The MSM Begins to Understand

"Vandals regularly comb the neighborhood, sometimes setting fires. ... This was once the sort of 'product' that dazzled Wall Street, feeding the subprime-mortgage bubble. ... Now, hundreds of lenders, securitizers and brokers like Kellogg are being investigated by the FBI, IRS, state attorneys general and county authorities nationwide for their respective roles in this global confidence game, which authorities are just beginning to piece together. ... But Cuyahoga County prosecutor Bill Mason tells Newsweek that Kellogg, who is still licensed as a loan officer in Cleveland, is a 'target' of a state task force on alleged mortgage fraud that is expected to return numerous indictments in the next few months. ... But by 2006, 44.7 percent of all securitized mortgages in the county were stated income or no-document loans, according to Patrick Madigan, an Iowa assistant attorney general. ... Now the investigations are going all the way up the pipeline--to Wall Street. ... Among the targets are 'major subprime lenders' and investment banks, [FBI spokesman Bill] Carter says. 'We're going after people right at the top,' says another FBI spokeman, Steve Kodak. ... An astonishing 80 percent to 85 percent of the Cleveland loans bought up by Wall Street from 2003 to 2007 went into foreclosure. ... 'We asked them to step up and take action,' the county treasurer [Jim Rokakis] recalls in his office in downtown Cleveland. 'But here's what I learned about the Fed. They do wonderul lunches. But the Federal Reserve Bank is not there to protect us. It's there to protect the banks'. ... But within a year, the state, heavily lobbied by Ohio banks like National City, stepped in to void the local law, saying authority lay with the governor and legislature in Columbus. Then the U.S. [OCC] issued a preemption order saying the states did not have the authority to enforce laws against national banks. ... Rokakis says, ... 'in the old days, people robbed banks. Now the banks were robbing the people'," my emphasis, Michael Hirsh at Newsweek, 2 June 2008.

Ah, the federal supremacy doctrine. It's time a way was found to incarcerate OCC clowns who protect banks. Are they bank co-conspirators? Rokakis, find a way to embarass the Bushites into throwing some OCC guys under the train with the doctrine you can't use sovereign immunity to perpetrate a crime. Either the OCC guys knew what was going on, in which care they're criminals, or else they were fools and should be fired. With enough publicity, you might be able to force the issue. Sovereign immunity, end it. The WSJ wants to extend sovereign immunity to drug companies based on FDA actions. Crazy. Will the FBI take down senior executives at say: Citibank, JPMorgan, Goldman Sachs, etc., as well as the banks themselves? Don't hold your breath.

"Expert" Monopolies

"Forensic evidence is foolproof, right? ... If only forensics were that reliable. Instead, to judge by the most comprehensive study on the reliability of forensic evidence to date, the error rate is more than 10% in five catagories of analysis, including fiber, paint and body fluids. ... DNA and fingerprints are more reliable but still not foolproof. ... Though a 2005 study in the Journal of Criminal Law & Criminology suggests a fingerprint false-positive rate a bit below 1%, a widely-read 2006 experiment shows an alarming 4% false-positive rate. ... The core problem with the forensic evidence system is monopoly. Once evidence goes to one lab, it is rarely examined by any other. That needs to change. Each jurisdiction should include several competing labs. ... Other reforms should include making labs independent of law enforcement and a requirement for blind testing. When crime labs are part of the police department, some forensic experts make mistakes out of an unconscious desire to help their 'clients,' the police and the prosecution. Independence and blind testing prevent that", Roger Koppl at Forbes, 2 June 2008.

Amen Koppl. Moody's take note. The SEC should consider the implications of Koppl's position with respect to potential rating agency reforms. Look at Moody's reassigning analysts to accommodate investment banks. Oh, no, did Moody's really do that? See my 28 December 2007 and 5 June 2008 posts.

