Tidbits Quotations on June 29, 2010
To Accompany the June 17, 2010 edition of Tidbits
http://www.trinity.edu/rjensen/tidbits/2010/tidbits062910.htm                         
Bob Jensen at Trinity University

 

Video on IOUSA Bipartisan Solutions to Saving the USA

If you missed Sunday afternoon CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/   (Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the occasional video clips of President Obama discussing the debt crisis. The problem is a build up over spending for most of our nation’s history, It landed at the feet of President Obama, but he’s certainly not the cause nor is his the recent expansion of health care coverage the real cause.

One take home from the CNN show was that over 60% of the booked National Debt increases are funded off shore (largely in Asia and the Middle East).
This going to greatly constrain the global influence and economic choices of the United States.

By 2016 the interest payments on the National Debt will be the biggest single item in the Federal Budget, more than national defense or social security. And an enormous portion of this interest cash flow will be flowing to foreign nations that may begin to put all sorts of strings on their decisions  to roll over funding our National Debt.

The unbooked entitlement obligations that are not part of the National Debt are over $60 trillion and exploding exponentially. The Medicare D entitlements to retirees like me added over $8 trillion of entitlements under the Bush Presidency.

Most of the problems are solvable except for the Number 1 entitlements problem --- Medicare.
Drastic measures must be taken to keep Medicare sustainable.

 

I thought the show was pretty balanced from a bipartisan standpoint and from the standpoint of possible solutions.

Many of the possible “solutions” are really too small to really make a dent in the problem. For example, medical costs can be reduced by one of my favorite solutions of limiting (like they do in Texas) punitive damage recoveries in malpractice lawsuits. However, the cost savings are a mere drop in the bucket. Another drop in the bucket will be the achievable increased savings from decreasing medical and disability-claim frauds. These are important solutions, but they are not solutions that will save the USA.

The big possible solutions to save the USA are as follows (you and I won’t particularly like these solutions):

 

 

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

  

Here is the original (and somewhat dated video that does not delve into solutions very much)
IOUSA (the most frightening movie in American history) ---
(see a 30-minute version of the documentary at www.iousathemovie.com )

If you missed Sunday afternoon CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/   (Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the occasional video clips of President Obama discussing the debt crisis. The problem is a build up over spending for most of our nation’s history, It landed at the feet of President Obama, but he’s certainly not the cause nor is his the recent expansion of health care coverage the real cause.

Watch the World Premiere of I.O.U.S.A.: Solutions on CNN
Saturday, April 10, 1:00-3:00 p.m. EST or Sunday, April 11, 3:00-5:00 p.m. EST

Featured Panelists Include:

  • Peter G. Peterson, Founder and Chairman, Peter G. Peterson Foundation
  • David Walker, President & CEO, Peter G. Peterson Foundation
  • Sen. Bill Bradley
  • Maya MacGuineas, President of the Committee for a Responsible Federal Budget
  • Amy Holmes, political contributor for CNN
  • Joe Johns, CNN Congressional Correspondent
  • Diane Lim Rodgers, Chief Economist, Concord Coalition
  • Jeanne Sahadi, senior writer and columnist for CNNMoney.com

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

 

CBS Sixty minutes has a great video on the enormous cost of keeping dying people artificially alive:
High Cost of Dying --- http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)

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

"The Looming Entitlement Fiscal Burden," by Gary Becker, The Becker-Posner Blog, April 11, 2010 ---
http://uchicagolaw.typepad.com/beckerposner/2010/04/the-looming-entitlement-fiscal-burdenbecker.html

"The Entitlement Quandary," by Richard Posner, The Becker-Posner Blog, April 11, 2010 ---
http://uchicagolaw.typepad.com/beckerposner/2010/04/the-entitlement-quandaryposner.html

David Walker --- http://en.wikipedia.org/wiki/David_M._Walker_(U.S._Comptroller_General)

Niall Ferguson --- http://en.wikipedia.org/wiki/Niall_Ferguson

Call it the fatal arithmetic of imperial decline. Without radical fiscal reform, it could apply to America next.
Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1
Please note that this is NBC’s liberal Newsweek Magazine and not Fox News or The Wall Street Journal.

. . .

In other words, there is no end in sight to the borrowing binge. Unless entitlements are cut or taxes are raised, there will never be another balanced budget. Let's assume I live another 30 years and follow my grandfathers to the grave at about 75. By 2039, when I shuffle off this mortal coil, the federal debt held by the public will have reached 91 percent of GDP, according to the CBO's extended baseline projections. Nothing to worry about, retort -deficit-loving economists like Paul Krugman.

. . .

Another way of doing this kind of exercise is to calculate the net present value of the unfunded liabilities of the Social Security and Medicare systems. One recent estimate puts them at about $104 trillion, 10 times the stated federal debt.

Continued in article --- http://www.newsweek.com/id/224694/page/1

 

Niall Ferguson is the Laurence A. Tisch professor of history at Harvard University and the author of The Ascent of Money. In late 2009 he puts forth an unbooked discounted present value liability of $104 trillion for Social Security plus Medicare. In late 2008, the former Chief Accountant of the United States Government, placed this estimate at$43 trillion. We can hardly attribute the $104-$43=$61 trillion difference to President Obama's first year in office. We must accordingly attribute the $61 trillion to margin of error and most economists would probably put a present value of unbooked (off-balance-sheet) present value of Social Security and Medicare debt to be somewhere between $43 trillion and $107 trillion To this we must add other unbooked present value of entitlement debt estimates which range from $13 trillion to $40 trillion. If Obamacare passes it will add untold trillions to trillions more because our legislators are not looking at entitlements beyond 2019.

 

The Meaning of "Unbooked" versus "Booked" National Debt
By "unbooked" we mean that the debt is not included in the current "booked" National Debt of $12 trillion. The booked debt is debt of the United States for which interest is now being paid daily at slightly under a million dollars a minute. Cash must be raised daily for interest payments. Cash is raised from taxes, borrowing, and/or (shudder) the current Fed approach to simply printing money. Interest is not yet being paid on the unbooked debt for which retirement and medical bills have not yet arrived in Washington DC for payment. The unbooked debt is by far the most frightening because our leaders keep adding to this debt without realizing how it may bring down the entire American Dream to say nothing of reducing the U.S. Military to almost nothing.


Niall Ferguson,
"An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 --- http://www.newsweek.com/id/224694/page/1

This matters more for a superpower than for a small Atlantic island for one very simple reason. As interest payments eat into the budget, something has to give—and that something is nearly always defense expenditure. According to the CBO, a significant decline in the relative share of national security in the federal budget is already baked into the cake. On the Pentagon's present plan, defense spending is set to fall from above 4 percent now to 3.2 percent of GDP in 2015 and to 2.6 percent of GDP by 2028.

Over the longer run, to my own estimated departure date of 2039, spending on health care rises from 16 percent to 33 percent of GDP (some of the money presumably is going to keep me from expiring even sooner). But spending on everything other than health, Social Security, and interest payments drops from 12 percent to 8.4 percent.

This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force. Which is why voters are right to worry about America's debt crisis. According to a recent Rasmussen report, 42 percent of Americans now say that cutting the deficit in half by the end of the president's first term should be the administration's most important task—significantly more than the 24 percent who see health-care reform as the No. 1 priority. But cutting the deficit in half is simply not enough. If the United States doesn't come up soon with a credible plan to restore the federal budget to balance over the next five to 10 years, the danger is very real that a debt crisis could lead to a major weakening of American power.




