Thursday, December 31, 2009

California Stimulus?

"If the world's eighth-largest economy were a company, it would have been on the edge of bankruptcy all year. California's legislature and its governor have already plugged more than $60 billion-worth of holes in the state budget, either by raising taxes or cutting spending. But as soon as one hole is filled, the economy--still bad, even if it no longer technically in recession--digs another. Mac Taylor, the state's non-partisan legislative analyst, now expects to see a deficit of $6.3 billion for the current fiscal year, which ends next June, rising to $14.4 billion next year. ... This means that California's legislature, having already made cuts that exceed the entire budget of many smaller states, must deal with another gap of $21 billion in the coming months. This is larger than, for example, California's entire spending on prisons and higher education combined. ... The problem, as in other states, is tax revenues are coming in below even pessimistic estimates and spending requirements that are rising with welfare claims and other legal requirements, such as Medicaid, the health system for America's poorest. ... The answer, suggests Taylor, must be a mix of additonal cuts and extended temporary taxes, although Republicans, a minority in the legislature large enough to block any tax or budget deal if they wish, are already saying no to more taxes as they prepare for an election year. But whatever the mix, taxing more and spending less is 'the opposite of what we should be doing' in a weak economy, says William Lockyer, California's treasurer, who is a Democrat", Economist, 3 December 2009, link:

Good luck Lockyer.

Martin Huchinson on the System

"The current political-economic system is simply unsustainable; no economy can afford to pay for four giant zombie financial institutions, two substantial military adventures, a zombie-driven housing market, an exploding health-care bill and Goldman Sachs partners' lifestyle aspirations. ... Iconodule vested interests will oppose such a program with all their strength. But in the end, the iconoclasts will win--the [US] cannot economically afford for them to lose", Martin Hutchinson at Prudent Bear, 23 November 2009, link:

I agree. Lloyd Antoinette Blankfein, repent. Before it's too late.

Yves Smith on Obama

Yves Smith (YS) has a 14 December 2009 post at her Naked Capitalism about Obama's criticizing the banksters. YS writes, "A little Goldman Kabuki theater to appease the peasants". I agree. Here's a link:

Wednesday, December 30, 2009

Vampire Squid Strikes Again!

"Back two years ago when the mortgage meldown was heating up, we wrote an article called 'Junk Mortgages Under the Microscope' (see dissecting a particularly wretched mortgage-backed securties issue peddled by Goldman Sachs [GSG]. ... We thought this was a cautionary tale--but it's turned into a horror story. All the tranches of this issue, GSAMP-2006 S3, that were originally rated below AAA have defaulted. Two of the three original AAA-rated tranches (French for 'slices') are facing losses of about 90%, and even the 'super senior', safer-than-mere-AAA slice is facing losses of 25%. ... Our tale begins in April 2006, when [GSG] sold $494 million of securities to institutional investors seeking yields somewhat above those that were available on US Treasuries or high-rated corporate bonds. ... In our case, borrowers' stated equity in their homes averaged less than 1%--0.71%, to be precise. Even that was doubtless overstated because a majority of the mortgages were low-documentation and no-documentation. Despite these problems, the formulas used by Moody's and S&P allowed [GSG] to market the top three slices of the security--cleverly called A-1, A-2 and A-3--as AAA-rated. That meant they were supposedly as safe as US Treasury Securities. ... As of Oct. 26., date of the most recent available trustee's report, only $79.6 million of mortgages were left, supporting $159.5 million of bonds. In other words, each dollar of bonds had a claim on less than 50 cents of mortgages. ... Now to the investment lessons: The first is, Don't put your faith in rating agencies, even though some branches of the federal government, including the [Fed], use ratings to determine whether certain securities qualify as collateral under federal loan programs to financial institutions. ... The second lesson is: No matter how fancy the name is on the offering statement--[GSG], the calumny being heaped on it lately notwithstanding, is still Wall Street's alpha outfit--you're on your own if the issue heads south", Allan Sloan and Doris Burke at Fortune, 21 December 2009.

I commented on this issue on 29 October 2007, link: Imagine, Vampire Squid is Wall Street's "alpha outfit". What an indictment!

31 More Years?-6

"When the financial crisis began, few players on Wall Street looked more ripe for reform than the Big Three credit rating agencies. ... It was the near universal agreement that potential conflicts were embedded in the ratings model. For years, banks and other issuers have paid rating agencies to appraise securities--a bit like a restaurant paying a critic to review its food, and only if the verdict is highly favorable. ... What explains the timidity of Congress' proposals? This is not a case of lobbyists beating back ideas thay might hurt their clients, say those close to the discussion. Instead, Congress is worried that bold measures may backfire. The Big Three, by allowing companies and public entities to raise money by issuing debt, are an essential engine in the country's vast credit factory, and given the still-fragile condition of the equipment, lawmakers are reluctant to try anything but basic repairs, patches and a new alarm system. ... While Congress may be happy with cosmetic surgery, law enforcement officials are getting more aggressive. Dozens of lawsuits have been filed against the rating agencies, inclduing a case filed on Nov. 20 by the Ohio attorney general on behalf of public pension funds. The Ohio suit, as well as the earlier suits, seeks billions of dollars in damages from the rating agencies and accuses the firms of negligence and fraud. ... But even if there is no foolproof way to reform the rating agencies, the measures that Congress is now backing are strikingly weak, a number of critics say. There is no talk, for instance, about creating a fee-financed, independent credit rating agency, one modeled along the lines of the [PCAOB]. ... Academics and former rating agency employees who have been warning lawmakers about the Big Three for years, say Congress is tiptoeing when it ought to be charging ahead. ... Both bills enhance the power of the SEC to supervise the rating agencies and both require the companies to bulk up their compliance teams. ... 'I think these bills are misguided and wrongheaded because they will have the ironic effect of making the incumbents even more important,' said Lawrence J. White, an econmics professor at the Stern School of Business at New York University. 'They're going to encrust the procedures already in place and discourage new business models'," my emphasis, David Segal at the NYT, 8 December 2009, link:

Even if there was a ratings agency like the PCAOB, who would staff it? Former S&P executives?Until rating agency executives live in terror of being indicted for aiding and abetting securities fraud, nothing will change. Any more than Sarbox cleaned up the CPA business. Why are the Big Three essential? If you can't sue them, they're just paper shufflers. What "foolproof" way fixed the CPA business? What's ironic? Didn't Sarbox help the Big 87654?

Tuesday, December 29, 2009

Zimbabwe Ben's "Audit"

In his 29 November 2009 Washington Post piece, Zimbabwe Ben (ZB) states, "Our financial statements are public and audited by an outside accounting firm". He's right. The Fed's website let's you download the Fed's audited 2008 financials. Some interesting points (millions):

The Fed has $2,245,728 in assets and $42,152 in capital, a 1.88% capital ratio, or 53.3X leverage ratio. ZB, didn't the SEC recently tell investment banks leverage ratios of 35X were unsound? Or did you miss that? Or is the Fed a highly leveraged, poorly managed hedge fund?

The Fed has its own accounting principles. Junior at Junior Deputy Accountant noted this. Why not use GAAP ZB? It's good enough for Vampire Squid. Why does the Fed need ZBAAP?

Why let Deloitte & Touche (D&T) audit the Fed? Doesn't D&T audit these federal bailout money recipients: Merrill Lynch, Morgan Stanley, General Motors, Fannie Mae and who knows how many others? Doesn't D&T also audit Blackstone which works for the Fed? ZB, do you see any potential conflicts of interest here? Now looking at the financials we see with page numbers:

a. D&T gives the Fed a "clean opinion", noting the financials are on a "comprehensive basis of accounting other than" US GAAP, referring to footnote 4 (page 11). D&T's opinion in substance states it only did some arithmetic, "An audit also includes ... assessing the accounting principles used and significant estimates made by mangement". Did you do this D&T? Don't be bashful. Tell us.

1. The Fed loaned depository institutions (DI) $544,010, others $100,082, had $553,728 in central bank liquidity swaps and $411,996 in investments in variable interest entities (VIE). On the liabilities side the Fed has $860,000 in DI deposits. Each of these amounts is at least ten times the comparable 2007 balance.

2. The Fed collected $43,003 in 2008 interest income. Averaging its 2007 and 2008 footings, during 2008 the Fed had $1,580,252 in average assets, a 2.72% yield. Does the Fed think it has an "AAA" loan portfolio? Did Moody's or S&P tell it that? The Fed's income statement had no loan loss provision. Banks usually do. Page 116 of Citigroup's 2008 financials has a $33,674 loan loss provision. As critical as I have been of Citigroup, I conclude an insolvent Citigroup is in better financial condition than the Fed. Imagine, I said something nice about Citigroup.

5. Here the Fed describes its various programs "designed to support the liquidity of financial institutions and to foster improved conditions in financial markets".

