The real climate change catastrophe
Is the main stream press suddenly getting a wake-up call?
The real climate change catastrophe
Is the main stream press suddenly getting a wake-up call?
The reason I keep yapping about gold is two fold. An unchecked fiat monetary system within a democratic environment, must inherently and by necessity lead to an inflationary blow-off phase (2003/2007) accompanied by the total debasement of the currency. This is not an opinion. If you doubt this assertion, then take a gander at the header gracing the pages of this blog. The other reason is that in an environment of floating exchange rates where despite unimaginably low yields credit creation is contracting and currencies are deliberately devalued, nothing other than gold and/or silver can help to preserve wealth.
That is because a fiat monetary system can only survive in a context of relative values, high monetary velocity and low savings. The inescapable outcome is that financial value progressively runs away from intrinsic value and nominal profits are progressively concentrated in fewer and fewer sectors till they are concentrated in the financial industry only.
Since whether our “authorities” like it or not, gold is a rare commodity and, as such, it is nobody else’s debt, gold still plays a role in state finances. However, the fiat logic dictates that gold should be devalued by any means possible or, at least, not accounted at its true value. Thus as the fiat monetary logic develops, the authorities have a vested interest in avoiding any reference to gold and certainly have an interest in discouraging the public from demanding physical gold in exchange for currency because this is tantamount to saving thus lowering the velocity of money.
Accumulating gold in an environment of low yields and cratering credit creation is the only thing that can be done to preserve wealth. Accumulating gold is direct action to signify a loss of confidence in the monetary system, the policies and the instigators of the policies.
Physicist Howard Hayden, a staunch advocate of sound energy policy, sent me a copy of his letter to the EPA about global warming. The text is also appended below, with permission.
As noted in my post Access to Energy, Hayden helped the late, great Petr Beckmann found the dissident physics journal Galilean Electrodynamics (brochures and further Beckmann info here; further dissident physics links). Hayden later began to publish his own pro-energy newsletter, The Energy Advocate, following in the footsteps of Beckmann’s own journal Access to Energy.
I love Hayden’s email sign-off, “People will do anything to save the world … except take a course in science.”
Here’s the letter:
Howard C. Hayden
785 S. McCoy Drive
Pueblo West, CO 81007
October 27, 2009
The Honorable Lisa P. Jackson, Administrator
Environmental Protection Agency
1200 Pennsylvania Ave., NW Washington, DC 20460
Dear Administrator Jackson:
I write in regard to the Proposed Endangerment and Cause or Contribute Findings for Greenhouse Gases Under Section 202(a) of the Clean Air Act, Proposed Rule, 74 Fed. Reg. 18,886 (Apr. 24, 2009), the so-called “Endangerment Finding.”
It has been often said that the “science is settled” on the issue of CO2 and climate. Let me put this claim to rest with a simple one-letter proof that it is false.
The letter is s, the one that changes model into models. If the science were settled, there would be precisely one model, and it would be in agreement with measurements.
Alternatively, one may ask which one of the twenty-some models settled the science so that all the rest could be discarded along with the research funds that have kept those models alive.
We can take this further. Not a single climate model predicted the current cooling phase. If the science were settled, the model (singular) would have predicted it.
Let me next address the horror story that we are approaching (or have passed) a “tipping point.” Anybody who has worked with amplifiers knows about tipping points. The output “goes to the rail.” Not only that, but it stays there. That’s the official worry coming from the likes of James Hansen (of NASAGISS) and Al Gore.
But therein lies the proof that we are nowhere near a tipping point. The earth, it seems, has seen times when the CO2 concentration was up to 8,000 ppm, and that did not lead to a tipping point. If it did, we would not be here talking about it. In fact, seen on the long scale, the CO2 concentration in the present cycle of glacials (ca. 200 ppm) and interglacials (ca. 300-400 ppm) is lower than it has been for the last 300 million years.
Global-warming alarmists tell us that the rising CO2 concentration is (A) anthropogenic and (B) leading to global warming.
