Thursday, April 30, 2009

SEC and DOJ Protect Whom?

"The [SEC] and the Justice Department asked a federal judge on Wednesday to block an effort by a group of customers to force convicted Ponzi-scheme operator Bernard Madoff into involuntary bankruptcy. ... In their filing last week, the customers raised concerns about whether the [DOJ] and the SEC would distribute to customers any funds recovered from Mr. Madoff and 'what rules would govern any such distribution.' ... Jonathan M. Landers, a lawyer representing the customers seeking to force Madoff into bankruptcy, said they were 'disappointed' by the SEC's opposition and that the bankruptcy court has well-established procedures for recovering assets", my emphasis, Chad Bray at the WSJ, 9 April 2009.

It's "well-established procedures" that the SEC and DOJ want to avoid. Who are the SEC and DOJ trying to protect?

MBIA Split Attacked

"Veteran investor Martin Whitman's Third Avenue Management LLC sued units of MBIA Inc., saying the bond insurer's decision to separate its busineses 'greatly harmed' Third Avenue as a bondholder. ... In a statement Monday night, MBIA Chief Executive Joseph 'Jay' Brown said: 'We appreciate Third Avenue's past support of MBIA and regret that they felt today's action was necessary.' He added that the insurer's split 'should not have been a surprise,' and believes the allegations in the complaint are without merit. ... In mid-February this year, MBIA split its municipal-bond guaranty business from its problematic exposures in an attempt to resart its business of writing new bond guarantees. The move left the original insurance unit with less capital and fewer financial resources to support guarantees on toxic securities, such as collateralized debt obligations backed by subprime mortgages", Serena Ng at the WSJ, 7 April 2009.

MBIA's maneuver is transparent, Whitman should win his case on summary judgment. See my 5 April 2009 post:

Wednesday, April 29, 2009

Two Masters?

"A federal judge's ruling in Los Angeles is getting attention among corporate lawyers because it suggests they need to issue more explicit warnings during internal investigations that they don't represent individual employees. ... Judge [Cormac] Carney said Irell & Manella LLP, a Los Angeles law firm hired by Broadcom to review possibly illegal stock option grants, failed to explain clearly to the executive that it wasn't representing him. The judge went so far as to refer the law firm to the California state bar for disciplinary action, citing 'ethical misconduct.' A spokesman for Irell & Manella [I&M], Charles Sipkins, called the judge's ruling an 'error' and said all of the law firm's disclosures were proper. The government is appealing the ruling, which suppresses all statements to the firm by former Broadcom Chief Financial Officer William Ruehle. ... Lawyers say it already is widespread practice to give some kind of notice in contacts with employees that the lawyer represents the company or its board of directors, not the employee. The Broadcom ruling is likely to make that warning even more precise. 'We're going to see the interview warnings turn into something akin to the Miranda warnings the police give to suspects,' said Streve Crimmons, a former [SEC] lawyer now at Mayer Brown. ... In the Broadcom matter, Mr. Ruehle said in court papers that since the lawyers had represented him personally as well as the company in previous shareholder lawsuits, he thought the same terms applied. ... Judge Carney said the law firm breached its duty of loyalty to Mr. Ruehle by revealing his statments to the government", Kara Scannell at the WSJ, 13 April 2009.

This case is worse than it first appears. I&M should have declined this case as it previously represented Ruehle. Judge Carney went easy on I&M. The DOJ apparently used I&M to circumvent the lawyer-client privilege rules, literally turning I&M into a DOJ "catspaw" and no DOJ lawyer was called to account. Or was the DOJ unaware of I&M's previous representation of Ruehle?

Let Creditors Pay

"This pattern has been evident for months, with the government aiding creditors and counterparties every step of the way. Yet this has not been explained to the American public. In truth, it's not the shareholders of American International Group who have benefited most from the bailout; they were mostly wiped out. The great beneficiaries have been the creditors and counterparties at the other end of AIGs derivatives deals--firms like Goldman Sachs, Merrill Lynch, Deutsche Bank, Societe General, Barclays and UBS. ... The bailout, and the regulatory regime outlined by Timothy F. Geithner, the Treasury Secretary, would give firms like these every incentive to make similar deals down the road. ... What the banking system needs is creditors who monitor risk and cut their exposure when that risk is too high. Unlike regulators, creditors and counterparties know the details of a deal and have their own money on the line. ... The more closely a financial institution is regulated, the more it will be assumed that its creditors enjoy federal protection. We may be creating a class of institutions whose borrowing is, in effect, guaranteed by the government", my emphasis, Tyler Cowen (TC), 5 April 2009 at the NYT, link:

I have said this for years. Look at Fannie and Freddie for example. Now we have Goldman, run by a bunch of multimillionaires on the federal dole. TC suggests "prepackaged" bankruptcies be built into credit agreements. I oppose this. I want to see blood spilled in open court. Let the CNC guillotine work.

Tuesday, April 28, 2009

One Truth Teller

"Charles Bowsher said he resigned last month as chairman of the Federal Home Loan Bank system's Office of Finance because he wasn't comfortable with the way the banks value their mortgage securities. 'I decided I didn't have confidence in the financial statements,' Mr. Bowsher said in an interview, confirming remarks that previously appeared in a Bloomberg News article. Mr. Bowser, a former partner at the accounting firm Arthur Andersen, said he believes financial companies generally, not just the home-loan banks, have too much discretion in valuing assets such as mortgage securities. 'They put a lot of assumptions in there,' he said", James Haggerty at the WSJ, 4 April 2009.

I wonder if Barney Frank wants Bowsher's old job. I agree with Bowsher and see bank accounting getting worse with the newly revised SFAS 157.

WSJ Mistitles Article!-2

"Law firm Davis Polk & Wardwell [DWP] recruited the [SEC's] former enforcement chief and another former high-level government lawyer to join its white-collar defense group, part of an effort to expand its Washington practice. Linda Chatman Thomsen, who left the SEC earlier this year, and Raul Yanes, former staff secretary to President George W. Bush, are joining the law firm as partners. Both had worked at [DPW] in New York before joining the government. ... [DPW] clients, including large financial institutions, are closely entangled with the government as it has pumped billions of diollars into financial rescue plans. ... Yanes, 43, spent a decade at [DPW] before stints at the Justice Department, the Office of Management and Budget and the White House. Ms. Thomsen, 54 is returning to [DPW] after nearly 14 years at the SEC, where she rose through the ranks and made her name working on the Enron accounting fraud case. ... Returning to Davis Polk 'wasn't a foregone conclusion in my mind at all,' Ms. Thomsen said. 'I was very lucky to have lots of opportunities'," my emphasis, Kara Scannell at the WSJ, 13 April 2009.

A better title, "Davis Polk attorney loaned to SEC, returns to firm". I'm sure Thomsen had "lots of opportunities". Why? Wasn't that public spirited of DWP, to "loan" the SEC Thomsen for 14 years? I last mentioned Thomsen on 18 February 2009, link:

Monday, April 27, 2009

SFAS 157 and Congress

"Plenty of banks have succumbed to the credit crunch. Now, accounting rules look set to join the list of casualties. Accounting rule makes will vote Thursday on proposals to soften 'mark-to-market' accounting, the controversial rules requiring companies to peg their investments' value to the market's ups and downs. Many banks blame the rules for worsening their current problems, by locking in losses that they say are merely temporary. The banks' claims are largely bogus--after all, no accounting rule forced them to create and invest in the toxic seecurities that helped cause this crisis. But the [FASB] is being pressured to water down the rule. ... Under the plan, all banks would have to do is say they don't intend to sell an 'avaliable-for-sale' investment that has incurred mark-to-market losses and probably won't be forced to sell before it recovers. Then, only 'credit losses,' the amount a company expects to lose if it holds an investment to maturity, would have to be recognized in earnings. ... The loophole is big enough to fit a bloated bank balance sheet through: The risk is that banks wouldn't admit to a major credit loss on such securities unless the losses really were so obvious they simply couldn't be ignored", my emphasis, Michael Rapoport at the WSJ, 1 April 2009.

"US accounting rule makers made it easier for banks to limit losses, but in an unexpected move they bowed to critics and backtracked on one proposal that would have let companies ignore market prices in some cases. ... For the most part, the board ratified proposals it had put out for comment two weeks earlier, including changes that would lessen the need for banks to take an earnings hit when assets run into trouble. Financial stocks led the market up in the morning in the expectation thet the rules would be approved, but faded and ended roughly on a par with the broader market. ... 'We are an independent standard setter and it's important that we maintain our independence,' said Lawrence Smith. But he said the board can't 'ignore what's going on around us' as banks plead for help. ... Patrick Finnegan, director of financial reporting policy for the CFA Institute, said the move gives managers too much room to fudge the truth. 'Financial statements are not there to reflect management's assumptions,' said Mr. Finnegan", Kara Scannell at the WSJ, 3 April 2009.

"Some of the biggest corporate blowups of the past 20 years, like Enron, occurred chiefly because managers could exploit accounting rules that gave them great liberty in pricing assets", Peter Eavis at the WSJ, 4 April 2009.

Thurgood Marshall (TM) said something about SFAS 157. But TM died in 1993. So? His words live on. When I find the quotation, I will post it. Stay tuned. But TM wasn't a CPA. So? He left us some wisdom. We should apply it.

Smith, shut up. You fraud. Your job was: tell Barney Frank, "Go to hell".

Amen Eavis.


