LA End Game

"Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy. Yet Mayor Antonio Villaraigosa [AV] and the City Council have been either unable or unwilling to face this fact. ... Even if [AV] were to enact drastic pension reform today--which he shows no sign of doing--the city would only save a few hundred million per year. ... Five thousand is the number of employees added to the city's payroll during [AV's] first term as mayor. According to California's Economic Development Department, when [AV] took office there were 4.73 million jobs in Los Angeles and 252,000 unemployed people. Today, there are just 4.19 million jobs in [LA] and over 632,000 unemployed people. ... How have city leaders responded to this crisis? Pension officials have played accounting games, like smoothing the investment return over seven years rather than five years. ... And most egregiously, rather than laying off employees, city officials have shifted certain workers to agencies like the Department of Water and Power and the airport, which have their own funding. ... He continues to insist that bankruptcy is not an option for [LA] even as anyone who can count understands there is no other option", Richard Riordan & Alexander Rubalcava (R&R) at the WSJ, 5 May 2010, link:

http://online.wsj.com/article/SB10001424052748704608104575218392603082622.html.

Riordan is a former LA mayor. Rubalcava is an investment advisor. Yes, R&R, LA's bankruptcy looks inevitable. Got muni bonds? Sell!

Mark Faber's Positions

"Central banks will never tighten monetary policy again, merely, print, print, print. ... Americans must re-think what constitutes a safe asset. ... '[T]he Federal Reserve will keep interest rates at 0 precisely 0. ... in real terms.' ... Contrary to what the talking heads are saying, markets are not out of control, central banks are out of control printing money. ... Eventually there will be war and one will want physical commodities 'not paper from UBS or JP Morgan.' ... 'Mugabe is the economic mentor of Ben Bernanke.' ... Sovereign credits in the Western world are all bankrupt, but before bankruptcy governments will print money. ... If deficits didn't matter as many like the Economist James Galbraith argue today, why should citizens even pay taxes?," my emphasis, Andrew Mellon at Big Government, 23 May 2010, link:

http://biggovernment.com/amellon/2010/05/23/faber-nations-will-print-money-go-bust-go-to-war-we-are-doomed/

I agree with Faber. Apparently the notion that he's Zimbabwe Ben is getting around. Why pay taxes indeed?

Iowan Thinking In Greece!

"Greek Prime Minister George Papandreou met President Obama in Washington yesterday, hoping to win US support for a crackdown on speculative traders. 'Unprincipled speculators are making billions every day by betting on a Greek default,' the Prime Minister said Monday, adding yesterday that Mr. Obama's response was 'very positive.' ... These days, of course, any purchase of Greek debt is a form of speculation--a fact reflected in the 320 basis-point spread over German bonds that Greece was forced to pay. ... As soon as Athens presented its latests E4.8 billion austerity package last week with across-the-board spending cuts, the pressure on the euro and Greek bonds eased. ... Unfortunately, this demonstration that the markets could be assuaged by some more-vigorous belt-tightening did not put Greek conspiracy theories to rest. ... These protests do real real economic harm and thus reduce government revenues, and Mr. Papandreou also does his economy no favors by railing against the very 'speculators' he needs to buy his debt. ... The bets against Greek solvency are the result, not the cause, of Greece's debt problems. The way to turn speculator profits into losses is be reining in government and reviving private growth", my emphasis, WSJ Editorial, 10 March 2010, link:

http://online.wsj.com/article/SB10001424052748704784904575111233555121958.html.

"'It has dawned on investors that solvency is a major issue--not a minor issue,' says Stephen Jen of the hedge fund BlueGold Capital Management. ... European Union President Herman Van Romply told several European newspapers on Friday that the bloc 'will be ready to step in if the Greeks ask.' French President Nicolas Sarkozy and Italian premier Silvio Berlusconi echoed those remarks, saying at a news conference that their countries were ready to help. ... The country's debt load totals more than 113% of its annual economic outpout and is rising. ... If Greece needs to restructure its debt, bondholders would find themselves sitting on big losses. ... The fundamental problem is that Greece is adding to its debt every year because of its big annual budget deficits. ... If that situation persists, Greece will never be able to pay off its debts without creditors agreeing to cut the amount they are owed. ... A big package could give Greece time to do a 'real devaluation'--a painful program of wage and price cuts, and a sharp drop in economic output, that could put it in a better position to pay off its debt, says Uri Dabush, director of the Carnegie Endowment for International Peace. ... But restructuring comes with a downside: A country that reneges on its debt would likely be shut out of global markets", my emphasis, Charles Forelle & Marcus Walker at the WSJ, 10 April 2010, link: http://online.wsj.com/article/SB10001424052702304703104575174203024119926.html.

