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.

Mark Faber's Positions

"Central banks will never tighten monetary policy again, merely, print, print, print. ... Americans must re-think what constitutes a safe asset. ... '[T]he Federal Reserve will keep interest rates at 0 precisely 0. ... in real terms.' ... Contrary to what the talking heads are saying, markets are not out of control, central banks are out of control printing money. ... Eventually there will be war and one will want physical commodities 'not paper from UBS or JP Morgan.' ... 'Mugabe is the economic mentor of Ben Bernanke.' ... Sovereign credits in the Western world are all bankrupt, but before bankruptcy governments will print money. ... If deficits didn't matter as many like the Economist James Galbraith argue today, why should citizens even pay taxes?," my emphasis, Andrew Mellon at Big Government, 23 May 2010, link:

http://biggovernment.com/amellon/2010/05/23/faber-nations-will-print-money-go-bust-go-to-war-we-are-doomed/

I agree with Faber. Apparently the notion that he's Zimbabwe Ben is getting around. Why pay taxes indeed?

Sic Semper Whistleblower-3

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

http://online.wsj.com/article/SB10001424052702303720604575170362357298800.html.

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

Sue a Bank?

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

http://online.wsj.com/article/SB10001424052748704187204575100932943214368.html.

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

UBS's New Savior

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

http://www.businessweek.com/magazine/content/10_08/b4167026005656.htm.

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

UBS Deal Collapses?

"A Swiss court ruled Friday that Swiss authorities may not disclose the account details of a wealthy American who used UBS's private bank to evade American taxes. The ruling, by the Swiss federal administrative court, threatens to open fresh legal challenges from American prosecutors of the Swiss banking giant UBS in what has become a protracted dispute between the two countries. It threatens to topple an agreement reached last August between Switzerland and the [DOJ] that requires Swiss tax authorities to disclose to the [IRS] the names of 4,450 American clients of UBS suspected of evading [US] taxes. ... Should the suit be revived, it could also jeopardize a separate deal last February in which UBS averted indictment by agreeing to pay $780 million to the [US] government and admitting criminal wrongdoing in the offshore private banking services it sold to wealthy Americans. ... In a statement, the IRS said Friday that 'We have every expectation that the Swiss government will continue to honor the terms of the agreement.' ... Friday's ruling is the second by a Swiss court to challenge the disclosure of client names. On Thursday, Swiss regulators said they would appeal a separate ruling by a Swiss court that said the Swiss regulators broke secrecy laws when they authorized UBS to hand over the names of 255 clients as part of the $780 million deal last February. The Swiss regulatory agency, Finma, said Thursday that it handed over the names because the possibility of an indictment of UBS 'would have threatened its existence'," Lynnley Browning (LB) at the NYT, 23 January 2010, link: http://www.nytimes.com/2010/01/23/business/23tax.html.

"The Swiss government on Wednesday backed off an agreement with the [US] that required it to hand over the names of wealthy American clients of the Swiss bank UBS who were suspected of tax evasion. ... The Swiss cabinet said it might put the disclosure of the names up for approval before the Swiss parliament--but only if if received detailed information from the [IRS] on how many UBS clients had come forward under a voluntary disclosure program that ended in November. ... IRS officials said Wednesday that Switzerland needed to hew to the August deal. 'We expect the Swiss government ot continue to honor the terms of the agreement,' the agency said in a statement. The [DOJ] declined to comment. ... Kevin E. Packman, a tax lawyer at Holand & Knight in Miami, said that the Swiss courts 'have put UBS and, so some extent the Swiss government in an uncomfortable position. I suspect that if the courts don't cooperate with the government to find a solution, things are going to get really ugly for UBS", LB at the NYT, 28 January 2010, link: http://www.nytimes.com/2010/01/28/business/global/28ubs.html.

The Swiss buckle to the IRS, when they wouldn't to Adolph Hitler. Wow. That's clout. The Swiss should have told the IRS, "Indict UBS. Fair enough. We'll indict Citigroup and raise you a Vampire Squid (VS). Your turn".

No problem. Invade Switzerland! Wait, even Hitler didn't do that. I have a better idea for the Swiss. Threaten to indict Citigroup and VS for violating Swiss banking laws. I'm sure if the Swiss regulators look, they'll find something.

Sic Semper Whistleblower

"Former UBS AG private banker Bradley Birkenfeld, the key informant in the landmark US case against the Swiss banking giant, reported to a federal prison in Pennsylvania on Friday, while his lawyers stepped up their criticism of the US Justice Department for prosecuting him. ... 'Every single UBS client is pretty much walking away free, either house arrest or probation,' said Mr. Birkenfled, who began serving a 40-month sentence for helping UBS clioents evade US taxes. He pleaded guility in 2008 and was sentenced last August. ... 'This decision is not only grossly unfair and personally harmful to Mr. Birkefeld, it will also have a radical chilling effect on the willingness of other bankers to step forward and expose fraud,' Mr. [Stephen] Kohn said. ... Prosecutors have conceded that they had no case against UBS without Mr. Birkenfeld's cooperation, but they said they sought jail time for the banker because he wasn't forthcoming about his own role in the scheme, an allegation that Mr. Birkenfeld denies", my emphasis, Brent Kendall & Aaron Dale at the WSJ, 9 January 2010, link:

http://online.wsj.com/article/SB10001424052748703481004574646562279548926.html.

"A former banker who provided key assistance in the US tax evasion probe of Swiss banking giant UBS reported to prison Friday and said his co-operation should have earned him the federal government's gratitude, not time behind bars. ... His sentence has drawn criticism from whistle-blower advocates because of Birkenfeld's importance in exposing tax evasion at UBS", Michael Rubinkam at the Houston Chronicle, 9 January 2010, link: http://www.chron.com/disp/story.mpl/headline/biz/6806545.html.

What nonsense. Igor Olenicoff (IO), my 20 May 2008 post: http://skepticaltexascpa.blogspot.com/2008/05/sentencing-snipes-2.html didn't go to prison. IO paid a $3,500 fine. How much did IO pay DOJ employees above and beyond the $3.500? Don't think that. Don't you know how upstanding most AUSAs are? They could leave the DOJ and join say Fredde or Fannie as general counsel. That's how upstanding. What's going on here? The DOJ just told would-be whistleblowers at Citigroup and Vampire Squid, AIG, etc., "shut up". Again I note, the DOJ couldn't have built the case without an insider. "Radical chilling effect", as Yves Smith says, "feature or bug"?

Does anyone remember the FBI's Richard Jewell fiasco?

Vampire Squid Wins Again

"The [Fed] of New York [NYFed] gave up much of its power in high-pressure negotiations with the American International Group's [AIG] trading partners last year, according to a government report made public on Monday. Just two days before the [NYFed] paid AIG's partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut--but it never got the chance. ... But UBS's good-faith gesture was quickly drowned out by Goldman Sachs [GSG] and the top French bank regulator. They argued, with others, that it would be improper and perhaps even criminal to force AIG's trading partners to bear losses outside of bankruptcy court. The banks and the regulator were confident that the [NYFed] was not willing to push AIG into bankruptcy, because earlier in the fall the [NYFed] had stepped in with $85 billion to prop up the insurer. ... The Fed 'refused to use its considerable leverage,' Neil M. Barofsky, the special inspector general for the [TARP], wrote in a report to be officially released on Tuesday, examining the much-criticized decision to make AIG's trading partners whole when people and businesses were taking painful losses in the financial markets. There have been suggestions that the Fed chose to negotiate weakly, Mr. Barofsky said, to give a 'backdoor bailout' to AIG's banks. He said Mr. Geithner and the Fed's lawyers had denied this, but added that 'irrespective of their stated intent,' there was no doubt about the result: 'Tens of billions of government money was funnelled inexorably and directly to AIG's counterparties.' ... Mr. Barofsky said that Goldman's hedges were unlikely to have held up amid the market turbulence of late last year. ... A spokesman for Goldman ... said any additional exposure to AIG's losses was a moot point, because the Fed's intervention had eliminated the risk", my emphasis, Mary Walsh at the NYT, 17 November 2009, link: http://www.nytimes.com/2009/11/17/business/17aig.html.

