The SEC and DOJ Fold

"The Justice Department's decision last week to abandon a criminal probe against current and former exectuives at [AIG] underscores the difficulty facing prosecutors who want to hold individuals criminally accountable for the financial crisis. ... But, late last Friday, Mr. Cassano and two colleagues who were also investigated were told through their lawyers that they wouldn't face criminal charges after prosecutors found evidence supporting Mr. Cassano's account, people familar with the matters said. ... The conclusion of the two-year criminal investigation marks a setback for prosecutors who have come under public and political pressure to find evidence of criminal conduct in the wake of the recession. ... The travails aren't over for Mr. Cassano. The [SEC], which has to meet a lower standard of proof, is considering whether to file civil charges, according to people familiar with the matter. Mr. Cassano's lawyers declined to comment on the civil probe. ... For months, they believed Mr. Cassano hadn't disclosed to senior AIG executives or its auditors, PricewaterhouseCoopers LLC, that an accounting adjustment allowed his unit to avoid writing down the value of its swaps by billions of dollars, these people said. PwC declined to comment", Amri Efrati at the WSJ, 24 May 2010: http://online.wsj.com/article/SB10001424052748704904604575262942729708122.html.

"The [SEC] dropped its investigation of a former [AIG] executive who ran a subsidiary at the center of AIG's problems, following a similar move last month by prosecutors. ... Federal investigtors looked into whether [Joseph] Cassano misled investors with reassuring statements about AIG's exposure to mortgage losses, people familiar with the matter have said. A turning point came when prosecutors found evidence Mr. Cassano did make key disclosures. ... Mr. Cassano's lawyers called the SEC's move 'completely appropropriate in light of the facts.' They said the SEC staff 'realized that our client acted in good faith, kept his superiors informed, and was honest with investors", Kara Scannell at the WSJ, 17 June 2010, link: http://online.wsj.com/article/SB10001424052748703513604575311350142446886.html.

Well SEC? Will you now go after PWC for its wonderful AIG audit? Well PCAOB?

I expected this after the DOJ folded.

Accounting Onion Almost Makes Me Cry

Tom Selling's 15 June 2010 post at Accounting Onion applies SFAS 52, Foreign Exchange Accounting, giving an absurd result. He slams the SEC, FASB and Big 87654 all at once for this. Good show Tom. Here's a link:

http://accountingonion.typepad.com/theaccountingonion/2010/06/asu-2010-19-when-a-dollar-of-cash-is-more-than-a-dollar-on-the-balance-sheet.html. Thank you Hugo Chavez for creating this anomaly. In rereading Tom's post I got an idea for Citigroup's treasury department. Incorporate a Venezuelan subsidiary; put $50 billion USD in it and presto, instant profits. Well Vikram Pandit, whaddayasay? I figure this idea is worth 1%. I'll expect my $500 million check within 30 days. Tom: If I get the $500 million, half is yours. I'll let you know.

Congress Finds Revolving Door

"A Senate panel asked the [SEC's] inspector general to review the agency's 'revolving door,' which shuttles many SEC staffers into jobs with the companies they once regulated. .... Mr. [Charles] Grassley also cited a Wall Street Journal article in April that reported how may former SEC employees have quickly turned around and represented clients before the commission, sometimes within days of leaving the agency. 'We need to ensure that SEC officials are more focused on regulation and enforcement than on getting their next job in the industry they are supposed to oversee,' Mr. Grassley said in a statement. ... '[W]e are currently conducting an investigation of allegations very recently brought to our attention that a prominent law firm's siginificant ties with the SEC, specifically, the prevalence of SEC attorneys leaving the agency to join this particular law firm, led to the SEC's failure to take appropriate actions in a matter involving the law firm,' Mr. [David] Kotz said. ... Last week, Sen. Edward Kaufman (D., Del.) said that restriction doesn't go far enough. Congress or the SEC should consider banning employees from taking jobs with companies affected by rule making in which the staffers had a significant role during the prior year, Mr. Kaufman said in a statement", Tom McGinty at the WSJ, 16 June 2010, link:

http://online.wsj.com/article/SB10001424052748703280004575309061471494980.html.

So what? "Max" and "Jack", two former SEC staffers can just switch "clients" to avoid the conflict of interest rules. The SEC is hopeless. Only one law firm Kotz? Get real.

