Friday, November 30, 2007

A Business I Never Understood-5

"California, the largest borrower in the U.S. municipal market, sold $1 billion of general obligation bonds without insurance, joining a growing number of issuers questioning the value of buying such coverage. ... 'The premium to be realized from bringing a deal insured has widened enough that a lot of these issuers are just saying, "let's go uninsured", if nothing else to test the waters,' said Evan Rourke, a municipal portfolio manager at M.D. Sass Associates in New York',", 30 November.

"When you take big risks, you expect big rewards if all goes well. Right? Well, not in early 2007. ... Essentially, they were guaranteeing, for 10 years, the credit of a group of financial companies, including credit guarantee insurance companies like Ambac and MBIA. A lot of defaults would be devastating to the investors, but so, too, would be rising market doubts about the quality of the companies' credit. ... They were guaranteeing the credit of the companies that guarantee the credit of large parts of the financial system. And they were guaranteeing that people would trust the credit of those companies. When this deal was put together by UBS in March, Moody's figured it was a sure thing and gave it an AAA rating. It seemed so safe that the upside ... was ... the Libor rate plus one percentage point. ... The financial engineeers persuaded people that big risks could be financed mostly through safe investments. ... The ready availablity of that financing encouraged more risks to be taken by lenders. ... In retrospect, it was inevitable this would blow up", Floyd Norris, in the NYT, 30 November.

In retrospect? It was always obvious! Now that the credit guarantors have been exposed as financial "Wizards of OZ", the various municipalities will abandon them.

Why We Need Federalism-3

"The Justice Department has decided not to file criminal charges against nine former Delphi Corp. officials involving allegations of accounting fraud. ... An SEC probe found Delphi manipulated earnings from 2000 to 2004, using illegal schemes to boost its profit, including concealing a $237 million transaction in 2000 with GM involving warranty costs", WSJ, 28 November.

"Robert Morgenthau, the Manhattan [DA] who investigated BCCI, tells us that Abu Dhabi 'has been responsible' since BCCI. ... Morgenthau also recounted that the elder Sheik Zayed once called to inform the State Department that, if Mr. Morgenthau indicted anyone in the royal family over the scandal, he would pull his billions out of the U.S. and make no further investments here. Mr. Morgenthau says this message was passed to him via the Justice Department. His reply: 'Tell them that that you don't control that cranky S.O.B. in New York'. As a long-time New York DA, Mr. Morgenthau could stand up to such political pressure the way the Justice Department might not", my emphasis, WSJ, 29 November.

I remember the BCCI scandal and how the DOJ tried to stop Morgenthau's investigation. This WSJ is the same WSJ which opposes letting the plaintiffs' bar tangle with the Wall Street powers that be, favoring DOJ and SEC discipline of Wall Street. Feh. Imagine: the DOJ can't stand up to political pressure from Abu Dhabi. How much does Saudi Arabia influence it?

Wednesday, November 28, 2007

The Law Is An Ass-6

"Unlike the initial program, in which the props were worth at most a few hundred dollars, the bags are now salted with real American Express cards, issued under pseudonyms to the Police Department. Because the theft of a credit card is grand larceny, a Class E felony, those convicted could face sentences of up to four years. ... In dismissing one case, a Brooklyn judge noted that the law gives people 10 days to turn in property they find, and suggested the city had enough real crime for the police to fight without any need to provide fresh temptations. The penal law also does not requires that found items be turned over to a police officer. The Manhattan [DA's] office began to dismiss Lucky Bag charges", NYT, 28 November.

With tens of billions of dollars of fraud likely on Wall Street, the NYPD chooses to arrest a few peasants who found purses apparently lost in Macy's. Either the NYPD has too many cops or still suffers from Vincent Broderick Syndrome (VBS). VBS? VB was the NYPD's commissioner in the 1960s. When John Lindsay (JL) became Mayor in 1966, JL immediately fired VB. Why? Racism. Racism? VB said something to the effect that the NYPD could not investigate crimes anymore, it could only make summary arrests. Why? Because the NYPD's average IQ had fallen from 115 in 1949 to 99. It doesn't take brains to make "Lucky Bag" arrests. It takes lots of brains to investigate sophisticated crimes.

Helicopter Ben is Lost

"If Fed Chairman Ben Bernanke's original estimate of subprime loan losses of $50-100 billion had been anywhere close to accurate, there would have been no problem. ... The Fed's chosen solution, dropping interest rates and pumping more money into the system, did not address the real problem and was thus useless, as it has since proved. It has only postponed the denouement for a few months and stored up further trouble with inflation. ... If Level 3 assets can be valued only by reference to an internal valuation model, ... how do we know they are really worth anything close to what the model says. ... Since every incentive led bank mathematicans to devise models that maximized the reported value of the bank's holdings, and since little or no market existed by which those values could be checked, it is likely that today those assets' book values are highly overstated", Martin Hutchinson, at, 26 November.

"And now Ben Bernanke, as is promised by 'targeting inflation' and heralded by the spooky sound of ravenous wolves howling in the distance and getting closer and closer, is going to bury us in price inflation and destroy us all, but that is the only thing he can do, as there is literally nothing he can do, for if there was, someone else in all of history would have thought of it, and tried it, when their stupid experiments with fiat currencies destroyed them, and believe me when I tell you that they tried everything, and they all failed. ... 'Stephen Cecchetti, professor of international economics at Brandeis University, and a former research director at the New York Fed', ... said, 'Nothing leads me to suggest that there's an inflationary pass-through from dollar depreciation.' Hahahahha!," The Mogambo Guru at, 27 November.

I agree. Helicopter Ben's raining money down on the banks did not address the problem: what are the bank's assets worth? The models will be revealed to be optimistic to say the least.

I read Cecchetti's piece at, 26 November, and thought it preposterous. It was so preposterous, I didn't think it worthy of comment.

Tuesday, November 27, 2007

MLEC Update

"In another sign of progress, BlackRock Inc. is expected next week to be named the manager for the $75 billion to $100 billion fund, people familiar with the matter said. Blackrock will be considered a neutral party and will help set pricing for the assets. As of now, it doesn't appear BlackRock would invest in the fund", WSJ, 23 November.

"A $41 billion question mark is hanging over Citigroup Inc. That is the amount, in a worst-case scenario, of potentially shaky securities the bank would need to bring onto its balance sheet. ... The fate of the $41 billion rests on the outcome of a debate going on in accounting circles over what constitutes a 'reconsideration event'. ... Like other banks, Citigroup structured these vehicles so they wouldn't be included on its books. The vehicles are created as corporate zombies that ostensibly aren't owned or controlled by anyone. In that case, accounting rules say consolidation of such vehicles is determined by who holds the majority of risks and rewards connected to them. ... Citigroup believes that because it hasn't changed the documents or contracts related to the vehicles, it shouldn't have to reconsider its relationship to them", WSJ, 26 November.

"In a sign of the building pressure, United Kingdom banking giant HSBC Holdings PLC yesterday became the first bank to bail out specialized funds known as structured investment vehicles. HSBC plans to gradually shut down two bank-sponsored SIVs and take $45 billion in mortgage-backed securities and other assets owned by the funds onto its own balance sheet. ... Banks technically aren't required to rescue their SIVs, but they may risk harm to their reputation if they don't. ... HSBC's plan to rescue the two SIVs is complex. The company plans to set up at least one structure that, much like the planned super fund, will issue commerical paper or use HSBC's own funding to buy assets from the SIVs", WSJ, 27 November.

Countrywide borrowed $51.1 billion from Atlanta's Federal Home Loan Bank. Charles Schumer, NY Senator, wants regulators to consider the risks this poses, WSJ, 27 November.

Citigroup's sponsored SIV accounting is nonsense and always was. If Citigroup does not control the SIVs, may I take control of them and manage them for say 50 basis points a year? That's $205 million a year. I'll take it. I work cheap, I'll take 25 basis points. In accounting, substance rules form. Citigroup created a blizzard of paper to obscure the SIVs economic realities. I say: Citigroup and KPMG fess up. Cut the nonsense.

Who considers BlackRock a neutral party? Henry Paulson? That BlackRock will not invest in the fund speaks volumes.

Why HSBC's complexity? Will HSBC buy the SIVs assets, or won't it? That HSBC thought it best to recognize the SIVs on its own balance sheet portends ill for Citigroup.

Countrywide's borrowing shows the situation is dire. I suspect the powers that be must sacrifice Countrywide for the greater good, showing "market discipline" while protecting Citigroup. Hank Paulson regrets that even one large financial institution that must lose its life for the good of the country. Countrywide will be "crucified on the free market cross for Citigroup", paraphrasing William Jennings Bryan.

A Business I Never Understood-4

"In the first sign of relief for the troubled bond-insurance industry, financial guarantor CIFG Holding said it will receive a $1.5 billion capital injection from controlling shareholders of its French parent so it can preserve its imperiled triple-A credit rating. ... Thomas Abruzzo, a managing director and credit analyst at Fitch, said CIFG and its owners 'were very proactive in arranging this plan'. 'Becuse of this capital infusion, we're able to reaffirm their rating and they were able to get ahead of any negative commentary resulting from our analysis;', he said", WSJ, 23 November.

The guarantors can't stand on their own. What do the rating agencies do, if the guarantors can avoid "negative commentary"? Should CIFG be consolidated with Banque Populaire and Caisse d'Epargne? Who really owns CIFG?

Monday, November 26, 2007

It's Worse Than You Think

"Central to every policy discussion in response to a financial crisis or the prospect of a crisis is the concept of moral hazard. ... Moral hazard fundamentalists misunderstand the insurance analogy, fail to recognize the special features of public actions to maintain confidence in the financial sector and conflate what are in fact quite different policy issues. As a consequence, their proposed policies, if followed, would reduce the efficiency of the financial sector in normal times, exacerbate financial crisis and increase economic instability. ... Second, the insurance analogy fails to take account of what is a key aspect of the financial context--moral hazard and confidence are opposite sides of the same coin. ... But much of what financial authorities do in response to crises does not impose any costs on taxpayers and may actually make them better off", Larry Summers (LS), at, 23 September, post titled, "Beware moral hazard fundamentalists".

