Thursday, July 31, 2008

Financial Firm Regulation

"Only in the weird world of Washington are mistakes rewarded with major new responsibilities. After mismanging both housing loans and the dot-com mess, the [Fed] may now become responsible for supervising investment banks. ... History shows that the [Fed] is a poor supervisor and regulator. ... During the 1980s Latin American debt crisis, the Fed worked with the International Monetary Fund to hide losses of banks. This mistaken policy continued until management at Citicorp chose to writeoff its losses. Other banks followed. Later the Treasury negotiated a reduction in the debt and an end to the crisis. ... So what can taxpayers expect from an increase in the Fed's discretionary authority over investment banks? The likely answer is rescues, delays and lax supervision--followed by taxpayer-financed bailouts. Through its post-war history, the Fed has responded to the interests of large banks and Congress, not the public", Alan Meltzer (AM) at the WSJ, 16 July 2008.

"Financial companies are calling for greater coordination among central banks, stronger industry risk-management practices and beefed-up market monitoring as ways to restore confidence in the stuggling markets and prevent future crises. ... The recommendations are part of a 200-page report in which global finance companies have laid out specific actions the industry should take to aid troubled markets. ... Joseph Ackerman [of] Deutche Bank AG's board ... [said] 'We acknowledge that there were serious weaknesses in the business practices of a number of firms, which contributed significantly to broader problems in the financial-services industry and the economy as a whole. ' ... The IIF's report also urges central banks to continue to make use of new liquidity-boosting programs ... 'Having "permanent tools" intended to facilitate market liquidity would help ensure that liquidity-supporting measures are available when market conditions determine they are needed', the report said", WSJ, 18 July 2008.

"'Our regulators have been lax in their enforcement of existing capital rules,' says Daniel Alpert, managing director at Westwood Capital. Potential losses in this crisis are far larger [than in the S&L crisis], with estimates of $1 trillion or more being bandied about. ... If regulators wait too long to clean up the mess, the U.S. starts to resemble Japan in the 1990s, allowing 'zombie' banks to shuffle along, unable to raise capital or lend while the economy lingers in purgatory. ... Any taxpayer solution will only worsen already troubling fiscal problems. But that's the price for a system that--as New York University economist Nouriel Roubini and others put it--privatizes profits and socializes losses", WSJ, 21 July 2008.

"The events of the past few weeks leave U.S. policy makers at a crossroads in a long-running debate about how to police financial markets. ... 'What we have here is obviously very dynamic markets that have the ability to run circles around regulators and they have an incentive to exploit every possible opening there is for regulatory arbitrage,' says Raghuram Rajan, a University of Chicago economist who sounded alarms about he excesses building up in the financial system back in 2005. One of the most important, and least talked about, needs for overhaul, is making sure that bankers have the right incentives: for example, in their own compensation, to ensure they don't push their institutions to extremes", my emphasis, Jon Hilsenrath at the WSJ, 21 July 2008.

"Angelo Mozilo was in one of his Napoleonic moods. It was October 2003, and the CEO of Countrywide Financial was berating me for the [WSJ's] editorials raising doubts about the accounting of Fannie Mae. I had just been introduced to him by Franklin Raines, then the CEO of Fannie, whom I had run into by chance at a reception hosted by the Business Council, the CEO group that had invited me to moderate a couple of panels. Mr. Mozilo loudly declared that I didn't know what I was talking about, that I didn't understand accounting. ... Any editor worth his expense account makes enemies, and complaints from CEOs, politicians, and World Bank presidents are common. ... Raines reacted with immediate fury, denouncing us in a letter to the editor as "glib, disingenuous, contorted and irresponsible,' and that was the subtle part. He turned up on CNBC to say , in essence, that we had made it all up because, we didn't want poor people to own houses, while Freddie issued its own denunciation. The companies also mobilized their Wall Street allies, who benefitted both from promoting their shares and from selling their mortgage-backed securites, or MBS. The latter is a beautiful racket, thanks to the previously implicit and now explicit government guarantee that the companies are too big to fail. ... I also received several interventions from friends and even Dow Jones colleagues on behalf of the companies. But I was especially startled one day to find in my mail a personal letter from George Gould, an acquaintance about whom I'd written a favorable column when he was Treasury undersecretary for finance in 1988", Paul Gigot at the WSJ, 23 July 2008.

I agree with AM, a professor at Carnegie Mellon.

The report is nothing more than a plea for continued central bank support of investment banks. All the rest of it is cloaking rhetoric. What are the market conditions in question? Whenever the investment banks get overextended? Adopting this report means more inflation.

I agree with Roubini.

I agree with Rajan, see my 1 July 2008 post for a suggestion.

Was Raines indicted for securities fraud? Why ask? The SEC and DOJ are sick jokes. In April 2008, Raines settled with the SEC for peanuts, see my 27 April 2008 post. And the DOJ can incarcerate Craig Giles. What a country.

Let the Market Decide, Even in Law?

"The judiciary is becoming an important election issue. ... The idea of a 'living Constitution' long has been popular on the political left. ... However, many Republicans, like Mr. McCain, are just as result-oriented as their Democratic opponents. They only disagree over the result desired. ... Yet, even as Republicans support and defend the Second Amendment, they ignore the Constitution when it says that only Congress can suspend habeas corpus, and then only in event of an invasion or rebellion. ... In his May 2008 speech on judges at Wake Forest University, Mr. McCain taked about the importance of 'the constitutional restraint on power', but in practice he recognizes no limits on government or executive branch authority", Bob Barr at the WSJ, 17 July 2008.

"Folks fret about trial lawyers. Are they the lawyers we should really fear? The attacks on trial lawyers continue, with recent reports of punished and jailed consumer-protection lawyers. The attackers fear that all lawyers protecting consumers go too far, but cite the successful prosecutions of extremist trial lawyers, brought to justice and punished by the court system created by our founding fathers. The trial system works on accountability. ... The lawyers we should fear are the government lawyers of the executive branch, operating with no accountabilty, in secret, authoring memos justifying widespread eavesdropping on Americans at home without warrant or legal permission of any kind. ... We should fear the Texas Attorney General's Office lawyers who approve vague standards that invite lawsuits. ... We should fear the state of Texas attorneys who take mandates by our Legislature for teacher pay raises and then force local school districts and taxpayers to pay for those mandates. ... In the teacher pay-raise decision, the Texas attorney general refused to address consitutional issues", my emphasis, Barbara Radnofsky (BR) at the Houston Chronicle, 20 July 2008. The link:

I agree with Barr, Libertarian presidential nominee. McCain has no concept of law. He's all the Constitutional scholar Obama is. That Republicans favor "result-oriented" judges is evidenced by Roberts' and Alito's recent appointments.

BR, a Houston attorney, writes, "the attackers fear that all lawyers protecting consumer go too far". No, the attackers represent corporate interests. That's all there is to it. Trial lawyers are accountable. If they take senseless cases, they lose money; unlike corporate defense lawyers paid by the hour. Think about it. I agree we should fear government lawyers. They have "sovereign immunity". What a racket. They can work for the DOJ for a few years, all the time armed with the most important power in their arsenal: the power NOT to indict. Why is this so important? Because it facilitates their getting lucrative positions when they leave government "service". What's Benton Campbell (BC) doing with his "Bear Stearns Two" prosecution? Is BC looking to identify all the miscreants involved in the production and distribution of the "financial heroin" these guys sold? Or to identify two scapegoats to protect the real powers that be? See my 22 October 2007 and 1 February 2008 posts about Ben Stein. Nothing that comes out of the legal system should be taken at face value.

