Chanos on MTM

"Mark-to-market (MTM) accounting is under fierce attack by bank CEOs and others who are pressing Congress to suspend, if not repeal, the rules they blame for the current financial crisis. Yet their pleas to bubble-wrap financial statements run counter to increased calls for greater financial-market transparency and ongoing efforts to restore investor trust. We have a sorry history of the banking industry driving regulatory changes. Now banks want accounting fixes to mask their recklessness. Meanwhile, there has been no acknowledgement of culpability in what top managment in these financial institutions did--despite warnings--to help bring about the crisis. Theirs is a record of lax risk management, flawed models, reckless lending, and excessively leveraged investment strategies. In the worst instances, they acted with moral indifference, knowing that what they were doing was flawed, but still willing to pocket the fees and accompanying bonuses. ... Before MTM took effect, the Financial Accounting Standard Board (FASB) produced much evidence to show that valuing financial instruments and other difficult-to-price assets by 'historical' costs, or 'mark to management,' was folly. ... MTM rules also give banks a choice. MTM accounting is not required for securities held to maturity, but you need to demonstrate a 'positive intent and ability' that you will do so. Further, an SEC 2008 report found that 'over 90% of investments marked-to-market are valued based on observable inputs. Financial institutions had no problem in using MTM to benefit from the drop in prices of their own notes and bonds, since the rule also applies to liabilities. And when the value of the securitized loans they held was soaring, they eagerly embraced MTM. ... And one wonders if they are as equally willing to forgo MTM for valuing the same illiquid securities in client accounts for margin loans as they are for their proprietary trading accounts? ... There is a correlation between efforts over the past 12 years to reduce regulatory oversight, weaken captial requirements, and silence the financial detectives who uncovered such scandals as Lehman and Enron. ... It isn't lost on investors that the MTM criticisms come, too, as private equity firms must now report the value of their investments. The truth is the market is functioning correctly. It's just that MTM critics don't like the prices that investors are willing to pay. The FASB and ... [SEC] must stand firm in their respective efforts to ensure that investors get a true sense of the losses facing banks and investment firms. ... Unfortunately the FASB proposal on March 16 represents capitulation. It calls for 'significant judgment' by banks in determining if a market or an asset is 'inactive' and if a transaction is 'distressed.' This would give banks more discretion to throw out 'quotes' and use valuation alternatives, including cash-flow estimates, to determine value in illiquid markets. In other words, it allows banks to substitute their own wishful-thinking judgments of value for market prices", my emphasis, James Chanos at the WSJ, 24 March 2009.

Three cheers for JC! JC at 24 did better analysis than all the highly paid Wall Street analysts. I have made most of JC's arguments. Bank accounting and auditing stinks! It will get worse. Where was today's investors Saladin, Mary Schapiro (MS) at the recent "Barney Frank" (BF) hearings? Why didn't MS show up, testify and tell BF off? Why ask? For that matter, why didn't the members of that great singing group, The Keating Five tell BF & Co., what they did in 1986 and what it led to? Well John McCain, would be president. Where were you?

Harvard on Today's French Revolution

"'Eat the wealthy.' The ferocity of the words used by some demonstrators on the eve of the Group of 20 summit evokes the worst excesses of the French revolution. Anti-capitalist anger in the west is not confined to Europe. Alexis de Tocqueville's The Ancien Regime and the Revolution is as relevant to understanding today's America as his deep and eye-opening thoughts on the young American republic in his Democracy in America. ... Yet as a European living in America--watching news on television every night, talking to friends, colleagues or my students--I sense fear, anger and a deep feeling of injustice reminiscient of the climate on the eve of the French revolution. Just replace bread shortages with foreclosures, aristocrats with bankers, and privileges such as the right not to pay tax with stock options. Add to that support for the king but rejection of many of his ministers, and the comparison looks less far-fetched. ... Fear for its own present and future is combined with anger at those it considers responsible, and who are much less afflicted than they. Are not senior bankers today like the aristocrats of yesterday, their privileges no longer justified by their social functions--to serve the king with their swords or to contribute to the creation and dissemination of wealth? .... This sympathy is perceived to contrast with the harsh treatment of carmakers. ... An interesting incident was reported by CNN last week. A group of protesters--very few to be honest--rented a bus in Connecticut and stopped in front of the mansions of AIG executives to express support for those who had returned their bonuses and outrage against those who had not and were still living in gran style, in contrast with the many who had lost nearly everything. ... Revolution is not around the corner, at least in America", Dominique Moisi (DM) at the FT, 3 April 2009.