"Three months ago, it was reasonable to expect that the subprime credit crisis would be a financially significant event but not one that would threaten the overall pattern of economic growth. This is still a possible outcome but no longer the preponderant probability. ... Second, it is now clear that only a small part of the financial distress that must be worked through has yet been faced. ... Third, the capacity of the financial system to provide credit in support of new investment on the scale necessary to maintain economic expansion is in increasing doubt. ... Then there are the potentially adverse effects on confidence of a sharply falling dollar. ... First, maintaining demand must be the over-arching macroeconomic priority. ... The priority now has to be maintaining the flow of credit. ... On the information available, the 'super conduit' has worrying similarities with the Japanese banking practices of the 1990s that aroused criticism from American authorities for their lack of transparency, suppression of genuine market pricing of bad credits, and inhibiting effect on new lending. Perhaps, there is a strong case for it, but that case has yet to be made. Third, there needs to be a comprehensive approach taken to maintaining demand in the housing market to the maximum extent possible", LS, at, 25 November, post titled, "Wake up to the dangers of a deepening crisis".

Who is LS? Winner of 1993's John Bates Clark Medal in Economics, nephew of Paul Samuelson and Kenneth Arrow, both Economics Nobel Prize winners, the youngest man ever to get tenure as a Harvard economics professor. What a pedigree! He was our Treasury Secretary and worked under Robert Rubin (RR), now at Citigroup as Undersecretary of the Treasury.

What do I make of this? The parade of horribles! Reduce efficiency! Wow. If there are no costs to be imposed on taxpayers, let the private sector do it. I'm sure, you guessed it Goldman Sachs (GS), will find a way to profit from the crisis. With geniuses like LS, RR, and Hank Paulson (HP) at work, GS can't miss. Oops, HP nominally is in the public sector now.

LS first piece is primarily an ad hominem attack on those he expected to disagree with him, likening them to ignoramuses who want to return to the "old time religion". Should LS call me a "hell fire and brimstone" policy proponent, he will not make me change my mind. The title doesn't scare me. Consider, LS first piece was printed 17 days before HP suggested MLEC. This indicates HP used LS to write a "set up" piece to discredit those expected to oppose MLEC. Now that MLEC looks like it will fail, LS is free to attack it. What are banking's special features that make it immune from moral hazard? In fact, banking is more given to moral hazard as the banks issue money and get reserves from the Fed. Why must "public actions [be made] to maintain confidence in the financial sector"? Why don't the $50 million a year geniuses who run these institutions run them prudently?

LS second piece attacks MLEC. Why not? None of the "wise men", including RR, former Treasury Secretary has devised anything else to protect the banks. LS mentions the falling dollar once in the piece. LS wants to maintain demand, and favors a "comprehensive approach ... to maintaining demand in the housing market". My idea: let all 105 milion Mexicans into the US. That also solves our illegal alien problem. We get one "comprehensive" solution to two problems. What a bargain! The US is overinvested in housing now. We don't need to maintain housing demand. We need large financial institutions to fail, or else the dollar will. We have a shortage of savings and LS wants to "maintain demand". Wild!

LS now sees the situation is "much more serious" than he thought it was a few months ago. Where has he been? Enough. My question: got gold?

What may be panicking the powers that be is: the bond insurers may all be downgraded. "Some veterans on Wall Street are now questioning the viability of their business model", Tomoeh Tse, at, 24 November.

I never saw bond insurance as a viable business, see my 30 October, 5 and 18 November posts.

Yves Smith has a nice post about LS piece at, 26 November.

Call Out the Cops-3

An employee of the Texas Commission on Environmental Quality (TCEQ), Rueben Herrera (RH), worked on BP's "application for a new air quality permit", then went to work for BP. RH's "new job at BP was to advocate for the company with his former co-workers to obtain the new permit on terms most favorable to BP. ... Eleven days after starting work for BP, Herrera began negotiations for the company on the permit with his former co-worker, Johnny Vermillion", Houston Chronicle, 25 November.

This story is virtually unbelievable. The TCEQ is siding with BP in this matter. Where is Harris County's DA? Texas has a law against "commerical bribery". It seems to have been violated. What's going on here? Let's not forget, BP negotiated a $50 million fine arising from the operations of its Texas City refinery, which sought the air quality permit. Could a state prosecution upset what appears to be a federal sellout of the public interest? RH sought a job with BP in October 2002. He went to work there in March 2003. What was he really doing while employed by the TCEQ for those six months? Also see my 22 November post.

The Law Is An Ass-5

"One of the nation's most aggressive attempts to limit the mobility of convicted sex offenders was struck down Wednesday as the Georgia Supreme Court [GSC] declared unconstitutional the state's law restricting where they may live. ... Jerry Keen [JK], one of the law's sponsors, said he intended to make its restrictions onerous enough that offenders 'will want to move to another state'. ... Mann's attorney, Stephen Bailey Wallace, said his client was 'calmly pleased' with the ruling. 'The law didn't even pass the smell test,' he said. 'Under its provisions, a person could be forever moving--a nomad situation'," Houston Chronicle, 22 November.

While I'm pleased the GSC struck down this law that "didn't even pass the smell test", the GSC ruled narrowly on a Fifth Amendment takings ground. It should have ruled broadly and killed the law completely, telling Georgia's legislature "no mas". The GSC could have ruled the law restricted interstate commerce. Consider: if the law was intended to force sex offenders "to move to another state", that means they could not move back into Georgia. As I recollect, only the federal government can regulate interstate commerce, US Constitution, Article I, Section 8. The Georgia legislature presumably takes an oath to, among other things, uphold the US and Georgia constitutions. Wouldn't it be nice to see JK and the other supporters of this law impeached?

Saturday, November 24, 2007

Quants at Work

"Since the bottom has fallen out of the market for structured credit, Washington Square Investment Management Ltd., for example, has seen wide variations in the few quotes available from banks, mostly one-sided quotes at that--bids at extremely low levels aimed at forced sellers, but no offers. ... 'Every time there is a crisis, people realize that valuation needs to be more accurate,' said David Gershon, chief executive of pricing service SuperDerivatives. 'People are becoming impatient about not knowing where they are.' ... Institutions with hundreds of millions of euros invested in CDOs of whatever type may find it worth spending a million or two to get a pricing model of their own when the see bid/offer spreads of, say, 16 to 95 --or no prices at all. ... 'Lots of people are building models,' said Jeff Gooch, Markit executive vice president for valuations. 'You can argue the merits of different models, but however good your model, the hard part is getting access to inputs and then testing them'. Auditors say that before allowing these independent numbers, they look in the detail at the price inputs that went into them", Jane Baird at, 23 November.

It's good CPAs look at these models now. What did they do before? What were the rating services doing, as if we don't know? Why is accurate valuation important in a crisis? Why not all the time? The wide bid/ask spreads show why Hank Paulson is pushing MLEC, the banks don't want to mark their assets to the market.

Accounting Slips Backward

"The [SEC] took an important step toward what many hope will eventually lead to a global accounting standard, dropping a requirement that non-U.S. companies with U.S. listings reconcile their results to U.S. rules. ... [The SEC's action] could eventually pave the way for the abandonment of U.S. generally accepted accounting principles. ... Chairman Christopher Cox called the step 'significant' and said the agency's acceptance of international rules signaled the continued convergence between these standards and U.S. GAAP. ... Despite the growing connections between international markets, countries and regions still differ sharply in who those markets are intended to serve first. In the U.S. and the United Kingdom, markets are generally investor-driven. ... Elsewhere in Europe, investors' needs often take a back seat to corporate or political goals. ... Proponents of a single, global accounting system say sufficient protections could assure that the body that crafts international rules, the IASB, is buffered from political interference", WSJ, 16 November.

I don't see how this helps US investors. Accounting rules are and always will be politically influenced. No US accounting rules body has ever been immune to political influence. Why could other countries which are higher on the corruption scale than the US, help create such a body? I agree, the US and other countries capital markets are converging; to more closely resemble those "elsewhere in Europe", i.e., "investors needs often take a back seat to corporate or political goals". Why did President Bush put Cox on the SEC? Was it to protect investors, or to protect issuers from investors?

Friday, November 23, 2007

"We are all [Supreme Court Justices] Now".

"In fact, motivated interest groups are pouring money into judicial elections in record amounts. ... The first step that a state like Pennsylvania can take to reverse this trend is to replace the partisan selection of its judges with a merit-selection system, or at least a nonpartisan system in which the candidates do not affiliate with political parties. In a typical merit-based system, an independent, commission of knowledgeable citizens recommends several qualified candidates suitable for appointment by the governor of the state. ... The second step a state can take is to set up campaign-conduct committees to educate voters and the media about the criteria people should use to select judges. ... One of the dangers of low media coverage and high-interest group spending is that voters hear only from activists who have targeted a particular judicial race. The Pennsylvania retention races show how easily the issues in judicial elections can be controlled by special interests. Special interest appeals to emotion and policy preferences tempt voters to join efforts to control the decisions of judges. Voters are less likely to devote themselves to the core value of judicial independence, because when judges apply the law fairly and impartially they cannot guarantee the outcome any particular voter might want. But fair and impartial judging is an essential part of our government. If we lose appreciation for our government structure and the role of the judiciary within it, it is only a matter of time before the judicial branch becomes just another political arm of government", WSJ, 15 November.

What does "merit selection" mean? Does a judge who shares the author's policy preferences have "merit"? Should law professors make judicial selections? Aren't governors who appoint judges partisan? What criteria does this piece's author think POTUS uses to select federal judicial nominees? Why do thousands of lobbyists try to influence POTUS's judicial selections? The author prefers lobbyists to elections. Does the author think Bill Clinton and George Bush had no political considerations in selecting judges? Who will select the independent commission of knowledgeable citizens? Could I serve on it even though I lack a law degreee? What makes a candidate qualified or suitable? Could I serve on the bench? If not, why not? Where is it written that a judge must be an attorney? Does having a Harvard JD qualify you? Educate voters and the media? Who selects the criteria? I don't want to be propagandized under the rubric of "education". Mao Ze Tong had "reeducation camps" in China. Would I be sent to one to learn which criteria to use to nominate judges? What's wrong with voters trying to control judicial decisions? Are judges beyond criticism? Are judges petty dictators? What do most judges know anyway? Why assume a judge is fair and impartial? What does "judicial independence" mean? Why should popular disappointment in judicial decisions be a surprise? Don't disputes give rise to legal cases?

