Posts Tagged ‘joblessness’

No good arguing for hyperinflation at this rate…

December 9, 2009

Istithmar (Dubai World) liquidates Union Square W Hotel for $2Million. Original purchase price was $282Million in 2006

Japan revises GDP growth (lower)

CaLPERS fund real estate holdings drop in value by 48% year on year,0,7319259.story

All the above circumstances and many more around the world mean a re-evaluation of asset prices lower. Lower asset values trigger cost cutting thus feeding unemployment. Rising unemployment causes rising social costs. However, just as social costs are rising, lower asset prices and rising unemployment result in diminished tax revenue.

So, we are at war and we are expanding the war. We are bailing out banks and companies to the tune of dozens of Trillion Dollars. Due to declining asset prices various layers of derivatives will come due (may I remind you that outstanding financial obligations globally stand at $500Trillion and that global GDP is somewhere in the neighborhood of $50Trillion and dropping like a rock) and through it all, our governments tax revenue is disappearing…

… and if that were not enough, our governments have no dosh stashed away anywhere. In fact, funds such as the US pension fund that in accounting terms is in surplus, in real terms the money has been spent. It is not there physically. Meaning that the US government has already borrowed and spent the sums you  thought you had saved. And may I remind you that this type of borrowing does not show up as “debt” on the accounts of the Federal State.

Inflation has a mathematical limit. Once at the limit, traditional inflation goosing techniques only serve to bankrupt the state.

World war by 2012/2015

Civil unrest… tic, toc… tic, toc…

November 17, 2009

Countdown to global conflict…

Social unrest… simmering nicely…

November 10, 2009

Anger and discontent are reaching a boil as a lethal combination of economic corruption and political collusion are deleveraged across the United States.”

And you ain’t seen nuthin’ yet…. tip of the iceberg this is…

War by 2012/2015

Something even uglier this way cometh… (government employment)

November 2, 2009

You’ve heard me screech that as the inflationary time line progresses government becomes progressively a larger actor in the economy. You’ve heard me wail that at the end of the inflationary dynamic, tax revenue dwindles forcing government to curtail public spending. You’ve heard me lament that as unemployment rises but social expenditure is curtailed, we would reach a flash-point making civil disorder very likely … and you’ve heard me howl that persistent and widespread civil disorder will be further fueled by rising scandals implicating politicians and the power elite leading eventually to the fall of governments across the West…. but that before that would happen, Western governments will engineer a war of global proportions….

Now read this courtesy of the team at Financial Sense (hat tip to Jasper on the VOY forum):

Significant excerpts:

As the chart shows us, the current year over year rate of [government payroll] contraction has no equal until we reach back to 1982

Although this may not be common knowledge, the bulk of government employees are found at the State and local levels of government. In fact, Federal government employment only accounts for 12.6% of total aggregate government employment as of September 2009-month end. That’s pocket change compared to State and local levels of employment. And of course the current cycle irony is that it’s the State and local governments that are hurting big time under the duress of not only infrastructure, maintenance and support, but pension issues, loss of Federal support payments, etc.

And then, this pearl with an accompanying chart

As of now, unfortunately for the US economy as a whole, government employees outnumber US manufacturing sector employees literally just shy of two to one. Now is the rhythm of government payrolls important enough for you?

This is a pearl because Western economies are largely service based economies. As I never tire to ask, in an economy that is 80% consumption, how much real wealth is being generated?

Essentially, when credit creation outpaces GDP progression by a wide margin (remember that even without considering corporate debt, household and government debt combined since 1980 has expanded 1200%  but GDP has only expanded by 100%) how much intrinsic value is there left in the economy to sustain those people that are losing their jobs?

This is not a question borne of idle curiosity. This is a question the answer to which is vital to understanding why I think we will be thrown into a world war by our “leaders”.

The research published recently indicates that we have entered and are fairly well into a deflationary cycle. I understand that opinions may diverge on whether we have or we haven’t and that’s fine.

However, what I feel is imperative is that all proponents of one type of “flation” or the other sit together and thrash out a hypothetical scenario of what would happen in case the “de” flationists should be right. Only once the perils and dangers of a deflationary outcome are identified and understood can we sit down with unions and economic actors and put forward a coherent argument as to what should be done at personal, household, corporate, union and government level in order to mitigate the repercussions of deflation.

But, for as long as government is hell bent on denying reality, then a world war is pretty much dialed-in.

When I say world war I don’t mean a war as we’ve had for the past forty years in remote backwaters against tin pot governments run exclusively by the armed forces without any sacrifice of the civilian population in the West. I mean a real war where the human and material resources of the West along with Western civilian industry will be marshaled and employed towards the war effort complete with rationing of food and electricity. That sort of war.

Accounting irregularities may be on the rise in the US

October 30, 2009

“May be”!!!!?????

Evidence of dereliction of duty, malfeasance and criminal collusion on the part of our governments abounds and is well documented.

There is a saying that goes something like: “when fish smells, it begins from the head”.

Given what our “leaders” and various people in positions of authority are doing, is it any wonder that others should heed their examples?

Accounting irregularities are increasingly showing up in U.S. regulatory filings and corporate announcements.”


Nearly a third of corporate executives have expected that fraud and misconduct would rise in their organizations this year, according to a survey from accounting firm KPMG KPMG.UL in August. The most common causes of financial restatements are related to costs, expenses and revenue recognition problems, according to the Government Accountability Office.”

The GAO should know!

Backdoor taxes hit Americans with public financing in the dark

October 26, 2009

This article highlights information that is much too important to show excerpts for. I warmly suggest you read the whole thing because it will give you an idea of the scope, breadth and depth of this debacle. I will reproduce the full text of the article and intersperse my comments in brackets prefixed by “GR” in Italics.

Oct. 26 (Bloomberg) — Salvatore Calvanese, the treasurer of Springfield, Massachusetts, for four years, had a ready defense for why he risked $14 million of taxpayer money on collateralized-debt obligations laden with subprime mortgages in 2007.

He didn’t know what he was buying, he says, and trusted the financial professionals who sold them and told him they were safe.

