Wednesday, October 31, 2007

Legalistic Foreign Policy

"For it is a history that keeps repeating itself, in the West's dealings with fanatical regimes. We do not seem to be able to learn that confrontation is cheaper now than later, that fires are worth putting out before they spread. Or that 'containment' is only a workable strategy for a rainy day. ... The costs [sanctions] impose on the enemy are often exceeded by the cost of their enforcement. ... But they are doomed to fail, as all legalistic sanctions have always failed to deter criminal regimes", David Warren in, 28 October.

Sanctions did not bring down Iraq, nor will they affect Iran. Sanctions are just Western "feel goodism", with no expected affect. Did we learn nothing from Neville Chamberlain's 1938 Munich trip? I guess not.

Spengler Strikes Again

"A year later than I expected, the drumroll has begun towards a Western attack on Iran's nuclear capability. Despite the best efforts of Western diplomacy, the 'moderate' option in Iranian politics expired last week with President Mahmud Ahmadinejad's triumphal consolidation of power. ... Iran has only two options: a sickening slide into economic decay and internal weakness as its oil-exporting capacity attenuates, or a regional adventure against the Sunni oligarchs of the Gulf oil-producing states. ... There are no good outcomes, only less terrible ones. ... Deals with the devil simply do not work, even in the ethically challenged world of foreign policy. The devil will act according to his nature, whatever bargain one attempts to make with him. ... The West has no choice but to attack Iran, because Iran believes it has no choice but to develop nuclear weapons", Spengler, in, 29 October.

I said we should unilaterally destroy Iran's nuclear capablities three years ago. Instead Bush wastes our: time, money and blood in Iraq and Afghanistan. Mohamed El-Baredi , head UN weapons inspector claims Iran is not trying to build nuclear weapons. Who is he kidding? Why does Iran have 3,000 working centrifuges? What is Iran doing with them? Why anyone should listen to El-Baredi's takiwa is beyond me.

How Much Is A Barrel of Oil Worth?

"Petro China is valued at about $440 billion, nearly double its midsummer capitalization. ... Huge valuation gaps between Chinese and U.S. companies exist outside the resource sector, as well. ... It is especially tough to argue Chinese resource companies should command huge premiums over American producers, because oil is a fungible international commodity. ... 'There presumably would be an arbitrage between PetroChina' and Western oil companies, says Kurt Wulff, president of McDep Associates, an independent provider of energy research", Barron's 29 October.

I couldn't have said it better. China looks like a bubble.

Call Out The Cops-2

"Accounting groups have raised the question of whether Citigroup and other managers of the SIVs should account for the funds, many of which face potential losses, on their balance sheets. ... Nearly 100 bankers and lawyers are racing to put the [MLEC] plan together. ... If [MLEC] doesn't work, Citigroup and other SIV managers could find themselves in a bind that could force them to take financial hits. ... But that prospect has raised the issue among accounting professionals about whether the bank shares in potential losses to such an extent that it should consolidate the SIVs onto its own books", WSJ, 31 October.

This is a no-brainer. Citigroup would have no problem if it didn't "own" the SIVs. Why is Hank Paulson trying to create MLEC? Where were the: SEC, the Big Four CPAs and Justice Department (DOJ) when the SIVs were created? Where are the securities fraud lawsuits? Imagine, the DOJ could prosecute William Lerach and Martha Stewart. What about Citigroup executives? See my 14 October post about this.

In 1979 I heard Jesse Jackson (JJ), yes, that JJ, give a speech in Chicago. He said something to the effect that, "The government should be as concerned about crime in the suites as crime in the streets". In 1979 I thought JJ was crazy. I don't anymore.

Tuesday, October 30, 2007

A Business I Never Understood

"Investor worries are mounting that the next big casualties from the credit squeeze might be the specialist companies that act as guarantors for bond issuers. ... 'Our conclusion is that MBIA and the rest of the financial guarantors are facing a prolonged period of stress', said Rob Haines, an analyst, at CreditSights, a research house",, 29 October.

I never understood what service companies like MBIA performed. If they could increase a bond's rating so the issuer could reduce his interest rate by say, 75 basis points and get a higher rating, how could the guarantor sell such insurance for say, 20 basis points? Who is wrong, the rating agencies, or the guarantor? Further, how can the rating agencies rate the guarantor's securities? How can the guarantors have AAA ratings, unless the rating agencies ratings of the underlying guaranteed bonds were wrong?

Why couldn't the bond owner reduce his risk by buying a diversified bond portfolio? I believed the premiums paid to financial guarantors either were pure waste since if push came to shove, the guarantors couldn't pay off and were just a Ponzi Scheme.

There is a fine post about the rating agencies at on 30 October.

Anatole of France Lives-2

"BP PLC put a host of legal threats behind it with far-reaching federal settlements yesterday and $373 million in fines and restitution. ... In the largest manipulation settlement in the history of the Commodities Futures Trading Commission, BP will pay $303 million in criminal and civil penalties and restitution for driving up the price of propane in 2004. BP will pay $50 million in connection with the deadly 2005 explosion at BP's refinery in Texas City, Texas, in the largest fine ever assessed against a corporation under the Clean Air Act. ... Rep. John Dingell, the Michigan Democrat ... criticized the size of the $50 million Texas City fine. 'I note with curiosity that when an average citizen commits a felony, it usually leads to a prison sentence,' he said also citing the company's profitability", WSJ, 26 October.

Another job well done by the Justice Department. Last year BP earned $22 billion. BP's total fines were 1.6% of this. Imagine, some poor slob with a few crack rocks can be sent to prison for ten years. Some justice. Imagine if an armed robber could avoid prison by agreeing to pay a nominal fine. That's the way it works here.

Monday, October 29, 2007

How Stupid Are the Rating Agencies?

"Some 58% of the loans were no-documentation or low-documentation. ... Even though the individual loans in GSAMP looked like financial toxic waste, 68% of the issue, or $336 million, was rated AAA by both agencies--as secure as U.S. Treasury bonds. ... Thus, a total of 93% was rated investment grade", Allan Sloan, in Fortune, 29 October.

Are the "national" rating agencies this incompetent? Or worse than incompetent? GSAMP? Goldman Sachs (GS) Alternative Mortgage Products, what else? GS is everywhere. It has friends everywhere. Can the U.S. afford the continued existence of GS?

