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.

Magic Words

"The term 'social justice' is now commonly used by leftist activists, clergy, educators, judges, and politicians to describe the goal they seek to achieve with many of their polcies. No precise definition of 'social justice' is ever offered by the left. Instead, the term is always used in a vague way--as if everyone already knows, or should know, what the seemingly well-intentioned phrase 'social justice' means. ... In short, social justice is communism. ... 'Justice,' in the Marxist context, means economic equality. This is Marxist utopian ideal that all members of society should receive the same amount of compensation, regardless or occupation, skill, or work ethic", Jayme Sellards at American Thinker, 16 May 2010, link:

http://www.americanthinker.com/2010/05/what_exactly_is_social_justice.html.

"You might think that being a Supreme Court justice would be the top of the line job for someone in the legal profession. But, many Supreme Court decisions suggest that too many justices are not satisfied with their role, and seek more sweeping powers as supreme policy-makers, grand second-guessers or philosopher-kings. ... The role of an appellate court is not to simply second-guess the decision of the trial judge and jury, much less usurp the responsibility of legislatures to make social policy. But the pretense of applying the Constitution gives appellate judges the power to do both. ... If justices can pick and choose which legal principles and practices they will follow, from the many widely varying principles and practices in countries around the world, then they can find a basis for doing just about anything they feel like doing. ... Once appellate judges are free to base their rulings on what people do in India, Egypt or Germany, Americans are no longer a self-governing people", Thomas Sowell at Frontpage Magazine, 24 May 2010, link: http://frontpagemag.com/2010/05/24/judicial-power-grabs/

"Ever wonder why most of your credit-card mail comes from South Dakota? The answer is a 1978 Supreme Court decision called Marquette National Bank on Minneapolis v. First of Omaha Service Corp. ... The Court ruled that it referred to the location of the bank. ... What happened next was predicatble enough: Citibank offered to move to South Dakota, bringing much-needed jobs and tax revenue, if the state would let it write new credit-card regulation. ... If the Supreme Court had interpreted one word differently, credit-card regulation in this country would be entirely different. ... Bruce Ackerman, a legal scholar at Yale ... [said] 'For sure ... the status of undocumented aliens is going to me mcuh more salient in Americna law. We're going to have 10 [million] or 15 million people or more who'll find themselves in a position increasingly like black people in 1954. That will be a terribly serious issue, and the court will have to decide how to respond.' ... 'What happens when promised benefits are cut back dramatically?' he asked. 'Will the court protect the weak, or not?'," my emphasis, Ezra Klein at Newsweek, 24 May 2010, link: http://www.newsweek.com//id/238075. This reminds me of my meeting Al Sharpton in 1966 or 1967, my 5 March 2009 post: http://skepticaltexascpa.blogspot.com/2009/03/eric-holder-deceiver.html.

Many times I've said the Supremes do whatever they want and justifiy it later. I await Justice Ginsburg's using Saudi Arabian law as precedent. Will she say it is neither cruel nor unusual to cut off a thief's hand?

Aren't you impressed by Ackerman's reasoning? Negroes in 1954 were American Citizens. The 14th Amendment was created to ensure they were citizens. How dare you claim the same rights for illegal aliens? See, we are all legal scholars now. Why will the Supremes have to decide anything with respect to illegal aliens? What happens when taxes are increased? Will the court protect the solvent, or not? Aren't you impressed with legal reasoning? Wait, there is an answer! Have the Supremes decide no person need pay anything to support illegal aliens. Based on what? Extending the reach of the Third Amendment. Why should American citizens "quarter" members of the Aztlan Army?

Some Assets?

"No one likes taxes, and investors always should be wary of assets based on them. ... Deferred-tax assets and liabilities arise because of differences in tax accounting, which is based on cash payments, and accounting for financial-reporting purposes, which assigns revenue and expenses to the period in which they occur. ... Citigroup ... reported $46 billion in deferred-tax assets at the end of 2009, triple the level of two years earlier, a result of huge losses. The bank steadfastly has maintained there isn't doubt over its ability to use these assets, basing this on expectations of being able to return to profitability", David Reilly at the WSJ, 10 April 2010, link:

http://online.wsj.com/article/SB10001424052702304222504575174071159514594.html.

