Coyote Blog

From Edward Pinto at the American

Fannie and Freddie entered into agreements accepting responsibility for misleading conduct discovered by the SEC, including:

1.    As of June 30, 2008, Freddie had $244 billion in subprime loans, while investors were told it had only $6 billion in subprime exposure.

a.    Freddie knew it was inadequately compensated for the risks it was taking. For example, it was taking on “subprime-like loans to help achieve [its] HUD goals” that were similar to private fixed-rate subprime, but the latter typically received “returns five to six times as great,” says the complaint.

b.    Freddie had concerns about risk layering on loans with an LTV >90% and a FICO <680. (Yet, in Freddie’s disclosures it only noted risk layering concerns on loans with an LTV >90% and a FICO <620. This is a major difference since only 10 percent of its loans fell into the LTV >90% and a FICO <620 category, while nearly half fell into the LTV >90% and a FICO <680 one.)

2.    As of June 30, 2008, Fannie had $641 billion in Alt-A loans (23 percent of its single-family loan guaranty portfolio), while investors were told it had less than half that amount ($306 billion, or 11 percent of its single-family loan guaranty portfolio).

3.    The SEC complaint disclosed that Freddie had a coding system to track “subprime,” “other-wise subprime,” and “subprime-like” loans in its loan guaranty portfolio even as it denied having any significant subprime exposure.

These suits are important because they demonstrate that Fannie and Freddie “told the world their subprime exposure was substantially smaller than it really was … and mislead the market about the amount of risk on the companies’ books,” said Robert Khuzami, director of the SEC’s Enforcement Division.

Nice tax refund you have coming .... we think we'll keep it

The [Greek] government has decided to stop tax returns and other obligation payments to enterprises, salary workers and pensioners as it sees the budget deficit soaring to over 10 percent of gross domestic product for 2011.

For all the supposed austerity, the budget situation is worse in Greece.  Germany and other countries will soon have to accept they have poured tens of billions of euros down a rathole, and that they will have to do what they should have done over a year ago - let Greece move out of the Euro.

Government workers and pensioners simply will not accept any cuts without rioting in the street.  And the banks will all go under with a default on government debt.  And no one will pay any more taxes.  And Germany is not going to keep funding a 10% of GDP deficit.  The only way out seems to be to print money (to pay the debt) and devalue the currency (to effectively reduce fixed pensions and salaries).  And the only way to do all that is outside of the Euro.  From an economic standpoint, the inflation approach is probably not the best, but it is the politically easiest to implement.

It used to be that the regulatory power of government agencies was delegated and specified by acts of Congress.  Now, it seems, they can just give themselves broad new powers

The U.S. Environmental Protection Agency wants to change how it analyzes problems and makes decisions, in a way that would give it vastly expanded power to regulate businesses, communities and ecosystems in the name of “sustainable development,” the centerpiece of a global United Nations conference slated for Rio de Janeiro next June.

Google is starting to discover that all its smug leftish do-gooder aura is not going to stop the government from trying to take it down merely for being successful.

Sens. Herb Kohl (D-Wis.) and Mike Lee (R-Utah), the top lawmakers on the Judiciary Committee's antitrust subpanel, are urging Federal Trade Commission (FTC) Chairman Jon Leibowitz to take a hard look at whether Google is engaging in anticompetitive business practices....

"Given the scope of Google's market share in general Internet search, a key question is whether Google is using its market power to steer users to its own web products or secondary services and discriminating against other websites with which it competes," the lawmakers wrote in a letter sent Monday.

Two quick thoughts

1. Further proof that, long ago, anti-trust actions dropped any hint of being about the consumer and have become completely about protecting competitors with connections in Washington from getting their butts kicks by a stronger company.  Look at some of the last suits - Microsoft, now maybe Google - both are actually about stopping companies from offering consumers free stuff.
2. Isn't Google being accused of doing exactly what, say, NBC does all the time?  NBC loses money on the Superbowl and the Olympics, but uses the huge audience to cross sell its other shows and offerings.

