Tax Nonsense

"Nero fiddled while Rome burned, but at least he didn't strike the match. Members of Congress are doing Nero one better. In the middle of the second global financial crisis in two years, Congress is preparing to dramatically raise a key tax rate on long-term investment. ... Last week, Senate Finance Committee Chairman Max Baucus (D., Mont.) and House Ways and Means Chairman Sander Levin (D., Mich.) released joint legislation that would significantly raise the tax on 'carried interest'. ... Carried interest refers to the share of the capital gains (typically 20%) earned on long-term investments in real estate, venture capital, private equity and other investments organized as partnerships that is allocated to the general (managing) partner. ... Both general partners and limited partners pay taxes based on the character of the income earned by the partnership; ordinary income rates on dividends and short-term capital gains, and the long-term capital gains rate on the long-term capital gains", John Rutledge (JR) at the WSJ, 24 May 2010, link:

http://online.wsj.com/article/SB10001424052748704852004575258401601217646.html.

"Dear IRS: Please note that beginning this year, I am no longer earning an income. From now on, I am compensated through what I like to call column interest. It isn't pay. It's a capital gain that I receive in exchange for providing about 2,000 words a week to this newspaper. Please lower my tax rate accordingly. hey, you can't blame me for trying. After all, a similar strategy has worked for years for money managers at hedge funds and private equity firms. ... The private investment community is decrying the move as a massive tax increase, is if oblivious to the fact that it's enjoyed an unfair tax break for years. ... Let's set aside the rather silly notion of private equity as an engine of job creation--most buyouts result in big job cuts--and focus on the inequality. Private equity managers typically collect a 2 percent annual fee on assets in the fund, which is taxed as income. They also scoop up 20 percent of their funds' annual profits, which is known as carried interest. ... Profit-sharing plans for just about everyone else are taxed as income. ... Tax law is a murky world, but one basic principle of our tax code is that people who perform similar jobs for similar pay should receive similar tax treatment. That's not the case in the investment world", Loren Steffy at the Houston Chronicle, 26 May 2010, link:

http://www.chron.com/disp/story.mpl/business/steffy/7022356.html.

What nonsense. Carried interest is a form of managment fee. It should never have been treated as long-term capital gains. What's the holding period? JR is a professor at Claremont Graduate University.

Right on Steffy!

The SEC's Vampire Squid Action, In Context

"Goldman Sachs Group Inc. [GSG] Chief Executive Lloyd C. Blankfein said the firestorm over civil-fraud charges leveled by the [SEC] is 'certainly uncomfortable,' but urged employees to remain focused. ... 'Following my message to you on Friday, I wanted to update all of you and let you know that we have been taking all appropriate steps to defend the firm and its reputation. ... Still, it is important to put the SEC's action in context. The core of the SEC's case is the allegation that one employee misled two professional investors by failing to disclose the role of another market participant in a transaction. ... I will repeat what you have heard me say many times in the past: [GSG] has never condoned and would never condone inappropriate activity by any of our people. On the contrary, we would be the first to condemn it and take immediate action. ... As you return to work on Monday morning, I ask that you maintain the level of focus on our clients that is at the heart of [GSG's] success over the past 140 years'," Joe Bel Bruno at the WSJ, 20 April 2010, link: http://online.wsj.com/article/SB10001424052748704671904575194111583096750.html.

"The biggest bummer to arise from the allegations that the revered and feared Wall Street puppet master [GSG] had played us all for patsies is this: the dial on the Wall Street capital-formation machine, the engine that was supposed to be the driving force of the greatest economic system on earth, was purposely set to junk--worthless, synthetic junk. ... JPMOrgan Chase played procurer for Magnetar, a hedge fund so artful in profiting from the meltdown that Northwestern's Kellogg School of Management praised it last year in a case study. ... In the end, it was in fact all one big scam predicated on rising housing prices. Certainly, greedy consumers played a minor role in feeding the fenzy. But the Street made sure that those of us who are not members of its elite club remained the suckers. ... One the surface, these deals look complicated. They are. ... Only now, in the wake of the SEC suit against Goldman, are investors beginning to suspect they were hoodwinked. ... A synthetic CDO is at its core a trade, meaning it has a long and short position, and grownup investors are free to take sides. ... The reality is that Wall Street's CDO synthesizer set on of the economy's largest sectors off in the direction of creating nothing but waste--pure economic waste. ... These CDOs were the last stop in a vast transfer of wealth from a large group of American mortgage holders to a much small group of already rich traders who profted as the CDOs failed. ... By picking a fight with [GSG]--the 'great white whale' of Wall Street, as Eliot Spitzer put it on Monday--the SEC is signaling that it has now adopted a feistier approach. ... In a sense, [GSG] is relying on the so-called big-boy defense: There are no victims on Wall Street, just fools. ... Beyond any legal issues, the [GSG] case has become the battering ram for financial-reform legislation that congressional Democrats have been looking for", my emphasis, Stephen Gandel at Time, 3 May 2010, link: http://www.time.com/time/business/article/0,8599,1983747,00.html.

