Friday, April 30, 2010

Pennsylvania's Pleasure Island affair

You remember Pleasure Island, right? You know, that place where Pinocchio ran off to with the not-so-ruffian Lampwick?

Well, run off is the wrong term. They got "invited" to go there by The Coachman, actually.

This story is not about Pinocchio or Lampwick.

It's about The Coachman. More accurately, it's about The Coachmen.

Former judge Conahan pleads guilty in kids-for-cash scheme

Former Luzerne County President Judge Michael T. Conahan faces up to 20 years in prison on a racketeering charge for accepting millions of dollars from two men connected to two for-profit detention centers that housed offenders from the county's juvenile court.

He and his co-defendant, former President Judge Mark A. Ciavarella Jr., entered guilty pleas to fraud and conspiracy charges in the case last year, but withdrew them after a federal judge rejected the 87-month prison sentences contained in their plea agreements.

Mr. Conahan and Mr. Ciavarella were instrumental in closing a county-owned juvenile detention center in 2003 and securing county contracts for facilities in Pittston Twp. and Butler County owned by two related for-profit companies, PA Child Care and Western PA Child Care, prosecutors say.

The grand jury alleged that Mr. Conahan, 58, and Mr. Ciavarella, 60, accepted $2.8 million from the builder and former owner of two for-profit detention centers that housed juveniles sentenced by Mr. Ciavarella, who presided over juvenile court for a dozen years.

Mr. Ciavarella violated state court rules by failing to fully inform juveniles of their right to counsel and jailed them on minor offenses, according to the state Supreme Court, which vacated thousands of the sentences he imposed in juvenile court. The incarceration rate in Mr. Ciavarella's court was more than double the state average.

The two former judges allegedly tried to disguise the payments by routing them through Beverage Marketing, a firm controlled by Mr. Conahan, and Pinnacle Group of Jupiter LLC, a holding company owned by the judges' wives but controlled by the judges that owned a condominium in Florida.

After the withdrawal of their guilty pleas in August, Mr. Conahan and Mr. Ciavarella were indicted by a federal grand jury on 48 counts that carried a cumulative maximum sentence of hundreds of years in prison.

In July, Judge Kosik rejected the 87-month prison sentences called for in the plea agreements Mr. Conahan and Mr. Ciavarella signed in January 2009 as too lenient.

Judge Kosik wrote in a court order that Mr. Conahan had been uncooperative and attempted to "obstruct and impede justice" in his dealings with probation officers preparing a pre-sentence report in the case. In his order, Judge Kosik also unfavorably cited public statements in which Mr. Ciavarella denied he had a "quid pro quo" agreement to jail juveniles for cash, as alleged by prosecutors.

Under his plea agreement, Mr. Conahan, who retired from the county bench in 2008 but was active as a senior judge until his arrest in January 2009, has 10 days to resign from the Pennsylvania Bar Association.

Judge in Pa. 'Kids for Cash' Scandal to Plead Guilty to RICO Charge
Sources in Luzerne County and others close to the investigation have told The Legal Intelligencer for nearly a year that Conahan essentially ran the county and was the epicenter of corruption in the courthouse.

Since September, the two former judges have faced a 48-count indictment containing charges of racketeering, fraud, money laundering, extortion, bribery and federal tax violations. And, along the way, they've made each public move -- court filings, hearing appearances -- together.

In early March, they filed 44 motions exploring nearly every open option.

They sought, for instance, to move the case out of Pennsylvania and charged the prosecution with "outrageous government conduct." They also petitioned for Kosik to recuse himself from the case.

The sentiment from several sources upon reviewing the plea deal was: "He must be singing like a bird." If so, sources said, the government will most likely expect Conahan to name lawyers or others involved in the case-fixing that allegedly went on in the courthouse. Sources close to the investigation have confirmed for months now that a number of lawyers are under federal scrutiny and some are talking.
To quote a non-Disney character, "Dithpicable".

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You buy 2, sell 1, get one free

I’ll Tell You When Chinese Bubble Is About to Burst: Andy Xie
Another friend recently vacationed in the southern island- resort city of Sanya in Hainan province and felt compelled to visit a development sales office. Everyone she knew had bought there already. It’s either buy or be unsocial.

“You should buy two,” the sharp sales girl suggested. “In three years, the price will have doubled. You could sell one and get one free.”

The evidence in official-corruption cases no longer involves cash stashed in refrigerators or starlet mistresses in Versace clothing. The evidence is now apartments. One mid-level official in Shanghai was caught with 24 of them.

Why would corrupt officials keep apartments rather than cash? Well, according to Wall Street, the yuan is going to appreciate. So holding dollars is out of the question. And why hold Chinese cash when property prices are always going up?

Expectations of a Chinese currency revaluation are, perhaps, the most important force inflating the bubble.

A bubble evolves and bursts in its own time. When it is about to burst, I’ll let you know.
China’s lending boom, illustrated
Loan growth in China in 2009 outpaced that in other EMs, and by year-end Chinese banking assets exceeded those of the other 23 systems covered in this report, combined.

Retail lending plays little role in Chinese banks’ overall loans.

Where is all that loan growth coming from, then? Here’s another enlightening chart — on state ownership of banks. Again, China is near the top.

The reach of China’s Local Government Funding Vehicles may go well beyond the five big state-owned banks.

Oh dear.
We live in interesting times.

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Thursday, April 29, 2010

Robots' Rules of Disorder

Robot Rules
Robots have the potential to act in the real world. Attorneys and legal scholars are now puzzling over how harmful actions of robots will be assigned liability, and particularly how robotic maneuvers will fit into traditional legal concepts of responsibility and agency.

One possible avenue would be to view the robot as an agent of its owner, who would be presumed liable for the robot’s actions, but Ryan Calo, a fellow at the Stanford Law School’s Center for Internet and Society, says it’s not so simple.

“Let’s say you rent a robot from the hospital to take care of Granny, and the neighborhood kids hack into the robot and it menaces Granny and she falls down the stairs. Who’s liable?” he asks. Possibilities include the hospital (which released it), the manufacturer (it’s easy to hack into), the neighborhood kids, or the consumer who failed to do something easy like update the software.

Damages are another puzzler. “Society tolerates Microsoft Word eating your thesis, but it won’t tolerate a robot running into somebody,” Calo says. “If you look at cases where computers have caused physical injury, then you could recover—for example, if the computer gave a cancer patient too much radiation.”

It was all so simple for Isaac Asimov, with his three rules:
1. A robot may not injure a human being or, through inaction, allow a human being to come to harm.

2. A robot must obey any orders given to it by human beings, except where such orders would conflict with the First Law.

3. A robot must protect its own existence as long as such protection does not conflict with the First or Second Law.
Of course, Asimov was first a scientist before a science fiction writer.

Now you got lawyers involved. So the new Asimov 4th rule will be Shakespearean: "The first thing we do, let's kill all the lawyers."

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"Inside baseball" lawyering for Senate hearings

The Blog of LegalTimes has an instructive backgrounder on some of the puppet masters who help stage events such as the recent/ongoing Goldman Sachs Senate not-hearings.

Goldman Lawyer's General Advice: Devour Senators' Time
O’Melveny & Myers partner K. Lee Blalack II spoke to The American Lawyer for a March 2009 story about what it’s like to prepare clients for a congressional hearing. His advice: a congressional hearing room is not a forum for getting at the truth. A day in the klieg lights, he said, should end with minimal damage to reputation while not complicating a client’s position in other investigations or litigation.

“Long, thoughtful pauses followed by rambling non-responsive answers can easily devour half of a member’s allotted questioning time,” Blalack told The American Lawyer, which is a sibling publication of The National Law Journal and The Blog of Legal Times.

Blalack formerly worked for the committee that’s hosting the hearing, the Senate’s Permanent Subcommittee on Investigations.
Much more in the link.

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Saturday, April 24, 2010

Rating credit agencies rate right up there

Wall Street got away with the bonus bucks and bail out because of its influence in Washington and on credit ratings agencies. Had either of those two other institutions failed to play ball, Wall Street would never have got to first base with its credit shenanigans.

This post is (again) about the agencies.

How credit watchdogs fueled the financial crisis
Lawmakers are now asserting that credit rating agencies (CRAs) like Moody's Investors Service and Standard and Poor's Ratings Services failed to expose the lurking dangers.

"Rating agencies continue to create an even bigger monster - the CDO Market," wrote one S&P employee in an internal e-mail in December of 2006. "Let's hope we are all wealthy and retired by the time this house of cards falters. :o)."

The Subcommittee is accusing the credit agencies of contributing to the crisis in several major ways: By using ineffective models to measure risk, by inflating ratings because of pressure from banks, by ignoring early warning signs and by failing to quickly disclose the risk on existing products once it was discovered.

In his testimony, Richard Michalek, former vice president of the Structured Derivative Products Group at Moody's admitted that he felt constant pressure to accept deals, even if they looked risky.
The Congressional watchdogs, of course, bear as much blame, what with their setting the so-called "investment" bank dogs off the regulatory leash and allowing "mark-to-bark" accounting gimmicks. But Guambat digresses.

