Sunday, May 31, 2009

Gaza in California

Rob Miller has a satirical 17 May 2009 piece, treating the Southwestern US as if it was Israel, likening the Zetas and MS-13 to Hamas and Hezboallah. Read it, laugh and learn about the Middle East, at American Thinker, link:

A Berkeley Liberal's "Ninth AA Step"

"These are not easy words for anyone to utter, much less a leftist from Berkeley, or a recovering leftist, that is. Even though I've been in recovery for 14 months, 2 weeks, and 3 days, leftists are always right in your face, in an I-hate-you-if-you-disagree sort of way. Hence this letter of amends to all the people I've lectured, scolded, ranted and raved at, and otherwise annoyed during my 30 plus years of 'progressive' politics", Robin, 11 May 2009 at:

"So what do you do when you realize that everything you've ever thought and believed no longer worked for you? Where do you go when the bubble of progressive politics bursts in your face and you're left in the leftist place on earth? ... Like many leftists who had abandoned Judeo-Christian religion, I worshipped at the altar of liberalism. ... I was programmed from birth to be a devout liberal. ... Take the anti war stance of the left. Noble and sactimonious and all that. But how easy it is to sit back and preach peace when you have an army defending you; to rail against the US when you are protected by free speech laws; to demonize Israel, when you've never lived through the murderous progroms of Tsarist Russia or the Holocaust. ... And this love affair with Radical Islam--what's up with that? ... To walk around, as I did, with utopian images that didn't match reality was to view life through the eyes of a child", Robin, 21 May 2009 at:

As Michael Savage said many times, "liberalism is a mental disorder". I add, one in which the diseased is impervious to facts. Robin, we accept your "ninth step".

Welcome aboard Robin. It's only taken you about 50 years to grow up.

Stress Test Kabuki Dance

"The [Fed] directed at least seven of the nation's biggest banks to bolster their capital levels by $65 billion while effectively blessing the stability of six others, marking for the first time a bold line between some of the nation's stronger and weaker banks. ... By contrast, regulators have told Bank of America Corp. it must take steps to address a roughly $34 billion capital shortfall, the biggest gap among its peers. Wells Fargo & Co. needs to find $13 billion to $15 billion; GMAC LLC, $11.5 billion; Citigroup Inc., $5 billion; and Morgan Stanley, $1.5 billion. ... Financial markets seemed to shrug off news of the capital shortfalls. ... Some investors said the news was less negative than many had feared. Others held out the idea that many banks would be able to boost their capital without having to seek fresh government funds. The stress tests--designed to examine individual banks' ability to withstand future losses--helped alleviate the near-panic that investors felt at the beginning of the year as many worried some banks might have to be nationalized. ... 'I think this will be a confidence-instilling announcement,' [FDIC] Chairman Shelia Bair told a Senate panel Wednesday. 'There will be additional needs for capital buffers for some institutions, but I think there will be mechanism to do that within the next six months.' ... Now, some of the stronger banks will be permitted to repay funds borrowed from the government under its [TARP] and escape the related restrictions on compensation and dividend payments. ... Banks are being told to boost their capital not because they are in trouble, but because regulators think they don't have a big enough buffer to continue lending if the economy worsens in the coming months", my emphasis, Deborah Solomon, David Enrich and Damian Paletta (SE&P) at the WSJ, 7 May 2009.

"For nearly three months, more than 150 federal employees have been scrutinizing bank books, questioning bankers' projections and comparing each bank's expectations. The government now knows more about the 19 banks, which represent about two-thirds of all US bank assets, than anyone", my emphasis, David Wessel (DW) at the WSJ, 7 May 2009.

"BofA needs to boost common equity by about $35 billion following the tests. Conveniently, it has about $33 billion of private preferred shares. ... True, forcing a conversion solely on private investors could make it hard for banks to sell preferred into private markets for years to come. ... Meanwhile, amid the euphoria, it is important to remember that switching preferred for common is just juggling capital, not raising new money", Peter Eavis at the WSJ, 7 May 2009.

"A shareholder revolt cost Ken Lewis, [BofA's] chief executive, his title as chairman of the board last week, but yesterday's news that BofA will probably need to raise $34bn in new capital could cost him the other part of his job. ... Jeffrey Sonnenfeld of the Yale School of Management said the latest revelations about BofA's financial condition were grounds for Mr. Lewis' dismissal. ... He added that BofA's acquisition of Countrywide Financial and Merrill Lynch in the past year were handled poorly, especially because Mr. Lewis did not inform BofA's shareholders about the size of Merrill's losses prior to the vote on approving the deal: 'Ken Lewis way overpaid on two acquisitions, and failed to inform his true owners of the status of the purchases he was going to make'," my emphasis, Greg Farell at the FT, 7 May 2009.

"The federal government projected that 19 of the nation's largest banks could suffer losses of up to $599 billion through the end of next year if the economy performs worse than expected and ordered 10 of them to raise a combined $74.6 billion in capital to cushion themselves. The much-anticipated stress-test results unleashed a scramble by the weakest banks to find money and a push by the strongest ones to escape the government shadow of taxpayer-funded rescues. ... But questions remain about the stress tests' rigor, in part since the Fed scaled back some projected losses in the face of pressure from banks. ... The information provided by the stress tests will 'make is easier for banks to raise new equity from private sources,' Mr. [Tim] Geithner said. ... Nine of the stress-tested banks--including titans like JP Morgan Chase & Co. and ... [GSG] as well as several regional institutions--have adequate capital. That finding essentially represents a seal of approval from the Fed. ... The test results were vigorously contested by some banks, which argued they were superficial and didn't reflect significant differences in the health of various banks' loan portfolios", my emphasis, David Enrich, Robin Sidel and Deborah Solomon at the WSJ, 9 May 2009.

"Why did the stress tests treat [GSG] better than Morgan Stanley [MS]? ... As a result of Thursday's stress test, [MS] raised $4 billion in common stock. That shareholder dilution mightn't have been needed if the authorities had come up with stronger earnings generation for [MS]. Were the stress tests' assumptions 'stacked in [GSG's] favor?' asks Michael Hecht at JMP Securities. ... The government documents don't give enough detail to explain the gap. ... Few would argue that [GSG] isn't the stronger of the two, and the government may have its [GSG] projections right. But the numbers appear to bake in the idea that [GSG] is savvier at making money from taking risk. The US had better be right", Peter Eavis at the WSJ, 9 May 2009.

"The [Fed] significantly scaled back the size of the capital hole facing some of the nation's biggest banks shortly before concluding its stress tests, following two weeks of bargaining. In addition, according to bank and government officials, the Fed used a different measure of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits. ... Government officials defended their handling of the stress tests, saying they were responsive to industry feedback while maintaining the tests' rigor. ... [BofA] was 'shocked' when it saw its initial figure, which was more than $50 billion, according to a person familiar with the negotiations. ... At times, frustrations boiled over. Negotiations with Wells Fargo, where Chairman Richard Kovacevich had publicly derided the stress tests as 'asinine,' were particularly heated, according to people familar with the matter. Government officials worried San Francisco-based Wells might file a lawsuit contesting the Fed's findings. ... With the stress tests, government officials were walking a fine line. If the regulators were too tough on banks, they risked angering their constituents and spooking markets. But if they were too soft, the tests could have lost their credibility, defeating their basic confidence-building purpose", my emphasis, David Enrich, Dan Fitzpatrick and Marshall Eckblad (EF&E) at the WSJ, 9 May 2009.

"I've been thinking about stresses. Actually I've been thinking about Treasury Secretary Geithner's stress tests, rosy scenarios, the missing laugh track, the classes of 2009, households, and the automotive giants. ... You see an army of 200 federal examiners had gone over the books and calculated the impact of growing unemployment, asset (particularly real estate portfolio lending) deterioration, potential exposure on other investments, and various personal-credit/ loan write-offs. The unstated goal was to re-assure the general public that our banking behemoths were on solid ground and that there was no reason to fear any 1930's type meltdown. ... It was set up from the get go to advance all of them to the next grade level in the spirit of 'no child (or mega bank) left behind.' Well, guess what? THAT is exactly what happened! ... The worst case scenarios (of what can go wrong, will go wrong) for the coming two years suggested a 'further potential exposure' of a mere $599 BILLION in losses (roughly 5.1% of total assets)", Fred Cederholm (FC) Financial Sense, 11 May 2009, link:

"Are America's banks: a) healthy, b) insolvent, or c) being kept alive by the government but delighted to pretend otherwise? ... That any bank can sell equity is one big benefit of the stress test. By producing a credible estimate of losses over the next two years--$600 billion--officials have restored some confidence in the banks' word. ... But investors can now buy a bank's shares and be confident that its books are not being cooked flagrantly and that it is not about to be nationalised", my emphasis, Economist, 14 May 2009, link:

"Finally, a stimulus plan Wall Street can get behind. ... But thanks to the government's stress tests, Wall Street is being flooded with fees. A number of the stress-tested 19 financial institutions, whether told by the [Fed] to raise money or to boost their capital cushions or not, are rushing to sell new shares. The 10 that have been told to plug a capital hole have a month to submit a capital-raising plan and than six months to raise the cash. ... What does that mean for Wall Street? Plenty of underwriting fees. ... Add to those offerings [GSG's] sale of $5 billion in common stock last month, and the fees that were generated from TARP bank follow-on deals in the past two months stand at more than $670 million. The big winners? The investment banks of [GSG], [MS], JPMorgan Chase, Barclays, and Wells Fargo and its Wachovia unit, which will share in this fee party, according to Dealogic", Stephen Grocer at the WSJ, 14 May 2009.

