Sharp Market Declines Held Up By Corruption

Mish's Global Economic Trend Analysis: Soft Canadian Job Market Masked By Public Hiring Binge: "Soft Canadian Job Market Masked By Public Hiring Binge."

How often are people here in effect, employed by the us government through bailouts and corporate welfare? How accountable can the recipients be in those situations?

Smells Like Enron (Lehman Brothers)

Lehman Brothers, a sort of Wall Street cousin to Bear Stearns (read: should have collapsed a long time ago), is showing that it finds Enron style solutions to financial inconveniences a usefull way to stave off pending disaster.

The company spun off a hedge fund staffed by "former" Lehman executives. R3 Capital Partners is a group that was essentially established to "buy" Lehman's risky investments, taking them off of Lehman's balance sheets.

Lehman is going out of its way to deny that it has any "ability to exercise significant influence'' (Lehman Spokewoman Keri Cohen) over R3. But the evdidence shows otherwise:

1. R3's employees maintain their restriced Lehman stock as if they were still Lehman employees.

From Naked Capitalism
"the former employee charged, based on information provided by several people at Lehman, that the R3 employees' restricted stock was still vesting on its original schedule, as if they were still on the firms' payroll. If true, this is both highly unusual and costly."

2. Lehman assets could account for nearly half of the fund's investment base. According to Lehman's own advisor Felix G Rohatyn in an interview with Andrew Sorkin of The New York Times, money like that does buy influence:

“The big difference is the political element,” he said. Mr. Buffett is seeking the best return when he invests; that’s his only goal, Mr. Rohatyn said. For Dubai and China, whether the investment returns 10 percent or 20 percent — or perhaps much less — is almost beside the point, he suggests. What they really want is influence on the world stage, despite their insistence otherwise."

Yes the article and the quote are discussing a different idea, but Rohatyn's point is that money buys influence. But given this quote an admitted 48% holding by Lehman in R3, could Rohatyn deny that Lehman has influence in R3?

3. Lehman is R3's Landlord.

The Empire Strikes Again
R3 allows Lehman to hide the truth from investors, creating and funding it's own buyer for potentially failing assets. This is very much like Enron's Chewco created to hide debt off balance sheets and inflate profits. Chewco was named after Chewbacca, a Star Wars character, I have to say "R3" sounds similarly named considering the star droids R2D2 and C3PO.

[Naked Capitalism and Bloomberg News]

A Guaranteed Way to Save the Markets and the Economy

MarketWatch's David Weidner takes an amusing look at some of the recent actions government has taken to prop up our faltering economy.


[MarketWatch via The BigPicture]

Further Reading: Bloomberg

Further Evidence of Blatant Fraud on Wall Street

Karl Denninger today rants about Merrill Lynch's recent declaration on their earnings call that they had evaluated some of their securities at $11 Billion. And today they're declaring the value to be $6.7 Billion.

The consequences of these types of action are further market erosion as confidence is blown away. To have misstated value to this amount is incredible. The markets are already facing a confidence crisis with the federal government doing everything to the point of offering government guarantees and loans to keep these companies afloat.

Making misleading statements like this violate SEC regulations. The problem is regulators have been effectively missing in action these last few years, which has lead us, at least partially into this economic mess in the first place.

The question now is will things like this continue to go unchecked? Or will regulators step in and deal with these issues so we can save some small bit of market confidence?

Further Reading:New York Times

Chinese Spying Out in the Open (In the Name of Security)

Senator Sam Brownback (R-KS) today has called out China for it's big brother approach to the coming Olympic Games.

Brownback said that China's Public Security Bureau has communicated with hotels, warning them of "severe retaliation" if they refuse to install government monitoring equipment. This is apparently directed at monitoring the internet use of guests.

The State Department Warns:

All visitors should be aware that they have no reasonable expectation of privacy in public or private locations. All hotel rooms and offices are considered to be subject to on-site or remote technical monitoring at all times.

Of course the U.S. Government doesn't have the inconvenience of having to go to those hotels, they can now go directly to AT&T and Verizon. And yes while Brownback was a critic, he voted for H.R. 6304 the FISA "compromise" bill.