More Self-Serving AICPA Claptrap

I got an e-mail from the AICPA's "Center for Audit Quality" on 16 June 2010, saying it opposes a permanent exemption for companies with market capitalizations under $75 million from compliance with SOX section 404. The Center opposes this to protect investors. Would an AICPA organ favor creating make-work projects for CPAs? No. The Center is the old AICPA SEC Practice Section in new garb. Consider how much the AICPA has improved audit quality since 1976. Not much. Here's a link to the letter sent Congress:

http://www.thecaq.org/publicpolicy/pdfs/CAQCIICFAInstitutelettertoConfereesRESOX404b61510.pdf. Don't laugh too hard in reading this.

Mary Schapiro's Mythology

Tom Selling (TS) at Accounting Onion, blasts SEC Chairwoman Mary Schapiro (MS) with respect to her support of IFRS convergence, 26 May 2010, link:

http://accountingonion.typepad.com/theaccountingonion/2010/05/mary-schapiro-mythbuster-or-myth-maker.html. I agree with TS and expect MS to do nothing which will improve the quality of financial reporting during her SEC tenure.

Another SEC Snow Job

"A recent report by [SEC's] inspector general shows that the investigation of Bernard L. Madoff was not the only one to go badly awry. While the impact of the SEC's missteps were not nearly as significant as in the Madoff case, the report shows that the agency's enforcement division allowed itself to be manipulated by a company it should have been investigating more thoroughly while allowing former staff members to influence decisions on how to proceed. ... The report made available by the Post is redacted, but it gives a fairly damning picture of the SEC staff ignoring seious allegation of corporate misconduct while different offices failed to communicate about the subject matter of the investigation. ... Mr. [David] Einhorn also criticized the financial reporting of Lehman Brothers before that firm collapsed into bankruptcy in September 2008. As is often the case in these situations, each side proclaimed that the other was acting improperly. ... Allied Capital got the upper hand, at least initially, when the SEC started a 'vigorous' investigation of Greenlight Capital after its representatives met with enforcement division staff members. But the report notes that the investigation began 'without any evidence of wrongdoing.' Less than a year later, it ended without finding any violations, but the SEC did not officially close it until 2006 and never notified Mr. Einhorn of its conclusions. ... The investigation by the compliance officer was derailed because one of Allied Capital's representatives was a former SEC staff member, and an ssociate director of the office said that anyone who had worked at the commission was 'not going to be doing anything illegal.' ... The original supervising attorney on the Greenlight Capital investigation was effectively pushed out of his job for performance reasons, and a year later he ended up registering as a lobbyist for Allied Capital. The report notes that the former supervisor 'learned a susbtantial amount of sensitive, nonpublic information regarding Einhorn and Allied.' To make matters worse, when he sought clearance from the SEC's ethics office to represent the company, his response regarding prior involvement with the company while at the commission was incomplete'," Peter Henning at the NYT, 25 March 2010, link: http://dealbook.blogs.nytimes.com/2010/03/24/how-not-to-run-an-s-e-c-investigation.

This is SEC standard operating procedure. Do you really want these guys regulating the accounting industry?

The SEC Wins Another One

"Former hedge-fund titan Arthur Samberg agreed Thursday to pay nearly $28 million to settle insider-trading allegations, ending a long-running case that got an unexpected boost from disclosures in the divorce case of the accused tipper. ... But the divorce of a former Microsoft Corp. employee who allegedly told Mr. Samberg about Microsoft earnings gave the SEC the break it needed, more than seven years after the alleged insider trading. Mr. Samberg, whe once managed $15 billion, didn't admit or deny wrongdoing. ... Mr. Samberg, 69 years old, will pay nearly $18 million in disgorgement and $10 million in penalties. ... The SEC said it also filed civil-fraud charges against Mr. [David] Zilka, and accused him of withholding information from regulators during an earlier probe that concluded without charges. 'The two cases have two particularly troubling aspects: a hedge-fund manager trading on illegal inside information, and his tipper source who withheld crucial information about the scheme during an SEC investogation,' said Robert Khuzami, the SEC's director of enforcement. 'Both are high-priority targets for SEC enforcement'. ... The agency reopened the probe after new evidence came to light from Mr. Zilkha's divorce proceeding in January 2009, which included new emails, allegations of hush money and a confession to a therapist. The discoveries proved to be a critcial link for the SEC, which had known that Mr. Samberg was looking for information about Micrisoft from Mr. Zilkha but didn't have evidence that Mr. Zilkha provided it ," my emphasis, Kara Scannell at the WSJ, 28 May 2010, link:

http://online.wsj.com/article/SB10001424052748704269204575270451427692356.html.

