Archive for December, 2010

Obama auto czar, Steven Rattner coughs up $16 million to settle fraud charges

December 31, 2010

Steven Rattner is a prominent Democratic fundraiser, a former banker at Lazard and a reporter for the liberal New York Times. During the nationalization of General Motors  by the Obama administration in 2009, Rattner served as auto czar, providing sweet deals for the UAW, an unsecured creditor, at the expense of priority bondholders in the bankrupted corporation.

On Thursday December 30, 2010, Rattner settled civil charges brought by New York Attorney General, Andrew Cuomo, by apologizing for bad behavior, while ponying up $10 million, and agreeing not to do business with any public pension fund in New York for five years.  By settling out of court, Rattner avoids a $26 million penalty sought by Cuomo together with a lifetime ban on working on Wall Street, a sweet outcome indeed for such a shady customer who has become a multi-millionaire by Wall Street wheeling and dealing. In November 2010, Rattner reached a similar sweet deal with the Securities and Exchange Commission, agreeing to pay $6.2 million and not to work on Wall Street for just two years.

These settlements wrap up a broad investigation into corruption at the $135 million state pension fund of New York.  Steven Rattner’s greedy fingers have been caught in that lucrative cookie jar. The vehicle that he utilized to exploit the pension fund was the private-equity firm Quadrangle Group, LLC that he had founded.

While at Quadrangle, Rattner allegedly arranged to pay kickbacks to gain investment business from the pension fund. Quadrangle settled charges earlier in 2010 and disavowed Rattner’s personal conduct. As a result of such kickbacks, the pension fund increased its investments with Quadrangle in 2005 and 2006 from $100 million to $150 million, paying the firm bigger fees for managing more money. Rattner personally netted $3 million in profit, according to the lawsuits targeted against him. 

The corruption charges against Rattner include the payment of in excess of $1 million in fees to Henry Morris, a political adviser to the then-state Comptroller, Alan Hevisi.  At Morris’s request, Rattner orchestrated a DVD distribution deal for  ‘Chooch‘, a low-grade movie produced by the brother of the pension fund’s chief investment officer, David Loglisci.  In addition, Rattner arranged for $50,000 in contributions to Hevesi’s reelection campaign.

With such a spectacular fraud record, Steven Rattner naturally polled high within the Obama administration for the role of an auto czar willing and able to defraud secured creditors on behalf of the UAW. Fortunately, he has met his match in Andrew Cuomo who, no doubt will take a special interest in Rattner’s future Wall Street and New York pension funds’ dealings from the Governor’s residence in Albany.

Fed. President, William Dudley, cozy’s up to Wall Street’s losers

December 30, 2010

William Dudley is a former Goldman Sachs economist – uh! oh! – who took over as President of the Federal Reserve Bank of New York in January 2009  when Timothy Geithner became Secretary of the U.S. Treasury. According to published records, Dudley spent a great deal of one-on-one time, early in 2009,  with Chief Executive of Goldman Sachs, Lloyd – I come from Greece bearing gifts – Blankfein, as well as with other senior Goldman executives.  He also made time for several tete a tetes’s with his successor  at Goldman Sachs, Jan Hatzius,  at a favorite watering-hole, the Pound  & Pence near the Fed’s downtown headquarters.

These meetings, together with others that I shall identify below, were little more than precursors to further  Fed support for illiquid- and in several instances insolvent -  financial institutions, who have become regular bottom-feeders on the New York Fed.  William Dudley, it turns out, is a replica of his predecessor, Timothy - may I offer you a taxpayer handout  – Geithner.

Dudley’s first order of business was to squirm his way into the good graces of American International Group, the out-of-control basket-case that helped to trigger the September 2008 financial crisis. Starting on February 11, 2009, Dudley met with AIG executives, including then-CEO Edward Liddy, to discuss the future of the company. This was followed up some 24 additional cozy chats with AIG, leading up to a March  announcement by the government that it was easing some terms of the rescue and providing AIG with further access to the TARP.  Specifically, the total value of  the TARP injection would be elevated to $182.3 billion.  Did I mention that this was taxpayers’ hard-earned money?

When Dudley meets with failing financial institutions, taxpayers should cling tightly to their wallets. For  William Dudley sure knows how to spend other people’s money.  On February 23, 2009, Dudley met with the CEO of Citigroup, Vikram Pandit, just four days before the government converted its $25 billion in preferred stock in that company to common stock, thereby placing itself at the bottom of the creditor listing.

