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Warren Buffett – It Wasn't Me!

03 June 2010.

Warren Buffett, the supposed Oracle of Omaha, is supposed to be an investment apostle of the writers’ cliche, "write about what you know."

But on Wednesday, Street. Warrren of Buffett testified that he did not know all that much about the credit score market,

even though the holding company he controls, Berkshire Hathaway, is the largest shareholder in Moody’s Investors Support, one of the three companies that master the business.

“I’ve never been to Moody’s,” he said at a listening to of the Financial Crisis Inquiry Commission, that is investigating the causes of the global crisis that led to the government bailout of big banks.

“We don’t even know where they’re located. I just know that their business design is extraordinary.”

Mr. Buffett’s remarks regarding Moody’s business, of course, might be interpreted not so much as a plea associated with ignorance but rather as a rhetorical flourish meant to put distance between him and the company.

He appeared prior to the panel under subpoena after very first declining an invitation, according to this article in the New York Times.

Pressed to explain how it was possible that he or she did not have an intimate knowledge of Moody’s operation,

Mr. Buffett offered the illustration of another of his holdings, Manley & Johnson.

Citing the recent recall of some of the company’s Tylenol products, he said that he did not know the inner workings of the drug maker’s laboratories

but that he had faith in the company’s reputation for solid administration.

Likewise, he said that Berkshire Hathaway had Two hundred and sixty,000 employees and at least one of these was doing something wrong at that moment. He just wished he knew who it was.

To that, Phil Angelides, the actual commission’s chairman, said, “There’utes a difference between that and systemic failure.”

Moody’s was the subject of the daylong hearing, held in Brand new York, as part of the commission’s study of

why rating agencies like Moody’utes, Standard & Poor’s and Fitch gave leading investment grades to mortgage-related bonds that were later downgraded to junk after the housing collapse. 

 

Berkshire owns about 13 percent of Moody’s, down from a peak of approximately 20 percent.

Appearing for two hours of questioning alongside Moody’s main executive, Raymond W. McDaniel Jr.

Mr. Buffett rejected several times to say that Mr. McDaniel must have been fired for what proved to be inaccurate ratings.

 

He did say that Mister. McDaniel and Moody’s were no much better or worse at predicting the financial fiasco than just about any other player on Walls Street.

“The entire American community was caught up in the belief that real estate prices could not fall dramatically,” Mister. Buffett said.

Moody’s “made the actual wrong call,” he said, but he counseled humility simply because “I was wrong on it, too.”

Before the catastrophe began, he called the housing percolate a “bubble-ette,” he said, a term lucrative regrets:

“It was a four-star percolate.”

Mr. Buffett was the marquee loudspeaker at the event, held in a large room around the second floor of the Brand new School in downtown Manhattan.

The listening to had the feel of a Congressional road show, including the ritual swearing in, as well as a raised platform ringed with blue bunting for the panel people.

Most of those testifying were former or current Moody’s employees, and much of the day was spent going through the pressures that analysts as well as managing directors felt to maintain market share against its competitors.  

Perhaps not surprisingly, the former employees tended to be much more critical than those still on the Moody’utes payroll.

 

Mark Froeba, a onetime senior v . p ., told the panel that the culture of Moody’s was transformed after the company was spun off from Dun & Bradstreet in 2000.

Quickly, the quasi-academic atmosphere of Moody’s vanished, he said.

Analysts suddenly felt their first priority was to assist the company maintain market share, not get the ratings right.

“Cooperative experts got good reviews, promotions, higher pay, bigger bonus deals, better grants of investment and restricted stock,” Mr. Froeba said in a prepared statement.

Uncooperative analysts, he added, were often fired.

Mr. Buffett’s large risk in Moody’s has brought him an unusual level of criticism

 

largely because he has a history of denouncing practices on Wall Street that he considers reckless or even geared toward short-term gains.

 

The commission’s questioning of Mr. Buffett was not particularly harsh, though panel members were scornful, at times, of Moody’s.

 

Mr. Angelides said in his opening statement that 89 percent of the securities provided a top triple-A rating by Moody’s were later downgraded.

“The actual miss was huge,” he said. “Ninety percent downgrade. Even the dumbest child gets 10 percent on the exam.”

Mr. McDaniel fell back on a defense that has been heard often from top executives at rating agencies:

the drop in housing prices was without precedent and therefore all but impossible to predict.

“We believed our ratings were our best opinion at the time we assigned them,” he explained. “I’m deeply disappointed using the performance of ratings associated using the housing sector.”

Mr. Buffett sounded his most sober note when asked by a panel member,

 

Brooksley Born, the former chairwoman of the Item Futures Trading Commission,

if the actual derivative market was "still a time bomb ticking away."

"I would say so," he said.

And yet he continues to pal around with the biggest derivatives players on all of Wall Street – Goldman Sachs.

How much longer is he going to get away with this particular obvious double game he or she keeps playing ???

 

David Caploe PhD

Chief Political Economist

EconomyWatch.com

President Or acalaha.com

Nightmare on Wall Street

7 Might 2010. By David Caploe Expert degree, Chief Political Economist, EconomyWatch.com.

It’s right now approaching 8 am within Singapore, and, as is my unfortunate wont, I still haven’t been to rest, although the writing is usually over by this time 😉 .

7 May 2010. Through David Caploe PhD, Chief Political Economist, EconomyWatch.com.

It’s now approaching Eight am in Singapore, and, as is my unfortunate wont, I still haven’t been to sleep, although the composing is usually over by this time 😉 .

But yesterday’s events on Wall Road – a more than 3% downturn in all the major New York indices – obviously impose their very own dynamic and logic.

Given the situation, though, we’re going to make an effort to bare this one – relatively 😉 – short and sweet, at least for us.

First of all, at the moment, no one has the slightest concept of what happened,

as this news article from the New York Times, and this from the Deal Book blog, help to make abundantly clear.

And it’s probably most likely we won’t have any idea "what happened" for a while – if ever.

So while the numerous investigations – and their associated cover-ups – go on,

let’s not make-believe that any of the "causes" pointed in order to explain why the Dow bottomed badly at 2:46 g.m., Thursday, May 6.