“I thought they were money markets that were just paying more,” Calvanese said in an interview. “Nobody ever used the term ‘CDO,’ and I am not sure I would have known what that was anyway.” (GR: This, I remind you, from a “Treasurer”; a County Treasurer to boot. These are the type of people that are in charge of public funds)

Such financial mistakes, often enabled by public officials’ lack of disclosure and accountability for almost 90 percent of government financings in the $2.8 trillion municipal bond market, are costing U.S. taxpayers as much as $6 billion a year, according to data compiled by Bloomberg in more than a dozen states.

The money lost to taxpayers — when the worst recession since the Great Depression is forcing local governments to cut university funding, delay paying bills and raise taxes — is enough to buy health care for everybody in Minneapolis; Orlando, Florida; and Grand Rapids, Michigan, according to figures from the U.S. Census Bureau and the U.S. Department of Health and Human Services.

Florida county commissioners sent deals to their favorite banks in an arrangement that led to criminal convictions. Pennsylvania school board members lost $4 million on an interest-rate swap agreement they didn’t understand in the unregulated $300 billion market for municipal derivatives.

Trouble With Swaps

Local agencies in Indianapolis, Philadelphia, Miami and Oakland, California, spent $331 million to end interest-rate swaps with banks including JPMorgan Chase & Co. of New York and Charlotte, North Carolina-based Bank of America Corp. during the past 18 months. The swaps, agreements to exchange periodic interest payments with banks or insurers, were intended to save borrowing costs. Payments increased instead.

New Jersey taxpayers are sending almost $1 million a month to a partnership run by Goldman Sachs Group Inc. for protection against rising interest costs on bonds the state redeemed more than a year ago, Bloomberg News reported Friday.

The interest-rate swap agreement, which the state entered in 2003 under former Governor James E. McGreevey, remained in place even after the state Transportation Trust Fund Authority replaced $345 million in auction-rate bonds that had fluctuating yields with fixed-rate securities last year.

Harvard Pays

Now, the 3.6 percent the trust fund is paying on the swap has pushed the cost on the original debt to 7.8 percent, the most the authority has paid since it was formed in 1985, according to records on its Web site. Canceling the swap before 2011 would require the state to pay an estimated $37.6 million fee, according to state records.

Even Harvard University, whose endowment of $26 billion makes it the world’s richest academic institution, fell for Wall Street’s financing in the dark: The Cambridge, Massachusetts- based university paid $497.6 million to investment banks during the year ended June 30 to cancel $1.1 billion of swaps. (GR: This from Harvard… that sacrosanct temple of knowledge)

The public needs more transparency in municipal debt transactions, said Elizabeth Warren, chairwoman of the Congressional Oversight Panel for the Troubled Asset Relief Program. Proposed reforms, such as an oversight agency for consumer finance, could help spur improvements, she said in an interview this month.

‘Worldview Change’

“We need a worldview change about transparency, and that includes municipal finance,” said Warren, a professor of bankruptcy law at Harvard Law School.

The public paid extra costs for borrowing with tax-exempt bonds because local governments resist providing investors the same level of disclosure as corporate borrowers, which file quarterly reports.

Municipalities typically file financial statements only once a year. Detroit, the largest U.S. city with a less-than- investment-grade credit rating, released its annual report for fiscal 2007 in March, more than 18 months later.

State and local governments that share more financial information than the minimum required pay yields as much as 0.20 percentage points lower than others, said Lisa Fairchild, professor and chairman of the finance department at Baltimore’s Loyola University Maryland, who produced a 1998 study on disclosure.

Applied across the tax-exempt bond market, that’s $5.6 billion a year, enough to buy more than 12,000 $465,608 pumper- tender fire trucks. That’s more than one truck for every county in the U.S. The rest could form a parade 50 miles (80 kilometers) long.

Build America Bonds

State and local governments that sold $43.8 billion of taxable Build America Bonds this year will pay $385 million a year more in interest than similarly rated corporate borrowers, based on data compiled by Bloomberg.

The bonds, for which the federal government subsidizes 35 percent of interest costs, pay an average yield that’s 0.8 percentage points more, relative to benchmark rates, than yields for corporate securities with the same credit ratings, the data show.

As a result, it costs New Jersey road authorities, Georgia sewer districts and other agencies more to borrow, even though they, unlike corporations, can raise fees or taxes to make up for deficits. Corporations are at least 90 times more likely to default than local governments, according to Moody’s Investors Service.

Discounted to their present value, those additional payments by municipal borrowers add up to $6.1 billion over the life of the debt.

‘It’s Horrendous’

“I think it’s horrendous, but it’s very hard to get anybody to pay much attention to it,” said Stanley Langbein, a law professor at the University of Miami and a former tax counsel at the U.S. Treasury in Washington.

Underwriters — banks or securities firms that guarantee the purchase of debt issuers’ bonds — have an interest in keeping prices low, and yields high, because it means higher returns for them and the first investors, Langbein said.

Many Build America bonds traded at higher prices immediately after agencies sold them, a sign that taxpayers lost, he said.

The Government Finance Officers Association, a professional group based in Chicago, warns municipalities of “competing objectives” in their relationships with underwriters. Many don’t heed that warning, said Christopher “Kit” Taylor, who was the top regulator of the municipal bond market from 1978 to 2007.

‘Stockholm Syndrome’

“They’re suffering from Stockholm syndrome,” he said, referring to the psychological phenomenon in which hostages begin to identify with and grow sympathetic to their captors. “They are being held hostage by their investment bank.”

Public officials shunned competitive bids for more than 85 percent of the $308.9 billion in new tax-exempt bond sales in the first nine months of this year, according to data compiled by Bloomberg. That’s up from 17 percent in 1970 and 68 percent in 1982, according to the Government Accountability Office.

Most borrowing costs that state and local taxpayers incur are set in private negotiations. Finance professionals say no- bid sales allow them to market debt to particular investors, helping issuers find demand when credit markets are tight.

The method boosts interest rates by as much as 0.06 percentage point, according to several academic studies reviewed by the GAO.

Excess Fees

Palm Beach County, Florida, paid $880,000 in excess bank fees and as much as $1.3 million a year in unnecessary interest because its commissioners sold bonds without bids, according to a county report in April.