On May 5, 2009, Dudley had individual meetings with seven financial institutions that under-went the so-called stress tests just two days before the results were made public: Bank of New York Mellon Corp., Goldman Sachs, J.P. Morgan Chase & Co., Morgan Stanley, American Express Co., and MetLife, Inc.. Guess what, folks?  They all passed with flying colors, though none of them since appears to be able to function effectively as lender in the nation’s financial markets.

I am feeling a little cash-strapped following the Christmas festivities. I think that I should give William Dudley a call and schedule a chat at the Pound and Pence.

Hat Tip: Chana R. Schoenberger and David Benoit, The Wall Street Journal December 30, 2010

Let the nation’s housing markets clear

December 29, 2010

The bursting of the U.S. house price bubble during the third quarter of 2006, presaged the financial collapse of September 2008. Since then political meddling in the housing market has continued unabated. 

Fannie Mae and Freddie Mac, major perpetrators of fraud during the bubble, are protected species, funded by unlimited taxpayer dollars.  The Federal Reserve has purchased trillions of dollars of toxic mortgage securities in a futile attempt to prop up a falling market. Federal subsidies to underwater mortgage holders intermittently drip into the housing market. Clumsy bids to slow down the foreclosure rates provide unwarranted hope for households that have not made a mortgage payment in months, and have no where withall  to make catch-up payments.

As a consequence, the housing market is failing to clear in significant sectors of the U.S. economy. The latest statistics indicate that house prices are falling again across 20 major metropolitan areas. Many economists expect such price declines to continue for the next several months. Some four years after the bursting of the bubble, the failure of the housing market to reach a new equilibrium is primarily due to political meddling. It is high time that the political elite should recognize that economic recovery will not return to trend until the false bubble is completely erased and a sustainable house price equilibrium is restored through market process.

The process is bound to be painful as homeowners lured into unsustainable mortgsges by the false promises of the likes of Barney Frank and Christopher Dodd retreat to the reality whence they came. Unfortunately, the penalties for political fraud are minimal. In other walks of life, Barney Frank and Christopher Dodd would be sharing prison cells with like-minded scam-artists such as  Bernie Madoff. Unfortunately, the United States has become a nation governed by the rule of men, not the rule of law. And, as always in such circumstances, the men who rule are members of the political class.

Tsar Vladimir Putin herds compliant Russians back to serfdom

December 28, 2010

Once Russia’s richest man, Mikhail Khodorkovsky was arrested on charges of fraud and tax evasion in 2003.  His real crime was that of openly criticizing then-President Vladimir Putin for leading albeit-compliant Russians on the return road to serfdom, and ultimately to peasant status. Shortly afterwards, Yukos, Russia’s largest oil company,  was hit with billions of dollars in back-tax claims, and ultimately was broken up and sold off to state companies, mostly in the hands of President Putin’s corrupt political cronies.

 In 2005, Khodorkovsky was given an eight-year sentence by a subservient judiciary, a sentence that, with time off for good behavior, inconveniently will run out early in 2011, well before the 2012 Presidential election which Vlady expects to contest and win, as the basis for his reincarnation as Tsar of all the Russias. With President Dmitry Medvedev – Putin’s protege and successor as president – mumbling words of support for Khordorkovsy, a stony-faced Putin condemned K as guilty before the judgment was rendered in a successful Kafka-esque bid to intimidate a faceless judge, in a case where the charges were never clearly advanced.

So yesterday, Judge Viktor Danilkin convicted K of stealing 218 million tonnes of oil from Yukos between 1998 and 2003 – some two -thirds of the company’s total output and of laundering $16 billion received from said theft.  This verdict is designed to keep K in a Siberian prison for a further several years, safely out of the way while Vlady secures his transubstantiation from President to Tsar.

Danilkin’s judgment confirms Russia as a nation governed by the rule of man, not the rule of  law. Multi-national corporations, already nervous about the security of property rights in a re-emerging totalitarian state, are now likely to flee the country. New international investment assuredly will dry up. Even with its oil and natural gas reserves, Russia is a sickly member of the world’s economy. Russians have no history of capitalism and entrepreneurship to build the wealth of their nation. They are physically the most sickly of people, with life expectations that parallel the poorest of Third World countries. Predictably, Tsar Putin will take them right back to the old nineteenth century lifestyles that are so attractive to the pliant majority.

