UK and Glass-Steagall

"Bank of England governor Mervyn King, saying new regulations won't prevent failures of big banks, made a strong call for breaking up some of the world's biggest financial firms, a view that takes on increasing significance because he is likely to gain new regulatory powers in the next year. ... Finance ministers across Europe share Mr. King's worries about systemic risk and on Tuesday signed off on an agreement in principle to establish a financial watchdog covering the 27-nation bloc. But the UK held up formal approval because of concerns that three banking subsidiary supervisors covering banking, financial markets and insurance could impose decisions on national governments with fiscal consequences.'The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believes, force us to confront the "too important to fail" question,' Mr. King said in a speech to Scottish businesssmen Tuesday. 'The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.' ... Mr. King appeared to take a swipe at recent banking overhauls put in place by the FSA, the Labour Party and banks themselves, saying that there had been 'little real reform.' Mr. King's views will get a hearing from the opposition Conservative Party, whose finance spokesman said that these 'is a case for separating banking from riskier activities,' though he belives that needs to be done on an internantional scale", Natasha Brereton and Stephen Fidler at the WSJ, 21 October 2009, link: http://online.wsj.com/article/SB125607015746097133.html.

"'Why,' Mr. King asked, 'were banks willing to take risks that proved so damaging both to themselves and the rest of the economy?' His answer: 'One of the key reasons ... is that the incentives to manage risk and to increase leverage were distorted by the implicit support or guarantee provided by government to creditors of banks that were seen as "too important to fail"'. Politicians--and the US [Fed] Chairman--hate hearing that it was their subsidies for credit and for the biggest banks that contributed to the problem", WSJ Editorial, 23 October 2009, link: http://online.wsj.com/article/SB10001424052748704224004574489254094714512.html.

Corporate limited liability is the problem. Answer: ban corporations from holding federally insured deposits. Henceforth only unlimited liability general partnerships may hold them. If vampire squid wants to gamble with its money, fine, not with public funds.

I don't care what Zimbabwe Ben thinks. Low interest rates were largely responsible for our current crisis.

FINRA = SEC = 0

"An internal review by the nation's largest independent securities regulator found that its staff members had missed numerous red flags that would have uncovered frauds run by Bernard L. Madoff and the Texas billionaire R. Allen Stanford. The report to the group, the Financial Industry Regulatory Authority, was the latest indication that government and private regulators did not investigate tips that might have unconvered suspicious activities by both men before tens of thousands of investors lost billions of dollars. ... According to the report, Finra's predecessor, the NASD, did not act from 2003 to 2005 on 'credible information from at least five different sources claiming that the Stanford CD's were a potential fraud.' ... The Finra report noted that from 1999 to 2003, Finra's office in Dallas was led by Bernard Young, who three years later was hired as managing director of compliance at the Stanford Financial Group, Mr. Stanford's company", Clifford Krauss at the NYT, 3 October 2009, link: http://www.nytimes.com/2009/10/03/business/03finra.html.

Give it up. Under current incentives, regulation is hopeless.

Dog Bites Man!

"An outside review of Citigroup Inc.'s management team has concluded that it is generally in good shape but that some shuffling of senior executives might be needed, according to people familiar with the matter. The review, conducted this summer for Citigroup's board by recruiting and consulting firm Egon Zehnder International [EZI],was triggered by the government's stress tests of top banks last spring. ... The [FDIC], which has had concerns about the qualifications of Chief Executive Vikram Pandit [VP] and his top management team, required Citigroup to hire an outside firm to perform the review. In a sign of the sensitivity about the report inside the company, the document hasn't been circulated in electronic form and is printed on paper that can't be photocopied. ... The report provided less-favorable assessments of at least two of Mr. Pandit's lieutenants, Vice Chairman Lewis Kaden and Chief Adminstrative Office Don Callahan, the people said. ... Citigroup's board met Tuesday morning to start discussing the findings and how to respond to them. ... The company has to inform regulators this month about [EZI's] findings and how the board is responding to them, these people said. The FDIC is likely to treat the management review as one factor in a broad assessment of Citigroup's financial health. ... The report's encouraging tone is a departure from the frustration that some analysts, investors and Citigroup executives have expressed about Mr. Pandit's leadership since he became CEO is December 2007. Among the complaints is that Mr. Pandit relies too much on a small cadre of advisers, according to people familar with the matter", David Enrich and Joann Lublin at the WSJ, 8 October 2009, link: http://online.wsj.com/article/SB125493943292571139.html.

"The [FDIC] is questioning the generally positive conclusions in a government-mandated review of Citigroup's top management, according to people familar with the situation. Some officials at the agency have expressed doubts about the rigor of the report, which was based partly on interviews with Citigroup executives who were asked to rate the effectiveness of their colleagues, these people said. ... The review was completed last week, and Citigroup's board began discussing this week whether to make any management changes in response to the report. The FDIC began sifting through the findings this week. ... FDIC officials vetoed a consulting firm that the bank had initially porposed for the job. After vetoing the consulting firm favored by Citi, FDIC officials sent Citi 'a list of approved firms acceptable to them,' and one was [EZI], one informed individual said. ... One person close to the agency described the outside report as 'a total whitewashing.' Some agency officials also are having second thoughts about the qualifications of [EZI], which largely runs executive searches for clients", my emphasis, David Enrich & Randall Smith at the WSJ, 9 October 2009, link: http://online.wsj.com/article/SB125504371565574655.html.

