Category: regulation

OK, this Is Corruption, and if it is Not Criminal, it Should Be

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Dean Baker notices the following bit of self-admitted corruption in a New York Times article on former Clinton Treasury Secretary Robert Rubin:

Mr. Rubin encouraged Goldman to move into more treacherous markets like proprietary trading and commodities trading. Even so, he now says he was always concerned about the dangers posed by risky futures and derivatives trades, having seen how the pell-mell use of futures contracts exacerbated the 1987 stock market crash.

Shortly before leaving Goldman to head up President Clinton’s National Economic Council, Mr. Rubin says, he met with Richard B. Fisher, the chairman of Morgan Stanley, to discuss the idea of imposing stricter margin requirements on futures trading. Mr. Rubin says the idea died after the Chicago Board of Trade told him “we will make sure Goldman Sachs never trades another future on the C.B.O.T. if this went ahead.”

Bob Rubin just said that he changed his recommendations policy for the benefit of his company in has capacity as head of the National Economic Council. This is completely corrupt, and he is freely admitting it.

Where is one of Bush’s DoJ political vendettas when you need them?

Level 3 Asset Bingo

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Here is an interesting commentary on the rather dubious nature of some of the assets on wall street.

Here’s Rule No. 1 from Wall Street’s public-relations playbook: If the company you run has big losses on hard-to-value assets, scream your head off about the accounting rules.

And what if the squishy values result in huge gains instead, as they have in the not-so-distant past? Rule No. 2: Stay mum about it for as long as the rules allow.

Basically he is noting that the various brokerages are booking a lot of profits on level 3 assets, but level three assets have no regular market to independently determine value, so we are back to smoke and mirror.

Go read, if you dare.

Must Read On Bond Ratings and Mortgage Crisis

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Roger Lowenstein is a very concise analysis of just how what Atrios and I call the “Big Sh%$pile”* got the high ratings from Moodys necessary for the debt to be resold.

I think that it explains the process in a clear and concise way, though I think that he is far too easy on Moodys.

The process involved is inherently corrupt, since the issuers get to choose their ratings agency.

I would argue that much of this was covered in “Best PowerPoint Ever“, which makes it rather more clear just how corrupt this game was.

*Only the distinguished gentleman from Philadelphia does not mask out the last two letters of the word “Sh%$”

Signs of Sanity Appearing with Regard to the GSEs

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It appears that both the Treasury Department and Congress are bedcoming concerned about the increasing exposure of Fannie Mae and Freddie Mac to a potential meltdown, and are looking at increased regulations to prevent this.

Considering the fact that they are the 2nd and 3rd largest borrowers in the world, after the US government, the effects of their needing a bailout are enormous.

On the other side of this are people who want to bolster the housing market, and tighter GSE regulation goes in the other direction, and the fact that they have been aggressively lobbying Congress for years.

Hopefully, this time the bears win, or we may see a trillion+ dollar bailout.

Food Crisis Update

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I guess the part of the story we expect is this:

The rising prices are “threatening to plunge more than 100 million people on every continent into hunger,” Josette Sheeran, executive director of the United Nations’ World Food Program, said on the agency’s Web site Tuesday.

Foreign starvation, hand wringing over biofuels, etc.

Nothing to worry about here, we’re Americans…right???

WRONG

We are seeing severe shortages of rye flour, with no domestic supplies being available around July, and there are currently only 27 days wheat supply.

Additionally, we are seeing panic buying, which is forcing big box retailers to restrict bulk purchases of rice, so that they don’t run out.

We already have hunger in the US, just look at our overburdened food pantries, and it is going to get worse.

Economics Update

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Today, since they’ve been off the update for a while, I’d like to welcome back a monoliner insurer, specifically AMBAC which lost even more money than forecast, $3.6 billion.

