Category Archives: News and politics

In a couple of examples of how to exactly not improve things, two CEO’s have walked the plank.  First out was Rick Wagoner from GM. Pushed or jumped doesn’t actually matter, Wagoner is gone from GM.  Over at Air Canada, Monte Brewer, the CEO is gone, the airline wobbling around the cusp of bankruptcy.  Again.

Union bashing is going to be listed as an Olympic sport in the auto industry shortly, then in the airline business, as the numbers get jiggered, smoke and mirrors predominating.  The numbers being tossed around regarding what union folks make in the car business are so absurd as to be almost laughable, if it weren’t that people with axes to grind, actually believe them.

First off, union members at GM do not make $78 an hour.  That number is the total cost of having an employee, unionized or not.  The rule of thumb is take the maximum hourly wage and double it. 

That’s the cost of the wages, as well as support services like HR, management, payroll, water, toilets, lights, administration, interest payments and earnings, operating expenses, depreciation, withholding taxes, Employment insurance premiums, mandatory health care premiums and all the other expenses that go into having a business with more than one employee. 

The business (like GM, or Air Canada) gets to deduct all those expenses from their pre-tax income to reduce the corporate taxes, which is conveniently overlooked in the name of shareholder value. 

According to some industry spokesmeat, Toyota, a non-union automaker, have employee costs around $50 per head.  Which might even be true, if you don’t add all the the usual costs associated with having an employee.  Sure sounds like those damnable unions have hamstrung GM and Chrysler, right? 

No, it’s a paper shuffle comparing apples to wood chips, to justify GM and Chrysler demanding a $28 dollar cut in wages from those lazy union sluggards.  I’m being ironic here, don’t get angry.

The same paper game is going to be played shortly at Air Canada, as the national flag carrier is about to go into the toilet for the second time in five years.  The argument is going to be labour costs again.  Those dirtbag union members and lazy high-paid pilots are just crushing our nuts, while over at Westjet, their cost per seat mile is so much lower, as they don’t have unions. 

Funny how it will sound exactly the same as the GM vs.. Toyota cost argument, comparing apples to wood chips again. 

Which leads to the real story:  The end of unions.  Which would be a posting later in the week.

The inbox is a sad place some days.  Over the last few days, it would seem that a distant relative has died, leaving significant sums of money unclaimed in the Ecomas Bank of Lome-Togo. 

Also, there would seem to be $22 million waiting for me in the Standard Chartered Bank of Ghana, the proceeds of which, I can have 30%, from the selling of rails, steel, copper and crude oil, as long as I’m willing to help.

This doesn’t include the missive from Edward Peters and Associates, encouraging me to help them transfer money that might be confiscated by the Bank as an unclaimed inheritance.  Of course, I’ll be listed as the next of kin.

Golly, a distant relative (a P.Eng no less) never before known, living in Togo, kicked it and left no inheritor.  If only I could remember…

Ah yes, Uncle Estes Smith.  A distant cousin of my grandfather, who, in the 1930’s fought with the Republicans in Spain.  He was wounded in a battle near Barcelona and was sent to El Taref province in Algeria to convalesce.  In the hospital, as the days passed and the patients recovered, boredom set in.  Gambling was rife in the wards and through the clever turn of a 9 of Spades, Estes Smith wound up owning the majority share of a bordello in Casablanca.

Upon discharge from the hospital, Estes traveled to Casablanca and ensconced himself in the proprietor’s suite at Le Chat Noir, a luxurious whorehouse catering to the very kinky whims of Captains of Industry, Diplomacy and Politics. 

Unbeknownst to Uncle Estes, agents of the German National Socialist Party had installed an elaborate and very well engineered electronic eavesdropping system in the various rooms of the house.  One Tuesday Uncle Estes confronted a youthful Aryan man fiddling with some mysterious boxes in the basement and uncovered the rig.  A .45 calibre gun was involved, to Estes benefit, as Casablanca was a troubled city in those days and Uncle Estes was nothing if not prepared for trouble.

In exchange for his life,  Johann joined Estes as a partner, with an equitable split of the work:  Johann would do all of it.  Estes would take the data not concerned with the war and Johann would have the political information. 

Johann didn’t know that Uncle Estes worked informally with the British Security Coordination office in New York City, as Uncle Estes was a one-time gin crony of William Stephenson.  Not only was economic information being transmitted surreptitiously to the Hydra receiver near Oshawa, thence to New York, but political information regarding the opening of a Second Front during the war (Operation Torch) came back to Le Chat Noir to be ‘found’ by the dim-witted Johann.

