Tuesday, September 30, 2008

Not Bailout, but a Code Blue

The Bush CorporaWhorehouse asked the public to stop using the "bailout" term to describe the proposed economic intervention. They requested:

Please call the plan Code Blue. Emergency procedures are needed to open the clogged credit arteries of the American economy and intervention is required to return its health.

While not chosen, the alternative Dr. Strong code remains an important option. This code is called when unruly citizens don’t go along with stated plans. Yes, uninsured Americans are livid over cardiac analogies when they can’t get medical care. If enough of these angry citizens gather in one location, the community should call NorthCom and request Dr. Strong. They have a combat unit (fresh from the Iraqi battlefields) at the ready.

Sunday, September 28, 2008

Uncle Sam Takes on Wall Street's Legacy of Risk

The Ghost of Credit Past visited Wall Street on September 18. The dark figure pointed to the interest rate board. The Reaper asked, "What did you sow?" He laughed scornfully at their reply of "Money?"

"Watch!" the visitor implored. Investment bankers saw their woefully inadequate efforts to price risk. Blinded by the greed of commissions, fees, and incentive executive compensation, they packaged credit bombs, sold at a premium. The scene replayed a credit rating expert saying, "I hope the house of cards collapses after my retirement."

With a wave of the Reaper's scythe, interest rates reset to cover the errors of past deeds and current market risks. The numbers on the rate board ticked up. They stopped at:

30 year fixed mortgage 15%
Credit card APR 29%
CCC rated corporate debt 20%

Investment bankers wailed at the horror. Chief executives donned their golden parachutes and fled to the rooftop heliport. His work done, the visitor left the building.

The Ghost of Credit Past had no idea another Reaper was nearby. One thousand feet above, a remote killing machine fired a Tomahawk missile at the karma enforcer. Despondent investment bankers watched their tormentor vaporize in a fireball.

On the big board, interest rates began ticking downward. When they returned to pre-visit levels, Uncle Sam barged in. "Don't worry boys, I've got it all under control. All those sins the Reaper tried to make you pay, I'll take 'em off your hands, and at premium prices to boot!"

Investment bankers cheered! A sole janitor interrupted the celebration. "Well, that might help with past sins, but what about your current ones?" Everyone discounted his question. After all, he was just a janitor.

Saturday, September 27, 2008

CPA Asks for Prayers of Wisdom in Financial Meltdown

West Texas Congressman Mike Conaway has a unique skill set, given America's current economic crisis. Conaway is a certified public accountant, meaning he understands corporate finance better than most people in the Capital. As a constituent with concerns and questions, I've been most interested in hearing from Rep. Conaway. So far, my e-mails have gone unanswered.

Research found a few general quotes in area newspapers. Mike suggested a thoughtful, measured approach, but provided few clues on the credit market collapse or appropriate remedies for clogged credit arteries.

Mike spoke up eight days after the watershed event, posting a podcast on his blogsite. After calling the situation "historic", "uncharted waters" and "sobering", Conaway spoke to the House Republican plan. He offered up a FDIC insurance like plan. Funds would come from fees on people who own these assets.

It's a great idea for five to ten years ago, where time and wise investment could build adequate reserves. Homeowner's insurance companies don't write new plans when a hurricane enters the Gulf of Mexico. Conaway's insurance proposal is similar to writing insurance on Galveston Island during the temporary calm of a Hurricane Ike's eye.

He noted the importance of keeping the "day in-day out, blocking & tackling" around lending going. He pointed to events on September 17-18 that caused credit to grind to a halt, but he didn't say what happened.

The Wall Street Journal reported Morgan Stanley's credit default swaps hit $900,000 for coverage on $10 million of their debt on September 18. Last summer a similar swap on Goldman Sach's debt went for $100,000, and that was considered junk status. An eightfold increase in "peace of mind" coverage on Wall Street debt qualifies as a huge problem. Thus, the phone calls to Hank Paulson.

The big money boys complained about pay day loan rates. Yet, they charged each other those exorbitant, effective interest rates. Wall Street expected their peers to welch on their borrowings. Risk got priced at premium levels. The big boys refused to pay, clogging our credit arteries.

Mike never said a word about the specific developments of mid-September, but he did ask for our prayers during this "big economic storm." He quoted a verse in Chronicles where Solomon asked God for "wisdom and knowledge that he might govern." Mike asked the people pray for wisdom for him, his House and Senate colleagues, and the White House.

Dang, I'd hoped to hear some CPA sharpened financial insights to the problem, not a prayer request. But I did comply. Minutes ago, I gave Mike that coveted wisdom prayer. What's the turnaround time on that? Hopefully, short and not blowing in the wind.

One last question, when the engine crew of the Titanic comes on deck asking passengers for prayers, should they be worried?

Friday, September 26, 2008

Cafferty File on Flailin' Palin

Jack Cafferty calls it like he sees it. "There is a reason the McCain campaign keeps Governor Sarah Palin away from the press. This is a direct excerpt from Katie Couric’s One-On-One interview with Sarah Palin, which aired Wednesday on CBS."

COURIC: Why isn’t it better, Governor Palin, to spend $700 billion helping middle-class families struggling with health care, housing, gas and groceries? … Instead of helping these big financial institutions that played a role in creating this mess?

PALIN: Ultimately, what the bailout does is help those who are concerned about the health care reform that is needed to help shore up the economy– Oh, it’s got to be about job creation too. So health care reform and reducing taxes and reining in spending has got to accompany tax reductions.

"If McCain wins, this woman will be a 72-year- old heartbeat away from being president of the United States. Here’s my question to you: Is Governor Sarah Palin qualified to be president?"

PEU Report Answer: What Jack, you didn’t like the corporate shopping list Sarah tacked to the bailout? Palin wants to be one heartbeat away from the top job in the CorporaWhorehouse at 1600 Pennsylvania Avenue. She clearly stated her qualifications for the job. It’s about Corporafornication. The pretty lady knows it….

What to Do When Doctor Says All Options are Bad?

Wall Street's big money boys charge each other pay day loan rates. Since they don't pay that kind of effective interest, credit dried up. One analogy for the credit crisis is clogged arteries. Given the patient's lack of health insurance, the government is currently evaluating treatment options.

