Saturday, January 31, 2009

Zimbabwe Ben Sleeps.

The monetary base was $1,742,684 million on 14 January 2009 and $843,841 million on 10 September 2008, a 106.52% increase in 18 weeks, which compounds to a 713% annual rate. The Fed's money machine is slowing down. Again, what are the deflationistas talking about?

Mideast History Lessons

"Israel later learned, at great cost, that Arafat's 'recognition' had been a lie. Yet the principle remaind valid regardless of the lie. Hamas, to its perverse credit, does not lie, at least not on fundamental issues. It have never accepted the Oslo Accords. It is sworn to Israel's destruction. Its charter is nakedly and aggressively anti-Semetic; no fig leaf of 'anti-Zionism' there. The closest it has ever come to terms with the Jewish state is the offer of a long-term hudna, on the model of the Prophet's 10-year truce with the tribes of seventh century Arabia. 'Anyone who thinks Hamas will change is wrong,' said supreme leader Khaled Mashal in 2006. Could he be any clearer? ... The Muslim Brotherhood, of which Hamas is merely an affiliate, has never been keen on the concept of the nation-state. Hamas's charter describes the land of Palestine as an 'Islamic Waqf,' or trust, 'consecrated for future Muslim generations until Judgment Day'," Bret Stephens (BS) at the WSJ, 13 January 2009.

Bruce Thornton has a 14 January 2009 post about Islamic history and the creation, not only of Israel, but Jordan, Iraq, Lebanon, Syria and Saudi Arabia. For those who know nothing of Middle Eastern and Islamic history, this is must reading, link:

"In all cultures where Islam has become ascendant, the Muslim authorities have attempted to rewrite the history of the conquered lands to obliterate the memory of anything that went before Islam. By this method the cultural contribution of civilizations that preceeded Islam--during jahiliyah, 'the days of ignorance'--is minimized, denigrated, and distorted. The destruction of physical evidence is part of the revisionist task. To the average Western scholar, the Bamiyan Buddhas and the archeological artifacts buried in the ancient rubble under the Temple Mount are priceless treasures which muct be preserved, restored, studied, and admired. But to a Muslim they are abominations and must be destroyed. If not actual idolatry, they are evidence of non-Muslim civlizations that preceeded the introduction of Islam, and thus are an affront to the pride of the entire Ummah. It has recently been discovered that an exiled Iranian academic literally took a scalpel to valuable Persians history books in the British Library and the Bodelian Library, removing inconvenient and offensive text. His depredations have caused permanent and irrecoverable damage to the historiography of the periods involved. ... Leading scholars at the library are at a loss to explain why Farhand Hakimzadeh, a Havard-educated businessman and publisher, took a scalpel to the leaves of 150 books that have been in the nation's collection for centuries. ... The process is already underway as school textbooks are modified to apmplify the peaceful accomplishments of Islam and play down its violent expansionism, all the while denigrating European Christain civilization", my emphasis, Baron Bodissey, 17 January 2009 at

Finally someone in the MSM discusses waqf and hudna. Once BS discusses takiwa, the "Big Three" words will be complete. No two-state solution can be reached between Israel and its neighbors. Why? Because Jordan exists, it will be at least a "three-state" solution. What is it we Westerners seem not to understand?

Whether it was in India, the West Bank or anywhere else, Islamic practice has been to destroy evidence of prior civilizations. There were 68 synagogues and cemetaries in the West Bank. Between 1948 and 1967 the Jordanians destroyed them all, digging up graves that were in some instances 2,500 years old. This intellectual dry rot has gone far in California where the State Board of Education gave Islamic groups veto power over what appears about Islam in state approved textbooks.

Don Feder expresses similar thoughts on 6 January 2009 at:

The SDNY's Lazarus

"When the [US] attorney in Manhattan resigned last month, his deputy, Lev. L. Dassin, was named to fill the job until President-elect Barack Obama takes office and chooses a replacement. That could make Mr. Dassin's tenure very short. ... If anything, the office seems busier than it was before he took over, lawyes say. 'They're always moving,' said Michael J. Garcia, the former [US] attorney whom Mr. Dassin succeeded. 'I think for Lev, the train speeds up'. ... So far, Mr. Dassin has stayed largely out of public view, speaking mostly through his prosecutors in court, as he did recently when his office asked a judge to revoke Mr. Madoff's $10 million bail, but was turned down on Monday. Mr. Dassin declined to grant an interview for this article, although his office answered biographical questions. ... Dassin graduated with a degree in English literature from Cornell, and he received his law degree from New York University. He joined the prosecutor's office in 1992, just a few months before the Feb. 26, 1993, bombing of the World Trade Center. ... Although Mr. Dassin was known primarily for his terrorism trials, his prosecution of a lawyer unexpectedly thrust him into the public light. The lawyer, Harvey Weinig, pleaded guilty in 1995 to being a member of a conspiracy that laundered $19 million in drug sales, money the authorities said was wired oveseas and ended up in the hands of Columbian drug traffickers. ... 'The prosecution of Harvey Weinig, probably more than most cases, sent a message that the law applies equally to everyone, regardless of their wealth, status and influence, he said. 'I think that President Clinton's actions perverted that message.' Mr. Dassin later became a partner at the law firm, Kaye Scholer and taught a Columbia Law School class with Judge Michael B. Mukasey, now the [US] attorney general. Mr. Dassin rejoined the prosecutor's office in 2005, under Mr. Garcia, first as chief of the criminal division, and later as his deputy", my emphasis, Benjamin Weiser, 13 January 2009 at

Mary Jo White (MJW), New York's "ping-pong ball" Fed, is reincarnated in pants! The SDNY US attorney's office, NY BigLaw and back again, see my 22 November 2008 post: With billions of Wall Street money drowning Manhattan, the SDNY US attorney's office is likely the US's most corrupt prosecutorial agency, maybe the world's. When Dassin regularly indicts NY BigLaw partners when their clients are indicted for say, $1 billion frauds, I may take his, "the law applies equally to everyone" seriously. Probably not even then. Dassin, how stupid do you think we are?

Kaye Schoeler, we know them, see my 25 June and 8 August 2008 posts:, This self-righteous clown makes me sick. When Dassin's name strikes terror in the hearts of: Fuld, Blankfein, Rubin, Pandit, et. al. and NY BigLaw, I'll reconsider my opinion. Weinig was a nobody who got an 11-year sentence, apparently at MJW's request, who else? What's $19 million anyway? Weinig's real crime: he had nothing to sell MJW. Compare Weinig's fate to Siemens, my 31 December 2008 post:

Friday, January 30, 2009

Financing Bailouts

University of Chicago professor Eugene Fama (EF) has a 13 January 2009 post at his new blog with Kenneth French, Dartmouth professor, Fama/French Forum, about financing bailouts, link: What EF did looks like accounting to me. Some of what EF wrote reads like Milton Friedman.

Tom Selling (TS) uses the "Largest Possible Entity" (LPE) concept at his Accounting Onion on 7 December 2008, link: This LPE notion blows aways virtually all the smoke of Keynesian economics by distinguishing "real" from "financial" assets. Once you realize: cash, receivables, payables, options, etc., are not real assets, you can dismantle Keynes on your own. TS's LPE is a more powerful analytical engine than even he thinks.

Blackstone's Outrage

"Mr. [Stephen] Schwartzman became enraged Tuesday after learning that federal prosecutors charged Blackstone Group [BG] investment banker Ramesh Chakrapani with securities fraud related to an insider ploy that netted more than $3.6 million in illicit profits. The [SEC] also filed civil charges against Mr. Chakrapani. ... 'I am personally infuriated that one person's behavior could damage our umblemished record built up over nearly a quarter of a century,' Mr. Schwartzman wrote in a memo to the firm's employees on Wednesday", Peter Lattman at the WSJ, 15 January 2009.

Unblemished record, if you say so. This case is another waste of prosecutorial effort, unless the Feds involved are looking for positions with BG's law firm. $3.6 million is 54% of my Blankfein test; DOJ, SEC, drop this one and get on to serious matters. This case shows how serious Lev Dassin is about showing us of "equality under the law". Schwartzman snaps his fingers and voila, an indictment appears. I await SDNY US attorney's office indictments of persons of consequence.

Australia's Dead Elephant

"Two dead cows putrefy at the entrance to this Aboriginal town deep in the Australian outback. ... Yuendumu and dozens of similarly frayed communities weren't supposed to turn out this way. Four decades ago, Australia enacted wide-ranging reforms to uplift its long-oppressed Aboriginal citizens. The laws mandated equal wages with whites, access to the country's generous welfare system and the eventual transfer of vast chunks of land to near-total Aboriginal control. ... Australia's government has proclaimed the upsurge of violence, child abuse and alcoholism among Aborigines a national emergency. ... Australia's 500,000 Aborigines are seven times as likely as other Australians to have tuberculosis, and eight times as likely to be infected with Hepatitis A, according to government data. Their life expectancy lags the rest of the population by 17 years, and is lower than that of impoverished countries such as Bangldesh and Bolivia. By contrast, the life expectancy gap between Native Americans and the general U.S. population has shrunk in recent decades to 2.4 years. ... Then, in 2007, Australia's conservative federal government decided that such self-imposed isolation was the root cause of the crisis in Aboriginal areas because it allowed widespread abuses to remain hidden from the public eye. Citing numerous cases of sexual violence against children, then Prime Minister John Howard vowed to bring Aboriginal areas into 'the mainstream of the Australian community.' Aborigines make up one-third of the Territory's population and own half its land; they also account for 84% of its prison inmates. ... The intervention immediately sparked accusations of racism from many Aboriginal leaders and some officials in Australia's Labor Party. Marion Scrymgour, currently the country's most senior Aboriginal government official, at the time labeled the intervention 'a vicious new McCarthyism.' ... Under this policy, Aboriginal welfare and pension recipients--the bulk of the adult population in many remote towns, including Yuendumu--are paid half their money in cash. ... The aim is to restrict the amount of cash Aborigines can spend on alcohol, gambling and drugs, and to combat child malnutrition. ... Jenny Macklin, Australia's federal minster for families, housing, community services and indigenous affairs ... says the government is now experimenting with extending similar welfare 'quarantining' to Aboriginal communities outside the Northern Territory. She says there are also plans to make Aboriginal welfare payments conditonal on recipients children's school attendance, hoping to tackle sky-high illiteracy rates in communities where as many as half the kids routinely stay away from school. ... 'You've got to do some tough love,' Ms. Macklin said in an interview, 'Otherwise, you're going to lose another generation.' ... After article appeared in the Australian press describing the poor conditions in town, Aboriginal elders imposed tight restrictions on the media. Visiting journalists had to be accompanied at all times by minders of the community's Warlpiri Media unit", my emphasis, Yaroslav Trofimov at the WSJ, 17 Janaury 2009.

