Friday, April 30, 2010

Woodrow Wilson II

"But few have noted his interesting parallels with Woodron Wilson [WW]. Historical comparisons have their limits. But Wilson-Obama similarities abound, starting with both men's use of the label 'progressive.' Wilson was no 'community organizer,' but like Obama, he was an academic--among the most prominent political scientists of his day. ... Here the comparisons diverge: Wilson spends key years as president of Princeton, while Obama sojourns in the Illinois State Senate voting present. ... Both register reputations as orators. Both challenge highly regarded congressional front-runners in hotly-run contests for the nominations. Wilson bests House Speaker Champ Clark in 1912. Obama triumphs over Hillary Clinton. ... Both appoint high-profile secretaries of state: the aformentioned Clinton by Obama; the aging party warhorse William Jennings Bryan by Wilson. ... Wilson cherishes the Soth's Lost Cause and segregates federal offices. He praises D.W. Griffith's controversial Birth of a Nation as being 'like writing history and lightning.' Obama allies himself with black liberation theology advocate Jeremiah Wright. Only political necessity induces him to break with Wright. Nothing keeps him from embracing the execrable Al Sharpton. ... Both Wilson and Obama receive tumultuous receptions in Europe: Obama in his tumultuous pre-coronation visit to Berlin and Wilson in his unprecedents 1919 European tour. Tumultuous crowds greeted Wilson throughout Europe. ... Yet, there remains in Wilson--and resides in Obama--a strange academic coldness that stiff-arms natural foreign allies. ... In 1916 [WW] campaigned as the 'peace candidate.' Supporters praised him for keeping 'us out of war.' By April 1917, however, Wilson demanded that Congress declare war on Berlin. In 2008 Obama derided George Bush's Iraqi surge and vowed a quick exit from that nation. He not only remains in Iraq, reluctantly, he has implanted his own surge in Afghanistan. ... Rather than compromise, Wilson--and Obama, his fellow Noble Peace Prize laureate--attempted rather to orate their dreams into reality", David Petrusza at American Thinker, 31 March 2010, link:

I warned you. See my 14 September 2008 post: This post drew more flak than anything else I've written.

Kill the PCAOB

The PCAOB "inspected" the CPA firm I work with in November. The "inspectors" were two "former" Big 87654 operatives. My opinion: they are functionally Big 87654 seniors. Neither understood discounted cash flow analysis. I had to tell them if you have a series of cash flows, you can specify the interest rate or the present value (PV), not both. As the PV increases, future interest income decreases. Where did this "issue" arise? In sales-type lease accounting under "old" SFAS 13. These two didn't understand "incremental borrowing rate", a lessee SFAS 13 concept, paragraph, 5l. Don't raise the substance over form concept to these two. They only me-chan-i-cal-ly follow "the rules". Imagine what would happen if we were under IFRS. Rules are a GAAP problem. If you only follow the rules, you can't figure out when they lead to absurdities or when a transaction was concocted to evade the rules. I say shut the PCAOB. In the alternative, have it sign opinions and be liable to suit. It also should be liable for suit for passing a CPA firm which has clients with "cooked books" like: KPMG at Citigroup and GE, or PWC at AIG or Goldman, or D&T at GM, etc., etc. What do the PCAOB people think bank "structured finance" departments do if not design transactions with differing form and substance?

Let "saw off", also called "reductio ad absurdum". Suppose a company issues a $1 million note paid in a year for $2 million. What's this note's interest rate? I say 100%. What say you? If the note is paid in six months, I say 300%. Why? It doubled in six months and I assume would double six months later. 2 x 2 = 4; 4 -1 = 3; hence 300%. If it doubles in three months, we get 2 x 2 x 2 x 2 = 16, 16 - 1 = 15; hence 1,500%. If it doubles in a month, we get 2*12 = 4,196; 4,196 - 1 = 4,195; hence 419,500%. Now a week, we get 2*52 = 4.5036 x 10*15, or 4.5036 quadrillion. A big number. Now if you have a $1 million note which the buyer can immediately sell for $2 million, I say the interest rate is infinite because it has no time dimension. I explained this to the Big 87654 partner who hired the PhD consultant I mentioned in my 16 August 2009 post: The PCAOB "inspectors" believe the consultants cost of capital (COC) study has significance and should be used to value a lessor's sales-type lease. Doesn't this give you "warm and cuddlies" with respect to Big 87654 partners, PCAOB apparachiks and PhD consultant's skills? The PhD consultant thought my client's COC was 13%. The Big 87654 partner had no idea how the consultant derived 13% but he knew: the consultant had an MIT PhD. The PCAOB people don't know anything except a Big 87654 firm accepted the consultant's report so it must be right. I add, the consultant is also an audit client of the Big 87654 firm in question. Did a Big 87654 firm bring him in to "further client relations" with its auditee? Never.

Absurdities? Like me-chan-i-cal-ly applying paragraphs 55-57 of SFAS 123(R). You can get stock option expense for an employee who leaves a company then returns, exceeding that if he was continuously employed. Dealing with PCAOB "inspectors" reminded me of Supreme Court case Graffam v. Burgess, my 24 October 2007 post:

Could the PCAOB help investors? Maybe? It could stop "inspecting" CPA firms and "inspect" audits. With a $15 trillion US stock market capitalization (MC), let the PCAOB inspect 500 audits a year, one per $30 billion. Thus XOM, WMT, MSFT, APPL and other "large caps" audits will be inspected annually. So? Of 500 audits inspected, 494 will be by the Big 87654, four by the "little three" and two by 1,790 other firms. Think of the time the PCAOB could spend with Vampire Squid, GS-NYSE, current $86 billion MC instead of micro caps. If the PCAOB inspects two audits for each of the 1,790 small firms, that's 3,580 audits. With total MC audited of $60 billion, that's a $17 million average auditee size, or 25% of Lloyd Antoinette Blankfein's 2007 year end $68 million bonus! What gives? The PCAOB is a scam. Kill it Supremes! Please. If every audit by the 1,790 small firms is defective, how much can that reduce investors' returns? Not much. Every hour the PCAOB spends with micro caps is one less hour it spends at: GS, C, FNM and other members of my "rogues gallery". Ladies and gentlemen of the blogosphere, why do you think the Big 87654-controlled PCAOB spends as much time as it does on the 1,790 small CPA firms in question? What say you?

