Monday, August 31, 2009

The "Economist" Stubs Toe

"All night they battled. Hispanic inmates on one side, blacks on the other, they smashed glass to use the shards as knives and ripped off pipes for bludgeons, burning down part of the prison and injuring hundreds. The riot on August 8th-9th was not the first and won't be the last in California's dreadful prison system. ... [Chino] is also one of the prisons that are currently trying to implement a 2005 ruling by the Supreme Court that inmates must not be segregated by race. ... In the last three decades, California's penal system 'has gone from one of the best to one of the worst in the world,' says Joan Petersillia, an expert on prisons at Stanford Law School. ... But in 1976 California decided to switch from 'indetermnate' to 'determinate' sentencing. The first system, emphasizing rehabilitation, gives a lot of discretion to parole boards, who can reward good behavior and also help with overcrowding by reducing inmates' prison time. Determinate sentencing, on the other hand, reflects a philosophy of deterrence and means that prison time is relatively fixed, whether an inmate behaves well or badly", The Economist, 13 August 2009, link:

At least the Economist noted Hispanic and black gangs in Chino went at it. In 1976 California had about 21.5 million residents, now about 38.5 million. California became a "minority-majority" state in those 33 years. The change to determinate sentencing was motivated by some of the same factors behind 1986's federal sentening guidelines, i.e., to increase sentencing uniformity. We in Texas have indeterminate sentencing, and I think it a disaster. I consider our Board of Pardons and Paroles (BPP) a nest of incompetence and corruption. Except for one convicted of a three-strikes crime or murder, a California inmate is generally released after serving 2/3rds of his sentence. In Texas, with a few exceptions, the BPP can release an inmate after he serves 11.9% of his sentence. Guess what that leads to. Despite population increases, a change in ethnic composition and three-strikes, California did not build more prisons. That's why it now houses 168,000 prisoners in facilities built for 85,000. That this disaster was coming was obvious years ago.

Natural Gas Hedging

"For oil and natural-gas companies, the budding crackdown on US energy markets comes at an awkward time. ... Recent earnings reports from a number of US companies--including El Paso Corp., XTO Energy Inc. and Chesapeake Energy Corp. [CHK]--all showed a big boost from deals that locked in high prices for natural gas before that market sank to seven-year lows. ... [CHK] is among those warning that a poorly though out rush to lock the doors to energy speculation could diminish the depth of the market, hinder the company's ability to secure the best price and deprive it of the 'cash-flow certainty' that allows it to fund the ambitious drilling programs that bring on new supply. '[CHK] has serious concerns regarding how position limits on energy futures and a more restrictive application of hedge exemptions would impact how we deploy our risk-management strategy,' corporate finance manager Eliot Chambers [EC] argued in written testimony before the Commodity Futures Trading Commission on Aug. 5. Had the company not been able to lock in gas sales to offset the risk of falling prices, a $3.75 billion investment leading to the 2008 discovery of prolific new gas supply in Louisiana 'would not have been possible,' Mr. Chambers contended", my emphasis, Ann Davis at the WSJ, 12 August 2009, link:

Here's how CHK can save money: fire EC and close his group. Marcus Rowland (MR), you don't need EC. Investment and financing decisions are separable. That CHK sold gas forward did not enable CHK to make any investments. If the investment had a projected NPV in excess of CHK's cost of capital, it should have been made. Consider a counterfactual. CHK sells for $22.41 currently. With 642 million shares, that's a $14.4 billion market cap. On 3 July 2008, CHK sold for $66.78. CHK could have sold 56.2 million shares to "fund" the drilling program. Better, had CHK sold 150 million shares for $10.0 billion and put the $6.25 billion remaining in the bank. With that money look at the investments CHK could make now at lower prices than 14 months ago. During 2008, CHK sold 51.75 million shares for $2.732 billion, or $52.79 a share. Nice going. We won't know if CHK "profited" from its "hedging" program for years, when we know what spot natural gas prices were during the period of CHK's "hedges". My conclusion: investment bankers sold CHK's financial management some useless financially engineered products.

We Are All Generals Now

"I saw some fresh figures on 2009 civilian casualties in Afghanistan this week from the UN Assistance Mission in Afghanistan (UNAMA). They are, I'm betting, on the generous side both when it comes to counting casualties as 'civilian,' and counting 'civilian casualties' as American-caused. The underreported news is, air strikes in Afghanistan, widely depicted as indiscriminate American causes of Afghan outrage, account for only 20 percent of the total. Suicide attacks and roadside bombs, attributable to jihadists, killed 39 percent. ... Civilian casualties have been widely, if not exclusively, portrayed by US military leadership as the stumbling block to our winning 'hearts and minds'--aka trust--in Afghanistan. Winning 'hearts and minds,' in turn is widely portrayed by US military leadership as the key to victory. A question for our brass: If the Taliban is responsible for disproportionately more casualties that the [US]--and purposely so where ours are inadvertent--shouldn't, by our brass' own reckoning, all those Afghan hearts and minds already belong to us? Could there be something else--such as the Islamic religion--causing Afghans to reject our infidel 'hearts and minds' pathetically pressed on them, along with grotesque sums of money, like hopeless valentines? These are questions the brass can't answer, can't even think about, because the answers would upend America's entire Afghan strategy. ... 'The Afghan people are the reason we're here,' [Stanley] McChrystal explained, weirdly disconnecting the American war machine from national interests", my emphasis, Diana West (DW), 6 August 2009, link:

"'Taliban Now Winning: US Commander in Afghanistan Warns of Rising Casualties.' Thus ran the startling headline on the front-page of the Wall Street Journal. ... Nevertheless, in the eighth year of America's war, the newly arrived field commander conceded that US casualties, now at record levels, will continue to be high or go higher, and that our primary mission is no longer to run down and kill Taliban but to defend the Afghan population. ... The president is now approaching a decision that may prove as fateful for him and his country as was the one made by Lyndon Johnson to send Maries ashore at Da Nang in December 1965. ... And what is so vital to us in that wilderness land worth another eight years of fighting, bleeding and dying, other than averting the humiliation of another American defeat? ... Now, whatever Obama decides, we shall pay a hellish price for the hubris of the nation-builders", orginal italics, Pat Buchanan (PB), 13 August 2009, link:

Amazing. Joo DW has doubts about our Afghan war. No, Stanley can't even think about our Afghan "strategy". There is nothing weird about "disconnecting the American war machine from national interests". It's been that way since Korea. A "CFR-Kennedy School" general like Stanley doesn't care about national interests. DW, well said, "the brass ... can't even think". No, it only parrots others' "magic words".

Yes, PB. Wow. Joo DW and anti-Joo PB seem to be singing the same song. What's going on here? Afghanistan smells more like Vietnam every day. If Stanley had: guts, brains, integrity, concern for his troops and knew military history, he would resign his commission. Immediately. Then tell POTUS Obama he will not oversee killing "his boys" needlessly. Good luck. Hey Stanley, you have 20 years in. What have you to lose? A future Kennedy School professorship? Realize: "our primary mission is ... to defend the Afghan population". Imagine telling George Patton in 1944, "our primary mission is to defend the German people from the Nazis". "Imagine telling Curtis LeMay in 1945, "Our primary mission is to protect the Japanese people from Hirohito". "'A great power does not show strength by dominating or demonizing other countries,' Barack Obama", Newsweek, 20 July 2009. How then, POTUS Obama?

Sunday, August 30, 2009

The SDNY's Continuing Revolving Door

"In his new post, Mr. [Preet] Bharara will oversee more than 200 lawyers who handle some of the country's most prominent cases, like the prosecution of Bernard L. Madoff for this multibillion-dollar Ponzi scheme. As a naturalized American citizen from India, Mr. Bharara also brings a diversity of background to the post. And while most recent [US] attorneys in Manhattan have come directly from prosecutors' jobs, Mr. Bharara's background on Capitol Hill will serve him well, said Daniel C. Richman, a law professor at Columbia and a former [SDNY] prosecutor. ... He grew up in Monmouth County, NJ, and graduated from Harvard in 1990 and Columbia Law School in 1993. ... In 2000, after about six years in private practice, Mr. Bharara became a [SDNY] prosecutor, first under Mary Jo White [MJW], and later under James B. Comey. For five years, he prosecuted organized crime, narcotics, and securities fraud, among other crimes. ... 'He does have an incredible manner and ability to work with others,' said the New Jersey attorney general, Anne Milgram, who in 2005 serves as counsel to Jon S. Corzine, then a [US] senator, and got to know Mr. Bharara through their work on judiciary issues", my emphasis, Benjamin Weiser at the NYT, 10 August 2009, link:

Wonderful. All the "boys" are here. We get a double Ivy Leaguer with Moslems, Sikhs, Hindus and Jews in his family. Mr. Diversity. We also get a MJW School alumnus. Bharara must know whose Capitol Hill calls to take. The SDNY seems to work like the KGB, it puts "agents" in place, potentially decades before "activating" them. What did Bharara fail to prosecute? Bharara gives us an "Andropov Moment". Does he drink Scotch too? Bharara "works well with others". Is this Bharara's kindergarten report card? Counsel to Corzine? Did Goldman Sachs, them again, have Milgram "vet" Bharara? This selection is so rich. Bharara even got his ticket punched at Gibson, Dunn & Crutcher, 1993-96. Laugh. Yes you. See my 31 January and 3 August 2009 posts:

DOJ Catches Leviathan!