Death and Taxes

"After my talk, a lady who appeared to be in her early 70s grabbed me by the arm and said: 'Mr. Moore, I thought you should know that my mother is 96 years old and in poor health. If she dies before 2010, we're not going to turn over her $30 million estate to the IRS. We will put her on ice if we have to.' ... 'I don't think members of Congress ever gave any thought to the chaos in estate-tax-planning they were causing. By bringing back the estate tax in 2011, they have created a roulette wheeel of death,' moans Dick Patten, head of the American family Busineess Intitute, a group lobbying to eliminate the tax for good. ... Consider a small-business owner who has accumulated $40 million of stock and other assets over her life. If she dies on Dec. 31, 2010, her estate will owe the government nothing. If she makes the mistake of dying one day later, the IRS reaches into her grave, and helps iteslf to about half, or $20 million (Less a $1 million exemption). Congress's tomfoolery might inspire a few Americans to consider the Menendez brothers' solution. ... Harold Apolinsky, an estate-tax attorney in Birmingham, Ala., says that clients 'are now preparing multiple wills' based upon which year they may die in. 'We've created thousands of jobs for estate-tax preparers' he explains. Another estate-tax planner tells me: 'I don't know it we will see an increase in suicides, but the threat of the government taking half of a lifetime of earnings and assets will certainly lessen the will to live beyond 2010 for many at death's doorstep.' ... The tax raises a tiny amount of revenue (just 1% of all taxes), which is a pittance compared with all the trouble it causes; it encourages wild spending during the last years of life while reducing the incentive to save and accumulate wealth during one's lifetime", Stephen Moore at the WSJ, 30 May 2008.

Anyone who thinks Congress can "solve" the "energy crisis" should read this. Congress can't see past the next election The estate tax raises little revenue and is a nuisance. Congress wants to increase the national savings rate, yet keeps the estate tax why? It's full of envious, ignorant fools. If Congress wants to "reform" the tax here's my suggestion: repeal the estate tax, repeal the asset basis step up and substitute a "deemed asset sale" rule. To reduce the nuisance factor my law would exempt amounts under $5 million and eliminate the marital exemption. All larger estates assets are "sold" at death and subject to the capital gains tax, currently 15%. If quasi-socialists like Warren Buffett and Bill Gates want to donate their estates to Uncle Sam, let 'em.

Inflation in Asia

"Vietnam's accelerating inflation is threatening to morph into a full-blown crisis, and it provides a warning to other Asian countries trying to tamp soaring prices. ... When oil and food prices began to rise late last year, the State Bank of Vietnam, hoping to sustain growth, was slow to rein in inflationary pressure by raising rates or clamping down effectively on iresponsbile lending. ... But Vietnam presents a worst-case scenario of what could happen if the region's central banks don't act swiftly to curb rising prices at a time when their economies--unlike those of the U.S. and Western Europe--are still showing robust growth. ... The stock market's down 55% this year, and the prices of goods are rising sharply. ... The country's policy response to rising inflation 'has been both too slow and too small,' [Fitch Ratings] said. ... Vietnam's experience shows that danger of waiting too long before taking decisive action to head off inflation. ... A year ago, Vietnam was the darling of global investors. ... The country's biggest state-run enterprises began diversifying. ... A former prime minister, Vo Van Kiet, wrote a public letter to Mr. Dung last year saying these were precisely the mistakes South Korea, Malaysia and others made in the run-up to the Asian financial crisis of the 1990s. ... The Vietnamese, meanwhile, have been draining bank accounts and buying gold instead. Some have also started hoarding dollars as a hedge agianst inflation", WSJ, 30 May 2008.

"A proliferation of labor strikes in Vietnam is dragging foreign manufacturers into the country's worsening inflation crisis, while Hanoi's Communist leaders struggle to keep rising prices under control. ... Matsushita Electric Industrial Co. of Japan ... workers at one of the company's Hanoi plants ... are seeking a 25% pay increase. ... The strikes reflect the anger of tens of thousands of Vietnamese who have left rural farming communities to seek work in the new industrial zones around Hanoi and Ho Chi Minh City, only to see the buying powers of their wage packets dwindle amid rising food and fuel costs. According to government statistics, about 300 strikes took place in the first quarter, up from 103 strikes recorded in the first quarter of last year. ... The central bank has also increased interest rates--although at 12%, the main policy rate still lags far behind rises in consumer prices", WSJ, 3 June 2008.

Helicopter Ben (HB), note Vietnam's experience and learn from it. Poor Vietnamese, buying dollars, instead of gold. They'll learn.

Strike in a Communist country? Is that treason? Now, with the advent of HB's "import", inflation, the Vietnamese have a real reason to be angry with us.

