Saturday, May 29, 2010

Pouring oil in troubled waters

"Pouring oil on troubled waters" is an old saying intended to convey the notion of making an attempt to calm an agitated situation.

As one website reports,
The calming effect of oil was known to the ancient Greeks. In 1762, Benjamin Franklin repeated an experiment first performed by Pliny, which he reported in A Letter from Benjamin Franklin to William Brownrigg, 1773:

"At length being at Clapham, where there is on the common a large pond which I observed one day to be very rough with the wind, I fetched out a cruet of oil and dropped a little of it on the water. I saw it spread itself with surprising swiftness upon the surface; but the effect of smoothing the waves was not produced; for I had applied it first on the leeward side of the pond where the waves were greatest; and the wind drove my oil back upon the shore.

I then went to the windward side where they began to form; and there the oil, though not more than a teaspoonful, produced an instant calm over a space several yards square which spread amazingly and extended itself gradually till it reached the lee side, making all that quarter of the pond, perhaps half an acre, as smooth as a looking glass."

Pouring oil up from the bottom of the Gulf of Mexico is having the opposite effect: one of creating more agitation and anxiety. It appears that efforts to stop the gusher have had the effect of creating underwater streams of the oil which then rise elsewhere. It's Mother Nature's way of running the blockade.

USA Today reports, to the East of the big gusher, towards Florida,
A 22-mile plume of oil was nearing an underwater canyon, where it could poison the sealife in waters off Florida's coast, the Associated Press reports.

The discovery by researchers on the University of South Forida College of Marine Science's Weatherbird II vessel is the second plume reported since April 20, the story says.

And the Washington Post reports on a messier plume off to the West of the Big Gusher.

La. scientist locates another vast oil plume in the gulf
Cowan said that his crew sent a remotely controlled submarine into the water, and found it full of oily globules, from the size of a thumbnail to the size of a golf ball. Unlike the plume found east of the leak -- in which the oil was so dissolved that contaminated water appeared clear -- Cowan said the oil at this site was so thick that it covered the lights on the submarine.

Cowan said that the submarine traveled about 400 feet down, close to the sea floor, and found oil all the way down. Trying to find the edges of the plume, he said the submarine traveled miles from side to side.

"We really never found either end of it," he said. He said he did not know how wide the plume actually was, or how far it stretched away to the west.

This discovery seems to confirm the fears of some scientists that -- because of the depth of the leak and the heavy use of chemical "dispersants" -- this spill was behaving differently than others. Instead of floating on top of the water, it may be moving beneath it.

That would be troubling because it could mean the oil would slip past coastal defenses such as "containment booms" designed to stop it on the surface. Already, scientists and officials in Louisiana have reported finding thick oil washing ashore despite the presence of floating booms.

This week, Mike Utsler, who helps oversee the spill response off the entire Louisiana coast as BP Houma incident commander, said he's focused only on taking oil off the surface. "We don't know there's oil underwater," he said.

William Hogarth, dean of the USF College of Marine Science, said university researchers have sent samples to federal officials for analysis, but it's clear the oil is new because Stanford scientists had sampled the same area a year ago and found no evidence of oil. The Weatherbird II will conduct another tour next week, he said, with different researchers aboard.

Buy, hey, no need to get all gloomy about the plumey oil. Maybe there's a silver lighting to those slicks.

Oil on troubled waters may stop hurricanes (2005)
As hurricane winds kick up ocean waves, large water droplets become suspended in the air. This cloud of spray can be treated mathematically as a third fluid sandwiched between the air and sea. "Our calculations show that drops in the spray decrease turbulence and reduce friction, allowing for far greater wind speeds - sometimes eight times as much," explains researcher Alexandre Chorin at the University of California at Berkeley, US.

The researchers suggest that, during a tropical storm, aeroplanes could deliver harmless surfactants to the ocean surface - reducing surface tension in water and stopping droplets from forming - perhaps preventing a hurricane developing.

The timing might not have been better.
2010 hurricane season could be one of most active
This year’s hurricane season, which begins in another four days, is shaping up to be one of the most active ones in recent times.

That’s according to the seasonal outlook issued yesterday by NOAA’s Climate Prediction Centre. It said that an “active to extremely active” hurricane season is expected for the Atlantic Basin and underscores the importance of having hurricane preparedness plans in place.

NOAA is projecting a 70 percent probability of 14 to 23 named storms, with top winds of 39 mph or higher; eight to 14 hurricanes with maximum winds of 74 mph or higher; and three to seven major hurricanes - Category 3, 4 or 5 with winds of at least 111 mph.

"If this outlook holds true, this season could be one of the more active on record,” said NOAA administrator Jane Lubchenco. “The greater likelihood of storms brings an increased risk of a landfall. In short, we urge everyone to be prepared.”

You think?

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Wednesday, May 26, 2010

We are mostly wards of the State

Assuming "we" are Americans, more of us are now wards of the State than not, and that isn't even taking into account the banks and auto companies.

Private pay shrinks to historic lows as gov't payouts rise
A record-low 41.9% of the nation's personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007. [So 58% of personal income comes from non-private wages and salaries or other sources.]

Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds.

At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010.

The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says.

Sounds to Guambat like a slippery slope. Indeed, Greecy.


Monday, May 24, 2010

Hussman takes the Ponzi out of Mr Market

John Hussman's weekly Market Comment blog must be read from time to time, but not all the time, because his world moves glacially, not in squalls. His thinking and analysis is for the big picture. If Guambat had any funds to park, he'd park them with Mr. Hussman. Unfortunately, Guambat failed the parking part of the driving test.

Guambat was delighted with the way Hussman put the right finger on the right button when he discussed the illusion behind the illusive of Mr Market, when he talked recently about taking the Ponzl out of Mr Market.
The basic problem is that Greece has insufficient economic growth, enormous deficits (nearly 14% of GDP), a heavy existing debt burden as a proportion of GDP (over 120%), accruing at high interest rates (about 8%), payable in a currency that it is unable to devalue.

This creates a violation of what economists call the "transversality" or "no-Ponzi" condition. In order to credibly pay debt off, the debt has to have a well-defined present value (technically, the present value of the future debt should vanish if you look far enough into the future).

Without the transversality condition, the price of a security can be anything investors like.

However arbitrary that price is, investors may be able to keep the asset on an upward path for some period of time, but the price will gradually bear less and less relation to the actual cash flows that will be delivered. At some point, the only reason to hold the asset will be the expectation of selling it to somebody else, even though it won't be delivering enough payments to justify the price.

Transversality forces the price of the asset to be equal to the value of the discounted cash flows.

It's not enough for a borrower to keep the payments up over the short term, and it's not enough for price of an asset to be on an upward track for a while - over time, securities actually have to be able to deliver enough cash flows to justify the price that investors pay.

When investors abandon this requirement (as they did with dot-com and technology stocks during the runup to the market peak in 2000), the price they pay stops having any relationship with the stream of cash flows that will be delivered to them over time.

An increasingly large portion of the asset price represents real money that is being paid for a "phantom asset" in the distant future, that bears no cash flows, and yet gets assigned positive value because investors assume they'll be able to sell it to a greater fool.