I wish Citigroup and its CPAs, KPMG, good luck. I last commented on Citi's deferred-tax assets on 16 March 2009: http://skepticaltexascpa.blogspot.com/2009/03/peter-wallison-advocate.html.

TBTF?-4

"There is no US government guarantee to protect the largest financial firms, a Treasury Department official said, as a congressional watchdog criticized the $45 billion in government aid provided to Citigroup Inc. ... 'There is no "too-big-too-fail" guarantee on the part of the US government,' Mr. [Herbert] Allison said. ... 'The market clearly perceives that there is a too-big-too-fail guarantee,' Ms. [Elizabeth] Warren said. 'That gives Citi an advantage in raising capital. ... That is very valuable to Citi.' ... 'I do not understand why it is that the [US] government cannot admit what everyone in the world knows, which is that in that week that Citigroup was a failing institution,' Mr. [Damon] Silvers said. Citigroup Chief Executive Vikram Pandit, also appearing before the panel, said the bank owes a 'large debt of gratitude' to taxpayers for aiding the firm", Michael Crittenden and Matthias Rieker at the WSJ, 5 March 2010, link:

http://online.wsj.com/article/SB10001424052748704187204575101511215418730.html.

This is a joke. Can't Uncle Sam ever stop lying? Citigroup should be closed.

Pravda on Vampire Squid

"I am a capitalist pig, and proud of it, thus you would not expect me to support government interference and more strenuous regulation of financial institutions--after all, capitalism (free markets) and tight regulation don't mix well. Well, at the risk of being kicked out of the Capitalist Pig Party, I am in support of tighter regulation of too-big-to-fail (TBTF) institutions--the likes of Citigroup, JPMorgan, Bank of America and (God forbid, after all, they are doing 'God's work' their CEO's words, not mine) Goldman Sachs. Lack of tight regulation in the TBTF space leads to the worst economic system of all: asymmetric socialism. The enormous gains are reaped by employees and shareholders, but losses are socialized and paid by taxpayers. That is simply immoral. Letting companies fail is at the core of capitalism's DNA, and I still stand by that", Vitaliy Katsenelson at Pravda, 30 January 2010, link:

http://english.pravda.ru/opinion/columnists/111922-capitalism-0.

More right-wing opinion from Pravda. Who would have believed this 20 years ago?

Debt Bomb

"Kyle Bass has bet the house against Japan--his own house, that it. ... 'Japan is the most asymmetric opportunity I have ever seen,' he says, 'way better than subprime.' ... If 2008 was the year of the subprime meltdown, 2010, he thinks, will be the year entire nations start going broke. ... National governments will issue an estimated $4.5 trillion in debt this year, almost triple the average for mature economies over the preceeding five years. ... Whether or not you believe the spending spree was morally justified, you have to be concerned about the prospect of a dismal, debt-burdened fiscal future. More debt weighs heavily on GDP, says Carmen Reinhart, a University of Maryland economist. ... America is a nation of spendthrifts, addicted to easy credit and dependent on the kindnesss of savers overseas to keep us comfortable. ... The personal savings rate has climbed from negative 0.4% in 2006 to a positive 4.5% rate now, but that it still a pathetic figure for a nation whose government is un-saving all that and more with its budget deficit. ... If the GDP doesn't expand at 'normal' rates of 3% to 5% coming out of this recession, wrestling down the debt will be very tough, indeed--perhaps impossible without drastic cuts in spending and higher taxes of many fronts. ... US corporate tax receipts were down 55% in the year ended Sept. 30, 2009 to $138 billion. ... If Congress and the Obama Administration don't trim spending [Benn Steil] says, 'we will get to the point where credit is much more expensive in the US than it has been in the past.' ... 'US states are like emerging markets,' says Reinhart. 'They spent a lot during the boom years and then were forced to retrench during the down years.' ... But Brian Coulton, head of global economics at Fitch Ratings in London, warns that once rock-solid economies like the US and UK could join shakier nations like Japan and Ireland in losing their AAA ratings if they don't get their bad habits under control. ... Most investors seem to believe, as the late Citibank chairman Walter Wriston put it, that 'countries don't go bust.' The opposite is true. ... Even if countries don't stiff creditors outright, they can sometimes accomplish the same thing through inflation", Daniel Fisher at Forbes, 8 February 2010, link:

http://www.forbes.com/forbes/2010/0208/debt-recession-worldwide-finances-global-debt-bomb.html.

