Wednesday, December 31, 2008

Justice Department Extortion Racket-4

"A record $800 million in U.S. fines for bribery allegations levied against Siemens AG on Monday could have been much higher if the German engineering and industrial conglomerate hadn't taken steps to cooperate with prosecutors, officials and lawyers say. When a German government investigation became known in 2006, Siemens quickly turned to New York law firm Debevoise & Plimpton LLP [D&P]. The move highlights a widespread practice in the U.S., where prosecutors encourage companies to hire private-sector investigators and then share the information with authorities. ... In a Friday court filing, the Justice Department said it could have sought as much as $2.7 billion in criminal damages from Siemens. In arguing for a lesser fine, it cited the 'extraordinary' steps taken by Siemens to cooperate with authorities and to beef up its compliance procedures. The filing said Debevoise's 'frequent and extensive reports' to U.S. authorities helped the Justice Department's own investigation 'enormously.' ... Siemens said it paid more than $850 million in fees and expenses to Debevoise and the accounting firm Deloitte & Touche. ... 'An independent law firm is hired to minimize damage to a firm,' said Cuno Tarfusser, a prosecutor in Bolanzo, Italy, suggesting there was a potential for conflict of interest. ... Austrian prosecutors investigating Siemens said Debevoise's role slowed their investigation", my emphasis, David Crawford and Mike Esterl at the WSJ, 16 December 2008.

"The husband of a partner at financial public-relations firm Brunswick Group LLC has pleaded guilty to running a $5 million insider-trading scheme. ... Matthew ... Devlin, a broker at Barclays PLC's Barclays Capital unit, was charged with five counts of conspiracy to commit securities fraud. he allegedly passed along confidential information to several 'clients and friends.' ... The bounty from the alleged conspiracy totaled $4.8 million, according to the authorities", Matthew Karnitschnig and Chad Bray at the WSJ, 19 December 2008.

Instead of paying $2.7 billion, Siemens paid $.8 billion, $1.9 billion less. $1.9 billion pays serious legal and accounting fees. Is the new "discount" 55%, i.e., you pay 45% in fees to the CPAs and attorneys in lieu of Uncle Sam. This seems high. Don't most personal injury lawyers only get 33%? If a case runs this large, perhaps 12%. What were the "extraordinary steps"? Would it be improper to think they were the $850 million in fees which could buy a few partnerships at D&P and Deloitte? We know D&P, that's Mary Jo White's firm! See my 31 January and 22 November 2008 posts. This stinks.

$4.8 million? Less than my Blankfein test. The SEC and DOJ should have ignored this case. What was Devlin's real crime? He's such a small fish he couldn't offer any SDNY AUSA a NY BigLaw partnership. That's a serious crime.

WSJ Loses Editorial Page

"The Supreme Court ruled that consumers can sue Altria Group's Philip Morris USA unit under state unfair-trade laws for its advertising of 'light' cigarettes, striking a blow against a broad effort by U.S. corporations to limit their exposure to suits filed under state law. ... Similar suits are pending in other states, exposing the tobacco industry to a new avenue of attack by smoking opponents. More broadly, the decision undercuts a legal strategy that the business community has deployed to insulate itself from consumer lawsuits filed in state court. With increasing success, companies have been arguing that federal regulation of their products, implicitly barred state action, whether by consumers or state government, to hold them liable for injury. ... On Monday, the Supreme Court broke along familiar ideological lines. Justice Kennedy, who sometimes splits with he fellow conservatives, joined Justice Stevens's majority opinion, along with Justices David Souter, Ruth Bader Ginsburg and Stephen Breyer. ... In dissent, Justice Thomas argued that Monday's decision departed from the court's recent cases that have displaced state law in favor of federal regulation", my emphasis, Jess Bravin at the WSJ, 16 December 2008.

This article, "Altria Case Deals Blow To Efforts to Rein In Lawsuits", could have been titled, "Supreme Court Tilts Right: Upholds States' Rights". The WSJ continues confusing its editorial and news pages. Imagine, Ruth Bader Ginsburg is a right-wing justice! John Roberts and Samuel Alito paid off for big business like two cheap streetwalkers. This case should have been a 9-0, no-brainer, shut out. Federal "regulation implicitly barred state action", wow. How can you make this argument with a straight face? What does the 10th Amendment say?

Tuesday, December 30, 2008

Drug Cartels and the Courts

"The case of a South Texas paralegal who allegedly leaked information to members of a violent drug cartel is highlighting fears that networks are using bribes to reach into the U.S. halls of justice. Federal authorities allege that Joel Carcano Jr., a college-educated paralegal, unlawfully provided confidential information to the Texas Syndicate drug mafia. ... But the case underscores the threat posed by violent gang memebrs who are willing to bribe their way inside the U.S. justice system, according to The (McAllen) Monitor, which reported on the case in Sunday's editions. 'There's a lot of money in the drug business,' said Jack Wolfe, a criminal defense attorney and former federal prosecutor. 'Sometimes, I think the temptation may be too much for some people'," my emphasis, Houston Chronicle, 8 December 2008.

Compare this case to Mary Jo White and Linda Thomsen's, my 23 October 2008 post. Consider Wolfe's comment. I ask, has Wall Street less money? The drug cartels are good at what they do; they are better run than Wall Street! Have any of them asked Congress for a trillion-dollar bailout? The drug cartels just need to hire the "right" attorneys to get things "fixed".

SEC Deep Capture

Jesse at Jesse's Cafe Americain has a link to Deep Capture about the SEC and New York Big Law's incestuous relationship, 16 December 2008. Here it is:

Mark to Make-Believe

Yves Smith has a fine 11 December 2008 post at her Naked Capitalism about the FASB 157 flap, link: I previously commented on FASB 157 here:

Monday, December 29, 2008

Oil Investments

"When crude hit $70 a barrel, Canada's oil sands became alluring. At $80, wind energy was profitable. And at $100-plus, even pricey plans to turn coal into gasoline came within reach. ... So far, companies aren't cutting major ongoing projects with oil under $50 amid a growing global recession and sharply shrunken demand. But increasingly they're postponing final investment decisions--the point at which contracts get signed, contractors are hired, and money is committed--at least until the lofty costs of doing business mirror crude's fall. ... George Kirkland, Chevron's executive vice president of global upstream and gas, ... 'For a period, oil prices went up faster than the costs of goods and services. But that's turned, it's definitely turned,' he said. 'And it's got to turn back.' ... According to Simmons & Company International, total exploration and production spending this year will exceeed $380 billion, including available figures from government-run oil companies as well as publicly traded producers. ... 'If we see oil sustained at $50 or $60, you will see more new projects delayed, especially in high-risk environments like deep water and unconcentionals like oil sands,' said Gary Adams, vice chairman of Deloitte's oil and gas group", Kristen Hays at the Houston Chronicle, 14 December 2008.

Until oil prices rise, investment in these projects will lag. Oil and gas and the related stocks look cheap to me.

Zimbabwe Ben is Lost

"While Ben Bernanke was teaching economics at Princeton University in late 1999, he admonished officials in Japan for doing too little to get their country out of its economic funk. Their model, he said, should be [FDR]. 'Roosevelt's specific actions were, I think, less important than his willingness to be aggressive and to experiment--in short, to do whatever was necessary to get the country moving again,' Mr. Bernanke said in a paper on Japan's paralysis. ... Fed officials on Monday begin two days of meetings to deliberate on the course of U.S. monetary policy at a critical juncture. The central bank's target interest rate, at 1%, is widely expected to be reduced, but doesn't have room to go much lower. ... One of the key lessons Mr. Bernanke drew from years as an academic studying the Great Depression and Japan was that policy makers made matters worse by tarrying and by being constrained by convention. He sees them as mistakes he is determined not to repeat. ... One buzz word inside the Fed these days is 'blue sky,' a term meant to encourage Fed staffers to come up with ideas beyond their normal boundaries. ... 'I call it the Great Experiment,' says Vincent Reinhart, a former Fed staffer who co-authored papers with Mr. Bernanke on how to manage when interest rates get near zero. ... But experimentation is now the order of the day. The Fed has rolled out nearly a dozen new programs aimed at rescuing failing institutions and specific troubled markets. ... The Fed's balance sheet has grown to more than $2 trillion, and because of its ability to pront money to fund these programs, it could grow further still. ... Mr. Bernanke's choices could damage several objectives that the Fed holds sacrosant. Low interest rates and an exploding balance sheet could some day cause inflation. ... Mr. Reinhart notes that Mr. Bernanke's approach also could open the Fed to political intrusion, something central bankers have fought for decades to avoid. ... Moreover, Mr. Bernanke's activist approach could expose the central bank to losses on loans it has made. The loans are all secured in one way or another, and Fed officials said losses are unlikely", my emphasis, Jon Hilsenrath (JH) at the WSJ, 15 December 2008.

"Policy makers around the world marched ahead Wednesday with efforts to stimulate a withering global economy that so far has overwhelmed their attempts to contain the damage. Central banks in Norway, the Czech Republic, Hong Kong, Saudi Arabia, Oman and Kuwait cut interest rates, a day after the Federal Reserve slashed its rates and promised more unconventional lending to battle the deepening U.S. downturn. Additional interest-rate reductions are becoming more likely in places such as Japan, the U.K. and the euro zone. ... As rescue efforts mount, economists are struggling to explain why nothing so far has worked to avert a deep recession", my emphasis, JH at the WSJ, 18 December 2008.

"It is now frighteningly clear that the world's dramatic financial rescue efforts are both unprecedented in scope and creativity--and wholly inadequate. ... The needed response is a big-bang global bailout that is even bigger than what we have seen so far, one that is large and sweeping enough to restore confidence. ... Clearly, the governments have not succeeded in restoring calm. Their efforts look improvised, confused and ineffective to the average consumer or investor. The risks are too great not to move more boldly. ... The U.S. stimulus package would have to be big enough to allay any doubts that the United States is not going to risk failure--a trillion dollars (about 7 percent of GDP) over two years is the right order of magnitude, not $500 billion over the next two years, if press reports of Obama's plans are accurate. ... Unfortunately, there is no way to finance a massive stimulus without going into deeper deficit and incurring extraordinary level of debt. ... The United States cannot act alone. ... Uncertainty is the enemy of stability and growth. Governments are, like it or not, in charge", my emphasis, Jeffrey Garten (JG) at Newsweek, 22 December 2008.

I would like JH's reporting to show more skepticism. "Specific actions were ... less important than [FDR's] willingness to be aggressive and to experiment". "I call it the Great Experiment", indeed. What objectives does the Fed hold "sacrosanct"? "Open to political intrusion"? The Fed is a creature of Congress. What else is it? "Could expose the central bank to losses"? Huh? The Fed bought or lent on paper no one else wanted! This article is pitiful.

In the real economy, things take time. Perhaps the world needs higher interest rates.