Does any of this sound familar? Racism, wow! Would Macklin move to the US and become Detroit's mayor, my 5 January 2009 post, link: Now for some real racism, my 1 September 2008 post, link: Richard Lynn in The Global Bell Curve, 2008, reported aborigines average IQ was 62. You don't suppose? Don't even think that, you racist you! Violent facts! Waaaa, waaaa, waaaa!

Thursday, January 29, 2009

Price Watergate-2

"This week, Wipro, India's third-largest software exporter, revealed that it had been barred by the World Bank more than 18 months ago for four years for offering bank employees shares in its 2000 stock offer in the US. ... [Ramalinga] Raju, in judicial custody until January 23, has reportedly confessed to interrogators that he diverted Satyam funds in speculative land deals for Maytas. He came unstuck after land prices crashed in his home state of Andhra Pradesh. ... [Ramesh] Gupta, a former secretary of the Bombay Shareholders Association, predicted more checks for fraud at other clients of Satyam's auditor, PriceWaterhouseCoopers (PWC). Gupta in particular queried the credibility of PWC and its operations in Dalal Street, Mumbai's financial center. 'Why does PWC get four times the fee that other auditors of companies such as Infosys?', he asked. The Hyderabad police have raided the PWC office since the fraud confession by Raju. The multinational auditor, with offices in 150 countries, is yet to explain haw it passed Satyam's fudged accounts for eight years. ... The fraud opened numerous credibilty cracks, bringing market regulators, various government institutions and market analysts themselves under investigation. The Institute of Chartered Accountants of India (ICAI), which is looking into the role of PWC, is also likely to question market consultants Ernst & Young on its valuation of two Maytas companies, as well as the basis on which E&Y declared Raju the 'E&Y Entrepreneur of the year 2007.' ICAI is itself under the cosh, with the Mumbai-based Small Investors Grievances Forum declaring India's top chartered accountants body, the second-largest in the world, to be among respondents in High Court public interest litigation filed by the Forum on the Satyam fraud. ... The plethora of investigating agencies had not impressed cynics who fear too many sleuths probing the Satyam soup may be a complex coverup for senior politician friends of Raju", Raja Murthy, 16 January 2009 at

"The fraud investigation at India's Satyam Computer Services Ltd. [SCSL] could spread to hundreds of other companies connected to the company's jailed founder, B. Ramalinga Raju, prosecutors said Friday. Investigators also have approached several banks to determine whether Satyam account statements were forged to show inflated cash balances, according to people familar with the situation. Satyam bank documents from India's largest private bank, ICICI Bank Ltd., had been forged according to a person familar with the matter", Eric Bellman (EB) and Jackie Range (JR) at the WSJ, 17 January 2009.

"[SCSL], the Indian outsourcer embroiled in a fraud scandal, used forged documents from at least four major banks to claim a cash balance in excess of $1 billlion, according to a person close to the investigation. Investigators have sent Satyam's account-balance statements and letters of confirmation of account balances to officials at HSBC Holdings PLC of the U.K., Citigroup Inc. of the U.S., and HDFC Bank and ICICI Bank Ltd. of India. Based on the banks' reviews, investigators have determined that the documents were forgeries, according to the person close to the investigation. Spokesmen for all four banks declined to comment", Geeta Anand and Romit Guha at the WSJ, 20 January 2009.

"The disgraced former chairman of [SCSL], B. Ramalinga Raju, used salary payments to 13,000 fictitious employees to siphon millions of dollars from the Indian outsourcer for land purchases, prosecutors said Thursday. Prosecutors said ... Satyam has only about 40,000 employees instead of the 53,000 it claims. ... 'The funds of Satyam have been diverted to many other companies,' K. Ajay Kumar, assistant prosecutor, told a packed courtroom. ... S. Bharat Kumar, a defense lawyer for the Raju family ... said it would be impossible for anyone to juggle 13,000 fake employee accounts", EB and Nirag Sheth at the WSJ, 23 January 2009.

"Satyam's former chairman had ticked all of the boxes normally associated with good governance. He had stacked his board with luminaries including professors from Harvard Business School and the Indian School of Business. He chose as his auditor one of the 'Big Four' international accountancies, PWC", Joe Leahy and James Fontanella-Khan at the FT, 23 January 2009.

"Prosecutors pursuing the fraud at [SCSl] said Tuesday the technology outsourcer's founder, B. Ramalinga Raju, should be denied bail because he could slow the investigation if released. Their assertions came after an employee of a company managed by Mr. Raju's familiy told police that he had been instructed to hide documents connected to land purchases by the Raju family, according to prosecutors and a court document reviewed by the [WSJ]. ... Meanwhile, Satyan's government-sponsored board hired Goldman Sachs and Aventus Capital to advise on strategic options", EB and JR at the WSJ, 28 January 2009.

Gupta's point is well taken. In 2008: Infosys paid KPMG $695,000; Satyam paid PWC $1,919,000 in fees. Infosys is slightly larger than Satyam. Did Satyam pay PWC say $600,000 for the (shoddy) audit and $1,319,000 to close its eyes? The ICAI suit is interesting. About 20 years ago, a plaintiff named the AICPA in an accounting malpractice case, alleging the AICPA's defective auditing standards gave rise to the plaintiff's damage. The suit was not permitted to proceed. We'll see if India's courts are more plaintiff friendly than America's.

Did PWC get bank confirmations and monthly statements directly from the banks in question? If not, why not?

Unless people at each of the banks made the forgeries and sent them directly to PWC, PWC is in big trouble here.
Disagreeing with Bharat Kumar, based on 1973's Equity Funding (EF) scandal, link:, it was possible. What is impossible is PWC's not finding a fraud involving 24% of employee accounts. If PWC is so incompetant it couldn't find this, its license should be revoked and it should be put out of business. In the old days, 30 years ago, Arthur Andersen, remember them, used the "TFA", transaction flow approach to auditing. If PWC used TFA it could not have missed this. If the prosecutor is correct, many SCSL employees were involved in this as were some PWC partners and employees. Goldman Sachs (GSG), ready your CNC guillotine, it has some serious work to do in India. SCSL smells more like EF every minute, see US v. Weiner, 578 F2d 757 (9th Cir., 1978) which grew out of the EF case. In it, three CPAs went to prison, link:

Good govenance, whatever that is, is another scam.

GSG? Will those who lost money in this scam arrange for GSG to sell their stock at original cost to the Fed?

50 Years of Balogna

"President Nasser, who has a taste for anniversaries, was expected to celebrate one at Gaza last weekend. It is exactly a year since the Israelis left the strip, and prophets had whispered that he might declare a Palestinian republic there. ... What held him back? ... The Gaza families have a way of keeping on both sides of the fence, and the refugees have produced no real leaders. ... There may be another reason for hesitation over proclaming a Palestinian state. All refugees of real competenece have by now scattered far and wide, from Libya to the Persian Gulf sheikdoms, where they have made new homes and new lives. They do not, on the whole, any longer expect to go back to Palestine. They simply like from time to time to recall that there are Arab families in North Africa who have kept the keys to their houses in Spain for hundreds of years", my emphasis, Economist, 22 March 1958, link:

50 years ago? Yes. The Economist posted this old story at its website on 13 January 2009. Think about it. Queen Isabella (QI) threw the Moslems and Jews out of Spain in 1492. These Arabs carried those keys for 466 years when this article appeared. Now that Spain has about 500,000 Moslems it has an irrendentist movement! QI's descendants should be forced to return that "stolen" Spanish land to the Arabs. Call the UN! But wait, didn't the Arabs invade Spain in 711 AD? Did the Spaniards reclaim THEIR stolen land? Where does this end? To understand what's going on, you must learn what is: a waqf and the Islamic Brezhnev doctrine.

Wednesday, January 28, 2009

Accounting in Flux

"Many see delay as inevitable, in part due to IFRS's relative youth and lack of robustness compared with U.S. generally accepted accounting principles (GAAP). 'IFRS is not ready and we certainly should not be ready to accept it,' says Charles Niemeier, a member of the Public Companies Accounting Oversight Board (PCAOB) and one of the leading critics of the currently proposed timeline. ... Among those mounting a grassroots movement to slow the rush to IFRS are Analyst's Accounting Observer newsletter editor Jack Ciesielski, former FASB member Ed Trott, and Bowling Green State University professor, David Albrecht (who has compiled the arguments of seven IFRS critics, including Niemeier and himself, on his blog, The Summa). ... Niemeier is also leery of letting the International Accounting Standards Board (IASB) be the standards-setter for the world, given its recent capitulation to pressure from the European Union authorities to loosen fair-value accounting for banks. ... Indeed, Bob Traficanti, the head of accounting policy and a deputy controller at Citigroup, who in May publicly objected to the standard's effects on banks during the subprime crisis, fully supported it in November at the SEC's final roundtable on the topic. Traficanti, a former FASB project manager, said both he and Citigroup 'believe 157 should be left intact'," Alix Stuart at CFO, January 2009.