Thursday, April 29, 2010

Wait Listed By Jail-15

"The California budget crisis has forced the state to address a problem that expert panels and judges have wrangled over for decades: how to reduce prison overcrowding. ... Many in the state still advocate a tough approach, with long sentences served in full, and some early problems with released inmates have given critics reason to complain. But fiscal reality, coupled with a court-ordered reduction in the prison population, is pouring cold water on old solutions like building more prisons. ... The strains on the system are evident inside the state prison here, about 50 miles north of Los Angeles, where 4,600 inmates fill buildings intended for half as many. A stuffy, cacophonous gymnasium houses nearly 150 people in triple-bunked beds stretching wall to wall. The new effort this year is intended to remove from prisons criminals who are considered less threatening and divide them into two categories: those who pose little or no risk outside the prison walls, and those who need regular supervision. ... To slow the return of former inmates to prison for technical violations of their parole, hundreds of low-level offenders will be released without close supervision from parole officers. Those officers will focus instead on tracking serious, violent offenders. ... The state spends, on average $47,000 per year to house a prisoner. Early estimates suggest the new changes could save $100 million this year. ... California is the only state that places all prisoners on parole at release, no matter what the offense, Professor [Joan] Petersilia sad, and usually for one to three years. .. . Even the guards' union, which so heavily promoted and supported the tough sentencing of the past that fueled the prison building and expansion boom, now says it supports the idea of alternatives to prison and did not publicly object to the new law", Randal Archibold at the NYT, 24 March 2010, link:

Even the guards' union. Wow. Times must be tough in California.

What New Rule?

"Discover Financial Services Inc. will implement a new accounting rule requiring companies to bring their off-the-books securitized loans onto their balance sheet in fiscal 2010. The rule would result in a $1.3 billion after-tax charge to equity in the first quarter, the company said in December. As a result of this change, Discover will bring on its books $21 billion of assets and increase reserves by $2.1 billion. ... In a report published Friday, analysts at Barclays Capital said, 'We believe the reserve build is one-time in nature and could lead to more rapid earnings improvement in subsequent quarters as the company front-loads reserves'," Aparajita Saha-Bubna at the WSJ, 15 March 2010, link:

What new rule? Likely Discover kept these assets off its books by misapplying existing rules. See my 6 February 2008 post:

SEC vs. the Shorts

Matt Phillips discusses the SEC's treatment of short-sellers and Lehman's shorts, WSJ, 15 March 2010, link:

Wednesday, April 28, 2010


"Breaking with tradition, Cardinal Joseph Ratzinger's musings veered away from Christ's Passion and into the Catholic Church's current problems. ... Some years before, as head of the Vatican body investigating abuse by priests, he argued that accused clergymen should not be handed over to the secular authorities. Rather, he wrote confidentially to bishops around the world in 2001, they should be investigated under utmost secrecy within the church--thereby avoiding public hysteria and second-guessing by the media. ... The recent revelations of sex-abuse scandals in Europe have smashed the perception that predatory priests are an American anomaly. ... The church's standing is falling to new lows among believers in its European heartland. Sensing the growing public alarm, some within the clergy are pushing for profound institutional and ecclesiastical changes, including an end to the priesthood's fundamental tenet of celibacy. ... Benedict himself stands accused of poorly handling the case of a pedophile priest when he was Archbishop of Munich and Freising in the early 1980s. ... The Pope's defenders say he has tried hard to force the church to confront its demons openly. ... But he has been remarkably unforthcoming about the latest scandals. ... His reluctance to speak out surprises and hurts many Catholics. ... Papal officials, however, defend Benedict's silence. 'The Pope was not part of what happened back then, and he shouldn't be part of it now,' says a Vatican insider. Indeed, the Vatican has mounted an aggressive campaign to portray the scandals as an attempt to besmirch the Pope and discredit the church as a whole. ... 'They all want to involve the Pope at all costs,' [Frederico Lonbardi] tells TIME. 'It's a desire to destroy the church, and this is an operation that has been well planned. They don't like the church's teachings on moral questions and sexuality, and this is how they think they can strike.' ... As the scandals have multiplied, so to have calls for profound change in the priesthood. One perennial proposal dusted off in recent weeks is the abolition of celibacy among priests: commentators in Germany and Italy have suggested it may help prevent abuse. Vienna's Cardinal Christoph Schonborn has called for a thoroughgoing review of the causes of abuse, writing, 'Part of it is the question of celibacy.' ... The Vatican argues that there's no connection between vows of celibacy and sexual deviance, and the Pope himself, a staunch conservative who recently defended celibacy as 'an expression of the gift of oneself to God,' is unlikely to budge on the issue", my emphasis, Bobby Ghosh at Time, 29 March 2010, link:

What nonsense. In 1963, yes 1963, a priest approached me to enter the priesthood, and I'm not even Catholic! I told him the church was finished. That poverty, chastity and obedience no longer sold and that Catholic seminaries would fill with homosexuals if clerical celibacy did not end. Ratzinger, come off it. Who are you kidding? Are you Lloyd Antoinette Blankfein, "doing God's work"? Ratzinger, you need many more divisions to sweep this mess under the rug. A basic legal principle is, "Every man is presumed to intend the natural and probable consequences of his own act", Allen v. US, 164 US 492, 496 (1896). . Even members of the Catholic hierarachy? Yes.

Wait Listed By Jail-14

"In the rush to save money in grim budgetary times, states nationwide have trimmed their prison populations by expanding parole programs and early releases. But the result--more convicted felons on the streets, not behind bars--has unleashed a backlash, and state officials now find themselves trying to maneuver between saving money and maintaining the public's sense of safety. ... In Illinois, Gov. Patrick J. Quinn, a Democrat, described as a 'big mistake' an early release program that sent some convicts who had committed violent crimes home from prison in a matter of weeks. Of more than 1,700 prisoners released over three months, more than 50 were soon accused of new violations. ... A victims' rights group in California sued last month to block a state law that expands the credits prisoners can receive to shorten their sentences, and prosecutors in Michigan are challenging release decisions there", Monica Davey at the NYT, 5 March 2010, link:

Tough luck California and Michigan. There's no more money. Period.

Tuesday, April 27, 2010

Los Angeles Is Scared

"Los Angeles is struggling to raise money and cut costs to fill a $200 million budget gap that could force thousands of layoffs and drive the city into bankruptcy. ... Officials ... worried that without the cuts, more businesses and jobs would flee the city, which has a 12.5% unemployment rate. ... 'If we didn't roll that [tax] back, there was a real chance many of them would leave,' said Austin Buetner, the mayor's new economic chief. 'They're high-paying businesses and the wages are spent in our city,' he said. ... Analysts say giving up cash for the prmise of job creation can be risky and doesn't always work. 'State and local governments are going to have to place their bets on what will bring in greater revenue and keep more jobs,' said Jessica Levinson, director of political reform for the nonpartisan Center for Governmental Studies in Los Angeles. 'It's a balancing act that every jurisdiction will have to face. Few governments have any room for error. Cutting taxes can mean laying off teachers and police officers to save cash. 'Most cities, counties and the states are strapped for cash and can't afford to make an ill-conceived gamble,' Ms. Levinson said", Tamara Audi at the WSJ, 9 March 2010, link:

Even LA taxpayers "vote with their feet". We'll see if LA's internet company tax reductions start a trend. Do you still want to own muni bonds?

