NBA as WWE

It seems I’m not the only one who thinks the NBA is fixing games on an institutional basis:

Via Bloomberg:

http://www.bloomberg.com/apps/news?pid=20601039&sid=aUrZ16kqbll4&refer=home

 

Overall a great article that hits many of the points I’ve been talking about for years, and adds stats to boot.

A couple of notes though:

a)  The author, Kevin Hassett, must have forgotten the success of professional Wrestling when he states: “If fans suspect foul play, they will presumably stop buying tickets.”

b)  The first few rounds of the playoffs, through tournament seeding, pit the best playoff teams versus the worst.  So there should be even less a likelihood of a home team advantage than in the regular season during the first two rounds.

c)   While he compares home court winning percentage of the playoffs to the regular season, he assumes that there is no benefit for the NBA in fixing regular season game.   Anyone who is a fan of any sport, knows that attendance is directly dictated by whether the home team wins or not.  Who wants to shell out a couple of hundred bucks to watch the home team lose?  Heck many people leave early after spending that kind of money to avoid watching them lose.

 

When do the honest become the blind?

Paul O’Neill, the former truth speaking Secretary of the Treasury, had a good analogy to explan why the subprime issue has spread to the rest of the economy (h/t my dad).

To paraphrase: imagine you had ten bottled waters; one of which contained poison.  Without knowing which one, would you take a drink of any?

This would be a good analogy were sub-prime mortgages truly the only issue.  In fact, O’Neill is blind to the reality of much wider problems.

A more accurate analogy would go as follows:

1.  Imagine you have ten bottle waters and you are told by the Federal Water Reserve that one contains poison.

2.  After watching someone pick one of the bottled waters and then promptly die, you then observe another person pick a different bottled water and then promptly die as well.

3.  Would you drink from any other bottles?

All houses are infected with the poison of bubble prices.   Those in the sub-prime category were just the first to become insolvent and the only ones without a PR firm or lobbyists to defend them.

UBS to Customers – Buyer Beware

From the WSJ: UBS Cutting Value Of Auction-Rate Securities In Brokerage Accounts

UBS is the first of what will surely be many large banks to pass losses on Auction Rate Securities on to their customers. Of course these are the same customers who were told that these investments were as liquid and as safe as cash.

The Money Quote:

“Some Clients Will Face Losses on Paper Of More Than 20%”

We’re all Charlie Brown now

Homeowner = Smoker

Is it really appropriate to use the same “should have known” language for people with negative equity or too high a mortgage payment that is has been used for a smoker with emphysema?

If so, should we also blame victims of medical malpractice for failing to understand their own medical procedures?

Of course we can blame any lay person for mis-applied trust, but what is the end result?

The regulatory environment that arose during the Great Depression (Securities Exchange Act of 1934, Securities Act of 1933,) came about to restore trust in stocks and the stock market.  It’s a testament to their effectiveness that it took over seventy years for Wall Street to subvert them.  There will always be people willing to break the law, the problem arises when you can commit fraud without technically breaking the law; as evidenced by stock brokers in the 1920’s and mortgage brokers in this decade.

Hopefully, we will have the same political will, as in the 1930’s, to close this loophole without the financial upheaval of yesteryear.

A Bailout by Any Other Name Still Stinks

Bail out the duped and you reward misplaced trust

Bail out the expert and you reward incompetence

By bailing out Wall Street and not the individual homeowners we will cause long term damage by both eroding trust and encouraging incompetence.

Wall Street, with Jim Cramer as its spokesmen, whine that these tactics are necessary to avoid a greater calamity. As I mentioned previously, these same tactics in 1998 are what caused today’s greater calamity.

Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat. – Sun Tzu

The Real Moral Hazard Already Passed

Moral Hazard as defined in Wikipedia:

“The prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.

 

Financial bail-outs of lending institutions by governments, central banks or other institutions can encourage risky lending in the future, if those that take the risks come to believe that they will not have to carry the full burden of losses.”

The flame out of Bear Stearns, while it wasn’t a bailout of shareholders, was a bailout of Bear Stearns creditors and counter-parties.

Counter-party Risk

The current crisis is the direct result of the moral hazard created with the bailout of Long Term Capital Management (LTCM), in 1998 (more details below the fold). As with Bear Stearns, the shareholders of LTCM were NOT bailed out, but the counter-parties and creditors were bailed out. Thus, the Fed sent a message that if you lend recklessly to a hedge fund or investment bank, don’t worry, the FED will guarantee private contracts, as long as the lending is reckless enough to put the entire economy at risk.

