Greece Today, America Tomorrow

"Are Europe and America headed to where Athens is today? ... Protected by the [US] through a half-century of Cold War, Europe cut back on defense and ratcheted up spending for La Dolce Vita. ... As the cradle-to-grave welfare states rose, an ever-increasing share of the labor force left the private sector for the security of the public sector. ... The fertility rate of Greece and every European nation fell below 2.1 births per woman needed to replace an existing population. Greece's birth rate has been below zero population growth for three decades. ... Were Greece a company, the solution would be bankruptcy. ... Because, should Greece decide not to take a chainsaw to her welfare state, but walk away from her debts and default, she would blow a hole in the balance sheets of the biggest banks in Europe. ... Rather than savage their welfare-state programs, and risk riots in the streets and a massacre at the polls, Madrid and Lisbon, too, might look ageeably at default. ... For how much longer will Greeks work longer, retire later and live on smaller pensions, so holders of Greek bonds can get their interest payments right on time? ... But the crisis will return. For the nations of Europe have made commitments beyond their capacity to keep, given their growing debts and aging population. ... And the unfunded liabilities of Social Security, Medicare and federal pensions rival those of Western Europe. States like California and New York, larger than Greece, look a lot like Greece. ... While the temptation is great for Washington to bail them out again, the [US] government itself has now begun to attract the concerned notice of holders of US debt", my emphasis, Pat Buchanan at World Net Daily, 6 May 2010, link:

http://www.worldnetdaily.com/index.php?pageId=150649.

"Crisis--from the Greek word 'Krisis'--is one of the many English words we owe to the ancient Athenians. Now their modern descendants and reminding us what it really means. ... So serious was the situation that it took a European version of the 2008 TARP bailout of US banks to save the euro. ... If fully implemented, it will be the mother of all bailouts--and one of the biggest admissions of error in modern financial history. The design of the European currency has been fatally flawed from the outset. It just took the Greek crisis to expose it. .... It would end forever the exchange-rate volatility that has bedeviled the continent since the breakdown of the Bretton Woods system of fixed exchange rates in the 1970s. ... A single European currency also seemed to offer a sweet deal. Countries with excessive public debt would get German-style low inflation and interest rates. And the Germans could quietly hope that the euro would be a little weaker than their own super-strong Deutsche mark. ... But the worst defect in the design of the Economic and Monetary Union (EMY), we argued, was that it united Europe's currecies but left its fiscal policies completely uncoordinated. ... The design of the EMU illustrates a profoundly important truth about human institutions. Just because you don't create a formal procedure for something you would rather not happen, that doesn't mean it won't happen. ... Problem solved? Unfortunately not. ... For one thing, it's simply not credible that the Greek government will be able to deliver the fiscal tightening it has promised at a time of deep recession. ... It will surely be at least a year before investors wake up to the fact that the fiscal predicament of the [US] is actually worse than that of the euro zone", Niall Ferguson at Newsweek, 24 May 2010, link:

http://www.newsweek.com/id/237645.

In about 1985 I remember reading a Fortune interview of Barton Biggs (BB). The substance of what BB said was, "The notion of 250 million South Americans slaving away in the hot sun to repay some New York banks does not comport with my notion of political reality". Well said BB Mine neither. Between now and 2017 I expect the "Venezuelanization" of most of Europe and the US. Got bonds? Sell while there's still time.

I disagree with NF. The Greek bailout did not save the euro. It saved banks holding Greek paper. It will kill the euro. There is nothing any European country could have done with respect to taxing and spending before the coming of the euro it couldn't do after. The euro was and is a "whole lotta nuttin". The euro was sold as a piece of financial engineering!

