Numerian's blog

What Really Happened with the AIG Swaps? It's Not What You Think

Thu, 19 Nov 2009 08:01:11 -0800

By now most people who follow Goldman Sachs in the news know that it received $13 billion from the Federal Reserve to liquidate its portfolio of derivatives with AIG. Because the Fed was willing to pay Goldman par value on these derivatives, even though the market valued them at about 48 cents on the dollar, Goldman walked away with no loss whatever from the AIG collapse. This has been described as a great gift for Goldman and all the other banks who dealt with AIG and who were treated the same way. Many others have described this as a colossal rip-off of the taxpayers.

How did this come about? We know a lot more this week about these transactions because of a report that has been issued by Neil Barofsky, the Special Inspector General for the bank bailout programs. The press has described this report as particularly damning of the NY Federal Reserve which negotiated these deals with the banks, and which was led at the time by Timothy Geithner, the current Treasury Secretary. These press reports, however, have mischaracterized what happened and what went wrong. The NY Fed acted properly and entirely as one would expect under the circumstances when they negotiated these contract abrogations. To see what really went wrong, follow along on the details below.

The AIG Transactions

First, a little bit of background on what got AIG into trouble. The insurance giant had a subsidiary in London called AIG Financial Products (AIGFP). This company developed a business that offered customers financial protection on a derivatives contract known as a Collateralized Debt Obligation (CDO). These derivatives packaged together various debt instruments, such as loans, bonds, mortgage-backed securities, even other CDOs, into a single security. When you bought the security, you received a regularly scheduled set of cash flows generated by these debt instruments as interest payments were made. You paid an up-front premium for these cash flows, which usually took place over a three to five year period during the life of the security.

It is interesting to note that the buyer of the security, and for that matter the seller/creator of the security, had no legal interest in the debt instruments. The bonds or loans could be any debt of this nature where public information was known about the interest rate, and whether or not a default had occurred by the debtor. There could be dozens, or even hundreds of different debt instruments bundled into one security.

These CDOs carried a public rating from Moody’s or S&P or Fitch, any of the three big ratings agencies. Also, you could get a daily price on the CDOs from a third party pricing agent located in London. If the price was 100, the security traded at its par value, meaning all payments were highly likely to take place over the life of the security as required by the contract. If the price was 48, on the other hand, it meant the market believed the security was seriously impaired due to defaults occurring on some of the debt instruments in the security.

Big banks loved to create CDOs up until the market crashed in 2007. CDOs were very lucrative. Banks had loan books that gave them a natural portfolio of debt as a start in creating a CDO, but there also was the booming housing market bubble that allowed for the creation of mortgage-backed securities. A huge amount of CDOs were created based on these mortgage instruments. Banks also realized that when they created and sold these securities to earn the profitable premiums involved, they were still on the hook in case any of the debt instruments in a security experienced a default. They wanted to get rid of this risk as much as possible, and pay away a little bit of their lucrative premiums for the privilege.

Here is where AIGFP comes in. AIGFP invented a derivative that acted like an insurance contract. Banks would pay AIGFP a premium, and AIGFP would promise to indemnify the banks in the event they experienced any losses on a specified CDO. The company used a derivative called a Credit Default Swap (CDS, unfortunately easy to confuse with a CDO) to structure this insurance product.

AIGFP was not regulated by any financial oversight agency. It didn’t even have to keep reserves on potential payouts on these CDSs, and even if it did, it has stated that the reserve amount would have been very small because it did not anticipate significant losses on the underlying debt instruments it was insuring. What AIGFP had going for it, and what the banks liked, was that it was a wholly-owned subsidiary of AIG, which carried a Aaa rating in its own name for everything it did. By virtue of this rating, AIG was viewed as one of the highest quality companies in the financial world – almost as safe and sound as a government.

The most common type of CDOs brought to AIGFP were called multi-sector: they had a little bit of everything mixed into them – loans, bonds, mortgage-backed securities on sub-prime mortgages as well as higher-quality instruments like prime mortgages. As long as none of these different types of instruments experienced unusual rates of default, the entire CDO would be traded on the market at a price close to par, and the ratings agencies would have no cause to downgrade the security.

What began to cause AIGFP trouble with its portfolio of credit default swaps backing up about $72 billion of multi-sector CDOs, was not that there were so many defaults on the CDOS that AIGFP had to make large payments under the swaps. The real problem was a series of collateral obligations AIGFP undertook every time it entered into a CDS, and the collateral conditions varied from one swap to the next.

There were three possible triggers for a collateral payment from AIGFP to the banks that bought insurance in the form of CDSs. The first occurred if the underlying CDOs being insured in the swap experienced a drop in price on the market – say from par value to 48 cents. The second occurred if the ratings given by Moody’s or some other agency on the CDOs were downgraded. The third occurred if AIG’s Aaa rating itself was downgraded.

You can now begin to see the sequence of liquidity disasters that befell AIGFP, and soon engulfed its parent AIG, starting in the summer of 2007 and extending until September 16, 2008 when AIG was near death. First, as the market realized that the US sub-prime mortgage business was experiencing very high and unexpected defaults, everyone looked at multi-sector CDOs that carried a significant percentage of these debt instruments in the security. These CDOs began to trade at lower and lower levels in the market as no one was sure just how impaired they would become.

Second, the ratings agencies began to downgrade dozens of CDOs because of the heightened default risk, and the lower prices in the market.

Third, the ratings agencies realized by 2008 that AIG stood behind the CDO market as insurer for the tune of $72 billion. At first, the long term rating of AIG was lowered, and this began a series of collateral calls from AIGFP’s swap customers. Then, by the summer of 2008, the ratings agencies were looking at downgrading AIG’s short term ratings, and doing so by several notches, which brought into question whether AIG could meet all of its obligations under these swaps. This accelerated the demands for collateral on AIG, which was experiencing a very unexpected triple whammy of collateral calls. By September, 2008, AIG had already coughed up an astounding $30 billion in collateral, and was really only half way through what ultimately it would need to satisfy contractual demands for collateral from the market. It simply ran out of resources to raise any more liquidity, and it faced inevitable default under its swap contracts, which would have led to bankruptcy.

This was the situation facing the Fed by the second week of September, 2008.

The Fed Steps In

The Fed already had its hands full in the summer and fall of 2008. First, Bear Stearns collapsed and was thrown into the arms of JP Morgan Chase, but only after the Fed agreed to take over the Bear Stearns real estate portfolio worth $30 billion in dodgy real estate assets. The quasi-government giants Fannie Mae and Freddie Mac had to be taken over by the government, then Countrywide Financial collapsed and also was pushed into a forced sale to a bank.

There was so much criticism directed at the government for the way in which these rescues were being done, and the amount of taxpayer money spent in the process, that when it came time to deal with the collapse of Lehman Brothers, the Treasury and the Fed threw this firm to the wolves on September 15, 2008. It received no help from the government and was thrown into the bankruptcy courts. This precipitated a global market meltdown.

The trigger for this meltdown occurred at the oldest mutual fund in the US, American Reserve Fund, which took a writedown of $785 million on Lehman Bros. bonds it held in its money market fund. This was announced on the afternoon of September 15, and by the close of business that day massive amounts of withdrawals were taking place at American Reserve since no money market fund had ever experienced such a loss (money market funds were supposed to be as safe as checking accounts).

When the market opened the next morning, mutual funds everywhere couldn’t cope with the withdrawals. The commercial paper market ground to a halt, as did the Eurodollar market for short term loans in London. Stock markets around the globe tanked. The global financial system was nearly paralyzed.

The US government stepped in and guaranteed the safety of all money market funds. It allowed Goldman Sachs and Morgan Stanley, the last two surviving old-line investment banks, to become commercial banks and enjoy the benefits of Fed liquidity. The Fed had been working since the previous week on the dire liquidity situation at AIG, and it had asked JP Morgan Chase and Goldman Sachs to form a bank syndicate to provide AIG with a massive $75 billion loan to solve its liquidity problem.

JP Morgan Chase came up with a package that charged AIG an onerous 11.3% on the $75 billion loan – a full $9 billion a year in interest alone. The banks would take an 80% ownership interest in AIG’s assets. This loan package was also intended to stop the ratings agencies from yet again lowering AIG’s ratings, which would have cost the company yet another round of collateral calls from the market.

There was one big problem, though. When the banks looked at AIGFP’s portfolio of swaps, and the potential collateral demands that could still occur, they realized that AIG, if it could sell all of its assets at decent market prices, still wouldn’t be able to meet the liquidity demands. In other words, the way the market was developing, AIG was headed straight towards default and the bankruptcy courts. Making this situation even worse was the global market collapse occurring at the same time as the result of the Lehman bankruptcy. The banks told the Fed that the loan package had collapsed. The banks effectively threw the AIG problem on to the laps of the regulators, none of whom by the way had any legal responsibility, regulatory oversight, or historical familiarity with AIG. It was an insurance company that had somehow become bigger and more important than even the biggest banks.

In deciding what to do, the Fed had about 24 hours from September 15 to 16 to analyze with the Treasury the AIG situation. They discovered that AIG would default on $103 billion in loans from state and local governments, $50 billion in bank loans and derivatives, $20 billion in commercial paper, and $40 billion in insurance covering 401k retirement packages across the US. The problems ranged from the horrendous to the horrific. The municipal bond market stood to be devastated by state and municipal loan losses. The Lehman bankruptcy involved $8 billion in commercial paper losses, which led to the Reserve Primary Fund disaster, but AIG’s commercial paper losses were much bigger at $20 billion. The 401k losses would affect tens of millions of Americans. AIG’s loan losses spread to banks all around the world.

The Fed and Treasury, standing in the middle of a global financial collapse the day after the Lehman Brothers bankruptcy, felt they had no choice but to save AIG, a much bigger player with far greater reach and implications for economic and financial disaster. The Treasury authorized an $85 billion line of credit at the Federal Reserve NY for the purpose of lending to AIG the amounts needed to post collateral behind its swaps at AIGFP. The Fed had no plan in place on how to do this, so it simply lifted the term sheet conditions from the JP Morgan failed loan package, and used those terms to lend to AIG.

From September 16 through October, the Fed lent $61 billion to AIG, over half of which found its way into the market as collateral to support its swaps. At the same time, AIG was instructed to begin reducing its swap book. This required AIG to turn to all the big banks with which it had a swap portfolio, and ask to close out, or abrogate the swap contracts. The banks would consider doing this, but would not want to be then left with the CDO risk that caused it to enter into the swaps in the first place. There was some talk of AIG therefore taking over the CDOs as well, which had sunk substantially in value because of the default risk, but it was very difficult to agree with each bank on what these CDOs were worth. In fact, the banks weren’t willing to sell these CDOs at any discount whatsoever, despite what the market said they were worth, so AIG turned to the Fed for help, and authorized the Fed to negotiate on their behalf.

Here is where we come to the gist of the Barofsky report and the criticisms of the Fed. But let us recap two critical facts up to this point. As of September 15, AIG was certainly heading for bankruptcy, within a manner of days. The banks stood to lose billions on their swaps with AIG, because they would be under-collateralized if the CDOs fell further in value, and because they could not easily all at once get replacement CDS coverage for their CDOs.

Second, shortly after September 16, the banks began receiving collateral from AIG, courtesy of the Fed via the $85 billion loan authorization. For the next two months, the banks were made whole as necessary whenever their CDOs fell in value. The banks could look at their portfolio with AIGFP and consider it safe and secure because of the collateral, and as important, because of the guaranty of more collateral to come as necessary, courtesy of the federal government.

The Fed Tries Its Hand at Negotiating

In early November the Fed assigned a team of managers to begin negotiating for the abrogation of the CDSs. They chose the eight largest bank counterparties to talk to, including Goldman Sachs, BOA, JP Morgan Chase, Deutsche Bank, UBS, and top of the list was Societe Generale in Paris. The plan was to ask the banks to tear up the CDS contracts through a legal abrogation agreement. It was common for banks to do this in the derivatives market from time to time, though never before on a large scale. The banks always required the customer to pay them for any potential real market losses they may incur in abrogating the contract, plus interest and a bit of a fee for all the trouble. Abrogations have never been cheap, especially if the customer was desperate to get out of a deal.

What would the banks want? Collectively, they held CDOs worth a face value of $62.1 billion, and these were the underlying CDOs behind the swaps bought from AIGFP. The banks wanted to give these over to the Fed and get $62.1 billion back, because otherwise the banks would be stuck with CDOs that were unhedged for further default problems.

The market price for this collective group of CDOs was in early November $29.6 billion, which tells you just how badly the market had trashed these instruments. But the banks held cash collateral of $35.0 billion to protect against just this contingency, and if you add the two numbers up, you come to a bit over the $62.1 billion in face value. In other words, the banks were sitting pretty. They were 100% covered for the existing market losses on these CDOs, and the market pricing was beginning to stabilize.

Remember that all this collateral came from the Fed on behalf of the now moribund AIG. The banks wanted to do a simple deal. They would give the Fed all the CDOs in exchange for $29.6 billion in cash – their current market value. They would keep all the existing cash collateral, so they would be perfectly whole. They would then abrogate the CDSs and have no further claim on AIGFP, as if the whole mess never occurred. The Fed, meaning the taxpayers, would be out $62.1 billion in cash to clean this mess up.

In preparing talking points for the negotiations, the Fed reminded each bank that it would be appropriate to give back some of the collateral to the Fed rather than keep it all. The Fed, by stepping in a month earlier, had saved the banks from billions of losses had AIG gone into bankruptcy, and these losses might have included a systemic crisis in which a few other banks went under and couldn’t pay their obligations as well. “”Be nice to us, given all that we have done for you,” was the Fed motto.

The Fed then tied the hands of their negotiators in several ways. First, the Fed would not threaten to throw AIG into bankruptcy if they didn’t get a “haircut” on the $35 billion in collateral. This would be unethical because the Fed had no plan to put AIG into bankruptcy and everybody knew it. Second, the Fed negotiators would have to do the same haircut deal with everybody. If Goldman Sachs agreed to return 30% of the collateral, JP Morgan Chase would have to agree to the same thing. Third, the banks were told up front that their participation in the negotiations was entirely “voluntary”; nobody was going to be forced to do anything or accept any haircut.

You should not be surprised that seven of the eight banks refused to take any haircut on the collateral and would therefore return none of it. They argued the cash was theirs, not the Fed’s, and they owned it by the sanctity of a legal contract that the Fed was proposing to violate. Second, AIGFP was not in default and there was no bankruptcy, and there wouldn’t be any, so giving back collateral when there was no legal requirement would constitute a breach of fiduciary duty that the banks had to their shareholders. Unstated in all this was the fact that the Fed wasn’t threatening any consequences if the banks refused to give back any of the collateral.