One, spend $700,000 billion for a cardiac catheterization, balloon angioplasty, and multiple stent insertion. This involves scraping and collecting the calcification inhibiting the circulatory system, including a Lehman valve replacement.

Two, do nothing. Hope the patient improves its credit diet and the fat cat starts exercising. This requires dramatic change and high costs. Large interest rate increases are needed to cut the fat and fuel the exercise needed to shed those unwanted pounds.

What are the risks? Heart attack in either scenario.

From the nonclinical view, the market didn't price credit adequately in the past. Interest rates didn't properly account for the risk of repayment. Banks and investment houses are in free fall as a result. The government proposal is to take over their failed products. What happens if they don't?

Interest rates will reset to address the heightened risk. How high might they go? A look at the piece of mind rates on Wall Street credit provides some insight. Credit default swaps are a form of coverage used by investors holding an organization's debt instruments. The annual rate for $10 million of Wall Street investment house credit rose from $100,000 last summer to $900,000 on Thursday, September 18. The rate hovered between $400,000-$700,000 since that dark day.

Might they double, triple? Who knows, but the reset will likely be major. A $700 billion bill for economic good health or a monstrous increase in interest rates? Both options are bad for this sick patient....

Fractal Failure of Washington Mutual

Washington Mutual failed at two levels yesterday after the closing bell . A brokered Wall Street bailout deal splintered after the Maverick rode into town to save the day. On the real Wall Street the largest bank bankruptcy occurred. Within hours Washington Mutual had been packaged and sold, most of it to JP Morgan/Chase.

Mutual and cooperative behavior is in short supply at the moment. It's a shame the Fed can't flood the market with leadership, so lacking in a country with such a rich history of iconic leaders.

Thursday, September 25, 2008

Strange Case of Morgan Stanley

Big Wall Street investment houses packaged and sold junk for years. They purchased each others junk securities, even selling "peace of mind" to back them up in the form of credit default swaps. Last week they quit buying each others crap, at least not without significant assurances of recouping their money. Look what happened to the price of Morgan Stanley's peace of mind:

9-10 $300,000
9-15 $450,000
9-18 $900,000
9-19 $560,000
9-22 $498,000
9-24 $790,000

Last summer, the cost of a Wall Street investment house credit default swap ran about $100,000 for $10 million in debt, and that was considered junk status. Such huge price increases indicate the unregulated credit market is very worried about Morgan Stanley's ability as an ongoing concern.

Who did the Treasury hire to help with A.I.G.? Morgan Stanley, who itself was in deep trouble. Consider Morgan announced its sale of 20% of the company to a Japanese bank on 9-21 for $8.4 billion. One might expect that to reduce their credit risk substantially, but instead it soared 290 basis points.

The big money boys are no longer lending to each other. They see their peers as credit worthy as a payday loan applicant. Beware the welfare tycoon, now driving his Rolls Royce because he had to let the butler go. They're are nowhere near as many as those welfare moms, but they expect a whole lot more than a Cadillac and big screen TV. It looks like Capital-lackeys and the CorporaWhorehouse will come through with the rich man's bailout. I believe they're calling the bi-paritsan agreement "Fostering Corporafornication."

WaMu Approaches Carlyle Group. Blackstone

Wall Street's credit tantrum crescendo sounded loudly last week, such that it was heard in the Bush Treasury Department. The likely result of the big money boys shutting down lending is the following:

1. Banks prices deflated
2. Investment by PEU’s, private equity underwriters
3. Banks dump their junk at premium prices, including 2nd liens, credit card debt, student loans, and car loans
4. Share prices rise
5. PEU boys profit handsomely

Washington Mutual is currently at stage one and looking to advance to stage two. According to the Wall Street Journal, WaMu approached The Carlyle Group and Blackstone for possible investment. Normally there is a courting process, but this could be accelerated by the Bush corporawhorehouse on Pennsylvania Avenue. Is it 1600 or 1001? The White House or Carlyle's corporate offices?

Bush is pushing rapidly for leaders to approve his bail out plan. Then the corporafornication can begin. Merge, exchange money, then sell the asset later....

Wednesday, September 24, 2008

December 2007 Bad for Chinese Products

Last December, two Western companies found out products from their Chinese joint ventures were sickening, even killing people.

Heparin, a medical drug manufactured by Baxter Corporation. It took three months to find the deadly ingredient, over-sulfated chondroitin sulfate. The corporate connection is:

Scientific Protein Labs---Changzhou SPL

Milk, the drink in liquid and powdered form. The tainted product sickened over 53,000 children and made its way into some 160 products, including infant formula. It took nine months for the scope of the problem to air. Deadly melamine, a protein booster, made its way into yet another food source, this time for humans.

Fonterra Cooperative---Sanlu Group Co.

The FDA said remarkably little about what tainted products could have made it to America. Oreo cookies, Snickers, and M & M's were recalled in Indonesia due to tainted milk ingredients.

China's substitution management epidemic, learned from their American counterparts, is dangerous and deadly. We have buyer beware at all levels of the economy.

Goldman's Credit Seizure Requires Drastic Taxpayer Medicine, as Prescribed by Dr. Carlyle

What blew up last week? The rich wouldn’t lend to rich at other than payday loan rates. They don’t pay that kind of interest, so the credit market locked up.

The crisis was created on Wall Street via unregulated credit derivative markets. It occurred in closed off conference rooms, inhabited by big money men.

Wall Street’s credit default swaps soared 9x from last summers junk level. Who did Goldman Sachs call to complain about the usury foisted upon them by their big money brothers? Ex-Goldman CEO, now Treasury Secretary Hank Paulson.

Now he’s proposing a taxpayer bailout to the tune of $1-2 trillion. The feds opened the door for other big money men, the private equity boys, to buy into failing banks. These are the same banks that will offload their junk onto the public.

1. Banks prices deflated
2. Investment by PEU’s, private equity underwriters
3. Banks dump their junk at premium prices, including 2nd liens, credit card debt, student loans, and car loans
4. Share prices rise
5. PEU boys profit handsomely

Warren Buffet just sunk $5 billion into Goldman Sachs. The Carlyle Group's financial division lobbied hard the last year to open up the gates for their billions. Carlyle's division head is Olivier Sarkozy, the brother of the French President. Yesterday, Nicholas spoke of capitalism gone unhinged at the United Nations. His brother works for a prime beneficiary of that unhinging.

