Ready, Aim, Misfire!

The SEC attacks a short sellers at the apparent behest of Wall Street bigwigs. Mike Shedlock has an excellent 15 July 2008 post at Mish's Global Economic Trend Analysis. Here's the link: www.globaleconomicanalysis.blogspot.com/2008/07/sec-panic-shorting-curbs-placed-on-gse.html. It's tough to be as incompetent as Chris Cox & Co. I have nothing to add to Mish's comments.

John Roberts-Supreme Fraud

"With his third term as chief justice coming to a close amid a trio of explosive cases last week, John Roberts Jr. [JR] has proven to be almost everything conservatives hoped and liberals feared. ... 'I come before this committee with no agenda, no platform,' Roberts told the Senate Judiciary Committee in September 2005. 'I will approach every case with an open mind.' Roberts branded himself then as a judicial 'umpire' who called the balls and strikes as he saw them without reference to ideology. ... The Supreme Court in 2007 scaled back the reach of civil rights laws in school affirmative action cases, upheld the federal 'partial-birth' abortion ban, and limited the ability of women to file equal-pay claims. ... In his three years on the court Roberts has never sided with the more liberal members of the court aginst his conservative brethren in a close case", James Oliphant at the Houston Chronicle, 29 June 2008.

I believe JR had no judicial "ideology" when he told the Senate that and never had one. He is an advocate. JR was a Hogan & Hartson partner and still is. He has and always had an agenda: whatever big business wants is good. JR apparently reads and rereads part of what "Engine Charlie" said in 1952, see my 5 October 2007 post. I think JR a judicial disgrace. He personifies why I favor a constitutional amendment to discipline our "judicial tyrants", they are politicians, pure and simple. They should have to justify their "rulings" to the people. In 1986 Rose Bird (RB), California Chief Justice, faced an election. RB ruled against upholding a death penalty in 61 of 61 cases she reviewed. RB, Cruz Reynoso and Joseph Grodin were removed from California's Supreme Court for failure to uphold the death penalty. RB's rulings showed, a judge can always concoct a "reason". It's about time Americans were enabled to clean up our Supreme "stable", uh, Court.

Is Lehman Next?

"Sometimes, when you really mess up, it is good to admit you erred. Unfortunately, no one seems to have gotten that message through to Lehman Brothers, the embattled brokerage house that is now fighting to pursuade the financial markets that it will not be the next Bear Stearns. This week it raised $6 billion in new capital, at the same time it disclosed a $2.8 billion loss in the quarter that ended last month. ... But what is clear is that Lehman's strategy, as the subprime mortgage crisis unfolded and expanded, was to seek to differentiate itself as being so well managed that it would not have the problems other firms might have. Its policy on share buybacks was to avoid the dilution caused by grants of restricted shares and options issued to employees, and that meant it bought back about as many shares as it issued. ... In the 13 quarters from the end of [2004] through this year's first quarter--that is, before the new $2.8 billion loss--Lehman reported net income of $11.9 billion and spent $11.8 billion on share repurchases. ... Even if we assume that the company will get the higher conversion price [$33.04], Lehman will have reaped $6 billion by issuing 203.4 million shares. That does not compare faforably with its share buybacks over the past 13 quarters, when it spent nearly twice as much to buy 189.5 million shares. It paid an average price of $62.19 for shares that dropped under $23 after the shake-up was announced. ... There are prominent short sellers who have made clear they think Lehman has not marked its securities down as far as it should", Floyd Norris, NYT, 13 June 2008 at www.nytimes.com/2008/06/13/business/13norris.html?.

