Muni Madness

"Investors are ignoring warning signs in the $2.8 trillion municipal-bond market, raising the risk of a reckoning, according to some market specialists. Numerous municipalities are struggling financially. ... But municipal-bond prices aren't reflecting much concern. Yields of municpal bonds, maturing in 2020 stood at 3.15% Friday, up slightly for the week but down from 3.3% in April. ... [Defaults] represented about $6.4 billion, or just .002% of outstanding municipal debt', [Matt Fabian] says", Ianthe Jeanne Dugan at the WSJ, 14 June 2010, link: http://online.wsj.com/article/SB10001424052748704067504575304782084631368.html.

Fabian, $6.4 billion / $2.8 trillion = .0023, not .002%. Check your arithmetic. Does anyone at the WSJ proofread anymore? I agree, the muni bond market is a disaster waiting to happen.

California Today, Texas Tomorrow-2

"The demographer who warned a decade ago about Texas' unhappy mix of dismal education achievement and high poverty is more concerned than ever. Actually, he's frightened. ... Some don't see much leadership from politicians or the private sector in attacking the trend line that demographer Steve Murdock says will result in three of every 10 workers not having a high school decuation by 2040. ... The state's public schools have more and more low-income kids and persistently high dropout rates--and unless that changes, the future of Texas will contain more long-term unemployment and poverty--and more folks depending on food stamps, Medicaid and CHIP, Murdock said. ... The trend line also is clear: School districts with large numbers of low-income students have higher dropout rates. Large school districts where low-income students make up at least 80 percent of the enrollment have dropout/attrition rates of 50 percent or more. ... 'Every kid deserves to be educated, and we're going to figure out what it takes and do it,' said Bill hammond, president and CEO of the Texas Association of Business. ... If nothing changes, average Texas household incomes will be about $6,500 lower in 30 years than they were in 2000, according to Murdock's projections. That number is not adjusted for inflation, so it would be worse than it appears. ... He sees only two solutions: Texas must do more to prepare preschoolers anbd must boost grants to provide financial help for college. ... The exact extent of the dropout problem is unknown. ... Murdock said it's critical for Texans to understand 'that our future is tied to these kids' future'," Gary Scharrer at the Houston Chronicle, 21 June 2010, link:

http://www.chron.com/disp/story.mpl/metropolitan/7063520.html.

Our future looks bleak. Disagreeing with Murdock, there is another solution.

Why Rubashkin?

"A federal judge in Iowa on Monday announced a prison sentence of 27 years on financial fraud charges for Sholom Rubashkin, the former manager of a kosher meatpacking plant where hundreds of illegal immigrant workers were arrested in a 2008 raid that garned national attention. Although the case against Mr. Rubashkin originally centered on immigration charges, during the trial in Cedar rapids prosecutors focused instead on financial abuses when he was in charge of the Agriprocessors slaughterhouse in Postville, Iowa. The sentence, two years more than prosecutors had requested, was unusually high in the recent history of financial crimes--longer than the term for Jeffrey K. Skilling, the former chief executive of Enron, and L. Dennis Kozlowski, the former chief executive of Tyco. ... The sentence is also likely to deepen the belief among some Orthodox Jewish leaders, who have sustained an international campaign on Mr. Rubashkin's behalf, that he was unfairly tried. ... The federal prosecutors had originally sought a life sentence for Mr. Rubashkin, but then revised their request to 25 years. Six former attorneys general, including Janet K. Reno and Edwin Meese III, wrote to Judge Reade in April arguing that a life sentence would be a severe misreading of the sentencing guidelines as applied to white-collar crimes", Julia Preston at the NYT, 22 June 2010, link:

http://www.nytimes.com/2010/06/22/us/22iowa.html.

