Cheap Planes

"Some of the warplanes drawing the most attention at this year's Paris Air Show are some of the slowest. Aerospace and defense companies are trying to capitalize on the growing appeal of low-cost planes packed with high-tech survelliance gear and weapons. These planes are suddenly in vogue as the costliest warplanes are falling out of favor at the Pentagon. ... Chunky no-nonsense looks are brutish enough to make passing generals stop and stare. [AT-802U's] 8,000-pound payload of missiles, rockets, cannons and bombs offers a contrasting image of air warfare to the larger, sleeker jet fighters that cost tens of millions of dollars and are the usual showstoppers here. ... Air Tractor's Air Truck, with a top speed of 210 miles per hour, will never be a stand-in for the US Air Force's F-22 Raptor, the kind of high-tech marvel that keeps enemies away so planes like an Air Truck can operate. But Mr. [Robert] Gates, who plans to end F-22 production, is focusing on fighting insurgents and buying less-expensive weapons systems, making such planes increasingly attractive", my emphasis, August Cole at the WSJ, 16 June 2009, link: http://online.wsj.com/article/SB124508942994615891.html.

I see nothing wrong with the Pentagon buying AT-802Us for use in say, Iraq. However, such planes are only usable after the US has achieved air supremacy. Got that Gates?

Mish Nails Krugman

Can Nobel Laureate Paul Krugman (PK), still learn? Michael Shedlock nails PK, 16 June 2009, link: http://www.globaleconomicanalysis.blogspot.com/2009/06/krugman-and-mcculley-deja-vu-all-over.html. Is PK just a propagandist in his old age?

Yves Smith Skewers "The Plan"

Yves Smith (YS) has a 19 June 2009 post skewering Tim Geithner's financial reform plan at her Naked Capitalism, link: http://www.nakedcapitalism.com/2009/06/geithers-plan-to-have-reform-plan.html.

I have nothing to add to YS's comments. My favorite quotes from her piece, "Those shortcomings are almost certainly features, not bugs. ... While these are legitimate concerns, the contretemps about the Fed masks more serious issues. ... That suggests that there needs to be not just an institution-based view of the financial markets, but probably also a product-based perspective and increased attention to system dynamics".

Now I present the IA financial reform plan:
1. Repeal the Federal Reserve Act.
2. See 1.
3. See 1.
4. Overturn the 1930s "gold clause cases".

5. Make it a felony punishable by up to 10 years in prison to authorize any financial institution holding FDIC insured deposits (FDCI-FI), from holding, trading, issuing shorting, acting as agent for any derivative. Put bank officers in prison? Yes. To hell with the FDIC-FIs.

6. Limit FDIC-FIs from exceeding 1% of total FDIC-FI assets.

7. Make it a felony punishable by up to 10 years in prison, for any FDIC-FI officer from making a loan other than what EC Harwood (ECH) would call a "short-term" self-liquidating loan. ECH wrote about sound bank management in the 1930s! The only blog I know of which follows his work is Sybil's Star, link: http://www.sybilstar.blogspot.com/.

8. Make it a felony punishable by up to 10 years in prison, for an FDIC-FI officer to authorize an FDIC-FI to run an "unmatched book", i.e., have unmatched loan and deposit maturites.

9. Reinstate Glass-Steagall.
10. Separate investment banking from retail brokerage.

11. Require all FDIC-FIs officers, in the case of an FDIC-FI bankruptcy to be personally liable for up to three times each officers last three years' total compensation.

12. Lastly, clone Andrew Jackson, give him two dozen flintlocks and let him loose on Manhatttan Island.

You wanna see Wall Street howl? Here it is.

