McLean on Shorts

"'This is indeed a concern and we will tackle it.' That was SEC chairman Christopher Cox's handwritten note to a Senator worried that companies were retaliating against analysts who produced research critical of them. ... In an new book, Fooling Some of the People All of the Time, David Einhorn, who runs a $6 billion hedge fund called Greenlight Capital, recounts his multiyear battle with Allied Capital, a publicly traded private equity firm. ... But the most troubling material concerns an issue that is bigger than Allied and Einhorn's battle: It's the way criticisms of corporate behavior are received in the marketplace. Many, including the SEC, appeared inclined to shoot the messenger. ... After Einhorn gave his speech, the SEC launched an 'informal inquiry'--into Greenlight. When Einhorn testified at the SEC, the 'gist of the questions,' he writes, was 'When did you start manipulating Allied's stock?' The SEC declined to comment. ... Lawmakers have urged the SEC to investigate whether short-sellers spread rumors to bring down Bear Stearns. ... The larger point is that even if a blameless Bear Stearns was crippled by wicked short-sellers-ha!--there's a big difference between spreading rumors and publishing critical research", my emphasis, Bethany McLean (BM) at Fortune, 12 May 2008.

Way to go BM. BM has followed this story for years, see my 20 December 2007 post about the monoline insurers. The SEC has largely been a fraud. For decades. I've cited the Ray Dirks fiasco before. The SEC frequently, it not usually protects politically well-connected corporate miscreants. I never heard of the SEC investigating say, a CPA firm, finding it fired an employee who complained about a client's wrongdoing, putting the employee in a position to sue his former firm and the client in question and win millions in a wrongful termination public policy tort suit. Hey, Mark Olson, does the PCAOB regularly interview former CPA firm employees to find out what went on during an audit? What does the PCAOB do aside from beat up miniscule CPA firms? The SEC's long-held contempt for the First Amendment is appalling. Apparently the SEC only applies it to rating agencies, which no matter how bad their opinions are, use it as a shield against lawsuits. But I thought one could sue over bad "expert" opinion. Apparently the SEC conferred "sovereign immunity" on the NRSROs.

Intellectual Honesty and the Supremes

"Thirty-two years ago, Justice John Paul Stevens sided with the majority in a famous 'never mind' ruling by the Supreme Court, Gregg v. Georgia, in 1976, overturned Furman v. Georgia, which had declared the death penalty unconstitutional only four years earlier. The week, Justice Stevens said 'never mind' again in Baze v. Rees, which ruled the Kentucky lethal-injection procedure did not constitute 'cruel and unusual' punishment. ... He's concluded, you see, that Furman was right all along. ... There's something almost admirable in Justice Stevens intellectual honesty on this point. Baze was one in a recent campaign to euthanize the death penalty piecemeal by getting the courts to declare the method of execution, rather than the penalty itself, to be unnecessarily cruel. But then again, his was not the deciding vote in this week's case, so his concurrence, accompanied as it was by a condemnation of the death penalty itself, was a 'free vote,' of a sort. ... The death penalty, he argues, is unconstitutional today, even if was constitutional 32 years ago, because it doesn't serve a social function that justifies the sentence, and so is 'excessive'," editorial at the WSJ, 19 April 2008.

The law is whatever the Supremes think it is, until they are told in no uncertain terms, that the other branches of government will ignore their opinions.

Good Riddance

"Brian Clarkson, ... is stepping down as president and chief operating officer of the oldest bond-rating firm, [Moody's] announced Wednesday. ... 'Challenging credit-market conditions, combined with Moody's role and function in [structured-finance] markets, have created scrutiny and criticism from numerous external sources about various aspects of our business,' Moody's Corp Chief Exectuive Raymond McDaniel said in a letter to employees Wednesday", WSJ, 8 May 2008.

Brian Clarkson (BC), good bye and good riddance. Now it remains to be seen if McDaniel will do anything to improve Moody's product. I mentioned BC in my 3 May 2008 post. It remains to be seen if BC's leaving Moody's was an attempt to make him the "face" of Moody's problems, like say Mozillo at Countrywide, or will Moody's change the way it does business. Stay tuned.

