Wednesday, September 30, 2009

Kill AIG, Now!

"AIG needs to save ILFC without hurting a core insurance business that has equity in the unit. And it must do so without raising the ire of taxpayers and Congress. In other words, AIG must figure out how to feed the beast without being consumed by it. ... Already, there is a consensus that the current ILFC doesn't make financial sense. The business, whose $47 billion balance sheet holds some 1,000 aircraft used to piggyback off AIG's sterling credit rating. That meant it could issue debt at a low cost of just 4% to 5%, buy aircraft and lease them at higher rates. The business was so solid that AIG invested some surplus capital of one insurance subsidiary--used to back policies--directly into ILFC. ... The [Fed] and the Treasury could agree to refinance tens of billions of ILFC debt at below-market rates, a move that would greatly increase their own risk and attract more AIG headlines", my emphasis, Dennis Berman (DB) at the WSJ, 15 September 2009, link:

AIG was as badly managed as GE Credit (GEC). TBTF, anyone? Kill these monsters. Now! DB's analysis stinks. Why should ILFC lend money to an airline at less than the airline's own credit rating justifies? Yves Smith would flunk ILFC in Credit 101. ILFC subsidizes airlines! So did GEC. AIG's putting an insurance sub's money into ILFC shows ILFC couldn't get other financing. The "core insurance business" was hurt when it put money into ILFC. New York's insurance commissioner should not have approved the ILFC investments. ILFC never made sense!

Israel, Iran and Obama

"The International Atomic Energy Agency has produced another alarming report on Iran's nuclear programs, though it hasn't released it publicly, only to governments that would also rather not disclose more details of Iran's progress toward becoming a nuclear theocracy. ... The mullahs understand that the only real challenge to their nuclear ambitions is likely to come from Israel. They've long concluded that the UN is no threat, as IAEA chief Mohammed ElBaradei has in practice become an apologist for Iran's program. They can also see that the West lacks the will to do anything, as the Obama adminstration continues to plead for Tehran to negotiate even as Iran holds show trials of opposition leaders and journalists for saying the recent re-election of Mahmoud Ahmadinejad was fraudulent. The irony is that the weaker the West and UN appear, the more probable an Israeli attack becomes. ... Israelis can see the relentless progress Iran is making toward enriching uranium, building a plutonium-breeding facility and improving on its ballistic missiles--all the while violating UN sanctions without consequence. ... Israel also looks wearily on the Obama Administration's policy of diplomatic pleading with Iran, which comes after six years of failed diplomatic overtures by the European Union and Bush Administration", Editorial at the WSJ, 31 August 2009, link:

"Events are fast pushing Israel toward a pre-emptive military strike on Iran's nuclear facilities, probably by next spring. That strike could well fail. ... So why is the Obama administration doing everything it can to speed the war process along? ... All this only helps persuade Israel's skittish leadership that when President Obama calls a nuclear-armed Iran 'unacceptable,' he means it approximately in the same way a parent does when fecklessly repremanding his misbehaving teenager. ... It is certainly in America's supreme interest that Iran not acquire a genuine nuclear capability, whether of the actual or break-out variety", my emphasis, Bret Stephens at the WSJ, 15 September 2009, link:

Like the UN, Obama's policy with respect to Iran is a joke. Either we destroy Iran's nuclear facilities or Iran will have atomic weapons. It's that simple. Instead of destroying them, we dance in Iraq and Afghanistan. Go figure.

If Stephens is right, we should have destroyed Iran's nuclear facilities years ago. Using our planes in Saudi Arabia and having Saudi and Israeli pilots join in the action.

Tuesday, September 29, 2009

No Ipana For Regulators

"Nothing succeeds like failure, as the saying goes. And nowhere is this dismal truth more evident in our financial regulatory system, one year after the bankruptcy filing of Lehman Brothers. ... Senior regulators who stood idly by for years as financial firms built their houses of cards have been rewarded with even bigger jobs or a jockeying for increased responsibilities. The [Fed], for example, wants to become the financial system's uber-regulator, even though its officials did nothing as banks made deadly decisions to lend recklessly and leverage themselves to the max. Awarding increased power to those who failed in their oversight duties flies in thje face of all notions of accountability. ... Instead of creating more regulations to try to prevent this kind of mess from recurring, why not figure out how to hold regulators accountable when they perform as poorly as they did in recent years? ... It's tough, however, to assign responsibility to regulators who routinely fend off or stymie anyone attempting to scrutinize how the cops on the beat functioned in the years preceeding the financial meltdown. So everyday Americans need to kick and scream if they want some light shed on this critical epoch in our financial history. ... To bring accountability to regulatory performance, Mr. [Edward] Kane suggests that financial supervisors take an oath of office in which they agree to perform four duties. ... To ensure that regulators live up to the promises they make, Mr. Kane suggests that inspectors general at each agency be charged with regularly auditing the performance of financial overseers.", my emphasis, Gretchen Morgenson at the NYT, 13 September 2009, link:

This is a job for "Superregulator". What a farce. Kane, are you stupid? CPAs regularly take oaths. So? We take ethics classes. So? The PCAOB "audits" our audits. So? Now with Sarbox, SEC registrants' CEOs and CFOs have new "swearings". So? Agencies like the SEC already have IGs. So? We need no more of this. We need more lawsuits and big shots going to prison. Oath? How about "double double, toil and trouble"? Who will watch the IGs? See Richard Posner's comments at my 31 July 2009 post: or Oliver Wendell Holmes at my 10 June 2009 post:, learn from the "bad man".

What a Product!

"The investment opportunity that Hao fell for was all the rage at the peak of the stock market two years ago. The marks: often Chinese entrepreneurs and state-owned enterprises. The banks selling the investment: firms including Goldman Sachs [GSG], HSBC, Citigroup and UBS. ... Here's how it worked: You commit to accumulate large blocks of shares of a Hong Kong-listed stock every day for, say, 12 months at a discount to the share price when you sign uop. You could load up on lots of a $10 stock for just $8. Easy money. The catch is that an accumulator contract terminates if the stock goes up only 5% or so, but if the stock tanks, you have to keep buying it. What were banks like [GSG] and Citigroup doing selling this product? The banks won't comment, but their standard disclosure on derivatives is that they are risky products that can win big or lose big. ... But in a commentary this spring in the Chinese business publication Ciajing, finance lawyer Mushtaq Kapasi, a former [GSFG] specialist in exotic derivatives, described how banks structured accumulators to have a big edge over the customer, like a house over the bettor in a casino. Whatever exposure they had with the accumulator client they could hedge away with other derivatives, all but locking in a profit", my emphasis, Gady Epstein at Forbes, 21 September 2009.

This is another amazing product. About the only way the retail customer could make money from accumulators is if the stock in question stayed between 80% and 105% of the original price. If I were Lloyd Blankfein, I would not travel to Hong Kong.

Monday, September 28, 2009

CPAs Again

"The accountants let us down. ... We now know the major banks were hiding dubious assets off their balance sheets and stretching rules if not breaking them. We know that their capital was woefully inadequate for the risks they were taking. ... But banks have pursuaded politicians on both sides of the Atlantic that the real problem came not when their financial inadequacies were obscured by bad accounting, but when they were revealed as the losses mounted. ... Behind the scenes, there is a battle pitting securities regulators--who instinctively favor disclosure--against banking regulators, who fear there are times when disclosure could make a bad situation worse. ... Some of the biggest and worst surprises of the financial crisis came when banks suffered large losses from assets that they had not even reported they owned. 'with the benefit of hindsight, we know that standards were not complied with,' said [Robert] Herz, regarding the rules on which assets could be left off balance sheets", Floyd Norris at the NYT, 11 September 2009, link:

Really Hertz? Will you name names? Will any controllers and CFOs of the largest banks in the US be indicted for securities fraud? What about their CPA firms? I bet all large banks are audited by Big 87654 firms. Will the PCAOB do anything to them? This is just more of the continuing Wall Street-Washington charade.

Another Non-Solution

"A December study of roughly 20,000 registered sex offenders on parole in California found 9% posed a 'high risk' of reoffending, and 29% posed a 'moderate-high' to 'high' risk, said Ms. [Janet] Neekly. But law-enforcement officials and academics say vast amounts of resources are spent monitoring nonviolent offenders rather than keeping closer tabs on more-dangerous ones. ... Its 'difficult if not impossible' to track the effectiveness of registry laws, [California's Sex Offender Management Board's 225-page] report said. ... The growing sex-offender list can dilute the amount of attention on the most dangerous offenders, said Nora Demlietner, the dean of Hofstra University Law School who studies sentencing. Some sex offenders 'tend not to be dangerous at all,' she said. 'You have to register them as sex offenders, so when you're law enforcement, all these people look the same.' ... 'There is no available evidence to indicate that expanding California's list of registerable crimes would promote public safety,' the board wrote", my emphasis, Ryan Knutson and Justin Scheck at the WSJ, 3 September 2009, link:

"His case is a reminder that the solutions to sexual predation are not solutions at all, but frustratingly inadequate, and often ethically and legally murky, tools. Continuing to hold offenders, after their prison sentences are completed, under the guise of 'treatment'? This punishes people for crimes they have not committed, awaiting cures that never happen, at huge expense. Following them around forever? All states require offenders to reigister, but few have the resources to constantly monitor everyone. ... None of these efforts, or course, address the reality that the overwhelming majority of victims are assaulted by people they know, who never appear in any database. ... The list of offenders is so large as to be almost useless. It is supposed to include not only rapists and kidnappers, but also flashers and teenagers who had consensual sex", Editorial at the NYT, 12 September 2009, link:

Public safety? What's that? Who cares?

