Monday, March 31, 2008

Call Out the Cops-5

"Melvyn Weiss, who built a reputation and fortune filing lawsuits that claimed companies had defrauded investors, agreed to plead guility to participating in a criminal conspiracy that helped his firm to bring the lucrative cases. ... The plea agreement carries a sentence of 18 to 33 months in prison, and Mr. Weiss has agreed to pay $10 million in fines and penalties. The government says it expects to seek the maximum sentence. ... In an unusual move, prosecutors in 2006 charged the law firm itself, as well as two senior partners at the firm who have since pleaded guilty. ... In discussions last year, the government sought $50 million, [from the firm] according to these people", WSJ, 21 March 2008.

"On March 16, the Wall Street merger experts at Lazard Ltd. gave Bear Stearns Cos. [BS] directors a written assurance that $2 a share was a fair price for the company, which was then teetering on the brink of bankruptcy. Eight days later, Monday, the same bankers at Lazard, told the same [BS] board that $10 a share--fives times as much--also was fair. ... Critics of such 'fairness opinion' letters, commonly used to justify prices for acquisitions of public companies, jumped on the first Lazard letter as evidence that such opinions give shareholders little protection against low-ball bids. Israel Shaked, a finance professor at the Boston University School of Management, says he believes 'the opinion and process in general are nothing more than a rubber stamp on the transaction,'," WSJ, 25 March 2008.

"As the U.S. government Tuesday tried to salvage its high-profile criminal-tax prosecution against former executives of KPMG LLP, appeals judges in Manhattan repeatedly called into question prosecutors' position on the case. In a two-hour hearing before the Second Circuit Court of Appeals in Manhattan, a lawyer for the government said prosecutors in Manhattan didn't coerce accounting firm KPMG to refuse to pay legal costs fot 13 former executives charged with selling and marketing illegal tax shelters. ...Karl Metzner, the prosecutor who argued the appeal for the government ... added that, in general, 'The government has no legitimate interest in impairing the quality or quantity of a defense.' At the hearing, Judge Jacobs said he couldn't 'reconcile those two positions'," WSJ, 26 March 2008.

The (In)Justice Department stinks from Los Angeles to New York. It's a coast-to-coast source of injustice. $50 million? I've seen that amount before. Yes, it's what a Houston US Attorney wants from BP! Wait, doesn't BP make $22 billion a year? What do the Feds allege was Millberg Weiss (MW) comparable amount? Why might the Feds indict MW? Why not Mayer Brown, see my 22 and 27 December 2007 posts. Don't tell me no AUSA wants to work for MW and say, at least a dozen seek positions at Mayer Brown. No, no, no! Don't think such a thing. For shame, not to believe all federal employees only look out for the public's welfare.

During the "infamous" 1994-95 OJ trial, Barry Scheck cross examined Lakshmanan Sathyavagiswaran (LS), Los Angeles County Coroner, who said at various times, one, two then one knife was used to kill Nicole Simpson and Ron Goldman. Scheck asked LS what new facts came to his attention to make him change his mind back to his original position. At that point LS turned to Marcia Clark in stupified silence! Beautiful cross examination. Perry Mason, 1957-66, or my father, now deceased, also an attorney, couldn't have done it better. This was right out of Francis Wellman's The Art of Cross Examination, 1903. A classic. Buy a copy, it's available in paperback. Read, enjoy, think. Scheck ended his cross examination without having his question answered. Why raise this now? Mike Garcia (MG), assuming you are merely incompetent, why not indict Lazard and the Lazard bankers for securities fraud? Let them explain what new facts came to their attention during the eight days in question. I think they have the burden of production, similar to that in a tax evasion prosecution using the "net worth reconstruction" method. Hey MG, here's the reference: Holland v US, 348 US 121 (1954). Now MG, the maxim of jurisprudence is: if the reason is the same, the rule is the same. Got it Mike? Get going! Do something for the public for a change. Tell us how it feels. PS Mike: US means it's a Supreme Court case. It's authoritative.

It's all right Judge Jacobs. What can you expect from MG's office? Doublethink! The Bush administration's (In)Justice Department lives in Orwell's 1984!

Real Estate Charade

"Federal officials say a wave of opportunistic scams are targeting homeowners trying to avoid foreclosure in the current housing downturn. Monday, prosecutors in California unsealed twin cases against 19 people who according to agents from the [FBI] and [IRS], skimmed nearly $13 million in equity from 115 homeowners coast to coast under the guise of a mortgage rescue. ... The indictments come as officials debate how to soften the blow of the housing and credit-markets turmoil on the U.S. economy. ... The Mortgage Bankers Association said a record 2% of the nation's 46 million mortgage loans were in the foreclosure process at the end of the fourth quarter. The number of defaults on first mortgages is forecast to rise to 1.9 million this year from 1.4 million in 2007, according to a report by using FDIC and other data. ... When the homeowners sought help, sales agents would steer them into a plan that called for owners to put an 'investor' on the home's title. In exchange, the homeowner would pay rent to the investor, typically a sum smaller than the original mortgage payment", WSJ, 25 March 2008.

"Foreclosures are occurring at the highest rate in decades--and as a result, lenders are acquiring homes faster than they can sell them off. Last year, sales of foreclosed homes rose just 4.4%, while the supply more than doubles, according to First American CoreLogic", WSJ, 25 March 2008.

This looks like a real scam and in total exceeds my Blankfein test. However, it appears the Feds are trying to make the banks into innocent victims of scams instead of beneficiaries of them. The Fed's recent bailout of Wall Street, not Bear Stearns, required it put out $29 billion to protect JPMorgan. The taxpayers losses on this transaction alone should greatly excced all the banks may have lost due to fraud.

Until the banks reduce their selling prices for foreclosed homes, they will have to hold them.

Sunday, March 30, 2008

Inflation Express

"Last Sunday, during a frantic weekend in which the housing crisis pushed a venerable Wall Street firm toward bankruptcy, Treasury Secretary Henry Paulson decided it was time to twist arms at mortgage giants Fannie Mae and Freddie Mac. ... 'We've got an opportunity to ... do a good thing for the markets,' Mr. Paulson told the housing executives, according to a person on the call. ... The Fannie/Freddie move was one of a series from the Treasury, the [Fed] and other U.S. authorities to stabilize markets and reassure homeowners, as many as two million of whom are expected to enter foreclosure this year. ... The government's actions this past week marked a noted uptick in federal activism. The also solidified Mr. Paulson's position within the administration as the crisis's point man. ... Treasury officials also privately encouraged the Federal Housing Finance Board to allow the nation's 12 Federal Home Loan Banks to buy as much as $160 billion in mortgage-backed securities, creating even more liquidity for markets", WSJ, 22 March 2008.

"While everybody else is running headlong from the burning building of debt, Uncle Sam looks like he is rushing in the other direction. As the credit crisis deepened, there's every reason to expect old-fashioned Keynesianism to become de rigeur, with the government blowing out the budget to make the downturn less painful. ... The government is also building massive backstops for the financial system and the housing market, agreeing to hold or guarantee trillions of dollars in mortgage and other private loans through the [Fed], and, less directly, through federal home loan banks, Fannie Mae and Freddie Mac. The next steps could be more stimulus, direct bank bailouts and government purchases of mortgage securities, easily dwarfing the $125 billion or so the government spent to fix the savings and loan debacle. ... Meanwhile, presidential candidates of both parties are making promises that will cost trillions of dollars more if they keep them, either in expanded health-care coverage or in making the 2001 and 2003 tax cuts permanent", WSJ, 24 March 2008.

"The agency that regulates the Federal Home Loan Banks has given them more scope to acquire mortgage-backed securities, marking the latest attempt by the U.S. government to restore confidence in the country's housing market. Under rules announced Monday, by regulators at the Federal Housing Finance Board, the 12 regional banks will be able to increase their holdings of mortgage securities issued by Fannie Mae and Freddie Mac by more than $100 billion. ... Officials at the U.S. Treasury ecouraged the finance board to allow the home-loan banks to increase their holdings of mortgage securities, according to people familiar with the discussions. ... 'The whole [mortgage] system was at risk of grinding to a halt,' said Allan Mendelowitz, one of five directors of the finance board. 'If there ever was a time for us to act, this is it.' ... The home-loan banks previously could have holdings of mortgage securities of no more than three times their capital. Effective immediately, the regulator is raising that to six times capital for the next two years. At the end of 2007, the banks had combined capital of about $54 billion, and they held $136 billion of mortgage-backed securities as of Sept. 30., the latest data available", WSJ, 25 March 2008.

Are the WSJ's writers this gullible? Hank Paulson (HP), "formerly" of Goldman Sachs is at it again. His interest is to protect Wall Street houses from failure no matter what cost to the public. If HP must talk of "protecting the markets" or the "economy", whatever that means, so be it. $200 billion, $160 billion, TAF, whatever. The details don't matter. As Will Rogers once said, "invest in inflation. It's the only thing that's going up". Hop on the inflation train. Get gold.

"Less painful" for whom?

The budget will never be balanced except through inflation. Sell bonds. Now!

Mortgage-backed securities are like dust. Even swept under the carpet, it eventually piles up. Somewhere. The Feds are desperate to hide the losses on this paper somewhere where the taxpayers will bear them and not realize what happened for years.

Yves Smith on Paulson

Yves Smith has an excellent post you should read on Hank Paulson's proposed "reform" plan at, 29 March 2008. I couldn't have said it better. Paulson's plan reminds me of something Amsel Rothschild said in 1838, "Let me issue and control a Nation's money and I care not who makes its laws". Paulson's proposal is: arbitary monetary control, free of any law. For whose benefit?

