Dystopian Paradox

The Taxpayerfornicator Paulson was CEO of Goldman Sachs when its representative along with those of four other investment banks met with five members of the SEC in April 2004 to discuss exemption of the banks’ brokerage units from an old regulation limiting the debt they could take on. The SEC gave it a go at the short meeting.

That move freed up billions of dollars held as a cushion against losses. The banks used the funds to buy mortgage backed securities, credit derivatives and other esoteric contracts that the Europeans were making big bucks on.

The SEC meeting took 55 minutes. Two years later, the Taxpayerfornicator resigned Goldman Sachs to become treasury secretary. A mere four and a half years after the fateful meeting, the major Wall Street players crumbled. The New York Times ran an in depth article Thursday on event.

Now that the bailout bill is passed, Congress should create an ad hoc committee as soon as it reconvenes to investigate the Wall Street collapse and the competency of the SEC and its members. The committee must be as politically neutral as possible. Paulson’s obvious conflict of interest is more than sufficient for the committee recommend and Congress to demand his resignation.

The House overwhelmingly passed the bailout bill. The dollar is down a little today, gold is down, oil is down, and the stock markets have fallen back from earlier gains.

I guess investors’ prevailing strategy is to get into US government paper. Apparently most investors don’t see the bailout as the final solution. Investors are taking a look and see attitude.

Next week and the weeks after that should continue to provide us with this most dramatic reality show. One in which all of us are involuntary players.

The underpinnings of the financial world are extremely complicated. It’s as complicated as maybe the space shuttle. The difference is the space shuttle comes with all kinds of manuals on how to fix every system in the thing. No such manual exists for the world financial system.

Greed drove the complexity. Make things so complex that auditors don’t know how to audit and you get by with a lot of book value that has no value. Moreover, the big accounting firms have been complicit in faulty reporting of their clients’ financial condition (Enron and Arthur Andersen).

Billie Sol Estes’s scheme was simple. Get loans on fertilizer tanks that don’t exist. Maybe buy one or two and move them around to show the banker the same tank at several locations.

The idea is the same with the big-time financial scam. Dream up contracts (derivatives) that reference any financial parameter and assign a functionally arbitrary notational value to it. Then sell or use it for collateral at its notational value.

As collateral leveraged 12 to 1 based on notational value, the true leverage would be 60 to 1 if the fair market value is 20 percent of notational. Or it would be infinity if the market value is zero.

I used the term “functionally arbitrary” to describe notational value. Math types create algorithms to arrive at the notational value of a lot of the $1 quadrillion of derivatives sitting on computers around the world These algorithms include assumptions that may not be valid in the future even if they were valid taking into account market conditions at the time they were created.

The subconscious mindset of the people creating the algorithms subjectively produces code that will justify the notational value. They use assumptions that are not realistic. I got caught in this trap a few years back by making projections based on historical data that I would have concluded were not representative of the future if only I had been honest with myself.

So now there’s all kinds of derivative contracts sitting on the books of banks at unrealistically high values. If you think this fact is not true, please read Section 132 of both the Senate and House versions of the Emergency Economic Stabilization Act (EESA). It gives the SEC the power to suspend mark to market valuation of just about any type of asset held by a financial institution, including derivatives.

Which brings us to LIBOR. It’s financial jargon for London InterBank Offered Rate. This standard came about in 1984 in part because banks were increasingly trading in certain types of derivatives. The increase in the LIBOR rate in this current crisis is an indicator of the unwillingness of banks to make loans to each other.

Gold bug Jim Sinclair today posted a warning that if the LIBOR rate doesn’t drop sharply, we’re looking in the near future at a Weimar-Republic-like world wide financial crisis. If I were a bank that had lending power, I’d want to know the true financial condition of any other bank I might make a loan to. If a prospect is holding a bunch of derivatives, I would have to assume they are worthless in making a decision to make the loan.

So here comes EESE and the US treasury buys bad assets from a bank, but at what value? Mark to the market or at notational value? If the House passes EESA, the treasury must pay a lot more than five percent of the notational value for bad assets of a bank in trouble, in order to give a sound bank an incentive to loan money to the troubled bank.

This evening on PBS’s Nightly News, three university economic profs (U of Chicago, George Washington and Harvard) were relating their views on the merits of EESA. The U of Chicago guy was against it. The other two were for it only because the fed taking action would bolster confidence on main street, and maybe Wall Street. That’s not a strong endorsement for EESA itself solving the problem.

Last night, Warren Buffett on Charley Rose made it clear that he’s all for its passage. George Soros is not.

We’re certainly in for a ride. It’s going to last a lot longer and cost a lot more than the roller coaster at Six Flags.

The Financial Accounting Standards Board issued a release yesterday setting out guidlines about how to value securities. Where have they been since 1933? You can read the whole thing here.