Hasn't the SEC anything important to do, like investigate bank "earnings"? This case looks like another wasted SEC effort. Why should the SEC make cases like this "high-priority"? What is the SEC trying to divert our attention from?

Incentives Count

"Why are profit-seeking corporations so much more efficient and innovative that bureaucracies? A significant part of the answer to that question lies in the fact that bureaucracies are often hamstrung by legislation, and amending legislation is always a cumbersome and politics-ridden process. But another significant part of the answer lies in the phrase 'profit-seeking.' ... For the employees who come up with the really bright ideas prosper even more than their fellow workers, being rewarded with raises, bonuses and promotions. ... In fact, they are highly disincentivized to increase efficiency and to innovate. In business a penny saved is a penny earned, the savings flowing to the all-important bottom line. But in a bureaucracy, a penny saved is a penny likely to be cut from next year's budget. And prestige in a bureaucracy comes not from profit but from the size of one's budget. So even accidental savings are likely to suppressed with make-work. ... Had the personnel of the [SEC] been as richly and personally incentivized to uncover securities fraud as the sailors of the Royal Navy were to capture enemy ships, Bernard Madoff would have been in jail years ago", John Gordon at the WSJ, 14 May 2010, link: http://online.wsj.com/article/SB10001424052748703915204575104113794207730.html.

I have commented on the role of incentives many times. Gordon, welcome aboard.

The WSJ's Got It!

"The [SEC's] complaint against Goldman Sachs is playing in the media as the Rosetta Stone that finally exposes the Wall Street perfidy and double-dealing behind the financial crisis. Our reaction is different: Is that all there is? ... Far from being the smoking gun of the financial crisis, this case looks more like a water pistol. ... Regarding the second point, the offering documents for the 2007 CDO made no claim that we can find that Mr. Paulson's firm was betting alongside ACA. ... More fundamentally, the investment at issue did not hold mortgages, or even mortgage-backed securities. ... Perhaps the SEC's enforcement division doesn't understand the difference between a cash CDO--which contains slices of mortgage-backed securities--and a synthetic CDO containing bets against these securities. ... Did Goldman have an obligation to tell everyone that Mr. Paulson was the one shorting subprime? ... Mr. Paulson bet against German bank IKB and America's ACA, neither of which fell off a turnip truck at the corner of Wall and Broad Streets. ... By the way, Goldman was also one of the losers here. Although the firm received a $15 million fee for putting the deal together, Goldman says it ended up losing $90 million on the transaction itself, because it ultimately decided to bet alongside ACA and IKB. ... Which leads us to the real impact of this case, which is political. The SEC charges conveniently arrive on the brink of the Senate debate over financial reform, and its supporters are already using the case to grease the bill's passage", my emphasis, WSJ Editorial, 19 April 2010, link:

http://online.wsj.com/article/SB10001424052702303491304575188352960427106.html.

Yes, convenient. Coincidence? We don't think so. Why did the SEC choose this case? See my 5 May 2010 post: http://skepticaltexascpa.blogspot.com/2010/04/vampire-squidking-canute-of_25.html. That the case is weak is a Yves Smithian "feature. not bug". Vampire Squid's losing money on this deal means nothing to me, except possibly that was one of the SEC's considerations in selecting this deal for "enforcement"

Old News at S & P

"In 2004, well before the risks embedded in Wall Street's bets on subprime mortgages became widely known, employees at Standard & Poor's, the credit rating agency, were feeling pressure to expand the business. One employee warned in internal e-mail that the company would lose business if it failed to give high enough ratings to collateralized debt obligations, the investments that later emerged at the heart of the financial crisis. ... In June 2005, and S&P employee warned that tampering 'with criteria to "get the deal" is putting the entire S&P franchise at risk--it's a bad idea. A Senate panel will release 550 pages of exhibits on Friday--including these and other internal messages--at a hearing scrutinizing the role S&P and the ratings agency Moody's Investors Service played in the 2008 financial crisis. The panel, the Permanent Subcommittee on Investigations, released excerpts of the messages Thursday. ... The investigation, which began in November 2008, found that S&P and Moody's used inaccurate ratings models in 2004-7 that failed to predict how high-risk residential mortgages would perform; allowed competitive pressures to affect their ratings; and failed to reassess past ratings after improving their models in 2006. ... A sweeping financial overhaul being debated in the Senate would subject the credit rating agencies to comprehensive regulation and examination by the [SEC] for the first time. The legislation also contains provisions that would open the agencies to private lawsuits charging securities fraud, giving investors a chance to hold the companies accountable", Sewell Chan at the NYT, 23 April 2010, link:

http://www.nytimes.com/2010/04/23/business/23ratings.html.