Wednesday, July 30, 2008

London Banker on Covered Bonds

"Whenever Henry Paulson at Treasury, Ben Bernanke at the Fed and Sheila Bair at FDIC agree on anything, American taxpayers should check their wallets to see if they are being mugged. As a result, my eyebrows rose a bit when these three started pressing in concert for covered bond issuance in US markets some weeks ago. ... Last week the FDIC released a policy statement on covered bonds that provides for 'expedited release of collateral' if an issuing bank is taken into FDIC receivership or liquidation. ... Several of the central players in the recent market dramas--particularly those investment banks and hedge funds on close terms with Mr. Paulson (naming no names, but initials GS comes to mind)--will go strong and aggressive for the covered bond market. ... When the troubled bank nonetheless fails, our golden circle creditors get the good collateral in an expedited release from the FDIC under its new policy statement. ... Covered bonds will be used to render profitable assets off soon-to-be-bankrupt corporates, leaving pensioners and other creditors with the stripped carcass in the liquidation. ... Am I too cynical?", London Banker (LB) at, 25 July 2008.

Thank you LB, this has bothered me for weeks. No, you're not too cynical. You explained it all. I concluded Grupo Mexico did this in the Asarco bankruptcy, see my 17 June 2008 post. Switzer in 1949 made a "good bank-bad bank" split which was found criminal, see my 1 June 2008 post. For a good explanation of a "bust out fraud" read US v. Muhammad, 53 F3d 1426 (7th Cir., 1995). Footnote 1 on page 1430 states, "In general, a 'bust out' scheme involves the planned fraudulent establishment, operation, and demise of a seemingly legitimate business for the purpose of defrauding the business' trade creditors. ... The scheme, described as a 'form of planned bankruptcy,' .... is meant to leave 'the mulcted creditors ... to pick over the meatless carcass of an assetless enterprise'." A bust out fraud can also start with an existing legitimate, but troubled business. I see "covered bonds" as the latest incarnation of MLEC. Remember Paulson's MLEC scheme which fell apart? See my 14 October and 22 December 2007 posts. In MLEC, a bank would put bad assets into an SIV to get them off its balance sheet and let the SIV collapse. Now Paulson et. al., reverse the process and take the good assets out of the bank and put them in a "SIV" and let the bank fail. See also my 20 June 2008 post referring to an old Polish saying.

Oil Shale

"By some estimates, U.S. oil-shale reserves could yield 800 billion barrels of oil, triple the proven reserves of Saudi Arabia. ... Oil shale's fortunes have risen and fallen before. Interest spiked in the 1920s, the 1950s and the 1970s as high oil prices made oil shale's challenges seem worth trying to overcome. When prices fell, the investments dried up. ... Industry leaders argue that the price collapses that undermined previous efforts won't be repeated this time because of rising demand for oil from India and China and the increasing difficulty of finding new supplies. ... 'We can technically put a man on Jupiter,' says Houston investment banker Matthew Simmons, a well-known proponent of the theory that global oil production may have already peaked. 'Being technically practical and technically possible are two very different things.' ... But Shell's process is complicated. The company plans to insert electric heaters hundreds of feet into the ground to heat the oil shale to between 650 degrees and 700 degrees for more more than two years. ... 'We understand there are skeptics,' says Shell Vice President Terry O'Connnor. The company says it won't decide whether its project is commerically feasible until the middle of the next decade. ... ", Ben Casselman at the WSJ, 18 July 2008.

Oil shale is like uranium, subject to a high oil price to make its economically feasible. I wish Shell good luck with its "in situ" process.

Tuesday, July 29, 2008

The Button Men

"Bruno and Iacono were indicted along with 86 others for a conspiracy to import, sell and possess narcotics; some were acquitted; others, besides these two, were convicted, but they alone appealed. ... The evidence allowed the jury to find that there had existed over a substantial period of time a conspiracy embracing a great number of persons, whose object was to smuggle narcotics into the Port of New York and distribute them to addicts both in this city and in Texas and Louisiana. This required the cooperation of four groups of persons; the smugglers who imported the drugs; the middlemen who paid the smugglers and distributed to the retailers; and two groups of retailers--one in New York and one in Texas and Louisiana--who supplied the addicts. ... The evidence did not disclose any cooperation or communication between the smugglers and either group of retailers, or between the two groups of retailers, or between the two groups of retailers themselves; however, the smugglers knew that the middlemen must sell to the retailers, and the retailers knew that the middlemen must buy of importers of one sort or another. Thus the conspirators at one end of the chain knew that the unlawful business would not, and could not, stop with their buyers; and those at the other end knew that it had not begun with their sellers. That being true, a jury might have found that all the accused were embarked on a venture, in all parts of which each was a participant, and an abettor in the sense that the success of that part with which he was immediately concerned, was dependent upon the success of the whole", my emphasis, US v. Bruno, 105 F2d 921, 922 (2 Cir., 1939) reversed on other grounds at Bruno v. US, 84 L ed 257 (1939).

"John Nathanson, one of the federal prosecutors handling the securities-fraud case against two former Bear Stearns hedge-fund managers, is being promoted to a supervisory position in the U.S. attorney's office in Brooklyn, N.Y. ... Before joining the government, he spent seven years at Manhattan law firm Rogers & Wells, which is now part of Clifford Chance LLP, where in the late 1990s he helped defend Merrill Lynch & Co. in civil and regulatory matters for the bank's role in a copper-market manipulation scandal", WSJ, 18 July 2008.

"Federal prosecutors Friday said they may seek additional charges against former managers of two Bear Stearns Cos. funds who were indicted in June ocver the collapse of the funds last year. At a hearing in Brooklyn Friday, [AUSA] Patrick Sinclair said the government was anticipating the possibility of additional charges against Ralph Cioffi and Matthew Tannin, the former managers of two high-profile bond portfolios in Bear Stearns's asset-management unit. Superceeding indictments are often filed to add new charges, additional counts, expanded allegations or even new defendants", Chad Bray at the WSJ, 19 July 2008.

Why cite a 69-year old narcotics conspiracy case? Because, giving Benton Campbell (BC), the benefit of the doubt, our EDNY US Attorney, did not use this type of "thinking" in the Bear Stearns Two (BST) case, my 3 July 2008 post. I see them at worst as being two "button men". Who didn't the DOJ indict? Why? Stupidity, or worse? Who originated the "product" C&T sold? BC seems to be trying to portray C&T as big time swindlers. I say of who? BC, are you familiar with West's criminal law key 772(5), the "wilful blindness" or "ostrich" instruction? Well? I can see it now, co-conspirators showing up in court as crime victims. What a country.

Good boy Nathanson. Now roll over and play dead. Beg. Good boy. I await the BST case second superceeding indictment to see who and what will not be named co-conspirators.

I await new defendants in the BST indictment. This may be a DOJ charge "pile on" in the hope of forcing the BST to plead guilty to something. The article was titled, "Bear Stearns-Case Charges May Grow". This reminded me of Pinocchio's nose. How strange Uncle Sam is. We will spend billions, possibly hundreds of billions to bail out Fannie and Freddie and Franklin Raines was not indicted for anything.

William Poole on Freddie and Fannie

Yves Smith (YS) has a good 27 July 2008 post at Naked Capitalism referring to William Poole's NYT op-ed proposing the US kill Freddie and Fannie. Here's a link to YS's post:

31 More Years?-2

"Credit-rating firms put profits ahead of quality controls as they sought to keep up with the surging growth of mortgage-related debt products in recent years, a [SEC] report released Tuesday showed. ... The 10-month examination uncovered poor disclosure practices, a lack of policies and procedures guiding the analysis of mortgage-related debt, and insufficient attention paid to managing conflicts of interests, the report said. The review also found that analysts performing the ratings often were cognizant of the fees the firms would make and there 'does not appear to be any internal effort to shield the analysts ' from discussions about fees. ... At least one firm struggled to maintain enough staff to ensure high-quality ratings. Two analysts at one rating firm were concerned about whether they should rate a deal, according to the report, which declined to identify which firms or individuals. In one exchange, dated April 5, 2007, an analyst said the ratings model didn't capture 'half' of the deal's risk but that 'it could be structured by cows and we would rate it,' according to the report. ... In an internal email dated Dec. 15, 2006, one manager wrote to another that the rating firms continue to create an 'even bigger monster--the CDO market. Let's hope we are all wealthy and retired by the time this house of cards falters.' ... Mr. Cox, who wouldn't comment on enforcement investigations, said one could 'rest assured' that 'when the SEC finds evidence of wrongdoing' the matter is reviewed by the agency's enforcement division. ... Joshua Rosner, an analyst at Graham Fisher & Co., a New York research boutique, said it was 'outrageous' that the SEC didn't disclose which rating firms had been found deficient on which counts. 'What does that teach the market in the way of transparency?' he asked. 'How does that help the market feel any more comfortable about holding securities held largely based on ratings. We want to know which deals are the worst deals, and releasing those documents would go toward that end'. ... Still, the SEC said 'there is no evidence that decisions about rating methodology or models were based on attracting or losing market share'," my emphasis, WSJ, 9 July 2008.

