Obama's Bank Dance

"Over the weekend, President Barak Obama went on the offensive against Wall Street for not lending more to Main Street. On CBS's '60 minutes,' the president declared, 'I did not run for office to be helping out a bunch of fat cat bankers on Wall Street.' ... Wall Street fat cats are always a convenient political target, but bankers are responding to the incentives generated by the economic policies of the Treasury and the [Fed]. First and foremost is the Fed's policy of near-zero interest rates. ... In today's troubled times, only the best credits will be bankable. Meanwhile, financial institutions are happy to service their new, best customer: the US Treasury. That play on the yield curve is open to banks of all sizes. The Fed's policy makes sense if the goal is restoring bank profitability by generating cash flow. It is a terrible policy is the goal is fueling small business, the engine of economic growth and job creation. Large, nonfinancial corporations have access to banks. ... While the public is upset with $10 million to $20 million banker bonuses, public policy should focus on what is generating them. ... Sending scare resources to major banks in the form of funds from the ... (TARP), ultra-low interest rates, and the Fed's targeted credit schemes has diverted needed capital from real, productive activity. Now the politicians feel the public's anger and are complaining about the lack of lending and the size of executive compensation", my emphasis, Gerald O'Driscoll (GO) at the WSJ, 17 December 2009, link: http://online.wsj.com/article/SB10001424052748704398304574597910616856696.html.

I agree with GO. GO is with Cato and once worked for the Fed and Citigroup. I consider GO an Austrian economist. GO wrote Economics as a Coordination Problem, 1977. A good read.

Tall Paul Speaks

"I can tell you of two--credit-default swaps and collateralized debt obligations--which took us right to the brink of disaster. Were they wonderful innovations that we want to create more of? ... I have been on boards of directors, and the chance that they are going to understand these products that you are dishing out, or that you are going to want to explain it to them, quite frankly, is nil. ... A few years ago I happened to be at a conference of business people, not financial people, and I was making a presentation. The conference was being addressed by a very vigorous young investment banker from London who was explaining to all these older executives how their companies would be dust if they did not realize the joys of financial innovation and financial engineering [FE], and that they had better get on with it. I was listening to this, and I found myself sitting next to one of the inventors of [FE]. I didn't know him, but I knew who he was and that he had won a Nobel Prize, and I nuged him aside and asked what all the [FE] does for the economy and what it does for productivity. Much to my surprise, he leaned over and whispered in my ear that it does nothing--and this was from a leader in the world of [FE]. I asked him what it did do, and he said it moves around the rents in the financial system--and besides, it's a lot of intellectual fun", my emphasis, Paul Volcker interview at the WSJ, 14 December 2009, link: http://online.wsj.com/article/SB10001424052748704825504574586330960597134.html.

I have long been suspicious of FE. As for 1997's Nobel Prize, see my 30 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/book-review-walter-wristons-bits-bytes.html.

PCAOB Apologists

"The legality of a federal board that oversees accounting firms was debated before the Supreme Court on Monday, with conservative justices suggesting that the board enjoys more independence from the president than the Constitution permits. ... During oral arguments, conservative justices including Antonin Scalia noted that the president's control over the accounting board is limited because the board answers to all five independent commissioners of the SEC, not just the chairman. ... Because of its power to initiate investigations into accounting firms, the board can take 'actions that have devastating consequences for the regulated bodies,' said Chief Justice John Roberts. ... Jeffrey Lamke, the attorney representing the [PCAOB] .... said the president has the same control over the board as he does over everything else that falls under the SEC's jurisdiction. 'Which is nothing,' said Justice Scalia. Several former SEC chairman and accounting-industry groups support the current setup of the accounting board", my emphasis, Fawn Johnson and Jess Bravin at the WSJ, 8 December 2009, link: http://online.wsj.com/article/SB126020055598680141.html.

If the AICPA and Big 87654 support the PCAOB, how much has it improved investor protection since 2003? Remember the AICPA, Big 87654 and SEC all supported CPA "peer review". I await the PCAOB barring a Big 87654 firm from further practice in front of the SEC.

I found a 21 July 1993 piece by Janice Shields, who was then an Associate Professor of Accounting at Bloomburg University titled, "Bad Audits ... Not Deep Pockets" about the Big 6's auditing failures. Nothing has improved since 1993. Here's a link: http://www.enronwatchdog.org/PDFs/bad_audits.pdf.

Sarbox Loophole?

"Congress wants to close a legislative loophole that has led to the dismissal of many corporate whistleblower complaints, undermining the government's goal of protecting employees who report fraud at publicly traded companies. Democratic lawmakers are seeking to amend the Sarbanes-Oxley Act's whistleblower-protection provision. Under the law, employees who claim to have been dismissed for reporting wrongdoing can file an adminstrative complaint with the US Department of Labor. ... In articles last year, the [WSJ] reported that the Labor Department has dismissed many whistleblower complaints on a technicality, saying the law, as written, doesn't apply to corporate subsidiaries. ... Under the Bush administration, Labor Department lawyers issued a directive saying there is 'no legal basis for the argument that subsidiaries of covered corporations are automatically covered,' because the language of the law does't 'expressly' mention subsidiaries. Sen Patrick Leahy, a Vermont Democrat and one of the main authors of the whistleblower provision, says Congress never meant to exclude subsidiaries", Jennfier Levitz at the WSJ, 1 December 2009, link:

http://online.wsj.com/article/SB10001424052748703939404574568272685253690.html.

