Monday, November 30, 2009

The DOJ Gets Its Men

"Of all the sinister things that Internet viruses do, this might be the worst: They can make you an unsuspecting collector of child pornography. Heinous pictures and videos can be deposited on computers by viruses--the malicious programs better known for swiping your credit card numbers. In this twist, it's your reputation that's stolen. ... Pranksters or someone trying to frame you can tap viruses to make it appear that you surf illegal Web sites. ... An Associated Press investigation found cases in which innocent people have been branded as pedophiles after their co-workers or loved ones stumbled upon child porn placed on a PC through a virus. It can cost victims hundreds of thousands of dollars to prove their innocence. ... 'It's an example of the old "dog ate my homework" excuse,' says Phil Malone, director of the Cyberlaw Clinic at Harvard's Beckman Center for Internet & Society. 'The problem is, sometimes the dog does eat your homework.' ... An inspection for his defense revealed the laptop was severly infected. It was programmed to visit as many as 40 child porn sites per minute--an inhuman feat. ... Many prosecutors say blaming a computer virus for child porn is a new version of an old ploy. ... Virus defenses are no match for such evidence, says Damon King, trial attorney for the US [DOJ] Child Exploitation and Obscenity Section. ... Computer exams can cost tens of thousands of dollars", Jordan Robertson at the Houston Chronicle, 15 November 2009, link:

Pedophiles? For viewing internet porn? I would repeal these laws. Pronto. King, get a real job. Prosecute some rapists, kidnappers or truck highjackers. AUSAs love cases like porn infested computers. Why? They take no brains to file.

How Dumb Can You Get?

"Buried in the Treasury's International Reserve Position report is an interesting bit of math. The document details the total amount, by weight, of the Treasury's gold reserves, plus a dollar value for said metal. But some fast division reveals something interesting: The Treasury marks the value of it gold at $42 an ounces, the price settled on in 1973, two years after the [US] scrapped the Bretton Woods System, which held gold at $35 an ounce for decades. ... If the Treasury's bling were valued at the spot price, we'd be sitting on a literal gold mine of nearly $288 billion. Why doesn't the Treasury account for the huge run-up in gold prices? ... And if the [US] were to dump its gold on the open market, there's no way we'd get today's spot rate. ... Raising the value of the Treasury's gold stockpile would have an inflationary effect, too, which is the last thing the [Fed] wants right now", my emphasis, Martha White (MW) at The Big Money, 4 November 2009, link:

Read MW's piece in its entirety. It's one of the worst pieces of analysis I've ever seen. The Treasury owns 261.5 million ounces of gold, no matter what price it puts on them! MW is so stupid, she could be a CPA! She must believe if you bought Exxon (XOM) decades ago at say $10 a share, it's "worth" $10 until you pick up the WSJ and see it's worth $75. Hmm, 261.5 million x $1,140 = $298.1 billion. MW, beg China to take all 261.5 milion ounces. How can revaluing gold be inflationary? It exists before and after revaluation. It's just accounting. It's Zimbabwe Ben (ZB) who prints dollars. How does MW know what ZB wants? Did she consult Ed McMahon's hermetically sealed mayonaisse jar?

Sunday, November 29, 2009

Vampire Squid Wins Again

"The [Fed] of New York [NYFed] gave up much of its power in high-pressure negotiations with the American International Group's [AIG] trading partners last year, according to a government report made public on Monday. Just two days before the [NYFed] paid AIG's partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut--but it never got the chance. ... But UBS's good-faith gesture was quickly drowned out by Goldman Sachs [GSG] and the top French bank regulator. They argued, with others, that it would be improper and perhaps even criminal to force AIG's trading partners to bear losses outside of bankruptcy court. The banks and the regulator were confident that the [NYFed] was not willing to push AIG into bankruptcy, because earlier in the fall the [NYFed] had stepped in with $85 billion to prop up the insurer. ... The Fed 'refused to use its considerable leverage,' Neil M. Barofsky, the special inspector general for the [TARP], wrote in a report to be officially released on Tuesday, examining the much-criticized decision to make AIG's trading partners whole when people and businesses were taking painful losses in the financial markets. There have been suggestions that the Fed chose to negotiate weakly, Mr. Barofsky said, to give a 'backdoor bailout' to AIG's banks. He said Mr. Geithner and the Fed's lawyers had denied this, but added that 'irrespective of their stated intent,' there was no doubt about the result: 'Tens of billions of government money was funnelled inexorably and directly to AIG's counterparties.' ... Mr. Barofsky said that Goldman's hedges were unlikely to have held up amid the market turbulence of late last year. ... A spokesman for Goldman ... said any additional exposure to AIG's losses was a moot point, because the Fed's intervention had eliminated the risk", my emphasis, Mary Walsh at the NYT, 17 November 2009, link:

"The [NYFed] caved in to demands by [AIG's] trading partners that they be paid in full for complex securities they had insured with the company, saving soem of the world's biggest banks from billions in losses, according to a government audit. ... The banks that were paid off in full included [GSG]. Merrill Lynch and large French banks Societie Generale and Calyon, the investment bank unit of Credit Agricole Group, which were represented by the French bank regulator in negotiations with the [NYFed] last November, the report said. ... The audit provides a window into a bailout effort that has been shrouded by a lack of disclosure--raised in the report--and questions over why the US government in effect funneled tens of billions of dollars to the US and European banks that were AIG's trading partners", my emphasis, Serena Ng & Carrick Mollenkamp at the WSJ, 17 November 2009, link:

"For more than a year, [GSG] has maintained that it wouldn't have suffered material losses had the government allowed one of its major trading partners, [AIG] to collapse. ... A revamped rescue package in November led to Goldman and 15 other banks being paid in full for $62 billion worth of insurance contracts they had with AIG to protect against losses tied to mortgage assets. ... The government auditor's report broadly fouind that the [NYFed] left itself little room in nogotiating with the banks for a better deal for taxpayers. ... In a separate series of trades, Goldman had sold protection against losses on the same assets to other trading firms. ... Goldman has said it was insulated against a material loss by an AIG default. And the audit pointed our that Goldman in fact was protected against some losses. For example, the firm had collected $8.4 billion worth of collateral--cash or a liquid equivalent--from AIG on a $13.9 billion portion of its bets. Separately, Goldman took steps to try and buy insurance against insurance by purchasing protection against an AIG default. ... The audit said, however, that given the fact that the market for those securities had tanked in November 2008, and then an AIG default would have sparked a rout, Goldman would have had a difficult time obtaining value for those assets. ... The bottom line: The audit said those assets that Goldman held would have been worth a lot less had AIG defaulted. ... The audit also raised questions about the insulation Goldman had purchased against an AIG default", my emphasis, Carrick Mollenkamp and Serena Ng at the WSJ, 18 November 2009, link:

"Finally, Mr. Barofsky pokes holes in arguments made repeatedly over the past 14 months by [GSG], AIG's largest trading partner and recipient of $12.9 billion in taxpayer money in the bailiut, that it had facced no material risk in an AIG default--that, in effect, had AIG cratered, [GSG] wouldn't have suffered damage. ... As Goldman prepares to pay out nearly $17 billion in bonuses to its employees in one of its most profitable years ever, it is important that an authoritative, independent voice like Mr. Barofsky's reminds us how the taxpayer bailout of AIG benefited Goldman. ... Regarding his firm's own dealings with AIG, Mr. [Lucas] van Praag said that Goldman believed that its 'exposure was close to zero; because it insulated itself from a downturn in AIG's fortunes through hedges and collateral it had already received. ... So is Janet Tavakoli, an expert in derivatives at Tavakoli Structured Finance, a consulting firm. 'On Sept. 16, 2008, David Viniar, [GSG's] chief financial officer, said that whatever the outcome at AIG, the direct impact of Goldman's credit exposure would be immaterial,' she said. 'That was false. The report states that if the [NYFed] had negotiated concessions Goldman would have suffered a loss.' ... 'The prices of the collateralized debt obligations against which Goldman bought protection from AIG were in sickening free fall, and the cost of replacing AIG's protection would have been sky-high,' she said. 'Goldman must have known this, because it underwrote some of those value-destroying CDO's.' Ms. Tavakoli argues that [GSG] should refund the money it received in the bailout and take back the toxic CDO's now residing on the Fed's books--and to do so before it begins showering bonuses on its taxpayer-protected employees. 'AIG, a sophisticated investor, foolishly took this risk,' she said. 'But the US taxpayer never agreed to be a victim of investment that should undergo a rigorous audit'," my emphasis, Gretchen Morgenson at the NYT, 22 November 2009, link:

The NYFed didn't play "chicken" with Vampire Squid (VS). The correct response was to have VS's executives "shadowed" by FBI agents 24 hours a day. Like what happened to Joe Jett in 1994. I'm sure even Lloyd Antoinette Blankfein would realize if VS had pressed any claims, he would be indicted for something. As Laverntiy Beria said, "Show me the man, and I'll find you the crime", my 16 October 2009 post: Well Mary Schapiro, read this and compare it to VS's claim it was fully hedged and had no AIG exposure. If true, it's because Timmy Boy put $85 billion into AIG. I think Barofksy is close to the truth here. "Improper and criminal"? Fine, VS, The NYFed should have said, "We will put out a press release 9:00 AM tomorrow with your statement. You have until 8:59 AM tomorrow to retract it. What do you want"? Even VS's attorneys could figure out what that meant. Suggestions? Read my 12 and 13 May 6 September 2009 posts: Hey Preet Bharara(PB), can you indict David Viniar (DV) for securities fraud based on his public pronouncements? Look into it. Boy. Or are you on VS's payroll? Here are some of my prior related posts:

Why? To bail out VS, that's why.

