Posts Tagged ‘mark to market’

A bunch of things… none good…

January 17, 2010

Lots to think about this week-end.

Jesse at the Cafe Americain digs out a speech by Ron Paul whom other than being one of the more sensible politicians thus enjoying the usual degree of ostracism as someone that tells it like it is usually does, appears to be concerned that “revolutionary change” is heading our way.

Over at the Market Ticker, Karl Denninger digs out a Wall Street Journal opinion piece by one Holman Jenkins Jr who takes a sarcastic and condescending swipe at those of us that see things for what they are and are intent on raising awareness.

As I began to distill excerpts from the WSJ piece, I soon realized that there was too much glaring bull shit being passed off as rational logic that I decided to break down the article in its significant paragraphs and comment on each. My comments are prefixed with “GR”.

Significant excerpts:

If you would know why bankers are enjoying a large and controversial deluge of annual bonuses, look no further than the monthly report of the New York State Comptroller’s Office. The economy may be in the dumps, but Wall Street enjoyed record profits of $50 billion in the first nine months of last year—”nearly two and a half times the previous annual peak in 2000.”

GR – So then, everything seems all right. Crisis averted, economy saved and all is well.

“Profitability,” adds the state of New York, “has soared because revenues rose while the costs of doing business—particularly interest costs—declined” (in other words, thank you Federal Reserve).

GR – This is a reference to the fact that the money that has been given to the banks is sitting in reserves on which the Federal Reserve is paying interest to the banks. Thus the Federal Reserve is paying interest to banks on money that has been given to them free of charge by the Federal Reserve. This, I might add, whilst banks are raising interest rates on loans to the public and where interest rates on credit card balances are now in the range of 30% if you are banking with some of the more prominent financial institutions.

[…] …but compensation isn’t paid out of profits, it’s paid out of revenues. Goldman last year paid out about 44% of revenues as compensation, Citigoup about 30%. In contrast, an auto company pays out about 11% of revenues, but an auto company consumes a lot of other inputs—glass, steel, energy, advertising, aluminum—whereas Wall Street has only two inputs: smarts and money….

GR – True; bonuses are paid out of revenue. Here’s the thing. The revenue banks enjoyed in the past two years has been achieved by illegal means. Essentially, subsequent US administrations have decreed that banks may disregard Mark-to-Market accounting rules. In so doing, government allows banks to maintain their investment rating thus eliciting more institutional funds thus goosing revenues. Of course, this begs the question why, if banks are in such rude health, allow them to disregard one of the linchpins of the entire accounting construct? Furthermore, both the government and the monetary authorities are still refusing to look into High Frequency Trading that artificially inflates trading volume in a security thus giving the appearance of liquidity and interest thus eliciting even more institutional funds (your pensions and insurance funds for example). But, more disturbing still, is what sort of “smarts” are banks availing themselves of when the game is rigged in their favor by none other than the government and, I might add, the one government that has exclusive control of the world reserve currency?

[…] But look at it this way: The $90 billion that will be distributed to employees is but a sliver of the massive capital Wall Street is sitting on. One firm, Goldman, cares for $880 billion, Citi another $1.9 trillion, JP Morgan another $2 trillion.

GR – Author attempts to diminish the importance of the sum in relation to the capitalization of the company. But think about it in a different manner. Without government collusion, the banks could not have enjoyed even such “meager” earnings.

“Much of the nation’s paper wealth rebounded sharply last year from depressed values after (choose your reason) Americans overbet on housing or the federal government briefly fumbled public trust in its ability to protect the financial system.”

GR – Here I’ve lost the author. Not sure what he means by “the Federal Government briefly fumbled”. However, that Americans overbet on housing is plainly false by any measure you care to look at. Revolving credit and mortgage origination have been declining for the past two years.

Compensation in our society is not set by Henry Waxman and a committee of Congress, but as a matter of legal and instrumental obligation under circumstances of market competition.”

GR – If that were the case, mark to market rules would have been suspended for everyone and not just for a chosen few. Either that or there would be no need to suspend mark to market rules for anyone at all. At the very least, now that banks are so healthy again, then mark to market should be reinstated. Whichever way you turn it, this is still bull shit.

