Sunday, November 30, 2008

More Good News

"In a closely watched move that may be followed across Wall Street, the top executives at Goldman Sachs Group Inc. [GSG] have decided to forgo their 2008 bonuses. In doing so, they are giving up potentially tens of millions of dollars in payouts in a year that reshaped the securities industry. ... The executives will only be eligible for their base salaries, $600,000 for each. A firm spokesman said the executives felt it was 'the right thing' to do. ... The debate over bonuses and how much should be paid out has been raging for months across Wall Street. Some investment bankers have argued that even if it was an ugly year, only a handful of people are responsible for the losses and not everyone should be punished for that. ... Many of these employees performed well in 2008 despite the market turmoil, these people say, but could get plucked away by rival firms if compensation practices are significantly altered. ... At many financial firms, about half of all revenue is allocated to compensation, and multimillion-dollar bonuses are routinely paid out to ensure the best talent stays put. ... Since the start of 2002, Goldman, Morgan Stanley, Merrill, Lehman and Bear have paid a total of $312 billion in compensation and benefits to its employees", my emphasis, Susanne Craig at the WSJ, 17 November 2008.

"Bring out the hair shirts? The decision by top executives at [GSG] to join peers at Deutsche Bank and UBS in forgoing bonuses for the year is a sensible act of contrition. But it is hardly radical. Against the backdrop of a financial crisis and intense public scrutiny--particularly after gorvernment capital injections--they had little choice. ... But cutting the pay of a handful of top executives is window dressing. What matters is the size of broader bonus pools", my emphasis, Thorold Baker at the WSJ, 18 November 2008.

"Citigroup Inc. Chief Executive Vikram Pandit vowed to keep slimming down the financial giant, announcing about 25,000 new job cuts that will shrink the number of employees by 20% since he took over last December", David Enrich at the WSJ, 18 November 2008.

"Capital is key to Citigroup's future. And on that score, investors are still worried, even after the banking giant announced plans Monday to cut 50,000 employees. ... Tangible assets, which don't include goodwill or intangibles, are 55 times the bank's tangible equity. J.P.Morgan Chase, by contrast, is 31.4 times, with Bank of America is 31.3", David Reilly at the WSJ, 18 November 2008.

"Behind headlines of record losses, a small group of Wall Street traders on commodities, currencies and interest-rate trading desks have made huge profits for the banks that employ them. That is setting up a scramble as traders vie for dwindling pools of bonus money once heaped on such top performers. So far, they look to be on the losing side of the trade. ... UBS, meanwhile, is crafting packages that withhold short-term pay if long-term bets go sour. Shaken by the global financial crisis and increasing government oversight, banks are groping with a new way of doing business: Pay out huge sums and risk public ire and perhaps more government intervention. Pay too little, and tempt defections or insurrection from the few people who are driving this year's profits. ... While Morgan Stanley's chief financial officer cited the commodities-trading group on an analyst call this year as one of the bank's 'two top businesses,' some traders in the unit in the past have argued that the commodities group is undercompensated relative to its contribution. ... The best traders at top-tier commodities and currency trading desks made $10 million to $20 million or more last year, and the next level down, traders who brought in $100 million in revenues, might have made $4 million to $5 million [Michael Karp] says. Generally, traders look for bonuses of up to 10% of profits they made for a firm, with adjustments for the performance of the unit and the overall firm. ... [Gustavo] Dolfino says star foreign-exchange traders who expected to make $25 million this year after earning the firm $250 million may get less if it isn't clear the feat can be repeated without the use of borrowed money. Acess to the firm's capital has been a key element to the returns of Morgan [MS] and Goldman [GSG], who have led a virtual duopoly in this commodities-trading business for more than two decades. ... Goldman, the other dominant Wall Street commodity dealer, could make as much as $3 billion in net revenue, say people familar with the results", my emphasis, Ann Davis (AD) at the WSJ, 19 November 2008.

"'The villagers are at the gates of the castle with burning torches,' says one compensation consultant. The sheer amount that bankers are paid riles people at the best of times. When the economy is ravaged and the source of the trouble is banks themselves, the pitchforks come out. Politicians on both sides of the Atlantic are gleefully grilling bankers on pay. ... Bankers are desperately trying to placate their critics. ... Paying out billions in bonuses will still look awful. Worse, many expect the ratio of compensation to income, which normally hovers just below 50%, to balloon as banks' revenues fall faster than their pay bills. ... Surely things are so bad that banks could still afford to disappoint even their better employees by screwing down on their pay? Banks everywhere are ditching staff, after all. ... Mob justice may have deserving targets but it is always crude and usually goes too far. Attacks on bankers' pay are no different", Economist, 20 November 2008, link:

"Treasury Secretary Henry Paulson, under fire from lawmakers and others for his approach to resolving the financial-sector crisis, defended his actions as 'necessary steps to prevent a financial collapse.' Mr. Paulson said Thursday that Washington should take a hard look at compensation practices in the financial-services industry, as well as the process of securitzing loans and selling them to investors. ... Mr. Paulson said he has dealt with matters as best as he could, and blamed the turmoil on factors including 'government action and mistaken actions, outdated U.S. and global financial regulatory sytems, and ... the excessive risk-taking of financial institutions'," my emphasis, Deborah Solomon at the WSJ, 21 November 2008.

"Wall Street firm [GSG] said Friday that it will issue debt backed by the Federal Deposit Insurance Corp. under the new Temporary Liquidity Guarantee Program, or TLGP", Matthew Cowley at the WSJ, 22 November 2008.

Mike Shedlock's 20 November 2008 post about Citigroup is worth reading:

Yves Smith's (YS) 20 November 2008 post about Citigroup is also worth reading,

YS has another post about Citigroup, 23 November 2008 worth reading, I add, "Where were the CPAs"? CPAs are supposed to evaluate a client's "business risks" among other things while doing an audit. The American Institute of Certified Public Accountants published Assessing and Responding to Audit Risk in a Financial Statement Audit (Assessing), 2006, a 498-page tome about how CPAs should consider risk during audits, 498 pages of junk to me. I read all 498 pages. Silly me. Lots of words, no substance. If Citi has "risk control" problems, whatever that means, what did KPMG get $88 million in 2007 for? Plaintiff's bar, start your engines. I smell a lawsuit. Section 4.21 of Assessing reads, "Usually, management identifies business risks and develops approaches to address them. This process for managing risk is an element of the client's internal control and should be evaluated as part of your procedures to gain an understanding of internal control". Then what? Another gem, "During the audit, you may identify risks of material misstatement in the financial stattements that management failed to identify. In such cases, you should consider why the client's risk assessment process failed to identify those risks and whether their process is appropriate to the client's circumstances". Well KPMG? Does anyone at Citi or KPMG know what cost of capital means? Isn't Robert Rubin (RR), "formerly" of Goldman Sachs and Treasury a Citi director? Why does Citi pay RR, double Ivy Leaguer, Harvard followed by Yale Law School, $17 million a year? Much of auditing is window dressing. Hey Mark Olson, of the PCAOB, did you read this NYT article? What if anything, will you do about it? Hey RR, do you know what cost of capital means?

GSG "top executives"? You're kidding. That these guys are eligible for any bonuses shows Wall Street compensation practices are bizzare. Joe Schmoe gets "punished" to support overpaid incompetants and worse, who want bonuses! What chutzpa; i.e., asking a judge for mercy after murdering your parents saying, "Your honor, I'm an orphan". What are investment banks today? A scam! They pay employees every dime possible, then having pushed themselves to the brink of insolvency, scream for bailouts. And get them! Babe Ruth, the Sultan of Swat, El Bambino, in 1931, during the depression asked for an $80,000 ($3 million today) salary. When told that's more than President Hoover makes, $75,000, responded, "I had a better year than he did". Did you have a better year than Bush, Lloyd Antoinette Blankfein (LAB)? Is your public approval rating better than Bush's 20%? LAB, here's a tip: keep your head down.

I agree, it's window dressing. Treasury should tell GSG and its competitors, not ask, tell, until all Treasury funds are repaid in full, including dividends, your bonus pools will be: zero! You don't like it, leave. "But I'm a $50 million a year trader". Really? Without the Fed's suppressing interest rates and fleecing the public to your benefit, you would be lucky to shine shoes in Grand Central Station. Would the capital markets cease to function if you stopped trading? I doubt it.

When you read the whole article, it appears only about 12,000 "job cuts" will come from layoffs. This is still a good opportunity for GSG. It might get 12,000 CNC guillotine rentals from Citigroup. I wonder how GSG bills for its use? Does GSG charge "day rates" or "per chop" like drilling contractors charge "per foot" in the oil patch?

Citigroup is woefully undercapitalized.

MS and GSG may be as poorly managed from each's shareholders perspective as GE. They have traders getting 10% of "their" profits. How do GSG and MS, among others, measure profits? Do they: use Kidder Peabody accounting, appropriately allocate cost of capital? AD notes, "Access to the firm's capital has been a key element to the returns of Morgan and Goldman". Whose capital is it? The traders, or the shareholders? I think these firms are ripe for shareholder revolts. Imagine thousands of "exploited" traders storming Capitol Hill, their Bastille! Will Barney Frank (BF) say, "Mr. Peckinsniff, trader, you made $25 million last year, right? With millions jobless, what are you complaining about? That it wasn't $50 million?" As outside the Capitol thousands of traders carrying pitchforks shake their fists and rebuild 1932's "Bonus Army Village".