VS had no exposure to an AIG bankruptcy. We know so because VS said it. I doubt VS could have kept the $8.4 billion in collateral it supposedly got. Was AIG then insolvent? Should AIG's "bankruptcy trustee" grab it as a preference payment? PriceWaterhouseCoopers (PWC), was AIG insolvent? You "audited" AIG and VS. Well? In 2008 AIG paid PWC $120 million, VS paid PWC $62 million. For $182 million, what did you do? Hey, VS audit committee, sight unseen, I can do a better audit than PWC. Here's my fee: only $50 million. Well? Of course, I might look DV in the eye and tell him VS will get an adverse opinion based on its supposed "hedge accounting", but I will be thorough. And I will not be intimidated.

VS believed this? It was wrong or lied. PWC, did you find this? What's wrong with VS's internal controls? PWC declared them Kosher for Passover on 22 January 2009. Well, Mary Schapiro, what will you do about this? Beat up some micro cap registrants to show us your brass cojones? Hey PB, Tavakoli (I love her) appears to allege the elements of a securities fraud count. What will you do about this?

What Gold Frenzy?

"'It could be your grandmother's gold or the gift of an ex-boyfriend,' said Erhard Oberli, the chief executive of Argor-Heraeus, a major refiner [in Mendriso, Switzerland] that processes roughly 400 tons of gold a year. 'Gold doesn't disappear.' ... Long considered the ultimate refuge for nervous investors, gold has climbed as the dollar has steadily weakened, budget deficits have expanded in the [US] and Europe, and central banks have continued to pump trillions of dollars into weak economies, creating fears of another asset bubble that will ultimately pop. ... Jim Rogers, an investor who has made his name investing overseas and in commodities, predicted to Bloomberg Television last week that gold might reach $2,000 an ounce--prompting a rebuke from Nouriel Roubini, an economist who gained attention for his early warnings about the global economic crisis. At a conference in New York on Wednesday, Mr. Roubini described Mr. Roger's forecasts as 'utter nonsense,' saying that there aren't any inflationary or economic pressures that would drive the price of gold to $2,000 an ounce. Even the most bullish of gold lovers were surprised last week when the Reserve Bank of India stepped in and bought 220 tones of gold from the [IMF] for $6.7 billion, a sign that other central banks might move away from dollar-denominated assets like Treasury bonds in favor of the precious metal. ... 'We have money to buy gold,' said Pranab Mukherjee, India's finance minister. 'We have enough foreign exchange reserves.' ... 'Gold has been around as an investment for 6,000 years,' Mr. Oberli said. 'When there is no alternative, it's there'," my emphasis, Nelson Schwartz at the NYT, 8 November 2009, link:

Disagreeing with Roubini, inflation is everywhere. Look. The inflationary pressures I see could drive gold to multiples of $2,000 an ounce. Unlike paper currencies, "gold doesn't disappear". Trillions of dollars? What is Zimbabwe Ben's marginal cost of producing a dollar? Or a trillion? How overvalued is it? When mankind sees "there is no alternative" it will return to gold. When? When the price is high enough. India's buying $6.7 billion of gold did not surprise me. It's peanuts in the world market.

Saturday, November 28, 2009

New Bank Accounting

"Banks are moving quickly to restructure commercial mortgages under new US guidelines that are more forgiving of battered property values and can help banks avoid bigger losses. ... The moves could help the banks absorb fewer losses on troubled real-estate loans and preserve capital. ... Matthew Anderson, partner at research firm Foresight Analytics, estimates that about two-thirds of the $800 billion in commercial real-estate loans held by banks that will mature between now and 2014 are underwater, meaning the loan amount exceeds the value of the property. ... The guidelines are controversial, with critics accusing the US government of prolonging the financial crisis by not forcing borrowers and lenders to confront inevitable problems. ... Regulators also suggested ways for banks and borrowers to restructure loans and avoid foreclosure even if the properties can't pay debt service. Banks can carve loans into one performing part and one nonperforming part. That would allow the bank to incur losses on only the nonperforming part, not the entire loan", Lingling Wei and Peter Grant at the WSJ, 11 November 2009, link:

What can I say? Uncle Sam supports bad bank accounting. In effect, the banks will create post hoc loan tranches. Amazing. Is this MLEC 4.0?

What Fed Independence?

"The [Fed] in coming years will probably become highly politicized and thus lose its quasi-independent status. This is because of past shortcomings in its policies and, more importantly, of difficult decisions that face it in the year just ahead. ... While Fed governors serve a 14-year term, most of them step down well before the end of their terms. ... Still, past presidents have hardly been effective at controlling their Fed chairman. ... So, why should be be concerned that the Fed will become highly politicized now? First, there is the Fed's legacy of its inability to limit past financial excesses. By failing to be an effective guardian of our financial system, it has lost credibility. ... The Fed also failed to foresee how the 1999 repeal of the Glass-Steagall Act, which had separated commercial from investment banking since 1933, would sharply accelerate financial concentraion through mergers and acquisitions and this contribute to the 'too-big-to-fail' phenomenon. ... If an overwhelming proportion of our financial institutions are deemed too big to fail, monetary restraint would fall heavily on institutions that are not. ... Taken to its logical conclusion, our market-based system of credit allocation would be replaced by a socialized system and the [Fed] would become part of it. A much better approach would be to prohibit any financial institution from becoming too big to fail. This would require that regulators downsize large financial conglomerates", my emphasis, Henry Kaufman (HK) at the WSJ, 11 November 2009, link:

I agree in part with HK. I say we have socialized credit now. Further, that Fed "independence" is and always was a fraud. Kill the Fed. I saw what Glass-Steagall's repeal would bring. HK in effect argues TBTF executives should be civil servants. The Fed was obviously politicized from 1942-1951, see my 19 April 2008 post:

Friday, November 27, 2009

NY's Broke

"Gov. David A. Paterson took the rare step on Monday of addressing a joint session of the Legislature during its traditional off-season and used the speech to underscore New York's deepening financial crisis. Mr. Paterson repeatedly used stark language to describe the gravity of the state's economic health as he prodded lawmakers to make cuts he has proposed to programs long considered sacrosanct. ... The state's budget crisis and the negotiations between the governor and lawmakers over how to confront it have raised a fundamental question: Can New York, which is more generous in its social welfare programs than any other state, afford to continue to finance its expansive health care safety net and generous education spending? ... A growing number of budget experts believe that New York can no longer afford to spend so much in the wake of the economic crisis, rising unemployment, the collapse of the stock market and the travails on Wall Street--the state's main fiscal engine. ... 'We're going to fall off a cliff unless we get our revenues and our expenditures in true sync,' said Lt. Gov. Richard Ravitch, the adminstration's point man in budget negotiations with the Legislature. He said that the state could no longer rely on its usual strategy of turning to an array of short-term solutions or ask more of the state's taxpayers, adding, 'We're at the outer limits of the elasticity of our tax system'," Danny Hakim at the NYT, 10 November 2009, link:

"Desperate for cash amid the worst fiscal crisis in years, New York State is pursuing tax debtors more aggressively than ever before, doubling the number of cases it is investigating and seeking to collect from delinquents ranging from JPMorgan Chase to an out-of-business convenience store on the Bowery. ... By the end of this year the state's Department of Taxation and Finance will have filed the largest number of warrants ever in a single year and settled about a million open cases, the most in state history", Nicholas Confessore at the NYT, 10 November 2009, link:

Quoted without comment.

There is no place in NY for the middle class. Leave.

Millionaire's Tax

"States hungry for revenue are turning to taxpayers to make up the shortfall as they deplete rainy-day and economic-stimulus funds. To avert a popular revolt, many are resorting to a so-called millionaire's tax, which puts the burden on a small group of the very well-heeled. ... In response, some wealthy residents are rethinking their financial strategies, including where they reside. They may see some sense to moving before they sell a business, for example, or stop using certain kinds of trusts. ... For the rich in California, the question can be 'do you really need to live in this state when you have a state next door that has a zero income-tax rate?' said Don Weigandt, a wealth adviser in the Los Angeles office of JP Morgan Private Bank. That next-door neighbor is Nevada", Arden Dale at the WSJ, 14 November 2009, link:

Californian, hear today's Lenin, Weigandt; vote with your feet. I first advised my California clients to move to Nevada in 1998. Go!