Government officials frequently blame "speculators" for causing their problems. No. Speculation against Greek debt results from Greece's imprudent policies. Is Papandreou so stupid as not to understand that price stabilizing speculators make money. Price destabilitizing speculators lose money absent government bailouts. Now it's time for a war story. In 1974 I was auditing a subsidiary of a Midwestern utility for a Big 87654 firm. The subsidiary manager complained of a "cabal" of "Jews and speculators" who made the price of copper rise. Copper hit $1.44 in 1974, about $10 per pound today. I didn't have the heart to tell him, if the "Jews and speculators" were wrong about future copper demand they would lose their shirts. Does His Obamaness understand this? Who cares?

Why is Greece a worse credit than Uncle Sam? Because Unc issues debt in his own currency. Now. Got gold? Get more. Got any government bonds? California, Ireland, Greece, Unc, even Germany, yes Germany. Sell now! Now people realize Greek solvency is an issue. Where were they for years? Does Unc add to his debt annually? Greece will never pay its debts. Unc defaulted on his obligations to pay gold for dollars in 1971. So? Imagine, some people think Unc is a better credit than Exxon. They probably also believe in the Tooth Fairy and Easter Bunny. See my 15 November 2008 post: http://skepticaltexascpa.blogspot.com/2008/11/forbes-capitalist-fool.html.

Now They Ask?

"Unlike past market meltdowns, auditors have so far escaped much of the blame in the current financial crisis. The focus on Ernst & Young LLP [E&Y] in the report released last week by the bankruptcy examiner for Lehman Brothers Holdings Inc. [LBHI] has changed that. ... In a statement Friday, a spokesman for E&Y said the firm reviewed the accounting for Lehman's Repo 105 deals 'on a number of occasions. Out view was, and continues to be, that Lehman's accounting policy for these repo transactions complied with generally accepted accounting principles. The Examiner has not concluded otherwise.' ... That has precluded the kind of in-depth bankruptcy-court examination that resulted after Lehman's collapse. This approach contrasts with the bursting of the tech-stock bubble, when the implosion of Enron Corp. and WorldCom Inc. put auditors directly on the hot seat. ... Those scandals led to the Sarbanes-Oxley Act, which changed some key ways in which accounting firms operate and are regulated. ... While E&Y maintains its audits were proper, the accounting for Lehman's Repo 105 deals appears dubious to some outside experts. 'Unless it's in "Alice in Wonderland," I've never seen this,' said Lynn Turner, former chief accountant of the [SEC]. Even if the deals are within the technical bounds of the accounting rules, experts say it appears they failed to reflect the deals' true purpose. .... These are usually accounted for as a financing arrangement akin to a loan. ... One possible proof of a lack of control is that the securities being exchanged are worth far more than the cash being received. ... Guidance in the accounting rules suggests that an exchange of securities in excess of 102% of the cash value would show a lack of control. ... And Lehman should have had some reason for the 105% level, said Jack Ciesielski, editor of the Analysts's Accounting Observer. ... The problem, accounting experts said, is that in an accounting treatment isn't allowed for a US parent company, transferring a deal to an overseas subsidiary isn't likely to pass muster", my emphasis, David Reilly at the WSJ, 15 March 2010: http://online.wsj.com/article/SB10001424052748703457104575121920770049774.html.

Another Big 87654 disgrace. Had E&Y ever heard of substance over form? The Repo 105 deals were clearly financings. What did E&Y think motivated Repo 105? Answer: end run the 102% rule! E&Y must be full of craven idiots? What should we expect from E&Y which sanctioned the '.001 standard", in another context? See my 20 March 2010 post: http://skepticaltexascpa.blogspot.com/2010/03/lehmans-fiddles.html.

BofA Attorneys Abuse

"Attorneys for Bank of America Corp. [BofA] have agreed to reimburse lawyers for a Miami developer after a US bankruptcy judge in Florida criticized the bank's lawyers for trying 'to score a litigation point' in an ongoing foreclosure dispute. ... The judge scolded the attorneys for putting potentially defamatory fatcs in the pleading without investigating them fully. ... The rebuke is an extreme example of how lenders can end up on the wrong side of a judge when they make mistakes while moving aggressively against delinquent borrowers. It comes as growing stress in commercial real estate is sparking battles between owners and creditors throughout the country. ... [BofA] attorneys apologized in open court for not conferring with Cabi first before including the accusations in their pleadings. 'I regret and apologize on my behalf and on behalf of the bank for the mistakes,' said H. Peter Haveles Jr., a Kaye Scholer [KS] attorney. ... But Cabi, an affiliate of Mexico's Cababie family and the company, Grupo Gisca, filed for Chapter 11 protection the same day, halting any foreclosure attempt. ... Cabi's attorneys have said the bank's refusal to lower the condos' minimum price slowed sales, harming the project", Christina SN Lewis at the WSJ, 10 March 2010, link:

http://online.wsj.com/article/SB10001424052748704145904575111912605562920.html.

We know KS. Here's a link to my 31 January 2009 post: http://skepticaltexascpa.blogspot.com/2009/01/sdnys-lazarus.html. What will happen to KS from this? Likely nothing.