"A Foolish Consistency is the Hobgoblin of Little Minds"

"Banks looking to collect damages from retailers for cases involving credit-card data breaches received a big boost from a federal judge here [in Boston]. ... Until now, banks that issue credit cards have been liable for fraud losses, while retailers haven't. ... In previous cases, judges have dismissed damages cases brought by banks, ruling that the contractual agreements to ensure the safety of the customer data were just between retailers and the credit-card associations, not the banks that issue credit and debit cards to consumers. ... Judge Young ruled that even though the companies didn't have 'direct contact with the issuing banks, TJX and Fifth Third knew that the issuing banks were part of a financial network that relies on members taking appropriate security measures'," WSJ, 26 October.

This post's title is from Ralph Waldo Emerson's, Self-Reliance, 1841, the rest of the sentence read, "adored by little statesmen and philosophers and divines". The banks must have gigantic minds! Bravo Judge Young (JY). You understand tort law and the concept of reasonable foreseeability. Will the Supremes follow JY in Stoneridge? Even better, let's see if the Supreme's "distinguish" the banks' arguments here from those made in Stoneridge to avoid liability for their structured finance departments actions affecting third-party investors. This I want to see. I'm sure John Roberts (JR), A.B., J.D., Harvard can do it easily. He's so smart. I bet he looks down intellectually on: Albert Einstein, Isaac Newton, Richard Feynman, et. al.. I suspect if JR ever heard of me, a sans coulotte, sans Ivy League degree ignoramus, he would spit. I opposed JR's joining the Supremes, believing he was and is, an unscrupulous child of privilege. I await JR's decision the Exxon Valdez case, now that the Supremes agreed to take it.

AOL-Times Warner Redux?

"Microsoft is partying like it's 1999. The company's $240 million investment in Facebook values the social-networking Web site at 500 times its estimated 2007 earnings of $30 million. ... Facebook's valuation also equates to 100 times its $150 million of annual revenue", WSJ, 27 October.

"History has shown that whenever companies, no matter how great, get priced above 50 to 60 times earnings, buyer beware. ... But many of today's investors are unfazed by history--and by the failure of any large-cap stock ever to justify, by its subsequent record, a P/E ratio anywhere near 100", Jeremy Siegel, a Wharton professor, in the WSJ, 14 March 2000, about a week after NASDAQ peaked. The article is available at

I have an idea for Bill Gates, the next time Microsoft is considering an acquisition call me. I'm sure I can split my "nominal" fee, of say 10% of the proposed acquisition's price with Professor Siegel and as Nancy Reagan said, "Just say no".

Sunday, October 28, 2007

Why We Need Federalism-2

"Connecticut's attorney general issued subpoenas to the three largest debt-rating firms as a part of an antitrust investigation. ... The [SEC] and state attorneys general in New York and Ohio have begun investigating how rating firms evaluated subprime-mortgage-backed securities", WSJ, 27 October.

How aggressive would the SEC be in investigating the rating agencies if there weren't state attorney's general looking over its shoulder? Especially since the SEC maintains the rating agencies cartel by recognizing "national" rating agencies.

Ben Stein Rides Again

"Supposedly, a number of wizard managers consistently earn more than 40 percent a year for their hedge funds. Yes, I know that this conflicts with every bit of investment and market theory--or almost every bit. ... Let's put Mr. Cohen to work for the common good. Let's have the federal government issue about $10 trillion in Steven A. Cohen National Debt Retirement Fund Bonds. After interest is paid on the bonds, if Mr. Cohen makes 40 percent on the money, the fund will return 36 percent a year. ... Why do we need federal taxes?", Ben Stein, in the NYT, 28 October.

I remember learning in 1994 the world's smartest woman, Hillary, turned $1,000 into $100,000 in a year trading cattle futures. At the time I suggested Goldman Sachs (GS) raise a $10 billion fund and give it to Hillary to manage for two years. At the end of two years the $10 billion will be $100 trillion and GS will be able to divide the spoils as follows: $3 trillion to GS, $48.5 trillion to the investors, $24.25 trillion to Uncle Sam and the balance to Hillary. My cut of GS $3 trillion, a "mere" $30 billion. Hey Hank, consider it. I don't want to think about how big the fund would be after three years. We would all be eating Merle Haggard's "Rainbow Stew", 1999. By the way, a similiar plan was floated in 1720 in England called the "South Sea Bubble". It ended with a crash.

PS. Hank, do you think GS could find a $300 million a year job for me in product development?

Saturday, October 27, 2007

What Investment Bankers Do Today

"In the old days, that is until about five years ago, investment banks were purely in the busines of intermediating risk. ... Investment banks like to pretend that they employ many an Einstein in their ranks, but the truth is, of course, far more mundane. ... For the investment banks, this absence of people to stuff (retail investors) meant that financial products simply had to get more complex for them to make any money. ... The increasing complexity of derivative products was encouraged by rating agencies, who wanted to increase their own fees. ... [I]nvestments that had been priced at about 90 at the end of August were reduced to 30 or 40 at the end of September", Chan Akya at, 26 October.

These are the geniuses who want the public to bail them out.

Nevada Real Estate

"Based on September's inventories and sales rates, Southern Nevada has about a 19-month supply of existing homes and a three-month supply of new homes. ... 'Trust me, there's another real estate boom coming', [Larry] Murphy [president of real estate research firm SalesTraq] said. ... Nevada is tied with Hawaii at No. 2 for the share of its residents' income that goes toward housing. Nevada homeowners spend an average 46 percent of their wages on housing. California is No. 1, with an average of 52 percent", Las Vegas Review Journal, 26 October.

Did Murphy predict the current Nevada real estate (RE) crash? I'm positive Nevada will have another RE boom. When?

California Foreclosures

"Foreclosures statewide were at an all-time high for the three months ended Sept. 30. ... Default notices set a state record at 72,572, eclipsing the previous mark of 61,541 set in the first quarter of 1996", LAT, 26 October.

I expect California real estate to fall for at least another two years.

Florida Real Estate

"Despite a record number of foreclosures and a raft of public auctions of unwanted houses, the upper tier of the real estate market in Florida remains relatively immune to the spreading disaster. Houses and condominiums with price tags of $1 million or more are still changing hands robustly in some of the more exclusive areas. ... [I]n Florida the housing market seems to be not one market, but two. ... Both markets have been buoyed by foreign buyers attracted to the United States because the weak dollar makes American homes comparative bargains. ... Based on the number of sales, the Florida real estate market as a whole ... fell 37.2 percent through Oct. 23 compared with the period a year earlier", NYT, 27 October.