"Fomer Louisiana congressman William Jefferson was convicted Wednesday of bribery schemes aimed at enriching him and his family in a trial that featured a freezer full of foil-wrapped cash in alleged bribe money. ... The seven-week trial featured video and audio tapes of Mr. Jefferson meeting with a federal informant. ... Prosecutors argued Mr. Jefferson was driven by greed, using his status as a congressman to carry out business deals to pay off credit-card debt and his daughters' college tuition bills", my emphasis, Dionne Searcey at the WSJ, 6 August 2009, link:

What's wrong with greed? Or using your status as a congressperson to line your pockets? Isn't greed endemic to Wall Street? I must hand it to the DOJ, Jefferson, a nobody, will likely go to prison over $96,000 while Henry Paulson (HP) enables his "former" firm Goldman Sachs to get $13 billion from AIG and neither HP nor Lloyd Blankfein has been charged with anything yet. Some justice. See my 24 August 2009 post:

DOJ Catches Minnows

"Peter Cammarano III, the mayor of Hoboken, NJ, who was arrested July 23 in a huge state corruption sweep, resigned effective at noon on Friday. ... Anthony R. Suarez, the mayor of Ridgefield, in Bergen County, has not resigned despite being charged with accepting $10,000 in bribes. The authorities say Mr. Cammarano, both before and after his June election, accepted $25,000 in cash from an undercover cooperating witness, Solomon Dwek, who posed as a developer looking to gain government support for his projects in several New Jersey counties. ... The criminal complaint against Mr. Cammarano, who narrowly won a runoff election for mayor on June 9, says he accepted money from Mr. Dwek in exchange for promises of help with Mr. Dwek's projects", my emphasis, David Halbfinger and Nate Schweber at the NYT, 1 August 2009, link:

$10,000 and $25,000, or 11 and 27 hours of a NY BigLaw partner's time. With all the fraud and corruption that must cross the Hudson River, NJ's Feds had time for this. Hahahahaha. Do it the NY way: help, then get your NY BigLaw partnership a few years after the fact.

Saturday, August 29, 2009

The Fraudbusters

"Corporate conspiracy theorists, whistle-blowers and suspicious financial minds long have struggled to get an audience for accusations of business fraud. ... 'We're suddenly on Broadway, on the tip of everyone's tongue,' said Lewis Freeman, who has a forensic-accounting firm in Miami. 'Before it was off-Broadway, or even in Boston.' ... The group, the Association of Certified Fraud Examiners [ACFE], said it has 47,000 members, up more than 25% in the past few years. ... Thomas Gaber ... said he also has taken on health-care fraud, sometimes working with the [FBI] and [DOJ]. The FBI and [DOJ] didn't comment. ... Most fraud examiners share a suspicion that criminal activity is rampant within companies, and regulators are incapable of stopping it", Gregory Zuckerman at the WSJ, 8 August 2009, link:

The ACFE organization always left me cold. Why? It's members seem to be dedicated to ferreting out frauds against companies, not by companies against the public. Which is not surprising. Who will pay them by the hour to find frauds against the public?

Daily Reviewer

The Daily Reviewer recently listed Skeptical CPA as one of its "Top 100" blogs. I'm in good company: Naked Capitalism, Mish's Global Economic Analysis, Baseline Scenario, Zero Hedge, Calculated Risk and Jesse's Cafe Americain.

Sic Semper Whistleblowers

"A Department of Justice whistle-blower who accused prosecutors of misconduct in the closely watched federal corruption trial of former Gov. Donald E. Siegelman of Alabama has been fired, and claims retaliation is the reason. The government denies it was retaliating. ... On June 1, [Tamarah Grimes] sent a letter to Attorney General Eric H. Holder Jr. that laid out her concerns in the case; that letter was included by the legal team for Mr. Siegelman in filings seeking a new trial", John Schwartz at the NYT, 9 July 2009, link:

Grimes was fired on 9 June, eight days after her letter to Holder. Aren't you impressed with the DOJ's integrity? Unfavorably, of course. Never believe anything the DOJ says if it can't independently corroborate it. And maybe not then. You never know if the DOJ is suborning perjury through a plea bargain.

Friday, August 28, 2009

Goldman's Schtarkes-3

"A US District Court judge ruled Monday that alleged computer-code thief Sergei Aleynikov can have access to his personnel records from former employer Goldman Sachs Group Inc. [GSG]. Mr. Aleynikov's lawyers want to use the records to show that he was a valued [GSG] employee. [GSG] argued that the records weren't relevant to the case, a criminal complaint filed by US prosecutors that alleges that Mr. Aleynikov stole computer code related to [GSG's] proprietary high-frequency trading. In response to a [GSG] lawyer's argument that the personnel records are from a 'third party' and thus subject to stricter standards, US District Judge Paul A Crotty said, 'This is not a shot in the dark. [GSG] is the complaining witness. He wants to look at his file'," my emphasis, Joseph Checkler at the WSJ, 11 August 2009, link:

GSG needs new lawyers. GSG's objection is absurd, like GSG's recently collapsed Goldman666 case. I hope Aleynikov is acquitted and sues GSG for defamation. Further, that GSG's supposed "proprietary" trading tool becomes public knowledge. Hey Khuzami, are you now investigating GSG's high-speed trading activities? Good show Judge Crotty. If GSG makes another absurd motion, sanction it. Criminal complaint, my arse. GSG is using the SDNY US attorney's office to bring a civil trade secrets theft case.

SEC, Crackdown or Crackup?

"The [SEC] is reeling off a string of enforcement moves against high-profile companies and individuals as it tries to establish what its new enforcement chief calls a 'sense of urgency.' ... SEC Chiarman Mary Schapiro and enforecment director Robert Khuzami are trying to repair the agency's reputation, which has been battered in recent years. ... 'Clearly the message going out is that the SEC is going to be much tougher with regard to settlement postures, in terms of penalites,' said Walter Ricciardi, a former deputy director of enforcement who is now a partner at the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP. ... The agency is trying to speed up cases with new tactics. It is looking for ways to grant cooperation points to individuals who help authorities uncover frauds. To expedite cases, the five-member SEC leadership no longer needs to approve all formal orders of investigation", Kara Scannell at the WSJ, 11 August 2009, link:

It looks like nothing of substance changed at the SEC. Its smoke and mirrors dance continues. Why headline rush? What is the SEC ignoring? Ricciardi's statement is interesting. I assume he made it on the SEC's behalf to make the SEC look tough. Will these "cooperation points" mean cash? Or what exactly?

Thursday, August 27, 2009

A Texan on the "Economist"

Wayne Allensworth (WA) of Fort Worth, Texas, blasts the Economist over its recent Texas vs. California "Special Report" at Vdare, 7 August 2009. I can't add to WA's piece. Good show, WA, link: One choice quote, "Do they really think that the hordes of low-skilled Mexicans and Central Americans, already predisposed to support statism, are here to participate in boosting 'the knowledge economy?' Do they really think that, after an appropriate dose of 'education', these same folks and their children will, against all the available evidence, be programming super computers?" This concept is laughable. Writing you from Lake Wobegon, Texas.

SEC, a Nuisance

"Maurice R. 'Hank' Greenberg, the former head of [AIG] in a rare concession agreed to pay $15 million to settle a securities-violation allegation arising from the giant insurer's past accounting improprieties. He didn't admit or deny wrongdoing", my emphasis, Amir Efrati and Lian Pleven at the WSJ, 7 August 2009, link:

Another SEC nothingburger.

Robert Gates-Traitor or Fool?-2

"The Department of Defense's rationale for canceling additional F-22s--a Cold War design not needed for today's war on terrorists--contains a major flaw. Since it takes many years to bring a complex modern weapon system to operational status, how do we know whop our enemy will be far into the future? ... There is no alternative to keeping our top-of-the-line weapons systems avaliable in viable quantities at all times", my emphasis, D. Randall Kent (DRK), letter to the WSJ, 1 August 2009, link:

"High-end conventional war is characterized by the clash of industrial forces. It's armored, mechanized and increasingly air-power centric. Few are equipped by training or temperament to understand the phenomenon, especially as it concerns air warfare, a relatively recent aspect of the human experience. ... But the bottom line is that in high-end conventional war, neither our Army nor Navy can be defeated unless someone first defeats our Air Force. ... When Saddam Hussein tried us on for size in the early-1990s, the ground war was a four-day walkover that followed the initial 39 days of aerial combat. So today, no one in his right mind wants to fight us in a conventional war. Many are saying this another way: that we have 'no peer competitor,' that there is no threat of high-end conventional war. I wouldn't bet the ranch on that, but, if it is so, it is a desireable condition and one that didn't happen by accident. ... But it seems clear that in this sort of war our existence is not threatened, that we can regulate the resource input. It can be expensive in men and material, but we cannot be defeated militarily. ... The future air combat capabilities we should build are based on the F-22, a stealthy, fast, maneuverable fighter jet that is unmatched by any known or projected combat aircraft. But the F-22's production run may soon come to an end at just 187 planes, well short of establishing the fleet size we need. ... In an argument they seem to think makes sense, critics say the aircraft has no worthy opponents--as it we want to create forces that do have peer competitors", my emphasis, Merrill McPeak at the WSJ, 10 August 2009, link:

I disagree DRK. There is one: defeat. Hmm, you mean it takes time to build weapons unlike Zimbabwe Ben's printing dollars? Amazing.

