Peter, Paul, and Barney:
An Evolving Essay On the Hidden Agenda of the U.S. Government Bailout
Bob Jensen at Trinity Universitys

U.S. National Debt Clock --- http://www.usdebtclock.org/
Also see http://www.brillig.com/debt_clock/
The unbooked entitlements have a present well over $100 trillion. But who's counting?

The Real National Debt (booked + unbooked entitlements) 2008
Source --- http://www.pgpf.org/about/nationaldebt/

American Experience: The Crash of 1929 (Video) ---  http://www.pbs.org/wgbh/amex/crash/

Iowa Sen. Charles Grassley suggested that AIG executives should accept responsibility for the collapse of the insurance giant by resigning or killing themselves. The Republican lawmaker's harsh comments came during an interview Monday with Cedar Rapids, Iowa, radio station WMT . . . Sen. Charles Grassley wants AIG executives to apologize for the collapse of the insurance giant — but said Tuesday that "obviously" he didn't really mean that they should kill themselves. The Iowa Republican raised eyebrows with his comments Monday that the executives — under fire for passing out big bonuses even as they were taking a taxpayer bailout — perhaps should "resign or go commit suicide." But he backtracked Tuesday morning in a conference call with reporters. He said he would like executives of failed businesses to make a more formal public apology, as business leaders have done in Japan.
Noel Duara, "Grassley: AIG execs should repent, not kill selves," Yahoo News, March 17, 2009 --- http://news.yahoo.com/s/ap/20090317/ap_on_re_us/grassley_aig

From the CFO Journal's Morning Ledger on March 30, 2018

Barclays to pay $2 billion to resolve securities claims. 
Barclays PLC agreed to pay $2 billion in civil penalties to resolve U.S. Justice Department claims that the U.K. lender fraudulently sold mortgage securities that helped fuel the financial crisis, causing investors “enormous losses,” the government said Thursday.

Bob Jensen's Fraud Updates are at
http://faculty.trinity.edu/rjensen/FraudUpdates.htm

The root cause of the fraud was the ability of lenders (often felon criminals) to issue mortgages ten or more times the value of the real estate collateral and then sell those mortgages upstream to Fannie Mae, Freddie Mack, and Wall Street Banks without bearing any risk of 1005 certain defaults on those mortgages. These default risks became the poison of the mortgages later sold in CDO bond portfolios that later brought down Bear Stearns, Lehman Bros,, Merrill Lynch, etc.
http://faculty.trinity.edu/rjensen/2008Bailout.htm#Sleaze

Video:  Is Anyone Minding the Store at the Federal Reserve? ---
http://www.silverbearcafe.com/private/05.09/mindingthestore.html

U.S. Debt/Deficit Clock --- http://www.usdebtclock.org/

The Obama Debt Tracker
He added $1.7 trillion of debt in his first year
http://www.treasurydirect.gov/NP/BPDLogin?application=np

Video of Detroit in Ruins --- http://www.youtube.com/watch?v=1hhJ_49leBw

Video:  Steve Wynn Takes On Washington  --- http://www.infowars.com/steve-wynn-takes-on-washington/

Debate Assignment:  Should We Never Pay Down the National Deficit or Debt (even partly)?
http://www.cs.trinity.edu/~rjensen/temp/NationalDeficit-Debt.htm

A Pissing Contest Between Bob and Jagdish:  An Illustration of How to Lie With Statistics ---
http://www.cs.trinity.edu/~rjensen/temp/LieWithStatistics01.htm

"Why Are Some Sectors (Ahem, Finance) So Scandal-Plagued?" by Ben W. Heineman, Jr., Harvard Business Review Blog,  January 10, 2013 --- Click Here
http://blogs.hbr.org/cs/2013/01/scandals_plague_sectors_not_ju.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Greatest Swindle in the History of the World ---
http://faculty.trinity.edu/rjensen/2008Bailout.htm#Bailout

The trouble with crony capitalism isn't capitalism. It's the cronies ---
http://faculty.trinity.edu/rjensen/2008Bailout.htm#CronyCapitalism

Subprime: Borne of Greed, Sleaze, Bribery, and Lies (including the credit rating agencies) ---
http://faculty.trinity.edu/rjensen/2008Bailout.htm#Sleaze

History of Fraud in America --- 
http://faculty.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

Bob Jensen's Fraud Updates are at
http://faculty.trinity.edu/rjensen/FraudUpdates.htm

Mortgage Fraud Task Force Stats: Did You See This? WOW  ---
http://www.senseoncents.com/2013/08/mortgage-fraud-task-force-stats-did-you-see-this-wow/

Inside Job: 2010 Oscar-Winning Documentary Now Online --- Click Here
http://www.openculture.com/2011/04/inside_job.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

In late February, Charles Ferguson’s film – Inside Job – won the Academy Award for Best Documentary. And now the film documenting the causes of the 2008 global financial meltdown has made its way online (thanks to the Internet Archive). A corrupt financial industry, its corrosive relationship with politicians, academics and regulators, and the trillions of damage done, it all gets documented in this film that runs a little shy of 2 hours.

To watch the film, you will need to do the following. 1.) Look at the bottom of the film. 2.) Click the forward button twice so that it moves beyond the initial trailer and the Academy Awards ceremony. 3.) Wait for the little circle to stop spinning. And 4.) click play to watch film.

Inside Job (now listed in our Free Movie Collection) can be purchased on DVD at Amazon. We all love free, but let’s remember that good projects cost real money to develop, and they could use real financial support. So please consider buying a copy.

Hopefully watching or buying this film won’t be a pointless act, even though it can rightly feel that way. As Charles Ferguson reminded us during his Oscar acceptance speech, we are three years beyond the Wall Street crisis and taxpayers (you) got fleeced for billions. But still not one Wall Street exec is facing criminal charges. Welcome to your plutocracy…

Bob Jensen's threads on the global financial meltdown and its aftershocks are at
http://faculty.trinity.edu/rjensen/2008Bailout.htm

Wharton:  Not Too Big To Fail: Why Lehman Had to Go Bankrupt ---
http://knowledge.wharton.upenn.edu/article/the-good-reasons-why-lehman-failed/

Essay

• Introductory Quotations
• Causes of the Bubble
• Causes of the Economic Collapse
• The Bailout's Hidden, Albeit Noble, Agenda (for added details see Appendix Y)
• The Bailout's Hidden Noble and Ignoble Agendas
• A Step Back in History
• Barney's Rubble
• Hedge Fund Shorts
• Forged Paperwork Mess
• 2009 Update on the Socialist Revolution Without Increased Taxes, Debt, or Civil War
• Subprime goes to college: 
  The new mortgage crisis — how students at for-profit universities could default on $275 billion in taxpayer-backed student loans
• Why Wasn't Your Diversified Investment Portfolio Safe?
• Renaissance in US Manufacturing (But Not Jobs So Much):  Robotics Explosion
• The CleanTech Bust (Frauds)
   

Appendix A:  Pending Disaster in the U.S.

Appendix B:  The Trillion Dollar Bet in 1993

Appendix C:  Don't Blame Fair Value Accounting Standards (except in terms of executive bonus payments)
                      This includes a bull crap case based on an article by the former head of the FDIC

Appendix D:  The End of Capitalism, Economics, and Investment Banking as We Know It

Appendix E:  Greatest Swindle in the History of the World
                      Your Money at Work, Fixing Others’ Mistakes (includes a great NPR public radio audio module)

Appendix F:  Christopher Cox Waits Until Now to Tell Us His Horse Was Lame All Along
                      S.E.C. Concedes Oversight Flaws Fueled Collapse
                      And This is the Man Who Wants Accounting Standards to Have Fewer Rules

Appendix G:  Why the Trillion-Dollar Bankster Bailout Won't Work

Appendix H:  Where were the auditors?
                        The aftermath will leave the large auditing firms in a precarious state?

Appendix I:   1999 Quote from The New York Times
                    ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Appendix J:  Will the large auditing firms survive the 2008 banking meltdown?

Appendix K:  Why not bail out everybody and everything?

Appendix L:  The trouble with crony capitalism isn't capitalism. It's the cronies.

Appendix M:  Reinventing the American Dream

Appendix N:  Accounting Fraud at Fannie Mae

Appendix O:  If Greenspan Caused the Subprime Real Estate Bubble, Who Caused the Second Bubble That's About to Burst?
                       Harvard Professors Says Economists are a Huge Part of the Problem

Appendix P:  Meanwhile in the U.K., the Government Protects Reckless Bankers

Appendix Q:  Bob Jensen's Primer on Derivatives (with great videos from CBS)

Appendix R:  Accounting Standard Setters Bending to Industry and Government Pressure to Hide the Value of Dogs

Appendix S:   Fooling Some People All the Time

Appendix T:  Regulations Recommendations

Appendix U:  Subprime: Borne of Greed, Sleaze, Bribery, and Lies (including the credit rating agencies)

Appendix V:  Implications for Educators, Colleges, and Students

Appendix W: The End

Appendix X:  How Scientists Help Cause Our Financial Crisis

Appendix Y:  The Bailout's Hidden Agenda Details

Appendix Z:  What's the rush to re-inflate the stock market?

The Commission's Final Report --- http://c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_full.pdf

American History of Fraud and White Collar Crime --- http://faculty.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

"The Financial Crisis, From A-Z," by Tunku Varadarajan, Forbes, November 10, 2008 ---
http://www.forbes.com/opinions/2008/11/09/financial-crisis-tarp-oped-cx_tv_1110varadarajan.html
Jensen Comment
This is a clever use of the alphabet and an understanding of what happened.

Shielding Against Validity Challenges in Plato's Cave ---
http://faculty.trinity.edu/rjensen/TheoryTAR.htm

• With a Rejoinder from the 2010 Senior Editor of The Accounting Review (TAR), Steven J. Kachelmeier
• With Replies in Appendix 4 to Professor Kachemeier by Professors Jagdish Gangolly and Paul Williams
• With Added Conjectures in Appendix 1 as to Why the Profession of Accountancy Ignores TAR
• With Suggestions in Appendix 2 for Incorporating Accounting Research into Undergraduate Accounting Courses

What went wrong in accounting/accountics research?  ---
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong

The Sad State of Accountancy Doctoral Programs That Do Not Appeal to Most Accountants ---
http://faculty.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

AN ANALYSIS OF THE EVOLUTION OF RESEARCH CONTRIBUTIONS BY THE ACCOUNTING REVIEW: 1926-2005 ---
http://faculty.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm#_msocom_1

Bob Jensen's threads on accounting theory ---
http://faculty.trinity.edu/rjensen/theory01.htm

Tom Lehrer on Mathematical Models and Statistics ---
http://www.youtube.com/watch?v=gfZWyUXn3So

Systemic problems of accountancy (especially the vegetable nutrition paradox) that probably will never be solved ---
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#BadNews

The Financial Crisis Cost Every American $70,000, Fed Study Says ---
Click Here

Jensen Comment
The root causes were as follows:

1. A nationwide super bubble of real estate prices that inspired buyers speculate in real estate (land and buildings) financed with subprime mortgages. Buyers intended to turn the properties over before subprime rates on mortgages gave way to higher rates --- Z
https://en.wikipedia.org/wiki/Subprime_lending 

2. Fraud entered into real estate and mortgage lending every step of the way. The major catalyst was government policy of buying mortgages (think Fanny Mae and Freddie Mack) with zero percent of the default risk borne by issuers of mortgages. Many fraudsters started issuing mortgages way above property values. For example, a criminal lender in Phoenix issued a mortgage for over $100,000 to a woman on welfare who purchased a shack for $3,500. Greedy real estate appraisers went wild in overvaluing properties for fraudulent lenders and buyers. The government and Wall Street investment bank bought up hundreds of billions of dollars in  poisoned mortgages  (where buyers had no hope of paying off the debt).

3. The Wall Street investment banks (like Lehman Bros. and Merrill Lynch) who realized they were holding huge amounts of poisoned mortgages tried to diversify the risk by including them in portfolios of solid mortgages. These portfolios were then sold as collateralized debt obligation (CDO) bonds to buyers such as Saudi Arabia. But the CDO bonds were sold with recourse such that when the USA real estate bubble burst those investment banks did not have enough liquidity to buy the CDO bonds back. Then came the government bailout in which some banks (think Goldman) were bailed out by the government and some were forced into bankruptcy (think Lehman Bros.) While all of this was going ton deeply troubled banks were getting fraudulent AAA credit ratings from greedy credit raters (think Moodys).

What happened before, during, and after the 2008 government bailout is explained in much detail at
http://faculty.trinity.edu/rjensen/2008Bailout.htm

The Financial Crisis Cost Every American $70,000, Fed Study Says ---
Click Here

A New Definition of Life on the Edge
 
 Loss of dollar purchasing power since 1775 --- http://manualofideas.com/blog/2009/03/declining_value_of_us_dollar_s.html

Peter Schiff is a widely-known economist who predicted the financial crisis well ahead of most everybody, but  nobody listened when he blared out warnings throughout the media, some of which are on YouTube
No, the main issue with Schiff seems to be that he hasn't changed his tune (in 2009) --- and it isn't a pleasant tune to listen to. He thinks the "phony economy" of the U.S. is headed for even harder times. He believes that the crisis-fighting measures coming out of Washington are merely delaying the inevitable, debasing the dollar and loading future taxpayers with huge debts.
Justin Fox, "Excluding the Extremist:  Peter Schiff predicted the credit collapse long before the 'experts." So why is it so hard to hear him now," Time Magazine, June 1, 2009, Page 48.

Barney Frank: I've destroyed the economy, my work here is done.
Washington Times headline, Nov. 29, 2011
Barney's Rubble --- http://faculty.trinity.edu/rjensen/2008Bailout.htm#Rubble

Oh, and don't forget Fannie Mae and Freddie Mac, those two government-sponsored mortgage giants that engineered the 2008 subprime mortgage fiasco and are now on the public dole. The Fed kept them afloat by buying over a trillion dollars of their paper. Now, part of the Treasury's borrowing from the public covers their continuing large losses.
George Melloan, "Hard Knocks From Easy Money:  The Federal Reserve is feeding big government and harming middle-class savers," The Wall Street Journal, July 6, 2010 --- http://online.wsj.com/article/SB10001424052748704103904575337282033232118.html?mod=djemEditorialPage_t

"Did Harvard (and then President Larry Summers) Ignore Warnings on Harvard's Investments?" Inside Higher Ed, November 29, 2009 --- http://www.insidehighered.com/news/2009/11/30/qt#214304

Senior Harvard University officials -- especially then-president Lawrence Summers -- repeatedly ignored warnings that the university's investment strategies were placing far too much cash (needed for short-term spending) in risky investments, The Boston Globe reported. The placement of the cash in risky investments has been a key reason why Harvard, which even after investment losses is by far the wealthiest university in the world, has been forced to make many cuts in the last year; such cash reserves, had the advice been followed, would have been easily accessible. Summers declined to comment for the article, but a friend of his familiar with the Harvard investment strategy noted that conditions changed after Summers left the presidency and that the university had the time to change its strategy prior to last year's Wall Street collapse.

Jensen Comment
There were advanced warnings before the fall, especially those of Peter Schiff ---
http://en.wikipedia.org/wiki/Peter_Schiff
But he missed the early timing and thus is still not a billionaire.
Larry Summers resigned from Harvard in a clash with feminists and is now the chief economic advisor to President Obama.

Wave Goodbye to this nation's top economic advisor
"Lawrence Summers Will Leave White House Post and Return to Harvard," Chronicle of Higher Education, September 21, 2010 ---
http://chronicle.com/blogPost/Lawrence-Summers-Will-Leave/27092/

An entire generation's prosperity vanishing, food stamp use exploding. Welcome to the jobless future. This month's jobs numbers drive home the point. The unemployment rate fell at the fastest rate for years — great news, right? Wrong. The vast majority of the gains — 75% — came from (wait for it) "temporary help services." See what just happened? We subtracted thousands of real jobs — and replaced them with low-value, no-future McJobs instead.
"Solve America's Employment Crisis With a Netflix Prize," Harvard Business School, December 4, 2009 ---
http://blogs.harvardbusiness.org/haque/2009/12/solve_americas_employment_cris.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE

"Why I don’t like Larry Summers," by Massimo Pigliucci, Rationally Speaking, July 22, 2011 ---
http://rationallyspeaking.blogspot.com/2011/07/why-i-dont-like-larry-summers.html

I have to admit to a profound dislike for former Harvard President and former Obama (and Clinton) advisor Larry Summers. Besides the fact that, at least going by a number of reports of people who have known him, he can only be characterized as a dick, he represents precisely what is wrong with a particularly popular mode of thinking in this country and, increasingly, in the rest of the world.

 

Lawrence was famously forced to resign as president of Harvard in 2006 because of a no-confidence vote by the faculty (wait, academics still have any say in how universities are run? Who knew) because of a variety of reasons, including his conflict with academic star Cornel West, financial conflict of interests regarding his dealings with economist Andrei Shleifer, and particularly his remarks to the effect that perhaps the scarcity of women in science and engineering is the result of innate intellectual differences (for a critical analysis of that particular episode see Cornelia Fine’s Delusions of Gender and the corresponding Rationally Speaking podcast).

 

Now I have acquired yet another reason to dislike Summers, while reading Debra Satz’s Why Some Things Should not Be for Sale: The Moral Limits of Markets, which I highly recommend to my libertarian friends, as much as I realize of course that it will be entirely wasted on them. The book is a historical and philosophical analysis of ideas about markets, and makes a very compelling case for why thinking that “the markets will take care of it” where “it” is pretty much anything of interest to human beings is downright idiotic (as well as profoundly unethical).

 

But I’m not concerned here with Satz’s book per se, as much as with the instance in which she discusses for her purposes, a memo written by Summers when he was chief economist of the World Bank (side note to people who still don’t think we are in a plutocracy: please simply make the effort to track Summers’ career and his influence as an example, or check this short video by one of my favorite philosophers, George Carlin). The memo was intended for internal WB use only, but it caused a public uproar when the, surely not left-wing, magazine The Economist leaked it to the public. Here is an extract from the memo (emphasis mine):

 

“Just between you and me, shouldn’t the World Bank be encouraging more migration of the dirty industries to the less developed countries? I can think of three reasons:

 

1. The measurement of the costs of health-impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health-impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.

 

2. The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost ... Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world-welfare enhancing trade in air pollution and waste.

 

3. The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity ... Clearly trade in goods that embody aesthetic pollution concerns could be welfare enhancing.

 

The problem with the arguments against all of these proposals for more pollution in least developed countries (intrinsic rights to certain goods, social concerns, lack of adequate markets, etc.) could be turned around and used more or less effectively against every Bank proposal for liberalization.”

 

Now, pause for a minute, go back to the top of the memo, and read it again. I suggest that if you find nothing disturbing about it, your empathic circuitry needs a major overhaul or at the very least a serious tuneup. But it’s interesting to consider why.

 

As both The Economist (who called the memo “crass”) and Satz herself note, the economic logic of the memo is indeed impeccable. If one’s only considerations are economic in nature, it does make perfect sense for less developed countries to accept (for a — probably low — price) the waste generated by richer countries, for which in turn it makes perfect sense to pay a price to literally get rid of their shit.

 

And yet, as I mentioned, the leaking of the memo was accompanied by an outcry similar to the one generated by the equally infamous “Ford Pinto memo” back in 1968. Why? Here I actually have a take that is somewhat different from, though complementary to, that of Satz. For her, there are three ethical objections that can be raised to the memo: first, she maintains that there is unequal vulnerability of the parties involved in the bargain. That is, the poor countries are in a position of marked disadvantage and are easy for the rich ones to exploit. Second, the less developed countries likely suffer from what she calls weak agency, since they tend to be run by corrupt governments whose actions are not in the interest of the population at large (whether the latter isn’t also true of American plutocracy is, of course, a matter worth pondering). Third, the bargain is likely to result in an unacceptable degree of harm to a number of individuals (living in the poor countries) who are not going to simultaneously enjoy any of the profits generated from the “exchange.”

Continued in article

Video:  Peter Schiff was right 2006-2007 (CNBC edition) ---
http://www.youtube.com/watch?v=Z0YTY5TWtmU

Five Speaker Videos from the Stanford Graduate School of Business (on the economic crisis and leadership)  [Scroll Down]
 Top 5 Speaker Videos for 2009 --- http://www.gsb.stanford.edu/news/top-videos.html?cmpid=alumni&source=gsbtoday

"The dominant public policy imperative motivating reform is to address the moral hazard risk created by what we did, what we had to do in the crisis to save the economy," Treasury Secretary Timothy F. Geithner said in an interview. That's from today's Washington Post. The "moral hazard risk" arises when government encourages people to gamble by suggesting that government will rescue them if they fail. By bailing out the banks, the federal government has essentially declared to the world that they will do it again. That created a moral hazard. It's refreshing to know that Administration is aware of...
John Stossel, "Geithner Moral Hazard," ABC News, August 28, 2009 ---
http://blogs.abcnews.com/johnstossel/2009/08/geithner-moral-hazard.html

Ten (now eleven) Trillion and Counting (a full-length PBS Frontline video) --- http://www.pbs.org/wgbh/pages/frontline/tentrillion/view/
 All of the federal government's efforts to stem the tide of the financial meltdown have added hundreds of billions of dollars to an already staggering national debt, a sum that is expected to double over the next 10 years to more than $23 trillion. In Ten Trillion and Counting, FRONTLINE traces the politics behind this mounting debt and investigates what some say is a looming crisis that makes the current financial situation pale in comparison

This is a great learning resource:  Very Effective
Visual Guide to the Federal Reserve," Simoleon Sense, May 22, 2009 --- http://www.simoleonsense.com/
Jensen Comment
The Fed's easy credit and low-interest policies of the past two decades got us into this financial crisis, and the Fed's approach to getting us out of this mess is like putting gasoline on political fire.

 I’d been working for the bank for about five weeks when I woke up on the balcony of a ski resort in the Swiss Alps. It was midnight and I was drunk. One of my fellow management trainees was urinating onto the skylight of the lobby below us; another was hurling wine glasses into the courtyard. Behind us, someone had stolen the hotel’s shoe-polishing machine and carried it into the room; there were a line of drunken bankers waiting to use it. Half of them were dripping wet, having gone swimming in all their clothes and been too drunk to remember to take them off. It took several more weeks of this before the bank considered us properly trained. . . . By the time I arrived on Wall Street in 1999, the link between derivatives and the real world had broken down. Instead of being used to reduce risk, 95 per cent of their use was speculation - a polite term for gambling. And leveraging - which means taking a large amount of risk for a small amount of money. So while derivatives, and the financial industry more broadly, had started out serving industry, by the late 1990s the situation had reversed. The Market had become a near-religious force in our culture; industry, society, and politicians all bowed down to it. It was pretty clear what The Market didn’t like. It didn’t like being closely watched. It didn’t like rules that governed its behaviour. It didn’t like goods produced in First-World countries or workers who made high wages, with the notable exception of financial sector employees. This last point bothered me especially.
Philipp Meyer, American Rust (Simon & Schuster, 2009) --- http://search.barnesandnoble.com/American-Rust/Philipp-Meyer/e/9780385527514/?itm=1
American excess: A Wall Street trader tells all - Americas, World - The Independent
http://www.independent.co.uk/news/world/americas/american-excess--a-wall-street-trader-tells-all-1674614.html 
Jensen Comment
This book reads pretty much like an update on the derivatives scandals featured by Frank Partnoy covering the Roaring 1990s before the dot.com scandals broke. There were of course other insiders writing about these scandals as well --- http://faculty.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
It would seem that bankers and investment bankers do not learn from their own mistake. The main cause of the scandals is always pay for performance schemes run amuck.

A growing concern for Fed policy makers is a weakening in the US dollar against major currencies. The price of the euro in US-dollar terms climbed from a low of $1.27 in November last year to around $1.41 in May and $1.43 in early June — an increase of 12.6% from November. The major currencies dollar index fell to 78.89 in May from 82.3 in April — a fall of 4.1%. If the declining trend in the US dollar were to consolidate, this could cause foreign holders of US-dollar assets to divest into non-dollar-denominated assets and precious metals.
Frank Shostak, "The Fed Might Have Painted Itself into a Corner," Mises Institute, June 12, 2009 ---
http://mises.org/story/3518

Let me conclude with a political note. The main reason for reform is to serve the nation. If we don’t get major financial reform now, we’re laying the foundations for the next crisis. But there are also political reasons to act. For there’s a populist rage building in this country, and President Obama’s kid-gloves treatment of the bankers has put Democrats on the wrong side of this rage. If Congressional Democrats don’t take a tough line with the banks in the months ahead, they will pay a big price in November.
Paul Krugman, Bubbles and the Banks," The New York Times, January 7, 2010 ---
http://www.nytimes.com/2010/01/08/opinion/08krugman.html?hpw

Teaching Case from The Wall Street Journal Accounting Weekly Review on October 5, 2012

BofA Takes New Crisis-Era Hit
by: Dan Fitzpatrick, Christian Berthelsen and Robin Sidel
Sep 29, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 
 

TOPICS: Contingent Liabilities

SUMMARY: "Bank of America Corp. agreed to pay $2.43 billion to settle claims it misled investors about the acquisition of troubled brokerage firm Merrill Lynch & Co...." during the financial crisis in 2008. At the time it acquired Merrill Lynch in September 2008, BofA became the biggest U.S. bank; the value of the bank then fell by more than half by the time the acquisition of Merrill Lynch closed 3 months later. These losses were not disclosed by then CEO Ken Lewis and his management team to shareholders before they voted on the merger transaction with Merrill.

CLASSROOM APPLICATION: The article addresses accounting for litigation contingent liabilities. The related video clearly discusses the history of the transactions.

QUESTIONS: 
1. (Introductory) To whom did Bank of America Corp. (BofA) agree to pay $2.43 billion dollars?

2. (Introductory) For what losses did BofA agree to make this payment?

3. (Advanced) How could losses have occurred and a payment of $2.4 billion be required if "Bank of America executives now say Merrill...has become a big profit contributor... [and that] it's clear that Merrill is a significant positive any way you want to look at it..."?

4. (Advanced) What accounting standards provide the requirements to account for costs such as this $2.4 billion payment by BofA?

5. (Advanced) According to the article, BofA has "set aside more than $42 billion in litigation expenses, payouts and reserves...[which] includes $1.6 billion taken in the third quarter [of 2012]...." According to the related video, what period will be affected by $1.6 billion being recorded as an expense related to this $2.43 billion settlement? Explain your answer.
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
BofA-Merrill: Still A Bottom-Line Success
by David Benoit
Sep 28, 2012
Online Exclusive

"BofA Takes New Crisis-Era Hit," by Dan Fitzpatrick, Christian Berthelsen and Robin Sidel, The Wall Street Journal, September 29, 2012 ---
http://professional.wsj.com/article/SB10000872396390443843904578024110468736042.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

Bank of America Corp. agreed to pay $2.43 billion to settle claims it misled investors about the acquisition of troubled brokerage firm Merrill Lynch & Co., in the latest financial-crisis aftershock to rattle the banking sector.

The payment is the largest settlement of a shareholder claim by a financial-services firm since the upheaval of 2008 and 2009. It also ranks as the eighth-largest securities class-action settlement, behind payouts like the $7.2 billion settlement with shareholders of Enron Corp. and the $6.1 billion pact with WorldCom Inc. investors, both in 2005.

The deal is a sign that U.S. banks' battle to contain the high cost of the crisis continues to escalate, despite a four-year slog of lawsuits, losses and profit-sapping regulations. Bank of America's total exposure to crisis-era litigation is "seemingly never-ending," said Sterne Agee & Leach Inc. in a note Friday.

Is the era that produced all of this legal exposure "history?" the Sterne Agee & Leach analysts said. "Unlikely."

The settlement ends a three-year fight with a group of five plaintiffs, including the State Teachers Retirement System of Ohio and the Teacher Retirement System of Texas. They accused the bank and its officers of making false or misleading statements about the health of Bank of America and Merrill Lynch and were planning to seek $20 billion if the case went to trial as scheduled on Oct. 22.The size of the pact highlights how hasty acquisitions engineered during the height of the financial crisis by Kenneth Lewis, then the bank's chief executive, are still haunting the company four years later. Decisions to buy mortgage lender Countrywide Financial Corp. and Merrill have forced Bank of America, run since 2010 by Chief Executive Brian Moynihan, to set aside more than $42 billion in litigation expenses, payouts and reserves, according to company figures. The funds are meant to absorb a litany of Merrill-related lawsuits and claims from investors who say Countrywide wasn't honest about the quality of mortgage-backed securities it issued before the crisis.

That total includes $1.6 billion taken in the third quarter to help pay for the Merrill settlement announced Friday and a landmark $8.5 billion agreement reached last year with a group of high-profile mortgage-bond investors.