How can traders be "undercompensated"? Why do they stay? Does anyone remember microeconomics? You should have encountered "marginal revenue product" (MRP). A firm will hire more of a factor, until its MRP less its marginal cost (MC) equals zero. If a "top" trader only gets 10% of his MRP, he's being enslaved! Why isn't his pay almost ten times his current pay? I see a 13th Amendment problem here. Traders of the world unite, you have nothing to lose but your chains! In 1847 Abraham Lincoln said, "To secure to each labourer the whole product of his labour, or as nearly as possible, is a most worthy object of good government". Traders, you are on the right side of history! Throw Lincoln's statement in BF's face! March around the Capitol with megaphones blaring about your exploitation at the hands of the greedy capitalists. Hand out hundreds of thousands of leaflets explaining your plight. Organize. Join the teamsters' union! If slaves got only 10% of their MRP's, I suspect the slaves' price in the antebellum South would have been much higher that it was. I look at these compensation practices and think, the bailout was an even bigger "mistake" than I thought before. Do MS and GSG do anything which is profitable? Why didn't these "exploited" traders leave years ago? Suppose one of them can make a $250 million pre-tax profit. At even a four PE multiple, he's "worth" $1 billion! Why is he with GSG or MS? What's going on? This sounds like a job, not for Superman, but Joel Stern. Maybe he can get into these firms and figure it out. If GSG's and MS's profits can walk out the door, what PE multiple should they be accorded? Why are they worth anything? On 19 November GSG was $55.18 a share, for a $21.8 billion market cap. If say 50 traders can walk out the door, the rest of GSG may be worth nothing. It may be worth nothing now.

Disagreeing with the Economist, we should reduce bankers' pay until they leave. It's one way to find their MRP given how bad I suspect the banks "responsibility accounting" is. If the traders, etc., don't like it, tough. They should ask their senior management's to return the bailout money. Until then, traders be grateful you haven't had a "date" with the CNC guillotine. The peasants aren't interested in your problems after having paid over $1 trillion to keep you arrogant ingrates in Rolexes and Rolls Royces. At least the unnamed compensation consultant saw the villagers with torches and pitchforks! There is a way to placate the peasants, seppuku!

When a company blames short sellers for the fall in its stock price, you should start its death watch. Is Citigroup's $800 million man this stupid? Doesn't he know when to shut up? Apparently not.

Hey Paulson, why should Washington look at say, GSG's compensation practices? Weren't you GSG's CEO? What did you do for GSG's shareholders when you were GSG's CEO? Did you discharge your job responsibilities correctly? Did you breach a fiduciary duty to them?

GSG employees want bonuses and need Uncle Sam to guarantee GSG's debt? Peasants, pitchforks at the ready. Storm the Bastille.

Rate War

"Banks across the U.S. are engaged in a heated competition for deposits as the battered industry tries to shore up its funding sources. ... The result is a boon for consumers hungry for higher returns as the stock market lurches. But the moves are causing pain for large and small banks across the U.S. by squeezing their profit margins. ... But the scramble for deposits also poses a dilemma for lenders. Banks that don't boost interest rates to keep up with rival institutions will find it harder to attract money that can be funnelled into loans. ... Citigroup's chief financial officer, Gary Crittenden [GC], said the company has a wide array of funding sources world-wide that it can tap. He said Citigroup's high rates on U.S. deposits are worthwhile because they're still cheaper than other types of financing available to the company", David Enrich at the WSJ, 14 November 2008.

Isn't GC smart? Hey Pandit, how much do you pay this guy? Whatever it is, it's too much. Even GC figured out Citigroup is better off paying less than more for deposits. Wow! Interest rates are too low!

SEC and the Whistleblower?

"A former accountant for retailer American Apparel Inc. [AAI] has filed a wrongful termination suit against the company alleging that he was fired after refusing requests from Chief Executive Dov Charney to inflate figures on the company's balance sheet. ... He alleges that in 2006 Mr. Charney repeatedly 'demanded that Mr. [Roberto] Hernandez pad the inventory' of the company in an effort to lure investors", Nicholas Casey at the WSJ, 12 November 2008.

We'll see what the SEC and Marcum & Kleigman, AAI's CPAs do with this.

Saturday, November 29, 2008

SEC v. Cuban

"The [SEC] filed civil insider-trading charges against Mark Cuban, saying the Dallas Mavericks owner dumped his stake in an Internet company just after he heard confidentially that the company was about to issue low-priced shares. ... Mr. Cuban, known for his tirades against national Basketball Association referees, quickly fired back at the securities cops, saying their claims were false, and that they had a 'facts be damned' attitude. ... In the SEC complaint, a witness described how Mr. Cuban allegedly flew off the handle in June 2004 when he was told about a proposed private offering in, an Internet company in which he had taken a roughly 6% stake earlier that year. ... Christopher Clark, a lawyer for Mr. Cuban, said, 'We're shocked. We find it incredible that given all the important issues that the SEC has to address with regard to today's economy they've sought to bring a $750,000 case relating to a he-said, she-said about one trade against a person whose integrity has never been questioned before with regard to the securities markets.' ... One question in the case is why the SEC waited more than four years to file charges related to the 2004 share sale. Mr. Cuban had written about the sale of his stock as early as 2005 on his blog", Kara Scannell, Leslie Eaton and Stephanie Simon at the WSJ, 18 November 2008.

"Mark Cuban is fighting back. The owner of the Dallas Mavericks laid out his defense to insider-trading charges Tuesday, saying he never agreed to keep private information about pending financing of an Internet company. ... On his blog Tuesday, Mr. Cuban struck back with a posting asserting, 'There was no agreement to keep information confidential.' Mr. Cuban's lawyers don't dispute that he may have been told the infomation was confidential, but they say he didn't agree to any confidentiality deal. ... Also Tuesday, Mr. Cuban's lawyers raised questions about potential SEC misconduct. ... The SEC responded in a letter dated Sept. 24, 2007, that Mr. [Jeffrey] Norris had no role in the investigation. 'Rest assured, political considerations and personal opinions will not have any bearing on any decisions that are being made during this investigation,' the SEC responded according to a copy of the letter. ... On Mr. Cuban's blog, he suggested there was improper conduct. 'Why did the SEC end their multiyear investigation of Inc. for alleged securities laws violations days before interviewing present and former Inc. executives about this matter? Was the timing a coincidence? We think not'," my emphasis, Kara Scannell and Leslie Eaton at the WSJ, 19 November 2008.

"Only recently did I learn that Cuban, in addition to being a wildly successful businessman and a genuinely brilliant if occasionally abrasive person, is an individualist whose favorite author is Ayn Rand. ... Bill O'Reilly ... , who suffers a severe histaminic reaction whenever he's exposed to critical thinking, insisted that Loose Change was a 'diversion' from the sacred war on terror that shouldn't be 'given a platform' of the sort Cuban offered. Cuban riposted that since the film was already in circulation on the internet and through other samidzat channels, it made more sense to bring it out in the open and confront its claims honestly.... Cuban's talk radio exchange with O'Reilly apparently was overheard by Jeffrey B. Morris, a Ft. Worth attorney employed by the [SEC] ... , one of the Regime's most corrupt and useless enforcement appendages. Inconsolably offended that someone would insult the supposed honor of his Fuhrer, Norris appears to have fashioned some kind of derogatory depiction of Cuban and threatened to make it public; this, it seems prompted Cuban to threaten action of some kind in defense of his reputation. ... This was apparently the first time Cuban had attracted the malevolent attention of the SEC's 'Patriotism Enforcement' division. He may have provoked official retaliation by his most recent effort to expose official squalor to the disinfecting rays of public sunlight. Cuban has underwritten the investigative website, which is devoted to chronicling and exposing the details of the largest economic crime in history: The theft of trillions of dollars from the middle class to cushion the financial collapse of politically favored Wall Street welfare whores. ... The SEC complaint is really weak beer. ... So now the same official financial enforcement apparatus that is laboring to put hundreds of billions or even trillions of dollars into the hands of unreconstructed Wall Street criminals has targeted Mark Cuban for ruin over a purported offense involving $750,000. This is like Stalin and Vyshinsky taking a breather from the work of slaughtering millions of human beings in order to prosecute someone for cruelty to animals. Let there be no ambiguity about the matter: This is unalloyed retaliatory intimidation, the purpose of which is as transparent as the mechanics of the Plutocrat Bailout have been opaque. The rulers of this nation are aware that the financial system is in an irreversible implosion: like their counterparts in the old Communist Party of the Soviet Union circa 1990, they are prepared to strip this country bare before the collapse is consummated, and they're willing to ruin anybody with the means to pose any kind of plausible threat. ... It would be worthwhile for decent people in numbers as large as can be aranged to let Cuban know that we have his back", my emphasis, William Grigg (WG), 21 November 2008 at

This reeks to high heaven. I agree with Clark, why does the SEC bother with this miniscule case, even if everything the SEC claims is true? Haven't the SEC's enforcement people anything important to do? Like chew gum. $750,000 is 11% of my Blankfein test. Fuggedaboutit. What do I think is happening? It's Ray Dirks (RD) redux. In about 1973 RD embarrased the SEC by blowing the whistle on Equity Funding (EF) after giving the SEC a chance to act. The SEC stood on its hands and did nothing. Eventually the SEC charged RD with insider trading for telling his clients EF was a scam. RD fought the SEC to the Supreme Court and beat it at Dirks v. SEC, 463 US 646 (1983). The SEC does not like to be publicly embarrassed after being exposed for not doing its job. As for the SEC being a model of rectitude, read my posts under "SEC at Work". Hahahahaha, as the Mogambu Guru would say. I hope Cuban kicks the SEC's arse on this one.

"Potential SEC misconduct"? "Say it ain't so, Joe". This Cuban case looks like a cross between John Mack's and Ray Dirks'. Cuban's question is well taken. Who was's counsel? Was it Mary Jo White? Given how much CLOUT she apparently has at the SEC, Christopher Clark, Cuban's attorney, might want to add her as co-counsel. Then this case will be quashed instantly. I don't believe anything the SEC says here. Go Cuban!