Treatment? Like in one of Joe Stalin's psychiatric hospitals? Shut these databases. They do not seem to solve or prevent crimes. Would you feel safer knowing Eliot Spitzer and his $4300 a night paramour were in such a database? How about six-year-olds caught kissing in grammar school? Is preventive detention an 8th amendment problem?

Sunday, September 27, 2009

Stanley's Army-2

"The US justification for the waging of war is because 9/11 was planned there. It is a fallacy. The next attack on America can be planned anywhere. Al Qaeda does not need Afghanistan to do that. ... All during the long years of the war in Vietnam, Americans were told that another increase of troops would turn the tide, but we now know what the White House knew then; there was no indigenous enthusiasm for the South Vietnamese generals and even less for the Americans. ... It doesn't matter who's elected because the business of Afghanistan is opium. ... Our military exists to kill people and smash things. Nation building is not one of its skill sets, nor should it be. ... When it becomes too lethal to join al Qaeda, its members will go back to herding goats", my emphasis, Alan Caruba, 8 September 2009, link:

"A US-German rift over a deadly airstrike in Afghanistan on Friday escalated, as US commanders accused the German military of undermining guidelines that seek to avoid civilian causalties. ... Afghan and Western officials have said betweeen 70 and 130 people died, including many civilians. ... Civilian deaths are undermining Western efforts to marshal Afghans' support for the fight against the Taliban and further threatening support for President Hamid Karzai. ... Public disquiet is growing in Germany about the country's role in Afghanistan, only three weeks before Germany's national elections. ... Public pressure is rising for the German government to clarify the purpose and duration of its Afghanistan mission. ... According to a written report by Germany's defense minstry to German lawmakers, Taliban militants hijacked the two fuel trucks and killed one of the drivers, before the trucks got stuck on a sandbank in the Kunduz River about four miles from a base housing German military and civil-reconstruction personnel. ... A senior US defense official said investigators are trying to determine whether Germany's stringent battlefield restrictions, known as caveats, contributed to the bloody airstrike by limiting German forces' scope for actions on the ground", my emphasis, Marcus Walker, Matthew Rosenberg and Yochi Dreazen at the WSJ, 8 September 2009, link:

George Patton couldn't have said it better, my 9 August 2008 post: Stanley, please read this. Learn your trade.

Do you remember the Jenin massacre, which wasn't? As the Prophet (PBUH) said, "Deception is the essence of warfare". Did the Taliban put "civilians" in harm's way to create an incident? Will this "incident" ground allied aircraft in Afghanistan? US commanders worry less about their "allies" than "enemy" civilians. Amazing. Germany should tell Stanley "take your guidelines and shove 'em. We will set our own rules of engagement. Don't like it? We'll leave". If the WSJ is right about civilian deaths, I suspect the Taliban acts to increase them. Wanna bet? Imagine if during WWII, Hitler killed German civilians to get the US end the war. This is laughable. Unintended consequences? Hmm.

Massachusetts' Laffer Curve

"On Interstate 95 here, just past the Massachusetts border, a big red barn full of tax-free liquor has helped New Hampshire [NH] turn itself into a booze-sales machine. ... [NH] has taken a different tack, betting that higher sales of alcohol would offset the absence of tax receipts. Nearly half of [NH's] booze is sold to out-of-state customers, according to state figures. Last year, [NH], which derives more revenue from wine and liquor sales than any other non-tax source, had the highest per-capita sales of hard liquor in the country, a distinction the Granite State has held for years. ... A budget crunch in Massachusetts pushed lawmakers this summer to revoke alcohol's long-standing exemption form the sales tax. ... A state audit earlier this year chided the [NH] commission for keeping liquor prices too low. The auditors said prices could be raised some--and would still be lower than in Massachusetts, Maine and Vermont", Philip Shishkin at the WSJ, 8 September 2009, link:

Masschusetts got thrown a curve, a Laffer curve. The auditors are wrong about NH raising its prices to meet surrounding states. They ignore the difference between quoted and delivered prices. Can NH raise its liquor prices to within 6.25% of Massachusetts and not lose lots of sales? I predict NH's liquor sales to NH residents will decrease sharply. Why? Here's an example for NH's auditors. Suppose a liter of Johnny Walker (JW) sells for $20 retail in Boston, or $21.25 including sales tax. Can NH continue to sell liquor to Bostonians? If a Bostonian has $212.50, he can buy ten bottles of JW around the corner and spend five minutes. Or he can drive 40 miles to NH and spend say 20 cents a mile, or $16 plus time, which might be 90 minutes round trip. Excluding time value the NH liquor can sell for no more than $196.50. At $10 an hour for time, $181.50. No, auditors, you must use the "Boston delivered price" to estimate NH's maximum price. Lenin would understand what's going on. Massachusetts residents are "voting with their feet", or in this case, cars.

Saturday, September 26, 2009

The SEC-BofA Circus

"Beware of regulators bearing the gift of quick settlements, especially amid a populist stampede. That seems to be the healthy attitude of Judge Jed Rakoff to the recent SEC fine against [BofA] for handing out unpopular bonuses. ... This tale begins in the panicked days of last year's financial crisis. ... Enter new SEC chief Mary Schapiro, who has used the episode to signal a new era of supposedly get-tough enforcement. The SEC brought a civil lawsuit, alleging that BofA had misled inveastors by failing to disclose the bonuses in the proxy documents it sent to shareholders. ... In pursuing BofA, Ms. Schapiro broke with the SEC's policy of pursuing individuals, rather than companies, in cases of alleged fraud against investors. ... Next enter Judge Rakoff, a Clinton appointee, who the SEC expected would rubber stamp the deal. But the judge has proven to be skeptical of the SEC's case. The judge first asked why behavior that the SEC considered so egregious merited a fine of merely $33 million. ... The SEC's defense is that it would be too difficult to go after BofA management, since individuals will claim their decisions were advised by corporate lawyers and are protected by attorney-client privilege. ... Then again, perhaps the real reason the SEC is reluctant to go after individuals is because, regarding the BofA, all roads lead back to the federal government. ... Buried within a brief filed recently to Judge Rakoff, the SEC included the bombshell detail that BofA had in fact supplied the Fed and Treasury with a financial document that included information about the bonuses. ... If the Fed and Treasury were fine with these payouts, and didn't demand their discliosure, pehaps Messers. Paulson and Bernanke should be the parties in the SEC dock", my emphasis, Editorial at the WSJ, 5 September 2009, link:

"The letter on Tuesday from David A. Markowitz, the chief of Mr. Cuomo's Investor Protection Bureau, said that 'attorney-client privilege is hindering this office's ability to make fair and fully informed decisions as to what charges, if any, to bring and whether individual [BofA] officers should be charged.' in its response, [BofA] disputed that assertion on several fronts, writing that 'because [BofA] did not violate the law, it has not offered reliance on legal advice as a defense'," Zachery Kouwe at the NYT, 10 September 2009, link:

"A federal judge threw out the [SEC's] proposed settlement with [BofA] over its disclosure of controversial bonuses paid to Merrill Lynch [ML] employees, in an unusual ruling that casts doubt about how the agency handles probes of major US companies. ... The Rakoff ruling undermines one of the most high-profile cases against alleged corporate wrongdoing conducted under SEC chief Mary Schapiro, who took the job in January. It puts new pressure on the agency to show it is fighting for investors in the wake of the controversy over its policing of the financial industry during the Wall Street boom and its failure to catch Bernard Madoff's massive fraud despite several red flags. ... In a rare scuttling of an SEC settlement, Judge Rakoff said the $33 million fine levied on [BofA] 'does not comport with the most elementary notions of justice and morality' because the company's shareholders--the victims of the alleged misconduct--are the same people being asked to pay the fine. He set a trial date for Feb. 1. ... Securities lawyers said they couldn't recall such a high-profile case being forced into a trial after the government and a company agreed to a settlement. In his ruling, Judge Rakoff often wrote that if bank executives in fact relied on legal counsel in crafting the proxy language, 'why are the penalties not then sought from the lawyers?' ... SEC spokesman John Nester said Monday the settlement, ... 'properly balanced all of the relevant considerations.' ... Wachtell, Lipton, Rosen & Katz, which represented [BofA], declined to comment. A lawyer for Shearman & Sterling, which represented [ML], declined to comment", my emphasis, Kara Scannell, Liz Rappaport & Jess Bravin at the WSJ, 15 September 2009, link:

"'If the Bank is innocent of lying to its shareholders, why is it prepared to pay $33 million of its shareholders' money as a penalty for lying to them?' On this point, we think the judge is soft-pedaling the coercive nature of regulatory prosecution. ... Given all the dirty laundry already aired about this deal, including claims that [Fed] Chairman Ben Benrnake and former Treasury Secretary Hank Paulson forced a reluctant BofA to conclude its Merrill purhase, it's not surprising if the BofA was willing to pay for it to go away", Editorial at the WSJ, 15 September 2009, link:

