Monday, June 30, 2008

EU Farm Subsidies

"With global food prices soaring and arable land in short supply, the European Union finds itself at loggerheads over how to overhaul a subsidy system that frequently pays landowners not to grow crops. The subsidies, dreamed up when overproduction was a greater concern, have gone to people like John and Gitte Abrahamson. They get $1,500 a year from the EU for renting out 37 acres in rural Denmark to a riding club. ... Last month, the EU suspended a requirement for farmers to keep 10% of land fallow and raised quotas that limit the amount of milk each EU nation is allowed to produce. It's proving much tougher for nations to agree on removing individual subsidies or figure out how to use EU farm money to lower food prices. ... U.K. officials believe high EU subsidies have depressed global food production because the EU dumped its surpluses on developing markets at low prices, discouraging local food production. ... Economists say subsidies of any kind are unlikely to bring down global food prices. 'The only proven way of bringing down prices is increasing productivity through research,' says Hafez Ghanem, director of economics for the Rome-based Food and Agriculture Organization", WSJ, 18 June 2008.

I agree with the Brits, EU food dumping hurt third world agricultural development, particularly in Africa. Disagreeing with Ghanem, you can decrease food prices by increasing real resources devoted to food production at our current level of knowledge.

When All Else Fails-3

"China, widely seen as the one nation most responsible for the soaring deamnd and price of oil in recent years, reminded the world it can nudge both in the other direction as well. The government, which controls domestic fuel prices, raised its base price for gasoline by 17% and diesel by 18%, a move that global oil traders quickly concluded could diminish the country's voracious appetite for fuel. ... Thursday's price hikes come just days before world leaders and oil executives meet in the Saudi Arabian city of Jeddah Sunday to bring record oil prices back to earth. ... Asia's other large consumers--such as India, Indonesia and Malayasia--all subsidize fuel heavily, but have risked popular ire in recent weeks to reduce those supports in order to protect state coffers. ... U.S. Treasury Secretary Henry Paulson ... urged Beijing to abandon its fuel-price controls, saying the U.S. found out the hard way in the 1970s that they don't work", WSJ, 20 June 2008.

Oil fell $4.75 a barrel on Thursday, to $131.93, a 3.475% drop. Supposedly China consumed 7.58 million barrels a day in 2007 and will consume 8.02 million in 2008. Using 2008's figure, does the drop in oil make sense? Assuming China's short-run elasticity of demand for oil is .1, we expect Chinese oil consumption to drop by .18 x .1 x 8.02 million = 144,000 barrels a day. With current world oil consumption at 86.8 million barrels a day, this is 0.166%; I see this accounting for about a 1.66% price reduction, $2.27. Alternatively, the market said oil's short-term price elasticity of demand is .21; .1 x (3.475 / 1.66). Traders relax. This is not that big a deal. Unless you think it has portents for other countries.

Sunday, June 29, 2008

Asarco Followup-3

"The takeover of U.S. copper giant Asarco LLC by India's Vedanta Resources PLC may have hit a bump Friday. A judge presiding over a U.S. bankruptcy court in Texas signaled he might give Grupo Mexico SA [GMSA], Asarco's estranged corporate parent, one last chance to resume control of its U. S. subsididary. ... The Mexican company has promised to pay all creditors in full and take Asarco, a copper-mining company in Tucson, Ariz., out of bankruptcy. Until now, the court has kept [GMSA] from filing its plan. ... But Thursday, the Mexican mining company proposed to recapitalize Asarco at $4.1 billion, part of that amount coming from Asarco's own assets, with the rest as a cash infusion from [GMSA]. ... Since it bought Asarco in 1999, [GMSA] has complained Asarco faced an unkown amount of liability from environmental claims because of a century of mining across the western U.S.", Joel Millman & David McLaughlin at the WSJ, 14 June 2008.

How much cash will GMSA contribute to its plan? I wouldn't let GMSA propose a plan. Southern Copper Corp.'s (PCU-NYSE) 2007 Form 10-K and 2008 Proxy Statement reveal GMSA held 221.1 million PCU shares, worth $22.8 billion at $102.95 each. On 1 April 2005 PCU issued GMSA 134.4 million shares in an "apparently" unrelated transaction. Assuming the balance, 86.7 million (221.1 - 134.4) were "old" Asarco shares, as I see it, GMSA holds an Asarco asset worth $8.9 billion (86.7 x $102.95). Judge Richard Schmidt should tell GMSA and its lawyers "get lost". GMSA put Asarco into bankruptcy in August 2005, after the 134.4 million shares were issued. Do I smell a "usurpation of corporate opportunity" suit here? Where's the FBI, SEC, DOJ? What's going on? Is this a bankruptcy fraud, 18 USC 152? Should GMSA's lawyer-client privilege be lost under the "crime-fraud exception"? Stay tuned.

Milberg Weiss-Sacrifice

"Under the terms of the settlement, styled a nonprosecution agreement, the government will drop criminal charges against Milberg in exchange for the firm's paying $75 million in fines and penalties, with the total due by 2012. ... Both sides have approved the terms of the deal, but it still awaits final sign-off by the main office of the [DOJ]. ... In another settlement term, Milberg is expected to agree to have attorney Bart Schwartz [BS] monitor its cases for two years to ensure it doesn't engage in prohibited conduct", WSJ, 14 June 2008.

"Milberg LLP, indicted two years ago in one of the highest-profile prosecutions ever of a law firm, will escape charges as part of a settlement with the government announced Monday. The firm will pay $75 million and admit wrongdoing. . ... Milberg acknowledges that after it became aware of the government's investigation, it failed to conduct an independent internal investigation and delayed taking adequate action to prevent the conduct in the future. ... "The settlement with Milberg reflects the seriousness of what was probably the longest-running scheme ever conducted by a law firm,' U.S. Attorney Thomas P. O'Brien said in a statement", my emphasis, WSJ, 17 June 2008.

"If there's a moral in this week's felony settlement by class-action lawsuit giant Milberg Weiss, it's this: Prosecutors should keep digging into tort-bar practices. The details are even worse than the headlines. ... In short, Milberg was a corrupt enterprise that perpetrated a vast fraud on our system of justice", Editorial at the WSJ, 18 June 2008.

What is the "prohibited conduct"? Suing say, drumroll please, Goldman Sachs? Who is BS? Is he a DOJ alumnus?

O'Brien and I live in alternative universes. What would have been an "independent internal investigation" that would have convinced the DOJ to let Milberg be? Who should have conducted it? A law firm with large corporate clients? What was Milberg's real crime? Not having enough, or perhaps any, "former" AUSA partners? Milberg gets to admit wrongdoing. Why wasn't it treated the same way the SEC treats most real miscreants? Why was Milberg charged and Mayer Brown, given a pass, my 22 and 27 December 2007 posts? I could go on and on.

I draw a different lesson from the Milberg saga. A law firm must hire AUSAs to ensure job opportunities for existing AUSAs. If Milberg was a "corrupt enterprise" what does the DOJ think of the Tobacco Research Council, the large tobacco companies and their law firms? No matter what Milberg did, the DOJ would have "gotten" it. Even if it cost the DOJ hundreds of millions. With all its imperfections, the world's Milbergs are a threat to: the SEC, DOJ and large corporate miscreants.

Saturday, June 28, 2008

Saudi Nukes

"Here's a quick geopolitical quiz: What country is three times the size of Texas and has more than 300 days of blazing sun a year? What country has the world's largest oil reserves resting below miles upon miles of sand? And what country is being given nuclear power, not solar, by President George W. Bush? ... Last month ... Condoleezza Rice was in Saudi Arabia [SA] signing away ... nuclear technology. ... [SA's] interest in nuclear technology can only be explained by the dangerous politics of the Middle East. [SA], a champion of and kingpin of the Sunni Arab world, is deeply threatened by the rise of Shiite-ruled Iran. ... By signing this agreement with the U.S., [SA] is warning Iran that two can play the nuclear game. ... Secretary of Energy Samuel Bodman shrugged off concerns about potential Saudi misuse of nuclear assistance for a weapons program, saying simply: 'I presume that the president has a good deal of confidence in the King and the leadership of [SA],'" Edward Markey (EM) at the WSJ, 10 June 2008.

Bush should stop fiddling around and give Israel the green light to destroy Iran's nuclear facilities with whatever help it needs. Then Israel can portray itself as the defender of Sunni Islam. I suspect SA has been pushing Israel to attack Iran for years. Who knows? If the attack is suceessful and SA feels safe, SA may recognize Israel and the Middle Eastern mess can begin cleaning itself up. I can't believe SA feels more threatened by Israel than Iran. Aren't you comforted by Bush's "confidence in the King"? Isn't Bush the guy who looked into Putin's soul and liked what he saw?

Of Stars, Cows, Dogs and ???

"GE's announcement a week ago that it would accept offers for its appliance business marked the death-knell of yet another US manufacturing business. ... For the last 30 years, Wall Street's insouciant attitude appears to have made sense. US manufacturing has slowly declined, as operations have moved to lower-wage centers in the Third World. However the US economy as a whole has continued to thrive, as financial services doubled its share of Gross Domestic Product and grew to provide 40% of the earnings of the Standard & Poors 500 share index. ... The collapse of the financial services bubble has however called into question three of the Wall Street's most cherished beliefs about manufacturing. ... Wall Street believes that financial services and other services can take the place of manufacturing. ... [I]t believes that manufacturing tangible goods is an intrinsically low-skill and uninteresting operation, so the US would do much better to specialize in 'symbol manipulation.' ... [I]t believes that the decline of US manufacturing was and is inevitable. ... Management decision-making like most human activities is a slave to fashion: whichever guru has captured the attention of business academics and the bsuiness press at any given time is likely to have an inordinate influence on management decisions. ... In the 1970s, the new and very fashionable Boston Consulting Group introduced the 'strategy matrix' under which businesses were divided into stars, cows, dogs and question marks, according to their growth prospects and profitability. ... There were several problems with this mechanistic, clever-clever approach to business management. One was that the businesses' typology could not be indentified accurately. ... When examined dispassionately in the light of posterity, it appears that far too many of these 'cow' businesses were manufacturing operations which were milked for cash flow that was diverted into the service sector, particularly in finance. ... [GE], however, from 1981 to 2001 run by ultra-fashionable 'Neutron Jack' Welch, epitomized the failings of the era. It underinvested in many of its manufacturing businesses, entered into a blizzard of divestitures designed to boost its short term earnings, played games with its pension accruals and built a gigantic financial services empire of low quality businesses in which it could never be a leader. It also ruthlessly eliminated its middle maangement and overpaid its top managment, winners in the corporate political game. GE was a much admired operation in Welch's later years; it is less so now, and if the bloated financial services business returns to a historically normal size may finally be seen to have been a disasater. ... The sad story of GE Appliances is a paradigm of what has gone wrong in the US economy since 1980. No, manufacturing did not need to leave the [US]: US manufacturing was killed by a multitude of foolish short-term-profit motivated decisions by inept and overpaid US management. ... Finally, the US cannot survive through financial services and tech startups alone; it needs to reinvest in manufacturing or it will find itself unable to support an advanced-economy living standard for the mass of its people", my emphasis, Martin Hutchinson (MH) at, 16 June 2008.