I find it irritating that folks like President Obama feel like the power to indefinitely detain people, without due process, is Constitutionally OK as long as the President does not abuse the power.  Sorry, but the very existance of this power is a violation of the Constitution.  The whole point of that great document was to always assume that state powers would be abused, and I think history has taught that this is a fair assumption

I have zero desire to be  a farmer.  But that would seem to be the logical end result if we take Obama's recent statement to its logical conclusion.  He said in his Kansas "OK, I really am a socialist after all" speech:

Factories where people thought they would retire suddenly picked up and went overseas, where workers were cheaper. Steel mills that needed 100—or 1,000 employees are now able to do the same work with 100 employees, so layoffs too often became permanent, not just a temporary part of the business cycle. And these changes didn’t just affect blue-collar workers. If you were a bank teller or a phone operator or a travel agent, you saw many in your profession replaced by ATMs and the Internet.

As has been pointed out by economists everywhere since the speech, Obama is fighting against the very roots of wealth creation and growth and our economy.  Productivity improvement has always been the main engine of a better life for Americans, but here Obama is decrying it.

This reduction in employment in major industries due to productivity is not new.  It began with the agriculture.  Check this out from the always awesome Mark Perry

This is exactly what Obama is criticizing.  Without productivity improvements of the type Obama seems to hate, nine out of ten of you would be laboring in a field rather than reading this on the Internet.   Are you poorer because you don't have to grow your own food?  Of course not.   Every time we increase productivity in a major industry, we fee up labor for the next big thing.  We couldn't have had the steel or auto or oil industries if agricultural productivity improvements had not feed up labor for them.  The computer revolution would be impossible if we all were working in steel mills.

PS- of course this does not work if the next big thing, say domestic gas productions through fracking, is blocked by the government and private investment capital is diverted by the government to cronies with a solar panel factory.

A new fashion and style blog for women over 40 featured my wife in their December profile.  Definitely the better half.

Humans have a natural desire  to innovate and exercise creativity.  Unfortunately, in government bureaucracies, the only place where this creativity is channeled is into inventing new ways to expand one's or one's agency's power.  Which is why life as a libertarian seems to be a constant whack-a-mole game against stupid regulatory proposals like banning even hands-free cell phones from cars.

Tim Lynch brings us an update on the Bill of Rights.  Good news:  The third is doing find.  The rest?  Not so much.

This is one of the most incredible things I have seen in a while.  I will describe the video, but it is only a bit over a minute long and you should definitely watch it.

The clip below is an outtake from the environmentalist movie "Crude", which purported to document the environmentalist's case against Chevron in Ecuador.  Apparently, between takes of earnest and un-selfinterested environmentalists saving the world from greedy corporations, these self-same environmentalists discussed lying about the science and duping the courts in order to score a big payday for themselves.

The video is doubly interesting because, as Anthony Watts explains, the woman in the video taking money to make up untrue findings was recently confirmed to the NAS, where there is a good bet that we will see her as the source for "evidence" that fracking is contaminating groundwater.  These three folks are all the subject of a civil suit from Chevron but all three should be subject to criminal charges for fraud and conspiracy.

Even more interesting than the soft consensus in favor of government intervention was a strong undercurrent that those who disagreed with it were guilty of denying basic truths. One of the questions from an audience full of Senate staffers, policy wonks, and journalists was how can we even have a rational policy discussion with all these denialist Republicans who disregarded Daniel Patrick Moynihan’s famous maxim that “Everyone is entitled to his own opinion, but not his own facts”? Jared Bernstein couldn’t have been more pleased.

“I feel like we’re in a climate in which facts just aren’t welcome,” he said. “I think the facts of the case are that we know what we can do to nudge the unemployment rate down.…I think the consensus among economists is that this is a good time to implement fiscal stimulus that would help create jobs and make the unemployment rate go down. I consider that a fact.”

In science, you insist most loudly on a fact based on how much it has withstood independent peer review. In politics, it’s closer to the opposite—the more debatable a point is, the more it becomes necessary to insist (often in the face of contrary evidence) that the conclusion is backed by scientific consensus

For a while now, a few authors have been quipping at Zero Hedge that the best investment strategy is to do the opposite of what Goldman Sachs is telling is retail customers.  The theory is that if Goldman tells the public to buy, it means that they are selling like crazy for their own account.

This seemed a bit cynical, but on Friday Zero Hedge observed that Goldman was telling its retail customers to buy European banks.  This advice seemed so crazy -- the European agreement last weekly explicitly did not contain anything to help banks in the near term with over-leveraged bets on shaky sovereign debt -- that for the fun of it I played along.  I shorted a couple hundred shares of EUFN, a US traded fund of European financial firms (took a bit of work to find the shares to borrow).

