Sentencing Snipes-2

"As part of a widening probe, the U.S. has charged a former UBS AG banker and a Lichtenstein consultant with helping clients avoid taxes by opening secret bank accounts, destroying documents, using Swiss credit cards and filing false tax returns. One client was billionaire California real-estate developer Igor Olenicoff. Mr. Olenicoff set up a web of secret bank accounts in Switzerland and Lichtenstein to avoid taxes on $200 million in assets, a person familar with the U.S. case said. Mr. Olenicoff has been cooperating with investigators in the wake of his criminal guilty plea to a criminal count of filing a false 2002 U.S. tax return. He was ordered to pay $52 million. ... The Justice Department alleges that a central component of the scheme was an effort to get around a 2001 agreement between UBS and U.S. authorities that called for UBS to identify clients who received U.S. taxable income. ... The indictment alleges the scheme with Mr. Olenicoff dates to the fall of 2001 and lasted at least through 2005: The first step was setting up accounts in Swiss and Lichtenstein banks that concealed Mr. Olenicoff's control of assets with taxable U.S. income. ... According to court records from Mr. Olenicoff's December guilty plea, he controlled financial accounts through a series of firms in the United Kingdom, Switzerland, the Bahamas, and Lichtenstein", WSJ, 14 May 2008.

What's going on here? It seems Olenicoff could have been charged with tax evasion, 26 USC 7201. Compare Olenicoff's sentence with Snipes, my 4 May 2008 post. See Doug Berman's (DB) post at http://sentencing.typepad.com/, 4 April 2008 which indicates Olenicoff will get one year of probation and a $3,500 fine. DB writes, "I think what irks me about this story is the idea that a defendant apparently worth $1.6 billion is going to face a fine of a few thousand dollars. Especially if he is to avoid all prison time, how about a fine say, .1% of his worth. Even letting this fellow keep 99.9% of his fortune could still produce a more fitting fine of $1.6 million". I think Olenicoff might have been charged under 18 USC 225, continuing financial crimes enterprise, or 18 USC 1344, bank fraud. Again, what's going on here? The DOJ is a joke. Jesse Jackson, where are you now that the US needs you. As you have said, "no justice no peace". The DOJ seems not to dispense justice, it dispenses injustice.

The 13th Juror Strikes Again

"A Texas state appellate court on Wednesday overturned a multimillion-dollar verdict against Merck & Co., ruling that there was insufficient evidence linking the painkiller Vioxx to a heart attack suffered by the plaintiff's spouse. ... In its opinion tossing out the verdict, the Fourth Court of Appeals wrote that the plaintiffs failed to negate, 'with reasonable certainty, Mr. Garza's pre-existing heart condiction as a plausible cause of death.' Under Texas law, the plaintiffs didn't have to prove the exact cause of the heart attack with medical certainty but were required to offer evidence excluding Mr. Garza's pre-existing heart disease as a cause", WSJ, 15 May 2008.

Judges contempt for juries leaves me numb. I thought a civil case's standard of proof was the "preponderance of evidence". "Failed to negate"? These judicial clowns seem to have improperly shifted the burden of production. If there was any credible evidence Vioxx caused Garza's heart attack, the verdict should stand. I further thought appellate courts do not: weigh evidence, consider the veracity of witnesses or overturn findings of fact except under very unusual circumstances. What's going on here? Did Merck improperly influence this court? Stay tuned.

Quotations From Chairman Steve

"Paulson repeatedly says he wants a strong U.S. dollar. ... Here's what Paulson and [Fed] Chairman Ben Bernanke should do: Soak up the excess dollars. Announce to the world that they are doing this and why. Get the G7 to intervene to prop up the buck. The Fed could simultaneously point out that the Bear Stearns operation demonstrates we can take pinpoint action to prevent the financial system from seizing up but that there is no need--if there ever was one--to throw gobs of dollars from a helicopter all over the U.S. and the world. ... Paulson ... has it backwards: The weak dollar is the fundamental problem", original emphasis, Steve Forbes (SF) at Forbes, 19 May 2008.