The kicker that destroyed any possibility of the Fed getting some of the collateral back occurred with the French bank. They told the Fed that it was not simply a fiduciary responsibility they had to follow in keeping cash that was rightfully theirs – it was decidedly against French law to give back the collateral because there was no bankruptcy. The French regulators confirmed this in no uncertain terms to the Fed, with the implication that if the Fed pushed on this point relationships with the French government would be damaged. Remember that all the banks had to agree to the same deal, so each bank had a veto power over any deal, and the French bank had the ultimate veto – it was illegal for them to give back the collateral.

The negotiating team reported all this back to Timothy Geithner, and recommended that the Fed settle all the swap abrogations by allowing the banks to keep all the collateral and thereby effectively receive par value on contracts that in the market were worth less than half that. Geithner agreed and the deal was done. The Fed then promptly kept all these details secret, including the names of the banks involved, and even went to court to maintain this secrecy under the financial equivalent of a “state secret” argument. They recently lost this argument on appeal to a higher court, and the Barofsky report severely berated the Fed for this because no terrible consequences have occurred now that the details are known.

What Went Wrong Here?

The Barofsky report lays a pretty heavy blanket of criticism on the Fed for not just the secrecy of their actions, but the actions themselves. The Fed didn’t have to treat everyone all the same. It could have accepted different levels of haircuts. It didn’t have to put so much faith in the sanctity of contracts when AIG was in virtual suspended animation – bankruptcy in all but name.

These criticisms do not show an understanding of how the Fed works. Like any large American organization, it pays considerable attention to the law. Timothy Geithner had a high powered, high-priced General Counsel sitting as his right side all the way. Geithner was told clearly that as long as AIG was not in bankruptcy, the Fed might damage its reputation by violating the terms of perfectly sound legal contracts and insisting on repayment of collateral when it was not legally required. He was also told the Fed had no ethical right to threaten bankruptcy when the threat could not be backed up later in court with proof it was real. He was probably told – though there is no proof of this in the report – that giving any bank preferential treatment on haircuts exposed the Fed later to lawsuits of unfair treatment.

Timothy Geithner is like most American executives – he is a technocrat. He respects technical advice, especially of the legal kind, and he abides by it. Past presidents of the NY Fed might be different – Gerald Corrigan comes to mind during the Drexel Burnham bankruptcy. He would bang some heads together to get an outcome that satisfied the political pressure on the Fed, even if it meant overriding legal advice. Gerald Corrigan, by the way, now works for Goldman Sachs. He might have in this situation taken Goldman Sachs and JP Morgan Chase aside and said, “I want you guys to get your consortium of banks to agree on a haircut – something like 30% would be nice – and I want all of you to come back and voluntarily request that the CDS collateral provisions be waived in favor of paying back to the Fed some amount of the collateral. I don’t care how you do this, and it is not going to be the Fed asking for it – it is going to be voluntarily offered to us.” The banks would not need to be told that there was a steel hand underneath the Fed’s velvet glove.

Maybe Timothy Geithner would have done this, technocrat though he is, if there were enough political pressure on him to save the taxpayers billions of dollars, but there wasn’t. No one in the Bush administration – certainly not Henry Paulson at Treasury – was demanding fairness for the taxpayers. There was public disgust over the whole bailout process, but this disgust got bottled up in a Congress paid for by the financial industry. Barofsky might have mentioned that lack of political pressure, and the consequent insensitivity to taxpayer needs that the Fed and the Treasury displayed, but he didn’t, maybe because his current paymaster, the Obama administration, isn’t showing any such sensitivity either.

Which brings us to the crux of the problem, only hinted at in the Barofsky report. The real problem for the taxpayers didn’t occur when the NY Fed failed to negotiate the return of some of the collateral in November, 2008. The problem occurred on September 16, when the Fed and the Treasury were suddenly faced with a collapsing AIG. Had there been any forethought and planning for such an event, the reaction could have been very different and far less panicky.

The first response should have been: ”Financial markets worldwide are frozen, and they are going to stay frozen for a long time no matter what we do with AIG." In hindsight, this is exactly what happened. The commercial paper market has taken nearly a year to recover a fraction of its previous activity, and this was only after the Fed had to guarantee transactions. Credit spreads took nine months to begin coming down to normal levels. Banks are lending to each other only because governments around the world now guarantee their bank activity, but banks are still not lending to corporations, small businesses, or individuals. The housing market in the US exists entirely on the generosity of Federally-managed firms like Fannie Mae, Freddie Mac, and FHA. In other words, the disaster that the Fed faced on September 16 rolled on despite the rescue of AIG.

If AIG had been allowed to fail, the market would have learned a serious lesson about dealing with companies that act like banks but really have no controls or regulatory oversight like banks. The pain would have been greatest at the banks themselves. Some banks like Citigroup and Bank of America would have been even more crippled than they are now, but their current status as zombie banks would not be any different. The damage done to 401ks could have been mitigated by additional federal government guaranties, but even here the cost while enormous would have been less than what was spent paying off AIGFP’s credit default swaps at par.

Suppose you say that it is impossible to expect government bureaucrats to react on September 16 in any different manner. You can argue that any normal person would have panicked too, and that tough-nosed regulators like Gerald Corrigan don’t come around all that often – in fact these days they are all working for Goldman Sachs. Fine. Where, then, was the prudential planning for this catastrophe. All it would have taken is someone in advance of the crisis – a clever lawyer for example – inserting one clause in the agreements with banks before any collateral was posted with them. It would have said “The Federal Reserve Bank of New York reserves the right at any time to demand immediate repayment of any or all amounts of collateral posted with Bank X, with no compensation required to be paid to Bank X in any form by the Federal Reserve Bank of New York, and Bank X hereby waives all rights to petition for a legal stay of said repayment.” If the banks didn’t like this clause, they wouldn’t get their collateral. They could go ahead and sue the government for breach of contract, but in the meantime they would be experiencing real pain with their CDO portfolio and the pressure would be on them to settle. Once the collateral was out the door, the Fed lost all leverage with the banks, and this is why the November negotiations were a foregone conclusion and a waste of time.

Finally, what is fundamentally missing at the Fed and the Treasury, and certainly now with two successive administrations and almost all 535 public servants in Congress, is the sense that the big financial institutions which have created this monstrous mess are dispensible. The problems that have arisen due to their avarice and misjudgments are only going to be solved over time, and are best solved in bankruptcy courts or through FDIC closure processes, not by making these institutions wards of the state until 10 or so years later they are nursed back to health. The public can and has been protected through deposit insurance, but the collapse of lending and credit in general has not been mitigated one whit by anything done so far to rescue these institutions. Let them die a merciful, quick death if death is their fate anyway. We will all of us individually benefit from such mercy as well.

The Disunification Church

Mon, 16 Nov 2009 06:27:26 -0800

Everything in Rev. Sun Myung Moon’s sprawling religious enterprise is about family.

His Divine Principle, the core of his religious teachings, posits that Rev. Moon and his wife Hak Ja Han Moon are humanity’s True Parents. They were placed on earth by God to rescue humanity from war and want by creating exemplary families that will through behavior and example show the way to world peace and unification. Rev. Moon claims that Jesus did not succeed in his mission to save humanity, because he did not marry. Jesus has therefore anointed Rev. Sun Myung Moon as the true Messiah. In the heavenly realm, Rev. Moon asserts that evil men like Adolf Hitler and Joseph Stalin have repented and have now declared Rev. Moon as the true Messiah. Rev. Moon’s Unification Church’s proper name is the Family Federation for World Peace and Unification.

Mr. Moon and his wife have 14 children. As you may expect, they are described on the Unification Church website as having raised exemplary families. They are accomplished religious leaders (many of them are referred to as “reverend”), business executives, community organizers, artists, and of course, peace advocates – though no mention is made of Moon Young-jin, who died of suicide in 1999.

Naturally, with so many talented children, many of them have found their way into employment in the family business. In fact, all the critical management positions in the Moon conglomerate are held by his children – an arrangement as nepotistic as it could possibly be, though conceivably justifiable since the companies are privately owned by Moon.

More after the jump.

Rev. Moon is turning 90 this year and has decided to retire to the Garden of Eden, as he refers to a private resort he is building in Hawaii. He therefore announced his successor to be Moon Hyung-jin, age 30, known as Sean. Technically, Sean Moon has been named head of religious missions, but that is the “whole enchilada” when it comes to ultimate authority and power in a church whose founder is the Messiah, sent to deliver salvation for you and me.

This appointment has not set well with Preston Moon (Moon Hyun-jin), who is head of International Operations, which includes primarily management of The Washington Times, Rev. Moon’s conservative mouthpiece founded in 1984. Preston Moon has expressed his unhappiness by going rogue – two weeks ago he fired the top management of The Washington Times, had them escorted out of the building by security guards, and confiscated their laptops and cell phones. This has left the newspaper in turmoil, with a lot of speculation as to whether it can survive this upheaval. The newspaper has run deficits from the beginning, and is supposedly suffering dearly in this recession.

What Preston Moon expects to achieve from this coup is unclear. His newspaper has survived only on the subsidies from profitable Moon businesses, especially True World Foods, which provides over 75% of all sushi to US restaurants, and counts 9,000 customers currently. Preston Moon’s recent title as head of International Operations may give him control over the fisheries business, though that is unclear because in the past Rev. Moon himself has kept his hand firmly on this, his biggest money earner.

Another possibility is that Preston Moon has an ally in his brother, Justin Moon (Moon Kook-jin), age 39, responsible for what are described as Korean Business Ventures. This includes a variety of activities in South Korea, as well as the largest commercial hotel in North Korea (Rev. Moon is as close to Kim Jung-il as he is to George H.W. Bush, on whom he has lavished hundreds of thousands of dollars in speaking fees). Justin Moon also manages another lucrative franchise, Kahr Arms, located in Blauvelt, NY. This company manufacturers handguns and automatic weapons, and business has been booming since the election of Barack Obama. The church explains this investment in armaments as necessary to effect world unification, though the truth is probably to be found in Justin Moon’s biography. He founded Kahr Arms with money from his father, and he has had a love affair with handguns since age 14.

If Justin Moon is helping his brother, it is being done quietly. For the moment, the official line from the church this week is that Preston Moon operated in an “unprecedented” manner. This was the description provided in a press release issued by Rev. Moon In-jin, Tatiana Moon, who is head of the Unification Church in the US. She said that press reports claiming there was a feud underway between Preston Moon and Sean Moon were completely untrue. Instead, what had happened is that Preston Moon had acted unilaterally and without authority from True Parents.

True Parents are heartbroken and dismayed over what has happened, especially in light of the fact that they have been guiding our movement worldwide, over the last several months, specifically to remain united with their spiritual leadership.

In other words, according to the church, it is time for Preston Moon to come back into the fold, in obedience to his parents. It is easy to imagine Rev. Moon as “heartbroken”. Obedience to one’s parents is the prime virtue in Korean culture, and Rev. Moon is suffering considerable shame from this disrespect. The losses he has piled into The Washington Times have been a small price to pay for the influence he achieves from this newspaper. It is all part of a pattern of subsidies to conservative causes, like his investment in Timothy LeHaye’s Left Behind series, or the millions spent in keeping Jerry Fallwell’s Liberty University afloat. Preston Moon’s action may have damaged the paper irrevocably, and Rev. Moon may be forced to fire him for insubordination.

But if it comes to that, what sort of Messiah is Rev. Moon if he cannot control his own “exemplary” family? All of these children mentioned have been born and raised in America. They all attended Harvard or Columbia (Harvard has profited nicely from the Moon family), and they may be more American than Korean. Someone has to run the business empire when Rev. Moon dies, and Preston Moon may feel his business experience trumps the religious credentials of his much younger brother, Sean Moon. In fact, Sean’s credentials aren’t all that sterling – he left the church for a while after his brother killed himself, and Sean became a Buddhist before returning to his True Parents.

Perhaps the crux of the problem is that it is not clear what Rev. Moon is leaving behind. Is it a religion, or a multi-billion dollar business? These two things are not necessarily incompatible – look at any televangelist today (especially the exceptionally wealthy Pat Robertson). But for the two to work together, you need one person projecting an image of religious sanctity and evangelism, while running a corporate empire in the background. By splitting up his empire, giving each child a business to run, and leaving the least-business like child to carry on the religious mission, Rev. Moon has failed to create a structure that blends business and religion. And if you can’t do that, what’s the purpose of having a religious cult in the first place?

Boy Does Wall Street Have a Deal For You!

Thu, 12 Nov 2009 07:56:40 -0800

American cowboy capitalism at its finest is on display today as Kohlberg, Kravis & Roberts (KKR), one of the country’s largest leveraged buy-out firms, is proposing to bring the Dollar General company back on to the public market. You – yes you, oh innocent investor – can buy a piece of this company for just $22 a share! Any why not? Dollar General is one of those stores where everything is on sale for $1, and cash-poor, recession plagued Americans have been flocking to stores just like these.

This is the only part of the retail sector that has been doing well. Wal-Mart, Dollar General and similar low cost vendors have been holding their heads above water while everyone else has been sinking. But before you plunk down your $22/share, come along with me on a ride through the fine print of the prospectus, to learn just what is going on here. You’ll understand better that the role the Wall Street boys want you to play is that of the sucker – the person who gets them out of a tight jam for a mistake they made.

That’s what everybody said about KKR 2-1/2 years ago when they bought all the shares of Dollar General and took them private. KKR, along with Citigroup and Goldman Sachs and a few other Wall Street firms, bought Dollar General for $7.3 billion, of which $2.8 billion was cash, and the rest - $4.5 billion - was borrowed from banks using Dollar General’s own assets as collateral.

If KKR can get $22/share for their Initial Public Offering this week (IPO), Dollar General will be valued at $7.8 billion, so that looks at first like a modest profit for KKR and its fellow buy-out partners. But this is a leveraged buy-out deal, so the real question is, what happened to all the debt taken on to buy this firm?

The answer is, it’s still there. The Dollar General company the public is being asked to buy this week has $4.1 billion in debt, down just slightly from the $4.5 billion that KKR dumped on it when it took the company private. Every quarter the company has to service this debt by paying interest to the banks, and that interest amount consumes 39% of the company’s operating earnings. This is ten times the debt burden of the average retail company.

The first thing you have to know, therefore, is that you are buying a company that may have kept its head above water in this recession when it comes to sales revenue, but it is drowning nonetheless in debt.

