Wednesday, March 24, 2010

BofA Attorneys Abuse

"Attorneys for Bank of America Corp. [BofA] have agreed to reimburse lawyers for a Miami developer after a US bankruptcy judge in Florida criticized the bank's lawyers for trying 'to score a litigation point' in an ongoing foreclosure dispute. ... The judge scolded the attorneys for putting potentially defamatory fatcs in the pleading without investigating them fully. ... The rebuke is an extreme example of how lenders can end up on the wrong side of a judge when they make mistakes while moving aggressively against delinquent borrowers. It comes as growing stress in commercial real estate is sparking battles between owners and creditors throughout the country. ... [BofA] attorneys apologized in open court for not conferring with Cabi first before including the accusations in their pleadings. 'I regret and apologize on my behalf and on behalf of the bank for the mistakes,' said H. Peter Haveles Jr., a Kaye Scholer [KS] attorney. ... But Cabi, an affiliate of Mexico's Cababie family and the company, Grupo Gisca, filed for Chapter 11 protection the same day, halting any foreclosure attempt. ... Cabi's attorneys have said the bank's refusal to lower the condos' minimum price slowed sales, harming the project", Christina SN Lewis at the WSJ, 10 March 2010, link:

We know KS. Here's a link to my 31 January 2009 post: What will happen to KS from this? Likely nothing.

Tuesday, March 23, 2010

Death Bonds-2

"In a little-known practice, investors can recruit a terminally ill person and together they can scoop up these bonds on the open market for a discount. when the ailing bondholder dies, the surviving co-owner can then redeem them at face value and potentially turn a quick profit. ... But the market's turmoil has made this arrangement more attractive for professional investors, since some bonds are traded at a steep discount. Legal and financial experts say there is nothing to prevent investors from buying the bonds with a dying relative or even a stranger who is terminally ill. ... One investor who scored big on the money-back guarantee is Joseph A. Caramadre, an estate-planning lawyer in Cranston, RI. From 2006 to 2009, Mr. Caramadre recruited several dozen terminally ill people to serve as joint brokerage-account holders. He then brouight survivor's-option bonds trading below face value for each account, according to Mr. Caramadre's lawyer and federal court records filed in Providence, RI, over how to pay out proceeds from the investments. ... While issuers didn't intend for them to be used to make a quick buck, [Edward Best] said, 'there are people out there who will figure out how to game almost anything in the world'," Mark Maremont and Aparajita Saha-Bubna at the WSJ, 10 March 2010, link:

What's the problem here? Should only banksters be permitted to game the system? There would be no problem if the Vampire Squid were syndicating these bonds and reaping a nice fee for doing so.

Monday, March 22, 2010

Lehman's Enablers

"A bankruptcy examiner's report about the accounting practices at Lehman Brothers Holdings Inc [LBHI] is filled with legally charged language, calling the bank's financial statements 'materially misleading' and saying its executives engaged in 'actionable balance sheet manipulation.' ... But legal experts say hurdles remain to criminal prosecutions that, while potentially surmountable, also could be significant. ... The examiner wrote there was 'sufficient evidence' to support a legal claim that Mr. [Richard] Fuld was 'at least grossly negligent for failing to ensure' Lehman filed proper financial statements about its accounting for the transaction, and that a key former executive of the firm, the chief operating officer, personally briefed him on the matter. ... But legal experts say the report can and likely will be used as a roadmap for the Justice Department and other agenceis considering charges or lawsuits. Representatives for the [SEC] and US attorney's offices in Manhattan and Brooklyn declined to comment. ... Another hurdle: Lehman had the blessing of its outside auditor, [E&Y], which had reviewed its quarterly earnings reports in 2008 and was briefed on concerns about Repo 105 accounting, the report said. ... [E&Y] has said the accounting for the repo transactions complied with generally accepted accounting principles", Amir Efrati & Ashby Jones at the WSJ, 13 March 2010, link:

Blessing? Big 87654 firm? So? Didn't they bless backdated stock options? Didn't E&Y sanction the ".001" standard? Who cares what E&Y thinks? E&Y should be indicted for securities fraud along with anyone at LBHI who sanctioned the Repo 105 accounting. Disagreeing with the "legal experts", I think drafting indictments and securing convictions should be easy here. Just "flip" the supposed "advice of counsel" defense to "you secured professional advice to make it appear you wanted it as opposed to creating an after the fact rationalization". Then let the jury decide.

Tyler Durden had an interesting 14 March 2010 post on E&Y's Lehman adventure at Phil's Stock World, link:

Sunday, March 21, 2010

Whose Reserves?

"Argentine President Cristina Kirchner on Monday sidestepped stiff Congressional resistance to spending foreign reserves for debt payments, issuing a pair of decrees shifting about $6.6 billion from the central bank to the Treasury. ... The first decree allocates $2.2 billion in foreign reserves to pay international organizations, while a second orders the central bank to hand over $4.2 billion for other public-debt payments. The moves will help Argentina make the estimated $13 billion due in debt payments this year", Shame Romig at the WSJ, 2 March 2010, link:

There is no law anywhere when it comes to governments. Governments are the worst of all debtors to collect from. To do so, you need your own army.

Saturday, March 20, 2010

Lehman's Fiddles

"A scathing report by a US bankruptcy-court examiner investigating the collapse of Lehman Brothers Holdings Inc. [LBHI] blames senior executives and auditor Ernst & Young [E&Y] for serious lapses that led to the largest bankruptcy in US history and the worst financial crisis since the Great Depression. ... The document runs thousands of pages and contains fresh allegations. In particular, it alleges that Lehman executives manipulated its balance sheet, withheld information from the board, and inflated the value of toxic real estate assets. ... The examiner said in the report that throughout the investigation it conducted regular weekly calls with the SEC and Department of Justice. There have been no prosecutions of Lehman executives to date. ... Mr. [Anton] Valukus, chairman of law firm Jenner & Block, devoted more than 300 pages alone to balance-sheet manipulation, accusing Lehman of using accounting methods to move assets off its books. But because the moved assets represented 105% or more of the cash it received in returns, accounting rules allowed the transactions to be treated as 'sales' rather than financings. The result: Assets shifted away from Lehman's balance sheet, reducing the amount of debt it showed to investors. ... Lehman's own global financial controller, Martin Kelly, told the examiner that 'the only purpose or motive for the transactions was reduction in balance sheet' and 'there was no substance to the transactions.' Mr. Kelly said he warned former Lehamn finance chiefs Erin Callan and Ian Lowitt about the maneuver, saying the transactions posed 'reputational risk' to Lehman if their use became publicly known. ... Mr. Valukus' report is among the largest undertakings of its kind. Those singled out in the report won't face immediate repercussions. Rather, the report provides a type of roadmap for Lehman's bankruptcy estate, creditors and other authorities to pursue possible actions against former Lehman executives, the bank's auditors and others involved in the financial titan's collapse. ... One party singled out in the report is Lehman's audit firm, [E&Y], which allegedly didn't raise concerns with Lehman's board about the frequent use of the repo transactions. ... '[E&Y] took no steps to question or challenge the non-disclosure by Lehman of its use of $50 billion of temporary off-balance sheet transactions,' Mr. Valukus wrote", Mike Spector, Susanne Craig & Peter Lattman at the WSJ, 12 March 2010, link:

"Many executives inside [LBHI] quietly fretted about the firm's accounting as the company headed to the brink in September 2008. Matthew Lee did something about it. In May 2008, the former Lehman senior vice president wrote a letter to senior management warning that the company may have been masking the true risks on its balance sheet. ... His warnings, disclosed for the first time in a report by a US bankruptcy-court examiner, could trigger legal consequences for Lehman's auditor [E&Y], as well as former senior officials. ... 'We are dealing with a whistle-blower letter, that is on its face pretty ugly and will take us a significant amount of time to get through,' William Schlich, a former lead partner on [E&Y's] Lehman team, wrote in a June 5, 2008, email to a colleague, which is included in the examiner's report. ... In a June 12, 2008 interview with [E&Y], Mr. Lee raised the issue that Lehman was moving as much as $50 billion off its balance sheet, using a practice the firm called 'Repo 105,' the report says", Michael Corkery at the WSJ, 13 March 2010, link:

We know E&Y. Substance over form? From the Big 87654? You're joking! E&Y accepts the ".001 standard", my 5 March 2008 post: Did Uncle Sam know about LBHI's accounting chicanery? Probably. See my 6 February 2008 post: Yves Smith has a related 11 March 2010 post at her Naked Capitalism:

Thursday, March 18, 2010

China Buys Dollars?