Annualizing sales through 23 Oct., Miami has 63 months housing inventory. Miami real estate has further to fall. I would be surprised to see it bottom in less than 36 months. I wonder if anyone at Goldman Sachs reads the NYT. Hint: the same falling dollar that increased the price of oil, is holding up top tier Miami real estate.

Thursday, October 25, 2007

The Harvard MBA Indicator

"Total compensation, including salary, bonus and carried-interest distributions, rose 24% to $340,000 for the median U.S. private-equity professional. ... Such incentives were enough to make private equity the No. 1. destination for graduates of the nation's top business schools last year. At Harvard Business School, 13% of graduates opted for a job in private equity, ahead of investment banking. The same held true at Stanford ... with 12% of the ... class heading for private-equity firms", WSJ, 3 October.

Private equity is finished. "Business school graduates of the class of 1973 are opening up their first pay envelopes about now, and thanks to a bull market for [MBAs], the checks are plumper than ever. Graduates of such elite schools as Harvard, Stanford, or Pennsylvania's Wharton start out an at avearge of close to $17,000 per year. To the graduates, glamour fields include management consulting, land development, banking and finance. ... Sea Pines Company, a recreational land developer in Hilton Head, S.C., hired at least eight from Harvard", Time, 6 August 1973. That made Sea Pines the number one destination for Harvard's 1973 MBAs. What are they doing now?

Wednesday, October 24, 2007

Call Out The Cops

"Lawmakers and law-enforcement officials have taken a keen interest in tax advice provided by Big Four accounting firms and other consultants. ... In May, four current and former Ernst & Young [E&Y] partners were indicted for their tax shelter work. ... In recent years, authorities have cracked down on cookie-cutter tax shelters mass marketed by accounting and law firms. ... Wal-Mart paid tax-deductible rent ... even though the rent payments never left the company. ... [E&Y] dreamed up a novel way to sidestep combined reporting requirements in California. It used an unusual type of dividend to transfer income from one subsidiary to another in such a way that the second unit wouldn't be taxed", WSJ, 23 October.

These all look like substance vs. form issues to me. These "shelters" won't stop until the various state accountancy boards ban the firms which dream this stuff up from practice. What would E&Y do if California banned if from practice within the state?

"It is insisted that the proceedings were all conducted according to the forms of law. Very likely. Some of the most atrocious frauds are committed in that way. Indeed, the greater the fraud intended the more particular the parties to it often are to proceed according to the strictest forms of law", Graffam v, Burgess, 117 US 180, 186 (1886). That the Supreme Court's opinion. That a transaction was made to look legal doesn't make it so.

I Want to Work For Goldman Sachs

"After Goldman Sachs [GS] raised its year-end price forecast by $13, to $85 a barrel, Jeffrey Currie [JC], global head of commodities research in London, spoke to Fortune's Eugenia Levenson [EL] about where oil is headed", Fortune, 15 October.

JC offered various explanations for the "recent surge in crude oil prices". Interestingly, JC did not mention the dollar's fall on the foreign exchange markets. EL did not mention it in her article. How much does JC know? Hey, Hank baby (Paulson), do GS a favor, call your old GS buddies and tell them I'll replace JC, on a part-time basis. I can't know less. I'll make GS an offer it shouldn't refuse, one million pounds a year ($2,050,000) to work a day a week. Why not? I even have a top school MBA. How can anyone take these guys seriously?

Addendum: "OPEC ministers have complained in recent weeks that the latest price surge has little to do with fundamentals such as supply and demand. They argue that the price increase is driven more by ... the falling U.S. dollar", WSJ, 26 October. I wonder if anyone at GS reads the WSJ.

Tuesday, October 23, 2007

Are Punitive Damages A Fraud?

"It has been nearly two decades since the Exxon Valdez ran aground in Alaska. ... The $2.5 billion award in Valdez raises obvious and important questions of excessiveness--it is larger than the total of all punitive damages awards affirmed by all the federal appeals courts in history", Theodore Boutros, a Gibson, Dunn & Cruther partner in the WSJ, 23 October.

I remember Exxon applauded the jury which awarded $287 million in compensatory damages, then rebuked the jury for its $5 billion punitive damages (PD) award. How did Exxon avoid paying the judgment for over a decade? In 2005 and 2006 Exxon made $36 and $39 billion repectively, what makes $2.5 billion excessive? Exxon's current market cap is $507 billion. Does Boutrous compare the PD award to say, a social security recipient's average annual payment? What does Boutrous claim is not excessive? $1? That federal appeals courts did not confirm $2.5 billion in total PD awards in history shows PD are a hollow threat. Let's get out our violins and crying towels for Exxon. Joe Schmoe can get 25 to life in California for stealing a pizza if it's his third "strike" and Exxon complains about "Due Process"? This is disgusting. This case has become a Seventh Amendment issue. We need new civil procedure rules. After appeal, the original jury should be reconvenied and shown all the appellate papers and rulings and permitted to affirm or reject the appellate court's holdings!

Monday, October 22, 2007

Ben Stein on Wall Street

"In recent weeks, there has been another tsunami of fear about money tied up in so-called conduits. These are basically incredibly risky and foolish instruments in which money is borrowed short to be lent long. Every finance student in the world is taught be to wary of this. ... It certainly looks to little me as if the top dogs on Wall Street have made some staggering mistakes. ... Now, the ultimate Wall Street player and insider, Henry M. Paulson Jr., the Treasury secretary has bestirred himself to take serious notice of the credit problems faced by some very big lenders. He wants to create a bailout fund. ... [I]t's a bit too predictable that Mr. Paulson would basically pooh-pooh the subprime problems until major Wall Street powers got into trouble and then--presto! swing into action. It might have been inspiring had he stepped up to the plate when smaller players like home buyers were getting burned, but that's not really his style. ... Why does Citigroup need a big Treasury-sponsored organization to sell [a loan]? They can sell it right now. The problem is with the questionable loans. ... The goal is to keep Citigroup and others from taking large losses on bad loans. ... But the viscious, cruel truth is that some very greedy, selfish and yes, stupid men men fortunes on deals that were economically and/or ethically wrong. ... They got immense fees. ... Despite what looks to me like a breathtaking lack of disclosure, I have not seen any lawsuits by the [SEC] against any of these big money-center princes or principalities--not to mention crmininal investigations from other law enforcement authorities" Ben Stein in the NYT, 21 October.