JG is a Yale School of Management professor. Professors love power. JG likes bold action and inflation. Own bonds? Euros, US dollars, Yen, etc., sell them! Worldwide inflation is coming. JG does not want the US to "risk failure", whatever that means. He'd rather the dollar fail. Did JG find his trillion dollar number in a hermetically sealed mayonnaise jar? How does he know it will "work"? Compare JG's comments to those of Robert Higgs at:

Sunday, December 28, 2008

Ecuador Defaults

"Ecuador's President Rafeal Correa said his nation is defaulting on its foreign debt, in a hardball move prompted as much by leftist ideology as economic distress. Mr. Correa said Ecuador will skip a $30.6 million payment to bondholders due Monday, asserting that there are irregularities in how the debt had been contracted by an earlier administration. ... Oil-rich Ecuador's move marks the first sovereign default since the onset of the global financial crisis in September. While Ecuador had put markets on notice last month that it was threatening such action, the announcement still left some investors agape, as Ecuador has $2 billion is cash on had to pay. ... Investors said the main impact of Ecuador's move would be to make money managers even more pessimistic than they already are about the prospects of countries like Argentina and Venezeula. Together with Ecuador, these countries are considered exceptional cases within the broader group of emerging-market borrowers because of their unorthodox economic policies. All three are also heavily dependent on commodities, whose prices have fallen sharply since September. ... Investors rejected Ecuador's rationale for the default, which was that the debt was illegal. 'That's like Obama coming in and saying that Bush issued Treasurys that were not legitimate,' says Arthur Byrnes of Deltec Asset Management in New York. 'It's amost embarrassing for them'," my emphasis Matt Moffett and Joanna Slater at the WSJ, 13 December 2008.

The rationale is irrelevant. What will Byrnes do about it? Raise an army and invade Ecuador? Since commodity prices are low, we should raise them to bail out Ecuador's debt holders. Why couldn't Obama challenge the propriety of the issuance of a few trillion of our Treasury debt? Because Byrnes finds it inconceivable? US dollar denominated debt is a sell. Byrnes, think about what you said.

Why Blago?

"So the governor's office was offering to sell Obama's vacant seat for the right price. It sounds like standard operating procedure for the Chicago political machine. But Barack Obama is the child beneficiary of that same machine. Who bought his chance at a Senate seat for him? And what price was paid for it? ... The Tribune has just filed for Chapter 11, and one of the aggravating financial circumstances for it is the Wrigley Field white elephant. And yet here it is today, calmly reporting the fact that elements of its own management were attempting dirty deals with the governor to help it unload Wrigley Field. ... Is this sudden outburst of civic-minded journalism designed to make it look better to potential new investors when the paper emerges from Chapter 11? ... For the full information on the substance of the case, see the Chicago FBI website. Tony Rezko is named as one of those involved, and he has already been convicted on corruption charges. Is it possible that the severity of his sentence was tied to his co-operation in nailing the higher-ups? And who is higher up than Rod Blagojevich? Who can he finger to help shorten his term in the slammer, or at least make himself more comfortable during his stay with the federal corrections authorities?", my emphasis, Baron Bodissey (BB), 9 December 2008 at

"Federal agents arrested Illinois Gov. Rod R. Blagojevich and a senior aide Tuesday for what prosecutors described as a political-corruption crime spree, including allegations they tried to sell the Senate seat of President-elect Barack Obama. ... Unveiling the federal criminal complaint at a news conference, U.S. Attorney Patrick Fitzgerald [PF] said Mr. Blagojevich had 'taken the state to a new low'. ... The arrests came five years after federal authorities began investigating Mr. Blagojevich's alleged fund-raising and influence-peddling schemes. For the past two months, investigators have been listening on wiretaps to profanity-laced conversations about the governor's alleged plans to profit from his authority. ... The allegations suggest a breathtaking degree of brazenness on the part of the Illinois governor. ... [FP] told reporters he felt compelled to act this week because of 'lot of things going on that were imminent,' including legislation awaiting the governor's signature that was allegedly being held, pending a potentially illegal payment to Mr. Blagojevich. ... Blagojevich was also threatening to stall the sale of Wrigley Field, owned by the Tribune Co., if the Chicago Tribune newspaper failed to fire five members of the editorial board who were critical of the governor", my emphasis, Douglas Belkin, Lauren Etter and Timothy Martin at the WSJ, 10 December 2008.

"The creditor of a Chicago plant where laid-off employees are conducting a sit-in to demand severance pay said Tuesday it would extend loans to the factory so it could resolve the dispute, but the workers declared their protest unfinished. A resolution seemed nearer as Bank of America, which yanked the plant's financing last week, announced it sent a letter to Republic Windows and Doors offering 'a limited amount of additional loans' to resolve employee claims", Houston Chronicle, 10 December 2008.

"Yesterday, while reading the story about Illinois governor Blagojevich, a central question went through my head. I am sure it was not the question most of Boobus Americanus was asking: Who were the people he was offering to sell the vacant U.S. Senate Senate to? Instead, I was wondering whom in the criminal enterprise we call government he had crossed? ... While the New York Times referred to the story using words such as corruption and scandal, those of us who realize the only 'change' this country secured in the recent presidential election was a change in the skin pigmentation of the tyrant in charge, knew instinctively that the good governor must have really upset someone in power, for corruption and scandal goes to the very core of our government. ... Considering the governor was recorded by those wonderful crime-fighting folks at the FBI bantering about his 'golden' egg with advisers, one must wonder who tipped them off? Of course the FBI is as pure as the driven snow and has never been accused of any wrongdoing, violating civil rights withholding or lying about evidence, or taking the innocent lives of those whom they are sworn to protect, so we know everything about their investigation would be above reproach. ... So, if we have the crooked and corrupt outing the crooked and corrupt, who stood to gain by the revelation to Boobus that one of the criminals was acting in a criminal manner? ... The governor has taken a pee in someone's cornflakes: it will be interesting as we learn who and why", my emphasis, Michael Gaddy (MG) , 11 December 2008 at

"Undoubtedly one of the events [PF] has no desire to influence is his own possible reappointment as U.S. attorney for four more years (all U.S. attorneys can be replaced by the incoming administration). ... Moreover, [PF's] bare-knuckle methods have rankled many in the Chicago bar. For example, he got former Gov. George Ryan's chief of staff, Scott Farwell to testify against his former boss by threatening to imprison Farwell's girlfriend for perjury. ... Instead, with wiretap evidence piling up, ... [PF] was forced to make the arrest", my emphasis, Scott Turow (ST) at the Houston Chronicle, 11 December 2008.

"Allegations that Illinois Gov. Rod Blagojevich approached the nation's largest union seeking help in a complex pay-for-play scheme involving an open Senate seat are the latest episode in a long, mutually beneficial relationship between the governor and the powerful Service Employees International Union ... The relationship, while not illegal, or even unusual, for the SEIU, may help explain why the union finds itself involved with a federal criminal investigation against Mr. Blagojevich. The governor was arrested this week after federal authorities issued a complaint against him which, among other things, said his office suggested a deal might be worked out in which he would be given a union job in exchange for naming a labor-friendly senator to fill the vacancy left by President-elect Barack Obama", my emphasis, Clare Ansberry at the WSJ, 13 December 2008.

"Illinois Gov. Rod Blagojevich's 'conduct would make Lincoln roll over in his grave,' according to U.S. Attorney [PF]. But [PF's] statement would, at the very least, make well-regarded former Attorney General Robert Jackson flinch in his. Almost seven decades ago, Jackson admonished a meeting of U.S. attorneys that they should be dedicated 'to the spirit of fair play and decency. ... A sensitiveness to fair play and sportsmanship is perhaps the best protection against the abuse of power. ...' ... The prosecutor is permitted to 'inform the public of the nature and extent' of the charges. In the vernacular of criminal law, that means the prosecutor may not go 'beyond the the four corners'--the specific facts--in the complaint or indictment. He may also provide any other public information, the status of the case, the names of the investigators, and request assistance. But he is not permitted to make the kind of inflammatory statements [PF] made during his media appearance. ... And although I am a Republican, I am first an officer of the court. Thus, I take no joy in a prosecutor pursuing a Democratic politician by violating his ethical responsibility. I fear for the integrity of the criminal justice system when a prosecutor breaks the rules. What's more, [PF] is a repeat offender. In his news conference in October 2005 announcing the indictment of Scooter Libby for obstruction of justice, he compared himself to an umpire who 'gets sand thrown in his eyes.' ... With this statement, [PF] made us all believe he could not find the person who leaked Valerie Plame's name as a CIA operative because of Mr. Libby. What we all know is that [PF] knew well before he ever started the investigation in January 2004 that Richard Armitage was the leaker and nothing Mr. Libby did or did not do threw sand in his eyes. ... In the Libby case, rather than suffer criticism, [PF] became a media darling. ... Additionally, [PF] violated another ethical mandate under Justice guidelines for prosecutors: He is supposed to 'exercise reasonable care to prevent' law enforcement--in this case the FBI agent--from making the same type of extrajudicial statements", Victoria Toensing (VT) at the WSJ, 13 December 2008.

"Lost amid the understandable clamor over the charges against Gov. Rod Blagojevich of Illinois are questions raised by the pretrial public comments about the case by the prosecutor, Patrick Fitzgerald. ... The obvious risk is that a prosecutor's statements outside the courtroom, particuarly statements that pillory a defendant, will taint the pool of prospective jurors and make it less likely that a defendant can receive a fair trial. ... [PF's] expressions of revulsion, use of hyperbolic rhetoric and implicit assertion of his personal belief that the charges have merit clearly run afoul of the rules. ... But [PF] is a prosecutor, a highly regarded, powerful and well-known one", Barry Coburn (BC), 13 December 2008 at

"Rod Blagojevich is the perfect holiday treat for a country fighting off depression. He gift-wraps the ugliness of corruption in the mirthful garb of farce. From a safe distance outside Illinois, it's hard not to laugh at the 'culture of Chicago,' where even the president-elect's Senate seat is just another commodity to be bought and sold. ... Blagojevich's alleged crimes pale next to the larger scandals of Washington and Wall Street. ... Enron was an energy company that had divesrified to trade in derivatives. ... It was also brilliant in devising shell companies that kept hundreds of millions of dollars of debt off the company's bottom line and away from the prying eyes of shareholders. ... Much larger companies than Enron figured out how to place even bigger and more impenetrable gambles on derivatives, all the while piling up unseen debt. They built castles of air on a far grander scale than Kenny Boy could have imagined, doing so with sheer stupidity and cavalier, greed-fueld carelessness rather than fraud. ... The most stupendous example as measured in dollars is Citigroup, now the recipient of potentially the biggest taxpayer bailout to date. ... Enron had been a Citigroup client. In a now-forgotten footnote to that scandal, [Robert] Rubin was discovered to have made a phone call to a former colleague in the Treasury Department to float the idea of asking credit-rating agencies to delay downgrading Enron's debt. ... The Republican side of the same tarnished coin in Phil Gramm, the former senator from Texas. ... Gramm is at UBS, which also binged on credit-default swaps and is now receving a $60 billion bailout from the Swiss government. ... Meanwhile, we have the governor [Obama] leaves behind in Illinois to serve as our national whipping boy, the one betrayer of the public trust who could actually end up paying for his behavior", Frank Rich, 14 December 2008 at

"But some members of [PF's] team actually wanted the alleged scheme to sell President-elect Barack Obama's Senate seat to advance for a little longer, according to some people close to [PF's] office ... The precise timing of Tuesday's pre-dawn arrest was dictated by the Chicago Tribune, according to people close to the investigation and a careful reading of the FBI's affidavit on the case. At [PF's] request, the paper had been holding back a story since October detailing how a Blagojevich confidant was coooperating with prosecutors. But editors decided to publish on Dec. 5, ending the Tribune's own cooperation deal--and tipping off Mr. Blagojevich", my emphasis, Can Simpson at the WSJ, 15 December 2008.

