Failed CDOs

"Amost half of all the complex credit products ever built out of slices of other securitised bonds have now defaulted, according to analysts, and the proportion rises to more than two-thirds among deals created at the peak of the cycle. ... So-called CDOs of ABS caused huge losses to banks such as Merrill Lynch, UBS, and Citigroup, which held large amounts of the supposedly safest top-rated chunks of them. They have since been damned by bodies such as the Bank for International Settlements as being too complex to risk manage effectively. ... However, the ratings of these deals proved unsustainable, as evidenced by the fact they have accounted for 92.9 per cent of all 16,587 ratings downgrades globally from all rating agencies since the beginning of last year, according to Mogan Stanley. The way these complex and risky transactions were exploited at the peak of the bubble can be seen in the data from analysts at Wachovia, , who reckon that 47.6 per cent of alll CDOs of ABS by volume issued since the market substantively began in 2002 have by now hit an event of default. ... However, the real peak of the market saw 147 deals done in the second half of 2006 and 172 done in the first half of 2007--of which 68 per cent and 76.2 per cent respectively have now defaulted", Paul Davies at the FT, 11 February 2009.

"The financial engineers are at it again. ... 'Airplanes fail, too,' says Peter Cotton, founder of Julius Finance, a structured-finance firm in New York. 'That doesn't mean you don't fix them.' Mr. Cotton is one of many such engineers trying to solve a seemingly intractible problem before the government: how to design a system for buying up assets shunted into a massive 'bad bank.' The government doesn't want to pay too much and banks don't want to sell for too little. ... Cotton says the models most banks and ratings firms used to price CDOs were poorly designed. 'They are superficial,' he says, and often spit out prices that don't capture the underlying value of the assets.' ... At Julius, he has been designing new systems that dig deeper into the underlying loans of CDOs. The models use a variety of data points crucial to valuing these assets, such as the relationships between underlying slices of debt with different maturities in the assets. For instance, a CDO contaning many slices of corporate debt, or derivatives tied to that debt, can be priced by looking at where a large number of baskets containing these assets are trading and implying the behavior of the slices from these prices. ... Other financial engineers are working on new methods to price troubled assets. Richard Field, managing director of structured-finance firm TYI, has designed a system that provides real-time loan-performance data investors can consult to more accurately price the securities. If investors can peer into the underlying loan-performance of their aseets on a daily basis, they'll have a much better idea of their present value, Mr. Field argues", Scott Patterson at the WSJ, 23 February 2009.

Who is surprised by this except for the rating agencies?

See my 12 December 2007 and 9 May 2008 posts

http://skepticaltexascpa.blogspot.com/2007/12/of-quants-faith-and-alcoholics.html.

http://skepticaltexascpa.blogspot.com/2008/05/aaa-failure.html.

Eric Holder, Deceiver?

"Attorney General Eric Holder [EH], a Clinton administration retread, wants to revive Bill Clinton's National Conversation on Race. (What's next? Hillarycare?) Holder recently told his Justice Department employees that the [US] was a 'nation of cowards' for not talking more about race. ... 'If we are to make progress in this area, we must feel comfortable enough about racial matters that continue to divide us.' ... The Clinton-era Conversaton also purported to be frank, and we know what that meant: a one-sided litany of white injustices. ... Not only do colleges, law schools, almost all of the nation's elite public and private high schools, and the mainstream media, among others, have 'conversations about ... racial matters'; they never stop talking about them. ... Education bureaucrats maintain an incessant harrange on white racism because they see the writing on the wall: most students are indifferent to race and just want to get along. If left to themselves, they would go about their business perfectly happily and color-blindly, and the race industry would wither on the vine. ... Holder told his [DOJ] employees that they had a special responsibility to advance racial understanding, according to the Associated Press. ... Its assumption was that racial disparities in cops' stop-and-arrest rates reflect police racism, not racial disparities in crime rates. ... For instance, the homicide rate for black men between the ages of 18 and 24 is well over ten times that of whites. And disparities in other violent-crime rates are just as startling. In New York City [NYC], one of the nation's safest large cities, 83 percent of all gun assailants were black during the first six months of 2008, according to victims and witnesses, though blacks make up only 24 percent of the city's population. Add Hispanic perps, and you account for 98 percent of all shootings in [NYC]. The face of violent crime in cities is almost exclusively black or brown. That explains why someone might feel a sense of trepidation when apporached by a group of black youths. ... If blacks and Hispanics performed at the level that whites do, the US would lead all industrialized nations in reading and would lead Europe in math and science, according to a study publiched in the Phi Delta Kappan in 2005. ... Likewise, after their first year of legal education, 51 percent of blacks labor in the bottom tenth of their class; two-thirds reside in the bottom fifth. Blacks are four times as likely to fail the bar exam on their first try. ... Closing the educational achievement gap will be difficult as long as the black illegitimacy rate is nearly 71 percent, compared to a white rate of 26 percent. ... Skin color is a proxy for [bad] behavior. If inner-city blacks behaved like Asians--cramming as much knowledge into their kids as they can possibly fit into their skulls--the lingering wariness towards lower-income blacks that many Americans unquestionably harbor would disappear", Heather MacDonald (HM), 19 February 2009 at: http://www.city-journal.org/printable.php?id=3971.