The SEC will be as effective in regulating the rating agencies as it has the CPA industry. What's the problem? How do CPA firms operate?

ObamaCare Accounting

"Earlier this week, House Democrats concluded that the deluge of corporate writedowns--amounting to $3.4 billion so far--were in fact the result of ObamaCare, not the nefarious conspiracy that the White House repeatedly cited when it was embarrased soon after the bill's passage. ... 'The companies acted properly and in accordance with accounting stndards in submitting filings to the SEC in March and April,' [staffers] write. ... The larger question is what motivated the White House to unleash the assault. Democrats were amply warned about the destructive consequences of these tax changes, and if they really thought these companies were acting out of political motives, then they didn't understand what was in their own bill. Or at least that's one possibility. More likely is that they did know and were simply trying to mislead the public in the early days of what was supposed to be the raptuous response to ObamaCare's passage", WSJ Editorial, 29 April 2010, link:

http://online.wsj.com/article/SB10001424052748704423504575212422971814134.html.

If the Democrats were serious, they should had the SEC look into these disclsoures. The Democrats were grandstanding.

SEC vs. Cuban, Round 2

"Like the adage, 'beware of Greeks bearing gifts,' perhaps the [SEC] should consider whether to beware of litigating against billionaires. Its insider-trading suit against Mark Cuban, the billionaire owner of the Dallas Mavericks basketball team, has turned into a pitched battle that is being fouight in two federal district courts and one federal appeals court. ... Having won an order dismssing the SEC case against him in 2009, he did not simply take his ball and go home--especially after the commission appealed. Instead, Mr. Cuban went on the offensive. ... The legal fees in the various cases have undoubtedly exceeded the amount at issue [$750,000] in the insider-trading case. but this seems to more of a grudge match in which money is no object. ... Judge Sidney A. Fitzwater of Federal district Court in Dallas found that the SEC did not have the authority to adopt the rule and that the SEC had not alleged that Mr. Cuban agreed not to trade in the information while maintaining its confidentiality. ... Mr. Cuban's appellate brief argues that the SEC is improperly attempting to convert an alleged breach of contract into a federal securities fraud' because any agrrement he might have made did not impose an obligation to refrain from selling his shares. Without a fiduciary duty to Mamma.com, there can be no insider trading liability, despite the SEC's attempt to create one in Rule 10b5-2. ... Judge Fitzwater allowed discovery of the SEC' conduct in pursuing the case", Peter Henning at the NYT, 3 April 2010, link:

http://dealbook.blogs.nytimes.com/2010/04/03/mark-cubans-grudge-match-with-the-s-e-c/.

Go Cuban! The SEC has shown time and time again, it cannot, or will not, distinguish breach of contract from securities fraud cases. It has also been vindicative to those who expose its incompetence, ever since 1973's Ray Dirks fiasco.

Khuzami and and CDOs

"[SEC] enforcement chief Robert Khuzami oversaw a group of lawyers at his old firm, Deutsche Bank AG [DB], that was closely involved in developing collateralized debt obligations, the same product in the agency's fraud lawsuit against Goldman Sachs Group In., according to people familiar with the matter. ... As part of that job he worked with lawyers who advised on the CDOs issued by the German bank and how details about them should be disclosed to investors. ... Liek Goldman, [DB] has faced allegations of inadequate control over its creation of CDOs. It isn't clear if Mr. Khuzami personally reviewed any sturctured-finance deal documents in his role at the bank, and outside law firms were also involved in CDO work. ... Because of Mr. Khuzami's old job and his financial interest in the company, he has recused himself from any matters related to [DB], according to an SEC spokesman. ... SEC officials say Mr. Khuzami's resume is a nonissue, adding thjat the agency will go after illegal conduct wherever it occurs. ... Mr. Khuzami has vowed to pursue wrongdoing against Wall Street firms in high-profile areas such as subprime mortgages and CDOs. ... Mr. Khuzami is the first SEC enforcement director in recent history to come directly from an investment bank. ... Some securities lawyers say Mr. Khuzami's high-level position at [DB] could have given him insight into structured-finance products, an area where the SEC has been criticized for a shortage of expertise", Aaron Lucchetti & Kara Scannell at the WSJ, 24 April 2010, link: http://online.wsj.com/article/SB10001424052748704388304575202562283283500.html.