EXCEPT …

for the fact that – no matter where you appear, with, as always, at least so far 😉 , the exception associated with China –

THERE ARE MAJOR STRUCTURAL PROBLEMS THROUGHOUT THE ENTIRE "ADVANCED" Globe, ie, the US / Europe / Japan,

none of which show the slightest sign of getting better within the foreseeable future,

whose different dimensions we have consistently explored in both the "Featured Analysis" and "In the News" columns for the past several months.

Until now, a few have tried to argue the actual US economy is improving, directed to both the stock market "rally"

and what we should have constantly referred to – and totally believe are — doctored numbers coming from various branches of the American government.

But after what happened yesterday in New York, as well as, as I’m watching Bloomberg –

CNBC being too unreliable under any conditions, given the centrality to its weltanshauung of my personal college, er, bud Jim Cramer 😉 –

cover the opening of Oriental markets, which have already exceeded the 3% drop on Wall Street,

the stock market "rally" argument is going to be awfully hard to take significantly,

even for those who have so clearly wished it to be true.

And with the certain drop in value of at least two major companies involved in the Gulf essential oil debacle – BP and Halliburton –

there’s good reason to believe the corporate "numbers" are likely to get even worse quickly.

And – within the admittedly unlikely event the actual financial "reform" actually DOES anything, particularly about derivatives, existing or otherwise [sorry, St. Warren ;-)] –

we may also expect the completely bubbled Or inflated / whatever you want to call it 😉 financial field to also suffer a severe, and well-deserved, collapse.

Which, of course, brings us to the sad spectacle of the Obama administration,

a group that, so far at least, has done little in order to inspire confidence in anyone except its most "tunnel-visioned" supporters,

and much to alienate its base, while utterly neglecting to convince its opponents, who, indeed, become bolder each day.

So there’s no reason for anyone to think the US situation is going to improve any time soon,

especially as long as the "rating agencies" retain their strange control of the US and global economic climate.

And the situation is hardly better within Europe,

where the British election offers produced a so-called "hung parliament,"

which seems most likely to result in a few variation of a weak group Conservative government, or some coalition of either the Tories OR Work with the Liberal Democrats –

one advantage of which would be an apparently much-needed modification of Britain’s "first beyond the post" electoral system and the establishment of the more "proportional representation" situation.

Whatever the "final" outcome, it seems one barely well-positioned to take decisive, let alone successful, action to deal with the UK’s OWN impending sovereign debt disaster.

Which, of course, brings us to the STILL-unresolved Greek sovereign debt situation,

NO proposed solution to which appears to either fix Greece’s ever-unravelling political economic mess,

AND, even worse, just seems to be encouraging the deadly mixture of speculators and rating companies making their methodical 03 across Ireland and the Membership Med countries,

ALL of which encounter real threats to their OWN "credit ratings," and, hence, the necessity of austerity finances of the same magnitude that the Greeks apparently confront.

Even the so-called "strong" European financial systems – basically only Indonesia – are hardly paragons associated with strength,

so anyone who expects improvement in Europe – especially with the impending "deflation" deadlock across the continent – is kidding on their own.

And let’s not even pretend there’s any good news coming from Japan,

where we’ve now had two "Lost Decades" since the collapse of THEIR real estate market within 1989.

To top it all off, I just heard Jim Rogers give a, literally, "breathless" telephone interview with Bloomberg,

where he sounded downright frightened, even though he said at this point, what went down is a "correction," and not a full-fledged "panic",

which, however, was exactly how HE sounded, even as he or she claimed he was "alright," since he’d been selling short for the last couple of months.

Given all of this, we STILL have no idea in the event that May 6 – 2 days before the birthday of oh my gosh friend Bridget 😉 –

will end up being appreciated, as Franklin Roosevelt so memorably put it, "as a day that will live in infamy", a minimum of in financial history,

but we should don’t have any illusions that, even if the markets do, in some manner, recover,

THE REAL ECONOMIC SITUATION THE WORLD CONFRONTS REMAINS, at best, DEEPLY UNCERTAIN, and, from worst, DOWNRIGHT DANGEROUS.

David Caploe PhD

Chief Political Economist

EconomyWatch.com

President Or acalaha.com

Warren Buffett and Goldman Sachs

3 May 2010. Through David Caploe PhD, Chief Politics Economist, EconomyWatch.com

3 May 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

While well-known in order to Americans and those who trade in All of us equities, many non-American readers of this site may not know who Warren Buffett is, so I hope the first group will forgive a SHORT introduction to the man and his importance.

Buffett is currently listed as the third richest man in the world, and CEO / main shareholder of Berkshire Hathaway,

a conglomerate holding company in whose individual shares are worth approximately USD 100,000, mostly because the company has never paid a dividend nor divided its shares.

He is also one among the leading, because most successful, proponents of “value investing,” which he originally defined as “buying stocks below their intrinsic value” – at first delineated as “the discounted value of all future distributions.”

Over the last Twenty five years, however, he has taken the idea even further, to define it as being "finding an outstanding company at a sensible price" rather than generic businesses at a bargain price.

But, aside from the worship Americans give wealth in general, Buffett is beloved for basically four reasons, and, in the current context, one notable comment in particular.

The first is that, in spite of his huge fortune, he has not moved to any of the locations usually associated with big money – eg, New York, Los Angeles, Miami, Vegas etc –

but has remained in his hometown of Omaha, Nebraska, where the winter seasons are freezing and snowy, and the summers revoltingly humid.

The second, consequently, is that he has seemed to retain the personal characteristics from the alleged “homespun” Midwesterner: unpretentious, straight-talking, not a snob, and very accessible to people from all walks of life.

Not that most Midwesterners are actually like that – that’s just the stereotype, and Buffett’utes public personality conforms to it perfectly. Whether it’s a good “act” or not, no one can say.

Given this, the third reason Americans adore him is that, despite all his money, he has continually expressed profound mistrust of – if not contempt for – Wall Street and everything that goes on there.

Fourth, he is an incredibly generous philanthropist, whose politics are usually liberal – in the US framework – top him to be a major donor to all sorts of “do-gooder” groups and activities,

as well as, for example, an earlier supporter of Barack Obama, that gave the latter a significant blast of credibility in the early stages of the endless American campaign season.

And finally, Buffett has been seen most recently as a fount of common-sense economic wisdom for regularly calling types “financial weapons of bulk destruction.”

