Wait Listed by Jail

"The recession is driving America's city governments into an epic fiscal storm. Unlike earlier downturns, all three big revenue sources--income, property and sales taxes--are falling together. Cumulative budget shortfalls are already in the tens of billions of dollars. ... This recession seems sure to be so serious, say urban finance experts, that many cities will be forced to go well beyond their familiar tight-times reductions in park and library budgets. A growing possibility: to cut into that historially inviolate sector--police officers and firefighters. ... How to do it? There's an oft-neglected candidate: corrections. Because of politically motivated manadatory sentencing legislation, prisoner rolls have been growing rapidly, reaching world-leading shares of the total population. Complains Maricopa County, Ariz., Manager David Smith: ... 'We're going broke slowly with this criminal justice system'," Neal Pierce at the Houston Chronicle, 30 November 2008.

"One measure of how tough times are in the Motor City: Some of the offenders in jail don't want to be released; some who do get out promptly head back where there's heat, health care and three meals a day. ... Even with no hurricane to blame, Detroit has, by many measures, replaced New Orleans as America's most beleaguered city. The jobless rate has climbed past 21 percent, the embattled school district just fired its superintendent, tens of thousands of homes and stores are abandoned, the ex-mayor is in jail for a text-messaging sex scandal. ... The roots of Detroit's current plight go back decades. Court-ordered school busing and the 12th Street riots of 1967 accelerated an exodus of whites to the suburbs, and many middle-class blacks followed, shrinking the city's population of 1.8 million in the 1950s to half that now. ... Rev. Edgar Vann, pastor of the Second Ebenezer Church ... [said] 'Somebody needs to hear us before we begin to see a rise of social upheaval. ... I hate to say that. It's a God-forbid reality.' ... The challenges are daunting. A City Council fiscal analyst projects that Detroit's budget deficit could surpass $200 million by June. The public school district faces a deficit exceeding $400 million, prompting the state to declare a financial emergency. ... Yet Jeriel Herd, chief of jails and court for Detroit's Wayne County, said jail conditions may deteriorate because of pressure to eliminate a quarter of the deputies who guard them. ... Overall, the residential real estate market is catastrophic, with the Detroit Board of Realtors now pegging the average price of a home at $18,513. Some owners can't find buyers at any price. ... Mark Douglas, 41, is among the metro area's most sucessful African-American car dealers--he succeeded his father as president of Avis Ford in suburban Southfield. ... [said] 'Whites have to move back in. You've got to have the integration factor. Everyone has to come together'," my emphasis, David Crary and Corey Williams at the Houston Chronicle, 21 December 2008.

End the drug war. Now. It's a luxury we can't afford. If you think this situation portends well for muni bonds, you are mistaken.

Wow! Some day instead of "dropping the H-bomb" at a party, i.e., saying "I go to Harvard Law (or) Business School", a man will impress the nearby attractive young lady by saying, "I went to Wayne County Jail". Eventually young ladies will swoon by one's even being wait-listed by Wayne Country Jail! "Whites have to move back in". Why? Will you force them at gunpoint? Will Douglas do anything for whites to encourage their return? This article reminds me of 1963's "Ocean Hill Brownsville" fiasco. New York City's (NYC) Board of Education decided an inexplicable osmotic process existed, i.e., sitting Negro kids next to whites in classrooms would improve their scholastic achievement. White parents wanted no part of this as the largely Negro schools their kids need be sent to had, drumroll please, high crime rates. Racism said NYC's liberals. The whites moved out. This is a microeconomic analysis failure. If white kids are valuable, pay them to attend largely Negro schools. At some price, they'll go. I searched the web and found a May, 1966 gem, Improving Ethnic Distribution of New York City Pupils by Jacob Landers. Laugh, read all 78 pages. Remember, this was written 42 years ago, link: http://www.eric.ed.gov/ERICWebPortal/recordDetail?accno=ED011270. This document is dear to me. Why? I went to page 70's Wingate HS, being zoned into it from Erasmus, the boundary being extended southward to Church Avenue. When I went to grammar school, I walked past J-210-K every day, a page 59 "Sending" School for the "Free Choice Transfer Policy". I saw it all. Columbia Teachers' College (CTC) "experts" visited our schools from time-to-time urging we engage in Maoist self-criticism, for not wanting to attend largely Negro schools, depriving them of a good education. As a high school kid I would say, "take the subway back where you came from". I remember 1958's George Goldfarb (GG) incident, Time, 10 February 1958, http://www.time.com/printout/0,8816,868253,00.html, "It was another grim chapter in one of the more shocking tales of modern education--the continuing story of a great city apparently unable to cope with the teen-aged hoodlums who terrorize its streets and public schools. ... As a result of these incidents, Principal George Goldfarb, 55, was twice called before a special grand jury investigating juvenile delinquency in the schools. ... He was supposed to appear a third time last week ... Instead he headed for his own six-story apartment house, climbed to the roof, and, without leaving a word of explanantion behind him, plunged to his death". So it was reported. I lived about 1/3 of a mile from Eastern Parkway, GG's 1958 residence. No one I knew believed the official story. We thought GG was killed. By whom and why, we had no idea. GG may have been a "hate" crime victim. In 1958, against a white? Impossible. Read Time's account. The New York Daily News has an account here: http://www.nydailynews.com/archives/news/2001/02/28/2001-02-28_displeasure_of_superiors_mr_.html. Good luck Michelle Rhee. I saw "you" before you were born. Your CTC professorship awaits. Go and leave Washington, DC's school kids alone.