Look at 1967's Arab-Israeli War for an idea of what future high-end conventional wars may look like. I agree with now retired Air Force General McPeak. The argument against building the F-22, that it has no current competition, strikes me as insane. Do we want "peer competitors"? If so, why? I can't believe even Gates is this stupid. What's really going on here?

Wednesday, August 26, 2009

Goldman, the Vulture

"Wall Street banks and lawyers could collect nearly $1 billion in fees from the Federal Reserve Bank of New York and [AIG] to help manage and break apart the insurer, according to a Wall Street Journal analysis. ... The government has a plan to recoup the more than $100 billion in taxpayer money it put at risk in the rescue. The plan requires hiring firms to handle public offerings of some AIG units and outright sales of others, to manage some toxic AIG assets, and for other tasks. ... Goldman Sachs Group Inc., [GSG] Bank of America Corp. and JPMorgan Chase & Co., have all gotten assignments in recent months to help dismantle AIG. ... The situation puts the government in the potentially uncomfortable position of employing some of the same firms it regulates. In theory, actions the government takes in connection with those firms, for example, could affect how effective the firms are at handling their AIG assignments", my emphasis, Liam Pleven and Aaron Lucchetti at the WSJ, 6 August 2009, link:

Can you believe this? After getting $13 billion from the AIG bailout, GSG found some "meat was left on the bones", and is picking at the carcass. Is there a less appropriate firm to work for AIG than GSG? Plan? Here's mine: let the "counterparties" return the $120 billion they got. I'm so generous, I'll even forgo any interest.

Accounting Scandal, Which?

"Financial downturns often expose accounting problems at companies, but scandals have been noticeably absent in the recent turmoil. Not so anymore. Late Friday, Huron Consulting Group Inc. said it would restate the last three years of financial results, withdraw its 2009 earnings guidance and lower its outlook for 2009 revenue. The accounting snafu, which has decimated the company's shares, was all the more surprising, because Huron traces its roots to Arthur Andersen LLP, the accounting firm as the heart of the last wave of scandals. A dose of added irony is that Huron makes its money providing financial and legal consulting services, including forensic-style investigative work, and tries to help clients avoid these types of mistakes. ... After its founding by 25 Andersen partners and more than 200 employees, Huron grew rapidly. ... Growing scrutiny of accounting firms that also did consulting made Huron's consulting-only business look promising, and shares soared from below $20 five years ago to nearly $44 before the news Friday. ... Huron is restating financial statements to correct how it accounted for certain acquisition-related payments to employees of four businesses Huron purchased since 2005", Gregory Zuckerman at the WSJ, 5 August 2009, link:

I read Huron's recent 8-Ks about this "problem" and Huron's last 10-K. I am not convinced Huron's previously issued financials were wrong and that the restatement is right. If so, Huron and PWC were defrauded and people should go to prison. Alternatively, Huron is using the restatements to effect what was known as "big bath" accounting decades ago. Stay tuned for further developments.

Tuesday, August 25, 2009

Central Banks Hoard Gold

"European central banks party to the Central Bank Gold Agreement have signed a five-year deal that will cut the annual sales limit to 400 metric tons of gold and allow the International Monetary Fund to join as a signatory it it wishes. ... Analysts said the lower ceiling on gold sales was a belated recognition that central banks have become less willing to sell reserves, reflecting a change in thinking at central banks at a time when the dollar is in decline and inflation worries are widespread. ... The latest deal provides certainty to the market that none of the European central banks will flood the market to take advantage of high prices. The gold holdings of the 10 largest signatories total more than 11,000 tons, valued at $350 billion. ... However, the lower ceiling is an encouraging development for gold prices, as it suggests gold is regaining its former status as a monetary asset. 'Many central banks are reviewing their position on gold,' [Eugene Weinberg at Commerzbank] said. 'Gold has been over the last years probably the most stable currency'," my emphasis, Nina Koeppen and Matthew Walls at the WSJ, 10 August 2009, link:

Less "willing to sell reserves"? Does that mean central bankers think gold is going up "in value"? "Flood the market"? Hahahahahaha, would the Mogambo Guru say. Nice cover story, I say. Sell gold to buy what? Dollar bonds? "Regaining its former stature"? What would Charles DeGaulle say to this? Gold is $956 as I write, 46.25X its 1933 $20.67 "price". Or is the dollar .00104 ounces of gold, down 97.9% from .04838 ounces in 1933? Got gold? get more? Even the central banks aren't selling. Suppose they sold 400 tonnes a year, how much is that? At 32,151 troy ounces per tonne, that's 12,860,400 ounces, or $12.3 billion a year. Not a lot. That all GSG got in its recent AIG bailout. "Most stable currency" indeed. So it has been for 5,000 years.

SEC Fumbles Again

"General Electric Co. agreed to pay a $50 million fine to the [SEC] to settle civil fraud and other charges that GE's financial statements in 2002 and 2003 misled investors. ... In a complaint filed with the US District Court in Connecticut, the SEC said the Fairfield, Conn., conglomerate used improper accounting methods to boost earnings or avoid disappointing investors. 'GE bent the accounting rules beyond the breaking point, said Robert Khuzami, director of the SEC's Division of Enforcement, in a prepared statement. 'Overly aggressive accounting can distort a company's true financial condition and mislead investors.' GE agreed to pay the fine without admitting or denying the SEC's allegations. ... 'We are committed to the highest standards of accounting,' said GE spokeswoman Anne Eisele. ... The SEC complaint focused on GE's accounting for four iterms over various periods: derivatives, commercial-paper funding, sales of spare parts and revenue recognition", Paul Glader and Kara Scannell at the WSJ, 5 August 2009, link:

Another SEC triumph. Khuzami, why don't you and GE find a way to blame this on Joe Jett, my 8 August 2008 post: Why didn't KPMG which GE paid $133 million last year find these problems?

Monday, August 24, 2009

Bank Accounting, MAI

"If banks' earnings look better, you can partly thank accounting rule makers. The Financial Accounting Standards Board's relaxation of controversial mark-to-market accounting rules in April gave banks new flexibility regarding impairment charges. Wells Fargo and State Street were two whose second-quarter earnings benefited. ... FASB eased the mark-to-market rules under pressure from banks and some in Congress. The changes help banks avoid reductions to earnings when taking 'other-than-temporary' impairment charges for losses on toxic investments. ... Jack Ciesielski of the Analyst's Accounting Observer has calculated that, without the changes, 45 banks he studied would have reported earnings a median 42% lower. ... Moving impairment charges to other comprehensive income instead of earnings helps the banks in another way. They avoid reductions in their regulatory capital. Thus, some key capital ratios like Tier 1 capital get at least small boosts", Michael Rapoport at the WSJ, 29 July 2009, link:

"Accounting rule-making bodies should resist the kind of meddling by politicians and interest groups that recently prompted them to ease rules for valuing troubled bank assets, an industry panel recommended in a report. The report, issued Tuesday by the Financial Crisis Advisory Group, also said that existing accounting standards in the US and abroad probably have allowed financial institutions to overstate the value of assets, not the opposite, as some contend", Tom McGinty at the WSJ, 29 July 2009, link:

The banks are not in as good financial shape as they want the public to believe. With the aid of Congress, bank accounting, which was bad, got worse.

What Congress should do is go all the way and exempt banks and their CPAs from the federal securities law. Why bother with some "trimming around the edges"?

Bankers Eat Own Stew

"Credit Suisse Group's novel plan to pay bankers with a brew of its own toxic bonds and corporate loans has gotten off to an unexpectedly strong start, which could put further pressue on other Wall Street firms to change how they pay their employees. ... Many were originally skeptical of the plan, with one decrying what he called the 'eat your own cooking' plan as unfair to employees who didn't contribute to the bank's 2008 net loss. ... But banks are increasingly desperate to pay employees without triggering outrage in Washington and other capitals. ... The employees who got the fund can't cash out of the shares for at least five years", Aaron Luccchetti at the WSJ, 7 August 2009, link:

Something like this is long overdue. I called for this type of compensation structure years ago.

Henry Paulson as Joe McCarthy

Yves Smith (YS) has a 9 August 2009 post at her Naked Capitalism referring to a NYT article about Henry Paulson (HP) and his contacts with his "former" firm, Goldman Sachs in September 2008. YS saved me the trouble of writing about this, thanks, link: In reading about HP I thought of what Joseph Welch said to Joe McCarthy on 9 June 1954 at the Senate hearings, "You have done enough. Have you no sense of decency, sir? At long last, have you no sense of decency?" I'll answer for HP and Lloyd Blankfein (LB), none at all. For the record, HP never called me for advice with respect to what to do for or to the financial services industry. I guess I am not as important as LB.

Sunday, August 23, 2009

Madoff and Stoneridge

"The court-appointed official in charge of recovering money for Bernard Madoff's investors is suing his wife Ruth, for at least $44.8 million, claiming she lived a 'life of splendor' on the gains from the fraud perpetrated by her husband. Irving Picard, the court-appointed trustee, alleged that 68-year-old Ruth Madoff [RM] 'knew or should have known' that vast sums of money she recieved from heer husband's investment firm, Bernard L. Madoff Investment Securities LLC, rightly belonged to the firm and to her husband's customers. ... Federal investigtors recently concluded there is no physical evidence that Mrs. Madoff actively participated in or concealed her husband's fraud, according to people familiar with the situation", Patrick Fitzgerald at the WSJ, 30 July 2009, link:

I hope RM wins her case on a 12-b6 motion. Why? Under Stoneridge, RM has no liability, my 26 January 2008 post: Under cases like Halberstam, she would.

