Monthly Archives: September 2015

Banks Bank on Saving Billions Using Bitcoin Blockchain

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By Barry Elias | Friday, 25 Sep 2015 09:36 AM

Banks are investing millions of dollars in the development of the bitcoin blockchain technology in the hopes of saving billions of dollars down the road.

Nine investment banks are collaborating with start-up R3CEV, a New York-based group of trading and technology executives, to develop governing standards and procedures to implement a more effective and efficient settlement system for asset movements between counterparties. They have invested several millions of dollars in seed capital with R3CEV thus far for the research, experimentation and design of prototypes.

The blockchain methodology is viewed as an instant, real time update of payment ledgers in multiple locations without a single, centralized authority overseeing the process. Banks, financial exchanges, and settlement clearinghouses are exploring how to harness this technology for the automatic execution of contracts that could potentially save billions of dollars in bank operational expenditures.

The nine investment banks are Goldman Sachs, JPMorgan, Credit Suisse, Barclays, Commonwealth Bank of Australia, State Street, RBS, BBVA, and UBS. Many banks, including Barclays and UBS, are working toward their own blockchain model or partnering with other start-ups, as a way to hedge their bets and align with the best possible option in the future.

Advocates of this industry collaboration point to the successes of other ventures such as the Depository Trust Clearing Corporation, to clear trades for corporate stocks and bonds, municipal bonds, and money market instruments; the CLS, to clear funds for global currency trades; and the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a global financial messaging system.

Circle Internet Financial recently became the first firm to be issued a BitLicense by the New York Department of Financial Services (DFS), permitting it to offer digital-currency services in New York. The company was founded two years ago and backed by Goldman Sachs.

The DFS said 22 firms applied for the license, including CoinSetter, Consensys, Gemini (founded by Cameron and Tyler Winklevoss), ItBit, and Symbiant, and it expects more approvals shortly.

The BitLicense was originally introduced by then- DFS Superintendent Benjamin Lawsky in January 2014. The license allows digital-currency firms to expand their services while protecting clients with anti-money-laundering compliance and cybersecurity protocols.

Circle is able to offer mobile payment services to receive, hold, and send U.S. dollars and bitcoins via text messaging that does not require conversions from one form to the other.

Circle is pursuing this same option with other currencies, such as the euro.

There seems to be no turning back from bitcoin.

© 2015 Newsmax Finance. All rights reserved.

Market Manipulation Is Menacing to the Middle Class

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By Barry Elias | Friday, 18 Sep 2015 05:54 AM

Wealth and income inequality has risen substantially since the Great Recession, and market manipulation is making matters even worse for the middle class.

Richard Grasso, former chairman and chief executive of the New York Stock Exchange from 1995 to 2003, suggests the average person is severely disadvantaged relative to Wall Street institutions and the causes need to be thoroughly investigated and corrected.

Prompting this remark was stock trading the morning of August 24, when the Dow Jones Industrial Average tanked approximately 1,000 points within the first six minutes on news of a dire Chinese economy that may portend poorly for the world.

The large sell orders precipitated nearly 1,300 trading halts, as ETF indices were unable to execute transactions in an optimal fashion and prices fell below the underlying stocks they held. TD Ameritrade experienced volumes 10 times larger than average in the first half-hour of trading, causing severe price volatility: 30 percent for Facebook within several minutes as its price moved from $86 to $72 to $84.  (Trading is halted for five minutes when there is a price move of 5 percent or more in either direction.)

Ironically, the ETF products are marketed to middle-America so they can participate in the American dream of investing in a cost-effective and diversified manner. However, the lack of adequate trading liquidity and the capital losses that result may greatly offset the low trading cost.

Grasso believes high frequency traders receive proprietary trading information ahead of others and transaction speed trumps competition and fairness. He suggests the trading of shares on more than 60 venues makes execution at the best possible price quite difficult and costly to the little guy.

Jeffrey Sprecher, chairman and CEO of Intercontinental Exchange Inc., also says the stock market is overly complex and needs simplification.

Evidence of market rigging has been uncovered in the pricing of the gold fix, LIBOR and foreign currency exchange.