WG's comments were an eye-opener. He has a lower opinion of the SEC than I do. I didn't think that was possible. Some related posts:


Dollar Trap

Jesse at Jesse's Cafe Americain has a magnificent 17 November 2008 post on "The Dollar Trap". As Uncle Sam learned in 1971 when he devalued the dollar from $35 per ounce of gold to $38, eventually, what must change will. Got gold? Get more. Got bonds? Hahahahaha! Read Jesse. Here's a link:

Military Morons

"Your article 'Boots on the Ground or Weapons in the Sky?' (Currents, Oct. 30) asks the wrong question about the future of America's military, suggesting that the U.S. must choose whether to be prepared to fight more 'grinding insurgencies' like in Iraq and Afghanistan or to fight a conventional conflict with a near-peer competitor like Russia or China. Wouldn't it be grand if the military could decide to prepare for only one type of warfare? ... In reality, the military must be prepared for both types of wars, and much else besides, because our nation's security depends upon it", Jim Tucci letter to the WSJ, 8 November 2008.

"Your article implies that increased defense spending since Sept. 11, 2001, was for modernization priorities, and it creates a false dilemma that the U.S. has the luxury of choice in preparing for asymmetric conflicts or all-out war. In fact, the increased spending funded the constant deployments to Iraq and Afghanistan, not the Army's core modernization program Future Combat Systems , which you singled out for its $160 billion cost. ... Our National Defense Strategy must achieve balance to deal with the entire continum of conflict, which in the future will include regular and irregular enemies potentially as deadly as any past state-on-state war. However, we musn't confuse balance as equal priority for everything or buying everything. We don't have the luxury of picking which kind of war an enemy will choose", Rickey Smith letter to the WSJ, 8 November 2008.

I agree with Tucci.

What doesn't our current SecDef and Obama's SecDef designate understand? Thomas Jefferson said, "Millions for defense, not one cent for tribute". Now we pay tens of billions in tribute to Goldman Sachs and similar "pirates".

Friday, November 28, 2008

Dollar Panic

"Why are investors rushing to purchase US government securities when the US is the epicentre of the financial crisis? This column attributes the paradox to key emerging market economies' exchange practices, which require reserves most often invested in US government securities. America's exorbitant privilege comes with a cost and a responsibility that US policy makers should bear in mind as they handle the crisis. ... But there has been a prominent exception to this classic tale. With fitting irony, the US, which is the epicentre of the crisis has avoided Act Three. [Here governments pick up the pieces, typically passing on the cost to future generations by issuing a vast volume of debt]. ... If this had happened to any other government in the world whose national financial institutions were in as deep disarray as those of the US, investors would have run for the hills--cutting off the offending nation from global capital markets. But for the US, just the opposite has happened. ... But why do global investors rush into a burning building at the first sign of smoke? ... The dollar portion of [official foreign exchange] reserves is most often invested in US government securities, which offers excellent market liquidity, and US government debt is also considered as safe as anything. ... The last time foreign official purchases bulked so large in the US government's financing was from 1968 to 1973, when the Bretton Woods system of managed exchange rates broke down. ... This time around, the source of [system] support has shifted to Asian-Pacific economies and Middle East exporters. In both cases, the message from the US seems best summarised in the words of then-Treasury-Secretary John Connolly, who famously said, 'the dollar is our currency, but your problem.' ... US officials must recognize that their nation's funding advantage rests on the unrivalled, for now, position of US government securities in global financial markets. ... Open access to markets probably allowed US government officials to drift in their response to the financial crisis. They initially mistook a solvency problem for a liquidity one. ... As for responsibility, officials must recognize that investors have granted the US its reserve-currency staus for reasons. Size matters, but other reasons include a respect for law and for contract enforcement and the predictability and transparency if the policy process", my emphasis, Carmen & Vincent Reinhart (C&VR), 17 November 2008 at

This article returned me to 1966 with Charles De Gaulle's criticisms of the dollar. I saw this act then, but now China, Japan and India have taken France and Germany's 1966 role, holding overvalued dollars they need "do something" with. Emerging market economies hold dollars to suppress their exchange rates, in effect, engaging in mercantilism. Global investors are hypnotized by dollars. I wrote of the Russians panicking into the dollar on 6 November 2008. I remember when Connolly said the statement quoted by C&VR. "US government officials ... initially mistook a solvency problem for a liquidity one". Really? I don't believe even Henry Paulson (HP) is that dumb. I think HP lied. A "respect for law"? In the US? I think the Bush administration has contempt for law, see my 9 November 2008 post as an example. Look at the bailout. I agree with most of what C&VR wrote here, but think the authors are naive. Unlike France in 1966, I think China will pull the plug on the dollar, sooner or later.

A Scrupulous DA

"Craig Watkins may be the only prosecutor in America who is making his name getting people out of prison. ... Critics, including some fellow prosecutors, say he seems too eager to besmirch his predecessors' reputations for the sake of a little publicity. They note that politically, these cases are easy targets: None of them were tried by him. 'Where I think he's doing a grave disservice is trying to create this image that the criminal-justice system is fatally flawed and that only people like Craig Watkins can save it,' says Joshua Marquis, the district attorney in Clastrop County, Ore., who serves on the board of the National District Attorneys Association. Mr. Marquis says Mr. Watkins could make other prosecutors' jobs harder by contributing to what he considers to be the public's false impression from TV cop shows that most prosecutors are bloodthirsty and routinely railroad defendants. In fact, he says, the percentage of people who are wrongly convicted is 'very small'. ... While it's true that [Bill Hill, former Dallas DA] and other prosecutors sometimes end up exonerating defendants after they're been convicted, few prosecutors take it upon themselves to review old convictions", Jennifer Forsyth and Leslie Eaton at the WSJ, 15 November 2008.

I agree, most criminals are rightly convicted. So? Suppose one wasn't, how will the system reverse the conviction? Further, I agree prosecutors rarely railroad defendants. They're usually too lazy and try to plea bargain most cases they see. Having been a juror four times, I've seen things in court you would barely believe. Watkins is black. I have a suggestion for Obama: Watkins for Attorney General! He's never worked for a "white-shoe" New York law firm and went to Texas Wesleyan University Law School, not Harvard or Yale! He's qualified.

Thursday, November 27, 2008

Listen to "The Greatest"

"Obama just got elected promising to bring change to Washington. Michelle Rhee [MR] is already on the job. ... Her top goal: reduce performance disparities between wealthy white students and poor minorities in a system where about 85% of the students are African-American. ... More telling: 'In some Washington, D.C., high schools, only about 6% of the sophomores can read or do math on grade level. While she is realistic that children in her school district come to school with 'significant challenges,' Ms. Rhee said it is 'complete crap' that those students can't perform at a high level because of their environments. 'It's easy to blame external factors as the reason why poor minority kids aren't achieving at the same level. It's a false premise. You have to put supports and mechanisms in place around those kids, but I refuse to allow the adults in the system to use that as an excuse.' ... She graduated from Cornell and the Kennedy School of Government at Harvard before teaching in a Baltimore elementary school", Gary Fields at the WSJ, 11 November 2008.

"Guess who recently said the following: 'Tenure is the holy grail of teacher unions, but it has no educational value for kids; it only benefits adults.' ... In going after tenure, Ms. Rhee is taking on the holiest citadel of the education establishment. ... She dismisses as 'complete crap' the argument that students can't learn because of disadvantaged backgrounds. It's about time. Washington is the lowest-performing school district in the nation. Only 12% of D.C. eighth graders are proficient readers, 8% in math. A mere 60% of high schoolers finish in four years with a diploma", my emphasis, Editorial at the WSJ, 22 November 2008.

MR, 38, double Ivy League, politically correct ignoramus, may not have read Arthur Jensen's 1969 classic, which appeared before her birth. Does anyone remember Harvard's flap over Larry Summers (LS) comments about women's inability to be top math students? That LS was right is irrelevant. It's just not "nice" to say it. La Griffe du Lion has two relevant posts, September 1999, and July 2005, By the way, why are 88% of prisoners men? Why do boys have higher school dropout rates? What is "left-tail" cut off anyway? Washington, DC spends over $15,000 a year per pupil, the highest for any US school district. So? MR, you were at Harvard once. Go back and try to find Alvin Poussaint (AP), 1934-, a Harvard Medical School psychiatry professor. In an October 1966 article, "The Stresses of the White Female Workers in the Civil Rights Movement in the South", American Journal of Psychiatry 123:401-407, AP said some of his Radcliffe patients had "White African Queen Complex", How dare AP write this? Easy, he's a "colored person" as they were known in 1966. AP graduated from New York's Stuyversant High School in 1952, long before affirmative action, so we know he's smart. For non-New York readers, the "Stuy" is one of New York City's three entrance exam only admission schools. Minimum IQ of entrants in the 1950s: 130. Last reported average student SAT score, 1408. Not your average high school.

Some quotes from AP's 13 May 1966 address to the American Psychiatric Association, "The white workers must make adjustments to the socio-economic and cultural as well as the racial situation. During this initial period they suffer anxiety which can generally be described as a 'cultural shock' reaction similar to that experienced by Peace Corps volunteers in foreign countries. ... She is treated with adulation and reverence, and frequently over-indulged. ... Needless to say, this makes the white female of a liberal background feel extremely uneasy and guilty and. This leads to a degree of anxiety which is in part determined by the worker's own unconscious attitudes toward 'colored folks'," 3. "However, a number of white females often contribute to their own difficulties in the Negro community (and I would like to direct particular attention to this problem). They may bring with them certain psychological attitudes (often unconscious and in different degrees) which can generally be referred to as the 'White-African-Queen Complex.' At the center of this 'complex' is commonly found a tabooed and repressed fantasy of the intelligent, brave, and beautiful white woman leading the poor, down-trodden, and oppressed black men to freedom. One white worker told me she sometimes felt like 'the master's child come to free the slaves'," 8. "Most of the white girls at some point become aware of the secondary emotional satisfaction of being a 'white queen' among oppressed black people, and of using the special condition of the Negro to satisfy their own somewhat neurotic grandiose needs", 9. The numbers are page references to AP's transcript.