Saturday, March 29, 2008

Army Officer Retention

"An expensive Army effort to retain young officers with big cash bonuses has fallen short of its target, underscoring the military's continuing struggle to recruit and keep troops. ... Senior Army officials acknowledge that the retention program missed its goal but credit the incentives with helping to avert a much larger manpower crisis. The Army is hoping to add tens of thousands of soldiers by 2010, including thousands of new captains. ... To make its numbers, the Army has had to repeatedly lower its eligibility standards, allowing in a larger number of recruits who lack high-school diplomas, are out-of-shape or have criminal records", WSJ, 26 January 2008.

"The military is weighing changes to its deployment policies to retain young Army officers amid concerns that repeated deployments in Iraq and Afghanistan are driving them from service. ... The number of West Point graduates leaving the military as soon as their initial tours are up is at a 25-year high. ... In Congressional testimony late last month, the Army's chief of staff, Gen. George Casey, warned that the Army was under significant strain and needed to reduce the length of its overseas combat tours from 15 months to 12 months as quickly as possible. 'It's impacting on their families, it's impacting on their mental health. We just can't keep going at the rate that we're going,' he told lawmakers", WSJ, 26 March 2008.

George Casey is to be commended for his candor which I find very unusual for our current crop of generals.

Middle East and Asian Prices

"Even as it enriches Arab rulers, the recent oil-price boom is helping to fuel an extraordinary rise in the cost of food and other basic goods that is squeezing this region's middle class and setting off strikes, demonstrations and occasional riots from Morocco to the Persian Gulf. Here in Jordan, the cost of maintaining subsidies amid the surge in prices forced the government to remove almost all the subsidies this month, sending the prices of some fuels up 76% overnight. In a devastating domino effect, the cost of basic foods like eggs, potatoes and cucumbers doubled or more. In Saudi Arabia, where inflation had been virtually zero for a decade, it recently reached a level of 6.5 percent, though unofficial estimates put it much higher", Houston Chronicle, 25 February 2008.

"The administration of Lee Myung-bak, South Korea's new president, tamped down a potential conflict with the Bank of Korea by declaring that the country's top economic priority is fighting inflation. In a joint interview with four newspapers over the weekend, Mr. Lee said restraining inflation is the 'most urgent policy'," WSJ, 25 March 2008.

The Fed exports inflation all over the world. No official statistic anywhere is above suspicion. Sooner or later, the victims of Fed-sponsored inflation will pull the plug on the dollar.

Friday, March 28, 2008

Is Chaos Coming?

"There is a serious threat of a complete breakdown of the social order. In recent months, there have been food riots in 7 countries. ... The last news from Zimbabwe (March, 2007), was that wage and price controls were being imposed, and goon squads of young toughs were going around with the police and threatening violence against shopkeepers who raised their prices. ... What scares me is not what is going on in Zimbabwe, or even Mexico. What is scary is what is going on in America. Starting Sept., 18, 2007 and continuing to the present there has been a deliberate campaign to increase the rate at which prices are rising. ... Starting Sept. 18, 2007, the Fed has been sharply cutting the interest rate, indicating that it is ready to start printing money at a much faster pace. ... Houses have become unaffordable for the average American. But houses were deliberately taken out of the official figures so as not to alarm you. ... In the past 12 months, the price of wheat has gone from $4.25/bushel to $11.50/bu. ... And at this crucial time, the [Fed] is deciding to spit in your face by printing money at an even faster rate. But quite frankly, they are safe because there is not one single major newspaper or magazine (or other media source) which will tell the Oprah-watching masses that their government is engaged in the operation of counterfeiting. ... But there is one thought that will never cross these people's minds, that their government, which robbed them of food, is the source of the problem. ... The government promised them something for nothing, and they want to believe. ... The very first thing the New Deal did on the very first day it was in office was to give the power to create money to the banks. The poor don't donate to political action committees. And the poor don't even vote for the politicians who are their true friends because they are misled by advertising paid for by the money of the rich. ... The key question is, will there be price and wage controls. ... In the '70s, Nixon imposed price and wage controls even as he was explaining that he did not believe in them. ... But the Repubclicans do not want to repudiate price and wage controls. They intend to buy votes by printing money", Howard Katz (HK) at, 18 February 2008.

HK's concern is well taken. Nixon said, "We are all Keynesians now". Nixon closed the "gold window". We have no idea what our next administration might do.

Stripper Well Economics

"The oil rig rumbles to life, breaking the early-morning quiet in this neighborhood of urban townhouses and big box stores with a deafening screech and roar. As sleepy commuters idle at a nearby stop light, a grease-caked crew scrambles to repair and expand one of the dozens of aging oil wells thart dot the landscape of this small, hillside city about 30 miles south of Los Angeles [Signal Hill]. With oil prices of $100 a barrel, producers nationwide are suddenly taking a second look at decades-old wells that were considered tapped out and unprofitable when oil sold for one-fifth the price or less. ... 'A lot of these wells have been sitting idle for many years,' said Mick Conner, who hopes to increase daily production on his half-dozen wells", Houston Chronicle, 23 March 2008.

Economics works. Even in the case of oil. As the price rises, extramarginal wells become intramarginal and produce again.

Thursday, March 27, 2008

A Holmesian Juror

"I'm the wrinkle, and I was ejected from a deliberating federal jury on March 13. ... I was thrown out because I refused to take a second oath of jury service that would have required that I suspend my common sense, and even suspend my belief in an objective reality. This second oath would literally have bound me to find the defendant guilty if the judge had instructed me that 'the law says all Italians are guilty.' ... All jurors in federal courts, ... take 'an oath to decide the case "upon the law and the evidence." The handbook then describes: 'The law is what the judge declares the law to be.' I found out later that--even if judges don't take the Constitution literally--they take this last part literally. The actual oath I took as a juror was to decide the case 'according to the facts and the law as the judge presents.' ... The defendant, Bobby Luisi, was a Boston capo in the Mafia who had sold a total of three kilos of cocaine to an FBI agent in 1999. ... The transactions took place within Boston city limits, and the prosecution made no attempts to produce any evidence that anything had ever crossed a state line. ... Judge [William] Young ... told us explicitly: 'You don't have to check your common sense at the door' of the jury room and said we could make 'rational inferences' and draw 'logical conclusions.' ... The other jurors were good people but weren't familiar with the details of the Constitution and under the sway of the philosophy of: 'The law is what the judge declares the law to be.' ... Here's [the question I posed the judge]: 'If 2/3 of the Congress decided in 1918 that they needed to amend the constitution to ban mere possession of a substance (in that case, ... alcohol), where is the constitutional authorization today for the federal prohibition of mere possession of cocaine today?' The judge didn't take to the question well. He said that I got the history wrong. (I didn't). He said that the juror 'had exceeded his authority' in questioning the constitutionality of a law, and reasserted that federal cocaine possession bans were constitutional. He did not cite any constitutional provision in his reply to the question. In effect, he said it's constitutional 'because I say so.' ... Soon we were back in the courtroom--again--and for the first and only time in the case the judge was livid. He said that in 30 years of service on the court he had never heard of such a case or question being on the jury. He said he'd confer with his peers (other judges) on the options, but did say that the jury was properly constituted and the juror, The Wrinkle, was a properly constituted juror. ... Judge Young said something along the likes of 'When you set aside the law and the Constitution for your own preferences, you undercut our whole system of government.' Ummm ... yeah I thought. You would be, if you set aside the Constitution. But what if you uphold the clear and unequivocal language of the Constitution? The judge continued his rant declaring that by reading the U.S. Constitution, 'You are exercising judgement that is beyond your competency.' ... He also said they by judging the law--as he related it to me. ... 'You are taking authority that was not given to you.' ... My view is that the law, as presented by the judge, included the U.S. Constitution. ... It would be illogical to conclude a judge's other instructions supercede the clear and unequivocal language of the U.S. Constitution. ... We don't need to interpret simple declarative English sentences of the Constitution. We can simply read them. ... I explained, 'If Congress felt they didn't have the power to ban a drug--alcohol--in 1918 without amending the Constitution, how is it that the Congress has the power to do exactly the same thing now without a constitutional amendment?' ... The judge was more interested in past court precedents than the actual language of the Constitution. ... Now I know what to say to the next judge who tries to put me on a jury: 'I'm not a qualified juror because I have memorized the U.S. Constitution, read English and believe in an objective reality", Thomas Eddiem (TE) at, 17 March 2008.

Right on TE! I used to be amazed at the arrogance of judges and lawyers who think they have some special competence to read simple words and act as if they are dealing with quantum mechanics, a subject accessible to few. Who are they kidding? I have read plenty of absurd legal decisions. As Finley Peter Dunne, writing as Mr. Dooley in 1896 said, "Even the Supreme Court follows the election returns". What is the consitutional warrant for the Harrison Act?

Oliver Wendell Holmes once wrote, "A jury can bring in a verdict in the eyes and the teeth of the law". That's one of the reasons we have juries, they should be beyond the control of the government. Does anyone remember 1735's John Peter Zenger case? What did the founding fathers learn from it?

Condo Flood

"The condominum market is about to get worse as many new cities brace for a flood of new supply this year--the result of construction that started at the height of the housing boom. ... The new building comes on top of unprecedented supply. The U.S. finished 2007 with a supply of condos large enough to absord 10 months of demand, the highest level since the National Association of Realtors began the tally in 1999. ... Lenders of all sizes have $42 billion of condominium debt on their books, according to Foresight Analytics. ... Vulture buyers have started to circle, hoping to take advantage of foreclosed properties that banks may start dumping at fire-sale prices. Also, some condos are being converted to rental units, increasing suply for renters and putting downward pressure on prices. ... Some deposits were as little as 3% of the purchase price. The price of a condo has frequently fallen more than the amount of the deposit, giving the buyer an incentive to forfeit the deposit", WSJ, 22 March 2008.

What's the big surprise? 3% down is a "call option", not a deposit. The asset falls in price, the option is permitted to expire.

