Closing the barn door after the horse has escaped

There are those that feel if only there was more government regulation we'd not be in the financial mess we're currently in. The problem with regulation is that like most legislation, it is a fairly blunt instrument with which to try to fix a specific problem, and it is not uncommon to find instances where the unintended consequences outnumber the intended consequences--often significantly. The Sarbanes-Oxley Act of 2002 (Sarbox) is a perfect example. Put in place with the intention of halting further accounting scandals like the ones that brought down Enron, WorldCom, Tyco and a host of other publicly traded companies, it has also acted to limit the choices a small business has regarding its growth and has moved most of what was left of our IPO market overseas and out of its jurisdiction. Rather than go public in the Unites States and wade through the sea of red tape and absorb the added costs that Sarbox has created, many companies ready to take the next step in their natural growth cycle instead choose to either sell out to a larger company--which makes a big company even bigger and has the correlative effect of limiting the competitive landscape--or go public in London where they will not be subjected to the excessive scrutiny that Sarbox mandates. Furthermore, you'd have to be crazy to choose to go public in the United States if you were a foreign company contemplating such a move.

Unsurprisingly, the monetary cost of compliance seems to not have been considered when Sarbox went into effect. If you are a $25bil company, this additional compliance cost is more easily absorbed than if you are a $25mil company. Setting aside the regressive nature of a law that burdens small companies more heavily than large ones, consider that micro, small and mid-cap companies outnumber large-cap companies by at least an order of magnitude. Also worth considering is the fact that if you are a CFO and you sign off on your company's quarterly financials and malfeasance later surfaces that you knew nothing about, you can be held criminally liable. Imagine what that does to a company's risk-taking initiative.

Though surely there are others, the most glaring unintended consequence of Sarbox is that thousands of law-abiding, jobs-providing, tax-paying smaller companies are penalized with significant added operating costs as a result of the regulatory reaction to the illegal actions of literally a handful of much larger companies. Forcing a firm to esentially prove their innocence each quarter is a perversion of the whole "innocent until proven guilty" theory that is the foundation of our laws.

Now to the point:

Yesterday it was revealed that IndyMac Bank is guilty of altering its records in order to appear more financially sound than they actually were just weeks before they were seized by regulators last summer. The twist is that a senior government regulator helped them do it.

A senior bank regulator was removed from his job after being accused of helping mortgage lender IndyMac Bancorp alter its records so it appeared to be in better shape -- weeks before it was seized by the government.

The Office of Thrift Supervision has reassigned its top West Coast official, Darrel Dochow, who was also a controversial figure in the regulatory lapses surrounding the savings-and-loan crisis of the late 1980s.

In a letter sent Monday to Sen. Charles Grassley, the senior Republican on the Senate Finance Committee, the Treasury Department's inspector general wrote that the federal OTS allowed the bank to backdate records of capital infusions last spring. That leeway made IndyMac appear more solid than was actually the case, shortly before federal regulators seized the bank in July -- at a cost of $8.9 billion to the government's deposit-insurance fund.

The key concern raised by Treasury Inspector General Eric Thorson in his letter was that OTS supervisors allowed IndyMac to register an $18 million capital injection from its holding company made on May 9 as if it had been carried out before the end of March. That appeared to put the bank's total risk-based capital ratio for the first quarter of the year over the 10% threshold for a "well-capitalized" institution, when in fact the bank had been below that mark and qualified only to be considered "adequately capitalized."

Mr. Thorson said in the letter that his investigators had also uncovered other incidents in which OTS supervisors had allowed banks to backdate capital infusions. The letter didn't specify which banks those incidents involved.

Darrel Dochow must be a cat, for surely he has 9 lives. Here's a guy that played a significant role in the Keating 5 Scandal by holding off on cracking down (which was his job BTW) on the unsound business practices of Lincoln S&L. Then he was only demoted for his role, and managed to work his way back up the ladder to again be named Western Regional Director of the Office of Thrift Supervision in 2007, only to again help at least one bank in trouble survive a little longer to again cost the taxpayer money. To add insult to injury, don't forget we're paying him a handsome taxpayer funded salary and benefits for all his "hardwork". This is not even a one-off event, there are other banks yet to be named. It will be interesting to see what other banks are also guilty of backdating capital with Mr. Dochow's help.

Lincoln later collapsed, costing taxpayers billions of dollars and triggering a political scandal for the "Keating Five" senators who had intervened with regulators on the thrift's behalf. Mr. Dochow was demoted in the wake of the scandal, but worked his way back up the OTS hierarchy.

Is this an example of more of the type of government regulation our nation should expect?

Institutions such as banks and our government are really a reflection of the habits of the citizens that make up the society that grants them legitimacy. Lately it seems that many of the institutions that make our nation what it is have been under assault by either the arrogant, the brazenly greedy, the incompetent, the criminal or all of the above. There will come a tipping point where those of us who keep our heads down, abide by the law, pay our taxes on time and generally behave like good citizens will say, "enough is enough." What happens then is anybody's guess, but whatever happens, it won't be pleasant for somebody.

"Those who destroy the protocols of civilization may well one day wish to rely on them".--Thucydides Book III

Dominos falling

Here's The Cato Institute sharing a little bit of common sense:

Daniel Mitchell, a senior fellow at the libertarian Cato Institute, said the government should have no role in helping the (auto) industry, except to provide positive economic conditions -- "a lower corporate tax rate, less red tape and things like that," he said.

Mitchell added that if the government takes control of the auto industry, it will be a recipe for disaster.

"The free markets allocate resources and reward people for doing good things and punish them for doing dumb things," he said. "Government misallocates resources and rewards people for doing dumb things and punishing them for doing good things.

"We're in this very dangerous situation where you're going to have people, Harry Reid and Nancy Pelosi, making these decisions," he said. "I wouldn't trust these people mowing my lawn, much less running a private company."

That quote is a little dated. As we now know, last Friday Congress approved a $13.4bil loan package to GM and Chrysler. Lest you think that money comes without any strings attached, here are the terms of the deal:

Fact Sheet: Financing Assistance to Facilitate the Restructuring of Automobile Manufacturers to Attain Financial Viability.

Purpose: The terms and conditions of the financing provided by the Treasury Department will facilitate restructuring of our domestic auto industry, prevent disorderly bankruptcies during a time of economic difficulty, and protect the taxpayer by ensuring that only financially viable firms receive financing.

Amount: Auto manufacturers will be provided with $13.4 B in short-term financing from the TARP, with an additional $4 B available in February, contingent upon drawing down the second of TARP funds.

Viability Requirement: The firms must use these funds to become financially viable. Taxpayers will not be asked to provide financing for firms that do not become viable. If the firms have not attained viability by March 31, 2009, the loan will be called and all funds returned to the Treasury.

Definition of Viability: A firm will only be deemed viable if it has a positive net present value, taking into account all current and future costs, and can fully repay the government loan.