I first heard of MR on 25 July 2008 when she was featured on Nightline. As I watched, I thought, "Poor Washington, DC school kids. To have White African Queen Complex's poster child as their chancellor". I suspect MR was a member of Cornell's "Masterdebate" team, my 5 November 2008 post.

Apparently despite being neither white nor a "Cliffie", MR, a Harvard graduate student of Korean extraction, was not immune to this malady. MR reminds me of Jane Forman's 1953 song, "I Believe" written by Drake, Graham and Shirl. It begins with, "I believe for every drop of rain that falls a flower grows. I believe that somewhere in the darkest night a candle glows. I believe for everyone who goes astray someone will come to show the way. I believe, I believe". MR, I've come for you.

Muhammad Ali got 78 on his Army IQ test in 1964. When asked about it, "The Greatest" remarked, "I never said I was the smartest, I said I was the greatest". Does Ali, in my opinion, one of history's four greatest heavyweights, want MR's post? I think he's made for it! See Ali's greatest boxing display, Ali-Patterson, 1965. He's magnificent! He did "float like a butterfly and sting like a bee". I believe it was after Ali returned from 1974's "Rumble in the Jungle" with George Foreman, Ali exclaimed, "I'm glad my great-grandpa got on that boat", having seen Africa first-hand. Ali, we love you; tell it like is, no matter what!

The WSJ has become so politically correct, its laughable. I think another concept is "the holiest citadel of the education establishment", the dead elephant in the living room, IQ, my 1 September 2008 post. "Lowest-performing school district in the nation"? Measured how? See my 18 September 2008 post. I quote Hugh McInnish, "We are constantly, shrilly condemning 'failing schools' when we should be condemning 'failing students.' But no, that's not quite right either. We should not condemn the students since they are in most cases doing their best with the intellectual talent they were born with. No, condemnation is not justified, either of a school or its students, when both are giving it all they have to give. And as I have seen, that is generally the case. ... I sounded one of the same subvervise ideas that Steve [Sailer] puts forth--namely that a student's ability largely determines his achievement despite any innovations his school may invoke, and that the aggregate ability of a school's students all but dictates that school's performance (at least as measured by standardized test scores)". Good luck MR. You'll need it.

Obama to City: Drop Dead?

"Last week, Mayor Mike Bloomberg announced a grim update to New York City's $60 billion budget. To meet falling revenues he proposes spending cuts and property-tax hikes, and he may increase income taxes by 15%. The real risk to the city isn't a tough budget this year or the next. It's that the mayor might be too optimistic in assuming the downturn in tax revenue will be short-lived. ... The problem is that the 'dark old days of the '70s' didn't start with cuts to vital services like police and sanitation. They started in the late 1960s, when the city had a chance to avoid its near bankruptcy a few years later. Instead it chose to raise taxes for new spending. It was in this period when the city enacted its first income tax as well as new business taxes. It kept raising taxes as it went on to lose half of its one million manufacturing jobs and half of its more than 100 Fortune-500 headquarters. ... The result was a deterioration of quality of life, including police cutbacks that allowed crime to spiral out of control. ... In the early 1980s, the financial industry started to grow at a spectacular rate relative to the rest of the nation's economy. The financial sector's profits as a percentage of the nation's income doubled twice from the early 1980s to 2006. ... Today, things are different. The financial-services industry could be at the beginning of a long-term correction that will leave profits much lower than they had been. Wall Street's business model--of taking ever bolder risks with shareholders' and lenders' money and reaping fees from ever-more-complicated proprietary financial products--now appears to be dead. Consequently, high finance may shrink as a share of the national economy and the city's economy, not just temporarily but for a decade or more. ... Two years ago, a third of all the wages and income in the city came from the finance, insurance and real-estate industries, up from just a quarter a decade earlier. The securities industry alone was responsible for a quarter of wages, up from 17% from a decade earlier. ... The financial sector provides more than a third of business taxes. Last year, Wall Street bonuses alone comprised 8% of of the city's personal income. In 2000, the peak year for high-tech bubble bonuses, they comprised 6.6%. The budget in general is 22% bigger, after adjusting for population and inflation, than it was at the height of the 1970s fiscal crisis. Most of that growth came in the past seven years. ... An indefinitely shrinking financial industry would seek to cut costs, including taxes. Companies like Merrill Lynch, merging with out-of-state institutions, could easily move jobs out of New York if taxes go up", my emphasis, Nicole Gelinas (NG) at the WSJ, 8 November 2008.

"The global credit panic has swept away many illusions, and we're about to find out is that includes those of the politicians who have feasted for years on Wall Street tax revenues. Ground Zero is New York, which has lived a tax-and-spend fantasy thanks to the long bull market and 'progressive' tax rates. Reality is now biting. The financial services industry employs between 2% and 3% of nongovernmental workers in New York, the same as it did in the late 1970s. What's changed is the share of total wages in the state represented by Wall Street jobs, which had skyrocketed to nearly 20% last years from a little over 2% in 1977. 'This is 212,000 people making nearly $80 billion in wages and salaries last year,' explained E.J. McMahon of the Manhattan Institute at a recent panel discussion on the financial crisis. ... New York's revenue coffers are set to take a hit. The only question is how big. ... Governor David Patterson ... is urging labor unions to renegotiate contracts on behalf ofpublic employees. And he's proposed trimming as much as $2 billion from this year's budget, including cuts to health care and education. ... New York spends more money per pupil ($14,000) than any other state", Editorial at the WSJ, 13 November 2008.

Does anyone remember mayor John Lindsay's (JL) handling New York's (NYC) 1966 transit strike? Transit workers union (TWU) chief Michael Quill (MQ), said, "The judge can drop dead in his black robes", when the judge signed an injunction prohibiting the strike. I still remember MQ's voice! JL became mayor in January 1966. The TWU went on strike. NYC was in chaos for about three or four days. Then New Yorkers figured out how to get into Manhattan even if it meant hitching a ride with a stranger. Crime fell. Traffic began returning to normal. MQ was panicked! NYC's peasants had decided "we will beat the TWU. Come hell or high water". But MQ knew who he was dealing with. A man he derisively called "Linsley". After 12 days, JL caved and gave the TWU whatever it wanted. My mother cried and said, "The damn Yale movie star. He's bankrupted the city". So JL had. I remember when NYC had 128 Fortune 500 headquarters! Any firm can move jobs out of NY State, NG. Financing and operating decisions are separable. If an operating decision makes sense, it doesn't matter who the owners are!

Good luck Patterson. Imagine cuts to health care and education. These are the last days.

Wednesday, November 26, 2008

The World's Best Managed Company

"General Electric Co. said its GE Capital financial-services arm would participate in the federal government's new debt-guarantee program, making it the first company with significant industrial operations to tap the program. ... 'It allows us to source our debt competitively with other financial institutions that are eligible, said Russell Wilkerson, a GE spokesman. GE said it expects to qualify for the program by Friday. GE said Wednesday that under the program, the government will guarantee as much as $139 billion in long- and short-term debt through next June. ... With roughly $600 billion is assets, GE Capital is as big as some large banks. ... But GE Chairman Jeffrey Immelt this September said he will shrink the unit in response to the credit crisis. ... Nigel Coe, an analyst at Deutsche Bank, said in a note that GE 'had retained a greater degree of strategic and operational flexibility,' by taking advantage of the government's debt guarantee. But Mr. Coe said it could cost GE as much as $1 billion to tap the full guarantee. ... Keith Sherin, GE's chief financial offiver, said that even after paying for the insurance, it would be cheaper for GE to issue debt backed by the federal program", Paul Glader at the WSJ, 13 November 2008.

"The government has bought Jeffrey Immelt some valuable time. But will [GE's] chief executive use it to radically restructure the balance sheet of GE Capital, the company's $680 billion finance business? ... GE Capital's heavy use of a type of short-term debt called commerical paper seems to make sense when times were good, because it was cheaper. But it left the unit exposed when investors' demand for corporate debt recently dried up", Peter Eavis at the WSJ, 14 November 2008.

Ed Harrison (EH) recently asked should GE be a AAA company, at Yves Smith at Naked Capitalism led me to EH's post. My answer: of course. If Uncle Sam is an AAA credit, why not?

Imagine, the world's best managed company needs a bailout. How do you spot a well managed company? It pays outsize executive compensation! Does this mean every other company with well paid executives in America needs a bailout too?

Without Uncle Sam's support, this junkpile of financial garbage would probably fold leaving only GE's industrial businesses. Remember those?

Jesse on Inflation and Deflation

Jesse at Jesse's Cafe Americain has a 12 November 2008 post on Inflationistas and Deflationistas, link:

I'll stick my 78 (2-1913) cents in! I am an unapologetic hard core "Inflationista". Could I be induced to switch camps? Yes, once: Citigroup, Bank of America, Goldman Sachs and Morgan Stanley all go into Chapter 7 and no sooner. And maybe not even then. As it is written, "I returned and saw under the sun that--The race is not to the swift, Nor the battle to the strong, Nor bread to the wise, Nor riches to men of understanding, Nor favor to men of skill; But time and chance happen to them all", Ecclesiastes, 9:11 (NKJV). Now I'll add my spin: All true, but that's how the smart money bets. Until the US returns to the gold standard, I see inflation ahead.

I recently stumbled upon an article first published in 1970, which I read in about 1982, that made its way to the web, "The Nightmare German Inflation", link: Anyone who is seriously interested in the inflation-deflation debate should read this.

Welcome Aboard Carl Icahn

"Goldman Sachs Group Inc. [GSG] will consider mergers to make it a more diversified financial company, but only if the deals keep Goldman's focus and culture intact, Chief Executive Lloyd Blankfein said at a conference Tuesday. ... 'We're going to consider everything,' but won't be provoked into 'doing something rash' that the company will spend years reversing, Mr. Blankfein said in response to an investor question at Tuesday's Merrill Lynch financial-services conference. ... He added, however, that the 'core strategy' of Goldman 'is to be able to recruit and train the best people ... and compensation plays an important role'," Aaron Lucchetti at the WSJ, 12 November 2008.