Another orchestrated farce like the stress tests. Man bites dog is news, that Citigroup's hired guns find Pandit is doing a decent job should surprise no one. Will Citigroup file the report as an attachment to a Form 8-K? If not, why not?

What wrong with a whitewash? Did the FDIC scream about Zimbabwe Ben's stress tests? For the record, Citigroup never approached me to do the review.

COYOTE does New York

"Ever since the New York City Charter was revised in 1989, public officials have been warned about trying to parlay their official positions into personal gain. And the powerful,m if largely anonymous, body that keeps those officials in line, using the threat of hefty fines and even job termination, is the city's Conflicts of Interest Board. ... One member, Monica Blum, testified at a recent City Council hearing in favor of a project that would benefit the Lincoln Square Business Improvement District, a group for which she serves as president Another member, Angela Mariana Freyre, was once a registered lobbyist who, city records show, tried to influence both the mayor's office and the City Council while on the board--even though the City Charter forbids that. Several members--including the newest one, Burton Lehman, a former general counsel at the real estate developer Tishman Speyer--sit on boards of nonprofit groups that have received city contracts or have accepted charitable money fronm Mr. Bloomberg. ... Dick Dadley, executive director of Citizens Union, a nonprofit government watchdog, said, 'There may be reason to question how strongly they are monitoring the activities of senior administration officials, given that they ruled against a number of lower-level city employees for rather minor mistakes or judgments and then appear not to be as equally fair-minded in their review of higher-level folks'," David Chen at the NYT, 7 September 2009, link: http://www.nytimes.com/2009/09/07/nyregion/07conflicts.html.

Is anyone surprised by this? Does this board need its own PCAOB?

Taleb in Washington

Marion Maneker (MM) wrote a 29 March 2009 piece about Nassim Taleb, link: http://www.thebigmoney.com/print/1660. Yves Smith brought MM's piece to my attention. Thanks. Some quotes, "To Taleb, the supposed stability brought about by complex financial derivatives, global banking connections, and accelerated flows of capital was a mirage masking the accumulation of massive amounts of hidden risk. ... Taleb has a clear-eyed plan. First, he says, we have to unmask the charlatans of risk like Myron Scholes. ... To Taleb, Scholes' academic work, which enabled the widespread use of complex derivatives, was like 'giving children dynamite.' ... We cannot have both debt leverage and a hyper-efficient system--the volatility is too great. What Taleb explains--which no one else does--is that efficiency is already a form of leverage. A highly efficient system removes slack and magnifies small changes. Think of the efficient system as a high performance aircraft. Each minute of steering input creates a rapid and violent shift, of course, speed, or altitude. ... A deleveraged financial system is a stable one, especially if we increase the redundancy within the system. That's an idea Taleb has taken from biology", my emphasis.

I agree with Taleb. Our large banks' capital structures, have too much short-term debt. These capital structures are the financial equivalent of just-in-time inventory. A system prone to breakdowns, see my 23 July 2007 post: http://skepticaltexascpa.blogspot.com/2007/07/just-in-time-inventory.html. As for Myron Scholes, see my 20 April 2008 post: http://skepticaltexascpa.blogspot.com/2008/04/on-black-swans.html. Read MM's piece. I have likened a highly efficient system to an M-16 rifle, an inefficient one, an AK-47. Ah, the simplicity of the Russians. The AK-47 is so crude, it's beautiful. It fires. In: heat, cold, sand, anywhere. It's reliable. Thank you Mikhail Kalashnikov. The AK-47, 75 million copies sold, first choice of terrorists everywhere. The market rules! Taleb even thinks we should "increase redundancy"! Wow. Amen. Redundancy makes for robust systems.

31 More Years-5?

"Auditors will lobby the UK government for a statutory requirement that limits their liability after the current operational system has been effectively blocked by US regulators. ... But the US [SEC] has now indicated to the UK government that it will not accept any limited liability agreements by British companies who are also registered with it, a list which includes many of the biggest UK companies. ... 'This is the door being slammed shut in reality,' said Peter Wyman, global director for public policy at PWC, who added that he did not consider it would be a 'huge shift' to make UK policy statutory. ... SEC opposition has focused on the negotiation required between auditors and company directors to agree to limits. Officials fear this compromises independence, which would not be the case if the agreements were mandatory. ... Officials fear market chaos should one of the Big Four collapse as suddenly as Arthur Andersen did, leaving companies scrambling to find a new auditor", Jennifer Hughes at the FT, 11 March 2009.

More Big 87654 snake oil. CPA liability limits are what the capital markets don't need. If Big 87654 work is bad now, consider how much worse it will get with liability limits. I have long advocated repealing 1995's Litigation Reform Act to increase CPA liability for bad audits. If the officials are concerned about a Big 87654 firm collapsing, I say bust 'em up into the not so big 40. We now have CPA firms which are TBTF just like banks! Wonderful. We see how vigorously the TBTF banks are regulated.