"With one rebuke from a federal judge, the [SEC's] tool for regulating financial markets and protecting investors faces daunting questions. Legal experts said Monday's rejection by US District Judge Jed. S. Rakoff of the agency's proposed $33 million settlement with [BofA] Corp. could bring tougher scrutiny of other settlements over alleged wrongdoing. For decades, the SEC has resolved more than 90% of its investigations through settlements, lawyers estimate. Defendants neither admit nor deny wrongdoing, and judges sign off on the deal with little scrutiny. In the process, government officials get to send a message of deterrence without blowing their enforcement budget, which could happen if too many cases went to trial. ... Other legal scholars noted that the judge undercut the derterrence message the SEC intended to deliver, suggesting that the proposed penalty was too light", my emphasis, Kara Scannell at the WSJ, 16 September 2009, link:

"New York's attorney general, Andrew Cuomo, ramping up his investigation of Merrill Lynch's purchase by [BofA], issued subpoenas to the five directors on the bank's audit committee at the time fo the deal, according to people familiar with the situation. ... In a comment Wednesday, Mr. Cuomo said he wonders broadly where the boards were in this financial crisis, and whether BofA directors 'protected the rights of shareholders, were they misled, or were they little more than rubber stamps for management's decision-making?' ... 'Subpoenas by an attorney general of outside directors [are] quite unusual' for any reason, said Charles Elsdon, head of the Weinberg Center for Corporate Governance at the University of Delaware's business school", Liz Rappaport, Dan Fitzpatrick and Joann Lublin at the WSJ, 17 September 2009, link:

Get tough enforcement? Against whom? The Feds encouraged the BofA to violate securities law? Never. The SEC's case stinks.

Did the SEC violate New York Law?

I'm sure Nester is right. What were the "considerations"? A managing directorship at say GSG, four New York BigLaw partnerships, and what else Nester? Who says the SEC can't be bought? We remember Nester. He appears in my 23 October 2008 post:

Would the BofA pay $33 million to stay in Zimbabwe Ben's good graces? It's peanuts. Through interest rate suppression, the BofA gets much more than $33 million a year from the Fed.

The SEC's "biggest tool" is as threatening as Monty Python's "comfy chair" wielded by the Spanish Inquisition. Consent decrees are an SEC tool. To protect miscreants, not investors. For decades I have advocated the SEC be deprived of this tool. The message the SEC sends with these settlements is: it can be bought off. Cheaply with big jobs to SEC enforcement personnel.

Will Cuomo's inveastigation lead to ZB and Henry Paulson? If not, what's he doing? IS the FBI looking to "Spitzer" Cuomo? Stay tuned.

Wait Listed By Jail-10

"Jeffrey Woods, warden of the Hiawatha Correctional Facilty here at the eastern end of Michigan's Upper Peninsula, was vacationing on Lake Huron when his cellphone rang on July 1. The message was from his boss: Hiawatha, which had been slated to shut down in October as part of a sweeping downsizing of the state's prison system, would have to close by Aug. 7. That meant he had just five weeks to ship out 1,100 inmates and 207 staff. ... The scramble to empty Hiawatha prison is part of a rapid shift in thinking about how many people should be locked up in the US, and for what crimes. ... Now the recession and collapsing budgets are forcing an about face. Prisons are one of the biggest single line items in many state budgets, in part because nearly five times as many people are behind bars as in the 1970s. ... At least 26 states have cut correctional spending in fiscal year 2010, and at least 17 are closing prisons or reducing their inmate populations, according to the Vera Institute on Justice, a criminal-justice reform organization in New York ... Inmates here on average serve 127% of the court-ordered minimum sentences, well beyond the sentences of inmates in other states that offer parole, according to the Council of State Governments Justice Center. ... Earlier this year, Michigan Gov. Jennifer Granholm expanded the parole and clemency board from 10 members to 15 and announced the state's prison population of 48,000 would be cut by 4,000 inmates. ... At the end of 2008, there were 12,000 prisoners in the Michigan prison system who were eligible for parole, but hadn't been released. In recent months, 3,000 of them have been paroled", my emphasis, Gary Fields at the WSJ, 5 September 2009, link:

"After decades of pursuing lock-'em-up policies, states are scrambling to reduce their prison populations in the face of tight budgets, making fundamental changes to their criminal justice systems as they try to save money. ... California, with the nation's second-largest prison system, is considering perhaps the most dramatic proposal--releasing 40,000 inmates to save money and comply with a court ruling that found the state's prisons overcrowded. ... Russ Marlan, a spokesman fior the Corrections Department in Michigan ... [said] 'When you're not having budget troubles, that's when we implemented many of these lengthy drug sentences and zero-tolerance policies [that] really didn't work.' ... State Atty. Gen. Jack Conway sued to overturn the thousands of early releases, arguing that a retroactive change to sentences is illegal and risky. The case was heard before the Kentucky Supreme Court in August. ... Still, Conway said that he too was concerned about the prison population, and that he wanted to bring it down by targeting nonviolent offenders for early release and expanding drug courts", my emphasis, Nicholas Riccardi at the LAT, 5 September 2009, link:,0,5705309.story.

"The wheels of justice in Georgia are grinding more slowly each day. Cuts in spending for the state court system have led to fewer court dates available for hearings and trials, creating a growing backlog of cases. With serious criminal matters being heard first, delays are stretching to months for many civil, domestic and minor criminal cases. The state court system, which handles more than 150,000 cases a year, had to slash spending by almost 15% in the past fiscal year, and more cuts loom. The state's budget shortfall widened to $3.7 billion over the past 18 months. ... According to a July survey by the Washington-based National Center for State Courts, at least 28 state court systems have imposed hiring freezes, 23 have frozen salaries and seven have planned or imposed salary reductions. ... In April, a group of attorneys with the Atlanta-based Southern Center for Human rights filed suit against the public-defender system, law-enforcement officials and state revenue officials. The suit, filed in the Superior Court of Elbert County on behalf of five plaintiffs and 'all those similarly situated,' alleges that many poor defendants are 'left to languish in jail' and that 'some have been without counsel for over six months' ... Bert Brantley, spokesman for [Georgia Governor Sonny Perdue said], 'every piece of government believes its spending is the most important, but clearly when you're governor you have to look at the state's overall responsibilities'," Paulo Prada and Corey Dade at the WSJ, 8 September 2009, link:

Michigan looks like inmate paradise compared to Texas. 12,000 of its 48,000 inmates are parole eligible, 25%. Texas has 91,000 of 156,000 imates parole or mandatory supervision eligible, 58%. Our inmates serve about 250% of their minimum time. The Texas Department of Criminal Justice (TDCJ) does not report the actual percentage but I estimated it from a TDCJ 2008 report. Michigan, with 10.0 million people has a .0048 incarceration rate: Texas with 24.3 million has a .0064 rate, 25% higher. We should follow Michigan's lead.

Conway's understanding of the US Constitution's "ex post facto" clause is not mine. Kentucky should consider following Mexico too. Only starving the beast will make it change. Kill the Fed, starve Uncle Sam. Marlin, what do you mean didn't work? They enabled contractors to get paid to build prisons and increased the number of prison guards. They worked fine.

Brantley hits on a big truth, economic calculation is impossible under socialism. Georgia might consider repealing some of its criminal laws. William Anderson has a comment on the impossibility of economic calculation under socialism at William Anderson, 31 August 2009, link:

Friday, September 25, 2009

How Many Divisions Has Goldman?

"Given its vast reserves and seemingly healthy economy, a default by China's government or one of its tentacles should be one of the lesser concerns for international markets. ... There is no official comment; terrified international bankers are silent. But reports in the local press and some elaboration by participants suggest that efforts by the country's large shippers, airlines and power companies to cope with high oil prices by taking out futures contracts produced steep loses as the market reversed and prices fell. ... If the contracts were arranged outside China through subsidiaries in Hong Kong, Singapore or London, which is common, then they were almost certainly done under non-Chinese laws that are unlikely to by sympathetic to deliberate deadbeats", Economist, 3 September 2009, link"

"China's government on Monday offered public encouragement to state-owned companies challenging foreign banks over huge losses from derivative contracts, a move that bankers say has raised the risks of dealing with some of China's largest enterprises. ... In a statement on its Web site, the State-owned Assets Supervision and Administration Commission said it supported moves by unnamed Chinese enterprises to seek recourse for their losses in structured financial derivative contracts tied to the price of oil and reserved the right to file lawsuits itself. ... With concern already rising in recent weeks that Beijing might challenge the fuel-derivative losses, bankers have been scurrying to protect themselves. One day last week, trading in certain contracts all but shut down in China, bankers say. Now, bankers are discussing how to impose stiffer collateral requirements for Chinese airlines and other companies that seek derivative contracts. ... In early August, China Eastern Airlines Corp., Air China Ltd. and China Ocean Shipping (Group) Co. sent letters to six international investment banks warning that certain transactions 'may be void, invalid or unenforcecable,' said a person familiar with the letters. Among the banks understood to have received such letters are Deutsche Bank AG, Goldman Sachs Group Inc. [GSG], JPMorgan Chase & Co., Citigroup Inc. and Morgan Stanley, according to three people familiar with the situation. ... Lawyers said Beijing's statement is startling. The government is 'actively encouraging Chinese state-owned companies to cut their losses by taking various actions, including legal actions,' said Alan Wang, a partner at Freshfields Bruckhaus Deringer LLP", my emphasis, James Areddy, Laura Santini and Shen Hong at the WSJ, 8 September 2009, link:

What nonsense. Hong Kong courts will enforce judgements Beijing doesn't want enforced? How may divisions have the counterparties? Does GSG think this is AIG? Bankers are terrified by Beijing, but not by Washington, why? Is GSG a "deliberate deadbeat" which courts are supposedly unsympathetic to?

