Friday, February 29, 2008

Who is Stephen Cutler?

"An awful lot of people seem to be paying an awful lot of attention to 'tone at the top' [TATT] these days. ... '[TATT]' seems to have become a panacea for what is ill in corporate America, and an explanation for what has gone wrong. ... In the last two fiscal years [2003-4], the SEC has brought more than 1,300 civil cases and has obtained orders for disgorgement and penalties in excess of $5 billion. ... But it's a recitation of the names (and not the numbers) that I think best conveys a sense of the period we've been through. ... We're trying to create an environment that reduces the risk of misconduct at all levels of a company--an environment in which people who run public companies will do more than simply keep themselves out of jail. ... We're hoping that if [the CEO, CFO or General Counsel] sees that a failure of corporate culture can result in an fine that significantly exceeds the proverbial 'cost of doing business,' and reflects a failure on her watch ... she may have a little more incentive to pay attention to the environment in which her company's employees do their jobs. ... Of course, the flip side of this approach is that we have to reward companies that, notwithstanding a violation of the law, can demonstrate that they had or have made significant efforts to achieve a culture of compliance. ... And by the way, we're not alone in our concern in these matters. The [DOJ] (in the Thompson memo), and the U.S. Sentencing Commission (in the sentencing guidelines) have emphasized the need for companies to have strong ethics and antifraud programs. ... And make it clear that retaliating against or threatening a whistle-blower will not be tolerated and will be viewed as a 'fire'-able offense. ... All the words in the world mean nothing without deeds to support them. ... Once the recent scandals recede from our collective memories, it's corporate culture that will serve as the bulwark against the eruption of a new scandal", my emphasis, speech by Stephen Cutler (SC), then SEC Director of Enforcement, at, 3 December 2004.

Aren't we impressed? Who is SC? He was with Wilmer, Cutler & Pickering (WCP), a Washington, DC law firm from 1988 to 1999, when he joined the SEC. He was with the SEC from 1999 to April 2005, when he joined WilmerHale, successor to WCP, where he stayed until 2006, when he became Executive VP and General Counsel of JPMorgan Chase (JPM) a large bank.

SC says, "all the words in the world mean nothing without deeds to support them". I agree. "Once the recent scandals recede from our collective memories, it's corporate culture that will serve as a bulwark against the eruption of a new scandal", writes SC. Is SC serious? I think it's multi-billion dollar fines and prison sentences that do the trick. What does this mean, "sees that a failure of corporate culture can result in a fine that significantly exceeds the proverbial 'cost of doing business'?" It is an act that may result in a fine, not corporate culture's failure or success, whatever it is. I think "corporate culture" and "TAAT" are obfuscations that facilitate selective SEC and DOJ law enforcement against smaller corporations which cannot hire law firms larded with former SEC and DOJ attorneys. What else can it mean?

1,300 civil cases. Like the case of the "PWC Two", my 19 January 2008 post. In his speech, SC states, "the subjects of our enforcement actions in the past two years include ... J.P. Morgan/Chase". I kid you not. Then SC joins JPM about 25 months later. One can question how vigorous the SEC's actions are against its staff's prospective employers. Wait, didn't we see something in the press in the past two years that might bear on which enforcement actions the SEC takes on? Didn't Gary Aguirre (GA) allege the SEC fired him on 1 September 2005, about five months after SC left, because GA wanted to depose MS's CEO, John Mack, in connection with an insider trading investigation of hedge fund Pequot Capital? Didn't Charles Grassley conduct Congressional hearings about this? Was SC ignorant of GA's allegations while he SC was at the SEC? "On 5 October 2006, the SEC recommended no action be taken against Mack", Note SC joins JPM 68 days later. Neat. Did JPM reward SC for his work for MS at the SEC? SC couldn't join MS, so Wall Street found a nice sinecure for SC at JPM. Is that what happened? Ladies and gentlemen of the blogosphere, you have heard the evidence, now render your verdict.

I disagree with Francine McKenna (FM), "'Tone at the Top' is a very powerful concept". I maintain it is no concept, just mumbo jumbo. I only know what people do. To me TATT is a diversion from looking at what people do. FM writes, TAAT "has very little meaning if the external auditors (and the internal auditors) are not willing to go the mat". I say it has no meaning. If the external and internal auditors are willing to go to the mat, the TAAT is irrelevent. As for the DOJ's concern with sentencing guidelines and such, see my posts on prosecutorial indescretion. I find ironic that SC writes, "retaliating against or threatening a whistle-blower will not be tolerated". Does that apply to the SEC too?

(In)Justice Department at Work

"Judge Lee Rosenthal ... has yet to address their major argument, that she should throw out the plea deal because the fine is too paltry for a disaster that killed 15 people and injured many more. ... The ruling this week was on the victims' assertion that Rosenthal should reject the plea deal because federal prosecutors shut them out of plea negotiations in violation of the 2004 Crime Victims Rights Act. ... Rosenthal said in her ruling that prosecutors didn't violate the victims' rights law by seeking [Judge Nancy] Atlas' permission to delay notice to victims until after plea talks had concluded", Houston Chronicle, 23 February 2008.

This BP case stinks. It gets worse daily. Do Judges Atlas and Rosenthal think they are "golden boy" John Roberts of the Supremes? My heart bleeds for Atlas concern with BP's "right to a fair trial" being compromised. It seems to me, the fix was in, what trial?

Thursday, February 28, 2008

Balkan Irredentism

"The current disaster in Serbia, including the attack on the U.S. embassy in Belgrade was predictable. That is, if you know the history of the region, our involvement under Bill Clinton and how George W. Bush, and the U.S. State Department's craziness about how to create 'democracy' and markets in the 21st century. ... The rush to [recognize Kosovo] may have a lot to do with resource issues as much as encouraging democracy to take root--which hasn't been happening under Clinton or Bush. ... Muslims, who represent 90 percent of Kosovo's two million people, have stated their claim on the new state. According to our source, a systematic ethnic cleasing of Kosovo's remaining Christian inhabitants has been going on for several years and will now likely escalate. ... We now have another nation in the heart of Central Europe that is home to drug cartels, mafia, and frankly, many potential Muslim terrorists. Recognition of Kosovo's independence also drives another stake into what is left of our shaky relationship with Russia. Our policies since the end of the Cold War towards that nation may just doom us to relive another Cold War of sorts. Isn't it odd that former atheistic Soviet Union is supporting a Christian society of Orthodox believers while the last two American administrations enable a growing arc of Islamic power and Arab militarism to form in the suburbs of Europe", Diane Alden (DA) at, 21 February 2008.

"To paraphrase Joseph Stalin, 'How many divisions does the EU have?' ... Consider Kosovo again. ... But is it a Muslim country in a post 9/11 landscape, with a history of drawing not only Albanian but also Middle Eastern jihadists to it defense. Russia and Serbia together have the military wherewithal to invade it tomorrow--Serbia by land, Russia by air--and end its breakaway experiment--to the relief of some Eastern European and Orthodox European states, and to the humiliation of the EU. What stops them is not a few NATO peacekeepers but the commitments of the [US] to use its vast resources to further the European agenda of stopping Serbian ethnic cleansing and aggression. ... Russia and the Middle East ... are sick and tired of Europe's empty lectures about human rights and feel only disdain for its absence of military light to back up its sermonizing", my emphasis, Victor Davis Hanson (VDH) at, 22 February 2008.

"Readers with exceptionally tenacious memories will recall that this pundit was opposed to the NATO intervention in Kosovo nine years ago. This may come as a suprise to readers without tenacious memories, since it is widely believed that I never saw a war I didn't like. Yet, believe it or not, I was opposed not only to the wanton bombing of Serbia, but to the whole 'inevitable' project of carving a new European Muslim state out of the flesh of that Orthodox Christian country. ... But the fact that Kosovo had a significant ethnic majority of Albanian Muslims over Serbian Christians was not, in itself, sufficient argument to detach it from Serbia by main force. For if that is the argument, the state system which provides the only order the planet currently enjoys will disintegrate. Strange to say, I am with Vladimir Putin on this one, and against George W. Bush. Mr. Putin's remarks on the inspiration that Kosovo's independence has given to violent separatists in Chechnya, Abkhazia-South Ossetia and elsewhere, are entirely to the point. Indeed, driving the Serbian government and Serbian people into the protective embrace of ex-Soviet Russia, and ultimately her ex-KGB strongman, was among several counter-productive dimensions in the war that Madeline Albright organized, along with other ruinous Clinton interventions in areas of peripheral interest to the U.S. ... The NATO action in Kosovo brought Mr. Putin--the hammer of the Chechens--to power, by demonstrating that force and force alone will decide secession struggles. ... Bush et al have validated ... a deadly new round of Balkan troubles, ripe for Islamicization", David Warren (DW) at, 23 February 2008.

"But with the presence of NATO troops, and swift recognition yesterday by the U.S. and European powers, ought to calm nerves and end the last territorial dispute in the Balkans. By taking the lead in the 1999 war that forced Slobodan Milosevics's ethnic cleansers from Kosovo and now on independence, the U.S. is shepherding one more Muslim nation to freedom", Editorial at the WSJ, 19 February 2008.

Well said DA. I wish Connie Baby, our Secretary of State, would read you column. I await the next administration's response to a Kosovar-like declaration of independence for the new state of Aztlan to be carved out of Southern California. Will Russia immediately offer it recognition and military support? Putin called the breakup of Serbia a dangerous precedent. I agree with Putin. Putin for President. Of the US. See my 11 January 2008 post.

VDH, be serious. The US lacks the military capability to defend Kosovo in Russia's backyard and everyone knows it. Why the Russians don't intervene militarily is for them to to know and for us to find out.

C'mon DW, join Spengler and my bandwagon, Putin for US President. Like DW, I opposed Clinton's Serbian adventure, believing it would only create an Islamic terrorist state in Europe.