"But is the biggest entity of all--the U.S. government--heading toward the financial rocks? Moody's, the credit-rating agency, got publicity--for once, not negative--in January when it warned that the U.S. government may lose its triple-A rating within a decade if Uncle Sam doesn't do something drastic about the unfunded liabilities of Social Security, Medicare and Medicaid. ... and let's ignore the fact that the U.S. government can literally print the money to service Washington's Treasury debt. ... Raising the retirement age for Social Security or reducing payouts is also unneccessary. ... If younger workers had their own accounts, Social Security liabilities could be treated as sunk costs to be amortized over the next 30 or so years. ... Moody's, by the way, didn't even mention that other and very real threat to the value of U.S. Treasury's: inflation", SF at Forbes, 19 May 2008.

"Given the turmoil in the credit markets, here's an initiative the White House should adopt: busting up the credit-rating-agency cartel. For more than 30 years the SEC has taken it upon itself the task of deciding who should rate debt instruments and who shouldn't. ... The SEC should step aside and let the financial markets decide which rating agencies should get the business", SF at Forbes, 19 May 2008.

I'll say it again, is SF stupid or crazy? If Helicopter Ben (HB) wants to defend the dollar, all he has to do is nothing. Literally stop printing them. If say, Citigroup fails, so be it. SF is correct, the weak dollar is a serious problem. The Bear Stearns bailout only showed that HB will protect Wall Street at the expense of dollar holders.

What has the potential amortization of prior Social Security (SS) liabilities to do with younger workers having separate accounts? If we don't reduce SS liabilities directly, we will reduce them through inflation. What's not to understand? Inflation is no threat to the nominal value of Uncle Sam's debt.

Hooray SF, something I agree with. See my 28 December 2007 and 14 March 2008 posts.

Poetic Justice

"Massachusetts legislators, demonstrating a growing resentment against the wealth of elite universities in tight economic times, are studying a plan to levy a 2.5% annual tax on the portion of college endowments that exceed $1 billion. ... Based on the most recent size of Harvard's endowment, the university would have to shell out more than $840 million annually. ... Kevin Casey, a spokesman for Harvard ... said Harvard would have to raise money to pay the tax because so much of the university's endowment is already tied up by restrictions on gifts", WSJ, 9 May 2008.

Delicious. A liberal institution like Harvard might be hoist on its own petard. "Raise money to pay the tax", says Casey. Is he Ernest Thayer's "Mighty Casey", who struck out? Why? Do idiots run Harvard? Larry Summers, former Harvard president, what do you think? Harvard should have some HBS professors draft moving plans. To Texas. Harvard, have Exxon which moved its headquarters to Irving in 1990, plan the move. Which I'm sure Exxon will do gladly. For a fee. How much is at stake? Let's capitalize $840 million at 9%, that's $9.333 billion Harvard could lose. Let's fill those moving vans! Now.

SEC, too little, too late

"The [SEC] will require investment banks to publicly disclose their funding levels after the second quarter, in the agency's first step to increase disclosure in the light of the collapse of Bear Stearns Cos. SEC Chairman Christopher Cox said in a speech Wednesday that the four largest investment banks overseen by the SEC will disclose 'actual capital and liquidity positions ... in terms that the market can readily understand and digest.' ... Investment banks provide liquidity information in their quarterly reports, but the SEC is looking to expand that to include capital ratios--assets minus liabilities--and what goes into that, such as regulatory capital and risk-weighted assets. ... In addition to increased disclosure on funding levels, the SEC has begun increasing stress-testing at the four largest brokerage firms it reviews under a voluntary oversight program", WSJ, 8 May 2008.

What does this mean? Will the SEC have these firms disclose under what circumstances they might have to shut down? Or is this another "smoke and mirrors dance" to conceal the investment banks financial condition? Let us not forget Cox sang Bear Stearns praises five days before JPMorgan swallowed it. See my 1 April 2008 post.