Each commissioner nominated his or her favorite bank and work was parceled out on a rotating basis, the report showed. That allowed former commissioner Mary McCarty to steer more than $600 million in debt issues to banks that employed her husband, Kevin McCarty, according to federal charges that led to guilty pleas from both this year.

After the McCartys were charged, the county adopted a policy stating a preference for competitive bond sales. When bonds are sold by negotiation, a financing committee will circulate a request for proposals, evaluate them and then recommend an underwriter to commissioners, said Liz Bloeser, Palm Beach’s budget director.

No Bids

Beaver County, Pennsylvania, commissioners haven’t taken bids for bond underwriters since 1986, county records show. After relying on the same firm for more than two decades, they paid as much as $2.8 million more than they had to on a bond sale in January, based on trading records from the Municipal Securities Rulemaking Board, which oversees the tax-exempt bond market.

Using the same underwriter repeatedly for negotiated sales increases borrowing costs each time, according to a study published in the Winter 2008 edition of the Municipal Finance Journal. The study found that if an issuer had used the same bank twice before, its borrowing cost on $100 million of 10- year bonds increased by more than $1 million over the life of the debt.

Other financial mistakes can be difficult to quantify. Taylor, who studied government finances for 30 years as the executive director of the MSRB, said as many as five out of 10 local governments “aren’t getting the best deal by a long shot” on their investments.

Overpaid for Securities

Apache County, Arizona, overpaid its broker almost $500,000 for U.S. government securities, county records show. A price check would have caught the problem. The county has no record that it ever did one.

Many local officials are unprepared for Wall Street’s sales pitches, said Mary Christine Jackman, Maryland’s director of investments in Annapolis.

“When you combine people who are less sophisticated with people who can sell as those on Wall Street usually can, you end up with a very big problem,” she said. Jackman tries to offer basic training and advice to small municipalities, she said.

There are more than 89,000 cities, counties, school districts and other municipal authorities in the U.S., according to data from the Census Bureau. Each year, about 5,000 people attend training sponsored by the Government Finance Officers Association, which has 18,000 members, said Jeff Esser, the group’s executive director.

‘Doing Nothing’

The GFOA has never tried to make a comprehensive tally of its members’ educational attainment or professional backgrounds, he said. He added that during his 30 years with the organization, he has seen “a significant increase” in members’ education, training and professionalism.

Supervisors in Mohave County, Arizona, took issue with the professionalism of its treasurer, Lee Fabrizio, during an investigation last year in which employees reported that he played a lot of golf and was rarely in the office.

“It’s nice to get this paycheck for doing nothing,” Fabrizio told employees once, according to the July 2008 report by the county manager.

Fabrizio, who received a $56,500 annual salary, said he doesn’t remember making that statement and was in the office every day. He said he played nine holes of golf a day for two hours at lunchtime.

An employee’s grievance sparked the investigation and ultimately a state audit, which reported Aug. 28 that the treasurer bought corporate bonds with no evidence of competitive bidding, didn’t vet brokers’ backgrounds and continued to value a $5 million Lehman Brothers Holdings Inc. bond at full cost even after the firm’s Sept. 15, 2008, bankruptcy.

Not an Expert

The Lehman bond was purchased in late 2007, when the treasurer put $50 million, about 25 percent of the county portfolio, into 11 corporate bonds, 10 of them in financial firms including Lehman and Bear Stearns Cos.

“Even if it was a bad investment, I wouldn’t have known the difference; I’m not an investment expert,” Fabrizio said, adding that he relied on his hired deputy for those decisions. The deputy e-mailed competing brokers and had them fill out questionnaires, he said.

The county never sanctioned him, and he was voted out of office last year.

The Lehman loss cost the 7,000-student district in Kingman, Arizona, the county seat, almost $1 million, according to Wanda Hubbard, the schools’ finance director. The real losers are taxpayers, who will be levied more as a result, she said. The owner of a $250,000 house in the district may pay $25 extra this year, Hubbard estimated.

‘Back-Door Tax’

“It was kind of a back-door tax increase,” she said.

Officials are up against increasingly sophisticated financial products, including interest-rate swaps and so-called swaptions. A swaption grants the owner the option to force a particular party into a swap.

The Butler Area School District in western Pennsylvania paid JPMorgan $5.2 million last year to cancel such a pact. The payment was about seven times more than the district had received under the contract. Statewide, 55 Pennsylvania school districts have paid counterparties to exit interest-rate swaps since 2003, according to state records.

Some officials now say they didn’t understand the deals.

“The financial guys would come in with a lot of stuff that nobody at the district understood,” Penelope Kingman, a former member of the Butler school board who voted against the deal, told Bloomberg News last year. “Local governments are entering into these without fully understanding what they are doing.”

Market Has Grown

While such contracts aren’t traded on regulated exchanges, the market for municipal derivatives has grown to as much as $300 billion annually, the MSRB says. Derivatives are a category of contracts whose value is tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

One type of derivative, the interest-rate swap, helped put Jefferson County, Alabama, on the brink of bankruptcy.

The county refinanced $3 billion of sewer debt in no-bid deals earlier this decade, issuing variable-rate bonds that were hedged with swaps. The plan backfired last year as the global credit crisis took hold. Interest payments due on the bonds more than tripled to 10 percent, while the swap income decreased.

Last week, the former president of the county commission, Larry P. Langford, went on trial in federal court in Tuscaloosa. Langford, now the mayor of Birmingham, pleaded not guilty in December to charges including bribery, conspiracy and filing false income tax returns.

‘Political Witch Hunt’

Prosecutors say he took cash, clothes and Rolex watches from a banker who received $7.1 million in fees on debt sales in 2003 and 2004. Langford has called the case “a political witch hunt.”

The Justice Department and the Securities and Exchange Commission are investigating whether Wall Street banks conspired with some brokers to rig bids and fix prices for municipal derivatives. The probe centers on interest-rate swaps and on investments that cities, states and schools buy with bond proceeds, according to subpoenas received by agencies in Alabama, Illinois, Pennsylvania and New Mexico.

While many municipalities turn to professional consultants for guidance on derivatives, the MSRB reported in April that 73 percent of financial advisers who participated in the municipal bond market in 2008 weren’t subject to the board’s rules because they weren’t registered securities dealers.