I agree with MH. GE became a hodgepodge of second rate businesses. Particularly in financial services. GE even leased airplanes to commerical airlines, in 2003 having a $27 billion portfolio of airplane leases! Can you believe it? Airlines usually lose money and GE bought planes for a money-losing industry. When I was in MBA school, Boston Consulting Group (BCG), was a "tres chic" employer. I thought BCG peddled nonsense. Neutron Jack's empire was in part built on scapegoats like Joe Jett, see my 10 August and 12 September 2007 and 12 April 2008 posts. It is written, "Man does not live on bread alone", Matthew 4:4 (NIV). Similarly, the US population cannot survive if all it does is shuffle paper. Someone must: mine and produce agricultural and manufactured goods. Eventually the Chinese will demand real goods for US paper. Then what? Real goods trade against real goods. Money is a medium in which they are priced. I haven't admired GE since 1986 when it bought Kidder Peabody. GE has struck me as being a conglomerate run by a bunch of overpaid accountants.

Friday, June 27, 2008

We Are All Economists Now

"Is it possible for Congress to stumble into a correct or honorable action on the economic front? Just such an event seems to have occurred in May, with the passage of a bill to halt deliveries of crude oil to the Strategic Petroleum Reserve. When it takes effect July 1, the bill will cause an immediate pullback in the price of oil, as much as $20. So says energy economist Philip Verleger [PV]. His prediction is surprising, given that injections into the reserve are just 60,000 barrels a day", Christopher Helman at Forbes, 16 June 2008.

A $20 a barrel oil price reduction would surprise me too. 60,000 barrels is .000691 of daily consumption of 86.8 million barrels. $20 is .149254 of the current $134 price. I presume PV estimates oil's "demand elasticity" as follows: .000691 / .149254 = .004623, highly inelastic. Most estimates I've seen of oil's short-term demand elasticity are between .1 and .3, which is not even PV's order of magnitude. I suspect the 1 July change will not change oil's price at all. Why? It's already known and reflected in current prices. Apparently PV never encountered the efficient market concept in MIT's PhD program. I'm sure Chicago's Eugene Fama could enlighten you.

The SEC Fumbles Again

"A federal judge found that two hedge funds had consciously avoided securities laws in their proxy battle with railroad CSX Corp., in a decision that stands to reshape how activist investors move on their corporate targets. ... [Hedge funds] were especially fearful [Judge Lewis Kaplan] would take a skeptical view of swaps, which allow shareholders to create a kind of synthetic stock via private contracts with large Wall Street firms. Those synthetic shares trade in tandem with a company's real shares, alllowing a hedge fund to post economic gains without filing share-ownership reports as required by securities law. Such arrangements have been legal for decades. Last week, the [SEC] said it was largely okay with swaps as long as they weren't used to disguise takeover intentions. ... Kaplan appeared to take the SEC head on, saying that its views on the swaps generally 'exalts form over substance.'," WSJ, 12 June 2008.

The SEC fumbles another football. This is a disgrace. Chris Cox (CC), SEC chairman has a Harvard JD. Apparently he was not exposed to the maxim of jurisprudence: "the law respects the substance over the form". Alternatively, he forgot it. I wonder if Harvard Law School has some refresher classes CC could take.

Thursday, June 26, 2008


"Ever since World War II, we have been driven by a passionate desire to understand how mass genocide, terror states, and global war came about--and how we can prevent them in the future. ... Just as with fascism, most contemporaries found it nearly impossible to believe that the Gulag Achipelago was what it was. And just as with fascism, we studied it so that the next time we would see evil early enough to prevent it from threatening us again. ... Yet, they are with us again, and we are acting as we did in the last century. The world is simmering in the familar rhetoric and actions of movements and regimes--from Hezbollah and al Qaeda to the Iranian Khomeniests and the Saudi Wahhabis--who swear to destroy us and others like us. ... Why are we failing to see the mounting power of evil enemies? ... No doubt there are many reasons. One is the deep-seated belief that all people are basically the same, and all are basically good. Most human history, and above all the history of the last century points in the opposite direction. But it is unpleasant to accept the fact that many people are evil. ... This is not merely a philosophical issue, for to accept the threat to us means--short of a policy of national suicide--acting against it. As it did in the 20th century, it means war. ... None of the democracies adequately prepared for war before it was unleashed on them in the 1940s. None was prepared for the terror assault of the 21st century. ... This time, ignorance cannot be claimed as an excuse. If we are defeated, it will because of failure of will, not a lack of understanding. As, indeed, was almost the case with our near-defeat in the 1940s", my emphasis, Michael Ledeen (ML) at the WSJ, 7 June 2008.

ML's got this knocked. Many Westerners, possibly a majority have no knowledge of the third world which contains tens of millions hostile to us. Get over it.

Repeat Player Advantage-3

"What if a judge solicited cases from big corporations by offering them a business-friendly venue in which to pursue consumers who are behind in their bills? What if the judge tried to make this pitch more appealing by teaming up with the corporations' outside lawyers. And what if the same corporations helped pay the judge's salary? ... Yet, that's essentially how one of the country's largest private arbitration firms operates. The National Arbitration Forum (NAF), a for-profit company based in Minneapolis, specializing in resolving claims by banks, credit-card companies, and major retailers that contend consumers owe the money. ... In California, the one state where arbitration results are made public, creditors win 99.998% of the time in NAF cases that are decided by arbitrators on the merits, according to a lawsuit filed the San Francisco city attorney against the NAF. ... But internal NAF documents and interviews with people familiar with the firm reveal a different reality. Behind closed doors, NAF sells itself to lenders as an effective tool for collecting debts. ... Arbitration ... purports to offer something akin to the evenhanded justice of the court system. ... Of the 18,075 that weren't dropped by creditors, otherwise dismissed, or settled, consumers won just 30, or 0.002%, the suit alleges. ... Elizabeth Bartholet, a Harvard Law School professor and advocate for the poor, worked as an NAF arbitrator in 2003 and 2004 but resigned after handling 24 cases. NAF ran 'an unfair, biased process,' she said in a deposition in September, 2006, in an Illinois state court lawsuit. ... What most troubled [Richard] Neely, the former West Virginia supreme court justice, was that the NAF provided him with an award form with the amount sought by the creditor already filled in. This encourages the arbitrator to 'give creditors everything they wanted without having to think about it,' says Neely. William A. Gould Jr., a Sacramento lawyer with a general private practice, says he stopped handling arbitrations for the [NAF] after doing several in 2003 and 2004 because the process 'just seemed to be pretty one-sided.'," Robert Berner and Brian Grow (B&G) at BusinessWeek, 16 June 2008.

B&G, check your arithmetic, 30 / 18,075 = .00166, or 0.166%. You lost two decimal places. See my 17 and 27 April 2008 posts. The OCC should do something here, stop every national bank from using the NAF and instruct it to keep records of all arbitration results. Would any bank use the NAF if it was not part of the collections process? I doubt it. The NAF suffers from the same problem the rating agencies and CPA firms do: lack of accountability.

Wednesday, June 25, 2008

Citigroup's Joe Jett

"On Wall Street he traded complex energy derivatives. ... In May 2007, Craig Gile was sentenced to a year and a day in prison after pleading guilty in U.S. District Court in Manhattan to one count of conspiracy to falsify bank records and commit wire fraud at Citigroup, where he was head of American sales and trading on the commodities desk. ... Is Gile guilty? That's how he pleaded to avoid the risk of a much longer sentence. He told the judge he was 'truly sorry.' But his real sorrow was that he had to give up what he desparately wanted: the chance to clear his name. He had little hope that a jury would understand or accept his rationale for the valuation of compex derivatives, let alone that he could convince it that his efforts to fix the problem were a sign of his good intentions rather than a cover-up. ... He was following his boss's orders, he told them. He was probably too trusting. ... At sentencing, the judge said he was sorry too, but felt he had to make a point. U.S. District Judge Robert W. Sweet ordered Gile to repay the bank $185,819 as restitution for the inflated bonus. ... At what point does a stretch goal become a step over the line? ... As a result, it's also common for traders to book the highly subjective value of their own complicated and volatile derivative trades, despite the obvious conflict of interest. ... Roland Riopelle, Gile's lawyer [said] ... The kind of derivatives that Gile was 'attempting to value on the books of his employer are extremely hard to value and I believe are often overvalued by those who deal in them. I think this is a common practice. ... Gile's friend, Eric Blattman, [said] 'When you look at the whole scope of things, what Craig's accused of is like the fly on the back of the elephant.' ... Neither Gile nor his lawyers ever knew for sure why a case as relatively small as theirs would be the one prosecutors would decide to take on. But they later speculated it was because Citigroup, which had been front and center in scandals ranging from Enron to the securities-analysis, debacle, wanted to demonstrate its enthusiasm for law enforcement. Citigroup's only comment to Fortune: 'Mr. Gile was terminated after an internal investigation in 2004, and Citi cooperated with the authorities during their investigation of the matter.' ... Jonathan Streeter, the [AUSA] who handled the case, said he couldn't comment", my emphasis, Betsy Morris (BM) at Fortune, 9 June 2008.

Another Mike Garcia (MG) miscarriage of justice. MG's Gile prosecution raises the question: why? The $2 million alleged derivative overstatement was less than my Blankfein Test. Who cares? $2 million is immaterial to Citigroup. It appears someone in Citigroup set Gile up. Who? Why? What was he or she trying to divert attention away from? On what basis did Gile value the securities, instead of Citigroup's Comptroller? Did the much lauded Sally Krawcheck know of this? If not, why not? Did KPMG, Citigroup's CPAs? This case looks like Joe Jett's (JJ). KPMG also audited General Electric (GE). JJ was not charged by Mary Joe White's (MJW) office. Why not? In my opinion, because MJW realized JJ could take much of GE's and Kidder Peabody's management with him and she might not even convict! Streeter wouldn't comment. Why not? When will Streeter leave MG's office for his big payoff, a $2-3 million-a-year NY law firm partnership. Hey, MJW, have you a slot for this boy? See my 31 January 2008 post. Citigroup conducted an "internal investigation". Were its results preordained? Who conducted it? Independent Accountant didn't. Gile's treatment is disgusting.

