Yves Smith and Junior on TARP

Yves Smith (YS) has a 23 June 2010 post at her Naked Capitalism blasting "Timmy Boy" Geithner's recent comments about TARP's "success". YS's got this knocked. Here's a link: http://www.nakedcapitalism.com/2010/06/geithner-yet-again-misrepresents-tarp-performance.html. YS notes that to make TARP look successful the Fed and Treasury sanctioned accounting fraud. What else is new? Remember, the SEC, part of the Treasury, controls the PCAOB. Doesn't that give you the "warm and fuzzies"? The supposed "police force" of the CPA profession must ignore banks' accounting fraud. Think about it.

Junior at Junior Deputy Accountant delivers a Sonny Liston-like left hook on 23 June 2010 to Timmy Boy, here:

http://www.jrdeputyaccountant.com/2010/06/tim-geithner-has-completely-forgotten.html. Go Junior!

Continuing Wall Street Control of DOJ

"The Justice Department on Thursday announced the arrests of nearly 500 people in what it billed as a nationwide 'takedown' of mortgage scams, many of them directed at homeowners in financial distress. ... Federal officials said they have identified losses of $2.3 billion stemming from hundreds of mortgage-fraud cases. High-profile convictions of Wall Street investment bankers have eluded authorities. On Thursday, Attorney General Eric Holder tried to showcase smaller cases. 'If you want to gauge the efficacy of this task force, you can't focus on simply what has happened with regards to the large institutions on Wall Street,' he said', my emphasis, Thomas Catan at the WSJ, 18 June 2010, link:

http://online.wsj.com/article/SB10001424052748704289504575312691317663972.html.

"It involves 1,215 criminal defendants in cases that uncovered more than $2.3 billion in losses. ... Hundreds of FBI agenst are working on the task forces with other law enforcement agencies to combat a type of crime that poses 'a risk to our economic stability' as a nation, FBI Director Rovert Mueller said at the news conference", Pete Yost at the Houston Chronicle, 18 June 2010, link:

http://www.chron.com/disp/story.mpl/business/7059319.html.

"Since taking office at the height of the financial crisis, President Barack Obama has promised to hold Wall Street accountabel for the meltdown. Attorney General Eric Holder reinforced that message in November when he vowed to prosecute Wall Street executives and others responsible for the crisis. ... His [DOJ] took steps to fulfill that promise this week when it arrested the ex-chairman of one of the nation's biggest mortgage firms--the largest crisis-related criminal case--and announced 1,215 people have been charged with mortgage fraud since March 1. But that success masks difficulties in the highest-profile probes: those of Wall Street banks. ... And law enforcement sources say no such charges are imminent. ... Justice officials say Holder did not over-promise and that the task force is targeting all financial fraud, not just on Wall Street. ... The shortage of Wall Street prosecutuions is not for lack of effort. ... But investigators are encountering obstacles in what they call their top-priority cases, which souces saud include probes of JP Morgan Chase, Citigroup, Deutsche Bank, UBS, Goldman Sachs, Morgan Stanley and the former Lehman Brothers", Jerry Markon at the Houston Chronicle, 18 June 2010, link: http://www.chron.com/disp/story.mpl/business/7059317.html.

More DOJ guerilla theater. Why not Eric? When I see Lloyd Antoinette Blankfein sentenced to 30 years for securities fraud, I might consider the DOJ is fighting securities fraud. Maybe. Let's apply my "Blankfein Test" and see if I would have bothered with the 1,215 arrests in question. $2.3 billion / 1,215 = $1.9 million a person. I would have selected some of them and ignored the rest. As they total $2.3 billion, I consider pursuing them in the aggregate, a waste of DOJ resources.

Quoted without comment.

Will Alan Greenspan and the other Fed Heads get indicted? What going on? The DOJ pursues these peanuts to turn firms like Vampire Squid into victims! Did any of these 1,215 peanuts get TARP money? Nonsense. I think the DOJ is running around in circles trying to figure out which peanuts working for these "top-priority" firms are safe targets.

Where's the Crime?