11. "Accounting principles for entities with the unique powers and responsibilities of a nation's central bank have not been formulated by accounting standard-setting bodies. The Board of Governors has developed accounting principles and practices that it considers to be appropriate for the nature and function of a central bank". Like 2 + 2 = any number ZB wants it to be? ZB's financials do not reconcile US GAAP and ZBAAP. Why not ZB? "Accordingly, fair values, earnings, and any gains or losses resulting from the sale of such securities and currencies are incidental to the open market operations and do not motivate decisions related to policy or open market activities". Is ZB indifferent to how much of Joe Schmoe's money he loses? I realize AU 623.10 does not require a reconciliation for D&T to opine on ZBAAP financials. Still D&T, show us some professionalism and refuse to be associated with ZB's sham. Instead of feeding us pap like you did in my 5 December 2009 post: AICPA ethics interpretation 203-1 states in part, "There is a strong presumption that adherence to officially established accounting principles would in nearly all instances result in financial statements that are not misleading". Was ZBAAP designed to mislead? What say you D&T?

12. "Loans are reported at their outstanding principal balances net of unamortized commitment fees". What are the $544,010 + $100,082 = $644,092 worth? I'd be amazed if this pig slop could be sold for $500,000 in the market. It might only be worth $322,046 or 50% of par.

21. "At December 31, 2008 and 2007, no loans were considered to be impaired, and the Reserve Banks determined that no allowance for loan losses was required". Huh? Every Fed loan is impaired. If the counterparty could have gotten non-Fed financing it would have. This is a joke. Aren't you impressed that D&T accepted this? Has the Fed an "internal control issue"? Need it hire SOX consultants? This sounds like a job not for Superman, but Huron.

22. At 2008 the Fed has Treasury paper worth $566,427 recorded at $502,189, meaning the Fed "made" $64,238 speculating in Treasury paper. Hey ZB, quit and set up a hedge fund. You have a promising future ahead of you.

25. Tells us about Fed VIEs. The Fed is exposed on $405.4 billion in VIE assets. During 2008 it took $5,237 in net losses on the VIE portfolio. How many losses are to be recognized?

32. ZB has an interesting chart here. It states, "At December 31, 2008, the sector/rating composition of [Maiden Lane] II's portfolio, recorded at fair value as a percentage of fair value, was as follows (in millions):" Then we see a chart with percentages. Read it carefully and see if you can figure out what it means. The chart is not expressed in dollars.

33. Apparently ZB lent ML III about $30 billion. See my 26 November 2009 post about ML III: D&T, are you sure these assets were not impaired at 31 December 2008? In July 2008 Merrill Lynch (MRL) sold $30 billion of what may have been similar paper for 22 cents on the dollar, my 7 October 2008 post: Was D&T aware of MRL's sale? But isn't MRL a D&T client? Fun and games. D&T may have been unaware of MRL's sale. Why? Because $30 billion in immaterial to MRL. Isn't it?

34. We are told the VIEs use fair value accounting. I don't believe it.

40. "As of December 31, 2008, both the probable loss and the fair value of the FRBNY's loan commitment were deemed to be zero, because under a range of scenarios it is unlikely that the FRBNY will be required to make the loan". The FRBNY thinks it will not suffer any losses on its $60,000 and $244,800 commitments to AIG and Citigroup respectively? If you say so D&T.

Remember, this is the same group that gave us the "stress tests".

"Contrary to conventional wisdom, the Fed's activities are already widely audited. [D&T] examines the Fed's financial statements, which are published", Robert Samuelson (RS) at Newsweek, 7 December 2009, link: RS, the Fed's "audited" financials aren't worth the paper they are printed on.

Jim Willie questions the Fed's balance sheet and solvency at Financial Sense, 15 December 2009, link: ZB, we are not all fooled. D&T, take note.

George Washington quotes William Bregman (WB), a former Fed economist at Naked Capitalism, 15 December 2009, "Well, for one thing, the appearance of extensive auditing authority doesn't mean audits are effective. Good auditing requires the willingness and ability of auditors to do their jobs", link: Well said WB. D&T's "audit" fails.

30 years ago I said the difference between bankruptcy today versus in the 1930s, was then you went bust. You gave your creditors your assets. They sold them, got 50 cents on the dollar and walked away. Now you go to the Fed. It prints a pile of money which you give your creditors and pay them 100% in fifty-cent dollars. See ZB, we're not that stupid. We figured out what you do. My bottom line: as of 31 December 2008, the Fed was insolvent by $100-400 billion. Thank you very much D&T. For nothing. As far as I am concerned, D&T is just a bunch of bookkeepers.

Whose Drug War?

"Starting next year, the Harris County [DA's] office no longer will file state jail felony charges against suspects found with only a trace--less than a hundreth of a gram--of illegal drugs, [DA] Pat Lykos [PL] said Thursday. ... Not surprisinly, the pending change was hailed by defense lawyers, but criticized by police officers. ... Gary Blankinship [GB] president of the Houston Police Officers' Union [said] ... Lykos said there were several reasons to change the policy, including the inability of defense experts to re-test drug residue that is destroyed when it is analyzed. To be tested twice, there has to be more than a hundrweth of a gram, she said. ... Lykos said the move 'gives us more of an ability to focus on the violent offenses and complex offenses. When you have finite resources, you have to make decisions, and this decision is a plus all around.' ... Of more than 46,000 felony cases filed last year, almost 30 percent, 13,713, were for possession of less than a gram of drugs", my emphasis, Brian Rogers at the Houston Chronicle, 9 December 2009, link:

"Harris County [DA] [PL] will re-evaluate a new policy downgrading crack pipe residue charges in response to conerns raised by Houston Police Department [HPD] officials. ... 'She met with the command staff of [HPD], and everyone on the command staff urged her not to do this policy because of the burglaries that were going to increase,' said Ray Hunt, vice president of the Houston Police Officers' Union. 'This is about decreasing the caseload of the [DA's] office and decreasing the number of people in jails.' ... The minimum weight, one-hundreth of a gram, is equivalent to half a grain of rice. ... 'Addicts may become so addicted to the drug that they engage in thefts, burglaries, prostitution, and other crimes in an effort to support their habit. By arresting a suspect for a small amount of crack cocaine, HPD may be preventing that suspect from committing a burglary later, for example,' according to the [HPD] release", my emphasis, Brian Rogers at the Houston Chronicle, 10 December 2009:

We might reduce the number of HPD officers and see if GB still sings this song. GB reminds me of a Big 87654 partner praising Sarbox.

Hunt, why not just tell truth: few HPD officers are capable of investigating crimes. It's summary arrest or no arrest. Why not legalize drugs to reduce crime? The drug war is revealed to be a policemen and prison guards make work program.

Monday, December 28, 2009

Crime Fighting

"With runoff campaigns now focused on the crime issue, we are likely to hear the inevitable rhetoric about police resources. Undoubtedly we will hear the most worn-out line in politics, that we need more 'boots on the ground.' If our approach is no more sophisticated than that, we're likely to continue to have the same lackluster results on crime. ... Second, we have already been increasing police funding significantly. Since 2002, HPD's budget has risen from $443 million to $675 million this year. That is almost a 7 percent year-over-year average increase, about twice the rate of inflation over the same period. Such increases would be somewhat understandable if the size of the department were growing to meet the city's growing population, but that is not the case. ... Nor has the increased funding resulted in any more crimes being solved. In 2002, HPD cleared a little more than 22,000 so-called Part I crimes. A case is cleared when an arrest is made and charges filed. Part I crimes are those designated by the FBI as more serious offenses. ... So in 2002 we got one Part I crime solved for every $20,000 we invested in the department. In 2008, that cost had gone up to nearly $33,000. ... However, there is one recurring theme I have encountered in my research on this subject, and that is the size of a department's investigative force. While the public generally believes that more officers on patrol will deter crime, most of the studies show that more patrols have little effect on the overall crime rate. Like squeezing a closed tube of toothpaste, patrols may move the crime to different areas, but the total amount does not change much. ... One of the principal reasons the clearance rate for burglary is low is that few cases are actually investigated. One detective told me that about one in 20 is seriously investigated", Bill King at the Houston Chronicle, 29 November 2009, link:

Boys and girls, the real world of police work is: summary arrest or no arrest in 90+% of cases. No, it's not Gary Sinese and CSI New York out there.

Freeman on Sarbox

James Freeman (JF) blasts Sarbox at the WSJ, 7 December 2009: JF notes, "On the other hand, news of potential relief from the law pushes up American stock prices. That's not a vote of confidence from the people supposed to benefit from the law". No it isn't. Cost-benefit analysis anyone? Nah, just say the mantra, "internal controls good. Lack of internal controls bad".

"As the CEO of a small bank, I know first-hand that internal and external audit costs for Sarbox compliance can easily reach six figures. ... The questions the [SEC] should be asking are: Would any of these accounting and disclosure regulations help discover or prevent the massive big bank and Lehman Brothers failures or AIG's near collapse? Do small companies under the SEC represent the real risk to our financial system and economy? I suspect the answer is a resounding no", Allen Sterling letter to the WSJ, 16 December 2009:

Yes Sterling.

Central Banks and Game Theory

The insightful Mencius Moldbug (MM) has a 3 December 2009 post at his Unqualified Reservations about game theory and central banks, link: MM asked a question I have asked many times over the last 30 years, "I've never really understood why gold miners sell gold, beyond recouping the cost of mining". They mine gold, but would rather "invest" in paper. Crazy. Why? To appease Wall Street "analysts"? To hell with Wall Street analysts!

Sunday, December 27, 2009

Follow China?

