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Steve Begleiter, Former Bear Stearns Exec: World Series Of Poker Winner? (VIDEO)

2009-11-05T08:00:01Z

Former Bear Stearns executive Steven Begleiter is set to compete in the final table at the Main Event at the World Series of Poker starting on Saturday in Las Vegas.

Begleiter qualified for the final round in the July preliminaries -- since 2008, the final table has been delayed until November -- where he finished among the top nine out of 6,494 entrants and took home $1.26 million in prize money. This month, he'll play for the top payout of $7.2 million.

Until 2008, Begleiter was head of corporate strategy at Bear Stearns, where executives were known more for their regard for bridge than poker. When Bear was sold to J.P. Morgan, Begleiter helped transition the firm before moving to the private equity group Flexpoint Ford. Begleiter told The New York Times that despite the "populist nonsense going on right now," he's still "very proud" of his time at Bear.

Time reports that, Begleiter will be up against several very skilled professional poker players -- including Phil Ivey, who many consider to be the game's top professional -- but it appears he appreciates the challenge: "It's not about the money, really, I just like to compete," he said.

WATCH: Begleiter talks about being in the "November Nine" below:

Meet the WSOP November Nine -- Steven Begleiter - Click here for more free videos

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New "Too Big To Fail" Bill Gives Feds Power To Freeze Derivatives Contracts

2009-11-03T13:46:49Z

The "Too Big To Fail" legislation currently being debated by a House committee has been widely criticized as toothless. But one provision gives the federal government a powerful mechanism to prevent another implosion like the one that launched the current financial crisis.

The bill, which would give the Federal Deposit Insurance Corporation the power to take over failing firms that pose a risk to the entire financial system, gives the FDIC the authority to repudiate the firm's derivatives contracts, pay the parties less than what they're owed, or transfer the contracts to another, healthy financial firm.

Perhaps most importantly, the FDIC would have the authority to delay the parties from closing out their contracts and taking their money with them. That's part of the reason why the Lehman Brothers bankruptcy announcement caused the financial markets to crash, and it's what helped bring about the demise of the 158-year-old investment firm -- everyone wanted to get their money out before it was too late.

The FDIC already has this power when it comes to failed banks. But its authority is strictly limited to insured depositories. So the FDIC can take over a Citibank, for example, but not all the operations of a Citigroup. It's an important difference, and part of the reason why the administration and House Financial Services Committee Chairman Barney Frank are proposing to give the FDIC this expanded authority.

Here's how it works:

These days, when the FDIC takes control of a bank, it can liquidate it (receivership) or take it over in preparation for a sale (conservatorship). Receivership is the most common approach. In those cases, the FDIC will sell off a bank's assets, or it can open a temporary bank in order to minimize the disruption that would come from immediately selling off all of a bank's assets.

In derivatives contracts, a firm's failure or bankruptcy often triggers a clause that calls for the contract to be immediately closed out.

From Michael Krimminger, special advisor for policy at the FDIC, before a House committee in October:

Under both the Bankruptcy Code and bank insolvency law, the counterparties to insolvent firms can terminate and net out derivatives and sell any pledged collateral to pay off the resulting net claim. During periods of market instability -- such as during the fall of 2008 -- the exercise of these netting and collateral rights can increase systemic risks. At such times, the resulting fire sale of collateral can depress prices, freeze market liquidity as investors pull back, and create risks of collapse for many other firms.

In effect, financial firms are more prone to sudden market runs because of the cycle of increasing collateral demands before a firm fails and collateral dumping after it fails. Their counterparties have every interest to demand more collateral and sell it as quickly as possible before market prices decline. This can become a self-fulfilling prophecy -- and mimics the depositor runs of the past.

This is what happened to Lehman Brothers and another Wall Street firm no longer standing, Bear Stearns.

"Rumors about Lehman's liquidity problems, and the subsequent bankruptcy filing, triggered asset fire sales and destroyed the liquidity of a large numbers of claims held by Lehman's direct counterparties as well as of claims held by counterparties several steps removed from those having claims directly against Lehman itself," Krimminger said. "This led to an abrupt collapse of liquidity as the ability of parties throughout the market to complete settlements was placed into doubt."

While the FDIC can now stem the tide for banks, it can't for investment firms such as Goldman Sachs or Morgan Stanley. The draft of the Financial Stability Improvement Act of 2009 -- first proposed by the administration and introduced in the House Financial Services Committee last week -- would give the agency that ability.

It's not going to be easy, though. With derivatives, under both its current and proposed authority, the FDIC only has until 5 p.m. on the business day following its appointment as a receiver to dispose of the problems. The rationale behind the one-business day turnaround is that the value of derivatives is tied closely to a company's relationship with others in the market and its need for immediate and continuous access to liquidity.

According to a summary of the administration's regularly reform framework by the international law firm Gibson, Dunn & Crutcher, which represents banks and other financial firms, the FDIC would have the "power to repudiate 'burdensome' contracts and leases and is liable only for 'actual direct compensatory damages' and no damages for profits or lost opportunity or pain and suffering or punitive damages...[and it would be able to] enforce contracts despite default, termination, or acceleration clauses."

The proposal has its critics. The International Swaps and Derivatives Association, a global trade group representing the over-the-counter derivatives industry, is concerned that the bill wouldn't allow firms to immediately net-out and end their contracts.

"In general, our main concern about any wind-down authority would be to ensure that potential legislation recognizes the importance of the enforceability of close-out netting to the derivatives markets and the counterparty risk management benefits this brings," the group said in a statement.

To put the provision into context, let's imagine that AIG had been taken over by the FDIC. Rather than the troubled insurer paying Goldman Sachs $12.9 billion for its disastrous credit-default swaps (a type of derivative contract) -- a sum paid in full per the contracts -- the FDIC could have mandated a lesser payment. In the real world, however, the New York Fed chose to make AIG pay all of its debts in full. Per Jonathan Weil of Bloomberg:

AIG wound up paying $32.5 billion to retire the swaps, $13 billion more than if it had paid, say, 60 cents on the dollar. The New York Fed also arranged to pay the banks $29.6 billion for collateralized-debt obligations backed by subprime mortgages and other loans, a tad less than half their face value. (The swaps were side bets by the banks that rose in value as the CDOs fell.)

It probably made sense for the counterparties to reject AIG's initial settlement offers. They had their own investors to look after. And once the government took control of AIG, it couldn't credibly threaten to force the company into bankruptcy proceedings. The premise of the government's seizure, after all, was that AIG was too big to fail.

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Robert Reich: Breaking Up the Big Banks, and Why Congress Won't Do It

2009-10-26T21:49:41Z

And now there are five -- five Wall Street behemoths, bigger than they were before the Great Meltdown, paying fatter salaries and bonuses to retain their so-called"talent," and raking in huge profits. The biggest difference between now and last October is these biggies didn't know then that they were too big to fail and the government would bail them out if they got into trouble. Now they do. And like a giant, gawking adolescent who's just discovered he can crash the Lexus convertible his rich dad gave him and the next morning have a new one waiting in his driveway courtesy of a dad who can't say no, the biggies will drive even faster now, taking even bigger risks.

What to do? Two ideas are floating around Washington, but only one is supported by the Treasury and the White House. Unfortunately, it's the wrong one.

The right idea is to break up the giant banks. I don't often agree with Alan Greenspan but he was right when he said last week that "[i]f they're too big to fail, they're too big." Greenspan noted that the government broke up Standard Oil in 1911, and what happened? "The individual parts became more valuable than the whole. Maybe that's what we need to do." (Historic footnote: Had Greenspan not supported in 1999 Congress's repeal of the Glass Steagall Act, which separated investment from commercial banking, we wouldn't be in the soup we're in to begin with.)

Former Fed Chair Paul Volcker, whose only problem is he's much too tall, last week told the New York Times he'd like to see the restoration of the Glass-Steagall Act provisions that would separate the financial giants' deposit-taking activities from their investment and trading businesses. If this separation went into effect, JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. And Goldman Sachs could no longer be a bank holding company.

But the Obama Administration doesn't agree with either Greenspan or Volcker. While it says it doesn't want another bank bailout, its solution to the 'too big to fail' problem doesn't go nearly far enough. In fact, it doesn't really go anywhere. The Administration would wait until a giant bank was in danger of failing and then put it into a process akin to bankruptcy. The bank's assets would be sold off to pay its creditors, and its shareholders would likely walk off with nothing. The Treasury would determine when such a "resolution" process was needed, and appoint a receiver, such as the FDIC, to wind down the bank's operations.

There should be an orderly process for putting big failing banks out of business. But this isn't nearly enough. By the time a truly big bank gets into trouble -- one that poses a "systemic risk" to the entire economy -- it's too late. Other banks, competing like mad for the same talent and profits, will already have adopted many of the excessively-risky banks' techniques. And the pending failure will already have rocked the entire financial sector.

Worse yet, the Administration's plan gives the big failing bank an escape hatch: The receiver might decide that the bank doesn't need to go out of business after all -- that all it needs is some government money to tide it over until the crisis passes. So the Treasury would also have the authority to provide the bank with financial assistance in the form of loans or guarantees. In other words, back to bailout. (Historical footnote: Summers and Geithner, along with Bob Rubin, while at Treasury in 1999, joined Greenspan in urging Congress to repeal Glass-Steagall. The four of them -- Greenspan, Summers, Rubin and Geithner also refused to regulate derivatives, and pushed Congress to stop the Commodity Futures Trading Corporation from doing so.)

Congress is cooking up a variation on the "resolution" idea that would give the Federal Deposit Insurance Corporation authority to trigger and handle the winding-down of big banks in trouble, without Treasury involvement, and without an escape hatch.

Needless to say, Wall Street favors the Administration's approach -- which is why the Administration chose it to begin with. If I were less charitable I'd say Geithner and Summers continue to bend over bankwards to make Wall Street happy, and in doing so continue to risk the credibility of the president, as well as the long-term financial stability of the system.

Wall Street could live with the slightly less delectable variation that Congress is coming up with. But Congress won't go as far as to unleash the antitrust laws on the big banks or resurrect the Glass-Steagall Act. After all, the Street is a major benefactor of Congress and the Street's lobbyists and lackeys are all over Capitol Hill.

The Street obviously detests the notion that its behemoths should be broken up. That's why the idea isn't even on the table. But it should be. No important public interest is served by allowing giant banks to grow too big to fail. Winding them down after they get into trouble is no answer. By then the damage will already have been done.

Whether it's using the antitrust laws or enacting a new Glass-Steagall Act, the Wall Street giants should be split up -- and soon.

Cross-posted from Robert Reich's Blog.

Joseph A. Palermo: Wall Street Is More of a Threat to Obama's Domestic Agenda than Afghanistan

2009-10-20T15:02:29Z

"Deficits don't matter." When Vice President Dick Cheney uttered this famous line he was making a political judgment, not an economic one. In 2001, when the newly selected President George W. Bush and his posse rode into Washington they immediately began in earnest the chicanery, lying and recklessness that we came to expect throughout the subsequent eight years. They promised there'd be great benefits for our nation if the Republican Congress passed a massive tax cut aimed at Bush's wealthy friends, corporations, and campaign donors.

This call for fiscal abandon came after years where we heard squawking about the danger of budget deficits from Newt Gingrich and other Republicans, as well as from conservative pundits and Blue Dog Democrats. And one of the loudest voices decrying budget deficits in the pre-Bush years was the Chair of the Federal Reserve Alan Greenspan. The proposal coming from the Republican president and the Republican Congress was a tax giveaway to the wealthiest Americans and corporations that was certain to blow a hole in the federal budget and add $1.7 trillion to the national debt.

As head of the Federal Reserve it was Alan Greenspan's job to tell the Bush gang that after the sacrifices made to pay down the debt a new round of Reagan-style tax giveaways to the rich and corporations would be a bad idea. That line would have been the "conservative" position to take. Instead, as the high priest of all things economic, Greenspan testified to Congress giving his imprimatur to the Bush administration's kleptomania.

Greenspan's easy money policies aided and abetted Wall Street's pumping up "the mother of all bubbles." And along with the federal budget deficit he encouraged (and the Republicans' drunken spending spree that followed) the money ordinary Americans circulate was buried under a mountain of new debt and new claims on the money supply from Wall Street. By 2006, Wall Street was throwing around 7.5 times as much money ($10.299 trillion) than was being spent by Main Street ($1.367 trillion). Greenspan also sat back and watched when an exemption to the "net capital rule" was passed in 2004 that allowed investment banks to exceed the maximum debt to equity ratio of 12 to 1. Soon Bear Stearns' debt to equity ratio jumped to 33 to 1 and Merrill Lynch's ballooned to 40 to 1. And a lot of this leveraged debt was wrapped up in collateralized debt obligations (CDOs) and other toxic derivative sludge.