"U.S. Debt and the Greece Analogy:  Don't be fooled by today's low interest rates. The government could very quickly discover the limits of its borrowing capacity," by Alan Greenspan, The Wall Street Journal, June 18, 2010 ---
http://online.wsj.com/article/SB10001424052748704198004575310962247772540.html?mod=djemEditorialPage_t

An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large U.S. borrowing capacity are misleading.

Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

The roots of the apparent debt market calm are clear enough. The financial crisis, triggered by the unexpected default of Lehman Brothers in September 2008, created a collapse in global demand that engendered a high degree of deflationary slack in our economy. The very large contraction of private financing demand freed private saving to finance the explosion of federal debt. Although our financial institutions have recovered perceptibly and returned to a degree of solvency, banks, pending a significant increase in capital, remain reluctant to lend.

Beneath the calm, there are market signals that do not bode well for the future. For generations there had been a large buffer between the borrowing capacity of the U.S. government and the level of its debt to the public. But in the aftermath of the Lehman Brothers collapse, that gap began to narrow rapidly. Federal debt to the public rose to 59% of GDP by mid-June 2010 from 38% in September 2008. How much borrowing leeway at current interest rates remains for U.S. Treasury financing is highly uncertain.

The U.S. government can create dollars at will to meet any obligation, and it will doubtless continue to do so. U.S. Treasurys are thus free of credit risk. But they are not free of interest rate risk. If Treasury net debt issuance were to double overnight, for example, newly issued Treasury securities would continue free of credit risk, but the Treasury would have to pay much higher interest rates to market its newly issued securities.

In the wake of recent massive budget deficits, the difference between the 10-year swap rate and 10-year Treasury note yield (the swap spread) declined to an unprecedented negative 13 basis points this March from a positive 77 basis points in September 2008. This indicated that investors were requiring the U.S. Treasury to pay an interest rate higher than rates that prevailed on comparable maturity private swaps.

(A private swap rate is the fixed interest rate required of a private bank or corporation to be exchanged for a series of cash flow payments, based on floating interest rates, for a particular length of time. A dollar swap spread is the swap rate less the interest rate on U.S. Treasury debt of the same maturity.)

At the height of budget surplus euphoria in 2000, the Office of Management and Budget, the Congressional Budget Office and the Federal Reserve foresaw an elimination of marketable federal debt securities outstanding. The 10-year swap spread in August 2000 reached a record 130 basis points. As the projected surplus disappeared and deficits mounted, the 10-year swap spread progressively declined, turning negative this March, and continued to deteriorate until the unexpected euro-zone crisis granted a reprieve to the U.S.

The 10-year swap spread quickly regained positive territory and by June 14 stood at a plus 12 basis points. The sharp decline in the euro-dollar exchange rate since March reflects a large, but temporary, swing in the intermediate demand for U.S. Treasury securities at the expense of euro issues.

The 10-year swap spread understandably has emerged as a sensitive proxy of Treasury borrowing capacity: a so-called canary in the coal mine.

I grant that low long-term interest rates could continue for months, or even well into next year. But just as easily, long-term rate increases can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points.

In the 1950s, as I remember them, U.S. federal budget deficits were no more politically acceptable than households spending beyond their means. Regrettably, that now quaint notion gave way over the decades, such that today it is the rare politician who doesn't run on seemingly costless spending increases or tax cuts with borrowed money. A low tax burden is essential to maintain America's global competitiveness. But tax cuts need to be funded by permanent outlay reductions.

The current federal debt explosion is being driven by an inability to stem new spending initiatives. Having appropriated hundreds of billions of dollars on new programs in the last year and a half, it is very difficult for Congress to deny an additional one or two billion dollars for programs that significant constituencies perceive as urgent. The federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms. This is not new. For at least a quarter century analysts have been aware of the pending surge in baby boomer retirees.

We cannot grow out of these fiscal pressures. The modest-sized post-baby-boom labor force, if history is any guide, will not be able to consistently increase output per hour by more than 3% annually. The product of a slowly growing labor force and limited productivity growth will not provide the real resources necessary to meet existing commitments. (We must avoid persistent borrowing from abroad. We cannot count on foreigners to finance our current account deficit indefinitely.)

Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit. I rule out large tax increases that would sap economic growth (and the tax base) and accordingly achieve little added revenues.

With huge deficits currently having no evident effect on either inflation or long-term interest rates, the budget constraints of the past are missing. It is little comfort that the dollar is still the least worst of the major fiat currencies. But the inexorable rise in the price of gold indicates a large number of investors are seeking a safe haven beyond fiat currencies.

The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate. In the past decade the U.S. has been unable to cut any federal spending programs of significance.

I believe the fears of budget contraction inducing a renewed decline of economic activity are misplaced. The current spending momentum is so pressing that it is highly unlikely that any politically feasible fiscal constraint will unleash new deflationary forces. I do not believe that our lawmakers or others are aware of the degree of impairment of our fiscal brakes. If we contained the amount of issuance of Treasury securities, pressures on private capital markets would be eased.

Continued in article


We're bringing oil to American shores.
British Petroleum Advertisement, 1999

"Hi, My Name is America and I’m an Addict," by Meredith Turney, Townhall, June 18, 2010 ---
http://townhall.com/columnists/MeredithTurney/2010/06/18/hi,_my_name_is_america_and_i’m_an_addict 

Fifty-seven days. For nearly two months Americans have watched the nation’s largest environmental disaster unfold in the Gulf of Mexico. It may not be at the forefront of every American’s mind as we head into the busy summer months, with the preoccupation of keeping children amused and planning vacations. But the images of helpless wildlife entombed in tarry crude, the heartbreaking stories of countless livelihoods lost, and the irritating nattering of incompetent politicians finally took their toll.

The President realized he could not allow the out-of-control oil spill and its ensuing public relations disaster to continue to drag down the public’s confidence in his leadership. And so he decided to use one of the president’s most powerful tools: an address to the nation.

Although it has lost much of its influence (and audience) over the decades, there is still a sense of importance amongst viewers when a president interrupts the normal course of America’s mundane activities to address the nation. Just over 32 million Americans tuned in for President Obama’s 18-minute address on Tuesday evening. Finally, the country’s leader would provide some clarity and direction in the midst of the quagmire.

Instead, Americans heard a lecture about their gluttonous consumption of energy and an embarrassing attempt to shift blame from a floundering administration.

The President began his remarks by likening the oil spill to a battle, with the oil “assaulting our shores and our citizens.” It seemed an odd analogy to use when the nation is fighting a real war against terrorists—terrorists who have increased their attacks on America in the last two years. For an administration that bends over backwards to accommodate the “rights” of terrorist suspects, likening an environmental “siege” to war plants further questions in the minds of citizens about how seriously the war against terrorism is regarded by this president.

Notably missing in the President’s remarks about his administration’s response to the spill was any concrete solution to fixing the leaking oil well. Apparently the President moved from the action-oriented “plug the damn hole” to passively seeking “ideas and advice” from “scientists at our national labs and experts from academia and other oil companies.” There was no explanation as to why, two months on, American ingenuity has failed to stop the oil flow. Perhaps it was because true American ingenuity has been stymied by bureaucratic, arcane policies and laws. A simple search of YouTube videos shows some rather interesting ideas for fixing the problem and cleaning up its mess.