Binding Terms and Conditions: The binding terms and conditions established by the Treasury will mirror those that were voted favorably by a majority of both Houses of Congress, including:

• Firms must provide warrants for non-voting stock.
• Firms must accept limits on executive compensation and eliminate perks such as corporate jets.
• Debt owed to the government would be senior to other debts, to the extent permitted by law.
• Firms must allow the government to examine their books and records.
• Firms must report and the government has the power to block any large transactions (> $100 M).
• Firms must comply with applicable Federal fuel efficiency and emissions requirements.
• Firms must not issue new dividends while they owe government debt.

Targets: The terms and conditions established by Treasury will include additional targets that were the subject of Congressional negotiations but did not come to a vote, including:

• Reduce debts by 2/3 via a debt for equity exchange.
• Make one-half of VEBA payments in the form of stock.
• Eliminate the jobs bank.
• Work rules that are competitive with transplant auto manufacturers by 12/31/09.
• Wages that are competitive with those of transplant auto manufacturers by 12/31/09.

These terms and conditions would be non-binding in the sense that negotiations can deviate from the quantitative targets above, providing that the firm reports the reasons for these deviations and makes the business case to achieve long-term viability in spite of the deviations.

In addition, the firm will be required to conclude new agreements with its other major stakeholders, including dealers and suppliers, by March 31, 2009.

Basically they have 3 months to get their acts together. Judging by how long it has taken them to not adjust their business models in order to stay competitive in the first place, it is laughable to think that they will, in fact, get their acts together in a mere 3 months time. No doubt they will ask for a time extension or use the "non-binding" clause to bend the terms more to their liking when nobody is looking. Besides, in this day and age a $13.4bil loan is almost a rounding error, so who really cares if they pay it back at all?

Do not get me wrong, I want to see our domestic auto industry succeed. From what I understand GM's Rick Wagoner is a helluva nice guy to boot, but I do not think that any good will come from the government getting involved in what should be a private industry affair. The excessive statism that we are now witnessing will only serve to undermine the economy in the long run.


This whole auto industry bailout story is old news already. Though if you listen closely, you'll hear jostling and footsteps as the commercial property developers line up for their alms from Uncle Sam.

Where does it end?

The Banana Republic of Illinois

If you’re looking for a great non-fiction read that reads like fiction, look no further. The complaint filed yesterday against the current Illinois governor, democrat Rod Blagojevich, almost reads like a John Gresham novel. They ought to just slap a cover on it and sell it on Amazon.

The reader will recall that this is the same fetid swamp from which our current President-elect emerged. No doubt he has insulated himself well from this particular scandal, but there's that age old wisdom, something about the apple not falling too far from the tree, that may be appropriate here. Unfortunately, the young aspiring representative Jessie Jackson Jr. may not be so lucky. His handlers stand accused of offering the Governor $500,000 for Obama's empty Senate seat.

Since it is 78 pages long, I've highlighted some of my favorite parts below.

Careful now, there's more F-bombs dropped here than Al Pacino dropped in Scarface.


On quid pro quo:

a. Defendant ROD BLAGOJEVICH and at times defendant JOHN HARRIS, together with others, obtained and attempted to obtain financial benefits for RODBLAGOJEVICH, members of the Blagojevich family, and third parties including Friends of Blagojevich, in exchange for appointments to state boards and commissions, state employment, state contracts, and access to state funds;

On pesky media bias, the Cubs and Wrigley Field:

b. Defendants ROD BLAGOJEVICH and JOHN HARRIS, together with others, offered to, and threatened to withhold from, the Tribune Company substantial state financial assistance in connection with Wrigley Field, which assistance ROD BLAGOJEVICH believed to be worth at least $100 million to the Tribune Company, for the private purpose of inducing the controlling shareholder of the Tribune Company to fire members of the editorial board of the Chicago Tribune, a newspaper owned by the Tribune Company, who were responsible for editorials critical of ROD BLAGOJEVICH

71. Based on a review of intercepted phone calls, it appears that the Tribune
Company, in connection with its efforts to sell the Cubs, has explored the possibility of obtaining financial assistance from the Illinois Finance Authority (“IFA”) relating to the financing or sale of Wrigley Field.19 During the course of this investigation, agents have intercepted a series of communications regarding the efforts of ROD BLAGOJEVICH and JOHN HARRIS to corruptly use the power and influence of the Office of the Governor to cause the firing of Chicago Tribune editorial board members as a condition of State of Illinois financial assistance in connection with Wrigley Field. The phone calls reflect that ROD BLAGOJEVICH directed JOHN HARRIS to inform Tribune Owner and an associate of Tribune Owner, Tribune Financial Advisor (Tribune Financial Advisor is believed to be an individual identified in media accounts as a top assistant and financial advisor to Tribune Owner, who played a significant role in Tribune Owner’s purchase of the Tribune), that State
of Illinois financial assistance for the Tribune Company’s sale of Wrigley Field would not be forthcoming unless members of the Chicago Tribune’s editorial board were fired. Set out below are summaries of certain of those conversations. This affidavit does not include all calls dealing with the corrupt efforts of ROD BLAGOJEVICH and JOHN HARRIS to misuse their influence over the expenditure of state funds to cause the firing of employees of the Chicago Tribune editorial board.

On standing by your man:

During the call, ROD BLAGOJEVICH’s wife can be heard in the background telling ROD BLAGOJEVICH to tell Deputy Governor A “to hold up that fucking Cubs shit. . . fuck them.”

On Global Warming, jet flights and personal loyalty:

4. According to Levine, in approximately late October 2003, after Levine was reappointed to the Planning Board, he shared a private plane ride from New York to Chicago with ROD BLAGOJEVICH and Kelly. Levine, ROD BLAGOJEVICH, and Kelly were the only passengers on the flight. According to Levine, at the beginning of the flight, Levine thanked ROD BLAGOJEVICH for reappointing him to the Planning Board. ROD BLAGOJEVICH responded that Levine should only talk with “Tony” [Rezko] or [Kelly] about the Planning Board, “but you stick with us and you will do very well for yourself.” ROD BLAGOJEVICH said this in front of Kelly. According to Levine, Levine understood from ROD BLAGOJEVICH’s manner of speaking and words that ROD BLAGOJEVICH did not want Levine to talk to ROD BLAGOJEVICH directly about anything to do with the boards, but that Levine should talk to Rezko or Kelly. Levine also understood that ROD BLAGOJEVICH meant that Levine could make a lot of money working with ROD BLAGOJEVICH’s administration. According to Levine, ROD BLAGOJEVICH did not seem to expect a response from Levine, and Kelly then shifted the conversation to something else.

Most appropriate acronym ever:

36. Levine’s criminal activities included his abuse of his position on the Planning
Board to enrich both himself and Friends of Blagojevich. The Planning Board was a commission of the State of Illinois, established by statute, whose members were appointed by the Governor of the State of Illinois. At the relevant time period, the Planning Board consisted of nine individuals. State law required an entity seeking to build a hospital, medical office building, or other medical facility in Illinois to obtain a permit, known as a “Certificate of Need” (“CON”), from the Planning Board prior to beginning construction

On tolls and highways:

63. According to Individual A, after Individual B left the meeting on October 6, 2008, ROD BLAGOJEVICH told Individual A that he was going to make an upcoming announcement concerning a $1.8 billion project involving the Tollway Authority. ROD BLAGOJEVICH told Individual A that Lobbyist 1 was going to approach Highway Contractor 1 to ask for $500,000 for Friends of Blagojevich. ROD BLAGOJEVICH told Individual A that, “I could have made a larger announcement but wanted to see how they perform by the end of the year. If they don’t perform, fuck ‘em.” According to Individual A, he/she believed that ROD BLAGOJEVICH was telling Individual A that ROD BLAGOJEVICH expected Highway Contractor 1 to raise $500,000 in contributions to Friends of Blagojevich and that ROD BLAGOJEVICH is willing to commit additional state money to the Tollway project but is waiting to see how much money Highway Contractor 1 raises for Friends of Blagojevich.