"In 2009 investors were warned about bubbles: a bubble in Treasuries, a gold bubble, and, finally, warnings of a rapidly expanding bond mutual fund bubble forming. It's brought to us by the [Fed's] 0% interest rate policy. Whether the flood into bond funds of all types was an intended consequence or not, it's now a flood that could go just as quickly the other way. ... There is a lot of unsophisticated money in bonds now, and I'm not sure investors understand how miserable things can get when the low interest rate party ends", Marilyn Cohen at Forbes, 8 February 2010: http://www.forbes.com/forbes/2010/0208/finances-junk-bonds-yield-interest-capital-markets.html.

If you have any type of bonds, no matter in what currency, sell! As for Walter Wriston, see my 30 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/book-review-walter-wristons-bits-bytes.html.

I agree, the bond market is a disaster waiting to happen.

Citigroup's Aleynikov

"The [FBI] is probing a computer-security breach targeting Citigroup Inc. that resulted in a theft of tens of millions of dollars by computer hackers who appear linked to a Russian cyber gang, according to government officials. ... It couldn't be learned whether the thieves gained access to Citibank's systems directly or through third parties. ... The attack underscores the blurring of lines between criminal and national-security threats in cyber space. Hackers also assaulted two other entities, at least one of them a US government agency, said people familiar with the attack on Citibank. ... The FBI and the National Security Agency, along with the Department of Homeland Security and Citigroup, swapped information to counter the attack, according to a person familiar with the case. Press offices of the federal agencies declined to comment. Citigroup said, 'Allegations of a breach of Citi systems and associated losses are false.' ... Losses to online crime of all types exceeded $260 million in the US last year, the FBI estimates. Attacks on corporations are 'at an epidemic level,' former White House cyber-security director Melissa Hathaway said recently. US banks have generally been loath to disclose computer attacks for fear of scaring off customers", my emphasis, Siobhan Gorman & Evan Perez at the WSJ, 22 December 2009, link:

http://online.wsj.com/article/SB126145280820801177.html.

Absent national security implications, I would tell the FBI drop this case. $260 million in annual losses is peanuts. Vampire Squid (VS) got $13 billion from the AIG bailout, 50 times the annual cybercrime total. I note the FBI jumped on this. Well FBI, how many people have you investigating the AIG-VS fiasco? If Citigroup denied the breach and lied about it, will Preet Bharara indict anyone for securities fraud? Will KPMG find Citigroup committed an illegal act? Will Dudley Doo-Right save Nell Fenwick? Isn't it nice to see how concerned the Feds are about attacks on corporations? The DOJ's case selection is designed to further DOJ employees' careers. Never forget it. Where's the SEC? What's this "loath to disclose" nonsense?

SEC Waivers

"Forget too big to fail. In the eyes of federal regulators, many Wall Street firms are too big to punish. ... Despite these findings, these financial giants got, sometimes repeatedly, special exemptions from the [SEC] that have saved them from a regulatory death penalty that could have decimated their lucrative mutual fund business. ... However, on Friday, the SEC said it has expanded its probe of Bank of America to include the bank's possible failure to disclose mounting losses at Merrill Lynch. ... While the companies were punished in other ways, they were spared from what some claimed would be 'severe and irreparable hardships.' In fact, the last time the SEC's staff could recall a waiver being turned down was 1978. The SEC, however, declined to comment in detail in its decisions. ... The Goverment Accountability Office, Congress' investigative arm, reported this year that SEC enforcement workers have felt overwhelmed by their caseloads and undermined by SEC leaders hesitant to levy heavy punishment. ... Securities experts think companies wouldn't apply for waivers if they didn't think their applications would be granted. At the same time, the fact that the SEC could someday deny one is a major weapon in its arsenal, experts said. ... In 2003, Citigroup settled a case after the SEC accused it of manipulating stock research. The settlement 'permanently restrained and enjoined' Citigroup from violating a specific section of federal securities laws. Then in 2006, Citigroup and other companies were cited for improperly marketing 'auction rate securities,' bonds issued by municipalities, student loan entities and corporations. The SEC censured Citigroup and fined it $1.5 million", Chris Adams at the Houston Chronicle, 14 December 2009, link: http://www.chron.com/disp/story.mpl/headline/biz/6768581.html.