The company's shares lost more than half their value between when Bank of America announced its late-2008 plan to purchase Merrill Lynch and the date the deal closed 3½ months later, wiping out $70 billion in shareholder value. The shares have fallen further since then, and investors who owned the shares won't be made whole by the settlement.

"We find it simply amazing the sheer magnitude of value destruction over the years," said Sterne Agee in the note issued Friday. And "the bill is surely set to increase" as the research firm expects the bank to reach other legal settlements over the next 12 to 24 months. Bank of America is still engaged in a legal clash with bond insurer MBIA Inc., MBI +3.91% which has alleged that Countrywide wasn't honest about the quality of mortgage-backed securities it issued before the financial crisis.

The move to buy Merrill over one weekend in September 2008 was initially hailed as a rare piece of good news during a week when much of Wall Street appeared to be teetering on the brink. It also vaulted the Charlotte, N.C., lender to the top of the U.S. banking heap, capping a goal pursued over two decades by Mr. Lewis and his predecessor, Hugh McColl.

The Merrill deal, initially valued at $50 billion in Bank of America stock, was the "deal of a lifetime," Mr. Lewis said on the day it was announced.

But the agreement soon became a problem as analysts questioned whether Mr. Lewis paid too much and Merrill's losses spiraled out of control in the weeks before the deal closed. Investor fears stemming from the financial crisis sent shares of Bank of America and other financial companies into free fall, and the deal was worth roughly $19 billion at its completion on Jan. 1, 2009.

Mr. Lewis and his top executives made the decision not to say anything publicly about the mounting problems before shareholders signed off on the merger—a decision that formed the basis of a number of Merrill-related suits, including an action brought by the Securities and Exchange Commission. The bank also didn't disclose that it sought $20 billion in U.S. aid to digest Merrill, or that the deal allowed Merrill to award up to $5.8 billion in performance bonuses. When Bank of America threatened to pull out of the deal because of the losses, then-Treasury Secretary Henry Paulson told Mr. Lewis that current management would be removed if the deal wasn't completed.

The legal scrutiny surrounding the Merrill acquisition contributed to Mr. Lewis's decision to step down at the end of 2009. Mr. Lewis's lawyer declined to comment.

"Any way you slice it, $2.4 billion is a big number," says Kevin LaCroix, a lawyer at RT ProExec, a firm that focuses on management-liability issues.

Bank of America executives now say Merrill, unlike Countrywide, has become a big profit contributor, while the company continues to work to absorb massive losses in its mortgage division. The divisions inherited from Merrill produced $31.9 billion in net income between 2009 and 2011 and $164.4 billion in revenue. Bank of America's total net income over the period was just $5.5 billion, on $326.8 billion in revenue, reflecting in part the hefty losses tied to the Countrywide deal.

"I think it's clear that Merrill is a significant positive any way you want to look at it," said spokesman Jerry Dubrowski.

The settlement doesn't end all Merrill-related headaches. The New York attorney general's office still is pursuing a separate civil fraud suit relating to the Merrill takeover that began under former Attorney General Andrew Cuomo. Defendants in that case include the bank, Mr. Lewis and former Chief Financial Officer Joe Price. A spokesman for New York State Attorney General Eric Schneiderman declined to comment.

It isn't known how much all shareholders will receive as a result of the Merrill settlement announced Friday. The amount shareholders receive will ultimately depend on how long they held the shares and how much they paid. Mr. Lewis, also a shareholder, won't receive a payout because defendants in the suit are excluded from the class that the court certified.

But because the decline in Bank of America stock was so steep—the shares fell from $32 to $14 between Sept. 12, 2008, the day before the Merrill acquisition was announced, and the Jan. 1, 2009, closing—no shareholders can expect to recover their full losses.

Before the settlement was reached, a targeted recovery for at least three million shareholders who were part of the class was $2.52 a share, said a spokesman for Ohio Attorney General Mike DeWine. The State Teachers Retirement System of Ohio and the Ohio Public Employees Retirement System, which held between 18 million and 20 million shares, now expect to recover $1.19 per share, or roughly $20 million.

Continued in article

CDO --- http://en.wikipedia.org/wiki/Collateralized_debt_obligation

Countrywide Financial --- http://en.wikipedia.org/wiki/Countrywide_Financial

Those Poisoned CDOs
"Bank of America Ordered to Unseal Documents in MBIA Case," by Dan Freed, The Street, June 4, 2013 ---
http://www.thestreet.com/story/11804771/1/bank-of-america-ordered-to-unseal-documents-in-mbia-case.html

Update November 22, 2016

Treasury Secretary Hank Paulson's Bank of America Extortion Scheme (Hustle) Finally Laid to Rest

From the CFO Journal's Morning Ledger on November 23, 2016

Do the Hustle? Nope
The government’s Hustle case against Bank of America Corp. is finally dead. The case, in which the government accused the bank’s Countrywide Financial Corp. unit of churning out shoddy mortgage securities in the run-up to the financial crisis, already was thrown out by a U.S. appeals court in May. The U.S. attorney’s office in Manhattan, which had first brought the case in 2012, then asked the appeals court to reconsider its decision, a request that was denied.

Jensen Comment

A better word for "Hustle" is Treasury Department "Extortion." When the economy collapsed in 2007 due to poisoned mortgages BofA had no poisoned mortgages. Then Treasury Secretary Hank Paulson came calling like an extortionist according to former BofS CEO Ken Lewis. Paulson gave BofA no choice but to buy Countrywide Financial with its millions of poisoned mortgages. The secret intent was to give Countrywide deeper pockets so that the Federal Government could turn around a sue BofA billions for all the financial crimes of Countrywide Financial.

There was never any doubt about the high crimes of Countrywide Financial on the main streets of cities and towns across the USA. Countrywide issued millions of mortgages to borrowers having no hope of meeting their mortgage obligations.

It makes me feel good that Paulson finally got his just dessert. I only wish he would be sued. As the former CEO of Goldman Sachs he bailed out Goldman with milk and honey and pissed on BofA. Now he's retired on his millions from Goldman and seemingly can't be touched for his extortion crimes.

Breaking the Bank Frontline Video
In Breaking the Bank, FRONTLINE producer Michael Kirk (Inside the Meltdown, Bush’s War) draws on a rare combination of high-profile interviews with key players Ken Lewis and former Merrill Lynch CEO John Thain to reveal the story of two banks at the heart of the financial crisis, the rocky merger, and the government’s new role in taking over — some call it “nationalizing” — the American banking system.
Simoleon Sense, September 18, 2009 --- http://www.simoleonsense.com/video-frontline-breaking-the-bank/
Bob Jensen's threads on the banking bailout --- http://faculty.trinity.edu/rjensen/2008Bailout.htm

Update November 23, 2016
Treasury Secretary Hank Paulson's Bank of America Extortion Scheme (Hustle) Finally Laid to Rest

From the CFO Journal's Morning Ledger on November 23, 2016

Do the Hustle? Nope
The government’s Hustle case against Bank of America Corp. is finally dead. The case, in which the government accused the bank’s Countrywide Financial Corp. unit of churning out shoddy mortgage securities in the run-up to the financial crisis, already was thrown out by a U.S. appeals court in May. The U.S. attorney’s office in Manhattan, which had first brought the case in 2012, then asked the appeals court to reconsider its decision, a request that was denied.

Jensen Comment

A better word for "Hustle" is Treasury Department "Extortion." When the economy collapsed in 2007 due to poisoned mortgages BofA had no poisoned mortgages. Then Treasury Secretary Hank Paulson came calling like an extortionist according to former BofS CEO Ken Lewis. Paulson gave BofA no choice but to buy Countrywide Financial with its millions of poisoned mortgages. The secret intent was to give Countrywide deeper pockets so that the Federal Government could turn around a sue BofA billions for all the financial crimes of Countrywide Financial.

There was never any doubt about the high crimes of Countrywide Financial on the main streets of cities and towns across the USA. Countrywide issued millions of mortgages to borrowers having no hope of meeting their mortgage obligations.

It makes me feel good that Paulson finally got his just dessert. I only wish he would be sued. As the former CEO of Goldman Sachs he bailed out Goldman with milk and honey and pissed on BofA. Now he's retired on his millions from Goldman and seemingly can't be touched for his extortion crimes.

U.S. loan relief program may have made things worse
The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good. Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.
Peter S. Goodman, "U.S. loan program may have made things worse," MSNBC, January 1, 2010 ---
http://www.msnbc.msn.com/id/34663078/ns/business-the_new_york_times/

Selling the debt in the left pocket to the right pocket:  The Fed is all smoke and mirrors

"Fed Is Buying 61 Percent of U.S. Government Debt," by Bob Adelmann, The New American, March 29, 2012
http://thenewamerican.com/economy/commentary-mainmenu-43/11357-fed-is-buying-61-of-us-government-debt

In his attempt to explode the myth that there is unlimited demand for U.S. government debt, former Treasury official Lawrence Goodman explained that there is high perceived demand because the Federal Reserve is doing most of the buying.

Wrote Goodman,

Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis.

This not only creates the false impression of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.

What about Japan and China? Aren’t they the major purchasers of U.S. debt? Not any more, notes Goodman. Foreign purchases of U.S. debt dropped to less than 2 percent  of GDP (Gross Domestic Product) from almost 6 percent just three years ago. And private sector investors — banks, money market and bond mutual funds, individuals and corporations — have cut their buying way back as well, to less than 1 percent of GDP, down from 6 percent. This serves to hide the fact that the government can’t find outside buyers willing to accept rates of return that are below the inflation rate (“negative interest”) given the precarious financial condition of the government. It also hides the impact of $1.3 trillion deficits from the public who would likely get much more concerned if real, true market rates of interest were being demanded for purchasing U.S. debt, as such higher rates would increase the deficit even further. Finally it takes pressure off Congress to “do something” because there is no public clamor over the matter, at least for the moment. 

One of those promoting the myth that buyers of U.S. debt must exist because interest rates are so low is none other than one of those recently seated at the Federal Reserve’s Open Market Committee table, Alan Blinder. Now a professor of economics at Princeton University, Blinder was vice chairman of the Fed in the mid-nineties and should know all about the Fed’s manipulations and machinations in the money markets. Apparently not. 

On January 19 Blinder wrote in the Wall Street Journal that

Strange as it may seem with trillion-dollar-plus deficits, the U.S. government doesn’t have a short-run borrowing problem at all. On the contrary, investors all over the world are clamoring to lend us money at negative real interest rates.

In purchasing power terms, they are paying the U.S. government to borrow their money!

Blinder repeated the error in front of the Senate Banking Committee just one week later: "In fact, world financial markets are eager to lend the United States government vast amounts at negative real interest rates. That means that, in purchasing power terms, they are paying us to borrow their money!"

Aggressive promotion of a myth never makes it a fact. All it does is hide, for a period, the reality that the world isn’t willing to lend to the United States at negative interest rates. This places the burden on the Fed to make the myth appear real by expanding its own balance sheet and gobbling up U.S. debt. 

There are going to be consequences. As Goodman put it,

The failure by officials to normalize conditions in the U.S. Treasury market and curtail ballooning deficits puts the U.S. economy and markets at risk for a sharp correction…. [Emphasis added.]

In other words, budget deficits often take years to build or reduce, while financial markets react rapidly and often unexpectedly to deficit spending and debt.

The recent release by the Congressional Budget Office (CBO) of future inflation expectations provides little assurance either as it mimics the line that inflation will stay low for the foreseeable future: "In CBO’s forecast, the price index for personal consumption expenditures increases by just 1.2 percent in 2012 and 1.3 percent in 2013."

With the Fed continuing to buy U.S. government debt, which keeps interest rates artificially low, when will reality set in? Amity Shlaes has the answer. Writing in Bloomberg last week, Shlaes explains:

The thing about [price] inflation is that it comes out of nowhere and hits you….

[It] has happened to us before. In World War I … the CPI [Consumer Price Index] went from 1 percent for 1915 to 7 percent in 1916 and 17 percent in 1917….

In 1945, all seemed well. Inflation was at 2 percent, at least officially. Within two years that level hit 14 percent.

All appeared calm in 1972, too, before inflation jumped to 11 percent by 1974 and stayed high for the rest of the decade….

One thing is clear: pretty soon, we’ll all be in deep water.

Doug Casey agrees: “Don’t think there are no consequences to our unwise fiscal and monetary course; a potentially ugly tipping point is more likely than not at some point.”

Coninued in article

The video is a anti-Bernanke musical performance by the Dean of Columbia Business School ---
http://www.youtube.com/watch?v=3u2qRXb4xCU
Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks) --- http://en.wikipedia.org/wiki/Ben_Bernanke
R. Glenn Hubbard (Dean of the Columbia Business School) ---
http://en.wikipedia.org/wiki/Glenn_Hubbard_(economics)

I don't want to make this statement of fact seem political.
It applies no matter what political side is in power!
The Science of Macroeconomics is quite literally blameless.

If the economy improves and unemployment drops, Obama can take credit. If it fails to improve and unemployment rises, though, he can say he averted an even worse showing. Republicans will take the opposite tack—attributing any improvement to the natural resilience of the economy and blaming the administration if things get worse. And neither side will really know who's right. I have long been a believer in the value of economics in understanding the world. But the chief effect of the current crisis is to raise the possibility that economists—at least those macroeconomists, who study the broad economy—don't have a blessed clue.
"Baffled by the Economy:  Why being a macroeconomist means never having to say you're sorry," by Steve Chapman, Reason Magazine, June 11, 2009 --- http://www.reason.com/news/show/134059.html

The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.
Taylor Caldwell, A Pillar of Iron (wrongly attributed to Cicero in 55 B.C.)

Five Speaker Videos from the Stanford Graduate School of Business (on the economic crisis and leadership)  [Scroll Down]
 Top 5 Speaker Videos for 2009 --- http://www.gsb.stanford.edu/news/top-videos.html?cmpid=alumni&source=gsbtoday

Great PBS Video on the Crash of 1929 --- http://www.pbs.org/wgbh/americanexperience/crash/

Yale School of Management Cosponsors NYC Roundtable Discussion on the Financial Crisis (Full Video Now Available)
http://mba.yale.edu/news_events/CMS/Articles/6608.shtml 

Collateralized Debt Obligation --- http://en.wikipedia.org/wiki/Collateralized_debt_obligation

"CDOs Are Back: Will They Lead to Another Financial Crisis?" Knowledge@wharton, April 10, 2013 ---
http://knowledge.wharton.upenn.edu/article.cfm?articleid=3230

Wall Street’s Math Wizards Forgot a Few Variables
What wasn’t recognized was the importance of a different species of risk — liquidity risk,” Stephen Figlewski, a professor of finance at the Leonard N. Stern School of Business at New York University, told The Times. “When trust in counterparties is lost, and markets freeze up so there are no prices,” he said, it “really showed how different the real world was from our models.
DealBook, The New York Times, September 14, 2009 ---
http://dealbook.blogs.nytimes.com/2009/09/14/wall-streets-math-wizards-forgot-a-few-variables/

Bob Jensen's threads on CDOs ---
http://faculty.trinity.edu/rjensen/2008Bailout.htm

"Saturn (Now Defunct Automobile): A Wealth of Lessons from Failure," University of Pennsylvania's Knowledge@Wharton, October 28, 2009 --- http://knowledge.wharton.upenn.edu/article.cfm?articleid=2366

Did the Cash for Clunkers Program cost taxpayers $24,000 for each success story?
"(Lots of) Cash for Clunkers," by Steven D. Levitt (University of Chicago economics professor and principal author of Freakonomics, Superfreakonomics, and the Freakonomics Blog at The New York Times), November 2, 2009 ---
http://freakonomics.blogs.nytimes.com/2009/11/02/lots-of-cash-for-clunkers/ 

Edmunds.com reports that its statistical analysis of the Cash for Clunkers program finds that the program generated only 125,000 extra new vehicle sales, meaning that the cost to the U.S. government was $24,000 for each of those new cars.

The reason the cost per incremental car is so high is that, according to Edmunds.com’s modeling, 82 percent of the vehicles purchased under the program would have been bought this year anyway, even without the subsidy. So Cash for Clunkers mostly just turned out to be a gift from the government to people who happened to be in the market for a new car at the right time. The auto manufacturers and dealers did not end up getting a very big chunk of the money ultimately, although they did get paid earlier rather than later in the year.

Is this surprising? Not to an economist. It is relatively easy to move around the timing of when someone purchases a durable good, but much harder to affect whether they buy a durable good or not.

For the second time in a week, I am deeply disappointed at the response of the Department of Transportation to research into areas of relevance to the department. The first case was Secretary LaHood’s response to my research on car seats. Here is what the agency had to say in response to the Edmunds.com analysis:

“It is unfortunate that Edmunds.com has had nothing but negative things to say about a wildly successful program that sold nearly 250,000 cars in its first four days alone,” said Bill Adams, spokesman for the Department of Transportation.

The right response, it seems to me, is either to say 1) that this new evidence convinces us not to do the program again, or 2) that this analysis is wrong. That’s the response  that Macon Phillips had on the White House blog (who knew the White House had a blog!):

The Edmunds analysis rests on the assumption that the market for cars that didn’t qualify for Cash for Clunkers was completely unaffected by this program. In other words, all the other cars were being sold on Mars, while the rest of the country was caught up in the excitement of the Cash for Clunkers program. This analysis ignores not only the price impacts that a program like Cash for Clunkers has on the rest of the vehicle market, but the reports from across the country that people were drawn into dealerships by the Cash for Clunkers program and ended up buying cars even though their old car was not eligible for the program.

I’m not sure whether this argument is empirically important or not, but at least it is actually engaging in a meaningful way with the Edmunds.com analysis.

Jensen Comment
My objection to the Cash for Clunkers Program was not how much it cost in terms of subsidies to some buyers (like me) and most dealers, although the benefits to buyers are probably overstated when compared to deals that are not being made by dealers. My objection is that the program destroyed perfectly good cars needed badly by poor people around the world such as poor people in Latin America and South America. Mathematicians would call the degree of impact epsilon with respect to reducing global warming and fuel consumption. The so-called "jobs created" were mostly temporary since backlogged vehicle inventories are now growing and growing and growing.

A very small example was the cash for clunkers program in the US that ended a short time ago. The 19th century French essayist Frederic Bastiat discussed facetiously the gain to an economy when a boy breaks the windows of a shopkeeper since that creates work for the glazier to repair them, and the glazier then spends his additional income on food and other consumer goods. The moral of that story is to hire boys to go around breaking windows! The clunkers program was hardly any better than that (see our discussion of the clunkers program on August 24th).
Gary Becker, Nobel Prize Winning Economist, "How Much Should We Care About Government Deficits?" The Becker-Posner Blog, September 15, 2009 --- http://www.becker-posner-blog.com/archives/2009/09/how_much_should.html
Also see Gary Becker, "The Cash for Clunkers Program: A Bad Idea at the Wrong Time, The Becker-Posner Blog, August 24, 2009 --- http://www.becker-posner-blog.com/archives/2009/08/the_cash_for_cl.html

The burden on the government budget that this imposes depends on the interest rates on the debt. At an average interest rate of 5%, that means 5% of GDP would go to servicing the debt, which is a little less than 20% of total federal government spending. This might be manageable but it is not trivial. On the other hand, if average interest rates were only 3%, servicing costs would be far more tolerable. In fact, the US has been paying about 3% on its debt, so even a considerable increase of the debt to 100% of GDP would still be manageable. But if the Fed starts raising real interest rates to head off the inflation potential in the $800 billion of excess reserves, the debt burden could become a major problem. Another factor is the savings rates coming from the Asian countries, like China. If their savings decline sharply, that too would raise world interest rates and increase the debt burden for all countries.
Gary Becker, Nobel Prize Winning Economist, "How Much Should We Care About Government Deficits?" The Becker-Posner Blog, September 15, 2009 --- http://www.becker-posner-blog.com/archives/2009/09/how_much_should.html

Mortgage Fraud Increasing
Despite the attention paid to mortgage fraud committed by borrowers and lenders since declines in the real estate values and the subprime loan crisis triggered severe problems in the banking industry, the number of Federal Bureau of Investigation’s (FBI) investigations of mortgage fraud and associated financial crimes is increasing. “The FBI has experienced and continues to experience an exponential rise in mortgage fraud investigations,” John Pistole, Deputy Director, told the Senate Judiciary Committee in April.
AccountingWeb, August 18, 2009 --- http://www.accountingweb.com/topic/mortgage-loan-fraud-increasing
Jensen Comment
I think mortgage fraud will continue to rise as long as remote third parties like Fannie Mae, Freddie Mac, and FHA continue to buy up mortgages negotiated by banks and mortgage companies basking in moral hazard. The biggest hazards are fraudulent real estate appraisals and lies about income in mortgage applications. We need to bring back George Bailey (James Stewart) in It's a Wonderful Life --- http://en.wikipedia.org/wiki/It%27s_a_Wonderful_Life
The banks that negotiate the mortgages should have to hang on to those mortgages.
Watch the video at http://www.youtube.com/watch?v=MJJN9qwhkkE

Bob Jensen's fraud updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm

"The FHA's Bailout Warning:  Whoops, there it is," The Wall Street Journal, November 13, 2009 ---
Click Here

Critics of Fannie Mae and Freddie Mac were waved off as cranks and assured that the companies wouldn't need a taxpayer bailout right up until the moment that they did. Some $112 billion later and counting, this political history may be repeating itself with the Federal Housing Administration, which yesterday announced that its capital reserve ratio has fallen to 0.53%.

That cushion is far below the 2% of its liabilities that Congress mandates, itself a 50 to 1 leverage ratio, and down from 3% last autumn. The FHA's mortgage guarantees in 2009 are four times higher than they were in 2007. Nearly 18% of its loans are 30 days or more past due, while mortgages guaranteed in 2007 are "on par with FHA's worst-ever books from the early 1980s," according to the Department of Housing and Urban Development's report to Congress. The financial deterioration is the result of the agency's plunge into high-risk loans over the last two years, asking dangerously low down payments of 3.5% from unqualified borrowers.

The FHA strikes a note of optimism by claiming that its book of business is improving and that "the just-completed actuarial studies show that FHA's capital reserve ratio will not dip below zero under most of the economic scenarios considered." The Administration has also made some modest reforms. Still, if housing values don't recover, or if by some chance the agency can't outrun its problems, the report admits that the FHA could ask taxpayers for $1.6 billion in 2012. Judging from history, that's probably a low-ball estimate.

Congress doesn't mind because these liabilities are technically off budget, until they aren't. This was all so predictable—and, ahem, predicted.

Are economists worse than the Keystone Cops?
"The Financial Crisis and the Systemic Failure of Academic Economics," 2008
Dahlem Report on the Economic Crisis --- http://www.cs.trinity.edu/~rjensen/temp/Dahlem_Report_EconCrisis021809.pdf

Abstract:
The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.

Two Videos Damning Capitalism: One Stupid, One Smart

Michael Moore cheered the bankruptcy of General Motors and absolutely despises the comeback of General Motors
He has a relatively long list (some lucrative to him) leftist documentaries --- http://en.wikipedia.org/wiki/Michael_Moore
His documentary Sicko got it wrong --- Cuba is not the dream country of equity and quality in health care for the masses
Now he has a new documentary entitled:  Capitalism:  A Love Story

The Stupid Video
"Michael Moore Gets It Wrong," by John Stossel, ABC News, July 11, 2009 --- http://blogs.abcnews.com/johnstossel/2009/07/michael-moore-gets-it-wrong.html

Michael Moore has been working on another documentary.  This time, he’s taking on capitalism:

"The wealthy, at some point, decided they didn't have enough wealth. They wanted more -- a lot more. So they systematically set about to fleece the American people out of their hard-earned money."

How ridiculous is that?  The wealthy, and everyone else, almost always decide that they don’t have enough wealth.  People ask their bosses for raises.  We invest in stocks hoping for bigger returns than Treasury Bonds bring.  “Greed” is a constant.  The beauty of free markets, when government doesn’t meddle in them, is that they turn this greed into a phenomenal force for good.  The way to win big money is to serve your customers well.  Profit-seeking entrepreneurs have given us better products, shorter work days, extended lives, and more opportunities to write the script of our own life.

On Thursday, Moore announced the title of the movie:  Capitalism: A Love Story.

It’s a title I might have picked to make a point opposite of what I assume Moore has in mind.  

Moore also fails to understand is that it was not “capitalism” run amok that caused today’s financial problems.   In reality, it was a combination of ill-conceived government policies and an overzealous Federal Reserve artificially lowering interest rates to fuel a bubble in the housing market.  Then it was government that took money from taxpayers and forced banks to accept it.

Moore ought to understand that, because he makes a good point when he says his movie will be about "the biggest robbery in the history of this country - the massive transfer of U.S. taxpayer money to private financial institutions."

That is indeed robbery.  It sure doesn’t sound like capitalism.

The Smart Video
Better Video Damning "Managerial Capitalism" and It's Free Online --- Click Here
http://snipurl.com/managerialcapitalism    [fora_tv]  

The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---
http://www.thenation.com/doc/20090608/kroll/print

Being Honest About Being Dishonest
Democrats openly admit that most of the stimulus money is going to counties that voted for Obama
A new study released by USA Today also finds that counties that voted for Obama received about twice as much stimulus money per capita as those that voted for McCain. "The stimulus bill is designed to help those who have been hurt by the economic downturn.... Do you see disparity out there in where the money is going? Certainly," a Democratic congressional staffer knowledgeable about the process told FOXNews.com.
John Lott, "ANALYSIS: States Hit Hardest by Recession Get Least Stimulus Money," Fox News, July 19, 2009--- http://www.foxnews.com/story/0,2933,533841,00.html

Alan Blinder --- http://en.wikipedia.org/wiki/Alan_Blinder

Disclaimer
I've never been a fan of the progressive scholarship of Alan Blinder. He's been a promoter of low (virtually zero) interest rates for megabanks that I think are turning into a disaster in this economic recovery. Ben Bernanke can do no wrong in the eyes of Professor Blinder. In my opinion, the real Bernanke-Blinder disaster is their support of restraining the government budget deficit with Zimbabwe economics that entails printing more greenbacks (over $2 trillion to date) rather than taxing or borrowing what is needed to fight the deficit. Actually the government does not add to the money supply by literally printing greenbacks. But having the Fed buy up over 60% of the new government debt is tantamount to printing greenbacks.

Taxing and borrowing to support government spending are going out of style.
The main problem with Zimbabwe economics is that it does little to restrain the excesses of government spending --- which we are now witnessing in the economic mess in Greece. Greece, of course, cannot simply print Euros to continue to feed government spending excesses. Greece has to get out of the Euro Zone to engage in the Zimbabwe economics of Benanke and Blinder. Of course all of Europe might soon engage in Zimbabwe economics to pay its debts. Taxing and borrowing to support government spending are going out of style.

The video is a anti-Bernanke musical performance by the Dean of Columbia Business School ---
http://www.youtube.com/watch?v=3u2qRXb4xCU
Ben Bernanke (Chairman of the Federal Reserve and a great friend of megabanks) --- http://en.wikipedia.org/wiki/Ben_Bernanke
R. Glenn Hubbard (Dean of the Columbia Business School) ---
http://en.wikipedia.org/wiki/Glenn_Hubbard_(economics)

The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.
Taylor Caldwell, A Pillar of Iron (wrongly attributed to Cicero in 55 B.C.)

But under my philosophy of sharing all sides of arguments, I forward the following case.
Teaching Case from The Wall Street Journal Accounting Weekly Review on May 25, 2012

The Long and Short of Fiscal Policy
by: Alan S. Blinder
May 22, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Governmental Accounting, Income Tax, Tax Laws, Tax Policy, Taxation

SUMMARY: Alan S. Blinder "...is a former vice chairman of the Federal Reserve [and is now] a professor of economics and public affairs at Princeton University." This opinion page piece provides a clear explanation of macroeconomic effects of budget deficits, tax cuts, and spending cuts, emphasizing the "macroeconomic effects of budget deficits in the short and long runs."

CLASSROOM APPLICATION: The article is useful in either a tax course or a governmental accounting class. The related article presents letters to the editor with more Republican viewpoints than Mr. Blinder's.

QUESTIONS: 
1. (Advanced) What are budget deficits?

2. (Introductory) Why can budget deficit spending be beneficial for the U.S. economy in the short run?

3. (Introductory) Why are budget deficits bad for the U.S. economy in the long run?

4. (Advanced) What tax law changes are imminent in January 2013? How do they relate to the comic graphic associated with this opinion piece? In your answer, comment on the size of these changes relative to the total economy.

5. (Introductory) How might specific choices in spending be more helpful than other possible choices? In your answer, explain the use of return on investment in these decisions, defining that finance concept as well.

6. (Introductory) What is the biggest cost component that could most readily reduce the long term budget deficit problem we face in the U.S.?