"Did you hear that giant yawn that swept over Fundland last week? It came when [SEC] Chairman Chris Cox expounded on 'serious shortcomings' in the practices of the nation's three major credit-rating firms, Moody's, Standard & Poor's and Fitch. ... But for all its insights, the report failed to go far enough. The report offered small correctives but stopped short of prescribing strong medicine for a system that is fundamentally flawed because the users pay for their ratings. Imagine a shipwright working for months patching the hull of an old cedar-strip boat only to watch the vessel sink because he ignored the drain plug. The SEC is that shipwright. ... And the SEC concluded by extending an olive branch, saying the credit-rating agencies were co-operative and committed to remedying the issues. The absence of strong preventive measures from the SEC is truly lamentable. ... [Sean] Egan, said [t]he SEC, ... is 'supposed to defend the average investor in those proceedings, not the [banking] industry',"my emphasis, Jack Willoughby (JW) at Barron's, 14 July 2008.

"Who's the most glaring culprit in the subprime mess? ... It's probably the only time we've had a business debacle this wide ranging [with] malfeasance at so many levels. Having said that, the one area that would have prevented all of this from taking place is if the ratings agencies would have had a monetary interest in the accuracy of the ratings they put out", Kirk Shikle's interview of Richard Bitner at US News, 21 July 2008.

"Cognizant of the fees", wow. What Big 87654 junior accountant isn't? The Big Three rating agencies look like the Big 87654 CPA firms. The SEC will do nothing to improve the quality of their ratings. My answer again: repeal 1995's Litigation Reform Act and let the plaintiffs' bar sue away. What would the SEC consider "evidence" of what the models and methodology were based on? Yuri Yoshizawa's affidavit? I am sure the SEC's enforcement division reviews "evidence of wrongdoing". What does it do when it finds such evidence? See who or what it will shield and if it can find a convenient scapegoat to blame? See my 28 December 2007 post.

The SEC will do as much to clean up the rating agencies as it has the CPA firms, nothing. Unlike JW, who was apparently disappointed with the SEC's report, I wasn't. The SEC came up with what I expected.

I agree with Bitner. Sue the rating agencies into doing better work.

Monday, July 28, 2008

Another Business I Never Understood

"Mortgage insurers have been dramatically tightening their standards throughout the U.S. further squeezing potential home buyers. ... The spreading restrictions are a symptom not only of the housing and credit crisis but of the mortgage-insurance industry's own huge losses. The insurers face massive borrower defaults on loans that were approved when securing a mortgage was far easier. ... For a time, it seemed mortgage insurers were going the way of the dinosaur. ... But with piggyback loans all but vanished, prospective home buyers are facing more pressure to purchase mortage insurance. ... This year, mortgage insurers have benefitted from the growing number of loans being funded by Fannie Mae and Freddie Mac, the government-sponsored mortgage companies that require mortgage insurance on loans that don't have a substantial downpayment. ... Nowadays, insurers are frequently requiring at least a 10% down payment, compared with previous standard that might have included a 3% to 5% down payment. Next month, for example, MGIC plans to charge an annualized premium of up to 0.75% of the loan balance for fixed-rate 30-year mortgages with a 10% down payment, up from 0.67% this month", WSJ, 15 July 2008.

Mortgage insurance is another business that never made sense to me. Why should Fannie or Freddie require it? If say, MGIC charges 75 basis points a year for mortgage insurance, Fannie or Freddie can come out ahead by charging another 75 basis points interest and eliminating all the insurers' overhead! What service do the insurers provide?

What is the Economy?

"The concept of 'the economy' is utilized ad nauseum by politicians and political pundits who want to believe (and make voters and taxpayers believe) that their tax-and-spend policies are unilaterally a good thing, as in 'my such-and-such policy is good for the economy.' All government policies benefit some people and hurt others, and the only worthwhile discussion of such policies is in terms of these conflicting effects on individuals, not in terms of benefits to some nonexistent entity", my emphasis, Mark James (MJ) letter to the WSJ, 11 July 2008.

Bravo, MJ. My 7 April 2008 post, "The Fed's Real Job" said virtually the same thing.

Oil Stocks

"Paradox: Despite the sharp rise in oil prices, bargains are bubbling in major oil stocks. The stock price of major oil companies hasn't kept pace with the price of a barrel of oil, which is now 95% more expensive than 12 months ago. ... But for the long term, the outlook for these stocks isn't rosy, as they face their biggest challenge ever: lack of oil-production growth or even a decline in output. Signs of this have emerged in the earnings statements of recent quarters, making some observers think these companies may not even be around in 10 to 15 years. ... Exxon's P/E has been in the range of 10 to 13 since 2004, its lowest level since the last time oil prices rose, in the late 1980s and early 1990s, with the onset of the first Persian Gulf War. ... Today, 'the majors, on the whole, look pretty cheap,' says Justin Perucki, an energy analyst at research firm Morningstar Inc., who assumes a long-term price of oil at $85 to $95 a barrel for valuing these companies. ... Life has gotten much tougher for the majors in their foreign endeavors. Decades ago, these companies were welcomed for their huge funding and technological and engineering prowess. Today, these companies are facing increasing nationalism in countries such as Venezuela, which are reducing the amount of oil they are willing to give up to let companies such as Exxon come in and drill", Shefani Anand (SA) at the WSJ, 12 July 2008.

SA explains the paradox: the majors "reserves" are all held at the sufferance of "host" countries. No one can predict what royalties or other taxes the majors will face in the future, so the market increases its discount rate on those reserves.

Sunday, July 27, 2008

Blackstone, Real Estate Genius?

"What's this pot of money worth now? That's a secret for a few more months, and [Charles] Spiller [of Pennsylvania teachers' fund] isn't releasing any of the communications he's had from the fund operators about their recent results. ... A year ago the most closely studied funds in the U.S. were holding $213 billion in commerical real estate equity, leveraged about 70% on average. ... Many opportunity funds are black holes. ... They're typically unregulated--a recent statement by the Financial Accounting Standards Board leaves it to the funds to address fair value--and private equity groups don't have to file regularly to the [SEC]. ... Say the manager buys a building for $100 million, putting down $30 million of your money and borrowing the rest. Over the next three years it appreciates to $150 million, Interest on the mortgage adds up to 20% or $14 million. Before fees, you made $36 million, a 120% return. That comes out to 30% a year. But the unleveraged return was only 14.5% Which return number 30% or 14.5%, is the one most likely to be talked about? ... 'We don't know how you define "risk-adjusted return",' says Joseph Dear, executive director of the $82 billion (assets) Washington State Investment Board, a heavy investor in opportunity funds. ... 'Risk-adjusted returns? There isn't such a thing,' insists Chicago billionaire Neil Bluhm, whose firm Walton Street Capital is raising its fifth opportunity fund. Comparing the returns of opportunity funds with those of a levered-up REIT index fund is 'for eggheads,' he says.' ... Blackstone ... since 1991 has made 200-plus real estate investments, totalling roughly $160 billion. ... It has leveraged those purchases 85% on average. The firm states that its funds have produced annual returns to investors of 31%", Stephanie Fitch (SF) at Forbes, 21 July 2008.