"To classify Obama in political terms is to underestimate his hatred of America. ... The Cloward/Piven Strategy, Rules for Radicals, the looting of American wealth and Keynesian Economics are simply means to an end. The end goal of Obama's spiritual journey is the complete destruction of the nation as created by the Founders. ... We are coming to the realization that we are a nation of sinners in the hands of an angry god-man President. Jonathan Edwards concluded his [14 July 1741] sermon--'Therefore let everyone that is out of Christ, now awake and fly from the wrath to come.' .... This negative belief is exhibited in Obama's statement: 'But the [Warren] Supreme Court never ventured into the issues of redistribution of wealth, and of more basic issues such as political and economic justice in society.' ... The history of nihilism is both political, and in a thunderingly empty way, deeply spiritual. ... Real-life nihilist Sergei Nechaev (1847-1882) argued that gross immorality of the European monarchies and Catholic Jesuits meant any action could be utilized in the sake of the people's revolution to bring them down. .... In today's culture, the immorality of Nechaev's Catholic Jesuits is now the sin of capitalists, free market economics, or conservatives. ... The president is a democratically elected revolutionist bent on destruction of the nation he serves. .... But fear not because Obama's massive budget is full of government munificence. The angry god-man President will be the overseer in the State's provision for the needy. ... Steeped in the 'new time religion' of Libertation Theology, a derivative of Marxist dialectics, Christ's message of man's restoration with God is contrived into one of social justice for the poor. ... By deftly redirecting the sin of an individual to an idea, the Marxist dialectic materialist argument swallows Judeo/Christian values whole. The State determines sin, as anything not proscribed by the State. As sinners in the hand of an angry President, taxes are now viewed as atoning contributions for the State's collection plate. This inevitably means the Rich and the Capitalists can only receive atonement through State seizure of all private property. ... There is also another insidious destructive activity that has been building for at least two generations involving the insipid acceptance of meaninglessness. ... Years of trivializing the important, while heralding the arcane and vacuous has resulted in a generation and a half that blithely believe in nothing. ... Obama speaks dramatic words for the cameras knowing that those watching him are experiencing him emotionally, not rationally", Nancy Coppock (NC) at The Jackalope's Voice, 14 March 2009, link:

This piece returns me to fifth grade, reviving less than fond memories. In fifth grade we read then wrote about Jonathan Edwards, "Sinners In the Hands of an Angry God". I remember my teacher, an unabashed Calvinist, saying none of us were members of the elect, we would all go to hell and that went double for the then relatively young Independent Accountant. I doubt she could teach that lesson today. I am not sure Obama is all NC thinks he is. Obama may be a nonidealogical Chicago Pol who goes along to get along. NC's point about Obama's comment on the Supreme Court is well taken. I doubt the Harvard Law School grad knows half, perhaps not a quarter what I do about Constitutional Law. I've said before, Obama would have been intellectually crushed in my fifth grade class. Really. See my 3 July 2008 post,

Sunday, April 26, 2009

Northrop's Whistleblower

"Northrop Grumman Corp.[NGC] agreed Thursday to pay the US government $325 million to settle civil claims that a company it acquired allegedly made defective parts for spy satellites that resulted in serious malfuctions and expensive fixes several years ago. ... The settlement is the largest ever of a so-called whistleblower case alleging military-procurement fraud. [NGC] didn't admit any wrongdoing. ... The agreement also ends a separate lawsuit filed by [NGC] against the Pentagon over an unrelated contract for stealthy cruise missiles. ... Because the two payments cancel each other out, there is no net financial impact on [NGC]. However, the suit highlights questions about how quality-control issues were handled at one of the country's premier areospace suppliers. ... Robert Ferro, an Aerospace Corp. official who first discovered the problem, alleged that in 1995 TRW pressured him against publishing his findings highlighting problems with the transistors. Even after subsequent TRW tests confirmed Mr. Ferro's conclusions and government satellites started failing during 2001 amd 2002, TRW continued to tell the government 'it did not know and could not have been expected to know' about the problems beforehand", my emphasis, Andy Pastor at the WSJ, 3 April 2009.

Our soldiers could have been "blinded" in the field and no one goes to prison. Did the DOJ ever hear of 18 USC 1001, the false statements act? NGC net paid nothing. It presumably filed a false claim so the DOJ could settle both cases with no net effect and pay Ferro a few million to shut him up.

John Bogle Lives!

Gretchen Morgenstern cites John Bogle, a Vanguard Group founder, 12 April at "In his view, the agents have failed to serve their clients--mutual fund shareholders, pension beneficiaries and long-term investors; instead the agents have served themselves. ... In the face of all this, Mr. Bogle suggests that we force our agents to relearn what being a fiduciary means. ... Some money management firms are publicly traded themselves, and Mr. Bogle says that those firms offer an added layer of deep and serious conflicts because executives running them try to serve two masters: their shareholders and their fund clients".

Adoph Berle, Columbia University law professor, and member of FDR's "Brain Trust", wrote of this in 1932 in The Modern Corporation and Private Property and 1959 in Power Without Property. This story brings to mind a fine 1956 move, "The Solid Gold Cadillac", with Judy Holliday. If you get a chance, see it. We need more proxy fights. The first one I would like to see is at: Goldman Sachs (GSG). Who should be able to vote as a GSG shareholder? Any registered voter in the US. We financed its salvation, directly and through the AIG bailout. We own it, we should run it. If Lloyd Blankfein doesn't like it, tough. Let him quit.

Saturday, April 25, 2009

Goldman's Hypocrisy Never Ends

"Goldman Sachs Group Inc. [GSG] Chairman and Chief Executive Lloyd Blankfein [LB] called for broad changes to how Wall Street pays employees and is regulated, saying 'the loss of public confidence from failing to live up to the expectations that we created will take years to rebuild.' ... Blankfein also recommended that stock awards be held for at least three years before they could be collected, a move that would rein in excessive risk-taking. ... 'We have a higher responsibility ... to act like an owner responsible for the integrity of the system.' ... Many of the recommendations made by Mr. Blankfein are being adopted or at least considered by some Wall Street firms as they react to public ire over their culpability for the financial crisis and bonus payments that to many Americans seem out of touch with reality. ... Blankfein didn't concede that Goldman has done anything wrong in how it pays employees. Indeed, some compensation experts noted that much of what Mr. Blankfein advocated is already in practice at Goldman. ... When deciding on pay for traders, bankers and other employees, Wall Street firms should take into account not only the contribution the employee made to profit or loss, but also the risks taken and the overall contribution to the better functioning of markets", my emphasis, Aaron Luchetti at the WSJ, 8 April 2009.

"A former chairman of Tajikistan's Central bank diverted more than $850 million to a company run by himself and his family, according to an independent audit posted on the bank's Web site on Monday", WSJ, 14 April 2009.

GSG and LB make me sick. GSG's shareholders should run LB out and tar and feather him. He admits he did not do his job properly. Stock awards be held for at least three years? Hmm. LB doesn't read IA, does he? See my 13 January 2009 post: Compensation experts? Where were these "experts" ten years ago? Act "like an owner"? What were you doing all along LB?

How much did former GSGer Hank Paulson "divert" to the members of his adopted family? We live in Tajikistan.

Robert Gates, Traitor or Fool?

"The highest-profile test of Defense Secretary Robert Gates's plan to overhaul how the Pentagon buys weapons will be whether he succeeds in winding down production of the most advanced fighter the Air Force has ever flown. ... But despite its political muscle and technological prowess, more F-22s don't have a place in Mr. Gates's vision. He wants to curtail production after 187 jets are delivered, some 60 jets short of what the Air Force has told lawmakers it wants. That could lead to thousands of job cuts. Mr. Gates sees the F-22, which costs $143 million apeice, as overkill for a military that needs to be more focused on hunting insurgents that fighting the militaries of peer nations. He is throwing the Defense Department's weight behind another plane made by Lockheed, the F-35 Joint Strike Fighter. It is a simpler design, and US allies who will buy the jet share the costs. ... There are likely to be a flurry of hearings on all aspects of the Pentagon's plans, which will test Mr. Gates's holistic approach to the budget. ... He also wants the Navy to go back to producing and older-model destroyer and abandon a futuristic cruiser, among other cutbacks. For the Army, Mr. Gates wants to abandon plans to develop high-tech ground vehicles that were part of an $87 billion program. All these programs, he says, are too expensive and rely on unproven technology. ... Lockheed Chairman and Chief Executive Robert Stevens in a note ... said ... 'I embrace Secretary Gates' call to put the interests of the United States first--above the interests of agencies, services, and contractors--and I will support him in every way.' ... It would be shortsighted to think 'we're going to be fighting terrorists for 50 years and we're not going to be engaged in conventional war', [Sen. Saxby Chambliss said]", my emphasis, August Cole at the WSJ, 8 April 2009.

"On Monday, Defense Secretary Robert Gates announced a significant reordering of US defense programs. His recommendations should not go unchallenged. In the 1990s, defense cuts helped pay for increased domestic spending. Though Mr. Gates said that his decisions were 'almost exclusively influenced by factors other than simply finding a way to balance the books,' the broad list of program reductions and terminations suggest otherwise. In fact, he tacitly acknowledged as much by saying the budget plan represented 'one of those rare chances to match virtue to necessity'--the 'necessity' of course being the adminstration's decision to reorder the government's spending priorities. However, warfare is not a human activity that directly rewards virtue. Nor is it a perfectly calcuable endeavor that permits a delicate 'balancing; of risk. More often it rewards those who are on the battlefield 'the fustest with the mostest,' as Civil War Gen. Nathan Bedford Forrest once put it. If Mr. Gates has his way, US forces will find it increasingly hard to meet the Forrest standard. ... The termination of the F-22 Raptor program at just 187 aircraft inveitably will call US air supremacy--the salient feature, since World War II, of the American way or war--into question. The need for these sophisticated, stealthy, radar-evading plance is already apparent. ... As the air-defense and air-combat capabilities of other nations, most notably China, increase, the demand for F-22s would likewise rise. And the Air Force will have to manage this small fleet of Raptors over 30 years. Compare that number with the 660 F-15s flying today, but which are lieterally falling apart at the seams from age and use. ... Meanwhile,Mr. Gates is further postponing the already decades-long search for the existing handful of B-2 bombers. The US Navy will continue to shrink below the fleet size of 313 ships it set only a few years ago. ... Dealying future moderization means that future generations of soldiers will conduct mounted operations in M1 tanks and Bradley fighting vehicles designed in the 1970s. Gates ... calculus is true only because the Obama administration has chosen to cut defense, while increasing domestic entitlements and debt so dramatically", my emphasis, Thomas Donnelly and Gary Schmitt at the WSJ, 8 April 2009.