BB's points are well-taken.

I see something else. First, Blago is a Gottiesque, "poor, obsolete loser", my 21 December 2007 post, What did Blago want for himself and his wife? Peanuts. It's not like he wanted a Goldman Sachs managing directorship or even a Chicago BigLaw partnership. Why now after five years? Did PF realize Obama will put him out on his keesta in a few weeks and needed to line up a Chicago BigLaw partnership now? Is he on the payroll of one of Tribune Co.'s secured creditors? Did PF decide to ingratiate himself with the Bank of America (BofA) by pushing Blago out after Blago threatened to stop doing business with the BofA because the BofA pulled the rug out from under Republic, which is currently undergoing a sit-down strike? Depending upon how dirty Blago wants to play this, and how many bodies he's willing to dig up and expose to the sunlight, he could have PF begging to dismisss the charges. Stay tuned. Was John Mack or Lloyd Blankfein indicted in New York? Why not? Why wasn't the Mayer Brown firm indicted, my 22 and 27 December posts? Or will PF hang his hat there next year? This wouldn't have happened if "Hizzoner da mare", Richard Daley, 1902-76, was still alive.

That's interesting.

Yes, MG. Interesting indeed.

Is ST crazy? Or is ST helping PF line up his next gig? PF was not "forced" to do anything. My conclusion is the opposite of ST's, i.e., PF is covering his rear, figuring: I get reappointed or a Chicago BigLaw partnership. Either way, I win. Is PF familiar with 18 USC 1512(b), the relevant witness intimidation statute, or does he know the law is not applied to federal prosecutors? Guys like PF can "operate" because juries are (still) insufficently skeptical of the feds. If and when they become sufficiently skeptical, PF and his ilk will need to go into a new line of work. They can become La Cosa Nostra "muscle boys".

What's the problem here? Look at the careers of some of our US attorneys like: Mary Jo White, Mike Garcia and Don DeGabrielle. Will Congress investigate the circumstances under which each got his current position?

How different former federal prosecutors see this. VT and ST are both former "Feds". Are they both right?

BC is correct. He too, is a former Fed. What's PF's game here? PF is no dummy. He knows better.

Blago looks like Shakespearian "comic relief" to me.

Here's how I see it: a company in bankruptcy is using the Northern District of Illinois US Attorney's Office as "muscle" to facilitate the sale of Wrigley Field. Who will look into this? The Tribune just decided to release the story? Or is the Tribune giving PF "cover" for "pulling the ripcord" now? This case stinks.

Saturday, December 27, 2008

Mad Dog and the SEC

"The stunning fraud Wall Street pillar Bernard Madoff [BM] is accused of has raised questions about whether federal regulators were lax in failing to scrutinize his operations and respond to alarms raised about them. ... SEC inspectors would have performed regular inspections of his securities brokerage operations as part of the agency's oversight program. SEC officials stress that it was Madoff's separate and secretive investment-adviser business that was used to perpetrate the alleged scheme, and that examinations of the securities operations wouldn't necessarily have detected irregularies. The hedge fund business didn't register with the SEC until September 2006. ... 'The agency can't help but look bad', said Barbara Roper, director of investor protection at the Consumer Federation of America. 'It does raise questions ... about the quality of the enforcement division generally'. ... A wrinkle in the case is the complaint dating back nine years by a securities industry executive named Harry Markopolos. He contacted the agency's Boston office in May 1999, telling SEC staff they should investigate Madoff because it was impossible for the kind of profit he was making to have been gained legally. The SEC's Boston office has been accused in the past of brushing off a whistleblower legitimate complaints, in a case that brought the resignation of the head of that unit in 2003", Marcy Gordon at the Houston Chronicle, 13 December 2008.

"The cops can't catch every crook, but a sophisticated financial system should be able to spot a multibillion-dollar Ponzi scheme operating in its midst. A failure by the authorities to catch [BM's] allegedly fraudulent activities could count as one of the biggest regulatory slip-ups of recent times. The [SEC], with substantial enforcement powers and a specific mandate to protect investors, received warnings about Mr. Madoff over several years. ... And if the agency did follow up on such leads and found nothing, the public should be told the details", Peter Eavis at the WSJ, 13 December 2008.

"An enforcement case 16 years ago gave the [SEC] its first shot at figuring out how [BM] could rack up such favorable returns with such uncanny consistency. After that, it received numerous warnings from outside whistle-blowers and at least twice looked into Mr. Madoff's brokerage itself. ... 'This is a debacle for the SEC,' said Joel Seligman, an SEC historian and president of the University of Rochester in New York. 'The commission has a lot to answer for'," Kara Scannell at the WSJ, 15 December 2008.

"The [SEC] will examine the relationship between a former official at the agency and a niece of Bernard L. Madoff [BLM], after the SEC's chief admitted, 'apparent multiple failures' to oversee the firm at the center of an alleged $50 billion Ponzi scheme. In an extraordinary admission that the SEC was aware of numerous red flags raised about [BLM] Investment Securities LLC, but failed to take them seriously enough, SEC Chairman Christopher Cox ordered a review of the agency's oversight of the New York securities-trading and investment management firm. ... Cox's statements represent a strong rebuke of an agency already facing criticism of its response to the credit crisis. Mr. Cox said an initial review of Mr. Madoff's firm found that 'credible and specific allegations' made as far back as 1999 'were repeatedly brought to the attention of the SEC staff, but were never recommended to the Commission for action.' ... Harry ... Markopolos pursued his accusations for years, dealing with the SEC's regional offices in New York and Boston, according to documents reviewed by the [WSJ]", Aaron Lucchetti, Kara Scannell and Amir Efrati at the WSJ, 17 December 2008.

"[SEC] investigators discovered in 2006 that [BM] had misled the agency about how he managed customer money, according to documents, yet the SEC missed an opportunity to unconver the Ponzi scheme. ... Under pressure to deliver, Mr. [Harry] Markopolos and a colleague at their Boston investment outfit tried to reconstruct Mr. Madoff's puported strategy. Their results paled in comparison, and Mr. Markopolos began suspecting possible fraud. ... Mr. Markopolos argued his case: A key part of Mr. Madoff's strategy relied on buying and selling options of the Standard & Poor's 100-stock index. But Mr. Markopolos said his research showed there weren't enough S&P-100 options in existence at the time to support Mr. Madoff's stated strategy, given all the money he seemed to be managing. So something else must be going on. ... In November 2005, Mr. Makopolos sent [Meaghan Cheung, a supervisor in the SEC's New York office] ... a series of 29 'red flags,' ranging from in-depth mathematical calculations that purported to show the Madoff investment stragtegy couldn't work, to little more than rumor or innuendo", my emphasis, Gregory Zuckerman and Kara Scannell at the WSJ, 18 Deecember 2008.

"Yet surely I'm not the only person to ask the obvious question: How different, really, is Madoff's tale from the story of the investment industry as a whole? The financial services industry has claimed an ever-growing share of the nation's income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it look as if much of the industry has been destroying value, not creating it. ... Last year, the average salary of employees in 'securities, commodity contracts and investments' was more than four times the average salary in the rest of the economy. ... But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion. ... Well, Madoff allegedly skipped a few steps, simply stealing his clients' money rather than collecting big fees while exposing investors to risks they didn't understand. ... At the crudest level, Wall Street's ill-gotten gains corrupted and continue to corrupt politics, in a nice bipartisan way", my emphasis, Paul Krugman at the Houston Chronicle, 20 December 2008.

Barron's, 22 December 2008, reprinted in large part, a 7 May 2001 article, "Don't Ask, Don't Tell", about BM's operations. "What's more, these private accounts have produced compound annual returns of 15% for more than a decade. ... When Barron's asked Madoff how he accomplishes this, he says, 'It's a proprietary strategy. I can't go into it in detail'. ... Still, some on Wall Street remain skeptical about how Madoff achieves such stunning double-digit returns using options alone. Three options strategists for major investment banks told Barron's they couldn't understand how Madoff churns such numbers using this strategy".

"Markopolos's work was a roadmap for any team of competent investigators to expose the fraud. ... The revolving door there is the biggest problem: Many [SEC] staff regulators who are ambitious and competent quit to pursue jobs in the financial industry that pay multiple times their former government salaries. ... I heard the excuses about why cases that we, the examination staff, uncovered failed to warrant actions by the [SEC] enforcement staff. .. Too complicated. ... Too politically connected. ... It is time to rethink the structure of the regulatory system because what we have isn't working", Eric Bright letter to the WSJ, 23 December 2008.

"Instead of encouraging maximum disclosure and protecting investors, the SEC often aimed and fired at small guys and let the Madoffs of the world get a free pass. It would take 50,000 successful $1 million penny stock-scam prosecutions to equal the Madoff scam and that is just for starters", Mark Baum letter to the WSJ, 23 December 2008.

"Options traders say anyone who did a bit of homework on [BM's] 'proprietary trading strategy' could see it was unworkable given market conditions in 2008. ... 'All it took was simple math--"What's the open interest of the S&P 100 option, and how many trades does he say he's making?'" said Jow Kinahan, chief derivatives strategist at brokerage thinkorswin", Rob Curran at the WSJ, 24 December 2008.

The SEC staff is preoccupied with form-filling and looking for other employment.

Think, the SEC opened 671 cases in the year ended 30 September 2008, my 9 December 2008 post. So?

The SEC will never be called to answer for anything.

This is SEC business as usual, step on ants and let elephants dance.

Markopolos "audited" Madoff's books and the fools at the SEC didn't understand what he did.

Yes Mr. Krugman. If the profits were "an illusion", I ask, "Where were the CPAs"?

Until I read this Barron's article I was agnostic on CPA lability arising from audits of Madoff's "feeder funds". Now I believe they should pay through the nose. Do these CPAs audit other investment banks? Were there "red flags" to pursue? Who is kidding whom? Are the Big 87654 ready to be sent to the Gulag? Can they substantiate anything? These incompetents were on "inquiry notice" seven years ago. Plaintiffs' bar, good luck! Will the PCAOB investigate this? Or is it afraid of what it might find?