Bank Regulation?

"Ground zero of the economic depression is the banking system--worldwide. The system is collapsed, exploded, demolished, gone ruined, kaput. The global banking system was a house of cards, and it has fallen. Governments and central banks everywhere do not yet realize this. They are attempting to rebuild the house from the pieces and scraps scattered far and wide. ... Government after government, and this includes the federal government of the US, has shown itself incapable of controlling bank lending, while simultaneously mandating a single national currency and insuring bank deposits. Banks are always one or more steps ahead of regulators, or else obtain concessions that allow them to take on inordinate risks. Central banks and governments are always all too ready to count on central banks to encourage banks to make marginal and risk loans. ... Banks are all too ready to take inordinate risks using insured bank deposits. ... Regulators are all too slow to identify and control banking behavior. ... The failed government banking system rests on a basic false assumption. The idea that government regulators should control money and banking because the market cannot. That idea is entirely false. ... In a market system, individual banks that provide loans and create deposits and that issue their own bank notes, cannot long survive without prudent policies. ... In the existing government and central banking system, this discipline is absent. Banks that are in a central bank system do not issue their own notes, so there is no pricing of their currencies. ... In a market system, if a bank over-issues, or makes bad loans, or makes loans that endanger its ability to meet deposit withdrawals, its notes depreciate in the market place. This induces people to present the notes for redemption. If the bank is not to experience a bank run, it must heed the market price of its notes", Mike Rozeff, 5 March 2009 at http://www.lewrockwell.com/rozeff/rozeff278.html.

Bank runs are good! They discipline banks! The regulators can't or won't.

IndyMac, an OTS Failure?

"Federal regulators failed to catch warning signs that presaged the collapse of mega-thrift IndyMac Bank last July, a US government watchdog said Thursday. ... The Office of Thrift Supervision, IndyMac regulator, recognized the red flags, but did nothing to stop them, the Treasury inspector general said. ... The report suggests OTS examiners put faith in IndyMac's management because the firm was turning profits and growing. Auditors found that OTS examiners didn't always report all problems identified by its examiners, and 'did not ensure that the thrift took the necessary corrective actions' when it did bring problems to IndyMac's attention. ... The report also rejected much of the blame targeted at Sen. Charles Schumer (D., NY). Mr. Schumer came under fire last year for making public a letter he sent to regulators questioning IndyMac's ability to stay afloat as a business", Michael Crittenden at the WSJ, 27 February 2009.

The attacks on Schumer were absurd. Even Treasury figured out, "that 'the underlying cause of the failure was the unsafe and unsound manner in which the thrift was operated',". See my 26 July 2008 post: http://skepticaltexascpa.blogspot.com/2008/07/full-cover-up-mode.html. This is an object lesson for those who favor replacing the Big 87654 with federal auditors to improve financial reporting. I think the federal auditors will be under more pressure to conceal wrongdoing than the Big 87654. Really. At least you can sue the Big 87654. Go sue the SEC. Or the OCC, or OTS.

Whistleblowing, Why?

"Many whistleblowers--employees who alert their bosses to fraud or recklessness in how a business is being run--do not fare as well as the Fool. They are not only ignored, but are sacked for being persistent irritants and naysayers. Yet, many of those who disdain or sack whistleblowers regret it later. ... Sir James Crosby resigned this week as deputy chairman of the UK Financial Services Authority after a controversy over a whistleblower at HBOS, the banking group of which he was formerly chief executive. Paul Moore, the former head of regulatory risk at HBOS, accused Sir James of firing him for warning about the bank's rapid growth. ... Meanwhile, another whistleblower is discomfiting US regulators. Harry Markopolos, a former fund manager, gave the [SEC] a dossier of evidence that Bernard Madoff was running a Ponzi scheme. He was ignored until Mr. Madoff had drawn in $50 billion. ... There are two reasons why [whistleblowers are ignored]. One is that they can be annoying. ... Someone who is a fraudster or is knowingly taking reckless risks has, of course, a motive for suppressing a whistleblower. But in many cases, the managers to whom a whistleblower complains are not themselves at fault but but simply dismiss the complaint as wrong or overblown. ... But some things are more complicated. 'Some people become whistleblowers because they feel that they were denied a bonus or a promotion or were not treated property,' says Steven Skalak [SS], a partner of PWC who investigates corporate fraud. The second obstacle is that not all complaints are well founded. The details given by Mr. Markopolos may have been underestimated by SEC officials because he was a rival to Mr. Madoff and seemed to have an axe to grind", my emphasis, John Gapper (JG) at the FT, 14 February 2009.