The Bush adminstration's interpretation of this law was indefensible. See my 16 September 2008 post:

http://skepticaltexascpa.blogspot.com/2008/09/sarbox-scam-2.html. Apparently I understand legal interpretation better than the DOL's lawyers. Big deal.

Vampire Squid Exposed

"Goldman Sachs Group [GSG] played a bigger role than has been publicly disclosed in fueling the mortgage bets that nearly felled [AIG]. [GSG] was one of 16 banks paid off when the US government last year spent billions closing out soured trades that AIG made with the financial firms. ... [GSG] originated or bought protection from AIG on about $33 billion of the $80 billion of US mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Societe Generale and Merrill Lynch, the banks with the biggest exposure to AIG after [GSG], according an analysis of ratings-firm reports and an internal AIG document that details several financial firms' roles in the transactions. ... The trades yielded [GSG] less than $40 million in profits, which were mostly booked from 2004 to 2006, according to a person familar with the matter. But they piled risks onto AIG's books, which later came to haunt the insurer and [GSG]. The trades also gave [GSG] a unique window into AIG's exposure to losses on securities linked to mortgages. ... A [GSG] spokesman says that until AIG was rescued by the government, the insurer 'was viewed as one of the most sophisticated financial counterparties in the world. It wasn't until the government intervened in September 2008 that the full extent of AIG's problems became apparent. ... More clarity has emerged recently over the roles that firms such as [GSG] played as complex deals carried out by banks are now being untangled in legal and regulatory inquiries. Last month a government audit of part of the AIG bailout described [GSG's] middleman role. ... The trades seemed prudent at the time given AIG's strong credit rating and the fact that AIG agreed to make payments to [GSG]. known as collateral, if the value of the CDOs declined", Serena NG and Carrick Mollenkamp at the WSJ, 12 December 2009, link: http://online.wsj.com/article/SB10001424052748704201404574590453176996032.html.

Where was PWC which "audited" AIG and GSG during the relevant time? Why hasn't the PCAOB yanked PWC's practice rights? There's more to come out.

Argentina Shows America How

"Argentina's government said it will set aside a portion of the central bank's foreign-currency reserves into a fund dedicated to debt service, in an effort to allay investor concerns about the country once again defaulting. ... But some economists said the creation of the fund raises longer-term questions about the Argentine government's commitments to control spending, which has been growing at a worrisome rate. ... Gabriel Torres, an economist at Moody's Investors Service ... said the debt bill is less onerous than it seems because much of the debt is held by Argentine government pension funds, banks, and other institutions that would surely roll it over. Nevertheless, Argentina's track record makes it risky. In 2001, Argentina declared the largest sovereign-debt default in history on about $100 billion in debt. ... 'Foreign-exchange reserves are to buffer you against all kinds of external shocks,' said Simon Johnson, a professor at the Massachusetts Institute of Technology and former IMF chief economist. Mr. Johnson said using some of the reserves to pay down debt could help shore up confidence in the Argentine market as some investors get unsettled about countries with big fiscal imbalances. ... Longer term, however, economists raised concerns over whether the Kirchner government was using the central-bank resources to avoid dealing with a growing fiscal problem", my emphasis, Matt Moffett and Matthew Cowley at the WSJ, 15 December 2009, link: http://online.wsj.com/article/SB126084511452791541.html.

Old South (OS), 10 November 2009, asks of Argentina's "plan to issue NEW sovereign debt", do the "money managers out there planning to buy in ... know, when push comes to shove, they can now dump the resultant losses on the US Treasury and taxpayer", link: http://mainstreetmattersmore.blogspot.com/2009/11/proof-positive-theres-one-born-every.html.

What distinguishes America's financial position from Argentina's: the US dollar is the world's reserve currency. For now. Set aside? Like the "social security lockbox"? This is accounting nonsense like "appropriated retained earnings". Argentina's supposed sinking fund lacks economic significance. I don't doubt Argentina's willingness to reduce spending. It won't. Moody's must be staffed with fools. Disagreeing with Torres, it doesn't matter who holds Argentina's debt. Who holds it governs who will lose when Argentina next defaults. Why should who holds Argentina's debt affect its value? Does who holds XOM affect its value? Disagreeing with Johnson, how can Argentina pay down debt net, without reducing spending? Argentina's actions are part of a continuing con game. Does the US have a big fiscal imbalance? Why are 30-year US Treasuries yielding 4.45%? Is Uncle Sam using Zimbabwe Ben to "avoid dealing with a growing fiscal problem"?