Lehman's Fiddles

"A scathing report by a US bankruptcy-court examiner investigating the collapse of Lehman Brothers Holdings Inc. [LBHI] blames senior executives and auditor Ernst & Young [E&Y] for serious lapses that led to the largest bankruptcy in US history and the worst financial crisis since the Great Depression. ... The document runs thousands of pages and contains fresh allegations. In particular, it alleges that Lehman executives manipulated its balance sheet, withheld information from the board, and inflated the value of toxic real estate assets. ... The examiner said in the report that throughout the investigation it conducted regular weekly calls with the SEC and Department of Justice. There have been no prosecutions of Lehman executives to date. ... Mr. [Anton] Valukus, chairman of law firm Jenner & Block, devoted more than 300 pages alone to balance-sheet manipulation, accusing Lehman of using accounting methods to move assets off its books. But because the moved assets represented 105% or more of the cash it received in returns, accounting rules allowed the transactions to be treated as 'sales' rather than financings. The result: Assets shifted away from Lehman's balance sheet, reducing the amount of debt it showed to investors. ... Lehman's own global financial controller, Martin Kelly, told the examiner that 'the only purpose or motive for the transactions was reduction in balance sheet' and 'there was no substance to the transactions.' Mr. Kelly said he warned former Lehamn finance chiefs Erin Callan and Ian Lowitt about the maneuver, saying the transactions posed 'reputational risk' to Lehman if their use became publicly known. ... Mr. Valukus' report is among the largest undertakings of its kind. Those singled out in the report won't face immediate repercussions. Rather, the report provides a type of roadmap for Lehman's bankruptcy estate, creditors and other authorities to pursue possible actions against former Lehman executives, the bank's auditors and others involved in the financial titan's collapse. ... One party singled out in the report is Lehman's audit firm, [E&Y], which allegedly didn't raise concerns with Lehman's board about the frequent use of the repo transactions. ... '[E&Y] took no steps to question or challenge the non-disclosure by Lehman of its use of $50 billion of temporary off-balance sheet transactions,' Mr. Valukus wrote", Mike Spector, Susanne Craig & Peter Lattman at the WSJ, 12 March 2010, link:

http://online.wsj.com/article/SB10001424052748703625304575115963009594440.html.

"Many executives inside [LBHI] quietly fretted about the firm's accounting as the company headed to the brink in September 2008. Matthew Lee did something about it. In May 2008, the former Lehman senior vice president wrote a letter to senior management warning that the company may have been masking the true risks on its balance sheet. ... His warnings, disclosed for the first time in a report by a US bankruptcy-court examiner, could trigger legal consequences for Lehman's auditor [E&Y], as well as former senior officials. ... 'We are dealing with a whistle-blower letter, that is on its face pretty ugly and will take us a significant amount of time to get through,' William Schlich, a former lead partner on [E&Y's] Lehman team, wrote in a June 5, 2008, email to a colleague, which is included in the examiner's report. ... In a June 12, 2008 interview with [E&Y], Mr. Lee raised the issue that Lehman was moving as much as $50 billion off its balance sheet, using a practice the firm called 'Repo 105,' the report says", Michael Corkery at the WSJ, 13 March 2010, link: http://online.wsj.com/article/SB10001424052748703447104575118122594094284.html.

We know E&Y. Substance over form? From the Big 87654? You're joking! E&Y accepts the ".001 standard", my 5 March 2008 post: http://skepticaltexascpa.blogspot.com/2008/03/enron-accounting-redux.html. Did Uncle Sam know about LBHI's accounting chicanery? Probably. See my 6 February 2008 post: http://skepticaltexascpa.blogspot.com/2008/02/treasury-and-banks.html. Yves Smith has a related 11 March 2010 post at her Naked Capitalism: http://www.nakedcapitalism.com/2010/03/ny-fed-under-geithner-implicated-in-lehman-accounting-fraud.html.

Iceland Rocks!

"Icelanders roundly rejected a deal to repay the UK and the Netherlands E3.9 billion ($5.3 billion) lost in the collapse of an Icelandic Internet bank, complicated the island's bid to access badly needed international aid funding and normalize its relations with the rest of the world. ... It was Iceland's first plebecite since the island's independence from Denmark in 1944. ... The government of Prime Minister Johanna Sigurdardottir has labored for the better part of a year to get a bill through a hesitant parliament, arguing that Iceland desperately needs money from an International Monetary Fund-led bailout program. ... After those talks ended Froday with no resolution, Ms. Sigurdardottir even encouraged citizens not the vote, hoping to blunt the referendum's effect with low turnout. ... A deal agreed by Iceland's parliament in December, under which Iceland would pay back the money over 15 years but wouldn't have to make payments for the first seven, was vetoed by the island's president, Olafur Ragnar Grimsson. In a rare display of power from a normally ceremonial post, he cited mass dissatisfaction for his veto, which led to the referndum. ... Many Icelanders are angry at the giant burden placed on them to clean up a mess widely seen as the fault of greedy, high-flying bankers", my emphasis, Charles Forelle at the WSJ, 8 March 2010, link:

http://online.wsj.com/article/SB10001424052748703391004575106452707894556.html.

