The Plan

After my posting this morning, I ran into a copy of the Paulson plan on Paul Kedrosky's web site. The "full" plan is available on Paul's web site.

 

The entire "plan" comprises three whole pages. And the bottom line is the Treasury Secretary has the right to do anything he feels is appropriate.

 

The proposal gives the Secretary complete discretion in managing the assets acquired. He may exercise rights, buy or sell the securities including arranging another form of borrowing through repurchase agreements, and he may create any "vehicle" to buy and sell securities.

 

But the most important part is section 8. "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

 

In other words, he is unaccountable for the management of over $700 billion!

 

Oh yes. Section 10 requests that the Congress increase the debt limit by $3 TRILLION to $11.3 TRILLION. That's about $40,000 for each citizen.

 

We have an energy czar, now we have a money czar.

Time for some honesty

This certainly has been a week for the record books. As another blogger said, "Our grandchildren will read about this week." While they may be reading, I hope it's not too much because they had better be working to pay off the debt this generation will be leaving them. By the end of this year, this country will be $12 TRILLION in debt. That's $40,000 for each man, woman and child in this country. Over $1,000 per year of each person's taxes will go just to pay the interest.

 

It's bad enough that we will be so far in debt, but the rhetoric this week of "mark to maturity", "this is another RTC and look how successful that was" and the really good one, "the government can be a patient investor awaiting his profits." All this is just so much crap.

 

Face it, the "plan" proposed by Bush, Paulson and Bernake is incredibly expensive. We are being asked to mortgage our children's future based upon a four page plan and a lot of uninformed discussion. Listening to the discussions, I couldn't help remembering the line "A battle of wits among unarmed opponents."

 

There are no securities being acquired from the banks that are anywhere near their market value. If they were at market, however you want to calculate it, we would not have a problem that needs to be solved. And to continue stating that the assets will mature and repay the government is absurd and probably deceitful.

 

Look at the type of assets the government will be acquiring.

 

It's 2005 and a mortgage broker just granted a teaser rate mortgage that has an initial low interest rate for 3 years then "resets" in 2008. Within minutes that mortgage has been sold to a Wall Street firm which along with other mortgages will be sliced and diced into pieces and sold to investors. But for this example, assume there were only 2 pieces; the principal portion was sold to a bank in Ohio while the interest portion was sold to a bank in Texas. Everything was sold at market values and the two loans performed as they should for three years.

 

Then default. No more payments on the mortgage are made. The owner is gone and what's left is the real estate, depreciating daily. And of course the two securities...owned by two different investors maybe thousands of miles away.

 

Now the regulators and auditors start to question the value of the two securities. The question the regulator in Texas asks is: "What is the value of a security whose value is derived from the cash flow from the interest only portion of a mortgage that is in default?" [I know default is such a harsh word, that's why it's now called "non-performing"...I guess that's more politically correct.]

 

If there is no expected cash flow, more than likely the regulator will require the bank to reduce the value of the security...but that hurts the equity of the bank. Bank failure, lines to redeem deposits, run on the bank...but wait, just like in the old westerns, just when Pauline is tied to the tracks, over the hill comes Hank, Ben and George to save the day. They tell the bank, "We will buy that security from you at an 'agreed price' so your equity won't be impaired. We can do this because we can wait forever until the interest on that defaulted mortgage starts to pay." [What goes unsaid is if the interest is never paid, the taxpayer will foot the bill.]

 

For any of you left reading, I'm getting to the point. As of September 26, 2008, the total net worth of the US banking system was about $1.2 Trillion, according the the Federal Reserve Bank. The taxpayers are being asked to "invest" $700 Billion to keep the system afloat. To me, it appears that the taxpayers will be the major owner of the financial system.

 

It is time to start talking about the 800 pound gorilla in the room.  It may be time to nationalize those banks that have proven that management is or was incapable of managing.  [BTW you have no idea how much it hurts to say that.]

 

And the friends of Paulson, Bernake and Bush will be rewarded when the government privatizes the banking system in the future. Hopefully the taxpayer will then be rewarded.

We Don't Need No Stinking Accounting

I just sat through 15 minutes of the most senseless banter ever conducted on national television. It was an interview of Steve Forbes on CNBC. In that interview, Forbes advanced a novel idea for addressing the problems befalling our debt laden economy...don't mark assets to the market!

 

What a brilliant solution! In one fell swoop, with a single stroke of the pen, all of our problems could be resolved. The entire financial mess has been rectified. Bear Sterns can be resurrected. Lehman does not need bankruptcy protection. And AIG can remain unscathed.

