Not A Mystery

When you are Goldman Sachs ordinary words take on extraordinary meanings:

Lemonade: A structured-financial deal Goldman mixed up to make bad loans go down easy on investors. Used in a sentence, from a Goldman email: “They structured like mad and travelled the world, and worked their tails off to make some lemonade from some big old lemons.”

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Then we learned that the Synthetic CDO’s over which the SEC is suing Goldman don’t actually contain any real bonds, but just mathematical representations put together by Goldman’s rocket scientists.

But let’s be honest, Synthetic CDO’s are so 2008. And we know from listening to Lord Blankfein that Goldman Sachs merely makes a market for whatever commodity their customers require.

What can we expect next from those Goldman wizards that would up the ante?

Wait for it … drum roll please … OK, here we go.

Genetically Modified CDO’s to replace those (now discredited) Synthetic CDO’s.

Yes! And these would be the lemons for their new batch of lemonade.

Such A Deal

Pass the vodka.

Note:  Believe it or not, these “lematoes” are actually real and were created several years ago by a team of Israeli scientists as part of an experiment in genetic engineering.

I revel in a good day every so often, as an attempt to avoid morphing into a grumpy old man.

Recently I went to Lowe’s home Improvement Center with the goal of purchasing a “Shrub Rake”. I didn’t know there was such a thing as a shrub rake before I got there, I was just looking for a smallish rake to be consistent in my desire to perform only smallish yard tasks.

The beauty of our capitalist system is a multitude of choices. In this case, big rakes, medium rakes and little rakes. Tons of rakes. I didn’t know there could be so many rakes. I was standing there scratching my head when another shopper pointed to a particular rake and said, “Don’t buy that rake, it doesn’t work.”

Now in spite of the name of our blog, I have to admit that how a rake could not work was a mystery to me.

In any case, after what seemed like an unduly long time I finally managed to pick out what was the ultimate rake on offer. It was the lightest, longest, prettiest and surprisingly cheapest of all the rakes on this wall display. I was honestly chuffed with my selection.

Now imagine my absolute gob-smaked surprise when I examined the label and discovered that this rake was Made In The USA.

The USA is getting our rake back, which may be even better than getting our groove back.

No Assembly Required

But wait, it gets better.

When I grasped the adhesived-on label and pulled, instead of ripping in tiny pieces that would take hours to remove, it peeled right off and left no residue!

Look Ma, It Didn't Stick!

And that’s all it takes, these days, to have a good day.

I have an acquaintance  in the packaging industry whose products utilize a super-strong cardboard. You can stand automobiles on boxes made of his cardboard; we are talking here about serious robustness.

Their shipping containers are  used to transport auto engines and heavy machinery.

Sit in your car, raise your hand up to touch the ‘head-liner’ on the inside of the roof, and you are probably touching another of their products.

Because their business was dependent on the (cyclical) auto industry, my acquaintance decided to look into other applications for their product that would be less cyclical.

He came up with the idea of making coffins for people who were planning to be cremated.

Brilliantly non-cyclical.

This was many years ago, and people were still purchasing expensive conventional caskets for their departed relatives despite the fact that they were going to be cremated, casket and all.

Unfortunately (at that time) the funeral industry was not receptive to new, cost-saving, ideas. And it’s not like consumers were demanding cardboard caskets.

His idea died a quiet death.

But times have changed. Cardboard is the New Green.

Google ‘Cardboard Caskets’ if you don’t believe me.

With Better Timing, It Could Have Been 'From Roads To Riches'

Next will be promotions that include casket offsets for people attending the funeral.

And remember, timing is everything.

In a nutshell, the way financial institutions (Big Bank) make their money is by knowing more than the other guy (that would be you). They will famously say that their priority is to serve their customers, and that capitalism depends upon them for the efficient allocation of capital. Also, that they are all in favor of shining the light of day on their operations.

Whatever.

We're Here To Allocate Your Capital

A better characterization of Big Bank’s approach to transparency and customer service is found in The Hitchhiker’s Guide to the Galaxy.