The release starts out with an introductory paragraph as follows:

“The current environment has made questions surrounding the determination of fair value particularly challenging for preparers, auditors, and users of financial information. The SEC’s Office of the Chief Accountant and the staff of the FASB have been engaged in extensive consultations with participants in the capital markets, including investors, preparers, and auditors, on the application of fair value measurements in the current market environment.”

So what rules and guidelines have the CPAs been using for the last 20 years? Seems to me we need to overhaul everything about our financial system, bar CPAs from doing audits and come up with a regulator scheme overseen by god to assure a legitamate reporting of financial information. Only problem is, the god might the god of Wall Street or the neocons. They most likely share the same god.

Maybe we need a new god. A god in which we can trust. We can’t trust the one referenced on our currency we are suppose to trust because the currency was issued by our government and we can’t trust our government.

The House version of the Emergency Economic Stabilization Act (EESA) of 2008 contains the following provision, and I assume it will be in the Senate bill.

8 SEC. 132. AUTHORITY TO SUSPEND MARK-TO-MARKET ACCOUNTING.

(a) AUTHORITY.—The Securities and Exchange Commission shall have the authority under the securities laws (as such term is defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) to suspend, by rule, regulation, or order, the application of Statement Number 157 of the Financial Accounting Standards Board for any issuer (as such term is defined in section 3(a)(8) of such Act) or with respect to any class or category of transaction if the Commission determines that is necessary or appropriate in the public interest and is consistent with the protection of investors.

The 1934 SEC act defines “issuer” as follows”

3(a)(8). The term ‘‘issuer’’ means any person who issues or proposes to issue any security; except that with respect to certificates of deposit for securities, voting-trust certificates, or collateral-trust certificates, or with respect to certificates of interest or shares in an incorporated investment trust not having a board of directors or of the fixed, restricted management, or unit type, the term ‘‘issuer’’ means the person or persons performing the acts and assuming the duties of depositor or manager pursuant to the provisions of the trust or other agreement or instrument under which such securities are issued; and except that with respect to equipment-trust certificates or like securities, the term ‘‘issuer’’ means the person by whom the
equipment or property is, or is to be, used.

The implications of this provision in the EESA if passed is that the SEC can allow an issuer of a security to report the value at an amount less than its fair market value.

This definition of “issuer” appears to be broad enough for a party to a credit default swap, for example, to be an issuer.

Moreover, the SEC can allowl derivatives that meet the definition of a security under the 1934 SEC Act to be carried at values higher than mark to the market. Maybe someone can explain to me how anyone can have confidence in a financial system where the financial statements of the institutions carry assets higher than fair market value. The SEC will have discretion to allow a financial institution to lie about its net worth or lack thereof.

Also, I think Congress needs to reveal now how much, if any, off-the-books obligations financial institutions around the world are carrying. We by definition cannot make an informed decision if we have not been informed.

Assuming EESA passes and has this provision, we taxpayers can put pressure on the SEC to require financial institutions and everyone else to (1) carry assets no higher than market, and (2) outlaw off-the-book treatment of liabilities associated with derivatives and other contractual obligations.

Note: The Senate version has exactly the language in it as does the House bill giving the SEC discretion to suspend mark to the market. This thing smells like Enron but with the blessing of Congress plus we’re talking about trashing everybody and not just Enron shareholders and employees. And I guess with the blessing of Bush too if he signs it. However, he can’t be held accountable given his mental impairment.

While we’ve got problems, we’re not alone. Last week the Dutch government partially nationalized Fortis, a top twenty Euro financial with a market cap of what was $40 billion. Yesterday, the Dutch helped bailout another financial.

The Euro stock indices have dropped 40 percent in the last year while the S&P 500 is down a mere 25 percent. I guess it makes me feel a little better to know that all Western democracies are experiencing severe financial challenges. The blame doesn’t reside solely with Wall Street. Nobody forced the rest of the world to buy derivatives. My guess is the Europeans have created some of their own.

The Senate takes up the bailout bill today. That should be fun. Bush is still haranguing Congress to vote for the bailout, but what he says gets trapped in everybody’s noise filters.

The Dow is up a couple hundred points. The House Republicans can use that as evidence that their libertarian ideology makes sense in a complex global economy.

Greed makes a home in all markets. Unregulated greed results in what we’re presently experiencing.

The problem with idealogues is that compromise is not in their vocabulary. It’s my way or the highway. Bush was that way until the last couple of days when he found out he’s politically illiquid. Now he needs an infusion of political capital, but since he is now a lame duck, not just a lame president, no one will lend him any.

So we’re stuck with the right wing doing what all idealogues do. Do bad things in the name of what they see as good. So I guess they’ll take everyone down including themselves rather than compromising and being a part of the solution.

The neocons turned Bush after 9/11. He bought in to their ideology of killing people to spread democracy. Look where that got us and him. The neocons are suppose to be intellectuals. I doubt the House Republicans are intellectuals. But they are idealogues and will probably fight new legislation regulating the financial industry. They don’t want government interefering in the free market. You can see where that got us.