President Obama can help them on their way, if he has the political courage to impose economic sanctions on Russia unless that country restores human rights and introduces the rule of law. In the meantime, U.S. support for Russia’s membership in the World Trade Organization, including congressional repeal of the Jackson-Vanik amendment, should be put on an immediate hold. Hey! Why not invite Tsar Putin to the White House in 2012, and have Michelle Obama welcome him with a freshly-brewed, polonium-laced cup of tea?

America should always seek peace by preparing for war

December 27, 2010

“To be prepared for war is one of the most effective means of preserving peace.”  George Washington

“From the president on down through his secretary of defense, the service secretaries, and a cast of generals whose decorations would choke an alpine meadow with color, we are told that further reductions in American military power are warranted and unavoidable.  This view is supported by the left, the right that unwisely fears accounting more than war, by most of the press, the academy, and perhaps a majority of Americans, and it is demonstrably and dangerously wrong.” Mark Helprin, ‘America’s Dangerous Rush to Shrink Its Military Power’, The Wall Street Journal, December 27, 2010

Between 1940 and 2000, average annual American defense expenditure was 8.5 percent of gross domestic product. During periods of war and mobilization for war it was 13.3 percent. Under Democratic administrations it was 9.4 percent.  Under Republican administrations it was 7.3 percent.  During years of peace it was 5.7 percent. Today, the United States spends just 4.6 percent of gross domestic product on defense and, if operational war costs are omitted, just 3.8 percent, or 66 percent of traditional peacetime outlays.  Even though the United States is at war, it is steadily disarming.

President Obama blithely flew in the face of military reality when he spoke the following words at West Point during the summer of 2010: ‘At no time in human history has a nation of diminished economic vitality maintained its military and political primacy”. These are defeatist words from the President of a country that became the arsenal of democracy that sustained Britain and Russia from defeat by Nazi Germany  that freed Western Europe, and that thrashed Japan on the basis of an economy cut in half by a 12 year Great Depression.

President Obama unwisely tells the People that never again will America face two major enemies at one time. This at a time when Iran is threatening to provide terrorists with nuclear weapons; when North Korea is brazenly threatening  South Korea with nuclear annihilation; when the Afghan War drags on in an effective stalemate with the Taliban; when Russia is drifting back into dictatorship  under the aggressive leadership of Vladimir Putin; and when the People’s Republic of China is bestriding the Far East like a new Colossus. 

History tells us repeatedly that when a once great nation fails to prepare for war, it loses the peace, and is sacked by its enemies. Thus Athens! Thus Rome!  Thus Spain!  Thus France! Thus, save for the grace of the United States, Great Britain and its once-mighty Empire .

“The strange , suicidal conviction now fashionable among the elite is that the customary vast reserves of power with which America maneuvers in the international system and, in extremis, wields in its defense, have become irrelevant to security and detrimental to the economy.  All across the country, children are growing up who, in the fire next time, may pay for this prejudice with their lives.  For a nation that has lost the unapologetic drive to defend itself cannot escape the consequences no matter how deft its self-deceptions or the extent to which, in contradiction of history and fact, error is ratified by common belief.” Mark Helprin, ibid.

The political wisdom of George Washington

December 26, 2010

“Few men have virtue to withstand the highest bidder.”

“It will be found an unjust and unwise jealousy to deprive a man of his natural liberty upon the supposition he may abuse it.”

Labor to keep alive in your breast that little spark of celestial fire, called conscience.”

“The Constitution is the guide which I will never abandon.”

“To be prepared for war is one of the most effective means of preserving peace.”

“Arbitrary power is most easily established on the ruins of liberty abused to licentiousness.”

“Firearms are second only to the Constitution in importance; they are the people’s liberty’s teeth.”

“Liberty, when it begins to take root, is a plant of rapid growth.”

“The marvel of all history is the patience with which men and women submit to burdens unnecessarily laid upon them by their governments.”

Christmas Day 2010

December 25, 2010

“And it came to pass in those days, that there went out a decree from Caesar Augustus, that all the world should be taxed.  (And this taxing was first made when Cyrenius was governor of Syria.)  And all went to be taxed, every one into his own city.  And Joseph also went up from Galilee, out of the city of Nazareth, into Judea, unto the city of David, which is called Bethlehem, (because he was of the house and lineage of David,) to be taxed with Mary his espoused wife, being great with child.