"The 66% plunge in Lehman Brothers Holdings Inc.'s stock price so far this year has taken a toll on the net worth and pride of the Wall Street firm's roughly 26,000 employees around the world. But in an unusual move to reward employees who are fighting to steady the firm amid mortgage-related woes, Lehman announced that most employees will be awarded mid-year stock bonuses. ... Wednesday's move also is Lehman's attempt to take advantage of its stock price, which fell Monday to its lowest since 2000. The battered price of the shares means more stock than usual will wind up in the hands of employees, typically paid through a combination of cash and shares. ... Lehman shares surged, with investors seeing the awards as another sign of Mr. Fuld's insistence that Lehman can prosper as an independent company, suggesting it won't sell at a rock-bottom price. Lehman stock rose $1.40, or 6.7%, to $22.36 on the New York Stock Exchange", my emphasis, Susanne Craig (SC) at the WSJ, 3 July 2008.

"At this point in the Lurches of Lehman, we aren't certain whether chief executive Dick Fuld will become Wall Street's latest human sacrifice or whether the firm itself will survive or in what form. ... When you look at Fuld's compensation package, you have to laugh at the idea that giving CEOs big slugs of equity aligns their interests with those of regular shareholders. Lehman's stock was down 60% for the year as Fortune went to press, but Fuld hasn't been asked to return a single penny that he's made from selling stock he received as compensation. By Fortune's count, Fuld, a bond trader turned CEO, has realized almost half-a-billion dollars from cashing in stock options and restricted stock awards since Lehman went public in 1994. ... By our calculation, which Lehman declined to discuss, Fuld has knocked down $489.7 million (before taxes) from selling 14.1 million optioned and restricted shares. (He seems to have kept 2.7 million). ... Lehman won't fail, but its stock ain't necessarily a bargain", Allan Sloan (AS) at Fortune, 7 July 2008.

"It's apparent that such notables as J.P.Morgan's James Dimon and Lehman's Richard Fuld [RF], as directors of the New York [Fed], will make decisions which will benefit their companies and themselves. ... [RF] was quoted by the Financial Times of London of June 4, 2008, with having made the following remarkable statement: 'The federal reserve's decision earlier this year to lend directly to investment banks should take questions about Lehman's liquidity off the table.' Let's analyse this statement a bit. The ... 'decision' ... is a reference to the 'primary' facility extended to Bear Stearns [BS] of $25 billion, which turned out to be part of the loans in effect made to J.P. Morgan of $55 billion. This is so because [BS] no longer exists and the loans are to J.P.Morgan now, $29 billion of which is non-recourse. ... [RF] does not say that questions of Lehman's liquidity are off the table because of the soundness of their present assets, liabilities and cash. He says the liquidity questions are 'off the table' only because of Lehman's expectations of being treated at least as well as J.P.Morgan by the New York [Fed] when and if Lehman demands bankers welfare (i.e. dole) payments from the FED and ultimately from the tax payers. ... Fuld suggests that if Lehman comes calling for a $50 billion loan from the FED offering dubious mortgages which Lehman values at $50 billion, he can assure Lehman and the public that Lehman will get the money because Lehman's illiquidity is off the table. ... [BS] CEO Schwartz was not on the NY FED Board. In fact no one from [BS] is on the Board. ... If [RF] approves a loan from the [NY Fed] to Lehman which he certainly indicated he would do, then he violates Title 18 section 208. And it can not be any clearer", John Olagues (JL) at www.optionsforemployees.com/articles/article.php?id=137, 8 June 2008.

Borrowing from the Mogambu Guru, "Hahahahahaha", Lehman (LEH-NYSE)! LEH must be run by a bunch of ignorant accountants. Why should LEH care if employee share issuances are "dilutive"? LEH's concern should not have been EPS, but was LEH stock over or underpriced. LEH shows the efficient market's hypothesis at work, i.e., its management hasn't a clue what LEH is worth. Imagine, people and companies ask LEH for financial advice! Hahahahaha!

