Sunday, August 31, 2008

The SEC's Kindergarten

"If the same few companies are behind virtually every major financial scandal and meltdown, why are the regulators talking about tightening up on the rest of us? After reading the new Treasury Department regulatory proposal again, I find myself wondering whether Congress, the Treasury and the SEC are truly interested in fixing the persistent problems in the securities industry. To see what I mean, let's look at the problems we've experienced and see if there's a discernible pattern. ... None of the companies happen to be independent financial planning firms, fiduciary planners, NAPFA members or independent broker-dealers. There are no regional banks on the list either, and I couldn't find any community banks, thrifts or credit unions. ... Instead, let's focus on the companies that are on the list. Interestingly, they all happen to be major Wall Street firms and big insurance companies. They make the list again and again. ... Looking at the conflicts built into Wall Street firms' revenue models, and executive and broker incentive systems, are you surprised that no matter what rules these companies are required to follow, some firms engage in risky, predatory and short-term focused activities? ... I see nothing wrong with SEC staff members paying 3% a year for a separate account that promises, but does not deliver any individual tax management, and whose performance is chronically below the index or low-cost portfolios recommended by those indistinguishable fiduciaries. For diversification, they should load up on structured products like those 8-1 leveraged muni hedge funds that lost $2 billion for Citigroup's wealthiest customers, even though they were sold as 'conservative investments'," Bob Veres (BV) at Financial Planning, August 2008.

BV calls this his "Modest Proposal"; positively Swiftian. The Mikado's Lord High Executioner would also approve of BV's solution! The SEC will never fix anything as long as it the subject of "regulatory capture".

Auction-Rate Update

"J.P. Morgan Chase & Co. and Morgan Stanley agreed to buy back more than $7 billion in auction-rate securities as part of an agreement to end probes by regulators into how they marketed the complex securities. At a news conference, New York Attorney General Andrew Cuomo siad J.P. Morgan would pay $25 million in civil penalties while $35 million in penalties will be paid by Morgan Stanley", WSJ, 15 August 2008.

"Wachovia Corp. is buying back as much as $8.8 billion in auction-rate securites, but the decision should have minimal impact on the Charlotte, N.C., bank as it works its way through the more-serious headaches relating to the U.S. mortgage rout, analysts said Friday. ... Wachovia, which neither admitted nor denied wrongdoing, also will pay $50 million in civil penalties", WSJ, 16 August 2008.

"The New York attorney general's office turned up the heat Wednesday on financial firms that sold auction-rate securities and haven't settled with regulators. Attorney General Andrew Cuomo's office is stepping up its probe of three banks Bank of America Corp., Goldman Sachs Group Inc. and Deutche Bank AG, which underwote and sold the securities, issued by municipalities and others. ... In the widened probe targeting the three firms, Mr. Cuomo's office has been gathering more documents, conducting witness interviews and assigning more lawyers to investigate the companies' auction-rate operations. Settlement discussions with the firms and with other regulators investigating these firms have also ramped up, people in the office say", WSJ, 21 August 2008.

"Andrew Cuomo and a group of regulators representing 48 other states have come to settlement agreements with Goldman Sachs Group Inc., Deutsche Bank AG [DB] and Merrill Lynch & Co. [ML] over the sales and marketing of auction-rate securities. Goldman agreed to buy back $1.5 billion of retail investors' auction-rate securities by Nov. 12. The firm will also pay a $22.5 million penalty to the states. [DB] consented to buy back $1 billion of its retail clients' auction-rate securities within 90 days and pay a $15 million penalty to the regulators. ... The [SEC] has been involved in the negotiations with these firms and said it expects to make an announcement regarding [ML] soon", WSJ, 22 August 2008.

"[ML] and the [SEC] reached a preliminary settlement under which the Wall Street firm would buy back at least $7 billion of auction-rate securities it sold to customers. ... '[ML] did not make adequate disclosures that the liquidity of these securities was based on [ML] supporting the auctions it managed when there was not enough demand. Investors were left holding illiquid securities when [ML] stopped supporting auctions in February 2008,' the SEC said", WSJ, 23 August 2008.

It would be nice if someone at these banks was indicted for something.

"Say it ain't so, Joe", said the 7-year old to "Shoeless Joe Jackson" after the 1919 Blacksox scandal. Even Goldman Sachs. I'm heartbroken.

$22.5 million for GS? Peanuts. It's 33% of Lloyd Blankfein's 2007 bonus!

Will anyone at ML go to prison over this? Why ask?

Saturday, August 30, 2008

Mission Impossible

"As this nation's financial crisis deepens, some have argued that the [Fed] has not done enough. Perhaps the question should be: Has the Fed done too much? Have its earlier actions created the crisis we now face? ... The current crisis is the result of a flood of easy money from 2002 to 2006. ... The party came to an end when the Fed started raising interest rates to more normal levels and investors started pricing risk more stringently. ... America's current fiscal and monetary policies bear a striking resemblance to those of the late 1960s and 1970s, which resulted in more than a decade of stagnant economic growth, a declining dollar and inflation. ... First, America should abandon central planning and allow the market--not the Fed--to set short-term rates. ... It makes no more sense for the Fed to set the price of money--the most ubiquitous of all commodities--than it does for it to set the price of wheat, corn or any other commodity. As with long-term rates, short-term rates should be market-driven. ... During times of crisis, the Fed could continue to provide liquidity to the banking system through its Treasury auction facilities", Haag Sherman (HS) at the Houston Chronicle, 10 August 2008.

"In the dozen or so years until 2007, it had become as close to a global economic orthodoxy in economic policy making as we ever see: Central banks should target a low and stable rate of inflation. This replaced earlier orthodoxies--such as that central banks should maintain a fixed exchange rate with an ounce of gold. ... The U.S. [Fed], the Eurpoean Central Bank, the Bank of England and other rich-country central banks have generally made 2% inflation, give or take a smidge, the touchstone of good performance. Fed officials have for 20 years paid public obeisance to the statutory 'dual mandate,' to maximize employment as well as stabilize prices. ... Yet one of the great attractions of inflation targeting was that it only appeared to constrain central bankers discretion. ... The irony of the collapse of inflation targeting's intellectual edifice is that it has long been championed by Fed Chairman Ben Bernanke. ... A sudden 'exogenous shock' cuts demand to 98 widgets. But the central bank can then print money to induce consumers to buy up the two excess widgets, thereby stopping the factory from cutting production capacity and causing a 'recession.' It claws back the excess money when 'equilibrium' is restored. But what if this analogy is deeply flawed? What if the economy is much more like two factories than one? One factory produces say, real-estate widgets, and the other produces everything else. If consumers decide they want fewer real-estate widgets and more of some other widgets, it will take time and resources for capacity to shift from the first factory to the second. 'GDP' growth will decline during that time. ... By printing more money, the central bank only makes it longer and more painful, not least by producing significant and prolonged inflation", my emphasis, Ben Steil, (BS) at the WSJ, 18 August 2008.

I agree with HS's diagnosis and have said the same thing myself, I disagree with his perscription. The Fed ain't ready for reform. It can only be killed. Who decides when we have a "crisis"? Why should banks get special Fed treatment? Why can't Joe Blow borrow from the Fed?

I concluded inflation-targeting was absurd 28 years ago. Kill the Fed. BS, welcome to the "club". You are beginning to sound like an "Austrian". You recognize there are "real" resources in the economy and that change takes time. See my 1 March 2008 post. Welcome aboard. Next you'll read Human Action, The Theory of Money and Credit and Man, Economy and State and realize how little you know.

Foreign Policy Fools

"Now, into America's trivialzing presidential campaign, a pesky event has intruded--a European war. Russian tanks, heavy artillery, strategic bombers, ballistic missiles and a naval blockcade batter a European nation. We are not past such things after all. The end of history will be postponed again. ... Clinging to the Obama campaign's talking points like a drunk to a lamppost, [Bill] Richardson said this crisis proves the wisdom of Obama's zest for diplomacy, and that America should get the U.N. Security Council 'to pass a strong resolution getting the Russians to show some restraint.' Apparently Richardson was ambassador to the U.N. for 19 months without noticing that Russia has a Security Council veto. The crisis illustrates, redundantly, the paralysis of the [UN] regarding major powers, hence regarding major events, and the fictitiousness of the European Union regarding foreign policy. ... Putin has abruptly pulled the presidential campaign up from preoccupation with plumbing the shallows of John Edwards and wondering what 'catharsis' is 'owed' to the disappointed Clintons. ... If Georgia were in NATO, would NATO now be at war with Russia?", George Will at the Houston Chronicle, 12 August 2008.

"Unilateral U.S. sanctions and more rhetoric are unlikely to succeed in reversing the immediate consequences of Vladimir Putin's lunge for revenge in the Caucus. The overriding policy goal for Washington should be the forging of a new U.S.-European understanding on Russia that will be as durable and agile as containment was in the Cold War. ... Called 'Putin's War' by some in Moscow, this conflict exposes the failure of Russia's post-communist leadership to develop a political culture that does not depend on force and intimidation along with a tactical cleverness that frequently backfires. For Putin, the attack on Georgian President Mikheil Saakashvilli's forces was not just business. It was intensely personal. ... In Putin's view, President Bush did not reciprocate for the help and support Putin provided in the immediate wake of Sept. 11, 2001. Instead the Americans continued to push for NATO expansion into Ukraine and Georgia, decided to place U.S. missile defenses near the Russian border and egged the Europeans on in granting Kosovo independence from Serbia that Russians refuse to recognize. ... Putin is someone who believes that a thumb in the eye deserves two if not three in return", my emphasis, Jim Hoagland (JH) at the Houston Chronicle, 17 August 2008.

"Meanwhile U.S. Secretary of State Condoleeza Rice will attend an emergency session of [NATO] in Brussels on Tuesday to fashion a more detailed response to Russia's actions in Georgia and the disputed territories of South Ossetia and Abkhazia. 'The damage done to Russia's reputation and the damage to people's views of Russia's suitability for some of these institutions, that damage can't be undone,' Ms. Rice said Sunday on CBS television's 'Face the Nation'," WSJ, 18 August 2008.