Warrant Buy Back

"Wall Street firm Morgan Stanley [MS] agreed to pay $950 million to buy back warrants issued to the government as part of the Treasury Department's capital infusion to banks last year. The payment means the government made $1.27 billion, including dividends, on its $10 billion investment in the firm. ... The company generated a 20% annualized return for the government, said Chairman and Chief Executive John Mack", Kevin Kingsbury and Aaron Lucchetti at the WSJ, 7 August 2009, link:

Big deal. How were these warrants valued? Did Timmy Boy Geithner insist they be auctioned before selling them to MS? Or is Timmy Boy looking for a job with MS when he leaves Treasury as it would be unseemly for his to join, drumroll please, Goldman Sachs. A 20% annualized return is inadequate for these warrants.

SEC, as the Jokester

"Take-Two Interactive Software's former chief lawyer and former chief accounting officer settled a civil complaint with the US [SEC] over alleged improper backdating of stock options. ... Pattiu Tay, the videogame maker's controller from 1998 to 2002 and its cheif accounting officer from 2002 to 2006, will pay a civil penalty of $125,000 and agreed to a permanent injuction, Mr. [Richard] Simpson said. Ms. Tay and Mr. [Kenneth] Selterman neither admitted nor denied wrongdoing as part of the settlements", my emphasis, Chad Bray at the WSJ, 4 August 2009, link:

Another SEC triumph. If material, why didn't Ernst & Young, Take-Two's CPAs find this?

Saturday, August 22, 2009

FBI Protects Fortune 500

"Just before dawn last October, around 50 federal law enforcement officials mustered in front of a six-story Beaux Arts townhouse on Manhattan's Upper West Side. ... For at least 15 years [Dina] Wein Reis [DWR] had made a fortune by allegedly gulling dozens of consumer product giants, including Proctor & Gamble, Unilever, and Hershey, in exquisitely orchestrated scams. ... [DWR] was arrested on charges of conspiracy and wire fraud. After fainting, she was escorted by FBI agents to a hospital for evaluation. There she was arraigned, fingerprinted, photographed, and sent to federal lockup. Five associates of [DWR] were also arrested for their alleged involvement in the fraud ring. ... The feds needed two huge moving vans to haul away the trove. The job wasn't finished until three the next morning. The federal agents were utterly overwhelmed by the quantities of loot. Recalled Dennis Halliden, the FBI special agent supervising the case: 'It was like King Tut's tomb.' ... For sheer dollar damages, her alleged thievery cannot come close to matching that of a Bernard Madoff or R. Allen Stanford. She didn't steal outright, fudge the books, run a Ponzi scheme, or leave investors destitute. She didn't rob charities. ... Here's how it worked: [DWR] persuaded executives to sell her merchandise at huge discounts, promising to include the products in knapsacks or boxes of free samples to be handed out at schools, senior centers, Native American reservations, or military bases. ... But there was no National Distribution Program, according to the deposition of a senior [DWR] lieutenant. It was a fantasy. Instead, [DWR] and her team sold nearly all of the goods to middlemen, who sold them to big retail chains, grocery stores, and wholesalers. ... Diversion is not necessarily illegal ... . But the way [DWR] did it was fraud, prosecutors say. ... [DWR]. it appears, is a person who thrives on complexity and illusion. ... The government seeks to recover $20 million in losses, but exactly how much money [DWR] garnered from trickery is unclear. ... [DWR] struck out on her own around 1991, when she launched her own company, Collegiate Marketing. ... Collegiate promised to distribute the samples in knapsacks and tote bags for students in college bookstores. ... The first lesson: Litigation could be tiresome and costly, but in the end it was just a nuisance. Two sources familar with the civil and criminal investigations said [DWR] was recorded later by an employee telling her staff that litigation was only a cost of doing business. ... Dennis Halliden, an FBI special agent in Indianapolis, read a small article about the [Walgreen] suit in a local paper. ... A month earlier, [Irvin] Nathan had gone to the [DOJ] fraud section, which had also begun to pursue the matter. Halliden became the lead investigator in the case. ... In one corner stands a lineup of aggrieved multinational companies; in the other corner, a self-made woman, a prayerful philanthropist, a mother of three. To which there is a likely government rejoinder: Free markets wither when trust is broken", my emphasis, James Bandler at Fortune, 17 August 2009.

It's hard to sympathize with DWR or her victims. If the facts are as stated, DWR is a crook. So? It used to amaze me how readily the DOJ prosecutes when a Fortune 500 company is the victim as opposed to the perpetrator. That's how it is. DWR's actions are not new. They harken back to a 1960's scam, National Student Marketing. DWR even chose a similar name for one of her operations. As for litigation as a cost of doing business, that's how it is for all enterprises. Would say Goldman Sachs do business the way it does, if Goldman's senior executives thought they would go to prison? This also reminds me of the way Clyde William Engle, subject of a 1984 Fortune article, does business. 50 feds. Wow. Were they busting the Cali drug cartel? If 50 feds busted the DWR mob, how many feds would Goldman take? At least a brigade.

Say It Ain't So, Joe

"The UK's Serious Fraud Office [SFO] is investigating sales of structured products such as credit-default swaps and collateralized debt obligations, amid concern some bankers may have knowingly sold complex assets based on flawed valuations bewfore the global financial crisis struck two years ago. ... Richard Alderman, director of the [SFO], said [,] 'The question is not just were they mis-sold, because that gives rise to a number of regulatory issues, but was there actually fraud. Or in other words, did those selling them actually know they weren't worth what the institution said they were?'. .... 'Valuation cases are fraught with difficulty, but the weight that certain financial products were made to bear was untenable,' said Glyn Powell, joint interim head of the SFO unit responsible for London's financial district. ... The office also is doing more to support whistle-blowers when they come forward and taking a closer look at accounting matters, [Alderman] said", Dominic Elliott and Matt Turner at the WSJ, 3 August 2009, link:

I wish London's SFO well. Now if the SEC would investigate serious frauds as opposed to opening and closing nickel and dime cases it might be useful to investors. We'll see how well the DOJ does with its CDS investigation.

Friday, August 21, 2009

New Improved SEC

"The [SEC] will give its attorneys more authority to speed up investigations and new tools aimed at winning the cooperation of Wall Street insiders, as part of a broader effort to overhaul an agency widely blamed for lax enforcement. ... The changes have drawn resistance from some attorneys in the agency, and will likely garner criticism from the business community, which has complained of an overly aggressive enforcement program. The SEC has opened 10% more investigations, granted 118% more formal orders, filed 146% more temporary restraining orders and filed nearly 30% more cases", my emphasis, Kara Scannell at the WSJ, 6 August 2009, link:

The SEC enforcement shell game continues. The SEC greenlighted its enforcement staff to open more insignificant cases most of which it will close with the subject neither admitting nor denying the accusations. What a joke. "Overly aggressive enforcement program", hahahahha, the Mogambo Guru would say. Aimed at who? Even Forbes "gets it", my 9 December 2008 post:

Ready, Aim, Misfire!-2

"The [SEC] accused two options traders and the brokerages for which they worked of violating short-selling rules, in what the agency billed as the first case of its kind. The people and companies settled the cases with the SEC and paid fines without admitting or denying wrongdoing, the commission said Wednesday. ... Since last year, the SEC has tightened short-selling rules. ... In one of the settlements, the SEC alleges that Steven Hazan, 31 years old and owner of Hazan Capital Management in New York, from 2005-2007 used a series of 'sham' transactions to avoid complying with trade-completion requirements. During that time, the firm improperly made at least $3 million, the SEC said. ... The SEC also thanked the [FINRA], the securities industry's regulatory body, for its assistance. ... In a separate case, regulators charged Michael Benson, a trader with Chicago trading shop TJM Proprietary Trading LLC, with naked short selling. ... TJM agreed to pay back $541,000 it made from improper gains", my emphasis, Kara Scannell at the WSJ, 6 August 2009, link:

I expect the SEC to rarely do anything useful. These two cases together do not meet my Blankfein Test. Why bother? Whose ox was gored here? It's nice to see Mary Schapiro (MS) pat herself on the back for a useless job well done. Wasn't MS FINRA's head before she went to the SEC? It doesn't seem to matter who heads the SEC. It's useless. See my 19 July 2008 post:

Wait Listed by Jail-9

"California state and local officials already reeling from budget cuts and public-safety layoffs, are struggling with a federal order to release about 40,000 inmates to reduce prison overcrowding and bracing for the impact on their communities. State officials have said they will appeal the decision, but as a contingency are cobbling together proposals to comply with the order. At the same time, cash-strapped local governments in places such as Los Angeles and Fresno are grappling with how to monitor and support thousands of released inmates at a time of scaled-down police forces and underfunded social-services programs. ... California Attorney General Jerry Brown has said he plans to appeal to the US Supreme Court. ... It is unclear how officials will execute the court's decision. The California Department of Corrections and Rehabilitation said it is working on proposals to reduce the prison population, but those plans need to be approved by the legislature. If the state doesn't comply with the order, it could be held in contempt and fined. ... The department suggests deporting illegal-immigrant inmates and allowing some low-level offenders to serve the final year of their sentences under house arrest. In addition, the state would reduce sentences of inmates who complete prison rehabilitation programs. ... Some local governments say they are unsure how they will support new parolees and an influx to their county jails at a time when their own budgets have been hit by the recession and the state's financial woes", Bobby White and Ryan Knutson at the WSJ, 7 August 2009, link:

The waiting list for jail keeps growing. Now is California's "Hour of Decision", as Billy Graham would say. Free the prisoners!

