omissions feed now with the palm of your. machine on the. line from moscow where it's nine thirty pm the headlines creeping contagion euro zone champion germany and tourist ratings downgrade with fears the crisis is hitting the monetary union's biggest economy. military maneuvering the russian plants closer ties with china while america promises to move most of its warships in the asia pacific and come in here. and protest peacefully or pay a fortune russian lawmakers pass a bill that sparked some of the most heated debate and set a new parliamentary record. next it's off to washington for

a capital account with born lester. good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for tuesday june fifth two thousand and twelve and that global's creditors could have more than three billion dollars in claims against the failed firm that is according to the creditors bankruptcy trustee former f.b.i. director louis freeh guess who is not in the front of the line for it according to freeze report customers who wells and this is of course out after a report yesterday from the other trustee james good is the one for the customers who wants to unpack here we have just a guess to help us do it author and former goldman sachs managing director nomi prins joins us also g seven finance chiefs reportedly held a eurozone crisis conference call today as spain's treasury minister has sent up a flare saying the hell does that country is shut out of the bond market the

treasury minister and reportedly some of spain's bankers want the ego to help recapitalize struggling banks easy for them to say a bank rescue for them comes on the backs of taxpayers citizens will ask if anything could turn that dynamic around. and could the way one kastrup city and others are trying to fill a budget shortfall backfired could it incentivize disaster and destruction adding fuel to the fire quite literally we'll explain let's get to today's capital account .

we have so much bad bank behavior and so little time i guess the question is where to start we have m.f. global bank of america also the government of course the treasury so why don't we start with m.f. global because the trustees of the now defunct firm have come out with reports both of them this week already their interest remember are at odds one is working for the creditors one is working for the customers the findings in james gibbons' report which points fingers at the finger i guess at john poor design and m.f. global execs raises a lot of questions this is the trustee for the customers among them this report finds the underlying liquidity problems that m.f. global did not commence in the fall of two thousand and eleven rather liquidity had been a cause of concern before and threw out mr kors lines tenure at m.f.

global yet systems and tools that would enable accurate real time monitoring of liquidity were never implemented so let's just take one angle on this m.f. global did not have proper internal systems in place but remember the federal reserve approved them as a primary dealer not long after john corazon came on board that was february of two thousand and eleven the new york fed announced m.f. global had received this designation so this status allowed the firm better conditions in borrowing it allowed them to trade directly with the fed as a counter party giving them the ability to take more risk now we know how that all ended up so let's talk about what this means what questions it should raise we have just the person to do that nomi prins senior fellow at demos and author of black tuesday also formerly of goldman sachs and a past life so know me thanks so much for for being on the show welcome back to look out so nice to see you again. thank you great to be back again let's start

with m.f. global with this trustee with the revelation that i just brought up that m.f. global had liquidity issues long before the fall of two thousand and eleven did not have the proper systems in place to i guess gauge this what kind of questions does that raise then that they were granted this primary dealer status and questions about what that enabled them to do then. well you know starting with the primary dealer status that is something that the fed can either choose to bestow on a company or not and as we know they chose to bestow it a lot of that was because with john coors on coming to the helm of them of global he had behind him all of the relationships the bravado everything that came from having been an insider in washington having come to washington from. position at goldman sachs and so forth so he was able to really persuade for his company the fed into granting this status and what it means is that the company has more

access to cheaper funding if it has cheaper funding it has more money to put on any betting table this is prevalent throughout the banking industry any any bank that has that kind of status has more of an inside track more of an open door into cheaper funding and that is one thing that m.f. global has now with that cheaper funding with that stamp of approval from the fed and the global was also able to make bigger trading trading transactions it was able to bring in additional customers it was able more importantly to get credit lines from the big banks and those credit lines and those big banks are what took their money when things turned sour from m.f. global first and those are the banks those are the creditors that are first in line to get anything back after the bankruptcy ahead of as you mentioned in the opening

the customers right so a really important distinction and a really important change in status that the fed gave to m.f. global and let's talk about what we what we know not then but what is reiterated in this report is that not only was corazon acting as c.e.o. but he also traded actively on its behalf through a specially designated account now this is bizarre because at the end of the day he's running a futures commodities merchant but is it kosher and if it is would it have needed to be disclosed was it disclosed. because of the immense amount of deregulation that has happened in the financial industry the kind that leads to a company like m.f. global being a government securities premier listed agent means that really he did not have to disclose maybe he should have for ethical reasons to allow his customers to