Krugman on the Economy

"Which decade is it, anyway? Not long ago it seemed as if everyone watching the carnage in financial markets was drawing scary parallels with the 1930s. ... You might think, then, that everyone would be congratulating Bernanke and company for their good work. But at an economic conference I recently attended, many of the participants--including people with a lot of influence in the policy world--seemed to be bashing the Bernanke Fed. ... The emerging conventional wisdom, if what I heard is any indication, is that Bernanke has been fighting the wrong enemy all along: inflation, not financial collapse, is the real threat. ... So this seems like a good time to declare that the new conventional wisdom is wrong. We are not watching a rerun of that '70's show--and the misguided belief that we are could do a lot of harm ... But as I said, this time there's no wage-price spiral in sight. ... But where are the unions demanding 11-percent-a-year wage increases? (Where are the unions, period?) Consumers are worried about inflation, but you have to search far and wide to find workers demanding compensation in the form of higher wages, let alone employers willing to accept those demands. In fact, wage growth actually seems to be slowing, thanks to the weakness of the job market. And since there isn't a wage-price spiral, we don't need higher interest rates to get inflation under control", Paul Krugman (PK) at the Houston Chronicle, 3 June 2008.

PK, are you serious? If you want to see your "wage-price" spiral, look at Asia, Vietnam, for example. I disagree with you, PK; we see a rerun of the 1970s, but this time, it will be worse for American workers as real wages in the US continue to fall to third world levels. You want to see unions, look to Asia; wage increases, look to Asia. PK, read a newspaper. As to increasing interest rates, why are commodity prices so high, if not in part due to low interest rates? See my 22 April 2008 post. PK, I think you understand what's going on, but are afraid to tell us.

Oil Supply

"The world's top oil producers are proving unable to put more barrels on thirsty world markets despite sky-high prices, a shift that defieds traditional market logic and looks set to continue. ... In all, according to the Energy Department figures, net exports by the world's top 15 suppliers, which account for 45% of all production, fell by nearly a million barrels to 38.7 million barrels a day last year. ... Last year, the regions six largest petroleum exporters,--Saudi Arabia, [UAE], Iran, Kuwait, Iraq and Qater--curbed their output by 544,000 barrels a day. At the same time, their domestic demand increased by 318,000 barrels a day, leading to a loss in net exports of 862,000 barrels a day, according to the U.S. Energy Information Adminstration. ... Saudi Arabia in particular has become a major energy consumer as the country pushes to put its oil riches to greater use. ... Analysts said there are reasons for optimism. Russia's government is scrambling to alter the tax rates that many say have put a lid on new oil development", WSJ, 29 May 2008.

"Mexico's planned opening to foreign oil companies may come too late to make up for a fall in the country's production. ... For decades, a heavy tax burden has left Pemex with scarce capital to find and develop new pools of oil", WSJ, 29 May 2008.

"XTO Energy Inc. agreed to pay $1.85 billion for drilling rights in an oil-producing area near the U.S.-Canadian border, highlighting the once-obscure field's growing importance. ... XTO said the land contains proved resrves of 68 million barrels of crude oil and natural gas, a figure it says could double easily as new technology allows greater production. ... Tom Gardner, director of research for investment banker, Simmons & Co., said that based on XTO's estimate of proved reserves, the $1.85 billion price tag only makes sense if oil stays above $100 per barrel", WSJ, 29 May 2008.

Russia apparently will lower its oil production taxes while our Congress debates a new "windfall profits tax". Crazy.

We'll see what if anything comes of Mexico's attempts to lure foreign capital back to its oil industry.

XTO is an oil bull. I wish it well. What may be its greatest challenge in developing the field is future US tax policy. We never know if Congress really will install a "windfall profits tax" and kill investments like this.

Houston's Housing Non-Bubble

"During the past year, I've made several appearances on television news programs to talk about the housing crisis. My role was that of the straight man. ... After the doom-and-gloom pronouncements from the coasts, I would say, 'Things aren't so bad here in Houston.'... Our housing prices haven't plunged, just as they didn't soar as the national housing bubble inflated. Our prices remained modest, if you believe the conventional wisdom, because we have a secret ingredient: plenty of land. ... In a report issued by the [Fed] of Dallas' Houston branch, senior economist Bill Gilmer found another reason Houston has been shielded from the country's real estate crisis: the lack of zoning. ... As housing demand has increased, cities with tight zoning laws saw a steep rise in prices because of limited supply. ... In Houston, however, demand was met with new construction rather than rising prices. ... Of course, Houston's lack of zoning is something that outsiders view as, well crazy for a city of our size. I must admit that before I moved here, I was among them", Loren Steffy (LS) at http://www.chron.com/, 28 May 2008.

Bravo LS. Compare Houston's experience California's. Or the oil business. Zoning is like prohibiting drilling in ANWAR. Eventually the lack of production, of houses, or oil, drives the price up. What's so hard to understand?