Multistate Debt Crisis

"California, New York and other states are showing many of the same signs of the debt overload that recently took Greece to the brink--budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay. And states are responding in sometimes desperate ways, raising concerns that they, too, could face a debt crisis. ... Connecticut has tried to issue its own accounting rules. Hawaii has inaugurated a four-day school week. California accelerated its corporate income tax this year, making companies pay 70 percent of their 2010 taxes by June 15. And many states have balanced their budgets with federal health care dollars that Congress has not yet appropriated. Some economists fear the states have a potentially bigger problem with their recession-induced budget woes. If investors become reluctant to buy the states' debt, the result could be a credit squeeze, not entirely different from the financial strains in Europe, where markets were reluctant to refinance billions in Greek debt. ... California's stated debt--the value of all of its bonds outstanding--looks manageable, at just 8 percent of its total economy, But California has big unstated debts, too. If the fair value of the shortfall in California's big pension fund in counted, for instance, the state's debt burden more than quadruples, to 37 percent of its economic output, according to one calculation. ... Unstated debts pose a bigger problem to states with smaller economies. ... State officials say a Greece-style financial crisis is a complete nonissue for them, and the bond markets so far seem to agree. All 50 states have investment-grade ratings, with California the lowest, and even California is still considered 'average,' according to Moody's Investors Service. The last state that defaulted on its bonds, Arkansas, did so during the Great Depression. ... Some states have taken even more forceful measures to build creditor confidence. New York State has a trustee that intercepts tax revenues and makes some bond payments before the state can get to the money. California has a 'continuous appropriation' for debt payments, so bondholders know they will get their interest even when the budget is hamstrung. ... In fact, New Jersey and other states have used a whole bagful of tricks and gimmicks to make their budgets look balanced and to push debts into the future. ... Some economists think the last straw for states and cities will be debt hidden in their pension obligations", my emphasis, Mary Walsh at the NYT, 30 March 2010: http://www.nytimes.com/2010/03/30/business/economy/30states.html.

Why shouldn't Connecticut have its own accounting rules? Doesn't Zimbabwe Ben? Who cares what state officals or the rating agencies say? NY's trustee does nothing for me. His existence is purely cosmetic. Do you still want to own muni bonds?

Two State Legislator Criminals

"The former assemblyman Anthony S. Seminerio, who prosecutors said took more than $1 million in payments from people and organizations doing business with the state, was sentenced to six years in prison before a federal judge in Manhattan on Thursday. ... Federal prosecutors said that from 1999 to 2008, he lobbied legislative colleagues and government officials on behalf of clients of a company he created called Marc Consultants. 'When you were elected, you were given a great privilege,' the judge, Naomi Reice Buchwald, said as Mr. Seminerio stared down at his clasped hands. 'You abused the trust placed in you.' ... Mr. Seminerio, 74, is among more than a dozen state lawmakers who have been forced to resign in recent years over ethical issues or have been convicted of crimes. ... A hearing in October to establish sentencing parameters included recordings of wiretapped conversations in which Mr. Seminerio talked with hospital executives, government officials and an undercover FBI agent, who paid $25,000 to Mr. Seminerio while posing as a developer looking for his help in securing tax credits and inserting language into legislation", Colin Moynihan at the NYT, 5 February 2010, link:

http://www.nytimes.com/2010/02/05/nyregion/05seminerio.html.

"State Rep. Terri Hodge provided a dramatic twist to the FBI's public corruption investigation Wednesday by agreeing to resign from the Texas House after pleading guility to failing to pay taxes on $74,000 in income, including more than $32,000 in bribes. Hodge, D-Dallas, also admitted that she never paid taxes on another $41,000, some of which was money she pilfered from her own campaign war chest for personal expenses. Neither prosecutors nor Hodge offered details. ... Hodge pleaded guilty to accepting money from prominent developers Brian and Cheryl Potashnik in the form of rent and utility payments. The Potashniks, both of whom have since pleaded guility to bribery, let her live in one of their affordable housing complexes for reduced rent and also bought her about $2,000 worth of carpet. ... 'People have to keep in mind that the role of the prosecutor is not to seek victory, but to seek justice,' said [John] Ratcliffe, now in private practice. The upside for the government is 'she's out of a position of public influence and trust, and she'll be held accountable for the rest of her life.' ... In pretrial filings, prosecutors alleged that Hodge 'received payments from families of Texas prison inmates oin return for her political support and assitance on proceedings affecting the inmate before the Texas Board of Pardons and Parole [BPP]'," Jason Trahan at the Dallas Morning News, 5 February 2010.

What's Seminerio's crime? Not working for the NY Fed where he can pass out multi-billion favors to his cronies Why does the FBI and DOJ waste time with this small-time corruption? Because this is all they are permitted to look at.

What happened here? Hodge ran afoul of the "prison-industrial complex" and its prison building campaign. The BPP is a corrupt joke. Who is Ratcliffe? The Dallas area former US Attorney. He's now a partner in John Ashcroft's (JA) law firm. Small world. We know JA, see my 17 January 2008 post: http://skepticaltexascpa.blogspot.com/2008/01/justice-department-extortion-racket.html. Compare Hodge's treatment to Olenicoff's, my 20 May 2008 post: http://skepticaltexascpa.blogspot.com/2008/05/sentencing-snipes-2.html. It's not for nothing I call it the (in)Justice Department.

