Tidbits Quotations
To Accompany the November 14, 2011 edition of Tidbits
Bob Jensen at Trinity University

No Comment
Donations To Occupy Wall Street Are Now ‘Tax Deductible’

It’s the Tax Code, Stupid: Niall Ferguson Solves Our Economic Mess --- Click Here

Video:  Hans Rosling Uses Ikea Props to Explain World of 7 Billion People --- Click Here

Bob Jensen's threads on visualization of multivariate data ---

Trying to Keep Paul Krugman Honest ---

The idea of a central bank manipulating world markets packs an increasingly powerful emotional punch with voters.
"Is there a shadowy plot behind gold?" by Gillian Tett, Financial Times, October 21, 2011 ---

Out there in the world today, a cabal of western central bankers is secretly determined to manipulate the world’s markets. They are doing this not via interest rates, but by rigging gold prices. More specifically, they have kept bullion prices artificially low in recent decades to ensure that our so-called fiat currency system – that is, money created by central banks – continues to work. For if the public ever knew the “real” price of gold, we would finally understand that our currencies, such as the dollar, are a sham … hence the need for that central bank plot.

Does this sound like the ranting of a Tea Party activist? A Hollywood screenplay? Or could there be a grain of truth in it? The question has been provoking hot debate among a small tribe of investors in America for many years, particularly those owning gold mining stocks. Right now it is also leaching into the more mainstream American political world.

Continued in article

Jensen Comment
This is not a rant from an long-haired anarchist defecating in a NYC park, but such a guy probably takes such market manipulation for granted. Such strange things are happening with gold prices I'm a bit of a believer myself.

Bob Jensen's Rotten to the Core threads are at

"The Euro Crisis: Italy's Turn," by David Champion is a senior editor of Harvard Business Review, HBR Blog, November 10, 2011 --- Click Here

It's no longer about the small fry. With borrowing costs now over 7%, Italy is next in line for a bail-out and the future of the Euro just got even more uncertain. It's a tough topic to blog about these days since the situation is evolving at frightening speed. But let's try and round up some of the various threads

. . .

The ECB still remains largely on the sidelines, largely because the Germans are still unwilling to allow the ECB to serve as a lender of last resort. All the new governments are signing up for austerity policies in an effort to stay in the Euro. Yet many commentators, both left-leaning and right-leaning, believe that heavy intervention by the ECB will be needed if the Euro zone is not to become mired in a decade-long depression.

Talk about a Euro zone break up is being taken more seriously than it was recently. One commentator wonders whether the surprising strength of the Euro relative to the dollar might not reflect market expectations that the Euro will turn into a kind of greater Deutschmark. All commentators believe that a break-up will be extremely hard, though some believe it might be preferable to continued austerity.

I was trying to make sense of all this at lunchtime today, and this narrative kind of evolved. Assume that the German government knows as well as anyone that if the Euro is to survive:

(a) The ECB will have to intervene in the short term
(b) Greater fiscal integration and convergence is needed in the long term

Inevitably, this will involve a reduction of political and economic sovereignty for all concerned. There is also the question of who does the converging. German politicians are probably afraid that the Italians, with their famously dysfunctional political system, will be unable to introduce the long-term fiscal changes they need to make to reduce indebtedness unless they are staring economic ruin in the face. German politicians are also worried for their own political futures. Any German who cedes any of Germany's economic sovereignty will have to have something to show for it if they are to stand any chance of re-election

If that's true, then you could make the argument that the Germans are playing chicken. They have to make the threat of a Euro break-up credible in order to force the Italians (and others) to introduce the long-term fiscal adjustments they need to make. If that's the case, once the Italians actually sign up for their austerity package, then we would expect to see ECB starting to act like a national central bank and Germany reflating. If this is what's going on, there are hopeful signs from the German perspective: at the time of writing it looks as though former EU Commissioner Mario Monti may be the next Prime Minister of Italy. So perhaps the Euro might survive after all.

But who knows? If despite all that has happened the Italians can't make their commitment to fiscal discipline credible, will the Germans stick to their hard-line approach? And what about the French?

Audit Failure: The GAO Reported No Problems Amidst All This Massive Fraud

Note that most of these particular workers retire long before age 65 and are fraudulently collecting full Social Security and Medicare benefits intended for truly disabled persons
"The Public-Union Albatross What it means when 90% of an agency's workers (fraudulently)  retire with disability benefits," by Philip K. Howard, The Wall Street Journal, November 9, 2011 ---

The indictment of seven Long Island Rail Road workers for disability fraud last week cast a spotlight on a troubled government agency. Until recently, over 90% of LIRR workers retired with a disability—even those who worked desk jobs—adding about $36,000 to their annual pensions. The cost to New York taxpayers over the past decade was $300 million.

As one investigator put it, fraud of this kind "became a culture of sorts among the LIRR workers, who took to gathering in doctor's waiting rooms bragging to each [other] about their disabilities while simultaneously talking about their golf game." How could almost every employee think fraud was the right thing to do?

The LIRR disability epidemic is hardly unique—82% of senior California state troopers are "disabled" in their last year before retirement. Pension abuses are so common—for example, "spiking" pensions with excess overtime in the last year of employment—that they're taken for granted.

Governors in Wisconsin and Ohio this year have led well-publicized showdowns with public unions. Union leaders argue they are "decimat[ing] the collective bargaining rights of public employees." What are these so-called "rights"? The dispute has focused on rich benefit packages that are drowning public budgets. Far more important is the lack of productivity.

"I've never seen anyone terminated for incompetence," observed a long-time human relations official in New York City. In Cincinnati, police personnel records must be expunged every few years—making periodic misconduct essentially unaccountable. Over the past decade, Los Angeles succeeded in firing five teachers (out of 33,000), at a cost of $3.5 million.

Collective-bargaining rights have made government virtually unmanageable. Promotions, reassignments and layoffs are dictated by rigid rules, without any opportunity for managerial judgment. In 2010, shortly after receiving an award as best first-year teacher in Wisconsin, Megan Sampson had to be let go under "last in, first out" provisions of the union contract.

Even what task someone should do on a given day is subject to detailed rules. Last year, when a virus disabled two computers in a shared federal office in Washington, D.C., the IT technician fixed one but said he was unable to fix the other because it wasn't listed on his form.

Making things work better is an affront to union prerogatives. The refuse-collection union in Toledo sued when the city proposed consolidating garbage collection with the surrounding county. (Toledo ended up making a cash settlement.) In Wisconsin, when budget cuts eliminated funding to mow the grass along the roads, the union sued to stop the county executive from giving the job to inmates.

No decision is too small for union micromanagement. Under the New York City union contract, when new equipment is installed the city must reopen collective bargaining "for the sole purpose of negotiating with the union on the practical impact, if any, such equipment has on the affected employees." Trying to get ideas from public employees can be illegal. A deputy mayor of New York City was "warned not to talk with employees in order to get suggestions" because it might violate the "direct dealing law."

How inefficient is this system? Ten percent? Thirty percent? Pause on the math here. Over 20 million people work for federal, state and local government, or one in seven workers in America. Their salaries and benefits total roughly $1.5 trillion of taxpayer funds each year (about 10% of GDP). They spend another $2 trillion. If government could be run more efficiently by 30%, that would result in annual savings worth $1 trillion.

What's amazing is that anything gets done in government. This is a tribute to countless public employees who render public service, against all odds, by their personal pride and willpower, despite having to wrestle daily choices through a slimy bureaucracy.

One huge hurdle stands in the way of making government manageable: public unions. The head of the American Federation of State, County and Municipal Employees recently bragged that the union had contributed $90 million in the 2010 off-year election alone. Where did the unions get all that money? The power is imbedded in an artificial legal construct—a "collective-bargaining right" that deducts union dues from all public employees, whether or not they want to belong to the union.

Some states, such as Indiana, have succeeded in eliminating this requirement. I would go further: America should ban political contributions by public unions, by constitutional amendment if necessary. Government is supposed to serve the public, not public employees.

America must bulldoze the current system and start over. Only then can we balance budgets and restore competence, dignity and purpose to public service.