"The senior investment officer at the Virginia Retirement System was apparently terrified at having to disclose performance for the fund's $3.3 billion in private equity investments that he asked his staff to box up every quarterly and annual report they received from general partners and ship them back. Return them to us when nobody's asking for them anymore, John Alouf, now head of private equity for the pension fund told the managers. ... VRS says one firm with purported 93% annual returns (it won't diclose which one) refused to do business with it because of disclosure concerns", Kai Falbenberg at Forbes, 21 July 2008.

It's debatable how well Blackstone's real estate investments did. SF presents evidence that on an equally levered basis, they did no better than a basket of REITS since 1999. This may explain Stephen Schwartzman's hostility to fair value accounting, my 17 July 2008 post. It might make Blackstone look bad. From time-to-time I've looked at one of these things for a client as a possible investment. I remember one in particular I looked at in 1984. I read one number in the private placement memorandum (PPM) and handed it back to the client saying, "Don't touch this. It's a piece of junk". He was shocked. "That's it"? I told him I would spend as much time with it as he was willing to pay for, but he was wasting his time. The PPM showed a projected 172.2% IRR. Really. I told the client, "if this thing was so great you would never see it. The syndicator would keep it for himself. Or the Big 87654 partners who reported on the projections would have bought it themselves". The PPM contained projections with a Big 87654 firm's review report on them showing a 172.2% IRR. At the client's insistence I dissected the numbers. The syndicator had netted various cash flows to derive the 172.2% IRR, as opposed to separating the inflows and outflows. The projected IRR as I calculated it was about 28%. Not too shabby, but still the "investment" was what I call a "fee generator". This particular real estate partnership went bankrupt in the 1984-87 Texas real estate debacle.

Alouf should be fired. Virginia's Attorney General should see if there is a statute, like obstructing the operations of Virigina's legislature to indict Alouf under. What a fool. If this wonderful fund really makes 93% a year, its managers don't need Viriginia's money.

Cop Asleep On the Beat

"HCC Insurance Holdings, a Houston-based property and casualty insurer, settled a [SEC] probe of its stock option grant practices without admitting wrongdoing. ... The company said Monday that a court approved the settlement of related class-action litigation last week", my emphasis, Houston Chronicle, 22 July 2008.

It's reassuring to know the "Cop is on the beat". Another SEC enforcement triumph.

Inflation, Where?

"Many long-held relationships are breaking down in this volatile economy. Among them might be the connection between headline inflation and so-called core inflation which strips out food and energy prices. ... Analysts expect the government to report that the inflation measure was up 4.5% from, a year ago, due mainly to soaring energy prices. Core CPI, however, is expected to be up a relatively modest 2.3% from a year ago", Mark Gongloff at the WSJ, 16 July 2008.

Here's an old CPA joke: A prospective client asks a CPA, "how much is 2 and 2"? The CPA answers, "Any number you want it to be". I wonder if that CPA now works for Uncle Sam.

Saturday, July 26, 2008

Full Cover Up Mode

"Sen. Charles Schumer, hit with criticism from a federal regulator that he contributed to the failure of IndyMac Bank, said he may have caused some depositors to withdraw their money but that he wasn't responsible for the bank's downfall. Sen. Schumer, a New York Democrat and member of the Senate Banking Committee, said IndyMac's lending practices and lax federal supervision are to blame for the failure of the thrift on Friday. ... 'Everything I wrote in my letter was publicly available. There was no new information there. It was what legislators are supposed to do.' ... OTS Director John Reich said Friday ... Schumer should have privately addressed his concerns with regulators. ... Schumer ... [said] 'Clearly what happened here was the OTS ... sought to blame the messenger. In sum, it's sort of classically what this adminstration does. Blame the fire on the guy who called 911.' ... Schumer has also been one of the most vocal critics of the bond rating firms. ... Last week, after the SEC came out with a report criticizing practices at the rating firms, Sen. Schumer said the agency 'should look at enforcement measures' to respond to the 'searing abuse' found. In May, he also said that Moody's president, Brian Clarkson was correct to resign over the crisis of confidence in ratings", Sarah Lueck at the WSJ, 14 July 2008.

"The federal takeover of IndyMac Bank over the weekend could cost the [FDIC] between $4 billion and $8 billion. But Senator Chuck Schumer, who helped to precipitate the collapse by publishing a letter to the bank's regulator last month, has no remorse. He was, he says, just doing his job in telling regulators that the bank 'could face a collapse,' a prophecy that quickly proved to be self-fullfilling. ... The Office of Thrift Supervision (OTS), whose job it actually was to regulate IndyMac, took a different view. 'The immediate cause of the closing,' the OTS wrote in a press release, 'was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York,' The OTS added: 'In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.' ... Only last week, the [SEC] announced an investigation into the role of rumor-peddlers in the run on Bear Stearns. We doubt somehow that Mr. Schumer will receive similar SEC scrutiny for his very similar role in bringing about a liquidity crisis at IndyMac", my emphasis, Editorial at the WSJ, 15 July 2008.

I agree with Schumer. John Reich, shut up. Look at the SEC's attack on short sellers. Instead of setting up the rating agencies for rafts of lawsuits, the SEC attacks short sellers. Chris Cox must live in Wonderland.

The OTS "took a different view". So? If the OTS had done its job, IndyMac (IMB-NYSE) would not have gotten into the shape it was. I'm behind Schumer. How does the WSJ know "rumor-peddlers" brought down Bear? If is does, let it publicly identify them and give Mike Garcia the names. The Bush administration is in "full cover up mode" to protect insolvent financial institutions. On 3 November 2006, IMB was $45.82, on 26 June 2008, $0.80, a 98.3% drop in 20 months. What does the WSJ think caused that? Chuck Schumer?

CBO-Car Salesman

Yves Smith (YS) has a 23 July post at Naked Capitalism worth reading and a link to a 23 July 2008 NYT article about the Congressional Budget Office's (CBO) estimate of Treasury Secretary Henry Paulson's proposed Freddie-Fannie rescue plan. Here's a link:

I am less critical of the CBO's estimate than YS. Why? When did you last buy a car? If you recollect, the salesman was reluctant to quote you a "cash price" and merely said something like, "It will be $550 a month", not even saying for how many months. I suspect this practice has taken root at the CBO, i.e., the rescue plan will cost $25 billion; $25 billion a month for 24, 36, 48 or 60 months. Take your pick.

SEC-Stock Manipulator

"The [SEC], under fire for not responding more vigorously to a raft of rumors that have pounded stock prices, says it is cracking down on firms or individuals that illegally spread false rumors. ... The announcement was timed to be released hours before the trading week began in Asia, in hopes it would serve as a warning shot to traders, a senior official said. ... Nothing final has been decided, but Lehman executives have long pushed for SEC action to stop the rumor mongering around their stock. Sunday, people close to the firm said Lehman hopes the SEC move will stop the fall of its stock until it has time to put together a plan. ... The SEC began its antirumor campaign Friday, calling several hedge funds to warn that subpoenas for their trading records related to Lehman were imminent, people familiar with the matter said. SEC officials weren't specific about what period of trading they planned to examine, these people said. ... Many top Wall Street executives have complained privately about the apparent lack of action, saying traders knowingly spreading false rumors were in part responsible for the unraveling of Bear Stearns Cos., which was sold to J.P. Morgan Chase & Co. in March for a fire-sale price. ... Lehman Chairman and Chief Executive Officer Richard Fuld Jr. [RF] has been encouraged to step up and buy shares of Lehman as a vote of confidence in the firm he has run since 1993", my emphasis, Kara Scannell, Susanne Craig and Dennis Berman (SC&B) at the WSJ, 14 July 2008.

