The Trend Is Not Your Friend

"In the 2010 tax year, for the first time, there is no $100,000 limitation on the ability to convert IRAs and other tax-deferred retirement accounts into Roth IRAs. ... To convert to a Roth entails paying any deferred taxes now, in exchange for freedom from taxes forever after on principal, income and gains, whether for one's self of one's heirs. ... When the conversions are reported next year in tax-year 2010 filings, that's going to drive hundreds of billions of dollars in unexpected revenue. ... If just 10% of it is converted, then taxes would be paid on $540 billion at a 35% rate-generating a $189 billion revenue surprise for the US Treasury. ... They'll benefit most from paying taxes today while the low Bush-era rates are still in effect, and by avoiding them in the future when soak-the-rich Obama-era rates come in. The USAA poll found that 61% of the highest-earning households planning to convert are thinking along those lines. ... Moreover, critics might point out that the bigger the miracle in the short run, the worse for revenues in the long run", my emphasis, Donald Luskin (DL) at the WSJ, 15 April 2010, link:

http://online.wsj.com/article/SB10001424052702304222504575173790279735972.html.

"Should anyone be so naive to think that this adminstration won't later change the rules and begin to tax all gains on Roth IRAs for those families making above $250,000 per year?," Dan Agan letter to the WSJ, 20 April 2010, link:

http://online.wsj.com/article/SB10001424052702303491304575188324189001944.html.

Unlike Lloyd Antoinette Blankfein, who does "God's work", DL does the IRS's. What a fool. Imagine, DL is the chief investment officer of Trend Microlytics (TM). Unexpected revenue, DL? Are you serious?

Agan's an optimist.

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.

LA's "Windfall"

"After a week of dire predictions, city officials here said an unexpected $26 million of new revenue will help stave off an immediate fiscal crisis, but serious longer-term financial problems remain. ... The city's budget deficit is expected to grow to $485 million in the coming fiscal year, which begins on July 1. ... 'In LA there are multiple centers of power with multiple priorities, and getting them to agree on one plan is an incredibly difficult process, which works better in the long term than when you're in a crisis,' says Fernando Guerra [FG], professor at Loyola Marymount University [LMU] in [LA]. 'In a crisis we need unitary power, but the city of [LA] doesn't have that'," Peter Sanders at the WSJ, 10 April 2010, link:

http://online.wsj.com/article/SB10001424052702304703104575174290182168722.html.

"Before he bacame mayor, Antonio Villaraigosa [AV] rose to power here as a union leader, organizing lawyers, teachers and secretaries. But with [LA] facing a $485 million budget crisis, Mayor [AV] is pressing for layoffs if union workers don't agree to wage cuts. That has pushed the old labor warrior to the other side of the picket line--and through the looking glass. ... The mayor's proposed budget for the next fiscal year, released earlier this week, calls for the elimination of more than 3,500 city jobs, affecting a range of city services, including pothole patching, libabry hours and park programs. ... The mayor's porposal has raised the ire of the unions, which represent more than 95% of the city's 37,000 workers. ... That sets the stage for what could be a protracted battle between the unions, the mayor's office and the City Council. ... 'He symbolized the growing power of unions and that link with unions and Latinos,' said [FG], a professor of political science at [LMU]. 'He was the symbol of the new LA: Latino, union, progressive'," Tamara Audi at the WSJ, 24 April 2010, link: http://online.wsj.com/article/SB10001424052748704830404575200752592646676.html.

Guerra, do you favor establishing a military dictatorship in LA? My idea: have LA get foreign aid from Mexico! LA's "crisis" to come was obvious at least 15 years ago. Like Greece, LA's problem is that it doesn't issue its own money. Today. Perhaps AV can make pesos legal tender in LA.

The new LA is like Obama's America in that the only place it has for Caucasians is to pay taxes. Locally, AV is known as "Mayor Reconquista". Why? Because he was a member of "La Raza", i.e., "The Race". Of course, AV isn't a member today.

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.

Multistate Debt Crisis

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

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

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.

Newsweaker Still

"The relative decline of American education at the elementary- and high-school levels has been a national embarrassment as well as a threat to our nation's future. ... Within the [US], the achievement gap between white students and poor and minority students stubbornly persists--and as they population of disadvantaged students grows, overall scores continue to sag", Evan Thomas & Pat Wingert at Newsweek, 15 March 2010, link:

http://www.newsweek.com/id/234590.

What idiocy. The magazine cover indicates "We must fire bad teachers" to save American Education. Really? How about accepting that there is no "achievement gap" at all and that as American demographics change, test scores will fall. Period.

Justice Department Extortion Racket-6

"The top government prosecutor overseeing international corporate bribery investigations is expected to join New York-based Paul, Weiss, Rifkind, Wharton & Garrison LLP next month, following months of courtship by about half a dozen law firms. ... Government prosecutors frequently join private law firms when they leave the civil service. But there was a feeding frenzy surrounding the 42-year-old Mr. [Mark] Mendelsohn after rumors of his departure for private practice started to circulate last year. ... FCPA prosecutions and fines have increased sharply in recent years amid a broader global crackdown on corruption. ... Mr. Mendelsohn is a particular catch for Paul Weiss because the FCPA is particularly vague. ... As the government steps up regulation of many industries, law firms are particularly eager to hire top government lawyers, legal recruiters say. Jane Roberts, a legal recruiter in Washington, said top government attorneys can command $1 million to $2.5 million a year in compensation at private firms", Nathan Koppel at the WSJ, 14 April, 2010, link:

http://online.wsj.com/article/SB10001424052702303695604575182174285804354.html.

The FCPA is so vague it gives AUSAs many reasons not to prosecute. Reasons they collect after they leave the DOJ.