Mr Market is inhabited by investments and Ponzis alike; things that are investments today can become Ponzis tomorrow. Be sure you know what's in your portfolio at all times, and what it is you're chasing.

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Swept away

Sweeping overhaul, or sweeping under the rug?

USA Today reports, Overhauling financial regulation
Two years after the nation faced its worst financial crisis since the 1930s, both houses of Congress have passed sweeping proposals to subject the financial services industry to stricter oversight and tougher rules.

The WSJ Heard on the Street, reports, Reading the Tea Leaves on Financial Overhaul
Break out the stogies. Congressional leaders are moving debate over financial reform into the proverbial smoke-filled back room.

It is widely expected that a provision forcing banks to spin off derivatives-trading businesses will be watered down or pulled completely.

Meanwhile, big question marks still hang over a ban on proprietary trading by banks, the so-called Volcker rule. As included in the Senate bill, the provision doesn't clearly define proprietary trading versus, say, market making. Nor does it make clear if trading in instruments like government securities or mortgage-backed bonds backed by the government would be exempt. Just how painful such a provision could be depends on where the conference committee draws the lines.

The insurers have argued that Congress didn't intend to rope them into the Volcker rule, but so far efforts to exclude them haven't flown. That said, insurers have a degree of Senate support for a carve-out.

Bonfire of the Loopholes
The bottom line is that despite the blizzard of amendments and provisions added—including some very smart changes at the 11th hour, like imposing greater control of ratings agencies—what's likely to emerge on the other side of this in the years to come is a Wall Street that's largely unchanged if marginally more regulated.

Indeed, if any structural changes to Wall Street follow from this law, it is likely to be that the biggest banks get even more powerful than they already are, despite the size limits being placed on them.

A new tough generation of regulators led by Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), says they're not worried by these nuances because the bill gives them broad discretion to write rules requiring open trading and clearing of swaps and other derivatives. And that's what they intend to do. The problem is: Gensler's not going to be around forever, and the Bush-era regulators got into the habit of not using any of their discretion at all. After all, banks urged them over the years not to worry. The same cycle is likely to repeat itself when the next boom arrives.

And finally, Zero Hedge, as it is wont to be, is strident:
The reform bill is a joke. It reforms nothing, it fixes nothing, and it will not prevent the next much bigger crash from happening.

Just two items that need to be pointed out: $6+ TRillion in GSE debt - untouched, $400 TRillion in IR swaps: untouched. This is reform?

For those wanting a program guide, try this one, courtesy of the NYT.



Here on Guam, there is a saying: "OOG", meaning, only on Guam.

This post is about a new headline that is OIO: Only in Oz.

Pit bulls attack camel train

The story has a great photo with it. Hope they solve the pit bull problem before other camels take their lumps from them.


More old "news"

This story in today's NYT is the last act of a play that was foretold at the start.

Japanese Leader Gives In to U.S. on Okinawa Base
Apologizing for failing to fulfill a prominent campaign promise, Prime Minister Yukio Hatoyama told outraged residents of Okinawa on Sunday that he has decided to relocate an American air base to the north side of the island as originally agreed upon with the United States.

On his second visit to Okinawa this month, Mr. Hatoyama for first time conceded what Japanese media had been reporting for weeks: that he would accept Washington’s demands and honor a 2006 agreement to move the United States Marine Air Station Futenma to the island’s less populated north.

The decision is a humiliating setback for Mr. Hatoyama on a problem that has consumed his young government and could prove its undoing. Before last year’s historic election victory, he had vowed to move the base off of Okinawa or even out of Japan. But his apparent wavering on the issue helped drive his approval ratings below 25 percent.

In the end, he seemed to decide it was more important to keep good ties with the United States, Japan’s longtime protector, at a time when his nation faces a nuclear-armed North Korea and an increasingly assertive China. Washington had consistently demanded that Tokyo honor the 2006 agreement to move Futenma and its noisy helicopters to a new facility to be built in Camp Schwab, near the northern Okinawan fishing village of Henoko.

Mr. Hatoyama explained his decision by saying that since taking office, he had learned to appreciate the role that the Marines play as a deterrent in the region, and that Okinawa was the most strategic location for them.

Mr. Hatoyama called it a “heartbreaking” decision, and said he extended his “heartfelt apology for causing much confusion” among islanders.

Six months ago, when Hatoyama was making the wild claims about ending US military support and presence, Guam posted,
the outcome is written.

Marines will come to Guam, some other adjustments will be made to mend fences and save faces, and the New Government will become a footnote in Japanese political history.


Thursday, May 20, 2010

Loonier than the Mad Hatter

New hero of Tea Party Rand Paul is so conservative he scares Dick Cheney
How conservative is he? The 47-year-old Paul - who trounced establishment candidate Trey Grayson in Kentucky's GOP Senate primary Tuesday - wants to abolish the federal departments of education, commerce and energy, as well as the income tax.

Like Palin, with whom Paul now stands atop the Tea Party cake, he is opposed to all government bailouts and earmarks, and President Obama's "socialist" health care law. He favors a constitutional amendment banning abortion, even in cases of rape and incest.

But in a libertarian twist, he also favors legalizing medical marijuana.

That's not all many Americans might find slightly odd about Paul. Some of his positions frighten even staunch conservatives like former Vice President Dick Cheney, who backed Paul's GOP opponent.

"We are encountering a day of reckoning," Paul said Tuesday night in one of his many ominous, end-is-near warnings. "And this Tea Party movement is a message to Washington that we are unhappy, and we want things done differently."


Given recent form of the Hatoyama government, don't get excited

Japan, Australia sign bilateral defense logistics agreement
Japan and Australia signed a bilateral defense logistics agreement Wednesday in Tokyo to strengthen security cooperation between the two nations.
Er, "defense"??

Not exactly. As that article goes on to reveal,
"The Acquisition and Cross-Servicing Agreement, signed by Foreign Minister Katsuya Okada, Defense Minister Toshimi Kitazawa and their Australian counterparts, would enable the two governments to provide food, water and medical services"
As BusinessWeek explains,
"The agreement follows talks that began in February and builds on the Australia-Japan Joint Declaration on Security Cooperation signed in March 2007 covering areas such as law enforcement, border security, counter-terrorism, disarmament, disaster relief and peacekeeping."
Indeed, BW particularly points out,
"The accord differs from the 1996 agreement Japan has with the U.S. that deals with the use of force and security in areas surrounding Japan, as well as goods and services, Japan’s Foreign Minister Katsuya Okada said at yesterday’s news conference."
Japan has dithered, procrastinated and all but disavowed the US 1996 agreement, only to waffle its way into something that resembles, but may not be, a capitulation over that one:

Japanese PM's Reversal on US Base May Have Political Cost
The U.S. Marine Corps Futenma air station on Okinawa has long been a target of protesters. A large city has grown around it over the past 50 years, and residents complain the base's aircraft are noisy and dangerous.

Okinawa hosts about half of the 49,000 U.S. troops in Japan, on several bases, as part of an alliance forged after World War II.