The address quickly turned from glossing over the administration’s mishandling to a beat down of BP. It’s true that BP should be held accountable for damages resulting from their oil spill. But when the President asserted, “We will make BP pay for the damage their company has caused,” it sounded like a promise based in vengeance rather than justice. President Obama’s vilification of BP is an attempt at deflection from his own mistakes; his frustration will be absolved in their humiliation. At a time of national crisis, Americans look to their president to provide assurance and direction. The last thing they expect to hear is a politically-motivated address that chides them for using natural resources to achieve prosperity. But on Tuesday evening, America walked into an intervention, lead by its Commander-in-Chief, for its “addiction to fossil fuels.” It was as though the Oval Office was the setting for an episode of Dr. Drew’s Celebrity Rehab.

As if labeling America an addict wasn’t bad enough, the President then held up Communist China as a model for developing a green economy. Never mind the fact China actually leads the world in carbon dioxide emissions and is the second highest consumer of oil. Has a President ever so blatantly compared America to a repressive Communist government, with America considered the inferior nation?

The last quarter of the address was spent selling America on the next item on the President’s policy agenda: increased environmental regulations. Instead of providing real direction and leadership, President Obama traded the power and mystique of the presidency for political gain. He placed his agenda ahead of the best interests of the nation. How shocking for a president to use his bully pulpit to admonish instead of inspire.

Continued in article


"The Obama Speech We're Waiting For:  Fannie Mae and Freddie Mac need to get the BP treatment," by William McGurn, The Wall Street Journal, June 22, 2010 ---
http://online.wsj.com/article/SB10001424052748704895204575320922399530274.html?mod=djemEditorialPage_t

The President: Good evening. As we speak, our nation faces a multitude of challenges. At home, our top priority is to recover and rebuild from a recession. Abroad, our brave men and women in uniform are taking the fight to al Qaeda wherever it exists. Tonight, I want to speak with you about a battle we're waging against an enemy that is assaulting the very homes our citizens live in.

In September 2008, Fannie Mae and Freddie Mac imploded when their losses became unsustainable. In part because so many of our financial institutions relied on mortgage-backed securities based on bad loans, a housing crisis exploded into a financial crisis. And Americans continue to suffer from the effects. Unlike a hurricane or oil spill, where the damage is obvious to the eye, the damage wrought by Fannie and Freddie is much more insidious. As president, I have many smart people in my administration. But you do not need a Nobel Prize to know the problem here.

Fannie and Freddie bought mortgages offered by banks, which it then resold as mortgaged-backed securities. Banks liked this, because it meant more money to lend. In the name of enabling ever more Americans to own their homes, and encouraged by Congress, Fannie and Freddie expanded into ever more risky mortgages. In the end, these two companies helped send billions in loans to Americans who lacked the means to pay them back—while spreading risk throughout our financial system.

Think of these bad loans as a nasty leak polluting our financial system. While most other large financial firms either have failed or are now recovering, the damage caused by Fannie and Freddie continues largely unabated. The Congressional Budget Office says that plugging these bad loans has already cost taxpayers $145.9 billion, making them the single largest bailout of all.

Make no mistake: We will fight Fannie and Freddie with everything we have got for as long as it takes. We will make these two government-created companies pay for the damage they have caused. In fact, we are going to make Fannie and Freddie pay with their lives. Tonight I'd like to lay out our battle plan going forward:

First, the cleanup. For more than three decades there's been a culture of corruption in the regulatory oversight of these companies. I inherited a situation in which these firms lobbied and captured their regulators. Fannie and Freddie's privileged place in the market was sustained because they were a source of riches for Washington's Republican and Democratic establishments. Even today we see this oily alliance at work in the recent decision by Congress to exempt Fannie and Freddie from their financial reform bill.

Tonight I promise you: We will do whatever it takes, for as long as it takes, to change this.

One of the lessons we've learned from Fannie and Freddie is that you cannot combine private profit with taxpayers bearing risk. For decades we've propped up Fannie and Freddie's near monopoly. And for decades we have failed to face up to the fact that homeownership is not the best path for everyone. Time and again, reform has been blocked by former congressmen of both parties whom these companies hired to spread the money around and persuade Congress to back off.

So the second thing I will do is meet with the chairmen of Fannie Mae and Freddie Mac. And I will tell them the day of reckoning has come. We are going to break up Fannie and Freddie and end the privileges they enjoy from the government.

You know, for generations, Americans have scrimped and saved to provide a better life for their families. That is now in jeopardy. I have met with moms and dads who bought modest houses that were within their means—and now find their tax dollars going to bail out neighbors who bought bigger houses not within their means. I have stood with retirees whose pensions have been devastated. And I have sat in the living rooms of families who now face foreclosure on homes they were falsely assured they could afford.

The sadness and the anger they feel is not just about the money they've lost. It's about a wrenching anxiety that their way of life may be lost. I am a prayerful man. But I do not believe that the American people should have to pray that their own government isn't undermining their homes, their savings, and the lives they have built for their families.

The financial crisis was not caused by Fannie and Freddie alone. But fixing them is essential. To this important task, we bring hope, which comes from the confidence that free men and women in a free economy will in the end make better decisions than any government. And tonight we revive that hope by delivering change to two of the fattest cats Washington has ever known.

Thank you, and may God bless America.

Bob Jensen's threads on the bailout are at
http://www.trinity.edu/rjensen/2008Bailout.htm



Video: Population Growth in Viet Nam and Seafood Contamination ---
http://www.vimeo.com/11817894



Video:  Former US General Warns of Chemical Attacks Against Israel
---
http://www.pjtv.com/?cmd=mpg&mpid=136


Wealth Transfer From the Accounting Profession to the Legal Profession
"Reforming Main Street: A trial-lawyer bonanza gets air-dropped into the financial bill," The Wall Street Journal, June 18, 2010 ---
http://online.wsj.com/article/SB10001424052748704009804575308970937631194.html#mod=djemEditorialPage_t

The White House and Congressional Democrats like to talk about their battle against "Wall Street lobbyists," but it's the rest of the economy that could use a few more advocates inside the Beltway. As Congressional negotiators prepare their final draft of new financial regulations, the potential impact on nonfinancial companies is striking.

To be clear, not all of the profound changes coming soon to American business will be bad. This week the conference committee responsible for merging House and Senate bills agreed to save the smallest public companies from some of Washington's worst red tape. Companies below $75 million in market value will no longer have to comply with the Sarbanes-Oxley law's infamous Section 404(b).

At enormous cost for questionable benefit, this law forces companies to pay accountants to do a second, highly intrusive audit on top of the traditional financial audit. The new exemption for smaller companies is a win for U.S. competitiveness and particularly for the innovative young companies that create jobs.

However, some of those savings from lower fees to accountants might simply go to plaintiffs lawyers. Yesterday we lauded Barney Frank for playing against type and pushing for a free market in credit ratings. But just as we were cheering his break-out performance, on Thursday the Massachusetts Congressman added to the House proposal a measure to overturn the Supreme Court's 2008 Stoneridge decision. He did so out of nowhere, and with several lawmakers absent from the meeting room.