Congressional Theater of the Absurd

"I was watching the Big Oil execs testifying before Congress. That was my first mistake. If memory serves, there was lesbian mud wrestling over on Channel 137, and on the whole that's less rigged. ... The NOPEC bill is, in effect, a suit against OPEC, which if I recall correctly, stands for the Oil Price-Exploiting Club. ... But, before we start suing distant sheikhs in exotic lands for violating the NOPEC act, why don't we start by suing Congress? After all, who 'limits the production or distribution of oil' right here in the [US] by declaring that there'll be no drilling in the Guld of Florida or the Artic National Mosquito Refuge? ... More to the point, if the House of Representatives has now declared it illegal ' for the government of Saudi Arabia to restrict oil production, why is it still legal for the Government of the [US] to restrict oil production? ... So instead Congress hauls Big Oil execs in for the dinner-theater version of a Soviet show trial and then passes irrelevant poseur legislation like the NOPEC bill. ... But government 'change,' Obama change, NOPEC change is nothing to do with that. In fact, it obstructs real dynamic change", Mark Steyn (MS) at http://www.washingtontimes.com/, 26 May 2008.

"Gasoline prices are through the roof and Americans are angry. Someone must be to blame and the obvious villian is 'Big Oil' with its alleged ability to gouge consumers and achieve unconscionable 'windfall' profits. Congress is in a vile mood, and has dragged oil industry executives before its committees for show trials, issuing predictable threats of punishments, e.g., a 'windfall profits tax. 'But if there is a villian in all of this, it is Congress itself. ... Indeed, as oil industry executives reiterated in their appearance before the Senate Judiciary Committee on May 21, 15% of the cost of gasoline at the pump goes for taxes, while only 4% represnts oil company profits. ... On the other hand, supply has been curtailed by the cartel-like behavior of foreign national oil companies, which control nearly 80% of world petroleum reserves. Faced with little competition in the production of crude oil, the members of this cartel benefit from keeping the commodity in the ground, confident that increasing demand will make it more valuable in the future. Despite its pious denunications of the behavior of U.S. investor-owned oil companies (IOCs), Congress by its actions over the years has ensured the economic viability of the national oil company cartel. ... Domestic price controls ensured that the OEC cartel would face little or no competition in the production of oil. Price controls were exacerbated by other wrongheaded policies stimulated by the two 'energy crises' of the 1970s. One of the most egregious was the infamous 'windfall profits' tax, designed to punish oil companies for alleged profiteering. But since it applied to even newly discovered oil, its main empact was to discourage the exploration and drilling that would have increased oil supplies. ... For instance, Frank Zarb, who had been Jimmy Carter's 'energy czar,' predicted that decontrolling the price of crude oil would lead to gasoline prices of $10 a gallon", Mackubin Thomas Owens (MTO) at the WSJ, 29 May 2008.

"The British government, pressed for solutions to soaring fuel prices, said it will exempt about 30 existing North Sea crude-oil and natural-gas fields from some taxes and approved the development of two North Sea oil fields, which could begin production in early 2009. ... Tax changes to certain North SDea production operations will allow new oil and gas fields to be carved from unprofitable parts of 30 existing fields", WSJ, 29 May 2008.

"U.S. regulators disclosed a broad nationwide probe into potential oil-market manipulation and said they are expanding surveillance of energy markets. ... Lawmakers in Congress have been pressing regulators to crack down on manipulation, as politicians seek to demonstate ahead of the fall elections that they are responding to soaring gasoline prices. ... Many economists and oil-industry executives say possible shenanigans by market traders have little or nothing to do with the high price of oil. ... The CFTC has expanded an investigation, disclosed previously by the Wall Street Journal, into alleged short-term manipulation of crude-oil prices via a widely used price -reporting system run by Platts, a unit of McGraw-Hill Cos.", WSJ, 30 May 2008.

"With criticism mounting that pension funds are culprits in the run-up in gas and food prices, the pension industry is starting to mobilize to protect its ability to invest in commodities markets. ... But in recent days, critics from farmers to politicians have questioned whether trading by pensions and other institutional investors should be restricted. .. 'We're not driving up the price of rice in the Third World,' says Bob Greer, an executive vice president at Pimco. ... Since the end of 2005, index-linked commodity investments has doubled to $260 billion, according to Citigroup", WSJ, 30 May 2008.

I agree with MS. The NOPEC bill is a joke. It will be as big a flop as the windfall profits tax.