Good show Iceland. Will Iceland's government ignore the will of 93% of Iceland's voters? What percentage of Americans would rather see our banksters hung than bailed out? Why does Iceland need IMF aid? Is Iceland AIG, passing through $13 billion to the Vampire Squid? If the UK and the Netherlands don't like Iceland's vote, let them invade or shut up.

Greece Now, California Next?

"While I have long predicted the collapse of the euro and eventually the European Union, I have to admit that Greece was not even on the periphery of my radar as a potential economic flashpoint. ... The response of the European Commission and the European Central Bank has been to take a page from Henry Paulson, former secretary of the Treasury in the Bush administration, and attempt to bluff the markets. ... State bankruptcies and monetary exits from the euro may not have been envisaged, but both are going to happen anyway. ... And it should be kept in mind that this is not an abstract exercise in American schadenfreude, as the more serious question is if the [US] financial system is itself strong enough to survive further economic pressure, since a number of US states, including Illinois and California, are now facing situations very similar to Greece. There is no known mechanism for a sovereign American state to declare bankruptcy", Vox Day at WorldNetDaily, 14 February 2010, link:

http://www.worldnetdaily.com/index.php?pageId=125098.

So the states won't file bankruptcy. They just won't pay their bonds.

What's Chapter 9?

"Just days after becoming controller of financially strapped Harrisburg, Pa., in January, Daniel Miller began uttering an obscure term that baffled most people who had never heard it and chilled those who had: Chapter 9. ... Created in the wake of the Great Depression, Chapter 9 is widely considered a last resort and filings under it are more taboo than other parts of bankruptcy code because of the resulting uncertainty for everyone from municipal employees to bondholders. ... As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds, And that is causing worry about the safety of securities traditionally considered low risk. ... For example, it isn't safe to assume that governments can raise taxes to cover shortfalls. ... Harrisburg Mayor Linda Thompson, a Democrat elected in November, opposes a bankruptcy filing and has presented an emergency plan that includes selling some of the city's assets. ... Since Chapter 9 was enacted in 1934, just 600 cases have been filed under the cose, partly because they require state approval. Some municipalities have found escape hatches, such as raising taxes. ... But many experts fear that a surge in municipal filings is unavoidable", Ianthe Dugan & Kris Maher at the WSJ, 18 February 2010, link:

http://online.wsj.com/article/SB10001424052748704398804575071591602878062.html.

Do you still want to own muni bonds?

Pravda Gets It!

"But unlike the perpetrators of the Watergate scandal, who wound up looking at jail time, Geithner evidently has a golden parachute waiting at Goldman Sachs [GS], not coincidentally the largest recipient of the AIG bailout. ... Hank Paulson, Geithner's predecessor, was CEO of [GS] before coming to the Treasury. Geithner, who has come up through the ranks of government, could be walking through the revolving door in the other direction. ... Critics are calling the New York Fed's [FRBNY] decision a back-door bailout for the banks, which received 100 cents on the dollar for contract that would have been worth far less had AIG been put through bankruptcy proceedings in the normal way. ... The [FRBNY] is a quasi-governmental institution that isn't subject to citizen intrusions such as freedom of information requests, unlike the [Fed]. This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed's bailout progrqams. It's as though the [FRBNY] was a black-ops outfit for nation's central bank. ... Eevn after the GM autoworkers, bondholders and vendors all received a government-enforced haircut on their contracts, [Geithner] still had the audacity to claim the 'sanctity of contracts' in the dealings with these companies like AIG. ... The contention that the Fed had no choice is also belied by a recent holding in the Lehman Brothers bankruptcy, in which New York Bankruptcy Judge James Peck set aside the same type of onvestment contracts that Secretaries Paulson and Geithner repeatedly swore under oath had to be paid in full in the case of AIG", my emphasis, Ellen Brown (EB) at Pravda, 8 February 2010, link: http://english.pravda.ru/business/finance/112085-aig_gate-0.

EB is a Los Angeles attorney. Why is this in Pravda? Is the American press afraid of the Vampire Squid (VS)? I disagree with one thing EB wrote. Timmy Boy will not leave Treasury for a VS position, but more likely BlackRock or Pimco. Timmy's joining VS would be too obvious.

Asarco Pays Off. Who?

