July 21, 2016

The Game of Cons: a Song of Eyes and Power

The media circus is pointing fingers at the symptoms (and not the root causes) of today's 'dysfunctionally-warped' status-quo.

How can society ever prosper, if it's in everyone's interest to go along with what money pays for, rather than what conscience avows?

The 'financial system' is rapidly transforming into a bloated manatee floating over humanity — the market tides ebbing to reflect whims and desires, and flowing into the pockets of billionaires  not natural market tendencies as the mainstream market commentary would have you believe.

The 'world economy' is autonomously monopolising itself within every industry and market sector. Not one market sector avoids the underlying trends of 'consolidation' and  'monopolisation', outwardly seen out in the world as the aggregation of more resources, into fewer hands. 

Possibly the most shocking aspect is that this mega-transfer of assets and resources has been expertly enshrined into law and is being done in full-view (and support) of shareholders, only too happy to see their assets inflate.

Beware of the Blorb

The bloated system, or 'blorb', is the concept of companies simply buying/acquiring/merging with other entities as if merging into one core mass at the centre of all markets.

It is worth mentioning that the US, Russia and China routinely trade and co-operate on Government and private-sector levels with all the perceived 'bad-boys' of geopolitics including Saudi Arabia, Iran, Syria, Venezuela, North Korea, and each other of course. Sanctions, tariffs and various other barriers are for those on the outside of proceedings — for those able to pierce the elitist turtle-shell incubating the low-hanging fruit, growth is assured in a default monopoly.

And when those monopolies, foreign or domestic, are built with borrowed capital at negative interest rates, the value accretion is even plumper. 

Recent takeover deals such as those of LinkedIn (US$26bn), Actavis (US$41bn) and Baxalta (U$32bn)are being done at hugely overvalued estimates with largely free money, borrowed at decades in advance.
Illustration of centralised ownership structure among global conglomerates.
Another sinister truth scarcely being noticed, is that by creating an ultra-competitive marketplace, whilst preserving the ability for chosen firms to fail without consequence — Establishment policymakers have birthed a warped monstrosity that rewards failure and stifles innovation. 

The current system dynamics have also enriched one set of people (profiteers) at the expense of others (innovators and individuals). Those terms can be easily changed to 'large conglomerates', 'small businesses' and 'individuals'.

To understand the difference between what large corporations, small businesses and individuals can achieve in the haunted house of today's 'financial system' — it's the equivalent of playing hide and seek, with one person having to open doors, while another being able to walk through walls, and for others, all the doors are locked.

A pattern of too-big-to-fail and too-small-to-matter

Smaller companies are struggling to make ends meet, while larger ones simply borrow capital to become larger. It's a proportionally sliding scale — the larger the company, the easier the inflationary mechanism becomes. 

At the very top, there are only a few companies that dominate each sector. This dominance is exerted through severe paper-powered means or clandestine force, with the financial media corralled or excited depending on the requirement.

Smaller competitors are bought or undermined. Equal competitors colluded or cajoled. Regulators are either paid or replaced. Politicians are paid and dismissed. Civil servants are either re-warded or swapped. Critics are discredited or recruited. Celebrities are recruited to help instil culture and brands, depending on who tows the right line best.

Sometimes, it's done so well, that the line between fiction and reality is blurred beyond all recognition.
The larger the firm, the more revenue it can generate and influence it is able to attain. Given some time and skewed incentivisation, it quickly becomes every companies' sole aim to become larger.

If a company ripens into a market leader, the no-brainer next move is to absorb every other entity and look for expansion opportunities using other 'verticals'. This is rapidly occurring and becoming an actual reality in all economic sectors and parts of the world — especially the developed Western variant currently seen as the shining light of progress and civilisation.

Through the use of funding and top-down economics, senior corporate overlords can limit what every far-away satellite companies they own are able to accomplish, and therefore protect the overarching hierarchy.

One Swiss study and direct personal observation indicate that a select number of large firms dominate all economies of the world today — and they don't mind overstepping national borders to achieve their goals either.

A Disturbing Deutsche Tale

The market woe currently engulfing Deutsche Bank has rattled cages across both the banking landscape and amongst average German citizens.

How can Germany’s largest investment bank be undergoing a slow-motion repeat of Lehman Brothers' swansong back in 2008 — especially when stalwart Deutsche and Europe's other juggernauts ran the gauntlet of multiple banking ‘stress tests’ since then?

Despite making it through a gauntlet of bank stress tests with flying colours, Deutsche’s share price is languishing at record lows below 2008 levels, its capital structure seems weak (all of a sudden) and many analysts (as if hypnotised by the share price) have jumped on the bandwagon criticising anything and everything from poor management to wrong geography to sloppy pricing.

In 2013, Credit Suisse rated Deutsche as "outperform" and dubbed Deutsche as one of its "top-picks", as part of a research note laying out the "roadmap to a European Banking Union".

