Tuesday, September 30, 2008

Ritholtz on the SEC

Barry Ritholtz (BR) skewers the SEC at rgemonitor.com on 18 September 2008, "Is Financial Innovation just another word for excessive and reckless leverage? Apparently so. ... [T]he events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow [investment banks] to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1. ... Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns and Morgan Stanley. ... So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis. You couldn't make this stuff up if you tried. ... As the SEC itself has noted, this alternative program requires significant judgment, as contrasted with the numerical tests and capital charges (the haircuts) imposed on broker-dealers under the basic net capital rule. The alternative approach requires substantial SEC resources for complex oversight, which apparently are not always available", my emphasis.

Right on BR. Imagine, Chris Cox's (CC) SEC wants to replace GAAP, with its hard and fast numerical tests with the "more judgmental" IFRS. Why? The SEC favors more bad accounting among other things. Even CC, JD and MBA Harvard, ain't that dumb. CC understands the implications of replacing GAAP with IFRS. BR notes certain "SEC resources ... apparently are not always available". That's interesting. Why not? Because the SEC pursues ridiculous cases like that of the Price Waterhouse Two, my 19 January 2008 post, http://skepticaltexascpa.blogspot.com/2008/01/of-planks-and-specks.html.

William Grigg's Denouement

"We are now into the second year of the unraveling of the world financial system. It could be described as the Great Denouement (or final act) of a plot that began in 1913, when Congress created the Federal Reserve System, aka the Focus of Evil in the Modern World. So far the effects of the unraveling have had minimal impact on the larger economy. ... While we're accustomed to weekly bank failures and periodic federal bailouts, the converging meltdowns of three pillars of Wall Street in a single weekend indicates that the crisis is accelerating and deepening in ways that our financial overlords hadn't anticipated. The fact that Lehman was permitted to fail demonstrates that the overlords are now beginning to conduct triage among themselves--a spectacle that might offer the some brief amusement for the hoi polloi until the survivors within the Power Elite turn their undivided attention on the rest of us. ... Lehman was part of the cartel that pushed for the creation of the Fed. Its roster of corporate leaders bristles with insider credentials; senior management officials held prestigious positions on the Federal Reserve Board, in the World Economic Forum, and the Council on Foreign Relations. And yet the firm is now bound for bankruptcy, a casualty of the Fed's housing/mortgage/refinancing bubble. ... When it became clear that no rescue could be arranged for Lehman, the bankster mafia did the next best thing: It opened the markets--just a crack--to let a handful of favored investors minimize their losses. The manipulation was as undisguised as the contempt the banksters feel for the torpid and indifferent public that is being plundered on behalf of the financial elite. ... Surely there are people just as qualified as Fuld to lead a company to immediate ruin who would have done so for less than one percent of what Lehman paid Fuld. ... Even Helicopter Ben must appreciate the point that the foreign creditors who continue to fund this racket are eventually going to stop taking dollar-shaped IOUs. That's when the real fun will begin", my emphasis, William Grigg (WG) at lewrockwell.com, 17 September 2008.

When Merrill fired Stan O'Neal in October 2007, giving him a $161 million severance package, the Valero convenience store clerk, where I buy my Houston Chronicle said, "That's crazy. Giving a guy who screwed up $161 million. Hell, I Could have screwed up Merrill for only $16 million. Hell, if Merrill's board was real cheap, I'd have done it for only $1.6 million". If he's still interested, I'll refer him to Lehman's bankruptcy trustee. Could he hurt Lehman more than Fuld? But he has no Harvard MBA. So. He has no college degree? So.

Here I go again, with my answer to Carthago delenda est, "Got gold? Get more".

Monday, September 29, 2008

Comrade Smith Reports from Oblast New York

"A mere few weeks ago, the Fannie/Freddie rescue was called 'the mother of all bailouts" by some commentators. ... This puts the Treasury's actions beyond the rule of law. This is a financial coup d'etat, with the only limitation the $700 billion balance sheet figure. ... The Treasury could via incompetence or venality grossly overpay for assets and advisory services, and fail to exclude consultants with conflicts of interest. ... Yet as we discussed the plan makes no sense unless the Orwellian 'fair market prices' means 'above market prices.' ... 'The failure to be honest about [losses] upfront will lead to a taxpayer backlash (or will lead to the production of phony financial statements for the rescue entity, which will lead to revolt by our friendly foreign funding sources).' ... The US needs to wean itself of unsustainable overconsumption, and since consumption has come to depend on growth in indebtedness, a reversal, however, painful is necessary. ... The Treasury program, by deliberately propping up asset prices, will delay finding a market clearing level and thus attenuate the financial crisis", Yves, aka "Comrade" Smith (CS) at Naked Capitalism, 21 September 2008.

"Is that really what got Wall Street and us into this mess--that we followed too religiously the gospel of Robert Taft and Russell Kirk? ... Yet, who got us into this mess, if not the government--the Fed with its easy money, Bush with his profligate spending, and Congress and the SEC by liberating Wall Street and failing to step in and stop the drunken orgy? ... We are going to have to learn to live again within our means. The party's over. ... Who are we kidding? What we are witnessing today is how empires end. The Last Superpower is unable to defend its borders, protect its currency, win its wars or balance its budget. ... An unelected financial elite is now entrusted with the assignment of getting us out of disaster into which an unelected financial elite plunged the nation. We are just spectators", Patrick Buchanan (PB) at the Houston Chronicle, 21 September 2008.

Thank you CS for a superb report from Oblast New York (ONY). Thanks too for paying IA an eight-figure fee for ONY's Henry Paulson as Che Guevarra T-shirt concession. Other concesssions available include: Los Angeles, San Diego, Dallas, Austin, Pittsburgh, Miami, Orlando, San Antonio, Chicago, Detroit, Atlanta, San Francisco-San Jose, and Philadelphia. Concession fees are only payable in one-ounce gold bullion coins: Krugerrands, Maple Leafs, Chinese Pandas and American Eagles. Note to Comrade Richard Fuld: I understand you have about $400 million. For only 400,000 one-ounce bullion coins I'll give you the concessions for all US Oblasts except ONY which CS has. I'm sure, for a very large fee, you could induce CS to sell you her concession. One issue CS. You write, "the only limitation the $700 billion balance sheet figure". CS, that's $700 billion today. The "law" will be amended in one year to read, "$1.4 trillion"! Excepting that, a superb job CS. So superb, you need not go to the gulag for at least a year. Heil Hitler! Excuse me, wrong dictatorship. Long live the proletariat and death to the capitalist running dogs.

Thank you Comrade Buchanan (CB) for your observations from Oblast Washington. An IA war story. About ten years ago as I walked down Los Angeles's Sunset Boulevard near Vine Street in front of the Border's book store, a camera crew interviewed people about some issue. The woman with the microphone walked over and asked my political affiliation. I answered, "I'm a Robert Taft Republican". She looked at me in horror and she and the cameraman walked away. IA's "present sense impression", the woman was not taken aback by the word "Republican", but she had not heard of Robert Taft. My guess: she went to a "J" school and knew virtually no American history. Here's a link to CB's article: http://www.chron.com/disp/story.mpl/editorial/outlook/6012931.html.

The Plan is MLEC multiplied nine times, see my 18 October 2007 post, http://skepticaltexascpa.blogspot.com/2007/10/use-your-own-money.html. The financial statements must be phony. Who will "audit" them? The Big 87654 which "audit" Freddie, Fannie, Citigroup, etc. Where are the Big 87654 when you need them? They should each have released a position paper at 9:00 AM 22 September 2008 stating the plan requires using phony financial statements and they will not be party to it. Well Mark Olson? What's your opinion? What do I suggest? Since 14 October 2007, I have favored "a 25-year moratorium on any GS executive working for the Treasury or Fed", http://skepticaltexascpa.blogspot.com/2007/10/party-like-its-1929.html. I now extend that from GS to include: Merrill, Morgan Stanley, Lehman, Citigroup and Bank of America. We can't afford these clowns in Washington doing favors for their cronies at the public's expense.

I thought some Mafia quotes would be appropriate. "Mafia is a process, not a thing. Mafia is a form of clan-cooperation to which it's individual members pledge lifelong loyalty. ... Friendship, connections, family ties, trust, loyalty, obedience--this was the glue that held us together", Joe Bonnano.

"Everybody has a price", Jimmy Hoffa.
"I never lie to any man because I don't fear anyone. The only time you lie is when you are afraid", John Gotti. Hank "Treasury" Paulson, Wall Street mob made member is very afraid.

"In Bensonhurst, that was it, becoming a made guy. It's all we kids ever talked about. ... I never saw the other side of it until I in, and then it's too late and you just do your work", Sammy, "The Bull" Gravano. Poor Paulson, he's in so deep. he can't get out. He needs to be put in the federal witness protection program.

"Other kids are brought up nice and sent to Harvard and Yale. Me? I was brought up like a mushroom", Frank Costello.

"Goodfellas don't sue goodfellas. Goodfellas kill goodfellas", Salvatore Profaci. More mafia quotes are avaliable at http://www.geocities.com/mafiason_99/Quotes.html?200825. Why Mafia quotes? Look at Paulson's actions. They remind me of a Russian word, "mafiozny", literally "mafianess". Here's a link to my 4 December 2007 post, which helps explain what's going on: http://skepticaltexascpa.blogspot.com/2007/12/bloodless-coup-continues-4.html.

Britney Spears Joins the US Army

"'The idea is to move from punishment to rehabilitation,' said Lt. Col. Paul Yingling, one of the officers leading the push. 'It's not enough to simply lock these guys up and hope they will somehow turn into productive members of Iraqi society.' ... Some officers privately complain the program is turning them into social workers who coddle violent extremists. But few are willing to voice those criticisms because the effort is a favored project of Gen. David Petreus, the former commander of U.S. forces in Iraq. Gen. Petreus believes the country's stability will be shaped by how well former insurgents are integrated back into Iraqi society. He sees the rehabilitation push as a powerful weapon in that fight. ... Maj. Jay Gardner, the executive officer for Task Force al-Amal, which runs the rehabilitation effort, said the military believes that some detainees would need to be held for the long term, while others 'simply made bad choices' and could be freed, he said. "The thin line we have to walk is figuring out which is which.' ... The centerpiece of the rehabilitation effort is the 'tanweer' course, Arabic for 'enlightenment,' which exposes detainees to moderate Islamic thought. ... Qais, a soft-spoke Iraqi, began a recent session by telling the detainees that God created all humans, regardless of their skin color. 'God is saying, don't hate because of religion,' he said. ... Many of the instructors believe they are making an impact but concede they can't be sure their messages get through. Jamal, one of the tanweer teachers, said many prisoners told him what they knew he wanted to hear. 'I want to believe they will leave here and be good citizens, but I cannot tell what is in their heart,' he said. 'They are very good at pretending'," my emphasis, Yochi Dreazen at the WSJ, 18 September 2008.