"After a four-year legal battle, a mining company has paid the government a record $1.79 billion to settle claims for hazardous waste pollution across 19 states, federal agencies announced Thursday. ... The money, received Wednesday night from a subsidiary of the mining conglomerate Grupo Mexico, Asarco's parent, will be used to repair extensive damage from the mining operations. ... The deal required the coopoeration of the Justice, Interior and Agriculture Departments as well as the Environmental Protection Agency. At the new conference, officials were jubilant about the outcome. ... Jack Kinzie, a lawyer at the firm Baker Botts who was the lead lawyer for Asarco in the bankruptcy case, called the settlement 'fair.' But in a statement in June, the firm said it had been able to limit the allowed claims against the copper giant to substantially less than the $3.6 billion originally filed", my emphasis, Leslie Kaufman at the NYT, 11 December 2009, link: http://www.nytimes.com/2009/12/11/science/earth/11settle.html.

This is appalling. Another DOJ sellout of the public interest. Why were these officals jubilant? Because of the $1.79 billion they collected, or the $1.81 billion they didn't? $1.81 billion will buy a lot of NY BigLaw partnerships.

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: http://www.nytimes.com/2009/12/01/business/global/01islamic.html.

DW sukuks were a disaster waiting to happen, see my 3 July 2009 post: http://skepticaltexascpa.blogspot.com/2009/07/eichmann-moment.html. I can't imagine how a government could issue Sukuks unless they are paid from some specific tax.

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: http://www.nakedcapitalism.com/2009/11/cant-get-enough-goldmans-profit-is-citis-pain.html.

AIG-Vampire Squid

"TARP Inspector General Neil Barofsky keeps committing flagrant acts of political transparency, which if nothing else ought to inform the debate going forward over financial reform. In his latest bombshell, the IG discloses that the New York Federal Reserve did not believe that AIG's credit-default swap (CDS) counterparties posed a systemaic financial risk. ... Yet now we learn from Mr. Barofsky that saving the counterparties was not the reason for the bailout. ... The Fed's taxpayer-funded vehicle, Maiden Lane III, bought out the counterparties' mortgage-backed securities at 100 cents on the dollar, effectively cancelling out the CDS contracts. This was miles above that those assets could have fetched in the market at that time, if they could have been sold at all. ... In April we noted in these columns that Goldman Sachs [GSG], a major AIG counterparty, would certainly have suffered from an AIG failure. And in his latest report, Mr. Barofsky comes to the same conclusion. But if Mr. Geithner now says the AIG bailout wasn't driven by a need to rescue CDS counterparties, then what was the point? Why pay [GSG] and even foreign banks like Societe Generale billions of tax dollars to make them whole? ... Regulators say that having taxpayers buy out the counterparties improved AIG's liquidity position, but why was it important to keep IG liquid if not to protect some class of crediutors? ... Yet, if there is one thins that all observers seemed to agree on last year, it was that AIG's money to pay policyholders was segregated and safe inside the regulated insurance subsidiaries. If the real systemic danger was the condition of these highly regulatyed subsidiaries--where there was no CDS trading--then the Beltway narrative implodes. ... For example, if AIG's CDS contracts were not the systemic risk, then what is the argument for resturcturing the derivatives market? After Lehman's failure, CDS contracts were quickly settled according to the industry protocol. Despite fears of systemic risk, none of the large banks, either acting as a counterparty to Lehman or as a buyer of CDS on Lehman itself, turned out to have major exposure", my emphasis, WSJ Editorial, 20 November 2009: http://online.wsj.com/article/SB10001424052748704204304574543822135042160.html.

Thomas Adams (TA), an attorney has a 24 November 2009 post at Naked Capitalism, about AIG-Vampire Squid (VS) Conspiracy Theories. TA writes, "I hate to get sucked into the vampire squid line of thinking about Goldman, but the only explanation I can think of for why AIG got rescued and the monolines did not is because Goldman had significant exposure to AIG and did not have exposure to the monolines". I have no problem with VS conspiracy theories, link: http://www.nakedcapitalism.com/2009/11/goldmanaig-conspiracy-theories-theres-a-reason-they-wont-go-away.html.

.
"Insurer [AIG] closed two transactions with the Federal Reserve Bank of New York [NYFed] that will reduce its debt to the government by $25 billion and position the two units for spinoff or sale. AIG said its outstanding debt with the [NYFed] now stands at $127 billion, down from $42 billion, excluding interest and fees. ... The moves will result in an fourth-quarter charge of $5.7 billion, on top of $11.7 billion in write-downs already recognized, AIG said", WSJ, 2 December 2009: http://online.wsj.com/article/SB10001424052748704107104574569250847894362.html.

The WSJ has this down. Maiden Lane III is a Fed vehicle on its financials. Did Deloitte & Touche (D&T), which audited the Fed know these things as of 20 April 2009? Did D&T do anything at the Fed aside from some bookeeping? What did PriceWaterhouseCoopers which "audited" AIG and GSG know and when did it know it?

I presume VS realized the monolines could never pay off. Here's a link to my 30 October 2007 post: http://skepticaltexascpa.blogspot.com/2007/10/business-i-never-understood.html. I keep coming back to the Big 87654. How good are these firms if they did not understand the monolines were Ponzi schemes? Here's a link to my 13 December 2007 post: http://skepticaltexascpa.blogspot.com/2007/12/business-i-never-understood-7.html.