"Five months ago, President Mikheil Saakashvili of Georgia, long a darling of this city's diplomatic dinner party circuit, came to town to push for America to muscle his tiny country of 4 million into NATO. ... At the White House, President Bush promised him to push hard for Georgia's acceptance into NATO. ... The Russian president warned that the push to offer Ukraine and Georgia membership in NATO was crossing Russia's 'red lines,' according to an adminstration official close to the talks. ... The story of how a 16-year, low-grade conflict over who should rule two small mountain regions in the Caucasus erupted into the most serious post-Cold War showdown between the [US] and Russia is one of miscalculation, missed signals and overreaching, according to interviews with diplomats and senior officials in the [US], the European Union, Russia and Georgia. In many cases, the officials would speak only on condition of anonymity", Houston Chronicle, 18 August 2008.

"[US] Secretary of State Condoleeza Rice is supposedly a specialist on Russia, yet one would not know that by looking at her triumphal statement that ... (NATO) will defeat Russian aims in Georgia. ... NATO is 'considering seriously the implications of Russia's actions for the NATO-Russia relationship', said a statement of the 26-member alliance. ... Short of destabilizing Europe, there is practically nothing the US can do about [Georgia], except fire more verbal volleys, as Rice has been doing relentlessly since the outbreak of Russia-Georgia hostilities on August 7-8. ... There are four interrelated causes of the present crisis: irredentism in Georgia, NATO's expansion, the US's plan to station an anti-missile system in Eastern Europe, considered a first-strike capability by Moscow, and the geo-economics of energy security. ... On the US's part, instead of applying the arithmetic of political realism and coming to terms with the sources of Russian anger, that is, at NATO's unwelcome, intrusive and threatening expansion near Russian territory, the US is now seeking to augment Russia's insecurity by pushing more aggressively for NATO's role and influence in the region and beyond. ... Such bellicose US reactions are neither fully in sync with Europe's needs and interests, nor that of the US's own interest--such as engaging Russia in the NATO-Russia Council. Whereas Moscow's legitimate national security worries have been completely side-stepped and ignored in Washington (and to a lesser extent in London), other Western leaders, such as those in Paris and Berlin, have been more cautious and one may even say considerate of the Russian point of view. ... It is simply not wise to corner the Russian bear and provoke it into aggression by taking blatant initiatives that threaten Russian national-security interests", Kavej Afrasiabi at, 20 August 2008.

"WAR doesn't change anything! How many times have we heard the claim from self-righteous leftists protected by their betters? ... Condoleeza Rice flew to Brussels to huff and puff, but NATO isn't about to blow Putin's house down. We'll get an earnest statement of concern, the cancellation of military exercises with the Russians and an easy-to-retract suggestion that, just maybe (if the astrologers approve unanimously), there might be a place in the Atlantic alliance for Georgia and the Ukraine in the distant future. In an act of breathtaking daring, NATO ministers even put down their teacups and agreed to term the Russian invasion 'disproportionate.' Boy, Putin's scared now. ... War doesn't change anything? Wish it were true--but war has been humankind's preferred means of effecting change. ... We're all--right and left--getting an in-your-face lesson about how the world really works. Passive resistance only has a chance when your opponent believes in the rule of law and respect for human rights. Gandhi was effective against law-abiding Britain, but he would've frozen to death in the Soviet gulag--if he'd lived long enough to reach the camps. ... But war does work. ... Berkeley radicals don't take midnight strolls through the toughest streets in Oakland. They know that some human beings are innately violent--but admitting it would be unbearable. ... The bitter truth is, none of us can move Russia. ... Putin believes in force. ... Imagine a President Barack Obama pitted against Putin--the left's new messiah would be gobbled up in one bite", Ralph Peters (RP) at, 20 August 2008.

"The international community has not done enough to push back. ... The fact is, Putin and his associates in the Kremlin don't accept the post-Soviet realities. ... But the West, and particularly the U.S., should continue to mobilize the international community to condemn Russia's behavior. ... But Russia must be made to understand that it is in danger of becoming ostracized internationally. ... If the issue of Georgia's territorial integrity is not adequately reasolved ... the U.S. should contemplate withdrawing from the 2o14 Winter Games, to be held in the Russian city of Sochi", Zbignew Brezinski (ZB) at Time, 25 August 2008.

"As Israel was provoked in 1967, so, too, was Russia provoked. ... If we proceed on a course of isolating Russia from the West, keeping her out of the [WTO], throwing her out of the G-8 and ending cooperation with NATO, where do we think Russia will go? Where did Il Duce go, when he was excommunicated from the West? ... Does the Stanford provost have any idea where the end of this road lies, upon which she and Bush have started the [US]? ... If the [US] intends to bring Georgia and Ukraine into NATO and arm them to fight Russia, why should Russia not dissolve the Treaty on Conventional Forces in Europe and move her tank armies into Belarus and up to the borders of Estonia, Latvia and Lithuania? ... In March 1939, Britain pledged to declare war and fight Germany to the death to guarantee the sovereignty and territorial integrity of Poland, How did that one turn out for Britain and Poland? Before we start down the road of isolating and encircling Russia with weak NATO allies, let us think through Gen. Petreus' question in 2003 about Iraq. 'Tell me, how does this thing end?' But, then, these folks never seem to think anything through", Pat Buchanan (PB) at, 25 August 2008. The link:

Richardson is as knowledgable about the UN as Obama is about Nuremberg, or Auschwitz. Russia should shock the elites of the world. It should support Richardson's UN resolution, let him draft it and introduce it into the Security Council. Then do what it pleases. Long live the Czar!

Does not depend on "force and intimidation"? The chairman (Mao Zedong) said, "political power grows out of the barrel of a gun". What is JH talking about? "Intensely personal"? I don't believe it. The Czar doesn't operate like that. JH is projecting American foreign policy on Russia. Bush "looked into Putin's soul", not Putin into Bush's. JH is right about one thing: Putin does not turn Russia's other cheek.

Rice's "threats" to the Czar reminded me of "Monty Python's Flying Circus" (MPFC). Many years ago, MPFC's skit called "The Spanish Inquisition" had a woman tortured by sitting in a "comfy chair". Similiarly, Russia with lots of oil and $800 billion in foreign exchange reserves must be terrified at Rice's threats. Here's a transcript of the skit:

I wonder when was the last time any of these "diplomats" and "experts" looked at a map? Why was Saakashvili so popular in Washington? Because he has Columbia LLM? This reminds me of the theory that Yuri Andorpov was a Western sympathizer. Why? He drank Scotch instead of vodka. How stupid can one get?

Silly me, I didn't know NATO and Russia were dating. Are they serious? I don't want to think about what Connnie baby might say to the Russians if she wasn't a "specialist on Russia".

Imagine, ZB was Jimmy Carter's National Security Adviser. I'm sure the threat of our not participating in the 2014 Winter Olympics has Moscow terrified. ZB, I have two words for you: shut up! How many divisions does ZB's "international community" have?

RP has this right.

I agree with PB. As my uncle who died in 1994 used to ask, "What comes next"? Have Rice and Bush ever asked this question?

Friday, August 29, 2008

Tribune of the People

"One yearns here for an Andrew Jackson. Our seventh President felt that the Second Bank of the [US]--which was chartered by the federal government and combined the powers of today's Federal Reserve and our largest commercial investment banks--was dangerously big and therefore its charter should not be renewed. But the bank had Fannie/Freddie-like lobbying muscle. Nonetheless, Jackson destroyed it", Steve Forbes (SF) at Forbes, 11 August 2008.

"Hold on to your hats. Common sense and constitutionalism have prevailed in the California judiciary. Last week, the Second District Court of Appeal in Los Angeles declared that parents who homeschool don't need teaching credentials in order to educate their own children. Amazingly, the three judges were overturning their own February decision. ... What prompted this fit of judicial restraint? In a case the provoked outrage across the country, lawyers for the Los Angeles Department of Children and Family Services earlier this year invoked the state's truancy laws to place two homeschooled children into public schools after reports of abuse by their father. ... The families of the 166,000 children who are homeschooled in California, as well as Governor Arnold Schwarznegger, registered their protests. And thanks, at least in part to public pressure, the court agreed to rehear the case", my emphasis, Editorial at the WSJ, 18 August 2008.

I have long been an Andrew Jackson (AJ) fan, see my 24 December 2007 post. SF, welcome aboard.

Not all all, WSJ. Constitutionalism had nothing to do with it. We had a "Patrick Buchanan-Andrew Jackson moment". The Los Angeles court realized: California has a $17 billion 2008 budget deficit, 172,000 prisoners, prisons at 159% of capacity and if California's localities tried to enforce this ruling, there would be a "waiting list for jail". Getting into Harvard would be easier than a California prison. Further, Schwarznegger's opposition made the ruling unenforceable. Schwarznegger took a page from AJ's book, see my 26 January 2008 post. To avoid public ridicule and having its order ignored, the court retreated in the face of Pat Buchanan's advancing "peasants with pitchforks". Even the teacher's union couldn't save this ruling for its members. Legal "reasoning", whatever that is, had nothing to do with it.

Compromised Experts

"A 1999 clinical study that Merck & Co. said was done to test side effects of the painkiller Vioxx was, in fact, conducted primarily to support a marketing campaign before the drug's launch, according to a study being published Tuesday. Researchers said their findings, based on internal Merck records disclosed during litigation, are among the first to document what many scientists suspect is a wider industry practice of using studies masquerading as clinial science to bolster marketing plans. ... Among the critics of the Merck study was Edward Scolnick, Merck's head of research at the time. According to a memo in the new report, he considered such a study as 'intellectually redundant' and 'extremely dangerous' because it could yield data that might compromise results of more-meaningful clinical trials", WSJ, 19 August 2008.

If so, what will the FDA, SEC and DOJ do about this? See also my 9 June 2008 post on Merck.