"For all their talk about moving beyond race, liberals sure like to talk about it a lot. ... Holder proudly noted that our schools and workplaces have been successfully integrated through forced busing and affirmative action, but complained that the country remains 'volutarily socially segregated.' ... The dialogue that Holder, Clinton, and Obama want is really a monologue. The only acceptable way to discuss race is to attribute all racial problems in the [US] to 'white racism'--past and present, conscious and unconscious. ... Talk show host Peter Boyles correctly calls the word 'racist' a 'conversation stopper.' Once you are called this, continuing with the conversation can only have negative consequences. ... As the co-discoverer of DNA and a Nobel Prize winner, James Watson was one of the world's most respected scientists. That was until he suggested that there was a link between race and intelligence. ... When David Horowitz tried to run and ad opposing reparations for slavery in dozens of college newspapers, many refuse to print it. ... Americans of all races need to stop acting like cowards and challenge the liberal orthodoxy on race--even if that means that Al Sharpton and the New York Times might call them names", Marcus Epstein, 23 February 2009 at: http://www.vdare.com/epstein/090223_holder.htm.

I agree in part with EH and HM. We should talk honestly about race. Then end 40+ years of affirmative action programs and fantasies about why Negroes haven't achieved economic parity with whites. I'm so old I remember what we were told would happen in Africa when white colonialism ended. Didn't. In 1966 or 1967, my brother introduced me to Al Sharpton. Really. My brother went to school with Reverend Al. Al begins, "When I was a slave". I interrupted, "Al, how old are you? Slavery ended over a hundred years ago". Al looked at me funny. I said I would not be intimidated by such ahistorical nonsense. Al taken aback, said, "You lack humane knowledge". I said, "what does that mean"? Al didn't respond. I doubt Al had ever been challenged that way before. One kid in "our group", a Negress, was the only one in our IGC classes. Her background: one parent a dentist, the other a college professor. In tenth grade she left our school with a fully paid scholarship to a well-known Connecticut private school. Why not? She had over 150 IQ. She later got a fully-paid scholarship to Radcliffe. She is now a professor at a university in New York City. In about 1990 Jesse Jackson (JJ) said when approaching an elevator, he always gets in the car with a white or Asian as opposed to a black male. It's safer. Does this make JJ racist? Thomas Sowell (TS) wrote of "educational mismatch" decades ago. TS is a Negro. Is he racist too? 55% of California Berkeley's students are Asian? Is that bad? If each is in the top 10% of his high school class and gets 1400 on the entrance exam, I see no problem. See also my 1 September 2008 post: http://skepticaltexascpa.blogspot.com/2008/09/dead-elephant-in-living-room.html.

