Coyote Blog

Or maybe it is more correct to say that the taxpayer is being set up to keep BofA counter-parties whole. From Bloomberg, via Zero Hedge:

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

Obviously I am not a huge fan of bank regulation, but if the taxpayer is going to insure deposits, then the government has got to set and enforce capital restrictions on how those deposits are invested.  How many times do we have to learn this lesson?  The S&L crisis and the Texas bank collapse of the 1980's was caused by the exact same BS, investing taxpayer insured deposits in increasingly risky investments.

Normally, in a free economy, we expect lenders to enforce rules and discipline on those to whom they lend, just as fire insurers in the 19th century developed the first building codes and inspections to protect their themselves.  But if depositors are insured, they are not going to get worked up too much about BofA -- I am a depositor but I know the Feds will make me whole if the bank crashes.  Deposit insurance provides comfort to depositors and pays some dividends in heading off bank panics, but at the same time it relieves the bank of any accountability for how the deposits are invested unless the US government takes on that role.  Of all the BS regulations financial firms have to put up with, this is the one that should actually exist, and the implication in this article is that despite thousands of pages of new regulation, these basic protections still don't exist.  Sure, they exist in law, but there seems to be nothing to stop an agency from issuing exemptions, and this Administration has shown itself to love giving exemptions.

This reminds me a ton of the AIG bailout.  For some reason, there are a group of Wall Street companies (cough Goldman cough) that seem to have immense political power to protect investments in which they are a counter-party.  To this point, people have been expecting that the BofA holding company might soon fail, but the underlying banks would be fine and just sold off in pretty good shape.  Most of the trash is apparently at the holding company level.

The losers in all this are the counter-parties to these various derivatives, who would rather have a better set of assets to grab if the ship starts sinking.  Of course, they don't have any right to this -- they didn't make these original deals with the depository banks, they made them with Merrill Lynch and other trash BofA has bought.  But never-the-less, the Fed seems fired up to give these guys a special deal.  It reminds me of the Solyndra deal where the Administration allowed certain private parties to move ahead of the US Government on the creditor list, though at least in Solyndra's case these parties actually put some money into the pot for the privilege.  This seems to be a straight giveaway, and it is no surprise that the FDIC is apoplectic.

I tell folks all the time -- there are very few bad people in government, just people with very bad incentives.   Government inspectors are no exception.  They look around them and see falling government tax revenues.  They know that state and local governments are looking to cut costs, and they know further that lawmakers are likely to look at falling construction starts and reduced business activity and say "I bet we could do with fewer inspectors."

So state inspectors, naturally, want to hold onto their jobs, so they have to go out and look busy.   One way to look busy (and to further look like one is being useful) is to be more picky about small, meaningless violations. Writing up more violations makes it look like one is needed (after all, if there are so many violations out there, surely we need inspectors to find them).  Also, violations demand return visits and follow-up inspections, which again create the illusion of activity.

Which leads to stuff like this:

Sherrie Nielson owns two Chandler bars, antique-filled Priceless Too at Alma School and Elliot roads, and Priceless Primetime at Dobson and Elliot.

An inspector with the county department of environmental services has told her she needs to install a sink at the bar so it's convenient for the bartenders to wash their hands

Nielson has one sink in the bar area, but that's for washing glasses. County regulations say employees can't wash their hands in the same sink that they wash dishes.

"I've owned 'Too' for 30 years," Nielson said. "The sink we use is probably 20 feet in a different direction. . . . I have a dishwashing sink; (the inspector) wants a hand sink next to it."

Nielson says counting the sinks in the kitchen and the restrooms, she has four sinks available for washing hands. But the key point is that it has to be convenient for the bartender.

"If I don't comply, they will start proceedings to shut me down," she said.

Johnny Dilone, a spokesman for the county environmental services department, verified that Nielson's license could be revoked if she doesn't install the new sink.

This story resonates with me, as we have had to fight the sink battle in a number of locations as well.  Take one small store we run in a state park in northern California.  Because we make coffee there, we must comply with food preparation rules (including 8 hours annually of training, lol.  I am not a coffee drinker, but for all that I sure hope we have good freaking coffee).  We eventually had to install:  A three sink dishwashing station, a sink in the employee bathroom, a separate sink for handwashing in the store a few feet from the sink in the bathroom, and a mop sink.

The problem is that the regulations are confusing, and no one in the local health department would look at our plans in advance.  Obviously, it is a lot easier to fix missing sinks and such at the planning stage, but the health department in this county would only inspect actual facilities, so would only tell us if our design met their requirements once it was built!

A few posts ago I discussed some of the onerous build code hurdles we had to pass in retrofitting our house to pass a pool inspection.  In short, the code is designed to keep small children from getting out of the house on their own to a pool area.  Dead bolts must be 54" off the ground where they cannot reach them, the doors must have automatic closers (and thereby be difficult for small children to open) and windows cannot open wide enough to allow the kids to pass.  This is, of course, nominally for the safety of kids.

I pointed out one obvious critique of this regulation:  the vast, vast majority of kids do not drown in pools by sneaking out of the house.  They drown in pools when their parents know full well they are outside and fail to supervise them closely.

But I failed to discuss an even more obvious critique.  Can anyone see any possible problem with making it impossible for small children to exit the house?  Perhaps, say, in a fire?   Once I bring my house up to code, because none of the children's wing of the house has any window or door except to the pool area, the state will have made it absolutely impossible for small children to escape in a fire.   Yes, the state has forced me to turn the back of my house into a fire trap for kids.  That is, of course, unless I reverse all the changes 5 seconds after the inspector leaves my property, which of course I would never, ever do because I am a good American who pledged allegiance to the state every shool day of my childhood.

"Meanwhile, the city's legal department is looking to see what, if anything, it can do about the First Amendment banner."

Via Radley Balko.  The city told Herb Quintero that he did not have the right to paint a mural on the side of his building, and had to cover it up.  So he did, with a banner containing the text of the First Amendment.  Image from here.

Speaking of building codes, we are about to get some repairs on our pool inspected.  To pass the inspection on our pool, though, we have to spend thousands of dollars inside of our house.  Phoenix building codes require all kinds of crazy rules for home entry doors to the pool area.  For example, they all have to be self-closing and have to have deadbolts 54" off the ground, which I can assure you that no house built normally actually has. No window can open more than 4 inches.  This is a problem for us, because we have a series of French doors opening to the pool area, giving us 9 separate doors we have to modify or replace.  We are lucky we are grandfathered and don't have to put a fence around the pool area as new homes do (our backyard is fenced of course, but regulations require new homes to have a fence around the pool itself).  I know a lot of folks whose first activity in buying a new home is to pay someone to rip out the fence once the home passes inspection.

The rationale is to keep kids from drowning, I guess, but the number of kids who drown by sneaking out through 5 inch window gaps, or even unlocked doors, is vanishingly small  (the number of kids that drown in homes with no small kids is also small).   Kids drown when parents know they are outdoors but fail to supervise them closely.  We have no small kids in the house, but when we did, we supervised them very closely and put them through swim school before they were five.  But politicians, when there is a high-profile drowning, feel they need to "do something."  Since they can't legislate good parenting, they add to the already bloated building code, often sticking in pet requirements of lobbyists representing particular building materials and services.

Well, it turns out there are any number of companies in Phoenix who specialize in getting your home ready for this inspection.  They will come in and install all kinds of temprorary hardware, then come back after the inspection and remove it (filling and patching screw holes and the like).  Talk about dead-weight loss.