Compare MG's office's treatment of Gile to what if anything it will do to Vikram Pandit (VP), Citigroup's "$800 million man". Citigroup writes off its Old Lane (OL) "investment" 11 months after VP signs on. 11 months ago Citigroup in good faith could have thought it would continue OL's operations. Then again, maybe not. Well MG, you have something new to look into, the bona fides of VP's contract and Citigroup's financial reporting with respect to OL. Well, how about it? See my 24 June 2008 post. What will MG's office do about the $49 billion in SIVs Citigroup put on its balance sheet, my 15 December 2007 post? Will anyone at Citigroup suffer for misreporting the SIVs? Well MG, here's something else for you to look into. YET, YOU PROSECUTED GILE, WHY?

Oath Helpers Return

"In August 2001, when in-house accountant Sherron Watkins warned Enron CEO Ken Lay that the company might implode in a wave of accounting scandals,' Lay asked the firm's regular law firm, Vinson & Elkins, to do a 'preliminary investigation.' Though V&E had worked on the very transactions Watkins was questioning, it took the assignment and reported back on Oct. 15 that there was no cause for concern. About a month and a half later Enron filed for bankruptcy, having, in fact, imploded in a wave of accounting scandals. ... In a forthcoming Stanford Law Review article titled 'The Market for Bad Legal Advice,' Columbia Law School professor William Simon cites [Charles] Wolfram's opinion as just one example of patently bad advice offered in exchange for lucrative compensation by academics whom he contends are becoming 'enablers of pernicious ... practices' ... 'Simon seems to suggest that giving favorable testimony for a law firm is facilitating future wrongdoing by the law firm,' says [Charles] Wolfram, who charges $650 an hour. ... Simon's article, whose take-no-prisoners tone left me slack-jawed, contends that there is a systemic, recurring problem that arises when well-heeled clients go shopping for expert exonerations--sometimes prior to doing something shady, sometimes after they've already done it--to immunize themselves from civil liability or criminal prosecution. ... Stephen Gillers ... [said] 'It's unique for law professors to so aggressively criticize the behavior of other law professors--not their intellectual positions.' ... A clear case is where the promoter of a dicey tax shelter offers a boatload of money to a law firm to opine that its Rube Goldberg-style investment has a genuine 'business purpose' and should therefore, pass muster with the [IRS]. ... The problem is even worse, Simon contends, when the client seeks a self-serving opinion not from a law firm but from an ostensibly above-the-fray professor. ... Prior to the Enron debacle, the Oscar for the most dubious performance by a law firm in a supporting role would have gone to New York's Kaye Scholer, which represented Charles Keating Jr.'s now notorious Lincoln Savings & Loan in the late 1980s. ... Simon writes, 'In effect, [Geoffrey] Hazard rented [Harvard's] imprimataur to Kaye Scholer for his own profit, allowing the firm to make virtually unconditional use of it.' (Kaye Scholer later paid $41 million to settle the regulators' suit but acknowledged no wrongdoing.) ... The lawyers he eviscerates are constrained from freely responding by confidentiality obligations. But that's exactly Simon's point. To the extent that free and open discussion can't take place, the opinions aren't worth the respect they're being accorded. ... I am now sufficently old and decrepit to describe myself as a longtime observer of the American legal system. For what it's worth, I find Simon's analysis of what's wrong with legal ethics testimony to be not just dead-on but cathartically so. How gratifying to finally hear someone speak the truth to power so bluntly, boldly, and pursuasively. The ethics emperors have no clothes on, and thank goodness the socially oblivious little boy has finally said it", my emphasis, Roger Parloff (RP) at Fortune, 9 June 2008.

RP, you see an example of a problem with all "expert" testimony: most of it is "MAI", made as instructed. I've read many tax opinions by large law firms used to promote various tax shelters that I couldn't have signed. Not even for the $500,000 I guessed the law firm got for the opinion. For $5 million, well ... The problem is a general lack of "expert" accountabilty, whether the "experts" are: CPAs, rating agencies, criminalists, FBI agents, economists, you name it. If you can't sue 'em over their opinions, they're worthless. If they can hide behind lawyer-client privilege, they're worthless. I previously said, 17 November 2007, publicly-held companies should not have such privilege. I say it again. Another problem Simon does not see is: most attorneys and judges I've seen do not understand evidence. They could learn more about evidence from watching ten episodes of "Perry Mason", 1957-66 than they know today. From time-to-time I get approached to do litigation support work. About half of it I turn down quickly when I explain to the attorney that he wants me to be an "oath helper". These clowns can't present a case, so they want someone else to opine on ultimate issues of fact, which is the trier of facts job.

Tuesday, June 24, 2008

Citi's $800 Million Man

"Citigroup Inc. is closing a hedge fund founded by Chief Executive Vikram Pandit, 11 months after Citigroup bought the fund's management company for $800 million. ... Pandit personally reaped at least $165 million when Citigroup bought Old Lane [OL] in July 2007, following its founding the previous year. ... But as the fund struggled, Citigroup was forced to choose between pumping new money into it or shutting it down. ... Pandit delivered a sterling reputation, a thick Rolodex of contacts around the world and a team of hedge-fund colleagues with deep experience in India and other fast-growing emerging markets. ... [OL] has essentially broken even since its inception. ... Pandit was required to park in [OL] about $100 million of his proceeds from the hedge fund's sale to Citigroup. ... With [OL] closing, Mr. Pandit will have to move that money to other Citigroup investment vehicles", my emphasis, David Enrich and Jenney Strasburg (E&S) at the WSJ, 12 June 2008.

Poor baby. Pandit "will have to move" the $100 milllion. My spin: this was contemplated when Citigroup brought Pandit aboard. The $800 million was compensation to Pandit and his "associates" 11 months ago, Citigroup "bought" no asset. $800 million for a Rolodex? Hey Citigroup, you can have mine for $80 million. I'm waiting. E&S miss the point: closing OL "frees up Pandit's $100 million, he's not being forced to do anything. "Forced to choose"? I doubt Citigroup ever intended to keep OL alive any longer than was necessary to disguise what I believe to be it's real reason for "buying" it. The Citigroup-Pandit transaction looks like a sham. Mike Garcia, are you listening?

Joshua Rosner Strikes Again

Joshua Rosner (JR) has a fine post at on 9 June 2008 concerning the Andrew Cuomo's rating agency (RA) "reforms". I agree with all of JR's post except his taking issue with compensating RAs when "the investment bank ultimately selects [another] to rate a RMBS". JR states, "Other than increasing the revenues for these rating agencies, this part of the Cuomo agreement does nothing to address the underlying truth stated by former Moody's Executive Brian Clarkson, 'you start with a rating and build a deal around a rating'." Paying RAs for preliminary work will not increase their total fees as the RAs will charge less to complete a rating. Suppose a RA has a 50% chance of getting an assignment. Each RA's preliminary work might be "worth" say $100,000. The work to complete the rating might be "worth" $500,000, assuming each bills by the hour like CPAs and attorneys. Assuming a RA is rational, how does it quote a fee? It quotes $700,000 to do the work. Why? You have two RA's split the market. Each does $100,000 of preliminary work, one does $500,000 of completion work, total fair value, $700,000. Whether RA A or B gets the $700,000 doesn't make any difference in the long run. I think this proposed reform would cost the investing public nothing and have some "informational content" as revealing a possible "ratings shop" by the investment banker. Good show, JR.

Monday, June 23, 2008

King Coal Returns, to Japan?

"But after decades of seemingly terminal decline, Japan's coal country is stirring again. With energy prices reaching record highs--oil settled above $135 a barrel on Thursday--Japan's high-cost mines are suddenly competitive again, and demand for their coal is booming. Production has jumped to its highest in nearly four decades, creating a sensation rarely felt in these mining communities. ... While Japan's coal industry remains tiny, its revival is an example of how higher commodity prices are driving a search for resources even in some of the world's most urbanized and developed nations. In recent months, South Korea has experienced calls to create a domestic coal industry in order to reduce dependence on imports. ... For example, in Bibai, the city's last two mines, produced just 34,961 tons of coal in 2005. This year, they expect to surpass 150,000 tons, the highest production since 1973, when the city's last underground mine was shutting down. ... But the industry's long decline has made it difficult to gear up. There are almost no geologists left in Japan specializing in coal, or recent surveys of the region. ... Japan's coal industry needs cheering up: nationwide, production is down from its peak in 1961 when 662 mines yielded 55 million tons of coal. Last year, eight mines produced about 1.4 million tons, according to [Hirofuni] Furukawa [of the Japan Coal Center] and Japan's economy ministry. ... Many residents [of Bibai] doubt a real renaissance is even possible",, 22 May 2008.

Ah ye of little faith. See my 2 November 2007 and 19 Janaury, 4 February, 4 and 28 March 2008 posts. Connie Yu, are you listening?

Leaky Tax Shelter

"The [IRS] is fighting with billionaire Philip Anschultz to force the Denver-based mogul to pay back taxes totalling $143.6 million. ... The deals netted him cash, as well as a share of any future rise in the stock price, with a toal value of roughly $429 million. The arrangement is also set up to protect him against losses if the stock price falls. He contends the deals technically weren't completed sales for tax purposes, and thus didn't trigger tax obligations, according to filings in U.S. Tax Court in Washington. ... In transactions like the one used by Mr. Anschutz, an executive agrees to turn over his shares to an investment bank on a specific date in the future, and meanwhile loans the bank the same amount of stock. The bank gives the executive cash up front, generally equal to as much as 80% of the shares' fair value. ... 'You've got all the elements of a completed sale: One guy's got the money, and the other guy's got the stock,' said Robert Willens, a former Wall Street tax aanlayst who runs his own corporate-tax advisory firm in New York. 'What more do you need for a sale?' ... Investment banks benefit by charging wealthy clients fees for services like these. ... An important part of the arrangement involved Mr. Anschutz also loaning nine million shares to DLJ for the length of the tranasaction. That would allow the invesment bank to engage in a 'short sale' of the shares to hedge its risk against a loss in the original transaction stemming from a drop in the stock price", WSJ, 9 June 2008.

I agree with Willens, there is no substance to this arrangement. Anschutz, pay up.