We all know how the story plays out: In October 2008 the Congress, with a gun to its head from Wall Street titans and in the middle of an election season, forked over $810 billion of the taxpayers' money to bailout some of the greediest and most short-sighted market players ever to exist in the history of capitalism.

Today, just over a year later, with Goldman Sachs and other bailed out financial institutions turning big profits and paying out bonuses to their luckiest gamblers we continue to see the "real economy" in free fall. There are about $70 billion in crappy mortgages due to be "reset" in the next eighteen months, so there's no end in sight to Americans being thrown out of their homes. Unemployment continues to climb (albeit at a slower rate) but the deep hole that needs to be filled to replace the jobs lost will take many years of robust economic growth. The Congress, always in hawk to Wall Street, is dragging its feet in passing anything near the sweeping regulatory restructuring that is needed if we are to prevent Goldman Sachs and the rest of the gang from exploiting their "moral hazard" by using the federal treasury as the mother of all "credit default swaps." We can't even get the Democratic Congress to create a Pecora Commission with subpoena power to explore the extent of the criminality that led to the current crisis with the aim of modernizing the Securities and Exchange Commission to challenge the kleptocracy.

At some point, as the journalist Matt Taibbi and others have pointed out, our nation's Treasury seems to have been usurped by the former Goldman Sachs CEOs and other executives who both Bill Clinton and George W. Bush thought would make great Treasury Secretaries.

President Barack Obama's economic team headed by Treasury Secretary Tim Geithner and presidential adviser Larry Summers, like Alan Greenspan, are the wrong people doing the wrong job at the wrong time. They are catering to the whims of Wall Street when they should be mad as hell and representing the interests of Main Street. When FDR tapped Joseph P. Kennedy to be the first chair of the SEC he did so because Kennedy understood the swindles that needed to be policed because he had practiced them himself. Geithner and Summers understand the problems but so far they have not shown the will or desire to do anything about them.

There is currently a lot of hand wringing about the possibility of the war in Afghanistan, as costs rise and public support wanes, destroying President Obama's domestic agenda just as the Vietnam War brought down Lyndon Johnson. But whatever Obama decides to do in Afghanistan is of little consequence compared to Wall Street's ongoing "plutonomy." Either President Obama and the Congress tame and bring under control the white collar criminals who run Goldman Sachs and other "too big to fail" institutions or else there isn't going to be a "domestic agenda."

Wall Street Donating Little To Obama

2009-10-20T03:37:35Z

The Wall Street giants that received a financial lifeline from Washington may have no compunction about paying big bonuses to their dealmakers and traders. But their willingness to deliver "thank you" gifts to President Obama and the Democrats is another question altogether.

Congressional Committees Quietly Kill Portion Of Derivatives Bill; No One Watching For Systemic Risk

2009-10-17T16:23:06Z

Two congressional committees in charge of drafting legislation to regulate derivatives have quietly killed a provision that would allow the Federal Reserve to police the complicated financial transactions. The kind of derivatives that many blame for the near-collapse of the American financial system have never been regulated.

In July, the Obama administration sent a proposed bill to Congress requesting that the Federal Reserve be given authority to oversee those aspects of the financial system that posed "systemic risk" -- in short the kind of firms and activities that could bring down the entire financial system. It would be up to the Fed and other federal regulators to determine what constituted "systemic risk." The trading of derivatives, essentially contracts that can act as insurance against a future event or as just a simple bet, were part of the package.

Derivatives brought down the Wall Street investment banks Lehman Brothers and Bear Stearns and nearly caused insurance giant AIG to go belly up. The reason why they nearly brought down the entire financial system is because every major financial firm and bank were tied to them through derivatives deals. They were all interconnected. But there wasn't a single regulator looking at that. Rather, individual government regulators -- both state and federal -- were overseeing their own individual part of the pie, instead of the whole thing. Obama's plan is an attempt to change that.

But late Friday afternoon, the House Agriculture Committee quietly posted to its Web site a revised version of the Obama administration-proposed legislation. The Committee, which has jurisdiction over one of the two federal regulators of derivatives trading -- the Commodity Futures Trading Commission (CFTC) -- deleted the portion of Obama's bill that gives the Federal Reserve a say in those derivatives activities that pose a risk to the financial system. Specifically, the Fed would have been given the power to oversee new rules set up by the exchanges and clearinghouses where derivatives trading takes place. The previous version of the Agriculture committee's bill, released Oct. 9, included that passage. The current bill places that power solely in the hands of the CFTC.

A spokesman for House Agriculture Committee Chairman Rep. Collin Peterson, a Democrat from Minnesota, could not be reached for comment late Friday.

The move follows that of the House Financial Services Committee, where Rep. Judy Biggert, an Illinois Republican, offered an amendment striking the same provision in their version of the bill with the agreement of Committee Chairman Rep. Barney Frank (D-Mass.). The original version of the Financial Services bill, though, was a bit stronger than the Agriculture bill (at least in this aspect) because it included all of the language originally put forward by the administration regarding systemic risk. Specifically, the administration's proposal gave the Fed authority over not only new rules governing derivatives trading that threatened the system, but also over new derivatives and how the trading of them would be processed.

Frank allowed Biggert's amendment to pass without debate, punting the issue to the Agriculture committee. His spokesman says the Financial Services Committee lacks jurisdiction in this area, thus calling the committee's move "irrelevant." However, Frank and the rest of the committee did impose additional regulation on other aspects of derivatives trading that fall under Agriculture's jurisdiction.

In its white paper announcing its detailed plans to overhaul financial regulation, the administration explained how derivatives led to the economy's near-collapse, and why the Federal Reserve would need additional power over them:

"Through credit derivatives, banks could transfer much of their credit exposure to third parties without selling the underlying loans. This distribution of risk was widely perceived to reduce systemic risk, to promote efficiency, and to contribute to a better allocation of resources," the administration said.

"However, instead of appropriately distributing risks, this process often concentrated risk in opaque and complex ways. Innovations occurred too rapidly...for the nation's financial supervisors.

"The build-up of risk in the over-the-counter (OTC) derivatives markets, which were thought to disperse risk to those most able to bear it, became a major source of contagion through the financial sector during the crisis," the administration said. "We propose to enhance the Federal Reserve's authority over market infrastructure to reduce the potential for contagion among financial firms and markets."

Derivatives, the administration said in its draft legislation, "may also concentrate and create new risks and thus must be well designed and operated in a safe and sound manner. Enhancements to the regulation and supervision of systemically important financial market utilities and the conduct of systemically important...activities by financial institutions are necessary to provide consistency, to promote robust risk management and safety and soundness, to reduce systemic risks, and to support the stability of the broader financial system."

Thus, "responsibility and authority for ensuring consistent oversight of all systemically important...activities should be assigned to the Federal Reserve," the administration said.

Officials from the Federal Reserve also have lobbied for the added role, arguing that it's best suited to minimize destabilizing threats to the financial system.

"The [Federal Reserve] Board believes that all systemically critical firms should have a consolidated supervisor, as well as be subject to the oversight of any systemic regulator that might be created," said Patricia White, associate director of the Fed's division of research and statistics, in June during testimony before the U.S. Senate. "The scope of a firm's activities in the OTC derivatives market will likely be an important factor in making that assessment."

Fed Chairman Ben Bernanke echoed those remarks the next month during testimony before Barney Frank's Financial Services Committee.

"It is critical that systemically important systems and activities be subject to strong and consistent prudential standards designed to ensure the identification and sound management of credit, liquidity, and operational risks," Bernanke said. "The Federal Reserve also would expect to carefully monitor and address, either individually or in conjunction with other supervisors and regulators, the potential for additional spillover effects...For example, the failure of one firm may lead to deposit or liability runs at other firms that are seen by investors as similarly situated or that have exposures to such firms. In the recent financial crisis, exactly this sort of spillover resulted from the failure of Lehman Brothers, which led to heightened pressures on other investment banks."

Thus, in explaining why the Fed would need additional police power over things like derivatives trading, Bernanke brought up the failure of Lehman Brothers, the largest bankruptcy filing in U.S. history. At the time of its demise, the storied Wall Street investment bank listed more than $613 billion in debt.

But as it stands, the Fed won't be getting that power from the two derivatives bills currently snaking through congressional committees. Rather, it will be fragmented across an array of federal and private regulators -- just what the Obama administration warned against.

The Treasury Department declined to comment.

The Entire Financial Crisis In 7 Minutes: iHeartWallStreet (VIDEO)

2009-10-16T16:26:24Z

Clusterstock points us to a new video by iHeartWallStreet, which attempts to distill the entire financial crisis in seven minutes and 15 seconds.

There are some hilarious clips of Jim Cramer in this piece, which melds together some of his worst calls of the crisis. There's one particular damning piece from TheStreet.com in which Cramer claims that, if the entire subprime loan market collapsed, the world would hardly notice. Ouch.

His words: "It has no relevance whatsoever...no one entity is going to be hurt, except for the one guy who ran Bear Stearns." Double ouch.

Watch the entire thing:

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New Bear Stearns Email Reveals Early Fear of "Blow-Up Risk"

2009-10-09T17:35:09Z

NEW YORK (Reuters) - One of two former Bear Stearns managers indicted for fraud over the collapse of hedge funds in 2007 feared a "blow up risk" to investors as early as November 2006, according to an email released on Thursday.

Georges Ugeux: Time to Stop the Regulatory Circus and to Steer the Ship to Safe Ground

2009-10-08T10:50:46Z

Writing from Istanbul October 6, 2009

After the G 20, the annual assembly of the International Monetary Fund and the World Bank in Istanbul has been a theater (in the true sense of the word) of the most confusing and disparate cacophony of opinions on the issues of the day. The world's financial regulators and Ministers of Finance need to stop their internal competitions and find a different way to reform financial regulation, make the economy grow, ensure that the systemic risk is eliminated and define an exit strategy.

Last year, this same assembly was starting to realize the magnitude of the disaster created by the bankruptcy of Lehman Brothers, the rescue of Bear Stearns and Merrill Lynch, the transformation of Goldman Sachs and Morgan Stanley into a bank, and of course the bloodbath of AIG. This week's meeting in Istanbul is the first assembly after three G 20 meetings, loads of summits and meetings around the world.

Foreign delegations were not amazed to hear, read or see the cacophony of opinions emanating from the U.S. administration and its focus on short term measures, completely missing the global and long-term perspectives. Emerging markets in particular had a field-day explaining that they coped very well with the crisis, did not suffer from a collapse of their financial institutions and were not plagued by greed as the Western Hemisphere has been.

However, this is not an excuse to continue business as usual. Somebody has to rein in the various parties and call them to focus on the work at hand. Yes, they can congratulate each other for the way they managed to stop what could have been a true financial earthquake, but the current landscape is not exactly pretty and it is urgent to make some sense of the current disorder of financial markets. On top of that, they should not ignore their own responsibilities in the crisis.

While all of this is happening, the derivative market's gross exposure is approaching its pre-crisis levels or in the words of NYU Professor, Nouriel Rubini, it is nearly ten times the world's Gross Domestic Product. With $ 1.5 trillion, the fixed income markets (and related bonuses) are at record levels.

The real issue for regulators around the globe is a serious definition of the financial world we want to live in. The current focus nearly exclusively on the banking sector, could cause authorities to miss the broader picture: the non-banking financial sector and global capital markets. By adding charges and equity requirements to the banks' balance sheet and cash flows, we are substantially shrinking the ability of banks to keep loans on their balance sheets and setting up the potential for days of scarce and expensive credit that could threaten the fragile economic growth we currently enjoy.

The United States has demonstrated that unless it reorganizes its regulatory apparatus to make it coherent and to give the Federal Reserve a coordinating role at the Federal and State levels, it will have no credibility. Only president Obama can empower the Federal Reserve Bank to play an essential leadership role, since it has the financial means to act and oversee the systemic financial risks.

Creating a special regime for financial institutions representing a systemic risk could effectively giving them control of banks to the public sector and creating a scenario where institutions that are "too big to fail" will enjoy quasi-Government guaranteed funding.

At international level, three institutions have the credibility to tackle these issues, provided that they closely cooperate: the International Monetary Fund for macro imbalances, the Financial Stability Board (acting effectively for the G 20) and the Bank for International Settlements where central banks coordinate their actions and clear funds between them. The time has come to stop talking and holding high level meetings. Let us see what these institutions will propose. In the mean time, the banks do not remain idle. They already are well under way in their restructuring, even at compensation level.

Now is time to identify a captain to steer this ship to safe ground by giving this person or institution the powers needed to implement a coherent new financial architecture and define the financial world in which we want to live.

Dan Solin: The Big Secret Wealthy Investors Don't Want You to Know

2009-10-06T20:57:44Z

Wealthy investors are different from you and me. They have a secret they don't want anyone to know.