"When Wall Street crashed, [Carl Icahn] adds, the guys that drove the companies off the cliff made off with huge severance packages. 'It's worse than what Marie Antoinette got guillotined for! They just walked off with hundreds of millions, leaving shareholders and employees stranded. And where's the outrage?' ... There are, or course, exceptions. But Mr. Icahn says some boards are so bad that it's (almost) funny. There's no need to watch Saturday Night Live anymore, he adds, 'I just sit at a board meeting.', " my emphasis, Emily Parker interview of Carl Icahn (CI) at the WSJ, 15 November 2008.

Lloyd old buddy, old pal. Shut up. Keep your head down. If you do, you might keep it. The peasants are screaming for bread and you want to keep GSGs "focus and culture", whatever they are. Now I dub you Lloyd Antoinette Blankfein (LAB). You are less in touch with the peasants than was Louis XVI in 1789. You worry about compensating GSG's "best people". I say tell them, "Boys, GSG now gives you an opportunity to become entrepreneurs. Leave. Here's a year's severance pay. Set up your own shops and keep all the profits you make. Oh, and keep you heads down". Yes Lloyd? I laughed as I read this article. LAB must live on the other side of the "looking glass". George Orwell's Animal Farm, 1945, may be a more appropriate "book theme" for today. All the animals were equal except the pigs who were more equal than the others. Does that fit LAB? The pigs were more equal. Interesting.

CI may see the same profitable opportunity for GSG I see, renting that CNC guillotine and selling tickets to watch it at work. LAB, step forward and try it out. Millions will pay to see you on pay per view. What a classy exit. GSG can even donate the proceeds to Uncle Sam. The proceeds might reimburse Unc for the $700 billion Hank Paulson bailout. The DVD sales should bring in billions! It's the least you can do for your country. Do you remember JFK's inaugural address? Now you have something to do.

Tuesday, November 25, 2008

Ben Franklin-2

My 6 November 2008 post, "Ben Franklin Was Right",, apparently ruffled some high-placed feathers. It attracted a record number of: "reads" for a Skeptical CPA post, 2,174 and comments, 22. IA may have joined Pat Buchanan's "peasants with pitchforks" brigade. If not, sign me up Pat. Teresa Ghilarducci's (TG) plan to end 401(k) plans as we know them is public record. Rush Limbaugh (Rush), with about 20 million weekly listeners discussed it! Mark Levin's (ML) 16-minute interview is a gem. Listen to it. It seems our learned professor spent too long in the academy and is not used to being cross examined by a clear intellectual better who is not dependent upon her for a grade! Enjoy, have some laughs at a "hackademic's" expense. ML has about 2.5 million weekly listeners.

Reuters 5 November 2008 article quotes TG as saying, George Miller "wants to make 401(k)s better. He doesn't want to kill the tax deduction. In my favor, he agrees I brought up genuinely credible criticisms of the 401(k) tax break as it exists now". The link: Isn't this dandy? Miller doesn't want to "kill the tax deduction" now. Wait until next year as New York Mets fans used to say. Did Miller get more flak over this than he anticipated and will wait to introduce a bill to kill the 401(k) tax deduction next year? What makes TG's plan transparent is: anyone who wants to put Treasury paper, either conventional or TIPS in his 401(k) can do so now. TG's plan is: seize your 401(k) assets and give you a piece of Uncle Sam's paper which he will hyperinflate out of existence at his leisure.

The Los Angeles Times, 9 November 2008, article by James Rainey (JR) attacked "El Rushbo" for his attack on Obama. JR in my opinion, is a left-wing Obamacon, economic ignoramus, who is incapable of making an argument, only ad hominem attacks. The relevant portion of JR's article, "In a time when the nation calls out for cool leadership and rational discussion, Limbaugh stirs the cauldron, a tendency he proved in a particularly grotesque way last week when he accused Obama's party of plotting a government takeover of 401(k) plans. 'They're going to take your 401(k), put it in the Social Security trust fund, whatever the hell that is,' Limbaugh woofed. 'Trust fund, my rear end.' A slight problem with Limbaugh's report: Obama and the Democrats have proposed no such thing. The proposal, in fact, emanated from a single economist, one of many experts testifying to a congressional committee. ... To broadcast such a report--so drained of context as to constitute a lie--would be a shameless act at any time. But Limbaugh needlessly stirred the fears of millions he holds in his thrall--making the 401(k) thievery sound like a done deal. Shameless", my emphasis. Link:,0,4216330.story. JR, didn't the Democrats have TG testify to fly their trial balloon? What do you think happened with say, 1996's Boskin Commission? Coincidence, I don't think so.

I followed about a dozen blog posts which described TG's plan. The majority referred back to the Workforce article I mentioned on 6 November.

Anonymous', 7 November 2008 comment launched this post, "I'm a constituent of Congressman Jim McDermott's, and I got in touch with his office after reading this. They told me in no uncertain terms that this is a false story, that Congressman McDermott is considering no such proposal, and that the 'quotes' from Congressman McDermott in various versions of this story are fabrications. If you'd like to check with his office and verify this yourself, you can reach them at: 206-553-7170. I look forward to seeing a prominent correction". Well anonymous, you ain't gettin' it. Who do you think you are? Dostoyevsky's Grand Inquisitor? I realize my posts are legal hearsay since I am not an "ear" witness to McDermott's statements. However, he never had any publication they appeared in retract them. What will you, yes you anonymous, do about it? Who did you speak to in McDermott's office? I offer McDermott a deal. If he flies here to Houston, at his expense, I will depose him and pay for the court reporter then post a deposition transcript at this blog. Let the readers decide who's lying and when.

"All of the issues the foes on Capitol Hill are considering are very troubling, especially Rep. George Miller's even considering the government's taking over 401(k)s. Are we in Argentina?", Thomas Edwards letter to the WSJ, 13 November 2008.

"You may have heard about Argentina's plan to nationalize private retirement accounts. Some Democrats on Capitol Hill are inspired, and with their big election victory they may get the chance to test Peronist ideas in America. Meet Congressmen George Miller and Jim McDermott, who are eager to change the way Americans save for their golden years. ... Before Election Day, the Congressmen began to target the $3 trillion in 401(k) accounts held by 60% of Americans. Mr. Miller called the system 'an inadequate vehicle' that has not been terribly sucessful' in encouraging retirement savings. He wants a 'wholesale re-examination' of pensions. ... But the Chairman has also signalled greater ambitions. At a hearing last month, Mr. Miller put the 401(k) system into play. Under the current system, employers match employee contributions that aren't taxed until redeemed, an indirect subsidy worth some $80 billion today. 'We have to start to think about in Congress ... whether or not we want to continue to invest that $80 billion for a policy that's not generating what we now say it should,' Mr. Miller said. 'For a taxpayer investment of this size, we must ensure that the structure of 401(k)s adequately protects the nest eggs of participating workers.' ... Most eye-catching was an idea from Teresa Ghilarducci at New York's New School for Social Research. ... A McDermott spokesman called her proposals 'intriguing' and 'part of the discussion.' Mr. Miller hasn't so far endorsed the plan. ... Anger over the drop in 401(k) balances is one reason that voters who belong to the 'investor class' swung to Democrats in greater than usual numbers this year. Their mandate is for policies that improve those returns, not strip them of tax benefits", Editorial at the WSJ, 14 November 2008.

"Allow me to repeat my position on 401(k)s, which you mischaraterize in your Nov. 6 'Obama's Real Opposition' and Nov. 14 'Targeting Your 401(k)' editorials. I do not support abolishing 401(k)s, forcing these plans into government programs, or changing their tax status. We must preserve and strengthen 401(k)s, not end them. ... That is why I support strong fee disclosure and other measures to increase participation in 401(k) plans", George Miller letter to the WSJ, 18 November 2008.

Some more links to look at:

US News & World Report, 23 October 2008 by James Pethokoukis (JP). JP quotes Jim McDermott as saying, "the savings rate isn't going up for the investment of $80 billion [in 401(k) tax breaks], we have to start to think about whether or not we want to continue to invest that $80 billion for a policy that's not generating what we now say it should".

On 13 November 2008 I went to Jim McDermott's (JM) website and did not find any mention of TG's plan. I did find that JM voted against the bailout bill. Thank you JM for that.

Yes, Edwards, we are in Argentina. Hyperinflation is coming!

In reading the WSJ's editorial I anticipated the words as I read them. Had the WSJ asked me, I could have written it as an op-ed.

This is what you say now Rep. Miller. Why did TG testify at your hearings? When will you tell us "circumstances have changed. We must nationalize your 401(k)s for the public good"? This looks like setting up Joe Schmoe for the coming nationalization.

At Skeptical CPA we are not afraid to draw conclusions from facts. IA surmises after Obama was elected someone in the "Office of the President-Elect" became aware of this proposal floating around Congress. This Obamacon, whoever he is, told Miller, McDermott and anyone else pushing it something to the effect, "Obama got about 80% of Wall Street's campaign contributions. Do you realize that even at 50 basis points a year, with $3 trillion in 401(k)s, to adopt Ghillarducci's plan would take $15 billion a year from Obama's constituents? Do you understand that?" And now the TG plan pushers are running from their own Frankenstein monster. At least that's how it looks from here.

Yves Smith on AIG-2

I read the WSJ article Yves Smith (YS) mentioned in her 12 November 2008 Naked Capitalism post, "Goldman big winner in government's revised bailout of AIG", link: YS hit the "high" points of the article, hitting the "money" quote, "Yves here. Note the clearly slanted choice of words, 'pry collateral'. Huh?" My only quibble with YS's comments is: she is too kind; writing, "Both roads lead to Goldman". I say GSG is the new Rome, "All roads lead to Goldman. Goldman is under every rock".