Legislation Considered

Congress is considering legislation to regulate the financial advisers. Still, there are other gaps.

Federal law exempts the municipal market from rules regarding disclosure and enforcement that apply to companies. And transactions between broker-dealers and municipalities are rarely scrutinized by the self-regulatory agencies that banks and securities firms use to police themselves, including the Financial Industry Regulatory Authority, said Taylor, the former MSRB chief.

Finra and other regulators presume that institutional clients are sophisticated enough to look after themselves, he said.

“Typically, what happens is, nobody looks,” he said. “Finra doesn’t look, the firm doesn’t look, the city council doesn’t look and the populace, the taxpaying populace, has no idea any of this is going on.” (GR: This is a typical case of people doing something just because everyone else is doing it regardless of whether they understand what they are doing or not)

Nancy Condon, a spokeswoman for Finra, declined to comment. The Strategic Programs Group of the authority’s enforcement department in May sent letters to dealers seeking information about interest-rate swaps, structured notes and other products they may have sold.

Enforcement Questions

Taylor questioned why the information-gathering hasn’t led to anything further.

“Finra wants the world to think it is doing something for investors and the good of the markets without actually bringing any enforcement actions or adopting any rulemaking,” he said.

In Orange County, the home of both Disneyland and the largest municipal bankruptcy in U.S. history, officials echoed the mistakes of 15 years ago by investing in another Wall Street innovation.

Robert Citron, who was county treasurer leading up to the 1994 bankruptcy, bought structured notes that paid off when short-term interest rates were lower than medium-term rates, and increased his gamble with funds from issuing new debt. The county lost $1.6 billion when interest rates rose.

Cost of Insolvency

Payments from the resulting insolvency still cost more than $80 million annually, about 1.5 percent of the county’s proposed fiscal 2010 budget.

County supervisors responded by creating an oversight committee to monitor the treasurer and banning investments in derivatives and the use of leverage to amplify returns.

Under John Moorlach, the accountant who exposed the bad bets and succeeded Citron as treasurer, the county later invested in structured investment vehicles, or SIVs. Banks set up the pools of loans to shift risk from their own balance sheets. They borrowed money at short-term rates to finance longer-term investments such as British credit-card receivables or home mortgages.

Moorlach said he got into SIVs, which often yielded more than the county’s other investments, after a ratings officer from Fitch Ratings told him that such exotic instruments were becoming more mainstream. (GR: The ratings agencies have been shown to be partial and bought for since many years. And yet, no government authority bothered to dismantle any of them. Quite the contrary, they sponsored and rewarded rating agencies for volume of business)

By 2007, one year after Moorlach won election to the county’s board of supervisors and was succeeded as treasurer by Chriss Street, the investments in SIVs totaled more than $800 million. They made up 14 percent of a county investment pool that manages money for the county, schools and local agencies.

‘Weren’t Paying Attention’

The county sold one SIV at $6.4 million below par last year and so far has recovered about $30 million of the $80 million it invested in Whistlejacket Capital LLC, created by London-based bank Standard Chartered Plc. Whistlejacket, which listed Citigroup Inc. debt and U.K. home loans among its assets, went into receivership last year.

“Despite the oversight, despite the audits, they weren’t paying attention — and should have been,” said Terry Fleskes, a member of an independent panel that chastised the treasurer and county auditor in June for allowing more investments in complex financial products. Fleskes is a former controller at a unit of San Diego-based Sempra Energy.

“The lessons of the past have been forgotten,” the Orange County Grand Jury said in its report. The group, which doesn’t have the authority to compel changes, serves as a kind of ombudsman to examine county policies.

‘Best Stuff Around’

The structured vehicles were difficult to evaluate, Moorlach said. He relied on rating companies, which “were treating it like it was the best stuff around.”

“I think the rating agencies have a lot of explaining to do because of the overreliance by hardworking municipal treasurers,” he said. (GR: Rating agencies can be blamed for what were clearly partial and paid-for opinions on the safety of various investment instruments. However, this fact does not detract from the fact that a Treasurer should know what he is getting himself into. This is what fiduciary duty is all about. One thing is a bank clerk peddling investments to an individual consumer whom may not necessarily know better and would fully rely on the rating agency’s advice. An entirely different thing is when a “treasurer” too relies blindly on the agency advice especially considering that even a cursory look at their prospectus would highlight potential conflicts of interest.)

A Fitch spokesman, Kevin Duignan, declined to comment. (GR: No kidding! I wonder why.)

“It’s easy to point the finger at others,” said Bart Hildreth, dean of the Andrew Young School of Policy Studies at Georgia State University in Atlanta and a former finance director of Akron, Ohio. “The rating agency didn’t authorize the allocation of the money.”

Orange County auditor David Sundstrom said the amount at risk in SIVs was nothing like the leveraged wagers made by Citron.

“The controls compared to pre-bankruptcy are incredibly strong,” he said.

Out of SIVs

The county has exited all of its SIV investments except Whistlejacket, in which it has notes in a restructured successor that’s being liquidated. Taking into account interest earned, the county hasn’t lost on the SIVs, said Deputy Treasurer Keith Rodenhuis. Interest totaled $58.6 million, with $50.2 million in capital still outstanding in the Whistlejacket successor. County officials expect to get that money back in time, he said.

While Moorlach said Orange County did what it could, sending an analyst to London to investigate one SIV and examining financial reports, the investments may have been a mistake.

“If something’s taking up so much of your time, maybe it ain’t worth it,” he said in his Santa Ana, California, office, overlooking a courtyard where volunteers from local churches serve hot dinners and distribute essentials like socks and toilet paper to a 40-deep line of needy people.

King County, Washington, the home of Seattle, has recovered less than half of $207 million that it put into four failed SIVs. It sued rating companies in federal court this month, saying it was misled by their assessments.

No Clue

“There’s a basic rule of finance: Don’t get into anything you don’t understand,” said Michael Granof, an accounting professor at the University of Texas in Austin. “Many municipalities had no clue as to what they were buying.”

Apache County, Arizona, an area the size of Maryland where 70,000 people live among vast mesas dotted with shrubs, stuck to safe investments, such as U.S. Treasury securities and federal agency bonds. It just didn’t know how to value them.

