Monthly Archives: December 2009

SEC’s Own Accounting Is Deficient

Posted on by

Apparently, the SEC, top regulator of financial fraud, isn’t up to snuff keeping its own financial books…
We don’t say it’s cooking its books, but it sure looks like if someone wanted, they could cook them quite easily, according to this report at law.com:

“The GAO found that the SEC “did not have effective internal control over its financial reporting as of Sept. 30, 2009.”
As part of its mission, the SEC is charged with enforcing strict financial disclosure rules for public companies. Apparently, it is less adept at policing itself.
For example, the GAO reported that SEC’s general ledger system allows unauthorized personnel to view, manipulate or destroy data, and that “serious unauthorized activity” may remain undetected.
Until the SEC fixes these problems, the GAO found, the SEC can’t be sure “1) its financial statements, taken as a whole, are fairly stated; 2) the information the SEC relies on to make decisions on a daily basis is accurate, complete, and timely; and 3) sensitive data and financial information are appropriately safeguarded.”
Nor could the SEC “provide evidence that it monitored controls over its payroll exception reports to ensure payroll transactions were recorded accurately and timely.”
While the GAO did credit the SEC with producing statements that were “fairly stated in all material respects,” it flagged “six significant deficiencies” for FY 2008 and 2009.

The six areas are:

• information security;
• financial reporting process;
• fund balance with Treasury;
• registrant deposits;
• budgetary resources;

My Comment:

Translated, those six problem areas amount to this:
No one can really be sure if or when

1. Someone steals information from the SEC
2. Something is wrong in the SEC’s accounts
3. How much money the SEC has with the Treasury
4. How much money the SEC takes in
5. How the SEC is doing on an ongoing basis

Chew on that…

Harvard Paper Suggests SEC Favors Big Firms

Posted on by

Now I’m waiting for the Harvard Law paper that says that if you jump off a cliff, you tend to fall downward not up…

August 11, 2009

Harvard Law and Economics Discussion Paper No. 27

Abstract:
Recent financial collapses have focused policymakers’ attention on the financial industry. To date, empirical studies have concentrated on corporate issuer activity, such as securities offerings and class actions. This paper makes a first step in studying SEC enforcement against investment banks and brokerage houses. This study suggests that the SEC favors defendants associated with big firms compared to defendants associated with smaller firms in three ways. First, SEC actions against big firms are more likely to involve exclusively corporate liability, with no individuals subject to any regulatory action. Second, the SEC is more likely to choose administrative rather than court proceedings for big-firm defendants, controlling for types of violation and levels of harm to investors. Third, within administrative proceedings, big-firm employees are likely to receive lower sanctions, notably temporary or permanent bars from the industry. To explain this gap, the paper first investigates whether big-firm violations are qualitatively different from small firms’ violations, but finds no support for this. This paper next explores two hypotheses that could explain a systematic bias in enforcement patterns: that constraints in bureaucratic resources weaken the SEC’s negotiating position towards big firms, and that SEC officials favor prospective employers.”

IPCC Chief Pachauri Central To Cap-and-Trade Scam

Posted on by

From Mish Shedlock:

“The crux of the scheme is this: European steelmakers have threatened to leave the EU for India, eliminating the jobs of thousands of workers in the process, unless the EU grants the steelmakers free carbon credits worth hundreds of millions of dollars.

Eurofer, a European trade group, is at the center of the scheme. The web of the plot, however, weaves in not only several companies, but also the United Nations’ climate change chief:

* Among its members, Eurofer represents two EU steelmakers, Corus Redcar and ArcelorMittal, each of which has ties to India as well as to Rajendra K. Pachauri, the Indian industrial engineer who has been chairman of the U.N. Intergovernmental Panel on Climate Change, or IPCC, since 2002.

* Eurofer appears to have coordinated a threat to the European Union Greenhouse Gas Emission Trading System that its steelmakers would move their operations from the EU to India unless the EU cap-and-trade exchange issued them – at no cost – carbon emissions permits worth hundreds of millions of dollars.