Wait Listed By Jail-13

"At the Twin Towers Correctional Facility, Jaime Iniguez was awakened Friday morning and told to get ready to leave. Iniguez, 53, was serving a four-month sentence for drunk driving, his second DUI offense. He wasn't scheduled to be released for another month. ... Iniguez is a member of a distinct group that benefits during a sour economy: jail inmates. When times are flush, the Los Angeles County Sherriff's Department has the money to keep jails open and staffed, and the vast majority of sentenced inmates serve most of their time behind bars. But when times get tough and tax revenues shrink, the department has repeatedly looked to its jail operations to make cuts, freeing thosands of inmates who've served only a fraction of their sentences. ... By 1966, on average, defendants were serving less than 25% of their jail sentences. ... Until this week, all male inmates served at least 80% of their jail time. Most women still serve only 20%", Jack Leonard & Ruben Vives at the LA Times, 5 March 2010, link:

See? Jails are a "Superior Good" Aren't you glad you studied economics? I suspect inmates leaving Wayne County Jail (WCJ) consider themselves unlucky. At least WCJ feeds them.

Monday, April 26, 2010

Texas Prison Literature

"But ask how many of those books and magazines have been rejected because prison reviewers decided they contain inappropriate content, and prison officials will tell you that information is unavailable: 'There's just no way to break that out,' said Tammy Shelby, a program specialist for the prison agency's Mail System Coordinators Panel. ... Novels by National Book Award Winners Pete Dexter, Joyce Carol Oates, Annie Proulx and William T. Vollmann have been banned in recent years. Award finalists Katherine Dunn and Barry Hannah are on the Texas no-read list, too, as are Pulitzer Prize winners Alice Walker, Robert Penn Warren and John Updike. ... Books of paintings by some of the world's greatest artists--da Vinci, Picasso, Boticelli, Michaelangelo--have been ordered out of state correctional facilitiies. ... John Grisham has had four blockbusters banned since 2005. And inmates will have to wait for parole before diving into 'Precious,' the book by Sapphire that last year was turned into a critically acclaimed movie. ... Inmates who don't read, for example, have a harder time finding jobs, said Marc Levin, a criminal justice analyst for the Texas Public Policy foundation. 'Literacy, or lack of it, is one of the biggest problems we have with respect to re-entry,' Levin said. Texas prison officials said restrictions on reading material are for the good of both guards and inmates, 'We have to protect the safety and security of our institution, but also aid in the rehabilition of our offenders,' said Jason Clark, an agency spokesman. 'And what may not be judged inflamatory in the public at large can be inflamatory in prison.' ... 'There is no evidence concluding that exposure to obscene material affects the morals or attitudes of prisoners,' said Robert Bastress, a professor at the West Virginia University College of Law, who in 2004 represented an inmate who sued when the prison library was cleansed of all materials considered 'a turn-on.' ... Even with appeals, [Paul] Wright said, 'there doesn't seem to be any real review going on.' In 2005, mailroom staffers flagged Freakonomics,' the best-selling popular economics book, for its use of a 50-year-old quote containing a racial epithet in a chapter about the Ku Klux Klan. That decision was upheld. ... Thus, National Geographic magazines are turned away for photos of naked toddlers", Eric Dexheimer at the Austin American, 31 January 2010, link:

It's good the TDCJ is hard at work. It bans prisoners having Texas maps. Why? They could be used to facilitate an escape. Really. Until you've had contact with "criminal justice professionals" you can't believe how stupid they can be.

Sic Semper Whistleblower-3

"With the benefit of hindsight sharpened by the view from the Pennsylvania prison where he began serving three-plus years in January, Mr. [Bradley] Birkenfeld says he is an informant who blew on the wrong whistle. ... The former UBS AG banker was the central informant in an investigation that led to a wide-ranging IRS crackdown on secret offshore bank accounts. That he also is the only person so far to be sentenced to substantial prison time--40 months, for conspiring to defraud the US government--has made Mr. Birkenfeld a popular hero in some corners of the tax community, though others disagree. ... At his sentencing hearing in August, Justice Department [sic] prosecutor Kevin Downing said: 'I will say that without Mr. Birkenfeld walking into the door of the Department of Justice [sic] in the summer of 2007, I doubt as of today that thus massive fraud scheme would have been discovered by the US government.' ... Mr. Birkenfeld says he came to the Justice Department [sic] ready to tell everything, and asked the agency to subpoena him so that he wouldn't break the law by naming names", Arden Dale at the WSJ, 9 April 2010, link:

What can you say? Who at the misnamed Justice Department didn't want this case prosecuted? Why? When the IRS wants information, it issues a subpoena. What's going on here?

Sunday, April 25, 2010

The Fed's Bad Loans

"The Federal Reserve Bank of New York [FRBNY] doesn't have to look far to understand the woes of banks and investors that hold loans and securities underpinned by real estate. It can look at its own books. ... In an unexpected twist, the takeover of the Bear assets effectively leaves the [FRNBY] as holder of credit-default swaps on bonds issued by the states of Nevada, California and Florida, That protection rises in value when the bonds decrease in value. ... Fair values are based on observable market proces, data points that can underpin as asset, and cash flow. ... Maiden Lane II's holdings include oddly named securities like a $29 million piece of New Century Home Equity Loan Trust 2005-3, which was stuffed with subprime loans originated by failed mortgage lender New Century Mortgage Corp. ... Among the residential mortgage loans and securities, about half were secured by homes in California and Florida. ... As a result, the Maiden Lane fund inherited about $4 billion of Bear's old Hilton debt. Blackstone is close to finalizing a deal to reduce its $20 billion loan by about 20%, according to people familiar with the matter", Carrick Mollencamp, Lingling Wei & Serena Ng at the WSJ, 2 April 2010, link:

The Fed is no better at buying subprime assets than anyone else. It exists to be "worse". Others had to lose on these assets had the Fed not bailed them out. Why unexpected? To whom?

Iowan Thinking In Greece!