"Federal officials have pressured [BofA] to revamp its board by bringing in directors with more banking experience, as regulators place the bank under increasingly heavy government scrutiny. The move represents unusual influence by the federal government over the workings of a financial institution in which it doesn't own a stake. It's particularly significant because many of the bank's woes stem from its purchase of Merrill Lynch & Co.--an acquisition that was completed after heavy prodding by federal regulators. The Merrill deliberations were the beginning of regulators' deepening involvement in the Charlotte, NC, lender's day-to-day operations. ... Prior to those moves, federal banking regulators--the [Fed] and the Office of the Comptroller of the Currency--had signalled to the bank's leadership that such steps would be well received by the federal government. Government officials also suggested that the task of reshuffling the board be led by independent directors, and that the board needed more members with banking expertise", my emphasis, Dan Fitzpatrick and Damian Paletta at the WSJ, 15 May 2009.

Come on SE&P, you can do better than this. How do you know what Zimbabwe Ben (ZB) thinks? Would ZB make a confidence shattering announcement? What do we learn from this? Ken Lewis "rats out" ZB and Hank Paulson, the BofA gets dinged for $34 billion. GSG wants to return its TARP funds, it's fine. How can anyone take these tests seriously? Is the BofA worse off than Citigroup? I have no idea what these tests consisted of. ZB said on television they were not solvency tests. What then?

DW, are you serious? I'll "audit" you comment. Assume 175 of ZB's "finest" worked 50 hours a week for 11 weeks. Further, if they were Big 87654 drones, they would be billed at a $325 per hour weighted average. By the magic of multiplication I get: 175 x 11 x 50 x $325 = $31.3 million. This is my "shadow" Big 87654 stress test price. Last year KPMG billed Citi $98 million, PWC billed BofA $83 million, that's $181 million already! What did the "stress testers" do? My surmise: a whole lotta nuttin'. The Big 87654 should be furious with DW for suggesting ZB & Co. know more about these banks than the Big 87654. On the other hand ...

Has Eavis ever got this right.

Is Sonnenfeld working for ZB?

Beware round numbers. I surmise ZB decided the stress tests' minimum future losses were $600 billion to still have "market cred". Starting with $600 billion, the stress testers job was: allocate losses to favored and disfavored banks, like GSG and BofA respectively. If a bank's losses exceed ZB's projections, can its stockholders sue the Fed as if it was a CPA firm rendering an opinion? Seal of approval? Is the Fed now an underwriter?

Quoted without comment.

Did EF&E read their article? Who wants a Fed which is "responsive to industry feedback"? Isn't that partially responsible for "the crisis"? I'd welcome Wells Fargo's lawsuit. Who knows what discovery might reveal? Regulators "risked angering their constituents". Who are? TBTF bank managements, or the members of Pat Buchanan's pitchfork brigade? The tests were a "confidence-building" measure. The Fed could have saved plenty. It could have asked the DOJ to let Bernie Madoiff run the stress tests in return for a reduced sentence. How about it ZB and Eric Holder? Bernie needs something to do with his time.

Well said FC. FC is an Illinois CPA who is an S&L crisis veteran.

Does the Economist realize it indicted the: Big 87654, SEC, OCC and PCAOB all at once? Ye who favor more regulation, think about this.

It's good to see GSG will get something out of this.

Who does the Fed want added to BofA's board? Vikram Pandit? Lloyd Blankfein? That this is retaliation for Ken Lewis violating the Fed's "omerta" becomes more obvious every day.

Saturday, May 30, 2009

African Aid

"A swell of opposition is building in the aid world to a new protagonist who has thrown down a strident challenge to the rock stars and liberal economists who have long dominated debate over foreign assistance to developing countries. ... Yet is it proving hard to suppress the hyper-active graduate of Oxford and Harvard, who pops up weekly in a new capital to promote her book Dead Aid--the title itself an affront to rock star Bob Geldorf's Live Aid campaigns. ... Within days of reading about her, Paul Kagame, Rwanda's president, flew Ms. [Dambisa] Moyo out to address his government. This month, Col. Muammar Gadaffi, the Libyan leader, invited her to Tripoli. Broadly, Ms. Moyo argues that official development assistance has fostered dependency and perpetuated poor governance. ... Her ideas are not especially new. But the publicity she has attracted poses challenges to an industry accustomed to having the most vocal campaigners on its side. ... Some critics claim her ideas are gaining prominence because of the novelty of a passionate, young African woman taking on the aid establishment. ... Academic Jeffrey Sachs is among those who have denounced her ideas. ... 'The aid establishment is scared to death of the public relations disaster that a growing movement of independent African professional would be', said William Easterly, the US academic", original italics, William Wallis at the FT, 23 May 2009.

"The former Goldman Sachs strategist, who won scholarships to Harvard and Oxford before joining the World Bank, is rapidly becoming a headache for the aid industry. ... Her solution: cut off funding within five years and encourage poor countries to access international capital markets. A mix of foreign investment, particularly from China, fairer trade, remittances and micro finance would do the rest. ... Panicked at the prospect that her ideas are gaining traction, Jeffrey Sachs, the US academic and aid advocate, accused her of endangering lives", my emphasis, William Wallis at the FT, 23 May 2009.

Imagine, there is a "Foreign Aid-Expert" complex, an aid industry.

Given our 50 years of failed aid to Africa, the aid establishment has been one of history's largest mass murderers. How may millions died in the Congo in the last 20 years for example? Sachs, shut up. Is Moyo really a "former" Goldmanite? If so, she may be unique.

MBIA Split Attacked-2

"Three weeks ago, Wells Fargo served a notice that it had failed to receive $5.5m of insurance payments. ... The use of their triple A rated guarantees was the backbone of huge parts of the credit industry such as securitisation and structured finance, their demise is one reason these parts of the financial markets remain dysfunctional. ... In spite of the pressures wrought by the credit crisis on the biggest bond insurers. or monolines, none of them had been forced to cease paying claims. ... The Syncora saga has put the spotlight on just one of the concerns around bond insurers--that of solvency. The solvency concerns around Ambac and MBIA are playing out in different ways. MBIA received regulatory approval to split into two: one business with municipal bonds and one which would have the structured bonds it insured. This, in effect, is seen as a way of protecting municipal holders at the expense of banks and investors who bought insurance on structured finance. ... 'Those seeking to sue MBIA may have an uphill battle on their hands to prove that the rationale behind the transaction was not well founded but rather was irrational, capricious and/or arbitrary,' said Rob Haines, analyst at Credit-Sights, Mr. Haines regards MBIA as a better credit risk than Ambac", Aline van Duyn at the FT, 14 May 2009.

"A group of 18 financial institutions sued MBIA Inc., claiming the bond issuer's decision to split its businesses earlier this year was fraudulent and left one of the units effectively 'insolvent.' The lawsuit, filed in New York state court, was brought by US and foreign banks, including JP Morgan Chase & Co., Bank of America Corp., Morgan Stanley, Canadian Imperial Bank of Commerce, Barclays PLC and UBS AG. ... MBIA in February separated its troubled mortgage exposures from its profitable US municipal-bond insurance portfolio in an attempt to resume writing guarantees on municipal debt. The original MBIA Insurance unit was left with $10 billion in claims-paying resources to back guarantees on about $240 billion in structured-finance securities and non-US bonds, and its rating was downgraded to 'junk' by credit-rating agencies. ... Many of the banks had bought credit derivatives from MBIA that insured them against losses on securities backed by subprime mortgage assets and commerical real-estate loans. ... In mid-March, representatives of about 15 financial institutions complained to New York State Insurance Superintendent Eric Dinallo [ED], who had approved MBIA's split. ... 'Our lawsuit simply seeks to ensure that policy holders receive what they have paid premiums for: contractually guaranteed insurance protection,' said Vince DiBlasi, a lawyer at Sullivan & Cromwell [S&C], who is representing the banks suing MBIA. ... MBIA and insurance regulators have said their internal projections and estimates of future losses indicate the original insurance unit remains solvent", my emphasis, Serena Ng at the WSJ, 14 May 2009.