"China's chief foreign-exchange regulator suggested the country's appetite for further gold purchases may be limited and offered soothing words about China's role as an investor in US Treasurys. 'Gold is not a bad asset, but currently a few factors limit out ability to increase foreign-exchange investment in gold,' said Yi Gang, director of China's State Administration of Foreign Exchange. ... China rarely revels its thinking on investment of its foreign-exchange reserves, which at $2.4 trillion are the world's largest. ... Mr. Yi said the past 30 years have shown that the return on gold hasn't been that great and that given China's heft as a gold buyer, any move it makes to purchase the precious metal would 'certainly' increase gold prices. ... China is the world's largest producer of gold and the second-largest consumer behind India, based on data from the World Gold Council", Aaron Back at the WSJ, 10 March 2010, link:

Suppose Yi is buying gold? Would he tell us? Got gold? Get more. Got bonds? Sell 'em to Yi. If he'll take them.

Executive Short-Sellers?

"For investors in Switch & Data Facilities, a telecom services startup, 2008 was a wild year. From a low of 8.60 in mid-March, shares more than doubled, to 18.17 three months later. ... One shareholder avoided much of that drop [to 4.21]: the CEO. On June 19, the day the stock peaked, [Keith] Olsen contracted with an investment bank to hedge 150,000 shares-- a quarter of his stock in the company--against losses if the price fell below 18. ... Olsen, who disclosed his hedging in public filings, declined to comment for this story. ... But the way hedging is done by CEOs, directors and other senior executives may deprice investors of clues about impending problems at companies. ... 'There is no question that these transactions should be a red flag for investors,' says Carr Bettis, the co-founder of forensic accounting firm Gradient Analytics and co-author of a recent study on hedging. ... Some 107 instances of hedging were reported to the [SEC] in 2009, up from a decade low of 48 in 2007, according to Bettis, and regulators are beginning to scrutinze these transactions. ... 'We wanted to make sure they couldn't undercut the links we created between compensation and long-term performance,' says [Kenneth] Feinberg. If executives at the companies could hedge their stock, he adds, 'they wouldn't have to worry about how [the stock does.' ... In a case pending before US tax court in Washington, the IRS is arguing that [Philip] Anschutz's deals were effectively stock sales rather than hedges, as is seeking $143.6 million in capital gains taxes. ... If the IRS wins its case, these hedgers could face big tax bills earlier than expected. Anschutz disputes the IRS's argument and would not comment for this story. ... Because he still technically owns the shares, the IRS doesn't consider a hedge a sale so long as the bank doesn't short the executive's own shares. So the executive need not pay capital gains taxes until the hedge expires. Meanwhile, he can still vote the shares and collect dividends. ... The hedge business helps the banks cement ties with top executives, which comes in handy when a bank is pitching other services. And the banks reap rich fees. ... Roughly 11% of the companies where an executive used a collar had to restate financials within two years of the hedge transaction: comparable companies where no hedging occurred had half as many restatements, Bettis says. ... 'The poor performance following hedging suggests a number of these trades are potentially based on privileged information,' argues Bettis. The trades 'appear to be tied to events that were known or could reasonably have been anticipated by the executives,' he adds", Jane Sasseen at Businessweek, 8 March 2010, link:

The SEC should ban this practice. Period. The SEC wants to limit short-sellers actions, but permits this. Amazing. The IRS should win its case against Anschutz.

Wednesday, March 17, 2010

UBS's New Savior

"Oswald J. Grubel gave a dazzling performance as head of Credit Swiss from 2004 to 2007, doubling the Swiss bank's profit and share price. ... The CEO has made no progress, however, on the bank's most pressing problem: withdrawals by wealthy clients, who have removed $214 billion over the past seven quarters. The outflow increased in the fourth quarter and will probably continue, analysts say, as uncertainty persists about the outcome of US efforts to investiagte alleged tax evasion by UBS clients. ... Grubel, known as 'Ossie,' says he is counting on the return to profitability to help make UBS 'a trusted bank again. ... UBS's tax dispute with the US will only complicate Grubel's task. ... The Swiss adminstrative court muddled the picture last month by blocking the government from passing some of the data to US authorities; judges ruled that the failure to file certain IRS forms, a key part of the UBS settlement, wasn't considered fraud in Switzerland", Elena Logutenova at Businessweek, 22 February 2010, link:

If UBS doesn't want to serve its clients by keeping their data from the IRS, it will lose them. Eventually these people will realize when push comes to shove, banks and the authorities will cooperate. When that happens, these people will leave the banking system and buy gold.

Iceland Rocks!

"Icelanders roundly rejected a deal to repay the UK and the Netherlands E3.9 billion ($5.3 billion) lost in the collapse of an Icelandic Internet bank, complicated the island's bid to access badly needed international aid funding and normalize its relations with the rest of the world. ... It was Iceland's first plebecite since the island's independence from Denmark in 1944. ... The government of Prime Minister Johanna Sigurdardottir has labored for the better part of a year to get a bill through a hesitant parliament, arguing that Iceland desperately needs money from an International Monetary Fund-led bailout program. ... After those talks ended Froday with no resolution, Ms. Sigurdardottir even encouraged citizens not the vote, hoping to blunt the referendum's effect with low turnout. ... A deal agreed by Iceland's parliament in December, under which Iceland would pay back the money over 15 years but wouldn't have to make payments for the first seven, was vetoed by the island's president, Olafur Ragnar Grimsson. In a rare display of power from a normally ceremonial post, he cited mass dissatisfaction for his veto, which led to the referndum. ... Many Icelanders are angry at the giant burden placed on them to clean up a mess widely seen as the fault of greedy, high-flying bankers", my emphasis, Charles Forelle at the WSJ, 8 March 2010, link:

Good show Iceland. Will Iceland's government ignore the will of 93% of Iceland's voters? What percentage of Americans would rather see our banksters hung than bailed out? Why does Iceland need IMF aid? Is Iceland AIG, passing through $13 billion to the Vampire Squid? If the UK and the Netherlands don't like Iceland's vote, let them invade or shut up.

Tuesday, March 16, 2010


"There is no US government guarantee to protect the largest financial firms, a Treasury Department official said, as a congressional watchdog criticized the $45 billion in government aid provided to Citigroup Inc. ... 'There is no "too-big-too-fail" guarantee on the part of the US government,' Mr. [Herbert] Allison said. ... 'The market clearly perceives that there is a too-big-too-fail guarantee,' Ms. [Elizabeth] Warren said. 'That gives Citi an advantage in raising capital. ... That is very valuable to Citi.' ... 'I do not understand why it is that the [US] government cannot admit what everyone in the world knows, which is that in that week that Citigroup was a failing institution,' Mr. [Damon] Silvers said. Citigroup Chief Executive Vikram Pandit, also appearing before the panel, said the bank owes a 'large debt of gratitude' to taxpayers for aiding the firm", Michael Crittenden and Matthias Rieker at the WSJ, 5 March 2010, link:

This is a joke. Can't Uncle Sam ever stop lying? Citigroup should be closed.