OS raises a good point. Did Argentina "clear" its proposed bond issues with His Obamaness? Will Argentina become the new Citigroup, with its hand continually in the taxpayers' pocket?

Exxon's Acquisition

"Shrinking? Me? Having spent much of this decade buying back the shares it issued in its last big acquisition, Exxon Mobil Corp. is purchasing another company for a change. ... What's more, Exxon is scaling up in a business that looks dreadful right now: US natural gas. ... Exxon has recycled $258.8 billion into buying back its own stock since September 2000, according to [S&Ps], equivalent to almost 79% of its current market capitalization. ... Moreover, it is paying less than $1 per thousand cubic feet equivalent whcn XTO's probable and possible reserves are taken into account. ... With XTO, an entrepreneurial, acquisitive company, the risk is largely cultural. In trying to capture the expertise of XTO's employees, Exxon must be careful not to smother them in its much larger organization", my emphasis, Liam Denning at the WSJ, 15 December 2009, link: http://online.wsj.com/article/SB10001424052748704869304574596431977167614.html.

There is much speculation about why EOM is buying XTO. My answer: XOM thinks the price of natural gas will increase over the next 5-10 years.

Zimbabwe Ben's Stalking Horse?

"Since the start of 2007, the financial crisis has triggered $1.62 trillion of write-downs and credit losses at US financial institutions, sending the American economy into its deepest recession since the Great Depression and the global economy into its first recession since World War II. ... Many observers worry that the debt-to-GDP ratios projected over the nerxt ten years are unsustainable. Assuming deficits can be reined in, how might the debt/GDP ratio be reduced? ... In a recent paper (Aizenman and Marion 2009), we examine the role of inflation in reducing the Federal government's debt burden. We conclude that an inflation of 6% over four years could reduce the debt/GDP ratio by a significant 20%. ... A government that has lots of nominal debt denomiated in its own currency has an incentive to try to inflate away to decrease the debt burden. If foreign creditors hold a significant share of the debt, the temptation to use inflation is greater, since they will bear some of the inflation tax. Shorter average debt maturities and inflation-indexed debt limit the government's ability to reduce its debt burden though inflation", Joshua Aizenman and Nancy Marion (A&M) at Voxeu, 18 December 2009, link: http://voxeu.com/index.php?q=node/4413.

A&M are economics professors at UC Santa Cruz and Dartmouth respectively. Professors, 20% won't cut it. See my 4 July 2008 post: http://skepticaltexascpa.blogspot.com/2008/07/sovereign-debt-risk.html. Did Zimbabwe Ben encourage A&M to write this to see what reaction the public might have to it?

AIG's Reserves

"An independent analysis of whether the insurance industry has been setting aside enough money to pay its claims estimates that the [AIG] has a shortfall of $11.9 billion in its property and casualty [P&C] business. The conclusion is at odds with the often-repated refrain that AIG's troubles can all be traced to its derivatives portfoliom and that its insurance operations are sound. ... In a report distributed to clients on Monday, the investment research firm Sanford C. Bernstein pointed to a big shortfall in AIG's [P&C] insurance business--which has been renamed Chartis and is intended to be the future core of the company's operations. ... Todd R. Bault ... said the inadequacy of AIG's reserves had grown in recent years--'nearly the opposite behavior that we would expect,' since the claims-paying reserves of other insurance companies had been growing. ... Bault saaid inadequate reserves could prompt regulators to penalize AIG, or customers to flee. Once he had excluded AIG from his industrywide data, he wrote, all other companies appeared to have more than enough reserves", Mary Walsh at the NYT, 1 December 2009, link: http://www.nytimes.com/2009/12/01/business/01aig.html.

If Bault is right, where was PriceWaterhouseCoopers or the NY State Insurance Commission in recent years? See my 8 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/yves-smith-on-aig.html.

Asarco Pays Off. Who?

"After a four-year legal battle, a mining company has paid the government a record $1.79 billion to settle claims for hazardous waste pollution across 19 states, federal agencies announced Thursday. ... The money, received Wednesday night from a subsidiary of the mining conglomerate Grupo Mexico, Asarco's parent, will be used to repair extensive damage from the mining operations. ... The deal required the coopoeration of the Justice, Interior and Agriculture Departments as well as the Environmental Protection Agency. At the new conference, officials were jubilant about the outcome. ... Jack Kinzie, a lawyer at the firm Baker Botts who was the lead lawyer for Asarco in the bankruptcy case, called the settlement 'fair.' But in a statement in June, the firm said it had been able to limit the allowed claims against the copper giant to substantially less than the $3.6 billion originally filed", my emphasis, Leslie Kaufman at the NYT, 11 December 2009, link: http://www.nytimes.com/2009/12/11/science/earth/11settle.html.

This is appalling. Another DOJ sellout of the public interest. Why were these officals jubilant? Because of the $1.79 billion they collected, or the $1.81 billion they didn't? $1.81 billion will buy a lot of NY BigLaw partnerships.