(A) CO2 concentration has risen and fallen in the past with no help from mankind. The present rise began in the 1700s, long before humans could have made a meaningful contribution. Alarmists have failed to ask, let alone answer, what the CO2 level would be today if we had never burned any fuels. They simply assume that it would be the “pre-industrial” value.
- The solubility of CO2 in water decreases as water warms, and increases as water cools. The warming of the earth since the Little Ice Age has thus caused the oceans to emit CO2 into the atmosphere.
(B) The first principle of causality is that the cause has to come before the effect. The historical record shows that climate changes precede CO2 changes. How, then, can one conclude that CO2 is responsible for the current warming?
Nobody doubts that CO2 has some greenhouse effect, and nobody doubts that CO2 concentration is increasing. But what would we have to fear if CO2 and temperature actually increased?
Consider the change in vocabulary that has occurred. The term global warming has given way to the term climate change, because the former is not supported by the data. The latter term, climate change, admits of all kinds of illogical attributions. If it warms up, that’s climate change. If it cools down, ditto. Any change whatsoever can be said by alarmists to be proof of climate change.
In a way, we have been here before. Lord Kelvin “proved” that the earth could not possibly be as old as the geologists said. He “proved” it using the conservation of energy. What he didn’t know was that nuclear energy, not gravitation, provides the internal heat of the sun and the earth.
Similarly, the global-warming alarmists have “proved” that CO2 causes global warming.
Except when it doesn’t.
To put it fairly but bluntly, the global-warming alarmists have relied on a pathetic version of science in which computer models take precedence over data, and numerical averages of computer outputs are believed to be able to predict the future climate. It would be a travesty if the EPA were to countenance such nonsense.
Howard C. Hayden
Professor Emeritus of Physics, UConn
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.
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.
“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.
“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.
“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.
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.
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.
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.
“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.
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.
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.
“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.
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.
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.
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.
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.
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.
… later than I thought this would happen but, here we go…
At least in the West, government is a human construct that is supposed to be by the people for the people.
Government is not a for profit entity. Government is supposed to collect money from society and allocate these sums to facilitate the socio economic development of its members.
If a government spends in excess of what it collects in taxes, it must make up the shortfall with debt. Taking on debt, means that government must also pay interest. In order to pay interest, government must collect more taxes (inheritance tax, stamp duties, VAT, income tax…).
As I explain here, society needs a monetary system. Short of going back to barter, there are only two choices: a monetary system based on some sort of value that is directly related to the economy or a monetary system that is based on nothing other than political will.
In the modern era since the turn of the 20th century, Western governments have gradually and arbitrarily moved towards the political monetary system known as “fiat”. The USA went on a fiat monetary system in 1913, Europe in 1970 and then all other countries in the world followed suit. Today, all countries in the world are on a US Dollar based fiat monetary system. Note that fiat monetary systems have been tried in the past and all, inevitably, collapsed in a final glorious conflagration of debt (i.e. the French Assignats, the American Continentals, the Argentine Peso…)
Thus, today all world currencies are interconnected which means that what happens in the USA and what the USA does domestically or overseas affects us all.
So then, why is stimulus nonsense?
Stimulus is nonsense because in order for the government to spend that money, the sums must first be extracted from the economy; or the sums must be borrowed first and then extracted from the economy; … which means that however you slice it the sums must be extracted from the economy sooner or later.
In the particular case of the cash-for-clunkers stunt, pundits and officials are all in a tizzy as to the purported “success” of the scheme. So much so that they now wish to double the effort with another Billion Dollars. This of course begs the question: why not extend the scheme to clothes, windows, bicycles, TVs or, for that matter and since it is the largest national employer, the hotel and restaurant industry or any other industry you care to think of. If cash for clunkers is so effective at securing economic growth, then lets give money to every single man, woman and child to buy what they please. Come to that, why limit it to 2Billion Dollars? Heck, let’s make it 15Billion; no, wait! Let’s make it 50Billions so everyone can become at least a millionaire; that should get things going nicely me thinks.
Advocates of stimulus (mostly Keynesians) maintain that the advantage of government stimulus lies in that lag of time found in borrowing-first-paying-later scam.
