Monday, August 31, 2009

Head Of Chinese Sovereign Wealth Fund (CIC) Says The U.S. And China Are Creating New Bubbles That Make Investing Riskless

This is just phenomenal. We go away on vacation for a few days and come back to a series of quotes from the head of the CIC, China's $300 billion sovereign wealth fund in this Reuters article. Some of these are just remarkable [emphasis added]:
"It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we're just taking advantage of that. So we can't lose," he said.

CIC was set up in September 2007 with $200 billion of foreign currency reserves transferred from the central bank, which manages its own stockpile of $2.13 trillion.

"If our returns are not bad and the state's FX reserves are still rising, we may go and ask for more," Lou said.

He said the risk of a decline in the dollar risks was more of a national issue for China than for CIC because its capital is in dollars.

Asked whether CIC would be a keen buyer in the United States, Lou said CIC can buy anywhere in the world, but it cannot avoid buying U.S. assets because the American economy and capital markets are so large.

Lou said CIC was building a broad investment portfolio that includes products designed to generate both alpha and beta; to hedge against both inflation and deflation; and to provide guaranteed returns in the event of a new crisis.

"We have to be in everything because you never know what's going to happen in this world," he said.
Our collective brain just short-circuited upon reading this and reflecting on the fact he's in charge of $300 billion of Chinese sovereign investments. Investment bankers and fund raisers everywhere must be salivating upon the first whiff of dumb-money blood in the water.

Wednesday, August 26, 2009

Vice Chairman Of Berkshire Hathaway Charlie Munger Is Interviewed By Joseph Grundfest

As Warren Buffett's long-time partner, Charlie Munger has played an integral role in the build up and wealth accumulation of Berkshire Hathaway. Die hard BRK fans have long appreciated his trenchant observations, biting sense of humor and quick wit. His presence has increasingly become more mainstream as the sunlight on Berkshire has grown in volume. (Click here for video of a prior talk Munger gave)

What follows is the transcript of an interview conducted by Stanford's Joseph Grundfest. The link to the transcript is here. Hat Tip: TD.

Just who is Charlie Munger. To many people he is the other half of Berkshire Hathaway. Buffett's partner, sounding board, confidant, strategist, etc... Charlie has often allowed Warren to hog the limelight, but his contribution has been significant as well. Just read Warren's notes and memoirs.

Charles T. Munger is a man of many interests, much like his hero Benjamin Franklin. Self-taught in a range of disciplines, he's a strong advocate for interdisciplinary education saying, "If I can do it, many people can." A student of physics and mathematics before entering law school, he left his mark on the legal profession early in his career by co-founding Munger, Tolles & Olson in 1962—a firm that is today consistently ranked at the top of its field. Now an icon of the business world, he joined forces with Warren Buffett in the mid-1960s—leaving law to become vice chairman of Berkshire Hathaway and a partner in one of the most successful firms in the world.

Over the years Munger has gained a reputation as something of a no-nonsense voice for sound investment strategies and responsible business practices—as well as simple common sense. But lately it is the mythical Greek character Cassandra who is much on his mind. After living through the Great Depression, serving in WWII, and entering the business world in an era of restraint and sensible regulation, he is irritated by what he calls "the asininities" of today's government and business leaders that led to the current crisis. He saw the financial train wreck coming and voiced his concerns loudly. But almost no one shared them.

"It is painful to see the tragedy coming, to care about all the people who are going to be clobbered, and not to be able to do one damn thing about it," said Munger, as we prepared for the interview that follows. As the nation navigates through this crisis, entering waters previously uncharted, perhaps the powers that be will be more willing to address issues previously ignored.

Joseph Grundfest is the W. A. Franke Professor of Law and Business is more than familiar with many of Munger's complaints. A former commissioner at the Securities and Exchange Commission (SEC) and counsel to the President's Council of Economic Advisers, Grundfest is today a prominent voice for sense and responsibility in corporate governance. Grundfest founded Stanford's Directors' College, the premier venue for continuing education of directors of publicly traded firms, and also founded the award-winning Stanford Securities Class Action Clearinghouse, which provides detailed, online information about the prosecution, defense, and settlement of federal class action securities fraud litigation. His scholarship focuses on matters related to securities fraud, complex litigation, corporate governance, and statutory interpretation, and his name regularly appears on lists of the nation's most influential attorneys.

GRUNDFEST: I'll begin with two words: Bernie Madoff. What do you think "l'affaire Madoff" teaches us about the operation of our financial system?

MUNGER: One of the reasons the original Ponzi scheme was thrown into the case repertoire of every law school is that the outcome happens again and again. So we shouldn't be surprised that we have constant repetition of Ponzi schemes.

And of course there are mixed schemes that are partly Ponzi just shot through American business. The conglomerate rage of buying companies at 10 times earnings and issuing stock time after time at 30 times earnings to pay for them was a legitimate business operation mixed with a Ponzi scheme. That made it respectable. Nobody called it illegal. But it wasn't all that different from mixing a significant amount of salmonella into the peanut butter.

Harry Markopolos, a hedge fund expert, sent a detailed memo to the Securities and Exchange Commission (SEC) articulating why Madoff must have been a fraud. The SEC did nothing with it. We don't know the reason why, but I'm willing to suggest that the lawyers who received Markopolos's warning simply didn't understand the finance or math that Markopolos relied on.

Lawyers who only know a mass of legal doctrine and very little about the disciplines that are intertwined with that doctrine are a menace to the wider civilization.

Why didn't the SEC understand the warning that was clearly placed at its door?

The SEC is pretty good at going after some little scumbag whom everybody regards as a scumbag. But once a person becomes respectable and has a high position in life, there's a great reticence to act. And Madoff was such a person.

Why aren't our regulators capable of addressing many of the issues that we confront in the market today?

Most of them plan to go back to living off money made in the system they are supposed to regulate. You can argue that financial regulation is so important that no one in such a position should ever be allowed to do as you partially did—serve and then leave to make money in the regulated field. Such considerations led to lifetime appointments for federal judges. And we got better judges with that system.

So government service should be a little like a monastery from which you can never escape?

What you can opt to do is retire, which is pretty much what our judges do.

What about the idea that investors should be able to fend for themselves?

We want the sophisticated investor to protect himself, but we also want a system that identifies crooks and comes down like the wrath of God on them. We need both.

And here I think what's intriguing is we have a failure of both.


As we look at the current situation, how much of the responsibility would you lay at the feet of the accounting profession?

I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the financial promoters want. They've sold out, and they do not even realize that they've sold out.

Would you give an example of a particular accounting practice you find problematic?

Take derivative trading with mark-to-market accounting, which degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade.

And they can't both be right. But both of them are following the rules.

Yes, and nobody is even bothered by the folly. It violates the most elemental principles of common sense. And the reasons they do it are: (1) there's a demand for it from the financial promoters, (2) fixing the system is hard work, and (3) they are afraid that a sensible fix might create new responsibilities that cause new litigation risks for accountants.

Can we fix the accounting profession?

Accounting is a big subject and there are huge forces in play. The entire momentum of existing thinking and existing custom is in a direction that allows these terrible follies to happen, and the terrible follies have terrible consequences. The economic crisis that we're in now is, in its triggering circumstances, worse than anything that's ever happened.

Worse than the Great Depression?

The economy hasn't contracted as much as during the Great Depression, but the malfeasance and silliness, the triggering events for today's crisis, were much greater and more widespread. In the '20s, a tiny class of people were financial promoters and a tiny class of people were buying securities. Today, it's deep in the whole culture, and it is way more extreme. If sin and folly get punished appropriately, we're in for a bad time.

And do you see a chance that our current economic woes could reach to a level closer to the Great Depression?

Well, nobody can predict that very well because we've never faced conditions as extreme.

Very few people realize how much we've screwed up. Even in leading law schools and business schools very few people realize that the mess at Enron never could have happened if accounting customs hadn't been changed. What we have now is a bigger, more widespread Enron.

When the regulators put in the option exchanges, there was just one letter in opposition saying "you shouldn't do this," and Warren Buffett wrote it. When they wanted to make the securities market function better as a gambling casino with vast profits for the people who were croupiers—there was a big constituency in favor of dumb change. Buffett was like a man trying to stop an elephant with a pea shooter. We're not controlling financial leverage if we have option exchanges. So these changes repealed longtime control of margin credit by the Federal Reserve System.

