Nevada New Tech Investment on the Fiscal Cliff

Once in a while I get lucky, as when a local Nevada story about start up tech companies in Las Vegas has implications for our nation-wide discussion of economic policy. There area some start up tech companies in the Las Vegas metro area that could use financing, and there’s the problem:

In spite of the city’s recent startup boom, there remains a small number of local investors willing to put cash into tech companies. And the funding gap could stanch tech development in the valley, as most startups earn paltry revenue and could easily flop or stagnate without outside capital.  [LVSun]

The problems associated with the lack of start up funding are common: Las Vegas has fewer local investors than other areas.  Las Vegas isn’t a tech hub center.  Local wealth doesn’t come with expertise in tech investment.  Venture capital funds don’t have offices in the Las Vegas area.  There aren’t enough “angels.” [LVSun]  It’s one thing to list the issues, but to address them requires some thought given to economic policy.

#1. Are we promoting an economic climate in which investment in start up companies is valued?

Speak to me of a gubernatorial candidate who didn’t campaign vigorously on his or her Economic Growth Plan, and I’ll show you a person who didn’t get elected.  Everyone has one, and everyone loves Small Business, and everyone prints out forest killing quantities of Economic Plans designed to create a pro-growth business climate.   Right?

Not so fast. Too much campaign literature is dedicated to the climatological issues of  existing businesses.  For example, candidate Bilgewater carefully explains to us that low taxes will create economic growth because the wealthy will have money to invest in new businesses.  Of course, what Bilgewater leaves unsaid is that the money and the expertise may not be a match.  There are two problems specified in the article and neither one is addressed by the proponents of the Trickle Down Hoax.

First, as observed in the article, people are reticent about putting money into tech companies if they don’t understand the milieu.   Why shouldn’t they be? Enough individuals got burned during the Tech Bubble Crash to leave many sensitive fingers behind.   If we would create a climate for successful ventures in tech-based firms, then we need to apply some assets toward educating potential investors in the characteristics of likely successful start ups, especially in tech-related fields.

Secondly, also as noted in the article, start up firms usually need some mentoring.  As in any market, some ideas are better than others, but even the brightest idea can devolve into disaster if there isn’t a cogent business plan behind it.   If local mentor-investors aren’t available, who is?  Here’s where we need to be watching the Fiscal Cliff (Curb) discussion carefully.

The Republican Party has offered a budget which severely cuts non-defense discretionary spending — and included in this category are funds for the Small Business Administration — in the interest of diminishing the Great Gloomy Cloud of Debt.   Existing businesses may have an over-arching interest in the Great Gloomy Cloud of Debt because it could restrict their access to capital. However, start ups haven’t gotten that far.  They’re still trying to get initial capital.  Or, to put it more bluntly, if SBA loans aren’t available this is no skin from the fingers of existing businesses, it burns the start ups.

As the NYT small business writer explains:”Much of the S.B.A.’s mission is to guarantee loans to small companies that banks would otherwise not make, and steep cuts would likely force the agency to turn away borrowers.”

In short, small start-ups are the very ones which find funds (either investments or loans) difficult and need assistance.  If we would improve the climate for innovative tech-based firms then it doesn’t make sense to slash funding for the Small Business Administration.

A third question should be raised in this part of the discussion: Do our economic and tax policies reward investment in technology and innovation, or do they favor already existing firms? This question splits into two topics: Taxation on Capital Gains and the diversion of wealth into speculative investment as contrasted with venture capital.   Let’s leave the second part for now, and look at the capital gains side of the argument.

For the record, capital gains are taxed as ordinary income if the investment is made for less than one year.  Since 2003 taxes on long term capital gains, defined as investments held for more than one year are at 15%.  Without going too deeply into the weeds, venture capital invested in a start up company for more than one year gets the 15% “bonus.”

If the contention that low rates of taxation, especially on capital gains, creates economic growth then the first speed bump on the road is that it is extremely difficult to infer a causal relationship between the number of new businesses and the tax rate for capital gains.   If the causal relationship is true, and low rates of capital gains mean more start up entrepreneurial enterprise, then why has the start up trend declined?

The start up rate peaked in 1987 (13.02%) and is now reported at 7.87%.  [Reuters]  The capital gains tax rates have held steady but the start up trends still show a decline.   Lower tax rates, then, are not the end and be all explanation for start up growth — or start up demise — the number still indicate a long established pattern: new businesses tend to fail in the first two years.

The argument that if we increase taxation on capital gains then there will be fewer start up companies falters when we look at the graphs showing a declining number of start ups even with the 15% rate on capital gains and the lowest overall tax burden since the Eisenhower Administration.   It also can’t be successfully argued that business “success” is better insured by lowering tax rates — the Sell By date is still about 2 years.

It’s easier to argue that small business efforts are best promoted when Small Business Administration funds and mentoring projects are available, and when the small business in question can overcome the more common problems associated with failure than esoteric questions about taxation rates.

#2. Are we diverting wealth from investment toward speculation?

On a micro-level this is an oversimplification.   If venture capitalists and “angels” can find good start up firms with a substantial service or product, a good business plan, and adequate resources to break the Two Year ceiling, they’ll invest.  Unfortunately, there’s also money to be made by making big bets on incomprehensible financial products — if a person can find someone to take the other side of the bet.  If not, then we have the spectacle of JP Morgan whose London Whale turned out to be the sucker at the exact time the CEO was arguing against the implementation of the Volcker Rule.  [MJ.com]  [Reuters]  Even if the Wall Street Casino isn’t siphoning off investment at a substantial rate, there are still problems for start up firms.