I didn't make this up. The US Army now runs a "Betty Ford Center" for Iraqi detainees. Does Petreus think he has arrested 17-year old kids for snorting coke? "Made bad choices"? Amazing. Rehabilitation is "a powerful weapon". Laugh! When I think of a powerful weapon, an M-1 Abrams tank or B-2 bomber crosses my mind. I am so unenlightened. See my 25 September 2008 post.

Let's study some Islam. "There shall be no complusion in religion", Koran 2:256. "All people are a single nation; so Allah raised prophets as bearers of good news and as warners, and he revealed with them the Book with truth, that it might judge between people in that in which they differed", Koran 2:214. Very good. Now continue our study of Islam. "Fighting is enjoined on you, and is an object of dislike to you; and it may be that you dislike a thing while it is good for you, and it may be that you love a thing that is evil for you, and Allah knows, while you do not know", Koran 2:216. Not so good, fighting. "So when the sacred months have passed away, then slay the idolaters wherever you find them, and take them captives and besiege them and lie in wait for them in every ambush, then if they repent and keep up prayer and pay the poor-rate, leave their way free to them", Koran 9:5. That's in the book too? Yes. "Fight those who do not believe in Allah, nor in the latter day, nor do they prohibit what Allah and his Apostle have prohibited, nor follow the truth, out of those who have been given the Book [Jews and Christians], until they pay the tax in acknowledgement of superiority and they are in a state of subjection", Koran 9:29. That's in the Koran? Yes. "O you who believe! do not take the Jews and the Christians for friends; they are friends of each other; and whoever amongst you takes them for a friend, then surely he is one of them; surely Allah does not guide the unjust people", Koran 5:51. I could go on. Did the tanweer teachers have Karen Armstrong edit their version of the Koran? What's going on here? Why shouldn't the prisoners tell the tanweer teachers what they want to hear? It's takiwa, also spelled taquiyya, or dissimulation. Islam encourages Moslems to lie to non-Moslems if the lie will advance Islam. Petreus is worse than useless as a general. He's a fool. He missed his calling, running the Los Angeles Union Mission.

Sunday, September 28, 2008

London Banker on the Fed

"Along with the rest of the world, I have watched with increasing disquiet as the [US] morphed under President Bush into a lawless soft dictatorship more like the USSR than the USA. ... Over the past year every financial crisis has been met with lawless and Enron-esque innovation by the [Fed] and Treasury, and this week was arguably more extreme. ... After this week's secret and unaccountable and extra-legal moves by the US financial authorities, I will not be holding any assets in the [US]. I do not understand the rules. I doubt any rules will be fairly applied to all the players. I cannot be sure who the umpire works for, or what principles the umpire thinks they should uphold. ... Every initiative introduced as a temporary measure has become a permament fixture. ... The hypocrisy of the Bush administration criticizing Chavez while defending Paulson and Bernanke should be the stuff of late night stand up comedy. ... Stalin could not have drafted a better plan for central control of the global economy after wreaking such havoc and destruction. Up until this week I thought the gold bugs a bit mad. ... Given the very public concerns now being expressed in China and Russia, I am keeping company I would have once thought very surprising. ... The loss of 1200 lives on the Lusitania was deliberately allowed to justify US entry into World War I. The attacks on Pearl Harbor were known in the White House three days before the bombs fell, but were ignored to justify entry into World War II. Tonkin Gulf was a fraud. ... You get the idea. ... I no longer believe that every financial collapse is unanticipated or without behind the scenes orchestration of effects. I no longer trust the authorities to act fairly, honestly, in the public interest", my emphasis, London Banker (LB) at London Banker, 19 September 2008. Here's the link: http://londonbanker.blogspot.com/2008/09/unitary-federal-reserve.html.

Welcome aboard LB. A few points. I concluded FDR and General George Marshall knew Pearl would be attacked on 26 November 1941, they just didn't know if the attack would occur on 30 November or 7 December. I don't mind be called a "gold bug". I've been called much worse. While LB cannot be sure "who the umpire works for", I think we had a "bloodless coup". Why pick on Stalin? Marx suggested creating a central bank, see Plank 5 of the Communist Manifesto. Book suggestion: Crisis and Leviathan by Robert Higgs, 1987. Why be surprised when "temporary" measures become "permanent"? That's the sweep of American history.

Chris Cox, Fool or Knave?

"With stocks tumbling, the [SEC] launched an effort aimed at making it harder for traders to improperly drive down stock prices and announced plans to require hedge funds to share more information about their trading. The SEC announced three trading rules ... following a weekend of tense negotiations with Wall Stret firms, which had asked SEC Chairman Christopher Cox [CC] to stop a tide of short selling", my emphasis, Kara Scannell at the WSJ, 18 September 2008.

More incompetent WSJ reporting. How does CC know which stocks were improperly as opposed to properly driven down in price? Why did CC negotiate with Wall Street firms anyway? Would he negotiate with IA? Of course not. Why? I've never used a law firm that could offer CC a seven-figure sinecure in about four months. This article's title was,"SEC Issues Short-Selling Rules in Bid to Stop Manipulation". WSJ, you should be ashamed of yourself for printing such junk. Were any of these firms: Goldman, Morgan, Wamu, Wachovia, Freddie or Fannie on the SEC's protected list before? Did any of them fail or seek assistance? Were the short sellers right all along?

Mish on the SEC

Mike Shedlock nails "Chris Cox and his 500 fools" at Global Economic Analysis, 19 September 2008. Mish starts with, "Every time I think the height of insanity has been reached I have been proven wrong. My new official statement is: 'There is no upward limit on insane actions by Congress, the SEC, the president, or for that matter anyone else'." My sentiments exactly. Here's a link: http://globaleconomicanalysis.blogspot.com/2008/09/peak-insanity-sec-plans-to-temporarily.html.

When I read that Britain's FSA had banned short selling, I thought, "As soon as that idiot Cox sees this, he'll do it too". And so he did. To think, we supposedly live in a country with free markets.

Saturday, September 27, 2008

Michael Savage on the Crisis

Michael Savage (MS), who frequently is over the top and browbeats his callers, savaged (ugh) Wall Street and Uncle Sam on 18 September 2008 starting at 5:09 PM Houston time. Some quotes, "Why Wall Street wanted Eliot Spitzer gone. ... Obama is a complete idiot. ... There is only one man in America I would trust [to investigate Wall Street]. ... You didn't ask yourself why this happened [Spitzer's being taken down by the Feds]. ... Do we have an Eliot Ness? Fire Chris Cox. ... I believe there was criminal negligence by Chris Cox. ... They lynched Eliot Spitzer to continue robbing the Treasury. ... We are entering another Great Depression. ... They threw you out of the building. ... It's [the crisis] turning the country into Argentina. ... We are on a level of an IQ of about 80. ... We are stupider as a nation than we have ever been. ... Bush made an unprecedented use of a law, federal pre-emption [to override state banking regulators]. ... I would investigate Chris Cox. ... The sheriff [Chris Cox] has been hiding".

MS was in rare form. I have written many similar things here. MS, welcome aboard!

Mencius Moldbug on the Dollar

The sometimes infuriating, but usually entertaining and enlightening Mencius Moldbug, has an 18 September 2008 post at his Unqualified Reservations worth reading. He even uses my "rock economy model". Read, enjoy, think. Here's a link: http://unqualified-reservations.blogspot.com/2008/09/clean-slate-accounting-of-dollar-part-1.html.

Mish on Roubini

Mike Shedlock disagrees with Nouriel Roubini (NR) at his Global Economic Analysis, 9 September 2008. Here's a link: http://globaleconomicanalysis.blogspot.com/2008/09/roubini-misses-boat-on-regulation.html. I agree with Mish and previously took NR to task over similar positions. Here's an example: http://skepticaltexascpa.blogspot.com/2007/12/two-view-of-plan.html, 10 December 2007.

Friday, September 26, 2008

American Hubris

"If the [US] neglects to rethink its purpose informed by the genius and practice of the Founding Fathers, it is destined to self-destruct like every other empire from hubris and overreach. ... The Constitution's preamble explains that the national interest of the [US] lies in providing for the 'common defense' and 'securing the blessings of liberty to ourselves and our posterity.' The Founding Fathers denied that the [US] was saddled with either a moral or legal responsibility to implant freedom throughout the planet. None ever hinted at a national duty to overthrow the French Bourbonism the Russian Romanovs, or Ottoman Sultans. Nor did they believe Americans would be made safer or freer by attempting to cram American democracy down the throats of feudalistic political cultures, for example, Afghanistan, Iraq, Russia or China. ... In addition, the trillions of dollars squandered in foreign military frolics subtract from fashioning a virtually invulnerable defense posture at home earmarked by spy satellites and aircraft, anti-missile systems, submarines, upgraded border security, sophisticated intelligence collection, and a credible threat to destroy any enemy nation with the audacity to attack. ... But President Bush's ambitions are also delusional, ill-founded and extra-constitutional. ... Secretary of State John Quincy Adams in his July 21, 1821, address amplified: 'The [US] has abstained from interference in the concerns of others, when the conflict has been for the principles to which she clings. ... She does not go abroad in search of monsters to destroy. She is a well-wisher to the freedom and independence of all. She is the champion and vindicator only of her own. ... She might become the dictatress of the world; she would be no longer the ruler of her own spirit'," my emphasis, Bruce Fein (BF) at http://www.washingtontimes.com/, 16 September 2008.

Thanks BF. I was looking for that "monsters to destroy" quotation for a few days. I wrote an essay about it in fifth grade and remembered it. Apparently my knowledge of American history in fifth grade was equal to that of Bush's entire cabinet. Combined.