Thursday, August 28, 2008

Wither Russia

"The fact that all Russian politicians are clever. The stupid ones are all dead. By contrast, America in its complacency promotes dullards. A deadly miscommunication arises from this asymmetry. The Russians cannot believe that the Americans are as stupid as they look, and conclude that Washington wants to destroy them. ... These perceptions are dangerous because they do not stem from propaganda, but from a difference in existential vantage point. Russia is fighting for its survival, against a catastrophic decline in its population and the likelihood of a Muslim majority by mid-century. ... America's interest in Georgia, the Russians believe, has nothing more to do with promoting democracy than its support for the gangsters to whom it handed the Serbian province of Kosovo in February. ... Chess players think in terms of the interaction of pieces: everything on the periphery combines to control the center of the board and prepare an eventual attack against the opponent's king. The Russians simply cannot absorb the fact that America has no strategic intentions: it simply adds up the value of the individual pieces on the board. It is as stupid as that. ... Dull people know that clever people are cleverer than they are, but they do not know why. The nekulturny (uncultured) Colonel Ralph Peters, a former US military intelligence analyst, is impressed by the tactical success of Russian arms in Georgia, but cannot fathom the end-game to which these tactics contribute. ... If the UN demographers are correct, Russia's adult population will fall from about 90 million today to only 20 million by the end of the century. ... Russia, in other words, has passed the point of no return in terms of fertility. ... Some demographers, predict a Muslim majority in Russia by 2040, and by mid-century at the latest. ... The West has two choices: draw a line in the sand around the Ukraine, or trade it to the Russians for something more important. ... The West should do its best to pretend that the 'Orange' revolution of 2004 and 2005 never happened, and secure Russia's assistance in the Iranian nuclear issue as well as energy security in return for an understanding of Russia's existential requirements in the near abroad. Anyone who thinks this sounds cyncial should spend a week in Kiev. ... Russia has more to fear from a nuclear-armed Iran than the [US]. ... One irony of the present crisis is that Washington's neo-conservatives, by demanding a tough stance against Russia, may have harmed Israel's security interests more profoundly than any of Israel's detractors in American politics. ... If America turns Russia into a strategic adversary, the probability of Israel's survival will drop by a big notch", my emphasis, Spengler at, 18 August 2008.

Spengler cites the same phrases in Hanson's and Peter's work I have. I always believed the USSR's breakup in part was to take 65 million Moslems out of the Russian body politic and delay the time when the USSR would have a Moslem majority. Look at our present predicament: we may face a nuclear-armed Iran in 1-5 years. Not a pretty prospect. But down the road is a less appetizing one: a nuclear-armed Russia, with 6,500 "deliverables" and a Moslem majority! Instead of Iran leading the charge for a caliphate, Russia will. I cannot believe Czar Vladimir the Great (VTG) is unaware of this. I think VTG is a smart guy, even if he doesn't have even one Ivy League degree, unlike Bush who has two.

Toothless SEC-8

"Nancy Heinen, the former general counsel at Apple Inc., agreed to pay $2.2 million to settle charges by the U.S. [SEC] over backdated stock options. ... Under terms of her settlement, Ms. Heinen neither admitted nor denied wrongdoing in connection with grants to executives including Mr. Jobs", my emphasis WSJ, 15 August 2008.

Another SEC enforcement division triumph.

Another Wachovia Shoe Drops

"A unit of Wachovia Corp. that sold insurance against defaults on mortgage-backed securities is being liquidated in Bermuda and is asking a U.S. court to protect its assets here. ... The company is asking the U.S. Bankruptcy Court in Manhattan to recognize the Bermuda proceeding so it can liquidate there. If approved, creditors will be blocked from seizing assets in the U.S. ... BluePoint provided a type of insurance, known as credit default swaps, against defaults of asset-based securities", David McLaughlin at the WSJ, 15 August 2008.

One more shoe falls off Wachovia's truck. There's more where this came from.

Wednesday, August 27, 2008

US Dollar Death Bed?

"In short, the dollar rules, to the great benefit of the U.S. Could it lose its dominion? It could. ... For real rates, compare the nominal return on short-term Trasury bills (less than 1.5%) with the rise in the consumer price index over the last year (5%). Someone sitting on cash in the form of T bills is seeing his wealth shrink (and this is before income tax is subtracted). Neither U.S. savers nor foreign central banks are willing to undertake this sacrifice forever. ... Foreign central banks purchase roughly 80% of all the new debt issued by the U.S. government. ... By my calculation, approximately 55% of the increase in corn since 2001 can be accounted for by the dollar's decline. ... By denying a direct link between the dollar and commodity prices, the Fed is signalling that it wants room to move interest rates and the dollar down", Steve Hanke (SH) at Forbes, 11 August 2008.

I agree with SH. I am still amazed USD interest rates are as low as they are.

Delphi--the Plot Thickens

"The government is trying to force Delphi to transfer more than $1.5 billion of unfunded pension obligations to General Motors by Sept. 30. ... Delphi's efforts to put together a strategic plan to come out of bankruptcy fell apart in April. ... The Pension Benefit Guarantee Corporation, the federal agency that takes over pension funds terminated in distress, is warning that it would then lay immediate claim to $8 billion, diluting the claims of Delphi's other unsecured creditors, who are owed about $3.5 billion. ... As long as Delphi keeps its pension plan intact, the pension agency has no claims on the unsecured creditors' money. ... This year, G.M. has been preparing to take back a portion of the pension fund as part of Delphi's reorganization plan. Delphi has been allowed to skip its pension contributions while in bankruptcy, and it has also received waivers from the [IRS] that pushed the due dates into the future. ... Delphi does not have the $2.4 billion to spend on its pension fund. It does not have to produce that much cash on Sept., 30, because of an eight-month grace period, but as it falls behind schedule, the I.R.S. has the authority to impose excise taxes. Delphi disclosed in a filing with the [SEC] that it could be liable for as much as $3.4 billion in excise taxes on top of the $2.4 billion contribution. ... In addition to taking over part of Delphi's pension obligations, G.M. has committed itself to helping Delphi close manufacturing sites, financing buyouts, buying some of Delphi's output and taking over some of Delphi's retiree health obligations. ... Last spring's strategic plan had called for G.M. to receive compensation in the form of cash, notes and stock in the new Delphi after it came out out bankruptcy. But as Delphi's problems have deepened, G.M. wants to make sure its compensation will still be adequate, given its crucial role", my emphasis, Mary Williams Walsh at the NYT, 15 August 2008.

Delphi was carved out of GM on 1 January 1999. Delphi's CPAs were Deloitte & Touche (D&T). D&T also audits GM. D&T should never have been appointed Delphi's CPAs given GM and Delphi's relationship. Delphi replaced D&T with Ernst & Young for its 2006 audit. Delphi had some accounting restatements and accounting related lawsuits for 2000-03. It recorded a $202 million payment to GM in 2000 as a pension settlement instead of warranty expense. That Delphi could do this when D&T was on both sides of the transaction shows something. Something not too complementary to CPAs. GM should be forced to pony up all of Delphi's pension contributions. Now. If GM can't pay, it should join Delphi in bankruptcy. The two cases could be jointly administered.

Tuesday, August 26, 2008

Strained Supply Chains

"When Tesla Motors, a pioneer in electric-powered cars, set out to make a luxury roadster for the American market, it had the global supply chain in mind. Tesla planned to manufacture 1,000-pound battery packs in Thailand, ship them to Britain for installation, then bring the mostly assembled cars back to the [US]. ... 'It was kind of a no-brainer decision for us,' said Darryl Siry, the company's senior vice president of global sales, marketing and service. 'A major reason was to avoid the transportation costs, which are terrible.' [Doing the work in California]. ... Cheap oil, the lubricant of quick, inexpensive transportation links across the world, may not return anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. ... 'If we think about the Wal-Mart model, it is incredibly fuel-intensive at every stage, and at every one of these stages we are now seeing an inflation of costs for boats, trucks, cars,' said Naomi Klien, the author of 'The Shock Doctrine: The Rise of Disaster Capitalism.' ... 'If prices stay at these levels, that could lead to some significant rearrangement of production, among sectors and countries,' said C. Fred Bergsten, author of 'The United States and the World Economy' and director of the Peter G. Peterson Institute for Internatonal Economics, in Washington, 'You could have a very significant shock to traditional consumption patterns and also some important growth effects.' ... The study, published in May by the Canadian investment bank CIBC World Markets, calculates that the recent surge in shipping costs is on average the equivalent of a 9 percent tarriff on trade. 'The cost of moving goods, not the costs of tariffs, is the largest barrier to global trade today,' the report concluded, and as a result 'has effectively offset all the trade liberalization efforts of the last three decades.'... The industries most likely to be affected by the sharp rise in transportation costs are those producing heavy or bulky goods that are particularly expensive to ship relative to their sale price. Steel is an expample. China's steel exports to the [US] are now tumbling by more than 20 percent on a year-over-year basis, the worst performance in over a decade, while American steel production has been rising after years of decline. ... In addition, the sharp increase in transportation costs has implications for the 'just-in-time' system pioneered in Japan and later adopted the world over. ... Jeffery E. Garten, the author of "World View: Global Strategies for the New Economy' and a former dean of the Yale School of Management, said that companies 'cannot take a risk that the just-in-time system won't function, because the whole global trading system is based in that notion'. ... As a result, he said, 'they are going to have to have redundancies in the supply chain, like more warehousing and multiple sources of supply and even production'," Larry Rohter at the NYT, 3 August 2008.

Welcome aboard NYT. Global trade patterns are being and will continue to be disrupted.

Smart Money?

"The big Wall Street firms are finally coming clean about the collapse of the auction-rate-securities market--now that New York Attorney General Andrew Cuomo and other regulators have put a gun to their heads. The truth is even uglier than I suspected. ... As regular readers know, I was among the victims. ... I've since heard from hundreds of others. Wall Street's reaction was to offer to lend investors their own money--using our other assets as collateral and charging us market rates. It was insult on top of injury. ... Thanks to a wave of subpoenas, lawsuits or threatened lawsuits, and the prospect of disclosure, three of the biggest sellers of auction-rate securities agreed last week to reimburse clients. ... Those firms said they will buy back a total of nearly $40 billion in the securities, a sum that, while large, can indeed be absorbed by their balance sheets. What's really shocking are the allegations and evidence that some executives may have known that the auction-rate market was about to collapse even as they pressed their brokers to push the product on unsuspecting clients. ... Katrina Byrne, a spokeswoman for UBS, responded: 'We catagorically reject any claim that the firm engaged in any widespread campaign to move auction-rate securities inventory from our own books into private client accounts.' As for the emails, she said, 'We were disappointed the New York attorney general released details on certain transactions when we conducted our own internal investigation with the assistance of external counsel. We found no evidence of unlawful conduct by any employees'," James Stewart (JS) at the WSJ, 14 August 2008.