But didn’t taxpayers bail out the financial system, so don’t taxpayers deserve the bonuses? No. Taxpayers (aka voters) were acting in their own interests in bailing out the system. They weren’t doing anybody a favor. Furthermore, government already stands to collect about 50% of any Wall Street cash bonuses in the form of income tax (which explains why the subject is of interest to the New York state comptroller).

GR – The author conveniently omits the fact that it was not the taxpayers decision to give funds away. Neither was it a decision of congress. It was the decision of unelected officials like Hank Paulson then and Tim Geithner now whom were accorded extraordinary executive powers to act as they see fit. And act they did, hence the profits claimed by their alternatively employers/sponsors. With regards to the income tax the Fed may stand to collect, those sums must be viewed in the context of the worth of the assets the Fed originally purchased with public money. However, we will not know what the assets that were purchased with our money are worth till mark-to-market rules are reinstated. And let me tell you, early indications are not good. Just remember that the most successful Ponzi schemes are predicated on paying out “profits” to a handful of patsies. The trick is in not allowing the patsies to see how those profits were earned because when you realize that they are paid out of revenue then you also realize that revenue may not be organic and, as is very clearly the case for the banks at this time, is dependent on eliciting more funds from new investors. This is exactly how Madoff operated. Text book Ponzi. And the fact that the Federal Reserve should be fighting tooth and nail a legitimate request for transparency (one of Obama’s campaign promises I might add) by none other than the courts of law of the land, inspire confidence it does not.

Taxpayers effectively acquired these assets on a bet that taxpayers’ own intervention would raise their value, which had previously been depressed at least partly by fears that taxpayers wouldn’t intervene. That bet has proved a good one so far (as bets often do when you control the outcome).

GR – Once again. Author omits to take into account mark to market rules. Till mark to market is reinstated for all or lifted for all, we won’t know what the worth of the assets we were saddled with are worth.

Now, in guise of a heads-up in terms of looking for indications of what invested public money may be worth now or in the future, I warmly recommend you read this post by Jesse’s. No need to read the whole thing if you have no time. Just look at the graphs.

http://jessescrossroadscafe.blogspot.com/2010/01/us-commercial-real-estate-multi.html

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Walk away from your mortgage (New York Times)

January 9, 2010

Is this more anecdotal evidence of media awakening?

http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html?source=patrick.net

As stated here, there is absolutely no moral obligation not to. A mortgage is a financial transaction.

Where this essay in the New York Times fails, is in correctly identifying the reasons government attempts to persuade you that walking away is immoral. The NYTimes article says: “There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. […] The other reason is that default (supposedly) debases the character of the borrower.

Actually, the NYT only partially got it wrong. The reason government does not want you to walk away is because doing so would immediately cause a revaluation of the property to the downside. This would require a re-marking of the outstanding debt thus triggering a reduction in total outstanding debt.

Of course, if you follow this blog, you know that in an unchecked fiat monetary system inflation is the conditio sine qua non of the existence of government. Thus, the survival of government is predicated on the continued expansion of inflation thus on the continual expansion of debt.

A reduction of outstanding debt is contrary and lethal to the logic of government.

Deflation brings about a reduction of outstanding debt. Deflation is the enemy of debtors and nobody is deeper in debt than government issuer of the reserve currency.

Even more proof the secular inflationary cycle has ended…

November 1, 2009

Via the team at Zero Hedge

http://www.zerohedge.com/article/guest-post-dear-prudence-wont-you-come-out-play

Read the entire post and look at the graphs. This is just more proof that traditional monetary policy has lost traction and that government is “pushing on” the proverbial “string”.

Important excerpts:

It should be no surprise to anyone that household debt outstanding fell again in 2Q (the latest Fed Flow of Funds data), making this now three quarters in a row of household net debt contraction.  The important character fingerprint in the 2Q period being that debt contraction at the household level accelerated. […] Household sector credit contraction is a first in post War history (emphasis added).