I agree with Bright.

Yes Mr. Baum.

The SEC can't do "simple math".

Hanke Spanks Bernake-3

"In October the Producer Price Index sank 2.8%, it's biggest one-month drop since the Labor Department began measuring it in 1947. At the same time, the Consumer Price Index fell by 1%. It's no surprise that everyone in the U.S. is talking about deflation. Indeed, the bond market is pricing in deflation. The fact that the yield on five-year Treasurys with no inflation adjustment is 2% while that on five-year Treasury inflation-protected securities is 2.4% implies that the bond market expects annual average inflation to be a negative 0.4%. ... However, the Fed has put the money pump into overdrive, and it is hard to see any way in which deflation could be a headline-grabber for many more months, let alone five years. U.S. Treasury-indexed securities remain a buy. ... In the absence of good official numbers, I've developed my own hyperinflation index for Zimbabwe. I derive it from market-based price data starting in January 2007. The index tells us that Zimbabwe's annual inflation rate peaked at 80 billion percent a month. That means about 6.5 quidecillion novemdecillion percent a year--or 65 followed by 107 zeros. To get a handle on it, realize that it's equivalent to inflation of 98% a day. ... No hyperinflation has ever been recorded when money was based on or convertible into a commodity. The first hyperinflation happened during the French Revolution. There were 28 other hyperinflatons before Zimbabwe's, all in the 20th century", my emphasis, Steve Hanke (SH) at Forbes, 22 Dercember 2008.

I'm not "everybody"; I don't talk of deflation. Bonds are a bigger bubble than real estate was in 2006. I wouldn't touch TIPS, disagreeing with SH. SH must think the US has "good official numbers". I'm sure they're good. For Uncle Sam! I think all of Unc's statistical measures have a political component. 28 of 29 hyperinflations occured in the 20th century. I wonder why.

Friday, December 26, 2008

Chutzpah Unlimited

"Intense lobbying by banks and bankruptcy experts softened a key provision in the auto-bailout bill that would require government loans be repaid ahead of banks and other lenders. But the current language leaves unlcear just who would collect first in the event of a bankruptcy filing--taxpayers or existing creditors. ... The banks prime concern centered around a plan to make the U.S. government's $14 billion in rescue loans senior to other loans. They argued that this clause violated the Fifth Amendment of the U.S. Constitution, which prohibits the taking of private property without 'just compensation'. ... Historically, the only way a secured lender can be forced to take a backseat to another lender is in bankruptcy court, where a judge hears from the secured lenders and determines if those creditors are protected with additional collateral or other measures. ... 'It really sounds like a clear violation of the taking clause in the Constitutuion, to put the government ahead of all the other lenders. To go this route is a treacherous path riddled with all sorts of constitutional issues,' said Don Workman, head of the restructuring practice at the law firm of Baker Hostetler [BH]. ... It is still unclear what the practical effects of this language may be. Potentially, that could place the government behind the banks but ahead of the bondholders in repayment, say turnaround experts. Lenders said if left unresolved, the language could make banks and others even less willing to lend to troubled companies, for fear that the government could intervene in more situations. But the change may also anger policy makers, who have demanded the government and taxpayers be paid back first", my emphasis, Jeffrey McCracken & Elizabeth Williamson at the WSJ, 11 December 2008.

"GMAC LLC is racing to raise $1.25 billion in fresh capital necessary for the [Fed] to begin backstopping the company's finances. ... As a federally chartered bank, GMAC can have its debt temporarily guaranteed by the [FDIC]. GMAC could also access the Fed's discount window for inexpensive, short-term emergency loans at a time when its borrowing costs have soared due to battered credit ratings. ... GMAC's shift to a bank holding company would greatly benefit GM", Aparajita Saha-Bubna at the WSJ, 15 December 2008.

"The key to any magic trick is to focus the audience's attention away from where the action is actually taking place. That is what Congress did in the failed auto bailout bill. Language in the proposed legislation seems to uphold the rights of existing car-company creditors while also protecting any taxpayer funds used to prop up Detroit. In reality, the bill raised a chilling prospect for debt investors: that in extreme situations the government could upend the traditional pecking order of the bankruptcy process. ... Creditors' rights became an issue in the proposed automobile bailout because the government planned to put its money first in line for repayment in the event of bankruptcy. That seems to be a no-brainer for taxpayers", my emphasis, David Reilly (DR) at the WSJ, 15 December 2008.

Is Uncle Sam considering an auto maker or another banker bailout? BH's Workman should be called to Congress and told on television tell your clients, "if you want federal money, subordinate. Alternatively, we will let the auto makers go bankrupt. Which would your clients prefer?". Congress should call Vikram Pandit (VP) and ask him, if he thinks Citigroup should treat any federal auto bailout money as if it's debtor in possession financing. Then call in Kenneth Lewis (KL) and ask him what is the B of A's position. What will VP and KL say on television in front of millions as thousands of UAW members and other peasants with pitchforks surround the Capitol? That any financial institution would raise this issue is amazing. Until Unc puts money in, he holds the cards. For that matter, any bank which received federal bailout money should be prohibited from lobbying. The bank doesn't like it, give the money back. I don't see banks arguing the Fed's existence violates US dollar holders rights and for the Supremes to reverse the 1930s' "gold clause" cases. "For fear the government could intervene"? This is the banks' Alice In Wonderland world. Michael Savage, radio talk show host, speculated that what's really driving the auto bailout bill is the Bush administration's desire to protect Cerberus Capital which has positions in Chrysler and GMAC and is well-connected politically. Maybe.


I agree DR, this is a "no-brainer". Either this is an auto bailout bill, or another bank bailout bill.

National (In)Security Team

"President-elect Barack Obama appointed his national security team December 1. ... Obama launched his White House campaign on the leftist antiwar plank of an immediate withdrawal of all U.S. forces from Iraq. ... 'We're going to have to bring the full force of our power, not only military but also diplomatic, economic, and political, to deal with threats, not only to keep America safe but also to ensure that peace and prosperity will exist around the world,' Obama said, noting that his security team nominees, 'share my pragmatics about the use of power and my sense of purpose about America's role as a leader in the world.' ... Susan Rice ... has argued that it was a mistake not to have intervened in Rwanda in 1994 when hundreds of thousands of Rwanda's Tutsis were massacred by Hutus in a tribal war that continues to play out today in the Congo. ... But there may be a downside to these appointments that runs beyond the current conflicts which Obama realizes cannot be lost on his watch if his presidency is to be considered a success by the American people. ... However, Gates has suggested trade-offs may be needed in long term programs to fund the current counter-insurgency campaigns. He has considered cancellation of expensive projects such as the Army's high-tech future Combat Systems and the Air Force's F-22 air superiority fighter. And he has shown no interest in expanding shipbuilding to maintain a 300-ship Navy which the admirals believe is necessary to sustain America's global reach. In a May 13 speech, Gates said, 'any major weapons program, in order to remain viable, will have to show some utility and relevance to ... irregular campaigns.' Such one-dimensional thinking, and at the low end of the conflict spectrum, would endanger America's strategic superiority against the most dangerous threats--rival major powers with the resources to expand their international influence. The U.S. and its allies must, of course, win the current campaigns against insurgency and terrorism. But it must be remembered that such irregular warfare is the tactic of the weak, and those whose capabilities are indequate to win control of people and territory. ... [A] National Intelligence Council ... report warned that the greatest dangers are coming from a resurgent Russia and a rising China, not terrorist groups. ... Yet, the U.S. military must be prepared to fight major wars against other nation-states, or their well-armed proxies. Air supremacy, command of the sea, and the ability to project heavy ground forces are necessary capabilities. Larger, deeper force levels are required for all services, to be issued with the best arms and equipment American industry can devise. If the United States fails at the high-end of conflict, it cannot succeed anywhere else in the long run", my emphasis, William Hawkins (WH), 5 December 2008 at

"If you've been laboring under the impression that President Bush is in favor of expanding and strengthening the American military, I've got some news for you. The man he installed as the replacement for Donald Rumsfeld as Secretary of Defense, former career CIA man Robert Gates, is not exactly headed in that direction. In fact, there's no question that he's quite adamant about continuing the current Bush Administration policy of not modernizing our conventional warfare capacity--that is, the Cold War concept of combat--because we're going to concentrate on 'irregular' warfare. ... Is Gates as Defense Secretary the greatest thing since sliced bread? Or is his continuation in that position a betrayal by Obama that is a grevious breach of his promises to the left wing of the Democrats? Or is Robert Gates taking us to the point of no return when it comes to America's conventional warfare capacity? Perhaps we should ask the Russians and the Chinese?", Dennis Sevakis (DS), 14 December 2008 at

"Iraq, Afghanistan and Guantanamo get more press, but among the most urgent national secuity challenges facing President-elect Obama is what to do about America's aging nuclear stockpiles. No less an authority than Secretary of Defense Robert Gates calls the situation 'bleak' and is urging immediate modernization. ... [Obama's] wooly words have given boost to the world disarmament movement, including last week's launch of Global Zero, the effort by Richard Branson and Queen Noor to eliminate nuclear weapons in 25 years. Naturally, they want to start with cuts in the U.S. arsenal", Editorial at the WSJ, 15 December 2008.

Adolf Hitler said during the Yugoslavia campaign that guerrilla warfare was the refuge of the weak. Gates may be our worst SecDef since Robert MacNamara. He "thinks" all major weapons programs should "show some utility and relevance to ... irregular campaigns". Is Gates an idiot, or worse? Must a hammer show "some utility ... to turning nuts"? Gates, get out. Why "must we win the current campaigns"? I see no strategic significance to the US of the Iraq or Afghanistan "wars". Absent strategic superiority, the rest of our military forces are useless. 300-ship Navy? I remember when the US aimed at a 600-ship Navy, see my 22 November 2007 post:

I agree with DS. Suprisingly, I think if we asked Czar Putin he would tell us. Why? I think the Czar prefers a strong US to a strong China. China borders Russia. We don't.

What a piece of work Queen Noor (QN) is. Who is QN? QN, born in 1951 as Lisa Halaby, had a silver spoon in her mouth. She went to Princeton. That happens if your father is CEO of Pan American Airways. She marries the King of Jordan. So? Now she wants the US to disarm. Why? I presume since she has not been assassinated, she is part of the world-wide Jihad. QN, thank you very much. Go to hell. Among QN's more charming traits are: apparent historical ignorance and virulent anti-Semitism. Did you know Jordan makes it a felony to criticize the Prophet (PBUH)? Has QN spoken out against this? Does QN believe in the First Amendment, or does she want to avoid following Marie Antoinette to the guillotine?