$1.5 million for Citigroup and Craig Gile goes to prison, my 25 June 2008 post: http://skepticaltexascpa.blogspot.com/2008/06/citigroups-joe-jett.html. The SEC and SDNY US attorney's office are sick jokes. Some threat, that a waiver might be denied.

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: http://www.prudentbear.com/index.php/component/content/article/33-BearLair/10311.

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

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: http://skepticaltexascpa.blogspot.com/2009/12/big-87654-firm-angles.html. 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: http://skepticaltexascpa.blogspot.com/2009/11/aig-sequel.html. 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: http://skepticaltexascpa.blogspot.com/2008/10/fair-value-accounting.html. 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: http://www.newsweek.com/id/224596. 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: http://www.financialsense.com/fsu/editorials/willie/2009/1215.html. 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: http://www.nakedcapitalism.com/2009/12/guest-post-the-feds-independence-argument-is-false.html. 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.

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.

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: http://online.wsj.com/article/SB10001424052748703735004574573443614069228.html.

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: http://skepticaltexascpa.blogspot.com/2009/09/how-many-divisions-has-goldman.html. 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.

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: http://online.wsj.com/article/SB10001424052748703819904574554223793153390.html.

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.

Citigroup's Death Rattle

"Over the past 80 years, the [US] government has engineered not one, not two, not three, but at least four rescues of the institution now known as Citigroup. In previous instances, the bank came back from the crisis and prospered. ... Chris Whalen, editor of the Institutional Risk Analyst, calls Citigroup 'the queen of the zombie dance,' referring to the group of financial institutions that the government has on life support. 'They are hoping that a combination of bank assistance and maximizing revenue and buying time will let them survive,' he said. 'When I look at the whole picture, Citigroup is in the process of resolution. I continue to believe the equity is worth zero and that the company will have to go to the bondholders for some kind of money to make the bank stable.' ... 'Our distinctiveness is we connect the world better than anyone else,' [Vikram Pandit] said, noting Citigroup's global reach. ... "it's very hard to change perceptions in the market place,' he said. 'We are not a troubled bank. We have a lot of assistance from the government. We can't fight that.' ... One ugly class of securities continues to haunt the bank: collateralized debt obligations, or CDOs. ... The suit contends that by late 2006, Citigroup's CDO operations 'had devolved into a Ponzi scheme where unsold portions of older CDO securitizations were recycled as the asset base for new CDO securitizations.' Furthermore, the lawsuit saysm Citigroup executives engaged in various accounting gimmicks to conceal the bank's ownership of assets that eventually soured", Andrew Martin & Gretchen Morgenson at the NYT, 1 November 2009: http://www.nytimes.com/2009/11/01/business/economy/01citi.html.

I agree with one thing VP said, Citigroup is not a "troubled bank". It is the "troubled bank". See my 15 December 2007 post about SIVs: http://skepticaltexascpa.blogspot.com/2007/12/citigroup-comes-clean.html. Imagine Citigroup paid $800 million to buy VP's "team", my 7 January 2009 post: http://skepticaltexascpa.blogspot.com/2009/01/citis-800-million-man-2.html.

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.

Incentives Still Count

"In the annals of what used to be known as American capitalism, yesterday will go down as a sorry day: The Treasury and [Fed] announced wage controls on private American companies. So once again our politicians are blaming bankers, rather than addressing the incentives the politicians themselves created for bankers to take excessive risks. ... We certainly have no sympathy for bankers who've been bailed out, and the most defensible of yesterday's pay curbs are those announced by Treasury's 'pay czar' Ken Feinberg. ... Those companies--and executives--owe their survival to political intervention, and the price of such taxpayer help is inevitably some populist retribution. ... But the danger is that these pay limits will drive the most talented people at these firms to other companies without such onerous pay limits. ... The irony is that judgment about what constitutes 'excessive risk' at banks will presumably be made by the same Fed regulators who let Citigroup put hundreds of billions in SIVs off its balance sheet. That certainly looks 'excessive' now, though apparently it didn't amid the credit mania. The point is that Fed officials aren't likely to have a clue what kinds of risks warrant tighter compensation rules. And these new guidelines may also drive the best and the brightest out of the banks and into less regulated institutions", my emphasis, WSJ Editorial, 23 October 2009, link: http://online.wsj.com/article/SB10001424052748704224004574489263857516126.html.