In 2006, after years of negotiations, the U.S. and Japan agreed to move Futenma to a coastal area in northern Okinawa, and to move about 8,000 other Marines to the U.S. island of Guam.

But Mr. Hatoyama's Democratic Party won a landslide victory last August, boosted partly by pledges to move Futenma entirely off Okinawa. He had promised a new plan for the base this month.

Tomohiko Taniguchi, adjunct political science professor at Japan's Keio University, says Mr. Hatoyama repeated the pledge "dozens of times," and has embarrassed himself by backtracking.

"It is none other than himself who dropped a huge stone on his own feet … he's made an absolute about face," said Taniguchi.
Japan's current Government obviously can't distinguish between "security" and "food, water and medical services". Perhaps, in a sort of Chamberlain-esque sense, Hatoyama's government figures humanitarian aid suffices for security arrangements.

If Guambat's comments have stomped on any geta, gomenasai.


In Big Oil, it takes one to tango

A week ago, Guambat had a brief post. He extracted the following quote from an article that really didn't have any context for this particular extract:
Mr Tony Hayward, BP's CEO, told the BBC the permit regime in the US was as rigorous as anywhere in the world.
Not terribly impressed with the implications, Guambat asked,
How does THAT make you feel?
Turns out, that was not as rhetorical as Guambat thought when he made that flippant remark:

AP INVESTIGATION: Oil self-regulates around globe
The U.S. government is not alone in ceding responsibility to the oil industry for the design of key safety features on offshore rigs, a trend coming under scrutiny worldwide following the deadly blowout in the Gulf of Mexico.

Across the globe, industry-driven regulation is the norm, not the exception.

An Associated Press investigation shows other nations harvesting oil and gas from offshore fields, including Britain, Norway, Australia and Canada, have moved in the same direction: Governments set the general safety standards that must be met, but leave it to rig operators to work out the details.

The shift away from more heavy-handed regulation started about two decades ago and was based on the notion that oil companies best know the risks of offshore operations - and how to minimize them.

But the Deepwater Horizon explosion on April 20 and another platform incident in the Timor Sea off Australia last year have raised concerns that Big Oil has been given too much leeway to police itself.

Read on.

For some reason (Guambat makes mental associations that are far from rational), the image of riding a bicycle with no hands on the handles comes to mind. It's a wonderfully free feeling of almost flying -- until it all goes pear shaped.

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BP's slippery gusher numbers

Guambat noticed a headline somewhere in the last day or so that said, to the effect, BP had contained 40% of the oil gushing into the Gulf of Mexico. At the time, he figured, hmmm, 60% of the oil is still gushing.


Heavy oil hits Louisiana shore
BP said it is now siphoning about 3,000 barrels (126,000 gallons/477,000 liters) a day of oil, out of what the company estimated was a 5,000 barrels (210,000 gallons/795,000 liters) a day gusher.

"This is not rocket science," said Steve Wereley, associate mechanical engineering professor at Purdue University, who pegged the spill's volume at about 70,000 barrels per day. "All outside estimates are considerably higher than BP's."

BP Chief Operating Officer Doug Suttles said on Wednesday its 5,000-barrels-a-day estimate was "highly" uncertain.

Meanwhile, Down Under in Wombat's Waffles, the connection of Haliburton to both the Louisiana spill and a major Australian spill last year was noted.

No waffling there, Davo was quite passionate in his disgust. Might have been something he didn't eat.

FOLLOWING UP: Recall the original estimate that the gusher was at the rate of 5,000 barrels a day, then consider this storyline from today (21st Guam time):
BP says it is capturing 5,000 barrels of oil a day from gulf spill
It's still a gusher:
Estimated rate of oil spill no longer holds up


US Justice Dept fouling the rigging in bond market

Conspiracy of Banks Rigging States Came With Crash (Update1)
West Virginia was just one stop in a nationwide conspiracy in which financial advisers to municipalities colluded with Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Lehman Brothers Holdings Inc., Wachovia Corp. and 11 other banks.

Court records in the broadest-ever criminal investigation of public finance shed new light on how Wall Street’s biggest banks were cheating cities and towns during the same decade in which they were setting the stage for a global economic collapse.

They rigged bids on auctions for so-called guaranteed investment contracts, known as GICs, according to a Justice Department list that was filed in U.S. District Court in Manhattan on March 24 and then put under seal. Those contracts hold tens of billions of taxpayer money.

In October, CDR was charged with criminal conspiracy and fraud, along with Chief Executive Officer David Rubin, 48.

In October, CDR was charged with criminal conspiracy and fraud, along with Chief Executive Officer David Rubin, 48, vice president Evan Zarefsky and Wolmark. They pleaded not guilty.

“Mr. Rubin doesn’t think that CDR broke the law in any of these transactions,” said Laura Hoguet, his attorney in New York.

Daniel Zelenko, a lawyer for Zarefsky in New York, said he was confident his client will prevail at trial.

“The government continues to show that it simply doesn’t understand how this market operated,” Zelenko said in an e- mail
Well, prehaps the government does. Only too well.

For more names and numbers, read the whole article.


Tuesday, May 18, 2010

Why, that's just Un-American !

Huang, Once China’s Richest Man, Jailed for 14 Years (Update1)
Huang Guangyu, the founder of Gome Electrical Appliances Holding Ltd., was sentenced to 14 years in prison for graft, completing the downfall of a school dropout who rose to become China’s richest man.

The 41-year-old was found guilty of bribery and insider trading by the Beijing No. 2 Intermediate People’s Court, lawyers for Huang’s co-accused business partner Xu Zhongmin said in phone interviews today. Huang was also fined 600 million yuan ($88 million), the state-run Xinhua News Agency said.

Huang, who built Gome into China’s second-biggest appliance chain by market value and amassed a fortune estimated at $6.3 billion in 2008, is the highest-profile businessman to be snared by a government crackdown on corruption. He is among 19 people who have featured on the Hurun Report’s China Rich List who are either in jail or awaiting sentencing as the nation’s economic growth creates a new class of entrepreneurs and breeds resentment over graft and widening income disparities.

Yes, yes, yes. But that's not the un-American part -- at least not all of it.

It was his un-American lack of political patronage and lawyering what did him in.

What brought down China's Huang Guangyu?
Rupert Hoogewerf, the publisher of the Hurun Rich List, was the first to dub Huang Guangyu the richest man in China. He says that although the entrepreneur was a brilliant businessmen he wasn't a good enough politician.

"Huang Guangyu was quite strange in so far as he didn't really cultivate his political contacts assiduously," he says.

"They say he shouldn't have been doing so overtly what he was doing," he says. "He was considered to be living what was considered to be quite a high risk business life in that respect."

Wang Rongli, a lawyer who's studied entrepreneurial corruption, believes Huang was not unusual in his disregard for the rules here. China's first generation of entrepreneurs, he says, don't really understand the law or don't want to.

"They develop bad habits," Mr Wang explains. "At the start of their careers, they settle business over dinner or with small bribes. But once their businesses reach a certain scale, the bribes become huge and this has become really dangerous."

He says efforts to draw up new laws to govern business transactions have produced loopholes that can be exploited by canny operators to maximise profits.

