Coyote Blog

Just in case you believed all the BS around the passage of Dodd-Frank that in the future there would be no such thing as too big to fail, just look at yesterday's JP Morgan hearings in Congress.  

U.S. lawmakers on Wednesday interrogated J.P. Morgan Chase Chief Executive James Dimon in a much-anticipated and sometimes-heated exchange after the bank registered more than $2 billion in derivatives losses

No one grills Exxon-Mobil executives when the company loses a couple of billion to a nationalization somewhere or grills Sears executives as the blunder their way towards bankruptcy.  These are private business losses.  The only reason to grill JP Morgan is if Congress still considers the American taxpayer to be ultimately on the hook for trading losses (above and beyond deposit insurance requirements, which the Bear Sterns and AIG bailouts certainly were).

Sometimes a proposed law is so wrong and so destructive, but so typical of a certain philosophical bent, that I almost wish it would pass, if for no reason than to have an Atlas Shrugged-type object example of disastrous results.  Such is the case for a California ballot initiative that has qualified for the signature-gathering stage.  The initiative, in part:  (full text linked here)

• Imposes one-time tax of at least 55% on property
  exceeding $20 million of a California resident or held in California by
  nonresident.  [note that this is an asset tax, not an income tax]
• Imposes one-time tax (between 36.5% - 54.3%) on income exceeding $10 million when resident dies or leaves California.
• Imposes
  additional 17.5% tax on total incomes of taxpayers with income
  exceeding $150,000 if single, $250,000 if married; 35% if incomes
  exceed $350,000 if single, $500,000 if married.
• The proceeds of this money will be used to:
  • To
    purchase 30% to 51% of the outstanding shares of stock in ExxonMobil,
    Chevron, General Motors, Ford, Goldman Sachs, JP Morgan Chase, and
    Citigroup, in order to ensure California has an uninterrupted source of
    energy and financial capital.
  • To drain and restore the Hetch Hetchy Valley to it's condition at the beginning of the 20th century.
  • Use
    any Surplus funds to combat Global Warming, make infrastructure repairs
    and improvements, and to research alternative energy sources.

Beyond the unbelievably Marxist confiscation going on here, it begs the question of just what supply of energy and financial capital that California is not getting today that this will somehow ensure.  The implication seems to be that ExxonMobil, GM, and Citigroup are too fair-minded, selling their wares too even-handedly, and that California would prefer their attention tilted towards California.

Of course this initiative is profoundly immoral, so I can't do anything but deride it, but it would make for a spectacular object lesson (though one would have thought the Soviet Union's experience to be sufficient to this task, but apparently not).  I am sure GM's troubles would be greatly helped by replacing its board of directors with the California State Legislature  (the only American organization running a bigger deficit than GM) and replacing Citigroup's credit analysists with California social services beauracrats.  I would kind of like to see this in the same way I would love to see what happens if I threw a crate of flourescent tubes off a 10th-floor roof  -- I would never actualy do it, because it would be unsafe and destructive, but I can still dream about how compelling the disaster would be.

Postscript: One could probably label this the Arizona and Nevada economic stimulation act and probably not be far off the mark.

I guess it turns out that compensation deals between sophisticated, consenting adults at private firms are not actually subject to approval by the NY attorney general, no matter how much he grandstands:

A state appeals court on Tuesday dealt a devastating blow to the New
York attorney general's efforts to force ex-New York Stock Exchange
Chairman Richard Grasso to return a portion of his $187.5 million
compensation package.

New York Attorney General Andrew Cuomo's
spokesman issued a statement saying he is not pursuing an appeal in the
case. The Grasso case is "over" "¦ "for all intents and purposes," the
spokesman said.

In a 3-1 decision, the New York Supreme Court's
Appellate Division dismissed the two remaining causes of actions
against Mr. Grasso and one against former NYSE director Ken Langone

I wrote much more about this fiasco long ago...

Update:  The AG argues that their real concern was about pay practice in non-profits.  OK, I am sure there are any number of NGOs and museum presidents where there might be real issues with the sophistication of board members.  Go after those folks, then, but there was never, ever any evidence that somehow Dick Grasso pulled the wool over the eyes of financial neophytes on the NYSE Board, babes in the woods such as the CEOs of JP Morgan Chase and Goldman Sachs.  Unfortunately, all these other non-profits tend to be run by folks who are the backbone of the NY Democratic Party.  Even in the Grasso suit, Spitzer had to work a bit to avoid naming prominent Democrats as targets.  For example, there is a lot of evidence that the person most responsible on the NYSE baord for the structure of Dick Grasso's compensation contract was NYSE board member and former NY State Comptroller Carl McCall, but since he is a powerful Democrat, Spitzer did some slick judo to avoid including him in the suit, which still including other NYSE board members.