Which contemptuous would be petty dictator wrote the piece? Sandra Day O'Connor (SDO), formerly Associate Supreme Court Justice. Despite SDO's Stanford BA and JD, I have long seen her as one of our two most "intellectually challenged" post-1945 Supremes. Two examples of SDO's judicial "thinking" are: Gratz v. Bollinger, 539 US 244 (2003) and Grutter v. Bollinger, 538 US 306 (2003). What a nitiwt! Does SDO ever read ? The Supreme Court has been another political branch of government since Brown v. Board of Education, 347 US 483 1954.

I borrowed this piece's title from Richard Nixon's 1971 comment, "We are all Keynesians now". SDO was an "affirmative action" Supreme. We can all be Supremes now.

Thursday, November 22, 2007

Punitive Damages are a Fraud-2

"BP should pay at least $1 billion in criminal penalties for the deadly Texas City refinery explosion instead of the $50 million agreed to in a plea bargain with the U.S. government, a lawyer for the blast victims said Tuesday. ... David Perry [DP] ... argued that BP neglected repairs at the Texas City plant for six years and made more than $1 billion in profit from the plant in that time, so the corporation should pay at least $1 billion in fines. ... [DP's] federal court motions filed Tuesday asked that the plea be rejected and that U.S. District Judge Gary Miller remove himself from the case because his former law firm, Fullbright & Jaworski, helped BP in lawsuits over the explosion", Houston Chronicle, 21 November.

"Motorola ... may seek $1 billion in punitive damages from the former owners of a Turkish wireless carrier. ... The trial judge said the Uzans had $5 billion", NYT, 22 November.

Gary Miller (GM) "stepped down after a lawyer protesting BP's plea bargain pointed out that the judge's former law firm had represented the oil giant. [He] noted that he was not required to recuse himself", Houston Chronicle, 22 November.

The Uzan's "'failed to demonstrate that the award exceeds their ability to pay. Therefore, we conclude that the modified punitive damages award of $1 billion is valid under Illinois law'," WSJ, 23 November. So said the Second Circuit Court of Appeals in New York.

Who is GM, the Federal Bench's Mary Jo White, see my 10 August, 12 September and 7 October posts? GM wasn't? What's wrong with the federal bench?

Let's "do" some numbers. I can, I'm a CPA. A trial judge grants a punitive damages award of 20% of the Uzan family's net worth ($1 /$5). Now Exxon's and BP's net worths as reported in their 30 September quarterly SEC filings were: $118,603 and $90,541 million respectively, source: Now dividing, we see the Exxon Valdez punitive damages award was 2.1% of Exxon's net worth ($2,500 / $118,603) and the BP fine is: drumroll please, .06%, that's right, not even a rounding error to BP of BP's net worth ($50 / $90,541). Will my "favorite" Supreme John Roberts grant immediate certiorari to reduce Motorola's award against the Uzans, individuals, not Fortune 500 corporations? Will Theodore Boutros of Gibson, Dunn & Cruther file an amicus brief with the Second Circuit Court of Appeals in New York, pro bono on behalf of the Uzans? Don't hold your breath. Also see my 23 and 30 October posts.

US Navy RIP-3

"In October, the Navy published a new maritime strategy called 'A cooperative Strategy for 21st Century Sea Power,' which, as its name suggests, focuses on deterring conflict by partnerships with other navies. ... It argues that [t]he Navy--together with the Marines and Coast Guard--is to forge international partnerships, develop trust, and learn foreign languages and cultural awareness. ... Moreover, if the Navy is concentrating on preventing wars, what happens to its ability to win them should deterrence fail? ... Indeed, the document contains the observations that 'war with another great power strikes many as improbable' ... China's purchases of advanced Russian anti-ship missiles and quieting technology have helped to turn the Chinese submarine fleet into a serious threat. ... But if the new strategy's view of the causes and kinds of future war is perplexing, the potential consequences are downright troublesome. The idea for the U.S. Navy to cooperate with the fleets of other like-minded states in the cause of avoiding war was originally callled the '1000-ship navy'. ... Under either name [1,000 or 600 ship], the strategy encourages Americans to think that peace can be preserved by supplying humanitarian services and that a smaller fleet can do this because others will take up the slack", Seth Cropsey (SC) at, 19 November.

Our Pentagon generals and admirals are useless. They should have resigned in mass in lieu of lulling Americans into thinking our defense posture is tenable. As George Washington said, "It you want peace, prepare for war". Not running a constabulary like the French Foreign Legion. Our generals and admirals apparently think they are Peace Corps workers. Why not, Colin Powell (CP) was a general before he went to State. The last time I looked after leaving State, CP's net worth was reported as over $7 million. Should we farm out our foreign and military policy to Goldman Sachs (GS)? After all, wasn't Hank Paulson GS's point man in China?

SC noted the British Royal Navy adopted a similar "cooperation strategy" in 1902. It got World War I 12 years later. I wonder if our admirals are aware of Royal Navy's plan? See my 20 October post on this "new" naval strategy.

Wednesday, November 21, 2007

Hank Paulson is Trapped

"Hank Paulson [HP], fine-tuning his rhetoric on the falling U.S. dollar, said Friday that the currency ultimately will reflect the strong U.S. economic fundamentals. ... Robert Sinche, head of currency trading at Bank of America, said ... Stronger rhetoric is one of the few tools at Washington's disposal", WSJ, 17 November.

HP "concerned that millions of homeowners aren't being helped quickly enough, is pressing the mortgage-service industry to help broad swaths of borrowers qualify for better loans instead of dealing with mortgage problems on a case-by-case basis. ... That's a shift from his previous view that the problems didn't warrant a group approach. [HP] said his outlook has evolved as he has learned more about the problem. ... [HP] faulted Congress for failing to pass several bills that could potentially provide relief for borrowers, and took aim at a Republican who is holding up a piece of legislation that would allow the Federal Housing Administration to play a greater role in the cleanup. ... [HP] ... also called the Senate's failure to pass legislation overhauling mortgage giants Fannie Mae and Freddy Mac 'very frustrating,' saying that the two government-sponsored entities need to be playing a bigger role in the housing market", WSJ, 21 November.

"Staff and nonsense", said Alice to the Queen of Hearts in Alice in Wonderland. I say that about the dollar's value will reflect "economic fundamentals", instead of how many Helicopter Ben prints. Either HP is living in Wonderland or I am.

What's really going on? Does Mr. Goldman Sachs care about peasants losing homes, or those who hold the peasants' mortgages? It seems HP concluded MLEC won't fly. Now it's time for "Plan B", have Uncle Sam bail out Citigroup etc., by stuffing Freddy and Fannie with bad paper. To make "Plan B' work HP needs new rhetoric which makes it appear he's doing something for the peasants instead of the banks.

Tanta has an excellent 21 November 2007 post about HP at Yves Smith has a post about HP at, which I take partial exception to. That said, its worth reading her take on HP's proposal.

Asian Real Estate Woes

"The Chinese real-estate market has been souped up for years. But lately it has been going into overdrive. Chinese property developers are racing to fill their war chests--and empty them again--as competition for the best remaining land intensifies and real-estate prices soar in China's booming cities. ... Bei Fu, an associate director of corporate ratings at Standard & Poor's in Hong Kong [said], many real-estate investors feel now is their chance to become national players, 'The next three to five years--that's their window, their do-or-die time'," WSJ, 21 November.

How right they are. What did people in California think in 2005? Buy a house now, it's only going to become more expensive in the future. What did many US land developers think in 2005? I expect Chinese real estate to begin falling in the next 18 months.

Tuesday, November 20, 2007

What Is War?

"If the West loses the current war against Islamofascism, it will be because some have lost all sense of what war really means. ... War isn't like divvying up the contents of a condo upon divorce so everyone walks away feeling good. It means people have to die. ... Sorry, but that's the way it has always worked. In the words of the A-bomb-pilot, 'I have been convinced that we saved more lives than we took'," Rachel Marsden at, 12 November.

Tell Connie Baby and the generals and admirals at the Pentagon.

US Navy RIP-2

"When the U.S. Navy deploys a battle fleet on exercises, it takes the security of its aircraft carriers very seriously indeed. ... That is the theory. Or, rather, was the theory. ... American miltary chiefs have been left dumbfounded by an undetected Chinese submarine popping up at the heart of a recent Pacific exercise and close to the vast U.S.S. Kitty Hawk--a 1,000 ft supercarrier with 4,500 personnel on board. ... The lone Chinese vessel slipped past at least a dozen other American warships which were supposed to protect the carrier from hostile aircraft or submarines",, 13 November.

What can I say? Admirals, wake up.

Foreign Policy Insanity

"Which is more critical to the United States in the Islamic world--that a government be democratic, or that it be a friend and ally in the war against al-Qaida and Islamic extremism? ... Nevertheless, democracy first became declared Bush policy. ... Why did free elections fail to advance U.S. interests? Because the most powerful currents running in the region are populism, nationalism, Islamic fundamentalism, anti-Zionism and anti-Americanism, all of which translate into popular recoils from leaders seen as too close to the [US]. ... Now, however, the [US] is demanding that Pakistan's Gen. Pervez Musharraf remove his uniform, end the state of emergency and hold free elections, which we anticipate will be won by the Pakistan People's Party of Benazir Bhutto of the Pakistan Muslim League of Nawaz Sharif", Patrick Buchanan at, 20 November.

"The [US] is imploring Turkey to desist from invading northern Iraq to combat the PKK, a Marxist-Leninist terrorist organization that keenly relishes the slaughter of Turkish teachers, doctors, technicians, engineers, Kurdish village guards and police, and otherwise. ... The PKK's murderous provocations against Turkey from the safety of the Kurdish Regional Government or elsewhere make Pancho Villa's villanies against the [US] pale in comparison", Bruce Fein at, 13 November.

Bret Stephens blasts Connie Baby in the WSJ, 20 November, noting, "Today the operative theory is that Israel's neighbors, fearful of Iran's growing regional clout, have a newfound interest is putting the Israeli-Palestinian conflict to rest. Nice theory-if only the locals would get with the concept. ... Then there are the Israelis, who have even better reasons that the Sunnis to fear Iran".

"Iran has done what decades of the peace proposals have not done--brought Israel, Jordan, Saudi Arabia, the United Arab Emirates, the Palestinians and the U.S. together", David Brooks at the Houston Chronicle, 8 November.