"Tis a consummation devoutly to be wished", Hamlet 3:1:6, that the "best and the brighertst" are driven from our banks. Regulated institutions don't need them. Feinberg may be smarter than I think. Driving the "best and the brightest" from the banks may be in Yves Smith's parlance, "A feature, not a bug", a backdoor to a new "Glass-Steagall". The WSJ does not take the Big 87654 and SEC to task here. Isn't Citigroup an SEC registrant? What does the SEC look at? Isn't Citigroup "audited" by KPMG, whatever that means? Isn't KPMG "reviewed" by the PCAOB, whatever that means? Regulation is the cover up of the cover up. No one blows the whistle. Why? Feinberg applied pay controls to seven companies after "Vampire Squid" repaid its TARP money. Hmm. How about this Feinberg: prevent any bank holding federally insured deposits from lending to a TARP recipient?

Parsons of Citigroup

"The eminent Richard Parsons, former chairman of Time Warner (the parent of Fortune's publisher), is chairman of the board of directors of Citigroup, the immense, troubled financial entity. As such, he owes an unequivocal, clear-cut fiduciary duty to Citi's shareholders. This duty means, among other things, that Parsons must put the interests of Citi's shareholders ahead of his own or anyone else's. He must avoid any conflict of interest in any situation involving Citi. ... One of Citi's millions of clients is a large private equity firm called Providence Equity Partners. ... Citi is involved as principal and/or lender in many private equity transactions with many other private equity firms, to which it owes, at the minimum, a duty of good faith and fair dealing. Now get this: It was announced last month that Parsons will-simultaneously with his being chairman of Citi--serve as a senior adviser to Providence. He will be paid by Providence, and if normal private equity practice governs, he could get a bonus depending on how much money Providence makes. That means Parsons will be chair of a huge lender to Providence and will at the same time be an employee of Providence. How can this be allowed--how it cannot be a severe conflict of interest--is impossible to understand. ... Yet how can any official of Citi possibly go against a deal in which his boss is involved? ... Maybe I'm wrong. Parsons clearly does not see a problem. It is a bit stunning that Citi's lawyers do not see one", Ben Stein at Fortune, 26 October 2009.

Citi's lawyers either: stink or are afraid to speak "truth to power" and refuse to admit Citi's emporer "has no clothes". What has Sarbox to say about this? Did Citi officially change its' name to "The Immense, Troubled Financial Entity"? If not, it should.

Dog Bites Man!

"An outside review of Citigroup Inc.'s management team has concluded that it is generally in good shape but that some shuffling of senior executives might be needed, according to people familiar with the matter. The review, conducted this summer for Citigroup's board by recruiting and consulting firm Egon Zehnder International [EZI],was triggered by the government's stress tests of top banks last spring. ... The [FDIC], which has had concerns about the qualifications of Chief Executive Vikram Pandit [VP] and his top management team, required Citigroup to hire an outside firm to perform the review. In a sign of the sensitivity about the report inside the company, the document hasn't been circulated in electronic form and is printed on paper that can't be photocopied. ... The report provided less-favorable assessments of at least two of Mr. Pandit's lieutenants, Vice Chairman Lewis Kaden and Chief Adminstrative Office Don Callahan, the people said. ... Citigroup's board met Tuesday morning to start discussing the findings and how to respond to them. ... The company has to inform regulators this month about [EZI's] findings and how the board is responding to them, these people said. The FDIC is likely to treat the management review as one factor in a broad assessment of Citigroup's financial health. ... The report's encouraging tone is a departure from the frustration that some analysts, investors and Citigroup executives have expressed about Mr. Pandit's leadership since he became CEO is December 2007. Among the complaints is that Mr. Pandit relies too much on a small cadre of advisers, according to people familar with the matter", David Enrich and Joann Lublin at the WSJ, 8 October 2009, link: http://online.wsj.com/article/SB125493943292571139.html.