7. (Introductory) What does Mr. Blinder recommend as a plan for our national fiscal policy?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Perhaps the 2013 Fiscal Cliff Presents an Opportunity
by Letters to the Editor: Carroll Hoke, Frank Peel, and Keith Colonna
Mar 23, 2012
Page: A14

"The Long and Short of Fiscal Policy," by: Alan S. Blinder, The Wall Street Journal, May 22, 2012 ---
http://online.wsj.com/article/SB10001424052702303360504577408490648029470.html?mod=djem_jiewr_AC_domainid

Can we talk about the federal budget deficit? Better yet, can we think about it? For there has been a lot more talking than thinking. One persistent point of confusion arises from the radically different macroeconomic effects of larger budget deficits in the short and long runs.

In the short run—let's say within a year or so—a larger deficit, whether achieved by spending more or taxing less, boosts economic growth by increasing aggregate demand. It's pretty simple. If the government spends more money without raising anyone's taxes to pay the bills, that adds to total demand directly.

That's true, by the way, whether you like the specific expenditures or hate them. Similarly, cutting somebody's taxes without also cutting spending raises spending indirectly—again, whether you like the tax cut or not.

A second layer of subtlety recognizes that some types of spending and some types of tax cuts have larger effects on spending than others, and similarly, that some types are more sharply targeted on job creation than others. Such details matter in designing a cost-effective stimulus package. But for present purposes, let's keep it simple: Higher spending or lower taxes speed up growth by adding to demand.

So, as long as the government can borrow on reasonable terms, the crucial short-run question is: Does the economy need more or less demand? For the last several years, the answer has been clear: more. Bolstering demand was the rationale for fiscal stimulus under President Bush in 2008 and under President Obama in 2009. It remains a persuasive rationale for further stimulus today.

But that's not going to happen. Instead, the operational budget objective for the coming months is to ensure that we don't shoot ourselves in the collective foot with fiscal austerity while the economy is still weak. Sounds foolish, but we could make that grievous error either by letting ourselves fall off the so-called fiscal cliff that awaits us in January (tax increases and spending cuts amounting to 3.5%-4% of GDP), or by crashing headlong into the national debt ceiling, as we almost did last summer.

But don't we need to reduce the deficit—and by large amounts? Yes, we do, but that's in the long run, where the effects of larger deficits are mostly harmful to economic growth. In the jargon, more government borrowing tends to "crowd out" private borrowers by pushing interest rates up. Those crowded-out borrowers include both consumers who want to buy cars and businesses that want to buy equipment. In the latter case, higher government budget deficits take a toll on growth by slowing down capital formation.

There is an important exception, however, which is highly germane to today's situation. Suppose government borrowing is used to finance productive investments in public capital—such as highways, bridges, and tunnels. Right now, the U.S. government can borrow for 10 years at under 2% per annum. At these super-low interest rates, you don't have to be a genius to find many public infrastructure projects with strongly positive net present values. Borrowing to make such investments will enhance long-run growth, not retard it. And I can't, for the life of me, understand why we are not doing more of it.

But other types of spending, and any tax cut that does not boost capital formation enough, will slow down growth. And that's the fundamental indictment of large deficits.

To think clearly about how to shrink the long-run deficit, we must understand its origins. Looking ahead, the lion's share of projected future deficits comes from rising health-care expenditures.

Some of this cost escalation stems from heavier usage—consuming more health services per capita. But most of it comes from ever-rising relative prices; health care just keeps getting more expensive relative to almost everything else. The good news is that, if we could somehow limit health-care inflation to the overall inflation rate, much of the long-run budget problem would virtually vanish. The bad news is that nobody knows how to do that.

Given this ignorance, President Obama's health-care reform law, which Republicans want to repeal and the Supreme Court may vacate, takes a sensible approach to cost control. It includes—either on an experimental, small-scale, or pilot basis—virtually every cost-containment idea that has been suggested. The pragmatic attitude is: Let's try everything and go with what works.

But what about the middle, between the short run and the long run? When should the federal government get serious about paring its deficit? There is no formulaic answer, but U.S. Treasury borrowing rates will provide a clue. When they start rising on a sustained basis, it will be time to push deficits down. Another important clue will be the health of the economy. The government should stop supporting aggregate demand when the economy is strong enough to stand on its own two feet.

Continued in article

Jensen Comment
What Blinder does not admit to is that government borrowing rates are not allowed to go up as long as the Fed buys over 60% of the new debt issues in its Zimbabwe economic policy. I think I'm going to throw up!

Alan Blinder is all smoke and mirrors in an election year.

Bob Jensen's threads on The Greatest Swindle in the History of the World ---
http://faculty.trinity.edu/rjensen/2008Bailout.htm#Bailout

Bernanke's money printing press
On March 18, the Federal Reserve announced it would purchase up to $300 billion of long-term bonds as well as $750 billion of mortgage-backed securities. Of all the Fed's moves, this "quantitative easing" gets money into the economy the fastest -- basically by cranking the handle of the printing press and flooding the market with dollars (in reality, with additional bank credit). Since these dollars are not going into home building, coal-fired electric plants or auto factories, they end up in the stock market. A rising market means that banks are able to raise much-needed equity from private money funds instead of from the feds. And last Thursday, accompanying this flood of new money, came the reassuring results of the bank stress tests. The next day Morgan Stanley raised $4 billion by selling stock at $24 in an oversubscribed deal. Wells Fargo also raised $8.6 billion that day by selling stock at $22 a share, up from $8 two months ago. And Bank of America registered 1.25 billion shares to sell this week. Citi is next. It's almost as if someone engineered a stock-market rally to entice private investors to fund the banks rather than taxpayers.
Andy Kessler, "Was It a Sucker's Rally? You can have a jobless recovery but you can't have a profitless one," The Wall Street Journal, May 12, 2009 --- http://online.wsj.com/article/SB124208415028908497.html

Bernanke is insanely printing hundreds of millions of dollars that do not arise from taxes or borrowing
We remember that 2003 debate because it turns out we played a part in it. The Fed recently released the transcripts of its 2003 FOMC meetings, and what a surprise to find a Journal editorial the subject of an insider rebuttal from none other than Ben Bernanke, then a Fed Governor and now Chairman. We had run an editorial on monetary policy on the same day as the Dec. 9, 2003 FOMC meeting, and Mr. Bernanke clearly didn't take well to our warning about "Speed Demons at the Fed."We reprint nearby both Mr. Bernanke's comments and our editorial from that day. Readers can judge who got the better of the argument, but far more important is what Mr. Bernanke's reasoning tells us about the Fed today. Our guess is that it won't reassure holders of dollar assets
"Bernanke at the Creation: What the Fed Chairman said at the onset of the credit bubble, and the lesson for today," The Wall Street Journal, June 23, 2009 --- http://online.wsj.com/article/SB124572415681540109.html

Video on the Long-term Disaster of Beranke's Money Supply Printing Press That Will Kick in Hyperinflation ---
http://www.youtube.com/watch?v=dlHBYQrCnIk
Will the U.S. become Zimbabwe? --- http://faculty.trinity.edu/rjensen/entitlements.htm

Can you see why I believe this is a sucker's rally?
The stock market still has big hurdles to clear. You can have a jobless recovery, but you can't have a profitless recovery. Consider: Earnings are subpar (and may get worse with more concessions to labor unions), Treasury's last auction was a bust because of weak demand, the dollar is suspect, the stimulus is pork, the latest budget projects a $1.84 trillion deficit, the administration is berating investment firms and hedge funds saying "I don't stand with them," California is dead broke, health care may be nationalized, cap and trade will bump electric bills by 30% . . . Shall I go on? Until these issues are resolved, I don't see the stock market going much higher. I'm not disagreeing with the Fed's policies -- but I won't buy into a rising stock market based on them. I'm bullish when I see productivity driving wealth.
Andy Kessler, "Was It a Sucker's Rally? You can have a jobless recovery but you can't have a profitless one," The Wall Street Journal, May 12, 2009 --- http://online.wsj.com/article/SB124208415028908497.html
Jensen Comment
Nobody can be counted on to predict the stock market and the unpredictable shocks that affect it. One shock that will ultimately drive equity market prices up is inflation, and inflation is inevitable with Obama's annual egalitarian deficits of $2 trillion or more. One problem with inflation is that nobody can accurately predict just when the stock market will make huge upward moves for Zimbabwe-like inflation. A second problem is that paper profits on equity are not real profits. They're probably losses in spending power. If these huge Obama deficits continue in the future, both debt and equity will have to be indexed for inflation when investors cease to be suckers. For many years investors in high-inflation nations like Brazil stopped being suckers. Virtually all security investments in Brazil are indexed for inflation.

America, what is happening to you?
“One thing seems probable to me,” said Peer Steinbrück, the German finance minister, in September 2008....“the United States will lose its status as the superpower of the global financial system.” You don’t have to strain too hard to see the financial crisis as the death knell for a debt-ridden, overconsuming, and underproducing American empire.
Richard Florida, "How the Crash Will Reshape America," The Atlantic, March 2009 ---
http://www.theatlantic.com/doc/200903/meltdown-geography

Bob Jensen’s threads on impending disaster --- http://faculty.trinity.edu/rjensen/2008Bailout.htm#NationalDebt

Once the spigot is turned on it's almost never turned off:  That's how special appropriations become entitlements
Several university presidents and higher-education officials went to Capitol Hill on Tuesday to thank lawmakers for committing more ($21.5 billion) funds for scientific research, but they worried about what might happen to their budgets if that commitment didn't continue.
Paul Baskey, "Universities Are Wary of Drawbacks to a Huge Boost in Federal Spending," Chronicle of Higher Education, March 25, 2009 --- http://chronicle.com/daily/2009/03/14470n.htm?utm_source=at&utm_medium=en
Jensen Comment
This is the same argument that will be raised by virtually all recipients of the 2009 massive Stimulus (Recovery) Act handouts to states, education/research institutions, welfare programs, public works projects, etc. Once the spigot is turned on such handouts are hard to stop in future budget years. They become entitlements that will make President Obama's promise to reduce the Year 2012 budget deficit a complete and utter failure. Both logic and sob stories make it virtually impossible to turn the spigots off once they've been turned on. This is one of the common problems of budgeting in general except for Zero-Based Budgeting that almost never takes place in industry and probably has never taken place in state and federal governments.
Bob Jensen's threads on the entitlements disaster are at http://faculty.trinity.edu/rjensen/Entitlements.htm

Tim Geithner Draws a Big Laugh and Lots of Sighs In China
U.S. Treasury Secretary Timothy Geithner on Monday reassured the Chinese government that its huge holdings of dollar assets are safe and reaffirmed his faith in a strong U.S. currency. A major goal of Geithner's maiden visit to China as Treasury chief is to allay concerns that Washington's bulging budget deficit and ultra-loose monetary policy will fan inflation, undermining both the dollar and U.S. bonds. China is the biggest foreign owner of U.S. Treasury bonds. U.S. data shows that it held $768 billion in Treasuries as of March, but some analysts believe China's total U.S. dollar-denominated investments could be twice as high. "Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s. His answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.
Glenn Somerville, Reuters, June 1, 2009 --- Click Here

The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.
John Kenneth Galbraith --- Click Here

The total return of the S&P 500 index fell by nearly 40% last year, the second-worst performance by America’s stockmarket since 1825 --- http://www.simoleonsense.com/us-stockmarket-returns-since-1825/
But Wall Street's pay packages in 2009 are shooting for all time highs --- Click Here
Bob Jensen's threads on outrageous compensation --- http://faculty.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

Instead of adding more regulating agencies, I think we should simply make the FBI tougher on crime and the IRS tougher on cheats

Our Main Financial Regulating Agency:  The SEC Screw Everybody Commission
One of the biggest regulation failures in history is the way the SEC failed to seriously investigate Bernie Madoff's fund even after being warned by Wall Street experts across six years before Bernie himself disclosed that he was running a $65 billion Ponzi fund.

I’m deeply suspicious that there was possibly too much “experience” of a different type as well as “inexperience” cited as the main cause of the SEC’s negligence. The Inspector General’s Report leaves a lot to be desired.

"Statement by SEC Chairman: Statement on the Inspector General's Report Regarding the Bernard Madoff Fraud," by SEC Chairman Mary Shapiro, SEC Speech, September 4, 2009 --- http://sec.gov/news/speech/2009/spch090409mls.htm

Inspector General's Report --- http://sec.gov/news/speech/2009/spch090409mls.htm

Swanson Acknowledged in Testimony that If He Had Carefully Reviewed the Complaint, He Would Have Investigated

Additional Red Flags That Were Raised Swanson stated the Hedge Fund Manager’s complaint and the 2001 articles mean something different to him today than they did at the time of the examination in 20032004, noting, “I didn’t know anything, very little anyway, about hedge funds and mutual funds and how they operated.” Id. at p. 39. Swanson admitted that to someone who understood the hedge fund world, Madoff’s failure to charge money management fees “would probably be a little surprising.” Id. at p. 37. Swanson now reads the Hedge Fund Manager’s complaint to “indicate to me … [BMIS] may be not trading as much in options as they’re saying they’re doing,” and the red flag about the auditor to “signal some level of a lack of independence with respect to the auditor.” Id. at pgs. 37-38. Swanson testified that if he had reviewed the complaint, he would have wanted to look into the auditor issue. Swanson Testimony Tr. at p. 50. McCarthy and Donohue also thought that the allegation that the auditor was a related party to the principal was noteworthy and something that should have been followed up upon. Donohue Testimony Tr. at p. 42; McCarthy Testimony Tr. at p. 58. As Donohue explained, “His statement that the auditor of the firm is a related party to the principal would indicate that there are potential conflicts with the firm and the auditor.” Donohue Testimony Tr. at p. 42. However, during the course of the examination, the exam team did not examine whether the auditor of the firm was a related party to the principal.

. . .

ALLEGATIONS OF CONFLICT OF INTEREST OR IMPROPER INFLUENCE ARISING FROM THE RELATIONSHIP BETWEEN ERIC SWANSON AND SHANA MADOFF (Pages 389-404)

After his sworn testimony on June 19, 2009, Swanson provided supplemental information to the Office of the Inspector General, stating that he had a vague recollection that, “prior to 2005, he and Mr. McCarthy discussed the appropriateness of working on matters involving Madoff in light of their participation in the compliance breakfasts, and that neither he nor McCarthy determined that they should be recused.” Letter dated June 19, 2009 from Michael Wolk, Counsel to Swanson, to IG Kotz, at p. 2, at Exhibit 183. Swanson also stated that he “took comfort in the fact that Lori Richards, Director, Office of Compliance Inspections and Examinations, was aware that the breakfasts were sponsored by the Securities Industry Association (SIA).” Id.

Jensen Comment
This part of the Inspector General's report relies a lot upon Eric Swanson's claims of not being able to remember much about his early-on relationships with Shana Madoff. About this part of the Report I am very suspicious. However, early news accounts are also somewhat inconsistent.

"Ponzi Schemer's Label-Whoring Niece Married SEC Lawyer," by Owen Thomas, December 16, 2008 ---
http://gawker.com/5111942/ponzi-schemers-label+whoring-niece-married-sec-lawyer

Shana Madoff, whose uncle Bernie Madoff stands accused of defrauding investors of $50 billion (later raised to over $65 billion), is the wife of Eric Swanson, a former top lawyer at the Securities and Exchange Commission. A goy, but well-placed!

So well-placed that SEC chairman Christopher Cox is now elaborately raising his eyebrows about the relationship — especially since Shana Madoff worked as the compliance lawyer at Bernard L. Madoff Investment Securities, and met Swanson at a trade association event. (Can you imagine what a swinging scene that was?)

Swanson resigned from the SEC in 2006, and the couple married in 2007. But they clearly dated for a while before that.

Some have suggested that Shana Madoff is a "shopaholic." So not technically true! Why, she married the manager of a men's clothing store in 1997, but that didn't work out. A 2004 New York profile detailed her simultaneous affection for Narciso Rodriguez and aversion to actually going out and shopping. Instead of trying on clothes at the store, she had salespeople messenger the entire collection to her office, and charge her only for what she didn't return. The article mentions her having a boyfriend. Was that Swanson, whom one SEC colleague said conducted a review of Madoff's firm in 1999 and 2004?

A spokesman for Swanson — they get flacks quickly these days, don't they — told ABC News that he "did not participate in any inquiry of Bernard Madoff Securities or its affiliates while involved" (it was later shown that he was veru involved in the Madoff "investigation" while at the SEC) with Shana Madoff. How convenient!

But that could be said about pretty much all of his coworkers. The SEC first fielded complaints about the Madoff firm in 1999, but never opened a formal investigation that would have allowed it to subpoena records. In 2006, Bernard Madoff registered as an investment advisor with the SEC, but the agency never conducted a standard review. Are you beginning to get a picture of why Shana Madoff, who was charged with keeping the company out of trouble with regulators, was so busy she couldn't even go shopping?

Swanson was at the commission in 2003 when the agency was examining the Madoff firm. More importantly, he was also part of the SEC team that was conducting the actual inquiry into the firm . . .  What does all this mean? Nothing, according to Shana Madoff or her husband, whom she married in 2007. A spokesman for Shana Madoff and one for Swanson confirm that both knew each other professionally during the time of the examination.
"Madoff Victims Claim Conflict of Interest at SEC," CNBC, December 15, 2008 ---
http://www.cnbc.com/id/28242487

Madoff Timeline --- http://www.madoff-help.com/wp-content/uploads/2009/06/timeline.pdf

CBS Sixty Minutes on June 14, 2009 ran a rerun that is devastatingly critical of the SEC. If you’ve not seen it, it may still be available for free (for a short time only) at http://www.cbsnews.com/video/watch/?id=5088137n&tag=contentMain;cbsCarousel
The title of the video is “The Man Who Would Be King.”
Also see http://www.fraud-magazine.com/FeatureArticle.aspx

Between 2002 and 2008 Harry Markopolos repeatedly told (with indisputable proof) the Securities and Exchange Commission that Bernie Madoff's investment fund was a fraud. Markopolos was ignored and, as a result, investors lost more and more billions of dollars. Steve Kroft reports.

Markoplos makes the SEC look truly incompetent or outright conspiratorial in fraud.

I'm really surprised that the SEC survived after Chris Cox messed it up so many things so badly.

As Far as Regulations Go

An annual report issued by the Competitive Enterprise Institute (CEI) shows that the U.S. government imposed $1.17 trillion in new regulatory costs in 2008. That almost equals the $1.2 trillion generated by individual income taxes, and amounts to $3,849 for every American citizen. According the 2009 edition of Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State, the government issued 3,830 new rules last year, and The Federal Register, where such rules are listed, ballooned to a record 79,435 pages. “The costs of federal regulations too often exceed the benefits, yet these regulations receive little official scrutiny from Congress,” said CEI Vice President Clyde Wayne Crews, Jr., who wrote the report. “The U.S. economy lost value in 2008 for the first time since 1990,” Crews said. “Meanwhile, our federal government imposed a $1.17 trillion ‘hidden tax’ on Americans beyond the $3 trillion officially budgeted” through the regulations.
 Adam Brickley, "Government Implemented Thousands of New Regulations Costing $1.17 Trillion in 2008," CNS News, June 12, 2009 ---
http://www.cnsnews.com/public/content/article.aspx?RsrcID=49487

Jensen Comment
I’m a long-time believer that industries being regulated end up controlling the regulating agencies. The records of Alan Greenspan (FED) and the SEC from Arthur Levitt to Chris Cox do absolutely nothing to change my belief ---
http://faculty.trinity.edu/rjensen/FraudRotten.htm

How do industries leverage the regulatory agencies?
The primary control mechanism is to have high paying jobs waiting in industry for regulators who play ball while they are still employed by the government. It happens time and time again in the FPC, EPA, FDA, FAA, FTC, SEC, etc. Because so many people work for the FBI and IRS, it's a little harder for industry to manage those bureaucrats. Also the FBI and the IRS tend to focus on the worst of the worst offenders whereas other agencies often deal with top management of the largest companies in America.

Why Obama's Big Spending, Big Taxing Regime Will Cripple the U.S. Economy
Before any article on savings and investment can really make sense, it must first define what savings and investment really mean. Saving is the process of transforming present goods into future goods. Present goods are consumption goods and future goods are capital goods. When we save, we transfer purchasing power from consumption to the production of capital goods, many of which will then be used to produce more capital goods. (This is why growth is sometimes called forgone consumption.) Investment in more capital (the material means of production) makes for increased future consumption, i.e., higher living standards. It needs little imagination to realise that taxing savings amounts to taxing future living standards. What needs to be remembered is that when defined in real terms, investment and savings are (a) always equal and (b) saving is clearly the only means by which resources can be directed from consumption to investment. To put it another way: The function of savings is to redirect resources from the production of consumption goods to the production of capital goods.
"Why Obama's Big Spending, Big Taxing Regime Will Cripple the U.S. Economy," Seeking Alpha, March 23, 2009 ---
http://seekingalpha.com/article/127312-why-obama-s-big-spending-big-taxing-regime-will-cripple-the-u-s-economy

Not a single county in the entire state (California) voted for the tax-and-spend propositions on yesterday's referendum ballot, not even the peculiar folks who live in Nancy Pelosi's far-left 8th Congressional District who persist in sending the Wicked Witch of the West to the Nation's Capitol to wage war on the CIA and the nation's taxpayers. The only measure voters did approve was one to freeze salaries of senior public officials during budget emergencies.
Michael Reagan, "Terminating the Terminator," Townhall, May 20, 2009 ---
http://townhall.com/columnists/MichaelReagan/2009/05/20/terminating_the_terminator
Jensen Comment
What's worse in many respects is that California voters sent a message to President Obama that taxing the middle class (the only way to raise serious deficit-cutting revenue) to halt deficit-induced halt hyperinflation of the U.S. dollar will not be supported by voters.
See http://townhall.com/columnists/MattTowery/2009/05/21/california,_here_we_come

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.
Alexander Tyler. 1787 - Tyler was a Scottish history professor that had this to say about 2000 years after "The Fall of the Athenian Republic" and about the time our original 13 states adopted their new constitution.
As quoted at http://www.babylontoday.com/national_debt_clock.htm (where the debt clock in real time is a few months behind)
The National Debt Amount This Instant (Refresh your browser for updates by the second) --- http://www.brillig.com/debt_clock/

America, what is happening to you?
“One thing seems probable to me,” said Peer Steinbrück, the German finance minister, in September 2008....“the United States will lose its status as the superpower of the global financial system.” You don’t have to strain too hard to see the financial crisis as the death knell for a debt-ridden, overconsuming, and underproducing American empire . . .
Richard Florida, "How the Crash Will Reshape America," The Atlantic, March 2009 ---
http://www.theatlantic.com/doc/200903/meltdown-geography

The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.
Winston Churchill
(Good thing Obama sent Churchill's bust back to the U.K. from the Oval Office and replaced it with a bust of Lincoln who wrote that Government should print all the money it needs without borrowing)

2001 Economic Crisis Prediction of George W. Bush (video) --- http://www.youtube.com/watch?v=cMnSp4qEXNM&NR=1

The government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the government and the buying power of consumers. By adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.
Abraham Lincoln (I wonder why this just does not work in Zimbabwe where Robert Mugabe adopted Lincoln's fiscal policy?)

The Abraham Lincoln School of Finance in Action
Zimbabwe's central bank will introduce a 100 trillion Zimbabwe dollar banknote, worth about $33 on the black market, to try to ease desperate cash shortages, state-run media said on Friday.
 KyivPost, January 16, 2009 --- http://www.kyivpost.com/world/33522

Who stands between the Obama and the Abraham Lincoln School of Finance?
If China won't lend trillions more to the U.S., Obama may have to print those trillions of dollars:  Watch inflation/trade deficits soar like a NASA rocket
The Chinese prime minister, Wen Jiabao, expressed unusually blunt concern on Friday about the safety of China’s $1 trillion investment in American government debt, the world’s largest such holding, and urged the Obama administration to provide assurances that the securities would maintain their value in the face of a global financial crisis.
Michael Wines and Keith Bradsher, "China’s Leader Says He Is ‘Worried’ Over U.S. Treasuries," The New York Times, March 13, 2009 --- http://www.nytimes.com/2009/03/14/world/asia/14china.html?_r=1&hp

America, what is happening to you?
“One thing seems probable to me,” said Peer Steinbrück, the German finance minister, in September 2008....“the United States will lose its status as the superpower of the global financial system.” You don’t have to strain too hard to see the financial crisis as the death knell for a debt-ridden, overconsuming, and underproducing American empire . . .
Richard Florida, "How the Crash Will Reshape America," The Atlantic, March 2009 --- http://www.theatlantic.com/doc/200903/meltdown-geography

And while you are at it, you might read another book published the same year as Hayek's book was: The Great Transformation by Karl Polanyi. It is Polanyi who is truly in the tradition of Adam Smith in that he incorporates ethics and sociological considerations into his economics. Smith was a moral philosopher before he was an economist. Hayek was used as a spokesperson by the ultra-conservative anti-Keynesians of the time. Life magazine even put out a cartoon version of Hayek's book. Academics might want to get a fuller picture and read both Polanyi and Hayek to understand two major currents of thought at the time.
Sue Ravenscroft, Iowa State University

The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
David M. Walker, Former Chief Accountant of the United States --- http://www.financialsense.com/editorials/quinn/2009/0218.html
Also see his dire warnings on CBS Sixty Minutes on the unbooked national debt for entitlements (over five times the booked national debt and soaring with new entitlements) --- http://faculty.trinity.edu/rjensen/entitlements.htm

South Park's animated cartoon solutions to the economic crisis Part 1 --- http://www.youtube.com/watch?v=Qx_sH_G38oY
South Park's animated cartoon solutions to the economic crisis Part 2 --- http://www.youtube.com/watch?v=KUIDG0n74J0
South Park's animated cartoon solutions to the economic crisis Part 3 --- http://www.youtube.com/watch?v=UbFcYuJ_H8c

Question
What caused the credit crisis and why can't credit be unlocked after throwing over $1 trillion at the big banks?
Great answers on Video --- this is a must-see video for you, your family, and your students who want to understand these banking failures
The Short and Simple Video About What Caused the Credit Crisis --- http://vimeo.com/3261363
Also at http://www.youtube.com/watch?v=Q0zEXdDO5JU
Ed Scribner forwarded the above links

The 2008-2009 Economic Downfall
Great Graphic:  Infographic: Anatomy of the Crash
http://www.simoleonsense.com/infographic-anatomy-of-the-crash/
Bob Jensen's threads on the downfall --- http://faculty.trinity.edu/rjensen/2008Bailout.htm 

Questions
Although all 50 states are in deep financial troubles, what state is in the worst shape at the moment and is unable to pay its bills?
Hint: The state in deepest trouble is not California, although California is in dire straights!

How did accountants hide the pending disasters?

Watch the Video
This module on 60 Minutes on December 19 was one of the most worrisome episodes I've ever watched
It appears that a huge number of cities and towns and some states will default on bonds within12 months from now
"State Budgets: The Day of Reckoning Steve Kroft Reports On The Growing Financial Woes States Are Facing," CBS Sixty Minutes, December 19, 2010 ---
http://www.cbsnews.com/stories/2010/12/19/60minutes/main7166220.shtml

The problem with that, according to Wall Street analyst Meredith Whitney, is that no one really knows how deep the holes are. She and her staff spent two years and thousands of man hours trying to analyze the financial condition of the 15 largest states. She wanted to find out if they would be able to pay back the money they've borrowed and what kind of risk they pose to the $3 trillion municipal bond market, where state and local governments go to finance their schools, highways, and other projects.

"How accurate is the financial information that's public on the states? And municipalities," Kroft asked.

"The lack of transparency with the state disclosure is the worst I have ever seen," Whitney said. "Ultimately we have to use what's publicly available data and a lot of it is as old as June 2008. So that's before the financial collapse in the fall of 2008."

Whitney believes the states will find a way to honor their debts, but she's afraid some local governments which depend on their state for a third of their revenues will get squeezed as the states are forced to tighten their belts. She's convinced that some cities and counties will be unable to meet their obligations to municipal bond holders who financed their debt. Earlier this year, the state of Pennsylvania had to rescue the city of Harrisburg, its capital, from defaulting on hundreds of millions of dollars in debt for an incinerator project.

"There's not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney predicted.

Asked how many is a "spate," Whitney said, "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."

Municipal bonds have long been considered to be among the safest investments, bought by small investors saving for retirement, and held in huge numbers by big banks. Even a few defaults could affect the entire market. Right now the big bond rating agencies like Standard & Poor's and Moody's, who got everything wrong in the housing collapse, say there's no cause for concern, but Meredith Whitney doesn't believe it.

"When individual investors look to people that are supposed to know better, they're patted on the head and told, 'It's not something you need to worry about.' It'll be something to worry about within the next 12 months," she said.

No one is talking about it now, but the big test will come this spring. That's when $160 billion in federal stimulus money, that has helped states and local governments limp through the great recession, will run out.