Audit Failure:  The GAO Reported No Problems Amidst All This Fraud
This is what a union site claims about the Long Island Rail Road workers for disability ---

What you won't read in Newsday or the New York Times from non-copyrighted labor source:

GAO Audit Gives Railroad Occupational Disability Program a Clean Bill of Health

The United States Government Accountability Office (GAO) just issued its second review of the Railroad Retirement Board Occupational Disability Program. And once again it found no problems.

“This was a major accomplishment for rail labor,” says TCU President Bob Scardelletti. “Occupational Disability is a vitally important program for members who need it. It’s the best in the country, and this Report will help keep it that way.”

The increased government attention on Occupational Disability began when New York politicians and newspapers began a full scale campaign targeting Long Island Rail Road workers’ alleged abuse of the program. After extensive scandalous press reports, public hearings, wild allegations, and a congressionally requested GAO investigation, no improprieties were found.

The Railroad Retirement Board did institute some oversight measures specific to Long Island Rail Road to make sure that no abuses were occurring, reflecting the fact that the rate of applications for occupational disability were higher than on any other railroad. But these oversight procedures wound up finding that all Long Island applications that were approved were properly reviewed, legitimate and in accordance with existing law and regulations. And that fact was endorsed by the first GAO audit of Long Island Rail Road claims in a report released in September, 2009.

Not satisfied with the GAO’s findings, two Congressman – John Mica of Florida and Bill Shuster of Pennsylvania – on March 18, 2009 formally requested the GAO to “conduct a systematic review of RRB’s occupational disability program”, not just limited to Long Island Rail Road.

The Congressmen’ request prompted yet another GAO review of the occupational disability program. In their just-issued response to the two Congressmen, the GAO reported they found no improprieties and made no recommendations.

Once again efforts to find fault with the occupational disability have come up empty,” says President Scardelletti. “That’s because the program is functioning as it was intended – to be a last resort for rail workers who because of illness or injury can no longer perform their jobs. It is a necessary benefit and it is not abused by those who unfortunately must apply for it. We will continue to do everything in our power to preserve it as is.

Jensen Comment
The program seems to be "working as intended." Either 90% of all the railroad's workers are becoming disabled on the job or the system is "intended" to defraud the taxpayers. One sign of that it was a fraud is that the same doctor (now indicted) was receiving millions of dollars from the union to sign phony disability claims.

And there are some who advocate that the GAO take over the private sector auditing because there will be less fraud, greater independence, and more competent auditors than anything the Big Four and other auditing firms can come up with. Baloney!


Disability Entitlements: Being Declared Disabled has More Benefits Than Working
Between the ages of 0 and 200, disability pay and medical payments go on virtually forever
The system is racked with fraud
Cost averages $1,500 annually for each and every taxpayer in the U.S.
"College Enrollment Fell Slightly in 2010," by Catherine Rampell, The New York Times (Economix)

In the worst economic times of the 1950s and ’60s, about 9 percent of men in the prime of their working lives (25 to 54 years old) were not working. At the depth of the severe recession in the early 1980s, about 15 percent of prime-age men were not working. Today, more than 18 percent of such men aren’t working.

That’s a depressing statistic: nearly one out of every five men between 25 and 54 is not employed. Yes, some of them are happily retired. Some are going to school. And some are taking care of their children. But most don’t fall into any of these categories. They simply aren’t working. They’re managing to get by some other way.

For growing numbers of these men, the federal disability program is a significant source of support. Disabled workers — men and women — received $115 billion in benefits last year and another $75 billion in medical costs. (Disability recipients become eligible for Medicare two years after starting to receive benefits.) That $190 billion sum is the equivalent of about $1,500 in taxes for each American household.

Yet disability usually goes unlargely uncovered by the media. Lately, it hasn’t. Motoko Rich of The Times and Damian Paletta of The Wall Street Journal have both written richly detailed articles recently.

Continued in article

"Europe's Entitlement Reckoning From Greece to Italy to France, the welfare state is in crisis," The Wall Street Journal, November 9, 2011 ---

In the European economic crisis, all roads lead through Rome. The markets have raised the price of financing Italy's mammoth debt to new highs, and on Tuesday Silvio Berlusconi became the second euro-zone prime minister, after Greece's George Papandreou, to resign this week. His departure may keep the world's eighth largest economy solvent for the time being, but it hardly addresses the root of the problem.

In Italy, as in Greece, Spain and Portugal and eventually France, the welfare-entitlement state has hit a wall. Successive governments on the Continent, right and left, have financed generous entitlements with high taxes and towering piles of debt. Their economies have failed to grow fast enough to keep up, and last year the money started to run out. The reckoning has arrived.

If the first step in curing an addiction is to acknowledge it, there is little sign of that in Europe. The solutions on offer are to spend still more money, to have the Germans bail out everybody else, or to ditch the euro so bankrupt countries can again devalue their own currencies. France's latest debt solution includes raising corporate, capitals gains and sales taxes.

Yet Europe's problem isn't the euro. If it were, Hungary, Iceland and Latvia—none of which use the euro—would have been spared their painful days of reckoning. The same applies for Britain. Europe is in a debt spiral brought about by spendthrift, overweening and inefficient governments.

This is a crisis of the welfare state, and Italy is a model basket case. Mario Monti, who is tipped to lead a new government of technocrats, once described the Italian economy as a case of "self-inflicted strangulation." Government debt is 120% of GDP, making Italy the world's third largest borrower after the U.S. and Japan. Its economy last grew at more than 2% a year in 2000.

An aging and shrinking population is a symptom, but not a leading cause, of the eurosclerosis. A fifth of Italy's 60 million people are 65 or older and make increasingly expensive claims on state-paid pensions and other benefits. In fast-growing Turkey, only 6.3% fit that demographic. Italian women have on average 1.2 children, putting the country's birth rate at 207th out of 221 countries.

But the bulk of the responsibility lies with politicians. Mr. Berlusconi, Italy's richest man, promised a shake up each time he ran for office (in 1994, 1996, 2001, 2006 and 2008). He was the longest serving premier in post-war Italy, from 2001 to 2006, controlled parliament and could have pushed through reforms. He didn't. Promises to lower taxes and hack away at regulations and protections for Italy's powerful guilds—from taxi drivers to pharmacists to journalists—were broken.

"It is not difficult to rule Italy," Benito Mussolini once said, "it is useless." The so-called concertazione, or concert, of Italian coalition politics that brings together numerous parties in the Parliament makes for unstable and indecisive governments. So does the fear prominent in many European countries that any serious reform will provoke street protests. An unhappy byproduct of a welfare state is that it creates powerful interests that will fight to the last to preserve their free lunch, no matter the cost to the country.

But now hard choices can no longer be postponed. And the solution to Europe's debt crisis must begin with reforming, if not dismantling, the welfare state. Europe rose from the economic grave in the 1960s, it rode the Reagan-Thatcher reform wave to more modest growth in the 1980s-'90s, and it can grow again. A decade ago, Germany was called the "sick man of Europe," bedeviled by Italian-like economic problems. But a center-left coalition, supported by trade unions and German society, overhauled labor and welfare codes and set the stage for the current (if still modest) export-led revival in Germany.

The road from Rome may now lead to Paris, Madrid and other debt-ridden European countries. But this is no cause for U.S. chortling, because that same road also leads to Sacramento, Albany and Washington. America's federal debt was 35.7% of GDP in 2007, but it was 61.3% last year and is rising on an Italian trajectory. The lesson of Italy, and most of the rest of Europe, is never to become a high-tax, slow-growth entitlement state, because the inevitable reckoning is nasty, brutish and not short.


Japan Adopted the Worst Entitlements Practices of the United States (and the same baby boomer mistakes following WW II)

"The Italy of Asia:  Japan's entitlement dilemmas are a warning to Washington," The Wall Street Journal, January 6, 2011 ---

Japanese politics is once again in turmoil, with the government's approval ratings around 20%. Prime Minister Naoto Kan is trying to force out his rival within the Democratic Party of Japan, Ichiro Ozawa, which might boost his own popularity but would probably cause enough defections to destroy a precarious majority. And he has chosen as his New Year initiative an increase in the consumption tax—a hugely unpopular policy that cost him the upper house election last year and would surely harm the economy.