What new information came to Traficanti's attention to change his mind? Or did Citigroup conclude it was politically infeasible to object to FASB 157 when asking the Feds for $306 billion more? See my 17 July and 19 September 2008 posts mentioning Traficanti and attacking IFRS:,

Banks and the Fed

"Top [Fed] officials said Tuesday that the incoming Obama administration must pump more money into ailing financial institutions and might need to take bad assets off the hands of the banks, a stance that injected the central bank into a tense political debate. ... Fed Chairman Ben Bernanke made a push Tuesday for a new effort to help banks get bad loans off their balance sheets, the TARP's original purpose. ... 'This disparate treatment, unappealing as it is, appears unavoidable.' Mr. Bernanke said repairing financial institutions is critical because the economy is dependent on the credit they provide. ... Donald Kohn, the Fed's vice chairman, delivered a similar message in testimony before the House Financial Services Committee Tuesday. Both men also talked about the need to aid homeowners, but their emphasis was on securing the workings of the banking system. ... A Goldman Sachs report released in December estimated that investors and financial institutions could lose $1.8 trillion on bad loans, but that only half of those losses have been realized", Greg Hitt and Jon Hilsenrath at the WSJ, 14 January 2009.

"The U.S. government, recognizing that the banking crisis is far larger than originally thought, is laying the groundwork for a second phse of its rescue attempt, with plans to purge assets that are paralyzing the financial system. Officials at the Treasury, [Fed] and the [FDIC], in consultation with the incoming Obama administration, are discussing a plan that would create a government bank that would buy up the bad investments and loans that are behind the huge losses that U.S. banks continue to report, say government officials. Another plan under discussion is an additional and giant government guarantee of banks' assets against further losses. ... The new government proposals are aimed at attracting private capital back to the banking system, efforts that have until now largely failed. ... Goldman Sachs economists estimate that financial insititutions and investors world-wide will ultimately realize $2 trillion in losses on bad U.S. loans, but have recognized only half those losses so far. ... Regulators say they worry that the only remaining source of capital for banks is the government. ... In the U.S., [Fed] officals are advocating aggressive action to take assets such as mortgage-backed securities off the balance sheets of financial firms. ... [Sheila] Bair said the assets could be purchased at fair value, the figure the banks use to value thier own assets. Such a move would remove the challenge of placing a price on assets that rarely trade. That would allow banks to avoid selling those assets for a low price, which would force them to take additonal write-offs", my emphasis, Deborah Solomon, John Hilsenrath and Damian Paletts (SH&P) at the WSJ, 17 January 2009.

Here we go again. Super MLEC returns in some guise or other. I disagree with Zimbabwe Ben and Kohn. It's more than time we let banks fail. All of them if need be. From "TBTF" Citibank on down.

More incompetant WSJ reporting. How do SH&P know what Uncle Sam "originally thought"? If Unc concluded 18 months ago the losses would be $2 trillion, would he have said it, or given us the "dribble" we've seen? MLEC is back! Private capital may go into the banking system, just not to existing banks! Why capitalize insolvent banks? Are most large banks insolvent? Yes. Where were the Big 87654 when we needed them? Purchased "at fair value"? Who is Bair kidding?

Tuesday, January 27, 2009

Save Citi, Why?

"The great unwind of Citigroup's financial supermarket has begun. In the face of $10 billion in losses in the latest quarter, and with its stock at a 16-year low, Citi has struck a deal on Tuesday to effectively sell control of its Smith Barney brokerage unit to Morgan Stanley. ... Citibank, founded as City Bank of New York in 1812, has been beat up before. ... To justify the 1981 merger of Shearson brokerage with American Express, [Sandy Weill] claimed in a Time magazine interview that 'a typical consumer may have a stockbroker in Claifornia, a banker in New York, an insurance agent in Maryland and a real estate agent jetting back and forth from Chicago to Boston.' It's an old Wall Street ploy--pitch a dream and use the premium valuation to do deals. ... Were there any real synergies from Citibank's one-stop shop? I doubt it. It failed because internal compensation incentives mainly stressed units, not the whole, the downside of all behemoths. ... Each segment's profits became suspect as Fed Chairman Alan Greenspan lowered short-term rates to 1% in November 2002. While a boon for banks who borrow short and lend long, those pesky long-term rates stayed low, as the Chinese kept buying 10- and 30-year Treasurys. ... Normally, when a bank sees smaller returns on investment, it stops investing, or at least slows down and lowers its equty until better returns are avaliable. Others did. But this was Citigroup, which never sleeps, where money lives, and the bank DNA was watered down. Instead of reining in, those in charge went for it. ... You could borrow at 2% and get 4%-6%-8% yields. Who could turn this down? Leverage of 20 to 1 or even 30 to 1 was used to buy this tuff. Shareholders might have balked at so much leverage. Citi, unlike other big U.S. banks, kept this stuff off its balance sheet in so-called conduits or SIVs (structured investment vehicles). This is how Citigroup grew its earnings. ... There was an unwritten of 'implicit obligation' for Citigroup to take the SIVs back onto its balance sheet in the unlikely event that something went wrong. Well it did. the SIVs collapsed when short-term financing dried up, and are now on Citi's balance sheet", my emphasis, Andy Kessler (AK) at the WSJ, 16 January 2009.

"For his doctoral thesis at Columbia University in the 1980s, Vikram Pandit tackled a complex economic problem involving asset pricing. His academic advisers told him it would be impossible to unravel. They were right. He never solved the problem. ... Citigroup also is expected to detail the downsizing strategy aimed at dismantling pieces of the financial supermarket that Mr. Pandit repeatedly defended even as the credit crisis and recession overwhelmed his efforts to tackle problems haunting the company long before he arrived. Mr. Pandit hasn't said publicly what changed his mind. ... On Nov. 17, Mr. Pandit touted the company's prospects in an empoyeee meeting. That evening, he boarded a Citigroup jet for a one-day trip to Brazil. Some employees were surprised that he didn't cancel the trip. ... At a meeting in Sao Paulo, an employee asked Mr. Pandit whether the U.S. government might have to intervene to prevent Citigroup from unraveling. Mr. Pandit said no. ... The next day, Mr. Pandit held a conference call with about 3,000 executives. He lashed out at 'fear-mongering' by short-sellers and rivals. But he defended the company's health and structure. 'This is a fantastic business model,' Mr. Pandit said", my emphasis David Enrich at the WSJ, 16 January 2009.

"Sheila Bair, chairwoman of the [FDIC], recently tried to describe how this would work: 'The aggregator bank would buy the assets at fair value. But what does 'fair value' mean? In my example, Gothamgroup is insolvent because the $400 billion of toxic waste on its books is actually worth only $200 billion. The only way a government purchase of that toxic waste can make Gotham solvent again is if the government pays much more than private buyers are willing to offer. ... But should the government be in the business of declaring it knows better than the market what assets are worth? And is it really likely that paying 'fair value,' whatever that means, would be enought to make Gotham solvent again? What I suspect is that policy makers--possibly without realizing it--are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as 'fair value' purchases of toxic assets.", my emphasis, Paul Krugman (PK) at the Houston Chronicle, 21 January 2009.

I agree with AK, "bad management" killed Citi. Including bad accounting. See my 6 February, 24 June, 17 July, 23 November 2008 posts. The Feds should kill this monster.

Pandit is either a criminal or a fool. Either way, he should be exited and told to return his $165 million "signing bonus". Citigroup's controller's office needs a thorough house cleaning. Pandit is right, Citigroup has a "fantastic business model" for him. It gave him $165 million for nothing. Is it possible, I an outsider, 2,000 miles from New York, knows more about what ails Citigroup than its CEO?

Uncle Sam would deceive the public? Say it ain't so, Joe. I go PK one better, why do we let the government declare it knows what interest rates are appropriate? Kill the Fed!

New Boss = Old Boss

"When President-elect Barack Obama nominated Mary Schapiro to lead the [SEC], he criticized regulators for having 'dropped the ball' in a 'failure of oversight' in the Bernard Madoff scandal. But a close examination of Ms. Schapiro's record as a regulator shows she has infrequently pursued tough action against big Wall Street firms. A regulatory-agency merger that Ms. Schapiro oversaw shifted power to larger financial firms at the expense of small ones. ... Last year, amid historic market convulsions and Wall Street scandals, Finra often filed tiny cases against small players. During the past few years of Ms. Schapiro's career as a regulator, which earns her over $3 million a year, enforcement fines against firms have plunged. ... Schapiro advocated the regulatory merger that created her agency by arguing in 2007--just before the mortgage bubble burst and financial firms wobbled--that the result would be 'reducing regulatory costs and reducing burdens' for Wall Street firms. ... During that time, the NASD and Finra were involved in several examinations of the brokerage business of Mr. Madoff, who stands accused of running a giant Ponzi scheme; her agency concluded in 2007 only that his firm had violated technical rules and had failed to report certain trades in a timely fashion. ... At an event in May, Ms. Schapiro was asked a question about getting tough about mortgage-backed bonds, the securities at the heart of the crisis, and one listener says she seemed to suggest depending on credit-rating agencies that rate the bonds. ... When bringing charges against large securities firms, Ms. Schapiro has occasionally appeared to go easy on them. ... Before bringing a civil adminstrative complaint, Ms. Schapiro at the NASD met with Morgan Stanley's general counsel, Gary Lynch, who sought to have the charges dropped or softened. Mr. Lynch is a former SEC enforcement chief with whom Ms. Schapiro had worked. .. After Finra was created, its enforcement chief, Susan Merrill, assumed oversight of the case. She, too, had previously worked for Mr. Lynch, at the law firm of Davis Polk & Wardwell. The matter was settled in September 2007, after Morgan Stanley persuaded Finra to cut the restitution fund. ... The merger of industry self-regulatory bodies that created Finra reduced the voice of small brokerage firms", my emphasis, Randall Smith, Tom McGinty and Kara Scannell at the WSJ, 15 January 2009.

"President-elect Barak Obama's nominee to head the [SEC] pledged to take the handcuffs off the agency's enforcement division and said she would explore more oversight of hedge funds. ... In a page-one article Thursday, the [WSJ] detailed how Ms. Schapiro has infrequently pursued tough action against big Wall Street firms. Amid the mortgage crisis, Finra often filed tiny cases against small players. ... 'I can be aggressive an enforcer as anybody has ever been at the head of the SEC,' Ms. Schapiro said. She said 'there can be no sacred cows' and that she would go 'will full force' against anyone who commits fraud. Ms. Schapiro told legislators that the Journal article 'presented a completely unfair picture of my record in particular with respect to enforcement and enforcement cases.' ... She also said she would look closely at 'procedural hurdles' hindering the enforcement process, and expressed caution about moving too swiftly toward adopting interantional accounting standards", my emphasis, Kara Scannell at the WSJ, 16 January 2009.