Precisely my sentiments, in some cases in my words. I add "A new academic study says the elaborate adminstrative structure set up by [SOX] to protect corporate whistleblowers is just a lot of hot air", Forbes, 15 October. Just like the SEC and Justice Department. I read a banking treatise from Amsterdam which warned against borrowing short and lending long. Print date: 1587! Over 400 years ago. How smart are these Wall Street geniuses? The DOJ has time to prosecute Matha Stewart over $53,000 of avoided losses; where is it now?

Why We Need Federalism

"One of the sharpest attacks on Wall Street these days is coming from the Midwest. ... Ohio Attorney General Marc Dann ... is focusing on how investment banks packaged mortgages into securities and how credit-rating companies ... evaluated those securities. ... Dann ... says he is trying to full a void left by federal regulators, who he says haven't thoroughly probed how mortgages were turned into securities and sold to investors", WSJ, 8 October.

It is too difficult for Wall Street to control all the 50 state Attorneys General in addition to the federal regulators. Viva federalism.

Who Lost Russia?

"Why has Putin's Russia turned hostile? ... Who restarted the Cold War? ... Russia did not use its veto in the Security Council to block the U.S. war to drive Saddam Hussein, an ally, out of Kuwait. When 9-11 struck, Putin gave his blessing to U.S. troops using former republics as bases for the U.S. invasion, What was Moscow's reward for its pro-America policy? ... In 1999, the United States bombed Serbia, which has long looked to Mother Russia for protection, for 78 days, though the Serbs' sole crime was to fight to hold their cradle province of Kosovo, as President Lincoln fought to hold onto the American South. ... At the Cold War's end, the United States was given one of the great opportunities of history: to embrace Russia. ... Our mutual interests meshed almost perfectly. ... We blew it", Pat Buchanan at, 18 October.

I have nothing to add.

Saturday, October 20, 2007

Public Servants at Work

"A yearlong investigation has now provided unassailable evidence that the Interior Department abdicated its responsibility to collect royalties from oil and gas companies. ... Top officials at the agency also seemed more concerned about the fortunes of the industry they were supposed to regulate than those of the federal government", NYT, 28 September.

"Helaine Morrision, head of the [SEC's] San Francisco office, is leaving at the end of the month for a private-sector position. Ms. Morrison will join San Francisco money management firm Hall Capital Partners as general counsel, chief compliance officer and principal", WSJ, 19 October.

It's nice to see our public servants doing well. It would be nicer to believe they did not regularly use their positions to protect the industries they purport to regulate.

U.S. Navy RIP

"The U.S. military unveiled a new maritime strategy Wednesday--its first created jointly by the Navy, Marine Corps and Coast Guard--shifting from a narrow focus on sea combat toward one that stresses the use of 'soft power' to counter terrorism and deliver humanitarian assistance", Houston Chronicle, 20 October.

Are our admirals idiots? Are they trying to win popularity contests in Brussels? Who needs a maritime version of "meals on wheels"? George Patton once described the job of the U.S. Army, "to kill people and break things". Admirals, can you apply that to the oceans? Alfred Mahan (AM), author of The Influence of Sea Power Upon History, 1890, must be spinning in his grave. Who was AM? President of the US Naval War College (NWC) when he wrote the book. I wonder if it is even on the NWC's current reading list.

Friday, October 19, 2007

Turkey and the Turkeys

"The sorry sight of an American president begging Congress not to affirm what the whole civilized world knows to be true underlines the overall stupidity of US policy towards the Middle East. It is particularly despicable for a Western nation to avert its eyes from a Muslim genocide against a Christian population. ... I am shocked, shocked to learn that the Democratic Party is engaged in politics. Col. Peters, though misses the big picture. With or without the Armenian resolution, conflict had to erupt with Turkey. ... America is not responsible for chaos in the Middle East. The Middle East has known nothing but chaos for most of its history. ... Washington should forget about Turkish support in Iraq. ... In the case of Iraq, the danger associated with partition stems from Iran's influence among Iraqi Shiites. ... All of this is hypothetical of course; the little men behind the desks in Washington do not have the stomach for it [war against Iran]", Spengler at, 18 October.

The magnitude of the Bush Administration's incompetence in handling the Middle East is breathtaking. Recep Erdogan, Turkey's Prime Minister wrote in the WSJ, 19 October, "Efforts to rewite the history of the events of 1915 through legislative fiat and vilify Turks are not new to the U.S. Congress. ... Turkey and the U.S.['s] alliance is based on common values. ... We value this partnership greatly but under current circumstances, the task of defending its importance is becoming increasingly hard". Nonsense, our alliance was based on mutual fear of the USSR. David Sayian wrote in the WSJ, 12 October, "I was taught a long time ago to do the right thing and speak the truth; if this offends one's 'friends,' then they probably aren't friends anyway". Indeed. The evidence that Turkey's current regime is Islamist grows daily.

Thursday, October 18, 2007

Use Your Own Money

"The objective of this fund is simple: price discovery. ... When there is great uncertainty about a product's value, buyers back off because they can't assess the risks and would-be sellers fear unnecessary losses if they sell at too low a price. ... No one knows how much the pools of mortgages are actually worth. ... With a substantial wad of cash, the contributing banks can help to discover the price at which trading will take place. ... The discovery of a price for hundreds of billions of dollars of asset-backed securities and commerical paper is very much in the banks' interest. ... The losses will be larger than necessary--not because the value of the assets is low--but because they are being dumped at distress prices. ... Auditors ... will want asset-backed instruments to be marked down to the distress price, the only price they can find on the record. ... The bottom fishers who bought at distress prices would profit as others recognized the true value of the securities that were dumped", Peter Wallison (PW), in the WSJ, 18 October.