"The [NYFed] caved in to demands by [AIG's] trading partners that they be paid in full for complex securities they had insured with the company, saving soem of the world's biggest banks from billions in losses, according to a government audit. ... The banks that were paid off in full included [GSG]. Merrill Lynch and large French banks Societie Generale and Calyon, the investment bank unit of Credit Agricole Group, which were represented by the French bank regulator in negotiations with the [NYFed] last November, the report said. ... The audit provides a window into a bailout effort that has been shrouded by a lack of disclosure--raised in the report--and questions over why the US government in effect funneled tens of billions of dollars to the US and European banks that were AIG's trading partners", my emphasis, Serena Ng & Carrick Mollenkamp at the WSJ, 17 November 2009, link: http://online.wsj.com/article/SB10001424052748704431804574540290325376348.html.

"For more than a year, [GSG] has maintained that it wouldn't have suffered material losses had the government allowed one of its major trading partners, [AIG] to collapse. ... A revamped rescue package in November led to Goldman and 15 other banks being paid in full for $62 billion worth of insurance contracts they had with AIG to protect against losses tied to mortgage assets. ... The government auditor's report broadly fouind that the [NYFed] left itself little room in nogotiating with the banks for a better deal for taxpayers. ... In a separate series of trades, Goldman had sold protection against losses on the same assets to other trading firms. ... Goldman has said it was insulated against a material loss by an AIG default. And the audit pointed our that Goldman in fact was protected against some losses. For example, the firm had collected $8.4 billion worth of collateral--cash or a liquid equivalent--from AIG on a $13.9 billion portion of its bets. Separately, Goldman took steps to try and buy insurance against insurance by purchasing protection against an AIG default. ... The audit said, however, that given the fact that the market for those securities had tanked in November 2008, and then an AIG default would have sparked a rout, Goldman would have had a difficult time obtaining value for those assets. ... The bottom line: The audit said those assets that Goldman held would have been worth a lot less had AIG defaulted. ... The audit also raised questions about the insulation Goldman had purchased against an AIG default", my emphasis, Carrick Mollenkamp and Serena Ng at the WSJ, 18 November 2009, link: http://online.wsj.com/article/SB10001424052748504538404574542192562568738.html.

"Finally, Mr. Barofsky pokes holes in arguments made repeatedly over the past 14 months by [GSG], AIG's largest trading partner and recipient of $12.9 billion in taxpayer money in the bailiut, that it had facced no material risk in an AIG default--that, in effect, had AIG cratered, [GSG] wouldn't have suffered damage. ... As Goldman prepares to pay out nearly $17 billion in bonuses to its employees in one of its most profitable years ever, it is important that an authoritative, independent voice like Mr. Barofsky's reminds us how the taxpayer bailout of AIG benefited Goldman. ... Regarding his firm's own dealings with AIG, Mr. [Lucas] van Praag said that Goldman believed that its 'exposure was close to zero; because it insulated itself from a downturn in AIG's fortunes through hedges and collateral it had already received. ... So is Janet Tavakoli, an expert in derivatives at Tavakoli Structured Finance, a consulting firm. 'On Sept. 16, 2008, David Viniar, [GSG's] chief financial officer, said that whatever the outcome at AIG, the direct impact of Goldman's credit exposure would be immaterial,' she said. 'That was false. The report states that if the [NYFed] had negotiated concessions Goldman would have suffered a loss.' ... 'The prices of the collateralized debt obligations against which Goldman bought protection from AIG were in sickening free fall, and the cost of replacing AIG's protection would have been sky-high,' she said. 'Goldman must have known this, because it underwrote some of those value-destroying CDO's.' Ms. Tavakoli argues that [GSG] should refund the money it received in the bailout and take back the toxic CDO's now residing on the Fed's books--and to do so before it begins showering bonuses on its taxpayer-protected employees. 'AIG, a sophisticated investor, foolishly took this risk,' she said. 'But the US taxpayer never agreed to be a victim of investment that should undergo a rigorous audit'," my emphasis, Gretchen Morgenson at the NYT, 22 November 2009, link: http://www.nytimes.com/2009/11/22/business/22gret.html.

The NYFed didn't play "chicken" with Vampire Squid (VS). The correct response was to have VS's executives "shadowed" by FBI agents 24 hours a day. Like what happened to Joe Jett in 1994. I'm sure even Lloyd Antoinette Blankfein would realize if VS had pressed any claims, he would be indicted for something. As Laverntiy Beria said, "Show me the man, and I'll find you the crime", my 16 October 2009 post: http://skepticaltexascpa.blogspot.com/2009/10/which-mob-3.html. Well Mary Schapiro, read this and compare it to VS's claim it was fully hedged and had no AIG exposure. If true, it's because Timmy Boy put $85 billion into AIG. I think Barofksy is close to the truth here. "Improper and criminal"? Fine, VS, The NYFed should have said, "We will put out a press release 9:00 AM tomorrow with your statement. You have until 8:59 AM tomorrow to retract it. What do you want"? Even VS's attorneys could figure out what that meant. Suggestions? Read my 12 and 13 May 6 September 2009 posts: Hey Preet Bharara(PB), can you indict David Viniar (DV) for securities fraud based on his public pronouncements? Look into it. Boy. Or are you on VS's payroll? Here are some of my prior related posts:

http://skepticaltexascpa.blogspot.com/2009/05/goldman-aig-and-18-usc-152.html.
http://skepticaltexascpa.blogspot.com/2009/05/pricewatergates-waterloo.html.

http://skepticaltexascpa.blogspot.com/2009/09/goldman-speaks.html.

Why? To bail out VS, that's why.

VS had no exposure to an AIG bankruptcy. We know so because VS said it. I doubt VS could have kept the $8.4 billion in collateral it supposedly got. Was AIG then insolvent? Should AIG's "bankruptcy trustee" grab it as a preference payment? PriceWaterhouseCoopers (PWC), was AIG insolvent? You "audited" AIG and VS. Well? In 2008 AIG paid PWC $120 million, VS paid PWC $62 million. For $182 million, what did you do? Hey, VS audit committee, sight unseen, I can do a better audit than PWC. Here's my fee: only $50 million. Well? Of course, I might look DV in the eye and tell him VS will get an adverse opinion based on its supposed "hedge accounting", but I will be thorough. And I will not be intimidated.

VS believed this? It was wrong or lied. PWC, did you find this? What's wrong with VS's internal controls? PWC declared them Kosher for Passover on 22 January 2009. Well, Mary Schapiro, what will you do about this? Beat up some micro cap registrants to show us your brass cojones? Hey PB, Tavakoli (I love her) appears to allege the elements of a securities fraud count. What will you do about this?

What a Product!