They are bigger suckers.

How can this this be?

They qualify as "accredited investors" who can invest in deals exempted from SEC registration. Without SEC registration, the sponsors of these deals can avoid troublesome filing requirements that require detailed disclosures about transparency, limitations on fees and liquidity.

This means they can be enticed to buy "alternative investments" like hedge funds and private equity deals.

How is that working for them?

Not well.

According to a web site that tracks hedge fund performance, since late 2006, 117 hedge funds at 71 fund families have "imploded." The fund mangers don't include just miscreants like Bernie Madoff. Carlyle Capital, Bear Stearns, Dillon Read (run by UBS) and JPM Partners all made the list.

The news was not bad for everyone. The sponsors of these funds did just fine. For example, the UBS-run Dillon Read Capital Management hedge fund closed after losing $124 million in the first quarter of 2007. When UBS closed its hedge fund group, it incurred costs of $300 million.

Where did that money go?

According to the New York Times, "...$200 million went to severance payments and other costs for the hedge fund manager and his team."

Now I understand.

The investors get clobbered. The fund manager and his "team" get rewarded.

Here's the ultimate irony.

When wealthy investors seek legal redress against the firms that put them into these deals, they are confronted with the defense that they are "sophisticated investors" who should have known better. It usually works.

The rest of us can learn a valuable lesson from the foibles of the rich.

They are no match for the securities industry.

We aren't either.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

Diane Tucker: Who Duped Rolling Stone Gonzo Reporter Matt Taibbi?

2009-10-06T12:35:37Z

It's starting to look like basketball-player-turned-political-reporter-turned-overnight-authority-on-Wall-Street Matt Taibbi may have fallen for a stock-trading ruse. Heaven knows he's an easy mark. "I can't even balance my checkbook," he told radio talk show host Don Imus.

Taibbi, Rolling Stone magazine's teen heartthrob, became a sensation last month after calling Goldman Sachs "a giant vampire squid wrapped around the face of humanity." His piece contained as many errors as facts, but few of us minded because the imaginative writer memorably captured the national zeitgeist.

Taibbi knows you're only as popular as your latest record, so in this month's issue of Rolling Stone he takes on short selling, a controversial Wall Street stock trading practice. His report offers the usual cocktail of half-truths, which you can read about at Business Insider, Economic Policy Journal, Fraud Files Blog, The Atlantic, New York Times DealBook, and Investment News.

To tell you the truth, I haven't lost any sleep worrying about Taibbi's sloppy reporting or his obscene language. He's colorful, he's cute, he admits he'd rather be writing fiction ... oh, fiddle dee dee.

But I am intrigued by the video Taibbi posted on YouTube to make his point about short selling. People who know about these things say the video is a fake ... a hoax. Taibbi claimed the video showed a Penson Financial Services trading platform transaction, but today Penson dashed off a fast letter to the U.S. Securities and Exchange Commission, alerting them that the trading platform identified in each of Taibbi's posts is not Penson's. "While we are uncertain whether Taibbi's article is the result of a hoax or something more deliberate, we are contemplating sharing our concerns with YouTube and the blogger directly," wrote Penson's associate general counsel, in a two-page letter to the SEC that was made available to the Huffington Post.

If all these folks are right, it begs a few questions:

-- How did "short selling" happen to catch Taibbi's attention?
-- Who slipped Taibbi the fake video?
-- For what purpose?

Well, Matt? Who's screwin' with ya? We're waiting ...

* * *

For more details on this story I recommend business writers John Carney, Dan Jamieson, Megan McArdle, Gary Weiss, and Robert Wenzel. You can also read fraud examiner Tracy Coenen. If you think this is all a bunch of silly nonsense, you might enjoy satirist William K. Wolfrum's hilarious Taibbi video.

David Paul: Regulating Systemic Risk and Banker Compensation Will Not Fix What Is Broken on Wall Street

2009-10-03T12:18:15Z

Thirty years ago, Salomon Brothers and Goldman Sachs were two of the "bulge bracket" underwriting firms that dominated Wall Street. Both firms with partnerships with trading cultures that characterized their organizations. It was a time when Wall Street firms were looking far and wide for ways to increase their access to capital. Trading firms make money by making bets. More capital meant bigger bets. Bigger bets meant more money.

In 1980, in pursuit of a bigger balance sheet, Salomon CEO John Gutfreund negotiated the sale of his firm to Philipp Brothers, then the largest commodity trading firm in the world. The sale was not without controversy. Within Salomon, bond traders--led by Salomon family member William Salomon--opposed the sale. How, they asked, would traders be paid their due in the event the new firm lost money in other far-flung commodity businesses? As partners, they had a reason to be concerned by over-expansion into business lines that they neither understood nor controlled. They did not yet appreciate the benefits of trading with Other People's Money.

But the sale of Salomon went through--John Gutfreund pocketed his $30 million bonus--and over the next few years, the new firm, Phibro-Salomon was acquired by Travelers Insurance. Travelers, in turn, was acquired by Citibank, to create the financial supermarket that was supposed to give American banking a global dominance to match the well-capitalized Asian and European counterparts.

The Salomon story was part of the evolution of Wall Street over the past thirty years, as the storied Wall Street firms succumbed to the lure of capital to give up their partnership status and merge into commercial banks and to become publicly traded corporations. And while these firms did achieve their goals of increasing their access to capital--and ultimately won back their access to the massive pools of depositor money insured by the FDIC--the cost to the rest of us has been significant.

Where, after all, was William Salomon when Lehman Brothers decided to bet the ranch on collateralized mortgage securities that would ultimately bankrupt the firm. Where was William Salomon when Bear Stearns increased its leverage to thirty times, based on financial models that few in the firm really understood. And where was William Salomon when Joseph Cassano, the head of AIG Financial Products took the insurance giant headlong into the credit default swap business.

There was a moment when Cassano made his case to the AIG Board of Directors. The credit default swap contracts that AIGFP was providing to financial giants such as Goldman Sachs had no risk to AIGFP, argued Cassano, and therefore all of the annual receipts paid to AIGFP under those credit default swap contracts could be taken as current income--and used to pay very large bonuses--rather than held as reserves against future risk. CDS contracts are essentially insurance contracts provided to guarantee against defaults on corporate bonds, but Cassano argued that the bonds were so strong that there was no credit risk, and therefore the money paid to AIGFP was essentially free money.

But there was no William Salomon on the AIG Board of Directors. Unlike the old Wall Street partnerships, directors of corporations are largely insulated from the financial consequences of their decisions. Had AIG been a partnership like the old Salomon Brothers, a William Salomon would likely have asked the logical question of Joseph Cassano:

Goldman Sachs is paying us tens of millions of dollars a year, but you are telling us there is zero risk. One of us is wrong. This is a game of poker, and there is an idiot at the table. And you are telling me that Goldman Sachs is the idiot? I don't think so. I think we are the idiots at this table. If Goldman Sachs is paying us tens of millions of dollars a year, we are taking risk, and we sure better know what that risk is, because we are betting our future on it.

But, of course, AIG was not a partnership, and the rest is history.

But the Phibro-Salomon story had one chapter left. This summer, Citibank--the failed financial supermarket that is now a ward of the State--sought approval from the US Treasury to pay bonuses in order to keep a group of highly profitable traders from leaving the bank. The bonuses--the most famous being the $100 million for Andrew Hall--were to be for traders in its Phibro commodity trading subsidiary.

William Salomon saw the writing on the wall. The partnership trading culture that was critical to Salomon Brothers success--a culture that combined incentives and accountability--would not survive an evolution into a corporate model. What we have learned is that the incentives to make big bets and take big risks has survived, but without the accountability. Andrew Hall made $2 billion for Citigroup placing energy bets, and was due to be paid $100 million. But what of those whose bets lost Citigroup $2 billion? They have not even lost their jobs.

The trading firms gained the access to the capital that they sought in the 1980s, and they found the joy of playing with Other People's Money. And for twenty years, the game has gone on.

Heads I win, tails you lose. Or in David Einhorn's more elegant formulation, Private Profits, Socialized Risk.

Today, the US Treasury and the Fed are trying to hold the pieces together. AIG. Citi. Bank of America. GMAC. Fannie Mae. CIT Financial. But why? Where is the evidence that large financial corporations are more efficient at allocating capital than smaller banks? Surely, they have not been sound custodians of depositor funds or of the public trust. Neither have they proven they can deliver more predictable returns on shareholder equity than smaller, more nimble financial institutions, who themselves are increasingly disadvantaged by each bailout. Whose interest has conglomeration served but that of insiders seeking greater compensation with less risk?

One central question to all of this is whether the fundamental corporate model is not central to the problem. Today, absent prosecution for fraud, the CEOs and directors of all of these failed firms will walk away with much of their wealth intact, insulated from the consequences of the decisions they made. For years now, they have been playing with our money.

New regulatory regimes will not be adequate to control this systemic risk. Controlling banker compensation might have a populist appeal, but no one should imagine it constitutes systemic reform. Regulatory bureaucracies cannot control systemic risk in massive financial corporations, because the systemic risk is the massive financial corporation.

Thirty years ago. William Salomon was suggesting a simple truth: Sound decision-making, incentives and accountability require that those who are making decisions and placing bets have their own capital at risk.

Kenneth Rogoff: Opinion: Why We Need To Regulate Banks Sooner, Not Later

2009-08-20T10:43:54Z

When in doubt, bail it out," is the policy mantra 11 months after the September 2008 collapse of Lehman Brothers. With the global economy tentatively emerging from recession, and investors salivating over the remaining banks' apparent return to profitability, some are beginning to ask: "Did we really need to suffer so much?"

Garrett Johnson: Two Years Later and None the Wiser

2009-07-30T12:35:23Z

Two years ago this Friday the financial crisis started.

Most financial media pundits and politicians didn't recognize that we had a problem until Lehman Brothers went under on September 15, 2008. The official start of the recession is marked at December 2007.

But the real start of the financial crisis was July 31, 2007, when Bear Stearns filed for Chapter 15 bankruptcy protection on its two major hedge funds (High-Grade Structured Credit Fund and High-Grade Structured Credit Enhanced Leveraged Fund).

And yet 24 months later, after all the job and capital losses, after all the heartbreak and stress on the average Americans, the financial media, the politicians, Wall Street, and most of the blogosphere still refuses to even acknowledge, much less address the root causes of our economic problems.

Of course the Bear Stearns hedge fund bankruptcy filing wasn't out of the blue -- more than a month earlier Bear Stearns tried bailing out the funds. In fact the stress in the credit markets had been building since March of 2007 when New Century Financial went under.

However, the Bear Stearns crisis was different for a very basic reason -- the assets of the funds would have to be liquidated because of the bankruptcy filing.

A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.

Because there is little trading in the securities, prices may not reflect the highest rate of mortgage delinquencies in 13 years. An auction that confirms concerns that CDOs are overvalued may spark a chain reaction of writedowns that causes billions of dollars in losses for everyone from hedge funds to pension funds to foreign banks....

"Nobody wants to look at the truth right now because the truth is pretty ugly," Castillo said. "Where people are willing to bid and where people have them marked are two different places."

The credit markets almost immediately froze up.

The market for mortgage bonds has become "very panicked and illiquid," CEO Michael Perry wrote in e-mail to employees yesterday:

"Unlike past private secondary mortgage market disruptions, which have lasted a few weeks or so, our industry and IndyMac have to be prudent and assume that this present disruption, which appears broader and more serious, might take longer to correct itself."

And that, in a nutshell, was the reason for the worldwide financial crisis - the mispricing of assets, mostly mortgage-backed securities, based on fictional financial models.

The reason for all this economic hardship wasn't because the government taxed too much or spent too much.

It wasn't because the Federal Reserve raised interest rates or contracted the money supply.
It wasn't because the American consumer stopped spending.

It was because the financial system knowingly overpriced a major financial asset class, and then leveraged itself against that asset class in the vain hope that the Day of Reckoning never came.

It's really quite simple when you break it all down.

And yet every policy response to the financial crisis, without a single exception, has been designed to:

a) cut taxes and interest rates,
b) boost the money supply, as well as government and consumer spending, and most of all,
c) to prevent the asset class in question from returning to real market prices.

It's insanity. Plain and simple.

The Elephant In The Room

It is technically possible that the economy might produce some very weak growth in the next few quarters. I wouldn't bet on it, but with the unprecedented government bailouts and deficit spending all over the world, I can't rule it out.

These bailouts, designed to prop up the financial institutions that caused this mess, and the deficit spending, designed to mortgage our future in the hopes of a quick economic boost now, are a fool's hope.

Why? Because the sources of all our economic problems remain in place - debt levels and the prices of it.

To use an analogy that is easy to understand, when you catch a cold you will have several symptoms. You will run a temperature. Your head and chest may become congested. Your eyes may get scratchy.