"A whistleblower contacted US regulators more than five years ago with allegations that Sir Allen Stanford's businesses were involved in an 'illegal Ponzi scheme', the Financial Times has learnt, raising new questions about why authorities waited until last week to shut down the alleged $8bn fraud. ... Leyla Basagoitia, a former Stanford employee, raised a series of red flags about the tycoon's empire in a 2003 employment dispute with her company at a tribunal run by the US finance industry's self-regulatory body. Ms. Basagoitia also alerted the US [SEC] at about the same time, her lawyer said, echoing criticisms that the agency ignored early warnings about Mr. Madoff's alleged fraud. ... Basagoitia's allegations were denied by Stanford Group Company and dismissed by the dispute resolution panel. She was ordered to pay Stanford $107,782 in damages, in repayment of a loan advanced to her while an employee of the company", Robert Cookson, Michael Peel and Joanna Chung at the FT, 27 February 2009.

JG's is one of the stupidest articles I've seen in months. What difference does it make why one becomes a whistleblower? What matters is: was he right. PWC investigates corporate fraud, since when? PWC investigates low level employee fraud committed against corporations. Will SS go to India to find out what happened at Satyam and see how many hundreds of millions PWC should pay to settle lawsuits against it? SS discredits whistleblowers. That's what SS's corporate masters pay him to do. How many times in the last five years did SS testify in court that another Big 87654 firm screwed up an audit? My guess: none. Why listen to PWC? It's one more parasite. Didn't PWC audit AIG, recipient of $170 billion in federal bailouts? People who live in glass houses shouldn't throw stones. Who cares if Markopolos had an "axe to grind"? Was he right? See my 18 January 2009 post about Meaghan Moron, link: http://skepticaltexascpa.blogspot.com/2009/01/meaghan-moron.html and 3 March 2009 post: http://skepticaltexascpa.blogspot.com/2009/03/see-no-evil-speak.html.

Was the body FINRA, Mary Schapiro's old outfit? Will the "dispute resolution panel" be investigated? If so, by whom? Will anyone get indicted at: FINRA, the SEC or the law firm which represented Stanford? Don't hold your breath. Self-regulatory body? Whaat? Like the AICPA used to regulate CPAs auditing SEC registrants?

See No Evil, Speak ...

"Numerous accounting firms missed the alleged fraud at Bernard L. Madoff Investment Securities LLC as they inspected the investment company's books or those of so-called feeder funds that helped steer money to it. As a result, those accountants could now be legally vulnerable to claims that they should have uncovered red flags, according to legal and accounting experts. ... Lynn E. Turner, former chief accountant for the [SEC], said he finds it hard to believe that auditors of so-called feeder funds checked out Madoff's auditor as a way of bullet-proofing their confidence. 'If they didn't,' he said, 'then investors will have to hold the auditor accountable.' ... Others say they had no obligation to check out Mr. Madoff's auditor. They contend their primary role is to make sure the numbers their clients supply add up, not to detect fraud. ... Friehling & Horowitz [F&H] wasn't registered with the [PCAOB]. Nor was it 'peer reviewed,' a system in which auditors check out one another for quality control. David Friehling, the firm's only active accountant, was enrolled in a peer-review program at the [AICPA], but wasn't required to participate because he didn't handle audits, according to the AICPA. ... 'Our audit conformed to all professional standards,' said KPMG spokeswoman Kathleen Fitzgerald. "This is not a KPMG issue,' she said, noting that lawsuits have been filed against many top auditing firms. ... ''PWC was not the auditor for Bernard Madoff Investments, where the alleged fraud occurred,' the Canadian [PWC] affiliate said in a statement. Fairfield [Greenwich Group] is also a defendant in the suit", my emphasis, Ianthe Dugan and David Crawford at the WSJ, 18 February 2009.

I agree, feeder fund CPAs might be liable for Madoff's fraud. Disagreeing with Turner, had the other CPA firms "checked out" F&H, what then? F&H wasn't PCAOB registered? So? KPMG, yeah those guys, "audits" Citigroup. PWC "audits" Satyam, etc., etc., ad nauseum. Peer review, bah humbug. I've mentioned it on 28 April 2008: http://skepticaltexascpa.blogspot.com/2008/04/sec-investors-friend-fiend-2.html. Peer review was an AICPA scam, PCAOB review replaced it for CPAs which audit SEC registrants. Another scam. KPMG Canada must use PWC's "random word generator". Isn't it remarkable how similar KPMG's words are to PWC's comments about the Satyam fiasco, my 4 February 2009 post: http://skepticaltexascpa.blogspot.com/2009/02/silver-blaze-and-cpas.html.

Fitzgerald just admitted F&H is a "top auditing firm". How? By revealing the secret membership requirement: at least one large lawsuit being filed against the firm! Laugh.

Yves Smith on Wall Street Pay

Yves Smith has a 18 December 2008 post at her Naked Capitalism which scolds the NYT for "double-speak" among other things, link: http://www.nakedcapitalism.com/2008/12/new-york-times-story-pulls-punches-on.html.