Recently, 12 banks and two institutions agreed to pay $1.87 billion to settle allegations that they manipulated the $16 trillion credit default swap market by prohibiting exchanges from placing these products on open, regulated platforms where pricing is more transparent.

The 12 banks named in the suit are Bank of America, Barclays, BNP Paribus, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Royal Bank of Scotland and UBS, along with the International Swaps and Derivatives Association (ISDA) and Markit Group, a data provider.

The Los Angeles County Employees Retirement Association and several Danish pension funds claimed the banks influenced the ISDA to deny intellectual property to the exchanges, such as auction price data.

As part of the agreement, the ISDA will form a committee, comprised of banks and investors that are independent of its board of directors, to license credit derivative products to exchange-like venues.

Currently, ISDA decisions are made by its board, which until 2009 was comprised entirely of bank representatives.

Dark pools have also been under intense scrutiny lately. These venues permit stock trading with greater anonymity than on the stock market exchange, amounting to a competitive disadvantage to many.

Credit Suisse tentatively agreed to pay $85 million to New York and the federal authorities for this practice. Last month, Investment Technology, a New York Brokerage, set aside $20.3 million to settle allegations of wrongdoing.

In January, the UBS Group agreed to pay $14 million for creating an unfair playing field using dark pools. And Barclays is in negotiations with the New York State Attorney General and the Securities and Exchange Commission regarding their involvement in this area.

The middle class has been ill-served by the current financial climate. Perhaps progress is afoot.

© 2015 Newsmax Finance. All rights reserved.

The Time Is Ripe for a Third-Party Presidential Candidate

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Donald Trump essentially represents an independent third-party candidate, since he is a self-financed, non-ideologue, who seems to believe as I do that neither political party has a monopoly on poor public policy.

While never a politician or government employee, Trump brings transferable skills and experiences to the table: an innovative, creative and productive entrepreneurial record.

The following article was originally published on Friday, November 15, 2013.

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By Barry Elias | Friday, 15 Nov 2013 07:17 AM

The credibility and trustworthiness of both political parties have waned significantly over the past few decades.

Extreme political polarization in Congress and recent polling that indicates many people would not elect their current Congressman suggests the time is ripe for a centrist, third-party candidate for president.

Republicans and Democrats created the public policy landscape that caused the financial crisis, which continues to this day.

After a $29 trillion Wall Street bailout, Main Street has barely felt a nudge, and Obamacare and the government shutdown have further eroded the future of our fiscal integrity.

Andrew Huszar, a former Federal Reserve official in charge of administering the massive bond-buying program labeled quantitative easing (QE), suggested in a Wall Street Journal op-ed piece that this was the first time in the nearly 100-year history of the Fed in which mortgage bonds were purchased from banks.

The result was a huge windfall for banks. They received nearly $4 trillion in capital over a five-year period from the Fed and recorded massive profits as a result of low-borrowing costs, bond capital gains and brokerage commissions for the bond-purchasing transactions.

However, this $4 trillion expenditure created only $40 billion in economic growth, or 1/4 of 1 percent — a very poor return for the American people indeed.

Further, Democrats are beset by Obamacare and Republicans by the government shutdown and intransigent social policies.

The Real Clear Politics eight-poll average indicates Congressional net disapproval has grown from 22 percent to 75 percent over the past four or five years (a 53-point negative move). Since the beginning of his term, the president’s net approval has fallen from 44 percent to -11 percent (a 55-point negative move). Net approval of their own Congressperson fell from 47 percent in 1990 to 1 percent today (a 46-point negative move), according to the Gallup.

In 1992, Ross Perot won nearly 19 percent of the presidential vote when the political chasm was much smaller. Eighty years earlier, Theodore Roosevelt captured more than 27 percent of the vote in the 1912 presidential election running as the Progressive “Bull Moose” candidate, garnering more votes than his Republican counterpart, William Taft.

Today, a third-party presidential candidacy can be viable, since both party brands have been severely tarnished in recent decades.

This independent candidate must embrace the best of both parties — a fiscal conservative who demonstrates compassion toward the indigent and a social moderate who empathizes with the vast complexities of the human condition.