"'There is no purely military solution to it,' [piracy] Gates said in an address to the Marine Corps War College in Quantico, Va. 'There's really no way in my view to control it unless you get something on land that begins to change the equation for these kids.' ... Among the advocates for more serious initiatives in Somalia has been Vice Adm. William E. Gortney, commander of US naval forces in the Middle East, who on Suday reiterated his ships could only do so much and 'the ultimate solution for piracy is on land'," Peter Spiegel at the WSJ, 14 April 2009.

Where do I begin with how incompetent, or worse Gates is? That we fought terrorists for over seven years shows our strategy and tactics incompetence. Gates should be fired. Now! What does "holistic approach" mean? Programs "rely on unproven technology", gee. Gates sounds like, drumroll please, a stupid accountant! The Manhattan Project relied on "unproven technology" too! Gates is a bigger danger to the Republic than al-Queda is, was or ever could be. Gates should find himself a sinecure somewhere with a foreign embassy. I understand the Saudis have lots of money. Gates find yourself a sinecure there. I've posted on the F-22 before, 12 March 2009:

Air supremacy? Time for an Independent Accountant father's war story. A real war story. During World War II my father said he used to seek shelter whenever he heard a plane in the sky until about November 1944. Why? By November 1944 the Luftwaffe could no longer fly.

Gates has forgotten, he is the US SecDef, not Obama's SecDef. He should resign. Now!

Gates is misplaced. He would be better at Health and Human Services. What does Gortney think we should do on land? Burn Somali villages to the ground if they harbor pirates? If not, what then?

Friday, April 24, 2009

North Korea's Missile

"But the devil of arms control also lies in the overall concept, with its implicit assumption that the weapons themselves are inherently more dangerous that the intentions of those who develop and deploy them. ... The irony is that Mr. Obama's opposition is making substantial reductions in the total US arsenal that much riskier. In the absense of actual testing,which hasn't happened in the US since 1992, the only real hedge against potentially defective weapons is a larger arsenal. ... In fact, a US nuclear aresenal that is diminshed in both quantity and quality would be an incentive for [Russia, North Korea, Pakistan and perhaps Iran] to increase their nuclear inventories, since the door would suddenly be opened to reach nuclear parity with the last superpower. Mr. Medvedev, for one, recently anounced Russia would pursue 'large-scale rearmament' of its army and navy, including nuclear arsenals", my emphasis, Editorial at the WSJ, 4 April 2009.

"Prior to North Korea's [NK] launch yesterday of a Taepodong-2 ballistic missile, President Barack Obama declared that such an action would be 'provocative.' This public statement was an attempt to reinforce the administration's private efforts to urge the Democratic Peoples' Republic of Korea (DPRK) not to fire the missile. ... Incredibly, US Special Envoy for [NK] Stephen Bosworth revealed--just a few days before the launch--that he was ready to visit Pyongyang and resume the six-party talks once the 'dust from the missile settles.' It is no wonder the North fired away. ... In 2006, when Pyongyang last lit off a volley of missiles and then exploded a nuclear device, the Security Council responded unanimously with Resolutions 1695 and 1718, which imposed extensive military and some economic sanctions. ... Yesterday's launch is attributable to prior failures, but the global consequences now unfolding are Mr. Obama's responsibility. In fact, Secretary of Defense Robert Gates is expected to announce today deep cuts in the US missile defense program, an extraordinarily ill-advsed step. ... Iran has carefully scrutinized the Obama adminstration's every action, and Tehran's only conclusion can be: It is past time to torque up the pressue on this new crowd in Washington. Not only is Iran's back covered by its friends Russia, China and others on the UN Security Council, but it sees an American president so ready to bend his knee for public favor in Europe that the mullahs' wish list for US concessions will grow by the minute. Israel must also be carefully watching how the US watched [NK] rip through 'the international community.' The most important lesson the new government headed by Prime Minister Bejamin Netanyahu should draw is: Look out for No. 1. If Israel isn't prepared to protect itself, including using military force, against Iran's nuclear weapons porgram, it certainly shouldn't be holding its breath for Mr. Obama to do anything", John Bolton at the WSJ, 6 April 2009.

"The President went even further in Prague, noting that 'as a nuclear power--as the only nuclear power to have used a nuclear weapon--the United States has a moral responsibility to act.' That barely concealed apology for Hiroshima is an insult to the memory of Harry Truman, who saved a million lives by ending World War II without a bloody invasion of Japan. As for the persuasive power of 'moral authority,' we should have learned long ago that the concept has no meaning in Pyongyang or Tehran, much less in the rocky hideouts of al Qaeda. The truth is that Mr. Obama's nuclear vision has reality exactly backward. To the extent that the US has manitained a large and credible nuclear arsenal, it has prevented war, defeated the Soviet Union, shored up our alliances and created an umbrella that persuaded other nations that they don't need a bomb to defend themselves. ... In Iran acquires a bomb or North Korea retains one despite this attempt to stop them, then the world will conclude that there is no such thing as an enforceable antinuclear order. It will be every nation for itself. ... Obama is a brilliant talker, and his words thrilled a Europe that wants to belive he can conjure peace and a nuclear-free world", my emphasis, Editorial at the WSJ, 7 April 2009.

"Reducing our nuclear arsenal only gives outlaw states (including China) the incentive to increase theirs, to try to rival ours. And eliminating nuclear-weapons testing reduces the reliability of our arms and hence their effectiveness as a deterrent. ... Beginning in 1906, Britain cut back an ambitious program of naval construction, begun under a previous adminstration, in the hope of thereby avoding an 'arms race' with Germany. ... The Washington Naval Conference of 1922 set limits on battleship consturction by the US, Japan, Britain, France and Italy. ... Britain's policy of restraint in military production in the 1930s--combined with with refusal of British and French governments to send forces to turn back Hitler's then weak army when it violated the Versailles Treaty by remilitarizing the Rhineland in 1936--did not placate Hitler", David Lewis Schaefer at the WSJ, 9 April 2009.

I agree with the WSJ. DO the math yourself. Or do you believe, along with that ignoramus Dianne Feinstein, we can blow the world hundreds of times over, my 15 January 2009 post,

I agree with Bolton. Again. Provocative. So? What will you do about it? If nothing, shut up!

Obama is a brilliant talker. Really? I conclude he can't think. He could not have survived intellectually in my fifth-grade class. But he was on the Harvard Law Review. So? I disagree with the WSJ about the reason we dropped A-bombs on Japan, read Gar Alperovitz's The Decision to Use the Atomic Bomb, 1995 for some possible explanations.

We apparently learn nothing from history. At least POTUS Obama hasn't.

Why We Need Federalism-9

"Connecticut Attorney General Richard Blumenthal said he is investigating why a [Fed] bailout program will steer as much as $400 million to the three largest credit-rating agencies, saying the firms' poor performance in recent months helped cause the crisis. ... The Fed's rules for its $1 trillion TAPF program, which is intending to restart consumer lending, require financial institutions to have new securities rated by two or more 'nationally recognized staistical ratings agencies'," John Kell at the WSJ, 7 April 2009.

This illustrates why we need federalism. Which federal agency would investigate this? As to why the Big Three rating agencies will continue to get business, it's because they will do what they are told. If good ratings facilitate the sale of paper the Fed wants sold, good ratings will be given.

Thursday, April 23, 2009

Michael Panzer Cites Black

I recently read a 13 April 2009 Barron's interview of William Black, an S&L crisis veteran. Black discussed our current financial crisis and Michael Panzner at Financial Armageddon, cited the interview. I have nothing to add to Black's comments. Here's a link:

Goldman, Goldman, Everywhere!

I read an article in the 17 April 2009 NYT about Edward Liddy, current AIG chief and his interests in, what else, Goldman Sachs (GSG). I thought of writing about it, but Junior at Junior Deputy Accountant, 17 April 2009, anticipated my thoughts, link: The US is economically hopeless. We need a new Andrew Jackson to drive all the "former" GS executives from the temple. Or else hope the "Master" returns with his whip to do it.

Iran's Bomb-3

"While President Obama's unanticipated Nowruz holiday greeting to Iran generated considerable press attention, his video wasn't really this week's big news related to the Islamic Republic. Far more important was that a senior defector--Iran's former Deputy Minister of Defense Ali Reza Asghari--disclosed Tehran's financing of Syria's nuclear weapons program. That program's centerpiece was a North Korean nuclear reactor in Syria. Israel destroyed it in September 2007. ... That the Pyongyang-Damascus-Tehran nuclear axis went undetected and unacknowledged for so long is an intelligence failure of the highest magnitude. It represents a plain unwillingness to allow hard truths to overcome well-entrenched policy views disguised as intelligence findings. ... Key IC agencies made two arguments in 2003 against the possibility of a clandestine Syrian nuclear weapons program. First, they argued that Syria lacked the scientific and technological capabilities to sustain such a program. Second, they said that Syria did not have the necessary economic resources to fund a program. ... The intelligence that did exist--which I thought warranted a close observation of Syria, at a minimum--that IC discounted as inconsistent with its fixed opinions. In short, theirs was not an intelligence conclusion, but a policy view presented under the guise of intelligence. ... Uncovering the North Korean reactor in Syria was a grave inconvenience for the Bush administration. It enormously complicated both the failing six-party talks on North Korea and the EU-3's diplomatic efforts with Iran, which Secretaries of State Colin Powell and Condoleeza Rice so actively supported. ... Such dialogue allows Iran to conceal its true intentions and activities under the camouflage of negotiations, just as it has done for the past six years with the EU-3. What's more, Iran will see it as confirmation of US weakness and evidence that its polcies are succeeding", my emphasis, John Bolton at the WSJ, 21 March 2009.