"The investment opportunity that Hao fell for was all the rage at the peak of the stock market two years ago. The marks: often Chinese entrepreneurs and state-owned enterprises. The banks selling the investment: firms including Goldman Sachs [GSG], HSBC, Citigroup and UBS. ... Here's how it worked: You commit to accumulate large blocks of shares of a Hong Kong-listed stock every day for, say, 12 months at a discount to the share price when you sign uop. You could load up on lots of a $10 stock for just $8. Easy money. The catch is that an accumulator contract terminates if the stock goes up only 5% or so, but if the stock tanks, you have to keep buying it. What were banks like [GSG] and Citigroup doing selling this product? The banks won't comment, but their standard disclosure on derivatives is that they are risky products that can win big or lose big. ... But in a commentary this spring in the Chinese business publication Ciajing, finance lawyer Mushtaq Kapasi, a former [GSFG] specialist in exotic derivatives, described how banks structured accumulators to have a big edge over the customer, like a house over the bettor in a casino. Whatever exposure they had with the accumulator client they could hedge away with other derivatives, all but locking in a profit", my emphasis, Gady Epstein at Forbes, 21 September 2009.

This is another amazing product. About the only way the retail customer could make money from accumulators is if the stock in question stayed between 80% and 105% of the original price. If I were Lloyd Blankfein, I would not travel to Hong Kong.

IRS Hold 'Em

"The [IRS] is staging a massive poker game. It has invited 52,000 UBS AG account holders to the table. ... Or do they stay quiet, hoping to avoid detection, but risk far greater penalties or even criminal prosecution if exposed to authorities? ... One factor in play: The IRS only has the resources to prosecute about 1,000 criminal tax cases each year. 'I'm surprised at how many are willing to gamble,' said Kevin Packman of Holland & Knight in Miami. ... Coming forward to the IRS has its hazards. The agency is offering a special voluntary disclosure program to holders of any offshore accounts that promises a measure of clemency to those who report before Sept. 23", Laura Saunders at the WSJ, 14 August 2009, link: http://online.wsj.com/article/SB125020653689430645.html.

I'm not surprised few people came forward. The IRS is very limited in the number of prosecutions it can bring. Look at Olenicoff, my 20 May 2008 post: http://skepticaltexascpa.blogspot.com/2008/05/sentencing-snipes-2.html. I think the IRS is holding a pair of dueces in this game of "Texas Hold 'Em" with the UBS account holders.

IRS Overseas Income Amnesty

"Wealthy taxpayers have inundated the [IRS] in recent weeks with requests to come clean for past tax evasion, amid a government crackdown on undeclared income from overseas accounts. ... The IRS disclosure program, which began in March and is set to end Sept. 23, offers Americans the possibility that they may face civil charges, which can carry lower penalties than criminal charges for volunteering details of tax evasion. ... The UBS matter represents the government's highest-profile efforts to capture some of the billions of dollars in revenue lost to offshore tax evasion annually. ... The US and UBS continue to wrangle over how many account-holder names the bank will turn over. On Wednesday, a UBS attorney told Judge Alan Gold, of the US Southern District of Florida in Miami, that the bank was close to reaching a settlement. In a statement Wednesday, UBS said the parties are having 'productive discussions' but have yet to reach an agreement", Laura Saunders and Carrick Mollenkamp at the WSJ, 30 July 2009, link: http://online.wsj.com/article/SB124887938516790353.html.

Will the IRS have the DOJ file criminal charges, or is this a bluff? With 115 million tax returns filed annually in a typical year, only 1,000 persons are charged with criminal tax evasion. The DOJ even settled with Olenicoff, my 20 May 2008 post, link: http://skepticaltexascpa.blogspot.com/2008/05/sentencing-snipes-2.html, for no prison time. How much time will the DOJ allot to this instead of Wall Street malfeasance? Billions, hah? How much did Uncle Sam spend on AIG? Consider sending Eric Holder a letter telling him you think the DOJ has better things to do with its time than harass these UBS account holders, like say, find something to charge Lloyd Blankfein with.

Swiss Banks and the IRS

"In a sign that UBS AG's high-profile spat with the [IRS] is chipping away at Switzerland's private banking industry, some Swiss banks are cutting off or curbing business with American clients for fear of crossing US authorities. A number are no longer accepting deposits from US-based customers, or allowing them to open accounts. ... The battle has made some banks in Switzerland see clients based in the USD-regardless of nationalitiy--as an expensive liability. ... For American citizens, who are taxed by the US government on all world-wide income, regardless of its origin, Swiss banks don't offer obvious legal tax advantages. ... Over the past several weeks, Zurich-based retail bank Zurcher Kantonalbank decided to no longer accept business from US cloients, a spokesman said", Katharina Bart at the WSJ, 21 July 2009, link: http://online.wsj.com/article/SB124812576770166239.html.

Why the big push to stop Americans from holding money in Swiss banks? Is it to reduce tax evasion? Or should we don our tin foil hats and expect the 1963-74 Interest Equalization Tax to return, and Treasury figures it will be easier to enforce such tax if Americans hold no money abroad? Stay tuned.

MBIA Split Attacked-2

"Three weeks ago, Wells Fargo served a notice that it had failed to receive $5.5m of insurance payments. ... The use of their triple A rated guarantees was the backbone of huge parts of the credit industry such as securitisation and structured finance, their demise is one reason these parts of the financial markets remain dysfunctional. ... In spite of the pressures wrought by the credit crisis on the biggest bond insurers. or monolines, none of them had been forced to cease paying claims. ... The Syncora saga has put the spotlight on just one of the concerns around bond insurers--that of solvency. The solvency concerns around Ambac and MBIA are playing out in different ways. MBIA received regulatory approval to split into two: one business with municipal bonds and one which would have the structured bonds it insured. This, in effect, is seen as a way of protecting municipal holders at the expense of banks and investors who bought insurance on structured finance. ... 'Those seeking to sue MBIA may have an uphill battle on their hands to prove that the rationale behind the transaction was not well founded but rather was irrational, capricious and/or arbitrary,' said Rob Haines, analyst at Credit-Sights, Mr. Haines regards MBIA as a better credit risk than Ambac", Aline van Duyn at the FT, 14 May 2009.

"A group of 18 financial institutions sued MBIA Inc., claiming the bond issuer's decision to split its businesses earlier this year was fraudulent and left one of the units effectively 'insolvent.' The lawsuit, filed in New York state court, was brought by US and foreign banks, including JP Morgan Chase & Co., Bank of America Corp., Morgan Stanley, Canadian Imperial Bank of Commerce, Barclays PLC and UBS AG. ... MBIA in February separated its troubled mortgage exposures from its profitable US municipal-bond insurance portfolio in an attempt to resume writing guarantees on municipal debt. The original MBIA Insurance unit was left with $10 billion in claims-paying resources to back guarantees on about $240 billion in structured-finance securities and non-US bonds, and its rating was downgraded to 'junk' by credit-rating agencies. ... Many of the banks had bought credit derivatives from MBIA that insured them against losses on securities backed by subprime mortgage assets and commerical real-estate loans. ... In mid-March, representatives of about 15 financial institutions complained to New York State Insurance Superintendent Eric Dinallo [ED], who had approved MBIA's split. ... 'Our lawsuit simply seeks to ensure that policy holders receive what they have paid premiums for: contractually guaranteed insurance protection,' said Vince DiBlasi, a lawyer at Sullivan & Cromwell [S&C], who is representing the banks suing MBIA. ... MBIA and insurance regulators have said their internal projections and estimates of future losses indicate the original insurance unit remains solvent", my emphasis, Serena Ng at the WSJ, 14 May 2009.