The Frank provision would allow trial lawyers to launch suits not just against companies that commit securities fraud, but also against other companies that didn't defraud investors but did business with the alleged fraudsters. Senator Arlen Specter had tried to get this trial-lawyer bonanza into the Senate bill, to no avail, and the House hadn't included it either. Yet Thursday night it remained close to reaching the President's desk as Senators mulled whether to accept Mr. Frank's proposal. An alternative authorizing a study by the Government Accountability Office still had a chance to win the day instead.

Meanwhile, the conferees next week will likely sign off on the details of the Bureau of Consumer Financial Protection, a regulator with independent rule-writing authority, the freedom to set its own budget and consume up to 12% of the earnings of the Federal Reserve system, and no responsibility to protect the safety and soundness of the institutions it regulates.

When we say "institutions," you might naturally think we're talking about huge banks, but the jurisdiction of this regulatory beast will be limited only by the imagination of the Obama Administration. Not only is there no bank in the country too small to be subject to its rules, but any business that charges customers to extend credit could also fall under the new bureaucracy's ambit.

Supporters of this new regulator say small businesses will be exempt, but the bill says the definition of "small" will be set by the Small Business Administration. For most retailers, the SBA's current level is $7 million in annual revenues, but under the bill that number can be changed without an act of Congress. Any business that charges a fee to customers who don't pay within 90 days could get this regulatory scrub.

This new regulator will decide whether such fees, and almost all financial products and services outside the securities and insurance industries, are "unfair, deceptive, or abusive." Yes, you read that correctly. This central element of "Wall Street reform" will not touch the securities industry, but it could hit dental practices and home-renovation companies that allow their customers to pay in installments.

What does "abusive" mean? We'll all find out after the President signs this bill and the regulators begin to make their judgments. The rule-making will be intense, because the pending bill hands to this new consumer czar the responsibility for interpreting a host of existing banking laws focused on consumer access to credit. This new regulator will not have authority over the infamous Community Reinvestment Act, which did so much to encourage risky but politically popular lending prior to the credit crisis. But the consumer czar will write the rules for a host of similar laws ostensibly created to encourage fair and truthful lending.

This is what has small banks terrified. Think back to the housing boom with banking regulators enforcing affordable housing goals and encouraging lending to allegedly under-served populations. Now imagine such regulators pursuing similar goals, except with no obligation to safeguard the financial health of the lender.

We're told there is little chance Democrats will change any of this, which means that small banks and creditors will soon be subject to even greater whims of regulatory chance. And all sold to you in the name of punishing Wall Street.

 


Question
Do big bonuses lead to worse performance?

"Does Bigger Bonus Equal Worse Performance?Around the turn of every year, bankers can think of only one thing: the size of their bonuses," by Dan Ariely, Wall Street Technology, June 18, 2010 ---
http://wallstreetandtech.com/career-management/showArticle.jhtml?articleID=225700612&cid=nl_wallstreettech_daily
Thanks Jagdish!

Around the turn of every year, bankers can think of only one thing: the size of their bonuses.

Even beyond bonus season, they run different scenarios and assumptions, trying to calculate their number.

This distracts them so much that the bigger the bonus at stake, the worse the performance, according to behavioral economist Dan Ariely, who lays out his theory in his new book "The Upside of Irrationality" (HarperCollins, $27.99).

"For a long time we trained bankers to think they are the masters of the universe, have unique skills and deserve to be paid these amounts," said Ariely, who also wrote the New York Times bestseller "Predictably Irrational."

"It is going to be hard to convince them that they don't really have unique skills and that the amount they've been paid for the past years is too much."

Ariely's findings come as regulators try to rein in Wall Street's bonus culture after the 2008 financial collapse. The financial industry argues it needs to pay large bonuses to attract and motivate its top employees.

In an experiment in India, Ariely measured the impact of different bonuses on how participants did in a number of tasks that required creativity, concentration and problem-solving.

One of the tasks was Labyrinth, where the participants had to move a small steel ball through a maze avoiding holes. Ariely describes a man he identified as Anoopum, who stood to win the biggest bonus, staring at the steel ball as if it were prey.

"This is very, very important," Anoopum mumbled to himself. "I must succeed." But under the gun, Anoopum's hands trembled uncontrollably, and he failed time after time.

A large bonus was equal to five months of their regular pay, a medium-sized bonus was equivalent to about two weeks pay and a small bonus was a day's pay.

There was little difference in the performance of those receiving the small and medium-sized bonuses, while recipients of large bonuses performed worst.

SHOCK TREATMENT

More than a century ago, an experiment with rats in a maze rigged with electric shocks came to a similar conclusion. Every day, the rats had to learn how to navigate a new maze safely.

When the electric shocks were low, the rats had little incentive to avoid them. At medium intensity they learned their environment more quickly.

But when the shock intensity was very high, it seemed the rats could not focus on anything other than the fear of the shock.

This may provide lessons for regulators who want to change Wall Street's bonus culture, Ariely said. Paying no bonus or smaller bonuses could help fix skewed incentives without loss of talent.

"The reality is, a lot of places are able to attract great quality people without paying them what bankers are paid," Ariely said. "Do you think bankers are inherently smarter than other people? I don't." (Reporting by Kristina Cooke; Editing by Daniel Trotta)

"Dan Ariely: The Mind's Grey Areas:  By controlling situations that create conflicts of interest, we can combat frauds and scandals better," Forbes, June 2010 --- Click Here
http://www.forbes.com/2010/06/15/forbes-india-dan-ariely-the-minds-grey-areas-opinions-ideas-10-ariely.html?boxes=Homepagelighttop

My interest in the irrationality of human behavior started many years ago in hospital after I had been badly burned. If you spend three years in a hospital with 70% of your body covered in burns, you are bound to notice several irrationalities. The one that bothered me in particular was the way my nurses would remove the bandage that wrapped my body. Now, there are two ways to remove a bandage. You can rip it off quickly, causing intense but short-term pain. Or you can remove it slowly, causing less intense pain but for a longer time.

My nurses believed in the quick method. It was incredibly painful, and I dreaded the moment of ripping with remarkable intensity. I begged them to find a better way to do this, but they told me that this was the best approach and that they knew the best way for removing bandages. It was their intuition against mine, and they chose theirs. Moreover, they thought it unnecessary to test what appeared (to them) to be intuitively right.

After leaving the hospital, I started doing experiments that simulated these two ripping methods. And I found that the nurses were wrong: Quick ripping turned out to be more painful than slow ripping. In my experiments, I discovered a collection of tricks that could have been used to lessen the pain or manage it more effectively. For instance, they could have started from the most painful part of the treatment and moved to less painful areas to give me a sense of improvement; they could have given me breaks in between to recover. There are great lessons to be learned from such experiments, lessons that apply to economics, markets, policymaking and even our personal lives.

Is there an idea you believe can change the world? Describe it in the comments section at the bottom of this story, and Forbes could publish your idea.

As it turns out, it is not that useful, and sometime even costly, to base our decisions on our intuitions. Instead, we need to inject some science in the way we go about everyday life because if one merely keeps following his instincts, he will continue making the same (preventable) mistakes.

Over the years, I have examined many topics related to the mistakes we all make when we make decisions, and one topic that I have explored in some depth is that of cheating behavior, and I would like to describe this in a bit more depth.