Another ratings agency failure is suggested in the following article: the failure to have enough knowledge of what they were dealing with to properly to dig deep enough to even ask the right questions.

UPDATE 1-Ex-Moody's exec didn't know Paulson shorted Abacus
A former senior official at Moody's Corp said he would have liked to have known that hedge fund manager John Paulson was shorting a Goldman Sachs Group Inc derivatives product when Moody's was rating it.

"I did not know that. I'm fairly sure that my staff did not know either" about Paulson's involvement, said Eric Kolchinsky

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Euro down the drain, caught in a Greece trap

Moody's Lowers Greece Ratings On Nation's Continued Woes
Moody's Investors Service lowered its ratings on Greece, and warned further downgrades were possible, as the ratings agency noted significant risk that debt may only stabilize at a higher and more costly level than previously estimated.

Following the news, the euro dropped to an 11-month low, as fresh worries over Greece's fiscal position led investors to flee riskier assets for the safety of the dollar.
Greece activates aid plan
Greece on Friday triggered an emergency aid plan to draw cash from other countries that use the euro and the International Monetary Fund and ease a debt crisis that has weighed on the shared currency.

The package has enough money to keep Greece from defaulting on its massive debts any time soon. But Greece faces years of painful cutbacks, and its long-term finances -- as well as whether its troubles will infect other indebted EU members and further harm the euro currency -- are still being questioned.

Read more:
Euro Recovers From Lows On Greek Aid Request
The euro rebounded sharply off a one-year low Friday after Greece formally asked for a financial aid package and euro- zone lynchpin Germany said it was prepared to help.

But with uncertainties still enveloping the aid process for Greece and debt issues casting a shadow over other euro-zone countries, the common currency is likely to come under renewed pressure. Structural issues--such as low-growth prospects and profligate spending--could lead to further declines in the euro.
Greek workers strike, warn of social explosion
Nurses, teachers, tax officials and dockers stopped work during the 24-hour strike, which paralyzed public services, while EU and IMF officials met in Athens for talks that could lead to a financial bailout for Greece.

"People are asking for blood," said ALCO pollster Costas Panagopoulos. "They need someone to be punished for what is happening. They want the government to put all those who did not pay their taxes in prison."
Greek sailors to strike over market liberalisation
Greek seamen on Thursday called a strike next week after the government said it would lift restrictions on foreign cruise ships in a first step towards liberalising the country's labour market.

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US Israeli relations reach a settlement

US: No breakthrough expected soon
An American official has played down the prospects of any immediate progress in US envoy George Mitchell’s efforts to resume peace talks between Israelis and Palestinians. President Shimon Peres assured Mitchell on Friday that Israel was committed to peace.
Bad Faith in the Holy City
Since 1967, virtually every time a U.S. envoy has arrived to discuss the fate of the West Bank or Gaza, the Israeli government of the day has bluntly shown who is really boss, usually with a carefully timed unilateral expansion of Israel’s presence in the occupied territories. Since the 1970s, Israel has illegally settled close to half a million of its citizens in the West Bank and East Jerusalem, not to mention building a barrier mainly inside the West Bank on Arab-owned land that is longer and taller than the Berlin Wall.

Given that for a year the Obama administration has sought a settlement freeze in the West Bank, including East Jerusalem, it is impossible to interpret the latest announcement of settlement expansion in the city as anything but a provocation.
U.S.-Israeli Ties: What’s Really Happening?
Essentially, there have been three causes of the crisis. First, the change in U.S. administrations....

Second, ... the election of Feb. 10, 2009, which brought Binyamin Netanyahu to power.

Third, and perhaps most important, the unwise settlement policies of Mr. Netanyahu, especially his policy of construction in Jerusalem that over the last few years has become the most sensitive issue in the Israeli-Palestinian conflict.


Friday, April 23, 2010

Once upon a time in LaLa Land

"Just as there was a time when people could smoke on airplanes, or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings agencies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he'd just done. That just changed."
A Message to Wall Street's Fabulous Fabs. Read the whole fable.

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Thursday, April 22, 2010

Not Tibet it is, then

Guambat ran with the post title Tibet or not Tibet when news of the "China" earthquake broke about a week ago, noting "It will be interesting to see how this gets reported and received once the Tibet angle sinks in."

China is making its druthers known on the ground, as the AP reports:

Tibetan monks ordered to leave China's quake zone
Now the Buddhist monks who responded first are being pushed out of the disaster area and off of state media — apparently sidelined by Beijing's unease with their heroism and influence.

Monasteries were given verbal orders this week to recall their monks. Amid hours of coverage for China's national day of mourning on Wednesday, no monks were visible in the official proceedings.


Wednesday, April 21, 2010

The short heard - but not seen - around the world

Questions for Banks That Put Together Deals
C.D.O. transactions are not publicly traded, so it is difficult to get a full picture of the market’s size. But research suggests it is huge. Thomson Reuters estimates that sales of C.D.O.’s peaked at $534.2 billion in 2006, from $68.6 billion in 2000. Even in 2007, when the housing market was starting to crumble, Wall Street created an estimated $486.8 billion in new C.D.O.’s.

Many banks on Wall Street and in Europe were even bigger players in the types of complex investment deals that Goldman is now defending. Merrill Lynch was at the top of the heap, assembling $16.8 billion worth between 2005 and 2008, according to a new report by Credit Suisse.

Once the air started coming out of the housing market and there were no more mortgage bonds to sell, they created synthetic C.D.O.’s, whose supply was unlimited because they did not rely on hard assets.

UBS put together $15.8 billion worth of similar products, according to the Credit Suisse estimates, while JPMorgan Chase and Citigroup each created more than $9 billion worth. Goldman Sachs was a comparatively small issuer, at $2.2 billion.

C.D.O.’s, which produced much of the financing for the mortgage explosion, are at the heart of the Securities and Exchange Commission’s civil fraud case against Goldman Sachs — as well as a broader S.E.C. investigation of sales and disclosure practices at many Wall Street firms.

Until the bottom fell out, these instruments also powered an age of riches on Wall Street. Initially, bundling mortgage bonds into C.D.O.’s helped open the spigot of easy money that allowed Americans to buy more house than they could afford.

But Wall Street, as it is wont to do, took the concept to another level, creating securities that allowed investors to make side bets on the housing market. Known as synthetic C.D.O.’s, they did not raise money for home loans or serve any other broad economic purpose.

Instead, like a casino offering blackjack along with slot machines and Texas hold ’em, they were just one more way to bet against the housing market.

Crucial to the case against Goldman is the question of whether the firm should have disclosed that an investor who was betting against the securities in the portfolio also helped select them. In legal filings, Goldman argues that it was not standard industry practice to make such a disclosure.

Magnetar, a Chicago hedge fund, also invested in C.D.O.’s that it then bet against, without disclosing its role, according to an investigation by ProPublica, a nonprofit journalism organization. Magnetar has denied that it picked individual securities, however, adding that its investment strategy was market-neutral.

The threat of more litigation represents the abrupt end to what was a golden era on Wall Street.

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With a gun to its head, Wash D.C. surrendurs its seat

Rosa Parks sparked a civil rights revolution in America when she refused to give up her seat.

The people in the District of Columbia, a territory of the US, fed up with the shootings that have turned D.C. into a murder capital, have had to again give up any hope of having a seat on the Federal floor of the House of Representatives because they refused to give up their gun control laws.

Ardent supporters of having the seat in the House backed out, saying "they pulled the bill because of an amendment that would have repealed most of the District's gun-control laws".

Congressional leaders shelve D.C. voting rights bill
House Majority Leader Steny H. Hoyer (D-Md.) abandoned the long-sought legislation with the blessing of Del. Eleanor Holmes Norton (D-D.C.), who had pushed for the measure.

Norton said the "egregious changes" by Reps. Travis Childers (D-Miss.) and Mark Souder (R-Ind.) would "directly proliferate guns throughout the District," in addition to eroding support for the bill among liberal Democrats, particularly in the Senate. Norton said that legislation would have restricted the District from prohibiting concealed or openly carried firearms.

The decision by congressional leaders Tuesday to shelve a D.C. voting rights bill, just days after announcing plans to move ahead, scuttles what supporters say was the best opportunity in a generation to give the District a voting seat in the House of Representatives.

"The price was too high," Hoyer explained during a news briefing in which he said he was "profoundly disappointed" at "his inability to get this legislation passed."

As Hoyer was making his announcement Tuesday, D.C. Council members at the other end of Pennsylvania Avenue were decrying the gun amendment during a breakfast meeting. They called it an infringement on the city's limited powers of self-government and spoke passionately about District residents who have died from gun violence, including the four teenagers killed in a drive-by shooting on South Capitol Street last month.
Guambat is acutely sensitive to the quest for representation in the US government by another US territory. Being a Guam resident, and along with a population soon to be in excess of 200,000 citizens, Guambat also has no direct representation on the House floor. He can't even vote for President.