"Greek Prime Minister George Papandreou met President Obama in Washington yesterday, hoping to win US support for a crackdown on speculative traders. 'Unprincipled speculators are making billions every day by betting on a Greek default,' the Prime Minister said Monday, adding yesterday that Mr. Obama's response was 'very positive.' ... These days, of course, any purchase of Greek debt is a form of speculation--a fact reflected in the 320 basis-point spread over German bonds that Greece was forced to pay. ... As soon as Athens presented its latests E4.8 billion austerity package last week with across-the-board spending cuts, the pressure on the euro and Greek bonds eased. ... Unfortunately, this demonstration that the markets could be assuaged by some more-vigorous belt-tightening did not put Greek conspiracy theories to rest. ... These protests do real real economic harm and thus reduce government revenues, and Mr. Papandreou also does his economy no favors by railing against the very 'speculators' he needs to buy his debt. ... The bets against Greek solvency are the result, not the cause, of Greece's debt problems. The way to turn speculator profits into losses is be reining in government and reviving private growth", my emphasis, WSJ Editorial, 10 March 2010, link:

"'It has dawned on investors that solvency is a major issue--not a minor issue,' says Stephen Jen of the hedge fund BlueGold Capital Management. ... European Union President Herman Van Romply told several European newspapers on Friday that the bloc 'will be ready to step in if the Greeks ask.' French President Nicolas Sarkozy and Italian premier Silvio Berlusconi echoed those remarks, saying at a news conference that their countries were ready to help. ... The country's debt load totals more than 113% of its annual economic outpout and is rising. ... If Greece needs to restructure its debt, bondholders would find themselves sitting on big losses. ... The fundamental problem is that Greece is adding to its debt every year because of its big annual budget deficits. ... If that situation persists, Greece will never be able to pay off its debts without creditors agreeing to cut the amount they are owed. ... A big package could give Greece time to do a 'real devaluation'--a painful program of wage and price cuts, and a sharp drop in economic output, that could put it in a better position to pay off its debt, says Uri Dabush, director of the Carnegie Endowment for International Peace. ... But restructuring comes with a downside: A country that reneges on its debt would likely be shut out of global markets", my emphasis, Charles Forelle & Marcus Walker at the WSJ, 10 April 2010, link:

Government officials frequently blame "speculators" for causing their problems. No. Speculation against Greek debt results from Greece's imprudent policies. Is Papandreou so stupid as not to understand that price stabilizing speculators make money. Price destabilitizing speculators lose money absent government bailouts. Now it's time for a war story. In 1974 I was auditing a subsidiary of a Midwestern utility for a Big 87654 firm. The subsidiary manager complained of a "cabal" of "Jews and speculators" who made the price of copper rise. Copper hit $1.44 in 1974, about $10 per pound today. I didn't have the heart to tell him, if the "Jews and speculators" were wrong about future copper demand they would lose their shirts. Does His Obamaness understand this? Who cares?

Why is Greece a worse credit than Uncle Sam? Because Unc issues debt in his own currency. Now. Got gold? Get more. Got any government bonds? California, Ireland, Greece, Unc, even Germany, yes Germany. Sell now! Now people realize Greek solvency is an issue. Where were they for years? Does Unc add to his debt annually? Greece will never pay its debts. Unc defaulted on his obligations to pay gold for dollars in 1971. So? Imagine, some people think Unc is a better credit than Exxon. They probably also believe in the Tooth Fairy and Easter Bunny. See my 15 November 2008 post:

Saturday, April 24, 2010

Lehman's Whistleblower

"Lehman Brothers Holdings Inc. ousted a whistle-blower just weeks after he raised red flags about the securities firm's accounting in 2008. Matthew Lee, a 14-year Lehman veteran, was let go in late June 2008 amid steep losses at the firm as it tried to maneuver through the global financial crisis. Earlier that month, he had raised concerns with Lehman's auditor, Ernst & Young, that the securities firm was temporarily moving $50 billion is assets off its balance sheet. ... Erwin Shutak, Mr. Lee's lawyer in San Diego, asserts that 'it was easier to just shut him up and let him go'," Michael Corkery at the WSJ, 16 March 2010, link:

Sure it was. Where was E&Y hiding when this went on? Don't you know Lehman's firing Lee discredited him? Sure. Ask E&Y. ML's firing could be an overt act to support a RICO claim against Lehman and E&Y if some attorney wanted to pursue it. It could be an early act in a fraud scheme. Aren't you impressed with how effective Sarbox was in protecting ML?


"Matthew Lee, a Lehman Brothers Holdings senior vice president, warned in a May 2008 letter that he believed 'senior management' may have violated Lehman's internal code of ethics by misleading investors and regulators about the true value of the firm's assets. ... A full version of the letter was reviewed Friday by the [WSJ]. Ms. Callan didn't return a phone call seeking comment. ... Mr. Lee, a 14-year veteran who headed the firm's global balance-sheet and legal-entity accounting, said Lehman had 'tens of billions of dollars of unsubstantiated balances, which may or may not be "bad," or non-performing assets.' ... At the time, India investment was drawing scrutiny from Lehman critics, including David Einhorn of hedge fund Greenlight Capital Inc. ... Lehman said in the spring of 2008 that it booked the gains because an investor had invested in the venture at a higher valuation than Lehman's investment. ... Mr. Lee's lawyer, Erwin Shustak, of San Diego, said his client had complained orally for several months to his boss, Martin Kelly, Lehman's former global financial controller, about many of the same issues he raised 'formally' in his letter. ... Mr. Shustak said his client was demoted about two months before he wrote the letter, which was drafted with help from the attorney. Mr. Lee was terminated a few days after he wrote the letter. ... In a statement, Ernst & Young said Lehman management determined that Mr. Lee's 'allegations were unfounded.' ... Mr. Lee and Lehamn ultimately negotiated a severance agreement which his lawyer said precluded him from filing a lawsuit or a whistle-blower complaint under the Sarbanes-Oxley Act", my emphasis, Michael Corkery at the WSJ, 20 March 2010, link:

Since when can a contract abrogate a law? The lawyers who drafted the severance agreement should be disabarred. Now. All lawyers who practice in front of the SEC should get a latter from the SEC stating that any lawyer involved in drafting such an agreement in the future will have his entire firm barred from practice in front of the SEC. Immediately. Aren't you impressed with E&Y's work? It asked Lehman management if Lee was right. Amazing. Tens of billions? What did E&Y look at?

