2010 Budget Cuts Proposed???

Has a new found sense of fiscal responsibility and frugality overcome the White House?  This Week, President Obama announced cuts to his record setting budget.

In making the announcement,the President said:

We can no longer afford to spend as if deficits don't matter and waste is not our problem," Obama told reporters. "We can no longer afford to leave the hard choices for the next budget, the next administration or the next generation.

In making the announcement, the President proposed ridding the budget of $17 Billion Dollars.   

$17 Billion.  Of Course, the 2010 Budget proposal is already $3.5 Trillion Dollars - which is down from the record setting $3.9 Trillion Dollar FY 2009 Budget.  (See, Holy Cow! $3.9 Trillion Dollar Budget.)   The promise to save $17 billion dollars has nothing to do with cutting waste.  Take a look at how much $17 Billion is in comparison to the budget (chart from Econopic):

Get out your microsope to see that tiny blue line at the bottom of the graph.  That is the hard choices we are making.   Keep in mind that the fiscal 2009 (originally proposed Bush) was $3.1 Trillion, and then increased to $3.9 Trillion by Obama.  The 2010 budget is still $300 Billion greater than the original 2009 budget.  

How's that for fiscal responsibility?

Contracts, National Debt and Cinco de Mayo

What is Cinco de Mayo anyway?  It is an opportunity to reflect on the value of holding contracts sacrosanct and the dangers of excessive national debt.  Huh?  An abbreviated history lesson (according to Sotus) is in order to set the stage for today’s ramblings. 

 Cinco de Mayo, Spanish for May 5, remembers the Battle of Puebla, which took place on May 5, 1862.  It was a pyrrhic victory for Mexican forces over the French forces that had invaded the Country a few months earlier.  It was the first major battle against the invading army and the defending Mexicans won.  Unfortunately, within a year, the French would have overthrown the government and installed Maximilian as Emperor of Mexico. 

 So, why did France invade Mexico in the first place – and here is the connection to today’s post – it is because Mexico decided not to honor its debt.  In 1861, Benito Juarez was elected President of Mexico (after leading the Country in the Battle of Reform) on a promise of sweeping changes and liberalization.   Mexico was struggling under the burden of its debt it had accumulated since its independence from Spain, and from its more recent constitutional turmoil.  The debt was held mainly by France, Spain and England.  After being elected, Juarez decided to suspend principal and interest payments on the national debt (as well as nationalizing certain private property, etc).  While Juarez was careful to state that Mexico was not "abrogating" its debt, it just was not paying it.  (Try that with your creditors.)

 Seeking payment or territory in lieu of payment, England, France and Spain entered into the Treaty of London in 1861, which authorized the intervention - led by France and supported by England and Spain.  Of course, the United States was involved in the Civil War, and was unable to come to the aid of Juarez, whom it supported.  After landing in Veracruz in December 1861, England and Spain quickly settled out and withdrew, but Napoleon II’s forces remained determined to gain territory for its debt. 

 The Battle of Puebla, Mexico's temporary rout of an invading army, while a victory of sorts, really should serve as a reminder to us all of the dangers of excessive national debt.  Today, our debt exceeds $11 Trillion dollars.  Interest on that debt is soon becoming the single largest line item in our budget – nearly 25% of our revenue goes to pay interest to debt holders.  Who are our biggest debt holders?  Number 1 is China.

 With Obama’s emerging penchant for abrogating contracts, what could happen if we decide not to pay our debt?  Could another country invade us?  The French Intervention in Mexico was not the first war started over abrogation of debt.  It will not be the last.  We live in a society that holds contract paramount – and there is good reason for that.  The entire underpinnings of our society and way of life are based on respect for contracts and the rule of law.  Our Constitution specifically prohibits the impairment of obligations of contract.  That is why it is troubling to see our President threaten to bring the full rath of government against investors who insist on their contractual rights.   These investors are companies that purchased contracts with auto maker Chrysler on behalf of the companies’ stakeholders (retirees, pension funds, teachers, mom, dad, apple pie, etc.).  The contracts purchased promising payment of debt and secured them fully with a first lien on assets of Chrysler.  That first lien means that these investors get 100 cents on the dollar.  When Obama’s administration singled out these investors because they wouldn’t reduce their contract to take a quarter of what they would be entitled to, it was disturbing and showed a fundamental disrespect for American values.  More troubling is the threats of SEC and IRS investigations against the hold out investors.  Ultimately, the contract and the Chrysler situation will be resolved in bankruptcy, but the damage to our constitution and rule of law by showing a willingness to ignore contracts could do more harm than the loss of 54,000 union jobs at Chrysler.