Khuzami's appointment did nothing for me. It still doesn'. See my 20 February 2009 post:

http://skepticaltexascpa.blogspot.com/2009/02/sec-at-large.html.

Another SEC Victory

"The [SEC] suspected Texas financier R. Allen Stanford of running a Ponzi scheme as early as 1997 but took more than a decade to pursue him seriously, according to a report further tarring the agency that missed Bernard Madoff's huge fraud. The report by the SEC's inspector general says SEC examiners concluded four times from 1997 to 2004 that Mr. Stanford's businesses were fraudulent, but each time decided not to go further. ... The former SEC official, Spencer Barasch, is now a partner at law firm Andrews Kurth LLP. ... The inspector general referred Mr. Barasch for possible disbarment from practising law. ... SEC Inspector General David Kotz's report suggests the agency's mistakes in the Stanford case were in part the result of a culture that favored easily resolved cases over messier ones. Cases such as the alleged Stanford fraud weren't considered 'quick hit' and 'slam dunk,' and examiners were discouraged from pursuing them, Mr. Kotz found. ... Examiners noted that Mr. Stanford was promising to pay investors a return well above the market, without any apparent way of delivering on that promise. ... SEC enforcement officials also appeared to have ignored warnings from insiders at Stanford's operations", my emphasis, Michael Crittenden & Kara Scannell at the WSJ, 17 April 2010, link:

http://online.wsj.com/article/SB10001424052702303491304575188220570802084.html.

Another day, another missed fraud at the SEC.

The SEC's Vampire Squid Action, In Context

"Goldman Sachs Group Inc. [GSG] Chief Executive Lloyd C. Blankfein said the firestorm over civil-fraud charges leveled by the [SEC] is 'certainly uncomfortable,' but urged employees to remain focused. ... 'Following my message to you on Friday, I wanted to update all of you and let you know that we have been taking all appropriate steps to defend the firm and its reputation. ... Still, it is important to put the SEC's action in context. The core of the SEC's case is the allegation that one employee misled two professional investors by failing to disclose the role of another market participant in a transaction. ... I will repeat what you have heard me say many times in the past: [GSG] has never condoned and would never condone inappropriate activity by any of our people. On the contrary, we would be the first to condemn it and take immediate action. ... As you return to work on Monday morning, I ask that you maintain the level of focus on our clients that is at the heart of [GSG's] success over the past 140 years'," Joe Bel Bruno at the WSJ, 20 April 2010, link: http://online.wsj.com/article/SB10001424052748704671904575194111583096750.html.

"The biggest bummer to arise from the allegations that the revered and feared Wall Street puppet master [GSG] had played us all for patsies is this: the dial on the Wall Street capital-formation machine, the engine that was supposed to be the driving force of the greatest economic system on earth, was purposely set to junk--worthless, synthetic junk. ... JPMOrgan Chase played procurer for Magnetar, a hedge fund so artful in profiting from the meltdown that Northwestern's Kellogg School of Management praised it last year in a case study. ... In the end, it was in fact all one big scam predicated on rising housing prices. Certainly, greedy consumers played a minor role in feeding the fenzy. But the Street made sure that those of us who are not members of its elite club remained the suckers. ... One the surface, these deals look complicated. They are. ... Only now, in the wake of the SEC suit against Goldman, are investors beginning to suspect they were hoodwinked. ... A synthetic CDO is at its core a trade, meaning it has a long and short position, and grownup investors are free to take sides. ... The reality is that Wall Street's CDO synthesizer set on of the economy's largest sectors off in the direction of creating nothing but waste--pure economic waste. ... These CDOs were the last stop in a vast transfer of wealth from a large group of American mortgage holders to a much small group of already rich traders who profted as the CDOs failed. ... By picking a fight with [GSG]--the 'great white whale' of Wall Street, as Eliot Spitzer put it on Monday--the SEC is signaling that it has now adopted a feistier approach. ... In a sense, [GSG] is relying on the so-called big-boy defense: There are no victims on Wall Street, just fools. ... Beyond any legal issues, the [GSG] case has become the battering ram for financial-reform legislation that congressional Democrats have been looking for", my emphasis, Stephen Gandel at Time, 3 May 2010, link: http://www.time.com/time/business/article/0,8599,1983747,00.html.