Will Zimbabwe Ben record a loss in the Fed's financials from this?

America's Dumbest Judge

"Ten years after launching a hostile takeover of US copper refiner Asarco LLC and four years after forcing it into Chapter 11 bankrupcty, Mexican billionaire German Larrea Mota-Velasco finally has what he wanted: control of the copper giant free from the threat of environmental and asbestos litigation", Joel Millman & David McLaughlin at the WSJ, 16 November 2009, link: http://online.wsj.com/article/SB10001424052748704538404574537914137572236.html.

This ruling is farcical. See my 16 July 2008 post: http://skepticaltexascpa.blogspot.com/2008/07/asarco-followup-4.html. What does Judge Andrew Hanen not understand?

Vampire Squid Wins Again

"The [Fed] of New York [NYFed] gave up much of its power in high-pressure negotiations with the American International Group's [AIG] trading partners last year, according to a government report made public on Monday. Just two days before the [NYFed] paid AIG's partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut--but it never got the chance. ... But UBS's good-faith gesture was quickly drowned out by Goldman Sachs [GSG] and the top French bank regulator. They argued, with others, that it would be improper and perhaps even criminal to force AIG's trading partners to bear losses outside of bankruptcy court. The banks and the regulator were confident that the [NYFed] was not willing to push AIG into bankruptcy, because earlier in the fall the [NYFed] had stepped in with $85 billion to prop up the insurer. ... The Fed 'refused to use its considerable leverage,' Neil M. Barofsky, the special inspector general for the [TARP], wrote in a report to be officially released on Tuesday, examining the much-criticized decision to make AIG's trading partners whole when people and businesses were taking painful losses in the financial markets. There have been suggestions that the Fed chose to negotiate weakly, Mr. Barofsky said, to give a 'backdoor bailout' to AIG's banks. He said Mr. Geithner and the Fed's lawyers had denied this, but added that 'irrespective of their stated intent,' there was no doubt about the result: 'Tens of billions of government money was funnelled inexorably and directly to AIG's counterparties.' ... Mr. Barofsky said that Goldman's hedges were unlikely to have held up amid the market turbulence of late last year. ... A spokesman for Goldman ... said any additional exposure to AIG's losses was a moot point, because the Fed's intervention had eliminated the risk", my emphasis, Mary Walsh at the NYT, 17 November 2009, link: http://www.nytimes.com/2009/11/17/business/17aig.html.

"The [NYFed] caved in to demands by [AIG's] trading partners that they be paid in full for complex securities they had insured with the company, saving soem of the world's biggest banks from billions in losses, according to a government audit. ... The banks that were paid off in full included [GSG]. Merrill Lynch and large French banks Societie Generale and Calyon, the investment bank unit of Credit Agricole Group, which were represented by the French bank regulator in negotiations with the [NYFed] last November, the report said. ... The audit provides a window into a bailout effort that has been shrouded by a lack of disclosure--raised in the report--and questions over why the US government in effect funneled tens of billions of dollars to the US and European banks that were AIG's trading partners", my emphasis, Serena Ng & Carrick Mollenkamp at the WSJ, 17 November 2009, link: http://online.wsj.com/article/SB10001424052748704431804574540290325376348.html.

"For more than a year, [GSG] has maintained that it wouldn't have suffered material losses had the government allowed one of its major trading partners, [AIG] to collapse. ... A revamped rescue package in November led to Goldman and 15 other banks being paid in full for $62 billion worth of insurance contracts they had with AIG to protect against losses tied to mortgage assets. ... The government auditor's report broadly fouind that the [NYFed] left itself little room in nogotiating with the banks for a better deal for taxpayers. ... In a separate series of trades, Goldman had sold protection against losses on the same assets to other trading firms. ... Goldman has said it was insulated against a material loss by an AIG default. And the audit pointed our that Goldman in fact was protected against some losses. For example, the firm had collected $8.4 billion worth of collateral--cash or a liquid equivalent--from AIG on a $13.9 billion portion of its bets. Separately, Goldman took steps to try and buy insurance against insurance by purchasing protection against an AIG default. ... The audit said, however, that given the fact that the market for those securities had tanked in November 2008, and then an AIG default would have sparked a rout, Goldman would have had a difficult time obtaining value for those assets. ... The bottom line: The audit said those assets that Goldman held would have been worth a lot less had AIG defaulted. ... The audit also raised questions about the insulation Goldman had purchased against an AIG default", my emphasis, Carrick Mollenkamp and Serena Ng at the WSJ, 18 November 2009, link: http://online.wsj.com/article/SB10001424052748504538404574542192562568738.html.