That the Sunni states: Saudi Arabia (SA), Jordan, Egypt, Libya, Kuwait and the UAE are afraid of Iran is independent of Israel's existence. I first heard 2.5 years ago that SA is surreptitiously pushing Israel to destroy Iran's nuclear facilities. Makes sense. Israel is supposed to have had nuclear weapons since 1964. SA apparently figures that if Israel hasn't bombed Mecca, Medina or Riyadh in 41 years, it's not likely to.

American foreign policy under Connie Baby is so inept I think of something that happened in about 1962. "Marvelous" Marv Throneberry dropped a easy fly ball and the Mets' manager Casey Stengl said, "can't anybody here play this game"?

Spengler Strikes Again-2

"The state of Israel embodies the last, best chance for the Islamic world to come to terms with the modern world. ... The premise of Western policy is to tread lightly upon Muslim sensibilities. That is an error of the first magnitude, for Muslim sensibilities are what prevent the Islamic world from creating modern states. Islam cannot produce the preconditions for democracy in the Western sense out of its own resources. Free elections in Muslim lands tend to hand power to fanatical despots. ... Islam has no inherent concept of humility; it can only be imported to Muslim countries from the outside. ... I have argued that it is the Judeo-Christian experience of divine love that make is possible for representative democracy to flourish, because imitation of God reveres the rights of the weak and helpless. ... For example, Japanese culture contains no concept of divine love in the Christian sense, but it does know humility, thanks to the instruction of the United States during 1941-1945 and the succeeding occupation. No concept of intermediate cause, or rational ordering of the universe, is to be found in mainstream Islam. ... In pagan society there is family, clan, and state; there is no intermediate function of representation, because there is no transcendent trust. ... For the Muslim world, what matters is not Israel is a functioning democracy located in Middle East, but rather that it is Israel that humbled the House of Islam. ... Israel offers an existential challenge to the Muslim world. ... Washington's misguided effort to foster Islamic democracy might be the stupiest idea in the history of foreign policy", Spengler at, 19 November.

I love Spengler, whoever he is. Spengler for Secretary of State, Spengler for President, dare I say it: Spengler for CEO of Goldman Sachs. Well, maybe not that.

The Bloodless Coup Continues-3

"Within Citi, many employees--highly aware that Rubin was a risk wizard at both Goldman Sachs [GS] and the Treasury--are angry at what he didn't do to avoid both this disaster and earlier write-downs that Citi reported. ... Meanwhile you might think the existence of the put would make it impossible for Citi to get those CDOs entirely off its balance sheet. But in fact Citi found a complex accounting rationale for doing exactly that, and the CDOs jumped entirely to somebody else's balance sheet. ... But remarkably, Nov. 5 was the first time that Citi mentioned liquidity puts to the world. CFO Crittenden says the need to make disclosures about the puts did not arise until the last part of October, because until then the super-senior status of the put-laden securities made it appear they would largely hold their value", Carol Loomis in Fortune, 26 November.

What does "risk wizard" mean? Is he like "Tommy's"pinball wizard, the "deaf, dumb and blind kid who sure plays a mean pinball"? The "accounting rationale" likely will be SFAS 5 about contingencies. I say crap, crap, CRAP and CRAP! As a senior accountant said to me when I was a junior at Big Eight, "that's a creatively revised accounting principle".

Citi can make a good faith case for not recording the SIVs on its balance sheet under SFAS 5; I see no basis not to disclose the contingent liability. KPMG should be put--sorry about that--out of business for this. Hey, KPMG New York (NY), my SFAS 5 copy includes paragraph 4 which lists guarantees, standby letters of credit and agreements to repurchase receivables as loss contingencies. I got it now. No one in KPMG NY has a complete copy of SFAS 5. Amazing.

Where's PCAOB? Did it start investigating KPMG's Citigroup audit? If not, why not? Is it too busy beating up miniscule CPA firms? What is very juicy in the 5 November disclosure is that our buddy, Hank Paulson suggested MLEC on 12 October, 24 days before Citigroup's public disclosure. Think about that. Where are the indictments? Where's the SEC?

Monday, November 19, 2007

Alice In Wonderland Academics-2

"After all, this is financial turmoil, not a systemic financial crisis. There has been no failure of a large complex financial institution, nor a widespread decline of asset prices. ... The growing role of large complex financial institutions may have made them 'too big to fail'--or conversely, 'too big to rescue.' It also raises the issue of regulatory capture. When financial institutions become very large ... their lobbying power increases significantly. This suggests a potential weakening of market discipline, which calls for greater disclosure. ... The wider distribution of risks within the global financial system offers many potential advantages", Richard Portes (RP) at, 15 November.

RP, London Business School Professor, is another academic living in an alternate world. That no large financial institution failed means the regulators are protecting them. At least RP recognizes regulatory capture is possible. Look at Hank Paulson running interference for Citigroup. I see no advantage "to the wider distribution of risks", since it means large financial institutions will be able to pawn off their junk on the public. As to "a widespread decline of asset prices", huh? What is your numeraire? In euro and gold terms the US market has fallen! Disgareeing with the Professor, Helicopter Ben can print all the dollars he needs to protect Citigroup, et. al., no financial institution is "too big to rescue", the dollar is.

The Bloodless Coup Continues-2

"Rarely on Wall Street, where money travels in herds, has one firm gotten it so right when nearly everyone else was getting it so wrong. ... Goldman's good fortune cannot be explained by luck alone. ... When the credit markets seized up in late July, Goldman was in the enviable position of having offloaded the toxic products that Merrill Lynch, Citigroup, UBS, Bear Stearns and Morgan Stanley, among others, had kept buying. ... For all its success on Wall Street, it is Goldman's global reach and political heft that inspire a mix of envy and admiration. ... All of which has made Goldman a favorite of conspiracy theorists, columnists and bloggers who see the firm as a Wall Street version of the Trilateral Commission. ... One particular obsession is President Bush's working group on the markets, an informal committee led by Mr. Paulson that includes Ben S. Bernanke, ... Christopher Cox, ... and Walter Lukken, the acting chairman of the Commodity Futures Trading Commission. The group meets about once a quarter--privately, with no minutes taken--to ensure thay government agencies are briefed on market conditions and issues. ... It also recently completed a study recommending that hedge funds not be subject to further regulation; the group's fund committee was led by Eric Mindlich, a former Goldman trader who now runs a sucessful hedge fund", by Jerry Anderson and Landon Thomas, at the NYT, 19 November.

"It's not even 2008 yet and already this presidential campaign has been going on too long. ... So, in utter frustration, I would make the following modest proposal: Just call off the election and let Goldman Sachs take over. After, all it seems to run just about everything already", Randall Forsyth (RF) in "The Goldy Standard", at Barron's, 19 November.

Count me a member of the "Black Helicopter" crowd. Guilty as charged. I agree, "Goldman's good fortune cannot be explained by luck alone". Amazing, a hedge fund manager does not want further regulation. What did Helicopter Ben (HB) think Mindlich would say? How do these NYT reporters know what is discussed at HB's quarterly meetings?

Amen Randy. Your "modest proposal" is Swiftian! I have thought these things for months. RF is closer to the mark than he thinks in titling his piece, "The Goldy Standard". I first wrote of the Bloodless Coup on 13 November also see my 15 November, "Dr. Doom Returns".

Fed Transparency and Other Illusions

Gary North has an excellent post with this title at, 19 November. The only exception I take is to using any CPA associated with the six largest CPA firms to audit the Fed. These guys are hopelessly compromised.

Sunday, November 18, 2007

The Joke's On Us

"The whole idea of core inflation is reminiscent of a prank Herb Stein, head of President Nixon's Council of Economic Advisers, played in the early 1970s. When a bad batch of numbers was released, Stein deadpanned that if you took out all the items in the Consumer Price Index that had gone up, there would be no inflation. Amazingly, most reporters took this as a profound insight", Steve Forbes in Forbes, 26 November.

That you Steve for reminding me of this.

The Law Is An Ass-4

"I've dedicated my career to holding powerful corporations accountable when they victimized innocent people. ... Two weeks ago, I pleaded guility to a conspiracy charge involving payments made to plaintiffs in lawsuits against major corporations. ... Prince and O'Neal have admitted to 'mistakes' and 'flawed risk models.' These 'mistakes' and 'risks' are reminiscient of those of Andrew Fastow, Kenneth L. Lay and the other Enron boys in their 'structured' 'off balance sheet' deals-contrivances that were really designed to put shareholders are risk while lining the insiders' pockets. ... It's way of life in American executive suites, aided and abetted by lax regulations and politically compromised regulators at the [SEC]. ... The real frustration is that there's so little that can be done. ... The CEO-and-director club knows that pro-business judges in the corporate haven of Delaware and elsewhere in the legal system will protect them. ... The government--forget it. The SEC, and even Congress, appear to be getting ready to cut back shareholder rights and court access even more. And the Justice Department is busy defending waterboarding and targeting Democratic activists. Why do you think corporate bigwigs behave so badly so often? ... It turns out that the legal system is a lot tougher on shareholder lawyers than it appears to be on Wall Street executives", William Lerach (WL) at the Houston Chronicle, 18 November.

I've said before the Justice Department (DOJ) had millions of dollars and seven years to prosecute WL and has done nothing to Citigroup executives. Wait you say, the billions of writeoffs were last month. So? When did Uncle Sam first learn they were coming? Why Did Hank Paulson (HP) become Treasury Secretary on 10 July 2006? Is HP an accessory after the fact, 18 USC 3 to securities fraud? Or is he a principal under 18 USC 2 as an aider-abettor?

As a condition of going public, SEC registrants should be able to be sued in any federal district court in which they operate, similar to criminal conspiracy venue provisions, which case can be tried in any federal district court in which it is alleged an overt act furthering the conspiracy took place, or RICO's at 18 USC 1965. Why Delaware's courts should hear shareholder cases is beyond me. Shareholders will miss WL, with all his flaws. I never saw how what WL was charged with harmed shareholders of any company he sued. Who was the supposed victim of WL's "crimes"? See my 12 September and 29 October posts.

A Business I Never Understood-3

"The crisis of confidence in bond insurers that bestow top credit ratings on debt sold by borrowers from the New York Yankees to Citigroup Inc. may cost investors as much as $200 billion",, 15 November.

There are fine posts about the bond insurers by Yves Smith at on 15 and 16 November and Mike Shedlock at, 15 November. I have nothing to add to what Smith and Mish said.