You get unlimited leverage.

Unlimited leverage comes automatically with an option exchange. Then, next, derivative trading made the option exchange look like a benign event. So just one after another the very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we'd put in the last time we had a big trouble—devices that worked quite well. The investment banks of yore, chastened by the '30s, were private partnerships, or near equivalents. The partners were dependent for their retirement on the prosperity of the firms they left behind and the customs and culture they left behind, and the places were much more responsible and honorable. That ethos, by the time the year 2006 came along, had pretty well disappeared. Our regulators allowed the proprietary trading departments at investment banks to become hedge funds in disguise, using the "repo" system—one of the most extreme credit-granting systems ever devised. The amount of leverage was utterly awesome. The investment banks, to protect themselves, controlled, to some extent, the use of credit by customers that were hedge funds. But the internal hedge funds, owned by the investment banks, were subject to no effective credit control at all.

You and your partner, Warren Buffett, have for years warned about the dangers of the modern derivatives markets, particularly credit derivatives, and about interest rate swaps, currency swaps, and equity swaps.

Interest rate swaps have enormous dangers given their size and the accounting that has been allowed. But credit default derivatives took that danger to new levels of excess—from something that was already gross and wrong. In the '20s we had the "bucket shop." The term bucket shop was a term of derision, because it described a gambling parlor. The bucket shop didn't buy any securities. It just enabled people to make bets against the house and the house furnished little statements of how the bets came out. It was like the off-track betting system.

Until the house lost its money and suddenly disappeared. Or the house made its money and suddenly disappeared.

That is right. Derivatives trading, with no central clearing, brought back the bucket shop, because you could make bets without having any interest in the basic security, and people did make such bets in the billions and billions of dollars. Some of the most admired people in finance—including Alan Greenspan— argued that derivatives trading, substituting for the old bucket shop, was a great contribution to modern economic civilization. There's another word for this: bonkers. It is not a credit to academic economics that Greenspan's view was so common.

Isn't it ironic in a sense that what we now have is a world in which every major financial institution is a federally chartered bank.

We had a rule that a business couldn't also be a deposit-insured bank, because we didn't want every business to be able to use the government's credit to do anything it wanted. It was a profoundly good idea to prevent the banks from being in other businesses.

Well now, when the captive finance companies like General Motors Acceptance Corporation are too big to fail and get in trouble, we give them a bank charter so that a company whose main interest is to preserve employment in Michigan gets to use the government's credit in huge amounts to sell more cars. This is crazy. Our whole regulatory system was long designed to prevent what we're stumbling back into as a reaction to a crisis. We do not need a bunch of non-banks with unlimited access to the government's credit.

So some of the steps that we're putting in place now to try to correct the problems are creating new problems.

Yes. We're also recreating old problems because we're reacting hurriedly to a crisis.

I think it's a given that you have to change General Motors in order to save it.

Well, of course. But count on some changes being silly.

The Federal Reserve is today buying assets that it wouldn't have even considered looking at a year ago.

I think the problem is so extreme that nothing non-extreme has any chance of working. I like the fact that it is so willing to do things that have never been done before, because we have problems that we have never seen before. I am a right-wing Republican, and I like the fact that Obama has put into the White House Larry Summers, who is a ferociously smart human being and will try to do the right thing even if it offends some people. I think that's a quality that we need right now.

What do you think of the job that President Obama is doing so far?

Given the circumstances, I think he's doing very well indeed. I don't want to trade him in at the moment for any other Democrat.

Do you have any views on the fiscal side of things—the mix of fiscal stimulus, tax cuts, and the like?

We have to save the financial system, in spite of our revulsion about the way many of its denizens behave. We also need a huge spending stimulus from the federal government. We have a whole lot of things that are worth doing. By and large, the president does not plan to have people standing around holding shovels in the middle of some forest. He is talking about fixing infrastructure and so on. In the city of Los Angeles, where I live, the streets are a disgrace compared with the streets in Japan. Japan had so much fiscal stimulus that you can't find a pothole on a side of a mountain.

As part of the response, the U.S. government and governments worldwide are printing money at a rate that is absolutely unprecedented. Should people be worried about deflation?

Sure. But the dangers from what we have to do are less than the dangers that would come if we responded much as we did in the '30s.

I think it is dangerous to have big disasters in a modern economy. I regard pre-World War I Germany as an advanced, decent civilization. After all, little Albert Einstein got a very good, subsidized primary education in German Catholic schools. But in its economic misery, Germany became dominated by Adolf Hitler. We've seen some god-awful people come to power in various miseries in various countries. Enough misery has huge dangers in a world where we have new pathogens, atomic bombs, and so forth. So we can't afford to have huge economic collapses. I think we have to do what we're doing. We're hooked. And so are the other advanced nations.

What I'm hearing from you, Charlie, is "so far so good"?

It is very reasonable to react with the extreme vigor that's been shown. In retrospect the vigor wasn't quite enough. I would argue that it was pluperfectly obvious the government had to save all these banks and major investment banks.

So on a scale of 1 to 10, how big a mistake was it that they let Lehman Brothers go?

I don't think that was a mistake. You can't save everybody. That would have created unlimited revulsion in the body politic. I probably would have let Lehman go, too.

Even though the market seized up very dramatically afterwards and we had some of the most difficult short-term financial consequences of that failure?

We needed a total correction to a system that was evil and stupid. You can't have a rule that no matter how awful you are, you're always going to be saved. You have to allow some failure. We don't need all our bright engineers going into derivative trading and hedge funds and so on. We need some revulsion.

How and why do you think economists have gotten this so wrong?

I would argue that the economists have not been all that good at working concepts of good and evil into their profession. Nor do they understand, at all well, the economic consequences of bad accounting.

In fact, they've made a profession of driving value judgments out of the subject.

Yes. They say it's not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we're learning is that when you don't understand these consequences, you don't have an adequately skilled profession. You have big gaps in what you need. You have a profession that's like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg.

So in order to cure the lame leg, you would lean more toward an approach to economics that takes human nature into account?

If you totally divorce economics from psychology, you've gone a long way toward divorcing it from reality.

The same could be said of psychology. If you divorce economics from psychology...

That's what's wrong with psychology professors. There are so few of them that know anything about anything else. They have this terribly important discipline that all the other disciplines need and they can't communicate that need to their fellow professors because they know so little about what these other professors know. This is not an unfair description of much of academia.

You've often said that one of the keys to your success has simply been to avoid making the garden-variety mistakes that you see other people make.

Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It's not a competency if you don't know the edge of it. And Warren and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error.

If you had to characterize a few mistakes that you see executives making, which ones jump out at you?

An extreme optimism based on an inflated self-appraisal is one. I think that many CEOs get carried away into folly. They haven't studied the past models of disaster enough and they're not risk-averse enough. One of the very interesting things about Berkshire Hathaway is how chicken it is, how cautious, how low is its leverage. But Warren and I would not have been comfortable with more risk, entrusted with other people's net worths. There was no reason for our financial institutions to stretch as much as they did, with the leverage, the shady people and the compromises.

Let me play devil's advocate. People might say, "Wait a minute. I'm at bank A and I'm competing with banks B, C, and D, and they're running at higher leverage and the system is willing to give them that additional leverage and they're making more profits. Unless I operate at their leverage ratios, I can't pay my traders competitively and I will fail."

You've accurately described the way the culture generally works and you have seen in the present crisis how well it works for the wider civilization when everyone insists on not being left behind in lowering standards. I think the culture is simply going to have to learn to work more the way Berkshire Hathaway does, instead of the way Citigroup did.

Do we go back to the old partnership model?

It would be vastly better. The culture of Goldman Sachs as a partnership was morally superior and better for the surrounding civilization than the culture that came after it went public.

Do you think we're going to be able to go back to some of the more traditional models that you value?

A lot of it is going to be forced, so we'll go some in that direction. However, there are powerful forces intrinsic to the system that resist reform. But I have lived in my own life with responsible investment banking. When I was young, First Boston Company was an honorable and constructive firm and very much served the surrounding civilization. Investment banking at the height of this last folly was a disgrace to the surrounding civilization.

Looking forward, I think we'll be fortunate if we're able to muddle along with 0 to 1 percent growth, 2 or 3 years out.