Indeed, these are the last days. I agree with DM, another Harvard professor! DM may be kidding himself. I doubt Louis XVI thought "revolution [was] around the corner" either. Disagreeing with DM, if Obama wants to keep his head, he will have to offer the mob some blood sacrifices. If he calls, I can give him a list. Madame DuFarge kept one. Why wouldn't I? Very few protestors today. We'll see in a year.

Kill the Fed?

Pat Buchanan (PB) quotes my favorite US president, "Of Nicholas Biddle's Bank of the United States, the great Andrew Jackson was eloquent. 'It has tried to kill me,' he said. 'But I will kill it.' And he did. Should not this creature from Jekyl Island, for all its manifest crimes and sins againt the republic, also be summarily put to death?," 2 April 2009 at http://vdare.com/buchanan/090402_fed.htm.

Yes PB. In the most gruesome way. Crucifixion! Invoke the spirit of Williams Jennings Bryan, "Thou shalt not crucify mankind upon a cross of paper"! The CNC guillotine is too good for the Fed!

Exxon Plunges!

"Capitalizing on recent years of soaring oil prices and conservative investment, Exxon Mobil Corp. said it will boost spending on energy exploration and production by 11% to $29 billion this year, even as many of its rivals are cutting costs. ... Exxon's spending this year will come in toward the top of the $25 billion to $30 billion the company had said it would spend each year through 2013", Russell Gold at the WSJ, 6 March 2009.

This makes sense to me. Exxon's exploration and development dollars go a lot further than they did nine months ago.

BP Justice

"A division of BP officially became a felon Thursday when a federal judge accepted a long-pending plea bargain to resolve a criminal investigation into the deadly 2005 explosion at the company's Texas City refinery. US District Judge Lee Rosenthal ordered BP to pay the agreed-upon $50 million fine by Monday and comply with blast-related settlements with regulators while on probation for three years. ... Victims say the fine is too small, that BP has failed to abide by blast-related settlements with regulators and that prosecutors bypassed a 2004 federal victim rights law requiring prosecutors to confer with victims before drafting the accord. ... In a 138-page order, Rosenthal noted that the case is among the few in which the government successfully applied a felony violation to an industrial accident. ... Brent Coon, the attorney who represented [Linda] Rowe and headed up massive civil litigation stemming from the blast, said the fine 'equates to the cost of a traffic ticket for an individual'," Kristen Hays at the Houston Chronicle, 13 March 2009.

I referred to this rotten case before, here for example: 13 May and 12 August 2008:

http://skepticaltexascpa.blogspot.com/2008/05/doj-v-people-of-harris-county.html.
http://skepticaltexascpa.blogspot.com/2008/08/coming-palmer-raids.html.

There just ain't no justice no more.

WSJ Mistitles Article!

"China called for the creation of a new currency to eventually replace the dollar as the world's standard, proposing a sweeping overhaul of global finance that reflects developing nations' growing unhappiness with the US role in the world economy. ... This time, China is on the offensive, backed by other emerging economies such as Russia in making clear they want a global economic order less dominated by the US and other wealthy nations. ... Central banks around the world hold more US dollars and dollar securities than they do assets denominated in any other individual foreign currency. ... Chinese officials are frustrated at their financial dependence on the US, with Premier Wen Jiabao this month publicly expressing 'worries' over China's significant holdings of US government bonds. ... Moving to a reserve currency that belongs to no individual nation would make it easier for all nations to manage their economies better [Zhou Xiaochuan, Chinese central bank governor] argued, because it would give the reserve-currency nations more freedom to shift monetary policy and exchange rates. ... In reent weeks, senior Obama administration officials have sought to reassure Beijing that the current US spending spree is a short-term effort to restart the stalled American economy, not evidence of long-term US profligacy. ... 'The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerability and systemic risks in the existing international monetary system,' Mr. Zhou said. The increasing number and intensity of financial crises suggests 'the costs of such a system to the world may have exceeded its benefits.' ... 'The dollar reserve system is part of the problems,' Joseph Stiglitz, the Columbia University economist, said in a speech in Shanghai last week, because it meant so much of the the world's cash was funneled into the US. 'We need a global reserve system,' he said in the speech", my emphasis, Andrew Batson at the WSJ, 24 March 2009.

The WSJ does it again. This article was titled, "China Takes Aim at Dollar". A better title would have been: "Zimbabwe Ben Convinces China Dollar is Doomed". Disagreeing with Zhou, moving to the "reserve currency", he's thinking of would make it more difficult for any country to manage its economy. Zhou, study your Marx! Off to a reeducation camp! See my 17 September 2007 post: http://skepticaltexascpa.blogspot.com/2007/09/belated-admission.html. Short-term effort? Compared to what? The number of years it took to create the Grand Canyon? No Stiglitz, we need GOLD! It's GOLD that will be our "Great Leap Forward".