Amnesiac Economists

"For a quarter-century after World War II, money was based on a loose version of the gold standard. ... Then in 1971 Richard Nixon balked at the high interest rates necessary to maintain the dollar's link to gold. ... The Fed has kept a lid on inflation, but the dollar's vulnerability is caused by debt--the debt of the federal government and of American households. ... So the world faces a dilemma. ... But the world may also draw the lesson that an alternative global currency needs to be the long-term goal. Households don't like saving in a currency that won't hold its value. Companies don't like building global supply chains based on a unit of account that fluctuates unstably. ... But one of my colleagues at the Council on Foreign Relations, Benn Steil [BS], has proposed another option--a privately created currency that would confer an inflation-proof claim on gold or a basket of commodities. Steil calls his idea 'digital gold' which has a nice back-to-the-future ring," Sebastian Mallaby (SM) at, 12 November.

If SM only knew. "The Fed has kept a lid on inflation". Huh? SM and I live in alternative worlds. Is digital gold, "paper gold", or Special Drawing Rights, created in 1981? As to an "inflation-proof" claim, "Nevertheless, I firmly believe that the time must ultimately come when the business world will see that a monetary unit stable in purchasing power is a necessity of civilization. Without it every monetary relation involving time, especially long time contracts is thrown into confusion". Who wrote that? Irving Fisher, Yale economics professor in the NYT, 18 October 1912. 1912?! Yes.

Since BS wants privately created money, is he aping Fredrich von Hayek's "free choice in currency" concept without attribution? There is no gold or commodity based money that will stand until government spending is reduced. Is BS aware of the "gold clause" Supreme Court decisions of the 1930s? When it is expedient for Uncle Sam to abrogate private contracts he will. Who is BS anyway? Is he just BS? He can't be, he has an Oxford PhD.

You can buy gold coins or ETFs now. As you can futures contracts on commodity price indexes. Does BS know this? Goldman Sachs (GS), not them again, has had a futures contract based on 24 commodities since 1992, GSCI. Recent month price, 564. Perhaps BS has been out of touch for the last 15 years. Or he's looking to work for GS and market GS products. See my 2 November post.

Bring Back the War Department

"Al Qaeda's suicide bombers and assorted gunslingers are not individual al Qaeda terrorists, inspired by Osama bin Laden, that have highjacked a religion. Like it or not, the West is fighting a religion 'that arose in enraged reaction to the West,' writes Fergus Kerr in '20th Century Catholic Theologians.' ... Religion generates certainty, which breeds intolerance, which ignites conflict. ... But there's a slight impediment: The last four CENTCOM commanders, including Tony Zinni and Arabic-speaking John Abizaid, said any bombing of Iran, would push 320 million Arabs into the camp of radical Islam and produce an unitigated geopolitical disaster for the United States. This, they believe, would also push a moderate Iraqi government into the arms of a 'martyred' Iran coupled with a demand that U.S. forces hightail it home", Arnaud de Borchgrave at, 18 November.

The Abrahamic, monotheistic religions, particularly breed intolerance. When the Prophet (PBUH) entered Mecca in 622 AD, he found the Meccans worshipped 360 gods at the Kaaba. The Meccans invited him to add Allah as god 361, but he declined and demanded the Meccans give up their 360 gods. The Meccans told the Prophet (PBUH), "get lost". He did.

As to our CENTCOM commanders, I don't care what these politically correct cowards think. During WWII, the last large war we won, having won "wars" like Grenada since, we didn't worry about pushing 80 million Germans and 100 million Japanese into the camp of "radical Nazism"and "Japanese imperialism". We bombed and bombed and killed and killed. By WWII's end 6.9 million Germans were dead and 2.2 million Japanese. We followed George Patton's, "It is the job of the United States Army to kill people and break things". What don't our Defense Department generals understand? As William Sherman said in his famous "War is Hell" speech, 19 June 1879, "There is many a boy here today who looks on war as all glory, but boys, it is all hell". Our generals are to make war hell for our enemies. A real expert on Islam, OBL said on 13 December 2001, "When people see a strong horse and weak horse, by nature, they will like the strong horse". The way for the US to win the Arabs' favor is to treat them as they treat each other. This may offend Western sensibilities, but that's how I see it.

What "moderate Iraqi government" are the generals talking about? Iraq is now a suzerainity of Iran. I opposed invading Iraq because Iraq is 55-60% Shiite and I expected Iraq to follow Algeria's example, 1955-63, with "one vote, one time" and elect a Iran-friendly, sharia-following government. That happened. As to a "demand that U.S. forces hightail it home", we should tell the Iraqis, "Nuts" as General Tony McAuliffe told the German commander demanding he surrender on 22 December 1944 at the battle of Bastogne. See Have we a McAuliffe today? Now that we are in Iraq we should use our presence for the only thing it is good for: destroying Iran's nuclear facilities.

Saturday, November 17, 2007

Blog Readability

I came across, "Blog Readability Test" in my internet ramblings. Out of curiosity of what it was I ran it on Skeptical CPA and the blogs it links to with these results:

American Thinker, Genius H
Asia Times, Genius
Becker-Posner, Genius
Gene Expression, High School WTL
George Borjas, College-Undergrad
Intellectual Conservative, College-Undergrad
Lew Rockwell, Elementary School WTL
Ludwig Von Mises, High School L
Overcoming Bias, College-Postgrad
Real Clear Politics, High School
TCS Daily, College-Undergrad
Townhall, High School
V Dare, High School
Calculated Risk, College-Undergrad
Doctor Housing Bubble, Junior High School
Financial Sense, College-Undergrad
Gold Eagle, Junior High School L
Kitco, Elementary School WTL
Naked Capitalism, College-Undergrad
Prudent Bear, Genius H
Re: The Auditors, College-Undergrad
RGE Monitor, Genius
The Gold Bug, Junior High School L
W.C. Varones, College-Postgrad

Skeptical CPA, College-Postgrad

I was surprised with how well the algorithim this website uses to acess readability agrees with my opinions. 68% or 17 of 25 results I agreed with; finding: 3, too low, signified by L, 2 too high, signified by H and 3, way too low, signified by WTL. I believe Gene Expression has the highest required education level of any blog I follow. Overall, a good job by blog readability test.

Corporate Privilege

"As part of its defense, AES obtained a court order that gave it access to Shaw's auditing records, which had been prepared by Ernst & Young. The records are a trove of information on corporate 'soft spots'--the unseen details behind the public filings. ... Companies are increasingly concerned that the auditors could be required to turn over confidential records to outsiders, exposing corporations and excutives to lawsuits from shareholders or whistleblowers and unwanted scrutiny by regulators. ... The trend of auditors looking further behind the corporate curtain is a major shift from the 'don't ask, don't tell' mentality of the years before Enron. ... Lawyers typically say that such legal opinions are confidential. ... 'In order for auditors to properly do their job, they must not share common interests with the company they audit', Judge [Alvin] Hellerstein wrote. ... The Association of Corporate Counsel, in a supporting brief filed on behalf of Shaw, wrote that without guarantees of confidentiality, 'talking to the corporation's accountant is no different than talking to a prosecutor or to the other side in civil litigation'. Critics say the system could have the opposite effect from what it intends, by chilling internal investigations", NYT, 16 November.

Why should an artificial state-created entity, like a corporation have any lawyer-client privilege? I say repeal it by statute, at least for SEC registrants. I said this 30 years ago! As to chilling internal investigations, so? What are they if not top management hiring an outside law firm to find middle-management scapegoats for top management nonfeasance, malfeasance or misfeasance? I say, "end it. You can't mend it". I have long deplored the Justice Department and SEC using corporate counsels as "private attorneys general" to police their employers.

CPAs are "looking further behind the corporate veil". Wonderful. Where were they before Enron? What is it the CPAs think they were being paid to do?

Judge Hellerstein's opinion is on firm legal ground. The Supremes chimed in on this in US v. Arthur Young, 465 US 805 (1984). 23 years ago?! What led anyone to believe a privilege existed to hide material information from an SEC registrant's auditors?

Friday, November 16, 2007

Alice In Wonderland Academics

"Economic theory, however, tells us that central banks should intervene to provide liquidity if the liquidity crisis risks disrupting the payments system thereby hurting 'innocent bystanders'. ... The argument that a bubble can never be recognixed ex ante is a very weak one. One had to be blind not to see the bubble in the US housing market, or the internet bubble. ... It is not inherently more difficult to stop asset bubbles that it is to stop inflation. And central banks have been very successful at stopping inflation", Paul De Grauwe at, 14 November.

What alternative world does Professor De Grauwe of the University of Leuven live in? Central banks cause inflation. Did the good Professor short say, Cisco in March 2000? Did he short the homebuilders earlier this year? What is this guy talking about?

Amnesiac Bankers

"In a world full of bosses with short memories, too many bankers stand out as amnesiacs. ... Everyone in banking points to risk management as a top priority, [John Reed former Citigroup head] says, but that is often just lip service. Risk analysis can easily become a series of routine chores that offer little protection from the unexpected. ... Mr. Reed has some sharp words too, for the ways that banks pay risk managers. 'If they get stock options, or get rewarded for earnings per share, they'll approve everything,' he cautions. Mr. Reed's most provocative warning: Be careful who you listen to", WSJ, 14 November.

Finally someone associated with banking who tells it like it is.

Wal-Mart in Italy

Wal-Mart created an Italian entity with a few employees which claims to own much of its real estate in the US. It was apparently created to avoid state income taxes, WSJ, 14 November.

The entity appears to lack economic sustance. This kind of abuse should lead to indictments.

The Classical Agency Problem-4

"Plaintiffs in litigation over the painkiller Vioxx are supposed to be able to decide whether to enroll in the ubersettlement announced last week or take their cases to court. But due in part to what lawyers say is an unusal provision in the settlement agreement, many plaintiffs in effect may have little choice but to accept the deal ... If a client decides not to take part in the settlement, then the lawyer, according to the deal, must take 'all necessary steps' to withdraw from representing that client. It is relatively rare for a settlement to require lawyers to cut ties with their clients, but it appears to be happening more often, lawyers say. ... The way the deal is structured, Merck has a huge incentive to get as many plaintiffs enrolled as possible. ... The lawyer-withdrawal rule was a negotiated point between Merck and the lead plaintiffs lawyers, and it was vetted by ethics professors, according to people involved in the discussion. Withdrawals will be supervised by judges", WSJ, 16 November.