The states are going to need some more cash and will almost certainly ask for another bailout. Only this time there are no guarantees that Washington will ride to the rescue.

Continued in article

The Government' Recipe for Off-Budget Debt
"US Government 'hiding true amount of debt'," by Gregory Bresiger, news,com ---
http://www.news.com.au/business/breaking-news/us-government-hiding-true-amount-of-debt/story-e6frfkur-1225926567256#ixzz106MjZzOz 

Bob Jensen's threads on the economic crisis ---
http://faculty.trinity.edu/rjensen/2008Bailout.htm

The Sad State of Government Accounting and Accountability ---
http://faculty.trinity.edu/rjensen/theory02.htm#GovernmentalAccounting

Question
Who more than anybody else is at fault for wiping out shareholders in AIG, Bear Stearns, Merrill Lynch, CitiBank, Bank of America, Washington Mutual, Fannie Mae, Freddie Mack, etc.
Answers
I primarily blame the CPA auditors, internal auditors, and credit rating agencies that failed to disclose the off-balance-sheet risks that fee-loving bankers had created. The auditors and credit rating agencies have a fiduciary and professional responsibility to disclose to investors the extent of looming uncollectable investments. For many years auditors have been knowingly understating banks' bad debt risks and failing to warn investors about such banking risks. I also think auditors, along with credit rating agencies, knew full well about the financial risks of their huge clients but were afraid to jeopardize their fees by blowing whistles.

Question
What more than anything else saved United Airlines and who is primarily at fault for wiping out the shareholders of United Airlines in 2002?
Answer
In December 2002 United Airlines filed Chapter 11 Bankruptcy. In order to get United's airplanes back in the air, the single most important saving device was to have Uncle Sam's taxpayers take over the lifetime retirement obligations to be paid to United's retired pilots, flight attendants, mechanics, passenger agents, and ground crews. This saved United Airlines with the help of some major wage concessions of existing employees who decided that keeping their jobs was the most important thing to them.

Once again the auditors are primarily at fault for not warning investors soon enough that United Airlines was not a viable going concern and would not be able to meet its unbooked liabilities called Off-Balance-Sheet-Financing (OBSF) by accountants. If investors had been warned years earlier, the stock market would've forced United Airlines to become more serious about pricing and funding of retirement obligations. But since investors were not forewarned by the auditors and credit rating agencies, the equity holders (many of them United Airlines employees) got wiped out by the 2002 declaration of bankruptcy.

Question
What more than anything else will save General Motors in 2009 and who is primarily at fault for wiping out the shareholders of General Motors?

In 2009 or 2010 filed General Motors will most likely declare Chapter 11 Bankruptcy. It will be Deja Vu United Airlines. In order to get GM's vehicles back on the road, the single most important saving device was to have Uncle Sam's taxpayers take over the retirement obligations (pensions and health care obligations) to be paid to GM's retired management and factory workers and GMAC retired employees as well. This will save GM with the help of some major wage concessions of existing GM employees who eventually decide that keeping their jobs was the most important thing to them.

Once again the auditors are primarily at fault for not warning investors soon enough that General Motors was not a viable going concern and would not be able to meet its unbooked liabilities called Off-Balance-Sheet-Financing (OBSF). If investors had been warned years earlier, the stock market would've forced General Motors to become more serious about pricing and funding of retirement obligations. But since investors were not forewarned by the auditors and credit rating agencies, the equity holders (many of them being huge investment funds) got wiped out by the forthcoming 2009 declaration of bankruptcy.

In fairness, the accountants did give more warning about OBSF unfunded retirement obligations in GM's case relative the United Airlines. Accountants did disclose some years ago that about $1,500 of each new vehicle sold went toward current funding of for retirement and health care of GM's retired workers. It's been widely known for some time that GM's retirement obligations were badly underfunded. What made it especially difficult for GM is that it's major foreign competitors were making longer-lasting vehicles that beat GM prices. The reason Toyota, Subaru, Nissan, etc. could undercut GM prices is that these foreign automakers did not have the serious unbooked OBSF obligations that GM carried on its back.

Question
What are the two secret numbers that you will never hear mentioned by Uncle Sam's current leaders like President Obama, House Speaker Pelosi, and Senate Leader Reid?
Answer
They will never mention the extent of Uncle Sam's unbooked OBSF liabilities. Accountants have no accurate estimates of these liabilities, but the former Chief Accountant of the United States, David Walker, estimates that these are about $60 trillion at the moment. They may well be $100 trillion in four years if Congress is successful in legislating tens of trillions of dollars in new entitlements for education, energy, welfare, and health care.

Uncle Sam's leaders are now focusing our attention on problems with the annual spending deficit (which may well approach $ trillion at the end of 2009) and the booked National Debt (which may well approach $12 trillion by the end of 2009). But these booked items will not break the back of Uncle Sam. What will break the back of Uncle Sam is what broke the back of United Airlines and General Motors. It's the unbooked OBSF debt which the companies, auditors, and credit rating agencies tried to keep secret.

Uncle Sam saved United Airlines by taking over United's OBSF retirement debt. Uncle Sam will probably do the same for GM, Ford, and Chrysler unfunded OBSF debt. But who will save Uncle Sam from its $60-$100 trillion of unfunded and unbooked OBSF debt?
Answer
Only the Abraham Lincoln School of Finance (see Lincoln’s quote below) will save Uncle Sam from its unsustainable OBSF

You, your family, and your students may learn a great deal from the links to David Walker's warning videos and the most worrisome CBS Sixty Minutes module ever produced --- http://faculty.trinity.edu/rjensen/entitlements.htm

The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
David M. Walker, Former Chief Accountant of the United States --- http://www.financialsense.com/editorials/quinn/2009/0218.html
Also see his dire warnings on CBS Sixty Minutes on the unbooked national debt for entitlements (over five times the booked national debt and soaring with new entitlements) --- http://faculty.trinity.edu/rjensen/entitlements.htm

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.
Alexander Tyler. 1787 - Tyler was a Scottish history professor that had this to say about 2000 years after "The Fall of the Athenian Republic" and about the time our original 13 states adopted their new constitution.
As quoted at http://www.babylontoday.com/national_debt_clock.htm (where the debt clock in real time is a few months behind)
The National Debt Amount This Instant (Refresh your browser for updates by the second) --- http://www.brillig.com/debt_clock/

America, what is happening to you?
“One thing seems probable to me,” said Peer Steinbrück, the German finance minister, in September 2008....“the United States will lose its status as the superpower of the global financial system.” You don’t have to strain too hard to see the financial crisis as the death knell for a debt-ridden, overconsuming, and underproducing American empire . . .
Richard Florida, "How the Crash Will Reshape America," The Atlantic, March 2009 --- http://www.theatlantic.com/doc/200903/meltdown-geography

From the Abraham Lincoln School of Finance
The government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the government and the buying power of consumers. By adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.
Abraham Lincoln (I wonder why this just does not work in Zimbabwe where Robert Mugabe adopted Lincoln's fiscal policy?)

 For the sake of future America, we’d better hope that Lincoln was correct. But Lincoln’s fiscal policy sure did not work for Zimbabwe.

Facing mounting criticism of a spending package packed with billions of dollars in earmarks, the Obama administration made a vow Sunday: This president will bring a halt to pork-laden bills.
"Obama budget director: We'll cut pork after '09 spending bill," CNN, March 8, 2009 --- http://www.cnn.com/2009/POLITICS/03/08/obama.earmarks/index.html
Jensen Comment
If you believe this, I have a great deal on ocean front property in Arizona just for you. I'll also let you have the Brooklyn Bridge for $5,000.

Fannie Mae and Freddie Mac, the two troubled companies at the heart of the nation’s mortgage market, are set to pay their employees “retention bonuses” totaling $210 million, despite calls from lawmakers to cancel the payments. The bonuses, which were made public on Friday, were defended by the companies’ federal regulator, James B. Lockhart, who said he intended to let them proceed , , , Mr. Lockhart declined to discuss his conversations with the White House, which declined to comment on Friday. “This is a de facto White House endorsement of these payments, which is a little odd considering that everyone spent days talking about how they were shocked by the bonuses given to A.I.G.,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a consulting firm in Washington and a longtime observer of the companies. “It’s also a tempest in a teapot. We should worry less about $210 million in bonuses, and more about the fact that these companies are sitting atop $5 trillion of risks, and if they stumble, the American economy could disappear.”
Charles Duhigg, "Big Bonuses at Fannie and Freddie Draw Fire," The New York Times, April 3, 2009 --- http://www.nytimes.com/2009/04/04/business/04bonus.html?_r=1

New restrictions proposed for ratings agencies -- including Moody's, Fitch and Standard & Poor's -- could have unintended consequences, warn experts in the United States. Europe, however, has clamped down on the agencies, whose stamps of approval on a broad spectrum of subprime mortgage securities helped pave the way to the credit crash of 2007 and the continuing global recession.
"Reforming the Ratings Agencies: Will the U.S. Follow Europe's Tougher Rules?" Knowledge@Wharton , May 27, 2009 --- http://knowledge.wharton.upenn.edu/article.cfm?articleid=2242

Simoleon Sense Reviews Janet Tavakoli’s Dear Mr. Buffett ---
http://www.simoleonsense.com/simoleon-sense-reviews-janet-tavakolis-dear-mr-buffett/

What’s The Book (Dear Mr. Buffett) About

Dear Mr. Buffett, chronicles the agency problems, poor regulations, and participants which led to the current financial crisis. Janet accomplishes this herculean task by capitalizing on her experiences with derivatives, Wall St, and her relationship with Warren Buffett. One wonders how she managed to pack so much material in such few pages!

Unlike many books which only analyze past events, Dear Mr. Buffett, offers proactive advice for improving financial markets. Janet is clearly very concerned about protecting individual rights, promoting honesty, and enhancing financial integrity. This is exactly the kind of character we should require of our financial leaders.

Business week once called Janet the Cassandra of Credit Derivatives. Without a doubt Janet should have been listened to. I’m confident that from now on she will be.

Closing thoughts

Rather than a complicated book on financial esoterica, Janet has created a simple guide to understanding the current crisis. This book is a must read for all students of finance, economics, and business. If you haven’t read this book, please do so.

Warning –This book is likely to infuriate you, and that’s a good thing! Janet provides indicting evidence and citizens may be tempted to initiate vigilante like witch trials. Please consult with your doctor before taking this financial medication.

Continued in article

September 1, 2009 reply from Rick Lillie [rlillie@CSUSB.EDU]

Hi Bob,

I am reading Dear Mr. Buffett, What an Investor Learns 1,269 Miles from Wall Street, by Janet Tavakoli. I am just about finished with the book. I am thinking about giving a copy of the book to students who perform well in my upper-level financial reporting classes.

I agree with the reviewer’s comments about Tavakoli’s book. Her explanations are clear and concise and do not require expertise in finance or financial derivatives in order to understand what she (or Warren Buffet) says. She explains the underlying problems of the financial meltdown with ease. Tavakoli does not blow you over with “finance BS.” She does in print what Steve Kroft does in the 60 Minutes story.

Tavakoli delivers a unique perspective throughout the book. She looks through the eyes of Warren Buffett and explains issues as Buffett sees them, while peppering the discussion with her experience and perspective.

The reviewer is correct. Tavakoli lets the finance world, along with accountants, attorneys, bankers, Congress, and regulators, have it with both barrels!

Tavakoli’s book is the highlight of my summer reading.

Best wishes,

Rick Lillie

Rick Lillie, MAS, Ed.D., CPA Assistant Professor of Accounting Coordinator - Master of Science in Accountancy (MSA) Program Department of Accounting and Finance College of Business and Public Administration CSU San Bernardino 5500 University Pkwy, JB-547 San Bernardino, CA. 92407-2397

Telephone Numbers: San Bernardino Campus: (909) 537-5726 Palm Desert Campus: (760) 341-2883, Ext. 78158

For technical details see the following book:
Structured Finance and Collateralized Debt Obligations: New Developments in Cash and Synthetic Securitization (Wiley Finance) by Janet M. Tavakoli (2008)

Financial WMDs (Credit Derivatives) on Sixty Minutes (CBS) on August 30, 2009 ---
http://www.cbsnews.com/video/watch/?id=5274961n&tag=contentBody;housing
The free download will only be available for a short while. I downloaded this video (a little over 5 Mbs) using a free updated version of RealMedia --- Click Here
http://www.real.com/dmm/superpass?pcode=cj&ocode=cj&cpath=aff&rsrc=1275588_10303897_SPLP

Steve Kroft examines the complicated financial instruments known as credit default swaps and the central role they are playing in the unfolding economic crisis. The interview features my hero Frank Partnoy. I don't know of anybody who knows derivative securities contracts and frauds better than Frank Partnoy, who once sold these derivatives in bucket shops. You can find links to Partnoy's books and many, many quotations at http://faculty.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

For years I've used the term "bucket shop" in financial securities marketing without realizing that the first bucket shops in the early 20th Century were bought and sold only gambles on stock pricing moves, not the selling of any financial securities. The analogy of a bucket shop would be a room full of bookies selling bets on NFL playoff games.
See "Bucket Shop" at http://en.wikipedia.org/wiki/Bucket_shop_(stock_market)

I was not aware how fraudulent the credit derivatives markets had become. I always viewed credit derivatives as an unregulated insurance market for credit protection. But in 2007 and 2008 this market turned into a betting operation more like a rolling crap game on Wall Street.

Bob Jensen's Rotten to the Core threads are at http://faculty.trinity.edu/rjensen/FraudRotten.htm

Bob Jensen's threads on the current economic crisis are at http://faculty.trinity.edu/rjensen/2008Bailout.htm
For credit derivative problems see http://faculty.trinity.edu/rjensen/2008Bailout.htm#Bailout

Also see "Credit Derivatives" under the C-Terms at http://faculty.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms

Outrageous Bonus Frenzy

AIG now says it paid out more than $454 million in bonuses to its employees for work performed in 2008. That is nearly four times more than the company revealed in late March when asked by POLITICO to detail its total bonus payments. At that time, AIG spokesman Nick Ashooh said the firm paid about $120 million in 2008 bonuses to a pool of more than 6,000 employees. The figure Ashooh offered was, in turn, substantially higher than company CEO Edward Liddy claimed days earlier in testimony before a House Financial Services Subcommittee. Asked how much AIG had paid in 2008 bonuses, Liddy responded: “I think it might have been in the range of $9 million.”
Emon Javers, "AIG bonuses four times higher than reported," Politico, May 5, 2009 --- http://www.politico.com/news/stories/0509/22134.html

"Let's Move Their Cheese:  We can get better bank management for a fraction of the cost," The Wall Street Journal on May 6,  2009 --- http://online.wsj.com/article/SB124157594861790347.html

Incentives work, all right. Just look at the way our bankers come back to bonuses, finding in every occasion a good opportunity to cut themselves a slice of largess. Their determination is unrelenting, monomaniacal. It's like Republicans returning to tax cuts, the universal solution to every problem.

Some institutions, we read, are struggling to free themselves from the TARP, because of its exuberance-chilling compensation limits. Others have decimated their workforces, apparently so they might continue to shower money on the favored ones. Still other institutions have signaled that they would rather borrow at higher rates of interest than accept the compensation limits that come with cheaper federal loans. And certain banks are on track to return to pre-recession compensation levels this year, according to a story last week in the New York Times. Goldman Sachs, for example, set aside $4.7 billion for compensation in the first quarter alone.

Another way incentives work is this: They have kept the debate over incentives from getting off the dime for years. There is no amount of shame that will deter the bonus class from pressing their demand, no scandal that will put it off limits, no public outrage over AIG or Enron or really expensive Merrill Lynch trash cans that will silence the managers' monotonous warble: "Attract and retain top talent!"

And there is no possible objection to inflated compensation you can make that will not be instantly maligned as senseless populism.

In truth, however, the verdict has been in for years. Pay for performance systems, at least as they exist in many places, are a recipe for disaster.

What they have "incentivized" executives to do, in countless cases, is not to perform, but to game the system, to smooth the numbers, to take insane risks with other people's money, to do whatever had to be done to ring the bell and send the dollars coursing their way into the designated bank account.

It may well be true that those in our bonus class are geniuses, but in far too many cases their fantastic brain power is focused not on serving shareholders or guiding our economy but simply on getting that bonus.

One might say that events of the last year had proved this fairly conclusively.

Or one could quote the immortal words of Franklin Raines, the onetime CEO of Fannie Mae, as they were recorded by Business Week in 2003: "My experience is where there is a one-to-one relation between if I do X, money will hit my pocket, you tend to see people doing X a lot. You've got to be very careful about that. Don't just say: 'If you hit this revenue number, your bonus is going to be this.' It sets up an incentive that's overwhelming. You wave enough money in front of people, and good people will do bad things."

Will they ever. They might, for example, pull an accounting fraud of the kind Fannie Mae itself was accused of committing in 2004, in which earnings were allegedly manipulated to, ahem, hit certain revenue numbers and make the bonuses go bang.

They might rig the game to take the credit -- and reap the rewards -- when good luck befalls an entire industry. If they're bankers, they might even try to claim that their firm's recovery, made possible by TARP money and government guarantees, was actually a fruit of their personal ingenuity. Bring on the billions!

Of course, they will also threaten to leave if they don't get exactly what they want. Take last week's news story about the supersuccessful energy trading unit of Citibank, whose star trader scored $125 million in 2005, owns a castle in Germany, and collects Julian Schnabel paintings. This merry band of traders is apparently thinking about a white-collar walkout should the government refuse to lift its compensation restrictions.

At first one feels pity for Citi and its resident geniuses, brought to these straits by the interfering hand of government. But then it dawns on you: Should a company receiving billions of public dollars really be gambling on speculative energy trades? After all, the bank's ordinary, everyday deposits would have to be made good by you and me through the FDIC should one of their bright traders pull a Nick Leeson someday.

Besides, why is Citi so anxious to give in to these guys? It can't be that hard to "retain top talent" when New York is awash with unemployed bankers and traders who are no doubt anxious for a chance to prove their own brilliance.

Here's a Wall Street solution to Wall Street's problems: Let's offshore trading operations to lands where ethics are more highly esteemed -- Norway, for instance. And while we're at it, let's replace our gold-plated, Lear-jetting American CEOs with thrifty Europeans, who may not write management books but who will do the work better, and for a fraction of the cost.

Bob Jensen's threads on outrageous compensation are at
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

"The Bailout of AIG: Mission Accomplished?" by Francine McKenna, re:TheAuditors, September 17, 2012 ---
http://retheauditors.com/2012/09/17/the-bailout-of-aig-mission-accomplished/

On Friday September 14, the US government announced the completion of the sale of AIG stock taxpayers bought during the financial crisis bailout of the insurer. The government took in $20.7 billion for the sale and is no longer the majority owner of the company. At the peak of the crisis, taxpayers owned almost 80% of AIG.

Andrew Ross Sorkin, New York Times reporter, CNBC host, and author of “Too Big To Fail” used his DealBook column to ask former Special Inspector General of TARP Neil Barofsky if he was satisfied, finally. Sorkin says the US Treasury made a profit on the AIG transaction.

As we approach the four-year anniversary of the collapse of Lehman Brothers and the rescue of A.I.G. next week, sadly, much of the public — and people like Mr. Barofsky, as well-intentioned as he is — are still criticizing and debating the merits of the bailout. It’s almost become a cottage industry.

In his book, Mr. Barofsky wrote, “Treasury’s desperate attempt to bail out Wall Street was setting the country up for potentially catastrophic losses.”

As distasteful as the rescue effort was, it should be clear by now that without it, we faced an economic Armageddon. And the results thus far of bailing out the big banks, and A.I.G., indicate a profit.

Treasury never uses the term “profit” to describe what taxpayers would receive. The GAO did in a report in May when it estimated the proceeds that could be realized at various sale prices.

I wrote in American Banker about Sorkin’s claim that the bank bailouts prevented “financial system Armageddon” and his debate with Barofsky. I think “profit” is not only the wrong term but an answer to the wrong question.

It can never be proven that the crisis bailouts saved us from financial Armageddon. That’s the logical fallacy of asserting a claim with no way to disprove the opposite, so saying we made a profit on the deal is the next best thing. The New York Times’ Andrew Ross Sorkin claims, if you combine Treasury actions and “positive returns” on Federal Reserve activities, the Treasury is now “on a path to actually turn a profit.” That’s where the debate starts.

Former Special Inspector General for the Troubled Asset Relief Program Neil Barofsky says, “Not so fast.” I agree. If your intention is to try to prove or disprove the government PR claims that the taxpayer has made an accounting profit on any of the bailouts, or even broken even, you must remember this: That’s not why the government supposedly did what they did. And on the two counts of failing to unfreeze credit and failing to help homeowners – how the bailouts were justified to Congress – the government is guilty.

Treasury never uses the term “profit,” even in press releases. The term it does use, “positive return,” is a non-Generally Accepted Accounting Principles metric. Treasury has sunk to the level of a social commerce IPO like Groupon, whose infamous Consolidated Segment Operating Income (CSOI) – which was slammed by the Securities and Exchange Commission – glossed over losses to convince investors there was a gain instead.

“Yves Smith” at Naked Capitalism also points out that AIG enjoyed a tax benefit that negates Treasury”s claim. Who reported that deal? Andrew Ross Sorkin in February.

In a February article, “Bending the Tax Code, and Lifting A.I.G.’s Profit,” Sorkin described how AIG was allowed to retain $26.2 billion of net operating losses that should have been wiped out as a part of the rescue of the company as well as an additional $9 billion of “unrealized loss on investments.” That increased AIG’s fourth quarter and hence fiscal year earnings by a remarkable $17.7 billion, which dwarfs the mere $1.6 billion its operations produced that quarter. And the article includes this juicy bit:

Analysts at Bank of America and JPMorgan Chase last year estimated that the tax benefits from the losses propped up A.I.G. stock by $5 to $6 a share. Its shares closed at $28.66 on Monday, just shy of the $29 mark that the government says it needs to sell its shares to break even.

General Motors, another bailout “success story” – because saving GM supposedly averted jobs and economic disaster in Detroit – also benefited from the IRS rule change regarding retention of net operating loss carry forwards and “fresh start” accounting.  I wrote about that in Forbes in November of 2010.

Reporting profits means new GM doesn’t lose the valuable deferred tax assets they carried over from old GM, thanks to a last minute fix from the US Treasury in September.  The accountants can pull dollars from a cookie jar valuation allowance to prop up earnings when needed.

The IPO would probably have never passed even a minimal “smell test” by the SEC’s Division of Corporate Finance if  ”fresh start accounting” hadn’t put millions in goodwill on their balance sheet. That gave GM a positive balance in shareholder’s equity.  In a perverse example of accounting chicanery, the better GM does the less valuable that asset is.

Read the rest of my column about the AIG share sale at American Banker.

Iowa Sen. Charles Grassley suggested that AIG executives should accept responsibility for the collapse of the insurance giant by resigning or killing themselves. The Republican lawmaker's harsh comments came during an interview Monday with Cedar Rapids, Iowa, radio station WMT . . . Sen. Charles Grassley wants AIG executives to apologize for the collapse of the insurance giant — but said Tuesday that "obviously" he didn't really mean that they should kill themselves. The Iowa Republican raised eyebrows with his comments Monday that the executives — under fire for passing out big bonuses even as they were taking a taxpayer bailout — perhaps should "resign or go commit suicide." But he backtracked Tuesday morning in a conference call with reporters. He said he would like executives of failed businesses to make a more formal public apology, as business leaders have done in Japan.
Noel Duara, "Grassley: AIG execs should repent, not kill selves," Yahoo News, March 17, 2009 --- http://news.yahoo.com/s/ap/20090317/ap_on_re_us/grassley_aig

"AIG, Surprise:  Moneymaker Its profits for taxpayers cast doubt on the notion that it behaved recklessly before the panic struck," by Holman W. Jenkins, Jr., The Wall Street Journal, August 31, 2012 ---
http://professional.wsj.com/article/SB10000872396390443618604577623373568029572.html?mg=reno64-wsj#mod=djemEditorialPage_t

AIG's bailout is getting the revisionist treatment. The rescue hasn't been the dismal federal experience that, say, GM's has been. Taxpayers are showing a $5 billion profit on their 53% stake in the insurer, as of yesterday's closing price.

What's more, in the last few days, the New York Fed liquidated the last of the complex mortgage derivatives it acquired from AIG's counterparties as part of the bailout. Such transactions and related fees have netted the government about $18 billion.

This is good news but requires some revising of theories of the crisis itself. The "toxic" and "shaky" housing derivatives that got AIG in trouble turn out, even amid the worst housing slump in 70 years, not to have been the crud many assumed they were.

A lot of renditions skip over this part, dismissing AIG's pre-crash mortgage activities as "reckless," thereby making a mystery of how the refinancing of AIG could be paying off so handsomely for taxpayers. Taxpayers are making out because they bought valuable assets on the cheap.

This is as it should be. But let's remember how AIG got in trouble. It wrote insurance to guarantee the very senior portions of securities derived from underlying mortgages—that is, the portions already designed to withstand a sizeable increase in defaults.

AIG failed not because of the failure of these securities to keep paying as expected, but because of its own promise to fork up cash collateral if the market price of these securities fell or if the rating agencies downgraded what they had previously rated Triple-A.

In the systemic panic that climaxed with the Lehman failure, both things happened in spades, even as AIG itself no longer could raise the cash to make good on its commitments. Some now claim AIG could have waved off the collateral calls, citing exceptional circumstances. But even that wouldn't have changed the fact that, because of the panic, AIG itself was no longer trusted despite being chock-full of good assets.

We'll never know if the company might have finessed its way out of its jam (quite possibly its counterparties, including Goldman Sachs, would have acted to keep AIG afloat if the alternative of a government bailout weren't available). Instead AIG turned to taxpayers to finance the collateral calls it couldn't finance itself, and taxpayers took advantage.

For all the desire to name villains and blame bad incentives for the financial crisis, notice that panic itself was the key player. Panic is a variable about which it's disconcertingly hard for government to do anything useful in advance.

Panic is systemic—an uncertainty or loss of trust in how the system will behave. Here's a simple but relevant example: What happens to the market value of mortgages if investors lose confidence in the legal system to permit them to foreclose on borrowers who stop paying?

We don't need to retread the history. Letting Lehman fail was a disaster because the rescue of Bear Stearns had conditioned the market to believe Washington wouldn't permit major institutional failures. The mixed signals sent about Fannie and Freddie only undermined the effort to recruit fresh capital to other financial institutions distressed by uncertainty over the value of mortgage securities.

AIG is the most dramatic example of the general case. A lot of things become good or bad collateral depending on what the government is expected to do. It's not too strong to say Washington had to bail out AIG because the market was uncertain whether Washington would bail out AIG. (An additional complexity we won't go into is how the Fed's QE exercises subsequently boosted the bailout's profits.)

Let us be careful here: A host of private and public behaviors contributed to the housing bubble and meltdown, whose losses were destined to be felt widely. Our system has no problem accommodating the failure of individual institutions, even very big ones. But systemic panic always comes to the door of government. It can't be otherwise.

Governments can try to duck this burden, as European governments have done, only by renouncing the ability to print money and so soiling their own credit that substituting their own credit for the financial system's is no longer an option. Make no mistake: This would be a real cure for too-big-to-fail if the Europeans were inclined to let the chips fall. They're not. Instead the self-disabling governments want Germany to supply the bailout.

Continued in article

 

Outrageous Bonus Frenzy

AIG now says it paid out more than $454 million in bonuses to its employees for work performed in 2008. That is nearly four times more than the company revealed in late March when asked by POLITICO to detail its total bonus payments. At that time, AIG spokesman Nick Ashooh said the firm paid about $120 million in 2008 bonuses to a pool of more than 6,000 employees. The figure Ashooh offered was, in turn, substantially higher than company CEO Edward Liddy claimed days earlier in testimony before a House Financial Services Subcommittee. Asked how much AIG had paid in 2008 bonuses, Liddy responded: “I think it might have been in the range of $9 million.”
Emon Javers, "AIG bonuses four times higher than reported," Politico, May 5, 2009 --- http://www.politico.com/news/stories/0509/22134.html

Bob Jensen's threads on AIG are at
http://faculty.trinity.edu/rjensen/2008Bailout.htm
Search for the term "AIG"

Professor Ketz Asserts Other Comprehensive Income (OCI from FAS 130)
may be More Important to Study Than Reported Income

"Citigroup Remains in Critical Condition," by: J. Edward Ketz , SmartPros, May 2009 ---
http://accounting.smartpros.com/x66534.xml
Note that all Citigroup dollar amounts are in millions of dollars such that  $(27,684) is really a $27,684,000,000 billion loss.

The stress tests conducted by the Fed are a farce inasmuch as the stress isn't too strenuous. That the Fed ascertained additional capital requirements for several banks merely points out the obvious - the banking sector remains in serious trouble.