GSG knows how to collect its money. Have Uncle Sam go to war with China! Why shouldn't China's enterprises renege? Unc will default on his debts to China. Will Unc bail GSG out of this mess too? This is not AIG, Lloyd Blankfein. Tread very carefully here. Things "happen" in China. Perhaps to GSG personnel. Don't go to China yourself. Send an emissary, like Zimbabwe Ben. He's expendable.

Government Accounting

Governmental accounting (GA) has long been laughable. Since governments do not use the price system to allocate resources, in a sense, there is no such thing as GA. Here are two examples of how governments "save" taxpayers money.

1. The IRS encourages taxpayers to e-file 1040s. Who does this help? Uncle Sam released some statistics in 2008. Unc said the IRS could save $40 million more a year if 80% of taxpayers e-filed. Good. Unc also said it cost the IRS $0.32 to process an e-filed 1040 and $2.69 to process one by mail. Now let's do some "cost" accounting to see if the IRS claim makes sense. $2.69 - $0.32 = $2.37, the IRS's e-filing "marginal savings". Wait. To e-file a return requires entering more data than one not e-filed. Ask your tax preparer what is your marginal e-filing cost. If he says less than $50, laugh. Would the IRS "cost" a taxpayer $50 to save $2.37? Would Pope Benedict like to see 1.4 billion Moslems adopt Catholicism?

2. The Texas Department of Criminal Justice (TDCJ) houses 156,000 inmates. Currently 91,000; 58% are parole or mandatory supervision eligible. Most TDCJ inmates can be released tomorrow? Yes. What's going on? About 15 years ago the Texas Bureau of Pardons and Paroles (BPP) "got tough" on crime, with our legislature's approval, of course. It reduced parole rates from 80% to 30%. Now, except for specified 3(g) crimes, a prisoner is released after completing about 65% of his sentence, up from about 25%. Result: an explosion in the number of Texas prisoners. Does the TDCJ "aid and abet" the BPP in getting "tough on crime"? You betcha. The TDCJ's 37-page 2005 book, Disciplinary Rules And Procedures For Offenders (DRFO) is much of what I expected: deciding to discipline inmates, disciplinary hearing mechanics, what are infractions and the existence of "major" and "minor" cases. That attempted escapes and assaults on officers or other inmates are serious is no surprise. I applaud the TDCJ's keeping safe facilities. What I question is the potential penalties for various offense "levels" and that the DRFO has little guidance as to what cases are "major" and "minor", a minor case cannot cost an inmate good time. Assaulting an officer with a weapon causing injury is a Level 1 offense and can lead to revoking all "good time credits". Such assault is a first degree felony, which can lead a 5-99 year sentence. The TDCJ's Level 2 and 3 offenses amaze me. Some make sense, others are so vague, no court could sustain a conviction for violating them, under the concept of "void for vagueness". Others are like killing flies with sledgehammers. Here's one: a TDCJ inmate can lose up to two years of good time for sending as little as $20 to another inmate. Texas taxpayers can spend $45,000 to incarcerate an inmate for this. Does the TDCJ care we pay 2,250X the amount involved? Does it care enforcing petty rules diverts effort from say teaching more inmates to read? Or does the TDCJ do this to increase the number of jobs for prison guards and the need for more prisons?

Thursday, September 24, 2009

Fire David Kotz

"The [SEC] botched numerous opportunities to uncover Bernard Madoff's Ponzi scheme, in part because of an inexperienced staff and delays in examinations, said an SEC inspector general report. ... The release of the findings comes as the SEC is seeking to rebuild its credibility. According to the report, the SEC received six warnings about Mr. Madoff's trading business over 16 years, but failure of staff to follow up adequately--including to determine whether trades were executed when Mr. Madoff said they were--and poor commincation within the agency's divisions enabled him to continue his scheme. ... The investigation found no evidence that the SEC staff had been influenced by Mr. Madoff or any of his family members. ... Sen. Charles Grassley (R., Iowa) called the SEC's failures 'further evidence of a culture of deference toward the Wall Street elite at the SEC.' He said, 'Until that culture is transformed, the SEC will not be the tough cop on the beat that the public needs.' ... The 22-page executive summary said the agency staff was too inexperienced or too narrowly focused, and missed opporunties to uncover the fraud. It said the SEC's structure hampered its effectieness, with two groups of examineers looking separately into Mr. Madoff's business at one point without knowing about the other. ... The IG report found that Mr. Madoff attempted to intimidate SEC staff during an examination in 2005 by dropping names of senior SEC officals, but the report didn't conclude whether he was successful. ... When examiners reported Mr. Madoff's aggressively pushback tactics to higher-ups, they didn't get any support and were 'actively discouraged from forcing the issue,' the report said", my emphasis, Kara Scannell at the WSJ, 3 September 2009, link:

"Unseasoned investigators from the [SEC] were alternatively intimidated and enthralled by a name-dropping, yarn-spinning Bernard L. Madoff as he dodged questions about his financial house of cards, according to a scathing new report on the agency's repeated failures to uncover the huge investment fraud. 'Madoff carefully controlled to whom they spoke at the firm,' the SEC's independent watchdog said in the report on Wednesday. ... In fact, the string of lapses was capped by a staff lawyer receiving the highest performance rating from the agency, in part for her 'ability to understand and analyze the complex issues of the Madoff investigation.' Perversely, Mr. Madoff used the SEC's inquiries as a selling point to reassure investors that the government had looked over his operations and found no problems. ... It was the fact that, 'despite numerous credible and detailed complaints,' the SEC never took 'the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme.' ... 'A simple inquiry to one of several third parties could have immediately revealed the fact that Madoff was not trading in the volume he was claiming,' the report said. ... One investigator described Mr. Madoff as 'a wonderful storyteller' and 'a capitvating speaker' after the 2005 encounter in which Mr. Madoff, a former Nasdaq chairman, boasted of his ties to people high up in the SEC and he said he was on the short list to be the next agency chairman--the post which went to Mr. Cox. ... The failure to heed Mr. Markopolos was almost inexplicable, except that some agency officials did not like him personally, Mr. Kotz said", my emphasis, David Stout at the NYT, 3 September 2009, link:

"Renaissance Technologies, the big hedge-fund run by James Simons, raised questions about Bernard Madoff at least as early as 2003, eventually triggering a regulatory investigation of Mr. Madoff and withdrawal of money according to a [SEC] watchdog report. Details revealing Renaissance executives' concerns about Mr. Madoff's strategy and the validity of his reported returns figure prominently in the SEC report, released Friday. ... Henry Laufer, Renaissance's chief scientist, questioned Mr. Madoff's ability to exit the market, selling its investments and holding primarily cash supposedly to avoid lossses that hit other investment firms. The timing of the moves, Mr. [Nathaniel] Laufer said, was almost statistically impossible. 'We would have loved to figure out how he did it so we could do it ourselves,' he testified this year to the SEC. 'And so that was very suspicious.' ... Nathaniel Simons told regulators the firm believed the SEC had closely examined Mr. Madoff's investments, and regulators should have been able to perform the same analysis of Mr. Madoff's trading strategy that Renaissance had. ... 'We did feel that despite the fact that we're kind of smart people, we were just looking at matters of public record,' he also said in his testimony", Jenny Strasburg and Scott Patterson at the WSJ, 8 September 2009, link:

"Top officials at the [SEC] pledged at a Senate hearing on Thursday to fix the problems that led to the agency's failure to detect the multibillion-dollar fraud conducted for more than a decade by Bernard L. Madoff. ... 'We intend to learn every lesson we can,' [Robert Khuzami] said. 'There are no sacred cows.' ... Harry Markopolos, the fraud investigator who brought his allegations to the SEC about improprieties in Mr. Madoff's business starting in 2000, testified that the agency's staff 'was not capable of finding ice cream in a Dairy Queen.' The system of conducting inspections at the agency rewards attention to detail rather that investigative energy and mortivation to catch misconduct, he said. ... Khuzami disputed Mr. Markopolos assertion that large numbers of SEC staff should be fired, saying the failures in the Madoff case were not emblematic of the the entire enforcement division", my emphasis, NYT, 11 September 2009, link:

Crap. Blame structure and SEC peons, not higher-ups for quashing the Madoff investigations. This looks like the John Mack fiasco, my 23 October 2008 post: Will any SEC higher-ups be named and indicted? This sounds like a Big 87654 audit. If there's a problem, blame the peons. "Discouraged from forcing the issue". By whom? Six warnings. Hmm. What can we do with this? Kotz: "It is true that all these instances, taken singly, do not prove beyond question that White knew the statements which he prepared were padded with false entries; but logically the sum is often greater than the aggregate of the parts, and the cumulation of instances, each explicable only by extreme credulity or professional inexpertness, may have a probative force immensely greater than any one of them alone. ... We do not say that his guilt was demonstrated, but enough was proved to subject him to the hazard of a verdict; faced with the choice of finding him a knave or a fool, we cannot say that the jury was bound to acquit him; fair men might have had no compunction in refusing to believe that he was so credulous or so ill acquainted with his calling as a finding of innocence demanded", US v. White, 124 F2d 181, 185 (2nd Cir., 1941) (Hand, J). Kotz, we're watching you; fool or knave?