"The [SEC] has sent subpoenas to more than 50 hedge-fund advisers as part of its investigation into whether individuals spread false rumors to manipulate shares of two Wall Street firms, a person familar with the matter said", WSJ, 15 July 2008.

"'When markets are moving this fast, people have a right to expect the information they are trading on is reliable.' SEC Chairman Christopher Cox said Monday. 'We want people to understand that the cop is on the beat, that subpoenas are going out, there are investigations under way'," Houston Chronicle, 15 July 2008.

"Lehman Brothers, which has seen its shares tumble sharply over the past few weeks, would seem to have much to gain from news that federal regulators are dialing up their scrutiny of market rumor mongering. The firm has complained that false rumors have been a driver of its recent share declines", WSJ, 15 July 2008.

"Bear markets often involve bear-knuckle fights, but it is still a shock when the referee starts punching below the belt. The [SEC] has intervened in the epic struggle between financial companies and the hedge funds that are short-selling their shares. ... The SEC's moves deserve scrutiny. Investment banks must have a dizzying influence over the regulator to win special protection from short-selling, particularly as they act as prime brokers for almost all short-sellers. ... The SEC's initiatives are asymmetric. It has not investigated whether bullish investors and executives talked bank share prices up in good times. Application is also inconsistent. ... Like the Treasury and the [Fed], the SEC is improvising in order to try to protect banks. But when the dust settles, the incoherence of taking a wild swing may become clear for all to see", Economist, 17 July 2008,

"As the dust settled from the rout of financial stocks earlier this week, the little clown cars came zigzagging up the Street. Have no fear, the [SEC] is on the case. Christopher Cox, the regulator whose only visibility during this financial crisis has been to proclaim Bear Stearns' soundness just hours before its collapse, will shake down every short-seller in America if he must to find someone he can blame for the financial flameout. ... In fact, what Cox has done is just one more distraction, one more attempt to make people think that maybe this crisis can be solved with easy pen strokes. ... The SEC, though, is more concerned with silencing the skeptics. We blame the short-sellers. We blame the speculators. Never, though, do we blame the people who made bad decisions. ... For all the fretting about rumors, Cox and his clown squad haven't announced a single investigation into misleading statements by CEOs. ... The SEC's move, then, is exactly what it seems: market meddling that props up the dogs while silencing the critics", Loren Steffy (LS) at the Houston Chronicle,, 18 July 2008.

"In the latest game of markets blameball, hedge funds are getting slammed. Should they be? ... Members of Wall Street's establishment, including J.P.Morgan Chase & Co. Chairman James Dimon and top corporate-attorney Martin Lipton, have urged regulators to step up their patrol, and even put a crimp on short selling in general. ... Some say the assaults are little more than the latest chapter in a long history of financial scapegoating. ... High-profile managers such as David Einhorn and William Ackman have been leveling criticism against giant financial firms for more than a year. Judging by the numbers, they have been vindicated, but their pointed attacks have engenderd hard feelings", WSJ, 18 July 2008.

The SEC's contempt for the public is appalling. Alan Sloan of Fortune, my 18 July 2008 post reported RF got $489 million from stock sales over the past few years. What is RF complaining about? RF has a terrific opportunity. I give RF another put up or shut up. Lehman (LEH-NYSE) is currently $21.10. It was $14.27. Did you, RF, buy any at $14.27? If you didn't, SHUT UP! If it's worth more than $21.10, buy. On margin. Plenty. RF, I salute you. At least you unloaded Erin Callahan. The SEC's "investigation" is a blatant attempt to support investment bank shares. I didn't think stock manipulation was the SEC's job. This is more poor WSJ reporting. If SC&B "know" rumors are pounding stock prices, did they buy? Why are they reporters as opposed to running a hedge fund? If the SEC is still harassing David Einhorn, I hope he gives it another black eye. Or worse. Maybe Einhorn and Ackman should hire an attorney who was an AUSA and have him draft "indictments"for RF, Chris Cox, and anyone else they think appropriate, then hand deliver the "indictments" to Mike Garcia (MG) at a "press conference" in front of the SDNY US Attorneys Office. Maybe Justin Fox, my 9 July 2008 post will attend and ask MG what he intends to do with the "indictments"? Maybe it's time for a hedge fund manager to tell MG that the SEC is aiding and abetting securities fraud. Well Mike, will you look into it? The complaints of "top Wall Street executives" are more nonsense. If rumors killed Bear, why didn't these executives outbid JPMorgan and buy Bear? Why give JPMorgan this "bargain"?

The SEC can say whatever it wants. I think it sent the subpoenas to prop up investment banks' share prices.

Well Cox, are investors entitled to "reliable" information in slow markets? What do the securities laws require? If there is inaccurate information, where do you think it comes from in large part? Hedge fund operators or SEC registrants? That's it Cox, do your best Captain Renault routine, "Round up the usual suspects".

I note that Erin Callahan recently left LEH. False rumors? List them.

The Economist has this knocked. Well Cox?

I agree with LS. I await any Wall Street CEO's being added to the Bear Stearns Two indictment.

Well Cox, will you join Lipton's firm when you leave the SEC? Why don't you do something useful like investigate LEH's disclosures for the past few years?

Friday, July 25, 2008

Panic Spreads

"And speaking of ugly, yesterday's markets showed one more nasty side of the Fannie Mae mania: fear of rising inflation. Gold popped up by $23 an ounce, and at $965 is back at the heights it reached during the March run on Bear Stearns", Editorial at the WSJ, 12 July 2008.

"The federal government's seizure of IndyMac Bank is deepening worries among executives, regulators and consumers about the U.S. banking industry, which is in a tightening bind following a long run of prosperity. ... While fewer banks are expected to fail than the 834 that went under from 1990 to 1992, it will likely take several years for battered financial institutions to work through their bad loans and replenish their depleted capital. ... The fast-moving decline of IndyMac Bancorp Inc., parent of IndyMac Bank and a mortgage lender that was one of the nation's largest savings and loans, illustrates that the problems in the U.S. banking system are much wider and deeper than a few months ago. ... 'This is a very serious banking crisis. There's just no doubt about that,' said Donald G. Ogilive, a longtime president of the American Bankers Association and now a senior adviser at Deloitte LLP", WSJ, 14 July 2008.

The gold market sees the Fed will effect the Fannie-Freddie bailout through inflation.

Thanks for telling us now, Ogilive. Where were you say, three years ago? My guess is that Oglivie knows about as much about accounting as I do about neurosurgery. Why did Deloitte hire him? In all likelihood, he's another guy with a "big rolodex".

Insha Allah (God Willing)

Jeffrey Goldfarb and Richard Beales have an amusing satirical piece at:, WSJ, 21 July 2008. Laugh, cry, smirk.

Inaugurating Wachovia Death Watch

"Hired as Wachovia Corp.'s chief executive late Wednesday, Treasury Undersecretary Robert K. Steel [RS] said he hopes to 'bring some new seasoning' to solving the challenges at the banking giant. ... In leading the search for a successor to ousted CEO G. Kennedy Thompson, Chairman Lanty Smith sought to bring to the Charlotte, N.C. bank an outside executive with credibility on Wall Street and in Washington. While [RS], a former Goldman Sachs Group Inc. executive who became Henry Paulson's top financial-policy adviser in 2006, has never operated a retail bank, he fits both bills. ... Mr. Smith said the board's decision was unanimous. 'There's nothing about [the commerical and retail] business that Bob can't learn,' he said. ... [T]he selection of [RS] could fuel questions about the relationship between Wachovia and Goldman Sachs", my emphasis, WSJ, 10 July 2008.