In The Hitchhiker’s Guide to the Galaxy, a notice ordering the demolition of someone’s house is found “on display” in a lightless, stairless cellar, in the bottom of a locked filing cabinet, in a disused lavatory, with a sign on the door saying “Beware of the leopard”.

A fine example of Big Bank’s drive for obfuscation is their lobbyist’s demands to not force them to trade derivatives on open exchanges. The reason Big Bank opposes exchanges is that,

Currently, the only way to trade many derivatives is to call up various dealers and ask for the price at which they are willing to buy or sell. The securities dealer profits from the difference between the prices at which it buys from one party and sells to another. Investors rarely, if ever, see details on the other side of the trade. Wall Street has signaled that it can live with a clearinghouse approach, but it is strongly opposed to exchange trading of derivatives, which would introduce price competition and lower the profits.

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But wait, it gets better. For those folks whose only connection with reality is the Adam Carolla podcast, here is an example of Big Bank’s service to customers and community.

The Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs for securities fraud [last Friday]… charging the bank with creating and selling mortgage-backed securities that were intended to fail … Goldman let John Paulson, a prominent hedge fund manager, select mortgage bonds that … were most likely to lose value and … sold [those bonds] to investors … [which then] plunged in value …

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What’s been famously reported in the media is that Paulson made $1 billion on this scam (although he hasn’t been charged by the SEC along with Goldman). So, speaking of service to their community,

What’s not been noted is that as a hedge fund manager Paulson collects only (sic) 20% of the profits he generates for his investors, which means his investors made $5 billion dollars on that scam.

What’s not been noted is that as a hedge fund manager Paulson pays income tax on his fees as capital gains, not ordinary income like us ordinary folks. This saves him approximately $200 million in taxes on that $1 billion income.

What’s not been noted is that because these profits are capital gains to the investors also, neither Paulson nor his investors pay Medicare withholding of 1.45%, thus depriving Medicare of $102 million in payments.

What’s not been noted is that in many instances hedge fund profits are collected off-shore and so can be immune from any US taxes. We don’t know that this is the case with Paulson’s fund, but just mention it as a possibility.

Thank goodness we don’t depend on Big Bank for the Answer to the Ultimate Question of Life, the Universe, and Everything.

42.

My father’s name was Jack.

When I hear someone say “You don’t know Jack”, I think of him.

This coming Saturday, HBO will air a film starring Al Pacino titled, “You Don’t Know Jack”. But it’s not about my dad, it’s the story of Dr. Jack Kervorkian and the end-of-life debate.

Last week Anderson Cooper interviewed the real Dr. Death, as he’s famously called by the media. It’s a fascinating interview, and indeed I don’t know this Jack at all. There were also several clips of Pacino in what looks to be an amazing performance.

You Really Don't Know This Jack

Cooper, who’s already seen the film, said “No matter what side of the debate you are on, this film is worth watching.”

If I had a TV, this would be at the top of my list.

Al Pacino As Dr. Jack Kervorkian

In the meantime I’m waiting for the DVD.

You don’t need to wait.

Close on the hooves of our Skinny Cow report comes further bovine news from Wall Street, which we’ll put under the category of Fatted Calves.

Fatted calf is a metaphor or symbol of festive celebration and rejoicing for someone’s long-awaited return. It derives from the parable of the prodigal son in the New Testament. In biblical times, people would often keep at least one piece of livestock that was fed a special diet to fatten it up, thus making it more flavorful when prepared as a meal. Slaughtering this livestock was to be done on rare and special occasions. Thus when the prodigal son returns, the father “kills the fatted calf” to show that the celebration is out of the ordinary.

The CDO's May Be Synthetic, But The Meat Tastes Great

Yesterday we learned that Goldman Sachs and John Paulson are accused by the SEC of fattening up a bunch of clueless investors.

The Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs for securities fraud on Friday, charging the bank with creating and selling mortgage-backed securities that were designed to fail.

According to the complaint, Goldman let John Paulson, a prominent hedge fund manager, select mortgage bonds that he wanted to bet against because they were most likely to lose value and packaged those bonds into the “Abacus” investments, which were sold to investors like pension funds. As those securities plunged in value, Goldman and the Paulson hedge fund made money on their negative bets, while the Goldman clients who bought the investments lost billions of dollars.

