Not A Mystery

The US Congress is getting close to passing new financial regulation, attempting to rein in our friends on Wall Street. Pending legislation would limit Investment Banks’ ability to trade for their own accounts, and effectively bar them from trading derivatives.

The bankers are pushing back.

Surprised?

The big banks argue that the Volcker proposal is misguided, for several reasons … the banks assert that the financial crisis of 2008 was a lending-based crisis caused by reckless loans made to unqualified home buyers. It was not, they say, a trading crisis.

Source

Wall Street Bankers "Getting Wood" Over The Volcker Rule

This is not quite the truth, or even a close approximation to the truth. It’s an outright lie.

• Investment banks packaged, securitized and re-sold the fraudulent loans made by originators, ‘enabling’ them to keep the hustle going.
• Investment banks deliberately ‘gamed’ the rating agencies so that sub-prime loans were magically converted to investment grade bonds.
• Investment banks invented new vehicles to peddle (trade) their products called Special Purpose Vehicles.
• Investment banks obfuscated what they were doing by re-branding (renaming) the slime that was inside these investments; for example No-Doc (Liar) loans became known as Alt-A loans.

And to say that the crisis was lending based? Get this. When Investment banks ran out of loans to repackage and sell, because their suppliers couldn’t make them fast enough, they invented a totally new class bonds called Synthetic CDOs that didn’t even require real mortgages at all!

It was truly breathtaking.

If you read only one book exposing the underbelly of Wall Street, get a copy of The Big Short by Michael Lewis. If you have an audible.com account, I can highly recommend the audio version read by Jesse Boggs. Listen while you are in the gym, and the adrenalin rush when you hear about these Wall Street thieves will definitely improve your workout.

If you are not familiar with the term “wood”, then here is your link to the Urban Dictionary. Caution, this link is not rated GP.

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.

Source

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 …

Source

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.

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.

Source

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.

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.

As far as I’m concerned, all babies look like Winston Churchill.

"Never Was So Much Owed By So Many To So Few"

I’ve never thought of babies as contributing members of society. But now that’s changed.

Parents aren’t just raising adorable kids. They are also producing little human capital units that are likely to grow up, get jobs, pay taxes and raise little human capital units of their own.

Source

But wait, it gets better.

Turns out that the parents of the capital unit pay lower taxes compared to their childless peers because of the peculiarities of our tax system. However, this is more than made up for by the taxes paid by their kids (capital units) as they grow up and go to work.

So we “breeders” can hold our heads high, knowing we are contributing more to society than everyone else; while our kids are actually moving the freight.

Which, if you think about it, could be a bigger Ponzi Scheme than ObamaCare.

Who wants to tell the Conservatives?

[Note: if you want compare real leadership to "no you can't" statements, click here for Churchill.]

The world needs a new Country and Western song updated for today’s investor, along the lines of Mickey Gilley’s “Don’t The Girls All Get Prettier At Closing Time“

Prettier As We Approach Closing Time

Our song might go platinum, all because there’s a new wrinkle (sic) on the menu of get-rich quick schemes.

Billions of dollars in corporate bonds sold to retail investors come with an unusual provision that could be used to generate a fast profit. There’s just one catch: Investors must team up to buy the bonds with someone who is about to die … major U.S. companies often issue bonds with what is known as a survivor’s option … investors can recruit a terminally ill person and together they can scoop up these bonds on the open market at a discount. When the ailing bondholder dies, the surviving co-owner can then redeem them at face value and potentially turn a quick profit.

Source

So bottom-line-wise, if our intrepid investors aspire to the big bucks, they need to partner up with a suitable co-owner just before closing time.

There’s only one snag for us as aspiring songwriters.

We can’t think of anything that rhymes with “co-owner”.

[Tip: In case you missed it, click the link to Gilley's video.]

You probably thought this was going to be a post about our dysfunctional political system.

You can relax, it’s not.

Voltaire He's Not

Voltaire’s quote has got a lot of mileage lately, mostly by proponents of Health Care Reform.

The original quote in French is “Le mieux est l’ennemi du bien.”, from Voltaire’s Dictionnaire Philosophique (1764) Literally translated as “The best is the enemy of good.”, but is more commonly cited as “The perfect is the enemy of the good.”