Thursday, November 26, 2009

AIG, the Sequel

"After shelling out billions of dollars to Wall Street banks last year on souring trades, [AIG] has gotten some of that money back, thanks to a turnaround in the very securities that helped to level the insurer. ... For the second quarter, the figure may have topped $3 billion, public filings suggest. Goldman Sachs Group Inc. [GSG] has sent back at least about $1 billion, said people familar with the matter. ... The cash that AIG is getting back from Wall Street is tied to credit-default swaps, which act as insurance policies on securities backed by assets such as mortgages and pay off in case of default. ... The development highlights how the government's decision last November to close out many of these trades aided big banks while costing AIG a chance to get billions of dollars more in collateral back in any rebound. ... Two months after the bailout, the government adopted a new strategy. The [Fed] of New York helped create an entity called Maiden Lane III to buy the underlying investments, and arranged to terminate many of the swap contracts. That was a boon to the banks, which were effectively made whole. The banks pocketed $35 billion in collateral AIG already had paid them, and collected another $26.8 billion in cash for selling the investments at roughly their lowered values. [GSG] got to keep billions in collateral and got paid $5.6 billion for the investments. ... Others have contended that AIG's trading partners should have been forced to accept less money for tearing up the contracts", my emphasis, Liam Pleven at the WSJ, 30 October 2009, link:

Vampire Squid (VS) almost always wins! What is the Fed for, if not to ensure VS is well Fed?

Gold Rush?

"The world's central banks are likely to be net buyers of gold in 2009 after two decades of selling, sparking a race among analysts to figure out which country will step in with the next big purchase. ... Wei Benhua, a former Chinese official, was cited by Chinese-language magazine Caijing on Monday as saying China, Brazil or Russia may follow India in buying IMF gold. ... The most logical buyers are countries that are running current-account surpluses and that don't have their own domestic gold production, Mr. [Jeff] Christian said. ... While China has become an obvious buyer, some analysts say the country is likely to buy production from Chinese mines rather than buy from the IMF. China, the world's largest gold producer, has $2.3 trillion in foreign reserve, with the majority in US Treasury securities. ... For example, to increase its gold holdings to the world average of 10%, China would need to buy $180 billion of gold, or about 5,400 metric tons--the equivalent of more than two years of the world's mine production. Gold prices would probably spike above $6,500 an ounce, Mr. [Andy] Smith estimates, making the scenario highly unlikely", Carolyn Cui at the WSJ, 11 November 2009, link:

Unlikely Smith? We disagree. At $1,174 gold is cheap. Dollars are dear. Buy the former, sell the latter. See how simple that is? Let Zimbabwe Ben make you rich. Smith is a Bache Commodities analyst. A "respectable" source said $6,500 gold is possible.

Wednesday, November 25, 2009

Who is the US?

"The US government lost the first major criminal trial spawned by the financial crisis as two former Bear Stearns hedge-fund managers were acquitted of securities fraud. Some prosecutors had viewed the case as a blueprint for future charges against Wall Street executives. ... The acquittals are a setback for the US attorney's office in Brooklyn, NY, which along with several other offices is investigating Wall Street for possible criminal wrongdoing stemming from the credit crisis, including at Lehman Brothers Holdings Inc. [LBHI] and [AIG]. ... There 'was nothing that was clear and convincing, said juror Tabasam Bhatti, a 31-year-old civil servant. ... The federal bailout of Wall Street has raised the ire of taxpayers and put pressure on the Justice Department to hold top executives accountable for the crisis. ... 'We're thrilled with the verdict,' said Susan Brune, a lawyer for Mr. [Matthew] Tannin. Messrs. [Ralph] Cioffi and Tannin [C&T] still face a civil-fraud lawsuit, which was brought alongside the criminal charges last year, by the [SEC]. John Nester, and SEC spokesman, said the agency expected to go forward with the litigation", my emphasis, Amir Efrati (AE) and Peter Lattman at the WSJ, 11 November 2009, link:

"The acquittals of two former Bear Stearns Cos. hedge-fund managers on securities-fraud charges is causing some soul-searching amid prosecutors who hope to hold Wall Street accountable for excessive risk-taking that helped lead to the financial crisis. ... This is particularly true for the investigations of former executives at [LBHI] and [AIG] which could be brought by the US attorney in Brooklyn, people famuilar with the matter have said. The Bear case was tried in Brooklyn. A spokesman for the Brooklyn US attorney declined to comment. ... Andrew Hruska, a former federal prosecutor [said] 'There's not as much unthinking animus [against Wall Street] by jurors as some prosecutors believe, and they can't just count on juries to gloss over facts that don't fit with the government's theory.' ... To be sure, the Bear case had certain unique characteristics, such as judicial rulings and expert witness testimony that was favorable to the defense. These advantages mightn't come into play in future cases. ... But the jury found that the emails, when read in their entirety, showed that the defendant's private ruminations weren't at odds with public comments", my emphasis, AE at the WSJ, 12 November 2009, link:

"The quick 'not guilty' verdict reached Tuesday afternoon by a Brooklyn jury in the federal criminal trial of two former Bear Stearns hedge fund managers was at once surprising--for its failure to comport with the zeitgeist--but also entirely understandable, based on a close reading of the prosecution's arguments and the evidence the judge allowed to be introduced. 'There was a reasonable doubt on every charge, one juror told the Times afterward. 'We just didn't feel that the case had been proven.' ... But the jury eventually saw the entire message, in which Mr. Tannin ruminated at length about various courses of action ans seemed to be striving to make the soundest financial choice. In other words, it was just about what you would hope your fund manager would be worrying about in a precarious time. ... For now, [C&T] remain the only bankers indicted for their professional behavior in what became one of the worst financial crises in our history", my emphasis, William Cohan at the NYT, 12 November 2009, link:

"The nasty juggernaut known as the US [DOJ] usually gets it man, regardless of whether or not the man targeted has committed any crimes. ... However, every once in a while, there is good news to report, and on Tuesday afternoon, the government's lousy case against former Bear Stearns hedge fund managers [C&T] was deep-sixed by a jury that could recognize the prosecutors' dearth of evidence. I don't have much confidence in federal juries, and I am sure that I never would be permitted to serve on one (Oh joy), but on this day, a federal jury in Brooklyn did its job and did it well. ... Second, they had a legal team that shot down everything that the federal prosecutors threw at them. Third, Judge Frederick Block could smell the dishonesty of the government's case and he was not afraid to do his job. Unlike most federal judges, Block did not see himself as being an arm of the prosecution, and that made a huge difference in the trial. Fourth, the government had no case. NO case. ... I closely followed this case and had a sense of where it was headed. (Interestingly, most of the media chose to present a rosy picture of the government's case, and at the breaks, reporters were seen laughing and joking with the prosecutors. ... However, the biggest howler came from prosecutors Illene Jaroslaw and Patrick Sinclair [J&S], who made off-the-record remarks that the Brooklyn jury was too unsophisticated to understand the intricacies of the case. ... First, and most important, the last thing that [J&S] wanted was for their presentation to be eye-glazing and they were hoping that the defense would present the argument that the securities markets were very complicated and maybe jurors should not try to figure out what constituted a crime and what was not a crime. ... Second, the reason that the trial was held in Brooklyn instead of Manhattan was because the court-shopping prosecutors wanted a Brooklyn jury, reasoning that a jury of working-class people would not be able to relate to a couple of once-wealthy Wall Street traders. [J&S] purposely wanted what they believed would be an 'unsophisticated' jury that would not understand the information the defense was going to present. Thus, to claim that the jury's alleged 'stupidity' was the reason that they lost is the ultimate proof that federal prosecutors are an arrogant lot", my emphasis, William Anderson at Lew Rockwell, 12 November 2009, link:

This case stank and always stank. C&T are "top executives"? It was brought to divert public attention from Vampire Squid's actions. It's the worst case since the Joe Jett fiasco, see my 8 August 2008 post:

Yes, Hruska, BC wanted the jurors to convict C&T for VS's actions. Soul searching by prosecutors? That presumes a fact not in evidence. Objection sustained. What is unique about "judicial rulings ... favorable to the defense"? What is AE saying about our federal judges? Hey, BC, did you ever hear of the Federal Rules of Evidence? Acquaint yourself with Rule 106, my 12 September 2009 post:

Was BC trying to deceive the jury into convicting C&T? I am clearly convinced. Why has no one else been indicted? This article was titled, "How the Scapgoats Escaped". Well done.

I despise federal prosecutors. To call them arrogant is a compliment. Every AUSA seems to think he's Albert Einstein. They're not. I haven't met an Einstein working for the DOJ yet.

IEA Whistleblowers

gaius marius has a 10 November 2009 post at his Decline and Fall of Western Civilization about a recent international energy agency report about oil reserves and a whistleblower who claims the report was doctored to suit american interests. Here's a link: Again: trust no government statistic.

Vampire Squid Loses One

"The US Treasury blocked Fannie Mae's proposed sale of nearly $3 billion in low-income housing credits to Goldman Sachs Group Inc. and Berkshire Hathaway Inc. after concluding the deal would lose too much money for taxpayers. The proposed sale would have resulted in a loss of tax revenue that would have been greater than the savings to the federal government had it allowed the sale. ... The blocked sale demonstrates the political and policy challenges facing the US as it looks to conserve both companies capital while advancing larger policy and political goals", my emphasis, Nick Timiraos at the WSJ, 7 November 2009, link:

Amazing. Uncle Sam did some cost-benefit analysis to Vampire Squid's detriment. Heads should roll at Treasury over this.