But younger entrepreneurs like Bernhard Zhao, from what you might call the second generation of Chinese entrepreneurs, argue that the corrupt ways of their forebears are no longer acceptable.

"There are skeletons behind every entrepreneur in China," he says, so even though these are men and women who today pay a lot of taxes and employ a lot of people "if today you are going on and employing these sharp practices and doing it a little bit too overtly, they will take you down, and I think that was the downfall of Huang Guangyu".

He says if his company of financial advisers decides to offer an inducement to someone to help bring in business, for example, the decision's always run past the company lawyers.
He has a lot to learn, and Goldies could have taught him all he needed to know -- at a price. Maybe 14 years wasn't such a bad price after all:
Goldie as political hedge fund (2006)

Contrary to Shakespeare, the first thing they must do is bring in all the lawyers.

Of course, there is a small American minority group (there's always some small minority group with an anti- message) that thinks that sort of criminal activity actually ought to result in hard labor. Fortunately, most fair and balance media outlets don't give them much airtime:

Bank Bosses Should Go After ‘Massive Fraud,’ Filmmaker Says
The chief executives of U.S. investment banks that led to the financial crisis should be removed from their jobs, a documentary shown at the Cannes Film Festival advocates.

“Inside Job,” directed by filmmaker Charles Ferguson, says Wall Street bosses should be as accountable as those executives who were imprisoned for the collapse of U.S. savings-and-loans institutions.

“I think it’s inexcusable that they still have their jobs,” said Ferguson in a Cannes interview.

“Inside Job,” narrated by Matt Damon, spotlights the events that led to the collapse in September 2008 of Lehman Brothers Holdings Inc., the $700 billion U.S. bailout of the financial system, and the worst recession since the 1930s.

Ferguson -- who holds a doctorate from the Massachusetts Institute of Technology -- shows how finance got the world economy in a pickle. His explanation is contained in one word: deregulation.

Astronomical take-home packages and year-end bonuses rewarded the risk takers, who splurged on houses in the Hamptons, yachts, private jets, holiday homes, and prostitutes. A woman who once ran a prostitution ring says half of her 10,000 clients were from big-name banks, many charging their corporate cards.

Ferguson said in the interview that U.S. President Barack Obama and his team were unlikely to enact deep change. “The people in charge of fixing this problem are in most cases people who created the problem,” he said. “So it’s rather difficult for me to believe that they’re going to be interested in reversing everything that they’ve done for the last 20 years.”

Ferguson does not indict capitalism as a whole. “I think it’s perfectly okay to make profits as long as you do it by doing something constructive and legitimate,” said the filmmaker, recalling that he had started and invested in companies.

Ferguson also adds a new angle to the meltdown tale: He highlights the practice among academics at top U.S. universities of being on the board of, or consultants to, companies.

In the world of academia, he said, “I anticipate that there will be a lot of unhappiness. But that’s just too bad, because that’s true. I’ve shown what’s true.”

And whilst on things American and not ...

The Oil Pollution [Limited Liability] Act of 1990 as discussed in Let Free Markets Reign!
Regulations and government intervention are for (socialist) losers. It’s in our DNA.

Imagine my surprise, then, when I saw a section of the Oil Pollution Act of 1990 (Sec. 1004) that places limits on liability for polluters! How un-free-market-like, to limit BP’s liability in the Gulf of Mexico debacle to a mere rounding error of $75 million! What true free-marketeer would ever stand for such nonsense?

Balderdash! How dare the government limit BP’s liability. Let the free markets determine BP’s fate. Why should it be otherwise? Should they face multiple lawsuits and get sued out of existence, that’s nothing more than the Darwinism of capitalism.

I’m just guessing here, but I assume when Senator Lisa Murkowski (R – Big Oil’s Pocket, AK) blocked a proposed bill that would have raised BP’s liability from $75 million to $10 billion it was because, as a Republican and free-marketeer, she preferred no cap at all on their liability and wants to see the free markets work as God intended them to (i.e. sans caps).

So here’s the deal: What’s good for the goose is good for the gander. If you’re a free-marketeer and believe that BP’s liability for the gulf disaster should be capped by statute — at whatever amount — you’re either not a free-marketeer or a hypocrite.

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Sunday, May 16, 2010

Bordering on treason

Many Homeland Security initiatives are called flops
A high-tech "virtual fence" to catch illegal border crossers. Next-generation nuclear detectors at ports. Tamper-proof driver's licenses in every state.

These were signature Bush administration initiatives to protect the country against terrorism and secure its borders. All have been proven to be flops, according to government and outside experts, and expensive ones at that.

The Department of Homeland Security paid defense contractor Boeing Co. $1.1 billion to build what is sometimes called the virtual border fence. But the system of radars and cameras can't consistently tell terrorists from tumbleweed, according to the Government Accountability Office. In March, Homeland Security Secretary Janet Napolitano froze funding on the project.

Last May, the Transportation Security Administration removed 37 explosive trace detection machines - or "puffers" - that had been deployed at airports to screen airline passengers at a total cost of $30 million. They had maintenance problems and didn't work consistently.

"DHS was pushing technology pretty hard under the Bush administration, and we were willing to risk failure because of the risks," said Stewart Baker, the former Homeland Security policy chief

"Before they did the puffers, everybody told them it wasn't going to work," said Richard Roth, an aviation security expert with CTI Consulting in Maryland. "The only guy that said it was going to work was the lobbyist for the company."

Corporations "have figured out that a whole lot of money has been budgeted for homeland security and counterterrorism, and they're really eager to market all sorts of gigantic technological solutions," said Charles Faddis, a former CIA officer and author of "Willful Neglect: The Dangerous Illusion of Homeland Security."

"We end up in a situation where there's all sorts of very straightforward things that we don't do, because there's no money to be made in it," he said.

For example, Faddis said, the government should make greater use of explosive-sniffing dogs at airports and should require simple steps to counter vehicle bombs at industrial plants that store dangerous chemicals. Napolitano told Congress recently that she supports expanding the use of bomb-sniffing dogs.

The Department of Homeland Security is hampered by a shortage of procurement officials experienced in buying complicated systems, said Rick "Ozzie" Nelson, a homeland security specialist at the Center for Strategic and International Studies, a think tank.
Yep. Blame it on the procurement clerks. It was all their idea.

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Saturday, May 15, 2010

BP doesn't know the meaning of the word audacity

BP chief backs oil drilling in wake of US disaster (current)
Mr Tony Hayward, BP's CEO, told the BBC the permit regime in the US was as rigorous as anywhere in the world.

How does THAT make you feel?

As good as these other stories thrown into the Stew in the last several years?

Greed may be good, but excess is best (2006)
Mr Buffett also had harsh words for speculators who, like Lord Browne of BP, he blamed for driving up the price of everything from housing to oil and metals.

Oh, thank haven (2005)
Caymans 97 [is] a holding company for BP - the world's second largest oil producer. Now, this company holds controlling ownership in Cayman of many of BP's worldwide operations. It serves a variety of useful purposes for BP, the most useful being the pooling together in one place of a massive portion of the income and assets of the entire BP group. The goal is to fill the holding company pool to the brim with revenue and then keep that money in play and wash it back through the company - untaxed - only landing it onshore in the U.S. or UK when tax rates have been engineered through the company's offshore network to be the most advantageous.