JS is a Smart Money columnist. Imagine, he bought this junk. Are we impressed with UBS's internal investigation? Yes, unfavorably. Will the NY State Bar investigate the investigators? Will it find UBS's attorneys are "justice obstructors" and make a criminal referral, or at the very least, violated some canon of legal ethics? Ain't gonna happen. Where was the SEC while this went on? Where's Mike Garcia (MG)? Will he indict anyone? Why not start with the attorneys who conducted UBS's internal investigation? Or is MG too busy with the "Bear Stearns Two"? Hey MG, how many SDNY US Attorneys Office "alumni" work for UBS's law firm? Enough to give it prosecutorial immunity? The Feds prosecuted Milberg Weiss. Whaddayasay Mike?

Monday, August 25, 2008

With a Little Help From My Friends

"A battle is brewing between the insurance industry and the [SEC] over a proposal that would put equity-indexed annuities under the purview of securities regulators. ... Such a move would have far-reaching implications for insurance companies and agents selling these products as well as for consumers, says Rachel Alt-Simmons, a research director in the inurance practice at research firm, TowerGroup. ... New opportunities for broker-dealer firms and insurance companies, to sell equity-indexed annuities, however, will emerge as the products 'lose their ambiguous regulatory status', she says", Daisy Maxey at the WSJ, 7 August 2008.

This is an SEC attempt to take this product from insurance agents and give it to stock brokers. Does the SEC, which claims to be spread thin, need to regulate these products, or can it leave them to state insurance regulators? This is another SEC "payoff" to stock brokers. While I'm no big fan of the insurance industry, I'm in its corner on this one. Chris Cox, get lost.

New Army Career Path

"The U.S. Army, in a far-reaching shift, is reconfiguring its promotion policies to better reward U.S. troops training Iraqi and Afghan security forces, a vital mission widely seen as a career-killer within the military. ... The new rules will in essence make service on the training teams--which live and work alongside Iraqi and Afghan forces as mentors--equal for promotional purposes to time spent in traditional Army roles like commanding artillery or logisitics. 'Our ability to train and operate effectively with indigenous forces will be a key element of 21st century land power,' Army Chief of Staff George Casey wrote in an email to other officers detailing the new policies. 'We need our best involved.' ... 'This will serve to express throughout the Army community that this in an assignment that should be taken seriously and sought after,' said Army spokesman Paul Boyce. ... last fall, Defense Secretary Robert Gates described the training effort as 'arguably the most important military component ' of the overall war effort", WSJ, 19 June 2008.

Are these guys serious? Vlad the Great's generals must have laughed hysterically upon reading this. I figured it out, Casey is auditioning. Auditioning? Sure for the Major-General's song in Gilbert & Sullivan's The Pirates of Penzance, 1879. Wikipedia's description, "The song is replete with historical and cultural references, satirically demonstrating the Major-General's impressive and well-rounded education that seems to come at the complete expense of any useful military knowledge". Have a good laugh, the song is available at

Sunday, August 24, 2008

NCC Probe

"National City Corp [NCC-NYSE] disclosed in a regulatory filing it is the subject of an 'informal' [SEC] investigation related to matters including loan underwriting, bank regulatory matters, and a $1.3 billion sale of a subsidiary in 2006", WSJ, 9 August 2008.

I welcome this probe having called for it in my 18 June 2008 post. I await its results to see if the SEC really investigated NCC's financial reporting or concealed problems with it. Hey Cox, I'm watching you. Don't flub this one.

Rating Agency Scapegoats

"Four executives at Standard & Poor's Rating Services are expected to leave the company as part of a broader management shake-up, people familiar with the matter said. All four had key management roles in businesses that have come under scrutiny as regulators examine why S&P and its rivals rated mortgage bonds too highly and then were too slow to downgrade some of these securites when the housing market began to suffer. ... Gale ... Scott wrote an August 2004 email suggesting that satisfying bond issuers was a factor in S&P's ratings criteria when the housing market was booming. The email was cited in a [SEC] report in July that criticized the practices by the ratings industry. Ms. Scott was not identified in the published report", Aaron Lucchetti at the WSJ, 13 August 2008.

It's nice that S&P will make four sacrifices to the SEC propriety god to attempt to avoid liability for this mess. I hope S&P gets sued and pays plenty. See my 29 July 2008 post for the SEC's report.

IA's Presidential Endorsement: Vladimir the Great!

"If Russian Prime Minister Vladimir Putin were president of the [US], would Iran try to build a nuclear bomb? Would Pakistan provide covert aid to al-Qaeda? Would Hugo Chavez train terrorists in Venzuela? Would leftover nationalities with delusions of grandeur provoke the great powers? Just ask Georgia's President Mikheil Saakashvilli, who now wishes he never tried to put his 4 million countrymen into strategic play. ... Thanks to Putin, the world has become a much safer place. By intervening in Georgia, Russia has demonstrated that the great powers of the world have nothing to fight about. ... Contrary to the hyperventilation of policy analysts on American news shows, the West has no vital interests in Georgia. ... It is humilating for the US to watch the Russians thrash a prospective ally, but not harmful, for Georgia should never have been an ally in the first place. The lack of consequences of Russia's incursion is a noteworthy fact, for never before in the history of the world has the world's military and economic power resided in countries whose fundamental interests do not conflict in any important way. ... Once it became clear that Russia would not tolerate a NATO member on its southern border, however, Washington had nothing to say about the matter, because no fundamental Ameriocan interests were at stake. ... After the US and its main European allies recognized the independence of Kosovo from Serbia in February 2008, Russia warned that this action set a precedent for other prospective secessions, notable South Ossetia. ... If the West is going to put itself at risk for 3.8 million ethnic Georgians, roughly the population of Los Angeles, or 5.4 million Tibetans, or 2 million Albanian Muslims in Kosovo, why shouldn't Russia take risks for the South Ossetians, not to mention the 100,000 Abkaz speakers in Georgia's secessionist Black Sea province? ... Precisely what were the 3.8 million freedom-loving Georgians supposed to contribute to American strategic interests with its $2 billion a year of exports consisting (according to the [CIA] World Factbook) of 'scrap metal, wine, mineral water, ores, vehicles, fruits and nuts'? ... If it had not been for America's insistence on installing a gang of trigger-happy pimps and drug-pushers in Kosovo, Russia might have responded less ferociously to the flea bites on its southern border .... America remains so committed to the myth of moderate Islam that it is prepared to invent it. Kosovo, like the Turkey of Prime Minister Recep Tayyip Erdogan, supposedly embodies a moderate, Sufi-derived brand of Islam that will foster an American partnership with the Muslim world. ... There is no 'clash of civilizations', for Confucian, Hindu, American and Orthodox civilization cannot find grounds for a clash. ... The most visible prospective spoiler in the pack remains Iran. If American wants to recover from its humilation in the Caucusus, it might, for example, conduct an air raid against Iran's nuclear facilities, and justify it with the same sort of reasoning that Russia invoked in Georgia. Contrary to the surface impressions , Moscow wouldn't mind a bit", my emphasis, Spengler at, 12 August 2008.
I love this guy! Spengler for Putin's foreign minister! Not only do I not think Moscow would mind our destroying Iran's nuclear facilities, I think Russia will join in the festivities. I can see Czar Vladimir the Great (VTG) telling Bush, "there's 636,000 square miles of Iran, how many do you want"? Upon hearing this, Bush faints leaving Czar Vladimir stupefied.

Watching VTG's "romp" through Georgia reminded me of this, "One time, years ago, the veteran Baltimore newspaperman, H.L. Mencken, was checking copy coming in from the night editor and sighing at the rising number of errors he was noticing, errors of fact but also of syntax, and even some idioms that didn't sound quite right. He shook his head and said, as much to himself as to the editor at his side: 'The older I get the more I admire and crave competence, just simple competence, in any field from adultery to zoology,' Alistair Cooke, Memories of the Great and the Good", reported by George Will at, 3 June 2007. That includes Czardom. Viva Putin! Where can the US find one like him?

Saturday, August 23, 2008

Loren Steffy on Auction-rate Securities

"This year it was Julius Caeser, and watching it, I felt a little like I did last week as I watched the investigation into the auction-rate bond market unfold. It's a familiar story. ... The auction-rate mess is a remake of two recent Wall Street productions: tainted research in 2002 and mutual fund market timing in 2003. ... In each case, the plot is the same: Wall Street used its control of information to lure unsuspecting investors into securities by misrepresenting their performance. ... For this latest drama, the curtain rises on a familar cast. There's a rogues' gallery of reported targets: Citigroup, Merrill Lynch, JPMorgan Chase, Morgan Stanley, UBS, Wachovia, Bank of America. On the other side, we have the prosecutors: Massachusetts Secretary of State William Galvin and the New York attorney general once again lead the charge, though Andrew Cuomo has replaced Eliot Spitzer, who briefly became governor before becoming a public disgrace. ... And the [SEC]? It's upstaged again, dithering over arcane short-selling rules and aiding in the administration's campaign to prop up the stocks of the very firms it should be investigating. The specter of Harvey Pitt looms large", my emphasis, Loren Steffy (LS) at the Houston Chronicle, 13 August 2008.

Harvey Pitt was my "favorite" SEC chairman. LS's article link: That's telling 'em LS.

College, an Investment?

"Imagine that America had no system of post-secondary education, and you were a member of a task force assigned to create one from scratch. One of your colleagues submits this proposal: First, we will set up a single goal to represent educational success, which will take four years to achieve no matter what is being taught. We will attach an economic reward to it that seldom has anything to do with what has been learned. We will urge large numbers of people who do not possess adequate ability to try to achieve the goal, wait until they have spent a lot of time and money, and then deny it to them. We will stigmatize everyone who doesn't meet the goal. We will call the goal a 'BA'. ... Finding a better way should be easy. The BA acquired its current inflated status by accident. Advanced skills for people with brains really did get more valuable over the course of ther 20th century, but the acquisition of those skills got conflated with the existing system of colleges, which had evolved the BA for completely different purposes. Outside of a handful of majors--engineering and some of the sciences--a bachelor's degree tells an employer nothing except the applicant as a certain amount of intellectual ability and perserverance. ... The solution is not better degrees, but no degrees. ... The model is the CPA exam that qualifies certiified public accountannts. ... The merits of a CPA-like certification exam apply to any college major for which the BA is now used as a job qualification. To name some of them: criminal justice, social work, public administration, and the many separate majors under the headings of business, computer science and education. Such majors accounted for almost two-thirds of the bachelor's degrees conferred in 2005. ... Certification tests will not get rid of the problems associated with differences in intellectual ability: People with high intellectual ability will still have an edge. Certification tetsts would disadvantage just one set of people: Students who have gotten into well-know traditional schools but who are coasting through their years in college and would score poorly on a certification test", Charles Murray (CM) at the WSJ, 13 August 2008.