These are all symptoms, but not the disease. If you got rid of all the symptoms would you be healthy? No. You would still be infected. Your body uses these methods to rid itself of the disease - the cold virus.

The same thing applies to the economy today.
Consumers need to cut back on their spending and pay down their outstanding debt (or default on it), after decades of living beyond their means, so their balance sheets can be healthy again. Banks need to write off hundreds of billions of dollars of bad loans so that their balance sheets can be repaired and they can afford to loan money again.

These are painful symptoms, but they are necessary for the economy to become healthy again. Without these symptoms the economy will still be burdened by mountains of non-productive debt and unable to move forward.

If Some Is Good, More Is Better?

On April Fools Day, the Financial Accounting Standards Board bowed to Wall Street pressure and agreed to revoke Mark-to-Market accounting rules for the banks. Thus the banks returned to the Mark-to-Fantasy accounting rules that existed back in 2007, the same rules that got us into so much trouble to begin with.

You may have noticed the blow-out profits by the big Wall Street banks this past quarter. Were those profits real? No, they were fake.

It's hard not to be skeptical after the financial community made the choices it did last week. Rather than come clean with the brutal truth that the banking business stinks and the investment banking business isn't much better, the biggest firms chose to obfuscate, be dim, mislead and camouflage what in reality was the kind of crummy quarter one would expect in the middle of the worst recession since World War II.

To make a simple analogy, let's say you purchase a used car for $10,000. Afterward you discover that the transmission is shot, the engine needs to be rebuilt, and there is rust under the paint.

You then try to sell the car to someone else, but no one will pay more than $2,000 for it. "But I paid $10,000 for it. Therefore that is what it is worth," you say. You then take the car off the market and announce on your income tax forms that it is still worth $10,000. Meanwhile the car continues to rust in your driveway.

That's what the Wall Street banks are doing with toxic mortgage-backed securities on (and off) their books. They then claim that their investments haven't lost any money so they can claim large profits, which in turn become large bonuses for the executives.

Even more important, keeping all that bad debt has its consequences. The banks must hoard capital, much of it taxpayer bailout money, to pay for the real losses that one day will need to be addressed. It can't afford to take chances on loans. That's what happened in Japan in the 1990's, and is being copied here in America today.

"I thought America had studied Japan's failures," said Hirofumi Gomi, a top official at Japan's Financial Services Agency during the crisis. "Why is it making the same mistakes?"

There's been a lot of talk about Green Shoots recently, and even a bottom in housing. Before we all start singing "Happy Days are here again" we should all take a step back and remember that the guys pushing the Green Shoots are the same guys who lied to us before.

So let's look past the spin and take a look at the real numbers and see what they tell us. Since the housing market is what got us into this mess, we need not look any further than that.

In particular, foreclosures soared to new record highs in June, LPS found: The national foreclosure inventory rate during June was 2.86%, up 2.5% from one month earlier and a huge increase of 86.1% from year ago levels. Total delinquencies rose as well, to 8.58%, up 44% from one year earlier.
...
New foreclosures are on the rise, as well. "Foreclosure starts in June increased 1.6 percent to the second highest level on record, while reinstatement and recidivism rates are not yet showing signs of improvement," LPS said in a statement.

OK, so foreclosures are as bad as ever, but what about home sales? You probably heard some good news about new home sales recently.

New-home sales soared in June from the previous month, the third increase in a row and supplying fresh evidence the housing market is beginning to recover from its long crisis.

It sounds good, but there are several extremely dishonest items about this news article. For starters, they wait to mention that homes sales year-over-year are down 21.3% and that prices are down both year-over-year and monthly as well.

The increase was the fourth in six months, as buyers take advantage of falling prices. It appears new-home sales reached a bottom in January, at a level of 329,000, and that the market is beginning to recover slowly.

The next dishonest thing about this article is that they are using non-seasonally adjusted numbers. The fact is that the home sales market is very seasonal, with the majority of sales happening during the spring and summer months. When you take a look at the month by month seasonal chart you get a very different picture.

You have to think that the WSJ is going to go back to using seasonally-adjusted numbers in the fall. The other thing to keep in mind is the long lag-time between a pickup in home building/sales and the the bottom in home prices. Take a look what happened after the much smaller 1980's housing bubble.

Falling home prices are important because negative equity is the most important factor in foreclosures, according to the Boston Federal Reserve.

There is little question that we are many years away from the day the housing market, the key source of our economic problems today, can be considered healthy again.

Meanwhile, the government is doing everything it can to stop home prices from falling back to their historical norm.

It's an understandable attempt at mitigating pain, but at the same time it is a waste of effort.

The Boston Fed's findings suggest the Obama administration's major effort to solve the foreclosure crisis by giving the lending industry $75 billion to rewrite delinquent loans to more affordable levels is not likely to work.

One of the study's coauthors, Boston Fed senior economist Paul S. Willen, said the government would be better off giving the money directly to struggling borrowers to help them with their payments, rather than to lenders that are averse to working out the troubled loans.

"Loan modification is not profitable for lenders," Willen said. "If it were profitable, they would go out and hire staff."

The Fed's study found that only 3 percent of seriously delinquent borrowers - those more than 60 days behind - had their loans modified to lower monthly payments; about 5.5 percent received loan modifications that did not result in lower payments.

Almost every economist out there, including the Fed, thinks that the "recovery", when it finally gets here, will be weak and slow. No one bothers to really explain to us why that is.

Well, I'll tell you why it is - it's because we haven't addressed the root cause of our economic problems. We continue to only treat the symptoms and ignore the fact that our economy is sick. It has long-term structural problems, problems that defy quick, easy solutions, that need to be addressed

What is likely to happen is that the "recovery" will be indistinguishable from the "recession" to the average person on Main Street.

Barbara Garson: The Mystery of the Missing Unemployed Man: On Jobs and Banks

2009-07-13T10:46:06Z

Crossposted with TomDispatch.com

For the book I'm writing about unemployed Americans, I had no trouble finding accountants, brokers, cashiers, or die casters. Admittedly, I had to go out of town to interview the die casters. But when I arrived, alphabetically, at unemployed editors, I had only to look in my address book.

Financiers were further from my life experience than either die casters or editors. Yet the "do you know anyone who...?" method still proved an effective way of turning up unemployed hedge-fund analysts and bank loan officers -- and within a week at that. It was only when I refined my search to ferret out unemployed financiers who had actually handled those infamous "toxic assets" that I hit the proverbial brick wall.

Since mortgage-backed securities and the swaps that insure them had been the downfall of Lehman Brothers, Bear Stearns, Merrill Lynch, and the giant insurance company AIG, packs of bankers who worked on them must, I assumed, be roaming free on the streets of Manhattan. Yet I couldn't find a single one.

Finally, I phoned a law firm representing Lehman Brothers employees in a suit for the pay they were owed when the company shut down without notice. I asked the lawyer if he could possibly inquire among his unemployed clients for someone, anyone, who used to work with mortgage-backed securities and might be willing to talk about how he or she was getting by today. "I don't have to use real names," I assured him. Many of the unemployed people I'd already interviewed felt so lost and ashamed that I had decided not to use their real names. Unemployed bankers deserve anonymity, too.

But the lawyer made it clear that that wasn't the problem. "Most of them were snapped up immediately by Barclays," he said. He represents other financial plaintiffs as well, and he seemed to think that the kind of person I was looking for hadn't remained unemployed very long.

The Clues

How could that be? We've heard ad nauseum about mortgage-backed securities. They're bonds "structured" out of thousands, or tens of thousands, of home or commercial mortgages. The bond's owner was to receive interest out of the mortgage payments from all those property owners. He could earn a low 5% interest if he opted to be paid out of the first money that came in. (Institutional investors often chose that safe "tranche," or slice, of the security.) But back when mortgages seemed so safe, a hedge-fund gambler might have been happy to opt for the last mortgage payments to come in -- in exchange for heftier 7% to 8% interest rates. Of course, that was the gamble. Too many missed mortgage payments meant little or no returns for his fund.

When last I heard, more than half of U.S. mortgages were held this way, so it was a reasonable supposition that a lot of people had been employed structuring, trading, and insuring those bonds. But who in his right mind would touch this stuff now? While that lawyer sounded like an honest, helpful fellow, I still wondered whether he wasn't just brushing me off to protect his embarrassingly unemployed clients.

Soon after, however, I met a bank corporate loan officer who confirmed that his colleagues on the "structured side" were indeed still employed. In fact, he thought he noticed a couple of new chairs at their trading desk in the bank's trading room. "Those damn things" had become so complicated, he speculated, that the people who put them together were now needed in similar numbers to "unwind the bank's positions" -- that is, get them out of the deals.

That must be it, I thought, and recalled a moment soon after AIG got the last of its $182 billion bailout from the government. At that time, the company braved a massive public outcry to award big bonuses to its top employees, including those who had created the "swaps" (short for credit default swaps, or CDSs) that swamped the company. Like so many other companies, AIG claimed that bonuses were necessary to retain the "best brains," especially those who understood the credit-default swaps.

These swaps are a type of derivative that was supposed to represent a way of insuring the very bonds we've been talking about. Here's how it worked -- at least theoretically, at least before the ship went down: On a given bond, say number 123456, an insurance company like AIG would essentially say to a large investor, perhaps a mutual fund, "You pay us $7,000 a month and, if you fail to receive the interest on that bond for, say, two months, then we'll buy the whole bond from you for the $200 million you paid for it." In other words, it was a private, custom-written contract to simply "swap" one of those bonds for money under certain agreed circumstances.

These deals were couched in such terms, rather than as straight insurance policies, because insurance is regulated and the regulations require setting aside relatively small amounts of money in reserve in case the disasters insured against occur. But swaps aren't regulated. Nothing need be set aside.

Here's the remarkable thing: both the Bush and Obama administrations decided that the government would make good on these non-regulated, non-insurance policies. The costs could be humongous.

Now, here's an even more distressing complication. You didn't have to own the original bond to buy the swap that was really an insurance policy. An "investor" could approach AIG and say, "You know that Merrill asset-backed bond -- number 123456? I'll pay you $7,000 a month, too, and if the bond defaults, then you owe me 200 million also."

It's as if any number of people could buy (or, really, bet on) your life insurance policy. Or think of a race track where anyone can go to the window and bet on any horse in any race -- and collect if it comes in. (Or in this case, collect if mortgage payments didn't come in.)

If our government were merely going to cover the original mortgage-backed securities, the maximum payouts, though large, would at least be calculable. If 50% of the mortgages in the U.S. were, as they say, securitized, and if they all were to default, that would be a vast but finite loss. But since any number of people could buy into the swaps on those bonds, the swap payouts could be an unknown amount that would be many times the value of the real buildings. How many multiples of reality might that come to? Two times, 10 times, 100 times? Who knows? Remember, these are unregulated transactions.

And keep in mind that the "investment" being bailed out here has nothing to do with anything in the real world. Neither party to these "me too" swaps owned, built, or financed the original housing, or anything else for that matter. They were simply betting on whether a certain group of people would pay their mortgage bills.

Why our government would underwrite these bets, and why such gambling contracts are legal in the first place, is beyond me, but as we know, they were placed on a vast scale. No wonder, I thought, that my swap men were all still employed. After all, even if there's no work for die-casters or editors, there's still all that "unwinding" to do by the people who did the winding in the first place.

The Crime

Then I read this headline in the Financial Times: "Strange but true -- the credit specs are back." According to the column that followed by John Dizard, "[T]hanks to the Geithner Treasury's policy of reform, rather than dissolution, CDS trading has regained a vampiric strength that the real economy still lacks."

So, now I understood: the man I couldn't find, the man who wasn't unemployed, wasn't just doing that final bit of unwinding or cleaning up old messes. He was busy making new ones!

How could Dizard be certain, though, that the debt trade is really booming again? He cites "one friend of mine in the credit fund trade" who has "made money on both the downside and the upside during the past year."

Of course, who can know for sure? If there was a derivative exchange along the lines of the New York Stock Exchange, we'd have a good idea of the volume of the trade. But derivatives -- I know you've heard this more than once -- are unregulated.

President Obama's recent white paper on financial reform suggests that derivatives should, in fact, be regulated, except for what it refers to as "custom" products. That, unfortunately, sounds like just the right-sized loophole for the financial instruments I've described. And -- I'm sure you won't be surprised by this -- financiers are lobbying furiously to expand that hole.

The Motive

Why is there such an interest in reviving the debt market and why are financiers so determined to keep it unregulated? Aren't they scared of it, too? Let me quote Dizard one last time:

"After all, if the dictates of style and tax auditors say you have to go easy on conspicuous consumption, and if there's no demand for the products of real capital spending, then you might as well take your cash to the track, or the corner credit default swap dealer."