Jim Grant on the Fed

Jim Grant (JG) has a fine article on the Fed, 20 December 2008 WSJ. David Theroux (DT) wrote of JG's article at Beacon, here: http://www.independent.org/blog/?p=736. Elihu Root's attack on the Fed was in 1912, before the Fed was created. There are few new arguments against the Fed's existence. Some excerpts DT left out: "Who will finance America's annual surplus of consumption over production (After 25 more or less continuous years, almost a national trait)? Inflation is a kind of governmentally sanctioned white-collar crime. Every crime needs a dupe. Now that the Fed has announced its plan to deceive, where will it find its victims? ... Gold is a hard master, and a capricious one, too, insofar as growth in the world's monetary base depends on the enterprise of mining engineers. But as we have seen lately, there is no caprice like the caprice of sleep-deprived Mandarins improvising a monetary solution to a credit crisis (or, for that matter, of fully rested Mandarins setting interest rates by the lights of their econometric models). ... 'If the Goverment can create money,' as a hard-money propagandist put in an 1892 broadside entitled 'Cheap Money,' 'why should it not create all that everybody wants? Why should anybody work for a living?' ."

Absolutely! I made this argument about Americans not having to work in my first economics class! That "Macroeconomics" takes in adults is astounding. Sing "Rainbow Stew", my 28 October 2007 post, link: http://skepticaltexascpa.blogspot.com/2007/10/ben-stein-rides-again.html. America eventually must choose: put your faith in Monetary Mandarins or Gold. George Bernard Shaw wrote in 1928, "At some point, you have to choose between trusting the natural stability of Gold, and the honesty and intelligence of the members of the government. With due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for Gold". Inflation is government sanctioned counterfeiting, my 24 August 2007 post, link: http://skepticaltexascpa.blogspot.com/2007/08/counterfeit-nation.html. What don't adults understand?

Backlash Afoot?

"The government is doing a lousy job helping distressed homeowners. And according to John Dugan, the Comptroller of the Currency, the little that's been done has had surprisingly little effect. ... What's going on? It's hard to know for sure, because the homeowners who have qualified for help so far were supposed to have been fairly good credit risks to begin with. ... It wouldn't surprise me if many of these Americans were starting to look at the size of the bailouts of Wall Street and the bailout of the Big Three--at the executives, well-paid professional employees, upscale creditors and shareholders, and even well-paid blue-collar workers, who are the major beneficiaries of this federal largesse--and conclude that a fundamental principle of fairness is being violated. These Americans aren't revolutionaries. To the contrary, they're conservative. They've worked hard, but their hard work hasn't paid off. Some have tried to save, only to see their savings disappear. ... They never expected anything like this. This is the angry soil in which populist backlashes can take root", Robert Reich (RR) 8 December 2008 at http://robertreich.blogspot.com/2008/12/are-we-courting-populist-backlash.html.