Schooling as Fraud

"Almost predictably, he now falls back on the apple pie and motherhood issue of education to elicit a legislative consensus and maybe, if lucky, enact something tangible. It's admittedly a tough sell in today's debt-ridden, frozen-budget times, but who can oppose a world-class education for American kids? ... Murky implementation details aside, Secretary Duncan assured everyone that key congressional Democrats and Republicans plus mayors and governors from both parties were on board. ... This budget-bloating money will not fix our educational woes; it will instead reward a dysfunctional educational establishment. This is yet one more dubious make-work jobs bill--or to use a little barnyard humor, a pig-in-a-poke wrapped in a sheepskin. America is addicted to educational largess. Between 1900 and 2008, our total government spending on education rose from 1% of GDP to 7% in 2008. In 1919-20, the cost per pupil in constant (2005-06) dollars was $668; by the beginning of WWII, it had risen to $1,404. Upward movement continued, so in 1949-50, it was $2,188, and by 1959-60, it was $3,190 per pupil. By the end of the 20th cebtury, it hit $10,000, and by 2003-05, it was $11,100. Education munificence has even outstripped health care appetities. We are also spending more on buildings and facilities. The enterprise is also incredibly labor-intensive. ... Schools with 'at-risk' students can rival luxury resorts where attendants outnumber guests. In 1949-50, the ratio of pupil to school staff members was 19.3 to 1; by 2004, it had fallen to 8 to 1. ... New York City's education bureaucracy illustrates the jobs creation machine at work, where positions are typically available to those with modest training or an easy-to-get high school equivalence certificate. Job titles include 'Teaching Assistant,' four distinct levels of 'Eduational Assistant,' three levels of 'Education Associate.,' and two types of 'Auxuliary Trainer,' plus varied 'Family Assistants.' ... And what were the proposed solutions? ... Instead, these 'probing and unflinching' experts demanded community partnerships, more role models and mentors, and 'wraparound' servies. Never heard of 'wraparound services'? ... None of this has ever worked, or at least not significantly, and if any of it had succeeeded, the original Great Society would have done the trick decades ago. ... Build the failure, and the job seekers will come", my emphasis, Robert Weissberg (RW) at American Thinker, 3 February 2010, link:

http://www.americanthinker.com/2010/02/obama_and_education_pork_you_c.html.

Education is a scam. Nothing can close the "achievement gap". That's the bottom line. The various assistants are in make-work programs, just like our penal system, with its parole boards. In the days of the dinosaurs, when I was in grammar school, we had classes of 30-40. So? The vast majority, possibly 75% of our education dollars are wasted.

Wall Street Control of DOJ Continues

"The White House announced on Wednesday that President Obama would nominate Loretta E. Lynch as the [US] attorney for the Eastern District of New York, setting her up for a return to a post she held at the end of the Clinton administration. ... Ms. Lynch, who could not be reached for comment, has held a range of positions in the Eastern District, where she began working in 1990. During her tenure as the head of the office, from 1999 to 2001, she oversaw the Abner Louima police brutality case and its aftermath. ... Ms. Lynch is a partner at Hogan & Hartson [H&H], a private law firm that focuses on commercial litigation, white-collar criminal defense and corporate compliance issues. She is also a member of the New York State Commission on Public Integrity, an ethics and lobbying oversight body", AG Sulzberger at the NYT, 21 January 2010, link:

http://www.nytimes.com/2010/01/21/nyregion/21prosecutor.html.

Lynch is another Mary Jo White, a "ping-pong ball" Fed. Do we know H&H? Sure. John Roberts is a H&H "alumnus". Do NY Biglaws has a secret oath like I assume Vampire Squid does, which means the only way you leave a NY Biglaw is by death?

School Shakedown

"Yet last week came a report from New York that makes DC look like MIT. Some 200 students, in their first math class at City University of New York, were tested on their basic math skills. Ninety percent could not do basic algebra. One-third could not convert a decimal into a fraction. ... Yet, the education racket has been shaking us down for four decades, and turning out graduates that know less and less. ... Just as there are many kids who do not have the athletic ability to play high school sports, or the musical ability to play in a high school band, or the verbal ability to recite poetry well or star in debate, not every kid has the academic ability to do high school work. ... This campaign to equalize test scores among unequal students is utopian and unattainable, and amounts to a scam by the education industry", my emphasis, Pat Buchanan, Vdare, 19 November 2009: http://www.vdare.com/buchanan/091119_test_scores.htm.

Yes PB. I've said this for about 40 years. I have seen college graduates who can't work with fractions.

Actual Innocence?