This is the worst piece of deception the WSJ printed since Norman Lamont's 4 October piece. The fund's objective is: to prevent price discovery. What is "too low a price"? A price below current market? PW claims, "no one knows how much the pools of mortgages are actually worth". So? No one "knows" what anything is worth. That's what markets determine. The "discovery of a price for hundreds of billions of dollars of ... securities" is not in the "banks' interest". The banks can sell now, without the fund. "The losses will be larger than necessary ... because [the assets] ... are being dumped at distress prices", claims PW. What is a "distress price"? A price PW dislikes? What is an "unnecessary" as opposed to necessary loss? PW claims "bottom fishers ... would profit as others recognized the true value of the securities that were dumped". What does PW think speculators do? Buy low and sell high. If PW "knows" the securities are worth more than others do, let him buy! PW, use your own money and offer Citigroup 95% of par for $100 million of these things, asking Citigroup to lend you $90 million to make the purchase. When your brilliance is revealed and the securities return to par, you will make a tidy profit. You could even suggest your friends do this. Or approach our Goldman Sachs (GS) friends with this idea: have GS create a $10 billion fund that will purchase these "undervalued" assets, having you run the fund and getting a mangement fee! GS should be able to sell the fund easily since PW can identify "undervalued" assets. That PW could have worked at Treasury is appalling.

Wednesday, October 17, 2007

The AICPA Finally Earns Its Money

"This time, the auditors don't seem to be backing down. ... In recent weeks, the accounting firms, operating through an industry group, have taken views at odds with at least some of their clients about the use of market prices for hard-to-trade securities and how banks should deal with their exposure to losses in off-balance-sheet lending vehicles. ... [The move] also prompted, at least in part, moves by the Treasury Department to bail out structured investment vehicles, or SIVs, which are special lending vehicles that banks keep off their books. .. Joseph Carcello ... of the University of Tennessee [asked] 'Why was this not guidance from the SEC staff'?'", David Reilly, in the WSJ, 17 October.

Why hasn't the SEC already said that any bank which puts assets into the pool, or whatever it will be called, at other than market prices, will immediately be investigated for securities fraud? Is our, yes our, not Wall Street's, Hank Paulson (HP) attempting to aid and abet securities fraud? Is that what HP is doing? Where's the Justice Department? Is it too busy prosecuting nickel and dime marijuana possession cases? If anyone doubts why investors need Stoneridge to go in their favor, look at this mess and Uncle Sam's position as articulated by HP.

Noriel Roubini (NR), a New York University Economics Professor, has the best analysis of the proposed SIV rescue plan I've seen yet, "Super-Conduit or Super-Bailout Shell Game"?, 15 October, at I commend NR. I couldn't have written anything better.

International Tort Crisis ????-2

"Norman Lamont's Oct. 4 editorial-page commentary 'International Tort Crisis' would have us believe that economic relationships between the U.S. and Britain will collapse if the U.S. Supreme Court rules in favor of investors' rights in the pending case Stoneridge v. Scientific-Atlanta. In doing so, he joins the fear-mongering of others who assert, among other things, that an investor-friendly decision in that case will destroy our capital markets. ... This is utter nonsense. ... Moreover, [Lamont's aguments] fail to accurately describe what is at issue in the case", James Coffman's letter in the WSJ, 17 October.

The misrepresentations in Stoneridge have been astounding. To see what is really at stake in this case follow the story about the $100 billion Citigroup bailout.

Tuesday, October 16, 2007

What is Citigroup's Problem? or Cuis Custodiet

"All the banks had to do was structure the vehicles [SIVs] so that the risk of loss associated with them was ostensibly transferred to other parties. Then the vehicles could stay off a bank's balance sheet. ... This belies the 'whole legal fiction of separateness' as allowed by accounting rules said Christopher Whalen, managing director of Institutional Analytics. ... No one is saying, of course, that the big banks are literally shams like Enron. ... But banks found they could structure vehicles so that other parties would have to shoulder losses. That allowed them to pass the risks test and keep the vehicles of their books", David Reilly, in the WSJ, 16 October.

If the banks had no risk in sponsoring the SIVs, why are they trying to keep them off their balance sheets today? Who says the banks aren't "shams like Enron"? It appears they used the same type of financing vehicles. The SIV crisis shows what "structured finance" is, i.e., creating vehicles which substance and form differ. Where was the SEC and the Big Four when all this was going on? See my post of 7 October, International Tort Crisis?

A WSJ editorial asks, "So we're left wondering whether Citibank isn't trying , in effect, to pull off the same trick twice? The conduit would issue debt and use the proceeds to buy otherwise illiquid commercial paper. But why would anyone buy the conduit's debt?" Why? To bail out Citigroup.

Monday, October 15, 2007

The Deception Never Ends

"The high-stakes plan to rescue banks from losses on mortgage securities amounts to a big bet that a consortorium of financial giants--at the prodding of the U.S. goverment--can persuade investors to pour more money into the troubled credit markets. ... The lack of buying signaled that the markets weren't working properly. ... The government isn't putting money into the plan but its role could be crucial in luring investors to buy debt issued by the rescue fund as part of the plan. ... Some bankers objected to the plan, calling it an escape hatch for Citigroup. ... Mr. Paulson's desire to involve Treasury in a private-sector problem stems from his view banks could otherwise be forced to dump mortgage-backed securities and other assets onto the market. ... Treasury officials could be criticized for rescuing banks from their bad bets", WSJ, 15 October.

The WSJ's David Reilly discusses the plan, "Ironically, by working with the ... Treasury ... to develop the plan, big banks are admitting things are bad and that their options aren't pleasant".

The plan is some "former" Goldman Sachs (GS) bankers attempt to have the public bail Wall Street out of its bad investment decisions. What does "The lack of buying signaled that the markets weren't working properly" mean? For whom? Do markets only work properly when Wall Street can sell any junk to the public? The Treasury's role "could be crucial is luring investors to buy debt issued by the rescue fund". In other words, Treasury wants big banks to overvalue assets put into the fund and have individual investors bail the banks out. Wonderful. Why does Treasury care if banks "dump mortgage-backed securities and other assets onto the market"? Individuals subject to margin calls do it daily. Will "former" GS bankers try to save them from margin calls?

Sunday, October 14, 2007

Party Like It's 1929?!