And so it was, that, while they were there, the days were accomplished that she should be delivered. And she brought forth her firstborn son, and wrapped him in swaddling clothes, and laid him in a manger; because there was no room for them in the inn.”

Luke, II

Ben Bernanke’s bad blunder

December 24, 2010

“By employing a faulty economic model at home and by being internationally insular, the Fed has merrily entered into a zero interest-rate trap.  At home, a debilitating credit-crunch ensued.  And abroad, hot money has reared its ugly head, distorting markets far and wide and inviting the use of capital controls.  The only way for the Fed to exit the trap is for it to begin to raise interest rates.” Steve Hanke, ‘Fed Up, Again“, GlobeAsia, January 2011

In this column, I shall focus attention on the domestic U.S. issue that arises directly from the Keynesian attempt by the Federal Reserve to boost the level of aggregate demand through the expansion of high-powered money and the forced imposition of low interest rates.

This policy has failed completely, not because the U.S. economy confronts a demand-side liquidity trap, as Keynesian economists such as Paul Krugman and Joe Stiglitz claim, but because the Federal Reserve has created a supply-side zero interest rate trap. As a consequence of this Fed-created trap, the money multiplier has collapsed and broad money measures such as M2 have barely budged during the post-crisis period.

Let me set the scene with some relevant statistics.  In May 2008, before the financial crisis emerged, the cash assets of U.S. commercial banks stood at a low of $0.31 trillion. This was the trigger for the financial collapse.  Since then, the commercial banks have availed themselves of the gusher of Fed liquidity to lift those cash assets first to $1.04 trillion in May 2009, and then to $1.13 trillion in October 2010. Even this latter level does not secure the liquidity of the major insolvent banks, such as Bank of America, Citibank, GMAC and Wells Fargo. Clearly, however, it is orders of magnitude better than in May 2008.

Over the same time period, the real estate loans of the commercial banks have barely budged, down from $3.64 trillion in May 2008 to $3.62 trillion in October 2010. The reason for this is that most of those loans are toxic, massively over-valued on the balance sheets of the banks, and unmarketable without exposing the mark to market reality that both the Fed and the commercial banks are desperate to avoid.

Again, over the same period, the Treasury and Agency securities of the commercial banks have increased significantly, from $1.11 trillion in May 2008 to $1.63 trillion in Octoober 2010, as floundering commercial banks have withdrawn into the socialist sector of the U.S. economy, for reasons that I shall outline.

Again over the same period, the commercial and industrial loans of the commercial banks – the engine-house for economic growth – have collapsed from $1.49 trillion to $1.22 trillion, as the banks have retrenched from risk-taking in the private sector to increasing reliance on the socialist sector of the economy.

Finally, as a symptom of what is occurring, interbank loans have shrunk from $0.46 trillion in May 2008 to $0.20 trillion in October 2010.

To understand these statistics, we must explain why the U.S economy confronts a growth-choking credit crunch during a period of unprecedented increase in high-powered money. The answer lies in the zero interest-rate trap and its impact on the interbank loan market.

The zero interest rates available to finance the borrowing of the commercial banks allows such banks to make positive returns from Treasury and Agency securities, without undertaking much if any risk. In contrast, retail bank lending to the private sector involves making risky forward commitments. Willingness to do so depends to a large extent on a well-functioning interbank market.  Such a market  –  without counterparty risks and with positive interest rates - enables even illiquid, but solvent, banks  to make forward commitments to their clients because they can cover these commitments by bidding for funds in the wholesale interbank market.

Herein lies the Ben Bernanke blunder. In a situation where the risk-free Fed funds rate is close to zero, banks with excess reserves are reluctant to part with them for virtually no yield in the interbank market.  Accordingly, that market has dried up, and with it, any willingness among the commercial banks to scale up their forward loan commitments.  Ben Bernanke’s Fed has created the credit crunch that is holding back the economy.

 Only by jettisoning this bungled policy and allowing the Fed funds rate to increase – say to two or three percent – can the Fed eliminate the credit corset and force the commercial banks to seek returns in the capitalist sector of the United States economy. Unfortunately, Ben Bernanke appears neither to have the necessary brain-power to understand the nature of the problem nor the courage to acknowledge his serious error in monetary management.