Who Does the ECB Work For?

"The European Central Bank is considering tightening lending standards amid concerns it has become a dumping ground for troubled securities, a move that could squeeze some struggling banks. As soon as Thursday, when its governing council meets, the ECB could announce plans to toughen rules of the collateral it will accept in exchange for billions of euros in loans that have kept much of the banking sector afloat. Policy makers are worried that banks have been taking advantage of the ECB's lending facilities, in part, by packaging risky mortgages into securities specifically designed to be parked as collateral with the central bank. ... In providing banks with a longer-term home for the securities, central bankers could be aggravating the crisis by preventing the market from finding a proper price for the securities. ... In a conversation with bankers, at least one ECB official expressed concern that the central bank has become the only game in town for financing mortgage securities, according to a person familiar with the conversation. The bankers also learned the ECB had received complaints that its lending practices are creating an artificial price for the securities and could be stalling any market recovery, the person said", my emphasis, Carrick Mollenkamp and Sara Munoz at the WSJ, 30 August 2008.

What is a central bank for, if not to be "taken advantage of" by commerical banks. The ECB sounds like it is a 12-year old girl being assaulted by a 60-year old "dirty old man". Of course the ECB is "creating an artificial price for the securities". That's why it's there. See my 18 October 2007 post concering Henry Paulson's MLEC proposal.

Thursday, September 25, 2008

The Islamic Way of War

"At the inaugural conference for the Association for the Study of the Middle East and Africa (ASMEA) back in April, presenter LTC Joseph Myers made an interesting point that deserves further elaboration. Though military studies have traditonally valued and absorbed the texts of classical war doctrine--such as Clausewitz's On War, Sun Tzu's The Art of War, even the exploits of Alexander the Great as recorded in Arrian and Plutarch--Islamic war doctrine, which is just as if not more textually grounded, is totally ignored. ... As a consequence, we still do not have an in-depth understanding of the war-fighting doctrine laid down by Muhammad, how it might be applied today by an increasing number of Islamic groups, or now it might be countered. Today, seven full years after September 11, our understanding of the Islamic way of war is little better. ... While one can argue that learning how Alexander maneuvered his cavalry at the Battle of Guagamela in 331 BC is both academic and anachronistic, the exploits and strategems of the prophet Muhammad--his 'war sunna'-- still serve as an example to modern-day jihadists. For instance, based on the words and deeds of Muhammad, most schools of Islamic jurisprudence agree that the following are all legitimate during war against the infidel: the indiscriminate use of missile weaponry, even if women and children are present ... ; the need to always deceive the enemy and even break formal treaties whenever possible ... ; and that the only function of the peace treaty or 'hudna,' is to give the Islamic armies time to regroup for a renewed offensive, and should, in theory, last no more than ten years. ... 'Taquiyya' ... permits Muslims to lie and dissemble whenever they are under the authority of the infidel. Deception has such a prominent role that the renowned Muslim scholar Ibn al-Arabi declares: 'In the Hadith, practising deceit in war is well demonstrated. Indeed, its need is more stressed than [the need for] courage.' ... Because the 'Whisperers'--Walid Phares's apt epithet for the majority of Middle East/Islamic scholars and their willing apologists in the press--have made anathema anyone who dares to point out a connection between Islamic doctrine and modern-day Islamic terrorism. ... Alas, far from taking the most basic and simple advice regarding warfare--Sun Tzu's ancient dictum, 'Know they enemy' the U.S. government is having difficulties even acknowledging its enemy", Raymond Ibrahim (RI) at nationalreview.com, 11 September 2008.

One issue with RI: Islamic war doctrine prohibits making peace treaties with infidels. The hudna he refers to is not a treaty but a cease fire. No contract can be made with an infidel. RI's taquiyya point, also spelled takiwa, can be enlarged: no Moslem's oath with regard to infidels' disputes should be believed. Why? Takiwa encourages the Moslem to lie to non-Moslems to advance the cause of Islam. Hence, no no infidel court should permit Moslems to testify in any matter involving Moslems. The Defense Department should not hire Moslem translators. Really. As for using missiles against non-combatant infidels, permitted. My conclusion made years ago, when at war with Moslems, adopt Islamic methods: wanton killing of non-combatants, no prisoners, etc., etc. The more killing, the better. This is not the "Western" way of war. So? The US should never had a detention center like Abu Gharib. We should have followed Islamic treatment of prisoners: behead them. We should close Gitmo. What should we do with the Gitmo inmates? Read them the story of the Banu Quarayza tribe in 626 AD. Then behead them chanting "allah akbar". They will understand and respect us for it. Israel recently exchanged about 400 terrorists for two Israeli soldiers' corpses. Are the Israelis crazy? Israel should execute all prisoners it holds for terrorism lest it be tempted to exchange them for anything.

Tom Selling on IFRS

Tom Selling (TS) attacks the SEC's recent proposal to ram IFRS down the investing public's throat at his Accounting Onion, 16 September 2008. TS has this issue well covered. Here's a link: http://accountingonion.typepad.com/theaccountingonion/2008/09/top-ten-reasons.html?cid=131143448. Enjoy. See what the SEC and Accounting Establishment wants to do "for", or perhaps "to" you. TS notes the CPA's "reduced exposure to litigation" from adopting IFRS. I made this point in my 19 September 2008 post.

Mish Skewers Bill Gross

I must hand it to Pimco's Bill Gross (BG). He is well named! Mike Shedlock debunks the fallacies behind BG's "thinking", if you can call it that at Mish's, 4 September 2008. Here's a link: http://globaleconomicanalysis.blogspot.com/2008/09/bill-gross-wants-treasury-to-buy-assets.html. BG's proposals are laden with fallacies exploded over 100 years ago! I don't know how anyone can take BG's proposals seriously today. One quote from Mish, "The reality is banks need to fail and financial wizardry needs to come to a screeching halt". Amen brother!

Wednesday, September 24, 2008

Regulation-Texas Style

"During the past five years, state law makers and home builders have constructed a Potemkin village of regulation in the Texas Residential Construction Commission. ... It's telling that the only group upset about dismantling the TRCC is the builders it is supposed to police. The TRCC purports to resolve differences between aggrieved homeowners and builders and promote better home construction. In fact, it's been a Legislature-sanctioned smoke screen for bad construction. ... 'Without the TRCC's dispute resolution process, homeowners with construction defects that are currently being resolved in an expedient and cost-effective manner will be left with nowhere to turn but time-consuming and expensive litigation', [Ron Connally, an Amarillo builder] said. ... The Sunset Commission's found that 88 percent of the disputes brought before the TRCC wind up in court anyway. ... As my colleague Clay Robison noted recently, Houston builder Bob Perry has been showering cash on Sunset Commission members. ... In the TRCC, builders have had a lapdog commission. Because most disputes still wind up in court, the TRCC is little more than a bureaucratic speedbump in the resolution process. ... What consumers want, of course, is real oversight, and [Mickey] Redwine's proposals should go a long way toward achieving that. ... As the facade of the TRCC crumbles, we see it for what it is: a regulator that never was", my emphasis, Loren Steffy (LS) at the Houston Chronicle, 12 September 2008.

Right on LS! LS could be writing about the: DOJ, SEC, OCC, PCAOB, etc., etc., ad nauseum. Here's a link: http://www.chron.com/disp/story.mpl/business/steffy/5996942.html. Will Hogan & Hartson suggest this "regulatory" approach to its clients. See my 6 August 2008 post. Well Christine baby, how about it?

Spengler on Leverage

"It is remarkable that the US authorities, exhausted from their efforts to bail out the mortgage guarantors and other firms, have left Lehman to its fate. An enormous hoax has been perpetrated on the global financial community during the past 10 years. ... Where the underlying profitability of the American economy was poor, financial engineering managed to transform thin profits into apparently fat ones through the magic of leverage. ... Wall Street and the City of London rode an unprecedented wave of profitability by providing overpriced leverage to consumer and corporate markets. Led by the financial engineers at Lehman, the securities industry grew an enormous infrastructure of staff, systems, and financial exposure. They were so successful that when the music stopped, there was no way to liquidate this mechanism gracefully. It could only be allowed to collapse. ... The aging pensioners of Europe and Asia must find young people to pay interest into their pensions at home. ... But one-fifth of Germans now are on the threshold of retirement and half will be there by mid-century. ... There is nothing complicated about finance. It is based on old people lending to young people. ... Never before in human history, though, has a new generation simply failed to appear. ... It is tempting to see in the failure of Lehman Brothers and the forced merger of Merrill Lynch with Bank of America a failure of 'corporate culture'. In the case of a great financial firm that has weathered many storms, the failure of a business culture contains more information. ... Lehman''s culture was held up as an exemplar, a beacon to the ambitious and avaricious. Lehman's demise is a minor event next to the travails of America's mortgage guarantee agencies, which required a government bailout last week, to be sure, but it is a landmark in the unravelling of American corporate governance. ... Bear was a group of scrappy outsiders, led by Jews of no social pedigree. ... Bear proudly rejected corporate culture and management philosophy as a matter of scruffy pride. ... [Jimmy] Cayne was not our class, dear; the jumped-up refugeee from a junkyard had risen too high and received his comeuppance. ... Everyone may like Dick Fuld, who presides over a socially-connected, politically-involved, army of networking specialists who have one of Wall Street's best stock of favors done and collectable in return, But no one likes Fuld well enough to buy his firm. ... What took both firms down, rather, is a sudden break in the chain of expectations between the present and the future", Spengler at http://www.atimes.com/, 15 September 2008.

I looked at Fannie's Board of Directors. Wow. It's 12 members include: a former FBI director, an accounting professor and seven persons in the "finance" industry. How much do these people know? As for corporate culture, whatever that is, bah humbug, see my 29 February 2008 post on Stephen Cutler.

Connie Yu, are you listening yet? Come home. Go to work for Exxon USA!