* Once the bureaucrats in Brussels acquiesced, Corus Redcar and ArcelorMittal maneuvered to cash in windfall profits from the EU carbon permits given them at no cost.

* Additionally, Corus Redcar has now announced a decision to close operations in Great Britain nonetheless and relocate its steelmaking activities to India in order to gain additional U.N. carbon credits.

Ironically, EU and U.N. officials who might have thought requiring cap-and-trade permits would operate as “protection racket” in which EU companies need to buy carbon credits to continue operations, have now found themselves on the losing end of the reverse scheme.

In the final analysis, the winners are the European Union corporations willing to play hardball with the European Union Greenhouse Gas Emission Trading System, and the losers are the EU middle class workers that are held hostage in the scheme.”

Facebook Charged With Violating Federal Laws

Posted on by

As I blogged earlier, Facebook’s policies and settings are themselves a problem, misleading users and indeed, abusers. It’s now being charged with violating federal privacy laws:

“Ten privacy organizations filed a complaint against Facebook Inc. to the Federal Trade Commission Thursday, arguing that recent changes to the social-networking company’s privacy policies and settings violate federal laws.

The complaint, spearheaded by the Electronic Privacy Information Center, or EPIC, was triggered by changes Facebook made in November and December. Those changes included recommending people set more of their information to be public rather than visible only to friends and treating new information, like a person’s gender and lists of friends, as “publicly available information” that Facebook may share with software developers who build services for Facebook users.

The complaint asks the FTC to investigate the practices and to require Facebook to restore previous privacy settings that allowed people to choose whether to disclose personal information.

A Facebook spokesman saidit “discussed the privacy program with many regulators, including the FTC, prior to launch and expect to continue to work with them in the future.”

The complaint is the latest sign of how privacy—or at least consumers’ perceptions about it—remains a problem for Facebook.”

Wall Street: The Crematory Of Capitalism

Posted on by

Bill Cara:

“Independent traders know as a fact that Humungous Bank & Broker (HB&B) research analysts are biased and unaccountable. We also know they give short-term tips to their firm’s proprietary traders and sales people that are at odds with their longer-term published opinions. These unfair practices are permitted because the fundamental conflict of interest structure of the securities industry is permitted.

Today the Wall St Journal has reported that FINRA (the Financial Industry Regulatory Authority) has launched a broad inquiry into how up to a dozen Wall Street firms disseminate stock ratings and research. Important questions are being asked.

On August 24 this year, WSJ informed the public of how Goldman Sachs analysts were tipping their traders with info that differed from published reports. These regular meetings were called “trading huddles”. At the time, I called it insider trading, which is criminal.”

My Comment:

A reader commented earlier that “insider trading” is a big yawn as a story  (for the latest insider trading arrest, see this case, of an ex-banker from Lazard, a relatively small case, admittedly)

Someone might come to that conclusion only if their knowledge of the practice were abstract and based on theoretical debate on the subject. But anyone who knows the history of the capital markets over the last 30 years or so knows that a big part of the story is that investment (merchant) banks turned into traders by the end of the century and that their proprietary trading became more important to them than their retail clients or customers. I’ve written about this in relation to Goldman Sachs, which was the most egregious (because it was the most powerful) of the lot.

Insider trading is essentially a failure of banking as a profession, with professional ethics. There is a fiduciary responsibility to shareholders (in the case of a company) and of clients (in the case of banks).  Conflict-of-interest is a problem in every other work place. Why not here?

Besides conflict-of-interest, insider trading involves an explicit fraud on the client.

That’s in addition to the crime of fractional brokering, as someone cleverly puts it. (This is quite different from fractional banking. Due to the confusion of language that lets banks perform both safe holding and investing functions at once, fractional banking is legal).  On the other hand, “fractional brokering,” which is what naked shorting and “fails-to-delivered” amount to, is illegal.