In other words, people are speculating on derivatives and derivatives of derivatives because there's no action in the real world. You can't invest in new real businesses or lend money to old real businesses for expansion unless people can afford to buy the products they'll produce. That brings me back to where I started: our real world. You know, the one where just about everyone's unemployed except those swap guys.

Charles H. Green: The Boston Consulting Group Caused the Recession

2009-07-12T16:41:56Z

Like all good conspiracy theories, this one may have a few loose links. But work with me here -- it's a good story.

The 70s: When Strategy Became Competitive Strategy

Back in the 60s, Bruce Henderson, chafing at Arthur D. Little, re-conceived competitive strategy. He founded the Boston Consulting Group, who in the 70s introduced the world to concepts like the experience curve, the Doom Loop, and the barnyard strategy matrix.

Together with Michael Porter, they redefined strategy from a vague, military idea, to a disciplined, quantitative analysis based on a Hobbesian view of the business world: a State of Nature as Competition. Competitors lurked everywhere--including masquerading as your suppliers and your customers. Henceforth, all talk of "strategy" would implicitly have "competitive" as a leading adjective.

It is hard to describe today the impact this new ideology had on the business community. Suddenly the world made sense--everything was about competition, and everything was quantitative. It was about winning, and the winner was the one who ran the numbers best. Peter Drucker was so 10 minutes ago--now, if you couldn't measure it, you couldn't manage it.

The 90s: When Organizations Became Processes

In the early 90s, Michael Hammer and James Champy wrote Reengineering the Corporation, and the other shoe dropped. The other shoe was business process re-engineering. Pre-Hammer, companies were functional organizations. Post-Hammer, they were bundles of processes.

Functional organizations were messy things that needed coordinating, leading, managing. Processes could be broken out, modularized, tinker-toy-rebuilt, outsourced, and re-assembled--and despite Hammer's later protestations, the idea remained attractively impersonal to its fans.

The 00s: Metrics, Competition and Process Prepare the TinderBox

BCG, B-schools and other leading business thinkers embarked on a decade of exploring the implications. The Holy Grail of business had become sustainable competitive advantage, which produced economic value added, which produced maximal shareholder value.

You got there by achieving global scale in every business process: if you weren't #1 or #2 in any process, you outsourced it to one who was.

Outsourcing to achieve scale through best practices meant multiplying transactions, reducing time-frames, and replacing messy relationships with tightly written contracts -- or, better yet, markets, the truly impersonal solution. Performance was quantitatively defined, included not only in contracts between companies, but in employee relationships with people (who were renamed "human capital" to fit the new business Esperanto -- finance). No need to inspire or manage through people; just craft a blend of metrics and incentives, the way Skinner invented those white mice in his boxes. Poster child: Jack Welch.

An example: the mortgage industry. The purveyors of the competitive/process/metric paradigm saw mortgage as an industry that was regionally fragmented, structurally clumpy, high cost, stodgy, inefficient, illiquid, and highly subjective.

In 15 years, they transformed it. The mortgage business became globally integrated, highly specialized (substituting markets for organizations via disintermediation), low-cost, nimble, cutting edge, efficient, liquid, and highly impersonal. It became a market-driven, process-linked, globally efficient industry. That's all true.

It also became bereft of relationships; laden with perverse incentives; managed by serial transactors; stripped of any sense of responsibility; and governed solely by financial metrics. In a business whose product already was money, the doubling-up emphasis on financial metrics obliterated any memory of other principles or values that might have once existed in the financial sector.

The new mantra was IBGYBG. I'll be gone, you'll be gone; do the deal and let the next sucker clean it up. The entire Meaning of Business became--to make more money than the other guys. Period.

You work for your company--in theory, the shareholders. Your company's job is to win. You win by beating others before they beat you. Customers are walking wallets, sources of the poker chips you use to measure success. Suppliers are to be played off against each other. All parties are to be managed in clumps of processes, carrotted-and-sticked to behave in certain ways. That, simply, is how it was supposed to work.

This ideology didn't just happen. It was four decades in the making.

Bruce Henderson didn't mean to do it -- but he did set the wheels in motion. BCG, Hammer, Porter, and CSC-Index made it look enticing. Economists and quant-wannabes from the HR, exec-comp and leadership world added their hops and spices to the brew. Goldman Stanley and Morgan Sachs refined it; private equity and financial engineers distilled it; and Merrill Stearns, mortgage brokers and Joe the Plumber got drunk on it.

Complicated? Yes. That's where conspiracy theories come in; they let you simplify. So pardon me if I just use the shorthand version: BCG caused the recession.

Rabbi Shmuley Boteach: Bear Stearns Has Learned Nothing

2009-06-24T17:30:54Z

Two best-selling books describe the decline and fall of Bear Stearns, once of one of Wall Street's most profitable and aggressive investment banks. House of Cards and Street Fighters detail the culture of arrogance and greed that prevailed at Bear and the contempt with which they treated so many of their clients, not to mention each other. The two dominating personalities at Bear that play larger-than-life roles in both narratives are its legendary chairman, Ace Greenberg, and its bridge-playing CEO, Jimmy Cayne.

One would have thought that given the colossal humiliation of having imploded and been sold for $2 a share in March of 2008 and having served as the first collapse in the deck of cards that nearly brought down the US economy, the greedy sharks at Bear would have learned a lesson. Surely they have learned to shown some humility and treat their customers with respect.

Not a prayer.

I am a witness that Bear has, if anything, grown more arrogant, more contemptuous of its customer base, and more greedy, than ever.

I have been a customer of Bear Stearns for about seven years. My wife and I have all our retirement savings in two IRA's in the bank. Our accounts were being personally managed by Ace Greenberg. I respect Ace because of his strong record of philanthropy and devotion to the Jewish community. Unfortunately, this never translated into having any real time to discuss our accounts. Ace was always warm and friendly to me and always took my calls. But sixty conversations were the norm even when the shares he bought for us were plummeting. With about two hundred thousand dollars in both accounts, I was a minnow in a sea of Ace's whales. So I didn't expect much and was grateful for whatever morsels of attention I could pry.

Our accounts never performed particularly well under Ace, but I bore with it because I was honored that a legend of his stature and a man of such geninune philanthropy personally looked after our accounts.

But when Wall Street began to decline, our accounts dropped catastrophically. Ace had invested nearly all our money in large cap stocks which took the biggest beating in the markets. There was little to no diversification. I called Ace several times to discuss moving the money into other areas. As usual I got very little time, just an assurance that I owned what he owned.

Growing increasingly worried at our dwindling portfolio, I bumped into another Bear trader, Matt Zimmerman, at a friend's birthday party. For the next few months he made a play to get our accounts. He emailed me, called my wife, and did everything possible to convince us that Ace was wrong for us and although he was a very junior trader he had the time to really take an interest in our accounts. He told us that Ace was hurting our money by concentrating everything in large caps. He promised us the world. He was going to diversify, he worked with people in Europe, he had investment connections in the Far East. In short, he had access to every strata of financial instrument. We were going to be a lot better off with him.

By April 2009 my wife and I had lost approximately forty percent of all our money with Ace. Matt continued to press us to move to him. He told me to inform Ace that we were making a change and he would take it from there. I informed Ace that given the catastrophic losses we were suffering we thought it best to make a change. Matt got in touch with Ace, moved our accounts, and that's when the fun began.

We thought that having lost such huge amounts with Bear was bad enough. We were about to discover the greed of a bank that will do anything to milk whatever you have left. Matt, after promoting himself to us as a portfolio manager who provided the same service as Ace, only with greater diversification and much more time, arranged to speak with us by phone. He said that we had to liquidate our positions and move our money to investments he would be recommending. I listened as he went through all the stocks that he suggested we sell. We took his word for it and agreed.

But the next day he called and said that he was moving our money into mutual funds. I was confused. Mutual funds? If I wanted that, I told him, I would have gone to Fidelity, where we once had our money. No, I explained, we wanted him to perform the function he had represented to us. We wanted a personal portfolio manager who would individually look after our investments, like Ace had before. 'Matt, that's what you told us you would do. So what's going on?' No he said, he doesn't do that. He is going to put most of our money in mutual funds. It was at this point that I got suspicious. What were the fees involved in having someone else look after our money? And it was then that I discovered that I had been had. That I was in the hands of a Wall Street shark whose desire was to bilk me for as many fees that he could gouge from me. He informed me that first there would be a 1.5% fee on all the money in the accounts. Then, there was a fee of $75 per transaction from all the stocks we had sold the day before. Then, there would be an approximately 2% fee for the mutual funds. I finally got it. I was the mark. I was the sucker who was in this guy's clutches. I was being triple charged for the same service.

I protested. If you're not managing my money and simply putting it into a mutual fund, then why are you charging me a management fee in addition to the mutual funds fee? In fact, I added, this is exactly the reason that NY Attorney General Andrew Cuomo was suing Ezra Mirken. It was not because Mirken had given his funds to Bernie Madoff who had promptly stolen them, but rather that Mirken charged his clients management fees when he never managed the money but simply passed it all to Madoff. Matt started getting flustered. I told him I was being gouged and that it was scandalous that he had liquidated our portfolio to make as many fees as possible without informing us. I demanded to speak to his superior.

The next day Matt called me with Ivan Alfaro on the line. Rarely in my life have I spoken to with the level of contempt and condescension employed by Mr. Alfaro. He made me feel like an unimportant, stupid bumpkin, ignorant of the vaulted ways of Wall Street. He justified all the fees, except for the transaction selling fees admitting that Matt should never have charged us since he was liquidating the position to place the money in a managed account. With the exception of that admission, he interrupted and talked down to me. He told me that I ought to get another manager if we weren't happy with Matt. I was beside myself and demanded that I speak to someone else. He gave me the name of Gary Munowitz but with no phone number.

I called Bear's general switchboard and after much trial and error got through to Mr. Munowitz, a Senior Managing Director. He treated me just as contemptuously, told me he had no time to speak to me, and said I should call him after the weekend. I made it clear to him that it was his job to investigate and get back to me.

A few days later Mr. Munowitz called me with Mr. Steven Longo, VP and Associate General Counsel at JP Morgan Chase. They told me that Matt had done nothing wrong. Bear would take off the selling transaction fee for the liquidated shares but would do nothing else. I told them that Mr. Zimmerman had utterly misrespresented himself to us as a portfolio manager. We wanted was to restore the account to the exact position before Mr. Zimmerman had sold my shares, especially now that there had been a market rally that we had missed out on. They refused.

I made it clear that if forced to I would take legal action to defend my rights.

It was at this point that something so surreal happened that you will find it incredulous to read. Ace Greenberg himself called me up. We had been friends for seven years. We had appeared on a panel together in front of hundreds of people for the launch of my book, The Broken American Male. I had never complained to him even as he lost tens of thousands of my hard-earned retirement savings and had barely a minute to speak to me. He growled at me, "Shmuley, I am going to tell everyone in this bank that you're an extortionist. That's what you are. An extortionist. You better stop the pressure on the bank to restore your position. I am telling everyone here that you're an extortionist." I was in shock. So that's the way Bear Stearns works. When you discover a trader that's taken you to the cleaners and have the temerity to stand up for yourself, in their unrequited arrogance they will threaten to destroy libel you and destroy your good name unless you back off and go away.

I told Ace that I could not believe the way he had spoken to me and that his accusation was deeply libelous. It was bad enough that Zimmerman had gouged us with fees and could not even provide the service he promised. How could he start a campaign to lie about me and ruin my name simply because I refused to be ripped off? I told him he was being misled by Mr. Zimmerman who had worked behind his back for a year to get him replaced as our portfolio manager.

A few hours later Ace called me back and said, "I had Zimmerman in my office. He denied everything you said. He never contacted you. He never lied to you. You're an extortionist and everyone here will be told."

I quickly got off the phone, had my office compile all of Mr. Zimmerman's emails to me, dating back to June, 2008, and had them sent to Ace, Mr. Munowitz, and Mr. Longo. The emails clearly demonstrated that Zimmerman had lied through his teeth to Ace as he had to us. Ace, clearly unsettled, wrote back to me that he is now no longer dealing with the matter. There was no apology and there was no retraction of the unbelievable libel which he had spread against me with catastrophic damage to my reputation.

A short while later, Mr. Longo called. The bank knew they had a problem and it was damage control time. He informed me that the bank would indeed restore my position before Mr. Zimmerman had entered the picture. Based on their calculation they owed me just $3900. This was a pittance of the tens of thousands of dollars I had lost. Still, because I am not a fighter and simply wanted to put the episode behind me, I told them I would accept the settlement. I wanted to get away from Bear Stearns as quickly as possible and move to people I could trust.