[…]

If households are paying debt down, then something has to be given up for that balance sheet reconciliation decision.  And the give up is consumption.  Although you may not realize this, and this is clearly one of the key reasons why the long tenured Street truism suggests no one bet against the US consumer, personal consumption in nominal dollars has actually increased during each and every recession of the last six decades (at least).  Each and every recession until the present, that is. […]  Lastly, we believe it’s also important perspective to remember that in our current circumstances, households have been treated to some of the lowest interest rates of a lifetime and consumer product price weakness has been pronounced.  Yet still zip in terms of consumption gains 19 months into official recession territory.

 

All I can say, is that you should be accumulating gold and silver bullion.

 

Accounting irregularities may be on the rise in the US

October 30, 2009

“May be”!!!!?????

https://guidoromero.wordpress.com/2009/10/21/fraud-is-no-longer-in-question/

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?

http://www.reuters.com/article/smallBusinessNews/idUSTRE59S31220091029

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.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aBarSkIcch2k

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 robison@bloomberg.net; Pat Wechsler in New York at pwechsler@bloomberg.net; Martin Braun in New York at mbraun6@bloomberg.net

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.

Remember this

October 21, 2009

Government is allowing banks to hide losses. Government is allowing banks to disregard those accounting rules that force everyone else to account for their assets and liabilites at market prices.

This is not a victimless crime.

Government has given Trillions of cash to banks

Government allows banks to appear solvent

Result:

Banks appear solvent and can attract institutional money from insurance companies (your life insurance money for example), from mutual funds (your IRA money for example), from local government funds (the money that is set aside for road maintenance, refuse removal or policing for example.

Subsequently, banks appear even more solvent thus pay obscene bonuses to their employees.

If government did not allow banks to circumvent the law, bonuses would not be paid.

The rationale for allowing banks to circumvent the law is to buy time in the hope that things recover and everyone can get back on their merry way.

Maybe the markets will recover maybe they wont. Either way the banks make out like bandits. If the markets recover, banks keep all the profits they have made thanks to public money. If markets do not recover, banks keep the money they were given and the profits they made till the crash.

This is what passes for fiduciary duty nowadays.

A change in sentiment?

October 17, 2009

It would appear that the main stream media is in the process of becoming somewhat more critical of government action and may be willing to take a stand against what are flagrant and obvious illegal if not criminal practices.

Here is a clip by MSNBC’s Dylan Ratigan whom along with a number of other commentators I cannot recall ever questioning the actions of our “leaders” and monetary “authorities”.

I don’t know what is causing the change in sentiment in the main stream press and, for the time being, I reserve judgment.

The information provided in the video clip is factual if greatly watered down. I suspect the watering down is necessary to make it intelligible to the greatest number of people. For example, it is true Goldman Sachs have taken public money and have made a killing by acquiring assets at distressed prices at the height of the financial panic. What is not explained is how Goldman Sachs should know which assets to acquire. That, is a much more complex concept that relates to far more criminal behavior than taking public money and retaining all the profits. If you browse any of the blog sources you find on my blog such as Karl Denninger or the team at Zero Hedge or search for High Frequency Trading on my blog (HFT) you will realize that criminal behavior runs deep and involves government collusion. HFT is not the only illegal action undertaken by GS or the government. There are dozen of other instances of criminal collusion and contravention to the letter of the law. Things like the suspension of mark-to-market rules for example. How about taking over Fannie Mae and Freddy Mac two clearly private enterprises that have never been government sponsored entities? Or the riding roughshod over GM bondholders but unilaterally and arbitrarily sparing bank bondholders. How about the information black-out imposed by government on who got TARP money and how much?

The list of acts of fiduciary negligence and criminal activity is fairly long and was heralded by numerous red flags along the way.

However, what seems to escape most people is what might have caused this latest crisis. Indeed, is there one overarching action or decision or dynamic that can be highlighted and pointed at that would explain what is happening today?

If you’ve read any of my posts, I think there is.

In my opinion, this is nothing but the logical conclusion of the dynamic brought about by our monetary system. That is, what is happening today is nothing but the direct and logical consequence of the use of an unchecked fiat monetary system.