Unfortunately, the professional financial reporters seem too myopic to understand the gravity of the problem, our self-involved “gonzo” journalists (yes you, Matt Taibbi) are too politically-driven to explain it correctly, and right now I’m too disgusted by the intellectual dishonesty of the media to take the trouble to make the argument on the web and see it lifted by all and sundry with nary a link or footnote, let alone verbal acknowledgment.

As Cara points out correctly (and safely, since he’s in Canada), Wall Street and the American capital markets have become a joke, and a substantial part of the financial media still doesn’t seem to realize it’s the punchline.

That gives me no pleasure to say. For years, I defended American business to my foreign friends, claiming that Americans at least held to standards, regulations, and transparency requirements higher than theirs (meaning, Indian and non-Western).

Behind all the glitz “America” still operated somewhere, I argued.

The Marxists and communists who called the whole thing a charade and a lie didn’t quite get it, I was sure. The values of the American republic would prevail. Once most money-managers and businessmen were alerted to what was going on in the markets, I fully expected that their outrage would be enough to stem the rot. I saw CEOs stepping up to the plate and doing their duty, when the future of their own (rather than someone else’s) children was at stake.
That was four and a half years ago, when I first began researching the markets.

In retrospect,  I see I was incredibly naive.The rot goes deep.

Those are somber thoughts to have around Christmas time. But perhaps not inappropriate. If you recall, in the Christmas story, gold (or should I say, gld?) and frankincense were only two-thirds of the offering. The other third was myrrh. Myrrh is a resin whose oil, I read here, is used for embalming and whose incense is used by penitents at funerals and cremations.

That must be the bitter scent I smell rising from the capital markets.

Peterson Gives Away A Billion

Posted on by

Having cast aspersions on Pete Peterson’s Blackstone Group in the pages of this blog, I am obliged to point out this article on his charitable giving. It implies that most of the money earned from Blackstone will be given to the Peterson Foundation, which I’ve blogged about before.

“Ultimately, I decided to commit $1 billion to the Peter G. Peterson foundation—the vast majority of my net proceeds from Blackstone. Why so much? Kurt Vonnegut once told a story about seeing Joseph Heller at a wealthy hedge-fund manager’s party at a beach house in the Hamptons. Casting his eye around the luxurious setting, Vonnegut said, “Joe, doesn’t it bother you that this guy makes more in a day than you ever made from Catch-22?” “No, not really,” Heller said. “I have something that he doesn’t have: I know the meaning of enough.” I have far more than enough.”

Read more at “Why I’m Giving Away More than One Billion Dollars,” Pete Peterson, Newsweek, May 30, 2009

When Did Roubini Call The Collapse

Posted on by

I saw this on Business Insider:

“Nouriel was predicting collapse from as early as 2002, if not before, and his focus was on the current account and the dollar more than the banks. I first raised the spectre of a massive liquidity crisis for highly leveraged U.S. financial institutions in 2006, so I think my timing and focus were a little better. But I was wrong in one respect: I thought a geopolitical event would be the trigger for a massive repricing of risk. Wrong. It happened all by itself, caused by endogenous forces within the financial system.”

So now Roubini is supposed to have called the collapse in 2002?

Maybe. But when I looked through his archives I could only find speeches to that effect in the summer of 2006. That’s all I’ve heard Roubini claim too.

But now here is Niall Ferguson (above) claiming Roubini called it in 2002.

Time for some more research…

We want to give the man his due. Just because he seems to be draped on the arms of beautiful women at parties nearly everywhere we see his mug, it doesn’t mean he wasn’t right on…er…top..of things..

Update: Megan McArdle says Roubini got the magnitude of the crisis right but not the causes.
(Lila: But he got that right only well into 2007, which I don’t consider prediction so much as description, at that point).

McArdle points out, however, that Roubini was mostly focusing on the current account deficit and the dollar in 2004…neither of which was central to the crisis.