Thursday, December 25, 2008

Are Insurers Next?-4

"A group working for state insurance regulators has greenlighted several proposals submitted by the life-insurance industry in recent weeks aimed at lowering insurers' capital and reserve requirements. Actuaries and other technical experts at the National Association of Insurance Commissioners gave the go-ahead to several of nine proposals. The news will be welcomed by investors, who battered shares of life insurers in recent weeks on concerns insurers would have to raise capital on unfavorable terms to show regulators they can made good on retirement-income products that carry minimum-return guarantees. ... The American Council of Life Insurers' proposals touch on reserves and capital requirements for life insurance and variable annuities, as well as investment and accounting practices. Insurers have said that many of the proposals involve the elimination of reserves. The ACLI estimates that the changes would free up $22 billion to $28 billion industrywide", my emphasis, Lislie Scism (LS) at the WSJ, 8 December 2008.

"Thanks to an effort by New York regulators to give life insurers more flexibility in calculating their reserves, MetLife Inc. said earlier this month it expects to reduce by about $1.8 billion, or more than 30%, the amount it must post to show it can deliver on guarantees in mimimum-return variable annuities. ... Reserve levels and capital cushions of publicly-traded variable-annuity sellers have been under a microscope in recent months as analysts and stock investors have feared that regulatory requiremnts would prompt a round of capital raising on punishing terms. ... Under the system of state insurance regulation, insurance departments rely heavily on the NAIC's expertise in solvency matters to guide them in setting rules. But they aren't bound by the NAIC's moves", my emphasis, LS at the WSJ, 19 December 2008.

"With their guaranteed payouts and protection against market downturns, annuities have long enjoyed a reputation as a refuge in times of turmoil. But after AIG required government assistance (three times so far this year) to stay afloat and several life insurers saw their stock prices sink 70% or more over the course of two months, annuity owners might understandably be nervous. After all, you invest in an annuity because you want your money to be absolutely safe. So how secure is it? ... Although life insurers are certainly struggling, to date not one major company has bitten the dust as a result of the crisis, which is more than you can say about banks and investment firms", Fortune, 22 December 2008.

How does LS know what made insurers' shares fall? Isn't their investment porfolios' fall a more likely reason? That insurers get "regulatory forbearance" indicates they are in bad shape. LS writes of "unfavorable terms". To whom?

More flexibility? Or book cooking? Punishing terms? Why does LS favor insurers over prospective new investors? Does anyone at the WSJ edit LS's articles to keep her opinions off the news pages? Apparently not. Last year MetLife paid Deloitte & Touche (D&T) $47 million. D&T's 2008 opinion should be interesting. MetLife's Audit Committee (AC), whatever that is has members: Sylvia Burwell, a Rhodes Scholar who once worked for Robert Rubin; Burton Dole, retired chairman of Dole/Neal an energy mangement firm, who has a Stanford MBA and was Chairman of the Kansas City Fed; Cheryl Grise, an attorney; James Houghton, Harvard MBA; John Keane, Director of Keane Advisors, a private equity investment firm, has a Fordham bachelor's degree in accounting; Hugh Price, a Yale Law Degreed attorney; Kenton Sicchitano, retired PriceWaterhouseCoopers partner has a Harvard MBA and William Steere, retired as Chairman of Pfizer. What does the AC do? If MetLife has a reserve problem, why didn't they find it? Will they excoriate D&T for doing a bad audit? Will Dudley Do-right save Nell Fenwick? Imagine, Metlife's AC has a retired Big 87654 partner. Page 28 of MetLife's 18 March 2008 Proxy Statement says, "The [AC], on behalf of the Board, is responsible for overseeing management's conduct of MetLife's financial reporting and internal control processes". Really? Will Metlife report the $1.8 billion as a change in accounting principle or estimate, see FASB 154. What will MetLife claim is the rationale for this change? What happened in the last nine months to permit it?

So far, but the Fed and Treasury have no compunctions about taking insurers' assets to protect investment firms. Witness AIG.

Steffy on Swaps

"Let's say you're driving down the road and three wheels fly off your car. How do you get rolling again? If you're Treasury Secretary Henry Paulson, you take a knife and slash the one remaining tire. ... The ensuing eight months have refuted the report's thesis of streamlined federal oversight. At every turn, state regulators have been the only friend for consumers and investors. It was the states, as my colleague R.G. Ratliffe norted earlier this week, that forced banks to make good on auction-rate bonds they sold to investors, often under false pretenses, when the market collapsed in February. It was the states that backed class-action lawsuits against subprime mortgage peddlers, such as Ameriquest and Countrywide, forcing the companies that bought them, Citigroup and Bank of America, respectively, to modify loans for beleaguered borrowers. ... When it became clear that the murky market for credit default swaps needed transparency, it was the state insurance commissioner from New York who stepped in, declaring what Congress had danced around for years: the swaps are insurance and need to be regulated as such. ... The SEC itself has seemed largely oblivious to its role of investor protection, a finding underscored in an inspector general's report on the agency released late on the Friday after Thanksgiving. Damning in its findings, the report portrays an agency rife with potential conflicts, including improper ovesight to prevent SEC employees from trading on insider information. In other words, it's the SEC itself that's ripe for reform. ... In fact, his plan is nothing more than a shill for Wall Street, which would have to love to see state regulation weakened, leaving the SEC and the self-regulatory arms of the stock exchanges as the primary enforcers", my emphasis, Lorey Steffy at the Houston Chronicle, 10 December 2008, link:

I note the PCAOB is an arm of the SEC. I think it's worse than the SEC, focusing on insignificant cases and ignoring larger issues. I've posted on the SEC and PCAOB many times. As they currently operate, they're jokes.

Wednesday, December 24, 2008

The Coming Depression

"In spite of Friday's alarming rise of 533,000 in unemployment, when you look at the near-term future, there still seems little chance that the current unpleasantness will turn into a rerun of the Great Depression [GD], or anything like it. ... However, in the long term, things are not so rosy; over the next 15 years, Americans and Europeans may suffer a worse fall in their living standards than during the [GD], albeit played out agonizingly slowly. ... In terms of living standards, real per capita personal consumption expenditures did not recover to their 1929 level until 1941, giving American consumers 12 years of living standards lower than they had become used to. ... In the long run, a major economic effect of economic globalization is to reduce the income gap between rich and poor countries, by bringing the latter fully into the nexus of the global economy. ... There is one snag, at least for rich countries such as the [US], Western Europe and Japan. If the world becomes more equal more quickly than it become richer, then living standards in rich countries must decline. If the world were suddenly to achieve equal income levels between countries, without a significant increase in output, U.S. living standards would fall by over three quarters. ... A second factor intensifying the decline in U.S. living standards is the appallingly low U.S. savings rate and the reduction in the U.S. capital pool that has resulted from over a decade of excessively low interest rates. ... The final factor depressing long-term living standards is the unwise policy response in the last few months to the credit crunch and the beginnings of global downturn. ... Contrary to popular and journalists' beliefs, these expenditures are not free; they must be borrowed. ... There are few policy responses that will do any good. Probably the most important is to raise the real return on risk-free savings as quickly as possible to around 5% to 6%, higher than the equilibrium rate, while eliminating the federal budget deficit. ... Before you dismiss this speculation as far-fetched, remember: everyone used to think house prices could not fall nationwide", Martin Hutchinson (MH), 9 December 2008 at

I don't dismiss MH's comments, I think his scenario is likely. See my related 4 July 2008 post on sovereign debt,

IRS Overreaches

"But the Treasury's and IRS's notice troubled many tax experts, who saw it as a strike against a portion of the tax law known as Section 382 that was intended to prevent companies from buying other companies solely for their tax losses. 'There's real doubt that the Treasury and the IRS even have the authority to issue this notice,' [Robert] Willens said, 'What they did was nullify a portion of the statute that Congress had enacted. It's certainly the consensus of tax experts that [Treasury and the IRS] have overstepped their bounds'," my emphasis, Heidi Moore at the WSJ, 10 December 2008.

I agree with Willens, and see no basis for IRS suspending Section 382 to facilitate Wells Fargo's Wachovia purchase. John Calhoun, nullification proponent, must be dancing.

Jim Chanos Portrait

New York Magazine's Jim Chanos, hedge fund manager, portrait, is worth reading, 7 December 2008, link:

Tuesday, December 23, 2008

Ben Franklin-3

"Teresa Ghillarducci has always had more interesting--and controversial--things to say than your average retirement-policy wonk. ... Still, as she sat at the witness table on Oct. 7 at a hearing on the House Committee on Education and Labor, running through the litany of what's wrong with the 401(k) and other defined contribution retirement plans--they have high fees, for one--Ghilarducci didn't think she was courting controversy. 'I was saying things that seemed completely milquetoast,' she recalls. Ghillarducci did bring up a bold proposal to replace the 401(k) with a mandatory, government-run pension plan and suggested that Congress immediately allow retirees to swap 401(k)s battered by the stock market's collapse for monthly payouts from the government. But she had floated both ideas before, to little effect. This time, all hell broke loose. Her proposal caught the attention of talk-radio juggernaut Rush Limbaugh, and over the next few weeks Limbaugh hammered on Ghilarducci's idea as a Democratic plot to kill the 401(k). 'McCain has gotta tie Obama to these people,' he said on the air. ... Limbaugh has since dropped the subject, but it is far from dead. While Limbaugh took care to describe Ghillarducci's proposals correctly even as he castigated them, word has since spread, and warped, in some conservative circles of a purported Democratic plan to confiscate 401(k)s. ... Ghilarducci wants more--a government-run plan, financed in part by the end of the 401(k) tax deduction, that would guarantee a 3% return above inflation. Don't think that's a good deal? Fine", my emphasis, Justin Fox (JF) at Time, 15 December 2008.

This is terrible reporting. JF, you should be ashamed of yourself. Ghillarducci's plan, which keeps morphing, would have done precisely what the "conservative circles" accused it of, seizing one's 401(k) assets and replacing it with a promise to pay 3% a year in real terms. Who will decide: the inflation rate and when you can withdraw your money? Etc., etc.. Welcome to Argentina. I previously speculated Obama killed this plan. JF's statement attributed to Limbaugh seems to confirm this. See my previous posts on Uncle Sam's contemplated 401(k) grab:

Media and the Moslems

"Shortly atfter the London Tube bombings in 2005, a reader of Tim Blair, The Sydney Daily Telegraph's columnist wag, sent him a note-perfect parody of a typical newspaper headline: 'British Muslims Fear Repercussions Over Tomorrow's Train Bombing.' ... This time round--Mumbai--it was the Associated Press that filed a story about how Muslims 'found themselves on the defensive once again about bloodshed linked to their religion.' ... For the Wall Street Journal, Tom Gross produced a jaw-dropping round-up of Mumbai media coverage: The discovery that, for the first time in an Indian terrorist atrocity, Jews had been attacked, tortured and killed produced from the New York Times a serene befuddlememt: "it is not known if the Jewish center was strategically chosen or if it was an accidental hostage scene.' ... An 'accidental hostage scene' that one of the 'practitioners' just happened to stumble upon? 'I must be the luckiest jihadist in town. What are the odds?' ... The 'fairer' we are to the, ah inflamed militant practitioners, the unfairer we get to everyone else. ... And yet we take it for granted that Pakistani 'militants' in a long-running border dispute with India would take time out of their hectic schedule to kill Jews. In going to ever more baroque lengths to avoid saying 'Islamic' or 'Muslim' or 'terrorist', we have somehow managed to internalise the pathologies of these men. ... Last week, a Canadian critic reprimanded me for failing to understand that Muslims feel 'vulnerable'," Mark Steyn, 6 December 2008 at

Quoted without comment.