The second thing you should look at in an IPO like this is the price/earnings ratio, or P/E ratio. The price per share divided by the earnings per share tells the multiple of annual earnings investors are willing to pay for a company. For example, Wal-Mart trades at a P/E of 15, meaning at its current stock price investors are willing to value the company at 15 times its annual income. This is a company much larger than Dollar General, but in somewhat the same business, so investors treat the two companies as comparable.

You would think, therefore, that the P/E implied for Dollar General at an initial public price of $22/share would be about 15 times earnings, but it is not. By setting the price at $22/share, KKR is asking investors to buy the company at a P/E of 29. KKR is claiming that the Dollar General franchise is twice as valuable as Wal-Mart’s franchise, not so much in terms of size, but in terms of growth potential.

You have every right to believe this if you wish, and buy Dollar General at $22/share if you wish, but check out first some more fine print. In May of this year, Dollar General granted 732,000 shares as stock options to management, and it used two models to figure out what the company was worth and what price to set for these options. One model estimated the present value of all future cash flows for the company, and the other looked at market prices for comparable companies. The average of the two models valued the company at $12.95/share.

To defend its new price for the IPO, KKR says that the stock market has rallied over 60% from its lows this year, so naturally Dollar General must be worth much more too. Certainly the stock market has put on an impressive rally, but using the other model – the cash flow model – it cannot possibly be the case that Dollar General’s future cash flows will now have doubled in such a short period of time.

Something is wrong here, unless you are a Dollar General executive, because you are going to make a quick $9/share profit if investors snap up the company stock at $22/share. And if you are KKR, the company is worth about $13/share when it comes time to valuing the executive stock options, but $22/share when it comes time to asking the public to buy into the company.

Are you still tempted? How about this delicious morsel in the fine print of the prospectus. Last month, knowing they were going to take Dollar General public, KKR, Goldman Sachs, Citigroup and the other owners paid themselves a dividend out of Dollar General’s earnings. The amount - $239 million – exceeded the quarterly operating earnings of the company, so some of it had to come from the company’s remaining equity. How convenient that the owners enriched themselves royally just before the IPO, and thereby reduced the equity cushion of a company already loaded up with too much debt.

As a final straw, guess which Wall Street brokers are going to bring the IPO to market and earn all the fees from underwriting this offering? How about KKR, Goldman Sachs, and Citigroup? As if they haven’t already earned enough money off this company.

There are dozens and dozens of companies like Dollar General that were taken private by leveraged buy-out firms during the market frenzy that peaked in 2007. They were all bought with little cash and enormous amounts of debts, and they are sitting like time bombs on the balance sheets of the leveraged buy-out firms that misjudged the market. As the months go by and the buy-out firms watch their fees from their investors get eaten up by high interest costs, they are getting more and more desperate to dump these companies back on to the public markets and naïve individual investors.

How wonderful, then, that we’ve had a 60% rally in the stock market since March. Do you think, maybe, Wall Street has a vested interest in keeping this rally going and exciting you and me about green shoots?

(Many of the facts on this IPO can be confirmed in this article on Bloomberg:

http://www.bloomberg.com/apps/news?pid=20601087&sid=awIsi0HV9G34&pos=6)

Why This Economic Recovery is Destined for Disaster

Mon, 09 Nov 2009 17:48:15 -0800

A most revealing comment was made today by The Maestro, Alan Greenspan, speaking at a conference in Alberta on energy and the global economy:

We have been very fortunate that the stock markets moved back and are re-liquifying the whole process.

He pointed to the “wealth effect” created by a rising stock market, especially when investors cash in their capital gains.

In olden times, before Alan Greenspan spent over a decade as Federal Reserve Chairman, Fed officials worried about the growth in money supply, the level of prices in the economy, unemployment, and the strength of the dollar overseas. In fact, if you read the enabling legislation for the Fed, these are the things the Board of Governors should be concentrating on.

Greenspan of course is no longer the Chairman of the Federal Reserve – his protégé Ben Bernanke is. For the most part, when he was Chairman he never spoke about the stock market for fear of influencing its direction. Now that he is a private citizen, he can blurt out whatever he wants to say, and how illuminating it is to hear him talk about the stock market “re-liquifying” the economy.

Not for nothing was he given the sobriquet “Bubbles Greenspan” when he was in office. Economists, Fed watchers, traders, investors – all sorts of people suspected Greenspan never met a financial bubble he didn’t like. He cheered on the 1990s tech bubble as an example of a paradigm shift in the economy. He sat back idly while the housing bubble in this decade blew out of all proportions. The best he could say was that central bankers were helpless in the face of growing financial market distortions, and all they could do was clean up the mess afterwards.

The reality was that he encouraged these bubbles through deliberate inaction. After the end of the tech bubble he was terrified of deflation, pushed interest rates to 1%, and kept them there long enough for a housing bubble to ignite. He gave speeches encouraging home buyers to take out adjustable rate mortgages – the type that have blown up disastrously in the face of thousands of homeowners. He wanted the explosion in consumer spending that resulted from the housing bubble. He didn’t care if he caused asset inflation, as long as it didn’t seep into the general price levels of the economy.

Were he still at the Fed, he’d obviously be very pleased with the stock market recovery this year, because it makes people more confident, it gives them the illusion of being wealthier, and in some cases if they cash in their gains, it gives them real money to spend. Maybe he’d be happy with the weak dollar, and the fact that the infamous “carry trade” has moved from Japan to the U.S. Now the speculators of the world borrow dollars at 0%, driving the exchange rate down for the dollar, and they invest in the hottest commodities, like gold, Chinese real estate, oil, equity markets everywhere, high yield bonds, and even mortgage backed securities.

Does Ben Bernanke believe in the re-liquifying dreams of The Maestro? In the infamous words of Sarah Palin, “You Betcha!” Just look at his actions. He has pushed interest rates to zero and said they will stay there for a long, long time. He is knowingly encouraging the carry trade and devaluing the dollar. Neither the Fed nor the Treasury has lifted a finger to support the dollar on the exchange markets. He has thrown trillions of dollars at the banks and encouraged them to revive their speculative practices from a few years ago before the crash. He is trying desperately to get the securitization business up and running again, and he would love the hedge fund and leveraged buyout boys to get back into the equity extraction game.

Of course, he would also love to see more controls on leverage this time, smaller bonuses being paid to bankers, and less swagger emanating from Wall Street, but he’s not pressing too hard on these points. The important thing is to get the economy back to where it was before 2007. Nor is he alone in this desire; the G-20 countries this weekend said the same thing – it is way too early to remove the excessive liquidity that has been pumped into the global economy.

This stock market rally is therefore both welcome and engineered by our financial masters. So is the bubble in gold, the collapse of the dollar, and in Asia, the construction of even more high rises and industrial parks that are destined to remain empty.

Not a single lesson has been learned from the market collapse last year. Every effort is being made to avoid letting anyone suffer any pain for their mistakes. The great global reflation that is underway is nothing but a repeat of the bubble-inducing liquidity push that occurred at the start of this decade. The whole effort is a tremendous gamble – a hope that real and substantive economic activity will be ignited by all this speculative activity.

But remember what Greenspan said is the end result of the stock market rally – a “wealth effect” – spending on vacations, McMansions, luxury automobiles, and other goodies for the wealthy who happen to own an equity portfolio. You yourself won’t be getting a decent raise in your salary; it certainly didn’t happen during the last two bubbles. The cost of education or medical care isn’t going down. In short, the real economy is not going to rebound based on the most recent bubbles.

Inevitably these bubbles too must burst. Where will we be then? For one thing, there will be a lot of embarrassed economists, almost all of whom now are predicting a slow but steady recovery, because that’s what the Leading Economic Indicators say, along with the stock market, credit spreads, and all the usual auguries. Few people are willing to say “this time is different”, but it really is different. The old tools of the past don’t work anymore. We are not suffering through a typical recession caused by overinvestment, excess inventories, and so on. This is much rarer – a recession caused by the collapse of credit, by too much outstanding debt that must now be paid or defaulted on, by deflation, and by a government that won’t be there this time to lift us up.

Perhaps then our central bankers will learn that asset bubbles are just another form of inflation, one that benefits a few of the wealthiest in the world, and hardly anyone else. Unfortunately, when an asset bubble bursts, we all share the pain.

Cupidity and Stupidity Both Run Rampant on Wall Street

Sun, 25 Oct 2009 06:04:52 -0700

If Wall Street bankers are so smart, how can they be so dumb when it comes to paying out bonuses?

Don’t these people read newspapers? Don’t they watch Dylan Ratigan on CNBC or Glenn Beck on FOX News, castigating bankers for their greed and ingratitude to the taxpayers who saved their firms? Haven’t they sat through one speech too many by President Obama insisting that they stop giving million dollar and multi-million dollar bonuses? Have they no idea what it means for the average worker to struggle in an economy with 10% unemployment and another 8% underemployed?

And yet Goldman Sachs is on schedule to give out record bonuses this year totaling nearly $20 billion, or half a million dollars on average per employee. Morgan Stanley is not far behind, and the investment bankers and traders at Merrill Lynch (now wholly owned by Bank of America) and Bear Stearns (now wholly owned by JP Morgan Chase) are going to be treated royally as well. What is it about these people who are supposedly so smart in figuring out the markets but dumb as posts when it comes to judging the larger world in which they operate?

To get to the bottom of this, it helps to know the environment in which these people have been operating, and the history behind Wall Street’s investment banking culture. It is a culture of entitlement, born of the fact that these investment banks operate like private partnerships, even though they are now all public companies.

Thirty years or so in the past, all the Wall Street firms were private partnerships. The partners were the owners, and their personal wealth was held in their ownership shares in the partnership. If it was a profitable year, the partners personally benefited, and their ownership position increased, some of them more than others because shareholdings were divvied up based on a partner’s contribution to the firm. As a Wall Street banker, you could live well enough, but not astoundingly so until you retired, which is when you could cash out your personal shares by selling them for cash to the remaining partners.

This system had discipline to it, because if the firm had a bad year the partners felt it immediately with a hit to the value of their holdings in the firm. Wall Street firms therefore kept a very close eye on risk and return, and for the most part avoided risk by making their money scalping a little bit here and there off each bond or stock offering they brought to the public on behalf of their clients.

Around 1980, this system began to break down. Investment bankers were watching some of their clients in the hedge fund business, or in the leveraged buyout business, make unbelievable fortunes by taking big risks and reaping outlandish rewards. Wall Street knew that their customers weren’t any smarter than they themselves were (the customers were often far dumber), and they realized they could do as well for themselves if they could have access to big amounts of capital in order to take on much more risk.

The public had to be brought into the partnership. In other words, the Wall Street firms had to abandon the partnership legal structure, organize themselves as a public company, sell shares of equity to the public, and use the capital they received to ramp up their risk taking. The secret of making this work for the Wall Street bankers was a fundamental understanding of how public companies in America operate: the shareholders are passive, often indirect investors, through mutual funds especially which don’t pester management with uncomfortable questions and rarely vote against management on any issue brought to the shareholders. This system allows management in corporate America to act as if they own the company themselves, and to run the company in their own personal interest.

This is precisely how Wall Street firms behaved themselves once they went public. The management acted like partners even though they were technically now beholden to the shareholders. They redirected the firms’ focus onto much riskier activity, and added huge amounts of debt to their balance sheets so that like hedge funds or private equity firms, they could begin making 20% to 30% returns on their equity. They began paying out gargantuan bonuses using a formula that paid out in bonuses around half of their revenue – not net income (a much smaller number). Profits that otherwise would have gone to the shareholders as retained earnings were instead paid out year after year in multi-million dollar bonuses.

The shareholders put up with this because, first of all they were passive investors. The average American corporate employee who owns a 401k checks a box saying “stock market investment portion”, but they don’t get to say which stocks are bought. This decision is left to some mutual fund manager who may decide to hold Goldman Sachs shares for six months when it looks like the market is rallying short term. If the mutual fund owns the stock long term, it still hasn’t been in a position to complain in the past twenty or more years, because the stock markets were enjoying an unprecedented, extended rally, especially for financial industry stocks.

The only time this system broke down was once last year, when Lehman Bros. was thrown on to the ropes over rumors (largely true) that it had huge losses in its real estate portfolio and it was in danger of running out of liquidity. Mutual funds dumped the stock in a frenzy, pushing the price close to zero. The collapse in value was also helped along by a peculiar propensity of Wall Street firms to engage in naked short selling, pushing shares lower even though the seller doesn’t own or hasn’t borrowed the shares from someone else as would be the case with normal short selling.

Lehman, unlike Bear Stearns which was forced to merge with JP Morgan Chase by the federal government, was allowed to go bankrupt. The resulting systemic crisis was so severe that the government stepped up immediately in support of all the other remaining Wall Street firms, each of which was beginning to experience the same pressure on their stocks as Lehman had gone through before bankruptcy. Goldman Sachs and Morgan Stanley were allowed to become commercial banks, borrow from the Federal Reserve, and receive all sorts of benefits and privileges, including sweetheart deals with the government that provided them with guaranteed profits.

The federal government even took shareholdings in these investment banks, through the TARP investment legislation. So how were you – the taxpayers – treated by the Wall Street firms? Like dirt, basically. You were treated like any other shareholders. You were ignored. Goldman Sachs in particular has gone on doing exactly what it always did, expecting its shareholders to be perfectly happy that the stock price of the firm is rising again, and then paying out 50% of this year’s revenues to themselves as employees. Goldman Sachs is making some small concessions to public pressure; it’s paying a measly $100 million to one of its charitable funds, and it is paying some of the bonuses in GS stock rather than cash. Still, the shareholders are taking it on the chin once again. Money that would have gone into their account as retained earnings is siphoned off into bonuses for management and staff.

You can see what has gone badly wrong here:

a) Wall Street bankers convert to a public corporation from a partnership, but continue to act as if they are a partnership, rewarding themselves with absurd bonuses at the expense of the public shareholders.
b) Wall Street bankers leverage their firms to the hilt, and eventually a highly leveraged financial system hits a wall in 2007 and collapses.
c) The federal government steps in and rescues all sorts of collapsing firms like Fannie Mae, Freddie Mac, and AIG (a company that was neither a commercial nor an investment bank and had no claim on government support other than the risk its collapse posed to the overall economy, or at least to Wall Street).
d) The “market” – the be all and end all in the world of high finance – is not allowed to work its magic. The weak, the stupid, the greedy, and the corrupt are not forced to face up to their faults and suffer the consequences of their mistakes. Market discipline is squelched by the government in the interest of preventing what is assumed to be a calamitous fall in national economic output.
e) The surviving Wall Street firms have no reason therefore to change their risk taking appetite, nor their avaricious habits when it comes to paying themselves bonuses.