 

Just think of the simplicity. No rating agencies to worry about. Certainly no reporting problems to the stockholders. With one bold pronouncement, all counter party risk is eliminated. Gone are the days of accountability. All we have to do is say we intend to hold these assets to maturity and all the mark to market problems are resolved.

 

With thinking like this, there ought to be a public outcry for Forbes for President...or Chairman of the SEC...or president of the Financial Accounting Standards Board...at least mayor of some town somewhere.

 

This is the kind of advise the McCain campaign is getting. This is a recommendation from one of this countries financial leaders. It's time to pray for the republic.

Tzolov and Butler

On September 3, 2008 the US Securities Exchange Commission filed a Complaint in US District Court for the Southern District of New York against Julian T. Tzolov and Eric S. Butler, two former employees of Credit Suisse Securities. The Commission requested the court to restrain and enjoin the defendants from violating various sections of the securities laws; order the payment of civil penalties; order the disgorgement of "ill-gotten" gains; and anything else the SEC could want.

 

But what did these two "bad actors" really do? What was it that they did that violated the laws of the United States?

 

According to the complaint filed, there two nefarious characters had contracted with certain customers to purchase auction rate securities backed by student loans. Instead, from February of 2005 until August of 2007, these two breached the contracts and purchased auction rate securities backed by non-student loan assets. 

 

Because of the breach of contract, the customers "...were stuck with at least $817 million..." in securities. Presumably, the SEC is saying these two owe their customers the entire $817 million since no loss is claimed.

 

The SEC is claiming that the breach of contract is a violation of the securities laws which prohibit fraudulent interstate transactions [15 USC Section 77q(a)] or to employ, in connection with the purchase or sale of a security, any manipulative or deceptive device [15 USC Section 78j(b)].

 

But what does the complaint allege? Only that these two breached a contract. What the complaint does not state is:

 

1. What gives the SEC jurisdiction over contract violations;

2. What gives a federal court jurisdiction over contract violations;

3. What was the fair market value of the auction rates securities owned by the customers versus the acquisition price;

4. What was the device employed in misrepresenting the price.

 

  These are relatively simple questions that I know the Commission is reluctant to answer. [Hint to SEC: Try an ex parte proceeding in the Western District of Pa.]

 

Hopefully, defense attorneys will ask the questions.

SEC probes Wachovia

The Securities and Exchange Commission enforcement division is expected to recommend to the Commission that it file civil proceedings against Wachovia for "anti-competitive" practices in the bidding for the investment of proceeds from tax exempt bonds issued by municipalities. But possibly in these instances, the SEC has managed to exceed its jurisdiction. It must be remembered that the SEC does not have jurisdiction over contracts. As a matter of fact, there is no federal jurisdiction over civil contracts.

 

From the SEC's own web site: "The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."

 

Look at the transaction the SEC is attempting to control. The municipalities solicited Wachovia and at least two other firms to enter into an agreement with the municipality to guarantee a rate of return on the municipality's investment of fund borrowed at tax exempt rates. The terms of the contract were prepared by the municipality pursuant to federal regulations. The fair market value of the contract was determined pursuant to those regulations.

 

So now we have a two party contract that the SEC is attempting to state falls under their jurisdiction. But that's not all.

 

The SEC is investigating because there may have been some bidding irregularities, specifically some sort of collusion. Assume the SEC is right and there was collusion. So what. Was the investor, the entity the SEC is to protect, harmed? There has not been such an allegation made in any investigation to date. And there is a reason.

 

Under federal regulations, the municipality that invests bond proceeds is limited to the amount of earnings it is allowed to keep. The balance must be sent to the IRS. That is why there has never been an allegation that the municipality was harmed. In all likelihood, even if there were collusion, did that event harm the municipality.

 

Now I'm sure that the SEC can overcome the problem of extending its jurisdiction to private contracts. All they have to do is find a friendly judge, in an ex parte proceeding, to say it is an investment contract. Of course that judge will find that a private two party contract was really "...an investment in a common enterprise with an expectation of profits to be generated through the efforts of others...." [HINT: To the SEC, try the Third Circuit]

 

But where the SEC will fail, is not stating what the market value of the investment contract should have been, but for the alleged collusion, and how that difference in market value really hurt the investor.

 

Enough for today. Sorry it has been such a long time between posts. I will do better in the future.

 

Stay tuned...lots more to come.