I don't care if all United States "legal ethics" professors vetted this settlement. I think it stinks for the plaintiffs and shows the plaintiffs' attorneys were not their fiduciaries. On 9 November Merck announced the settlement. On that day, Merck stock rose $1.13 per share. With 210 million shares outstanding, the market concluded that the settlement was good for Merck, to the tune of $2.5 billion. Who do these plaintiffs' lawyers really work for?

See my 29 September post quoting Lester Brinkman. That judges will supervise the withdrawals does nothing for me.

More Government Stupidity

"Lenders must for example determine what loan products are 'appropriate' to the consumer's existing circumstances. Does that mean that the lender has to investigate whether the borrower is telling the truth? ... Lenders must make 'a reasonable and good faith determination based on verified and documented information' that the consumer had a reasonable ability to repay the loan. Who will be able to say what is reasonable or taken in good faith? Would you like to make a loan if years later you can be called in front of a federal agency or a jury and cross-examined as to whether your actions were reasonable? ... Thousands of loans are packaged and sold as part of Mortgage Backed Security pools. How long will housing mortgages continue to be part of these pools after Congress creates a due diligence standard that no securitizer will want or be able to meet? ... Although the Mortgage Review and Anti-Predatory Lending Act may have been written with intentions that are good, its consequences are not", Stuart Saft, a Dewey & LeBoeuff partner, in the WSJ, 10 November.

These really are the last days, the "wolf will lie down with the lamb", Isaiah 11:6. I am in substantial agreement with a member of the Corporate defense bar. The proposed legislation will create potential chaos. How can a lender become a borrower's fiduciary? That said, I think many lending abuses would end if mortgage originators had to retain 10% of their loans until paid in full. As to the potential inability to securitize these loans, I say "wonderful". The loan originators will no longer be able to pawn off junk. A special kudo to Saft for focusing on the "consequences" of the proposed legislation, not just producing empty rhetoric.

Haven't the Feds Anything Important To Do?

"Barry Bonds, the former San Francisco Giant's star and baseball's home-run king, was indicted on perjury and obstruction of justice charges Thursday for telling a federal grand jury he did not knowingly use performance-enhancing drugs", Houston Chronicle, 16 November.

It's good the see that the Justice Department has so many FBI agents and AUSAs laying around doing nothing that it has the time to investigate and prosecute Barry Bonds (BB). What do I care whether or not BB used steroids? That's a contract matter between him and major league baseball. The Feds should butt out.

Thursday, November 15, 2007

Dr. Doom Returns

"Another credit bubble has met its demise in U.S. financial markets. ... Meanwhile, it's worth asking who is in charge of our financial systems during this critical period? That is, what kind of role should regulators play to ease us through the crisis and safeguard against future turmoil? ... Indeed, it seems the basic purpose of the superfund is to delay the accurate pricing of the junk mortgages in the SIVs, and to delay the recognition of losses. The superfund would neither resolve nor mitigate the fundamental problems in the financial markets. ... The problem is that the Federal Reserve and Treasury have failed to come forth with solutions that will limit future financial excesses. ... I asked [Ben Bernanke] what information he would like that is not currently available to him. Pointing immediately to the problem of pricing subprime instruments, Mr. Bernanke said frankly, 'I would like to know what those damn things are worth'. ... Leading Fed officials periodically acknowledge ... it lacks the analytical capacity to identify a credit bubble in the making", Henry Kaufman (HK) in the WSJ, 13 November.

HK suggests we create a "new Federal Financal Oversight Authority ... under the auspices of the Federal Reserve". I oppose this. HK did not identify the problem. It is not that the "[Fed] and Treasury have failed to come forth with solutions that will limit future financial excesses". They cause they excesses. My answer: repeal the Federal Reserve Act and let the market act. Get the Treasury out of the business of protecting Wall Street from the people. We need to put large financial institutions in bankruptcy.

If Olympian Helicopter Ben (1590 SATs) does not know what the CDOs are worth, how can we lesser mortals know? Hint: let Citigroup have Sotheby's or Christie's auction them off. Or take them to a North Carolina tobacco auction. CDOs, tobacco, cattle, what's the difference? Alan Sloan at Fortune, 29 October, likened Goldman Sachs to butchers, "The butcher--excuse us, the investment banker--gives the customers what they want", see my 29 October post. We have more regulation than we need. Any regulatory body will be subverted by the industry it purports to regulate. The new agency amounts to: let GS do whatever it thinks best. That's current policy. Make it official

Addendum: "While Mr. Kaufman proposes a new large regulatory agency for the credit crises and subprime mess for large banks, I would ask a different question or propose a potential solution going forward. Maybe the answer is to restore the Glass-Stegall Act of 1933", Peter Hill's letter to the WSJ, 15 November. Hill may be right.

Tuesday, November 13, 2007

Price Controls Work!

"Amid a severe kidney-donor shortage, an idea long considered anathema in the medical community is gaining new currency: payments for people willing to give up a kidney. ... 'There's one clear argument for sales', [Arthur] Matas told a gathering of surgeons earlier this year. The practice, currently illegal in the U.S.. 'would increase the supply of kidneys, save lives and improve the quality of life for those with end-stage renal disease.' ... 'Payments eventually result in the exploitation of the individual', says [Francis] Delmonico [a Harvard professor]. The federal ban on organ sales dates back to 1983. ... Since then, the gap between demand and supply has widened. ... Today the waiting list has grown more than fivefold, to nearly 75,000 patients. ... About 4,400 people died [in 2006] before they could get [a kidney]", WSJ, 13 November.

As the prophet Milton Friedman said, "We economists don't know much, but we do know two things: If you want more of something subsidize it, if you want less of something, penalize it". Did anyone in Congress ever read Forty Centuries of Wage and Price Controls, 1979, by Robert Schuettinger and Eamon Butler? What did these self-righteous fools think would happen? Of course, no one would accuse Congress of killing 4,400 people last year. Why not? Does Delmonico think his Harvard salary exploits him? Did Delmonico ever talk to George Borjas, a Harvard economics professor?

Res Ipsa Loquitur

"Would you feel comfortable if your company sold off your pension plan to a big bank? This month, Citigroup Inc. got the green light from the [Fed] for an unususal deal to take over the $400-million retirement plan of a British newspaper company. In exchange for getting its hands on all that cash, Citigroup will run the pension plan--investing the money, paying the benefits and taking on the liability previously borne by Thompson Regional Newspapers. ... Ari Jacobs, head of the Retirement Benfits Advisory Group at Citigroup .. said Amercian employers seemed 'very interested in opportunities to reduce or eliminate the risks associated with their pension plans.' He added, "We in the U.S. are looking at a similar model' as the British deal ... 'As a financial institution, we believe we are better at managing financial risk than anybody else', Citigroup's Jacobs said. 'That's our core business", Los Angeles Times, 31 October.

That you Vox Baby for finding this. What can I say? The thing speaks for itself. What does KPMG think of Citigroup's risk management? What world does Helicopter Ben (HB) live in that he would permit this? Unless HB and Hank Paulson know Citigroup will use the pension assets to buy slices of MLEC?

The Return of Charles DeGaulle and Jaques Rueff

Adrian Ash gives us a short history of Charles DeGaulle's (CDG) interactions with Uncle Sam and Uncle's various "Minsters of Finance" from 1965 to 1972, at, 10 November.

I remember CDG's February 1965 press conference and being taught "DeGaulle was a bad man". Why? Becuase he wanted gold, not dollars. CDG was right, dollar holders were wrong. Ash asks, "Are we now facing the final endgame in America's post-war monetary dominance?" It looks that way to me.

Common Sense From Some Economists

"Governments should consider requiring financial houses that make loans and then sell then off as securities to retain some of the risk on their books to prevent a repeat of the current problems sparked by mortgage-backed securities, a group of prominent economists and current and former policy makers said. ... 'The regulators as a class missed the accumulation of these highly complex financial instruments that were probably mispriced [Richard] Portes [President of the Centere for Economic Policy Research] said at a news conference. ... 'This is a financial turmoil, but not a systemic financial crisis: There has been no failure of a large complex financial institution nor a widespread decline of asset prices', he added", WSJ, 13 November.

Who are these "prominent" economists? No one asked me. If Portes believes the assets were mispriced, did he short Citigroup about a year ago? I suggested mortgage security orginators be forced to retain 10% of their loans as far back as 1999! Yes I did. And they should not be permitted to hedge their interest rate or credit risk. As for the lack of "large complex financial institution" failures and "widepread decline of asset prices", so? That's because the regulators protect the financial institutions and don't want them to sell the assets in question. What's Hank Paulson trying to do with MLEC? Look at the dollar. Enough said.

The Bloodless Coup Continues

"Stephen Friedman, chairman of Stone Point Capital LLC and director of President Bush's National Economic Council from 2002 to 2004, will become chairman of the New York Fed's board next year, the Fed announced. Mr Friedman was co-chairman of Goldman Sachs & Co. from 1990 to 1994", WSJ, 9 November.

Isn't it amazing how public spirited Goldman Sachs alumni are? I repeat what I wrote on 14 October, "Establish a 25-year moratorium on any GS executive working for the Treasury or Fed". I now would extend this moratorium to any "former" GS who had worked for GS at any time in the last 25 years.

Monday, November 12, 2007

Do Lawyers Think?

"Without a DNA test, proper notice, and full hearing, the state has no authority to declare anyone the father--and it clearly exceeds its authority incarcerating anyone who refuses to honor an illegitimate child support order. ... Judge Teitelman [of Missouri] is to be greatly commended for interpreting both civil and criminal procedure properly. ... Judge Limbaugh wrote the sole dissenting opinion. In Limbaugh's mind, under civil procedure, any process constitutes 'due process.' The ends justify the means--expediency substituting for due process--so long as it inures to the convenience of the state. ... Mr. Limbaugh, have you ever heard of 'best evidence?' Should the state entitle the most egregious possible form of marital adultery by knowingly attacking the wrong man?", David Usher at, 7 November.

