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.