Thursday, August 20, 2009

Danger, Uncle Sam at Work

"Bank of America Corp. [BofA] agreed to pay $33 million to settle a civil lawsuit alleging that it misled shareholders about billions of dollars in bonuses promised to Merrill Lynch & Co. employees when it bought the troubled firm at the height of the financial crisis last year. ... [BofA], the largest US bank in assets, neither admitted nor denied wrongdoing in settling the lawsuit, describing the agreement with the [SEC] as a 'constructive conclusion' to the matter. The case reflects the SEC's heightened effort to speed up cases, as new SEC Chairman Mary Schapiro and new enforcement director Robert Khuzami take a harder line with companies and individuals under investigation. ... The SEC said the documents show Merrill wouldn't pay year-end bonuses before the deal closed without [BofA's] consent. The bank's view is that the proxy didn't state Merrill bonuses would go unpaid and that it was well known that Merrill had been holding money for year-end awards, according to people familair with the bank's thinking on the matter. ... The US ultimately provided an additional $20 billion to push the deal forward, making [BofA] the second lagest recipient of bank bailout funds after Citigroup", my emphasis, Dan Fitzpatrick and Kara Scannell at the WSJ, 4 August 2009, link:

I'm with the BofA on this. This is another empty SEC settlement. Uncle Sam gives the BofA $20 billion and the SEC gets $33 million, .165% back. Big deal. That Merrill held the bonus money was public knowledge. I see this settlement as Uncle Sam's continuing intimidation effort at BofA.

McNamara's Ghost

"Geeky in his think, rimless glasses and slick-backed hair, expressionless, desiccated, fast-talking, and mechanically confident, McNamara was at the cutting edge of the managerial revolution--a business administrator, statistician, and efficiency expert. He was a mesmerizing figure for a time, especially after the Kennedy public-relations apparatus confected the myth of calibrated crisis management in the Cuban missile showdown of 1962. ... If there ever had been a time for the US to give battle [in Vietnam] (and there probably wasn't), it was after France promised independence but was still prepared to fight the Communists in Indochina. ... Having catastrophically given Laos away in the 1962 Neutrality Agreement (Nixon called it 'Communism on the installment plan'), turning that country into a river of troops and supplies being infiltrated southwards on the Ho Chi Minh Trail, Kennedy should not have poured thousands of military advisers into South Vietnam and should not have schemed against South Vietnamese president Ngo Dien Diem, who was assassinated in 1963. ... In the face of a full-scale North Vietnamese invasion of the South, McNamara set about winning the hearts and minds by building infrastructure, with the North Vietnamese army and Viet Cong promptly destroyed. ... He and almost all the Best and Brightest (as the Kennedy entourage was often called) scurried out the back doors of the White House and the Pentagon into the tall grass, leaving Johnson holding the bag. ... One of McNamara's last public utterances as defense secretary was to rejoice that nuclear-weapons equality with the USSR, Mutual Assured Destruction, would be conducive to arms control and reduction. It wasn't. It was a huge preemptive concession that made the Russians more assertive than ever. ... Vietnam was a disaster because between the Eisenhower and Nixon adminstrations, the US leadership lacked reliable faculties of judgment about whether to enter such a war, had no idea how to conduct it, and sabotaged the efforts of those who did", Conrad Black, 27 July 2009 at:

"Geopolitical trendies ran a new one up the international flagpole to see if anyone saluted. It claimed to be the magic formula on how to win in Afghanistan. ... In the July/August issue of Foreign Affairs, Fotini Christia, a member of the Security Studies Program at [MIT], and Michael Semple--an Irish official with the European Union delegation who was expelled from Afghanistan in December for his involvment with a Taliban reconciliation effort--put forward their 'flipping the enemy' thesis, which makes the exercise seem a tad harder than flipping hamburgers. Western logic is not a good guide when assessing the psychological profile of men who curse the birth of a girl and exalt a baby boy, born with a Kalashnikov in his cradle. ... But the authors fail to point out that this is precisely the reason [they want us to leave] why Taliban 'reconcilables,' as perceived by European interlocutors, will remain irreconcilable. ... The Vietnam War is long since forgotten and its lessons ignored by virtue of not being remembered. Before that, there was France's eight-year war in Algeria. And before that, France's eight-year war in Vietnam, Laos and Cambodia. In each of these conflicts, the illusion was nurtured about splitting hard-as-nails insurgent fronts in the vain hope of getting the 'reconcilables,' or turncoats to carry the white man's burden. Guerilla movements frequently fostered the illusion of fissures to splt the rants of their enemies. ... The Christia-Semple thesis says the 'for many Taliban fighters, insurgency has nothing to do with Islamic zealotry, it is a way of life'," my emphasis, Arnaud de Borchgrave (AB), 3 August 2009, link:

40+ years ago I was taken in by "The Best and the Brightest". Not today. We are reliving Vietnam in Afghanistan.

Is AB ever right. I remember this stuff from Vietnam. Here we go again. Christia and Semple are two fools. Or worse. They are children, projecting their beliefs on others. I wonder if Stanley uses Christia and Semple as consultants, my 1 August 2009 post:

Wednesday, August 19, 2009

IRS Overseas Income Amnesty

"Wealthy taxpayers have inundated the [IRS] in recent weeks with requests to come clean for past tax evasion, amid a government crackdown on undeclared income from overseas accounts. ... The IRS disclosure program, which began in March and is set to end Sept. 23, offers Americans the possibility that they may face civil charges, which can carry lower penalties than criminal charges for volunteering details of tax evasion. ... The UBS matter represents the government's highest-profile efforts to capture some of the billions of dollars in revenue lost to offshore tax evasion annually. ... The US and UBS continue to wrangle over how many account-holder names the bank will turn over. On Wednesday, a UBS attorney told Judge Alan Gold, of the US Southern District of Florida in Miami, that the bank was close to reaching a settlement. In a statement Wednesday, UBS said the parties are having 'productive discussions' but have yet to reach an agreement", Laura Saunders and Carrick Mollenkamp at the WSJ, 30 July 2009, link:

Will the IRS have the DOJ file criminal charges, or is this a bluff? With 115 million tax returns filed annually in a typical year, only 1,000 persons are charged with criminal tax evasion. The DOJ even settled with Olenicoff, my 20 May 2008 post, link:, for no prison time. How much time will the DOJ allot to this instead of Wall Street malfeasance? Billions, hah? How much did Uncle Sam spend on AIG? Consider sending Eric Holder a letter telling him you think the DOJ has better things to do with its time than harass these UBS account holders, like say, find something to charge Lloyd Blankfein with.

Nuclear Bananas-4

"All in all, the Obama administration's nuclear weapons policies appear confused and self-defeating. ... Moreover, the Obama administration [OA] is opposing moderization measures designed to protect against the risk that the aging of US weapons will compromise their safety or reliability. There is an important connection between proliferation risks and modernization. But the [OA] seems to have it backwards. If the US fails to ensure the continuing safety and reliability of its arsenal, it could cause the collapse of the US nuclear umbrella. Countries such as Japan, South Korea, Taiwan, Australia and others might decide that their security requires them to acquire their own nuclear arsenals, rather than rely indefinitely on the US. ... The [OA's] nuclear weapons policies--including its treaty talks with Russia--affect the way America's friends and potential adversaries view the integrity of the US deterrent. The wrong policies can endanger the US directly. They can also cause other states to lose confidence in the American nuclear umbrella and to seek security in national nuclear capabilities", my emphasis, Douglas Feith and Abram Shulsky at the WSJ, 4 August 2009, link:

I agree. His Obamaness has things backwards. Again.

Tuesday, August 18, 2009

Non-Insurer Insurer?

"Next to a Chinese restaurant in Burlington, Vt., sits a quiet guardian of Wall Street--an obscure insurance company that is supposed to protect big-money investors in the event of a catatrophic failure of a major brokerage firm. ... Now, after years in the shadows, the insurer, the Customer Asset Protection Company, could finally be put to the test, and questions are starting to swirl. ... If it were overwhelmed by claims, the banks and brokerage companies that own Capco, as it is known, could end up owing billions of dollars. ... Officials at the New York State Insurance Department are concerned about the company's ability to withstand the Lehman bankruptcy, the largest in history. ... The state is examining whether the company sold policies without the means to cover them, according to a person with direct knowledge of the inquiry who had signed confidentiality agreements. ... Capco was created in 2003 by Lehman and 13 other banks and brokerage companies as a kind of marketing tool. ... Capco, which is private, is something of a financial mystery, Its members include Wall Street giants like Morgan Stanley, and Goldman Sachs, banks like JPMorgan Chase and Wells Fargo, smaller brokerage firms like Robert W. Baird & Company and Edward Jones, and Fidelity, the mutual fund giant. ... Although Capco's finances were never disclosed publicly, the company was initially given a high rating by Standard & Poor's. ... 'Right away, the whole Capco thing just did not pass the smell test,' said Robert Meave, an outside consultant for Schwab at the time, who evaluated the insurance company", my emphasis, Zachery Kouwe at the NYT, 31 July 2009, link:

Another Wall Street scam. With lots of intellectual firepower, do we believe no one saw Capco did not operate on a sound actuarial basis? Where are the indictments? Capco went from NY to Vermont to avoid dicslosure. This should be admittable to show "consciousness of guilt". Preet Bharara, where are you? Capco in effect, was an "advance fee scam". How will Goldman have Zimbabwe Ben bail it out of this?