"The [FDIC] is questioning the generally positive conclusions in a government-mandated review of Citigroup's top management, according to people familar with the situation. Some officials at the agency have expressed doubts about the rigor of the report, which was based partly on interviews with Citigroup executives who were asked to rate the effectiveness of their colleagues, these people said. ... The review was completed last week, and Citigroup's board began discussing this week whether to make any management changes in response to the report. The FDIC began sifting through the findings this week. ... FDIC officials vetoed a consulting firm that the bank had initially porposed for the job. After vetoing the consulting firm favored by Citi, FDIC officials sent Citi 'a list of approved firms acceptable to them,' and one was [EZI], one informed individual said. ... One person close to the agency described the outside report as 'a total whitewashing.' Some agency officials also are having second thoughts about the qualifications of [EZI], which largely runs executive searches for clients", my emphasis, David Enrich & Randall Smith at the WSJ, 9 October 2009, link: http://online.wsj.com/article/SB125504371565574655.html.

Another orchestrated farce like the stress tests. Man bites dog is news, that Citigroup's hired guns find Pandit is doing a decent job should surprise no one. Will Citigroup file the report as an attachment to a Form 8-K? If not, why not?

What wrong with a whitewash? Did the FDIC scream about Zimbabwe Ben's stress tests? For the record, Citigroup never approached me to do the review.

Niall Ferguson on Wall Street

"Since its brith, the [US] has grappled with the problem of an over-mighty financial sector. With the exception of Alexander Hamilton, the Founders' vision was of a republic of self-reliant farmers and small-town tradesmen. The last thing they wanted was for New York to become the London of the New World--a mammon-worshipping metropolis in which financial capital and political capital were rolled into one. ... But now, barely a year after one of the worst crises in all financial history, we seem to have returned to the Gilded Age of the late 19th centruy--the last time bankers came close to ruling America. ... And what makes the losers in this crisis really mad is the fact that there's now one law for the small debtors and another one for big ones. If you lose your job and fall behind on your $1,500 monthly mortgage payment, no one's going to bail you out. But Citigroup can lose $27.7 billion (as it did last year) and count on the federal government to hand it $45 billion. ... Today it's the turn of Goldman Sachs to be likened to a 'great vampire squid.' To understand why, you need to go back 12 months. ... Despite much talk on both sides of the Atlantic of new financial regulation, the likelihood is that the most important flaw in our financial system will not be addressed. ... That flaw can be summed up in a single phrase: banks that are 'too big to fail.' Let's call them TBTFs. ... The TBTFs are able to pay crazy money because they reap all the rewards of risk-taking without the cost of going bust. ... What's needed is a serious application of antitrust law to the financial-services sector and a speedy end to institutions that are 'too big to fail.' ... Yet if the status quo persists, the danger of a populist backlash against both Wall Street and Washington will only grow. Such a backlash has more than one precedent in US history. ... TBTFs be warned. Old Hickory, where are you when we need you?", Niall Ferguson at Newsweek, 21 September 2009, link: http://www.newsweek.com/id/215178.

Amen. I would be honored to load our new Andrew Jackson's flintlocks.

What a Product!

"The investment opportunity that Hao fell for was all the rage at the peak of the stock market two years ago. The marks: often Chinese entrepreneurs and state-owned enterprises. The banks selling the investment: firms including Goldman Sachs [GSG], HSBC, Citigroup and UBS. ... Here's how it worked: You commit to accumulate large blocks of shares of a Hong Kong-listed stock every day for, say, 12 months at a discount to the share price when you sign uop. You could load up on lots of a $10 stock for just $8. Easy money. The catch is that an accumulator contract terminates if the stock goes up only 5% or so, but if the stock tanks, you have to keep buying it. What were banks like [GSG] and Citigroup doing selling this product? The banks won't comment, but their standard disclosure on derivatives is that they are risky products that can win big or lose big. ... But in a commentary this spring in the Chinese business publication Ciajing, finance lawyer Mushtaq Kapasi, a former [GSFG] specialist in exotic derivatives, described how banks structured accumulators to have a big edge over the customer, like a house over the bettor in a casino. Whatever exposure they had with the accumulator client they could hedge away with other derivatives, all but locking in a profit", my emphasis, Gady Epstein at Forbes, 21 September 2009.

This is another amazing product. About the only way the retail customer could make money from accumulators is if the stock in question stayed between 80% and 105% of the original price. If I were Lloyd Blankfein, I would not travel to Hong Kong.