MBIA's split is an obvious fraudulent conveyance. How can Haines miss this? I agree with the banks here. Let MBIA file bankruptcy. Now. See my 30 April 2009 post, link:

Let's look at some numbers. At 31 December 2008 MBIA had $994 million in book equity, $233 and $554 billion in insurance in force on structured finance products and municipal bonds respectively. I looked at MBIA's financials, PWC, the guys who "audit" AIG and GSG, had no problem with MBIA's numbers for $4.6 million in fees. MBIA's financials are laughable as is PWC's opinion. I wouldn't pay $1.26 billion for MBIA at its current $6.06 per share price. MBIA should be sent to sleep with the fish. I wish the banks, yes the banks, well with their suit. If they win, they may teach ED a badly needed lesson. What did ED know and when did he know it? Well PWC, where do you stand on this, my 13 May 2009 post, link:

These are the end times. S&C, a "New York BigLaw'" is on the right side here! Hey, Vince, I have a pro bono idea for S&C, if S&C is not conflicted out. You have 18 banks. File bankruptcy against AIG and kill it. You may expose why ED let AIG's insurance subs upstream $20 billion to the AIG parent. Of course, if any of your 18 banks were recipients of $120 billion paid to AIG's counterparties, you can't touch this. Aren't you impressed with MBIA's projections? Tell us ED, did you "project" AIG was solvent in September 2008? Will S&C hire its client Moody's as an "expert" to discredit MBIA's projections, my 30 May 2008 post,

Friday, May 29, 2009

We Don't Need No Stinking Law

"The rule of law, not of men--an ideal tracing back to the ancient Greeks and well-known to our Founding Fathers--is the animating principle of the American experiment. ... Fleecing lenders to pay off politically powerful interests, or governmental threats to reputation and business from a failure to toe a political line? We might expect this behavior from a Hugo Chavez. But it would never happen here, right? Until Chrysler. ... Violating absolute priority undermines this commitment by introducing questions of redistribution into the process. It enables the rights of senior creditors to be plundered to benefit the rights of junior creditors. ... The value of the rule of law is not merely a matter of economic efficiency. It also provides a bulwark against arbitrary government action taken at the behest of politically influential interests at the expense of the politically unpopular", my emphasis, Todd Zywicki (TZ) at the WSJ, 13 May 2009.

TZ, George Mason law professor, nothing is new here. Look at the 1930s "gold clause" cases. Or Sandra Day O'Connor's "jurisprudence". Harvard Law grad, POTUS Obama is taking us to fascism. How many hundreds of billions did the Fed pass out to "politically powerful interests"? YS has a related 12 May 2009 post at her Naked Capitalism, link: The Fed's Coleman is as much a general as the Modern Major General, my 25 August 2008 post:

Goldman SACKS, Its Clients?-2

"One of Goldman Sachs Group Inc.'s [GSG] premier real-estate funds is in discussions with its lenders to restructure debt on some of its biggest investments: Nevada casinos, German office buildings and a US hotel chain. The wrinkle: One of the main lenders on those deals is [GSG]. ... With commercial real-estate values plunging, investors and their advisers have begun focusing on the conflicts. They say that [GSG] is able to use its position as investor, lender and fee-collector to benefit itself at the expense of outsiders. ... But all wasn't lost for [GSG]. During 2008, [GSG] made at least $88 million in fees for arranging financing for Whitehall 2007 deals, plus an additional $30 million in advisory fees, and $19 million in property-management fees, according to documents for the first, second and fourth quarters of the year that were reviewed by the [WSJ]. ... Such high fees at a time of poor performance have upset some outside investors in the fund. Some of its investments were made at the top of the market prices when analysts including some at [GSG] were already warning of looming problems facing commerical real estate. Adding to the discord: [GSG] offered to buy out its employees' interest in the fund at a discount to net asset value late last year, weeks before further marking down the equity value of the fund. Outside investors didn't get that offer. ... [GSG] is in an especially tricky position when acting as both a borrower and lender to itself, critics say. Concesssions granted by Whitehall may benefit [GSG], the lender, at the expense of Whitehall investors, the critics add. ... [Andrea] Raphael, the [GSG] spokeswoman, said Whitehall 'formed an independent investment advisory committee comprised of significant outside investors who are asked to approve certain transactions that involve other parts of the firm'," my emphasis, Anton Troianovski and Linging Wei at the WSJ, 13 May 2009.

Why does GSG still have clients? This reminds me of my 16 December 2007 post: Would GSG benefit itself at the expense of its clients? Anyone thinking this should be hung. Right Lloyd Blankfein?

Thursday, May 28, 2009

When Giants Fall--Book Review

"Still, acceptance goes only so far. If, for example, you ask Americans how their lives might change when the [US] is no longer the world's military, political, economic, and cultural leader--or even a superpower at all--many will look at you strangely, as if you had two heads. Yet history teaches us that empires come and go. ... In fact, there is plenty of evidence to suggest that the [US'] days as hegemonic leader are already numbered", ix. "But it seems that even those who accept that the world is changing haven't fully thought things through. Typically nowadays, many believe that no matter what happens more broadly speaking, it won't have much impact on their lives. ... And finally, more than a few people have some vague notion that whatever transition does occur will be benign or maybe even positive--akin, perhaps, to what took place many decades ago, when the [US] grabbed the leadership baton from its English-speaking predecessor, Great Britain", my emphasis, x.
"In late 2007, a Chinese submarine suddenly 'popped up' in the middle of US military exercises taking place in the Pacific Ocean. ... The newspaper added--in a report that received scant US media attention--that American military chiefs 'were left dumbstruck'," xv. "Mounting logistical disruptions, tighter borders, heightened geopolitical instability, rising costs of key inputs like water and energy, and an assortment of dislocations will shoot holes in many of the olf theories about how to improve efficiency and boost growth. For most firms, approaches that might once have increased the odds of success, including just-in-time inventory management, the development of long and intricate supply chains, and outsourcing of functions to other locales, will lead to their undoing", my emphasis, xxii.
"Simply put, the [US] has gone soft. People prefer watching or pretending, instead of doing. Education has been dumbed down. According to 'PISA 2006,' the 2006 Programme for International Student Assessment (PISA), a triennnial survey of 15-year-olds around the world, the [US] ranked 29th in science and 35th in mathematics out of 57 countries in terms of overall performance. ... Social standards have slipped. ... Sound arguments are overrun by sound bites, discourse is drowned out by diatribe, and facts and fundamentals are eclipsed by feelings and fantasy", my emphasis, 8.
"What is having a more pronounced effect on the resource supply-demand equation is a structural shift in regional consumption patterns, as populations in fast-growing countries like China and India look to savor the fruits long enjoyed by the [US] and other economically advanced nations. ... But if, for example, China were to reach the same level as the [US], overall rates of consumption would be twice what they are now; if India did the same, the total would be three times as much", 24. "Another concern stems from the so-called demographic tsunami in the [US] and other nations, where the costs of rapidly aging populations are being shouldered by a shrinking number of workers. Such a shortfall lays the groundwork for future generational clashes", my emphasis, 25. "Over the past decade, however, there has been a visible buildup of stresses and bottlenecks signalling a seemingly intractible disparity between supply and demand. ... At the same time many traditional suppliers are making it clear that they no longer wish to play by the rules of what has been a Western-dominated game. ... Such perspectives underscore increasingly widespread acceptance of the concept of 'peak oil'," 27. "During the past four decades or so, global oil consumption has climbed sharply. Based on data from the BP Statistical Review of World Energy 2007, demand rose from 31.2 million barrels a day in 1965 to 83.7 million in 2006, an increase of around 170 percent. Over that span, India's and China's combined share of the total grew eightfold, from 1.5 percent to nearly 12 percent, while the US share fell from 37 percent to just under a quarter of world consumption", my emphasis, 30.
"There's little doubt, of course, that the [US'] military dominance and its formidable nuclear arsenal--as well as other nations' long-standing acceptance of our role as global policeman of last resort--have helped to foster a degree of peace in the postwar period that is unpredecedented. Now, though, with the [US] poised to lose its place at the head of the geopolitical table and the prospect of an intense scramble for key resources, several developments suggest the world is on the cusp of a destabilizing shift in favor of rising violence and more frequent outbreaks of hostilities between individuals, groups, and nations", 44.
"Indeed, no matter how or why the [US] reached this point, there is an argument that says the sizeable dollar claims of a relatively small number of countries actually represent a problem for them, not the [US]", 66.
"Firms that have depended on free-spending American consumers, for example, will find that the structural underpinnings of their business models have been obliterated as incomes drop, attitudes sour, purchasing habits change, and easy credit disappears", 131. "Firms with significant exposure to foreign markets, either directly or indirectly, will also see doubt cast on supply, production, research, and marketing agreements. Paradoxically, energy and mining companies--along with others in seemingly well-positioned industries--could be exposed to dangerous crosscurrents", my emphasis, 133. "Souring municipal finances will also see police budgets slashed, courts overloaded, and crime rates shoot up. Businesses could find that their dependence on computers, telecommunications networks, the Internet, and other components of digital-age plumbing have serious drawbacks when electrical and other systems don't function as intended--or at all", my emphasis, 136. That waiting list for jail grows daily. "Instead of operating on a just-in-time basis, businesses will have to worry about getting enough of what they need--in enough time. Otherwise it won't really matter how efficient they are", 137. "For those operators who are intent on sticking around for a while, the watchword for the future will be a throwback to the past: 'just-in-case' systems", 141.
"Oil-rich countries like Saudi Arabia, for example, which to a great entent maintained structural links to and large portfolios of the [US] currency for strategic purposes, will have much less incentive to do so when the US protective umbrella is in tatters", 149. "Traditional fundamentals may matter less than the question of which firms or industries will benefit from favoritism and government largesse", 156. "Once things get bad enough, however, [policy makers] will turn to other more destructive approaches. These might include cranking up the government printing presses, thereby triggering a hyperinflationary spiral; mandating forced conversions of savings and investments into government bonds; and nationalizing or expropriating businesses", 157. "Some might argue--perhaps convicingly--that equities stand to benefit in a hyperinflationary environment like that which has been seen most recently in the African nation of Zimbabwe", my emphasis, 159.
"Those who have spent years in an office, sitting in front of a computer or pushing paper around, will discover that they have to get their hands dirty doing other, less comfortable tasks", 171-2. "The budgets of state and local governments will be in similarly bad shape. One result will be an ongoing decline in public services such as law enforcement and education. Another will be the shredding of various social and financial safety nets, including Social Security, Medicare, unemployment compensation, and other insurance-type programs", 173.