And they would be right… at least for a limited time… and at an earlier stage of the inflationary cycle… because that is a scam that you can only run so long. Essentially, you can run the stimulus scam only for as long as underlying economic activity is sufficient to cover debt service. However, in 40 years of skyrocketing debt accumulation and cratering velocity of money, GDP expansion has been on life support since at least 2000. Essentially, as is typical in fiat monetary systems, once past the half way point in the inflationary dynamic, the structure of “value” is compromised as it becomes ever more dependent on currency depreciation and increasing debt rather than real demand. So, cash for clunkers, is nothing but more currency depreciation pulling even more demand forward in time.
However, in October 2008, after a steady 30 year decline, the money multiplier finally fell below 1… meaning that money and credit creation were no longer having any effect on economic expansion. This means that unless money starts circulating again, then GDP must adjust downward accordingly. Now, considering the charts I posted here and in many other essays, I’d say GDP has to adjust downwards by a good chunk for a few years to come… quite a few years to come.
The moment economic activity generates less revenue than required to cover debt service, more stimulus brings about the implosion of the economy, thus the implosion of the tax base; thus the implosion of the monetary system; thus the implosion of government.
But, as self proclaimed holders of the moral high ground, I really don’t see any Western government admitting to being bankrupt nor, indeed, admitting to fraud… because that’s what a fiat monetary system becomes when coupled with a “democracy”.
So, if the West cannot admit bankruptcy and yet there is no money to maintain social services such as mail delivery, road maintenance, driver license renewal, unemployment benefits… traffic management…. teachers’ salaries…… medical staff salaries……. food stamps………. pensions……………. debt service……………………….
War by 2013/2015… that’s what…
This is a chart of US deficit spending since 1935
The following, is the related chart of US government borrowing (debt)…
… and this is a chart of US GDP year on year (yoy) percentage progression …
All charts are official US government data provided by the Fed of St Louis. And although self explanatory, I am going to parse what these charts mean.
The short explanation is that despite borrowing and spending ever increasing amounts of money, we are not getting wealthier and each additional dollar of “stimulus” has an exponentially decreasing effect on GDP expansion with the result that Western governments are today bankrupt and, by necessity, are shifting towards a fascist form of government.
The longer answer.
As stated in previous essays, government is not a for profit entity. Government’s only income is through taxes (licenses, fees, duties, income taxes, inheritance taxes, sales tax, stamp duty …).
Just like you and me, if government spends more than what it receives in taxes, then it must borrow the difference.
Just like you and me, when government borrows money, it pays interest. The more money you borrow, the more money you have to spend on interest… but… government has no income so it can only pay more interest if it extracts more money from the economy in the form of taxes.
If you can get your head around that, then observe the charts I present above.
What the first chart at top indicates is that the US government has pretty much always run a deficit. In other words, the US gov has consistently spent more than what it earned and other than an outlier during the Clinton era, the secular trend has resumed its downward trend with a vengeance.
Before you stand up and clap for Clinton, observe the next chart in the middle.
Although in the first chart it would appear that Clinton brought deficit spending under control during his tenure, the second chart shows that his borrowing did not abate.
The third chart is the chart of US GDP yoy progression that you will find in many of my essays.
When you take the three charts together, the conclusion is inevitable. The US gov has consistently spent more than what it made in taxes and made up the shortfall by taking on increasing quantities of debt…. but GDP has only ever progressed at a rate of 3% year on year with occasional peaks at 6%
So, despite having overspent like the proverbial drunken sailor for the best part of the last forty years, despite having borrowed sums that have no comparison in human history, we’ve only ever been able to get GDP growing at a clip of 3%yoy.
But wait. That’s not all!!
Not only has GDP only progressed at 3%yoy but, in the meantime, we’ve become a service based economy to the point that consumption constitutes 70% of GDP. This is important to the extent that somebody should ponder the question of how much real wealth is created in a consumer economy; i.e. what part of the 70% of consumption creates the conditions and the means to create something else.