China's Challenge

"China is threatened neither by Japan, Russia, India, nor the Western powers, as it was not that long ago. ... Unlike the U.S., which governs itself almost unconsciously, reactively, and primarily for the short term, China has plotted a long course, in which with great deliberation it joins economic growth to military power. ... The crux is to raise per-capita income significantly enough that diversions for defense will go virtually unnoticed. ... As we content ourselves with the fallacy that never again shall we have to fight large, technological opponents, China is transforming its forces into a full-spectrum military capable of major operations and remote power projection. Eventually the twain shall meet. By the same token, our sharp nuclear reductions and China's acquisitions of ballistic-missle submarines and multiple-warhead mobile missles well eventually come level. ... Our reductions are not solely nuclear. Consider the F-22, the world's most capable air dominance aircraft, for which the original call for 648 has been whittled to 183, leaving, after maintenance, training, and test, approximately 125 to cover the entire world. The same story is evident without relief through our diminshed air echelons, shrinking fleets, damaged and depleted stocks, and ground forces turned from preparation for heavy battle to the work of a gendarmerie. ... We must revive our understanding of deterrence, the balance of power, and the military balance. In comparison with its recent history, American military potential is restrained. Were we to allot the average of 5.7% of GNP that we devoted annually to defense in peacetime from 1940-2000, we would have as a matter of course $800 billion each year with which to develop and sustain armies and fleets. ... And there we will be, if we are wise, not with 280 ships, but a thousand; not eleven carriers, or nine, but 40, not 183 F-22s, but a thousand, and so on. That is, the levels of military potential that traditional peacetime expenditures of GNP have provided, without strain, throughout most of our lives. ... And yet what candidate is alert to this? Who asserts that our sinews are still intact? That we can meet any challenge, especially when in can be answered with our historial strengths", my emphasis, Mark Helpirn (MH) at the WSJ, 13 May 2008.

I agree with MH. So far the 2008 presidential campaign has lacked any discussion of military affairs. See most of my previous posts on military affairs. See my 14 April and 1 May 2008 posts.

Toothless SEC-3

"Marvell Technology Group Ltd. and one of its founders agreed to settle [SEC] charges for backdating stock-options. The Santa Clara, Calf., chip maker agreed to pay a $10 million fine for a pattern of backdating that, the SEC alleged in a complaint filed Thursday, 'allowed Marvell to overstate its income by $362 million from its fiscal years 2000 to 2006.' Weili Dai, who is married to Marvell's chief executive and had served as its chief operating officer agreed to pay a $500,000 fine, and is barred from serving as an officer at a public company for five years. ... According to the SEC's complaint, Ms. Dai didn't cooperate with the agency's investigators and invoked the Fifth Amendment right against self incrimination when asked 'substantive questions' by the SEC staff", WSJ, 9 May 2008.

Another SEC "triumph". The $10 million fine was .028 ($10 / $362) of the alleged fraud. I'm sure its imposition will have a tremendous deterrent effect on other corporate miscreants. The SEC settled another case recently on similar terms. See my 28 April 2008 post in which the SEC settled a case with Broadcom for .006 of the alleged fraud. Amazing.

Monoline Hijinks

"Back in the dot-bomb days, companies liked to guide investors to rosy variations of their stated profit. These profit figures became known as EBBS, or 'earnings before bad stuff.' ... MBIA ... prefers a metric it calls 'analytic adjusted book value' that 'provides an economic basis for investors to reach their own conclusions about the fair value of the company.' ... So MBIA's variation on book value excludes things like the $3.5 billion mark-to-market loss on derivatives that drove its $2.4 billion net loss in the first quarter. Rather, it includes management's expectations of losses, plus gains from future expected premium payments. ... Investors shouldn't forget the lessons of the Internet-stock bubble; they should stick to figures the company compiles according to generally accepted accounting principles. On the basis of that $8.70-a-share figure, the stock, even at its current level [$9.85], isn't a bargain", David Reilly (DR) at the WSJ, 13 May 2008.

"When you shop for groceries, the checkout clerk asks, 'Paper or plastic?' When your broker calls to sell you municipal bonds in the depths of the credit crisis, he should ask, 'Insured or uninsured?' Your correct answer: 'Uninsured, and what is the credit rating?' ... We who manage municipal portfolios care a lot about credit ratings and give credence to insurance from just three firms: Financial Security Assurance, which carefully managed its exposure to CDOs; Berkshire Hathaway, the new insurer on the block; and, to a lesser extent, Assured Guaranty, which just received an infusion of capital from W.L. Ross & Co. ... For months now, good-quality uninsured municipal bonds, A-rated or better, have yielded less than insured ones. The fact is, no one in the business gives any value to the insurance coverage, and you shouldn't either", my emphasis, Marilyn Cohen (MC) at Forbes, 19 May 2008.

I agree with DR, MBIA's creating its own metrics reeks of the dot-com bust. Investors, beware. MBIA CFO C. Edward Chaplin is pushing his own metric. I did a google search to see when Chaplin last filed a Form 4, it was 15 February 2007, when he bought 20,181 MBIA shares at $70.86 each or $1,430,026. Has he taken a beating. Let's take up a collection for him.

MC gets it. See my 16 February 2008 post, among others.