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"One of Wall Street's best-regarded young traders sustained a $1 billion hit recently, as the corporate-bond trading market has been upended by the credit crisis. ... Profits flowed, as the corporate bonds carried yields that were slightly higher than the cost of buying swaps protection. ... 'I don't think there's anybody around who expected the CDS-cash basis to widen out this much this fast,' said Brian Yelvington, senior macrostrategist at a research group CreditSights. A recent move by Deutsche to reduce borrowed money in its trading area also has added to the losses, by forcing traders to sell while the corporate-bond market has fallen, according to a person familiar with the bank. ... The trades that hurt Deutsche are similar to ones that led to losses at Chicago hedge fund Citadel Investment Group LLC, which was down almost 50% this year in its two largest funds through early December. ... [Boaz] Weinsten ... was an innovator of a strategy known as capital-structure arbitrage, which exploits discrepancies between the price of a company's bond and its stock, and often uses credit-default swaps", Scott Patterson and Gregory Zuckerman at the WSJ, 13 December 2008.

I ask, where was Deloitte & Touche, CPAs (D&T), which Merrill paid $57 million in 2007, while this went on? Didn't D&T understand the implications of Merrill's incentive compensation scheme on Merrill's risks and accounting? If you will, Wall Street was a "heads we get bonuses, tails the public gets our firm's bankruptcy" game. Merrill's 2008 proxy statement shows it has eleven directors. They include: Armando Codina, President of Flagler Development Group, a real estate investment company; John Thain, Merrill's CEO; Virgis Colbert, Senior Advisor to Miller Brewing; Alberto Cribiore, Principal of Brera Capital Partners, a private-equity firm; Aulana Peters, Gibson Dunn & Crutcher partner and Member of the International Public Interest Oversight Board of the International Federation of Accountants, former member of the AICPA Public Oversight Board, Former SEC Commissioner; Charles Rossotti, Advisor to the Carlyle Group, a private investment firm: John Finnegan, Chairman of Chubb Corporation; Ann Reese, formerly Principal in Clayton Dubilier & Rice, an investment firm. Do any of these people know anything? In 2007 Goldman Sachs said something about a 25-sigma event. Amazing. I don't think we'd experience a 25-sigma event once in a billion years! My 29 October and 30 November 2008 posts mention Wall Street pay.

Can anybody play this game? Any financial institution holding federally insured deposits should prohibited from engaging in this type of gambling.

Comrade Smith Reports from Oblast New York

"A mere few weeks ago, the Fannie/Freddie rescue was called 'the mother of all bailouts" by some commentators. ... This puts the Treasury's actions beyond the rule of law. This is a financial coup d'etat, with the only limitation the $700 billion balance sheet figure. ... The Treasury could via incompetence or venality grossly overpay for assets and advisory services, and fail to exclude consultants with conflicts of interest. ... Yet as we discussed the plan makes no sense unless the Orwellian 'fair market prices' means 'above market prices.' ... 'The failure to be honest about [losses] upfront will lead to a taxpayer backlash (or will lead to the production of phony financial statements for the rescue entity, which will lead to revolt by our friendly foreign funding sources).' ... The US needs to wean itself of unsustainable overconsumption, and since consumption has come to depend on growth in indebtedness, a reversal, however, painful is necessary. ... The Treasury program, by deliberately propping up asset prices, will delay finding a market clearing level and thus attenuate the financial crisis", Yves, aka "Comrade" Smith (CS) at Naked Capitalism, 21 September 2008.

"Is that really what got Wall Street and us into this mess--that we followed too religiously the gospel of Robert Taft and Russell Kirk? ... Yet, who got us into this mess, if not the government--the Fed with its easy money, Bush with his profligate spending, and Congress and the SEC by liberating Wall Street and failing to step in and stop the drunken orgy? ... We are going to have to learn to live again within our means. The party's over. ... Who are we kidding? What we are witnessing today is how empires end. The Last Superpower is unable to defend its borders, protect its currency, win its wars or balance its budget. ... An unelected financial elite is now entrusted with the assignment of getting us out of disaster into which an unelected financial elite plunged the nation. We are just spectators", Patrick Buchanan (PB) at the Houston Chronicle, 21 September 2008.

Thank you CS for a superb report from Oblast New York (ONY). Thanks too for paying IA an eight-figure fee for ONY's Henry Paulson as Che Guevarra T-shirt concession. Other concesssions available include: Los Angeles, San Diego, Dallas, Austin, Pittsburgh, Miami, Orlando, San Antonio, Chicago, Detroit, Atlanta, San Francisco-San Jose, and Philadelphia. Concession fees are only payable in one-ounce gold bullion coins: Krugerrands, Maple Leafs, Chinese Pandas and American Eagles. Note to Comrade Richard Fuld: I understand you have about $400 million. For only 400,000 one-ounce bullion coins I'll give you the concessions for all US Oblasts except ONY which CS has. I'm sure, for a very large fee, you could induce CS to sell you her concession. One issue CS. You write, "the only limitation the $700 billion balance sheet figure". CS, that's $700 billion today. The "law" will be amended in one year to read, "$1.4 trillion"! Excepting that, a superb job CS. So superb, you need not go to the gulag for at least a year. Heil Hitler! Excuse me, wrong dictatorship. Long live the proletariat and death to the capitalist running dogs.