Monday, December 22, 2008

AAA Garbage

"In the past month, there has been a big selloff in a corner of the mortgage-bond market that investors once thought impregnable: triple A. ... The most troubling change has been a wave of selling in triple-A prime mortgages. ... Leland Abrams, a trader at a Florida broker dealer, says his firm has bought prime triple-A mortgage bonds for about 30 cents on the dollar. Similar bonds traded for about 70 cents a few months ago", Scott Patterson at the WSJ, 9 December 2008.

"In a sign of how quickly the global crisis has reversed Russia's economic fortunes, Standard & Poor's cut the country's debt rating on Monday for the first time in a decade, warning of the 'rapid depletion' of Russia's massive reserves. ... The government has steadily added to its bailout package, which now totals more than $200 billion. ... S&P highlighted Russia's spending of its reserves as a key reason for its downgrade to BBB from BBB+, adding that a further downgrade is possible. ... Its current debt remains at modest levels", Gregory White at the WSJ, 9 December 2008.

AAA may mean nothing today.

In reading this article, I thought, "If Russia is only a BBB credit, why should Uncle Sam be higher"? I await S&P's downgrading Unc's debt.

Block on Fractional Reserve Banking

Walter Block's 9 December 2008 piece on fractional reserve banking is worth reading:

Ivy League Chickens

"Here's another sign of the tough economic times: Some clinics are reporting a surge in the number of women applying to donate eggs or serve as surrogate mothers for infertile couples. ... One ad running in campus newspapers promises $25,000 for a donor who is '100% Jewish with ... High SAT Scores ... Attractive, at Healthy Body Weight and Free of Genetic Diseases.' ... Andrew Vorzimer, an attorney who represents prospective parents in Los Angeles, says the usual six-month wait for a surrogate in California has vanished as well. 'Many of these women have college loans to pay off or they want to help buy a house or provide for their own kids' education,' says Mr. Vorizmer, who is also CEO of Egg Donation Inc., a recruiting agency in Encino", Melinda Beck at the WSJ, 9 December 2008.

Shades of William Shockley's "genius" sperm bank. When will Ivy League (IL) female students pay tuition in eggs? The IL can "certify" and sell them at a profit. After losing $11 billion in the market recently, Harvard needs the money. I have another idea for the IL: make female students sell eggs to fund various charitable causes. Karl Marx would approve, "From each according to his ability. To each according to his need". Compare this to the kidney donation situation, my 13 November 2007 and 15 January 2008 posts:

Sunday, December 21, 2008

Welcome to North Korea

"The political world was set on its ear last week by the report that Caroline Kennedy might be interested in Hillary Clinton's Senate seat in New York. ... Bear in mind that Caroline has never done one thing politically in her life until endorsing Barack Obama earlier this year. But, because of her last name and her family's history, she can call Gov. Patterson just 'for informational purposes about the Senate.' ... Caroline has three children who are almost grown up and, according to a source in yesterday's New York Post, 'She's looking for a mission in life. Preferably in politics.' So someone from a 'royal' political family in the midst of a mid-life crisis can just choose whether or not she can be a U.S. senator. Only in America. This is, of course, a total farce. Serious people who have worked in the political vineyards are aghast as this recent trend in American politics: the Bushes, the Clintons and the Kennedys all have dominated national politics because of the power of a name. ... America was created as a rejection of inherited power. Yet, somehow, we keep drifting back to it", John LeBoutillier (JL), 8 December 2008 at

"'What really draws me to the notion of Caroline (Kennedy) as senator, though, is the modern-fairy-tale quality of it all. ... Caroline has always been part of my consciousness: The lucky little girl with a pony and an impossibly handsome father. ... In this fairy tale, Caroline is our tragic national princess.' So gushed Ruth Marcus, the hard-as-nails political scribbler for the Washington Post (WP), even as the circulation of the [WP] continues to slide. ... She is playing 'My Little Pony' on the front page , as a substitute for adult analysis about Caroline Kennedy for Senator from New York, a job for which her previous life as Little Princess of the Kennedy Clan has obviously qualified her. ... Nothing could better prove the bottomless triviality of the liberal media as they say goodbye to their monopoly power in American politics, having thrown up in the very act of dying the farthest Left president in American history. The media terminate their monopoly with a final, giant finger to the American Republic. I will not mourn their passing. ... There is nothing new about goo-goo liberalism. ... It is not even a substitute for thinking. Like much of the media today, it is gaudy pink lipstick on the snorting pig of media decay. ... If [Barack Obama] turns out to be a Jimmy Carter, or worse, the voters may find themselves having to grow up fast. Vladimir Putin and Mahmoud Ahmandinejad will not be impressed with My Little Pony", James Lews, 9 December 2008 at:

Why is JL complaining? Isn't this how the Democratic People's Republic of Korea operates? Didn't Kim Jong-Il follow Kim Il-Sung? Further, didn't Raul follow brother Fidel Castro in the Republic of Cuba? JL protests too much. Apparently JL didn't realize Caroline's assumption of Hillary's NY Senate seat will be only temporary. Temporary? Chelsea will be 30 in 15 months! Besides, Caroline is qualified to be US President. She went to Harvard then Columbia Law School! Lock and load. Peasants, get your pitchforks. Viva la revoluccion!

Lewis has got it.

Condoleezza Rice and William Jennings Bryan

"Federal prosecutors in Washington likely face an uphill fight in their case against five indicted Blackwater Worldwide guards who are expected to surrender to authorities Monday. The case is crucial for the Justice Department, which is struggling to show it can hold U.S. security contractors accountable, as well as for Iraqi leaders, who have just stripped legal immunity from foreign guards. ... Justice officials have faced trouble with the case nearly from the start. Investigators from the State Department, which had jurisdiction over the guards, gave the men immunity in exchange for providing statements immediately following the incident. ... The September 2007 shooting incident outraged Iraqis and led the government to aggressively lobby for the elimination of immunity for foreign private security guards", my emphasis, August Cole and Evan Perez at the WSJ, 8 December 2008.

I hope the give Blackwaters kick the (in)Justice Department's arse on this. I note Blackwater was not indicted. Where will, Patrick Rowan, assistant attorney general on this, work when Obama becomes president? A law firm that represents Iraq's lobbyists? Apparently Condoleezza Rice & Co. needed some scapegoats to ingratiate itself with Iraq's government, voila, scapegoats. In 1896 William Jennings Bryan (WJB) delivered his famous "Cross of Gold" speech at Chicago's Democratic Convention. In 1913 WJB became Secretary of State under Woodrow Wilson (WW). WJB became so outraged at WW's foreign policy that he resigned in 1915. Connie baby, do likewise. Instead, you crucify five nobodys on a cross of failed US foreign policy. This case looks like a State-DOJ-FBI travesty.

Saturday, December 20, 2008

Jesse Rants

"The problem of official US statistics not fully reflecting the actual economic situation is reasonably well-documented and accessible to any literate person. ... Peer pressure discourages negativity and outlying opinions amongst many economists, so trend changes and innovation in ideas become particularly problematic. ... Noriel Roubini is hailed as a prophet for predicting a downturn that common sense and an examination of the statistics should have made it obvious to a first year economics student in March at the latest. Roubini was a maverick in that as a tenured professor with a reputation he dared to state the obvious before it became painfully obvious to everyone. ... Meredith Whitney and Yves Smith are two outstanding examples of those who are led by the data, who are remarkable in the integrity of their thought processes, even when they might be incorrect as we all are. ... It fosters an ideological balkanization of knowledge, and the tendency to impress and intimidate rather than illuminate, because the person understand they simply do not know the answer, but can never admit it. Perhaps that is why some of the best information has been coming from those who have less vested interest in the established order. ... Then there are the economists who act as hired opinion slingers or unpaid angry villagers for ideological causes and think tanks, tending to dominate the landscape in the short term because it is easier to declare yourself and work for a group whose first principles you embrace. ... Change is coming, and a renewal of thought is in the air. It may be time for a radical change in rethinking old ideas of how an economy can operate efficiently, ironically by often viewing even older ideas in the light of new experience", my emphasis, Jesse, 7 December 2008 at

In 1958 I read a piece about the US balance of payments and why despite all mainstream economists said about Europe's "dollar shortage", the US's negative balance of payments was unsustainable over the long run. It was put out by the American Institute of Economic Research (AIER), Great Barrington, MA 01230. I have read AIER publications, on and off for 50 years. That's right, 50 years! The AIER was founded in 1933 by EC Harwood (ECH), an engineer, not an economist and initiallly operated from MIT's campus. What brings the AIER to mind now? Jesse's comments in bold. You can buy AIER publications at Some items worth considering:

Cause and Control of the Business Cycle, 1974, by ECH.
A Current Appraisal of the Behavioral Sciences, 1973, by Rollo Handy and ECH.
Reconstruction of Economics, 1970, by ECH.
Useful Procedures of Inquiry, 1973, by Rollo Handy and ECH.

I don't agree with everything in these books, but each is worth reading. Cheapskate alert, these books are between $6 and $15 each.

Goldman's Long Arms

"Federal prosecutors on Monday unsealed a 101-count indictment against the mayor of Birmingham, Ala., and two associates on bribery and other charges related to the $5.4 billion worth of financial instruments for a massive cleanup of county sewers. ... The indictment accuses Mayor Larry Langford--along with Birmingham investment banker William Blount and local lobbyist Albert LaPierre--of conspiracy, bribery, fraud, money-laundering and tax evasion related to $5.4 billion worth of financial contracts negotiated while Mr. Langford was in his previous post as president of the Jefferson County Commission. ... The 62-page indictment follows an investigation and civil lawsuit earlier this year by the [SEC] with largely identical allegations. That case is pending. ... The county's problems stem from a series of derivative contracts, known as interest-rate swaps, negotiated to finance the improvements to water and sewer systems. ... The county's credit downgrade and the change in the value of the swap caused its counterparties to demand additional collateral for the swaps. But county officials have said they can't meet that increase in collateral and continue to make bond payments. Jefferson now owes more than $400 million to swap counterparties, according to Swap Financial Group, a south Orange, N.J., advisory firm", my emphasis, Paulo Prada and Craig Karmin (P&K) at the WSJ, 2 December 2008.

"Larry Langford ... is accused of telling Wall Street giants JP Morgan, Goldman Sachs, Bank of America and the now-bankrupt Lehman Brothers that they had to include his friend's investment banking firm on the deal if they wanted to handle the county's bond work, which was worth hundreds of millions of dollars", Houston Chronicle, 2 December 2008.