Looks like it's almost time for another change of leader in Tokyo, which is becoming the Italy of Asia. Whoever it is, he will have to tackle Japan's problems before unpleasant outcomes are forced upon it. Without cuts to entitlements and tax cuts to promote growth, Tokyo will continue turning into Athens.

Mr. Kan's claims to fiscal rectitude are belied by the draft fiscal 2011 budget released late last month. It calls for another year of near-record addition to a national debt already approaching 200% of GDP. The budget includes $867 billion of spending, though total government revenue amounts to just $501 billion. The budget proposes trimming discretionary spending only marginally, cuts that are overwhelmed by the uncontrolled growth of entitlement programs, which make up 53% of total spending.

Japan is foundering on the promises made by past generations of politicians that are coming due in a rapidly aging society. These include unfunded pensions and medical care for the elderly. And it will only get worse—2012 is expected to be a watershed year when the biggest wave of baby boomers begins to retire.

As two lost decades since the bursting of the bubble show, Japan's consensus-based political system seizes up when it comes to allocating societal losses. In the 1990s, that meant that the government encouraged banks to sit on bad loans rather than undergo the kind of cathartic restructuring the U.S. is now undergoing, at least in some parts of the economy. That made Japan appear more stable, but without creative destruction the economy was unable to return to growth. This time the leverage is spread across generations, with the lack of growth making the promises to the old a bigger burden, which in turn makes it impossible to pursue pro-growth policies.

Payments on the national debt next year are projected at an already substantial $263 billion, but this assumes a payout of no more than 2% on 10-year bonds. Yields may remain well below this level for now, but in recent auctions signs have emerged that investors are losing their appetite for government bonds. The national debt is forecast to exceed household savings in the next year, as retirees continue to spend down savings. As long as growth remains slow, corporations will probably continue to save. But if Tokyo is forced to look abroad for funding, it will have to pay much higher rates.

That has the potential to blow out the budget in spectacular fashion. With central and local government debt now estimated at over $11 trillion, each one percentage point increase in yields will cost $110 billion. Adding in its unfunded liabilities, Japan has already reached the point at which its debt load will continue to increase regardless of how much it cuts spending or raises taxes.

In other words, Japan is about to run into the late economist Herb Stein's obvious but oft-overlooked law, which states that if something cannot continue it won't. The crunch is coming in one form or another.

Continued in article

Bob Jensen's threads on entitlements are at

That some bankers have ended up in prison is not a matter of scandal, but what is outrageous is the fact that all the others are free.
Honoré de Balzac

Bankers bet with their bank's capital, not their own. If the bet goes right, they get a huge bonus; if it misfires, that's the shareholders' problem.
Sebastian Mallaby. Council on Foreign Relations, as quoted by Avital Louria Hahn, "Missing:  How Poor Risk-Management Techniques Contributed to the Subprime Mess," CFO Magazine, March 2008, Page 53 --- http://www.cfo.com/article.cfm/10755469/c_10788146?f=magazine_featured
Now that the Fed is going to bail out these crooks with taxpayer funds makes it all the worse.

Wall Street Remains Congress to the Core
The boom in corporate mergers is creating concern that illicit trading ahead of deal announcements is becoming a systemic problem. It is against the law to trade on inside information about an imminent merger, of course. But an analysis of the nation’s biggest mergers over the last 12 months indicates that the securities of 41 percent of the companies receiving buyout bids exhibited abnormal and suspicious trading in the days and weeks before those deals became public. For those who bought shares during these periods of unusual trading, quick gains of as much as 40 percent were possible.
Gretchen Morgenson, "Whispers of Mergers Set Off Suspicious Trading," The New York Times, August 27, 2006 ---
Click Here


"Should Some Bankers Be Prosecuted?" by Jeff Madrick and Frank Partnoy, New York Review of Books, November 10, 2011 ---
Thank you Robert Walker for the heads up!

More than three years have passed since the old-line investment bank Lehman Brothers stunned the financial markets by filing for bankruptcy. Several federal government programs have since tried to rescue the financial system: the $700 billion Troubled Asset Relief Program, the Federal Reserve’s aggressive expansion of credit, and President Obama’s additional $800 billion stimulus in 2009. But it is now apparent that these programs were not sufficient to create the conditions for a full economic recovery. Today, the unemployment rate remains above 9 percent, and the annual rate of economic growth has slipped to roughly 1 percent during the last six months. New crises afflict world markets while the American economy may again slide into recession after only a tepid recovery from the worst recession since the Great Depression.

n our article in the last issue,1 we showed that, contrary to the claims of some analysts, the federally regulated mortgage agencies, Fannie Mae and Freddie Mac, were not central causes of the crisis. Rather, private financial firms on Wall Street and around the country unambiguously and overwhelmingly created the conditions that led to catastrophe. The risk of losses from the loans and mortgages these firms routinely bought and sold, particularly the subprime mortgages sold to low-income borrowers with poor credit, was significantly greater than regulators realized and was often hidden from investors. Wall Street bankers made personal fortunes all the while, in substantial part based on profits from selling the same subprime mortgages in repackaged securities to investors throughout the world.

Yet thus far, federal agencies have launched few serious lawsuits against the major financial firms that participated in the collapse, and not a single criminal charge has been filed against anyone at a major bank. The federal government has been far more active in rescuing bankers than prosecuting them.

In September 2011, the Securities and Exchange Commission asserted that overall it had charged seventy-three persons and entities with misconduct that led to or arose from the financial crisis, including misleading investors and concealing risks. But even the SEC’s highest- profile cases have let the defendants off lightly, and did not lead to criminal prosecutions. In 2010, Angelo Mozilo, the head of Countrywide Financial, the nation’s largest subprime mortgage underwriter, settled SEC charges that he misled mortgage buyers by paying a $22.5 million penalty and giving up $45 million of his gains. But Mozilo had made $129 million the year before the crisis began, and nearly another $300 million in the years before that. He did not have to admit to any guilt.

The biggest SEC settlement thus far, alleging that Goldman Sachs misled investors about a complex mortgage product—telling investors to buy what had been conceived by some as a losing proposition—was for $550 million, a record of which the SEC boasted. But Goldman Sachs earned nearly $8.5 billion in 2010, the year of the settlement. No high-level executives at Goldman were sued or fined, and only one junior banker at Goldman was charged with fraud, in a civil case. A similar suit against JPMorgan resulted in a $153.6 million fine, but no criminal charges.

Although both the SEC and the Financial Crisis Inquiry Commission, which investigated the financial crisis, have referred their own investigations to the Department of Justice, federal prosecutors have yet to bring a single case based on the private decisions that were at the core of the financial crisis. In fact, the Justice Department recently dropped the one broad criminal investigation it was undertaking against the executives who ran Washington Mutual, one of the nation’s largest and most aggressive mortgage originators. After hundreds of interviews, the US attorney concluded that the evidence “does not meet the exacting standards for criminal charges.” These standards require that evidence of guilt is “beyond a reasonable doubt.”

This August, at last, a federal regulator launched sweeping lawsuits alleging fraud by major participants in the mortgage crisis. The Federal Housing Finance Agency sued seventeen institutions, including major Wall Street and European banks, over nearly $200 billion of allegedly deceitful sales of mortgage securities to Fannie Mae and Freddie Mac, which it oversees. The banks will argue that Fannie and Freddie were sophisticated investors who could hardly be fooled, and it is unclear at this early stage how successful these suits will be.

Meanwhile, several state attorneys general are demanding a settlement for abuses by the businesses that administer mortgages and collect and distribute mortgage payments. Negotiations are under way for what may turn out to be moderate settlements, which would enable the defendants to avoid admitting guilt. But others, particularly Eric Schneiderman, the New York State attorney general, are more aggressively pursuing cases against Wall Street, including Goldman Sachs and Morgan Stanley, and they may yet bring criminal charges.

Successful prosecutions of individuals as well as their firms would surely have a deterrent effect on Wall Street’s deceptive activities; they often carry jail terms as well as financial penalties. Perhaps as important, the failure to bring strong criminal cases also makes it difficult for most Americans to understand how these crises occurred. Are they simply to conclude that Wall Street made well- meaning if very big errors of judgment, as bankers claim, that were rarely if ever illegal or even knowingly deceptive?