The only "inappropriate" act at Vampire Squid (VS) is losing money. What's going on here? Did Lloyd Antoinette Blankfein (LAB) write this memo for VS's employees, or the American public? The SEC's case fails to impress me. Fab Touree, looks like VS's "sacrificial lamb", shades of Joe Jett of 1994's Kidder Peabody. While LAB weeps crockodile tears for VS, I think the case was a setup to push the Dodd bill through. I can see LAB telling Touree, "Look boy, take this one for the team. We'll take care of you. There's $100 million for you in Switzerland. Chill out".

Not the "last stop". That's Zimbabwe Ben's interest-rate suppression policy. The SEC did not pick a fight with VS. It got permission to appear to annoy the VS. Why did tthe SEC bother with this insignificant case instead of the AIG fiasco? VS wants the Dodd bill passed and is using this case to derail legislation that might hurt it.

Houston's Loren Steffy called the SEC's action "A slap on the tentables for the vampire squid", Houston Chronicle, 17 April 2010, link: http://blogs.chron.com/lorensteffy/2010/04/a_slap_on_the_t.html. Well said .

Steffy on Swaps

"Let's say you're driving down the road and three wheels fly off your car. How do you get rolling again? If you're Treasury Secretary Henry Paulson, you take a knife and slash the one remaining tire. ... The ensuing eight months have refuted the report's thesis of streamlined federal oversight. At every turn, state regulators have been the only friend for consumers and investors. It was the states, as my colleague R.G. Ratliffe norted earlier this week, that forced banks to make good on auction-rate bonds they sold to investors, often under false pretenses, when the market collapsed in February. It was the states that backed class-action lawsuits against subprime mortgage peddlers, such as Ameriquest and Countrywide, forcing the companies that bought them, Citigroup and Bank of America, respectively, to modify loans for beleaguered borrowers. ... When it became clear that the murky market for credit default swaps needed transparency, it was the state insurance commissioner from New York who stepped in, declaring what Congress had danced around for years: the swaps are insurance and need to be regulated as such. ... The SEC itself has seemed largely oblivious to its role of investor protection, a finding underscored in an inspector general's report on the agency released late on the Friday after Thanksgiving. Damning in its findings, the report portrays an agency rife with potential conflicts, including improper ovesight to prevent SEC employees from trading on insider information. In other words, it's the SEC itself that's ripe for reform. ... In fact, his plan is nothing more than a shill for Wall Street, which would have to love to see state regulation weakened, leaving the SEC and the self-regulatory arms of the stock exchanges as the primary enforcers", my emphasis, Lorey Steffy at the Houston Chronicle, 10 December 2008, link: http://www.chron.com/disp/story.mpl/business/steffy/6156405.html.

I note the PCAOB is an arm of the SEC. I think it's worse than the SEC, focusing on insignificant cases and ignoring larger issues. I've posted on the SEC and PCAOB many times. As they currently operate, they're jokes.

Francine McKenna on the Wolves

Francine McKenna (FM) has a 22 October 2008 post at her Re: The Auditors about Henry Paulson's recent choice of PriceWaterhouseCoopers and Ernst & Young, two Big 87654 firms to work for the bailout organization. I have nothing to add to FM's post except I share her displeasure with the appointments. Here's a link: http://retheauditors.blogspot.com/2008/10/treasury-appoints-pwc-and-ey-wolves-are.html. Imagine likening Big 87654 firms to wolves. Francine, you are warned: that's treason, off with your head! Of course, we are Through the Looking Glass.