Amazing, I agree with Janet Reno. Applying the sentencing guideline 2B1.1 to Rubashkin's crimes, I add four points as a manager of five or more, and 22 points for $26 million damage, total = 33 points, a 135-168 month sentence from the table. What's going on here? Is the Obama administration's (ad hominem attack notice) displaying its anti-semitism for all to see? A life sentence? Why?

California's Gestapo-3

On 19 June 2010 I got the California State Board of Accountancy's Spring 2010 Update. From page 18, "Do you presently live and work out of state, but continue to maintain an active California CPA license? The CBA has some important tax-related information for you. Required by law, the CBA must provide the FTB, upon request, specific information including your name, address, social security number, and license status. The FTB may then use its authority under the Revenue and Taxation Code to generate a request for tax return information from any California-licensed CPA who does not file a California tax return, regardless of his/her state of residence, and require you to provide proof that you did not earn income in California. Failure to respond to the FTB request for tax return information for any reason, including non-receipt of the request, can result in the FTB filing a lien against you. The CBA does not receive any notification when such a demand letter is generated by the FTB and the CBA does not have access to any information in this regard. if you have any questions, regarding this process or want information, please contact the FTB at (916) 845-7057", my emphasis.

The FTB is desperate. Imagine, shifting the burden of production to an out-of-state resident. Is the FTB kidding? The FTB may wind up in federal court over this. Would the FTB knowingly and wilfully mail "requests" for "tax return information" to wrong addresses then file liens? Will the DOJ then pursue the FTB for mail fraud, 18 USC 1341? Don't hold your breath. What would the FTB accept as proof? An affidavit from a Texas Ranger that I did not set foot in California during 2009? Should each California CPA who lives out-of-state CPA have a "cop" follow him around all year to provide the affidavit? This is another FTB abuse. If you are financially solvent and can leave California, do. Why doesn't the CBA get notification? The CBA claims among other things to protect the interests of CPAs. Good luck.

One of my tax clients is in a dispute with Massachusetts about interstate tax allocation. Taxachusetts wants to tax his earnings in New Hampshire and Texas. He may wind up in court over this.

WSJ Shills For IRS

"Congress wouldn't tax Roth IRAs, would it? ... But dozens of less-convinced readers have asked Tax Report about Congress's intentions, and well-known IRA expert Ed Slott says he hears it from consumers and advisers every time he makes a speech: '"If I pay tax to convert my IRA",' they ask, "how do I know Congress won't turn around and take away the benefits?"' ... Without a crystal ball, it is impossible to answer the question definitively. But the short answer appears to be: 'No Congress won't tax Roth conversions, at least not soon.' And the prospects of longer-term changes isn't deterring experts who are converting their own accounts. ... This particular tax was so hated that it is hard to imagine its return. Michael Graetz of Columbia University, a former top tax official at the Treasury Department, also thinks it is unlikely that lawmakers would enact a wholesale levy on Roth assets. 'That would be like taxing salary twice,' he says. ... They could try to tinker with income definitions for Medicare or Social Security, or perhaps require distributions for Roth owners. They might even tax an account's earnings if either the earnings or the account is above a certain threshold--although these would be such big changes in retirement policy that they don't seem likely, Prof. Graetz says", (LS) Laura Saunders at the WSJ, 19 June 2010, link:

http://online.wsj.com/article/SB10001424052748703280004575308953569367286.html.

"The thinking was that the rush to grab tax-free income down the road would raise a $6.4 billion windfall. ... Government mistrust is another factor. A TD Ameritrade survey found that 36% of ideal candidates for conversion suspect that Washington will somehow change the rules later to help reduce the national debt, partially at Roth IRA holders' expense", JR Brandstrader at Barron's, 18 January 2010, link: http://online.barrons.com/article/SB126360927771630223.html.