The WSJ and I inhabit parallel universes. The only thing the US did by pushing the Serbs out of Kosovo is create a new jihadist state in Europe. The WSJ claims the US acts "end the last territorial dispute in the Balkans". Sure. Just like Neville Chamberlain came back from Munich in September 1938 with Mr. Hitler's last "territorial demand in Europe". WSJ, you can do better than this. Suggestion: have at least one editorial writer who knows some history.

Models and Accounting

"The smart money keeps looking dumb. ... When conversations turn to the use of market values, 'the inital response is often, "I don't like the answer the market is giving me," says Mark Olson, chairman of the audit-firm regulator the [PCAOB]. 'But you can't ignore what the market is telling you.' ... Allowing managment to base values on models that look to long-term values, rather than on current, potentially stressed market conditions, also opens the door to abuses. That allowed Enron Corp. to book profits that didn't exist. ... The debate about the appropriateness of the market-value approach aside, using market values holds another challenge for investors. It requires them to think differently about debt insturments and loans, viewing them like stocks whose value can swing from day to day or quarter to quarter", my emphasis, David Reilly (DR) at the WSJ, 20 February 2008.

Yes, DR, using models let Enron report whatever profit it wanted. I await the SEC's saying major banks are lobbying for "Enron-style" accounting. I won't hold my breath. That the Big 87654 let their clients account for loans based on models shows how poor their audits are. I suspect many now objecting to using market values would not if they liked the market values. What are "long-term values" anyway? Debt instruments vary in value. That investors did not see this is a result of their being mesmerized by historical cost accounting.

Wednesday, February 27, 2008

TIPSing Over?

"Inflation's a big risk to your savings. But inflation-protected bonds are an even bigger risk these days. ... Many investors, and their financial planners, are reacting to the danger by rushing into what they think is a safe haven: ... TIPS. It's a bad move. ... In theory, TIPS are an excellent idea. Like all bonds issued by Uncle Sam, they are safe from default. But unlike other Treasurys, they are also supposed to be safe against rising prices as well. ... This 'real,' or after-inflation, yield is locked in when you buy the bond. And right now, those real yields are terrible. They recently touched record lows. ... For the seven-year bond it's just 1.23%, and for the five-year, a crazy 0.78%. Early last fall, long TIPS guaranteed a respectable 2.3% plus inflation. ... Imagine inflation rises to 5%. Your 10-year TIPS, with its 1.56% 'real' yield, will therefore pay 6.56%. But that's taxable. At the top 35% rate of federal income tax, you will actually get only 4.26% a year. And that, of course is well below the inflation rate. A guaranteed negative real return. In this scenario, only those below the 25% federal income tax rate come out ahead", Brett Arends (BA) at the WSJ, 21 February 2008.

BA nails it. TIPS are a very bad buy at current prices. For that matter, all US dollar long-term bonds are bad investments currently. See also my 5 October 2007 post.

Schwartzneggerian Risk Managers?

"Subprime losses hitting the painful $100 billion mark have focused Wall Street's best minds on the dangers of excess. The result is new thinking about the role of risk managers. Till now, most have been midlevel functionaries powerless to curb the reckless tendencies that got the Street into this mess. ... In the past, 'banks have seen risk mangement as an industrial process where you have the machine, you crank the data, and then you crank the handle,' says Alan McIntyre, a managing director at consultant Oliver Wyman. 'There's been no judgment'," Businessweek, 25 February 2008.

I disagree with Wyman. The banks seem to have had excellent judgment. They apparently always believed "risk management" was something you do because your Big Four (BF) firm needs to complete its Sarbox questionaire to make the PCAOB functionaries happy that BF has enough "file stuffer" on its client's "risk management process". The banks' reality: don't worry about risk, the Fed will bail you out if you get in enough trouble.

Guerilla Theater at Treasury

The WSJ had a lengthy article on 26 February about opening sovereign wealth funds to outside scrutiny. In reading it I thought these "negotiations" about things like "best practices" were a sham and form of guerilla theater. Yves Smith (YS) has a nice post on this at on 26 February 2008. I have nothing to add to YS's comments.

Tuesday, February 26, 2008

Oil Costs and the Price System-2

"More than 70% of energy companies expect their future operations to be hit by shortages of skilled personnel, according to a survey commissioned by the London-based Energy Institute. ... 'The risk of future serious shortages in science, engineering and technical skills has emerged, exacerbated by increasing global demand, large-scale downsizing leading to lack of recruitment into the energy sector during the 1980s, and a large section of the work force rapidly approaching retirement.' the report accompanying the survey said. ... The report said it is vital for the industry to raise its profile and convince young people that it offers exciting long-term careers", WSJ, 20 February 2008.

Long-term careers? Really? I'm sure most college kids considering an energy sector career spoke to their elders and were told how cyclical the industry is and that it offers little job stability. What will the companies looking to hire kids offer them? Pensions when they retire, which will never be paid? See also my 24 December 2007 post.

Justice Department Extortion Racket?-3

"In the six yars that he has been the [US] attorney for New Jersey, Christopher J. Christie, Jr has investigated freeholders and governors, party hacks and [US] senators, winning indictments against Republicans and Democrats alike and obtaining convictions or guilty pleas against more than 125 public officials without losing a case. But today Mr. Christie finds himself challenged over the way he has conducted business. He recently drew the attention of the Justice Department's inspector general and Congress after awarding tens of millions of dollars in no-bid contracts to his friends and political allies. ... But there is a growing chorus of critics who say [Christie] has resorted to the same kind of cronyism and bullying tactics for which he has excoriated others. ... Democrats complain that his office tried to tarnish candidates facing election and intimidate state lawmakers before they cast crucial votes. Mr. Christie declined several requests to be interviewed for this article, but he has insisted that Mr. Ashcroft's contract was based on merit rather than political loyalty or the hope that Mr. Ashcroft might one day repay the favor as a political fund-raiser. ... In 2002, ... James Treffinger, a popular Republican, ... was not permitted to surrender like most elected officials who find themselves in similar circumstances. Instead Mr. Treffinger, who was about to begin a campaign for the [US] Senate, was arrested at gunpoint and spent more than six hours in handcuffs and leg shackles. Mr. Christie's aides said that the decisions on how to arrest and detain Mr. Treffinger were made by the [US] Marshall's Service out of concern that Mr. Treffinger might have access to a gun. ... 'He's done a great job as U.S. attorney and certainly has every right to use that record to run for higher officed if he chooses,' said Edward H. Stier, a former federal prosecutor. 'But the danger with these things is if people think you are using the power of your law enforcement position for personal reasons, you lose credibility.' ... 'There was never even the slightest suggestion that partisan politics plays any role whatsoever in who we investigated or how we made cases,' said Scott Resnick, who worked in the public corruption unit under Mr. Christie. 'If there had been, the career prosecutors in that office whould have been resigning every day." ... For all the laurels that Mr. Christie has earned for vigorously prosecuting corruption, the area that has brought him a spate of negative publicity involves his role in deferred-prosecution agreements, which are legal settlement that allow corporations and public entities to avoid criminal charges by agreeing to pay damages and be overseen by an appointed monitor", my emphasis,, 13 February 2008.

I am impressed. The NYT interviews former federal prosecutors who support Christie. Big deal. I believe in Mafia parlance they are: "stand-up guys". I suspect they just want a piece of the pelf. Why care what feds who may very well have participated in criminal acts themselves say? How can anyone take the DOJ seriously? Career prosecutors "would have been resigning every day", said Resnick. Puhleeze, spare me this nonsense. I don't believe it. Who are our career prosecutors? My guess: bully boys. Did any go public on the floor of Congress screaming about corruption within the DOJ? Christie let Herbert Stern, "a former [US] attorney, whom he described as a mentor" have a $10 million contract. How do I get in on this? Let's "investigate" this, we'll have our "friend" Mary Jo White appointed a "special prosecutor" to investigate Christie's office. Steir got it almost right. He should have written, "if people think, you lose credibility".

Monday, February 25, 2008

Goodbye, Old Friend

"Columns, like plays, open only to close, and this one now steals into the night. ... A skeptic is who I am, though my readers and I would be a little richer if, on occasion, I doubted less and trusted more. ... Then again, only a few truly superb moneymaking ideas are required to deliver the man or woman of moderate habits from the toils of a 9-to-5 job. ... 'All That Glitters' was the headline over the Dec. 25, 2000 essay featuring a frustrated John Hathaway, portfolio manager of Tocqueville Gold Fund, whose share price languished near $11 as the world persisted in putting its monetary faith in the person of Alan Greenspan ... 'It grates on Hathaway', it said here seven years ago, 'that he anticipated many of these problems, each a candidate to promote a rise in the demand for a monetary asset not created by a political act of the U.S. government. ... Since then, gold's price has vaulted to $920 an ounce from $274 and the price of a share of the Tocqueville Fund to $51.60 from $11.25", James Grant (JG) at Forbes, 25 February 2008.

I'll miss JG's Forbes' column. He's one of the few original thinkers around today. One point JG makes, the "fundamentals", often take many years to work themselves out.

New Doctor Doom?

Nouriel Roubini (NR), "makes the old Dr. Doom, bond pessimist Henry Kaufman, look like Dr. Phil. No mincer of words. Roubini thinks a full-blown panic will scorch the global economy. ... 'Cash is king in 2008,' says Roubini. ... Banks got hooked on off-balance-sheet entities like structured investment vehicles, which Roubini calls the 'shadow banking system.' But the shadow system has no access to the 'lender of last resort' support of central banks. When the banks tire of bailing out their SIVs, holders of SIV paper will have losses", Forbes, 25 February 2008.

I disagree with NR again. "Cash is trash", inflation's coming. As to bailouts, by hook or by crook, the banks will be able to discount SIV paper with the Fed. Bet on it.