"Make no mistake about it: the health care bill that moved forward to debate in the Senate on Saturday is simply a power play by the government to gain more control over how we live our lives. It could easily lead to government control over the continuation of our families. ... Still in force today, the technical policy requires IUDs for women of childbearing age with one child, sterilization for couples with two children (usually performed on the woman), and abortions for women pregnant without authorization. By the mid-eighties, according to Chinese government statistics, birth control surgeries--abortions, sterilizations, and IUD insertions--were averaging more than thirty million a year. ... China did not initiate their one-child policy to be cruel to their people, nor did they do it because they do not respect life. They initiated the policy simply due to the growing fiscal demands of a rapidly expanding population. ... We talked about 'death panels' in reference to the health care bills now under consideration by Congress, but another approach is simply to control the number of people entering the system--new births. ... As to whether or not it could happen in the [US] ... yes, it could", Robert Bonelli at American Thinker, 25 November 2009, link:

Would such ban be enforced against illegal aliens? Would they be deported if population growth is a problem? Who are we kidding?

Schapiro's Head Fake-2

"The [SEC] on Monday accused three former executives at the now-defunct company of hiding losses as homeowners began missing mortgage payments. The claims, made in a civil suit filed in the Central District of California, come two years after New Century [NC] buckled under the weight of its bad loans. ... The SEC claims that Brad A. Morrice, the company's former chief executive, and two other senior executives received dire warnings about their company's prospects in weekly 'Storm Watch' reports from employees but assured [NC] investors that the company was sound. ... Mr. Morrice, through his lawyers, denied any wrongdoing. In a statement, he said he had lost millions of dollars on his stock investments in [NC] and had done all he could to avert the company's collapse. ... Also charged with accounting and securities fraud were Patti M. Dodge, [NC's] former chief financial officer, and David N. Kenneally, the company's former controller. Regulators are seeking financial restitution for investors who were defrauded as well as fines, but are also aiming to claw back more than $7 million in bonus and other incentive payments received by Mr. Morrice and Ms. Dodge", Zachery Kouwe at the NYT, 8 December 2009, link:

"John Vandevelde, a lawyer for Mr. Kenneally, said his client was never a senior officer of the firm and 'always relied on the fully informed advice of the outside auditors.' ... A court-appointed examiner looking into [NC's] collapse found in 2008 that KPMG, the company's accountant, 'contributed' to some of the accounting and financial reporting strategies. At the time, KPMG said it strongly disagreed with the report's conclusion. KPMG declined to comment further Monday. ... 'This shows our focused effort to pursue and scrutinize those who dealt in or sold or created mortgage-related structures regardless of vehicle they used,' said Robert Khuzami, the SEC enforcement director", Kara Scannell at the WSJ, 8 December 2009:

No Morrice. You had to put a "former" NC executive in as US Treasury Secretary. Well Schaprio, when will you try to get similar restitution from Lloyd Antoinette Blankfein and David Viniar at Vampire Squid (VS)? I last commented on NC on 13 April 2009:

I'll believe Khuzami when I see VS's officers get the same treatment.

Saturday, December 26, 2009

Vampire Squid Smacked Again

"One of the biggest disconnects on Wall Street today is between the way Goldman Sachs [GSG] sees itself (they're the smartest) and the way everyone else sees [GSG] (they're the smartest, greediest, and most dangerous). ... And Buffett has said that while no one could ever understand the balance sheet of any Wall Street firm, he has confidence that [Lloyd] Blankfein is both very smart and very conservative. But there was another reason he invested: 'If I didn't think the government was going to act, I would not be doing anything this week,' he explained to CNBC's Becky Quick. 'I might be trying to undo things this week.' ... Widespread rage. 'Complete crap,' says a former [GSG] managing director. Even Neel Kashkari, a former [GSG] banker, who became assistant secretary of the Treasury last summer, told the [NYT] that 'every single Wall Street firm, despite their protest today, every single one benefited from our actions. And when they get up and say, "Well we didn't need it" that's bull.' ... Despite the public financial statements that [GSG] files evey quarter, no outsider can tell how the firm really makes its money. ... In the aftermath of the crisis, criticism erupted that [GSG] had continued to sell mortgage-backed securities to its clients while betting against those very sercurities for its own account. ... But a less generous interpretation was given in a recent McClatchy Newspapers series, which quotes an analyst report that describes [GSG] as being 'solely interested in pushing its dirty inventory onto unsuspecting and obviously gullible investors.' ... When I ask Gary Cohn is he was worried about [GSG's] stock price, which plunged from $207.78 in Ferburary 2008 to $47.41 in November, he says, 'It wasn't scary at all.' 'Complete and utter nonsense,' says someone who knows Cohn well. ... For all [GSG's] tough talk, when the market made a judgment on [GSG] itself, the firm blinked. ... A memo written by Joseph Cassano, the former head of the AIG financial-products division, shows that some of the securities [GSG] insured with AIG were created by none other than [GSG] itself", my emphasis, Bethany McLean at Vanity Fair, January 2010:

PriceWaterhouseCoopers (PWC), did you read this? Preet Bharara, did you read this? Where are some indictments of Vampire Squid executives for securities fraud? Like Alice in Wonderland, "stuff and nonsense", Cohn.

The Big 87654 Repeat S&L Crisis

Francine McKenna (FM) has a 7 December 2009 post at her re: The Auditors about CPAs' performance in the current financial crisis. Read FM's comments about AIG-Goldman Sachs credit default swap (CDS) accounting. My conclusion: Goldman told PriceWaterhouseCoopers (PWC) to have AIG change its CDS accounting and PWC did as instructed. I never called FM's assessment "harsh". Here's links to FM's post: and my my 13 May 2009 post on AIG-PWC:

Yves Smith on Rating Agency non-Reform

Yves Smith has an 8 December 2009 post at her Naked Capitalism about rating agency non-Reform which I generally agree with, link: I oppose creating a rating agency PCAOB. If created, it would be as successful at improving ratings as the PCAOB has been at improving the Big 87654's work, i.e., not at all.

Friday, December 25, 2009

Stuck With Sukuks

"The debt crisis in Dubai is about to test one of the fastest-growing areas in banking, Islamic finance, and put the city-state's opaque judicial system on trial, according to bankers and experts in finance. Many loans and bonds that comply with Shariah, or Islamic law, were issued in recent years by Dubai World [DW], the investment arm of Dubai, and other Persian Gulf companies as oil-rich Middle East nations increased spending, and the global credit crisis fed-debt investments in emerging markets. ... This is likely to create many legal issues for investors in [DW], which sent jitters through global markets, by seeking to delay payments on $59 billion in debt. ... Shariah-compliant investments prohibit lenders from earning interest, and effectively place lenders and borrowers into a form of partnership. Yet there are no consistent rules about who gets repaid first if a company defaults on such debt, said Zaher Barakat, a professor of Islamic finance at Cass Business School in London. ... 'No one has tested the legal system or the documentation,' a lawyer briefed on the situation said. ... In October, the British Treasury drew up rules that would soon allow Britain to issue Shariah-compliant government debt. The same month, the World Bank issued $100 million in Shariah-compliant bonds", Heather Timmons at the NYT, 1 December 2009:

DW sukuks were a disaster waiting to happen, see my 3 July 2009 post: I can't imagine how a government could issue Sukuks unless they are paid from some specific tax.

Sliding Back to Gold

"So the world has bench-tested the Keynesian theory that gold is a barabrous relic, and found it wanting. ... There are three ways in which the world could move towards a gold standard without actually getting there. ... Second, the world's monetary authorities could start targeting the gold price as part of their monetary management, aiming to keep it within a certain range, thereby preventing excessive monetary expansion and dampening excessive exchange rate fluctuations. A 'hard money [Fed] chairman, for example, worried about the value of the dollar, could seek to keep the gold price between $900 and $1,000", Martin Hutchison (MH) at Prudent Bear, 7 December 2009, link:

I first used MH's phrase "sliding back towards a Gold Standard" almost 30 years ago, suggesting MH's second alternative. However, $1,000 an ounce isn't high enough. See Mike Rozefff's comments about the ZDV of gold.

Thomas Adams on AIG, Goldman and Citi

Thomas Adams has a 29 November 2009 post at Naked Capitalism about AIG, Goldman Sachs, Citigroup, the monolines and our Treasury. I have said similar things for over a year. Here's a link:

Thursday, December 24, 2009

What Danger, Cut Off the Fed's Hands!

"How much should we worry about inflation? In the coming year, nearly all economists say 'not much.' ... Looking beyond next year, though, the question is beginning to take on greater weight, especially amid recent congressional challenges to the [Fed's] authority and independence in conducting monetary policy. ... More important, the Fed's credibility as an inflation fighter, which is crucial to its ability to make effective policy, may be at risk. ... Rock-solid inflation-fighting credentials are the chief reason why the Fed has been able to run a wildly expansionary policy while keeping long-term interest rates low and avoiding a collapse in the dollar", James Cooper at Businessweek, 7 December 2009.

"The US [Fed] is one unloved central bank. ... But anger toward the Fed is running so hot that the organization will probably have to take some kind of hit to appease the public and lawmakers. The question is where it's most willing to concede ground. ... For the Fed, what makes this period so dangerous is that the central bank has become a lightning rod for the severe recession and the huge bonuses going to Wall Street bankers who helped cause the mess", my emphasis, Peter Coy at Businessweek, 14 December 2009.