know he was potentially trading with their money which he says he wasn't doing which as we know he was ultimately he was but in terms of the actual regulations the fact that he as the c.e.o. also might have a position as a traitor or as head traitor or whatever it was he was doing in between is on that gray line of ethical behavior versus legal behavior and it's not necessarily something that legally needs to be disclosed although of course it had major ethical ramifications and also led to the illegal taking of customer segregated funds to back the bets that john corps was indeed making right and then also in this report i guess it was interesting that james givens did point the finger. at other executives and said he believes he has a case at least to sue them for breach of fiduciary duty for negligence so if he

has the dirt that he needs to have these claims to sue these executives including junk or assign where are the criminal charges from the d.o.j. or the f b i. the damage has been ridiculous on all of these situations that have occurred in the financial industry that there have been no criminal indictments of any of the leaders the leaders of the companies that have done so much speculation and that has gone so wrong it has lost so much money outside of the lines of any kind of fiduciary responsibility throughout this entire period and global is one major glaring example of the d.o.j. falling down on its job and the f.b.i. we are talking about monies that went across state lines that went across countries either went over the ocean into the u.k. and so forth this is technically an f.b.i. matter is well the this is this is larceny this is money that disappeared now all

the language and all the defendants on the m.f. global side will say well you like john corazon says i didn't authorize the misuse of customer funds of course you didn't say hey by the way can we misuse customer funds but the point the funds were misused right and all of the lines in between and legalities in between will be what you know his side and what the customer side are going to be arguing but the reality is their money was misused it was used for margins it was used to prop up credit lines it was taken before it should have been taken and it was used to back john cores science bets he made those bets he backed those bets when things were going wrong and as you mention this was not just something that happened in the fall was already happening in the summer regulators were asking questions about the bets and corazon was basically saying to loot as some of his stewards were at the company that he's got it that the things are ok that he's ahead in a lot of these positions and that everything will be fine and of course as we know

that wasn't the case and more and more money got poured in from the company into the creditors to allow them to continue to call margins on the company and ultimately everything imploded right and as you mentioned earlier some of this money was abroad it were. in the u.k. and i thought it was interesting in getting this report he says that one of the things one of the three things that needs to happen in order for customer property to be returned one hundred percent of it is contingent upon these proceedings with the u.k. and recovery of funds now this is the same trustee i understand that is on year four of trying to do this with the lehman brothers bankruptcy and has received or recovered nothing so is this right for him to be banking on getting money back from the u.k. when at best it is a lengthy process at worst it's going to deliver nothing. it's nice that he's optimistic i guess you know if it gets him energized to continue to fight for

customers funds to be returned that's great but yeah the reality is he's been doing this for four years with lehman it hasn't happened and a lot of that is because you have this david and goliath situation in these. situations where the customers are very very last to getting what is owed to them or what in this case was theirs to begin with is is still there is as it stands and all of the creditors with all of the lawyers and all of the big guns and everything else are ahead in bankruptcy court saying no we need to get that first and you know there are laws that protect creditors and so on and so forth where they're also laws that protect customers but because m.f. global operated as do many companies across all of these different regulators and across all of these different rules and move money back and forth and through companies like j.p. morgan chase on the way and so forth it's hard to get that pinpoint of accountability and more important relinquishing of customer funds before the creditors who are fighting like mad on the other side are trying to get any of

their money back right and in these long fights one thing we do know for sure is this amounts to millions and millions of dollars in fees for these trustees and these bankruptcy attorneys that are overseeing it so it's a long battle they're going to get a lot of money i know james get as you know hidden kind of is it or not the headline is that seventeen million dollars has been the cost that he's incurred already or has asked for i think through february now really quickly before we go to break and we're going to talk more with you after a break let's quickly touch upon some other executives presumably behaving badly because it's come out in a new lawsuit in federal court in manhattan that bank of america executives painted a rosy picture of the losses from their acquisition of merrill lynch back in two thousand and eight knowingly now on its face it looks like bank of america exactly the bad guys here but is a store more complicated than that. yeah that's a really murky issue ken lewis as the c.e.o. at the time of bank of america did preside over bank of america when they acquired