Are Insurers Next?-7

"Hartford Financial Services Group Inc. said state regulators had approved the easing of certain requirements, boosting the capital level of its life-insurance units by nearly $1 billion, or about 20%, while Lincoln National Corp. won approval for about $300 million in relief. .. Hartford disclosed the approval in a regulatory filing that also confirmed that recent ratings downgrades make the company ineligible to participate in a program under which the government serves as a backstop to U.S. issuers of commercial paper. ... One chunk of relief for Hartford is tied to the calculation of reserves to back the minimum-return guarantees to variable annuities. The market downdraft has ratched up the liability for these guarantees. ... The other relief relates to the accounting for deferred tax assets. .... Lincoln similarly sought to book more of these as assets, and said its regulators in Indiana have given approval", Leslie Scism at the WSJ, 13 February 2009.

Fun with numbers! Imagine, CPAs have state regulators.

California in Crisis-4

"As influxes of non-English speakers hit various neighborborhoods served by the school district (Lodi and north Stockton), the principals put in requests to the Adult School to send out a teacher to start a class. Before long, I noticed a fascinating pattern that held up regardless of which campus I was assigned to. The American-born teaching staff had small families averaging two children per teacher. But among their immigrant K-6 pupils, each had five, six or as many as eight siblings. Some immigrant parents had even larger families. One Mexican farm worker had fourteen children. A bilingual teaching aide, also Mexican, was one of twenty-two children. What brings this page from my past to the forefront is the storm surrounding Nayda Suleman, the unmarried 'California woman' who recently gave birth to octupulets even though she already had six children under the age of eight. VDARE.COM's Steve Sailer calls her 'Octomon.' ... Suleman and her defenders claim it's wrong to rob her of her privacy and to scapegoat her as selfish for ignoring the country's economic crisis, especially as it pertains to health care costs. ... But Suleman's approving a website that takes Pay Pal donations to allow you to help her raise her familiy (as if you don't have financial worries of your own) is inconsistent with her demands for privacy. ... Suleman's sanctimonious claim that her lifestyle is her decision alone and therefore none of anyone else's business is a tough sell. She recently hired a public relations firm Kileen Furtney Group ... to market book and movie opportunities. ... And Suleman receives food stamps valued at about $500 monthly plus disability payments for three other infants--public money, every dime of it. What's amazing is that so many people still can't see the whole picture when it comes to family size. ... In my immigrant classrooms of twenty years ago, my fellow teachers and I were dismayed and outraged at the numbers of children born to young immigrant mothers. In many ways, those immigrant mothers had much in common with Suleman. Although none of them took fertilization treatments, they had neither the financial resources--almost all received welfare--nor the emotional make up to nurture their children successfully in their new American environment. ... The long-term effects of those large families born to Southeast Asian refugees, and the steady inflow of illegal aliens from all over the world (but mostly Mexico and Central America) have devastated California. ... During the [recent] two-decade period, California health care came under seige. Every legal immigrant received a Medi-Cal card and used it freely, and often abusively, for ailments ranging from emergency room treatment for headaches to major surgery. Public K-12 education began its slide from among America's best to its current place as the country's worst--an irredeemable disaster. ... As I look back to my ESL teaching days, its clear to me there should have been as much outrage over the America's immigration disaster and its predicatable impact on our culture and population growth then as there is over Suleman's irresponsibilty", Joe Guzzardi, 14 February 2009 at: http://www.vdare.com/guzzardi/090213_octomom.htm.

China has a "one-child" policy and California a "two-child" policy for its working and taxpaying classes. Workers of California unite, you have nothing to lose but your chains. The fertility gradient rears its ugly head, my 18 September 2008 post: http://skepticaltexascpa.blogspot.com/2008/09/todays-sat.html. Junior at Jr. Deputy Accountant, said something to the effect that her generation was the stupidest in America's history. She's right! Do these illegal alien women think they are $25 million a year Wall Street traders living on public largesse? Jeb Bush, when Florida's governor never offered to support Terri Schiavo out of his own pocket, but would spend public funds to keep her alive. Who pays is always the issue. The US pays Mexico "war reparations" by supporting Mexico's least productive citizens it exports. What a world! We were warned on 20 April 1968 by Enoch Powell in his "Rivers of Blood" speech, link: http://www.vdare.com/misc/powell_speech.htm.