DOJ v People of Harris County

"A federal appeals court ruled Wednesday that the rights of victims of the 2005 BP explosion in Texas City were violated by Houston federal prosecutors and a judge, but the plea bargain they object to remains on the table. ... The plea agreement must be accepted by a judge to be final and that has not yet happened. ... Judge Lee Rosenthal ... listened in a sometimes tearful February hearing where they complained the fine should be more like $1 billion, not $50 million. But Rosenthal refused to scrap the plea bargain, which is still awaiting her further consideration. ... Prosecutors have defended the plea bargain and noted that the $50 million fine was the harshest available under the Clean Air Act. 'We are ... disappointed by the appellate court's criticism of the government's good faith reliance upon a court's order approving our approach to meet our CRVA obligations,' U.S. Attorney Don DeGabrielle said in a prepared statement. ... The appellate court said it was improper for [Judge Nancy] Atlas to approve the U.S. attorney's request. Prosecutors argued that victims should not be consulted because they were numerous and a leak to the media could impair the plea negotiations and prejudice the case. ... The appellate court said the reasons to keep victims out did not 'pass muster,' and the victims had a right to be involved before a plea deal is reached. ... Victims' lawyer [David] Perry said ... 'What they wanted to do here was keep the fact that they were exploring a criminal case from the public and the victims. Under the victims' rights act, that should not be the case.' ... 'The dirty little secret is that prosecutors are happy to take advantage of victims when it serves their relatively parochial interest,' [Doug Berman, Ohio State University law professor] said. 'But they can also create a lot of headaches for prosecutors'," Mary Flood (MF) at the Houston Chronicle, 8 May 2008.

See my 6 January, 29 February and 19 March 2008 posts. I think Judge Rosenthal should be thrown off the bench. DeGabrielle, stop wasting time. Leave the DOJ for whatever job you've got lined up with whatever law firm you're going to. Do us a favor, leave. Now! Get out that crying towel for BP. $50 million? It's insignificant. I'll bet if E&Y had enough guts to respond to the question, I'm sure it would say $50 million is immaterial to BP's financial statements. DeGabrielle, I don't care about your personal convenience and future career prospects. Who are you kidding? With say a $1 billion fine, not levied, I'm positive you can find something attractive when you leave the DOJ. The DOJ looks more like an extortion racket every day.

SEC v Spitzer

"Say what you will about his personal life, but a new study finds former [NY] Attorney General Eliot Spitzer was a successful advocate for investors harmed by mutual-fund trading abuses. Investors received five to 10 times more in mutual-fund settlements that Mr. Spitzer took part in, according to a comparison of 20 settlements with federal and state regulators between December 2003 and January 2007. Regulators recovered an average of 77% of estimated investor losses in settlements when Mr. Spitzer was involved compared with 7% when he wasn't noted the study. When penalties are included, the recovery rates are 125% and 25% respectively. ... What accounts for the gap? ... [Eric Zitzewitz, an associate professor at Dartmouth College] found one difference: Mr. Spitzer was just more aggressive in pursuing and settling cases than the SEC. SEC spokesman John Nester declined to comment on the research. ... Spitzer insisted that settling funds pay hefty penalties, make restitution to harmed investors and lower fund-management fees, an aggressive approach that his critics attributed to a desire to gain publicity and advance his career, even at the expense of the SEC", my emphasis, WSJ, 30 April 2008.

Why do Spitzer's critics complain? What do SEC staffers do, if not "advance [their] careers" at the expense of investors? Spitzer appeared to seek public approval, SEC staffers appear to seek the approval of the companies they purport to regulate. Either way, Spitzer and SEC staffers each pursues private ends. I conclude the critics' problem with Spitzer is that his interests were more closely aligned with those of investors than the SEC staffers are.

Another Pension Bomb

Michael Panzer has a nice post about state and locality pension problems at http://www.financialarmageddon.com/, 11 May 2008. I have nothing to add to his comments.

