Don’t miss Boston.com’s Big Picture’s collection of the best photos of 2008 here, here and here.
The Big Picture — 2008
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Monthly Archives: December 2008
Any connection?
As Bill Henderson notes, many big law firms are going to have trouble surviving in these turbulent financial markets.
Financial markets aside, though, I wonder whether this type of news is an even larger part of big law’s problem?
Wallstrip does Cramer on Wall Street
Making sense of Madoff
Loren Steffy, the Houston Chronicle’s business columnist, has been having a hard time lately.
You will recall that Steffy was one of the leaders of the mainstream media lynch mob that embraced the myth of the Greed Narrative in calling for harsh criminal prosecutions of former Enron executives, particularly the late Ken Lay and Jeff Skilling.
However, now that pretty much the same thing that happened to Enron has happened to Bear Stearns, Freddie and Fannie, Merrill Lynch, Lehman Brothers, AIG and any number of other trust-based businesses during the current financial crisis, Steffy has had difficulty making sense of it all. We can’t just throw all of those executives in prison, can we?
Now to make things even more confusing for Steffy, Bernard Madoff’s alleged Ponzi scheme has unraveled. Steffy’s column from yesterday bemoans that Madoff, as with Enron, was at least in large part the result of lax regulation:
And so the era of lax regulation that began with Enron ends with the Madoff madness looming as a monument to the SEC’s ineptitude. Already under fire for smelling the flowers while Bear Stearns — to cite one example — charged toward collapse, the SEC’s days may be numbered. Treasury Secretary Henry Paulson introduced a sweeping reform plan earlier this year that would relieve it of much of its oversight role.
But wait a minute. The SEC had been continually warned about Madoff’s company (see Henry Markopolos’ 2005 notice to the SEC here). Moreover, the "lax regulation" that Steffy complains about came at a time of unparalleled growth in the SEC during the supposedly pro-business Bush Administration:
Since 2000 and especially after the fall of Enron, the SEC’s annual budget has ballooned to more than $900 million from $377 million. . . . Its full-time examination and enforcement staff has increased by more than a third, or nearly 500 people. The percentage of full-time staff devoted to enforcement — 33.5% — appears to be a modern record, and it is certainly the SEC’s highest tooth-to-tail ratio since the 1980s. The press corps and Congress both were making stars of enforcers like Eliot Spitzer, so the SEC’s watchdogs had every incentive to ferret out fraud.
Yet, the regulators couldn’t put the pieces of the puzzle together (even Spitzer’s family was a victim of Madoff!). So, Steffy’s solution is the SEC "needs to be put out to pasture." In other words, rearrange the deck chairs on the Titanic.
Look, as J. Robert Brown and Larry Ribstein point out, there are understandable systemic reasons why Madoff was able to slip through the regulatory cracks for decades. Most of those flaws are not going to be fixed by simply creating a Super-SEC. Indeed, the suggestion that such regulatory remedies are the best protection against the next Madoff (and, rest assured, there will be many) actually is counter-productive to understanding the truly best protection from such schemes.
The primary justification for this regulatory retrofitting is the plight of the innocent investors (and it sure is an interesting bunch) who lost millions when Madoff’s company went bust. Although nothing is wrong with compassion for folks who lose money in an investment fraud, it’s important to remember that those investors who lost their nest egg in the Madoff implosion were imprudent in their investment strategy. They should have diversified their Madoff holdings or done some real due diligence into his operation if they were going to bet the farm on it. Even though every one of Madoff investors carry insurance on their homes and cars, one can only speculate why they didn’t attempt to understand the risk of their investment in Madoff’s company better than most did. Most likely, many of the investors simply did not care to truly understand how Madoff claimed to create wealth for them in the first place. Chidem Kurdas’ speaks to this dynamic in his timely study on the demise of the Manhattan Capital hedge fund:
As the failure of the hedge-fund firm Manhattan Capital demonstrates, both government regulators and market players can make mistakes resulting from cognitive biases. Responding to such mistakes by strengthening government watchdogs, although often recommended, reduces both the watchdogs’ and the public’s incentive to learn, thereby creating a vicious spiral of regulation, regulatory failure, and even more regulation.
Thus, as Larry Ribstein has been advocating for years, no amount of increased regulation is likely ever to do a better job than the market in mitigating fraud loss. It’s easy to throw Madoff in prison for the rest of his life, simply attribute the investment loss to him and pledge to do a better job of policing the crooks next time. It’s a lot harder to understand how Madoff’s investors could have hedged their risk of Madoff’s fraud. As this WSJ editorial concludes, "expecting the SEC to prevent a determined and crafty con man from separating investors from their money is no more sensible than putting your life savings with a Bernard Madoff."
A Tuna Wins a Small Lottery Prize
As a result of the Buffet Rule, the federal government decided to land a bunch of tuna rather than the barracuda in regard to an AIG-General Re finite risk insurance transaction that was not clearly illegal, much less criminal.
Subsequently, after convicting the business executives (sort of like shooting tuna in a barrel these days), the federal prosecutors proposed that the tuna get effective life sentences. For what?