Iron Ore Jumps

"Japanese and Korean steelmakers agreed to a 65% increase in the price of iron ore with Brazilian mining power Cia. Vale do Rio Doce, boosting the fortunes of big mining companies at the expense of steel producers and their customers world-wide", WSJ, 19 February 2008.

Inflation is currently running about 4% per year, isn't it? Let's ask Helicopter Ben what the current inflation rate is.

Sunday, February 24, 2008

Kosovo and The Polish Colonels

"Quite apart from the undeniable merits of independence, in political terms Kosovo 2008, is not quite Kosovo of 1998. Let us count the post-9/11 ways: ... Yet given NATO's dismal performance in Afghanistan, it has little fides in the Balkans, and the American attitude might be 'you didn't want to fight much for Afghanistan, so why should we for Kosovo?' ... Where does all this leave us? It might be a fine and noble thing for the Kosovars to have their own state like the rest of the regions of the former Yugoslavia. But let us pray that neither Serbia nor Russia calls the Western bluff and guaranteeing Kosovar automony, because in the present climate it really would be, a well, a big fat bluff", Victor Davis Hanson (VDH) at 19 February 2008.

My favorite military historian, BH Liddell Hart (BHLH) said something about a smiliar situation in 1939, about six months before 1 September 1939, when Germany invaded Poland. I quote BHLH, "It is immoral to make promises that one cannot in practice fulfill-in the sense that the recipient expects. On that ground, in 1939, I questioned the underlying morality of the Polish Guarantee, as well as its practicality. ... It also seemed to me that any such promises [by the British and French] were the most certain way to produce war--because of the inevitable provocativeness of guaranteeing, at such a moment of tension, an area which we had hitherto treated as outside our sphere of interest; because of the manifest temptation which that guarantee offered, to a military-minded people like the Germans, to show how fatuously impractical our guarantee was; and because of its natural effect in stiffening the attitude of a people, the Poles, who had always shown themselves exceptionally intractible in negotiating a reasonable settlement of any issue", Why Don't We Learn From History, 1944, 34. "The responsibility for the consequent misery that has befallen the peoples of Denmark, Norway, Holland, Belgium, France Yugoslavia and Greece in turn, thus lies heavily upon us--for losing the sense of military realities", 40. The Bush-Clinton administration's Kosovo policy is madness.

On 19 February 2008 at 5:09 PM Houston time, Michael Savage (MS) said, "I back China and Russia" in this matter and he wished them well in trying to prevent Kosovo's separation from Serbia. Imagine, MS, nationalist, backs Russia and China against the US. I salute MS for taking that position.

Special Pleading at Work

"Does restricting 'eminent domain'--the power of government to seize private property--harm economic growth? A new report from the Institute of Justice looks at the evidence and concludes the answer is no. ... But one constant since Kelo v. New London has been the refrain, echoed by developers and politicians alike, that eminent domain is necessary for redevelopment. ... The verdict: So far there has been no discernable hit to economic activity from the restriction of eminent domain, even in those states with the broadest reforms. ... Developers love eminent domain because it's easier to snap up land when government forces owners to sell-no unpleasant dickering over price, etc. Local politicians likewise believe they are best positioned to pick winners and losers and to shape the future of their cities. ... If a project cannot proceed without government interference, it is reasonable to ask whether it it worth putting the hamfist of government on the scales at all", editorial at the WSJ, 30 January 2008.

Why is anyone surprised with this? About 23 years years ago, there was a group of Democratic politicians known as the "Atari democrats" who pushed various government schemes to select high-tech winners and subsidize them. It struck me that that's the stock market's job. Why did those "geniuses" think they were more capable of doing that then the market? Similarly for eminent domain.

Saturday, February 23, 2008

Rivers of Blood, 40 Years Hence

"Violence is oozing through the cracks of European society like pus out of a broken scab. Just when liberal opinion congratulated itself that Europe had foresaken its violent past, the specter of civil violence has the continent terrified. ... Not since [WWII] has British opinion been provoked to the present level of outrage. ... Matthew d'Ancona, quoted former Conservative parliamentarian Enoch Powell's warning that concessions to alien cultures would cause 'rivers of blood' to flow in the streets of England. Times columnist Minetter Marin accuses the archbishop of treason. Coercion in the Muslim communities of Europe is so commonplace that duly-constituted governments there no longer wield a monopoly of violence. Behind the law there stands the right of the state to inflict violence, and the legitimacy of states rests on what German political economist and sociologist Max Weber once called 'the monopoly of violence'. ... By proposing to concede a permanent role to extralegal violence in the political life of England, the Archbishop of Canterbury pushed his phelgmatic countrymen over the edge. No one is better than the British at pretending that problems aren't really there, but once their spiritual leader admits to an alien source of coercion and proposes to legitimize it, they understood that a limit had been reached. ... Europe's governments refuse to rule, that is, refuse to enforce their own laws because they fear violence on the part of Muslim immigrant communities who refuse to accept these laws... If [Europe's] duly-constituted governments abandon their monopoly of violence to self-appointed religious leaders, the likelihood is that a river of blood will flow, just as Powell warned in 1968", my emphasis, Spengler at, 11 February 2008.

I love Spengler, whoever he is. I remember Enoch Powell's April 1968 "Rivers of Blood" speech. You may read it at The state is: violence, the opinions of many law, political science and philosophy professors to the contrary. A state which refuses to use violence to enforce its laws or defend itself against other states, ceases to be a state. Like Europeans exempting their Moslem communities from Europe's laws, our illegal aliens will push the US into a civil war or have the US break up like Yugoslavia did. Be patient, chaos is coming right here to "River City".

Harris County Justice

"Six members of a Harris County grand jury who indicted Texas Supreme Court Justice David Medina and his wife on charges stemming from the fire that destroyed their Spring home filed a lawsuit to talk about the evidence that they saw before handing up the indictments. Jeffrey Dorrell, an attorney who was the assistant foreman of the grand jury, filed the lawsuit on behalf of the members who want to tell a new grand jury about the evidence they heard behind closed doors. They also want to defend themselves against accusations that they were part of a 'runaway grand jury,' Dorrell said. ... "The other members of the grand jury felt that our grand jury had been abused and insulted by both the [DA's] office and the defense attorneys in the case, ' Dorrell said. .. Assistant [DA] Vic Wisner has repeatedly said he continues to investigate the circusmtances of the fire to amass enough evidence to win a case. ... Dorrell disagreed that Wisner and the [DA's] office would adequately investigate the case. 'If he wouldn't do the investigation that we told him to while we were authorized and empowered to issue those orders, I don't know why he would do it now,' Dorrell said. 'To be blunt, we don't believe him'," Houston Chronicle, 14 February 2008.

I don't believe Wisner either. Another potential miscarriage of justice is brewing. If Medina is so rough and tough and innocent, he should authorize what Dorell wants. Alternatively, he should resign from the bench. As for Wisner, who does he think he is? Mike Nifong.

Friday, February 22, 2008

General McCain's War

"I should restate that--most of us in the West are terrified to exercise our freedom to voice our disdain of an ugly and vicious ideology because it has been ordained from on high that voicing such sentiments would constitute a breach of the rights of those who treat us with contempt . But is McCain proposing anything that may reverse these humilations? Of course not. He is simply incapable of recognizing that we are fighting Islam, in our own countries, and in the rest of the world. Instead, he wants to sacrifice more American lives to sustain and promote the Islamic countries we have already established in Iraq and Afghanistan. ... Well, I have news for McCain. If what I experience over here is any indication of the 'success' of the mission, then we have already lost. As my experience flying from Paris to Washington demonstrates, I already have to prostrate myself before the greater sensitivites of Islamic ideology. ... [McCain] claims, again like Bush, that the central battleground of the War in Terror is Iraq and Afghanistan. ... It seems not to have occurred to either that perhaps our entanglement in Iraq and Afghanistan is precisely what bin Laden wants. ... The logic seems to be that [bin Laden's] ... communcations reveal bin Laden's personal assessment, they must be true. It hasn't occurred to these great leaders that bin Laden wants his followers to believe that these wars are fundamental to his cause because it suits him. ... Well, we have already conceded Islamic States in the countries we have 'liberated'--Iraq and Afghanistan. That is a victory for Islam. ... So why embroil themselves in these wars in Iraq and Afghanistan? ... It's because it is where they intend, and are succeeding, in sapping our strength--mentally, physcially, and financially. ... And what is amiss here is military acumen--and vision. ... I am not surprised by this stupidity since [McCain] refuses to even acknowledge our enemy. When you refuse to acknowledge the enemy for fear of offending people, by definition, you cannot know whether you are triumphing over the enemy. ... But in the case of our Islamic enemies, the one thing we can be sure of is that they will never weary of their cause, because for them their cause is God's cause. ... And at the moment we are playing their game. ... We are simply giving them the opportunity to deplete our resolve and resources. Yet, the likes of McCain think that playing to their tune is somehow a strategy for victory. ... And when Churchill did finally come in from the cold to take control, he did not play nice to our enemies. Germany had to be crushed--not the 'bad,' or the 'moderately bad' Germans, but all the Germans. They had to be shown that their ideology which had brought catastrophe on civilization would not be tolerated, and would be destroyed--once and for all. ... They decide when to engage in battle, and when to lie low. We simply react. ... And when McCain is prepared to sacrifice our own innocent men, women and children for fear of breaching some naive Convention designed by a bunch of arm-chair warriors, then he is simply not fit to baby-sit my children, never mind lead the free world. ... Getting bogged down in the 'trenches' of Iraq and Afghanistan is a recipe for disaster, not victory", my emphasis, Joseph McMillian (JM) at, 13 February 2008.

Amen, JM. Our "War on Terror" is a joke. Without an enemy, there is no war. Who or what is it? We destroyed Germany and Japan, before rebuilding those countries. What will be today's equivalent of the Russians invading Berlin and McArthur's taking the Japanese surrender on the Missouri? Who would sign the surrender documents? Our involvment in Iraq and Afghanistan is right out of Uncle Remus. It is the military equivalent of the briar patch's "tar baby". da more you grab it, da more it grabs you.