You'd think, in such circumstances, especially in D.C. where most Congresspeople have to go to work, they'd want to keep guns out of the hands of angry and other dysfunctional people. Remember what the Boston Tea Party led to.

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The Ten Percent Solution?

For most of Guambat's six decades plus long life, the standard, wet-finger-in-the-air benchmark for interest rates has been ten percent. Mind you they have fluctuated, and rather violently in the 1980's, but for the most part you'd often hear people say, "well, assume you get 10% ...."

Since Greenspan, however, real and nominal rates have been south of that 10% "norm".

Are we soon to revert to mean? You might expect so if we continue to be stuffed full of stimulus and bail out moneys, but where're the "green shoots" of inflation that would get us there?

Well, Australia has been raising rates multiple times in the last year due to heating economy, and China (always China) has been reporting trouble holding its tiger in line, and now this:

Sharp inflation rise may force Bank to raise interest rates
Sharply higher petrol, gas and food prices have pushed inflation to "uncomfortably high" levels, ahead of City expectations, raising fears that the Bank of England may need to lift interest rates sooner than expected. The cost of motoring is about 17 per cent up on a year ago, and some food prices may spike further as a result of the no-fly zone restricting imports of some fruit and vegetables.

The spike in inflation will also further depress the real returns being offered to savers. The real return on an average no-notice account, after basic tax and inflation, today stands at minus 2.82 per cent, according to the price comparison website Moneyfacts.

Although still historically low, British inflation is markedly higher than in other comparable advanced economies. "Core" inflation, which strips out volatile items such as fuel and food, is also up, from 2.9 per cent to 3 per cent.
California home default cases plunge
Mortgage default notices — the first step toward foreclosure — plunged 40.2% statewide in the first three months of the year compared with the same period in 2009, according to San Diego research firm MDA DataQuick.

Foreclosure sales dropped 1.7% from a year earlier and 16.1% from the last three months of 2009, DataQuick said Tuesday.

The numbers suggest that the housing market won't be flooded by a fresh wave of bank repossessions, which had been seen as a major threat to the market's recovery.
BOJ's Nishimura: signs Japan escaping deflation
Bank of Japan Deputy Governor Kiyohiko Nishimura said on Wednesday there are positive signs that Japan will escape deflation.

"It can be said that some beams of light are starting to break through a thick cloud of deflation."
India Boosts Rates To Tackle Inflation
As expected, India has joined Australia in lifting rates more than once to try and control a strong recovery.

Vietnam and Malaysia have also lifted rates, China has started a small tightening via lifting asset ratios and curtailing bank lending and Singapore has boosted the value of the Singapore dollar as a first, and possibly only step to start controlling a strong rebound.

First signs of an inflationary spring, or still too much to swallow?


Health care reform with a grain of salt

The Tea Party Democrats and Republicans did their dead level best to derail health care reform, in one aspect, but ...

Lawmakers urge FDA to move swiftly to limit amount of salt in foods
Two members of Congress urged the Food and Drug Administration on Tuesday to move quickly to limit the amount of salt in processed foods, calling the matter a "public health crisis" that demanded a swift response from government.
The analogy is chuckle-able in Guambat's delinked mind.

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GOPsmacked SEC/Goldman case

The Republicans seem hellbent on aligning themselves with the masters of the imploded credit universe, which of course is their right. Their far right.

No one wading through the finance of mass destruction would fail to take note of the cynical, pernicious and central role of the derivative houses that used to be called investment banks until, to get bail out money, they morphed into bland banks, and after they got that money, they bailed out again from bank to continue their business as usual. Goldman was central to this, if only because they were more politically structured and legally astute, and last standing.

Buffett warns on investment 'time bomb' March 2003
The rapidly growing trade in derivatives poses a "mega-catastrophic risk" for the economy legendary investor Warren Buffett has warned.

The derivatives market has exploded in recent years, with investment banks selling billions of dollars worth of these investments to clients as a way to off-load or manage market risk.

But Mr Buffett argues that such highly complex financial instruments are time bombs and "financial weapons of mass destruction" that could harm not only their buyers and sellers, but the whole economic system.

The derivatives market has exploded in recent years, with investment banks selling billions of dollars worth of these investments to clients as a way to off-load or manage market risk.

But Mr Buffett argues that such highly complex financial instruments are time bombs and "financial weapons of mass destruction" that could harm not only their buyers and sellers, but the whole economic system.

Derivatives also pose a dangerous incentive for false accounting, Mr Buffett says.

The profits and losses from derivates deals are booked straight away, even though no actual money changes hand. In many cases the real costs hit companies only many years later.

This can result in nasty accounting errors. Some of them spring from "honest" optimism. But others are the result of "huge-scale fraud", and Mr Buffett points to the US energy market, which relied for most of its deals on derivatives trading and resulted in the collapse of Enron.

Some derivatives contracts, Mr Buffett says, appear to have been devised by "madmen".
Banks Boosted by Fixed Income
Goldman Sachs Group Inc.'s fixed-income group turned in a record performance in the first quarter, underscoring the investment bank's dominance in a business that is driving Wall Street's resurgence.

At Goldman, Chief Executive Lloyd C. Blankfein has emphasized fixed-income trading after taking the job in 2006.
There are and have been derivatives in currency and commodity markets but it was the fixed income credit derivatives that brought the world's financial markets to their knees.

It was about the time that Blankfein came on board that Goldman ramped up its CDO operations in subprime debt that formulated and foisted off the Abacus and other credit schemes which fornicated the credit hungry markets.

Wall Street reform and Goldman Sachs
Partisanship in the Senate is holding up Wall Street reform legislation the same week the Securities and Exchange Commission sued Goldman Sachs for alleged fraud. The mutterings of our Readers Who Comment suggest that the discussions on Capitol Hill reflect the significant differences of opinion that exist out there in the land.

Lawmaker questions timing of SEC's Goldman case
A top Republican lawmaker is raising questions about the U.S. Securities and Exchange Commission's fraud case against Goldman Sachs Group Inc, implying political motives

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Tuesday, April 20, 2010

Sex is at fault

Extramarital sex causes earthquakes
Tehran, Iran -- Ayatollah Kazem Sedighi told worshippers that women who wear fashionable clothes and apply make-up cause youth to "go astray" and have affairs. As a result, the country that is bound by several fault lines experienced more ‘calamities’ such as earthquakes, The Telegraph reported Tuesday.

"Many women who dress inappropriately ... cause youths to go astray, taint their chastity and incite extramarital sex in society, which increases earthquakes," Aftab-e Yazd newspaper quoted him as saying at a Tehran prayer service late last week.

"Calamities are the result of people's deeds. We have no way but conform to Islam to ward off dangers."

Every woman regardless of her religion or nationality must cover her hair and bodily contours in public and offenders face punishment.

Guambat reckons some of them ayatollahs have a lot in common with lots of Southern Baptist preachers he heard about as a yung-un. Christians might not've invented fire and brimstone, but they certainly put a marketable brand on it.

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Parts? Which parts?

Guam was concerned to read that Iran will have the capability to to send a missile to parts of the US by 2015.

Since Guam is about 300 miles closer to Tehran than New York is (according to this distance calculator), Guambat was particularly disturbed to read this part of the story:
The U.S. military tried and failed to shoot down a simulated Iranian missile strike on the United States in January, in a botched $150 million exercise over the Pacific Ocean.
Well I don't know why I came here tonight,
I got the feeling that something ain't right,
I'm so scared in case I fall off my chair,
And I'm wondering how I'll get down the stairs,
Clowns to the left of me,
Jokers to the right, here I am,
Stuck in the middle with you.

-- Bob Dylan


Monday, April 19, 2010

Fab Abs

(Fab Abs is not meant to be confused with Ab Fab Tourre. Not directly, anyway.)

Goldman Sachs's New Palace Creates Princes, Serfs
Goldman Sachs Group Inc.'s new headquarters in lower Manhattan has the kind of amenities befitting masters of Wall Street. The $2.1 billion steel-and-glass building has giant murals, opera-house ceiling heights, and a gym with overachiever fitness classes, like "Awesome Abs."

The company has been secretive about its new headquarters, especially as it tries to counter criticism that has hurt the company's sterling image [sic].

But a new class of haves and have-nots has emerged—even at Goldman where the notion of have-nots is relative.

"I haven't had a desk like this since high school," said one employee who asked not to be named.

"If I had been at a bench my whole life, it would be fine," said one vice president, "but I used to have an office."

Goldman broke ground in 2005. The construction was plagued with problems. In 2007, seven tons of steel fell off the 740-foot-tall building, paralyzing an architect on the ground. Then a sheet of steel plummeted from the 18th floor. [Metaphor for credit time line and bust?]