On using a children's hospital as leverage for a political donation:

65. According to Individual A, on October 8, 2008, during a discussion of
fundraising from various individuals and entities, the discussion turned to Children’s Memorial Hospital, and ROD BLAGOJEVICH told Individual A words to the effect of “I’m going to do $8 million for them. I want to get [Hospital Executive 1] for 50.” Individual A understood this to be a reference to a desire to obtain a $50,000 campaign contribution from Hospital Executive 1, the Chief Executive Officer of Children’s Memorial Hospital. Individual A said that he/she understood ROD BLAGOJEVICH’s reference to $8 million to relate to his recent commitment to obtain for Children’s Memorial Hospital $8 million in state funds through some type of pediatric care reimbursement. As described in further detail below, intercepted phone conversations between ROD BLAGOJEVICH and others indicate that ROD BLAGOJEVICH is contemplating rescinding his commitment of state funds to benefit Children’s Memorial Hospital because Hospital Executive 1 has not made a recent campaign contribution to ROD BLAGOJEVICH.

On selling Obama’s vacated Senate Seat for personal gain:

c. Defendants ROD BLAGOJEVICH and JOHN HARRIS, together with others, attempted to use ROD BLAGOJEVICH’s authority to appoint a United States Senator for the purpose of obtaining personal benefits for ROD BLAGOJEVICH, including, among other things, appointment as Secretary of Health & Human Services in the President-elect’s administration, and alternatively, a lucrative job which they schemed to induce a union to provide to ROD BLAGOJEVICH in exchange for appointing as senator an individual whom Minimization procedures were implemented during the interception of conversations at the Friends of Blagojevich offices and over phones. At times, these minimization procedures were stricter than required under law so as to avoid intercepting certain potentially privileged conversations. ROD BLAGOJEVICH and JOHN HARRIS believed to be favored by union officials and their associates.

c. ROD BLAGOJEVICH said that the consultants (Advisor B and another consultant are believed to be on the call at that time) are telling him that he has to “suck it up” for two years and do nothing and give this “motherfucker [the President-elect] his senator. Fuck him. For nothing? Fuck him.” ROD BLAGOJEVICH states that he will put “[Senate Candidate 4]” in the Senate “before I just give fucking [Senate Candidate 1] a fucking Senate seat and I don’t get anything.” (Senate Candidate 4 is a Deputy Governor of the State of Illinois).

On planning for the future:

d. One of ROD BLAGOJEVICH’s advisors said he likes the idea, it sounds like a good idea, but advised ROD BLAGOJEVICH to be leery of promises for something two years from now. ROD BLAGOJEVICH’s wife said they would take the job now. Thereafter, ROD BLAGOJEVICH and others on the phone call discussed various ways ROD BLAGOJEVICH can “monetize” the relationships he is making as Governor to make money after ROD BLAGOJEVICH is no longer Governor.

On non-profits:

104. On November 11, 2008, ROD BLAGOJEVICH talked with JOHN HARRIS
about the Senate seat. ROD BLAGOJEVICH suggested starting a 501(c)(4) organization (anon-profit organization that may engage in political activity and lobbying) and getting “his (believed to be the President-elect’s) friend Warren Buffett or some of those guys to help us on something like that.” HARRIS asked, “what, for you?” ROD BLAGOJEVICH replied, “yeah.” Later in the conversation, ROD BLAGOJEVICH stated that if he appoints Senate Candidate 4 to the Senate seat and, thereafter, it appears that ROD BLAGOJEVICH might get impeached, he could “count on [Senate Candidate 4], if things got hot, to give [the Senate seat] up and let me parachute over there.” HARRIS said, “you can count on [Senate Candidate 4] to do that.” Later in the conversation, ROD BLAGOJEVICH said he knows that the President-elect wants Senate Candidate 1 for the Senate seat but “they’re not willing to give me anything except appreciation. Fuck them.”

Maybe the whole world was not listening, but the FBI most certainly was:

ROD BLAGOJEVICH told Fundraiser A that “you gotta be careful how you express that and assume everybody’s listening, the whole world is listening. You hear me?”

On being stuck in a dead end job and dreaming of reaching for the stars:

116. In addition, in the course of the conversations over the last month, ROD BLAGOJEVICH has spent significant time weighing the option of appointing himself to the open Senate seat, and has expressed a variety of reasons for doing so, including frustration at being “stuck” as governor, a belief that he will be able to obtain greater resources if he is indicted as a sitting Senator as opposed to a sitting governor, and a desire to remake his image in consideration of a possible run for President in 2016, avoid impeachment by the Illinois legislature, make corporate contacts that would be of value to him after leaving public office, facilitate his wife’s employment as a lobbyist, and assist in generating speaking fees should he decide to leave public office.

In my opinion, of the many outrages against all that our nation is supposed to stand for present in this complaint, the hubris displayed by Mr. Blagojevich and his associates is the most breathtaking. His behavior as outlined in this complaint reveals that he may be a borderline sociopath as well. It begs the question; do sociopaths become politicians, or do politicians become sociopaths? That's beyond the scope of this post, but I think the brass knuckle, "pay to play" world of Illinois politics would be a great place to conduct a study on the subject.

I have a feeling that when Thomas Jefferson said, “If once the people become inattentive to the public affairs, you and I, and Congress and Assemblies, Judges and Governors, shall all become wolves. It seems to be the law of our general nature, in spite of individual exceptions” this is exactly the sort of thing he was afraid could happen.

Karmic Payback is Alive and Well

O.J. Simpson gets at least 15 years in prison:

"Earlier in this case, at a bail hearing, I said to Mr. Simpson I didn't know if he was arrogant, ignorant or both,"(Judge) Glass said. "During the trial and through this proceeding I got the answer, and it was both."

I hope he enjoyed that fine meal, because I hear Nevada prison food isn't quite so tasty looking.

By they way, that's some nice ham carving skills on display there.

Coincidence?

Federal Reserve Liquidity Programs to Date

Every industry has its share of acronyms, but unless one is a part of a particular industry, specific acronyms generally have no meaning. Since it is our money being used in the latest iteration of the current corporate/social bailout, I believe every taxpayer should take an interest in the list below.