What is stopping prosecution? Apparently not public opinion. A Pew Research Opinion survey back in 2010 found that three quarters of Americans said that government policies helped banks and financial institutions while two thirds said the middle class and poor received little help. In mid-2011, half of those surveyed by Pew said that Wall Street hurts the economy more than it helps it.

Many argue that the reluctance of prosecutors derives from the power and importance of bankers, who remain significant political contributors and have built substantial lobbying operations. Only 5 percent of congressional bills designed to tighten financial regulations between 2000 and 2006 passed, while 16 percent of those that loosened such regulations were approved, according to a study by the International Monetary Fund.2 The IMF economists found that a major reason was lobbying efforts. In 2009 and early 2010, financial firms spent $1.3 billion to lobby Congress during the passage of the Dodd-Frank Act. The financial reregulation legislation was weakened in such areas as derivatives trading and shareholder rights, and is being further watered down.

Others claim federal officials fear that punishing the banks too much will undermine the fragile economic recovery. As one former Fannie official, now a private financial consultant, recently told The New York Times, “I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again.”

The responsibility for reluctance, however, also lies with the prosecutors and the law itself. A central problem is that proving financial fraud is much more difficult than proving most other crimes, and prosecutors are often unwilling to try it. Congress could fix this by amending federal fraud statutes to require, for example, that prosecutors merely prove that bankers should have known rather than actually did know they were deceiving their clients.

But even if Congress does not, it is not too late for bold federal prosecutors to try to bring a few successful cases. A handful of wins could create new precedents and common law that would set a higher and clearer standard for Wall Street, encourage more ethical practices, deter fraud—and arguably prevent future crises.

Continued in article

"How Wall Street Fleeced the World:  The Searing New doc Inside Job Indicts the Bankers and Their Washington Pals," by Mary Corliss and Richard Corliss, Time Magazine, October 18, 2010 ---

Like some malefactor being grilled by Mike Wallace in his 60 Minutes prime, Glenn Hubbard, dean of Columbia Business School, gets hot under the third-degree light of Charles Ferguson's questioning in Inside Job. Hubbard, who helped design George W. Bush's tax cuts on investment gains and stock dividends, finally snaps, "You have three more minutes. Give it your best shot." But he has already shot himself in the foot.

Frederic Mishkin, a former Federal Reserve Board governor and for now an economics professor at Columbia, begins stammering when Ferguson quizzes him about when the Fed first became aware of the danger of subprime loans. "I don't know the details... I'm not sure exactly... We had a whole group of people looking at this." "Excuse me," Ferguson interrupts, "you can't be serious. If you would have looked, you would have found things." (See the demise of Bernie Madoff.)

Ferguson—whose Oscar-nominated No End in Sight analyzed the Bush Administration's slipshod planning of the Iraq occupation—did look at the Fed, the Wall Street solons and the decisions made by White House administrations over the past 30 years, and he found plenty. Of the docufilms that have addressed the worldwide financial collapse (Michael Moore's Capitalism: A Love Story, Leslie and Andrew Cockburn's American Casino), this cogent, devastating synopsis is the definitive indictment of the titans who swindled America and of their pals in the federal government who enabled them.

With a Ph.D. in political science from MIT, Ferguson is no knee-jerk anticapitalist. In the '90s, he and a partner created a software company and sold it to Microsoft for $133 million. He is at ease talking with his moneyed peers and brings a calm tone to the film (narrated by Matt Damon). Yet you detect a growing anger as Ferguson digs beneath the rubble, and his fury is infectious. If you're not enraged by the end of this movie, you haven't been paying attention. (See "Protesting the Bailout.")

The seeds of the collapse took decades to flower. By 2008, the financial landscape had become so deregulated that homeowners and small investors had few laws to help them. Inflating the banking bubble was a group effort—by billionaire CEOs with their private jets, by agencies like Moody's and Standard & Poor's that kept giving impeccable ratings to lousy financial products, by a Congress that overturned consumer-protection laws and by Wall Street's fans in academe, who can earn hundreds of thousands of dollars by writing papers favorable to Big Business or sitting on the boards of firms like Goldman Sachs.

Who's Screwing Whom? In the spasm of moral recrimination that followed the collapse, some blamed the bright kids who passed up careers in science or medicine to make millions on Wall Street and charged millions more on their expense accounts for cocaine and prostitutes. After the savings-and-loan scandals of the late-'80s, according to Inside Job, thousands of executives went to jail. This time, with the economy bulking up on the steroids of derivatives and credit-default swaps, the only person who has done any time is Kristin Davis, the madam of a bordello patronized by Wall Streeters. Davis appears in the film, as does disgraced ex--New York governor Eliot Spitzer; both seem almost virtuous when compared with the big-money men. (See "The Case Against Goldman Sachs.")

The larger message of both No End in Sight and Inside Job is that American optimism, the engine for the nation's expansion, can have tragic results. The conquest of Iraq? A slam dunk. Gambling billions on risky mortgages? No worry—the housing market always goes up. Ignoring darker, more prescient scenarios, the geniuses in charge constructed faith-based policies that enriched their pals; they stumbled toward a precipice, and the rest of us fell off.

The shell game continues. Inside Job also details how, in Obama's White House, finance-industry veterans devised a "recovery" that further enriched their cronies without doing much for the average Joe. Want proof? Look at the financial industry's fat profits of the past year and then at your bank account, your pension plan, your own bottom line.

Video:  Watch Columbia's Business School Economist and Dean Hubbard rap his wrath for Ben Bernanke
The video is a anti-Bernanke musical performance by the Dean of Columbia Business School ---
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) ---

"Cheat Sheet: What’s Happened to the Big Players in the Financial Crisis?" by Braden Goyette, Publica, October 26, 2011 ---


Watch the video! (a bit slow loading)
 Lynn Turner is Partnoy's co-author of the white paper."Make Markets Be Markets"
 "Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 ---
 Watch the video!

The greatest swindle in the history of the world ---

Bob Jensen's threads on how the banking system is rotten to the core ---

"Finding more flaws in HUD’s accounting of HOME program," by Debbie Cenziper, The Washington Post, November 7, 2011 ---

The calls started in mid-May, two weeks before a looming congressional hearing.

Staff members across the vast U.S. Department of Housing and Urban Development were racing to check in with hundreds of local agencies to determine the status of housing construction projects for the poor.

Within days, the massive scramble came to a conclusion: HUD told Congress that its $32 billion HOME Investment Partnerships Program was doing just fine.

Those findings followed reports by The Washington Post that HUD had routinely failed to track the progress of its affordable-housing projects and that hundreds of deals involving hundreds of millions of dollars showed signs of delay or appeared to be in limbo. HUD officials defended the program, saying most projects are successfully completed.

But HUD’s attempt to demonstrate that success to Congress resulted in reports to lawmakers that, to judge by federal records and interviews with dozens of local housing agencies in charge of the projects, contain discrepancies and contradictions that suggest continuing problems with the program.

Indeed, the delays vexing the HOME program are larger than previously reported. In recent weeks, local housing agencies have confirmed that about 75 construction projects drew and spent $40 million in HOME funds with little or nothing built. That is in addition to the nearly 700 potentially delayed projects The Post identified earlier this year.

“The data that HUD has provided to this committee is completely unreliable,” said Rep. Randy Neugebauer (R-Tex.), chairman of the House Financial Services subcommittee on oversight and investigations, which has been probing the HOME program. “HUD has almost no way of knowing whether taxpayer dollars have been wasted or used for their intended purpose.”

In its recent accounts to Congress, HUD reported as complete at least 17 construction projects that did not deliver all of the units that had been promised. One was in Newark, where a developer received nearly $700,000 in HOME funding but completed only four of 11 units, leaving behind partially completed houses and barren lots, records and interviews show.

“We would not have characterized it as satisfactorily completed,” said Newark housing chief Michael Meyer.

HUD also reported that at least 16 projects were completed months or even years before low-income buyers purchased the units, local housing officials said. HUD’s regulations state that homeowner projects are complete only after the homes are sold.