I wondered if folks would find my analogy from Bear Stearns to Enron I posted the other day stretched. 

Because Enron's demise came in exactly this sort of liquidity crisis,
and the situations are nearly entirely parallel, all the way up to and
including the CEO telling the world all is well just days before the
failure.  But no one understood Enron's business, so its failure seemed
"out of the blue" and therefore was attributed by many to fraud,
lacking any other ready explanation.   In the case of Bear Stearns, the
public was educated in advance as to the problems in their portfolio
(with mortgage loans) such that the liquidity crisis was less of a
surprise and, having ready source of blame (subprime loans) no one has
felt the need to apply the fraud tag.

Apparently, the Economist sees the same connection (via a reader):

For many people, the mere fact of Enron's collapse is evidence that
Mr Skilling and his old mentor and boss, Ken Lay, who died between his
conviction and sentencing, presided over a fraudulent house of cards.
Yet Mr Skilling has always argued that Enron's collapse largely
resulted from a loss of trust in the firm by its financial-market
counterparties, who engaged in the equivalent of a bank run. Certainly,
the amounts of money involved in the specific frauds identified at
Enron were small compared to the amount of shareholder value that was
ultimately destroyed when it plunged into bankruptcy.

Yet recent events in the financial markets add some weight to Mr
Skilling's story"”though nobody is (yet) alleging the sort of fraudulent
behaviour on Wall Street that apparently took place at Enron. The
hastily arranged purchase of Bear Stearns by JP Morgan Chase is the
result of exactly such a bank run on the bank, as Bear's counterparties
lost faith in it. This has seen the destruction of most of its roughly
$20-billion market capitalisation since January 2007. By comparison,
$65 billion was wiped out at Enron, and $190 billion at Citigroup since
May 2007, as the credit crunch turned into a crisis in capitalism.

Mr Skilling's defence team unearthed another apparent inconsistency
in Mr Fastow's testimony that resonates with today's events. As Enron
entered its death spiral, Mr Lay held a meeting to reassure employees
that the firm was still in good shape, and that its "liquidity was
strong". The composite suggested that Mr Fastow "felt [Mr Lay's
comment] was an overstatement" stemming from Mr Lay's need to "increase
public confidence" in the firm.

The original FBI notes say that Mr Fastow thought the comment
"fair". The jury found Mr Lay guilty of fraud at least partly because
it believed the government's allegations that Mr Lay knew such bullish
statements were false when he made them.

As recently as March 12th, Alan Schwartz, the chief executive of
Bear Stearns, issued a statement responding to rumours that it was in
trouble, saying that "we don't see any pressure on our liquidity, let
alone a liquidity crisis." Two days later, only an emergency credit
line arranged by the Federal Reserve was keeping the investment bank
alive. (Meanwhile, as its share price tumbled on rumours of trouble on
March 17th, Lehman Brothers issued a statement confirming that its
"liquidity is very strong.")

Although it can do nothing for Mr Lay, the fate of Bear Stearns
illustrates how fast quickly a firm's prospects can go from promising
to non-existent when counterparties lose confidence in it. The rapid
loss of market value so soon after a bullish comment from a chief
executive may, judging by one reading of Enron's experience, get
prosecutorial juices going, should the financial crisis get so bad that
the public demands locking up some prominent Wall Streeters.

The article also includes more details of exculpatory evidence that was withheld from the Skilling team and will very likely lead to a new trial.  The Enron prosecution team has not had a very good record in appeals court scrutiny of their actions at trial:

For what it is worth, prosecutors have had a tougher time in the
appeals court with Enron-related cases than in the initial jury trials.
Convictions have been overturned in a case relating to Nigerian barges
that Enron sold to Merrill Lynch. The conviction of the chief financial
officer of Enron Broadband has also been vacated, after two trials. So,
too, was the decision to convict Enron's auditor, Arthur Andersen
(albeit too late to save the venerable firm from liquidation).