As soon as I read the words "swap counterparties" I thought,"what is Goldman's part in this"? GSG isn't named in P&K's article. Need to post more collateral, just tell Zimbabwe Ben that Jefferson County is an AIG affiliate. Piece of cake!

That'll learn yuh! If GSG doesn't want someone in its "syndicate", it will call its "enforcement arm" on you, the (in)Justice Department. Nobody tells GSG anything, excepting maybe, Vladmir Putin. Maybe.

Friday, December 19, 2008

Policy Instability

"In an article published in 1997 titled "Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War,' I advanced the idea of regime uncertainty in an attempt to advance our understanding of the Great Depression's extraordinary duration and of the highly sucessful postwar transition to a genuinely prosperous market-oriented economy. ... In my conception, regime uncertainty pertains above all to a pervasive uncertainty about the property-rights regime. ... Treasury Secretary Henry Morgenthau tried repeatedly to persuade [FDR] to make a public statement that would reassure investors, and as the president continued to reject his entreaty, Morgenthau became so frustrated that in a 1937 cabinet meeting, he blurted out to his boss: 'What business wants to know is: are we headed toward Socialism or are we going to continue on a capitalist basis?' ... Morgenthau [also said in 1937] 'Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don't know. Is labor to be union or non-union? ... Are we to have inflation or deflation, more government spending or less?' ... However, it is clear that government's frantic actions of the past several months have created a situation in which investors have little confidence about the character of future property rights in the United States", Robert Higgs (RH), 6 December 2008 at

Yes RH. My "tax instability" concept seems to be an application of RH's broader "regime uncertainty", my 23 November 2008 post for example, RH's concept also helps explain the recent stock market crash. US government policy instability is increasing real discount rates.

31 More Years?-4

"'These errors make us look either incompetent at credit analysis or like we sold our soul to the devil for revenue, or a little bit of both.' --A Moody's managing director responding anonymously to an internal management survey, September 2007. ... Moody's, which judges the quality of debt that corporations and banks issue to raise money, had just graded a pool of securities underwritten by Countrywide Financial, the nation's largest mortgage lender. But Countrywide complained that the assessment was too tough. The next day, Moody's changed its rating. ... That was not the only time Moody's softened its stance on Countrywide securities. It elevated ratings several times after Countrywide complained, the people briefed on the matter say. ... A Moody's spokeman, Anthony Mirenda, said ... 'Moody's knows of no instances in which a reconvened rating committee resulted in improper changes to ratings on Countrywide securities.' ... 'Moody's credit ratings play an important but limited role in the financial markets--to offer reasoned, independent, forward-looking opinions about relative credit risk, based on rigorous analysis and published methodologies,' Mr. Mirenda said. The company denies that it went easy on ratings to generate income. ... 'If you can't figure out the loss ahead of the fact, what's the use of your ratings,' asked an executive with Fortis Investments, a money management firm, in a July 2007 e-mail message to Moody's. 'You have legitimized these things, leading people into dangerous risk.' ... Edmund Vogelius, a Moody's vice president, explained the company's business model in a 1957 article in The Christian Science Monitor. 'We obviously cannot ask payment for rating a bond,' he wrote, 'To do so would attach a price to the process, and we could not escape the charge, which would undoubtedly come, that our ratings are for sale.' ... [Thomas] McGuire, the former director of corporate development at Moody's [said] 'Rating agencies are staffed by ordinary people with families to support and bills to meet and mortgages to pay,' he said in a speech to the S.E.C. in 1995. 'Government regulators are inadvertently subjecting those people to improper pressure, and share accountability for any scandals which may result.' ... 'The mistaken notion that Moody's was a company like any other, that was very fundamental,' said Sylvain Raines, a former Moody's analyst who is co-founder of R&R Consulting, a firm that helps investors guage debt risks. 'It is not just a profit-maximization entity like Exxon or Microsoft, Moody's has a duty to the American public. People trusted it'," my emphasis, Gretchen Morgenstern (GM), 7 December 2008 at

I am sure Mirenda is telling the truth. As long as Moody's is paid, any rating changes are by definition, proper. As I've said before, the rating agencies suffer from the same classical agency problem as CPA firms. Fixing the problem will require the same medicine in both cases.

Thursday, December 18, 2008

The Deprizio Doctrine and AIG

12 May 1989 turned the bankruptcy world upside-down with the release of Levitt v. Ingersoll-Rand, 874 F2d 1186 (7th Cir., 1989) (Easterbrook, J.). Frank Easterbrook (FE) is the second most economically literate judge on today's federal bench. He would make an excellent Supreme. FE's opinions are a joy to read. The Deprizio Doctrine, as it is commonly known, was repealed by Section 202 of 1994's misnamed Bankruptcy Reform Act, as a sop to bankers to unsecured creditors' detriment. Why go into dead bankruptcy law here? To show the "thinking" behind what AIG seems to be doing. "In 1980 V.N. Deprizio Construction Co. was awarded contracts to do $13.4 million of work on the extension of Chicago's subway system to O'Hare Airport. By 1982 the company was in trouble. ... These and other dealings by Richard N. Deprizio, the firm's president, including suspicions of affiliation with organized crime, led the [US] Attorney to open an investigation. In April 1983 Deprizio Co. filed a petition under the Bankruptcy Code of 1978. ... As the investigation continued and Deprizio's indictment was imminent, word circulated that he might 'sing'. So in January 1986 Deprizio was lured to a vacant parking lot, where an assassin's gun and the obligations of a lifetime were discharged together. Corporations are not so easily liquidated', 1187. That's how we do things in Chicago, Al Capone's ghost still stalks the city! "Payments out of the ordinary course in the 90 days before filing a bankruptcy petition may be recovered for the estate under SS 547 and 550. ... Payments to or for the benefit of an insider during the full year, not just 90 days, may be recovered by virtue of S 547(b)(4)(B). ... The Trustee reasoned that the payments made to these outside creditors were 'for the benefit' of insider co-signers and guarantors, because every dollar paid to the outside creditors reduced the insider's exposure by the same amount", 1188. "Now for the principal question: whether the Trustee may recover from an outside creditor under S 550(a)(1) a transfer more than 90 days before the filing that is avoided under S 547(b) because of a benefit for an inside creditor. ... More than language lies behind this approach. The trustee's power to avoid preferences (the 'avoiding power') is essential to make the bankruptcy case a collective proceeding for the determination and payment of debts. Any individual creditor has a strong incentive to make off with the assets of a troubled firm, saving itself at potential damage to the value of the enterprise", my emphasis, 1194. "Insiders pose special problems. Insiders will be the first to recognize that the firm is in a downward spiral. If insiders and outsiders had the same preference-recovery period, insiders who lent money to the firm could use their knowledge to advantage by paying off their own loans preferentially, then putting off filing the petition in bankruptcy until the preference period had passed. ... An alternative device is to make the preference period for insiders longer than that for outsiders. With a long period for insiders, even the prescient managers who first see the end coming are unlikely to be able to prefer themselves in distribution. ... So insiders bent on serving their own interests (few managers hold outside lenders' interests of equal weight with their own!) could do so by inducing the firm to pay the guaranteed loans preferentially. ... While concealing the firm's true financial state, they would pay off (at least pay down) the debts they had guaranteed, while neglecting others. To the extent they could use private information to do this more than 90 days ahead of the filing in bankruptcy, they would make out like bandits", my emphasis, 1195. GSG was no creditor of AIG's insurance subsidiaries. These subsidiaries should have refused Eric Dinallo's (ED) request and told AIG, "go to hell".

Metromedia v. Fugazy, 983 F2d 350 (2nd. Cir., 1992) illustrates the kind of accounting analysis involved in insolvency determinations and why AIGs' CDS counterparties cannot let a jury make an AIG insolvency determination. AIG's 30 September 2008 10-Q, states it had (billions) $73 of shareholders' equity and owed the Fed $63. However, some of its assets look questionable under current circumstances, like $10 in goodwill, $48 in deferred policy acquisition costs and $24 in prepaid commitment fees. PriceWaterhouseCoopers (PWC) should have a very interesting 2008 audit. Let's see what PWC does for $120 million, which is what it charged AIG last year. Will PWC conclude AIG is not a going concern? If not, what then? Why is PWC auditing AIG anyway?

"[PWC], the independent auditor for [AIG], will pay $97.5 million to settle a class-action securities fraud lawsuit against the insurance giant and others, according to the Ohio state attorney general. ... A federal appeals court also upheld a $182.9 million jury award that PwC will have to pay policyholders of a defunct insurance company audited by the Big Four firm's predecessror, Coopers & Lybrand", Practical Accountant, November 2008.

"Bruce West, Sr., a Texas real estate developer, experienced serious financial problems as a result of the decline in the Texas economy during the mid- to late 1980s. West eventually filed a petition in bankruptcy on April 2, 1990. This criminal case emanates from West's bankruptcy filing, with many of the charges contained in the indictment based on three transactions that West participated in shortly before his bankruptcy petition", US v. West, 22 F3d 586, 587 (5th Cir., 1994). "West was convicted of several counts of bankruptcy fraud, in violation of 18 U.S.C. S 152. Three of these counts charged West with fraudulently transferring funds to Exalter during Feburary and March 1989. West contends that transfers, which occurred more than one year prior to the filing of his bankruptcy petition, cannot provide the basis for a S 152 prosecution because the transfers were 'outside the jurisdiction of the Bankruptcy Code.' ... We disagree with West's interpretation of S 152. The plain language of S 152 certainly cannot be read to impose the requirement suggested by West", 589. "Moreover, in light of the explicit intent requirements found in S 152, we will not transplant from the Bankruptcy Code the additional requirement that a fraudulent transfer, to be prosecutable as bankruptcy fraud, must be made within one year prior to the defndants filing of his bankruptcy petition. A defendant may knowingly and fraudulently transfer property in contemplation of or with the intent to defeat the provisons of Title 11 without necessarily transferring the property within one year before filing a bankruptcy petition", my emphasis, 589-90. "Indeed, a knowledgeable defendant bent on pursuing a fraudulent course of action would effect a fraudulent transfer outside the one year period within which the bankruptcy trustee could rescind it", my emphasis, 590. Are AIG's CDS counterparties "knowledgable"? If AIG files bankruptcy say 15 months after 15 September's "ED transaction", will the SDNY US Attorney immediately indict AIG's CDS counterparties, their attorneys and senior management personnel? Or would that squelch Mike Garcia's successor's NY BigLaw partnership? Stay tuned for this saga's next installment. "For example, the financial statements prepared on West's behalf indicate that West's net worth fell dramatically after 1985. Because the deterioration of West's financial situation bears strongly on both his incentive and need to seek bankruptcy protection, such evidence is relevant not only to West's motive for hiding assets from creditors, but also indicated that it was very probable that he knew he was going to file a petition in bankruptcy long before March 1990", 595. Do AIG's CDS counterparties know enough about AIG's financial situation to be similarly criminally liable? "At trial, the only real issue in dispute involved West's intent--i.e., whether he acted in comtemplation of declaring bankruptcy or with intent to defeat the Bankruptcy Code", 597. Are AIG's CDS counterparties different? Yes. West was a nobody who concealed about $800,000 from the bankruptcy trustee, peanuts. Not tens of billions. It's Anatole of France time, my 1 September, 30 October and 9 November 2007 and 24 January 2008 posts.