Does Schapiro think she is Linda Thomsen? And is Gary Lynch Mary Jo White in drag? See my 23 October 2008 post, link: This appointment stinks. Didn't the big Wall Street firms give Obama the majority of their money? Apparently the money was well spent. If Schapiro only "occasionally" went easy on big Wall Street firms, she would never have been nominated.

I believe Schapiro when she says, "I can be an aggressive enforcer as anybody has ever been at the head of the SEC". Think about what Schapiro said. I would go further than Schapiro with respect to IFRS, dropping US adoption.

Monday, January 26, 2009

The Kids Blow It Again

"Australian investment bank Macquarie Group Ltd. said its December quarter was 'exceptionally challenging' for almost of its operations, hurting both business activity and profitability", Cynthia Koons at the WSJ, 9 January 2009.

Where did Australian kids want to work, my 3 October 2007 post, link:

Hyperinflation in the MSM

Michael Panzner has an 11 January 2009 post at his Financial Armageddon with a link to a Barron's article. Mario Gabelli to Fred Hickey (FH), "So, you're saying [Bernanke]'s going to make the same mistake of the Weimar Republic"? FH, "There is a possibility of that". I'll add a quote from FH, editor of the High-Tech Strategist, "On to gold. You have to protect yourself against potential hyperinflation. All the central banks are printing money now. The bull market in gold was rather orderly for the first eight years. We haven't seen the blowoff phase you get in all bull markets. That's coming".

The dirty word "hyperinflation" finds its way into the MSM.

We Are All Experts Now

"As much as $75 billion of Lehman Brothers Holdings Inc. value was destroyed by the unplanned and chaotic form of the firm's bankruptcy filing in September, according to an internal analysis by the company's restructuring advisers. ... An orderly filing would have enabled Lehman to sell some assets outside of federal bankruptcy-court protection, and would have given it time to try to unwind its derivatives portfolio in a way that might have preserved value, the study says. ... Unsecured creditors have asserted in court filings that they are owed about $200 billion. ... 'While I have no position on whether or not the federal government should have provided further assistance to Lehman, once the decision was made not to provide further assistance, an orderly wind-down-plan should have been pursued. It was an unconscionable waste of value,' said Bryan Marsal, co-chief executive of the advisory firm who now serves as Lehman's chief restructuring officer. Mr. Marsal estimates that the total value destruction at Lehman will reach betweeen $50 billion and $75 billion, once losses from derivatives trades and asset impairment are combined. Much of the destruction of value comes from the bankruptcy filing of the parent guarantor, Lehman Holdings. ... The problem for creditors is that this also terminated contracts in which Lehman was owed money. Mr. Marsal said a few extra weeks would have allowed Lehman to transfer or unwind most of its 1.1 million derivatives trades, preserving more cash for creditors. ... 'This filing, which was pretty much dictated to the board of directors at Lehman that weekend, occurred with no planning,' said Mr. Marsal, whose New York firm was hired by Lehman's board around 10:30 PM Sept. 14. That was just hours before Lehman [LEH] filed for the largest bankruptcy in U.S. history, after the U.S. government declined to offer its backing. ... 'Had fundamental rules of crisis management been followed, much of the value that was lost by the unsecured creditors would have been prevented. This loss in value was a big hit to the public holders and could have been mitigated,' Mr. Marsal said. ... About 150 Alvarez and Marsal [A&M] employees are on site at Lehman offices in New York, London and Hong Kong, combing through creditor claims and managing operations. They are piecing together what happened at the moment of Lehman's collapse", my emphasis, Jeffrey McCracken at the WSJ, 29 December 2008.

How interesting. A&M was hired before LEH's bankruptcy. What if anything did A&M tell LEH before filing? Is A&M's report designed to protect A&M from a malpractice suit for failure to warn LEH's board of this at least, reasonably possible result? If A&M did not anticipate this $50+ billion disaster, why listen to A&M now? What does "value was destroyed" mean? Did an "Act of God" cause it? Aren't derivatives a "zero-sum" game? If so, counterparties gained at LEH's expense! Should LEH's bankruptcy estate sue them? Or is A&M protecting these counterparties by saying value "destruction", not transfer? Has LEH preference payments or fraudulent transfers to pursue? Does A&M recognize LEH's counterparties may give it future referrals with nothing more to gain from LEH, a "repeat player advantage"? A better title for the WSJ article, "Lehman's Chaotic Bankruptcy filing Destroyed Billions in Value", would have been "Lehman's Consultant Claims ... ". The WSJ accepted A&M's claims at face value. "Preserved value" or cost counterparties more? "This also terminated contracts". Did the "Three Musketeers", Henry Paulson (HP), Zimbabwe Ben (ZB) and Chris Cox (CC) know this on the night of 14 September?

Why believe "experts"? Look at KPMG's recent BCE "solvency" opinion. Citigroup was to be a BCE buyout lender. Citigroup gained by the buyout falling through. As Citigroup is also a KPMG client, KPMG should have refused this assignment, my 18 December 2008 post. What does Marsal mean by, "pretty much dictated to the board of directors at Lehman"? Who? Marsal name names. Did Goldman Sachs (GSG), orchestrate this through HP? Or was this CC's or ZB's doing? No matter, LEH's board should not have filed on 15 September if it was not in the interest of LEH's shareholders and creditors. PERIOD! Did Marsal discuss these "fundamental rules" with LEH's board on the night of 14 September? If not, why not? Where was Harvey Miller (HM), LEH's bankruptcy counsel on the night of 14 September? Should LEH sue HM for malpractice? The WSJ headline is revealing. Creating chaos may conceal bankruptcy fraud so intentional acts appear to result from oversight or mistake. Did that happen here? Is the SDNY US Attorney's Office looking into this? The WSJ might have used this title, "Lehman Counterparties Screw Unsecured Creditors Out Of $50 Billion".

One commenter on Yves Smith's 29 December 2008 piece, link:, cited this 14 December 2008 NYT article, link: I hadn't read it before, thinking it a HM profile. Here goes, "From his perspective as Lehman's undertaker, Mr. Miller believes that the fallout from the firm's messy bankruptcy could have been avoided. Regulators could have stepped in, he says, not necessarily to save Lehman, perhaps, but to head off the meltdown that followed. 'They totally missed it,' he says. 'Look what happened.' ... In the days after Lehman filed for bankruptcy, he notes, demand for corporate debt utterly evaporated. The failure of a Wall Street firm poses its own special risks, because other companies that rely on it--such as counterparties to complex financial contracts known as derivatives--are all financially exposed to its collapse. That's why Mr. Miller says it was crucial for the government to head off the wholesale termination by counterparties of all their transactions with Lehman Brothers before the firm was forced into bankruptcy. "If the Fed or the Treasury said, "Let's say to Lehman, there's no bailout, we're not going to save the company," they could have supported an orderly unwinding of all the transactions over a period of months," he says. 'It probably would have cost the economy a lot less money'," my emphasis, Johnathan Glater (JG) at the NYT, 14 December 2008, link:
"This matter came on for trial, on September 30, 1992, upon plaintiff/trustee's second amended complaint for avoidance of transfers, preferential, fraudulent and post-petition, of funds and assets by Debtor to defendant Society Bank in an amount approaching $3,000,000. Upon consideration of the evidence adduced at trial and the record herein, the court finds that certain transfers made to defendant should be avoided, and that the trustee should be granted judgment against defendant in the amount of $2,148,499.43. On August 20, 1990, an involuntary petition under chapter 7 of title 11 was filed against Debtor Parker Steel Company. ... Plaintiff, in the instant complaint, seeks to avoid certain payments, as preferential. Plaintiff claims that defendant received paymennts from Debtor, while insolvent, within one year of Debtor's petition, benefitting certain guarantors", In Re Parker Steel, 149 BR 834, 838 (Bkrtcy, ND Ohio, 1992). Parker Steel was decided before 1994's change to section 404 of the bankruptcy code, or under Deprizio. "Therese A. Zmuda, employed as a CPA with Holt, Kisoff & Moseley, Inc., testified that she had been retained by plaintiff to review Debtor's records", 841. "Zmuda's opinion, using the 1989 audited statement and 1990 reviewed statement, applying these adjustments to Debtor's valuation of assets and liabilities, was that Debtor was insolvent in August, 1989, continuing until March, 1990. ... Zmuda opined that, based upon the relationship between the draws on the line of credit and the amount of accounts payable, Debtor was attempting to pay down the line of credit", 842. The time of insolvency is critical as are payment practices. I call this a secured-unsecured creditor debt swap. "Michael Clodfelter, a partner of Ernst & Young, defendant's witness, testified that he is a consultant for creditors and Debtors in bankruptcy situations, valuing privately held businesses. ... It was Mr. Clodfelter's opinion that Debtor was solvent through March, 1990; Debtor's solvency is more doubtful beginning in April, 1990", 843. "The issue contested by defendant is the solvency of the Debtor from August, 1989 until July, 1990. ... Initially, the court notes that insolvency is to be determined at the time of the transfer, not at the time the petition was filed. ... Additionally, the court must consult the bankruptcy code definitions is assessing the imapct of the Sharon liability", 844. "This balance sheet test refers, then, to insolvency when a Debtor's liabilities exceed its assets, at a fair value. ... In valuing Debtor's liability to Sharon, although GAAP are relevant, they are not controlling", 845. LEH's CDS counterparties must prevent an insolvency determination, lest they be found to be beneficiaries of billions in preference payments. I note the court found the Ernst & Young experts testimony to be less credible than Zmuda's.