As a result of all these, Buffett is regularly referred to as “The Oracle of Omaha”, or even, as we like to call him “St Warren of Buffett”.

Now, why do we go through all this ???

The reason is that, since the announcement of the SEC civil indictment of Goldman Sachs –

generally considered the MOST evil of the many dubious denizens associated with Wall Street –

Buffett, and the vice-chair of Berkshire, Charlie Munger, have been among the most vocal as well as forthright defenders of the investment company.

Now provided everything that we have said regarding why Buffett is such a beloved figure, his defense of GS raises a lot of questions, especially:

If Buffett is so anti-Wall Street in general, then why is he so fond of the company that even individuals on Wall Street think about – perhaps with envy –

to be the sharpest operator in an environment usually considered “shark-like” at best ???

Even more disturbing:

If Buffett is such a militant foe of derivatives, then how possibly can he be therefore pro-Goldman when they –

along with the now-defunct Lehman Brothers, as you may know from the whole Repo 105 scandal –

have been among the most consistent and very first users of what he has therefore famously been quoted as calling “financial weapons associated with mass destruction” ???

Now part of it is that Buffett is simply defending his massive individual stake in GS:

He got a large sweetheart deal from them in the height of the panic throughout Black September 2008, when he gave them five million dollars,

in return for which he got favored shares that pay a yearly dividend of USD 500 million –

which means he will get his entire investment back in 10 years, whatever happens,

AND he got 43,478,260 – that’s right, Forty three MILLION – warrants for common inventory at a strike price of $115,

which means he also has a very definite risk in Goldman’s share price sustaining / increasing its worth.

So how does all this fit with each other –

St. Warren of Buffett, the “regular guy”, homespun, Midwestern millionaire exponent of “value investing”, on the one hand,

and, alternatively, Goldman Sachs, prime user of types, and the most reviled and disliked of the many Wall Street companies,

whose high-level employees have been raking within millions in compensation,

while the majority of the rest of the world sits mired within the Great Recession ???

Well, not to pat ourselves on the back an excessive amount of, but we raised this three months ago, well before the actual SEC suit –

long before anybody else was even thinking along wrinkles –

wondering how these two seemingly opposite poles of the US / worldwide financial system could fit with each other so seamlessly.

The answer all of us came up with at that time, not surprisingly, had been basically a question,

taken directly from the immortal words of Senator Howard Baker, when he asked about Richard Nixon’s involvement with Watergate –

then a scandal which, by today’s standards, would barely raise eyebrows –

namely, “what did he know, so when did he know it ???”

And using the announcement of the SEC scams suit –

whose legal strength we originally questioned, but which has been strongly endorsed by some knowledgeable financial world bloggers –

we Might have begun to get some answers about how much due diligence St Warren did before jumping into bed with what Matt Taibi has so notoriously called a “vampire squid”.

And it seems like the answer is, “quite a lot.”

The occasion was Berkshire’utes annual meeting in Omaha hold’em, where Buffett – to give the man his due –

did NOT shy away from challenging questions coming from either his – admittedly, usually worshipful – shareholders nor the media.

NB: We are including almost all of this piece from the influential Deal Book function of the New York Times – admittedly with our emphases –

just to reassure our more skeptical readers regarding our portrait of Buffett and exactly how in which people view him:

The first question asked during Berkshire Hathaway’s 2010 shareholder meeting had been unsurprisingly about Goldman Sachs,

which is below fire from the Securities and Exchange Commission to have an alleged act of securities fraud.

A bit more surprising is when strongly Berkshire’s head, Warren At the. Buffett, is defending the company.  

He told Bloomberg Television before the meeting that he backed Goldman’s leader, Lloyd C. Blankfein, “100 percent.”

Mr. Buffett said that he or she felt little sympathy for that firms the S.At the.C. says were harm by what the agency calls Goldman’utes lack of adequate disclosure.

Of one company, ABN Amro, Mr. Buffett said: “It’s a hardship on me to get terribly supportive when a bank makes a foolish credit bet.”

What Mr. Buffett thinks about Goldman is something the investment community has been buzzing over for days.

Again, which was a question we raised a few three months ago.

Berkshire has invested $5 million in Goldman preferred shares, and Mr. Buffett is notoriously suspicious of Wall Street mores.

As we noted above … at least presumably …

In the case of Goldman, Mr. Buffett and the chief lieutenant, Charles Munger, made it clear they’re on the firm’s side.

Goldman as well as Berkshire have a long history, with Mr. Buffett relying on Goldman as his longtime investment bank.

He has stated that Byron D. Trott, a long time Goldman banker who left to begin his own shop, is one of the couple of Wall Street bankers he or she trusts.

According to DealBook’s Andrew Ross Sorkin, who’utes one of three panelists asking questions at the conference,

Mr. Buffett essentially took Goldman’s defense that everybody involved in the deal under scrutiny, Abacus, was a sophisticated investor completely capable of evaluating the risks in the subprime mortgage investment.

Instead of needing to find out that a hedge fund manager who suggested which bonds should form the underpinnings of the Abacus collateralized debt obligation was also short the actual bonds,

the investors should have trusted their own due diligence, Mr. Buffett stated.

“If I have to care who’s on the other side of the trade, We shouldn’t be insuring bonds,” he said.

Mr. Buffett added an implicit rebuke of a line of questioning raised by several senators during this week’s Goldman hearings.

An investment bank could very well be short the securities Berkshire is buying, and a buyer like Berkshire should be perfectly aware of that in any case.

Mr. Munger added that were he on the Utes.E.C., he would not have access to voted to press charges.

That isn’capital t to say that Mr. Buffett as well as Mr. Munger think Goldman is blameless right here.

Mr. Munger suggested that there was a difference between breaking the law and behaving unethically — and that simply following the law shouldn’capital t be the basis of a business’s carry out.

He added that many investment banks had taken on “scuzzy” customers they shouldn’t have.

Well, scuzzy is as scuzzy will, and this makes pretty obvious Buffett knew QUITE A BIT about Goldman prior to he came in and rescued them in the dark days of Dark September 2008,

as is only to be expected, given both their history and, in this particular case, their explicit endorsement of the demand for due diligence.

Which brings us back to the important thing question of derivatives and St Warren’s attitude towards them.

And right here the story gets even more dark.