"In a far-reaching response to the global credit crisis, Citigroup, Inc. and other big banks are discussing a plan to pool together and financially back as much as $100 billion in shaky mortgage securities and other investments. ... The meeting was hosted by Treasury's undersecretary for domestic finance, Robert Steel, a former Goldman Sachs Group Inc. [GS] official and the top domestic adviser to Treasury Secretary Henry Paulson [HP]. The Federal Reserve has been kept informed but has left the active role to the Treasury. ... The new fund represents a way for Citigroup and other banks to 'outlast the current market conditions that are so dry right now,' says Jaime Peters, an analyst at Morningstar Inc. ... Because the superconduit would be backed by the big banks themselves, it's expected this would reassure investors and make them more willing to buy its short-term debt, or commercial paper. ... One supporter of the effort is ... HP, who decided to assemble the banks after conversations with businesspeople who expressed concerns about SIVs and their impact on the economy. ... SIV are purposely kept off the balance sheets of the banks to which they are affiliated", WSJ, 13 October.

This story brings six things to mind. 1. This pool resembles a large "pump and dump" scheme. The banks put problem assets in the pool and sell it to the ignorant public. Where is the SEC when you need it? 2. The superconduit is to "reassure investors and make them more willing to buy its short-term debt". Does this mean the banks believe the underlying "pool" investments have tens of billions of dollars of unrecognized losses and want to use the superconduit to delay recognition? 3. Who are the businesspeople who claim to be concerned about SIVs "impact on the economy"? Is "impact on the economy" a bank executives euphemism to provide cover for an attempt to prop up their earnings? 4. Where were the Big Four when all this was going on? Did they learn nothing from Enron? 5. Establish a 25-year moratorium on any GS executive working for the Treasury or Fed. 6. We've seen pools before. Huh? "Pools. Any Wall Streeter knows, but few Senators do, how pools are run. ... With dictatorial powers, the pool manager begins accumulating stock, buying a little more each day than he sells. ... When the manager has the stock he wants, publicity is shot out, bullish rumors about the company appear, the stock is 'tipped,' for it is now advantageous to whisper the existence of the pool. ... At its high point [GS] Trading Corp. was worth over half a billion dollars. Last week at its price of $1.50 per share it had a market value of $8,700,000". What is the source of this news of a GS-sponsored investment "pool" which lost 98% of its value? Time, 30 May 1932! There are a few differences between the 1920s "bull pools" and this "superconduit", i.e., the banks now own the securities which are not stocks, but bond-related. I thought pools like this were outlawed by the 1930s "reforms". Apparently not for GS, or only stock pools were outlawed, not bond-related securities pools. I estimate the $500 million referred to in this Time 1932 article would be about $18 billion today.

"If banks are forced to take assets onto their books? Either it's a bank asset or its not. If it's a bank asset, it ought to be on the books in the first place. Did the idiot regulators learn nothing from Enron? Chuck Prince [Citigroup Head] ought to be sharing a cell with Andy Fastow", W.C. Varones at, 13 October. I thought of having Robert Rubin (RR) share Andy Fastow's cell, but I give W.C. Varones two thumbs up, he beat me to the post. Why RR? He's a former Treasury Secretary and GS executive, a potential "triple header", were he to join Andy in prison.

Friday, October 12, 2007

Party Like It's 1999

"The Chinese stock market for new stock offerings is starting to look a lot like the U.S. in the late 1990s. ... The average first-day return for Chinese IPOs in 2007 is 192%, according to data from Thomson Finance. ... 'I think there's a bubble,' says Uri Landsman, a senior portfolio manager at ING Investment Management. ... Shanghai's benchmark Composite index is up 121% so far this year", WSJ, 12 October.

Uri Landsman said it all.

Wednesday, October 10, 2007

Were Friends of the Fed Tipped Off?

"It is no secret Goldman Sachs has plenty of friends in high places. It is no secret the company, as well as the rest of Wall Street, was on the ropes in August. ... By the end of August, Goldman reported its second best trading results ever. How much of their good fortune was the result of skill we'll leave to the reader's imagination", Kevin Duffy at, 9 October.

Is Duffy suggesting there was some "insider trading" in the Treasury bond market? Say it ain't so! How can anyone think that?

Tuesday, October 9, 2007

Have You No Sense of Decency Sir?

The Wall Street Journal printed a long article titled, "Big-Money Battle Pits Business vs. Trial Bar", 9 October. I find the headline deceptive. It's businesses joining fraudulent schemes vs. defrauded shareholders. "Stoneridge also sued Motorola Inc. and Scientific-Atlanta. ... Both vendors agreed to charge artificially high prices for cable boxes they sold to Charter. Then they used the extra money to 'buy' advertising from Charter--money Charter used to inflate its bottom line".

Does the WSJ believe Motorola and Scientific-Atlanta didn't know why they were asked to agree to such terms, not in the normal course of business? These transactions had "badges of fraud" all over them. Why weren't these companies prosecuted under the wire and mail fraud statutes, 18 USC 1343 and 1341? Where was the Justice Department? Harvey Pitt, former SEC Chairman, filed an amicus brief in favor of the defendants.

On 9 June 1954, during the Army-McCarthy hearings, Joseph Welch said to Joe McCarthy, "Have you no sense of decency sir ... ? Have you left no sense of decency"? That a former SEC Chairman could file an amicus brief in favor of the defendants shows why we can't trust the SEC to protect investors. The 9 October WSJ also had an op-ed by Paul Atkins, a current SEC Commissioner in favor of the defendants. Amazing.

Monday, October 8, 2007

Are They Really This Stupid-2

"In June 2004, I attended a meeting with a personal trust committee of a New York bank. A trust officer opened the discussion with an unqualified forecast: 'Ten-year Treasuries are yielding 4.73 percent this morning, but the yields are going higher.' Then he added, 'Everybody knows that.' ... [That] could not possibly be a correct forecast. If everyone knew that rates were going higher, why would any investor have been buying those bonds at 4.73 percent? ... There were only two possibilities under the circumstances: the buyers in the bond market did not know what they were doing, or our trust officer did not know what he was doing. Guess which!", Peter Bernstein in the NYT, 7 October.

I once was amazed with many financial peoples incompetence. Now I'm numb. Did the trust officer say, "I just shorted $10 million of 30-year Treasuries on 8% margin. When 30-year rates hit 6 percent, I'll cover the short and retire?". I doubt it. For example, I have heard hundreds of times things on the television like, "stock prices rose because there were more buyers than sellers". What does that mean? If 10 million shares of Exxon were traded yesterday, it means 10 million were bought and sold.