If you're used to growing 3 to 4 percent per year and you go to no growth at all for 10 years, which is roughly what happened in Japan, then, as human tragedies go, that's not major. That's not the rise of Hitler. It's painful, but it's quite endurable.

Are you worried about China and the possibility of unrest there, given this global economic slowdown?

The people rising fastest in the Communist Party are engineers, and that's hugely desirable. The Chinese people have vast virtues intrinsic to their culture and their nature that make me optimistic that China will keep advancing. If China has to adapt to 4 percent growth instead of 10 percent growth, China will manage.

In many ways I see China and the United States as being natural allies. Both economies are tremendous importers of oil. It's in both of our interests to come up with effective, low-cost, clean energy solutions. Yet we have these perpetual frictions that tend to dominate the debate. Any views on that and what we could do to address those questions?

China is a nuclear power with more than a billion people, talented, driven, and achievement-motivated. I think we have no practical alternative but to get along with China. I think, properly handled, our relationship can be a big plus.

Getting back to prospects for growth, I would bet on technology.

We think alike. And we may even take our present misery and use it to boost our chance of ending up where you and I want us to go. We probably have a man in the White House who is quite friendly to this concept.

A crisis is...

We may be forced into much desirable change. If there aren't a lot of new jobs in derivative trading, maybe the engineers will have to do more engineering. If you look at the history of Berkshire Hathaway, you will find that time after time we did something that I describe as turning lemons into lemonade. Part of my Berkshire Hathaway holdings came from a dumb investment.

I didn't realize you made dumb investments.

I certainly did. I think it's part of a life lived right that you learn how to make some lemonade out of your lemons.

So turn the clock back. Imagine that you're a young law school graduate from a top law school, one of the top grads the same way you were several years ago, what advice would you give to a graduate looking at the world today?

Well, that's easy. I would avoid fields where prosperity depended to a considerable extent on misbehavior. I would not go into a plaintiffs' law firm. I would be afraid of what that would do to me. And I would want to work for people at a business that I admired, and I would take less money to do that.

Sunday, August 23, 2009

The FDIC Goes Broke; Guaranty Bank Find Its Way To The Dustbin Of History (And Three Other Banks Fail)

The FDIC is trickling bank deaths at its New Normal steady state of four or five per week. As we predicted a ways back, at least 250 banks would die before the end of September 2010.

Our bank death scoreboard on the July 1st, 2009 through September 30, 2010 period stands at:

36 down: 214 (minimum) to go

Should be fun.

We also had our second $10+ billion asset bank fail in as many weeks.

This week, Guaranty Bank of Austin Texas took a Glock single shot to the dome...and the FDIC dragged its feet long enough on reforming its rules that govern private equity ownership of banks that We The People ended up placing Guaranty in the hands of Spain's second largest (and probably best run) bank, Banco Bilbao Vizcaya Argentaria (BBVA). Technically BBVA's Birmingham, Alabama based subsidiary BBVA Compass is the acquiror (the South(ern banking capital of Birmingham) will rise again!).

This transaction cost the FDIC Deposit Insurance Fund (DIF) a cool $3 billion on Guaranty's $13 billion asset base (23%). As a citizen guarantor of the DIF, aren't you comforted by the FDIC's desire to keep private capital bidders out of these auctions? Nothing like suppressing capital to get a full and fair price on our behalf!


Of the other three banks that failed, two were in Georgia (numbers 17 and 18 for the year) and one was in Alabama (its second in two weeks). And for the fourth time in less than three months, Stearns Bank of Minnesota acquired a failed bank (this time an internet bank ostensibly located in Atlanta, Georgia called eBank). This puts the Red Jersey of Shame leaderboard at: Georgia 18, Illinois 13, California 8, Florida 6.

Weekly Failure Summary:

eBank, Atlanta, GA
Assets: $143mm, FDIC Losses: $63mm, Losses as a Percentage of Assets: 44.1%

First Coweta, Newnan, GA
Assets: $167mm, FDIC Losses: $48mm, Losses as a Percentage of Assets: 28.7%

CapitalSouth Bank, Birmingham, AL
Assets: $6170mm, FDIC Losses: $151mm, Losses as a Percentage of Assets: 24.7%

Guaranty Bank, Austin, TX
Assets: $13,000mm, FDIC Losses: $3,000mm, Losses as a Percentage of Assets: 23.1%

Straight Average Losses as a Percentage of Assets: 30.1%
Weighted Average Losses as a Percentage of Assets: 23.4%
...another brutal week.

Per the FDIC's own estimates, since July 1st alone the DIF has lost $10.5 billion! Mind you, at March 31st the DIF stood at $13 billion and while the FDIC has taken in rich TLGP guarantee fees during that period, when the 4/1/09 - 6/30/09 losses (which we don't have at our fingertips but are substantial) are taken into account we can safely state that the DIF is, for all intents and purposes, broke.

Now, now, we know the US Treasury guarantees the DIF, so depositors need not fear, but hopefully this recognition of functional insolvency allows us to get past the ruse that the FDIC has fulfilled its duty of charging appropriate insurance premiums and providing capable regulatory oversight. In fact, the FDIC's has been an abject failure at these core functions. If the FDIC DIF were were an actual insurer, the FDIC Deposit Insurance Fund itself would have been taken over and killed by the government.

Keep that track record in mind when the FDIC "experts" espouse their opinions on the "solutions" to our current ills.

As an aside, the FDIC continues its rampant and unrighteous theft from its US citizen guarantors by providing deposit insurance to accounts over $250,000!

Memo To Sheila:
As if your horribly managed insurance "business" was not screwing us all enough, you have decided to insure depositors that - in essence - have not paid for insurance! What the deuce?! For the love of all that is holy, this gift to certain rich depositors is a regressive tax to end all regressive taxes. You are providing free deposit insurance to rich people paid for by the deposits of the portion of the population that does not happen to have two hundred fifty thousand dollars cash on hand. Are you kidding me? At least stop pretending like you don't insure these deposits and charge banks for this insurance. Otherwise, stop violating your mandate and stealing from U.S. citizens out of some sense of unfounded paranoia.

The below video is intended to deliver TILB's message to the FDIC. Anytime it refers to Arthur, his cohort, or the English just substitute The Sheila Bear, her cohort, or the FDIC. Yes, we accept the roles as the French guys. It can be summarize as, "I fart in your general direction, your mother was a hamster and you father smelled of fuckers."

Saturday, August 22, 2009

Steven Rattner Gets His Very Own Expose By New York Magazine

NY Mag's in-depth view into Steven Rattner's professional life is excellent, albeit perhaps not the way S-Ratt, as our hat tipped friend CM refers to him, would have penned about himself. After a career as journalist, BSD i-banker, private equity fund manager, and Car Czar with a disdain for contract law, S-Ratt seems caught in a pay to play scandal surrounding his days as head of Quadrangle (his PE Fund). These paragraphs from the NY Magazine article lay the groundwork for the rest of the story. Enjoy:
Six months after taking the job, Rattner (who declined to comment for this story) had helped to perform a seeming magic trick, rewriting the understanding between the car companies and the unions while bending the companies’ financiers—his friends and peers—to his will. With what seemed a cool, almost arrogant confidence—his casual dismissal of GM CEO Rick Wagoner reflected this quality—he had played a large role in restructuring the American car industry, accomplishing what few had thought possible a few months earlier, and in record time.

Then, on July 13, Rattner announced that he was stepping down. His resignation took most of Washington and New York by surprise. Though the work of the task force was winding down, Rattner had let friends know that he’d planned to stay in Washington, a financial samurai ready to attack the next problem the president set before him. The announcement was accompanied by praise for his performance, but the applause was almost drowned out by a scandal Rattner had left behind in New York. He hasn’t been accused of anything, yet Rattner had become ensnared in a “web of corruption,” as it was sometimes called, in order to get state pension money for his private-equity firm to manage.

In Rattner’s conception, money was necessary but not sufficient. He wanted to be useful, to give back—noblesse oblige, after all. But Rattner’s previous life pulled him back, and faced with the reality of politics, where appearances matter, Geithner and Summers didn’t push for him to stay. “If this thing gets worse, and it sounds like it might, if they jam him,” explains a Treasury source, reflecting the view at the top, “and [New York attorney general Andrew] Cuomo makes things hotter, it’s untenable. Everyone decided it was better for him to go.”
TILB already doesn't miss you Steve. Thanks for helping to destroy America.