Another DealBook item from about a 7 days before the one quoted above indicates maybe St Warren no more feels these “weapons associated with mass destruction” are as bad because he supposedly thought:

As Democrats relocated closer to an overhaul of financial rules, The Wall Street Journal documented that 

Warren Buffett — the man who once branded derivatives as “financial weapons of mass destruction” — has been combating the deal.

Mr. Buffett’s company, Berkshire Hathaway, has been lobbying for changes to the overhaul that would prevent his finances from being overly impacted by the bill, The Journal said.

Berkshire would like a provision to the bill ensuring that existing derivative agreements would not be affected by the suggested rules.

Berkshire has $63 billion price of derivatives on its publications, according to Barclays Capital, The Journal reported.

WHAT ???

Financial weapons of mass damage WORTH USD 63 Million on Berkshire’s books ???

Hmmmm …

What does THAT say ???

Unfortunately for St Warren, that effort was declined, and Democrats included a provision that made charges on EXISTING derivatives agreements part of the “financial reform” bill.

Of course, the fight on that “effort” has just started, and, from this clip through CNBC –

whose Becky Quick actually had the actual gumption to mention the “mass destruction” portrayal to Buffett as he was leaving the stockholder’s meeting –

it’utes clear Buffett is a long way from quitting.

Which probably could also be inferred from the fact that the ONLY Democratic Senator to vote WITH the Republicans and Towards his own party on the initial vote on this legislation

was – you’ll never guess – Ben Nelson, through Buffet’s own – apparently in lots of senses of the word – condition of Nebraska.

David Caploe PhD

Chief Political Economist

EconomyWatch.com

President / acalaha.com

By David Caploe PhD, Chief Politics Economist, EconomyWatch.com.

Like nearly every other element of the global financial and economic mess that both triggered and has followed from Black September 2008,

By David Caploe Expert degree, Chief Political Economist, EconomyWatch.com.

Like virtually every other element of the global monetary and economic mess that both caused and has followed from Black September 08,

the April 16 announcement through the US Securities and Exchange Commission [SEC] civil match for fraud against Goldman Sachs offers raised more questions compared to answers.

Despite the seeming significance of the transfer – involving, as it does, Goldman Sachs, the most visible / profitable Or and politically connected of the many Walls Street firms that have prospered mightily, DESPITE the world-wide pain their actions have caused – several aspects stay unclear.

So let’s start with what we should DO know, and then try to illuminate a few of the many areas that remain murky.

1)    

In spite of Goldman’s prominence, the way the SEC handled the announcement was, to put it mildly, unusually rude, and quite different than the way it usually handles relations with the targets of its investigations.

In common, there are extensive discussions between your SEC and its targets BEFORE any announcement is made.

Indeed, the actual “normal” course of action is the announcement of both the bringing of charges AND the settlement agreed to at the same time.

However cozy an overall relationship that might indicate between the SEC and the industry it regulates, the fact the announcement clearly caught Goldman by surprise was a radical variation within standard operating procedure [SOP], and is hard to interpret as something OTHER than an intentional slap in the face.

2)  

Given this clear leaving from SOP, the SEC and, undoubtedly, the Obama administration – which HAD to provide the go-ahead for such a potentially mind blowing move, as well as the way it had been handled – were clearly trying to signal SOMETHING.

But it remains completely unclear WHAT they were trying to say – and to whom.

Were they trying to inform an angry public – concerned by the worsening spectre of joblessness, while Wall Street profits and compensation skyrocketed –

that, to use the Clinton phraseology, they “felt their pain,” and were going to – lastly – DO something about the corporations which had caused it ???

Were they attempting to tell Wall Street these were – finally – fed up, and going to begin riding herd on them,

regardless of their massive power via the limitless and, given the insane decision in Citizens United, ever-increasing requirement for campaign finance contributions ???

This was certainly the – hopeful – meaning of many consistent critics of the “kid glove” treatment Team Obama has given Wall Street to this point.

3)  

But if this does, in fact, signal a radical turnaround in the way the actual Obama administration is handling Wall Street, that only raises more questions – first and foremost, why would they pick what many informed observers see like a – legally – relatively weak case on which to make a stand ???

Now there is the comeback to that: namely, this is only the beginning,

and the rude departure from SOP by the SEC is intended to make sure Goldman will, because it has said, fight this case in the court, and NOT, as is usual, seek a settlement.

The significance of an open and extended legal battle, many observers point out, would reveal to public scrutiny – via the lawful process of discovery –

the sordid game not just Goldman, but the entire inter-connected web of Walls Street banks, have been actively playing – both before and after Dark September.

In that context, perhaps the most hopeful sign is the fact that the SEC move will give a good imprimatur of legitimacy to what some of these same observers argue will be a cascade of lawsuits that build on the SEC action.

If that DOES occur, it may indeed turn out to be the "straw that broke the camel’s back" in terms of what has been, until now, the reluctance of ANY of the parties involved in these transactions to find legal redress –

in which case, this could be the harbinger of a very big change in the whole politics / legal framework by which not just Goldman, but all Wall Street firms, conduct their business.

4)  

But that possibility, in turn, only boosts MORE questions, most immediately:

given that Obama has basically continued the Cheney / Plant policy of giving Walls Street and other Too-Big-To-Fail [ TBTF] banks anything they want,

why make a seemingly revolutionary change NOW ???

This is where the whole “dual game” theory comes into play.

Proponents of this view – certainly one of whom participated in the Room for Debate piece linked to over – see the move as related, even if indirectly, to the impending Senate debate on “financial reform”.

The argument here is that – having seen he got nowhere with the Republicans as well as their corporate handlers in the various “health” industries when it came to health care “reform” –

Obama understands he has to ramp up the “neighborhood organizer / tough Chi town pol” aspect of his admittedly multi-faceted character, dump the “bi-partisan” nonsense that has clearly failed, and play a little hardball

IF he has any about getting through the Senate the – in our view, totally weak-kneed and insufficient – financial “reform” he is proposing.

Put bluntly, given the Senate Republicans’ seeming 41-vote solidarity Towards him, he has to give the United states senate Democrats SOME kind of stick with which to cleave away at least several Republicans,

not to validate the “bi-partisan” foolishness, but simply to make sure that SOME kind of bill DOES pass.