"US authorities arrested Lee Farkas, the high-rolling former chairman of a failed Florida mortgage lender, and charged him with orchestrating a seven-year, multibillion-dollar fraud that contributed to the collapse of a major bank and targeted the US government. ... On Wednesday, the US alleged in a criminal indictment that Mr. Farkas had been propping up his firm since 2002 using an array of fraudulent schemes that have cost investors and government programs in excess of $2 billion. ... The Federal Housing Administration said Wednesday it had lost $3 billion because Taylor Bean had lied about the health of loans it was servicing for the public housing agency. ... 'The fraud alleged here was truly stunning in its scale and complexity,' said Assistant Attorney General Lanny Breuer, who heads the [DOJ's] criminal division. ... The indictment is the largest case in which a bank has been accused of attempting to defraud the bank-bailout fund. It also comes as the Obama administration comes under pressure to hold bankers accountable for their perceived role in helping cause the financial crisis. According to the government's indictment, which was unsealed Wednesday, Mr. Farkas and his co-conspirators started the fraud by siphoning money from Colonial, which lent it billions of dollars to buy mortgages, and from its own funding arm, Ocala Financing", my emphasis, Thomas Catan & Evan Perez at the WSJ, 17 June 2010, link:

http://online.wsj.com/article/SB10001424052748704198004575310703342951666.html.

It seems Taylor Bean was run like a major Wall Street house, i.e., to benefit its officers. As much as possible was apparently stripped from it then it failed. So? Is Farkas' problem failing to install a "former" officer as Treasury Secretary? Didn't Fannie Mae have multiple accounting restatements involving billions of dollars? Won't Freddie and Fannie need about $400 billion in bailouts? Didn't AIG get $182 billion? Why is the DOJ bothering with Farkas? What's wrong with propping up a failing enterprise anyway? "Stunning in its scale"? Huh? Anyone remember Lehman and Repo 105?

Fed Newspeak

"The Federal Reserve Bank of New York [FRBNY] has come under pressure from Fed officials in Washington to improve the performance of its supervisors overseeing the nation's biggest banks, new documents show. ... 'Our review found some examples where supervisory products were not fully completed, and supervisory processes were not fully performed,' the review said, adding it also found 'that supervisory ratings were not always updated on an ongoing basis to reflect the evolving risk profile and financial condition of the organization.' ... As the Fed has emphasized, we need to learn lessons from the crisis. We recognized that improvements can and should be made. ... Despite the criticisms, Washington officials were also sympathetic to the [FRBNY], lauding it for the 'exceptional work' in responding to the financial crisis 'in an extraordiarily challenging and stressful environment.' ... The government's efforts to stem the crisis 'were, in the end, fundamentally inadequate,' Mr. Geithner said. ... Like Mr. Geithner, Mr. Paulson cited 'huge gaping holes in the regulator system' that made it difficult for regulators to address the financial crisis", Jon Hilsenrath & Fawn Johnson at the WSJ, 7 May 2010, link:

http://online.wsj.com/article/SB10001424052748704370704575228010828622910.html.

Wasn't Timmy Boy at the FRBNY a few years ago? Why believe he knows any more now than he did then? What would have been an adequate response? Giving the FRBNY the right to control monetary policy and print dollars?

Einhorn on Truth

Greenlight Capital's David Einhorn (DE) has an interesting 27 May 2010 post at the NYT:

http://www.nytimes.com/2010/05/27/opinion/27einhorn.html. DE asks, "how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms. And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts--that is, by the printing of money? ... Despite the promises by the [Fed] chairman, Ben Bernanke, not to print money or 'monetize' the debt, when push comes to shove, there is a good chance the Fed will do so, at least to the point where significant inflation shows up even in government statistics. ... " DE raises other issues I have. My bottom line: eventually all will see the emperor is naked.

Three-Card Monte Central Bankers

"After all the massive bailouts, the federal debt is exploding. ... The US now has a heavier debt burden than several of the overleveraged countries that have been branded with the scornful nickname 'the PIIGS.' ... Yes, in recent months, there's been a lot of bullish talk about how the American balance sheet has been cleaned up. ... And banks and other financial institutions owe $1.4 trillion less than they did in late 2008. Those debts haven't disappeared. They have merely been shifted onto the books of the federal government--in what may be the highest-stakes shell game ever. ... There's no sign of a slowdown in debt growth. 'These processes are not linear,' warns [Carmen] Reinhart. 'You can increase debt for a while and nothing happens. Then you hit the wall, and--bang!--what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big.' ... 'If you flood the markets with more and more debt, its value is going to go down. We are silly to fool ourselves into believing otherwise.' ... In 1989, the great investor Sir John Templeton told me something that has rung in my ears ever since, this week more than ever: Those who spend too much will eventually be owned by those who are thrify.' ... But in my view, the obvious tools--gold and other commodities, emerging-markets stocks, inflation-protected bonds--are already so popular that they are likely overpriced", my emphasis, Jason Zweig at the WSJ, 8 May 2010, link: http://online.wsj.com/article/SB10001424052748704292004575230601932486166.html.