I agree with the vast majority of what's in Michael Panzner's (MP) book. Most of it I could have written myself. I share MP's concerns about just-in-time inventory for example, and have written about it. Similarly, China's submarine surfacing in the middle of a carrier battle group should have alarmed all Americans. But didn't. The system's lack of slack could lead to lots of bottlenecks. MP and I read many authors in common including: Alan Abelson, Pat Buchanan, Neil Buckley, Jerome Corsi, Niall Ferguson, Martin Hutchinson, Gretchen Morgenson, JR Nyquist, Stephen Roach, Nouriel Roubini and Robert Samuelson. I see one big difference in our worldviews and have a suggestion for MP should he decide to release a second edition of When Giants Fall.

MP notes on page 8 that "Education has been dumbed down". He offers no explanation for this. He should. The generational clashes described on page 25 were the subject of Kotlikoff and Burns, The Coming Generational Storm, 2005, which should be added to MP's bibliography.
Page 30 has a common error, confusing consumption with demand. This is the only error I found in the book.
I share MP's concerns about the dollar and Saudi Arabia's potential actions with respect to it. I am bullish on the market except for financials. I see hyperinflation wiping out corporate debt, which will benefit equity holders.
MP's comment at 171-2 is Austrian, i.e., as malinvestments are revealed the system's "rounaboutness" will decrease. Farmers should do fine in the collapse. They did well in the German hyperinflation of 1922-23, for example.
Now a deficiency, MP's apparent unfamilarity with the "IQ and economics" literature from Lynn and Vanhannen, IQ & Global Inequality, 2006 and IQ and the Wealth of Nations, 2002. Anyone interested in a major, perhaps the major source of global per capita GDP differences should read these books as well as the La Griffe du Lion website. While many academicians may scream, eventually America will give up trying to equalize incomes by race or we will bankrupt ourselves. We have spent 45 years on this quixotic quest and after perhaps $10 trillion in 2009 dollars, should give it up. Africa is poorer than say Japan. Africa's average IQ is 69, Japan's, 104, and there ain't nuttin' anybody can do about it.

Overall, MP rings the tocsin. Ignore his comments at your peril. Spend the time, read, wake up America.

California Real Estate Buy Signal?

"California Gov. Arnold Schwarzenegger is threatening to make deep education cuts and auction off some of the nation's most iconic properties--from the San Quentin state prison to the Los Angeles Memorial Coleseum--in order to close current and future budget shortfalls. ... The governor's office said the sales would be made two to five years from now and would not help close the current deficit. The state projects $15.4 billion in fresh red ink for the coming fiscal year, which begins on July 1. ... By offering up the cuts and property sales, the governor is also opening a new negotiating tactic as he struggles to cajole taxpayers into approving a set of money-raising ballot measures. ... 'Until we fix the system,' Mr,. Schwarzenegger said, 'the budget madness that has always plagued the state will always be with us.' ... California legislators in April rejected such an idea [selling San Quentin (SQ)] for the fourth straight year, saying it would burden already overcrowded state prisons. The governor in recent days also floated the idea of releasing 40,000 inmates to relieve the prison system", Nichiolas Casey and Stu Woo at the WSJ, 15 May 2009.

The waiting list for jail grows daily. SQ is only 12 miles from Berkeley. Can Schwarzenegger make SQ a new UC campus and collect tuition from out-of-staters? Release the inmates? If they're in for minor drug offenses, why not? Alternatively, offer them to the feds for prosecution. Most state drug offenses are also federal crimes. Perhaps the Bureau of Prisons can house them. Do you still want to own California muni bonds?

Wednesday, May 27, 2009

Iran's War

"Convinced that the Obama administration is preparing to retreat from the Middle East, Iran's Khomeinist regime is intensifying its goal of regional domination. It has targeted six close allies of the US: Egypt, Lebanon, Bahrain, Morocco, Kuwait and Jordan, all of which are experiencing economic and/or political crises. Iranian strategists believe that Egypt is heading for a major crisis once President Hosni Mubarak, 81, departs from the political scene. ... Last month, Egypt announced it had crushed a major Iranian plot and arrested 68 people. ... The arrests reportedly took place last December, during a crackdown against groups trying to convert Egyptians to Shiism. The Egytian Interior Ministry claims this proselytizing has been going on for years. Thirty years ago, Egyptian Shiites numbered a few hundred. Various estimates put the number now at close to a million, but they are said to practice taqiyah (dissimulation) to hide their faith. ... In Bahrain, Tehran hopes to see its allies sweep to power through mass demonstrations and terrorist operations. Bahrain's ruling clan has arrested scores of pro-Iran militants but appears more vulnerable than ever. ... Iran-controlled groups have also been uncovered in Kuwait and Jordan. According to Kuwaiti media, more than 1,000 alleged Iranian agents were arrested and shipped back home last winter. ... As for Jordan, Iranian strategists believe the kingdom, where Palestinians are two-thirds of the population, is a colonial creation and should disappear from the map--opening the way for a single state covering the whole of Palestine. Iranian Supreme Leader Khamenei and President Mahmoud Ahmadinejad have both described the division of Palestine as 'a crime and a tragedy.' Arab states are especially concerned because Tehran has succeeded in transcending sectarian and ideological divides to create a coalition that includes Sunni movements such as Hamas, the Islamic Jihad, sections of the Muslim Brotherhood, and even Marixst-Leninst and other leftist outfits that share Iran's anti-Americanism. ... Khomenist propaganda is trying to portray Iran as a rising 'superpower' in the making while the [US] is presented as the 'sunset' power. The message is simple: The Americans are going, and we are coming", original italics, my emphasis, Amir Taheri at the WSJ, 4 May 2009.

Hmm, Egypt's Sunnis acuse Shiites of takiwa. Two-thirds of Jordan's population is Palestinian. Now is Jordan the Palestinian state? Iran looks like the Middle East's rising power to me. It offers the various Arab states a chance to hop aboard its train. Jordan is a "colonial creation". Iran's right on this, Jordan was created in 1946.

China and American Gold

"In China, many people refer to the dollar as mei jin, or 'American gold.' Government officials, businessmen and people on the street all use the term. ... Chinese impressions of the American dollar as the gold standard were so deeply entrenched that they survived President Richard Nixon's 1971 delinking of gold and the greenback. Around 30 years ago, China's foreign exchange reserves were as little as $167 million. ... After a long pause, Deng [Xioping] went on to tell the unconvinced crowd: 'Comrades, just imagine! With 10 billion American gold, how much China can do!' ... China's foreign exchange reserves are now close to $2 trillion, and around $1.5 trillion of it is invested in dollar assets. With the global financial crisis, the attention of the world often focuses on this huge pile of American dollars in Chinese hands. ... No one knows for sure when the tide started to turn, or the exact moment when American gold started its slow but seemingly irreversible loss of luster. But now many shops in China no longer accept dollar-based credit cards issued by foreign banks (the customer pays in dollars, but the shopkeeper is paid in renmibi) and foreigners cannot convert American dollars beyond a given quota. ... The [US] may want to consider offering inflation-protection measures for China's existing investment in America and offer additional security or collateral for its continued investments", Victor Zhikai Gao at the NYT, 14 May 2009, link:

This reminds me of Europe in the late 1960s when US dollars were not an acceptable medium of exchange. Eventually the Chinese will pull the plug on the dollar. That Chinese viewed the dollar favorably in 1971 is no surprise. In 1937-1949 China underwent a hyperinflation, Shanghai's price level rose from 1 in May 1937 to 151.7 trillion in April 1949. 1971, 22 years later, had most Chinese adults remembering the hyperinflation. By 2009 most 1949 adults are dead. Today's Chinese adults do not fear a Chinese hyperinflation.

Tuesday, May 26, 2009

Robert Nozick's Disciple

"Why is it that so many people believe that the world works the way they want it to work, rather than they way it actually works? ... Robert Nozick's office was a bastion of intellectual refuge for me when I was a college student at Harvard. I spent long hours in his office complaining about my Harvard education--an education that seemed to me to be mostly indoctrination into the wonders of socialism. ... In a discussion in an economics class I had presented a rather detailed criticism of the liberal John Kenneth Galbraith's work using, essentially, the arguments of the libertarian Friedrich von Hayek. The class instructor offered a one-sentence 'refutation' of my argument. "Friedrich von Hayek is full of sh*t!' I was so mad. ... 'Why are you asking me about how the world works? That guy was a jerk. It is clearly an ad hominem attack. It was an insult,' I steamed. ... I didn't come to Harvard to hear what I thought were the smartest people in the world talk about whether or not their desks are really made of ice, or if their hands are really real. If they are dumb enough not to know the answer to those questions ... why are they teaching at Harvard?' I babbled, almost in tears. ... 'It seems to me,' I began, 'that I start from little things, objects and events in my life--from the immediate things in front of me---and I make abstractions from those little things to a principle about how the world works. Then when I have enough faith in the principle I start working backwards. I check to see if the principle matches up with the real things and then I redo the principle if it doens't fit. Like round pegs go in round holes and square pegs go in square holes. ... 'That is not "about it"--that is just the beginning. That proccess of checking your principles against reality never stops. That's why I have a job. That's what philosphers do. We check our principles against reality,' [said Nozick]. ... If it shows signs of not working or if it does not explain all of the evidence. That's why we moved from Newton's physics to Einstein's", original italics, Larey Anderson (LA), 17 May 2009 at

EC Harwood wrote of using the scientific method in economics in the late 1930s. Nozick's concepts are similiar to Sherlock Holmes way to test his theory of a crime. LA should have tried an experiment with his professors, saying, "Here, drink this. See if this hemlock is real".

