www.MauldinCircle.com (formerly AccreditedInvestor.ws) or directly related websites. The Mauldin Circle may send out material that is provided on a confidential basis, and subscribers to the Mauldin Circle are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private and non-private investment offerings with other independent firms such as Altegris Investments; Capital Management Group; Absolute Return Partners, LLP; Fynn Capital; Nicola Wealth Management; and Plexus Asset Management. Investment offerings recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor's services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staffs may or may not have investments in any funds cited above as well as economic interest. John Mauldin can be reached at 800-829-7273.