 Take the disdain for contracts one step further and wonder what will happen if Obama abrogates our contracts to pay our national debt?  Could a foreign debt holder intervene in US affairs to recover its money?  It happened before. 

 Happy Cinco de Mayo

De-Stressing The Stress Tests

A truism of government, regardless of political party, is that when officials tell you something, they mean the opposite.  The large bank holding company stress tests recently conducted by our government is no different:  it is  simply a whitewash intended to dupe the US taxpayer into continuing to bail out a failed financial system instead of doing the just and proper thing of liquidating the system and starting anew.  

On Friday, the Fed released its white paper of the stress test, The Supervisory Capital Assessment Program: Design and Implementation.  You can read it in full, or for those of us who need assistance deciphering government doublespeak, you can read Tyler Durden's Stress Test Cliff Notes .    Here are a few highlights of Durden's analysis:

(1) “more than 150 senior supervisors, on-site examiners, analysts and economists” spent a month reviewing the 19 BHC’s [Bank Holding Companys] that hold two thirds of the country’s bank assets and account for one half of the loans

More than 150 means at least 151.  .  .  .  A typical single bank examination utilizes hundreds of examiners and takes several months. Clearly the next release of public sector productivity numbers is going to astonish.

(2) ”the firms were asked to project…..the firms were asked to provide…etc.”

In other words, the banks tested themselves and the 150 examiners took their word for it. Any wonder they passed?

.  .  .  

(4) “As a result of the loss recognition framework for assets in the accrual loan book, the results of this exercise are not comparable with those that would evaluate such assets on a mark-to-market basis”.

Absolutely. What does the market know anyway? The banks’ models got us into this calamity so damn if they can’t get us out!

.  .  . 

(6) “Each participating firm was instructed to project potential losses on its loan, investment, and trading securities portfolios, including off-balance sheet commitments and contingent liabilities and exposures over the two-year horizon beginning with year-end 2008 financial statement data. “

Again, Treasury outsourced the testing to the banks themselves. So what was the job of the Treasury staff other than to photocopy , collate and file? Was this a Temp Staff? Kelly Girls?

(7) “Firms were allowed to diverge from the indicative loss rates where they could provide evidence that their estimated loss rates were appropriate. ”

I know it looks bad, but believe me, it’s getting better!

.  .  .

(10) “Under the baseline scenario, BHCs were instructed to assume no further losses beyond current marks”

It’s over! Great news!

In other words, the banks were asked to evaluate themselves using less time than bank regulators typically take, using models that do not truly reflect what would happen under the assumed scenarios.  

So, why are we doing these stress tests if they don't really test stress?  The Fed and Treasury are well aware of the capital required to bail out banks and depositors.  Since the Great Depression, the Fed and Treasury have taken the view that the economy and maintaining deposits in a bank is a game of confidence.  (Indeed, in a larger sense, the utility of paper currency - the Federal Reserve Notes we all keep in our wallets - depends very much on the world's confidence in our political and economic system - but that is another topic that involves a discussion of the national debt and the willingness of other governments to finance the debt).   Con games work as long as people believe the con or until their money is gone.  

The trouble is that people are starting to question the system.  When retirement accounts have lost 45% of their value, homes have lost 30% of their value, and banks in which we keep our deposits are insolvent, people have a right to question whether the system in which we placed our faith and credit can endure.  We have all heard stories from our grandparents how banks closed and the depositors money was not there.  We have been reminded of it all our lives, and now we want to protect what we have.  Systems have crashed before even with semi-rational governements.  The Wiemar republic blew up after a banking crisis.  So did Argentina.  I certainly want to have money if the system crashes - not just a credit from the government for only $250,000 (which, after the massive inflation we will experience at the tail end of the receission as a result of the massive "liquidity injection" {meaning printing of money}, will be worth about $2.50).  Because we operate on a fractional reserve system (meaning that your money is not really in the bank, but the banks maintain a sufficient reserve to meet anticipated withdrawals in normal situations), it is in the Fed's best interest to discourage you from withdrawing your money or from selling your bank stock.  If you knew the bank was insolvent, you would withdraw your money immediately and find another safe haven.  The Fed needs you to have confidence that the bank can provide the money when needed.  That is why these fictional stress tests are created.  

