Sit UBU Sit

It's looking my break is going to be longer than expected. Maybe, I'll be back, maybe not.



For kicks, my twitterpage is here, and my shared items (to which you can subscribe) will keep you in constant supply of all the bad news you love to hate.

If this is it, best to all.

While I'm Away...

Reich Again

Like Reich, I am also taking some time off. It is not about a populist rampage; ok, maybe it is.

Angry populism thrives on stories about the rich and privileged who use their influence to get cushy deals for themselves at the expense of the rest of us. AIG's bonuses provide a perfect example. It's too bad the same populist outrage doesn't extend to issues involving far more money, affecting many more people, and entailing far more insidious abuses of power. Congress's potemkin populism over AIG's bonuses disguises business as usual when it comes to the really big stuff.

[I will resume blogging at the start of April. Until then, I'm off on a populist rampage.]

AIG: Up a Notch

I certainly hope so.

You really don't think there's anything in what happened at AIGFP that we're not going to find out fell seriously afoul of a lot criminal statutes? And we're still paying out these bonuses? I suspect we need to get this conversation out of Treasury and over to DOJ.

Go over there and have a read.

Economy Down

Michael Panzner of Financial Armageddon knows how to take the wind out of a reasonably decent day. His latest work is particularly heart rendering:

If you'd like a reading on how the economy is affecting the average San Franciscan, you could call an economist. You could study wages and layoffs. You might even graph the rise of foreclosures.

Or you could stop into the Provident Loan Association on Mission Street behind the Old Mint.

[...]

Last week a woman came in with more than a dozen items. She told him several of the pieces had been custom crafted. She had sky-high appraisals.

Shemano took a look at what she had. Before he met her eyes, he knew she would be disappointed.

"It was just a nightmare," he said. "She asked for the number, and it was just devastating to her."

She told him how she'd had an impressive job with an international firm that went belly-up. Her investments went south, and now she and her husband had rented a three-bedroom home with two other couples.

The plan was to sell the jewels, get a little cushion and hope for an economic uptick. Surely, she thought, her grandmother's prized pearl necklace would fetch a nice price.

"It's always Grandma's pearls," Shemano said. "They bring in these high appraisals. But how can you price for a secondary market when there is no secondary market?"

Why is there no secondary market? It's because few have any need for luxury items anymore. It's sad. On the other hand, reality must set in before we move on. Perhaps we will salvage something of the departing economy and push on toward the a permagrowing future. I don't believe in planning for the best however.

As deeper reality sets in, more of us will be forced to create a viable economic system. As I rarely say, the more the merrier.

Mark to Marketeering

Don't trust our corporatocracy? Now you have even less reason to: FASB is making it easier to mislead, obfuscate, deny, and delay the inevitable.

The Financial Accounting Standards Board, pressured by lawmakers to change the fair-value rule blamed for worsening the financial crisis, proposed permitting companies to use “significant judgment” in valuing assets.

Discretion, the one thing that we need; the one thing we've always had in overabundance.

Mark-to-Market. The proposal for estimating market values will take into consideration whether there is an active market (such as the number of recent transactions, whether price quotes are based on current information, whether price quotes vary substantially, etc.). If there is not an active market, then the quoted price is a distressed transaction unless certain other conditions exist. For distressed transaction prices, “Level 3” techniques (such as present values of future cash flows) are used instead of the distressed prices and should reflect an orderly transaction between market participants, including a reasonable profit margin for uncertainty in a non-distressed situation.

Ugh, present value of future cash flows? How is that determined? Well just pretend everything is normal and you could sell it. The value would be the price you could fetch under those circumstances. My 1.5 bedroom house is worth a million dollars--it's close to the water and has a view of the water tower, after all. I can't sell it now because the market is bad, but I can luckily borrow against it for the value of a million dollars under this new rule.

Robert Reich has long been decrying the crisis of trust. This doesn't exactly help.

Smithsonian: TraderZ

The second post which I found so interesting by way of Naked Capitalism in which Yves Smith described some of the antics traders pull not only against the market in general, but inside their own firms, as she says:

The next, which gets even less attention, is how traders play games with their own firms. I don't mean the rogue trader version (although that is an out of control variant, usually born out of a trader taking on big risk to get himself out of a lossmaking position, making matters MUCH worse, then hiding his losses from management as he continues to spiral downward).

I would very much like knowledgeable readers to elaborate (particularly with any incidents they can vouch for or appeared in the press, even in specialized industry publications) but here are some typical variants (note these are crude typologies, so corrections and elaborations welcome):

Marking phony prices. Can be done in illiquid markets where what you trade doesn't relate (much, at all) to any benchmarks). It has to be reasonably credible (you can't be showing gains when your sector is losing, for instance). Management is supposed to have ways to vet/validate pricing, but the funkier it is, the harder it is for management to keep.

Colluding with your trader buddies to produce market prices that are distorted. This reportedly happened with collateralized loan obligations, where traders would trade them among them selves in small lots at fictive prices that they then used for valuation purposes. That kept them in the upper 80s for a while while the the rest of the credit markets were falling more severely, but the CLOs then started to be priced more realistically (I assume some real trades got done, making the ruse impossible to maintain). I presume this is a favorite activity at year end, particularly since a lot of institutions cut way back on trading as of Dec 15 to square their books, so year end volumes are particularly thin.