That the financial industry was and remains in trouble is not revelatory to those who pay attention to fair value measurements. Take Citigroup for instance. This firm, once a giant among banks, now gasps for its existence.

Citi’s reported net income was $(27,684) for 2008 (all accounting numbers in millions of dollars). While this is a smelly number, the odor grows worse when one adjusts it for various items that bypass the income statement.

Ever since the FASB invented the comprehensive income statement in a political move to get business enterprises to do some accounting for items they didn’t want to disclose, I have advocated that investors use comprehensive income instead of net income. Comprehensive income includes relevant items that have had a real economic impact on the business entity; therefore, investors will find these items informative.

For fiscal 2008, Citi shows unrealized losses on its available-for-sale securities of $(10,118). It also shows a loss on the foreign currency translation adjustment of $(6,972), a loss on its cash flow hedges of $(2,026), and a loss for additional pension liability adjustment of $(1,419). This makes Citi’s comprehensive income $(48,219).

But the bad news doesn’t end there. The pension footnote (footnote 9) shows the expected rate of return is 7.75%. While this is what is required per FAS 87, it is nonsense. Did anybody know the 2008 rate of return in (say) 2005? The FASB should get rid of such fantasyland assumptions and require business enterprises to employ the actual rate of return. If Citi had done so on its pension assets, it would have had an actual return of (5.42)%, so we shall adjust downward the 2008 income by another $1,370.

The most interesting item is Citi’s move with respect to its investments. It reports debt securities in its 2007 held-to-maturity portfolio of only $1. By year end 2008, however, this amount mushroomed to $64,459. Clearly, Citi is shielding these debt instruments from fair value accounting and the reporting of additional losses. Footnote 16 indicates that these losses for 2008 amounted to $(4,082).

Another item concerns the firm’s deferred income tax assets. For 2008, Citi discloses $52,079 in deferred income tax assets and a valuation allowance of zero. Given that Citi paid no federal income taxes in 2007 or 2008 and likely will pay no federal income taxes in the near future, if ever, how can the company justify a valuation allowance of zero? Whatever amount it should be would further reduce the profits of the firm. Since we don’t know how to estimate this valuation allowance correctly, we shall continue to hold its balance at zero, even though this is clearly wrong.

Putting these considerations together, Citigroup has an adjusted income in 2008 of $(53,671). This is still an estimate but clearly it is more nearly accurate than the reported number. And it reveals that Citi lost twice as much as it reported.

Recently, we have been hearing how Citi has turned things around and that the first quarter in 2009 returns Citi to the black column with a profit of $1,593. Don’t believe a word of it!

Items in comprehensive income shows a modest gain in the available-for-sale portfolio of $20, gains on cash flow hedges of $1,483, and a gain because of the pension liability adjustment of $66. Unfortunately, these gains are wiped out by a loss in the foreign currency translation adjustment of $(2,974). Comprehensive remains ugly at $(225).

We don’t have any disclosure in the quarterly report about actual versus expected returns on pension assets, so we cannot adjust them to show the truth.

But, the strategy to move debt securities from available-to-sale to held-to-maturity paid off significantly. First quarter results show a staggering loss on these securities of $(7,772).

So far, the adjusted earnings for Citigroup for the first quarter of 2009 is $(7,584). Don’t tell me that Citi has improved its operations.

Further, these numbers have been improved by an eccentricity in FAS 157. For some silly reason, the board allows entities to show a gain on their liabilities if the firm’s own credit risk has increased. This takes a perfectly good notion of fair value of liabilities to an absurd result. Failing companies might be able to make liabilities disappear by claiming a sufficiently high increase in their own credit ratings! Utter rubbish—and the FASB should amend its statement.

Citi disclosed in a conference call that the first quarter results include a gain of $2,700 because of this increase in its own nonperformance risk. This gain is total nonsense, so I would adjust quarterly income further, giving Citi adjusted earnings of $(10,284).

Citigroup suffered a cardiac arrest in 2008, and it remains in critical condition. Any other conclusion is propaganda or self deception. And forget the stress tests; they are so flawed that Lehman Brothers might pass them. The Fed says that Citi needs another $5,500 in capital to weather any additional economic crises it might face. It isn’t true. Citi needs a lot more capital than that just to weather current conditions. If a real crisis occurs, Citi will become a flat-liner; it might die anyway.

If you want to protect your portfolio, don’t listen to the optimistic forecasts coming from Washington and don’t stop at the reported income number. Look at the fair value disclosures within SEC filings, adjust reported earnings for these fair value gains and losses, and then you will obtain the truth.

Poor government workers who sacrifice so much just to serve President Obama: 
Biding time before their book royalties eventually flow
Lawrence Summers, a top economic adviser to President Barack Obama, pulled in more than $2.7 million in speaking fees paid by firms at the heart of the financial crisis, including Citigroup, Goldman Sachs, JPMorgan, Merrill Lynch, Bank of America Corp. and the now-defunct Lehman Brothers. He pulled in another $5.2 million from D.E. Shaw, a hedge fund for which he served as managing director from October 2006 until joining the administration. Thomas E. Donilon, Obama’s deputy national security adviser, was paid $3.9 million by the power law firm O’Melveny & Myers to represent clients including two firms that received federal bailout funds: Citigroup and Goldman Sachs. He also disclosed that he’s a member of the Trilateral Commission and sits on the steering committee of the supersecret Bilderberg group. Both groups are favorite targets of conspiracy theorists. And White House Counsel Greg Craig earned $1.7 million in private practice representing an exiled Bolivian president, a Panamanian lawmaker wanted by the U.S. government for allegedly murdering a U.S. soldier and a tech billionaire accused of securities fraud and various sensational drug and sex crimes. Those are among the associations detailed in personal financial disclosure statements released Friday night by the White House.
Kenneth P. Vogel, "W.H. team discloses TARP firm ties," Politico, April 3, 2009 --- http://www.politico.com/news/stories/0409/20889.html

Wave Goodbye to this nation's top economic advisor
"Lawrence Summers Will Leave White House Post and Return to Harvard," Chronicle of Higher Education, September 21, 2010 ---
http://chronicle.com/blogPost/Lawrence-Summers-Will-Leave/27092/

I can't believe The New York Times published this Op-Ed from a former (ten-year) CEO of the Federal Reserve Bank of St. Louis
This WSJ-like heresy would never appear on NBC or MSNBC
"Stop the Bailouts ," by William Poole, The New York Times, February 28, 2009 ---
http://www.nytimes.com/2009/03/01/opinion/01poole.html?_r=2&ref=todayspaper

THE fundamental causes of this recession, unique in the experience of the United States, were mortgage defaults and the consequent insolvency of major financial firms. These insolvencies, and especially fear of them, damaged normal credit mechanisms.

The self-correcting nature of markets will ultimately prevail. We should not underestimate the power of monetary policy; with the sharp increase in the nation’s money stock starting in September, monetary policy is now extraordinarily expansionary. I believe, though without great confidence, that the recession will end in the second half of this year.

Federal policy is damaging the economy’s prospects.
It fails to provide the needed tax incentives for investment in factories and equipment, incentives that were central to efforts to revive the economy during the Kennedy-Johnson era and under Ronald Reagan. But government spending can’t lead the way to sustained recovery, because its stimulating effect will be offset by anticipated higher taxes and the need to finance the deficit.

Heavy-handed federal intervention into the management of companies from banks to auto makers will also delay recovery. And misguided efforts to help distressed homeowners by permitting courts to rewrite the terms of mortgages will cause banks to limit mortgage lending, which will prevent housing from contributing to the recovery.

The unrelenting anger across the country over bailouts of corporations and households that made unwise and even irresponsible financial decisions is influencing federal policy. Punitive measures, like forcing companies receiving federal dollars to cancel employee events, will increase uncertainty over where the government will strike next in its effort to deflect public outrage. Instead of more bailouts, we need a clear and consistent path to fundamental reform of our financial system.

William Poole is a senior fellow at the Cato Institute and the president and chief executive of the Federal Reserve Bank of St. Louis from 1998 to 2008.

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.
Alexander Tyler. 1787 - Tyler was a Scottish history professor that had this to say about 2000 years after "The Fall of the Athenian Republic" and about the time our original 13 states adopted their new constitution.
As quoted at http://www.babylontoday.com/national_debt_clock.htm (where the debt clock in real time is a few months behind)
The National Debt Amount This Instant (Refresh your browser for updates by the second) --- http://www.brillig.com/debt_clock/

America, what is happening to you?
“One thing seems probable to me,” said Peer Steinbrück, the German finance minister, in September 2008....“the United States will lose its status as the superpower of the global financial system.” You don’t have to strain too hard to see the financial crisis as the death knell for a debt-ridden, overconsuming, and underproducing American empire . . .
Richard Florida, "How the Crash Will Reshape America," The Atlantic, March 2009 --- http://www.theatlantic.com/doc/200903/meltdown-geography

The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.
Winston Churchill
(Good thing Obama sent Churchill's bust back to the U.K. from the Oval Office and replaced it with a bust of Lincoln who wrote that Government should print all the money it needs without borrowing)

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.
Alexander Tyler. 1787 - Tyler was a Scottish history professor that had this to say about 2000 years after "The Fall of the Athenian Republic" and about the time our original 13 states adopted their new constitution.
As quoted at http://www.babylontoday.com/national_debt_clock.htm (where the debt clock in real time is a few months behind)
The National Debt Amount This Instant (Refresh your browser for updates by the second) --- http://www.brillig.com/debt_clock/

America, what is happening to you?
“One thing seems probable to me,” said Peer Steinbrück, the German finance minister, in September 2008....“the United States will lose its status as the superpower of the global financial system.” You don’t have to strain too hard to see the financial crisis as the death knell for a debt-ridden, overconsuming, and underproducing American empire . . .
Richard Florida, "How the Crash Will Reshape America," The Atlantic, March 2009 --- http://www.theatlantic.com/doc/200903/meltdown-geography

America Bought a Pig in a Poke
It's like going on a spending binge at the Titanic's passenger store just after hitting the iceberg
Alas, that opportunity was squandered. Mr Obama ceded control of the stimulus to the fractious congressional Democrats, allowing a plan that should have had broad support from both parties to become a divisive partisan battle. More serious still was Mr Geithner’s financial-rescue blueprint which, though touted as a bold departure from the incrementalism and uncertainty that had plagued the Bush administration’s Wall Street fixes, in fact looked depressingly like his predecessors’ efforts: timid, incomplete and short on detail. Despite talk of trillion-dollar sums, stock markets tumbled. Far from boosting confidence, Mr Obama seems at sea.  . . . Mr Obama’s team must recognise this or they, like their predecessors, will come to be seen as part of the problem, not the solution.
"The Obama Rescue," The Economist, February 14, 2008, Page 13 ---
http://www.economist.com/opinion/displaystory.cfm?story_id=13108724&CFID=45050187&CFTOKEN=28690481

Barack Obama promised to get the economy's mojo working again with the passage of an almost $800 billion stimulus package. Wall Street responded with a Bronx Cheer and a 300 drop in the Dow Jones Industrial Average. What gives? . . . It is unclear how many more boondoggles will be uncovered in the 1000+ page bill. People are still pouring through its mass of pages. Few, if any, members of Congress read the bill before it was passed. Scare tactics well known to every salesman were used to facilitate its passage. The President proclaimed the sky was falling. An economic catastrophe was just around the corner. Congress had to do "something" immediately to forestall disaster. There was no time to read the fine print or to deliberate in a thoughtful manner. And in lemming like fashion, the Democrats poured over the cliff. It was their prerogative they claimed. After all, as Mr. Obama declared, "We won the election."
Ken Connor, "Pork and Pitchforks ," Townhall, February 22, 2009 --- http://townhall.com/columnists/KenConnor/2009/02/22/pork_and_pitchforks

IOUSA (the most frightening movie in American history) --- (see a 30-minute version of the documentary at www.iousathemovie.com ).
A Must Read for All Americans --- The Fact Accountant That Liberals Progressives Will Never Interview or Even Discuss
The most important article for the world to read now is the following interview with a former Andersen Partner and former Chief Accountant of the United States:
"Debt Crusader David Walker sounds the alarm for America's financial future," Journal of Accountancy, March 2009 --- http://www.journalofaccountancy.com/Issues/2009/Mar/DebtCrusader.htm 

David Walker is a man on a mission. As U.S. comptroller general, he used the bully pulpit to fuel a campaign of town hall meetings highlighting the country’s ballooning federal deficit. The Fiscal Wake-Up Tour and the publicity it generated begat the documentary I.O.U.S.A. Walker hopes the film will do for fiscal irresponsibility what Al Gore’s An Inconvenient Truth did for global warming—mobilize new citizen activists and pressure politicians to act.

A year ago, Walker stepped away from the five-plus remaining years on his term as comptroller general and head of the Government Accountability Office. He had been recruited by billionaire Pete Peterson, a co-founder of the private- equity fund The Blackstone Group, to become president and CEO of Peterson’s foundation. The Peter G. Peterson Foundation, a nonprofit to which Peterson has pledged $1 billion, focuses on issues such as the deficit, savings levels, entitlement benefits, health care costs, and the nation’s tax system.

Walker talked with the JofA recently about the deficit and the financial crisis. What follow are excerpts from that conversation.

JofA: What did you hope to accomplish when you set out on your speaking tour and got involved with the documentary I.O.U.S.A., and what progress has been made on those goals?

Walker: I have been to over 42 states, giving speeches, participating in town hall meetings, meeting with business community leaders, local television and radio stations, and editorial boards with the objective of trying to state the facts and speak the truth about the deteriorating financial condition of the United States government and the need for us to start making some tough choices on budget controls, tax policy, entitlement reform and spending constraints. And the good news is that people get it. The American people are a lot smarter than many people give them credit for—especially elected officials

Well, a lot has happened since we started the Fiscal Wake-Up Tour. Two significant events would be the 60 Minutes piece, which ran twice in 2007, and that led to the commercial documentary I.O.U.S.A. (see a 30-minute version of the documentary at www.iousathemovie.com ). So there’s a lot more visibility on our issue, and I think that’s encouraging. The other thing that has happened is the recent market meltdown and bailouts of some very venerable institutions in the financial services industry have served to bring things home to America. The concept of “too big to fail” is just not reality anymore, and when you take on too much debt and you don’t have adequate cash flow, some very bad things can happen.

Here’s the key. The factors that led to the mortgage-based subprime crisis exist for the federal government’s finances. Therefore, we must take steps to avoid a super subprime crisis, which frankly would have much more disastrous effects not only domestically but around the world.

JofA:
How does the economic crisis affect your message and the outlook for the kind of wide-scale changes you think need to be made?

Walker:
What’s critical is that we take advantage of the teachable moment associated with the market meltdown and the failure of some of the most prominent financial institutions in the country to help the American people know that nobody can live beyond his means forever. And that goes for government, too.

We have a new president, and therefore we have an opportunity to press the reset button, and I hope President Obama will do two things: That he will assure Americans that he will do what it takes to turn the economy around. I think it is critically important that he also focus on the future and be able to put a mechanism in place like a fiscal future commission so that once we turn the corner on the economy, we have a set of recommendations Congress and the president would be able to consider about budget controls, tax reform, entitlement reform—things that are clear and compelling that we need to act on.

Individuals need to understand that the government has overpromised and under-delivered for far too long. It is going to have to engage in some dramatic and fundamental reform of existing entitlement programs, spending policies and tax policies. The government will be there to provide a safety net through Social Security, a foundation of retirement security, and it will be there to help those that are in need. In general, most individuals are going to have to assume more responsibility for their own financial future, and the earlier they understand that the better off they are going to be. They need to have a financial plan, a budget, make prudent use of debt, save, invest their savings for specified purposes and, very importantly, preserve their savings for the intended purpose, including retirement income.

I believe the government policies are going to have to encourage people to work longer by increasing the eligibility ages for many government programs. So if people want to retire at an earlier age, they are going to have to plan, save, invest and preserve those savings for retirement purposes.

JofA:
You’ve called the current U.S. health care system unsustainable. How can the system be fixed without negatively affecting the care Americans need?

Walker:
Our current health care system is not really a system. It’s an amalgamation of a bunch of different things that have occurred over the years, and it’s unacceptable and unsustainable. We spend twice per capita what any other country on the Earth does. We have the highest uninsured population of any industrialized nation. We have below average health care outcomes. So the value of the equation just does not compute.

We are going to need to do two things on health care. We are going to need to take some steps quickly to reduce the rate of increase in health care cost. We are also going to have to better target taxpayer subsidies and tax preferences for health care.

We are also going to end up needing to move toward trying to achieve comprehensive health care reform that accomplishes four key goals. First: achieve universal coverage for basic and essential health care—based on broad-based societal needs, not unlimited individual wants—that’s affordable and sustainable over time and that avoids taxpayer-funded heroic measures. Secondly, the federal government has to have a budget for health care. We are the only nation on Earth dumb enough to write a blank check for health care. It could bankrupt the country. We have to have constraints. Thirdly, we need national evidence-based practice standards for the practice of medicine and for the issuance of prescription drugs to improve consistency, enhance quality, reduce costs and dramatically reduce litigation risks. And last, but certainly not least, we have to require personal responsibility and accountability for our own health and wellness in a whole range of areas including obesity.

JofA:
What drives you?

Walker: My family has been in this country since the 1680s, and I have ancestors who fought and died in the American Revolution. So I care very deeply about this country, and I am a big history buff. I believe you need to study history in order to learn from it in order not to make some of the same mistakes that others have made in the past.

Secondly, I am only the second person in my direct Walker line to graduate from college. My dad was the first. Therefore, I am somewhat of an example of what someone can accomplish in this great country if you get an education, if you have a positive attitude, if you work hard, if you have good morals and ethical values.

My personal mission in life is to be able to make a difference, to try and make a difference in the lives of others, to try and help make sure our country stays strong, that the American dream stays alive, and that the future will be better for my children and my grandchildren.

Links to David Walkers videos, including his famous CBS Sixty Minutes bell ringer that is far more frightening and sobering than anything Rush Limbaugh is screaming about. You never, ever hear Keith Olbermann, Jon Stewart, Barack Obama, Nancy Pelosi, or Harry Reid so much as whisper the name of David Walker --- http://faculty.trinity.edu/rjensen/entitlements.htm

"Obama's Economic Fish Stories:  On unemployment, the president claims that the stimulus bill was several times more potent than his chief economic adviser estimates. Such statements hurt his credibility," by Michael J. Boskin, The Wall Street Journal, July 21, 2010 ---
http://online.wsj.com/article/SB10001424052748703724104575378751776758256.html?mod=djemEditorialPage_t

A president's most valuable asset—with voters, Congress, allies and enemies—is credibility. So it is unfortunate when extreme exaggeration emanates from the White House.

All presidents wind up saying some things that make even their own economists cringe (often the brainchild of political advisers unconstrained by economic principles, facts or arithmetic). Usually, economic advisers manage to correct these problematic statements before delivery. Sometimes they get channeled into relatively harmless nonsense, such as President Gerald Ford's "Whip Inflation Now" buttons. Other times they produce damaging policies, such as President Richard Nixon's wage and price controls. The most illiterate statement was President Jimmy Carter's late-1970s plea to the Federal Reserve to lower interest rates to combat high inflation, the exact opposite of what it should do. Not surprisingly, the value of the dollar collapsed.

President Obama says "every economist who's looked at it says that the Recovery Act has done its job"—i.e., the stimulus bill has turned the economy around. That's nonsense. Opinions differ widely and many leading economists believe that its impact has been small. Why? The expectation of future spending and future tax hikes to pay for the stimulus and Mr. Obama's vast expansion of government are offsetting the direct short-run expansionary effect. That is standard in all macroeconomic theories.

So, as I and others warned in 2008, the permanent government expansion and higher tax rate agenda is a classic example of what not to do during bad economic times. Worse yet, all the subsidies, bailouts, regulations and mandates are forcing noncommercial decisions on the economy, which now awaits literally thousands of new diktats as a result of things like ObamaCare and the financial reform bill. The uncertainty is impeding investment and hiring.

The president does not say that economists agree that the high future taxes to finance the stimulus will hurt the economy. (The University of Chicago's Harald Uhlig estimates $3.40 of lost output for every dollar of government spending.) Either the president is not being told of serious alternative viewpoints, or serious viewpoints are defined as only those that support his position. In either case, he is being ill-served by his staff.

Mr. Obama's economic statements are increasingly divorced not only from competing viewpoints but from those of his own economic advisers. It is surprising how many numerically challenged pronouncements come from this most scripted and political of White Houses. One slip is eventually forgiven, but when a pattern emerges, no one believes it is an accident.

For example, on the anniversary of the stimulus bill, Mr. Obama declared, "It is largely thanks to the Recovery Act that a second Depression is no longer a possibility." Yet his Council of Economic Advisers just estimated the stimulus bill's effect on GDP at its trough was 1%-2%.

The most common definition of a depression is a long period in which GDP or consumption declines at least 10%. The decline in GDP in the recent recession was 3.8%, in consumption 2%. No one disputes the recession was severe, but to reach a 10% GDP decline requires tripling the administration's estimate (three times their 2% effect) added to the actual 3.8% decline. On the alternative consumption standard, the math is even more absurd. The depression statement isn't credible. The stimulus bill has assumed certain mystic powers in administration discourse, but revoking the laws of arithmetic shouldn't be one of them.

The recession would have been worse if not for the Fed's monetary policy and quantitative easing. Also important were the unmentioned automatic stabilizers—taxes falling more than income, cushioning declines in after-tax incomes and consumption—which were far larger than the spending and tax rebates in the stimulus bill. Arguing that all these policies (including injecting capital into banks, which was necessary but done poorly) may have prevented a depression is perhaps still an exaggeration but at least is within hailing distance of plausibility. On that scale, the effect of the stimulus was puny.

On his recent "Recovery Tour," Mr. Obama boasted, "The stimulus bill prevented the unemployment rate from "getting up to . . . 15%." But the president's own chief economic adviser, Christina Romer, has estimated that the stimulus bill reduced peak unemployment by one percentage point—i.e., since the unemployment rate peaked at 10.1%, it prevented the unemployment rate from rising to just over 11%. So Mr. Obama claims that the stimulus bill was several times more potent than his chief economic adviser estimates.

Perhaps the most serious disconnect concerns the impending expiration of the 2001 and 2003 tax cuts, which will raise the top two income tax rates and the rates on dividends and capital gains. If these growth inhibiting tax increases occur—about $75 billion in tax increases next year, $1.4 trillion over 10 years—there will be serious economic damage.

In the most recent issue of the American Economic Review, Ms. Romer (and her husband David H. Romer) conclude that "tax increases are highly contractionary . . . tax cuts have very large and persistent positive output effects." Their estimates imply the tax increases would depress GDP by roughly half the growth rate in this so-far-anemic recovery.

If Mr. Obama is really serious about a second stimulus, by far the best thing he can do is have Congress quickly extend the expiring Bush tax cuts, combined with real spending cuts set to take effect as the economy improves.

The president badly needs to make more realistic pronouncements. No one expects him to say his policies have failed (although most have delivered far less than claimed at large cost). A little candor about the results of experimentation in uncharted waters would go a long way. But at the very least, his staff needs to avoid putting these exaggerations on the teleprompter. It undermines confidence and raises concerns about competence. It's doing nobody any good—not the economy and certainly not Mr. Obama.

Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.

Harvard professor says economists are a huge part of the problem --- http://faculty.trinity.edu/rjensen/2008Bailout.htm#LiquidityBubble
Stephen A. Marglin is a professor of economics at Harvard University. His latest book is The Dismal Science: How Thinking Like an Economist Undermines Community (Harvard University Press, 2007).

Fractal --- http://en.wikipedia.org/wiki/Fractal

Question
Why do markets misbehave? How should you measure market risk? And what’s wrong with academic finance?

These are a few questions that polymath Benoit Mandelbrot addresses in the fascinating book The Misbehavior of Markets. Mandelbrot suggests all of these questions can be properly understood by rejecting the standard assumptions of academic finance and instead using a “fractal view” of risk and markets.
"The Misbehavior of Markets," Simoleon Sense, April 6, 2009 --- http://www.simoleonsense.com/

Fractals are at the heart of this book. Fractal geometry is a form of mathematics developed by Mandelbrot that deals with rough but highly self-similar structures like trees, coastlines, and mountains. Fractals have helped explain a wide range of natural phenomena and revolutionized computer graphics, influencing movies like Star Wars Episode III. There is room for more applications in this early science, and fractals may help explain the jagged but predictably irrational patterns in the stock market, claims Mandelbrot.

In this book, Mandelbrot contends that fractals are the key to modeling the market. The interesting part is that Mandelbrot does not merely explain why he’s right but he goes to great length to explain why others-those using the standard theories of academic finance-are wrong. Mandelbrot offers interesting history, anecdotes, trivia, and beautiful illustrations to make his case. The stock market does not act like a random walk, he says, but rather it’s like the flight of an arrow down an infinite hallway. It sounds a bit abstract at first, but this is exactly where the book shines. There are stories and illustrations that make such abstract concepts easily understandable. I literally felt smarter after reading each chapter…

Winning the Lotto jackpot has become a key factor in my retirement plan.
New Yorker Cartoon

"Two billion more bourgeois," The Economist, February 14, 2009, Page 18 ---
http://www.economist.com/opinion/displaystory.cfm?story_id=13109687&CFID=45050187&CFTOKEN=28690481

PEOPLE love to mock the middle class. Its narrow-mindedness, complacency and conformism are the mother lode of material for sitcom writers and novelists. But Marx thought “the bourgeoisie…has played a most revolutionary part” in history. And although The Economist rarely sees eye to eye with the father of communism, on this Marx was right.

During the past 15 years a new middle class has sprung up in emerging markets, producing a silent revolution in human affairs—a revolution of wealth-creation and new aspirations. The change has been silent because its beneficiaries have gone about transforming countries unobtrusively while enjoying the fruits of success. But that success has been a product of growth. As growth collapses, the way the new middle class reacts to the thwarting of its expectations could change history in a direction that is still impossible to foresee.

The new middle consists of people with about a third of their income left for discretionary spending after providing basic food and shelter. They are neither rich, inheriting enough to escape the struggle for existence, nor poor, living from hand to mouth, or season to season. One of their most important characteristics is variety: middle-class people vary hugely by background, profession and income. As our special report in this week’s issue argues, their numbers do not grow gently, shadowing economic growth and rising 2%, or 5%, or 10% a year. At some point, they surge. That happened in China about ten years ago. It is happening in India now. In emerging markets as a whole, it has propelled the middle class from a third of the developing world’s population in 1990 to over half today. The developing world is no longer simply poor.

As people emerge into the middle class, they do not merely create a new market. They think and behave differently. They are more open-minded, more concerned about their children’s future, more influenced by abstract values than traditional mores. In the words of David Riesman, an American sociologist, their minds work like radar, taking in signals from near and far, not like a gyroscope, pivoting on a point. Ideologically they lean towards free markets and democracy, which tend to be better than other systems at balancing out varied and conflicting interests. A poll we commissioned for our special report on the middle class in the developing world finds that such people are happier, more optimistic and more supportive of democracy than are the poor.

These attitudes transform countries and economies. The middle class is more likely to invest in new products and new technologies than the rich, who tend to defend their existing assets. It is better able than the poor to leap barriers to entry into business and can therefore set up companies big enough to generate jobs. With its aspirations and capacity for delayed gratification, the middle class is more likely to invest in education and other sources of human capital, which are vital to prosperity. For years, policymakers have tied economic success to the rich (“trickle-down economics”) and to the poor (“inclusive growth”). But it is the middle class that is the real motor of economic growth.

Now the middle class everywhere is under a great threat. Its members have flourished in places and countries that have opened up to the world economy—the eastern seaboard of China, southern India, metropolitan Brazil. They are products of globalisation, and as globalisation goes into reverse they may well be hit harder than the rich or poor. They work in export industries, so their jobs are unsafe. They have started to borrow, so are hurt by the credit crunch. They have houses and shares, so their wealth is diminished by falling asset prices.

What will they do when the music stops? Those at the bottom of the ladder do not have far to fall. But what happens if you have clambered up a few rungs, joined the new middle class and now face the prospect of slipping back into poverty? History suggests middle-class people can behave in radically different ways. The rising middle class of 19th-century Britain agitated peacefully for the vote; in Latin America in the 1990s the same sorts of people backed democracy. Yet the middle class also supported fascist governments in Europe in the 1930s and initially backed military juntas in Latin America in the 1980s.

Nobody can be sure what direction today’s new bourgeoisie of some 2.5 billion people will take if its aspirations are dashed. If the downturn lasts only a year or two the attitudes of such people may survive the pain of retrenchment. But a prolonged crash might well undo much of the progress the developing world has lately made towards democracy and political stability. It is hard to imagine the stakes being higher.