Friday, April 23, 2010

Bulls and Bears

"John Tammy, the editor of, a columnist and a monetarist in the fashion of Milton Friedman, thinks GDP is a flawed number. It's expressed in an unreliable measure--the US dollar. Expressed in gold, GDP has been contracting for eight years. Richard Koo, chief economist for Nomura Research Institute, says the US is in a balance sheet recession, marked by deflation and deleveraging that will crimp investing and spending for a decade or more. ... Harvard financial historian and author Niall Ferguson says debt-laden America is past its glory but will try to mask its decline by inflating away its debt. ... However, maybe what this is telling us is that the biggest economic and market surprises of this decade could be on the upside", Rick Karlgaard (RK) at Forbes, 12 April 2010:

RK gives a "seven-band spectrum of bears to bulls". I am in his most bearish group, which includes "bloggers too numerous to mention here". However, as inflation panic engulfs the US I expect a Misean "crack-up boom" and apparent prosperity. Before the collapse. I agree with Koo, the US dollar is a unreliable measure.

Judging the SEC

"In challenging the combined wisdom of the SEC and 12 big Wall Street firms, US District Court Judge William H. Pauley III joins his colleague on the bench of the Southern District Court in New York, Jed Rakoff, who gave the commission fits last year as it tried to settle a case with Bank of America Corp. ... 'Closer scrutiny appears to be here.,' says Joseph Grundfest, a law professor at Stanford and former SEC commissioner. 'This is likely not to be viewed as a happy development at the SEC.' ... But the SEC and the banks decided last year that the firewall was no longer needed: Other protections had been put in place, they believed, to assure analysts' independence. ... After the 'April 2003 headlines regarding the "Global Research Analyst Settlement" had faded,' the judge wrote in a 2009 ruling, 'the SEC as well as these defendants were indifferent to the mechanics of restitution'," my emphasis. Nathan Koppel & Ashby Jones at the WSJ, 20 March 2010, link:

Did the SEC and the banks decide? Or did the SEC take orders?

Thursday, April 22, 2010

Improper Influence at the SEC?

"The [SEC] has known since 1997 that R. Allan Stanford likely was operating a Ponzi scheme but waited 12 years to bring charges against the billionaire, the agency inspector general said Friday. ... The SEC didn't bring charges against Stanford until February 2009, when it alleged a $7 billion fraud. ... Complex cases like Stanford's that couldn't be quickly resolved were discouraged by enforcement higher-ups, the report said. [David] Kotz's report said his office's examination didn't find that the reluctance of the SEC's Fort Worth enforcement attorneys to investigate Stanford was tied to 'any improper professional, social or financial relationship on the part of any former or current SEC employee.' ... Senior agency officials in the Fort Worth office believed they were being judged on the number of cases they brought and told their enforcement staff that novel or complex cases--as opposed to 'quick-hit' cases--were discouraged, the IG's inquiry found. ... Kotz's investigation also found that a former head of enforcement in the Fort Worth office played 'a significant role in multiple decisions to quash investigations of Stanford'," my emphasis, Marcy Gordon at the Houston Chronicle, 17 April 2010, link:

OK, Kotz. The influence was "proper". Who needs you? The SEC likes to bring many insignificant cases to few big ones. This falls right into the Vampire Squid's tentacles. Forbes noted this, my 9 December 2008 post:

Wednesday, April 21, 2010

SEC, Investors Friend, Fiend?-4

"The [SEC] joined 12 Wall Street firms in seeking to scrap a key portion of a landmark 2003 deal that put strict curbs on stock analysts, a move that could heighten the ongoing debate about a broad overhaul of the financial-regulatory system. ... The proposal would have allowed employees in investment-banking and research departments at Wall Street firms to 'communicate with each other ... "outside the presence" of lawyers or compliance-department officials resposible for policing employee conduct--an activity strictly prohibited by the settlement'. ... After the bust, it was revealed that many of those analysts were touting stocks at the behest of their firms' investment-banking operations, which were profiting from initial public offerings. One solution to the conflict of interest was separating the analysts from the investment-banking operations. ... SEC spokesman John Nester said the agency believes there are other restrictions in place, such as keeping bankers physically separate and prohibiting bankers from influencing analyst coverage decisions. In a letter requesting the change, the SEC and the banks had stated 'it is appropriate to eliminate' certain provisions because the conduct is now covered by new rules and regulations. Securities firms covered by the settlement, including Goldman Sachs Group Inc., Morgan Stanley and the Merrill Lynch unit of Bank of America Corp., declined to comment. ... The SEC is at the heart of the battle because of its mistakes during the crisis. ... Also yesterday, the head of enforcement at the Financial Industry Regulatory Authority, Wall Street's self-regulatory boy, resigned. Like the SEC, Finra has been criticized for failing to detect abuses that led to the crisis and didn't uncover the Ponzi scheme run by Bernard Madoff. ... The settlement allows the firms and the SEC to seek a judge's approval to change the agreement under certain circumstances. ... In a letter to the judge, Lewis J. Liman, a lawyer representing the securities firms, said the Chinese wall is no longer needed because of securities regulations enforced by Finra. The securities firms and SEC 'believe that these rules adequately address the concern intended to be addressed' in the original settlement, Mr. Liman wrote", my emphasis, Susanne Craig & Kara Scannell at the WSJ, 18 March 2010, link:

Did the SEC join the 12 firms, or did it take orders? Investment-banking and retail brokerage should be severed. The settlement did not do that, so had no effect in my opinion. Enforced by Finra? Hahahahaha would the Mogambo Guru say. Physically separate? Did Nester ever hear of a telephone? Or the internet? You who take the SEC's case against Vampire Squid seriously, please read this.

Tuesday, April 20, 2010

Cash Balance Baloney

"AT&T Inc. is seeking to dismiss a long-running pension case alleging age discrimination that seeks $2.3 billion in damages, according to documents filed this week in a federal court. The suit alleges a 1998 pension change effectively froze the pensions of 40,000 older management employees at AT&T, in some cases for years, but not those of younger employees. ... "we believe the conversion to our cash balance plan was appropriate and in accordance with all legal obligations,' said spokesman Mark Siegel. 'We believe our filing speaks for itself in explaining why we have no additional liabilities to these retirees.' ... Legal papers filed Monday in federal court in Newark, NJ, include the first publicly disclosed estimate for potential damages. ... Last May, the [SEC] asked AT&T why it hadn't disclosed its potential exposure in the pension case. ... If a jury found that the company willfully discriminated against older workers, it could award punitive damages that would double the size of the claim to $4.6 billion. ... In its motion for dismissal, AT&T is asking the judge to throw out the case without a jury trial. ... Minutes of a 1997 meeting of AT&T's pension consultants, included in court documents, notes that 'employees in 40s could lose, [and] have to wait 10 years for benefits'," Ellen Schultz at the WSJ, 7 April 2010, link:

I wish the AT&T employees well. Having attended actuaries cash-balance plan conversion seminars, I assure you, the conversions are made to reduce current employees' pension obligations. See my 11 February 2008 post on Uncle Sam's position on cash-balance plan conversions:

Monday, April 19, 2010

The SEC's Revolving Door

"Steven Richards left the SEC in July 2008 as a top accountant in the enforcement division to join the global business advisory firm FTI Consulting. Five days later, he signed on to represent a client involved in a 'nonpublic investigation' by his old division. ... The two ex-SEC men were among 66 former SEC employees who filed 168 letters with the SEC secretary in the first nine months of 2009 disclosing clients or new employers they planned to represent before the agency, according to documents obtained through a public-records request. ... John. P. Freeman, a former SEC lawyer and professor of professional and business ethics at the University of South Carolina School of Law, has done his own research that documented that a relatively high proportion of SEC employees go on to work for the industries they once policed. ... Others argue that employees of every government agency leave for the private sector and that the rules in place guard against conflicts of interest. ... Martin Dunn, a former deputy director of the division of corporation finance, left the agency in August 2007 after 19 years to join the law firm O'Melveny & Myers. ... In an interview, Mr. Dunn said he understands the interest in the revolving door, but said he and the SEC both take the issues seriously. 'Everybody I know cares intensely about following the ethics rules,' he said", Tom McGinty at the WSJ, 5 April 2010, link:

I'm sure Dunn speaks the truth. Everyone follows the rules if they lack substance. I again cite Graffam v, Burgess, my 24 October 2007 post:

Sunday, April 18, 2010

Alan Meltzer Strikes Again!

"Last year the New York Times ran several articles about the end of capitalism. ... Then--just in the nick of time--we were allegedly saved by timely, forceful and intelligent government actions. The groundwork was laid for the next phace: more government regulation of financial and economic life. Left out of this narrative, is the government's disastrous mortgage and housing policy. Without the policies followed by Fannie Mae and Freddie Mac--and the destructive changes in housing and mortgage policies, like authorizing subprime and Alt-A mortgages for impecunious borrowers--the crisis would not have happened. ... Would bankers have made so many errors if there had never been a too-big-to-fail policy? ... Quite the opposite. The new financial regulations, spearheaded by Sen. Chris Dodd (D., Conn.), only bring back too big to fail by authorizing a Systemic Risk Council headed by the Treasury Secretary. ... Consider the Basil Accord, passed following bank failures in Germany and the US in the 1970s. This was supposed to reduce banking risk by requiring banks to increase capital if they incresed holdings of risky assets. But financial markets circumvented it by putting the risky assets off their balance sheets. Unusual? Not at all. ... This is because regulation is static, while markets are dynamic. If markets don't circumvent costly regulations ar first they will find a way later. The answer is to use regulation to change incentives by making the bankers and their shareholders bear the losses. ... Secretaries Timothy Geithner and Hank Paulson told Congress at the AIG hgearing earlier this month that they faced a choice: a bailout or another Great Depression. This is not true. ... The market is not perfect. It is run by humans who make mistakes. But the same humans run government where they make different, often more costly, mistakes for which the public pays. ... Regulators talk a lot about systemic risk. They do not--and probably cannot--give a tight operational definition of what this means. So setting up an agency to prevent systemic risk, as Mr. Dodd has just proposed, is just another way to pick the public's purse. ... We will not get sound banking until the CEOs of the large banks and their shareholders are forced to pay for their mistakes", my emphasis, Allan Meltzer (AM) at the WSJ, 19 March 2010, link:

As usual, I agree with AM. AM says it all. Imagine, incentives count!

Saturday, April 17, 2010

China's a Bubble-2

"It is still on the market, but Charles Tong, the developer of Tomson Riviera, a luxury riverfront complex in the heart of the financial district here [Shanghai], says he is having no trouble finding takers for similarly priced units. 'We're selling three to four apartments every month,' said Mr. Tong, seated in a white Versace easy chair. 'Now, people here want something more luxurious; they'd like a new lifestyle.' ... When other recent booms collapsed--in the [US], for instance--they depressed entire economies. In China's case, a bursting bubble could affect much of the world. China is the fastest-growing large economy and, so far, a main engine pulling the world out of recession. ... Last year, a record $560 billion of residential property was sold in China, an increase of 80 percent from the year before, according to government statistics that are widely considered reliable. And with prices soaring, developers are scrambling to build more mansions, villas and high-rise apartments with names like Rich Gate, Park Avenue and Palais de Fortune. ... In the city of Tianjin, in north China, developers have created a $3 billion 'floating city,' a series of islands built on a natural reservoir, featuring villias, shopping malls, a water amusement park and what they say will be the world's largest indoor ski resort. 'This is wild,' said Andy Xie, a former Morgan Stanley economist who is now an independent analyst. 'By all tradtional measures, like rental yield, this is a bubble.' Speculators are snapping up properties on the expectation that prices will continue to rise, as prices have nearly every year for more than a decade. ... Prices [in Shanghai] have risen more than 150 percent since 2003, pushing the price of a typical 1,100 square foot apartment up to $200,000, according to real estate experts. (Shanghai residents typically earn less than $5,000 a year.) ... The apartment complex's entrance has original artworks by Salvador Dali and well-known Chinese artists. The apartments, a few of which have been decorated by Armani and Fendi, as well as Versace, lease for $7,000 to $17,000 a month--to high-level executives from companies like General Motors. ... Despite the fear of a bubble here, Mr. Tong said prices were just right, particularly because of so much hidden wealth in China. The publicly listed company is controlled by his family. ... The most recent apartment sold for about $2,300 a square foot. The average luxury apartment in Manhattan sold for just under $1,900 a squarte foot in the fourth quarter of 2009, according to Prudential Dougals Elliman real estate", David Barboza at the NYT, 5 March 2010, link:

Jonathan Swift's "Laputa" rises in China. A 1,100 square foot condo in Houston could be had for $80,000 to $250,000 depending upon location. To some extent we are seeing the same effects of monetary inflation in China as say in Argentina, where people are "selling" the local currency to buy real goods. China's a bubble!