In other words, pursuing the “best” solution may end up doing less actual good than accepting a solution that, while not perfect, is effective. One could also infer that the best makes that which is good seem to be worth less than it is.

So it’s always inspiring to find a nice, simple, example of real people not letting perfection get in the way of their actions.

Case in point, we have a report in the Wall Street Journal that Bernie Madoff was “physically assaulted by another inmate in December, according to three people familiar with the matter”. Being a reputable news outlet the WSJ article takes pains to gather multiple sources and attempts to disect the reasons behind the beating. [I prefer to think of the incident as a beating as opposed to a physical assault.]

Mr. Madoff was treated for a broken nose, fractured ribs and cuts to his head and face, according to a felon currently at Butner serving time on drug charges who was familiar with his condition at the time.

In any case it never becomes quite clear why the assailant attacked Mr. Madoff, although several theories are offered.

My own theory is that the assailant was familiar with Voltaire, and decided to beat the s–t out of Bernie not because of a perfect reason, but just because he felt like it.

Bravo.

On the other hand, all is not lost for Bernie while he is behind bars. It turns out that in some cases life allows you a form of redemtion,

Fellow prisoners say Mr. Madoff, who is Inmate No. 61727-054 at Butner, has garnered some respect from inmates because of the breadth of his Ponzi scheme. The fraud caused about $20 billion in net losses by thousands of investors.

Hey, nothing is perfect.

Since the Great Recession started in 2008 the Brits have been at the leading edge of economic engineering. For a while it looked like Gordon Brown was going to get a Nobel Prize in economics, but he peaked too soon.

No matter, there’s a second chance for Gordon and it looks promising.  In that popular phrase often used by London newspapers, NotAMystery “can now reveal” Gordon’s plan.

Part one of the plan was leaked several weeks ago, when the Telegraph reported a new government plan to incentivize recycling:

People will accumulate points for the household waste they recycle and be able to use the points to claim up to £130 a year in vouchers from major retailers like Marks & Spencer and Tesco.

In The USA We'd Call It "Bucks For Bags"

Part two of the plan came clear just two days ago with reports that the UK Treasury is preparing to tax bank bonuses:

Alistair Darling is drawing up plans to face down the country’s top bankers by taking the “nuclear option” of a windfall tax on their bumper bonuses as part of measures aimed at the super-rich.

So there you have it. A tax on the bankers who rubbished the world economy used to finance a rubbish cleanup we can believe in.

If only Robin Hood were around to administer the plan.

Better Than Pitchforks?

After all, he was a Brit too.

Note for accuracy: The “Bucks for Bags” program originated with the Tories, but we are confident Gordon can push them off the front pages and capture the moral high ground.

“Freedom From Fear“ earned its author David Kennedy a Pulitzer Prize for History in 2000.

You can think of Freedom from Fear as the academic’s version of The Greatest Generation: like Tom Brokaw, Stanford history professor David M. Kennedy focuses on the years of the Great Depression and the Second World War and how the American people coped with those events …

Kennedy relies on published accounts and primary sources, all meticulously footnoted. This academic rigor, however, does not render the book dull–far from it. Certainly the subject matter is interesting enough in its own right, but Kennedy offers attention-grabbing turns of phrase on nearly every page.  –Ron Hogan, Amazon Review

I was originally motivated to read this book because of its Depression Era coverage. And yes, if you are wondering, our recent Great Recession displayed frightening similarities to the Great Depression. If you think that Bernanke, Paulson and Geithner went down the wrong road during the past year, “Freedom From Fear” might change your perspective.

While the Depression Era history alone was worth the price of admission, the WWII years was even better. What I didn’t know about WWII and the Greatest Generation would fill a large book; and guess what, this is the book!

Large Enough To Swallow My Ignorance

To give you an idea about what I mean when I say “large”, let’s take a look at my Kindle resting on top of the actual print version. The funny part is I had not actually seen the book before I started reading on my Kindle. After weeks of reading I was still only 10% into the book, and it wasn’t until I stopped by the library that I understood why!