Just when they were supposed to send the check and I was to move my accounts to a reputable bank I suddenly received a phone call from Mr. Longo. Bear Stearns would require me to sign a release. It was emailed to me, the most onerous release I had ever seen and a clear indication that Bear was terrified that the story of their greed, lies, and libel would leak. The release was not limited to Mr. Zimmerman's actions but encompassed all my years at Bear Stearns. Although I am a public figure who writes on values-based issues, it demanded that I essentially never tell a soul about what had happened with Bear. It gagged me from ever divulging Mr. Zimmerman or Ace's actions.

I wrote back saying the release was preposterous. I asked them to please amicably settle this, that I would sign the release for Mr. Zimmerman's actions but would not be gagged. I told him it was a gift that I was prepared to go away for the measly sum of $3900 given the tens of thousands I had lost and that they should not be so stupid as to provoke me further. They insisted on the gag. I refused.

So, I was given no choice but to sue Bear Stearns.

I believe fervently that if we who are not investors but are simple people whose only desire it is to put away money for ourselves and our children allow ourselves to be fleeced by Wall Street, things will never improve. Wall Street will remain as corrupt as it has always been, with devastating consequences to our economy, our morality, and our bottom line. If you have your own horror stories of how the sharks on Wall Street have treated you, do others a favor and warn them. If we don't confront Wall Street greed it will continue to destroy our economy and our nation.

Danny Schechter: Who Can we Bank on as Crisis Gets Worse?

2009-06-12T10:39:40Z

Can it possibly be true that the Congress can't walk and chew gum at the same time? This question is prompted by the announcement that financial reform is being pushed back as health care becomes the priority.

This makes me nervous for two reasons. First, it portends a long drawn out legislative battle on health care reform with more time for industry lobbyists and the Congresspersons and Senate persons on their payrolls to compromise away or wreck the change we so deeply need.

Second, it confirms that the lobbyists for financial institutions -- the people responsible for the collapse of our economy---have been scheming and wrangling to gut the reforms that could stop anther economic breakdown. Reviving this industry without restructuring and re-regulating it just guarantees another disaster down the line.

Bear in mind that that disaster is already underway despite what you may be reading about "green shoots" and signs that a turnaround is coming because unemployment didn't go down as much as expected -- only 500,000 plus a month.

In fact, many observers see a deeper crash still coming with a depression quietly deepening, even if most us cling to our perennial optimism and trust in the change maker we can believe in. The Telegraph's Ambrose Evan-Pritchard, who unfortunately has been more prescient than wrong, whines:

"Those of us who still question whether the world has purged its toxins are reduced to the same tiny band of moaning Druids from early 2007, when we shook our heads in disbelief as the carry trade swept Iceland to fresh madness and bankers laughed off sub-prime rot at Bear Stearns. We learned then to thicken our skins with walnut juice, lie down in dark rooms, and dissent from Goldman Sachs."

You may recall Dennis Kucinich asking his colleagues aloud if he was in the Congress of the United States or the "board room of Goldman Sachs" as if the former is a wholly owned subsidiary of the latter. Or perhaps, there was a merger between the two in the sense that Wall Street may be down but by more means out. It is "clawing back" its influence with a new lobbying surge which is allowing Goldman and the big banks to pay back their TARP Money and get out from under the spectre of new regulations, compensation limits and the like.

The Empire inside the Empire is striking back.

Meanwhile we still live with a fog of misinformation, disinformation and no information. Basic information about monies from the Federal Reserve to Banks and financial institution has not been disclosed. Bear in mind the Banks control the Fed -- and free marketers ran the economy, not the government.

Writes Bob Chapman of International Forecaster:

"Not one banking or Wall Street executive owned up to what really happened to cause the crisis. They are totally lacking in honesty, integrity and decency. As it now stands we'll never know the true inside story of what really went on. We have seen no civil or criminal charges against any of these crooks. Not even investigations. Whatever happened to RICO? Over the past 25 years our financial industry has descended into darkness and corruption and the people who caused it are getting away scot-free"

Wow, what an indictment! Example: do we really know the purpose or the TARP program that gave money to banks that apparently didn't need it, but didn't say no. (The other side of giving loans to borrowers who couldn't afford them?)?

The Ritholtz blog suggests:

"It was $700 billion dollar pile of money in search of a justification for its existence. Most people still look at TARP the wrong way. When trying to discern what the true basis of it was, we eliminated what made no sense whatsoever, and what was left were a few strange ideas. When you eliminate the impossible, what's left, no matter how improbable, becomes the best explanation.

What was that explanation? In Bailout Nation, we discuss the possibility that The TARP was all a giant ruse, a Hank Paulson engineered scam to cover up the simple fact that CitiGroup (C) was teetering on the brink of implosion. A loan just to Citi alone would have been problematic, went this line of brilliant reasoning, so instead, we gave money to all the big banks."

Oh, that explains it!

Shamus Cooke writes on Global Research: "History will likely show that these bailouts involved the largest transfer of wealth ever - from the working class to that small group of billionaires who own the corporations. This fact is recognized by most people now and is such common knowledge that even the mainstream media feels comfortable discussing it . . . matter-of-factly.

These corporations have also exerted tremendous influence in other realms of politics, working towards destroying Obama's campaign promises of health care, job creation, civil liberties, the Employee Free Choice Act, peace, etc.

In each case, the promised reform was gutted of its essence, and 'compromise' versions of the bills are now being discussed: instead of universal health care, we will likely be universally mandated to purchase health insurance; instead of 'job creation' we are told that the stimulus has 'saved jobs' (contrary to the evidence); while troops are 'drawing down' from Iraq, the war in Afghanistan/Pakistan is being escalated; instead of allowing workers to organize unions easier, a compromise version -- Employee Free Choice Act, minus card check - seems more politically 'pragmatic,' etc."

At the heart of the crisis is the plight of homeowners who we know were defrauded in large numbers, victims like the Madoff investors. Yet the former are getting reimbursed to some degree, the latter are not. Bills to help them have been killed with Matt Renner on TruthOut reporting:

"A new analysis from a government watchdog group shows senators who killed off a consumer-friendly change in law aimed at addressing the foreclosure crisis received more money in campaign contributions from the industries their vote aided. Senators who voted against the consumer-friendly amendment received $3.98 million from the financial industry during the 2008 election cycle, while proponents of the bill received $2.65 million."

Could this be more corruption? Of course, but they call it politics as usual. And, that's not the worst of it, is that foreclosures are still rising and now affecting non-subprime lenders with little relief in sight.

Back to the banks: I have been reading complex web posts showing how the stress tests of banks were rigged and more may be needed. I have been reading about how the unemployment figures undercount folks out of work with the real numbers probably doubled, with minorities possibly tripled. I have been reading essays arguing that the notion that the government is "saving jobs" is not quantifiable with no statistical back up. I have been following the campaign to get the Federal Reserve Bank to disclose it's showering of money on financial institutions -- something it refuses to do.

Who can we trust and bank on? The President wants to give us confidence but seems to be playing a confidence game. The Banks are dissembling when they are not lying. The most trenchant critics -- may they be wrong -- believe a total collapse is in the offing.

And the rest of us, mostly puzzled and paralyzed, unable to comprehend the severity of the situation, the billions, no make that trillions, gone. How do we make sense of the game playing in State Governments like those in California and New York a caricature of responsibility? The jobs are going and the Banksters are still going for it, sucking up what they can in a race to the bottom.

Who can we trust? Who Can We Bank on? You tell me.

Mediachannel's News Dissector Danny Schechter is making a film based on his book PLUNDER: Investigating Our Economic Calamity (newsdissector.com/plunder) Comments to Dissector@mediachannel.org

Michael Martin: The Case of the Missing Stock Data

2009-06-03T13:03:37Z

Every month now, more companies fall victim to the global credit crisis. Some, such as Lehman Brothers and Bear Stearns, are still fresh in our minds, but others that blew up years ago, such as Enron and Refco, have held on in the public consciousness. The sorry endings of these companies are still being unpacked - and they should be, as we try to learn from what happened.

Yet the lessons we can take away are limited by a peculiar situation. With the demolition of these firms, something important is disappearing too: their share price data from the stock exchanges.

Gone are the data of Merrill Lynch and Countrywide Financial, as well as Enron and Refco. Also erased are the data from firms that have been acquired legitimately such as BankBoston, PaineWebber, and Solomon Brothers. One of the creepiest examples is what happened to Bear Stearns & Company. Not only is its data gone, its former ticker symbol has been reassigned. Mutual funds are no better. Many failed funds are "merged" with other funds in the same fund family. According to one study, one out of every six mutual funds merged "out of business" from 1962 to 1999. All together, this is a kind of financial genocide with far-reaching implications.

Let's say ten years ago, you began investing. You created an appropriate asset allocation model, then you selected the managers that, given their past performance, met your needs. You were given three choices: Say, Jim Rogers, Warren Buffett, and Peter Lynch. They had all done extremely well for themselves up to that point. Whomever you have picked, you'd have had great results today.

Let's do it again, except this time, let's make your choices realistically reflect what was going on in the world at the time: Jim Rogers, Warren Buffett, Peter Lynch, Bernie Madoff, and a special fund with holdings only in the large financials like AIG, Lehman, Citi, and Bear Stearns, and another fund invested heavily in the Big 3 automakers. Given these choices, you might well have had a much different set of results, even if you were diversified. Some results could be potentially disastrous.

Whether you're analyzing fund managers or stocks, it serves you poorly to look at a world without any failures and blowups. In the second example, the data is robust, which means you would have been able to choose "expertise" that we know now didn't fare so well. It would be very beneficial to know NOW if your model would have picked what we know to be an abomination such as Madoff.

Likewise, managers of hedge funds, mutual funds, and traders create trading models and algorithms to uncover strategies that consistently make money have a problem when any share price data is missing. All hypothetical results will be statistically biased. Since Enron's data does not exist, it will never again be in anyone's model.

If you think that the data being erased is a good thing, it's not. If your model would have otherwise owned Enron during any part of its implosion, you'll never know what effect it would have on your portfolio. Same goes for Refco or Countrywide Financial. If your model hypothetically owned any of these, you likely would have lost money. If you were a buy and hold investor, you may have lost much more than you would have anticipated. Maybe your strategy would have seen these as candidates for short sales. Or, securities to avoid altogether. You'll never know...that's the problem.

Since your data has been scrubbed of all the blowups, you are robbed of the chance to learn from being wrong. You cannot statistically relive the meltdown in the comfort of your own algorithm or hypothetical asset allocation model. Neither can any of the Wall Street firms, from the large brokerages to the online trading firms, to the hedge funds, to the proprietary traders.

What we're faced with now is called Survivor Bias, and it means the opportunity to learn from the data in its fullness is gone. Without Countrywide Financial and its brethren's data in the mix, you will always choose only from firms that have survived. Every firm in your model is a Rogers, a Buffett, and a Lynch - a survivor.

When you the investor are faced with such fantastic results, you are encouraged to go "open an account" or take some action - which means create revenue for your would be financial suitor. Could that be why the losers have been pulled? Mutual fund firms, brokerage firms, online trading firms, and discount advisory firms may be the only ones who benefit from this situation. If you chose any of the blowups, you might have experienced hypothetical losses over the last decade and that would not give you the confidence to open up a new account or add money to an existing one.

Yahoo Finance discloses that it gets its data directly from the exchanges, so Yahoo is off the hook. But go to the NYSE website itself and you won't find the data there either.

Geez, at least the Pharaohs left us the pyramids. All Wall Street has left us are mouse pads and coffee mugs from imploded firms through the ages. These artifacts may be the only true survivors of the meltdown. The lessons of the subprime meltdown, meanwhile, will be trapped in a pyramid that will never be discovered...a mass grave.

Rob Fishman: Desperate Housewives

2009-05-18T14:39:12Z

Sky Masterson: "You have wished yourself a Scarsdale Galahad, the breakfast-eating, Brooks Brothers type."

Sarah Brown: "Yes! And I shall meet him when the time is right."

--- "I'll Know," Guys and Dolls

Boy those were the days.

On April 19, a Scarsdale mother was arrested after becoming so exasperated with her bickering daughters (aged 10 and 12) that she ordered them from her car and drove off. A week later, another Scarsdale woman was charged with smuggling $12 million in gold in the lining of her purse from the jewelry manufacturer where she had worked for 28 years. Earlier in the month, police accused a Scarsdale dentist of defrauding a life insurance company of over $15,000. Then last week, a former Bear Stearns employee--also a Scarsdalian--sued for a $2 million bonus after his wife reportedly traded down their Mercedes SUV for a Honda.

I grew up in Scarsdale, in a stucco house across the street from where the Hollywood writer Aaron Sorkin grew up. As can be expected, there was some truth to the stereotype of Scarsdale--its place in the pantheon of suburban decadence was all but assured when hundreds of inebriated high schoolers flooded the Homecoming Dance in 2002, prompting some parents to send their drivers to collect the young sots--but aside from the occasional bacchanal, and a sex scandal here or there, it was a wholesome upbringing.