North Korea Ignored

"Yesterday, North Korea [NK] declared all its political and military agreements with the South 'dead'--the latest in a string of confrontational moves taken by Pyongyang against Seoul and the US. ... Unfortunately, early signs are that Secretary of State Hillary Clinton is falling prey to such logic and downplaying the significance of Pyongyang's nuclear program. It may well be that the Obama administration wants to emphasize domestic economic issues and limit foreign affairs priorities to the Arab-Israeli conflict. But neglecting [NK] is a dangerous gamble with very high stakes. ... Of course, the easiset way to solve a difficult problem is to conclude there really isn't one. (This was John Kennedy's technique for eliminating the 'missile gap' with the Soviet Union which he had deployed so effectively against Richard Nixon.) For years, State's permanent bureaucracy has been trying to wish away [NK's] uranium-enrichment program. If President Barack Obama's State Department takes this strategy, Pyongyang will once again have occasion to contemplate the profound wisdom of the ancient [NK]an riddle: Why negotiate with the Americans when we do so well by letting them negotiate with themselves?", John Bolton at the WSJ, 31 January 2009.

Why indeed. State operates through the looking glass, "If it were so it would be, but as it isn't it ain't". SecState Clinton should apply this to NK. I remember the 1960 election and the "missile gap". There wasn't one. However, JFK let the USSR create one!

Rating Agency SARBOX

"Credit-rating companies, widely assailed for their role in fueling the financial crisis with overly rosy debt ratings, stand to make a billion-dollar windfall in the government's latest attempt to heal the credit markets. ... Now the government is in the uncomfortable position of rewarding these same firms through a new program that will result in numerous companies issuing securities. If the rating companies are wrong this time around, the [Fed] and the Treasury--and therefore the taxpayers--will be on the hook for some losses. ... At a Senate hearing in Washington earlier this month, Fed Chairman Ben Bernanke said the central bank has looked at the models of the major rating companies as is 'comfortable' they can rate securities eligible for the new program 'in an appropriate way.' ... 'Until the rating firms bite the bullet and develop forward-looking signals and methods, it's going to be the same old, same old, and their models can be gamed,' says Ann Rutledge, principal of New York structured-finance advisory firm R&R Consulting and a former credit-rating analyst", Serena Ng and Liz Rappaport at the WSJ, 20 March 2009.

SARBOX 2! Sarbox was a Big 87654 windfall of increased audit fees. Assuming Zimbabwe Ben (ZB) knows this, I conclude the Fed is knowingly creating a rating agency (RA) windfall. Why? ZB is "comfortable", means the RAs will say what ZB tells them to say and ZB will use them to game the system! Like the Big 87654 did not "blow the whistle" on insolvent banks, apparently at Uncle Sam's behest, the RAs will pass on all kinds of financial garbage. I agree with Rutledge and think it's worse than she does. ZB (1590 SATs), is no fool. He knows the "models can be gamed" and will use them to protect the issuers of securities in the program!

MBIA = AIG, Maybe Not

"Representatives of about 15 financial institutions will meet Thursday with New York State Insurance Superintendent Eric Dinallo [ED] to complain about MBIA Inc.'s decision to split its bond-insurance unit into two companies, people familiar with the matter said. The group includes many banks that feel disadvantaged by MBIA's move last month to separate its municipal-bond business from its commitments to insure mortgage-backed bonds and other structured securities. The banks are counterparties to MBIA on derivatives called credit-default swaps that were written on securities they own, many of which have deteriorated since the onset of the credit crisis. MBIA and New York State's insurance regulator--which endorsed the restructuring--are facing a growing backlash from banks, investment funds and other policyholders. ... On Wednesday, a group of hedge funds sought class-action status for a lawsuit against MBIA and the two operating units. ... In the lawsuit, filed in a New York federal court, the funds said MBIA's restructuring 'was nothing short of a looting' of MBIA Insurance Corp., the firm's main operating unit. The funds are asking the court to reverse MBIA's plan", my emphasis, Serena Ng and Lavonne Kukendall at the WSJ, 12 March 2009.

These must be the last days. I agree with the banks. We see a fraudulent transfer in process, approved by ED. Compare MBIA's situation to AIG's, where ED approved a $20 billion bailout of the AIG parent to protect the banks. Looting indeed. ED, why did you let AIG loot its insurance subsidiaries in September?