Members of Congress have found similar inconsistencies. At a hearing last week, several Republican members of the House Financial Services Committee said they had tracked down reportedly completed projects in their districts and found, among other things, a vacant lot and a shuttered building.

“Where’s the money? Where are the units that were promised? Has HUD demanded repayments for units that were not built?” said Rep. Judy Biggert (R-Ill.), who chairs the Financial Services subcommittee on insurance, housing and community opportunity.

Bob Jensen's threads on the sad state of governmental accounting and accountability ---


"A Better Way Forward for State Taxation of E-Commerce," by David S. Gamage and Devin J. Heckman, SSRN, October 25, 2011 ---

We propose a novel solution for states that wish to tax interstate e-commerce – based on fully and adequately compensating remote vendors for all tax compliance costs. We argue that our proposed solution is compatible with the Quill framework for when states can constitutionally impose burdens on remote vendors. We argue that unlike our proposed solution, the recent state attempts to tax interstate e-commerce through so-called “Amazon laws” are unconstitutional, ineffective, or both. We thus urge the states to adopt our proposed approach as the best way forward for state taxation of interstate e-commerce.

Jensen Comment
This sounds more equitable at first blush, but it really is a complicated issue for vendors like Amazon and LL Bean facing so many taxing jurisdictions and having little say in the politics of states where they have no employees and physical presence.

Firstly, it's complicated when a single decision to opt for collecting out-of-state or out-of-country sales tax is a commitment for all customers for all time. Online vendors will probably not choose this option on their own accord.

Secondly, it's complicated since all the negotiating power appears to shift from the online vendors to the state governments. State governments might set very attractive "come on" rates of compensation that are very hard for vendors to refuse like 50% of the sales tax collected. Then five years later after all the software for collecting the sales taxes for 45 states and 147 other countries is up and running, and without warning, the reimbursement becomes 40%. then 30%, and eventually 0.00001%.

Most vendors like Amazon and LL Bean will probably see through the state comeon tricks and will only capitulate when the U.S. Supreme Court declares that they no longer have a choice. All it will take is one more Supreme Court appointment by President Obama to make this a reality (in my opinion). I'm not at all certain that state courts have the power to overturn the infamous LL Bean case decided by the U.S. Supreme Court.

The problem for states is deciding when to have the U.S. Supreme Court take up this vital case. I think they may be waiting for another liberal appointment to replace a conservative U.S. Supreme Court justice. Of course there are a lot of other cases awaiting that replacement. And with a more liberal Supreme Court they may not have to share a penny of the collected tax with the online vendors.

"The Mortgage Crisis: Some Inside Views Emails show that risk managers at Freddie Mac warned about lower underwriting standards—in vain, and with lessons for today," by Charles W. Calomiris, The Wall Street Journal, October 28, 2011 ---

Occupy Wall Street is denouncing banks and Wall Street for "selling toxic mortgages" while "screwing investors and homeowners." And the federal government recently announced it will be suing mortgage originators whose low-quality underwriting standards produced ballooning losses for Fannie Mae and Freddie Mac.

Have they fingered the right culprits?

There is no doubt that reductions in mortgage-underwriting standards were at the heart of the subprime crisis, and Fannie and Freddie's losses reflect those declining standards. Yet the decline in underwriting standards was largely a response to mandates, beginning in the Clinton administration, that required Fannie Mae and Freddie Mac to steadily increase their mortgages or mortgage-backed securities that targeted low-income or minority borrowers and "underserved" locations.

The turning point was the spring and summer of 2004. Fannie and Freddie had kept their exposures low to loans made with little or no documentation (no-doc and low-doc loans), owing to their internal risk-management guidelines that limited such lending. In early 2004, however, senior management realized that the only way to meet the political mandates was to massively cut underwriting standards.

The risk managers complained, especially at Freddie Mac, as their emails to senior management show. They refused to endorse the move to no-docs and battled unsuccessfully against the reduced underwriting standards from April to September 2004. Here are some highlights:

On April 1, 2004, Freddie Mac risk manager David Andrukonis wrote to Tracy Mooney, a vice president, that "while you, Don [Bisenius, a senior vice president] and I will make the case for sound credit, it's not the theme coming from the top of the company and inevitably people down the line play follow the leader."

Risk managers had already experimented with lower lending standards and knew the dangers. In another email that day, Mr. Bisenius wrote to Michael May (another senior vice president), "we did no-doc lending before, took inordinate losses and generated significant fraud cases. I'm not sure what makes us think we're so much smarter this time around."

On April 5, Mr. Andrukonis wrote to Chief Operating Officer Paul Peterson, "In 1990 we called this product 'dangerous' and eliminated it from the marketplace." He also argued that housing prices were already high and unlikely to rise further: "We are less likely to get the house price appreciation we've had in the past 10 years to bail this program out if there's a hole in it."

Donna Cogswell, a colleague of Mr. Andrukonis, warned that Fannie and Freddie's decisions to debase underwriting standards would have widespread ramifications for the mortgage market. In a Sept. 7 email to Freddie Mac CEO Dick Syron and others, she specifically described the ramifications of Freddie Mac's continuing participation in the market as effectively "mak[ing] a market" in no-doc mortgages.

Ms. Cogswell's Sept. 4 email to Mr. Syron and others also anticipated the potential human costs of the mortgage crisis. She tried to sway management by appealing to their decency: "[W]hat better way to highlight our sense of mission than to walk away from profitable business because it hurts the borrowers we are trying to serve?"

Politics—not shortsightedness or incompetent risk managers—drove Freddie Mac to eliminate its previous limits on no-doc lending. Commenting on what others referred to as the "push to do more affordable [lending] business," Senior Vice President Robert Tsien wrote to Dick Syron on July 14, 2004: "Tipping the scale in favor of no cap [on no-doc lending] at this time was the pragmatic consideration that, under the current circumstances, a cap would be interpreted by external critics as additional proof we are not really committed to affordable lending."

Sensing that his warnings were being ignored, Mr. Andrukonis wrote to Michael May on Sept. 8: "At last week's risk management meeting I mentioned that I had reached my own conclusion on this product from a reputation risk perspective. I said that I thought you and or Bob Tsien had the responsibility to bring the business recommendation to Dick [Syron], who was going to make the decision. . . . What I want Dick to know is that he can approve of us doing these loans, but it will be against my recommendation."

The decision by Fannie and Freddie to embrace no-doc lending in 2004 opened the floodgates of bad credit. In 2003, for example, total subprime and Alt-A mortgage originations were $395 billion. In 2004, they rose to $715 billion. By 2006, they were more than $1 trillion.

In a painstaking forensic analysis of the sources of increased mortgage risk during the 2000s, "The Failure of Models that Predict Failure," Uday Rajan of the University of Michigan, Amit Seru of the University of Chicago and Vikrant Vig of London Business School show that more than half of the mortgage losses that occurred in excess of the rosy forecasts of expected loss at the time of mortgage origination reflected the predictable consequences of low-doc and no-doc lending. In other words, if the mortgage-underwriting standards at Fannie and Freddie circa 2003 had remained in place, nothing like the magnitude of the subprime crisis would have occurred.

Taxpayer losses at Fannie and Freddie alone may exceed $300 billion. The costs of the financial collapse and recession brought on by the mortgage bust are immeasurably higher. Unfortunately, the Obama administration has perpetuated the low underwriting standards that gave us the crisis and encouraged the postponement of foreclosures by lending support to various states' efforts to sue originators for robo-signing violations.

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$6 billion here, $6 billion there, who cares as long as taxpayers foot the bill?

"Freddie Mac Loses $4.4B in Third Quarter, Requests $6B More From Treasury," Fox News, November 3, 2011 --- Click Here

Government-controlled mortgage giant Freddie Mac has requested $6 billion in additional aid after posting a wider loss in the third quarter.

Freddie Mac said Thursday that it lost $4.4 billion, or $1.86 per share, in the July-September quarter. That compares with a loss of $4.1 billion, or $1.25 a share, in the same quarter of 2010.

This quarter's $6 billion request from taxpayers is the largest since April 2010.