After the War, Uncle Estes moved into a life of leisure.  The war had been good for Estes, as using information from Le Chat Noir, had allowed him to almost completely corner the market on vanadium, a strategic metal for the arms industries on both sides.  There were rumours of blackmail of Vichy officials who had patronised Le Chat Noir, but that was also said about the general staff of Allies after the Torch landings.  Apparently Estes travelled to California, in the post-war years, tiring of Casablanca. 

There seems to be a gap or two in Estes’ history, the Hollywood Period, perhaps for good reason.  There were rumours that he was involved with the same woman who was a companion of Efrem Zimbalist Sr.  Some of the rumours involved a company called EG&G and Howard Hughes, but nothing was ever said to confirm or deny things.  Nevada and Havana were occasionally mentioned in the very infrequent letters.

It would seem that after his Hollywood period, Estes returned to Africa, as the “coordination of aviation” for both the Belgian Congo and Rhodesia, which might explain some of the Howard Hughes rumours.  There are stories of DC-3’s landing in areas where there were no airports and uniforms for the pilots from a warehouse in Langley Virginia.

If Uncle Estes wound up in Togo, with a fat bank account, then I wouldn’t be surprised.  If the lawyer in Togo told me that Uncle Estes died while boinking two double-jointed, bisexual, Peruvian gymnasts, that wouldn’t surprise me either.

Perhaps I should communicate with Barrister Anwuru Ben Obodo, Esq, regarding Uncle Estes’ Estate.  Uncle Estes must have died a decade or more ago.

Or, perhaps we’ll just let sleeping dogs lie. 

Godspeed Uncle Estes.  We hardly knew ye.      

With the death of British actor Natasha Richardson this week, there has been renewed screeching for all kinds of mandatory safety appliances to be applied to every sport from skiing to chess.  This is only human nature in action as like most dumb beasts we only know how to react, instead of think. 

That Richardson died from head injuries is very sad, as she was very talented and it is even sadder that her injury was from an apparently minor fall on a bunny hill while taking a lesson.  We tend to forget that humans can be a bit on the fragile side when it comes to blunt force.

Safety equipment is one of those things that gets some people up on their back legs about a nanny society, kids in a bubble-wrap world, government over-legislating everything, individual freedom and so on.  There is some validity in that point of view. 

We have warning labels on aluminum step ladders cautioning us about everything bad that could happen if we use one.  There are bright yellow labels telling us not to use a step ladder to stir coffee, as the coffee might be hot and a step ladder could spill the coffee causing burns.  Beware! 

Perversely, there are no warning labels on handguns, shower heads or your blender.  After all, it is much more likely that you would use your blender to make fruity alcoholic drinks, get drunk, go play with your handguns in a shower, slip, fall, break your shoulder, get laid off, wind up on the street and need a lawyer to sue somebody for $12 million. 

The legal system is to blame a bit here.  Personal-injury contingency law specifically.  Contingency law means you, as the moron playing with a handgun, in a shower, while drunk, don’t have to put any money up.  The lawyer gets paid a percentage of what you eventually might win. 

Theoretically, this helps the disadvantaged individual go after the big corporations, who can essentially tie things up in court for decades and bankrupt the poor guy who fell in the shower, with a handgun, while drunk and lost his job.  Remember, lawyers don’t work for free and they don’t sue poor people, as there is no likelihood of actually getting paid, which is the real objective of contingency law. 

The odds of suing a corporation are much better, as the corporation will pay out on a lawsuit, if only to make it go away.  Right or wrong doesn’t actually matter, just make it go away with confidentiality agreements taping your mouth shut forever. You get a piece of the $12 million, probably around half of it, while the lawyer gets the other half. 

Let’s see, a $6 million dollar payday for filing some papers, answering some phone calls, having your clerk spend time online with Lexis-Nexis to find the case law and precedents, then signing a letter that a drone typed up.  Not a bad payday at all. 

Which explains all the warning labels.  At some time, the manufacturer was sued and settled the case, the opposition lawyer demanding payment because the manufacturer didn’t warn the customer that using a metal step ladder to stir coffee would be a bad idea, not only because of overhead wires and a danger of electrocution, but because the coffee might be hot and burn you.

In an adversarial legal system one side has to prove the other side are a bunch of bloodthirsty criminals while their client is as innocent as can be.  He didn’t know that a blender could make alcoholic drinks and that playing with a handgun in a shower, while the showerhead was spurting out water on a slippery tub, could result in such serious, career-ending injuries. 