Tuesday, September 23, 2008

Where's the Pain?-2

"Former UnitedHealth Group Inc. Chief Executive William McGuire agreed to pay $30 million and forfeit 3.7 million stock options to settle shareholder claims related to options back-dating, adding to what was already one of the largest executive-pay givebacks in history. ... McGuire, who reaped about $530 million in pay and options gains while running UnitedHealth from 1991-2006, still retains 20 million stock options that could be exercised for a gain of $307 million at the current share price. ... To resolve other civil and government claims, Dr. McGuire already had agreed to forfeit 9.2 million stock options and nearly $100 million in retirement pay, in addition to a $7 million penalty to the [SEC]. ... He still faces a criminal inquiry into UnitedHealth's options scandal by the U.S. attorney for the Southern District of New York, Vanessa Fuhrmans at the WSJ, 11 September 2008.

This is a joke. Mike Garcia's office has time to send Craig Gile, my 25 June 2008 post to prison and he's waiting to act in this case. Amazing. Will the PCAOB act against Deloitte & Touche, UnitedHealth's CPAs, who should have found this? Why ask?

The Time Bomb

Robert Higgs has a 10 September 2008 Beacon post about the public's refusal to face reality, "Our political economy is rife with such catastrophes in waiting, yet the public always seems startled, and outraged, when the day of reckoning can no longer be deferred, and another apartment collapses in the state's Hotel of Impossible Promises, loading onto the taxpayers more visibly the burden of sheltering the previous occupants. Each of these time bombs has at least one element in common: it promises current benefits, often seemingly without cost; but if it must acknowledge a substantial cost, it places that burden somewhere in the distant future, where it will be borne by somebody else". Here's a link: http://www.independent.org/blog/?p=186. Part of what facilitates these frauds is: bad accounting.

An IA war story. Social Security (SS) started in 1937. When it began, an employer and employee each paid in 1% of wages up to a $3,000 per year limit. This meant a SS participant might have paid in $90 ($3,000 x 3 x .01) by 1 January 1940, when the first SS recipients began collecting checks. The most one could collect in 1940 was $27 per month. Someone said something to the effect, "That's impossible. The recipient at most could have a 'fund' of $200 including some interest. The fund would be exhausted in about eight months!". Who said this in 1940? IA's mother who then was 14 years old. My mother at 14 would have made a better chief actuary for the SS administration than anyone whose ever held the office.

Monday, September 22, 2008

Spengler Channels Carlin

"After reading Vice President Dick Cheney's spirited defense on September 4 of the brave Georgian nation and the need to free Ukraine against nefarious Russian intentions, I listened to old comedy clips on YouTube until I felt well enough to write. We don't appreciate people until they are gone, and iconic American stand-up comedian, actor and author George Carlin's death in June was an irreparable loss for American foreign policy. ... By coincidence, Washington's two favorite beacons of liberty happen to be countries with the world's fastest rate of population decline. ... Only in the context of over-the-top black humor do Americans ask the obvious question, namely: What are certain countries doing there in the first place? Merely suggesting that some of them might not need to be there made [Sam] Kinison, who died in a 1992 car crash, the deepest foreign-policy thinker of his generation. ... Emulating Michael Ledeen, who sometimes channels the late James Jesus Angleton via an Ouija board, I have asked the late Carlin to comment on this from the afterlife. ... 'People speak 7,000 languages. Does that mean we need 7,000 countries? That's never going to happen. That would give us 7,000 UN missions with diplomatic plates, and no one in New York would ever get a parking spot. Nobody would be able to haul garbage. The mafia would send an army from Bensonhurst to kill them all. ... Most of these countries don't need to be there. ... NATO is a military alliance, right? Military--doesn't that mean soldiers? What if we get a country in NATO that doesn't have any people who are able to be soldiers? Suppose they were all paraplegics. Would we still let them into NATO? How about a motorized wheelchair brigade? ... The Mormons claim that they can pray dead people into heaven after the fact. Why can't we recruit extinct countries into NATO? ... That would really show the Russians were serious! We'll sic the Scythians and Etruscans on their *****! ...' Not everybody is going to make it. That should be America's mantra. American was settled by people who didn't think that Europe was going to make it, and decided that the better part of valor was to bail out and start something new. Georgia and Ukraine are not going to make it. They are past the point of no return. ... America's obsession with a happy ending for all--otherwise known as Wilsonian idealism--is the ultimate source of the problem. The Georgian crisis began, as everyone knows--but nobody in Washington will say--with the Bill Clinton administration's decision to bomb Serbia in defense of Albanian Muslims in the Serbian province of Kosovo. ... One can blame naivete, or Saudi influence, or any number of factors, but the fundamental weakness of American policy lies in the inability of Americans to conceive of unhappy endings for some important stories. That is what has turned America's foreign policy into a George Carlin routine", Spengler at http://www.atimes.com/, 9 September 2008.

"Many in Washington have described Russia's attack on Georgia as a turning point in international affairs. ... The attack on Georgia will go down not as the dawn of a new era of Russian power but as a major strategic blunder. ... The truth is, we're not in the 19th century, where the Russian intervention would have been standard operating procedure for a great power. ... Its actions are deplorable but the reaction to them--worldwide--is a sign of how much the rules have changed. ... The problem is not that Russia has been integrated into a world order that has failed to deter it, but rather that the country reamins largely unintegrated--and thus feels it has little to lose by breaking the rules", my emphasis, Fareed Zakaria (FZ) at Newsweek, 8 September 2008.

"'At no time did the U.S. attempt to train or equip the Georgian armed forces for a conflict with Russia,' [LTC Robert Hamilton] says. ... Even so, Newsweek has learned, NATO didn't bother to formally assess any of the new members' defense needs before they joined. 'The attitude was, the more the merrier,' says retired U.S. Air Force Gen. Charles Wald, deputy commander of U.S. forces in Europe through the early years of this decade. 'NATO didn't really look at the Article 5 part of it'," Newsweek, 15 September 2008.

Black humor? Do I detect racism afoot? I remember the Washington, DC school district banned the use of the word, "niggardly". Ouija board? Who needs one if you have a hermetically sealed mayonnaise jar? I may have grown up with Spengler. He talks of the mafia in Bensonhurst and NY's parking problems. I thought for decades it would be a pleasure to get rid of the UN and its army of rude "diplomats" armed with "DPL" and "FC" plates double-parking all over NY! Bensonhurst, no way; Bay Ridge! Yeah, Colonial Road in the 90s! Brilliant, I never thought of a motorized wheelchair brigade! Go Spengler. I add, domestic policy too! Victor Davis Hanson, please read this. I suggested "showing the Russians" with my "Paulson-Gates-Rice" position swap, 15 September 2008 post.

What really happened FZ? Your illusions were blasted into oblivion by Czar Putin's tanks. Grow up. That's how the world works. Read Thomas Hobbe's Leviathan, 1651. You might learn something. Nations exist in a "state of nature". What is it you don't understand? What does FZ think we should do with Russia, send it to bed without any supper? Put Russia in detention? Keep Russia after school? FZ, read Oliver Wendell Holmes comments at my 25 April 2008 post.

I return to 1960 and Katanga's revolt against the central Congo government in Leopoldville. The USSR backed Patrice Lumumba. Moise Tshombe, backed by Belgium and certain Western interests, led Katanga's revolt. The US airlifted a UN force into the Congo to fight for Lumumba. At times, the UN forces fought Tshombe's. The US backed another group, Joseph Kasavubu's and wanted to keep the Congo, now Zaire, intact. In 1963 the UN forces defeated Tshombe's reuniting the Congo. I remember thinking at the time: what is Ike doing? Why are we involved in a civil war on the other side of the Atlantic, fighting on what seems to be the USSR's side against our "ally" Belgium? I now add, in "reassembling" the Congo, we established a precedent opposed to our treatment of Kosovo.

Didn't look at Article 5 of NATO. Amazing.

The WSJ Returns

Today, 22 September 2008, no, not a date "which will live in infamy", I had my first WSJ copy delivered since 11 September 2008. We've had an "unpleasantness" here in Houston, known as Ike and I've largely been "out of the loop".

America's Bankruptcy

"Within minutes of the [Federal Open Market Committee] release, the headlines were blaring the revelation contained within the minutes of the last FOMC meeting--of the committee's broad agreement that the next move in rates would be higher. ... So those greeting the revelation in [the recently-released minutes] as indicative of a hawkish Fed are making the grave error of emphasizing words over action. Far from providing support for the buck, the Fed's comments suggest they're packing away their conventional tools and that the real debasement is about to begin!", Stephanie Pomboy letter to Barron's, 1 September 2008.

"The most revolutionary notion in commerce today is one of the oldest. If you want something, you may actually have to pay for it. We are quickly reverting from a borrow-and-buy model to the old school cash-and-carry model our grandparents knew. ... But widespread consumer credit is really a 20-th century phenomenon. ... It was this behavior--the endless willingness of lenders to lend and borrowers to borrow--that kept the consumer economy humming uninterrupted from the early 1990s, straight through the brief recession of 2001, until the credit meltdown of 2007. ... The tightening of credit is forcing more people to confront these uncomfortable choices", Daniel Gross at Newsweek, 8 September 2008.

"At the Democratic National Convention, Sen.Ted Kennedy echoed the view of many that health care is a 'right' that demands universal insurance. This is a completely understandable view and one that is, I think, utterly wrong. ... But the central problem is not improving coverage. It's controlling costs. In 1960, health care accounted for $1 of every $20 spent in the U.S. economy; now that's $1 of every $6, and the Congressional Budget Office projects that it could be $1 of every $4 by 2025. ... Greater health spending should not have the first moral claim on our wealth, because its relentless expansion is slowly crowding out other national needs. ... We need more realism on health care. There is a basic moral and political dilemma that most Americans refuseto acknowledge. What we all want for ourselves and our families--access to unlimited care paid for by someone else--may be ruinious for us as a society", Robert Samuelson (RS) at Newsweek, 15 September 2008.

At 7:12 PM on 9 September 2008, here in Houston, Michael Savage (MS), radio talk show host, likened today's US to Germany's Weimar Republic. He said our "currency is built on quicksand". Eventually Americans will realize MS is right. When they do, it's "watch out for bonds and all other US dollar denominated paper". I think a closer analogy is 1780s France. Book recommendation: Anatomy of Revolution, 1965, by Crane Brinton (CB), 1898-1968. CB was a Harvard history professor. Ugh. As the Master said, "Therefore by their fruits you will know them", Matthew 7:20 (NKJV).

I agree with Pomboy. $12 silver and $867 gold are on the bargain counter. Dollars are not.