The lawyer understood her job well. If the apparent "perp" is a person of consequence, ignore whatever you find. What complex issue? Madoff was a big shot. Check with third parties? Is the SEC PWC auditing Satyam? What difference does it make if SEC employees like Markopolos? What matters is: the facts. These morons should have to watch hundreds of Dragnet, 1954-62, reruns until they can cite Sgt. Joe Friday in their sleep, "Just the facts maam. Just the facts".

This is also my experience with the SEC and DOJ. It doesn't matter what you give these clowns, including matters of public record. They are only interested in ingratiating themselves with persons of consequence. If Goldman Sachs' general counsel handed the same materials to the SEC as Markoplos, Madoff would have been in prison years ago. Look at Aleynikov's experience, my 12 September 2009 post:

Now we get a "twofer", i.e., fire Khuzami too. I agree with Markoplos. Most SEC enforcement people are glorifeiod box ticking clerks. No sacred cows? How about John Mack, or Lloyd Blankfein for starters. Reorganiztion is the refuge of the incompetent.

Columbia Comes to Texas

"An increase in the number of students seeking financial aid has prompted the University of Texas [UT] at Austin to phase out its multi-million-dollar National Merit Scholarship [NMS] program starting next year so it can use the money for need-based scholarships. ... Tom Melecki, director of the university's office of student financial services, said the withdrawal wasn't a criticism of the [NMS] program, but rather a reaction to the growing need on campus. 'We have to make sure that UT-Austin is financially accessible to all qualified students,' he said. ... The [UT] is not the first university to drop funding for the [NMS] program. The University of California withdrew from the program in 2006 because it disagreed with the use of the PSAT exam in determining winners", Tom Benning at the WSJ, 2 September 2009, link:

"Economic pressures have prompted [UT] at Austin officials to stop giving scholarships to some of their best and brightest students. The university will end its [NMS] program--worth about $13,000 per student--beginning with entering freshmen next fall. ... The program costs the school about $4.4 million a year, [Thomas Melecki] said. ... The university's action underscores 'how much further we have to go as a Legislature to help support a preeminent university in Texas,' said Rep. Joaquin Castro, D-San Antonio, vice chair of the House Higher Education Committee. 'A great university should be able to both serve needy students and offer the best students throughout the country an opportunity to be educated at their campus', Castro said", Gary Scharrer at the Houston Chronicle, 2 September 2009, link:

Whose kidding whom? UT ended NMS participation for the same reason UCal did: the winners are NAMs. Why has the NMS Corporation Achievement Scholars and Hispanic Recognition? Currently Texas NMS PSAT cutoff score is 217, or say about 1450 on two SAT parts. My guess: any NAM with 1450 SATs and decent high school grades is in: Harvard, Stanford, Yale, Princeton, etc., on a "full ride" such that UT has no NAM NMSs. I doubt the "number of "students seeking financial aid' had anything to do with the decision. The Houston Chronicle got some letters critical of the decision saying just this. See my 7 July 2009 post:

What nonsense. In 2008 141,733 Texans took the SAT. Using this as a proxy, I estimate we had 1,500 NMS finalists of whom 5-10 were NAMs. I doubt any of these NAMs went to UT-Austin.

Wednesday, September 23, 2009

SEC War Story-2

This is follow up my 9 May 2009 post: I recently discussed the acquisition accounting issue with three SEC staff accountants. They told me they had met with others in the SEC accounting staff, including the chief accountant and concluded their accounting is correct. Let's revise the example in my 9 May 2009 post.

1. Company A issues 20 million shares to Company B's shareholders to buy B when A's market price was $5 a share, market value = $100 million.
2. Company B's shareholders give Company A $70 million simultaneously as part of an "integrated transaction".
3. The IRS still has its "step transaction" doctrine.
4. Elevating substance over form in integral to accounting.

What did A pay to buy B?

My answer is $30 million, $100 million in shares less $70 million "cash back". To me the purchase price is still $30 million; $100 - $70 = $30 just like $50 - $20 = $30. The SEC staff accountants told me A should record the $70 million as goodwill with a credit to additional paid in capital. I kid you not. Think about this. By manipulating the amount of shares A issues and the "cash back" A can create any "cost" it wants. These are the guys you want to stop the Bernie Madoffs of the world. Hahahahahaha. You're kidding. Never argue substance over form with the SEC. I can't imagine how much worse the SEC will be to deal with if IFRS is adopted.

Paul Krugman, Surely You're Joking

"It's hard to believe for now, but not long ago economists were congratulating themselves over the success of their field. Those successes--or so they believed--were both theoretical and practical, leading to a golden era for the profession. ... And in the real world, economists believed they had things under control: the 'central problem of depression-prevention has been solved,' declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economics Association. ... Few economists saw our current crisis coming. ... 'The General Theory' is a work of profound, deep analysis", Paul Krugman (PK) at the NYT, 6 September 2009, link:

If you have the stomach for it, read PK's piece. For my money, it's garbage. PK was born in February 1953 making him 17 months younger than your truly. One would hope PK's knowledge of the history of economic thought was at least equal to mine. He's an economics professor. Hahahahahaha. Economists thought they had the business cycle controlled during the New Frontier. Boy were they wrong. I remember. It seems the same failed economic nostrums resurface every 25 years or so, with new names. Unsurprisingly, PK fails to mention Austrian economics once in his 16-page tome. That's how obscure Austrian economics is.

Tuesday, September 22, 2009

Subsidies Work!

"California finally has a budget deal, through accounting maneuvers and budget cuts (including the release of convicted felons). But California's bidget deal is toast--whether or not the econo0my turns around. The cauase: Millions of low-income, unskilled immigrants (not just illegals) with lots of children have moved in. And lots of high- and middle-income Americans have moved out. ... Immigration's highest cost is the public education of the immigrants' children. ... Overall, in twenty years, the increase in Hispanic and Asian/Pacific Islander children in the US made up three quarters of the enrollment increase for US schools. In California in the same period, enrollment of White and Black children declined by 1.4 million. But the enrollment of Hispanic and Asian students increased by 2.5 million students. Therefore, the increase in Hispanic and Asian students in California made up 132 percent of California's enrollment increase (and an incredible 28 percent of the enrollment increase for the entire country). ... Of course, elite opinion dislikes voters interfering in government's taxation plans. The London Economist reflected this consensus recently when it disparaged California's initiative system as the 'crack cocaine of democracry.' ... And Proposition 13 is not the problem anyway. The state of California raises quite enough money through its increased income taxes. ... Tax revenue is down. But whan (and if) it goes up, the problem will not be fixed--because new poor people (and their children) arrive every day. ... Like the old woman who lived in the shoe, she had so many children she didn't know what to do, immigrants (illegal and illegal) simply do not pay enough in taxes to support their public costs. Education is the poster student for this basic fiscal truth. But it extends to all transfer programs. ... California is toast", original italics, my emphasis, Linda Thom (LT), 2 September 2009 at Vdare, link:

What's so hard to understand? Import millions of unskilled poeple with an 82 average IQ and expect their children to go to Caltech? Madness. If LT's table is correct, and California has 3,143,000 Hispanic students, their annual education could cost $37.5 billion at $11,000 each. This may be conservative as many qualify for "free lunch" and other programs. Uncle Miltie warned us of unlimited immigration combined with the welfare state over 40 years ago, see my 14 February 2009 post: Something's got to give. It looks like California. Think of if this way: as California approaches Mexico's demographics, it will approach Mexico's economics.

What Ails Harvard?