"Appellant Helig-Meyers Company and five of its wholly-owned subsidiaries appeal the decision by the [US] Bankruptcy Court [BC] for the Eastern District of Virginia that debtors were solvent on the date of the alleged preferential transfers to Wachovia Bank, N.A., and others (collectively 'the lenders'), as part of a financial restructuring on May 25, 2000. ... The debtors argue that the [BC] improperly applied the balance sheet test and relied upon an analysis of the creditor's expert on the mistaken belief that sich expert executed a balance sheet test of the debtor's solvency", In Re Helig-Meyers, 328 BR 471, 474 (ED Va., 2005). "The burden is on the trustee to prove the avoidability of a transfer under subsection (b); however, 'the debtor is presumed to have been insolvent on and during the 90 days immediately preceeding the date of the filing", 475. "The definition of insolvency nicely frames the issue. An insolvent debtor's financial condition is such that 'the sum of such entity's debts os greater than all of such entity's property at a fair valuation.' ... The qualification of 'a fair valuation' in the definition often requires that the judge sort through the differing presentations by the parties' valuation experts and to make factual findings. Not surprisingly in this case, the two valuation experts reached vastly different conclusions regarding the value of the debtors' assets. ... As a threshold matter, Judge Tice considered whether, on the date of the transfers, the debtors collectively operated as a going concern or were on their deathbed", my emphasis, 477. "A debtor lies on its deathbed where the debtor is 'in a precarious financial condition' so that 'liquidation was imminent when the petition was filed", 477. "As a going concern, the court applies the balance sheet test to measure the debtors' solvency. The balance sheet method 'contemplates a conversion of assets into cash during a reasonable period of time'," 477.

If HM is right, "the fallout ... could have been avoided", why does HM think the regulators "totally missed it"? Did they? Was the result intended? In reading this I conclude A&M and HM "cleared" reports before release. They both want to protect LEH's board and the counterparties. "Look what happened"! Yes, look! "Forced into bankruptcy", what nonsense. Either ZB, CC and HP did not anticipate what looks like the counterparities $50 billion gain, or they did. Is A&M preparing a smiliar AIG report at this minute? "Orderly unwinding"? Should HM come back, in his next life, he could make a fine offensive lineman, protect that quarterback! What does "cost the economy" mean? Which participants in the economy? "Counterparties ... are all financially exposed". Yes they were. Should they be dragged into federal district court? Well HM, how big are your cojones? Will you make enemies of every other Wall Street house to benefit LEH's unsecured creditors? If not, you should be replaced. I refer again to Switzer, my 18 December post:

Look at some expert "advocacy". In about 1971, McKinsey, the big consulting firm, disgraced itself, in my opinion, by writing Pan American's plea for government subsidies. In about 1999, KPMG wrote a report economically "justifying" subsidies for a Hartford, Connecticut sports stadium. Forensic experts produce junk to attempt to mislead juries into convicting defendants with forensic evidence, my 8 June 2008 post: No matter how much expertise A&M supposedly has, we don't know why it wrote what it did. No document reveals the circumstances of its preparation, my 7 February 2008 post, link:

A significant similarity between LEH and AIG is: the derivatives counterparties were protected. HP, ZB and CC seem to have their answer to "Carthago delenda est", i.e., "The counterparties will be protected".

What Judge Tice did at Helig cannot be done for AIG lest someone conclude AIG was insolvent months ago and that liquidation, not going concern valuation was appropriate.

Sunday, January 25, 2009

Zimbabwe Schwarzenegger

"Zimbabweans are facing a deepening humanitarian crisis and what appears to be a renewed security crackdown, just weeks before President Robert Mugabe plans to set up a new government. ... This week, the government released a new 50-billion-dollar note--valued at little more than one U.S. dollar. ... State services have collapsed. Most district hospitals and clinics, especially in rural areas, have been closed since the begining of January, because they have no drugs, materials or means to pay their staff. Mothers struggle to deliver their babies. HIV/AIDS patients eat medicinal herbs dug from the ground. 'The whole country is turning into some kind of giant mortuary,' aid Douglas Gwatidza, head of the Zimbabwe Association of Doctors for Human Rights. Health workers are charging their patients in foreign currency, then sharing the profit among themselves. 'The government cannot pay us, so we have to find ways of paying ourselves,' said one nurse, Ethel Ngunda. It isn't just health-care workers who have turned their business into a private practice. Police officers demand extra to follow up on complaints. Some public-school teachers have refused to go to work unless parents pay them directly, in foreign currency. ... Soldiers in recent months have demanded to be paid in foreign currency, which the government can't afford. Instead, soldiers roam city streets, looting market stalls and stealing from citizens, on the pretext of hunting down illegal foreign-currency dealers. Some have hired themselves out as debt collectors", my emphasis, WSJ, 14 January 2009.

When will these conditions come to the US? California first!

Atlas Shrugged

WC Varones has a 9 January 2009 post which refers to a WSJ article by Stephen Moore. I underlined WCV's excerpted lines when reading it, link:

I add, "Finally, and out of desperation, the politicians come to the heroic businessman John Galt (who has resisted their assault on capitalism) and beg him to help them get the economy back on track". Read what Detroit's Mark Douglas said, my 5 January 2009 post, link:

Zimbabwe Ben Update

The monetary base (MB) was $1,686,386 million on 31 December 2008, and $843,841 million on 10 September 2008, a 99.85% increase in 16 weeks, which compounds to an 850% annual rate. I say again, what are the deflationistas talking about?

Saturday, January 24, 2009

California Death Watch

"After more than 150 years of becoming a destination, California is becoming a place entrepreneurs, investment capital and the hardy workers who made it a global leader in agriculture, technological innovation amd scientific research are leaving. The exodus is the marker of something deeper than a national recession. It's a sign that the attempts by state leaders to spend their way back to prosperity are killing California. ... Citizens are burdened by all sorts of state regulations. ... Entrepreneurs and investors, seeking the path of least resistance, leave when it becomes easier to make a living in more business-friendly states. ... Over the past few years, we've witnessed the state government's response to the capital and entrepreneur flight out of our state: Taxes remain high, and lawmakers employ all sorts of tricks in the book to produce 'balanced' budgets from shifting expenses around to borrowing ever larger sums of money", my emphasis, Devin Nunes (DN) at the WSJ, 10 January 2009.

"California is in crisis. Maybe we should recognize that it's terminal. The problem: Sacramento is in a state of total capitol dysfunction. The budget has grown vastly more impossible to balance (an additional $40 billion over 18 months must be scrounged up somehow), but the tax-intoxicated Democratic legislature insists upon more money from its citizens. ... We have been warned so often about the disaster that it can be difficult to believe that the axe may be close at hand. ... The Sacramento politicians hoped that good economic news would appear to rescue them from responsibility. ... Californian's have tried long and hard to make Sacramento get serious about the state's business. ... According to calculations by State Senator Tom McClintock, spending under Gov. Davis had grown by seven percent annually. But, since then, Schwarzenegger has increased that rate to 10 percent. ... At least one of those money magnets, education, is hugely impacted by the entry of millions of immigrants and illegal aliens. ... It is likewise significant that SacraMexico pols won't even take action against the low-hanging fruit for spending cuts, e.g., the taxpayer tuition subsidy (AB 540) for illegal alien college students (many of whom are Asian, interestingly). That issue had to be dragged through the courts over years at great expense for the participants because the legislature is too Mexifornicated to mind the people's business properly. It was recently announced that the case would be advanced to the highest state level, California Supreme Court to take on state law granting in-state tuition to illegal immigrants [LA Times, Jan. 5, 2009]. ... The tuition debacle has gone on for so long (since 2001), that there are now hundreds of illegal alien college graduates who benefitted by the program of taxpayer subsidy but who are unable to work legally. After years of unearned entitlement, the young foreign adults are miffed that they cannot obtain employment in America. ... Many Californians have voted against incompetence and Mexicanization by leaving. ... California may just be too big and diverse to govern. California's difficulty excessive has resulted in balkanized tribal areas of different ethnicities and languages, as well as vastly diffent ideas about how (and whose) resources should be used. Teddy Roosevelt's characterization of "squabbling nationalities' comes to mind. California has the highest percentage of foreign language speakers--43 percent speak a language other than English at home. In particular California has too many Mexicans who care more about their ancestral homeland than assimilating to this country. In addition, immigration-caused diversity is a force multiplier of societal stresses. As sociologist Robert Putman has determined, diversity decreases trust. It doesn't help that immigrants are never satisfied, never done with demanding more than what cirtizens receive, like tuition breaks and totally free medical care. ... No one in California government today is willing to take the tough measures necessary to solve the structural financial problems. The short-term fix is to kick them down the road into someon else's adminstration. ... It is an axiom in the patriotic immigration reform movement that good fences make good neighbors. By limiting the opportunity for cross-communal plundering through the tax system, good fences could make fiscally-responsible neighbors too", my emphasis, Brenda Walker, 12 January 2009 at

"Mike Reilly spent his entire lifetime chasing the California dream. This year he's going to look for it in Colorado. With a house purchase near Denver in the works, the 38-year-old engineering contractor plans to move his family 1,200 miles away from his home state's lemon groves, sunshine and beaches. For him, years of rising taxes, dead-end schools, unchecked illegal immigration and clogged traffic have robbed the Golden State of its allure. Is there something left of the California dream? 'If you are a Hollywood actor,' Reilly says, 'but not for us.' ... But for many California families last year, tomorrow started somewhere else. The number of people leaving California for another state outstripped the number moving in for another state during the year ending on July 1, 2008. California lost a net total of 144,000 people during that period--more than any other state, according to census estimates. ... Why are so many looking for an exit?", 12 January 2009, link:

"In 2004, FAIR published a study estimating California's annual cost for illegal immigration at $9 billion, an amount which surely has not decreased in the intervening time. But the goodies for illegal aliens are not being cut, even as basic services are being axed for citizens. The presence of millions of illegal aliens--many of whom are uneducated, unskilled and non-English speaking--is not the only cause of California's budget crisis, but it is a significant part. ... Schwarzenegger called it a 'big mistake' Wednesday to blame illegal immigrants for the state's looming $8 billion budget gap [in August], just as Republican lawmakers have proposed a rollback of benefits for illegal immigrants to save money", Brenda Walker, 18 January 2009 at

DN is a Congressman from California. He can't say, "The exodus is largely a response to the Mexodus".