Deutsche (much-like all other top 10 banks) are like huge oil tankers — it takes a long time and consensus to change direction and yet the current captaincy gets the flak. From one of the best banking picks in Sep 2013, Deutsche is now considered one of the worst  so what changed?

The flurry of criticism and finger-pointing is possibly well-placed, with some fingers probably being more accurate than others. However, a much greater insight is largely missed by market analysts and commentators with regards to ‘success’ in banking.

As a simple observation over the past decade, some banking titans seem to be able to stray into shipwreck, and swim away unscathed, regardless of the loss or consequence to shareholders. 

Some banks have an uncanny ability to gloss over pretty much any problem and remain solvent, while a few stowaway rogue sailors are ceremoniously marched down the plank. 

Back in 2008, there was even a grandiose knight wheeled out from the dusted Keynesian textbooks, with the vaunted name of 'moral hazard'. 
Liquidity-guzzling banks were able to take huge financial risks while making them seem very safe via pliant ratings agencies, all too keen to slurp from the same trough. 

Investing hundreds of billions of dollars into outrageous junk-level assets, composed of defunct mortgages, banks were rewarded by handsome share-price gains and asset-price inflation. By having 'insurance' in place, it was effectively stealing from anywhere possible, including yourself — to be paid back with interest.

Accepting the rationale behind moral hazard allowed banks to wreak havoc on the financial landscape, in tandem with having proportionally less accountability for it.

Maybe 'Wall Street 2' says it best?

Deutsche Bank struggling has little to do with the bank's actual operations, and a lot more to do with how Deutsche fits into the game of monopoly being played out at stratospherically elite levels of Banking.

Why did Bear Stearns go under while Bank of America did not?
Why were Goldman Sachs and Morgan Stanley saved at the last minute by a regulatory loophole while Lehman Brothers was not?
Why did Arthur Andersen crumble and PwC never does?
Why did Enron get caught out and BP does not?
How does UBS avoid tax evasion on a corporate and client level, but Chevron cannot?
How do 30% of the largest private companies in Australia avoid tax altogether, while 70% of their counterparts do not, and 100% of the citizenry cannot?
Why do 80% of large companies operating in S.America strive to avoid all tax through elaborate tax-avoidance schemes that have tacit connections to a single firm (Mossack Fonseca)?

It's rather presumptive to think that it was only Enron in energy and Arthur Andersen in accounting doing all the cheating. Or that it was only five banks doing the FX fixing.

It's almost a certainty their closest competitors were engaged in similar activities or were willing to do so if installed in top market position. Companies compete and corporate subterfuge occurs a lot more often than people would care to admit.

It's more or less the case, that every industry on earth is now dominated by a handful of firms, who always prefer to collude and fix the markets they make, for the purpose of profit. 

The occulted reality is that whenever a corporate giant falls, it's often another giant that was doing all the pushing.

Size and tactics

Giant corporations that stomp in and out of markets are generally not held to account — quite the opposite. They are given a pass by Authorities because of their size and market influence. 

Rather than fulfilling greater corporate responsibility with size, it seems large corporations become increasingly expert at plotting a course around all the pesky regulations and hurdles small companies typically stumble over.

With size, they become expert at collusive behaviour, subterfuge, conspiracy, market oligopolisation and "sentiment-building". Big budget Hollywood movies can be made for the purpose of promoting a corporation these days.

The British Petroleum Story

A perfect example of how some companies are able to snatch victory from the jaws of defeat is BP’s faux pas in spilling millions (maybe even billions) of gallons of oil in a catastrophic orgy of incompetence in the Gulf of Mexico — unsurprisingly leading to an undersea calamity of epic proportions back in 2010.

BP's Macondo project in the Gulf of Mexico suffered an explosion that killed 11 crew members and ruptured an undersea oil well. Huge impacts on fisheries industries, small businesses and tourism will continue for decades, and yet BP is unscathed.

Some gargantuan firms are treated favourably in relation to others. 

BP has been proven to have caused irreparable damage with immeasurable financial, socio-economic, and environmental consequences   there was only a US$40 billion fine to pay — or so it seems.

Financial accountant wizards have enabled BP to write off 75% of the ~$40 billion originally estimated as business expenses, which after several years of haggling, foot-dragging and purposeful delay, has been watered down to US$20 billion  to be paid out over 16 years at a rate of $1.3 billion per year. 

The superb galvanisation of insurance and reinsurance companies, added to liability-hot-potato legal experts, means that when all is said and done, the Macondo disaster could end up making BP a profit  especially if the coming Hollywood movie catches a wave with the masses. 

Which it could well do, and end up proving how the snakes and ladders of modern society are rigged so that all the wrong incentives reinforce each other. BP's spectrum of damage is incrementally twisted into further benefits for BP, while the consequences linger on in Louisiana and elsewhere.