"In a meeting Thursday at the Journal, Admiral Mike Mullen, the Chairman of the Joint Chiefs of Staff, told us that 'there is a leadership in Israel that is not going to tolerate' a nuclear Iran. Tehran's atomic designs, he said, were a matter of 'life or death' for the Jewish state. ... The Admiral was also clear about Iran's challenge to the US. 'I think we've got a problem now. ... I think the Iranians are on a path to building nuclear weapons.' For the time his counsel is diplomacy, noting that 'Even in the darkest hours of the Cold War we talked to the Soviets.' But, he added, 'we don't have a lot of time'," my emphasis, Editorial at the WSJ, 6 April 2009.

"On Apr. 9, Gholam Reza Aghazadeh, the head of Iran's atomic energy agency, announced that the Islamic Republic had installed 7,000 centrifuges in its Nataz uranium enrichment facility. The announcement came one day after the US State Department announced it would engage Iran directly in multilateral nuclear talks. ... Thus our president fulfills a pattern in which new adminstrations place the failure of diplomacy on predecessors rather than on adversaries. The Islamic Republic is not a passive actor, however. Quite the opposite: While President Obama plays checkers, Supreme Leader Ayatollah Ali Khameni plays chess. The enrichment milestone is a testament both to Tehran's proactive strategy, and to Washington's refusal to recognize it. ... It was a ruse. Iranian officials were as insincere was European diplomats were greedy, gullible or both. Iranian officials now acknowledge that Tehran invested the benefits reaped into its nuclear program. ... When Mr. Obama declared on April 5 that 'All countries can access peaceful nuclear energy,' the state-run daily newspaper Resalat responded with a front page headline,' The United States capitulates to the nuclear goals of Iran'," Michael Rubin at the WSJ, 13 April 2009.

I agree with Bolton. I have no confidence in our intelligence establishment at all. It says what it's told.

Welcome aboard Mullen. I concluded this about five years ago. Have I access to better intelligence that you do?

Iran's press is more accurate than our State Department.

Wednesday, April 22, 2009

Satyam and PWC

"Three employees from the finance department of software-services firm Satyam Computer Services Ltd. [SCSL] were arrested Sunday, while separately, the company's former chief financial officer told the head of an Indian accounting body that the company's outside auditors weren't complicit in cooking the books. ... Separately, Mr. Valdamani told the president of the Insititute of Chartered Accountants of India on Sunday that Satyam's outside auditors from Price Waterhouse weren't complicit in the fraud, said Uttam Prakash Agarwal, the president of the accounting body, in an interview. Price Waterhouse in the Indian affiliate of [PWC]. ... According to Mr. Agarwal, Mr. Vadlamani said the forged documents were given to the auditors and they 'relied on the documents provided by the management'," Jackie Range and R. Jai Krishna at the WSJ, 7 April 2009.

"The Indian federal agency investigating the accounting issues at [SCSL] said Tuesday it had filed charges of cheating and forgery against the former chairman of the Indian software exporter, B. Ramalinga Raju, and eight others. ... All the people charged worked for Satyam or a Raju family company except for Messers. Gopalakrishnana and Taluri, who worked for Price Waterhouse. ... Price Waterhouse said it was 'surprised and disappointed' that the CBI pressed charges against the two auditors. 'The fraud perpetrated by Mr. Maju and his cohorts was designed to and did circumvent PW India's audit process; the two Satyam audit partners--and PWC India--were victims of that fraud,' the statement said", my emphasis, Romit Guha and R. Jai Krishna at the WSJ, 8 April 2009.

This stinks. Was Vadlamani paid to try to exculpate PWC? I don't buy his story for a minute. Suppose the documents were forged, did PWC have the relevant banks authenticate them?

PWC makes a public profession of incompetence at best and expects it and its' partners to be let off the hook. I don't buy any of this. Pity poor PWC's "audit process". It's worthless as are PWC's audits. PWC, the fraud "victim", boo hoo.

Prosecutorial Immunity

"Last fall, the senior senator from Alaska was the poster octogenarian for political corruption. As of yesterday, Ted Stevens is merely another casualty of abusive prosecutors out to make a name for themselves. ... In the motion, Justice said it 'recently discovered' that prosecutors withheld from the defense notes about an interview last April with the state's star witness, Bill Allen, that contradicted his subsequent testimony. Under the Brady Rule for evidence, Justice was obliged to share that with Senator Stevens lawyers. ... The Republican narrowly lost his bid for a seventh term. Attorney General Eric Holder yesterday promised a 'thorough' proble into the conduct of prescutors, which is the least the Department owes Mr. Stevens. The Obama Administration made the political calculation here to wlak away from the original mistake made by Bush Justice rather than further embarass the Department in post-trial hearings. ... Chad Joy, an FBI 'whistleblower,' filed a complaint in early December, saying his partner, Mary Beth Kepner, had an unspecified inappropriate relationship' with Mr. Allen, the prosecution witness", Editorial at the WSJ, 2 April 2009.

"A federal judge ordered a criminal investigation into prosecutorial misconduct in the trial of former Alaska Sen. Ted Stevens, and suggested that the botched case exposed a deeper problem at the Justice Department. US District Judge Emmet G. Sullivan appointed a special prosecutor to look into possible criminal contempt-of-court charges against six federal prosecutors who the judge said repeatedly withheld evidence from defense lawyers. ... A federal jury in October convicted Mr. Stevens on seven counts of failing to disclose free home rennovations and other gifts from friends. The verdict came just eight days before Election Day, and the Republican lost his re-election bid by fewer than 4,000 votes, handing Democrats a crucial seat in the Senate. ... 'In 25 years on the bench I have never seen anything approach the mishandling and misconduct I have seen in this case,' Judge Sullivan said. ... Paul O'Brien, part of the new Justice team that sought diusmissal of the case, told the judge, 'I apologize to the court and deeply regret this occurred.' The judge criticized the Justice Department for its internal investigation of the prosecutors, saying that after six months 'the silence has been deafening.' ... Mr. Stevens, wearing cowboy boots with his dark suit, briefly addressed the courtroom packed with relatives and friends, some of whom wiped away tears. The ex-senator, 85 years old, said his faith in the justice system had been shaken, but that with the dismissal of the charges, 'My faith has been restored.' ... In a statement, the Justice Department said it takes allegations of misconduct seriously, but added, 'it's important to recognize that the department's attorneys act responsibly and ethically in the vast majority of cases they litigate'," Evan Perez at the WSJ, 8 April 2009.

Isn't ignoring the Brady Rule DOJ standard operating procedure?

Who is the DOJ kidding? My experience with DOJ attorneys is: there is no more "ethically challenged" group in the entire justice system. These guys make the SEC look good. There is no form of justice obstruction I would out past the typical AUSA, witness intimidation, evidence falsification and suppression, perjury subornation, you name it. I doubt any DOJ misconduct like in Stevens' case, would be exposed in a drug possession case brought against a nobody.

Tuesday, April 21, 2009

Hutchinson on the Dollar and SDRs

Martin Hutchinson (MH) attacks China's notion SDRs should replace the dollar, 30 March 2009 at Prudent Bear, link: MH notes, "There is thus no good reason to believe that the dollar represents a sound store of value, the principal function of a reserve currency. ... Other major world currencies don't look any more solid than the dollar. ... In an ideal world, we would satisfy Zhou's requirements by a simple return to the Gold Standard, at a parity of perhaps $1,000 per ounce that was high enough not to be excessively deflationary. ... 2008's gold mine production of 2,407 tons, higher than in recent years because of high gold prices, was only 1.4% of the gold stock of 170,000 tons. If velocity were constant, that would not be sufficent to accommodate 1% population growth and desired global economic growth of 3% without an unpleasant annual deflation of 2.6%".

Why would "deflation" be unpleasant? It's gold holders being paid 2.6% annual 'interest" in terms of other goods. While agreeing with most of MH wrote, and seeing he referrred to the "stock-flow ratio", I conclude MH does not understand the gold standard. $1,000 an ounce is far too low for a stable parity price. See my 24 December 2007 post:

Arbitration and the Supremes

"The Supreme Court ruled that labor unions can surrender their members' right to sue over employment discimination, the latest in a line of decisions giving broad sweep to agreements providing for arbitration. ... Both decisions follwed the court's conservative-liberal split, with conservatives in the majority, showing how the presumptions judges bring to the bench affect their reading of laws as differnt as the Age Discrimination in Employment Act and the Clean Water Act. ... The Second US Circuit Court of Appeals in New York ruled that the workers were entitled to a trial, saying unions couldn't bargain away the power of individual members to sue over statutory rights. ... Writing for the majority, Justice Clarence Thomas rejected 'misconceptions' of arbitration as an inferior form of justice. He said employees' substantive rights are the same whether pursued through a private arbitrator or a federal judge", my emphasis, Jess Bravin at the WSJ, 2 April 2009.

I agree with the Second Circuit. This is an appalling ruling. 790 federal district court judges should be up in arms over this. Can Thomas believe what he wrote?