Cooper and I live in alternative universes. The Fed has no credibility. Only China, Japan and a few other countries hold up the dollar. If they stop, it will crater. This article was titled "The Danger in Tying the Fed's Hands". I see no danger in that. I think its hands should be cut off, like certain Islamic countries do to thieves.

This is amazing. How many divisions has Zimbabwe Ben? The Fed is a creature of Congress. Congress can kill it.

Back to California's Future

"Of all the states in the union, California has probably had a more durable and magical appeal for Americans than any other. ... California's future will not be like its past. The last several decades have witnessed a tragic despoilation of the Californian paradise. Both federal and state governments have set what could have been a shining outpost of European civility on a sure course towards third-world squalor. The single greatest threat to California's future is its buregeoning population. Thanks to waves of immigration and to high birth-rates among immigrants after they arrive, the state is growing almost as quickly as such developing countries as India and Brazil. Every year, there are about 700,000 more Californians, the vast majority of whom are non-white. Between 1920 and 1990 the state's population increased tenfold and now stands at more than 31 million. At current rates of increase, there could be nearly ten million more Californians by the year 2000 and yet another ten million the decade after. ... In the last 20 years, while the state's population increased by half, the number of Californians on welfare doubled. During the same time the prison inmate population tripled. ... As recently at 1970, California was 77 percent 'Anglo,' to use the currently fashionable term that reflects the Hispanic perspective. ... Los Angeles is only 40 percent white. Long Beach and San Jose are both about 35 percent white, and Oakland, which is 44 percent black and 15 percent Asians is only 18 percent white. ... During the 1980s, California received more than 2,300,000 legal immigrants and unkown numbers of illegals, but once they arrive, non-whites have more babies than native-born whites. ... The economic structure that supports this massive system of services and give-aways is breaking down. ... Currently, California has only 1.2 taxpayers for every recipient of tax dollars", Marian Evans at American Renaissance, Feburary 1993, link:

"As California loses its white majority, it is also losing any sense of ethnic or cultural coherence. This will be the state's most devastating loss. ... The hatred they share for whites is hardly enough to unify blacks and Hispanics. Though the press is squeamish about reporting it, the blacks in South-Central deeply resent the influx of Hispanics. AR has already reported (Dec. 1992) on one of the irresolvable questions that face growing numbers of minorities. What happens to affirmative action benefits when there are no more whites left whose interests can be sacrificed? ... So where does this leave the poor bloody white man? It has begun to dawn on him that if public schools spend their time teaching Hmong and Guatemalans how to speak English there may never be time for algebra or Shakespeare. It has begun to dawn on him that as the numbers of tax money receivers overtakes the number of tax payers, he can look forward to having his very own, probably brown-skinned dependent to take care of. It has begun to dawn on him that the newcomers show few signs of becoming American and that they resent him because he is American. It has begun to dawn on him that as more than 600 black, Hispanic, Vietnamese, and Chinese gang members gun each other down every year, he might be caught in the cross-fire. Although there are times when parts of California still feel just like the paradise they used to be, more and more whites can see the future well enough to know that it holds no place for them. The white exodus has begun. ... Whites who would doubtless find 'ethnic cleansing' a loathsome horror in the Balkans do not hesitate to practice a form of it themselves. ... When neighborhoods lose their white majorities schools decay, crime increases, taxes rise, welfare proliferates, and what was once an outpost of civilization subsides into barbarism", Marian Evans at American Renaissance, March 1993, link:

"Once the envy of the other 49 states, California has become the measure of failure. Historically a trend-setter, once again, as California goes, so may go the nation. ... 'The same pressures that drove the Golden State toward fiscal disaster are wreaking havoc in a number of states, with potentially damaging consequences for the enrtire country,' concluded the study, 'Beyond California: States in Fiscal Peril.' ... California, Illinois and New Jersey repeatedly have used borrowing or accounting schemes to put off tough budget decisions. ... The problem will only be aggravated by bailing out states like California that repeatedly have used poor judgment in relying disproportionately on cyclical industries, and that have borrowed excessively or employed accounting gimmicks rather than making tough decisions about which activities to stop doing, or do less of. ... The 'too big to fail' approach to fiscal management is merely more of the same poison that made these states so economically ill", Editorial at the Orange County Register, 2 December 2009, link:

This was written almost 17 years ago!

Quoted without comment.


Wednesday, December 23, 2009

What China Intelligence?

"On Oct. 21, the incoming commander of the US Pacific Command, Adm. Robert F. Willard, made a little-noticed but astonishing accusation to reporters in Seoul: 'I would contend that in the past decade or so, China has exceeded most of our intelligence estimates of their military capability and capacity every year. They've grown at an unprecedented rate in those capabilities.' Very politely, the head of PACOM has accused the American intelligence community (IC) and, by extension, its political leadership, of failure to estimate correctly the capabilities and capacity of a nuclear-armed dictatorship with a history of hostility against all of its neighbors and the [US]. According to the admiral, this failure has gone on for 10 years. This sort of public bomb-throwing is very rare in Washington, especially on China issues. An informal survey of China specialists couldn't come up with a similar instance of a major official accusing the IC of 10 years of incompetency. At least not in public. ... What is known is that the admiral has a deserved reputation of competency and a low threshold for tolerating fools. ... When the Soviet Union fell, we discovered that all our estimates had been far too low by multiple factors. Fortunately, there were minimal deadly consequences from out underestimates", my emphasis, William Triplett at the Washington Times, 2 November 2009, link:

Don't you know the US spends 45% of the world's total on arms? I don't know it, despite having read that figure many times. In the late 1970s I estimated the USSR spent 2-3 times what it claimed on arms from published data. I was too low. It was 3-4 times. I estimate China spends at least 3X what it claims on arms. But what do I know? China's budget says otherwise.

Debating Immigration

"Alan Johnson, home secretary, has recently admitted that the government has been 'maladroit' in its handling of immigration. This is British understatement. It has been dishonest: it has pursued a radical policy, with profound consequences, on weak grounds, without serious debate. ... The government has been able to get away with its dishonesty because immigration is the 'third rail' of politics. Few wish to discuss the topic openly. But some discussion is essential. That is the democratic way. ... First, on the government's own figures, the population of the UK is likely to hit 70m by 2030. Immigration would account for 70 per cent on the increase, directly and via births from immigrant parents. The assumption here is that the net inflow would continue at 190,000 a year. It might be higher: government actuaries have, in the past, tended to underestimate the immigration rate. ... Third, net immigration from outside the European Union, which is, in principle, subject to control, has dominated the net inflow: this has been running at around 200,000 a year since 2000. Asylum seekers have become a small part of the total. ... Already, just over half of inner London school pupils have a first language other than English. Continuing immigration will transform populations in many areas. Such changes are significant. Are they desirable? ... The UK has a real income per head of about five times the world average. One must assume that the inflow, under unrestricted immigration, might be numbered in the tens, if not hundreds, of millions. The impact is not hard to imagine. I, for one, have no difficulty with arguing that immigration is a privilege, not a right. Most people agree. We are then, inescapably, in the messy world of having to decide how--and on what principles--to control immigration. My view is that the interests of the existing citizens are of decisive weight, though we should also place some weight, too, on the interests of immigrants. ... Yet there is little net economic benefit to the existing population from immigration", my emphasis, Martin Wolf at the FT, 5 November 2009.

"But while the President gears up his campaign for Climate Change [CC] awareness in Denmark, a Population Change anti-awareness campaign has long been in full swing in America. The acid test of the sincerity of the [CC] activists: do they publicly demand a US immigration moratorium to keep carbon emissions from increasing? ... 'The campaign recognizes immigration as the number one factor driving US population growth and makes the point that when immigrants settle in the US their energy use quickly becomes Americanized. As a result, immigrants' carbon emissions skyrocket. The result is a quadrupling of immigrants' carbon footprint compared to the amount of carbon emissions they produced in their home countries.' Mexicans don't illegally immigrate to avoid starvation. The average life expectancy in Mexico is over 76 years. ... Yet why are those [CC] insights so seldom applied to the quesation of Population Change? ... The changing nature of the population has far-reaching ramifications that deserve well-informed public discussion. But, of course, that's not a fashionable view on either the Left or the corporate Right. ... To serve my country, I just have to have a thick enough hide to withstand rage-filled respectable conduits of the reigning dogmas screaming 'How dare you? at me. ... California has already been inundated, fiscally, by the rising tide of population change. But only evil people like me are aware of that--and dare to tell the rest of America", Steve Sailer at Vdare, 3 December 2009, link:

Britain, see your fate in California. London sounds like Los Angeles, see my 11 October 2009 post:

Yes Sailer.

Tuesday, December 22, 2009

Niall Ferguson's Tocsin

Niall Ferguson (NF) has an article in Newsweek, 7 December 2009, link: NF warns us the US days as the world's superpower may be ending. We ignore NF at our peril.

China = US?

"China sold its first 50-year government bond, a move that expands its domestic debt market and places the country in a small league of nations that have issued ultralong-term sovereign debt. ... The bond sale wasn't primarily about raising money. China's government has a healthy fiscal position and ample access to capital. Rather, it is part of China's efforts to make its government bond market a better pricing benchmark for corporate debt sales as the country's economy--and firms' hunger for cash--continues to expand. ... China's 30-year bond was yielding 4.20% Friday", Wang Ming, WSJ, 28 November 2009:

30-year US Treasuries yielded 4.20% on 27 November 2009. China appears to be as good a credit as Uncle Sam.