Sunday, June 22, 2008


"Every few years, it seems like the marketplace produces a 'study' of variable annuities that makes the product look too good to be true--a creative fusion of research and PR. I'm referring to a white paper titled 'Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit (VA+GMWM).' ... This objective evaluation was (as the cover page discloses) sponsored by Nationwide Financial, whose Best of America annuities are among the hottest-selling products in the industry. ... It's helpful to note a few things that aren't made clear in the white paper. First, this account isn't annuitized. Although the distribution is being held constant, the insurance company that sold the rider isn't reaching into its pocket to pay the difference. All the distribution money is still coming from the annuity holder's (diminishing) investment account--ultimately from the pockets of the people who will inherit it. ... Second, there is no inflation adjustment during these periods (in this case seven years plus) when the income is frozen .... And third, for most of these annuities, the yearly cost of the rider is higher than you might think. ... Then comes the part that had me scratching my head. The study assumes a 0.4% mortality and expense (M&E) fee for each year and a GMWB rider fee of 0.6%. Come again. ... What about sales loads? ... Most important, the paper makes no mention of taxes. ... With my eyes still glazed from the spreadsheet, I called Peng Chen, the lead author of the Ibbotson study. He was clearly alarmed at the tone of my questions. 'The M&E is typically a lot higher than what you see in the table.' ... What about taxes? 'We didn't take taxes into consideration.' ... 'I'm not a tax expert,' Chen said, 'but I know the average mutual fund has a 100% turnover ratio. If you're talking about a low-cost index fund, then it's a different story. ... But alas, the sheer number of assumptions that lean favorably to the VA/GMWB rider makes it hard to conclude that it's all just a coincidence", Bob Veres (BV) at Financial Planning, May 2008.

I am surprised Ibbotson Associates, a company I've long been aware of and respected, like BV, put out this paper. Chen should be ashamed of himself. Chen's not a "tax expert". Fine, he should have called one. For a fee, I'm available. BV is correct, M&E for variable annuities averages about 1.5% a year, not 0.40%. These annuities have loads, the money coming out of them is taxed at ordinary, not a combination of ordinary and capital gains rates as mutual funds. Chen, are you learning from Yoshizawa at Moody's, a "structure expert' whatever that is, who knows nothing of the paper she's structuring? The paper is available at Ibbotson's response to BV's criticism is also at the website. In my experience, variable annuities (VA) are an oversold product. Some insurance people I know who sell annuities, refuse to sell VAs and direct their clients who buy other annuities to, drumroll please, buy mutual funds!

The Gold Clause

"People these days fear inflation. We also fear changing rates of inflation. And most of the tools we might use to protect ourselves such as the Treasury Inflation-Protected Securities bond or gold stocks, are imperfect. TIPS are, after all, based on an inflation-measure whose accuracy is itself controversial--the Consumer Price Index. ... Consider an investor in the gold standard era. The dollar was worth $20.67 in gold, and you could, at least in theory, trade your greenbacks for gold at the bank. The gold standard checked a government's willingness to inflate, since it started losing gold when it did so. ... Since investors protected by these clauses [gold] knew that they would get their money back, interest rates were lower. To finance World War I, Washington even inserted gold clauses into Liberty Loans. ... Randall Kroszner, a governor at the [Fed], has studied this period [1933] and has noted that the price went up on most stocks and bonds, even gold-clause bonds, when the Supreme Court eventually validated FDR's action [repudiating gold clauses]. ... The market rally in the spring of 1933 slowed as investors watched FDR fiddle with the dollar and commodities over the course of the fall. In 1934, FDR thought better of it all and fixed the dollar to gold again, albeit now at $35 dollars an ounce. But the abrogation of the gold clause suggested that Washington has no regard for property rights. ... And from then on, the federal government enjoyed wider license to inflate. ... People don't talk more about the damage of monetary uncertainty because that damage is so spread out--harder to discern than, say, a single giant event like the implosion of Bear Stearns. But the old gold clause footnote explains why we may see yet more angst over the [CPI] the TIPS bond, or even LIBOR, the London Interbank rate. We have lost our bearings and our confidence in money generally", my emphasis, Amity Shlaes, (AS) at the WSJ, 5 June 2008.

While generally agreeing with AS, I disagree that "we have lost ... our confidence in paper money". Had we US dollar interest rates would be higher, possibly 20-25% for 30-year Treasuries, not 4.72%. Gold would not be $886, but in the thousands. AS, be patient. Americans misplaced confidence in the dollar will collapse. As to the gold clause, there is no law Uncle Sam will not abrogate if it suits his purpose. Treasury bond buyers, beware. See my 18 November 2007 post.

Saturday, June 21, 2008

Yves Smith on MBIA

Yves Smith (YS) at Naked Capitalism has 18 and 19 June 2008 posts worth reading on MBIA I have nothing to add to, 18, They show how desparate MBIA must be to stay alive and how NY's Insurance Commissioner is reluctant to kill it. 19, Way to go YS!

Hanke Spanks Bernanke-2

"Rice prices have ratcheted up during the past three years. In the last year alone, they've more than doubled, sparking urban food riots in several countries. Politicians have been quick to blame speculators and hoarders. Their blame is misplaced. ... But the blame for the long-term trend of higher prices should be placed upon those who've delivered a weak U.S. dollar. Not surprisingly, those who reside inside the Beltway, including Donald Kohn, vice-chairman of the [Fed] disagree. ... But determining what's behind the escalation in commodity prices involves a principle to which economists universally pay lip service but in practice often ignore: the distinction between nominal prices and relative (real) prices. ... Accordingly, a weak dollar should signal higher commodity prices. ... Other data also suggest that the effect of the gold price on rice prices is roughly proportionate. ... The rice-price problem is a weak dollar problem. Until the dollar strengthens, the nominal dollar prices of rice and other commodities will remain elevated", my emphasis, Steve Hanke and David Ransom (H&R) at the WSJ, 10 June 2008.

I don't know how often I've seen economists unable to distinguish nominal from real prices. John Maynard Keynes wrote, "Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose", Economic Consequences of the Peace, 1920. That one in a million excludes most economists and virtually all members of Congress. See my 31 May 2008 post on Kohn.

Bank Regulation, Sure

"In a move that could provide a glimpse into the future of global financial regulaton, the top finance official in the United Kingdom's resurgent opposition Conservative Party met Friday with the chairman of the the U.S. [Fed] to discuss ways to prevent a repeat of the current credit crisis. ... One solution, which Mr. [George] Osborne discussed with ... Ben Bernanke, is to make banks set aside more capital during the booms, damping their aggression in good times and lessening thier need to pull back so sharply during the busts. ... The problem: Banks magnify booms by increasing their lending activity, and then make the downturns worse by pulling back and trying to rebuild their capital cushions. ... 'In Britian, there is now an urgent debate about how to reform our system of financial regulation,' said Mr. Osborne, who has spoken to other central bankers about the idea. ... Osborne has an increasingly strong platform to propose the idea of requiring banks to set aside more capital. He is in line to be the U.K. Treasury chief if the Conservative Party wins in a general election. ... The idea of implementing countercyclical capital requirements is seeing increasing backing among economists. ... And many economists and bankers believe such programs just won't work. 'It would require central banks to have a very strong idea of where the market should be and what is the correct price for an asset, and that is usually what central banks don't like getting into,' said Giles Moec, a senior economist at Bank of America in London", WSJ, 9 June 2008.

This is more Keynesian nonsense. The Fed can't stabilize the economy, now people want it to stabilize the banking system? Crazy. My answer: end fractional reserve banking.

Friday, June 20, 2008

Vietnamese Dong-RIP?

"Vietnam's Prime Minister Nguyen Tan Dung said last week he is confident the country won't have to devalue its currency. ... The country has been hit by a wave of strikes as it grapples with the impact of seven months of double-digit inflation, which hit an annualized rate of 25.2% in May. The stock market has collapsed as investors switch to gold. Forward currency markets are pricing a further devaluation of the 40% for the dong in the next 12 months. ... Last week, he told economists from J.P. Morgan Chase & Co. and officials from state-owned Bank for Investment and Development of Vietnam, BIDV, that the country remains financially strong. ... The upshot is that despite Mr. Dung's reassurances, Vietnam's economy could be in for another testing week after Friday's new record prices for oil--an important economic component in Vietnam, which imports all its refined oil needs. ... Economists familiar with Vietnam's Communist government say its leaders' reluctance to push up interest rates stems from their wish to ensure a steady supply of cheap money to fuel the expansion of state-owned companies and also to support Vietnam's sagging stock market, which has lost 58.5% of its value since the beginning of the year. ... [T]he State Bank of Vietnam, on Friday began enforcing long-ignored rules prohibiting foreign-exchange agents from selling dollars to Vietnamese who are scrambling to try to protect their savings", WSJ, 9 June 2008.

"Vietnam effectively devalued its currency by almost 2% Tuesday to bring official exchange rates closer to black-market rates, which have fallen sharply as Vietnamese investors buy dollars to escape soaring inflation. ... The central bank ... also increased its main interest rate for dong-denominated loans to 14% from 12% in a bid to tamp inflationary pressure", WSJ, 11 June 2008.

Amazing. Dung sounds like Hank Paulson. When Dung steps down, one can't help but wonder if there's a Goldman Sachs Managing Directorship waiting. The Vietnamese want to support their stock market so do not increase interest rates. Helicopter Ben similarly supports US banks. There's an old Polish saying: "Communist, capitalist, fascist, it all makes no difference. When the Germans and Russians get together it's bad for us". In today's context: "Communist, capitalist, fascist, banker, formerly communist, it makes no difference. When the monetary manipulators are are work, it's bad for the working class". I remember the Brits in 1967 saying they would not devalue the Pound. Sure. See my 27 September 2007 and 12 May 2008 posts.Two days after Dung's speech, Vietnam devalues the Dong by 2%. Not enough. More's coming.

Oceans of Crude?

"John Bartelson, who smokes Marlboro Lights through fingers blackened with tractor grease, may look like an average wheat farmer. He isn't. He's one of North Dakota's new oil barons. Every month, he gets a check for tens of thousands of dollars from Houston company EOG Resources, which drilled two oil wells on his land last year. ... His new wealth springs from the Bakken formation, a sprawling deposit of high-quality crude beneath the durum wheat fields of North Dakota, Montana and southern Saskachewan and Manitoba, The Bakken may give the U.S.--the world''s biggest importer of oil-- a new domestic energy source. ... Best of all, the Bakken could be huge. The U.S. Geological Survey's [USGS] Leigh Price, a Denver geochemist who died in 2000, estimated that the Bakken might hold 413 billion barrels. ... The USGS said in April that the Bakken holds as much as 4.3 billion barrels that can be recovered using today's engineering techniques... Now, companies like EOG are drilling horizontally.. ... Then they pump pressurized water and sand into the hole to fracture the dolomite, making cracks for the oil to seep through", Houston Chronicle, 8 June 2008.