What fools these experts are. I expect, one way or another, Roth IRAs to be taxed. LS apparently selected IRS shills as her "experts" in this piece. Having read a few of his articles, I think Slott a clown. Taxing salary twice? We tax: estates and social security. You pay sales taxes on items bought with after-tax income. Why not Roths? We may get increased taxes on the rich, i.e., those making over say $250,000 a year. Why not tax Roth accounts over say $1 million by "imputing "distributions to their holders? See my 2 January 2009 and 5 May 2010 posts: http://skepticaltexascpa.blogspot.com/2009/01/hogan-v-mcquarrie-on-roths.html and http://skepticaltexascpa.blogspot.com/2010/04/vampire-squidking-canute-of.html.

The Roth IRA conversion law was changed to increase taxes.

Yves Smith and Junior on TARP

Yves Smith (YS) has a 23 June 2010 post at her Naked Capitalism blasting "Timmy Boy" Geithner's recent comments about TARP's "success". YS's got this knocked. Here's a link: http://www.nakedcapitalism.com/2010/06/geithner-yet-again-misrepresents-tarp-performance.html. YS notes that to make TARP look successful the Fed and Treasury sanctioned accounting fraud. What else is new? Remember, the SEC, part of the Treasury, controls the PCAOB. Doesn't that give you the "warm and fuzzies"? The supposed "police force" of the CPA profession must ignore banks' accounting fraud. Think about it.

Junior at Junior Deputy Accountant delivers a Sonny Liston-like left hook on 23 June 2010 to Timmy Boy, here:

http://www.jrdeputyaccountant.com/2010/06/tim-geithner-has-completely-forgotten.html. Go Junior!

Wait Listed By Jail-17

"As far as jails go, the Los Angeles Police Department's gleaming, new Metropolian Detention Center is about as good as it gets. ... The new detention center sits empty because of the city's dire fiscal crisis, which has left the LAPD unable to hire enough jailers to operate the large, labor-intensive facility", Joel Rubin at the LAT, 20 June 2010: http://latimesblogs.latimes.com/lanow/2010/06/lapd-new-74-million-dollar-jail-sits-empty.html.

Quoted without comment.

Continuing Wall Street Control of DOJ

"The Justice Department on Thursday announced the arrests of nearly 500 people in what it billed as a nationwide 'takedown' of mortgage scams, many of them directed at homeowners in financial distress. ... Federal officials said they have identified losses of $2.3 billion stemming from hundreds of mortgage-fraud cases. High-profile convictions of Wall Street investment bankers have eluded authorities. On Thursday, Attorney General Eric Holder tried to showcase smaller cases. 'If you want to gauge the efficacy of this task force, you can't focus on simply what has happened with regards to the large institutions on Wall Street,' he said', my emphasis, Thomas Catan at the WSJ, 18 June 2010, link:

http://online.wsj.com/article/SB10001424052748704289504575312691317663972.html.

"It involves 1,215 criminal defendants in cases that uncovered more than $2.3 billion in losses. ... Hundreds of FBI agenst are working on the task forces with other law enforcement agencies to combat a type of crime that poses 'a risk to our economic stability' as a nation, FBI Director Rovert Mueller said at the news conference", Pete Yost at the Houston Chronicle, 18 June 2010, link:

http://www.chron.com/disp/story.mpl/business/7059319.html.

"Since taking office at the height of the financial crisis, President Barack Obama has promised to hold Wall Street accountabel for the meltdown. Attorney General Eric Holder reinforced that message in November when he vowed to prosecute Wall Street executives and others responsible for the crisis. ... His [DOJ] took steps to fulfill that promise this week when it arrested the ex-chairman of one of the nation's biggest mortgage firms--the largest crisis-related criminal case--and announced 1,215 people have been charged with mortgage fraud since March 1. But that success masks difficulties in the highest-profile probes: those of Wall Street banks. ... And law enforcement sources say no such charges are imminent. ... Justice officials say Holder did not over-promise and that the task force is targeting all financial fraud, not just on Wall Street. ... The shortage of Wall Street prosecutuions is not for lack of effort. ... But investigators are encountering obstacles in what they call their top-priority cases, which souces saud include probes of JP Morgan Chase, Citigroup, Deutsche Bank, UBS, Goldman Sachs, Morgan Stanley and the former Lehman Brothers", Jerry Markon at the Houston Chronicle, 18 June 2010, link: http://www.chron.com/disp/story.mpl/business/7059317.html.