Loren Steffy makes similar observations at the Houston Chronicle on 26 October 2008. Here's a link: http://www.chron.com/disp/story.mpl/business/steffy/6077533.html.

Note to Mark Olson at the PCAOB: do you see any conflicts of interest here? If not, I'll find them for you.

Regulation-Texas Style

"During the past five years, state law makers and home builders have constructed a Potemkin village of regulation in the Texas Residential Construction Commission. ... It's telling that the only group upset about dismantling the TRCC is the builders it is supposed to police. The TRCC purports to resolve differences between aggrieved homeowners and builders and promote better home construction. In fact, it's been a Legislature-sanctioned smoke screen for bad construction. ... 'Without the TRCC's dispute resolution process, homeowners with construction defects that are currently being resolved in an expedient and cost-effective manner will be left with nowhere to turn but time-consuming and expensive litigation', [Ron Connally, an Amarillo builder] said. ... The Sunset Commission's found that 88 percent of the disputes brought before the TRCC wind up in court anyway. ... As my colleague Clay Robison noted recently, Houston builder Bob Perry has been showering cash on Sunset Commission members. ... In the TRCC, builders have had a lapdog commission. Because most disputes still wind up in court, the TRCC is little more than a bureaucratic speedbump in the resolution process. ... What consumers want, of course, is real oversight, and [Mickey] Redwine's proposals should go a long way toward achieving that. ... As the facade of the TRCC crumbles, we see it for what it is: a regulator that never was", my emphasis, Loren Steffy (LS) at the Houston Chronicle, 12 September 2008.

Right on LS! LS could be writing about the: DOJ, SEC, OCC, PCAOB, etc., etc., ad nauseum. Here's a link: http://www.chron.com/disp/story.mpl/business/steffy/5996942.html. Will Hogan & Hartson suggest this "regulatory" approach to its clients. See my 6 August 2008 post. Well Christine baby, how about it?

Oil Company Hedging

"'Lord, give me just one more oil boom, and I promise I won't hedge it all away this time.' ... Yet [Newfield Exploration] reported a $244 million loss because of a 'net unrealized loss on commodity derivatives of $508 million' before taxes. ... Anadarko Petroleum ... has a similar story. Its derivatives losses ballooned to more than $1.6 billion before taxes, pulling net income down to a measly $23 million compared with more than $1.3 billion a year earlier. ... What Anadarko, Newfield and Noble did was use derivative investments such as swaps and options to lock in prices they received for their oil. ... But at a time when they should have been reveling in record profits, companies like Anadarko, Newfield and Noble traded away opportunity by entering into swap agreements and other derivatives investments, essentially losing the chance to benefit from higher prices. ... Once again, we see companies discussing earnings in terms of generally accepted accounting principles, which count the hedging losses, and 'non-GAAP' numbers that don't. Analysts play along, mostly because the companies tell them to", Loren Steffy at the Houston Chronicle, 15 August 2008.

Idiots! Commodity producers should ignore the Wall Street geniuses who peddle hedges. We, who buy commodity producers, don't want them to hedge anything! We buy them as inflation hedges, not hedge funds. All the commodity company managements that hedge should be fired.

Loren Steffy on Auction-rate Securities

"This year it was Julius Caeser, and watching it, I felt a little like I did last week as I watched the investigation into the auction-rate bond market unfold. It's a familiar story. ... The auction-rate mess is a remake of two recent Wall Street productions: tainted research in 2002 and mutual fund market timing in 2003. ... In each case, the plot is the same: Wall Street used its control of information to lure unsuspecting investors into securities by misrepresenting their performance. ... For this latest drama, the curtain rises on a familar cast. There's a rogues' gallery of reported targets: Citigroup, Merrill Lynch, JPMorgan Chase, Morgan Stanley, UBS, Wachovia, Bank of America. On the other side, we have the prosecutors: Massachusetts Secretary of State William Galvin and the New York attorney general once again lead the charge, though Andrew Cuomo has replaced Eliot Spitzer, who briefly became governor before becoming a public disgrace. ... And the [SEC]? It's upstaged again, dithering over arcane short-selling rules and aiding in the administration's campaign to prop up the stocks of the very firms it should be investigating. The specter of Harvey Pitt looms large", my emphasis, Loren Steffy (LS) at the Houston Chronicle, 13 August 2008.