Go EOG, go! At $135 a barrel, what you're doing makes sense. At least to me. Connie Yu, my 2 June 2008 post, are you and your Stanford friends listening?

Thursday, June 19, 2008

Melvyn Weiss and the DOJ Extortion Racket

"When Christopher J. Christie, New Jersey's top federal prosecutor, gave a multimillion-dollar no-bid corporate monitoring contract to John Ashcroft, the former attorney general, it looked like an isolated case of favoritism. Now the [DOJ] has revealed that at least 30 former government officials have been riding the same patronage train. The [DOJ] is increasingly using 'deferred prosecution' agreements for corporate wrongdoers. Under pressure from Congress, the [DOJ] released documents last week showing that of 40 corporate monitors appointed since 2000, at least 30 were former government officials, and 23 were former prosecutors. ... When prosecutors pick people who appear to be cronies ... it raises questions about whether prosecutors are deferrring prosecution because it is in the public interst--or because it creates a rich payday for a friend", Editorial at, 25 May 2008.

"Melvyn Weiss was sentenced to 30 months in prison for his role in a scheme in which he and his partners used kickbacks to gain an advantage in lucrative cases. ... In handing down a sentence near what prosecutors sought--33 months--Judge John Walter noted the seriousness of the offense, which he said involved a 'nationwide conspiracy that continued for decades.' ... Some 275 letters in support of Mr. Weiss before the hearing marked 'a showing that I don't think I've ever seen' on the bench, the judge said. The letters 'attest to the life of an extraordinary man.'... 'Weiss was widely recognized as the king of the plaintiff's securities bar,' said Jacob Frenkel, a former federal prosecutor now in private practice in Maryland. 'He has taken the same fall as the corporate executives who put greed before their shareholders'," Houston Chronicle, 3 June 2008.

The NYT failed to add, "and creates an expected rich payday for the prosecutor when he leaves the DOJ as the system will continue and he'll get his payoff from future deferred prosecutions by future AUSAs". Neat. See my 17 and 31 January, 28 February and 12 March 2008 posts.

This is a joke. One Weiss "crime" was doing the SEC's job for it. This is the thanks he gets. Among other things Weiss was charged with racketeering. Frenkel, how do you analogize Weiss actions to those of a say, Ken Lay or Andrew Fastow? Who is the victim? Another Weiss "crime": Milberg Weiss did not have any $2 million-a-year partnerships to hand out to former AUSAs.

Victim or Co-Conspirator?

"In a ruling that backs borrowers even when they have lied on loan applications, a federal bankruptcy judge held that borrowers who inflated their income to get a loan don't have to pay back a bank because the lender should have noticed a 'red flag' about the deceit. ... Inaccuracies in loan documents have emerged as a factor behind the wave of foreclosure and banckruptcy actions. The Oakland case highlights a debate that has emerged over whether responsibility for homeowner's woes should fall to lenders or borrowers", WSJ, 31 May 2008.

Why is National City Bank (NCC), see my 18 June 2008 post, surprised? Do we really know what went on here? Did NCC expect to sell the mortgage in the market, then got stuck with it, which might explain NCC's failure to investigate the borrower's financial bona fides?

Wednesday, June 18, 2008

Donlan, Welcome Aboard

"What do you call a person who owes more on his mortgage than his house is worth? Some would call him a victim. Many would call him a homeowner in distressed circumstances. Almost nobody observing the current crisis has thought to give his situation its proper name: He is a renter. Such an occupant makes monthly payments to live in a house in which he has no equity", Thomas Donlan (TD) at Barron's, 26 May 2008.

TD, I called these people renters with options to buy, or owners with options to sell in 2005. Welcome aboard. See for example my 14 February, 27 March and 9 May 2008 posts.


"National City Corp.'s banking unit [made] a confidential agreement with the [OCC] ... over the past month or so. ... Under such agreements, which are entered into privately and aren't publicly disclosed, banks are given an opportunity to work with federal regulators to address serious financial problems without triggering alarm among depositors. ... National City was believed to be out of the woods with regulators since it raised $7 billion in capital from outside investors led by buyout firm Corsair Capital. ... A spokeswoman for National City declined to comment, citing company policy of not commenting on rumor or speculation. The OCC is a division of the Treasury Department that regulates national banks. ... [M]emorandums of understanding [MOUs] are considered serious and are fairly rare, though it is even less common for a bank to face a public enforcement action", WSJ, 6 June 2008.

National City's parent is publicly-held National City Corp., NCC-NYSE. Chris Cox (CC), are you listening? I reviewed recent NCC 8-K filings at the SEC's website, and found four: 21 April, 8 and 12 May and 10 June 2008. The instructions to Item 1.01 of Form 8-K govern disclosure of a "Material Definitive Agreement". Instruction B says the Form 8-K should be filed "within four business days after the occurrence of the event".

The 10 June Form 8-K attachment reads, "someone has breached the confidential relationship between National City and our regulators. Given the potential concerns and misunderstandings that this breach could cause for many of our stakeholders, we can confirm that National City entered into [MOUs] with the [OCC] and the Federal Reserve Bank of Cleveland on May 5 and April 29, 2008 respectively". Well, CC, will you look into this? Is this legal? Should you encourage the DOJ to bring criminal charges against the OCC and Fed employees responsible for this, if not legal? Will you do anything? The 10 June filing followed the 6 June WSJ article and was after the four-day filing period ended. To ensure you can't claim ignorance of the situation, I will mail you a letter bringing it to your attention.

Tuesday, June 17, 2008

Asarco Followup-2

"German Larrea, head of Mexico's largest copper-mining company, took the stand in U.S. District Court here [Brownsville] Tuesday, denying charges that he looted U.S. miner Asarco in order to leave the historic company too indebted to pay for environmental cleanup work across the U.S. Mr. Larrea, chairman of Grupo Mexico SA [GMSA], said that the decision to put Asarco in Bankruptcy in 2005 was a 'low-cost solution' aimed at cleaning up Asarco's outstanding liabilities. Mr. Larrea said he never dreamed the bankruptcy process would drag on for years and said U.S. Chapter 11 law was different than in Mexico. ... If found guilty, [GMSA] could pay penalties exceeding $10 billion, including punitive damages. ... According to U.S. environmentalists and some U.S. regulators, Mr. Larrea's overall strategy was to free his company from Asarco's many legal liabilities, while simultaneously seeking to retain the U.S. Unit's most lucrative copper holdings. In 2003, [GMSA] shifted profitable mining interests owned by Asarco into the Mexican parent's other corpoate holdings", my emphasis, Joel Millman (JM) at the WSJ, 11 June 2008.

JM, wake up. Shouldn't Larrea have left the courtroom in handcuffs? What does the DOJ do? It prosecutes Melvyn Weiss, but lets Larrea walk. This case has striking similarities to US v. Switzer, 257 F2d 139 (1958). What is the DOJ waiting for? I think it can walk into the case with Larrea's "admission against interest". A "low-cost solution", means? What can we expect from a DOJ that thinks a $50 million fine will deter BP from future misconduct? See my 1 and 11 June 2008 posts on Asarco, also 22 November 2007 and 6 January, 29 February, 19 March and 13 May 2008 on BP. This looks like another DOJ orchestrated miscarriage of justice.

The Monolines are Dead, the Rating Agencies Should Follow

"It finally happened. One of the major credit-rating firms stripped bond insurers MBIA Inc. and Ambac Financial Group Inc. of their vital triple-A ratings. Thursday [S&P] dropped the bond insurers' ratings to double-A and warned of further downgrades, just one day after Moody's Investors Service warned that it would likely knock down the ratings of the two companies. ... U.S. Treasury's a haven for funds seeking safety, barely saw any buying from worried investors, while the [DJIA] posted a gain of 213.97 points. ... The $2.6 trillion municipal-bond market has been in the process of valuing insured debt based on its underlying rating rather than that of the insurers, also known as monolines. ... Shares of both insurers actually rose after S&P cut them to double-A and warned of further downgrades", WSJ, 6 June 2008.

"Even as Moody's Investors Service was handing out triple-A ratings last year on a huge number of securities tied to mortgages, a senior Moody's analyst involved in rating them was warning about the housing market and asking if the ratings were too optimistic. In late 2006 and early 2007, the Moody's Corp. unit continued to rate new [CDOs] even as the analyst, Eric Kolchinsky, aired his concerns to his colleagues and his boss, people familar with the matter said. ... As the credit crunch drags on, regulators and lawmakers are pressing for answers on why ratings firms gave investment grade ratings to subprime bonds and [CDOs] and didn't respond more aggressively to signs of trouble. ... Kolchinsky, a managing director, was one of many people involved in the discussions. He specifically took his concerns to his boss at the time, Yuri Yoshizawa, a group managing director at Moody's, who said she would take Mr. Kolchinsky's point of view under consideration, according to people familar with the matter. Mr. Kolchinsky wasn't available to comment, according to a spokesman. ... 'We all wanted to downgrade as soon as possible, but we wanted to downgrade based on information we could rely upon,' says Ms. Yoshizawa. For example, she says, the firm studied the performance of each subprme securitization it had rated instead of making what she calls a 'blanket cut.' ... Moody's also might have been seen as doubting its own ratings on subprime mortgages if the CDO group expressed doubts on mortgage-backed CDOs. A Moody's spoksman says that 'vigorous discussion among analysts is encouraged and expected in ratings committees,' so debates about CDOs 'would not be unsual.' He added that 'commerical considerations do not influence our ratings,'" WSJ, 7 June 2008.

It's good S&P works in the public interest. It cut MBIA and Ambac's ratings after the muni bond market concluded their guarantees are worthless. I await public apologies to William Ackman, long-time MBIA nemesis. Right. See my 19 and 20 December 2007 and 17 January 2008 posts. I never "understood" the monolines business, see my 30 October, 8, 18, and 30 November and 8, 13 and 15 December 2007 posts. Apparently the S&P and Moody's geniuses never understood it either. Hey guys, for a mere $10 million I'll "splain" it to you. Waddayasay? I got it: the S&P and Moody's geniuses read Marilyn Cohen's Forbes article, my 16 May 2008 post. Who needs these guys? Shut 'em down.