Made 6% in one day.  Thanks Goldman.

Investors everywhere were shocked to see that MF Global seems to have lost over a billion dollars of their customers capital.  In most cases, this capital was cash customers thought was sequestered as collateral for their trading accounts.  MF Global took its customers money and used that money as collateral in making risky, leveraged bets on European sovereign debt, bets that fell apart as debt prices fell and MF Global faced margin calls on its bets that it did not have the liquidity to cover.

Certainly it strikes most folks as unethical to lose the assets in your customers' brokerage accounts making bets for the house.  But it turns out, it may have been entirely legal.  This article is quite good, and helps explain what was going on, what this "hypothecation" thing is (basically a fancy term for leveraging up assets by using them as collateral on loans), and why it may have been legal.

In short, the article discusses two regulatory changes that seemed to be important.  The first was a 2000 (ie Clinton era, for those who still think these regulatory screwups are attributable to a single Party) relaxation in how brokerages could invest customers' collateral in their trading accounts.  The second was a loophole where brokerages created subsidiaries in countries with no controls on how client money was re-used (in this case mostly the UK) and used those subsidiaries to reinvest money even in US brokerage accounts.

The increase in leverage was staggering.  Already, cash in most commodities trading accounts is leveraged - customers might have only 30% of the value of their trading positions as collateral on their margin account.  Then the brokerage houses took this collateral and used it as collateral on new loans.  Those receiving the collateral on the other end often did the same.

MF Global would be bad if it were fraud.  But it is even worse if MF Global is doing legally what every other brokerage house is still doing.

Here is the minimum one should do:  Diversify brokerage accounts.  We diversify between bonds and stocks and other investments, but many people have everything in one account with one company.  I am not sure anyone can be trusted any more.  My mutual funds are now spread across three firms and, if I grow my brokerage account for individual stocks and investments (right now it is tiny) I will split that as well.

It is interesting to study the contrast between the handling of the Toyota accelerator problems, which turned out to be pretty much all driver error, and the Chevy Volt fire issues.

In the case of the former, we had public hearings and government threats.  The government, without evidence at that point, demanded Toyota recall the vehicles and stop production.  Eventually, when the NHTSA determined that the panic and recall was in error and the issue was operator error and not with the car, the Obama Administration suppressed the results.

Now, Volts appear to have a fire problem with their batteries.  This time, the government is keeping things real quiet and, instead of exaggerating the safety issue, they are suppresing it

It now appears the fire hazard was first discovered back in June, when GM first heard about a fire in a Volt that occurred some three weeks after the vehicle had been crash tested.

Yet, almost five months went by before either GM or the US National Highway Traffic Safety Administration (NHTSA) told dealers and customers about the potential risks and urged them to drain the battery pack as soon as possible after an accident.

Part of the reason for delaying the disclosure was the “fragility of Volt sales” up until that point, according to Joan Claybrook, a former administrator at NHTSA.

Demagoguing a non-problem in the first case, covering up a real problem in the second.  Guess which one has a union that supported Obama's election and which does not.  Guess which one Obama bought equity in with taxpayer money?

My new column is up at Forbes, and discusses the proposal by a number of Congressmen for a Constitutional Amendment to strip corporations of speech and other rights.  The post is hard to excerpt but here is just a bit:

This is why this proposed Amendment is so absurd.  In effect, it would mean that we all enjoy the full range of Constitutional rights, except when we agree to assemble and cooperate -- then we lose them all.   If I as an individual bake bread in my kitchen for resale, I could still petition the state to modify regulations relevant to my activity.  If I then join together with my neighbor in a cooperative venture to bake and resell bread, does it really make sense that I would then lose my right to petition the government?

Worse, the proposed Amendment does not limit its scope to just the First Amendment.  It means that individuals, when on corporate property, might have no protection from unreasonable searches and seizures;  corporations would have no guarantee of due process or of a jury trial in civil suits;  corporate assets would no longer be protected from eminent domain seizure without compensation.  Under this provision, the Federal government could seize Apple Computer if it so desired (or even quarter troops in the Apple offices!).  This all sounds like a stalking horse for Socialism, which might seem overwrought until one realizes that Bernie Sanders is the sponsor of a similar proposal in the Senate....