"under normal preconditions, this would be an angst-filled time. at a time when american middle-classmen are in an unparalleled state of indebtedness and have watched the assets on which their families' well-being in predicated on decimated by a continuing epic financial market collapse, something more incendiary is altogether possible. ... 'as unemployment grows, displaced workers are starting to protest. In Chicago, employees of Republic Windows & Doors occupied a factory earlier this month after Bank of America Corp. of Charlotte, North Carolina, forced the company out of business by cutting its credit line. ... 'With nothing left to lose, militancy gave them their one hope,' said Harley Shaikin, a labor relations professor at the University of California, Berkeley. We'll see more rather than less of this'," gaius marius (gm), 23 December 2008, link: http://declineandfallofwesterncivilization.blogspot.com/2008/12/militancy.html.

"My gut reaction comes from watching the growing brutality and lawlessness of immigrant areas in various parts of Europe, about which the civil authorities do virtually nothing. ... The reaction of the lawfully-constituted governments is to ignore or play down the problem or pretend it really doesn't exist, and to give the young thugs at most a slap on the wrist. In Britain, anyone who dares to point out the extent of the crisis and criticize it may be charges with the crime of 'racism.' ... So I have to admit to a guilty and illicit thrill at the thought of vigilantes on my own ethnic persuasion taking back the mean streets from the invaders. ... On the other hand, what will be the alternative? This is the awful dilemma which is gradually confronting us. ... In a free society, people voluntarily give up a portion of their liberty in exchange for the protection of the state. This is the basic social contract. ... Maybe we as a society would rather be 'nice' than be protected from violent thugs. ... Maybe we are too morally sophisticated to protect ourselves. But not everyone feels that way, and eventually some people are bound to respond in the same manner that the Russian vigilante groups are responding, by adding their own murder and mayhem to the mix", my emphasis, Baron Bodissey, 23 December 2008 at http://gatesofvienna.blogspot.com/2008/12/adding-lawlessness-to-lawlessness.html.

I usually find myself disagreeing with RR, our former Labor Secretary. However, I agree with him here. See my 20 October 2008 post, http://skepticaltexascpa.blogspot.com/2008/10/agents-of-influence.html.

I go further than gm and believe the US is in a pre-revolutionary state, like 1780s France.

The concept of law is collapsing in the West.

Condoleezza's Scapegoats

"Seventeen people died in the Sept. 16, 2007, shooting, which strained relations between the U.S. and Iraq. ... Patrick Rowan, assistant attorney general for national security, acknowledged the dangers of Baghdad that day, but he said the guards disregarded their obligation to refrain from firing their weapons except in self-defense. The victims, he said, 'were ordinary people going about their lives, performing mundane daily tasks, like making their way through a crowded traffic circle.' In pressing charges, prosecutors are attempting to expand the use of a federal law intended to govern the conduct of government contractors in war zones; this is the first use of the Military Extraterritorial Jurisdiction Act in a case involving contractors working for an agency other that the Defense Department. ... Justice Department and [FBI] officials acknowledged complications in their investigation. The guards were granted immunity for statements made to investigators during an initial probe by State Department agents. When the FBI agents arrived to take over the investigation weeks later, they had to reconstruct a crime scene. Justice officials are going up against former military veterans who may benefit from reluctance by jurors to second-guess actions taken in a war zone. Federal prosecutors faced such jury skepticism in August, when a California jury acquitted former Marine Jose Luis Nazario, Jr. on charges of killing a prisoner during a 2004 military operation in Fallujah, Iraq. Jurors hugged Mr. Nazario after the verdict and said they didn't feel they 'had any business' judging combat conduct", my emphasis, Evan Perez and August Cole at the WSJ, 9 December 2008.

"Radio logs from a deadly 2007 shooting in Baghdad cast doubt on U.S. government claims that Blackwater Worldwide security guards were unprovoked when they killed 14 Iraqi civilians", Matt Apuzzo and Lara Jakes at the Houston Chronicle, 19 December 2008.