Tuesday, November 24, 2009

Kosher Krime

"Federal prosecutors Wednesday accused a former manager of defunct meatpacker Agriprocessors Inc. [AI] of cheating a bank, laundering money and destroying evidence during opening arguments [in Sioux Falls, SD]. ... Mr. [Sholom] Rubashkin's lead defense attorney, Guy Cook called Mr. Rubashkin an 'honest family man' who was in over his head in a complex business. Mr. Rubashkin, a Hasidic Jew, was trained as a rabbi, not as a businessman, he said, and any 'sloppy' business practices that might have occurred don't amount to crimes. ... Assistant US Attorney Charles J. Williams said in court that Mr. Rubashkin 'repeatedly lied' to his lender about his company's financial health and 'reassured the bank that [AI] was in full compliance with the law.' ... But [AI] filed for Chapter 11 bankruptcy protection in November 2008, leaving the US with a temporary shortage of kosher meat. The company was recently sold to SHF Industries. Specifically, the government says Mr. Rubashkin engineered a scheme that illegally diverted millions of dollars in customer payments away from First Bank Business Capital Inc., a subsidiary of St. Louis-based First Bank, which had issued him a $35 million revolving line of credit", Lauren Etter at the WSJ, 15 October 2009, link:

This case always disturbed me because the press made it into an immigration case. Now we see the immigration angle was tangential to the bank fraud.

US, a Financo-State

"Evidence that the US is a failed state is piling up faster than I can record. ... Income inequality in the US is now the most extreme of all countries. ... The stark increase in US income inequality in the 21st century coincides with the offshoring of US jobs, which enriched executives with 'performance bonuses' while impoverishing the middle class, and with the rapid rise of unregulated OTC derivatives, which enriched Wall Street and the financial sector at the expense of everyone else. ... When Goldman Sachs [GSG] recently announced that it was paying massive six- and seven-figure bonuses to every employee, public outrage erupted. In defense of banksters, saved with the public's money, paying themselves bonuses in excess of most people's life-time earnings, Lord Griffiths, Vice Chairman of [GSG] International, said that the public must learn to 'tolerate the inequality as a way to achieve greater prosperity for all.' ... In other words, 'Let them eat cake.' ... A narco-state is bad enough. The US surpasses this horror with its financo-state", original emphasis, Paul Roberts at Vdare, 26 October 2009, link:

I don't call Him (capitalized intentionally) Lloyd Antoinette Blankfein for nothing.

Monday, November 23, 2009

Free the Bear Stearns Two

"Two weeks into the first major Wall Street prosecution after the financial crisis, the government's case appears headed for an anticlimax. ... Even the judge, Frederic Block, of Federal District Court in Brooklyn, has indicated he is fed up. On at least two occasions during the second week of trial, Judge Block admonished Ms. [Ilene] Jaroslaw to settle down. Regarding the ever-growing mountain of evidence, he commented: 'We have a lot of papers here. ... I doubt jurors are going to read all 530 of these documents. But this is how the government chooses to present its case. Continue.' ... For instance, when the prosecution tried to exclude from evidence an e-mail message from [Ralph] Cioffi that spoke of having a plan 'to save' his limited partners in the fund, Judge Block said: 'What's wrong with having a plan that saves his LPs? It shows his state of mind, that he is still trying to actively salvage the day'," Dan Slater at the NYT, 23 October 2009, link:

This case stinks. It's good to see the jury was not fooled by the DOJ's nonsense and acquitted Cioffi and Tanen.

What Gold Frenzy?

"'It could be your grandmother's gold or the gift of an ex-boyfriend,' said Erhard Oberli, the chief executive of Argor-Heraeus, a major refiner here that processes roughly 400 tons of gold a year. 'Gold doesn't disappear.' ... Long considered the ultimate refuge for nervous investors, gold has climbed as the dollar has steadily weakened, budget deficits have expanded in the [US] and Europe, and central banks have continued to pump trillions of dollars into weak economies, creating fears of another asset bubble that will ultimately pop. ... At a conference in New York on Wednesday, Mr. [Nouriel] Roubini described Mr. Roger's forecasts as 'utter nonsense,' saying that there aren't any inflationary or economic pressures that would drive the price of gold to $2,000 an ounce. Even the most bullish of gold lovers were surprised last week when the Reserve Bank of India stepped in and bought 220 tons of gold from the [IMF] for $6.7 billion, a sign that other central banks might move away from dollar-denominated assets like Treasury bonds in favor of the precious metal. ... 'We have money to buy gold,' said Pranab Mukherjee, India's Finance Minister. 'We have enough foreign exchange reserves.' ... 'Gold has been around as an investment for 6,000 years,' Mr. Oberli said. 'When there is no alternative, it's there'," my emphasis, Nelson Schwartz (NS) at the NYT, 8 November 2009, link:

Yes, NS, gold is "there", and has been for 6,000 years. When will the world remonitze gold? "When there is no alternative". Roubini, you are lost. Gold could easily go to multiples of $2,000 by 2017, perhaps 5-10X. Really. NS, don't speak for me. What's $6.7 billion on the world stage? Peanuts. Zimbabwe Ben can create that many dollars in five minutes!

Sunday, November 22, 2009

Christie's Potential Andrew Jackson Moment

"But what New Jersey [NJ] needs is a governor willing to confront the state's Supreme Court over who is in charge of school funding. And Mr. Christie has shown no stomach for that fight. ... But in a succession of school-funding cases over the years, the state Supreme Court has taken control of the $11 billion Property Tax Relief Fund. ... The court sends more than half of the state aid to 31 largely urban 'special needs' school districts, the special needs of which were for the most part created by decades of Democratic mismanagment. The remaining 554 largely suburban towns fight over the rest. ... The public schools produce dismal test scores. Yet thanks to the court they are subsidized at almost incomprehensible levels. The city [Asbury Park] gets $29,895 per-pupil annually in education aid from the state. The total per-pupil cost exceeds $35,000 annually--enough to ship the kids off the prep schools where they would get top-notch schooling and room and board. The average per-pupil cost across the state is about $18,000. ... 'Will one of those tough choices be to wrest control of school funding back from the courts?' I asked. Mr. Christie spent the spring ducking questions about the issue, so I figured I might have better luck with Ms. [Kim] Guadagno [Christie's running mate]. ... If you're looking for a reason for the Republican's inability to pull away from the unpopular Corzine in the polls, look no further than this. New Jersey residents are struggling under some of the highest property tax bills in the nation. ... Surburban property taxes are high because the state Supreme Court has turned the property-tax system into a massive scheme to transfer wealth from the suburbs to the cities", my emphasis, Paul Mulshine at the WSJ, 31 October 2009, link:

Gov. Christie, you have an opportunity to follow Andrew Jackson's comment to John Marshall, my 26 January 2008 post:
Tell your Supremes, "I will ignore your rulings with regard to using the property tax as a "progressive income tax". Dare it to arrest you. Remind NJ's Supremes "I control the state police, not you". With some luck you can head the 2012 Republican ticket. Look at the obscure Illinois politician we recently elected POTUS. The idea of courts setting tax policy is absurd. I remember in 1958 New York City's (NYC) public schools averaged about $550 per pupil per year, say $7,400 today. Does NJ's public schools spending over twice per student as much in real terms as NYC's did in 1958, make them better? Stop the euphemisms. Are "special needs" synonymous with majority NAM? Do largely non-NAM school districts produce "better results" for less money? Asbury Park is 16% white and 67% black. Hmm. Has this something to do with its schools' abysmal results?

The SDNY Circus Continues

"Armed with informants, wiretaps, and sophisticated software tools, the [SEC]--still smarting after missing Bernard Madoff's Ponzi scheme--is determined to raise its game. 'It would be wise for investment advisers and corporate executives to look closely at [the Galleon] case and consider what lessons can be learned and applied to their own operations,' SEC enforcement chief Robert Khuzami said in a press conference. ... Notes Wayne Black, a private financial-crime investigator and former drug cop: 'The fact that they used the stuff you see for mobsters, drugs, and terrorism shows their very serious'," Roben Farzad & Theo Francis at Businessweek, 2 November 2009.