Does "credibility" mean RS can open the Fed's coffers to Wachovia (WB-NYSE) by snapping his fingers? Supposedly RS may get $38 million in first-year compensation from WB. Compared to what Citigroup paid for Vikram Pandit, that's cheap. WB's board unanimously chose RS, wow. This is largely the same crew which authorized WB's $25 billion Golden West (GW) purchase from the Sandlers. At least 13 of WB's 17 directors were around for the GW purchase. Resign. Now. I suspect WB is in much worse shape than anyone will admit. Did RS design his policy recommendations to enhance his resume for when he left Treasury? WB's current market cap is $35.2 billion, after falling to $20.6 billion which was less than what WB paid for GW.

Thursday, July 24, 2008

Rating Agency Regulation

"European Union finance ministers Tuesday backed plans to regulate credit-rating companies more directly, after the raters' volutary code of conduct was deemed inadequate to prevent future financial crises. ... The commission's chief market regulator, Charlie McCreevy, has described ratings companies' code of conduct as a 'toothless wonder'," WSJ, 9 July 2008.

Mark Olson and Chris Cox, are you listening? "A toothless wonder", amen!

Patton on Quarles

"With their $400 billion in idle cash, if private equity really wants to be the banking industry's white knight, rather than asking the [Fed] to change the rule book, it should buy at face value, the $150 billion worth of loans and debt estimated to be be remaining on bank balance sheets. They wouldn't even need to do much due diligence since they initated most of this issuance via leveraged buyouts over the past two years", Letter by Steven Patton of Patton Investments at the WSJ, 8 July 2008.

Way to go Steve! See also my 7 July 2008 post.

The Tightening Noose

"Federal officials are converging in support of a sweeping overhaul of financial regulation, making it likely that Wall Street investment banks and other major financial institutions will be subject to a tighter government grip. ... At a House Financial Services Committee hearing Thursday, Treasury Secretary Henry Paulson [HP] and [Fed] Chairman Ben Bernanke agreed that regulators need new tools to deal with financial crises and stronger oversight authority over major financial institutions. ... Officials are trying to walk the line between being prepared for the downfall of a major financial institution that would threaten the overall economy and signalling that the government would step forward with funds to bail out a collapsing firm. 'Regulation alone cannot eliminate all future bouts of market instability,' Mr. Paulson said. 'For market discipline to be effective, market participants must not expect that lending from the Fed, or any other government support, is readily avaliable.' Knowing that a government backstop exists can alter firms' behavior, interfere with markets and ultimately put the system at greater risk, Mr. Paulson said. 'For market discpline to effectively constrain risk, financial institutions must be allowed to fail.' ... The Fed recently signed an agreement with the [SEC], ... to coordinate on information sharing", my emphasis, WSJ, 11 July 2008.

"The U.S. Treasury and the [Fed], capping a weekend of high-stakes maneuvering, attempted to shore up confidence in Fannie Mae and Freddie Mac by announcing a plan that placed the federal government firmly behind the battered mortgage giants. ... The weekend's moves constitute an attempt by the federal government to ease the potential crisis at Fannie and Freddie without intervening directly. By promising bold action if needed, officials are hoping that can instill sufficient confidence in the two companeis that such intervention ultimately will prove unnecssary. ... The weekend move means that Fed Chairman Ben Bernanke ... will have even more power. ... Fannie Mae Chief Exeutive Office Daniel Mudd expressed gratitude for the government's actions. ... Both the line of credit and the liquidity backstop would be temporary, but could be in place for up to 18 months", my emphasis, WSJ, 14 July 2008.

"The [Fed] is rapidly becoming the world's largest financial garbage dump, as for months, it has agreed to accept banks' asset-backed securities, including sub-prime real estate bonds, as collateral in return for US Treasury bond purchases. ... Meanwhile, some investors are viewing the Paulson bailout not as a bid to rescue the US economy but a lifeline for his former Wall Street cronies as the country's big banks teeter towards a financal implosion", F. William Engdahl at, 16 July 2008.

Regulators need new tools? Why? To conceal bailouts, that's why. Isn't HP brilliant, "regulation alone cannot eliminate all future bouts of market instability". HP even recognizes moral hazard exists. Wow. What do we need HP for? The bottom line: many major financial institutions are at death's door and Chris Cox's SEC is looking for ways to hide this from the public. Got gold? Get more! Why do we need more regulation anyway? We have Wall Street executives making tens of millions a year, surely they know how to manage their own companies? Don't they?

Temporary? New York City established rent control in 1943 as a temporary WWII measure. It's still there. Instill confidence? Are the Feds playing three card monte with the public?

I agree with Engdahl. The Fed is a garbage dump.

Wednesday, July 23, 2008

Of Fannie & Freddie

"The Bush administration has held talks about what to do in the event mortgage giants Fannie Mae and Freddie Mac falter, according to three people familar with the matter, as the stock prices of both companies continue to fall. ... The government doesn't expect the entities to fail and no rescue plan is imminent, these people said. ... Treasury officials are nonetheless talking about what the government could--or should--do if Fannie and Freddie become so pressed that they are unable to borrow money and continue operating. ... The two companies own or guarantee about $5 trillion of mortgages or nearly half of all U.S. home-mortgage debt outstanding. ... 'They can't be allowed to fail,' said Peter Wallison, a former Treasury Department general counsel ... 'There is simply no way that the [US] government can let that happen.' ... Treasury Secretary Henry Paulson has said in the past the government will not back the debt of Fannie and Freddie. ... The most likely scenario is that Fannie and Freddie will raise capital from private investors, even though that will dilute the interests of current shareholders, said Josh Rosner, an analyst at Graham Fisher & Co., a New York research boutique", WSJ, 10 July 2008.

"Even as federal officials sought to reassure investors about the financial health Of Fannie Mae and Freddie Mac, pressure mounted on the giant mortgage companies to raise fresh capital to offset the tumbling values of home loans they hold. ... Meanwhile, some high-profile bond investors snapped up Fannie and Freddie debt, believing the government would never allow them to default. ... A default would set off 'a firestorm of intolerable proportions,' [Bill] Gross said. ... Ben Bernanke said the firms 'are playing a critical role' in the mortgage market, but 'I think they could do any even better job if they were better supervised and better capitalized.' ... Politicians in both parties expressed their confidence in the companies and pledged to take action if things worsen. 'Fannie Mae and Freddie Mac are too important to go under,' said Democratic Sen. Charles Schumer of New York. ... Goldman Sachs ... is advising Freddie on possible ways to raise capital", WSJ, 11 July 2008.

"Investors began paying closer attention to the GAAP balance sheet and fair-value figures. On that score, Fannie looked decidedly weak; Freddie was a basket case. At the end of the first quarter, Freddie's regulatory capital was about $38 billion. Yet GAAP total shareholders equity was $16 billion and common equity, or book value, was just $2 billion. On a fair value basis, the company had negative net worth of nearly $17 billion", WSJ, 12 July 2008.

"The Lehman report, released Monday, aired the possibility that Fannie and Freddie would need to raise a staggering $75 billion if a new accounting rule being contemplated went into effect. ... The Lehman report thrashed Fannie and Freddie shares. Then the two stocks took another beating after former St. Louis [Fed] President William Poole said the two companies might need a government rescue", WSJ, 12 July 2008.

"Much of what the [Fed] and the Treasury said to prop up Fannie Mae and Freddie Mac over the weekend was redundant. ... Opening up the Fed's discount window was likewise redundant--at least up until the point where Uncle Sam's own credit is shot and the Fed starts printing money to make good on its commitments. We're not there yet--but that's where all this may be heading: to the [Fed] 'monetizing' all kinds of bad public and private debt, from mortgages to student loans to the unfunded liabilities of Social Security and Medicare ... The obvious solution is to nationalize Fannie and Freddie and break them up. Sell off their regional undewrting offices to private investors. ... If Moody's thinks that honestly owning up to liabilities that everybody knows Washington faces should lead to a downgrade, it only shows how feckless ratings have become. ... In fact, worth noting is how much of this 'crisis' is a crisis of the commanding heights of the Wall Street-Washington axis, and not a crisis of Main Street, which has proved to remarkably resilient so far", Holman Jenkins (HJ) at the WSJ, 16 July 2008.