"In a recent 79-page decision, a Manhattan judge could well have stopped after the first four sentences of his concluding paragraph and still conveyed his main point: that Fernando Bermudez was no longer guilty of murder. Instead, the judge, Justice John Cataldo of State Supreme Court in Manhattan, tacked on a fifth sentence that ended with two powerful words: 'actual innocence.' .. To the layperson, the distinction might seem nuanced, if not trivial. But to advocates for the wrongfully convicted, Justice Cataldo's decision, which was released Nov. 12, clawed toward what they view as a groundbreaking push to get New York State courts to focus more on the content of evidence, rather than procedural roadblocks. ... [Eric] Schneiderman is one of the sponsors of a bill introduced in the Senate last month that would add a provision to state law allowing judges to overlook procedural errors in a defendant's case and overturn a conviction when the evidence before them 'conclusively establishes" innocence. ... 'It elevates substance over form,' said Glenn A, Garber, a Manhattan defense lawyer and founder of the Exoneration Initiative, an organization that focuses on innocence claims that lack DNA evidence. 'If they know they're required to engage in actual innocence analysis, it sends a message to courts that they have to do more when they're confronted with compelling evidence of innocence.' ... Federal courts have been especially skeptical of actual innocence claims and do not recognize them as a ground for overturning a conviction", my emphasis, John Eligon at the NYT, 23 November 2009, link: http://www.nytimes.com/2009/11/23/nyregion/23innocence.html.

Much of what goes on in our courts is just word play. I find lawyers poor at evaluating evidence, preferring to make procedural rulings. Out Texas Court of Criminal Appeals is terrible at reviewing criminal appeals, sustaining 98% of them with little if any consideration. Our Fifth Circut is no better. Our courts stink. Exxon could appeal the Valdez judgment to the Supremes. Good luck to a death row inmate trying that.

NY's Broke

"Gov. David A. Paterson took the rare step on Monday of addressing a joint session of the Legislature during its traditional off-season and used the speech to underscore New York's deepening financial crisis. Mr. Paterson repeatedly used stark language to describe the gravity of the state's economic health as he prodded lawmakers to make cuts he has proposed to programs long considered sacrosanct. ... The state's budget crisis and the negotiations between the governor and lawmakers over how to confront it have raised a fundamental question: Can New York, which is more generous in its social welfare programs than any other state, afford to continue to finance its expansive health care safety net and generous education spending? ... A growing number of budget experts believe that New York can no longer afford to spend so much in the wake of the economic crisis, rising unemployment, the collapse of the stock market and the travails on Wall Street--the state's main fiscal engine. ... 'We're going to fall off a cliff unless we get our revenues and our expenditures in true sync,' said Lt. Gov. Richard Ravitch, the adminstration's point man in budget negotiations with the Legislature. He said that the state could no longer rely on its usual strategy of turning to an array of short-term solutions or ask more of the state's taxpayers, adding, 'We're at the outer limits of the elasticity of our tax system'," Danny Hakim at the NYT, 10 November 2009, link: http://www.nytimes.com/2009/11/10/nyregion/10paterson.html.

"Desperate for cash amid the worst fiscal crisis in years, New York State is pursuing tax debtors more aggressively than ever before, doubling the number of cases it is investigating and seeking to collect from delinquents ranging from JPMorgan Chase to an out-of-business convenience store on the Bowery. ... By the end of this year the state's Department of Taxation and Finance will have filed the largest number of warrants ever in a single year and settled about a million open cases, the most in state history", Nicholas Confessore at the NYT, 10 November 2009, link: http://www.nytimes.com/2009/11/10/nyregion/10taxes.html.

Quoted without comment.

There is no place in NY for the middle class. Leave.

Old South Smacks NYT

Old South has a 1 November 2009 post smacking Frank Rich of the NYT. I thought about writing something similar, but decided not to. The NYT's arrogance is almost beyond belief. Here's a link: http://mainstreetmattersmore.blogspot.com/2009/11/frank-rich-and-gop-stalinists-invading.html.

Lenin Visits New York

"An old saying goes that the time to live in New York is when you're young and poor, or old and rich--otherwise, you're better off somewhere else. ... Between 2000 and 2008, the Empire State had a net domestic outflow of more than 1.5 million, the biggest exodus of any state, with most hailing from New York City. The departures also have perilous budget consequences, since they tend to include residents who are better off than those arriving. Statewide, departing families have income levels 13% higher than those moving in, while in New York County (home of Manhattan) the difference was even more severe. ... In 2006 alone, that swap meant the state lost $4.3 billion in taxpayer income. Add that up from 2001 through 2008, and it translates into annual net income losses somewhere near $30 billiion. ... That pattern is consistent with the annual migration patterns, showing that highly taxed and economically lackluster states were most likely to end up in residents' rear view mirrors. According to the annual study by United Van Lines, states like New York New Jersey, Michigan and Illinois have been big losers in recent years. ... Liberals continue to insist that they can raise taxes ever higher without any effect on behavior, but the New York study is one more piece of evidence that this is a destructive illusion", Editorial at the WSJ, 28 October 2009, link: http://online.wsj.com/article/SB10001424052748703574604574499772371161800.html.