These idiots don't understand, or don't seem to understand the importance of disinformation campaigns. Disinformation is integral to Islamic warfare, i.e., it's called takiwa. "Fighting is prescribed for you, and ye dislike it. But it is possible that ye dislike a thing which is good for you, and that ye love a thing which is bad for you. But Allah knoweth, and ye know not", Koran 2:216, Yusuf Ali translation. bin Laden can easily support his positions Islamically.

Save the Country; Save the Banks

"Janet Yellin, president of the [Fed] of San Francisco, ... said, when the time comes, the Fed will have to move in a 'timely way' to remove the stimulus to prevent inflationary pressures. ... The Fed doesn't want its recent interest-rate cuts to be perceived as bailing out markets, Ms. Yellin said, adding that people are taking losses on bad bets, and its ridiculous to suggest otherwise", WSJ, 13 February 2008.

"The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government. ... The fact that the plan is receiving serious consideration suggests that the level of concern in Washington as housing problems worsen. ... "Everybody is looking at everything,' [FDIC] Chairman Sheila Blair said. 'The door is not closed on anything'," WSJ, 14 February 2008.

Madame Yellin, we are not that stupid. That "people are taking losses' is irrelevant to whether or not the Fed's actions were bailouts of markets. The issue is: are the losses they're taking smaller than they would have been had the Fed done nothing. Does this nitiwit think we are all so stupid?

Consider Blair of the FDIC's statement, "The door is not closed on anything". Does that include deceiving the public about the inflation rate? How dare you ask? WC Varones has a 14 February 2008 post on this article worth reading at as does Yves Smith at

Thursday, February 21, 2008

Buffett's Bargain

"Municipal bonds seldom if ever default. ... Let's pause, however, to consider how some crazy rules helped inadvertently bring [Warren Buffett] his present opportunity--and put the world seemingly on the brink of financial chaos. In the abstract, of course, neither bond insurance nor bond raters should exist. The market ought to be able to assess and price bond issues efficiently itself, leaving no profit opportunity for raters and insurers. ... In effect, a triple-A insurer turns every bond issuer into a triple-A issuer, and does it more cheaply than the bond issuer could do it for himself. ... Hooray for an efficient market solution. Or it would be an efficient market solution if participation by all parties were voluntary, therefore conditoned by appropriate skepticism. ... We're not so sure the result [downgrades of thousands of municipal bonds] would be the financial catastrophe that some forecast. The market might well recognize the value of the downgraded bonds despite any downgrades. ... Enter Mr. Buffett, who offers to solve the problem is his own way, no doubt hoping regulators will quietly pressure the big bond insurers to acquiesce in his proposal to take their bread-and-butter business away from them, leaving them to sink into the mire along with their remaining subprime bets. ... We should quickly note that he's not offering to solve the problem for many banks that own mortgage-backed securities also insured by the bond insurers--but these banks have already shown themselves capable of facing up to their losses", Holman Jenkins (HJ) at the WSJ, 13 February 2008.

Buffett's "offer yesterday to wade into the bond-insurance market was only half-brave, so its worth paying attention to where he thinks the risks lie. ... The argument goes that if the bond insurers are downgraded across the board, the bonds they've insured go south too, causing writeoffs and another cascade of financial-industry losses. ... But the notion that a spare billion or two for the 'monolines' could forestall many billions more in writedowns never made any sense. ... That's why the calculating Mr. Buffett only wants to reinsure the municipal business, which is pretty much all premiums and no claims. ... And a few billion dollars in capital won't be nearly enough to make a dent in the $1 trillion in exposure that the bond insurers have to the asset-backed market", my emphasis , Editorial at the WSJ, 13 February 2008.

"More fundamentally, however, Buffett's bid should remind us that most municipal bonds don't need insurance at all. They haven't been very risky. After studying the history of bond defaults, a research firm called Municipal Market Advisors found that only 2.65% of munis rated Ba or better by Moody's had defaulted, compared with 19.12% of similarly rated corporate bonds. [S&P's] discrepancy was even greater: 1.74% of municipals rated double-B or better defaulted compared with 29.93% of like-rated corporates. ... The muni-rating scale increases taxpayers' cost of borrowing, and it has lined the pockets of municipal-bond insurers. The [SEC], which handed the rating agencies far too much power, should stop this long-running scam, not let Buffett join the feast", my emphasis, Thomas Donlan (TD) at Barron's, 18 February 2008.

I agree with HJ, the monolines' end will not be the catastrophe many believe it will be. I think the market already prices bonds as if the monolines don't exist. See my 16 February 2008 post.

I never saw any value provided by the monolines in their muni business since it: "is pretty much all premiums and no claims". If so, who needed them? Consider, a municipality wants to sell a bond. How is the bond buyer's position improved by paying a monoline a premium in excess of the expected value of its default rate? We have a "fallacy of composition", all municipalities are weakened by the premiums they pay to the detriment of muni bond holders. The muni bond holders could more cheaply "self-insure" by buying a muni bond fund. TD says it all: muni bond insurance is a "scam". It's time it ended

Nixonomics's Returns?

"With the price of wheat and other grains soaring, a broad swath of food producers are calling on the government to help farmers rachet up production. ... Others are even calling for restrictions on exports--an effort unlikely to gain traction but one that illustrates the depth of food producers' concerns. ... Robb Mackie, president of the Washington-based American Bakers Association, is calling on government officials and Congress to respond to the high prices, which he says are 'raising serious domestic food security issues.' ... Restrictions of exports are unlikely to succeeed due to expected opposition from farm groups and U.S. trading partners. Such a move would be a throwback to 1980, when President Carter imposed an embargo on U.S. grain shipments to the former Soviet Union", WSJ, 14 February 2008.

What does Mackie think Uncle Sam can do aside from an export embago like Nixon did in 1973? Or does he want an end to all crop acreage restrictions?

Wednesday, February 20, 2008

Why We Need Federalism-6

"Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. ... Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers. ... [T]he Bush administration ... embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye. ... For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers. ... The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules. ... [W]hen the dust settles, the administration will be judged as a willing accomplice to the lenders ... [s]o willing, in fact, that it used the power of the federal government in an unprecedented assault on state legislatures, as well as state attorneys general and anyone else on the side of consumers", my emphasis, Elliot Spitzer at the Houston Chronicle, 15 February 2008.

Imagine, the Republican party is supposed to be the party of federalism. Hahahaha would the Mogambu Guru say. It's the party, "Of the banks, by the banks and for the banks". Now that the idiot bankers are in trouble, the Fed and Treasury will steal hundreds of billions from savers to prop them up. What a system.

PWC On Guard

"American International Group Inc., which has struggled to recover from an accounting scandal, will be forced to write down the value of financial instruments tied to mortgages after its auditors said they found 'material weakness,' in its accounting systems, a signal that accounting firms may get tough on already battered financial giants. ... Bond rating firm Fitch Ratings announced yesterday that it is putting AIG's issuer default rating on 'negative' watch. ... Kathleen Shanley said ... 'But the latest disclosures about a "material weakness" in the internal controls related to the company's credit default swap portfolio undermines credibility with investors.' ... PricewaterhouseCooper's finding that there was a material weakness in the internal controls used to value the insurance contracts is one of the first of its kind involving a major company since the financial crisis erupted last August, said [Mark] Cheffers. ... The accounting firm's actions are in line with a push by auditors to force companies to use market values for securities they hold even if there is little trading going on. ... Not everyone gives the auditors, or even [PWC] in this case such high marks, though. The finding of a material weakness by [PWC] was 'absolutely' a step in the right direction said Janet Tavakoli, president of Tavakoli Structured Finance Inc., a Chicago research firm. But she said that disclosures were still insufficient in regard to the way AIG and others are coming up with values for such complex securities", my emphasis, Liam Pleven and David Reilly (LP&DR) at the WSJ, 12 February 2008.

"Many big Wall Street firms were asleep at the switch in the years leading up to the credit crisis. At least another group--the auditors--seems to be minding the store. They fell down badly during the tech-stock bubble, but their standards seem to be pretty tight these days. The most recent evidence: The apprently hard line taken by [AIG's] auditors [PWC], when it came to how the insurer valued credit default swaps", David Reilly (DR) at the WSJ, 13 February 2008.

"You see things; and you say, 'Why?' But I dream things that never were; and I say, 'Why not'?", George Bernard Shaw, Back to Methuselah, 1921. Similarly, I ask: why didn't PWC find this weakness before? What changed? "In valuing those swaps, AIG ... benefitted from assumed differences in value of the swaps and the securities they were insuring", LP&DR write. Assumed? What's going on here? Did PWC have an "internal inspection" team review its AIG audit workpapers and find no support for AIG's assumption? Is AIG's credit default swap valuation as well documented as Enron's valuation of long-term electric sale contracts that tripped up Arthur Andersen? Stay tuned.

Is DR serious? If PWC was so tough, it should have found this "weakness" years ago. My guess: PWC and AIG are scared and in lieu of making AIG restate prior financials, again, opening PWC and AIG up to expensive lawsuits, they "negotiated" the disclosure of a "material weakness". It seems to me that AIG changed an accounting principle, or should correct an error and has no material weakness at all. Francine McKenna's 13 February 2008 post about AIG, PWC and the WSJ at, is definitely worth reading.

Tuesday, February 19, 2008

Of Planks and Specks-2

"Yesterday, the [SEC] announced a settlement with Mr. [David] Li and two others to pay a total of $24 million in illegal profits and penalties to resolve insider trading charges. Mr. Li, chairman and chief executive of Bank of West Asia Ltd., agreed to pay an $8.1 million penalty to settle insider-trading charges with the SEC, without admitting or denying wrongdoing. ... 'We hope this case sends a forceful reminder to corporate insiders that they need to exercise careful discretion when discussing business matters outside the boardroom and executive suite,' Linda Thomsen, [LT] the SEC's director of enforcement, said in a statement", WSJ, 6 February 2008.