Why? It's the: fee arrangements, NRSRO designation and public inability to sue the rating agencies (RA) for bad ratings that's why. The RA have the same problem as the CPA industry: lack of user accountability. Moody's says "commerical considerations do not influence" its ratings. What does then? Should we also believe "six impossible things before breakfast", citing the White Queen of Alice in Wonderland? I wonder if it's required reading at Moody's like the Little Red Book was in Mao's China? Yoshizawa wants "information [she] could rely upon". What qualifies? Marilyn Cohen's Forbes article, no doubt. Yoshizawa, the best case I can make for you after this statement and my 9 May 2008 post, is what I said before: you're an overpaid clerk. You said, "We're not underlying asset experts". What then? Kolchinsky, you have a unique opportunity to do well and good at the same time. Approach some venture capitalists for money and set up your own ratings firm. You don't need Moody's. Base your firm on these operating principles: never assert a first amendment defense against users, i.e., stand by your ratings; only accept an assignment if paid in advance, never participate in a "show down"; avoid conflicts of interest like rating mortgage securities and related CDOs. Go get 'em fella. Leave Moody's! Lastly, tell Chris Cox, the RA "cartel enforcer" you expect: an end to the NRSRO designation, or one for yourself. Alternatively, you will see him in court on the the wrong end of an anti-trust case.

Monday, June 16, 2008

The Oil Bubble

"In there an oil bubble that is about to burst? ... At issue are deep disagreements over what is driving the run-up in oil prices. In the search for scapegoats, many on Capitol Hill in the U.S. and elsewhere are now blaming oil-futures speculators, noting the vast cash inflows into commodity index funds. ... Hedge-fund manager George Soros also has chimed in. 'We are currently experiencing the bursting of a housing bubble and, at the same time, a rise in oil and other commodities whch has some of the earmarks of a bubble,' he said Tuesday in prepared testimony before the U.S. Senate. ...Economists who have cited the dollar's fall as a key factor in the rising price of oil now argue that the linkage is set to reverse. ... The main factor cited for sustained high prices is the surprisingly steep fall so far this year in production from some of the world's key exporters, paticularly Mexico, Russia and Venezuela", WSJ, 4 June 2008.

Congress's search for scapegoats continues. Who cares what Soros says? I don't. See my 13 June 2008 post.

Banks Real Estate Woes

"Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums. ... Banks have begun to dump them at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses. ... Banks with swelling portfolios of troubled loans tied to land and housing are struggling to unload some of the real-estate debt. ... Winning bids on many of the [Indy Mac] loans were, on average, about 60 cents on the dollar, according to people familiar with the matter. But some winning bids were only about 20 cents on the dollar. ... The sales are a response to a growing problem: Home builders are falling behind on loan payments, and the value of the land and housing developments that a serve as loan collateral is plummeting. ... The prospect of a new wave of losses worries federal regulators, given the large proportion of loans to housing developers held by many banks and thrifts. The problems are worse at small banks that can't easily absorb losses, and at banks with big exposure in states hard hit by the housing crisis. ... The FDIC's [Shelia] Bair said she would be 'very surprised' if a large bank failed, but added that 'we need to be prepared for all contingencies.' ... 'We've seen a real change in the market,' says Ricardo Chance, a managing director at KPMG Corporate Finance LLC, who is helping troubled builders restructure their businesses. 'Finally the banks are capitulating and saying, "Let's mark to market and flush this all out." The market is going to get worse. We don't want to hold on to this stuff'. ... 'I've been through three cycles, and this is the worst,' says Mark Connal, a vice president at Michael Crews Development, a closely-held Escondido, Calif., builder. 'You can buy brand new homes for less than the cost of construction.'", WSJ, 6 June 2008.

Of course Bair would be "very surprised" if a TBTF bank failed. That meant Helicopter Ben didn't buy enough of the bank's garbage to keep it afloat. KPMG's consulting arm helping builders is good. Has KPMG a conflict of interest? Did Chance warn KPMG's clients of the "housing crisis", 2-3 years ago? Hey Chance, did you short PWC's, E&Y's and D&T's builder clients 18-24 months ago? If not, why should anyone listen to you now? Can KPMG work for a builder if one of its clients, like say Citibank, holds the builder's debt, or are the builders hiring KPMG nuts? Will KPMG face the same issue Arthur Young, that's a name out of the past, did in 1964, with the "Big Skid at Yale Express"? Stay tuned.

Sunday, June 15, 2008

Lacker Lashes Bernanke

"In a striking insider's critique, a [Fed] policy maker said lending programs the central bank has created to combat the credit crisis distort private markets, encourage risky behavior and could endanger the Fed's independence. ... 'The danger is that the effect of recent credit extension on the incentives of financial market participants might induce greater risk taking' a phenonmenon called moral hazard, 'which in turn could give rise to more frequent crises, in which case it might be difficult to resist further expanding the scope of central bank lending.' Mr. [Jeffrey] Lacker said, according to a text of his remarks..... When a central bank makes loans to [investment banks] or accepts their debt as collateral, it 'distorts economic allocations by artificially supporting the prices of some assets and the liabilities of some market participants.' ... Lacker said the Fed has already 'gotten questions from firms saying, "I'd like to take over this other firm. Can you help like you helped with Bear?"' He declined to name or describe the firms, adding, 'We've turned them down' because helping them 'wasn't appropriate'," WSJ, 6 June 2008.

Lacker is naive. What did he think the Fed's job is, if not to support some economic interests at the expense of others? Lacker, when would helping a firm be "appropriate"? Ludwig von Mises wrote of the effects of monetary expansion 80 years ago. Lacker, welcome aboard. Yves Smith has a good 6 June 2008 post about this at I have little to add to her comments.

When All Else Fails-2

"India and Malaysia announced increases in fuel prices, risking higher inflation rates and a backlash from consumers to relieve mounting pressure from subsidies on national finances. ... India raised the retail prices of gasoline and diesel by about 10% to trim growing losses at state-run oil-marketing companies that sell fuel at subsidized rates, lifting prices for the second time this year. New Delhi also scrapped a 5% import tax on curde oil and cut the import tax on gasoline and diesel to 2.5% from 7.5%. In oil- and gas-producing Malaysia, the government made a bigger 41% increase in heavily subsidized gasoline prices. ... The decisions to pass along higher fuel costs were taken despite the threat of higher inflation and possible political unrest", WSJ, 5 June 2008.

When all else fails, governments act rationally, or fall. See my 22, 27, 29 and 30 May 2008 posts. This article's authors, like many other journalists, apparently cannot distinguish "inflation" from relative price changes. I recently saw an interview with Bruce Kasman, chief economist of JPMorgan who couldn't distinguish between the two either.

Saturday, June 14, 2008

A Most Wonderful Paper

I recently read "Fractional Reserve Banking as Economic Parasitism: A Scientific, Mathematical & Historical Expose, Critique, and Manifesto" by Vladimir Z. Nuri (VZN), written 15 March 2005, at I have said similar things since February 1980, when I concluded: gold is money and paper is not. VZN writes, "It may be something like a new 'F=ma' rule of the emerging econophysics field. Some implications of the equation are outlined, derived, and proved. The phenomena of counterfeiting, inflation and deflation are analyzed for interrelations". I recommend VZN's paper highly. At least I agree with virtually all of it, having used similar examples myself. On page 51 VZN writes, "One remarkable idea for a blip-system is one with a totally fixed number of blips", emphasis in original. I examined the implications of a totally fixed money stock system in 1980! Disagreeing with Uncle Miltie, we don't need to increase the money stock 3-5% a year to ensure prosperity. A fixed money stock will work fine.

Helicopter Ben Crashes

Fed "Chairman Ben Bernanke's warning this week about the dollar's steep fall marks the latest step in a Bush administration effort that began in November to use stronger rhetoric to try to prop up the sagging U.S. currency. ... The jawboning marks a shift from just a few months ago, when the Bush administration was seen by many on Wall Street as tacitly approving a weak dollar, which makes U.S. exports more attractive. ... The stepped-up rhetoric comes as the world's economic powers prepare to gather in Japan next week for the Group of Seven meeting. The dollar, along with the U.S. economy, is expected to be a key topic of discussion. ... 'Benign neglect went too far over the past many years,' said Harvard economist Kenneth Rogoff. Policy makers in Washington are 'nervous that there could be another leg down on the dollar,' Mr. Rogoff said, a situation that could exacerbate inflation at home and potentially set off a flight out of dollar assets. The increased focus on the dollar represents somewhat of a gamble by Messrs. Paulson and Bernanke. Their bet is that as the housing crisis subsides and the Fed finishes cutting interest rates, the dollar will climb--making their rhetoric seem like is is having an impact. 'Realistically what has made the most difference is that people now expect the Fed to raise interest rates, or at least not to lower interest rates any more,' said [MIT] economist Kristin Forbes, a former White House adviser. ... Paulson's ... efforts began [in November], when he offered a more vocal defense of the currency by linking it ot the 'long-term strength' of the U.S. Economy. ... In many ways policy makers have no choice but to talk tough on the dollar, said Edwin Truman, a fomer [Fed] official now at the Peterson Institute for International Economics in Washington", my emphasis, WSJ, 5 June 2008.

"Ben Bernanke, in a speech to Harvard's graduating class, drew sharp distinctions between the inflation problem of the 1970s and price surges today. ... Bernanke emphasized differences between the two eras: Overall inflation over the last four quarters, averaging 3.5%, is 'significantly higher than we would like,' but far from the double-digit pace of inflation in the mid-1970s, he said. ... 'Importantly, we see little indication today of the beginnings of a 1970s-style wage-price spiral, in which wages and prices chased each other ever upward,' he said. ... Bernanke also noted that sharply higher productivity growth has been key to the economy's strength over the last decade, helping to heep inflation in check compared to the 1970s", WSJ, 5 June 2008.

"When Paul Volker declared several weeks ago that the world was in a 'dollar crisis,' his successors at the [Fed] made their private disapproval very clear. This week ... Bernanke raised the white flag over Mr. Volker's point by declaring his own public concern 'that the dollar remains a strong and stable currency.' ... The Fed has monopoly power over dollar creation, and concern for its value ought to go without saying. ... The question now is whether the Fed will follow up its new words with action. ... But the Fed chief signaled that he isn't about to tighten monetary policy any time soon because current 'policy seems well positioned to promote moderate growth and price stability over time.' ... The Fed-inspired commodity boom has sent food and energy prices soaring, while wage gains invariably lag. ... The Fed's dollar indifference has sent an inflation shock through those dollar-linked economies. This week alone, we''ve read about price riots in Vietnam, inflation hitting 10.1% in Kuwait, Abu Dhabi contemplatating price or wage controls, South Korean and Indonesian central bankers considering rate hikes, and the Chinese letting the yuan rise ever higher to curb inflationary pressure imported from the U.S. The result has been the largest decline in America's global economic influence since the 1970s. ... Changing the value of the dollar means reducing the supply of, or increasing the demand for, dollars", my emphasis, Editorial at the WSJ, 5 June 2008.