I disagree with Templeton, remembering something Brazil's finance minster said about 25 years ago, "If I owe the bank a million dollars and I can't pay, I'm in trouble. If I owe the bank a billion dollars and I can't pay, the bank is in trouble". Who is in trouble if Uncle Sam owes trillions? I think $1,225 gold is cheap.

Magic Words

"The term 'social justice' is now commonly used by leftist activists, clergy, educators, judges, and politicians to describe the goal they seek to achieve with many of their polcies. No precise definition of 'social justice' is ever offered by the left. Instead, the term is always used in a vague way--as if everyone already knows, or should know, what the seemingly well-intentioned phrase 'social justice' means. ... In short, social justice is communism. ... 'Justice,' in the Marxist context, means economic equality. This is Marxist utopian ideal that all members of society should receive the same amount of compensation, regardless or occupation, skill, or work ethic", Jayme Sellards at American Thinker, 16 May 2010, link:

http://www.americanthinker.com/2010/05/what_exactly_is_social_justice.html.

"You might think that being a Supreme Court justice would be the top of the line job for someone in the legal profession. But, many Supreme Court decisions suggest that too many justices are not satisfied with their role, and seek more sweeping powers as supreme policy-makers, grand second-guessers or philosopher-kings. ... The role of an appellate court is not to simply second-guess the decision of the trial judge and jury, much less usurp the responsibility of legislatures to make social policy. But the pretense of applying the Constitution gives appellate judges the power to do both. ... If justices can pick and choose which legal principles and practices they will follow, from the many widely varying principles and practices in countries around the world, then they can find a basis for doing just about anything they feel like doing. ... Once appellate judges are free to base their rulings on what people do in India, Egypt or Germany, Americans are no longer a self-governing people", Thomas Sowell at Frontpage Magazine, 24 May 2010, link: http://frontpagemag.com/2010/05/24/judicial-power-grabs/

"Ever wonder why most of your credit-card mail comes from South Dakota? The answer is a 1978 Supreme Court decision called Marquette National Bank on Minneapolis v. First of Omaha Service Corp. ... The Court ruled that it referred to the location of the bank. ... What happened next was predicatble enough: Citibank offered to move to South Dakota, bringing much-needed jobs and tax revenue, if the state would let it write new credit-card regulation. ... If the Supreme Court had interpreted one word differently, credit-card regulation in this country would be entirely different. ... Bruce Ackerman, a legal scholar at Yale ... [said] 'For sure ... the status of undocumented aliens is going to me mcuh more salient in Americna law. We're going to have 10 [million] or 15 million people or more who'll find themselves in a position increasingly like black people in 1954. That will be a terribly serious issue, and the court will have to decide how to respond.' ... 'What happens when promised benefits are cut back dramatically?' he asked. 'Will the court protect the weak, or not?'," my emphasis, Ezra Klein at Newsweek, 24 May 2010, link: http://www.newsweek.com//id/238075. This reminds me of my meeting Al Sharpton in 1966 or 1967, my 5 March 2009 post: http://skepticaltexascpa.blogspot.com/2009/03/eric-holder-deceiver.html.

Many times I've said the Supremes do whatever they want and justifiy it later. I await Justice Ginsburg's using Saudi Arabian law as precedent. Will she say it is neither cruel nor unusual to cut off a thief's hand?

Aren't you impressed by Ackerman's reasoning? Negroes in 1954 were American Citizens. The 14th Amendment was created to ensure they were citizens. How dare you claim the same rights for illegal aliens? See, we are all legal scholars now. Why will the Supremes have to decide anything with respect to illegal aliens? What happens when taxes are increased? Will the court protect the solvent, or not? Aren't you impressed with legal reasoning? Wait, there is an answer! Have the Supremes decide no person need pay anything to support illegal aliens. Based on what? Extending the reach of the Third Amendment. Why should American citizens "quarter" members of the Aztlan Army?