merrill lynch that we know but merrill lynch who at the time was headed by john thain who was former head of the new york stock exchange former. senior executive at goldman sachs and so forth was running a company that was staggering from c.d.o. and various types of derivatives losses when the deal to acquire went down in the middle of september of two thousand and eight the deal that bank of america made to purchase this very troubled company that as we saw continued to plummet in value as the deal details were being discussed at twenty nine dollars a share which was seventy percent higher than it was even trading in the market before and during the time it was tanking in the market so that is something that ken lewis you know used basically his company to buy it and inflated value even if all the information were true marilyn so that's number one that's definitely has

fall no i mean i mean it was down on the ones that also. no i mean he wanted to let merrill lynch fail and you know hank paulson treasury secretary ben bernanke the chairman of the fed well look we cannot have a really big bank like merrill lynch fail we happen to lehman happened to bear we're not going to happen to merrill lynch and plus john things are guys so we're definitely not going to let it happen to merrill lynch who can take well j.p. morgan to just you know agree to take bear stearns citigroup was a disaster it had to be bank of america and in that process whether ken lewis knew or didn't know or was subtly or not so subtly implored to not disclose the true condition of merrill lynch i think there was a lot of people involved with that information being withheld from from shareholders who approved the merger and that it was irresponsible the fed to allow the merger to take place. of course they pushed it so a lot of a lot of people a lot of culpability here when we come back i want to talk a little bit more about some perverse incentives at play too we will have more nomi

hang on right there we'll have more with nomi prins author and senior fellow at demos after the break also still ahead forget grex it and suspect that some have called for a camel exit but where the california turn for a currency we'll tell you about one town solution in loose change but first your closing market numbers.

which was the same or similar there's a huge decision on the market to evolution that is going on with the violin crisis interview continuing to deepen and spread can love them all and remain on the sidelines much longer than. the big welcome back before the break we were talking about the revelations that have come out of a lawsuit filed in federal court in new york about bank of america and what executives withheld from shareholders about their purchase of merrill lynch which was just losing a lot of money so one of the other revelations that have come out from this lawsuit is the following if we could bring that up showing some of the perverse it senate incentives that may have been in. played it said while lewis stated that b. of a was inclined to terminate the merger lewis also raised the prospect of b.

of a consummating the merger on the condition that it received a taxpayer funded guarantee to cap the losses that bank of america was exposed to for merrill's toxic assets and how much were so there's a lot of questions that come up from last let's bring back nomi prins in to ask them so know me if we could go to her please given the situation and just laid out in that part of the lawsuit about some of the perverse incentives here how much were banks incentivized to worry less about their own balance sheets and more about being too big to fail so that they have this implicit backstop guarantee of the government. well in the case of j.p. morgan chase they received twenty nine billion dollars of backing from the government which they still have in order to take over bear stearns which was falling as well and fell as well in bank of america's case when the decision was

made that it would be acquiring merrill lynch. and again this was in such a dire market at the time that when the decision was made i think the fed and the treasury department got together and were complicit with ken lewis in. putting together a bailout or a guarantee package and what wound up happening was that bank of america certainly received tarp money they receive bailout money which was direct to bank of america's let's say top line but they also received. a substantial multi-billion dollar guarantee package and that was connected and would have been connected to merrill lynch's poor folio so in one sense bank of america didn't have to worry on the other sense again we're looking at a company that they over inflated the price that they paid to get and that was failing daily at the time so even if there was to be backing by the government and

the government was pushing this merger bank of america was still culpable in alternately agreeing although there was a very strong push from the government to make the remit happen so this is really a situation of major complicity of the government taking the risk in order for bank of america shareholders affectively to take over merrill lynch but ultimately pulling the plug for that risk at this point a lot of those guarantees don't exist anymore and yet the portfolios in the securities that merrill lynch had at the time are not necessarily much better some of the losses had already been taken but some are still there are lying kind of dormant and this priced inside of the bank right and we know that in any of these bailouts in areas the loser is always taxpayers citizens and i'm wondering if some news out of europe could actually reverse this a little bit so we know that spanish banks right now are kind of the banking system does your to be asking for possibly needing bailouts or recapitalization but i