MBIA's split is an obvious fraudulent conveyance. How can Haines miss this? I agree with the banks here. Let MBIA file bankruptcy. Now. See my 30 April 2009 post, link: http://skepticaltexascpa.blogspot.com/2009/04/mbia-split-attacked.html.

Let's look at some numbers. At 31 December 2008 MBIA had $994 million in book equity, $233 and $554 billion in insurance in force on structured finance products and municipal bonds respectively. I looked at MBIA's financials, PWC, the guys who "audit" AIG and GSG, had no problem with MBIA's numbers for $4.6 million in fees. MBIA's financials are laughable as is PWC's opinion. I wouldn't pay $1.26 billion for MBIA at its current $6.06 per share price. MBIA should be sent to sleep with the fish. I wish the banks, yes the banks, well with their suit. If they win, they may teach ED a badly needed lesson. What did ED know and when did he know it? Well PWC, where do you stand on this, my 13 May 2009 post, link: http://skepticaltexascpa.blogspot.com/2009/05/pricewatergates-waterloo.html.

These are the end times. S&C, a "New York BigLaw'" is on the right side here! Hey, Vince, I have a pro bono idea for S&C, if S&C is not conflicted out. You have 18 banks. File bankruptcy against AIG and kill it. You may expose why ED let AIG's insurance subs upstream $20 billion to the AIG parent. Of course, if any of your 18 banks were recipients of $120 billion paid to AIG's counterparties, you can't touch this. Aren't you impressed with MBIA's projections? Tell us ED, did you "project" AIG was solvent in September 2008? Will S&C hire its client Moody's as an "expert" to discredit MBIA's projections, my 30 May 2008 post, http://skepticaltexascpa.blogspot.com/2008/05/broken-models.html.

Tax Day Follies

"US prosecutors won their first guilty plea from an American client of UBS AG's Swiss banking services, part of the government's efforts to crack down on citizens who evade taxes through offshore accounts. Robert Moran, of Lighthouse Point, Fla., pleaded guilty in a Florida federal court to filing a false tax return. Mr. Moran, a Fort Lauderdale yacht broker, admitted to concealing more than $3 million in a secret UBS account", Brent Kendall at the WSJ, 15 April 2009.

The IRS and DOJ like to settle these cases around tax time to intimidate the public into paying more taxes.

Let Creditors Pay

"This pattern has been evident for months, with the government aiding creditors and counterparties every step of the way. Yet this has not been explained to the American public. In truth, it's not the shareholders of American International Group who have benefited most from the bailout; they were mostly wiped out. The great beneficiaries have been the creditors and counterparties at the other end of AIGs derivatives deals--firms like Goldman Sachs, Merrill Lynch, Deutsche Bank, Societe General, Barclays and UBS. ... The bailout, and the regulatory regime outlined by Timothy F. Geithner, the Treasury Secretary, would give firms like these every incentive to make similar deals down the road. ... What the banking system needs is creditors who monitor risk and cut their exposure when that risk is too high. Unlike regulators, creditors and counterparties know the details of a deal and have their own money on the line. ... The more closely a financial institution is regulated, the more it will be assumed that its creditors enjoy federal protection. We may be creating a class of institutions whose borrowing is, in effect, guaranteed by the government", my emphasis, Tyler Cowen (TC), 5 April 2009 at the NYT, link: http://www.nytimes.com/2009/04/05/business/economy/05view.html.

I have said this for years. Look at Fannie and Freddie for example. Now we have Goldman, run by a bunch of multimillionaires on the federal dole. TC suggests "prepackaged" bankruptcies be built into credit agreements. I oppose this. I want to see blood spilled in open court. Let the CNC guillotine work.

Failed CDOs

"Amost half of all the complex credit products ever built out of slices of other securitised bonds have now defaulted, according to analysts, and the proportion rises to more than two-thirds among deals created at the peak of the cycle. ... So-called CDOs of ABS caused huge losses to banks such as Merrill Lynch, UBS, and Citigroup, which held large amounts of the supposedly safest top-rated chunks of them. They have since been damned by bodies such as the Bank for International Settlements as being too complex to risk manage effectively. ... However, the ratings of these deals proved unsustainable, as evidenced by the fact they have accounted for 92.9 per cent of all 16,587 ratings downgrades globally from all rating agencies since the beginning of last year, according to Mogan Stanley. The way these complex and risky transactions were exploited at the peak of the bubble can be seen in the data from analysts at Wachovia, , who reckon that 47.6 per cent of alll CDOs of ABS by volume issued since the market substantively began in 2002 have by now hit an event of default. ... However, the real peak of the market saw 147 deals done in the second half of 2006 and 172 done in the first half of 2007--of which 68 per cent and 76.2 per cent respectively have now defaulted", Paul Davies at the FT, 11 February 2009.

"The financial engineers are at it again. ... 'Airplanes fail, too,' says Peter Cotton, founder of Julius Finance, a structured-finance firm in New York. 'That doesn't mean you don't fix them.' Mr. Cotton is one of many such engineers trying to solve a seemingly intractible problem before the government: how to design a system for buying up assets shunted into a massive 'bad bank.' The government doesn't want to pay too much and banks don't want to sell for too little. ... Cotton says the models most banks and ratings firms used to price CDOs were poorly designed. 'They are superficial,' he says, and often spit out prices that don't capture the underlying value of the assets.' ... At Julius, he has been designing new systems that dig deeper into the underlying loans of CDOs. The models use a variety of data points crucial to valuing these assets, such as the relationships between underlying slices of debt with different maturities in the assets. For instance, a CDO contaning many slices of corporate debt, or derivatives tied to that debt, can be priced by looking at where a large number of baskets containing these assets are trading and implying the behavior of the slices from these prices. ... Other financial engineers are working on new methods to price troubled assets. Richard Field, managing director of structured-finance firm TYI, has designed a system that provides real-time loan-performance data investors can consult to more accurately price the securities. If investors can peer into the underlying loan-performance of their aseets on a daily basis, they'll have a much better idea of their present value, Mr. Field argues", Scott Patterson at the WSJ, 23 February 2009.

Who is surprised by this except for the rating agencies?

See my 12 December 2007 and 9 May 2008 posts

http://skepticaltexascpa.blogspot.com/2007/12/of-quants-faith-and-alcoholics.html.

http://skepticaltexascpa.blogspot.com/2008/05/aaa-failure.html.

SEC at Large

"The [SEC] is investigating whether Apple committed securities fraud by failing to inform the public about CEO Steve Job's health. This investigation exemplifies how the agency has run amok. ... Mr. Jobs met persistent inquiries with a snippy, 'Why don't you guys leave me alone? Why is this important?' ... His health was surely material information for investors. And under federal securities laws, it is a serious felony--securities fraud--for corporate officers to disseminate false material information, or to fail to disclose true material information related to the company's financial prospects. ...But while the legal meaning of 'materiality' has long been the subject of dispute and little regulatory definition, it should not dictate that corporate officers have no right to privacy. ... The SEC's investigation is the latest in a long history not only of incompetence, but it connivance with Department of Justice prosecutors", my emphasis, Harvey Silverglate (HS), at the WSJ, 2 February 2009.