Freddie's losses are increasing mainly for two reasons: Many homeowners are paying less interest because they are able to refinance at lower mortgage rates. And failing and bankrupt mortgage insurers are not paying out as much money when homeowners default.

The government rescued McLean, Va.-based Freddie Mac and sibling company Fannie Mae in September 2008 after massive losses on risky mortgages threatened to topple them. Since then, a federal regulator has controlled their financial decisions.

Taxpayers have spent about $169 billion to rescue Fannie and Freddie, the most expensive bailout of the 2008 financial crisis. The government estimates it could cost up to $51 billion more to support the companies through 2014.

Freddie and Washington-based Fannie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. Along with other federal agencies, they backed nearly 90 percent of new mortgages over the past year.

Charles E. Haldeman Jr., Freddie's chief executive, said many homeowners are refinancing at lower mortgage rates or are shortening the terms of their mortgage. While that saves homeowners money, it is pushing Freddie deeper into the red.

"In fact, borrowers we helped to refinance will save an average of $2,500 in interest payments during the next year," he said.

For Freddie, those losses are temporary because interest rates will remain low for the foreseeable future, said Jim Vogel, an interest-rate specialist at FTN Financial.

Still, many homeowners are still defaulting on their mortgages. Unemployment remains stubbornly high at 9.1 percent. The percentage of those who are late by 90 days or more on their monthly mortgage payments was virtually unchanged at 3.51 percent in the July-September quarter.

Another reason Freddie needs more aid is because it has received less money from mortgage insurers.

Many riskier mortgage loans require insurance, which is meant to protect lenders and investors from losses if a homeowner defaults and the lender doesn't recoup costs through foreclosure. The borrower pays a monthly premium for the insurance, typically a set percentage of the total mortgage loan. But when those mortgage insurers fail, they pay out less in claims.

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Bob Jensen's threads on Barney's Rubble ---

"How Harrisburg Borrowed Itself Into Bankruptcy:  Can the capital of Pennsylvania stiff creditors when a credible payment plan is available?" by Steven Malanga, The Wall Street Journal, October 28, 2011 ---

During an April 2009 debate among candidates vying to be mayor of Harrisburg, Pa., one aspirant suggested that the financially troubled city should sell some of its valuable historical artifacts and use the proceeds to finance a "Harrisburg Museum of Bad Ideas." One compelling exhibit would be the city's recent decision to file for bankruptcy protection.

Harrisburg, the capital of Pennsylvania, is drowning in debt. City officials have known for more than four years that they'd have to deal with the fiscal mess, but they punted. The state has engineered a bailout plan, but the city council rejected it. Instead it has asked creditors to forgo as much as $100 million of the debt. Essentially, the city council is engaged in a giant game of brinksmanship with the state and creditors, daring them to come up with something that's less onerous than the current state plan, which involves asset sales and renegotiating union contracts.

"There's no way [state] legislators are going to sit up there and let the capital city of this state go under. They would be the laughingstock of the country," council member Gloria Martin-Roberts said earlier this year.

Under seven-term Mayor Stephen Reed, who governed from 1982 to 2010, Harrisburg had a long love affair with borrowed money, using it to spur projects of dubious value. The city invested millions of dollars in a stadium in the late 1980s to attract a minor league baseball team. When the Harrisburg Senators threatened to leave in 1995, the city bought the team with borrowed money. In 2009, even as the fiscal clouds darkened, it sank another $45 million, including $18 million in new debt, into upgrading the stadium. The team was attracting 2,488 fans per game.

Then there are those historical artifacts. Mr. Reed, once described by a local newspaper as a man who "never met a municipal bond he didn't like," wanted to borrow to open a network of museums. He spent some $39 million on a National Civil War Museum that opened in 2001. It has struggled for years to attract crowds. Undeterred, the mayor borrowed some $8 million to buy artifacts—including a Gatling gun, a Wells Fargo coach and a document signed by Wyatt Earp—for a proposed Wild West museum, though most of the purchases were made without the knowledge and consent of the city council. Plans for a Wild West museum and a National Sports Hall of Fame, financed by a $30 million bond offering, mercifully fell through.

The Harrisburg Authority, a city agency controlled by the mayor, floated much of the city's debt, including millions on an ill-fated incinerator. Built in the 1970s, it has been plagued by breakdowns and operating losses. Many other municipal governments, including nearby Lancaster County's, have turned their incinerators over to private-sector operators. The Harrisburg Authority spent the 1990s investing millions in a fruitless effort to make the plant efficient and profitable. But default loomed by 2003—when the city was forced to close the incinerator, now saddled with $100 million in debt, because it did not comply with federal clean-air standards.

Next up? A massive retrofit engineered by Barlow Projects Inc., a firm from Fort Collins, Colo. Harrisburg and Dauphin County, where the city is located, agreed to guarantee $125 million in new borrowing that was supposed to be paid back by revenues from the reopened plant. The city's debt load grew to $441 million, about $9,000 per resident.

The project fell behind and Barlow filed for bankruptcy in 2007 after the city fired it before work on the plant was completed. Harrisburg has missed payments on the incinerator debt, and it avoided default on its general obligation bonds in September 2010 only because the state stepped in with aid.

A worried state government enlisted a financial consultant to come up with a bailout plan. Unveiled in June, it involves selling the rights to the city's parking garage revenues to raise money, privatizing commercial sanitation services to cut costs, gaining concessions from city workers on pay and benefits, and raising taxes.

The city council rejected the state plan in July. Mayor Linda Thompson proposed a similar plan. It was voted down in August. Earlier this month the city council essentially threw Harrisburg on the mercy of the federal bankruptcy court, where members hope for a better deal.

The state has already challenged the bankruptcy petition. Gov. Tom Corbett, calling the Chapter 9 filing "illegal," is preparing to take over management of the city. But the city council remains defiant. Its attorney, Mark Schwartz, said that Mr. Corbett "can declare it Flag Day or Pay Investment Banks Day, it doesn't matter. He has to justify [a takeover] before the bankruptcy court."

Harrisburg's creditors, including municipal bond insurer Assured Guaranty Municipal Corp., have also sued the city. The municipal finance industry will be watching what happens with keen interest—because Assured Guaranty had received city and county debt guarantees. The county has lived up to its agreement and made payments to bondholders, but Harrisburg has not.

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"Bloomberg's Broken Windows The mayor's message: When the crazies come, you're on your own," by William McGurn, The Wall Street Journal, November 8, 2011 ---

. . .

For most, the Occupy movement has been a lark. For Woodstock wannabees, it's a romantic trip back to the Vietnam War protests they weren't around for. For television cameras and leftish documentarians, it's a feast of crazy signs and even crazier behavior. For a certain kind of Democrat, it's the answer to the energy of the tea party ("We are on their side," President Obama said of the Occupy movement to ABC News just three weeks ago).

The president is by no means alone. The mayor of Oakland, Calif., Jean Quan, issued words of support for the Occupy movement that sprang up outside her City Hall, claiming that sometimes "democracy is messy." Indeed it is: According to the San Francisco Chronicle, eyewitnesses claim her husband was among those who helped close the port down last week.

Ditto for Mayor Vincent Gray in the District of Columbia. On Friday a mob from Occupy DC attacked the Washington Convention Center where a conservative group was holding its meeting. The police did not protect them, and some who called for help claim 911 operators hung up. Earlier in the month, the D.C. government issued a press release boasting that "a fired-up Mayor Gray" had spoken in a freedom march that had "merged with separate demonstrations in support of DC voting rights and the Occupy Wall Street movement."

In short, instead of seeing "broken windows," too many of our urban leaders have persuaded themselves that the drugs, sexual assault and vandalism that have accompanied the Occupy movement are all "isolated incidents." In New York, Mayor Bloomberg says that he won't tolerate the kind of violence they had in Oakland. Of course, this is the same mayor who complains that the protesters have no right to erect tents when the whole of Zuccotti Park is blanketed with them.

Thus far too, those looking for the fallout have focused mostly on the political. Pollster Doug Schoen has warned his fellow Democrats that support for the Occupy movement will come back to bite them. George F. Will made the same point from the other side: "Conservatives," he wrote, "should rejoice and wish for it long life, abundant publicity and sufficient organization to endorse congressional candidates deemed worthy."

