Wednesday, December 31, 2008
Tuesday, December 30, 2008
Monday, December 29, 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: http://skepticaltexascpa.blogspot.com/2008/12/policy-instability.html.
Sunday, December 28, 2008
"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.
"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 http://www.lewrockwell.com/gaddy/gaddy36.html.
"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 http://www.nytimes.com/.
"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 http://www.nytimes.com/.
"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, http://skepticaltexascpa.blogspot.com/2007/12/mortgage-fraud-whose.html. 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.
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
"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.
The SEC will never be called to answer for anything.
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".
Friday, December 26, 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.
"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 http://www.americanthinker.com/blog/2008/12/whither_americas_defense_polic.html.
"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: http://skepticaltexascpa.blogspot.com/2007/11/us-navy-rip-3.html.
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
"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?
Wednesday, December 24, 2008
Tuesday, December 23, 2008
Quoted without comment.
Monday, December 22, 2008
Sunday, December 21, 2008
"'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: http://www.americanthinker.com/blog/2008/12/the_fairy_tale_school_of_polit.html.
Saturday, December 20, 2008
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.
Friday, December 19, 2008
Thursday, December 18, 2008
"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: http://www.dol.gov/ebsa/pdf/ruth2.pdf.
"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 http://www.nytimes.com/.
Francine McKenna mentions KPMG's solvency opinion at her re The Auditors, 28 November 2008, link: http://www.retheauditors.com/2008/11/kpmg-in-news-not-good-kind.html.
"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: http://www.crfonline.org/orc/pdf/ref11.pdf. 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.