But then she herself goes onto suggest that it was the mispricing of risk through incorrect statistical modeling, as described by Mandelbrot and Taleb (of Black Swan fame)k, that underlay the crisis. But this too is incorrect. Indeed Taleb himself has denied it and said he was misquoted.

Frankly, even though I say it myself, Mobs beats them all in prescience and apt timing in describing why the system toppled over.

In a word – it got hollowed out. I think that was a theme already described in Empire of Debt (Bonner & Wiggin) in 2005 and Financial Reckoning Day (Wiggin & Bonner) in 2002.

All three were read widely by a large swath of the business community and press and plagiarized.

Ex-Sith Lady Uses RICO On Sith Lord (?)

Posted on by

The ex-wife of Steven A. Cohen, legendary multi-billionaire manager of hedge-fund SAC, whom the ever controversial (and confrontational) Patrick Byrne has for some time been suggesting is the, or perhaps, one of the Sith Lord/s of Wall Street, is using RICO laws to get a bigger settlement from her former husband. That´s turned up some interesting accusations:

“In Ms. Cohen’s version of events, her husband and his brother, Donald Cohen, orchestrated a long-running racketeering scheme. She says her former husband lied under oath about his net worth, conducted mail and wire fraud, and concealed from her and the Supreme Court of New York millions of dollars that he possessed in 1990, thus reducing her divorce settlement.

Even in this post-Madoff era, the accusations might seem outlandish. Mr. Cohen, known as Stevie, is one of the nation’s most successful money managers. With a $13 billion hedge fund and a sumptuous Connecticut estate, he is, at 53, a Wall Street legend.

But all of this comes at an uncomfortable moment for Mr. Cohen and his company, SAC Capital Advisors. Since federal prospectors began making arrests in a major insider trading investigation in October, SAC, which is based in Stamford, Conn., has been linked to the case.

A former SAC analyst has pleaded guilty on charges related to insider trading that occurred years after he left the firm and has agreed to provide any information he might have about insider trading that occurred when he was at SAC. No current SAC employee or manager has been charged with wrongdoing.”

and this:

“She claims in her suit that in 1985, while they were married, Mr. Cohen confessed to her that he received inside information about the takeover of RCA by General Electric, a megadeal of the 1980s that prompted a sweeping insider-trading investigation. The Securities and Exchange Commission dropped its investigation after bringing charges against a G.E. executive and a Houston family with ties to a Wall Street bank.”

and this:

“When the couple divorced, Mr. Cohen stated that, on paper, he had a net worth of $16.9 million. But $8.7 million of that was “worthless,” he said, because of a bad real estate deal with Mr. Lurie.”

Lurie, who later fell out with Cohen, claimed that the money he got from Cohen to put through the deal came from an SAC trading account.…

My Comment

And some substantiation for the charges can be found in this WSJ story on Goldman Sachs analysts tipping off their own traders first and then favored hedge-funds (SAC at the head of them), before their own clients(which I noted in 2006).
See also this Deep Capture post.

Apparently, it´s not easy street being a Sith Lord. You never know when your spurned Sith Lady (not to mention various disgruntled Sith Knaves) might spring out from the shadows to expose what´s apparently standard operating procedure in the money business.

(Sigh) Not even a Greenwich mansion seems worth it (for a colorful account of the culture of the hedgies, whom we call the bubble kings, see “The High Way Robbers,” in ¨Mobs, Messiahs and Markets,”(Bonner & Rajiva, Wiley 2007).

I said this a long time ago  in “Three Card Capitalists”

The market collapse might have been triggered proximately by failed sub-prime loans, but the deeper sources of it lie in the massive fraud and corruption that go back to the  1980s, and even earlier, to the 1970s.