"A UBS AG investment banker, a former co-worker, a family friend and a former classmate have been charged criminally in an insider-trading case that allegedly reaped more thean $7 million in illicit profits. ... On Thursday, the [SEC] separately brought civil charges against seven people in the matter", Chad Bray at the WSJ, 6 February 2009.

"The new chairman of the [SEC] pledged a crackdown on fraud and announced changes aimed at speeding up inquiries and reaching tougher settlements. ... Schapiro said she wants to improve audits at privately held brokerage firms and promote safe custody of customer assets. Also, Friday, the SEC announced that David Becker, a partner with Clearly Gottlieb Steen & Hamilton LLP [CGSH], was named the SEC's general counsel, a post he earlier held from 2000 to 2002", Kara Scannel at the WSJ, 7 February 2009.

"Former federal prosecutor Robert Khuzami will be named the new head of enforcement at the [SEC], as soon as this week, a person familiar with the matter said, in the latest bid by the SEC's new chief to restore its credibility. Mr. Khuzami, currently a top lawyer at Deutsche Bank AG in New York, was offered and accepted the position of enforcement director, this person said. ... The appointment of Mr. Khuzami, a respected prosecutor who served as chief of the securities fraud unit at the U.S. attorney's office in Manhattan, is part of SEC Chairman Mary Schapiro's effort to reinvigorate the enforcement division", Kara Scannell at the WSJ, 9 February 2009.

I agree with HS, the SEC should drop this. HS in an attorney and author in Boston. What, the SEC and DOJ can't be trusted?

While the amount involved, $7 million, exceeds my "Blankfein test", I think the SEC and DOJ should drop this too, and focus on more significant matters, like: are Citigroup's books cooked?

Will Schapiro have the same firm that audits Citigroup audit brokerages? She brings Becker back. The SEC-BigLaw revolving door, revolves once more. From his resume at CGSH's website, "David M. Becker ... focuses on SEC and other investigations, internal corporate investigations, corporate governance issues, and on a broad range of SEC regulatory matters. ... Becker was particularly active in advising the Commission on matters related to corporate governance, and accounting and disclosure. ... Becker received a JD degree from Columbia ... in 1973, and an undergraduate degree from Columbia College in 1968". Oh goody, Becker has two Ivy League degrees. Harvey Pitt was SEC chairman from 2001 to 2003. Think about that. My take: it's open season for accounting fraud at the SEC.

If selecting a former AUSA from the SDNY US attorney's office, currently with a NY BigBank, is Schapiro's attempt to "reinvigorate the enforcement division", I don't want to know what she thinks will emasculate it. Laugh, Schapiro made a joke.

Junior at Jr. Deputy Accountant, 5 February 2009, advocates the SEC be abolished, link: http://jraccountant.blogspot.com/2009/02/abolish-sec-once-and-for-all.html. Junior calls me a "brutal critic" of the SEC. Guilty as charged. I am not ready to kill the SEC, yet, unlike the Fed which I would have been buried decades ago. At least in theory, I stress, in theory, the SEC, unlike the Fed, could do more good than harm, if it was the "least cost provider" of information used by the market to price securities. This is theory. I await a study which would convince me the SEC ever paid for itself. At least, the Obamaites should arrive at the SEC with GSG's CNC guillotine, cutting heads left and right and admonish those staffers, each of whom still has his head: pay for yourself or get out! Make annual personnel decimation Uncle Sam's policy with regard to the SEC.

UBS Tax Case

"UBS AG is under legal pressure as U.S. prosecutors expand their investigation into whether the Swiss bank helped tens of thousands of Americans avoid paying taxes, said several people involved in the case. U.S. tax investigators believe the number of American clients that UBS helped to avoid taxes could be much higher than the previously disclosed estimate of about 17,000, these people said. ... The bank is in a round of talks with the Justice Department to avert a possible felony criminal indictment by admitting to criminal conduct and paying a penalty in the range of $1.2 billion, these people said", Glenn Simpson, Evan Perez and Carrick Mollencamp at the WSJ, 26 January 2009.

"The departing No. 3 official at the Justice Department, Kevin J. O'Connor, is joining Bracewell & Giuliani LLP as a litigation partner. Mr. O'Connor was U.S. attorney in Connecticut in 2007. ... At Justice, Mr. O'Connor, 41 years old, has been helping to oversee a criminal investigation into UBS AG's private-banking services, which U.S. officials claim have aided U.S. taxpayers in evading taxes", Evan Perez at the WSJ, 26 January 2009.

We'll see who if anyone at UBS goes to prison over this.

Does this mean that Bracewell is not the "go to firm" when a big bank gets in trouble?

Why Blago?

"So the governor's office was offering to sell Obama's vacant seat for the right price. It sounds like standard operating procedure for the Chicago political machine. But Barack Obama is the child beneficiary of that same machine. Who bought his chance at a Senate seat for him? And what price was paid for it? ... The Tribune has just filed for Chapter 11, and one of the aggravating financial circumstances for it is the Wrigley Field white elephant. And yet here it is today, calmly reporting the fact that elements of its own management were attempting dirty deals with the governor to help it unload Wrigley Field. ... Is this sudden outburst of civic-minded journalism designed to make it look better to potential new investors when the paper emerges from Chapter 11? ... For the full information on the substance of the case, see the Chicago FBI website. Tony Rezko is named as one of those involved, and he has already been convicted on corruption charges. Is it possible that the severity of his sentence was tied to his co-operation in nailing the higher-ups? And who is higher up than Rod Blagojevich? Who can he finger to help shorten his term in the slammer, or at least make himself more comfortable during his stay with the federal corrections authorities?", my emphasis, Baron Bodissey (BB), 9 December 2008 at http://gatesofvienna.blogspot.com/2008/12/governor-shakedown.html.

"Federal agents arrested Illinois Gov. Rod R. Blagojevich and a senior aide Tuesday for what prosecutors described as a political-corruption crime spree, including allegations they tried to sell the Senate seat of President-elect Barack Obama. ... Unveiling the federal criminal complaint at a news conference, U.S. Attorney Patrick Fitzgerald [PF] said Mr. Blagojevich had 'taken the state to a new low'. ... The arrests came five years after federal authorities began investigating Mr. Blagojevich's alleged fund-raising and influence-peddling schemes. For the past two months, investigators have been listening on wiretaps to profanity-laced conversations about the governor's alleged plans to profit from his authority. ... The allegations suggest a breathtaking degree of brazenness on the part of the Illinois governor. ... [FP] told reporters he felt compelled to act this week because of 'lot of things going on that were imminent,' including legislation awaiting the governor's signature that was allegedly being held, pending a potentially illegal payment to Mr. Blagojevich. ... Blagojevich was also threatening to stall the sale of Wrigley Field, owned by the Tribune Co., if the Chicago Tribune newspaper failed to fire five members of the editorial board who were critical of the governor", my emphasis, Douglas Belkin, Lauren Etter and Timothy Martin at the WSJ, 10 December 2008.

"The creditor of a Chicago plant where laid-off employees are conducting a sit-in to demand severance pay said Tuesday it would extend loans to the factory so it could resolve the dispute, but the workers declared their protest unfinished. A resolution seemed nearer as Bank of America, which yanked the plant's financing last week, announced it sent a letter to Republic Windows and Doors offering 'a limited amount of additional loans' to resolve employee claims", Houston Chronicle, 10 December 2008.