The Next Pension Disaster

"BMW AG's deal to unload E3 billion ($4.65 billion) of UK pension risk to Deutsche Bank Ag's Abbey Life unit is likely to be followed by similar deals as companies seek affordable solutions to mitigate their pension problems, a cash cow for banks and insurers. ... Pensions consultant and actuaries group Hymans Robertson [HR] said it expects more companies to agree to large longevity hedging deals this year. 'we think the longevity swaps market will cover more than Pound 10 billion of liabilities this year,' up from Pound 4.1 billion in 2009, said James Mullins, a longevity swap expert at [HR]. ... Abbey Life, in partnership with specialist pension insurance company Paternoster, are insuring the plan against the risk that around 60,000 retirees live longer than expected. BMW will pay a premium for the insurance, while Deutsche Bank will spread the risk among a consortorium of reinsurers, including Hannover Re AG, Pacific Life Re and Partner Re. ... One appeal of longevity hedging is that it doesn't require a major upfront cost. Paternoster business development executive Myles Pink said. Instead the company pays a monthly premium for the insurance. ... Hedging part of a pension plan's risk reduces the costs compared with selling the entire plan to an insurer", my emphasis, Kathy Gordon at the WSJ, 23 February 2010, link:

More terrible WSJ reporting. Spread the risk? Haven't we heard this song before? This is more derivative nonsense, another accounting scam. How can the insurers charge BWM less than the present discounted value of the "risk transferred"? How can BWM gain from this zero-sum game? Seek affordable solutions? Longevity swap expert? Hahahahaha! No upfront cost? What is the monthly payments' present value? This is absurd. BMW should fire Frederick Eichener, its CFO immediately! Does KPMG, BMW's CPAs, have anyone who understands what's going on here?

Monday, March 15, 2010

China's Real Estate Bubble

"Jack Rodman has cashed in on property busts from Los Angeles to Tokyo, buying and selling soured loans and counseling other investors. Now he's convinced the Beijing real estate market is about to tumble. ... Much of the $1.4 trillion in loans made by Chinese banks last year--with considerable encouragement from officials aiming to boost growth--was spent on skyscrapers and other commercial property. Now empty buildings are sprouting across the mainland. Beijing had an office vacancy rate of 22.4% in the third quarter, the ninth-highest of 103 markets tracked by broker CB Richard Ellis (CBRE). ... 'There's a monumental property bubble and fixed-asset investment bubble under way,' says James Chanos, founder of New York hedge fund Kynikos Associates. ... 'The Chinese authorities are clearly trying to bring excessive bank lending under control,' says Stephen Roach, the chairman of Morgan Stanley Asia. ... Now some economists are speculating that the government could allow China's currency, the yuan, to appreciate against the dollar for the first time since July 2008. ... If Beijing can't cool things off and the property boom turns to bust, there could be a surge in nonperforming loans. ... Builders, meanwhile, continue to build. ... In eastern Beijing, officials are hoping to double the size of a vast development called the Central Business District, even though the vacancy rate is 35%", Michael Forsythe and Kevin Hamilton at Businessweek, 1 March 2010, link:

Shades of Houston during the 1982-87 oil bust when office vacancy rates hit 28%! Here we go again! Is Alan Greenspan running China's central bank?

Greece Now, California Next?

"While I have long predicted the collapse of the euro and eventually the European Union, I have to admit that Greece was not even on the periphery of my radar as a potential economic flashpoint. ... The response of the European Commission and the European Central Bank has been to take a page from Henry Paulson, former secretary of the Treasury in the Bush administration, and attempt to bluff the markets. ... State bankruptcies and monetary exits from the euro may not have been envisaged, but both are going to happen anyway. ... And it should be kept in mind that this is not an abstract exercise in American schadenfreude, as the more serious question is if the [US] financial system is itself strong enough to survive further economic pressure, since a number of US states, including Illinois and California, are now facing situations very similar to Greece. There is no known mechanism for a sovereign American state to declare bankruptcy", Vox Day at WorldNetDaily, 14 February 2010, link:

So the states won't file bankruptcy. They just won't pay their bonds.

Sunday, March 14, 2010

Ken Lewis Scapegoat-3

"A federal judge harshly criticized but approved a $150 million settlement between Bank of America Corp. and the [SEC], resolving claims the bank should have disclosed billions in losses at Merrill Lynch & Co. before it was acquiired by the bank. US District Judge Jed. S. Rakoff on Monday said the fine was 'paltry' when considering the Merrill merger 'could have been a bank-destroying disaster if the US taxpayer had no saved the day.' He faulted the bank for 'hiding material information from its shareholders' and the SEC for being 'content with modest and misdirected sanctions'," Dan Fitzpatrick, Kara Scannell & Chad Bray at the WSJ, 23 February 2010, link:

This is nonsense. Could the SEC have fined the Treasury or the Fed?

No Evidence SEC

"What was new about Wednesday's vote to approve new limits on short-selling was that not even Ms. Schapiro claimed there was any evidence that short-selling is harming investors--or that her new rule will help investors. ... In fact, short-sellers make for a more efficient market by allowing all points of view to be expressed in a company's stock price. The SEC came to this conclusion several years ago when it abandoned the so-called uptick rule that had prevented a short-sale unless the last movement in the stock price had been up. ... Ms. Scahpiro's argument is essentially that, even though the SEC staff has studied the issue exhaustively and found bupkus, some investors think it's a problem and therefore they will feel good when they see the SEC regulating it. ... But what if other investors realize that limits on short-selling impede price discovery and reduce liquidity", my emphasis, WSJ Editorial, 26 February 2010, link:

The SEC never asked me about this. It may be time to send the SEC and the Fed "to sleep with the fish".

Saturday, March 13, 2010

Bargain Foreclosures?

"Johnathan Griffin, Michael Pawlak and Chris Iuso all are chasing bargains on foreclosed homes here [Las Vegas]. ... 'I thought it would be a heck of a lot easier,' said Mr. Iuso, a renter who wants to buy a home but has been outbid eight times, usually by investors able to pay cash. ... But prospective home buyers say it is increasingly difficult to find foreclosed homes at attractive prices in desirable neighborhoods. ... The bargain chase is even tougher for those buying with a loan. Investors with cash have an advantage in that their offers aren't conditional on obtaining a loan so banks often prefer selling to them than taking the risk that another offer will fall through. They are often quick to react when bargains appear", James Hagerty at the WSJ, 23 February 2010, link:

Another sign the real estate market is bottoming: cash buyers.

A Greek Specialist

"The architect of Goldman Sachs Group Inc.'s controversial 2001 trade with the Greek government is a top executive in the bank's London office with a yen for yoga and a command of Greek. Colleagues say 46-year-old Antigone Loudiadis [AL], who has a given name from classical mythology but goes by the nickname 'Addy,' was the woman behind the deal. ... Undertaken privately, it helped mask Greece's true indebtedness until recently, when the country's finances fell under deep scrutiny by public markets, critics say. ... For Goldman, the trade generated fees of as much as $300 million, according to the people familar with the matter--a windfall that left traders in the firm's London office marveling at [AL's] deal-making prowess. ... [AL] became a Goldman partner in 2000. A cerebral Oxford University graduate, she was eventually named co-head of the company's investment-banking group in Europe, making as much as $12 million in annual compensation, according to someone familar with the matter. She lives in an exclusive neighborhood in West London known for its white stucco homes. ... Educated at the Cheltenham Ladies College, an exclusive private girls' school outside London, [AL] came to Goldman from JP Morgan in 1994. ... By 2001, when those rates had become unattractive, [AL] helped Greece structure a different trade that enabled the government to continue using advantageous rates for accounting purposes", my emphasis, Kate Kelly, Cassell Bryan-Low and Dana Cimilluca at the WSJ, 22 February 2010, link:

Yen for yoga? Is AL Andropov who liked Scotch? Command of Greek? How many dollars an hour does AL get for Greek? Investors can rein in the Vampire Squid. Stop doing business with it. This is a zero-sum game. Who paid the $300 million? Where were the CPAs and analysts while this sham went on? There should not be structured trades to enable a "government to [use] advantageous rates to accounting purposes". AL and her CPA and attorney enablers should all be in prison for securities fraud.