As long as Uncle Sam has Helicopter Ben's (HB) printing press, he need not face "uncomfortable choices". Eventually, people rejecting HB's notes, Federal Reserve Notes (FRNs), will make the choice for him. What is the present discounted value of a note with no interest rate and no maturity date? Now take a dollar out of your pocket and look at it. As C.V. Myers used to say, "All debt is repaid. Either by the borrower or the lender". "Neither a borrower nor a lender be", Hamlet, 1:3; in today's world, Shakespeare would likely say, "better a borrower than a lender be".

Eventually, when Asia's peasants stop subsidizing American consumption, we will be faced with the choice: who will we let die? It's coming. Bet on it.

At 5:12 PM on 11 September 2008 MS said, "The one investment bank that runs the world", referring to Goldman Sachs. People are waking up. I've posted on the "Bloodless Coup" since 13 November 2007, http://skepticaltexascpa.blogsot.com/2007/11/bloodless-coup-continues.html

Sunday, September 21, 2008

Unmentionable Numbers

"There's a burning concern in the American West--almost an obsession--that Democrats did not touch in their convention [in Denver]. Nor will Republicans in St. Paul. It is the U.S. population explosion. The West is feeling the brunt of it, as flowing lava of housing developments and big-box crudscapes claim its cherished open spaces--and increasingly scare water supplies. ... And where oh where are they going to find water? Every county in Colorado was declared a federal drought disaster area in 2002, when the population stood at 4.5 million. It is expected to approach 8 million by 2035. ... Why isn't the population boom being discussed at the party conventions? Because its main driver is immigration--both the number of newcomers and their high birth rates. (The region is also trying to accomodate people relocating from other parts of the country, many of them trying to escape congested California.) Promoters of open borders like to drag race into any discussion of immigration, so that even those who focus on numbers, not skin color, fear to speak. The Sierra Club leaders have gone into hiding on the matter. ... 'It's called the third rail,' [Fred] Elbel [of Sierrans for U.S. Population Stabilization] told me. 'But immigration and urban population growth will be the defining issue for our country in this century.' The parties do talk about immigration, he adds, but never its environmental implications", Froma Harrop at the Houston Chronicle, 31 August 2008. Here's the link: http://www.chron.com/disp/story.mpl/editorial/outlook/5974826.html.

People sure talk about immmigration and its implications in Houston.

Delphi Update-2

"The federal government's pension-insurance agency, frustrated by missed pension payments and the lack of a resolution with bankrupt auto-parts titan Delphi Corp., said it would go to court Friday to secure a claim on an additional $900 million in Delphi assets. ... The Pension Benefit Guaranty Corp., [PBGC] is trying to increase pressure on Delphi and its former parent, General Motors Corp. On Tuesday. the agency sent its second letter in the past month to GM and Delphi executives urging GM to absorb at least $1.5 billion in Delphi pension obligations before Sept. 30. ... The letter to Delphi and GM executives comes as GM and other Detroit auto makers are making a plea to lawmakers in Washington for as much as $50 billion in federal loans. ... Delphi's pension plan, which covers about 85,000 people, had obligations of $14.05 billion at the end of 2007, but was underfunded by $3.3 billion according to [SEC] filings", Jeffrey McCracken at the WSJ, 11 September 2008.

The PBGC should not have let Dephi be formed without GM fully funding Delphi's pension plan. Where was the PBGC in 1999? Where is the DOJ? Will anyone from GM get indicted over this? Or will the PBGC continue playing around in bankruptcy court? You might be amazed to see how quickly GM could find $1.5 billion, if GM's executives believed, one-by-one they would be sent to federal prison, should Delphi's pension liabilities not be paid.

Saturday, September 20, 2008

California Squeeze

"Whoever crafted the 'Sopranos' television series of downward-spiraling family dysfunctionality must be writing the script for California's saga of upward-spiraling taxation dysfunctionality--into bankruptcy oblivion. ... With no discernable conclusion, [Sopranos] somehow just drifted off into nothingness, where California's economy may well be headed. Once the Golden State, now 'Taxifornia,' has grown addicted to the Tony Soprano formula. Its politicians, Democrats and Republicans, seem to think they can play 'Sopranos' roles in real life and get away with it. Gov. Arnold Schwarzenegger, who burst onto the scene as a low-tax, low spend terminator, was soon kidnapped by tax-and-spend Sacramento Sopranos. ... Taxifornia is a terminal thrall to tax-addicted special intersts that depend on state entitlements to survive. ... They, like Tony, apparently never had a day of economics at school or cracked a history book. ... Taxifornia is taxing a multitude of its own residents into leaving the state. It is also taxing into leaving the state a parade of significant industries (which hire employees who are consumers, and are taxed). If politicians there cannot discipline themselves (as Tony's analyst was always counseling him), discipline will be imposed upon them--ultimately at the polls. A bankrupt state is not a happy place for those politicans who cause bankruptcies to run for reelection", John Perry at newsmax.com, 8 September 2008, http://newsmax.com/john_perry/california_taxes/2008/09/08/128708.html.

My answer for the Governator, Senate Majority Leader, Gloria Romero and Assembly Speaker, Karen Bass, is: get your own Fed. Print your own money, hire your own Helicopter Ben. You know what Lenin said at a time like this, see my 28 December 2007 post. http://skepticaltexascpa.blogspot.com/2007/12/california-municipal-bonds.html. Why should anyone in California worry? Does Alfred E. Neuman worry? Remember the New York Daily News 30 October 1975 headline, "Ford to City: Drop Dead"? Will any White House incumbent let California go bankrupt? No, he will let the dollar go bankrupt through inflation. Got gold? Get more.

Coordinating Inflation

"A top European Central Bank policy maker Tuesday said global central banks should coordinate further to ensure banks have easy access to funds during a crisis. Making currency-swap lines permanent or ensuring central banks can accept collateral in foreign currencies could ease global funding logjams that can crop up during turmoil, ECB executive board member Jose Manuel Gonzalenz-Paramo said", my emphasis, WSJ, 10 September 2008.

It's good to see central banks cooperating to ensure a uniform rate of inflation throughout the world. Eventually they will make all paper currencies worthless.

Big 87654 CFOs-Feh

"We hold capital well in excess of regulatory requirements. Our liquidity position remains strong, and we have reported strong revenue growth in our mortgage-investment and guarantee businesses. ... Yet, Barron's seems to be arguing that all these facts should be disregarded, instead looking only at Freddie Mac's fair-value balance sheet to ascertain our financial condition. Freddie Mac is a buy-and-hold investor--we invest in mortgages with the intent of holding them to maturity. So today's mortgage valuations are less relevant a measure of our financial condition, especially given the highly subjective nature of these valuations in today's unsettled market", Buddy Piszel (BP) letter to Barron's, 8 September 2008.

Who is BP? Freddie Mac's (FRE) Executive VP and CFO. BP's letter appeared in Barron's on Saturday, 6 September 2008. Did anything happen to FRE shortly thereafter? IA is very impressed with BP, but not favorably. See my 26 May 2008 post, http://skepticaltexascpa.blogspot.com/2008/05/gses-and-their-cfos.html.

Friday, September 19, 2008

Danger, CPAs at Work

"No joke, accountants are the Rodney Dangerfields of business. But perhaps they deserve some respect after all. Accountants in the U.S. are signing up for a fundamental rethinking of how they do their jobs. ... The [SEC] recently announced that the U.S. will abandon Generally Accepted Accounting Principles--for almost 75 years, the bible for U.S. accountants--joining more than 100 countries around the world instead in using the London-based International Financial Reporting Standards. ... There are specific differences between the two systems; for example, the international system only allows the first-in, first-out inventory accounting system. The most important difference is that the international standard is based on principles, whereas GAAP is based on rules. GAAP suffers from the complexity of trying to set rules for all situations, a complexity that often masks economic reality. ... A single set of accounting rules would mean more effective global disclosure and transparency. ... The forensic accountants who sniff out problems will have to develop instincts using a new set of measures. The transition will also be tough on investors. ... The big U.S.-based accounting firms generally support the abandonment of GAAP. Skeptics could call this switch in systems the equivalent of the accountant full employment act for many years, but the profession itself also recognizes that GAAP often fails to refect underlying economics. A PriceWaterhouseCoopers briefing document for executives on the accounting change notes that changes will also be necessary in the law. 'If an accounting and reporting framework that relies on professional judgment rather than detailed rules is to flourish in the U.S., the legal and regulatory environment will need to evolve in ways that remain to be seen.' These include that 'regulators will need to respect well-seasoned professional judgments.' A system based on principles could create new defenses for company boards and accountants who try to do the right thing, if they fully disclose why they thought that a particular accounting treament made sense", my emphasis, Gordon Crovitz (GC) at the WSJ, 8 September 2008.

"Gordon Crovitz defuses several concerns over IFRS. Grounded in principles, U.S. [GAAP] has been accreting guidance, exceptions and amendments for at least 75 years. That it often looks like a book of arcane rules is not coincidental--preparers, auditors, litigators, and to some extent users demanded it. ... But I say go for it! ... Although IFRS is obviously deficient, auditors must stand up to clients much more under IFRS than they did in the past. And I do take issue with Mr. Crovitz's assertion that IFRS will make it easier for companies 'to do the right thing.' That option was always open through voluntary disclosures and alternative presentations, sometimes with auditors' blessings, suggesting that getting companies to want to do the right thing is a major part of the problem", my emphasis, James Largay (JL) letter to the WSJ, 10 September 2008.

Who is GC kidding? The Big 87654 must figure they can use IFRS to lobby for more lawsuit protection. The Big 87654 want to serve investors? Really? Why can't they do that now? Another selling point to the Fortune 500: possible Boards of Directors lawsuit exemption. "Professional judgment"? Does PW use that now? You know what Adam Smith said at a time like this: "people of the same trade ...". IFRS was adopted by more than 100 countries. So? My mother used to say, "If everyone else is jumping off the Brooklyn Bridge are you going to jump too"? This is bandwagon propaganda, GC and this "argument" would have been shredded in my fifth-grade class. Yes, GAAP frequently does not reflect economic reality. So? Will IFRS be better? I wonder if GC used a PW "resource person" who should have told him, disclosure is no substitute for measurement. Imagine, CPAs have Statements of Financial Accounting Concepts. Such statements exist? Yes. Current GAAP uses concepts? Yes. What's really going on here?

