Moody's is conducting a review to see how come several CPDOs (constant proportion debt obligations), some of the most highly engineered products in the alphabet soup of finance, were given AAA ratings when they should have been as much as four notches lower.
I note that CPDOs are some of the most virulent forms of credit derivatives ever devised. In short, they force investors to keep raising their ante in the form of higher leverage as losses mount. It's equivalent to doubling down every time you lose a round at the roulette table. Most appropriate rating for CPDOs? "F", as in: "fools and their money are soon parted".
Naturally, such claims of involuntary computer malfeasance can produce other schoolboy excuses. For example, MBS arrangers who never bothered to obtain proper title ownership paperwork, can go before the foreclosure judge and claim "my dog ate them".
I note that CPDOs are some of the most virulent forms of credit derivatives ever devised. In short, they force investors to keep raising their ante in the form of higher leverage as losses mount. It's equivalent to doubling down every time you lose a round at the roulette table. Most appropriate rating for CPDOs? "F", as in: "fools and their money are soon parted".
Naturally, such claims of involuntary computer malfeasance can produce other schoolboy excuses. For example, MBS arrangers who never bothered to obtain proper title ownership paperwork, can go before the foreclosure judge and claim "my dog ate them".
In our era there is one constant we can rely on, and that is mendacity on the part of officialdom. As our entire creaking financial edifice collapses in spectacular fashion right before our eyes, "My dog ate it" and a hundred other bogus excuses will ring (with the deadening hollowness of a fog horn) throughout the land.
ReplyDeleteWall St. firms and Congress to Joe Sixpack when losing his job and falling behind on mortgate payments:
ReplyDelete* Hold yourself accountable.
* Pick yourself up by your bootstraps!
* Don't blame your problems on somebody else.
* We all make choices in life ... and you made the wrong ones!
* A tax rebate will solve your problem.
Now when a Wall St. firm makes a mistake:
* It's not my fault. The computer did it.
* It's not my fault. My subcontractor sent us the contaminated heparin, toys with lead paint, ...
* It's not my fault. The ratings agencies said these were AAA rated.
* A tax cut will solve our problem.
Thai,
ReplyDeleteI hope you're beginning to see that an explicit all-clear signal went out from Bozo to the Boyz to start ransacking the economy and before you point out that there was alot of malfeasence under Clinton; yes there was and most of it could be traced to Phill Grahm (and his wife).
Every time Arthur Leavitt of the SEC tried to regulate some unsavory aspect of corporate behavior (under existing authority), Grahm (Rep. chair of the Banking committee) threatened to cut funding for the SEC if Leavitt didn't back off. Reagan's favorite tactic; if you couldn't get Congress to revoke a law, simply defund enforcement.
Will the idiots at the DOJ indict anyone over this?
ReplyDeleteI prefer these juvenile excuses to Bush's excuse (or lies, "America doesn't torture") of Jesus told him to do it.
ReplyDeleteCome on guys...... What ever happened to team spirit...? You all sound like if you've got a bad case of the Mondays... I think that we need to hold a good PEP RALLY....! Come on, let's get a good attitude change here....
ReplyDeleteThe glass is 1/13th full....! Yeah.....!
Econolicious
Yea that's the problem Econolicious, people that think we need a "Pep Rally".
ReplyDeleteIf we just had more happy talk on bubble-vision and we just listened to the head-cheerleader everything would be OK. We could get back to selling the latest basket of toxic alphabet collaterallized debt to the greater fools.
The first step in solving a problem is getting people to admit there is a problem--we're still at this stage. Or maybe you don't think there is a problem?
Hello Hell,
ReplyDeleteI have the feeling that those in charge at Wall Street are already preparing themselves for what is obviously coming next.
Trials for a number of executives. No need to be rich if your neighbour is Jeffrey Skilling and your home is the Federal Correctional Institution in Waseca, Minnesota.
They will come. I am pretty sure that a lot of them would better have the reputation of a dammed idiot than the one of a mendacious financier.
I just read an article on itulip by Michael Hudson (Savings, Asset Price Inflation and Debt-induced Deflation). It was long and tediously repetitious but one nugget that salvaged the effort was that the racketeering and fraudulent conveyance laws had to be loosened to allow LBOs. Without these changes LBO raiders wouldn't have been able to plunder the assets and pension funds of their target companies and bankrupt them in many instances.