The only "inappropriate" act at Vampire Squid (VS) is losing money. What's going on here? Did Lloyd Antoinette Blankfein (LAB) write this memo for VS's employees, or the American public? The SEC's case fails to impress me. Fab Touree, looks like VS's "sacrificial lamb", shades of Joe Jett of 1994's Kidder Peabody. While LAB weeps crockodile tears for VS, I think the case was a setup to push the Dodd bill through. I can see LAB telling Touree, "Look boy, take this one for the team. We'll take care of you. There's $100 million for you in Switzerland. Chill out".

Not the "last stop". That's Zimbabwe Ben's interest-rate suppression policy. The SEC did not pick a fight with VS. It got permission to appear to annoy the VS. Why did tthe SEC bother with this insignificant case instead of the AIG fiasco? VS wants the Dodd bill passed and is using this case to derail legislation that might hurt it.

Houston's Loren Steffy called the SEC's action "A slap on the tentables for the vampire squid", Houston Chronicle, 17 April 2010, link: http://blogs.chron.com/lorensteffy/2010/04/a_slap_on_the_t.html. Well said .

What Loophole?

"As it neared collapse in 2008, Lehman used an accounting gimmick to move $50 billion in assets off its books. The firm did this thanks to a more-than-questionable interpretation of accounting rules governing the treatment of repo transactions. ... Yet this apparently didn't raise red flags with the firm's auditor, Ernst & Young LLP, or the [SEC]. The lesson: Regulators should move toward a system where companies are judged by the substance of what they are trying to achieve, rather than meeting the definition of accounting rules", my emphasis, David Reilly (DR) at the WSJ, 13 March 2010, link: http://online.wsj.com/article/SB10001424052748704131404575117733017612228.html.

"The UK's Financial Reporting Council, the regulator for accounting and auditing, said Monday it had started looking at how Lehman Brothers Holdings Inc. repo transactions were accounted for and audited in the UK. It said it was seeking extra information from Lehman's former auditor, [E&Y]", Greg Manuel at the WSJ, 16 March 2010, link: http://online.wsj.com/article/SB10001424052748703909804575123913796112340.html.

DR, here's news for you: that's what we supposedly have now! The lawyer-infested SEC can't function at a level beyond that of "summary judgement". I don't know how many times I discussed "substance vs. form" with SEC personnel. They just don't get. Or do they? The IRS has a "step transaction doctrine" and realizes the substance and form of transactions may differ. The SEC apparently doesn't.

It's good to see someone look at this aside from the SEC.

Financial Reform, Chicago-Style

"A 'trilemma' is like a dilemma, only there are three things to choose from and you can have just two. The current debate over post-crisis financial regulation suggests we face such a trilemma: We can choose any two of the following: but not all three: 1) efficient capital markets 2) no bailouts to big banks and 3) a depression-free economy. ... But the idea that big banks might be able to get new capital from the Treasury was scarcely even contemplated. Choosing one and two resulted in a global financial and economic crisis worthy of the name depression. ... Either the bill does not imply future bailouts, as Republicans argue. Or, as seems more plausible to us, it is going to introduce such a wide range of new financial regulations that the efficiency of our capital markets will be significantly diminshed. ... Whether or not there is any basis for the SEC's claim that [Goldman] misled investors, the key point is that the collateralized debt obligation (CDO) at issue was nothing more than an elaborate wager on the future price of some mortgage-backed securities--a wager with as much economic utility as a gigantic bet on a roulette wheeel or a horse race. ... But [derivatives] increased the instability of the global financial system. And taxpayers have paid a heavy price since the system all but collapsed in late 2008. ... There was never a good reason for treating credit default swaps and their ilk differently from commodity futures, which are standardized and traded on exchanges. ... The nightmare possibility arises: Could the proposed cure turn out to be just another symptom of the same disease? As the rules become ever so more convoluted, so the opportunities for the unscrupulous increase--and the efficency of the financial system as a whole decreases. ... First, in the more controlled capital markets of the 1970s, borrowers generally paid more for their loans because there was less competition. ... Second, it is not at all clear that our crisis was exclusively caused by a failure of regulation as opposed to a failure of monetary policy. ... Third, the crisis of 2007-2009 originated in one of the most highly regulated sectors of the financial system: the US residential mortgage market", my emphasis, Niall Ferguson & Ted Forstmann (F&F) at the WSJ, 23 April 2010, link:

http://online.wsj.com/article/SB10001424052748703876404575200104219993576.html.