Incidentally, I wish everyone to realize that although we live in societies that are presumably steeped in economic and personal freedom, no government anywhere in the “free” West has ever asked ratification for their unilateral and arbitrary choice of monetary system.  Even worse, in our presumed economically free capitalist societies, government retains the power to set interest rates.

Once the government of a democratic society awards itself the right to impose the monetary system and manipulate interest rates, the one logical and inescapable outcome is the gradual erosion of the purchasing power of the unit of currency i.e. inflation.

Inflation is a dynamic that is both exponential in nature and, therefore, limited mathematically. Being exponential, inflation has a number of preordained and inevitable effects on society and the economy. One of the inescapable ramifications of inflation is that by artificially, pervasively and aggressively inducing inflation into a monetary system, government induces a rise in price level hence a rise in GDP. However, as GDP progression becomes ever more dependent on generating more inflation, the intrinsic wealth structure of society is progressively impaired. As the dynamic progresses, financial value runs away from intrinsic value at ever greater speed until the only way to induce more inflation requires ever greater degrees of government collusion in carrying out actions that eventually become criminal. This causes government to become an ever greater actor in the economy and eventually the existence of the political structure becomes dependent on generating ever more inflation.

But since expanding government can only subsist if it is financed by increasing tax revenue, then the generation of ever greater inflation becomes a goal unto itself.

The problem is that the logical conclusion of a fiat monetary system is known and inevitable. It has happened before. We know how it ends. Government intervention can at best stretch out the time line but cannot avoid the conclusion. In the process, government becomes a progressively larger actor in the economy. But as government is a non profit construct, its existence is predicated on increasing tax revenue thus progressively sapping the life blood of the economy.

The point at which the economy no longer generates enough revenue to service debt, that is the point at which financial value spurred on by leverage and gimmickry (i.e. hedonic adjustments, CPI manipulation, absurd leverage of 80 t0 1 )  is the most distant from intrinsic value. At that point, due to the yawning gap between what assets are worth on the market and the amount of debt that needs to be extinguished, returning to equilibrium causes social and economic devastation in the form of rising unemployment and a reduction of social services expenditure (road maintenance, mail delivery, social medicine, teacher salaries, civil servant salaries, food stamps… pensions… ).

Historically, similar junctures have resulted in world wars. We can only hope that this time will be different. But hope, as you know, is not a sound strategy.

http://www.msnbc.msn.com/id/31510813/ns/msnbc_tv-morning_meeting/#33346455

(look for “Ratigan: Goldman Sachs magic trick”)

Houses at $7000 (seven thousand Dollars)

October 16, 2009

The cost of a house can never drop below construction cost right?

Right?

http://finance.yahoo.com/news/At-foreclosure-auctions-rb-853906128.html?x=0&.v=1

We’re having a difficult day,” said Tom Atkins of Zetabid, the company holding the auction. “There was a $1,000 property that no one bid on. You’d think a slum lord at the very least would buy it and put a (federal housing assistance voucher) renter in there for $600 a month.”

Greenspan says US should consider breaking up big banks… ????

October 16, 2009

Is this guy bi-polar? Schizophrenic maybe?

Greenspan has spent his early days preaching restraint and sound money. Great!

Then when he was put in charge of the economy he immediately set about undermining the monetary system by doing exactly what he always said should not be done. As a result he pandered to the banks culminating in the repeal of Glass-Stegal thus having a direct hand in allowing banks to become big …. and now he says the big banks should be broken up?

http://www.bloomberg.com/apps/news?pid=20601110&sid=aJ8HPmNUfchg

The big banks shouldn’t have become big in the first place.

Stiglitz… hypocrite…

October 8, 2009

Stilglitz is in Ireland and for some reason he has found the courage to tell the Irish how it is. The thing is that by size comparison, Iraland is an economic backwater. So, I have to wonder why when the puppeteers of the largest economy in the world, that happens to be that of his own country, do the same, he should not feel as compelled to tell them how it is. And yet the Irish are doing nothing that the Americans or the Brits or the Europeans are not doing only on a scale that is a fraction of what the US is for example. Seriously, $77Billion?

http://www.irishtimes.com/newspaper/breaking/2009/1007/breaking45.html?via=mr