Much of our educational establishment is based on the "post hoc ergo propter hoc" fallacy, i.e., college graduates make more money, therefore it is their college experience that caused it, as opposed to their being smarter which let them go to college in the first place. Under the second scenario college is just a "sorting mechanism". Vance Packard wrote about this in the Status Seekers, 1959, 49 years ago. I am less enamored of the CPA exam than CM. I know many incompetent CPAs. See my 15 April 2008 post. The last real debate over colleges' role in the US took place about 50 years ago, brought on by "Sputnik panic".

Friday, August 22, 2008

IRS Gets Black Eye

"A federal appeals court decision could pave the way for a surge in tax-refund claims by holders of insurance policies who sold shares in insurance companies that went public. ... The court ruled that a taxpayer who sold such shares didn't have to pay capital gains on the proceeds. ... The [IRS] has maintained that owners of stock from converted insurers owe capital gains taxes on the full amount of the cash received. ... Burgess Raby, the attorney who brought the case, surmises that the fair market value of the stock at the time of its issuance should count as the owner's cost basis. ... Taxpayers could also argue that their cost basis is determined by their total premiums paid, said [Robert] Wilens, the tax adviser", Jesse Drucker and Liam Pleven at the WSJ, 11 August 2008.

I always felt the IRS position on insurance company demutualizations was wrong and applaud this ruling. I encourage the DOJ not to appeal this case. As to the basis, I agree with Raby to the limit of premiums paid.

Tom Selling on FAS 140

Tom Selling has a good 11 August 2008 post at his Accounting Onion, about the FASB's machinations in the current SFAS 140 flap. is the link. In my experience the longer a SFAS is, the less economic sense it makes. Any SFAS over 10 pages long is suspect. SFAS 133 is especially notable, including interpretations, it's 809 pages long! What a joke. SFASs like 133 and 140 illustrate how politicized the world of accounting is.


"Accounting-rule makers will delay by a year proposed changes that could force banks and other financial firms to take onto their books certain off-balance-sheet vehicles that played a central role in the credit crunch. ... Following calls from companies and legislators that companies needed more time, the [FASB] on Wednesday agreed to make the changes for both new and existing structures effective in 2010. If adopted, the rule changes could have a signifcant impact. Citigroup Inc. alone has more than $700 billion in assets in vehicles that it may have to bring back onto its books under the changes", Matthew Cowley and David Reilly at the WSJ, 31 July 2008.

The FASB is gutless. The supposed changes are unnecessary. The problem is: failure to properly apply the existing rules and the PCAOB's unwillingness to discipline the Big 87654 firms which audit big banks. The existing rules are fine. See my 15 December 2007 and 6 February 2008 posts.

Thursday, August 21, 2008

Excessive Domestic Consumption

"From 2000 through 2007, total U.S. [GDP] ... was $92.5 trillion in current dollars. Total U.S. purchases, however, were $97 trillion, a $4.5 trillion overrun, nearly 5% of the entire period's GDP. Those additional goods and services, of necessity, all came from overseas. ... Personal consumption's share of GDP jumped from a long-term average of around 67% to 72% by 2007, probably its highest level anywhere, ever. ... To ensure a steady stream of product, investment banks competed to buy up subprime lenders. ... By 2007 financial-sector profits jumped to 30% or 40% of all corporate profits, depending on the data source. ... It will be essential to shrink the hypertrophied financial sector. ... Pushing the U.S. economy back to a sustainable path has to be a core priority for a new Administration. Consumption has to fall, by at least 4% to 5% of GDP, and the money shifted to savings and investment", Charles Morris at BusinessWeek, 4 August 2008.

I agree with Morris. Connie Yu, are you listening yet?

Russia's "Man Among Munchkins"

"As these words are being written Russian mechanized troops are moving against the Republic of Georgia. The Georgian leadership has been taken by surprise. They did not think the Russians would go this far. So the question has to be asked: Why is Russia invading Georgia now? What would a war between Georgia and Russia accomplish? ... First, the suppression of ragtag forces is always possible if the invader is persistent and determined. In Chechnya the Kremlin's determination has been unwavering and brutal for almost nine years. Nobody thinks Russia has lost the war in Chechnya. ... Fighting partisans was a sign of victory, [Hitler] explained. ... Only those who cannot keep the field in regular warfare hide in caves and snipe at convoys from the underbrush. ... One thing is certain: the Russian invasion of Georgia, if it continues, will mark a turning point. Why are the Russians acting in such a bold manner? ... Already America has been weakened on many fronts. ... There may never be a better moment to paint America as an imperialist aggressor. In Washington, D.C., however, there is no desire for a break with Russia. ... The Russians see America's weakness. First and foremost, the Americans are unwilling to bomb Iran. They have upset the Saudis by building a Shiite democracy in Iraq. The Americans have angered the Turks by supporting the Iraqi Kurds. ... The Russian leadership probably feels it is time to tip everything over. It is time to expose America's weakness. What will President Bush do? By the time you read these words, the White House will probably have issued a statement denouncing the Russian invasion. But will American troops be sent to Georgia? ... The real issue is that Georgia's leadership threw off Moscow's shackles and aligned herself with the United States. ... By invading Georgia, the Russians are assuring the Iranians of Moscow's readiness to confront the U.S. ... It is true that Russia has benefitted from high energy prices. More significantly, Russia will benefit even more when the U.S. dollar collapses. ... If we look at Russian rhetoric and Russian actions over the past nine years we will find a pattern. In recent months the Russians have been acting as if they want to provoke a break with the Americans", my emphasis, JR Nyquist (JRN) at, 8 August 2008.

"Bush did use tough language, demanding that Russia stop bombing. And Secretary of State Condoleeza Rice demanded that Russia 'respect Georgia's territorial integrity.' ... Putin ... appeared ostensibly to coordinate assistance to refugees who had fled South Ossetia into Russia, but the Russian message was clear: This is our sphere of influence, others stay out. 'What the Russians just did is, for the first time since the fall of the Soviet Union, they have taken a decisive military action and imposed a military reality,' said George Friedman, chief executive of Stratfor, a geopolitical analysis and intelligence company. 'They've done it unilaterally, and all of the countries that have been looking to the West to intimidate the Russians are now forced into a position to consider what just happened.' And Bush administration officials acknowleged that the the outside world, and the [US] in particular, had little leverage over Russian actions. 'There is no possibility of drawing NATO or the international community into this, ' said a senior State Department official in a conference call with reporters. ... "Strategically, the Russians have been sending signals that they really wanted to flex their muscles, and they're upset over Kosovo,' the diplomat said. ... During one meeting on Kosovo in Brussels this year, Mr. Lavrov, the foreign minister, warned Ms. Rice and European diplomats that if they recognized Kosovo, they would be setting a precedent for South Osseta and other breakaway provinces. ... 'We've placed ourselves in a position that globally we don't have the wherewithal to to do anything,' Mr. Friedman of Stratfor said. 'One would think under the circumstances, we'd shut up'," my emphasis, Helene Cooper at the NYT, 10 August 2008.

"Russia's only worry is the United States, which currently has a lame-duck president with low approval ratings, and is exhausted after Afghanistan and Iraq. But more importantly, America's attention is preoccupied with a presidential race, in which 'world citizen' Barack Obama has mesmerized Europe as the presumptive new president and soon-to-be disciple of European soft power. ... Most importantly, Putin and Medvedev have called the West's bluff. ... Together with the dismal NATO performance in Afghanistan, the Georgian incursion reveals the weakness of the Atlantic Alliance. The tragic irony is unmistakable. NATO was given a gift in not having made Georgia a member, since otherwise an empty ritual of evoking Article V's promise of mutual assistance in time of war would have effectively destroyed the Potemkin Alliance. ... Indeed, tired of European lectures, the Russians are now telling the world that soft power is, well soft. Moscow doesn't give a damn about the United Nations, the European Union, the World Court at the Hague, or any finger-pointing moralist from Geneva or London. Did anyone in Paris miss any sleep over the rubble of Grozny? ... Russia does not need a global force-projection capacity; it has sufficient power to muscle its neighbors and thereby humiliate not merely its enemies, but their entire moral pretensions as well. The Russians have sized up the moral bankruptcy of the Western Left. They know that half-a-million Europeans would turn out to damn their patron the United States for removing a dictator and fostering democracy, but not more than a half-dozen would do the same to criticize their long-time enemy from bombing a constitutional state. ... We talk endlessesly about 'soft' and 'hard' power as if humanitarian jawboning, energized by economic incentives or sanctions, is the antithesis to mindlesss miliary power. In truth, there is soft power, hard power and power-power--the latter being the enormous advantages held by energy rich, oil-exporting states", my emphasis, Victor Davis Hanson at, 12 August 2008.

"The Russian are alcohol-sodden barbarians, but now and then they vomit up a genius. Prime Minister--and now generalissimo--Vladimir Putin is Mother Russia's latest world-class wonder. Let's be honest: Putin's the most effective leader in the world today. ... Not a single free-world leader currently in office can measure up to Czar Vladimir the Great. ... Putin not only knew what he was doing--he knew exactly what others would do. ... Strategy and conflict hinge on character. Pution's character is ugly, but he's certainly got one: On the world stage, he comes across as a man among munchkins. ... The empire of the czars hasn't produced such a frightening genius since Stalin", my emphasis, Raph Peters (RP) at the NY Post, 14 August 2008.