Smart What?

"The world's terrorists and rogue nations have clearly become more dangerous since President Obama took office, and analysts say they're testing him to see how much they can get away with. ... In an ever-more-dangerous world, the Obama adminstration says it is practising 'smart power' instead of 'hard power.' ... That's the message Mr. Obama has sent since his swearing-in, but so far, it doesn't seen to be working. On the contrary, it seems to be encouraging bad behavior. ... What the administration does not seem to grasp is that the battle against the Taliban in Pakistan and nuclear threats posed by Iran are not going to be solved through soft power or good-faith engagement. 'The Taliban--or for that matter, the Iranian leadership--are motivated not by earthly desires but by a religious ideology, one that brands any government unwilling to bow to their demands as illegitimate and Satanic', [Michael] Rubin wrote", Donald Lambro, 11 May 2009 at

I don't believe even Obama is this stupid. He apparently has something in mind. I think.

Monday, May 25, 2009

Gold and Central Banks

"Europe's central banks are $40bn poorer than they might have been after they followed a British move taken 10 years ago today to shrink the Bank of England's gold reserves, analysis by the Financial Times has shown. ... Many of these banks, such as those in France, Spain, the Netherlands and Portugal, decided later in 1999 to follow Britain and sell off their reserves. ... European banks eventually sold about 3,800 tonnes of gold, reaping about $56bn, according to calculations from official sales data and bullion prices. ... The biggest loser in the Swiss National Bank which sold 1,550 tonnes over the decade and at today's gold prices is $19bn poorer, followed by the Bank of England, which is $5bn poorer. ... However, central bankers are confident that over the long run their move out of gold and into bonds will pay off and reduce the volatility of their portfolios, people familar with their thinking said", my emphasis, Javier Blas at the FT, 7 May 2009.

I'll say again, "Got gold? Get more. Got bonds? You fool"! What morons these bankers be. They sell an asset they cannot make, gold, for one they can, bonds.

Bank Discipline

"The results of bank stress tests--expected tomorrow--will no doubt prompt calls for further government guarantees and capital injections. But continuing to prop up the banks with government cash is a mistake. There is a better approach. ... Not only is the carrot approach not jump-starting lending, it is also angering the American people. It's hard to justify to taxpayers that we need to reward the same group of people who, rightly or wrongly, are perceived as responsible for the current situation. ... The first step should be an announcement that the FDIC guarantee of short-term debt, set to expire at the end of October, will not be renewed. Insolvent banks--defined not by stress tests, but as those that cannot fund themselves in the private market--will be taken over by the FDIC. Otherwise creditors will play 'chicken' with the government, knowing that at the last minute the government will flinch and fail to remove the guarantees. ... First of all, the FDIC lacks the staff to oversee, let alone run, several large and complex banks which may become insolvent. Second, the FDIC's main approach so far, as with Washington Mutual and IndyMac, has been to restructure the banks for acquisition. ... On the one hand, this split separates the toxic assets, whose value is very uncertain, in an institution that has no insured or guaranteed liabilties and poses no systemic risk. ... One of the major objections to letting banks fail is the argument that they are not really insolvent; they are just facing a temporary dislocation in the marketplace. But if this observation were true, the bad bank would surge in value, and the old shareholders of the banks, who received the shares in the bad bank would gain. If it is false, the bad bank would default and the old shareholders would receive nothing (as they should)", my emphasis, R. Glenn Hubbard, Hal Scott and Luigi Zingales (HS&Z) at the WSJ, 6 May 2009, link:

Hubbard is a Columbia economics professor, Scott, a Harvard Law professor and Zingales a Chicago economics professor, all big "hitters" here. Disagreeing with them, I prefer simplicity. It's good HS&Z are concerned with the pitchfork brigades' opinion. Make us happy. Have HS&Z an opinion as to who is "responsible for the current situation"? Offer us, the pitchfork brigade, some bank CEOs heads on pikes. No good-bad banks splits. Let the banks fail. Send them to bankruptcy court. I attended a Houston CPA Chapter annual reporting seminar on 7 May. One panelist who talked sense, as opposed to nonsense, was James Leisenring (JL), an IASB member. As JL said, if bank asset impairments are "temporary", let the bank managements resign and buy those assets for themselves. I said this of Citigroup, on 17 July 2008, link: Bret Dooley, a Citigroup employee, and another presenter, flinched at JL's suggestion. First step? Of 12? I disagree with making an announcment. Let the banks twist in the wind. Just don't renew in October. No press release. Creditors "will play 'chicken' with the government" until they see Lloyd Blankfein among others indicted. The "FDIC lacks the staff", absolutely. So why were banks holding FDIC insured deposits permitted to grow to this point? Why were they permitted to hold assets the FDIC examiners can't understand? It's too late for the separation to occur. Let the bank's bondholders pay.

Sunday, May 24, 2009

Economists Answer

"Some, like Fred Bergsten (2009) of the Institute of International Economics, exhorted the US government to take Mr. Wen's concerns seriously and listen to Beijing's suggestion to create a substitution account in the IMF, which would allow Fund members to exchange unwanted dollar balances for SDRs, as part of a gradual process to replace the dollar with a supra-national reserve currency over the long run. ... According to Mr. Krugman (2009), China had fallen into a trap of its own making due to its reluctance to adopt a more flexible exchange rate policy in the past. ... Kenneth Rogoff (2008), the former chief economist of the IMF, has recently written that 'a sudden burst of inflation would be extremely helpful in unwinding today's epic debt morass.' Put in other words, by increasing inflation, the US would 'solve' two problems at once. ... The problem with this 'solution,' aside from the reputational problems it creates for the US government, is that once the inflation genie is out of the bottle, it will be very difficult to put it back in. ... Fortunately, there is an easier and better way to protect the value of emerging market reserves while reducing the risk of a resurgence in world inflation. ... By substituting TIPS for nominal bonds, the US government would be sending a strong signal that it does not plan to 'inflate its way out of debt,' as disingenuously suggested by Mr. Rogoff but, to the contrary, will commit itself to adopting a more disciplined monetary and fiscal policy going forward", my emphasis, Domingo Cavallo and Joaquin Cottani (C&C), 12 May 2009 at

C&C are consultants with Harvard and Yale PhDs respectively. Cavallo once headed Argentina's central bank. A more impressive credential would have been his heading Zimbabwe's. C&C do not suggest Uncle Sam reduce spending to balance the budget. No, substitute TIPS for regular Treasury debt. How stupid do C&C think the Chinese are? Uncle Sam sets the TIPS inflation rate, see my 22 June 2008 post: Rogoff is right. Inflation, not Eli is coming. Out of the bottle? Fools! The "inflation" is already baked in the cake. Look at the monetary base explosion over the last year. Going forward? What? When will the disciplined policy begin? 2109?

McKinsey's PC Extravaganza

"The most ambitious US presidency in living memory hardly needs to extend its list of tasks, you might think. Yet the country's long-term economic prospects turn on something that is all to easy to neglect, just as it has been in the past. The US is failing calamitously in primary and secondary education. The average quality of its workforce is falling, and its schools are adding to the problem rather than mitigating it. ... The trouble is, fixing the schools is not something that a crisis ever forces you to do. The consequences of a third-rate education system creep up on you and, experience shows, can be tolerated indefinitely. Many vested interests prefer it that way. ... Just how badly is the US school system failing? A new study by McKinsey bravely attempts to come up with some numbers--and its estimates, though arrived at conservatively, are pretty startling. ... Forty years ago, the report points out, the US was a leader in high-school graduation rates. Today it ranks 18th out of 24 industrial countries. As recently as 1995, the US was tied for first place in college graduation rates. Ten years later it had slipped to 14th, and only partly because other countries had improved in absolute terms. ... Drawing on work by Stanford's Eric Hanushek, the McKinsey team estimates the economic consequences of this educational deficit. If the US had raised its educational performance between 1983 and 1998 to that of countries such as South Korea and Finland, its output last year would have been $1,399bn-$2,300bn ... higher--a gain of about 9 to 16 per cent of gross domestic product. In other words, the education deficit imposes the equivalent of a permanent depression on the US", my emphasis, Clive Crook at the FT, 11 May 2009.