"And the [Fed] still thinks its chief weapon in quelling this slow-motion panic and restoring confidence is to continue printing as exccessive amount of dollars. Yet it is this very policy--and the resultant inflation--that is perpetuating the crisis and undermining our economy, as well as the global economy. ... One might fathom a former professor's [Bernanke] clinging to his disproved pet theories. But a practical Wall Street money man? Treasury Chief Henry Paulson's continuing passivity in the face of a crashing dollar is increasingly weird and puzzling", Steve Forbes (SF) at Forbes, 21 July 2008.

What's the big deal? Call Zimbabwe, nee Helicopter Ben and let him ride to the rescue with wheelbarrows full of money. Americans can become billionaires too. It works for Zimbabwe.

It's always good to see Goldman Sachs (GS) at work. I wonder what advice it's giving Freddie? If GS doesn't show billions in trading profits in the next quarter from shorting Fannie and Freddie, my advice to Freddie: ignore whatever GS says. Uncle Sam may take "action" to save Fannie and Freddie. Which means: get those helicopter blades twirling. For investors, got gold? Get more.

Fannie and Freddie look like two zombie thrifts.

Might, Mr. Poole?

I agree with HJ, liquidate Freddie and Fannie. The crisis is one of protecting investment bankers seven and eight-figure bonuses at the expense of Joe Sixpack.

SF, I'll explain it to you. Henry Paulson (HP) is Goldman's "Agent of Influence" at Treasury. What's not to understand? I'm sure if he was so inclined, Vladimir Putin could explain it to you, see my 4 December 2007 post. Why believe HP is not doing precisely what he wants? HP has two Ivy League degrees, Dartmouth and Harvard! Hail!

Saudi Arabia's Brasilia

"Some 80 miles north of the Yemeni border, on Saudi Arabia's Red Sea coast, lies a desolate stretch called Jazan Economic City. Though the 40-square-mile area today is little more than desert scrubland, over the next couple of decades it is to become a $30 billion industrial zone that's home to hundreds of thousands of people. ... Jazan is part of an ambitious Saudi scheme to wean the kingdom from its dependence on oil exports. The idea is to tap a blend of foreign and Saudi private money and government support to build a half-dozen new cities in regions that trail the rest of the kingdom economically. ... The new city could transform this pleasant backwater. ... 'It's going to make us [grow like] crazy,' says Fahad A. Galam, chairman of the Jazan Chamber of Commerce & Industry. Land prices in the town of Bayash, 15 miles from the site of the new city, have already tripled. But the project's success is far from certain", Businessweek, 14 July 2008.

Jazan reminded me of my youth's "wonder" city, Brasilia. I read in My Weekly Reader in about 1958 that Brazil would develop a city in the middle of the Amazon, 150 miles from civilization to, among other things, aid local indian economic development. Wonderful! Brasilia was hatched in 1956 during Juselino Kubitschek's (JK) regime. JK's 1955 campaign slogan, "50 years of progress in five". After JK was in power his critics said he brought "50 years of inflation in five". I didn't realize it in 1958, but Brasilia was Brazil's version of a Russian 5-year plan. Brasilia was largely an economic failure for decades. I wish Saudi Arabia better luck with Jazan. By the way, Galam, did you have the sense to buy thousands of acres of land in Bayash, say about two years ago? If so, no matter what happens to Jazan, you will profit.

Tuesday, July 22, 2008

Jacksonians vs the Wilsonians

I recently stumbled across this post. I agree with virtually all of it,, by Dymphna at Gates of Vienna, 15 April 2007. "The Wilsonians are suicidal. ... They think words count more than actions". As it is written, "Therefore, by their fruits you will know them", Matthew 7:20 (NKJV).

Whither Mortgage Insurance?

"Amid their many problems, Fannie Mae and Freddie Mac also are contending with woes in an industry that is supposed to help reduce their risk: morgage insurance. ... 'They [MGIC, PMI and RDN] do have a depth of capital, and they should be able to continue paying claims,' said Dan Kelly, director of mortgage-insurer relations for Freddie. ... In a May filing with the [SEC], Fannie spelled out the dilemma. If it stopped doing business with some insurers and couldn't find alternative protection, Fannie said, it 'may be restricted' in buying home loans with low down payments. 'This restriction could negatively impact our competitive position and our earnings,' it said", WSJ, 11 July 2008.

Mortgage insurance is another smoke and mirrors industry. What did buying "insurance" accomplish that charging the borrower a higher interest rate wouldn't have? With less overhead.

Taxes and Baltimore

"If you've seen HBO's 'The Wire.' you know why those of us who live in Baltimore are often asked whether our city really is the hellhole it is portrayed to be on TV. Our answer is, well, yes. Baltimore deserves the Third-World profile it has developed because it has expanses of crumbling, crime-riddled neighborhoods populated by low-income renters, an absent middle-class, and just a few enclaves of high-income gentry near the Inner Harbor or in suburbs. ... Today, the city has a population that is almost 50% smaller [than in the 1950s], and about 40% of families with children live at or near the federal poverty line. ... Most people think of cities as dense concentrations of people. They are that, of course. But they are also dense concentrations of capital--homes, offices, factories, theaters and roads. ... The problem is that once capital is built, it can become a target for tax-and-spend politicians who bank on the fact that physical capital will continue to draw people, even as it is taxed more heavily. This is what has happened in Baltimore. ... Politicians, in short, reason that because physical capital cannot typically be picked up and moved, it is immutable. Wrong. It depreciates. Fail to replenish or improve it, and it decays to uselessness. ... To the extent that city officials recognize the problem, they seem to confuse symptoms with the root cause of the economy's disease. For them, poverty, street crime or bad schools are the problem. Their solution is always more social spending and still-higher taxes, together with targeted tax breaks and subsidies aimed at bringing 'big footprint' development projects downtown. ... True enough, the ability to hand out subsidies gives officials great power. But is also gives them a reason, and incentive, to dismiss the common sense that if tax breaks for the well-connected are a good iodea, lower tax rates across the board would lead to broad-based redevelopment", Steve Hanke and Stephen Walters (H&W) at the WSJ, 5 July 2008.

I agree with H&W. As Uncle Miltie said many times, "We economists don't know much, but we do know two things: If you want more of something, subsidize it, if you want less of something, penalize it". Baltimore's city fathers want more poor people and less productive people. So be it. I note Mexico has "milked" Pemex for so long, it may bring foreign capital back to fix Mexico's oil industry.

Monday, July 21, 2008

Bailouts Are Us

"Ben Bernanke once might have been tempted to duck into the Fed chairman's private bathroom to high-five himself over his heroics to save the financial system. ... Let us review the relevant history: Inaugurating the modern era of bailouts was Continental Illinois in 1984, following which a top regulator declared 111 national banks were 'too big to fail.' ... Since then the circle has been expanded willynilly to include more banks, one hedge fund (in 1998) and one investment bank (2008). ... Bailouts, remember, are an informal substitute for bankruptcy, with its messy and prolonged division of the leftovers. Bailouts create moral hazard, all right, but how much really? ... Meanwhile, the real moral hazard disaster lies elsewhere--in the degree to which, in order to avoid being confronted with the bailout question, Washington has relied on monetary policy to contain incipient financial market crises. ... This unsavory trend is not unrelated to another, namely Washington's steady politicization of the credit markets", Holman Jenkins (HJ) at the WSJ, 9 July 2008.

I largely agree with HJ. Why is the Treasury full of "former" Goldman Sachs guys? Why did Wachovia just hire Robert Steel (RS), who might get $38 million there next year? Aside from bringing "access" to the Treasury and having a rolodex that might be as large as Robert Rubin's, probably nothing. Did RS spend months discreetly setting this up through the positions he advocated, see my 14 October 2007, 6 and 13 February, 7 and 24 April and 28 May 2008 posts mentioning RS. The big thing RS brings Wachovia is a "call option" on the next Fed bailout.