Stay tuned. The deals will be fast and furious. Carlyle is sure to come out a winner.

Tuesday, September 23, 2008

Senator Dole Tries to Get Information on the Role of Credit Derivatives in Last Week's Debacle

Senator Dole asked about credit derivatives in her Q & A time at the Senate Banking Committee hearing on the financial bailout. She wanted to know:

What role did credit default swaps play in last week's failure?

Not one of the members answered her question. Only the SEC Chair addressed the need to reign in the huge, unregulated credit default swap market.

Credit derivatives are part of the junk financial innovation perpetrated by Wall Street the last ten years. They don't have a long and storied role in America's financial system, despite Hank's assurances.

Christopher Cox noted such instruments support credit for the market. They're the peace of mind for debt buyers. What none said, they soared last week and it strangled the market.

Paulson Confirms Feds Will Buy Mortgage Derivatives

Finally, I got an answer to my question, are credit default swaps included under the "mortgage related securities" the government plans to buy from financial institutions? Treasury Chief Hank Paulson confirmed mortgage derivatives fit under the list of products the government will buy back from the private sector in his Senate Banking Committee testimony.

Otherwise the testimony is odd. Christopher Cox assailed the unregulated credit default swaps market and its excesses. It took over an hour for Hank to say those very products could be on the feds shopping list of troubled, even toxic assets.

Also, to rescue failed financial markets, the government plans to use "market based" approaches. What? How will market approaches help those locked up markets? If the market approach worked, couldn't it save itself?

The end result is a bailout of bad assets held by the big money boys. It stinks that unregulated, legalized financial gambles, like credit default swaps, are included! The big boys can’t sell their junk to each other anymore. They don’t trust the system. The taxpayer gets to return order to the frightened rich man’s world. Payday loan rates are only for the poor, not the wealthy.

Monday, September 22, 2008

Bank Bailout Plan a Potential PEU Financial Windfall

Private equity firms found one more way to benefit from the current financial crisis. The Wall Street Journal reported the Federal Reserve relaxed rules on who can own banks. Recall Goldman Sachs and Morgan Stanley switched to commercial bank status over the weekend. The piece stated:

The Federal Reserve, unleashing its latest attempt to inject more cash into the nation's ailing banks, loosened longstanding rules that had limited the ability of buyout firms and private investors to take big stakes in banks.

It marks the latest move by the Fed to rewrite the rulebook in response to the financial crisis. Regulators have grown worried about a shortage of capital at banks, in particular smaller thrifts and regional institutions. The Fed has been crafting this policy for at least two years, and private-equity firms have been aggressively lobbying for more lenient policies.

How can a private equity firm benefit? The Carlyle Group already showed two ways they can win:

1) Managers of their distressed company fund felt things would get worse, before they got better. Tighter credit could stress good companies, steering them to private equity underwriters, like Carlyle, for investment.

2) Carlyle purchased ManorCare last year, using mortgage backed securities to the tune of $4.6 billion. If those instruments end up in Uncle Sam's coffers, the PEU could buy back their securitized debt for pennies on the dollar.

3) Cash heavy Carlyle can buy larger chunks of distressed banks, something they've lobbied hard for the last six months. Their financial segment is led by an ex-Number 2 to Hank Paulson and the brother of French President Sarkozy.

4) Failed fund Carlyle Capital Corporation can submit their mortgage backed assets to the feds for purchase. They may be able to salvage more from their bankrupt fund.

Welcome to disaster capitalism! Carlyle grew from $5.8 billion to some $90 billion during the George W. years. It looks like that trend will continue. Even Reuters noted the opportunities...

Credit Default Swap's Role in Financial Meltdown

Right now the market hates risk. For credit to move, investors require peace of mind. Unregulated credit derivatives, in the form of credit default swaps, provide that security. What happened to the pricing of those instruments? Last summer Bloomberg reported:

On Wall Street, Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Goldman Sachs Group Inc., are as good as junk.

Bonds of U.S. investment banks lost about $1.5 billion of their face value this month as the risk of owning the securities increased the most since at least October 2004, according to Merrill indexes. Prices of credit-default swaps based on the debt imply that their credit ratings are below investment grade, data compiled by Moody's Investors Service show.

Another story showed the cost of covering $10 million in loans/mortgage securities via credit default swaps last year:

Goldman Sachs
July 26, 2007 $81,000
July 27, 2007 $105,000

Bear Sterns
July 27, 2007 $110,000

Fast forward to September 2008. The Wall Street Journal reported the same piece of mind soared, up to 9 times the prior year.

Morgan Stanley
September 10, 2008 $300,000
September 15, 2008 $450,000
September 18, 2008 $900,000
September 19, 2008 $560,000
September 22, 2008 $498,000
September 24, 2008 $790,000 (update)

Today's numbers come from a Reuters' story on credit default swap pricing for those newly designated commercial banks.

Goldman Sach's cost for "coverage" is now $328,000 a year on $10 million of credit. Even with the commercial bank conversion, swaps cost three times last year's amount. The high cost of "coverage" via unregulated credit default swaps is killing America's credit system.

Tell Uncle Sam Not to Buy Credit Derivatives

Unregulated Wall Street investment houses sold credit derivatives as a form of insurance on packaged loan securities. Credit default swaps are a bet on the failure of the borrowing firm. Their cost soared recently, effectively drying up the credit market.

No investor wants to pay through the nose for "peace of mind" on holding credit. Nor do they want to hold unprotected debt in today's market.

The failure of unregulated mortgage backed securities is clear, evidenced by the billions in quarterly write downs from financial firms. But the excesses in the credit default swaps market is a new development, one the SEC is investigating. News sources say some $62 trillion exists in credit default swaps, but I believe that's the size of the credit pool they cover.

One bank, Fairfax Financial Holdings sold some of their credit default swaps. Today's MarketWatch story said the following about this investment instrument:

The credit default swaps are extremely volatile, with the result that their market value and their liquidity may vary dramatically either up or down in short periods, and their ultimate value will therefore only be known upon their disposition. Similarly, the values of Fairfax's other portfolio investments, including Treasury bills, government bonds, other fixed income securities, equities and equity derivatives employed to hedge our equities, are also volatile, and particularly so given the increased volatility of current financial markets, and their ultimate value will only be known upon their disposition.