Frank Chodorov On Destroying The Citadel Of Power

Posted on by

Frank Chodorov, on the seduction of power, from  Mises.org

“For, it is said that while Saul of Tarsus was carrying out his duties as Commissar of Truth, the Messiah he had been denying appeared before him and convinced him of his error. So, after a bit of soul searching, he quit his job and thereafter dedicated himself to the task of preaching the very doctrine he had been denouncing. And because he was now the persecuted rather than the persecutor, he was effective; everywhere he went he found willing listeners, even in Rome itself. More important than their numbers was the conviction of his converts that in the eyes of God the lowliest in society was equal unto Caesar. The psalm of freedom — of the dignity of the individual — reawakened their souls. Neither the lash nor the dungeon vile nor the wild beasts in the arena could rob them of their self-esteem. By their very suffering and death they transmitted their faith to others, the sect grew, and at long last Caesar capitulated.

From the story of Saul, who came to be known as Paul, we draw the lesson: that when people want freedom they will get it. When the desire of the business man for “free enterprise” is so strong that he will risk bankruptcy for it, he cannot be denied. When youth prefers prison to the barracks, when a job in the bureaucracy is considered leprous, when the tax collector is stamped a legalized thief, when handouts from the politician are contemptuously rejected, when work on a government project is considered degrading, when, in short, the state is recognized to be the enemy of society, then only will freedom come, and the citadel of power collapse.”

Dan Denning On Dubai, Copenhagen, And The Stock Market

Posted on by

Dan Denning, author of “Bull Hunter” (Wiley, 2005), in the Daily Reckoning (Australia):

“The S&P 500 hit a 14-month high overnight. The conventional wisdom is that two news events are responsible. This is probably wrong. But let’s look at both events anyway and see what happened.

The first is that Abu Dhabi extended a $10 billion in financing to debt-distressed Dubai. Hossanah! Remember, Dubai is not Lehman. It’s Bear Stearns. It’s merely the reminder that there are lot of leveraged investors in the world who’ve used borrowed money to buy assets that aren’t very productive. They’ll get theirs soon enough.

The second bullish item is that ExxonMobil (NYSE:XOM) made a US$41 billion all stock bid for Houston-based natural gas company XTO. This sent Exxon shares down 4.4%. Thus the Dow’s rally was a bit tepid (XOM is a Dow component)……

Exxon is either getting a bigger foot in the U.S. natural gas market or hedging against cap-and-trade legislation, or both. We vote for both. No one is in a better position to know about the constraints on global oil production and discovery of new reserves than a major company like Exxon. And Exxon has seen firsthand that unconventional natural gas can be a lucrative little market.

But are those two bits of news really enough to send the market higher? Probably not. Who knows why the market goes higher? It does what it does. There’s an alternative explanation.

The alternative explanation is that the Copenhagen climate talks look like they’re collapsing into confusion and President Obama’s legislative agenda is in tatters. The private sector absolutely loves this…..

Good policy? Bad policy? Who knows? All we know is that the more uncertainty you introduce into the markets, the more conservative and defensive investors are going to get……

That’s not to say that a deal won’t come out of Copenhagen. Maybe the planet will be saved. Or maybe Copenhagen is the sell signal for global warming as a big idea/moral issue with which to bash the public. But either way, we reckon the stock market actually likes the idea that no climate deal is imminent and that healthcare legislation in the U.S. Senate can’t seem to get 60 votes.“

My Comment

Full disclosure: I worked for Agora two years ago. I receive no financial or other compensation ( trips, free food, passes to movies, restaurants, invites to exclusive seminars, commissions on real estate, insider deals etc. etc.) for mentioning them.  But, if you´re writing about financial contrarians, they´re the original ones ….

My own difficulties with and criticism of them do not – and should not – prevent me from correctly attributing and acknowledging their work in populariazing nearly all the main issues that are now being debated in the media. Certainly, it was through them, and through Lew Rockwell, and Mises, not through establishment media or their blogs that I received an education in Austrian economics (I should add that I was always instinctively oriented to it, from childhood on).

Having deleted my facebook account after the social media wrestling-match between the Wall Street media mob (and backers) and Deep Capture´s investigative team (and backers),  I am now content with actually writing emails or making phone calls to people I want to contact. Thankfully, there aren´t many I do.