ReplyDeleteAnd we continue to wonder why the country is swirling down the bowl. Criminality has been elevated to high virtue.
Yoyomo,
ReplyDeleteAgain back to my idea of leadership. People in the organization tend to reflect the values of their leaders.
The leaders of the country's executive branch, in charge of enforcement, being lying criminals themselves, how can you expect any better?
yoyomo, if you think the leadership at Moody's committed fraud because of some kind of 'all clear signal' from Washington (and especially Bush), you and I just look at our world WAY DIFFERENTLY.
ReplyDeleteTo me, you seem to view 'cause and effect' in this world thru a partisan lens I simply don't share.
I do agree with Marcus when he says "People in (an) organization tend to reflect the values of their leaders"
But I think the inverse of his statement is even more true: i.e. "leaders of an organization reflect the values of its people".
I see the power within leadership as an emergence phenomena. That you do not, I have no answer.
Moody's leaders perpetrated fraud once they recognized their error and did not rectify it because they have integrity issues. That you somehow see this as 'because of Bush' seems almost bizarre. How was what Moodys did significantly different that what the telcoms did? Why would anyone blame Clinton for the fraud at World Com? I don't.
Greenie keeps hinting 'liberal Bay Area California' tolerates employee stock options fraud (one of those 'because their paycheck depends on it issues?). The SF Bay Area is as 'anti-Bush' as anywhere in the country, it is reputedly one of the most liberal areas in America, and Bay area residents (being one myself until recently) supposedly embrace regulation enthusiastically. Yet as Greenie suggests 'fraud is alive and well in this hotbed of idealism' (indeed he suggests it is actually worse-- not sure I agree with him but I get his point).
Why is this different than tax fraud (committed by what % of Americans)? Medicare fraud? Or unions preventing companies from airing bad employees records?
You seem to excuse bad behavior with a classic 'lemming' fallback position: "'it's my leader's fault".
Companies are what WE make them-what we tolerate in them just as much asany culpability on the part of Bush.
And by the way, I am not a spokesperson for the Bush administration. I didn't vote for him.
Yoyomo:
ReplyDeleteThanks for mentioning that article at iTulip. Here is the relevant passage. I have highlighted the relevant points:
In calling for “euthanasia of the rentier” Keynes pointed to the desirability of preventing the diversion of income into the purchase of securities and property already in place. He hoped to restructure the stock market and financial system so as to direct savings and credit into tangible capital formation rather than speculation. He deplored the waste of human intelligence devoted merely to transferring property ownership rather than creating new means of production.
Today’s financial markets have evolved in just the opposite direction from that advocated by Keynes. New savings and credit are channeled into loans to satisfy the rush to buy real estate, stocks and bonds for speculative purposes rather than into the funding of new direct investment and employment. Matters are aggravated by the fact that financial gains are taxed at a lower rate, thanks to the growing power of the financial sector’s political lobbies. This prompts companies to use their revenue and go into debt to buy other companies (mergers and acquisitions) or real estate rather than to expand their means of production.
Going into debt to buy assets with borrowed funds experienced a quantum leap in the 1980s with the practice of financing leveraged buyouts with high-interest “junk” bonds. The process got underway when interest rates were still hovering near their all-time high of 20 percent in late 1980 and early 1981. Corporate raiding was led by the investment banking house of Drexel Burnham and its law firm, Skadden Arps. Their predatory activities required a loosening of America’s racketeering (RICO) laws to make it legal to borrow funds to take over companies and repay creditors by emptying out their corporate treasuries and “overfunded” pension plans. New York’s laws of fraudulent conveyance also had to be modified.
Tax laws promoted this debt leveraging. Interest was allowed to be counted as a tax-deductible expense, encouraging leveraged buyouts rather than equity financing or funding out of retained earnings. Depreciation of buildings and other assets was permitted to occur repeatedly, whenever a property was sold. This favored the real estate sector by making absentee-owned buildings and other commercial properties virtually exempt from the income tax. To top matters off, capital gains tax rates were reduced below taxes on the profits earned by direct investment. This diverted savings to fuel asset-price inflation. By the 1990s the process had become a self-feeding dynamic. The more prices rose for stocks and real estate, the more mortgage borrowing rose for homes and other property, while corporate borrowing soared for mergers and acquisition.