Uncle Sam's coffers may be the only place some of these volatile portfolio investments may land. Tell George Bush and Hank Paulson not to buy credit derivatives. Shoring up the underlying loan security should be enough. Just say no to credit default swaps.

Sunday, September 21, 2008

Credit Derivatives Swamp Wall Street

Credit default swaps are Wall Street's method of granting peace of mind to large credit holders. Those instruments soared in price as word of investment house troubles spread. The Wall Street Journal reported:

In the past week, a jump in the value of credit-default swaps tied to Morgan Stanley and Goldman Sachs Group Inc. set off similar concerns at both firms. On Thursday morning, swap sellers were charging buyers more than $900,000 annually to insure $10 million of Morgan Stanley's obligations from default over five years, a price typically associated with highly risky or distressed companies. The prices had doubled from Monday and tripled from the week before. On Friday, after the SEC announced its short-selling curbs, the cost fell to $560,000.

After the government took action the price of the Morgan Stanley credit default swap dropped to 28% over a five year period. Lenders need to pass such costs on, causing a huge rise in interest rates. A 5% jump overnight would kill credit.

Not having peace of mind via some insurance mechanism? That also kills credit in this panicky market.

Unregulated credit derivatives are a huge problem for our economy. That's the financial innovation cited by President Bush and John McCain. On 60 Minutes Republican candidate McCain said he didn't regret financial deregulation, saying it was "probably helpful to the growth of the economy."

Sorry John, I don't see how off balance sheet trading of legal gambles, like derivatives, "helps the growth of the economy." They're currently clogging the air intake of our financial sector. With that locked up, it won't take long for the engine to choke off and die. Let's hope credit default swaps aren't the motor oil. A restart is much better than a complete rebuild. Goldman Sachs and Morgan Stanley are trying a restart as bank holding companies.

More Disaster Capitalism for PEU's?

It turns out Wall Street, with all its financial innovation the last eight years, is in need of a government bailout. Our free market President's latest rescue plan fits into the new maxim:

"Privatize the profits, socialize the losses"

Yet, who stands to win in the $1.5 to $2 trillion taxpayer sponsored rescue of "mortgage related securities"? First, pension funds will take less of a hit. Last fall, their losses were estimated at $1 trillion. Second, America's worldwide creditors including central banks and sovereign wealth funds will be able to offload their mortgage related securities onto Uncle Sam. Third, domestic banks and financial institutions can move their billions in financial dog food.

How do you feel about bailing out foreign investment companies already fat from our gas money? At a time when I want help with health insurance coverage, I'm not excited about helping Wall Street insure their financial health by covering their bad products.

Bush is effectively nationalizing a segment of financial products and taking on their product liability. That is if it's truly limited to mortgage related securities? It makes some sense to buy real asset backed securities, but not credit derivatives, like credit default swaps. I'd like to see a definition of the term "mortgage related securities" and a list of the range of products Uncle Sam will buy back.

Who will buy the products at a later date? How about the corporate issuers of the debt? Not long ago. Carlyle Group co-founder David Rubenstein bragged about buying back their debt on the cheap.

"The flavor of the day is buying your own debt at below face value. I'm buying bank debt in my deal with leverage from the bank that made me that deal"--David Rubenstein in Forbes, May 2008

What if David could buy it back even cheaper from Uncle Sam? Now that would help any greedy private equity underwriter. The Carlyle Group purchased ManorCare, the huge nursing home company in late 2007. They floated $4.6 billion in debt via a commercial mortgage backed security facility.

Disaster capitalism could benefit firm's like Carlyle. William Conway, another co-founder of the politically connected PEU, hates a level playing field. Did it just tilt more in their favor? If they become their own debt holder for pennies on the dollar, while maintaining high interest deductions, they could really ride Uncle Sam.

Saturday, September 20, 2008

Derivatives + Off Balance Sheet Items = Overnight Failure?

I have to wonder what else contributed to the fast fall of Bear Sterns, Fannie Mae, Freddie Mac, Lehman Brothers, and A.I.G. Yes, having the resale market for mortgage backed securities dry up overnight could be fatal. But is something else contributing to their fall?

America's financial innovation produced a bowl of alphabet soup like products that cranked up the risk/reward angle. They make money hand over fist on the way up, but turn into a flesh blender when markets turn bad. Did these products cause the widespread, sudden failures?

I poured through several of Lehman's annual reports and something jumped out, their off balance sheet trading of derivative financial instruments. In 2004 they comprised $470 billion of obligations. By 2007 they'd grown to nearly $740 billion, more than all of Lehman's assets. What if derivatives went in the tank, if the market dried up? What if they became as hated as subprime mortgage backed securities? Could they wipe out Lehman's book value of $40 per share overnight? Lending credence to my concern, the SEC is now probing derivatives trading, including credit default swaps.

Not long ago, a business declared bankruptcy overnight. It happened recently to The Carlyle Group's energy affiliate, SemGroup, which lost billions trading energy contracts. Such trading was not listed as a major focus of the firm in their SEC documents. They bet the wrong way, costing shareholders the firm. Debt holders now manage SemGroup's reorganization.

What role has off balance sheet trading in speculative financial instruments played in the current broad meltdown? If I get to pick up the pieces via a $1.5 trillion increase in the national debt ceiling, I'd like some answers. The Bush administration has a long and storied record of not coming through.

F Troop Rides Again to Deal with Financial Crisis

After allowing Wall Street firms to package rubber arrows as robust instruments of financial protection, President Bush assembled a team to arrest the crisis of confidence threatening to implode the world's financial system. His "F Troop" already kept Bear Sterns, Fannie Mae, Freddie Mac, and A.I.G. from going under. But the financial fort remained under siege.

The team circled the horses, wagons, loaded their weapons, and strategized night and day for the last week. The answer? The U.S. government will buy back all those rubber arrows held in corporate coffers, hoping to resell them at a later date. The cost, $1,000,000,000,000 to $2,000,000,000,000!

Friday, September 19, 2008

Fannie Mae: Obama's Johnson, McCain's Duberstein!

The man who helped John McCain run for President in 2000 has a storied role as Fannie Mae board member from 1998 to 2007. Ken Duberstein advised John from near and afar through his various Presidential runs. Most recently he was on Meet the Press, speculating on "Modest Change" McCain's VP selection process.