Model behaviour (2005)
"The British Petroleum investor relations person presented yesterday at the BankAmerica conference, and during the breakout session she defended the fact that BP uses a $20 per barrel oil price to “test” its spending projects—i.e. to decide whether to go ahead with drilling for oil.When reminded that oil currently sells for about three-times that figure, the BP investor relations person vigorously defended this $20 “test” price, noting that BP sees oil trading in a $20 to $35 a barrel range over the long haul.Since it takes five to seven years to bring a big project on stream, “it is reckless to be investing (based) on (today’s) oil price.”That is true enough, I suppose…but when asked if $20 a barrel was not a little on the low side of recklessness, she noted that at the $20 per barrel “test” price, BP has enough exploration and production projects “to grow production 5% per year.”And since world oil production is growing “at half” that rate—i.e. around 2.5%—then “we are doing more than our fair share.” British So-Called Petroleum is giving back to its shareholders 70% more of the cash flow it makes thanks to $65 oil prices than it is spending to find new sources of oil supply."

Running a presidential campaign at BP (2006)
BP needs a cultural shift because whoever wins the race for the top job will be leading a company built in Lord Browne of Madingley’s image — a highly centralised organisation with a presidential style of office that keeps its senior management on a tight leash and projects its public image from the chief executive’s podium.

Tony Hayward, head of exploration and candidate for the chief executive’s job, recently told an internal audience in Houston that the top of the organisation was not listening.

He said that management was too directive and too fond of making a virtue out of doing more for less. “(BP) has lived too long in the world of making do and patching up this quarter for the next quarter,” he said.

Mr Hayward’s passionate plea for management to listen and reject the penny-pinching approach to resources would sound more persuasive if he had not been an arch exponent of the BP cost mantra in previous years.

Etc., etc.


Thursday, May 13, 2010

Yes Virginia, there is no free lunch

IMF report predicts long, painful road ahead for Greece's recovery
The risk that the joint IMF-European Union rescue plan will come unwound is "undeniably high," said the IMF staff report, which detailed how variations in the fund's assumptions about growth, inflation, interest rates, restructuring and other variables could leave Greece's debt load climbing despite the efforts to bring it down.

The level of concern that Greece's problems might spill over to other countries became clear last weekend when European finance ministers and the IMF approved a separate, near-trillion-dollar effort to support other indebted European nations if they run into trouble.

After years of growth fueled by low-interest borrowing available after Greece adopted the euro, the country must now go through years of "internal devaluation" -- falling wages, rising unemployment rates and stunted growth. As a member of the 16-nation European Monetary Union, the country does not have its own currency. But using local economic conditions, the IMF staff estimated that the country's "effective exchange rate" was overvalued by as much as 30 percent -- an excess that will have to be squeezed out of the economy in a "long and painful process."

The program's success "requires a decisive break from past behavior," the report said, and "hinges on deep and comprehensive structural reforms. . . . Without such reforms, Greece would not restore competitiveness, growth, and real incomes will remain stagnant and unemployment high, and the debt burden would eventually prove unsustainable."

Greek debt bailout makes no sense in any language
Equity and credit investors can't both be right -- and they're not. This European package of paper and promises is likely to end up on the scrap heap of history faster than you can say, ''auf wiedersehen, adieu, arrivederci, bye-bye," because it has little credibility with those who count the most -- potential buyers of the new mountain of debt.

Once equity investors figure this out, it will be lights out for Europe. Start the clock for a new Dark Ages: the whole Continent will be a massive short.

The key reason, says Jeddeloh, is that investors recognize what European politicians couldn't muster the courage to say: If launched, the loan package would force structural reforms that would require higher taxes, lower government spending, more unemployment, a recession in the EU and a depression in Greece.

A trillion dollars cannot be snapped out of thin air.

"Region of Reverse Command:" Consequences of the Industrialised Country Debt Explosion
A pilot usually gets a plane to gain altitude by pulling back on the controls to raise the plane’s nose, which directs more engine thrust upward and causes the plane to climb. But as student pilots quickly learn, there is a limit. While raising the plane’s nose causes the plane to climb, it also induces a type of drag that causes the plane to slow down. As a plane slows down, it becomes progressively more difficult to maintain the lift needed to get the plane into a climb. Eventually, the induced drag is so large that it overwhelms the impact of raising the nose, so that pulling back on the controls does the opposite of what it normally does, causing the plane to descend instead of climb. Pilots know this as the “region of reverse command”.

Economic policy has a region of reverse command, too.

Emerging economies have experienced many painful moments with this region of reverse command. When financial crises spread across the emerging world in the 1990s and early 2000s, many emerging governments had to respond to deep recessions by doing exactly the opposite of the Keynesian response: cutting government spending, in order to establish fiscal credibility in the midst of crisis.

But this concept is new for the global economy as a whole, specifically for the industrial world.

If 2008 showed how quickly financial crisis could push the global economy toward the abyss, 2009 illustrated the potency of a whatever-it-takes government policy in pulling it back from the brink. A year ago, it was almost conventional wisdom that the bulk of the US financial system was insolvent and needed to be nationalised, threatening to create a new wave of uncertainty at a moment when the US economy was shedding jobs at the fastest rate since the Great Depression.

But this didn’t happen. The combination of a massive increase in government spending and zero interest rates alongside over $1 trillion in asset purchases by the Federal Reserve provided direct support to economic activity and – at least as importantly – gave financial markets a perceived government-underwritten green light to add risk. And add risk they did, generating historic increases in equity, corporate bond, and other asset markets that helped repair damaged balance sheets in the financial and household sectors.

The extraordinary effectiveness of government policy in 2009 has given way to a new focus on the limits of government policy in 2010. At the core of the discussion is the extraordinary build-up of government debt in the industrial world. The increases in public debt in the United States and other key industrial countries are without precedent outside of wartime.

Investors are only beginning to enumerate and understand the full consequences of the debt explosion in industrial countries.

The financial crisis has ushered in a period where investors discuss not just interest rate risk at the core of the industrial world, but also credit risk.

The problem now confronting the industrialised world is that the increase in debt levels is a secular, not cyclical phenomenon; and it is also increasingly structural in nature. It is not a matter of belt-tightening during the recovery phase to bring debt levels down to pre-crisis levels and pave the way for fiscal policy to come to the rescue during the next downturn. Rather the belt-tightening is needed to prevent the medium-term debt path from becoming explosive. The reaction function of core governments as they confront future economic disruptions will be constrained in ways they have not experienced in recent history.