• TAF – Term auction facility. The Fed auctions discount window loans to banks for terms of 28 and 84 days.
• PDCF – Analogous to the TAF in that the Fed is providing collateralized loans to primary dealers. The loans are for overnight terms. Primary dealers can pledge assets (including equities) from their London branches.
• Foreign currency swaps – The Fed is providing dollar loans to foreign central banks who will then pass the funds onto banks in the libor market. Four of the nine participating banks will provide dollar funding in unlimited amounts.
• TSLF – The Fed’s swap program exchanging its holdings of TSYs for investment grade assets. Available to primary dealers via weekly auctions. The Fed recently increased the size and expanded the eligible assets in the program.
• TOP – Designed to offer primary dealers options to draw on special short-dated TSLF auctions scheduled around quarter and year-end periods. Options can be allowed to expire unexercised or used to swap mortgage collateral against general Treasury collateral.
• AB-CP back up (AMLF)– The Fed is providing loans to banks and other depository institutions to purchase asset backed commercial paper from money market funds.
• CP-FF – The commercial paper funding facility where the Fed will buy CP directly from issuers. For most issuers, the CP will be purchased at 3- month OIS+200bp. Banks can lower their cost by securing FDIC debt insurance.
• MMIFF – A facility created by the Fed designed to purchase assets out of money market funds through newly created SPVs that themselves are financed with AB-CP.
• Other credit extension – This includes the Fed loan to AIG collateralized by the companies businesses and assets. The total line of credit is $123bn.
• Maiden Lane LLC – The Fed entity created to hold BSC’s portfolio of assets that collateralize the loan the Fed made to JPM ($30bn) to finance the purchase of BSC. Any losses over the first $1bn accrue to the Fed.
• Fed purchases of GSE securities – The Fed plans to purchase up to $100 billion in GSE direct obligations from primary dealers and $500 billion in MBS from asset managers, in conjunction with the Treasury's bailout of the GSEs.
• TALF – Term Asset-Backed Securities Loan Facility. The New York Fed plans to lend up to $200 billion (with an added $20 billion in credit protection from the Treasury’s TARP funds) to holders of AAA ABS securities tied to student, credit card, auto, and small business loans.
• TARP – While not a Fed program, the TARP is designed to inject capital into financial institutions and purchase “troubled assets.” The scope and structure of the program has gotten broader and less clearly defined as there has been talk of using the money to modify home mortgages and make loans to auto manufacturers.

Surely this list will grow, so check back often.

The State of Wall St.

When I first started working in the finance industry years ago, one of the first books I was advised to read was "Liar's Poker" by Michael Lewis. It remains one of the more memorable books I've ever read for a few reasons, mostly though because I like his writing style.

In the following article from Conde Nast's Portfolio.com website, Mr. Lewis offers us an entertaining glimpse of the grinding gears that are currently driving Wall St. to the brink of the abyss. He ends the article with an informal interview of his old boss and antagonist in the book that made him famous, John Gutfreund, the former CEO of Salomon Brothers.

You can’t really tell someone that you asked him to lunch to let him know that you don’t think of him as evil. Nor can you tell him that you asked him to lunch because you thought that you could trace the biggest financial crisis in the history of the world back to a decision he had made. John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation. He ignored the outrage of Salomon’s retired partners. (“I was disgusted by his materialism,” William Salomon, the son of the firm’s founder, who had made Gutfreund C.E.O. only after he’d promised never to sell the firm, had told me.) He lifted a giant middle finger at the moral disapproval of his fellow Wall Street C.E.O.’s. And he seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers.

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

No partnership, for that matter, would have hired me or anyone remotely like me. Was there ever any correlation between the ability to get in and out of Princeton and a talent for taking financial risk?

I think those closing paragraphs illustrate nicely the problems associated with removing moral hazard from the risk/reward equation.

Now What?

Now that The One is set to ascend to the throne, what will all of his disciples do with their free time? The following video gives us a clue:

Obama Supporters Devastated By Election Win!

IowaHawk has an excellent post-election essay here.


On a more serious note, this is just plain creepy...


As an American, I congratulate Obama on his win. I will respect the office of the President as long as the person holding the office deserves respect. Hopefully, he will govern from the center and jettison the hardcore leftist crowd that helped him win. Based on his thin record, I fear that he will not, and we as a nation may have to endure the spasms associated with a severe case of buyer's remorse as portions of his coalition slowly discover they've been left at the altar. Apart from that, there are many people who do not have the United States of America's best interests at heart holding Obama chits, and it won't be long before they start expecting their dividend payments.

Every President inherits a host of issues from the former administration. How Obama positions himself--either as a victim of "Bush's failed policies" or as the Leader of the Free World--will tell us a lot about his character. It is my hope that he chooses the latter, because our nation can ill-afford the former.

Major candidate's tax plans compared

Greg Mankiw, an economics professor at Harvard, walks us through the following exercise:

Let me try to put each tax plan into a single number. Let's suppose Greg Mankiw takes on an incremental job today and earns a dollar. How much, as a result, will he leave his kids in T years?

The answer depends on four tax rates. First, I pay the combined income and payroll tax on the dollar earned. Second, I pay the corporate tax rate while the money is invested in a firm. Third, I pay the dividend and capital gains rate as I receive that return. And fourth, I pay the estate tax when I leave what has accumulated to my kids.

Let t1 be the combined income and payroll tax rate, t2 be the corporate tax rate, t3 be the dividend and capital gains tax rate, and t4 be the estate tax rate. And let r be the before-tax rate of return on corporate capital. Then one dollar I earn today will yield my kids:

(1-t1){[1+r(1-t2)(1-t3)]^T}(1-t4).

For my illustrative calculations, let me take r to be 10 percent and my remaining life expectancy T to be 35 years.

If there were no taxes, so t1=t2=t3=t4=0, then $1 earned today would yield my kids $28. That is simply the miracle of compounding.

Under the McCain plan, t1=.35, t2=.25, t3=.15, and t4=.15. In this case, a dollar earned today yields my kids $4.81. That is, even under the low-tax McCain plan, my incentive to work is cut by 83 percent compared to the situation without taxes.

Under the Obama plan, t1=.43, t2=.35, t3=.2, and t4=.45. In this case, a dollar earned today yields my kids $1.85. That is, Obama's proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan and by 93 percent compared to the no-tax scenario. In a sense, putting the various pieces of the tax system together, I would be facing a marginal tax rate of 93 percent.

It should be pretty obvious that the only people who should legitimately call themselves democrats are either billionaires or poor people; both groups are the only ones that will benefit under Obama's plan. Billionaires are what you could call "recession-proof"and can therefore afford the high cost of social engineering; and if you're poor you have nothing to lose under any tax scheme. It's interesting how businessmen such as Bill Gates and Warren Buffet(there are many other examples) belatedly find the virtue of socialism after they've spent their entire lives accumulating vast sums of wealth in a decidedly un-socialist manner. It reminds me of an aging rockstar who has spent 25 years chasing booze, drugs and women only to become a spokesperson for abstence after their liver has failed.

A filibuster-proof democratic Congress aligned with a President who's scant 2 year Senate voting record that is the most liberal in that chamber will be able to deliver the one-two punch to our wallets, for our own good of course. Surely when Obama speaks of change he really means "redistributive change." When that happens, we can all be equal and poor together.