Wednesday, March 26, 2008

Roasting Cox's SEC

Tom Selling (TS) roasts the SEC for its recent handling of the Bear Stearns matter. More than justifiably in my opinion. I think TS went easy on Cox & Co. His post, 19 March 2008, is more than worth reading. Guys like Cox have no shame.

Who Cares What Helicopter Ben Says?

"When the history of the Panic of '08 is written, there will be BBS (before Bear Stearns [BS]) and ABS (after [BS]). ... No matter the merits or intellectual distinctions, it is nearly impossible for a politician to explain the following: Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson were willing to risk as much as $30 billion of taxpayer money--without congressional approval--so that J.P. Morgan Chase could buy [BS] cheap at an auction in which it was the sole bidder. But a taxpayer-backed rescue of homeowners whose mortgages are worth more than their homes is unwise and unwarranted. ..Well, it's getting harder to see the line that disntinguishes banks and other financial entities. ... So the government insures deposits, and the Fed stands ready to lend banks money through its discount window; in return for those perks, the government insists on supervising and regulating banks. Securities firms, such as [BS], are supposed to be different. ... So comes the inevitable conclusion: Securities firms should be regulated more like banks", my emphasis, David Wessel (DW) at the WSJ, 20 March 2008.

"Wall Street firms are stepping up to use the [Fed's] new direct-lending program, submitting their hard-to-trade securities for funds from the central bank. ... The Fed announced the program Sunday night, extending its lending beyond banks, which are under its direct supervision. ... The Fed didn't disclose the size of individual loans or the borrowers identities", WSJ, 21 March 2008.
DW, I don't come up with your inevitable conclusion at all. I think the Fed should renounce its "too big to fail" doctrine and let banks fail. See my 12 December 2007 post.

Steve Waldman at has made much of the details of the Fed's various bad paper purchases. I ignore the details, the only thing that matters is: the Fed will bail out the banks by buying whatever it has to and will worry about the details and the legalities later. If at all. "What me worry", says Helicopter Ben, our Alfred E. Neuman of central bankers. Why should he? Hank Paulson's got his back as "The Bloodless Coup Continues", which I last wrote of on 4 December 2007.

"Hard-to-trade" securities? At what price? It's a bird. It's a plane. No it's super psuedo regulator, Mark Olson (MO) of the PCAOB. I understand that the Fed has not disclosed the entities which are using it's facilities. Well MO, do you think that's important? Do you and Chris Cox think that using those facilities is at least as important as any other 8-K disclosable event? What do you think anyway? What does Walter Riccardi think? Mike Garcia, do you think an entity which fails to disclose its use of the Fed's new facility should be indicted for securities fraud? No, you're too busy with Eliot Spitzer.

Tuesday, March 25, 2008

The SEC's Limits

"As Bear Stearns Cos. unraveled over the past several days, its primary regulator, the [SEC], had few tools at its disposal to stem the crisis, a reality that could reignite the debate over how U.S. financial markets should be regulated. ... But, unlike the [Fed], the SEC and other regulators don't have a checkbook to help inject money into an investment bank or market when it hits trouble. ... Last Tuesday, ... SEC Chairman Christopher Cox said ... 'We have a good deal of comfort' about capital adequacy of bank holding companies based on 'constant,' sometimes daily reviews", WSJ, 18 March 2008.

Can Bear's stockholders sue Cox for misleading them? If not, who needs him? Cox, unlike the Fed, can't print money. Perhaps he should ask Congress for the authorization.

Federal Garbage Dumps?

"Federal regulators, in an effort to contain financial turmoil, are handing government-sponsored companies an even bigger role in propping up the mortgage market. Officials affirmed yesterday that government-sponsored mortgage investors Fannie Mae and Freddie Mac will enjoy loosened capital requirements, allowing them to pile more mortgage securities onto their balance sheets. Fannie and Freddie could purchase an additional $200 billion of mortgage securities, equivalent to about 10% of expected U.S. home-mortgage lending this year. The two also plan to raise new capital. ... Investors welcomed the shrinking gap and news of a greater role for Fannie and Freddie. Fannie's shares rose 8.8% yesterday to $30.71, while Freddie shares were up nearly 15% to $29.90. ... The [Fed] last week sought to stabilize the mortgage market by saying it would lend as much as $200 billion in Treasury securities to bond dealers in return for mortgage-backed securities", WSJ, 20 March 2008.

Fannie and Freddie are now garbage dumps for mortgage related securities. Their stock values should plummet over the long term.

Monday, March 24, 2008

On Eliot Spitzer and John Ashcroft

"Michael Bachner, a former prosecutor in the Manhattan [DA's] office said: 'The Mann Act [MA] was designed more towards those who get someone to travel against their will. ... If Spitzer gets indicted, it would seem to me he would be indicted based on who he is rather than what he's done'," WSJ, 11 March 2008.

"When [NY] Governor Eliot Spitzer was implicated Monday as a customer of a multistate prostitution ring, journalists rushed to brush up their knowledge of a 1910 federal law known as the [MA]. The law, once known as the 'white slavery' law, forbids the transportation of women across state lines for 'immoral purposes,' including prostitution. ... Meanwhile the [MA] has been used repeatedly throughout the years in prostitution cases, although normally it was the purveyors of prostitutes, and not their procurers who were charged under it. Perhaps the most famous use of the [MA] was the 1959 case against Chuck Berry, who served three years for transporting a 14-year-old Indian girl across state lines", Editorial at the WSJ, 12 March 2008.

"The investigation into the prostitution ring that Mr. Spitzer is alleged to have patronized is being carried out by a team of public corruption prosecutors in [the SDNY], a unit that U.S. Attorney Michael Garcia has beefed up since his arrival in 2005", WSJ, 12 March 2008.

"Former Attorney General John Ashcroft on Tuesday denied receiving 'a backroom sweetheart deal' after getting a multimilllion-dollar contract aided by the Justice Department. 'There is not a conflict of interest; there is not an appearance of a conflict of interest,' Ashcroft insisted as a hearing on Capitol Hill. ... Rep. Chris Cannon, R-Utah, said the attack on the former attorney general was 'appalling.' He called Ashcroft 'a man with a distinguished history and unquestioned ethics.' ... David Nahmais, a U.S. attorney in Georgia, testified that deferred prosecution was a 'middle ground' that allows corporate wrongdoers to pay fines and penalties but preserves 'financial viability'," Houston Chronicle, 12 March 2008.

"The federal criminal investigation that has led to Eliot Spitzer's resignation as governor of [NY] illustrates the great dangers all Americans face from vague and open-ended sex and money-transaction statutes. Federal law, if read broadly, criminalizes virtually all sexual encounters for which something of value has been given. ... But the very existence of these selectively enforced statutes poses grave dangers of abuse. ... There is no hard evidence that Eliot Spitzer was targeted for investigation, but the story of how he was caught does not entirely ring true to more experienced former prosecutors and current criminal lawyers. The [NYT] reported that the revelations began with a routine tax inquiry by revenue agents. ... We are talking about thousands, not millions of dollars. ... The idea that federal investigators would focus on a few transactions to corporations--that were not themselves under investigation--raises as many questions as answers. ... Money laundering, structuring and related financial crimes are designed to ferret out organized crime, drug dealers, terrorism, and large-scale financial manipulation. They were not enacted to give the federal government the power to inquire into the sexual or financial activities of men who move money in order to hide payments to prostitutes. ... In this case, they intercepted 5,000 phone conversations, intercepted 6,000 emails, used surveillance and undercover tactics that are more appropriate for trapping terrorists than entrapping johns. ... As the [WSJ] has reported: 'It isn't clear why the FBI sought the wiretap warrant. Federal prostitution probes are exceedingly rare, lawyers say, except in cases involving organized crime leaders or child abuse. Federal wiretaps are seldom used to make these cases'," my emphasis, Alan Dershowitz (AD) at the WSJ, 13 March 2008.

"Michael Garcia, Republican hatchet man and U.S. attorney for the [SDNY], is at it again. This time Garcia is after a Democratic governor. ... I, for one, pray Garcia's political career is as short-lived as former U.S. Attorney General Alberto Gonzalez", (PS) Patrick Sweeney letter to the Houston Chronicle, 13 March 2008.

"Something has been overlooked in the Gov. Eliot Spitzer hubbub: A few weeks ago, Spitzer wrote an op-ed piece for the [NYT] that was reprinted in the Houston Chronicle (Please see 'Predatory Lenders had a partner in crime at OCC/Federal agency, made it all worse for unwary borrowers.' Outlook, Feb. 15). ... Now a few weeks later, by quirk of fate, Spitzer is exposed for his sexual shortfalls. And by luck alone, the high powers of the federal government were being used to investigate a prostitution ring! In this era of scant resources and a mountain of mortgage fraud, perpetrated by bankers, the feds have time to investigate some New York sleazebags for what is generally considers a misdemeanor. What an amazing coincidence, indeed!," Gene Hayes (GH) letter to the Houston Chronicle, 13 March 2008.

"For those who have been on Mars the past few days, Governor Spitzer was caught in an FBI wiretap probe. ... The sting that caught him involved a banking institution alerting federal authorities ... to 'suspicious' financial transactions between Spitzer and the call girl service. ... That said, there is a nagging question in the back of my mind. Why did the hammer fall on Governor Spitzer now? ... So, why was Governor Spitzer 'caught?'. ... I do not have the answer to that question, but mark it down, somebody in Washington, D.C. has the answer. There is an old saying inside the Beltway, 'When it comes to politics, there are no accidents or coincidences. How is it that in this elaborate FBI 'sting,' only Governor Eliot Spitzer was 'caught'? ... All this talk about a war on terrorism is a bunch of hooey. What is really happening is a war on freedom", Chuck Baldwin (CB) at, 14 March 2008.