There must have been collusion between the blender manufacturer, the hand gun company and the shower head monopoly to hide their product flaws.  Sue, dammit, sue!  Shortly, we will see big red warning labels on blenders and showerheads:  There won’t be any on handguns, but that’s another posting.

Which leads us back to Natasha Richardson and helmets for skiing.

Companies who make helmets, like Bell, Arai, Riddell (football) and so on, have all been sued at one time or another for deliberately foisting off shoddy products and not warning their customers that using their products is no guarantee you won’t get injured.  At least that’s the perspective of the opposition lawyers.

Simpson Safety, specifically Bill Simpson, was a pioneer in helmets and other safety equipment for motorsports for many years.  The story goes that a motorcycle racer at Daytona, on the big track, during a sanctioned race, lost it, high-sided and hit the concrete wall head-first somewhere in the neighbourhood of 200 miles per hour.  He died of course.  The helmet was a Simpson. 

Then the lawyers got involved.  There was no warning on the helmet that it wouldn’t protect you at 200 per into concrete, so Simpson lost and it bankrupted the company. 

The lesson, no matter how dumb, is that there will be a lawyer somewhere, who will try.  As a company, you have to defend yourself and that costs money.  Lots of money for lawyers, that doesn’t go to profits, shareholders, employees or even research to make better products.

So, why do some people want helmets for skiing?  Simple enough, it’s easy to bang your head while skiing.  Just like it is easy to bang your head riding a bicycle, doing tricks on a skateboard, or for that matter, making love in a bed with a big headboard. 

<Insert your own cynical and dirty-minded comment here.>

Had Natasha Richardson been wearing a helmet, the bump she took might not have eventually killed her.  Or, it wouldn’t have mattered a bit.  I don’t know, I wasn’t there and neither were you.

However, some common-sense should apply.  If there is a likelihood of you banging body parts into hard objects, then it’s prudent for you to wear a helmet, or other appropriate protection.  Or not engage in the activity in the first place.

The question becomes how much can you rely on the protective gear?  There will always be circumstances where even the best safety protection won’t help.  Circumstances that no reasonable person could predict.  That would be the tiny little crack that personal injury lawyers try to squeeze through.

Scotland used to (I don’t know if they still do) have a finding of “Death by Misadventure”, meaning the deceased was in the wrong place at the wrong time, not necessarily doing something that contributed to their own demise. 

We need something like that, a finding that things go bad and sometimes it happens for no good reason to good people for no better reason than Shit Happens.

Which is probably exactly what happened to Natasha Richardson. 

Sadly, shit happens.

We’ve written earlier about the whole financial mess in the three previous posts as well as back here.  In our last instalment of the autopsy, we’re going to point some fingers.

First off, home buyers who fell for the luscious dreamy stories of the New American Dream.  Your house would exponentially increase in value yearly and by refinancing the increased equity, you could get that big screen TV, the SUV, the xBox, the rims, the clothes and everything else you want. Sign here.  Never mind the stuff about the balloon payment.

Second finger:  Mortgage and loan officers who were compensated on the loans they wrote.  Not if the loans are worth a pinch of manure, just the dollar volume of the loans they wrote.  There was no control, no due diligence, no review.  Why?  Because the managers of the loan folks were compensated on how much their people wrote.  Funny that.

Third finger:  Fannie Mae and Freddie Mac.  Supposedly these were mortgage lenders of almost last-resort for those who were borderline for a bank or mortgage company to touch, enabling risky credit borrowers to have a half a shot at getting a house.  Fannie and Freddie started behaving like an investment bank, leveraging derivatives on derivatives, playing with mythical money that wasn’t theirs.  Due diligence?  None.   

Fourth finger:  The Security and Exchange Commission and the Federal Reserve Bank.  Their role was to be policeman for the investment houses and the banks respectively, setting rules regarding how much and how far the investment houses and banks could go.  Imagine being told not to do something by a fluffy white six week old kitten.  The phrase ‘useless as tits on a bull’ comes to mind.

Fifth finger:  The investment houses and banks who decided, using the assumptions of their quants, that Asset-Backed Commercial Paper, being AAA rated would let them invest in riskier instruments.  Conceptually their back was always covered with the mortgage packages if things went wrong in that vanadium mine in Sudan, or the derivative of the derivative’s hedge on gold prices.

