We’re another step closer to auditing the Federal Reserve

This has been a long time coming. The Federal Reserve has never been audited. Ever. The House has now moved us a step closer to shedding real light on all of the secret deals:

The measure, cosponsored by Reps. Ron Paul (R-Texas) and Alan Grayson (D-Fla.), authorizes the Government Accountability Office to conduct a wide-ranging audit of the Fed's opaque deals with foreign central banks and major U.S. financial institutions. The Fed has never had a real audit in its history and little is known of what it does with the trillions of dollars at its disposal.

Continue ReadingWe’re another step closer to auditing the Federal Reserve

When do the prosecutions begin?

In the St. Louis alternative newspaper, The Riverfront Times, James Lieber sizes up the prosecutions now underway for the economic collapse. Oh, wait. There aren't any prosecutions:

As it stands now, there is only one federal prosecution related to the credit crash and bailout cycle, and it was begun by the Bush administration's Justice Department in June 2008. Not that there aren't culprits. Bernie Madoff and other accused Ponzi schemers like Allen Stanford are mere pickpockets compared with Wall Street's institutional buccaneers, who so far have carted off up to $12.7 trillion — that's nearly equal to the entire gross domestic product. They've multiplied their booty with billions in subsidies and a flood of derivatives — some of them merely old soured wine in new bottles. Today's pirates are sailing away from the light regulatory scrutiny that apparently will continue in our benighted, weakened, financially top-heavy and bubble-addicted economy. [Former regulator William] Black says Obama's current efforts are doomed to fail — and, in a twist, it's for lack of trying. "There is not a single successful regulator giving him advice," Black notes.
I've posted about William Black previously. Lieber describes him as follows: "a Ph.D. criminologist and lead lawyer at the Office of Thrift Supervision, who helped steer the brilliant federal effort that cleaned up the S&L industry and won more than 1,000 felony convictions of senior insiders while recovering millions of their ill-gotten dollars." Black is someone to whom Obama should be listening. He states that there are two reasons why there aren't vigorous ongoing prosecutions resulting from this collapse 1) "It's difficult to prosecute others for securities fraud if you condoned the deals to begin with," and
2) Obama administration lacks the will. Obama was the candidate most preferred by Wall Street and he has surrounded himself with lackeys for big finance, including not only Lawrence Summers and Tim Geithner, but also Attorney General Eric Holder, who has made it clear that white collar crime is something which he'd rather not prosecute. Keep in mind that "Wall Street's institutional buccaneers [have] so far have carted off up to $12.7 trillion, and that in 2008, In 2008 American households lost 18 percent of their wealth. Why aren't there more prosecutions? There's no good reason. This is an excellent in-depth article. The title: "No Justice: We've bailed out the banks. When do we go after the crooks behind our financial collapse?"

Continue ReadingWhen do the prosecutions begin?

Buffett’s bet on peak oil

Warren Buffett is lauded as one of the greatest investors of all time, if not the greatest. He's the second-richest person in the world, and known as the "Oracle of Omaha" for his seemingly prescient investments. For example, in the wake of the collapse of Bear Stearns and during the height of the market panic that followed it, Buffett stepped in and negotiated a deal with Goldman Sachs. He acquired $5 billion worth of preferred shares, which would pay him a 10% dividend, as well as warrants with the rights to sell those shares at any time within 5 years from the time of the transaction. As of September this year, those warrants were "in the money" to the tune of $3.1 billion, and that doesn't include the $500 million in premium payments that Goldman pays every year. Those lucrative terms (punitive for Goldman Sachs) left others wondering why the Treasury Department could only negotiate a 5% dividend, but that only added to the mystique and legend of Warren Buffett. At the time, Buffett was quoted as saying "If I didn't think the government was going to act, I would not be doing anything this week," referring to the massive bailout bill which was indeed enacted by the government. It's deals like that that enable one to become one of the richest people in the world. But it's also that background that has some on Wall Street scratching their heads at the news that he was purchasing Burlington Northern railroad. The Wall Street Journal discussed how the acquisition seemingly broke two of Buffett's cardinal rules on investments: 1) buy undervalued stocks or companies, for obvious reasons and 2) don't split your own stocks, as it dilutes the equity of the existing shareholders. Bloomberg quoted a hedge fund principal as saying, "It could be five years before the logic of [Buffett's purchase of] Burlington Northern becomes clear." Even Buffett admits that the purchase was "not cheap" and that it represents an "all-in wager"on the future of the American economy. And there can be no doubt that it is a significant investment-- he's liquidating other rail investments totaling $691.3 million while the Burlington Northern purchase will cost some $26 billion-- an increase in his railroad holdings of some 3,600%. And this bears repeating, he's splitting stock to get it done. This is the first time ever that Berkshire Hathaway (Buffett's investment company) has split shares. He's so reluctant to split shares, the class A shares regularly trade over $100,000 per share, an unheard-of valuation.