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Strangely, this whole episode came to light not thru regulatory oversight, but from a recently published book on the financial meltdown “The Greatest Trade Ever“ by Gregory Zuckerman.

Unfortunately, even though the regulators are now on the case, they have come after the gourmets with civil instead of criminal charges.

We’ll take whatever we can get, “Cin cin”.

I’m a fan of Skinny Cow products. Not only do they taste good, but their ‘spokes-cow‘ reminds me of the old Gateway computer boxes and appeals to my inner geek.

If you scan through their product line-up you’ll notice that they have a great variety of flavors. But even more importantly, they deliver them to you  in a myriad of ways. You can consume them from cups, sticks, cones and sandwiches. Pretty much whatever form you desire for your ice cream, it’s there to enjoy.

And, when they introduce a new flavor, they don’t hold back the cones and cups so they can get their full mark-up on sandwiches for a few extra months.

Interesting idea, isn’t it.

Giving customers access to your product in whatever form your customer desires.

Maybe they should start a book publishing business or a movie studio.

That would be tasty.

Now that speculation has begun on the cause of Saturday’s tragic plane crash in western Russia that killed Poland’s president Lech Kaczynski and many of the government’s leaders, it’s tempting to imagine that the pilots were pressured into landing against their better judgement.

Investigators examining the crash appeared to be focusing on why the pilot did not heed instructions from air traffic controllers to give up trying to land in bad weather in western Russia on Saturday morning. [And] whether the pilot had felt under pressure to land to make sure that the Polish delegation would not be late for a ceremony on Saturday in the Katyn forest, where more than 20,000 Polish officers and others were massacred by the Soviets during World War II.

… attention has been drawn to the pilot’s state of mind because of a previous incident involving the Polish president, Lech Kaczynski, who died along with numerous other senior Polish government and military officials in the crash. In August 2008, during Russia’s brief war with Georgia, Mr. Kaczynski got into a dispute with a pilot flying his plane to the Georgian capital, Tbilisi, according to reports at the time. Mr. Kaczynski demanded that the pilot land despite dangerous conditions, but the pilot disagreed and diverted to neighboring Azerbaijan.

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We all have a tendency to ‘simple’ answers, and it’s tempting to lay the blame on Lech Kaczynski and the pilot, even though we may never know the truth of the matter. Certainly many aircraft accidents are caused by the pilot’s frame of mind, where stress or the desire to achieve a certain goal clouds judgement.

Unlike the Butterfly Effect where a single event can lead to many different seemingly unrelated outcomes, aircraft accidents are invariably the result of multiple small mistakes that cascade into a final tragedy. And whereas the Butterfly Effect leaves us powerless in the face of random events, in this case any one of a number of small changes in the situation would probably have prevented the crash.

Like everything else in life, we try to learn and move on. So the next time I’m on a flight about to take off and in a hurry to get home, when the pilot comes on and says we have a mechanical problem, patience will be my middle name. I will also remember the victims of the Katyn Massacre, whose story I would not have known except for this tragedy.

Note: As a private pilot with an instrument rating, I do have a dog in this hunt when it comes to affixing blame before the facts are known.

Last week we noted ATT’s whining about a $1 billion [non-cash] charge they were being forced to take because of Obamacare. In fact the new law just eliminated a 7-year old scam allowing them to ‘double-dip’ by taking a tax deduction on healthcare premiums that were actually being paid (for them) by the government.

A simple back-of-the-envelope calculation showed us ATT had saved so much money over the past 7 years, that the new $1 billion charge still left them with a $1.6 billion profit. Not a bad return on a smallish lobbying investment.

But now we learn that by their own standards of what is material information ATT shouldn’t even have brought the matter to anyone’s attention in the first place.

So, This Is The New AT&T

Turns out that ATT has been mum (F2U Rio Linda, that means ‘silent’) about another significant liability making that $1 billion write-off look like chump change.