The Economist, 20 February 2009, wrote of "The Ungovernable State", California. I note the left-wing Economist did not mention immigration as a source of California's fiscal and social woes, link: http://www.economist.com/world/unitedstates/PrinterFriendly.cfm?story_id=13145207.

See No Evil, Speak ...

"Numerous accounting firms missed the alleged fraud at Bernard L. Madoff Investment Securities LLC as they inspected the investment company's books or those of so-called feeder funds that helped steer money to it. As a result, those accountants could now be legally vulnerable to claims that they should have uncovered red flags, according to legal and accounting experts. ... Lynn E. Turner, former chief accountant for the [SEC], said he finds it hard to believe that auditors of so-called feeder funds checked out Madoff's auditor as a way of bullet-proofing their confidence. 'If they didn't,' he said, 'then investors will have to hold the auditor accountable.' ... Others say they had no obligation to check out Mr. Madoff's auditor. They contend their primary role is to make sure the numbers their clients supply add up, not to detect fraud. ... Friehling & Horowitz [F&H] wasn't registered with the [PCAOB]. Nor was it 'peer reviewed,' a system in which auditors check out one another for quality control. David Friehling, the firm's only active accountant, was enrolled in a peer-review program at the [AICPA], but wasn't required to participate because he didn't handle audits, according to the AICPA. ... 'Our audit conformed to all professional standards,' said KPMG spokeswoman Kathleen Fitzgerald. "This is not a KPMG issue,' she said, noting that lawsuits have been filed against many top auditing firms. ... ''PWC was not the auditor for Bernard Madoff Investments, where the alleged fraud occurred,' the Canadian [PWC] affiliate said in a statement. Fairfield [Greenwich Group] is also a defendant in the suit", my emphasis, Ianthe Dugan and David Crawford at the WSJ, 18 February 2009.

I agree, feeder fund CPAs might be liable for Madoff's fraud. Disagreeing with Turner, had the other CPA firms "checked out" F&H, what then? F&H wasn't PCAOB registered? So? KPMG, yeah those guys, "audits" Citigroup. PWC "audits" Satyam, etc., etc., ad nauseum. Peer review, bah humbug. I've mentioned it on 28 April 2008: http://skepticaltexascpa.blogspot.com/2008/04/sec-investors-friend-fiend-2.html. Peer review was an AICPA scam, PCAOB review replaced it for CPAs which audit SEC registrants. Another scam. KPMG Canada must use PWC's "random word generator". Isn't it remarkable how similar KPMG's words are to PWC's comments about the Satyam fiasco, my 4 February 2009 post: http://skepticaltexascpa.blogspot.com/2009/02/silver-blaze-and-cpas.html.

Fitzgerald just admitted F&H is a "top auditing firm". How? By revealing the secret membership requirement: at least one large lawsuit being filed against the firm! Laugh.

Mullen the Moron

"Having routed the Taliban, liberated millions, midwived a (Sharia-supreme) constitution, assisted in elections, propped up a government and routed the Taliban, some more, all the [US] needs now to win victory in Afghanistan is to win the 'trust' of the Afghan people. So, cockamamiely, wrote Adm. Mike Mullen, chairman of the Joint Chiefs [JC], in a column appearing in the Washington Post just days before President Obama ordered 17,000 new troops to Afghanistan, nearly doubling the American presence there. ... Sorry, admiral, but if that is what we have 'learned' in a war that has claimed more than 600 American lives, wounded and maimed thousands more, and cost billions of pre-bailout dollars, we are practically done for. Why? The short answer is that making a primary objective out of winning the 'trust' of the Afghan people, the chairman of the [JC] has, by definition, abandoned all rational war policy. Indeed, he has placed the marker for American success not on the ability of US forces to execute their missions, but on the emotional reaction of the average, illiterate, modernity-challenged Afghan to those missions. ... I wish I could say I've never heard such fatuous counsel, but the entire so-called war in terror, from start to non-finish, reverberates with this same sort of line. It tends to turn profound Islamic differences from the West into profound Western failings toward Islam. ... Mullen goes on to accept, ... the thoroughly bizzare idea that 'each civilian casualty for which we are even remotely responsible sets back our efforts to gain the confidence of the Afghan people months, it not years.' ... The infilitration of jihadists is as advanced as it is complex, and defeating it requires more than massive deployments of troops abroad. For starters, it requires total reconfigurations of two national policies: our energy policy to decouple us from Islamic oil; and our immigration policy, including travel restrictions, in order to stop any further demographic incursions of Sharia and jihad into the West", my emphasis, Diana West (DW), 20 February 2009, link: http://townhall.com/columnists/DianaWest/2009/02/19/win_the_trust_of_people_who_hate_us_what.