Friday, March 12, 2010

Saving Chile

"Milton Friedman has been dead for more than three years. But his spirit was surely hovering protetively over Chile in the early morning hours of Saturday. Thanks largely to him, the country has endured a tragedy that elsewhere would have been an apocalypse. ... By contrast, Saturday's earthquake in Chile measured 8.8. That's nearly 500 times more powerful than Haiti's, or about one million Hiroshima's. ... It's not by chance that Chileans were living in houses of brick--and Haitians in houses of straw--when the wolf arrived to try to blow them down. ... Inflation topped out at an annual rate of 1000%, foreign-currency reserves were totally depleted, and per capita GDP was roughly that of Peru and well below Argentina's. ... Even before the 1973 coup, several of Chile's 'Chicago Boys' had drafted a set of policy proposals which amounted to an off-the-shelf recipe for economic liberalization: sharp reductions to government spending and the money supply; privatization of state-owned companies; the elimination of obstacles to free enterprise and foreign investment and so on. ... In fact, Pinochet had been mostly indiffierent to the Chicago Boys' advice until the continuing economic crisis forced him to look for some policy alternatives. ... Result: Chileans have become South America's richest people. They have the continenet's lowest level of corruption, the lowest infant mortality rate, and the lowest number of people living below the poverty line", Bret Stephens at the WSJ, 2 March 2010, link:

Amazing. Incentives count! I remember when we got calls from the "Chicago Boys" who wanted to confirm their advice to Chile. I was then on Chicago's campus.

Chinese Locality Borrowing

"China's local governments, which ran up huge debts in the record-breaking lending spree of the past year, are now feeling the pinch as authorities in Beijing tighten credit. ... Now regulators in Beijing, worried that local governments won't be able to pay back all their loans, are increasing their scrutiny of this kind of debt. ... Estimates of the total debt accumulated by investment vehicles set up by local governments range from six trillion yuan (around $878 billion) widely cited in the Chinese media, to the 11 trillion yuan calculated by Northwestern University professor Victor Shih. ... Several Chinese banks contacted Wednesday didn't respond to queries about such lending. Although local governments in China are generally prohibited from going into debt, most manage to circumvent the law by setting up their own companies to do the borrowing. Supported by land holdings and the promises of offficals such firms found plenty of obliging banks during the recent lending spree", Andrew Batson at the WSJ, 25 February 2010, link:

The Chinese localities are issuing Mandats and moral obligation bonds. Good luck, anyone who buys them.

Thursday, March 11, 2010

Innumerate Attorneys

"What was it like to spend nine years trying to persuade the [SEC] that Bernard Madoff was a fraud, only to learn that the agency thought he was perfectly reputable? For nine years I was the SEC's dormat. Now you're triumphant, a hero in investment circles who exposes the SEC as the most futile of agencies in your new book, 'No One Would Listen.' It was a trip though the twilight zone. ... They've reorganized. They redisorganized the enforcement unit. I actually approve of that. I think Robert Khuzami, the new head of the enforcement division, has got fire in his belly. Are you saying the SEC under Schapiro is about to catch fraud on Wall Street? She has the wrong staff. They're a bunch of idiots over there. What do you mean? The five commissioners of the SEC are securities lawyers. Securities lawyers never understand finance. They don't have the math background. Of you can't do math and if you can't take apart the investment products of the 21st century backward and forward and put them together in your sleep, you'll never find the frauds on Wall Street. ... They're overlawyered. They're poisoned by lawyers", my emphasis, Deborah Solomon interview with Harry Markopolos (HM) at the NYT, 28 February 2010, link:

HM is too kind to the SEC. It is worse than full of idiots. It is corrupt from top to bottom. That it is overlawyered and lawyers are innumerate is old news. See my 22 December 2007 post:
The SEC staffers' incentives are all wrong. That's why idiots like Meaghan Cheung work there, 18 January 2009:

Greek Military Spending

"Concerns that Greece and other struggling European nations may not be able to repay their debts are focusing attention on another bug worry: Economies across the Continent have used complex financial transactions--sometimes in secret--to hide the true size of their debts and deficits. ... Despite criticism, european leaders deemed many of these moves acceptable as they sought the long-planned currency union. ... In 2000, Grrece reported that it spent E828 million ($1.13 billion) on the military--about a fourth of the E3.17 billion it later said it spent. Greece admitted to underreporting military spending by E8.7 billion between 1997 and 2003. Portugal classified subsidies to the Lisbon subway as equity purchases. But even though the swaps prettied up the accounting, they didn't affect the underlying economics: A drop in the euro would leave Greece with a losing swap position. In 2000 and 2001, that happened, according to people familar with the situation", my emphasis, Charles Forelle and Susanne Craig at the WSJ, 22 February 2010, link:

Countries lie? About military spending? But the US spends 45% of the world's total. Sure.

Wednesday, March 10, 2010

China's Mandats

"China's local governments, which ran up huge debts during the record-breaking lending spee of the past year, are now feeling the pinch as authorities in Beijing tighten credit. ... Now regulators in Beijing, worried that local governments won't be able to apy back all their loans, are increasing their scrutiny of this kind of debt. ... Estimates of the total debt accumulated by investment vehicles set up by local governments range from six trillion yuan (around $878 billion) widely cited in the Chinese media, to the 11 trillion yuan calculated by Northwestern University professor Victor Shih. ... Several Chinese banks contacted Wednesday didn't respond to queries about such lending. Although local governments in China are generally prohibited from going into debt, most manage to circumvent the law by setting up their own companies to do the borrowing. Supported by land holdings and the promises of officials, such firms found plenty of obliging banks during the recent lending spree", Andrew Batson at the WSJ, 25 February 2010, link:

Shades of the Mandats issued during the French Revolution. Imagine, governments issuing paper backed by land. What will they think of next?

The Endless SIV

"The first step in treating Washington's spending addiction is for the political class to admit is has a problem. This means being honest with taxpayers about the debts politicians are racking up. ... The Obama Administration has refused to provide such an accounting in its official budget, which is indefensible under the traditonal rules to government-sponsored entites. ... Taxpayers have been rightly appalled at the $111 billion they've been forced to contribute to these failed housing projects since the takeover, but that figure doesn't begin to describe the taxpayer obligations. ... [The CBO] estimates suggest that the toxic twins will consume almost $380 billion from the 2008 takeover through 2020. ... What is clear is that no one in official Washington is counting the $1.6 trillion in corporate debt issued by Fan and Fred as taxpayer debt, even though we all know who's on the hook for it. Not even Citigroup maintained and off-balance-sheet SIV as big as this one", WSJ Editorial, 23 February 2010, link:

$380 billion? Sounds good to me. Government accounting stinks.

Tuesday, March 9, 2010

Israel and Iran

"The fact that Ha'aretz, Israel's left-leaning daily, found it necessary on February 17 to warn the Benjamin Netenyahu government not to attack Iran strongly suggests that the option is on the table. ... Hillary ... Clinton was quoted as saying that the 'evidence doesn't support' Iran's claim it is pursuing a peaceful nuclear program. ... Israel ... can act like an American client state, or a regional superpower. Either decision would have substantial costs. ... That is the concern of the editors of Ha'aretz: 'The chairman of the US Joint Chiefs of Staff, Admiral Michael Mullen, warned in Tel Aviv on Sunday of the unepected consequences of an Israeli attack on Iran, just as he did during the days of the [George W] Bush administration. ... No matter how much 'intelligence help' and diplomatic support' Israel might get from the [US], Israel's capacity to deliver conventional munitions at a distance of 1,250 miles (2012 kilometers) could not eradicate the Iranian nuclear program, which is located in hardened underground facilities. ... Iran's perceived attempt to acquire nuclear weapons, though, is not Israel's problem as such; the problem is that Israel is the ally of a superpower that does not want to be a superpower, headed by a president with a profound emotional attachment to a nostalgic image of the Third World. If America were in fact acting like a superpower, the problem would not have arisen in the first place, for the [US] would use its considerably greater resources to destroy Iran's nuclear program. Rather than focus on the second-order effect--the consequences of Iran's possible acquisition of nuclear weapons--Israeli analysts should consider the primary issue, namely the strategic zimzum of the [US]. The correct questions are: 1) can Israel act as a regional superpower independently of the [US], and 2) what would Israel do to establish its regional superpower status? ... To act as a regional superpower, Israel would have to take actions that shift the configuration of forces in its favor. ... First, the Sunni Arab states have a stronger interest than Israel's to stop Iran from possibly going nuclear. ... The Saudis have done everything but take out a full-page ad in the Washington Post to encourage the Obama adminstration to attack Iran. Prince Saud al-Faisal, Saudi Arabia's foreign minister, warned on February 15 that sanctions were a long-term measure while the world faces a short-term threat from Iran. Egypt reportedly has allowed Israeli missile ships to pass through the Suez Canal en route to the Persian Gulf. Secondly, Russia might well prefer to deal with Israel as an independent regional power than as an ally of the [US]. ... Russian-Israeli cooperation in a number of military fields has improved markedly during the past year, including the first-ever sale of Israeli weapons to Russia (drones) and Israeli help for the Russian-Indian 'fifth generation' fighter project", my emphasis, Spengler at the Asia Times, 17 February 2010, link:

I think Spengler has this knocked. Israel fought the Arabs in 1948 using Czech weapons. Huh? Did Stalin supply those? Yes.