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Sunday, April 18, 2010

Channeling Interfluidity

Over at the bottom of the links list on the right is the only finance/economics/market link Guambat provides. Steve Waldman writes that one. Guambat is so envious. After getting all the preceding posts off Guambat's puny chest, he wandered over to see what Steve had to say. Steve's take on this Goldman Sachs thing is thoughtful, personal, provocative, prosaically expressed. As you'd expect. Steve is even more wordy that Guambat, but it is worthy because of his prose. There are extracts following, but to get the full flavor, argument and understanding of his message, you should go read the whole piece. Take your time, it's worth it.
Goldman-plated excuses
My first reaction, upon reading about the SEC’s complaint against Goldman Sachs was to shrug. If that’s the worst the SEC could dig up, I thought, there’s way too much that’s legal.

Had you asked me, early Friday afternoon, what would happen, I would have pointed to the “global settlement” seven years ago. Then as now, investment banks were caught fibbing to keep the deal flow going (then via equity analysts who hyped stocks they privately did not admire). The settlement got a lot of press, the banks were slapped with fines that sounded big but didn’t matter, promises were made about “chinese walls” and stuff, nothing much changed.

The SEC threw Goldman a huge softball by focusing almost entirely on the fibs of a guy who calls himself “the fabulous Fab” and makes bizarre apocalyptic boasts. Given the apparent facts of this case, phrases like “bad apple” and “regret” and “large organization” and “improved controls” would have been apropos. It’s almost poignant: The smart thing for Goldman would be to hang this fab Fab out to dry, but whether out of loyalty or arrogance the firm is standing by its man.

But Goldman’s attempts to justify what occurred, rather than dispute the facts or apologize, could be the firm’s death warrant. The brilliant can be so blind.

The core issues are simple. Goldman arranged the construction of a security, a “synthetic CDO”, which it then marketed to investors. No problem there, that’s part of what Goldman does. Further, the deal wasn’t Goldman’s idea. The firm was working to serve a client, John Paulson, who had a bearish view of the housing market and was looking for a vehicle by which he could invest in that view. Again, no problem.

I’d argue even argue that, had Goldman done its job well, it would have done a public service by finding ways to get bearish views into a market that was structurally difficult to short and prone to overpricing.

Goldman could, quite ethically, have acted as a broker. Goldman could have tailored a security or derivative contract to Paulson’s specifications and found a counterparty willing to take the other side of the bet in full knowledge of the disagreement.

Investors get to disagree. But it did need to ensure that all parties to an arrangement that it midwifed understood the nature of the disagreement, the substance of the bet each side was taking. And it did need to ensure that the parties knew there was a disagreement.

Goldman argues that the nature of the security was such that “sophisticated investors” would know that they were taking one of two opposing positions in a disagreement:
"These investors also understood that a synthetic CDO transaction necessarily included both a long and short side."
That line is so absurd, brazen, and misleading that I snorted when I encountered it.

Of course it is true, in a formal sense. Every financial contract — every security or derivative or insurance policy — includes both long and short positions.

So why did Goldman put that line in their deeply misguided press release? One word: derivatives. The financially interested community, like any other group of humans, has its unexamined clichés.

One of those is that derivatives are zero sum contests between ‘long’ investors and ’short’ investors whose interests are diametrically opposed and who transact only because they disagree. By making CDOs, synthetic CDOs sound like derivatives, Goldman is trying to imply that investors must have known they were playing against an opponent, taking one side of a zero-sum gamble that they happened to lose.

Of course that’s bullshit. Synthetic CDOs are constructed, in part, from derivatives. (They are built by mixing ultrasafe “collateral securities” like Treasury bonds with credit default swap positions, and credit default swaps are derivatives.) But investments in synthetic CDOs are not derivatives, they are securities.

While the constituent credit default swaps “necessarily” include both a long and a short position, the synthetic CDOs include both a long and a short position only in the same way that IBM shares include both a long and a short position.

Synthetic CDOs were composed of CDS positions backed by many unrelated counterparties, not one speculative seller. Goldman’s claim that “market makers do not disclose the identities of a buyer to a seller” is laughable and disingenuous.

A CDO, synthetic or otherwise, is a newly formed investment company. Typically there is no identifiable “seller”. The investment company takes positions with an intermediary, which then hedges its exposure in transactions with a variety of counterparties.

The fact that there was a “seller” in this case, and his role in “sponsoring” the deal, are precisely what ought to have been disclosed. Investors would have been surprised by the information, and shocked to learn that this speculative short had helped determine the composition of the structure’s assets. That information would not only have been material, it would have been fatal to the deal, because the CDO’s investors did not view themselves as speculators.

I have little sympathy for CDO investors.

Wait, scratch that. I have a great deal of sympathy for the beneficial investors in CDOs, for the workers whose pensions won’t be there or the students at colleges strapped for resources after their endowments were hit.

But I have no sympathy for their agents and delegates, the well-paid “professionals” who placed funds entrusted them in a foolish, overhyped fad. But what investment managers believed about their hula-hoop is not what Goldman now hints that they believed.

Investors in synthetic CDOs did not view themselves as taking one side of a speculative gamble against a “short” holding opposite views. They had a theory about their investments that involved no disagreement whatsoever, no conflict between longs and shorts. It went like this:
There is a great deal of demand for safe assets in the world right now, and insufficient supply at reasonable yields. So, investors are synthesizing safe assets by purchasing riskier debt (like residential mortgage-backed securities) and buying credit default swaps to protect themselves. All that hedging is driving up the price of CDS protection to attractive levels, given the relative safety of the bonds.

We might be interested in capturing those cash flows, but we also want safe debt. So, we propose to diversify across a large portfolio of overpriced CDS and divide the cash flows from the diversified portfolio into tranches. If we do this, those with “first claims” on the money should be able to earn decent yields with very little risk.
I don’t want to say anything nice about that story. The idea that an investor should earn perfectly safe, above-risk-free yields via blind diversification, with little analysis of the real economic basis for their investment, is offensive to me and, events have shown, was false.

But this was the story that justified the entire synthetic CDO business, and it involved no disagreement among investors. According to the story, the people buying the overpriced CDS protection, the “shorts” were not hoping or expressing a view that their bonds would fail. They were hedging, protecting themselves against the possibility of failure.

The RMBS investors may have believed that they were overpaying for protection, just as CDO buyers did, just as we all knowingly and happily overpay for insurance on our homes. Shedding great risk is worth accepting a small negative expected return.

That derivatives are a zero-sum game may be a cliché, but it is false. Derivatives are zero-sum games in a financial sense, but they can be positive sum games in an economic sense, because hedgers are made better off when they shed risk, even when they overpay speculators in expected value terms to do so. (If there are “natural” hedgers on both sides of the market, no one need overpay and the potential economic benefits of derivatives are even stronger. But there are few natural protection sellers in the CDS market.)

Perhaps the bankers thought Paulson was a patsy, that his bearish bets were idiotic and they were doing investors no harm by hiding his futile meddling. Perhaps, as Felix Salmon suggests, the employees doing the deal had little reason to care about whether the part of the structure Goldman retained performed, as long as they could book a fee. But all of that is irrelevant, assuming the SEC has the facts right.

Investors in Goldman’s deal reasonably thought that they were buying a portfolio that had been carefully selected by a reputable manager whose sole interest lay in optimizing the performance of the CDO.

They no more thought they were trading “against” short investors than investors in IBM or Treasury bonds do. In violation of these reasonable expectations, Goldman arranged that a party whose interests were diametrically opposed to those of investors would have significant influence over the selection of the portfolio.

Goldman misrepresented that party’s role to the manager and failed to disclose the conflict of interest to investors. That’s inexcusable.

Was it illegal? I don’t know, and I don’t care. Given the amount of CYA boilerplate in Goldman’s presentation of the deal, maybe they immunized themselves.

But the firm’s behavior was certainly unethical. If Goldman cannot acknowledge that, I can’t see how investors going forward could place any sort of trust in the firm.

As mentioned, Interfluidity can be provocative, and this post certain generated a lot of 2-way dialogue. If you want to try to think your way through the GS imbroglio, you could start with his post and the comments. He's also continuing to publicly think his way through the issues, so keep up with his posts. If you want to soundbite your way through the GS "story", you can read most of the press. In either case, Guambat highly recommends his own take, suggested in the various posts on this subject over the least coupla days.

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Ab Fab Tourre

Edina - 'Bubble, listen, what is your job?'

Bubble - 'What is what?'

Edina - 'What do you do?'

Bubble - 'I don't really know... Nothing. Get paid!'

Edina - 'Good.'

Edina and Bubble
From the Ab Fab episode - Iso Tank

It takes good evidence to pin down charges on a company like Goldman Sachs, draped in the legal armory they are.

The evidentiary needle in the GS haystack being produced as government Exhibit 1 in the SEC's case against GS is Fabrice Tourre.
Fabrice Tourre, age 31, is a registered representative with GS&Co. Tourre was the GS&Co employee principally responsible for the structuring and marketing of ABACUS 2007-AC1. Tourre worked as a Vice President on the structured product correlation trading desk at GS&Co headquarters in New York City during the relevant period. Tourre presently works in London as an Executive Director of Goldman Sachs International.