Climate Change?

"My favorite moment in the Climategate/Climaquiddick scandal currently roiling the 'climate change' racket was Stuart Varney's interview on Fox News with actor Ed Begley Jr., star of the 1980s medical drama 'St Elsewhere' but latterly known, as is the fashion with members of the thespian community, as an 'activist.' He's currently in a competiton with Bill Nye ('the Science Guy') to see who can have the lowest 'carbon footprint.' Pistols at dawn would seem to be the quickest way of resolving that one, but presumably you couldn't get a reality series out of it. ... Nothing to worry about, folks. 'We'll go down the path and see what happens in peer-reviewed studies,' says Ed airly. 'Those are the key words here, Stuart, "Peer-reviewed studies".' ... He wore an open-necked shirt, and although I don't have a 76-inch HDTV, I wouldn't have been surprised to find a talismanic peer-reviewed amulet nestling in his chest hair for additional protection. 'If these scientists have done something wrong, it will be found out and their peers will determine it,' insisted Ed. 'Don't get your information from me folks, or any newscaster. Get it from people with PhD after their names. "Peer-reviewed studies" is the key words. And if it comes out in peer-reviewed studies.' ... You stand on the pier, and you notice the tide seems to be coming in a little higher than it used to and you wonder if it's something to do with incandescent light bulbs killing the polar bears? Is that how it works? No, no, peer-reviewed studies. 'Peer-reviewed studies. Go to Science magazine, folks. Go to Nature,' babbled Ed. 'Read peer-reviewed studies. That's all you need to do. Don't get it from you or me.' ... The trouble with outsourcing your marbles to the peer-reviewed set is that, if you take away one single thing from the leaked documents, it's that the global warm-mongers have wholly corrupted the 'peer-review' process. When it comes to promoting the impending ecopalypse, the Climate Research Unit is thee nerve-center of the operation. ... When Climate Research published a paper dissenting from the Jones-Mann 'consensus,' Jones demanded that the journal 'rid itself of this troublesome editor,' and Mann adnived that 'we have to stop considering Climate Research as a legitimate peer-reviewed journal. Perhaps we should encourage your colleagues in the climate research community to no longer submit to, or cite paper.' ... The more frantically they talked up 'peer review' as the only legitimate basis for criticism, the more assiduosly they turned the process into what James Lewis calls the Chicago machine politics of international scinece. ... 'Quis custodiet ipsos custodes?' wondered Juvenal: Who watches the watchmen? But the beauty of the climate-change tree-ring circus is that you never need to ask 'Who peer-reviews the peer-reviewers?'," my emphasis, Mark Steyn at the Orange County Register, 27 November 2009, link:

Sound familiar? The Big 87654 peer reviewed each other for decades. Now the Big 87654 controlled PCAOB "inspects" CPA firms. If you expect anything substantive to come from the PCAOB, you are at best naive. At worst, insane. "Internal control", whatever that is, has become a "talismanic ... amulet".

Monday, December 21, 2009

China's AIG?

"A Chinese economic official blamed 'fraudulent practices' at some large international investment banks for large losses incurred by Chinese state-owned companies on derivative contracts, in the government's strongest criticism yet of the role played by foreign banks. ... Mr. Li [Wei], writing in the latest issue of the Study Times, a newspaper published by the Party School of the Central Committee of the Communist Party, also criticized Citigroup Inc., along with Merrill Lynch and Morgan Stanley, for developing 'extremely complicated' derivatives products. He said 68 state-owned enterprises incurred combined book losses of 11.4 billion yuan ($1.67 billion) on 125 billion yuan worth of derivatives investments by the end of October. ... Soon after those contracts were signed, oil prices fell below the exercise prices of the options, which caused losses on both sides of the contracts, he said. ... 'Some fraudulent practices by some international investment banks resulted in major losses,' Mr. Li said. Chinese companies should bear some responsibility, but the losses 'arte also closely related to hostile sales of certain fraudulent, complciatedly designed high-leveraged products by international investment banks", Victoria Ruan at the WSJ, 4 December 2009, link:

Li exercise your "option", sell Zimbabwe Ben these contracts at 100 cents on the dollar. Why let ZB treat your companies worse than Vampire Squid (VS) in the AIG fiasco? Besides, the People's Liberation Army has more divisions than VS, see my 25 September 2009 post: If anyone should realize he can't collect these debts its Lloyd Antoinette Blankfein (LAB). LAB is a kid from the 'hood. He went to "Tommy Jeff". He understands. Even LAB is not fool enough to bring a writ to a gunfight.

Barrick Rings the Bell

"Barrick Gold Corp. accelerated plans to eliminate hedges against declines in gold prices, jumping to capitalize on months of gains for the precious metal and freeing up the company to develop even more. ... Tuesday's move by the Toronto-based moner, the world's biggest gold producer, helped boost the metal's price briefly to a record intraday high of $1,200 an ounce. Gold settled at a record close of $1,199.10, up 1.5%. ... Barrick and other miners for years protected against the risk of declining gold prices by selling part of future production in advance at fixed prices. ... Higher gold prices present some challenges for Barrick and other big miners. And moves to escape the hedges can have a bearish element in gold market. ... Barrick said it expects that it will provide an instant boost to its reserves--the amount of gold it can say it posses underground--which now is 138.5 million ounces. ... Barrick is investing $100 million more in a mine in Montana that it had initially planned to close last year. ... Barrick instead is focusing on developing its own sizeable pipeline of mines and is considering whether gold prices will be strong enough to let it accelerate its plans, Mr. [Aaron] Regent said. ... Barrick in September said it would spend $5.1 billion to eliminate its hedges within a year, by buying gold on the open market and by paying off previous contracts", my emphasis, Phred Dvorak at the WSJ, 2 December 2009, link:

I don't see why Barrick and other miners sell any more gold than necessary to pay the bills. Gold stock investors buy miners as leveraged gold proxies. Why sell gold for paper, instead of storing it? As for "hedging", see Tom Selling 21 July 2009 comment: ABX should drive its investment bankers (IBs) out and stick to mining. ABX has 983 million shares outstanding. Therefore, every $100 increase in gold's price yields ABX $9.00 billion in net revenues (138.5 million X $100 X 65%). Assuming it is paid over 20 years and no extramarginal ore become intramarginal, this is $450 million in annual net revenue for ABX, discounted at 7% real or, $4.837 billion, or $4.92 per share. ABX, you idiots, stop this hedging nonsense no matter what your IBs say. Hedges are not just against gold price declines, but increases.

Sunday, December 20, 2009

The Keating Five Return-2

"Federal regulators on Friday seized AmTrust Bank, a battered Cleveland thrift kept alive this year after local politicians pleaded with the government for a second chance. ... The family-owned AmTrust, with $12 billion in assets and roots back to 1889, had been in trouble for more than a year. Like many other banks during the housing bubble, AmTrust barreled into unfamilar geographic areas with aggressive mortgage and construction lending. ... The [FDIC] said the AmTrust failure was expected to cost its deposit-insurance fund about $2 billion. ... As part of the deal, the FDIC is shielding New York Community from most losses on $9 billion of AmTrust's assets. ... Last fall, its primary regulator, the Office of Thrift Supervision, rejected AmTrust's requests for aid through the federal government's Troubled Asset Relief Program. ... After AmTrust missed a deadline to raise capital, the FDIC in January approached other banks to gauge their takeover interest--a sign the agency was gearing up to seize the thrift, according to people familar with the matter. ... But AmTrust benefited from the advocacy of politicians, including Rep. Steven LaTourette (R., Ohio), who pleaded with Treasury and White House officials not to kill a second Cleveland bank. ... Sen. George Voinovich (R., Ohio) wrote to then-Treasury Secretary Henry Paulson, complaining about Treasury's discretion in 'picking winners and losers.' ... The OTS and FDIC eventually agreed to plans by AmTrust to aggressively shrink its balance sheet, sell branches, and thicken its capital cushions, according to people familar with the matter. ... People close to AmTrust blame federal regulators for some of the troubles. In recent months, OTS examiners demanded that AmTrust write down the value of loans far more aggressively than bank officials thought necessary, these people say. ... The requirements triggered more losses. Deteriorating finances prompted regulators' complaints about AmTrust's health to amplify from 'a gradual drumbeat ... to a crescendo,' said a person close to the company", my emphasis, David Enrich at the WSJ, 5 December 2009, link:

Apparently AmTrust needed a "former" executive at Treasury. Would AmTrust still be with us if Hank Paulson was its "former" Board Chairman? AmTrust's death is another argument for busting up our TBTF financial institutions. Citigroup has only survived since 1983 because of Fed bailouts by manipulating the yield curve adverse to savers. Citigroup should be killed. But that won't happen. Regulation is a joke., Instead of letting Vampire Squid fail, Uncle Sam lets it become a bank holding company. Amazing.