How times change, now that John wants to aggressively upend special interests in Washington. It seems McCain passed on Duberstein's VP advice for "that person can step in in a moment's notice in case of emergency and could be our president." Sarah Palin needs training, alot of it.

In furthering McCain's special interest thread, today John cited two Fannie Mae executives, Franklin Raines and James Johnson, and their association with Barack Obama. Of course, McCain left out his ties to Kenneth Duberstein, a governing board member when each man left the helm of Fannie.

Ken's firm made $1,875,000 from Fannie over a five year period 2002-2006. The Duberstein group advised the company on regulatory matters, effectively keeping the wolves at bay. But what else did Kenneth do in his role as board member, other than approving Fannie's strategic direction, endorsing accounting policies and acting on the annual audited financial report?

Most notably, Duberstein served on the Executive Committee and Chaired the Assets & Liabilities Policy Committee. Here's where Ken's role becomes integral, given Fannie Mae's then huge accounting problems and today's failure, requiring hundreds of billions in government support. The 2004 Definitive Proxy statement describes this important board committee:

The Assets and Liabilities Policy Committee, which assists the Board in its oversight of management’s interest rate risk, credit risk, and capital management activities by:

1. developing an in-depth and specialized knowledge on matters relating to assets and liabilities management; and

2. reviewing management’s policy proposals and performance, and making recommendations and reports to the Board, on matters relating to Fannie Mae’s assets and liabilities. In this capacity, the Assets and Liabilities Policy Committee, among other things, reviews: credit and interest rate risk management policies and performance; investment guidelines for the liquid investment portfolio and management’s compliance with those guidelines; the use of derivative contracts; and dividend payments

Not only did McCain's friend make over $1,875,000 consulting with Fannie on regulatory matters, for years Ken Duberstein approved the risky management moves that eventually sent the company under. Be careful who you cite, Mr. McCain. The red team helped create the present day monster...Duberstein was in charge of President George Bush's transition into the White House!

McCain's Duberstein Not Only on Board of Fannie Mae, Kept Regulatory Wolves Away

The man who helped John McCain with his 2000 Presidential run and gave advice on his VP selection process, governed Fannie Mae from 1998 to 2007. Not only did he serve on their board during a time of shoddy accounting, to the tune of some $9 billion in restatements, Ken's firm worked for Fannie Mae, advising them on regulatory matters. Their restated 2004 10-K shows Duberstein's firm made over $1,000,000 keeping the regulatory wolves away from Fannie Mae's door over a three year period.

Transactions with The Duberstein Group

Mr. Duberstein is Chairman and Chief Executive Officer of The Duberstein Group, Inc., an independent strategic planning and consulting company. Our contract with The Duberstein Group provides that The Duberstein Group shall provide consulting services related to legislative and regulatory issues, and associated matters. The firm has provided services to us since 1991. During 2004, 2005 and 2006 the firm provided services on an annual fixed-fee basis of $375,000. Mr. Duberstein is a non-independent Fannie Mae director

Ken and the Board replaced a laundry list of leaders to clean things up. It included:

In December 2004, Franklin D. Raines, who had served as Chairman of the Board and our Chief Executive Officer, left his position. Our Board of Directors appointed Daniel H. Mudd as our new Chief Executive Officer. In addition, we have replaced all of our senior financial and accounting officers who served during the period in which we issued the consolidated financial statements that have been restated, including our Chief Financial Officer and Controller, and we hired a new General Counsel, Chief Risk Officer, Chief Audit Executive and Chief Compliance Officer.

What didn't work? Accounting changes, switching auditors, the wholesale replacement of top leadership, all failed. The whole company cratered. Why should the public trust the next clean up to be more effective than the last?

Management, governance and regulatory bodies failed. No matter what each says at the moment, Ken Duberstein and John McCain did their part, rest assured.

Thursday, September 18, 2008

Forbes Richests: Carlyle Group's Founders at $2.7 billion

The three founders of The Carlyle Group landed at #155 on the latest Forbes Richest 400 list. David Rubenstein, William Conway and Daniel D'Aniello founded the firm in the 1980's, but their growth under the Bush administration has been spectacular. When the public voted for George W., Carlyle managed $5.8 billion in assets. They now manage $90 billion across 64 funds.

While the last year has been tough for most Americans, the three private equity underwriters saw their holdings grow by $200 million. Of course, Congress' keeping preferred taxation on carried interest had to help the PEU boys.

Wednesday, September 17, 2008

Bush's "Publicization" Efforts on Wall Street Produces SWF

President George W. Bush just opened a sovereign wealth fund, using the beleaguered American taxpayer's money. His first four investments involved loans and equity stakes in four storied firms.

1. Bear, Sterns $29 billion
2/3. Fannie Mae & Freddie Mac as much as $200 billion
4. A.I.G $85 billion

George W. raised over $310 billion in a matter of weeks. It can take private equity firms months to assemble an offering.

Let's consider the history of three of the firms, George pocketed on behalf of the taxpayer. Here’s the pattern with Fannie Mae, Freddie Mac, and A.I.G.

1. Accounting scandal
2. CEO change
3. Financial practices supposedly cleaned up
4. Mortgage crisis causes huge losses
5. Taxpayer funded government rescue
6. New CEO’s

These firms have a history of fudging financially, followed by leadership changes and intensive cleanup efforts. That the pattern repeats itself, the root cause might be hiding in plain sight.

Could it be incentive executive compensation that causes CEO's to swing for the cheap seats, undertaking high risk strategies? If so, the new owners, American taxpayers, need to demand more changes.

Tuesday, September 16, 2008

It's a PEU Economy!

Guess who's making out like bandits while the average American struggles? Private equity underwriters (PEU's). First, Congress let them keep their preferred taxation on "carried interest". Now, the PEU boys are lined up to buy corporations on the cheap. But more opportunities abound, as they get to purchase their affiliates' debt at a significant dollar discount.

The Carlyle Group's distressed company fund is frothing at the mouth at opportunities. Their leaders believe things will get worse in our economy, before they get better. One manager said, "We are well positioned to make great investments."

Not long ago. Carlyle co-founder David Rubenstein bragged about buying back their debt on the cheap.