Friday, August 21, 2009

Liberty Quote Of The Day: Justice Stephen J. Field - Part II

Yesterday we mentioned that 19th century supreme court Justice Stephen Field has become one of our new monetary heroes. To partly explain why we'd elevated him to such a status, we provided you with Part I in our two part series on Field's dissents during decisions from the Supreme Court that helped legitimize non-asset backed paper currency within the United States. Today, we bring you Part II. This is a collection of statements from Field's dissent in Knox v. Lee, which overturned Hepburn v. Griswold and upheld Lincoln's efforts to debase the money (in fact, Field refused to refer to paper currency as itself "money" and instead only referred to the assets (i.e. gold) that should back a currency as money).

"The statesmen who framed the Constitution ... had seen in the experience of the Revolutionary period the demoralizing tendency, the cruel injustice, and the intolerable oppression of a paper currency not convertible on demand into money, and forced into circulation by legal tender provisions and penal enactments.
"There are unchangeable principles of right and morality, without which society would be impossible, and men would be but wild beasts preying upon each other, so there are fundamental principles of eternal justice, upon the existence of which all constitutional government is founded, and without which government would be an intolerable and hateful tyranny.
"Whenever the fulfillment of the obligation in the manner stipulated is refused, and acceptance of something different from that stipulated is enforced against the will of the creditor, a breach of faith is committed; and to the extent of the difference of the value between the thing stipulated and the thing which the creditor is compelled to receive, there is repudiation of the original obligation. I am not willing to admit that the Constitution, the boast and glory of our country, would sanction or permit any such legislation. Repudiation in any form, or to any extent, would be dishonor, and for the commission of this public crime no warrant, in my judgment, can ever be found in that instrument."
- Justice Stephen J. Field
The man brings it hot and heavy. It's hard to argue with logic though.

Thursday, August 20, 2009

Liberty Quote Of The Day: Justice Stephen J. Field - Part I

This is the first of two quotes we will provide from one of our new monetary heros, Justice Stephen J. Field of the late 19th century U.S. Supreme Court. Tomorrow, we'll give you Part II.

Today in Part I, we provide Justice Field's concluding statement from his dissenting opinion in Juilliard v. Greenman, 110 U.S. 470 (1884), which affirmed the constitutionality of Congress issuing paper money not backed by gold or other stores of value. Justice Field showed a strong Constrained Vision and remarkable long term prescience. The quote speaks for itself.

“From the decision of the Court I see only evil likely to follow. There have been times within the memory of all of us when the legal tender notes of the United States were not exchangeable for more than one-half of their nominal value. The possibility of such depreciation will always attend paper money. This inborn infirmity no mere legislative declaration can cure. If Congress has the power to make the notes a legal tender and to pass as money or its equivalent, why should not a sufficient amount be issued to pay the bonds of the United States as they mature? Why pay interest on the millions of dollars of bonds due now when Congress can in one day make the money to pay the principal? And why should there be any restraint upon unlimited appropriations by the government for all imaginary schemes of public improvement if the printing press can furnish the money that is needed for them?”
- Justice Stephen J. Field
Turn the printing presses on Uncle Ben. There's nobody to stand in your way.


Wednesday, August 19, 2009

Bernie Madoff Has A "Tiny Penis"; Ex-Lover Tells All

This is too f'ing funny. Sorry to all the kids out there, but if Bloomberg can publish it, we can publish it.

Here's a choice excerpt from the Bloomberg article:

“Bernie had a very small penis,” she wrote. “Not only was it on the short side, it was small in circumference. That he was now pointing it out to me was telling. It clearly caused him great angst. I wanted to be careful how I responded. Men and their penises have a strange and unique relationship.”

Still, she said: “I liked this man and didn't want to emasculate him. His tiny penis hadn't prevented me from climaxing.”

“On the bright side,” she concluded, because of its size, “oral sex would be a breeze.”

‘On Fire’
“When we made love, I was on fire,” Weinstein said. “Bernie was a release valve, someone I could disappear with for a few hours. Somebody who would say nice things to me and treat me like a lady. He was an older man, and he was chivalrous. He opened doors for me, stood when I entered restaurants and was never short on compliments.”

In the middle of the affair, Weinstein wrote, Bernie professed his love for her at the Hilton Hotel.

“Usually, we’d spend three or four hours talking, eating, and making love,” she wrote. “I was getting myself together and Bernie was already dressed and pulling his coat from the closet. He was about to walk out the door when suddenly he turned back to look at me. ‘Sheryl, you know I love you.’”

Her fantasies of a whirlwind romance in Europe and staying in five-star hotels began to end. The realities of an affair between two married people took root.

“I knew in my heart of hearts that this was never going to be anything more than it was, simply an affair,” she wrote. “But there was a part of me that wanted Bernie for myself. I wanted to be number one.”

Nassim Nicholas Taleb - Author Of Fooled By Randomness And The Black Swan - Gives A Speech To The Long Now Foundation

Taleb talks about human fallacies and our attempts to use mathematics in dangerous ways and with false precision in this recent speech he gave to The Long Now Foundation. The speech is called "A Crazier Future." It is really an enjoyable to give you depth around the basic views of The Black Swan concepts.

I think my favorite aspect is his well worn use of his turkey metaphor (a thanksgiving turkey spends 1000 days believing a farmer has its best interests in mind - food, shelter, etc. - and then in one fell swoop: black swan). Particularly his point that when you swivel views, from the turkey to the farmer, everything about the perception of the event changes.

TILB is fond of a picture we have in New Zealand where we are posing with an actual black swan on the shores of a giant lake on the North Island. Our photo pre-dates The Black Swan, but trails Fooled By Randomness where Taleb first popularized the black swan metaphor.

In case the embedded video does not work, here is the link.

Tuesday, August 18, 2009

Classic Wall Street Value Destruction

The dangers of taking Wall Street advice are made clear by this Bloomberg article, titled "Taking Wall Street Advice in Rally Means Owing $6,000". We might re-phrase the title as "Taking Wall Street Advice Causes You to Lose 160% of Your Money In Five Months".


Here's a great cut and paste from the article:
Anyone who did what Wall Street analysts advised last March has only losses after the biggest stock market rally in seven decades.

Citigroup Inc., Bank of America Corp. and more than a dozen other firms told clients to purchase European energy producers and U.S. drugmakers while selling banks and retailers, according to combined rankings compiled by Bloomberg. An investor who used $10,000 to buy companies in the highest-rated industries and bet on declines in the lowest since the advance began on March 9 lost everything and would owe as much as $6,000 to cover bearish trades, the data show.

The recommendations didn’t work because companies with the worst earnings led the 46 percent gain in the Standard & Poor’s 500 Index since it fell to a 12-year low five months ago. Securities firms that failed to foresee that the hardest-hit stocks last year would recover fastest steered investors to drug and energy producers, which have trailed the MSCI World Index by more than 24 percentage points, the data show.

Consumer Spending And The Pending Retracement

This graph from RBS shows consumer spending as a percentage of GDP.

We all know "the consumer is 70% of GDP" but the question is, "what will consumer spending end up being as a percent of GDP?" Does 1997's 67% seem crazy? Does anyone think of the 1980s as a period of frugality and restraint? Could the highest point in the 80s (1989) be the new normal at just under 66%? These are the headwinds we face economically, but retracing that profligacy as debt to income corrects doesn't seem like a bad thing to your interpid author.

It will be painful, but healthy.

Sunday, August 16, 2009

Five More Bank Failures, Including The Colonial Bank Doozy; WSJ Reports On FDIC Struggles

Another Friday, another five bank homicides.

The FDIC closed five more banks this past weekend, including the sixth largest failure in the FDIC's history: Colonial Bank at $25 billion asset base.

BB&T stepped up to the plate to takeover Colonial in what looks like a win for the FDIC. The Sheila Bear even went on record as stating, "losses from [Friday's] failures are lower than had been projected." Perhaps not surprisingly, TILB has a alightly different take on the matter.

We have been stating for some time, losses are actually higher than they should be under the FDIC's legal mandate, as the FDIC continues to provide insurance on deposits that are, in fact, not insured. This theft from the FDIC's U.S. citizen owners seems completely ignored by the fourth estate and, frankly, everyone else in the world.