"Spitzer's lynching and the bankers' enriching are intimately tied. ... Spitzer not only took on Countrywide, he took on their predatory enablers in the investment banking community. ... Do I believe the banks called Justice and said, 'Take him down today!' Naw, that's not how the system works. .... Headlines in the financial press--one was 'Wall Street Declares War on Spitzer'--made it clear to Bush's enforcers at Justice who their number one target should be. And it wasn't Bin Laden. ... Back in the day when I was an investigator of racketeers for the government, the federal prosecutor I was assisting was deciding whether to launch a case based on his negotiations for airtime with 60 Minutes. I'm not allowed to tell you the prosecutor's name, but I want to mention he was recently seen shouting, 'Florida is Rudi country! Florida is Rudi country!' ... Naming and shaming and ruining Spitzer--rarely done in these cases--was made at the 'discretion' of Bush's Justice Department. Or maybe we should say, 'indiscretion'," Greg Palast (GP) at, 14 March 2008.

"In another one of those nice coincidences that seem to happen whenever Wall Street is down and out, the unpopular governor of [NY] was found consorting with prostitutes through a Federal investigation that has all the hallmarks of a 'hit job' ordered from the very top. Spitzer was deeply unpopular in the corridors of power, and especially with the current Treasury Secretary Hank Paulson, for daring to take various Wall Street firms down a few notches earlier this decade. ... It is almost too convenient that the disclosures of his extracurricular activities came this week. ... The sorry story of the governor and his extramarital affair though helped to achieve something more important, namely to hide a brewing problem in the securities industry. ... As with the Sherlock Holmes dictum of 'who benefits from the crime', it is clear that this week's moves were intended to help beleaguered brokers", Chan Akya at, 15 March 2008.

"The press has almost solely focused on the salacious aspects of the affair, not least the hefty fee Spitzer apparently paid. Why the scandal breaks now is the more interesting question. ... Spitzer had become increasingly public in blaming the Bush administration for the nation's current financial and economic disaster. ... On February 14, Spitzer published a signed article in the influential Washington Post. ... With that article, Spitzer may well have signed his own political death warrant", William Engdahl at, 19 March 2008.

The Spitzer case looks like another "triumph" for America's worst prosecutor, since Mike Nifong of "Duke Three" fame went to his appropriate professional reward. I nominate Mike Garcia (MG), SDNY US Attorney for my first annual Nifong. I haven't designed the Nifong yet, but it won't look like an Oscar. Why did MG beef up his public corruption unit? How is Spitzer's paying $80,000 evidence of public corruption? I figure MG's almost unprecendented example of prosecutorial overkill merits MG more than a $3.5 million a year large NY law firm partnership. Say, an eight figure slot at: KKR, Blackstone, or dare I think it, Goldman Sachs. Or wherever he will be offered the best deal.

Really Mr. Nahmais? Or does it give AUSAs opportunities to do very well when leaving the DOJ? Further, it gives current AUSAs a basis to avoid trying cases to conceal whatever they wish to conceal. "Deferred prosecution" agreements avoid trials which might expose information useful to the plaintiffs' bar. Should drug distribution gangs "financial viability" be preserved? If not, why not? It seems to have deterrent capability, you don't want to preserve a corporation's financial viability. Or is Nahmais lining up a job with Exxon's or BP's attorneys as soon as 21 January 2009 rolls around?

AD misses this: the lack of "hard evidence" is a defense usually raised in criminal conspiracy cases. It is no element of a prosecution's case in chief. Why do I raise this? Because criminal convictions can be built on circumstantial evidence. AD could look forever for the proverbial "smoking gun" email or memo within the (In)Justice Department that would "prove" Spitzer "was targeted for investigation". How many millions did the FBI and MG spend to "make" this case and why? Some people made the "connections" quickly. The first was at on 10 March. I remember thinking it absurd for the Feds to spend $9 million to prosecute Martha Stewart (MS) over $53,000 of avoided losses. That isn't even 1% of my Blankfein test amount. Remember, MS was a big time criminal, she was a Democrat!

PS, insha Allah.

GH, you built a circumstantial evidence case against MG. Go guy! As I wrote Bill Pickering on 11 March 2008, I've seen criminal convictions sustained on three pieces of circumstantal evidence. I think GH has this knocked. The Bush administration is unsubtly telling anyone opposed to its Wall Street bailout, "We're coming for you". Andrey Vishinsky, Stalin's chief procurator would have been proud to have made MG's Spitzer case. I cited Spitzer's piece on 20 February 2008. The NYT article about the prostitution ring appeared on 7 March, 21 days after Spitzer's piece. Coincidence, I doubt it. As attorneys who pursue wrongful termination cases know, proximity in time between the "protected act" and the "adverse employment decison" is a fact a jury may consider in its deliberations. But there is no "hard evidence" say the corporate defendants when appealing a lost employment case. So?

Some history. The MA is currently codified at 18 USC 2421. It reads, "Whoever knowingly transports any individual in interstate or foreign commerce, ... with intent that such individual engage in prostitution, or in any sexual activity for which any person can be charged with a criminal offense, or attempts to do so, shall be fined under this title or imprisoned not more than 10 years, or both". The MA was made "gender neutral" years ago. WSJ, wake up. What does the MA mean Nifong, excuse me, Garcia? That a 17-year old New York boy, taking his 15-year old girl friend to New Jersey to "do it", can be charged under the MA for doing the "Act". Another MA application: a pornographer drives an actor and actress from Los Angeles to Las Vegas to shoot a film. It appears he could be charged under the MA. I believe the 1910 legislative intent that such "crimes" not be punished under the (appropriately named, I love it) Mann Act as it was then called the "white slave trafficking act". A $4,300 an hour hooker is a "white slave"? Puhleeze. That's about four times the highest rate any NY law firm charges for partner time. Suppose a Debevoise and Plimpton attorney, our old friend Mary Joe White's firm, takes the Washington Bridge to New Jersey with a honey in tow, he could be charged under the MA too. Who knows, if we construe the MA broadly (ugh) enough, MG could be charged under it too if he crossed state lines with the requisite intent. Suppose he takes a "friend" to Mississippi, which has a fornication law. MG and his "friend" could both be charged under the MA. Crazy. The Spitzer case is one of the worst cases of selective prosecution I've seen in years. MG, I salute you. As opposed to spending time with what must be multi-billion dollar Wall Street frauds, you insult the American public with this? You should be ashamed of yourself. Bachner's understanding of the MA is the same as mine.

We should not ignore the "wag the dog" aspects of Spitzer's undoing as Helicopter Ben just bought $200 billion of toxic waste from Wall Street this week as Akya notes.

I remember once seeing Telly Savalas (TS) as Kojak investigating a murder. One witness was a streetwalker. She was unwilling to testify. So what does TS say? This is a paraphrase, "I'm a real cop. A homicide dick. Not one of those vice idiots. If any of those vice idiots gives you any trouble just tell me and I'll take care of them. Now talk". And she did. Has the NY FBI anything important to do?

CB's question is unusual as he is a Baptist pastor from Pensacola, Florida who opposes adultery and fornication among other things. He's asking why?

What more need be said, MG? Who do you think you're fooling? This nonsense will end when the various state police agencies make it a regular practice to investigate US attorneys. After a few of them are sent to state prisons, the remainder will concern themselves with real crimes as opposed to supporting Bush administration policies.

Made As Instructed

"Consumer prices in February were unchanged, easing concerns a bit about inflation and paving the way for a substantial interest-rate reduction by the [Fed] next week. 'The pretty result ... will turn ugly' in March as a result of record-setting gas prices and a resurgence in food prices, said Global Insight economist Kenneth Beauchemin in a research note. Still, he said, 'the Fed has been handed a neatly wrapped gift' ahead of its policy meeting Tuesday. ... By indicting inflation isn't surging at the moment, the CPI data make it easier for the Fed to focus on cutting rates to spur economic growth and reduce financial-market risks", my emphasis, WSJ, 15 March 2008.

Beauchamin misses the point in writing, "the Fed has been handed a neatly wrapped gift". The old joke about real estate appraisers is that they are MAI. Members of the Appraisal Institute? No, their work is made as instructed. How convenient for the Fed, to get a CPI statistic that gives it cover to reduce interest rates. This reminds me of somthing my favorite jurist, Oliver Wendell Holmes wrote. He wrote something to the effect that a judge decides which side he wants to win then starts searching the law and the facts to support his decision. That the notion of the disintersted jurist inpartially applying the law is nonsense. Similarly, Helicopter Ben needs a rationale to reduce interest rates, voila, the CPI shows up as unchanged.

Sunday, March 23, 2008

The Dollar Run

"In recent years, officials in the oil-rich Persian Gulf appeared to have accepted inflation as a side effect of a booming economy. These days, it is turning into the region's biggest economic challenge. ... Last year, Dubai construction workers rioted to protest their diminishing buying power. For many expatriate laborers in the Gulf, the falling dollar is especially painful. ... But the big question for a region that imports most of its labor is: When does the Gulf's inflation rate become too costly for foreigners to stomach?", WSJ, 11 March 2008.

"Lawrence Goodman, a currency strategist at the Bank of America, says that inflation is increasingly outside the comfort zone of central banks in emerging markets. ... China's central bank governor recently noted that a stronger currency 'helps to rein in inflation'--which hit a 12-year high of 7.1% there in January. ... In late February, Hungary abolished a regime linking its currency, the forint, to the euro, to give its central bank more flexibility to tackle a growing inflation problem. ... The inflation dilemma is at its most stark in countries that peg their currencies directly to the U.S. dollar", WSJ, 11 March 2008.

"'When will the Gulf Cooperation Council pull the trigger?' analysts at BNP Paribas in London wrote in a note to clients yesterday. 'The sharp drop of the dollar, in combination with the Fed probably cutting interest rates, will increase pressure on the GCC to cancel its dollar peg,' ... Recent reports put inflation at around 14% in Qatar, 7% in Saudi Arabia and 11% in the U.A.E.", WSJ, 19 March 2008.