The Fed's assault on the dollar continues unabated. Anyone who believes in Fed "independence" should note the Fed is part of the Bush adminstration. The Fed has "no choice but to talk tough". Got gold? Get more. Rogoff is apparently another economist who doesn't read the newspapers. Hey Rogoff, did you notice the recent prices of: wheat, corn, soybeans, copper, oil, gold, silver, platinum, nickel, lead, iron ore, zinc and natural gas? See my 21 November 2007 post.

Poor Harvard kids, having to hear this nonsense. As for "inflation", it's whatever number Uncle Sam wants it to be. "Productivity" is a residual, less inflation, more productivity.

Ignore anything HB says, see my 9 November 2007 and 27 January 2008 posts.

Friday, June 13, 2008

Another Tobacco "Deal"

"The three major bond-rating firms are set to overhaul the way they collect fees as part of a settlement with New York State's attorney general, Andrew Cuomo. ... Under the Cuomo settlement, which would cover the hardest-hit portions of the mortgage-market, the firms would get paid for their review, even if they didn't end up getting hired to rate the deal. This would mean the firms would get paid even if they were tough. .. The settlement is unlikely to satisfy critics who have urged that bond-rating firms stop being paid altogether by bond issuers or that the firms be permitted to rate any deal they choose, regardless of the whether the issuer cooperates. ... The decision not to seek fines from the three major bond-rating firms ... shows [Cuomo] believes investor confidence can be shored up without an all-out attack on the bond-rating industry", my emphasis, WSJ, 4 June 2008.

"An agreement between New York state Attorney Geneal Andrew Cuomo and the three major bond-rating firms will overhaul the way they collect fees and aims to improve the way mortgage-backed securites are rated. ... Moody's Corp. Chief Executive Raymond McDaniel, at a separate briefing, said the settlement is a 'very constructive development' for bond-rating firms and an 'important step' for 'restoring confidence' in the credit markets. ... Mr. Cuomo's settlement ... does deal with what many critics say has been a chronic problem with bond ratings: They are paid for by the entities being rated. ... Under the accord, the firms would get paid for their review, even if they aren't hired to rate the deal. That is designed to make ratings firms less reliant on getting the ratings assignment from bond issures. Ratings firms will also have to disclose the fees they collect in these securities. ... The settlement also requires that rating firms review due-diligence reports on loans that go into the securities in an effort to better equip them to understand what is in the mortgage securites they are rating. ... Christopher Cox, chairman of the [SEC] said in a statement: 'I am most appreciative of the efforts of the Attorney General Cuomo and his staff to consult with the Commission and coordinate their efforts in a way that is consistent with the Commission's pending rulemaking for credit-rating agencies'," my emphasis, WSJ, 6 June 2008.

This deal stinks. It will not fix the ratings agencies. See my 10 June 2008 post, Bert Ely's got the right idea. The "deal" reminds me of the tobacco industry "settlement", that cost the tobacco industry nothing, but cartelized it. Few people understand the tobacco industry deal was in substance, a group of state attorneys general levying an excise tax on cigarettes. I remember reading a good analysis of the deal by a Stanford University law professor in the WSJ.

There is nothing in Cuomo's settlement for investors. Consider McDaniel's comment, it's a "very constructive development" for Moody's. I agree, McDaniel, that's exactly why it's of no help to investors. Further, the defender of investors' interests, Chris Cox endorsed it. 'Nuff said.

Commodity Scapegoats

"In the political quest to place blame for high food and energy prices, a new scapegoat has been found: commodity index funds [CIF]. Politicians of both parties, energy company executives and farm lobbying organizations all agree these funds should be regulated or prohibited altogether. ... Nevertheless, it was reported over the weekened that the CFTC will likely bow to political pressure, and soon announce initiatives to crack down. ... [CIF] are especially vulnerable politically. ... [CIF] do what index managers like Vanguard have done for decades with stocks,--invest passively in a portfolio designed to track a published benchmark index. ... And such causation that can be shown to exist actually runs the other way: Rising commodites prices cause the dollar value of [CIF] to rise, just as rising stock prices would make a stock index fund more valuable. ... In the absence of rigorous evidence, are there theoretical reasons to expect that [CIF] should affect prices? Yes, if only that when new buyers enter a market they can be expected to drive prices higher, all else being equal. ... But of all investors, index funds should have the least power to move prices. ... With increasing demand from emerging economies, the dollar near all-time lows, and the [Fed] holding interest rates below the rate of inflation, surely we can come up with better explanations for high commodity prices than the growth of [CIF]. Sadly, those better explanations are more difficult to swallow politically", Donald Luskin (DL) at the WSJ, June 2008.

DL's got it!

Thursday, June 12, 2008

Rating Agency Death Watch

"When [S&P] lowered its ratings on $34 billion of so-called Alt-A mortgages Wednesday, the firm's largest downgrade of that type of debt and one that some strategists see as a harbinger of other rating actions in the sector, it was hardly a blip on investors screens. Jaded by endless downgrades and revisions to the very methodology and assumptions that the firms use the assess risk, most market participants have simply tuned out the rating firms", WSJ, 31 May 2008.

Now that people ignore the rating agencies, next they will ask that securities not be rated. Why waste the money? See my 13 and 19 December 2007 and 4 March 2008 posts. Also my 16 May 2008 post referring to Marilyn Cohen of Forbes.

Toothless SEC-5

"The [SEC] reached a settlement with Analog Devices Inc., in which the company agreed to pay $3 million to settle charges that it backdated stock options grants to executives, directors and employees. ... In addition, Analog's chief executive Jerald Fishman agreed to settle the case, without admitting or denying wrongdoing, and will pay $450,000 in proceeds from option sales and interest as well as a $1 million fine. ... The decision likely means the SEC won't charge other companies with spring-loading, which has been controversial from the start. SEC Commissioner Paul Atkins, a Republican, in a July 2006 speech, defended the practice as a legitimate and low-cost way for boards to efficiently compensate executives. He rejected the idea that such awards amount to trading on inside information. In a statement, Analog Devices noted it neither admitted nor denied the SEC's allegations and said it didn't have to restate financial results", my emphasis, WSJ, 31 May 2008.

Another SEC triumph. Close the SEC Enforcement Division. Who needs it? That an SEC Comisisoner could not see that "spring-loading" is trading on inside information is beyond me. Imagine, Martha Stewart's "insider trading" case involved about $53,000; for which she went to prison. Fishman made $450,000 from this which he refunded and paid a $1 million fine. How nice. Analog Devices has a $10.3 billion market cap and made $466 million last year. The $3 million it paid, .0064 of last year's income was probably less than it's legal fees.

Wednesday, June 11, 2008

Asarco Followup

"Highlighting the growing global clout of companies from emerging markets, India's Vedanta Resources, PLC reached a $2.6 billion deal to purchase the assets of a bankrupt U.S. copper miner, Asarco LLC, people familiar with the transaction said. ... Groupo Mexico [GM] said it will challenge the sale. ... Jorge Lazlade, vice president and general counsel for Asarco Inc., the [GM] entity that is the nominal owner of Asarco LLC denied the asset-stripping claim and said the suit was a legal tactic designed to damage [GM]", WSJ, 31 May 2008.

I wish Vedanta well with its new acquisition and hope it wipes the legal floor with GM. See my 1 June 2008 post.

US Air Force-RIP

"Defense Secretary Robert Gates ousted the Air Force's [AF] two top officials after a series of gaffes, including accidentally shipping ballistic-missile fuses to Taiwan and flying a nuclear-laden B-52 over the U.S. ... The immediate trigger for the resignations of [AF] Secretary Michael Wynne and Gen. Michael Moseley, its chief of staff, was the March disclosure that the [AF] had accidentally sent four ballistic-missile fuses to Taiwan 18 months earlier, a discovery that infuriated Chinese officials. ... Speaking to reporters at the Pentagon, Mr. Gates said the Taiwan incident represented 'a significant failure to ensure the security of sensitive military components' and was part of 'a pattern of poor performance' by the [AF]. ... Beyond the gaffes, the firings are the culmanation of a broader dispute between Mr. Gates and the [AF's] leadership over the service's strategic direction. The biggest source of tension has been the [AF's] insistence on buying hundreds of expensive, state-of-the-art F-22 fighter jets, made by Lockheed Martin Corp., despite opposition from Mr. Gates, who has argued that the planes aren't needed for prosecuting America's current wars. The U.S. hasn't deployed F-22s in Iraq or Afghanistan. ... Advocates of the F-22, which costs $140 million apiece, say the U.S. needs to be prepared to fight conventional wars against big powers such as China and Russia. [AF] officials say that, because of the lead time required to build advanced jets, it makes sense to buy them now to ensure they're available when needed. That argument rankles Mr. Gates and his top aides, who have privately belittled it as 'next-war-itis.' ... Gates privately rebuked the officer, Gen. Bruce Carlson, for signalling that the [AF] would buy 381 of the planes, rather than the 183 called for in the the [DODs] 2009 budget. The [AF's] aggressive advocacy tested the service's traditonal deference to the defense secretary on such matters", my emphasis, WSJ, 6 June 2008.

"President Hamid Karzai angrily charged the [US] with being cavalier about Afghan lives during a year in which the number of [AF] bombs dropped in Iraq and Afghanistan increased to 5,019, from 371 in 2004. Similar complaints have come from Iraqi government officials as the [US] has increased airstrikes targeting insurgent bomb-making factories, safe houses, and weapons stockpiles. ... With that emphasis must come caution to avoid killing or wounding civilians, officials [in Afghanistan] add. In the [AF's] counterinsurgency-driven combat operations, casualty avoidance can be the targeting team's most time-intensive task. Says one military official: 'We're definitely in quality-control mode, especially for Afghanistan.' ... Among the 50-plus troops analyzing intelligence on the floor of the combat operations center, there's a military lawyer on hand around-the-clock. ... 'And yet it's war,' says [AF] attorney Col. Bill Carranza, the chief JAG here. ... Some U.S. Army officials complain, though, that the [AF] is too cautions and that measures to avoid civilian casualties may increase the danger to U.S. troops. The Combined Air Operations Center 'is a bureaucracy really in charge of covering its ass,' says one Army general. 'To make sure there are no [AF] prints on anything.' " my emphasis, US News & World Report, 9 June 2008.