On Friday, all deposits were again protected except potentially $4.2 million from the Community Bank of Nevada. That bank was apparently so toxic that there was no willing buyer at a price the FDIC found acceptable. As such, the FDIC set up a government managed run-off bank and will likely leave those $4 million of depositors out in the cold. As George Orwell warned us so long ago, "All animals are equal but some animals are more equal than others."


While The Sheila Bear may be pounding the table that losses are lower than "projected," TILB will note that a) these losses are still estimates, we'll see how final losses come out; b) it's obviously (and appropriately) weighted largely by Colonial's failure given its size; and c) three of the other four banks that failed had losses that were 50% of assets. Holy shit.

Losses have trended so poorly that even the media is starting to catch on. In tomorrow's WSJ, this article by Joe Bel Bruno will begin highlighting to the masses what TILB has been saying for over a year: losses as a percent of bank assets are trending at a staggeringly high rate.

Banks in the U.S. that failed in the past two years were in far worse shape than those that collapsed during the industry's last crisis, a looming problem for the government agency charged with insuring deposits.

At three of the five banks that failed Friday, increasing the total to 77 so far this year, the financial hit to the agency's deposit-insurance fund is expected by the Federal Deposit Insurance Corp. to be about 50% of their assets.

The biggest hit on a percentage basis is coming from Community Bank of Nevada, a Las Vegas bank with $1.52 billion in assets and an estimated cost of $781.5 million. The failure of Colonial Bank, a unit of Colonial BancGroup Inc. that was sold to BB&T Corp., will cost $2.8 billion, or 11% of the Montgomery, Ala., bank's assets.

For the 102 banks that have collapsed in the past two years, the FDIC's estimated cost averaged 25% of assets. That is up from the 19% rate between 1989 and 1995, when 747 financial institutions were closed by regulators, according to the FDIC.
As the number of bank failures escalates, FDIC officials have been trying to find investors and buyers for terminally ill financial institutions, increasingly by agreeing to shield acquirers from certain losses on assets of the failed bank.
Down to the nitty gritty, as the WSJ's nifty chart shown at the top of the post indicates, this was a binary week. Two banks trended better than average (including Colonial) and three were epically horrible:

Weekly Failure Summary:

Dwelling House Savings and Loan Association, Pittsburgh, PA
Assets: $13.4mm, FDIC Losses: $6.8mm, Losses as a Percentage of Assets: 50.7%

Colonial Bank, Montgomery, AL
Assets: $25,000mm, FDIC Losses: $2,800mm, Losses as a Percentage of Assets: 11.2%

Community Bank of Nevada, Las Vegas, NV
Assets: $1,520mm, FDIC Losses: $781.5mm, Losses as a Percentage of Assets: 51.4%

Community Bank of Arizona, Phoenix, AZ
Assets: $158.5mm, FDIC Losses: $25.5mm, Losses as a Percentage of Assets: 16.1%

Union Bank, NA, Gilbert, AZ
Assets: $124mm, FDIC Losses: $61mm, Losses as a Percentage of Assets: 49.2%

Straight Average Losses as a Percentage of Assets: 35.7%
Weighted Average Losses as a Percentage of Assets: 13.7%
As The Sheila Bear noted, the weighted average outcome is a substantial improvement. However, the simple average outcome was by far the worst we've seen. This was driven by the fact that any of the three truly toxic takeovers would have represented the single worst percentage of assets performer in our dataset by a wide margin (our dataset is incomplete and has not yet been backfilled but covers approximately the last 40 failures).

While we have not yet seen it reported, we strongly suspect that the Community Bank of Arizona and Community Bank of Nevada are controlled by the same folks. The Arizona failure probably had to be done at the same time as the Nevada failure to avoid creating a taint from one to the other. Additionally, the FDIC sold both Arizona failures to MidFirst Bank (based in Oklahoma City). Its Arizona presence just jumped a notch...

Tracking the race for the Red Jersey of Shame, it's good to see Nevada (now three) and Arizona (now two) put some points on the board. We highlighted a few weeks ago that we suspected they had some good, toxic bank failure runway in front of them. The leaderboard now stands at:
Georgia with 16, Illinois 13, California 8, Florida 6.

Friday, August 14, 2009

The Public Option; TILB Debates Government Spending And Socialized Health Care With The Left: Part I

A long Time TILB friend and hard leaning leftist that we will refer to as Batfish took up the baton for socialized health care and made an argument for why government spending is not, in fact, simply taking money from your neighbor (TILB blogged our original argument here for government spending and here for health care).

Below we present a back and forth between TILB and Batfish (and a few brief interludes by OB).

We edited down some of the volume of the content, but we believe the main discussion points remain intact. Without getting too defensive before the main course is served, we feel it's necessary to point out that Batfish often tries to lump TILB in with the GOP, which is not at all an accurate representation of our views. We just want that out there before folks read on and think Batfish's characterization of our views is accurate (it is often not). That said, his points still merit attention as they are deeply considered and indicative the way many well intentioned folks think.

Part I of our debate is below, with an initial focus on the health care debate. Part II to follow in the not too distant future. Let us know where you stand!

Batfish email to TILB and OB:
It's fun to watch the conservative movement kill itself. Please don't stop. And by all means keep on trying to say taxation is theft and there's no such thing as government spending. (Among other things...)

Planet Wingnuttia is getting more and more entertaining every day from here on Earth.

Demagoguing end-of-life counseling issues??? How repugnant. Health reform is unconstitutional? Riiiiight. Death panels? "Im losing my country?" My GOD you people deserve to lose this one. Your strategies pretty much guarantee it at this point. There will be a health care reform law. Mark my words. There has to be. The current system is broken, no serious person disputes that.

WTF is wrong with people? You guys cant possibly support all this right-wing populist anti-government nonsense, even if you have what you perceive to be a self-interest in doing so. There is no evidentiary support for hard core libertarian economics. NONE. You two are much, much smarter than that. There would be no "free market" that is actually also FAIR without a government as the trustee and participant - much more than just referee. You damn well know that. Cmon, you can do better. And yet .....

Whatever. Here's an investment tip: lots of people are buying popcorn right now. Keith and Rachel and John Stewart and Steven Colbert are delivering big time, not to mention Kos and Crooksandliars and the rest of the blogosphere. Butter and salt would make good investments at this moment too come to think of it. It will expand your property base which you can then defend through your novel constitutional interpretations, and then we'll buy MORE popcorn and win MORE seats in legislatures. The wingnuts will keep blowing their gaskets, we'll relish the entertainment value of it, then you can invest more in popcorn. See how it works?


[here TILB cuts down on some cut and pasted text and instead just provides the headline and links to a series of articles Batfish included in his email]

The 'Tea Party' nexus: Mainstream conservatives empowering far-right extremists who want a new civil war
By David Neiwert Tuesday Aug 11, 2009 12:00pm
NH Teabagger on illegal immigrants: 'Send them home with a bullet in the head'
By David Neiwert Tuesday Aug 11, 2009 5:00pm
"Death Panels" - How Rovian
August 11, 2009
by Dave Johnson
'Concerned father' on Fox: Obama's health-care reforms 'sentencing our families to death'
By David Neiwert Monday Aug 10, 2009 1:00pm
The Lies Never Cease To Astonish
August 8, 2009
By Dave Johnson
Whistleblower: Insurance firms ‘very much’ behind town hall disruptions
By David Edwards and Daniel Tencer
Published: August 11, 2009

Batfish sent a quick follow-up email with these two links and the text "Just getting started."
[there are many more articles Batfish sent us, but for the sake of space, we stop adding them here. If you'd like to see the rest of the links, let us know and we'll forward them to you. The sample we included is indicative in that it basically is left-leaning bloggers saying that right leaning folks are a) misframing the health care issue; b) ginning up false anger; and c) profit driven and/or corporate slaves]

OB brief interlude back to Batfish
Interesting. I have not heard most of those "lies" and probably agree that they are false, but have some truth behind them as government healthcare always ends up in some form of rationing, see Canada and France.

The biggest lie pushed by Obama is that his plan is "reform." It is not reform, but change. Reform would be a very different plan and a good thing, but he has to pander to many special interests, both corporate and union. While his plan has some reforms in it, it is not in whole reform, but a move towards a government run plan.
Batfish replied to OB with the following (this is what finally set TILB off):
A "government run plan" ........ so you want to do away with Medicare and the VA? Make our veterans duke it out on the private markets such as exist right now? Do you think they would have a problem with pre-existing conditions? Not pretty.