Harvey Pitt was my "favorite" SEC chairman. LS's article link: http://www.chron.com/disp/story.mpl/business/steffy/5940178.html. That's telling 'em LS.

Saga of Lucky Lou Pai

Loren Steffy has a poem about Lou Pai, a former Enron executive, he considers "the luckiest guy in the room", Houston Chronicle, 1 August 2008. Laugh. Here's a link: http://blogs.chron.com/lorensteffy/2008/08/column_the_stor.html.

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.

SEC-Stock Manipulator

"The [SEC], under fire for not responding more vigorously to a raft of rumors that have pounded stock prices, says it is cracking down on firms or individuals that illegally spread false rumors. ... The announcement was timed to be released hours before the trading week began in Asia, in hopes it would serve as a warning shot to traders, a senior official said. ... Nothing final has been decided, but Lehman executives have long pushed for SEC action to stop the rumor mongering around their stock. Sunday, people close to the firm said Lehman hopes the SEC move will stop the fall of its stock until it has time to put together a plan. ... The SEC began its antirumor campaign Friday, calling several hedge funds to warn that subpoenas for their trading records related to Lehman were imminent, people familiar with the matter said. SEC officials weren't specific about what period of trading they planned to examine, these people said. ... Many top Wall Street executives have complained privately about the apparent lack of action, saying traders knowingly spreading false rumors were in part responsible for the unraveling of Bear Stearns Cos., which was sold to J.P. Morgan Chase & Co. in March for a fire-sale price. ... Lehman Chairman and Chief Executive Officer Richard Fuld Jr. [RF] has been encouraged to step up and buy shares of Lehman as a vote of confidence in the firm he has run since 1993", my emphasis, Kara Scannell, Susanne Craig and Dennis Berman (SC&B) at the WSJ, 14 July 2008.

"The [SEC] has sent subpoenas to more than 50 hedge-fund advisers as part of its investigation into whether individuals spread false rumors to manipulate shares of two Wall Street firms, a person familar with the matter said", WSJ, 15 July 2008.

"'When markets are moving this fast, people have a right to expect the information they are trading on is reliable.' SEC Chairman Christopher Cox said Monday. 'We want people to understand that the cop is on the beat, that subpoenas are going out, there are investigations under way'," Houston Chronicle, 15 July 2008.

"Lehman Brothers, which has seen its shares tumble sharply over the past few weeks, would seem to have much to gain from news that federal regulators are dialing up their scrutiny of market rumor mongering. The firm has complained that false rumors have been a driver of its recent share declines", WSJ, 15 July 2008.

"Bear markets often involve bear-knuckle fights, but it is still a shock when the referee starts punching below the belt. The [SEC] has intervened in the epic struggle between financial companies and the hedge funds that are short-selling their shares. ... The SEC's moves deserve scrutiny. Investment banks must have a dizzying influence over the regulator to win special protection from short-selling, particularly as they act as prime brokers for almost all short-sellers. ... The SEC's initiatives are asymmetric. It has not investigated whether bullish investors and executives talked bank share prices up in good times. Application is also inconsistent. ... Like the Treasury and the [Fed], the SEC is improvising in order to try to protect banks. But when the dust settles, the incoherence of taking a wild swing may become clear for all to see", Economist, 17 July 2008, www.economist.com/finance/displaystory.cfm?story_id=11751227.

"As the dust settled from the rout of financial stocks earlier this week, the little clown cars came zigzagging up the Street. Have no fear, the [SEC] is on the case. Christopher Cox, the regulator whose only visibility during this financial crisis has been to proclaim Bear Stearns' soundness just hours before its collapse, will shake down every short-seller in America if he must to find someone he can blame for the financial flameout. ... In fact, what Cox has done is just one more distraction, one more attempt to make people think that maybe this crisis can be solved with easy pen strokes. ... The SEC, though, is more concerned with silencing the skeptics. We blame the short-sellers. We blame the speculators. Never, though, do we blame the people who made bad decisions. ... For all the fretting about rumors, Cox and his clown squad haven't announced a single investigation into misleading statements by CEOs. ... The SEC's move, then, is exactly what it seems: market meddling that props up the dogs while silencing the critics", Loren Steffy (LS) at the Houston Chronicle, www.chron.com/disp/story.mpl/business/steffy/5894371.html, 18 July 2008.