Of all the possible approaches to reducing the ability of private citizens to manipulate government policy to their personal benefit, this is in fact likely the worst.  As mentioned above, there are many different avenues to exercising influence and power, of which election spending and advertising is just one.  But election spending is the most transparent of all of these approaches.  This proposed amendment would in effect substitute highly visible advertising and electioneering with backroom deals and political patronage that is far more hidden from the public eye.  A cynical person might argue that this is exactly the goal.

Apparently, while Sheriff Arpaio was busy raiding businesses and zip-tieing everyone with brown skin and distracted by his attempts to arrest judges that handed down unfavorable decisions, there was actual violent crime happening in Maricopa County.  With the Sheriff busy with celebrities raiding homes suspected of cockfighting with tanks, minor stuff like rape got put on the back burner.  The story has just been discovered by the AP but it has been kicking around town for a while:

The Maricopa County Sheriff's Office failed to adequately investigate more than 400 sex-crime cases, including dozens in El Mirage, over a two-year period because of poor oversight and former Chief Deputy David Hendershott's desire to protect a key investigator from bad publicity, according to documents pertaining to a recent internal investigation released by the Sheriff's Office.

The errors led to interminable delays for victims of serious crimes who waited years for the attackers to be brought to justice, if they were ever caught.

More than 50 El Mirage sex-crime cases, most involving young children reportedly victimized by friends or family, went uninvestigated after police took an initial report. The lack of oversight was so widespread in El Mirage that it affected other cases: roughly 15 death investigations, some of them homicides with workable leads, were never presented to prosecutors, and dozens of robberies and auto-theft cases never led to arrests.

The East Valley Tribune actually had details on this story over three years ago, in a story that won a Pullitzer, but the Sheriff never bothered to do anything until the story hit the AP.

Employees were preparing to close the 99 Cent Discount Store in El Mirage on Aug. 20, 2006, when a teenage girl ran inside.

Agitated and refusing to leave, the 15-year-old girl told the store's manager that two men had just raped her in a ditch outside, a police report says.

Paramedics took the girl to Del E. Webb Hospital in Sun City West, where medical staff found physical evidence of sexual assault, according to deputy chief Bill Knight, head of the sheriff's central investigations, who researched the case.

At midnight, a detective from the MCSO's special victims unit arrived at the hospital to begin an investigation, the report says.

But the investigation never really began.

The MCSO closed the case a month later by designating it "exceptionally cleared," which is supposed to be applied to cases where a suspect is known and there's enough evidence to make an arrest but circumstances prevent an arrest. That designation allows the MCSO to count the case in the same reporting category as investigations that end in arrest.

But in this case, the detectives didn't have a suspect and appear to have done no work on the case.

I would love to see a reincarnation of "the Wire" focused on our Sheriff's department.  All the same corruptions in the show are on display every day here in Arizona.

GM has announced it is willing to give a full refund to customers who bought Volts and are worried they will burst into flames.  My question is this:  In these refunds, does GM or the car buyer intend to reimburse the taxpayer for the $7500 subsidy we kicked in?

1.  I had thought that libertarians and conservatives were overwrought when they accused the Obama administration of using their own gun sales in the Fast and Furious program to argue for increased gun control.  Oops.  It appears that is exactly what they are doing.  This article is particularly fascinating, as we get to see a gun dealer, so often vilified by the Left, showing more concern about the guns winding up in the wrong hands than does the ATF.

2.  I had thought it an exaggeration when Conservatives accused Obama of being a Marxist.  I thought he was reinforcing a corporate state, but politicians of both parties play that game.  I assumed that, like much of the Left, he had socialist tendencies but basically accepted the core approach of free exchange and individual liberty.  Oops.  It is clear from his speech in Kansas that Obama has decided he is going to run in 2012 on a platform of proletarianising the middle class..