Thank you Comrade Buchanan (CB) for your observations from Oblast Washington. An IA war story. About ten years ago as I walked down Los Angeles's Sunset Boulevard near Vine Street in front of the Border's book store, a camera crew interviewed people about some issue. The woman with the microphone walked over and asked my political affiliation. I answered, "I'm a Robert Taft Republican". She looked at me in horror and she and the cameraman walked away. IA's "present sense impression", the woman was not taken aback by the word "Republican", but she had not heard of Robert Taft. My guess: she went to a "J" school and knew virtually no American history. Here's a link to CB's article: http://www.chron.com/disp/story.mpl/editorial/outlook/6012931.html.

The Plan is MLEC multiplied nine times, see my 18 October 2007 post, http://skepticaltexascpa.blogspot.com/2007/10/use-your-own-money.html. The financial statements must be phony. Who will "audit" them? The Big 87654 which "audit" Freddie, Fannie, Citigroup, etc. Where are the Big 87654 when you need them? They should each have released a position paper at 9:00 AM 22 September 2008 stating the plan requires using phony financial statements and they will not be party to it. Well Mark Olson? What's your opinion? What do I suggest? Since 14 October 2007, I have favored "a 25-year moratorium on any GS executive working for the Treasury or Fed", http://skepticaltexascpa.blogspot.com/2007/10/party-like-its-1929.html. I now extend that from GS to include: Merrill, Morgan Stanley, Lehman, Citigroup and Bank of America. We can't afford these clowns in Washington doing favors for their cronies at the public's expense.

I thought some Mafia quotes would be appropriate. "Mafia is a process, not a thing. Mafia is a form of clan-cooperation to which it's individual members pledge lifelong loyalty. ... Friendship, connections, family ties, trust, loyalty, obedience--this was the glue that held us together", Joe Bonnano.

"Everybody has a price", Jimmy Hoffa.
"I never lie to any man because I don't fear anyone. The only time you lie is when you are afraid", John Gotti. Hank "Treasury" Paulson, Wall Street mob made member is very afraid.

"In Bensonhurst, that was it, becoming a made guy. It's all we kids ever talked about. ... I never saw the other side of it until I in, and then it's too late and you just do your work", Sammy, "The Bull" Gravano. Poor Paulson, he's in so deep. he can't get out. He needs to be put in the federal witness protection program.

"Other kids are brought up nice and sent to Harvard and Yale. Me? I was brought up like a mushroom", Frank Costello.

"Goodfellas don't sue goodfellas. Goodfellas kill goodfellas", Salvatore Profaci. More mafia quotes are avaliable at http://www.geocities.com/mafiason_99/Quotes.html?200825. Why Mafia quotes? Look at Paulson's actions. They remind me of a Russian word, "mafiozny", literally "mafianess". Here's a link to my 4 December 2007 post, which helps explain what's going on: http://skepticaltexascpa.blogspot.com/2007/12/bloodless-coup-continues-4.html.

Saving Sergeant PCAOB

"A federal appeals court Friday rejected a constitutional challenge to the Public Company Accounting Oversight Board [PCAOB], which oversees U.S. public-company accountants. In a 2-1 decision, the U.S. Court of Appeals for the D.C. Circuit ruled that the private non-profit board doesn't violate the presidential-appointments requirements of the U.S. Constitution. The challengers plan to appeal, possibly to the Supreme Court. ... Free-enterprise groups joined with Beckstead & Watts LLP, a small Nevada accounting firm, to challenge the oversight board on constitutional grounds. ... The majority ruling disagreed, finding that the SEC's authority over the board is 'explicit and comprehensive' and 'extraordinary,' and it doesn't infringe on the president's broad-ranging authority. ... Judge Brett Kavanaugh dissented from the majority opinion in a 58-page rebuttal, saying the board plainly violates the appointments clause of the Constitution", my emphasis, Judith Burns at the WSJ, 23 August 2008.

This is another no-brainer decision, right out of Alice in Wonderland. Kavanaugh is right. So? What is the PCAOB? A Big 87654 tool. It harasses small CPA firms and does nothing to the Big 87654. Let's consider its "reviews". The Big 87654 audit 98+% of US publicly-held companies by market cap (MC). Three small firms audit less than 1%, 1300 tiny firms audit less than 1%. The PCAOB concerns itself with "process", not the substance of audits. The total US MC is about $15 trillion. Suppose the PCAOB wants to "review" 1000 audits a year, audits not firms, audits, that's one review per $15 billion in MC. Exxon's audit, with $415 billion in MC will be selected 28 times ($415 / 15 = 27.7). Similarly, say Microsoft will be selected 17 times ($252 / $15 = 16.8), etc., etc. I suspect only about 300 reviews need be performed. As to the three small firms, if they audit $150 billion in MC, only a total of ten of their audits will be reviewed, ($150 / $15 = 10), similarly for the 1,300 small firms, ten reviews amongst the lot of them. What is the PCAOB doing? Stepping on ants while the elephants dance. Imagine, a tiny firm will have a .0077 (10 / 1,300) probability of having one of its audits reviewed. From my perspective, 99% of the PCAOB's work on the 1300 is pure waste. Hey Olson, did you hear that?