Yes, LT, it sends a message: when engaged in insider-trading, make at least $24 million, lest you be prosecuted like the peasants in my 19 January 2008 post, Raben and Bouchard, who went to prison over less than $100,000. Anatole of France lives. I wonder which law firm, stuffed with dozens of "former" AUSA's negotiated Li's deal?


"For decades, wheat was a commoditity no American needed to think much about, except the farmers who grew it. The grain was usually plentiful and prices were low. All of a sudden, those assumptions have been turned upside down. With demand soaring abroad and droughts crimping supply, the world's wheat stockpiles have fallen to their lowest level in 30 years, and stocks in the [US] have dropped to levels unseen since 1948. ... Prices for common wheat are up nearly 50 percent since August. ... Though this week's prices were nominal records, the inflation-adjusted record for wheat was set in the mid-1970s, when it exceeded $20 a bushel in today's dollars after huge sales to the Soviet Union. ... Foreign buying is driving this market",, 13 February 2008.

The commodities markets look like those of the early 1970s. Everything is going up. Will Bush follow Nixon and close the "wheat window" as Nixon closed the gold window in 1971 and the soybean window in 1973?

Monday, February 18, 2008

Food Freeze?

"As food prices soar, more nations are falling back on an old--and potentially hazardous--response: price controls. ... These measures reflect the mounting pressure on developing economies as food costs rise sharply. Food-price inflation is running at an 11% annual rate in major developing countries, up from 4.5% in 2006, according to Bank of America Corp. ... Price pressures on food are mounting for two big reasons. Farmers are diverting some of their crops to make biofuels, leaving less available for the table. In addition, diets are improving rapidly in fast-growing countries like China and India. Chinese demand for soybeans, for instance, has shot up to about 47 million metric tons from 11 million metric tons in 1990. ... But many economists believe the forces driving food prices higher--including shortages of land and water in China and elsewhere--could be around for a long time. ... Chinese officials, for instance, worry that out-of-control food inflation could foment trouble in the rural hinterlands, leading to more challenges for Beijing", WSJ, 4 February 2008.

Yes, the "forces ... [which] could be around for a long time" are called people. They will be. See my 13 November 2007 post about price controls. They never work. "Food-price inflation is running at an 11% annual rate in major developing countries", interesting. What is it running at in the developed world? Commodities price behavior is looking more like that in 1973 every day.

Coal and China

"China is doing for coal what it once did for oil: pushing prices to new highs, adding more pressure to the creaking global economy. ... China's need for coal is rising as other factors around the world are putting severe strain on supply for the fossil fuel. ... Demand is rising quickly elsewhere. Japan ... is burning even more coal since an earthquake damaged a nuclear reactor last year. ... Indonesia has been moving over the past year or so to divert more of its coal stores to domestic use, as the coal industry there has been depleting its higher-quality coal reserves. ... The China-driven coal boom has pushed up wages and created more jobs for U.S. miners as well as port and rail workers--a twist on recent trends moving industrial jobs from the U.S. to China. ... Chinese coal demand grew nearly 9% last year, raising its share to a quarter of the world's consumption. ... Coal was assumed by many in the energy industry to be immune to worries about the stability of supply that have helped push oil to record highs. ... Beijing began closing coal mines in 2005 to address a horrific safety record. ... But China was also adding hundreds of new coal-fired power stations", WSJ, 12 February 2008.

The US economy is coming to more closely resemble that of a third world country daily as agricultural products and natural resources are among the few things the US is capable of exporting.

Sunday, February 17, 2008

Eat Wheat?

"Speculative money pouring into the grain market ignited another round of record prices, with analysts pointing to Minneapolis Grain Exchange Wheat as one of the main drivers. ... MGE March-delivery wheat rose 30 cents to $14.93, a record. ... There are plenty of fundamental reasons to be bullish on wheat, especially with supplies at historically tight levels, after weather problems around the world cut down production last year. In addition, global demand for wheat continues to strengthen. ... 'No one knows how high is high,' said Dan Basse, president of AgResource", WSJ, 7 February 2008.

I'll bet no one knows. That said, like all commodities, I expect wheat to increase in price in all currencies. Even the Chinese Yuan. I wonder if Jeffrey Currie (JC) of Goldman Sachs has taken a position on wheat prices. In US dollars. I referred to JC on 24 October, 2 and 9 November 2007 and 4 and 5 February (twice) 2008.

MLEC Redux

"As the Bush administration announced a fresh plan to aid homeowners overburdened by their mortgages, initial figures suggest much-touted earlier efforts have done little to help most troubled borrowers. ... In a companion move, the administration announced a toll-free number for homeowners, but the hotline has provided counseling to just 36,000 borrowers in the past two months", WSJ, 13 February 2008.

Yves Smith has a 13 February post I agree with on this at I have nothing to add to it.

Executive Tax Planning

"A strategy that corporate executives routinely use to turn their stockholdings into cash while delaying payment of taxes is coming under increased scrutiny by the [IRS]. ... The strategy, known as a variable prepaid forward contract, is one of the most widely used in corporate America. ... The strategy comes into play when an executive holding a large amount of publicly traded stock that has gained in value wants to turn that stock into cash, but not immediately pay the capital gains taxes that apply when the stock is sold. Instead, the executive agrees at a future date to sell a chunk of the stock to an investment bank, in exchange for an immediate cash payout. The executive pays the taxes on the stock when he actually turns over the shares to the bank, typically many years later. ... The executives and the banks argue that the shares are technically borrowed by the banks, not sold to it, and that the transaction is thus not a sale resulting in a cash payment that is immediately subject to taxation ... The bank gets 'all the benefits and burdens of ownership in the pledged shares,' making it a true sale and this taxable to the executive [said the IRS]'," Lynnley Browning at, 11 February 2008.

This is another "substance vs. form" issue. I agree with the IRS, this should not fly.

Saturday, February 16, 2008

Incentives Count-For Bankers Too?

"Yet of one thing we can be sure: unless we learn from this crisis, another one will put the world economy back on to the rocks in the not too distant future. ... The big question, indeed, is whether the lesson must be embedded in regulation. Optimistic opponents of regulation argue that the banks have learned their lesson and will behave more responsibily in the future. Pessimistic opponents fear that legislators might create a Sarbanes-Oxley squared. The Act passed by the US Congress in 2002, after Enron and other scandals, was bad enough, they say. The banks might now suffer something worse. ... Two points shine out about the financial system over the past three decades: its ability to generate crises, and the mismatch between public risk and private reward. ... [T]he banking sector is the recipient of massive explicit and implicit public subsidies: it is largely guaranteed against liquidity risk; many of its liabilites seem to be contingent claims on the state. ... In addition, banking institutions suffer from massive agency problems. ... In the end, we are left with a dilemma. ... A financial sector that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders is, I would argue, politically unacceptable in the long run", my emphasis, Martin Wolf (MW) at, 5 February 2008.

On 6 February 2008 Yves Smith mentioned MW's article favorably at See also my 13 January 2008 post. I agree with MW's observations but believe no, I repeat no, regulatory changes will make any difference. Either the regulators will prove too incompetent to "cage" the banks, or will make things worse like our current Goldman Sachs (GS)-run Treasury, which turned Abraham Lincoln's 1863 Gettysburg Address upside-down. As Sean Oleander remarked, we live in a world of "upside-down communism". MW argues our "financial sector ... is ... politically unacceptable in the long run". Amen. That's revolutionary talk. The US today reminds me of 1780's France as described in Crane Brinton's Anatomy of Revolution, 1965. I would be surprised not to see tremendous changes to our financial system in the next ten years.

Monolines Death Throes

"Rescue plans are starting to take shape for struggling bond insurers, but they aren't likely to prevent further ratings downgrades for many of the companies. ... A group of banks--betting that the insurers still have some value--are working with the management and investors of New York-based Financial Guaranty Insurance Co. on a potential plan for FGIC. ... The banks, then would share in the proceeds that the bond insurers could make as they collect premiums and wait for their existing portfolio of policies to 'run off.' In this scenario, the most the banks are hoping for is that the bond insurers' credit ratings don't fall below double-A. ... 'It's just an indeterminable amount of losses on these assets and the final number could be far more significant than we had been envisioning,' Thomas Abruzzo, managing director at Fitch says. ... A key hurdle for the banks and the bond insurers is determining how much the banks should get in exchange for tearing up their credit-default swaps, and whether owning stakes in companies that could get further downgraded is fair compensation, says one person familiar with the discussions. Another option being banded about by the analysts and others is to form a new company, funded by the banks, which could take responsibility for meeting the obligations of some of their insurance policies--mainly the credit-default contracts--weighing on the bond insurers", WSJ, 7 February 2008.

"The financial crisis plauging municipal-bond insurers has some people wondering what the world would look like without them. The answer: maybe not as bad as you would think. ... Yesterday, Moody's Investors Service cut its triple-A rating on units of Security Capital Assurance Ltd., saying the bond insurer had been weakened by its exposure to the U.S. residential-mortgage market. ... But some regulators, investors and municipalities are starting to question the value of all that insurance. ... Municipal bonds with a double-B rating from credit-rating services have a cumulative average 10-year default rate of 1.74% since 1970. That is much lower than double-B rated corporate bonds which have a 29.93% 10-year cumulative default rate during the same period. ... Before the bond-insurer crisis, bond investors charged about 30% of the interest-rate savings an issuer would get. In recent months, that has climbed to 80% or 90% as the bond insurers try to extract as much premium as possible. For the issuers, though, that has reduced the value of the coverage. ... The market is also pricing municipal debt as though the insurance didn't exist anyway, says John Mousseau, vice president and portfolio manager at Cumberland Advisors. 'You're seeing insured bonds trading at 5% levels, as if they had no insurance', says Mr. Mousseau. ... Robert Shoback, managing director at Ambac, in U.S. public finance, says municipal-bond insurance 'has been and continues to be cost effective' for many issuers who choose to use the service because it reduces their payments. He also noted that insurance provides individual investors with a sense of security about the bonds they own", my emphasis, Liz Rappaport and Karen Richardson at the WSJ, 8 February 2008.