I remember Zarb's prediction. By 1986, oil was $10 a barrel. The attacks on Big Oil are absurd. Assume its executives are "greedy". Were the greedy yesterday, a week ago, a year ago, ten years ago, 100 years ago? Since they were always greedy, their greed does explain changes in the oil price. Thanks George Stigler for making this argument in your "Organization of Industry" class.

Apparently the Brits have taken half of Uncle Miltie's phrase to heart, i.e., "if you want less of something tax it". Apparrently the Brits want more oil.

Hasn't the CFTC anything important to do? I have an idea, shut the CFTC and let the SEC do the investigation. Why? The SEC harasses short-sellers. Since the CFTC is apparently after the longs, an SEC investigation would change the investigation's focus.

What are these index-linked investments? Irving Fisher's "compensated dollar" in action. See my 18 November 2007 post. Why shouldn't pension funds diversify out of dollars? Suppose they didn't? Would the Pension Benefit Guarantee Corp. or Department of Labor say they failed to properly discharge their fiduciary duties to the pensioners?

Rating Agency Follies

"Bond insurers MBIA Inc. and Ambac Financial Group Inc. landed back on the hot seat Tuesday, as Moody's Investors Service said mounting losses are raising fresh questions about whether they deserve their key triple-A insurer ratings. ... Losses on complex securities backed by mortgages are now meaningfully higher than the rating agency's prior expected-case losss estimates, elevating existing concerns about capitalization levels relative to the AAA benchmark,' Moody's said in a news release", WSJ, 14 May 2008.

"Moody's Corp.'s Moody's Investors Service and Fimalac SA's Fitch Ratings acknowledge they have switched analysts assigned to rate bonds after receiving requests to do so from bond insurers or their bankers. Changes usually were made after a specific bond was rated, meaning the analyst wouldn't work on the bond insurer's next deal, according to current and former officials at the credit-rating firms. While switching analysts appears to be infrequent, there are situations 'where an analyst doesn't get the message that you're expected to be responsive,' Bill May, a Moody's managing director said in an interview. ... The little-known practice could spur even more questions about whether bond insurers have too much influence over how their bonds are rated before being sold to investors. ... Lawmakers and regulators are weighing new rules to beef up analyst independence. ... Moody's ... is investigating reports it tried to cover up a bug in its computer models that caused Moody's to overrate securities known as constant-proportion debt obligations or CPDOs. ... Another mortgage analyst at Moody's was moved to the firm's surveillance unit after a Moody's official agreed with an investment banker's opinion that the analyst was too fussy, a person familar with the situation said. ... 'Wall Street is not switching our analysts,' a Moody's spokesman says. 'Moody's makes decisions based on the best interest of the rating.'," my emphasis, WSJ, 23 May 2008.

This is a joke. Moody's should never have rated these entities AAA as soon as they began insuring CDOs, CPDOs, etc.

Hey Bill May, what does "doesn't get the message", mean? That the analyst did what he thought was his job, i.e., to be objective, then found out his job was to "get the deal done"? Rules and regulatory actions nothwithstanding there are few substitutes for lawsuits and indictments. If Mike Garcia wants to do something for investors, he should he handing out indictments by the dozen. This Moody's fiasco reminds me of the Marv Roffman (MR) incident of 1990. The story was reported in Barron's. MR was an analyst working for Janney, Montgomery Scott (JMS). He wrote a report about the Trump Taj Mahal (TTM) that Donald Trump (DT) disliked. DT complained to JMS, which fired him. The TTM eventually went bankrupt just as MR predicted. MR won a $750,000 arbitration award from JMS and got a settlement rumored to be $6 million from DT. Did the SEC learn anything from the MR incident? Apparently not. See my 6 October and 28 December 2007 posts.

Builders' Woes

"Highlighting their desperation to sell homes, builders are bringing back the gimmicks--mortgage rates that start low, help with down payments, zero out-of-pocket expenses--that helped fuel the housing bubble before it went bust. ... Builders, trying to survive the worst downturn since the Depression, must move inventory quickly to bring in cash: Stung by eroding land and house values that show no sign of stabilizing, the nation's top builders have racked up more than $24 billion in impairment charges, according to [S&P's]. ... Most industry watchers aren't worried. To them, this is simply the latest batch of incentives--this round inspired by the heightened lending restrictions--necessary for business, even if they stress already-razor-thin margins", WSJ, 23 May 2008.

The builders didn't see the end of the real estate cycle any better than anyone else. They won't see the upturn when it comes either.