NewsWEAK on College

"While nine out of 10 white students routinely get their diplomas within six years, only seven out of 10 black students made it to graduation day in several recent classes. ... The [US] once had the highest graduation rate of any nation. Now it stands 10th. For the first time in American history, there is the risk that the rising gneration will be less educated than the previous one. ... Studies show that more and more poor and nonwhite students aspire to college--but their graduation rates fall far short of their dreams. ... As the minority population grows in the [US], low college-graduation rates become a threat to national prosperity. ... The most selective private schools--Harvard, Yale, and Princeton--show almost no gap between black and white graduation rates. ... With effort and money, the graduation gap can be closed", my emphasis, Evan Thomas and Pat Wingert at Newsweek, 1 March 2010, link:

What nonsense. Newsweak should compare our current 18-year olds' educational attainments to that of say our new peer group countries, like Mexico. That the "Big Three" graduate NAMs at about the rate of non-NAMs is no surprise. They get the pick of the liter. Our second and third tier colleges admit NAM students who I think have as much business going to college as I do playing in the NBA. College is a waste of money for many, if not most current students. Reduce standards sufficiently and all can graduate. We can make college a "Caucus Race" like that of Alice in Wonderland. Pardon me. That already happened.

Monday, March 8, 2010

Kennedy on Prisons

"Justice Anthony Kennedy spoke out against excessive prison sentences this month in California, criticizing the state's deeply misguided three-strikes law. It was a welcome message, delivered with unusual force. ... Sentences in the [US] are eight times longer than those handed out in europe, Justice Kennedy said. California has 185,000 people in prison at a cost of $32,500 each per year, he said. ... Justice Kennedy took special aim at the three-strikes law, which puts people behind bars for 25 years to life if they commit a third felony, even a nonviolent one. The law's sponsor, he said, is the correctional officers' union, 'and that is sick.' ... Under the three-strikes law, a man named Gary Ewing was sentenced to 25 years ot life for shoplifting three golf clubs from a golf pro shop. ... It's not that the court is insensitive to excessive punishments. It has repeatedly thrown them out--when they are against corporations", NYT, 16 February, 2010, link:

I believe California incarcerates about 168,000 prisoners at $62,500 each per year. That said, it's too many. Three-strikes law was imposed on convenience store thieves, who took three 75 cent candy bars. California's taxpayers can spend $62,500 a year for 25 years over a $2.25 theft! Amazing.

No Fed Exit-2

"Meltzer is writing a two-volume history of the [Fed]. Few people know more about its operations. ... He is an old-timer. He will turn 82 this week. It is quite impressive that he is still writing major books. ... His article is significant because he writes from the perspective of decades of FED-watching. There are few if any FED-watchers with superior credentials, both academic and practical. When he says that the FED policies will eventually produce price inflation, we would be wise to give careful consideration to his views. ... He began by observing that Chairman Bernanke has explained his exit strategy. ... Bernanke has repeatedly said that the FED will unwind, but I am unaware of any explanation of how, exactly, the FED will accomplish this feat. It is the absence of such an explanation that leads me to believe that there is no such plan, and that the FED is unlikely to deflate the monetary base for long. ... An economist normally begins with the concept of supply and demand. In monetary affairs, as in all others, the free market clears by means of prices. The supply of loanable funds and the demand for such funds are balanced in the free market by means of a rate of interest. ... All of the FED's press announcements about setting the fed funds rate is nothing but PR flak. There is no rate to set. Banks are not borrowing, because they are not lending. They are holding excess resrves. ... In the 1970's, the FED's policies produced the worst of both worlds; high unemployment and high price inlfation. Meltzer does not say this, but this unwanted pair of outcomes were what brought Keynesianism into question. ... Meltzer sees that the FED's present policy is not credible. It will produce monetary inflation when banks start lending", Gary North at Lew Rockwell, 2 February 2010, link:

I agree. Zimbabwe Ben is trying to confuse matters as to the inflationary implications of the Fed's actions over the last 18 months.

Sunday, March 7, 2010

BusinessWEAK vs. Pat Buchanan

"They are called the PIGS--Portugal, Ireland, Greece, Spain. What they have in common is that all are facing deficits and debts that could bring on national defaults and break up the European Union [EU]. Who brought the PIGS to the edge of the abyss? All are neo-socialist states that provde welfare for poor people, generous unemployment, universal health care, early retirement and comfortable pensions. Most consume 40 percent to 50 percent of their gross domestic product annually, a crushing burden on the private sector. ... For 30 years, the fertility rate of Europe has been below the 2.1 children per woman necessary to replace a population. In Russia and Ukraine, a million people disappear yearly. In Western Europe, the passing of the native-born goes on quietly, as Third World peoples come to fill the empty spaces left by the aborted and unconceived. ... These newcomers have neither the education nor the skills of the Europeans. Hence, they earn less and contribute less in taxes, but consume more per capita in social benefits. ... Thus the burden of pensions and health care grows steadily and the need for higher taxes and larger worker contributions increases. ... Greece is the first European nation to hit the wall. ... The EU'c crisis would then be like a crisis in the [US] should California default on its state bonds and interest rates on other municipal bonds surged to double digits. ... In every Western nation, government is growing beyond the capacity of taxpayers to bear", my emphasis, Pat Buchanan at Vdare, 9 February 2010, link:

"The [EU's] experiment with a single currency is deep in crisis because Europe failed to learn from the Greeks. ... Today's Sirens are the investors and traders of the global bond market, who lure nations into tapping abundant credit at low rates when times are good. ... Greece has fallen into precisely that trap. It got low-interest loans by promising to behave responsibily and keep its budget deficit low. ... At this point, Greece and the [EU] have no good choices left. It's hard to see how Greece can muddle through on its own. ... Yiannis Kelekis, 68, a retired construction worker who joined a demonstration in rainy Athens, complained: 'The people that caused the crisis are now asking for others to make sacrifices.' ... If the EU] refuses aid, the government could find itself unable to issue $26 billion worth of debt as scheduled this spring. ... Trouble is, extending aid isn't a great choice, either. ... For now, investors are pouring money into the US Treasury market as a safe refuge. ... When Greece joined the euro zone, its borrowing costs fell to near-German levels because bond investors bought into the theory that Greece had finally become fiscally responsible. ... According to economists Kenneth S. Rogoff of Harvard University and Carmen M. Reinhart of the University of Maryland, Greece has been in default for half of the time since it won independence from the Ottoman Empire in 1829. ... Greece and the EU wouldn't be in this no-win situation if they had followed their own rules from the start. But coming up with a failsafe mechanism that forces sovereign nations to do what's right when they feel like cheating is pretty much impossible", my emphasis, Peter Coy (PC) at Businessweek, 22 February 2010:

Gary North's (GN) 17 February 2010 post at Lew Rockwell is about the PIGS: GN asks, "How wise is to to lend to wicked people? Not very". Consider what this implies for Treasury paper.