Backdating Chutzpah

"Some companies that backdated stock options have tried to undo the practice to preserve tax deductions valued at millions of dollars. ... In the backdating scandal in 2007, companies changed the dates of stock-option grants in order to boost the potential profits that could be reaped on the options. ... Since then, some of the companies found to have backdated options have argued to the IRS that they should be able to undo the effect of the backdating. Their aim was to preserve tax deductions for options granted to chief executives and other top employees. ... The IRS rejected both proposals. 'Subsequent actions intended to retroactively reprice an option cannot change the fact that the option was issued at a discount,' the agency said in its ruling", Laura Saunders at the WSJ, 28 July 2009, link:

Not only is the IRS right on this, the SEC and DOJ are wrong. Why? The companies, executives, CPAs and attorneys involved in backdating should have been indicted. Tax evasion, securities fraud, foreign corrupt practices act violations, take your pick DOJ. Multiple count indictments could be drafted. Well?

Monday, August 17, 2009

S&P, About Face

"A surprise ratings flip-flop by Standard & Poor's cast a cloud of uncertainty over the $700 billion market for commercial mortgage-backed securities and further tarnished the ratings firm's credibility. ... The imbroglio began in May when S&P warned it might downgrade billions of dollars of triple-A rated CMBS bonds because of proposed changes in its ratings methodology. ... A week ago, S&P followed up on its warning and cut the creditworthiness on 19 classses of a $7.6 billion deal that is viewed by market participants as a benchmark for pricing CMBS bonds. Some of the classes were downgraded all the way from triple-A to just one notch above 'junk.' But on Tuesday S&P did an about-face. The New York-based ratings company said in a statement that it restored some of those bonds to triple-A because of its 'recently updated criteria' for assessing losses on top-ranked CMBS bonds. ... The $7.6 billion benchmark deal at the center of the ratings controversy is commonly known as GG10. It was sold by RBS Greenwich Capital and Goldman Sachs Group Inc. in 2007", Lingling Wei and Anusha Shrivaastava at the WSJ, 23 July 2009, link:

It's good to see S&P knows who is its boss. What new information came to S&P's attention to cause it to change its rating? Well S&P?

California's Budget

"California has avoided fiscal reality for so long it's fitting that the state legislature reverted to subterfuge last week while voting for its third budget deal in nine months. ... This vote scrubbing [of a bill to allow offshore oil drilling] is symbolic of the lengths to which California's leaders want to paper over the state's deficit. Some $1.2 billion of the money 'saved' in the budget deal comes from simply shifting the day state workers get paid by one day into the next fiscal year. Cities and counties will sue to declare the $3.2 billion raid on their propery tax revenue unconstitutional, and they might well win in court. ... No wonder the new Public Policy poll finds only 28% of voters are happy with the job done by GOP Gov. Arnold Schwarzenegger. He's tied with New York's Democratic Gov. David Patterson for the nation's worst rating. The California legislature's approval rating is even lower: 17%. ... Just 144,000 wealthy families. or 1% of taxpayers, provide half of the state's income tax revenue under the state's steeply progressive tax rates, which top off at 10.3%. ... The hour is late. Until the 1980s, Californians got richer than the rest of the nation did. But in 2007 alone, 260,000 poeple moved to other states with more opportunity. The Tax Foundation says only New York and New Jersey have worse business tax climates. ... Some business and labor groups say a constitutional convention is necessary to sweep away restrictions such as the requirement that a state budget muster two-thirds support in the legislature. But giving legislators more maneuvering room isn't the answer", my emphasis, John Fund (JF) at the WSJ, 1 August 2009:

JF is a WSJ opinion writer. JP doesn't use the "I word" once. Suppose California elminated the 2/3 budget rule. Then what? It would spend as usual until it has no one left to tax. Productive Californians, leave. It doesn't want you. Did the change JF notes took place in the 1980s result from California's changed demographics? Perish the thought. JF, what is your answer?

Sunday, August 16, 2009

Governmental Collapse

"This is not an easy topic to deal with. The idea that violent, criminal, or marginal people may be the vanguard of the resistance to Islamization--it just doesn't sit well. Unless our discussion includes a deep-throated and serious disapproval, we risk being labeled 'criminals' as well as 'racists' and 'neo-Nazis.' ... We would like our political leaders to cease importing millions of Muslim immigrants. We would like them to show more spine in the face of Islamic intimidation. We would like our fellow voters to educate themselves so that they become aware of what's happening and elect a new batch of leaders who will take a stand on behalf of their own people. ... In the eight years since 9-11, there has been no sign that any of the major traditional players in the existing political order 'gets it.' George W. Bush fought 'terrorism', and he was the best we could hope for. Most European politicians--whether Left of 'Right' support Multiculturalism and are passive in the face of continued mass immigration. No one who wields power shows the slightest sign of dealing seriously with the coming social and financial catastrophe that the liberal welfare state has brought upon us. ... Under the traditional social contract, in return for maintaining a monopoly on violence, our civil authorities are obligated to protect us from lawlessness and criminal predation. But they have abdicated this duty, and thousands of ordinary citizens are victimized every day as a result. A paralysis brought on by the twin ideologies of Political Correctness and Multiculturalism has immobilized the muscular systems of the Western Democracies and blocked and response to existential threats, both internal and external. ... As working-class neighborhoods are overrun by 'culturally enriched' crime, as unemployment rises, as governmental fiscal folly erodes the value of what little money people earn, they have less and less to lose. If official paralysis continues, eventually some of them will abandon all those decades of self-restraint and take up violent resistance. At some point people will snap. ... We need to make sure that the Muslim world feels such an overwhelmingly decisive blow--including glassing and Windexing Mecca, Medina, Oom, etc., if necessary--so that they learn what a 'strong horse' really is and act accordingly. ... All of our societies have created fiscal and social Ponzi schemes which cannot last, which must eventually come crashing down around our ears. ... The collapse of the welfare state will be the absolute limiting factor for the liberal paradigm. ... We can't even talk frankly about these issues in any major public forum. ... There will be no way to prevent various forms of violencce and destruction--you can't cut off life support to millions of people without lethal consequences, and there is a distinct possibility of geronticide in our future, whether via Obama's health care plan or by some other means", Baron Bodissey (BB), 29 July 2009, link:

That we can't talk seriously about these things shows how childish the West is. Bush told us we needed Mexican immigrants to save Social Security. Is he crazy? Similarly, any European who thinks Moslems will pay old Christians "jiyza" as opposed to killing them is nuts. Europe's future does not look bright. See my 12 October 2008 post: California may be the first place to snap. California can't print its own money. Yet.


"Most US economists believe globalization is good. The unfettered flow of goods, labor, and intellectual capital across our international borders reduces costs and improves competitiveness of most sectors of the economy. ... Foreign students increasingly dominate US doctoral programs in economics. Although the number of doctorates has remained relatively stable over the past 35 years, the fraction of these degrees conferred on foreign students has increased dramatically--from 20.5 percent in 1972 to 72 percent in 2005. ... The best and the brightest? Perhaps. Most PhD candidates in economics are Asians--from Japan, Korea, India, and China, and Taiwan. ... But there is one problem: while the Asians are whizzes at math, they generally do not speak English well. Had they been high-schoolers, remedial English classes would have been mandatory for most of them. ... Gone was the history of economic thought. Gone was the economic history course that exposed students to market failures and the importance of psychological factors--what Keynes dubbed 'animal spirits'-- to a prosperous economy. In their place: mathematically-oriented courses devoid of any historical content or context. ... In the mid 1980s the financial community discovered it could use mathematics to make money. ... A boom time for economics PhDs? You betcha. What Wall Street was really after, a former 'rocket scientist' says was not PhDs, but PSDs: people who were 'poor, smart and with a deep desire to get rich'. Asian PhDs fit that description perfectly. Born Xiang Lin in China, educated in Canada, Mr. Li was a sucessful PhD actuary before he published the mathematical equation that propelled him to the position global head of derivatives at Citigroup. His equation 'proved' that the risk of an investment grade mortgage defaulting could be estimated with precision, independently of the risk that other--say, sub-prime mortgages--would default. ... Ergo, no need for AIG and other insurers of mortgage-backed debt to spread their assets among different instruments if you know the risk of each asset class with precision", my emphasis, Edwin Rubenstein, 27 July 2009, link:

Most Asian PhDs I've encountered are mathematically knowledgable economic ignoramuses. They fall prey to economic fallacies an average CPA with three years experience won't. Proved? Hahahahaha. Know the risk of an asset class? Eugene Fama, where are you? I've said before, Citigroup is one of the US most mismanaged entities. It even has Vikram Pandit, Indian PhD as CEO! I have a current dispute with one of these geniuses. I'll describe it. One of my clients issued two-year converts with a 10% coupon, convertible at 47% of the common stock's price at issuance! That's right. Suppose the client issued $1,000,000 of converts when the stock was $1 a share; at $0.47, the debt converts into 2,127,660 common shares. The converts conversion price was not at a market premium, say $1.25, yielding 800,000 shares, but a discount. The PhD consultant has mathematical models jump through hoops to show the convert's "implicit" interest rate is not the 85%+, I think it is. He is flustered. Why? I must be the first person he's met who told him, "I don't care if you have a PhD. I don't care if you are Milton Friedman returned from the dead. The client made a bad deal. Your calculations are worthless". He can't comprehend that no matter what his models "cash flows" are, the client issued shares at a 53% discount to the market, a "real" cost.