In this look at, at least APPEARING to take on Goldman – even with an admittedly weak lawsuit – will be enough to make some “moderate” Republicans –

especially those who are up for election this November,

and don’t wish to appear to be TOTALLY bought-and-paid-for by the same Wall Street gang

whose shenanigans possess brought the lending deep freeze and consequent unprecedented joblessness to Main Street –

go along with what is, after all, a not-especially tough “reform,”

which, in the end, their corporate patrons are going to have few problems making your way around, given their well-paid and innovative legal advisers.

5)   

And given a somewhat cynical, albeit realistic, view of the degraded state of American public discourse, it’s not the worst bet on the planet to think the whole thing can be stage-managed within the following way:

Having made it’s play to extract credits from a minimal number of possibly vulnerable Senate Republicans, Obama can tell the actual SEC to take a “slow” as well as “down-low” approach for the next period,

using the actual “we want the judicial process to take its course” rhetoric, and keeping the case OFF the front pages.

Then, once Obama has won passage of a “financial reform” that, as with the health “care” “reform”, is something the industry can easily live with,

the SEC as well as Goldman announce a negotiated negotiation,

in which the latter agrees to pay for a fine that, whatever the amount, is a sum they can effortlessly afford, given their immense profits.

Obama and the SEC can then state victory in this entire arena, not bother to bring anymore cases, and everything will go along as before:

Wall Street is happy, Obama has an additional “big” legislative “victory”, the Democrats don’capital t get killed in the November elections,

and Obama’s “progressive” supporters, in the immortal words of Sonny Corleone, are left holding their d—ks in their hands.

6)  

But even if this “double game” scenario – APPEARING to visit after Goldman, while not in fact planning to follow through – is, unfortunately, all as well plausible,

there IS at least a possibility the procedure thereby unleashed can, in fact, “get free from control.”

And this is where the Pandora’s Box aspect comes into play.

As indicated over, it’s not hard to imagine a predicament where domestic anger at Wall Street –

whether on the part of Obama’s alleged "progressive" base, whom he has shown little hesitation within ignoring to this point, or the Tea Party gang –

can be included by seeming to “get tough,” while in fact merely continuing business-as-usual.

At the same time, there IS the possibility the actual SEC is, in fact, playing for keeps,

basically in order to modify its well-deserved reputation as Wall Street’s lapdog gained during the Cheney Or Bush years,

when it completely rolled over for any “request” it caused by the financial sector.

Now if this IS the case – and it’s a large IF, the worries of Business 7 days and many other corporate internal organs aside –

then, in fact, the hopes of Simon Johnson, Robert Kuttner, and a whole host of others centered around the Huffington Publish –

that this represents a radical change in what has heretofore been Obama’s continuation of Cheney / Bush policies towards Wall Road and the whole TBTF sector of the American political economy –

may well be confirmed.

To be perfectly honest, we are doubtful about this,

even if it is, as Shakespeare stated in his most famous soliloquy, “To Be Or Not To Be,” from Hamlet, “a consummation devoutly to be wished”.

That said, there is a real danger – not just for Goldman, but also Obama, insofar because this is a “double game” ploy, meant fundamentally for domestic consumption – in the reaction of significant players OUTSIDE the US.

Indeed, both the German and UK governments have, in the wake of the SEC suit, begun investigations into Goldman’s actions, since both British as well as German banks were involved in this situation.

Even here, though, there may be less than meets the eye.

This is because both British Prime Minister and German Chancellor Angela Merkl face elections THEMSELVES in the next couple weeks,

and each of them would like nothing more, in both the short- and long-term,

than to shift responsibility for their OWN negligence in managing THEIR financial industries onto evil Wall Street and several complicit American organizations.

7)   

In conclusion, then, there remain at this time many more UN-answered questions than certainties regarding just WHAT the SEC’s – and Obama’s – “Goldman gambit” means.

It really could be the beginning of the far-reaching change in the whole way Obama and the rest of official Wa deal with the key issue associated with Wall Street and TBTF organizations in general –

especially given the news which Goldman’s profits rose an astonishing 91 per cent over the very first quarter of 2009,

which will certainly not make the “double game” situation any easier for them to pull off, if that is indeed the perform here.

And today’s appearance before the Home Financial Services Committee of court-appointed Lehman examiner Anton Valukas –

the man who made us all painfully aware of the now-infamous Repo 105 – will also "stiffen the spine", as it were, of the SEC,

since his scheduled testimony reportedly attacks that agency –

admittedly under different leadership during the Cheney / Plant years –

for failing to do anything to stop the shady practices which, eventually, led to Lehman’s collapse.

All having said this, we still remain dubious this type of change is going to come as long as the President retains Larry Summers and Tim Geithner as his key economic policymakers,

given, once we have discussed numerous times, Geithner’s complicity in the Black Sept 2008 meltdown, and their joint “unshackling” of derivatives during the last moments of the Clinton administration.

If, on the other hand, we see them replaced by the likes of Brooksley Born or Joe Stiglitz or Paul Krugman – despite his deeply mistaken position on Chinese language currency values –

and there is a substantive change in the nature of the "financial reform" being proposed,

the least of which is to, as Senator Blanche Lincoln seems to want, either ban complex derivatives or make them COMPLETELY transparent –

then we might start to believe there is really going to be a change.

But until then, regrettably, we are not yet convinced that even the seemingly dramatic events along with Goldman and the SEC are anything more than, to paraphrase perhaps Shakespeare’s 2nd most famous soliloquy, from Macbeth, “a tale filled with sound and fury, signifying not too much."

Happy 4/20.

 

David Caploe PhD

 

Chief Political Economist

EconomyWatch.com

President / acalaha.com

GE Capital, Jack Welch as well as Jeff Immelt

08 April 2010, By David Caploe PhD, Chief Political Economist, EconomyWatch.com

What follows are the contents of 2 emails, received by me via my friend Richard Martin,

 

 

08 04 2010, By David Caploe Expert degree, Chief Political Economist, EconomyWatch.com

What follows are the contents of two emails, received by me via my friend Richard Martin,

 

who subsequently received confirmation from the contents of the initial e-mail from a good anonymous source within GE Capital.

Ritholtz is Barry Ritholtz, whose blog, The Big Picture, was analyzing a book by Roger Lowenstein, "The actual End of Wall Street".