"Finally, Mr. Barofsky pokes holes in arguments made repeatedly over the past 14 months by [GSG], AIG's largest trading partner and recipient of $12.9 billion in taxpayer money in the bailiut, that it had facced no material risk in an AIG default--that, in effect, had AIG cratered, [GSG] wouldn't have suffered damage. ... As Goldman prepares to pay out nearly $17 billion in bonuses to its employees in one of its most profitable years ever, it is important that an authoritative, independent voice like Mr. Barofsky's reminds us how the taxpayer bailout of AIG benefited Goldman. ... Regarding his firm's own dealings with AIG, Mr. [Lucas] van Praag said that Goldman believed that its 'exposure was close to zero; because it insulated itself from a downturn in AIG's fortunes through hedges and collateral it had already received. ... So is Janet Tavakoli, an expert in derivatives at Tavakoli Structured Finance, a consulting firm. 'On Sept. 16, 2008, David Viniar, [GSG's] chief financial officer, said that whatever the outcome at AIG, the direct impact of Goldman's credit exposure would be immaterial,' she said. 'That was false. The report states that if the [NYFed] had negotiated concessions Goldman would have suffered a loss.' ... 'The prices of the collateralized debt obligations against which Goldman bought protection from AIG were in sickening free fall, and the cost of replacing AIG's protection would have been sky-high,' she said. 'Goldman must have known this, because it underwrote some of those value-destroying CDO's.' Ms. Tavakoli argues that [GSG] should refund the money it received in the bailout and take back the toxic CDO's now residing on the Fed's books--and to do so before it begins showering bonuses on its taxpayer-protected employees. 'AIG, a sophisticated investor, foolishly took this risk,' she said. 'But the US taxpayer never agreed to be a victim of investment that should undergo a rigorous audit'," my emphasis, Gretchen Morgenson at the NYT, 22 November 2009, link: http://www.nytimes.com/2009/11/22/business/22gret.html.

The NYFed didn't play "chicken" with Vampire Squid (VS). The correct response was to have VS's executives "shadowed" by FBI agents 24 hours a day. Like what happened to Joe Jett in 1994. I'm sure even Lloyd Antoinette Blankfein would realize if VS had pressed any claims, he would be indicted for something. As Laverntiy Beria said, "Show me the man, and I'll find you the crime", my 16 October 2009 post: http://skepticaltexascpa.blogspot.com/2009/10/which-mob-3.html. Well Mary Schapiro, read this and compare it to VS's claim it was fully hedged and had no AIG exposure. If true, it's because Timmy Boy put $85 billion into AIG. I think Barofksy is close to the truth here. "Improper and criminal"? Fine, VS, The NYFed should have said, "We will put out a press release 9:00 AM tomorrow with your statement. You have until 8:59 AM tomorrow to retract it. What do you want"? Even VS's attorneys could figure out what that meant. Suggestions? Read my 12 and 13 May 6 September 2009 posts: Hey Preet Bharara(PB), can you indict David Viniar (DV) for securities fraud based on his public pronouncements? Look into it. Boy. Or are you on VS's payroll? Here are some of my prior related posts:

http://skepticaltexascpa.blogspot.com/2009/05/goldman-aig-and-18-usc-152.html.
http://skepticaltexascpa.blogspot.com/2009/05/pricewatergates-waterloo.html.

http://skepticaltexascpa.blogspot.com/2009/09/goldman-speaks.html.

Why? To bail out VS, that's why.

VS had no exposure to an AIG bankruptcy. We know so because VS said it. I doubt VS could have kept the $8.4 billion in collateral it supposedly got. Was AIG then insolvent? Should AIG's "bankruptcy trustee" grab it as a preference payment? PriceWaterhouseCoopers (PWC), was AIG insolvent? You "audited" AIG and VS. Well? In 2008 AIG paid PWC $120 million, VS paid PWC $62 million. For $182 million, what did you do? Hey, VS audit committee, sight unseen, I can do a better audit than PWC. Here's my fee: only $50 million. Well? Of course, I might look DV in the eye and tell him VS will get an adverse opinion based on its supposed "hedge accounting", but I will be thorough. And I will not be intimidated.

VS believed this? It was wrong or lied. PWC, did you find this? What's wrong with VS's internal controls? PWC declared them Kosher for Passover on 22 January 2009. Well, Mary Schapiro, what will you do about this? Beat up some micro cap registrants to show us your brass cojones? Hey PB, Tavakoli (I love her) appears to allege the elements of a securities fraud count. What will you do about this?

Kosher Krime

"Federal prosecutors Wednesday accused a former manager of defunct meatpacker Agriprocessors Inc. [AI] of cheating a bank, laundering money and destroying evidence during opening arguments [in Sioux Falls, SD]. ... Mr. [Sholom] Rubashkin's lead defense attorney, Guy Cook called Mr. Rubashkin an 'honest family man' who was in over his head in a complex business. Mr. Rubashkin, a Hasidic Jew, was trained as a rabbi, not as a businessman, he said, and any 'sloppy' business practices that might have occurred don't amount to crimes. ... Assistant US Attorney Charles J. Williams said in court that Mr. Rubashkin 'repeatedly lied' to his lender about his company's financial health and 'reassured the bank that [AI] was in full compliance with the law.' ... But [AI] filed for Chapter 11 bankruptcy protection in November 2008, leaving the US with a temporary shortage of kosher meat. The company was recently sold to SHF Industries. Specifically, the government says Mr. Rubashkin engineered a scheme that illegally diverted millions of dollars in customer payments away from First Bank Business Capital Inc., a subsidiary of St. Louis-based First Bank, which had issued him a $35 million revolving line of credit", Lauren Etter at the WSJ, 15 October 2009, link: http://online.wsj.com/article/SB125552995951084931.html.