Scarsdale, a town of some 17,000, has always traded on its education system--and hence, its values. By 1925, over 70 percent of denizens occupied the upper-middle class, and so "demanded private school results from the public school system," according to one village history. That much is unchanged; in the wake of the Homecoming debacle, a New York Times reporter called Scarsdale a "bastion of high incomes and test scores." Added a senior at the high school, "We are supposed to be Scarsdale, the rich people, the good people, the studious."

The newspapers had choice words for Madlyn Primoff, the "drive-away mom"--and none so superlative. As the Times pointed out, Primoff's pedigree--"Scarsdale, Park Avenue, Columbia Law School"--worked against her and her family, with the New York Post reporting that Primoff was "busted after tossing her bratty 10- and 12-year-old daughters out of her car" on the way home to the family's "$2 million spread in Scarsdale." What frightened so many Scarsdalians (and I suspect others across the country) was the familiarity, if not the outcome, of the situation; that every parent has teetered on the edge, and just barely made it back on the road with kids in tow.

And what of the upsurge in thievery, these crimes that make Teri Hatcher and co.'s seem petty by comparison? Dr. Joanne Baker, for one, is denying all charges. Said attorney George Rosenbaum of his dentist client: "We will fight tooth and nail to prove her innocence." Teresa Tambunting, the jeweler, took the opposite tack. After she caught wind of the investigation, Tambunting arrived at her former employer's with a suitcase carrying 66 pounds of gold. A subsequent investigation of her home yielded another 447 pounds.

Then there's Gary Reback, notable mostly among the malefactors of suburbia for lacking a criminal record. Reback earned a $4 million bonus in 2007, the highest in all of his years of collecting a $250,000 base salary. Unsatisfied with the terms of his dismissal, Reback filed suit against Bear Stearns and J.P. Morgan Chase, which purchased Bear in a fire sale last year, requesting $1.1 million in severance pay, and another $2 million in bonuses. Attorney Jonathan Sack, speaking on behalf of Reback, was hardly the first to accuse an investment bank this year of "shocking, bad faith behavior." Of course the upside is that children of privilege will more willingly flee a Honda than a Benz.

Perhaps moral decay has seeped outward from the metropolis. Populist anger certainly has, its schadenfreude falling indiscriminately across the greater New York area, particularly on those enclaves of privilege where bonus money seems to reside. Or maybe Scarsdale was always a sordid place, its faults and fragilities only illuminated by the recession. As the Times said of Primoff, "If she had been a clerk who left her kids at a Costco in Fargo, N.D., what happened in Fargo would have stayed in Fargo." Yet I suspect in desperate times, these worst of times, people from Fargo to Farmington to Folsom resort to desperate measures.

The Scarsdale I remember is impregnable snow forts, bike rides to the Kensico Dam, fireflies fading into the gloaming, and an impromptu gathering on the school playground after 9/11. Sure, Galahad was a bastard child, but after all, he found the Holy Grail.

Sanjay Khanna: Expert As Frenemy: Notes On The New Yorker Summit

2009-05-13T11:25:11Z

Experts, fortuitously, are among our best friends when their knowledge steers us to safety. Tragically, the converse is also true: experts are among our worst enemies when their hubris leads us astray, or worse.

"The Next 100 Days," a policy summit hosted by The New Yorker earlier this month, sought to shed light on the near future of President Obama's administration. Assembled experts laid bare U.S. intellectual prowess in navigating a super-sized minefield of freakishly sensitive, potentially explosive issues -- from the economy and financial markets, to health, education, energy, and the environment, to defense and diplomacy. The best and the brightest included Esther Duflo, M.I.T. development economist; David Kilcullen, U.S. Army counterinsurgency adviser; Naomi Klein, syndicated columnist and author of The Shock Doctrine; Jeffrey Sachs, macroeconomist and author of The End of Poverty; and Nassim Taleb, derivatives trader and author of The Black Swan.

Bathing in the glow of leading intellectuals is curiously seductive. One is persuaded that amply funded experts could negate -- in masterstrokes devoid of unintended consequences -- financial sleight-of-hand, environmental degradation, unconscionable hunger and poverty, diplomatic fearfulness and mistrust, potentially irrevocable climatic instability, and ongoing nuclear proliferation.

Which appeared to be why Malcolm Gladwell, New Yorker staff writer and noted author, kicked off the proceedings with a sobering disquisition on how experts as historically diverse as James Cayne, disgraced former CEO of Bear Sterns, and the British planners of the Battle of Gallipoli, had succumbed to overconfidence, believing their predictive abilities and heralded strengths would allow them to control situations that proved so astoundingly complex as to be insoluble. It has been demonstrated, Gladwell emphasized, that many outsize failures result from neither incompetence nor flawed institutions. Rather, he concluded, instances abound where failure is "the [direct] consequence of experts acting like experts."

Segue to the experts. Taleb and Robert Schiller, a Yale economist, discussed and, at times, debated the U.S. economy's dire straights. Taleb predicted that, in the long run, the economy would get much worse. He insisted that most economists should be banished since common folk like taxi drivers weren't predisposed to flights of economic risk. (Shiller, for his part, expressed irritation with Taleb's certainty about uncertainty and unalloyed distaste for experts.) Klein said that Obama's economic plan favored private interests disproportionately. To wit, she reflected on her post-election "hopeover," which, she said, had been triggered by the Obama administration's "crony capitalist" economic measures that gave $11.5 trillion of taxpayer support primarily to financial institutions, while providing a Keynesian stimulus of only $800 billion for public benefit.

On world poverty and development economics, Sachs, whose reputation of inspiring hope precedes him, appeared to be in the throes of a hopeover himself. Voice frayed, he reported that over the past two decades, "We [the U.S.] abandoned all development aid, we abandoned the environment, we left everything to Wall Street." (Might Obama, I wonder, seen now as the ultimate exemplar of political hope, express such battle-weary realism years hence?)

On energy and the environment, Mary Anne Hitt, deputy director of the Sierra Club's Beyond Coal Campaign, Dan Reicher, director of climate and energy initiatives at Google.org, and R. James Woolsey, Director of Central Intelligence under Clinton, formed a consensus opinion that carbon emissions would level off by the end of Obama's first term--cold comfort given the pressing need to forestall runaway climate change by stabilizing atmospheric CO2 concentrations at 350 ppm.

Most intriguing was the innovative Kilcullen, a former Australian Army officer, who, on behalf of the U.S. Army, has sat down with members of Pakistan's now-notorious Inter-Services Intelligence (ISI) and famously helped to quell sectarian killings in Iraq. Interviewed by George Packer, New Yorker staff writer and author of The Assassins' Gate: America in Iraq, Kilcullen said that Pakistani intelligence, confronted often by the U.S. about its illicit funding of the Taliban, is akin to a recalcitrant wife abuser. Mocking the Pakistanis' verbal shuffles, he quipped, "I can change, baby, I can change." His repartee provoked a spontaneous round of audience laughter (making it easier to imagine Kilcullen win over allies in Pakistan, Iraq, or virtually anyplace else).

I pondered my lingering unease with that crowd-pleasing interaction. Then, a day later, it pounced: the U.S. and its international allies, as Kilcullen readily admits, are without moral high ground. U.S. counterinsurgency tactics, responsible for torture, rendition, and Predator-drone sorties, continue to exact a high death toll among innocent civilians. Against this unfortunate reality, U.S. military leadership must seek to placate local populations and aggrieved interests that, quite predictably, retain a keen awareness of America's ability to inflict harm. Forcing essentially hamstrung U.S. diplomats and military officers in Iraqi and Afghan theaters to parrot the Pakistanis, to repeatedly maintain, "We can change, baby, we can change." This reality may establish practical limits on Kilcullen's anthropological approach to counterinsurgency, whose success depends on securing popular trust and cooperation.

Nevertheless, it seems our human nature leads us to insist on turning towards increasingly discrete, expert-dependent disciplines to save us from ourselves. Which is why this could be a good time, as Gladwell smartly hinted, to question our pretense of control. After all, every day, beneath our conscious awareness, the Earth spins around its axis and revolves around the Sun, while the biosphere in its every realm demonstrates that the whole is greater than the sum of its constituent parts. It may seem glib to say so, but given that we're simply a small part of that infinite complexity, it might serve us well to ask, hat in hand: What is it we believe we can control, exactly? And, equally, to what extent are experts -- and our own competence -- the frenemy in our midst?

Bear Stearns Obit Writer Talks To Minyanville

2009-04-15T12:41:13Z

William D. Cohan, the author of House of Cards, which details the fall of Bear Stearns, talks to Minyanville.

WATCH:

Francine McKenna: KPMG Has A $1 Billion Problem At New Century

2009-04-08T09:58:11Z

KPMG is being sued for $1bn by the liquidators of New Century, the collapsed subprime lender, in the first big case against an auditor arising from the current financial crisis.

If you've been reading my blog, re: The Auditors, you're very familiar with the New Century case. I wrote about New Century for the first time back in March of 2007!

Back then, I wrote:

New Century Financial, the US subprime lender scrambling to avoid bankruptcy, hit further troubles on Tuesday as it revealed that it was facing a preliminary investigation by the Securities and Exchange Commission and that it had received a grand jury subpoena from the Department of Justice...The US Attorney is examining trading in New Century's securities and accounting errors in how much it set aside for loan losses. ...The halt, ordered by the New York Stock Exchange, came after New Century said its banks had either cut off credit or signalled their intention to do so, increasing the likelihood of an imminent bankruptcy filing or asset liquidation....

There are 17 pages of discussion of general and REIT specific risk associated with this company, but no mention of the specific risk of the potential for their banks to accelerate the repurchase of mortgage loans financed under their significant number of lending arrangements....it does not seem that reserves or capital/liquidity requirements were sufficient to cover the possibility that one of or more lenders could for some reason decide to call the loans. Did the ratios drop? Were they delivering their monthly compliance certificates to all the lenders? Were those accurate and truthful? Did the lenders have the right to call the loans unilaterally? It does say that if one called the loans it is likely that all would. Didn't someone think that this would be a very big number (US 8.4 billion) if that happened?... I find it very curious that no matter how much auditing and disclosing goes on, we continue to see "rapid, unexpected declines" in once high-flying companies that suddenly teeter on the edge of bankruptcy, even though the best and the brightest are supposedly "Keeping Watch" for us as their auditors.

New Century declared bankruptcy in April of 2007. KPMG resigned as New Century auditor in May 2007, shortly afterward. (Unfortunately they were still auditor for Countrywide, the other big ugly mortgage lender, until it was bought by Bank of America.) It was a tough couple of weeks for KPMG, although they were not alone in their pain. All of the Big 4 were experiencing similar pain or the anticipation that they may be tarnished by the same subprime brush.

The litigation-like activities began and the bankruptcy trustee said KPMG was still part of the problem, delaying his investigation.

And then the bankruptcy examiner's report pointed the smoking gun at KPMG, almost a year ago to the day.

The lawsuits filed yesterday are interesting from several perspectives. I'm going to point to several areas now and expand them in later posts.

1) There's both a California filing against KPMG LLP, the US firm, and a filing in New York against KPMG International, the umbrella firm for the KPMG "global network" of firms. Interestingly, and not too surprising to me, the attorney for these cases against KPMG, Steven Thomas, is the same attorney who won the large judgment under appeal in the Banco Espiritu Santo case against BDO Seidman and the one who is going to trial in the same issue against BDO International, their umbrella firm.

The international cases looks similar and I believe this is a trend. We've already seen Stuart Grant make his case successfully regarding Deloitte's International firm's potential culpability in the the Parmalat case. A similar one will be filed against PwC in the Satyam case, I can assure you.

2) One potential weak spot in the filings I see is their overemphasis on the "independence" issue. It seems they are claiming "independence" issues and, therefore, invalid audits and audit related work. This is based on accusations that KPMG rolled over and acquiesced to New Century management even when they knew numbers, assumptions, calculations were wrong. Not sure the attorneys understand the fine distinction between KPMG neglecting responsibility to their true client, the shareholders and other users of the financial statements, a statutory expectation of due professional care and adherence to standards, versus an actual "independence" conflict.

Did New Century pay KPMG's bill? How much were the fees? Were there other prohibited relationships or transactions that compromised the KPMG partners' and professionals' true independence and objectivity such as mortgage loans from New Century or personal relationships of the romantic kind? Had they been planting KPMG professionals in the client over the years? Those are true independence issues from an accounting and auditing professional standards perspective. Rolling over and playing dead for the sake of the business is not an "independence" violation, I'm sorry to say.

3) There are a few phrases in the filing that allude to a potential claim theory of "deepening insolvency."