I spin this story differently from SC. I think LEH's issuing employees stock in lieu of cash and stock shows LEH is trying to save cash. If LEH is cheap at $22.85, I expect many SEC Form 4s to be filed, by LEH's senior management buying lots of LEH. LEH's 2008 Proxy Statement, available at www.lehman/com/shareholder/proxy shows Richard Fuld (RF) "owns" 10,851,590 shares of which 1,800,000 "may be acquired within 60 days of January 31, 2008". RF's 30 November 2007 SEC Form 5 , at http://www.sec.gov/, shows he owned 3,298,578 shares, including GRAT shares. Hey, RF, show LEH you care. Buy say 10 million shares in the open market. It's only $166.5 million. You're a wealthy man. Show us LEH is worth at least $16.65.

Thank you AS. RF is a good stock trader, he sold 14.4 million shares of LEH at an average price of $34.63 ($489.7 / 14.1). Let's see how much he buys now.

Suppose RF recuses himself from a Fed vote to extend LEH credit? So? Will the other Fed heads let LEH crumble, or save it at the taxpayer's expense, or in the knowledge that each in turn, will "recuse" himself at the appropriate time, approve it? Repeal the Federal Reserve Act. Now!

Ted Forstmann-Austrian Economist

"Twenty years ago, Ted Forstmann contributed a scathing--and prescient--op-ed to this newspaper warning that the junk-bond craze was about to end badly: 'Today's financial age has become a period of unbridled excess with accepted risk soaring out of proportion to possible reward,' he wrote in October 1988. ... Within a year, the junk-bond market had collapsed, and within 18 months Drexel Burnham Lambert, the leading firm of the junk-bond world, was bankrupt. Mr. Forstmann sees even worse trouble coiming today. For a curmudgeon, he is a cheerful man. ... 'We are in a credit crisis the likes of which I've never seen in my lifetime,' Mr. Forstmann warns. He adds: 'The credit problems in this country are considerably worse than people have said or know. I didn't even know subprime mortgages existed and I was worried about the credit crisis.' ... Forstmann's argument about the present crisis starts with the money supply. After Sept. 11, 2001, the [Fed] pumped so much money into the financial system that it distorted the incentives and the decision making of everyone in finance. ... But after 9/11, the Fed opened the spigot. Short-term interst rates went to zero in real terms and then into negative territory. ... This led to a series of distortions in the financal system that are only now coming to light. ... Straightforward economics tells us that when you print too much money, it loses value and prices go up. But Mr. Forstmann is most concerned with a different, more subtle effect of the oversupply of money. When it becomes too plentiful, bankers and other financial intermediaries wind up taking on more and more risk for less return. ... By his own description, he's a bit of a figure from another age---'a bit like Wyatt Earp in 1910.' ... 'You've got ... Paulson saying, 'Oh, you see the good news it's over.' The problem, according to Mr. Forstmann, is that it's far from over. 'I think we're in the second inning of this'. ... Take what happened to Bear Stearns. 'What should be the health of one brokerage firm in America mean to the entire global financial system? To any ordinary person, probably not much. But in today's world, with all the interdependence, a great deal'.' ... 'Buffett once told me that there are three "I's" in every cycle. The "innovator," that's the first "I'. After the innovator comes the "imitator." And after the imitator in the cycle comes the idiot. ... So when Mr. Forstmann says we're at the end of an era, it's another way of saying that he's afraid that the idiots have made their entrance. ... 'The creation of much too much money caused all of this excess,' he says. In other words, his is not an argument for draconian regulation, but for sound money", my emphasis, Brian Carney at the WSJ, 5 July 2008.

Forstmann gives a "conventional" Austrian analysis of current conditons, I agree with. When I saw former used car salesmen, literally, selling mortgage products in the San Fernando Valley near Los Angeles, California making $500 thousand to a million dollars a year, in 2005, I saw the end in sight. Forstmann's point about the change in the capital market line's slope is valid too.