"In the latest game of markets blameball, hedge funds are getting slammed. Should they be? ... Members of Wall Street's establishment, including J.P.Morgan Chase & Co. Chairman James Dimon and top corporate-attorney Martin Lipton, have urged regulators to step up their patrol, and even put a crimp on short selling in general. ... Some say the assaults are little more than the latest chapter in a long history of financial scapegoating. ... High-profile managers such as David Einhorn and William Ackman have been leveling criticism against giant financial firms for more than a year. Judging by the numbers, they have been vindicated, but their pointed attacks have engenderd hard feelings", WSJ, 18 July 2008.

The SEC's contempt for the public is appalling. Alan Sloan of Fortune, my 18 July 2008 post reported RF got $489 million from stock sales over the past few years. What is RF complaining about? RF has a terrific opportunity. I give RF another put up or shut up. Lehman (LEH-NYSE) is currently $21.10. It was $14.27. Did you, RF, buy any at $14.27? If you didn't, SHUT UP! If it's worth more than $21.10, buy. On margin. Plenty. RF, I salute you. At least you unloaded Erin Callahan. The SEC's "investigation" is a blatant attempt to support investment bank shares. I didn't think stock manipulation was the SEC's job. This is more poor WSJ reporting. If SC&B "know" rumors are pounding stock prices, did they buy? Why are they reporters as opposed to running a hedge fund? If the SEC is still harassing David Einhorn, I hope he gives it another black eye. Or worse. Maybe Einhorn and Ackman should hire an attorney who was an AUSA and have him draft "indictments"for RF, Chris Cox, and anyone else they think appropriate, then hand deliver the "indictments" to Mike Garcia (MG) at a "press conference" in front of the SDNY US Attorneys Office. Maybe Justin Fox, my 9 July 2008 post will attend and ask MG what he intends to do with the "indictments"? Maybe it's time for a hedge fund manager to tell MG that the SEC is aiding and abetting securities fraud. Well Mike, will you look into it? The complaints of "top Wall Street executives" are more nonsense. If rumors killed Bear, why didn't these executives outbid JPMorgan and buy Bear? Why give JPMorgan this "bargain"?

The SEC can say whatever it wants. I think it sent the subpoenas to prop up investment banks' share prices.

Well Cox, are investors entitled to "reliable" information in slow markets? What do the securities laws require? If there is inaccurate information, where do you think it comes from in large part? Hedge fund operators or SEC registrants? That's it Cox, do your best Captain Renault routine, "Round up the usual suspects".

I note that Erin Callahan recently left LEH. False rumors? List them.

The Economist has this knocked. Well Cox?

I agree with LS. I await any Wall Street CEO's being added to the Bear Stearns Two indictment.

Well Cox, will you join Lipton's firm when you leave the SEC? Why don't you do something useful like investigate LEH's disclosures for the past few years?

Houston's Housing Non-Bubble

"During the past year, I've made several appearances on television news programs to talk about the housing crisis. My role was that of the straight man. ... After the doom-and-gloom pronouncements from the coasts, I would say, 'Things aren't so bad here in Houston.'... Our housing prices haven't plunged, just as they didn't soar as the national housing bubble inflated. Our prices remained modest, if you believe the conventional wisdom, because we have a secret ingredient: plenty of land. ... In a report issued by the [Fed] of Dallas' Houston branch, senior economist Bill Gilmer found another reason Houston has been shielded from the country's real estate crisis: the lack of zoning. ... As housing demand has increased, cities with tight zoning laws saw a steep rise in prices because of limited supply. ... In Houston, however, demand was met with new construction rather than rising prices. ... Of course, Houston's lack of zoning is something that outsiders view as, well crazy for a city of our size. I must admit that before I moved here, I was among them", Loren Steffy (LS) at http://www.chron.com/, 28 May 2008.

Bravo LS. Compare Houston's experience California's. Or the oil business. Zoning is like prohibiting drilling in ANWAR. Eventually the lack of production, of houses, or oil, drives the price up. What's so hard to understand?

Oil Speculation?