"A new scholar who is doing interesting work in Jason Richwine, a recent PhD graduate from the Kennedy School of Government at Harvard and is a research fellow at the American Enterprise Institute. ... One of Richwine's achievements has been to calculate the average IQ of various immigrant groups--he has provided far more detail on this matter than any other research I am aware of. ... The results are, for the most part, predictable, as the IQs of most immigrant groups are approximately the same as those of their home countries: Mexican immigrants have an average IQ of only 82, which is below that of American blacks, and Northeast Asians' IQ is 106. ... The average Indian IQ is 81, but Indian immigrants to the US have an average IQ of 112, leading them to become the nation's 'new model minority', as Richwine wrote in a Forbes article. ... Richwine works with Robert Putnam's concept of 'social capital,' which designates social networks based on turst and reciprocity. ... Where social capital is greater, Putnam says, 'children grow up healthier, safer, and better educated; people live longer, happier lives; and democracy and the economy work better.' ... Richwine brings together scattered research findings proving that IQ and the capacity to build social networks are related. He refers to the Kohlbergian tradition of research in moral development that finds that high IQ people are more likely to reason about moral issues in a principled manner. ... Richwine suggest that the link between IQ and social capital ought to inform our immigration policy: the negative effects of diversity on trust would be mitigated by restricting entry to high-IQ immigrants", Ian Jobling at White America, 19 August 2009, link:

"High-school students' performance last year on the SAT college-entrance exam fell slightly, and the score gap generally widened between lower-performing minority groups and white and Asian-American students, raising questions about the effectiveness of national education reform efforts. ... The reading scores are the worst since 1994. Many observers Tuesday viewed the flat results of recent years as discouraging in light of a more than 25-year effort to improve US education. 'This is a nearly unrelenting tale of woe,' said Chester E. Finn Jr., president of the Thomas B. Fordham Institute., a Washington, DC think tank. ... The results come a week after the disclosure that only a quarter of 2009 high-school graduates who took the ACT, the other main college entrance exam, had the skills to suceed in college. ... A record 1.53 million students took the [SAT] in 2009. About 40% were minority students, up from 29% in 1999. Education analysts said scores would be expected to drop as more students take the test, so College Board officials interpreted the stability in scores as encouraging. ... Jack Jennings, president of the Center on Education Policy, a nonpartisan research organization in Washington [said] 'The bottom line is the country is changing dramatically. Unless minority kids are educated better, we are going to be in trouble because pretty soon they are going to be the majority'," my emphasis, John Hechinger at the WSJ, 26 August 2009, link:

Gregory Mankiw (GM), Harvard professor has a 28 August 2009 post which mentions "omitted variable bias" in attacking a NYT piece, link: Way to go GM!

GM notes his "previous blog post on SAT scores and income generated a surprising amount of blogosphere pushback", 29 August 2009, link: GM, you're naive. Don't you remember the 2005 flap over Larry Summer's (LS) statements about women and mathematics ability? You and LS are in the same department. Talk to him.

What gives? Richwine has a Harvard PhD and Putnam is a Harvard Professor. I suggested auctioning immigration slots decades ago.

Suppose someone tried to teach me to play basketball. He would have had a "tale of woe" that could have lasted for decades too. So? Are our "education analysts" missing something? Why should average SAT scores fall as more students take the test? If you have a representative sample of high schoolers in your "standardization sample" all other things being equal, if your sample size increases, there is no reason average scores should drop. If you encourage more high schoolers with bad grades to take the SAT, the average score will drop as high school grades and SAT scores are positively correlated. Are these "analysts" afraid to identify this possible explanation: as the percentage of Non-Asian Minority (NAM) test takers increases, average SAT scores will drop and there is nothing anyone can do about it. It doesn't matter if "minority kids are educated better", if we even know what that means. As America's demographics change, we will come to resemble the native lands of our new immigrants. That is the bottom line.

Monday, September 21, 2009

Mencius Moldbug as Governor

"State government finances are a wreck. ... Only an emergency infusion of printed federal funny money is keeping most state boats afloat right now. ... What the radar tells me is that we ain't seen nothin' yet. What we are being hit with isn't a tropical storm that will come and go, with sunshine soon to follow. It's much more likely that we're facing a near permanent reduction in state tax revenues that will require us to reduce the size and scope of our state governments. ... The coming state government reset will be particularly wrenching after the happy binge that preceeded this recession. During the last decade, states increased their spending by an average of 6% per year, gusting to 8% during 2007-8. Much of the government institutions built in those years will now have to be dismantled. ... But the dominant reality is that even assuming the official revenue projections are accurate ... the state of Indiana will have fewer dollars to work with in 2011 than in did in 2007. ... The 'progressive' states that built their enormous public burdens by soaking the wealthy will hit the wall first and hardest. California, which extracts more than half its income taxes from a fraction of 1% of its citizens, is extreme but hardly alone in its overreliance on a few, highly mobile taxpayers. Both individuals and businesses are fleeing soak-the-rich states already. ... Unlike the federal government, states cannot deny reality by borrowing without limit", my emphasis, Mitch Daniels at the WSJ, 4 September 2009, link:

"California drivers can't line up to renew their licenses Friday. Wisconsin natives can't order copies of their birth certificates. Georgia consumers will have to postpone registering complaints with state watchdogs. And stranded motorists in Maryland may have to wait a little longer for highway-department help. ... State offices are shuttered Friday in California, Maine, Maryland and Michigan. Rhode Island had planned to join them on Thuirsday until a judge blocked its closure plan. ... But furloughs do little to address fiscal problems such as ballooning pension costs, and some policy watchdogs fret they are a short-term solution to what is likely to be a long-term problem. 'Many states expanded health-care funding over the last decades and are now having real trouble paying for it,' said Robert B. Ward, deputy director of the Rockefeller Institute. Educational programs and economic development also ballooned, he said", my emphasis, Leslie Eaton, Ryan Knutson and Philip Shishkin at the WSJ, 4 September 2009, link:

Do you still want to buy muni bonds? Insured or not? That waiting list for jail keep growing.

States have health-care cost problems. How will Obamacare be paid for?

Texas Goes Bust, Sort Of

"The Texas Tomorrow Fund, faced with possible bankruptcy, is drastically cutting its payout on cancelled contracts, angering many parents who signed up for the fund between 1996 and 2003. ... Tuition is three times what it was 10 years ago, so the payout would mean a windfall for many families. But last week, a letter went out saying that in case of canceled contracts, the state would reimburse only the amount parents paid into the fund, minus adminstrative fees of around $36 per year. 'Now I will be getting back less than I paid in. How is this different than what Bernie Madoff did?' San Antonio resident Philip Seeling said, referring to the New York financier who bilked his clients out of billions", my emphasis, Melissa Ludwig at the Houston Chronicle, 4 September 2009, link:

Anyone who thinks he has an enforceable contract with a government is crazy. Imagine, this happened in Texas, a relatively solvent state. Anyone still want muni bonds? Windfall my arse. If that's what was contracted for, that's what was contracted for. The Chronicle should not editorialize in its news pages.

Sunday, September 20, 2009

Crack in the Firmament

"Shares in two companies that own credit-rating firms, Moody's Corp. and McGraw-Hill Cos., declined on Thursday in reaction to a court decision that rejected the companies' longtime claim that the First Amendment [FA] protected them from lawsuits. ... But US District Judge Shira Scheindlin ruled on Wednesday in a 68-page opinion that the ratings of certain securities--those that were distributed to a limited number of investors--don't deserve the same free-speech protection as more general ratings of corporate bonds that were widely disseminated. ... SIVs typically used short-term debt to buy long-term assets, largely residential mortgage-backed securities. The model broke down when these complex securites started to fall apart during the financial crisis, prompting lenders to shut off their supply of cheap short-term funding. Pieces of the SIVs sold to investors were rated AAA by leading ratings firms, meaning they were considered as safe as US Treasury bionds, only offering significantly better returns", Nathan Koppel, Andrew Edwards and Chad Bray at the WSJ, 4 September 2009, link:

Judge Scheindlin's ruling is very narrow. Congress should strip the rating agencies of any FA protections. Think how absurd these SIVs were, they borrowed short and lent long. Mismatched maturities is a banker's prescription for disaster. I read a 1587 treatise on banking which warned against this. Apparently the raters did not know this. What fools. How could SIVs be "as safe as US Treasury bonds"? Do the SIVs have their own Fed to print money to prop them up? Or are the raters correct, T-bonds are junk paper?

Which Mob?

"Everybody is looking for stimulus money. ... The mob is eager too. Federal and state investigators who track organized crime believe that some members have geared up to take advantage of the swift and enormous cash influx--if they have not already--looking, as the old Sicilian expression goes, to wet their beaks. Nimble, innovative and with a seemingly boundless appetite for the taxpayer's dollar, the mob's more sophisticated cadre has plundered municipal, state and federal coffers for generations. So the FBI office in New York has conducted an extensive analysis of the money flowing into the area to create a blueprint of its vulnerabilites, a process, an official said, that is being continually updated. ... 'Because there is so much money involved, criminals will look to exploit the system,' said Guy Petrillo, chief of the criminal division in the [US] attorney's office in Manhattan, referring to the New York area's five Mafia families", my emphasis, William Rashbaum (WR), at the NYT, 31 August 2009, link:

Which five families? Goldman, Morgan Stanley, Citigroup, AIG and JPMorgan? Or was Petrillo thinking of other "families"? What could say, the Genoveses come up with to top the $13 billion Goldman got from AIG? In broad daylight! "Seemingly boundless appetite for the taxpayer's dollar". WR, do you mean Freddie and Fannie? Or Citigroup? "Plundered ... for generations"? Petrillo, did Goldman call you complaining it did not want the Genoveses, Gambinos, et. al. "muscling on its racket"? Do you mean the way the Fed plunders Joe Schmoe's savings to support the banks? From 1913 to 2009 is 96 years, or four generations. Enough. Kill the Fed. I think the "Five families" would each give up its questionable ways to become Goldman. Read my 21 December 2007 post citing Ben Stein's 1990 NYT article:

Saturday, September 19, 2009

PC Military

"No good officer lies on purpose. But all too many of our serving officers repeat falsehoods without giving serious thought to what they're saying. ... In an age that demands fierce intellectual rigor or those who lead young Americans into battle, our military's weakest link may be its increasing tendency--mirroring our society--to substitute sound bites and slogans for stern analysis. ... Consider just a few of the war-pop mantras infecting the speech of four-star generals and well-meaning junior officers: 'We can't kill our way out of this conflict.' Applied to Iraq or Afghanistan, that's political correctness run amok. ... Over the past 3,000 years, insurgencies overwhelmingly failed--because counterinsurgents killed them. ... 'Counterinsurgency is graduate-level warfare.' Was D-Day kindergarten? How about the campaign in the Southwest Pacific? ... A full-blown conventional war with a major power remains immeasurably more complex and dangerous than playing tag with terrorists. ... Our troops are victims of ambitious officers who went to ticket-punch grad schools and based their theses on examples cherry-picked from limited historical knowledge", original italics, my emphasis, Raph Peters at Armchair General, September 2009.