Meanwhile, the more gains being made off the bubble, the more powerful its beneficiaries grew. They turned their economic power into political power to lower taxes and deregulate speculative finance – along with fraud, corrupt accounting practices and the use of offshore tax-avoidance enclaves – even further. This caused federal, state and local budget deficits while shifting the tax burden onto labor and industrial income. Markets shrank as a result of the fiscal drain as well as the financial debt overhead.
Abuses of arrogance and outright fraud occurred in what became a golden age for Enron, WorldCom and other “high flyers” akin to the S&L scandals of the mid-1980s. But free-market monetarism draws no distinction between tangible direct investment and purely financial gain-seeking. Opposing government regulation to favor any given way of recycling savings as compared to any other way, the value-free ethic of our times holds that making money is inherently productive regardless of how it is made. “Free-market fundamentalism” came to shape neoliberal tax policy in a way that favored finance, not industry or labor.
Thai, I don't have too much faith in peoples' "integrity". I have faith in enforcement.
ReplyDeleteI've lived in large East-coast cities and West-coast cities. There are jaywalking statues in all, yet pedestrians in Philadelphia and New York practice jaywalking without a thought. Seattle downtown jaywalking is rare. The difference is not integrity but enforcement.
I harp on Bush for not only the lack of enforcement of fraud on a grand scale, but the lack of vision or leadership concerning energy: the resistance to CAFE increases, the mocking of conservation by Cheney, the tax breaks for businesses to buy large expensive vehicles, the total lack of substantive incentives for conservation or alternative energy sources, the continued insistence that the only energy problem is lack of drilling in the US and lack of new refineries (an absolute falsehood) --this is depressing I end here out of --wait, the Iraq war, which uses how many extra thousands of barrels of oil a day and decreased Iraq's oil production significantly. The Halliburton and oil industry favors are another category of malfeasance.
I don't believe in differences of integrity between groups of people, I believe in different levels of enforcement. This administration has gone out of its way to favor the oil industry at the expense of the country's security.
Gas was hovering around $1 during the Clinton years,so it was difficult to change attitudes. Gas has been increasing steadily under Bush, much easier to introduce change, but we see inaction and aggravation of the problem instead. Remember this when they're rationing gasoline.
"I don't have too much faith in peoples' "integrity". I have faith in enforcement... The difference is not integrity but enforcement"
ReplyDeleteWe may agree, depending on what you mean by 'enforcement', but if I read you as I think I do, I think what your saying is a load of PC nonsense and doubt even you don't believe your own words. Most research I have read would certainly disagree with you. Further, the statement runs in contradiction with your earlier statement “People in (an) organization tend to reflect the values of their leaders”.
Police patrol frequency/density has a strong inverse correlation with a neighborhood’s violent crime statistics-- does the lack of comparable 'enforcement' in neighborhoods with less violent crime lead the low crime neighborhoods to become violent? Or is it ‘more complex’ than just enforcement? (I assume you'll say 'more complex')
While I certainly think local police or local government enforcement (of whatever) CAN make a difference on just about anything government puts its mind to enforcing (doesn’t matter whether it is violent crime, white collar crime, regulatory compliance, pollution, etc… ), yet far and away the main 'enforcers' in this world are peers. And peers enforcement is STRONGLY based on cultural norms.
The research showing linkage between culture and behavior is unbelievably strong.
So to flip your example-- the prevalence of jaywalking in New York, and its non-existence in Seattle, is really more a cultural phenomena than anything else. Where the citizens of Seattle find jaywalking unacceptable, they make a big deal about it and remind the police to ticket the jaywalkers (which of course they do responding to their peers like any good institution would). Where New Yorkers do not care about jaywalking, police do not enforce the laws. These things are strongly reinforcing and impossible to separate from one another (separating them is as stupid as people that separate ‘nature’ vs. ‘nurture’ as if they were separable (which they too are not))
Go visit Vienna Austria and you will hear an earful of 'enforcement' from the average Austrian if you walk off the path of a park onto the grass. Travel to Berlin Germany and the locals might just as well sunbathe nude with you on their grass. No police, no government will ever be required to keep Vienna’s grass beautiful.
I suspect both Copenhagen and New York enforce child abduction laws fairly strictly (though in truth I do not know this for sure). Yet Danes leave their infants unattended in strollers outside stores and shop while Americans would consider such acts child abuse.