Jack Welch, of course, had been the revered head of GE, "one of America’s most respected companies",

and Immelt is Jeffrey Immelt, Welch’s successor at GE as Chairman and CEO …

From our point of view, it may sound like GE was using JUST the same tricks that Lehman Bros was using with Repo 105 — and, as we pointed out, GSachs with Greece … 😉 …

which undercuts YET AGAIN the ridiculous argument about the necessity of insane compensation levels in the financial sector to be able to attract "the best talent",

SINCE, APPARENTLY, THEY’RE ALL USING THE SAME BASIC BAG Associated with TRICKS ANYWAY 😉

Here’s the FIRST email:

“GE’utes Jack Welch pocketed over $400 million bucks in salary, bonuses, as well as options.

Lowenstein argued in his book that Welch essentially managed the actual earnings with very creative accounting, and the help of GE Capital’utes impenetrable financial black box.

The credit turmoil caused the collapse associated with GE’s earnings management, verifying Lowenstein’s thesis of earnings management.

It’s hard to avoid his conclusion that the finest industrial CEO in current American history was little more than a clever accounting cheat.”

And this short note from my friend RM brought This particular – highly detailed — SECOND email response from the anonymous supply within GE:

Lowenstein is absolutely correct in his ideas and views on Welch’s earnings management practices.

These practices did not end when [Jack] Welch left the company.

[His successor Jeffrey] Immelt was selected by Welch, and Immelt has maintained the same revenue management practices.

GE denies these allegations to the street, but it is widely known as well as accepted internally that

the company manages the quarterly outcomes by buying and selling assets and moving earnings as necessary.

In addition, on the equipment side of the business,

the company pushes product forward or holds it back depending on which quarter they want to go ahead and take profit.

This worked nicely in good times, but as we saw in the disaster in 2008/2009,

GE could not conceal their practices and had to scurry to manage their quarter revenue,

and hence why Immelt landed on his heels and the company skipped its quarterly numbers for the first time within history.

The street also has always said that the company is propped up through the commercial paper market,

and without which market, GE would not be able to exist.

This came true when the commercial paper market came to a standstill

[the on-going lending deep freeze, which was especially frightening throughout the immediate aftermath of Black September 2008]

and the company had to accept cash from [St. Warren of] Buffet to stay afloat

 

[a move which sounds awfully similar to exactly what St Waren pulled off with Goldman during that same period ].

The company might say this was a "precautionary" measure or a "proactive" action.

That is not the case – GE Capital was on the lifeline in Fall of 2008 and was near death.

 

The company could not keep its obligations and couldn’t fund its Borrowers.

What GE displays to the street and what really happens at the company are two entirely different things.

An additional side point I might add is that, in addition to the clever accounting occurring at the company,

GE also has significant Hr issues, with inappropriate and illegal behavior occurring and coverups like a regular course of business.

Of course I could talk about this for hours, however this is just a tidbit of the real functions of supposedly "the most respected company in the world".

 

China: Rio Tinto Convictions

30 March This year. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

When four executives through Rio Tinto, the giant Anglo-Australian mining company, had been arrested last July upon charges of stealing commercial secrets, as well as taking and receiving bribes from Chinese officials,

30 March 2010. By David Caploe Expert degree, Chief Political Economist, EconomyWatch.com

When four executives from Rio Tinto, the giant Anglo-Australian mining organization, were arrested last This summer on charges of robbing commercial secrets, as well as getting and receiving bribes from Chinese officials,

most Westerners interpreted the move because trumped-up retaliation for the debt-strapped company’s rejection of a 19.5 billion All of us dollar cash injection from the state-run Chinalco final June,

since Rio Tinto is one of China’s greatest suppliers,

helping it import tens of vast amounts of dollars worth of iron ore every year — a vital component for metal that is fueling its flourishing economy.

Given the deep inter-relationship between organization and  country, the confrontation was highly charged from the beginning.

But when the run-up to the trial began, as well as the highly un-transparent proceeding itself, the situation became even stranger,

culminating in the announcement of unexpectedly harsh prison sentences of seven to 14 years for the 4 executives for taking bribes and stealing commercial secrets.

According to the New York Times account of the verdict,

The case heightened the fears associated with foreign investors doing business here because the four were initially arrested on espionage charges,

fueling concerns that the prosecution was politically motivated, intended to punish Rio Tinto for its clashes with Chinese companies.

Until the actual verdict, Rio Tinto — one of the world’s greatest producers of iron ore — had strongly defended its employees.

But the organization issued a statement late Mon saying it had chose to immediately fire the 4 employees,

describing the evidence released throughout the trial that they had accepted about $13.5 million within bribes as “beyond doubt.”

The verdict, which will come shortly after Google decided to pull its search engine out of China,

appears to be the latest indication that China is taking a harder line with foreign companies doing business here.

Rio Tinto was not charged in the case, however in announcing its verdict Monday,

the court essentially accused the company of using stolen information to damage China’s economic interests,

costing about 20 of this country’s steel generators an extra $150 million last year alone.

For reasons we discuss by the end, this in fact appears to be the essential issue in the case.

But before explaining why, it also makes sense to check out several of the OTHER strange facets of this situation,

notably the announcement through Rio Tinto, just before the trial was set to begin in late 03,

that it and Chinalco had signed the non-binding, 1.35 billion US dollar deal to help develop a massive mine in Guinea, closing a period of turbulent relations using its biggest shareholder.

According to Rio leader Tom Albanese at that time, "We have lengthy believed that Rio Tinto and Chinalco could work together on major projects for mutual benefit".

In that context, this looked as if the test would conclude with a simple slap on the wrist or even two.

But once it actually started, as this earlier New York Occasions article notes, a lot of "filthy laundry" on both sides began to appear,

and this became clear that more what food was in stake than simply some relatively minor disagreements among close business associates.

Stern Hu, an executive at the British-Australian mining giant Rio Tinto, said in court he accepted two large bribes at the end of 2008 and early 2009 totaling about $1 million from Chinese steel mills in exchange with regard to agreeing to sell them long-term supplies of iron ore, his lawyer Jin Chunqing said.

Although the four Rio Tinto executives on test here on charges of bribery and stealing commercial secrets had admitted taking bribes,

the revelation shed new light on why they did and just how corruption in the Chinese steel business worked …

“Two small companies bribed Stern Hu to get a long-term contract with Rio Tinto, which normally is not available for medium- and small-sized businesses,” Mr. Jin said.