We are all Billionaires Now

"Robert Mugabe has kept his embattled regime in Zimbabwe afloat on a sea of paper money. Now he'll have to try to do it without the paper. ... Mugabe's regime relies on a steady stream of the paper--fortified with watermarks and other antiforgey features--to print the bank notes that allow it to pay the soldiers and other loyalists who enable him to stay in power. With an annual inflation rate estimated at well over 1 million percent, new notes with ever more zeros need to be printed every few weeks because the older ones lose their worth so quickly. ... Germany's foreign minister, Frank-Walter Steinmeier, phoned Karten Ottenberg, Giesecke & Devirent's chief executive, Tuesday to complain about the [paper] deliveries, according to a German diplomat. On Friday, Germany's development minister denounced the company's dealings with Zimbabwe as 'terrible' and send a fax demanding that they stop. ... The firm tried to weather the storm. Producing bank notes is lucrative, particularly for countries like Zimbabwe that are ravaged by hyperinflation and need to issue new notes so often. ... A loaf of bread costs 30 billion Zimbabwean dollars. Gideon Gono, the governor of Zimbabwe's central bank, said in a phone interview that the cutoff in deliveries will create hassles but 'there is no need to commit suicide ... We are basically prepared for anything that comes our way' Inflation, he added, is a grave problem, but Zimbabwe will 'survive the onslaught' ... A 500,000 Zimbabwe dollar bill issued late last year is already out of circulation: It is worth just 0.00004 U.S. cents at the official exchange arte--and much less on the black market. ... In place of ordinary bank notes, Zimbabwe's central bank has taken to issuing bearer checks in recent years. These look much the same as bills and use the same German paper, but are valid for only a fixed period. ... Hyperinflation, says Steve H. Hanke, a professor of applied economics at John Hopkins University in Baltimore and an expert on the subject, 'is a very simple equation'--stop printing money and it stops. ... Hanke ... doubts much will change in Zimbabwe unless it gets rid of its central bank and adopts an entirely different monetary system", my emphasis. Marcus Walker & Andrew Higgins (W&H) at the WSJ, 2 July 2008.

"Custodian of a currency in free fall in a country ravaged by hyperinflation, Gideon Gono, Zimbabwe's central-bank governor scoffs at 'traditional economics' and seeks guidance elsewhere. He says he reads the Bible. ... 'Anyone who says the bank governor should violate the head of state is violating a principle that Jesus Christ demanded of his disciples,' says Mr. Gono, a churchgoing Christian and former commerical banker. 'A key element Christ looked for in his disciples was loyalty.' ... Gono 'has to answer to his master,' says Tapiwa Mashakada, an economist and the shadow finance minister of the opposition Movement for Democratic Change. ... Of all the world's central bankers, Zimbabwe's gets the biggest--or at least the longest--salary. Mr. Gono won't say how much he earns as head of the Reserve Bank of Zimbabwe but does claim to have 'more digits' on his pay slip that [sic] of his peers. He earns trillions of Zimbabwe dollars. ... Lamenting in a telephone interview that he has 'the most difficult job' in central banking, Mr. Gono says he would like to tame inflation but his hands are tied. Critics who blame him for the the profilgate printing of money, he says, don't understand that 'traditional economics do not fully apply in this country.' ... Inflation is now so high that officials no longer release figures. ... In June, says John Robertson, an economist in the Zimbabwe capital Harare, prices were roughly eight million percent higher than the same month last year", my emphasis, Andrew Higgins (AH) at the WSJ, 8 July 2008.

I agree with Hanke. The same goes for the US, repeal the Federal Reserve Act! Gono is brilliant, he adopted John Maynard Keynes "stamped money" advocated in Chapter 23 of the General Theory, 1936. Keep that money circulating! Gono for Fed head! Replace our "Zimbabwe Ben" with the real McCoy. Ludwig von Mises once wrote, "Government is the only agency that can take a useful commodity like paper, slap some ink on it and make it totally worthless". Consider the parallels between Zimbabwe and the US. A 50 billion Zimbabwe dollar bearer check is worth $4, so has a 12.5 billion per US$ exchange rate, therefore the 500,000 note is not worth 0.00004 US cents, someone lost two zeros. I checked an on-line currency converter and got 13 billion to one.