Sixth finger:  Standard and Poor’s, Moody’s, Fitch and the other rating agencies.  These shops and their quants were the ones who decided that these loans were AAA or better.  It either means collusion with the financial community, or they were smoking crack and did ratings while high.  Collusion means their ratings mean nothing today, have meant nothing before and will mean nothing in the future.

That sixth finger is the nasty one.  It speaks to exactly how broken the system really is.  Common sense, prudent, financial management has been replaced by quants, bond ratings and assumptions, run through a computer to do the high-end statistical math to prove or disprove something as fast as possible for shareholder value.

Truly, what we see, doing the autopsy here, is collusion from top to bottom.  A fully broken system, based on a wink and a nod, designed to make money for everyone on the inside, but never for those poor mooks on the outside:  The customers, the suckers, the government and anyone not privy to the insider line. 

The solution?  Jail time comes to mind, but that would entail arresting all of Wall Street, most of the banking industry and seven tenths of the homeowners more than one payment behind on the mortgage they know they can never pay down. 

A better solution might be this.  First off, the timeline for investments succeeding or failing is now down to the second.  A simple fix is no stock, bond or other financial instrument can be bought or sold more than once in a 24 hour period.  This takes significant edge away from the computerized machinations of the quants, derivatives and hedges.  It rips up the global derivative market based on nothing more than working a clock and hallucinatory market wobbles. 

These things aren’t real, but a lot of companies are making money on insider knowledge moving huge amounts of money quickly, upsetting what is near-real in the actual market.  You’ve seen the market surge and fall based on nothing tangible in the last few months.  That’s derivatives and hedges at work and they dramatically upset real business.

Business is based on real profits and real losses, not mythical derivatives.  A 24 hour hold stops weird, incomprehensible swings in values based on nothing more than rumours and sunspots in a quants’ assumptions and higher math.  Maybe investors will buy and hold stocks for more than a week. 

Second, henceforth if you’re a bond rating agency, you become the insurance for an investment.  If you haven’t got the balls and the bucks to back up your rating, then shut your pie hole.  You don’t like it?  Too bad.  You screwed the rest of us with your bullshit ratings on decades of smoke and mirror jobs for your buddies.  Don’t let the door hit your ass on the way out. 

And no, you can’t pool the risk.  If your company says an investment is AAA, your company is on the hook to insure it to 80 percent of the value.  Have the cash on hand to back it up, or shut up. 

Third.  If you’re a bank, a bank holding company, an investment house, broker, investment instrument packager, or any other weasel term you care to invent to snake through some legal loophole, be prepared to have $1.00 on hand in cash money for every $3.00 you’ve got invested.  Not stocks, not bonds, not derivatives, hedges, or market declared value.  Cash.  Gold will do.  Actual gold bars. You have shown you can’t be trusted, so we’re going to enforce some serious rules.

If you exceed 3 to 1 debt to cash, the government will take your company in the course of an afternoon and send your miserable ass to jail on a felony Investment Fraud rap.  It won’t be ClubFed either.  Your cellmate will be a serial rapist named Three-Legged Lenny.  He will be your new friend.  You’ve had your last suck at the government teat.  If you don’t like it, go die in a fire.  The TARP has been rolled up.

Fourth.  Fire every investigator and bureaucrat working for the SEC and the Fed.  Remember that Dutch Regan fired all the air traffic controllers:  It can be done.  Hire new people.  You will have several thousand applicants, many of whom will be ex-Wall Street insiders who have axes to grind with their former employers.

Their incentive will be this:  For every stock scam, ponzi pyramid, insider trading rip-off and balloon float they uncover, they get 20% of the potential value of the scam as a non-taxable cash bonus.  Choose the most savage ones as field investigators and set them loose. 

The 20% bonus incentive will have the SEC and Fed investigators digging hard and finding the liars and bullshit artistes.  Statements filed with the SEC will actually mean something. 

There will be many arrests and many convictions.  There will be ‘no-knock’ Federal warrants being served in the Hamptons at 0300 and a lot of bankers being perp walked in their shorts.  Too bad.

The objective is a level, fair, playing field and insider trading is illegal.  Always has been.  Fraud is illegal.  Always has been. 

Convicted of Insider Trading or Investment Fraud?  All your assets are forfeit.  It’s called the RICO statutes and they’re already on the books.  Nothing new to pass or legislate.   

If the investment houses, banks and brokers are as squeaky clean, honourable and liquid as they say they are, then there’s no problem.  They’ll come through rigorous investigations just fine.  We need Wall Street fixed and fixed fast.

Plus, Three-Legged Lenny has friends inside who are lonely and want cellmates too. 