County treasurer Katherine Arviso, a school administrator on the Navajo reservation for 40 years until she won election in 2004, said she arrived to find investment records packed away in boxes.

“I had to put the whole office back together,” she said.

Then came an August 2005 letter from Piper Jaffray Cos.’sBradley Winges, the head of sales and trading for the Minneapolis-based firm’s public finance group. He wrote that the firm had reviewed trades in the county’s account and found unacceptable commissions. The firm credited $247,060.79 to the county’s account.

Eventual Refund

Piper Jaffray eventually refunded $472,060.79, according to a settlement obtained by Bloomberg News under the state public records act. That’s more than double the $194,870 that the county, one of the poorest in the U.S., spent on immunization, teen pregnancy prevention and home health care last year. Apache County’s per capita income was $8,986 in the 2000 U.S. Census, less than half the U.S. figure, $21,587.

Three days after sending the letter, the firm fired broker Eric Ely, according to Finra records. Ely didn’t return telephone messages or respond to an e-mail seeking comment for this story.

From Oct. 20, 2003, to June 29, 2005, Ely executed 103 trades for Apache County, buying and selling bonds, according to a subsequent investigation conducted by Edward “Buzz” France, a former deputy county attorney.

Estimated Commissions

In a presentation to county supervisors, France estimated that Piper Jaffray earned commissions of just over $1 million on $158.6 million in principal, an average rate of 0.638 percent. Investment bankers told France the commissions should have been no more than 0.3 percent.

“Our clients’ interests come first,” Piper Jaffray said in a statement. “Four years ago, we discovered a situation in which we believed one employee had run counter to this guiding principle, and we proactively and quickly worked to rectify any client impact, and terminated the employee.”

There was no need for so many trades if the goal was steady, reliable returns, said Charles Anderson, the former manager of field operations for the tax-exempt bond division of the Internal Revenue Service.

A reasonable commission for the $158 million of securities that Apache County purchased would have been $50,000 to $100,000, said Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets Corp. in New York, one of 18 firms that trade directly with the Federal Reserve.

Not Unusual

Basic financial mistakes trip up many local governments, said Kevin Camberg, a partner with Fester & Chapman P.C., a Phoenix accounting firm that has checked the books of Apache County and others in Arizona for the state auditor.

“It’s not as unusual as it should be,” he said.

France, the county investigator, never determined how Piper Jaffray was chosen to handle Apache County’s investment fund. The treasurer at the time, Betty Montoya, declined to comment on the selection process for this story.

Had the county checked Ely’s licensing history with Finra, which oversees almost 4,800 brokerage firms, it would have found previous allegations of infractions. Since 2002, investors have been able to access BrokerCheck reports of disciplinary histories online, said Condon, the Finra spokeswoman.

Ely paid $80,000 toward a $260,000 settlement of a customer’s 1989 complaint of “unauthorized and unsuitable transactions,” according to Finra records. Ely worked for Merrill Lynch & Co. from 1983 to 1990, the records show.

Settlement in Wyoming

In 2002, Piper Jaffray reached a $42,500 settlement of a customer’s allegations that Ely had purchased and sold securities contrary to Wyoming state law or local investment policy, the records show.

Ely, now affiliated with Public Asset Management Group in Greenwood Village, Colorado, and First Financial Equity Corp. in Scottsdale, Arizona, continued seeking business with small local governments. The broker gave a speech called Investment Management Alternatives for the School at a meeting of the Montana Association of School Business Officials in June 2008.

“He said he was interested in all the smaller players,” said Dustin Zuffelato, who attended as business manager of the 2,400-student Columbia Falls School District Six in Flathead County, Montana.

Zuffelato recommended that his school board consider investing about $8 million with Ely. The board declined, citing the logistical hurdles of switching investments from a pool managed by the county treasurer, he said. Zuffelato said he didn’t check for complaints against the broker first.

Investing 101

In June, the broker appeared again at the Montana schools conference, this time teaching a class called Investing 101.

In Springfield, Calvanese, the former city treasurer, said brokers told him he was investing in money-market funds.

City officials could have learned that they were really buying securities that bundle various issuers’ bonds or loans, or both, if they had insisted on seeing disclosure documents about the securities. Calvanese said in an interview that he rarely looked at such documents, which outline risks.

Calvanese was fired after the CDO investment came to light. He has filed suit challenging his dismissal.

Springfield officials and the Massachusetts attorney general argued that the city was misled by its brokers from Merrill Lynch, who sold it financial instruments that violated a state restriction on public investments. Calvanese said the brokers assured him the transaction complied with state law.

Merrill Lynch, now owned by Bank of America, returned the $14 million the city had invested, and agreed to pay an additional $300,000 in July.

A $75,000 portion of that money was set aside for educating municipal officials on investment management.

To contact the reporters on this story: Peter Robison in Seattle at; Pat Wechsler in New York at; Martin Braun in New York at

GR: The moral of the story is that for as long as things are going in one direction, nobody can be bothered to go and look at the detail. Those that do are considered party poopers and those that opt out of what everyone else is doing are routinely blamed for substandard performance and may even lose their jobs. On the other hand when public finances are being squandered and pillaged at the highest echelons of government, how can lower ranking administrations officials be blamed for doing what their bosses are doing? Acting on principle and moral standing will very easily make your life impossible during the blow off phase of the inflationary dynamic.

Detroit house auction flops for urban wasteland

October 26, 2009

County tax revenue is on the ropes and about to hit the mat. Make no mistake. The only difference between a County and the Federal State is that the latter can, for a time, maintain the illusion of solvency by borrowing more. However, it is now abundantly clear that the Federal Government can now only buy government debt from itself. This is what monetization is all about.

A fiat monetary system of floating exchange rates, depends on each sovereign country member of the system buying another country’s debt. If you are able to visualize the absurdity of this system in the first place, then the reasons that will signal the system’s demise should be clear too.

Governments purchasing their own debt rather that the debt of other countries is a clear sign that the system has broken down.

A breakdown in the tax revenue flow at city, municipal, county and state level guarantees that there is a breakdown in tax revenue at federal state too. The fact that governments today are monetizing their own debt guarantees that the fiat monetary system has broken down.