"Russia won. Diplomacy failed. No state or alliance will reverse the decision. When President Bush spoke out strongly on Friday, Moscow ignored him: Words mean nothing to Prime Minister Putin, a man who regards all compromise as weakness. ... Georgia will never be whole again. ... Knocked off balance politically, American leftists rushed to blame both America and democratic Georgia. Their hypocrisy rivals Putin's. ... Putin is sending an unmistakable message to all other independent states that once belonged to Moscow's empire: Russia will not tolerate true democracies or Western orientations on its 'eternal property'. ... Apart from some tactical slovenliness on the part of the military, things have gone perfectly for him. His strategic acumen, audacity and ruthlessness easily make him 2008's 'Man of the Year'. ... Putin's a Russian nationalist. He would have been as at home in the age of Peter the Great as in our time", RP at the NY Post, 16 August 2008.

I agree in part with JRN. JRN writes of "the past nine years". We began bombing Serbia in March 1999, nine years ago. Is that a coincidence? Washington doesn't want a break with Moscow? Huh? What did FDR do to bring us to war with Japan? See Mauritz Hallgren's The Tragic Fallacy, 1937. The next to the last chapter is titled, "Japan the Chosen Foe" and describes FDR's provocations of Japan which exploded across the headlines on 7 December 1941. I disagree with JRN, that the Russians are "assuring the Iranians of Moscow's readiness to confront the U.S.". I think Russia is inviting us to attack Iran! In effect saying: "see what we did in Chechnya. See what we are doing in Georgia. Get off the stick and do likewise in Iran. We border Iran, will join the party and split the proceeds". The Russians are not provoking anything so much as reacting to our provocations. A legal case illustrates. "The fourth assignment was to the following language: 'How can you find a deliberate intent to kill? Do you have to see whether or not the man had that intent or not in his mind a year or month or day or hour? Not at all, for in this day of improved weapons, when a man can discharge a gun in the twinkling of an eye, if you see a man draw one of these weapons, and fire it, and the man toward whom he presents it falls dead, you have a deliberate intent to kill, as manifested by the way he did that act',", Allen v US, 164 US 492, 495 (1896). "The sixth assignment is to the following language: 'The law says we have no power to ascertain the conditions of a man's mind. The best we can do is to infer it more or less satisfactorily from his acts. A person is presumed to intend what he does. A man who performs an act which it is known will produce a particular result is, from our common experience presumed to have anticipated that result, and to have intended it'. ... This is nothing more than a statement of the familiar proposition that every man is presumed to intend the natural and probable consequences of his own act", 496. We: attack Serbia, criticize Russia for charging the Ukraine market prices for natural gas, bring countries bordering Russia into NATO, yet expect Russia not to react adversely? I agree with Michael Savage, radio talk show host on this. We apparently learned nothing from Britain and France's 1939 guarantee of Polish borders, which in part led to World War II, see my 24 February 2008 post.

Friedman gives Bush and Rice sage advice: "shut up". Look at Britain and France's 1939 Polish guarantee. Shut up, both of you. Now! Bush and Rice's "demands" show American foreign policy's bankruptcy, as well as considering the "world community", whatever that is. Napoleon once said, "God is always on the side of the big battalions". Which battalions oppose Russia in Georgia? See my 22 October and 12 December 2007 and 28 February and 18 March 2008 posts.

I have talked about "soft power". It's a fantasy of the American and European elite. I cite Napoleon.

Why's RP frightened? Czar Vlad the Great (VTG) is a Russian nationalist. He will do what he believes serves Russia's interests. What's not to understand? RP shows envy here, saying in effect, he wishes the US had a president like VTG.

Diplomacy failed? No, without the military capability of backing up diplomacy, one just has noise. As Carl von Clausewitz wrote in On War, 1812, "War is the continuation of policy by other means". What's wrong with VTG's being a Russian nationalist? Should he be Barack Obama, "world citizen"? Putin is in good company. Stalin was Time's "Man of the Year" in 1939 and 1942. So far, Putin's only made it once, 2007. Let's see if he can make it back-to-back.

Wednesday, August 20, 2008

Richard Jewell 2?

"Federal law-enforcement officials continued to deliberate on whether and when to release evidence they say implicates a U.S. military researcher in the 2001 anthrax attacks. ... The intense, seven-year investigation has also put Fort Detrick under increased scrutiny. ... The Justice Department's caution stems in part from early mistakes that caused investigators to focus on another Fort Detrick scientist, Steven Hatfill. Mr. Hatfill sued the government for wrongly targeting him in the case and the [DOJ] last month agreed to pay him $5.8 million to settle the case", my emphasis, WSJ, 5 August 2008.

"Over the past week the media was gripped by the news that the FBI was about to charge Bruce Ivins, a leading anthrax expert, as the man responsible for the anthrax letter attacks in September/October 2001. ... The FBI needs to explain why it zeroed in on Ivins, how he could have made the anthrax mailed to lawmakers and the media, and how he (or anyone else) could have pulled off the attacks, acting alone. ... The spores could not have been produced at the U.S. Army Medical Research Institute of Infectious Diseases [AMRIID] where Ivins worked without many other people being aware of it. Furthermore, the equipment to make such a product does not exist at the institute. ... In short, the potential lethality of anthrax in this case far exceeds that of any powdered product found in the now extinct U.S. Biological Warfare Program. In meetings held on the cleanup of the anthrax spores in Washington, the product was described by an official at the Department of Homeland Security as 'according to the Russian recipes'--apparently referring to the use of the weak electric charge [on the spores]. ... The FBI has not officially released information on why it has focused on Ivins. ... The multiple disciplines and technologies required to make the anthrax in this case do not exist at the [ARMIID]", Richard Spertzel (RS) at the WSJ, 5 August 2008.

"The [FBI] is basing a central part of its case against Bruce Ivins on anthrax spores found on a laboratory flask to which the scientist has access, according to two people briefed on the matter. ... Much remains unclear about the agency's case, including its theory of Dr. Ivin's motivation and evidence tying the scientist directly to the anthrax in the attacks. The agency is under pressure to bring the nearly seven-year case to a conclusion after a succession of stumbles and dead ends. ... The [FBI] official added, however, it was unclear how many others had access to the flask. ... Justice Department and FBI officials are bracing for the possbility of a skeptical reception from scientists and amateur analysts poised to compete with the official version of events. ... By late 2006, it was clear the investigation was homing in on Dr. Ivins, said Jeffrey Adamovicz, who took over as chief of Dr. Ivin's division in 2003. ... Adamovicz didn't know what was searched because the FBI would turn off the security cameras while they were there. ... Adamovicz said the scientist was very upset, adding, 'He mentioned a couple of times maybe they were trying to set him up.' ... Adamovicz also recalls finding Dr. Ivins at work, yelling that the FBI had raided his home and taken his family to different locations for hours of questioning", my emphasis, Evan Perez, Siobhan Gorman, Susan Schmidt and Elizabeth Williamson at the WSJ, 6 August 2008.

"The [FBI] says the evidence, including hundreds of pages of unsealed documents, proves that Dr. Ivins was the sole person responsible for the 2001 anthrax mailings. ... He committed suicide on July 29 after federal prosecutors informed him they intended to charge him in the attacks that killed five people and injured 17. ... U.S. Attorney Jeffrey Taylor [JT] ... said there was no physical evidence that tied the researcher to the mailbox in Princeton. where the letters were mailed, but said authorities reached a 'reasonable conclusion' that it was possible he had done so, based on his past actions. ... Paul Kemp, Dr. Ivin's attorney, accused federal prosecutors of conducting 'an orchestrated dance of carefully worded statements, heaps of innuendo and a staggering lack of real evidence.' ... The FBI now faces a major challenge: making its version of events stick over the many competing narratives that have arisen in the intervening years, and over its own prior mistakes. ... 'We believe we could have proven Dr. Ivin's guilt beyond a reasonable doubt,' said Mr. Taylor the U.S. Attorney", my emphasis, Evan Perez, Siobhan Gorman, Gary Fields and Elizabeth Williamson at the WSJ, 7 August 2008.

"It sounds like a very bad made-for-televison move: a mad scientist--a violent sociopath, a 'nerd with a dark side,' who had already tried to kill several people, is obsessed with pornography, and is fixated on a particular college sorority--unleashes a strain of anthrax through the U.S. mail, killing five, infecting 17 others, and terrorizing the country. His motive, aside from sheer antisocial vindictiveness: he holds the patent for an anthrax vaccine, and he also wants to direct the nation's attention to the supposedly overlooked and underfunded problem of bio-terrorism, That'll teach 'em! It sounds like some pretty execrable fiction, yet the FBI is peddling this farrago of shopworn cliches as the facts surrounding the alleged guilt of Bruce E. Ivins, whose suicide the other day ostensibly closes the 7-year-old anthrax terrorism case that has baffled investigators and shown a cruel light on the Bureau's methods and standards of conduct. ... The real topper has got to be the 'sorority obsession'. ... This passes muster in Hollywood, of course, since it embodies all the social prejudices so beloved by that temple of cultural corruption, yet in the real world one looks at it askance and wonders: are these guys kidding? ... Clearly, the whole purpose of bringing this sorority angle up is to smear a dead man as a pervert and cast him in the sinister light suitable for the villian in this crude media narrative. ... For all the 'genome tracing' and scientific detective work conducted by the FBI over a period of years, the reality is that they can trace the anthrax to a particular lab--but not, as several experts have pointed out, to a particular person. That would require real detective work of the gumshoe variety, as opposed to farming it out to scientists, many of whom are (or were) on the FBI's suspect list. (Ivins himself was recruited to this task.) Yet the FBI is not that concerned with the facts: what they're after is a good story, one that the media--and therefore, they think the public--will swallow without thinking about it too much. ... They aren't trying to convince a jury; after all, the guy is dead. ... Well, they didn't arrest him because there wasn't enough evidence. So they drove him to suicide, as the only alternative to confessing to a crime he didn't commit. ... Did they drive Ivins to suicide because he knew too much? ... Surely a lone nut could not have carried out this technically difficult and logistically complicted scheme", Justin Raimondo (JR) at, 6 August 2008.

"The anthrax murder case has become an epic embarassment for the [FBI], and the suicide of Ivins on July 29 forced the government to go public with its case against him before it was ready", my emphasis, Amada Ripley/Frederick at Time, 18 August 2008.

"Paul Kemp, Ivin's lawyer, said some of what's presented in the unsealed affidavits are 'speculative; theories that would never be admissible in court ... What's more, Kemp said, the FBI omitted evidence that might have been exculpatory, including that Ivins kept his security clearance after passing a polygraph in which he was questioned about the anthrax investigation", Michael Isikoff at Newsweek, 18 August 2008.