Tourre was principally responsible for ABACUS 2007-AC1. Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. Tourre knew of Paulson’s undisclosed short interest and its role in the collateral selection process. Tourre also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting.

The SEC complaint includes this self-portrait of Tourre:
Portions of an email in French and English sent by Tourre to a friend on January 23, 2007 stated, in English translation where applicable:
“More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!
So does this raise the spectre of a "rogue trader" defense?

You wouldn't think so from this article:

British FSA launches probe into Goldman ops: Report
The SEC on Friday charged Goldman Sachs with defrauding and causing a loss of over $1 billion to investors by misrepresenting facts about a financial product tied to sub-prime mortgages. Charges have also been slapped against one of Goldman Sachs vice-presidents Fabrice Tourre.

The Sunday Times reported that Tourre has worked at the bank's London headquarters since late 2008.

"Goldman claims it lost money on the transaction. It also denies the SEC allegations that it gave favourable treatment to John Paulson, a billionaire hedge fund manager," the report pointed out. As per the report, some believe that Tourre has been made a scapegoat.

Quoting a senior hedge-fund source, the publication said, "with all of the guys inside the Goldman credit engine, to point the finger at some French (origin) vice-president is as credible as blaming the collapse of RBS on one of its tellers."

If your mem'ry serves you well
You'll remember you're the one
That called on me to call on them
To get you your favors done

And after ev'ry plan had failed
And there was nothing more to tell
You knew that we would meet again
If your mem'ry serves you well

This wheel's on fire
Rolling down the road
Best notify my next of kin
This wheel shall explode !

This Wheel's On Fire, theme song for AB FAB
-- Song by Bob Dylan


GS the new GM?

Give it a name: General Motors is about to become Government Motors.

Charles Erwin Wilson was formerly GM CEO, way back in the WWII era. He's the one who said (though the context provides nuance the quote doesn't translate), "for years I thought what was good for the country was good for General Motors and vice versa."

Now, along comes an editorial in the NY Daily News with a similar refrain for GS.
Like it or not, what's good for Goldman - as the ultimate representative of the financial industry - is good for the city. In fact, the economic well-being of the entire state is inextricably tied to the presence of big, thriving banks.
Thus, it is concerned about the SEC action:
The Securities and Exchange Commission has poured gasoline on the populist fires burning Wall Street with its charge that Goldman Sachs created and peddled subprime mortgage investments that were designed to go bust.

The agency could not have picked a juicier target than the world's richest bank or done so at a more perilous time for both the U.S. economy and the fortunes of New York.

Read more:
NY, as with The City of London, owes its excesses to the bloated and gloating big banks. It owes its "well being" to the bonuses and excessive salaries plucked from the dreams of Main Street, US. Those excesses were bought with the savings of American and international taxpayers, pension funds, municipalities and homes.

It is payback time.
And it's time to fix the problems. Both ideas tend to run together. Don't try to derail the fix by crying "don't hurt me" to the crowd you preyed on and played the fool and looked down your nose on.

Burn Baby Burn.

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GS Take-aways: Filibuster buster and Sequel to The Producers

FT Alphaville raises hope anew for a modicum of mediocre market regulation after the SEC claims against Goldman Sachs was filed.
There’s been nothing to gain for Republicans or Democrats (bar campaign contributions) in pushing for a watered-down version of the Dodd bill, which is now headed to the Senate. In fact, to stop this legislation ending up in front of President Obama, ready for signing, Wall Street would need all 41 Republican senators to stand together and maintain a filibuster.

After Friday’s events, that is just not going to happen.

Obama to kick the props out from under banks??

Disowning the Ownership Society

Barry Ritholtz' take, however, is the reason he is a regular read over in Guambat's burrow:
I’ve been racking my brain for the easiest way to get people to understand what GS did.

The best I could come up with was Mel Brook’s “The Producers.” They purposefully tried to create the worst play ever, lose their investors money and pocket the proceeds.

Its not much of a stretch to suggest that Abacus 2007 was Goldman Sachs’ “Springtime for Hitler.”


Risk taker refused to be risk maker

A throwback to a bygone era, Bear Stearns still operated as a cigar-chomping, suspender-wearing culture where taking risks was rewarded.
But there were some things that even that risk taker were too much to Bear. It was one of the few that took a Stearn stand against the temptations to which Goldman Sachs strayed.

The WSJ Deal Journal blog excerpted some interesting bits from Gregory Zuckerman's 2009 book, “The Greatest Trade Ever: The Behind-The-Scenes Story of How John Paulson Defied Wall Street and Made Financial History”:
Paulson and Pellegrini were eager to find ways to expand their wager against risky mortgages; accumulating it in the market sometimes proved a slow process. So they made appointments with bankers at Bear Stearns, Deutsche Bank, Goldman Sachs, and other firms to ask if they would create CDOs that Paulson & Co. could essentially bet against.

Paulson and his team were open with the banks they met with to propose the idea.

“We want to ramp it up,” Pellegrini told a group of Bear Stearns bankers, explaining his idea.

However, at least one banker smelled trouble and rejected the idea. Paulson didn’t come out and say it, but the banker suspected that Paulson would push for combustible mortgages and debt to go into any CDO, making it more likely that it would go up in flames. Some of those likely to buy the CDO slices were endowments and pension plans, not just deep-pocketed hedge funds, adding to the wariness.

Scott Eichel, a senior Bear Stearns trader, was among those at the in vestment bank who sat through a meeting with Paulson but later turned down the idea. He worried that Paulson would want especially ugly mortgages for the CDOs, like a bettor asking a football owner to bench a
star quarterback to improve the odds of his wager against the team. Either way, he felt it would look improper.

“On the one hand, we’d be selling the deals” to investors, without telling them that a bearish hedge fund was the impetus for the transaction, Eichel told a colleague; on the other, Bear Stearns would be helping Paulson wager against the deals.

“We had three meetings with John, we were working on a trade together,” says Eichel. “He had a bearish view and was very open about what he wanted to do, he was more up front than most of them.

“But it didn’t pass the ethics standards; it was a reputation issue, and it didn’t pass our moral compass. We didn’t think we should sell deals that someone was shorting on the other side,” Eichel says.

Other bankers, including those at Deutsche Bank and Goldman Sachs, didn’t see anything wrong with Paulson’s request and agreed to work with his team.

One of the biggest losers, however, wasn’t any investor on the other side. It was the very bank that worked with Paulson on many of the deals: Deutsche Bank. The big bank had failed to sell all of the CDO deals it constructed at Paulson’s behest and was stuck with chunks of toxic mortgages, suffering about $500 million of losses from these customized transactions, according to a senior executive of the German bank.


Playing Liar's Dice with the financial system

OK, this is going to be so simple a statement as to perhaps be stupid, but that has never stopped Guambat before.

The point he wants to make here is that there are 2 general themes in US securities laws. One is disclosure and the other is fraud.

Disclosure requirements are mainly evolved from the 1933 Securities Act. This was the first main post-Great Depression securities law passed. Crudely, it was passed to keep the common man out of the clutches of the pandering stock salesmen by requiring securities to be registered. The registration process was fraught with disclosure requirements aimed at mitigating the caveat emptor rules of the ancient bazaars.

Fraud, on the other hand, is mainly based in the 1934 Securities Exchange Act. Crudely, it raises what would have been traditionally a state action (fraud was at that time thought to be a criminal act and the federal laws should stir clear of state prerogatives) into a federal crime.

The notion of disclosure includes the qualification that you don't need to disclose things that are obvious on their face. Of course, what is obvious to one person is beyond the perception, let alone ken, of another. Out of this observation rose the idea that certain risky elements of stocks didn't need to be explained to seasoned investors. Such investors didn't need to be held by federal hands.

And so exceptions were made to the registration/disclosure requirements when stocks were to be circulated only to seasoned investors. In defense of a charge of failure to disclose, the defendant would paint the plaintiff as a seasoned investor.

Plaintiffs, of course, are seasoned at times, like when they're bragging and telling war stories, and are orphans and widows at other times, like when they're claiming disclosure duties. They don't mind being labeled as unseasoned when it suits.

But claiming a seasoned investor is ever unsophisticated just goes too much to character for most investors to swallow. So the defense became, "Mr. investor, I assume you are a sophisticated person and investor, aren't you?"

Can't image many people, under oath, swearing they were unsophisticated. How would that play when the wife next appeared at the ladies' lunch?

While "sophisticated" is the connotative word preferred colloquially, "accredited" is the more neutral word used in the legal sense. Either way, hubris being what it is, people seem to clamor for glamor and want to be thought of as sophisticated or accredited, when it suits them of course.

Guambat reckons if you have to claim to be sophisticated, that should be one factor in proving you're not, but Guambat digresses.

This sophisticated investor became the poster child for defense lawyers, and they tend to apply that "defense" to both disclosure and fraud claims alike.