I only disagree with F&F over this: we cannot have a "depression-free economy". Apparently F&F don't favor the Dodd bill either.

Crony Capitalism's Foundation

"Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepeneurs allocating capital across time; and a firm's accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism. ... Classical liberals, whose modern counterparts are libertarians and small-government conservatives, believed that the state's duties should be limited to (1) to provide for the national defense; (2) to protect persons and property against force and fraud; and (3) to provide public goods that markets cannot. ... Why has this happened? Financial services regulators failed to enforce laws and regulations against fraud. Bernie Madoff is the paradigmatic case and the [SEC] the paradigmatic failed regulator. Fraud is famously difficult to uncover, but as we now know, not Madoff's. ... Are we to believe that regualtors were unaware? ... The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. ... Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated... In a paper for [Fed's] Jackson Hole Conference in 2008, economist William Buiter described 'cognitive capture,' by which regulators become incapable of thinking in terms other than that of the industry. ... Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. ... We call that system not the free market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith. ... Hayek's mentor, Ludwig von Mises, predicted in the 1930s that communism would eventually fail because it did not rely on prices to allocate resources. He predicted that the wrong goods would be produced: too many of some, too few of others. He was proven correct. ... Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates. ... If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets", my emphasis, Gerald O'Driscoll (GO) at the WSJ, 20 April 2010, link:

http://online.wsj.com/article/SB10001424052748704508904575192430373566758.html.

I have said things like GO for decades.

Vampire Squid in the Briar Patch

"Goldman Sachs Group Inc. [GSG]--one of the few Wall Street titans to to thrive during the financial crisis--was charged with deceiving clients by selling them mortgage securities secretly designed by a hedge-fund firm run by John Paulson, who made a killing betting on the housing market's collapse. ... 'The SEC's charges are completely unfounded in law and fact,' said Goldman in a statement, promising to 'contest them and defend the firm and its reputation.' ... Goldman's shares fell 13%, one of the steepest slides since the firm went public in 1999, erasing some $12 billion of market capitalization. ... Regulators say Goldman allowed Mr. Paulson's firm, Paulson & Co., to help design a financial investment known as a CDO, or collateralized debt obligation, built out of a specific set of risky mortgage assets--essentially setting up the CDO for failure. ... 'The product was new and complex, but the deception and conflicts are old and simple,' said Robert Khuzami, the SEC's enforcement chief. ... The SEC said Mr. Tourre was 'principally responsible' for piecing together the bonds and touting them to investors. ... But he was hardly alone, the SEC alleges: The deals, were signed off by senior Goldman executives, though the SEC didn't specify how high up it believes the knowledge extended. ... Goldman has vehemently denied putting its own interests ahead of its clients.'," Gregory Zuckerman, Susanne Craig and Serena NG at the WSJ, 17 April 2010, link: http://online.wsj.com/article/SB10001424052702303491304575187920845670844.html.

I put no stock in this suit, concluding the SEC and Vampire Squid (VS) needed some headlines to make it appear "the cop is back on the beat" and help pass Dodd's toothless "reform" bill. So the SEC brought this suit with VS playing Brer Rabbit not wanting to be thrown in the briar patch.

Frightening! On 30 April 2010, while editing I came across a post by Junior at Junior Deputy Accountant:

http://www.jrdeputyaccountant.com/2010/04/goldman-sachs-gets-thrown-in-briar.html. Go Junior! Your father is proud.

SEC vs. the Shorts

Matt Phillips discusses the SEC's treatment of short-sellers and Lehman's shorts, WSJ, 15 March 2010, link:

http://blogs.wsj.com/marketbeat/2010/03/12/lehman-and-the-shorts-why-regulators-should-have-listened/