As social costs rise and as social expenditure must by necessity be curtailed, civil unrest will rise. As civil unrest rises, governments will fall.

No western politician is about to relinquish power. Before civil unrest will get out of hand, we’ll have us a world war.

After five hours of calling out a drumbeat of “no bid” for properties listed in an auction book as thick as a city phone directory, the energy of the county auctioneer began to flag. OK,” he said. “We only have 300 more pages to go.” […] “Despite a minimum bid of $500, less than a fifth of the Detroit land was sold after four days. The county had no estimate of how much was raised by the auction, a second attempt to sell property that had failed to find buyers for the full amount of back taxes in September.”

Are the Fed the Congress and the Primary Dealers an alliance of convenience?

October 21, 2009

Jesse’s comments on Chris Whalen’s recent editorial. Find below the link to Jesse’s web post as well as the full text of his and Chris Whalen’s comment.  Notice the reference to fiat money in Chris Whalens’s text in the 5th paragraph.

The US Power Elite: An Alliance of Convenience or a Ménage à Trois?

“I submit that our spendthrift government, the Federal Reserve System and the TBTF banks together now comprise the paramount political tendency in America today. This tripartite “Alliance of Convenience,” let’s not call it a conspiracy, fits beautifully into the corporatist mold that seems to be America in the 21st Century – but only viewed by the elites in cities like New York and Washington. Many Americans of all political descriptions oppose this corrupt and unaccountable political formulation.” Chris Whalen, Institutional Risk Analytics

“Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power.” Benito Mussolini

There can be little doubt now that Chris Whalen is not only a subject matter expert of the first order in the field of banking, but is additionally a brilliant mind, being able to step outside his discipline and connect the dots using his knowledge in other diverse fields including politics, history, and organizational behaviour.

I cannot judge where his thinking and my own diverge, because we do not disagree at all in this exemplary characterization of the world economy as it is today, I suspect that the solution, the path to a stable model, might offer some differences in implementation, but nothing beyond that. One cannot tell if there is a taint of the ‘Chicago School’ of free market romanticism in his views until one sees his detailed model of a post-recovery regulatory regime.

He does seem to be overly dismissive of a Europe in caricature, but makes many good points which are important to address at the EU. ‘Europe’ is one entity in the same way that New York is New Orleans. Germany has a difficult path to steer, but his criticism is right, and we have been very critical of Peer Steinbrück among others.

There are some enormous implications in the regime of the dollar as the world’s currency that most economic commentators just do not ‘get.’ There can be no serious dollar deflation while the dollar has that role, without the world grinding to a virtual halt. This essay alone is worthwhile if one can understand that, which is a ‘difference’ between the US in 1929 and 2009.

But the description of the unholy alliance among Washington – the Fed – and the Banks is exceptionally good. Each depends on the other two. Washington wishes to spend while rewarding its friends, the Fed is only too eager to please by printing money to maintain the financial system which they have engineered, and the Primary Dealers on Wall Street distribute and manage the money while taking a hefty slice of the product for themselves.

Chris Whalen calls this an Alliance of Convenience, implying that of course there is no conspiracy per se, but each member of this triumvirate is merely obtaining and enabling from the others.

I would call it a willing Ménage à Trois, literally the eternal triangle, because of course this arrangement has been repeated throughout history among people of certain types who seek each other out by design.

Bootleggers need protection, corrupt politicians need criminals, and the distributors need a product. Kings desire legitimacy, churchmen need powerful defenders, and warlords wish to be paid extremely well.

There is also a great deal of intermingling and changing of positions among the actors in this arrangement. The revolving door between the Congress and the financial interests is obvious. It is hard to tell just who is on top at any given moment.

The only check and balance on this arrangement, besides the intrusion of the law as embodied in the Constitutional limitations on power, is the value, the acceptability of the dollar and the bond.

One cannot tell if Chris has thoroughly thought through the implications of what he has concluded, the Ponzi nature of the US financial system, and the consequences of its collapse. If he does, he should have more sympathy for his colleagues at the Fed who, in the American colloquial sense, should be ‘scared shitless’ of what they have done, if they have a mind of their own at all.

Institutional Risk Analytics
Are the Fed, the Congress and the Primary Dealers an Alliance of Convenience?
October 20, 2009

+For the better part of a year, many smart, talented people in the worlds of finance and economics have been struggling to describe the causes of the financial crisis and solutions. I witnessed such a debate recently at the international banking conference sponsored by the Federal Reserve Bank of Chicago. It is fair to say that the representatives from Europe, Asia and the Americas continue to have differing views of the crisis and how to address it; more regulation or less, more capital or less, and whether markets should be re-regulated.

Far from being dismayed by such disparity of views, I am encouraged by this difference of opinion and I hope that the debate intensifies in coming months. To recall the words of Alfred Sloan, it is only by sharpening our differences can we understand complex problems and understand those distinctions which matter and those which do not. But as we build a narrative to understand the crisis, we seem to be converging on one view of the causes of the financial “bubble” and thereby ignoring other perspectives and views that might be instructive.

In his books such as The Black Swan, the author Nassim Taleb warns us that the news media and particularly condensed versions of reality such as television force all of us into a view of the world that is often over simplified. As social creatures, we all tend to use narrative to describe and understand complexity. We speak and write and discuss. Gradually we distill our impressions and these views merge together into the collective understanding, the “official” story.

But just as bubbles are probably not a good technical metaphor to describe financial crises, we need to beware the tendency to simplify and categorize complex events when it comes to public policy for our financial institutions and markets. Americans have a wonderful tendency to look at public policy from a vertical perspective, in silos, that suggest we can somehow isolate monetary policy and bank supervision and fiscal policy into neat, separate little boxes that are never affected or disturbed by one another.

In particular, this comes to mind when we hear US economists talk about foreign capital inflows as an externality. Those fiat paper dollars belong to us. We printed them and of course they are returning home in search of at least a nominal return. That’s why we have problems such a mortgage market bubbles and a surfeit of capital inflows, then a sudden outflow of these same pools of credit. In a fiat money system, after all, there is no “money” in a classical sense, merely credit. These large flows of fiat paper dollars, I submit, explain the increasingly manic behavior of markets, investors and large banks over the past decade as true investment opportunities are increasingly outnumbered by speculation.