So, what can you do?  Tell your representative to stop the nonsense.  Let the bad banks fail and press the reset button.  In the meantime, secure your assets.   

 

Finally A Call For A Congressional Investigation

Say what you want about US Speaker Nancy Pelosi, but she has just floated a very reasonable idea of having Congress investigate the cause of the financial crisis (presumably somewhat deeper than just noting greed and fraud).  Bloomberg is reporting that House Speaker Nancy Pelosi plans to push for a comprehensive inquiry.  You would think that prior to legislating new laws and regulations Congress would have already called for an investigation into the causes and practices of the financial industry.  Unfortunately, not all in power agree.  In his typical "Barney Knows Best" approach, Barney Frank, chair of the House Financial Services Committee, proposes legislating first and then holding hearings to justify the new laws he proposes.  

It is exactly that type of arrogance that has resulted in the shift of losses from investors to taxpayers and the resulting delay in recovery.  Had Congress held hearings before approving the TARP legislation, it is unlikely that it would ever have been passed.  We now know that the expert panel appointed by Congress to oversee the TARP fund stated that subsidizing financially troubled institutions results in a delayed recovery, but permitting orderly liquidation while painful, results in a quicker recovery and a more robust economy.  (See $4 Trillion and Nothing to Show for It.)  Legislating with prudence after careful consideration of all relevant facts and the likely effects of the proposed regulation results in better law and more workable solutions.  Legislating on the fly only results in a poor and confusing patchwork of red tape that is bound to have unintended consequences that forethought could have avoided.

What is truly unfortunate is that the rush to regulate by this Congress will undoubtedly stifle the free market and substitute Barney Frank's ideas for collective best practices.  Legislation needs to focus on maintaining transparency and punishing deceit rather than substituting the judgment of business folk with that of politicians.  

My hope is that hearings will happen and will ferret out the truth about the extent of the fraudulent and questionable practices occurring on Wall Street (and Main Street), but also explore how greater transparency in this day and age is possible.  Indeed, more frequent and more accurate disclosures may have prevented the crisis in the first place (albeit at the cost of cutting short the recent economic bubbles - which were probably not real in the first place).  

Perhaps the hearings will also force the Treasury and Fed to be more open and transparent with information as well, such as bank ratings.  The Treasury is reluctant to disclose information on banks for fear of causing a run on banks, as happened in the Great Depression.  It is, however, rumor and innuendo that cause runs on banks (and thus runs on the taxpayer funded FDIC fund).  If banks were forced to disclose their assets and liabilities, leverage ratios, loan loss reserves, etc. on a weekly (or even daily) basis to the public, the depositors could make an informed decision as to the safety of their funds.  It won't prevent banks from becoming insolvent or from making bad loans, but it will allow individuals to save more of their deposits at an earlier date.  Maybe the hearings will also result in some other common sense provisions, such as increasing FDIC insurance premiums for banks that assume more risk than conservative banks.  Bad drivers pay more for insurance than good drivers (in most free market states), why shouldn't bad banks pay more for deposit insurance than good banks?

The Declaration of Independence

Within the next week we have 2 relatively significant events in every American's life.  The first is April 15 - which is the day individual tax returns are due.  Paying taxes is the cost of living in a free society; but this year, the pain many of us feel will be heightened emotionally due to the unprecedented spending by our Government.  Spending is initiated by our elected officials who are ever increasingly ignoring the wishes of the people who elect them to office.  The recent spending spree has been contrary to the wishes of the majority of Americans and as has been written about frequently is nothing more than a way of taking hard earned dollars and paying them to the already wealthy.  