"What is good for Ambac, the bond insurer, is good for the country. Well, perhaps in the short run if it prevents a run on the shadow banking system. ... But not in the long run. ... The Ambac business model is as faulty now as was chairman Charles Wilson's forecast for General Motors more than half a century ago. ... In combination with overly generous triple-A ratings on not only these assets [subpime mortgages, SIVs and CDOs squared] but the monoline companies themselves, they have fostered a bubble of immeasurable but clearly significant proportions. ... How could Ambac, through the magic of its triple-A rating, with equity capital of less than $5bn (Pound 2.5bn) insure the debt of the state of California, the world's sixth-largest economy? How could an investor in California's municipal bonds be comforted by a company that during a potential liquidity crisis might find the capital markets closed to it, versus the nation's largest state with its obvious ongoing taxing authoroty? Apply the same logic to the gargantuan size of the asset-backed securities market it has insured in recent years--subprimes and CDOs in the trillions of dollars--and you must come to the same logical conclusion--this is absurd. ... As long as the illusion lasted, however, it is clear that monoline insurers fostered an expansion of our modern shadow banking system and therefore an extension of US and even global economic prosperity. ... But like General Motors a half century back, the sense of stability imparted to an oligopolistic industry with visible flaws is not likely to last, nor may the hope for a return to economic growth of recent years", my emphasis, William Gross (WG) at, 8 February 2008.

Now Fitch says there may be "an indeterminable amount of lossses". Who needs these guys? The banks don't know how much to "get in exchange for tearing up their credit-default swaps". Poor babies. How anyone ever thought the monolines could honor their swaps is beyond me.

"The market is also pricing municipal debt as though the insurance didn't exist". It's about time. The insurance never existed. Shoback of Ambac states, "insurance provides individual investors with a sense of security about the bonds they own"; the insurance is and always was, a public relations stunt. Think about this: the 10-year default on double-B corporates was 17.2X (29.93% / 1.74%) that of double-B munis. What does "double-B" mean anyway? Anything? Also see my 13 December post.

WG says, "this is absurd". It always was. I long thought the monolines were akin to the Wizard of Oz, an illusionist. Yves Smith's post on WG's article at, 8 February 2008, is worth reading.

Friday, February 15, 2008

Quo Bene?

"It's been highly touted as an economic stimulus bill that will help millions of Americans. ... As part of the bill, Congress is set to rush through an increase in the mortgage loan limits for Fannie Mae and Freddie Mac (and Federal Housing Administration insurance, too) from $417,000 to $729,750--the first step toward a massive financial diasaster in which taxpayers will end up paying through the nose. ... Now, thanks to Congress, junk bond investors will be able to pawn off their bad debt to Fannie and Freddie, instead of suing the big investment houses for ripping them off. ... Expansion of Fannie and Freddie's reckless lending is exactly what Congress wants because it's plausibly deniable. ... Those same lawmakers won't mention the fact that they get paid far more by real estate lobbyists than they do from our Treasury. ... It's like some sort of upside-down communism where the poor pay the rich welfare. Why should taxes from families earning $48,000 a year be used to support expensive mortgages in New York, Los Angeles and San Francisco? Welfare for the hungry and homeless is evil, but welfare for million-dollar homeowners facing a tough refi ... well, that's called 'helping the economy'," Sean Oleander (SO) at, 3 February 2008.

Thanks, W.C. Varones (WCV) for leading me to SO's article. I agree completely, quoting Mao on occassion. There's no other way to explain this. WCV's post at on 3 February is critical of this government policy. No, Hank Paulson, we're not all fooled.

Monoline Bailout

"At a time when most investors would be counting their winnings, William Ackman, head of hedge fund Pershing Square Capital Management LP, is ramping up his high-profile campaign against bond insurers, even as news swirls that a possible bailout is in the works for the insurers. Mr. Ackman, who has been criticizing the bond insurers for five years, says he still has a multibillion-dollar wager against them, including credit-default swaps he used to bet specifically against MBIA Inc. shares in 2002. ... In recent weeks, ratings agencies have started to come around to his argument that the bond insurers have flawed risk-management practices that have left them with significant shortfalls in capital. ... He characterized the bailout as an attempt by banks to 'arbitrage' the stringent capital requirements of federal bank regulators with what he says are the less-stringent requirements of the ratings agencies, which oversee the bond insurers. ... 'But if the bailout is a mechanism for the banks to continue to hide losses off balance sheet, then we think it's very bad for the capital markets'," Karen Richardson (KR) at the WSJ, 2 February 2008.

Bravo KR. Go Ackman go. Also see my 20 December 2007 post.

Thursday, February 14, 2008

Helicopter Ben in the Sandbox

"Monetary policy, the management of global companies and the workings of Wall Street are indisputably the realms of the mature: one searches the gallery of Federal Reserve chairman portraits in vain for a full head of hair. ... When you're trying to bring a massive tanker to port amid stormy seas, the last thing you want to see is a 12-year-old apprentice steering the tugboat. ... Of course, 'giving in to a tantruming child just reinforces the demand,' said Dr. Wendy Mogel, a clinical psychologist in Los Angeles. ... Mogel puts it in starkly financial terms: 'Indulge tantrums and you get short-term gains and long-term loss.' ... Like proto-teens, bankers are incapable of exercising independent judgment. Which is why every bank--from the staid Swiss to the sharp trading houses on Wall Street--got caught up in the subprime debacle. ... Harvard economist Ricardo Hausmann, who characterized America as 'whiner of first resort,' believes the rush to stimulus is being led more by a concern for Wall Street than a concern for Main Street. Rather than take their lumps after several years of exceptional returns, the banks are furiously lobbying for help. They're getting it", my emphasis, Daniel Gross (DG) at Newsweek, 11 February 2008.

I largely agree with DG, but bankers need not lobby an administration full of "former" Goldman Sachs (GS) guys. The "former" GS guys tell us homeowners' defaults would be horrible and do not tell us how horrible a dollar default would be. Every interest rate reduction is a tax on dollars in "grandma's" savings account to benefit seven and eight-figure per year Wall Street geniuses who suck at the public trough. Where are our "economists" explaining to the public in simple terms: who gains from Helicopter Ben's policies and who loses instead of conjuring up monsters like "recession"? As long as bankers can "externalize" their losses, they will. See my 10 December 2007 post.

Rating Agency Reform?

"Standard & Poor's Ratings Services plans to announce 27 separate actions it will take in the hopes of bolstering confidence in credit markets and the bond rating firm's analytical integrity, including a tougher oversight of analysts to spot potential conflicts of interest. ... Analysts who leave S&P to work at a bond insurer will have some deals they previously rated reviewed to make sure their objectivity wasn't compromised by the prospect of the new job. ... An auditing or governance expert will also be brought in to publicly review S&P's processes", WSJ, 7 February 2008.

"Andrew Cuomo, New York state's attorney general, wants credit-ratings firms to go further in their efforts to overhaul how they rate mortgage-related bonds, criticizing voluntary changes under way at the firms as 'too little, too late.' ... Cuomo called the moves 'window dressing' that fall short of the systemic change needed to restore investors confidence. S&P and Moody's 'are attempting to make piece-meal change that seem more like public relations window dressing than systemic reform,'' he said", WSJ, 8 February 2008.

I agree with Cuomo. Having seen 31 years of CPA reform, I expect no subtantive changes from the ratings agencies. "An auditing or governance expert". Who? A Big Four CPA firm? Mary Jo White? Arthur Levitt? Give it up S&P.

Puts, Calls and Mortgages

"As the housing slump drags on, some builders have a deal for potential buyers: Sign a contract, and if the cost of comparable homes drops before closing, you get the lower price. ... As the residential market continues to deteriorate, more buyers are having trouble securing mortgages and selling existing homes. ... The resulting barrage of chilling headlines has left builders fighting to reassure customers that now is, in fact, a safe time to buy", WSJ, 6 February 2008.

''The apparent willingness of borrowers to "walk away" from mortgage debt,' the [Fitch] analysts noted, 'has contributed to extraordinary high levels of early default' on loans issued during the 18 months before the mortgage bubble burst. It expects losses to reach 21% for subprime mortgages issued in 2006 and 26% for those issued in early 2007. ... Such behaviour, where not precipitated by wilful fraud, shows that American homebuyers aren't so dumb.. They're perfectly capable of acting rationally without political interference. ... A decade ago, most people started off with enough equity in their homes to make foreclosure irrational from a financial standpoint. Consider: If you made a 20% down payment on a house, prices would have to fall by 20%, almost immediately, before you lost all your money and had much incentive to walk away. ... But over the past few years--until last spring--banks and the mortgage-backed securities investors who bought the loans the banks packaged weren't demanding substantial downpayments; they were happy with 5% or even nothing down. They also didn't worry about whether or not borrowers were building up equity. 'Interest-only' loans, quick mortgage refinancings to cash out equity, and other inventions often led to just the opposite. ... Essentially, mortgage-bond investors, seeemingly unwittingly, sold homebuyers a put option, without properly pricing it, and now homeowners are exercising that option. ... It's beginning to dawn on lenders and their agents ... that they could be stuck with hundreds of thousands of houses at a minimum", my emphasis, Nicole Gelinas (NG) at the WSJ, 8 February 2008.