Friday, April 16, 2010

Sic Semper Whistleblower-2

"A crusading legislator who had made a considerable reputation following up on whistleblower charges once told me that nearly all the whistleblowers she had met shared two qualities. First, they were onto something--that is, there was at least some truth to what they were saying. Second, they were 'a little bit nuts.' ... Through common sense at first, but ultimately through brilliant analytical detective work, Mr. Markopolos [HM] figured out precisely what Mr. Madoff was up to--and showed why Mr. Madoff could not bea earning the amazingly consistent returns that he claimed for his investors. ... The response of the SEC's enforcement staff was nothing less than appalling--a complete derelication of duty. ... The crook simply outmatched the watchdog. As Mr. Markopolos observes: 'The quants who create these financial products understand differential equations and nonnormal statistics; they program in languages the SEC doesn;t speak; they run statistical packages the SEC doesn't even know exist. The quants are busy data mining with supercomputers while the SEC is still panning by hand.' ... Mr. Markopolos writes: 'In my mind, at leat, I was convinced that someone high up at the Journal had decided it was too dangerous to go after Bernie Madoff.' No evidence for this charge is offered or even suggested. ... Now we come to the second quality that whistleblowers often sow. The author of 'No One would Listen' is fond of describing himself as 'slightly eccentric,' but he is not exactly self-aware. ... Mr. Markopolos tells us that for years, fearing for his own and his family's safety, he checked for bombs under his car; he also carried a loaded gun and slept with it at his bedside. He did so becase he believed--though he offers no evidence--that Mr. Madoff's clients included Russian mobsters and Latin drug cartels", Richard Tofel books review at the WSJ, 9 March 2010, link:

RT's condescending manner to HM indicates RT never blew the whistle. My experience with the (In)Justice Department makes me believe HM missed his biggest danger: the SEC would turn him over to Madoff and Madoff's cronies. Having blown the whistle in 1991 on a fraud, admittedly small by today's standards, only about $210 million in 2010 dollars, HM's fears were justified. I had the tires of my car slashed four times. I then parked it blocks away from my apartment. My apartment was burglarized. Strangely, nothing was taken. The investigating Los Angeles Police Department officer asked me who I thought did it and why. I told him. He said I might be in big trouble. I told him If I got killed tell the FBI it was a witness killing, punishable under 18 USC 1513(a). He saw I meant it. I looked under my car for bombs every day for 18 months. I had over 200 "hang up" phone calls from midnight to 1:00 AM in the morning. Who the hell does RT think he is talking to?

Thursday, April 15, 2010

What's Gold in the Ground Worth?

"This March two of the world's biggest investors became believers in a company with next to no revenues and $352 million in losses over three years. ... Both Soros and [John] Paulson are seriously bullish on gold, but why did they bet on a Vancouver mining company with an unimpressive history? ... An Oxford-trained historian, [Thomas] Kaplan believes that the last 40 years, when gold was not the world's reserve currency, were an aberration and that gold will revert to the top of the store of value as it was for 5,000 years. He means it: Kaplan's family office, Tigris Financial Group, manages close to $2 billion in gold assets. ... Billionaires, big money managers and Wall Streeters are jumping in, even as few ways remain to play this game. ... But then, if you believe that government spending run amok and easy money will result in the decline of Western civilization, you don't need any multiples to look at. ... Kaplan's NovaGold deal started in January 2009, when his New York investment outfit, Electrum Strategic Resources, made a $70 million investment for a 28% stake and warrants for more. ... One, called Donlin Creek, is in Alaska. NovaGold says it has 29.3 million ounces of gold. The other is British Columbia's Galore Creek, with 7.3 million ounces of gold and 8.9 billion pounds of copper. But investors may be getting ahead of themselves. Both properties are remote and tough to develop. ... NovaGold's annual-return estimate on [Donlin] at $1,000 gold is 12.3%, which is marginal for a big mining project", Nathan Vardi at Forbes, 12 April 2010, link:

I think and have thought for about 30 years, gold bullion coins are the world's most conservative investment. What about gold stocks? For more leverage, why not? See my 1 October 2008 post: Look at NovaGold (NG-AMEX). Now at $7.79, NG has a $1.47 billion market cap (MC). What's NG worth? With 36.6 million ounces of gold and 8.9 billion pounds of copper "in situ" I get gross revenues of $74.8 billion for NG (36.6 million x $1,161 = $42.5 billion; 8.9 billion x $3.63 = $32.3 billion; $42.5 + $32.3 = $74.8). So NG will have $74.8 billion in gross revenues over the next say, 20 years. Assuming 50% operating costs, we have net cash inflows of $37.4 billion ($74.8 x 50%). Now, assume a 35% tax rate, we get $24.3 billion in net after tax cash flows ($37.4 billion x 65%). If coming in evenly over 20 years that's $101 million per month ($24.3 billion / 240 = $101 million). Discounting this at a 7% real rate, per Kenneth Arrow, I get a $13.03 billion value for NG. With NG's $1.47 billion MC. that means the market assumes NG has an 11.3% chance of developing these projects ($1.47 / $13.03 = .113). NG appears to be fairly priced to me. Eugene Fama, take a bow.

Wednesday, April 14, 2010

Obama, Corporatist

"Socialists believe that the way to paradise is for governments to own 'the means of production'. ... Today's neosocialists are smarter than their ancestors. Instead of outright takeovers, they are achieving much the same goal through rigid regulations. ... Entitlements go hand in hand with sweeping, overbearing regulations. President Obama wants higher education in this country to be free of charge, which is why his Administration is pushing for a government takeover of student lending. ... Senator Chris Dodd's (D-Conn.) recently unveiled package of financial regulatory reforms is a neosocialist's dream. It is also destructively stupid. The bill doesn't address the key causes of the recent economic crisis: the Fed's too loose monetary policy, the behavior of Fannie Mae and Freddie Mac in buying or guaranteeing almost $1.5 trillion in junk mortgages and the failure to properly regulate credit default swaps and other derivatives. ... In the name of fighting Washington's too-big-to-fail doctrine for major financial institutions, Dodd's bill is a de facto institutionalization of them. ... Thus these biggies, like Fannie and Freddie, will have lower costs of borrowing--debt is by far the biggest component of their capital--which will put their smaller competition at a crippling disadvantage. ... Thus the paradox of today: bargain-basement rates of interest for larger firms and higher costs--or no credit at all--for smaller borrowers. ... Chief among its tasks would be assessing the risk of banks and their products and activities, yet Washington has demonstrated that it is incapable of judging risk. ... Sensible debt-to-equity ratios, including stiffer equity requirements for volatile short-term debt, and clearinghouses for almost all derivatives would effectively accomplish what Dodd's monstrosity purports to do and manifestly does not", Steve Forbes (SF) at Forbes, 12 April 2010, link:

Amazing. I agree with SF. The Dodd bill will not reform the TBTF banks. Feature or bug?