Obamacare anyone? California anyone? What's controversial about this?

PC is PC. He never suggests Greece reduce spending. Anyone who buys sovereign debt does it at his peril. The article was titled, "The Bond Vigilantes Who Left Greece in Ruins". Imagine, the bond market did it, not Greek government spending. Failsafe mechanism? Try the gold standard. "Lure nations"? Is Greece a naive 14-year old girl being seduced by Casanova?

Wither Class Size

"Laws aimed at lowering class sizes in US public schools are coming under fire as budget shortfalls lead many states to slash education spending. ... The moves follow California's easing of class-size targets last year, which helped result in around 75% of the state's public elementary schools incresing class sizes thus school year, according to estimates from a University of California, Los Angeles, report last month. ... The move toward bigger classes is causing a backlash among some teachers and parents, who argue that smaller classes are essential for individualized instruction. ... Others say the benefits of smaller class sizes are unproven", Cari Tuna at the WSJ, 13 February 2010, link:

Smaller class size is another Teacher-Educationalist-Social Worker complex scam. I remember New York's Catholic schools in the 1950s has classes of 40-50. So? It's good to see the dismal science at work. Fund "shortages" may even cut school costs. I remember the Columbia Teachers College fools who "visited" us in about 1962 and were shocked to find NYC public school class size was negatively related to student achievement. Had they asked us, we could have told them that's what they would find. Why? NYC assigned the largest classes to the best students, the smallest classes to the worst!

Saturday, March 6, 2010

Waiting List for Cops

"The bleak arithmetic of the recession has pushed cities across the nation to make deep cuts in police, fire and emergency medical services. ... Others have announced they will no longer respond to entire categories of calls, such as burglaries, check fraud, shoplifting and traffic accidents involving minor injuries. ... Public safety, considered a core government duty by voters on the left and right alike, has traditionally been protected from belt-tightening despite the fact that it consumes a big chunk of most budgets. ... Public safety accounts for 22% of general municipal spending nationally, according to US Census Bureau data. That's second only to education, which accounts for about 27%. ... Colorado Springs police no longer will deal with abandoned vehicles unless they pose a hazard. Officers are unlikely to respond to property crimes unless they have a solid lead on a suspect. ... Some police chiefs said the lean budgets have pushed them to do better. San Diego Chief Bill Lansdowne trimmed a number of specialized units to same money--including narcotics, canine and harbor safety--but assigned more officers to beat patrol", Stephanie Simon at the WSJ, 13 February 2010, link:

Property crime? Narcotics? What next? Will some cities stop enforcing prostitution laws? Stay tuned. Still want to hold muni bonds?


"As Washington spins its wheels on financial reform, it's becoming painfully clear that the problem of entities that are too interconnected or 'too politically powerful to fail' is also too hard for our policy makers to tackle. ... We can't be sure who the specific members of this club are--regulators simply say they know 'em when they see 'em. But this much is certain: They've seen a lot of them lately. ... But because we are footing the bills for these rescures--and will do so again if more crises occur--don't you agree that we should know what these implied federal guarantees will cost us? ... An expert on government guarantees, his wholly sensible view is that it is dangerous for possible bailout costs to remain unmeasured and, of course, unrecognized in the budget. 'If we are extending the safety net, extending the implied guarante to the debts of a lot of other financial institutions, and we know those guarantees are valuable and costly, then we ought to start budgeting for it,' Mr. [Marvin] Phaup said in an interview. ... He was the researcher at the Congressional Budget Office in 1996 who undertook the first efforts to assign a value to the implied federal guarantee backing Fannie and Freddie. When he prognosticated on the matter, the bailouts of those two hobbled entities were more than a decade away, but his CBO report quatified the billions in benefits that the mortgage finance companies reaped each year for their implicit government backstop. ... The CBO report enraged Fannie and Freddie because it also showed how much of that financial benefiit--fully one-third--the companies kept for themselves, their managers and their stockholders. Mr. Phaup's analysis showed that, counter to the companies' claims, Fannie and Freddie did not pass along all the benefits to homeowners in the form of lower mortgage rates. Moreover, who actually believed that the government would ever have to bail out Fannie and Freddie? Perish the though and shame on silly researchers like Mr. Phaup for even considering such possibilities. ... But owning up to future obligations associated with government backing is something that lawmakers are likely to fight vigorously. (Consider Social Security). ... Edward J. Kane, a professor of finance at Boston College, agrees that the costs associated with providing a safety net for complex and politically connected companies should be quantified. 'People talk about systemic risk, but they have no metric of measuring it,' he said", my emphasis, Gretchen Morgenson at the NYT, 14 February 2010, link:

See my previous posts on "government accounting". Also yesterday's post on Greece. Who believed in 1996? Your Skeptical CPA did. That's who! He goes further. He believed and always believed, F&F were created to conceal their costs and expected bailouts! As Yves Smith would say of their future bailouts, "It was a feature, not a bug". Not "too hard". Washington is just afraid of Wall Street. Metric? Janet Tavakoli, do you want to take a shot?

Friday, March 5, 2010

What Moral Hazard?

"Any deal by European officials to guarantee the debt of Greece and other troubled nations might keep the crisis from worsening, but it raises another big problem: moral hazard. ... One of the strengths of the euro was the idea that when a country joined the European Union it was a one-way trip that came with strict fiscal responsibilities. A loan-backstop program could change that perception. ... If a loan bailout became necessary and was imposed with the kind of harsh measures that would eliminate moral hazard, it could do significant damage to local economies, especially already-fragile banks. ... Given signs that the troubles in Greece and other Mediterranean countries were beginning to infect markets in the relatively healthy core of Europe, the lack of a debt-guarantee program could set the marets tight back on the path to contagion. ... In the short run, a guarantee plan plan is seen by many as a positive for the euro. Amid fears that the problems in Greece would spread, investors had been pulling money out of European financial markets and buying US dollar or yen. ... 'A bailout implies "moral hazard",' analysts at BNP Paribas wrote last week. 'Lack of market-driven discipline due to the [European Monetary Union] umbrella' has certainly been one of the factors contributing to the buildup of imbalances in Greece and elsewhere. Bailing out Greece would give a signal to other countries, limiting the incentives to undergo the needed adjustments as they gain fiscal "impunity".' ... 'It's a Catch-22,' says David Gilmore, economist as Foreign Exchange Analytics. The recent declines in the euro 'are doing wonders for European competitiveness at a time whne they are crawling out of recession.' ... Others, hoiwever, say that hthe currenct circumstance, the benfits of a bailout won't necessarily come with the unwanted baggage", Tom Lauricella at the WSJ, 11 February 2010:

Why not bail out Greece? The US bailed out the Vampire Squid (VS)? Is Greece less impoortant to the EU than VS to the US? Guarantees have cost? Really now?

Two State Legislator Criminals

"The former assemblyman Anthony S. Seminerio, who prosecutors said took more than $1 million in payments from people and organizations doing business with the state, was sentenced to six years in prison before a federal judge in Manhattan on Thursday. ... Federal prosecutors said that from 1999 to 2008, he lobbied legislative colleagues and government officials on behalf of clients of a company he created called Marc Consultants. 'When you were elected, you were given a great privilege,' the judge, Naomi Reice Buchwald, said as Mr. Seminerio stared down at his clasped hands. 'You abused the trust placed in you.' ... Mr. Seminerio, 74, is among more than a dozen state lawmakers who have been forced to resign in recent years over ethical issues or have been convicted of crimes. ... A hearing in October to establish sentencing parameters included recordings of wiretapped conversations in which Mr. Seminerio talked with hospital executives, government officials and an undercover FBI agent, who paid $25,000 to Mr. Seminerio while posing as a developer looking for his help in securing tax credits and inserting language into legislation", Colin Moynihan at the NYT, 5 February 2010, link:

"State Rep. Terri Hodge provided a dramatic twist to the FBI's public corruption investigation Wednesday by agreeing to resign from the Texas House after pleading guility to failing to pay taxes on $74,000 in income, including more than $32,000 in bribes. Hodge, D-Dallas, also admitted that she never paid taxes on another $41,000, some of which was money she pilfered from her own campaign war chest for personal expenses. Neither prosecutors nor Hodge offered details. ... Hodge pleaded guilty to accepting money from prominent developers Brian and Cheryl Potashnik in the form of rent and utility payments. The Potashniks, both of whom have since pleaded guility to bribery, let her live in one of their affordable housing complexes for reduced rent and also bought her about $2,000 worth of carpet. ... 'People have to keep in mind that the role of the prosecutor is not to seek victory, but to seek justice,' said [John] Ratcliffe, now in private practice. The upside for the government is 'she's out of a position of public influence and trust, and she'll be held accountable for the rest of her life.' ... In pretrial filings, prosecutors alleged that Hodge 'received payments from families of Texas prison inmates oin return for her political support and assitance on proceedings affecting the inmate before the Texas Board of Pardons and Parole [BPP]'," Jason Trahan at the Dallas Morning News, 5 February 2010.