However, they are looking to turning things around. Specifically, they have their “lawyers and forensic experts”looking at 17 big money losing contracts, targeting (it appears) Bear Stearns and First Franklin. The max losses were originally seen at 10-12%, and now they are staring down the barrels of over 80%, so they may have a good case.

We’ll be seeing a lot more of this, and insurers won’t be paying out in the near term without this sort of teardown of the contract and investment looking for evidence of deception of some sort.

In related news, bondholders recovery on bankruptcy has plunged, with B+ bonds going from around 42¢ on the dollar to less than 10¢.

This is not a liquidity crisis. It is an insolvency crisis.

The Fed, however, is still treating this as a liquidity crisis, because there is no cure for an insolvency crisis but the dissolution of the entities involved, and it will auction another $75 billion in Treasuries in exchange for pieces of the big sh%$pile.

Speaking of the sh%$pile Moody’s just downgraded 1,923 residential mortgage backed securities in the past to days.

It’s likely to get worse. Robert Shiller, who is one of the creators of Case-Shiller housing index, believes that house prices will fall more than 30% from their high, and likens this to the slump associated with the Great Depression.

In terms of the more general economy, we have UPS saying that it’s seeing a dramatic slowing in the U.S. economy, and in its business, and Target’s write offs on its credit card sales are soaring. They are at an annualized rate of 8.1% for March (ouch) up from a rate of 6.8% in February (ouch x2).

In currency, we already know about the Dollar cracking the $1.60 barrier, but now we are seeing a price hike driven by this, with Airbus raising prices on its planes.

We’re going to see a lot more currency driven inflation.

Thielert’s Troubles: Criminal Investigations, and a Cash Crunch

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There are maybe one of two of you out there who recall a couple of posts (here and here) just under a year ago about Thielert, a company that seemed to be on the verge of “great things” with its line of turbocharged diesel commercial aircraft engines.

While the tech might still be first rate, and it does sound so, the company appears to be in serious financial, and possibly legal, trouble.

It appears that the company may be very near insolvency, either through booking non existent orders to puffing up the balance sheet, or through customers who are seriously late in making payments for products that are already shipped.

My money is on the second, as two (perhaps all) of the management board have been dismissed by the board of directors.

It’s a pity. It’s nice well developed tech.

Bush and His Evil Minions™ Break the Law….Again

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Why am I not surprised.

This time though, it wasn’t to spy on political opponents find terrorists, and it wasn’t to torture children gain important intelligence.

This time, it was to make sure that children did not get medical care, because the insurance companies contribute to Republicans.

The Bush administration’s limits on expansions of the State Children’s Health Insurance Program (SCHIP) are unlawful, according to Congress’s investigative arm.

The Centers for Medicare and Medicaid Services (CMS) unlawfully bypassed congressional review when it issued a directive to states in August alerting them that federal authorities would seek to restrict raising the income eligibility level for the program, the Government Accountability Office (GAO) concluded in a report issued Thursday.

**Sigh**

Why We Are Screwed

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I’m not sure that there is a real “vision” for my blog, except to provide for the 5-6% of personal posts that I want to put in my eponymous newsletter.

That being said, I think that my most consistent vision, after being a fighting liberal, is that I am an economic bear, and a pro-regulation one at that.

Martin Hutchinson, writing in the Asia Times, manages to distill much of what is going on right now. He calls it The degradation of accounting.

Basically, it comes down to the fact that any number of people have a vested interest, at least in the short term, of not using accounting that reflects the situation out in meat space.

THE BEAR’S LAIR
The degradation of accounting
By Martin Hutchinson

Fair value accounting, by which debt and equity securities on a company’s balance sheet are “marked to market” – written up or down to their market price – has been hyped by accountants and regulators as the epitome of modern financial reporting, enabling investors to gain a completely true picture of their investment’s financial position.

Indeed, Gerald White of the Chartered Financial Analyst Institute, speaking at an American Enterprise Institute conference on Tuesday, believes it should be applied to all items on the balance sheet, not just financial instruments. There is just one problem: in the turbulence of the past nine months, it has completely failed to
work and has indeed shown itself to be pro-cyclical, encouraging economically foolish behavior in both up and down cycles.