JL is a Lehigh accounting professor. Yes, US GAAP is "grounded in principles". In a sense, US GAAP is like "common law" as opposed to "code law". We make up more detailed rules as we go along. I prefer common law. Is JL serious: "auditors must stand up to their clients"? Why don't they do that now? IFRS, GAAP, CRAP (Cleverly Rigged Accounting Ploys) or MAAP (Martian Accepted Accounting Principles), unless you change CPAs' incentives, nothing of substance will change. Yes, "that option was always open". What will change under IFRS?

Obama on Oil

"Barack Obama received many ovations during his acceptance speech at the Democratic convention in Denver. Perhaps the most enthusiastic applause from the crowd of 84,000 came after the senator from Illinois declared: 'And for the sake of our economy, our security and the future of our planet, I will set a clear goal as president: In 10 years, we will finally end our dependence on oil from the Middle East.' ... But we retain a quaint notion that reality should be in the same room during discussions of the world's single most important commodity. And embracing energy reality requires looking closely at the numbers. If you assume a fleet of electric power plants operating with 30 percent efficiency, replacing [6.1 million barrels of OPEC crude daily], would require about 1.4 million megawatts of electric power capacity. ... That's a huge amount of production capability, particularly when you consider that the entire U.S. power grid has about 986,000 megawatts of capacity. Thus, if Obama wants to replace OPEC supplies with electric cars, then, in just 10 years, he plans to: a) more than double America's existing power production capacity; and b) overhaul the power grid so that millions of cars can be recharged without causing blackouts. .. We're in favor of solar. So what would it take to replace OPEC oil if Obama wanted to just use electric cars supplied by solar power? If you assume a conversion efficiency of 12 percent, the [US] would need about 3.5 million megawatts of installed solar capacity, That's more than three times the existing electric capacity in the country. It also translates into about 35.5 million acres of solar collectors, or an area the size of the state of Illinois. ... So let's take a modest approach and assume that Obama wants to use cellulosic ethanol to replace the 2.5 million barrels of oil per day that come from the Persian Gulf. That would mean creating a domestic industry capable of producing 38.3 billion gallons of motor fuel per year. Sound's reasonable, right? Not so fast. ... Remember that ethanol's energy content is only about two-third's that of gasoline. So to produce the energy equivalent of 38.3 billion gallons of conventional motor fuel, the [US] would actually need to produce about 49.7 billion gallons of celluslosic ethanol per year. ... Obviously, there's disconnect between the Democratic nominee's rhetoric and the hard realities of the energy world, a business that runs on numbers, not vague promises about 'change.' In July alone, Obama's campaign raised some $51 million. Perhaps someone on his campaign should buy the candidate a calculator", my emphasis, Robert Bryce and Michael Economides (B&E) at the Houston Chronicle, 7 September 2008. Here's a link: http://www.chron.com/disp/story.mpl/editorial/outlook/5986462.html.

"To find anything comparable to crowds' euphoric reactions to Obama, you would have to go back to old newsreels of German crowds in the 1930s, with their adulation of their fuehrer, Adolpf Hitler. With hindsight, we can look back on those people with pity, knowing how many of them would be led to their deaths by the man they idolized. ... A leader does not have to be evil to lead a country into catastrophe. Inexperience and incompetence can create very similar results, perhaps even faster in a nuclear age, when even 'a small country'--as Senator Obama called Iran--can wreak havoc anywhere in the world, when they are led by suicidal fanatics and supply nuclear weapons to terrorists who are likewise suicidal fanatics. Barack Obama is truly a phenomenon of our time--a presidential candidate who cannot cite a single serious accomplishment in his entire careeer, besides advancing his own career with rhetoric. He has a rhetorical answer for everything. ... Those who studied the years leading up to World War II have been astonished by how many people and how many countries failed to see what Adolf Hitler was getting ready to do. Will future generations wonder why we slept? ... Yet what are we talking about? Taxing and spending policies, socking it to the oil companies and rescuing people who gambled on risky mortgages and lost. Are we serious? Are we incapable of adult foresight and adult responsibility? ... But what does Obama have besides talk--and adoring crowds?," Thomas Sowell (TS) at nationalreview.com, 16 September 2008.

Numbers? Call a CPA. Blackouts, how dare you? Racist! Why not? There's a movement afoot in Dallas to rename "black holes" since the name is racist. I kid you not. We should not expect more from Obama, a man who is "as non-scientific as the most muddled philospher", see my 22 December 2007 post, http://skepticaltexascpa.blogspot.com/2007/12/us-injustice-system-at-work.html.

Indeed, TS, what else does Obama have?

Thursday, September 18, 2008

Why We Need Federalism-9

"Cuomo has become 'a second SEC', or Securities and Exchange Commssion, says Columbia Law professor John Coffee, 'in cases in which the SEC has been strangely slow'," Barron's, 1 September 2008.

"A former Credit Suisse Group broker pleaded not guilty to charges he and another broker misled investors about purchases of auction-rate securities. Julian Tzolov, through his attorney, entered his plea Friday before a U.S. Magistrate in Brooklyn, N.Y. ... Prosecutors allege the two engaged in a plan to get higher commissions by approaching clients about buying auction-rate securities backed by student loans, but used clients' funds to buy more risky debt securities. The [SEC], in a separate civil lawsuit, alleged Messrs. [Eric] Butler and Tzlov made more than $1 billion in unauthorized purchases of auction-rate securities for the accounts of their corporate clients", Chad Bray at the WSJ, 8 September 2008.

"In July, Anotolio Pellizzetti, a 70-year old retired physician in Tavernier, Fla., filed an aribitration claim accussing UBS AG's wealth-mangement unit of fraud in selling him $2.5 million of auction-rate securities. ... [O]ne feature of this litigation stands out: Mr. Pellizzetti was referred to an attorney by his son--a former UBS broker who first sold his father the securities. ... Now, in the latest twist of the roiled credit markets, some brokers are siding with customers who allege that the securities weren't as billed. ... In the wake of all this, a behind-the-scenes debate is unfolding about the role played by brokers. Even as the auction market burgeoned to $330 billion in recent years, many brokers knew little about its inner workings, according to regulatory documents, lawsuits and interviews with brokers and their clients. ... Brian McNiff, a spokesman for Massachusetts Secretary of State William Galvin, notes that the state opted to file civil-fraud suits against units of UBS and Merrill Lynch & Co., not their financial advisers. ...UBS and Merrill Lynch have both settled their complaints with Massachusetts and other regulators without admitting or denying wrongdoing. ... Brokers are caught in the middle because the auction market was both obscure and complex--but filled a need for their clients at a time when money-market funds offered often-paltry returns. In short, an auction-rate security is a form of debt that pays a short-term interest rate that is reset periodically. ... According to a complaint filed by New York's attorney general [Andrew Cuomo] against two UBS units, which the company settled in August without admitting or denying wrongdoing, the firm's financial advisers, 'readily admit that they represented auction-rate securities to be cash equivalents, as that was their understanding.' Many UBS brokers, the complaint says, 'did not even have the most basic understanding of how auction-rate securities worked until; after UBS determined not to participate in auctions of Feb. 13, 2008.' ... [T]he Massachusetts complaint ... [said UBS] 'was providing its sales force, and consequently its customers, with half-truths about the mature of' the auction market during the fall of 2007 and early this year", Daisy Maxey at the WSJ, 8 September 2008.

It sould be nice if Chris Cox would ask himself why a "second SEC" is necessary. What's wrong with the SEC he heads?

I doubt Butler & Tzolov (B&T) did this without their Credit Suisse supervisors knowledge. This sounds like another Joe Jett fiasco and B&T are the designated scapegoats.

Compare the Feds' treatment of brokers with that of the state regulators.

Today's SAT

"High-School sudents' performance on SAT college-entrance exams stalled, and the gap widened between low-scoring minority groups and the overall population, raising questions about the quality of teaching in U.S. schools. ... The reading scores of the past two years were the lowest since 1994. Math represented the worst showing since 2001. Each section is judged on a 200- to 800-point scale. African-American students received an average critical reading score of 430, 72 points below the general population and three points beneath their 2007 level. ... More than 1.5 million students from the high-school class of 2008 took the SAT, 2% more than in 2007 and 8% more than five years ago. Minority SAT takers made up 40% of test takers, up from a third 10 years ago. ... No boost in overall scores and persistent minority shortfalls suggested to some experts that the improvement shown on many state exams mandated by the federal No Child Left Behind law may be illusory. The law, which took effect in 2002, mandates that all students be proficient in reading and math by 2014 and requires that school systems show steady progress toward meeting that goal or face sanctions. In particular, NCLB is supposed to lift the results of lagging student groups, including minorities. ... Studies have shown a wide variance in the difficulty of the state exams, which are used to measure progress toward goals set by NCLB. ... In addition Prof. [Joe] Pedulla [of Boston College] says, the persistent gap in the achievement of minority students is ' a very troubling outcome.' ... Asian-Americans continue to post stellar results. On the math section, the group achieved an average score of 581, 66 points better than average. Asian-Americans also outperformed in critical-reading and writing, though by less. Some students have said that college-admissions offices have placed unofficial quotas on the number of spots allowed to Asian-American students", my emphasis, John Hechinger at the WSJ, 27 August 2008.

"The students at Powell Point Elementary [PPE] report to the school gym before 8 a.m. for their morning exercises. ... 'First time!' they answer. By that, the students mean they will pass the state-mandated TAKS exam in reading, writing, math and science on their first attempt. ... Powell Point, which dates back to 1904, is among the oldest historically black schools in Texas. ... About half the children are black, half are Hispanic, and nearly all come from poor families. The median household income in Kendleton [location of PPE] is $21,562. ... Kendleton ISD and Powell Point had earned the state's 'academically unacceptable' rating for two straight years when [Mildred] West [principal of PPE] arrived", Houston Chronicle, 7 September 2008.