We're Safe Now

"The Treasury and the [Fed] issued rules that bar financial companies from processing payments connected to most gambling Web sites, effectively making Internet gambling illegal. ... Democratic lawmakers, the banking sector and elements of the gambling industry have registered opposition to the move", Corey Boles and Jeff Bater at the WSJ, 13 November 2008.

Wonderful, now the "crisis" is solved!

Monday, November 24, 2008

America's Default

"Default is the failure to honour contractual obligations. In the case of debt, non-payment of interest or principal payments due to the lender. The financial impact of default is the loss suffered by the lender. ... Given that in a typcial sovereign default the investor loses 50% to 80% of the value of the investment, the [foreign exchange] losses suffered are not far short of default. Despite 'strong dollar' official policies, a case can be made that the US is in the process of defaulting on its obligations via a systematic devaluation of its currency. ... Lawrence Summers [LS], a former Deputy Secretary of the US Treasury, proudly extolled the merits of the US financial system in a 2001 speech at the London Stock Exchange in the following terms, 'the United States is the only country in which you can raise your first $100 million before you buy your first suit.' He gave short shrift to critics who felt that US financial sophistication was synonymous with financial instability: '[That belief] is observed in inverse proportion to knowledge of these matters.' ... Confidence in US financial markets has suffered. The growth of the network of securitisation and off-balance sheet vehicles--the 'shadow banking' system--without regulatory oversight to the point where it now threatens the financial system has perplexed foreign observers. ... The real reason that the US has actually not experienced a sovereign debt crisis is that it finances itself in its own currency. This means that the US can literally print dollars to service and repay its obligations. ... The dollar's dominance may be coming to an end. ... The artificial nature of the Euro and its long term survival is also problematic. ... Does any of this matter? Walter Wriston, then chairman of Citigroup, opined that: 'Countries don't go broke'. In 1982, shortly after this statement, Mexico, Brazil and Argentina defaulted inflicting near mortal losses on Citibank. ... Max Winkler ... noted [in 1933]: 'The history of government borrowing is really the history of government defaults'," my emphasis, Satyajit Das, 10 November 2008 at

I note LS became Treasury Secretary. If I ever took a class with Harvard's LS I would likely have gotten an "F", given my beliefs about financial "sophistication". I have likened the shadow banking system to US "wildcat" banks in the 1800s. Das and I have said many of the same things. Winkler is correct about government defaults. See for example my 4 July 2008 post. As for Wriston, I reviewed his last book on 30 October 2008. Less than favorably. Bonds are "A graveyard for capital", my 2 February 2008 post.

Feds in Motion

"Michael Garcia, the U.S. attorney for the [SDNY], in Manhattan, could resign his position as early as this week and is likely to join a private law firm in New York, say people close to his office. ... Public pressure is growing to increase regulation of financial institutions and find people who may have contributed to the financial crisis. ... The [SDNY] has suffered some setbacks of late. Mr. Garcia's securities-fraud unit recently lost the chance to investigate mortgage investors Fannie Mae and Freddie Mac after the Justice Department have the cases to federal prosecutors in Washington and Virginia, according to a person familiar with the matter. ... Mr. Garcia has been in advanced talks to join the New York office of law firm Kirkland & Ellis. A spokeman for the law firm declined to comment", Amir Efrati at the WSJ, 10 November 2008.

"Tim Johnson has been named acting U.S. attorney for the Houston-based Southern District of Texas, taking over for Don DeGabrielle, who resigned as of last week. ... DeGabrielle annnounced Monday that he has joined the Houston law firm, Fullbright & Jaworski [F&J] to work in international governmental investigations and white-collar defense. ... DeGabrielle's move to [F&J] was not entirely a surprise in Houston legal circles. His own predecessor, the late Mike Shelby, also went to Fullbright when he resigned from the top prosecutor position. 'Mike always spoke highly of Fullbright, making it an easy next step for me, especially after seeing firsthand the support offered Mike while he was ill. Fullbright has assembled a strong white-collar defense team that includes a nucleus of lawyers with whom I have previously worked in the Department of Justice'," my emphasis, Mary Flood at the Houston Chronicle, 11 November 2008.

You didn't think Garcia would hang out his own shingle and file class-actions for plaintiffs did you? Mike, good riddance.

The DOJ revolving door revolves once more. Good riddance to you too, DeGabrielle. Shades of New York's Mary Jo White!

Sunday, November 23, 2008

War Story

Roth IRAs became legal to contribute to in 1998. In 1997 I attended a CPA-attorney pension seminar by an actuary in West Los Angeles. At the seminar's end the actuary asked the attendees if they would recommend the new Roth IRAs. He was shocked when 85-90% of the CPAs present stood and denounced Roth IRAs as a scam. Our opinion: we get a new tax law every two years. By the time anyone under about 45 tries to cash in his Roth IRA, it will be taxable one way or another. We CPAs concluded at a minimum, a Roth IRA would reduce one's social security (SS) payments. How? Through "imputed withdrawals" beginning at 70.5. If you had a $500,000 Roth IRA balance, assuming your life expectancy at 70.5 was 27.4 years, divide the $500,000 by 27.4 to get $18,248. Now Uncle Sam does not make this taxable; Unc has the Roth IRA holder report $18,248 to the SS Administration which multiplies it by 25% and reduces your SS payment $4,562. This is not a "tax increase", is it? Or else the Roth IRA would be subject to a 10% "excise" tax on "required mandatory distributions" after 70.5. The only issue we discussed was the mechanics of how Unc would make Roth IRAs taxable and what would be the triggering mechanism to do so. Our guess: once $1 trillion was in Roth IRAs, Congress would see $100 billion coming from the excise tax and lots more from SS reductions. Imagine, some people converted regular IRAs to Roths and paid income taxes to get Unc's promise of future tax-free withdrawls. Hahahahaha! On 3 March 2007, Edward McQuarrie wrote about this possibility at Barron's. Here's a link:

Anyone investing based on today's tax attributes for anything, be wary. If your tax planner does not discuss the possibility of tax law changes, dump him! Read McQuarrie's article. Be warned: Congress will stop at nothing to seize your money. Welcome to Argentina. Bienvenidos a Arjentina.

Hellacious on CDSs

Hellacious has a 11 November 2008 post about CDSs at Sudden Debt I agree with. Here's a link:

Bank Accounting

"Deutsche Bank AG, helped by a change in the way European banks book souring assets, posted a profit in the third quarter even as in-house trading bets in the stock and credit markets led to third-quarter losses totaling Euro 1.3 billion ($1.68 billion). ... A change this month by European accounting policy makers allowed banks to move souring loans to their hold-to-maturity books, limiting write-downs that would have resulted from valuing the assets at market prices", Carrick Mollenkamp at the WSJ, 31 October 2008.

"The new chief executive of Royal Bank of Scotland Group PLC said there are no 'sacred cows' when it comes to paring the global bank's balance sheet and reducing its risk as part of a turnaround strategy. ... The bank has hired McKinsey & Co. to advise and weigh each business against a variety of factors, such as returns, risk, market share and customer base", Sara Munoz and Carrick Mollenkamp at the WSJ, 7 November 2008.

"Investors were rattled by [Citigroup's] announcement that it will buy the last $17.4 billion in assets held by its structured investment vehicles, which were among the first casualties when the credit crunch hit last year. ... As Citigroup's stock fell Wednesday, executives instructed traders, financial advisers and other employees to reach out to key clients to reassure them about the company's health. ... Tanya Azarch's, a credit analyst at Standard & Poor's, says the federal government had made a 'broad expression of support.' ... 'As we're watching the deterioration here of the market ... it makes us think that the mark-to-market writeoffs are not over yet,' she adds. Such write-offs, which reflect the dwindling value of assets Citigroup is holding, have already cost Citigroup tens of billions of dollars this year", David Enrich at the WSJ, 20 November 2008.

"The market is losing confidence in Citigroup. In the wake of some planned balance-sheet maneuvers, it isn't tough to see why. ... Largely overlooked in presentation materials released to investors was a disclosure that this quarter the firm would reclassify about $80 billion in assets. Those assets wouldn't have to be marked to market prices. Or they could be be held in way that keeps losses from hitting earnings. ... Mr. Pandit's rationale for the move: The assets could eventually bounce back in value. Investors have heard that one before and don't believe it. If anything, the move has only made investors more skeptical about Citigroup's ability to withstand mounting losses. The bank says its sufficiently capitalized", David Reilly at the WSJ, 20 November 2008.

"With even the largest vessels now vulnerable to pirates, these are dangerous times for shipping. The same goes for financial supertankers such as Citigroup. ... Dozens of new managers have been brought in, some of them old colleagues of Mr. Pandit's from his days at Morgan Stanley. Risk management has been spruced up. Treasury has been centralised, to ensure that capital is allocated more efficiently. ... The big question is whether Citi, which has already raised $75 billion in equity, a third of it from the government, will need more. ... And Citi may yet have to bring a portion of its $1.2 trillion in off-balance-sheet assets onto its books under proposed accounting rules. ... Though the American government would not allow Citi to fail, the idea that it will need further state support, or will need to be rescued by another bank, no longer seems fanciful", my emphasis, Economist, 20 November 2008, link:

"Citigroup hopes the government makes a public expression of confidence in Citigroup that would help reassure clients and customers. Mr. Pandit told employees that Citigroup has 'a fantastic business model.' But executives haven't ruled out a possible sale or breakup of Citigroup if there is no alternative, according to people familiar with the matter", David Enrich at the WSJ, 22 November 2008.

Quoted without comment.

I applaud Royal Bank's move but wonder: what was it doing all along?

Things go from bad to worse at Citigroup. On 7 July 2008 "C" was $17.34; on 20 November 2008, $4.71; a 73% decrease in 4.5 months. Great work $800 million man.

Yes, Uncle Sam will keep Citi afloat, no matter what. I ask the question I've asked before: what kind of cost accounting did Citi have that now it's improving its risk management and capital allocation process? What was its prior management being paid for?