"Le Etat c'est moi", or "I am the state", said Louis XIV, 1638-1715. Judges can justify anything. Olver Wendell Holmes, in my opinion our finest jurist ever, once said something to the effect that a judge decides what he wants, then seeks justification in the law. Why be surprised with a judge's contempt for facts and law? Judges have absolute immunity for judicial acts. Look at the Supremes and Kelo. Amazing. Some people favor Daubert and letting a judge determine what expert evidence to admit. I don't. The judge might have majored in Women's Studies in college. Can he evaluate scientfic evidence? Wait a minute, isn't evaluating evidence the jury's role? Look at OJ's case. Marcia Clark and Chris Darden's DNA evidence "expert" acquitted OJ! What did he say? That in one sample the odds against a DNA match were 57 billion to one! The jurors, yes the maligned OJ jurors, seized on that and discredited the procecution's case since there were only 6.2 billion people on earth and they had some notion of statistical independence. I discussed the case with a Cal Berkeley engineering professor who had a Cal Tech BS and Berkeley PhD who also would have acquitted, concluding the prosecution coached its experts. No, say it ain't so.

Sunday, November 11, 2007

Why Financial Engineering Doesn't Work

Martin Hutchinson wrote a post with this title at, 5 November. He concludes, "Financial engineering's benefit to the global economy is questionable at best and the increases it has produced in the financial services sector's share of global output may have been mere sucessful rent seeking". I agree. Financial engineering only made money for the financial engineers and left behind problems for the rest of us to pay for. Unlike say, mechancial engineering, there are no fixed numbers in finance. There is no Planck's constant.

Is $100 Oil Cheap?

"Is $100 oil cheap? ... Simply put, the Earth is running out of that magic combination of oil that is both high quality and cheap to extract. ... It is not a lack of oil that will trigger the next oil crisis; it is a lack of production capacity. ... Your average economist will tell you that once you correct for inflation, crude prices reached their actual peak in 1980 during the energy crisis spurred by the Iran-Iraq war. ... Using the government price index (CPI) numbers, that record-high price per barrel is estimated at between US$90-US$102 in today's dollars. ... Using [John Williams] shadow stats, Bud [Conrad] has calculated the oil price history using the 1980 CPI method. It turns out that 1980 barrel of $39.50 crude is the equivalent of over $200 per barrel in today's anemic dollars. ... Another way to view the big picture is to examine the weighing of different sectors within the S&P 500 over time. ... Interestingly, the biggest run has been experienced by the financial sector, which has expanded from 5% to 20% in the last 30 years. ... The current weighing of 9.3% demonstrates that energy stocks have yet to make their big run", Chris Gilpin at, 8 November.

I estimate that $39.50 in 1980 is about $160 today. I agree with Gilpin and have used S&P "sector percentage" analysis myself, noting energy declined from 29% in 1980 to 9.3% today and that financials now make up 20% of the S&P 500. When Harvard and Stanford MBAs beg for jobs with small wildcat oil E&P companies and drillers and field service companies like: Helmerich & Payne, Parker Drilling, Global SantaFe, Pride, Weatherford, National Oilwell Varco, etc., you'll know the bull market in energy is over, see my 25 October post. We've got years and many dollars to go.

Oil and OPEC

"For one, basically all of the OPEC countries are in rare agreement that they are not to blame for the recent price spike. ... The issue, OPEC argues, is not too little oil on the market. It's speculators, the falling dollar, and logistical bottlenecks in the supply chain that are jacking up the price", WSJ, 10 November.

These must be the end times in which, "The wolf will lie with the lamb", Isaiah 11:6. That OPEC lies down with me is a similar portent . I agree with two of OPEC's three "issues", the falling dollar and supply bottlenecks.

Banking Back to 1694

"Investors can also get exposure to gold through the MarketSage Gold Bullion CD, a five-year certificate of deposit from EverBank Financial ... that guarantees depositors' principal and offers potential returns equal to the percentage change in the average spot price of gold over a five-year period. The bank also offers an online account that lets customers purchase gold or silver", WSJ, 10 November.

Wait a minute, didn't goldsmiths in England do this before they were permitted to engage in fractional reserve banking? Didn't they issue gold and silver certificates? Wait a minute, didn't Uncle Sam issue gold and silver ceritificates? Are EverBank's certificates better than Uncle Sam's? If not, could you sue EverBank? Stay tuned, the gold standard is returning piecemeal.

Saturday, November 10, 2007

US Dollar-Rip?

"The dollar is 'losing its status as the world currency,' declared Xu Jian, a middling official at China's central bank, on Wednesday. 'We will favor stronger currencies over weaker ones, and will readjust accordingly.' ... French President Nicolas Sarkozy visited Washington and brought a dollar warning of his own. 'The dollar cannot remain someone else's problem,' he told Congress. 'If we are not careful, monetary disarray could morph into economic war.' ... Wall Street wants easier money to rescue the banks caught in the subprime crisis, never mind the risks of future inflation. ... Worst of all are the economists, who should know better, but have convinced themselves that the dollar must fall so that the 'trade deficit' can adjust. ... Treasury Secretary Hank Paulson mouths the ritual lines about a strong dollar, even as he keeps pressuring China to revalue the yuan", WSJ, 9 November.

I agree with the WSJ. As for the economists, I am reminded of a Brezhnev-era joke: The last exhibit in Moscow's May Day parade was a small truck containing three old, bald men. An American in the reviewing stand says, "I don't understand. The ICBMs, the tanks, the bombers, the fighters, the infantry, those I understand. But three old men?". His Russian host responds, "Their presence in our May Day parade is easily explained. Those are our economists and you would not believe the damage they can do". I wonder if Helicopter Ben (HB) was in that truck as an MIT graduate student? Currency devaluation aggravated the 1930s depression. Does HB know that? That France's president should be saying the same things Charles DeGaulle did in the 1960s is ironic.

The UN at Work

"So Mohammed El-Baredi finds it 'distressing' that neither Israel nor the U.S. shared information with him about an apparent Syrian nuclear program before Israeli jets destroyed it on September 6. Imagine that: Not everyone is prepared to entrust the head of the International Atomic Energy Agency with their national security. ... Yet this is the same agency that was taken surprise by nuclear projects in Libya, North Korea and Iraq in the 1980s. And now Syria, which in September was voted co-chair of the IAEA's General Confrence. ... Not surprisngly, the Syrians are hailing the IAEA chief for saying neither Israel nor the U.S. had provided 'any evidence' to suggest Damascus was in the nuclear business", WSJ, 7 November.

Who cares what the UN thinks? US out of the UN, UN out of the US! I've said this since 1960 when I went on a class trip to the UN. UN, bah humbug! See my 31 October post mentioning El-Baredi.

The Law Is An Ass-3

"A former high school football star given 10 yers in prison for having consensual oral sex with another teenager was freed Friday by Georgia's highest court, which ruled that his sentence amounted to cruel and ususual punishment. ... In its 4-3 decision, the Georgia Supreme Court noted that state lawmakers has scrapped the law that required a minimum 10-year prison term. His sentence was denounced even by members of the jury that convicted him", Houston Chronicle, 27 October.

10 years for a 17-year old being fellated by a 15-year old? This is outrageous. It shows that Georgia has too many police and prosecutors that they could waste time on such nonsense. That the ruling reducing his sentence was 4-3 is also disgusting.

Friday, November 9, 2007

Bernanke's Crime Spree Continues-2

"The Federal Reserve is working with banks to help establish 'true valuations' of securities linked to subprime mortgages, chairman Ben S. Bernanke [BSB] said. ... 'It's very much in the interest of the banks to disclose as much as possible as to write down their losses', [BSB] said in a hearing of the congressional Joint Economic Committee today. ... 'We are working with the banks, the ones who sponsor these off-balance-sheet instruments, to make sure they are getting true valuations,' [BSB] said in response to questions at the hearing today. Banks 'are being aggressive in marking down their assets,' he added", Scott Lanman, at, 9 November.

This post's title is from 26 October's, so look for Bernanke's Crime Spree Continues there. In 1979 I read this joke in Barron's, "How do you know when the chairman of the Fed is lying? Every time he moves his lips". For a guy who got 1590 on the SATs and is a Harvard man, BSB should be able to do better than this. BSB wants to help banks establish "true valuations"? What does that mean? How does be define a "false" valuation? Are BSB's "true valuations" the 21st Century equivalent of the Medieval "just price" or "fair wage"? Will BSB next try to lead into gold? Stay tuned.

Anatole of France Lives-3

"Based on the Justices' questions at the Oct. 9 oral argument, a majority think investors should be barred from bringing class-action suits againt third parties. ... In a bank heist, for example, the getaway driver is just as guilty as the stickup man. But Congress was striking a very crude compromise reflecting a deep skepticism about whether shareholder lawsuits really benefit shareholders at all", Roger Parloff in Fortune, 12 November.

My "deep skepticsm" is that the SEC and Justice Department (DOJ) "benefit shareholders". I prefer lawsuits. It's true that corporations pay the lawsuits. So? Suppose they never paid? What is likely to happen? The incidence of financial fraud would soar. Why not? What's the disincentive not to commit fraud? The SEC and DOJ are compromised now. Suppose there were no class action lawsuits, without the plaintiffs' bar looking over the SEC and DOJ's shoulders, can you imagine what they would do? Read my 6 October post mentioning the Ray Dirks fiasco. Prohibiting lawsuits would hurt investors in another way. How? It would cause more capital misallocations. I know of lawsuits "deadweight loss". So? It's a monitoring or information cost. Viva lawsuits!

Parloff writes, "in real life most diversified investors, like mutual funds, aren't really harmed by securities frauds to begin with". No? Why not do away with the SEC competely? Better still, repeal the wire, mail and securities fraud statutes. As to Congress's "crude compromise", balderdash. Congress is "of Wall Street, by Wall Street, for Wall Street", to paraphrase Abraham Lincoln.

Who Needs the Rating Agencies?

"The credit-rating downgrade deluge that's been rocking financial markets isn't over. ... The three major rating firms ... have been maligned by critics for originally underestimating the danger of bonds backed by subprime mortgages and other investments tied to mortgages. ... In September, during hearings about ratings firms on Capitol Hill, at least one questioner raised the issue about whether the [SEC] could require more uniform updates from the rating firms, which could also boost transparency about the state of the market", WSJ, 9 November.

The last thing the rating agencies want is transparency. The various rating agencies have downgraded tens of billions of dollars of CDOs recently. Where were they when we needed them?