Big 87654 Fraternity

Francine McKenna has a 17 March 2009 post at her re: the Auditors, which is very critical of the Big 87654. Some choice quotes: "And the largest global public accounting firms--KPMG, [PWC], Deloitte and Ernst & Young--again failed to prevent, warn, or mitigate the desperate financial situation, the national crisis of significant proportions we now find ourselves in. ... They're getting a free pass. ... They recruit and promote less like a business, based on merit, and more like a secret society or fraternity. ... There's a type of Big 4 omerta, the extreme form of loyalty and solidarity in the face of authority usually attributed to the Mafia. Once initiated into firm culture, survival requires adoption of this informal oath of allegiance that makes it shameful to betray even one's deadliest enemy, your competitors, to legal and regulatory authorities. ... Violence is the only thing left that the firms haven't depended on to accomplish their goals. ... Controlling and making money from all sides of a transaction is another potential sign of a criminal organization at work", http://www.huffingtonpost.com/francine-mckenna/the-button-down-mafia-how_b_174496.html.

This is how it is. When I was with the Big 87654 we called the road to partnership, "The dance of the sychophants". One partner in my office, who was on the "outs" with the others and biding his time to retirement, complained of the firm's childish, "fraternity-like" atmosphere. The Big 87654 have many conflicts of interest. So? The PCAOB is full of "former" Big 87654 partners. Did the PCAOB publicly demand say Citigroup recall all its financials for the past five years? Did it try to tar and feather the responsible KPMG partners? If not, why not? Good job Francine. Try to hire a Big 87654 firm to testify against another in an accounting malpractice case. Good luck. Francine, how do you know no Big 87654 firm ever resorted to violence to shut up a critic? The closet I know of is the Abe Briloff, 1917- (AB) peer review fiasco of about 15 years ago. AB is a Baruch College professor in New York. He also had a small CPA firm. His NY State Society "peer review", whatever that is, failed his firm. There was an ensuing hubub and the peer reviewers backed down. For my money, the peer review authorities have as much integrity as Mike Nifong of "Duke Three" fame, i.e., none at all.

Some books AB's written: Unaccountable Accounting, 1972; More Debits Than Credits, 1976 and The Truth About Corporate Accounting, 1981. There is nothing new here.

An Eichmann Moment?

"The once-booming market for Islamic-friendly bonds, having suffered a contraction amid the credit crisis, now faces a new challenge: default. The fledgling market in recent months experienced its first two defaults, and they aren't expected to be the last as issuers like Saad Group hit financial difficulties. This is taking investors and courts into uncharted territory as they seek to apply Western laws to bonds that were designed to comply with Islamic law, or Shariah. ... Sukuk bonds get around the Islamic ban on speculation and paying interest by using devices such as sale-repurchase deals. Although based on centuries-old religious law, the sukuk market has become a 21st-century phenonemon. ... In 2007, respected Pakistani scholar Muhammad Taqi Usmani [TU] delivered a bombshell, suggesting that the most popular type of sukuk structures, responsible for up to 85% of issues were unlawful according to Islam. The problem: They offered partial or total guarantees of repayments or of annual distributions, which ran counter to the Islamic principle that parties to a financial transaction must share in the risks and rewards attached to it. Last year, the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions formally ruled such structures weren't Shariah-compliant. ... [TU] 'didn't realize how much his views mattered,' says Dawood Ahmedji, director of Islamic Finance at Deloitte LLP. ... The structure of sukuk bonds can invite challenges and delay as Western bankruptcy judges accustomed to traditional bonds try to figure out where sukuk holders belong in the line of creditors, and even whether they are creditors or owners", my emphasis, Stephen Fidler at the WSJ, 16 June 2009, link: http://online.wsj.com/article/SB124510859262816907.html.

Investment bankers, lawyers and CPAs associated with these sukuks have more guts than brains. They're lucky Israel's Mossad doesn't try to make some friends in: Saudi Arabia, Kuwait, the UAE and other Arab states by giving us another "Eichmann Moment", i.e., kidnapping all associated with these sukuks and giving them to the Saudis to deal with. If lucky, each will only lose one hand. If unlucky, a hand and foot on opposite sides. Go Mossad! That lawyers and CPAs pronounced the sukuks "halal", like those in the East Cameron (EC) case, shows "Goldman Sachism" pervades the Islamic world too. The EC sukuks were issued through a "special purpose vehicle". Uh, oh. I say balderdash, agreeing with London Judge Robert Summerhays. EC should be estopped from claiming sukuks were "halal" at issuance and now sukuk holders are creditors as opposed to royalty stream part owners. Having studied sukuks, I agree with TU. Ahmedji, at Deloitte's in London, have you no integrity? Or do I know more about Shariah Finance than you? Did you not see these instruments were "haram"? TU knew exactly what he was doing. I presume the changed circumstance will mean fewer fees to Deloitte.