How does Rowan know? Was he there? Is he an eyewitness? If so, he should recuse himself from the case. If not, he should shut up. Will the hopelessly compromised DOJ and FBI admit takiwa exists and list it as "Brady" material? Today's FBI wants jurors to fantasize it is "CSI New York's" Gary Sinise reconstructing a crime scene. Did the FBI control the area from 16 September 2007 until it arrived? Is the FBI kidding? Is the area's "chain of custody" broken in a hundred pieces and will the FBI's work be thrown out? If the FBI's work did not support Bush Administration policy, would it say so? This case is politically motivated; Condoleezza Rice needs American blood sacrifices to ingratiate herself with Iraq! I think of Idaho v. Horiuchi, 215 F3d 986 (9th Cir., 2000) (Kozinski, J. dissenting), reversed en banc at 253 F3d 359 (9th Cir., 2001). Lon Horiuchi was the FBI "sharpshooter" who killed Randy Weaver's wife in 1992 at Ruby Ridge. In dissent, Alex Kozinski said, "Because the 007 standard for the use of deadly force now applies to all law enforcement agencies in our circuit--federal, state and local--it should make us all feel less secure". The DOJ does not apply its "007 standard" to contractors in a war zone. A World War II case like this would have been laughable. I can see generals like Mark Clark and George Patton saying to Italian or German civilians, "you want what"? Before throwing them out of each's tent. Forcibly. I can see Patton chewing his XO's ass off for letting the civilians into his presence.

Did the FBI know of these logs? Did it care? See also my 21 December 2008 post: http://skepticaltexascpa.blogspot.com/2008/12/condoleezza-rice-and-william-jennings.html.

Yves Smith on Wall Street Pay

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

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

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

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

Hogan v. McQuarrie on Roths

"A silver lining in the dark cloud over Wall Street is the chance to convert your traditonal IRA to a Roth IRA, the only retirement account whose withdrawals won't be taxed after you get your gold watch. Uncle Sam taxes conversion amounts as ordinary income (not at capital gains or dividend rates) in the year of conversion. So, assuming you own recently devalued securities that you think will bounce back, why not pay taxes on a lower total? Let's face it: Tax rates are as low as they're likely to go in the near future and Roth money isn't subject to annual distributions forced on regular IRAs, 401(k)s and sundry other government-defined account types. ... A much more difficult--actually, impossible--question to answer is whether you can lower your net tax bite by paying the taxes on the conversion sum now. ... The problem is you can't know your pre- and post-retirement tax brackets and rates of return over time. Congress changes the rules every year--even without major tax legislation--improving outcomes for some taxpayers and penalizing others", my emphasis, Mike Hogan (MH) at Barron's, 8 December 2008.

MH is a fool. Or an IRS plant. He either doesn't read Barron's, or ignores it. MH realizes: "Congress changes the rules every year". So why pay taxes now? See my 23 November and 16 December 2008 posts:

http://skepticaltexascpa.blogspot.com/2008/11/war-story.html.
http://skepticaltexascpa.blogspot.com/2008/12/william-baldwin-speaks.html.

With a Little Help From My Friends-2

"Certain annuities contracts tied to the performance of a stock index will be treated as securities rather than insurance products, the [SEC] ruled. The 4-1 vote Wednesday ends a long-running dispute over the status of indexed annuities, subjecting them to additional disclosure rules and altering how they will be sold to investors", Jessica Holzer at the WSJ, 18 December 2008.

This article was titled, "SEC Targets Indexed Annuities". It should have been titled, "SEC pays off for Stock Brokers". What disclosures does the SEC want to add to those the insurers made in describing indexed annuities? My last post on this was on 25 August 2008, link: http://skepticaltexascpa.blogspot.com/2008/08/with-little-help-from-my-friends.html.

Banks v. Oil Companies

"Accounting-rule makers moved to launch an effort that could lead to an expansion of mark-to-market accounting, a practice many banks say has worsened the financial crisis. The Financial Accounting Standards Board on Monday told its staff to begin work on a project, or the first step in the standards-setting process, to re-examine accounting for financial instruments. Under one scenario likely to be examined, the use of mark-to-market accounting might be extended to a wider variety of securities, with FASB taking a more holistic view of accounting for loans, bonds, derivatives and stocks. ... Critics say the approach ignores long-term values, while ensuring losses deplete bank capital when they need it most", David Reilly at the WSJ, 16 December 2008.

"Tumbling energy prices already have hurt oil companies' revenue. Now they are threatening companies' untapped oil and natural-gas reserves, a key measure of a company's value. Many companies will likely be forced to declare that big chunks of their oil and gas reserves are unconomic. That could have wide-ranging implications for oil companies, which need to show increasing reserves to attract investors and, in some cases, to serve as collateral on loans. ... Under securities rules, they can only include oil that can be produced economically--a calculation based on oil and gas prices at the end of their year, usually Dec. 31", Ben Casselman at the WSJ, 16 December 2008.