“It was throughout the economic crisis in late 2008 which large-scale steel companies were struggling with continuing their deals with Rio Tinto. That’s when the small companies decided to get involved, causing a corruption of the system.”

Steel industry experts say bribery has grown widespread here in recent years as Chinese steel mills have competed for valuable imports of metal ore, much of it controlled through foreign suppliers.

Analysts said a chaotic pricing system had made a two-tiered market, fueling corrupt deal-making.

Many large state-run metal companies in China agree to long-term contracts at a set price with foreign suppliers,

while smaller metal mills compete to buy materials on the open market, frequently for higher prices.

“Desperate steel mills would do anything to call supplies,”

said one steel industry professional in a telephone interview on Friday,

speaking on the condition of anonymity for fear of government retribution.

“There was a huge potential for mischief and a huge incentive to bribe.”

Getting a discount on the open market price could mean saving tens of millions of dollars, experts say,

giving tremendous power to iron ore salesmen working for companies like Rio Tinto.

In this particular context, the verdicts raised one immediate question:

If the Rio Tinto executives were guilty of accepting bribes, what about the companies that offered them ???

The Shanghai No. 1 Intermediate People’s Court partly answered that question on Monday, launching it would soon charge at least two Chinese steel industry officials with passing trade secrets to Rio Tinto.

But that certainly doesn’t finish the questions, not just with regard to Rio Tinto, but ALL Western companies either actively doing or seeking to do business in China.

By the time of the convictions, there is a general consensus the convictions had been significant not so much for the company, even though it certainly complicates its connection with China,

but for the general state of China’s often tough discussions with foreign suppliers over iron ore prices.

Before the detentions, China’s steel business association had repeatedly attacked Rio Tinto and other foreign iron ore providers for driving up the cost of iron ore and negotiating unfairly.

On Monday, the court confirmed that metal ore negotiations were at the center from the case

and insisted that Rio Tinto employees had been passing secrets to top arbitrators for the company.

It said that in 2009, Mr. Hu and Mr. Wang obtained confidential information from the China Iron & Steel Association,

the government physique that negotiates iron ore prices with foreign suppliers.

The court said the actual Rio employees had “damaged” China’s interests.

In this context, the MOST important take-away from the Rio Tinto case, at least to this point —

there is, in the end, the possibility that, having made its toughness clear, China will decide to soften the suddenly stiff sentences —

seems NOT to be, the la Google, that Traditional western companies seeking to do business in China had better watch their own step,

although there’s little doubt the actual surprisingly harsh convictions perform, in fact, underline such a information, at least for now.

But if the whole issue area of iron ore prices Or availability / negotiations is really the central issue here,

then the REAL significance of all this drama lies in its ramifications for what most observers from the global political economy see as THE key issue of the moment:

Is China’s financial growth likely to continue — or is it going to crash, whether in a hard or gentle landing ???

If the country is willing to make such a stink about the whole area of iron ore —

which, remember, is really a key factor of production within the making of steel, The important component in almost all manufacturing —

then it’s hard not to infer China’s leaders are in fact certain growth is going to continue,

and it is therefore in the country’s short-, as well as medium- and long-term, curiosity to strike as hard a bargaining position as it can about prices / availability etc.

This being said, it wouldn’t end up being beyond the Chinese leadership to realize that most shrewd observers would in fact infer this from the hard-line outcome of the trial,

and take advantage of that inference to increase the credibility associated with projections of the country’s continued growth

as prelude to what they know is, in fact, going to be a slowdown associated with some sort, whether hard or soft.

But it could also mean what it appears to mean:

China’s leadership is quite certain growth is going to continue, and they want to safe the most advantageous negotiating placement as possible,

with not just Rio Tinto and other companies, but also the other countries who serve as the ultimate supply of that key ingredient.

Given the actual crisis in the Eurozone and, doctored BLS figures aside, the on-going problems of the US,

China’s short-term economic profile remains key to the immediate future of the world political economy.

And if the Rio Tinto case is any indication — which, again, it may or may not be —

then one would have to figure the Chinese leadership, at least, is confident about the country’s ability to continue its remarkable growth,

even within a general global framework of weakness at greatest and steep recession from worst.

They could, of course, be arrogantly wrong in this assessment.

But the fact they’d even take such a position —

given all the complications it will obviously bring with one of their most significant private-sector partners —

is definitely a fact really worth pondering.

David Caploe PhD

Chief Political Economist

EconomyWatch.com

China: Krugman Wrong on Forex Devalution

Conventional academic economics is a disease.

Despite its pretensions and mathematical “certainties,” there is no department of social science much more dis-connected from its alleged subject matter compared to economics – and that is saying something, something not good.

So while particularly disappointing, it’s not particularly surprising whenever usually UN-conventional economists – notably Paul Krugman of Princeton and, more importantly, the actual New York Times, and Nouriel Roubini of NYU, aka Dr Doom, one of the few academics that had even the vaguest inkling the catastrophe of Black September 08 was coming – lapse in to the orthodoxies they generally eschew.

Intriguingly enough, these conceptual slides often come in the area associated with global trade and balance of payments, where or else smart people like Krugman as well as Roubini are seemingly unable to escape the stale platitudes they generally disdain when it comes to MOST issues of political economy:

in Roubini’s case, the “sub-prime” state of the US financial system like a whole, which he correctly warned about well before even the Bear Stearns collapse in March and, of course, Lehman Bros in Black September associated with 2008;

with Krugman, he’s on the mark regarding just about EVERY issue – recently, the IN-sufficiency of the Obama stimulus, which he properly said at the time it handed Congress would NOT be enough to promote a sustainable recovery, and the economic [not just human] imperative of SERIOUS health care “reform,”

although he was a little past due in realizing how significant a blockage the insane All of us campaign contribution “system” would be within achieving anything of actual value.

It was thus fairly disheartening to wake up on Monday, eager to read his latest clear sally against all things stupid in American political economy, to rather be blasted by his ill-mannered screed against China’s alleged forex manipulation, which is supposedly getting such a bad effect on the weak efforts at global recovery.

Tensions are rising more than Chinese economic policy, and rightly so: China’s policy of keeping its forex, the renminbi, undervalued has become a substantial drag on global economic recuperation. Something must be done.