Question:     What's $2+$3,269,999,999,998?
Accountant   What would you like it to total? We strive to keep our clients happy.
Politician:     I voted for $789,000,000 but I've never been real good with big numbers having lots of commas.
Economist:   Why it's 33 Yen in terms of the anticpated foreign exchange rate ten years from now.
Congressional Budget Office: $3,270,000,000,000 --- but please don't tell on us

All of the major news outlets are reporting that the stimulus bill voted out of conference committee last night has a meager $789 billion price tag. This number is pure fantasy. No one believes that the increased funding for programs the left loves like Head Start, Medicaid, COBRA, and the Earned Income Tax Credit is in anyway temporary. No Congress under control of the left will ever cut funding for these programs. So what is the true cost of the stimulus if these spending increases are made permanent? Rep. Paul Ryan (R-WI) asked the Congressional Budget Office to estimate the impact of permanently extending the 20 most popular provisions of the stimulus bill. What did the CBO find? As you can see from the table below, the true 10 year cost of the stimulus bill $2.527 trillion in in spending with another $744 billion cost in debt servicing. Total bill for the Generational Theft Act: $3.27 trillion.
"True Cost of Stimulus: $3.27 Trillion," Heritage Foundation,  February 12, 2009 ---
http://blog.heritage.org/2009/02/12/true-cost-of-stimulus-327-trillion/
Jensen Comment
The above article has a pretty good summary table --- the best that I've seen to date.

The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
David M. Walker, Former Chief Accountant of the United States --- http://www.financialsense.com/editorials/quinn/2009/0218.html
Also see his dire warnings on CBS Sixty Minutes on the unbooked national debt for entitlements (over five times the booked national debt and soaring with new entitlements) --- http://faculty.trinity.edu/rjensen/entitlements.htm

Delay is preferable to error.
Thomas Jefferson

Wall Street’s Math Wizards Forgot a Few Variables
What wasn’t recognized was the importance of a different species of risk — liquidity risk,” Stephen Figlewski, a professor of finance at the Leonard N. Stern School of Business at New York University, told The Times. “When trust in counterparties is lost, and markets freeze up so there are no prices,” he said, it “really showed how different the real world was from our models.
DealBook, The New York Times, September 14, 2009 ---
http://dealbook.blogs.nytimes.com/2009/09/14/wall-streets-math-wizards-forgot-a-few-variables/

An Excellent Presentation on the Flaws of Finance, Particularly the Flaws of Financial Theorists

A recent topic on the AECM listserv concerns the limitations of accounting standard setters and researchers when it comes to understanding investors. One point that was not raised in the thread to date is that a lot can be learned about investors from the top financial analysts of the world --- their writings and their conferences.

A Plenary Session Speech at a Chartered Financial Analysts Conference
Video: James Montier’s 2012 Chicago CFA Speech The Flaws of Finance ---
http://cfapodcast.smartpros.com/web/live_events/Annual/Montier/index.html
Note that it takes over 15 minutes before James Montier begins

Major Themes

1. The difference between physics versus finance models is that physicists know the limitations of their models.
    
2. Another difference is that components (e.g., atoms) of a physics model are not trying to game the system.
    
3. The more complicated the model in finance the more the analyst is trying to substitute theory for experience.
    
4. There's a lot wrong with Value at Risk (VaR) models that regulators ignored.
    
5. The assumption of market efficiency among regulators (such as Alan Greenspan) was a huge mistake that led to excessively low interest rates and bad behavior by banks and credit rating agencies.
    
6. Auditors succumbed to self-serving biases of favoring their clients over public investors.
    
7. Banks were making huge gambles on other peoples' money.
    
8. Investors themselves ignored risk such as poisoned CDO risks when they should've known better. I love his analogy of black swans on a turkey farm.
    
9. Why don't we see surprises coming (five excellent reasons given here)?
    
10. The only group of people who view the world realistically are the clinically depressed.
     
11. Model builders should stop substituting elegance for reality.
     
12. All financial theorists should be forced to interact with practitioners.
     
13. Practitioners need to abandon the myth of optimality before the fact.
    Jensen Note
    This also applies to abandoning the myth that we can set optimal accounting standards.
     
14. In the long term fundamentals matter.
     
15. Don't get too bogged down in details at the expense of the big picture.
     
16. Max Plank said science advances one funeral at a time.
     
17. The speaker then entertains questions from the audience (some are very good).

James Montier is a very good speaker from England!

Mr. Montier is a member of GMO’s asset allocation team. Prior to joining GMO in 2009, he was co-head of Global Strategy at Société Générale. Mr. Montier is the author of several books including Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance; Value Investing: Tools and Techniques for Intelligent Investment; and The Little Book of Behavioural Investing. Mr. Montier is a visiting fellow at the University of Durham and a fellow of the Royal Society of Arts. He holds a B.A. in Economics from Portsmouth University and an M.Sc. in Economics from Warwick University
http://www.gmo.com/america/about/people/_departments/assetallocation.htm

There's a lot of useful information in this talk for accountics scientists.

Bob Jensen's threads on what went wrong with accountics research are at
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong

Remember when the 2007/2008 severe economic collapse was caused by "street events":

Fraud on Main Street
Issuance of "poison" mortgages (many subprime) that lenders knew could never be repaid by borrowers.
Lenders didn't care about loan defaults because they sold the poison mortgages to suckers like Fannie and Freddie.
        http://faculty.trinity.edu/rjensen/2008Bailout.htm#Sleaze
For low income borrowers the Federal Government forced Fannie and Freddie to buy up the poisoned mortgages ---
         http://faculty.trinity.edu/rjensen/2008Bailout.htm#Rubble
 

Math Error on Wall Street
Issuance of CDO portfolio bonds laced with a portion of healthy mortgages and a portion of poisoned mortgages.
The math error is based on an assumption that risk of poison can be diversified and diluted using a risk diversification formula.
The risk diversification formula is called the Gaussian copula function
The formula made a fatal assumption that loan defaults would be random events and not correlated.
When the real estate bubble burst, home values plunged and loan defaults became correlated and enormous.
 

 Fraud on Wall Street
All the happenings on Wall Street were not merely innocent math errors
Banks and investment banks were selling CDO bonds that they knew were overvalued.
Credit rating agencies knew they were giving AAA high credit ratings to bonds that would collapse.
The banking industry used powerful friends in government to pass its default losses on to taxpayers.
Greatest Swindle in the History of the World ---
        http://faculty.trinity.edu/rjensen/2008Bailout.htm#Bailout
 

Warnings from a Theoretical Physicist With an Interest in Economics and Finance
"Beware of Economists (and accoutnics scientists) Peddling Elegant Models," by Mark Buchanan, Bloomberg, April 7, 2013 ---
http://www.bloomberg.com/news/2013-04-07/beware-of-economists-peddling-elegant-models.html 

. . .

In one very practical and consequential area, though, the allure of elegance has exercised a perverse and lasting influence. For several decades, economists have sought to express the way millions of people and companies interact in a handful of pretty equations.

The resulting mathematical structures, known as dynamic stochastic general equilibrium models, seek to reflect our messy reality without making too much actual contact with it. They assume that economic trends emerge from the decisions of only a few “representative” agents -- one for households, one for firms, and so on. The agents are supposed to plan and act in a rational way, considering the probabilities of all possible futures and responding in an optimal way to unexpected shocks.

Surreal Models

Surreal as such models might seem, they have played a significant role in informing policy at the world’s largest central banks. Unfortunately, they don’t work very well, and they proved spectacularly incapable of accommodating the way markets and the economy acted before, during and after the recent crisis.

Now, some economists are beginning to pursue a rather obvious, but uglier, alternative. Recognizing that an economy consists of the actions of millions of individuals and firms thinking, planning and perceiving things differently, they are trying to model all this messy behavior in considerable detail. Known as agent-based computational economics, the approach is showing promise.

Take, for example, a 2012 (and still somewhat preliminary) study by a group of economists, social scientists, mathematicians and physicists examining the causes of the housing boom and subsequent collapse from 2000 to 2006. Starting with data for the Washington D.C. area, the study’s authors built up a computational model mimicking the behavior of more than two million potential homeowners over more than a decade. The model included detail on each individual at the level of race, income, wealth, age and marital status, and on how these characteristics correlate with home buying behavior.

Led by further empirical data, the model makes some simple, yet plausible, assumptions about the way people behave. For example, homebuyers try to spend about a third of their annual income on housing, and treat any expected house-price appreciation as income. Within those constraints, they borrow as much money as lenders’ credit standards allow, and bid on the highest-value houses they can. Sellers put their houses on the market at about 10 percent above fair market value, and reduce the price gradually until they find a buyer.

The model captures things that dynamic stochastic general equilibrium models do not, such as how rising prices and the possibility of refinancing entice some people to speculate, buying more-expensive houses than they otherwise would. The model accurately fits data on the housing market over the period from 1997 to 2010 (not surprisingly, as it was designed to do so). More interesting, it can be used to probe the deeper causes of what happened.

Consider, for example, the assertion of some prominent economists, such as Stanford University’s John Taylor, that the low-interest-rate policies of the Federal Reserve were to blame for the housing bubble. Some dynamic stochastic general equilibrium models can be used to support this view. The agent- based model, however, suggests that interest rates weren’t the primary driver: If you keep rates at higher levels, the boom and bust do become smaller, but only marginally.

Leverage Boom

A much more important driver might have been leverage -- that is, the amount of money a homebuyer could borrow for a given down payment. In the heady days of the housing boom, people were able to borrow as much as 100 percent of the value of a house -- a form of easy credit that had a big effect on housing demand. In the model, freezing leverage at historically normal levels completely eliminates both the housing boom and the subsequent bust.

Does this mean leverage was the culprit behind the subprime debacle and the related global financial crisis? Not necessarily. The model is only a start and might turn out to be wrong in important ways. That said, it makes the most convincing case to date (see my blog for more detail), and it seems likely that any stronger case will have to be based on an even deeper plunge into the messy details of how people behaved. It will entail more data, more agents, more computation and less elegance.

If economists jettisoned elegance and got to work developing more realistic models, we might gain a better understanding of how crises happen, and learn how to anticipate similarly unstable episodes in the future. The theories won’t be pretty, and probably won’t show off any clever mathematics. But we ought to prefer ugly realism to beautiful fantasy.

(Mark Buchanan, a theoretical physicist and the author of “The Social Atom: Why the Rich Get Richer, Cheaters Get Caught and Your Neighbor Usually Looks Like You,” is a Bloomberg View columnist. The opinions expressed are his own.)

Jensen Comment
Bob Jensen's threads on the mathematical formula that probably led to the economic collapse after mortgage lenders peddled all those poisoned mortgages ---

America Bought a Pig in a Poke:  It's like going on a spending binge at the Titanic's store just after hitting the iceberg
Barack Obama promised to get the economy's mojo working again with the passage of an almost $800 billion stimulus package. Wall Street responded with a Bronx Cheer and a 300 drop in the Dow Jones Industrial Average. What gives? . . . It is unclear how many more boondoggles will be uncovered in the 1000+ page bill. People are still pouring through its mass of pages. Few, if any, members of Congress read the bill before it was passed. Scare tactics well known to every salesman were used to facilitate its passage. The President proclaimed the sky was falling. An economic catastrophe was just around the corner. Congress had to do "something" immediately to forestall disaster. There was no time to read the fine print or to deliberate in a thoughtful manner. And in lemming like fashion, the Democrats poured over the cliff. It was their prerogative they claimed. After all, as Mr. Obama declared, "We won the election."
Ken Connor, "Pork and Pitchforks ," Townhall, February 22, 2009 --- http://townhall.com/columnists/KenConnor/2009/02/22/pork_and_pitchforks

Lou Dobb's Video on Where the Pork is Embedded in the Stimulus Sausage --- http://www.thehopeforamerica.com/play.php?id=340
But Lou fails to look at the long-term, multi-year entitlement links in this string of sausage.

The National Debt has continued to increase an average of $3.93(now $6) billion per day since September 28, 2007!
The National Debt Amount This Instant (Refresh your browser for updates by the second) --- http://www.brillig.com/debt_clock/
History of the National Debt --- http://en.wikipedia.org/wiki/National_Debt 
Entitlements --- http://faculty.trinity.edu/rjensen/entitlements.htm

History of the National Debt --- http://en.wikipedia.org/wiki/National_Debt 

You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.
Ronald Reagan

America, what is happening to you?
“One thing seems probable to me,” said Peer Steinbrück, the German finance minister, in September 2008....“the United States will lose its status as the superpower of the global financial system.” You don’t have to strain too hard to see the financial crisis as the death knell for a debt-ridden, overconsuming, and underproducing American empire . . .
Richard Florida, "How the Crash Will Reshape America," The Atlantic, March 2009 --- http://www.theatlantic.com/doc/200903/meltdown-geography

Professor Schiller at Yale asserts housing prices are still overvalued and need to come down to reality
The median value of a U.S. home in 2000 was $119,600. It peaked at $221,900 in 2006. Historically, home prices have risen annually in line with CPI. If they had followed the long-term trend, they would have increased by 17% to $140,000. Instead, they skyrocketed by 86% due to Alan Greenspan’s irrational lowering of interest rates to 1%, the criminal pushing of loans by lowlife mortgage brokers, the greed and hubris of investment bankers and the foolishness and stupidity of home buyers. It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued. Long-term averages are created by periods of overvaluation followed by periods of undervaluation. Prices need to fall 20% and could fall 30%.....
Watch the video on Yahoo Finance --- Click Here
See the chart at http://www.businessinsider.com/the-housing-chart-thats-worth-1000-words-2009-2
Also see Jim Mahar's blog at http://financeprofessorblog.blogspot.com/2009/02/shiller-house-prices-still-way-too-high.html
Jensen Comment
In the worldwide move toward fair value accounting that replaces cost allocation accounting, the above analysis by Professor Schiller is sobering. It suggests how much policy and widespread fraud can generate misleading "fair values" in deep markets with many buyers and sellers, although the housing market is a bit more like the used car market than the stock market. Each house and each used car are unique, non-fungible items that are many times more difficult to update with fair value accounting relative to fungible market securities and new car markets.

The government gave them 105% for their $200,000 subprime mortgage.
They then sold the house for $37,000, got married, and are escaping from California.

So are we now that we flipped the doghouse!

It is apparent that we've learned nothing from several millennia of monetary destruction. The persistent demonstration that capital, not paper, is the basis for prosperity has fallen on deaf ears. Daily, we face the sad spectacle of government officials, pundits, and even Nobel laureates (read that Paul Klugman from the Zimbabwe School of Finance) telling us that printing money is the answer to an economic downturn.
"Printing Like Mad," Mises Economic Blog, February 15, 2009 --- http://blog.mises.org/archives/009457.asp

I started saving up in the barn to buy a new snow shovel in about six years.

 

Question
As of December 2008, what do Zimbabwe and the United States have in common?

Answer
Rather than taxing or borrowing to cover deficit spending, both governments are simply printing more money?

What's wrong with that?
First look at what it did to Zimbabwe. Then read about Gresham's Law --- http://en.wikipedia.org/wiki/Gresham%27s_Law
The instant the Federal Reserve announced this new funding policy in December, the U.S. dollar plunged in value relative to foreign currencies. The reason is obvious.

Zimbabwe's central bank will introduce a 100 trillion Zimbabwe dollar banknote, worth about $33 on the black market, to try to ease desperate cash shortages, state-run media said on Friday.
KyivPost, January 16, 2009 --- http://www.kyivpost.com/world/33522
Jensen Comment
This is a direct result of raising money by simply printing it, and the U.S. should take note since this is how our Federal government has decided to pay for anticipated trillion-dollar budget deficits --- http://faculty.trinity.edu/rjensen/2008Bailout.htm#NationalDebt

The United States will "look like a banana republic" unless it gains control over its budget deficit and federal debt, economist Allen Sinai warned Congress on Thursday. "The deficit and debt prospects under almost any scenario are daunting," Mr. Sinai, chief global economist for Decision Economics Inc., told the Senate Budget Committee. "This territory is uncharted, with no real historical analogue to this kind of financial situation for a major global economic power." Asked by committee Chairman Kent Conrad, North Dakota Democrat, whether the U.S. government's creditworthiness is at risk, Mr. Sinai replied, "Unequivocally yes." Richard Berner, chief U.S. economist at Morgan Stanley, told the committee one measure of America's creditworthiness -- credit default swap spreads -- already shows some deterioration. The worse a nation's credit rating becomes, the more its CDS spread rises. U.S. sovereign CDS spreads have widened to about 0.6 percent from 0.1 percent last summer, Mr. Berner noted. "So the message is that you ignore global investors at your peril," he told the committee.
David M. Dixon, "Congress warned about debt U.S. advised to gain control," The Washington Times, January 16, 2009 --- http://washingtontimes.com/news/2009/jan/16/policies-on-debt-a-risk-to-economy/

"Economics has met the enemy, and it is economics," by Ira Basen, Globe and Mail, October 15, 2011 ---
http://www.theglobeandmail.com/news/politics/economics-has-met-the-enemy-and-it-is-economics/article2202027/page1/ 
Thank you Jerry Trites for the heads up.

After Thomas Sargent learned on Monday morning that he and colleague Christopher Sims had been awarded the Nobel Prize in Economics for 2011, the 68-year-old New York University professor struck an aw-shucks tone with an interviewer from the official Nobel website: “We're just bookish types that look at numbers and try to figure out what's going on.”

But no one who'd followed Prof. Sargent's long, distinguished career would have been fooled by his attempt at modesty. He'd won for his part in developing one of economists' main models of cause and effect: How can we expect people to respond to changes in prices, for example, or interest rates? According to the laureates' theories, they'll do whatever's most beneficial to them, and they'll do it every time. They don't need governments to instruct them; they figure it out for themselves. Economists call this the “rational expectations” model. And it's not just an abstraction: Bankers and policy-makers apply these formulae in the real world, so bad models lead to bad policy.

Which is perhaps why, by the end of that interview on Monday, Prof. Sargent was adopting a more realistic tone: “We experiment with our models,” he explained, “before we wreck the world.”

Rational-expectations theory and its corollary, the efficient-market hypothesis, have been central to mainstream economics for more than 40 years. And while they may not have “wrecked the world,” some critics argue these models have blinded economists to reality: Certain the universe was unfolding as it should, they failed both to anticipate the financial crisis of 2008 and to chart an effective path to recovery.

The economic crisis has produced a crisis in the study of economics – a growing realization that if the field is going to offer meaningful solutions, greater attention must be paid to what is happening in university lecture halls and seminar rooms.

While the protesters occupying Wall Street are not carrying signs denouncing rational-expectations and efficient-market modelling, perhaps they should be.

They wouldn't be the first young dissenters to call economics to account. In June of 2000, a small group of elite graduate students at some of France's most prestigious universities declared war on the economic establishment. This was an unlikely group of student radicals, whose degrees could be expected to lead them to lucrative careers in finance, business or government if they didn't rock the boat. Instead, they protested – not about tuition or workloads, but that too much of what they studied bore no relation to what was happening outside the classroom walls.

They launched an online petition demanding greater realism in economics teaching, less reliance on mathematics “as an end in itself” and more space for approaches beyond the dominant neoclassical model, including input from other disciplines, such as psychology, history and sociology. Their conclusion was that economics had become an “autistic science,” lost in “imaginary worlds.” They called their movement Autisme-economie.

The students' timing is notable: It was the spring of 2000, when the world was still basking in the glow of “the Great Moderation,” when for most of a decade Western economies had been enjoying a prolonged period of moderate but fairly steady growth.

Some economists were daring to think the unthinkable – that their understanding of how advanced capitalist economies worked had become so sophisticated that they might finally have succeeded in smoothing out the destructive gyrations of capitalism's boom-and-bust cycle. (“The central problem of depression prevention has been solved,” declared another Nobel laureate, Robert Lucas of the University of Chicago, in 2003 – five years before the greatest economic collapse in more than half a century.)

The students' petition sparked a lively debate. The French minister of education established a committee on economic education. Economics students across Europe and North America began meeting and circulating petitions of their own, even as defenders of the status quo denounced the movement as a Trotskyite conspiracy. By September, the first issue of the Post-Autistic Economic Newsletter was published in Britain.

As The Independent summarized the students' message: “If there is a daily prayer for the global economy, it should be, ‘Deliver us from abstraction.'”

It seems that entreaty went unheard through most of the discipline before the economic crisis, not to mention in the offices of hedge funds and the Stockholm Nobel selection committee. But is it ringing louder now? And how did economics become so abstract in the first place?

The great classical economists of the late 18th and early 19th centuries had no problem connecting to the real world – the Industrial Revolution had unleashed profound social and economic changes, and they were trying to make sense of what they were seeing. Yet Adam Smith, who is considered the founding father of modern economics, would have had trouble understanding the meaning of the word “economist.”

What is today known as economics arose out of two larger intellectual traditions that have since been largely abandoned. One is political economy, which is based on the simple idea that economic outcomes are often determined largely by political factors (as well as vice versa). But when political-economy courses first started appearing in Canadian universities in the 1870s, it was still viewed as a small offshoot of a far more important topic: moral philosophy.

In The Wealth of Nations (1776), Adam Smith famously argued that the pursuit of enlightened self-interest by individuals and companies could benefit society as a whole. His notion of the market's “invisible hand” laid the groundwork for much of modern neoclassical and neo-liberal, laissez-faire economics. But unlike today's free marketers, Smith didn't believe that the morality of the market was appropriate for society at large. Honesty, discipline, thrift and co-operation, not consumption and unbridled self-interest, were the keys to happiness and social cohesion. Smith's vision was a capitalist economy in a society governed by non-capitalist morality.

But by the end of the 19th century, the new field of economics no longer concerned itself with moral philosophy, and less and less with political economy. What was coming to dominate was a conviction that markets could be trusted to produce the most efficient allocation of scarce resources, that individuals would always seek to maximize their utility in an economically rational way, and that all of this would ultimately lead to some kind of overall equilibrium of prices, wages, supply and demand.

Political economy was less vital because government intervention disrupted the path to equilibrium and should therefore be avoided except in exceptional circumstances. And as for morality, economics would concern itself with the behaviour of rational, self-interested, utility-maximizing Homo economicus. What he did outside the confines of the marketplace would be someone else's field of study.

As those notions took hold, a new idea emerged that would have surprised and probably horrified Adam Smith – that economics, divorced from the study of morality and politics, could be considered a science. By the beginning of the 20th century, economists were looking for theorems and models that could help to explain the universe. One historian described them as suffering from “physics envy.” Although they were dealing with the behaviour of humans, not atoms and particles, they came to believe they could accurately predict the trajectory of human decision-making in the marketplace.

In their desire to have their field be recognized as a science, economists increasingly decided to speak the language of science. From Smith's innovations through John Maynard Keynes's work in the 1930s, economics was argued in words. Now, it would go by the numbers.

Continued in a long article

Mathematical Analytics in Plato's Cave ---
http://faculty.trinity.edu/rjensen/TheoryTAR.htm#Analytics
 

Federal securities class action lawsuits increased 19 percent in 2008, with almost half involving firms in the financial services sector according to the annual report prepared by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research --- http://securities.stanford.edu/scac_press/20080106_YIR08_Press_Release.pdf

Especially note the 2008 Year in Review link at http://securities.stanford.edu/clearinghouse_research/2008_YIR/20080106.pdf

"Fed Cuts Key Rate to a Record Low," by Edmund L. Andrews and Jackie Calmes, The New York Times, December 16, 2008 ---
http://www.nytimes.com/2008/12/17/business/economy/17fed.html?_r=1&scp=1&sq=printing money&st=cse

In effect, the Fed is stepping in as a substitute for banks and other lenders and acting more like a bank itself.
“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth,” it said. Those tools include buying “large quantities” of mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans.

The move came as President-elect Barack Obama summoned his economic team to a four-hour meeting in Chicago to map out plans for an enormous economic stimulus measure that could cost anywhere from $600 billion to $1 trillion over the next two years.

The two huge economic stimulus programs, one from the Fed and one from the White House and Congress, set the stage for a powerful but potentially risky partnership between Mr. Obama and the Fed’s Republican chairman, Ben S. Bernanke.

“We are running out of the traditional ammunition that’s used in a recession, which is to lower interest rates,” Mr. Obama said at a news conference Tuesday. “It is critical that the other branches of government step up, and that’s why the economic recovery plan is so essential.”

Financial markets were electrified by the Fed action. The Dow Jones industrial average jumped 4.2 percent, or 359.61 points, to close at 8,924.14.

Investors rushed to buy long-term Treasury bonds. Yields on 10-year Treasuries, which have traditionally served as a guide for mortgage rates, plunged immediately after the announcement to 2.26 percent, their lowest level in decades, from 2.51 percent earlier in the day.

Yields on investment-grade corporate bonds edged down to 7.215 percent on Tuesday, from 7.355 on Monday. Yields on riskier high-yielding corporate bonds remained in the stratosphere at 22.493 percent, almost unchanged from 22.732 on Monday.

By contrast, the dollar dropped sharply against the euro and other major currencies for the second consecutive day — a sign that currency markets were nervous about a flood of newly printed dollars.
Some analysts predict that the Treasury will have to sell $2 trillion worth of new securities over the next year to finance its existing budget deficit, a new stimulus program and to refinance about $600 billion worth of maturing government debt.

For the moment, Mr. Obama and Mr. Bernanke appear to be on the same page, though that could abruptly change if the economy starts to revive. Fed officials have already assumed that Congress will pass a major spending program to stimulate the economy, and they are counting on it to contribute to economic growth next year.

In more normal times, the Fed might easily start raising interest rates in reaction to a huge new spending program, out of concern about rising inflation.

But data on Tuesday provided new evidence that the biggest threat to prices right now was not inflation but deflation.

The federal government reported on Tuesday that the Consumer Price Index fell 1.7 percent in November, the steepest monthly drop since the government began tracking prices in 1947. The decline was largely driven by the recent plunge in energy prices, but even the so-called core inflation rate, which excludes the volatile food and energy sectors, was essentially zero.

Mr. Obama’s goal is to have a package ready when the new Congress convenes on Jan. 6. His hope is that the House and Senate, with their bigger Democratic majorities, can agree quickly on a plan for Mr. Obama to sign into law soon after he is sworn into office two weeks later.

The Fed, in a statement accompanying its rate decision, acknowledged that the recession was more severe than officials had thought at their last meeting in October.

“Over all, the outlook for economic activity has weakened further,” the central bank said.

“Labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined.”

The central bank added: “The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

With fewer than 10 days until Christmas, retailers from Saks Fifth Avenue to Wal-Mart have been slashing prices to draw in consumers, who have sharply reduced their spending over the last six months. On Tuesday, Banana Republic offered customers $50 off on any purchases that total $125. The clothing retailer DKNY offered customers $50 off any purchase totaling $250.

Ian Shepherdson, an analyst at High Frequency Economics, said falling energy prices were likely to bring the year-over-year rate of inflation to below zero in January.

The Fed has already announced or outlined a range of unorthodox new tools that it can use to keep stimulating the economy once the federal funds rate effectively reaches zero. On Tuesday, Fed officials said they stood ready to expand them or create new ones to relieve bottlenecks in the credit markets.

All of the tools involve borrowing by the Fed, which amounts to printing money in vast new quantities, a process the Fed has already started.
Since September, the Fed’s balance sheet has ballooned from about $900 billion to more than $2 trillion as it has created money and lent it out. As soon as the Fed completes its plans to buy mortgage-backed debt and consumer debt, the balance sheet will be up to about $3 trillion.

“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating,” said Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve.

“Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”

This is the thing I’ve been afraid of ever since I realized that Japan really was in the dreaded, possibly mythical liquidity trap. You can read my 1998 Brookings Paper on the issue here. Incidentally, there were a bunch of us at Princeton worrying about the Japan problem in the early years of this decade. I was one; Lars Svensson, currently at Sweden’s Riksbank, was another; a third was a guy named Ben Bernanke. I wonder whatever happened to him?
Paul Krugman, "ZIRP," The New York Times, December 16, 2008 ---
http://krugman.blogs.nytimes.com/2008/12/16/zirp/?scp=8&sq=printing money&st=cse

How much to bail out the banks now? $3.5 trillion by one estimate
America, what is happening to you?
A federal program to guarantee or buy bad assets from the ailing U.S. bank sector could come with a $3.5 trillion price tag. That would push the accumulated costs of rescuing the financial markets over the last year through various federal loan, stock purchase, debt guarantee and other programs close to $9 trillion and counting, with practically no end in sight for the bad news battering the banking industry. That figure doesn't count the $825 billion economic stimulus plan also under consideration. "We expect massive federal intervention into the financial sector from the new administration in the coming months," says Keefe Bruyette & Woods analyst Frederick Cannon, who calculated the $3.5 trillion figure, which is one-quarter of the banking sector's $14 trillion in combined assets.
Liz Moyer, "A TARP In The Trillions?" Forbes, January 21, 2009 --- http://www.forbes.com/2009/01/21/tarp-banking-treasury-biz-wall-cx_lm_0121tarp.html
Jensen Comment
The estimate is now almost double the above figure.
So how much are we talking about in the already-existing toxic paper already held by Fannie, Freddie, and the most poisoned banks?
Estimates place these at $6 trillion, which is well over half our out-of-control existing National Debt --- http://online.wsj.com/article/SB123396703401759083.html?mod=djemEditorialPage

Plus another $3,6 trillion maybe
America, what is happening to you?
Much has been made of the subprime debacle. But few seem to be willing to talk about another looming crisis: credit card debt. People like Nouriel Roubini, the professor who has predicted much of this crisis, have estimated that you could have losses of as much as $3.6 trillion, which would bankrupt the industry. What do you make of that number? And since credit card defaults are correlated to employment, what happens if unemployment goes as high as 10 percent or more? What is the highest unemployment level that you’ve used in your forecasting models? And do you have adequate reserves for your worst-case situation? If your assumptions are wrong, what happens?
Andrew Ross Sorkin, "Up Next for Bankers: A Flogging," The New York Times, February 9, 2009 ---
http://www.nytimes.com/2009/02/10/business/10sorkin.html?_r=1&partner=permalink&exprod=permalink

As it has so often in recent months, the market elation that greeted the Federal Reserve's epic monetary easing earlier this week has turned to worry. Stocks fell off again yesterday, but the big news of the week has been the slide in the dollar. The nearby chart shows the greenback's story since September. From its dangerous summer lows, the buck soared at the height of the credit panic as investors looked for safety in a hurricane. But the dollar has fallen like Newton's apple in December, as Chairman Ben Bernanke and his comrades signaled that they are willing to cut interest rates to near-zero and print as much money as it takes to prevent a deflation.
"A Dollar Referendum Currency markets reflect a lack of faith in Bernanke," The Wall Street Journal, December 19, 2008 ---
http://online.wsj.com/article/SB122965017184420567.html

A few quick facts about Wall Street bonuses. The pretext for the political outrage was the New York comptroller's report this week on the aggregate data for bonuses in 2008. That "irresponsible" bonus pool of $18 billion was for every worker in the New York financial industry, from top dogs to secretaries. This bonus pool fell 44% in 2008, the largest percentage decline in 30 years. The average bonus was $112,000; bonuses typically make up most of an employee's salary on Wall Street. The comptroller estimates that this decline will cost New York State $1 billion in lost tax revenue and New York City $275 million. Both city and state may have to announce layoffs.
"'Idiots' Indeed," The Wall Street Journal, January 31, 2009 --- http://online.wsj.com/article/SB123336371503735447.html?mod=djemEditorialPage
Jensen Comment
Although this puts our bonus contempt somewhat in a new light, it also does not lesson opinion that John Thain and the other crooks who declared themselves multi-million bonuses are one of the reasons that America now despises Wall Street. Actually Thain wanted a $10 million bonus while captain of his sinking ship (Merrill Lynch).
Bob Jensen's threads on outrageous executive compensation --- http://online.wsj.com/article/SB123336371503735447.html?mod=djemEditorialPage

Rep. Manzullo Questions Bailout Czar Neel Kashkari (Watch a Butt Get Chewed Out) --- http://www.youtube.com/watch?v=UP73cK3GXdo
Bob Jensen's threads on outrageous executive compensation --- http://faculty.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

Bank of America --- http://en.wikipedia.org/wiki/Bank_of_America
BofA was riding high after the 2009 financial crises until it acquired the disasters called Countrywide and Merrill Lynch!

Teaching Case from The Wall Street Journal Accounting Weekly Review on October 5, 2012

BofA Takes New Crisis-Era Hit
by: Dan Fitzpatrick, Christian Berthelsen and Robin Sidel
Sep 29, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 
 

TOPICS: Contingent Liabilities

SUMMARY: "Bank of America Corp. agreed to pay $2.43 billion to settle claims it misled investors about the acquisition of troubled brokerage firm Merrill Lynch & Co...." during the financial crisis in 2008. At the time it acquired Merrill Lynch in September 2008, BofA became the biggest U.S. bank; the value of the bank then fell by more than half by the time the acquisition of Merrill Lynch closed 3 months later. These losses were not disclosed by then CEO Ken Lewis and his management team to shareholders before they voted on the merger transaction with Merrill.

CLASSROOM APPLICATION: The article addresses accounting for litigation contingent liabilities. The related video clearly discusses the history of the transactions.

QUESTIONS: 
1. (Introductory) To whom did Bank of America Corp. (BofA) agree to pay $2.43 billion dollars?

2. (Introductory) For what losses did BofA agree to make this payment?

3. (Advanced) How could losses have occurred and a payment of $2.4 billion be required if "Bank of America executives now say Merrill...has become a big profit contributor... [and that] it's clear that Merrill is a significant positive any way you want to look at it..."?

4. (Advanced) What accounting standards provide the requirements to account for costs such as this $2.4 billion payment by BofA?

5. (Advanced) According to the article, BofA has "set aside more than $42 billion in litigation expenses, payouts and reserves...[which] includes $1.6 billion taken in the third quarter [of 2012]...." According to the related video, what period will be affected by $1.6 billion being recorded as an expense related to this $2.43 billion settlement? Explain your answer.
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
BofA-Merrill: Still A Bottom-Line Success
by David Benoit
Sep 28, 2012
Online Exclusive

"BofA Takes New Crisis-Era Hit," by Dan Fitzpatrick, Christian Berthelsen and Robin Sidel, The Wall Street Journal, September 29, 2012 ---
http://professional.wsj.com/article/SB10000872396390443843904578024110468736042.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

Bank of America Corp. agreed to pay $2.43 billion to settle claims it misled investors about the acquisition of troubled brokerage firm Merrill Lynch & Co., in the latest financial-crisis aftershock to rattle the banking sector.

The payment is the largest settlement of a shareholder claim by a financial-services firm since the upheaval of 2008 and 2009. It also ranks as the eighth-largest securities class-action settlement, behind payouts like the $7.2 billion settlement with shareholders of Enron Corp. and the $6.1 billion pact with WorldCom Inc. investors, both in 2005.

The deal is a sign that U.S. banks' battle to contain the high cost of the crisis continues to escalate, despite a four-year slog of lawsuits, losses and profit-sapping regulations. Bank of America's total exposure to crisis-era litigation is "seemingly never-ending," said Sterne Agee & Leach Inc. in a note Friday.

Is the era that produced all of this legal exposure "history?" the Sterne Agee & Leach analysts said. "Unlikely."

The settlement ends a three-year fight with a group of five plaintiffs, including the State Teachers Retirement System of Ohio and the Teacher Retirement System of Texas. They accused the bank and its officers of making false or misleading statements about the health of Bank of America and Merrill Lynch and were planning to seek $20 billion if the case went to trial as scheduled on Oct. 22.The size of the pact highlights how hasty acquisitions engineered during the height of the financial crisis by Kenneth Lewis, then the bank's chief executive, are still haunting the company four years later. Decisions to buy mortgage lender Countrywide Financial Corp. and Merrill have forced Bank of America, run since 2010 by Chief Executive Brian Moynihan, to set aside more than $42 billion in litigation expenses, payouts and reserves, according to company figures. The funds are meant to absorb a litany of Merrill-related lawsuits and claims from investors who say Countrywide wasn't honest about the quality of mortgage-backed securities it issued before the crisis.

That total includes $1.6 billion taken in the third quarter to help pay for the Merrill settlement announced Friday and a landmark $8.5 billion agreement reached last year with a group of high-profile mortgage-bond investors.

The company's shares lost more than half their value between when Bank of America announced its late-2008 plan to purchase Merrill Lynch and the date the deal closed 3½ months later, wiping out $70 billion in shareholder value. The shares have fallen further since then, and investors who owned the shares won't be made whole by the settlement.

"We find it simply amazing the sheer magnitude of value destruction over the years," said Sterne Agee in the note issued Friday. And "the bill is surely set to increase" as the research firm expects the bank to reach other legal settlements over the next 12 to 24 months. Bank of America is still engaged in a legal clash with bond insurer MBIA Inc., MBI +3.91% which has alleged that Countrywide wasn't honest about the quality of mortgage-backed securities it issued before the financial crisis.

The move to buy Merrill over one weekend in September 2008 was initially hailed as a rare piece of good news during a week when much of Wall Street appeared to be teetering on the brink. It also vaulted the Charlotte, N.C., lender to the top of the U.S. banking heap, capping a goal pursued over two decades by Mr. Lewis and his predecessor, Hugh McColl.

The Merrill deal, initially valued at $50 billion in Bank of America stock, was the "deal of a lifetime," Mr. Lewis said on the day it was announced.

But the agreement soon became a problem as analysts questioned whether Mr. Lewis paid too much and Merrill's losses spiraled out of control in the weeks before the deal closed. Investor fears stemming from the financial crisis sent shares of Bank of America and other financial companies into free fall, and the deal was worth roughly $19 billion at its completion on Jan. 1, 2009.

Mr. Lewis and his top executives made the decision not to say anything publicly about the mounting problems before shareholders signed off on the merger—a decision that formed the basis of a number of Merrill-related suits, including an action brought by the Securities and Exchange Commission. The bank also didn't disclose that it sought $20 billion in U.S. aid to digest Merrill, or that the deal allowed Merrill to award up to $5.8 billion in performance bonuses. When Bank of America threatened to pull out of the deal because of the losses, then-Treasury Secretary Henry Paulson told Mr. Lewis that current management would be removed if the deal wasn't completed.

The legal scrutiny surrounding the Merrill acquisition contributed to Mr. Lewis's decision to step down at the end of 2009. Mr. Lewis's lawyer declined to comment.

"Any way you slice it, $2.4 billion is a big number," says Kevin LaCroix, a lawyer at RT ProExec, a firm that focuses on management-liability issues.

Bank of America executives now say Merrill, unlike Countrywide, has become a big profit contributor, while the company continues to work to absorb massive losses in its mortgage division. The divisions inherited from Merrill produced $31.9 billion in net income between 2009 and 2011 and $164.4 billion in revenue. Bank of America's total net income over the period was just $5.5 billion, on $326.8 billion in revenue, reflecting in part the hefty losses tied to the Countrywide deal.

"I think it's clear that Merrill is a significant positive any way you want to look at it," said spokesman Jerry Dubrowski.

The settlement doesn't end all Merrill-related headaches. The New York attorney general's office still is pursuing a separate civil fraud suit relating to the Merrill takeover that began under former Attorney General Andrew Cuomo. Defendants in that case include the bank, Mr. Lewis and former Chief Financial Officer Joe Price. A spokesman for New York State Attorney General Eric Schneiderman declined to comment.

It isn't known how much all shareholders will receive as a result of the Merrill settlement announced Friday. The amount shareholders receive will ultimately depend on how long they held the shares and how much they paid. Mr. Lewis, also a shareholder, won't receive a payout because defendants in the suit are excluded from the class that the court certified.

But because the decline in Bank of America stock was so steep—the shares fell from $32 to $14 between Sept. 12, 2008, the day before the Merrill acquisition was announced, and the Jan. 1, 2009, closing—no shareholders can expect to recover their full losses.

Before the settlement was reached, a targeted recovery for at least three million shareholders who were part of the class was $2.52 a share, said a spokesman for Ohio Attorney General Mike DeWine. The State Teachers Retirement System of Ohio and the Ohio Public Employees Retirement System, which held between 18 million and 20 million shares, now expect to recover $1.19 per share, or roughly $20 million.

Continued in article

Breaking the Bank Frontline Video
In Breaking the Bank, FRONTLINE producer Michael Kirk (Inside the Meltdown, Bush’s War) draws on a rare combination of high-profile interviews with key players Ken Lewis and former Merrill Lynch CEO John Thain to reveal the story of two banks at the heart of the financial crisis, the rocky merger, and the government’s new role in taking over — some call it “nationalizing” — the American banking system.
Simoleon Sense, September 18, 2009 --- http://www.simoleonsense.com/video-frontline-breaking-the-bank/
Bob Jensen's threads on the banking bailout --- http://faculty.trinity.edu/rjensen/2008Bailout.htm

Update November 23, 2016
Treasury Secretary Hank Paulson's Bank of America Extortion Scheme (Hustle) Finally Laid to Rest

From the CFO Journal's Morning Ledger on November 23, 2016

Do the Hustle? Nope
The government’s Hustle case against Bank of America Corp. is finally dead. The case, in which the government accused the bank’s Countrywide Financial Corp. unit of churning out shoddy mortgage securities in the run-up to the financial crisis, already was thrown out by a U.S. appeals court in May. The U.S. attorney’s office in Manhattan, which had first brought the case in 2012, then asked the appeals court to reconsider its decision, a request that was denied.

Jensen Comment

A better word for "Hustle" is Treasury Department "Extortion." When the economy collapsed in 2007 due to poisoned mortgages BofA had no poisoned mortgages. Then Treasury Secretary Hank Paulson came calling like an extortionist according to former BofS CEO Ken Lewis. Paulson gave BofA no choice but to buy Countrywide Financial with its millions of poisoned mortgages. The secret intent was to give Countrywide deeper pockets so that the Federal Government could turn around a sue BofA billions for all the financial crimes of Countrywide Financial.

There was never any doubt about the high crimes of Countrywide Financial on the main streets of cities and towns across the USA. Countrywide issued millions of mortgages to borrowers having no hope of meeting their mortgage obligations.

It makes me feel good that Paulson finally got his just dessert. I only wish he would be sued. As the former CEO of Goldman Sachs he bailed out Goldman with milk and honey and pissed on BofA. Now he's retired on his millions from Goldman and seemingly can't be touched for his extortion crimes.

Merrill Lynch had a friend in Hank Paulson, but he was no friend to Bank of America shareholders
The ex-US Treasury Secretary has admitted telling the Bank of America boss he might lose his job if he walked away from a merger from Merrill Lynch. The former US Treasury Secretary says the merger was necessary Hank Paulson warned the bank's chief executive Kenneth Lewis that the Federal Reserve could oust him and the board if the rescue did not proceed. But Mr. Paulson insisted that remarks he made were "appropriate." Bank of America bought Merrill during the height of the financial crisis and suffered severe losses.
"Paulson admits bank merger threat," BBC News, July 15, 2009 ---
http://news.bbc.co.uk/2/hi/business/8152858.stm
 

Jensen Comment
Paulson's claim that his threats were "appropriate" comes as little comfort to Bank of America shareholders who will be losing greatly because of the threats.

Bank of America is now paying a steep (fatal?) price for having purchased the fraudulent Countrywide and Merrill Lynch companies. The poison-laced Countrywide was a lousy investment decision. However, then CEO Kenneth D. Lewis contends that then Treasury Secretary Hank Paulson held a gun to his head and forced BofA to buy the deeply corrupt and poison-laced Merrill Lynch.

CDO --- http://en.wikipedia.org/wiki/Collateralized_debt_obligation

Countrywide Financial --- http://en.wikipedia.org/wiki/Countrywide_Financial

Those Poisoned CDOs
"Bank of America Ordered to Unseal Documents in MBIA Case," by Dan Freed, The Street, June 4, 2013 ---
http://www.thestreet.com/story/11804771/1/bank-of-america-ordered-to-unseal-documents-in-mbia-case.html

Jensen Comment
Arguably the worst decision in the 2008 economic bailout was Bank of America's decision to buy the bankrupt Countrywide Financial. BofA then CEO Lewis claims to this day that Treasury Secretary Hank Paulsen held a gun to his head and said buy Countrywide Financial or else. Countrywide has been nothing but a cash flow hemorrhage for BofA ever since.

"BofA plunges as AIG sues for $10 billion "fraud," by Jonathan Stempel and Joe Rauch, Reuters, August 8, 2011 ---
http://www.reuters.com/article/2011/08/08/us-bankofamerica-aig-lawsuit-idUSTRE7772LN20110808

Bank of America Corp shares plunged more than 20 percent on Monday, capping a three-day rout in which the largest U.S. bank lost nearly one-third of its market value.

Monday's decline was triggered by a $10 billion lawsuit from American International Group Inc alleging a "massive" mortgage fraud.

The action raised new concerns about burgeoning losses related to the bank's $2.5 billion purchase of Countrywide Financial Corp in 2008 and prompted questions about the stability of the bank's management team.

"The bank just can't get its hands around the liabilities it's facing," said Paul Miller, an analyst at FBR Capital Markets.

He said investors fear the bank will have to raise equity to cover potential losses, diluting existing shareholdings.

Bank of America spokesman Jerry Dubrowski countered that the bank has adequate reserves to buy back mortgages if necessary and is comfortable with its strategic plans.

"We don't think we need to raise capital to run our businesses," he said. "We have the right strategy and management team in place."

In a separate court filing on Monday AIG, challenged an $8.5 billion agreement Bank of America reached in late June to end litigation by several large investors who bought securities backed by subprime Countrywide loans.

New York Attorney General Eric Schneiderman and other investors have previously tried to block that accord, saying the settlement amount is too small.

Bank of America shares closed down $1.66 at $6.51 after earlier plunging to $6.31, their lowest since March 2009. More than $30 billion of the company's market value has been wiped out since August 3.

Monday's drop came amid a broad market selloff, led by financial stocks, on the first trading day after Standard & Poor's downgraded its rating of U.S. government debt.

The shares of Citigroup Inc, another large bank, fell 16.4 percent to $27.95.

The cost of insuring Bank of America debt against default, an indicator of potential trouble at companies, rose roughly 50 percent on Monday to a level higher than several of the bank's main rivals, data provider Markit said.

It now costs $310,000 a year to insure the bank's bonds for five years, compared with $143,000 for the bonds of JP Morgan Chase & Co, the second largest U.S. bank.

CONFIDENCE AND TRUST

AIG's lawsuit also upped the ante for Bank of America Chief Executive Brian Moynihan, who is struggling to contain losses from the Countrywide deal engineered by his predecessor, Kenneth Lewis.

"Brian Moynihan and the management team have not gained the confidence and trust of investors," said Jonathan Finger, whose Finger Interests Number One Ltd in Houston owns BofA stock and was a vocal critic of Lewis.

Moynihan is scheduled to participate in a public conference call on Wednesday hosted by Fairholme Capital Management LLC, one of its largest shareholders.

"Brian will have to give the performance of his life," said Tony Plath, a professor at the University of North Carolina at Charlotte, where Bank of America is based.

Moynihan's saving grace might be that the bank's board has no obvious candidates to replace him, said Miller of FBR Capital Markets.

Some large investors appeared to have avoided some of the debacle.

Hedge fund manager David Tepper, who has made a fortune betting against financial company shares, sold nearly half of his stake in Bank of America during the second quarter, according to a regulatory filing from his company, Appaloosa Management.

"Bank of America's stock price will remain under duress," said Michael Mullaney, who helps invest $9.5 billion at Fiduciary Trust Co in Boston and who said his company has sold nearly all its BofA shares.

Continued in article

Thain Pain:  Merrill Lynch Bonuses of Over $1 Million to 696 Executives
Rewarded for making their company so profitable for shareholders? (Barf Alert!)
Merrill Lynch quietly paid out at least one million dollars bonus each to about 700 top executive even when the investment house was bleeding with losses last year, a probe has revealed. They were part of 3.6 billion dollars in the firm's bonus payments in December before the announcement of its fourth quarterly losses and takeover by Bank of America, the investigation by the New York state Attorney General's office showed. "696 individuals received bonuses of one million dollars or more," New York Attorney General Andrew Cuomo said of the Merrill scandal in a letter to a lawmaker heading the House of Representatives financial services committee.
"Merrill bonuses made 696 millionaires: probe," Yahoo News, February 11, 2009 --- http://news.yahoo.com/s/afp/20090211/bs_afp/usbankingjusticeprobecompanymerrillbofa_20090211201133

John Alexander Thain (born May 26, 1955) was the last chairman and chief executive officer of Merrill Lynch before its merger with Bank of America. Thain was designated to become president of global banking, securities, and wealth management at the newly combined company, but he resigned on January 22, 2009. Bank of America lost confidence in Thain after he failed to tell the bank about mounting losses at Merrill in late 2008. The Associated Press identified him as the best paid among the executives of the S&P 500 companies in 2007. On December 8, 2008, Thain gave up on pursuing a controversial bonus of $10 million from the compensation committee at Merrill.[2] Thain also decided to accelerate payments of bonus to employees at Merrill, giving out between $3 billion and $4 billion using money that appeared to come directly from the $15 billion Bank of America and Merrill Lynch had received from US government taxpayers (via the Troubled Assets Relief Program). Thain has additionally become infamous for spending $1.22 million in corporate funds to decorate his office, even as he was asking the government for a bailout of his troubled company.
Quoted from Wikipedia *** http://en.wikipedia.org/wiki/John_Thain
Thain has since been fired by Bank of America and has agreed to pay for over $1 million spent redecorating his new office.
My question is how Bank of America could buy Merrill without audit verification of Merrill’s 2008 losses and cash flows --- these should've never been a surprise to Bank of America unless Bank of America was plain stupid about accounting. The final settlement price at a minimum could've been contingent on an audit of 2008 earnings.

Added Jensen Comment
I've never been a big fan of Merrill Lynch after repeated disclosures emerged about the repeated frauds instigated by employees of Merrill in the 1990s. Just do a word search on "Merrill" and note the number of frauds that are documented, not the least of which is the Orange County massive derivatives instruments fraud --- http://faculty.trinity.edu/rjensen/FraudRotten.htm

Good Bank, Bad Bank by Dr. Seuss --- http://thereformedbroker.com/2009/01/29/good-bank-bad-bank-by-dr-seuss/

The Short and Simple Video About What Caused the Credit Crisis --- http://vimeo.com/3261363
Also at http://www.youtube.com/watch?v=Q0zEXdDO5JU
Ed Scribner forwarded the above links

"Six Errors on the Path to the Financial Crisis," by Alan S. Blinder, The New York Times, January 24, 2009 --- http://www.nytimes.com/2009/01/25/business/economy/25view.html?_r=1&ref=business

My list of errors has six whoppers, in chronologically order. I omit mistakes that became clear only in hindsight, limiting myself to those where prominent voices advocated a different course at the time. Had these six choices been different, I believe the inevitable bursting of the housing bubble would have caused far less harm.

WILD DERIVATIVES
In 1998, when Brooksley E. Born, then chairwoman of the Commodity Futures Trading Commission, sought to extend its regulatory reach into the derivatives world, top officials of the Treasury Department, the Federal Reserve and the Securities and Exchange Commission squelched the idea. While her specific plan may not have been ideal, does anyone doubt that the financial turmoil would have been less severe if derivatives trading had acquired a zookeeper a decade ago?

SKY-HIGH LEVERAGE
The second error came in 2004, when the S.E.C. let securities firms raise their leverage sharply. Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the S.E.C. and the heads of the firms thinking? Remember, under 33-to-1 leverage, a mere 3 percent decline in asset values wipes out a company. Had leverage stayed at 12 to 1, these firms wouldn’t have grown as big or been as fragile.

A SUBPRIME SURGE
The next error came in stages, from 2004 to 2007, as subprime lending grew from a small corner of the mortgage market into a large, dangerous one. Lending standards fell disgracefully, and dubious transactions became common.

Why wasn’t this insanity stopped? There are two answers, and each holds a lesson. One is that bank regulators were asleep at the switch. Entranced by laissez faire-y tales, they ignored warnings from those like Edward M. Gramlich, then a Fed governor, who saw the problem brewing years before the fall.

The other answer is that many of the worst subprime mortgages originated outside the banking system, beyond the reach of any federal regulator. That regulatory hole needs to be plugged.

FIDDLING ON FORECLOSURES
The government’s continuing failure to do anything large and serious to limit foreclosures is tragic. The broad contours of the foreclosure tsunami were clear more than a year ago — and people like Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms.

Yet the Treasury and Congress fiddled while homes burned. Why? Free-market ideology, denial and an unwillingness to commit taxpayer funds all played roles. Sadly, the problem should now be much smaller than it is.

LETTING LEHMAN GO
The next whopper came in September, when Lehman Brothers, unlike Bear Stearns before it, was allowed to fail. Perhaps it was a case of misjudgment by officials who deemed Lehman neither too big nor too entangled — with other financial institutions — to fail. Or perhaps they wanted to make an offering to the moral-hazard gods. Regardless, everything fell apart after Lehman.

People in the market often say they can make money under any set of rules, as long as they know what they are. Coming just six months after Bear’s rescue, the Lehman decision tossed the presumed rule book out the window. If Bear was too big to fail, how could Lehman, at twice its size, not be? If Bear was too entangled to fail, why was Lehman not?

After Lehman went over the cliff, no financial institution seemed safe. So lending froze, and the economy sank like a stone. It was a colossal error, and many people said so at the time.

TARP’S DETOUR
The final major error is mismanagement of the Troubled Asset Relief Program, the $700 billion bailout fund. As I wrote here last month, decisions of Henry M. Paulson Jr., the former Treasury secretary, about using the TARP’s first $350 billion were an inconsistent mess. Instead of pursuing the TARP’s intended purposes, he used most of the funds to inject capital into banks — which he did poorly.

To illustrate what might have been, consider Fed programs to buy commercial paper and mortgage-backed securities. These facilities do roughly what TARP was supposed to do: buy troubled assets. And they have breathed some life into those moribund markets. The lesson for the new Treasury secretary is clear: use TARP money to buy troubled assets and to mitigate foreclosures.

Six fateful decisions — all made the wrong way. Imagine what the world would be like now if the housing bubble burst but those six things were different: if derivatives were traded on organized exchanges, if leverage were far lower, if subprime lending were smaller and done responsibly, if strong actions to limit foreclosures were taken right away, if Lehman were not allowed to fail, and if the TARP funds were used as directed.

All of this was possible. And if history had gone that way, I believe that the financial world and the economy would look far less grim than they do today.

Jensen Comment
Alan Blinder missed some whoppers.

1. The SEC was authorized to regulate investment banking and consistently failed to do so through several crises, including the dot-com crisis of the 1990s and credit default swap crisis commencing in 2008 --- http://faculty.trinity.edu/rjensen/2008Bailout.htm#SEC
   Also so see http://faculty.trinity.edu/rjensen/2008Bailout.htm#Bailout
   This is an admitted failure of SEC Directors from Arthur Levitt though Christopher Cox.
   
    
2. The Federal Reserve failed in regulating investment banks. Alan Greenspan belatedly admitted that he was largely at fault.
   "‘I made a mistake,’ admits Greenspan," by Alan Beattie and James Politi, Financial Times, October 23, 2008 ---
   http://www.ft.com/cms/s/0/aee9e3a2-a11f-11dd-82fd-000077b07658.html?nclick_check=1

   “I made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders,” he said.

   In the second of two days of tense hearings on Capitol Hill, Henry Waxman, chairman of the House of Representatives, clashed with current and former regulators and with Republicans on his own committee over blame for the financial crisis.

   Mr Waxman said Mr Greenspan’s Federal Reserve – along with the Securities and Exchange Commission and the US Treasury – had propagated “the prevailing attitude in Washington... that the market always knows best.”

   Mr Waxman blamed the Fed for failing to curb aggressive lending practices, the SEC for allowing credit rating agencies to operate under lax standards and the Treasury for opposing “responsible oversight” of financial derivatives.

   Christopher Cox, chairman of the Securities and Exchange Commission, defended himself, saying that virtually no one had foreseen the meltdown of the mortgage market, or the inadequacy of banking capital standards in preventing the collapse of institutions such as Bear Stearns.

   Mr Waxman accused the SEC chairman of being wise after the event. “Mr Cox has come in with a long list of regulations he wants... But the reality is, Mr Cox, you weren’t doing that beforehand.”

   Mr Cox blamed the fact that Congressional responsibility was divided between the banking and financial services committees, which regulate banking, insurance and securities, and the agriculture committees, which regulate futures.

   “This jurisdictional split threatens to for ever stand in the way of rationalising the regulation of these products and markets,” he said.

   Mr Greenspan accepted that the crisis had “found a flaw” in his thinking but said that the kind of heavy regulation that could have prevented the crisis would have damaged US economic growth. He described the past two decades as a “period of euphoria” that encouraged participants in the financial markets to misprice securities.

   He had wrongly assumed that lending institutions would carry out proper surveillance of their counterparties, he said. “I had been going for 40 years with considerable evidence that it was working very well”.

   Continued in the article

   Jensen Comment
   In other words, he assumed the agency theory model that corporate employees, as agents of their owners and creditors, would act hand and hand in the best interest for themselves and their investors. But agency theory has a flaw in that it does not understand Peter Pan.