Given this sequence of events, should we all just get used to Wall Street extracting preposterous amounts of personal wealth from the economy? In the short term, yes. Nothing can be done now short of clawing back the bonuses through legislation, which is not going to happen from a Congress bought and paid for by Wall Street.

But note this: Wall Street’s current behavior may be myopic in the extreme. A day may come, sometime soon perhaps, when the credit crisis reasserts itself. Money and credit may once again become hard to get; there is already talk by the government of shutting down many of its support programs. Even if these programs are allowed to remain, the continuing liquidation of debt by American consumers and corporations is on its own likely to bring back credit constraints. When Wall Street turns once again to Washington for protection, this time the door may be closed. This time even a paid-for Congress and a compliant administration in the White House may have had enough. This time Goldman Sachs may be pushed into the pit with Lehman Bros.

One way or another, the day of multi-million dollar bonus payments in the finance sector is coming to an end, not just for Wall Street firms, but for the hedge funds and leveraged buyout firms that are no longer able to work their alchemy because no one is willing to finance them. The global economy can no longer afford to have so much of its wealth siphoned off to such activity. In this respect, if we return to our opening question “How dumb can Wall Street be?” – the answer is very dumb indeed. So dumb that they can’t see that business as usual exists now only because the government and the taxpayers short-circuited the market mechanisms that would have destroyed Goldman Sachs, Morgan Stanley, and probably Citigroup, Bank of America and quite a few other big players as well.

Business as usual also exists because the global bond market is still allowing America to borrow trillions of dollars in new government debt. This too is coming to an end. Long term interest rates have been ratcheting up lately, and something happened last week that was very important but got hardly any notice. Moody’s the ratings agency said for the first time that the US cannot expect to maintain its Aaa rating forever in the face of such deficits. In fact, the firm suggested that the US has about three or four years to begin reducing its deficit or its Aaa rating will be lost.

Is there somebody out there on Wall Street, in the upper echelons of Goldman Sachs or Morgan Stanley or JP Morgan Chase, who is paying serious attention to what is happening to the US credit position? Is there anybody thinking long term? If so, they have to understand that the game is over, and their financial and securitization business model is broken beyond repair. If so, they should be pounding the table in their board room, demanding that the bank or firm change course immediately and exit these businesses.

If so, we won’t hear about them until long after these companies have themselves gone to the wall and finally faced up to the market discipline that should have been imposed last year when the credit crisis first erupted.

China's Export Drive Moves Into High Gear

Wed, 14 Oct 2009 07:14:15 -0700

During this decade the global economic and financial dynamic that mattered most was the United States - China relationship. China sold cheap manufactured goods to American consumers desperate to maintain their standard of living in the face of a shrinking job market and declining real wages. Americans borrowed money to pay for the essentials of its lifestyle - college education, premium health care, two or more cars, etc. The Chinese were the major lenders to American consumers, financing the purchases of the goods China was selling.

What this dynamic was doing was forestalling the inevitable decline in the American standard of living that began when Deng Hsiao Ping first unleashed China's capitalist spirits. The West looked on this development greedily - 800 million new consumers ready to buy Western products! This was a great misconception, because it assumed somehow that China was going to make its way up the economic ladder by making Westerners richer. In fact the reverse began to happen. Hundreds of thousands of entrepreneurial manufacturers arose in China, with access to labor willing to work for pitiful wages and no benefits, and with no governmental regulation on working conditions or environmental degradation. The result has been an economic catastrophe for the West, which has seen its manufacturing sector whittled down, its trade deficits soar, and its debt levels skyrocket.

The credit crisis that arose in 2007 and 2008 was the end of the line for this financial dynamic, despite every effort of the US to keep the game going. The only way to do this is for the US to turn to the last agency that can still borrow money - the federal government. Last year the US government borrowed or issued debt guaranties for an amount equal to its entire gross national product for 2008. Since obviously no nation can borrow its way to prosperity, this is a last ditch effort at maintaining a First World lifestyle through programs that subsidize car purchasers and housing sales. This game can go on a few more years until China finally chokes on all the US paper it is accumulating, and which is progressively becoming less and less valuable since there are no other buyers.

There are already signs that the Chinese government has had enough and is buying only as much US paper as can help stabilize the global financial markets. If you want to see what really is going on, though, read this article in today's NY Times:

http://www.nytimes.com/2009/10/14/business/global/14chinatrade.html?_r=1&ref=business

In it you will notice that China is ramping up its export machine, moving into downscale, cheaper products that are the only goods Americans can afford anymore. In doing this, China has replaced Germany and Canada as America's biggest trading partners. China is, as the article states, grabbing a bigger piece of a shrinking global trade pie.

The economic name for the effect of this export push is deflation. The low cost global producer is slashing prices, further undermining the export capabilities of the West, and further eroding Western living standards. Americans companies will not be able to restore wages and salaries to even the low levels seen at the peak of the market in 2007. Even government workers are now taking pay cuts, if they can even keep their jobs at all.

The West, and the US in particular, is unable to maintain its First World status. China is moving up from its Third World status (or at least the 10% of China's population which is benefiting from its export drive), and somewhere in the middle Chinese rising living standards will meet up with declining American living standards. This process will play out in years, if not decades, and the only people in the US who can still profit from it are the financiers who extract middle-man profits from shuffling pieces of debt around the globe. Making the whole situation even worse is that India, Brazil, Russia and other countries are pushing just as aggressively on Western living standards.

If you are an American and want to survive this, you have got to get your living costs down. You have to find a cheaper mortgage or cheaper housing, you have to monitor your food costs, shrink your electrical and heating bills, renegotiate your homeowners and life insurance, and pray that the federal government does something to reduce health care costs. Your wages are going to stagnate for a long time to come - if you can keep a job - and you are going to have to play the deflation game yourself when it comes to managing your costs.

If you are successful, you'll wind up in that Second World medium where Chinese and American living standards merge. If you fail, you're going to end up like the poorest Chinese, trying to wrest a subsistence living from a cruel and uncaring global economy.

Obama Wins Nobel Peace Prize!

Fri, 09 Oct 2009 04:41:38 -0700

The Nobel Committee awarded the Peace Prize to an unexpected choice - President Barack Obama. The committee cited his work in restoring diplomacy to the center of international relations, relying more on the United Nations for multilateral peace efforts, and accelerating the nuclear disarmament talks among nuclear powers.

The Nobel Committee had already telegraphed its intention to seek a candidate who emphasized the peace process, and not necessarily someone who had a significant peace accomplishment next to their name. Obama fits that criterion as he has not yet accomplished a break-through on his efforts in the Middle East, or in the nuclear disarmament arena, for example. Others will look on this award as an "Anybody but Bush" statement, or possibly a recognition to the American electorate that it purposely moved away from eight years of unilateral military action and towards diplomacy in its decision to elect Obama.

Personally, knowing how much goes on in diplomatic circles behind the scenes, if I were Obama I would state publicly that he considers the award to be shared with Hillary Clinton and her national security team. On the other hand, as an award winner, down the road when real accomplishments are achieved, he can now nominate Hillary Clinton for her own Peace Prize.

Read the Nobel committee citation for the US president in full here

The Morality of Deliberate Defaults

Sun, 04 Oct 2009 04:41:01 -0700

Over a quarter of American homeowners owe more on their mortgage than their home is worth. In some bubbly markets like California, three out of four homeowners are underwater. Should these homeowners deliberately default, rather than continue to pay on a mortgage when it may take 20 years or longer for market values to equal mortgage values?

Eighty-one percent of Americans think no, according to a survey done this summer by the University of Chicago and Northwestern University business schools. Most American homeowners think it is “immoral” to deliberately default on a mortgage when it is possible to make continuing payments. Yet the numbers of American homeowners doing just that is growing. It is estimated that four percent of all defaults on mortgages are “strategic defaults” according to a phrase used by the financial industry: the homeowner can pay the mortgage but makes a strategic decision to suffer foreclosure rather than continue to make payments on a wasting asset.

Four percent may seem like a small number but it is enormous in banking terms. Two years ago at the start of the collapse of the housing market, Ken Lewis, CEO of Bank America and recently “retired” this week, said that it was astonishing that any homeowner would deliberately default on a mortgage when they continued to make payments on their credit cards and were obviously able to meet their mortgage obligations. This was a world that had gone upside down in banking terms, because the last thing a consumer wanted to lose was their shelter.

Ken Lewis implied that something had gone wrong with Americans, as if there had been a moral collapse where people no longer felt obligated to fulfill their legal commitments when they easily could do so. Such a collapse if it spread could devastate the banking industry, because it added an entirely new dynamic to the foreclosure risks banks face – a dynamic that was certainly not contemplated in all the modeling banks did to project their credit losses. If foreclosure losses were to become much larger than banks ever anticipated, some banks might not survive.

What is this “morality” people assume when they borrow money? It is not quite in the realm of sinful prohibitions such as those of the Ten Commandments, adjuring us not to kill or commit adultery. Borrowers pay back debt in a timely way in order to protect their personal honor, primarily in the business world. A borrower wants to be known as a woman of her word: trustworthy, honest, scrupulous about meeting her legal obligations, and careful in her use of debt. Such a reputation has traditionally been considered as good as material wealth, because it allows the borrower to function successfully in the financial and business world.

The morality of paying back what you owe is therefore a matter of self-interest, and not something motivated by a sense of personal ethical behavior or contributing in some way to the common good. If there has been a breakdown in the willingness of some borrowers to pay back what they owe, and if this trend is growing, then something must be happening that makes it in the self-interest of borrowers to deliberately default. If eighty-one percent of Americans still think it is wrong to “stiff the bank”, then we must look elsewhere to see why strategic defaults are growing, and where we should look is to the banks, not the homeowner. Consider how the role of the banks has drastically changed in the lending market over the past 25 years.

1. Banks make mortgages for the sole purpose of earning fees, not making money off the interest that is paid on the mortgage. Banks do this by charging one fee after another, many of them hidden, at the time of closure, and during any circumstance where the homeowner is late on their payment. Banks also sell the mortgage on to some other financial institution, and often to the federal government, so that the bank can remove itself from any of the credit risk of the mortgage yet keep all the fees it has earned up to that point.

2. Consumers have no ongoing relationship with the lender. Most homeowners get a notice out of the blue that their mortgage has been sold to some other party, and often this happens several times over the life of the mortgage.

3. Banks can often sell the mortgage as part of a package of securities marketed to investors. The investor has absolutely no interest in dealing with the borrower, and leaves this task to a third party mortgage servicer that has even less interest in dealing fairly with the borrower because it doesn’t own any part of the mortgage and doesn’t have a financial incentive to make accommodations to the borrower if there is payment trouble.

4. Banks have failed to protect the most basic interest of the borrower – the mortgage note they signed evidencing the loan. The amount of sloppiness and laxity by banks in keeping records of the loan has shocked courts around the country, to the point that many judges are refusing to allow banks to foreclose on a property if they cannot produce the original note. It used to be that homeowners looked forward to paying off their mortgage and obtaining their mortgage note back from the bank (people used to have mortgage burning parties to celebrate), but in the chaos of the existing mortgage securitization market, the mortgage note is often missing.

5. The practice of banks earning their living off fees rather than interest income has extended to many other products. There has been significant abuse among the big banks with a product that “allows” consumers to overdraw their checking account when using a debit card. The banks charge fees of $35 or more for each overdraft, even if the amount overdrawn is $1.00. The implicit interest rate for this use of money exceeds thousands of a per centum, beyond any definition of usury. Moreover, the banks do not allow the customer to sign up for this service – it is forced on anyone who obtains a debit card – and debits are rank ordered by size in order to create the largest overdraft possible. Worse still, credits are deferred for days even when the check being credited is drawn on the bank itself. In any other industry such practices would be considered racketeering and criminal.

6. Banks taught consumers to look at their home as an investment first, and a shelter second. They did this by emphasizing, along with the real estate industry, that home values never went down. Banks began lending money against the equity built up in a home, as if the home were a piggy bank to be used by the homeowner for luxuries as well as necessities. Homeowners were only told the total amount of debt they owed if they asked; otherwise marketing was focused solely on the monthly payment due and the amount of “cash” one could take out of the home. After 2004, banks abandoned all sensible credit precautions in a rush for fee income, and made mortgages without any verification of the borrower’s income, job, assets, or cash flow. People were given mortgages who were obviously unable to pay out of their own cash flow, which meant the only form of repayment was through a refinancing when the home value increased. Now that home values have declined as much as 50% in some markets, banks are “shocked” that defaults are so high and some homeowners are simply walking away from their home.

To put this all together, banks have severed their relationship with the homeowners to whom they have initially extended a mortgage. If you have a mortgage, you do not have a traditional borrower-lender relationship, and in most cases you don’t have a relationship at all. The homeowner is at the mercy of whatever mortgage servicer may be responsible for ensuring the homeowner makes their payment. The servicer works for the bank currently owning the mortgage, or for the investors, each of whom owns a small portion of the mortgage. When it comes to other products like credit cards or debit cards, banks have become so avaricious in imposing fees and penalties that the relationship has become that of predator to prey.

Banks also marketed homes as investments first and foremost, to be bought and sold as the homeowner constantly traded up, even to the McMansion level. Extra equity that had built up due to the miracle of market forces could easily be extracted as cash and used as a source of even more lucrative fees for banks in the process.

In these circumstances, there is no morality imposed on the borrower to deal with the bank as a proper lender, or to treat the mortgage obligation as some sacred moral responsibility to be paid no matter what the circumstance. For one thing, since the borrower has no lender to talk to, the borrower’s personal circumstances if they are late in making payments are of no interest to whatever third party may have responsibility for the loan, and any remaining relationship the borrower has with the bank is one in which absurd interest rates are being charged for the use of money the consumer didn’t intend to borrow in the first place.

Those homeowners who have strategically defaulted on their mortgage have therefore made a conscious decision that they have no ethical obligation to pay the bank back on an asset worth far less than the mortgage, and they have determined that the consequences of a bad credit record are not that severe. In many states a home foreclosure does not allow the bank to take away other assets of the borrower, and within a few years of a foreclosure a homeowner can begin to obtain loans from banks quite willing to look past the foreclosure event. There are many known cases where a borrower can move across the street to a similar home that is being rented out for half of the amount that was being paid on the mortgage.