More sloppy WSJ reporting. How does the WSJ know what the DOJ's "caution" stems from? The most the WSJ could say is the DOJ "stated" where its caution stems from.

I am as skeptical of the FBI's claim as RS. Ivins looks like today's "Richard Jewell" or "Joseph Jett" (JJ). The Bush administration will soon end and apparently wants the anthrax case closed, and so it is. Let us not forget the FBI has published "DNA match" statistics of up to 110 trillion to one! Who is the FBI trying to impress with big numbers? Here's one: "googolplex", so there. Nah, Nah, Nah!

Who conducted this investigation? The FBI or Russia's FSB? "Skeptical reception"? You bet. I'm here. The "FBI would turn off the security cameras". How nice. Criminal lawyers should see a problem here. Many police agencies film arrests when possible. Why? To avoid lawsuits. Why did the FBI turn off those cameras? Will it say to look for things in the lab and not "compromise" its investigation, or to plant things in the lab? Even so, it could have kept the cameras on, given the films immediately to say a Texas Ranger or Michigan State Policeman, part of the "team", stationed at the lab, for safekeeping. Why do I suggest those agencies? They're not federal and still have good reputations. I see the FBI's turning off the cameras as "res gestae", i.e., "things done". Res gestae are admittable in criminal cases to show: motive, plan, intent, absence of mistake, etc. West's criminal law keys 351 and 364-370 include concealment as res gestae! I assume JT knows this. Yet he permitted it. Hmmm. As Justice Louis Brandeis once wrote, "sunlight is often the best disinfectant". The DOJ and FBI need lots of sunlight here.

I have no confidence in anything the FBI or DOJ will say on this case. The FBI "raids" of Ivin's home reek. Was the FBI conducting an investigation, or kidnapping members of his family to get them to "talk"? Shades of a 1930s "B" gangster movie. This reminds me of the FBI's following JJ during its investigation of his "crimes". An investigation that yielded no indictment. As former Judge Sol Wachler of New York's Court of Appeals once said, a "prosecutor can get a grand jury to indict a ham sandwich" and no federal grand jury indicted JJ. Another FBI fiasco: the Geronimo Pratt case. Look into it. It's amazing. Another FBI fiasco: Unabomber. In 17 years the FBI did not find Unabomber. David Kacynski, Ted's brother did. Then the DOJ and FBI threatened David with being an accessory after the fact or some such thing and tried to reneg on a deal David made to keep Ted from being executed. The FBI and DOJ are not to be trusted. They identified suspect after suspect in the anthrax case, and I surmise tried to induce each "suspect" to commit suicide. In Ivins they finally hit pay dirt and we are expected to believe this.

Aren't we impressed? Yes, but unfavorably. The FBI and DOJ love "lone nuts". That's their Lee Harvey Oswald and Timothy McVeigh portraits. I didn't buy it then, I don't now. The DOJ told Ivins it would charge him. So? It tells us after he's dead. Wonderful. I believe the DOJ wanted Ivin's suicide, so it needn't try him! No "physical evidence" tying him to the mailbox. Great. JT says he "could have proven Dr. Ivin's guilt beyond a reasonable doubt". What should JT say? Whoever JT is, he's not the mythical Hamilton Burger (William Tallman) of 1957-66's Perry Mason, who once said to Perry, "You know my office Perry. We would never even seek an indictment if we didn't feel we had enough evidence to convict". To which Perry replies, "I know Hamilton, but my client will plead not guilty". Said in the context in which Burger wanted Perry's client to plead to a lesser charge, possibly voluntary manslaughter as there were "extenuating circumstances" for the homicide. JT, whoever you are, you ain't the "Hamburger" I grew up with. Shame on you. Had you tried this case, you should have selected the stupidest, most gullible jurors possible. Your "dog don't hunt". I would pay to see you and a group of FBI agents on the stand being cross-examined by say, Barry Scheck, of OJ Simpson fame. That would be a real treat.

I see what JR sees. The FBI tried to intimidate JJ and getting nowhere, gave up after about three weeks. The FBI and DOJ should have learned from the fate of Mike Nifong of the "Duke Three", i.e., everything they did or could have done will be picked apart in the blogosphere. I don't buy the FBI-DOJ "narrative". It shows how far the US has come: the FBI issues a narrative like a college English professor "deconstructing" literature. We no longer have truth and falsehood, just "competing" narratives . Here's a link to JR's post:

"Forced" Uncle Sam, Amanda? Surely you jest. My spin: Ivin's death let Uncle Sam reveal his pathetic case.

Fed Independence, a Fraud

Thomas DiLorenzo has a 15 August 2008 post at Lew Rockwell about the Fed's supposed independence worth reading. Here's a link: The short version: it isn't, wasn't and the Fed is Uncle Sam's political tool. Anything it does is suspect, even it's supposed research.

Steve Waldman on Risk

Steve Waldman (SW) has a must read 7 August 2008 post about risk at his Interfluidity. Welcome aboard SW, I've said things like this since 1980. Jim Grant said things like this before me. Here's the link:

Tuesday, August 19, 2008

Muni Bond Insurance-RIP

"Bond insurer Ambac Financial Group Inc. paid $850 million to Citigroup Inc. to terminate a guaranty contract tied to $1.4 billion in troubled mortgage-related securities. The move sent shares of Ambac and other bond insurers higher, as investors anticipated more cancellations of similar contracts, which could help the insurers clear out some of their losing positions. ... While the terminations of CDO guarantees appears to be positive for many bond insurers, it could spark a rush by financial institutions to get as much capital as they can from the insurers. If the insurers make significant payouts now 'there could be less protection left for the rest of their policyholders,' which include investors that hold municipal bond guarantees, said Rob Haines, an analyst at Credit-Sights", Lavonne Kuykedall and Serena Ng at the WSJ, 2 August 2008.

I think Eric Dinallo, NY State Insurance Commisioner should prohibit this. It looks like a "preferential payment" prior to bankruptcy to me. I agree with Haines, these kind of payouts are bad news for muni bond holders. Muni bond issuers should be screaming over this.

London Banker on Snake Oil

London Banker (LB) has an 8 August 2008 post at his London Banker blog likening today's financiers and politicians to snake oil salesmen. I previous called the financiers alchemists, 23 August and 24 December 2007 and 3 April and 1 July 2008. Here's a link to LB's post:

Toothless SEC-7

"Ernst & Young LLP [E&Y] agreed to pay $2.8 million to settle [SEC] allegations that it compromised its independence by engaging in separate business dealings with a director of three of its client companies. ... [E&Y] settled the SEC's administrative proceedings without admitting or denying the allegations. ... By entering into an independence-impairing business relationship with [Marc] Thompson, [E&Y] clearly violated the rules,' said Scott Friestad, co-deputy director of enforcement at the SEC's Washington office", my emphasis, WSJ, 7 August 2008.

Another SEC enforcement triumph. $2.8 million for E&Y and $8.4 million for Jett, my 12 September 2007 post. What a country.

Monday, August 18, 2008


"The [IRS] is offering a type of amnesty to more than 45 companies that engaged in complex leasing transactions that the agency has challenged as abusive tax shelters, an amnesty under which the firms would give up most of the tax benefits from the deals but avoid potential penalties. The transactions are known as SILOs or LILOs, for sale in-lease out or lease in-lease out. Long popular with banks, they involve companies' buying or leasing assets outside the U.S., such as telephone networks or railroad and power systems, then leasing them back to their original owners. Such arrangements created tax benefits for the U.S. companies, which claimed depreciation expenses for the assets on their tax returns", WSJ, 7 August 2008.

I read IRS Revenue Ruling 2002-69, 4 November 2002, available at,,id=120633,00.html. I am amazed any CPA or attorney ever thought SILO and LILO would fly. I agree with the IRS's analysis, LILO and SILO lack economic substance. The IRS should go further and bar from practice in front of it any CPA or law firm which promoted SILO or LILO. For that matter, Mark Olson (MO) at the PCAOB, will you review the tax accrual workpapers of whichever CPA firms audited the banks and companies in question? Well MO?

I Didn't Make This Up

"The Treasury Department, which recently received authority to help shore up Fannie Mae and Freddie Mac, hired Morgan Stanley [MS] to provide 'market analysis and financial expertise' in connection with its rescue plan. ... The Treasury on Tuesday reiterated that it has no plans to use the [line of credit] authority. It said it retained [MS] to help it 'analyze and understand these authorities, should circumstances ever warrant their use.' [MS] won't have access to Fannie's or Freddie's books and records other than what is publicly available. ... A spokeswoman for [MS] said the bank is giving up any involvement it has had in advising Fannie and Freddie as part of this new assignment. ... [MS] will receive $95,000 in exchange for providing its services through Jan. 17, 2009", my emphasis, WSJ, 6 August 2008.

I had difficulty reading this article I laughed so hard! Why do two financial geniuses like Hank Paulson and Ken Wilson (KW) need MS's help? MS will get $95,000. Couldn't it have shown us its public spirit and accepted $1 as compensation like KW will? Imagine, MS will give up "any involvement it has had in advising Fannie and Freddie". Who is MS really working for? Every time I think of MS's "opportunity losses" in accepting this assignment for a measly $95,000, I laugh. The sacrifices MS makes for his Uncle Sam. Let's have Bush give MS a Presidential Medal of Freedom, our highest civilian award!

Sunday, August 17, 2008

The 13th Juror Strikes Again!-2

"A federal judge in Phoenix Monday overturned a verdict against Apollo Group Inc., ruling that jurors erred in January when they sided with a class of shareholders who had sued the company for fraud. Had the ruling stood, Apollo, the owner of the for-profit University of Phoenix, faced a payout of as much as $280 million. The jury trial garnered attention, partly because so few shareholder lawsuits go to trial. ... After a two-month trial in Phoenix, the jury found evidence of fraud concerning the timing of the report's release and awarded shareholders $5.55 a share. Judge James Teilborg Monday overturned the jury's ruling, essentially holding that the plaintiff's failed to show that they suffered damages as a result of the fraud. ... Wayne Smith [WS] of Gibson Dunn & Crutcher LLP, which represented Apollo said: "We didn't settle this case because we believed there were no damages", Ashby Jones at the WSJ, 6 August 2008.