"Vietnam is trying to unshackle its fast-growing economy from the sliding U.S. dollar, a tactic that might stem rampant inflation but is rattling exporters and Vietnamese who have been using greenbacks as a daily currency for years. ... After considering the move for several weeks, the central bank on March 10 widened the band in which it allows the Vietnamese dong to rise or fall against the dollar in one day to 1% from 0.75% previously. ... Freeing the dong will let it strengthen against the dollar 'and will help tame the higher cost of oil and other imports,' says Vo Tri Thanh, head of the Institute of Economic Planning, a state-run advisory group. ... Tellers at branches of Military Bank, among others, have begun turning away visitors trying to exchange dollars for dong. They say banks worry the dollar's value will fall further. ... Inflation hit a 13-year high of 15.7% in February, prompting a series of stiff measures designed to suck money out of the local banking system", WSJ, 19 March 2008.

Eventually the GCC countries will pull the plug on the dollar.

Does Thanh want a job as US Treasury Secretary? I note Helicopter Ben's (HB) unconcern about the fate of Vietnamese peasants, while protecting Wall Street millonaires. Does Connie Baby think HB's actions have foreign policy implications? Does Connie Baby think at all? As the dollar run continues, HB may become interested. Look at these countries reported inflation rates. What is our's supposedly? 4%? Vietnam appears to be more capitalistic than the US! We won the Vietnam War!

Lesson for the Fed

"Why doesn't the value of the quarters drop relative to the $10 bill? The answer is that as fewer coins are being used, they get returned to the central bank, which perhaps sells them as scrap metal, issuing $10 dollar bills instead. The same process can work for any two currencies of two different countries. ... The issue isn't that 'we will never have a perfect model of risk', as Mr. Greenspan appears to think. What we need is accountability, not perfection". Reuven Brenner (RB) at the WSJ, 18 March 2008.

Right on RB. I go further. Your quarter principle applies to almost all saleable assets. Even mortgages and mortgage-backed securities. It's called arbitrage. See my 8 November 2007 post.

Saturday, March 22, 2008

Fed, Dollar and Japan

"In the credit market panic that began in August, we have now reached the point of maximum danger: A global run on the dollar that could become a rout. As the [Fed's] Open Market Committee prepares to meet tomorrow, this should be its major concern. Yet the conventional wisdom--on Wall Street and in Washington--continues to be precisely the opposite. In this view, the Fed is 'behind the curve' and needs to cut interest rates even faster and further than it has. ... The Fed's main achievement so far has been to stir a global lack of confidence in the greenback. ... The flight from the dollar has made U.S.-based investments less attractive at a time when the U.S. financial system urgently needs to raise capital. ... In the name of avoiding a recession, reckless monetary policy has made one more likely. ... Dollar weakness explains much of the oil price surge. ... [China's] import prices have surged nearly 14% in the last year, but that is mainly recycling the inflation that the [Fed] has inspired. ... The stock market may rally, until it once again decides that easier money can't remedy what is fundamentally a problem of bank solvency. That problem can only be resolved by financial institutions and regulators coming to grips with the losses, raising more capital to cushion the blow, and closing or selling those banks that can never recover", Editorial at the WSJ, 17 March 2008.

"The Fed's agreement to accept potentially bad assets as collateral, its agressive interest-rate cuts and other liquidity-pumping measures have also helped to pummel the value of the U.S. dollar. The greenback, which last week fell below 100 Japanese yen for the first time since 1995, is off nearly 22% against the yen since last June. ... Given the wide spread betweeen U.S. interest rates and those in Europe and elsewhere, analysts already speculate that the dollar could end up as another carry-trade vehicle", my emphasis, Mark Gongloff (MG) at the WSJ, 18 March 2008.

I agree with the WSJ.

Potentially, MG?

MBIA Strikes Out

"MBIA Inc. has asked Fitch Ratings to withdraw its insurer ratings on six of its units, saying it disagrees with the ratings company's approach. MBIA spokesman Willard Hill said Fitch's models would require it to put too much capital to back its business of guaranteeing now-troubled structured-finance debt, which MBIA intends to separate from its less risky business of insuring municipal bonds. ... While MBIA said it wants Fitch to continue rating outstanding debt obligations from MBIA and MBIA Insurance Corp. Fitch said it will 'evaluate its ability to maintain coverage' on MBIA in the coming days. ... Fitch has been the most aggressive of the three main rating firms in issuing negative assessments of bond insurers", WSJ, 10 March 2008.

Mike Shedlock has a nice 10 March 2008 post on this at I note the SEC might develop a 8-K reporting requirement for circumstances like this similar to the one for changing CPA firms.

Friday, March 21, 2008

Bare Stearns?

"What are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the part year? Or all of the above? ... Agreeing to guarantee a 28-day credit line to Bear Stearns [BS], by way of JPMorgan Chase, the Federal Reserve Bank of [NY] conceeded last Friday that no sizable firm with a book of mortgage securities or loans out to mortgage issuers could be allowed to fail right now. ... But why save [BS]? ... Bear's default rates on so-called Alt-A morgages that it underwrote also indicates that its lending practices were especially lax during the real estate boom. ... And the firm tried to dump toxic mortgage securities it held in its own vaults onto the public last summer in an initial public offering of a financial company called Everquest Financial. ... If [BS] failed, for example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are hiding. ... As of last Nov 30, [BS] had on its books approximately $46 billion of mortgages, mortgage-backed and asset-backed securities. Jettisoning such a portfolio onto a mortgage market that is not operative would, it is plain to see, be a disaster. But, who knows what those mortgages are really worth? According to [BS's] annual report, $29 billion of them were valued using computer models 'derived from' or 'supported by' some kind of observable market data,. the value of the remaining $17 billion is an estimate based on 'internally developed models or methodologies utilizing significant inputs that are generally less readily observable,' In other words, your guess is as good as mine. ... 'For the government to print money at the expense of taxpayers as opposed to requiring or going about a receivership and wind-down of any insolvent institutions should be troubling to taxpayers and regulators alike,' said John Rosner, an analyst at Graham Fisher & Company and an expert on mortgage securities. 'The Fed has now crossed the line in a very clear way on "moral hazard", because they have opened the door to the view that they are required to save almost any institution through non-recourse loans'. ... Here, is the bind the Fed is in: Like the boy who puts his finger in the dike to keep sea water from pouring in, the Fed finds that new leaks keep emerging", my emphasis, Gretchen Morgenstern (GM) at, 16 March 2008.

GM blew this one. BS failed a few days later. At least GM sees the Little Dutch Boy analogy. How does GM know BS's failure would result in a "wholesale dumping" of assets? If BS filed for bankruptcy, what would the judge do? Insist BS trustee auction off the assets at the best price. Given this is the counterfactual, I assume: this is what the Fed wanted to avoid: having market values for these assets that could be applied to other financial institutions. Rosner is right about "moral hazard", but wrong about the Fed's saving financial institutions. BS was not "too big to fail". It was sacrificed to protect the still bigger boys.

Bearing the Dollar

"What makes these proceedings so frightening is that not only is credit in crisis, but so, too, is money. There are well-founded doubts about the promises to pay money and about the nature and integrity of the dollar itself. ... Where will the Fed find these dollars? Where it always, ultimately, does. It will just have to print them, despite abundant evidence for the currency and gold markets that the world has just about all the dollar bills it cares to hold. ... Robert Rubin, chairman of the Citigroup Executive Committee, ... urged the government to exert itself on behalf of the mortgage market and the American homeowner. And who are these bankers who went sailing off the end of the Earth and thereby find it necessary to pass the cup to the gorvernment? The company of errant, if lavishly compensated, navigators includes none other than Rubin himself. ... Almost certainly, the gulf between competence and compensation on Wall Street has never been wider. ... It wouldn't be so bad if the [US] were not the issuer of the world's reserve currency. The dollar is not only America's scrip but also a store of value and a medium of exchange in Asia, South America and the Middle East. Yet--and here is the rub--the [Fed] makes monetary policy for one country only. ... Americans enjoy the inestimable privilege of consuming more than they produce and financing the difference with the currency they alone can lawfully print. ... But the Fed--its eye not on the worldwide inflation rate but on the Bear Stearns share price--is about to turn easier still ... [T]he plunging dollar may prompt a serious reexamination of worldwide monetary arrangements", James Grant (JG) at, 16 March 2008

Way to go JG. Precisely.

Thursday, March 20, 2008

Countrywide, the Sacrifice

"The [FBI] is probing subprime lender Countrywide Financial Corp. for possible securities fraud, according to law-enforcement officials and finance-industry executives. ... More than two dozen Wall Street firms helped construct [mortgage-backed security] deals, making it possible than some of them will also face law-enforcement scrutiny", WSJ, 8 March 2008.

I nominated Mozillo of Countrywide as Wall Street's sacrifice to the propriety gods on 25 December 2007. It remains to be seen how much scrutiny the other two dozen Wall Street firms will face and where it will lead. Hey Mike Garcia, where will it lead?

SEC, Investor's Friend? Fiend?

"Just as companies are closing their books on another tumultous quarter, regulators are working on a plan that would let them tell investors that things may not be as lousy as they seem. ... The [SEC] is expected to tell public companies that while they still need to use market prices for many of the instruments they hold no matter how bad those prices look, they can also give investors a wide range of the possible values for those securities. ... 'It probably does give business some discretion and wiggle room,' says James Cox, a securities-law professor at Duke University. ... In January, the SEC's chief accountant took a more-controversial step, saying banks and mortgage companies could modify mortgages without triggering accounting rules that would put the debt onto the company's balance sheet. ... Two weeks ago, during testimony before the Senate banking committee, [Fed] Chairman Ben Bernanke noted his agency's unease over the use of mark-to-market accounting and said it 'is one of the major probelms we have in the current environment.' But he added that there wasn't a clear alternative to the approach", David Reilly and Kara Scannell at the WSJ, 14 March 2008.