The economy will continue to flounder until the Fed reverses course. The President and his administration are likely to cotton on to this reality by end-2011 whenm electoral disaster looms. Hopefully, Ben Bernanke is living on borrowed time as Chairman of the Federal Reserve.

On mentoring doctoral students to successful completion

December 23, 2010

I understand that the overall success rate among doctoral candidates in the United States (across all disciplines) is very low for students who find themselves ABD (all but dissertation). I have seen figures as low as one in seven and as high as four in ten. Never have I seen a figure where a majority of thus-placed students, across the United States, successfully complete their dissertations and secure their degrees.

My success rate among the large numbers of students that I supervise is dramatically higher: in the range 96 to 98 percent across my career. How do I account for this huge differential?  In part, no doubt , it is due to the high quality of the graduate students who attend a program that has been graced by two Nobel Prize Winners in Economic Sciences. But that has not always been true, clearly not during my early career. Moreover, I have supervised my share of the most clever and of the less clever within the entry cohort of any program, top-knotch, or otherwise. So this is not the entire story by any means.

There are three reasons for my success. The first is a brutal requirement for productive hard-work that I place upon each and every student under my mentorship. Many are the students whom I have broken down into tears during the early phase of their dissertation, when they come to meetings with me bearing little or no incremental contribution. Like  young, untamed colts, once they are broken  in this manner, their expectations of a successful, well-disciplined career improve by several orders of magnitude.

The second reason for my success is that I place the same burden upon myself that I require from my students. I meet with each one for at least one hour every week of the year (with rare exceptions for vacations) until they have completed their dissertations. I read what they have written, provide detailed comments and suggestions, and expect that the better of those comments will be dealt with by the following meeting. By now, that has become  the  rational expectation for any student who seeks me out as a mentor and supervisor.

The third reason for my success is the dissertation proposal, upon which I place an enormous importance. Like building a fine house, work on the foundations is the basis of success. If the foundations are weak, any edifice, however magnificent it may appear to be, ultimately will collapse. Ideas  and structure are no less important than good concrete in this regard. To my mind, the Proposal is a contract that is written between the student and his committee, and that, once signed, is  inviolate with respect to the bond that it creates between the two parties.

For the Proposal to represent a contract, it must be well-developed and clearly defined with respect to all its aspects, including a thorough review of all the relevant literature.

If the dissertation embraces a normative position, is that normative position well-defined and internally coherent? How does it set against plausible alternatives?

If it contains positive analysis (as all my dissertations do) are the relevant models clearly articulated and developed, how do they compare with relevant extant models, and where does any element of originality lie? 

 If institutions are involved (as is the case with almost all my dissertations) how have those institutions evolved, what are their key characteristics, and (sometimes) how do they compare with other institutions in other locations,  across both time and space? 

If empirical analysis is required (as is the case with most of my dissertations) how well does the specification of the  empirical model reflect the theoretical model that has been developed, what are the testable predictions of that model, and how is the model to be refuted or not by empirical testing?

Finally, what data is required for such testing, does it exist or must it be compiled, and if so, from what sources and by what means?

Only when this foundational work has been completed will I allow a candidate to defend his Proposal before the committee. For only then is there a valid basis for a binding contract. Each committee member, in signing off on such a proposal effectively confirms (1) that the dissertation is worth while, and (2) that it is feasible.  Thereafter, the successful candidate can move forward with confidence to the completion of his dissertation.

Now, of course, the contract may be adjusted as the candidate discovers new insights or finds a better route to travel to his ultimate destination. However, whenever such an adjustment is proposed, all committee members are consulted, and their comments are taken seriously to make sure that they remain on board for the journey.

In a nutshell, those are the lessons that I have learned from a lifetime of experience. Not every supervisor and not every student will choose to follow that path. For me, however, it is the path to success, in some 96 to 98 percent of the cases that I have ever worked.

The political wisdom of Thomas Jefferson

December 22, 2010

“A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned – this is the sum of good government.”

“I have sworn upon the altar of God, eternal hostility against every form of tyranny over the mind of man.”

“I know of no safe depository of the ultimate powers of the society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them but to inform their discretion.”

“I own that I am not a friend to a very energetic government.  It is always oppressive.”

“My reading of history convinces me that most bad government results from too much government.”

“Timid men prefer the calm of despotism to the tempestuous sea of liberty.”

“We are not to expect to be translated from despotism to liberty in a featherbed.”

“The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.”


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