"Federal authorities widened their crackdown on insider trading, uncovering an alleged network of conspirators with elements of a James Bond movie, including packages of money, throwaway cellphones, a ring-master named 'Octopussy' and an associate called 'the Geek.' In a 24-page criminal complaint filed in New York federal court, prosecutors alleged that 14 individuals were part of an insider-trading group that generated $20 million in illegal profits. The group allegedly included several hedge-fund traders, two lawyers, a former junior analyst at a credit-rating firm and a technology-company executive. ... 'The casual betrayal of corporate secrets by insiders ... makes a mockery of our system,' said Preet Bharara, the Manhattan US attorney, at a news conference announcing the charges. A related civil case was filed by the [SEC]", my emphasis, Robert Guth & Amir Efrati at the WSJ, 6 November 2009, link:

"The government's fast-moving insider-trading case is being built on information from five co-operating witnesses, some of whom received information from investors and companies that haven't been charged in the probe, potentially broadening the case, people familar with the matter said. ... The cooperators have pleaded guilty to charges including conspiracy and insider trading and are cooperating in the hope of getting lighter penalties, investigators say. ... The complaint alleges that Messrs. [Choo-Beng] Lee and [Ali] Far paid some of their sources $2,000 per quarter in exchange for information", Susan Pulliam at the WSJ, 6 November 2009, link:

Black, I disagree. It appears the DOJ and SEC are acting to convince Joe Schmoe the Feds are serious about white collar crime. What should a prospective white collar criminal do to ward off the Feds? Have some Vampire Squid (VS) higher-ups take part in your scheme such that it you can't be prosecuted without bringing VS down too. Who says VS is good for nothing? Well Preet Bharara (PB), will you indict me for aiding and abetting say wire fraud, 18 USC 2, 1343? Doesn't the US Attorney's Manual state no VS senior executive should be prosecuted? Or is that in the Manual's "confidential" section?

Aparently PB has nothing important to do that he can waste time on this case. By going after some "high profile" types like the Galleon people, he diverts Joe Schmoe's attention from VS. PB, you are making a mockery of our system.

$2,000 per quarter. Wow. Lloyd Antoinette Blankfein's monthly cigar bill must be 100 times larger. This case shows one problem with DOJ prosecutors. They can't make a case without "co-operating witnesses". Well, PB, which VS can you get to co-operate?

Saturday, November 21, 2009

LA Times on California

WC Varones (WCV) has a 2 November 2009 post which refers to a 1 November 2009 Los Angeles Times opinion piece. Here's a link to WCV's post: I was surprised "LA" Times printed it too. Even LA Times apparently recognizes that California's current tax and spending policies are unsustainable without federal help, "California's public sector has pinned its hopes for avoiding fundamental reform on increased federal aid to replace dollars the state's fed-up taxpayers refuse to surrender. In other words, residents in the other 49 states--the new 49ers?--would enjoy the privilege of paying California's taxes". Why not? Californians pay Mexico's taxes? Steve Sailer (SS) at Vdare sees this article on 6 November 2009, much the way I do, link: SS notes, "The concept that Latinos don't earn enough to pay for an expensive government is pretty obvious, but it's just off the radar screen. The liberal media just see more NAMs as more justification for more government spending and more votes for government spending". Yes SS.

Jesse's Calculator Abuse

Jesse at Jesse's Cafe Americain has a 6 November 2009 post about job loss statistics. Enjoy. Here's a link:

Vampire Squid Obfuscation

"But most Americans know all too well that only the intervention of billions of dollars in taxpayer bailout money saved Goldman [GSG] from the dire fate of its less well-connected competitors. The growing ranks of under-and-unemployed Americans, meanwhile, are waiting with increasing desperation for a recovery of their own. Goldman is this century's octopus--almost literally so. The most-quoted sentence is financial journalism this year, by Matt Taibbi of Rolling Stone, describes the company as a 'great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.' ... And there is one other significant way that our 21st-century vampire squid differs from Rockefeller's 20th-century octopus. Americans knew what oil was, and they understood how Standard Oil's manipulations directly affected their pocketbooks. Even now many Americans don't know what Goldman's products are or how it makes its money. The less we know, the easier it is for reckless gambling to return to capitalism's casinos, and for Washington to look the other way as a new financial bubble inflates. ... At least health care, like oil, is palpable, so we will be able to keep score of how reform fares--win, lose or draw. But the business of Wall Street, while also at center stage in a Congressional committee last week, is so esoteric that the public is understandably clueless as to what, if anything, the lawmakers were up to, if anyone even noticed at all. ... As the Reuters columnist Rolfe Winkler wrote last week, 'Main Street still owns much of the risk while Wall Street gets all of the profit'," my emphasis, Frank Rich (FR) at the NYT, 18 October 2009, link:

Vampire Squid's continued existence requires Joe Schmoe not understand what its real business is. FR is to be commended for making this clear. See my 25 October 2009 post:

Friday, November 20, 2009

Madoff on the SEC

"Bernard Madoff was dismissive of a compliance examiner involved in a [SEC] inspection into his firm, calling the man a 'blowhard' who talked tough, but didn't look at anything. ... [David Kotz's] report found that the SEC received six substantive tips over 16 years, but still failed to detect the fraud because of inexperienced staff, delays and a lack of communcation. ... 'It's very easy to do a third-party check. It's an absolute must,' Mr. Madoff said of how one investigates a Ponzi scheme. 'It's accounting 101.' ... Mr. Madoff said he thought he might get caught during another enforcement investigation when officials asked for his DTC number. He credited them with 'asking all the right questions' and was later shocked to learn the investigation would be closed", Sarah Lynch at the WSJ, 31 October 2009, link:

Blame the SEC staff, not SEC management. Why? Bernie, it's auditing 301, not accounting 101. But it's pretty basic. Who is the compliance examiner? He might make an excellent Big 87654 partner. Bernie, write him a reference letter.

Economists Don't Learn

"The pain of the financial crisis has economists striving to understand precisely why it happened and how to prevent a repeat. For that task, John Geanakopolos of Yale University takes inspiration from Shakespeare's 'Merchant of Venice.' ... For years, his effort to understand this process didn't draw much interest. Now it does--yet another aftereffect of the brutal deflating of the credit bubble. ... Mr. Geanakopolos is among a small band of academics offering new thinking about those cycles. A varied group ranging from finance specialists to abstract theorists, they are moving to economic center stage after years on the margins. The goal: Fix the models that encapsulate economists' understanding of the world and serve as policy-making tools at the world's central banks. It is a task that could require a thorough overhaul of the way those models work. ... Mr. Geanakopolos is emblematic of the new thinking but now necessarily the one whose ideas will prevail. ... The past century saw two economic revolutions in the way economists view the world. Both required painful crises to set them in motion, but both arguably improved government's ability to manage the economy. The first came after the Depression, when economists built some of the first mathematical models that policy makers could use to try to manage the economy. The second came after the inflationary 1970s, when economists created new models that took into account how people's expectations, such as about prices or income, can influence the economy over time. ... As Robert Lucas of the University of Chicago, one of the intellectual fathers of the models, put it in 2003: The 'central problem of depression-prevention has been solved ... for many decades'," my emphasis, Mark Whitehouse at the WSJ, 3 November 2009, link:

"Professor [Steve] Hanke argues that the chief enabler of both the Great Depression and our latest economic downturn is the [Fed], who sees itself as America's systemic risk regulator. This is the world upside down, Hanke explains: The [Fed] is the systemic risk. ... The bottom line is that the idea that government bureaucrats have enough knowledge to manage an economy well is the height of conceit--what Nobel Laureate Fredrich Hayek called the 'fatal conceit'," Walter Williams (WW), 5 November 2009, link:

Does anyone remember JFK's adminstration and the Phillips Curve? We conquered the business cycle then! The economists here are still looking for the philosopher's stone. They are wasting their time. If they studied the Austrian Theory of the Business Cycle, they might learn something. This is pitiful. Where is George Stigler when we need him? That Lucas, a Chicago professor, should sprout this nonsense is inexcusable. Did he study the History of Economic Thought? It appears Geanakopolos has no concept of capitalization. He doesn't understand the efffects of central bank monetary base expansion on bank lending practices. This search for the "new paradigm" is an intellectual joke, see my 23 August 2007 post: To end business cycles, kill the Fed. New thinking? That's laughable. Go back to gold!

I agree with WW, an economics professor at George Mason University.

Thursday, November 19, 2009

Old South Smacks NYT

Old South has a 1 November 2009 post smacking Frank Rich of the NYT. I thought about writing something similar, but decided not to. The NYT's arrogance is almost beyond belief. Here's a link:

Feeding the Vampire Squid

Calculated Risk has a 1 November 2009 post about Vampire Squid's (VS) bets on the US housing crash and how it sold clients mortgage-backed securities while expecting they would fall in value. Here's a link: Is anyone surprised VS stuck its blood funnel into its own clients? Here are some of my VS posts relevant to its conduct, 16 December 2007, 22 February 2009 and 29 May 2009:

More Bad Bank Accounting

"Federal bank regulators issued guidelines allowing banks to keep loans on their books as 'performing' even if the value of the underlying properties have fallen below the loan amount. ... Regulators said that the rules were designed to encourage banks to restructure mortgages with borrowers rather than foreclose on them. But the move has prompted criticism that regulators are simply prolonging the financial crisis by not forcing borrowers and lenders to confront, rather than delay, inevitable problems. The guidelines, released on Friday by agencies including the [FDIC], the [Fed] and the Office of the Comptroller of the Currency, provide guidance for bank examiners and financial institutions working with commercial property owners who are 'experiencing diminished operating cash flows, or prolonged delays in selling or renting commercial properties.' Restructurings are often in the best interest of both lenders and borrowers, the guidelines point out", Lingling Wei at the WSJ, 31 October 2009, link:

More crap from Uncle Sam. If a restructuring makes sense, no matter what the accounting, do it. See my 17 July 2008 post: This is an accounting issue. Well PCAOB, SEC, Big 87654? Where are you on this?