I agree with DW. Mullen is a joke as JC Chairman. Has he heard of our Vietnam debacle? What do we pay Mullen for anyway? Mullen, 62, served in Vietnam. Does he think we won? I last mentioned Mullen on 2 December 2008, link: http://skepticaltexascpa.blogspot.com/2008/12/security-and-specialization.html. Dismissively, he was called a "Havard MBA type" officer. Very close. Mullen was a Havard AMP. Heaven help us with admirals like this. Hey Mullen, the torpedoes exit from this side of the tube! David Hackworth called "Mullens" "perfumed princes of the Pentagon". Amen. In Vietnam they were called "REMFs". Look it up. Mullen is the Navy's "Major General", my 25 August 2008 post: http://skepticaltexascpa.blogspot.com/2008/08/new-army-career-path.html.

Barro on Krugman and Taxes

Robert Barro, Harvard economics professor was interviewed by the Atlantic. The 11 February 2009 WSJ, has some excerpts: "I take it that you are fairly skeptical in general that fiscal policy will boost aggregate demand. Barro: Right. There's a big difference between tax rate changes and things that look like throwing money at people. Tax rate changes have actual incentive effects. ... Do you read Paul Krugman's blog? Barro: Just when he writes nasty individual comments that people forward. ... He just says whatever is convenient for his political argument. He doesn't behave like an economist".

I agree with Barro. See my 10 February 2009 post about tax incentives, link: http://skepticaltexascpa.blogspot.com/2009/02/no-stimulus-tax-cuts.html.

North vs. South

"'Defeat in detail' is a military concept that denotes the rout of an enemy by dividing and destroying segments of his forces once by one, instead of engaging his entire strength. ... The concept is as old as Sun Tzu ('if enemy forces are united, separate them') and was more recently restated by Mao ('concentrate a superior force to destroy the enemy forces one by one'). It is highly relevant to the American interest because the civilization upon which this country is founded--usually described as 'Western,' although 'Northern' would be more accurate--is in danger of being defeated in detail by its enemies, internal and external. ... Russia's ambassador to NATO, Dmitry Rogozin ... [said] 'There is a new civilization emerging in the Third World that thinks that the white, northern hemisphere has always oppressed it and must therefore fall at its feet now. ... If the northern civilization wants to protect itself, it must be united: America, the European Union, and Russia. If they are not together, they will be defeated one by one.' ... It indicates that, in some important respects, Russia is freer than the [US] or the [EU]: No American or Western European diplomat of his rank would dare make such a statement, even if he shared the sentiment--or hope to remain in his post after making it. And finally, it correctly diagnoses the attititude of the Third World to the northern civilization as inherently adversarial, based on the myth of the latters' oppressiveness and on the expectation of its eventual collapse. ... Since the collapse of the Soviet Union, Russia's population has fallen six percent, from around 150 million to just over 140 million. ... At the same time, the number of self-identified Muslims in Russia has risen by 40 percent in the last 15 years to 20 million, partly fueled by immigration from Central Asis and the Caucasus. ... The fertility of white Americans slipped below the replacement rate in the early 1970s' however, and it never recovered: Today it stands at about 1.8 babies per woman. ... In Russia, Rogozin's thesis is disputed by two very different groups. The Westernizers--insignificant in numbers but influential in the country's intelligensia--reject the notion that Russia can be, or should aspire to be, an equal partner of Europe and America unless and until she is reformed in their image. The Eurasianists, by contrast, see Russia's destiny in the great continental heartland and in strategic partnership with her southern and southeastern neighbors. They believe that Russia's interests and those of the [US] are inherently divergent. In their view, detente with Islam is more desireable than cooperation with the West. ... American exceptionalists believe that the [US] differs qualitatively from Europe (not to mention Russia) by virtue of her 'propositional credo,' which transcends the shackles of ethnicity, race, culture and faith. ... These groups share the radical notion that America is not a real country, but a metaphysical concept or a tool for their own Will to Power--or both. ... The short-term prospects for fostering a sense of unity among Europeans--Eastern, Western, and American--are dim and will remain so for as long as the regimes of all the major states of the West are controlled by an elite class hostile to its own biological and cultural fruits", Baron Bodissey (BB), 16 February 2009 at http://gatesofvienna.blogspot.com/2009/02/north-worth-saving.html.