Thus, Goldman Sachs most recently per this Business Week article:

In their annual letter to shareholders last week, Blankfein and Goldman Sachs President Gary Cohn said most of the firm’s business is aimed at serving sophisticated clients capable of making their own decisions. “The investors who transacted with Goldman Sachs in CDOs in 2007, as in prior years, were primarily large, global financial institutions, insurance companies and hedge funds,” the letter said.
But bear in mind that the sophisticated investor notion is only really applicable to disclosure requirements. Fraud is a different matter, and only in the outlying elements of fraud, like reliance where there is no proof of intentional fraud, would the sophistication of the alleged fraud victim ever even be deemed relevant.

It is generally no defense to a claim of fraud that it is OK to defraud a sophisticated person. (See, e.g., THE SOPHISTICATED INVESTOR DEFENSE.)

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Saturday, April 17, 2010

This is now, that was then: a moral in 4 parts


Paulson, Looking to Go Short on Mortgages, Found a Willing Partner
Paulson & Co. asked banks including Goldman Sachs Group Inc. to structure mortgage deals that would include some of the poorest quality mortgages. The hedge fund's plan: bet against the deals and then hope for a bursting of the housing bubble

One senior banker at Bear Stearns Cos. turned down the business. He questioned the propriety of selling deals to investors that a bearish client was involved in putting together, according to people familiar with the matter.

Goldman Sachs and Deutsche Bank AG were among those that played ball.
Merrill Lynch Used Same Alleged Fraud as Goldman, Bank Claims
“This is the tip of the iceberg in regard to Goldman Sachs and certain other banks who were stacking the deck against CDO investors,” said Jon Pickhardt, an attorney with Quinn Emanuel Urquhart Oliver & Hedges, who is representing Netherlands-based Rabobank.


How to gain from their pain October 24, 2006
About 18 percent of all mortgages issued in the first half of the year were to borrowers considered most likely to default, such as those with high credit-card balances, up from 2.4 percent in 1998, based on data from the Mortgage Bankers Association.

The ABX index, created by London-based Markit Group Ltd., measures prices of credit-default swaps based on the $565 billion of bonds secured by so-called subprime mortgages and home-equity loans.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on the ability of borrowers to repay debt.

"The unequivocally bad housing data we've seen" is prompting investors to seek to profit from potential declines in mortgage-backed securities, said Greg Lippmann, the head of asset-backed trading at Deutsche Bank AG in New York who helped create the ABX indexes in January.

A Merrill Lynch & Co. index of debt securities derived from home-equity loans rated AA to BBB is having its worst month this year, falling 0.01 percent. They have returned 4.54 percent since the end of December. Banks and lenders such as Countrywide Financial Corp. in Calabasas, California, and Washington Mutual Inc. of Seattle typically take mortgages and package them into bonds for sale to investors.
A nice, big, juicy subprime stake October 30, 2006
Since the beginning of 2002, banks and specialized lenders such as ACC Capital Holdings Corp.'s Ameriquest Mortgage Co., New Century Financial Corp., and H&R Block Inc.'s Option One Mortgage Corp. have made some $2.2 trillion in loans. That is more than five times the amount in the preceding five-year period, and includes a growing share of "affordability" products such as "piggyback," "interest-only" and "no-doc" loans. These products, respectively, allow borrowers to avoid a down payment, make extra-low payments in a loan's early years, and state their income without supporting documentation. Subprime loans' actual interest rates are typically much higher than those on more traditional "prime" loans.

A recent study by two researchers at the Federal Reserve Bank of Chicago, Jonas Fisher and Saad Quayyum, suggests that subprime lending alone could account for close to half of the four-percentage-point rise in the ownership rate since 1995.

At about the same time, in early 2005, Wall Street bankers were developing a new kind of derivative contract that would allow investors such as Mr. Whalen to make bets based on their misgivings. Called a credit-default swap, it had previously been applied mainly to corporate and sovereign bonds. Like an insurance contract, it pays off if a subprime-backed bond suffers a certain amount of losses to defaults.

In January 2005, for example, Mr. Whalen bought an insurance contract on the Long Beach Mortgage Loan Trust 2004-2, the bond into which Mr. Spirou's loan had been packaged. He agreed to pay the counterparty, Citigroup Inc., $20,300 a year for a contract that would pay up to $1 million if more than 3.35% of the loans originally in the bond went bad. So far, the wager hasn't made money.

Meanwhile, data on loan delinquencies suggest that lending standards have indeed fallen. As of August, about 3% of borrowers who took out subprime loans in 2006 were more than 60 days behind on their payments -- about three times the level two years earlier.

The annual cost of $1 million in insurance against moderately risky subprime-backed bonds has gone from a low of about $21,500 in early August to $25,000 Friday, and has spiked as high as $27,800. Market participants say big hedge funds increasingly are using the derivatives to make outright bets against U.S. homeowners.
This summer, for example, New York hedge-fund manager Paulson & Co. launched a fund that has aimed specifically at profiting on subprime defaults.


Lehman Bros goes bankrupt, Merrill Lynch is bought up... Mortgage giants Fannie Mae and Freddie Mac are taken over by the government. Bear Stearns collapses, America's largest insurance company AIG's share collapse from $22.19 on September 9 2008, to less than $4.00 at the close of trading on September 16, a decline of more than 80 percent of its value.

A.I.G. Lists Banks It Paid With U.S. Bailout Funds
American International Group on Sunday released the names of dozens of financial institutions that benefited from the Federal Reserve’s decision last fall to save the giant insurer from collapse with a huge rescue loan.

Financial companies that received multibillion-dollar payments owed by A.I.G. include Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).

Big foreign banks also received large sums from the rescue, including Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion; Barclays of Britain ($8.5 billion); and UBS of Switzerland ($5 billion).

Ever since the insurer’s rescue began, with the Fed’s $85 billion emergency loan last fall, there have been demands for a full public accounting of how the money was used. The taxpayer assistance has now grown to $170 billion, and the government owns nearly 80 percent of the company.
Goldman converted to a bank holding company during the crisis, allowing it to receive $10 billion in federal bailout money.


The Natural Result of Deregulation
If the allegations against Goldman Sachs are true, then much of the blame for investors’ losses in the Abacus deal can be laid at the feet of an obscure statute passed by Congress in 2000, the “Commodities Futures Modernization Act.”

In one dramatic move, that act eliminated a longstanding legal rule that deemed derivatives bets made outside regulated exchanges to be legally enforceable only if one of the parties to the bet was hedging against a pre-existing risk.

This traditional derivatives rule against purely speculative derivatives trading has a parallel in insurance law, because insurance, like derivatives trading, is really just a form of betting. A homeowner’s fire insurance policy, for example, is a bet with an insurance company that your house will burn down.

Under the rules of insurance law, you can only buy fire insurance on a house if you actually own the house in question. Similarly, under the traditional legal rules regulating derivatives trading, the only parties who could use off-exchange derivatives to bet against the Abacus deal would be parties who actually held investments in Abacus.

If we allow the unscrupulous to buy fire insurance on other people’s houses, the incidence of arson would rise sharply.

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Friday, April 16, 2010

Taxing the imagination?

Lexington, Kentucky? Interesting place to see this editorial.

Rebelling against lower taxes?
Most Americans don't know they got a tax cut last year, according to a New York Times/CBS News poll.

Seventy-nine percent said the Obama administration had raised taxes or kept them the same.

Only 12 percent knew that most Americans are paying less in federal income taxes.

Ninety-eight percent of working families and individuals got a tax cut, saving them an average $1,158

The top 1 percent in Kentucky (average income $769,270) got an average tax cut of $3,644 mainly because of relief from the alternative minimum tax.

It's probably a safe bet that most Americans also don't know that federal taxes are lower now than they have been in most of our lifetimes.

Read more:

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Fun with

Using radius-around-a-point utility, Guambat has added visuals to the relative position of his burrow. (Click on a map to enlarge it; right click to open in new window.)

This is a circle (egg-shaped due to the 13 degrees north latitude) around Guam with a radius of 2400 miles, which is roughly the distance between San Francisco and Hawaii:

This is a circle with a radius of 2600 miles, which is roughly the distance between San Francisco and New York:

This encircles an area around Guam with a radius of 3500 miles, which is a bit less than the distance between Guam and Hawaii:

And finally, this "circle" shows how much of the planet is as near to Guam as Guam is to the US West Coast:

Can you spell s-t-r-a-t-e-g-i-c ?
Better yet, can you think of a better place to travel from?

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Kraut stuffed fakelaki?

Sounds vaguely like a Euro-fusion Greek dish, and indeed it sorta is. It's the Germans, after all, who are up the Greek without a bail out.

Tragic Flaw: Graft Feeds Greek Crisis
Fakelaki is the Greek for "little envelopes," the bribes that affect everyone from hospital patients to fishmongers. Rousfeti means expensive political favors, which pervade everything from hiring teachers to property deals with Greek Orthodox monks.

Together, these traditions of corruption and cronyism have produced a state that is both bloated and malnourished, and a crisis of confidence that is shaking all of Europe.