Greece Today, America Tomorrow

"Are Europe and America headed to where Athens is today? ... Protected by the [US] through a half-century of Cold War, Europe cut back on defense and ratcheted up spending for La Dolce Vita. ... As the cradle-to-grave welfare states rose, an ever-increasing share of the labor force left the private sector for the security of the public sector. ... The fertility rate of Greece and every European nation fell below 2.1 births per woman needed to replace an existing population. Greece's birth rate has been below zero population growth for three decades. ... Were Greece a company, the solution would be bankruptcy. ... Because, should Greece decide not to take a chainsaw to her welfare state, but walk away from her debts and default, she would blow a hole in the balance sheets of the biggest banks in Europe. ... Rather than savage their welfare-state programs, and risk riots in the streets and a massacre at the polls, Madrid and Lisbon, too, might look ageeably at default. ... For how much longer will Greeks work longer, retire later and live on smaller pensions, so holders of Greek bonds can get their interest payments right on time? ... But the crisis will return. For the nations of Europe have made commitments beyond their capacity to keep, given their growing debts and aging population. ... And the unfunded liabilities of Social Security, Medicare and federal pensions rival those of Western Europe. States like California and New York, larger than Greece, look a lot like Greece. ... While the temptation is great for Washington to bail them out again, the [US] government itself has now begun to attract the concerned notice of holders of US debt", my emphasis, Pat Buchanan at World Net Daily, 6 May 2010, link:

http://www.worldnetdaily.com/index.php?pageId=150649.

"Crisis--from the Greek word 'Krisis'--is one of the many English words we owe to the ancient Athenians. Now their modern descendants and reminding us what it really means. ... So serious was the situation that it took a European version of the 2008 TARP bailout of US banks to save the euro. ... If fully implemented, it will be the mother of all bailouts--and one of the biggest admissions of error in modern financial history. The design of the European currency has been fatally flawed from the outset. It just took the Greek crisis to expose it. .... It would end forever the exchange-rate volatility that has bedeviled the continent since the breakdown of the Bretton Woods system of fixed exchange rates in the 1970s. ... A single European currency also seemed to offer a sweet deal. Countries with excessive public debt would get German-style low inflation and interest rates. And the Germans could quietly hope that the euro would be a little weaker than their own super-strong Deutsche mark. ... But the worst defect in the design of the Economic and Monetary Union (EMY), we argued, was that it united Europe's currecies but left its fiscal policies completely uncoordinated. ... The design of the EMU illustrates a profoundly important truth about human institutions. Just because you don't create a formal procedure for something you would rather not happen, that doesn't mean it won't happen. ... Problem solved? Unfortunately not. ... For one thing, it's simply not credible that the Greek government will be able to deliver the fiscal tightening it has promised at a time of deep recession. ... It will surely be at least a year before investors wake up to the fact that the fiscal predicament of the [US] is actually worse than that of the euro zone", Niall Ferguson at Newsweek, 24 May 2010, link:

http://www.newsweek.com/id/237645.

In about 1985 I remember reading a Fortune interview of Barton Biggs (BB). The substance of what BB said was, "The notion of 250 million South Americans slaving away in the hot sun to repay some New York banks does not comport with my notion of political reality". Well said BB Mine neither. Between now and 2017 I expect the "Venezuelanization" of most of Europe and the US. Got bonds? Sell while there's still time.

I disagree with NF. The Greek bailout did not save the euro. It saved banks holding Greek paper. It will kill the euro. There is nothing any European country could have done with respect to taxing and spending before the coming of the euro it couldn't do after. The euro was and is a "whole lotta nuttin". The euro was sold as a piece of financial engineering!

EU in Wonderland

"The bailout package for eurozone governments facing debt troubles has created another urgent challenge for European policy makers: how to keep free spending governments in line. ... Because there was no currency risk, banks, insurance companies and pension funds in every euro-zone economy became the biggest investors in the bonds issued by governments of other countries using the euro. .... Although the budget policies of euro-zone members were tied together in this way, without people really noticing, there were no mechanisms to prevent governments from overspending. ... But, in practice, the pact had no bite. ... These packages circumvented rules that many had assumed prohibited bailouts within the euro zone. They also weakened market incentives for governments to get their houses in order. ... 'Profligate countries now can count on the ECB to alleviate market pressure that could provide the only disciplining device before a crisis situation is reached,' Mr. [Marco] Annuziata says. ... As a step toward improving it, Olli Rehn, the EU economic commissioner, is set Wednesday to propose rules, with clear enforcement mechanisms, both to prevent excessive government debts and deficits, and to act more decisively in a debt crisis", my emphasis, Stephen Fidler at the WSJ, 11 May 2010, link: http://online.wsj.com/article/SB10001424052748704879704575236572824559304.html.