Until very recently, however, few have paid attention to the economic ramifications. In this, Bloomberg News is way ahead of its owner: A recent story noted that the same people assailing the lack of jobs and protesting income inequality are devastating local businesses. The owner of a café near Zuccotti Park told the reporter that the 103 jobs he created when he opened in June are now in jeopardy.

There's no denying that local businesses are suffering. Still, the economic ramifications of these protests go well beyond the painful drop in sales receipts that neighborhood merchants are suffering. Longer term, there surely is a broken-window aspect to urban investment, which raises important questions our occupied mayors seem largely oblivious to.

What company thinking of moving to Texas or even Connecticut, for example, will be persuaded to stay in Manhattan after witnessing the mayor's impotence here? How many trade groups or associations are going to move their big meetings from the nation's capital after they've seen the lack of police protection at the convention center? Who's going to sink money into Oakland—which clocked in below Flint, Mich., on a recent Forbes ranking of cities by job growth—when they see a mayor unwilling to call in the cops even after businesses have been openly attacked?

Our progressive mayors may think themselves reasonable when they turn a blind eye to the public disorders that have characterized the Occupy movement. In fact, they are sending a signal that imperils the urban development they so profess to love. For the message they are sending to business is this: When the crazies come for you, you're on your own.

"Cheat Sheet: What’s Happened to the Big Players in the Financial Crisis?" by Braden Goyette, Publica, October 26, 2011 ---

Widespread demonstrations in support of Occupy Wall Street have put the financial crisis back into the national spotlight lately.

So here’s a quick refresher on what’s happened to some of the main players, whose behavior, whether merely reckless or downright deliberate, helped cause or worsen the meltdown. This list isn’t exhaustive -- feel welcome to add to it.

Mortgage originators

Mortgage lenders contributed to the financial crisis by issuing or underwriting loans to people who would have a difficult time paying them back, inflating a housing bubble that was bound to pop. Lax regulation allowed banks to stretch their mortgage lending standards and use aggressive tactics to rope borrowers into complex mortgages that were more expensive than they first appeared. Evidence has also surfaced that lenders were filing fraudulent documents to push some of these mortgages through, and, in some cases, had been doing so as early as the 1990s. A 2005 Los Angeles Times investigation of Ameriquest – then the nation’s largest subprime lender – found that “they forged documents, hyped customers' creditworthiness and ‘juiced’ mortgages with hidden rates and fees.” This behavior was reportedly typical for the subprime mortgage industry. A similar culture existed at Washington Mutual, which went under in 2008 in the biggest bank collapse in U.S. history.

Countrywide, once the nation’s largest mortgage lender, also pushed customers to sign on for complex and costly mortgages that boosted the company’s profits. Countrywide CEO Angelo Mozilo was accused of misleading investors about the company’s mortgage lending practices, a charge he denies.  Merrill Lynch and Deutsche Bank both purchased subprime mortgage lending outfits in 2006 to get in on the lucrative business. Deutsche Bank has also been accused of failing to adequately check on borrowers’ financial status before issuing loans backed by government insurance. A lawsuit filed by U.S. Attorney Preet Bharara claimed that, when employees at Deutsche Bank’s mortgage received audits on the quality of their mortgages from an outside firm, they stuffed them in a closet without reading them. A Deutsche Bank spokeswoman said the claims being made against the company are “unreasonable and unfair,” and that most of the problems occurred before the mortgage unit was bought by Deutsche Bank.

Where they are now: Few prosecutions have been brought against subprime mortgage lenders. Ameriquest went out of business in 2007, and Citigroup bought its mortgage lending unit. Washington Mutual was bought by JP Morgan in 2008. A Department of Justice investigation into alleged fraud at WaMu closed with no charges this summer. WaMu also recently settled a class action lawsuit brought by shareholders for $208.5 million. In an ongoing lawsuit, the FDIC is accusing former Washington Mutual executives Kerry Killinger, Stephen Rotella and David Schneider of going on a "lending spree, knowing that the real-estate market was in a 'bubble.'" They deny the allegations.

Bank of America purchased Countrywide in January of 2008, as delinquencies on the company’s mortgages soared and investors began pulling out. Mozilo left the company after the sale. Mozilo settled an SEC lawsuit for $67.5 million with no admission of wrongdoing, though he is now banned from serving as a top executive at a public company. A criminal investigation into his activities fizzled out earlier this year. Bank of America invited several senior Countrywide executives to stay on and run its mortgage unit. Bank of America Home Loans does not make subprime mortgage loans. Deutsche Bank is still under investigation by the Justice Department.

Mortgage securitizers

In the years before the crash, banks took subprime mortgages, bundled them together with prime mortgages and turned them into collateral for bonds or securities, helping to seed the bad mortgages throughout the financial system. Washington Mutual, Bank of America, Morgan Stanley and others were securitizing mortgages as well as originating them. Other companies, such as Bear Stearns, Lehman Brothers, and Goldman Sachs, bought mortgages straight from subprime lenders, bundled them into securities and sold them to investors including pension funds and insurance companies.

Where they are now: This spring, New York’s Attorney General launched a probe into mortgage securitization at Bank of America, JP Morgan, UBS, Deutsche Bank, Goldman Sachs and Morgan Stanley during the housing boom. Morgan Stanley settled with Nevada’s Attorney General last month following an investigation into problems with the securitization process.

As part of a proposed settlement with the 50 state attorneys general over foreclosure abuses, several big banks were offered immunity from charges related to improper mortgage origination and securitization. California and New York have withdrawn from those talks.

The people who created and dealt CDOs

Once mortgages had been bundled into mortgage-backed securities, other bankers took groups of them and bundled them together into new financial products called Collateralized Debt Obligations. CDOs are composed of tiers with different levels of risk. As we’ve reported, a hedge fund named Magnetar worked with banks to fill CDOs with the riskiest possible materials, then used credit default swaps to bet that they would fail. Magnetar says that the majority of its short positions were against CDOs it didn’t own. Magnetar also says it didn’t choose what went its own CDOs, though people involved in the deals who spoke to ProPublica contradict this account.

American International Group’s London-based financial products unit was among the entities that provided credit default swaps on CDOs. Though the business of insuring the risky securities made AIG large short-term profits, it eventually brought the company to the brink of collapse, prompting an $85 billion government bailout.

Merrill Lynch, Citigroup, UBS, Deutsche Bank, Lehman Brothers and JPMorgan all made CDO deals with Magnetar. The hedge fund invested in 30 CDOs from the spring of 2006 to the summer of 2007. The bankers who worked on these deals almost always reaped hefty bonuses. From our story:

Even today, bankers and managers speak with awe at the elegance of the Magnetar Trade. Others have become famous for betting big against the housing market. But they had taken enormous risks. Meanwhile, Magnetar had created a largely self-funding bet against the market.

When banks found CDOs hard to sell, some of them, notably Merrill Lynch and Citibank, bought each other’s CDOs, creating the illusion of true investors when there were almost none. That was one way they kept the market for CDOs going longer than it otherwise would have. Eventually CDOs began purchasing risky parts of other CDOs created by the same bank. Take a look at our comic strip explaining self-dealing, and our chart detailing which banks bought their own CDOs.

Goldman Sachs and Morgan Stanley also made similar deals in which they created, then bet against, risky CDOs. The hedge fund Paulson & Co helped decide which assets to put inside Goldman’s CDOs.

Where they are now: Overall, the banks and individuals involved in CDO deals haven’t been convicted on criminal charges. The civil suits against them have produced fines that aren’t very big compared to the profits they made in the leadup to the financial crisis. JP Morgan paid $153.6 million to settle an SEC suit alleging they hadn’t disclosed to investors that Magnetar was betting against Morgan’s CDO. Citigroup just agreed to pay a $285 million fine to the SEC for betting against one of its mortgage-related CDOs. The lawsuit doesn’t mention dozens of similar deals made by Citi.