A study to be published in coming weeks by the Washington-based Brookings Institution finds that bribery, patronage and other public corruption are major contributors to the country's ballooning debt, depriving the Greek state each year of the equivalent of at least 8% of its gross domestic product, or more than €20 billion (about $27 billion).

Last year, 13.5% of Greek households paid a bribe, €1,355 on average, according to a Transparency International survey published last month. Ordinary citizens hand out cash-filled envelopes to get driver's licenses, doctor's appointments and building permits, or to reduce their tax bills, according to the organization's Greek chapter.

"The core of the problem is that we don't have a culture of civic society," says Stavros Katsios, a professor at Greece's Ionian University who specializes in economic crime. "In Greece, complying with the rules is a matter of dishonor. They call you stupid if you follow the rules."

One-quarter of all taxes owed in Greece aren't paid, says Friedrich Schneider, an economist at Austria's Linz University who studies tax evasion around the world. He estimates that around one-third of that is due to bribery. "You split your tax payment with the tax inspectors, and you get a discount," he says.

Hiring to public-administration jobs surged last year as the right-leaning government struggled to restore its popularity in the face of scandals and economic slowdown. In the month before the fall election, the government added 27,000 people to the public payroll. Many had no position to fill, and not even an office to go to, according to finance ministry officials.

Government officials say the health-care system is a hotbed of corrupt procurement.

It's an article choke a bloke full with corruption hard to swallow. Have a read if you can get into the WSJ site.

How do you like your Greek salad?



Early recovery foreclosed in some parts

Ohio foreclosures spike in 1Q
A surge in lender filings last month helped send first-quarter foreclosures up 5 percent in Ohio as bank repossessions nationwide hit their highest point in at least a half-decade, according to a Thursday report from RealtyTrac Inc.

Irvine, Calif.-based RealtyTrac, which compiles and sells foreclosure data, said Ohio logged 15,041 default notices, 7,543 auction notices and 10,637 bank repossessions in the first three months of the year. While up 5 percent from the same period in 2009, it was a 12 percent jump from the fourth quarter of last year.

Foreclosure rate drops but crisis not over yet
The number of New Jersey homeowners in various stages of the foreclosure process dropped in the first quarter of the new year — yet was still higher than in the same period in 2009.

Foreclosure Flood Waters Are Still Rising Fast
The dam is bursting on foreclosures. New data out today shows that the number of homes repossessed by banks has hit a record high.

REOs, as they’re called in the trade, rose nine percent in the first quarter compared to the previous one, according to housing industry research firm RealtyTrac. Home seizures are up 35 percent from the year-ago quarter.

RELATED: Unemployment rises in 24 states
Jobless rates in California, Florida, Nevada and Georgia all set record highs during March.

North Dakota continued to have the lowest jobless rate in March. The state's 4% rate was followed by South Dakota's 4.8% and Nebraska's 5% unemployment rates.

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Wednesday, April 14, 2010

Putting an end to a capital idea

Gain on stock are generally treated as capital gain. But not when the gain is from stock given as compensation for services. Then it's ordinary income. (That is an oversimplification because of the rules put in place to try to change the character back to capital in the years since stock options have become such an integral part of some paychecks.)

Ordinary "income" from your wages and other service compensation has traditionally been taxed at higher or less concessional rates than "profits" from capital assets. It's one of the ways the rich get richer.

Interest income is also taxed at ordinary rates, but interest paid to purchase capital assets is deductible from ordinary income received. (Again, oversimplified to ignore numerous anomalies.)

With that basic notion of the difference between tax treatment of capital and income, consider this:

Managers of investment partnerships typically are paid 2 percent of fund assets as an annual management fee and 20 percent of the profit earned for investors above certain levels. While the management fee is taxed as income, the share of profit, known as carried interest, is treated at the capital- gains rate

Seem fair to you?

The spin given in this article, starting with its title, clearly seems to want you to. Pay attention to the fanciful use of italicized words.

Senate Considers Tax Rise on Buyout-Firm Managers, Schumer Says
The U.S. Senate, seeking funds for jobs bills and other initiatives, will consider adopting a House proposal to more than double tax rates on executives at private- equity firms, said Senator Charles Schumer, a New York Democrat. [This is not a rates issue, it's a characterization issue. And it's not a tax on executives, but on the compensation they earn from their services.]

The proposal, projected to raise $24.6 billion over a decade, would affect venture capitalists, managers of real- estate partnerships, and hedge-fund managers who make long-term investments. [It is not an investment, it's deferred income, based on the investors' income. These guys just make and manage the investment for a fee. Real estate agents who manage property for other owners also get a percentage of the rent due under the lease, which is taxed as ordinary income.]

Democrats in Congress need to tap new sources of revenue for any spending after the passage last month of the $940 billion health-care bill. [This tries to make it seem an unfair grab to underwrite what some keep wanting to portray as a grubby health bill. No one mentions how unfair it was that this scheme was allowed to go on in the first place.]

“Even though the measure doesn’t produce a lot of revenue, it’s good economic policy,” Geithner said at the time. Investment managers shouldn’t be paying less in taxes than firefighters, he said.

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said through a spokesman in December that he wanted to address the carried-interest issue in the context of a broader overhaul of the tax system. [Wolves up in Montana know that the first thing you have to do to get a kill is to cull the prey from the herd.]

Buyout managers are getting back to business after the global credit crisis that began in 2007 prevented them from buying companies or selling assets. About $14.2 billion worth of private-equity deals have been announced in 2010, compared with $3.36 billion in the same period a year earlier, according to data compiled by Bloomberg. [Private equity buy out managers were a contributing cause of the credit meltdown. See here and here, etc.]

John Chapoton, a partner at Brown Advisory in Washington who served as a top tax-policy official under President Ronald Reagan, said both venture capitalists and buyout firms are defending an undeserved tax break.

“Capital-gains rates are meant to encourage investment of risk capital; there is no capital placed at risk when a carried interest is received for services rendered,” Chapoton said.

“The preferential treatment of carried interests would not be in the law except for an historical anomaly, and its repeal would not warrant any thought on the Hill but for large campaign contributions.” [Amen to that.]

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Tibet or not Tibet

That's probably not the question as news stories begin to come in of an earthquake of substantial proportion (+/-7.1) and estimates of dead and injured from few to thousands.

So far, all the stories Guambat has seen refer to its taking place in China.

China's Xinhuanet, however, is more particular:
Quake-hit Tibetan Autonomous Prefecture of Yushu in Qinghai Province.
It will be interesting to see how this gets reported and received once the Tibet angle sinks in.

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Disowning the Ownership Society

What is the Ownership Society, you might ask? It was the ownerous vision of the Republican leadership under King George XLIII.

2002: Bush's speech to the White House Conference on Increasing Minority Homeownership
Here's George W. Bush's speech to the White House Conference on Increasing Minority Homeownership. The precise programs he was advocating aren't terribly important, they're fairly minor, but the tone of his speech is important. It puts the Presidential Seal of Approval on the orgy of dubious mortgage lending (Down payments? We don't need no steenking down payments!) in the name of increasing minority homeownership.
THE PRESIDENT: …. I appreciate your attendance to this very important conference. You see, we want everybody in America to own their own home. That's what we want. This is -- an ownership society is a compassionate society.

We've got to work to knock down the barriers that have created a homeownership gap.

I set an ambitious goal. It's one that I believe we can achieve. It's a clear goal, that by the end of this decade we'll increase the number of minority homeowners by at least 5.5 million families.

We've got the Horton family from Little Rock, Arkansas, here today. … They were helped by HUD, they were helped by Freddie Mac. …

The idea of encouraging new homeownership and the money that will be circulated as a result of people purchasing homes will mean people are more likely to find a job in America. This project not only is good for the soul of the country, it's good for the pocketbook of the country, as well.

To open up the doors of homeownership there are some barriers, and I want to talk about four that need to be overcome. First, down payments.

If a down payment is a problem, there's a way we can address that. And when Congress funds the program, this should help 200,000 new families over the next five years become first-time home buyers.

I'm also going to encourage the lending industry to develop a mortgage market so that this script, these vouchers, can regularly be used as a source of payment to provide more capital to lenders, who can then help more families move from rental housing into houses of their own. …

Partners in the mortgage finance industry are encouraging homeownership by purchasing more loans made by banks to African Americans, Hispanics and other minorities.

Freddie Mae -- Fannie Mae and Freddie Mac -- I see the heads who are here; I want to thank you all for coming -- (laughter) -- have committed to provide more money for lenders. They've committed to help meet the shortage of capital available for minority home buyers.

Fannie Mae recently announced a $50 million program to develop 600 homes for the Cherokee Nation in Oklahoma. Franklin [Raines], I appreciate that commitment. They also announced $12.7 million investment in a condominium project in Harlem. It's the beginnings of a series of initiatives to help meet the goal of 5.5 million families. Franklin told me at the meeting where we kicked this off, he said, I promise you we will help, and he has, like many others in this room have done.