Arbitration in China

"Western companies doing business in China are increasingly being asked to agree to what they consider a risky--proposition--to resolve disputes through arbitration in China in the event a deal goes sour. ... But some Chinese companies, especially the state-owned, are pushing for their business contracts with Western companies to stipulate that conflicts go to arbitration in mainland China. ... Among issues worrying to Western companies are how the arbitrators are chosen and paid under the Chinese system. Raising different concerns is a particular case in which an arbitrator--at that time the head of CIETAC--who sided with PepsiCo Inc. against a Chinese bottler was later detained by the Chinese authorities. Jerome Cohen, a professor of law at New York University ... served on an arbitration panel in China. ... The arbitrators ruled 2-1 in favor of the Chinese company, with Mr. Cohen the dissenter. "I was astounded,' recalls Mr. Cohen. "I saw some of the most blatant contract violations I'd ever seen, but it was like the others had been watching a different case.' ... Still, many western lawyers remain wary of certain practices they fear can undermine fairness. ... But in China, if the parties can't agree, CIETAC chooses the third [arbitrator]. 'That's an extraordinatrily risky proposition,' says Francis Kao, a lawyer at Skadden, Arps, Slate, Meagher & Flom L.L.P. Ms. Kao advises her clients to cut down the risk by putting a requirement in their business contracts that a CIETAC-appointed arbitrator meet certain qualifications. But the strategy isn't foolproof. 'You still really don't know what you're going to get,' she says. ... In March 2006, Dr. Wang was apprehended outside CIETAC's Beijing headquarters. He has been detained ever since. ... The charges against him allege financial impropriety within CIETAC, but people in the arbitration community have feared something else was at work", Ashby Jones and Andrew Batson at the WSJ, 9 May 2008.

Kao, grow up. As the Chairman taught us, "Political power grows out of the barrel of a gun". How many guns can a Chinese company command and how many can your clients command? Face it Kao, contracts in China are virtually unenforceable. I am touched by the companies concerns over arbitration. I wonder if any of the companies in question were the subject of my 17 and 27 April 2008 posts? How much do American companies like arbitration? See my 24 December 2007 post. The Chinese arbitration system looks much like our own SEC. Kao, do your clients a favor, have them contact Joel Stern, MBA (Chicago, 1964), who among other things, is a Columbia Business School professor. Why? Have him consult with them about how much each should raise its "hurdle" rate for Chinese investments since contracts in China are virtually unenforceable. By the way, I've read a lot of Stern's stuff over the years and think he is a real smart guy.

Model Doubts

"Statistical modelling increasingly drives decision-making in the financial system while at the same time significant questions remain about model reliability and whether market participants trust these models. If we ask practitioners, regulators, or academics what they think of the quality of the statistical models underpinning pricing and risk analysis, their response is frequently negative. ... To have numbers seems to be more important than whether the numbers are reliable. This is a paradox. How can we simultaneously mistrust models and advocate their use? ... A single asset class worth only $400 billion should not be able to cause such turmoil. And indeed, the problem lies elsewhere, with how financial institutions packaged subprime loans into SIVs and conduits and the low quality of their ratings. ... [E]ven a cursory glance at history reveals that mortgage defaults become highly correlated in downturns. Unfortunately, the data samples used to rate SIVs often were not long enough to include a recession. Ultimately this implies that the quality of SIV ratings left something to be desired. ... After all, why would a AAA-rated SIV earn 200 basis points above a AAA-rated corporate bond? Underpinning this whole process is a view that sophistication implies quality; a really complicated statistical model must be right. That might be true if the laws of physics were akin to the statistical laws of finance. However, finance is not physics. ... Taken to the extreme, I have seen banks required to calculate the risk of annual loses once every thousand years, the so-called 99.9% annual losses. However, the fact that we can get such numbers does not mean the numbers mean anything. The problem is that we cannot backtest at such extreme frequencies. ... Fundamental to the scientific process is verification, in our case backtesting. Neither the 99.9% models, nor most tail value-at-risk models can be backtested. ... If we do not understand how the system works, generating numbers may give us comfort. But the numbers do not imply understanding", Jon Danielson (JD) at http://www.voxeu.org/, 8 May 2008.

I agree with JD. Without understanding concepts like arbitrage and discounted present value, the models are worse than worthless, they are "soma" pills. Mark Thoma has a post about JD's article at http://www.economistsview.com/, 8 May 2008 which is worth reading.