thought it was really interesting an article in the wall street journal talking about some legislation that the european commission is proposing and they're planning to propose it tomorrow according to this report that would change some of the rules and it would give nations more sovereignty and more ability to sound like unwind banks before they. and what it would allow them to do is essentially have bondholders take heads and it would change the tides to where investors take losses and not taxpayers would also allow them to replace management before a bank fails do you think that anything any kind of legislation could truly change this dynamic so that it is investors taking the hit and not taxpayers. well i think it's a good try and technically in the united states there is an f.d.a. i see that's supposed to help to work out banks that are facing bankruptcy so that the positives are safe in the bank on lines and as we have seen the smaller banks

have had to unwind or fail or go bankrupt in the larger banks get the government backing so for europe where governments have already stepped in to back some of their banks into this crisis for example in ireland the government had decided a few years ago we're going to back these banks to the tune of an amount of money that has only continued to increase so that you know the governments are kind of in this position where they don't really want their banks to fail even though they're allowed to make them fail because if a bank fails in the banks holding government debt and now the debt gets dumped into the market and the government now has to pay more to run its country because now its debt is lower price and has higher interest rates then that all of what is happening right now continues to happen so the governments if they were able to unwind and did have the ability to unwind would have to have the guts to unwind and so far with the capacity they have. today they haven't made the moves to do that

they've made the moves to allow their banks and the relationship between the banks and the government to continue to degrade yeah yeah it's a great point thank you for making me prince thanks for being on the show she's author and senior fellow at demos. all right let's wrap up with loose change dimitri shannon maybe is training someone but even with a global economic crisis it seems the market of luxury is doing extremely well it's set to hit one point five trillion dollars this year but one of consumers shelling out their couch for take a look named k.

by a local safari guide she likes to use of bari vehicle move talks to search her gait . blog i do not encourage this behavior it's an exhilarating experience with a tourist. according to financial times it's experiences like so far e and also yachts and spas that are beating out other luxury items like high and clothing so what is this say people are worried that you can't take it with you in the apocalypse is coming so we better do everything there we've ever wanted to do and some are cashing taken away the first thing that came to our mind just now hearing this story is it kind of the bunch of us matter splits argument that there's only so much wealth that individual can accumulate there's only codes that you can where before you kill over but he didn't factor in this new kind of says no we could live in this global all authority where you have these bank executives that have a pipeline to central banks and they become really guber wealthy when they do they

spend on these experiences ok there you go safaris who knows like they could go build igloos have some credibility i mean there's there's an infinite amount of. possibilities as far as like with the service sector for these you know pretty soon that you always are they could go to space i mean really sky's the limit well that's what richard branson is. going to lead them into what's happening to cities which are broke because that's the other dynamic you have here many municipalities around the u.s. we know are struggling with budget shortfalls but baltimore thinks they have a solution they just approved this selling of ads based on fire trucks take a look. and see that it encourages people to spend locally in the community currency is not a new idea to bolster. what another city is coming up with their own currency but in baltimore they're advertising on fire trucks so the question that that raised

for us is does this incentivize corporations to start fires going where and out there i certainly think and especially banks because they're arsonists ok they love starting fires they do all right metaphorically and literally they are they always put them out always put them out and you know what i have put in a special request on a big screen shot of this. special group for capital account. on these fire trucks in baltimore because i think i'm going to the banks ok and i think that's the smartest charge for capital account to get their ad space out there let the banks of the far as we capitalize we bring it to the people we bring you the news in the fire trucks straight from a burning cities of baltimore the banks quite literally yes and. the sound bite that you heard just before that was from davis california where add them to the list of u.s. cities that have developed their own local currency so the question that came up for us because we've heard about california's problems me being a california native i've always heard about california's problems we've heard about

the california exit scenario people have said hey if people are talking about a greek exit how about california axing the dollars and so hey our cities are being prepared for this is for this is the collective we should be talking about greg's with legs it and this puts you in a spot because this is a very profit good state you guys live live nice out there in california you got a great close because of. all the things so i think this is you know an opportunity for us to be better off the rest of the country to get rid of california because we already know that you guys are in the earthquake so i've seen you get in your before we go greek i am a california. when in doubt it area to another at least california contributes it's like i said it went like a country in terms of what where is greece sorry it's not just pulling its weight without california the u.s. case like mississippi. we will. call to serve those over we've got to end it there we thank you so much for watching and you can

maybe weigh in with what you think but come back tomorrow and watch the show. and in the meantime you can follow me on twitter at lauren lyster and give us feedback on the kalajzich vs the grags it at youtube dot com slash capital account watch us in h.d. on hulu and come back tomorrow thanks so much have a good night.