Successful companies will thrive.  If you make a product or service that makes sense and a profit, you’ll do fabulously as you should.  People will always invest in good things that show a profit, long, medium or short term.  Owners of those companies will make plenty of money by being smart and wise. 

Employees of those companies will have jobs that they might be able to rely on for more than a week at a time. 

Paper shuffles and investment dodges will be eaten alive, the bones spat out into the gutter to bleach white in the sun.

As for homeowners who are upside down, stuck in house they’ll never make the payments on?  You get one shot at a renegotiation with your bank.  You’ve got one year to show that you can make it work and the government will help, a little bit, perhaps with a small grant per month, otherwise you’re finished. 

If that means you have to work three part-time jobs to make it work, then it means you work three part time jobs.  Immigrants have been doing that for generations to get a piece of the American Dream, busting their ass to make a go of it. 

If you don’t want to keep your house, or can’t keep your house, then you take the hit.  You signed the mortgage.  Nobody held a gun to your head.  They might have lied to you, but you still signed up.  Sorry.

Nobody said the American Dream came with a guarantee.  All that you can hope for is a chance to try.  Nothing more.

In a series of news items in Canada, sixteen offshore oil rig workers are now being considered lost after their helicopter went down in the Atlantic ocean on Thursday.  One body has been recovered, one survivor rescued; sixteen others missing and presumed lost.  The search was called off Friday evening and is now focusing on finding the helicopter and recovering the bodies.  The sole survivor is in critical condition.

The problem is the nature of offshore oil and gas production:  You can’t hop on the bus to get to the job.  The ‘bus to work’ is a hours-long helicopter flight over the stormy, cold, deep, iceberg-laden Atlantic ocean.  That’s where the job is and that’s how you get to work for two weeks at a stretch.

By an only slightly inaccurate and cynical definition, a helicopter is 30,000 highly-fatigued, over-stressed aluminum parts flying in very close formation with people in it.

A helicopter violates most of the laws of physics and gravity.  The only reason it flies is the combination of the main rotor pushing air down and the tail rotor keeping the whole thing from spinning counter-clockwise.  Helicopters can’t actually glide like that US Air flight that ditched in the Hudson River a few weeks ago.  If the rotors stop working, then gravity takes hold and Gravity Always Works. 

True, to be accurate, helicopters can autorotate, letting the main rotor spin without engine power, as long as you have 300 feet of height and 30 knots forward speed.  But an autorotate landing is a controlled crash at the best of times and you have less than ten seconds to figure out where you’re going to land.  (I’ve been in one autorotate landing in a Hughes 500 and never, ever, want to be in one again, thank you, very much.)

Yes, they were already in survival suits and had all taken their recurrent training in how to get out of a sinking helicopter and survive at sea.  That’s part of the job description for an offshore rig worker.  A real emergency landing, hard, in the sea during a gale means the conditions of the training tank and procedures training can only be guidelines that might help, a little bit.

As the investigation goes forward we might find that there are things we can do better, but right now it appears the system worked as well as it could.  Sadly, sixteen people are likely dead, despite the best efforts of all involved.   

Their families, friends and communities will miss them greatly.          

Having deconstructed what could go wrong with the financial industry in the US, let us look at what went wrong.

Asset-Backed Commercial Paper is the term used by banks and mortgage lenders to describe the pool of mortgages lent to folks to buy houses.  Ideally, the mortgages were done with people who had jobs, some savings and the likelihood of making the regular monthly payments on the mortgage loan.  Described as AAA credit risk by the credit rating agencies, banks and investment houses ran the math (It’s rated AAA it must be good) and bought the packaged loans.

The quants (remember them?) plugged the new numbers into their assumptions formulae and spit out ‘buy’ recommendations by the truckload.  Now the banks and investment houses could run their debt to cash ratios as high as they wanted to and did, leveraging the AAA rated loans. 

The problem was that people who wouldn’t normally be trusted to have a library card were being pre-approved for huge mortgages if they could fog a mirror and make a mark on the documentation.  Due diligence by the mortgage lenders?  None.  Due diligence by the customers signing the mortgage?  None.  They signed for multi-thousand dollar mortgages knowing there was no way in hell they’d ever be able to make the payments.

Even the finance industry got into it.  Finance pundits looked at the ratings of the Asset-Backed Commercial Paper and screamed Buy!  Investment joints ran this stuff through derivatives, hedging bets left, right and center.  On paper, as long as house prices kept going up, ABCP and the multilevel derivatives were making everyone money on The Street. 