That Citigroup's $800 million man thinks he needs government expressions "of confidence", tells me Citigroup is insolvent. Absent further bailouts, Citigroup is finished.

Citigroup been singing this song for months. See my 7 and 17 July 2008 posts:

Saturday, November 22, 2008

Mary Jo Rides Again

"On Sept. 25, as the world financial crisis escalated, two of New York's most powerful lawyers met for lunch in a restaurant near Wall Street with a name that recalled happier times: Bull Run. They were Michael J. Garcia, the [US] attorney in Manhattan, and Andrew J. Cuomo, the state attorney general. Both men's offices have histories of moving aggressively against financial fraud, and of vigorously defending their turf when other prosecutors try to compete for their cases. ... First came the bust; now comes the inevitable flood of investigations and possible prosecutions. State and federal prosecutors are looking at a range of companies, from Fannie Mae and Freddie Mac, the mortgage finance companies that were effectively nationalized in September, to Lehman Brothers, the Wall Street bank that collapsed last month in the largest bankruptcy in [US] history. But the crisis is so widespread that there has been another phenomenon--cooperation among prosecutors, especially in New York, where in the past they have not been shy about bumping elbows and sometimes had to resolve conflicts at the highest levels of the Justice Department. ... Two people familiar with the Lehman investigations said the case had been divided among the three offices [Manhattan, Brooklyn and New Jersey] because there were too many avenues of inquiry for any one office to handle. ... The decision to cooperate can be advantageous to prosecutors. Under the arrangement in the swaps investigation between Mr. Garcia and Mr. Cuomo, for example, some of Mr. Cuomo's lawyers would be designated as 'special' federal prosecutors to enable them to participate in secret grand jury proceedings. ... Mr. Garcia's office has said it is looking into whether federal laws were violated, while Mr. Cuomo, with a broader mandate as the state's attorney general, can seek industry reforms, legislation, civil settlements and other remedies. ... Mary Jo White [MJW], who served as [US] attorney for the [SDNY] from 1993-2002 and is now in private practice, said there were risks of intense public pressure 'to put scalps on the wall--"how could something as bad as this happen if nobody did something wrong?"' 'You have to distinguish between arguably bad risk-taking,' she said, 'and someone who has actually violated the law.' ... But for now, the public cooperation between prosecutors, notably Mr. Garcia and Mr. Cuomo, has caught the attention of the legal community, largely because of the history of turf battles involving the [US] attorney for the [SDNY]. ... In 1997, for example, Ms. White, then the [US] attorney, allowed one of [Paul] Shechtman's clients, who had been charged in a securities case by Robert M. Morgenthau, the Manhattan district attorney, to plead guilty to federal charges. That effectively stopped Mr. Morgenthau from pursuing his case. Mr. Morgenthau's office complained, but Ms. White responded that to prosecute the crimes 'under only state law diminshes their seriousness'," my emphasis, Benjamin Weiser and Ben White at, 31 October 2008.

"The [SEC] said it won't take disciplinary action against its enforcement chief and others who were criticized in a report by the agency's inspector general [IG]. The clearance of SEC enforcement chief Linda Thomsen and David Nelson, head of the agency's Miami office, came amid a congressional review of the agency's performance in recent years. Recent SEC [IG] reports have highlighted potential issues raised by a revolving door between the government and industry. One report by the [IG] found Ms. Thomsen had improperly released information about an insider-trading investigation involving hedge fund Pequot Capital Management and John Mack, a well-known Wall Street executive. The [IG] concluded Ms. Thomsen improperly relayed information when she told lawyer [MJW], who was working for Morgan Stanley's board and vetting Mr. Mack as a potential chief executive, that there was smoke but not fire in the investigation. ... The SEC's chief administrative-law judge ... said Ms. Thomsen did disclose to Ms. White information about the status of the SEC investigation, but '[t]here are no indications that Thomsen's disclosure was committed maliciously or for gain, or was frequently repeated.' ... SEC [IG] David Kotz said he was 'surprised and disappointed" by the decision", my emphasis, Kara Scannell at the WSJ, 8 November 2008.

Whenever my "favorite" Fed, MJW comes up, I assume I have a "target rich" environment. Hey MJW, get the joke, "target", like "target notice" sent to persons under federal investigation? Just checking. Wouldn't want to overtax your intellect. I remember your using your office in 1997, improperly in my opinion, to derail Manhattan DA Morgenthau's prosecutions, a man I disagreed with from time-to-time, but who I believe to be incorruptible. Unlike the SDNY's AUSAs and US Attorney. MJW, why worry about "scalps" now? What did you do as US attorney for nine years? Had you taken more "scalps" of "persons of consequence" to use Frank Kafka's term, we might not be in this mess today. But had you, you might not be back at Debevoise and Plimpton (D&P). Can one's future employment prospects at "Justice" influence his exercise of "prosecutorial discretion" today? Yes, MJW, we want scalps. How about starting with John Mack (JM)? I'm sure if Mike Garcia's (MG) successor spends even the $9 million spent to prosecute Martha Stewart for nothing, he can find something to incarcerate JM for. No, MJW, we need not distinguish anything. Save your comment for jury closing argument. I say, paraphrasing Franklin Delano Roosevelt, "Investigate and investigate, indict and indict and convict and convict". No deals, no quarter; public jury trials. MJW "allowed" someone to cop a plea instead of letting Morgenthau try the case. Why? Did you protect someone Mary? Come on, don't be shy. Tell us all about it. If so, who? "Diminishes their seriousness?" What does that mean?

What's going on here, given the SDNY US Attorney's office history of questionable, in my opinion, prosecutorial decisions? I surmise MG realized with Bush's approval rating at about 20%, his office had little credibility and he "rented" some from Andrew Cuomo (AC). AC, watch your back when in bed with the "White-Garcia Mob". If you have designs on New York's governorship, following Thomas Dewey, your involvement with this "operation" could end your political career. Why did MG pursue Eliot Spitzer? Why did MG expend federal prosecutorial effort on that? AC, watch yourself and assume nothing in dealing with these characters.

The federal "revolving door" revolves once more. According to her biography at D&P's website, MJW graduated from Columbia Law School in 1974. She was Judge Marvin Frankel's law clerk, then worked for D&P from 1976 to 1978. She was a SDNY AUSA from 1978 to 1981. From 1983 to 1990 MJW was a D&P litigation partner. From 1990 to 1993 she was with the Brooklyn US Attorney's office, 1993-2002, SDNY US Attorney, then back to D&P. "White's practice concentrates on internal investigations and defense of companies and individuals accused of involvement in white collar corporate crime, of [SEC] and civil securities law violations, and of other major business litigation disputes and crises. For her criminal work, she leads a Debevoise team that includes ten former Assistant U.S. Attorneys with extensive experience in major commercial investigations and prosecutions. Ms. White's recent representations of public record include: ... A Special Committee of the Board of Tommy Hilfiger which conducted an internal investigation in connection with a federal criminal investigation resulting in a decision by the US Attorney for the [SDNY] not to criminally prosecute the company. ... Under Ms. White's leadership, the [US] Attorney's Office for the [SDNY], sucessfully investigated and prosecuted numerous cases of national and international significance", my emphasis. Doesn't this give you warm and fuzzy feelings and increase your confidence in the SDNY US Attorney's Office? We don't know who MJW declined to prosecute or why? Do we? I would have liked the SDNY US Attorney's Office to have indicted Tommy Hilfiger, but MJW's biography is apparently a D&P sales tool aimed at prospective clients, "See, Tommy Hilfiger wasn't indicted, you won't be either. Trust us, we have CLOUT where it counts". Is this what D&P is saying? MJW's D&P biography reminds me of Monty Python's Flying Circus, "Snap snap, grin grin, wink wink, nudge nudge, say no more". MJW's D&P team "includes ten former Assistant U.S. Attorneys" I thought, "Hmm, could an enterprising, fearless go-for-broke, politically inclined AUSA with brass cojones use this as an "admission against interest' or a a co-conspirator statement after a James determination? More from MJW's D&P biography, "When [MJW] left her post as US Attorney for the [SDNY] in January, 2002, she was acclaimed for her nearly nine years as the leader of what it widely recognized as the premier US Attorney's office in the nation". By whom? MJW never prosecuted anyone at Kidder Peabody or GE for 1994's Joe Jett debacle did she? Under the most charitable interpretation I can credit, MJW never figured out what happened at Kidder. Under less charitable interpretations, duh.

The SEC is hopeless, top to bottom. An administrative-law judge fined Joe Jett $8.4 million for nothing, my 12 September 2007 post, and Thomsen walks! A travesty. Thomsen knowingly and wilfully released information. That she did not gain, nor did it frequently (how often is "frequently"?) nor maliciously is irrelevant. Isn't it? Suppose one commits a murder. Will he be prosecuted for "only one time"? Is motive an element of crime? I thought mens rea refers to intent to commit the act, not whether or not one intended to break the law by virtue of the act. "Whoever corruptly, or by threats of force, or by any threatening letter or communication influences, obstructs, or impedes or endeavors to influence, obstruct or impede the due and proper administration of the law under which any pending proceeding is being had before any department or agency of the [US], ... Shall be fined under this title, imprisoned not more than 5 years or, ... or both", 18 USC 1505. Could an aggressive AUSA shoehorn MJW's actions into an indictment under this statute? Maybe. I think it's worth a shot. Besides, the peasants would love seeing a former US Attorney and SEC enforcement chief indicted. The SDNY US Attorney's office could turn the trial into a big moneymaker on pay per view. Why not, people pay millions to see pay per view fights? UFC is on pay per view. Why not US v. White and Thomsen? The Las Vegas bookmakers could take bets on which counts would yield convictions. Then on the sentence length. Hundreds of millions could be made.