The SEC, the investor's "friend", wants to obscure the accounting for various mortgage-related securities value. How nice! See also my 6 February 2008 post. Imagine, accounting may stand in the way of a Fed bailout of the banks.

Wednesday, March 19, 2008

BP and Exxon Justice?

"In a case that could test the limits of punitive damages, the Supreme Court will hear arguments today related to the $2.5 billion award against what is now ExxonMobil Corp. for the 1989 Exxon Valdez oil spill. ... Beyond taking its case to lawmakers and presenting arguments in litigation, Exxon has sought to influence academic thinking about the remedy, funding research by several prominent scholars who concluded that juries were likely to act arbitrarily in awarding punitive damages. ... Moreover, Exxon complains that jurors were permitted to consider the award's amount in light of the company's profitability", WSJ, 27 February 2008.

"Victims of the 2005 Texas City refinery accident should not be allowed to block a $50 million criminal settlement between BP and the government, prosecutors wrote in court papers filed this week. Federal prosecutors argue they didn't violate the victims rights when they didn't include them in settlement discussions. They also noted that, among other things, including them in negotiations could make it more difficult to reach an agreement. ... The prosecutors' response, filed this week, says the government shouldn't be compelled to have discussions with victims on issues related to possible fines in a criminal case. In such discussions the government might not be able to reveal all the facts to the victims because it 'poses a significant risk of publicity that could impair the government's ability to secure a negotiated resolution or could impair the defendant's constitutional rights if negotiations fail'," my emphasis, Tom Fowler at the Houston Chronicle, 8 March 2008.

"A congressional committee is investigating the government's proposed criminal plea deal with BP stemming from the deadly 2005 Texas City refinery explosion, questioning whether the deal woulf protect workers or deter future misconduct. ... John [Dingell's] ... letter posed dozens of pointed questions about the deal's adequacy, how it was forged, prosecutors' responsibilities to include blast victims in the plea process and whether top executives are culpable. ... The committee wants a meeting with prosecutors, documents related to the plea deal, and an assessment from the [DOJ] about whether the deal is an 'ineffectual deterrent to future violations' given BP's history of problems. ... Dingell and Rep. Bart Stuart ... said in the letter that even if the fine is the largest imposed for a violation of the Clean Air Act, 'this alone does not address whether the fine is adequate to achieve the goal of deterrence, particularly since the fine is less than a single day of profits for BP in 2006 and 2007'," Kristen Hays and Lise Olson (H&O) at the Houston Chronicle, 13 March 2008.

This case is a farce. The Supremes had no business hearing it. Exxon funded research? Big deal. Is this Exxon's answer to the Tobacco Research Institute of the 1950s? The Supremes heard "doll" evidence in deciding Brown v. Topeka School Board. Are juries less "arbitrary" than judges? I think not. As for Exxon's profitability. I remember companies lobbying the California Supreme Court to admit evidence of their net worth so as to limit punitive damages awards against them. Exxon should have been forced to pay this judgment decades ago. Will the Supremes now hear arguments to limit fines individuals might pay as a result of criminal convictions if they can't "afford" to pay them? Should a Los Angeles drug dealer be able to contest a fine by pleading poverty?

Of course, it could make it more "difficult to reach an agreement", if that means sell out the public interest. Get out that crying towel. The Bush administration's new found concern with defendant's consitutional rights is touching. I wonder in Exxon would settle its punitive damages case for the $50 million fine BP is being asked to pay by Uncle Sam? This is a joke.

I wonder if the Supremes will consider the Dingell-Stuart letter in deciding the Exxon Valdez case? Or it they have already decided it. For Exxon. Exxon's academics claim juries are arbitrary. Look at the DOJ and the BP case. See my 22 November 2007 and 29 February 2008 posts.

Doublethink CPAs

"At first glance is appears there are a handful of global accounting firms--the Big Four and a couple of others--but that is not the reality. ... And while they may market themselves as unified organizations with worldwide abilties, a very different view is presented when someone sues over a failed audit. Then the firms disclaim any responsibility to actions of a firm with a similiar name in another country", Floyd Norris at, 14 March 2008.

The large CPA firms have played this game for decades. The SEC should have ended this nonsense decades ago. If you're "one firm, you're one firm". Period. The PCAOB should deregister any firm which asserts such defenses in litigation. Mark Olson, wake up. Francine McKenna's 14 March 2008 post about this at, is worth reading. These large firms live an Orwellian world of doublethink as described in 1984.

Tuesday, March 18, 2008

Qatar, China and the Dollar

'China increasingly is blaming an influx of cash from speculative investors known as 'hot money for a host of economic ailments and has pledged to cut the inflow. ... Analysts say foreign investors have been getting around China's strict capital controls and pouring funds into the country, as they try to profit from the rising yuan and high interest rates", WSJ, 10 March 2008.

"Qatar, the world's largest exporter of liquified natural gas, may revalue its currency or end its peg to the dollar as soon as next month, Qatari Central Bank officials said. ... Qatar's prime minister, Sheikh Hamed bin Jassem Al Thani told news agency Zawya Dow Jones that the emirate was studying delinking its currency from the dollar", WSJ, 12 March 2008.

The Chinese created their problem by not floating the yuan. As soon as the yuan floats and the dollar sinks, the "hot money" will go somewhere else.

Qatar: stop studying, just do it.

Monday, March 17, 2008

California Real Estate Update-3

"Median-home prices plunged in many of California's most populous counties in February, with Southern California leading the slide with an overall drop of 18% compared with a year earlier, according to housing data released yesterday. ... Home-sales volume also fell last month. Sales declined 39% from a year earlier in Los Angeles, Orange, San Diego, Riverside, San Bernadino and Ventura counties", WSJ, 14 March 2008.

This will get worse.

The Fed as Little Dutch Boy

"Is a housing bailout the solution for clogged-up credit markets and a faltering economy? ... The Fed's latest move provides financial institutions another $200 billion in direct short-term lending against their unsalable housing collateral. The Dow Jones Industrials jumped 416 points. But it won't restart markets for the underlying collateral. Where are the speculators, vultures and hedge funds? Where are the big money players willing to buy the exotic but still substantial mortgage-backed securities for which the markets have ceased? The Fed's liquidity rush seems only to have convinced them the time is ripe for staying on the sidelines. ... The transfer of wealth from the overleveraged banks and hedge funds to those who kept cash handy will be shocking, ugly and cathartic--but it will also be relatively quick. [When prices of mortgage debt fall sufficiently.] ... On all sides, meanwhile, the call for a housing bailout is becoming deafening, nigh irresistible. But the seized-up credit markets won't be unseized by trying to induce debtors to cling to houses they now see as throwing good money after bed", Holman Jenkins (HJ) at the WSJ, 12 March 2008.

I agree with HJ, the Fed's bank bailout is designed to keep mortgage-backed securities trading above the market's perception of their value, and enable the banks to avoid writedowns. Hence the "vultures" won't buy them. This has been Uncle Sam's policy for months. See my 10 December 2007 post.

Sunday, March 16, 2008

Ambac Bailout?

"A consortorium of banks is considering injecting $3 billion into Ambac, the mono-line insurer that relies on its AAA rating to insure, amongst others, municipal bonds and CDOs (collateralized debt obligations). What appears as a rescue plan and may appease the markets short-term, may plant the seeds for disaster. ... The two developments caused the insurers to veer from their path: as public companies, mono-line insurers were looking for new income streams. Not only that, rating agencies told these insurers that they are not very diversified, that they may have to have a second look at the credit ratings if they did not broaden their insurance coverage to, say, securitized mortgage products. Rating agencies were eager to see the market of debt derivatives expand, so that they could facilitate a market by providing credit ratings to structured products. ... Think of a credit default swap as a put option that will pay you if a company or a security fails. With a perceived foolproof arsenal of financial tools, banks felt encouraged to carry a lot of complex financial products on their balance sheets. By buying insured securities, or by protecting against the default of an issuer, the banks reasoned, they could show stellar balance sheets. Banks are in the business of lending money; to do so, they require reserves. That arsenal of financial tools, however, is at risk of turning into an asinine collection of toxic waste if the securities held are not as secure as they seem or of the credit default swaps are not worth the paper they are written on. One risk that few talked about until recently, is counterparty risk. ... In [municipalities] view, mono-line insurers have betrayed them by risking their credit ratings through reckless veering into riskier lines of business. ... Banks are closer to being their own counterparty to their credit default swaps. ... We used to criticize Japanese shareholder crossholdings, building a house of cards that eventually had to collpase. U.S. financial institutions are laying the foundation for the same mistakes", Axel Mark (AM) at, 27 February 2008.

I think AM has this knocked. None of the monoline bailout plans make sense.

TIPSy Bond Buyers

"'Going negative' usually happens in politics, not the bond market. But one corner of the bond world has gone alarmingly negative lately. The real yield on five-year [TIPS] has turned negative for the first time since the Treasury Department started issuing the securities in 1997. Late yesterday, they yielded -0.026%, meaning the return investors get on these securities is a little less than the inflation rate. ... Inflation expectations are certainly rising. ... But it's too early to say the Fed is losing its inflation-fighting credibility", Mark Gongoff (MG) at the WSJ, 12 March 2008.

I have viewed TIPS as a scam from the first time they were issued. MG, are you serious about the Fed? Gold is $996, the Euro $1.56 and oil $110. Why do you think this is so?

Saturday, March 15, 2008

OPEC Is Not Fooled

"Ministers from the [OPEC], meeting in Vienna, blamed surging oil prices on the weak U.S. dollar and 'mismanagement' of the U.S. economy. .... Mr. Bush urged OPEC this week to pump more oil. ... Oil stockpiles across the developed world remain lean in places, but they are well within the historical norm. ... 'What is happening now is as much about the supply and demand for dollars as the supply and demand for oil,' said Daniel Yergin, chairman of Cambridge Energy Associates. 'This is a flight to commodities that is premised on the dollar getting still weaker'," WSJ, 6 March 2008.