Magnetar is still thriving (the deals they made weren’t illegal according to the rules at the time). In 2007, Magnetar’s founder took home $280 million, and the fund had $7.6 billion under management. The SEC is considering banning hedge funds and banks from betting against securities of their own creation. As of May 2010, federal prosecutors were investigating Morgan Stanley over their CDO deals, and Goldman Sachs paid $550 million last year to settle a lawsuit related to one of theirs. Only one Goldman employee, Fabrice Tourre, has been charged criminally in connection to the deals.

Though recorded phone calls suggest that former AIG CEO Joseph Cassano misled investors about the credit default swaps that contributed to his company’s troubles, the evidence wasn’t airtight, and federal probes against him fell apart in 2010. Cassano’s lawyers deny any wrongdoing.

The ratings agencies

Standard and Poor’s, Moody’s and Fitch gave their highest rating to investments based on risky mortgages in the years leading up to the financial crisis. A Senate investigations panel found that S&P and Moody’s continued doing so even as the housing market was collapsing. An SEC report also found failures at 10 credit rating agencies.

Where they are now: The SEC is considering suing Standard and Poor’s over one particular CDO deal linked to the hedge fund Magnetar. The agency had previously considered suing Moody’s, but instead issued a report criticizing all of the rating agencies generally. Dodd-Frank created a regulatory body to oversee the credit rating agencies, but its development has been stalled by budgetary constraints.

The regulators

The Financial Crisis Inquiry Commission [PDF] concluded that the Securities and Exchange Commission failed to crack down on risky lending practices at banks and make them keep more substantial capital reserves as a buffer against losses. They also found that the Federal Reserve failed to stop the housing bubble by setting prudent mortgage lending standards, though it was the one regulator that had the power to do so.

An internal SEC audit faulted the agency for missing warning signs about the poor financial health of some of the banks it monitored, particularly Bear Stearns. [PDF] Overall, SEC enforcement actions went down under the leadership of Christopher Cox, and a 2009 GAO report found that he increased barriers to launching probes and levying fines.

Cox wasn’t the only regulator who resisted using his power to rein in the financial industry. The former head of the Federal Reserve, Alan Greenspan, reportedly refused to heighten scrutiny of the subprime mortgage market. Greenspan later said before Congress that it was a mistake to presume that financial firms’ own rational self-interest would serve as an adequate regulator. He has also said he doubts the financial crisis could have been prevented.

The Office of Thrift Supervision, which was tasked with overseeing savings and loan banks, also helped to scale back their own regulatory powers in the years before the financial crisis. In 2003 James Gilleran and John Reich, then heads of the OTS and Federal Deposit Insurance Corporation respectively, brought a chainsaw to a press conference as an indication of how they planned to cut back on regulation. The OTS was known for being so friendly with the banks -- which it referred to as its “clients” -- that Countrywide reorganized its operations so it could be regulated by OTS. As we’ve reported, the regulator failed to recognize serious signs of trouble at AIG, and didn’t disclose key information about IndyMac’s finances in the years before the crisis. The Office of the Comptroller of the Currency, which oversaw the biggest commercial banks, also went easy on the banks.

Where they are now: Christopher Cox stepped down in 2009 under public pressure. The OTS was dissolved this summer and its duties assumed by the OCC. As we’ve noted, the head of the OCC has been advocating to weaken rules set out by the Dodd Frank financial reform law. The Dodd Frank law gives the SEC new regulatory powers, including the ability to bring lawsuits in administrative courts, where the rules are more favorable to them.

The politicians

Two bills supported by Phil Gramm and signed into law by Bill Clinton created many of the conditions for the financial crisis to take place. The Gramm-Leach-Bliley Act of 1999 repealed all the remaining parts of Glass-Steagall, allowing firms to participate in traditional banking, investment banking, and insurance at the same time. The Commodity Futures Modernization Act, passed the year after, deregulated over-the-counter derivatives – securities like CDOs and credit default swaps, that derive their value from underlying assets and are traded directly between two parties rather than through a stock exchange. Greenspan and Robert Rubin, Treasury Secretary from 1995 to 1999, had both opposed regulating derivatives.  Lawrence Summers, who went on to succeed Rubin as Treasury Secretary, also testified before the Senate that derivatives shouldn’t be regulated.

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Jensen Comment
This is a well-researched summary article of what happened between 2008 and 2011 to the "Major Players" in the enormous economic  crisis, subprime mortgage, CDO, and other scandals.

My criticism is that the article seems to let CPA auditors off the hook in terms of being "Big Players" which, in my viewpoint is an enormouse oversight. For example, it mentions the huge WaMu settlement without mentioning the lawsuit against Deloitte. It mentions the Lehman Bros. scandal without mentioning Ernst & Young.  Nor does it mention the other dereliction of duty of all the large international audit firms and the small audit firms who never warned the public about pending failures of thousands of small banks and mortgage companies on Main Street as well as Wall Strett. The large and small CPA audit firms fell flat on their faces as important watchdogs over the Bigger Players and Smaller Players ---

Here are the only tidbits about audits and auditors in the above article:

U.S. Attorney Preet Bharara claimed that, when employees at Deutsche Bank’s mortgage received audits on the quality of their mortgages from an outside firm, they stuffed them in a closet without reading them. A Deutsche Bank spokeswoman said the claims being made against the company are “unreasonable and unfair,” and that most of the problems occurred before the mortgage unit was bought by Deutsche Bank

. . .

An internal SEC audit faulted the agency for missing warning signs about the poor financial health of some of the banks it monitored, particularly Bear Stearns. [PDF] Overall, SEC enforcement actions went down under the leadership of Christopher Cox, and a 2009 GAO report found that he increased barriers to launching probes and levying fines. .

So my conclusion is that Braden Goyette did a pretty good job summarizing what happened to what he called the "Big Players" in the economic crisis. He just did not include all of the Big Players ---

$6 billion here, $6 billion there, who cares as long as taxpayers foot the bill?

"Freddie Mac Loses $4.4B in Third Quarter, Requests $6B More From Treasury," Fox News, November 3, 2011 --- Click Here

Government-controlled mortgage giant Freddie Mac has requested $6 billion in additional aid after posting a wider loss in the third quarter.

Freddie Mac said Thursday that it lost $4.4 billion, or $1.86 per share, in the July-September quarter. That compares with a loss of $4.1 billion, or $1.25 a share, in the same quarter of 2010.

This quarter's $6 billion request from taxpayers is the largest since April 2010.

Freddie's losses are increasing mainly for two reasons: Many homeowners are paying less interest because they are able to refinance at lower mortgage rates. And failing and bankrupt mortgage insurers are not paying out as much money when homeowners default.

The government rescued McLean, Va.-based Freddie Mac and sibling company Fannie Mae in September 2008 after massive losses on risky mortgages threatened to topple them. Since then, a federal regulator has controlled their financial decisions.

Taxpayers have spent about $169 billion to rescue Fannie and Freddie, the most expensive bailout of the 2008 financial crisis. The government estimates it could cost up to $51 billion more to support the companies through 2014.

Freddie and Washington-based Fannie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. Along with other federal agencies, they backed nearly 90 percent of new mortgages over the past year.

Charles E. Haldeman Jr., Freddie's chief executive, said many homeowners are refinancing at lower mortgage rates or are shortening the terms of their mortgage. While that saves homeowners money, it is pushing Freddie deeper into the red.

"In fact, borrowers we helped to refinance will save an average of $2,500 in interest payments during the next year," he said.

For Freddie, those losses are temporary because interest rates will remain low for the foreseeable future, said Jim Vogel, an interest-rate specialist at FTN Financial.

Still, many homeowners are still defaulting on their mortgages. Unemployment remains stubbornly high at 9.1 percent. The percentage of those who are late by 90 days or more on their monthly mortgage payments was virtually unchanged at 3.51 percent in the July-September quarter.

Another reason Freddie needs more aid is because it has received less money from mortgage insurers.

Many riskier mortgage loans require insurance, which is meant to protect lenders and investors from losses if a homeowner defaults and the lender doesn't recoup costs through foreclosure. The borrower pays a monthly premium for the insurance, typically a set percentage of the total mortgage loan. But when those mortgage insurers fail, they pay out less in claims.

Continued in article

"Three Traps Facing New Global Leaders," by Saj-nicole Jon, BusinessSchools, November 7, 2011 ---






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·     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

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