Loyalty Gono? See Basil Hart's comments, my 7 February 2008 post. As to following Christ, it is also written "You shall not make for youself an idol. ... You shall not bow down to them or worship them", Ex 20:4 (NIV); even Robert Mugabe? "You shall not steal", Ex 20:15 (NIV) even by counterfeiting? I note Uncle Sam: no longer publishes M3 and publishes a "core inflation" rate, whatever that is. Perhaps we should follow Gono and stop publishing any inflation statistics.

Schwartzman and McTeer on Accounting

"Some blame the rapacious lenders. Others point to the deadbeat borrowers. But Stephen A. Schwartzman [SS] sees another set of culprits behind all the pain in the financial industry: the accountants. That's right, the bean counters. ... Schwartzman is convinced that the rule--known as FAS 157--is forcing bookkeepers to overstate the problems at the nation's largest banks. ... Some of his bigwig pals in finance believe that Wall Street is in much better shape than the balance sheets suggest, Mr. Schwartman said. The president of Blackstone, Hamilton E. James, goes even further, FAS 157, he said, is not just misleading: 'It's dangerous.' Huh? So the Citigroups and Merrill Lynches of the world are writing off billions of dollars--but they haven't actually lost the money? ... FAS 157 represents the so-called fair value rule put into effect by the Federal Accounting Standards Board, the bookkeeping rule makers. It requires that certain assets held by financial companies, including tricky investments linked to mortgages and other kinds of debt, be marked to market. In other words, you have to value the assets at the price you could get for them if you sold them right now on the open market. ... The rule forces banks to mark to market, rather than some theoretical price evaluated by a computer--a system often derided as 'mark to make-believe' ... But here's the problem: Sometimes, there is is no market--not for toxic investments like collateralized debt obligations or C.D.O.'s, filled wuith subprime motrgages. No one will touch this stiff. And if there's is no marklet, FAS 157 says, a bank must mark the investment's value down, possibly all the way to zero ... Schwartman and others say FAS 157 is forcing underserved [sic] write-offs and wreaking havoc on the financial system. There is even a campaign afoot in Washington to change the rule. ... Bob Traficanti, head of accounting policy and deputy comptroller at Citigroup, said at a conference last month, that the bank had 'securities with little or no credit deterioration, and we're being forced to mark those down to values that we think are unrealistically low.' ... According to the [SEC], FAS 157 requires an institution to 'to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. '' ... Schwartzman's theory only holds up if the underlying assets are really worth much more than anyone currently expects. And if they are so mispriced, why isn't some vulture investor--or Mr. Schwartzman --buying up C.D.O.s en masse? For Mr. Schwartzman's part, he says that the banks haven't been willing to unload the investments at the distressed prices. Besides, the diligence required for most buyers is almost too complicated. ... The folks at the University of Chicago--those the-market-is-always-right guys--take umbrage at the mere suggestion that marking-to-market is not always appropriate. ... 'He's entitled to his view, but I don't agree' said Daniel Alpert, managing director of the investment bank Westwood Capital. 'I don't believe that people are taking writedowns that forces them to dilute their shareholders.' If anything, Mr. Alpert says, 'There is still a lot of sludge out there.' ... But some say Goldman Sachs proved why FAS 157 works: Goldman has been marking its books to market for years, and as a result, its risk officers were able to hold back its go-go traders from making bad bets when everyone else was throwing down their chips last year into the subprime game", my emphasis, Andrew Sorkin (AS) at the NYT, 1 July 2008, www.nytimes.com/2008/07/01/business/01sorkin.html?ref=business.