I agree with OPEC and Yergin. Jeffrey Currie, pay attention.

Much Ado About Nothing

"We've seen some puzzlers over the years, but we never expected to see a [Fed] Chairman talking down the capital cushion of the nation's banking system. ... Voluntary loan modifications aren't doing enough to stop foreclosures, declared the chief steward of the U.S. financial system. 'In this environment,' he said, 'principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.' ... Bernanke's broadside might well hamper these volutary workouts by signalling to other borrowers that they needn't do anything at all", Editorial at the WSJ, 6 March 2008.

These must be the end times, I agree with Helicopter Ben (HB), disagree with the WSJ and say it is making, with apologies to Shakespeare, much ado about nothing. Does anyone at the WSJ understand discounted cash flow analysis? I'll illustrate with an example. Suppose A buys a house for $300,000. It's value rises to $400,000 and he refinances taking all the equity out with a 30-year fully amortized loan at 6.5%. My HP-17B says he makes 360 monthly $2,528.27 payments. Now the house drops in value to $320,000. A decides to walk away from the house, in effect "selling it to the bank". The WSJ apparently thinks the bank should "modify" the loan by reducing A's interest rate to say 4%. That reduces A's monthly payment to $1,909.66. However, the bank could reduce A's principal balance to $302,129 ($1,909.66 / $2,528,27 X $400,000). What's the big deal? This is an accounting issue. In the second instance the bank records a $97,871 ($400,000 -$302,129) loss. Economically I see no difference. The cash flows are what they are. You can apply whatever discount rate you want to them. HB's point is, I think: the homeowner is less likely to walk away from a house if he feels he has some equity in it. If the bank reduces the homeowner's principal balance it appears he has $17,871 in equity ($320,000 - $302,129).

Friday, March 14, 2008

They Never Learn

"Conditions at Carlyle Capital Corp. had become so dire Thursday that Carlyle Group co-founder David Rubenstein raced back to Washington, D.C. that night from a Wall Street confab at the swank Deer Valley, Utah, ski resort. ... It looked like easy money at first. Carlyle Capital would exploit the difference between the interest earned on its investments in mortgage securities and the costs of financing those investments. The secret to making money was borrowing massive sums. Carlyle Capital manged only $670 million in client money, but used borrowings to boost its portfolio of bonds to $21.7 billion. ... As a habitual buyer, seller, and financier of businesses, the firm gushes payments for the Street. Last year it paid out $330 million in investment banking fees", WSJ, 8 March 2008.

This was a strategy? Borrowing short and lending long? I read a treatise on banking written in Amsterdam that warned against this. When was it written? 1587! I kid you not.

Rating Agency Monopolists

"If S&P and Moody's are no more to be trusted than other issuers of private opinions, they will soon have the reputation that the public gives to journalists, and their opinions will also be worth five bucks a week. ... They're profit-making (they hope) companies that charge bond issuers substantial fees for evaluating investors' risk that may be entailed in the bonds. They're not unlike bond insurers, except that they don't put their capital behind their opinions. ... The [SEC] doesn't stand behind the varacity of the filings of registered corporations. The SEC simply files corporate paperwork and leaves to investors the responsibility to read the numbers and question them. ... In fact, the SEC should bear a special responsibility in the current crisis, having conferred special staus on Moody's, S&P and Fitch as [NRSROs]. At the end of last year, the SEC finally decided to let competitors into the field, including the smart, aggressive and timely Egan Jones, which charges fees to investors, rather than to issuers. ... The SEC would have done better to get rid of the whole idea of Nsros, and institutional investors would do better to rely on their own reserarch", Thomas Donlan at Barron's, 3 March 2008.

I agree with Donlan. It's more than time the NRSRO designation ended.

Thursday, March 13, 2008

Understanding Kosovo?

"As Americans look quizzically at their TV sets while non-Muslim protestors in Europe torch a U.S. embassy, they should know that yesterday's 200,000-person protest in Belgrade ... is the first time in two decades that Serbs are showing a glimmer of rational behavior--amid 20 years of the 'free world' foisting terrorist neighbors upon them. To put this in perspective, with advance apologies to any offended ethnic groups: How would Americans react if Latino gangs started ambushing police and killing government officials in California, and after a few years, the U.S. sent in the troops because the gangs were outgunning the police force; following this, the gangsters started claiming atrocities--and so Russia and China bombed California and Washington in response to the 'atrocities'; the foreign powers then occupied California for eight years while the gangs killed or expelled most of the non-Latinos in 'revenge attacks,' then backed a declaration of independence for California as a Mexican-majority state that may just unify with Mexico? ... We are now several years post 9/11, yet our government is creating Muslim states in Europe and is about to engage the [US] military against European Orthodox Christians who don't want to live under Muslim rule. When did it become the free world's business to spread Sharia law, as is always the upshot of any Islamicizing region?", Julia Goren (JG) at, 22 February 2008.

"If Washington wanted to develop a vibrant underworld of vicious criminal gangs, it couldn't do any better than the immigration system now in place. ... A recent heart-breaking example: the slaughter on March 2 of 17-year-old Jamiel Shaw. The South Los Angeles high school student was shot dead just a few doors from home by two Latino men who jumped from a car and demanded to know to which gang he belonged. ... Jamiel had no gang connections. He was apparently just another victim of Hispanic gangsters killing blacks to drive them out of their corner of Aztlan. ... The City of the Angels recently experienced a daytime gang battle that brought out the police SWAT team and closed down dozens of blocks for six hours. ... Los Angeles used to be a wonderful American city. Now it has become Mexican (in the words of former mayor Hahn), LA is a preview of the future America. ... [LA] is Ground Zero for gangs in the country. The County is home to an many as 1,200 gangs with 80,000 members. ... No citizen should have to stay indoors to be safe from rampaging foreigners. Living with a reasonable expectation of protection against crime is part of inhabiting a first-world country. ... Hispanic gangsters ... are ethnically cleasing black citizens out of parts of LA now, but indications are more of the same for the rest of us--first through the Southwest, next America as a whole", Brenda Walker at, 10 March 2008.

Right on, JG. Our Balkans policy is crazy. Your example explains what is really going on.

Who says we don't have ethnic cleasing in the US? Right now! Who says our immigration policies are leading to the Balkanization of the US and its eventual breakup?

The SEC Responds

"A four-year investigation into gifts lavished on mutual-fund companies by Wall Street has claimed its biggest name: Peter Lynch, legendary investor and adviser to mutual-fund giant Fidelity Investments. ... The SEC alleges Mr. Lynch accepted 61 tickets to 12 events, including 14 three-day passes to the 1999 Ryder Cup golf tournament and a U2 rock concert. The total value: $15,948. ... 'The tone is set at the top,' said the SEC's Walter Riccardi, deputy director of enforcement. ... In addition to the $8 million payment, Fidelity as part of the settlement agreed to hire an independent consultant to conduct a review of its policies and procedures, the SEC said", Kara Scannell, Susanne Craig and Jennifer Levitz (SCL) at the WSJ, 6 March 2008.

I hope SCL wrote this article "tongue in cheek". Imagine a four-year investigation finds $15,948 in inappropriate gifts to Peter Lynch, who has a $352 million net worth according to I'm sure the gifts influenced his actions significantly. Not to be outdone by its DOJ cousins, the SEC will have Fidelity "hire an independent consultant". Who? John Ashcroft? Gary Lynch, Harvey Pitt or Arthur Levitt, all formerly with the SEC? Why not Independent Accountant? I'll do it for a mere $900 an hour if I can start after 15 April, when tax season ends. Why not Riccardi?

The SEC's 5 March 2008 press release reads in part, "'This case demonstrates again the SEC's commitment to preventing conflicts of interest from compromising the integrity of the markets,' said David P. Bergers, Regional Director of the SEC's Boston Regional Office". No it doesn't. It shows the SEC hasn't a clue what's important.

What makes the SEC's "tremendous" catch interesting is: the SEC's announcing it on 5 March, six days after my 29 February 2008 post. Does Riccardi read this blog. Well? "Tone at the top", bah humbug.

Wednesday, March 12, 2008

Food Subsidies

"In Egypt, food subsidies have been part of life for decades. The poor can buy a loaf of bread for less than one cent, about a fifth the cost of an unsubsidized loaf. ... Scaling back could be risky. Across the Middle East and North Africa, 'this bread subsidy is so politically sensitive that it is very hard to dismantle,' says Akhter Ahmed, a senior research fellow with the International Food Policy Research Institute in Washington. ... Corruption is prevalent. In Egypt, a ton of subsidized flour cost less than a 10th of what it goes for on the black market", WSJ, 4 March 2008.

"China's central-bank governor said a stronger currency isn't the best or only way to fight inflation, countering widespread expectations that the yuan's gains will accelerate as the nation's prices rise at their fastest pace in more than a decade. ... Indeeed, in its October monetary policy report, the People's Bank of China wrote that 'Theoretical economic analysis and the experience of many countries both show that an appreciation of the currency helps contain domestic inflation'," WSJ, 7 March 2008.

The various countries of the world need to rationalize their farm policies, the US included. The first step should be an end to subsidies.

The People's Bank of China's (PBC) analysis seems to be more sophisticated than that of Helicopter Ben & Co. (HB). It would be nice for the PBC to send it to HB. Despite his Harvard and MIT degrees, he might learn something.