Debt: America versus Greece
Paul Farrell points out the ugly truth about profligacy, American style:

1. Federal government debt … $14.3 trillion
2. Treasury and Fed cheap-money policies … $23.7 trillion
3. Social Security’s rising debt … $40 trillion
4. Medicare’s unfunded debt … $60 trillion
5. Annual health-care costs … $2.5 trillion
6. Secretive global derivatives trading … $604 trillion
7. Population growth of 50% vs. Peak Oil demands … $30 trillion
8. U.S. dollar losing as reserve currency … $20 trillion
9. Global real estate losses … $15 trillion
10. Foreign trade and ownership … $5 trillion
11. State and local budget and pension shortfalls … $3.5 trillion
12. Corporate pensions plus 401(k) plans … $3.2 trillion
13. Consumer card debt … $2.5 trillion
14. Lobbyists annual costs … $1.4 trillion

Paul McCaulley's prescription:
After the Crisis: Planning a New Financial Structure
Learning from the Bank of Dad


Wednesday, May 12, 2010

Don't send a Guambat to do a yeoman's job

About a week ago, Guambat posted Buffett talks up his book(s), drinks the koolaid .

Kid's stuff.

This is real man's work, by Paul B. Farrell:

Buffett defends Goldman, joins greed Conspiracy
Behind the façade, the lovable, good ol' Uncle Warren strumming his cute little ukulele, ostensibly supporting reform, there's a dark force that's part of the toxic Goldman Conspiracy fighting to keep alive everything that's wrong with Wall Street, everything that got us into this mess, everything that will trigger another meltdown that even Uncle Warren says: "I can guarantee it."

Yes, folks, Uncle Warren has a bad case of denial. Remember, not too long ago Buffett was calling derivatives "weapons of financial mass destruction." And yet, there he was on stage at his love fest last week defending Wall Street's most toxic companies, trapped in denial, defending the greedy culture that got America into its current mess.

And that's just a warm-up. The rest just has to be read.


Monday, May 10, 2010

The war of terror drones on

U.S. Urges Action in Pakistan After Failed Bombing
The American military commander in Afghanistan, Gen. Stanley A. McChrystal, met with the Pakistani military chief, Gen. Ashfaq Parvez Kayani, at his headquarters here on Friday and urged Pakistan to move more quickly in beginning a military offensive against the Pakistani Taliban and Al Qaeda in North Waziristan, Americans and Pakistanis familiar with the visit said. The officials spoke on the condition of anonymity because of the delicacy of continuing diplomatic efforts here.

In Pakistan, a jumbled scaffolding of militancy
In this teeming southern metropolis, authorities are focusing on a domestic militant outfit that might have escorted Shahzad to distant northern peaks where U.S. investigators allege he received training with the al-Qaeda affiliated Pakistani Taliban. In Pakistan's heartland, extremist organizations freely build compounds and campaign with politicians, while their foot soldiers fight alongside the Taliban in the borderlands, intelligence officials say.

The overall picture is one of a jumbled scaffolding of militancy that supports al-Qaeda and the Taliban with money and safe houses, and can provide entrance tickets to mountain training camps for aspiring terrorists like Shahzad, one U.S. counterterrorism official said.

No-name terrorists now CIA drone targets
Once upon a time, the CIA had to know a militant's name before putting him up for a robotic targeted killing. Now, if the guy acts like a guerrilla, it's enough to call in a drone strike.

It's another sign of that a once-limited, once-covert program to off senior terrorist leaders has morphed into a full-scale -- if undeclared -- war in Pakistan. And in a war, you don't need to know the name of someone on the other side before you take a shot.

Across the border, in Afghanistan, the rules for launching an airstrike have become tighter than a balled fist. Dropping a bomb from above is now a tactic of last resort; even when U.S. troops are under fire, commanders are reluctant to authorize air strikes.

In Pakistan, however, the opposite has happened. Starting in the latter days of the Bush administration, and accelerating under the Obama presidency, drone pilots have become more and more free to launch their weapons.

"You've had an expanded target set for [some] time now and, given the danger these groups pose and their relative inaccessibility, these kinds of strikes -- precise and effective -- have become almost like the cannon fire of this war. They're no longer extraordinary or even unusual," one American official tells CNN.

This official -- like many other officials -- insists that the drone strikes have torn up the ranks of militants.

"The enemy has lost not just operational leaders and facilitators -- people whose names we know -- but formations of fighters and other terrorists," the official tells the Los Angeles Times. "We might not always have their names, but ... these are people whose actions over time have made it obvious that they are a threat."

National security law experts, inside the government and out, are in the middle of an intense debate over whether the remotely piloted attacks are legal. One leading law professor told Congress last week that the drone operators could be tried for "war crimes," under certain circumstances.

25 killed in U.S. drone attack in Pakistan
Twenty-five people, including 21 militants, were killed in Pakistan's northwest where a U.S. drone targeted insurgent hideouts and the military stepped up ground attacks on militants in the region today.

Ten people, including six militants, were killed and several others injured in a U.S. drone strike in the restive North Waziristan tribal region in northwest Pakistan.

Unmanned spy planes fired at least two missiles at a suspected militant hideout in Inzarkas village, located 50 km west of Miran Shah, the main town in North Waziristan Agency.

“Local residents pulled 10 bodies from the rubble and some more people are said to be injured,” a source said. Sources said six of those killed were militants, while the rest were civilians.

The strike occurred in the vicinity of Datta Khel, considered a haven for Taliban and Al Qaida elements.

Datta Khel, located near the border with Afghanistan, is the hometown of militant commander Hafiz Gul Bahadur


Friday, May 07, 2010

We're not talkin' Kiwis or sheep here, but ...

Neanderthals and humans interbred, fossils indicate
Humans and Neanderthals likely interbred 50,000 to 80,000 years ago in the Near East, concludes the international genetics team's pair of studies in the new issue of the journal Science.

It turns out, based on a new fossil analysis out Thursday, that people of European and Asian descent inherited a small amount, an average 1% to 4% of their genes, from the extinct species. The finding splits the difference in a long-running scholarly debate over whether people are solely African in origin, or spring from "multiregional" interbreeding of early human species.

Stocky, thick-browed and heavy-boned, the Neanderthals last shared a common ancestor with the African precursors to modern humans about 500,000 years ago. The Neanderthals populated the Near East and Europe until they vanished from the fossil record about 30,000 years ago. The gene maps produced by the DNA analysis of the bones found Neanderthal genes scattered randomly among non-Africans, Paabo says, indicating they don't account for any racial differences between modern-day Africans and anyone else. Also, the study finds no sign of human genes intruding into the Neanderthal lineage.

The studies also revealed a few dozen genes altered in humans since they genetically diverged from Neanderthals; some related to skull and brain development. But overall, "they were not very genetically distinct from us," Paabo says.

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He has a pension for making money

Suit accuses former pension officials of fraud
California's attorney general is suing two former officials from Calpers, the nation's largest public pension fund, alleging that they took kickbacks in exchange for a piece of the fund's lucrative investment portfolio.

Jerry Brown, the state attorney general, charges that former chief executive Federico Buenrostro Jr. accepted tens of thousands of dollars in gifts and promises of a future employment from Alfred Villalobos, a former Calpers board member who is now a placement agent.

Brown's office secured a court order to freeze the assets of Villalobos's firm and to recover more than $40 million in commissions.

Brown also said the court will take control of Villalobos's 20 bank accounts and all of his assets, including two Bentleys, art worth more than $2.7 million and 14 properties.