Wednesday, November 18, 2009

Fortune Exposes Zimbabwe Ben

"This is a quiz. What do the record-high Wall Street bonuses have in common with the record-low yields for savers? Answer: They show yet another way that prudent people, especially those living on fixed incomes, are being screwed by the government's bailout of the imprudent. ... The government is spending trillions to keep interest rates down in order to support the economy and prop up housing prices, and those low interest rates have inflicted collateral damage on savers' incomes. 'It's a direct wealth transfer from savers and retirees to overly indebted borrowers,' says Greg McBride, senior financial analyst at ... One day, the federal government won't be able to keep all these interest rates artifically low, as it's now doing. The Chinese goverment, our major financier, is growing restless. The dollar's falling sharply relative to other cuurencies is an ominous sign. If thbis problem accelerates, it will put pressure on the Fed to let interest rates rise to protect the dollar from collapse. ... A nice reward from the government for a lifetime of savings. Thanks for nothing, guys", Allan Sloan at Fortune, 9 November 2009.

Sloan says it all. It is Uncle Sam's policy to "tax" savers to protect the banks. Storm the Bastille! Or at least, kill the banks.

NYT-Big Business Shill

"The fight is over whether the bill should be amended to block the imposition of a post-Enron auditing requirement on small publicly traded companies--defined as those with a market capitalization of less than $75 million. Incredibly, nearly eight years after Enron imploded and more than a year after the failures of deregulation nearly brought the entire financial system down, some members are still insisting that the audit requirement will impose undue burdens on small businesses. Under the post-Enron law, all public companies must have procedures in place to prevent errors and fraud in the company's financial statements and have outside auditors assess the effectiveness of those internal controls. ...Watching this fight play out, we despair whether corporate America or Congress have learned anything over the last year. We are even more disturbed by reports that the Obama administration is supporting the Garrett-Adler amendment. If Congress and the White House won't get tough on accounting fraud at small public companies, how likely are they to take on tougher issues and mere powerful constituencies--when it comes to controlling the multitrillion-dollar derivatives market or downsizing too-big-to-fail firms?", Editorial at the NYT, 4 November 2009, link:

What idiocy. Congress passed the Foreign Corrupt Practices Act in 1977. So? Citigroup, AIG, Vampire Squid, Freddie, Fannie, and the rest of my "rogues gallery" (RG) each had multibillion market caps and "internal controls". So? Congress never understood SOX did nothing to prevent fraud, only enriching the Big 87654. The SEC wastes an inordinate amount of time on small SEC registrants. Why? Because it's afraid of the politically well-connected. The SEC does no cost-benefit analysis. It should largely ignore the 6,000 companies in question and focus on my RG. But the RG companies are "audited" by the Big 87654 and represented by BigLaw firms. Precisely. The audit requirement has nothing to do with accounting fraud at smaller SEC registrants. It's just more form-filling. Read Tom Selling's comments at my 30 October 2009 post:

Tuesday, November 17, 2009

I Remember

"On Monday, June 5, 1967, we woke up and turned on the TV, and before our ears had disgested even the first word we knew there was war. We didn't see Barbara Walters on the 'Today' show; instead there was a stagehand pinning a map of the Middle East onto an easel and an insecure commentator saying, 'That's all we have from the war zone at this time. When further word is forthcoming we'll relay it to you without delay.' The Arab communiques were bone-marrow-curdling. 'Two Egyptian tank columns are knifing through the Negev [southern Israel], blared Radio Cairo; 'Haifa is in flames.' The scary part, for those who side with Israel, was that Israel said nothing. Nothing! ... Israeli Gen. Chaim Herzog came to America and appeared on my radio show. 'General Herzog,' I began, 'You knew before we in America even woke up Monday morning that you'd destroyed five Arab air forces on the ground, you'd pierced Egyptian defenses in Gaza, you'd taken Khan Yunis, there was nothing between there and the Suez Canal to stop you; you knew you were going to storm East Jerusalem the next day, you knew you were saving Syria for Thursday. Why did you give friends of Israel heart failure by--for the first time in history--concealing victory?' 'You see,' explained Herzog, 'we knew that as long as the the world believed Israel was losing, the United Nations would do nothing.' So, as long as the world though Israel had come to an end, the [UN] would remain glassy-faced and silent. Only when they learned that Israel was the winner would the international wailing for cease-fire and withdrawal and the rest begin", original italics, my emphasis, Barry Farber (BF), 3 November 2009, link:

I remember this show. I consider BF one of the great all time talk radio show hosts. See my 14 January 2009 post: The 1967 war made me pro-Israel and convinced me Israel's Arab neighbors are genocidal maniacs. Sooner or later the West will crush them or be crushed by them. The Arabs bragged about "driving the Jews into the sea" and drowning them all. Anyone who wonders about the relative "rightness and wrongness'" of the various parties claims in the area should think about that. Question: What really happened with the "Liberty Fiasco"? I also mentioned BF on 7 December 2008:

Where's the SEC?

"One year after the government took over and bailed out Freddie Mac, the giant mortgage company, federal regulators are blocking former employees from revealing infomation to investors who are suing the company for fraud, lawyers for shareholders say. ... Federal prosecutors in Virginia and the [SEC] are already investigating whether the company misled investors about the risks it was taking with securities backed by subprime mortgages and no-document loans. But in a battle that will surface on Friday in a federal courtroom in New York, the company and its primary government overseer, the Federal Housing Finance Agency [FHFA], are trying to enforce secrecy agreements that scores of former employees signed as a condition for receiving severance payments when they left the company. ... But, barring a court order, the former employees are prohibited from cooperating with anyone in a civil lawsuit against Freddie Mac", my emphasis, Edmund Andrews at the NYT, 23 October 2009, link:

Well Mary Schapiro? What are you waiting for? Why not pass an edict that no SEC registrant may make such a pact with a former employee? Who does the SEC protect anyway? What is Freddie and the FHFA trying to hide?

Monday, November 16, 2009

Oxford in Boulder

"But this Halloween, one of its wackiest traditions is under siege: the Naked Pumpkin Run [NPR]. ... For nearly a decade, naked pumpkin runners did their thing unmolested, stampeding through the frigid dark past crowds of admirers who hooted, hollered and tossed cady. ... All [police] have orders to arrest gourd-topper streakers as sex offenders. ... The American Civil Liberties Union has fired off a letter accusing the police of violating citizens' consitutional rights to express whatever it is they're expressing when they slip hollowed-out pumpkins over their heads and race buck naked down the Pearl Street pedestrian mall. ... Oleg Abramov, a 31-year-old planetary scientist, says it's an excruciating choice. He loves the run; he calls it a 'liberating and somewhat surreal community arts project.' But being labeled a sex offender could ruin his career. ... More recently, Boulder has played host to an annual Naked Bike Ride to protest dependence on fossil fuels. And the Boulder Daily Camera, the local newspaper, serves up a steady diet of stories about clothes-free joggers and nudist gardners. ... Given that the [NPR] starts at 11 p.m., long after young trick-or-treaters have retired, and given that the route is packed with fans who come out specifically to see the event, runners argue that it's absurd to think that their prank is causing either affront or alarm. ... Police acknowledge that they have not been flooded with pumpkin-run-related complaints, but say that's beside the point. A throng of naked people with jack-o-lanterns on their heads is by definition, an alarming sight, Chief [Mark] Beckner says. Therefore, it's illegal. Those convicted of indecent exposure rarely get jail time, but they must register as sex offenders, just as rapists do. Which seems a bit excessive to Boulder County [DA] Stan Garnett", my emphasis, Stephanie Simon at the WSJ, 31 October 2009, link:

In 1968 or 1969 I attended a lecture by Commander Whitehead of Schweppes Tonic Water fame. He spoke of two Owford dons who swam naked in a lake. A few co-eds went by. One wrapped his "privates" in a towel. The other wrapped his head in a towel. The first said to the second, "That's extraordinary". The second replied, "Not at all. On this campus I am generally recognized by my face". So it is in Boulder. Laugh! A law which does not distinguish streakers from rapists should be repealed. Boulder has too many cops. It should fire some. Starting with Beckner.

