Calling Deloitte Detroit

General Motors (GM) will form a VEBA to put billions of dollars in future employee healthcare expenses into it. However, "GM is still funding the trust, so it still has to pay the costs. ... The important thing is that the health care costs will now be off our balance sheet. ... Wouldn't it have made more sense to come up with a system that might have actually reduced those costs", Loren Steffy (LS) in the Houston Chronicle, 5 October.

Right on LS! As I have said before, when you see a "financing innovation" ask what it lets the new "owner"do the old one couldn't. This VEBA seems to lack economic substance. Will Deloitte insist GM consolidate the VEBA if it lacks substance and CPAs should elevate substance over form? Will Deloitte find time to have its employees consider this issue? With $73 million in GM fees last year, it appears Deloitte could spend five to ten hours considering this. Will the Mounties Dudley Do-right save Nell Fenwick tied to the train tracks from the oncoming train? Stay tuned for the next installment of this saga. As LS noted, GM didn't do so well in offloading Delphi's labor costs.

International Tort Crisis????

"Stoneridge could exponentially increase the U.S. litigation exposure of non-U.S. companies. ... The only requirement would be that their U.S.-listed partners be accused of misreporting transactions in which they participated, whether as buyers, sellers or advisers. ... Every business dealing with U.S.-listed companies would have to examine the possibility of fraudulent bookkeeping in every transaction", Norman Lamont, in the WSJ, 4 October.

If Lamont is right, that foreign entities would have their U.S. litigation exposure "exponentially increased", it means they have had none up to now. As to protecting advisers, buyers and sellers, who is Lamont kidding? What does a bank's structured finance department do, if not arrange transactions to circumvent accounting and tax rules? Similarly, buyers and sellers offering sales terms not available to all comers. I say there is no organization which can more easily determine a transaction's economic bona fides than the counter-party when it is entered into. The economics of information indicate the counter-party is the "least cost" investigator and should bear the burden of ascertaining the transaction's bona fides. Who believes they don't do it now? But they bear no responsibility for their actions which affect innocent third parties.

31 Years of Failure

Henry Paulson will form a "21-member committee, which includes a mix of business, regulatory and academic representatives. ... [It] will take a broad look at the auditing industry since [SOX] ... changed the dynamic between accounting firms and the companies they audit. .. Paulson and other Treasury officials have expressed concern about the way the industry now operates, saying it places too much risk on accounting firms if they fail to spot problems. ... The group is part of Mr. Paulson's broader initiative to ... [reduce] regulatory and legal burdens that corporations say are hindering their ability to compete globally", WSJ, 3 October.

Too much risk? This is laughable. What is the Paulson Group's (PG) real purpose? To better protect the Big Four (BF)? Look at the ratings agencies mess. Aren't the BF sufficiently protected by 1995's Litigation Reform Act? I see the PG's findings: strengthen the PCAOB and exempt the BF from class-action lawsuits. Why not, the SEC's expertise and integrity protect the public. Does anyone remember the Ray Dirks fiasco over Equity Funding which culmanated in Dirks v. SEC, 463 US 646 (1983)?. The PG can recycle the AICPA's 1999 lobbying efforts which talked of the CPA profession's successful response to 1976's 1760-page report titled, The Accounting Establishment, generally known as the "Metcalf Report". 1976??? The PG will do as much to protect investors as "The Commission" which met in 1957 at Little Apalachin did.

Daniel Dustin of the New York State Board of Public Accountancy said in May 1999, "When you review the conclusions of the Metcalf report against the realities of the current regulatory structure, you will see that the vast improvements envisioned in 1976 have met with only moderate success. ... Regulatory bodies serve only one master, the public". No, the regulated. The regulatory bodies are almost immediately co-opted. Have we learned nothing in 31 years?

An Old Voice Still Speaks

In 1980 I read a book titled The Warmongers, by Howard Katz. It's a gem. If you get a chance to read it, you should. I recently found Howard Katz has his blog, The Gold Bug, which I linked to. It too is worth a look.