Lenin gets around pretty well for a dead guy. After visiting California, my 10 July 2009 post, he is now making the rounds east of the Mississippi, link: http://skepticaltexascpa.blogspot.com/2009/07/lenin-comes-to-california.html.

No Tax Relief in Death

"With the federal estate tax disappearing for most people, state death taxes have emerged as a new worry. ... At the current level, only 5,500 estates a year are federally taxable. ... The problem is that most states with estate or inheritance taxes haven't raised exemptions to meet federal limits. That means thousands of taxpayers who now escape the federal levy could still get hit with a state death tax. As a result, tax advisers are tweaking bypass trusts that allow married couples to maximize exemptions from state taxes. They are advising taxpayers where to retire in order to pare or eliminate estate taxes. And they are counseling out-of-state taxpayers so that they don't get dinged for property they own in a state with a tough death tax. ... Others warn that even taxpayers who live in states without estate taxes, such as Florida or California, risk unpleasant surprises if they also own property in a state that does have one. ... This means that a taxpayer could live in estate-tax-free Florida, California or Texas and even spend most of his time there. But if he keeps an apartment in New York or a summer home on Cape Cod and has other ties to the area the properties might be assessed at death", Laura Saunders at the WSJ, 31 October 2009, link: http://online.wsj.com/article/SB125694593227919879.html.

If you own any out-of-state property have your estate planner review its potential for taxability or to change your "domicile". If you don't, you might subject your estate to an unpleasant surprise.

Escape From New York

"Billionaire Julian Robertson won a $27 million tax case after he successfully argued that he wasn't a New York City [NYC] resident for the year 2000 and didn't owe city taxes. At issue was Mr. Robertson's whereabouts on four days during that leap year: April 15, July 23, Jukly 31 and Nov. 16. The other 362 days were accounted for, with documentary proof of 183 days spent in the city and 179 spent outside. The New York State Department of Taxation and Finance argued that because he didn't have documentary proof for the four days, he was therefore a resident and owed city taxes of $26,792,341. ... The tax case concerns the year when Mr. Robertson closed his hedge fund, Tiger Management LLC, complaining he couldn't make sense of the tech boom, which peaked that March. ... The lengthy decision last month by a judge at the state's Division of Tax Appeals examining a mountain of evidence concerning Mr. Robertson's whereabouts on the days in question. ... According to independent tax expert Robert Willens, high earners often face local disputes about residency", Laura Saunders at the WSJ, 4 November 2009: http://online.wsj.com/article/SB125729222815826639.html.

"For every Sunbelt refugee who has tried to leave high tax bills behind in the cold Northeast, Julian Robertson scored a victory this week. By proving that he was outside [NYC] for half the days in the year 2000, the former hedge-fund titan avoided $27 million in city taxes, thanks to a ruling by New York's tax court. ... In the upside-down world of tax law, where citizens are guilty until they can prove their whereabouts, it's a rare taxpayer victory", WSJ Editorial, 7 November 2009, link: http://online.wsj.com/article/SB10001424052748704795604574520080219397914.html.

Unless you absolutely must stay, leave New York behind.

Robertson for Treasury Secretary, if he'll take the job.

SDNY Head Fake

"Federal prosecutors announced charges on Thursday against 41 lenders, lawyers and others in the real estate industry who they said used fraud to obtain more than $64 million in loans connected to more than 100 residential properties in New York State. An investigation involving the FBI, the Secret Service, the [NY] State Banking Department and other agencies led to the wire fraud, bank fraud and conspiracy charges against the lawyers, mortgage brokers and loan officers, who engaged in complex plots that operated over a period of years, said Preet Bharara, the [US] attorney for the [SDNY]. ... 'Whether the economy was going up or the economy was going down, these alleged fraudsters were working feverishly to game the system.' ... Eventually, prosecutors said, the defendants would strip all the equity from the homes, putting them through sham transactions and saddling the properties with enormous debt. ... 'This office has a tradition of looking at institutions and executives oif institutions,' [Bharara] said. 'And we will go wherever the facts lead'," my emphasis, Colin Moynihan ay the NYT, 16 October 2009, link: http://www.nytimes.com/2009/10/16/nyregion/16fraud.html.