Talk of regulatory capture. What percentage of PCAOB employees are "former" Big 87654 partners? If I ran the PCAOB, I would not hire any one who worked for the Big 87654 in the last 10 years! Is the PCAOB the Big 87654 cartel enforcer? If not, what is it? Did the PCAOB ever make a finding a plaintiffs' law firm could use to sue a Big 87654 firm or make a criminal referral to the DOJ? If not, after six years, who needs these useless paper shufflers? I read the 92-page opinion including Kavanaugh's 58-page dissent. It's at: http://pacer.cadc.uscourts.gov/common/opinions/200808/07-5127-1134687.pdf. My short version: Janice Brown, formerly of the California Supreme Court, did as instructed, she came up with whatever rationalization she felt she needed to keep this useless beast alive.

The PCAOB reminded me of some 1950's Charles Atlas (CA) ads. They had a bully kick sand in a 97-pound weakling's face. The PCAOB is that bully. You can see some of the CA ads at http://www.sandowplus.co.uk/Competition/Atlas/Adverts/adverts.htm.

London Banker on Snake Oil

London Banker (LB) has an 8 August 2008 post at his London Banker blog likening today's financiers and politicians to snake oil salesmen. I previous called the financiers alchemists, 23 August and 24 December 2007 and 3 April and 1 July 2008. Here's a link to LB's post: http://londonbanker.blogspot.com/2008/08/snake-oil-and-deflation.html.

Rating Agency Update

"Standard & Poor's Ratings Services pushed back against [SEC] proposals to revamp how bonds are rated, in another sign of the resistance from Wall Street to efforts to overhaul financial markets. ... In a 33-page letter, the largest bond-rating company by revenue also suggested relaxing a gift ban the SEC has proposed as a way to improve independence. The SEC rule would effectively ban rating-company analysts from accepting gifts worth more than $25 from issuers. ... As expected, S&P also opposed the SEC's idea of requiring a disclaimer on structured-finance bond ratings", Aaron Lucchetti at the WSJ, 28 July 2008.

"Problems keeping up with the surging growth of mortgage-related debt products were particularly acute at Standard & Poor's Rating Services, according to a draft version of a [SEC] report on bond-rating firms. ... Some of the most strongly worded emails from analysts questioning their own ratings came from S&P, according to a draft version of the 38-page report, which includes the firms and was reviewed by the [WSJ]. ... In an email, an S&P analytical stafffer emailed another that a mortgage or structured-finance deal was 'ridiculous,' and that 'we should not be rating it.' The other S&P staffer replied that 'we rate every deal,' adding that 'it could be structured by cows and we would rate it. ' ... The draft report could trigger more scrutiny of how each bond-rating firm did business during the credit market's boom and bust, including how they dealt with conflicts of interest and other issues affecting the accuracy of ratings. ... But satisfying Wall Street issuers also crept into the process. 'We are meeting with your group this week to discuss adjusting the criteria for ratings CDO's of real estate assets ... because of the ongoing threat of losing deals,' S&P commerical mortgage analyst Gale Scott wrote to colleagues in August 2004, according to the draft report and a person familiar with the situation", Aaron Lucchetti at the WSJ, 2 August 2008.

"'What we do is provide access to the capital market,' Mr. [Harold] McGraw responded. 'If the market wants those kinds of products and the institutional investors want those products, then we move with the market and we're going to rate whatever.' The comment got little notice at the time [October 2007]. But it helps to explain why S&P, its parent company and Mr. McGraw now are in a pickle. ... In the mid-1990s, Frank Raiter, then an S&P executive working in residential-mortgage ratings, proposed using more sophistiated models to predict how mortgage loans would perform. Mr. Raiter wanted to pitch the modeling product to big market participants such as Fannie Mae and Freddie Mac. ... Building market share in existing and new products also got lots of attention. ... In March 2007, Mr. McGraw described CDOs as a 'high-quality' market, as shown by the high number of triple-A ratings S&P had assigned to them", my emphasis, Aaron Luchetti at the WSJ, 2 August 2008.

This "independence" stuff is a joke. It never stopped CPA firms from bending to their clients wishes, why will it improve the rating agencies (RA) work? The notion a "gift" would more influence an analyst's work more than the fee his firm will or will not receive is preposterous. The SEC's proposed gift rule is just more window dressing.

The RA suffer from all the problems the Big 87654 firms do. I say, sue away. That's the only way to fix them.

Yes, McGraw, and to do your job properly sometimes you must shut the door. McGraw is so clueless he thinks S&P's giving CDOs a lot of triple-A ratings meant they were in a "high-quality" market. Now we have reason to believe that S&P did not commit fraud when it rated all those CDOs, it just didn't know what it was doing, fool not knave.

Regulatory Failure?