What's Seminerio's crime? Not working for the NY Fed where he can pass out multi-billion favors to his cronies Why does the FBI and DOJ waste time with this small-time corruption? Because this is all they are permitted to look at.

What happened here? Hodge ran afoul of the "prison-industrial complex" and its prison building campaign. The BPP is a corrupt joke. Who is Ratcliffe? The Dallas area former US Attorney. He's now a partner in John Ashcroft's (JA) law firm. Small world. We know JA, see my 17 January 2008 post: Compare Hodge's treatment to Olenicoff's, my 20 May 2008 post: It's not for nothing I call it the (in)Justice Department.

Thursday, March 4, 2010

SEC v. Cuomo

"In a swipe at New York Attorney General Andrew Cuomo, the [SEC] said in a court filing that the December 2008 firing of Bank of America [BofA] Corp.'s general counsel had nothing to do with his opinion about ballooning losses at Merril Lynch & Co. just before the securities firm's takeover by the giant bank. The SEC's court filing sets up a showdown between two securities regulators whose relationship has been fraught with tension for years. ... Mr. Cuomo alleged in a separate complaint filed last month that Timothy Mayopolous, [BofA's] former general counsel, was ignored by another executive when he tried to discuss Merrill's mounting losses and then terminated the next day. ... Meanwhile the swift action by Messrs. Spitzer and Cuomo to take on Wall Street occasionally has left the SEC looking flat-footed. The divergent stances in the [BofA] case could portend trouble for cooperation on other cases", Kara Scannell & Dan Fitzpatrick at the WSJ, 18 February 2010, link:

That the SEC and Cuomo are at each's throat means the truth may come out.

More Monitors, More Waste

"A decade ago General Electric experimented with a promising approach to employee health care known as disease management. ... 'It seemed too good to be true,' says Dr. Robert S. Galvin, GE's chief medical officer. And he adds, it was. ... Disease management [DM]--depite a series of studies finding that it doesn't deliver what it promises--has caught on throughout the business world (BW-Feb. 1 & 8). ... Companies marketing [DM] counter that in-house research shows such services sharply reduce costs. ... But outside analysts say the case for [DM]--and the data its marketers emphasize--typically rely on exaggeration and ignore the cost of the service itself. ... In August 2009, Rand [Corp.] issued a report for the state of Massachuetts concluding that [DM] Could increase employer and government spending in the state by $6.7 billion over 10 years with little overall benefit. ... One reason: A lot of preventive attention ends up directed at relatively healthy people who wouldn't require hospitalization anyway. ... The vast discrepancy between the contentions of [DM] companies and those of critics stem from different attitudes toward projections. .. About three-quarters of large companies offer some form of [DM] services, as do most state Medicaid programs for the poor. ... In Washington there is bipartisan support for allowing employers to grant bigger incentives to employees who participate in [DM]. ... Healthways ... was one of the eigt that participated in the 3-year Medicare pilot that ended in 2008. Medicare paid the [DM] providers about $360 million in fees, but outside consultants found no evidence of improved outcomes. ... At GE, [DM] didn't work on a broad scale, according to Galvin, who was a primary-care physician for 10 years before joining the company. ... The program failed, Galvin says. GE struggled to get enough enrollment to justify the cost, and those who did enroll rarely responded to the nurses. For much of the past year, the providers have been promoting their wares in Washington. Healthways officials say they've lobbied fiscally conservative democrats who are swing votes on health reform legislation. Their claim that prevention programs could save Medicare $652 billion over 10 years reflects industry assumptions that [DM] would dramatically increase the percentage of healthy seniors entering Medicare at 65 and keep them fit for yeas to come", Chad Terhune and Arlene Weintraub at Businessweek, 15 February 2010, link:

DM looks like another boondoggle. Like say the PCAOB, or much of CPA firm auditing which doesn't pay for itself. Or "portfolio monitoring services".

Wednesday, March 3, 2010

Argentina Shows America How-2

"Argentina is enduring its biggest inflation surge to start the year in two decades, posing a challenge for the government's newly named central bank president who is viewed skeptically by financial markets. ... Economists blame the price spiral on chronic overspending by the government of President Cristina Kirchner, as well as interventionist policies such as price and export controls on beef, which they say have discouraged investment and reduced the supply of cattle. ... In her comments about inflation prior to taking office, Ms. Marco del Pont often placed emphasis not on monetary policy, but on monopolistic business practices, which she said gave a few Argentine companies excessive pricing power. ... Economists are concerned that gaining access to the reserves would encourage Mrs. Kirchner to maintain aggressive public spending, which has been growing at a rate of around 30% the past year, and has helped to propel inflation. Ms. Marco del Pont's positions suggest 'she views the priority of the central bank isn't defending the value of the peso, but helping to finance the government,' says Aldo Abram, an economist at the Higher School of Economics and Business Administration in Buenos Aires. ... For her part, Mrs. Kirchner blames rising meat prices on Argentine ranchers, who she says aren't bringing enough cattle to market. ... Agrarian economists say government meddling has been so disruptive that many ranchers have liquidated herds and turned to farming. A drought last year also hurt ranchers. ... Private economists also say the government has been trying to sweep inflation under the rug by manipulating official inflation statistics, keeping them at one-half to one-third the true level", my emphasis, Matthew Moffett at the WSJ, 20 February 2010, link:

President Obama, are you listening? Price controls? What say you ghost of Richard Nixon? I'll never forget George Stigler's Industrial Organization class at Chicago. "Stiggie" told of an encounter with Harvard's Alvin Hansen. They discussed monopolistic business practices as a source of "inflation". Stiggie said the thought was nonsense. Hansen disagreed. Stiggie said assume "monopolists" exist on day one. What lets them raise prices on day two? Why didn't they already extract all their monopoly profits on day one? What changed from day one to day two to let the "monopolists" raise prices? Hansen had no response. Go Stiggie.

Small Banking From Boston

"The publishing world is too slow for Laurence J. Kotlikoff. On a frigid January day, the 58-year-old Boston University economist is pecking away at his computer keyboard in his office overlooking the Charles River. ... 'We have miscreants running the financial system left, right and center,' says Kotlikoff. 'Nobody is calling the [Obama] Adminsitration to task and saying, "You guys are putting a Band-Aid on cancer".' ... Instead of taking deposits and making loans, banks would connect borrowers and depositors with ultrasafe mutual funds created for those purposes. ... Kotlikoff sounds so unrealistic that, like George Bailey, he could use a guardian angel to set him straight. But he's beginning to catch the attention of powerful policymakers and the economists who have their ears. ... In the US, Kotlikoff's limited-purpose banking' idea is finding support among economists across the political spectrum, including University of Chicago Nobel Laureate Robert Lucas on the right and Columbia University's Jeffrey Sachs on the left. ... 'The problem,' he writes in his book, 'is the leveraging of the taxpayer by people with no formal training in finance or economics, no personal downside, an assortment of Napoleonic complexes, the money to buy ratings in New York and policy in Washington, and the ability to run circles around regulators.' ... In Kotlikoff's scenario, banks would be shorn of their risk-taking functions. ... Mutual funds would supply loans, too. Already, companies raise money by issuing bonds, which are bought by fixed-income mutual funds on behalf of investors. ... The advantage is that if certain borrowers didn't repay, there would be no systemic, global-economy-threatening crisis, liek the ones that can occur when one bank goes down and drags other with it. Instead, the worst that could happen is that investors who funded a particular loan would lose part or all of their investment. One side benefit: Kotlikoff says 100-plus regulatory agencies could be disbaded because financial firms would no longer have other people's money to play with", Peter Coy at Businessweek, 15 February 2010:

Go Kotlikoff! I've favored "small banking" for decades. Frank Graham suggested 100% reserve banking in 1936, my 24 December 2007 post:

Tuesday, March 2, 2010

What's Chapter 9?