He notes that this is a change from when he was in B-School in the 1970s, when frequently assets such as real estate were on the balance sheet at a value close to what they were in the 1920s.

While having undervalued assets on a balance sheet is an issue in the old system, it’s also clear that the current system of accounting is less accurate, and it is less accurate in a potentially catestrophic way:

The new accounting standard FAS157, propounded in September 2006 and coming into effect for fiscal years beginning in 2008, codifies this trend but does not materially alter it. Its most startling feature for a layman is that it allows companies to mark-to-market assets for which there is no market. Financial assets are divided into three “levels” according to their degree of marketability. Level 1 assets are those for which a ready market exists, Level 2 assets are those for which a market exists for comparable securities and Level 3 assets are those for which no market exists, which are to be valued by use of mathematical models.

(emphasis mine)

He makes the note that this is why we have an insolvency crisis, not just a liquidity crisis.

It will take 5 minutes to read, and you should send it to every financial regulator you know.

Really, Really, Really Bad Ideas: Carbon Trading Edition

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Unfortunately, it’s hit the big time, with Fortune Magazine declaring that it has hit “the big time”, so it appears that much like new math, new Coke, sequels the Rocky, mortgage backed securities, and Astroturf, we will be seeing a lot of this.

The idea is that the government issues a limited number of carbon credits, basically permission to emit a certain amount of carbon dioxide into the atmosphere, and since there are fewer credits issued than would be actually needed, a “robust market” would be established where, because they can make money on these markets, carbon emitters would, through the magic of the profit motive, cut emissions.

You see, this market, with its highly compensated traders, and the complex investment vehicles that come with them, constitutes an unparalleled opportunity to create innovation.

Well, that’s the first problem. That’s what Alan Greenspan said about mortgage backed securities and credit default swaps, but it’s supposed to work just fine with combating global warming.

The second problem is that any regime for this is going to be difficult. You have to decide how many credits are issued, and who issues them, and how to regulate the market so you don’t have a lone trader bankrupting a multi-billion dollar company.

The most basic problem however, is that this is a tax on carbon.

Because your goal is to reduce carbon emissions, the number of credits issued must necessarily be lower than what the market really wants, at least a bit, which costs every business participating in it.

Only this tax goes to the polluters, at least the ones who manage to improve efficiencies or game the system by getting excess credits, and to the Bear Stearns types, who would leverage one of my farts if they could find a way.

If you are going to put a tax on pollution, then just tax that pollution, and let the government collect the monies, as opposed to the polluters and their parasites, and spend it on something other than multi million dollar executive compensation.

Did I Say $45 Trillion? Me bad. $62 Trillion

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Yep, the numbers for Credit Default Swaps are far higher than I had previously noted. It’s $62.2 Trillion, up from $34.5 trillion a year ago, and up from my earlier number of $45 trillion.

By way of reference, world GDP is listed at $65.82 Trillion.

So we have something near the entire economic capacity of the Earth in complex instruments which may be worth nothing, and no one really knows what they are worth.

Paul Calello, head of investment banking at Credit Suisse, will tell the Isda meeting that the banking sector must accept that regulators will become more involved in the CDS market and other areas of derivatives in the future.

In particular, bankers and other financiers must now work with regulators to make the infrastructure more robust, since the crisis has exposed some serious potential weaknesses.

“There will be new regulation and there should be; voluntary efforts are not enough,” Mr Callelo will say. “We cannot expect ‘business as usual’.”

But Alan “Bubbles” Greenspan said that, “The use of a growing array of derivatives and the related application of more sophisticated methods for measuring and managing risk are key factors underpinning the enhanced resilience of our largest financial intermediaries.”