Quoted without comment.

Obama's Philosopher King

"Ezekiel Emanuel [EE] is upset. The president's health care czar sees the growing resistance to his vision, to his brave new world of government-run 'communitarian' health care in which politicians and bureaucrats control one-sixth of the economy and 100% of our bodies. He doesn't quite understand how it all came apart on him, but he does know who started the unraveling: Sarah Palin. ... And he wonders, as have so many others, what it takes to put a stake through her heart? People should listen to him, not Sarah Palin. He is the philosopher king of Democratic health care. And he went to Harvard, you know. ... He has a medical degree and a doctorate in political philosophy from Harvard. The only Harvard she knows is the chunk of ice off Prince William Sound, Harvard Glacier. ... She cut through the rhetoric, the academic jargon, and adoring press to the truth: [EE] and Barack Obama and the Democrat-led Congress are putting in place a health care system that will control the lives--and deaths--of citizens to an extent never seen in this republic. ... It's as if the waitress at the Harvard Faculty Club had, instead of a check, taken out a baseball bat and cold-cocked him. ... This is not supposed to happen--he went to Harvard, you know", Stuart Schwartz (SS) at American Thinker, 2 September 2009, link:

Way to go SS. Way to go Sarah. This story shows the failure of America's farm support policy. Huh? Looking at EE, Philosopher King, I think we should subsidize the production of hemlock.

Friday, September 18, 2009

Infantile Populations

"Manfred, who blogs at 'Manfreds politische Korrektheiten', has translated one of his own posts--originally published in German as 'Mutter Staat'--which describes the actions of the modern welfare state as the infantilization of an entire populace. ... 'I propose to conceptualize as 'feminization' the mentality change that spread all over the West during the second half of the twentieth century, leading to an equivalent change of political ideology. ... The state, as leftists imagine it, is a gigantic mother's breast. A destructed and de-differentiated society--the core of the left-wing project--resembles an unstructured and undifferentiated brain of a baby'," Baron Bodissey at Gates of Vienna, 23 August 2009, link:

Here. Here. Has POTUS Obama the "undifferentiated brain of a baby"?

Sick Minibanks

"The banking industry continues to deteriorate, with federal regulators adding 111 lenders to their list of endangered banks in the latest quarter, even as the economy is stabilizing. Data released Thursday painted a gloomy picture of the state of banking. ... The [FDIC] said it had 416 banks on its 'problem list' at the end of June, equivalent to about 5% of the nation's banks, up from 305 at the end of March and 117 at the end of June 2008. Problem banks had a combined $299.8 billion in assets at the end of June, compared with $78.3 billion a year ago", Damian Paletta and David Enrich at the WSJ, 28 August 2009, link:

Big deal, these are small banks, averaging $721 million each in assets. Conspicuosly no large banks are on the list. Why?

The Sarcastic "Economist"

"As the financial crisis gathered force in August 2007, Jim Cramer, a hyperbolic market commentator on cable television, hurled the worst epithet he could muster at the chairman of the [Fed]: 'Bernanke is being an academic. It is no time to be an academic!' ... It is too soon to declare that the threat of depression has passed, but not to conclude that Mr Bernanke's academic background, which seemed a liability at the start of his tenure, has proved his greatest asset. ... The recovery now under way will be feeble: deflation will remain a bigger threat than inflation for at least a year. ... He will also have to create a new monetary regime to replace the single-minded focus on low inflation, says David Blanchflower, who recently quit the Bank of England's monetary policy committee. ... But Mr Bernanke not only acted more quickly and forcefully, he faced unique constraints. ... But America's economy is now dominated by a shadow banking system of investment banks, financial firms and investment funds. Mr Bernanke's staff devoted much of their creativity to overcoming the legal and technical barriers of the Fed's 20th-century charter and, when they hit the limit, convincing Congress and the administration to pick up the baton. ... Professional economists have applauded Mr Bernanke's action, but the public has not", my emphasis, Economist, 27 August 2009, link:

Where to begin with this? "Begin at the beginning", said the King in Alice. The story is titled, "The very model of a modern central banker". This tells us what the Economist really thinks of Zimbabwe Ben (ZB), not much. How do we know? The Economist likens him to Gilbert & Sullivan's "modern major general", my 25 August 2008 post: Laugh. "Deflation will remain a bigger theat than inflation"? We are on the other side of the looking glass. "Single minded focus on low inflation", huh? Are all central bankers Mad Hatters? "Devoted much of their creativity to overcoming the legal and technical barriers", ah, ZB runs the Enron of central banks. Now POTUS Obama can pardon Andrew Fastow (AF) and put him on the Fed at the next opening. Alternatively, AF would make a fine replacement for Timmy Boy. Who could object to AF at Treasury? I can't. He never worked a day in his life for Goldman Sachs!

Thursday, September 17, 2009

Uncle Sam-Aider & Abetter

Jesse at Jesse's Cafe Americain, 25 August 2009, has a Harry Markopolos (HM) interview. HM exposed the Bernie Madoff fraud about eight years before the SEC did anything about it, link: HM "said that all the members of his team feared for their lives during the long investigation and he for more reason than any of the others because of his visibility. He was the one who was submitting all the complaints each year, and he knew that any leak from the SEC could make him a marked man", my emphasis. HM worried about SEC leaks. Why? Are leaks the SEC's and DOJ's modus operandi when dealing with "troublesome" third parties like HM? HM "says that there were SEC lawyers who were 'in bed with Madoff'." No! Next HM will claim the SDNY US attorney's office is a cesspool of corruption. Whocoudanode?


"Do you fret about whether you're raising your child correctly? Not to worry. Even if you're deeply involved in your children's lives and happy with their social development, you have an eager partner in rearing your offspring: the Clark County School District. ... Instead, I was greeted by a full page of mind-numbing, politically correct mumbo-jumbo under the headline, 'The Challenge of Excellence--Be Positive!' ... Unfortunately, most of the 34 bullet points that follow have nothing to do with helping kids master their multiplication tables and learn how to spell. ... Those last two nuggets aren't character-development tools--they're political ideals. ... It's this kind of rubbish that makes parents, taxpayers and employers question whether school systems are focused on indoctrinating students instead of educating them. ... UNLV's Office of Diversity and Inclusion--headed by a radical education professor--actually lobbied the Legislature this year to greatly expand the time spent on a 'comprehensive multiculturalism curriculum' in all Nevada elementary schools. Thankfully, the legislation died", Glenn Cook (GC) at the Las Vegas Review Journal, 30 August 2009, link:

60 years of continuous educational establishment "flapdoodle", see my 1 September 2008 post:

Wednesday, September 16, 2009

The SEC as Passover's Fourth Son

"The [SEC] has 'historically been slow to act' in regulating the nation's credit rating agencies, the agency's inspector general said in a report released Friday that called for a broad range of improvements in oversight. ... The audit report found that the commission delayed adopting rules on the rating agencies and sometimes failed to follow the rules that existed. ... The report recommended that the SEC impose further restrictions on the consulting and advisory services that rating agencies provide to issuers of rated debt, to avoid conflicts of interest. It advised a rotation requirement for credit ratings analysts to 'reduce the risk of undue pressure' on analysts to sign off on questionable products to maintain relationships with issuers. It also called for a review of the effect of what is called a revolving door syndrome, in which analysts leave to work for an issuer whose debt they were rating", my emphasis, Cyrus Santi at the NYT, 29 August 2009, link:

"The [SEC's] internal watchdog criticized the SEC's handling of credit-rating firms, saying some won federal approval despite slipshod applications and, in one case, suspicious financial data. ... In a report released Friday, the SEC's inspector general, David Kotz, cited serious concerns about one firm, including 'suspicions regarding the accuracy of the financial information provided in its application and concerns about the authenticity of a number of certifications.' ... The big three credit-ratings firms have been blamed by some critics for exacerbating the financial crisis after giving overly positive ratings to certain kinds of debt, including some backed by subprime mortgages. However, the problems identified in Mr. Kotz's report appear to involve primarily smaller firms", Sarah Lynch at the WSJ, 29 August 2009, link:

"When everyone else is blaming you for creating the credit crisis, it helps to have a friend at the [SEC]. Especially when the SEC has the power to prevent new competitors from entering your market. ... Yet David Kotz, the SEC's inspector general, has apparently concluded that the real problem is not this government-anointed oligopoly, but the upstarts that have lately been approved to compete with them. ... Kotz has also issued recommendations certain to make competing with the Big Three more difficult, time-consuming and expensive. ... Of course, the greatest reform of all would be to get the government out of the business of approving credit raters. The SEC should enact its 2008 proposal to remove all references to NRSROs from the agency's rules and let markets decide how to judge default risk. ... Among the most costly of Mr. Kotz's ill-advised recommendations is the suggestion that all rating agencies should be audited by a firm regulated by the [PCAOB], the bureaucratic monster created by Sarbanes-Oxley", Editorial at the WSJ, 1 September 2009, link:

This is worthless. Kotz advocates the same "solutions" that did not improve Big 87654 audits for 33 years. He must be "Passover's fourth son", the one who cannot ask a question. Why is Kotz worried about the rating agencies "revolving door syndrome"? Kotz, first look at the SEC and DOJ. Did not the Master say, "Why do you look at the speck of sawdust in your brother's eye and pay not attention to the plank in your own eye? How can you say to your brother, 'Let me take the speck out of your eye,' when all the time there is a plank in your own eye? You hypocrite, first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother's eye", Matthew 7:3-5 (NIV).