It is interesting that during all this time, banks and other corporations are arguing in courts that they deserve to have the same constitutional protections accorded to individuals. The Supreme Court is due to decide soon on whether to consider corporations as individuals. How ironic that would be. With such protections, we should expect corporations to assume all the benefits of being a person, but none of the obligations of individuals, especially the perceived moral obligations. Eighty-one percent of corporations are not suddenly going to say they have a moral obligation to pay down their debts. The practice of debt cramdowns, where the bondholders of a corporate note are forced to accept a lower interest rate or a deferred interest and principal repayment, is extremely common in the corporate world. America’s premier public figure in real estate, Donald Trump, is notorious for defaulting on his debts and forcing the bondholders to accept no or little payment. His companies are not going to change their behavior and start paying their debts on time like individuals would.

The remarkable thing about the morality question is that so many Americans still feel some moral obligation to live up to their word. It puts these Americans at a terrible disadvantage to the banks, which have no such obligations. The only logical response Americans can make is, unfortunately, to become like the banks, and in certain circumstances walk away from their mortgages after weighing the consequences in a rational, business-like manner.

US Abandons Central Europe Missile Defense Shield

Thu, 17 Sep 2009 03:23:41 -0700

The Obama administration quietly announced today it had a "new attitude" toward one of the hallmark foreign policy initiatives of the Bush administration - a missile defense system in Central Europe.

The United States spent eight years during the Bush administration selling this project to various European countries, and finally got the Czech Republic and Poland to agree to install the defense towers in their countries. The purpose of the shield was to protect these countries from an Iranian or North Korean nuclear attack.

Ellen Tauscher, Undersecretary of Defense for Arms Control, is scheduled to meet with Polish and Czech officials today. Last night she was reported to have talked to President Obama by phone to work out the details of the "new attitude", which includes the conviction that Iran has not come anywhere near to developing a nuclear weapon and is far behind the schedule assumed by the Bush administration. Two other considerations in this policy change are said to be the fact that the missile defense system didn't work, and the entire project antagonized Russia unnecessarily.

The administration may be going about this quietly because the implications are significant. If the defense system doesn't work, than the Bush administration wasted tens of billions of dollars on a satellite defense network that will also have to be abandoned. Second, one of the direct purposes of the Bush policy was to assert US military supremacy over any potential rivals, Russia included. Russia quickly concluded that the defense missile shield was part of a policy to encircle Russia with US and NATO facilities, and to use former Soviet vassal states such as Poland and the Ukraine as a front line for containment of Russian maneuverability. The Obama administration is making a complete U-turn on this policy, and is seeking to engage Russia as opposed to containing it. Third, if the Iranian nuclear program is nowhere as advanced as previously thought, what does this say about the ongoing pressure from Israel to bomb Iranian nuclear sites in order to eliminate an "existential threat"?

With this policy change, it is getting more and more difficult for the Obama administration to go along with the neoconservative campaign to eliminate Iran's nuclear threat, since such a threat does not yet exist and is not likely to exist anytime soon, contrary to what the neocons and the Israeli government assert. In fact, since Iran has now agreed to engage in bilateral talks with the US on defense and other issues, the door is open for the Obama administration to repudiate completely the neocon project that asserts the US must forcibly project military supremacy everywhere and at all times, especially in relation to suspected terrorist states. Neocons have put Iran on the top of their list as a terrorist supporter and provocateur.

The Israeli government will no doubt pay attention to this latest policy change from the US. The Netanyahu government has been frustrated over its inability to influence the Obama administration the way Israel was able to do with the Bush administration. Israel's influence with the Democrats in Congress has also diminished, and this has perhaps been an even bigger surprise for Israel. Nonetheless, this week the Israeli government went ahead with an expansion of the settlements program, despite specific objections raised by the US government. This may suggest that Israel will want to go it alone and attack the Iranian nuclear plants on their own, forcing the issue. There are some military impediments to unilateral action by Israel, including whether it can get fly-over rights from neighboring countries in order for its jets to reach Iran. On the other hand, Israel has in the past ignored these diplomatic niceties when it deems military action necessary for its survival.

For complete details on the "new attitude", see this article on Bloomberg:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUv769bBFVOE

Quite a Week in the "Genteel" Sports

Tue, 15 Sep 2009 21:51:25 -0700

We live in an age of sports immortals. Men like Michael Jordan, Tiger Woods, and Roger Federer, and women like Serena Williams, have not only thoroughly dominated their sport, they have set records which will last for a very long time – possibly forever. What they have in common is a rare combination of athletic grace and unwavering determination to win. These are athletes who are noted for making everything look easy, when in fact they put in hours of work each day to accomplish just this illusion.

Three of the four are still performing and gave wonderful examples this week of what makes them so extraordinary. Tiger Woods completely dominated the field in a victory at the BMW Championship, part of the playoffs for the FedEx Cup that caps off the PGA Tour. Roger Federer displayed some unusual brilliance at the US Open this week, and then in the finals failed to show anything of his normal form as he lost to a newcomer, Juan Martin del Potro. Still, people will be talking about this tournament as the one Federer lost, just as they will be discussing the mental collapse of Serena Williams in her pursuit of yet another US Open title.

Michael Jordan is retired from basketball but was in the news this week with some illuminating comments, so let’s begin with him.

Michael Jordan Elected to Basketball Hall of Fame

No surprise here. Everyone knew Michael Jordan would be elected at the earliest point of eligibility. What was surprising was the speech he gave discussing what motivated him during his career.

During this 20 minute talk Michael Jordan listed the names of coaches, teachers, mentors, and managers who had dismissed him sometime during his career. These were men who promoted somebody else over him because that person had been on the team longer, or who wouldn’t select him consistently for the starting line-up, or who told him some part of his game was weak and he could never fix it. Jordan took each of these instances as a dare and challenge, and he channeled his disappointment and anger into motivation to put in the intense work necessary to prove that person wrong.

The result was one of the most intense and competitive players in the NBA during the 1990s, when Jordan led the Chicago Bulls to six NBA championships. The opposition learned to keep their mouth shut on the court when facing off against Michael Jordan; trash talking the man only resulted in humiliation as Jordan stepped up his game and began to perform his wizardry.

His best known trick was a gravity-defying lunge up the middle to the basket. As his opponents leapt up to block him, Jordan would crouch down, still in mid-air, contort his body and spring out unexpectedly from the side, his left or right arm surging toward the basket and a goal. This bit of MJ magic became known as Air Jordan, as were the Nike basketball shoes he endorsed that made him a millionaire.

When Michael Jordan was hot he could sink 20 baskets in a night and as many free throws. An off night found him performing only half as well. Still, even at his best, there was no guarantee the Bulls would win that night. It took Chicago Bulls coach Phil Jackson some intense coaching with Jordan to realize that championships would not result from his talents alone. He had to learn team playing, which involved the art of passing the ball to find the optimal shot, not the maximum shot for MJ.

Once Jackson obtained a team performance from the Bulls, with Michael Jordan as the star forward, the door was open to one championship after another, and dominance of the league throughout the 1990s. No team since then has achieved the Bulls’ won-loss record, nor has anyone come along who can energize a sell-out crowd at an away game like Michael did. Michael Jordan became a global brand name, carefully rationed out to sell only certain types of products, and also exploiting Jordan’s warm smile and personality in the commercials. He was, in the 1990s, the most recognized male anywhere on the globe, so powerful was his personal franchise.

This was another part of Michael Jordan’s education: learning to live in a fishbowl, surrounded by bodyguards, judiciously maintaining a curtain over his personal and family life (which eventually led to a divorce), choosing endorsements with care for the impact on his image and the reliability of the company product; and choosing the right money manager when hundreds of millions of dollars began to pile up in the bank.

No wonder Michael Jordan was the first athlete Tiger Woods consulted when he first broke into international fame. No one on the planet was better able to counsel Tiger what was in store for him.

Tiger the Brand

When Tiger Woods walks up to the tee in a tournament he has his golf cap adorned with the Tiger Woods logo – a mixed T and W. His clothes are carefully set out in advance by his advisers, so that the sewn logos will receive maximum exposure on the cameras, justifying the millions of dollars spent by the advertisers to convince Tiger to wear them. Tiger’s clothes are color-coordinated for maximum affect on camera; Tiger always wears a particular red shirt on the last day of a tournament, partly to bring him luck.

His shoes, his golf club collection, his monogrammed golf balls, tees, and other accoutrements are all sold at stores and clubhouses around the world. He earns vastly more from the clothing and equipment franchise than from playing golf, and he has become the first sports billionaire, able to fly from one tournament to the next in his private plane with entourage.

As with any billionaire in the public eye, he has learned to keep his family off-limits to the press (the fewer pictures of them the better, from a security standpoint), You rarely see even his wife at a tournament, He selects his charitable appearances carefully, doling out his smile and drawing power to only a handful of causes each year. In that regard, he is more stingy than other top athletes, and people hope at the end of his career he will turn into a Bill Gates and set up a foundation to disburse his billions.

All of this would be for naught if Tiger Woods couldn’t continue to perform on the golf course at an exemplary level. There was some question that his career had peaked after Tiger was forced off the tour to undergo knee surgery. He has one of the most elegant and careful driving shots in the game, but it is also one of the most powerful. He torques his body up like a corkscrew in under to unleash a a highly controlled, propulsive whack to the ball. His swing can generate routine drives off the tee of 325 yards, giving him often a pitch-up on an average par 4 hole in order to get on the green. More than most players, he can shape a ball’s direction in flight to the left or right, in order to avoid trees or sand traps or water hazards. His short game around the greens is also first-rate, and when his putting is at its best, no one can beat him. But all this stress on his body has taken a claim on his health, especially with his knees and back where the stress is the greatest. The golf world has been waiting to see if Tiger has recovered fully, and if he could pull all his talents together again as in the past.

We got the answer this week at the BMW Championship at Cog Hill golf course in suburban Chicago. Tiger has played here many times and won four previous championships. He says he loves the course as it suits his style of game. On Friday he put on an incredible display not only of error-free golf, but of golf that was risk-taking when necessary, and beautifully positioned at all times to generate birdies and the occasional eagle. His drives were long and true, avoiding any hazards along the way. His approach shots to the green most often found the ball lagged up within ten feet of the hole. At this distance, Tiger was devastatingly accurate with his putter. He made all but one of these putts all week, generating one birdie after another when the opportunity arose. On Friday he shot a 62, nine under par for the course, and tying the all-time record low score on the course. By Sunday’s finish, he was 18 under par for the course, with an eight stroke lead over anyone else. It was the sort of dominating performance Tiger put on years ago at the Masters tournament, when he first announced his presence on the golf circuit. This week, following a year off from surgery for a sore knee, Tiger was announcing “I’m back!”

When Tiger attends a tournament, over half of the paying crowd chooses to walk along with him hole by hole. The rest of the golf course seems devoid of spectators. I’ve joined along on occasion with these crowds, and what you see, off in the distance, is a very intense, focused young man, whose mind is constantly turning over the possibilities for the next shot. Tiger doesn’t banter with the crowd or even smile. He is all business, He seems to have been working out in a gym, because his physique is lean and muscular, carried with a military bearing. He leans carefully over a ball to pick it up or inspect a putting line; he never hunches over or shows the slightest lack of military precision. He will take multiple practice swings, then spend some time addressing the wall until he lets go with the perfectly placed shot. He shows visible displeasure if he feels he mis-hit the ball, even if it luckily lands five feet from the cup. He has been known to finish his golf game for the day, leading a tournament, and then spend an hour or two on the practice holes working on some perceived flaw in his swing.

In the 1960s golf had its first mega-star in Arnold Palmer. He too attracted tens of thousands of followers to the course. I followed him around back then and remembered having a very good time. Arnold did not have a picture-perfect swing. He would wrench his shoulders and hit what looked like an amateur shot, only to see the ball soar majestically forward 285 yards (a big drive those days). He would struggle every so often with his putter or wedge, and you could see the pain of disappointment on his face when he hit a poor shot. But he loved chatting with the spectators, signing autographs, making jokes, and having a good time at what was after all a game. The whole business of endorsing products came later for Arnold, after he retired from the game, and it certainly made him a millionaire.

What Arnold had that Tiger Woods lacks is charisma – a relation to the crowd that generates excitement and warmth, and a sense for the spectator that they are part of something fun. The sense from the crowds that follow Tiger Woods is one of awe and reverence. No one dares breathe while Tiger is ready to take a shot, for fear of interrupting his concentration, thereby affecting Something Really Important. Indeed, on occasion Something Really Important does happen and the crowd is satisfied to have witnessed an incredible shot.

For me, I would rather take the bonhomie and gentlemanly banter of an Arnold Palmer. He turned 80 this week and received a lot of birthday congratulations from people at the BMW Championship. If you know a friend of a friend you can still call up Arnold Palmer and ask for a game of golf with him at his club in Pennsylvania. Likely as not, he’ll join you in a foursome, make some terrific and not-so-terrific shots, crack some jokes, have a Long Island Tea at the ninth hole (a drink he popularized), in general have a good time, and make sure you had a good time. To Arnold Palmer, golf is still a game, not the road to a billion dollar franchising empire that requires the utmost seriousness at all times. Long may he continue to remind us of that.

Swiss Precision

One of Tiger Woods’ close buddies is Roger Federer, the Swiss tennis superstar. Federer dominates tennis like Woods and Jordan have dominated their sport. He holds the most grand slam tournament victories. He has an incredible number of records relating to the number of matches he has gone without being broken, the succession of semi-finals and finals he has achieved, most tie breaks won, etc. He is still reasonably young and can be expected to drive his grand slam victory mark to around 20 during his career, a number that will be very difficult to match for any future player. The only significant complaint about Federer is that his play is spotty, and there was certainly evidence of that this Monday when someone impersonating Federer appeared to show up at the US Open final and take a chink out of his reputation for greatness.

It’s not that Federer is playing a weak field. His nemesis, Rafael Nadal from Spain, kept Federer for years from winning the French Open. It was only when Nadal went off the tour due to injury that Federer was able to grasp this missing title this year. Federer himself has been injured and forced out of play due to a bout with mononucleosis. He is now scrupulously careful about his health and conditioning, because there has been an alarming increase in career-destroying injuries in professional tennis. The equipment being used is vastly more powerful than the wooden rackets of thirty years ago, and the swing being used involves the same sort of torque that is employed in golf and which can play havoc with back, thigh, and leg muscles, not to mention the knees. Nadal plays each stroke with such a ferocity that no one on the tour was surprised when both his knees gave out this year, necessitating surgery from which he may never fully recover.