"Vested interests"? Like the "school teacher-expert-diversity consultant" complex? Does an "education deficit" impose "the equivalent of a permanent depression on the US", or our post-1965 immigration policies? This is another McKinsey farce. Bravely? Come on. Pretty startling, to whom? McKinsey could have asked me. I could have told it. I distinctly recollect McKinsey was the most IQ-obessesed of all potential Chicago MBA employers when I was there. How did McKinsey not see what I see, i.e., post-1965 US demographic changes caused in large part, the output gap? I refer to my 1 September 2008 post: Properly understood, there is no achievement gap, my 18 September 2008 post: As to the output shortfall, La Griffe du Lion is years ahead of McKinsey, with his January 2005, "Cognitive Decline: The Irreducible Legacy of Open Borders", link: La Griffe writes, "Prodigy's Laws of Immigration. 1. A Western country may be approximated as a nation composed of two distinct populations, one indigenous, the other third-world, differing in mean IQ by approximately one standard deviation. ... 3. Per capita GDP, declines linearly with the third-world immigrant population fraction. 4. Each percentage point increase in the third-world immigrant population, will eventually cause the per capita GDP of a Western nation to drop by approximately 0.76 percent of its zero-immigrant value". If 1960 the US was 88.5% white. We had a few Asians, let's assume the NAM population was 10%. Now assume it's 27%, a 17% increase since 1960. Now multiply, .17 x .76 = .129. McKinsey gives us 9 to 16 per cent. Not knowing McKinsey's base year, I'll stand with this. Coincidence? We don't think so. I bet, if he's so inclined, Steve Sailer (SS), top blogger in this area, could take McKinsey's study apart in a few hours. Finland is of special interest. SS wrote about it on 1 March 2008, link:

McKinsey, you should be ashamed of yourself. Again. As IQ-obsessed as you were and probably still are, what's your excuse? You want more HHS consulting contracts?

McKinsey please note James Fulford's 21 May 2009 post, In referring to a book by Richard Lynn, Fulford writes, "IQ has consequences". What is it McKinsey doesn't understand? It has consequences for "crime, ... immigration policy, education, and all kinds of other things". Even foreign policy! Yes!

Saturday, May 23, 2009

Friedman Heeds IA

"Goldman Sachs Group Inc. [GSG] director Stephen Friedman, facing criticism at the firm's annual meeting, defended his purchase of [GSG] shares while chairman of the New York Federal Reserve Bank. Responding to a shareholder question, Mr. Friedman said he bought the [GSG] shares when they were inexpensive, adding that it was a good time for directors to show their 'confidence' in their company's stock", my emphasis, Kate Kelly and Joe Bel Bruno at the WSJ, 9 May 2009.

These are the last days. I applaud Friedman's action. This is what I suggested Vikram Pandit do on 7 July 2008, link: Friedman showed GSG a little "love". So? However the hook, Freidman should have resigned from the NY Fed before buying the GSG stock.

Obama's Tax Grab

"President Obama revealed Monday that he's half a supply-sider. If only someone could explain to him the other half. We have a tax code, the President said, 'that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.' ... Set aside that India is a poor example to make Mr. Obama's point, since its corporate tax rate on foreign-owned companies can be as high as 55%. ... The current tax-deferral system is a clumsy attempt to deal with the fact that most other countries don't tax their companies' overseas profits. ... And because almost everyone else's corporate tax rates are lower than America's ... , US companies end up paying higher taxes than their international competitors. ... America now has the worst of both world's--a high statutory tax rate and a tax code so riddled with complexity that it is both expensive to administer and inefficient at collecting taxes. And yet Mr. Obama's proposal to limit deferral only layers on the complexity. ... Some of Mr. Obama's advisers understand all this, but then their real goal isn't tax reform or US competitiveness. It's a revenue grab, one made easier by the fact that overseas tax 'avoidance' is easily demagogued. ... But even as a revenue raiser, this is likely to fail. Fewer companies will keep their headquarters in the US, especially small or mid-sized firms that can slip away without becoming a political target", Editorial at the WSJ, 6 May 2009.

The Obamites won't get much from this. I agree with WSJ. "Mr. 57 states" is apparently innumerate, like many other lawyers. See my 22 December 2007 post:

Friday, May 22, 2009

Wait Listed by Jail-6

"When the district attorney in suburban Contra Costa County, Robert J. Kochly, announced last month that he would stop prosecuting certain misdemeanors for lack of money, the resulting outcry was enough to make him cut his own salary to avoid putting the plan in place. ... District attorneys in many parts of the country say they are considering prosecutorial rollbacks, including opting not to try some minor crimes, eliminating crime prevention and monitoring programs, and seeking to divert more defendants to so-called community court systems. The reason: not enough money to pay lawyers to try all those crimes. ... In Oregon, which faces a bulging budget deficit over the next two years, several prosecutors has said that something must give. For instance, the district attorney is Marion County, south of Portland, has cut back on prosecutions of crimes inside correctional facilities. ... In Contra Costa County, for example, Mr. Kochly startled the county Board of Supervisors when he issued a memordandum outlining a number of drug offenses--including possession of up to a gram of cocaine or metamphetamine--that would not be pursued", my emphasis, Jesse McKinley at the NYT, 9 May 2009, link:

Economics works! Prosecutors make tradeoffs. The waiting list for jail grows daily. The drug war is moribund. Do you still want to buy muni bonds?

Saving Sergeant 401(K)

"If ever there were a product whose time has come, this would seem to be it: a guarantee that you won't lose the money you've amassed in your 401(k) as you near retirement, no matter what happens with the market. And you can convert that money into a stream of paychecks that will last your entire life. ... For one thing, insurers can't promise too much, or they risk damaging their own financial health. ... And that highlights a big irony. Last year's market slide showed that there's a great need for guaranteed 401(k) products. But it also showed the vulnerability of the insurers who craft these offerings. And it raised questions about how well insurers understand the risk of dealing with complex financial instruments--such as the ones used to guarantee investments. ... Before the market's slide, 'we would talk to plan sponsors, and the conversation was around when and why' to launch these guarantees, [Vivek Agrawal, a McKinsey partner, said]. Today, 'the case for guarantees is clear, but the big question now is, 'Whose guarantee can I count on?' ... Interest in these plans is growing. ... Manulife Financial Corp.'s ... plan promises to protect the amount participants invest--the 'benefit base'--in eight designated stock-and-bond funds. Once a year, on the participant's anniversary date, if the market value of the fund investment with the guarantee is higher than the benefit base, the benefit base is increased to equal the market value, locking in the gains. ... Workers can start withdrawing 5% of the base annually as early as ago 59 1/2, provided they had the guarantee in place for at least five years. The plan charges 0.35% of the account value annually, on top of investment-management fees of 1.01% to 1.3%. ... Before [Manulife] offers it to its existing 401(k) base of 43,000 plans, [Edward Eng of Manulife] says, 'we want to ensure the underlying business assumptions are borne out through real-life experience.' ... The guarantees use financial derivatives to bet against stock-market indexes. The idea is that when the market falls, the hedges gain in market value--and thus protect participants' assets.", my emphasis, Leslie Scism at the WSJ, 4 May 2009.

See Theresa Ghillarducci (TG), the market doesn't need you. I last referred to TG on 23 December 2008, link: please note. Guarantees? Locked in gains? Whatever these things will be, they will look a lot like equity-indexed annuities, my 2 January 2009 post:

Thursday, May 21, 2009

Incentives Count-For Pirates Too?

"OK, not the problem of piracy per se. But the problem of these specific pirates off the coast of Somalia: taken care of. And, if more pirates were shot, there would be fewer pirates. Unlike, say, jihadi terrorists, pirates are in it for the money. Raise the cost of being a pirate--in denominations of pirate blood--and you'll lower the supply of pirates. That's how governments--good and bad--have dealt with piracy for thousands of years. ... For those of us who see the resurrection of Jimmy Carter in Barack Obama, this [killing three pirates] was a nice surprise. People forget how reluctant the Carterites were to use force. ... Looked at from 200 years ago--the last time an American-flagged ship and crew were seized by pirates--we've fallen terribly behind. ... Generations of 'don't blame the victim' talk have made us sympathetic to criminals, particularly Third World Ones. ...And that raises the primary reason this all seemed so complicated. Lawyers. Layers and layers of lawyers. ... Add to this the fact that trial lawyers, bureaucrats and accountants for too long have conspired with corporate honchos to make paying ransoms the least costly option", my emphasis, Jonah Goldberg (JG) at the Houston Chronicle, 15 April 2009.

No American ship should pay any pirate anything. Uncle Sam should bill Maersk for rescuing its ship and sailors. All merchant crews should be armed. If they go to ports that refuse armed sailors, these ports' governments should give the merchantmen naval escorts. JG understands incentives better than most economists. Imagine how much Big 87654 audits would improve if say KPMG's Citigroup partner was publicly beheaded. If PWC's AIG partner was also beheaded, we might not need to repeal 1995's Litigation Reform Act and could shutter the PCAOB!

Casablanca and the Stress Tests

"The results of the government's stress tests on banks, to be released in a few days, will not mark the beginning of the end of the financial crisis. If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape. This would be good news of it were credible. ... Our [loss] estimates are RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate. ... The hope was that the stress tests would be that start of a cleasing process that would lead to a cleansing of the financial system ... The stress tests' conclusions are too optimistic about the banks' absolute health, although their relative assessment is more precise, because consistent valuation methods were used. Still, with Thursday's announcement of the results, it shouldn't be a surprise when the usual suspects emerge. We fear that we are back to bailout purgatory, for lack of a better term. Here are some suggestions for how to extricate ourselves. ... And to mimize cost to taxpayers, banks must not be allowed to cherry-pick which legacy assets to sell. ... Second, the government should stop providing capital, loan guarantees and financing with no strings attached. ... For example, consider the fact that the government, while providing aid to the banks, did not restrict their dividend payments. ... Consider also recent bank risk-taking. The media has recently reported that Citigroup and Bank of America were buying up some of the AAA-tranches of nonprime mortgage-backed securities. Didn't the government provide insurance on portfolios of $300 billion and $118 billion on the very same stuff for Citi and BofA this past year? These securities are at the heart of the financial crisis and the core of the PPIP. If true, this is egregious behavior--and it's incredible that there are no restrictions against it. Third, stress tests aside, it is highly likely that some of these large banks will be insolvent, given the various estimates of aggregate losses", my emphasis, Matthew Richardson and Nouriel Roubini (R&R) at the WSJ, 5 May 2009.