I agree with Vince and the other speakers about the nature of the problem created by America’s addiction to debt and inflationary monetary policy, and how difficult it makes it for us to address more basic structural problems in our economy. This is especially true so long as the rest of the world is willing to allow the US to retain a global monopoly on dollars as the primary means of exchange and as a short-term store of value. But I believe to achieve a true understanding of the crisis, we must step back and take a political perspective.

The evolution of the US from a democratic republic into a more statist, more corporate formulation that looks more and more like the states of Europe and Asia every day, is what makes concepts such as too big to fail (“TBTF”) and “systemic risk” viable. The migration of the US from a society based on individual liberty, work and responsibility, to a society where a largely corporate and socialist perspective holds sway, in my view, is changing the way we look at our financial and monetary system. Because of the huge and some would say illegal subsidies provided to Wall Street firms during the early part of the crisis, particularly in cases such as the rescue of American International Group, the American electorate is engaged in an intense, sometimes angry debate about financial policy and government.

This debate is also very intense among the bank regulatory community, where you have FDIC Chairman Sheila Bair, the FDIC and state regulators, and smaller banks supporting a traditional if somewhat legalistic American view of banks regarding issues like insolvency and resolution, on the one hand. Then we have the internationalist tendency represented by the large banks, the Federal Reserve Board, Treasury and White House, who like the leaders of the EU advocate a socialist and proudly statist perspective where banks are “too big to fail” and under the table subsidies to well-connected institutions are encouraged. Whereas in the 1800s the New York banks advocated hard money and sound banks, and the inflationists where among the agrarian populist ranks, today it is Washington, Paris and Berlin, among the largest dealer banks and their political allies, that are found advocates of inflation and public sector debt.

Our friends at the Fed and Treasury seem to know nothing about American values when it comes to insolvency or bank safety and soundness. Our founders embedded bankruptcy in the Constitution not out of generosity, but because they knew that prompt resolution and liquidation of claims benefitted all of society. The internationalist set, like their counterparts in Europe and Japan, talk of the ill-effects of resolving zombie banks via traditional bankruptcy, but fail to notice the benefits with equal concern. If we do not have losers and well as winners in our society, then we shall have neither. For every loser in the case of the failures of Lehman Brothers and Washington Mutual, there were winners at JPMorganChase and Barclays PLC, which bought the assets of the failed companies for pennies on the dollar and absorbed thousands of valuable employees.

The internationalist tendency prefers instead to align themselves with the view of foreign nations whose governments are predominantly socialist in economic orientation and authoritarian politically. These politicians and their economists prefer to pick “losers as winners,” to paraphrase my friend Bob Feinberg. Look at the situation in Germany, where the political leadership refuses to even acknowledge the depth of the crisis in the state or private banking sector. Germany is a case study illustrating the corruption and incompetence that prevails when you allow the political class to take unilateral control over all financial institutions and markets.

It is both fascinating and troubling for me to watch members of the Fed staff who I love and respect as friends and former colleagues being seduced by the siren song of political expediency when it comes to issues such as “systemic risk,” a political concept that has no place in a serious discussion of finance. Certain banks, say Fed and Treasury officials, are “too big to fail.” But just as true finance is about the arithmetic certainty of market prices and cash flow rather than speculative models, Fed officials seem to confuse safety and soundness in a financial sense with pleasing the political class that inhabits both of the major political parties in Washington.

I hear my colleagues at the Fed recite the mantra about how Lehman Brothers should not have been “allowed” to fail and large banks are too connected globally to be subject to traditional resolutions, as in the case of the failures of both Lehman and Washington Mutual. When I point out to these same Fed officials that Lehman had been for sale, unsuccessfully, for a year, I hear only silence. When I note that Harvey Miller working as bankruptcy trustee and SIPIC and the good people of the Southern District of New York did a very fine job handling the Lehman insolvency, there is likewise only silence from the TBTF advocates. Instead of being used as an excuse for inaction and delay, the insolvency of Lehman Brothers and WaMu should be held up as examples of the American legal system functioning well.

When you challenge officials at the Fed and Treasury about TBTF and systemic risk, they point to the fact that using bankruptcy to resolve complex institutions is too damaging to “confidence.” Vince mentions in his fine presentation that avoiding damage to confidence is a top-level priority for policy makers. We must avoid damaging sacred confidence. But if you have such a rule, then you cannot have a true market system. Markets must be allowed to go from exuberance to terror in order to have a free market system and also a free and democratic society. Investors, bank managers and politicians can only be held accountable if failure is allowed to occur. If we allow government to legislate confidence via the imposition of “systemic risk” regulators and rules such as TBTF, then I suggest that we will not be a free society for much longer.

If you want to see where the US is headed by embracing concepts such as “systemic risk” and TBTF into public policy, then just look at the EU, where whole nations have lost their private banking sector, where there is no private capital formation to create new banks and the state-sector has largely monopolized many areas of personal and commercial finance. In 2008, there were more de novo banks created in the great state of Texas than in all of the EU. By not allowing failure and insolvency for even the largest banks and companies in the US, we deprive our citizens of opportunity.

That the largest portion of the damage done to EU banks in the latest speculative cycle is found among state-sector banks should come as no surprise. Claims by EU politicians as to the effectiveness of regulation in terms of mitigating financial risk seem to be belied by the facts when it comes to regenerating a healthy banking system. EU politicians and bureaucrats may have regulated away bad acts and freedom of choice for private investors, but that only means that the misbehavior has migrated to the public sector and is for the benefit of entrenched political elites. We see the same pattern now in the US.

Let’s turn now to Fed policy, an area where Vince spent a great deal of time in his research, in terms of whether the Fed can be both an effective safety and soundness regulator and a monetary authority, especially given the corporatist political evolution already mentioned. If you really analyze the way in which political power flows in the US today, there are three significant groupings:

First we have a central bank that manages a global fiat dollar system based on a currency unit that is not convertible into specie or commodities. The Fed enables the issuance of dollar debt by the Treasury and imposes no effective policy restraint, no check to balance US fiscal policy. In fact, since the October 1987 crisis, the Fed has never said “no” to the Congress or the markets in terms of liquidity or collateral. It has only been a matter of price. When was the last time we had a Fed Chairman willing to say no to the politicians in the White House or the Congress? Paul Volcker? I suggest that it has been far too long.