Now these are really amateur versions, but are still effective. Think of the games that are possible with derivatives.

Yet this type of chicanery gets perilous little notice. Why? Because management is complicit, either by commission or omission. The poster boy of "commission" was Joe Jett, the Kidder Peabody so called rogue trader who in fact never lost the firm a dime, but reported huge phantom profits due to a flaw in Kidder's reporting system. I won't bore you with details, but there is good reason to believe that Jett thought the profits were real, that he did not think he was perpetrating a fraud.

However, anyone with an operating brain cell, and particularly his bosses, should have questioned the idea that it was possible to make such monster profits in the Treasury market, Even if Jett had miraculously discovered some anomaly, it should have been arbitraged away, pronto.

So what happened? Jett was barred from the securities industry, and forced to disgorge his bonuses (I am going from memory, but I believe they were about $8 million). And what happened to his boss, Ed Cerullo, who made $20 million thanks to Jett? Nada.

For those of us in this side of the known universe, it is extremely difficult to read about these kinds of activities without extreme outrage. It seems a prerequisite for employment in this field is lack of ability to act ethically. The post details a few examples of additional chicanery including this one:

From one Anonymous:

I was a junk bond trader for a large firm during the 1990's. I was intimately involved in year-end book-marking chicanery to boost profits and hide bad positions.

I can guarantee you that the traders at Merrill violated every securities rule in the books and every possible code of ethics in order to boost profits.

NO QUESTION ABOUT IT. BEEN THERE DONE THAT.

We may be onto something bigger here which could have expressed itself most tanglibly with the recent Stewart Cramer interview. I do hope we are:

Go back and look at the Cramer tape. It's actually brilliant. He is not very specific! There is no "when I was short X stock in 2004, I did F, T, and H and the price fell by $Z and I made $100,000 in two days." It's all murky, to the point where Henry Blodgett, in parsing the transcript, had to insert words at quite a few junctures to make what Cramer say make sense to him (and note I in reading the transcript would have inserted different words). That's why this incident never really stuck to Cramer. It all came off like knowing innuendo, but he didn't present a smoking gun.

So unless we have a Pecora commission, or a lot of ex-traders and trading managers coming forth with particulars, the great unwashed public is not going to know enough of what happened to know where to direct its diffuse but well warranted anger over having been had.

I encourage readers to provide suggestions, links to any known incidents or articles about market manipulation and internal games playing with position valuations (most important, in fixed income and derivatives markets, since that is where the big damage was done), either links to stories or personal examples (per above, the more specific, the better) or write me at yves@nakedcapitalism (I promise I will not go public with any information unless given explicit permission).

Yves Smith recently closed a book deal; I do hope the scope of its work will continue this very important aspect of our beloved and infallible market.

Detroit: Super Duper

Small scale urban food production in Detroit.

Innovation returns to the Motor City.

Detroit is one example of how a city can provide its inhabitants with locally produced food. Every year, more than six tons of produce are harvested and sold on local markets. Rooftops, walls, unused landareas, planters in malls and on sidewalks are all subject for agriculture when Detroit is being transformed into a sustainable city. Together with backyard gardens and larger scale farms they provide thousands of pounds of fresh, nutritious produce for Detroit families. Simultaneously they improve communities by connecting neighbors, providing an alternative to trash strewn vacant lots, improving property values and reducing crime.

Smithsonian: AIG

Yves Smith has a couple of wonderful posts today. The first is her discussion of AIG's determination to award bonuses because it is contractually obligated to do so despite the fact that it would not have existed at all, had it not been awarded a huge taxpayer funded bailout to the tune of 170 Billion dollars. Read the article here; I'll give a couple of clips:

Liddy needs to consult DeGaulle, who remarked, "The graveyards are full of indispensable men." And the folks at AIG should consider themselves lucky not to be in jail.

Since the WaPo excerpt did not make it explicit, the Financial Products group was the one that entered into the credit default swaps that brought the company to its knees. Given the fact that AIG keeps coming back for more money, I see no evidence that this group is doing a good, or even remotely competent, job.

Conclusion:

This is the problem with not declaring bankrupt firms bankrupt. Then the bonuses COULD be clawed back, via fraudulent conveyance. Instead, we not only witness looting, but add insult to injury by having Liddy defending payment of bonuses out of a bust enterprise.

Each time this garbage happens it gives Obama less credibility to do the things he was elected to do. As the Administration sees it, I'm sure, they cannot push forward on their agenda without AIG due to its threat of systemic collapse should it fail. Damned if you do; damned if you don't.

I am just trying to get you excited. Read the whole post.

Sanctimoniosity

Spot on, Seajane.

Where is all this concern for contracts when it comes to labor contracts like the UAW? How come mortgage contracts are off limits when they talk about "cram downs"? What about the State of Washington's contract with it's workers on pay raises?

Why are bonuses to folks who bankrupted their company so privileged for this contract protection? I'm sick of this class warfare.