This is laughable. There no "rules" for governments, unless you have your own army to enforce them. Unless the EU has its own army and will use it to "enslave" millions of Greeks, Greece's debt will be repudiated. One way or another. What part of this don't you understand? Sovereign debts are usually repudiated. Openly. Or by inflation. Government bonds are a sell. Treasuries, Bunds, Gilts, etc. They all stink. You want to restrain government spending? Have your government go back to the gold standard. "[T]here were no mechanisms to prevent governments from overspending". Of course. As Yves Smith asks, "feature or bug"? What "circumvented rules"? What "clear enforcement mechanisms" short of an army? Will the EU hire the Crips or Bloods to collect from Greece? For a small "emolument", they could likely be enticed into collecting. How small? Say 10% of whatever they collect. Hell, for 10% of say $150 billion, you might be able to get the Zetas to collect for you.

The WSJ's Got It!

"The [SEC's] complaint against Goldman Sachs is playing in the media as the Rosetta Stone that finally exposes the Wall Street perfidy and double-dealing behind the financial crisis. Our reaction is different: Is that all there is? ... Far from being the smoking gun of the financial crisis, this case looks more like a water pistol. ... Regarding the second point, the offering documents for the 2007 CDO made no claim that we can find that Mr. Paulson's firm was betting alongside ACA. ... More fundamentally, the investment at issue did not hold mortgages, or even mortgage-backed securities. ... Perhaps the SEC's enforcement division doesn't understand the difference between a cash CDO--which contains slices of mortgage-backed securities--and a synthetic CDO containing bets against these securities. ... Did Goldman have an obligation to tell everyone that Mr. Paulson was the one shorting subprime? ... Mr. Paulson bet against German bank IKB and America's ACA, neither of which fell off a turnip truck at the corner of Wall and Broad Streets. ... By the way, Goldman was also one of the losers here. Although the firm received a $15 million fee for putting the deal together, Goldman says it ended up losing $90 million on the transaction itself, because it ultimately decided to bet alongside ACA and IKB. ... Which leads us to the real impact of this case, which is political. The SEC charges conveniently arrive on the brink of the Senate debate over financial reform, and its supporters are already using the case to grease the bill's passage", my emphasis, WSJ Editorial, 19 April 2010, link:

http://online.wsj.com/article/SB10001424052702303491304575188352960427106.html.

Yes, convenient. Coincidence? We don't think so. Why did the SEC choose this case? See my 5 May 2010 post: http://skepticaltexascpa.blogspot.com/2010/04/vampire-squidking-canute-of_25.html. That the case is weak is a Yves Smithian "feature. not bug". Vampire Squid's losing money on this deal means nothing to me, except possibly that was one of the SEC's considerations in selecting this deal for "enforcement"

Ticking Debt Bombs

"My first lesson in the power of contagion happened in 1997, when I was based on Seoul. ... Why would a problem in Thailand extend to wealthier South Korea? ... On the surface, contagion makes no sense. Just because country A falls into a debt crisis doesn't mean countries, B, C or G should as well. But that's not how investors think in times of uncertainty. Instead, they look for other potential trouble spots, then try to get out of them. ... Europe may be facing a similar contagion effect today. Worries that overindebted Greece could default sent investors scouring for the next ticking debt bomb. ... Not even the unprecedented $145 billion European Union-IMF bailout for Greece announced in early May is guaranteed to stop things from getting worse. In South Korea in 1997, the IMF rescue failed to restore shattered investor confidence. ... Athens must still prove it can implement the brutal tax hikes, public-sector salary cuts and other budget-reduction measures it promised in return for the aid. ... And why stop in Europe? Much of the indistrialized world is emerging from the Great Recession buried in debt, the result of historical profligacy mixed with the costs of stimulus packaages and bank bailouts initiated during the recession. ... No investor should equate Greece's problems with those of the US. But we're not in normal times. .... What makes contagion so scary is that investors respond in a completely rational fashion: they panic. .... Now, with the Greek rescue, Europe has finally shown the backbone to take on contagion. But it needs to do more. This is no longer a Greek crisis; it's a eurozone crisis", my emphasis, Michael Schuman (MS) at Time, 17 May 2010, link:

http://www.time.com/time/magazine/article/0,9171,1987598,00.html.