This case always disturbed me because the press made it into an immigration case. Now we see the immigration angle was tangential to the bank fraud.

Citigroup's Fraudulent Loans

"A judge ruled that loans made to Tousa Inc. ahead of the home builder's bankruptcy filing were 'fraudulent transfers,' ordering lenders to turn over more than $600 million. ... The 'disastrous business venture,' Judge [John] Olson wrote, spurred Tousa to borrow $500 million from Citigroup Inc. and others in July 2007, just six months before Tousa filed for Chapter 11. ... In bankruptcy proceedings, a judge can find certain debt deals to be fraudulent transfers if a company was insolvent when taking on new liabilities. Such deals can also be deemed fraudulent if they leave a company with insufficient capital to pay debts when they come due. After a 13-day trail in August, Judge Olson ruled that Tousa's relevant subsidiaries were insolvent at the time they took on the new debt. The judge also noted that the transaction made Tousa 'even less solvent.' The judge also concluded that Tousa's senior lenders 'did not act in good faith' and were 'grossly negligent.' Tousa executives and lenders pressed forward with the deal in part to reap bonuses and fees, the judge wrote in Tuesday's ruling. The judge also faulted Alix-Partners LLP, a turnaround firm hired by Tousa to give a solvency opinion, noting it stood to get $2 million in fees by delivering a favorable analysis", Mike Spector at the WSJ, 15 October 2009, link: http://online.wsj.com/article/SB125555159224285641.html.

Good Judge Olson. It's nice to see Citigroup kicked in the keesta. These loans do not surprise me. What's surprising is how rarely they are exposed.

Question Conventional Wisdom

"Conventional question: Did the government's quick intervention on Wall Street last year save us from another Great Depression? Alternative question, one that I prefer: Did government intervention make matters worse? ... Next, consider the view that the crisis was prolonged by a misdiagnosis that led to more interventions. When the crisis first flared up, government officials argued that high interest rates in the money markets were due to a shortage of liquidity rather than to risk on the banks' balance sheets. ... Now, with the recent one-year anniversary of the Lehman bankruptcy, people are discussing why the financial crisis worsened so much in the panic last fall. Many still say that the big government mistake was not stopping the failure of Lehman. I do not think the evidence supports that view. Of course the losses for Lehman's creditors and the run on certain money market funds were a jolt to the market. But far worse was the chaotic intervention by the government in the following weeks, including the Treasury Deparment's not vey credible description of how it would remove toxic assets from the banks' balance sheets, the huge amount of money it asked for with only two and a half pages of legislation and the scare stories it let loose about another Great Depression if the legislation was not passed. ... The government interventions during this time of panic were part of a pattern of ad hoc responses starting with the Bear Stearns bailout. No guidance was given following Bear Stearns about the circumstances under which another firm, such as Lehman, would be rescued", my emphasis, John Taylor (JT) at Forbes, 2 November 2009.

I agree with JT, a Stanford economics professor. Uncle Sam made things worse. Remember MLEC in its various incarnations, see my 22 December 2007 post: http://skepticaltexascpa.blogspot.com/2007/12/mlec-rip.html.

Asarco Followup-7

"Grupo Mexico SAB [GMSA] hit a hurdle in its plans to regain control of US subsidiary Asarco LLC as US bankruptcy jduge Andrew S. Hanen indicated he will consider a broad array of issues before ruling in the case. ... The judge also has been asked to consider the Mexican copper miner's past performance as an owner of Asarco, which is based in Tucson, Ariz. ... Judge Hanen last year found [GMSA] guility of defrauding creditors by diverting rich copper assets Asarco owned in Peru to a different [GMSA] unit. [GMSA] has appealed the verdict. ... But Judge Hanen allowed Sterlite to argue for its amended bid. And he said he would consider the union's objections to [GMSA]. 'I actually ordered their representative to be here,' he said. ... [GMSA] since has been accused of looting Asarco and forcing Asarco into bankruptcy, making it difficult for parties alleging environmental damage to get company funds for cleaning up dozens of contaminated sites across the West", Joel Millman at the WSJ, 20 October 2009, link: http://online.wsj.com/article/SB10001424052748703816204574483490034605488.html.

I say again, GMSA should get nothing from this. A few of its officers should be sent to prison for bankruptcy fraud. That is not likely to happen.