The Dollar and Goldman Sachs

"The credit crisis sparked by mortgage problems reared its head anew, as stocks tumbled on fears about shaky financial institutions. This time, the dollar's fall to record lows and oil's flirtation with $100 a barrel added to the worrisome brew. ... Something else is beginning to nag at investors. The dollar and oil are pushing to opposite extremes. ... The combination of economic worries and market movements is reminiscent of the chaotic 1970s, when the U.S. was best by inflation. ... Inflation is under control and most investors trust central banks to keep it that way. ... 'This is a critical juncture,' said Jim O'Neill [JO], head of global economic research at Goldman Sachs [GS]. 'The dollar is behaving in the past couple of days as though the market is testing its reserve-currency status'," WSJ, 8 November.

With gold at $835, most investors trust central banks to keep inflation under control? I wonder if JO talks to Jeffrey Currie at GS? See my 24 October post.

Thursday, November 8, 2007

They're Kidding

"Federal housing-finance agency Ginnie Mae plans to roll out as soon as today, what it calls the first 'standardized' bond backed by reverse mortgages", WSJ, 8 November.

I kid you not.

A Business I Never Understood-2

"Investors are fast losing confidence that bond insurers, who provide a financial anchor for roughly a trillion dollars in debt, will weather the credit-market storm. ... If a bond insurer's rating slips, it could trigger a domino effect of bond-rating downgrades. ... While the likelihood of insurers being disabled appears remote, 'if their credit ratings were downgraded, then the whole industry would go away', said Ann Rutledge, a principal at R&R Consulting, a structured-credit consulting company. ... Most guarantors insured only CDO securities that had the highest triple-A credit ratings to begin with, and the added protection made the securities more attractive", WSJ, 8 November.

Ann Rutledge (AR) ain't no Janet Tavakoli. Credit guarantees is an industry that should go away. It may be time for AR to start looking for honest work. I understand Citigroup needs a permanent replacement for Chuck Prince (CP). At say $20 million a year, my 35% fee for brokering AR to Citigroup as CP's replacement would be $7 million. I'll work on it.

Who is Hank Paulson Fooling?

"This may sound silly, but let me ask you a question. Let's say that I maxed out my credit at Citigroup to speculate on a house whose market price is now less than what I paid. Citi wants its money, but instead I say, 'Sorry, the house is selling for less than its true value. As soon as it sells for what it should, I'll send you a check.' What do you think Citi's reaction would be? ... Citi clearly screwed up with its SIVs. When a financial institution borrows short term to buy long-term assets--it's supposed to have a plan for when its bet goes bad--rather than just whining about 'disorderly markets'," Allan Sloan in Fortune, 12 November.

Amen Allan!

Stupidity Must Be Inherited

"The dollar was pummeled across the board after reports surfaced suggesting China may want to dump some of its enormous reserves of dollars and replace them with euros. ... Marc Chandler, global head of foreign exchange at Brown Brothers Harriman [BBH] in New York said yesterday's comments from Mr. Cheng [an advisor to China's parliament] 'lack merit and most likely do not reflect policy'," WSJ, 8 November.

BBH? I remember them. In 1961 Robert V. Roosa (RVR) joined JFK's Treasury as Undersecretary for Monetary Affairs. He had been a BBH partner. So? In 1962 he dreamed up what became known as Roosa Bonds (RB). RVR noticed Swiss Franc (SF) interest rates were below US dollar (USD) interest rates. So to save Uncle Sam money, RVR had the Treasury issue principally SF denominated bonds. In 1962 I thought this was brilliant. Cut me some slack, I was 11. As the SF strengthened against the USD, the Treasury lost billions in foreign exchange speculation. I wonder if Chandler is channeling RVR as I write. The Chinese should stop supporting the dollar and American domestic consumption.

Why $100 Oil Can't Float

"The price [of oil] is too high to be sustainable. There are 10 solid reasons why: 1, Supply above ground is abundant. ... 2. Supply below ground is abundant. ... 3. Production is set to increase. ... 4. The cost of production is much less than $100 a barrel. ... 5. Iranian exports aren't likely to be cut. ... 6. High prices are pulling back demand. ... 7. High prices are forcing goverments to cut subsidies. ... 8. Energy from oil is looking expensive compared with energy from gas. ... 9. The weak dollar is a poor excuse for high oil prices. ... 10. Speculation is artificially boosting prices", WSJ, 8 November.

My responses: 1. So? 2. So? 3. So? 4. Irrelevant. What does "cost" mean? I remember in 1973, the sainted Milton Friedman blew this one during the first oil shock. He thought per barrel lifting costs were relevant. He later realized that the marginal barrel of oil is the next barrel we find. Besides, price drives cost, not vice versa. 5. So? 6. So? 7. This is important as China and other countries reduce subsidies, this will shift the demand curve. 8. So gas will increase. 9. What does this mean? 10. What does artificial mean? We are not impressed.

Wednesday, November 7, 2007

Experts, Bah Humbug

"Hank Johnson (D., Ga.) ... does claim that arbitration is often heavily stacked in favor of companies. but a 2004 study in Law and Contemporary Problems, a publication of Duke Law School, found exactly the opposite. ... Univerity of Kansas law professor Stephen J. Ware says that even in cases where arbitration contract terms are more favorable to sellers, the result is generally lower prices for consumers, because the cost of lawyering has been stripped out", editorial in the WSJ, 7 November.

The WSJ's continued attacks on lawsuits are economic idiocy. Why not repeal the Seventh Amendment? Even better, why not exempt all Fortune 500 companies from lawsuits by individuals? If arbitration was "better" for Merrlll Lynch's (ML) clients, wouldn't ML make its clients sue? What "hackacademics" say means nothing to me. The WSJ's position ignores "externalities", just like its open borders position. The benefits go here, the costs are borne somewhere else. You can read Henry Hazlitt's wonderful Economics in One Lesson, 1946 to see many applications of the doctrine of "seen and unseen effects". The WSJ is sufficiently economically sophisticated that it should not peddle this nonsense.

Goldman Fools No One

Loren Steffy makes many of the same observations I have concerning the apparent conflicts of interest of "former" Goldman Sachs personnel in and out of Uncle Sam's service,, 7 November.

The Continuing Bloodbath

"But calling this crisis a sub-prime meltdown is ludicrous as by now the contagion has seriously spread to near prime and prime mortgages. ... And it is spreading to every corner of the securitized financial system. ... The reality is that most financial institutions ... have barely started to recognize the lower 'fair value' of their impaired securities. Valuation of illiquid assets is a most complex issue", Nouriel Roubini at, 6 November.

Excellent post with a good discussion of the accounting issues involved. Bernard, a blog contributor noted that Goldman Sachs (GS), yes those guys again, has level three assets of 185% of its capital base. Who knows how big an asset writedown GS needs?

I have been leery of securitized assets since 1997 when David Bowie sold $55 million in bonds which were backed by 10 years of royalties from 287 of his songs.

Goldman Sachs Meets Marie Antoinette

"Treasury Secretary Hank Paulson [HK] says the U.S. is examining the subprime mortgage crisis to ensure that 'yesterday's excesses' aren't repeated. He could be talking about himself and his former firm, Goldman Sachs Group Inc. [GS]. Paulson, 61, doesn't mention that [GS] still has on the market some $13 billion of almost $37 billion in bonds backed by subprime loans or second mortgages that it created while he was chief executive officer. Those bonds have an average deliquency rate of almost 22 percent. ... Starting in March, Paulson said the damage was 'largely contained' and was no risk to the larger economy. ... 'I can't help but notice that when middle-class homeowners are losing their homes to foreclosure, he was pretty nonchalant about it', [Brad] Miller said of Paulson. 'But when Wall Street CEOs start seeing trouble in their absurdly complicated financial instruments built on the mortgages of middle-class homeowners, he feels their pain'," Mark Pittman at, 5 November.

On 29 October I asked can the US afford the continued existence of GS? On 14 October I called for a 25-year moratorium in hiring GS people by Uncle Sam. What are we waiting for? As for Citigroup, if it's in enough trouble, let it file for bankruptcy. Does Paulson think he is Marie Antoinette who said under different circumstances, "Let them eat cake"? We all know what happened to her.

Tuesday, November 6, 2007

The Prince of Islamabad

James Robbins (JR) has an excellent and amusing post which Connie Baby should read titled, "The Prince of Islamabad" at, 6 November. JR writes as he's Niccolo Machiavelli writing a memo to Pervez Musharraf. Enjoy.

Monday, November 5, 2007

Humpty Dumpty was a Goldman Sachs Guy

Citigroup's "board named Sir Win Bischoff ... as interim chief executive. Senior Advisor Robert Rubin [RR] will become chairman. Citigroup also said it will write off between $8 and $11 billion to reflect the declining value of subprime-mortgage-related securities since Sept. 30", WSJ, 5 November.

"In 1999,then Treasury Secretary [RR] was pictured alongside Alan Greenspan and Larry Summers on the cover of Time magazine with the headline: The Committee to Save the World", David Enrich in the WSJ, 5 November.

"When the market for mortgage securities entered a meltdown over the summer, financial firms holding billions of dollars of hard-to-trade assets used mathematical models that were heavily dependent on credit ratings. ... For lack of any market pricing, Citigroup used credit ratings as a key input in figuring out the value of the future payments they expected to receive on the securities, according to people familiar with the bank's valuation models. For example in valuing the payments on pieces of subprime-backed CDOs with the highest triple-A rating, the bank would look to how the market was valuing payments on corporate bonds with the same rating", Carrick Mollenkamp and David Reilly in the WSJ, 5 November.

Amazing. This brings two thoughts to mind: One, Humpty Dumpty (HD) of Lewis Carroll's 1842 Alice in Wonderland must have been a GS guy; two, Citigroup is in worse trouble than it wants to admit. We have the spectacle of "former" GS guy RR apparently asking "former" GS guy Hank Paulson to prevent the writedown Citigroup is about to record.

I expected RR to be named interim Citigroup chairman, because he has "street cred", whatever that is. I think it means he can pull strings behind the scenes and has a big Rolodex. "Faster than a speeding bullet. More powerful than a locomotive. Able to leap tall [piles of bad paper] in a single bound. Look! Up in the sky! It's a bird. It's a plane. It's Super[former GS guy]", with apologies to the "Superman" televison show intro of 1952 to 1957.

HD said to Alice, "When I use a word it means just what I choose it to mean--neither more nor less". Alice, "The question is, whether you can make words mean so many different things". HD, "The question is: which is to be master-- that's all". HD, "former GS guy" now says, "when I value a security it's worth exactly what I say it's worth".