Sunday, October 7, 2007

Calling Deloitte Detroit

General Motors (GM) will form a VEBA to put billions of dollars in future employee healthcare expenses into it. However, "GM is still funding the trust, so it still has to pay the costs. ... The important thing is that the health care costs will now be off our balance sheet. ... Wouldn't it have made more sense to come up with a system that might have actually reduced those costs", Loren Steffy (LS) in the Houston Chronicle, 5 October.

Right on LS! As I have said before, when you see a "financing innovation" ask what it lets the new "owner"do the old one couldn't. This VEBA seems to lack economic substance. Will Deloitte insist GM consolidate the VEBA if it lacks substance and CPAs should elevate substance over form? Will Deloitte find time to have its employees consider this issue? With $73 million in GM fees last year, it appears Deloitte could spend five to ten hours considering this. Will the Mounties Dudley Do-right save Nell Fenwick tied to the train tracks from the oncoming train? Stay tuned for the next installment of this saga. As LS noted, GM didn't do so well in offloading Delphi's labor costs.

International Tort Crisis????

"Stoneridge could exponentially increase the U.S. litigation exposure of non-U.S. companies. ... The only requirement would be that their U.S.-listed partners be accused of misreporting transactions in which they participated, whether as buyers, sellers or advisers. ... Every business dealing with U.S.-listed companies would have to examine the possibility of fraudulent bookkeeping in every transaction", Norman Lamont, in the WSJ, 4 October.

If Lamont is right, that foreign entities would have their U.S. litigation exposure "exponentially increased", it means they have had none up to now. As to protecting advisers, buyers and sellers, who is Lamont kidding? What does a bank's structured finance department do, if not arrange transactions to circumvent accounting and tax rules? Similarly, buyers and sellers offering sales terms not available to all comers. I say there is no organization which can more easily determine a transaction's economic bona fides than the counter-party when it is entered into. The economics of information indicate the counter-party is the "least cost" investigator and should bear the burden of ascertaining the transaction's bona fides. Who believes they don't do it now? But they bear no responsibility for their actions which affect innocent third parties.

Saturday, October 6, 2007

31 Years of Failure

Henry Paulson will form a "21-member committee, which includes a mix of business, regulatory and academic representatives. ... [It] will take a broad look at the auditing industry since [SOX] ... changed the dynamic between accounting firms and the companies they audit. .. Paulson and other Treasury officials have expressed concern about the way the industry now operates, saying it places too much risk on accounting firms if they fail to spot problems. ... The group is part of Mr. Paulson's broader initiative to ... [reduce] regulatory and legal burdens that corporations say are hindering their ability to compete globally", WSJ, 3 October.

Too much risk? This is laughable. What is the Paulson Group's (PG) real purpose? To better protect the Big Four (BF)? Look at the ratings agencies mess. Aren't the BF sufficiently protected by 1995's Litigation Reform Act? I see the PG's findings: strengthen the PCAOB and exempt the BF from class-action lawsuits. Why not, the SEC's expertise and integrity protect the public. Does anyone remember the Ray Dirks fiasco over Equity Funding which culmanated in Dirks v. SEC, 463 US 646 (1983)?. The PG can recycle the AICPA's 1999 lobbying efforts which talked of the CPA profession's successful response to 1976's 1760-page report titled, The Accounting Establishment, generally known as the "Metcalf Report". 1976??? The PG will do as much to protect investors as "The Commission" which met in 1957 at Little Apalachin did.

Daniel Dustin of the New York State Board of Public Accountancy said in May 1999, "When you review the conclusions of the Metcalf report against the realities of the current regulatory structure, you will see that the vast improvements envisioned in 1976 have met with only moderate success. ... Regulatory bodies serve only one master, the public". No, the regulated. The regulatory bodies are almost immediately co-opted. Have we learned nothing in 31 years?

Friday, October 5, 2007

An Old Voice Still Speaks

In 1980 I read a book titled The Warmongers, by Howard Katz. It's a gem. If you get a chance to read it, you should. I recently found Howard Katz has his blog, The Gold Bug, which I linked to. It too is worth a look.

Engine Charlie Returns, Sort Of

"Several Republican members of Congress yesterday called for a Treasury Department probe into whether Pentagon computer networks will be compromised by the merger of a U.S. network-equipment maker and a Chinese firm with links to Beijing's military. ... Government officials concerned about the deal have doubts about a Treasury review, because Mr. Paulson is a former executive at Goldman Sachs, which is advising 3Com on the deal. White House Chief of Staff Joshua B. Bolten was also a Goldman Sachs executive", Washington Times, 4 October.

How appropriate that this should be announced on Sputnik's 50th anniversary. I remember one of Ike's Defense Secretaries was Charles Wilson, formerly General Motors CEO. In 1952 "Engine Charlie" as he was known, told Congress, "What is good for the country is good for General Motors, and what is good for General Motors is good for the country". Apparently Mr. Paulson remembers the quote this way: What's good for Goldman Sachs is good for me and if it's good for me, it's good enough for the country. Imagine, Goldman Sachs has done a "leveraged buyout" of the whole US with virtually nothing down.

A Tip on TIPS

"Imagine that a cardiologist told you aside from the irregular heartbeat, the stratospheric cholesterol count, and a little blockage in your aorta, your core heart functions are just fine. ... Signs on inflation are evident throughout the economy. ... In still-poor China, food expenditures account for 37 percent of the CPI, compared with 14 percent in the United States. ... China's government is trying to deal with its inflation [by instructing local bureaus] not to use the word 'inflation' to describe what is happening. ... But by focusing on core inflation, the [Fed] ... is practising its own subtle form of denial", Daniel Gross in Newsweek, 8 October.

Gross is too kind. What's subtle about it? Uncle Sam knows what he's doing. In 1997 he revised his CPI based on the Boskin Commission's (BC) report. I thought BC was a fraud. The BC concluded the CPI overstated inflation by about 1.3 percent per year. We need a new BC! "Round up the usual economists". That said, in reducing reported inflation Uncle Sam reduces Social Security payments and increases income tax collections. Moral of the story, do not buy TIPS, Uncle Sam will manipulate their returns to his advantage and your disadvantage.