"Yesterday, while reading the story about Illinois governor Blagojevich, a central question went through my head. I am sure it was not the question most of Boobus Americanus was asking: Who were the people he was offering to sell the vacant U.S. Senate Senate to? Instead, I was wondering whom in the criminal enterprise we call government he had crossed? ... While the New York Times referred to the story using words such as corruption and scandal, those of us who realize the only 'change' this country secured in the recent presidential election was a change in the skin pigmentation of the tyrant in charge, knew instinctively that the good governor must have really upset someone in power, for corruption and scandal goes to the very core of our government. ... Considering the governor was recorded by those wonderful crime-fighting folks at the FBI bantering about his 'golden' egg with advisers, one must wonder who tipped them off? Of course the FBI is as pure as the driven snow and has never been accused of any wrongdoing, violating civil rights withholding or lying about evidence, or taking the innocent lives of those whom they are sworn to protect, so we know everything about their investigation would be above reproach. ... So, if we have the crooked and corrupt outing the crooked and corrupt, who stood to gain by the revelation to Boobus that one of the criminals was acting in a criminal manner? ... The governor has taken a pee in someone's cornflakes: it will be interesting as we learn who and why", my emphasis, Michael Gaddy (MG) , 11 December 2008 at http://www.lewrockwell.com/gaddy/gaddy36.html.

"Undoubtedly one of the events [PF] has no desire to influence is his own possible reappointment as U.S. attorney for four more years (all U.S. attorneys can be replaced by the incoming administration). ... Moreover, [PF's] bare-knuckle methods have rankled many in the Chicago bar. For example, he got former Gov. George Ryan's chief of staff, Scott Farwell to testify against his former boss by threatening to imprison Farwell's girlfriend for perjury. ... Instead, with wiretap evidence piling up, ... [PF] was forced to make the arrest", my emphasis, Scott Turow (ST) at the Houston Chronicle, 11 December 2008.

"Allegations that Illinois Gov. Rod Blagojevich approached the nation's largest union seeking help in a complex pay-for-play scheme involving an open Senate seat are the latest episode in a long, mutually beneficial relationship between the governor and the powerful Service Employees International Union ... The relationship, while not illegal, or even unusual, for the SEIU, may help explain why the union finds itself involved with a federal criminal investigation against Mr. Blagojevich. The governor was arrested this week after federal authorities issued a complaint against him which, among other things, said his office suggested a deal might be worked out in which he would be given a union job in exchange for naming a labor-friendly senator to fill the vacancy left by President-elect Barack Obama", my emphasis, Clare Ansberry at the WSJ, 13 December 2008.

"Illinois Gov. Rod Blagojevich's 'conduct would make Lincoln roll over in his grave,' according to U.S. Attorney [PF]. But [PF's] statement would, at the very least, make well-regarded former Attorney General Robert Jackson flinch in his. Almost seven decades ago, Jackson admonished a meeting of U.S. attorneys that they should be dedicated 'to the spirit of fair play and decency. ... A sensitiveness to fair play and sportsmanship is perhaps the best protection against the abuse of power. ...' ... The prosecutor is permitted to 'inform the public of the nature and extent' of the charges. In the vernacular of criminal law, that means the prosecutor may not go 'beyond the the four corners'--the specific facts--in the complaint or indictment. He may also provide any other public information, the status of the case, the names of the investigators, and request assistance. But he is not permitted to make the kind of inflammatory statements [PF] made during his media appearance. ... And although I am a Republican, I am first an officer of the court. Thus, I take no joy in a prosecutor pursuing a Democratic politician by violating his ethical responsibility. I fear for the integrity of the criminal justice system when a prosecutor breaks the rules. What's more, [PF] is a repeat offender. In his news conference in October 2005 announcing the indictment of Scooter Libby for obstruction of justice, he compared himself to an umpire who 'gets sand thrown in his eyes.' ... With this statement, [PF] made us all believe he could not find the person who leaked Valerie Plame's name as a CIA operative because of Mr. Libby. What we all know is that [PF] knew well before he ever started the investigation in January 2004 that Richard Armitage was the leaker and nothing Mr. Libby did or did not do threw sand in his eyes. ... In the Libby case, rather than suffer criticism, [PF] became a media darling. ... Additionally, [PF] violated another ethical mandate under Justice guidelines for prosecutors: He is supposed to 'exercise reasonable care to prevent' law enforcement--in this case the FBI agent--from making the same type of extrajudicial statements", Victoria Toensing (VT) at the WSJ, 13 December 2008.

"Lost amid the understandable clamor over the charges against Gov. Rod Blagojevich of Illinois are questions raised by the pretrial public comments about the case by the prosecutor, Patrick Fitzgerald. ... The obvious risk is that a prosecutor's statements outside the courtroom, particuarly statements that pillory a defendant, will taint the pool of prospective jurors and make it less likely that a defendant can receive a fair trial. ... [PF's] expressions of revulsion, use of hyperbolic rhetoric and implicit assertion of his personal belief that the charges have merit clearly run afoul of the rules. ... But [PF] is a prosecutor, a highly regarded, powerful and well-known one", Barry Coburn (BC), 13 December 2008 at http://www.nytimes.com/.

"Rod Blagojevich is the perfect holiday treat for a country fighting off depression. He gift-wraps the ugliness of corruption in the mirthful garb of farce. From a safe distance outside Illinois, it's hard not to laugh at the 'culture of Chicago,' where even the president-elect's Senate seat is just another commodity to be bought and sold. ... Blagojevich's alleged crimes pale next to the larger scandals of Washington and Wall Street. ... Enron was an energy company that had divesrified to trade in derivatives. ... It was also brilliant in devising shell companies that kept hundreds of millions of dollars of debt off the company's bottom line and away from the prying eyes of shareholders. ... Much larger companies than Enron figured out how to place even bigger and more impenetrable gambles on derivatives, all the while piling up unseen debt. They built castles of air on a far grander scale than Kenny Boy could have imagined, doing so with sheer stupidity and cavalier, greed-fueld carelessness rather than fraud. ... The most stupendous example as measured in dollars is Citigroup, now the recipient of potentially the biggest taxpayer bailout to date. ... Enron had been a Citigroup client. In a now-forgotten footnote to that scandal, [Robert] Rubin was discovered to have made a phone call to a former colleague in the Treasury Department to float the idea of asking credit-rating agencies to delay downgrading Enron's debt. ... The Republican side of the same tarnished coin in Phil Gramm, the former senator from Texas. ... Gramm is at UBS, which also binged on credit-default swaps and is now receving a $60 billion bailout from the Swiss government. ... Meanwhile, we have the governor [Obama] leaves behind in Illinois to serve as our national whipping boy, the one betrayer of the public trust who could actually end up paying for his behavior", Frank Rich, 14 December 2008 at http://www.nytimes.com/.

"But some members of [PF's] team actually wanted the alleged scheme to sell President-elect Barack Obama's Senate seat to advance for a little longer, according to some people close to [PF's] office ... The precise timing of Tuesday's pre-dawn arrest was dictated by the Chicago Tribune, according to people close to the investigation and a careful reading of the FBI's affidavit on the case. At [PF's] request, the paper had been holding back a story since October detailing how a Blagojevich confidant was coooperating with prosecutors. But editors decided to publish on Dec. 5, ending the Tribune's own cooperation deal--and tipping off Mr. Blagojevich", my emphasis, Can Simpson at the WSJ, 15 December 2008.

BB's points are well-taken.