Engine Charlie Returns, Sort Of

"Several Republican members of Congress yesterday called for a Treasury Department probe into whether Pentagon computer networks will be compromised by the merger of a U.S. network-equipment maker and a Chinese firm with links to Beijing's military. ... Government officials concerned about the deal have doubts about a Treasury review, because Mr. Paulson is a former executive at Goldman Sachs, which is advising 3Com on the deal. White House Chief of Staff Joshua B. Bolten was also a Goldman Sachs executive", Washington Times, 4 October.

How appropriate that this should be announced on Sputnik's 50th anniversary. I remember one of Ike's Defense Secretaries was Charles Wilson, formerly General Motors CEO. In 1952 "Engine Charlie" as he was known, told Congress, "What is good for the country is good for General Motors, and what is good for General Motors is good for the country". Apparently Mr. Paulson remembers the quote this way: What's good for Goldman Sachs is good for me and if it's good for me, it's good enough for the country. Imagine, Goldman Sachs has done a "leveraged buyout" of the whole US with virtually nothing down.

A Tip on TIPS

"Imagine that a cardiologist told you aside from the irregular heartbeat, the stratospheric cholesterol count, and a little blockage in your aorta, your core heart functions are just fine. ... Signs on inflation are evident throughout the economy. ... In still-poor China, food expenditures account for 37 percent of the CPI, compared with 14 percent in the United States. ... China's government is trying to deal with its inflation [by instructing local bureaus] not to use the word 'inflation' to describe what is happening. ... But by focusing on core inflation, the [Fed] ... is practising its own subtle form of denial", Daniel Gross in Newsweek, 8 October.

Gross is too kind. What's subtle about it? Uncle Sam knows what he's doing. In 1997 he revised his CPI based on the Boskin Commission's (BC) report. I thought BC was a fraud. The BC concluded the CPI overstated inflation by about 1.3 percent per year. We need a new BC! "Round up the usual economists". That said, in reducing reported inflation Uncle Sam reduces Social Security payments and increases income tax collections. Moral of the story, do not buy TIPS, Uncle Sam will manipulate their returns to his advantage and your disadvantage.

If Jim Chanos Didn't Exist We Would Have to Invent Him

"'This is the greatest single financial coup in the history of Chicago.' That's how alderman Edward Burke of the city council's finance committee, described the 99-year lease of the Chicago Skyway, a 7.8-mile toll road, to a private operator for the stunning sum of $1.8 billion-almost $1 billion more than the next highest bid. ... The 'Macquarie model,' as both believers and skeptics call it, is now spreading around the world. ... And powerful firms from AIG to Goldman Sachs are following in its footsteps by raising multibillion-dollar infrastructure funds of their own. ... Chanos ... [said]: 'The Macquarie model is justly famous around the world. It is possibly the most efficient method of legally relieving investors of their money ever conceived.' ... 'Borrowing future growth to pay investors today bears the hallmarks of a Ponzi scheme,' said Chanos. ... Already Macquarie was shifting its business model, which Chanos saw as a sign it was trying to avoid disclosure. ... These days every smart young Australian who wants to work in finance wants to work at Macquarie Bank--and those who work there often think there's no place else worth working", Fortune, 1 October.

Did somebody call? Skeptic here. I first heard of Jim Chanos in about 1984 when he was a Duff & Phelps analyst in Chicago. A client asked me about an annuity which would yield 10.5% annually. I told him don't touch it. He asked why. Because AA corporates yield 12%. If it costs the insurance company even 1.5% per year to run the annuity, it can't pay off. The product can't work. The client was furious, "But the salesman said ... " I said, "Of course. He's got a commission on the table. What's he supposed to say"? Chanos went further and realized the company offering the product, Baldwin-United was insolvent. Had I only thought about the issuer instead of the product I could have made a beautiful short sale. I have followed Chanos' career ever since. I believe the "Macquarie model's" biggest risk is political: how long will localities let Macquarie raise fees to use its assets? This seems to be what lets Macquarie work: it gives politicians cover to raise user fees. Whenever you see a new financing "innovation" ask: what operational changes will the new owner make the old one couldn't?

I disagree with Chanos about one thing: inflation is a more efficient way to legally relieve investors of their money than Macquarie could ever hope to be. As a world renowned expert in relieving investors of their money said, "The way to crush the bourgeoise to to grind them between the millstones of taxation and inflation". Who was he? Lenin.