Yves Smith has a 5 May 2009 post at her Naked Capitalism about this piece, which hits the high spots, link:

Insolvent, interesting; the system as a whole and some large banks. What to do? Print money! What else? I disagree with the New York University professors. As long as the Fed exists it will suppress interest rates to real savers detriment and banks benefit, or subsidize banks. Only repealing the Federal Reserve Act or a German-style hyperinflation may end this. The banks will evade any rule while the Fed stands by, eyes closed, or having told the banks how to evade the rule, crafting it to facilitate evasion. "Round up the usual suspects", said Casablanca's Captain Renault. Indeed. R&R note Citi and BofA got portfolio insurance totalling $418 billion, yet engaged in "egregious behavior". Really? Is Zimbabwe Ben (ZB) so stupid he did not anticipate this? Or was this exactly what ZB wanted? You decide.

Wednesday, May 20, 2009

AIG's Whistleblower?

"A former [AIG] lawyer says she was fired after protesting what she alleges was a potentially 'corrupt arrangement' between the financial-services company and a South Korean government agency that invested in an AIG real-estate fund. ... Ms. [Kimberly] Lebron initially filed a complaint on Sept. 23, 2008, with the Labor Department under the 2002 Sarbanes-Oxley Act's whistle-blower provisions protecting employees who allege corporate wrongdoing. The Labor Department dismissed her claim on Feb. 19 without commenting on her allegations. It ruled that Ms. Lebron had no standing because she worked at an AIG subsidiary", my emphasis, Jennifer Levitz at the WSJ, 2 May 2009.

No standing? See my 16 September 2008 post: The Labor Department is a joke. Sarbox is a joke. This shows lawyering at it worst. Most lawyers will do anything to avoid dealing with the subtance of a claim. In this case, I think it's worse.

Killing "Militants"

"It used to be said that self-preservation is the first law of nature. But much of what has been happening in recent times in the [US], and in Western Civilization in general, suggests that survival is taking a back seat to the shibboleths of political correctness. ... There was a time when people who violated the rules of war were not entitled to turn around and claim the protection of those rules. German soldiers who put on US military uniforms in order to infiltrate American lines during the Battle of the Bulge were simply lined up against a wall and shot. ... American authorities filmed the mass executions. Nobody dreamed up fictitious 'rights' for these enemy combatants who had violated the rules of war. Nobody thought we had to prove that we were nicer than the Nazis by bending over backward [BOB]. ... [BOB] is a very bad position from which to defend yourself. Nobody in those days confused [BOB] with 'the rule of law,' as Barack Obama did recently. [BOB] is the antithesis of the rule of law. It is depriving people of the protection of their laws, in order to pander to mushy notions among the elite. ...Terrorists--'militants' or 'insurgents' for those of you who are squeamish--have declared open-ended war against America. It is open-ended in methods, including beheadings of innocent civilians. President Obama can ban the phrase 'war on terror,' but he cannot ban the terrorists' war on us. ... Those who choose to live outside those laws, whether terrorists or pirates, can be--and have been--shot on sight. Squeamishness is neither law nor morality. And moral exhibitionism is beneath contempt, when it sacrifices the safety of those who live within the law for the sake of self-satisfied preening, whether in editorial offices of in the White House. ... Repercussions extend far beyond issues of the day. It is bad enough that we have a glib and sophomoric narcissist in the White House. What is worse is that whole nations that rely on the [US] for their security see how easily our president welshes on his commitments. So do other nations, including those with murderous intentions toward us, our children and grandchildren", Thomas Sowell (TS), 28 April 2009 at:

"Rules of engagement, most often references in the Geneva Convention, exist to separate depravity from 'civilized' warfare. Extending those rules and protections to those who consistently ignore them or openly flout them (such as terrorists who target civilians or behead journalists-on camera) is calculated to show its proponents as principled as well as having high-minded values (such as Sen. John McCain, who experienced torture after being captured as a uniformed memebr of a state armed force). ... We absolutely need to have principles, and to respect the Geneva rules for those who also adhere to them. However, I draw the line at those that descend to barbarism anbd depravity. The targeting of civilians and those with absolutely no connection to an armed force has to be condemned in no uncertain terms, and a failure to do so only encourages more of this activity", my emphasis, John Cox (JC) letter to the WSJ, 6 May 2009.

I quoted Leon Trotsky on 7 October 2008,; Michael Savage on 6 February 2009,

Very nice, JC. However, these are normal Islamic warfare practices. Now what? Once you've condemned the behavior, what would you do to end it?

Tuesday, May 19, 2009

Mish on California

Mike Shedlock has a 9 May 2009 post at at his Global Economic Analysis about California, link:

Read this. Do you still want to buy California munis?

Former Prosecutor Attacks Eric Holder

Andrew McCarthy (AM), a former prosecutor nails Eric Holder, Attorney General, over Obama's "Task Force on Detention Policy", 1 May 2009 at

I agree with AM. One wonders if Obama, constitutional scholar, or Holder, ever even heard of the term "unlawful combatant" and the significance of the term for who is or is not a prisoner of war?

Inflation, Not Eli Is Coming

"The road to hyperinflation starts with central banks printing money to finance government spending. But while they can print money, they can't create sustainable wealth. Contrary to what it wants us to believe, the Fed has no exit strategy. ... But the Fed may want inflation: If you don't want home prices to fall, try raising the price of everything else. Sophisticated investors can cope with inflation and credit, but using inflation to bail out debtors could increase the wealth gap. ... As the US tries to reflate the world economy, commodities and commodity-sensitive currencies will benefit. The less industrial use a commodity has, the more sensitive it is to monetary inflation. ... As inflation increases, China may need to allow its currency to appreciate. Currency isn't only a medium of exchange, but also a store of value. As more central banks are tempted to devalue their currencies, investors may want to take a diversified approach to cash", Axel Merk (AM) at Financial Planning, May 2009.

I agree with AM.

Monday, May 18, 2009

Atomic Taliban

"At his press conference Wednesday evening, President Obama endorsed Pakistan's official position that it has secure control over its nuclear-weapons arsenal. Mr. Obama said he was 'gravely concerned' about the situation there, but 'confident that the nuclear arsenal will remain out of militant hands.' His words are not reassuring in light of the Taliban's military and political gains throughout Pakistan. Our security, and that of friends and allies worldwide, depends critically on preventing more adversaries, especially ones with otherwordly ideologies, from acquiring nuclear weapons. Unless there is swift, decisive action against the Islamic radicals there, Pakistan faces two very worrisome scenarios. ... Often known as Pakistan's 'steel skeleton' for holding the country together after sucesssive corrupt or incompetent civilian governments, the military itself is now gravely threatened from within by rising pro-Taliban sentiment. In these circumstances--especially if, as Secretary of State Hillary Clinton testified recently, the nuclear arsenal has been dispersed around the country--there is a tangible risk that several weapons could slip out of military control. ... Not only could this second scenario [a coup] give international terrorists even greater access to Pakistan's nuclear capabilities, the risk of nuclear confrontation with India would also increase dramatically. ... Contrary to Western 'international nannies,' the primary conflict motivators in [Pakistan and Afghanistan] are ethnic and tribal loyalties, religious fantacism and simple opportunism. It is not a case of the 'have nots' rising against the 'haves,' but of True Believers on a divine mission. ... We didn't get here overnight. We are reaping the consequences of failed nonproliferation polcies. ... Musharraf's performance against the terrorists left much to be desired, and he was no democrat. But removing him was unpleasantly reminiscent of the 1963 coup agiant South Vietnam's Diem regime which ushered in a succession of ever-weaker, revolving-door governments, thus significantly facilitating the ultimate Communist takeover", my emphasis, John Bolton (JB) at the WSJ, 2 May 2009.

Kamikaze means "divine wind". Interesting. Was JB alluding to Eric Hoffer's The True Believer, 1951? Eeerie. I thought it. Removing Musharraf reminded me of coup which removed Diem too! Blasphemy! Questioning "His" words.