Citigroup's Death Rattle

"Over the past 80 years, the [US] government has engineered not one, not two, not three, but at least four rescues of the institution now known as Citigroup. In previous instances, the bank came back from the crisis and prospered. ... Chris Whalen, editor of the Institutional Risk Analyst, calls Citigroup 'the queen of the zombie dance,' referring to the group of financial institutions that the government has on life support. 'They are hoping that a combination of bank assistance and maximizing revenue and buying time will let them survive,' he said. 'When I look at the whole picture, Citigroup is in the process of resolution. I continue to believe the equity is worth zero and that the company will have to go to the bondholders for some kind of money to make the bank stable.' ... 'Our distinctiveness is we connect the world better than anyone else,' [Vikram Pandit] said, noting Citigroup's global reach. ... "it's very hard to change perceptions in the market place,' he said. 'We are not a troubled bank. We have a lot of assistance from the government. We can't fight that.' ... One ugly class of securities continues to haunt the bank: collateralized debt obligations, or CDOs. ... The suit contends that by late 2006, Citigroup's CDO operations 'had devolved into a Ponzi scheme where unsold portions of older CDO securitizations were recycled as the asset base for new CDO securitizations.' Furthermore, the lawsuit saysm Citigroup executives engaged in various accounting gimmicks to conceal the bank's ownership of assets that eventually soured", Andrew Martin & Gretchen Morgenson at the NYT, 1 November 2009:

I agree with one thing VP said, Citigroup is not a "troubled bank". It is the "troubled bank". See my 15 December 2007 post about SIVs: Imagine Citigroup paid $800 million to buy VP's "team", my 7 January 2009 post:

Sunday, November 15, 2009

Vampire Squid Values

"Sure, firm trumpet their values and missions. Goldman Sachs has 14 business principles, many of which could apply to a preschool. ('We stress creativity and imagination.')", Daniel Gross at Newsweek, 2 November 2009, link:

I mentioned the Vampire Squid's (VS) values on 24 October 2008: Hahahahahahaha the Mogambo Guru would say. Here's principle 1, "Our clients' interests come first. Our experience shows that if we serve our clients well, our own business success will follow". Ya gotta hand it to Lloyd Antoinette Blankfein. He lacks the decency to remove VS's principles from its website. Here's a link, don't laugh too hard:

SEC-DOJ Dilemma

"On Monday, US District Judge Jed. S. Rakoff told the [SEC] to be ready to begin the civil insider-trading trial in five months. ... Ordinarily, civil and criminal investigators coordinate their activities. In instances where both file charges, most judges allow the government to 'stay,' or postpone the SEC case until the criminal case is completed to avoid complicating the criminal matter, according to lawyers and people familiar with the situation. ... That is possible since the SEC wouldn't want to jeopardize the government's criminal case, lawyers say. The [DOJ's] US Attorney's office in Manhattan declined to comment, as did a lawyer for [Raj] Rajaratnam. ... 'Defendants in criminal cases don't have that ability. In a criminal case, the first time a defense lawyer may see critical witnesses is in the courtroom when they're testifying,' [Michael Schacter, Wilkie Farr & Gallagher lawyer said]. ... If the SEC withdraws its case, it could be another blow for the agency, which has drawn fire from its critics recently. ... The ruling puts the spotlight back on Judge Rakoff, whose harsh SEC rulings recently have been on display. In August, the judge critcized the SEC's $33 million settlement with [BofA] Corp. over disclosure of bonuses following the bank's purchase of Merrill Lynch last year. ... Judge Rakoff has long experience in insider-trading cases. As a defense lawyer before being nominated to the federal judiciary, Mr. Rakoff represented Martin Siegel, the Kidder, Peabody & Co. investment banker, who the US alleged passed inside information about takeover deals to Ivan Boesky in exchange for suitcases of cash in the 1980s. Mr Siegel pleaded guilty to securities fraud. ... An SEC trial in advance of a criminal trial would give defendants the opportunity to depose, or interview the government's witnesses in the case. The government doesn't want to have its witnesses on the record saying anything before its put them on the stand under oath. ... Judge Rakoff in 2005 refused to postpone an SEC civil suit against Anuradha Saad, chief executive of a cancer-information company, and other executives, who were also charged by federal prosecutors. ... In an opinion rejecting the postponement, Judge Rakoff noted that because the litigation was both a criminal and civil matter, the defendants were 'fully entitled to to the timely discovery that federal law grants them in defending such an action.' In the decision, he said 'parallel proceedings' of the US Atttorney and SEC had 'bizarre aspects' and that it is 'stranger still' that the two can combine their efforts in a case 'against some hapless defendant'," my emphasis, Susan Pulliam and Kara Scannell at the WSJ, 27 October 2009, link:

More WSJ editorializing in a news article. What "harsh" rulings? I like Rakoff more every day. Preet Bharara (PB) why not let Rajaratnam depose "your" witnesses? Are you afraid they might be impeached with inconsistent statements? Or your coaching them to give perjured testimony might be exposed? Would you suborn perjury? Would you buy my bridge over the East River? It's only $1 billion. Well PB? Will anything like this happen to Lloyd Antoinette Blankfein? hah! This case looks like another DOJ waste of time.

Saturday, November 14, 2009


"Russia withdrew a $22.7 billion lawsuit against Bank of New York Mellon Corp. Thursday, agreeing to a $14 million settlement and ending a case that critics said had theatened to further tarnish the already battered reputation of its judicial system. ... Russian officials, facing a deep recession and their first budget deficit in a decade, welcomed the financing, which they said would amount to $4 billion over five years. Matthew Biben, deputy counsel for the bank, called the deal a 'commonsense resolution.' ... In 2005, the bank paid $14 million in a nonprosecution agreement with the US government. ... After heavy lobbying by US officials, the Russian government last year decicded to settle the case. Negotiations took months, however", my emphasis, Gregory White at the WSJ, 23 October 2009, link:

I mentioned the BNY case on 8 October 2009, link: I then wondered if "Russia got other concessions". Now the $400 million loan is $4 billion, an order of magnitude greater. Wait, will we see that the real source of the loan is Zimbabwe Ben & Co.? Why did US officials lobby for a bank?

Lenin Visits New York

"An old saying goes that the time to live in New York is when you're young and poor, or old and rich--otherwise, you're better off somewhere else. ... Between 2000 and 2008, the Empire State had a net domestic outflow of more than 1.5 million, the biggest exodus of any state, with most hailing from New York City. The departures also have perilous budget consequences, since they tend to include residents who are better off than those arriving. Statewide, departing families have income levels 13% higher than those moving in, while in New York County (home of Manhattan) the difference was even more severe. ... In 2006 alone, that swap meant the state lost $4.3 billion in taxpayer income. Add that up from 2001 through 2008, and it translates into annual net income losses somewhere near $30 billiion. ... That pattern is consistent with the annual migration patterns, showing that highly taxed and economically lackluster states were most likely to end up in residents' rear view mirrors. According to the annual study by United Van Lines, states like New York New Jersey, Michigan and Illinois have been big losers in recent years. ... Liberals continue to insist that they can raise taxes ever higher without any effect on behavior, but the New York study is one more piece of evidence that this is a destructive illusion", Editorial at the WSJ, 28 October 2009, link:

Lenin gets around pretty well for a dead guy. After visiting California, my 10 July 2009 post, he is now making the rounds east of the Mississippi, link:

Friday, November 13, 2009

No Tax Relief in Death

"With the federal estate tax disappearing for most people, state death taxes have emerged as a new worry. ... At the current level, only 5,500 estates a year are federally taxable. ... The problem is that most states with estate or inheritance taxes haven't raised exemptions to meet federal limits. That means thousands of taxpayers who now escape the federal levy could still get hit with a state death tax. As a result, tax advisers are tweaking bypass trusts that allow married couples to maximize exemptions from state taxes. They are advising taxpayers where to retire in order to pare or eliminate estate taxes. And they are counseling out-of-state taxpayers so that they don't get dinged for property they own in a state with a tough death tax. ... Others warn that even taxpayers who live in states without estate taxes, such as Florida or California, risk unpleasant surprises if they also own property in a state that does have one. ... This means that a taxpayer could live in estate-tax-free Florida, California or Texas and even spend most of his time there. But if he keeps an apartment in New York or a summer home on Cape Cod and has other ties to the area the properties might be assessed at death", Laura Saunders at the WSJ, 31 October 2009, link:

If you own any out-of-state property have your estate planner review its potential for taxability or to change your "domicile". If you don't, you might subject your estate to an unpleasant surprise.