Thankfully, a federal judge in Connecticut showed unusual restraint on Tuesday in rejecting the government’s brutal behavior. He handed the first of the tuna to face sentencing a two-year prison term.
Meanwhile, former Enron executive Jeff Skilling continues serving an effective life prison sentence in Colorado pending his appeal after being convicted (although not fairly) for pretty much the same thing as the tuna above.
So, during a financial downturn when we need to be promoting our best and brightest to be engaging in the business risks that generate jobs and wealth, our federal government continues promoting its corporate criminal lottery.
Why would the best and brightest risk that? Do any investors really feel safer now that Skilling is off the streets? And does anyone really think that keeping Skilling locked up for most of the rest of his life will deter the next Bernie Madoff?
A truly civil society would find a better way.
Blago blogging
The criminal troubles of an Illinois governor would not normally be one of this blog’s topics, but this Michael Barone op-ed on the Rod Blagojevich affair is just too good not to pass along.
Barone is well-versed in the complicated web of influences that define Chicago politics, so he is right in his element explaining Blagojevich to other pundits not so steeped in Chicagoland:
The answer, . . . is that [Blagojevich is] not crazy, but simply stupid, hugely stupid. I’ve long since come to the conclusion that Rod Blagojevich is clearly the stupidest governor in all of our 50 states, and he may be the stupidest governor I’ve had occasion to write about in the four decades when I’ve been co-author of The Almanac of American Politics. And a stupid man (or woman) in high political office can be very dangerous to all concerned. I have long said that as a political operative I would prefer a smart opponent to a stupid opponent. If you’re pretty smart yourself, you should be able to figure out what another pretty smart person will do. But whether you’re smart or stupid, it’s hard to figure out what a stupid person will do. That’s even more true when the stupid politician is your political ally. Stupid people do all sorts of things that are against their own interests. Like tell the press on Monday that you wouldn’t mind being taped, even when (as we learned on Tuesday) that you’ve been saying all kinds of things that you should have known could easily send you to the slammer.
Meanwhile, Joe Queenan compares Blago to Nero, and then wonders what we have come to when a governor of a big state can shake down Bank of America and nobody really notices:
The idea that the governor of a state as prosperous and important and sophisticated and upscale as Illinois would make this kind of threat is terrifying. Even more terrifying is that Bank of America saw no alternative but to give in. Yet even more terrifying is that nobody outside Chicago seems to have gotten terribly worked up about the situation, riveted as they are on the governor’s more theatrical transgressions. But peddling a Senate seat or using scare tactics to shake down a newspaper are nowhere near so serious a menace to society as letting the government arbitrarily intervene in financial transactions between banks and creditors. A crooked governor we can all handle. But a governor who capriciously decides which commercial enterprises a bank must finance and which it can ignore is a scary proposition indeed.
Rome wasn’t built in a day. But get the wrong politician in office, and you can burn it in a day.
Meanwhile, Patrick Fitzgerald, a prosecutor who is quite capable of pursuing a weak case that nevertheless puts him in the center of the media spotlight, ought to shut up about the Blagojevich case, says Victoria Toensing:
In the Dec. 9 press conference regarding the federal corruption charges against Gov. Blagojevich and his chief of staff, Mr. Fitzgerald violated the ethical requirement of the Justice Department guidelines that prior to trial a "prosecutor shall refrain from making extrajudicial comments that pose a serious and imminent threat of heightening public condemnation of the accused." The prosecutor is permitted to "inform the public of the nature and extent" of the charges. In the vernacular of all of us who practice criminal law, that means the prosecutor may not go "beyond the four corners" — the specific facts — in the complaint or indictment. He may also provide any other public-record information, the status of the case, the names of investigators, and request assistance. But he is not permitted to make the kind of inflammatory statements Mr. Fitzgerald made during his media appearance. [. . .]
Throughout the press conference about Gov. Blagojevich, Mr. Fitzgerald talked beyond the four corners of the complaint. He repeatedly characterized the conduct as "appalling." He opined that the governor "has taken us to a new low," while going on a "political corruption crime spree."
Of course, we know all about federal prosecutors violating such ethical duties down here in Houston.
Finally, the always insightful Larry Ribstein puts the Blagojevich affair in proper perspective:
Let’s keep that in mind before we hand over more regulatory power to politicians because we think we can trust them more than the market participants who would be regulated.
2008 Weekly local football review
(AP Photo/David J. Phillip; previous weekly reviews are here)
The Texans (7-7), who most everyone in these parts had left for dead a month ago, won their fourth straight game for the first time in franchise history by handing the division-leading Titans (12-2) only their second loss of the season.