AT&T Inc. is seeking to dismiss a long-running pension case alleging age discrimination that seeks $2.3 billion in damages, according to documents filed this week in a federal court. The suit alleges a 1998 pension change effectively froze the pensions of 40,000 older management employees at AT&T, in some cases for years, but not those of younger employees …  Legal papers filed Monday… include the first publicly disclosed estimate for potential damages. The $2.3 billion potential claim dwarfs the well-publicized $1 billion noncash charge the company will take to reflect the recent loss of its deductions for health-care subsidies it receives from the government.

But because this case includes an age-discrimination claim, under federal law the judge could send it to a jury trial. If a jury found that the company willfully discriminated against older workers, it could award punitive damages that would double the size of the claim to $4.6 billion.

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So how is it, you might ask, that ATT neglected to tell their shareholders about this potential damage to their share price?

Last May, the Securities and Exchange Commission asked AT&T why it hadn’t disclosed its potential exposure in the pension case. AT&T responded that it didn’t think the case met the reporting threshold for disclosure, SEC filings show.

I guess the SEC will need to re-write their regulations so that we take into account politics when deciding what is and is not material.

But wait, it gets even better.

To butress their case ATT revealed that even if they lost a $2.3 billion cash judgement it would have no real impact because the retirement account is so well-funded it could simply absorb that hit. At the same time we are being told that the Obamacare $1 billion non-cash write-off could trigger a loss of such magnitude that ATT might have to cancel or cut back retiree health benefits.

This simply boggles the mind. Or maybe not.

This teaching moment is in the spirit of our continuing drive for bipartisanship.

It was Tip O’Neill who, as Speaker of the House, famously battled President Reagan, but still managed to get along. It would be a positive change if the relationship between Speaker O’Neill and President Reagan became a model for today’s politicians.

[The] rivalry between O’Neill and Reagan was comparable to that of President Bill Clinton and Speaker Newt Gingrich in the 1990s … O’Neill called Reagan the most ignorant man who had ever occupied the White House. [But] privately, O’Neill and Reagan were always on cordial terms, or as Reagan himself put it in his memoirs, they were friends “after 6PM.” [Reagan] once joked he had received a valentine card from O’Neill: “I knew it was from Tip, because the heart was bleeding.”

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We need more of this personal respect after hours, it would defuse a lot of tension and improve our national debate.

Since the first step on the road to recovery is to admit your addiction, let’s own up to our own toxic methods of debate, which are perfectly illustrated in this Monty Python clip.

Sometimes laughter is the best medicine, especially when you don’t have a lot of choices.

As we approach April 15th., otherwise known as Tax Day, it’s time once again to mention the staggering corruption of the US Senate, the world’s ‘greatest deliberative body’.

For well over three years (!) there has been an attempt to get rid of a loophole in the tax code granting hedge fund managers a lower tax rate than ordinary people who work for a salary. A gift that cuts their tax rate in half, assuming they even pay any taxes.

And what group is proudly standing in the way of tax reform? The US Senate, whose members are worried about damage to their own cash hoards.

The World's Greatest Body, Deliberating

Is corruption too strong a word? I don’t think so; especially at this time of year when I am writing my own check to Uncle Sam.

Riding high on the bank bailout, hedge fund managers posted record paydays in 2009 … the top 25 managers earned $25.3 billion in 2009 … [meanwhile] the government reported that unemployment was stuck at 9.7 percent, with 15 million Americans out of work … To add insult to injury, some hedge fund managers and, more commonly, private equity fund managers are able to pay a much lower rate of tax than the typical working professional.

The tax disparity results from an outdated rule that lets a money manager in a private partnership treat a chunk of his fees as if they were long-term capital gains, taxed at a special low rate of 15 percent. Fees for managing someone else’s money should be taxed as ordinary income, like wages and salary, at rates as high as 35 percent.

President Obama has included a provision to end that special treatment in his most recent budget. For three years running, the House has passed a bill to close the loophole. In the Senate both Democrats and Republicans have resisted, all for fear of losing lucrative campaign donations.

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It does get even better for the fund managers. What’s not reported, because it adds some complexity to the story, is that capital gains have another wonderful trait when it comes to taxes. Unlike ordinary income, capital gains can be offset with capital losses.

Then the tax rate goes to Zero.