And upon he went from there.

It was equally dismaying to read two days later on a New York Times content – whose board, like Krugman, has generally been notable in making strong and convincing quarrels against the babbling inanities that pass for “public discourse” in the US these days – taking the same sort of ill-informed collection on the whole question of Chinese currency values:

China’s decision to base its financial growth on exporting intentionally undervalued goods is threatening economies around the world. It is fueling huge trade deficits in the United States and Europe. Even worse, it’s crowding out exports from other creating countries, threatening their about recovery.

And on THEY proceeded to go, making more likely just the sort of worldwide trouble they correctly warned against at the conclusion, namely that “this difference [can] escalate into a fight that no one can win.”

So what is the problem with this line – and why does it go back to the nonsense associated with conventional academic economics ???

Put bluntly, both Krugman and the Times content board are ignoring the central fact of the world political economic climate that has existed since the late Nineteen forties: countries either sell to the US or even they sell to countries that sell to the US.

Instead, they are simply following the inaccurate – but ubiquitous – conventional academic economics Presumption that world trade should somehow be “balanced” – that is, that each country should have its industry and overall payments be roughly “in balance.”

In reality, this flies in the face of not just the current world political economic set-up, however the entire history of world politics economies that have existed, in a variety of forms, since at least 1815 and also the rise of the “second” British Kingdom, following its victory within the Napoleonic wars of the early 19^th hundred years.

“Equilibrium”, however, is a KEY concept of conventional academic economics – regardless of how non-existent it is in the real world – and they will try everything they can to POSIT equilibrium in almost any situation –

even if, as is the case with the current world economic downturn in general and trade picture in particular, it is completely ir-relevant to what is really happening.

Now most of the time, smart guys like Krugman / the New York Times Editorial Board Or Roubini realize this, especially when you are looking at DOMESTIC economies,

where it’s blatantly apparent equilibrium may be a “consummation devoutly to be wished,” but they recognize it for which it is: “a complete falsehood,” as Michael Corleone told the Senate in Godfather II.

But somehow, when it comes to problems with trade and the world politics economy – especially one in the actual terrible shape it is these days – they want to return to the emotional comfort of the dominant myths of their graduate school days,

and make-believe an equilibrium they know is completely fictional in domestic political economic climate somehow really DOES exist on the global stage.

In fact, nevertheless, it NEVER has – the actual US, for example has run an overall balance of payments deficit since 1959, and an overall trade deficit because 1971, without any appreciable decline within the American standard of living –

and, given the American-centered character of the world political economy since 1947, it never SHOULD.

Put bluntly, both the US and the rest of the world possess benefited greatly from a worldwide political economy that is essentially UN-balanced:

it is good for both America and every other country that the US run consistent payments and trade deficits, which will enable at least SOME countries to run payments and trade SURPLUSES –

which, by the way, are a) different and b) not necessarily good things in and of themselves, but that’s a subject for another day.

In reality, there ARE some countries that MIGHT be hurt by China’s fierce determination to hold on to a particular worth for its currency –

but they are certainly NOT developed economies like the United States as well as Western Europe, the Times’ editorial on the contrary.

Despite the rhetoric emanating from the US – but NOT other nations supposedly being hurt by the Chinese value, the reasons for which the Times can’t seem to figure out –

low-value-added Chinese exports TO the US and the rest of the developed world generally do NOT compete with high-value-added products arriving from those countries,

for the simple reason that low-value-added products left the developed world quite a long time ago as a result of wage levels which are simply too high.

Put bluntly, almost all the manufacturing jobs that left the US for Mexico or China or any other low-wage country are NEVER coming back –

and to pretend they are is not just absurd and self-delusionary analytically, but misleading to People in america and dangerous to world economic peace.

The first 3 are pretty obvious. However why is this nonsensical obsession with Chinese language currency valuations so inimical to world economic peace ???

Quite simply, because it pretends there’s a villainous motive at the rear of perfectly “normal” economic practices the US by itself a) has practiced for decades; and b) continually promotes in principle –

namely, the mobility of capital, which, as Karl Marx therefore eloquently pointed out, always seeks the lowest possible wages in order to get the actual highest possible profits.

In this context, the countries whose industries are most likely to be harm by low Chinese forex valuations are not the US and Europe – whose consumers only benefit from the low prices of Chinese exports –

but places such as Indonesia and Vietnam, whose manufactured exports contend directly with China, both in their own home markets and third markets like the US and Europe.

These countries definitely could have a case against China, although many of them offset their own problems with manufactured goods by making significant sales of raw materials to China itself.

But for significant and generally enlightened sectors of the American elite – like Paul Krugman and also the New York Times Editorial Panel, as well as the openly selfish web host of K Street insurance supporters swarming all over Capitol Hill –

to make a big deal about “low” Chinese currency ideals being in any way problematic for either the US or global economy is patently absurd.

As we have noted, US consumers – practically more than any major economic “actors” on the planet – in fact benefit significantly from low cost Chinese language imports,

as would European consumers, if their more protectionist governments might let them in, which, a minimum of so far, they remain reluctant to perform, given the political power of whatever domestic manufacturers may still can be found.

The problems with the US and, because the global political economy is American-centered, the world economies have little to do with China in general, and certainly NOTHING to use the value of China’s currency.

Those problems relate to the lies that America’s politics / corporate / press / academic elites have been informing the American people and the world – and, for all we know, themselves – since at least the Reagan regime, exponentially multiplied, obviously, during the age of Cheney / Bush.

And if the US is going to somehow manage to find a way out of the mess it’s in, it should stop blaming China, and admit, because Shakespeare put it, “the fault lies not in our stars, but in ourselves.”

But of course, that’s a great deal harder than shifting the onus onto one of the couple of countries in the world that –

for its admitted problems, above all within environmental / occupational / product safety, as well as independence of speech and individual rights –

has a political leadership that actually knows what it’utes doing when it comes to economic policy.

As all of us put it in the matter of Lehman / Repo One hundred and five and Goldman Sachs / Greece –

which are MUCH much more to the point when it comes to America’s real issues –

“Welcome to the Lost Years,” which are, unfortunately, only just beginning.

David Caploe PhD

Chief Politics Economist

EconomyWatch.com

President / acalaha.com