The second day that falls on the heels of tax day is April 18 - Patriot's Day.  It is the day that celebrates the original ride of Paul Revere in 1775, the British Invasion and the beginning of the American Revolution.  The Revolution was a rebellion against an oppressive and tyrannical government that viewed the citizens of the Colonies as nothing more than a source of revenue which would be extracted by taxes.  The  oppression and lack of response from Parliament led to the independence of the colonies from Great Britain.  Every now and then it pays to reread the words so eloquently expressed by Thomas Jefferson and the Second Continental Congress as to why the formation of a new government was then necessary.  The text of the  Declaration of Independence is set forth below.  Please read it and remember why we are our own country.  Remember, if our elected officials become non-responsive, we have a choice.

The Declaration of Independence

In Congress July 4, 1776

The unanimous declaration of the thirteen United States of America:

When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. — Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.

He has refused his Assent to Laws, the most wholesome and necessary for the public good.

He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent should be obtained; and when so suspended, he has utterly neglected to attend to them.

He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only.

He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their Public Records, for the sole purpose of fatiguing them into compliance with his measures.

He has dissolved Representative Houses repeatedly, for opposing with manly firmness his invasions on the rights of the people.

He has refused for a long time, after such dissolutions, to cause others to be elected, whereby the Legislative Powers, incapable of Annihilation, have returned to the People at large for their exercise; the State remaining in the mean time exposed to all the dangers of invasion from without, and convulsions within.

He has endeavoured to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and raising the conditions of new Appropriations of Lands.

He has obstructed the Administration of Justice by refusing his Assent to Laws for establishing Judiciary Powers.

He has made Judges dependent on his Will alone for the tenure of their offices, and the amount and payment of their salaries.

He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people and eat out their substance.

He has kept among us, in times of peace, Standing Armies without the Consent of our legislatures.

He has affected to render the Military independent of and superior to the Civil Power.

He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:

For quartering large bodies of armed troops among us:

For protecting them, by a mock Trial from punishment for any Murders which they should commit on the Inhabitants of these States:

For cutting off our Trade with all parts of the world:

For imposing Taxes on us without our Consent:

For depriving us in many cases, of the benefit of Trial by Jury:

For transporting us beyond Seas to be tried for pretended offences:

For abolishing the free System of English Laws in a neighbouring Province, establishing therein an Arbitrary government, and enlarging its Boundaries so as to render it at once an example and fit instrument for introducing the same absolute rule into these Colonies

For taking away our Charters, abolishing our most valuable Laws and altering fundamentally the Forms of our Governments:

For suspending our own Legislatures, and declaring themselves invested with power to legislate for us in all cases whatsoever.

He has abdicated Government here, by declaring us out of his Protection and waging War against us.

He has plundered our seas, ravaged our coasts, burnt our towns, and destroyed the lives of our people.

He is at this time transporting large Armies of foreign Mercenaries to complete the works of death, desolation, and tyranny, already begun with circumstances of Cruelty & Perfidy scarcely paralleled in the most barbarous ages, and totally unworthy the Head of a civilized nation.

He has constrained our fellow Citizens taken Captive on the high Seas to bear Arms against their Country, to become the executioners of their friends and Brethren, or to fall themselves by their Hands.

He has excited domestic insurrections amongst us, and has endeavoured to bring on the inhabitants of our frontiers, the merciless Indian Savages whose known rule of warfare, is an undistinguished destruction of all ages, sexes and conditions.

In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince, whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.

Nor have We been wanting in attentions to our British brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these usurpations, which would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity. We must, therefore, acquiesce in the necessity, which denounces our Separation, and hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.

We, therefore, the Representatives of the united States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of these Colonies, solemnly publish and declare, That these united Colonies are, and of Right ought to be Free and Independent States, that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. — And for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor.

$4 Trillion and Nothing to Show for It.

Congress, without debate or investigation of any sort, blindly approved bailout after bailout.  $4 Trillion dollars of your hard earned dollars have gone to the financial rescue of banksters.  Now, after committing to spend all that money, your non-representative representatives heard a report from an oversight panel that told Congress the bailout plan was ill conceived and isn't working. 