"The flavor of the day is buying your own debt at below face value. I'm buying bank debt in my deal with leverage from the bank that made me that deal"--David Rubenstein in Forbes, May 2008

It seems Kohlberg, Kravis, Roberts will get that same opportunity, given the fall of Lehman Brothers. Bloomberg reported:

Lehman Brothers Holdings Inc. is trying to sell $852 million of high-yield, high-risk loans, signaling it's dumping some assets after filing for bankruptcy, according to people familiar with the sale. Bids for the loans, some of which helped finance leveraged buyouts for First Data Corp. and TXU Corp., are due by 2 p.m. tomorrow in New York.

KKR owns all or part of both firms. How cheap can Henry Kravis buy back his own debt? Watch closely Jeb Bush, an advisor to Lehman's private equity division. You can see how the pro's work.

Now, how can the PEU's get those investment banks to lower their fees when they launch new IPO's?

Monday, September 15, 2008

Carlyle Group's Distressed Fund Vultures Circle

While the rest of the world frets over the failure of Lehman Brothers and the fire sale of Merrill Lynch, corporate vultures at The Carlyle Group's $1.5 billion distressed fund circle for prospects.

Today, President Bush and candidate John McCain talked about the strong fundamentals of the U.S. economy. Carlyle executives aren't so sure.

The group believes the current economic slowdown is still in its early days, even if the financial system recovers quite quickly. "It creates a lot of opportunity for us," says Mr Raymond Whiteman, co-head of Carlyle Strategic Partners fund. "When corporate slowdown collides with corporate profit pressure it creates defaults, corporate bankruptcies and restructuring."

"We are deep value investors, we are patient and we think it is going to get worse before it gets better," says Mr Whiteman. "We are well positioned to make great investments."

Sunday, September 14, 2008

Say Goodbye to Lehman Brothers and Merrill Lynch

Two Wall Street giants will be no more in the near future. Lehman Brothers will declare bankruptcy and Bank of America plans on buying Merrill Lynch. Will those anticipated runs on financial institutions happen with a big investment bank failure? Ask Peter Wallison of the American Enterprise Institute. He defended the government's bailout of Bear Sterns for such a reason on CSPAN. (Wallison panned the private business practices of Fannie Mae & Freddie Mac. Maybe, that will put a chink in the bi-partisan armor of privatizing all government functions.)

Also, conservative host Sean Hannity said claims the U.S. has seen a “dire” economy is “all based on a lie.” Will he change his tune after the demise of Lehman and the sale of Merrill?

Saturday, September 13, 2008

Slacker Bush Highlights Old Facts on HSA's

President George W. Bush continued his half hearted, cherry picking administration with a round table visit on health insurance in Oklahoma City. His fact sheet omits the fact that 42% of people with high deductible health plan have no health savings account, thus 5.2 million are under-insured. But he does offer a few facts:

1. Today more than 6.1 million people are covered by HSA plans, up 35 percent since 2007. Low- and moderate-income Americans and those previously uninsured are enrolling in HSA plans. In 2005, the most recently available data, more than one-third of HSA policyholders in 2005 had incomes under $50,000 per year, and one-third of individual HSA policyholders in 2005 were previously uninsured.

New data is available, it just doesn't support the Bush fiction. The 2007 Employee Benefits Research Institute/Commonwealth Fund Consumerism in Health Survey showed:

1. Enrollment remains low
2. Income is higher
3. Health status is better
4. Little impact on the uninsured
5. Lower satisfaction
6. More missed care
7. More cost conscious behavior
8. Limited consumer information available

The new information on income Bush left out? Here it is:

In 2007, 31 percent were in households with incomes of $100,000 or more, up from 22 percent in 2005. Just 19 percent of adults with CDHPs were in households with incomes under $50,000, down from 33 percent in 2005. Among HDHP enrollees, 23 percent were in higher income households in 2007, up from 15 percent in 2005.

And how many markets flip behavior for 2% of potential customers? In the 1990's managed care penetration had to reach 40-50% to impact provider behavior. Bush's signature solution for the ills of America's health care system is a placebo at best, a con at worst.

Friday, September 12, 2008

Greed Kills

The American and Chinese management mantra is "substitute cheaper inputs, regardless of quality, to maximize profits and executive incentive compensation." The latest manifestation is tainted baby formula. It killed and sickened thousands of Chinese infants.

The melamine tainted formula caused kidney stones and renal failure in babies. How would you feel if your "one baby" allowed by law was poisoned its formula, by the very thing intended to nourish life?

China, thus the world, has a major quality crisis. Solutions will not come from authoritarian reactions, but from true leadership, from profound knowledge. Dr. Deming is gone, but his followers know the way. How many more will die from greed?

Thursday, September 11, 2008

Red & Blue Fight Over PEU's

Republicans and Democrats compete for the right to send trillions in federal spending in the direction of their favored private equity underwriters. The Blue team favors green corporations, while the Red squad likes anything with the potential to provide gargantuan profits.

NYT's Dealbook reported on some of the latest draft choices by notable PEU's:

Governor George Pataki-MidOcean Partners
Vice President Al Gore-Kleiner Perkins Caufield & Byers
President Bill Clinton-Ron Burkle's Yucaipa Funds
President George H.W. Bush-The Carlyle Group*
General Colin Powell-Kleiner Perkins Caufield & Byers
General Peter Pace-Behrman Capital
Governor Jeb Bush-Lehman Brothers

*The Carlyle Group has a scroll like list of ex-government insiders. They even have one of their own, Dov Zakheim, on the President's Commission for Wartime Contracting in Iraq & Afghanistan.

This portends a continuation of the disastrous contracting of critical U.S. government functions and infrastructure. Those who cannot lead or manage, contract. Will they ever learn?

Wednesday, September 10, 2008

Bush Draws Line in Harbor on Iran

The Jerusalem Post reported the Bush administration imposed sanctions on the Islamic Republic of Iran Shipping Lines (IRISL) and its 18 affiliated companies for aiding the rogue regime in Tehran. There are numerous inducements for businesses and other governments not to utilize IRISL, but the kicker in the article is:

The vessels must be physically blocked should they enter US jurisdiction.

And where is the closest U.S. jurisdiction to Iran? Might it be near the Straight of Hormuz, maybe Iran's uncertain border with Iraq? Look for a Bush/Cheney naval incident, one that can serve as the precipitating event to a wider conflagration. General Petraeus takes over CentCom next week. Something wicked this way comes....