Every time we enter business in a new state, it is a constant challenge to figure out all the taxes we owe.  In Alabama, for a single campground, we file and pay

• Alabama lodging tax
• Alabama sales tax
• Alabama boat rental tax
• Marshall County lodging tax
• Marshall County property tax
• Marshall County sales tax
• Marshall County occupancy tax
• Marshall County health certification
• Alabama unemployment tax
• Alabama withholding tax
• Alabama personal and corporate income tax

So of course we got billed for a new one today, for the Alabama Business Privilege Tax, apparently a corporate net worth tax.  No forms or notices are sent for this tax until after it is due, when one owes about 80% in penalties.

By the way, pay the government for the "privilege" to conduct commerce is one of those government euphemisms that drive me up a tree.

More nominally intelligent people talking seriously about a Social Security trust fund as if such a thing exists.

The only thing supporting our ability to pay future Social Security benefits in full is the government's ability to print currency.

I have said many times that protection of individual liberties is a far more important metric for the quality of governments than the quality of a country's elections.  We are about to get an object lesson in this in Egypt, where a really marvelous, open, and transparent election is going to lead to enormous losses of individual liberties, particularly for women.

California voters -- unskeptical, unrealistic, and gullible -- nevertheless trusted their elected and unelected technocrats in Sacramento to be telling them the truth when they agreed to a $9.95 billion bond issue for high speed rail.  It turns out, even according the HSR's most fervent supporters, that the numbers that were used to sell the bond issue were total crap, and they knew it at the time

In September, I was one of several journalists who interviewed top officials with the California High Speed Rail Authority. Here is board member Lynn Schenk’s response to my question about accountability:

Q: In 2008, this project was sold to voters with the claim that when it was done there would be 117 million annual riders, which is more than four times what Amtrak now has, and it operates in 46 states. It was sold with claims of a $100 round-trip ticket and many other claims that no one believes anymore. If we had known then what we know now, it might not have passed. So when do we get accountability?

SCHENK: This deserves as much of a direct answer as I can maybe possibly give. And that is about the first business plan and those early studies. These gentlemen were not there at the time. I was there. We had one professional and two half-professionals, who were constantly being furloughed because of the state budget issue. That first plan, much to the regret of many of us, was pulled together with Scotch tape and hairpins because we had to get something to the Legislature, but we didn’t have the money, the resources, the people to pull together, so there were a lot of errors. You’re right. But there were also things in there that still stand true today. And we have new studies, a new business plan coming out. The ridership study that we had it is not as bad as the opponents would say. But there are tweaks. And there are things that need to be adjusted and we are looking to do that.

Because the last thing a bureaucratic is ever going to say is "we don't know."   So they told they public the rail line would have 117 million annual riders, when even an estimate of 5 million is probably high.  Jeff Skilling is in jail for a far less substantial exaggeration of his business prospects.

Of course voters were idiots to accept these numbers, when 5 minutes of research would have shown them absurd (the media did nothing to help, of course).  One relevent factoid:

The current air passenger traffic between LAX and SFO is 2.7 million a year

But we are going to have tens of millions of rail customers.  Right.

Arnold Kling has one of the best statements on modern political incentives I have seen lately

Salmon complains that as far as the latest [European debt] plan is concerned, "the commitment is still vague." What I want to suggest is that for the politicians, vagueness is a feature rather than a bug. This reflects a fundamental misalignment between political incentives and economic requirements.

What markets and the economy need are policies that resolve uncertainty. That way, people know who is going to take a hit. Most important, they know where they can invest with confidence going forward.

What politicians need are vagueness and opacity. Having a clear, well-defined policy exposes the politician to the people who are hurt by that policy. Thus, instead of producing a balanced budget today, you produce a plan to produce a plan to balance the budget down the road. Instead of restructuring sovereign debt, you make a commitment that everyone will be made whole, without explaining how that commitment will be honored.

It is December, 2005.  The Gulf Coast had just been pounded, in succession, by Katrina, Rita, and Wilma.  Everyone was talking about how global warming seemed to be intensifying hurricanes.  In a speech just after Katrina, Al Gore said

 When the corpses of American citizens are floating in toxic floodwaters five days after a hurricane strikes, it is time not only to respond directly to the victims of the catastrophe but to hold the processes of our nation accountable, and the leaders of our nation accountable, for the failures that have taken place....

There are scientific warnings now of another onrushing catastrophe. We were warned of an imminent attack by Al Qaeda; we didn't respond. We were warned the levees would break in New Orleans; we didn't respond. Now, the scientific community is warning us that the average hurricane will continue to get stronger because of global warming. A scientist at MIT has published a study well before this tragedy showing that since the 1970s, hurricanes in both the Atlantic and the Pacific have increased in duration, and in intensity, by about 50 percent....