MS produced a descriptive piece devoid of economic analysis. Contagion means and explains nothing. MS, do you know what a balance sheet is? You are right about this: "it's a eurozone crisis". Instead of confining the cancer to Greece, Germany injected itself with it. Got euros? Poor dear. I'm sure MS will happily take them off your hands. This kind of piece Yves Smith would decry for its dismissive tone, "You sans culottes. Fear nothing. Super ECB-IMF is here. Buy Greek bonds". Why should Greece's $145 billion bailout do any more than spread the problem to Germany and France? MS, how dare you tell me what not to do? I "equate Greece's problems with those of the US". All times are those of "uncertainty". So? What made investors to look less positively on Greece's debt?

Khuzami and and CDOs

"[SEC] enforcement chief Robert Khuzami oversaw a group of lawyers at his old firm, Deutsche Bank AG [DB], that was closely involved in developing collateralized debt obligations, the same product in the agency's fraud lawsuit against Goldman Sachs Group In., according to people familiar with the matter. ... As part of that job he worked with lawyers who advised on the CDOs issued by the German bank and how details about them should be disclosed to investors. ... Liek Goldman, [DB] has faced allegations of inadequate control over its creation of CDOs. It isn't clear if Mr. Khuzami personally reviewed any sturctured-finance deal documents in his role at the bank, and outside law firms were also involved in CDO work. ... Because of Mr. Khuzami's old job and his financial interest in the company, he has recused himself from any matters related to [DB], according to an SEC spokesman. ... SEC officials say Mr. Khuzami's resume is a nonissue, adding thjat the agency will go after illegal conduct wherever it occurs. ... Mr. Khuzami has vowed to pursue wrongdoing against Wall Street firms in high-profile areas such as subprime mortgages and CDOs. ... Mr. Khuzami is the first SEC enforcement director in recent history to come directly from an investment bank. ... Some securities lawyers say Mr. Khuzami's high-level position at [DB] could have given him insight into structured-finance products, an area where the SEC has been criticized for a shortage of expertise", Aaron Lucchetti & Kara Scannell at the WSJ, 24 April 2010, link: http://online.wsj.com/article/SB10001424052748704388304575202562283283500.html.

Khuzami's appointment did nothing for me. It still doesn'. See my 20 February 2009 post:

http://skepticaltexascpa.blogspot.com/2009/02/sec-at-large.html.

What 13th Amemdment?

"In October 2008, polls showed that the majority of the American people, 56 percent, were opposed to the $700 billion TARP bill that funded the bank bailouts at the cost of $2,334 to each and every 300 million of them. ... Unlike the unfortunate Americans, the people of Iceland were given the chance to exert their will directly on a similar banking bailout in the form of a referendum. As the US Congress had done before them, the politicians in the Icelandic parliament approved legislation covering the losses of a private Icelandic bank, a bill that would have cost every Icelander $16,400. But thanks to the brave resistance of their president, the Icelandic people took full advantage of their more democratic system to vote down the Icesave bailout on March. A full 93 percent of them voted against handing over $5.3 billion, nearly half their annual GDP, to repay the Dutch and British governments ... President Grimsson is the first true hero of the current financial crisis, which is far from over regardless of how many economic green shoots are spotted by keen-eyed central bankers or created by governement statisticians. In direct contrast to John McCain and Barack Obama, who didn't hesitate to throw over the American people on behalf of the bankers, President Grimsson personally intervened in the political process and, by forcing the referendum, gave the Icelandic people the opportunity to make a genuinely democratic decision on their financial future. ... It should be clear that what is much more dangerous to the economy of Iceland and every other country in the world is a political system that permits politicians such as Haarde, Sigurdardottir, Sigfusson, Brown, Bush, McCain and Obama to turn entire nations into unwilling serfs of a small number of short-sighted and woefully incompetent bankers. There is no one road to serfdom, and given their woeful performance over the last five decades, it would appear that the banking oligarchy would make for a de facto ruling class that is even less effective than the communist apparachiks, fascist bureaucrats, inbred aristocrats and clueless kings who preceded them", Vox Day at World Net Daily, 8 March 2010, link: http://www.worldnetdaily.com/index.php?pageId=127206.

Well said Day. Eventually we will have an American president who is not owned by the banksters. When he is elected, woe to them.