Banks Need Not Learn

"Banks have spent the past year dealing with a mountain of bad assets. Now attention is turning to trillions of dollars of debt they have maturing over the next few years. ... The situation was caused by banks engaging in cheap borrowing during the credit-market boom that began in the middle of the decade and lasted through 2007. As financial markets hit crisis mode, banks were propped up by government guarantees that enabled them to keep selling debt--but with much shorter maturities. ... The life span of bank debt has shrunk to historically low levels, forcing banks to deal with the problem sooner than later. Globally, the average maturity of new debt rated by Moody's fell from 7.2 years to 4.7 years in the past five years. ... The problem is especially acute for US and UK banks, which have been among the hardest hit by the financial crisis. ... Large banks such as Citigroup Inc. and Bank of America said they expect no problem refinancing at affordable rates and that they have historically high levels of cash to cover maturing debt. Their funding needs are likely to be lower anyway because of sluggish lending and sales of assets or business that require debt funding. ... The government debt also was sold at markedly cheaper costs. A Baa-rated bank that sold government-backed three-year debt would have paid a coupon of about 1.3%. That same bank would have to pay 7.75% to sell 10-year debt, according to Moody's. That is important because banks are being pressured to sell longer-term debt", Carrick Mollencamp & Serena Ng at the WSJ, 24 November 2009, link:

Banks can get in trouble on both sides of their balance sheets. They should not run "unmatched" books. The regulators should prevent this. Zimbabwe Ben could easily be suppressing interest rates 6.45% (7.75% - 1.3%) to float the banks.

Saturday, December 19, 2009

Systemic Risk Creation

"As Congress lumbers toward creating a systemic-risk regulator, it's worth a look back--to 2002, when an economist named Stiglitz and a duo named Orzag wrote a paper with the droll title, 'Implcations of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard.' We won't keep you in suspense. The paper, written the year after Joseph Stiglitz won the Nobel Prize for economics, concludes that on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero.' Their analysis has recently been making the rounds on the Web to a chorus of chortles. ... The paper is notable because it represents the almost universally held view of the two mortgage giants at the time and for years afterward. These pages began writing about the systemic risk posed by Fannie and Freddie at around the same time, but until the very end we were in the distinct minority. Fan and Fred's own regulator assured the world that they were well-capitalized almost until they wre put into conservatorship in September 2008. ... The assumptions in the test were said to be 'severe.' Even so, the probability of a default was 'so small that it is difficult to detect.' Some $111 billion in taxpayer-funded bailouts later, with perhaps hundreds of billions to go, the risks have been detected. ... In reality, it took barely a year of financial distress for Fan and Fred to burn through their capital and wind up in taxpayer laps. Professor Stiglitz says of his paper today, 'I'd like to think that if we'd done the same stress test in 2007, ... we would have said, "You ought to be worried."' Taxpayers would like to think so too. ... Both Orzags and Mr. Stiglitz were officials in the Clinton Administration and saw the debates about Fan and Fred that the Clinton Treasury began in the late 1990s, only to get clobbered by the companies' lobbying machine. ... Why should anyone think that regulators--or economists--will predict the next systemic debacle any better? ... And when large, systemically important companies are threatened with curbs on their business, they will pay Nobel laureates to write studies that explain away the dangers, and hire lobbyists to block any reform. A future Treasury secretary may also dismiss critics of a future Fannie Mae, or Goldman Sachs, as 'ideologues,' as Hank Paulson did in 2007-2008. ... Look no further than the eminent Mr. Stiglitz or the brilliant Orzag brothers for how hard it is to detect systemic risk, much less do anything about it", my emphasis, WSJ Editorial, 1 December 2009:

I remember this paper, concluding at the time it was a rationalization for then current Freddie and Fannie (F&F) lending policies. I saw F&F as insolvent years ago. Is it a 25-sigma event as the Vampire Squid said in 2007? What would CPA Fred of Illinois have said if asked about this paper? Do I detect some WSJ sarcasm here? I think Stiglitz is smart. He knew he was providing the rationale F&F wanted. The WSJ may be right about the Orzags. I have not been favorably impressed with either's intellect.

Jim Grant on the Dollar

Jim Grant writes about the dying dollar at the WSJ, 5 December 2009: Read Grant.

Pound Drops 99%

The US double eagle coin had .9675 ounces of gold, thus the dollar was .048375 ounces of gold. The British sovereign coin had .2354 ounces, the pound's dollar value. .2354 / .048375 = $4.866. The current dollar price of pounds is $1.6487. The pound fell 66.12% against the dollar since 1792. On 5 December 2009 the pound "price" price of gold was 704.45, or .00142 ounces per pound, therefore today's gold pound is .00603 1792's pound, down (1 - .00603) or 99.4%. That's a bear market. Pounds, dollars, gold, it all "arbitrages" out.

Friday, December 18, 2009

North Korea Shows the Way

"North Korea [NK] redenominated its currency for the first time in 50 years and limited how much old money could be traded for new, likely wiping out millions of residents' savings and much of the cash used in market activities frowned on by its authoritarian government. ... [NK] has issued new currency four previous times since it was founded in 1948, most recently in 1992, usually at times of financial distress. But it has also used new currency issues as a political weapon, by limiting how much can be converted or distributing new notes unevenly, says Marcus Noland. a seior research fellow at the Peterson Institute for International Economics in Washington. ... The government announced the move Monday, using a closed-circuit broadcast system that can't be monitored outside the country. It said the old currency could be traded for new at a rate of 100 to 1--with a 1,000 won bill, for example, becoming a 10-won note--marking the North Korean won's first redenomination since 1959. It said it would make the exchanges from Tuesday to Saturday. ... [NK's] unofficial economy started on a small scale amid famine a decade ago, when the state-run distribution system broke down and people began selling goods and food from homes and farms. Sizable markets grew in nearly every town and city. ... Initial reports indicated the government would allow only 100,000 old won to be exchanged, likely wiping out the holdings of people who have saved for years from market activities. Those who saved in foreign currencies--which, theough not illegal, is difficult for ordinary North Koreans--appear unaffected so far", Evan Ramstad at the WSJ, 2 December 2009, link:

Americans study this. Walter Wriston's ghost must be in shock. Don't laugh, some form of debt repudiation is coming to America. I'm sure Timmy Boy and Zimbabwe Ben are studying NK's actions carefully.

SEC-Two Views

"We can't deal with all of them in one week, so we take special note of the regulators on our turf. Although the [SEC] was founded in the 1930s, its efforts to protect consumers have not yet succeeded. But it knows why: All it needs is a little more money. ... After examining a recent report from the SEC's inspector general, we must add a codicil: A government pretending it can do a lot of good automatically will do a lot of harm. ... According to the report, the SEC conducted nine investigations and audits of Madoff's now-infamous operations and was unable to detect his Ponzi scheme or the fictitious nature of the trades he reported to his investors. ... Many people claim that the SEC is understaffed, overworked or underfunded. How about incompetent? As with most regulatory agencies, neophyte lawyers usually work at the SEC for sub-market wages, just long enough to acquire the expertise in regulatory arcana that makes them really valuable in private practice as advisers to those being regulated. ... 'Most of the investigation was directed at determining whether Madoff should register as an investment adviser or whether Madoff's hedge-fund investors disclosures were adequate.' Regulation and regulators frequently drift from substance to form. Paper-pushing and registration are a defense against inquisitive supervisors, but they are no substitute for forcible disclosure, aggressive investigation and well-supported prosecution. ... Though it looked down its nose at the SEC's staff, even the office of the inspector general hired two expert consulting firms to do its investigation. And the IG had the advantage of knowing what had happened. Even when the SEC does find a fraud or a failure to disclose, it almost never prosecutes. It reaches a settlement. ... The IG wants to add more forms, not more effort. It urges new systems to list complaints and keep track of them, to handle tips and assign them to knowledgeable investigators, to acquire and hold data, to train employees, to plan and to analyze enforcement", my emphasis, Thomas Donlan (TD) at Barron's, 5 October 2009, link:

"The Inspector General of the [SEC] has provided suggestions on how the agency might improve its chances of catching the next Bernie Madoff. The report has an all-too-familiar-ring. Whenever a new financial scandal erupts the finger-pointing begins: Who knew what when, and why didn't they do something? ... In each case, the SEC's hybrid role as regulator, inspector and enforcer made it particularly difficult for the agency to explain why it came so late to the game. Often adding to its embarrassment in the discovery that someone had been pestering the SEC about the abuse it didn't uncover on its own. Whistleblowers told the agency that no money manager can really get a 10% return every year in perpetuity, that securities built from leveraged real-estate plays may prove problematic, and that no company can book billions of dollars in sales from products no one seems to buy. ... To reflate trust in the post-Enron stock market, Congress stuffed the Sarbanes-Oxley Act with protections for those who know how to out their lips together and blow. ... The IG said the problems include a lack of technical knowledge by line attorneys and many supervisors, little institutional memory for the enforcement staff to draw upon, and weak support from the SEC's other divisions. These are indeed persistent problems--so persistent that some skepticism is warranted that the IG's procedure-heavy recommendations will, in themselves, improve the SEC's investigative performance. ... The safeguards however, can quickly turn into new kudzu, doomed attempts to substitute institutional process for individual judgment. ... From my experience, however, the slush pile of unsolicited investor complaints yields few hits. ... Unfortunately, few of these professionals have any incentive to talk to the SEC. Corporate whistleblowers are often rewarded with a pat on the back followed by a shove out the door, Sarbanes-Oxley notwithstanding. ... And, unlike the criminal authorities, the SEC has no mechanism for giving a free pass to informants, although it's currently considering a move in that direction. ... That leaves short-sellers. ... Almost any public squaring-off against a company by short-sellers (or, for that matter, by journalists or analyst firms) invites a lawsuit. ... The Enforcement Division [ED] hires young lawyers who are smart and hardworking, but devoid of industry experience. ... They need all the help they can get, and the SEC should encourage industry professionals to volunteer information routinely. Additional examination of the tips that bounce into the agency is not enough", my emphasis, Richard Sauer (RS) at Barron's, 23 November 2009, link:

My experience dealing with the SEC is that it's worse than TD thinks. The SEC's "neophyte lawyers" (NL) are mostly interested in who is the "relator". If the relator is a nobody and the complaint is about a potential employer, they jump through hoops to ignore the obvious. The NLs are primarily interested in filling up their rolodexes while on the public payroll. I would prefer an SEC that was merely incompetent to today's SEC. Substance vs. form at the SEC? Hahahahahahaha. The SEC's IG needed consultants too! Most SEC investigations are a waste of time. See my 9 December 2008 post about SEC success stories:

RS is a "former" SEC attorney. After reading this, I wonder if there are "former" SEC attorneys, any more than "former" Vampire Squid (VS) executives. How bad is the SEC? Remember the Ray Dirks fiasco? It led to a Supreme Court decision, my 6 October 2007 post: I see SEC personnel as economic ignoramuses. They can't get past: "condition present, condition absent". Unlike IRS personnel, I have no confidence in SEC ED personnel's good faith efforts. I never encountered an IRS agent I thought corrupt. Stupid and ignorant, yes. How does RS know what is in his "slush pile"? Who is RS kidding? If VS's general counsel complained of something involving say $100,000, the SEC ED would be all over it! The SEC can tell registrants they will not file lawsuits against short-sellers without potentially subjecting themselves to securities fraud claims! When? Right now!

Thursday, December 17, 2009

Chanos on Munis

"James Chanos, the famed short seller who was among the first to forsee the collapse of Enron, recently sounded the alarm on the municipal bond market--in the hallowed halls of the New York Historical Society, no less. ... In a subsequent telephone interview with this columnist, Chanos said, 'State and local municipal finance are a mess and going to get worse.' ... California faces a $60 billion deficit, and the politicans there believe that in a worst-case scenario, the federal government will bail them out,' says Chanos. ... Ex- [New Jersey] Governor James McGreevy had bonded for current-account expenses before he resigned, and the bonding was stopped by the state's courts. His Democratic successor, former Goldman Sachs honcho Jon Corzine, promised property-tax relief to the middle class but couldn't deliver, and therefore got the boot. Given the scope of the problem, 'munis are a bad bet,' says Chanos", Tom Sullivan at Barron's, 9 November 2009, link:

I agree with Chanos, munis are a disaster waiting to happen. "But many state constitutions require bond holders get paid first". So? If you think a piece of paper will protect you as a muni bond holder from the need to run: local police forces, courts, prisons, etc., you're nuts! See my 5 January 2008 post:

Pushing the Prison-Industrial Complex

"America has 5% of the planet's population, but 25% of its prisoners. ... Cash-strapped states seeking to cut the cost of housing inmates are mulling drastic measures, ranging from quicker paroles to earlier releases. ... The grim share prices dwell too much on states' stop-gap attempts to curb incarceration costs, and overlook private prisons' steady profitability, their stranglehold on a tough-to-penetrate industry and the widening chasm between supply and demand. In an extensive recent report, Barclay's analyst Manay Patnaik pegs the annual demand for new prison beds at 35,000. That's being met by a supply of just 20,000 from both the public and private sectors. Patnaik's conclusion: 'It's an imbalance that works in favor of private-prison operators.' ... Investors in the triad of Corrections Corp. of America (or CCA), Geo Group and Cornell have other perks: Private prisons earn recurring revenue, impervious to seasons or business cycles. They build decades-long ties with a fairly reliable customer--the government, be it state or federal. And if the customer is the feds, ther companies are selling to a client that doesn't even have to balance the budget and can print money at will. ... A long stay in prison, according to an industry joke, cures very little except heterosexuality. Yet out prison population has more than tripled over the past quarter-century, jumping from roughly 700,000 in 1984 to 2.38 million this year, the fastest pace of any country on earth. ... A significant reduction of the US incarceation rate, the highest in the world, would rattle private prisons", my emphasis, Kopin Tan at Barron's, 19 October 2009, link:

This industry is a disaster waiting to happen. As states run out of money they will cut their incarceration rates. Before closing state prisons, they will end contracts with privately owned ones no matter how much the triad claims they can save states money.

Wednesday, December 16, 2009

Who's Right?

"The American economy is in its worst shape in a quarter-century. At least that appears to be the belief of the consumers questioned by the Conference Board for its consumer confidence survey, for which premliminary November results were announced this week. ... Why the glum opinion, at a time when many economists say they think the recession that began in December 2007 ended sometime last summer or fall? The primary reason is unemployment. ... Not since late 1982 have people been that negative on jobs. The history of the present-conditions index indicates that public perceptions often trail reality", my emphasis, Floyd Norris (FN), NYT, 28 November 2009:

FN, could the economists' measuring sticks be wrong? Might public perceptions have as great a claim on reality as economic constructs like GDP?

Uncle Sam Protects You

"How do you turn an industry that costs $700 million annually into one that eats $6 billion? Nationalize it, as Congress did airport screening after Sept. 11, 2001. ... Federal and local governments long controlled most aspects of aviation safety, from municipalities that policed the airports they owned to the Federal Aviation Administration's air-traffic control system. When political protestors began hijacking planes in the 1960s, Uncle Sam elbowed his way into security too. Airlines didn't hire experts to invent checkpoints; the Feds imposed them. ... The Aviation and Transportation Security Act of 2001 brought that control of security into the open. ... Foisting the TSA on us protected politicians of both parties far more than it did passengers. 'After 9/11,' said the former chairman of the Homeland Security Committee, Christopher Cox (R-Calif.), 'we had to show how committed we were by spending hugely greater amounts of money than ever before, as rapidly as possible.' ... What they haven't done after eight years and $48 billion is catch a single terrorist. ... One tourist claimed the sex toy that screeners fished from his luggage was a bomb rather than explain it in front of his family, while Democratic Representative John Lewis (D-Ga.) and the late Senator Ted Kennedy (D-Mass.) so menaced America that the TSA added their names to its No-Fly List. This lunacy ruins lives: The embarrassed tourist and other Americans without criminal records or motives have gone to jail. ... The TSA's response? Assistant Secretary David Stone huffed that since the attacks on Sept. 11 cost Americans over $100 billion and took thousands of lives, every dollar the agency spends 'in an era of threatened terrorism' is worth it. Taxpayers might disagree. ... More expensive and more infuriating are the gee-whiz contraptions that don't work: Puffer machines at $160,000 a pop were supposed to detect residues of explosives by blowing air at passengers and dislodging particles for analysis. ... Unfortunately [CTX machines are] 'chemically blind,' as the manufacturer of a rival technology out it: They can't differentiate peanut butter, fruitcake and other foods from explosives of similar density. So many false alarms resulted that screeners resorted to asking passengers what they had packed. Apparently, an agency that believes Listerine and Crest turn explosive at 30,000 feet also believes terrorists answer questions honestly. ... But screeners typically fail to find 60%, 75% and even 90% of the weapons undercover investigators smuggle past them. ... Before Sept. 11, there was no TSA. Can we really credit the agency with stopping any terrorists in the past eight years. Whether weighed against history, common sense, or economics, the conclusion reamins the same: The TSA is another terrorist victory. It's time we sent this boondoggle of a bureaucracy packing", my emphasis, Becky Akers at Barron's, 14 September 2009, link:

Chris Cox, we know him. He's late of the SEC. Could we apply these thoughts to the SEC, PCAOB and Sarbox? Screeners miss at last 60% of weapons people try to smuggle on planes. What percentage of frauds does the SEC miss?