   Peter Pan, the manager of Countrywide Financial on Main Street, thought he had little to lose by selling a fraudulent mortgage to Wall Street. Foreclosures would be Wall Street’s problems and not his local bank’s problems. And he got his nice little commission on the sale of the Emma Nobody’s mortgage for $180,000 on a house worth less than $100,000 in foreclosure. And foreclosure was almost certain in Emma’s case, because she only makes $12,000 waitressing at the Country Café. So what if Peter Pan fudged her income a mite in the loan application along with the fudged home appraisal value? Let Wall Street or Fat Fannie or Foolish Freddie worry about Emma after closing the pre-approved mortgage sale deal. The ultimate loss, so thinks Peter Pan, will be spread over millions of wealthy shareholders of Wall Street investment banks. Peter Pan is more concerned with his own conventional mortgage on his precious house just two blocks south of Main Street. This is what happens when risk is spread even farther than Tinkerbell can fly!
   Read about the extent of cheating, sleaze, and subprime sex on Main Street in Appendix U.

   March 1, 2009 reply from Henry Schwarzbach [henryschwarzbach@gmail.com]

   What happened is exactly what agency theory posits. The fly by night mortgage brokers were agents for the investment banks. They were given incentives to originate mortgages which could provide benefits for divergent behavior, fraudlent applications. There was great assemetry since the bankers had no primary info on the borrowers. Agency theory tells us that we can reduce agency costs with proper incentives (e.g. the originators could be pentalized for late payments and defaults.) and/or monitoring. What existed was a system with no incentives or monitoring to reduce the very high agency cost. Mortgage brokers and investment banks both enriched themselves at the expense of the investors. That's exactly what agency theory would predict.

   Henry Schwarzbach PhD
   URI College of Business
   7 Lippitt Road Kingston, RI 02881
   Phone 401 874-4327 Email: henrys@uri.edu

    

3.     U.S auditing standards explicitly require careful estimation of bad debts. The auditing firms failed the world when auditing sub-prime mortgage receivables, the collateralized debt obligation (CDOs) investments, and the credit derivative instruments sold to insure those investments? Where were the auditing firms that were paid millions to audit commercial and investment banks as well as Fannie Mae and Freddie Mack?
See http://faculty.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
 

4, Subprime: Borne of Sleaze, Bribery, and Lies --- http://faculty.trinity.edu/rjensen/2008Bailout.htm#Sleaze
Much of this began with good intentions to make housing credit available to minorities and poor people in general, but politicians figured out how to play Robin Hood with taxpayer money and used Congressional power over Fannie Mae and Freddie Mack to do just that.

 

"Busted At Last: KB Home, Countrywide (now owned by Bank of America) Hit With $2.8 Billion Racketeering Charge," Money News, May 8, 2009 ---
http://moneynews.newsmax.com/headlines/kb_home_countrywide/2009/05/08/212443.html

Homeowners brought a federal racketeering lawsuit on Thursday against KB Home (KBH.N), the former Countrywide Financial Corp and appraiser LandSafe Inc, accusing the companies of operating a scheme to fraudulently inflate sales prices of KB homes in Arizona and Nevada.

The lawsuit, filed in federal court in Phoenix, claims the three companies colluded to overprice as many as 14,000 homes in the two states by an average of $20,000, for an estimated total of $2.8 billion between 2006 and the present. The plaintiffs seek class action status and triple damages.

A KB Home spokeswoman said the Los Angeles-based home builder had not seen the lawsuit and had no comment. Calabasas, California-based Countrywide, which was acquired last year by Bank of America (BAC.N), could not be reached for comment.

The lawsuit contends that KB and Countrywide formed the joint venture Countrywide KB Home Loans to "rig and falsify" appraised values of the homes they were selling and financing in the two states.

The joint venture steered prospective buyers of KB Homes to hand-picked appraisers at Countrywide subsidiary LandSafe who would "come in with the appraisal at whatever number was necessary to close the deal," the lawsuit said.

LandSafe appraisers "blatantly falsified" sales prices for comparable properties, using prices from homes as much as 10 miles away, and citing comparable properties that were in different planned communities, the suit said.

The homes were generally priced between $250,000 and $350,000 -- inflated sums that homeowners discovered when they attempted to sell their homes and hired independent appraisers, said plaintiffs attorney Steve Berman of Hagens Berman Sobol Shapiro LLP in Seattle.

"Most of these people were underwater from the get-go," said Berman.

The Hagens firm filed a similar lawsuit against KB and Countrywide earlier this year in California, citing claims under the Racketeer Influenced and Corrupt Organizations Act and violation of the state's unfair competition law.

The case is Nathaniel Johnson v. KB Home et al., 2:09-CV-00972-MHB, in U.S. District Court in Arizona.

Bob Jensen's threads on Rotten to the Core are at http://faculty.trinity.edu/rjensen/FraudRotten.htm

Bob Jensen's threads on Countrywide Financial (now owned by Bank of America) fraud are at
http://faculty.trinity.edu/rjensen/2008Bailout.htm#Sleaze

Professor Schiller at Yale assets housing prices are still overvalued and need to come down to reality
The median value of a U.S. home in 2000 was $119,600. It peaked at $221,900 in 2006. Historically, home prices have risen annually in line with CPI. If they had followed the long-term trend, they would have increased by 17% to $140,000. Instead, they skyrocketed by 86% due to Alan Greenspan’s irrational lowering of interest rates to 1%, the criminal pushing of loans by lowlife mortgage brokers, the greed and hubris of investment bankers and the foolishness and stupidity of home buyers. It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued. Long-term averages are created by periods of overvaluation followed by periods of undervaluation. Prices need to fall 20% and could fall 30%.....
Watch the video on Yahoo Finance --- Click Here
See the chart at http://www.businessinsider.com/the-housing-chart-thats-worth-1000-words-2009-2
Also see Jim Mahar's blog at http://financeprofessorblog.blogspot.com/2009/02/shiller-house-prices-still-way-too-high.html
Jensen Comment
In the worldwide move toward fair value accounting that replaces cost allocation accounting, the above analysis by Professor Schiller is sobering. It suggests how much policy and widespread fraud can generate misleading "fair values" in deep markets with many buyers and sellers, although the housing market is a bit more like the used car market than the stock market. Each house and each used car are unique, non-fungible items that are many times more difficult to update with fair value accounting relative to fungible market securities and new car markets.

Thain Pain:  Merrill Lynch Bonuses of Over $1 Million to Each of 696 Executives
Rewarded for making their company so profitable for shareholders? (Barf Alert!)
Merrill Lynch quietly paid out at least one million dollars bonus each to about 700 top executive even when the investment house was bleeding with losses last year, a probe has revealed. They were part of 3.6 billion dollars in the firm's bonus payments in December before the announcement of its fourth quarterly losses and takeover by Bank of America, the investigation by the New York state Attorney General's office showed. "696 individuals received bonuses of one million dollars or more," New York Attorney General Andrew Cuomo said of the Merrill scandal in a letter to a lawmaker heading the House of Representatives financial services committee.
"Merrill bonuses made 696 millionaires: probe," Yahoo News, February 11, 2009 --- http://news.yahoo.com/s/afp/20090211/bs_afp/usbankingjusticeprobecompanymerrillbofa_20090211201133

Long Time WSJ Defenders of Wall Street's Outrageous Compensation Morph Into Hypocrites
At each stage of the disaster, Mr. Black told me -- loan officers, real-estate appraisers, accountants, bond ratings agencies -- it was pay-for-performance systems that "sent them wrong." The need for new compensation rules is most urgent at failed banks. This is not merely because is would make for good PR, but because lavish executive bonuses sometimes create an incentive to hide losses, to take crazy risks, and even, according to Mr. Black, to "loot the place through seemingly normal corporate mechanisms." This is why, he continues, it is "essential to redesign and limit executive compensation when regulating failed or failing banks." Our leaders may not know it yet, but this showdown between rival populisms is in fact a battle over political legitimacy. Is Wall Street the rightful master of our economic fate? Or should we choose a broader form of sovereignty? Let the conservatives' hosannas turn to sneers. The market god has failed.
Thomas Frank, "Wall Street Bonuses Are an Outrage:  The public sees a self-serving system for what it," The Wall Street Journal, February 4, 2009 --- http://online.wsj.com/article/SB123371071061546079.html?mod=todays_us_opinion 
Bob Jensen's threads on outrageous compensation are at http://faculty.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

Bob Jensen's threads on corporate governance are at
http://faculty.trinity.edu/rjensen/Fraud001.htm#Governance

5. Congress, perhaps intentionally under the leadership of President Obama, is now turning the economic crisis into a perfect storm to bailout spendthrift state governments, ailing companies and unions such as American automobile manufacturers and the United Auto Workers, most anybody else with a sob story.

 

Cartoon link forwarded by David Fordham http://blogs.indystar.com/varvelblog/archives/2008/11/feeding_time.html

The problem with the current bailout is that the government may be giving money to companies that don't have a long-term future: zombies. On paper, for example, the Treasury Dept. says it invests Troubled Asset Relief Program (TARP) money only in "healthy banks—banks that are considered viable without government investment" because "they are best positioned to increase the flow of credit in their communities." That's the right idea. In practice, though, the criteria aren't so stringent. Banks like Citigroup still aren't strong enough to lend. "The bailout model is socialism," says R. Christopher Whalen, senior vice-president for consultancy Institutional Risk Analytics. He advocates selling failed institutions in pieces, as was done to resolve the savings and loan crisis in the late '80s and early '90s. In fact, Washington may be moving toward something like that with Citigroup. When a big employer runs into trouble, it's tempting to keep it going at any cost. Economists call this "lemon socialism"—the investment of public money in the worst companies rather than the best. The impulse is misguided, says Yale University economics professor Eduardo M. Engel. "You don't want to protect the jobs," he says. "What you want to protect is workers' income during the transition from one job to another." Peter Coy, "A New Menace to the Economy:  'Zombie' Debtors Call them "zombie" companies. Many more has-been companies will be feeding off taxpayers, investors, and workers—sapping the lifeblood of healthier rivals," Business Week, January 15, 2008 --- http://www.businessweek.com/magazine/content/09_04/b4117024316675.htm?link_position=link2

The Perfect (Stimulus) Storm:  $646,214 per saved government job
"$646,214 Per Government Job Spending where unemployment is already low," by Alan Reynolds, The Wall Street Journal, January 28, 2009 --- http://online.wsj.com/article/SB123310498020322323.html?mod=djemEditorialPage

After subtracting what House Democrats hope to spend on government payrolls, health, education and welfare, only a fifth of the original $550 billion is left for notoriously slow infrastructure projects, such as rebuilding highways and the electricity grid.

The Obama administration claims the stimulus bill will "create or save three or four million jobs over the next two years . . . with over 90% [of those jobs] in the private sector." To prove it, they issued a report from Christina Romer, chairman of the Council of Economic Advisers, and Jared Bernstein, chief economic adviser to Vice President Joe Biden. Its key estimates, however, were simply lifted from an outdated paper by Mark Zandi of Moody's economy.com.

Mr. Zandi's current estimates have government employment growing by 330,400 over two years as a result of the House bill (compared with 244,000 in Bernstein-Romer paper). Yet even that updated figure still amounts to only 8.3% of total jobs added, even though state and local governments are to receive 39% of the funds ($214.5 billion). Spending $214.5 billion to create or save 330,400 government jobs implies that taxpayers are being asked to spend $646,214 per job.

Does that make sense?

Simulations with his macroeconomic model, according to Mr. Zandi, reveal that "every dollar spent on unemployment benefits generates an estimated $1.63 in near-term GDP." By contrast, such "multipliers" simulate that tax cuts for business or investors would add only 30-38 cents on the dollar.

But econometric models are parables, not facts. The big multipliers for transfer payments and tiny multipliers for capital taxes in Mr. Zandi's model reveal more about the way the model was constructed than about the way the economy works. If model builders make Keynesian assumptions, their model will generate Keynesian results. Yet as Harvard economist Robert Barro recently pointed out on this page, contemporary academic economic research does not support the multipliers used to justify the House stimulus bill.

In the March 2006 IMF Research Bulletin, economist Giovanni Ganelli summarized recent International Monetary Fund research on fiscal policy. Several studies find that reductions in government spending "can have expansionary effects, since they can contribute to a consumption and investment boom owing to altered expectations regarding future taxation."

A 2002 study of U.S. data by Roberto Perotti of Università Bocconi did find that the effect of debt-financed spending increases was somewhat positive, but the multiplier effect was much less than one. A 2004 IMF study of recessions in advanced economies likewise found that "multipliers are unlikely to exceed unity." A 2006 study of U.S. data by IMF economist Magda Kandil found the effect of "fiscal expansion appears insignificant on aggregate demand and economic activity."

Continued in article

Video Lecture:  John Maynard Keynes and Hayek: Bruce Caldwell ---
http://www.youtube.com/watch?v=t4a_SkJzoIg

Video Rap:  Keynes and Hayek Rap from PBS  ---
http://www.pbs.org/newshour/bb/business/july-dec09/keynes_12-16.html
Also see http://financeprofessorblog.blogspot.com/2009/12/keynes-and-hayek-rap-from-pbs.html

The Perfect (Stimulus) Storm
A new analysis shows that California would get a whopping $21.5 billion under an economic stimulus plan that's expected to be approved by the House next week, making it the biggest winner among the 50 states. That's according to the National Conference of State Legislatures, which analyzed the new spending proposals offered by House leaders.
Rob Hotakainen , "California could reap $21.5 billion from U.S. stimulus plan,"  The Sacramento Bee, January 24, 2009 --- http://www.sacbee.com/capitolandcalifornia/story/1569761.html

The Less-Than-Perfect (Stimulus) Storm for Illinois
None of the funds provided by this Act may be made available to the State of Illinois, or any agency of the State, unless (1) the use of such funds by the State is approved in legislation enacted by the State after the date of the enactment of this Act, or (2) Rod R. Blagojevich no longer holds the office of Governor of the State of Illinois.
Draft of the Stimulus Act
I’m unaware of any previous case of the Congress dangling a bag of money over state legislators’ heads like this before. I’d also be surprised if it fails, no matter how commanding Blagojevich looks on “The View.” Illinois is not really in the position to turn down cash right now.
David Weigel, "Starving Out Blago," The Washington Independent, January 26, 2009 --- http://washingtonindependent.com/27252/starving-out-blago

The Perfect (Stimulus) Storm for Construction After the Recession
An analysis by Forbes publications of where most jobs will be created singles out engineering, accounting, nursing, and information technology, along with construction managers, computer-aided drafting specialists, and project managers. Unemployment rates among most of these specialists are not high. The rebuilding of "crumbling roads, bridges, and schools" highlighted by in various speeches by President Obama is likely to make greater use of unemployed workers in the construction sector. However, such spending will be a small fraction of the total stimulus package, and it is not easy for workers who helped build residential housing to shift to building highways . . . The likelihood that such a rapid and large public spending program will be of low efficiency is compounded by political realities. Groups that have lots of political clout with Congress will get a disproportionate amount of the spending with only limited regard for the merits of the spending they advocate compared to alternative ways to spend the stimulus. The politically influential will also redefine various projects so that they can fall under the "infrastructure" rubric. A report called Ready to Go by the U.S. Conference of Mayors lists $73 billion worth of projects that they claim could be begun quickly. These projects include senior citizen centers, recreation facilities, and much other expenditure that are really private consumption items, many of dubious value, that the mayors call infrastructure spending. Recessions would be a good time to increase infrastructure spending only if these projects can mainly utilize unemployed resources. This does not seem to be the case in most of the so-called infrastructure spending proposed under various stimulus plans.
Nobel Laureate Gary Becker, The Becker-Posner Blog, January 18, 2009 --- http://www.becker-posner-blog.com/

The Perfect (Stimulus) Storm for Signing Up Voters for the Democratic Party
The House Democrats’ trillion dollar spending bill, approved on January 21 by the Appropriations Committee and headed to the House floor next week for a vote, could open billions of taxpayer dollars to left-wing groups like the Association of Community Organizations for Reform Now (ACORN). ACORN has been accused of perpetrating voter registration fraud numerous times in the last several elections; is reportedly under federal investigation; and played a key role in the irresponsible schemes that caused a financial meltdown that has cost American taxpayers hundreds of billions of dollars since last fall. House Republican Leader John Boehner (R-OH) and other Republicans are asking a simple question: what does this have to do with job creation? Are Congressional Democrats really going to borrow money from our children and grandchildren to give handouts to ACORN in the name of economic “stimulus?” Incredibly, the Democrats’ bill makes groups like ACORN eligible for a $4.19 billion pot of money for “neighborhood stabilization activities.” Funds for this purpose were authorized in the Housing and Economic Recovery Act, signed into law in 2008. However, these funds were limited to state and local governments. Now House Democrats are taking the unprecedented step of making ACORN and other groups eligible for these funds:
Rick Moran, "ACORN eligible for billions from stimulus plan," American Thinker, January 26, 2009 --- http://www.americanthinker.com/blog/2009/01/acorn_eligible_for_billions_fr.html
Jensen Comment
Keith Olbermann correctly points out that ACORN will not get the funds directly but must bid competitively for such funds. What he does not explain is why ACORN disserves to be allowed to bid for billions of bailout funds given its biased political activities.

The group (ACORN) that pushed banks into the risky loans that brought the economy down is now eligible for a huge chunk of stimulus cash. The stimulus plan does create jobs — for community activists.
"ACORN's Seed Money," Investor's Business Daily, January 27, 2009 --- http://www.ibdeditorials.com/IBDArticles.aspx?id=317952439188615
Jensen Comment
It's never too late to give jobs to register fictitious people to vote for Democrats. Soon ACORN will have stimulus funds to register more Democrats.

"Another Bogus ACORN Lawsuit," by Michelle Malkin, Townhall, November 13, 2009 ---
http://townhall.com/columnists/MichelleMalkin/2009/11/13/another_bogus_acorn_lawsuit 

ACORN is doing what it does best: playing the victim, blaming everyone else for its self-inflicted wounds, perpetuating false narratives and defending the entitlement industry to the death.

On Thursday, the disgraced welfare rights organization filed suit over a congressional funding ban passed in September after nationwide undercover sting videos exposed ACORN's criminal element.

The group and its web of nonprofit, tax-exempt affiliates have collected an estimated $53 million in government funds since 1994. This pipeline is apparently a constitutionally protected right. According to ACORN's lawyers at the far-left Center for Constitutional Rights, the congressional funding ban constitutes a "bill of attainder" -- an act of the legislature declaring a person(s) guilty of a crime without trial.

Now cue the world's smallest violin and pass the Kleenex: ACORN's lawyers say the group has suffered cutbacks and layoffs as a result of the punitive funding ban. The congressional persecution means ACORN can no longer teach first-time-homebuyer indoctrination classes and -- gasp -- the loss of an $800,000 contract to conduct "outreach" on "asthma."

Message: The demons in the House who defunded ACORN (345 of them, including 172 Democrats) are cutting off oxygen to poor people!

"It's not the job of Congress to be the judge, jury and executioner," CCR lawyer Jules Lobel moaned as he equated the House's act of fiscal responsibility with the death penalty.

"It is outrageous to see Congress violating the Constitution for purposes of political grandstanding," CCR Legal Director Bill Quigley seethed without a shred of irony.

"Congress bowed to FOX News and joined in the scapegoating of an organization that helps average Americans going through hard times to get homes, pay their taxes and vote. Shame on them," ACORN head Bertha Lewis piled on in an affidavit lamenting the loss of state, local and private foundation grants, which she blamed on the resolution. It "gave the green light for others to terminate our funds, as well."

What ACORN's sob-story tellers leave out is the inconvenient fact that nonprofits were bailing on ACORN long before undercover journalists Hannah Giles and James O'Keefe and BigGovernment.com publisher Andrew Breitbart entered the scene. Internal ACORN records from a Washington, D.C., meeting held last August noted that more than $2 million in foundation money was being withheld as a result of the group's embezzlement scandal involving founder Wade Rathke's brother, Dale -- reportedly involving upward of $5 million.

Rathke admitted he suppressed disclosure of his brother's massive theft -- first discovered in 2000 -- because "word of the embezzlement would have put a 'weapon' into the hands of enemies of ACORN." In other words: The protection of ACORN's political viability came before the protection of members' dues (and taxpayers' funds).

A small group of ACORN executives helped cover up Dale Rathke's crime by carrying the amount he embezzled as a "loan" on the books of Citizens Consulting Inc. CCI, the accounting and financial management arm of ACORN and its affiliates, is housed in the same building as the national ACORN headquarters in New Orleans. It's also home to ACORN International, now operating under a different name, which Wade Rathke continues to head.

ACORN brass cooked up a "restitution" plan to allow the Rathkes to pay back a measly $30,000 a year in exchange for secrecy about the deal. ACORN's lawyers issued a decree to its employees to keep their "yaps" shut. Dale Rathke kept his job and his $38,000 annual salary until the story leaked to donors and board members outside the Rathke circle.

In June 2008, the left-wing Catholic Campaign for Human Development cut off grant money to ACORN "because of questions that arose about financial management, fiscal transparency and organizational accountability of the national ACORN structures." In November 2008 -- ahem, more than a year before the congressional ACORN funding ban was passed -- CCHD voted unanimously to extend and make permanent its ban on funding of ACORN organizations. "This decision was made because of serious concerns regarding ACORN's lack of financial transparency, organizational performance and questions surrounding political partisanship," according to Bishop Roger Morin.

Did ACORN's lawyers call that withdrawal of funding "political grandstanding" and "scapegoating," too?

The lawsuit over the congressional funding ban is just the latest desperate legal measure to distract from ACORN's long-festering ethics and financial scandals. ACORN's attorneys have sued Giles, O'Keefe, Breitbart and former ACORN/Project Vote whistleblower Anita MonCrief. And they'll sue anyone else who gets in the way of rehabilitating the scandal-plagued enterprise's image.

It took decades to build up its massive coffers and intricate web of affiliates across the country. It will take months and years to untangle the entire operation. And it will take time, money and relentless sunshine to dismantle the government-subsidized partisan racket.

ACORN can never be "reformed." It is constitutionally corrupt. Sue me.

Bob Jensen's fraud updates are at http://faculty.trinity.edu/rjensen/FraudUpdates.htm

 

The Perfect (Stimulus) Storm for Transfer Payments to Medicaid and the Poor
Another "stimulus" secret is that some $252 billion is for income-transfer payments -- that is, not investments that arguably help everyone, but cash or benefits to individuals for doing nothing at all. There's $81 billion for Medicaid, $36 billion for expanded unemployment benefits, $20 billion for food stamps, and $83 billion for the earned income credit for people who don't pay income tax. While some of that may be justified to help poorer Americans ride out the recession, they aren't job creators.
"A 40-Year Wish List You won't believe what's in that stimulus bill," The Wall Street Journal, January 28, 2009 --- http://online.wsj.com/article/SB123310466514522309.html?mod=djemEditorialPage

The Perfect (Stimulus) Storm for Amtrak, Artists, Child Care Businesses, and Global Warming Research
We've looked it over, and even we can't quite believe it. There's $1 billion for Amtrak, the federal railroad that hasn't turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects. There's even $650 million on top of the billions already doled out to pay for digital TV conversion coupons.
"A 40-Year Wish List You won't believe what's in that stimulus bill," The Wall Street Journal, January 28, 2009 --- http://online.wsj.com/article/SB123310466514522309.html?mod=djemEditorialPage

The Perfect (Stimulus) Storm for Democrats in Congress
This is supposed to be a new era of bipartisanship, but this bill was written based on the wish list of every living -- or dead -- Democratic interest group. As Speaker Nancy Pelosi put it, "We won the election. We wrote the bill." So they did. Republicans should let them take all of the credit.
"A 40-Year Wish List You won't believe what's in that stimulus bill," The Wall Street Journal, January 28, 2009 --- http://online.wsj.com/article/SB123310466514522309.html?mod=djemEditorialPage
Jensen Comment
Of course it goes without saying that it's already been a perfect (stimulus) storm for bankers and Wall Street executives who brought on this chaos by reckless investment in fraudulent subprime mortgages. They inadvertently created an excuse for the largest populist spending spree in the history of the world.

The Perfect (Stimulus) Storm for a Universal Healthcare Entitlement in the United States
The more we dig into the pile of spending and tax favors known as the "stimulus bill," the more amazing discoveries we make. Namely, Democrats have apparently decided that the way to gun the economy is to spend even more on health care. This is notable because if there has been one truly bipartisan idea in Washington, it's that the U.S. as a whole spends too much on health care. President Obama has been talking up entitlement reform as a way to free up the money for his other social priorities. But it turns out that Congress is using the stimulus as cover for a massive expansion of federal entitlements.
"The Entitlement Stimulus:  More giant steps toward government," The Wall Street Journal, January 29, 2009 --- http://online.wsj.com/article/SB123318915075926757.html?mod=djemEditorialPage
Jensen Comment
On January 28, ABC News reported how the Canadian Universal Health Care Plan was so much more efficient in terms of accounting efficiency, largely because third party billing in the U.S. has become a quagmire. However, what ABC failed to mention, probably deliberately, is that over half of the average Canadian's salary is taxed mostly for health care. Much has been made about the months or years Canadians wait for non-emergency medical treatments. But seldom does the liberal U.S. press mention the enormous tax bill that goes with the Canadian Universal Health Care Plan. Taxpayers need not worry in the United States however. The new entitlement payment plan in the U.S. simply entails printing money rather than taxing or borrowing --- http://faculty.trinity.edu/rjensen/Entitlements.htm

The Perfect (Stimulus) Storm for Fannie Mae and Freddie Mac
Although shareholders in Fannie and Fred sucked gas, the companies themselves are being bailed out
"Fan and Fred's Lunch Tab A quarter-trillion dollars, and rising," The Wall Street Journal, January 29, 2009 ---
http://online.wsj.com/article/SB123318925593626697.html?mod=djemEditorialPage

It seems a lifetime ago, but it's only been six months since the Congressional Budget Office put a $25 billion price tag on the legislation to bail out Fannie Mae and Freddie Mac. At the time, then CBO Director Peter Orszag told Congress that there was a "probably better than 50%" chance that the government would never have to spend a dime to shore up the two government-sponsored mortgage giants.

So much for that. In the past few days Fannie and Freddie have requested a combined $51 billion from the Treasury to compensate for losses in their loan portfolios. This comes on top of the $13.8 billion that Freddie needed in November.

The latest requests take the tab to $70 billion or so -- but that's not the end of the story by a long shot. Earlier this month, CBO released its biannual budget outlook. And largely ignored underneath the $1.2 trillion deficit estimate for fiscal 2009 was the little matter of a $238 billion charge for rescuing Fan and Fred. To put that in perspective, $238 billion is more than the entire federal budget deficit in fiscal 2007

The CBO's $238 billion estimate represents its guess of the long-term cost of paying for the guarantees that Fannie and Freddie write on their mortgage-backed securities. Nor is that just a post-bubble hangover. The last $38 billion of that is for losses on new business this year. And for all anyone knows, that number, like the earlier estimates, is wildly optimistic.

For starters, that $238 billion doesn't include $18 billion that the CBO expected the Treasury to lend the wonder twins this year. But in any case we're already well beyond $18 billion on that score: As of this week they've already requested $70 billion since the fiscal year began -- and we still have eight months to go. So you can add $70 billion to the $238 billion, which gets us to $308 billion -- and even that might be conservative. Rajiv Setia, an analyst at Barclays, figures the duo will need $120 billion from Treasury this year alone, which would mean another $50 billion on top of the $70 billion already requested.

Back when the bailout was being debated last July, Senator Jon Tester (D., Mont.) worried that the Fan and Fred bailout could cost $1 trillion. Given that the two companies combined have more than $5 trillion in debt and mortgage backed securities outstanding, Mr. Tester's guess isn't looking worse than anyone else's.

At that same time, Senator Kent Conrad (D., N.D.) said that the CBO's $25 billion estimate would be "very helpful to those who want to advance this legislation." And no doubt it was. A spokeswoman for Fannie promoter Barney Frank said then, "we especially like that there is less than a 50% chance that it will be used." The CBO had figured that there was a 5% chance that losses would reach the $100 billion cap on the credit line created by the July law. Now CBO's best guess is more than double that.

The bigger picture here is that politicians like Mr. Frank have been telling us for years that Fannie and Freddie's federal subsidy was a free lunch. We are now slowly, and painfully, learning the price of Mr. Frank's famous desire to "roll the dice" with Fan and Fred. Keep that in mind the next time you hear a politician propose a taxpayer guarantee. The only sure thing is that the taxpayers will pay.

Barney's Rubble --- http://faculty.trinity.edu/rjensen/2008Bailout.htm#Rubble

Accounting Fraud (when Frank Raines was CEO) at Fannie Mae --- http://faculty.trinity.edu/rjensen/theory01.htm#Manipulation

 

Glenn Beck Explain's What's Wrong With Obama's Stimulus Program (video) ---
http://www.thehopeforamerica.com/play.php?id=249

 

 Quotations forwarded by Jagdish