But guess who pulled the plug on the banking rules put in place in the ’30s. Bill Clinton. He did that in 1999. Clinton wasn’t and idealogue like the neocons or the right wing Congressional Republicans. Maybe he got a little on the side for his signature. Clinton was always trying to get some on the side. Still is.

It’s easy to become cynical about the quality or lack thereof of our elected lawmakers and executives and in Texas judges. However, we put them there. So we are the enemy. Not they.

I find it very easy to be cynical about the state of our society because the quality of our elected lawmakers and executives and in Texas judges are a reflection of our values. Our predominant values spring from ideologies. I’m right and your wrong and I’ll prove it to you even if I kill both of us doing it. Games of mentally ill children.

I hit goldbug Jim Sinclair’s blog this morning and he had some YouTube video posted along with a comment from the person who sent it to him.

There are lots of people who should be prosecuted for fraud. I can’t wait to get hold of the text of the bill if the House passes it and see if it let those at fault off the hook. There are texts of the discussion draft on the web. The bill is 110 pages long. I searched a pdf draft for “criminal” and “prosecution” and “penal” and got no hits.

If you want to look at the YouTube videos on Sinclair’s site, you’ll have to scroll down a ways on his homepage because he has subsequent posts.

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Sunday, September 28, 2008

Protests on Wall Street - what the news media isn’t showing you

Protests took place on Wall St. to protest the bail out plan - and the mainstream news media didn’t even mention it

Anyway, in case you haven’t seen it, I have collected a bunch of video from the protests on Wall Street (Sept. 25) and posted them below. Have a look at what the news media DIDN’T show you! Warning: some of the protest videos . . . (More)

Bailouts don’t plug leaks. They just empty the boat of water. So we need a plumber to stop the leaks. The plumber is Congress and the plumbing will be sensible banking regulations. Reagan style Republican idealogues, with Clinton’s approval in 1999, ripped-out the old plumbing put in place in the 1930s.

However, a new fix is only prospective. There’s derivatives sitting on the books around the world with a notational value of $1 quadrillion. These derivatives are contractual in nature and don’t trade on any exchange and therefor are inherently illiquid at their notational values. More implosions to come.

An article at Telegraph.co.uk sets out a realistic assessment of what we’re in for. The bailout will not save the world from the severest economic recession (depression?) since the 1930s. With luck, the economy will recover in a decade.

Because of all the US currency being created in the bailouts (EuroUnion rules prohibit bailouts) and the deficits that will continue if for no other reason than tax breaks to the wealthy and funding two wars, we most likely will see significant increases in costs for necessities while incomes of middle income families continue to stagnate. Who knows what the unemployement rate will go to.

Trickle down economics (which means the guys above you get to take a leak on your head any time they want to) perpetuated by Bush and combined with revoking regulations that had prevented greed from taking control of the financial markets, put us where we are.

The bad guys in Congress are those who want to continue deregulation. No interference in commerce is an ideal, a fantasy that when put in place results in catastrophes like the one we’re presently experiencing.

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US Economy: Even Hank Paulson’s bail-out plan
cannot detox global banking

Can the rescue package really halt our slide into a new Depression?

By Ambrose Evans-Pritchard
Last Updated: 3:30AM BST 27 Sep 2008

Even if Congress backs the Paulson bail-out, the $700 billion blast cannot save the US, Britain or the world from the deepest economic slump since the Thirties. If Congress balks, God help us. The credit system is suffering a heart attack. Inter-bank lending is paralysed. Funds are accepting zero interest on US Treasury notes for the first time since Pearl Harbour, because no bank account is safe.

Wherever you look – dollar, euro, sterling Libor (the rate at which banks lend to each other), or spreads on credit derivatives – the stress has reached breaking point. If borrowers cannot roll over the three-month loans that are the lifeblood . . . (more)

The national polls through yesterday show Obama ahead which is some indication that Obama won the debate. Also, CNN’s viewer’s poll put Obama as the clear winner.

Maybe Obama’s bounce comes from Couric’s interview of Palin last week. Most all the press, including blog posts and comments, pretty much trashed Palin’s performance.

Could be that McCain’s grandstanding hurt him.

It’s unbelievable how many significant events in the last seven days could have gone one way or the other for McCain, except for Palin’s gig with Couric.

One thing that may help Obama was his answer to the first question of the debate. That question was his position on the Bailout. Obama responded that it should be conditioned on protecting the taxpayers, no excessive executive compensation, bipartisan oversight and helping homeowners. The agreement outlined this morning contain those conditions.

The Thursday debate between Palin and Biden should be fun. One commentator I read noted that Biden’s style tends to be condescending. Biden’s implementing that style against a younger woman won’t go over well with viewers. Sexism continues to support double standards, some of which favor women.

But if she comes at Biden like a bulldog wearing lipstick and a lady librarian’s glasses, then she’ll be fair game. Biden’s a moose that will shoot back.