Americocentric Analysts

"Oil's seemingly unstoppable surge has led some analysts to issue gloomier price outlooks. Goldman Sachs Group Inc, which predicted the latest run-up says the world may face a 'super-spike' in which crude ranges from $150 to $200 a barrel as early as October, up from $120 now. ... Even more unusual is that oil has maintained its upward momentum in the face of sharply diminished U.S. demand, which fell in Febuary to 19.7 million barrels a day. That was down a million barrels a day from the 2007 average. ... The world oil market has also learned to be disappointed with non-OPEC producers, as underinvestment and aging oil fields in places such as Mexico and Russia have crimped crude production. ... Many analysts now contend that oil prices will fall only following a sharp and sustained drop in demand in the U.S. and other large consuming countries", WSJ, 7 May 2008.

It's good the analysts now realize US oil consumption is only about a quarter of the world's total.

Hanke Spanks Bernanke

"U.S. Treasury Secretary Henry Paulson's blundering is becoming more breathtaking with each passing week. At the end of March he rolled out a grand plan to crown the [Fed] as the nation's new financial stabilizer. The Fed a stabilizer? That's who created the financial mess we're in. ... All the while favoring in this fashion a debasement of the U.S. currency, Paulson proclaimed that we should remain calm and confident because the economic fundamentals are sound. He reminds me of the stockbroker who performed a valuable service to his partners by always being wrong. ... As long as inflation remains at or below its target level, the Fed's modus operandi is to panic at the sight of real or perceived economic trouble and provide emergency relief. It does this by pushing interest rates below where the market would have set them. ... Austrian economists warned that price stability might be inconsistent with economic stability. ... The Austrians concluded that monetary stability should include a dimension extending to asset prices and that changes in relative prices of various groups of goods, services and assets are of utmost importance. For the Austrians a stable economy might be consistent with a monetary policy that had prices gently falling. ... A broad measure of the money supply (MZM) reported by the Federal Reserve Bank of St. Louis increased at an astounding annual rate of 37.7% from the end of January until Mar. 24. ... Until the Fed dumps inflation targeting and the U.S. abandons its weak-dollar policy, inflation will rule the day. Retain (and add to) your gold hedges", my emphasis, Steve Hanke (SH) at Forbes, 5 May 2008.

"On those awkward occasions when he is asked about his nation's currency, President George W. Bush has a simple response. 'We believe in a strong-dollar policy,' he'll say--or words to that effect. For his Treasury Secretary, Hank Paulson, the mantra is 'A strong dollar is in our nation's interest.' ... It should be pretty obvious, then, that the U.S. doesn't have a strong-dollar policy. ... So why do Bush and Paulson keep saying they're in favor of a strong dollar? ... Over time, a currency's value reflects an economy's fundamentals. .. So in that sense, a strong currency is reflective of a strong economy. ... The difficulty is that it's hard to distinguish a cyclical downswing that's clearing the way for good times ahead from the wheezing of a currency and a nation in decline. ... So what should U.S. dollar policy be? ... Menzie Chinn, a University of Wisconsin economist who is one of the nation's leading academic currency watchers [said] 'Because, frankly, I'm confused'," Justin Fox (JF) at Time, 5 May 2008.

I wonder if Steve Forbes read SH's article. If not, I suggest he do. The Los Angeles financial group I was a member of debated including asset prices in "measured inflation" for years. I gave up being a "Friedmanite" when I realized a stable economy is consistent with a falling price level. Why? In a gold-standard economy, gold holders get no "interest". However, by holding gold they forego current consumption, in effect making the rest of society a loan. A non-interest bearing loan. How is the "interest" paid? In falling gold prices of other goods. Think about it. I disagree that Hank Paulson (HP) is "blundering". Mr. "former" Goldman Sachs guy wants to increase the Fed's control over the economy so he can direct it. See my 1 March 2008 post.