CalPERS may see more lawsuits
A state lawsuit targeting two top former officials of the California Public Employees' Retirement System could be the first in a series of state and federal actions focused on the nation's largest public pension fund.

"Villalobos spent tens of thousands of dollars to lavishly entertain key senior exectives at CalPERS, who then influenced the board to authorize investments that generated over $40 million in commissions to Villalobos," Brown said. "None of these actions were disclosed as required by law, as state pension holders and taxpayers have every right to expect."

Brown said that information from his office's investigation or independent investigations could result in more lawsuits or criminal indictments from a local district attorney, the Fair Political Practices Commission or other law enforcement agencies.

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Thursday, May 06, 2010

Grime pays even if crime doesn't

Playing dirty doesn't seem to hurt Wall Street CEOs.

Fraud-Tarred Finance Firms’ Trail May Mean Blankfein Keeps Job
Even after being sued for fraud by regulators and paying multimillion-dollar fines, the biggest financial firms rarely depose their leaders.

Citigroup Inc., Goldman and Merrill Lynch & Co. were among 10 firms that agreed to pay $1.4 billion in 2003 to settle claims that analysts manipulated recommendations. Not one CEO lost his job over the claims. There was a similar result in 2006, when Citigroup and Goldman Sachs were among lenders that paid $13 million for manipulating the market for auction-rate bonds.

That same year Bear Stearns Cos. paid $250 million to settle SEC claims it had helped clients break mutual-fund trading rules. CEO James “Jimmy” Cayne didn’t just keep his job -- he accepted a total 2006 payout of almost $34 million.

Since 2001, when the SEC said companies that promptly disclose suspicions of wrongdoing and cooperate with investigators may receive lighter penalties, CEOs have been forced out only when they were personally involved in improprieties or if the misdeeds were systematic or involved a failure to supervise properly, said Joseph Grundfest, a former SEC commissioner who is now co-director of Stanford University’s Rock Center for Corporate Governance.

“Criminal charges are the game changer,” said Gerald Rosenfeld, deputy chairman of Rothschild North America Inc. and co-head of the business and law program at New York University. “If Goldman were to be criminally charged, then all bets are off. It’s sort of a truism on Wall Street that no securities firm can survive in such a regulated industry if the firm is indicted.”


Pirates lost Russian roulette

Russian navy retakes oil tanker
The Russian navy has retaken an oil tanker that had been hijacked by suspected Somali pirates off the coast of Yemen, officials say.

At least one pirate was killed and 10 other captured. A Russian defence ministry official said all 23 crew on board the China-bound tanker, which was seized on Wednesday with $52 million worth of crude oil onboard, were alive and well following the rescue.

A spokeswoman for the tanker's owner, Novorossiysk Shipping Company, said the crew survived the 20-hour siege by hiding in a safe room that was inaccessible to the hijackers.

Russian investigators said that the captured 10 pirates would be transferred to Moscow to face charges.

The investigative committee of Russia's prosecutor general office said they would face "criminal responsibility" for the hijacking and the investigation would be conducted in accordance with Russian and international law.

Поздравляю !!


I only hope it does

Wednesday, May 05, 2010

Fail, don't bail, Greece: German Parliamentary leader

U.S. Stocks Drop on Europe Debt Concern, China Factory Slowdown
Volker Kauder, the parliamentary head of Chancellor Angela Merkel’s Christian Democratic Union, called for the possible “orderly insolvency” of European states as “consequences” follow from the Greek crisis. The European Commission must be able to better examine the finances of member states to avoid the kind of ballooning budget deficit witnessed in Greece, Kauder told reporters in Berlin today.

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South's turn for a bit of Haidong Gumdo

After years of North Korea's saber rattling, South Korea is returning the serve with its own show of Haidong Gumdo.

South Korea Vows Clear Response to Ship Sinking
President Lee Myung-bak of South Korea convened a meeting of top military commanders on Tuesday, calling for a review of his country’s defenses against North Korea and vowing a “clear and resolute measure” against those responsible for the sinking of a South Korean warship in March.

South Korea, which has called a torpedo attack the likeliest cause of the sinking, has not specifically accused North Korea. But on Tuesday, Mr. Lee appeared to be inching closer to blaming the North.

“What has become clear so far is that the Cheonan sinking was not an accident,” Mr. Lee told senior officers.

He said the sinking, which killed 46 South Korean sailors, “reawakened South Koreans to the fact that just 50 kilometers to the north, long-range North Korean artillery and rockets are trained on us.” It also reminded South Koreans that “a threat that shatters our prosperity and stability can come in a way we cannot imagine,” he said.

Analysts said that Mr. Lee was trying to please his conservative base with a firm stance while avoiding too much saber-rattling, which could disrupt the financial markets.

Perhaps the market disruption obstacle has been negated by the Greece fallout, which is being blamed for causing the DJIA to slip into triple digits today.

Whatever, the Christian Science Monitor is taking a slightly more sanguine view of the situation, noting the meeting President Lee "convened" is a regular meeting of the generals, though it may be unusual for the President to lead it.

South Korea's leader calls Cheonan warship sinking 'no accident'
While President Lee Myung-bak linked the incident to North Korea in his speech at the twice-a-year meeting of the South’s top military commanders, he stopped short of accusing the North of involvement. The meeting is normally chaired by the defense minister, and Lee's presence alone revealed the heightened tensions between North and South.

"What is obvious so far is that the Cheonan did not sink due to a simple accident," Lee said, reports the Associated Press. "As soon as the incident occurred, I sensed it was a grave international and inter-Korean matter."

President Lee’s continued refusal to directly accuse the North highlights the cautious approach the South is taking toward its aggressive northern neighbor.

He pledged “firm and definite” action once the international investigation of the explosion is concluded. Lee has avoided talking of a military strike, and Reuters reports that South Korea will likely refer the North to the United Nations Security Council if it decides that Pyongyang was responsible.

Ready for another Tour of Duty, Jack?

Guambat hopes this does not land nearby tiny Guam in deep kimchi.


Hatoyama caves

Japanese take to baseball, US to play hardball (December 2009)
For the decades after WWII in which the LDP ran the show in Japan, there developed a certain standardized pas de due between the US and Japan that was pragmatic, commercial and static. Each could be counted upon to go no further than the dance choreographed.

Then, in August this year, the LDP finally got back-footed. In an expression of exasperation, the Japanese people voted for Anyone But LDP. The darts landed on hapless Mr. Hatoyama and his "visionary" wife, and his more inept than hapless comrades without arms coalition.

The new Japanese coalition government can't make up its mind to implement the US/Japan Guam relocation agreement because nothing less than the wholesale removal of all US troops from Okinawa will currently satisfy its vision of self. Anything less than that is seen as a defeat, not a start. So they refuse to even start.

These will be very tense times in the coming months. Guambat only senses the tension, and guesses at the game. But the outcome is written.

Marines will come to Guam, some other adjustments will be made to mend fences and save faces, and the New Government will become a footnote in Japanese political history.

Guambat here abjectly apologizes to his family and friends who might find offense in anything said here. It is meant only dispassionately and affectionately for all concerned.

Some things in realpolitik are simply hard to swallow, even when being jammed down the throat.