The saying, “too big to fail”, directly and inexorably leads to the kind of reckless lending that crushed Bear Stearns and still threatens the US economic and monetary supremacy.

Who would lend billions of dollars to Bear Stearns unless they know, via the actions in 1998, that Bear Stearns debt would be backed by the faith and credit of the Federal Reserve? Rather then squelch the reckless lending that allowed for the current crunch, the Bear Stearns creditor bailout reinforces the LTCM lesson that as long as you lend to large enough institutions you need not worry about default and counter-party risk.

The problem today is that there isn’t enough money to bail out the entire system as LTCM’s creditors were bailed out in 1998.   In 1998, LTCM was the only over leveraged firm threatening the economy, now virtually all investment banks are over leveraged (and banks as well given Glass-Steagall’s 1999 repeal).

Had the FED and Wall Street allowed LTCM to fail, causing counter-parties a lot of financial pain, perhaps Bear Stearns would not have been allowed to borrow 3000% of their equity. Homeowners buying houses with zero equity is understandable as they are laypersons, Wall Street over leveraged precisely because of the backing of the FED as implied by their behavior in 1998. Just as Wall Street misjudged the severity of home mortgage defaults they are still misjudging the severity of their own over-leveraging.

Grab you hats, this roller coaster is still on the way down.

Bad Service is Good for Business

Great Article on Naked Capitalism: “Character and Capitalism“  Anyone who has dealt with a phone company, cable company or any call center will understand. It’s worth a read.    

How to Steal Money Without Really Trying: Auction Rate Securities

“Everybody talks about the weather, but nobody does anything about it.” – Mark Twain

I had been trying to get my head around this whole issue with Auction Rate Securities. Once again, the Time’s Gretchen Morgenson covers the basics of another investment shell game in her March 9^th article: As Good as Cash Until it’s Not.

Ms. Morgenson classifies the misrepresentation of Auction Rate Securities as a Wall Street problem: “The investments, which Wall Street peddled as a cash equivalent, are known as auction-rate notes.” As a former ethically inflexible broker myself, my perspective is that this is just another example of rewarding unethical, and most certainly illegal, behavior on Wall Street. By classifying it, incorrectly, as a Wall Street problem, the article takes an editorial stand that the Auction fiasco in not the result of unethical and most likely illegal, behavior but standard Wall Street operating procedure.

Isn’t fraud a common law principle still contained somewhere in the American legal canon? I’m sure the Times isn’t asserting that fraud is standard operating procedure on Wall Street.

Broker Example:

Broker A: Our Money Market Yields 3.5%

Broker B: Our Money Market Equivalent yields 4.5% (never revealing the, now realized, pitfall of zero liquidity)

Allow this behavior for too long and eventfully Broker A will be either be out of business or begin changing his ethics he can compete with Broker B.

On the other side of these transactions are hundreds of municipalities. Similarly caught in this Interest Rate shell game, these municipalities are facing situations analogous to a mortgage borrower with a 7, 14 or 28 day ARM.

Investment Banker Example:

The town of Springfield is trying to build a monorail and needs to raise $30 million dollars.

Investment Banker A: Offers to issue $30 million in 10 year fixed bonds @ 6%

Investment Banker B: Offers to issue $30 million 10 year Auction Pfds @ 4%

Just as Broker B does in the previous example, Investment Banker B never emphasizes the con, only highlights the pros, of these Auction securities. The con being that if no one buys at the next auction the Investor loses liquidity and the Issuer (municipality) gets the exorbitant penalty rate.

Of course prior the recent failed actions (70% failure by some estimates), the Investment Banker assures Springfield that the weekly or monthly auctions have been successful for three decades and the exorbitant failed auction rates, possibly as high as 20%, are only just so much legalese. Just like fraud, I’m pretty sure the word fiduciary is still in our legal cannon.

 

The Time’s article acknowledges that investors were intentionally misled:

“In interviews, investors who own these securities say they weren’t warned that they might not be able to sell them if an auction failed. They say they were told that the instruments were as safe and liquid as — yes, you guessed it — cash.”

No mention is made of any investors who knew the true nature of these investments. It seems that all current investors are the poor schmos who order the fish of the day not realizing it’s really the fish that went bad yesterday. Most likely, informed investors were smart enough to exit this market months ago.