Money as a Motivator

June 18, 2010 message from Bill Ellis [bill.ellis@furman.edu]

Daniel Pink - Drive
http://www.youtube.com/watch?v=u6XAPnuFjJc

Bob,

Here’s Daniel Pink’s latest book. This time he presents theories on motivation. This clever YouTube clip is a great animation explaining a point made in the book.

Bill Ellis, CPA, MPAcc
Furman University
Accounting UES
864-908-4743
 

June 19, 2010 reply from Bob Jensen

Hi Bill,

What a great animation video that makes such good points about compensation.

By the way, this animated video reminds me of why BYU’s variable-speed videos are so successful for teaching basic accounting --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#BYUvideo 

Bob Jensen

Bob Jensen's threads on rationality and behavioral economics are at
http://www.trinity.edu/rjensen/Theory01.htm#EMH

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


"Degeneration of Democracy ," by Thomas Sowell, Townhall, June 22, 2010 ---
http://townhall.com/columnists/ThomasSowell/2010/06/22/degeneration_of_democracy

When Adolf Hitler was building up the Nazi movement in the 1920s, leading up to his taking power in the 1930s, he deliberately sought to activate people who did not normally pay much attention to politics. Such people were a valuable addition to his political base, since they were particularly susceptible to Hitler's rhetoric and had far less basis for questioning his assumptions or his conclusions.

"Useful idiots" was the term supposedly coined by V.I. Lenin to describe similarly unthinking supporters of his dictatorship in the Soviet Union.

Put differently, a democracy needs informed citizens if it is to thrive, or ultimately even survive. In our times, American democracy is being dismantled, piece by piece, before our very eyes by the current administration in Washington, and few people seem to be concerned about it.

The president's poll numbers are going down because increasing numbers of people disagree with particular policies of his, but the damage being done to the fundamental structure of this nation goes far beyond particular counterproductive policies.

Just where in the Constitution of the United States does it say that a president has the authority to extract vast sums of money from a private enterprise and distribute it as he sees fit to whomever he deems worthy of compensation? Nowhere.

And yet that is precisely what is happening with a $20 billion fund to be provided by BP to compensate people harmed by their oil spill in the Gulf of Mexico.

Many among the public and in the media may think that the issue is simply whether BP's oil spill has damaged many people, who ought to be compensated. But our government is supposed to be "a government of laws and not of men." If our laws and our institutions determine that BP ought to pay $20 billion-- or $50 billion or $100 billion-- then so be it.

But the Constitution says that private property is not to be confiscated by the government without "due process of law." Technically, it has not been confiscated by Barack Obama, but that is a distinction without a difference.

With vastly expanded powers of government available at the discretion of politicians and bureaucrats, private individuals and organizations can be forced into accepting the imposition of powers that were never granted to the government by the Constitution.

If you believe that the end justifies the means, then you don't believe in Constitutional government. And, without Constitutional government, freedom cannot endure. There will always be a "crisis"-- which, as the president's chief of staff has said, cannot be allowed to "go to waste" as an opportunity to expand the government's power.

That power will of course not be confined to BP or to the particular period of crisis that gave rise to the use of that power, much less to the particular issues.

When Franklin D. Roosevelt arbitrarily took the United States off the gold standard, he cited a law passed during the First World War to prevent trading with the country's wartime enemies. But there was no war when FDR ended the gold standard's restrictions on the printing of money.

At about the same time, during the worldwide Great Depression, the German Reichstag passed a law "for the relief of the German people." That law gave Hitler dictatorial powers that were used for things going far beyond the relief of the German people-- indeed, powers that ultimately brought a rain of destruction down on the German people and on others.

If the agreement with BP was an isolated event, perhaps we might hope that it would not be a precedent. But there is nothing isolated about it.

The man appointed by President Obama to dispense BP's money as the administration sees fit, to whomever it sees fit, is only the latest in a long line of presidentially appointed "czars" controlling different parts of the economy, without even having to be confirmed by the Senate, as Cabinet members are.

Continued in article


"Guns Save Lives," John Stossel, Townhall, June 22, 2010 ---
http://townhall.com/columnists/JohnStossel/2010/06/23/guns_save_lives

It's all too predictable. A day after a gunman killed six people and wounded 18 others at Northern Illinois University, The New York Times criticized the U.S. Interior Department for preparing to rethink its ban on guns in national parks.

The editorial board wants "the 51 senators who like the thought of guns in the parks -- and everywhere else, it seems -- to realize that the innocence of Americans is better protected by carefully controlling guns than it is by arming everyone to the teeth."

As usual, the Times editors seem unaware of how silly their argument is. To them, the choice is between "carefully controlling guns" and "arming everyone to the teeth." But no one favors "arming everyone to the teeth" (whatever that means). Instead, gun advocates favor freedom, choice and self-responsibility. If someone wishes to be prepared to defend himself, he should be free to do so. No one has the right to deprive others of the means of effective self-defense, like a handgun.

As for the first option, "carefully controlling guns," how many shootings at schools or malls will it take before we understand that people who intend to kill are not deterred by gun laws? Last I checked, murder is against the law everywhere. No one intent on murder will be stopped by the prospect of committing a lesser crime like illegal possession of a firearm. The intellectuals and politicians who make pious declarations about controlling guns should explain how their gunless utopia is to be realized.

While they search for -- excuse me -- their magic bullet, innocent people are dying defenseless.

That's because laws that make it difficult or impossible to carry a concealed handgun do deter one group of people: law-abiding citizens who might have used a gun to stop crime. Gun laws are laws against self-defense.

Criminals have the initiative. They choose the time, place and manner of their crimes, and they tend to make choices that maximize their own, not their victims', success. So criminals don't attack people they know are armed, and anyone thinking of committing mass murder is likely to be attracted to a gun-free zone, such as schools and malls.

Government may promise to protect us from criminals, but it cannot deliver on that promise. This was neatly summed up in book title a few years ago: "Dial 911 and Die." If you are the target of a crime, only one other person besides the criminal is sure to be on the scene: you. There is no good substitute for self-responsibility.

How, then, does it make sense to create mandatory gun-free zones, which in reality are free-crime zones?

The usual suspects keep calling for more gun control laws. But this idea that gun control is crime control is just a myth. The National Academy of Sciences reviewed dozens of studies and could not find a single gun regulation that clearly led to reduced violent crime or murder. When Washington, D.C., passed its tough handgun ban years ago, gun violence rose.

The press ignores the fact that often guns save lives.

It's what happened in 2002 at the Appalachian School of Law. Hearing shots, two students went to their cars, got their guns and restrained the shooter until police arrested him.

Likewise, law professor Glen Reynolds writes, "Pearl, Miss., school shooter Luke Woodham was stopped when the school's vice principal took a .45 from his truck and ran to the scene. In (last) February's Utah mall shooting, it was an off-duty police officer who happened to be on the scene and carrying a gun".

It's impossible to know exactly how often guns stop criminals. Would-be victims don't usually report crimes that don't happen. But people use guns in self-defense every day. The Cato Institute's Tom Palmer says just showing his gun to muggers once saved his life.

Continued in article

 


"BP spoof video is runaway hit for UCB website," MIT's Technology Review, June 25, 2010 ---
http://www.technologyreview.com/wire/25663/?nlid=3166&a=f

The most memorable comedic take on the oil spill disaster in the Gulf of Mexico hasn't come from "Saturday Night Live," ''The Daily Show" or a late-night monologue.