"To me, the most serious example of doing the right thing at the wrong time is overy strict adherence to 'mark to market' accounting rules. Most of the write-downs of securities that are creating capital shortages in financial institutions don't result from actual losses, or even expected losses. They result from having to mark down assets, many or most of which could be held to maturity and redeemed at par. ... Moreover, identfying [assets] that can easily be held to maturity, and classifying them as such, makes more sense than marking them down to levels that never need be realized. ... While mine is no doubt a minority view, it is supported by William Isaac, former chairman of the [FDIC]. ... Accounting purists would call this forbearance and frown. But forbearance in shooting the sick and wounded with good recovery prospects is no sin in my book", my emphasis, Bob McTeer (BM) at the WSJ, 5 July 2008.

I largely agree with AS, but believe his errs in writing, SS "is convinced". It would be correct to say, "Schwartman said", from which I conclude it is in SS's interest to replace SFAS 157. Who are these "bigwig pals"? Who or what is FAS 157 dangerous to, Hamilton? Your personal interests? Hey Bob Traficanti (BT), does "C" make margin loans? Does "C' mark margin loan collateral "to market"? Would "C' make IA a loan on collateral for which I state a value based on Yuri Yoshizawa (YY) at Moody's values? Well? BT, if you know "C" has assets worth more than their recorded values, give up your sinecure at "C" and buy them with your own money. Otherwise, shut up. Do you, a former FASB employee remember the SFAS 15 accounting nightmare of "troubled debt" restructurings? BT, I have another idea for you and your superiors: value the assets in question at any amount you want. However, have "C" schedule them on a new SEC form, I'll call IA-3. IA-3 lists the assets cost, market and accounting values. IA-3 must be updated quarterly. At the end of five years, all IA-3 assets, not yet sold are sold. If the total proceeds of the asset sales are less than say 90% of the original accounting values, all IA-3 preparers enter guilty pleas to securities fraud. How about it? Alternatively, you BT, "C's" resident genius, buy any scheduled asset within 30 days of IA-3's filing for 75% of the scheduled amount. Well, BT, howaboudit? A suggestion for "C": let "C" voluntarily disclose all this info on a Form 8-K. C'mon tough guy, show us some stones. Why was Craig Giles prosecuted? No market, at what price? How will SS distinguish between deserved and undeserved write-offs? Consult Ed McMahon's hermetically sealed mayonaisse jar? How does BT know the securities had "little or no credit deterioration"? Did he ask YY? Will "C" offer say $1 billion of its least valuable, in BT's eyes CDOs to say Sam Zell for $10 million? $20 million? How much?

I go further than I did on 7 July 2008, Vikram Pandit, give BT an ultimatum: buy the assets he thinks are undervalued or have "C" give his a year's severance pay and out the door. Heck, "C's" directors should give you the same ultimatum. Or else disclaim BT's position.

What's SS's beef? He must be finding it more difficult to secure leverage buyout financing which is now marked to market. How did LBO companies like Blackstone make their money? From capital market inefficiencies. The banks systematically underpriced LBO loans to the detriment of bank shareholders and benefit of LBO sponsors. Did most LBO profits come from billiant managerial decisions? Operating and financing decisions are separable. Anything operating change the pre-LBO company could have made, it could have made without the LBO. Where's the profit? Extracted from the backs of bank shareholders and bondholders. You do some LBOs, some win some lose. The losers wind up in bankruptcy court. Who cares? "Call options" expire all the time.

BM's comments are so rich, where to start? Writedowns create capital shortages? How? BM, do you remember the S&L crisis, or was that before your time? You are about 67, so should remember it. We heard the same accounting arguments then. Call me an accounting purist. Ad hominem attack. So? BM, when would be a good time to implement the rules? Did large financial institution mangements learn nothing from the S&L crisis? As to holding assets "to maturity and redemeed at par", I have an idea: I'll buy 30-year Treasuries, like the 4 3/8 due February 2038, currently at 97 14/32 and see if you'll buy them from me at par. Even better, the February 2038 zero currently at 26 8/32. How does BM know what "levels ... never need be realized"? If BM, does, shut up and join SS's vulture fund. BM is a "former president of the Federal Reserve Bank of Dallas". My conclusion: Helicopter Ben et. al., encouraged BM to write this. Further, the big banks have tens of billions more in writedowns to come.