JF, like Chinn is confused. I conclude Bush and HP claim to support a strong dollar because they sell dollars and are talking up their product. Would HP, world's largest bond salesman, tell us his product is defective when he has hundreds of billions of dollars of bonds to sell annually? Why care what Bush and HP say? Chinn's being "confused" is no surprise. What does "a currency's value reflects an economy's fundamentals" mean? A currency's quantity controls its value. I have a few years on Chinn and suspect, many more battle scars. Chinn graduated from Harvard in 1984, so I estimate was born in 1962. It's unlikely he remembers the 18 November 1967 British pound devaluation the way I do. See my 27 September 2007 post. Once you've lived through a devaluation like that, you will never again take anything a Finance Minister says at face value. The pound devaluation was typical in that it was done over a weekend to "surprise the speculators".

Uncle Sam at Work

"Yesterday, the [Fed] lowered the federal funds rate to 2%, it's lowest level since 2004. In a nod to growing inflation fears, the Fed said, 'it will be necessary to continue to monitor inflation developments carefully.' But if we really want to do something about inflation, Congress should repeal the Humphrey-Hawkins Full Employment Act of 1978, which diverted the Fed from its most important job: price stability. When the Fed was created in 1913, its principal role was to maintain a sound currency with stable prices. ... Because goosing the economy in the short run and maintaining stable prices over the long run are often at odds, I'm introducing legislation that would rewrite Humphrey Hawkins and give the Fed just one mandate: price stability. ... The Fed's actions have pushed real short-term interest rates into negative territory. ... Clearly, these negative outcomes are not the intention of Fed policy", my emphasis, Paul Ryan (PR) at the WSJ, 1 May 2008.

"You may also be wondering how a higher tax on energy will lower gas prices. Normally, when you tax something you get less of it, but Mr. Obama seems to think he can repeal the laws of economics. We tried this windfall profits scheme in 1980. It backfired. ... If oil companies believe their earnings from exploring for new oil will be expropriated by government--and an excise tax on profits is pure expropriation--they will surely invest less, not more. ... This tiff over gas and oil taxes only highlights the intellectual policy confusion--or perhaps we should say cynicism--of our politicians. ... They want more oil company investment but they want to confiscate the profits from that investment. And these folks want to he President", editorial at the WSJ, 3 May 2008.

Congressman PR of Wisconsin is naive, in my opinion. The Fed's real mandate from day one was to support the Treasury's debt sales. The US price level in 1913 was about the same as it was in 1792. We never needed a Fed to maintain price stability. The negative outcomes PR decries, commodity price increases and reductions in the earnings of those on fixed incomes are exactly what the Fed intends. Remember, in criminal law a man is presumed to intend the "natural and probable consequences of his acts". Are we to believe Helicopter Ben (1590 SATs) does not know what he is doing? If PR is serious about ending inflation I have another suggestion for him: repeal the Federal Reserve Act.

Are our politicians this stupid? Why should Exxon drill more wells if it can't do it at a profit? I remember the windfall profits tax. It drove the IRS crazy trying to figure out how to compute it and collect it. It diverted IRS resources from audits. It was a fiasco. So? It was so much fun last time, let's do it again.

FASB on QSPEs

"Yet at a conference Thursday morning, FASB chairman Robert Hertz reminded both investors and preparers that his staff issued an unusual six-page 'reminder' back in December 2005 that warned investors that investments in subprime mortgages were risky. ... The financial vehicles into which these features were packaged become 'ticking time-bombs,' Hertz said earlier this month at a joint meeting of the FASB and the International Accounting Standards Board in London. ... At that meeting, Hertz added that the securitization of those loans had made improper use of an accounting mechanism known as a qualified special purpose entity of QSPE. Both U.S. and international accounting standards setters are now looking to eliminate QSPEs", http://www.cfo.com/, 1 May 2008.

I agree with Hertz. The accounting for QSPEs was improper when they were created. See my 6 February 2008 post. I bet Hank Paulson, Chris Cox, Conrad Hewitt and Mark Olson are furious with Hertz over his position. Tough.