More DOJ guerilla theater. Why not Eric? When I see Lloyd Antoinette Blankfein sentenced to 30 years for securities fraud, I might consider the DOJ is fighting securities fraud. Maybe. Let's apply my "Blankfein Test" and see if I would have bothered with the 1,215 arrests in question. $2.3 billion / 1,215 = $1.9 million a person. I would have selected some of them and ignored the rest. As they total $2.3 billion, I consider pursuing them in the aggregate, a waste of DOJ resources.

Quoted without comment.

Will Alan Greenspan and the other Fed Heads get indicted? What going on? The DOJ pursues these peanuts to turn firms like Vampire Squid into victims! Did any of these 1,215 peanuts get TARP money? Nonsense. I think the DOJ is running around in circles trying to figure out which peanuts working for these "top-priority" firms are safe targets.

Texas Schools Pass Stress Tests!

"Even with such low standards, the Texas Education Agency decided to rate hundreds of Texas schools and scores of Texas districts as 'academically acceptable' last year--the lowest 'passing' catagory--by counting thousands of students who flunked the TAKS as passing it. ... For example, TEA reported that statewide the number of 'exemplary' campuses, the highest rating, more than doubled from 1,000 in 2008 to 2,158 in 2009. But without the statistical projections that some failing students would later pass, the increase would have been only 44 campuses. ... [Scott] Hochberg said the new system is disturbing not only because of the large number of schools that are receiving upgraded ratings under it, but also because of the statistical formula itself. ... 'But they're not doing that,' [Hochberg] said.'If you're projected going up, you're counted as passing. But if you're projected going down, you're not counted as not passing'," Rick Casey at the Houston Chronicle, 20 June 2010, link:

http://www.chron.com/disp/story.mpl/metropolitan/casey/7063167.html

Stress tests for Texas! Financial engineering for schools! I had noticed more schools with signs indicating they were exemplary. Yeah, sure. Accept no government statistic at face value.

SEC Takes Over Gulf of Mexico

"In the five years before the Deepwater Horizon exploded, federal investigators documented nearly 200 safety and environmental violations in accidents on platforms in the Gulf of Mexico, describing a stunning array of hazards that resulted in few penalites. ... And yet, in their investigations of nearly 400 offshore incidents, Mineral Management Service officials failed to travel to one-third of the accident scenes, collected only 16 fines and did not investigate every blowout as their own rules require. BP, the region's leading offshore oil producer, reported more accidents and blowouts than any other oil company operating in Gulf waters, followed by Chevron, the region's third largest offshore oil producer. ... Each major oil company paid only a single fine related to violations linked to those incidents. Both Chevron and BP spokesmen defended their companies' safety records and said their employee injury rates are low. ... It was rare for any oil company to pay penalties for problems found in accidents investigated by the MMS, records show. The agency can charge $35,000 per day per violation. But many proposed violations get reduced or dropped during behind-the-scenes reviews. Records how that most final payments were small and took a year or more to collect. ... MMS officials did not respond to repeated requests for information and comment for this story", Lise Olsen and Eric Nadler at the Houston Chronicle, 7 June 2010, link:

http://www.chron.com/disp/story.mpl/business/deepwaterhorizon/7039960.html.

The MMS sounds as effective at regulating offshore oil drilling as the SEC is at the financial markets.