Part of the secret to Federer’s longevity is his style of movement. His forehands and backhands are models of economic motion. The speed and spin put on the ball matches that of any other professional player, but Federer appears to exert far less energy than his competition. He seems to glide from point to point on the court, barely out of breath when other players are sprinting and hacking their way up and down the court. With apparent little effort, he can reach virtually any ball and still get off a classically proportioned stroke.

When he combines his mobility with his incredible accuracy in placing his shots in corners and on the base line, Federer is able to maneuver his opponents back and forth across the court, further and further to the left or right, until the time comes to deliver the ball to where the opponent ain’t. That’s what high level tennis is really about – a strategic game of maneuvering your opponent to a fatally out-of-place position. This takes some chess-like thinking ahead, and no one is better at this than Federer.

His highlight this week was the penultimate point played in his semi-final match with Novak Djokovic. Federer was chasing down an overhead lob, his back to the net, when he leaned down to catch the ball beneath his legs and drive it over the net for a winner. This type of circus shot is used by many pros, but hardly anyone is ever successful at it, and then only to give themselves time to handle the return shot from their opponent. What Federer did that was so unusual was not simply hit a winner, but hit it with real force, as if it were an offensive shot, not a defensive one. It’s the sort of athleticism that makes other professionals gape in awe, and if you haven’t seen it, check out this You Tube link.

The only way for Federer to top off what was a perfect week would have been to demolish his opponent in the finals, 20 year old Argentinian Juan Martin del Potro. He had, after all, beaten him in all previous six matches. The performance put on by Federer was amazing, all right, but for all the wrong reasons. His playing was an embarrassment of double faults, weak serves, errant ground strokes, and volleys plowed into the net. Who this Federer was is not clear, but even in his struggles with Rafael Nadal, he performed better than this.

Tennis as a match sport is ruthless when it comes to mental collapses like this. Unforced errors and double faults are counted up and displayed on the screen for everyone to comment on. In golf, Tiger Woods can have a bad day (and often does), but there are 70 other players out there for the camera to follow. Michael Jordan got to sit on the bench out of public view if his game was off. Tennis pros are exposed for two or more hours to scrutiny of their every failure.

Federer was so discommoded in the finals he even had a rare outburst at the umpire. Maybe he was taking lessons from Serena Williams, who had a far worse breakdown a few days earlier in the women’s semi-finals.

The Williams Dynasty

For nearly ten years Serena and Venus Williams have dominated women’s tennis. They rank one and two in title victories, Serena being the more accomplished of the sisters. They have taken turns ranked as World No. 1 in the sport. They were the first to introduce a more forceful style of play to the women’s game, as they took advantage of improvements in racquet technology. They also took weight and endurance training to new heights, with a demonstrable improvement in their games. Within the tennis world, they are as much appreciated for their skill as double partners, a part of the game that gets little camera attention but is viewed as equally demanding as singles play.

Both sisters have had trouble with leg and knee injuries, a common motif in sports like tennis and golf where aggressive play has sidelined Tiger Woods, Rafael Nadal, and other top players. Serena entered this month’s US Open with a knee brace on one leg, and somehow managed to advance to the semi-finals despite obvious pain when playing. It was in the semi-finals that her game blew up.

Serena Williams was down a set to Kim Clijsters and losing in the second. She faced elimination and had been serving poorly all night, while Clisjters was on top of her game. At a crucial second serve, Williams was called by the line judge for a foot fault, causing her to double fault and leaving her with one last chance to stay alive in the tournament.

Something motivated Serena to protest vociferously to the line judge. Her protest was loud, crude, prolonged, and worst of all, involved the threat of jamming the tennis ball down the line judge’s throat. Of course, Serena didn’t mean she would literally do this to the line judge. She was speaking out of anger. She was also violating a major rule that forbids intimidation of a judge or referee.

Instant replay showed the line judge was in error – there was no foot fault. But a closer review from another angle showed that Serena Williams’ foot had indeed touched the court before her racket touched the ball. That is a foul that cost her a point, and then her outburst cost her another point and the match. A stunned crowd watched her walk over to the other side of the court to congratulate Clijsters on her victory.

This was a bizarre way to lose a match. Conjecture was immediately made that she did this on purpose, since her play was poor in the first place and she was bound to lose. This is not very convincing. Serena could have easily and with no loss of face withdrawn due to injury. She has been such a competitor over the years that it is difficult to imagine the thought of throwing the match crossing her mind.

She said afterwards that she used to be much worse with her temper, and she left it at that, trying to “move on” from an embarrassing incident without admitting any culpability. The tennis authorities assessed her a $10,000 fine, small change from the $350,000 paycheck she received for reaching the semi-finals.

A number of tennis pros felt that Serena was treated way too lightly by the USTA, and that she should have been suspended from play rather than allowed to compete with her sister in the doubles final. They made the point that no other sport, not even hockey or football, would tolerate anything approaching this behavior to a referee or umpire, especially involving intimidation or threats. They are almost certainly right about that. The integrity of sport breaks down if the arbitrators are not free to make impartial decisions.

What happened to Serena Williams was a mental collapse, not unlike Roger Federer’s, expressed in part in her athletic performance, and also in her courtside behavior. A past master of these sort of outbursts – John McEnroe – was one of the commentators on television, and it was odd hearing his colleagues talk about his previous disgraces (as they put it), with him saying nothing in defense and unwilling to comment about Serena. It does make you wonder what he thinks about his behavior thirty years ago as a young tennis star.

No doubt, like John McEnroe, Serena Williams will want to be remembered for her trophies and her tennis records. Unfortunately, we now have You Tube and permanent access to her Foot Fault Frenzy, a lasting stain on her record. Tennis, like golf and basketball, is said to be much more a mental game than other sports, and what we saw this week with both Williams and Federer was just how much mental strain these athletes are under. No wonder Tiger Woods paces the golf course like an automaton, holding every ounce of negative emotion in check.

Intimidating the Regulators

Sport is not divorced from trends in society at large. A tremendous amount of advertising dollars has found its way into golf, basketball, tennis, football, etc. The stars of the game become instant multi-millionaires, and superstars like Michael Jordan and Tiger Woods earn hundreds of millions of dollars more in commercial endorsements. Managing their image becomes as important as managing their game. They have large entourages to feed, a brand to nurture, contracts to live up to, lease payments to make on their private jets, and mortgages to meet on their multiple homes. Technology has given them racquets and golf clubs that make it easy to break established records, but also require that they brutalize their body and risk major and career-threatening injuries.

We see the results in spectacular and unprecedented performances. We see records broken routinely. We also see these heroes and heroines sidelined time and again with injuries, and on occasion, we see a breakdown in the steely composure they employ when at their work.

Have we seen a limit being reached in these developments? Are the advances peaking, and are the strains becoming too much for these athletes? I suspect so. I suspect there is some general, though weak, connection with what is happening with professional sports and what has happened with other industries like banking and health care that have been polluted by too much money. Standards get compromised, and egoistic, selfish behavior is tolerated or even encouraged. Eventually even the regulators are dragged into the corruption through intimidation and cooption.

This is, however, about as far as I want to go with the social generalizations. When all is said and done, it is sport as big business, but sport also as entertainment that is involved here. We continue to be entertained by some extraordinary athletes, and quite possibly we are living in an era that will not be repeated in our lifetimes. We should enjoy these athletes and their performances while we can.

Tea for Two: Will the Right Find Common Cause With the Left?

Sun, 13 Sep 2009 23:20:53 -0700

Courtesy of Glenn Beck, America’s #1 Teabag Gasbag, around 60,000 protestors marched on Capitol Hill today, and a more motley crowd you never saw. I use the word motley in the sense of incongruous or nonsensical, as evidenced by the protest signs they were carrying. Barack Obama can be many things to many people, but he cannot be a Marxist, Nazi, Socialist, Fascist, Kenyan Muslim Jew all at the same time.

You can’t have a protest if the crowd can’t agree on what it is protesting. By caricaturing Obama as the embodiment of all evil (quite a few signs depicted him as Satan), the protestors lost not only cohesion, but also coherence. So maybe the way to describe what this Teabag party had in common was “anger.” Also, they were virtually all white people, most of them baby boomers, no doubt a few of them carrying concealed weapons, and the overwhelming number of them seriously overweight. But here again, we get back to incongruity. How can anyone take your protest against socialized medicine seriously when you are marching in your motorized scooter, bought for you by Medicare?

We can’t dismiss these teabag protestors just because they are incomprehensible. In states where it is legal to carry weapons in public, a few of the protestors have showed up with automatic rifles, even at venues where the president himself was speaking. These protestors can easily evolve into the fascist, brown-shirt arm of the American right, ready to be used for intimidation or violence.

There are other, obvious reasons to be concerned. These teabag parties represent the newly disenfranchised white, rural voter – the backbone of the Republican Party and its southern strategy. The outburst this week by Rep. Joe Wilson, the obscure South Carolina Congressman who called President Obama a liar during his speech to a joint session of Congress, was prompted by Obama’s statement that nothing in the healthcare reform package he is proposing would provide care for illegal immigrants.

The fear of immigrants is a primal constant in American politics, but since the adoption of the southern strategy, this fear is at its core a racial concern. Immigration in the past 30 years is no longer about poor white people coming from Europe, it’s about brown people coming from Mexico. Now that an African-American is president, protests against illegal immigrants can be a respectable way for people to say what is really on their mind – they cannot accept a black person as president.

Something else that was highly significant about Rep. Wilson’s shout-out was that he himself was lying – none of the reform bills in front of the Congress allows any provision of healthcare for illegal immigrants. Perhaps we should start with the fact that Joe Wilson doesn’t actually exist – his real name is Addison Graves Wilson, Sr. Joe Wilson is a faux-populist pseudonym used to give Addison Wilson some credibility as an average Joe with the voters, so perhaps we shouldn’t be surprised that he isn’t interested in the facts or the reality of what is actually being discussed and proposed in Congress.

Joe Wilson is the embodiment, as are the Teabaggers and Glenn Beck and Rush Limbaugh, of the challenges the political right in America has with reality and its well-known liberal bias. It is now perfectly acceptable for Republican politicians to distort and deny reality, assert any lie they wish about Democrats or liberals, and then have the hypocrisy to accuse the Democrats or liberals of being themselves the liars. This propensity confuses the political discussion (such as it is these days what with all the shouting), but the real danger it poses occurs when the Republicans win national office, because they no longer have an ability to govern effectively since they don’t operate in the real world. Supposedly it was Karl Rove who spoke triumphantly of the Bush administration’s ability to create its own reality, and this type of thinking is what virtually every Republican politician displays these days.

But what is most odd and fascinating about the teabag movement, and certain media leaders like Glenn Beck and Lou Dobbs, is the tendency to lift themes from the liberal protests that began during the Bush administration, and to use them as their own. I’m not making an argument of equivalence here; George Bush used intimidation to wrest the presidency from Al Gore, while Barack Obama overwhelmed John McCain in popular and electoral voting, and won the presidency fair and square. What happened following these “victories” was similar, though. The left never accepted George Bush as a legitimate president, and the right denies Obama’s legitimacy as well through the birther movement. The right has to use a trumped up, fantastical argument that Obama is an unconstitutional president, since it has no real facts to support its case, but the underlying core feeling is that Obama in the world as they know it could not possibly be president.

A second theme is the level of disgust each side has with deficit spending. Liberals watched George Bush turn the Clinton-Gore surplus into the biggest federal deficit ever, for the purpose of transferring more wealth to the rich and funding an illegal, misbegotten and mismanaged war. Conservatives see Barack Obama expanding the deficit even further, in an attempt to bring “socialism” to America in the form of a larger, more intrusive federal bureaucracy. It’s not so much that either side has a problem with deficit spending, as it is for what purpose the spending is used. There is the usual heavy dose of Republican hypocrisy at work here – after eight years of sitting by mutely, acquiescing in Bush’s reckless spending, the right is suddenly galvanized by fiscal prudence? Not really. It is how this money is spent that motivates Republican protests.

Both sides have miserable economic conditions they can decry and blame on the other side. The Republicans have much more to work with here – the economy has tanked into a depression brought about by the collapse of the credit system. The Republicans have to abandon all sense of shame and remorse and wallow completely in hypocrisy, ignoring the devastating economic damage caused by Bush’s eight years of a housing bubble and financial deregulation. The more sensitive Republicans can just dump Bush completely and claim he never represented conservatism anyway – he was a liberal in disguise. Just never mind the fact they didn’t dare protest him while he was in office.

The most intriguing similarity, though, is the reliance on anti-corporatism. The left has a long tradition of suspicion of corporate power to work with in its current campaign against vested corporate interests, such as the lobbyists that dominate Congress, the pharmaceutical and insurance industries that have wrecked health care, or the industrial complex that feeds off military largesse. The left has added to this a sense of amazement and disdain over the way the financial industry has not only destroyed the economy, but managed to get the taxpayers to fund their errors through trillion dollar bailouts.

Lou Dobbs has long been a voice on the right criticizing corporate influence on the political process, and he has been joined by Glenn Beck who forecasts an economic and social Armageddon as this depression rolls on, and who sees socialism or communism at work in the degree to which the federal government now has replaced the banks as the source of capital in this country. Leftist commentators were equally vociferous in condemning the banking bailout when Henry Paulson was running the show, but what they saw was not socialism at work, but crony capitalism at work and corruption and greed run rampant on Wall Street.

What the right and left have in common is a sense that the economic, financial and political system is broken; that corruption dominates policy making in this country; that this “Great Recession” is greater than is being let on by the government; that the media are in the pockets of big business and the banks and are therefore not reporting on the true and desperate situation facing the country; that Constitutional power has been usurped by the presidency against the interests and rights of the people; and that social order is breaking down as this country slips into a third world banana republic.

There must be at least some partial truth in these feelings. There is after all deep economic pain being felt throughout an economy in which the true level of unemployment/underemployment runs around 17%, and in which living standards are deteriorating sharply. Both sides, therefore, have a surprising degree of unanimity on the problems. The left happens to see government intrusion as a necessary and temporary expediency to get the economy moving; the right sees this intrusion as permanent and a debilitating expansion of the socialist state erected by FDR and Lyndon Johnson.

The different interpretations of the role of government in solving this crisis are wide and deep between the right and the left. The critical question, therefore, is whether the similarities when it comes to recognizing the problems are enough for the right and left to find common ground. If they did, the country wouldn’t be quite as politically polarized as it is, because the right and left would be both arrayed against corporate power and the entrenched Washington political and media elite. To give an example, both sides would have reason to get rid of Timothy Geithner, Ben Bernanke, and the entire Obama economic team, because they represent the failed status quo. There would be agreement that change is needed, but there wouldn’t be much agreement on who or what policies were to follow.