"While our 'coverage' of the [Olympic] games appeared in real-time, the actual competition took place over the past several years, via international exams such as the Trends in International Mathematics and Science Study (TIMSS) and the Program for International Student Assessment (PISA). ... But it's particularly depressing to glance at the events where the U.S. flopped completely. By far our worst showing was for out lowest-performing students. The [US] placed 38th in the world in terms of getting our 15-year-olds over PISA's most basic achievement level in science. The [US] has 15 times more students than Finland does performing below this level, and more than three times as many as our Canadian Neighbors. ... Consider the latest reflections in the Wilson Quarterly from Jay Matthews, the crackerjack veteran Washington Post education reporter. He writes that 'there is scant evidence that test scores have much to do with national economic performance. ... Perhaps Matthews should acquaint himself with Eric Hanushek's recent research on this very topic. ... Though the analysis was complicated, Hanushek's key finding was simple: The level of cognitive skills of a nation's students has a large effect on its subsequent economic-growth rate. ... Hanushek et. al. close with this warning: ... 'the situation at the K-12 level should spark concerns about the long-term outlook for the U.S. economy.' ... Simply put, we're living on borrowed time", Michael Petrilli & Amber Weber (P&W) at nationalreview.com, 8 September 2008.

Amazing. Asians average 105 IQ, Caucasians, 100; Negroes and Hispanics about 85. Are these results unexpected? Not by me. As to Asians being discriminated in college admissions, I have seen them called "New Jews". The state test result improvements may be illusory? Hardly. The states showing improvement just adopted my 1965 suggestion. See my 1 September 2008 post.

Today's SAT may tell us something else: our educational standards are falling faster than most people realize. Average critical reading and mathematics scores were: 502 and 515. Let's compare this 1017 to 1960's SAT. Why? Because test takers ethnic composition changed. I estimate 95% of 1960 SAT test takers were caucasian. ... SAT test takers average IQ has fallen by about 6 points or .4 SD in the last 48 years. How did CEEB handle this in scoring today's exam in addition to "recentering" it about 10 years ago? I estimate today's 1600 is about 1450 on the 1960 exam.

Charles Murray (CM), remember him, calls things like NCLB, "educational romanticism". "The [US] Congress acting with large bipartisan majorities, at the urging of the President, enacted as the law of the land that all children are to be above average. ... There are no examples of intensive in-school programs that permanently raise intellectual ability during the K-12 years. ... When Congress passed the 1964 Civil Rights Act, it included a mandate for a nationwide study to assess the effects of inequality of educational opportunity on student achievement. ... Before Coleman's team set to work, everybody expected that the study would document a relationship between the quality of schools and academic achievement of the students in those schools. To everybody's shock, the Coleman Report instead found that the quality of the schools explains almost nothing about difference in academic achievement. ... To put it another way, we have every reason to think--and already did when the [NCLB] Act was passed--that the notion of making all children proficient in math and reading is ridiculous. ... The effects of the triumphant Civil Rights Movement gave a special reason for white elites in the 1960s to start ignoring the implications of intellectual limitations. ... Elite white guilt made it impossible to say that a lot of black children were going to fail in school and there's nothing anybody could do about it. ... People are unwilling to talk about those differences in public, but it is a classic emperor's-clothes scenario waiting for someone to point out the obvious", my emphasis. Here's a link to this May 2008 New Criterion article: http://www.newcriterion.com/articleprint.cfm/The-age-of-educational-romaticism-3835.

Steve Sailer (SS) has a 29 June 2008 Vdare post about how to improve our schools. I endorse SS's propsals. Here's a link: http://www.vdare.com/sailer/080629_schools.htm. Hugh McInnish seconded SS's position, proposing a new way to measure school achievement at Vdare, 2 July 2008, http://www.vdare.com/mcinnish/080702_iq.htm. I proposed McInnish's measure 40 years ago!

Here's an application of SS's proposal. "Almost two-third's of the students in Dallas's 225 schools are Hispanic, while 29% are African American and 5% are non-Hispanic white, WSJ, 20 August 2008. Dallas Independent School District (DISD) has a 25.8% dropout rate. So? Is this "bad"? If 65% of DISD's kids are Hispanic, we add the 29% Negro and get 94% with an average 85 IQ. Using Arthur Bestor's citerion, my 1 September 2008 post, only about 37.4% should be able to graduate from high school. How does DISD graduate 74.2%? What does DISD teach anyway?

I ask Lenin's 1902 question, "What is to be done"?

I again ask Lenin's 1902 question. I note P&W do not refer to Lynn and Vanhanen's work. As to Finland's good results, the blogosphere is all over it. Here are two posts from vdare.com: http://www.vdare.com/sailer/070319_diversity.htm and http://www.vdare.com/guzzardi/080307_vfl.htm.

Was this forseeable? "A great many people are anxious about having children. I hear about this concern frequently from young men and women pasing through Harvard--more than ever before in my three and a half decades here. ... Though populations in South America and Africa and the Indian subcontinent continue to grow at an alarming rate, the U.S. media direct their attention increasingly to labor shortages in industrial societies and to shrinking school populations in affluent American suburbs", "IQ and Falling Birth Rates", R.J. Herrnstein, Atlantic, May, 1989, Vol. 263, No. 5, page 73. "If the French worry about fertility was characterized as mainly quantitative, the British worry was mainly qualitative. ... But [Prime Minister lee Kuan Yew of Singapore] is an exception, for few modern political leaders dare to talk in public about the qualitative aspect of low fertility. We know why this is, and it has less to do with whether or not we have a fertility problem that with the unacceptability of talking about the subject. In our century the Nazis made selective fertility an emblem of National Socialism, with malevolent consequences that need not review here. Hence to even mention fertility in relation to nation or race have become taboo. ... My subject is differences among groups within the population: how these differences affect fertility and how that, in the long run, may affect the society's economic well-being. ... The evidence shows that prior to transition [to an industrialized society] women of high status had higher fertility than those of low status", 74. "With only rare exceptions, according to the evidence [Robert] Retherford has assembled, the fall in fertility during the transition is thus not just a fall but also a redistribution. ... No species can survive in the long run, however, if its female fertility falls below what demographers call the replacement rate", 75. "Much research suggests that the less intelligent people are, the less they are likely, on average, to be influenced by the delayed consequences of their behavior. ... Differential reproduction shifts a population toward the characteristics of the more prolific parents for all traits in which parents and children resemble each other, for whatever reason. Are brighter women, in fact, having few children than less bright women in the [US]? ... The decline would be larger in the black population than in the white, because black women show a steeper fertility differential in relation to IQ", 76. "Whether or not one approves of it, education and intelligence are thus correlated--but they are not identical. ... Occupational success in modern societies is linked to education. ... Therefore, one line of reasoning goes, the key to productivity and individual achievement is education--rather than individual traits that predict educational success. ... The [US] has decisively left the competition behind in sending its population to school. ... Sending more people to school has no doubt produced benefits in the quality of American life, but instead of an educated populace, we find widespread illiteracy and its mathematical equivalent, innumeracy. Many Americans are going to school more but, apparently are learning less. ... For the present, however, the fact is that the expansion of schooling has not done the job we expected it to do, and its disappointments are evident not just in the classroom", 78. "What are the implications? First, at this point in our history merely sending more people to school for more years seems to offer little benefit to economic performance. ... Second, we should be conscious of how public policy interacts not just with education but also with other influences on the intellectual quality of the population, such as the differential in the fertility rates for women of different intelligence. ... Whatever else we may want to infer from that fact, we ought to bear in mind that in not too many generations differential fertility could swamp the effects of anything else we may do about our economic standing in the world", 79. When Herrnstein wrote that, 19 years ago, he was a Harvard professor. Differential fertility is real. Negroes fertility gradient, for whatever reason, is steeper than that of caucasians. This implies that, over time, black and white IQs and achievement test results should diverge, all other things being equal! For shame, I agree with a deceased Harvard man! The popular media's most significant recent treatment of this issue was 2007's movie, "Idiocracy". That's where the US is going if we continue on our current path, the opinions of our "educationalists" notwithstanding.

Wednesday, September 17, 2008

Panzner & Smith on Freddie & Fannie

Michael Panzner pats Yves Smith on the back at his Financial Armageddon, 6 September 2008, for her comments on Fannie & Freddie (F&F) Here's a link: http://www.financialarmageddon.com/2008/09/dont-say-you-we.html.

Jesse at Jesse's Cafe Americain, 7 September 2008, translates Henry Paulson's "newspeak" into English at http://jessescrossroadscafe.blogspot.com/2008/09/text-of-paulsons-statement-on-freddie-html. Thank you Jessee.

Francine McKenna has some choice words about F&F at her Re: The Auditors, 8 September 2008. Here's a link: http://www.retheauditors.com/2008/09/fannie-mae-freddie-mac-takeover-now.html.

"The government's planned takeover of [F&F], ... came together after advisers pouring over the companies' books for the Treasury Department concluded that Freddie's accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter. ... Then, last week, advisers from Morgan Stanley hired by the Treasury Department to scrutinize the companies came to a troubling conclusion: Freddie Mac's capital postion was worse than initially imagined, according to people briefed on those findings. The company had made decisions that, while not necessarily in violation of accounting rules, had the effect of overstating the companies' capital resources and financial stability", my emphasis, Gretchen Morgenstern and Charles Duhigg at the NYT, 7 September 1008.

I'll add a few things. According to each's proxy statement, Fannie, Freddie and Morgan Stanley (MS) paid Deloitte & Touche (D&T), PriceWaterhouse (PW) and D&T: $49, $73 and $47 million in audit fees last year. Amazing. What did D&T and PW do for that money, assuming MS is correct and F&F still have accounting problems? What does the SEC do? What do those useless idiots, pardon me, upstanding public servants at the PCAOB do? How can this continue? Hey Mark Olson (MO), why don't you beat up ten 97-pound weakling CPA firms to show us how macho your PCAOB is? Do you push 80-year old, 5' 2" 110-pound ladies to the ground when you're feeling "bad" MO? Yeah, you MO. Try that with Sara Palin and see what happens. She'll probably fill you with lead. Will MS fire D&T for failing to detect accounting problems at FNM? Or will MS recommend FNM keep D&T as D&T's "failure to find the problems" shows D&T will "play ball" when told? Stay tuned for the continuing soap opera.

Jesse has a strong stomach. Even I don't have the guts to read Henry "formerly of Goldman Sachs" Paulson's statement.