This is the DOJ's MO, see my 12 September 2009 post: http://skepticaltexascpa.blogspot.com/2009/09/csi-las-vegas.html. $64 million? That's Lloyd Anoinette Blankfein's annual bonus. While over my "Blankfein test", why bother with this? Bank fraud, 18 USC 1344. Hmm. Was the investigation which likely cost tens of millions made because the fraud was against as opposed to for banks? What did the "alleged fraudsters" do? If big enough they're called leveraged buyouts! Right? Just get a solvency opinion from say KPMG, my 18 December 2008 post: http://skepticaltexascpa.blogspot.com/2008/12/deprizio-doctrine-and-aig.html and you're good as gold. "[W]e will go wherever the facts lead", says Bharara. Even to the Vampire Squid? Is this case part of the DOJ's continuing efforts to turn bankers into fraud victims as opposed to co-conspirators, my 31 March 2008 post: http://skepticaltexascpa.blogspot.com/2008/03/real-estate-charade.html.

Rockefeller's Revenge

"Last Wednesday, changes to New York's notorious Rockefeller drug laws went into effect, allowing judges to shorten the prison terms of some nonviolent offenders. This measure will further reduce New York's prison population, which has already declined, in the past 10 years, from about 71,600 in 1999 to about 59,300 today. (The state's crime rate also dropped substantially during that time.) Nevertheless, mainly because of opposition from the correction officers' union and politicians from the upstate areas where most of our correctional facilities are, the state has been slow to close prisons. It was not until earlier this year that policymakers in Albany, confronted with fiscal crisis, mustered the will to shut three prison camps and seven prison annexes--a total of about 2,250 prison beds--in a move that is expected to save $52 million over the next two years. ... The prison system still has more than 5,000 empty beds in 69 prisons. What's more, there are other ways to lower the prison population. For starters, state lawmakers could repeal the Rockefeller mandatory sentencing provisions that remain on the books. ... In addition, the state could reduce the number of people--last year, more than 9,000--who are returned to prison for technical parole violations like missing a meeting with an officer or breaking curfew. ... Also, more prisoners with good institutional records could be given parole. ... After New York passed the Rockefeller drug laws in 1973, a mandatory sentencing movement swept the country, raising the nationwide prison population to nearly 2.4 million, from 300,000", Robert Gangi at the NYT, 12 October 2009, link: http://www.nytimes.com/2009/10/12/opinion/12gangi.html.

Texas has 156,000 prisoners and 24.3 million people, New York, 59,000 and 19.5 million, thus Texas incarcerates 212% as many persons per capita as New York. Why? The correction officers' union's opposition to closing prisons should surprise no one.

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.

Which Mob?-3

"The latest indictment to hit the New York City Buildings Department taps into the usual themes of bribery, corruption and compromised inspections. But it also introduces a new criminal element into the agency: the mob. Manhattan prosecutors on Thursday accused the Luchese crime family of infiltrating the Buildings Department, saying that three of the family's associates found jobs as building inspectors and that others in the family, including top bosses, committed a wide range of crimes. ... Robert M. Morgenthau, the Manhattan district attorney, said 27 of 29 people named in the indictment had been arrested; the other two remain at large. Those indicted include bosses and associates of the Luchese family, officials of four corporations, real estate officials and the six building inspectors. ... 'These former inspectors are accused ot betraying the public and this department for their own selfish gain, and they should be prosecuted to the full extent of the law,' [said Robert LiMandri, buildings commisioner]. Morgenthau said the largest known bribe was $44,000, paid by a real estate company to Carmine Francomano Jr. for 'favorable dispositions' of building inspections. Altogether, Mr. Francomano accepted $82,500 in bribes, Mr. Morgenthau said. ... In an unrelated gambling indictment announced almost simultaneously on Thursday, a dozen other people connected to the Luchese family were among 19 people charged. The announcement was made by Preet Bharara, the [US] attorney in Manhattan, and Andrew M. Cuomo, the state attonery general", Christine Hauser, at the NYT, 2 October 2009, link: http://www.nytimes.com/2009/10/02/nyregion/02building.html.

Bharara, you learned well at Mary Jo White's knee. Forget the Lucheses. Find something to indict Vikram Pandit for. If you lack the brains, I'll explain the "Old Lane Scam". Pro Bono. But I have no law degree, lest an Ivy League one. So? You tell criminals "ignorance of the law is no excuse", don't you? Find something to indict Lloyd Blankfein (LB) or John Mack for. Invoke Laverntiy Beria's, 1899-1953, spirit, "Show me the man, and I'll find you the crime". Are the SEC and DOJ "mob infiltrated" organizations. Ben Stein, my 21 December 2007 post, was so right: http://skepticaltexascpa.blogspot.com/2007/12/mortgage-fraud-whose.html. $44,000? Is that LB's monthly cigar bill? Why is "Lady Justice" depicted wearing a blindfold? Because she's blind to only certain types of crimes?