Second we have a corrupt, entrenched Congress that equates tax revenues with the proceeds of debt. All fiat paper dollars are one and the same to our esteemed Congress, which believes that the borrowing capacity of the US is infinite. There is no effective limit on spending to keep the electorate mollified and the entrenched political class in power. The Fed enables the spending habit of the Congress and whatever administration occupies the White House.

Some of the supporters of former Fed Chairman Alan Greenspan like to argue that no Fed chairman could have stopped the party in housing early; that no Fed chairman could go up to Capitol Hill and say tough things to members of the Congress about housing policy or public spending. I think that tough talking Fed governors is precisely what we need. If the heads of independent agencies are not ready to lose their jobs every day and be willing to take tough policy stands on equally tough issues, then we need new leaders. I would hold up Chairman Bair at the FDIC as an example of a public servant who understands that part of her job is to offer advice to the Congress and the White House, and not to be a creature of politics or special interests as so many of our supposed leaders seem to be today.

Thirdly we have the dealer community, especially the members of the primary dealers of US government securities, who have a special relationship with the Fed and the Treasury, most recently by placing former Wall Street chieftains and their minions as Secretary of the Treasury. Many of these banks created the trillions of dollars in toxic waste that has crippled our financial system and were subsequently bailed out by the extraordinary actions taken by NYFRB President Tim Geithner and the Fed’s Board of Governors starting last year.

These large dealers such as JPMorgan, Goldman Sachs, Wells Fargo, Morgan Stanley and Citigroup, enable the US Treasury to sell debt and thereby keep the US fiat dollar system stable for another day. These large, TBTF banks are also the mechanism through which the Fed executes monetary policy or at least used to until the Fed itself grew operationally into a de facto primary dealer in its own right, merging fiscal and monetary policy explicitly.

In order to boost the profitability of these TBTF dealer banks, the Fed and the Congress encouraged the creation of opaque, unregulated over-the-counter (“OTC”) markets for derivatives and complex assets. The growth of OTC markets were a retrograde development in historical terms and again illustrate the tendency of the Fed and Treasury, the Congress and the large banks to take an anti-American view of issues like market structure, transparency and solvency, encouraging instruments of fraud like OTC derivatives and private placements, while the FDIC, state regulators and smaller banks tend to oppose such innovations. By allowing the creation of derivatives for which there was no basis, the Fed enabled some of the worst acts by the dealer community.

OTC markets for derivatives and structure assets have been the primary source of “systemic risk” over the past 24 months and have contributed the lion’s share of losses sustained by banks and the taxpayers of the industrial nations. Indeed, without the active support from the Congress and the Fed for “innovations” such as OTC and opaque, unregistered complex structured securities, the current crisis might never have occurred. It important to be very specific as to the alien nature of things like “dark pools” and closed, bilateral market structures such as OTC, structures that go against the most basic American principles of transparency and fairness.

When Vince and I were in Chicago for the Fed’s international banking conference, I reminded our colleagues that the analog to the political checks and balances revered in the history books is a public, open outcry market. Whether virtual or physical, an open market structure is essentially for having true confidence in markets. When markets start to slip back into retrograde formulations like OTC, we are also eroding the very basis of American markets, namely openness and fairness. If our OTC markets are deliberately opaque and unfair, deceptive by design as I told the Senate Banking Committee earlier this year, then can we reasonably hope that our financial institutions and markets will be stable?

I submit that our spendthrift government, the Federal Reserve System and the TBTF banks together now comprise the paramount political tendency in America today. This tripartite “Alliance of Convenience,” let’s not call it a conspiracy, fits beautifully into the corporatist mold that seems to be America in the 21st Century – but only viewed by the elites in cities like New York and Washington. Many Americans of all political descriptions oppose this corrupt and unaccountable political formulation. I hope and expect that these differences will become even more pronounced as the election approaches next November.

The difference that separates the United States from the rest of the world is the difference which has always divided us, namely our at least theoretical devotion to individual liberty and free markets. Until we break the Alliance of Convenience between the Congress, the Fed and the large, TBTF banks and force our public officials to embrace core American values regarding transparency, insolvency and accountability, we will not in my view find a way out of the crisis. In may ways, the differences that separate the popular view and the views of our political elite have been turned on their heads compared with a century ago, but this does not mean that the debate and resulting political competition for ideas will be any less intense.

Fraud is no longer in question

October 21, 2009

There is no question fraud is a deliberate and necessary policy of state. A fiat monetary system virtually guarantees that, eventually, government becomes the largest actor in the economy in an attempt to sustain a positive inflation trajectory. But as a dynamic that is exponential in nature that conforms to the law of diminishing returns, inflation has a limit. As the limit is approached, fiduciary duty is gradually abandoned and fraud becomes increasingly a necessity for the survival of the state. That is the truth Brooksley Born stumbled upon but could not rationalize. Most people alive today have no idea what a monetary system is, what it is meant to do, how it is supposed to work let alone what the risks are.

The only question today is knowing when people will have had enough. The end of the inflationary cycle progressively uncovers the illegal shenanigans concocted and perpetrated over the years. Once enough people will be unemployed, homeless, hungry and angry, public sentiment will progressively become less tolerant towards what by then will be perceived as an evil profiteering elite.

Till now there is nothing that is being openly discussed and officially planned that makes me think we can avoid a global conflict by 2013/2015. At this rate, civil unrest is virtually guaranteed in the West in the next few months. Politicians know that civil unrest will cause the fall of governments and they are nowhere near ready to either relinquish power or admit that, in fact, we are not the holders of the moral high ground that we would like the world to think we are.

Boston unemployment at 33 year high, insurance fund running dry

October 18, 2009

If you read my posts this is not news. The only thing you should note in this article is the “insurance fund running dry” bit.

This is exactly the combination that no government in the West wants to see but that, in a deflationary recession, is inevitable.

We are on track for global war by 2013/2015–+Latest+news