Monday, April 20, 2009

Moody's Sued

"A former Moody's Investors Service credit bureau analyst has sued the company, alleging he was fired after his call on a bond rating was trumped by a manager's concern about how much the bond issuer was paying Moody's. Paul Bienstock, a former vice president at the unit of Moody's Corp., said in a lawsuit in US District Court in New York that he was dismissed after complaining to Moody's compliance department about his manager. The lawsuit alleges the supervisor caused an upgrade for Express Scripts Inc. to be withheld, arguing that the company 'doesn't pay us.' Moody's spokesman Michael Adler ... said 'Moody's is strongly committed to protecting the integrity of its ratings and we have robust procedures in place to do that.' A spokeswoman for Express Scripts, a Missouri-based pharmacy-benefits mamager, declined to comment. ... The lawsuit, filed by the firm of Sack & Sack, alleges he was fired by [Patrick] Finnegan on Dec. 12. Mr. Finnegan who has since left Moody's, didn't return calls seeking comment", Jennifer Levitz at the WSJ, 26 March 2009.

Sack & Sack? You're kidding. This case bears watching. If Bienstock is correct, he complained on 4 December 2007 and was fired eight days later, Moody's better have a big check waiting for him. Coincidence? I don't think so.

Are Insurers Next?-10

"The Treasury Department has decided to extend bailout funds to a number of struggling life-insurance companies, helping an industry that is a lynchpin of the US financial system, people familiar with the matter said. ... The news will come as a relief to a number of iconic American companies that have suffered big losses made worse by generous promises to buyers of some investment products. Shares of life insurers have fallen more than 40% this year. Their troubles led to a string of rating-agency downgrades that, in a vicious cycle, made it more difficult for some insurers to raise funds. ... If massive numbers of customers sought to redeem their policies, it could cause a cash crunch for some companies. ... The decision by the Treasury Department adds a third industry to the banks and auto companies that have already received bailouts from the government. ... Any life insurer that gets TARP funds will have to comply with strict executive compensation rules required by Congress. ... Hartford and Lincoln have applied for TARP funds. Genworth said it has applied with the Office of Thrift Supervision to approve its thrift purchase. ... Treasury had said last year that life insurers could be eligible for TARP funds if they owned bank-holding companies, but it hadn't officially decided to give funds to these companies as it focused much of its energies on banks and auto makers. ... Life insurers have been waiting several months to learn whether they would get federal funds. Many have resorted to contortions to bolster capital as they awaited word. Hartford recently said it plans to infuse $20 million into a cash-strapped Florida thrift it agreed to purchase for $10 million to qualify for federal aid under TARP", my emphasis, Scott Patterson and Deborah Solomon at the WSJ, 8 April 2009.

During the S&L crisis I saw home builders buy S&Ls to use the S&Ls to finance their construction on favorable terms. Look at the perverse incentives TARP has created for life insurers.

Sunday, April 19, 2009

MTM Asset Values

"A new accounting rule set to be approved this week will relax mark-to-market rules for banks sitting on billions of dollars in toxic assets, making it more attractive to keep those assets on their books. Yet those changes may undermine a larger US Treasury plan to rid the banks of those same assets, bankers and accounting experts say. The [FASB] is proposing significant changes to its [MTM] rules, allowing banks to set their own values for certain hard-to-value troubled mortgages, corporate loans and consumer loans. The new proposal, called FAS 157-e, is scheduled for a vote this Tuesday. ... Once the new accounting rule takes effect, banks will have a new incentive to keep the assets directly on their books, say bankers. That is because the rule states that banks can use their own judgment on asset values as long as there are no willing bidders to set a market price. ... 'There is a disconnect between the two plans,' said Robert Willens who follows tax and accounting issues for the Willens Report. ... If approved, FAS 157-e will give banks more leeway to determine what constitutes a 'market'," Heidi Moore at the WSJ, 1 April 2009.

Indeed. This new accounting principle is a joke. It reminds me of "regulatory forbearance" during the S&L crisis.

Obama's Slush Fund

"The Obama administration insists it wants to 'partner' with private investors for its new toxic-asset purchase plan. But the more details that emerge, the more it seems Treasury wants to work with only a select few companies. This is no way to conduct a bank clean-up. The investment community was already suspicious last week when Secretary Timothy Geithner unveiled his plan, announcing that Treasury would select four or five companies as 'fund managers' to purchase toxic securities. Given that the whole idea is to create a liquid market for these assets, we'd have thought Treasury would encourage as many players as possible. ... Treasury rules also say the $10 billion limit must be comprised of commercial and residential mortgage-backed securities that as 'secured directly by the actual mortgage loans, leases or other assets and not other securities.' ... While dozens of banks and insurance companies today hold more that $10 billion in toxic securities, the vast majority are trying to get these assets off their books--not lining up to buy more. ... 'This is ugly,' says Joshua Rosner, ther managing director of Graham, Fisher & Co., an independent research firm. 'As long as they are experienced, there is no rational reason for creating limitations on who becomes a bidder and manager of assets. It doesn't serve the public good, though it may serve those few large firms that appear to have a privileged relationship with Treasury.' ... If this program is a roaring success, Treasury is guaranteeing that a select group of hand-picked firms are set to reap enormous profits, via a program that was largely underwritten by taxpayers", my emphasis, Editorial at the WSJ, 1 April 2009.

This is excellent. SecTreas Geithner can polish his resume while on the public payroll. Of course it is a "way to conduct a bank clean-up". The selected parties will do just that.

Saturday, April 18, 2009

Larry Summers Cleans Up

"Top White House economic adviser Lawrence Summers received about $5.2 million of compensation over the past year from hedge fund D.E. Shaw & Co., according to a financial-disclosure form released Friday. ... Summers made about 40 speaking appearances to a range of firms, collecting a total of $2.77 million. Two appearances paid for by Goldman netted him $202,500, while two Citigroup events brought in $99,000. ... Summers joined D.E. Shaw in late 2006 as a managing director. He developed strategies involving new businesses and evaluated investements for the New York firm, which oversees about $30 billion of assets, making it one of the biggest hedge-fund managers in the world", John McKinnon and TW Farnham at the WSJ, 4 April 2009.

It sounds like Shaw gave Summers a sinecure consisting of little more than lobbying for the firm.


"Why aren't we debating limiting the size of such large [financial] institutions? Nothing will be too big to fail if institutions are kept small enough to prevent systemic risk from becoming a significant problem. ... Let's note that too big to fail isn't limited to financial entanglements. If a company has too many employees or too many suppliers to be allowed to fail, then it is also too big", Tom Wolf (TW) letter to the WSJ, 27 March 2009.

"Stronger regulation alone won't prevent firms from becoming so large that their failure threatens the financial system, current and former Federal Reserve officials said Tuesday. ... Gary Stern, the president of the ... Minneapolis [Fed] ... said in a speech at the Brookings Institution that policy makers in recent years had ignored warnings about firms becoming too big, and, as a result, raised the costs of the current financial crisis. ... Regulators can identify when markets underprice risk, he said, but they can't always forecast events accurately. ... Firms seen as 'too big to fail' can enjoy lower borrowing costs based on the expectation that creditors will be backed by the government. [Alan] Greenspan said capital requirements should be set to erase any such benefits for big companies. ... Top government officials are stuggling to address the growing too-big-to-fail problem throughout the financial system. ... In an interview, Mr. Stern said creditors must face the potential for losses that are 'sufficiently significant' for them to pay more attention to risks, but not so great that it creates the 'spillover' that hurts the broader system", my emphasis, Sudeep Reddy at the WSJ, 1 April 2009.

Yes, TW.

Regulators can? Really? Besides, there are no TBTF banks, see my 12 December 2007 post:

Friday, April 17, 2009

Moldbug's Zombie America

"For example, everyone knows what a zombie bank is these days. They have also heard of the shadow banking system, which the Obama administration is doing its best to resurrect. ... To put it succinctly, America is a zombie nation because it is no longer possible to imagine her without zombie finance. ... Zombie finance is the financing of zombies. To be more exact: you commit an act of zombie finance when you lend money to a zombie. ... The zombie's creditors must therefore meet, divide up its assets pro rata and sell its executives as white slaves to the salt-pans of Tangier. ... If the zombie is an inherently unprofitable institution, the majesty brings its axe instead, and has a grave handy. ... But what I don't understand is what happens when we break this [natural] law. ... Again, a zombie loan is a loan to an institution which is unable to pay its obligations. ... So who would make a zombie loan? The answer is simple: only another zombie. But why would even a zombie loan money to a zombie? ... Zombie finance is a money-losing proposition; zombies are money-losing institutions. The symmetry is striking and perfect. Of course zombies lend to zombies. This is one of the best ways to lose money. ... The first fact to understand is that zombies lie. There is no such thing as a truthful zombie. ... And therefore, in the view of both the zombie borrower and the zombie lender--both of whom are zombies--the borrower is just engaging in the natural practice of refinancing its debt. ... For example, a common zombie sructure is that of patronage. In a patronage hierarchy, money flows downward and power flows upward. ... Another common zombie structure is that of bureaucracy. Bureaucracy can be seen as a form of patronage in which the commodity distributed is not money, but power--personal importance. ... The truth is that zombies act differently. Again, they have ulterior motives, and they are fundamentally dishonest. ... What we observe about the two voluntary forms of live transaction, profitable and charitable, is that both impose some discipline on B. It is this discipline that zombie finance destroys. ... Charity--true charity--produces discipline because true charity is in all cases a paternal relationship. In exchange for the gift of charity, the recipient surrenders his independence to the benefactor. ... In true charity, affection is always matched by obedience. If B surrenders himself to the care of A, he becomes the ward of A. A, his sponsor, assumes the obligation to support him, and also takes responsibility for any misdeeds B may commit while under his sponsorship. In return, B gives up his freedom, or at least his freedom to disregard the wishes of A. ... Freed from the discipline of profit or charity, the zombie lender becomes a free radical, an agent of destruction. ... My theory is that Dilbert and Brezhnev are the same thing. I call it the Dilbert-Brezhnev syndrome, or DBS. While we are certainly not the Soviet Union, my theory is that America has contracted a rather serious case of DBS. ... The Soviet Union was a world in which business bore no relation to profit. ... Nothing in America today is Brezhnev bad, but it is getting there. Furthermore, we cannot compare the America of 2009 to itself--we must compare it to the America of 2009 that should exist. Where is the iron broom of competitive discipline? How can pointy-haired managers, HR red tape and sensitivity seminars survive it? ... Let's take the loans that created the housing bubble. ... The loans were made because they could be securitized and given AAA ratings. Their AAA ratings were assigned by Moody's, S&P, and Fitch, the three major NRSROs, which are not in any sense private corporations. They might as well be a Department of Ratings. ... When resource allocation is not subject to the discipline of profitable exchange, everything decays and becomes foul. ... Since only a zombie will lend to a zombie, and the USG certainly lends to plenty of zombies, it must be a zombie itself. ... Thus, all zombie loans are ultimately government loans. ... A bank run is the banking equivalent of burying the corpse. ... This entire structure is dependent on that wonderful modern innovation, fiat currency. ... By the standards of 1909, Americans have no money at all. ... Often, when evaluating the solvency of an institution, no reliable accounting exists. ... So let's consolidate America into two separate balance sheets. Balance sheet A: USG and the banks. Balance sheet B: households and all other businesses. ... The most plausible explanation of an economy that is continually borrowing more money, and taking on more debt, is that the entire economy, as a whole, is a money-losing proposition", my emphasis, Mencius Moldbug (MM) at Unqualified Reservations, 9 April 2009, link:

Bravo MM. I have said many of these things myself. No axe though. The CNC guillotine. Tom Selling uses the largest possible entity concept at his Accounting Onion, my 30 January 2009 post: Yes, we need bank runs to discipline banks. I have attacked bank accounting as inadequate, particularly cost of capital allocation, on 21 February 2009 post: One quibble: you write, "If the zombie is an inherently unprofitable institution". I say paraphrasing Henny Youngman, "for who"? The banks are profitable, for their managers who have no, or very little capital tied up in them. As I have said, "Interest is what the government promises to pay you to steal your principal". Well done MM.

Mish on the Glut

Mike Shedlock demolishes the supposed savings glut which Zimbabwe Ben and our newest Economics Nobel Laureate Paul Krugman favor at his Global Economic Analysis, 7 April 2009, link: Read. Enjoy and realize how bad the current state of economic analysis is.

Thursday, April 16, 2009

Savage on Piracy

"For the first time in 200 years, a US merchant vessel has been taken by priates. Now, the brave American crew of this merchant vessel, the Maersk Alabama, was able to overpower the pirates and retake the ship--but in the process, the pirates escaped with the captain of the ship, Richard Phillips. ... First of all, why was the crew on board this vessel not armed so they could prevent this sort of highjacking? ... On top of that, some idiot ship owner whose boat was taken over last year got on Fixed News and said that these crews shouldn't be armed. With idiots like this in positions of power, it's no wonder that these pirates sense weakness and prey on our vessels. .... It seems that our Navy has become nothing more than an extended form of welfare so that certain groups in our country can have better access to health care. ... I told you months ago ... that the US Navy was created in the early 1800s to combat the Barbary pirates that were attacking our merchant ships from North Africa. .... Back then we had real statesmen who were willing to take real action. Today we have Hillary Clinton. She's not angrily demanding the release of the captain and threatening to use the full force of the US military to wipe them off the face of the earth. Instead she's going to partner up with other countries in order to stop the problem. ... And now we hear the FBI is assisting the Navy in securing the release of the captain from the pirates. This is not a law enforcement issue; this is a military issue. We don't want police action; we want combat action", Michael Savage (MS) at World Net Daily, 10 April 2009, link:

I agree with MS. Our current posture is absurd. All US merchant ship crews should be armed with: telescope sighted rifles, semi-auto rifles and hundreds of hand grenades. My guess: the first time a pirate ship is fired on and some pirates fall to small arms at say 300 meters from the intended target, it will leave. If not, dropping say six hand grenades over the side at the pirate ship might convince the would be pirates the crew was serious. The Navy can support the merchantmen if all else fails. We should then sink the pirate ship. We should video pirate ship sinkings and take no survivors. Then inform all would be Somali pirates, WE WILL KILL YOU. NO PRISONERS. NO ARRESTS. DEATH, FOLLOWED BY DOUSING YOUR CORPSE IN BACON GREASE. If we do this three or four times, my prediction: piracy off the Somali coast will decrease 90%. After I began writing this post three Navy Seals killed three of the four pirates, each with a single rifle shot. Well done Seals.

Are Insurers Next?-9

"Once a seemingly stable sector, life insurers are looking like a concentrated bet on the broader market. ... Shares of life insurers have come under pressure in recent months due to weakness in their portfolios of bonds and turmoil in their variable-annuity products--retirement investment products that become more costly for companies that sell them when stocks fall sharply. ... Moody's ... said the risk of further losses on Hartford's portfolio 'is meaningful in view of unsettled markets and deteriorating economic conditions.' ... For some time, life insurers' fates seemed more stable than those of banks, because they tend to invest in historically safe assets such as corporate and municipal bonds. But lately the market seems to expect that more writedowns are inevitable, especially on the commerical real-estate securities some companies snapped up. ... 'If the market takes another steep decline, many of these companies would have little to no excess capital,' said Barcalys Capital analyst Eric Berg. 'If on top of that rating agencies downgrade large numbers of investment grade bonds, the situation could become grim.' ... On Monday, Lincoln said it entered an agreement to cede a large block of life-insurance assets to Commonwealth Annuity & Life Co., a unit of Goldman Sachs Group Inc. That move will proivde Lincoln with about $240 million in capital relief, primarily from funds it has set aside for the policies, according to Lincoln", Scott Patterson at the WSJ, 31 March 2009.

This industry and its accounting bear watching.

Wednesday, April 15, 2009

Justice for Asarco?

"A US court ordered a unit of Mexican mining conglomerate Grupo Mexico SAB [GMSA] to return 30% of the shares of Southern Copper Corp. [SCC] to US copper miner Asarco LLC, in the latest chapter in their legal dispute. US District Court Judge Andrew Hanan in Brownsville, Texas, gave Asarco and [GMSA] until April 15 to present their calculations concerning the value of the award. Besides the [SCC] shares, worth about $4.88 billion in trading last Thursday, Judge Hanen awarded Asarco dividends [GMSA] paid on six years' worth of [SCC] earnings, plus interest. the plaintiffs estimate the award will exceed $6 billion. ... The lead attorney for the Mexican company, at New York's Milbank, Tweed, Hadley & McCloy, didn't return a request for comment, but [GMSA] said it will appeal the judgment to the Fifth US Circuit Court of Appeals. ... Judge Hanen found [GMSA] may have paid a fair amount for Asarco's stake in [SCC] when it sold the holding from Asarco to [GMSA's] AMC unit. However, he ruled that the Mexican company acted to structure the transfer 'knowing that the transaction as contemplated would constitute a transfer in fraud of Asarco's creditors'," Joel Millman at the WSJ, 3 April 2009.

How right Judge Hanen is. See my last Asarco post, 15 September 2008: As for Milbank, I think the Fifth Circuit should tell these New York carpetbaggers go back where they came from for filing a frivolous appeal. Then double the award!

Weimar Ben?

"'The best way to destroy the capitalist system is to debauch the currency,' said Lord Keynes. Ben Bernanke disagrees. a student of the Detpression, the Fed chair appears far more fearful of deflation--a vicious cycle of falling prices, debt defaults, home foreclosures and rising unemployment. ... Is Bernanke fighting the war of 1929 in 2009? Surely, today, with the explosion in M1, the basic money supply, there is no shortage of dollars out there, even if they are not circulating fast enough. To end our recession, Bernanke may be running an even greater risk: hyper-inflation. This has destroyed more nations than deflation or even depression. ... 'The first panecea for a mismanaged nation,' said Ernest Hemingway, 'is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.' ... Bernanke is printing money to buy US bonds. ... For inflation is theft", Pat Buchanan (PB), 24 March 2009 at

PB's Weimar solution looks like the dollar's final solution.

Tuesday, April 14, 2009

Hutchinson on Failure

Martin Hutchinson (MH) has a 9 March 2009 post, which among other things, attacks TALF Here's a link: I agree with MH. Among other things, MH called the CDS business "wholly unsound". Amen. The Obama administration's program will only "divert $1 trillion into the most unproductive assets on the planet, the lowest quality mortgage, credit card and commerical real estate loans made during the crazed easy-money bubble of 2004-07". Precisely.

BusinessWEAK on the Dollar

"China has fired another shot across Washington's bow, again signaling Beijing's anxiety about its vast Treasury holdings and its ambition to have more say in global financial matters. ... Not surpringly, US officials were not amused, and Treasury Secretary Geithner said on Mar. 25 that any changes should be 'evolutionary.' Just about everyone agrees that the dollar won't be dethroned soon", my emphasis, Businessweek, 6 April 2009.

Wanna bet?