War story time. About six or seven years ago, I was approached to write a special report on some sukuks. After studying the CPA rules I concluded I could write the requested report. I next studied Shariah and concluded the proposed sukuks were "haram". I never heard from the investment banker trying to peddle these things again. This ain't that tough.

Obama, Netanyahu and Ahmadinejad

"What is clear is that Obama has chosen to pick a fight with Israel. ... I think the real key to understanding the policy shift is the linkage the Administration has laid out between Israeli Palestinian negotiations (which the Administration is arguing depends almost exclusively on an Israeli halt to settlement activity) and the effort to prevent Iran from becoming a nuclear power. It is my belief that the Obama team has thrown in the towel on stopping Iran from getting nuclear weapons. Obama will never use military force for this. ... So in order to provide an excuse for the Administration's failure to stop Iran, they will make Israel the reason for this happening--Israel refused to stop settlement activity. ... It is also sad to see Hillary Clinton, who many of us would be much better on US Israel relations than Obama during the campaign last year, turning into the loyal warrior for Obama on this initiative, knifing Israel at every opportunity. ... There is a fourth possibility--that Obama simply wants to be loved by the Muslim masses around the globe. ... It is frightening to consider that the current policy shift might be occurring for narcissistic reasons and not strategic ones", my emphasis, Richard Baehr, 10 June 2009 at: http://www.americanthinker.com/2009/06/obama_and_the_settlements.html.

Even I don't think geographically and historically challenged, double Ivy League POTUS is so stupid as to believe if Israel disappeared tomorrow and its 5.2 million Jews died in a 2009 "tenth Egyptian plague", Iran would end its nuclear weapons program. Either Uncle Sam destroys Iran's nuclear sites or he doesn't. That's the bottom line, POTUS. Obama will not attack Iran. Instead, like Bush, he keeps us busy in Iraq and Afghanistan. I never thought "The Smartest Woman in the World" would be "better on US Israel relations". Mr "57 States" can't think strategically, or otherwise. Alternatively, as "OIS President" he believes attacking Iran is "haram", so uses Iraq and Afghanistan to weaken us strategically! As Yves Smith would say, keeping us busy in Iraq and Afghanistan is a "feature, not a bug". It's what the jihadis want.

China Sells Dollars-2

"The world's most important bond salesman told a Peking University audience Monday that 'in the [US], we are putting in place the foundations for restoring fiscal sustainability.' News reports said the audience tittered at that one, and no wonder. The Chinese are well aware of the great American fiscal and monetary blowout, with the 2009 federal budget deficit set to reach 13% of GDP, if we catch a break or two. ... The Chinese must have been especially startled to hear Mr. Geithner add that the US plans to 'put in place comprehensive health-care costs, costs that are the principal driver of our long-run fiscal deficit.' So by adding another few trillion dollars in new health entitlements, the US will 'bring down' the cost of health care. The Chinese will have to consult their Washington embassy on that fiscal puzzler. ... There's at least once hitch: The US-China trade imbalance didn't cause the current financial crisis. To the extent that 'global imbalances' played a role, the original sinner was the Fed, which flooded the world with dollars. ... The policy point is that the 'imbalances' resulted more from reckless monetary policy than from spend-thrift American consumers or Chinese exchange-rate policy. ... And speaking of inflation risks--that is, danger of a debased dollar and dollar assets--Mr. Geithner didn't help by advising China Monday to allow 'greater exchange-rate flexibility.' ... It's also a signal to the Chinese that the US may secretly want the dollar to decline, which is one reason that, despite the global recession, the prices of oil and other goods that are denominated in dollars have been rising again", my emphasis, Editorial at the WSJ, 3 June 2009, link: http://online.wsj.com/article/SB124398801277079489.html.