I see something else. First, Blago is a Gottiesque, "poor, obsolete loser", my 21 December 2007 post, http://skepticaltexascpa.blogspot.com/2007/12/mortgage-fraud-whose.html. What did Blago want for himself and his wife? Peanuts. It's not like he wanted a Goldman Sachs managing directorship or even a Chicago BigLaw partnership. Why now after five years? Did PF realize Obama will put him out on his keesta in a few weeks and needed to line up a Chicago BigLaw partnership now? Is he on the payroll of one of Tribune Co.'s secured creditors? Did PF decide to ingratiate himself with the Bank of America (BofA) by pushing Blago out after Blago threatened to stop doing business with the BofA because the BofA pulled the rug out from under Republic, which is currently undergoing a sit-down strike? Depending upon how dirty Blago wants to play this, and how many bodies he's willing to dig up and expose to the sunlight, he could have PF begging to dismisss the charges. Stay tuned. Was John Mack or Lloyd Blankfein indicted in New York? Why not? Why wasn't the Mayer Brown firm indicted, my 22 and 27 December posts? Or will PF hang his hat there next year? This wouldn't have happened if "Hizzoner da mare", Richard Daley, 1902-76, was still alive.

That's interesting.

Yes, MG. Interesting indeed.

Is ST crazy? Or is ST helping PF line up his next gig? PF was not "forced" to do anything. My conclusion is the opposite of ST's, i.e., PF is covering his rear, figuring: I get reappointed or a Chicago BigLaw partnership. Either way, I win. Is PF familiar with 18 USC 1512(b), the relevant witness intimidation statute, or does he know the law is not applied to federal prosecutors? Guys like PF can "operate" because juries are (still) insufficently skeptical of the feds. If and when they become sufficiently skeptical, PF and his ilk will need to go into a new line of work. They can become La Cosa Nostra "muscle boys".

What's the problem here? Look at the careers of some of our US attorneys like: Mary Jo White, Mike Garcia and Don DeGabrielle. Will Congress investigate the circumstances under which each got his current position?

How different former federal prosecutors see this. VT and ST are both former "Feds". Are they both right?

BC is correct. He too, is a former Fed. What's PF's game here? PF is no dummy. He knows better.

Blago looks like Shakespearian "comic relief" to me.

Here's how I see it: a company in bankruptcy is using the Northern District of Illinois US Attorney's Office as "muscle" to facilitate the sale of Wrigley Field. Who will look into this? The Tribune just decided to release the story? Or is the Tribune giving PF "cover" for "pulling the ripcord" now? This case stinks.

More Good News

"In a closely watched move that may be followed across Wall Street, the top executives at Goldman Sachs Group Inc. [GSG] have decided to forgo their 2008 bonuses. In doing so, they are giving up potentially tens of millions of dollars in payouts in a year that reshaped the securities industry. ... The executives will only be eligible for their base salaries, $600,000 for each. A firm spokesman said the executives felt it was 'the right thing' to do. ... The debate over bonuses and how much should be paid out has been raging for months across Wall Street. Some investment bankers have argued that even if it was an ugly year, only a handful of people are responsible for the losses and not everyone should be punished for that. ... Many of these employees performed well in 2008 despite the market turmoil, these people say, but could get plucked away by rival firms if compensation practices are significantly altered. ... At many financial firms, about half of all revenue is allocated to compensation, and multimillion-dollar bonuses are routinely paid out to ensure the best talent stays put. ... Since the start of 2002, Goldman, Morgan Stanley, Merrill, Lehman and Bear have paid a total of $312 billion in compensation and benefits to its employees", my emphasis, Susanne Craig at the WSJ, 17 November 2008.

"Bring out the hair shirts? The decision by top executives at [GSG] to join peers at Deutsche Bank and UBS in forgoing bonuses for the year is a sensible act of contrition. But it is hardly radical. Against the backdrop of a financial crisis and intense public scrutiny--particularly after gorvernment capital injections--they had little choice. ... But cutting the pay of a handful of top executives is window dressing. What matters is the size of broader bonus pools", my emphasis, Thorold Baker at the WSJ, 18 November 2008.

"Citigroup Inc. Chief Executive Vikram Pandit vowed to keep slimming down the financial giant, announcing about 25,000 new job cuts that will shrink the number of employees by 20% since he took over last December", David Enrich at the WSJ, 18 November 2008.

"Capital is key to Citigroup's future. And on that score, investors are still worried, even after the banking giant announced plans Monday to cut 50,000 employees. ... Tangible assets, which don't include goodwill or intangibles, are 55 times the bank's tangible equity. J.P.Morgan Chase, by contrast, is 31.4 times, with Bank of America is 31.3", David Reilly at the WSJ, 18 November 2008.

"Behind headlines of record losses, a small group of Wall Street traders on commodities, currencies and interest-rate trading desks have made huge profits for the banks that employ them. That is setting up a scramble as traders vie for dwindling pools of bonus money once heaped on such top performers. So far, they look to be on the losing side of the trade. ... UBS, meanwhile, is crafting packages that withhold short-term pay if long-term bets go sour. Shaken by the global financial crisis and increasing government oversight, banks are groping with a new way of doing business: Pay out huge sums and risk public ire and perhaps more government intervention. Pay too little, and tempt defections or insurrection from the few people who are driving this year's profits. ... While Morgan Stanley's chief financial officer cited the commodities-trading group on an analyst call this year as one of the bank's 'two top businesses,' some traders in the unit in the past have argued that the commodities group is undercompensated relative to its contribution. ... The best traders at top-tier commodities and currency trading desks made $10 million to $20 million or more last year, and the next level down, traders who brought in $100 million in revenues, might have made $4 million to $5 million [Michael Karp] says. Generally, traders look for bonuses of up to 10% of profits they made for a firm, with adjustments for the performance of the unit and the overall firm. ... [Gustavo] Dolfino says star foreign-exchange traders who expected to make $25 million this year after earning the firm $250 million may get less if it isn't clear the feat can be repeated without the use of borrowed money. Acess to the firm's capital has been a key element to the returns of Morgan [MS] and Goldman [GSG], who have led a virtual duopoly in this commodities-trading business for more than two decades. ... Goldman, the other dominant Wall Street commodity dealer, could make as much as $3 billion in net revenue, say people familar with the results", my emphasis, Ann Davis (AD) at the WSJ, 19 November 2008.

"'The villagers are at the gates of the castle with burning torches,' says one compensation consultant. The sheer amount that bankers are paid riles people at the best of times. When the economy is ravaged and the source of the trouble is banks themselves, the pitchforks come out. Politicians on both sides of the Atlantic are gleefully grilling bankers on pay. ... Bankers are desperately trying to placate their critics. ... Paying out billions in bonuses will still look awful. Worse, many expect the ratio of compensation to income, which normally hovers just below 50%, to balloon as banks' revenues fall faster than their pay bills. ... Surely things are so bad that banks could still afford to disappoint even their better employees by screwing down on their pay? Banks everywhere are ditching staff, after all. ... Mob justice may have deserving targets but it is always crude and usually goes too far. Attacks on bankers' pay are no different", Economist, 20 November 2008, link: http.www.economist.com/finance/PrinterFriendly.cfm?story_id=12650356.

"Treasury Secretary Henry Paulson, under fire from lawmakers and others for his approach to resolving the financial-sector crisis, defended his actions as 'necessary steps to prevent a financial collapse.' Mr. Paulson said Thursday that Washington should take a hard look at compensation practices in the financial-services industry, as well as the process of securitzing loans and selling them to investors. ... Mr. Paulson said he has dealt with matters as best as he could, and blamed the turmoil on factors including 'government action and mistaken actions, outdated U.S. and global financial regulatory sytems, and ... the excessive risk-taking of financial institutions'," my emphasis, Deborah Solomon at the WSJ, 21 November 2008.