If the Democrats succeed in keeping the wool over the eyes of the electorate long enough to win the White House and Obama becomes our President, I will respect the office, if not the man. But I would strongly recommend that Senator Reid, Madame Speaker Pelosi, and President Obama read the following essay by somebody who's been there too; and remember that it is "not yours to give."

The rise of the Welfare State

The Claremont Institute put out an excellent piece that chronicles the rise of big government since 1940.

One of the Office of Management and Budget's (OMB) historical tables tracks annual federal outlays beginning in 1940, using enormous categories ("superfunctions") composed of smaller but still vast "functions." The two main superfunctions, National Defense and Human Resources, have together accounted for at least 61.7% of federal outlays in every year since 1940. The superfunctions that account for the rest of federal outlays are:

• Physical Resources (e.g., Energy, the Environment)
• Net Interest on the National Debt
• Other Functions (e.g., Science, International Affairs, Agriculture, General Government, and the Administration of Justice)

If we group those three final superfunctions as "Everything Else," we can see the changing makeup of the federal budget over the past 67 years in Chart A.

OMB's Human Resources superfunction is made up of the following six functions:

• Education, Training, Employment, and Social Services
• Health (excluding Medicare)
• Medicare
• Income Security (excluding Social Security)
• Social Security
• Veterans' Benefits and Services

Let's leave the final category off the list, since veterans' programs don't figure prominently in the arguments liberals and conservatives have conducted over the size and scope of government. What's left is an imperfect but useable approximation of the welfare state. (The chief imperfections are that we're looking only at federal expenditures, which leaves out state and local welfare state spending; and that the costs imposed by regulations, like the minimum wage laws, don't show up in the federal government's outlays.)

Anybody that says war is bankrupting our nation needs to take a good look at the chart above. Human resource outlays account for approximately 65% of federal outlays, while national defense outlays account for approximately 20%.

The long political advance of liberalism has coincided with the refusal of any prominent liberal politician or writer to specify or even suggest the welfare state's ultimate and sufficient size. Instead, liberals have denounced our shockingly insufficient welfare state every year since the beginning of the Progressive era. When Max Sawicky did so in 2004, real, per capita expenditures on Human Resources were more than twice as large as they had been in 1975.

Yet it would be absurd to argue that the sort of economic insecurities the welfare state exists to alleviate were twice as severe in 2004 as in 1975, or that America had been little better than a Third World country during Gerald Ford's presidency. The percentage of Americans who owned their own homes increased between 1975 and 2004 from 64.4% to 69.1%. Average life expectancy became 5.2 years longer. In 1975 the proportion of Americans aged 25 or older whose educational attainments included the completion of at least four years of high school was 62.5%, and 13.9% had completed at least four years of college. By 2004 the percentages were 85.2% and 27.7%, respectively.

Numerous consumption items that had been luxuries or Research-and-Development daydreams in 1975 were parts of the furniture of American life in 2004, even for millions of Americans with incomes below the median: e.g., color televisions receiving dozens of channels by cable or satellite, home computers accessing the internet, air conditioning in homes and cars, cell phones and microwave ovens. None of these developments give pause to liberals who say that a welfare state that doubles its outlays in the 29 years separating a prosperous era from an even more prosperous era needs to grow dramatically faster.

Nor do liberals ask hard questions about how the persistence of shocking and shameful poverty relates to this inexorable growth of the welfare state. Americans were jarringly reintroduced to their economically vulnerable and socially isolated countrymen by Hurricane Katrina. Ask any hopeful Democrat leaving an Obama rally what we should do about such poverty, and you'll be told that the federal government ought to spend a lot more money to help these people. What you won't be told is that a welfare state that grows 4% a year for six decades and still hasn't eliminated the nation's worst poverty might have problems that more money can't solve. Specifically, you won't hear serious consideration of the possibility that the benefits already dispensed by the welfare state are not so much scandalously inadequate as scandalously misallocated.

Our elected officials never consider doing a comprehensive review of any program, they just keep asking the taxpayer for more money. I am reminded of this every time I go to the polls and there's a bond measure on the ballot for schools, parks, bridges, hospitals etc. that I could have sworn I voted on in the prior election. No matter how much money is asked for, it never seems to be enough.

Representative Dennis Kucinich of Ohio is sponsoring H.R. 808 which would establish a Department of Peace and Nonviolence. There are 70 co sponsors, all democrats.

Department of Peace and Nonviolence Act - Establishes a Department of Peace and Nonviolence, which shall be headed by a Secretary of Peace and Nonviolence appointed by the President with the advice and consent of the Senate. Sets forth the mission of the Department, including to: (1) hold peace as an organizing principle; (2) endeavor to promote justice and democratic principles to expand human rights; and (3) develop policies that promote national and international conflict prevention, nonviolent intervention, mediation, peaceful resolution of conflict, and structured mediation of conflict.

Establishes in the Department the Intergovernmental Advisory Council on Peace and Nonviolence, which shall provide assistance and make recommendations to the Secretary and the President concerning intergovernmental policies relating to peace and nonviolent conflict resolution.

Transfers to the Department the functions, assets, and personnel of various federal agencies.

Establishes a Federal Interagency Committee on Peace and Nonviolence.

Establishes Peace Day. Urges all citizens to observe and celebrate the blessings of peace and endeavor to create peace on such day.

Yay, yet another government program that I will be obliged to pay for if it ever gets passed into law. What I want to know is how one enforces the rules that will surely be established by the Department of Peace and Nonviolence? Will they force people to conform to peace and nonviolence by using peace and nonviolence? It sounds positively Orwellian to me, or rather, sounds like a good job for Obama's Youth Brigade.

The single best idea I can think of for reforming the behemoth that is our government would be to establish a house in Congress whose sole function was to review and repeal laws and programs. For every new bill that was slated to pass, one would have to be repealed; and the bottom performing 5% of all government workers and any irrelevant positions would be eliminated every year.

The One We've Been Waiting For

Gotta love capitalism:





I wonder how long the seller would tolerate me if I went over to the flea market on Hayes and Octavia next Sunday and bought one, then accidentally dropped it, then bought another one, and "oops", dropped it again, etc...?

The Problem with Polls

During the weeks leading up to the Presidential election 4 years ago, my wife and I were on our honeymoon, far away from any television or newspaper. It was a welcome relief from the non-stop jibber-jabber of the television talking heads, the hyper-analysis of political "experts", and the endless polling that seemed to take place after every new sentence that was uttered by either candidate. I especially did not miss the polls. What's the point of a poll anyhow? They are useful as blunt tools for measuring a general trend, but beyond that they can be inaccurate and misleading even when well intentioned, and when ill-intentioned manipulating the data to fit a preconceived result is possible. Besides, the only poll that counts is the one taken at the ballot box on election day.

It has been my suspicion that Obama supporters have been using polls to reinforce the notion that victory is a foregone conclusion for The One. Can't you see? Even the whole world wants Obama to win! Climb on board the Hope and Change Express before it leaves the station without you. You don't want to be on the wrong side of what the polls tell us is the likely outcome of this election, do you? As Getty Lee once sang, "conform or be cast out."