Personally Id support single payer. Much of the scare stories about rationing in Canada are false. Most Canadians like their system and think we are "off our meds" so to speak. ... The much-dreaded Michael Moore has covered all this but he's been censored out of the whole discussion, as has single-payer. That would be change as opposed to reform.

Anyhoo there is no easy answer to all of this, and no system is perfect but it's good to see some rationality here. Id just like to see the perfect not made the enemy of the good, and I think there is something to be said for noblesse oblige. The commons really does benefit all. The reforms currently under proposal take us in the right direction. There is a way to do this right and if we can have a functional conversation about it and dispense with all the hissy fits and pearl-clutching and fainting couches, we might just get somewhere.
TILB Loses their ability to stay above the fray and responds with the following:
There’s no such thing as a private insurance market, so who knows? Insurance, other financial companies, education, and defense are the four most regulated industries in America. Utilities are in the argument as well. I’d say three of those are amongst the top five most broken industries in our nation. Probably not a coincidence. [After sending that, we thought to come up with another industry that constantly comes up short for its customers. We came up with air travel, also an incredibly heavily regulated industry...pattern continues]
Batfish replied with a cut and paste article that we basically have to show in its entirety, because he later references it several times. We believe it frames the context of Batfish's beliefs fairly well:

Well if you are partaking in all the profit-making festivities, I can certainly see why you dont want the government involved. After all, what's wrong with lining up in the rain for volunteer care in animal stalls? Is this a great country or what?

Rachel Maddow Show: Wendell Potter on the Health Care Industry Putting Soaring Profits Before People
By Heather Wednesday Aug 12, 2009 11:00am

Rachel Maddow talks to whistleblower Wendell Potter about the health care industry's rising profits while more and more Americans lose their health care insurance.

MADDOW: Are you by any chance a health insurance company executive? No? Me neither. And you and I, therefore, even though I know nothing else about you, you and I have one thing in common for sure. We are both in the wrong line of work.

SEC filings show that between the year 2000 and the year 2007, profit of the country‘s 10 largest health insurance companies rose 428 percent. In 2000, they had $2.4 billion in profit. By 2007, it was $12.9 billion.

Now, of course, this is America, we are capital C “Capitalists,” nobody begrudges anyone a ginormous profit, particularly if they‘re serving an important national need, like providing health insurance to the American people.

So, while the 10 biggest health insurance companies were seeing their profits rise over 400 percent between 2000 and 2007, how were they doing at serving that important national need? How were they doing at the whole providing health insurance to the American people thing? Eww! Apparently, while they quadrupled their profits between 2000 and 2007, the number of Americans without health insurance grew by 19 percent.

That seems bad. But not for everyone - also by 2007, the CEOs of the 10 largest health insurance companies were taking home an average compensation of $11.9 million each every year, while the number of Americans without health insurance for whom a burst appendix can mean bankruptcy has gone through the roof.

It was the insurance industry that bankrolled efforts to kill the last effort of health care reform in Bill Clinton‘s first term. And now, the industry says they‘re OK with reform of a sort. They just want to make sure that they don‘t get any competition from a non-profit government-run insurance plan that patients could opt into if they didn‘t like what the private sector was dishing out. You know, if I was a health insurance company executive, I‘m sure I would want that, too.

Joining us now is a former health insurance executive-turned-whistle blower, his name is Wendell Potter, and he was the head of public relations for CIGNA, one of the nation‘s largest insurers. He‘s now a senior fellow on health care at the Center for Media and Democracy.

Mr. Potter, thank you very much for joining us.


MADDOW: The leader of America‘s Health Insurance Plans, the industry association, says that the health insurance industry is being unfairly blamed as the president and Congress try to reform the health care system.

Do you think it is unfair to single them out for blame?

POTTER: I think that she‘s doing what she‘s paid to do. I think that the health insurance industry deserves a great deal of the blame because they‘re very much behind the town hall disruptions that you see and a lot of the deception that‘s going on in terms of disinformation that many Americans apparently are believing.

MADDOW: Why do you think it is that profits for health insurance companies have ballooned so dramatically over the past seven years or so? We‘ve seen since 2000 to 2007, we‘ve seen such a dramatic increase in profits. Why is that?

POTTER: Well, for one thing, since 1993, in particular, the amount of money that the insurance companies take in on premiums, less and less of that is going—they‘re using it to pay medical claims—in 1993, it‘s about 95 percent. In a couple years ago, it was down to just around 80 percent. So, that‘s one way.

Another is that they kick sick people off the rolls when they do get sick or when people get injured—either through, whether they have bought their insurance through the individual market or through small employers.

It‘s—and also, they‘re paying fewer claims.

MADDOW: Well, if the government were to provide a health insurance option to the public, for example, like a widening of Medicare so that anybody could opt into it if they wanted to do—could private insurance companies compete alongside a government-run non-profit plan like that?

POTTER: Well, they could, absolutely. I‘ve seen the health insurance industry change its business models many, many times. The insurance companies who operate now are very different from the companies that operated a few years ago. They adapt very quickly. And the one thing they know how to do is make money.

MADDOW: You worked for CIGNA for 15 years, you left last year.

What caused you to change your mind about what you were doing and to leave?

POTTER: Well, two things. One, it was kind of gradually. One instance or in one regard because I was becoming increasingly skeptical of the kinds of insurance policies that the big insurance companies are promoting and marketing these days. And they‘re really pushing more people into the so-called consumer-directed plans that feature high deductibles, and that is a leading reason why so many more people are in the category of the underinsured.

The other thing that really made me make this final decision to leave the industry occurred when I was visiting family in Tennessee a couple of summers ago, and I picked up the local newspaper and saw a story about the health care expedition that was being held across the state line in Virginia, in the coal mining area in southwest of Virginia. So, out of curiosity, I just went up there to check it out and was absolutely dumbstruck when I went through the fairground gates. This is being held at the Wise County fairground.

And what I saw when I went inside the fairground‘s gates were hundreds and hundreds of people who were lined up, waiting in the rain, to get care that was being provided to them by volunteer doctors throughout the state of Virginia in animal stalls. Other volunteers had come previously to scrub down the animal stalls to make sure that they were sanitary enough for these doctors to treat people who otherwise couldn‘t get any care.

MADDOW: And this is the system that the health industry has been able to construct and lead us into over the past—over the past generation and that they‘re fighting so hard to preserve now.

POTTER: That‘s right.

MADDOW: Wendell Potter, senior fellow on health care at the Center for Media and Democracy, a man who‘s been through a very big change in his life in recent years—thanks very much for joining us, sir.

POTTER: Thank you, Rachel
Batfish followed up that email with this one, which we've edited down to take out another cut and paste article (leaving in the subject line, link, and last paragraph since it gives context to Batfish's final statements):
Even I am pretty gobsmacked by all this ... Wow.

Who are the Shouters?
by Hunter
Wed Aug 12, 2009 at 07:46:03 AM PDT

Standing two feet from the senator, Craig Anthony Miller, 59, shouted into his face, “You are trampling on our Constitution!”
You might ask yourself why, of all possibilities, reforming America's healthcare system is the thing that "tramples on the Constitution" or "leaves the existence of the Republic at risk." You might ask this, because you're probably not insane. But again, this matches what we've been seeing in every "deather" protest so far --people angrily denouncing government intervention and "socialized medicine" -- but they all love Medicare. They don't want government to supposedly decide who's too expensive to keep alive, with visions of "death panels" and the like -- but insurance companies are doing that now, all the time, and there's nary a peep about that. The opposition, in other words, doesn't know the first damn thing about the thing they're supposedly protesting.

The hostility goes back to what I was pondering in my Sunday essay: that the aggressive, furious attempts to even shut down the possibility of a political discussion is reminiscent of the anti-desegregation movement, a point that becomes noteworthy when you aggregate the motives of the "birthers", who loudly deny Obama's citizenship, the "teabaggers", who loudly declare that the same taxes they paid under Bush are tyrannical under Obama, the "deathers", who loudly assert that healthcare reform is secret plot to euthanize seniors and others that the government deems unproductive. None of these positions makes a lick of sense or has any evidence to back it up, but in large part it is the same group of hard-right, almost entirely white conservatives that believes all three at once. If you believe the shouters themselves, in their own words, the healthcare debate isn't about healthcare but about a conspiratorial government and the end of the Republic.