What the builders need is "put option" mortgages to help unload their inventory, like those NG describes.

Bravo, NG! As soon as I saw nothing down loans, I concluded the underlying real estate was not sold, but had 30-day renewable call options issued on it. By combining ownership with puts you can create synthetic calls. See my 10 December post as to MLEC's real reason. That the rating agencies couldn't see this is amazing. What do their analysts analyze?

Wednesday, February 13, 2008

Gold Goes Mainstream-2

"The [Fed] ... [has] been increasing the money supply at a much faster rate than people realize, near a 15% annual rate of increase in M3. ... We are going to have an even more narrowed and focused market than we had last year. Something the world is going to want now is a currency alternative. An investment I have felt positive about but now feel dramatically more positive about is gold. Gold is probably the single most important investment that most of us can have a representation in. ... At most tops in gold, gold and the [DJIA] sell at the same price. Right now, gold is about one-fourteenth the price of the Dow. ... I would rather own the Chinese currency than the U.S. currency. Another area that is significant and that we must pay some attention to is agriculture, beacause worldwide demand for food is going up", Sandra Ward interviewing Joseph McNay of Essex Investment Management at Barron's, 4 February 2008.

In 1933 the DJIA got down to 41 with gold at $20.67, a 2 to 1 ratio, in 1980, gold got to $875 with the DJIA at 889 a 1 to 1 ratio. Three to one gold would put it over $4,000. Gold looks cheap to me. Also see my 24 December 2007 post.

The Treasury and the Banks-2

"'You people created this mess,' [Eric Dinallo, ED] told senior officials of Wall Street's top firms, including Citigroup Inc., Goldman Sachs Group Inc. Merrill Lynch & Co. and Morgan Stanley. 'And the headline on this is going to be: How Wall Street Ate Main Street.' ... Eight banks and brokerage firms are working on a possible rescue of Ambac Financial Group Inc., one of the nation's biggest bond insurers, which recently lost its top rating from one credit-rating firm and faces a possible downgrade by another. ... But the no-holds-barred strategy ... also is ruffling feathers on Wall Street. ... After last month's meeting, some participants who were alarmed by the aggressive tone of Mr. Dinallo's remarks called senior officals at the Treasury Department and the New York Federal Reserve [FRBNY], appealing for them to take a substantial role in any rescue effort. After that, Treasury Undersecretary Robert Steel and Timothy F. Geithner, president and chief executive of the [FRBNY], encouraged Mr. Dinallo to hire an outside adviser with credibility among the various banks, say people familiar with the discussion. ... While working at the Manhattan district attorney's office, [ED] helped prosecute now-defunct A.R. Baron & Co., a brokerage firm whose top officials pleaded guilty to defrauding investors", my emphasis, WSJ, 6 February 2008.

"Mortgage companies have stepped up their efforts to work with delinquent borrowers, but their actions aren't keeping up with the rapid rise in bad loans, a new study by state officials suggests. ... The mortgage companies expect less than 7% of the troubled borrowers to come up with the funds to make the loan current. ... The state report also found that resets aren't the key issue for many homeowners who are falling behind. More than 30% of borrowers with subprime or Alt-A ARMs .... are already at least 30 days past due even though they haven't yet seen their first reset, according to the report. ... Meanwhile, just 3% of borrowers with subprime or Alt-A ARMS who are currently delinquent fell behind on their payments in the first three months after the intererst rate on their loan first reset. That suggests that many borrowers were put into loans they could never have afforded, says [Mark] Pierce of North Carolina. The report also highlights the tensions between state and federal officials. J.P. Morgan Chase & Co. and Wells Fargo refused to provide data to the working group 'on the advice or direction' of the Office of the Comptroller of the Currency [COOC], according to the report. ... 'We think it's better if we collect the information we think is important for the national banks we supervise,' says [COOC] John C. Dugan, adding that 'it's great for the state to focus on the banks they supervise'," my emphasis, WSJ, 7 February 2008.

Here we go again. "Ruffling feathers"; Wall Streeters are so "sensitive", they're "New Age Men". I bet they cry regularly. The Treasury and the Fed are apparently trying to strong-arm state prosecutors to protect Wall Street's "malefactors of great wealth". I think ED should show brass 'cohones", call a press conference and tell Robert Steel (RS), super "former" GS guy, him again, and the NY Fed, "nuts" citing General McAuliffe's 1944 statement. Alternatively, ED may be biding his time. ED may get the "advice" vetted by a RS-approved "advisor", then reject it and explain why in excruciating detail. On television. What would RS do then? Attempt to have ED arrested for interfering with the operations of a federal agency under 18 USC 1505 for rejecting RS's "disinterested" advice? Suppose Joe Schmoe called RS to complain his savings were being depleted to protect the banks, would RS take his call? Get serious. Would RS or Timothy Geithner answer Joe Schmoe's phone call?

Dugan's concern for the banks is touching. Is he afraid the state regulators will expose the real reasons for the Fed-Treasury bank bailout are inconsistent with the stated reasons? The party of Abraham Lincoln, who said something about "government, of the people, by the people and for the people", in 1863 has morphed into a government, of, by and for, the banks. What a country.

Tuesday, February 12, 2008

Why We Need Federalism-5

"Tensions are beginning to rise between state and federal authorities as the number of agencies investigating mortgage fraud continues to grow. ... Andrew Cuomo is in a tussle with the Office of Federal Housing Oversight. ... Their dispute is over who should be ... investigating allegations of fraudulent appraisals and mortgage fraud. ... Sen. Charles Schumer ... in a letter dated Jan. 30, ... urged Ofheo 'in the strongest possible way' to partner with New York prosecutors and be 'part of the solution not part of a perpetuation of the problem.'," WSJ, 31 January 2008.

"Although prosecutors have expressed an interest in the subprime matters, the criminal investigations might not result in the filing of any charges. Securities-valuation cases involve a fair amount of judgment based on an opaque market. To bring fraud charges, 'prosecutors need proof beyond a reasonable doubt that the banks made materially misleading statements about securities, and proof that they did it with the intent to deceive,' says Christopher J. Clark [CJC], a New York white-collar lawyer and former [AUSA] in Manhattan in the securities and commodities fraud unit", WSJ, 2 February 2008.

"Federal criminal prosecutors are stepping up their interest in Wall Street's mortgage-securities activities. ... The SEC is examining, among other things, whether [Merrill] booked inflated prices of mortgage bonds it held despite knowledge that the valuations had dropped, [people familiar with the matter] say. ... The interest of the Manhattan U.S. attorney's office follows a series of investigations being pursued by state and federal regulators with criminal and civil enforcement powers around the nation into the financial industry", my emphasis, WSJ, 8 February 2008.

The SEC and (In)Justice Department are "forced" to farm out investigations to private law firms, and Ofheo doesn't want NY's Attorney General investigating mortgage fraud. That's interesting. Think about it. Why would the Feds prefer private law firm investigations to NY's Attorney General? I realize the firms which hire the private law firms are large publicly-held entities. So? I can't believe there isn't a large potential "substititution effect" possible here.

CJC is correct so? Intent is inferred from actions. If the securities were improperly valued, will those who valued them, plead incompetence as a defense? If so, that will leave them open to civil claims. Or will the US Attorney's office for the SDNY let its "alumni network" take care of things and state there is insuffient evidence to prosecute. This after those who got target notices spend fortunes in attorney fees. Stay tuned. See my 31 January 2008 post.

I appreciate our good friend, Mike Garcia, showing "interest" after other state and federal authorities. How nice.

Stoneridge and the Banks

"Last spring, Wachovia bank was accused in a lawsuit of allowing fraudulent telemarkers to use the bank's accounts to steal millions of dollars from unsuspecting victims. When asked about the suit, bank executives said they had been unaware of the thefts. But newly relased documents from that lawsuit now show that Wachovia had long known about allegations of fraud and that the bank, in fact, solicited business from companies it knew had been accused of telemarketing crimes. ... Documents also show that Wachovia was alerted by other banks and federal agencies about ongoing deceptions, but it continued to provide banking services to multiple companies that helped steal as much as $400 million from unsuspecting victims. ... In the last three years, government agencies have sued several companies accused of routing telemarketing thefts through at least nine banks, including Wachovia, the largest company named in those lawsuits. .. However, Wachovia and most other banks accussed of involvement in similar frauds have never been publicly fined or prosecuted by federal regulators for aiding telemarketing criminals. So victims have turned to private lawsuits. ...Last June, ... Edward J. Markey, Democrat of Massachusetts ... asked five regulatory agencies to answer questions regarding the unsigned checking system that fraud artists use. ... Many of the agencies responded by saying they lacked jurisdiction. ... 'These types of crimes only are possible because banks tolerate them,' said the [US] Attorney in Philidelphia, Patrick L. Meehan, who prosecuted a payment processor accused of using Wachovia accounts to steal more than $100 million", my emphasis,, 2 February 2008.

The (In)Justice Department is amazing. Banks which aid and abet felonies are never accused of anything. Just peasants who defraud banks of insignificant amounts. Consider, "the agencies responded by saying they lacked jurisdiction". Really? Why did the Bush Aministration push Stoneridge?

Monday, February 11, 2008

Oil Sands

"Alberta estimates that the province has 174 billion barrels of recoverable bitumen, making Canada's oil reserves second only to those of Saudi Arabia. ... The turning-point came around four years ago, when crude began its rally and oil sands became economic. ... Richard Gusella, chief executive officer of Connacher Oil & Gas Ltd says he paid $20 per acre for land near Fort McMurray in January 2004, when oil cost $30 a barrel. 'In October, crude went up to $60 and the price of land went up to $2,000-$4,000 an acre', he says. ... Five years ago, an average home in Fort McMurray cost $350,000. Now it is more than $600,000. ... Faced with simmering public anger at Big Oil's soaring profits, Alberta last year increased the royalites oil producers have to pay the provincial government", WSJ, 5 February 2008.