The Congressional Oversight Panel, approved after Congress voted without little debate on allowing Treasury to have $700 billion of TARP fund.  The panel is chaired by Elizabeth Warren, a Harvard Law School professor.  The findings (Executive Summary found here) point out that there are three general approaches to crises: 1) liquidation of troubled institutions (as was done in the 1980's S&L crisis); 2) reorganization of the institutions using conservatorships (as was done with Continental Illinois and Sweden in the 1990's); or 3) Subsidization (as was done with Japan during its lost decade).  The report noted that the total spent on subsidization to date exceeds $4 Trillion Dollars.

The liquidation option, while the best choice is politically difficult, but provides certainty to the markets, prevents unending subsidies, and results in a quicker resolution to the crisis.  Our elected officials chose not to liquidate the insolvent banks.  It worked during the S&L crisis.  Reorganization involves replacing management and selling off bad assets, but it taxes government resources and results in politicization of the business.  Our non-representative representatives chose not to reorganize and replace management.  It sort of worked with Continental Illinois.  Subsidization involves endless commitment of taxpayer resources, hides true value and delays economic recovery.  It didn't work with Japan, but this is how our government chose to spend our money - without debate or fact finding.  

We know the path our elected officials chose - a path doomed to failure from the beginning.  The only way subsidization could work is if the crisis was short and shallow.  In other words, if the crisis was limited to just a temporary dip in housing prices that caused a short term liquidity issue, subsidization might have worked.  We all know from history that real estate crises are never short term.  Despite receiving calls and letter at the rate of 300 against the bailout to every one in favor, and despite having a cadre of economists telling Congress that the bailout was a bad idea, Congress went ahead with its plan.  Now we know it won't work. 

What are you going to do about it?  It is never to late to exercise your constitutional right to let your elected officials know how you feel.  Send the tea bags.  Write the letters.  Go onto the websites and send email messages.  There are plenty of ways to express yourself.  Remember - if you don't tell your representative, who will?

Below is a video introduction to the oversight panel's report.  Enjoy,

SOTUS

Fraud and Cover Up In the Banking Scandal

The fraud that has brought our economy to the brink of collapse occurred at every level, from the borrowers, to the mortgage lenders, to the investment bankers pooling the loans, to the ratings agencies, to the government regulators themselves.  It is time to ask yourself why after at least fifteen (15) months since the public became aware of the crisis (which started 2 years ago) have there been no fact finding investigations in Congress as to the roots of the crisis?  Sure, Congress called in some of the ratings agencies, but where is the fact finding investigation about the practices, who was involved, who knew what when?The Senate engages in endless debate about political appointees, but passes bailout legislation without even understanding why the money is needed.  Ask why have there been no prosecutions for the fraud yet?  The answer may very well be that our senior elected officials from both parties and the top regulators are involved in covering up the extent of how bad the crisis is.

On April 3, 2009, PBS's Bill Moyers interviewed William K. Black, a professor of law and economics at the University of Missouri-Kansas City School of Law, and author of The Best Way to Rob a Bank Is to Own One .  (Hat tip to Economic Populist and Market Ticker.) Black was a former prosecutor and chief regulator in for the Federal Home Loan Bank Board during the Savings and Loan crisis in the 1980's.  Black understands bank fraud and how it occurs.  He was instrumental in setting up laws that would prevent such crises in the future - laws that are now being ignored.    The interview is about 20 minutes, but it is worth watching if you want to understand the extent of the fraud.  If you don't want to watch, read the transcript here.  

Black points out that the roots of the fraud extend back to the Clinton administration, and were exacerbated by the Bush administration diversion of regulatory attention from white collar crime to homeland security.  What is worse is that current Treasury Secretary Timothy Geitner was the chief regulator of the New York banks while he was President of the New York Federal Reserve District.  In recent testimony before Congress, Geitner denied that he had regulatory authority.  In September 2004 the FBI warned that this crisis was occurring and the fraud was building.  The FBI warning was ignored on every level.  

It is time that we insist that our Government Hold Those Responsible Accountable.  If the Department of Justice will not prosecute those involved, then Congress needs to pass a law allowing private rights of action to enable individuals to prosecute fraud actions on behalf of the government.  We have laws dating back to the Civil War, called Qui Tam actions, that permit private citizens to sue and recover on behalf of the Government when there is fraud against the government - typically a whistle blower actions involving misuse of government funds.  It is time that we expand those laws to allow private individuals to act on behalf of the government to pursue those who were involved in the fraud.