Insurance companies, like AIG, insured both ends of the derivative of derivatives transactions.  Heck, it was all rated AAA and the quants kept their assumptions tweaked enough to ensure that on paper, everyone involved was exposed to next to zero-risk and on paper, the investment joints were so solvent they could branch out into higher risk investments.  If they didn’t, then they weren’t working the market efficiently, using the shareholder’s money to “increase shareholder value.”  Shit Jim, Merril is paying a huge dividend, why they hell aren’t we?  If we don’t meet our ‘whispered’ number, then we’ll be downgraded, our bonus won’t be as big and we can’t go on the sales trip to Belize!   

Except it was all based on the assumption that house values would go up and the mortgage loans were performing. 

Oh yeah.  That’s right.  Someone paying down the mortgage.  Let’s get back to you on that one.

Previously, here, we broke down what was a tad wobbly with The Glorious Free-Market System in the US pre-2004.  We’re going to continue the autopsy, at least from my viewpoint of what’s going on with our global economic meltdown.

The 12 to 1 market valuation pre-2004 was based on some fascinating calculations of the net worth of the investment houses and the policing done by the Securities and Exchange Commission. 

The policing is easy to report on:  Not much done.  Yes, the SEC was understaffed, had no regulatory teeth and rarely attracted the best and brightest, as Wall Street paid more.  Coming out of MBA/Law/Accounting school, with $50,000 worth of debt, who would you work for?   Government, offering you a starting salary of SFA as a drone so you could pay off your student loans by 2020, or Wall Street where your student loan would be a rounding error after your first years’ bonus? 

Hmmm.  I’ll take Junior Masters of the Universe for $200 please Alex.

Of these Junior Masters of the Universe, some were statisticians and mathematics geniuses called ‘quants’.  Quant is a slang for Quantitative Analyst, the kind of person who can, using very high-end math, reduce a company to a formula that expresses risk and reward numerically.  (I am over-simplifying to the point of crazy-talk here, but bear with me)

Your credit score, as a very simple example, is a Quantitative Analysis of your credit worthiness that a lending institution uses to determine if you get the car loan, or the mortgage.  Assuming you have a job, some debt, some savings and so on, the credit score is a three digit representation of how risky you are to the bank, to default on your car loan. 

The lender doesn’t want to own your car as they’ll lose money on it paying the repo man, selling the car at auction and all the paperwork needed to retire your loan.  They want you paying interest, eventually owning your four year old car. 

To make quick decisions, they need a way to judge your ability to pay for four years and a credit score is a ‘good’ way to do it.  Decisions can be be made automatically, as long as you score over whatever number the lender decides is the lowest threshold they’re willing to risk.

As I said, this is a very simple example, but you get the essential idea.  The granting of credit becomes a mathematical formula. 

The same math was applied to businesses, with several hundred times more variables involved.  Eventually it got to the point where buy or sell decisions were automated.  One could look to the 90’s where brokerages were moving vast lumps of money around by the second, almost completely without human intervention, as the math could be linked to some reasonable programming skills to test for variances from the ‘norm’ and make a buy-sell-hold decision and then execute the trade.

Automagically the buyer and seller generate the orders, commission is calculated and paid, the money is moved, the banks get their service fees and the cycle starts again. 

As the human, you come in at 9 am and see that you’ve bought and sold a bunch of stuff overnight, paid and received commissions, made several thousand in profits and now have a bunch of ‘new’ money sitting in your account, which is being bought and sold to increase your profits during the day while the North American markets are open.  All you did to earn it, was be asleep overnight and let the program do its work.

Multiply times several hundred thousand and that’s what banks, investment houses and governments do every second.  As long as the mathematical assumptions are good, it all works reasonably well.  Notice that caveat:  as long as the mathematical assumptions are good. 

Part of the assumptions is the credit ranking of the debt.  Who does the credit ranking for big corporations and governments?  Standard and Poor’s, Moody’s Fitch and the rest of the rating agencies, like Dominion Bond Rating Service in Canada. 

How do they come up with their judgements?  Quantitative Analysis of the organizations involved, using their own, proprietary, analysis tools designed by quants who scour data looking for minute by minute anomalies in the ‘value’ of the organization they’re looking at, based on a different set of mathematical assumptions, variables and trends, out to the seventeenth decimal place. 

Then they spit out a value:  A, AA, Aa (if you use Moody’s) AAA, B, BBB- and so on, which plugs into the other programs to generate buy-sell-hold decisions in other organizations. 