Further Reading:[Associated Press] [Catholic News Agency]

Popular Senator Ted Stevens Indicted

Looking out as a citizen, the political landscape can seem incredibly corrupt. Personally I know that speaking out can feel very futile. The amount of money and influence proliferating politics is overwhelming. Yes a vote still means something, but when put up against large corporate money a constituent can be left feeling very small.

In Washington D.C. today a federal grand jury returned an indictment related to false statements Steven's made on his financial disclosure forms. More than $250,000 in gifts are a part of the charges.

Sen. Stevens has been under investigation for his relationship with VECO Corporation, an Alaska oil pipeline company recently purchased by CH2M HILL. According to the Justice Department's Release former VECO executives have pleaded guilty to providing more than $400,000 in corrupt payments to Alaskan public officials.

The senator is wildly popular, he's brought a lot of money into his state, MarketWatch points out that he's the longest-serving Republican Senator in the party's history representing Alaska for some 40 years. Some months ago when I first heard the story it was on PBS's NOW there was some doubt as to whether or not such an indictment would ever be produced.

"Certainly, Sen. Ted Stevens is involved somehow, but whether he will actually be charged with anything remains to be seen."

David Shurtleff Nov. 2007

Stevens announced he will step down from his ranking positions in the Senate for the time being and maintains his innocence. He is up for re-election this year.

While I don't see this as any end to the frustration, for those of us concerned about the rampant corruption, this indictment provides a glimmer of hope that perhaps these actions will not go unchecked, and warnings will not go completely unheeded.

Update: The Crypt blog reports that The Senate Ethics Committee has been under fire for not taking up an investigation on Senator Stevens, with this latest indictment the Department of Justice has allowed for the ethics committee to not take up the issue as they "defer investigation into matters where there is an active and ongoing criminal investigation."

Are Bailout Concerns "moralist and purist?"

Tanta at calculated risk yesterday posted this

there are more than a few people who are more interested in getting a front-row ticket to a morality play than working through a financial crisis with the least (further) damage to the banking system. ...I for one would rather try debating with a pragmatist than a purist or a moralist.

Tanta's post completely and openly insults and alienates the Calculated Risk Readers.

I see a growing frustration with the state of our (The U.S.) political, financial, and legal landscape. I see large numbers of people looking for outlets.  Calculated Risk represents one of those outlets.  

The frustration is with corporate malfeasance, and the seemingly (or blatantly )

corrupt government policy that goes to support it.  I'm not the only one decrying the growing legal corruption and moral hazard that this privatized gain, socialized losses program breads.

What's wrong, Why are people angry?

• Prudent market investors get screwed. Dropping market confidence.
• For prudent real estate investors there's no clear strategy.  The markets are much less discernible.
• Tax payer is forced to hand over money to corrupt or inept institutions
• Risky, careless and sometimes illegal behavior is rewarded.
• This type of policy stability through inept and failing institution.
• By not shutting down some of these institutions new institutions don't have a space to come in and rebuild.

There are alternative ways to "work through a financial crisis."  The $29 billion dollar bailout to Bear Stearns and JP Morgan/Chase went to support inept management, this was not a necessary part of the takeover. Why is Alan Schwartz allowed to break the law, and walk away with his corporate bonuses? How many investors who correctly identified the problems with Bear Sterns lost money when the CDS's (Credit Default Swaps) they purchased ended up worthless?

In my opinion there is a growing perception that large corporate money gets the attention of policy makers at a detriment to the individual.  There appears to be a growing disconnect between policy makers, and their constituents.

Yes a lot of people are angry about helping to cover the salaries of Angelo Mozilo, Jamie Dimon, Alan Schwartz, or James Cayne.  It's not OK to reward criminal behavior that further degrades the markets and the economy. An orderly collapse may be the best solution, but an orderly collaps does not have to be a "bailout" for James Cayne.

Gawking or not, many of us, your readers, are "pragmatic."  Tanta, your characterization of "moralists and purists" might as well have said "cranks and crackpots."

Update: Mish's Post today is a great example of the concern I am talking about.