2008's Smoot-Hawley

"Every day, planes filled with fresh flowers from Ecuador and Colombia land at Miami International Airport, where the flowers are transferred to refrigerated trucks cooled to 34 to 36 degrees. ... Since the mid-1980s, U.S. businesses that rely on quick delivery for time-sensitive products--from sushi restaurants to flower shops to manufacturers that use just-in-time delivery strategies--have benefited from inexpensive transportation costs. ... Over time, the increasing expense of moving goods could lead to a broad restructuring in the way America conducts commerce. ... Just as the SUV owner will eventually switch to another car, U.S. businesses will find ways to cut their transportation bill. But it will take time", Justin Lahart (JL) at the WSJ, 30 June 2008.

"As a sign over its main boulevard proclaims, Honghe is 'China's Famous Town for Sweaters.' But the economy of sweater town is unravelling, providing an early sign that China's manufacturing sector may be entering middle age. ... Manufacturers say their profits have dwindled as they pay out more for raw materials and energy", James Areddy at the WSJ, 30 June 2008.

Except for high-value products, just-in-time inventory will no longer be a viable strategy, see my 23 July 2007 post. JL limits his comments to American commerce. Increased transportation costs are a worldwide phenomenon with worldwide effects.

I could not explain the Chinese stock market's 55% collapse from October 2007 at 6,092, currently, 2,748, until now. Putting these two articles together made it clear to me. About 25 years ago the WSJ had an article following the Congressional Smoot-Hawley (SH) tariff debate and the Dow Jones. As SH went through Congress, the Dow collapsed as it understood the impending disruption of world trade patterns. Today's transportation cost increases are doing what SH did in 1930. The economic analysis of transportation costs is virtually identical to that of tariffs.

Asarco Followup-4

"A U.S. judge on Tuesday breathed new life into Mexico mining giant Grupo Mexico SA's [GMSA] efforts to win back its U.S. subsididary, Asarco, LLC, despite Asarco's plan to sell its assets to an Indian metals group. Judge Richard Schmidt of the U.S. Bankruptcy Court in Corpus Christi, Texas, gave [GMSA] permission to file a reorganization plan for the company, something the Mexican company has been barred from doing so far in Asarco's bankruptcy case. ... [GMSA] said its own plan would top the $2.7 billion and satisfy Asarco's many creditors, including federal and state environmental agencies. ... 'Although we disagree with the court's ruling in granting bid protections to Sterlite Industries, we are gratified that we should have the right to file our own reorganization plan,' said Luc Despins of the New York firm Milbank Tweed, which represented [GMSA]. ... Throughout the case Asarco has resisted [GMSA's] efforts to regain control. Asarco says it was forced into bankruptcy in an attempt by the Mexican parent to avoid paying Asarco's environmental liabilties resulting from its mining activities", WSJ, 2 July 2008.

What's Judge Schmidt doing? That GMSA effected a fraudulent transfer in relieving Asarco of its Southern Coppper shares seems obvious to me. GMSA has "dirty hands" and should be thrown out of court. Or a lot worse. The GMSA-Asarco situation reminded me of a case I encountered 18 years ago, Voest-Alpine v. Vantage, 919 F2d 206 (3rd Cir., 1990). "On June 13, 1986, the day after VATCO filed for summary judgment against Paige, the Stablers, through their attorney in that action and in conjuction with their secured lender, New Jersey National Bank (NJNB), to which they owed over $1,5 million, put the Paige Group up for sale. ... That purchase was found by the district court to have been structured 'through a "foreclosure" by NJNB in order to launder the assets [in question] and cleanse the Paige Group of its unsecured debt'," my emphasis. Didn't German Larrea (GL) admit GMSA wanted to do this with respect to Asarco's environmental liabilities? Or did I fail to understand what GL said? "Before the foreclosure, Paige was a troubled but going business with assets of over $1.7 million, a debt to NJNB of $1.5 million (guaranteed by the Stablers whose known assets were about $300,000), and debts to unsecured creditors of about $800,000, which included the debt owed to VATCO. After the August 8, 1986 transactions, Paige had no assets and no secured debts. It did, however, continue to owe its unsecured creditors, who for their part, however, now had no Paige assets from which to collect". Sound familiar? What happened to Asarco's interest in Southern Copper?