A change in the rating of a company, as you can see, can have extraordinarily wide-ranging effects, as you’re changing one of the mathematical assumptions being relied on by another number-crunching quant in another company.

Now, track back and see how the 12 to 1 market cap rule is affected by the valuation of the investment company.  A single change, then run through the various interrelated transactions that peg the value of the investment, can jigger the discount used to determine if the investment house is compliant or non-compliant with SEC rules. 

Done well, meaning on a financially sensible basis to protect against the whole investment house going broke, a change means some investments don’t get done as they’re too damn risky, as defined by the Quantitative Analysis.

In 2004 the rules were changed by the SEC, after being nagged into a coma by Wall Street.  If your investment house had more than $5 billion in value, you could exceed the 12 to 1 ratio of debt to cash, regardless of how you calculated it and you kept your ratings high. 

It didn’t matter how second-by-second the calculations were done, using whatever assumptions were thrown into the formula.  Nobody understood them to start with, so the SEC decided to trust the financiers, who trusted the quants, who trusted S&P et al, who trusted their quants, who trusted the research, who trusted the math.

Merrill-Lynch, as an example, worked their debt-to-cash ratio up to 40 to 1.  There was no way in hell if Merrill-Lynch had some debts go bad, could ever have enough cash on hand to keep from going broke.  Even selling all the Merrill employees as meat at $2.10 a pound, there wouldn’t be enough money around. 

(I’m certain there was an analysis done of the actual value of Merrill-Lynch staff as meat, as well as the value of the paper clips in the various offices, both as paperclips and as recycled steel, leading to a decision to sell all the paperclips and to add more potatoes to the staff’s cafeteria menu.  I’m kidding.)

Except the quants, doing their assumptions, could ‘prove’ that Merrill, or Lehman or the others involved, were perfectly sound, deserving of their high credit ratings, and should be left alone as The Glorious Free-Market System will self-police and self-correct.  Selah.

Since everyone was making money hand over fist, it must be true. Right?

Enter Asset-Backed Commercial Paper with a AAA rating.  

President Barack Obama is in the hot seat with the right wing, again, as the U.S. Government now owns 40 percent, give or take, of Citigroup.  Media outlets with various axes to sharpen are calling it a nationalization of the banking system south of the border, creeping socialism, near-communist, New Deal II, yadda yadda yadda.

Let’s see what’s really up with this.  In the Dark Ages of 2003, investment companies and banks were required to keep a reserve of “cash” on hand in proportion to their debt. 

“Cash” was defined as tradable assets and valued by the market with a discount (or haircut), based on the type of asset.  If the ‘cash’ was a Treasury Bill, a very safe investment, the discount was 6%.  If the ‘cash’ was an investment in Sudanese mining stocks, the discount might be 15 percent, or higher.   

The broker would add up all the stocks, bonds and equities they owned, less the discounts and come up with a number.  Let’s call it $1,000 for simple math purposes.  According to the Security and Exchange Commission, they had to keep that $1,000 around, readily available, in the event something went bad.         

The ratio was 12 to 1, meaning the broker or bank had to have $1,000 worth of assets in a drawer somewhere, if they had $12,000 in debt. 

There were rules that broker-dealers had to maintain a certain level of rating with the various (privately owned) rating agencies like S&P, Moody and so on. 

If the broker-dealers got close to the 12 to 1, there were notifications they had to make to the government.  This is only prudent, as there will always be some investments that don’t work out and there has to be some kind of financial cushion to prevent the broker from tanking and taking all the investor’s money down too.

Where things got murky was in how you calculated what an investment company was worth.  Investment companies, to have a wad of money to play with, were usually owned by their own investment banks, which have large lumps of cash around, sitting there, doing very little or invested in very conservative things.

On paper, they’d have a huge market value, as the bank money was counted along with the investment dealer money.  The investment dealer money was significantly more risky, the bank money significantly safer, if something went bad, so there was a fudge factor and a bit of sleight-of-hand in how you calculated the real market value of a broker. 

That market value number became, using the 12 to 1 rule, the amount of money the investment broker could play with and still be legal.  The bigger the wad, the bigger the chance for a huge payback, but also the bigger the risk of losing it all.

The ugly question became:  Who’s value are we calculating?  Is it the holding company?  Is it the broker itself?  How much of that money the investment broker is risking, is actually backed up by something that can be cashed in and paid out if the investments turn out to be floating turds? 

Needless to say the investment holding companies and their hundreds of other companies underneath, had no real idea, as the ‘value’ was often stocks held in each other, again held in a separate company and loaned to another subsidiary, to borrow against, to juggle a big debt somewhere else.  In accounting parlance, it’s called a fuzz job. 