Japan PM abandons plan to move US base off Okinawa By Harumi Ozawa (AFP) – 9 hours ago
Japan's embattled premier Tuesday abandoned a plan to move an unpopular US airbase entirely off Okinawa island, backtracking on a key election pledge after months of dithering that angered Washington.

"I really feel sorry as I visit here today that I must ask for the Okinawan people's understanding that part of the base operations would have to stay" on Okinawa, Yukio Hatoyama told reporters after meeting the local governor.

Under the latest compromise plan -- not formally announced by the government but widely reported in domestic media -- Japan is proposing to stick with the original plan, with some modifications.

Hatoyama -- whose approval ratings have dived into the 20 percent band amid the row ahead of upper house polls due in July -- was meeting officials in Okinawa in a bid to sell the compromise plan.

"Initially, there was an argument to move it overseas. But when we consider the Japan-US alliance and matters related to neighbouring nations, it is difficult to do so from the viewpoint of deterrence"' Hatoyama said.

"It is impossible in reality."

“It has gotten to the point where the only way to make progress on this issue would be for Prime Minister Hatoyama to resign,” said Satoshi Machidori, a politics professor at Kyoto University.

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Monday, May 03, 2010

Buffett talks up his book(s), drinks the koolaid

Topics today:
I. Financial Weapons of Mass Destruction?

II. “All-in wager” on the American economy?

I. Buffet's change of heart on FWMD:

Buffett warns on investment 'time bomb' (2003)
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 are financial instruments that allow investors to speculate on the future price of, for example, commodities or shares - without buying the underlying investment.

Some derivatives contracts, Mr Buffett says, appear to have been devised by "madmen".

He warns that derivatives can push companies onto a "spiral that can lead to a corporate meltdown", like the demise of the notorious hedge fund Long-Term Capital Management in 1998.

Berkshire Hathaway, the investment group led by Mr Buffett, is pulling out of the market, closing down the derivatives trading subsidiary it bought as part of a huge reinsurance company a few years ago.

In his letter Mr Buffett compares the derivatives business to "hell... easy to enter and almost impossible to exit", and predicts that it will take years to unwind the complex deals struck by its subsidiary General Re Securities.
Warren Buffet on Derivatives -- excerpts from the Berkshire Hathaway annual report for 2002.
I view derivatives as time bombs, both for the parties that deal in them and the economic system.

before a contract is settled, the counter-parties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands. Reported earnings on derivatives are often wildly overstated. That’s because today’s earnings are in a significant way based on estimates whose accuracy may not be exposed for many years.

The errors usually reflect the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them.

Those who trade derivatives are usually paid, in whole or art, on “earnings” calculated by mark-to-market accounting. But often there is no real market, and “mark-to-model” is utilized. This substitution can bring on large-scale mischief.

As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counter-parties to use fanciful assumptions. The two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.

I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.

Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counter-parties tend to build up over time.

A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. However under certain circumstances, an exogenous event that causes the receivable from Company A to go bad will also affect those from companies B through Z.

Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.

Beyond that, other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts.

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

Buffett boosts Goldman Sachs with $5-billion investment (2008)
Warren Buffett to the rescue: His Berkshire Hathaway Inc. agreed today to invest $5 billion in Goldman Sachs Group via a purchase of preferred stock.

Berkshire also will get warrants to buy up to $5 billion of Goldman common shares.

The deal, announced after markets closed, amounts to a huge vote of confidence by Buffett in the investment banking titan, at a time when investors remain spooked about the future of Wall Street.

"Goldman Sachs is an exceptional institution," Buffett said in a statement.

Buffett will earn a hefty 10% dividend yield on his preferred shares. The warrants, which are immediately exercisable, have a strike price of $115 a share.

The deal has given Goldman’s shares a pop in after-hours trading, to $135.87. The stock had gained $4.27 to $125.05 in regular trading, after falling as low as $113.
Goldman was down 15 points at $145 at last Friday's close (April 30).

The Buffett-Blankfein Alliance (current)
Goldman Sachs shares should pop Monday morning on the unambiguous support of America’s most renowned investor, Warren Buffett.

According to a Belgian fund manager who worked for seven years for Goldman in London, and who just arrived here in Pasadena for the Value Investing Congress this week, Goldman Sachs ( GS - news - people ) has an intrinsic book value of $111 a share and that book value should rise at least to $132 a share over the next six months unless disaster strikes.
Goldman Sachs has mounting legal woes
Shares of Goldman (GS, Fortune 500) have plunged 21% since the SEC first revealed its fraud allegations, including a 9% drop on Friday as news of the federal criminal probe prompted a pair of analysts to cut their rating on the firm.

The interesting thing to Guambat is how sanguine Buffett is about all that CDO Koolaid -- he's now apparently quite prepared to drink the stuff Goldman stirred up and peddled.

As Barry Ritholtz has pointed out, the WSJ has a take on just how toxic the CDO Koolaid can be, and how Goldman followed the recipe:

Senate's Goldman Probe Shows Toxic Magnification
In a memo last week, panel Chairman Sen. Carl Levin (D., Mich.) said Goldman's work "magnified the impact of toxic mortgages" by replicating mortgage securities in debt pools known as collateralized debt obligations as well as CDO derivatives, and also in an index that tracks subprime bonds.

This was a central finding of the Senate investigative panel probing Goldman Sachs Group Inc.'s actions in the mortgage market. In effect, the documents said, Wall Street was "copying and pasting" what turned out to be the worst-performing securities of the mortgage boom.

An important moment in the housing cycle came in January 2006, a year before the downturn of the housing market had crystallized. That month, a consortium of banks, including Goldman and Deutsche Bank AG, with the help of a London data firm, launched an index, known as the ABX, which served as a proxy for subprime loans.

By late 2006, Goldman had a large bullish position on the ABX, because it had taken the other side of bearish bets by hedge-fund clients, according to the Senate documents. Subsequent deals would help reverse that position.

Anthony Sanders, a real-estate finance professor and authority in securitization at George Mason University in Fairfax, Va., said the problem was that the same mortgage bonds ended up in many deals, potentially multiplying the losses.

"Serious problems with common [asset-backed securities] deals can decimate all CDO deals," Mr. Sanders said.
That last statement sounds very much like pre-Goldman Buffett:
"Under certain circumstances, an exogenous event that causes the receivable from Company A to go bad will also affect those from companies B through Z. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others."
But, by 2008, Buffett had finally learned enough about the direction of the economy that he was willing to make his own bet against it, by taking a position in Goldman, whose own derivative-based bet was about to pay off -- with a little bail out assistance at the net by Buffett's shareholders and other US taxpayers.

Topic II: Jumping the tracks

Buffett on right track? (2009)
The headline story was that Buffett was purchasing a US railroad. Not just any old purchase, this one was his largest purchase ever. The traders skipped right over the part where Buffett said the purchase was an “all-in wager on the economic future of the United States”, and landed on the notion that transports ultimately lead the industrials in the stock market race.

Feisty Buffett supports Goldman, high on economy (current)
Buffett cautioned policymakers not to artificially stimulate housing sales and perhaps derail a recovery.

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