No Justice From Justice

"Don Siegelman, a popular Democratic governor of Alabama, a Republican state, was framed in a crooked trial, convicted on June 29, 2006, and sent to Federal prison by the corrupt and immoral Bush administration [BA]. The frame-up of Siegelman and businessman Richard Scrushy is so crystal clear and blatant that 52 former state attorneys general from across America, both Republicans and Democrats, have urged the US Congress to investigate the [BA's] use of the US Department of Justice to rid themselves of a Democratic governor who 'they could not beat fair and square,' according to Grant Woods, a former Republican Attorney General of Ariziona and co-chair of the McCain for President leadership committee. Woods says that he's never seen a case with so 'many red flags pointing to injustice.' ... Jill Simpson, a Republican lawyer who did opposition research for Rove, testified to the House Judiciary Committee and went public on '60 Minutes.' Simpson said she was told by Bill Canary, the chief GOP political operative in Alabama, that 'my girls can take care of Siegelman.' Canary's 'girls' are two US Attorneys in Alabama, both appointed by President Bush. ... Federal prosecutors claimed that Scrushy's charitable contribution was a bribe to Siegelman in exchange for being appointed to the Certificate of NeedBoard [CNB]. In the words of federal prosecutor Stephen Feaga, the contribution was 'given in exchange for a promise for an official act.' ... As a large number of attorneys have pointed out, every US president appoint his ambassadors and cabinet members from people who have donated to his campaign. Under the reasoning applied in the Siegelman case, every president, every cabinet member and ambassador should be in federal prison. .. Presented with threats of a long sentence, Bailey agreed to testify falsely that Siegelman came out of a meeting with Scrushy and showed Bailey a $250,000 check he had accepted in exchange for appointing Scrushy to the [CNB]. Prosecutors knew that Bailey's testimony was false, not only because they had Bailey rewrite his testimony several times and rehearsed him until he had it down pat, but also because they had they check. The records show that the check, written to a charitable organization, was cut days after the meeting from which Siegelman allegedly emerged with check in hand. ... [Judge] Fuller himself was part of the prosecution. He bore a strong grudge against Siegelman. Fuller had been an Alabama district attorney [DA] before Bush made him a federal judge. Fuller's sucessor as [DA] was appointed by Siegalman and produced evidence that Fuller had defrauded or attempted to defraud the state retirement system. Despite his known animosity toward Siegelman, Fuller refused to recuse himself from Siegelman's trial. According to the WOTM special report, Fuller owns a company that was receiving federal money during Siegelman's trial. Fuller did not disclose this conflict of interest. ... The Justice (sic) Department's answer to the exposure of its frame-up of Siegelman is that Siegelman was indicted by career prosecutors and convicted in a fair trial by a jury of his peers. These claims are no more truthful than anything else the DOJ says. ... The Siegelman case makes it clear exactly what Bush, Rove, and the disgraced Bush flunky Alberto Gonzales intended by firing the eight Republican US Attorneys. These eight refused to politicize their office by falsely prosecuting Democrats in order to achieve a Rovian political agenda. Apparently, there were only eight honest persons among the 1,200 Republican US Attorneys, Bush, Rove, and Gonzales had no problem with the other 1,192", my emphasis, Paul Roberts (PR) at, 28 February 2008.

"Congress is looking into the decision by the [US] attorney for New Jersey, Christopher Christie, to hand former Attorney General John Ashcroft a hugely lucrative job monitoring a wayward company. ... Congress should conduct a broader inquiry into prosecutors' selection of richly rewarded monitors and require that the appointments be made on merit. ... But we have already seen how federal prosecutors appointed by the [BA] used their offices to help Republicans win elections. Congress needs to ensure that they are not using their positions to throw patronage to friends and political allies. The Ashcroft appointment came in a 'deferred prosecution agreement,' a fast-growing arrangement ripe for abuse. Rather than file criminal charges against corporations, federal prosecutors ... increasingly are striking deals. These agreements are done without court supervision and sometimes in secret", Editorial at, 26 February 2008.

The BA's new found respect for the jury system is touching. How can anyone take the InJustice Department seriously? I think suborning perjury is the norm for the DOJ. This is the same DOJ that wants to protect drug companies from tort suits, apparently out of fear that juries might make damage awards against corporations. What, do we see some consistency here? The DOJ is consistently on the side of large corporate interests.

I would go further than the NYT. I would ban deferred prosecution agreements. They are more than "ripe for abuse". They are an abuse. Have the Crips, Bloods or MS-13 gangs in Los Angeles ever been offered one? Why not? Is is because they can't offer multi-million dollar monitoring jobs to DOJ alumni?

Tuesday, March 11, 2008

Municipal Revolt

"Does Wall Street underrate Main Street? A growing number of states and cities say yes. ... A complex system of credit ratings and insurance policies that Wall Street uses to set prices for municipal bonds make borrowing needlessly expensive for many localities, some officials say. .. States and cities rarely dishonor their debts. ... But some officials complain that ratings firms assign municipal borrowers low credit scores compared with corporations. Taxpayers ultimately pay the price, the officials say, in the form of higher fees and interest costs on public debt. ... California ... is soliciting support from other municipalities for a letter it intends to send the ratings agencies, arguing that municipal bonds should be rated on the same scale as the one used for corporate bonds. ... Officials at ratings firms and bond insurance companies defend the system, saying it gives investors the information they need to buy bonds with confidence. The recent turmoil, they say, highlights the need for insurance. They further add that rating municipal bonds like corporate debt would not save taxpayers much money, if any. ... The plunging fortunes of bond guarantors, meantime, have cast doubt over the value of the insurance polices municipalities buy. 'We are learning essentially that the emporer may have no clothes, that there is no real reason to require these towns to have insurance in many instances,' said Richard Blumenthal, the attorney general of Connecticut, who is investigating the ratings firms on antitrust grounds. 'And it simply serves the bottom lines of the ratings agencies, the insurers, or both'. ... Ratings firms, bond insurance companies and some bond investors defend the separate ratings scales, arguing that it allows investors to make distinctions among various debt and ultimately, set appropriate interest rates. ... Gail Sussman, the Moody's executive in charge of public finance ratings, likened the firm's dual ratings scale to a ruler that measures in inches on one side and centimeters on the other", my emphasis, Julie Criswell and Vikas Bajaj at, 3 March 2008.

What a pile of self-serving claptrap from Moody's Sussman. I have an idea: end letter ratings. Instead give bonds classes by expected default rate, less than .001 over ten years, less than .002 over ten years, etc.. If this means Moody's and S&P have 50 classes, so be it. At least we will be able to see how good these organizations are based on their ex ante default rate estimates. Unwittingly, officials at the rating agencies let the cat out of the bag, "the system .... gives investors ... confidence", i.e., it's a con game.

Of Homeowners and Hedge Funds

"As home prices plumment, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners--those who can afford to pay their mortgages but have decided not to--are starting to walk away from their homes. ... A rise in the number of people choosing to default on their mortgages would represent a significant departure from past behavior of American homeowners, who during past housing downturns tended to walk away only as a last resort. ... Also, many borrowers who bought in recent years have put down little if any equity. 'If they haven't lived in [the home] very long and haven't put any cash into it, it's a lot easier to walk away,' says Chris Mayer. director of the Milstein Center for Real Estate at Columbia Business School", WSJ, 29 February 2008.

"The financial turmoil is taking on a new dimension: Banks that lent money to hedge funds and other big risk-takers are asking for some of it back. ... But as the value of mortgage-backed bonds and other investments has dropped in recent weeks, the lenders are demanding that borrowers put up more cash or assets. ... A bank might lend 97 cents against the collateral of a high-quality mortgage security with a market value of $1", WSJ, 7 March 2008.

3% "margin" for a 'high-quality mortgage security"? A whaaaat? The Mogambu Guru would say, "Hahahahah". Are the banks this stupid? The most interesting thing in these articles was their titles: "Borrowers Abandon Mortgages as Price Drop" and "Hedge Funds Squeezed by Tough Lenders". The WSJ's message: homeowners bad, hedge funds good. The WSJ's thinking is like that in George Orwell's Animal Farm, in which all the animals were equal except some, the pigs, which were more equal than others.

Monday, March 10, 2008

Liberate Housing

"Any debate about a housing bailout can be put aside--the bailout is underway, even in advance of specific plans being shopped around Washington by Bank of America to prop up home prices with direct subsidies to homeowners whose debt exceeds the value of their houses. ... But this time, the liquidationist school has been routed--so named for Herbert Hoover's Treasury secretary, Andrew Mellon, who said' 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. ... It will purge the rottiness out of the system.' ... So here's the question: Do the people who would be bailed out want to be bailed out? Do they benefit from being bailed out?", Editorial at the WSJ, 27 February 2008.

See my 21 November and 10 December 2007 posts. Who is Hank Paulson's Treasury trying to kid? The thrust of all its efforts is to protect the banks, not the peasants.

A PCAOB Opportunity

"Fannie Mae and Freddie Mac announced an agreement with New York Attorney General Andrew Cuomo to discourage inflated appraisals by enforcing new standards in the home-mortgage market. ... The code bars lenders and their representatives from pressuring appraisers to supply inflated estimates of property values, which are widely viewed as an important contributor to the mortgage crisis. Appraisers have long complained that they risked losing business if they didn't appraise homes at values that would allow loans to be made. ... Fannie and Freddie also agreed to create an independent organization to monitor the new appraisal standards. Their main regulator, the Office of Federal Housing Enterprise Oversight [OFHEO], approved the new code", WSJ, 4 March 2008.

We are witnessing the "SEC-ization" of the mortgage business with OFHEO as the SEC, Fannie and Freddie as underwriters and appraisers as CPA firms. We need one more organization to made the ensemble complete, the "independent" monitoring organization. I nominate the PCAOB. Why not? It already exists and has shown tremendous competence in regulating the CPA profession. Hey Mark Olson (MO), how about it? This looks like a natural PCAOB "product extension". Hey, MO, get on with it.

Seriously, this appears to be a "pass the buck" operation to blame the mortgage mess on the least well politically connected group responsible for it, appraisers.