"Wall Street firm [GSG] said Friday that it will issue debt backed by the Federal Deposit Insurance Corp. under the new Temporary Liquidity Guarantee Program, or TLGP", Matthew Cowley at the WSJ, 22 November 2008.

Mike Shedlock's 20 November 2008 post about Citigroup is worth reading: http://globaleconomicanalysis.blogspot.com/2008/11/citigroup-blames-short-sellers-for.html.

Yves Smith's (YS) 20 November 2008 post about Citigroup is also worth reading, http://www.nakedcapitalism.com/2008/11/citi-considers-selling-itself-in-whole.html.

YS has another post about Citigroup, 23 November 2008 worth reading, http://www.nakedcapitalism.com/2008/11/new-york-times-citi-woes-due-to-lousy.html. I add, "Where were the CPAs"? CPAs are supposed to evaluate a client's "business risks" among other things while doing an audit. The American Institute of Certified Public Accountants published Assessing and Responding to Audit Risk in a Financial Statement Audit (Assessing), 2006, a 498-page tome about how CPAs should consider risk during audits, 498 pages of junk to me. I read all 498 pages. Silly me. Lots of words, no substance. If Citi has "risk control" problems, whatever that means, what did KPMG get $88 million in 2007 for? Plaintiff's bar, start your engines. I smell a lawsuit. Section 4.21 of Assessing reads, "Usually, management identifies business risks and develops approaches to address them. This process for managing risk is an element of the client's internal control and should be evaluated as part of your procedures to gain an understanding of internal control". Then what? Another gem, "During the audit, you may identify risks of material misstatement in the financial stattements that management failed to identify. In such cases, you should consider why the client's risk assessment process failed to identify those risks and whether their process is appropriate to the client's circumstances". Well KPMG? Does anyone at Citi or KPMG know what cost of capital means? Isn't Robert Rubin (RR), "formerly" of Goldman Sachs and Treasury a Citi director? Why does Citi pay RR, double Ivy Leaguer, Harvard followed by Yale Law School, $17 million a year? Much of auditing is window dressing. Hey Mark Olson, of the PCAOB, did you read this NYT article? What if anything, will you do about it? Hey RR, do you know what cost of capital means?

GSG "top executives"? You're kidding. That these guys are eligible for any bonuses shows Wall Street compensation practices are bizzare. Joe Schmoe gets "punished" to support overpaid incompetants and worse, who want bonuses! What chutzpa; i.e., asking a judge for mercy after murdering your parents saying, "Your honor, I'm an orphan". What are investment banks today? A scam! They pay employees every dime possible, then having pushed themselves to the brink of insolvency, scream for bailouts. And get them! Babe Ruth, the Sultan of Swat, El Bambino, in 1931, during the depression asked for an $80,000 ($3 million today) salary. When told that's more than President Hoover makes, $75,000, responded, "I had a better year than he did". Did you have a better year than Bush, Lloyd Antoinette Blankfein (LAB)? Is your public approval rating better than Bush's 20%? LAB, here's a tip: keep your head down.

I agree, it's window dressing. Treasury should tell GSG and its competitors, not ask, tell, until all Treasury funds are repaid in full, including dividends, your bonus pools will be: zero! You don't like it, leave. "But I'm a $50 million a year trader". Really? Without the Fed's suppressing interest rates and fleecing the public to your benefit, you would be lucky to shine shoes in Grand Central Station. Would the capital markets cease to function if you stopped trading? I doubt it.

When you read the whole article, it appears only about 12,000 "job cuts" will come from layoffs. This is still a good opportunity for GSG. It might get 12,000 CNC guillotine rentals from Citigroup. I wonder how GSG bills for its use? Does GSG charge "day rates" or "per chop" like drilling contractors charge "per foot" in the oil patch?

Citigroup is woefully undercapitalized.

MS and GSG may be as poorly managed from each's shareholders perspective as GE. They have traders getting 10% of "their" profits. How do GSG and MS, among others, measure profits? Do they: use Kidder Peabody accounting, appropriately allocate cost of capital? AD notes, "Access to the firm's capital has been a key element to the returns of Morgan and Goldman". Whose capital is it? The traders, or the shareholders? I think these firms are ripe for shareholder revolts. Imagine thousands of "exploited" traders storming Capitol Hill, their Bastille! Will Barney Frank (BF) say, "Mr. Peckinsniff, trader, you made $25 million last year, right? With millions jobless, what are you complaining about? That it wasn't $50 million?" As outside the Capitol thousands of traders carrying pitchforks shake their fists and rebuild 1932's "Bonus Army Village".

How can traders be "undercompensated"? Why do they stay? Does anyone remember microeconomics? You should have encountered "marginal revenue product" (MRP). A firm will hire more of a factor, until its MRP less its marginal cost (MC) equals zero. If a "top" trader only gets 10% of his MRP, he's being enslaved! Why isn't his pay almost ten times his current pay? I see a 13th Amendment problem here. Traders of the world unite, you have nothing to lose but your chains! In 1847 Abraham Lincoln said, "To secure to each labourer the whole product of his labour, or as nearly as possible, is a most worthy object of good government". Traders, you are on the right side of history! Throw Lincoln's statement in BF's face! March around the Capitol with megaphones blaring about your exploitation at the hands of the greedy capitalists. Hand out hundreds of thousands of leaflets explaining your plight. Organize. Join the teamsters' union! If slaves got only 10% of their MRP's, I suspect the slaves' price in the antebellum South would have been much higher that it was. I look at these compensation practices and think, the bailout was an even bigger "mistake" than I thought before. Do MS and GSG do anything which is profitable? Why didn't these "exploited" traders leave years ago? Suppose one of them can make a $250 million pre-tax profit. At even a four PE multiple, he's "worth" $1 billion! Why is he with GSG or MS? What's going on? This sounds like a job, not for Superman, but Joel Stern. Maybe he can get into these firms and figure it out. If GSG's and MS's profits can walk out the door, what PE multiple should they be accorded? Why are they worth anything? On 19 November GSG was $55.18 a share, for a $21.8 billion market cap. If say 50 traders can walk out the door, the rest of GSG may be worth nothing. It may be worth nothing now.

Disagreeing with the Economist, we should reduce bankers' pay until they leave. It's one way to find their MRP given how bad I suspect the banks "responsibility accounting" is. If the traders, etc., don't like it, tough. They should ask their senior management's to return the bailout money. Until then, traders be grateful you haven't had a "date" with the CNC guillotine. The peasants aren't interested in your problems after having paid over $1 trillion to keep you arrogant ingrates in Rolexes and Rolls Royces. At least the unnamed compensation consultant saw the villagers with torches and pitchforks! There is a way to placate the peasants, seppuku!

When a company blames short sellers for the fall in its stock price, you should start its death watch. Is Citigroup's $800 million man this stupid? Doesn't he know when to shut up? Apparently not.

Hey Paulson, why should Washington look at say, GSG's compensation practices? Weren't you GSG's CEO? What did you do for GSG's shareholders when you were GSG's CEO? Did you discharge your job responsibilities correctly? Did you breach a fiduciary duty to them?

GSG employees want bonuses and need Uncle Sam to guarantee GSG's debt? Peasants, pitchforks at the ready. Storm the Bastille.