Instead, a cheaply made video by an unlikely New York improv troupe has created the only commentary that has truly resonated online: a three-minute spoof that shows BP executives pathetically trying to clean up a coffee spill.

In the video, BP execs are in the middle of a meeting when someone overturns a coffee cup. The liquid oozes across the conference table. One exec says it will "destroy all the fish" (his sushi lunch); another says it's encroaching on his map of Louisiana. They try to contain the coffee spill by wrapping their arms around the perimeter, dumping garbage on top to absorb the liquid, clipping hair over it and other stupid human tricks.

Three hours later, the spill remains with all the mess left from attempts to contain it: paper, hair, soil, plants, etc. Finally, they get Kevin Costner on the phone.

"He'll know what to do for sure," an exec says with great hope.

"Do you have a golf ball?" Costner asks. No. A pingpong ball? Yes. Costner tells them to throw it at the spill. They do. Nothing happens. Then: 47 days later. The spill and the mess are still there with BP execs no closer to a solution.

In the last two weeks, the video has been watched by nearly 7 million people on YouTube. By the count of Viral Video Chart, it's been shared some 300,000 times on blogs, Facebook pages and Twitter feeds.

The video was dreamed up by the writers for the sketch show "Beneath Gristedes," a monthly stage show at the Upright Citizens Brigade Theatre in New York. While meeting to work on the show, a germ of the concept came to Erik Tanouye, who worked out the script with fellow writers John Frusciante, Gavin Spieller and Eric Scott.

They shot it two days later and within a week, it was up on UCBComedy.com. The site has had some viral hits -- a parody of a Google ad, a spoof of the "David After the Dentist" video -- but nothing on this level. UCBComedy.com's servers immediately crashed under the traffic.

"I couldn't do my day job," said Tanouye, 32, who is the director of student affairs for the UCB training center.

It's been the biggest hit yet for UCBComedy.com, which was founded in 2007 to give its performers an online outlet. The Upright Citizens Brigade Theatre, which has popular theaters in New York and Los Angeles, was co-founded by Amy Poehler.

For more than a decade, it has regularly churned out exciting young comic talent, including "SNL" players Bobby Moynihan and Jenny Slate, and "Office" regular Zach Woods. Young audiences line up on a nightly basis to pack the 300-seat New York theater, which has a youthful, collegiate vibe.

"What we're trying to do with videos is get out there to the general public the talent that we have," says Todd Bieber, 30, the website's director of content and production. "We can reach New York and L.A. audiences pretty easily, but there's a whole world out there that we can't reach through the theaters."

The boost in visitors to the site has been considerable. From May 21-June 21 last year, the site drew just under 43,000; the same period this year has attracted more than 450,000.

But Bieber, who formerly worked at the Onion News Network, is the only one being paid to work full time on the site. Videos don't have anything like the budgets of the Onion News Network, which shoots in the style of real news broadcasts.

UCBComedy.com includes a lot of footage of improv performances, which typically have much more energy in person, where the thrill of instant creation is immediate. But the dozens of UCB performers -- who are graduates of the theater's improv training classes -- have learned to fashion their comedy to the Web.

"Beta teams" -- performers dedicated to producing content for the site -- were formed in January. Original series have been created, including one called "Blackouts," which are short 30-second bites, one punch line at a time.

Bieber says that a viral sensation such as "BP Spills Coffee" can "energize the UCB community" in creating video for the website. Having so much talent at the ready makes UCBComedy.com a little like an amateur version of FunnyOrDie.com, the comedy site co-founded by Will Ferrell and Adam McKay, which pulls contributions from famous comedians.

"That's the hope," says Bieber. "There are so many terribly ridiculous things going on in the world that there's plenty of room for commentary. If we can be looked in the same way as FunnyOrDie, that would be terrific. We'd love to get the hits that they do."

There's plenty of competition when it comes to topical humor, though, and the oil spill has been a common topic. The slow-motion horror of the spill is utterly serious, but people have long turned to comics to give voice to rage. BP, which is said to have mismanaged the spill, has been an easy target.

David Letterman, Jay Leno and other late-night hosts have made BP jokes practically a nightly feature. Conan O'Brien, perhaps feeling like he was missing out, recently tweeted: "The past 2 months I've been on tour and haven't followed the news. What's with all the photos of chocolate pelicans?"

"The Colbert Report" and "The Daily Show" have battered the subject relentlessly. Mixing comedy with activism, Colbert Nation has launched a "Gulf of America Fund" to raise donations for the recovery efforts. "SNL" is off for the summer and so has missed the opportunity to lampoon BP.

One of the more interesting Internet-based parodies has been a mock Twitter feed, purporting to be from BP's public relations department: http://twitter.com/BPGlobalPR. It has more than 175,000 followers. One example: "Investing a lot of time & money into cleaning up our image, but the beaches are next on the to-do list for sure."

But the success of the UCB's video could well be a firm foothold in the world of online comedy, and boost the troupe's national presence.

"People can see these amazing talents come up," says Bieber. "As awesome as the theater is, at the end of the day, that sketch would have killed for 200 or 300 people, not 6 or 7 million."

Jensen Links to Some Other BP Videos

http://www.youtube.com/watch?v=2AAa0gd7ClM

http://www.youtube.com/watch?v=aPbZe43pTC8

http://www.youtube.com/watch?v=40kYQd7ybRA

http://www.youtube.com/watch?v=MLdAJn7YxeE
After the June 23 loss of the containment cap, 60,000 barrels per day are gushing out
This is no joking matter

Bob Jensen's threads on Enron humor ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor

 

 


"A Missed Opportunity on Financial Reform:  How could Fannie Mae and Freddie Mac have escaped Congress's attention?" by Walter Levitt, The Wall Street Journal, June 24, 2010 ---
http://online.wsj.com/article/SB10001424052748704853404575322491510468572.html#mod=djemEditorialPage_t

As a lifelong Democrat and public servant to four presidents, I had hoped the financial reform bill would be the best example of my party's long-standing reputation for standing on the side of individual investors.

It's not. The bill, already weakened by deal-making as it emerged from the Senate, has been bled dry of nearly every meaningful protection of investors.

Ironically, the authors of this bill are the same Democrats who normally would have opposed many of its features if they were in the minority. Now in the majority, these politicians are investor advocates in their press releases alone.

The Democrats had the chance to do this bill the right way. They should have been motivated by Congress's previous failure to adopt meaningful reform, which left investors unprepared for the crisis. And they had the input of talented leaders and experts who attempted to help lawmakers deal with systemic risk and gaps in basic investor protections.

Whatever these positive contributions, Congress more than overwhelmed them with sins of commission and sins of omission. One of many bad ideas that made it into the bill: Public companies will now have a wider loophole to avoid doing internal audits investors can trust. This requirement was the most important pro-investor reform of the last decade, and it worked. Of the 522 U.S. financial restatements in 2009, 374 were at small firms not subject to auditor reviews.

But the reform bill about to be passed expands the number of small companies exempt from Sarbanes-Oxley audit requirements. When fraud is happening at a public company, small or large, investors care. Now, thanks to Democratic leadership, investors are less likely to know.

There are many missed opportunities in this bill, but these are the biggest:

First, Democratic leaders in Congress failed to revoke the 1975 law that prevents municipal bond issuers from facing the kind of regulation and scrutiny of the corporate bond market. If the municipal bond market melts down in the next few years, we'll know who to blame.