This is, by definition, a far-right position, and less charitably a batshit insane one, and that it has managed to make it so far and be featured so prominently is testament to just how completely the farthest of the far right has captured the Republican party.
At this point, as you might imagine having perhaps followed TILB for some time, we could no longer sit by idly and not respond. Finally the debate began to rage. We will save the bulk of it for Part II, but here are a few appetizers:

It’s kind of disappointing that the argument that the pro socialized health care crowd wants to address is not the argument of why putting the government in total control of something they already have shown an utter lack of ability at is a good idea. Everyone already knows the answer to that, so instead, they want to convince people that are reasonably upset that they shouldn’t be upset because some other portion of upset people are “organized”. I’m a little surprised that organized protest is something the left frowns upon, given that’s their bread and butter.

In any case, this has nothing to do with the core argument: the portion of health care that government is already in charge of is an abject failure so giving them the rest of the system is literally insane (per Ben Franklin, the definition of insanity is doing the same thing over and over again and expecting it to come out different). If Franklin's right, then this is insanity magnified: we’re not just doing it again, we're doing it bigger; we're giving the government more responsibility! I also think the argument that Obama made that health care is a “right” is an immoral argument. Goods and services cannot be a “right”. They are not inalienable. The only way to provide for that “right” is to take liberty from someone else to pay for it. It may be something we choose to provide, but it is anything but a “right.” This is the discussion that should be taking place, but both sides prefer distraction from it, especially the left given it will undress the reality that this is simply another (although on giant scale) unfunded mandate that will result in taking enormous gobs of earnings and savings from some people and granting it to others.
Batfish back at TILB
Well you argument is logically coherent but I maintain rests on unfounded assumptions. If Medicare and the VA are such abject failures why do people like them so much? Admittedly they are costly and I'll admit that nothing is free. But I have tried to address the redistribution problem by pointing out what is sometimes referred to as "mutual reciprocal advantage" esp. in the context of zoning laws. By your argument, all zoning laws are unconstitutional takings of private property. The Supreme Court long ago dispensed with that claim in the line of cases starting with Pa. Coal v. Mahon and its progeny, where the doctrine of mutual reciprocity of advantage supersedes the idea that anyone's property rights are being violated by zoning laws. All property owners benefit from an ordered system of managing real property. Similarly, all benefit from a system of health care that prioritizes services over profits. It doesnt eliminate profits, and what is being proposed is not total government control.

The "rights" debate is the subject of another conversation - for now it's well to ask why property rights should be more fundamental than other rights. If a corporation claims the right to prevent you from drinking water out of a public waterway because they have staked some private claim to it, have your rights been violated? If you then sue and get a court to enjoin a corporation against preventing you from drinking that water, have the corporation's rights been violated? Who owns that water in the first place, and are those ownership rights transferable? Does anyone own the oxygen in the air? How about the genetic information contained within agricultural crops that have taken millenia for indegenous farmers to develop? It's onething to speak in general principles and it's comforting to try to deduct universal principles from them, but it gets alot more complicated when you hit the -road with your rubber.
TILB, diving at the keyboard, began the responding volley with the following paragraph. The balance of the debate will be in Part II...
I don't think it's as complicated as you want it to sound. The air - a shared property - is not owned by any single person and thus can be reasonably regulated, though I have certain rights within the airspace above my property. Health care is not a shared property. If, as I believe you are saying, health care is subject to the same concepts as eminent domain, then I guess you advocate forfeiting your right to your own being if the government sees fit to take your being for public use. Not my cup of tea, personally.

Stay tuned for more in Part II. We are just heating up, I assure you.

Let us know where you stand.

Thursday, August 13, 2009

Obama Compares Public Health Care Option To The Success Of The US Postal Service

In the below clip, answering a Town Hall questioner who worries about the public health care "option" suffocating out private insurance, President Obama replies with an analogy to the package and letter shipping industry, "UPS and FedEx are doing just fine. Right? It's the post office that's always having problems."

We saw this live and quickly thought to ourselves three things:

1) Shock Phase: "wha, wha, what?! Did you just make the argument that government insurance would be akin to and inherently flawed like the US Postal Service? I'm sure someone in your office vetted this analogy ahead of time; how did you let this happen?"

2) Practical Phase: "I don't often wait in lines at FedEx (actually, they create all sorts of convenient innovative alternatives to waiting in lines) but I sure do at the post office. Extrapolating that to health care..."

3) Realization Phase: "In fact, UPS and FedEx are not able to compete with the USPS in the USPS's core business of regular mail because the USPS operates in a manner that creates value destructive returns on capital; so is your point that public health care will similarly crowd out private health care in core functions?"


This whole debate frightens us on a number of levels, not least of which is that the proponents of public health care seem to want the debate not to be about public health care itself, but to be about their perception of fake anger at the Town Hall meetings. As if to convince the majority of America, which is legitimately worried about the creeping death of socialism, that their worries are illegitimate because the Town Hall protests are too angry and too organized.

Who cares about Town Hall meetings? These distraction arguments have nothing to do with the actual merits of health care reform or socialized health care. TILB will address the actual merits tomorrow (though the Whole Foods founder and CEO did a great job elucidating the dangers of public health care already).

For now, we leave you with the source clip for President Obama's frightening analogy of public health care to the US Postal Service:

Hat Tip: Ernie.

Wednesday, August 12, 2009

Whole Foods CEO John Mackey Comes Out Swinging Against "Obamacare"

John Mackey, purveyor of organic food to hippies everywhere, comes out guns blazing in a WSJ OpEd taking on public health insurance. He begins by making the point that socialism's inevitable end is failure. He goes on to note that the more government involvement we have, the lower quality service we receive per dollar. In fact, he argues the solution is less government, more freedom, more personal accountability, and more personal responsibility.

As we occasionally do with OpEds only, we show it below in its entirety. We strongly encourage you to pay homage to the WSJ as they continue to be, by far, the best provider of business news coverage in America. They are quickly closing the NY Times' lead on mainstream geopolitical coverage as well.

AUGUST 11, 2009, 7:30 P.M. ET
The Whole Foods Alternative to ObamaCare;
Eight things we can do to improve health care without adding to the deficit.


"The problem with socialism is that eventually you run out
of other people's money."

—Margaret Thatcher

With a projected $1.8 trillion deficit for 2009, several trillions more in deficits projected over the next decade, and with both Medicare and Social Security entitlement spending about to ratchet up several notches over the next 15 years as Baby Boomers become eligible for both, we are rapidly running out of other people's money. These deficits are simply not sustainable. They are either going to result in unprecedented new taxes and inflation, or they will bankrupt us.

While we clearly need health-care reform, the last thing our country needs is a massive new health-care entitlement that will create hundreds of billions of dollars of new unfunded deficits and move us much closer to a government takeover of our health-care system. Instead, we should be trying to achieve reforms by moving in the opposite direction—toward less government control and more individual empowerment. Here are eight reforms that would greatly lower the cost of health care for everyone:

• Remove the legal obstacles that slow the creation of high-deductible health insurance plans and health savings accounts (HSAs). The combination of high-deductible health insurance and HSAs is one solution that could solve many of our health-care problems. For example, Whole Foods Market pays 100% of the premiums for all our team members who work 30 hours or more per week (about 89% of all team members) for our high-deductible health-insurance plan. We also provide up to $1,800 per year in additional health-care dollars through deposits into employees' Personal Wellness Accounts to spend as they choose on their own health and wellness.

Money not spent in one year rolls over to the next and grows over time. Our team members therefore spend their own health-care dollars until the annual deductible is covered (about $2,500) and the insurance plan kicks in. This creates incentives to spend the first $2,500 more carefully. Our plan's costs are much lower than typical health insurance, while providing a very high degree of worker satisfaction.

• Equalize the tax laws so that employer-provided health insurance and individually owned health insurance have the same tax benefits. Now employer health insurance benefits are fully tax deductible, but individual health insurance is not. This is unfair.

• Repeal all state laws which prevent insurance companies from competing across state lines. We should all have the legal right to purchase health insurance from any insurance company in any state and we should be able use that insurance wherever we live. Health insurance should be portable.

• Repeal government mandates regarding what insurance companies must cover. These mandates have increased the cost of health insurance by billions of dollars. What is insured and what is not insured should be determined by individual customer preferences and not through special-interest lobbying.