New Jersey Gov. Chris Christie will have a very difficult time surviving the Republican primary despite his social conservative credentials, and Hillary Clinton is beset with huge policy failures that will hurt her at the national level.

The issues surrounding Hillary Clinton include the Benghazi debacle and her overwhelming support for the sinking Obamacare legislation. The Affordable Care Act (ACA) is eerily reminiscent of the massive universal healthcare overhaul in 1993 that she chaired under President Bill Clinton, which was jettisoned in bipartisan fashion.

Recent efforts by Bill Clinton to remedy the ACA may prove insufficient in salvaging her reputation. Bill Clinton has recommended that President Obama fulfill his powerful, oft-repeated promise that you can keep your doctors and insurance plan if you so choose.

There is a tremendous void in the center that awaits an independent, third-party candidate for president — one who can champion a clear path toward economic prosperity, individual responsibility, equal opportunity and respectful empowerment for those facing tough times.

If ever there was a time for an unprecedented independent win, this is it.

© 2015 Newsmax Finance. All rights reserved.

The Fed Is Becoming Less Relevant

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By Barry Elias | Friday, 11 Sep 2015 11:40 AM

The Federal Reserve implicitly acknowledges that it is ill-equipped to fulfill its dual mandate of optimizing the levels of inflation and employment in the broad economy.

The Fed was charged with these objectives when the Humphrey-Hawkins Full Employment and Balanced Growth Act became law in 1978.

Now, the Fed believes employment is a non-monetary phenomenon — as I have and still do.

In their Statement on Longer-Run Goals and Monetary Strategy, the Fed recognizes that “maximum employment is largely determined by non-monetary factors that affect the structure and dynamics of the labor market.”

They also understand that these factors “may not be directly measurable.”

Alan Blinder, an economics professor at Princeton and a former vice-chairman of the Fed, claims the Fed is “clueless” about the growth of labor productivity. Despite lackluster growth of 0.65 percent each year on average since 2010 — and only 0.3 percent last year, excluding farming — the Fed anticipates productivity to grow at approximately 1.75 percent annually: a very unrealistic projection.

The Fed also recognizes that inflationary data and projections are not well understood. James Bullard, President of the Federal Reserve Bank, recently said, “There is definitely less confidence, a lot less confidence” in how inflation operates.

The Phillips Curve, an economic model that posits the rate of inflation and unemployment move in opposite directions — e.g., high unemployment suggests low inflation — has not been empirically accurate in recent years.

The rate of Inflation has declined less than expected following the financial crisis when unemployment hovered near 10 percent, and is now rising less than expected — currently below 2 percent — as the unemployment rate has fallen to 5.1 percent and labor demand is at record levels, with 5.8 million job openings advertised in July.

(While inflation for goods and services remain low, expansionary monetary policy has inflated financial assets, thereby increasing income and wealth inequalities to near historic levels.)

Economists are reevaluating the inflationary model based on behavioral psychology and empirical data. Simon Gilchrist, a Boston University professor, and Egon Zakrajsek, a Fed board economist, suggest when cash and credit levels dwindle during financial crises, firms may actually increase prices in the short-term, even if they risk the loss of long-term customers.

This dynamic would especially apply to essential products and services, such as food, energy, healthcare, and residential rent.

Stanley Fischer, Vice Chairman of the Federal Reserve, suggests currency exchange rates play an important role in formulating monetary policy as well.

There is now evidence that the strong U.S. dollar may not necessarily translate into lower import prices and domestic inflation in the U.S., as compared with other countries.

For a long time, many economists believed that inflationary expectations are critical in forecasting future inflation. These expectations are typically represented in bond yields, with low rates suggesting low inflation going forward. The low government bond yields of late suggest low inflationary concerns from the market, which might contradict the Fed’s intent to raise interest rates soon.

Given this information, the Fed “should be a little more uncertain about forecasting inflation than it was,” says Athanasios Orphanides, a former governor of the Central Bank of Cyprus, a Fed economist, and a professor at the MIT Sloan School of Management.