 

Neither is there any mention in the Time‘s article of any informed brokers who advised their clients to exit this market in the months preceding their failure. I guess there’s a thin green line preventing them from outing their corrupt brethren.

 

Of course these tactics not only allow the less informed ,or less ethical brokers, and investment bankers to steal business from the better informed and more ethical, it also happens to generate hugely exorbitant fees. Again Ms. Morgenson notes:

“Wall Street made generous fees issuing these securities and running the auctions — as long as there were bidders. After the bidders vanished, some firms stepped in and bid for the securities for a while, giving investors a way out.

No more. What’s the sense stretching your already-thin balance sheet just to keep a market open for your customers? “

A favorite of marketers is the term built in obsolescence. Take a product that lasts for years and turn it into a product that has to be repurchased every couple of weeks; sharpening a straight razors sucks…get a new blade for your Mach 3 every two weeks.

Someone must have realized that a 30 year bond issued at a fixed rate once at inception doesn’t generate as much fees as a 30 year issue that needs to be reissued every week or month.

This behavior makes an investor want to learn how to use a straight razor like a certain Sweeney Todd.

Ms. Morgenson asserts, hopefully incorrectly, that Broker B and Investment Banker B are representative of all of Wall Street. After all she said “Wall Street convinced investors that they were just as good as cold, hard cash.” Individuals people and Individual Corporations committed this fraud and individuals should be held accountable, not “Wall Street”.

In closing, companies and individuals on Wall Street will continue to convince their clients to do things against their own interests so long as it is rewarded handsomely for that behavior. And the ethical and honest will continue to leave Wall Street. Investors must insist that individuals like Broker B and Investment Banker B are held to account in civil, if not criminal, court.

Gold and Oil – Straight to the Moon as the FED fumbles

What rational person would sell oil for $100 a barrel today if they can get $120 in two months or less??

So whether it’s Gold or Oil; if you own it, it’s better to leave it in the ground and watch the FED work their magic on your inventory.  And of course, leaving it in the ground will result in lower available supplies and further accelerate the rise in prices.

And don’t believe the canard that at least our exports will be more attractive with the weakening dollar. As the following example demonstrates:

Widget costs $100 when Euro is worth $ 1.40 = € 71.43

Widget costs $100 when Euro is worth $ 1.50 = € 66.67

But, this assumes it still costs $100 to make the widget. Now lets add the that 7.14% dollar depreciation bank into the cost of the widget. Don’t forget that the widget’s raw materials all cost more with inflation.

Widget now costs $107.14 when Euro is worth $ 1.50 = € 71.43

Exactly the same cost in Euros, NOT LESS, as is assumed by those who state a weakening dollar leads to lower costs for foreign consumers.   It’s even worse if the costs to make a widget are going up faster then our currency is dropping.

Now, we all know there are many people smarter than me.   I also grant that some of them actually work in D.C. as well.   One more reason to ask; why is FED the lowering rates??

Crime and Punishment…or No Punishment

A)Huffington Post 2/27/2008 : US Imprisoning More Than 1 In 100 Americans

“For the first time in U.S. history, more than one of every 100 adults is in jail or prison, according to a new report documenting America’s rank as the world’s No. 1 incarcerator.

B) Leonard Lopate Show 2/28/2008 : Unfair Crack and Cocaine Sentencing Guidelines

“According to current federal sentencing guidelines, convictions for the sale of 500 grams of powder cocaine – and only 5 grams of crack cocaine – both result in a 5-year mandatory minimum sentence. Jesselyn McCurdy, legislative counsel for the ACLU, explains why this sentencing disparity is unfair and fails to address the larger problem of the drug trade. Karen Garrison is the mother of 2 sons who are each serving long sentences in federal prison for non-violent crack cocaine offenses.”

C) Bloomberg 12/13/2008 : Bush Fraud Probes Jail Corporate Criminals Less Than Two Years

“Median sentences for white-collar crime changed little in the 1990s, holding in a range of 12 to 13 months, commission data shows. That number increased to 15 months in 2001 and reached 18 months last year, reflecting the new guidelines…On July 17, the task force’s five-year anniversary, then- Attorney General Alberto Gonzales announced that the department had obtained 1,236 corporate fraud convictions….”

 

I’ll leave it to someone else to crunch the numbers thrown out in all these stories. It should be obvious that with 1,236 corporate convictions of less then two years, on average, would account for less the 0.0001 percent of the current prison population.

Even the high profile convictions of Enron, Ebbers and Conrad Black do not change the profitability of corporate crime.