Could we see a day in which teabaggers and liberal activists join forces in public protests? Given continued economic deterioration, anything is possible – in fact it is quite plausible that many sectors of the public could rise up against the “establishment”. What is missing is, first, the necessary economic collapse, and second, the right sort of leader. We’ve already had a terrible economic setback, and the road we are on suggests an economic collapse ala Argentina in this decade is possible though not yet probable.

But we definitely do not have the right sort of leader. Limbaugh and Beck are spokesmen for disenfranchised white people railing against their inevitable demographic status as a minority in a country dominated by blacks, Hispanics, Asians and other non-white immigrants. These men use the current economic disorder and disgust with the bank bailouts as tools to stir up what is essentially a racist movement. No one has yet appeared on the right who is able to play the role of leader in an effort to throw out the established economic and financial order. The cranky Ron Paul isn’t that person, though some of his ideas regarding the Federal Reserve and the cost of the empire have the possibility of resonating deeply across the political spectrum.

No one on the left has risen to that position either. Barack Obama had the potential but has shown himself captive to the status quo and much more interested in “fixing” a corrupt system rather than overthrowing it. He would need a massive conversion of spirit to want to overthrow the system rather than reform it, though again, anything is possible. FDR did not enter office as an agent for radical change; he became one by necessity and one can debate just how radical his changes were. To the average European politician, FDR looks like he brought a bit of European socialism to the US system, but nothing like what certain European countries have set up and come to love.

So the left watches the right and the right watches the left, each side criticizing the other, and neither willing to admit the remarkable similarities that have begun to appear on each side of the political spectrum. The similarities are in the diagnosis of the depth of the problems and the need to replace the existing establishment in Washington in order to do anything about it. We need to watch for a sequence of events to occur that would portend significant change for the United States. This sequence would include:

a) Substantial further deterioration in the economic order, for which there is reasonable expectation given the amount of debt liquidation still required from the private and public sector,
b) An awakening moment when the right and left realize they have common cause in overthrowing the economic and political elites which brought about this disaster,
c) The rise of a leader who can channel the anger into productive protest, and who can grab the levers of power, one hopes with constitutional legitimacy. This leader may be from the right or left, or equally possible, from neither end of the spectrum and therefore appearing as an outsider ready to chuck both liberal and conservative control over policy and the tools used to change policy.

Once these three things happen, the real fight can begin. Will the US accept more of the socialism that characterizes France, Belgium, the Scandinavian countries, etc.? Will a more rigid, right wing regime take over as is often seen in banana republics, and if so, what role will corporations play in a system that is often heavily reliant on crony capitalism? Will something else evolve?

Whatever happens, the potential for momentous change is growing. It is at these moments when a system that appears permanently rooted is most vulnerable. We are used to seeing the same men – mostly men at least – occupying the committee chairs in Congress, the cabinet and commission seats in the administration, the anchor and newspaper columnist posts in the media, the generalships and admiralties in the military. We cannot imagine all of them being swept away, much less their positions being abolished or disappearing in irrelevance. But such is the nature of our problems, and of our despair, that a mass political and economic extermination is not just possible but becoming probable.

Sister Souljah Speaks

Sat, 22 Aug 2009 08:48:56 -0700

There was a moment in the 2008 campaign when Barack Obama stood up and denounced the left wing crazies at Daily Kos and other liberal blogs. The press loved it. They called it his Sister Souljah moment, after the event in the Bill Clinton run for the presidency when he attacked an African-American activist. That was interpreted as a pivotal time in the Clinton campaign, when he showed the country he was running as a moderate and could face down the radicals in his own party.

It was always possible that Barack Obama and his campaign managers were deliberately looking for their Sister Souljah moment, and the rabid and vulgar leftist bloggers were a convenient foil to be used exactly for that purpose. Even if the rejection was not anticipated and deliberate, it seemed heartfelt. Obama has always operated as if there are right wing crazies and left wing crazies, and his job as president is to ignore both and govern from the center.

This has become a big problem for him in the health care debate. He made the mistake of assuming the right wing crazies are on the fringe of the Republican Party, only to discover that they sit in Congress as Republican senators and representatives. Even a supposed moderate like Charles Grassley has proven himself a believer in the craziest of lies regarding death panels designed to kill off grannie by denying her coverage (we call these panels insurance companies at the moment).

The second mistake he made is to believe that the left wing of the Democratic Party is crazy. Liberals told him that Republicans are not to be trusted in this matter, and that negotiations with them are not only useless but counterproductive. They will promise this and promise that, extract all sorts of major concessions, and then vote against reform anyway. Liberals told him that the root problem with health care in the U.S. is the profit motive of the insurance and pharmaceutical industries. The greed that infects the system has driven costs to absurd levels, capriciously denied coverage to customers who have paid in premiums for years, and left almost 40 million Americans uninsured. Since the private sector health care industry has failed this country as miserably as the banks, it is time to get rid of them and go for a single payer system funded and managed by the government. If this can't be achieved, at a minimum the insurance companies need some serious competition from a government run program.

Obama doesn't want to hear any of this because in his view the left wing of the Democratic Party is crazy. His biggest mistake is not recognizing that the liberals in this country are the only source left for sensible, workable policies on health care, the banking crisis, global climate change, an over-extended military, erosion of civil rights, and many other critical issues. Obama thinks liberals are radicals who want a Revolution with a capital R. What liberals really want is a Restoration - a restoration of the New Deal that has been eroded by Reaganism, a failed political and economic philosophy if ever there was one.

Now the president is reaping the fruits of his misconceptions and misplaced trust in the Republicans. His health care reform is in shambles and dangerously close to failure. The Republicans and the right wing media are close to achieving their real objective: cripple and then destroy the Obama presidency as quickly as they can.

The vast political center of this country that Obama caters to and sees as his base is certainly not rushing to his defense. The majority of them now believe that death panels are an integral part of his reform legislation and they are scared enough to want to forget the whole thing and stick with the devil they know. As for the liberal base of the Democratic Party, including the unions, their support for Obama has plummeted from 84% to 71% in a few short weeks, according to this morning's Washington Post poll. Liberals are disillusioned by the way Obama has been manipulated and used by the Republicans. They are disgusted by the constant hints from the White House that the public option is expendable - just a minor component of the overall solution, as Obama has said.

Rahm Emanuel, Valerie Jarrett, David Axelrod and the rest of the Obama kitchen cabinet can't fix this problem, assuming they even recognize the problem. The solution rests in Obama's soul. Is he scared enough yet to realize how close he is to failure, not just for his health care reform effort, but for his entire presidency? Does he recognize that taking his earliest and most fervent supporters for granted, and worse still, denying them any credibility or voice in his policies, is a prescription for disaster? Is he willing to open his eyes and realize that governing from the "center" is a fools mission because the Republicans long ago shifted the political center of this country to their far right, free market, white people uber alles philosophy?

Real leaders are said to be forged in the crucible of failure. I hope for all our sakes that Barack Obama discovers real leadership in the imminence of failure, rather than experiencing a self-inflicted failure that destroys any hope for true change in this country and dooms his presidency before it has barely begun. That sort of failure could bring about a restoration all right - a catastrophic restoration of Republicans in Congress and the White House, this time accompanied by fascist thugs strutting around the country with their semi-automatic weapons while FOX News cheers them on.

Terrorists: 2 United States: 0

Mon, 10 Aug 2009 14:45:53 -0700

Terrorists today claimed two more victims in the War on Terror: Senator Sam Brownback and Senator Pat Roberts, both Republicans of Kansas.

Both Senator Brownback and Senator Roberts conceded today that the terrorists incarcerated at Guantanamo Bay are so wily and fearsome that even as secure a federal penitentiary as the one at Leavenworth, Kansas is incapable of holding them. The two senators were responding to a study from the Department of Defense that recommended Leavenworth as one of the prisons appropriate for housing Guantanamo Bay inmates. As a means of preventing the Pentagon from going ahead with this plan, the two senators have put a hold on the nomination of Congressman John McHugh as Secretary of the Army.

“We recognize Congressman McHugh is a Republican and would probably be a better Army Secretary than some latte drinking, pansy Democrat”, said Senator Roberts, “but the good people of Kansas will not tolerate housing Evil Doers on our soil. These men are so dangerous that they could easily escape and threaten our grain silos, our industrial hog farms, even our cattle abattoirs. The entire American way of life would be at risk if people were forced to go without a Burger King Whopper with bacon on a sesame seed bun!”

Democrats in Congress are accusing the two Republican senators of cowardice and suggest that their ploy is a pusillanimous attempt to satisfy their political base, since Republicans have been cowering in fear of terrorists ever since the color-coded warning system was put in place by the Department of Homeland Security. Senator Brownback takes issue with this charge. “Senator Roberts and I are hardly cowards – if anything we are martyrs in the War on Terror. We are willing to sacrifice our political careers if that is what it takes to keep the terrorists out of Kansas and preserve our American freedoms to eat what we want, where we want, and when we want.”

The Department of Defense, stymied in their attempt to move terrorist prisoners to Kansas, is looking at other alternatives. Attention has now shifted to the California prison system, specifically the men’s prison at Chino, the site of a major racial riot over the weekend that left dozens injured. “The real issue with incarcerating these terrorists at Chino is how long they would survive in that prison,” said Col. Rocky “Bud” Hackworth. “You can’t just drop these guys in there – they would stand out like an Hassidic Jew in a mosque.”

The Pentagon is considering enrolling the Guantanamo Bay terrorists in the Witness Protection Program before they are transferred to the federal prison system. “Most of these guys, with the right haircut and tattoos, could pass as Latino gang members,” added Col. Hackworth. “Of course, they’d have to keep to themselves until they pick up some Spanish, and all the training in the world isn’t going to allow them to pass as a member of the Crips or Bloods. We are going to have to give them an identity in a fake Latino gang; as of now we’re thinking they could be gang leaders of the feared Tostitos of Topeka.”

Senator Brownback’s office responded late today that the use of Chino prison, and the creation of a fake Latino gang in Topeka, might be the type of compromise that would allow the two senators to lift their hold on the Army Secretary’s nomination. Said a spokesman for Senator Brownback: “If an imaginary gang like the Tostitos of Topeka keeps illegal Mexicans out of Kansas and evil terrorists out of Leavenworth, I am sure the senator would be all for it.”

In Case You Missed It: How GE Scammed Investors

Wed, 05 Aug 2009 07:39:50 -0700

Yesterday, courtesy of the US Securities and Exchange Commission, we got a peek at how the earnings per share scam was perpetrated at General Electric during the wonder years of their former chairman Jack Welch.

In the race to generate ever high amounts of return on equity, supposedly for the “shareholders”, corporate titans like Jack Welch manipulated profit figures so that quarter after quarter, GE produced net income that was always just a bit better than what the Wall Street analysts expected. It helped, of course, that GE had private conversations with the analysts during the quarter, giving them “guidance” on how earnings were shaping up. Sometimes that wasn’t enough, so Welch would have to dip in to the reserves set aside at his vast financial services subsidiary and top up company earnings with just the right amount to beat the analyst expectations.

In a really tough environment, like the recession of 2002, even dipping into the reserve kitty wasn’t enough. That’s when GE took the next step, according to the SEC, of committing accounting fraud.

The SEC press release states the following:

The SEC's complaint, filed in U.S. District Court for the District of Connecticut, alleges that GE met or exceeded final consensus analyst earnings per share (EPS) expectations every quarter from 1995 through filing of its 2004 annual report. However, on four separate occasions in 2002 and 2003, high-level GE accounting executives or other finance personnel approved accounting that was not in compliance with Generally Accepted Accounting Principles (GAAP). In one instance, the improper accounting allowed GE to avoid missing analysts' final consensus EPS expectations

The specific instances cited by the SEC included violations of accounting rules governing hedging for commercial paper holdings so that GE could avoid a $200 million pre-tax charge to earnings; violations of accounting rules governing interest rate swaps, which GE management failed to correct once they found out about the violations; booking $370 million in revenues from the sales of locomotives when the sales had not in fact occurred; and generating $585 million in improper revenue from the sale of aircraft engine spare parts.

Now do you see how easy it is to look like some great managerial genius? Cook the books, and then retire just as the SEC starts investigating. Jack Welch left GE in 2004 a very wealthy man, currently estimated to be worth a quarter of a billion dollars.

I harp upon Jack Welch because no one in corporate America better represents the rape and plunder management style than Jack Welch. There isn’t a company he touched that didn’t achieve profit growth largely by firing employees, often after outsourcing their jobs to China or some other third world country. He was a proponent of the odious practice of Rank and Yank, whereby every year employees received a numerical rank for their performance, and the bottom 10% were deliberately fired. His corporate philosophy was based on “shareholder value”, and he made sure he personally became a significant shareholder in GE through stock options and grants given to him by a weasely board of directors he himself appointed. Employees and the communities they worked in counted for little in his plans.

Even after Jack Welch left the company, GE fought the SEC on these charges every step of the way. They finally agreed to pay a $50 million civil penalty for accounting fraud, without agreeing to the charges themselves. They did so to “put this matter behind us” , but only after spending $200 million in legal fees fighting the SEC. This is all corporate speak for “we are guilty as sin but will never say so publicly, we will almost certainly lose this case if it ever went to trial, and we are tired of paying attorneys in a fruitless effort to establish our innocence and intimidate the SEC.”

$200 million in legal fees, and a $50 million fine, is penny ante money for GE and it won’t hurt them a bit. They expect, and they are probably right, that nobody will make a big deal of this settlement and the matter will drift away into oblivion in a day or two. They’ll continue in their role as the biggest spending lobbyist roaming the halls of Congress, and NBC and MSNBC will continue to spread the GE corporate message, which is “We bring good things to life – for our company and our executives.”

At some point Jack Welch will show up on TV again, and maybe he’ll espouse his view that any constraints on executive pay are “outrageous.” Just remember as you watch him that you are looking at the poster boy for executive excess, and one of the worst examples we have of how corporate power is used to advance the interests of the corporation by buying off legislators, controlling the message on the airwaves that are supposed to be a common good, and as we now learn, deceiving investors through accounting fraud.