That "every smart young Australian" wants to work for Macquarie, I see as a very negative indicator. The kids are usually behind the curve.

Those Who Do Not Know History ...

"Here's a simple solution to the problem of China having too many dollars and the IMF not having enough-start selling the IMF gold to China", Tim Iacono at themessthatgreenspanmade.blogspot.com, 2 October. Iacono continues, "Hey, China could buy all of the IMF gold for less than $100 billion. ... That sounds like that's way too many dollars and way too little gold". At what price?

First: whose problem is it that China has "too many dollars"? China's or the IMF's? I say it's China's. Why does the IMF need more dollars?

Next: what price should the IMF sell at? Iacono says the IMF has 2,817 metric tons (MT) of gold. My conversion at 32,151 Troy ounces per MT is 90.6 million ounces. If China has $1.3 trillion dollars of foreign exchange reserves (FER) and if the IMF wants to buy even 20% of China's FER or $260 billion, the IMF needs $2,870 per ounce ($260 billion / 90.6 million). With gold at $728 as I write, the IMF needs a "quadruple" to retire 20% of China's FER. Does Iacono suggest the IMF sell a real asset GOLD, to buy paper dollars? If the IMF wants dollars all it need do is call Helicopter Ben (HB) and have HB print them. HB can print them and make a big profit. What do dollars cost HB to print? Virtually nothing.

By the way, the IMF held gold sales from 1976 to about 1980. Iacono should see what happened to these gold sales involving about 25 million ounces.

Perhaps Iacono thinks the US should "redeem" China's FER. We have 8,133.5 MT of gold according to Iacono or 261.5 million ounces. If we were to redeem 20% of China's FER we need a price of $995 per ounce. For the US to redeem all of China's FER would require $4,971 per ounce. The bullish case for GOLD is easily made.

One of Our Best Thinkers

"The American [SEC] is investigating the big banks to determine whether they bribed the rating agencies, in effect, to bias their judgment in order to help the banks peddle a tainted product. ... The ratings agencies pronounced riskless a trillion and a half dollars' worth of derivatives that turned out risky after all. The banks sold it, and the Federal Reserve and other regulators let the world apply vast amounts of leverage to it. That leaves the rest of us waiting to see whether the house of cards will come down. ... But the present crisis ... was executed by corporate types who did little more than cut a few corners and assume that someone else would take responsibility for the problems they were creating. ... China and other emerging economies desperately require investment in infrastucture, and the return on such investments is likely to be very high. That is where Asian savings should be directed. ... What we have witnessed in the financial markets is ... the evil of mediocrity. Most people have no special gifts or insight, no skills or powers that distinguish them from the mass of their fellows about them. ... If Americans have to learn the hard way that they cannot surf the wave of the world's savings forever, it will be a painful but necessary lesson", Spengler, in atimes. com, 1 October.

I could not have said it better. Spengler, who usually writes about religious topics, is one of our best thinkers. Imagine, "Quants" with MIT PhDs and 800 Math GREs, have no more insight into the world than the rest of us. Say it ain't so Joe.

In 1987, a Merrill Lynch (ML) trader, Howard Rubin, lost $377 million trading mortgage-backed securities. I remember thinking at the time, "Didn't anyone at ML understand these products"? I recollect they were "interest only" or "principal only" strips. Apparently not. The IOs and POs were not that complicated. But ML apparently thought Rubin knew what he was doing. Similarly, as we are learning, today's quants don't know what they are doing either. I agree with Spengler, China and India would do better investing in their own economies than US Treasury paper.

Tea Bulb O-Mania

"A type of tea commonly pressed into Frisbee-shaped cakes, puer (pronounced 'poo-ahr'), was long the domain of a small group of tea collectors. Earlier this year, speculators discovered the tea, driving up its value. ... The price of one of the hottest varieties of puer soared to nearly $35-a-cake this past April, seven times the $5-a-cake value just three years ago. ... Like wine, puer is judged by the vintage. At the top of the scale are 150-year-old cakes that can fetch more than $13,000", WSJ, 2 October.

In 1636-7 the price of tulip bulbs soared in Holland, one being sold for 5,200 florin, which I estimate would be about $55,000 today. If the Chinese can trade teas cakes like this, the Chinese stock market may be due for a fall.