"Our mounting economic downturn was supposed to curtail demand and drive prices down. ... 'All the conventional wisdom about the oil markets is wrong,' said Jeffrey Brown, an independent geologist in Dallas who studies energy market data. ... I called him ... because of his work developing the Export Land Model, a counterintuitive theory that says as oil prices rise, exports from oil-producing nations will fall. ... The message here is simple: We have to share the world. Other countries want a piece of the living standard we've enjoyed for decades. For us, that means $120 isn't a spike, it's just another milestone on oil's upward journey. Let's talk in a few more months", Loren Steffy at the Houston Chronicle, 25 April 2008.

I agree with Brown. I do not expect say, the Saudis to increase oil exports as prices rise. Why should they sell oil likely to increase in value for dollars, likely to decrease? As long as oil exporters think oil's future price will at least keep up with long-term US dollar interest rates, why should they sell now? What a radical notion, that the Saudis, who hold about 260 billion barrels of oil reserves, are also speculators in the oil markets.

Paulson's Obfuscation

"In case you're wondering, Henry Paulson didn't put little X's and O's after his signature when he signed his plan to revamp financial regulation. I checked. It's such a loving gift to his friends on Wall Street, I thought maybe he'd sealed it with a kiss. ... Having failed to follow its own lending standards, the industry has shown it needs more oversight. The rest of Paulson's plan, though, is an insult to the trees that perished in it's name. It is a document of distraction. ... It is, of course, a political dodge. ... Nothing in those 218 pages, for example, addresses the role credit rating agencies played in offering Treasury-grade blessings on risky subprime debt. Then there's the plan to increase the power of the [Fed] by expanding its oversight and giving it a mandate to ensure 'market stability.' ... It's not clear, though, where the Fed's new powers would stop. ... The plan also includes other Wall Street favorites, such as combining the [SEC] and the [CFTC]. Given that the two major exchanges already combined their regulatory operations, Paulie's playbook further winnows the number of cops on the beat. Meanwhile, his proposal for a national insurance charter, an issue beyond the outer rim of the current crisis, is simply a gift for which national insurers have long pined. They say it's more efficient, which means translated for consumers probably higher rates and less coverage. ... The shadowy group of money men [Working Group on Financial Markets] is the same one that less than a year ago argued that too much regulation was hurting U.S. companies abroad. Their cries of over-regulation drowned out sounds of the burgeoning crisis that had dampened the competitiveness of our markets far more than regulation. Most disturbing, though perhaps not surprising, is the absence of accountability written into Paulie's playbook. ... The Fed answers to no one. ... This isn't the plan Amrica needs. It's what Wall Street wants", Loren Steffy (LS) at the Houston Chronicle, 2 April 2008.

Larry "Summers, the former Treasury Secretary, says the Fed in any case might not be up to the task. 'It's not realistic to think that career civil servants are going to forsee bubbles that are about to burst in ways that are better than those who have their large fortunes on the line,' he said", WSJ, 31 March 2008.

"Groups ranging from small banks to state attorneys general criticized Treasury Secretary Henry Paulson's proposals to consolidate regulatory agencies and revamp oversight of a financial system bruised by crises in the credit and housing markets. ... Critics aren't shy about making their feelings known. For example, smaller banks fret that creation of a single banking regulator will favor the desires of their bigger competitors. ... Other groups that have expressed early opposition include credit unions. ... State prosecutors complain that a proposal to create a national insurance regulator would substitute their vigilance with weak federal oversight. ... States attorneys general, a powerful group, contend that the Paulson proposals will usurp their enforcement powers, particularly over the insurance industry. ... Paulson argued that state regulation needed to be more even and consistent. He proposed creating a federal commission to judge and grade state policies related to mortgage lending", WSJ, 1 April 2008.

Hank Paulson (HP) is a proponent of "fiat money slavery". He wants all Americans to bail out his Wall Street cronies by holding continually debased dollars. He fights federalism by trying to increase federal oversight of, among other things, insurance companies, pre-empting state regulation, he releases his plan after Eliot Spitzer's demise. How neat. I disagree with LS about one thing: we don't need more regulation, we need more Wall Street firms going bankrupt. Oh yes, and more indictments of the heads of these firms. Well Mike Garcia, the ball's in your court.

Face it, HP wants to gut state regulation of anything to protect his big business cronies.

Summers echoes what Milton Friedman said over 30 years ago. I remember.