If you think I am exaggerating, consider this: Dennis Kozlowski is sitting in prison for his accounting fraud at Tyco; Bernie Madoff just received a 150 year sentence for his Ponzi scheme; and Jeff Skilling is serving a 24 year sentence for accounting fraud at Enron. Yet the SEC isn’t even bothering to investigate Jack Welch for his role in this accounting fraud, not one member of Congress is calling for such an investigation, and the media are notably silent about a story that they would seemingly prefer to disappear beneath the waves.

That tells you everything you need to know about how certain big corporations work the system to their advantage, and about the executives who act as if they are the entrepreneur owners of the company while plundering the company for their personal profit. In the meantime, the workers see their pay and benefits squeezed year after year, whole towns if not cities are decimated as plants are shut down, states which offered generous tax relief to entice the company there in the first place find they were played for fools, and investors wake up one day to see the stock has dropped 15% because of “accounting irregularities”. This is what has happened to the American dream.

Science Corner: Debate Flares Over the Intensity and Duration of Solar Cycle 24

Mon, 03 Aug 2009 14:49:16 -0700

The months go by and still the sun remains quiet. This current sunspot cycle was supposed to end in 2007 if the usual average solar cycle duration of 10.7 years prevailed. It may have ended last December, about 18 months late, but no one knows for sure. So far the scientists at the National Oceanic and Atmospheric Administration and at NASA are only projecting that what is called the solar minimum has occurred, but even this projection is in doubt since the sun has been quiescent throughout 2009.

That means we may be in year 13 of the last solar cycle number 23, which would strengthen the hand of those scientists who have been warning that a major global cooling is coming our way. And by “our”, they mean everybody and everything on the planet. And by “cooling”, some scientists are beginning to wonder if the earth is in for a replay of the Little Ice Age that culminated in 1640. This is why an otherwise obscure scientific discussion of the arcana of sunspots and the solar cycle is starting to get more serious attention. As many parts of the U.S. have just gone through their coldest July since 1891, evidence seems to be mounting that this current prolonged solar minimum may already be having an effect.

Our scientific understanding of the sun has advanced enormously compared even to 30 years ago, but a lot of what happens with the sun is still poorly understood, and certainly open to debate. As with anything to do with earth’s climate, serious disagreements can arise over basic data derived from what are now constant measurements of solar activity. Until this most recent solar cycle, the debate has usually not taken on alarmist tones, but clearly something not seen at least in 100 years is now occurring with earth’s fundamental source of energy and life.

Basic Solar Dynamics

The sun is a giant nuclear reactor which creates energy not by fission, as occurs in an atomic bomb where atoms are forced apart, but by fusion. At the core of the sun, hydrogen atoms are under intense pressure due to the sheer mass of the sun itself, and this pressure fuses two hydrogen atoms together. This reaction produces helium atoms and certain other particles, and since helium is much lighter than hydrogen, the difference consists of massive amounts of energy that are released in the form of light and heat. Some of this light is visible to us and produces daytime on earth, but other parts of the light spectrum like x-rays, ultraviolet, and radio waves are just as important though not visible. Certain atomic particles like protons are also released and they eventually reach the earth in the form of the solar wind, which would otherwise be dangerous to life on the planet if not for the protective atmosphere of earth.

While the nuclear fusion process is instantaneous in the core of the sun, the manner in which energy reaches the surface is anything but. The energy first churns about in the middle section of the sun known as the reactive zone, and then convection currents of light and hot gases transfer the energy to the surface, where it eventually escapes and reaches us. The convection zone is what concerns us here, because it is heavily influenced by the magnetic field generated by the sun’s huge mass and its gravity. Earth has its own magnetic field and magnetic poles, but the sun’s is 5,000 times greater. The magnetic field is expressed along magnetic lines that loop from the interior outwards and back again, and as these magnetic lines pass through the sun’s surface, they create patches that are cooler than the rest of the surface and visible to us as dark sunspots.

Sunspots always erupt in pairs, like a positive and negative pole of a magnet, and these pairs are often clumped together. Sunspots interfere with the convection zone at the surface, so that light and other forms of energy reach us on an irregular basis, which is important because it is this light and energy which heats the planet, allows for life transformational processes like photosynthesis, and creates weather (think how hurricanes become more powerful as they pass over warm ocean water). We on earth have a keen interest in the behavior of these sunspots and their interference with the sun’s transfer of energy.

Galileo was the first scientist to systematically observe and chart sunspots in 1611. Since then, there has been a steady observation of these phenomena, with a more precise monitoring process established around 1750 that is known as the modern era. What this observation revealed is that sunspots appear in different intensities according to a cycle that averages 10.7 years, but ranges from as short as 7 years to as long as 16 years. At the start of the cycle there are very few sunspots – this is known as the solar minimum - and then sunspot production increases for about 5.5 years to reach a solar maximum. In an average cycle, 40,000 to 50,000 sunspots can occur, with 150 occurring at any one time.

It is not clear what drives the solar cycle, but magnetic fields are not stable and this might create the cycle. Earth’s magnetic field appears stable but really isn’t; every so often the field reverses itself and the north magnetic pole trades places with the south magnetic poles (these poles themselves shift position regularly, in a position close to but not coterminous with the geographic North Pole and South Pole). Something similar may be happening with the sun, but on a more rapid cycle that is equivalent to about 11 years on earth.

History of the Solar Cycle

We have four hundreds years of data regarding the solar cycle, which is reproduced in this chart:

Starting with the first complete solar cycle charted shortly after 1750, there have been 23 solar cycles numbered accordingly, and we are now about to enter cycle 24. These cycles are shown as blue on the chart, and the black line is the median number of sunspots in thousands (scale on the right) during each cycle. One thing that has been observed regarding the cycle is that longer cycles, such as cycle 4 ending right around the French Revolution, tend to lead to weaker cycles where sunspot production can be cut in half. The two weak cycles that occurred around 1800 – 1835 are known as the Dalton Minimum, for the scientist who studied this period.

An even more interesting minimum production occurred from 1650 to 1725, known as the Maunder Minimum; these are identified as red on the chart. The lack of sunspots during the Maunder Minimum is not the result of fewer people looking at the sun during the pre-modern era of observations. Scientists today have confirmed through other measures of solar activity on earth, such as tree samples or deep ice samples, that the sun was remarkably quiet during this period. Summers were much shorter and cooler, and winters longer and more severe. Around 1640, no sunspots occurred at all, and this corresponds to the coldest recorded temperatures during what is known as the Little Ice Age.

Temperatures on earth appeared to drop significantly in the late 1500s, and by the time Shakespeare was at the peak of his powers in 1600 and Galileo was turning the new invention of the telescope towards the sun, a very pronounced cooling was being recorded in historical documents from Europe to China. Rivers in Europe routinely froze; glaciers expanded, snowfalls were noticeably heavier, and winter began around October with thaws beginning to occur in May. Crop production in Europe plummeted and famine was widespread for many years during the Little Ice Age, which lasted throughout the 17th century.

Icebergs traveled much further south in the Atlantic, and the complaints by the colonists in Jamestown about the bitter winter weather were not misplaced. In fact, colonization of North America may have slowed down because of the dramatic cooling during the 17th century. Henry IV of France initially supported expansion of the French colony at Port Royal in l605 at the top of the Bay of Fundy, but refused further expeditions of settlers to the colony due in part to the difficult conditions there. The Dutch established the fort of New Amsterdam at the southern tip of Manhattan in 1625; they reported that in the winters New York Harbor routinely froze over and it was possible to walk from Manhattan to Staten Island over the ice.

The circumstantial evidence that the Maunder Minimum, which coincided with the Little Ice Age, was its cause is very strong, and most climatologists and solar scientists agree that more than coincidence was involved. But there was also increased volcanic activity on the planet at the time, and this may have provided increased cloud cover to block out the sun and cool the earth. Some historians say a chain reaction, starting with the Black Death in the 14th century, which resulted in severe depopulation, which then led to widespread reforestation in Europe, might have contributed to global cooling.

But the Dalton Minimum also coincided with much harsher winters, and even solar cycle 20, which occurred in the 1970s and was a noticeably weak cycle, was accompanied by cooler weather. Newspaper articles at the time commented on the many record cold days and heavy snows, and scientific articles began to warn about an early return of the next ice age. As scientists have recently begun collecting ice samples from Antarctica and Greenland to study global warming, they are noticing that the earth was definitely colder during the Little Ice Age, and this was felt globally. This increases the possibility that the Maunder Minimum – during which time the sun’s magnetic field repositioning seemed to shut down completely – was the main cause of global cooling.

Is the Sun Entering a Quiet Period Again?

Originally the NASA and NOAA committee of solar scientists responsible for monitoring the sun and then reporting their opinions on the solar cycle to the federal government, believed that solar cycle 24 would arrive on time and be of average strength and length. One of these scientists, David Hathaway, has studied how hot gases in the convection zone are transmitted to the surface through conveyor belts located above and below the equator. Using sunspot data going back to the 19th century, he has determined that the conveyor belts are moving slower than ever. Given the time it takes for gases to reach the surface, he believes this next solar cycle will be typical, but cycle 25 afterwards will be noticeably quieter. He has averred that an event like the Dalton Minimum could happen again in the next two decades, but he would not go so far as to call for a Maunder Minimum.

Hathaway’s prediction has set off excitement within the cottage industry devoted to debunking global warming. One such organization in Florida, the Space and Science Research Center, immediately jumped on the Hathaway announcement as proof of what they have been saying all along – that global warming is a hoax. The SSRC director John Casey, issued a press release that said in part:

There can no longer be any doubt that the Sun has entered an historic period of dramatically reduced activity which will bring us many long years of deep cold weather. This was predicted by me and a few other scientists around the globe but of course we were not taken seriously because of the politics of global warming and the refusal of many media outlets to print or telecast alternatives to the now discredited man made global warming concept. According to national and international sources that monitor the Sun, what is happening on and in the Sun is nothing short of record setting, astounding, and at the same time worrisome. The solar wind is at its lowest level in fifty years. The surface movement on the Sun has slowed to record rates and according to NASA’s previous announcements is ‘off the bottom of the charts.’ Most telling is the current prolonged lack of sunspots between the normal 11 year solar cycles 23 and 24 which is about to set a one hundred year record for time without sunspots. NASA also has long since forecast that cycle 25 will be ‘one of the weakest in centuries.” All of these events in combination leave little doubt that a ‘solar hibernation’ lasting several decades delivering the coldest weather in over two centuries has in fact arrived.

Dr. Casey states that no one has taken him seriously, so should we now? When you are out in the scientific wilderness for decades you tend to grab on to whatever will accord you respectability, and mixing up solar cycle predictions with the global warming debate is an easy temptation. The weight of scientific evidence has been mounting over the years in favor of the hypothesis that CO2 emissions in the atmosphere are contributing to global warming (earlier attempts to debunk the very idea that warming is occurring have been abandoned by most of the global warming hoax crowd). Whether or not the solar cycle is slowing down or going into hibernation, does not negate the facts surrounding carbon emissions. Even the Indian and Chinese governments do not deny global warming and their own contribution to it; they merely present the crass argument that they too should now be allowed their turn, like the West, to industrialize rapidly by polluting the environment.

Most scientists involved in climatology agree with the global warming theories. Their view about the solar cycle is evolving as the science evolves. For example, recent research shows sunspot activity to be highly correlated with the warming of the Pacific Ocean, which in turn leads to the El Nino and La Nina phenomena. There may be many other such climatic correlations to be discovered. But what hasn’t been established yet is a direct link between global temperatures and the solar cycle, whereas the link between carbon emissions and temperature change is much more solid. Also, the degree of damage done by global warming could be catastrophic; a second Little Ice Age on the other hand would mitigate this damage but not prevent it. Moreover, the planet did survive and recover from the Little Ice Age. Global warming under the worst scenarios could cause changes lasting over 100,000 years.

What Do We Know as of Now?

1. Solar cycle 24 may have kicked off at the end of 2008. Some sunspots appeared then which had the requisite reversed magnetic polarity from sunspots in cycle 23, and this is one of the key bits of evidence that the solar cycle has reset. But since then, nothing much has happened, so the official U.S. government committee monitoring the sun is split on what is occurring.

2. Cycle 23 may therefore be continuing, according to some of these scientists, and if so we are entering an unusual, rare extension of the cycle. Cycle 24 under these conditions is likely to be quite weak, which could lead to temporary global cooling.

3. Even if cycle 24 has commenced, the follow-up in 2009 has been unusually weak and has caused those scientists who originally thought we were in for a typical cycle to downgrade their expectations for the number of sunspots to be produced in cycle 24. Along with this downgrade comes predictions that some global cooling might occur.

4. At least one scientific expert believes the follow-up cycle, number 25, will be very weak, possibly on the order of the Dalton Minimum. This would have even greater implications for global cooling.

5. No one, scientist or otherwise, really knows what is happening now with the sun. There are 23 data points to the solar cycle, not counting what occurred during the Maunder Minimum. These 23 data points are too few to draw statistical conclusions of any reliability. No one can say for sure what cycle 24 will look like until it is well underway, and no one can accurately predict another Minimum period other than to say that what has happened with the sun in the past should in all probability happen again. Maybe the sun’s magnetic field is even able to move into hibernation for as long as 100,000 years; that could explain earth’s Ice Ages.

6. Whatever is happening with the sun, there is no reason to take these events as evidence or proof that manmade global warming is not occurring, much less that the solar cycle has caused global warming. At best, solar cooling might mitigate the effects of global warming, but at least we can do something about global warming as a manmade event. We can do nothing about the solar cycle.

7. There does seem to be some temporary cooling going on in 2008 and 2009, though this is of little comfort to places like Texas under severe drought, or the northwestern U.S. states suffering a record high summer temperature. This cooling may be related to the current minimal sunspot activity.

8. Finally, nothing is more vital to the existence of life on earth than the sun, so it well behooves us even as non-scientists to be mindful of the solar cycle. It certainly behooves government to spend money monitoring, debating and reporting on solar activity. Since mankind began exploiting electromagnetic radiation for use in radios, satellite communications, cell phones, power lines, and many other applications, solar activity has taken on vital importance because all these uses could be disrupted or permanently damaged.

It would be fun to end this article with a rousing cheer for the sun, in the hopes that a normal sunspot cycle will commence soon. But the only operative adage we can take when it comes to the sun is que sera sera. We can only wait and see what will happen. We can’t even prepare for a temporary 50 year global cooling period until it is upon us. And we should certainly not reduce our vigilance in reducing carbon emissions into our own atmosphere.

Still, something’s happening out there that is more than just interesting – it might be earth-shaking. We shall see whether a phenomena as obscure as sunspots begin to affect all our lives in unexpected ways.