Second, they failed to pass a meaningful majority-vote or proxy access rule for corporate ballots. Instead, thanks to Sen. Chris Dodd (D., Conn.), the Senate passed a proxy access rule that is comically useless: You need 5% of shares to get on the proxy. Very rarely do investors assemble such large stakes in any company.

Third, New York Sen. Chuck Schumer's wise idea to let the Securities and Exchange Commission (SEC) become a self-funded agency will likely be killed by appropriators who are unwilling to give up the power of the purse.

Fourth, Democratic leaders left in place the confusing dual regulatory structure of the SEC and the Commodity Futures Trading Commission. A merger was necessary to eliminate regulatory arbitrage and corrosive bureaucratic turf battles, yet it didn't happen.

Fifth, Senate Democrats failed to support Rep. Barney Frank's (D., Mass.) effort to pass a new law to overcome the legal precedent of the 2008 Supreme Court's Stoneridge decision, which allows third-party consultants, accountants and other abettors of fraud to avoid liability. Again, another sellout of investor interests.

Sixth, Congress didn't deal with the massive problems of Fannie Mae and Freddie Mac. It's one thing to fail to see trouble before it happens. Now, there's no excuse. The central role played by these two organizations in the financial crisis is indisputable. Congress had a chance to fully restrict these agencies from anything but the most basic market-making activities, and it didn't.

Finally, Democrats could have proposed a law obligating investment advisers to serve their clients' interests above all others. That was in the House version of the bill, but the Senate punted the idea, and it's is likely to end up kicked down the road even further.

The sad reality is that we may not have a chance to enact these kinds of reforms until after the next major financial crisis. For those of us who champion the rights of investors, that's too long to wait—especially since until very recently we didn't think we would have to.

Mr. Levitt, chairman of the Securities and Exchange Commission from 1993 to 2001, now serves as an adviser to the Carlyle Group and Goldman Sachs.

Bob Jensen's threads on Freddie and Fannie are at
http://www.trinity.edu/rjensen/2008Bailout.htm

"They Left Fannie Mae, but We Got the Legal Bills," by Grechen Morgenson, The New York Times, September 5, 2009 ---
http://www.nytimes.com/2009/09/06/business/economy/06gret.html?_r=1&scp=2&sq=gretchen morgensen&st=cse

  • I Saw Maxine Kissing Franklin Raines --- http://www.youtube.com/watch?v=vbZnLxdCWkA
    Before Franklin Raines resigned as CEO of Fannie Mae and paid over a million dollar fine for accounting fraud to pad his bonus, he was the darling of the liberal members of Congress. Frank Raines was creatively managing earnings to the penny just enough to get his enormous bonus. The auditing firm of KPMG was accordingly fired from its biggest corporate client in history --- http://www.trinity.edu/rjensen/Theory01.htm#Manipulation

    Video on the efforts of some members of Congress seeking to cover up accounting fraud at Fannie Mae ---
    http://www.youtube.com/watch?v=1RZVw3no2A4 

  •  

     

    The Largest Earnings Management Fraud in History and Congressional Efforts to Cover it Up

    Without trying to place the blame on Democrats or Republicans, here are some of the facts that led to the eventual fining of Fannie Mae executives for accounting fraud and the firing of KPMG as the auditor on one of the largest and most lucrative audit clients in the history of KPMG. The restated earnings purportedly took upwards of a million journal entries, many of which were re-valuations of derivatives being manipulated by Fannie Mae accountants and auditors (Deloitte was charged with overseeing the financial statement revisions. 

     

    Fannie Mae may have conducted the largest earnings management scheme in the history of accounting.

     

    You can read the following at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

     

    . . . flexibility also gave Fannie the ability to manipulate earnings to hit -- within pennies -- target numbers for executive bonuses. Ofheo details an example from 1998, the year the Russian financial crisis sent interest rates tumbling. Lower rates caused a lot of mortgage holders to prepay their existing home mortgages. And Fannie was suddenly facing an estimated expense of $400 million.

    Well, in its wisdom, Fannie decided to recognize only $200 million, deferring the other half. That allowed Fannie's executives -- whose bonus plan is linked to earnings-per-share -- to meet the target for maximum bonus payouts. The target EPS for maximum payout was $3.23 and Fannie reported exactly . . . $3.2309. This bull's-eye was worth $1.932 million to then-CEO James Johnson, $1.19 million to then-CEO-designate Franklin Raines, and $779,625 to then-Vice Chairman Jamie Gorelick.

    That same year Fannie installed software that allowed management to produce multiple scenarios under different assumptions that, according to a Fannie executive, "strengthens the earnings management that is necessary when dealing with a volatile book of business." Over the years, Fannie designed and added software that allowed it to assess the impact of recognizing income or expense on securities and loans. This practice fits with a Fannie corporate culture that the report says considered volatility "artificial" and measures of precision "spurious."

    This disturbing culture was apparent in Fannie's manipulation of its derivative accounting. Fannie runs a giant derivative book in an attempt to hedge its massive exposure to interest-rate risk. Derivatives must be marked-to-market, carried on the balance sheet at fair value. The problem is that changes in fair-value can cause some nasty volatility in earnings.

    So, Fannie decided to classify a huge amount of its derivatives as hedging transactions, thereby avoiding any impact on earnings. (And we mean huge: In December 2003, Fan's derivatives had a notional value of $1.04 trillion of which only a notional $43 million was not classified in hedging relationships.) This misapplication continued when Fannie closed out positions. The company did not record the fair-value changes in earnings, but only in Accumulated Other Comprehensive Income (AOCI) where losses can be amortized over a long period.

    Fannie had some $12.2 billion in deferred losses in the AOCI balance at year-end 2003. If this amount must be reclassified into retained earnings, it might punish Fannie's earnings for various periods over the past three years, leaving its capital well below what is required by regulators.

    In all, the Ofheo report notes, "The misapplications of GAAP are not limited occurrences, but appear to be pervasive . . . [and] raise serious doubts as to the validity of previously reported financial results, as well as adequacy of regulatory capital, management supervision and overall safety and soundness. . . ." In an agreement reached with Ofheo last week, Fannie promised to change the methods involved in both the cookie-jar and derivative accounting and to change its compensation "to avoid any inappropriate incentives."

    But we don't think this goes nearly far enough for a company whose executives have for years derided anyone who raised a doubt about either its accounting or its growing risk profile. At a minimum these executives are not the sort anyone would want running the U.S. Treasury under John Kerry. With the Justice Department already starting a criminal probe, we find it hard to comprehend that the Fannie board still believes that investors can trust its management team.

    Fannie Mae isn't an ordinary company and this isn't a run-of-the-mill accounting scandal. The U.S. government had no financial stake in the failure of Enron or WorldCom. But because of Fannie's implicit subsidy from the federal government, taxpayers are on the hook if its capital cushion is insufficient to absorb big losses. Private profit, public risk. That's quite a confidence game -- and it's time to call it.

     

    **********************************

    :"Sometimes the Wrong 'Notion':   Lender Fannie Mae Used A Too-Simple Standard For Its Complex Portfolio," by Michael MacKenzie, The Wall Street Journal, October 5, 2004, Page C3 

    Lender Fannie Mae Used A Too-Simple Standard For Its Complex Portfolio

    What exactly did Fannie Mae do wrong?