Saturday, August 15, 2009

Newsflash, DOD Wins War!

"Defense Secretary Robert Gates [RG] scored a key victory Tuesday against the F-22 Raptor fighter in Congress, part of his battle to reshape Pentagon priorities. ... Mr. Gates is adamantly opposed to buying more of the highly sophisticated fighters, which he says have little relevance to today's conflicts in Iraq and Afghanistan", my emphasis, August Cole at the WSJ, 22 July 2009, link:

"President Obama claimed a triumph for spending rectitude yesterday after the Senate stripped out funding for the Air Force's F-22 Raptor fighter. Credit $1.75 billion in savings, or a third of a percentage point of the overall 2010 defense request. Only a couple of trillion more, and Mr. Obama will have a balanced budget. ... In the budget sent up to the Hill in April, [RG] made hard choices. Among them was his decision to kill the stealthy F-22, bar none the best fighter jet in the skies, and instead to focus resources on the wars in Afghanistan and Iraq. We happen to think the US needs this program to keep its superiority in the air for the next three or so decades. .. But not all conflicts are likely to be against inferior, unconventional enemies", my emphasis, Editorial at the WSJ, 22 July 2009, link:

Gates, what an accomplishment, to win "a key victory" over a US plane, not an enemy force, a US plane! In Gates' World the F-22 is the enemy! Gates lives on the far side of the looking glass. That the F-22 will not be used in Iraq and Afghanistan shows neither war is of strategic importance to the US. At the rate Gates is going, he will be our worst SecDef since Robert McNamara. Gates, you idiot, your job is to prepare our military for the next war.

I agree with the WSJ.

Bubble Blowing Fed

"President Barack Obama proposed last month that the Fed act as an overall 'systemic risk' regulator, with consolidated supervisory responsibility over 'large, interconnected firms whose failure could threaten the stability of the system.' Now William C. Dudley, the ex-Goldman Sachs economist just appointed president of the New York [Fed] has upped the ante. He thinks the Fed should be responsible for identifying and preventing asset-price bubbles. Considering that the Fed's track record reveals more skill at causing bubbles than preventing them, this is a very dangerous idea. ... Mr. Dudley claims that 'Asset bubbles may not be that hard to identify--especially large ones' and suggests 'additional policy instruments'--that is, new regulatory powers for the Fed to 'more directly influence risk premia.' Because risk premia are a key element in determining asset prices, Mr. Dudley is effectively asking for the power to control asset prices. ... Mr. Dudley seems surer of himself. He notes confidently, by way of example, that 'the housing bubble in the [US] had been identified by many by 2005.' Well, that's true. But it is only true in retrospect. It offers no justification for a leap toward government control of asset prices. ... There can be no assurance that those who hold the correct [opinions] about what is or is not a bubble will end up at the Fed, where they can make prescient policy decisions", my emphasis, Donald Luskin (DL) at the WSJ, 30 July 2009, link:

Dangerous? For who? All except, GSG. I agree with DL. Did the "prescient" Dudley warn the US about the housing bubble in 2005? If not, why should we listen to him now? What did Dudley learn at Berkeley, where he got a PhD? Dudley was a Fed economist from 1981 to 1983, then to Morgan Guaranty, then to GSG in 1986. I'm sure GSG could tell us how public spirited Dudley is. Who needs this guy?

Friday, August 14, 2009

California in the Netherlands

"'How predictable, the hue and cry on the questions directed at the government by PVV MP Sietse Fritsma about the costs of immigration. This is supposed to be a new low in the activities of the PVV, according to its opponents. But is that true? ... If only so that the politicians at least know what the material consequences are when they again open the border to immigrants with similar characteristics (regions of origin, education, employment opportunities, culture, language) to those of the previous immigrants who arrived in the Netherlands. This, of course, primarily concerns non-Western immigrants, at the moment about two million, who are quite out of tune in the lists on unemployment, pensions, crime and low income. ... It is quite odd that there are politicians who don't want to know this. It is even the more remarkable since malicious myths are constantly being spread about the presumed benefits of immigration. But there are no benefits, at least there hardly ever are any. ... But why do all the opponents rampage as a wild bunch agains this PVV request? Weren't they the ones who always have said the immigrants deliver an essential and indispensible contribution to our prosperity and economy? If that is the case, and can be proven with numbers, isn't that to their advantage? For they always talk of the "multicultural enrichment". If that enrichment is not in the economic contribution, where is it then? It won't be in forced marriages, honor crimes, headscarves or burkas, will it? The core of Fritsma's questions is always the same: the government is spending a disproportionate amount of money to (non-Western) immigrants and there is little in return'," Baron Bodissey, 26 July 2009, at

As Michael Savage says, "Borders, language, culture".

The Real Kidney Scandal

"Even by New Jersey's standards, Thursday's roundup of three mayors, five rabbis and 36 others on charges of money laundering and public corruption was big. But what put this FBI dragnet head and shoulders above the rest are the charges of trafficking in human body parts. ... The early responses to the New Jersey Scandal leave me dismayed, though not surprised. 'We really have to crack down,' the co-director of the Joint Council of Europe/United Nations study on Trafficking in Organs and Body Parts told MSNBC. That strategy is doomed, or course. It ignores the time-tested fact that efforts to stamp out underground markets either drive corruption further underground or causes it to flourish elsewhere. ... The best way to make that happen is to give legitimate incentives to people who might be willing to donate. ... More than 80,000 Americans now wait for a kidney, according to the United Network for Organ Sharing. Thirteen of them die daily; the rest languish for years on dialysis. Thge number of donors last year was lower than in 2005, despite decades of work to encourage people to sign donor cards and donate to loved ones. ... What [Levy] Rosenbaum is accused of doing is indeed against the law, and if he is found guilty he will be held accountable. But his alleged actions were a symptom of a deeper problem: the dire organ shortage", my emphasis, Sally Satel at the WSJ, 27 July 2009, link:

Change the law! The same "morality" that gave us prohibition and the Harrison Act, gives us the "kidney shortage", people who want to control others with respect to what in my judgment is not their concern. That the FBI and DOJ had time for this case shows their misplaced enforcement efforts. 13 Americans die daily and Congress won't change the law. Congress consists of murderers. I would like to see Rosenbaum acquittted. That might encourage the FBI and DOJ to go after bigger game: Wall Street. I last commented on the kidney scandal on 15 January 2008, link:

Thursday, August 13, 2009

Free the Prisoners!

"The Anti-Drug Abuse Act of 1986 was one of Congress's more notable efforts to get tough on drugs. ... Unfortunately, the law was rooted in ignorance about crack's potency, how the drug trade actually worked--and even about the cause of [Len] Bias's death. He actually died from an overdose of powder--not crack-cocaine. ... Why are the penalties for crack and powder so disparate? Largely because legislators were told--and believed--that small-time crack dealers were somehow on a par with big-time powder dealers, recalls Eric Sterling, former counsel to the House Judiciary Committee. ... Sincce 1995 the Sentencing Commission has been trying to set things straight--partly because the law makes no sense and partly because it has hit black communities particularly hard. More than 80 percent of federal crack prosecutuions are of African-Americans, despite evidence that crack use is only slightly higher among blacks than among whites or Hispanics. ... The Supreme Court ... in 2007 ... noted the absurdity of hitting crack dealers harder than the cocaine distributors who supplied them. ... Congress, [Sterling] points out, never intended that so many precious federal resources go toward prosecuting small-time crack dealers", my emphasis, Ellis Cose at Newsweek, 20 July 2009.

Crack prosecutions are like SEC and DOJ white collar criminal prosecutions, the feds prosecute nobodys. Obama can do something now. He can end this nonsense. How? Pardon 1,000 small-time crack dealers. This will subtly tell the DOJ: ignore future crack cases. Let the states prosecute. Instead Obama shills for Skip Gates. Apparently "His" class solidarity trumps "His" race solidarity.

Who Lost Russia?-3

"Vice President Joe Biden said in an interview that Russia's economy is 'withering,' and suggested the trend will force the country to make accommodations to the West on a wide range of issues, including loosening its grip on former Soviet republics and shrinking its vast nuclear arsenal. ... The geographical proximity of the emerging nuclear programs in Iran and North Korea is also likely to make Russia more cooperative with the US in blocking their growth, he said. ... 'Russia has to make some very difficult, calculated decisions,' Mr. Biden said. 'They have a shrinking population base, they have a withering economy, they have a banking sector and structure that is not likely to be able to withstand the next 15 years, they're in a situation where the world is changing before them and they're clinging to something in the past that is not sustainable.' ... Despite Russia's economic and geopolitical difficulties, Mr. Biden said, Moscow could become more belligerent in the short term unless the US continues to treat Russia as a major player on the international stage. He said Russian leaders are beginning to grasp their diminshed global role, but that the US should be cautious not to overplay its advantage. ... Mr. Biden's remarks illustrate the extent to which the Obama adminstration believes the balance of power is shifting toward Washington, giving the White House a new opening to leverage its strategic advantages to pursuade Moscow to reduce Russia's nuclear arsenal, loosen its grip on emerging democracies on its border, and cooperate on Iran and North Korea", Peter Spiegel at the WSJ, 25 July 2009, link:

"US Secretary of State Hillary Clinton said the Obama administration considered Russia a 'great power' and wanted it to be a strong and properous country, in an apparent effort to reassure Moscow that the White House remains committed to efforts to 'reset' bilateral relations. ... 'We view Russia as a great power,' Mrs. Clinton said on NBC News's 'Meet the Press' on Sunday. 'Every country faces challenges. We have our challenges, Russia has their challenmges. There are certain issues that Russia has to deal with on its own.' ... On Sunday, Russian President Dmitry Medvedev criticized the US over its continued support of membership in [NATO] for the former Soviet republics of Ukraine and Georgia, saying the alliance 'is not ready' to absorb them", Peter Spiegel and Alan Cullison at the WSJ, 27 July 2009, link:

Biden and I live in different worlds. Biden wants Russia to reduce its nuclear arsenal then tells Russia to worry about Iran and North Korea. Biden thinks Russia's banking system is in sorry shape. Look at ours Joe. Absent illegal immigration, the US population base is shrinking. The US does not want to modernize its conventional or strategic forces. Why should anyone take us seriously? Biden has a promising career ahead as a stand-up comic. Alternatively, he can ghost write material for Peggy Noonan, my 2 August 2009 post:

Shades of Chamberlain's 1939 Polish guarantee, my 30 August 2008 post: I agree with Medvedev, we should not admit any state bordering Russia into NATO. Will NATO go to war for Georgia? In Russia's backyard?