• Enact tort reform to end the ruinous lawsuits that force doctors to pay insurance costs of hundreds of thousands of dollars per year. These costs are passed back to us through much higher prices for health care.

• Make costs transparent so that consumers understand what health-care treatments cost. How many people know the total cost of their last doctor's visit and how that total breaks down? What other goods or services do we buy without knowing how much they will cost us?

• Enact Medicare reform. We need to face up to the actuarial fact that Medicare is heading towards bankruptcy and enact reforms that create greater patient empowerment, choice and responsibility.

• Finally, revise tax forms to make it easier for individuals to make a voluntary, tax-deductible donation to help the millions of people who have no insurance and aren't covered by Medicare, Medicaid or the State Children's Health Insurance Program.

Many promoters of health-care reform believe that people have an intrinsic ethical right to health care—to equal access to doctors, medicines and hospitals. While all of us empathize with those who are sick, how can we say that all people have more of an intrinsic right to health care than they have to food or shelter?

Health care is a service that we all need, but just like food and shelter it is best provided through voluntary and mutually beneficial market exchanges. A careful reading of both the Declaration of Independence and the Constitution will not reveal any intrinsic right to health care, food or shelter. That's because there isn't any. This "right" has never existed in America

Even in countries like Canada and the U.K., there is no intrinsic right to health care. Rather, citizens in these countries are told by government bureaucrats what health-care treatments they are eligible to receive and when they can receive them. All countries with socialized medicine ration health care by forcing their citizens to wait in lines to receive scarce treatments.

Although Canada has a population smaller than California, 830,000 Canadians are currently waiting to be admitted to a hospital or to get treatment, according to a report last month in Investor's Business Daily. In England, the waiting list is 1.8 million.

At Whole Foods we allow our team members to vote on what benefits they most want the company to fund. Our Canadian and British employees express their benefit preferences very clearly—they want supplemental health-care dollars that they can control and spend themselves without permission from their governments. Why would they want such additional health-care benefit dollars if they already have an "intrinsic right to health care"? The answer is clear—no such right truly exists in either Canada or the U.K.—or in any other country.

Rather than increase government spending and control, we need to address the root causes of poor health. This begins with the realization that every American adult is responsible for his or her own health.

Unfortunately many of our health-care problems are self-inflicted: two-thirds of Americans are now overweight and one-third are obese. Most of the diseases that kill us and account for about 70% of all health-care spending—heart disease, cancer, stroke, diabetes and obesity—are mostly preventable through proper diet, exercise, not smoking, minimal alcohol consumption and other healthy lifestyle choices.

Recent scientific and medical evidence shows that a diet consisting of foods that are plant-based, nutrient dense and low-fat will help prevent and often reverse most degenerative diseases that kill us and are expensive to treat. We should be able to live largely disease-free lives until we are well into our 90s and even past 100 years of age.

Health-care reform is very important. Whatever reforms are enacted it is essential that they be financially responsible, and that we have the freedom to choose doctors and the health-care services that best suit our own unique set of lifestyle choices. We are all responsible for our own lives and our own health. We should take that responsibility very seriously and use our freedom to make wise lifestyle choices that will protect our health. Doing so will enrich our lives and will help create a vibrant and sustainable American society.

Mr. Mackey is co-founder and CEO of Whole Foods Market Inc.

Tuesday, August 11, 2009

Atticus Capital To Close After 15 Grueling Years Of Getting Rich Investing Other People's Money

It can be hard work using other people's money to pay yourself a few billion dollars. Tim Barakett of Atticus Capital, for one, is tired of it. So, he's retiring; rumor has it he even plans to meet his children. Enjoy your well earned billions, Tim. The Rothschilds appreciate your hard work.

Below is Tim Barakett's letter to clients announcing his intentions to close Atticus's main hedge fund, liquidate positions and return capital to clients.

Aga Aug 11 2009 Ltr Final

I think it would have been more effective if Tim had just sent folks a link to this video:

Chappelle's Show
Dave Gets Oprah Pregnant
Buy Chappelle's Show DVDsBlack ComedyTrue Hollywood Story

Monday, August 10, 2009

There Is No Such Thing As "Government" Spending

There is no such thing as government spending. Period.

The government is not a private citizen that creates wealth that it subsequently uses for its own investment or consumption. The government does not "earn" money.

The government is simply a conduit through which we make collective decisions.

Government is, in essence, a private club with broad membership. It makes regular assessments (taxes) to fund what we require of it. However, unlike most clubs, it does not assess members evenly or based simply on usage, it actually charges successful members (from a monetary success standpoint) a greater assessment than less successful members. It charges an uneven rate for its membership.

We make the point about the non-existence of government spending because we believe it is vital to understanding what "government spending" actually is. Government spending is simply the act of taking money from certain citizens to use for some purpose that, presumably, those citizens would not make via the sum of their individual collective decisions. It serves as an override on individual liberties in the name of the greater good.

In order to grasp this important idea - that the government has no wealth to spend that it does not first take (or prepare to take via borrowings) from its citizens - we need to recognize that this is a limitation on freedom; that man should not be allowed to retain the fruits of his labor or to use them as he sees fit.

Warren Buffett wrote that value investing is like an inoculation: it either quickly takes or it never does; once explained people either quickly grasp the concept or they never do. The concept of government spending that we are talking about is similarly an inoculation: you either quickly understand or you don't that if you ask your government to spend on something, you are asking the government to take money and liberty from your fellow citizens and redirect it toward your purposes and away from theirs.

The majority of people either do not understand this or willfully ignore it...and yet it is so fundamental to our lives.

TILB was skimming Facebook the other day and noticed that a friend from college wrote, after being frustrated with her inability to get private health insurance at a price she appreciated, "bring on the Obama health care plan." Her view was that the government should spend "its" money on her health care insurance rather than her spending her own money. If instead we worded her desire as, "I would like to force my neighbor to pay for my health care plan because I don't like having to pay for it myself," we would quickly extrapolate the implication that her actual request is for the few to pay for the needs of the many. Clearly her request is not that the burden or assessment should be made equally, otherwise she would reap no benefit. Rather, she implicitly believes it should be an unequal system. She obviously does not believe she should pay for other folks' health care; she doesn't even think she should have to pay for most of her own! Instead she wants to go up the pyramid and take resources from the few and shower them on the many.

Yet I honestly doubt she recognizes that is the essence of her request.

We cannot ask the government to spend in a vacuum. All we can do is ask the government to confiscate wealth from our neighbor in order to sprinkle our neighbor's former wealth onto others or ourselves. When thought of this way, the insidiousness of "government spending" comes quickly to light. It seems easy to ask the faceless, bottomless pocket of government for more handouts. It is quite another thing to go next door and shakedown our neighbor to their face.

Sadly, that is exactly what a request for government spending is: an impersonal way of requisitioning our neighbor's wealth.

TILB stands against this theft of liberties other than for limited constitutional purposes: national defense, protecting personal liberties, prosecuting cheats, and contract enforcement. All else falls outside the duties of government. If not explicitly limited in this way, the incremental theft of freedom becomes too easy to give into and the desire too great to resist.

After writing the above paragraph, TILB went searching for a good quote on the matter. We came across the below from Congressman Ron Paul, which we will leave you with for today:
"In a truly free nation, the government acts only as a referee by protecting property rights, enforcing contracts, prohibiting force and fraud, and providing national defense. Such was the system [envisioned] by the Founding Fathers, who strictly limited regulatory and tax powers in the Constitution. They were tired of having their business affairs managed by the Crown, so they created a servant government that would allow freedom and capitalism to flourish.

"Today’s political rhetoric demonstrates that the servant has become the master. Most politicians, and too many Americans, have accepted the premise that government should plan our lives and control the economy. This subservient mindset encourages political pandering, as candidates strive to convince voters of their superior plans to take care of all of us. For a nation founded upon rugged individualism and self-reliance, the modern political landscape represents a wake-up call. Unless and until Americans begin to reclaim the mentality that made us great, we are destined to slide further into an economic and political malaise that cannot be solved by the grandiose plans of politicians."

PS: Keep your eyes peeled for a similar post in the future about corporate taxation, which is a misnomer. There are, of course, no corporations that are not ultimately owned by people. Corporate tax is simply another form of personal income tax.