    Much has been made of the accounting improprieties alleged by Fannie's regulator, the Office of Federal Housing Enterprise Oversight.

    Some investors may even be aware the matter centers on the mortgage giant's $1 trillion "notional" portfolio of derivatives -- notional being the Wall Street way of saying that that is how much those options and other derivatives are worth on paper.

    But understanding exactly what is supposed to be wrong with Fannie's handling of these instruments takes some doing. Herewith, an effort to touch on what's what -- a notion of the problems with that notional amount, if you will.

    Ofheo alleges that, in order to keep its earnings steady, Fannie used the wrong accounting standards for these derivatives, classifying them under complex (to put it mildly) requirements laid out by the Financial Accounting Standards Board's rule 133, or FAS 133.

    For most companies using derivatives, FAS 133 has clear advantages, helping to smooth out reported income. However, accounting experts say FAS 133 works best for companies that follow relatively simple hedging programs, whereas Fannie Mae's huge cash needs and giant portfolio requires constant fine-tuning as market rates change.

    A Fannie spokesman last week declined to comment on the issue of hedge accounting for derivatives, but Fannie Mae has maintained that it uses derivatives to manage its balance sheet of debt and mortgage assets and doesn't take outright speculative positions. It also uses swaps -- derivatives that generally are agreements to exchange fixed- and floating-rate payments -- to protect its mortgage assets against large swings in rates.

    Under FAS 133, if a swap is being used to hedge risk against another item on the balance sheet, special hedge accounting is applied to any gains and losses that result from the use of the swap. Within the application of this accounting there are two separate classifications: fair-value hedges and cash-flow hedges.

    Fannie's fair-value hedges generally aim to get fixed-rate payments by agreeing to pay a counterparty floating interest rates, the idea being to offset the risk of homeowners refinancing their mortgages for lower rates. Any gain or loss, along with that of the asset or liability being hedged, is supposed to go straight into earnings as income. In other words, if the swap loses money but is being applied against a mortgage that has risen in value, the gain and loss cancel each other out, which actually smoothes the company's income.

    Cash-flow hedges, on the other hand, generally involve Fannie entering an agreement to pay fixed rates in order to get floating-rates. The profit or loss on these hedges don't immediately flow to earnings. Instead, they go into the balance sheet under a line called accumulated other comprehensive income, or AOCI, and are allocated into earnings over time, a process known as amortization.

    Ofheo claims that instead of terminating swaps and amortizing gains and losses over the life of the original asset or liability that the swap was used to hedge, Fannie Mae had been entering swap transactions that offset each other and keeping both the swaps under the hedge classifications. That was a no-go, the regulator says.

    "The major risk facing Fannie is that by tainting a certain portion of the portfolio with redesignations and improper documentation, it may well lose hedge accounting for the whole derivatives portfolio," said Gerald Lucas, a bond strategist at Banc of America Securities in New York.

    The bottom line is that both the FASB and the IASB must someday soon take another look at how the real world hedges portfolios rather than individual securities.  The problem is complex, but the problem has come to roost in Fannie Mae's $1 trillion in hedging contracts.  How the SEC acts may well override the FASB.  How the SEC acts may be a vindication or a damnation for Fannie Mae and Fannie's auditor KPMG who let Fannie violate the rules of IAS 133.

     

    Video on the efforts of some members of Congress seeking to cover up accounting fraud at Fannie Mae ---
    http://www.youtube.com/watch?v=1RZVw3no2A4


  • INDIVIDUAL DEVELOPMENT ACCOUNT PROGRAM (IDA)?

    This message from my good friend Cindy is off topic, but I think it may be useful for you to check if the region around your home town has something similar. This could be great advice to pass along to poor people. San Antonio is one of the larger cities in the United States and certainly has its share of residents (counted plus uncounted) below the poverty line.

    Cindy works in the Business Office on the Trinity University campus.

    Incidentally, San Antonio is ranked as the seventh largest city in the United States --- http://en.wikipedia.org/wiki/San_Antonio 

    However, that ranking is misleading, because San Antonio has insignificant suburbs. San Antonio drops way down in rankings of metropolitan area population. For example, San Antonio is larger than San Francisco unless you consider Oakland and the Bay Area suburbs as part of San Francisco. Or is San Francisco really a relatively small suburb of Oakland?

    From: Mundy-Cobb,
    Cynthia
    [mailto:Cynthia.Mundy@trinity.edu]
     Sent: Friday, June 25, 2010 4:01 PM
    To: TIGERTALK Subject: City of San Antonio has a special program savings for people with limited income.

    Please pass this on to any individual that you might know who may be able to make use of this program. The City’s Individual Development Account – IDA program is a special match savings program for people with limited income. For every dollar you save -up to $1000 - the City of San Antonio (COSA) will match it with four dollars. ($4 to $1). See below for more information and link for this program.

    There are also programs that assist people with foreclosure counseling.

    ________________________________________

    WHAT IS THE INDIVIDUAL DEVELOPMENT ACCOUNT PROGRAM (IDA)?

    The IDA Program is a special match savings program for people with limited income. IDA members will receive extra dollars and the tools needed to get a head start on building for their future by attaining long term assets. These assets include gaining secondary education and purchasing a home. For every dollar you save -up to $1000 - the City of San Antonio (COSA) will match it with four dollars. ($4 to $1)

    http://www.sanantonio.gov/comminit/ida/idamain.asp 

    Cindy Mundy-Cobb
    Trinity University Office Manager Business Office

     

    June 26 reply from Wayne Tanna [wtanna@netserver05.chaminade.edu]

    Hi Bob,

           Thanks for the message.  We corresponded a while back about the stimulus payments in 2008.  We have an IDA program here in Hawaii that supports first time home buyers, start up small businesses and post secondary education. 

    We have been trying to get the program expanded to buying new cars, especially for people who live in rural areas where there is no public transportation option which in Hawaii is pretty much every island other than Oahu where Honolulu the 12th largest city is located.  The reason for the car purchase is so that people can get to work and thus not fall deeper into poverty.

    One of my past students was the founding executive director of the initial IDA collaborative in Hawaii and was a past volunteer with our school’s VITA program.  We even had a state law that granted a 50% tax credit, beyond the normal charitable deduction, for amounts contributed to a Hawaii IDA program’s matching fund from any for-profit corporation.  Unfortunately that law sunsetted a couple years ago and the financial mess we are all in pretty much guaranteed that it was not reenacted.

    As with most IDA programs participants here need to accomplish certain things, in addition to making their savings goals, like classes on financial aid applications (FASFA), basics of running a business, financial literacy and asset building which many of our school’s service learning students get to teach.  Another great thing about IDAs is that the matching contribution and the interest on the match are not subject to income tax so the power of compounding is given maximum effect.

    A group of us are trying to change our state’s public benefits laws so that IDAs will not count against asset limitations ($2000 single and $3000 for married couples) for such things as TANF (welfare) and SNAP (Supplementary Nutrition Assistance Program or food stamps) so that the climb out of and off of public assistance is not abruptly interrupted due to having engaged in such a prudent and forward thinking actions as saving money.

    Organizations like the Annie E. Cassy Foundation as well as various state and federal grant programs provide the matching funds so if you work with a non profit that serves the poor and supports programs like VITA and financial literacy this is a great addition that can draw additional friends and funders. 

    Aloha,

    Wayne

     

     

     

     




     

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