This is interesting. Why did Henry Paulson need MS to "scrutinize" anything? What did FRE pay PW $73 million for last year? Will MS suggest PW be banned from auditing financial institutions? "Not necessarily"? What does that mean? Will MS now lobby to close this accounting loophole assuming MS is correct? Stay tuned for the next installment of: "As the Big Shots Obfuscate".

This is too good. Bravo Francine! Way to go girl, you even kicked the PCAOB in the shins! Thanks.

Bankruptcy Finangling-Retail Style

"When a high-profile group including Cerebus Capital Management and Sun Partners purchased Mervyn's for $1.26 billion in 2004, the deal was structured as two separate transactions--one for the retailer and a second one for the retailer's real estate. This complicated structure, the suit alleges, enriched the private-equity firms while leaving the retail operations insolvent. ... The case against Sun and Cerebus is especially fraught for the private-equity industry, which is trying to shake off decades of criticism that the funds 'strip' healthy companies with little regard for employees or insititutions. It is a dynamic that forms the basis of the company's complaint. ... Mervyn's was originally sold by former parent Target Corp. for $1.26 billion. The new owners then leased many of the stores to Mervyn's and sold or leased some properties to other retailers. ... Mervyn's ... alleges that the arrangement strangled its profitability, and that it was a 'helpless pawn.' That was because the new arrangement nearly doubled the company's annual lease payments, to $172 million. In addition, it was required to pay a special dividend to the real-estate company. Furthermore, Mervyn's couldn't close unprofitable stores without the consent of the private-equity firms and the real estate company", my emphasis, Jeffrey McCracken & Peter Lattman at the WSJ, 4 September 2008.

All Mervyn's rents paid the real estate company over its pre-purchase rents should go to Mervyn's creditors. This is a "transfer pricing" problem. By increasing Mervyn's rents the real estate company could siphon off Mervyn's profits and apparently did. Where's the DOJ on this? This looks like another case where indictments should be passed out like Halloween candy. I won't hold my breath. Isn't this a variant of "equity skimming"? I'll explain. 12 USC 1709 provides, "Whoever, with intent to defraud, willfully engages in a pattern or practice of --purchasing one-to four-family dwellings ... which are subject to a loan in default at the time of purchase or in default within one year subsequent to the purchase and the loan is secured by a mortgage or deed of trust insured or held by the Secretary of [HUD] ... failing to make payments under the mortgage or deed of trust as the payments become due, ... applying or authorizing the application of rents from such dwellings for his own use, ... shall be fined not more than $250,000 or imprisoned not more than 5 years or both". I realize Mervyn's properties were commercial, not 1-4 family homes. So? We have old standbys: 18 USC 1341, 1343 and 1344, mail, wire and bank fraud to work with. Also 18 USC 152, bankruptcy fraud. The "two-company split" was found criminal in Switzer. I'm sure a diligent AUSA could find something to indict Cerebus and Sun for. Of course such AUSA will never get a "NY Big Law" partnership in the future, but he's working for the DOJ today. Isn't he? Well, DOJ, how about it?

Tuesday, September 16, 2008

Bankruptcy Balogna

"A federal appeals court in St. Louis ruled Thursday that a provision of a sweeping 2005 federal bankruptcy-overhaul law violates the free-speech rights of lawyers. The 8th Circuit Court of Appeals struck down a provision of the Bankruptcy Abuse Prevention and Consumer Protection Act that barred attorneys from advising clients to take on more debt before they filed for bankruptcy protection. The appeals court, in a 2-1 ruling, said the provision 'prevents attorneys from fulifilling theur duty to clients to give them appropriate and beneficial advice', ... A Justice Department representative said the department was reviewing the decision. Constitutional law professor Edwin Chemerinksy, dean of the University of California-Irvine School of Law, said the invalidated provison was the most significant constitutional problem with the bankruptcy law", Brent Kendall at the WSJ, 5 September 2008.

I agree with Chemerinsky. I wait to see if "Roberts and the Supremes" take this up. Will the big banks tell the DOJ to bring this issue up in another circuit? Stay tuned.

Whistleblowers at Work

"Whistleblowers helped authorities recover at least $9.3 billion from health-care providers accused of defrauding states and the federal government, according to an analysis of [DPJ] records. Private citizens with inside knowldge of wrongdoing now initiate more than 90% of the department's lawsuits focusing on health-care fraud", my emphasis, WSJ, 2 September 2008.

"More than 90%". Wow. Do the FBI and DOJ do anything, or just wait for whistleblowers to show up? Imagine if this happened on Wall Street. We might see some indictments of serious players as opposed to nobodys.

The SARBOX Scam-2

"The Labor Department [DOL] is asking a former executive of UBS Financial Services who filed a complaint raising questions about the auction-rate securities melt-down to show that his UBS AG subsidiary is covered by the whistleblower statute, according to the plaintiff's attorney. ... The [DOL], which enforces the whistle-blower provision under the Sarbanes-Oxley Act, asked an attorney for Mr. [Timothy] Flynn to submit a brief showing why the subsidiary is covered. ... A [DOL] spokeswoman said the department 'can't confirm or deny any whistleblower case'," my emphasis, Jennifer Levitz at the WSJ, 2 September 2008.

"The [DOL], charged with enforcing the federal law protecting corporate whistleblowers at publicly-traded companies, has been dismissing complaints on the technicality that workers at corporate subsidiaries aren't covered. The government has ruled in favor of whistleblowers 17 times out of 1,273 complaints filed since 2002, according to department records. Another 841 cases were dismissed. ... Sen. Patrick Leahy, a Vermont Democrat who helped craft the whistleblower provision--part of [SARBOX]--says the law was meant to cover workers in corporate subsidiaries. 'Otherwise, a company that wants to do something shady, could just do it in their subsidiary,' he said. ... Another pending case involves UBS AG, the Swiss bank. The plaintiff, Timothy Flynn, alleged that in June he was suspended from his job as a UBS financial adviser for cooperating with a Massachusetts investigation of the bank's sales of auction-rate securities. Mr. Flynn's attorney, Jason Archinaco, says the [DOL] has asked him to show that the UBS unit that employed his client was covered under the act. ... According to Sen. Leahy, the provision was written to be 'interpreted as broadly as possible.' ... Gregory Jacob, the [DOL's] chief legal officer, has asked the review board to uphold the November decison [in a Siemens case], according to filings in the case. ... Nearly all of Siemens AG's approximately 400,000 employees work at its business units, according to Siemens AG's 2007 SEC filings", Jennifer Levitz at the WSJ, 4 September 2008.

"Two U.S. senators accused the [DOL] of violating the 'spirit and goals' of a federal law aimed at protecting employees who report corporate wrongdoing, and called on the agency to stop rejecting claims from workers at subsidiary companies. ... Sen. Leahy and Sen. Grassley, who wrote those provisions, said that, 'there is simply no basis to assert' that employees of the subsidiaries of publicly traded companoes aren't covered under that acrt, as the department has asserted in numerous recent cases. ... But the [DOL] said, 'We are confident we are correctly enforcing the statute, and do not believe the text of Sarbanes-Oxley was written supports the broader reading that employees of subsidiaries are automatically covered.' Tom Devine, legal director of the Government Accountability Project, a nonprofit group that promotes whistelblower rights, called the department's stance, 'dysfunctional,' saying: 'This one is a no-brainer. There is nothing in the law that allows for that type of loophole.'," my emphasis, Jennifer Levitz at the WSJ, 10 September 2008.

Now class, let's have a lesson in The Law. Laws are interpreted among other things, by using the "Maxims of Jurisprudence". You can find them at California's Civil Code, Sections 3510-3548. Here are some which might help the DOL's legal geniuses interpret SARBOX: "One who grants a thing is presumed to grant whatever is essential to its use", 3522:" "The law respects form less than substance", 3528; "The law never requires impossibilities", 3531; "An interpretation which gives effect, is preferred to one which makes void", 3541 and "Interpretation must be reasonable", 3542. Let's apply these to the instant situation by using reductio ad absurdum. Suppose we have Fortune 500 Inc. (F500), a publicly-held company with $50 billion in sales, $75 billion in market cap and 100,000 employees. F500, now forms a holding company and 100 subsidiaries. It transfers 99,998 employees, all save the CEO and COO to the subsidiaries. Did F500 just exempt 99.998% of its employees from SARBOX whistle-blower provisions? The DOL thinks so. See, you too can be an attorney. Where's the (In)Justice Department on this? Why haven't the DOL employees who adopted this SARBOX interpretation been indicted as justice obstructors, 18 USC 1505? What does "Justice" do anyway? Why haven't the UBS attorneys who apparently encouraged this DOL SARBOX interpretation been indicted as accessories after the fact to witness retaliation, 18 USC 3, 1513? Of course not, they're just "zealous advocates". Who needs the DOL? The Bush administration's "Justice" is blind. To crimes by well-heeled miscreants! This is almost enough to make you want an Obama victory.

Among the things lawyers do to engage in statutory interpretation is look for similar laws, reasoning "by analogy". Does anyone at the DOL or DOJ think a criminal defendant could have a securities fraud indictment dismissed based on his working for a F500 subsidiary? A federal district court judge hearing this, would probably laugh and ask defense counsel if he needs medical attention. What's the SEC's position on this? Are subsidiaries of SEC registrants exempt from SARBOX? I'm a CPA and no client has ever asked me! What's the DOJ's position? Well, Michael Mukasey, will you indict anyone at the DOL as an accessory after the fact, 18 USC 3, to SARBOX violations? Or is it now the DOJ's position that federal securities laws do not apply to persons employed by SEC registrants' subsidiaries?

Now Elaine Chao, AB Mount Holyoke, MBA Harvard, Secretary of Labor, as this is a "no-brainer", will Michael Mukasey indict you you for hundreds of counts of accessory after the fact to witness retaliation, 18 USC 3, 1513? With that academic pedigree, will you now claim to be stupid? Oh, and all the attorneys representing "Fortune 500 Inc." who pushed this? If Uncle Sam built and filled say, a new, 2,500-inmate federal prison just to house these clowns, the incidence of corporate fraud would likely drop 90%. Can you imagine, "NY Big Law" partners telling clients, "Gee, that's really nice. But I can't help you perpetrate a crime, not even for 5,000 billable hours at $900 per. If we get caught I will go to prison and be disbarred. I studied law at Harvard and later learned the value of my license from Lucky Luciano. Sorry, no can do".