Yves Smith on Jim Grant

Yves Smith wrote a 19 July 2008 post about Jim Grant's (JG) WSJ essay worth reading, the link: JG writes, "I have another theory, and that is that the old populists actually won. This is their financial system. ... The Populist Party might have lost the elections in the hard times of the 1890s. But it won the future. ... Wall Street ... shares precious few characteristics with the metal-fastener business or the auto-parts trade. ... Rather, they open their doors to pay their employees--specifically, to maximize employee compensation in the short run".

JG explains what's going on. He offers no solution. Why? Americans can't handle the truth. We bail out financial institution executives to ensure they keep their seven and eight figure bonuses. Crazy. If these guys are so smart, why can't they manage their own companies without federal aid? Why should they make any more than civil servants?

Chinese Justice

"On Friday, Chinese authorities announced that four Communist Party, local government and security officials in Guizhou province's Weng'an county were sacked for 'severe malfeasance' over the alleged coverup of a murder, according to the state run Xinhua news agency. ... Exposed to online postings that sprout up and multiply before they can be censored, the public has come to expect more transparency and responsiveness from the government. ... Friday's apparent change of heart is the latest sign authorities tried to get out in front of the story: In Weng'an, local officials held a news conference less than two days after the riot to give their version of events. And Xinhua also covered the riot almost immediately, in contrast to past practices of waiting days before reporting such events. ... For blogger Mr. Zhou, providing on-the-scene information about events like a riot is a means to give voice to people whose stories get 'overlooked' in a media culture that treats news as propaganda", WSJ, 5 July 2008.

Local police said a high school student drowned. Many local people thought "she was raped and murdered, perhaps by children of local officials". 30,000 people protested the local officials handling of the incident. Do we need 30,000 protesters at the intersection of Broad and Wall to "encourage" Mike Garcia and Benton Campbell to catch some whales instead of minnows? Li Shufen, the deceased student may get more justice in China than Mary Jo Kopechne did. What brought Mike Nifong down? Not the normal operation of state authorities.

Sunday, July 20, 2008

Exxon and the Supremes

"After almost 20 years of legal battles over the Exxon Valdez oil spill, the Supreme Court last week slashed the punitive damages imposed on ExxonMobil to $500 million from $2.5 billion. ... Justice David H. Souter cited studies showing that under federal maritime law, punitive damages were on average equivalent to actual damages in cases where the damage was not deliberate or malicious. ... It's what conservatives call 'judicial activism' when so-called liberal judges do it. As Justice John Paul Stevens wrote in his dissent, 'Congress is far better situated than is this court to assess the empirical data, and to balance competing policy interests, before making such a choice.' ... Ginsburg wrote, 'The new law made by the court should have been left to Congress.' So it should be. Yet again, as in cases involving automakers, cigarette manufacturers and other companies the court has sided with big business. ... Exxon is a business, and it functions like a businees. The Supreme Court, however, strayed from its function in arriving at this arbitrary decison with no basis in the law, and that's everybody's business", my emphasis, Editorial at the Houston Chronicle, 30 June 2008.

I agree with the Chronicle. The Supremes regularly create law. Look at the recent case ending Louisiana's death penalty for rape. What was the Supreme's basis for that? Why was the recent District of Columbia gun case decided 5-4 as opposed to a 9-0 shutout? The Supremes do whatever they want. We should accord them no respect whatsoever.

What is Not Said

"Every year, the world's most boring people, namely its bankers, await their version of the 'Swimsuit edition', the annual report of the Bank of International Settlements, or BIS. ... In this case, the BIS has avoided mention of the real source of all the dumb money that swirled around financial markets in the first place, flooding banks and investment mamagers with more funds than could be invested with reasonable returns. ... US officials led by Treasury Secretary Hank Paulson recently completed a trip around the [Middle East], where they urged Gulf countries to avoid changes to US dollar pegs, even as those countries struggle to contain double-digit inflation. It is even thought in some circles that the whole idea of 'containing' Iran may have come a a quid-pro-quo from these meetings. ... Back to the BIS report though, this glaring error of omission on the main source of market liquidity that prompted the excess of greed and gluttony not to mention, gullibility makes the rest of the report rather pointless. ... Even as the BIS makes an attempt to draw a line between incompetence, greed and perverse incentives, the world's governments continue to avoid taking responsibility for their own actions. ... In times of crisis, there are some curious market rituals to be observed, by far the most entertaining of which would be to observe what investment banks say about each other. .... [T]he most entertaining of reports make their way suggesting that investment banks would have to cut about 25% or more of their staff into the global downturn. Most of the business models are irreparably broken, according to the analysts. This represents a logical, it somewhat perverse question. If the analysts in question are so smart, why do they work for an investment bank themselves? And if they aren't smart enough to have decamped to a hedge fund or climbing Mount Everest, why then should normal equity investors listen to them? ... The point though, is that this particular ritual [Moody's recent CPDO fiasco] exposed the rating agencies for what they are--a bunch of businesses that make money providing so-called independent opinions that really only represent the best interests of the investment banks selling [CPDOs]. ... Thus it is starting with the BIS, then harkening to the Indian Finance Minstry, and going on to investment banks and to the rating agenices, we find it is not what people say that matters--it is almost always what they don't", Chan Akya (CA) at Asia Times, 4 July 2008,

I agree with CA. Connie Yu, are you listening yet? CA's comments remind me of the OJ Simpson case and all the pieces of evidence the prosecution didn't introduce: murder weapon, motive and theory of the crime. Also the dog which did not bark in the Sherlock Holmes story, "Silver Blaze".

Saturday, July 19, 2008

Samuelson on Speculators

"Tired of high gasoline prices and rising food costs? Well, here's a solution. Let's shoot the 'speculators.' ... Gosh, if it were only that simple. Speculator-bashing is another exercise in scapegoating and grandstanding. Leading politicians either don't understand what's happening or don't want to acknowledge their complicity. ... Oil rose 177 percent, corn 70 percent and copper 360 percent. But that's just the point. Did 'speculators' really cause all these increases? If so, why did some prices go up more than others? And what about steel? ... A better explanation is supply and demand. ... 'We've had a demand shock,' says analyst Joel Crane of Deutsche Bank. 'No one foresaw that China would grow at a 10 percent annual rate for over a decade. Commodity producers just didn't invest enough.' ... Or take nonferrous metals, such as copper and aluminum. 'You had a long period of underinvestment in these industries,' says economist John Mothersole of Global Insight. ... Commodity-price increases vary, because markets vary. Rice isn't zinc. ... For every trader betting on higher prices, another is betting on lower. These trades are matched. ... But all the frantic trading doesn't directly affect the physical supplies of raw materials. ... If politicians wish to point fingers of blame for today's situation, they should start with themselves", Robert Samuelson (RS) at Newsweek, 7 July 2008.

I agree with RS. Politicans are amazing. "Hillary's plan includes: ... Cracking down on speculation by energy traders and market manipulation in oil and gas markets that are driving up the pirce of oil by at least $20 a barrel",, 28 April 2008. Hillary should know. After all, she's "Madame Cattle Futures".

Ready, Aim, Misfire!

The SEC attacks bank stock short sellers at the apparent behest of Wall Street bigwigs. Mike Shedlock has an excellent 15 July 2008 post at Mish's Global Economic Trend Analysis. Here's the link: It's tough to be as incompetent as Chris Cox & Co. I have nothing to add to Mish's comments.

John Roberts-Supreme Fraud

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

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

Friday, July 18, 2008

Is Lehman Next?

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

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

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

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

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

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

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

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

Ted Forstmann-Austrian Economist

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

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

Thursday, July 17, 2008

We are all Billionaires Now

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

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

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

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

Schwartzman and McTeer on Accounting

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

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

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

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

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

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