Jeremy Siegel on the EMH

"Financial journalist and best-selling author Roger Lowenstein didn't mince any words in a piece for the Washington Post this summer, 'The upside of the current Great Recession is that is could drive a stake through the heart of the academic nostrum known as the efficient-market hypothesis.' ... But is the Efficient Market Hypothesis (EMH) really responsible for the current crisis? The answer is no. The EMH, originally put forth by Eugene Fama of the University of Chicago in the 1960s, states that the prices of securities reflect all known information that impacts their value. The hypothesis does not claim that the market price is always right. ... The fact that the best and the brightest on Wall Street made so many mistakes shows how hard it is to beat the market. ... Regulators wrongly believed that financial firms were offsetting their credit risks, while the banks and credit rating agencies were fooled by the faulty models that underestimated the risk in real estate. ... From 2000 through 2006, national home prices rose by 88.7%, far more than the 17.5% gain in the consumer price index or the paltry 1% rise in median household income. Never before have home prices jumped that far ahead of prices and incomes. This should have sent up red flags and cast doubts on using models that looked only at historical declines to judge future risk. But these flags were ignored as Wall Street was reaping large profits bundling and selling the securities while Congress was happy that more Americans could enjoy the 'American Dream' of home ownership. Indeed, through government-sponsored enterprises such as Fannie Mae and Freddie Mac, Washington helped fuel the subprime boom. ... With few exceptions (Goldman Sachs being one), financial firms ignored these warnings. CEOs failed to exercise their authority to monitor overall risk of the firm and instead put their faith in technicians whose narrow models could not capture the big picture. One can only wonder if the large investment banks would have taken on such risks when they were all partnerships and the lead partner had all his wealth in the firm, as they were just a few decades ago", my emphasis, Jeremy Siegel (JS) at the WSJ, 28 October 2009, link:

JS is a Wharton professor, (boo), Fama is a Chicago professor (yay). I agree with JS. The models fail the EMH's "weak form", i.e., in relying on "historical information" they were a form of "technical stock market analysis". No Chicago grad since 1972 should have been fooled by this. For that matter, no: Wharton, Stanford, Tuck or ... grad since 1972 should have been fooled the rating agencies models. Well, maybe a Tuck grad. If Wall Street's "best and brightest" were fooled by what was covered in Finance 301 (1972 Chicago house number), how smart are they? Are they worth tens of millions a year? I mention JS on 29 April 2008 and 11 March 2009:

Thursday, November 12, 2009

Not So Odd Couple

"As the world begins recovering from the worst financial crisis in 70 years, an odd couple of winners have emerged: stocks and gold. So far this year, the Dow Jones Industrial Average, a bet on economic recovery, is up 14%. Gold futures, a bet on calamity, are up 19%. ... But the creation of all that money, together with the [Fed's] maintenance of near-zero benchmark interest rates and the prospect of heavy government borrowing to fund deficits, threatens to weaken the dollar and fuel inflation and economic volatility later. ... 'In 5,000 years of human history, gold has been the currency of choice, the store of value, when humans have called into question their governments' efforts to solve problems by running printing presses' and injecting money into the economy, says Michael Avery who helps oversee the $22 billion Asset Strategy funds of asset-management firm Waddell & Reed in Overland Park, Kan. ... Just a few years ago the idea that paper monety was somehow suspect and gold was the best store of value was the province of a frightened few. No longer. In recent months, gold has been pushed to new highs as investors who once considered precious metals archaic have been shifting funds in that direction to avoid a too-heavy exposure to Western currencies", my emphasis, ES Browning at the WSJ, 26 October 2009, link:

I see gold and the Dow rising as manifestations of a decrease in the dollar's value. If stocks, excepting financials, represent claims on real assets, as the numeraire, dollars, decreases in value, gold and stocks should rise as expressed in dollars. This is more terrible reporting from the WSJ, which cannot separate its news and editorial pages.

Moody's Exonerated

"Moody's Corp., the owner of credit-ratings firm Moody's Investors Service, boosted its profit forecast for the year as a boom in corporate-debt issuance helped it maintain operating margins of almost 40%. The New York-based company also said an external investigation into allegations of impropriety by a former analyst has been completed and found no evidence of wrongdoing. ... Moody's had engaged a law firm to conduct the investigation into Mr. [Eric] Kolchinsk'y complaint. 'Investigators found that the allegations were not supported by facts and were without merit,' Moody's Chief Executive Raymond McDaniel said in a conference call on Thursday. ... Rep. Edolphus Towns (D, NY), chairman of the House Committee on Oversight and Government Reform, said the committee is still examining the matter and on Thursday sent a formal request to Moody's for a report of the investigation and copies of records provided to the law firm. An SEC spokesman declined to comment", Serena Ng at the WSJ, 30 October 2009, link:

Big deal. Another nothingburger investigation by a "board-hired law firm". Why would anyone pay any attention to such report? I last mentioned Kolchinsky on 19 October 2009:

Wednesday, November 11, 2009

Leave No Child Behind

"More states lowered their standards for academic proficiency in recent years than raised them, and nearly all used exams that fell short of federal testing benchmarks, accorsding to a new study. ... It also cast doubt on claims of educational progress made by many states. ... The federal [NCLB] law requires all students to be proficient in reading and math by 2014, but leaves to each state the job of measuring achievement. ... The study of 47 states compared test scores of fourth-grade and eighth-grade students in reading and mathematics in 2005 and 2007. The differences found were especially stark between states considered to have the highest proficiency standards--such as Massachusetts and South Carolina--and those with the lowest, including Tennessee and Mississippi. A Tennessee child in fourth-grade math, for example, would be considered proficient with a state score equivalent to 198 on the NAEP exam. A child in Massachusetts would need to score 254. ... A student deemed proficient in Massachusetts would be five or six years ahead of a proficient Tennessee math student, according to researchers", my emphasis, John Hechinger at the WSJ, 30 October 2009, link:

NCLB is and always was a farce. Suppose it required all fifth-graders to be 5' 10" tall, what then? People might realize how absurd it is.

Citigroup's Fraudulent Loans

"A judge ruled that loans made to Tousa Inc. ahead of the home builder's bankruptcy filing were 'fraudulent transfers,' ordering lenders to turn over more than $600 million. ... The 'disastrous business venture,' Judge [John] Olson wrote, spurred Tousa to borrow $500 million from Citigroup Inc. and others in July 2007, just six months before Tousa filed for Chapter 11. ... In bankruptcy proceedings, a judge can find certain debt deals to be fraudulent transfers if a company was insolvent when taking on new liabilities. Such deals can also be deemed fraudulent if they leave a company with insufficient capital to pay debts when they come due. After a 13-day trail in August, Judge Olson ruled that Tousa's relevant subsidiaries were insolvent at the time they took on the new debt. The judge also noted that the transaction made Tousa 'even less solvent.' The judge also concluded that Tousa's senior lenders 'did not act in good faith' and were 'grossly negligent.' Tousa executives and lenders pressed forward with the deal in part to reap bonuses and fees, the judge wrote in Tuesday's ruling. The judge also faulted Alix-Partners LLP, a turnaround firm hired by Tousa to give a solvency opinion, noting it stood to get $2 million in fees by delivering a favorable analysis", Mike Spector at the WSJ, 15 October 2009, link:

Good Judge Olson. It's nice to see Citigroup kicked in the keesta. These loans do not surprise me. What's surprising is how rarely they are exposed.

Tuesday, November 10, 2009

Yield Curve

Hellacious at Sudden Debt has an interesting 29 October 2009 post on the yield curve's (YC) shape: While agreeing with his conclusion, i.e., the YC will flatten, we disagree as to why the YC is so highly sloped and what its slope means. I say the YC will flatten when Zimbabwe Ben's hand is twisted by the foreign exchange markets and he is forced to let short-term interest rates rise. Well done Hellacious!

I'm Available

"On Tuesday, Senator Jeff Merkeley, Democrat of Oregon, and Senator Bob Corker, Republican of Tennessee, intorduced legislation to allow the Government Accountability Office to audit some of the [Fed's] lending programs. Different bills calling for more comprehensive Fed audits already have widespread support in the House and Senate. Expanding this oversight is long ovedue", William Barnett at the NYT, 23 October 2009, link:

Audit? I'm available Zimbabwe Ben. Just send me an e-mail and I'll go to Washington and give you an estimate.

Incentives Still Count

"In the annals of what used to be known as American capitalism, yesterday will go down as a sorry day: The Treasury and [Fed] announced wage controls on private American companies. So once again our politicians are blaming bankers, rather than addressing the incentives the politicians themselves created for bankers to take excessive risks. ... We certainly have no sympathy for bankers who've been bailed out, and the most defensible of yesterday's pay curbs are those announced by Treasury's 'pay czar' Ken Feinberg. ... Those companies--and executives--owe their survival to political intervention, and the price of such taxpayer help is inevitably some populist retribution. ... But the danger is that these pay limits will drive the most talented people at these firms to other companies without such onerous pay limits. ... The irony is that judgment about what constitutes 'excessive risk' at banks will presumably be made by the same Fed regulators who let Citigroup put hundreds of billions in SIVs off its balance sheet. That certainly looks 'excessive' now, though apparently it didn't amid the credit mania. The point is that Fed officials aren't likely to have a clue what kinds of risks warrant tighter compensation rules. And these new guidelines may also drive the best and the brightest out of the banks and into less regulated institutions", my emphasis, WSJ Editorial, 23 October 2009, link:

"Tis a consummation devoutly to be wished", Hamlet 3:1:6, that the "best and the brighertst" are driven from our banks. Regulated institutions don't need them. Feinberg may be smarter than I think. Driving the "best and the brightest" from the banks may be in Yves Smith's parlance, "A feature, not a bug", a backdoor to a new "Glass-Steagall". The WSJ does not take the Big 87654 and SEC to task here. Isn't Citigroup an SEC registrant? What does the SEC look at? Isn't Citigroup "audited" by KPMG, whatever that means? Isn't KPMG "reviewed" by the PCAOB, whatever that means? Regulation is the cover up of the cover up. No one blows the whistle. Why? Feinberg applied pay controls to seven companies after "Vampire Squid" repaid its TARP money. Hmm. How about this Feinberg: prevent any bank holding federally insured deposits from lending to a TARP recipient?