But wait. That’s not all!!
Not only has GDP only progressed at 3%yoy and, along the way, we’ve become a service economy but debt and the monetary base have consistenly expanded at an average of 10%yoy over the past forty years. When money and credit expand faster than the economy, you have inflation. So, a good chunck of that 3% is due to inflation really.
As I point out here, here, here and here, a fiat monetary system combined with “democracy” has an inherently logical and inescapable conclusion. The only variable is time; i.e. how long a government can postpone said conclusion. A fiat monetary system is in fact a pyramid scheme; that is, its existence is predicated on your ability to bring new contributors in at the bottom of the pyramid.
I maintain that our modern fiat monetary system was conceived along with the inception of the US Federal Reserve in 1913. Since then, as the hegemon, the US was able first to manipulate gold’s convertibility domestically thus creating the conditions for unchecked inflation which brought us to 1929. That first crisis lead us straight into WWII. After that, the US was still able to use inflation and debt to carry out hegemonic activities like the Marshall Plan, putting a man on the moon and expanding the military and nuclear arsenal till the late 60s when the cows came home. At that point, Bretton Woods was abrogated and the US convinced all then industrialized countries to abandon a monetary system based on gold and to adopt instead the US$ as their reserve currency along with fiat money. Thus, the hegemon was able to bring in several new contributors at the bottom of the pyramid. Then in order to keep feeding the pyramid, we immediately set to work on the Euro to devalue the currencies of the European countries thus giving a breath of fresh air to the now interconnected global monetary system as well as globalization thus brining in all other countries in on the US$ reserve fiat monetary system.
Except that today, short of introducing a new world currency, we have run out of contributors to bring in at the bottom of the pyramid.
Of course, if you scan my blog you will find clues that, indeed, we are working on a world currency. The question is, can we effectively introduce a global currency in useful time to give the global US$ based fiat monetary system some new wind. “Useful” time here means in a few months from today!
So, unless someone, somewhere, does not come up with a brilliant idea to restart a modicum of inflation, we are pretty much looking at the same situation the US found itself in at the end of the 60s – that is, sovereign countries are staring at bankruptcy.
Of course, by now you know that I maintain that no Western country will admit to bankruptcy. But as unemployment climbs to unprecedented heights and as social services are reduced and then necessarily discontinued, the West becomes a tinder box of social unrest. As Western governments feel they are losing their grip on power, they will engineer a war.
At this rate and unless something changes in the coming months, I say we have us a global conflict by 2013/2015
This is a brief explanation of fiat money, the inflation dynamic and the role of debt along with the BIS’s December 2008 report
Today we have the BIS’s latest findings along with Zero Hedge’s comment as an added bonus…
Folks! Things are not getting better at all. You laugh; three years from now you’ll be scanning these pages again!
As shown here, here, here and proven here with charts, and in many other posts on my blog, in a fiat monetary system, inflation is the reason sine-qua-non of the existence of the system and therefore, the state. Inflation is a dynamic that is both exponential in nature and limited mathematically. Inflation pulls forward and compresses in time industrial capacity – i.e. as the inflationary dynamic develops, savings are depleted, debt increases and demand and production accelerate faster than otherwise would be the case. No other entity accumulates more debt than government, particularly the government of the hegemonic power. As inflation is an exponential dynamic (i.e. you always need more inflation in order to bring about the same or greater expansion of GDP) it conforms to the law of diminishing returns. Thus, once you are past the peak beneficial effect of the inflationary dynamic, government has a vested interest in inducing ever greater degrees of inflation at fist legally but as the effects of inflation wane, then also illegally.
This excerpt from a CSPAN broadcast requires little or not comment as it is self explanatory.
Other than Bernanke’s attitude that is akin to that of a boy caught doing something down right irresponsible, as kids are inclined to do, what is more important is that Bernanke provides proof of the interdependency of currencies. In a global US$ based fiat monetary system, what happens to the US stock market, the economy and the Dollar happens to all of us around the world.
If you do not find this excerpt frightening, you have not understood the magnitude of the predicament we are in.