I recently received a Wikinvest invitation and saw it works well on Naked Capitalism and Financial Armageddon so added the plug-in.

Sarah Palin-Two Views

"The Palin farce is already the stuff of legend. For a generation at least it is sure to keep presidential historians and late-night comedians in gainful employment, which is no small thing. ... John McCain's choice was not a fluke, or a senior moment, or an act of deperation. It was the result of a long campaign by influential conservative intellectuals to find a young, populist leader to whom they might hitch their wagons in the future. ... After the campaign for Sarah Palin, those intellectual traditions may now be officially pronounced dead. ... In a country susceptible to political hucksters and demagogues, [conservatives like Buckley, Krsitol, Glazer, Moynihan, Himmelfarb, Berger, Kirkpatrick and Podhoretz] studied the passions of democratic life without succumbing to them. They were unapologetic elites, but elites who loved democracy and wanted to help it. ... It's a sad tale that began in the '80s, when leading conservatives frustrated with the left-leaning press and university establishment began to speak of an 'adversary culture of intellectuals.' ... In 1976 Irving Kristol publicly worried that 'populist paranoia' was 'subverting the very institutions and authorities that the democratic republic laboriously creates for the purpose of orderly self-government.' But by the mid-80s, he was telling readers of this newspaper that the 'common sense' of ordinary Americans on matters like crime and education had been betrayed by 'our disoriented elites,' which is why 'so many people--and I include myself among them--who would ordinarily worry about a populist upsurge find themselves so sympathetic to this new populism.' ... They mock the advice of Nobel-Prize-winning economists and praise the financial acumen of plumbers and builders. They ridicule ambassadors and diplomats while promoting jingoistic journalists who have never lived abroad and speak no foreign languages. And with the rise of shock radio and televison, they have a found a large, popular audience that regularly absorbs their contempt for intellectual elites. ... What matters in democracy is that those elites acquire their positions through talent and experience and that they be educated to serve the public good. ... There was a time when conservative intellectuals raised the level of American public debate and helped to keep it sober. Those days are gone. As for political judgment, the promotion of Sarah Palin as a possible world leader speaks for itself", my emphasis, Mark Lilla (ML) at the WSJ, 8 November 2008.

"Because Sarah Palin is not only a conservative, but a Western populist, she is far less amenable to control by the New York-Washington axis of bureaucratic insiders, media commentators and think-tank grandees that dominate the Republican Party elite. McCain's advisers discovered this late in the campaign, when they complained she was going rogue and attacking the Democratic candididate instead of quietly and dutifully following Mr. McCain into genteel defeat. This independence, combined with her huge popularity among the conservative base, means that the Republican East Coast elite knows it has to destroy her now, before she becomes the obvious alternative to a second Obama term. ... It must be understood that the East Coast elite would far rather lose the White House, House and Senate than lose its influence over the Republican Party. ... The social conservative measures such as California's Proposition 8 that conservatives have been told to abandon have nevertheless proven to be popular vote winners even in democratic states, whereas elite-approved measures such as alien amnesty, the foreign occupations and the Wall Street bailouts are hated by Republicans and Democrats alike. It is illogical, bordering on downright insane, to conclude from this that less of the former and more of the latter will result in any improvement in Republican fortunes", my emphasis, Vox Day, 10 November 2008 at

"Among the many wonders to be expected from an Obama adminstration, if Nicholas D. Kristof of the New York Times is to be believed, is ending 'the anti-intellectualism that has long been a strain in American life.' ... During the 1930s, some of the leading intellectuals in America condemned our economic system and pointed to the centrally planned Soviet economy as a model--all this at a time when literally millions of people were starving to death in the Soviet Union, from a famine in a country with some of the richest farmland in Europe and historically a large exporter of food. ... In the 1930s, it was the intellectuals who pooh-poohed the dangers from the rise of Hitler and urged Western disarmament. It would be no feat to fill a big book with all the things on which intellectuals were grossly mistaken, just in the 20th century--far more so than ordinary people. ... How have intellectuals managed to be so wrong, so often? By thinking that because they are knowledgeable--or even expert--within some narrow band of the vast spectrum of human concerns, that makes them wise guides to the masses and to the rulers of the nation. But the ignorance of Ph.D.s is still ignorance and high-IQ groupthink is still groupthink, which is the antithesis of real thinking", Thomas Sowell, 11 November 2008, at

"Strip away the fluffy historical and theoretical camouflage in Mark Lilla's 'The Perils of "Populist Chic"' (Weekend Journal, Nov. 8) and you find a Democratic creed that is simple, arrogant and all too familiar: 'We smart few know what's best for you not-so-smart masses.' ... What this Columbia professor really means in that she isn't Ivy League educated and isn't from New York City. His attack on the current crop of Republican intellectuals implies that his elite Democratic colleagues got it right in their selection of Barack Obama, who both Joe Biden and Hillary Clinton criticized for his lack of judgment and who both said isn't ready to be president", Peter Murray letter to the WSJ, 15 November 2008.

"Prof. Lilla urges conservative intellectuals to 'own up to their elite status and defend the need for elites.' The need for elites? Most of us nonelites are a little down on elites right now after the role they played in the current mortgage crisis and its resulting meltdown of the financial markets and global economy", Robert Smith letter to the WSJ, 15 November 2008.

"The professor who teaches at an 'elite' university that bans the Reserve Officer Training Corps but allows the president of Iran to speak, surely shouldn't be in politics. A saying someone told me a long time ago still holds true: Those who can, do; those who can't teach. I would rather have a tested executive from a nonelite school than an untested elite-school graduate who has never had to manage anything or maintain a balanced budget", Wayne Dettinger letter to the WSJ, 15 November 2008.

"For Prof. Lilla, Gov. Palin's appeal to 'ordinary Americans' is 'populist demagogery' and represents a 'vulgarization all democracy tends toward.' Given this bleak view of our republic from the liberal intelligensia, give me a double shot of Gov. Palin's 'populist chic'," William White letter to the WSJ, 15 November 2008.

"But the academic elite deserve no excuse. There is no clearer example of 'populist chic' than Barak Obama's utterly sophomoric mantra of cosmic change. Yet the eminent Dr. Lilla chooses to leap into the Gov. Palin scapegoat fest as his excuse to trash the entire conservative world view. What is that called: 'chutzpah chic' or just plain cheeky ignorance?", Charles Kiene letter to the WSJ, 15 November 2008.

"In times like these, when conservatives are licking their wounds and trying to figure out what comes next, a helpful framework exists. It starts with a simple, self-evident fact: There is such a thing as elite opinion that is not the same as popular opinion. ... At other times, elites in a democracy have a tendency to get overly bound up with social status and careerism, and there is a premium on conformity. Having the right views, and the right way of expressing such views, becomes an emblem of elite status and a harbinger of career advancement. More and more issues become 'not debatable.' At such times, elite opinion is likely to to see itself as self-evidently superior to popular opinion, and its role toward popular opinion as--shall we say--educative. ... The reason elite opinion makers are set on destroying [Palin] is fear. They sense that like Ronald Reagan, and unlike say, Mitt Romney or Tim Pawlenty, she really, genuinely doesn't care what they think, and for that reason is willing and able to go over their heads and make a strong, direct appeal to voters. ... One of they key characterisitics of elite opinion, particularly at times like the present when it has become so unanimous that it has forgotten what it is to have a real debate, is repetition of the claim that some issues are settled, or no longer subject to serious debate", my emphasis, Jeffrey Bell, 17 November 2008 at

ML is a Columbia humanities professor. Professor Lilla, most esteemed sir, in addressing you, I kowtow in the Japanese manner. I, a Sans-culotte am one whom your piece oozes contempt for. I have no special regard for Nobel Prize winning economists' opinions. I've been taught by some, I went to school with one. So? Two were behind Long-Term Capital Management. I think your revulsion at Palin's nomination arises from her being an Ivy League degreeless Sans-culotte. That's it. A Palin's becoming president would be an Ivy League disaster. People would: hold mock funerals in Harvard Square and tear their clothes on 116th Street and Broadway. The wails from Hanover, NH, New Haven, CT and Providence, RI would be so loud they would be heard in Boston and New York! Jim Cramer would yell "short-sell Harvard"! The Ivy League would bemoan its end as "gatekeeper of presidents". Do you believe double Ivy Leaguer Obama a huckster and a demagogue? I do. Feel free to look down on me for this. I saw this "adversary culture of intellectuals" in college in the late 1960s. I ask: why did "conservative intellectuals" take about 15 more years to see it? I ridicule ambassadors and diplomats. So? Learned professor, have you the temerity to call me an ignoramus? You're probably surprised I knew the word and used it properly, aren't you? Have you considered exchanging your current appointment for one at the University of Laputa?

I agree with Day. If Palin had a graduate degree from Princeton's Woodrow Wilson School, or Harvard's Kennedy School, the Republican East Coast Elite would fall all over her. Even Democrats would praise her.

Intellectuals' deception and ignorance can stagger. Many were victims of the USSR's "Potemkin Villages". The NYT's Walter Duranty concealed Stalin's 1933-35 Ukraine famine. The NYT told us Castro was only an "agrarian reformer" among other intellectual fiascos. Follow the current flap over schooling and affirmative action or the Wall Street bailout as opposed to Joe Schmoe's position.

How right you are Mr. Murray.

Yes Mr. Smith.

Dettinger, the good professor knows one thing about Obama, he has two Ivy League degrees and that's all he need know.

White, amen!

Kiene, I agree. I doubt Obama could have survived in my fifth grade class intellectually. Really. But the O-man was Harvard Law Review president. What does that say about Harvard Law School?

I agree with Bell. Palin may become my "Andrew Jackson" in a dress. Imagine Palin arriving at the White House with a pair of flintlocks! Lock and load Sarah! This thought terrifies our East Coast elites. Imagine Palin telling Harvard's faculty, "I don't care what you think. And if you don't like it would you rather look down the muzzle of one of these"? Shocking!