Supreme Injustice

"In the latest of a series of victories for Wall Street, the Supreme Court sharply limited the ability of shareholders defrauded by a company to sue other parties, including advisers, lawyers and accountants. ... Wall Street has successfully argued that Congress intended only the [SEC] to police fraud, not to open the door to lawsuits by private shareholders. ... The SEC took the position that federal law permits private lawsuits against third parties. ... Stoneridge also sued Motorola Inc. and Scientific-Atlanta, now a unit of Cisco Systems Inc. Both vendors agreed to charge artificially high prices for cable boxes they sold to Charter. They used the extra money to 'buy' advertising from Charter, money which Charter used to inflate its bottom line ", WSJ, 16 January 2008.

"When did protecting big, fraudulent business enterprises become the hallmark of conservative thought, or was it ever thus? ... Writing for the court, Justice Anthony Kennedy said Charter didn't need to collude with the other two companies in order to defraud its accountants and investors. If that were the case, Charter would not have engaged in the charade, taking the chance that one of the third parties would blow the whistle", Houston Chronicle, 18 January 2008.

"They're basically providing escape routes for people who are going to be pursuing their own game at the expense of investors,' said Stephen Arbogast, a finance professor at the University of Houston. ... The box makers can't be held accountable because the 'deceptive acts were not communicated to the public'. That, of course, in the nature of deceptive acts. They're not deceptive if you tell everyone about them", Loren Steffy (LS) at the Houston Chronicle, 18 January 2008.

I predicted the Stoneridge votes of seven of the eight voting Supremes, only Antonin Scalia surprised me. This ruling is a DISGRACE. If it comes to it, I hope President Hillary has Congress impeach these black-robed hooligans. Stoneridge flies in the face of 250 years of common law and prior Supreme Court rulings like: Pinkerton v. US, 90 LEd 1489, (1946) which upheld the concept of co-conspirator liability. This is basic, it's in Torts, 4th Edition, 1984, Section 46, by Prosser; literally, it's hornbook law. I am mortified. The "Crits" are right, "law" serves the interests of the ruling class. "Pretty Boy Roberts" pays off for the plutocrats like a "fixed" slot machine. Shame on these gangsters in black robes. Harvard Law Review (HLR), big deal. I remember reading a 1959 HLR article on conspiratorial liability. What don't the Supremes understand? Way to go LS.

This case is such a disgrace. Why weren't all the parties involved in the overbilling scheme indicted under the federal mail and wire fraud statutes, 18 USC 1341 and 1343?

Let's look at the "Supreme Five" who voted for Stoneridge:

Antonin Scalia, Harvard Law Review.
Anthony Kennedy, Harvard Law School.
John Roberts, Harvard Law School, Magna Cum Laude.
Clarence Thomas, Yale Law School.
Samuel Alito, Yale Law Journal.

Texas Attorney General, Greg Abbott, explained the ruling on 88.7 FM radio this way: If a person plans a bank robbery and drives the getaway car, he cannot be sued in tort by the bank. Why? He never went into the bank and no teller ever saw him. So? Under the felony-murder rule and Pinkerton, if one of the four robbers in the bank killed someone, the getaway driver could be charged with murder, but the Supremes say not sued in civil court for tort damages. Amazing. This is: ALICE IN WONDERLAND law! This is the worst decision by the Supremes since Kelo. See my 1 September, 9 and 17 October and 9 November 2007 posts on Stoneridge.

Upon hearing the Supreme's ruling in Worcester v. State of Georgia, 8 LEd 483 (1832), President Andrew Jackson (AJ) is supposed to have said, "Justice Marshall has made his decision, now let him enforce it". Where is an AJ today? Kennedy's opinion is crazy. To believe it, you would have to believe no conspiracy could take place for fear a conspirator would "rat" on his fellows! Who in his right mind could believe this?

Here we have peasants like Joseph K in Franz Kafka's Before the Law, waiting for the Law and never being admitted to it. Supremes, you should be ashamed of yourselves.