The list of examples I could go on with is so long I will just stop. Just leave it to say that culture matters and culture strongly influences integrity—the tolerance of behaviors contrary to the public good. Arnould says he saw paying people to report violent crime as ‘snitching’ (what about reporting white collar crime/fraud?) I don’t understand why anyone requires payment as (from my point of view) it is our civic duty. Things like this have a tremendous amount to do with the underlying culture we grew up in and how our brain's moral circuitry is hardwired.
As for blaming Bush for everything (including other people’s lack of integrity) go ahead if you will. I may agree with a number of the things you listed in your ‘things I don’t like about Bush’ list, but I disagree with you on that. To the extent Bush has little integrity (I don’t think he has more or less than most politicians by the way) I think his low integrity is ‘permitted’ by his peers, the voters , who do not really care about ‘the truth’ (whatever that is), but instead are looking for someone to describe the world to them in ways they want to hear. This is a trait which seems common in many people of ‘partisan’ ideology as well.
Thai,
ReplyDeleteI'm not excusing anyone, I hope all these fraudsters get nailed to the floor but the cops looking the other way (for a fee) deserve to get it twice as hard. I don't blame Clinton for WorldCom because he appointed people who tried to stop the fraud but the bought and paid for co-conspirators in congress, time and again, blocked any action. This is a world of difference from Bozo ordering the Comptroller of the Currency to block states from enforcing anti-fraud lending laws, something that corrupt congress members didn't have the power to do, only the Prez.
Bozo in his own words:
You can fool all of the people some of the time and you can fool some of the people all the time and those are the people we should concentrate on.
BTW, don't take any of this personally, I'm not accusing you of anything.
Okie,
As a lawyer (not that I am) I'm sure you were as stunned as I was when you read that, it's absolutely breathtaking. Our legislators have now become criminal facilatators.
Thai,
ReplyDeletere: peer pressure; it only works on public behavior not fraud committed in the dark with a sense of security that the authorities won't come down too hard because they're on your team.
That said, I agree wholeheartedly with you that alot of voters disregard what they know to be fact in favor of someone who will validate their biases. I'm convinced that alot of people who knew better pretended to believe in the WMD threat so they could support a war they thought would give them cheaper gas but weren't willing to admit publicly that they had no problem with killing thousands of people to steal their resources.
Thai wrote:
ReplyDeleteBut I think the inverse of his statement is even more true: i.e. "leaders of an organization reflect the values of its people".
Do you believe that the leaders of Enron, for example,
reflected the values of the company's employees?
The fish always stinks from the head downwards.
ReplyDeleteThai:
ReplyDelete"I think his low integrity is ‘permitted’ by his peers, the voters , who do not really care about ‘the truth’ (whatever that is), but instead are looking for someone to describe the world to them in ways they want to hear."
Yea I know, these times warp philosophy and scientific method "...'the truth' (whatever that is)..." and its a "long, hard slog" but let us try to do critical analysis as we both were learned, and present "facts".
Focus on statistical findings of Bush's approval rating (is there any big divergence of the various groups that do these studies? Does Bush have a >50% rating in any polls?).
Statistical evidence that says this isn't indicative of a heated rabble being baited to war--with an 80% rating--but a slow methodical consensus by the majority of people that this guy is an incompetent boob. Or do you think Bush just lost his "mojo" on knowing how to "describe the world to them in ways they want to hear." Maybe some "facts" have crept in people's lives?
I don't blame the Shrub for everything. The Washington Nationals would probably suck without him in town.
Edwardo-- to some degree yes. A lot of people were involved in many types of fraud at Enron; transcripts of traders revealed during the investigation into the California energy crisis revealed a lot of fraud way below the top.
ReplyDeleteMarcus-- Sorry, I don't follow your point-- are you saying the majority of voters didn't even vote for Bush (I certainly agree with this though a lot certainly did, even if it was a minority)? Or are you saying Bush ignores low approval raitings and acts however he likes (this ignores the fact that the only approval which really does matter is when a voter votes).
Hell-- I couldn't find anything on Mythbusters or Urban legends on this. So for now the 'saying' stands unchallenged.
Yet I presonally don't think crime is lower in my neighborhood because of one individual neighborhood leader. It is a composite thing.
let's move on, as I said before, I am not a spokesperson for the Bush administration. You need to find someone else to debate their views if you are looking for this.
"My dog ate it" and a hundred other bogus excuses will ring (with the deadening hollowness of a fog horn) throughout the land.
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