Freddie Mac recently began 25 initiatives around the country to dismantle barriers and create greater opportunities for homeownership. One of the programs is designed to help deserving families who have bad credit histories to qualify for homeownership loans. …

If you put your mind to it, the first-time home buyer, the low-income home buyer can have just as nice a house as anybody else.

Again, I want to tell you, this is an initiative -- as Mel will tell you, it's an initiative that we take very seriously.

We Are What We Own
When running for re-election in 2004, and again last year as he campaigned for Social Security reform, President Bush repeatedly advocated an "ownership society."

For Mr. Bush, the ownership society initiative is temporarily gone--but hardly forgotten. He has a taste for ambitious proposals like transforming the Middle East into a hotbed of democracy. He dismisses smaller programs as "miniball." And an ownership society is his domestic big idea.

Where the phrase "ownership society" came from, nobody knows, not even Mr. Bush or political adviser Karl Rove. Nor did the program emerge in full form. Rather, it was patched together

The notion behind the ownership society is that growth of government can never be halted by attacking supply. Only reducing the demand for government holds a promise of working.

In any case, he now believes an ownership society would foster a wave of self-sufficiency. "I think part of government's responsibility is to encourage certain cultures," he told me. "And a primary cultural change that I have been trying to instill ever since I got into public office" is a fresh "period of personal responsibility." Ownership "does a lot of things." One of them, Mr. Bush continued, is to increase "independence from government. Government sometimes, because you're dependent on it, undermines the sense of personal responsibility."

Of course, selectively bailing out banks who brought ruin on themselves under the Big Lie of Too Big To Fail is the ultimate undermining of personal responsibility.

Anyway, that's the background on the Ownership Society: let the government give you a hand in financing your way to the American Dream, and tear down government obstacles to that dream.

So how, after patting Fannie and Freddie and the Horton family from Arkansas on the back, is the Republican leadership now disowning the Ownership Society?

The blue print for this was put to paper over a year ago when the Republican Caucus put its particular revisionist spin on the "Roots of the Financial Crisis".

According to the GOP line, it wasn't Countrywide Financial, which, it seems, the government brokered to Bank of America, and it wasn't Washington Mutual.

It wasn't Lehman Bros or the individual Wall Street bankers and the derivatives they traded.

It wasn't even the big investment bankers who whoreded hoarded subprime loans to pimp slice, dice and package for sale to the "investing" securitization buyers.

Of course it wasn't Goldman Sachs, albeit they did offer a mea culpa just in case.

And most certainly, they say, it was not Washington's Glass-Steagall breaking deregulatory laissez-faire, either:
Although failures among private-sector actors and institutions were significant, the roots of the financial crisis can be traced to flawed government policies. For that matter, the housing sector – where most of he difficulties started – is hardly the kind of unbridled market the term laissez-faire suggests: it has substantial government components, including the financial and regulatory roles of large government agencies. In short, the current crisis reflects not a failure of the capitalist system, but the ways in which government distorted the functioning of private markets.

Of particular concern to the GOP is the government involvement in these two arenas:
>> Actions of two government-sponsored enterprises, Fannie Mae and Freddie Mac, that put taxpayer dollars at risk to chase profits.

>> The government’s push to lend money to those who could not afford it to buy homes.
Both of which Bush XLIII lauded in his 2002 Ownership Society speech.

Rather than deal with the particularly pernicious factors in the New Millennium Meltdown, mainly off-exchange trading in unregulated derivatives worth TRILLIONS (due to the opaque nature, no one knows how big the market is) and moral hazards created by TBTF mentality, blind adherence to ratings agencies and lax mark to fantasy accounting, the GOP is sticking to its guns.

And not, unfortunately, without a little too much help from some Democrap names who have also played too cozy with the Wall Street funny money guys.

Key Republican Faults Senate Financial Bill On Bad Underwriting
Sen. Bob Corker (R., Tenn.) said that he doesn't believe bad underwriting will be prevented by requiring companies that securitizes loans to hold a portion of the risk on their own balance sheets. Imposing such a risk-retention requirement on securitizers would instead likely "shut the market down," Corker told the Mortgage Bankers Association.

Corker's criticism of the risk-retention language in the Senate financial-overhaul bill drew applause from the audience of mortgage bankers.

"The very core issue that created the problem across this country was the fact that at the end of the day this country wrote a lot of really bad loans. And this bill doesn't deal with that," Corker told reporters after his speech.

Mitch McConnell: Regulatory bill won't solve problems
In a floor speech that detailed the Republican case against the bill, McConnell said the version that passed through the Banking Committee last month on a party-line vote would continue to prop up financial institutions deemed “too big to fail” and provides the government with new authorities that could be abused.

A spokeswoman for Senate Banking Committee Chairman Chris Dodd said his bill would end bailouts, and that McConnell’s speech simply parrots a January messaging memo by Republican strategist Frank Luntz, who urged the GOP to call everything a “bailout” because of the negative connotations of that term.

McConnell’s complaints are identical to those detailed in letter sent last week from Sen. Richard Shelby (R-Ala.), the ranking Republican on the Banking Committee, to Treasury Secretary Tim Geithner.

McConnell raised the specter of a filibuster on the Senate floor unless the bill is changed.

Read more:

Top GOP senator, White House clash on financial reform
A bare-knuckles fight is coming in days ahead as the Obama administration and congressional Democrats push for a crackdown on banks and capital markets against Republican opposition.

A White House official said momentum for regulatory reform seemed to be building.

But that upbeat assessment clashed with a defiant message delivered by Senator Mitch McConnell, the chamber's top Republican.

The House of Representatives approved a sweeping reform bill in December. It embraced most of the many proposals Obama issued in mid-2009. But the slow-moving Senate has yet to act on a 1,336-page bill offered by Senator Christopher Dodd.

The Senate banking committee that Dodd chairs approved his bill last month, but did so without any Republican support. Dodd will need some Republican backing to get his measure through the full Senate.

"It's going to be a fight," Senator Richard Durbin, the No. 2 Democrat in the chamber, said in floor remarks.

He said the financial firms that are working to block reforms are the same ones that piled up excessive risks and leverage in their "excitement and greed" during the real estate bubble that broke in 2007-2008, precipitating the crisis.

Dodd Swaps Bill May Give Trading Edge to CME, ICE (Update1)
Senate legislation to regulate the $605 trillion private derivatives market may cut into Wall Street profits more than a House bill passed in December by moving most trades to exchanges or similar systems.

At stake is trading revenue in unregulated markets that last year generated an estimated $28 billion for five U.S. dealers including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, according to company reports collected by the Federal Reserve and people familiar with banks’ income sources.

Forcing privately negotiated swaps to trade on exchanges would reduce bank profit because dealers would no longer control the prices offered on the contracts. JPMorgan alone could lose up to $3 billion a year in revenue if it doesn’t combat the move to exchange trading, Morgan Stanley analysts said in a March 15 report.

Companies, hedge funds and other money managers that use bilaterally negotiated swaps need to be able to execute trades off exchanges, often on customized terms, in order to effectively hedge against potential losses on everything from rising interest rates to dropping commodity prices, according to Christopher Giancarlo, chairman of the Wholesale Markets Brokers’ Association Americas.

The bill “jeopardizes the ability for these robust markets to remain a source of liquidity for American businesses by imposing a monopolistic market structure on the trade execution of cleared transactions,” Giancarlo, executive vice president at inter-dealer derivatives broker GFI Group Inc., wrote in a March 30 letter to members of the Senate Banking Committee.

Lawmakers have focused on requiring that most swaps trades move through clearinghouses to improve the OTC derivatives market structure to allow regulators to monitor positions and prices. Trades that aren’t sent to clearinghouses would face higher capital charges and be required to be reported to trade repositories.

The derivatives ding-dong waiting in the Dodd bill
Tuesday brought an odd bit of shadow-boxing over where to park derivatives trading in the post-Lehman age. Something to watch, as Senator Chris Dodd’s bill gets ready for actual legislative debate late this month, according to the Washington Post.

In the blue corner, Treasury Sec Tim Geithner makes the case for putting over-the-counter products through centralised clearing.

But — in the red corner, Republican Senator Judd Gregg alleges there’s a liquidity risk.

Why, the jargon couldn’t have been more pitch-perfect if derivatives traders had written Senator Gregg’s piece themselves. Surprise, surprise — private derivatives trading brings home quite a bit of bacon for JP Morgan et al. at the moment, as BusinessWeek reports.

But, er, hang on — Geithner’s central clearing-houses aren’t the same as exchanges, surely. And while Senator Gregg would prefer ‘industry migration’ to transparency rather than a specific mandate — that didn’t happen before, so why would it now?

At any rate, sure, market liquidity is a problem — but solvency in the shadow of mispriced derivatives is a slightly more pressing matter. Ask AIG’s CDS writers.

Indeed, Senator Gregg, ask the US taxpayers who rescued America’s largest insurer.

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