Listen to Lenin!

"State and municipal governments, stuggling with sinking revenue, are raising money by levying fees on consumers, slapping businesses with back taxes and tweaking tax laws in ways that force many businesses to pay more. That is leading to accusations--and, in some case, lawsuits--that governments are trying to rake in more money without officially raising taxes, sometimes illegally. ... Last week, five retailing groups sued New York state alleging that a new tobacco-registration fee was unconstitutional. The groups argued the new fee, which uses a sliding scale based on a retailer's total sales, instead of just cigarette sales, 'is essentially a tax,' said Andrew Curto, a lawyer representing the groups. ... In San Francisco, tax lawyers say the city is sidestepping the electorate by labeling the new cigarette levy as a fee instead of a tax. ... Among the more aggressive states has been California, which teetered on the brink of insolvency during a budget impasse earlier this year", Conor Dougherty at the WSJ, 26 September 2009, link: http://online.wsj.com/article/SB125392874638642923.html.

Who said California still isn't "on the brink of insolvency"? Muni bonds anyone? See my 20 October 2008 post on the Franchise Tax Board: http://skepticaltexascpa.blogspot.com/2008/10/californias-gestapo.html. If you don't have to do business in California, get out. While the going is good.

State Tax Collections

"State tax revenues in the second quarter plunged 17% from a year earlier as rising unemployment and reduced spending hurt sales- and income-tax collections, according to Census Bureau figures released Tuesday. The decline was the sharpest since at least the 1960s. ... But with tax collections continuing to decline, many have been forced to reopen budgets after they have been passed to push through even bigger cuts to staffing and servicces. States, unlike the federal government, are generally required to balance their budgets. ... 'Anything is fair game,' said Amber King, a public information officer for [Louisiana] state Treasurer John N. Kennedy, who serves on the 'streamlining commission.' ... In Arizona, overall tax revenues fell 27% in the second quarter. Tax revenues fell 12% in Florida and 14% in California. ... Eleven states--including California, New York and Wisconsin--saw personal income taxes fall more than 30%", Connor Dougherty at the WSJ, 30 September 2009, link: http://online.wsj.com/article/SB125424963214850111.html.

Muni bond buyers, good luck. If anything is on the table, how about repudiating Louisiana's muni bonds? Only fat cat, tax avoiders own them anyway.

COYOTE does New York

"Ever since the New York City Charter was revised in 1989, public officials have been warned about trying to parlay their official positions into personal gain. And the powerful,m if largely anonymous, body that keeps those officials in line, using the threat of hefty fines and even job termination, is the city's Conflicts of Interest Board. ... One member, Monica Blum, testified at a recent City Council hearing in favor of a project that would benefit the Lincoln Square Business Improvement District, a group for which she serves as president Another member, Angela Mariana Freyre, was once a registered lobbyist who, city records show, tried to influence both the mayor's office and the City Council while on the board--even though the City Charter forbids that. Several members--including the newest one, Burton Lehman, a former general counsel at the real estate developer Tishman Speyer--sit on boards of nonprofit groups that have received city contracts or have accepted charitable money fronm Mr. Bloomberg. ... Dick Dadley, executive director of Citizens Union, a nonprofit government watchdog, said, 'There may be reason to question how strongly they are monitoring the activities of senior administration officials, given that they ruled against a number of lower-level city employees for rather minor mistakes or judgments and then appear not to be as equally fair-minded in their review of higher-level folks'," David Chen at the NYT, 7 September 2009, link: http://www.nytimes.com/2009/09/07/nyregion/07conflicts.html.

Is anyone surprised by this? Does this board need its own PCAOB?

Rating Agency Snake Oil

"Regulators of some of the biggest bond buyers in the world are considering cutting credit-ratings firms' role in the market in response to botched ratings of complicated mortgage securities. Ratings firms including Standard & Poor's and Moody's Investors Service [MIS] are facing fresh dissent from state insurance regulators, who are cosidering moving away friom the firms ratings' are a way of measuring the health of insurer portfolios of mortgage-backed bonds. The move is a notable challenge to a ratings system that has long embedded itsdelf in the markets. Insurers are among the most important users of band ratings, collectiv ely holding some $3 trillion in rated bonds in their porfolios. ... The challenge from insurance regulators reflects the relentless criticism directed at ratings firms since the credit crisis began in 2007. ... Regulators say they have no plans now to move away from the leading agencies for corporate and other bonds considered less-difficult to rate. The regulators' action could subject them to criticism from consumer-advocacy groups that they are bending over backward to help insurers look good on paper, at the possible expense of policy holders", Leslie Scism & Aaron Lucchetti at the WSJ, 17 September 2009, link: http://online.wsj.com/article/SB125314357900717631.html.