Banks and CPAs

"With all the attention to banking regulation, it seems strange that something called Basel III has escaped widespread notice, even though its various new rules have been up for public discussion since January and the window closed on that opportunity on Friday, April 16. Maybe it's because the Basel Accords, a set of rules agreed to by bank regulators around the world, have been something of an embarrasment to the authors. ... The idea was to give an increasingly globalized financial-services industry a common set of rules so that bankers could have more confidence in the solidity of their global counterparties. ... In an unsuprisingly generous gesture toward national treasuries, banks were allowed to regard government-issued securities as zero risk, meaning they would require not offsetting capital. ... Japanese banks were boasting that they were over-compliant with Basel standards right before they tanked in 1990. ... But the Basel standards proved to be largely irrelevant to the factors that caused the fall 2008 near-meltdown of global finance. For example, Lehman Brothers had close to triple the core capital required by the Basel standards when it crashed. ... The 2008 crisis resulted when the Fed-created credit bubble collapsed and soaring housing prices deflated as well. ... One of the great ironies of our times is that the two strongest defenders of the Fannie-Freddie shell game, Chris Dodd and Barney Frank, are now in charge of reforming banking regulation. ... Aside from giving Washington an even tighter grip on the banking industry, the Dodd bill partly institutionalizes what Ben Bernanke at the Fed and Henry Paulson at Treasury, and Timothy Geithner at the New York Fed did ad hoc in the fall of 2008. It permits backdoor bailouts and gives enormous powers to the same Fed that crafted the housing bubble", my emphasis, George Melloan at the WSJ, 24 April 2010, link:

http://online.wsj.com/article/SB10001424052748704508904575192534100550538.html.

The Dodd bill stinks. It's more of the same and more TBTF bailout. I agree with Melloan. There is virtually no rule that banks can't "engineer" around. Irony? Or as Yves Smith says, "Feature, not bug".

Financial Reform, Chicago-Style

"A 'trilemma' is like a dilemma, only there are three things to choose from and you can have just two. The current debate over post-crisis financial regulation suggests we face such a trilemma: We can choose any two of the following: but not all three: 1) efficient capital markets 2) no bailouts to big banks and 3) a depression-free economy. ... But the idea that big banks might be able to get new capital from the Treasury was scarcely even contemplated. Choosing one and two resulted in a global financial and economic crisis worthy of the name depression. ... Either the bill does not imply future bailouts, as Republicans argue. Or, as seems more plausible to us, it is going to introduce such a wide range of new financial regulations that the efficiency of our capital markets will be significantly diminshed. ... Whether or not there is any basis for the SEC's claim that [Goldman] misled investors, the key point is that the collateralized debt obligation (CDO) at issue was nothing more than an elaborate wager on the future price of some mortgage-backed securities--a wager with as much economic utility as a gigantic bet on a roulette wheeel or a horse race. ... But [derivatives] increased the instability of the global financial system. And taxpayers have paid a heavy price since the system all but collapsed in late 2008. ... There was never a good reason for treating credit default swaps and their ilk differently from commodity futures, which are standardized and traded on exchanges. ... The nightmare possibility arises: Could the proposed cure turn out to be just another symptom of the same disease? As the rules become ever so more convoluted, so the opportunities for the unscrupulous increase--and the efficency of the financial system as a whole decreases. ... First, in the more controlled capital markets of the 1970s, borrowers generally paid more for their loans because there was less competition. ... Second, it is not at all clear that our crisis was exclusively caused by a failure of regulation as opposed to a failure of monetary policy. ... Third, the crisis of 2007-2009 originated in one of the most highly regulated sectors of the financial system: the US residential mortgage market", my emphasis, Niall Ferguson & Ted Forstmann (F&F) at the WSJ, 23 April 2010, link:

http://online.wsj.com/article/SB10001424052748703876404575200104219993576.html.

I only disagree with F&F over this: we cannot have a "depression-free economy". Apparently F&F don't favor the Dodd bill either.

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:

http://online.wsj.com/article/SB10001424052748704231304575092141898417002.html.

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

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:

http://www.forbes.com/forbes/2010/0412/fact-comment-steve-forbes-neosocialists-obama-obamacare-marx-impressed_print.html.

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

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:

http://www.businessweek.com/magazine/content/10_10/b4169044647894.htm.

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.

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:

http://online.wsj.com/article/SB10001424052748703391004575106452707894556.html.

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.

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:

http://online.wsj.com/article/SB10001424052748704454304575080983997544158.html.

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?