Illegal aliens' UCLA and Berkeley tuition is less than foreigners, i.e., Arizona and Nevada kids! If illegal aliens attend UCLA, why doesn't the (in)Justice Department raid UCLA's registrars office, identify, and deport them? Then find a charge to arrest UCLA's adminstrators on. Californians follow Lenin's dictum, they are "voting with their feet". I'm sure this makes Paul Krugman cringe. "Balkanized tribal areas", see my 6 September 2008 post: The majority of LA County (LAC) residents speak a language other than English at home. The LAT reported 53% of LAC residents are functionally illiterate. What country is LAC in anyway? Robert Putnam is a Harvard professor. I'm surprised he hasn't been driven off that campus. Totally free medical care. Is that making California hospitals close? "Tough measures"? My fix: let California issue its own money then hyperinflate it out of existence! "Cross-communal plundering", I love it! See also gm's comments at my 4 January 2009 post: California is a witches' brew of troubles.

Because it's too expensive to live there and large parts of California are no longer part of the US.

Is the Guvernator serious? What is California's annual illegal alien and anchor baby cost? 60,000 prison inmates @ $36,000 each or $2.1 billion; 530,000 LAUSD students @ $13,000 each or $6.9 billion, 5.5 million people getting medical care @ $1,500 each or $8.2 billion; that's $17.2 billion already. Either the illegal aliens and their progeny will be denied services at the barrel of a gun, or the Franchise Tax Board will take Californian's property at the barrel of a gun. The question is: who will the gun be aimed at? This reminds me of something Hitler's propaganda minister Joseph Goebbels said, "The most important weapon of war is propaganda. Why? Any idiot can be taught to carry a rifle. But it is the proper administration of propaganda which determines the direction in which he points it".

Rozeff Blasts the New Deal

Michael Rozeff (MR), a retired finance professor, echoes my sentiments about the New Deal, blasting it on 15 January 2009 at:

Mish on Pensions

Michael Shedlock has a 14 January 2009 post about pension problems facing the states. State pension funds lost a total of $865 billion in the last 14 months. Something has to give, link:

Friday, January 23, 2009

42 More Years?

"In the afterglow of your election, Americans today run the risk of forgetting that the nation still faces one last great civil-rights battle: closing the insidious achievement gap between minority and white students. Public education is supposed to be the great equalizer in America. Yet today the average 12th-grade black or Hispanic student has the reading, writing and math skills of an eighth-grade white student. ... This achievement gap cannot be narrowed by a series of half-steps from the usual suspects. .. We, too believe that true education reform can only be brought about by a bipartisam coalition that challenges the entrenched eduation establishment. And we second your belief that school reformers must demonstrate an unflagging commitment to 'what works' to dramatically boost academic achievement--rather than clinging to reforms that we 'wish would work.' ... Dismissing the potential of schools to substantially boost minority achievement, as is now fashionable in some Democratic circles, is ultimately little more than a recipe for defeatism. ... First, the federal government, working with the governors, should develop national standards and assessments for student achievement. Our current state-by-state approach has spawned a race to the bottom, with many states dumbing down standards to make it easier for students to pass achievement tests", my emphasis, Joel Klein and Al Sharpton (K&S) at the WSJ, 12 January 2009.

Good luck, K&S. You''ll need it. What's "insidious" about the achievement gap? We can do it! Just clap hands! We do not accept "defeatism". Why should "national standards" be better here than in say the insurance business? What will an "education SEC" do anyway? See my 1 and 18 September and 27 November 2008 and 5 and 7 January 2009 posts:


"When we give something a name, it is a common error to think we understand it. But we often don't understand. Even worse, it is possible to misname things and build a false set of understandings leading to disaster. ... When politicians are allowed to mislabel things, to attribute false capabilities or attributes, to apply solutions for insoluable problems, then you know that something wretched is in the works. ... The official position of the [US] in its 'war against terror' is not imperialist. It is something worse. In fact, we need a new word to describe it--and a new set of understandings to see our way out of it. ... According to President Bush, 'We are led, by events and common sense, to one conclusion: The survival of liberty in our land increasingly depends on the success of liberty in other lands. The best hope for peace in our world is the expansion of freedom in all the world.' The president's statement is logically correct, but strategically nonsensical. While the 'expansion of freedom' is desireable for America, it is prohibitively costly and beyond out capabilities. ... In the Middle East, Bush's policy of spreading democracy has a destabilizing effect. It promises nothing less than revolutions and civil wars. ... If the West suffers economic collapse due to chaos in the Persian Gulf, democracy may not survive anywher. In that event, the attempt to spread democracy could actually destroy democracy. ... 'History aways repeats itself twice,' wrote Karl Marx. 'The first time as tragedy, the second time as farce.' When the Left compares Bush toHitler, we ought to make use of Marx's formula--turning it back on itself. A farce is a comedy characterized by broad satire and improbable situations. ... Like Hitler's blitzkrieg, George W. Bush's blitzkrieg initially appeared unstoppable, victorious, sweeping all before it; but like Hitler, he overextended, became bogged down, found himself at odds with his generals, issuing a 'no retreat' order in the face of collapsing morale. While Hitler filled the concentration camps and exterminated 'undersireables' in conquered territory, Bush was determined to fill voting booths and elect the undesireables. When the Gestapo captured insurgents, they were brutally tortured; when Americans captured insurgents they were forced to wear women's underwear. Hitler attacked the Russians because of their treachery. Bush invited his treacherous Russian 'partner' to a barbeque at his dad's house. ... In fact, America's enemies had reason to smile. Some of them probably laughed. "Iraq is lost. Iran won it,' noted former CIA operative Robert Baer. Because of Bush's invasion of Iraq, Iran will be the dominant power in the region. ... Baer [wrote] The [US] was the instrument of its own defeat in the Middle East. By decimating Iraq's army, we opened the door to Iran to annex Iraq and its oil through proxies--a process that is well under way.' ... The 'war on terror,' therefore, tends toward farce. It is not imperialism, but misguided philanthropy in which many people are killed and America's enemies gain the advantage", JR Nyquist (JRN), 9 January 2009 at

JRN's got this knocked. In the 60 years of Israel's existence, discouraging the US Iraq invasion was one of the two things Israel and Saudi Arabia agreed on. They saw this coming! What a complete blunder! Consider concepts like: GDP, CPI, PPI, etc. What are they really?

Thursday, January 22, 2009

The Big 87654 Did It!

"The chief lesson from Japan, scholars say, is that good monetary and fiscal policies are necessary but not sufficient for a recovery. The government also needs to spend political capital by taking on entrenched interests: the management, shareholders, and debtholders of big but unhealthy banks that need to be shut down so the financial system can get a fresh start. That campaign must start wth a cold-eyed audit of the books of every major financial institution. 'We have not closed down the banks ruthlessly. That's the big problem,' says Harvard University's Kenneth Rogoff, who delivered a paper at the [Jan. 3-5] San Francisco meeting. ... It has become conventional wisdom that it was a huge mistake for the government to let Lehman Brothers go under, but [Anil] Kashyap said: 'I don't think it's so obvious that if you had saved Lehman no one else big would have failed.' The bigger mistake, he said, was taking an ad hoc, inconsistent approach that has left the private sector confused about which institutions are sage to invest in, this chilling capital-raising", my emphasis, Peter Coy at Businessweek, 19 January 2009.

Kashyap is a University of Chicago professor. Does Rogoff think Big 87654 audits of financial institutions are not "cold-eyed"? If so, he should lobby to prevent the Big 87654 from continuing to audit these institutions. I wonder if the PCAOB shares Rogoff's opinion. Kashyap agrees with Higgs, see my 19 December 2008 post:

Expert Madness

"The other day I read an op-ed by the Danish Cold War researcher, Bent Jensen, in Jylands-Posten, where he wrote that a Russian friend of his recommended that he read the book The Flying Inn [TFI] by Gilbert K. Chesterton [GKC] from 1914, in order to understand what was going on in the European elites in general and the British elites in particular vis-a-vis multiculturalism and pandering to Islam. ... Not only did [GKC] have the uncanny foresight to see how Europe could be overtaken by Islam, but also describing the effete elite's hypocrisy and double-standards to the dot. ... The plot and the problems of the book appear as if taken straight out of the political-intellectual stage of Denmark, Britain and Europe of today. ... A close Russian friend of mine had for quite a while encouraged me to read a devil-may-care novel by the English Catholic author [GKC], who died in 1936. His novel, which is a utopian piece, takes place in England at the end of the 19th century. 'It will teach you what is happening in Denmark and Europe right now,' said my Russian friend. 'Read it, the book is named The Flying Inn'." Briefly explained, [TFI] is about the ruling class and its fierce discontent with the state of the world, and in particular the way the lower classes choose to live their lives. The spokesman for the upper class if Lord Ivywood [LI], a member of Parliament--a pale, anemic and humorless world-improver, isolated from the British people, their faith and customs. Personally, the Lord believes in nothing except his own utopian ideas. ... And here we are at the core of the matter. The Higher Society has always considered the lower classes, the common people to be vulgar. The underclass dresses wrong, eats and drinks wrong; it talks and even thinks in wrong ways. Thus is becomes an important task for the ruling classses in politics, journalism, science, and education to raise the incorrectly eating and thinking classes. It is also of utmost importance to make the lower classes abandon their love for the country and their culture--as well as their skepticism towards alien cultures seeking to intrude and dominate. [LI] and his peers in other European countries have decided to make peace with the Islamic world--on Islam's terms. Partly because there is profit to be made from such a peace, and partly beacuse Islam would be good for the lower classes, for instance by curbing the ongoing drunkenness in England. ... The book opens with a description of a 'menagerie of asylum members', that is, the major or minor fools who create a considerable share of the noise also known as 'public debate'. ... Finally, we also find in the menagerie a Turk wearing a red fez, who emplains that British civilization actually originated with the Turks, a fact utterly forgotten by the British. One of his brilliant proofs for this statement is that the British prefer Turkeys for Christmas. The similarity to the imams of our days is striking. This ignorant madman is excessively popular with the higher classes. ... According to Captain Dalroy modern man is utterly confused as to life and its meaning. He expects something never promised to him by nature, and for that reason he destroys all that nature has already granted him. In [LI's] atheistic mission houses for social improvement and salvation of the planet there is 'a preachery up and down the doors' about the perfect peace, unlimited mutual confidence, universal joy and souls uniting. ... [GKC] without respect describes diplomats in this fashion: They are permitted to divulge neither knowledge nor ignorance. This is one of their tragedies. For that reason, they try to appear as if they know everything. This is an apt description of current Danish and European politicians. They not only assume that they know everything. They also assume that it is their right to interfere with everything", Baron Bodissey (BB), 11 January 2009 at:

Right on BB. In the US we are told about great civilizations south of the Sahara Desert and what we owe Africa. Nonsense. If you don't know what you are doing, leave well enough alone. I read this and thought, "If only Israel would", self-destruct. Then the European elites can be happy. Peace will reign in the Middle East. For about one week, then the Sunnis and Shites will resume their 1,352 year long antagonism.