I found this piece over at Zombietime today that describes in great detail what I've felt to be the problem with polling.

Because it all boils down to this: Obama supporters presume that increasing Obama's perceived support will induce informational conformity in the American public. In other words, Obama supporters operate on the assumption that individual McCain supporters or undecided voters will in actuality change their minds about who to vote for if they perceive that a majority of people are supporting Obama. The imagined line of thinking is, "Gee, if so many people like this Obama guy, then my impression of him must be wrong; I trust the group's wisdom more than my own impressions."

I submit that this assumption is a catastrophic blunder. To the extent that there is any conformist behavior being exhibited by McCain supporters and undecided voters, it is much more likely to be normative conformity. In other words, people who are confronted with apparent overwhelming support for Obama may indeed announce that they too support Obama, but do so only in order to avoid ostracism or accusations of racism. Inside, however, they have not changed their minds. On November 4, they will go into that voting booth, and in total privacy and anonymity, they are free to vote for whomever they want, without fear of social condemnation for doing so. And in such a setting, normative conformity disintegrates, because there is no "norm" to conform to when your vote is anonymous.

I find it difficult to get excited about McCain; but I prefer him over Obama. At least McCain does not think I'm rich and therefore feels entitled to take an even larger share of my earnings in order to "spread the wealth around" to the people that would elect him to office, like Obama will. The only things I want from my next president are somebody who will build aircraft carriers, veto pork and play a lot of golf. By those measures, McCain scores 2 out of 3. Obama doesn't pass the sniff test, and the creep-factor is high among his supporters .

There's a Spanish saying that goes something along the lines of, "show me who your friends are and I will show you who you are." Suffice to say, I don't like the crowd that Obama rolls with. The number of hard left people and organizations that have skin in the game for him should be enough to give any rational person pause. Then again, it is obvious that the bulk of his supporers have cast all semblance of rationality aside.

With any luck, the hubris displayed by his supporters and manifested in the pre-election polling process will be enough to force the silent majority into action and spare our nation from at least four years of an Obama administration.

The Twin Frankensteins: Fannie Mae and Freddie Mac

The current liquidity gridlock and extreme volatility washing across all of our debt and equity markets has caused me to do some reflecting on what I think some of the possible causes may have been. Obviously, mortgage lending took a reckless and unsustainable turn. This is what I believe has been the major catalyst for our current state of affairs. (The second catalyst--and one I will not delve into in this piece--was a combination of the repeal of Glass-Steagall Act in 1999, the bursting of the internet bubble in 2000 and the subsequent squeeze on investment bank profit margins which led to their "all-in" approach to highly leveraged, high fee, structured investment vehicles).

In order to understand how this reckless mortgage lending began, a short history lesson is in order. In a word--regulation. Regulation driven by liberals and progressives, not free-market “deregulators” as the aforementioned would have you believe.

Pushed hard by politicians and community activists, the regulators systematically and deliberately altered financially sound lending practices. The mortgage market was humming along just fine when, in the late 1980s, progressives, in their traditional style of fixing things that aren't necessarily broken, decided that it needed to be “fixed.” Their complaint: some ethnic groups got approved for mortgages at lower rates than others.

The shift began in 1989, when Congress amended the Home Mortgage Disclosure Act to force banks to collect racial data on mortgage applicants. By 1991, critics were using that data to paint lenders as racist by showing that minority applicants were approved at far lower rates. In fact, they found a racial disparity only by ignoring relevant data on applicants’ ability to make mortgage payments - such as their assets and credit history.

But the political pressure was intense - with few in politics or media eager to speak the truth. And then, in 1992, came a study from four researchers at the Boston Fed, which seemed to bear out the critics’ contentions.

That study was, in fact, based on quite flawed data - but the authors’ political, media and academic protectors stifled most serious criticism, smearing the reputation of one whistleblower and allowing the Boston authors to avoid answering serious academic challenges to their work. Other studies with different conclusions were ignored.

The very next year, the Boston Fed announced new requirements for banks - rules that have now turned out to be monumentally catastrophic: Adopt “relaxed lending standards” or risk being labeled as racists, and face serious penalties under the Federal Community Reinvestment Act.

But don't take my word for it. Below is a New York Times article--ironically published 9 years ago to the day--that talks about Fannie Mae relaxing their lending standards in order to allow more minorities to realize the American dream of debt beyond their wildest imaginations.

Here's also an 8.5 minute video spliced together from C-SPAN footage that documents how the democrats protected FNM and FRE from proper oversight.

Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES

Published: September 30, 1999

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

The reason that progressive liberals should never be trusted with anybody's money is that they do not realize the simple fact that money is ethnic, color and race blind. If somebody is a good credit risk, they will be able to secure financing no matter the color of their skin. If by chance a bank really is racist, or there's some wild conspiracy among bankers where they collude to discriminate against qualified borrowers based on the color of their skin, you can bet another bank outside the reach of this cabal of colluding bankers would spring up and do a thriving business with all of these potential borrowers. There's really no need to legislate looser lending standards due to perceived discrimination. I do not expect that that argument will ever hold water in the minds of those who see racism or sexism lurking behind every door, especially when their livelihood and power is predicated on maintaining that illusion; regardless of the cost to society in the aggregate.

UPDATE: here is a report from the Independent Institute that details exactly what was the flawed data in the initial Boston Fed report I mentioned above.

Burning Man 2008

Burning Man: Part IV

Juggernaut: n.

1. Something, such as a belief or institution, that elicits blind and destructive devotion or to which people are ruthlessly sacrificed.
2. An overwhelming, advancing force that crushes or seems to crush everything in its path: “It doesn't assume that people need necessarily remain passive when confronted by what appears to be the juggernaut of history” (Christopher Lehmann-Haupt).

It may sound counter intuitive, but not coming across as redundant after four separate Burning Man experiences is hard to do. There's a certain consistency to the chaos out there on the playa; a familiarity that only reveals itself when you are standing there immersed in it. The last thing most people want to do--me included--whilst standing in the middle of the BM experience is to pause and reflect on the moment in order to create a memory catalog for reference when it comes time to write about it later. Pictures are helpful, but they generally do not provide the proper context in which events unfold. Plus people that take too many pictures miss out on a lot. It is hard to participate (Burning Man is all about participation) with a camera glued to your eyeball, which is why all I have to show for all my picture taking efforts is this pathetic collection of grainy photos from a disposable camera. Personally, I find that kind of charming. For anybody that wants to get into a full on Burning Man pictography, google will provide countless links to professional portfolios.

The "Lido" deck was my favorite place to spend the mornings.
Our camp this year was the best ever. Thanks to all who made it possible!

The playa surface was pretty loose this year. That made biking a bit more difficult.

The Tower of Babel: quite possibly the grandest piece of artwork that has ever been erected on the playa.

The Lido Deck: Cazadores and Coors Light served daily.

Neither was able to knock any sense into the other...

From the inside of the 12 story Tower of Babel.