Somewhere in that chain of stocks and bonds, all under the same letterhead of “Citi” or “Lehman Bros.”, but different actual companies, there was a company that could be made to hold the floating turds without affecting the worth of the whole thing at the top of the letterhead. 

Then the tax accountants got into it.  Each company could post losses against profits and move into that whole murk of offshore, onshore, arms-length, closely held, privately held and so on.  The sole objective of the tax accounts was to hide profit and avoid paying taxes.  Profits had to be put somewhere and the Caymans or Bermuda, with their friendly tax laws, were often the location of choice.

Keep in mind, this is before the rules were changed in 2004.

In Part II, we’ll look at the rule changes in 2004.     

It would seem that Prez O partially took some of my advice from a previous post regarding what he should see while in Ottawa.  The O-Man stopped at Hooker’s Beavertails and Le Moulin de Provence Bakery in the Byward Market.

Apparently in the dash to the airport, the motorcade swung by the Byward Market and Prez O did an unplanned walkabout, much to the joy of the folks in the Market and the consternation of the Secret Service.

A Beavertail, for the uninitiated is approximately related to the American fried dough, or elephant ear that you get at the state fair.  The Obama-Beavertail has cinnamon, sugar, maple flavoured eyes and a round chocolate “O” in Nutella on the top. 

A few steps away at Le Moulin de Provence Bakery, he scored a couple of “Canada” cookies for his kids.  Even more remarkable is he actually had Canadian money to pay for them.  Normally, US tourists proffer pictures of Washington or Jackson and rely on the clerk to do the math.  The owner of Le Moulin de Provence decided wisely and comped the cookies, as the calculations involved require a university degree in Nuclear Engineering. 

Canada has a lot of underemployed Nuclear Engineers working in the Byward Market, as it is a tourist destination for those with U.S. dollars.

There are no reports that the O-Man left with a pocket laden with Loonies (our one-dollar coin) or Toonies (our two-dollar bi-metal coin), but his aides likely did.  Sascha and Malika can have some of that weird Canadian money as a souvenir along with their cookies.  Heaven knows Canadian money isn’t worth anything in the US.

There are no reports of members of his entourage waking up somewhere in Hull or Point Gatineau in compromising situations involving a stuffed giraffe, ‘danceurs’ and a trampoline.  Perhaps just as well. 

Unless you’ve been under a rock, or in protective custody for the last few days in Canada, President Barack Obama has finished his six-hour drive-by State Visit.  The national media, television and the wireless have been wall to wall with coverage.  Even CNN dropped in the occasional live shot of Prez O getting off the plane, getting into his limo, getting out of his limo, doing a two-handed presser with our Prime Minister Stephen “Call Me Stephen” Harper, and getting back on Air Force One, after breaking the speed limit going up the Airport Parkway.

When it comes to actual ‘content’, we are now assured that Prez O can actually get into and out of an airplane, a limo and a press conference.  There was much lip-flapping that Prez O actually turned around on Parliament Hill and waved at the gathered several thousand frozen citizens who had flown in to see him. 

As for the press conference, no surprises.  Everything had a “Sanitized for your Protection” stamp on it.  We heard that Prez O likes Canada and respects our banking system.  We also heard that relations will improve under the O-Man.  This is good as the previous incumbent, Jo Jo The Idiot Boy, didn’t know what street Canada was on in Kennebunkport.  Stevie even managed to crack a smile, despite cautions from his handlers to never, ever smile again.

For the American readers, imagine those old elementary school photos of Calvin Coolidge, then imagine him telling a fart joke with a big grin on his face.  Doesn’t work does it?  Harper made children cry during the election campaign when he’d smile at them.  Harper smiling makes him look like he needs to wear a helmet while out of the house and take the small bus to school; not the big bus.  According to the pundits, Harper came off as ‘statesmanlike’, which means as wooden as a pallet of 4 x 4 pressure-treated softwood lumber posts.

Just for giggles, I listened to the air traffic frequencies for Ottawa on the web and heard the pilot of Air Force One ask for wind speed, direction and runway, then confirm that he was over the Greely marker, wheels down and ready to land.  The landing was accomplished successfully. 

Other than that, Prez O has now taken “Canada” off the whiteboard list at 1600 Pennsylvania Ave.  Perhaps he got a fridge magnet from our Governor General, Michaele Jean.

There were no beavers harmed during the writing of this blog post.