Wednesday, January 21, 2009

Ecuador's Default

"One of the questions concerning Latin America in 2009 is whether or not the region will be plunged into yet another dismal round of debt defaults as commodity prices stay low and foreign capital inflows frozen solid. ... In the context of a region that gave birth to the term 'serial defaulter,' Ecuador's mid-December decision to default on its bonded debt is an alarming development. ... Tempting as it is to forget about Ecuador, what happens next there matters a lot for Latin America and for the world. Why? First, dollarized Ecuador really has managed to get its political and economic act more or less together in recent years, say what you will about President [Rafael] Correra. Second, the financial pressures that comprise the default backdrop in Ecuador are similar throughout Latin America. Every Latin American country faces tough choices. ... We should not look upon the drama in Ecuador as a morality play. ... Putting moral considerations aside, this is about how the global credit crunch is harming commodity-addicted and foreign capital-dependent economies of Latin America. ... Now add to this toxic mix a panicky run of deposits in the banking system and a scenario suddenly appears of an abandonment of dollarization followed by furious running of the printing presses to produce massive amounts of a new domestic currency", my emphasis, Thomas Trebat (TT), 12 January 2009 at

TT is a Columbia professor. What did Nixon do in 1971 when he "closed the gold window"? How different was that from Ecuador's ending dollar convertibiity? See my 1 November 2007 post. The US faces "tough choices" too. Save the banks, raise commodity prices! What is Zimbabwe Ben doing, if not creating "massive amounts of a ... domestic currency"?


"first, late-stage receivables securitizations were a criminal fraud perpetrated by the investment banks in conjunction with mortgage lenders. tavakoli asserts there was no confusion on wall street and investment banks were not at all duped by rating agencies--indeed, they knowingly exploited the conflicted interests and moral weakness of those agencies to sell trillions of loss-making loans onto unsophisticated investors. they did so in an effort to pass off investment bank losses while collecting fees on the packaging and distribution of those losses. ... nail not only their bankrupt leadership but these outfits themselves to a tree and light it on fire. i'll more than gladly accept permanently lower growth as the price paid for the modest semblance of moral rectitude, culpability and worthiness that might ensure that 'banker' is not merely another euphemism for 'parasite'," gaius marius (gm), 9 January 2009 at:

gm has a link to a 6-minute interview with Janet Tavakoli (JT) of Chicago who says things like "there were no black swans, but black barts". See it. She's wonderful! I love you JT! JT is as critical of investment bankers (IB) who sold MBSs and CDOs as I've been. JT contends IBs knowingly packaged garbage which they sold to investors. The scheme was something akin to what I call a "secured debt, unsecured debt swap" prior to bankruptcy of an insolvent company. gm is more hostile to the IBs, than me. Imagine, he wants them burned at the stake. I'll settle for their merely visiting GSG's CNC guillotine! Chop, chop! For an explanation of what's going on see:

Tuesday, January 20, 2009

Whose Product Liability?

"A federal judge threw out lawsuits on behalf of thousands of patients with heart-defibrillator wires that have been shown to fracture and dispatch potentially lethal shocks, concluding that a recent Supreme Court opinion made the dismissals inevitable. U.S. District Judge Richard H. Kyle in Minneapolis dismissed the lawsuits, citing the February decision that federal law 'pre-empts' product-liability lawsuits under state law, effectively precluding such cases. That decision triggered an effort in Congress to change the law, one that will almost certainly intensify under the new Democratic Congress. ... Medtronic Chief Executive Bill Hawkins lauded the decision as supporting 'the principle that the U.S. Food and Drug Administration is the appropriate body to determine the safety and efficacy of innovative technologies.' ... The lead was marketed based not on any multiyear study in hundreds of human patients, but rather on 'bench testing' of the product in a laboratory to determine how easily it might fail by putting multiple stresses on it. ... Judge Kyle took the unusual step in his opinion of noting his apparent discomfort with the result. 'The Court recogizes that at least some plaintiffs have suffered injuries from using Sprint Fidelis leads, and the Court is not unsympathetic to their plight,' he wrote. Neverthless, he said, the plaintiffs' remedy 'lies with Congress'," my emphasis, Thomas Burton at the WSJ, 7 January 2009.

Hawkins is a fool, or worse. Lower courts must follow clear Supreme Court precedent, which is all Kyle did. Kyle asks Congress to reverse Wyeth. It is ususual for a District Judge to say in effect, "I disagree with the Supremes, but am stuck. Congress, reverse these fools". Those who think we can develop nuclear warheads using only computer simulations should read this. If Mr. Obama wants, he can become our "Andrew Jackson". Obama? He can push legislation and overturn Wyeth. Then when our "constitutional scholar" signs it in the Oval Office, with all Supremes present, he hands John Roberts (JR) the pen in front of tens of millions. We'll see how long it takes even corrupt, arrogant, superior, JR to get the hint and return (publicly) to Hogan & Hartson! See my 16 November 2008 post, link: See also my 26 January 2008 post, link:

Bananaless Republic?

"According to a report just released by the Congressional Budget Office (CBO), 'the federal budget deficit this year will total $1.2 trillion, or 8.3 percent of GDP.' This seems about right for a banana republic. The bad news is that neither commerical banana cultivation or a republican form of government has proved viable in this country. ... As for the republican form of government, the American people have progressively repudiated it almost from the time they won their independence from the British Empire, and during the past century, thay have increasingly favored a form of electorial dictatorship cum empire in which, every four years, the people cast ballots for one of the candidates put forward by the two wings of the one-party political apparatus. This system, vigorously promoted by the imperial running dogs known as the mainstream news media, brings great delight to the masses, who love a good horse race, even if it has been fixed. They are also kept contentedly semi-comatose by the bread and circuses their masters provide in the form of the welfare-nanny-theraputic state and its Hollywood adjuncts. ... With little fanfare, the CBO report ventures to mention that 'foreign lenders, who have recently been willing to lend the the U.S. government on very advantageous terms, may become less willing to do so in the future, which would tend to raise interest rates in this country.' ... Meanwhile, my advice is: eat bananas while they are still avaliable from producers who will accept U.S. dollars in exchange for them", Robert Higgs, 9 January 2009 at

I agree with Higgs. If you like bananas, eat your fill, now!

Monday, January 19, 2009

California In Crisis-3

"California, first in many things, is facing America's worst budget crisis. The gap between projected revenues and spending during this fiscal year and next amounts to $41.6 billion, which is almost half the total sum that the state expects to raise next year. Unlike the federal government, California is not allowed to get out of the jam by running a deficit. It is finding it hard to borrow to meet even short-term needs. ... Recession triggered the crisis but did not cause it. California relies heavily on income taxes, especially those paid by the top 1% of earners. These veer up and down with the markets. But instead of saving money in boom years, the state locks in higher spending on public services and embarks on projects that need long-term investment", my emphasis, Economist, 8 January 2009, link:

California's budget crisis deepens. No mattter what conditions, real per capita spending increases. California has a budget crisis because: it can't print its own money. Yet. California needs its own monetary policy and a flexible exchange rate with the other 49 states! Why not? Robert Steel, "formerly" of Goldman Sachs, the Treasury and Wachovia is available. Let's see if he will help California set this up, pro bono of course.

Price Watergate

"The chairman of one of India's largest technology companies said he concocted key financial results, including a fictitious cash balance of more than $1 billion, sending shock waves across India and likely prompting investors to question other corporate results as the once-hot economy slows. B. Ramalinga Raju, founder and chairman of Satyam Computer Services Ltd., [SCSL] said in a letter of resignation that he also overstated profits for the past several years, overstated the amount of debt owed to the company and understated the liabilities. Eventually, he said, the scheme reached 'simply unmanageable proportions' and he was left in a position that was 'like riding a tiger, not knowing how to get off without being eaten.' ... Satyam--the name means 'truth' in Sanscrit--was audited by PricewaterhouseCoopers [PWC] and has had high-profile independent directors, including a Harvard Business School professor on its board. With 49 world-wide offices including eight in the U.S., Satyam was also one of India's flagship technology companies that have come to define a new, modern Indian industry that competes on the world stage. [PWC] said it was examining Mr. Raju's statement and declined to comment further. ... Immediate comparisons were drawn to the watershed in U.S. corporate accounting and governance standards that stemmed from the Enron crisis a few years ago", my emphasis, Niraj Sheth, Jackie Range (JR) and Geeta Anand at the WSJ, 8 January 2009.

"The implosion of [SCSL] may batter the World Bank, which kept quiet until last month about its suspicions the firm engaged in bribery", Bob Davis at the WSJ, 8 January 2009.

"The huge accounting scandal at [SCSL], ... could lead to an overhaul of corporate-governance standards in the country and force changes in how Indian companies do business. ... Yet there is no indication it was detected by the company's auditors, [PWC]. 'It's kind of hard to miss $1 billion of cash,' said Dennis Beresford, a former chairman of the Financial Accounting Standards Board, a U.S. accounting watchdog. ... It also could embarass the World Council for Corporate Governance, a London-based organization that helped create the 'Golden Peacock Awards.' Satyam received a Golden Peacock Award for Corporate Governance last year", my emphasis, JR and Joann Lublin at the WSJ, 8 January 2009.