Iran's Bomb-2

"Iran's mullahs are set to achieve what decades of western diplomacy could not-bring about Arab/Israeli detente. Fears of nuclear weapons in the hands of Tehran's revolutionary Shite regime are forcing a shotgun marriage of Tel Aviv and the Sunni Arab states in a stunning triumph of power politics over historical hatreds. The Washington Times recently had an opportunity to sit down with an Israeli source who told us, 'You'd be amazed at how we see eye-to-eye with the moderate Arab states.' ... The center-left Institute for Science and International Security reported in December that Iran 'is expected to reach [the nuclear capability] milestone during 2009 under a wide variety of scenarios.' Even the much (and rightly) derided December 2007 US National Intelligence Estimate found that the earliest Iran would have a nuclear capability was in 2010, which if you haven't checked your calendar lately is about nine months from now. ... In fact, the Palestinian issue is rapidly becoming an extension of Iranian ambitions. Egyptian President Hosni Mubarak noted archly that Tehran's considerable support for Hamas means that in practical terms Egypt 'shares a border with Iran.' Saudi Foreign Minister Prince Saud al-Faisal has decried Iranian support for non-state actors like Hamas and Hezbollah. At this point no peace with Israel will be possible without Iran's permission, and the Arab states would be happy to see this issue go away. ... Other states will act if the US does not. The Israeli source told us that a nuclear Iran would be an existential threat to Israel, and that Israel cannot allow the Iranians to have the bomb. 'We take seriously their statement to wipe Israel from the map,' our source said. 'Given our history we take it very seriously.' ... Saudi Arabia [SA] faces its own existential threat from Iran. Tehran is seeking to undermine the legitimacy of the Saudi regime and establish a protectorate over Mecca and Medina. The notion of Persian Shites in Mecca is far more alarming to the Arab Sunni states than Israeli control of Jerusalem. ... The [US] approaches this issue as though it can control events, but Iran, Israel and other countries in the region will not wait for the stately processes of American diplomacy. The strategic map in the Middle East will change with or without us", my emphasis, Editorial at the Washington Times, 17 March 2009, link: http://washingtontimes.com/news/2009/mar/17/obama-and-the-iranian-bomb-you-the-us-are-too-smal

"Make no mistake: The Middle East may be on the verge of a nuclear arms race triggered by the inability of the West to stop Iran's quest for a bomb. ... The six-nation Gulf Cooperation Council (Saudi Arabia, Kuwait, Bahrain, Qatar, the ... [UAE] and Oman) set up a nuclear exploratory commission in 2007 to prepare a 'strategic report' for submission later this year. But [SA] is not waiting for the report. It opened negotiations with the US in 2008 to obtain 'a nuclear capacity,' ostensibly for 'peaceful purpoess.' Egypt also signed a nuclear cooperation agreement , with France, last year. ... 'A nuclear armed Iran with hegemonic ambitions is the greatest threat to Arab nations today,' President Hosni Mubarak told the Arab summit in Riyadh, [SA] two weeks ago. ... According to the foreign ministry in Paris, the French are building a military base close to Abu Dhabi ostensbily to protect the nuclear installation against 'hostile action,' including the possibility of 'sensitive material' being stolen by terrorist groups or smuggled to Iran. ... 'A single tactical nuclear attack on Basra and Baghdad could wipe out a third of our population,' a senior Iraqi official told me, on condition of anonymity. Since 90% of Iraqis live within 90 miles of the Iranian border, the 'fear is felt in every town and village,' he says. ... Iran's rivals for regional leadership, especially Turkey, Egypt and [SA], are aware of the propaganda appeal of the Islamic Republic's claim of being 'the first Muslim superpower' capable of defying the West and rivaling it in scientific and technological fields. In that context, Tehran's development of long-range missiles and the Muslim world's first space satelite are considered political coups. ... [SA's] appointed parliament, the Shura Council ... devoted a recent session to 'the Iranian threat,' insisting that unless Tehran abandoned its nuclear program, [SA] should lead the Arabs in developing their own 'nuclear response.' The debate came just days after the foreign ministry in Riyadh issued a report identifying the Islamic Republic's nuclear program as the 'principal security theat to Arab nations'," my emphasis, Amir Taheri (AT) at the WSJ, 23 March 2009.

Our failure to destroy Iran's nuclear facilities may lead to a Middle East catastrophe. Why is anyone surprised Israel and the Arabs see Iran the same way. I have always believed Israel, like SA, opposed our Iraq adventure as only strenghtening Iran.

AT realizes our failure to stop Iran's nuclear program. I agree with Mubarak and the Saudis. Israel has had atomic weapons since about 1964, yet the Arabs do not see Israel as a threat. Interesting.