"The short take on the economic crisis of the 1970s was that regulation failed. Price controls failed; high taxes failed; regulation was outmoded. The mortgage and banking crisis of 2008 feels diametrically different. What failed this time were markets. The lenders were supposed to regulate mortgage borrowing--and the credit-rating firms who monitored them--failed utterly. The investors whose job it was to monitor the capital of financial institutions were asleep at the swich. ... The [Fed] and the U.S. Treasury have lately widened the federal safety net more quickly and more aggressively than at any time since the New Deal era. ... And not since the Depression ... has the government bought significant equity in private firms, as the Treasury has sought the authority to do so in the case of Fannie Mae and Freddie Mac. At least during the 1930s, legislation followed months of deliberation and public hearings. The proferred fixes to today's fast-moving crises are worked out hastily and in private. At a visceral level, it is deeply upsetting when institutions that once reaped fabulous profits (a goodly share of which were snared by their executives) are granted the protection of Uncle Sam. ... More troubling than the unfairness is the potential that the solutions will exacerbate moral hazard: that people who feel innnoculated will run greater risks", my emphasis, Roger Lowenstein (RL) at the NYT, 27 July 2008.

I disagree with RL's conclusion: "What failed this time were markets". Uncle Sam's policies got what he expected: the privatization of profit and socialization of loss. Why is Treasury full of "former" Goldman Sachs guys? Why does the SEC protect the rating agencies?

Toothless SEC-6

"Prudential Financial Inc. agreed to settle a [SEC] lawsuit alleging that it had engaged in improper accounting of sham reinsurance contracts with General Reinsurance Corp., the SEC announced Wednesday. No fines were imposed on [Prudential], which didn't admit or deny the SEC's allegations", WSJ, 7 August 2008.

Another SEC triumph. I wonder if Mark Olson's PCAOB did anything to PriceWaterhouseCoopers, Prudential's CPAs? Why ask?

Is Anyone Surprised?

"Since the Enron Scandal, a coterie of corporate-governance firms has emerged as standard-bearers for shareholder rights. In addition to acting as quote machines, the firms--which include the Corporate Library and RiskMetrics Group's ISS Governance Services--are also big businesses that sell, among other things, ratings that say whether a company is well governed or not. But a new study from Stanford University's law and business schools gives mostly dismal grades to four of the biggest rating servies: ISS, the Corporate Library, GovernanceMetrics International (GMI) and Audit Integrity. ... No sophisticated investment manager relies on ratings alone. But the Stanford team found very little or no statistical evidence of links between the ratings and company performance, undermining the firms' very reason for being. ... On average, [ISS's] top-ranked companies were more likely to have class-action lawsuits than its lowest rated companies. ... Patrick McGurn, special counsel at ISS, said ... the ratings are ... not meant to act as a predictor of performance", James Bandler and Doris Burke (B&B) at Fortune, 7 July 2007.

B&B's article does not state if the Stanford study corrected for company size, as a small company with poor "corporate governance" might not have any class-action suits against it as no firm of attorneys thought it could collect a settlement or judgment against such a small firm. That said, the result is no surprise. Assuming McGurn is correct: who needs 'em?

Legal Ethics?

"In 'Legal Opinions for Sale' (June 9), you refer to a legal opinion by Kaye Scholer in connection with accusations against the firm concerning its representation of Lincoln Savings and Loan in the late 1980s. ... At the conclusion of the [New York State disciplinary committee] investigation, the chief counsel to the committee wrote a four-page letter to the lead lawyers involved in the Lincoln representation, concluding that 'we found no basis for taking any disciplinary action as to any of the matters on which the DDC concentrated,' and accordingly that the investigation was being terminated", Barry Wilmer (BW) letter to Fortune, 21 July 2008.

BW is Kaye Scholer's managing partner. So? That a state bar disciplinary "investigation" found nothing wrong with a large law firm's actions, no more impresses me than PCAOB reviews of Big 87654 firms. I give BW a big "so what"? See my 25 June 2008 post.

Loren Steffy on Reich

"One of my first assignments as a business reporter was covering the second failure of Dallas' Sunbelt Savings. ... Regulators overseeing the bailout fielded questions from reporters, and the busted thrift's chief executive, Tom Wageman, sat silently in the corner. ... Twenty years later, the government is still shielding the banking industry from tough questions. ... John Reich [OTS head], blasted reporters for 'staking out' banks, interviewing customers and stoking public fears, saying journalists were 'seemingly oblivious to the fact that they could drive otherwise healthy banks to fail and push troubled institutions away from potential solutions toward ruin.' ... Banks shouldn't fail just because someone asks questions. If they do, consumers have reason to be worried, even if their deposits are insured. Maybe he doesn't read his own signs. 'Supervision' is part of his office's name. ... But 20 years ago we [in Texas] were at the epicenter, and the latest banking malaise shows the lessons from that time were largely ignored by both banks and regulators. ... Subprime and its cousins such as Alt-A loans became just another convenient tool with which mortgage brokers could close deals and collect fees, all wrapped in a sales pitch about how rising home prices would make the shaky numbers work. The lenders didn't have to worry if the loans went bust. Their Wall Street buddies had found something far better than brokered deposits: mortgage securities. ... And so here we are, a place not all that different than 20 years ago in Texas. ... And once again, accountability gets passed on, from lenders to Wall Street to the government, and then, ultimately to the taxpayers", Loren Steffy (LS) at the Houston Chronicle, 23 July 2008. Here's a link: www.chron.com/disp/story.mpl/business/steffy/5902434.html.

LS's got this right. The answer may be: deny incorporation to any financial institution that holds federally insured deposits. The privatization of profits and socialization of losses should end.