"Shoot the messenger. For months, that has been the mantra of some bankers who say mark-to-market accounting has made the financial crisis far worse. ... Indeed, as FASB member Thomas Linsmeier noted during this week's board's meeting, of 17 banks seized this year by the [FDIC], just 10% of their average total assets were marked to market prices. These banks were failing for reasons other than mark-to-market accounting, namely bad lending. ... But the accountants shouldn't shy away too much from battles, even if it brings politicians into the fray. Legislators on both sides of the Atlantic have begun trying to politicize accounting during the crisis", David Reilly at the WSJ, 19 December 2008.

If banks think accounting entries "deplete" their capital, they haven't a clue what their business is about.

Do banks think oil companies should base their reserve calculations on "long-term oil prices"?

Will the Big 87654 tell Congress, "Get lost"? If not, who needs them?

CPA Triple Header

"At a banquet here [Copenhagen] late last month, accounting firm Ernst & Young [E&Y] feted a Danish Software company for runaway growth under Stein Bagger, its dynamic chief executive. ... But Mr. Bagger, the night's big winner, wasn't there to pick up the accolade of 'Entrepreneur of the Year' and two other awards. ... In the meantime, his award-winning company, IT Factory [ITF], declared bankruptcy. A liquidator has taken over [ITF] and is sifting through its affairs. ... KPMG audited [ITF's] accounts from 2005 through 2007. Deloitte did the same in the previous two years. ... KPMG in Denmark says it is 'shocked' and 'cooperating with police.' Deloitte's Danish unit said it has double-checked its 2003 and 2004 audits and found no problems. [E&Y] for its part, has now withdrawn the three awards it gave to [ITF] on the day Mr. Bagger took flight. 'We feel deceived,' said Soren Strom, head of [E&Y's] 'Entrepreneur of the Year' program, in a statement. The accounting firm, he added, is 'unable to understand the last few days' developments.' ... [Asger] Jensby [ITF's chairman] now says he was wrong and estimates that 95% of [ITF's] reported business was fictitious. ... One person to come out of the mess looking good is Dorte Toft, a 64-year old free-lance journalist and blogger. ... In December, she wrote a blog challenging Mr. Bagger's extraordinary growth figures. But, she says, virtually no one wanted to listen to 'an old woman'," Andrew Higgins at the WSJ, 17 December 2008.

In 2001, Texas CPA named a "Corporate Finance Department of the Year". The company: Enron. Really. This story is so good, a big 87654 firm triple-header. What do these guys know? ITF sounds like Barry Minkow's ZZZZ Best in 1987. What did these CPAs look at? How did PriceWaterhouse avoid involvment with ITF? KPMG is "shocked". Is KPMG Casablanca's Captain Renault? Laugh!

Hans-Werner Sinn Gets It

"Now that the countries of the west have agreed to a three-trillion dollar bailout programme to rescue their banking systems, it is time to look forward and to draw lessons from the crisis. To do this we must understand the causes of the crisis. ... The core of the crisis lies in the legal provisions of limited liability. Creditors of corporations have no claims against the personal assets of the owners (shareholders) of these corporations. ... In times of great economic insecurity, however, limiting liability can become a problem because it induces entrepreneurs to become gamblers. ... The risks created incentives to minimise the stock of equity kept inside these firms, and the small amount of equity capital in turn created incentives to pursue overly risky operations. The interplay of these incentives is the actual cause of the crisis--and this is where reform must begin. The privilege of limited liabilty is not a creation of the market. ... Politicians must finally face the task of defining legal liability limitations for corporations by establishing strict minimum standards for equity capital requirement for the various business models of the banks, both in America and in Europe", my emphasis, Hans-Werner Sinn, 17 December 2008 at http://www.voxeu.org/index.php?q=node/2701.

I agree with Sinn, a University of Munich professor, but think his remedy unworkable as the system will be gamed and publicly-traded companies shares would in effect, be traded with "coupons attached". How do you attribute liability to a shareholder who owned his 100 shares for three days of the company with nine billion shares outstanding? Assume you make a three-year "fraudulent transfer" search. Should the 100 share shareholder be liable for 300 / 9,855 billion of the company's liabilities (9 billion x 365 x 3)? Should you bring hundreds of thousands of shareholders into the bankruptcy? I proposed making officers of companies liable up to three times each's last three years' compensation. In effect, making publicly-traded companies limited partnerships.