"Defendant, an attorney, appeals from convictions of the crimes of concealing assets from a trustee in bankruptcy, 18 USC 152, and conspiring to transfer the assets of one corporation to another in contemplation of bankruptcy and with intent to defeat the National Bankruptcy Act, 18 USC 371 and 18 USC 152. ... There was evidence before the jury that Switzer's client, a corporation called Berkeley Jewelers, Inc., borrowed substantial sums from money lenders who also were represented by Switzer", my emphasis, US v. Switzer, 252 F2d 139, 141 (2nd. Cir., 1958). "In December 1949, Switzer, who was well aware of the corporation's financial deterioration, proposed a plan whereby the bulk of its inventory would be transferred to a new corporation to be managed for the benefit of those creditors who were also Switzer's clients. The new corporation was then to continue the profitable portion of the old corporation's business", my emphasis, 141-2. "The valuable inventory previously removed was then sold for the benefit of the favored creditors and Switzer; and the property purchased at the sale went to the newly organized corporation, which continued to pay the old corporation's debt to one of the creditors with whom Switzer was associated. ... These decisions reveal that the intent of Congress was to prevent the defeat of the bankruptcy statute and that this intent is best applied by adopting a literal reading of the statute", my emphasis, 142. "It is clear that the latter interpretation should be followed because the actual intent of Congress is best served by prohibiting either transfer or concealment for either one may defeat the purpose of the Act", my emphasis, 142-3. AIG looks like a reverse Switzer, in that Switzer created a new company to effect an inequitable distribution of the bankrupt's assets. AIG, in effect, is combining itself with its seperately incorporated insurance subsidiaries to effect an inequitable distribution of the insurance subsidiaries assets.

"The owner of a defunct Wayne-based health benefits management company pleaded guilty today to mail fraud and tax evasion, admitting he misled subscribing participants and employers about the management of premium payments, embezzled from commingled accounts and ran the business into bankruptcy, U.S. Attorney Christopher J. Christie announced. Donald Ruth, 64, formerly of Hackensack and now of Hudson, Fla., admitted that, with the diverted and commingled funds of Wayne, NJ-based Meredian Benefit, Inc., he purchased a Florida home, a boat and paid for travel and other personal expenses--in addition to receiving more than $1.5 million in income between 1999 and mid-2003, when Meridian collapsed and filed for bankruptcy, leaving approximately $15 million in unpaid insurance claims. ... Meridian was established by Ruth as a third-party administrator of health benefit plans such as those established by employers for their employees. ... The company collected close to $40 million from the participant groups. Ruth and Meridian promised and represented that funds collected from participant groups would be segregated and held in trust accounts. ... Throughout the concealment, Ruth admitted, he induced continued payments from current participants while aggessively soliciting others to further the scheme. To prevent detection, Ruth admitted that he with others did mass mailings to participants with false assurances of future payments and disseminated a roster of false explanations to customer service personnel to explain and delay claim payments", my emphasis, Department of Justice Press Release, 22 September 2005, link:

"The $50 billion privatization of Bell Canada, Canada's largest telecomminications company, was in jeopardy Wednesday after accountants said they were unable to conclude if the leveraged buyout would leave the company solvent. Bell Canada, which trades under the corporate name BCE, is among Canada's most widely held and prominent corporations. Unless the accountants change their minds, 'the transaction is unlikely to proceed,' the company said Wednesday. ... But its failure would be openly welcomed by current Bell debt holders, who say they believe their bonds will be degraded, and would provide relief at the banks that agreed to finance the takeover in a much different market climate in June 2007. ... In a brief statement, [BCE] said that the accounting firm KPMG found in a preliminary analaysis that 'the amount of indebtedness' involved in financing the deal,about $30 billion, left it unable to conclude whether the privatized company would be solvent. ... [BCE's] chief financial officer, Siim A. Vanaselja, said in that company's statement, 'The company disagees that the addition of the LBO debt would result in BCE not meeting the technical solvency definition.' ... The debt holders, however, challenged the transaction in court, saying it unfairly favored equity holders at their expense. While they were successful at a Quebec court, that ruling was overturned by the Supreme Court of Canada after an unusally swift hearing in June", my emphasis, Ian Austen, 27 November 2008 at

Francine McKenna mentions KPMG's solvency opinion at her re The Auditors, 28 November 2008, link:

"It is unusual for a merger pact to require a solvency certificate as a condition of closing. banks typically require such certificates to finance a transaction, but BCE had put this condition is place because it wanted to protect itself from complaints by existing BCE bondholders about the company's new, debt-heavy capital structure. A collapse would likely benefit the financing banks, led by Citigroup Inc., Deutsche Bank, the Royal Bank of Scotland and Toronto Dominion", my emphasis, Peter Layttman at the WSJ, 28 November 2008.

"BCE, the parent of Bell Canada, recently was hit by a preliminary solvency opinion from valuation consultants KPMG warning that the telecom operator mightn't be solvent if its $55 billion buyout by a group led by Providence Equity Partners and Ontario Teachers' Pension Plan goes through. ... Typically, with solvency opinions, they're talking about the three tests that could constitute what's called a fraudlent transfer. If you couldn't have passed the three tests prior to and subsequent to the deal, you weren't deemed solvent. Two of them have to do with the company's balance sheet. The first test would be: Do assets exceed liabilities where the assets are valued as a going concern. The second is, is the company left with adequate capital after the transaction closes, so that it there's a market hiccup after the deal happens, will it be pushed over the line, or close to it? The third is the cash-flow test, which tells whether the company can pay its debt when it comes due", Heidi Moore Interview of Rick Braun (RB) at the WSJ, 3 December 2008.

"[AIG] owes Wall Street's biggest firms about $10 billion for speculative trades that have soured, according to people familiar with the matter, underscoring the challenges the insurer faces as it seeks to recover under a U.S. government rescue plan. ... The speculative trades, engineered by the insurer's financial-products unit, represent the first sign that AIG may have been gambing with its own capital. ... An AIG spokesman characterized the trades not as speculative bets but as 'credit protection instruments.' He said that exposure has been fully disclosed and amounts to less than $10 billion of AIG's $71.6 billion exposure to derivative contracts on debt pools known as collateralized debt obligations as of Sept. 30. ... The fresh $10 billion bill is particularly challenging because the terms of the current $150 billion rescue package for AIG don't cover those debts. ... The outstanding $10 billion bill is in addition to the tens of billions of taxpayer money that AIG has paid out over the past 16 months in collateral to Goldman Sachs Group Inc. [GSG] and other trading partners on trades called credit-default swaps. ... AIG's problem: The rescue plan calls for a company funded by the [Fed] to buy about $65 billion in troubled CDO securities underlying the credit-default swaps that AIG has written, so as to free AIG from its obligations under those contracts. But there are no actual securities backing the speculative positions that the insurer is losing money on. Instead, these bets were made on the performance of pools of mortgage assets and corporate debt, and AIG now finds itself in a position of having to pay off its partners because those assets have fallen significantly in value. The Fed first stepped in to rescue AIG in mid-September with an $85 billion loan when the collateral demands from banks and losses from other investments threatened to send the firm into bankruptcy court. ... Some of AIG's speculative bets were tied to a group of [CDOs] named 'Abacus,' created by [GSG]. ... In what amounted to a side bet on the value of these holdings, AIG agreed to pay [GSG] if the mortgage debt declined in value and would receive money is it rose. ... The plan has resulted in banks in North America and Europe emerging as winners: They have kept the collateral they previously received from AIG and received the rest of the securities' value in the form of cash from Maiden Lane III. ... It also has been a double boon to banks and financial institutions that specifically bought protection on now shaky mortgage securities and are effectively being made whole on those positions by AIG and the [Fed]", my emphasis, Serena Ng, Carrick Mollenkamp & Michael Siconolfi at the WSJ, 10 December 2008.

"The fate of the C$51.7 billion ($41.3 billion) takeover of BCE Inc. took another turn after the telephone company got a positive solvency opinion from its new auditing firm, in a twist that could put the deal back on track. The Montreal-based telecom company retained PricewaterhouseCoopers LLP, which determined that the company will be solvent after the buyout, said a person familiar with the situation", Shasha Dai, at the WSJ, 9 December 2008.

"The BCE Inc. buyout is officially busted. A year and a half after it was struck, then the largest private-equity deal in history, the $41 billion leveraged buyout of the Canadian telephone company collapsed Wednesday when a valuation expert at auditing firm KPMG LLC issued a final opinion that the transaction would create an insolvent entity. ... BCE is expected to take issue with that view and sue the private-equity group over the breakup fee. ... While BCE and the private-equity firms will likely head to court, four financing banks are in a position to walk away with an early Christmas present. Citigroup Inc., Deutsche Bank AG, Royal Bank of Scotland Group PLC and Toronto Dominion Bank won't have to provide $34 billion in debt to fund the deal. Had the buyout deal closed, the banks would have absorbed as much as $12 billion in losses from selling the debt package at steep markdowns or by holding the debt on their books", Peter Lattman at the WSJ, 11 December 2008.

Here's an explanation of various bankruptcy scams, including bust-outs and bleed-outs: Strictly speaking, amongst us bankruptcy fraud cognoscenti, AIG appears to be a "bleed-out" as opposed to a "bust-out". Either one can be prosecuted under 18 USC 152.

First AIG question: is GSG an insider or an outsider? Since GSG apparently had ED authorize AIG's insurance subsidiaries to "upstream" $20 billion to AIG's parent, GSG looks like an insider to me. I think GSG should be held to be a "control person" of AIG and this should be disclosed in both companies SEC filings. Chris Cox, are you listening? What do you do anyway?

The Ruth case is a recent insurance company bust-out. These things get prosecuted from time-to-time.

Existing bondholders usually are injured by LBOs.

RB, a managing director of FTI Consulting correctly describes the three solvency tests. It is clear AIG would fail the third and possibly the second test. To be insolvent, one need fail any of the three tests.

AIG is like BCE in that creditors' relative positions are being shuffled around to benefit say, GSG, and injure AIG insurance subsidiary policy holders.

Doesn't this give to great confidence in the Big 87654's work?

I handn't thought about this before, but KPMG audits Citigroup. It should never have accepted this valuation assignment.

Step right up ladies and gentlemen, in this corner, the largest bankruptcy fraud in history. Frank Easterbrook must be laughing at this. Over 16 months. Hmm. Just get over that 12 month period for the last payment and we're home free! AIG should have filed bankruptcy in September.