Another federal judge who should be thrown off the bench. It is not Teilborg's job to: weigh the evidence, assess witness credibility or shill for Apollo. I think his "reasoning" was as follows: Apollo is a big Phoenix area employer so I will not let a jury verdict stand against it. The correct standard for the judge to review the case is the "no evidence" standard. If that was so, the case should have been disposed of before trial through summary judgment. WS claims "we believed there were no damages". That may be WS's opinion. So? He's paid to express that opinion. Alternatively, WS knew the fix was in from the start. I've said before: nothing that comes out of our courts should be taken at face value. I have followed Apollo since 2002 and concluded it committed just the fraud it was accused of. At the time in 2004! What are you going to do about that, WS? I concluded your client committed a fraud.

Mish on Wachovia

Mike Shedlock has a good 13 August 2008 post on Wachovia at his Global Economic Trend Analysis. Mish asks if Wachovia can do anything right. Yes, it can, and did. Here's a link: It hired a former Goldman Sachs guy, see my 25 July 2008 post. That may be enough.

Michael Panzner Strikes Again

Michael Panzner has a 6 August 2008 post at Financial Armageddon about the "Counterparty Risk Management Group" and its recent report, "As far as I can tell, no one raised the possibility that this 'initiative' was actually intended to deflect the blame for the crisis away from where much of it belonged: Wall Street". As Tanta at Calculated Risk says, "Whocoudanode"?; the link to Panzner's post:

Saturday, August 16, 2008


"A fired bank executive who became the first person to win protection under a federal law that shields whistle-blowers, only to see his victory overturned, suffered another setback in a federal appeals court Tuesday. A three-judge panel of the 4th U.S. Circuit Court of Appeals, did not reinstate David Welch to his job, ruling that he failed to explain how his employer's shoddy accounting practices could be considered a violation of federal law. ... Since Sarbanes-Oxley was signed into law, more that 1,000 self-professed whistle-blowers have come forward, and most have seen their cases rejected. Welch was the first to win his case before an administrative law judge, but that decision was reversed in June 2007 by the Department of Labor's [DOL] Administrative Review Board", my emphasis, Houston Chronicle, 6 August 2008.

What's the DOL doing? Is the DOL the Bush administration's (BA) version of the NAF, hearing arbitrations, see my 17 and 27 April and 26 June 2008 posts? Welch was the first winner in over 1,000 cases. Wow! Did they all lack merit? Or is the DOL's job to protect corporate miscreants? I always viewed SARBOX as bad law with one good provision: the whistle-blower provision; which the BA gutted. The Fourth Circut creates new law here. It ruled "shoddy accounting practices [cannot] be considered a violation of federal law". Amazing. Did these guys ever hear of 18 USC 1341 and 1343, the mail and wire fraud statutes; or 15 USC 78, which contains securities fraud; or 18 USC 1005, false entries? Imagine the Fourth Circuit just ruled these laws do not apply. In effect it gave a "stay out of jail free card" to all banks in its area. Expect the incidence of bad bank accounting to soar.

Spengler on the Middle East

"America is stuck to the Iraqi tar baby, and becomes more entrapped the more it struggles. Iran's leverage inside Iraq, as I have warned for years, gives the Islamic republic room to bargain for its broader objectives. ... There are simply too many adherents of militant Islam to deal with the matter conveniently. Any solution today will be messy; a confrontation postponed for another half dozen years might cost eight figures' worth of lives. ... The outlook is grim, not least because the US State Department is repeating in Turkey the errors that helped bring Islamist governments to power in Iran and Pakistan. ... In advance of the November election, the Bush administration wants quiet in Iraq and quiescence in the oil market, and Tehran can help with both. That is why 'talks on Iran's nuclear program in Geneva indicated a shift of the US policy toward Iran on line with the Baker-Hamilton recommendations of 2006.' ... With all due respect to the US's military chief in Iraq and now also Central Command head, General David Peterus, diminished violence in Iraq is not due entirely to the skill of American arms. Without Iranian forbearance, the troop 'surge' would not seem as effective. ... As I wrote in October 2005 ... 'the probable outcome is that Washington will refrain from military action to forestall Iranian nuclear arms developments, while Tehran will refrain from disrupting Washington's Potemkin Village in Iraq. In this exchange, Iran gives up nothing of importance. ... What matters to Washington at the moment is Turkey's ability to create the appearance of progress in Middle Eastern diplomacy. ... The Middle East bears a strong comparison to Europe in the years before World War I. ... Israel is the only player in the region with the perspicacity and power to stop the slide towards regional war. The Jewish state may not have the capacity to eradicate Iran's nuclear development program, but it almost certainly has the means to set it back for a number of years. ... If Israel fails to act, the near-certain outcome will be a regional war on a scale dwarfing the Iran-Iraq war on the 1980s", Spengler at, 4 August 2008.

I love this guy. Why not? I agree with virtually every word he writes. We have no good options in the Middle East. Our troop "surge" only gave Iran "cover" to decrease the violence in Iraq temporarily. I doubt it did anything to further US interests.

Michael Rubin and John Bolton have been very critical of US policy with respect to Iran at the WSJ, 21 July and 5 August 2008. Bolton's piece is especially notable. Here's a link:

Friday, August 15, 2008

Why We Need Federalism-8

"A former Treasury Department official is at the center of a civil complaint recently filed by New York Attorney General Andrew Cuomo against UBS AG, in which the firm is accused of fraud in the auction-rate-securities market. ... The complaint, filed last week in New York City, alleges that [David Aufhauser, DA] and six other UBS executives sold $21 million of their personal holdings in auction-rate securities in the months leading up to the market's collapse, based on unique inside knowledge of the problems in the market. ... The Treasury Department awarded [DA] its highest honor, an Alexander Hamilton award. He also represented the Treasury Department on the Justice Department's Corporate Fraud Task Force. He joined UBS in 2004", Liz Rappaport, at the WSJ, 1 August 2008.

"Massachusetts regulators accused Merrill Lynch & Co. of co-opting 'supposedly independent' research anaylsts to help them dump collapsing auction-rate securities on unsuspecting customers. ... 'We've seen a corruption of research', says Massachusetts Secretary of the Commonwealth William Galvin, who oversees the state securities division. 'This is an issue that many of us on the enforcement side have seen years ago, and it's the same pattern.' ... In August 2007, Martin Mauro, a fixed-income research analyst, issued a report noting some of the less-than flattering features of auction rate securities. That alarmed Francis Constable, a managing director in charge of Merrill's auction-rate securities desk. Ms. Constable demanded that Merrill retract the report. ... Constable ... sent the following message: ' Shut this guy down'," John Hechinger at the WSJ, 1 August 2008.

"New York state's attorney general, Andrew Cuomo, threatened Friday to sue Citigroup Inc. for alleged fraud in the marketing and sales of auction-rate securities and for destroying evidence after being subpoenaed by his office. ... Citigroup said it is cooperating with Mr. Cuomo's investigation and 'acted in good faith and in the best interests of our clients both before and since auctions began to fail, and there is simply no basis for claims to the contrary.' ... The firm also disclosed Friday in a regulatory filing that it has received subpoenas or requests for information for the [SEC], among others, in connection with its handling of auction-rate securities. ... The letter, written by David Markowitz, the head of the investor-protection bureau in Mr. Cuomo's office, accused the bank of wrongly telling customers the securities were safe, liquid and cash-equivalent. It added that the bank failed to tell investors that, from last August until earlier this year, the market was kept afloat only because the bank placed bids in auctions for the securities", Amir Efrati at the WSJ, 2 August, 2008.

"Pushing to put one of the biggest debacles on the credit crisis behind them, Citigroup Inc. and Merrill Lynch & Co, agreed to buy back $17 billion in auction-rate securities", WSJ, 8 August 2008.

"A once obscure corner of the bond market is triggering one of the messiest Wall Street scandals in years--and potentially the largest mass bailout of American individual investors ever. On Friday, facing allegations of wrongdoing over its sales of so-called auction-rate securities, UBS AG agreed to buy back nearly $19 billion of the investments as part of a settlement with federal and a group of state regulators. ... Regulators from several states have also shown up on Wachovia's Corp.'s doorstep demanding documents; the bank says it's cooperating. A New York state official has accused Citigroup of destroying documents, a charge Citi has denied. Federal prosecutors are preparing to file criminal charges against two former Credit Suisse Group brokers who allegedly lied to investors about auction-rate securities. ... UBS said it didn't intentionally hide the risks of auction-rate securities, and sold them 'appropriately' to individuals for 20 years. ... Merrill categorized auction-rate securities as 'other cash' on its brokerage statements. ... Also, regulators say brokers were paid unusually rich commission to sell the securities. ... UBS said that, after its own internal probe, it 'found cases of poor judgment' but not illegality by certain individuals, and is 'evaluating appropriate disciplinary measures", Liz Rappaport and Ann Randall Smith (R&S) at the WSJ, 9 August 2008.

"Securities regulators are widening the list of Wall Street firms that are being told to fix the auction-rate securities mess. ... State regulators have subpoenaed roughly 30 financial institutions about their involvement in the auction-rate securities market. ... In an SEC filing, [Wachovia] said its individual retail-brokerage clients held $8.7 billion of auction-rate securities as of Aug. 1. That doesn't count other clients, such as corprate clients and charities", Liz Rappaport at the WSJ, 12 August 2008.

Doesn't DA's participation in a "Corporate Fraud Task Force" (CFTF) make you feel nice and warm inside? Was the CFTF's job to facilitate corporate fraud by getting corporations prosecutorial immunity? Why did UBS hire DA? Did DA do anything at Treasury that served USB's interests? It's Alice in Wonderland at Treasury. I await Chris Cox's SEC joining in Cuomo's case. That'll be a long wait.

Hey Chris Cox, now you have an opportunity, charge Constable with securties fraud and make a referral to Mike Garcia's office. Whaddayasay?

I wish Cuomo good luck with his Citigroup suit. I note the SEC is also investigating "C". I can't help but wonder what the SEC would have done absent Cuomo's investigation.

I wonder how Citigroup will account for the buy back.

Aren't you reasured that UBS found no illegality?

I'm crushed. Wachovia too!