More Regulation?

The G-20 meetings that were held in London this past week resulted in President Obama agreeing to follow France's President, Nicolas Sarcozy, plan to regulate more tightly the once free markets.  Obama also pledged to repudiate U.S. policies towards freeing markets from excessive government interference.  The President's promises at the G-20 essentially reversed 25 years of free market policy spanning Presidents from both parties that ushered in  the largest growth in American wealth in history. 

The problem we are in today has little to do with lack of regulation and has everything to do with a) failing to enforce the regulations we have on the books; and b) sheltering risk takers from the consequences of their actions.  Many of the problems we have could have been prevented simply by enforcing the laws on our books.  If we don't enforce our laws, including punishing people for acts of fraud, we encourage people and entities to push the boundaries of what is acceptable.  Indeed, all laws, customs, mores, and social conventions are fluid concepts that derive from expansion of boundaries of what was once acceptable.  Laws and regulations are in place to put absolute limits on the extent to which these social conventions may be pushed.  Regulations as to capital ratios, executive compensation, and other minutiae on the day to day runnings of business have no place in our society.  The world is complex; businesses are complex.  One government solution does not fit all, nor should it.  No one wants a policy wonk sitting in a government building in Washington DC telling businesses in New York, San Francisco, Boston or elsewhere what ratios, salaries, employees they should have.  What is important is transparency and uniform standards of disclosure, not how the task is accomplished.  Essentially, we want transactions to be free from fraud and the best way to accomplish that is through transparency and mandatory disclosure.  In this day and age with modern communications and powerful computers, there is no reason that we can't have monthly reporting (or even weekly) rather than relying on quarterly disclosures.

The flip side of transparency, however, is another key area that we seemed to have forgotten.  That is, allowing the consequences of risk to fall upon the party assuming the risk.  Risk is a 4-letter word after all.  Not only is there an upside reward if the risk pays off, but there has to be a downside consequence when the risk doesn't pay off.  Spreading the risk among innocent parties (taxpayers in the case of the recent government bailouts) encourages riskier conduct than would normally be taken.  If risk is taken knowing that 100% of the upside is yours, but there is little  penalty on the downside, undisciplined risk will be assumed.  Bankruptcy has to be a viable option for every entity.  There can be no such thing as too big to fail.  The only role of government should be the orderly winding down of large institutions that have failed.    If we choose to insure bank deposits, the risk premiums paid by banks to the FDIC need to be set based on the risk undertaken by the bank, not a uniform premium across all banks.  Conservative banks that make solid loans in accordance with well established underwriting guidelines should be rewarded with lower premium and the ability to pass savings onto their constituencies.  Conversely, banks that take excessive risk need to pay a higher price because it will be more likely that taxpayer dollars will be needed to pay off depositors.  

Bankruptcy needs to be a viable option.  In many instances, it helps restructure loans.  It clears dead weight off the necks of individuals and businesses and allows them to once again become productive.  A few years ago we  changed our bankruptcy laws to make it more difficult for individuals to discharge credit card and other consumer debts in bankruptcy.   We need to revisit the wisdom of making it more difficult to restructure individual debt while at the same time allowing corporations to avoid bankruptcy.  While I have little sympathy for the individual that incurred debt beyond their means, the risk of that loss must be shared with the counter party lender that took the risk to allow the person to incur debt that couldn't be repaid. Without risk, the same practices that brought our economy to the brink of collapse will repeat and collapse will be inevitable.  

Choking the businesses with excessive regulation will not bring us out of this great depression 2.0, but enforcing laws to bring transparency to transactions and allow the consequences of risk to fall upon the risk taker will be a start to righting the ship.

Congress and Obama Knew About AIG Bonuses

One thing that has been, and is still, a certainty is that when any government politician says something we know the opposite is true.  The furor over the AIG bonuses is a prime example.   (see AIG Bonus Firestorm Misdirection - Updated and AIG Bonus Firestorm Misdirects Attention Away From CDS Payments for prior discussion.)  We now know that President Obama knew about the amount of the AIG bonuses on Thursday March 12 - several days before his "impromptu" expression of outrage.  