Wednesday, August 12, 2009

Junior on Accounting Rulemakers

Junior at Junior Deputy Accountant has a 28 July 2009 post referring to a NYT piece by Floyd Norris about accounting rulemakers, link: Junior blasts the FASB and IASB, which "have a valid argument in insisting their decisions be firmly grounded in political independence (bah, just as with the Fed, the entire concept if this is a joke at best)". Amen. Junior quotes Edward Trott, "'In my experience, banks want current fair value information about assets that serve as collateral for loans. They do not want information about what assets cost two or three years ago'." Indeed. I've been saying things like this for years.

What Bank Profitability?

"If the government's guarantee since November on new debt issued by financial firms such as Citigroup Inc and General Electric Co. will save these companies about $24 billion in borrowing costs during the next three years, according to an analysis by the Wall Street Journal. In the second quarter alone, the eight largest issuers of corporate debt under the [FDIC's] Term Liquidity Guarantee Program cut their interest costs by about $2.2 billion, increasing their profits and delivering an extra jolt to the stock market's two-week rally. Citigroup saved nearly $600 million in the latest quarter on the $44.6 billion in medium-term FDIC-backed debt it has issued, or about 14% of its overall profit of $4.28 billion. Goldman Sachs Group Inc. [GSG], which posted record quarterly profit on $3.44 billion, is cutting financing costs by roughly $205.5 million every three months by selling corporate debt through the government-assistance program instead of on its own. ... Without federal assitance, companies that rely on short-term financing to fund operations would have been unable to roll over their debt without paying exorbitant interest rates", my emphasis, Mark Gongloff (MG) at the WSJ, 27 July 2009, link:

MG, please stop shilling for the banks. Your article is deceptive because it ignores a larger effect, Zimbabwe Ben's suppressing interest rates to the banks' benefit. GSG is still on welfare, but wants to pay bonuses. Exorbitant, by whose standards? Apparently MG believes banks should be able to borrow at less than market rates.

Tuesday, August 11, 2009

Obama, the Bully

"The Ivy League [IL] is not real life. College in general is not real life, and the [IL] is a more fantastic version of college. The amenities are better, the rules are flexible, and everyone, student and faculty alike, is well aware that the realities of life as most people know it are merely a peculiar footnote to the day-to-day of campus life. I do not speak out of turn when I say this. I know because I am in and of that world. ... When the [IL] Effect is going full tilt, our black compass gets confused; the realities we know to exist become other people's problems. ... All the lessons about dealing with police as a black person seem to have no place in the ivory tower. We can forget those lessons because, more than we're black in America, we're Ivy Leaguers. ... How dare you hassle me? I'm Skip Gates: Harvard professor! ... Skip Gates ... does not see those million men as kin and he doesn't, by and large, give a damn about those guys. He's merely annoyed that such an irritation as police misconduct found its way into his home. If he read about this story happening to a plumber in Roxbury, he'd shake his head in disapppointment and then go on with his life", A Phantom Negro (APN), 24 July 2009, link:

"Two stubborn individuals have done more than anyone else to slow the Obama political juggernaut over the last month--Frank Ricci and James Crowley. ... At Thursday's press conference, Barack Obama, in a textbook example of racial prejudice, essentially prejudged the Gates-Crowley confrontation based only on Gates' side of the story--plus the President's own abundant (but generally better-concealed) personal resentments about race. ... They are Northeasterners, civil servants, and union men. Indeed, their unions' strong opposition to the racial spoils system and to racial blackmail has been one of the keys to their fortitude", Steve Sailer, 26 July 2009, at:

"Thus the two most powerful black elected officials in the US, with no hard knowledge of what happened, came down on the side of a black professor, their buddy, against a white cop and his department, implying racial motivation in the arrest of Gates. ... The victim here is Sgt. Crowley, not professor Gates. ... But if Obama's racial reflexes served him badly Wednesday night, his political instincts served him well on Friday. For he must have sensed that this confrontation was shaping up as three powerful black men coming down hard on a white cop with a stellar record who had only done his conscientious duty. ... It was a goodly slice of humble pie the president ate, but it was a class act", Pat Buchanan (PB), 27 July 2009, link:

Hey Eric Holder, why don't you worry about the tens of thousands in federal prisons over minor drug charges? You too, POTUS Obama. Does Skip Gates believe his experience is say that of a prisoner in Angola, Louisiana's maximum security prison? Even a white guy in Angola?

Gates set off the "H-Bomb", "I'm a Harvard professor" and Crowley didn't blink. No fair. How dare a sans culotte not do as he is told.

I agree with PB. Obama slipped on a banana peel here.

Goldman's Schtarkes-2

"Critics claim that via its special software, Goldman is able to detect huge order positions ahead of their execution, and to profit accordingly; in other words, that high-frequency trading is essentially high-tech front-running. ... The hubub over high-frequency trading grew in intensity and virulence when a slightly befuddled prosecutor told the court, in arguing to keep Mr. Alenynikov in the hoosegow rather than allowing him to make bail, the Goldman code in the wrong hands could lead to 'unfair manipulation' of markets. We couldn't help being amused by how ravenously the malapropism was seized upon by horders of cybernauts, unable to resist the obvious, as suggesting that in Goldman's hands it was used for 'fair manipulation'," Alan Abelson (AB) at Barron's, 13 July 2009, link:

AB, why are you shilling for Goldman Sachs (GSG)? Doesn't GSG have enough public relations people? I am guilty as charged, concluding any GSG market manipulation is fair in the SDNY US attorney's ofifice's opinion. My guess: the supposedly "befuddled prosecutor", Joseph Facciponti (JF), repeated verbatim what GSG told him. Now JF, roll over, play dead, beg. Good boy. A NY BigLaw partnership awaits you in 2-3 years if you do as you are told and never repeat in public what GSG told you in private. Got it boy? See my 22 July 2009 post:

Monday, August 10, 2009

Delphi Update-4

"The Pension Benefit Guaranty Corp. agreed to take on $6.2 billion in pension liabililies from bankrupt auto supplier Delphi Corp., putting in place a key piece in the bailout of the car industry but renewing pressure on a government agency facing hudge burdens as more companies fail. ... The pension rescue is the PBGC's second-largest ever, ranked by dollars, after that of United Airlines in 2005, which totaled $7.5 billion. ... Still, Delphi faces other formidable challenges. Lenders financing Delphi's stay in court have challenged the government's plan to move its assets to private-equity firm Platinum Equity calling it a 'secretly negotiated deal.' The plan, in which [General Motors] would provide funds alongside Platinum, would pay off lenders at about 20 cents in the dollar. The lenders say the payoff is unfairly low, since bankruptcy-court loans, known as debtor-in-possession financing, are typically paid back in full. Platinum has maintained it made the best offer. ... For the pension agency itself, Delphi could be just the beginning. About 135 companies have filed for bankruptcy this year, more than double the number for all of 2008. ... At a Senate hearing in May, Vince Snowbarger, PBGC's acting director, said the agency had enough funds to meet its obligations for many years because beneficiaries are paid out over the beneficiaries' lifetime and not in one lump sum. The agency is running a deficit, which it defines as losses from plans it has taken on plus estimated losses from plans it is likely to take over. Its deficit as of March 31 was $33.5 billion, more than three times what it recorded six monts earlier. 'Over the long term, the deficit must be addressed,' Mr. Snowbarger said at the hearing. ... The strain on the PBGC is similar to that felt by other government agencies grappling with the aftermath of the financial meltdown. ... The move by the PBGC clears billions of dollars in potential additional exposure to Delphi from GM, which is Delphi's former parent and itself just exited bankruptcy-court reorganization", Melanie Trottman, Mike Spector and John Stoll at the WSJ, 23 July 2009, link:

"Delphi Corp.'s lenders prevailed in a bankruptcy auction and are poised to take control of the bankrupt auto-parts supplier, beating back a government-orchestrated deal to sell the company to [GM] and a California-based private-equity firm, said people familiar with the situation. Delphi's lenders prevailed in the auction by forgiving $3.5 billion in debt they are owed, a process known as credit bidding. The debt, a so-called debtor-in-possession loan, is owned by several investment funds led by Elliott Management and Silver Point Capital LP", Mike Spector at the WSJ, 28 July 2009, link:

Didn't you know? Government liability guarantees are free?

Good show Judge Robert Drain.