Alan Greenspan, former chairman of the Federal Reserve, says fiscal policy, or the government’s tax and spending programs, is more important than central bank monetary policy, and the Fed will “become utterly irrelevant” if lawmakers undermine their fiscal responsibilities.

The Fed has limited tools to work with. Adjusting interest rates and the money supply is insufficient to deal with fiscal issues, such as federal debt and income inequality.

Blinder believes the importance and power of the Federal Reserve is overstated, and they can only address these “around the edges.”

If they are uncertain as to the cause of price movements, how can they know when to adjust interest rates and by how much?

Further, the Fed needs to be thinking more outside the box. Unemployment levels may be less important than other parameters. In May 2004, when employment was at 5.6 percent, the Fed believed this signaled a near onset of rising inflation and the need to increase interest rates.

The effective federal funds rate then rose from 1 percent in May 2004 to 5 percent in June 2006, while the unemployment rate fell to 4.6 percent.

However, this large, rapid rise in rates precipitated the financial crisis. The quantity of outstanding adjustable-rate subprime residential mortgages was so large that many homeowners no longer maintained the income to support the huge increase in monthly debt service payments — causing significant and rapid sales to meet cash flow obligations, depressed prices, excessive foreclosures, and a dire economic recession.

The Fed also needs to be prescient of global economic developments. The recent Chinese economic slowdown may have enormous impact on emerging economies as well as the U.S. in terms of lower imports and weaker commodity and energy prices.

Monetary policy is experiencing diminishing returns, and fiscal reform is the best tool we have to resuscitate our economy. My tax proposal is a good place to begin.

© 2015 Newsmax Finance. All rights reserved.

Bankers Getting On-Board With Bitcoin Blockchain

By Barry Elias   |   Friday, 04 Sep 2015 12:50 AM

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Bankers are going bonkers for the bitcoin blockchain.

Go figure. Several years ago, the financial industry was abhorrently opposed to the introduction of bitcoin, a virtual currency that would revolutionize the way we conduct our banking business. Fearful of a massive professional upheaval, the financial cognoscenti steeled themselves in undermining this virtual currency.

Fast forward a few years, and ironically, Wall Street is now the largest proponent and investor in this space and the momentum continues to grow.

The financial industry has taken exceptional note of the possible applications of the blockchain distributed ledger methodology that underpins the bitcoin technology. Essentially, the blockchain functions as a trusted “third party” to verify the validity of a digital asset transfers. However, this third party is comprised of the entire universe of bitcoin market participants, rather than a centralized authority subject to unpredictable behavior. Digital miners independently confirm that all the ledger transactions are bona fide, for which they are compensated.

The blockchain method is now being viewed as a way to digitize any good or service so its ownership can be transferred accurately, timely, cheaply, transparently, and securely. In particular, the financial industry has its eye on utilizing this ledger system to trade currencies, public and private equities, corporate bonds, and syndicated loans.

Goldman Sachs, Santander and BBVA have invested in start-ups that focus on harnessing this technology. Citigroup and JP Morgan have been conducting internal groups to assess how best to enter this area. And Barclays would like to implement this technology to offer consumer products that are less expensive than credit cards and direct money transfers.

Bank of America and more than a dozen financial institutions have met with R3Cev to coordinate a foreign currency exchange platform using the blockchain ledger apparatus. This has huge implications, since the daily trading of foreign currencies was $5.3 trillion in April 2013, according to the September 2013 Triennial Survey of the Bank of International Settlements.

Nasdaq OMX Group has embarked on what may be the largest project in this area. It would like to use the blockchain to process privately held equity transfers. Currently, these transactions take as long as several weeks to complete. The Nasdaq Group believes this new methodology is more efficient, transparent and secure than the current techniques.

The U.S. Federal Reserve Bank and the Bank of England are also in the mix.

Further, the applications for other industries are significant, since this model provides a more effective and efficient accounting system. Governments are looking into this for more robust record keeping and the music industry sees potential in tracking and tabulating artist royalties based on internet download activity.

The consensus now among bankers is the blockchain technology is here to stay. The new question is not when it will be adopted, but how.

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