Tuesday, April 13, 2010

Sue a Bank?

"A court ruled Thursday that investors who lost money in Bernard Madoff's Ponzi scheme through funds set up by UBS AG can't sue the Swiss bank and its adviser Ernst & Young for the losses they incurred. ... Instead, they must rely on the fund liquidator to obtain compensation for them from UBS. ... One state court in Palm Beach County, Fla., last mont allowed some claims to proceed by investors against a Madoff feeder fund firm, Tremont Group Holdings Inc., and its auditor, KPMG LLP. The court hasn't ruled on the merits of the lawsuit, which alleges professional malpractice, among other things. ... Responding to the ruiling, UBS said only that it welcomes the clarification of the Luxembourg law. The bank has maintained that it set up the fund at the request of wealthy clients who wanted it to invest in Madoff products and doesn't have any responsibility for the result", Mike Gordon at the WSJ, 5 March 2010, link:

This ruling may not be that bad if the liquidator vigorously pursues the claims. If. As to UBS responsibility, was it acting only as a broker or as an adviser?

Monday, April 12, 2010

Take Peer Review, Please!

"Last fall, emails revealed that scientists at the Climatic Research Unit at the University of East Anglia in England and colleagues in the US and around the globe deliberately distorted data to support dire global warming scenarios and sought to block scholars with a different view from getting published. What does this scandal say generally about the intellectual habits and norms at our universities? ... Fashionable ideas, the convenience of professors, and the bureaucratic structures of academic life combine to encourage students and faculty alike to defend arguments for which they lack vital information. They pretend to knowledge they don't possess and invoke the authority of rank and status instead of reasoned debate. ... Only a handful of the nation's leading univeristies--Columbia and the University of Chicago at the forefront--insist that all undergraduates must read a common set of books and become conversant with the main ideas and events that shaped Western history and the larger world. ... But how can students who do not know the basics make intelligent decisions about the books they should read and the perspectives they should master? ... By far, though, the most important reason is that faculty generally reject the common sense idea that there is a basic body of knowledge that all students should learn. This is consistent with the popular campus dogma that all morals and cultures are relative and that objective knowledge is impossible. ... Good students quickly absorb the curriculum's unwritten lesson---cutting corners and vigorously pressing strong but unsubstantiated opinions is the path to intellectual achievement. The production of scholarship also fosters intellectual vice. Take the peer review process, which because of its supposed impartiality and objectivity is intended to distinguish the work of scholars from that of journalists and commercial authors. ... But any competent scholar can determine an article's approach or analytic framework within the first few paragraphs. Scholars are likely to have colleagues and graduate students they support and whose careers they wish to advance. ... There is no check to prevent them from benefiting their friends by providing preferential treatment for their orientation and similarly punishing their enemies. That's because the peer review process violates a fundamental principle of fairness. We don't allow judges to be parties to a controversy they are adjudicating, and don't permit athletes to umpire games in which they are playing. In both cases the concern is that their interest in the outcome will bias their judgment and corrupt their integrity. So why should we expect scholars, especially operating under the cloak of anonymity, to fairly and honorably evalute the work of allies and rivals? ... Harvard University Press tells a reviewer the name of a book manuscript's author but withholds the reviewer's identity from the author. It would be hard to design a system that provided reviewers more opportunity to reward friends and punish enemies. ... Then there is the abuse of confidentiality and the overreliance on arguments from authority in hiring, promotion and tenure decisions. Owing to the premium the academy places on specialization, most university departments today contain several fields and within them several subfields. ... Often unable to form independent professional judgments--but unwilling to recuse themselves from important personnnel decisions---faculty members routinely rely on confidential letters of evaluation from scholars at other universities. Once again, these letters are written--and solicited by scholars who are irreducibly interested parties", my emphasis, Peter Berkowitz (PB) at the WSJ, 13 March 2010, link:

PB is at the Hoover Institution. I agree with PB. The Sixth Amendment gives us the right to confront our accusers. Why not apply it here? As bad as academic peer review is, CPA peer review is worse. It's a sham to protect the Big 87654 as is the current PCAOB. See William Aiken's 1982 comments at my 1 September 2008 post:

Sunday, April 11, 2010

Now They Ask?

"Unlike past market meltdowns, auditors have so far escaped much of the blame in the current financial crisis. The focus on Ernst & Young LLP [E&Y] in the report released last week by the bankruptcy examiner for Lehman Brothers Holdings Inc. [LBHI] has changed that. ... In a statement Friday, a spokesman for E&Y said the firm reviewed the accounting for Lehman's Repo 105 deals 'on a number of occasions. Out view was, and continues to be, that Lehman's accounting policy for these repo transactions complied with generally accepted accounting principles. The Examiner has not concluded otherwise.' ... That has precluded the kind of in-depth bankruptcy-court examination that resulted after Lehman's collapse. This approach contrasts with the bursting of the tech-stock bubble, when the implosion of Enron Corp. and WorldCom Inc. put auditors directly on the hot seat. ... Those scandals led to the Sarbanes-Oxley Act, which changed some key ways in which accounting firms operate and are regulated. ... While E&Y maintains its audits were proper, the accounting for Lehman's Repo 105 deals appears dubious to some outside experts. 'Unless it's in "Alice in Wonderland," I've never seen this,' said Lynn Turner, former chief accountant of the [SEC]. Even if the deals are within the technical bounds of the accounting rules, experts say it appears they failed to reflect the deals' true purpose. .... These are usually accounted for as a financing arrangement akin to a loan. ... One possible proof of a lack of control is that the securities being exchanged are worth far more than the cash being received. ... Guidance in the accounting rules suggests that an exchange of securities in excess of 102% of the cash value would show a lack of control. ... And Lehman should have had some reason for the 105% level, said Jack Ciesielski, editor of the Analysts's Accounting Observer. ... The problem, accounting experts said, is that in an accounting treatment isn't allowed for a US parent company, transferring a deal to an overseas subsidiary isn't likely to pass muster", my emphasis, David Reilly at the WSJ, 15 March 2010:

Another Big 87654 disgrace. Had E&Y ever heard of substance over form? The Repo 105 deals were clearly financings. What did E&Y think motivated Repo 105? Answer: end run the 102% rule! E&Y must be full of craven idiots? What should we expect from E&Y which sanctioned the '.001 standard", in another context? See my 20 March 2010 post:

I'm Back

After a three week IRS and SEC induced layoff, Independent Accountant returns. Thank you readers who expressed concern about my well being.