Credit Expansion

"It is believed that banks fund economic activity by means of credit expansion. ... We suggest, however, that what matters when it comes to economic recovery is the state of real savings. Contrary to popular thinking, it is real savings that fund economic activity and not bank lending. ... Since the heart of credit is real savings, it is obvious that no government schemes, such as cleansing banks' balance sheets, can increase fully backed credit. These government plans can only redistribute a given pool of real savings", my emphasis, Frank Shostak (FS), 2 April 2009 at

"There's an old saying on Wall Street: Don't fight the Fed. ... The danger is that inflation ultimately will surge before policymakers can sop up all the excess liquidity they have created. ... The stock market's powerful endorsement on Mar. 23 of the Treasury Dept.'s plan to relieve banks of $1 trillion worth of 'legacy' assets was the first hopeful sign that the banking system can begin its healing process. ... Most analysts believe the Fed will have plenty of time to take back its excess funds without fueling inflation or disrupting markets. But it will be a delicate maneuver that the Fed has never attempted before. ... That's because the recession has created enormous slack in the economy in terms of unemployment and excess production capacity, which is weighing heavily on pricing power and wage growth", my emphasis, James Cooper (JC) at Businessweek, 6 April 2009.

Actually, FS is optimistic. In redistributing savings, the government destroys some.

Does JC believe Zimbabwe Ben will reduce the monetary base in the future? If so, JC, I've got a bridge to sell you. JC's analysis shows all the ills of Keynesianism. He does not understand "capital" is not monolithic, but specific. Inflation, here we come!

Monday, April 13, 2009


"KPMG, the world's third-biggest accounting firm, is to be sued for $1bn by the liquidators of New Century Financial [NCF], the collapsed US subprime lender, in the first big case against an auditor to emerge in the global financial crisis. In a court filing in New York yesterday, lawyers for the liquidators claim KPMG was responsible for [NCF's] collapse because it allowed the lender to understate the size of its bad loan problem--and even 'silenced' KPMG experts who raised red flags. 'KPMG did not act like a watchdog. Instead KPMG assisted in the mis-statements and certified the materially misstated financial statements,' the filing said. ... The complaint claims KPMG brushed aside questions raised by its own experts for fear of upsetting its client. ... However, John Donovan, KPMG's lead audit partner on [NCF] told [John] Klinge in an e-mail: 'As far as I am concerned, we are done. The client thinks we are done. All we are going to do is piss everybody off.' ... A KPMG spokeswoman said the firm has not yet seen the complaint but it would 'vigorously defend' its audit work. 'Any claims that we acquiesced to client demands is unsupportable,' she said", Jennifer Hughes at the FT, 2 April 2009.

"The trustee overseeing the bankruptcy of subprime lender [NCF] filed suit against its auditor, KPMG LLP, claiming that 'reckless and grossly negligent audits' helped accelerate the firm's collapse two years ago. The lawsuits filed Wednesday said that specialists at KPMG tried to point out errors in [NCF's] financial statements but were silenced by the KPMG partner in charge of the audits 'to protect KPMG's business relationship with, and fees from, [NCF]. ... If the [NCF] trustee is sucessful, 'it may embolden others to look more closely at the possibility of bringing [accounting] firms to some level of culpability for the things that happened' that led to the credit crisis, Francine McKenna, president of McKenna Partners LLC, a corporate-governance consultancy, said in an interview. ... 'While we have not seen the complaint yet, any claim that the acquiesced to client demands is unsupportable,' KPMG spokesman Dan Ginsburg said in an emailed statement. ... The accounting issues center on provisions in the mortgages the bank sold to investors that required it to take back or make payments on the mortgages if they quickly went bad. When subprime mortgages began to sour in early 2007, [NCF] was on the hook for $8 billion in loans and collapsed soon thereafter", Donna Kardos at the WSJ, 2 April 2009.

Caving in to large clients is the Big 87654's stock in trade. How do you think they got that big? By being aggressive auditors? Well, PCAOB, where are you? Did you already review KPMG's NCF work? If not, why not? Will you provide "expert" testimony for KPMG or the plaintiffs in this matter? Or are you nowhere to be seen?

This seems to be the same issue KPMG "missed" at Citigroup, my 15 December 2007 post:

No Two-State Solution

"In 1920, Great Britain [GB] was given the responsibility by the League of Nations to oversee the Mandate over the geographical territory known as Palestine with the express intention of reconstituting within its territory a Jewish National Home. ... At first the sudden addition of this article [25] was not a cause for alarm but gradually it became apparent that its inclusion directly enabled [GB] in 1921 to tear away all the territory of geographical Palestine, east of the River Jordan, and give it to the Arab Hashemite family, the territory to become Trans-Jordan and led by the emir Abudullah. ... This was the first partition of Palestine and created a brand new entity 87 years ago, covering some 35,000 square miles or nearly four-fifths of the geographical territory of Palestine. Immediately Jewish residence in the territory was forbidden and it became in effect judenrein--the German term for the ethnic cleansing of Jews from a territory. ... Shortly after, in 1923, the British and French colonial powers also divided up the northern part of the Palestine Mandate. Britain stripped away the Golan Heights (ancient biblical Bashan) and gave it to French occupied Syria. ... During its administration up until 1947, Britain severely restricted Jewish immigration and purchases of land while turning a blind eye to massive illegal Arab immigration into the territory from neighboring Arab states. ... But the Arab League, meeting in Khartoum in August, 1967, delivered the infamous three No's: No peace with Israel, no negotiations with Israel, no recognition of Israel. ... The fact is that this is not a dispute over borders; this is religious war and the Arabs, so long as the overwhelming majority remain Muslim, will never accept the existence of a non-Muslim state in territory previously conquered in the name of Allah--whatever the size and shape of its borders", my emphasis, Victor Sharpe (VS), 29 March 2009 at

Whenever I read of a "two-state" solution to the "Palestinian-Israeli" dispute, I know the author is an ignoramus or Arab stooge. VS is correct, disagreeing with Jordan's Queen Noor (QN), about the area's history. I last mentioned QN on 26 December 2008: In 1920 GB got control of a 35,000 square miles of territory from the Mediterranean Sea past the Jordan River. GB was charged with creating a Jewish state in this area. In 1920, GB created Trans-Jordan on 26,000 square miles of the Mandate. Jordan is the Arab state. VS is correct, Moslems have a "Brezhnev Doctrine", once an area is Moslem controlled, it must always be Moslem controlled, as Spain is learning. See my 13 December 2008 post about the Brezhnev Doctrine, link: Moslems complain of the "Tragedy of the Andalus". Which is? Queen Isabella's 1492 expulsion of Moslems from Spain! I again applaud Hamas for its honesty. Hamas has stated repeatedly, it will not rest as long as Israel controls "one square meter" of the "land between the River and the Sea". There is no "peace" treaty the Arabs will honor with Israel over the long run. The most they can agree to is a ten-year hudna. Wake up. Secularized Americans cannot believe this is a religious war. Believe what you want. That's what I believe.

Sunday, April 12, 2009

OTS at Work

"The acting director of the Office of Thrift Supervision was put on leave while the Treasury Department investigates the agency's role in the allegedly improper backdating of capital infusions, the agency said Thursday evening. ... The agency said [Scott] Polakoff's leave is tied to 'the OTS's August 2008 actions related to post-period capital contributions.' ... A Treasury spokesman said the inspector general has made findings 'regarding certain actions taken by management' at the OTS but wouldn't elaborate or say which company was involved. ... Mr. Polakoff had been acting director since John Reich stepped down as head of the agency last month, and before that was deputy director of the OTS. ... Backdating capital infusions can make a company appear healthier than it really is, misleading investors and avoiding regulatory restrictions. ... The OTS hasn't disclosed the role that officials at its Washington headquarters played in anty decisions by field examiners to allow the backdating", Damian Paletta and Michael Crittenden at the WSJ, 27 March 2009.

What problem? Even if Polakoff allowed the backdating, which I believe a felony under 18 USC 1006, I see no problem. Polakoff anticipated the latest policy directive of Barney Frank, our newest accounting "maven"! I say Polakoff for Treasury Secretary! Oops. He has to spend at least a year at Goldman Sachs first.

Taleb in Washington

Marion Maneker (MM) wrote a 29 March 2009 piece about Nassim Taleb, link: Yves Smith brought MM's piece to my attention. Thanks. Some quotes, "To Taleb, the supposed stability brought about by complex financial derivatives, global banking connections, and accelerated flows of capital was a mirage masking the accumulation of massive amounts of hidden risk. ... Taleb has a clear-eyed plan. First, he says, we have to unmask the charlatans of risk like Myron Scholes. ... To Taleb, Scholes' academic work, which enabled the widespread use of complex derivatives, was like 'giving children dynamite.' ... We cannot have both debt leverage and a hyper-efficient system--the volatility is too great. What Taleb explains--which no one else does--is that efficiency is already a form of leverage. A highly efficient system removes slack and magnifies small changes. Think of the efficient system as a high performance aircraft. Each minute of steering input creates a rapid and violent shift, of course, speed, or altitude. ... A deleveraged financial system is a stable one, especially if we increase the redundancy within the system. That's an idea Taleb has taken from biology", my emphasis.

I agree with Taleb. Our large banks' capital structures, have too much short-term debt. These capital structures are the financial equivalent of just-in-time inventory. A system prone to breakdowns, see my 23 July 2007 post: As for Myron Scholes, see my 20 April 2008 post: Read MM's piece. I have likened a highly efficient system to an M-16 rifle, an inefficient one, an AK-47. Ah, the simplicity of the Russians. The AK-47 is so crude, it's beautiful. It fires. In: heat, cold, sand, anywhere. It's reliable. Thank you Mikhail Kalashnikov. The AK-47, 75 million copies sold, first choice of terrorists everywhere. The market rules! Taleb even thinks we should "increase redundancy"! Wow. Amen. Redundancy makes for robust systems.