The slugfest win certainly was not picturesque. It came about through an odd combination of stellar play from WR Andre Johnson (11 catches for 208 yds and a TD!) and rookie RB Steve Slaton, who slogged his way through the rugged Titans defense for 100 yds on 24 carries, an abysmal day by Titans QB Kerry Collins (15-33/181 yds/1 INT/0 TD’s, another impressive performance for the most part by the Texans defense (holding the Titans to 281 total yds) and an odd go-for-it on 4th down call by Titans’ coach Jeff Fisher in the fourth quarter when a 49 yard-field goal would have given the Titans the lead with two minutes to go. Collins overthrew the 4th down pass, as he pretty much overthrew everything all day, and that was the ball game.
So, will the Texans beat my pre-season over/under prediction of eight wins? Only the Raiders (3-11) next Sunday in Oakland and the Bears (8-6) at Reliant the following week stand in the way of the Texans first winning season.
I must say, these Texan players under Kubiak do not give up.
Project Barkley
Hank Haney has done some really good work in helping Tiger Woods modify his swing plane over the past several years. But what he has done in helping Charles Barkley fix his golf swing is nothing short of miraculous.
That’s a solution?
As Congress and the mainstream media continue their muddle over the current downturn in financial markets, one of the ubiquitous "solutions" that Washington and the MSM have already decided is needed to prevent another such disruption is more and better governmental regulation of those markets.
Thus, it was with great interest that I read this W$J article today about the meltdown of Bernard Madoff’s apparent Ponzi scheme:
Bernard Madoff is alleged to have pulled off one of the biggest frauds in Wall Street history. But there were multiple red flags along the way, including a series of accusations leveled against Mr. Madoff’s operation. Now some are asking why regulators and investors didn’t pick up on the alleged scheme long ago.
"There were multiple smoking guns of various calibers," says Harry Markopolos, an industry executive who in 1999 first contacted the Securities and Exchange Commission with his suspicions. "People were willfully blinded to the problems, because they wanted to believe in his returns." [. . .]
Mr. Markopolos, who years ago worked for a rival firm, researched the strategy and was convinced the results likely weren’t real. "Madoff Securities is the world’s largest Ponzi scheme," Mr. Markopolos wrote in a letter to the SEC. Mr. Markopolos pursued his accusations over the past nine years, dealing with both the New York and Boston bureaus of the agency, according to documents he sent to the SEC that were reviewed by The Wall Street Journal. An SEC spokesman declined to comment.
In short, the regulatory agency that is supposed to protect investors has been warned about Madoff’s fund since 1999 and has done nothing.
Meanwhile, Marcia Vickers and Roddy Boyd write in this Fortune article about the troubles of Citadel Investment Group, the Chicago-based hedge fund that manages $15 billion and has 1,300 employees worldwide, which announced yesterday that it has frozen withdrawals through March:
The panic that swept through the capital markets after Lehman declared bankruptcy was one form of human frailty that Citadel’s sophisticated mathematical models could never have anticipated. The second and perhaps more devastating one occurred on Wednesday, Sept. 17, when news broke that the Securities and Exchange Commission was considering a temporary ban on short-selling 900 stocks – 799 of them financial stocks.
The proposed ban was good news for the banks and brokers. It meant that Morgan Stanley (MS, Fortune 500), Citigroup (C, Fortune 500), and others didn’t need to worry that hedge funds could drive them to the brink.
Yet the news was horrifying for hedge funds like Citadel. Scores of Citadel’s positions – particularly in convertible arbitrage, which requires shorting – would simply blow up if the ban went into effect.
According to sources, Griffin phoned Christopher Cox, the SEC’s chairman. Griffin pleaded with Cox, telling him the ban could mean certain death to many hedge funds – including Citadel. Cox, according to these sources, was unmoved and merely responded with the party line about how the country was going through a national financial crisis and the SEC needed to do what it had to.
There was nothing Griffin could do or say to sway him, and on Friday, Sept. 19, the ban was made official. (The SEC declined to comment for this story.)
Citadel was now hemorrhaging money. Over the weekend and throughout the following week, Griffin talked with his portfolio managers and told them to dump the dogs and keep the racehorses, meaning preserve the positions that they believed had long-term upside as they engaged in a selloff.
By the end of September, Citadel’s funds were down 20%. In early October, Griffin sent a letter to investors stating that September had been the “single worst month, by far, in the firm’s history. Our performance reflected extraordinary market conditions that I did not fully anticipate, combined with regulatory changes driven more by populism than policy.”
So, let me get this straight. The CEO of a huge hedge fund calls the SEC chairman to protest that responsible businesses that have hedged risk properly are going to suffer huge, unfair financial losses as a result of the SEC’s dubious, knee-jerk temporary ban on short-selling. And the best that the SEC chairman can come up with is that "the SEC needed to do what it had to"?
Go ahead and toss Chairman Cox in with this group.
Finally, almost unnoticed amidst all this turmoil is this piece of news that the Federal Trade Commission is inexplicably continuing to fight Whole Foods’ merger with natural food competitor, Wild Oats, despite the fact that it is now pretty darn clear that Whole Foods overpaid for Wild Oats, that Whole Foods isn’t doing all that well right now, and that the grocery business generally continues to be brutally competitive.
So, in light of all this, even more regulation is the solution?
As Larry Ribstein points out, that "solution" could well make things worse.
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