Two thousand scientists, in 100 countries, engaged in the most elaborate, well-organized scientific collaboration in the history of humankind, have produced long-since a consensus that we will face a string of terrible catastrophes unless we act to prepare ourselves and deal with the underlying causes of global warming....

At about the same time, the IPCC was in the process of preparing its fourth report, later released in 2007.  It said, in part:

Several peer-reviewed studies show a clear global trend toward increased intensity of the strongest hurricanes over the past two or three decades. The strongest trends are in the North Atlantic Ocean and the Indian Ocean. According to the 2007 Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC-AR4), it is “more likely than not” (better than even odds) that there is a human contribution to the observed trend of hurricane intensification since the 1970s. In the future, “it is likely [better than 2 to 1 odds] that future tropical cyclones (typhoons and hurricanes) will become more intense, with larger peak wind speeds and more heavy precipitation associated with ongoing increases of tropical [sea surface temperatures].”

So what happened?  Since Wilma in 2005, we have gone 6 full years without a category 3+ hurricane making landfall in the US, the longest span since 1900 without such an event.  And the clock is still counting.  When alarmists of all stripes were breathlessly predicting hurricane after hurricane in late 2005, the reality is that we wouldn't see another in the US for  over six years.

Of course, US landfall is in fact a terrible indicator of hurricane activity.  Its relevant to us, but it is a pretty random metric.  I said this when there were a lot of landfalls and I say it again since there have been so few.

A better metric is accumulated cyclonic energy, a sort of time integral of all large cyclonic storms worldwide.  Here is the most recent ACE figures:

As it turns out, the total strength of hurricane and hurricane-like storms has been falling almost since the exact day of Al Gore's speech in 2005 (another Gore effect!)  In fact, of late, it has hit numbers close to all-time lows.

Of course this chart will go back up some day, and then back down, and then up ... because hurricane activity has always been cyclical over decadal time scales.

The media loves to trumpet end-of-the-world predictions from folks like Al Gore and Paul Ehrlich, but they never go back five years later and back-check their predictions.  And despite their horrendous record for accuracy, the media eagerly publishes the next one.  Here is a proposed editorial rule for the MSM -- no breathless publication of anyone's next prediction without first revisiting the last one.

Apparently European leaders are close to an agreement that countries cannot run budget deficits higher than 3% of GDP.  If you are left to wonder, "hey, didn't they already have that rule before" the answer is yes.  Everyone had to promise a really, really stern oath not to run higher deficits before joining in the Euro group.

Of course, these promises meant nothing as there was no penalty for breaking the promise, and so the EU is proposing a new enforcement mechanism

Governments whose debts exceeded three percent of their GDP would be cited by the European Court of Justice, after which a super-majority of 85 percent of European governments would have to agree to impose some sort of sanction against the offending country.

I am not clear if the 85% is of the whole EU  (which would require a vote of 23 of the 27 members) or of just the Euro zone (which would require 15 of the 17 countries that use the Euro as currency).  Either way, I disagree with Drum and can't see how there is any hope at all here.  I am left with a number of questions

• What is the likelihood that European countries will adopt this Constitutional provision and precedent for reduced sovereignty?  Don't treaty changes have to be unanimous?
• Even if ratified, does anyone imagine the penalties will be high?  Imagine Greece today if such penalties exist.  How much are they going to worry about fines when they are already bankrupt?  And what will be the optics of the EU adding new costs to countries that are in financial crisis?  If a country in the future is doing things to endanger the euro from too much debt, the last thing the EU is going to be able to do is add to that country's burdens -- in fact, it is doing the opposite now, sending huge checks to all these countries
• How are they every going to get the votes when this comes up?  Again, think about today.  Would Italy, Belgium, Spain, Ireland, etc. vote to sanction Greece, when they know they are next?

I just can't see this going anywhere.  And I would be surprised if the folks involved do either.  My guess is that they hope this will settle the bond markets so they can kick the can down the road.  Sure, we will have to deal with this all over again the first, inevitable time a country breaches the 3%, but that is later and right now they will accept a few years, even a few months, of survival.