"I Know Nothing", Sergeant Schultz as Economist

"The financial crisis of 2007 is bringing out the creative side of the world's central bankers. ... Central bankers are extremely conservative people. ... Their first rule is to do no harm. ... After improving for several months, the banks are swooning again. ... Simply stated, the problem is that the banks are unwilling to lend for anything more than a few days. ... Clearly, they were worried about the quality of the assets on the balance sheets of the potential borrowers. My guess is that banks were having enough trouble figuring out the value of the things they owned, so they figure that other banks must be having the same problems. The result has been paralysis in the inter-bank lending markets. ... And, as I will discuss in a moment, non-US banks faced an added problem--they could not get dollars. ... Everyone has described the current environment as a crisis. ... The discount lending rate is supposed to put a cap on the federal funds rate in the interbank market. ... Today we have the new problem that dollars are in short supply outside of the United States. ... Okay, so what exactly is the Fed trying to do here? ... To understand why [the Fed is] doing this, we need to think about the fact that the central bank can use operations to either change the size of its balance sheet or the composition of the assets that [it holds]. ... This new mechanism is aimed at shifting assets from US Treasury securities ... to some of the lower quality stuff that is accepted as collateral for discount loans. ... I simply note here that in a crisis it can become almost impossible to distinguish illiquidity from insolvency", Stephen Cecchetti (SC) at http://www.voxeu.org/, 16 December.

"On Wednesday, the Fed said it was teaming up with four other central banks, including the European Union's, in a scheme to inject capital into the market more broadly than it can through short-term loans at the discount window. ... You may wonder what Bernanke & Co. will take as collateral from banks for this handsome handout--pretty much anything a bank has in its vault short of the old electric typewriter and the battered desk chair with one brokern wheel. ... The Fed also will accept as collateral triple-A-rated [CDOs] and mortgage securities. In fact, it's willing to lend up to 98 percent of the face value of the notes. ... Will the Fed lose money on this? Probably, but that's how bailouts work. The government assumes the risk, and often the losses , when others can't. ... In fairness, the Fed is merely doing its job. Its mission calls for it to safeguard the integrity of our financial markets. To do that, the Fed is basically letting banks know it will shoulder any toxic debt they're holding on their balance sheets", Loren Steffy (LS) at http://www.chron.com/, 14 December.

Uh, oh. Beware central bankers being "creative". Learn from the Trojans, beware central bankers bearing "new anything". See my 28 November post. "Their first rule is to do no harm"? To whom? What about Hjalmar Schacht, a German Reichsbank director in 1922-23? No, SC, the problem is: the banks believe other banks are insolvent and lack good assets to use as collateral. "Dollars are in short supply outside of the United States", SC writes. Really? Communist China has $1.4 trillion in foreign exchange reserves as does Japan. SC, read the newspapers. It is almost always impossible to "distinguish illiquidity from insolvency". Again, many http://www.voxeu.org/ posts are nonsense. We can learn one thing from SC's piece: the banks are in much worse condition than anyone will publicly admit.

Yves Smith (YS) at http://www.nakedcapitalism.blogspot.com/, 13 and 16 December was comfortable with the new Fed Term Auction Facility (TAF). To YS's credit, he refers and provides a link to a 16 December post by Steve Waldman (SW) at http://www.interfluidity.com/ critical of the TAF and YS's analysis. I think SW's got this knocked as does LS. I finally understand my problem with the rating agencies. It's the product of a typing error. When the rating agencies are supposedly rating something "triple-A", what they mean to say is "tripe-A". Now I get it.

Calling Deloitte Detroit

General Motors (GM) will form a VEBA to put billions of dollars in future employee healthcare expenses into it. However, "GM is still funding the trust, so it still has to pay the costs. ... The important thing is that the health care costs will now be off our balance sheet. ... Wouldn't it have made more sense to come up with a system that might have actually reduced those costs", Loren Steffy (LS) in the Houston Chronicle, 5 October.

Right on LS! As I have said before, when you see a "financing innovation" ask what it lets the new "owner"do the old one couldn't. This VEBA seems to lack economic substance. Will Deloitte insist GM consolidate the VEBA if it lacks substance and CPAs should elevate substance over form? Will Deloitte find time to have its employees consider this issue? With $73 million in GM fees last year, it appears Deloitte could spend five to ten hours considering this. Will the Mounties Dudley Do-right save Nell Fenwick tied to the train tracks from the oncoming train? Stay tuned for the next installment of this saga. As LS noted, GM didn't do so well in offloading Delphi's labor costs.