"Just days after becoming controller of financially strapped Harrisburg, Pa., in January, Daniel Miller began uttering an obscure term that baffled most people who had never heard it and chilled those who had: Chapter 9. ... Created in the wake of the Great Depression, Chapter 9 is widely considered a last resort and filings under it are more taboo than other parts of bankruptcy code because of the resulting uncertainty for everyone from municipal employees to bondholders. ... As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds, And that is causing worry about the safety of securities traditionally considered low risk. ... For example, it isn't safe to assume that governments can raise taxes to cover shortfalls. ... Harrisburg Mayor Linda Thompson, a Democrat elected in November, opposes a bankruptcy filing and has presented an emergency plan that includes selling some of the city's assets. ... Since Chapter 9 was enacted in 1934, just 600 cases have been filed under the cose, partly because they require state approval. Some municipalities have found escape hatches, such as raising taxes. ... But many experts fear that a surge in municipal filings is unavoidable", Ianthe Dugan & Kris Maher at the WSJ, 18 February 2010, link:

Do you still want to own muni bonds?

Go Blago!

"Disgraced former Illinois Gov. Rod Blagojevich said Wednesday he would testify at his trial this summer and moved to introduce all the secretly recorded [FBI] tapes that are the basis of the corruption case against him. ... 'Today I am laying down the gauntlet,' Mr. Blagojevich said in the courthouse lobby. ... Mr. Blagojevich sad he and his lawyers have listened to al the tapes. Along with waiving his right to try to suppress their introduction in court, the ex-governor filed an affidavit asking the government to join him in airing as many tapes as possible, attorney Sam Adam Jr. said", Douglas Belkin at the WSJ, 11 February 2010, link:

Do I see a DOJ practice here, of not introducing all the evidence? Look at the Aleynikov case. Who else is on the Blago tapes? Eric Holder? His Obamaness?

Steve Waldman on Truth

"Both globally and within most nations, the patterns of consumption required to sustain existing social arrangements are inconsistent with the distribution of the fruits of production. Social and economic stability, therefore, depend upon redistribution for which there is not overt legal framework or political consensus. To square this circle, the financial and government sectors have evolved means of hiding redistribution in complex, continually improvised arrangements", Steve Waldman at Interfluidity, 14 February 2010, link:

Welcome aboard Steve. I've said this for decades. That's why we have: Fannie and Freddie, Social Security, the Fed, education reform and who knows what else? Sooner or later, our entire edifice of deception will collapse. Look at California and how it concealed the effects of illegal immigration from its taxpayers. It's gotten so bad, even Sacramento can't hide the dead elephant in its living room anymore. See my 11 October 2009 post:

Monday, March 1, 2010

Immigration Omerta?

"The Democrats loss of the Massachusetts Senate seat long held by Teddy Kennedy has driven Washington, which had spent most of the last couple of years worrying about subsidizing Wall Street and socializing health care, into finally starting to think about jobs. ... 'In November, 19.4 percent on all men in their prime working years, 25 to 54, did not have jobs., the highest figure since the Bureau of Labor Statistics began tracking the statistic in 1948.' ... Last Tuesday, Ed [Rubenstein] reported that Hispanic employment is up 22.4 percent since January 2001, while non-Hispanic employment is down 2.5 percent. ... According to [Don] Peck, high unemployment means marriage rates will decline further. ... Affordable family formation--the observation that America has been a relatively happy place because marriage and children were made affordable by our historical legacy of abundant, and thus cheap, land plus scarce, and thus well-paid workers--is the oldest social science theory in American history. ... W. Bradford Wilcox, head of U of Virginia's National Marriage Project asserts, "We could be headed in a direction where, among elites, marriage and family are conventional, but for substantial portions of society, life is more matriarchial.' 'Matriarchial' is a euphemism for the kind of familial disorder that plagues black America, the Carribean, and Sub-Saharan Africa. ... Peck concludes: 'We are living through a slow-motion social catastrophe, one that could stain our culture and weaken our nation for many, many years to come.' ... First, he cites sociologist William Julius Wilson's research on the disastrous ramifications of black men exiting the work force. (In 1960, 90 percent of black men were employed versus only 76 percent in prosperous 2000.)', Steve Sailer at Vdare, 14 February 2010, link:

Did the black male employment rate fall after 1960? Didn't 1964's Civil Rights Act ... ? In 1960 about 23% of Negroes as they were then called were born out-of-wedlock. Now it's 71%. What made Negro families less stable than they were 50 years ago? Worse, this family instability is spreading to the white working-class. Harvard professor Kathryn Edin notes, "These white working-class communities ... they're just in terrible straits. I hang around these neighborhoods in South Philadelphia, and I think, 'This is beginning to look like the black inner-city neighborhoods we've been studying for the past 20 years'." If that don't beat all. A Harvard professor can see what's plainly to be seen. Now will "He" actually do something about one "driver" behind this, immigration, legal and illegal?

The Continuing SEC Circus

"In the headquarters of the [SEC], Mr. Madoff's name is rarely spoken. More than seven months after he was sentenced to prison for orchestrating a global Ponzi scheme, shaken SEC employees are still struggling to come to grips with how they failed to catch him before it was too late. ... It is the job of Robert S. Khuzami, the SEC head of enforcement, to unmask the next Madoff--and, equally daunting, to convince skeptics that the commission can reassert itself and adequately police Wall Street. ... Unlike some at the commission, Mr. Khuzami, 53, talks openly about the Madoff fiasco. 'For a group of people committed to investor protection and prevention, the tragedy of investors' losses are not lost on anyone,' he said in an interview in his bright, corner office in Washington. ... Wall Street vastly outdoes the SEC in terms of people, money and, many in the financial industry argue, talent. The administration has requested a budget of $1.3 billion for the SEC for 2011. ... On Monday, what SEC officials had hoped might be a quick victory in a prominent case instead turned into another potential headache. Mr. Khuzami and a squadron of SEC lawyers filed into a New York courtroom where the commission was trying to end its losing investigation into the takeover of Merrill Lynch by Bank of America [BofA]. But District Judge Jed S. Rakoff--who last September rejected as too low an earlier $33 million settlement that the SEC had reached with [BofA]--again raised questions about the commission's handling of the case. If he rules against the second settlement, for $150 million, the case is set to go to trial on March 1. ... The commission also has not sattisfied critics on Capitol Hill--and many ordinary Americans--who had hoped to see charges leveled at banking executives after the financial collapse. Mr. Khuzami recognizes that the cases the SEC brings, or does not bring, will define his tenure and, possibly, the future of the commission. 'It's all about the cases in the end,' he said. ... The SEC has hired some talent from Wall Street. Norm Champ, the former general counsel of Chilton Investment Company, a multibillion-dollar hedge fund, was named last year as an associate director in the examinations group in New York. Richard Bookstaber, a former Wall Street risk manager, joined the new division of risk, strategy and financial innovation", my emphasis, Jenny Anderson & Zachery Kouwe at the NYT, 9 February 2010, link:

Just what we need, more "former" Wall Streeters at the SEC. Khuzami is right about one thing: we will be interested in the cases the SEC doesn't bring. Who at the SEC cares about "investor protection" as opposed to protecting their former and future employers?