Congratulations Hank Paulson (HP); you now run the Defense Department (DOD) too. Weren't you Goldman Sachs (GS) point man on China? For decades generals are accused of fighting the "last war". Now we have some fired for worrying about the "next war". Amazing! Gates, have you any guts? Tell your boss, HP, "go to hell". The DOD does not exist to ingratiate itself with China, or a bunch of bookkeepers. Or are you this stupid? Do you think airplanes are as simple to make as toasters? "Our" SecDef is more concerned with Bush's budget fictions than national security. Gates, you're the US Secretary of Defense, not George Bush's personal aide. Got it? You work for all 302 million of us, not George Bush. I'd rather see the AF spend $140 billion buying 1,000 F-22s than waste it in Iraq and Afghanistan. Who is Gates? He was a member of James Baker's (JB) Iraq Study Group. Imagine, Bush elevates one of JB's cronies to SecDef. Why?

Yes, "measures to avoid civilian casualties" will "increase the danger to U.S. troops". What don't we understand? If WWII was fought this way, as Michael Savage said many times, "You'd be speaking German or a lampshade". The contempt in which the DOD holds American blood appalls me. Disagreeing with you Carranza, you are not fighting a war, you're a cop, a clerk, or a district attorney concerned about "excessive force" cases. A policeman should always be aware of his backstop before firing his weapon, but a soldier at war? Amazing! Poor soldiers, poor marines!

Tuesday, June 10, 2008

Financial Reforms

"The demands for more government regulation of financial markets are growing louder and more insistent in the wake of the housing meltdown. ... But it is naive to expect the Fed to be an omniscient predictor of financial trends. It is even more naive to think that the Fed would have the political will, and clout, to neutralize potentially destabilizing forces before they cause financial havoc. ... Securitization distances a bank from the consequences of bad lending and not charging enough for credit risk. ... [Some key changes]: Encourage banks to use 'covered bonds' to fund--and hold onto--the fixed-rate mortgages they originate. ... Those longer maturities would reduce maturity mismatching, which was the underlying cause of the U.S. S&L fiasco and more recent problems in the financial markets. ... Eliminate the double taxation of dividends. ... Modify fair-value accounting rules. ... When assets and liabilities have roughly the same maturities, changes in their market values largely cancel each other, making fair-value accounting pointless. ... Hold bond-rating agencies more accountable for their ratings. ... These agencies have successfully invoked the First Amendment to protect themselves against lawsuits when their ratings have been widely wrong. Elminating that protection when a securities issuer has paid for a rating would make the agencies extremely reluctant to rate complex, opaque securities whose performance is subject to nearly incomprehensible variables", Bert Ely (BE), at the WSJ, 31 May 2008.

I remember when BE testified in front of Congress in 1983 about the S&L crisis. It didn't believe him. I see BE as one of the few people who understood the S&L crisis at the time. I agree with all of BE's suggestions except modifying fair-value accounting rules. If banks match maturities, the fair value accounting entries to be made will be minimal. However, to suspend the rule would invite abuse.

A New Religion

"One of the least noticed and most peculiar campaign promises made by Barak Obama is his pledge, if elected president to 'secure all loose nuclear arsenals in the world within four years.' Without doubt that is a laudable goal, but one is left wondering how exactly he expects to accomplish it in four years, or even, for that matter, in 40. One of many obstacles is that our intelligence agencies seldom know where loose nuclear materials are, especially when they are hidden on the territory of hostile states. An even bigger problem is that when we do locate them, there always will be some expert or another telling us that, despite all the the evidence, they are not really there. Obama, of all people, should know this. ... Interviewed by Seymour Hersh of the New Yorker after the Israeli raid, [Joseph] Cirincione was emphatic: 'Syria does not have the technical, industrial or financial ability to support a nuclear waepons program. I've been following this issue for 15 years, and every once in awhile suspicion arises and we investigate and there's nothing. There was and is no nuclear weapons threat from Syria. Thanks to materials made public by the U.S. on April 24, we now know that the facility at Al Kibar was a nuclear reactor and that it had been built with North Korean assistance. ... Cirincione has admitted he got it wrong, explaining that the evidence 'seems strong' that Syria was building a nuclear reactor and that no one can bat 1,000. ... Experts, like generals, have a tendency to fight the last war. ... Cirincione is now the president of an outfit called the Ploughshares Fund, a foundation dedicated to funding advocates of arms control negotiations around the world. To him and his fellow members of the arms control creed, the admission that North Korea was illicitly shipping nuclear technology abroad--and that a country such as Syria, a signatory to the Nuclear Nonproliferation Treaty, had been caught in a brazen violation of its commitments--might be taken as an acknowledgement that the arms control regime on which they have staked their reputations and dedicated their lives has failed utterly", Gabriel Schoenfeld (GS) at http://www.latimes,com/, 24 May 2008.

Right on GS. Arms control has been a Western fantasy since at least 1922's naval limitation treaty. It is a fraud and the US should grow up and not engage in arms control negotiations. It seems arms control is in part, a result of the "legalization" of foreign policy by Woodrow Wilson. What's not to know? That say, Adolph Hitler lied about Rhineland militarization? That he built the Luftwaffe clandestinely? What's not to know about North Korea's nuclear reactors or Iran's 9,000 operating centrifuges?

Monday, June 9, 2008

Vioxx and the Courts

"A Houston appellate court Thursday overturned a $26 million Angleton jury finding that a 59-year-old triathalete died because of his use of the popular painkiller Vioxx. The 14th Texas Court of Appeals ruled that Bob Ernst's widow, Carol Ernst, should receive nothing because the more than one month of testimony in the nation's fist Vioxx trial contained insufficient evidence to prove the drug caused his heart problem and death. ... [Carol] Ernst ... said that trust took a big blow Thursday, and she feels she was naive about both corporate power and judges. ... Earlier this month, an appellate court in San Antonio overturned a $32 million jury award to a widow in South Texas who claimed her husband had died of a heart attack because of Vioxx. 'We are gratified that the Texas appeals court correctly found that Vioxx did not cause Mr. Ernst's death and reversed the previous decision for the plaintiff in the first Vioxx case to go to trial,' Bruce Kuhlik, general counsel for Merck, said in a news release. ... Jon Skidmore, a Dallas-based Fulbright & Jaworski attorney ... said 'The court found certain expert testimony by Mrs. Ernst's experts was possibility, speculation and surmise. They didn't find that to be reliable science.' ... Mark Lanier ... [Ernst's attorney] said Thursday he will appeal all the way to the U.S. Supreme Court, if necessary. 'It's pretty rare for an appellate court to take the place of the jury and the trial judge like that,' said a disappointed Lanier. 'Appellate courts in Texas have a reputation of standing up for corporate executives over and against widows and orphans. I'm sure the champagne corks are popping in New Jersey at Merck.' ... Ernst ... said she's been naive about the power of corporations and about how active citizens need to be in electing judges", Houston Chronicle, 30 May 2008.

"Texas and New Jersey may have different political cultures, but appeals courts in both states this week delivered a one-two punch to the liability suits against Merck for its Vioxx painkiller. ... The rulings are evidence that some sanity still exists in the tort system--at least at the appellate level. ... This week's verdicts are especially important in the message they send regarding federal pre-emption, the topic of a pending case at the U.S. Supreme Court. ... For drug makers to submit both to the long and expensive FDA approval process and tort suits after approval amounts to a kind of business double jeopardy", editorial at the WSJ, 31 May 2008.

"Carol Ernst, whose 59-year-old husband Bob died of heart problems after taking the drug Vioxx for nine months, must be wondering what it takes to win a verdict in a damages suit these days. ... On Thursday, a three-judge appellate court panel in Houston found that the expert testimony presented in the trial on behalf of the plaintiff did not prove Vioxx caused his death. The judgment was overturned, and Ernst will receive nothing. She and her lawyer, Mark Lanier, intend to appeal. ... More and more Texans are learning that trust is misplaced in a court system inclined at the higher levels to protect the interests of business over consumers. ... Rather than encouraging Merck to do what's right, the 14th Court's decision in the case risks emboldening the company to rely on judicial friends in high places to overrule judges and send widows home empty-handed", my emphasis, Editorial at the Houston Chronicle, 1 June 2008.

What evidence would these three "jurists" think sufficient? Kuhlik's affidavit that Vioxx caused Ernst's death? Was Carol Ernst (CE) naive. Another instance of "jurists" usurping the power of the jury. CE and Mark Lanier (ML), let's see if we can recall these "jurists"for judicial misconduct. Don't they take an oath to uphold the US Constitution? Did they ever hear of the 7th Amendment? This appellate decision is disgusting. Skidmore talks of "reliable science". Does that mean whatever Merck's experts say it is? On what basis did the "Vioxx Three" assess evidence credibility? I thought juries do that. Naive me. Having been involved in four lawsuits in my life, I can swear, what really goes on ain't what I saw on the 1957-66 "Perry Mason" show. ML, have I got news for you: appellate courts overturn jury findings of fact every day. Good luck with your appeal. Full disclosure: I have never owned Merck nor had a short position in it.

No, WSJ, the one-two punch was delivered to the 7th Amendment. Double jeopardy? That only applies in criminal cases. Even there, the concept of "dual sovereignity" applies. Huh? A bank robber may be charged by the state and federal government for the same action. Similarly a street level drug dealer. Why is an incorporated drug dealer exempt from state tort suits? This is one of the worst pieces of WSJ special pleading I've read in a long time. Get out your crying towel for Merck. The most I can see is: FDA "approval" is just expert opinion which is admittable for jury consideration, like other expert opinion. That drug companies can use FDA approval to immunize themselves against lawsuits is insane in my opinion. On what basis can the FDA grant sovereign immunity? This is another example of Bush adminstration ignoring state's rights when it suits big business. I have no more confidence in the FDA than the SEC, OFEHO or the DOJ.

I agree with the Chronicle. ML, if you want to win your appeal, figure out how to frighten the Texas Supreme Court into reinstating the verdict. The facts and law in your appellate brief won't matter. Saying stuff like "clearly erroneous standard" may sound nice in law school, but in the real world means nothing. If the judges who hear the case believe their failure to reinstate the verdict will make the public lose faith in "the system" they will reverse and figure out their rationalization later. That's the way it really works as Oliver Wendell Holmes taught us.