The real outrage, however, is that we now learn that Obama's treasury secretary, Timothy Geitner, not only knew about the bonuses in advance, but with Connecticut Senator Christopher Dodd's assistance, inserted a provision in the $400+ billion spending bill that preserved AIG's bonuses.  In a New York Times article on the fallout affecting Senator Dodd, Geitner takes the blame for protecting the bonuses:

On Thursday, Treasury Secretary Timothy F. Geithner came to Mr. Dodd’s defense, saying in an interview with CNN that his staff had raised concerns about whether the legislation limiting executive compensation “was vulnerable to legal challenge.”

Dodd - the chair of the Senate Banking Committee and person responsible for the portion of the legislation providing the loophole, was not forthcoming about his involvement.  The NYT article went on

This week’s uproar was triggered largely by Mr. Dodd himself, when he provided conflicting answers about the provision that allowed the bonuses at A.I.G. According to the Center for Responsive Politics, the company’s employees, political action committees and subsidiaries have made campaign contributions of nearly $300,000 to Mr. Dodd since 1989.

Initially, Mr. Dodd said he did not know how the loophole got into the legislation that sought to crack down on executive compensation. But then in an interview Wednesday with CNN, he acknowledged that his staff helped write the revisions after receiving a request from the Treasury Department.

Aside from the asinine attempts at covering up what was done, the question we should be asking is why did NONE of the 534 other elected officials raise any concern about this provision?  The answer is pretty clear - the $787 Billion stimulus bill was rushed through Congress, and the controlling parties would not let a full debate come to the floor.  Provisions were  inserted in backroom meetings and both houses were given a mere 24 hours to pass the bill.  No debate was allowed.  That, my friends is not how democracy is supposed to work.

The reason this happened is that our elected Senators and Representatives failed to perform their job.  It is their job to represent us and debate the legislation.  I am very skeptical whether any of the 435 Representatives or 100 Senators even read the full bill before it was voted upon.  America, we were cheated.  Our elected officials are no better than the greedy bastards that took the bailout money and lined their own pockets.  In fact, it is worse.  It is nothing short of a breach of trust.  

We need and deserve better representation.  Ask your congressman why he or she voted for a stimulus bill that allowed recipients of federal money to pay huge bonuses?  Listen to what they say and ask them if they personally read the 1000 page bill before they voted on it.  If they told you they did, they are lying.  If they admit they did not, ask them to step down.  It is time that we either throw all the bums out of Congress.  At the very least, we need to make sure that our representatives are effective and that we have a voice.  Consider insisting on our Constitutional right to have one representative for every 30,000 inhabitants (see, Taxation With Representation Is Not So Good Either.)   With more members of Congress, we the people will have more control and the elected officials, individually, will be less powerful, albeit collectively we will all be more powerful.  If none of the 535 members had the foresight or fortitude to question the $787 Billion dollar spending bill, then maybe, just maybe increasing the size of the representatives to 2500 would produce one or two who would stand up for what is right.  It is time to act now before it is too late.

Madoff's Accountant Charged

The SEC had finally decided to take action against Madoff's accountant, David G. Friehling, for enabling Madoff's fraud.  

The SEC's complaint alleges that Friehling enabled Madoff's Ponzi scheme by falsely stating, in annual audit reports, that F&H audited BMIS financial statements pursuant to Generally Accepted Auditing Standards (GAAS), including the requirements to maintain auditor independence and perform audit procedures regarding custody of securities.

The SEC's position is that Friehling enabled Madoff's fraud by conducting an audit but not following accounting standards.  In other words, Friehling sold his accounting license to Madoff. 

Instead, the SEC alleges that Friehling merely pretended to conduct minimal audit procedures of certain accounts to make it seem like he was conducting an audit, and then failed to document his purported findings and conclusions as required under GAAS. If properly stated, those financial statements, along with BMIS related disclosures regarding reserve requirements, would have shown that BMIS owed tens of billions of dollars in additional liabilities to its customers and was therefore insolvent.

In other words, Friehling sold his accounting license to Madoff.