BP's annual revenue in 2015 was US$226 billion, from which it generated a profit of US$6.4 billion. In 2013, its annual profit was US$24 billion. Keep in mind this was during a commodities downturn of epic proportions and oil prices falling from $130 per barrel down to $30 per barrel since 2010.

Clearly, the concepts of proportion and justice have been lost in perspective.

Since 2010, BP had to cut its dividend, and its share price took a hit for a while. But it all ebbed away like a bad smell, the costs were recovered, and the share price swelled through other projects.

At the time, former Ericsson CEO and current dual-Chairman of Volvo and BP, Carl-Henric Svanberg expressed his concern for the Gulf victims as, "We care about the common people."
(2010) Top echelons of BP and US Government apparatus meeting to discuss the appropriate monetary settlement (~US$20 billion) to be escrowed for Macondo disaster victims. Six years later, US$1.6 billion per year over 16 years is being hoped for.
Svanberg's foot-in-mouth incident was quickly re-spun as a slip of the tongue as part of a PR campaign to make the illustrious BP Captain seem wholesome and of-the-people again."Simpleton commoners getting in the way all the time", is possibly what he was actually thinking.
(2011) Former UK Chancellor George Osborne, Mukesh Ambani, Chairman & Managing Director of Reliance Industries, Robert Dudley, CEO of BP and Carl-Henric Svanberg, Chairman of BP; penning a profit-boosting deal to insert BP into India worth US$7 billion.

Compound Fracture

In the ten years preceding Macondo, BP was responsible for three other disasters – Grangemouth, Texas City, and Prudhoe Bay – causing 15 deaths, 200 injuries, and the release of millions of gallons of gas and oil into the environment. 

After each incident, BP pled guilty to criminal charges and after the Texas City incident in 2005, BP openly admitted willfully ignoring safety measures and was cited with 439 additional violations. When compounded together, between 2007-2010 BP accounted for 97% of all fines issued for flagrant violations in the oil industry.

How does such a crushing level of systematic incompetence over several years simply slide off BP's back without any serious consequences?

Doing the rounds helps...
(2005) BP Chief executive John Browne soirées with Mikhail Friedman, Chairman of Directors at TNK-BP and Russian President Vladimir Putin; discussing taxes, projects and future business.
What is forgotten is the overwhelmingly crushing effect the Macondo disaster had on a whole swathe of society, small businesses and industries.

The Ultimate Insult

To illustrate the level of means and opportunity large firms have to sculpt whichever story they fancy  and then sell to the public as truth — is readily seen by the movie 'Deepwater Horizon' starring Mark Wahlberg. 
Don't expect the truth to get in the way of a good story when this work of contorted fiction hits theatres in September 2016, and do expect BP to come out looking heroic courtesy of its crew, as represented by Wahlberg. In actual fact, the operating crew was incredibly bad at their jobs and could have averted the explosion on several occasions if they had been competent. 

A film exposing the truth behind BP's calamities and subsequent nefariousness to cover up past failures is not something Hollywood deems good for business. 

How can society ever prosper, if it's in everyone's interest to go along with what money pays for, rather than what conscience avows?

Back to Banking

Banks like Goldman/Bank of America defrauded millions of homeowners through over-complicated (and sure-to-fail) financial derivatives, with only fines to pay.

So we get to Enron and Arthur Andersen. This dynamic-duo also defrauded, lied and cheated — but instead of receiving a fine, a deep and thorough investigation led to the liquidation of both firms.

Were the collusive and occulted actions of Enron & Arthur Andersen better or worse than those of Goldman & BoA? Or daresay BP's calamity in the Gulf of Mexico?

Were the banks responsible for Libor/FX/metals manipulation and price-fixing, less economically culpable than Enron/Arthur Andersen or BP? According to US lawmakers, it would seem so. 

Where Enron/Arthur were liquidated for their price-fixing sins, the banking cartels behind systematic asset price-fixing received fines amounting to less than 5% of annual revenue.

The Deepwater Horizon oil spill will cost BP around $20-40 billion in total — roughly 10% of one years' revenue.

Truth Hurts

The answers to all these questions and also why some banks do better than others has everything to do with the games of monopoly being played behind closed doors, by self-modelled kingpins of industry.

With respect to Banks, their relative failures or miracle-survival stories are directly influenced by factors largely removed from public view.

Publicly, aspects such as the magnitude of tangible and intangible exposure in addition to some firms being absolutely indispensable to the global financial charade, are given and accepted by populist belief.

But at the core, there is an understanding amongst the higher-level corporate Captains that trouble only seeks those firms not willing to toe the line prescribed to them by a consensus on a higher plane i.e. central banks and their familial owners including various dukes, lords and most likely, a smoky hall full of Sirs and Gentlemen.

Written by George Tchetvertakov