"[PWC], the long-standing auditor of stricken software company Satyam, faces the prospect of disciplinary action by market regulator SEBI if it is found that it failed to verify the autheticity of financial documents furnished by the company. ... Independent auditors feel the regulator's approach may be too harsh. Officials at audit firms say that if they start verufying the veracity of all documents given to them, would become a full-fledged investigation into the company. ... 'How can we verify the authenticity of millions of pages while auditing a company with a turnover of thousands of crores in a few days?' said an auditor working with one of the big four accounting firms, who asked not to be named. Auditors certify that the financial statement reflect a "true and fair" picture of the state of affairs of the company, and not an accurate picture", he added. The SEBI official, however, rubbished this argument", my emphasis, Junior, 8 January 2009 at

"Debate in Mumbai is now focusing on whether Satyam, India's fourth-largest computer software company, or its multinational auditors [PWC], was more to blame for what is possibly corporate India's worst scandal. ... Contrary to perceptions that this is a brand new financial scandal, the Satyam fraud appears to be the latest variant of financial scams involving manipulating information with the aim of duping investors, while involving regulatory and accounting practices not traditionally used in India. ... The general verdict of accountants in Mumbai is that Satyam's auditors blew it big time, whatever fraud and forgery the management could have produced to hoodwink them in a scandal that is estimated to have cost Satyam investors $2 billion on January 7 alone as the stock plunged by 77% on news of the fraud. ... PWC, formed in 1998 through the merger of Price Waterhouse and Coopers & Lybrand of London, faces a choice of either being found so utterly incompetent that it could not spot a $1.5 billion-sized accounting crater, or that it was party to the investor fraud that presented an annual 24% growth rate in Satyam balance sheets instead of an actual 3% growth rate. ... In other words, Satyam auditors have not apparently undertaken what traditionallly would have been the minimum independent verification of the client's accounts as a chartered accountant firm is supposed to do", Raja Murthy, 9 January 209 at

"[PWC] , which signed off on [SCSL] finances for several years without detecting the fraud by Satyam's founder and chairman, defended its procedures on Thursday. [PWC] said, in a statement send by email, 'The audits were conducted by [PWC] in accordance with applicable auditing atandards and were supported by appropriate audit evidence.' It said it is cooperating with regulators. ... A [PWC] spokesman declined further comment. Srinivas Talluri, the [PWC] partner who signed off on Satyam's most recent annual accounts in Hyderabad in April last year, couldn't be reached. ... Also in his letter, Mr. Raju said the company's cash and bank balances had been inflated by more than $1 billion dollars. 'This is the easiest thing to verify,' said Vinesh Chandok, national managing partner of accountant Grant Thornton", JR and Scott Patterson at the WSJ, 9 January 2009.

"Indian authorities moved to contain the fallout from the fraud at [SCSL] by arresting the company's founder, firing its remaining board members and launching an accounting review of India's biggest publicly traded companies. ... In an unprecedented action, the government also said it will install directors on a new 10-member Satyam board that will meet within one week. A board meeting that had been scheduled for Saturday was canceled. ... The Securities and Exchange Board of India [SEBI], the chief markets regulator, said Friday it will review auditors' working papers relating to companies in the Sensex and the National Stock Exchange 50-share index in a bid to boost investor confidence in financial disclosures. ... C.B. Bhave, SEBI's chairman ... said recent results for big companies would be subject to peer review by another auditor; other company results will be subject to peer review by accounting firms on a random basis", Eric Bellman and John Kumar at the WSJ, 10 January 2009.

"If this scandal proves anything to transnational investors and corporations it would be that doing business in India may be less risky than doing so in the more criminal friendly USA. India is demonstrating that it has very little tolerance for white collar fraud and they are showing that corporate criminals will be swifly punished. It is yet to be seen if most of those arrested will bribe themselves out of trouble but so far the punishment is more severe than aything we see in the U.S. In contrast to India, the U.S. coddles its corporate criminals by allowing them to stay on the job with big pay raises, or giving them golden parachutes so that they can retire in the Bahamas", Rob Sanchez, 12 January 2009 at

"Suresh Senapathy, the chief financial officer of Satyam rival Wipro (WIT) said it was 'impossible to imagine that this could happen. I can't believe that five or six years' worth of misappropriated books and accounts missed the scrutiny of auditors'," Elliot Wilson at Barron's, 12 January 2009.

"The board at troubled [SCSL], freshly appointed by the Indian government, said it is looking for a new auditor. ... 'New independent accountants that we appoint shortly will restate the numbers and confirm the veracity of those numbers,' [Deepak] Parekh told a news conference in Hyderabad following the first meeting of the government-appointed board", Eric Bellman and JR at the WSJ, 13 January 2009.

"Indian regulators and police are trying to unravel how the chairman of [SCSL], who has admitted to falsifying corporate figures, may have managed for years to fool his top financial officer and the company's audit committee. ... Satyam's chief financial officer, Srinivas Vadlamani, was arrested over the weekend on suspicion that he was involved with fraud, forgery and other charges. In a written statement, presented in the local courts Sunday, Mr. Vadlamani said that while he wasn't directly involved in fudging the company's accounts, he knew that there was something suspicious for more than five years. The statement didn't say why he didn't report the suspicions. He said he wasn't in charge of keeping track of the company's deposits. 'I was specifically asked not to look into that area of operations,' Mr. Vadlamani said in the statement. ... Mr. Vadlamani didn't admit to any crime in the statement. ... Sandeep Parekh, a professor at the Indian Institute of Management in Ahmedabad ... said another clue came when an analyst from Mumbai-based securities firm Kotak Securities Ltd. [KSL] raised questions about why the company was keeping such large amounts of money interest-free current accounts rather than a 9% fixed deposit with a bank. Kawaljeet Saluja, a senior research analyst with the institutional equities arm of [KSL], raised the question during an investor call with Satyam in April, a [KSL] spokeswoman said", my emphasis, Eric Bellman and JR at the WSJ, 14 January 2009.

"[SCSL] began a search Wednesday for a new chief executive and new chief financial officer, while the software exporter's board named Deloitte Touche Tohmatsu and KPMG as interim auditors to assess the company's financial health. ... The new board had said Monday it would name new auditors to assess the true financial condition of Satyam, based in Hyderabad, India. Satyam is India's fourth-largest software exporter by revenue. ... In a separate statement Wednesday, [PWC] said its audit opinion on the financial statements of the software exporter may be rendered inaccurate and unreliable. ... 'We placed reliance on management controls over financial reporting and the information and explanations provided by management and also the verbal and written representations made to us during the course of our audits,' the firm said", Romit Guha at the WSJ, 15 January 2009.

"Minutes from a crucial December board meeting at [SCSL] shed light on how the giant outsourcer's directors would up approving two deals that were a key part of the massive fraud that has since engulfed the company. ... The deals at issue were the acquisition by Satyam of two infrastructure companies--Maytas Properties Ltd. and Maytas Infra Ltd.--that are run by the sones of the founder and then-chairman of Satyam, B. Ramalinga Raju. Mr. Raju also had a financial interest in the companies. ... In a prepared statement, Ernst & Young said it had prepared the valuation for another purpose and was 'not given to understand by any party, explicitly or implicitly, during the valuation exercise, about Satyam's plans to acquire Maytas Properties.' ... 'The proposed acquisitions have two complicated aspects--unrelated diversification, and realted party transcation,' said Krishna Palepu, a Satyam director and a Harvard Business School professor of corporate governance,who participated in the meeting by telephone conference, according to the minutes", Niraj Sheth and JR at the WSJ, 16 January 2009.

Shut the World Bank.

It is difficult to miss $1 billion in cash. I must hand it to PWC. I noted PWC avoided the ITF scandal in my 1 January 2009 post,, Not to be slighted, it gives us Satyam. Great going fellas.

This is too rich, a Big 87654 Indian Chartered Accountant doesn't think his clients financials need be stated accurately. He exposes a dirty secret of the CPA business, i.e., given the Big 87654's time constraints, many times they can't finish the work. It would take something lacking in Big 87654 partners to tell the SEC we can't finish audits when you want, a backbone. The damn SEC keep moving up SEC registrant filing deadlines. That's crazy. Indians use crores, 10 million and lakhs, 100,000 as counting units. 10 million rupees is $208,000 at R48.1 = $1.

Good luck PWC, fool or knave? Satyam's audited 31 March 2008 financials show $2,243 and $827 million of total assets and "investment in bank deposits" respectively. Were 65% of these assets fictitious? What did PWC look at? Who at PWC did this audit? The AIG audit team?

Chandok is correct. Auditing cash is simple.

Compare India's actions to those of US regulators. What would happen to: Mozzillo, Blankfein, Pandit, Fuld et. al., if they were in India.? I have bad news for Bhave. US peer review was a fraud. Why will India's chartered accountant peer review be anything else? SEBI's review of auditors' workpapers is nice. Will SEBI have its Meaghan Cheung (MC) do it? Will MC, who is currently "available" fly to Hyderabad and offer to do it pro bono to atone for her sins?

Sanchez has got it. Now if we can only find a way to ship say Bernie Madoff, Lloyd Blankfein, Richard Fuld, et. al. to China or India.

I can't believe it either.

We'll see if the new auditors conclude PWC's audit was deficient.

I find PWC's being unaware of this fraud inconceivable. Saluja asked a question any CPA should have asked during an audit as part of "analytic review". As for CFO Vadlamani, under US law he said enough to be convicted. US law has a "wilful blindness" concept, i.e., when you ignore the obvious, knowledge may be imputed to you. In criminal law, the judge gives the jury an "ostrich instruction". If Indian law follows the US, Vadlamani is going to prison. In all likelihood, along with many others. See West's criminal law key 772(5).

Isn't PWC wonderful? It now admits its opinions may be unreliable. What audit work did PWC do? SCSL's board should not hire any Big 87654 firm to do anything. Why? These firms cover up for each other whenever possible.

Now E&Y is in the pool too! All the Big 87654 are here. What was the valuation's purpose, if not in connection with a proposed merger? Satyam was smart. It had a corporate governance professor on its board. Governance, bah humbug! See my 10 August 2008 post;