Kotz's report could have been written by the PCAOB. It's worthless. The problems appear to be clerical.

I knew Kotz would use his report to further a PCAOB power grab. Aren't the Big Three already audited by large CPA firms?

I anticipated Kotz's PCAOB idea, but meant it sarcastically. Kotz took me seriously. See my 27 September 2007 and 28 April 2008 posts:

Added links 7:40 PM:

National Review--About Face?

"California's financial unraveling has prompted a long-overdue debate about taxes, regulation, and government spending, but the state's media and government continue to ignore what could be an even greater problem: the irreparable damage to California's human capital that nearly 30 years of unrestrained illegal immigration has achieved. ... A strong case could be made that, in terms of educational achievement, industriousness, and entrepreneurial acumen, Asian immigrants to California have proven superior to white natives of the state. Therefore, if California were to experience a wave of mass immigration from Asia, its long-term economic prospects would be improved. Today's Hispanic immigrants would probably have the same effect if they came from the top 10 to 20 percent of their society according to those same measures of human capital, rather than the bottom rungs. But the influx has instead been composed mainly of the poorly educated, the unskilled, and the illiterate. Such immigrants will likely soon dominate the state's overall population and politics. In 2005, the California K12 school system was 48.5 percent Hispanic, compared with 30.9 percent white. By now it is above 50 percent Hispanic. Two-thirds of kindergarten students were Hispanic, most of them unable to speak English. ... The state's inability to improve the educational attainment of its residents will result in a 'substanial decline in per capita income' and 'place California last among the 50 states' by 2020, according to a study by the National Center for Higher Education Management Systems. ... Perhaps the most dangerous myth about illegal immigrants is that they do not impose any cost on society. The reality is that even those who work and half do not, according to the Pew Hispanic Center cannot subsist on the wages they receive and depend on public assistance to a large degree. Research on Los Angeles immigrants by Harvard University scholar George J. Borgas shows that 40.1 percent of immigrant families with non-citizen heads of household receive welfare, compared with 12.7 percent of households with native-born heads. Illegal immigrants' cost to the taxpayer is estimated to be $13 billion half the state's budget deficit. ... Milton Friedman once said that unrestricted immigration and the welfare state do not mix. Must we wait until California catches up with Mexico to realize how right he was?," my emphasis, Alex Alexiev (AA) at National Review, 24 August 2009, link:

Amazing. Pro-unlimited immigration National Review printed AA's piece. 20 years ago I concluded as California's ethnic composition began converging with Mexico's, it would become Mexico. Wait 10-15 years, it will be. Negroes were among the first Californians to see this. Where but in California would Terry Anderson (TA) have a radio show devoted to letting Californians vent about illegal immigration. Where but in California would Negroes turn against affirmative action as they see they no benefit from it. My estimates of illegal aliens "net annual tax cost" to California are higher than Professor Borgas's, I place them at $17-20 billion. TA is a black man with a Los Angeles radio show. Yes, Uncle Miltie warned us 47 years ago. The immigrants from India which are mostly the best India has. I even admit to having Hindu friends. They are probably California's best educated people. We get 35% of Indian Institute of Technology's (IIT) graduates, India's: Harvard, Yale, Princeton and MIT all rolled into one. IIT admits one in 70 applicants. By examination. It's tough. Having met many IIT grads, I guess they average about 145 IQ. IQ, that old devil again. California's Mexican immigrants by and large come from southern Mexico, average IQ 82. And there is nothing we can do about that. Where but in "South Central" Los Angeles, 20 years ago, working-class blacks screamed about illegal aliens destroying "their schools". Really . Harvard still lets Borgas teach with those findings. Wow.

Tuesday, September 15, 2009

Uncle Sam, Speculator

"Critics of the Troubled Asset Relief Program said the government was giving away taxpayer funds when it invested in financial institutions last fall. The government insisted the investments would show a profit. Who was right? So far, it seems the government, according to a report from SNL Financial. ... Including warrants and dividends, government has received $44.7 billion back. The total rate of return to the Treasury for all companies that have repaid TARP funds and redeemed their warrants is 10.16%, according to SNL data. The warrant repurchases have accounted for a large portion of the returns--7.15%. ... The biggest returns are chalked up from Goldman Sachs Group, Morgan Stanley [MS] and American Express, which yielded 14.18%, 12.68% and 12.23%, respectively. ... And this analysis doesn't include huge government investments in American International Group or the mortgage giants Freddie Mac or Fannie Mae, let alone TARP funds funneled to auto makers General Motors and Chrysler", Stephen Grocer at the WSJ, 28 August 2009, link:

"Taxpayers are getting a reward for the trillions of their dollars US authorities put at risk in a bid to save the financial system. But they still face big potential losses from the rescue effort, which will remain on the government's books for many years. ... The government didn't set out to turn a profit; it set out to prevent the collapse of the financial system and the damage that would have caused to the economy. ... The Treasury is sitting on some very large risks, including $248.8 billion in investments to banks and [AIG] that haven't yet been paid back, and many of those banks are in a weaker position than those that have returned their [TARP] money. ... 'It is not a bad return for all of the extra added benefits [of stabilizing the financial system],' said John-Patrick O'Sullivan, a senior banking analyst at SNL Financial, a research firm specializing in banks. ... Dividend and warrant payments from those firms worked out to a 7% annualized rate of return for the government on its investments, he estimated. ... On a portfolio that averaged $2.1 trillion, the net income in the first half of the year amounted to roughly a 1.5% annualized return, not a large return, but more than what the Fed would have earned had it put the same sum in short-term Treasury bills", my emphasis, Jon Hilsenrath at the WSJ, 1 September 2009, link:

"Indeed, during the Great Panic of 2008, American taxpayers reluctantly made a series of very expensive investments in blue-chip companies--Fannie Mae, AIG, General Motors. But it's been hard to see the returns of these efforts, since they were designed to avert a total meldown. ... We can't extrapolate the early returns to the broader pool, due to what economists call adverse selection. In engliosh, it means the healthiest banks fled like thieves (not the flacks: that's hyperbole!) once they could raise private capital, leaving behind the weaker institutions", my emphasis, Daniel Gross (DGI) at Newsweek, 7 September 2009.

Yves Smith (YS) slams the similar FT and NYT articles at Naked Capitalism, 31 August 2009, link: Between the FT, NYT and WSJ, it appears these stories were coordinated. Yes YS, "the spin is in". Why not? Look at the wonderful job Zimbabwe Ben (ZB) has done as Fed Head. That's why these stories are appearing now, to provide cover for ZB's recent reappointment. YS writes, "Credit 101 is that your best borrowers repay first". Amen.

Are these SNL guys kidding? 10.16% is a good return on these "investments"? SNL excluded the value of guarantees from the investment "base". $40.6 billion in, $44.7 billion back, a 10.16% profit. Wow. MS was $6.71 in October, it's $29.53 now, a 340% increase in 11 months. 10.16% on the "investments" which were repaid does nothing for me. It excludes the effects of public subsidies to these firms through suppressed interest rates. Would there be any "return" if the public's "lost interest" is included? Compare Uncle Sam's return with Lloyd Blankfein's, my 6 September 2009 post:

How does DG know what the "investments" were designed to do? I think they were designed to bail out Wall Street. At least he recognizes "adverse selection". DG's piece reminded me of the "old days", i.e., when Newsweek had more critical economics columnists like Henry Hazlitt, 1946-66 and Millton Friedman, 1966-84. How we could use them now.

YS is almost certainly correct, these look like planted stories. SNL must be composed of fools, or worse. The Fed's "making" a profit is preposterous. It issues non-interest bearing paper called Federal Reserve Notes! Imagine, the "capital market line" is so flat, that the Fed's portfolio of garbage only made 1.5% over T-bills. This might mean T-bills are garbage. Got gold? Get more. Got T-bills, have an anxiety attack!