Tuesday, September 9, 2008

Carlyle Group Grew Mightily During Bush Years

While the average citizen's personal income stagnated under the Bush Presidency, one politically connected private equity underwriter (PEU) made out like bandits. The Carlyle Group went from managing $5.8 billion in assets in 2001 to over $89.3 billion in 2008.

In 2000 the mean household income was $57,047. By 2007 mean household income rose to $67,609.

Carlyle grew its asset base by 1,440% while income rose 18%. Adjusted for inflation, the 18% rise disappears. Households were lucky to hold their own, while Carlyle grew like Jack's beanstalk.

Will the PEU crack $100 billion before the next American President is sworn in? They are poised to do so with several personnel moves. Carlyle senior advisers just landed key jobs as CEO of Freddie Mac and CFO of Wachovia. Why are these moves important? Carlyle expressed interest in buying chunks of troubled banks and government backed mortgage underwriters. They now have people on the inside who can work that same agenda. (P.S. That new Wachovia CFO netted a $4 million sign on bonus and options on 1 million shares.)

Monday, September 8, 2008

Carlyle Group's Moffett to Take Over Freddie Mac

The new CEO of embattled Freddie Mac is David Moffett, Senior Adviser at The Carlyle Group, a politically connected private equity underwriter (PEU). As part of the recovery, the government plans to buy significant amounts of Fannie Mae and Freddie Mac's mortgage-backed securities on the open market. They begin with the purchase of $5 billion worth this month.

Why should anyone be concerned about Moffett's appointment? One, Carlyle has been lobbying that same federal government for looser restrictions on investing in banks. David works in the PEU's global financial services sector. He worked alongside Randal Quarles, the point man for banking rule relaxation.

Two, Carlyle Capital Corporation held residential mortgage backed securities in their failed fund. The roll up is underway. What impact might Moffett's appointment have on CCC? Might Freddie buy their securities first, even paying a higher price? That's something for an auditor to watch.

Bush has a history of doing right by his friends, as well as looking the other way. Carlyle experienced this in early 2006 with their omission from the White House Lessons Learned report on Hurricane Katrina. LifeCare Hospitals, an affiliate of the Carlyle Group, lost 24 patients in the storm's aftermath. This warranted not one mention in W.'s report. What's missing from the latest news release?

Sunday, September 7, 2008

Domestic Taxes Prop Up Foreign SWF Investments in Fannie Mae & Freddie Mac

American taxpayers' rescue of huge mortgage lenders Fannie Mae and Freddie Mac benefits their bondholders. Foreign government central banks and investment companies hold large chunks of both companies. The New York Sun reported:

According to data from the Council on Foreign Relations, central banks own $925 billion in debt in the two companies. China tops the list with $420 billion in Freddie and Fannie debt; Russia and Japan come in second with a combined $407 billion in debt. Others countries that hold the debt include Singapore, Taiwan, and several countries in the Persian Gulf.

The issue is bigger than Fannie and Freddie. The U.S. needs to keep its foreign bankers buying our federal debt. A year ago, foreign countries financed $6 trillion of American IOU's.

As of June 2007, foreigners owned $6,007bn of long-term US debt. (Equal to 66pc of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103).

Citizens should know how rich Middle Eastern sovereign wealth funds will benefit from the rescue. Foreign government coffers already bulge from the high price of commodities, especially oil and gasoline. While American citizens struggle to pay their mortgage, they get saddled with an IOU that makes rich SWF's whole. Middle East oil exporters can sleep soundly knowing their $30 billion of debt holdings in Fannie Mae are now secure. Israeli banks cheered the decision, as well.

They not only get your gas money, but a chunk of your taxes. We can't pour gasoline in the harbor, but we can have a key party! Park that vehicle...

Saturday, September 6, 2008

McCain's Son on Board of Directors of Failed Bank

Silver State Bank of Nevada became insolvent and was taken over by the federal government. Presidential hopeful, John McCain's son served on the Board of Directors of the failed institution. At least Rick Sanchez from CNN just reported that news.

Research shows Andrew resigned from the board in late July. He was likely aware of the bank's financial quagmire and hoped to avoid dragging his father into yet another Western banking scandal. Dad had Charles Keating of Lincoln Savings & Loan. The son governed Silver State Bank of Nevada, even heading up its audit committee.

Run, McCain, run!

You May Have Been Sublimed During McCain's Speech

Republican Presidential candidate John McCain horned in on many of Barack Obama's messages in his RNC acceptance speech. He mirrored his call for change and the need to clean up eight years of special interest groups running Washington. His backdrop at the beginning of the speech was Walter Reed Middle School.

The campaign blames the picture on its ad men. And those ad men know about subliminal messaging. How might that've worked?

Walter Reed Middle School is the site where an Obama like, Presidential aspirant announced his candidacy on the show West Wing. Jimmy Smitts plays Matt Santos, a minority running for the Chief Executive. His speech focused on hope in front of the same Walter Reed Middle School.

This election is about narratives. The McCain camp is trying to steal Barack Obama's story, i.e., claim it as their own. John McCain attached the leech Sarah Palin to Obama's neck to bleed him faster. Every time someone asks about her lack of experience, the red talking head replies "it's more than Obama's."

But, the beauty of the school backdrop during John's speech from his special podium? It enabled John to piss on the symbolic Democrat's lawn. How much more slime is coming?

If McCain makes it the White House, count on him behaving like the cartoon Calvin, impish and selfish. It's what George Bush did and McCain is more of the same...

Republican Theme Song: Eye of the Liar

Eye of the Liar
(to the tune of Eye of the Tiger by Survivor)

Ragin' hard, back on K Street
Delivered my lines, teleprompter dances
Rolled the dice with my VP pick
Now I'm hiding her, my need to survive

So many earmarks, they happen too fast
Stealing “change”, my ticket to glory
Lost my grip on dreams of Americans
But I pander, as I deliver them lies

It's the eye of the liar, it's the cream of victory
Risin' up to our major donors’ cries
And the last known survivor gets the big booty
While no media's watchin' the eye of the liar

Two faced, willing to cheat
Livin' high, fat and happy
Diebold stacks the odds 'til we declare victory
We need the White House to start another war


Ragin' hard, pumping my fists
Emotional upchuck, that’s my story
Went the distance, now I'm physically spent
Dress that woman and get her to hide


The eye of the cheater (repeats out)...