They're Kidding

"When the history of this era is written, what will it say about the financial crisis of 2008? ... Contributing to the gloom over the financial sector is something artificial--mark-to-market accounting. The rules say that banks have to value derivatives like swaps and mortgage securities at their current market prices. The rules make no provision for what to do when there is no market. ... These paper writedowns of mortgage-related assets have real consequences. ... The question here and now is how investors can be on the winning side of history. My answer is to buy some of the debt and preferred issues of high-quality, too-big-too-fail financial institutions that are being forced to raise capital to comply with the accounting rules. When was the last time AA- and A-rated institutions had to pay 8% for capital? Would you believe the early 1990s?", my emphasis, Richard Lehman (RL) at Forbes, 30 June 2008.

"Bond-fund king Bill Gross called on the Democratic presidential candidate to double the federal budget deficit to $1 trillion by fiscal 2011 if he becomes president. 'The economy will need an additional jolt of $500 billion or so of government spending real quick,' wrote Mr. Gross, manager of the $128.8 billion-in-assets Pimco Total Return mutual fund, in a letter to 'President' Obama posted on Pimco's Web site. ... Gross noted that this year's budget deficit should be about $500 billion. By doubling that to $1 trillion in three years, that would put the deficit at about 6% of gross domestic product, 'a mere pittance by Japanese standards.' ... 'While the Republicans will blame you for years and label you "Trillion Dollar Obama" in future campaigns, there is in fact not much that you or any other President can do,' Mr. Gross said. 'You've inherited an asset-based economy whose well has been pumped nearly dry with lower and lower interest rates and lender of last resort liquidity provisions that have managed to support Ponzi-style prosperity in recent years',"my emphasis, WSJ, 1 July 2008.

RL shows he is a fool. He will not buy paper which has "no market". No, RL wants to buy TBTF institution paper on the premise that as TBTFs, RL is buying a "call option" on an expected Fed TBTF bailout like that which facilitated JPMorgan's Bear Stearns purchase. I wouldn't buy Citigroup 8.5% series F perpetual preferreds RL recommends. What accounting problem is RL talking about? If the paper in question is worth more than say Citigroup has it on the books for, someone has a good opportunity. RL, Vikram Pandit (VP) and say Robert Rubin and Robert Steel can each resign his position and form a vulture fund to buy the paper in question and clean up. I'm sure Steve Schwartzman will want a piece of this action too. With thousands of recent Citigroup layoffs, VP's vulture fund could easily assemble a team to create and sell the fund. Hey, there's such a great opportunity, I expect dozens of KPMG partners to want to work for the fund. I wonder if James Suglia called VP already to get the ball rolling. I won't hold my breath.

I am in partial agreement with Gross. There is little the President can do. Imagine, 30-year Treasury bonds yield 4.53% as I write. People still buy them?

Varones on the FDIC

WC Varones has a 13 July 2008 post about IndyMac's recent failure and the FDIC, which I agree with, here's the link: www.wcvarones.blogspot.com/2008/07/fdic-gone-wild.html. The best case I can make for the FDIC's Sheila Bair: she's incompetent, see my 16 June 2008 post. The worst, well ... I nominate Christopher Dodd to be head of "The New Keating Five". Does anyone remember the old Keating Five? No it was not a rock group like the Beatles. OTS Director Reich should shut his face.