Saturday, April 11, 2009

Populists and Wall Street

"The short answer, of course, is AIG. Why did the Treasury Department allow the payout of many millions in bonuses to executives of the unit that sank the company? ... This lapse of common sense arises from a deeper problem: the reflexive contempt for populism that is felt by the dominant faction of the Democratic Party--the faction that regards itself as the responsible guardian of financial civilization, and that thinks of populism as crackpot economics and senseless proletarian rage. ... In Washington, where the need to treat government like a business is a no-brainer, thinking about politics in this way--as though it were a matter of branding, entrepreneurship and CEOs--is thought to be highly advanced stuff. But I don't agree. Surely we have learned the hazards of turning business models lose on the state, after all our experiences with the 'MBA president' and his 'market-based' government, all the 'K Street Projects' and 'superlobbyists' of the last 20 years, all the regulatory agencies that understood the regulated as their 'customers,' all the bailouts engineered by friends of the bailed-out, all the faith placed in 'voluntary compliance' on the grounds that business would naturally self-regulate. ... The theme that matters most these days, though, is the DLC's war with populism, a term that is supposed to summarize everything that is wrong with class-based discontent. ... The group's attacks on populism resonate in DC, I suspect, because the commentariat has always thought 'populism' to be faintly ridiculous, a thing of mobs and pitchforks and windbag leaders more demogogue than CEO. ... This way of thinking has not served the Obama administration well in recent weeks. Think of Larry Summers repeating, on program after program, his outrage with the AIG bonuses, but then immediately moving, as you would with a naughty child, into a discussion of the rule of law--which I guess is what you call the years of de facto de-supervision that allowed this disaster. One of these days it may dawn on our leaders that the public, in this case, is right: that this time the mountebanks and charalatans are not the populists but the responsible CEOs who ran the country's financial institutions into the ground--and who the administration apparently wants to leave in charge of those institutions", Thomas Frank at the WSJ, 25 March 2009.

I agree with Frank. POTUS Obama, ready that CNC guillotine and set it to work on Manhattan. It has much work to do.

State Secrets

"New officials in Washington are commonly warned not to say or do anything that they would not like to see on the front pages of the Washington Post and the New York Times. An older authority--the gospel of Luke--had it: 'What ever you have said in the dark will be heard in the light, and what you have whispered in the inner rooms will be proclaimed upon the housetops.' ... 'Secrecy is the first essential in affairs of state,' declared Cardinal Richelieu. His conduct as first minister of France easily explains his insight. Those who lie constantly must avoid being found out. ... The US government has been a secrecy addict for decades. In 2007, the agencies of government made 23 million classification decisions, up from eight million in 2001. Financial secrets rarely get into the government's formal classification system, and classification isn't what is cloaking today's most harmful secrets. Treasury, the [Fed] and the regulatory agencies are hiding information by classifying it in an even more insidious way--by saying it is too complicated for us to understand. ... Consider [AIG], the giant insurance company that did not go bankrupt a few months ago, thanks to injections of debt and equity capital from the government. AIG is now a money addict, and 80% owned by the people of the US, for whatever that is worth. ... But goverment agents, supported AIG's every effort to avoid coming clear about its counterparties--the banks and institutions that received payments funded by the government's money. AIG recently published a list to deflect public fury about a trivial side issue--the much-denounced bonuses--but disclosure has been grudging and still seems incomplete. From the presidents on down, two adminstrations have said that if the government didn't help AIG pay its obligations, the world financial system would be threatened. ... The government has instead--at a very high cost--tried to give itself plausible deniability. But the furtive payment of bounses is just a signpost of further trouble at AIG, Fannie Mae and Freddie Mac, and probably at other bailout buddies, yet to be named. ... The Treasury should drive a hard bargain with AIG--taking it into bankruptcy now and appointing a trustee to supervise orderly dissolution of its untenable obligations. The second argument, about the ironclad contracts, has a simple answer: 'So sue me.' Treasury should be asserting that the bonus contracts were fradulent, rooted as they were in rewards for disguising sewage as single-malt whiskey. ... Bankruptcy would have been far preferable to the current mess", my emphasis, Thomas Donlan (TD) at Barron's, 23 March 2009.

As one wag noted, the Godfather of old made you an offer you couldn't refuse. Today's banksters make you an offer you can't understand. How times change. I agree with TD, AIG should have been forced into bankruptcy months ago. As for the lawsuits, they'll never happen once the AIG "bonus babies" (AIGBB) see some Wall Street capos indicted for securities fraud and Lev Dassin (LD) discreetly lets them know one thing which would militate against their indictments is not having received any purloined funds. Talk of painting a target on your back! Suing for an AIG bonus. If LD convicts enough of these AIG fools, he could run for New York Governor. And win! Would anyone in his right mind sue for an AIG bonus? The complaint is a public record. Within ten minutes of filing it will be all over the internet. Within ten more minutes any dirt available on the AIGBB will surface. Good luck AIGBB. Within ten more minutes 100 protestors will arrive at the AIGBB's house demanding LD indict him and that he drop his suit. His kids will ask him, "Daddy is it true what they say? Are you a crook"?

Friday, April 10, 2009

Russia Rearms

"Russian President Dmitry Medvedev struck a Cold War tone on Tuesday, pledging to press ahead with an ambitious rearmament program in response to what he described as NATO's military expansion close to Russia's borders. His hawkish comments come ahead of his first meeting with President Barack Obama early next month at the Group of 20 meeting, and were paired with even tougher rhetoric from Russian Defense Minister Anatoly Serdyukov. Mr. Serdyukov accused the US of trying to push Russia out of its traditional sphere of influence--the former Soviet Union--in order to secure raw materials and energy supplies. ... 'It's more a message to America: Don't take us for granted,' said Nikolai Zlobin, a senior fellow at the World Security Institute, a Washington think tank. ... The US reaction was muted. Obama administration spokesman Robert Griggs said on Tuesday that [NATO] 'is a collective defense organization. I think to suggest that it poses an offensive military threat is simply wrong'," my emphasis, Andrew Osborn at the WSJ, 18 March 2009.

Eddie Antar apparently designed our NATO policy, it's "insane". How many divisions has NATO to defend the US? We no more need say, Poland in NATO, than we needed the USSR to take Mexico into the Warsaw Pact. I disagree with Serdyukov to this extent: we are not trying to "secure raw material and energy supplies" in pushing NATO up to Russia's borders, but "spreading Democracy". See my 30 July 2007 post on Wilson, link: We should respect Russia's sphere of influence if we expect it to respect ours, which was articulated in the Monroe Doctrine. Anyone remember it?

Hungary's Pension Bomb

"It's a story that goes to the heart of the country's economic mess. Hungary, a nation of 10 million, has three million pensioners. ... The average Hungarian retires at 58, and just 14% of Hungarians between 60 and 64 are working, compared with more than half of Americans.. ... Hungary has run fiscal deficits for years to pay for social programs, and its annual tab for pension now surpasses 10% of its gross domestic product. The government had sold bonds to finance these outlays. In October, investors stopped buying them. ... Hungary poses the global financial crisis's biggest challenge yet to the European Union, which is fiercely debating how, or whether, to attempt a rescue. ... Pensions weigh heavily on Hugary's public finances. Employers and employees in the country's work force of roughly four million pay into the state pension program. ... Members of Prime Minister Gyurcsany's Socialist party have been protective of pensioners, wary that cuts could fall hard on older Hungarians who form a key Socialist voting bloc. ... The system, many say, gives Hugarians an incentive to retire young or leave the work force for relatively minor ailments. ... A stab at reform in 1997 shifted the country toward private pensions, but politicians eager for votes subsequently larded the public system back up--the biggest hunk of pork being the 13th month, introduced in 2003 by Mr. Gyurcsany's predecessror. ... Critics say the problems with Hungary's pension system are manifold. ... [Les] Nementhy, who runs a small investment-banking firm in Budapest, says his firm has to spend just over one million forints a month in income and payroll taxes so that an employee can have 395,000 forints in take-home pay. This 'tax wedge'--the difference betwen what the employer pays and what the employee takes home--is the second-highest in the OECD, behind Belgium. ... Gyurcsany had proposed some changes. He preached austerity starting in 2006, after he was caught in tape admitting that the government lied to camouflage how bad the fiscal situation was ahead of elections. He has since propsed cutting the 13th-month bonus, but for existing retirees would spread the money out over the other 12. He proposed raising the retirement age to 65, but not until 2050", Charles Forelle at the WSJ, 25 March 2009.

Who wants to hold a forint savings account or bond? The government lied. Amazing. Was this the only time in Hungary's history? Zimbabwe Ben, do you duty. Bail Hungary out! In 1971 Richard Nixon saved Social Security for all time to come. What separates the US from Hungary is that the US dollar is the world's reserve currency. For now.

Thursday, April 9, 2009

Commercial Real Estate Crisis

"Commercial real-estate loans are going sour at an accelerating pace, threatening to cause tens or possibly even hundreds of billions of dollars in losses to banks already hurt by the housing downturn. ... Some experts say it now looks as if the current commercial real-estate recession will rival or even exceed the one in the early 1990s, when bad commercial-property debt played a big role in dragging the economy into a recession. ... Since late 2007, a total of 47 banks and savings institutions have failed, of which a dozen or so had unsually high commerical mortgage exposure. ... Commercial real-estate debt is potentially more dangerous to the financial system than debt classes such as credit cards and student loans because of its size. ... The [Fed] and the Treasury are moving to adapt a government funding program to make it attractive for investors to buy debt backed by office buildings, hotels, stores and other income-producing property. The program, called the Term Asset-Backed Securities Loan Facility, or TALF, was begun to finance purchases of debt backed by consumer credit, and officials will expand its use to include commerical-property debt. ... The government officials are considering extending the TALF to accommodate the needs of the commerical real-estate industry but no decisions have been made", Lingling Wei at the WSJ, 26 March 2009.

Soon TALF will accept loans backed up by dried cow dung. Next, moist cow dung.