Kindle Saves Some Space

If you are one of those Americans who believe the French and English would be speaking German if it wasn’t for the USA, this book will wake you up to the fact that Russia is entitled to make a similar claim. Some of the most riveting narrative covers the meetings between Churchill, Stalin and Roosevelt during the course of the war.

If, like me, you’ve never read much about the history of this period, and you only want to read one book…then this is your book.

Read on.

Do you know the difference between angst and anxiety?

Here’s a quote from our Definitons page:

An airplane crashes into the side of a remote snow-covered mountain; those passengers that worry about their lives without hopes of survival only face anxiety. In contrast, those passengers who worry about their lives with hopes of survival but do not know when the rescue party will arrive face angst.

Now let me change the wording a bit:

A Financial System crashes under the weight of a collapsed housing market supported by securitized mortgages financed with huge amounts of leverage; those investors that worry about their finances without hopes of improved financial regulation only face anxiety. In contrast, those investors who worry about their finances with hopes of improved financial regulation but do not know when the Politicians will respond face angst.

On the anniversary of Lehman Brothers collapse, I’m feeling anxiety.

Forget The Angst, It's Time For Some Real Anxiety

Having just finished reading a pile of articles in financial publications I’m not really surprised to find that the consensus of observers is that regulatory reforms are currently stalled. Everyone makes it seem pretty complicated, but I actually think the reasons are quite simple:

1. Regulators don’t understand the new “financial products”. Derivatives are mathematical constructs literally created by rocket scientists. The people who sell them don’t understand them, how are the regulators going to figure them out?
2. The Players don’t want regulation, and they are paying their lobbyists big bucks to slow down the politicians. Follow the money.
3. Regulators become sympathetic to their ‘clients’. They tend to take on the same world view, and it’s not unusual for people to move back and forth between the regulated and the regulator. This phenomenon even has a name! It’s called “regulatory capture”.
4. The US has one of the most fragmented financial regulatory systems in the world. Infighting between agencies is also slowing down any move to reform because nobody wants to give up their turf.
5. The public and most politicians don’t understand, nor do they want to take the time to understand, these complex financial markets.
6. As we’ve avoided Depression 2.0 the public’s pressure on politicians to force changes on the regulatory system fades.

As Jeffry A. Frieden, professor of government at Harvard, recently said:

Policymakers and regulators must be generally immune to political pressure from the financial services industries. Reformers have to have a broad and deep understanding of the great complexity of modern finance. Central policymakers need to be willing and able to override the opposition of existing, turf-protecting, state and federal regulators. And enough people have to care, and to be paying attention, to get politicians to focus on the topic and push it to a conclusion.

What are the chances?

That’s why I’m feeling anxiety.

It’s a good thing that we have correspondents on the ground around the world.

As you know we have been tracking the Big Mac Index (BMI) for quite some time because we believe it will become the lynch-pin (sic) for the new Global Reserve Currency.

• Click this link for a list of posts.

Data for the index has been compiled by The Economist since 1986,

Just to review, The Economist has been publishing their (not so tongue-in-cheek) Big Mac Index since 1986. It’s a reality check on world-wide currency exchange rates, based on the concept of Purchasing-Power Parity.

But yesterday their data has been called into question by our Argentine investigator!

According to the latest BMI the price of a Big Mac in Argentina is 11.50 Pesos. We are quoting in local currency so that there isn’t any confusion about exchange rates. Here is the latest Economist data from July, 2009, showing the  price of a Big Mac in Argentina.

Data Called Into Question

Today we received documented evidence (see photo) from Matthew, in Buenos Aires. It looks like the 11.50 peso Big Mac is now going for 8 pesos, no make that 7 pesos!

Breakdown In The Global Currency Reserves?

When I questioned the data as perhaps ‘Bait and Switch”, I got this response from Matthew:

Well they have huge billboards all over BsAs, which has 1/3 of the country’s population, advertising their price is marked down from 8 to 7 pesos. And your humble correspondent did purchase one for 7 pesos yesterday whilst trapped on Florida Street waitig for his wife…

What to think?

We are awaiting a response from the International Monetary Fund.

And since Mattew went to Argentina on your behalf,  a final shameless plug for his website, TreasuredFinds.com, your home for Sterling Jewelry and Gifts.