From the complaint against KPMG International: "...Had KPMG LLP done its job and upheld its public duty, the problems that caused New Century to fail - or at least to spectacularly increase the enormity of its failure - could have been stopped before they started and materially misstated financial statements would not have been issued in the public marketplace. Moreover, had its financial statements been fairly presented in accordance with GAAP, New Century could not and would not have incurred billions in liabilities to repurchase mortgages or direct liabilities to lenders."

As much as I like the "deepening insolvency" theory on an intellectual level, it's not been successful. No less than Judge Posner has smacked it down, for what I believe are very naive and too limiting ideas about the auditor's role. Maybe those are the limits of the law, unfortunately. Don't go there. This one seems clear cut enough on the negligence and professional malpractice points alone.

4) I wrote a few days ago about former PCAOB Chief Auditor and Director of Professional Standards Tom Ray returning to his home firm, KPMG, after several years at the PCAOB. I lamented the fact that Ray could roll back into his old firm and rejoin as a partner in their Professional Standards group. I was assured by the PCAOB spokesperson that:

The Sarbanes -Oxley Act of 2002 directed the PCAOB to establish ethics rules for its Board members and staff. In accordance with these provisions, the PCAOB adopted an Ethics Code that governs the conduct of all Board members and staff. The PCAOB's Ethics Code includes "post employment" restrictions (Section EC12(b)) that prohibit Board members and professional staff from:

practicing before the Board (or the SEC with respect to Board related matters) for one year after leaving the PCAOB; and

practicing before the Board (or the SEC with respect to Board related matters) on particular matters involving specific parties in which the Board or staff member participated personally and substantially while at the PCAOB.

The PCAOB has not yet taken any disciplinary action against KPMG or the KPMG partner for New Century named in the lawsuits. I guess Mr. Ray is free to help KPMG defend itself against this one. I'm sure it won't come up before the PCAOB or SEC for at least a year. How convenient.

5) I'm sure the attorneys took most of the information about specific conversations and evidence that KPMG looked the other way from the bankruptcy examiner Missal's report. Did they think to subpoena the 2005 inspection reports on KPMG from the PCAOB? It's highly likely that New Century was one of the clients sampled for inspection during this period by PCAOB. Although the clients cited as exceptions in their inspections reports are not named and are kept a closely guarded secret to the detriment of investors and plaintiff's lawyers, it may be interesting to see if these lawyers could test that theory. If there are specific instances where KPMG did not uphold the actual auditing standards, per the regulators' judgment, it will be all there (including KPMG's response to any exceptions noted) in those reports. In addition, the non- published Part Two of the reports, which talks about the actual quality and risk management processes at KPMG, would also be interesting for this purpose.

In a related case, I can't wait to see what the report by the PCAOB of their inspection trip to India last year at this time holds as clues to the PwC/Satyam debacle. Did you know the PwC Satyam partners are still in jail in India, two months later? No, the PCAOB's report is still not issued!

6) With BDO International case, the Deloitte International/Parmalat case, an inevitable PwC/Satyam case,and now this suit against KPMG International, the audit industry is extremely vulnerable on the "global network" issue.

7) Can KPMG claim they were "duped" as they have in their counter suit against Fannie Mae? Will cases against New Century directors and officers go to trial first and guilty pleas/convictions of New Century executives for fraud diminish the case against auditor like they did in Refco?

8) KPMG were also the auditors of Countrywide. ( I think there was a "models" problem there, too.) They are still auditors of Citigroup. Who's next? Many claiming this is first subprime related case against auditors but NJ recently sued Lehman and their auditor EY. And Deloitte is being sued over Bear Stearns and over WAMU.

Jim Lichtman: Entertainment vs. News

2009-03-17T15:20:37Z

Who do you believe - entertainment or news?

That's not a trick question.

Last Thursday, CNBC's lead financial reporter and host of Mad Money Jim Cramer paid a visit to Jon Stewart's Daily Show on Comedy Central. It was a showdown of sorts.

Stewart had been running video clips of CNBC gaffs like Rick Santelli's rant against an Obama policy announcement and Jim Cramer's videos showing him cheerleading different investments, including Bear Stearns. In the face-off, Stewart points out that Cramer, with all his inside information, either knew what was really going on with the banks and markets or should have known.

Cramer did admit that that he was wrong on many of his stock choices, but added, "We have 17-hours of live TV to do!"

"It's not about being wrong about certain things," Stewart says. "It's the gap as to what CNBC advertises itself as and what it is."

Stewart's point is that CNBC cannot advertise itself as financial experts for people who need help on the one hand while touting the beejeasus out of certain stocks on the other that quickly go south.

"We're both snake-oil salesmen," Stewart tells Cramer, "but we label the show snake-oil, here. Isn't there a problem selling snake-oil as vitamin tonic...? It's dangerous [and] it's ethically dubious..."

But the larger reality is that the line between entertainment and news has gotten so fuzzy that it's getting harder to tell a reporter from an entertainer. Even crazier is the fact that you have a comedian like Stewart educating "financial reporter" Cramer about the distinction between the two!

"We are sheep," a friend told me. "We want to be led rather than do the necessary homework, and we'll be led right off the cliff."

And she's right!

In the "old days," when a newscaster expressed an opinion, it carried an on-screen disclaimer. Now, we have commentary so thoroughly mixed with reporting by the likes of Jim Cramer, Rick Santelli and Larry Kudlow that, at times, sound less like three wise men and more like the Three Stooges... without a single disclamer.

Can you imagine ABC's Charlie Gibson throwing tiny, red flags at the camera a'la Cramer every time he makes a story point; or CBS news anchor Katie Couric waving her hands and shouting at viewers about a news story that she's particularly angry about?

If you want to be an entertainer, hire a PR team, get yourself booked on all the late-night shows and act crazy to your heart's content. But if you want to be a reporter, you'll need to live by a different and more exacting set of standards.

We don't need flash, flag-throwing or yelling at the camera. We just need honest, factual stories. And we need reporters who can give us those stories in a responsible and trustworthy manner.

Lichtman's commentaries can be found at www.ethicsstupid.com

Danny Schechter: Financial Crisis Goes Global, Slams into Europe

2009-03-10T11:52:22Z

KREMS, AUSTRIA: Obsessed as we are about our own crumbling economy, it's hard for most Americans to see and appreciate the global nature of the crisis and how it is impacting and will impact others throughout the world. We don't recognize how many in other countries blame the fall of their own economies on a kind of financial disease born in the USA.

And even as protests spread with Britain just putting its own army on alert for fear of disruptions this summer by anarchists with bent on class war with slogans like "burn a banker," mass demonstrations show no sign of abating in France, Iceland, Ireland Greece and other EU countries. People here have politicized economic issues perhaps because of a more thorough and diverse media environment as well as an expectation that their governments have a duty to protect their people.

When I arrived in Vienna for a film forum and festival at the Danube University, I was surprised to see merchandise and remainders marked down to flea market prices at stalls in the usual pricey booths at an airport usually only known for pedaling luxury brands.

Some think the European Union and the Euro zone may not survive the tremors. European Commission President Jose Manuel Barroso said on Friday. "The European Union is facing an unprecedented situation due to the economic crisis and needs to work at different levels to restore credit flows." He said the bloc's economy is expected to contract by 2 percent this year.

General Motors wants a bailout from European governments too with 32,000 jobs at risk.
Eastern Europe is feeling the crunch worst with its currencies reeling. Western Europe has so far declined to come to their requests for more bailouts from Hungary, for example, once a model for how the free market can replace Soviet bloc economics.

There are waves of protests underway in the East. Left publications report "thousands of demonstrators in Lithuania, Latvia and Bulgaria have attacked government buildings and called on their governments to resign as unemployment soars in Eastern Europe.

Experts predict a regional increase of 15 million to 18 million unemployed in the coming months, with no relief as jobs for immigrants disappear in Western Europe and the United States."

Writes Mike Whitney: "The global economy is decelerating at the fastest pace on record. 40 percent of global wealth has been wiped out. The banking system is insolvent, unemployment is soaring, tax revenues are falling, the markets are in shock, housing is crashing, deficits are soaring, and consumer confidence is at its lowest point in history."

When you look at some of the numbers, you can see the time bombs that are ticking away, According to Ed Bonawitz, many countries are in deep hock, "Ireland's external debt, at US$1.8 trillion, equals 900% of the country's US$200 billion GDP. The United Kingdom's external debt of US$10.5 trillion equals 456% of its US$2.3 trillion GDP. Switzerland's external debt of US$1.3 trillion equals 433% of its US$300 billion GDP."

Now that the credit markets are locked tight, renegotiating the terms of these loans is virtually impossible.' U.S. Banks are said to have a loan ratio of around 26-to-1. And European Banks have one that is around 60-to-1.

F. Wiliam Engdahl writes:

The problems in Eastern Europe which are just now emerging with full force are, if you will, an indirect consequence of the libertine monetary policies of the Greenspan Fed from 2002 until 2006, the period where Wall Street's asset backed securitization Ponzi Scheme took off.

The riskiness of these eastern European loans is now coming to light as the global economic recession in both east and west Europe is forcing western banks to pull back, refusing to renew loans or 'rollover' the credits, leaving thousands of borrowers with unpayable loan debts. The dimension of the eastern European emerging loan crisis pales anything yet realized...

According to my well-informed City of London sources, the new concerns over bank exposures to eastern Europe will define the next wave of the global financial crisis, one they believe could be even more devastating than the US sub-prime securitization collapse which triggered the entire crisis of confidence.

Because of globalization and the interwoven nature of the world economy, what is happening there will make things worse for us here.

Reuters reports: "A new report suggesting Eastern Europe's economic slump will drag Western banks further into the red fanned fears that emerging economies will deepen the recession in the West. No wonder international agencies are up in arms."

One issue that is just getting attention Europe is unregulated activity by Hedge Funds and controlling enormous amounts of money stashed in untaxed off shore accounts. European leaders have now agreed a tough stance on hedge funds, the highly speculative products that many blame for fuelling instability in financial markets. Another major issue involves Swiss Banks. US tax authorities demanded the names of 52,000 Americans banking in secret accounts to evade taxes.

Bloomberg reports: "In the past two weeks, Finance Minister Hans-Rudolf Merz said he's willing to collect taxes on offshore accounts for the U.S., and Justice Minister Eveline Widmer-Schlumpf offered cooperation on some cases of tax evasion.

"That's de facto abolishing banking secrecy," said Regula Staempfli, a Swiss political scientist in Brussels."

There is also a darker dimension with reports that legitimate businesses are turning to the mafia and organized crime gangs for the billions they need to stay in business. Douglas Farah writes in the Counterrorism blog:

There is strong anecdotal evidence that cartels from South America to Southeast Asia and Europe ...are stepping in to credit breach, building relations with businessmen desperate to stay in business, who would not normally look to the "informal" economy for a loan.
This will serve to extend the tentacles of these groups even further into the legal society and financial structure. As (one) article notes, "Stronger organized crime means a weaker state.

A story in the Washington Post "says a new report estimated that organized crime syndicates in Italy -- including Naples's Camorra, Sicily's Cosa Nostra, Calabria's 'Ndrangheta -- collect about 250 million euros, or $315 million, from retailers every day. That is about a billion dollars every three days, or about $122 billion a year siphoned out of a single economy. Is it any wonder Italy is a constant economic wreck?"

If trends continue, there is apt to be more opportunities for the criminal class and more of a fusion between so the supposedly legitimate business world and the supposedly illegitimate one.

Tony Soprano, are you paying attention?

Regulators are also monitoring missing money. Here's a headline from the Financial Times:

Lehman Brothers' US liquidators have asked Barclays to explain what happened to an estimated $3.3bn earmarked for bonuses and other liabilities that the UK bank received when it acquired part of the bankrupt Wall Street company last year?

Funny business like this seems to be part of the way this business is run.

Increasingly, banking bosses are sounding like mob under-bosses. Here's a quote attributed to Jimmy Cayne, former chief of Bear Stearns, about Tim Geithner, who engineered the sale of his bank to JP Morgan at a sizable loss:

The audacity of that p- in front of the American people announcing he was deciding whether or not a firm of this stature and this whatever was good enough to get a loan ... This guy thinks he's got a big d-. He's got nothing, except maybe a boyfriend ... Who the f- asked you? You're not an elected officer. You're a clerk. Believe me, you're a clerk. I want to open up on this f--r, that's all I can tell you.

This is getting nasty. It may be time to go to the mattresses. As economies crumble and the center doesn't hold, as W.B. Yeats wrote, things fall apart.

News Dissector Danny Schechter is making a film based on his book PLUNDER; Investigating Our Economic Calamity. He apologizes for inaccurately quoting Karl Marx last week because of a web hoax. You can contact him at Dissector@mediachannel.org.