Back in college we would sometimes get an assignment that required "stream of consciousness" writing. This involved putting the pen to the paper and simply writing whatever came to mind, non-stop, for a specified period of time. It is an exercise I've always enjoyed. Sometimes I'll still do it because I think it helps to quiet the mind and get the ideas flowing. I did a short exercise before starting this post, and one word that really resonated this time around was juggernaut.
Burning Man is a juggernaut, but not so much in the Old Testament style of blind devotion and destrictive sacrafice as defined in the first definition. Rather, it is more like the second definition, the one that defines a juggernaut as an overwhelming, advancing force that crushes or seems to crush everything in its path.

That's Burning Man!

A different kind of hope for a change

It is entertaining to watch the Obamaniacs soil their capri pants over John McCain's choice of Sarah Palin as his running mate. So far it seems the most dirt they can dig up on her is that her 17 year old daughter is 5 months pregnant and unmarried. For reasons that are unclear to me this seems to be a hypocracy of epic proportions; I guess because Mrs. Palin preaches the insane notion that abstinence is the best form of birth control. Anybody that was once young will recall that teenage rebellion is based on doing exactly what your parents tell you not to.

If she'd only hold still long enough for an abortion, that would surely pacify the left.

Bastard-ette!

Here is a list of 21 famous illegitimate children including poets, actors, authors, popes, and statesmen whose parents were not married. There's actually only 20 listed on the website, but I added one extra at the end.

21 Illegitimate Children

1. Guillaume Apollinaire. Poet.

2. Sarah Bernhardt. Actress.

3. Giovanni Boccaccio. Author.

4. Cesare Borgia. Catholic cardinal.

5. Aleksandr Borodin. Composer.

6. Pope Clement VII. Spiritual head of the Catholic Church.

7. Leonardo da Vinci. Artist.

8. Josephine de Beauharnais. Napoleon's wife.

9. Frederick Douglass. Abolitionist.

10. Alexandre Dumas, fils. Novelist and playwright.

11. Desiderius Erasmus. Scholar and author.

12. Alexander Hamilton. U.S. Secretary of the Treasury.

13. Jenny Lind. Singer.

14. Marilyn Monroe. Actress.

15. Bernardo O'Higgins. Dictator.

16. Francisco Pizarro. Conqueror of Peru.

17. James Smithson. Chemist and inceptor of Smithsonian Institution.

18. August Strindberg. Playwright.

19. Richard Wagner. Composer.

20. William the Conqueror. First Norman ruler.

21. Jrod. Blogger.

For the record, here are the contrasting views on parenthood that we will be able to vote for this November:

Obama…
“If my daughter makes a mistake, I don’t want her punished with a baby.”

Palin…
“As [our daughter] faces the responsibilities of adulthood, she knows she has our unconditional love and support.”

All of this will ultimately be irrelevant since unwed mother will marry unwed father before the baby is born. At that point, they'll have a 50/50 chance of making it work, just like the rest of us married folk.

Andrew Fastow and Milton Friedman would appreciate this

Harvest of cash: Kern County agency buys public water low, sells high

Delta fish suffered a crippling decline while taxpayers paid nearly $100 million to a Kern County water wholesaler for an environmental protection program that was largely ineffective, a Contra Costa Times investigation has found.

In the process, the wholesaler sold water to the state for as much as $200 an acre-foot and last year bought water from the state for as little as $28 an acre-foot.

The Kern County Water Agency was the biggest buyer in a program that delivered discounted Delta water in a way that now appears to have been particularly harmful to the environment. It also was the biggest seller of water to an ill-fated, publicly-financed state program meant to protect the same environment, the investigation found.

The Kern agency collected $96 million in taxpayer money — nearly all of it borrowed on the bond market — for sales to an "environmental water account" that was shelved after seven years at the end of 2007, records show.

While state water officials took steps to ensure they did not directly repurchase the discount water, the exchanges amounted to "classic arbitrage," where investors exploit price differences in financial instruments, said Barry Nelson, a water policy analyst at the Natural Resources Defense Council.

Andrew Fastow would appreciate this because it is a play right out of Enron's own play book.

Milton Friedman would appreciate it because he demonstrated his knowledge of how government spends money when he said this:

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.

It boggles the mind.

"New " Short Sale Rule

Even if you never pick up the business section of the paper, it has been hard not to notice that the stock market has been particularly volatile lately. Although there are numerous factors involved, most of the volatility has stemmed from the uncertainty surrounding the solvency of our nation's two largest mortgage lenders, Fannie Mae and Freddie Mac, as well as questions surrounding the balance sheets of some of the larger commercial and investment banks with large opaque mortgage portfolios like Wachovia, Washington Mutual, Merrill Lynch and Lehman Brothers.

Just as surely as blood in the water attracts sharks, volatility attracts short sellers. Yesterday the Securities and Exchange Commission announced an emergency order stating that they were going to crack down on naked short selling (i.e. selling shares you have not borrowed, nor have even a reasonable expectation of borrowing) in 19 of some of the most volatile and vulnerable financial stocks. Their plan will go into effect Monday.

Here are the highlights:

No person is permitted to short any of the 19 stocks on the SEC list without first securing one of the following:

1) Have a borrow in hand
2) Have a pre-arranged borrow
3) Have shares in inventory

• There’s culpability at the order entry level, not just the settlement level.
• Pre-borrows will have a fee attached.
• Delivery requirement does not permit any Failure(s) to Deliver (FTD), no penalty for non-compliance is mentioned though.
• Traditionally there has been a 13 day window before a mandatory buy in happens. All trades will have to settle in 3 days.
  
• Exercising a put option that results in a short position is covered by the new rule, auto-exercise of a put option is also covered.
• Assignment of options is not covered
• If you have a pre-borrow (not just a locate) the executing broker can take the short order.
• SEC will exempt market makers, specialists, etc…details not released yet.
• Slated to expire in 10 days but can be extended for 30 days.
• Documentation will be paramount.

It is difficult not to conclude that all of this is SEC political posturing in the face of market turmoil. Naked short selling is already illegal after all, just as it should be. The problem is that there is no enforcement. It seems that a few very heavy fines at the order entry level would go a long way towards stopping the practice since there's no incentive for prime brokers to police beyond their mandate that a short seller must have a "reasonable expectation" of being able to deliver a stock. In fact, there's a disincentive because they collect fees for facilitating a short sale--borrow or not.

The Depository Trust & Clearing Corporation (DTCC), where virtually all stocks go to settle, has in place a system called the continuous net settlement (CNS) system. To oversimplify what it does, each prime broker "nets" out their positions each night which acts to cut down on a lot of back office noise and electronic paper shuffling. If a prime broker acting on behalf of a client fails to deliver a stock because the client did not secure a borrow before selling the stock short, it throws the system out of balance. If this is not rectified over the normal settlement period of 3 days, the stock transaction may be flagged FTD (failure to deliver). After 13 days, the position will theoretically go through a "buy in" where the prime broker goes into the open market and purchases the stock in order to make good on the delivery to the counter party. Since markets are dynamic, the price paid in the open market for the buy in can vary greatly from the reported price on the original transaction, and let's not even consider that the stock you buy in could result in another FTD. To say the least the potential for an ugly and costly situation exists when a FTD is issued. One way to avoid this potentially nasty situation is if all prime brokers on the CNS system collude to not issue FTDs unless under the direst of situations. That is exactly what they do. The whole system is a house of cards supported only by the fact that nobody calls in their chips.