Wednesday, October 3, 2007

If Jim Chanos Didn't Exist We Would Have to Invent Him

"'This is the greatest single financial coup in the history of Chicago.' That's how alderman Edward Burke of the city council's finance committee, described the 99-year lease of the Chicago Skyway, a 7.8-mile toll road, to a private operator for the stunning sum of $1.8 billion-almost $1 billion more than the next highest bid. ... The 'Macquarie model,' as both believers and skeptics call it, is now spreading around the world. ... And powerful firms from AIG to Goldman Sachs are following in its footsteps by raising multibillion-dollar infrastructure funds of their own. ... Chanos ... [said]: 'The Macquarie model is justly famous around the world. It is possibly the most efficient method of legally relieving investors of their money ever conceived.' ... 'Borrowing future growth to pay investors today bears the hallmarks of a Ponzi scheme,' said Chanos. ... Already Macquarie was shifting its business model, which Chanos saw as a sign it was trying to avoid disclosure. ... These days every smart young Australian who wants to work in finance wants to work at Macquarie Bank--and those who work there often think there's no place else worth working", Fortune, 1 October.

Did somebody call? Skeptic here. I first heard of Jim Chanos in about 1984 when he was a Duff & Phelps analyst in Chicago. A client asked me about an annuity which would yield 10.5% annually. I told him don't touch it. He asked why. Because AA corporates yield 12%. If it costs the insurance company even 1.5% per year to run the annuity, it can't pay off. The product can't work. The client was furious, "But the salesman said ... " I said, "Of course. He's got a commission on the table. What's he supposed to say"? Chanos went further and realized the company offering the product, Baldwin-United was insolvent. Had I only thought about the issuer instead of the product I could have made a beautiful short sale. I have followed Chanos' career ever since. I believe the "Macquarie model's" biggest risk is political: how long will localities let Macquarie raise fees to use its assets? This seems to be what lets Macquarie work: it gives politicians cover to raise user fees. Whenever you see a new financing "innovation" ask: what operational changes will the new owner make the old one couldn't?

I disagree with Chanos about one thing: inflation is a more efficient way to legally relieve investors of their money than Macquarie could ever hope to be. As a world renowned expert in relieving investors of their money said, "The way to crush the bourgeoise to to grind them between the millstones of taxation and inflation". Who was he? Lenin.

That "every smart young Australian" wants to work for Macquarie, I see as a very negative indicator. The kids are usually behind the curve.

Tuesday, October 2, 2007

Those Who Do Not Know History ...

"Here's a simple solution to the problem of China having too many dollars and the IMF not having enough-start selling the IMF gold to China", Tim Iacono at, 2 October. Iacono continues, "Hey, China could buy all of the IMF gold for less than $100 billion. ... That sounds like that's way too many dollars and way too little gold". At what price?

First: whose problem is it that China has "too many dollars"? China's or the IMF's? I say it's China's. Why does the IMF need more dollars?

Next: what price should the IMF sell at? Iacono says the IMF has 2,817 metric tons (MT) of gold. My conversion at 32,151 Troy ounces per MT is 90.6 million ounces. If China has $1.3 trillion dollars of foreign exchange reserves (FER) and if the IMF wants to buy even 20% of China's FER or $260 billion, the IMF needs $2,870 per ounce ($260 billion / 90.6 million). With gold at $728 as I write, the IMF needs a "quadruple" to retire 20% of China's FER. Does Iacono suggest the IMF sell a real asset GOLD, to buy paper dollars? If the IMF wants dollars all it need do is call Helicopter Ben (HB) and have HB print them. HB can print them and make a big profit. What do dollars cost HB to print? Virtually nothing.

By the way, the IMF held gold sales from 1976 to about 1980. Iacono should see what happened to these gold sales involving about 25 million ounces.

Perhaps Iacono thinks the US should "redeem" China's FER. We have 8,133.5 MT of gold according to Iacono or 261.5 million ounces. If we were to redeem 20% of China's FER we need a price of $995 per ounce. For the US to redeem all of China's FER would require $4,971 per ounce. The bullish case for GOLD is easily made.

One of Our Best Thinkers

"The American [SEC] is investigating the big banks to determine whether they bribed the rating agencies, in effect, to bias their judgment in order to help the banks peddle a tainted product. ... The ratings agencies pronounced riskless a trillion and a half dollars' worth of derivatives that turned out risky after all. The banks sold it, and the Federal Reserve and other regulators let the world apply vast amounts of leverage to it. That leaves the rest of us waiting to see whether the house of cards will come down. ... But the present crisis ... was executed by corporate types who did little more than cut a few corners and assume that someone else would take responsibility for the problems they were creating. ... China and other emerging economies desperately require investment in infrastucture, and the return on such investments is likely to be very high. That is where Asian savings should be directed. ... What we have witnessed in the financial markets is ... the evil of mediocrity. Most people have no special gifts or insight, no skills or powers that distinguish them from the mass of their fellows about them. ... If Americans have to learn the hard way that they cannot surf the wave of the world's savings forever, it will be a painful but necessary lesson", Spengler, in atimes. com, 1 October.

I could not have said it better. Spengler, who usually writes about religious topics, is one of our best thinkers. Imagine, "Quants" with MIT PhDs and 800 Math GREs, have no more insight into the world than the rest of us. Say it ain't so Joe.

In 1987, a Merrill Lynch (ML) trader, Howard Rubin, lost $377 million trading mortgage-backed securities. I remember thinking at the time, "Didn't anyone at ML understand these products"? I recollect they were "interest only" or "principal only" strips. Apparently not. The IOs and POs were not that complicated. But ML apparently thought Rubin knew what he was doing. Similarly, as we are learning, today's quants don't know what they are doing either. I agree with Spengler, China and India would do better investing in their own economies than US Treasury paper.

Tea Bulb O-Mania

"A type of tea commonly pressed into Frisbee-shaped cakes, puer (pronounced 'poo-ahr'), was long the domain of a small group of tea collectors. Earlier this year, speculators discovered the tea, driving up its value. ... The price of one of the hottest varieties of puer soared to nearly $35-a-cake this past April, seven times the $5-a-cake value just three years ago. ... Like wine, puer is judged by the vintage. At the top of the scale are 150-year-old cakes that can fetch more than $13,000", WSJ, 2 October.

In 1636-7 the price of tulip bulbs soared in Holland, one being sold for 5,200 florin, which I estimate would be about $55,000 today. If the Chinese can trade teas cakes like this, the Chinese stock market may be due for a fall.