Gates in Wonderland

"Defense Secretary Robert Gates, a man not known for having his head in the stars, announced his strategic Pentagon blueprint this week, saying his proposals 'will profoundly reform how this department does business.' We hope he informed Congress, home to 535 procurers in chief. ... So give the Defense Secretary an A for optimistic effort, even if we have our disagreements with some of his strategic choices. In announcing his spending priorities, Mr. Gates said he wants to focus on the current wars in Iraq and Afghanistan, rather than on the unknown wars of the future. ... But it's worth remembering that the reason our enemies have resorted to terrorism and insurgency is because US conventional forces overwhelmingly dominate on the ground, in the sea and in the air. ... China and Russia are upgrading their conventional forces, and China in particular is aiming to build a navy that can neutralize US forces in the Western Pacific. ... Even so, the Navy is left with a fleet of fewer than 300 ships, which strikes us as perilously small. When a US-flagged container ship was briefly taken by pirates off Somalia this week, the Navy's nearest vessel was hours away. Mr. Gates's decision to kill the stealthy F-22 fighter jet, which outclasses everything in the sky, is also troubling. We already have 183 F-22s-original plans called for 750--and Mr. Gates wants to order just four more before shutting down the production line. His proposal to double the number of F-35 Joint Strike Fighters the Pentagon buys next year--to 30 from 14 in 2009--is no quid pro quo. The F-35 is a cheaper, more multipurpose plane but it can't begin to compete with the F-22 as a fighter jet. Pentagon spending is now about 4% of GDP and is expected to decline, which means too little investment against potential threats. In particular, Mr. Gates's budget priorities give no indication of how the Pentagon will ensure that US military dominance extends to the battlefield of the future, outer space. ... The $1.4 billion in cuts to missile defense are especially worrisome, with losers including the Airborne Laser, designed to shoot down ballistic missiles in the boost phase, and additional interceptors planned for the ground-based system in Alaska", my emphasis, Editorial at the WSJ, 10 April 2009.

Gates doesn't concern himself with a potential war in space. He lives there and figures so does the rest of the US military.

Sunday, May 17, 2009

Schapiro's Head Fake

"The [SEC] brought its first-ever case alleging insider trading in credit-default swaps--an opaque derivative instrument at the heart of the recent carnage in the financial industry. ...The SEC's action shows that the Obama administration is eager to more closely regulate a host of esoteric trading strategies, the agency says. Both the White House and Congress have viewed the derivatives markets as having grown too large and unruly in recent years, contributing to the financial woes. 'We are looking at a broad array of financial products associated with the financial crisis, including credit-default swaps,' Kay Lackey, associate regional director of the SEC's New York office, said in an interview. .... Mr. [Renato] Negrin allegedy used that information to earn a $1.2 million profit on credit-default swaps tied to the value of the company's debt. Mr. [Paul] Rorech, in turn, got some of the trader's sales buiness, the complaint alleges. ... Since taking over in January, SEC Chairman Mary Schapiro has talked tough about taking the 'handcuff's off enforcement attorneys. The rescession is adding to concerns that people with an inside track to troubles at companies can use swaps to cash in on their knowledge before it becomes publicly known", my emphasis, Liz Rappaport at the WSJ, 6 May 2009.

More of the same. The SEC pursues insignificant cases to appear to do something. Schapiro, how about investigating all of AIG's filings for the last two years. See if you can find anything. This case reminds me of the Bear Stearns two, my 3 July 2008 post: Schapiro talks tough. So? $1.2 million? Not even close to my Blankfein test. Schapiro, close this case to go on to more serious business. Hey Lackey, is that your real name, or a pseudonym you selected?

Ashcroft Exposed

Mark Thoma nails former Attorney General John Ashcroft (JA) at Economist's View, 5 May 2009, link:

The rule of law no longer exists in the US. Next we will install sharia and the "blood price" for murder. See my 17 January, 26 February, 12 and 24 March, 15 April and 19 June 2008, posts on JA, links:

Saturday, May 16, 2009

What Peer Review?

"Scientific issues often deal with items that are too complex and technical for many people to grasp. When these issues touch on public policy, the problem of educating the public is compounded because partisan special-interest groups often mischaracterize or disregard the best available evidence in order to further their agendas. ... A National Academy of Engineering report says, 'As a society, we are not even fully aware of or conversant with the technologies we use every day. In short, we are not "technologically literate".' ... 'Peer review is the process by which research and scholarship are evaluated by other experts in one's field. The depth and breath of formal peer review varies by field; for example, the number of reviewers, as well as whether or not they and article authors will remain anonymous to one another, differs across science, social science, and humanities disciplines.' ... Yet, as John Moore writes in Nature, 'It's been peer revieweed so it must be right, right? Wrong! Not everything in the peer-reviewed literature is correct. Indeed, some of it is downright bad science.' ... There is no warranty that the results are correct or that they can be reproduced. ... Yet, the term 'peer review' is often equated with 'gold standard'. Hence, the politically motivated, lazy or unscrupulous can use the peer-reviewed literature selectively to make arguments that are seriously flawed, or even damaging to public policy", my emphasis, Jack Dini, 3 May 2009 at:

As bad as peer review is in the hard sciences, it's worse in the CPA business. About 12 years ago Florida considered making peer review mandatory for CPA firms. As luck would have it, one member of Florida's House was a CPA. His fellow legislators were horrified when he told them large CPA firms had been peer reviewed since about 1977 and that peer review has and would do nothing to protect Floridians from crooked or incompetant CPAs.

Apartheid and Beverly Hills

"Millions of Hispanics, mostly poor and uneducated, have immigrated to America illegally since the early 1990s. Most are Mexicans and most of them are high school dropouts. Compared to what they might have had in a slum or impoverished rural area of Mexico or Central America, these immigrants have done well here. It has been a different story for their neighbors--middle class Americans. For them, illegal immigration has often meant a deterioration of their neighborhoods, public schools, and their quality of life--especially across America's Southwest. Some have watched their culture erode: It's not uncommon to see Mexican flags flying in Spanish-speaking enclaves in towns and cities from Texas to California. ... Most middle-class Americans are fed up with illegal immigration. ... You definitely won't find any Mexcians crowding into low-rent apartments in those areas, creating Spanish-speaking enclaves resembling shabby parts of Mexico. ... In exclusive towns like Westport, Connecticut (pop. 27,000), a place I'm familar with. It's composed almost entirely of very expensive single-family houses. Oh, and something else about Westport: It's overwhelming white. ... In Austin, which prides itself on being inclusive, multicultural and diverse, gang activity is surging, say police. However, Austin's politically correct media tiptoes around the Hispanic character of gang violence. It's not as if Connecticut has no illegal immigrants; it does. The working-class city of Danbury just north of Westport--a 40-minute drive away--is home to thousands of illegal immigrants from Ecuador and Brazil. They comprise an estimated 20 percent of the 80,000 population. Angry residents blame the invasion for straining the city's schols and social services and lowering its quality of life. ... So why has nothing like this happenened in Westport? It's thanks to draconian zoning rules. ... Back in the mid-1980s, before illegal immigration was a problem, critics of Westport's zoning policies accused the town of creating a 'zoning wall of exclusion.' As a consequence, middle-class people working in one of Westport's many office complexes couldn't afford to live in the town; they had to commute from less affluent towns and cities in the region. Westport's homes also were too expensive for policemen and firemen, school teachers, and social workers. ... In other affluent bedroom communities in the northeast's blue states, that's how they do things. ... Spinning the story around an open-borders agenda, the Times portray's Irving's residents (its white residents) as narrrow-minded hicks. Yet even the Times cannot ignore some of the changes that have happened in Irving due to illegal immigration, primarily from Mexcio. Residents of Danbury should pay close attention. ... Hispanic birthrates have been explosive in Irving and across the nation. Many of these children are the offspring from millions of illegal immigrants whom Congress allowed to stay under an amnesty in the 1990s. Today, Irving's future may be found in its public schools: 70 percent of kids enrolled in kindergarten through fifth grade are Hispanic, notes the Times. More than a few experts on immigration have expressed concern that the sons and daughters of these immigrants tend to do poorly in school, and dropout up until the fourth generation. Indeed, compared to other immigrant groups, the children of Hispanic immigrant groups have the highest dropout rates, say experts. ... You have to wonder how liberal elites at the Times would feel if such problems suddenly visited their neighborhoods--drunken illegal aliens stumbling about in the street. Driving without a license and insurance. Or contemplating their next violent crime? ... Why do liberal elites at the New York Times find it so much easier to identify with illegal immigrants than with middle-class Americans?," my emphasis, David Paulin, 3 May 2009 at:

War story time. In about 1998 I was riding a bus in Beverly Hills (BH). A Negro lady on the bus complained of her 14-mile 40-minute commute from South Central. I asked her if she knew why she commuted so long. She said no. I told her because of apartheid. She said what? BH calls it zoning. I asked her if she could rent an apartment in BH. She said there weren't any. She then said only South Africa (SA) had apartheid. I asked her if Shaquille O'Neal could stay in any hotel in SA? She said sure. He's got millions of dollars. He can go anywhere. I asked her why should she worry about apartheid in SA when we have it here. She looked quizzically and said, "You're right". It's not only Northeastern states that use zoning for exclusionary purposes. I don't need to see Irving. Los Angeles Unified School District is 73% Hispanic.

"Compared to what they might have had". In high school I read Charles Dickens Oliver Twist. My English teacher was a flaming pinko (FP). FP railed out against the evils of industrialization, London's black snow, 72-hour work weeks and the exploitation of the masses. I said nothing and did some research. In those days farmers frequently worked 98 hours a week. Armed with this I asked FP if London's factory workers were held at work at gunpoint. He said no. I then asked him why they didn't return to the farms. FP said nothing. I said my conclusion is: factory work was the best option they had. I then asked FP if he knew if farm or factory work had longer hours. FP didn't. He became furious as I exposed his ignorance. If I had done this today, I'm sure FP would have me sent to a re-education camp.