Continue ReadingBuffett’s bet on peak oil

Jeffrey Sachs: Democrats and Republicans both offer only snake oil for the economy

Jeffrey Sachs, the Director of The Earth Institute at Columbia University, has sharply criticized both the Democrat and Republican approaches to dealing with our failing economy. For instance, Sachs complains that President Obama is seeking to kick up consumer spending through “near-zero interest rates, massive Fed financing of mortgages and various consumption incentives, such as rebates for new home-buyers and cash for clunkers.” According to Sachs, though this will simply get us into a new bubble, as the US consumer is encouraged to over-borrow. This is a terrible strategy “with budget deficits of about 10 per cent of gross domestic product.” How about those Republicans? Their “solution” is equally terrible:

For every problem there is a single Republican answer: tax cuts. Simple arithmetic reveals the stunning shortsightedness of this proposition. The federal government collects about 17 per cent of GDP in tax revenues. That roughly equals the outlays on social security, Medicare, Medicaid, veterans’ benefits, defence and interest payments on debt.

All the rest – roads, rail, clean energy, science and technology, diplomacy, international disease control, space, education, job training, water, transport, courts, poverty relief, homeland security, conservation, climate adaptation – is financed on borrowed money. All of these critical areas are underfunded, which hinders productivity, national security and private investment.

What a good idea that is being largely ignored? Sachs likes the idea of jump-starting the green economy:

One where the jobs would come through a massive expansion of low-carbon energy. We were told about plug-in hybrids, intercity fast rail and new water and sewerage plants to replace the crumbling infrastructure. We were told about a new infrastructure bank to fashion complex multi-state projects that would employ huge numbers of workers while building a cutting-edge economy.

Continue ReadingJeffrey Sachs: Democrats and Republicans both offer only snake oil for the economy

Run from actively managed securities funds

Dan Solin at Huffpo has repeatedly pointed out the folly of paying an investment "expert" to manage a securities fund. His advice goes against the grain; innumerable books, magazines and websites pretend that if you want to grow your investments, you need to pay someone to actively manage them. As Dan Points out in this post, the great majority of fund managers hyperactively stir your investments (which costs you money for all these transactions) and the fund typically does less well than passively managed index funds that cost a fraction of the cost of actively managed funds to maintain. Vanguard, for example, is a prominent company offering many passively managed funds that cost less than 1/10 as much to maintain as actively managed funds. After pointing out new statistics showing the follow of active management, Dan offers this hypothetical conversation that you should have with the next investment professional who offers to help your funds "grow," for a fee, by wheeling and dealing securities for you:

Broker: I recommend this [hyperactively managed] stock [or bond] fund. You: You get a commission if I follow your recommendation, right? Broker: Of course. You: Based on data from both Morningstar and S&P, your recommended fund is likely to underperform a low cost index fund of comparable risk, right? Broker: Yes. You: Is this a farce or a con? Then hang up.

Continue ReadingRun from actively managed securities funds