Thursday, September 4, 2008

Lieutenant General Carol Mutter Speaks at Eisenhower's RNC

Republicans have President Dwight D. Eisenhower in their history, yet Sarah Palin highlighted Democrat Harry S. Truman. President Eisenhower warned of the looming military-industrial complex. Under the steroidal Bush administration, the MIC morphed into the government-industrial monstrosity, incorporating health care and public infrastructure.

One of its benefactors took the RNC stage this evening, Lieutenant General Carol Mutter. She serves on the advisory board of Neah Power. Their press release states:

Gen. Mutter has been a consultant for companies including IBM (NYSE: IBM), Raytheon Co. (NYSE: RTN), Revision Eyewear, as well as virtual training and nanotechnology organizations, directly contributing to their relationships with and success in obtaining government contracts.

The McCain/Palin ticket talks about cleaning up Washington. My quick look at General Mutter's background calls this into question. With her time on the stage, Carol sold her ability to influence the Republican Presidential ticket.

General Eisenhower's grand daughter dropped the Republican Party the last two weeks. Susan is now an independent. At least she said so in her appearance on The Colbert Report.

Who do I trust to reform Washington? Not the ex-maverick McCain or the lipstick laden Palin.

Wednesday, September 3, 2008

News Reported on Palin's Rocky Speech Hours Before Its Delivery

As I watched Sarah Palin speak live on CNN, I read an AP report with words she just uttered. The news report was filed two hours and 45 minutes ago. What? How did the media report on a talk yet to be given?

The world has gone flippy floppy. McCain's shuffling the last two years wore through the sole of his Maverick boots. Palin hasn't been a reformer, any more than the NRCC Executive Committee. They picked low hanging fruit and left the more powerful rotten apples in place.

D.C. is a political pit of vipers after eight years of Bush/Cheney. Republicans will do anything to hold onto the White House. That means passing outright false talking points, saying the party line to the camera while panning Palin with the audio still rolling, even putting "lipstick on a pit bull." Bush was a cardboard cowboy, and Palin is a faux reformer.

Lipstick can't cover the gaping holes. The Republican ticket is Rocky's trainer and wife, but the boxer is missing. That doesn't mean the old guy and lady in glasses won't throw a few punches. They will, but they won't be enough to knock out K Street in the form of Apollo Greed. Republicans remain true to their rich donor roots as they continue to promise corporate welfare.

Oil Rich SWF's Now Want Your Movie Money

Not content to profit when you fill up at the gas pump, foreign government owned sovereign wealth funds want to make more money off the American consumer. The oil rich government of Abu Dhabi in the United Arab Emirates invested in movie and video game deal with Warner Brothers. That came about the same time another arm purchased 7.5% of The Carlyle Group, a huge private equity underwriter (PEU).

Consider this scenario sometime in the future:

Your family flies on vacation, on the newly released Boeing 787 Dreamliner, partially built by Vought Aircraft Industries. Then you rent a car from Hertz. After freshening up with the hotel's complimentary Philosophy products, the family decides to do dinner and movie. "Shorts", the new family-friendly adventure film just came out. After a nice meal, the kids spy a Baskin-Robbins. You treat them to a sundae. The movie is a hit, partly because of the large Dr. Pepper you purchased.

After taking the kids back to the hotel, the adults are ready for some gambling at Harrah's. After enriching the house, the tired couple is ready for some shuteye on their hotel's fine bed, provided by Mattress Giant. The next day, Dad has to check in at work. He does so via his laptop, housed in a Targus bag. He has to make his way through the computer's security system, using a fingerprint ID. The hotel's wireless system provides the means.

After a wonderful vacation, the kids foot dragging means not enough time to gas up the rental. Hertz gets to make an extra buck with their exorbitant gas charges. Back home you brag about the fun you had, as you head to Home Depot.

Meanwhile The Carlyle Group and United Arab Emirate SWF's brag about the money they made off you...

Tuesday, September 2, 2008

Bush Uses Gustav to Push Domestic Drilling

Ever the disaster capitalist, President George W. Bush used Hurricane Gustav to push domestic offshore drilling. The script included:

“One thing is for certain, when Congress comes back, they’ve got to understand that we need more domestic energy, not less,” Bush said in the Roosevelt Room. “One place to find it is offshore. America”s lands that have been taken off the books, so to speak, by congressional law and now they need to give us a chance to find more oil and gas here at home.”

With the Gustav bullet dodged, it's full steam ahead on oil and war. Bush did say he wanted to finish at a sprint. That and a little Olympic beach volleyball derriere handling. Who's backside with V.P. Cheney massage as he circles the world on his latest war tour? Stay tuned for when Congress might be coming back. Will there be any clues in President Bush's speech this evening?

Monday, September 1, 2008

Oil Expert Palin Distorts Exxon "Valdez" Oil Spill

The Republican V.P. matriarch of a fertile Alaskan family, Sarah Palin spoke with CNBC's Maria Bartiromo recently. Maria came away impressed with Sarah's knowledge of energy. Did Ms. Bartiromo watch Palin's interview with Washington Journal this past February? Here are a few clips from that CSPAN interview (available under the heading: Sen. John McCain (R-AZ) Announces V.P. Pick Gov. Palin) :

Governor Palin (at the 4:00 minute mark): A drunken captain that ran the Exxon Valdez ship into Bligh Reef and spilled 11,000 gallons of fuel

(at the 7:04 minute point): You know the footprint that we're looking at, hopefully being able to drill in ANWR at some point, it's a 2,000 acre footprint. That's small. smaller than the footprint of say, LAX

(at the 12:20 minute mark): and then was appointed a commissioner at the Alaskan Oil and Gas Conservation Commission, regulating oil and gas.

Later in the interview, Sarah spoke to Captain Joseph Hazelwood's specific role in the Exxon Valdez spill. So why would an acclaimed energy expert miss the size of the spill by 10.79 million barrels? And why would she call the spill "fuel" vs. crude oil?

Was she purposefully minimizing the spill to encourage further tapping of Alaska's energy resources? If so, what does that say about her later statistic, the 2,000 acre footprint?

Sarah's "11,000 gallons of fuel" was 10.8 million gallons of crude and it fouled 11,000 square miles of ocean. While the world focuses on exactly when her water broke, it misses her misrepresentation of a major hull breach. Strange days, my friend....