"California Attorney General Edmund G. Brown Jr. began an investigation into three major US credit-rating companies and their role in the financial crisis, in part to determine whether the firms violated California law", Tess Stynes at the WSJ, 18 September 2009, link: http://online.wsj.com/article/SB125321131860920357.html.

"Throughout the financial crisis, the major credit-ratings firms were criticized for their overly rosy ratings of complex debt securities, which deteriorated soon after and led to billions of dollars of investor losses. ... The analyst, Eric Kolchinsky [EK], said [MIS] gave a high rating to a complicated debt security in January 2009 knowing it was planning to downgrade assets that backed the securities. Within months, the securities were put on review for a downgrade. ... The [MIS] spokesman declined to comment on the January rating that Mr. Kolchinsky questioned because a review of the matter 'is in progress.' Before he resigned, Mr. Kolchinsky was a managing director in a nonratings unit and wasn't involved in ratings of the securities in question. He was previously a Moody's rating analyst for six years and had experience with complex securities. ... In December, according to internal memos reviewed by Mr. Kolchinsky, Moody's executives approved changes to their ratings methodology that they expected to lead to the downgrades of many securities backed by corporate loans. The notes issued in January were tied to those types of securities, but Moody's analysts still gave the deal a high rating. ... In October 2007, Mr. Kolchinsky was told there was no role for him because the CDO ratings group was downsizing. He joined Moody's Analytics, a separate unit. ... A Moody's spokeman says that the firm 'has a strict nonretaliation policy' and that Mr. Kolchinsky 'has made an evolving series of claims of misconduct within the company and we have conducted multiple separate reviews.' In each case, Moody's 'found that his claims were unsupported,' the spokesman said", Serena Ng and Aaron Luchetti at the WSJ, 23 September 2009, link: http://online.wsj.com/article/SB125366267173132295.html.

"[EK], the former Moody's Corp. analyst who this week went public with allegations of inflated credit ratings, plans to tell a congressional committee on Thursday that the ratings industry is still hampered by conflicts of interest. He also believes the 'credit policy' and 'compliance' groups at [MIS] lack independence and are short-staffed, and analysts get 'routinely bullied' by business line managers, according to a draft of his testimony. ... Over the past year, he has given presentations within and outside Moody's on the causes and lessons of the financial crisis, detailing problems such as 'ignored incentives,' and overreliance on quantitative models, the highly complex nature of many financial instruments, and regulations that were inconsistently applied, according to a copy of his presentation", Serena Ng at the WSJ, 24 September 2009, link: http://online.wsj.com/article/SB125375108331535851.html.

"Credit-rating firms came under pressure as lawmakers and regulators renewed scrutiny of the ratings process. ... A Moody's spokesman said the company 'takes very seriously all allegations of impropriety,' and a review into Mr. Kolchinsky's most recent claims is in process. The spokesman said Mr. Kolchinsky's previous claims were found ny Moody's to be unsupported. ... [EK] also wrote that he fears that conflcits of interest, which arise bwecause Moody's is paid by debt issuers to rate securities, have become worse in recent months. the group that rates complex securities takes 'analytical short-cuts in their quest for revenue,' he wrote", Serena Ng, Sarah Lynch and Leslie Scism at the WSJ, 25 September 2009, link: http://online.wsj.com/article/SB125382176881638625.html.

This is another example of why we need federalism. It will be more difficult to capture all 50 state insurance regulators than the "systemic federal regulator".

Brown, good luck.

Aren't we impressed with MIS internal investigations. Did John Ashcroft do them? David Kotz may have a place at MIS if he gets pushed out of the SEC. CPAs have had SAS 22 since March 1978, now superceeded by SAS 108. So? SAS seemed to prohibit retaliation against CPAs for holding differences of opinion. Hahahahahahaha.

What? Incentives Count? How dare you? Analysts getting "bullied"? It sounds like EK worked for a Big 87654 firm.

As long as ratings agencies are paid by issuers, the conflcts of interest will remain. It like how CPA firms are paid. I'm sure MIS takes allegations of impropriety seriously. After they become lawsuits.