I have to give some credit to the SEC. They're an overworked and under-funded department charged with maintaining the integrity of our markets against the malfeasance of some of the most intelligent, clever and greediest people on the planet.

The SEC did well when they eliminated the plus tick rule. Now it is imperative that they extend these naked short rules to the market as a whole and then actually enforce them. The electronic paper trail is not difficult to follow, and if the chances of getting caught go from close to zero (as they are now) to close to 100%, you'll see the practice stop virtually overnight. Nothing hurts a trader more than getting kicked right square in the pocket book.

Short sellers provide a vital service to financial markets. They are often the first to point out that the "emperor has no clothes" and they provide another source of liquidity when markets get overheated. But the artificial conditions created when one engages in naked short selling needs to be stopped.

I wonder why he came here?

Of all the nations on earth, upon escape from being tortured in an Iranian prison for 9 years, Mr. Batebi chose to come to the United States of America.


From The Economist print edition

An Iranian student protester, sentenced to death for appearing on our cover, has escaped to America

NINE years ago, Ahmad Batebi appeared on the cover of The Economist. He was a 21-year-old student, one of thousands who protested against Iran’s government that summer. He was photographed holding aloft a T-shirt bespattered with the blood of a fellow protester. Soon afterwards, he was arrested and shown our issue of July 17th 1999. “With this”, he was told, “you have signed your death warrant.”

During his interrogation he was blindfolded and beaten with cables until he passed out. His captors rubbed salt into his wounds to wake him up, so they could torture him more. They held his head in a drain full of sewage until he inhaled it. He recalls yearning for a swift death to end the pain. He was played recordings of what he was told was his mother being tortured. His captors wanted him to betray his fellow students, to implicate them in various crimes and to say on television that the blood on that T-shirt was only red paint. He says he refused.

He was sentenced to death for “creating street unrest”. But after a global outcry, the sentence was commuted to 15 years in jail. He speculates that his high profile made it hard to kill him without attracting negative publicity. For two years, he was kept in solitary confinement, in a cell that was little more than a toilet hole with a wooden board on top. He was tortured constantly. Only when he was allowed to mingle with other prisoners again did he begin to overcome his despair.

He suffered a partial stroke that left the right side of his body without feeling. He needed medical attention. The regime did not want to be blamed for him dying behind bars, he says, so he was allowed out for treatment. Three months ago, on the day of the Persian new year, he escaped into Iraq. On June 24th he arrived in America.

He spoke to The Economist on July 7th. Looking at the picture that sparked his ordeal, he says that another man in his place might be angry, but he is not. Mr Batebi is a photographer himself. He says he understands what journalism involves. Had we not published the picture, he says, another paper might have. Looking at the same picture, his lawyer, interpreter and friend Lily Mazahery says she is close to tears: in it, the young Mr Batebi’s pale arms are as yet unscarred by torture.

The protests Mr Batebi took part in nine years ago frightened Iran’s rulers. The students were angry about censorship, the persecution of intellectuals and the thugs who beat up any student overheard disparaging the regime. Mr Batebi thinks Iran could well turn solidly democratic some day. In neighbouring states, religious extremism is popular. In Iran, he says, the government is religiously extreme, but the people are not.

He is cagey about how exactly he escaped. But he says he used a cellphone camera to record virtually every step of his journey, and will soon go public with the pictures and his commentary. Meanwhile, he seems to be enjoying America. He praises the way “people have the opportunity to become who they want to be”. Shortly after he arrived, he posted a picture of himself in front of the Capitol on his Farsi-language blog, with the caption: “Your hands will never touch me again.”

“People have the opportunity to become who they want to be.” It's what the American Dream all comes down to. Sometimes it takes an outsider to comment on the obvious, something so obvious it is taken for granted by most of us.

“The obscure

we see eventually.

The completely obvious.

it seems

takes longer”.

– Edward R. Murrow

Racism in Brazil

When I think of Brazil, the first three things that come to mind are passionate, scantily-clad, soccer fans, that Chiquita banana lady, and of course Charo. As far as I'm concerned that's clever brand management on Brazil's part, because upon further reflection the next three things that come to mind are institutionalized corruption, favelas and that depressing movie City of God. So on balance, Brazil appears to be just another BRIC nation taking the good with the bad while trying to navigate their way to a successful future.

But maybe all is not what meets the eye:

Brazilian Secret 93 Million Don't Want to Talk About Is Racism

Brazilians pride themselves on their multicultural society, home to the largest black population outside of Africa. Their food, music and dance -- their feijoada, the national dish of black beans stewed with pork and beef, and their rhythmic samba and bossa nova -- are a mishmash, the legacy of more than 200 indigenous peoples, Portuguese colonists and about 4.5 million Africans who were brought to the country during more than 350 years of slavery. Interracial marriages are common.

So pervasive is the perception that Brazil is a paragon of racial harmony and equality that it makes the discussion of discrimination all but impossible, says Carlos Santana, a Workers' Party legislator who represents Rio de Janeiro and heads the National Congress's Parliamentary Group to Promote Racial Equality.

``In Brazil, we can talk about anything but race,'' Santana says. ``The myth of racial democracy created a taboo.''

Some people outside of government use harsher terms.

``We have the strongest apartheid ever because people deny racism exists,'' says Humberto Adami, head of the nonprofit Institute for Racial and Environmental Laws in Rio de Janeiro. ``It's very hard to combat what is taken as nonexistent.''

Statistics paint a picture of a nation tainted by the legacy of unequal opportunities. One hundred twenty years after becoming the last country in the Americas to abolish slavery, Brazil remains divided by color. People of African descent are ``a large, impoverished and discriminated-against population,'' the Brazilian embassy in Washington said in a press release posted on its Web site in April.

Blacks -- defined by the government and nongovernmental organizations as people who describe themselves as either ``preta'' (black) or mixed-race ``parda'' (brown) -- make up almost half of the population. Of the nation's more than 187 million people, 92.7 million are black and 93.1 million are white; Asians, Indians and those who haven't declared a race make up the rest. On average, they earn little more than half as much as whites, 578.2 reais ($361) a month compared with 1,087.1 reais, according to a report based on 2006 data by IPEA Institute for Applied Economic Research, a government group in Brasilia.

(snip) The whole article is worth a read.

So often here in the United States we're told by the social justice crowd that our nation remains mired in an antebellum mindset, but I do not believe that to be true for a second. While racism surely exists in the hearts of a percentage of Americans--Americans of all colors by the way--as a nation we're light years ahead of places like Brazil where the legacy of slavery and current race relations have simply been ignored. If the social justice crowd acknowledged that they'd be out of a job; for their livelihood depends on the perpetuation of the myth. Second of all, it would seem that they should be in a lather over this. They usually get worked up over far less. Maybe they're not because Lula De Silva is a leftist himself, though admittedly he seems to be doing a better job at governing than most of his peers.

Upon further reflection, this is the Brazil of my mind's eye: Brigitte Bardot in the Girl From Ipanema