Price drives cost. "Excess" profits by oil companies will be taxed or competed away. See my 24 December 2007 post.

The Treasury and the Working Class

"Under pressure from employers, the Treasury issued a ruling that allows companies to freeze the pensions of older workers in certain cases without running afoul of laws meant to protect employees' nest eggs. In addition to validating some pension rollbacks that could save companies billions of dollars, the Treasury's action also could tip the outcome of long-running lawsuits alleging age discrimination by pension plans at AT&T Inc., Cigna Corp., Dun & Bradstreet Corp., El Paso Corp., and other major companies. The stakes are huge: In just the AT&T case, nearly 24,000 current and former workers had opted into a class action as of December, with potential claims exceeding $2 billion. ... The crux of the issue is whether employers that change from traditional pension plans to so-called cash-balance plans can freeze the growth of older workers' pensions for months or years following the change. ... The Treasury ruled that decades-old 'backloading' laws that effectively prohibit companies from temporarily freezing pension growth don't apply when the freeze is delayed, even if it is eventually implemented. ... 'The agency charged with enforcing a law to protect older workers has blown a hole in it,' says Laurie McCann [LM], a senior attorney at the elder-advocacy group AARP. The Treasury says that it is just interpreting the law. ... With Friday's ruling, the Treasury and the IRS are now agreeing that employers aren't violating backloading laws when they give employees a pension option that delays wearaway but doesn't eliminate it", WSJ, 4 February 2008.

A company tells an employee if he works for it for say, 30 years, he will get a pension of $X when he gets to 55 based on his last five years wages. After working for the company for 25 years it says, "Oh we didn't mean that. We'll give you a pension based on your earnings in years 15-20". I conclude: either you defrauded the employee when you hired him since you never intended to pay him his pension as agreed, or you broke an existing contract with him and should get sued for damages. Amazing, the plutocrat-run Treasury sides with employers on this. I say: if an employer can't pay, it has a place to go: bankruptcy court. Using Treasury reasoning, after I borrow from a bank I can say: I'll pay you in two years and not pay any interest during that time. It's interest wearaway? I don't think so.

I agree with LM. This is another example of "regulatory capture", where the regulator works for the regulated. It's Alice in Wonderland at Treasury. "In class society, everyone lives as a member of a particular class, and every kind of thinking, without exception, is stamped with the brand of a class. ... The ruthless economic exploitation and political oppression of the peasants by the landlord class forced them into numerous uprisings against its rule. ... It was the class struggles of the peasants, the peasant uprisings and peasant wars that constituted the real motive force of historical development in Chinese feudal society", Mao Zedong, Little Red Book, chapter 2. The Bush Administration (BA) undermines the rule of law and respect for America's courts daily. Mao explains the BA's actions, i.e., each class has its own logic, and the BA's is that of China's 1900 landlord class. Why is Hank Paulson (HP) the BA's "Man on China"? Because HP exemplifies the thinking of China's landlord class of 1900. I add HP is busy exporting that thinking to the US. Seize the peasants' savings to support Wall Street rentiers.

Sunday, February 10, 2008

REITS and Commecial Real Estate

"Memo to buyers of commerical real estate who might have cash burning holes in their pockets: Sit tight. ... The proof can be found in the shares of [REITs] which have a remarkable track record when it comes to predicting what will happen to the prices of commercial real estate. ... According to Green Street, REITs in general already are trading 14% below their underlying asset values. Office REITS are trading at an 18% discount. ... In the end, either REITs are too cheap or real estate is too expensive. History isn't on real estate's side", Herb Greenberg at the WSJ, 26 January 2008.

There is a continuous arbitrage between the public and private markets. If the estimated asset values are correct, commercial real estate prices will fall.

Gold Goes Mainstream

"The new gold rush is on. As inflation has picked up and the stock market has tumbled, investors seeking a safe haven have piled into gold, driving the metal to all-time highs. ... The precious metal has been a horrible hedge against inflation. To keep pace with inflation going back to 1980, gold futures would need to be above $2,228 today. Believers see that as a sign that gold has a lot of room to rise, and predict it will surpass the $1,000 mark this year. ... It is highly unusual for traditional investors such as mutual funds and trust companies to invest so much in a commodity they once viewed as a non-productive asset. ... Brett Galagher ... at Julian Baer Investment Management [said], 'We don't feel the dollar is a good store of value'," WSJ, 31 January 2008.

No, the dollar isn't "a good store of value", hence it's not money. As for gold being an inflation hedge, go back to 1913. Gold was $20.67, it's $903 as I write, 44X as high. That's beaten inflation over the long run.

Saturday, February 9, 2008

What's Holding Treasuries UP?

"Distrust of asset backed commerical paper, as an example, has resulted in a flooding of funds into short Treasuries as an alternative. ... As you are well aware, there are more than a fair amount of institutional investors out there mandated to hold AAA rated paper. ... The last time we checked, it's yield curve steepness that the Fed would really like to see, especially in the current environment where we believe a major end game goal of the Fed is to rebuild weakening banking system and broader financial sector balance sheets. ... We see very little value in Treasuries right here outside of a panic driven safe haven status vehicle. Are Treasury bonds the last financial asset bubble standing? ... But at current levels, ... the foreign community now has to look at Treasury investments ahead as being almost a guaranteed loser, at least on a real return basis. That means foreign buying of Treasuries from here on out is being driven by one thing and one thing only--mercantilist economics. From an investment standpoint, there's nothing else there. ... C'mon, buying Treasuries two years out at recent levels ... does have everything to do with the most basic of all human behavior and emotions-fear. Fear coupled with relative lack of AAA credit supply, or even the perception of lack of supply, can do very strange things to prices over very short spaces of time", my emphasis, Contrary Investor (CI) at, 3 February 2008.

CI said one thing I take issue with. I think foreign buying of Treasuries has been driven by mercantilist economics for years. I can't explain China's accumulating $1.4 trillion of foreign exchange reserves any other way.

D&T and Snipes

"A federal jury returned a mixed verdict against the actor Wesley Snipes on Friday, acquitting him of the most serious tax charges he faced, but convicting him on three of six lesser charges. ... The case was the most prominent tax prosecution since the billionaire hotelier Leona Helmsley was convicted of tax fraud in 1989. ... It was the fourth major case in with the Justice Department failed to win convictions in cases against prominent tax deniers. The verdict drew whoops of joy outside the federal courthouse here from fellow tax deniers who immediately proclaimed it another victory that would draw more people to their cause. ... Instead of prosecuting all offenders, the Justice Department brings cases against well-known individuals, hoping that widespread news coverage will encourage compliance, a policy known as general deterrence. The Snipes prosecution, like the three earlier cases that resulted in full acquittals, appears to have backfired",, 2 February 2008.

"Deloitte & Touche, one of the Big Four accounting firms, agreed yesterday to pay $1 million to settle accusations that it had botched an audit of a pharmaceutical company by entrusting it to a partner it new to be a poor auditor. ... The wholesalers had the right to return unsold drugs to Ligand, which could report sales on its financial statement only after reducing them to reflect estimated returns. The board said Deloitte had not challenged those estimates despite evidence that returns were running at a much higher rate", Floyd Norris (FN) at, 11 December 2007.

Consider how differently the (In)Justice Department (DOJ) treats well-known tax protestors versus its apparent failure to prosecute well-known Wall Street figures. Why couldn't Snipes hire say, Mary Jo White and pay her a fee to show his contrition and investigate his tax situation. Why not? The DOJ permits this to corporations? Should an individual have fewer rights?

I previously mentioned James Fazio's case on 12 December 2007. It illustrates the critical area of accounting estimates. There is no reason banks can't estimate their losses from loan reconsiderations.

Friday, February 8, 2008


"Value at risk, the measure banks use to calculate the maximum their trades can lose each day, failed to detect the scope of the U.S. subprime mortgage market's collapse as it triggered more than $130 billion of losses since June for the biggest securities firms led by Citigroup Inc., Merrill, Morgan Stanley and UBS AG. The past six months have exposed the flaws of a financial measure based on historical prices that securities firms use idiosyncratically and that doesn't anticipate every potential disaster, such as the mistaken credit ratings on defaulted subprime debt. 'Finance is an area that's dominated by rare events,' said Nassin Taleb, a research professor at London Business School and former options trader. 'The tools we have in quantitative finance do not work in what I call the "Black Swan" domain.' ... Executives at Merrill, Morgan Stanley and UBS took steps in the past six weeks to overhaul their risk-mangement groups after internal models failed to foresee the first annual decline in house prices since the Great Depression. ... Hiring risk managers and giving them more power won't alter the mistake that led to last year's slump and that was Wall Street's dependence upon statistics to quantify risks, Taleb said. 'We have had dismal failures in quantitative finance in measuring those risks, yet people hire quants and hire risk managers simply to back up the desire to take these risks,' he said. 'There are some probabilities that you cannot compute.' ... 'If you compare what peoples' [VaR] are versus what their losses were in the third quarter or fourth quarter, the numbers are astounding,' said David Einhorn, president and co-founder of hedge fund Greenlight Capital LLC in New York. ... All of the risk-meaurement tools failed to prepare Merrill for the unforeseen declines on triple-A rated securities backed by subprime mortgages. ... 'In a market stress event, some individual sectors that previously appeared unrelated do move together, and as a result, the organization could take losses on both of them or even on positions that were previously deemed to be a hedge,' said Ed Hilda, the partner who runs the risk strategy and analytics services group at Deloitte & Touche LLP in New York . ... 'Stress tests are only as good or as predictive as the scenarios used and in many cases the scenarios that played out were much more severe than people anticipated,' Hilda said", Christine Harper at, 28 January 2008.

Yves Smith has a fine post about this at on 28 January 2008. He says it all. I previously discussed those models, unflatteringly, on 23 August, 8 November and 1 December 2007.