I agree with BB. Our current policies with regard to Russia are foolish.

Boom, Bust

"The world has gone from the greatest synchronized boom in history to the first synchronized global bust since the Great Depression. How we got here is not a cautionary tale of free markets gone wild. Rather, it's the story of what can happen when governments ignore market signals and central bankers believe in endless booms. ... But the interest rates during this time [2004 to 2006] continuously lagged behind nominal GDP growth as well as cost of living increases, the Fed never truly implemented tight monetary policies. Indeed, total credit increased in the U.S. from an annual growth rate of 7% in the June 2004 quarter to over 16% in early 2007. It grew five times faster than nominal GDP between 2001 and 2007. The complete mispricing of money, combined with a cornucopia of financial innovations, led to the housing boom and allowed buyers to purchase homes with no down payments and homeowners to refinance their existing mortgages. ... Consequently the U.S. trade and current-account deficit expanded--the latter from 2% of GDP in 1998 to 7% in 2006, thus feeding the world with approximately $800 billion in excess liquidity that year. When American consumption began to boom on the back of the housing bubble, the explosion of imports into the U.S. were largely provided by China and other Asian countries. ... Another unique feature of this synchronized boom was that nearly all asset prices skyrockected around the world--real estate, equities, commodities, art even bonds. ... Sadly, government policy responses--not only in the U.S.--are plainly wrong. It is not that the free market failed. The mistake was constant intervention in the free market by the Fed and the U.S. Treasury that addressed symptoms and postponed problems instead of solving them", Marc Faber, WSJ, 18 February 2009, link: http://online.wsj.com/article/SB123491436689503909.html.

I agree with Faber. Net, the Fed creates more problems than it solves. Milton Friedman said that about 40 years ago.

Future Weapons

"Last August, a resurgent Russia won a swift victory over tiny, democratic Georgia. Sticking with tradition, Moscow relied on mass. The 'new' Russian military couldn't use its precision weapons effectively; its combined arms coordination was poor; pilots flying the latest aircraft couldn't hit their targets with smart bombs; and the Black Sea fleet could only deploy a five-ship squadron. ... Had we wanted to counter Russia's move militarily, we literally 'couldn't get there from here.' A few angry voices called for bombing. But we just couldn't have done it. ... Send in ground trops? Even if we could've deployed them, we couldn't have supported them or provided air cover. We--and the Georgians--were stuck. ... When naive U.S. politicians suggested sending our ground forces into Pakistan's troubled border regions to root out al-Queda and the Taliban, they didn't understand that, were Pakistan provoked by what local politicans would brand as an American invastion, Islamabad could simply deny us use of its lines of communication. That would mean 'game over' in Afghanistan. ... The answer is obvious: We need weapons that don't require permission from third-party governments for their use. That means weapons that can intervene from space", Ralph Peters (RP) at Armchair General, March 2009.

I draw a different lesson than RP, i.e., we should accept a Russian sphere of influence and stay out of it. We learned nothing from Britain's 1939 Polish guarantee, my 24 February 2008 post: http://skepticaltexascpa.blogspot.com/2008/02/kosovo-and-polish-colonels.html. As to creating space weapons, I think they would be among the first things destroyed in a war. Suppose it was "game over" in Afghanistan. So? What would we lose? Why should we care if the Taliban control Afghanistan anyway?