"Strong buying by China has helped lift commodity prices around the world this spring, but growing evidence suggests that a sizeable portion of this buying has been to build stockpiles in China, and may not be sustainable. At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel exports remain weak. Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including alumimum, copper, nickel, zinc, canola and soybeans. Starting in April, China began stockpiling significant quantities of crude oil", Keith Bradsher, at the NYT, 11 June 2009: http://www.nytimes.com/2009/06/11/business/economy/11commodity.html.

"However, this boils down to nothing more than grandstanding. The Chinese are not idiots. ... Indeed, abandoning the dollar for another currency (say the yen or euro) would serve no benefit from an economic standpoint. ... It would be akin to trading one problematic investment for another: no major world currency is backed by gold or any asset of real value. ... Throughout 2009, China has been buying up natural resouces, commodities, and other real assets at a break-taking pace. ... The headlines were right under the world's collective nose, but no one was thinking 'diversification away from the dollar.' Instead they were thinking, 'purchases needed to fuel economic growth.' ... The reasoning here is simple. Unlike paper currencies, natural resources and commodities cannot be reproduced ad infinitum by central banks. ... Make no mistake, the Chinese have already begun diversifying away from the dollar. They just haven't advertised the fact openly", original italics, Graham Summers (GS), at Gold Eagle, 17 June 2009: http://www.gold-eagle.com/editorials_08/summers061709pv.html.

Secretly? Correction, real assets are not "denominated" in dollars, but units like: barrels, bushels, pounds, etc. What is gold's denomination? Is a krugerrand worth more or less than an American Eagle or Chinese Panda? An ounce of gold is an ounce of gold.

This piece was titled, "China's Commodity Buying Spree". A better title, "China's dollar selling spree". Think about it. In substance, China is adopting Irving Fisher's Compensated Dollar Plan.

Well said, GS.

Higgs and Junior on Reform

Robert Higgs has a 14 June 2009 post sharply critical of financial reporters at the Beacon. Junior Deputy cites it and links to it, 14 June 2009, link: http://www.jrdeputyaccountant.com/2009/06/great-regulatory-power-grab-obama.html.

Feds in Motion-3

"George Canellos, a former federal prosecutor, has been tapped to run the [SEC's] New York office, the first outsider in years to take the key post. ... Currently, Mr. Canellos is a defense lawyer with Milbank Tweed Hadley & McCloy LLP, where he represents companies and individuals in white-collar investigations. He is expected to join the SEC in July", my emphasis, Kara Scannell at the WSJ, 3 June 2009, link: http://online.wsj.com/article/SB124398631471479327.html.

The revolving door revolves once more. Outsider? Hahahahaha would say the Mogambo Guru.

Laffer On the Fed

"Here we stand more than a year into a grave economic crisis with a projected budget deficit of 13% of GDP. ... With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilites of federal programs--such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid--are well over the $100 trillion mark. ... The Fed controls the monetary base [MB], 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position. ... The currency-in-circulation component of the [MB]--which prior to the expansion had comprised 95% of the [MB]--has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the [MB] is a smidgen less than 50% of the [MB]. Yikes! ... Banks now have huge amounts of excess reserves, enabling them to make lots of net new loans. ... The expansion of money, given an increase in the [MB], is inevitable, and will ultimately result in higher inflation rates. ... The 12-month growth rate of M1 is now in the 15% range, and close to its highest level in the past half century. ... To date what's heppened is potentially more inflationary than were the monetary polices of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges", Arthur Laffer (AL) at the WSJ, 10 June 2009, link: http://online.wsj.com/article/SB124458888993599879.html.

I agree with AL. Sell dollars. Buy gold. 'Nuff said. Junior at Junior Deputy has a 16 June 2009 post referring to AL's piece: http://www.jrdeputyaccountant.com/2009/06/ready-or-not-here-comes-inflation.html. Disagreeing with Junior, "it's [only] going to hurt" if you hold US dollar denominated securities. Here I go again, "Got gold? Get more! Got bonds? You fool"! The Mogambo Guru and I must be rubbing off on Junior. She writes "doomed" and makes bold some of Laffer's words I excerpted above.