Financial Engineering and BP

"In retrospect, the pattern seems clear. Years before the Deepwater Horizon rig blew, BP was developing a reputation as an oil company that took safety risks to save money. An explosion at a Texas refinery killed 15 workers in 2005, and federal regulators and a panel led by James A. Baker III, the former secretary of state, said that cost cutting was partly to blame. The next year, a corroded pipeline in Alaska poured oil into Prudhoe Bay. None other than Joe Barton, a Republican congressman from Texas and a global-warming skeptic, upbraided BP managers for their 'seeming indifference to safety and environmental issues.' ... The people running BP did a dreadful job of estimating the true chances of events that seemed unlikely--and may even have been unlikely--but that would bring enormous costs. ... For all the criticism BP executioves may deserve, they are far from the only people to struggle with such low-probability, high-cost events. Nearly everyone does. 'These are precisely the kinds of events that are hard for us as humans to get our hands around and react to rationally,' Robert N. Stavins, an environmental economist at Harvard says. We make two basic--and opposite--types of mistakes. When an event is difficult to imagine, we tend to underestimate its likelihood. This is the proverbial black swan. Most of the people running Deepwater Horizon probably never had a rig explode on them. So they assumed it would not happen, at least not to them. ... On the other hand, when an unliklely event is all to easy to imagine, we often go in the opposite direction and overestimate the odds. After the 9/11 attacks, Americans canceled plane trips and took to the road. There were no terrorist atttacks in this country in 2002, yet the additonal driving apprarently led to an increase in traffic fatalities. ... In a little-noticed provision in a 1990 law passed after the Exxon Valdez spill, Congress capped a spiller's liability over and above cleanup costs at $75 million for a rig spill. Even if the economic damages--to tourism, fishing and the like--stretch into the billions, the responsible party is on the hook for only $75 million. ... Without the cap, executives would have to weigh the possible revenue from a well against the cost of drilling there and the risk of damage. With the cap, they can largely ignore the potential damage beyond cleanup costs", David Leonhardt at the NYT, 6 June 2010, link:

http://www.nytimes.com/2010/06/06/magazine/06fob-wwln-t.html.

$50 million. Apply these principles to the CPA and rating agency businesses and see what happens.

States Repudiate Pensions

"Many states are acknowledging this year that they have promised pensions they cannot afford and are cutting once-sacrosanct benefits, to appease taxpayers and attack budget deficits. ... 'We can't afford to deny reality or delay action any longer,'said Gov. Pat Quinn of Illinois, adding that his state's pension cuts, enacted in March, will save some $300 million in the first fiscal year alone. But there is a catch: Nearly all of the cuts so far apply only to workers not yet hired. Though heralded as breakthorugh reforms by state officials, the cuts phase in so slowly they are unlikely to save the weakest funds and keep them from running out of money. Some new rules may even hasten the demise of the funds they were meant to protect. ... That vaunted $300 million in immediate savings? The state produced it by giving itself credit now for the much smaller checks it will send retirees many years in the future--people who must first be hired and then, for full benefits, work until age 67. By recognizing those far-off savings right away, Illinois is letting itself put less money into its pension fund now, starting with $300 million this year. ... 'We're within a few years of having some of the pension funds run out of money,' said E. Eden Martin, president of the Commerical Club of Chicago, a business group that has been warning of a 'financial implosion' for several years. 'Funding for the schools is going to be cut radically. Funding for Medicaid. As these things all mount up, there;s going to be a lot of outrage.' ... If a state pension fund ran out of money, the state would be legally bound to make good on retirees' benefits. But paying public pensions straight out of general revenue would be ruinous. In Illinois's case, it would consume about half the state's cash every year, bringing other vital state services to a standstill", my emphasis, Mary Walsh at the NYT, 20 June 2010, link:

http://www.nytimes.com/2010/06/20/business/20pension.html.

The pensioners will not get paid all they were promised. Current services will be maintained. Who are Illinois CPAs? Price Waterhouse, the guys who audited AIG and Vampire Squid? Or some other Big 87654 firm? Anyone with eyes open saw this disaster coming decades ago.