And as we all know Alan “Bubbles” Greenspan, acolyte of Ayn Rand, and poster child for sex without partners, is never wrong.*

*I know cheap shot, fish in a barrel. But I’m a cheap shot, fish in a barrel kind of guy.

Credit Default Swaps: Another Primer

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In 2002, Greenspan discussing the CDS said that, “The use of a growing array of derivatives and the related application of more sophisticated methods for measuring and managing risk are key factors underpinning the enhanced resilience of our largest financial intermediaries.

Now we have $45 TRILLION of potential exposure out there.

Bloomberg has a pretty good primer here, and it’s fairly entertaining, which goes along with the fact that “Frankenstein’s Monster” is in the title.

More OOXML

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It appears that ISO is now working on “harmonizing” OOXML and ODF, and the Norwegian protest continues, though switching that vote would not be decisive.

However, there does appear to be an EU anti-trust investigation regarding their lobbying, (Note: the link is two months old, and so might be mooted by the vote).

My guess is that the fat lady has sung.

My other guess is that if OOXML were to become a real standard, Microsoft Office would not be certified as complying, if the experience of Internet Explorer is any guide.

Economics Update

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Busy day in real estate, we have:

Of course with any of these situations, you will inevitably find the highly placed moron, and today’s is Morgan Stanley CEO John Mack, who is saying that he thinks that the credit crunch is, “in the final innings”. If you have money in Morgan, get it out now.

Why am I so certain about this? Because the Fed auctioned another $50 billion banks in their “crap for cash” program, which has now “auctioned” $310 billion to banks for their worthless mortgage paper.

If that doesn’t convince you, how about GMAC looking down the barrel of a ratings cut, which means that people who might want to buy a car will find it even more difficult to get a loan to do so.

Of course, Mack thinks that things are looking up because private equity firm TPG just put $7 billion into WaMu, which implies to him that private equity is on its way to a comeback.

Nope….Dead cat bounce. WaMu’s only virtue is that it’s better, and only a bit better, than Countrywide.

For an idea of how badly things are going, note that First Marblehead is at risk of imploding. Note that FM is a student-loan services provider. It should basically be impossible for them to lose money.

This is federally guaranteed, and cannot be discharged through bankruptcy, but given that their insurer, The Education Resources Institute Inc., just filed for bankruptcy, all bets are off.

Signs of the Apocalypse: The WaPo Editorial Board Gets One Right

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They label the Senate foreclosure bill a, “A Pro-Foreclosure Bill“:

We refer to a $7,000 tax credit (payable over two years) to anyone who purchases a foreclosed home within a year of the proposal’s enactment. Supposedly, this would help clear the nation’s swollen inventory of repossessed properties, thus propping up home prices more generally. Here’s the catch. For lenders as well as borrowers, foreclosure is an expensive hassle. If at all possible, most banks would rather avoid repossessing a house, which they must then try to resell. But, by making it cheaper to buy a foreclosed house than a comparable unforeclosed property, the tax credit makes it more feasible to sell one. The cost and hassle — for the lender — of foreclosure go down, and the benefits go up. Other things being equal, lenders would be that much more likely to foreclose — rather than to help homeowners stay in their houses on modified terms.

The record of the Washington Post editorial board lately has been so bad that I’ve come to wonder if Richard Nixon was innocent.

H/T Dean Baker

Fannie Mae Tightens Guidelines Again

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Fannie Mae is tightening lending standards (here and here).

This follows regulators allowing the borrow and lend more extensively, in an attempt to bolster the housing market.

Upper management at FNM gets it. That the market is completely fscked, and if they don’t tighten up, they will get swamped.

Changes to their standards for buying loans:

  • Minimum credit score of 580.
  • It won’t buy, “Delinquent loans that have fallen 60 or more days past due in the last year”.
  • It won’t buy loans to borrowers who have been foreclosed on in the past 5 years (used to be 4 years).

Calculated risk has some more details, and there are some additional standards which appear directed towards dissuading people from walking away from properties where they are under water (aka jingle mail).