Tuesday, December 15, 2009

Banks are Different

"The usual laws of corporate finance do not seem to apply to banks. ... The profitability of any activity, too, must be assessed before the magnifying effects of leverage are taken into account. In bank-land, however, anything goes. Accounting, not cash, is king. And most common yardsticks, for measuring performance are all in some way distorted by leverage, not least return on equity (ROE). ... Bankers complain that equity is too expensive and it will have a knock-on effect on the price of credit, damaging the economy. But this contradicts a cornerstone of corporate finance, set out by Franco Modigliani and Merton Miller in 1958, that a firm's value is unaffected by its capital structure (at least in a partially efficient tax-free world). ... The firm's blended cost of capital is unchanged, and is driven largely by the risk of the firms assets, not how they are paid for. ... Why, then, are banks different? ... A century ago, when banks could fail, they carried equity buffers of about twice today's levels in order to reassure customers. ... It is not just guarantees which make deposits special. They are also priced off central banks' short-term interest rates. ... America's mega-banks typically paid a blended annual interest rate on borrowings and deposits of 1-2% in the second quarter. Equity cannot compete with that. Banks' privilieges mean the rules on cost of capital break down. ... Once society underwrites banks, the choice is between big equity buffers that push up the price of credit but make things safer, or smaller buffers and periodic bail-outs. Which is best? Some of the predictions made by banks about the impact of more equity on the cost of credit are silly", my emphasis, Economist, 29 October 2009, link:

No one who graduated one of our "better" MBA schools in the last 35 years should be taken in by bank accounting nonsense. I have often said bankers are amongst our two stupidest groups of businessmen. They can't understand cost of capital (COC). Or perhaps they do and what appears to be stupidity is just bank special pleading. We have COC in leasing, my 7 November 2009 post: Big 87654 firm partners seem not to understand it, nor PhD "experts" or PCAOB people. For a banker who knows his business, see my 21 June 2009 post:

Yves Smith Smashes the Fed's Looking Glass

Zimbabwe Ben (ZB) wrote a Washington Post, 29 November 2009, opinion piece. I planned to write about it and repeat my call to repeal the Federal Reserve Act and liquidate the Fed, when I read Yves Smith's (YS) 29 November 2009 post at her Naked Capitalism, link: YS dissected ZB's Fed apologia, comprehending everything I intended to say. Thank you YS. ZB's appeal to "global consensus", is an "argument" that would not have swayed my fifth-grade class. We would have said, "Bandwagon Propaganda", no argument. The Fed supposedly has "teams of economists, financial market specialists and other experts". So? My fellow fifth-graders would have said, "Appeal to authority. No argument". ZB, give up. Do you believe we here in the real world think your stress tests were any more than a public relations exercise? ZB notes, "Our financial statements are public and audited by an outside accounting firm". So? Didn't Deloitte & Touche (D&T) audit Merrill Lynch? ZB, call me about that audit. I'll give you an estimate. I wonder if the PCAOB "inspected" D&T's Fed audit?

Junior at Junior Deputy Accountant, 28 November 2009, has some choice words for ZB, link:

Robert Higgs smacks ZB at Beacon, 28 November 2009, link: "Such a warning seizes the high ground by creating the presumption that Bernanke and the present Fed have proved themselves to be beneficial to the causes of financial reform and economic recovery. ... Independent? Of you and me, to be sure, but not of Goldman, BofA, JPMorgan Chase, and the other old boys up there in the big city".

Monday, December 14, 2009

Why Save?

"In the recent unpleasantness, the [US] made some progress towards solving its biggest economic problem of recent years: the lack of US savings. Regrettably, in the latest figures, the beginnings of economic recovery have brought backsliding with the savings rate dropping back from 6% to 4.3%. Without more savings, as global liquidity declines, the [US] will quickly become a capital-starved economy, losing investment to capital surplus countries where savings are plentiful. The difficult questions are: what caused the savings decline and what can be done about it? ... The US savings rate began to decline in the 1970s. ... There appear at first glance to be three factors that may have affected the trend in savings rates: The first and most important is the return available to savings. ... The second reason why the savings rate may have declined is the revolution in consumer finance since the 1960s. ... The third reason, impossible to quantify, is the attitude to saving of the US population itself", Martin Hutchinson at Prudent Bear, 26 October 2009, link:

The savings rate fell because interest rates are too low. As long as Zimbabwe Ben can steal your savings to give banks to prop them up, why save? Further, your savings are subject to taxes on non-existent interest and capital gains. Among other things the tax code should change to encourage savings. What's hard to understand? Under the current fiat-money, post-1971 regime, interest is what Uncle Sam promises to pay you to steal your principal.

Israel, Iran, Russia and Obama

"Iran has blamed the [US] for Sunday's suicide bombing in Sistan-Balochistan province in which six Iranian Revolutionary Guards Corps commanders were killed, as well as 37 other people. In an indirect way, the charge is true. ... The most dramatic response to Washington's abdication of power may be Israel's. ... A complex negotiation involving Russia and Israel is underway. ... The question is: what does Russia want from Israel in return for refraining from arming Iran? ... For the first time since World War II, America's rule of the skies may be challenged by its failure to invest adequately in the next generation of American aircraft. Russia and India have already agreed on joint development of a fifth generation fighter based on existing Russian airframes. ... If Israel joined the consortorium, the product might challenge the F-35 in the world market for military aviation. ... Were Israel to strike Iran during the next few weeks, it might do so not as a proxy for the US, but as part of a broader agreement with Russia. America may have missed the point of Russian policy. The entire issue of sanctions on Iran may seem like diplomatic idiocy to the Russians; the question, in Moscow's judgment, may come down to a digital decision: either attack Iran, or don't. ... The [US] may cast away its technological edge in air power without a second thought, but Russia understands that superpower status today depends more on military technology than any other factor. ... If Israel were to set back Iran's nuclear weapons development, the position of the Tehran regime would deteriorate, particularly at the expense of Pakistan. ... The world's attention will shift from the shadow-play of interests between Israel and the Palestinian Arabs, to the Pakistan-India theater. Pakistan is the natural center of militant Islam. ... What is most astonishing is that official Washington seems entrely oblivious to the crack-up of American influence occuring in front of its eyes. ... The reason for Obama's peculiar mode of governance, though, may have less to do with his apparent narcissim than with his objectives. It is a credible hypothesis that this president holds views that he cannot easily share, even with his own staff. ... There is some basis for the conjecture that his innermost sentiment is hard-core, left-wing Third World antipathy to the [US]", my emphasis, Spengler at Asia Times, 19 October 2009, link:

As ususal, I agree with Spengler. Obama is the first US president whose administration I've lived through who I suspect of treason. I can't believe double-Ivy League Obama is as ignorant as he appears. He is disarming the US and pushing Israel into Russia's lap. Brilliant.

Sunday, December 13, 2009

Spengler on Gold

"Even a rather wobbly reserve currency is a better asset than gold, whose price again crossed the US$1,000 mark last week. Gold is far less liquid than US Treasury securities, costly to store and insurance, and above all far more volatile in price. ... In a functioning world financial system, in which investors trust governments to control extreme instability, even an indifferently managed reserve currency with a broad capital market behind it is better than gold. ... Strictly speaking, gold isn't an investment but an insurance policy against a breakdown of the functioning of the world financial system. ... Divided by the US Consumer Price Index (CPI), the price of gold trades at half its 1979 peak, when the world had cause to believe that America would lose the Cold War. ... America's position in the world today is far less subject to challenge than it was in those dark days at the end of the Carter administration. ... The scurrilous fringe of financial journalism likes to speculate as to when China will dump the dollar, without asking the obvious question: what would China do in the absence of the dollar? ... Gold will have no official role unless America's international role really does collapse, and the world is reduced from a system of trsut (or imperial dictates, which amounts to the same thing) to a kind of barter at the international level. ... Everyone owns too many dollars; by definition, a problem in the resrve currency means that the whole world is long as asset they no longer want. But the dollar is so large that nothing can substitute for it", my emphasis, Spengler at Asia Times, 14 September 2009, link:

I am a 30-year card carrying member of the "scurrilous fringe of financial journalism". I assert China will dump the dollar and buy gold. I disagree, gold is better than any (paper) currency. Gold has fallen in real terms since January 1980, true. But the dollar has fallen 98% relative to gold since 1933. Is gold rising or the dollar falling? Gold is as "volatile in price" as the dollar. Who cares what gold's "official role" is? Nothing can substitute for the dollar. Interesting. Think about that.

Banks and Boats

"The collapse of Eastwind Marine, analysts say, while small, could well be a harbinger of more carrier failures to come. ... In Britain, for example, where the economy shrank a further 0.4 percent for the third quarter, the government had to put an additional Pound 43 billion ($71 billion) into the Royal Bank of Scotland [RBS] and Lloyds, both essentailly under national control, because of continuing trouble with their real estate loans. ... Banks with large shipping industry portfolios--among them [RBS] and Lloyd's, and HSH Nordbank and Commerzbank in Germany--could face meaningful write-downs as ship owners confront plummeting charter rates from a 25 percent drop in global trade. ... And while global trade appears to be gradually on the mend, a glut of previously ordered ships due in the coming years is expected to limit the extent of a meaningful price recovery. ... Banks in Europe have stubbornly resisted taking write-downs for their shipping industry debts. They concede that the global cargo sector is troubled, but as long as companies continue to pay interest on their loans--which most are still doing--the banks contend that there is no need to write them off. ... But as competition for business drives cargo revenue well below what it costs to send a ship across the ocean, analysts say that ship owners may soon be the next group of borrowers unable to manage their debts. ... Although the pile of shipping industry debt does not compare to the trillions of dollars in toxic mortgage securities that infected balance sheets worldwide, the essential dynamic of plummeting ship values, burdensome debt and disappearing equity is much the same. ... The current bust began in the summer of 2008. And after what [Carl Brahde] called the 'biggesrt order book of all time,' that suggests that most of the pain for the shipping industry is still to come. ... Like all carriers, Eastwind built its fleet of 55 ships by relying on the generous terms of its eager bankers. At the top of the cycle, when the average five-year old vessel was valued at about $88 million as of June of 2008, the company seemed a pretty good bet. ... But the fact that shipping industry debts are concentrated in some of Europe's weakest banks suggests that the loans may well cause more problems than bankers are now willing to admit", my emphasis, Landon Thomas at the NYT, 12 November 2009, link:

Excepting insurance company executives, bankers are our dumbest businessmen. They almost always lend at the top of a cycle. Bankers generosity with credit is a sign a sector will soon collapse. In 2-3 years you will have good opportunities to buy shipping stocks. Be patient.