In the wake of the speculation begotten Financial Crash of 2007-2008 more entrepreneurs found getting bank financing more difficult.  The role of family, friends, angels, and venture sources became more significant.  There are two forms of venture capital, corporate and independent, and both have different motives.

CVCs typically make a financial investment and receive a minority equity stake in an entrepreneurial company. CVCs also facilitate investment of in-kind resources into portfolio companies. In return, the parent corporation gains a window on new technologies and strategically complementary companies that could become strategic partners. CVCs generally invest with a combination of financial and strategic objectives. Strategic objectives include leveraging external sources of innovation, bringing new ideas and technologies into the company, and taking “real options” on technologies and business models (by investing in a wider array of technologies or business directions than the company can pursue itself). [NIST] (pdf)

And, corporate venture capital investment tends to be in smaller amounts than independent sources.

“Because corporate venture capitalists are making partially strategic investments, while independent venture capitalists are making purely financial ones, corporate venture capitalists can accomplish their goals by putting in less money. The ability to tap knowledge from an investment in a young company is not proportional to the size of the investment, but earning a financial return is. Therefore, corporate venture capitalists tend to make smaller investments than independent venture capitalists.” [SmBizTrends]

We need to ask better questions?

If candidate Bilgewater is pontificating on the necessity of reduced capital gains tax rates, or any other tax rate reduction, then the question needs to be asked — On what basis do you draw the conclusion that a reduction in the marginal tax rates will spur increased investments in entrepreneurial enterprise?  Because the numbers simply don’t support the conclusion when we have declining start ups, with the same life expectancy, in the least burdensome tax environment we’ve had for decades.

If candidate Sludgepump is preening before the cameras with the message that “We Must Support Small Business The Backbone Of American Life,” then the next inquiry ought to be how do we incentivize investment in small business enterprises by making it more attractive to invest in the business than to hedge bets on the little business’s securitized loans?

If candidates Bilgewater and Sludgepump argue that the Great Gloomy Cloud of Debt threatens to rain on our business parade and we must deplete it before doing anything else, then someone needs to ask:  How do you reconcile the reduction in Small Business Administration funding when you presume small business activity is the motor impelling our economy forward?

 

See also: Monthly Labor Review, Amy E. Knaup, May 2005. (pdf) “Corporate Venture Capital: Seeking Innovation and Strategic Growth,” National Institute of Standards and Technology, Department of Commerce, June 2008. (pdf)

Chart of the Day: DJIA

Any questions?

What Matters? The Long Climb Back From A Very Deep Pit

Often it’s easy to have the attention span of a gnat, a problem exacerbated by the 24 hour news cycle in which topics are headlined for a time, and then hit the public equivalent of the Lost and Found barrel.  Nevada’s economic situation in 2008 and early 2009, and how we got to our current position, are illustrative of the issue.  The Las Vegas Sun has a summation, a kernel of which says:

“Even though the government stepped in to stabilize the system, the economy still seized up. Only last year did we learn that the American economy saw an annualized decline of an astounding 8.9 percent in the fourth quarter of 2008, far worse than original estimates. By the time Obama took office, the private sector was losing 700,000 jobs per month, with state and local governments soon to follow with their own layoffs.”

The point made by Sun writer J. Patrick Coolican deserves repetition:  When something crashes this hard it takes more time to recover.

#1.  Recapitalize the investment institutions.  Done. Although the term “bank bailout” is as popular in some quarters as fire ants at a ‘clothing optional  beach’ picnic, the lending institutions had become so baffled in 2008 that they couldn’t properly determine the price of their own financial products, nor could they assess the price of their risks — hence the seizure.

#2. Enact legislation to prevent the repetition of the banking issues. Done. The Dodd-Frank Act (pdf) is far from perfect, however it does (a) require more regulatory oversight of the derivatives markets, a major component of the initial problem, (b) revise regulations involving the ratings agencies, another important issue, (c) create a Financial Stability Oversight Council to act as an Early Warning System to evaluate the financial viability of our banking institutions, (d) require banks to draft a type of Living Will, in the form of a plan for orderly liquidation, (e) seek to prevent “regulator shopping” in which institutions sought to slide under the jurisdiction of the least restrictive regulator, (f) include the Volcker Rule, and (g) create the Consumer Financial Protection Bureau.

This item on the check-list is a work in progress. While, the legislation has been enacted, the drafting of regulations associated with the new law is still a work in progress.  The Federal Reserve Bank of St. Louis has an updated time line of the drafts, and is a good resource for those wanting to see what has been done and what remains.

There are two essential points included in the Dodd Frank Act which are extremely important, and speak directly to avoiding another crash based on the lack of adult supervision associated with the 2008 Debacle.  First, is the oversight of the derivatives markets — an activity loudly criticized by some on Wall Street, but nevertheless necessary for insuring that the next amalgam of Quants, Wizards, and Masters of the Universe, doesn’t repeat their performance of 2008.  The second is the inclusion of an independent panel to warn banks of impending problems combined with the Orderly Liquidation Authority provisions.   The bankers are still squawking about being subject to the Financial Stability Oversight Council because they believe in “self regulation;” however, they were “self regulating” prior to 2008 and they drove the system into the ditch.

#3.  Stabilize the housing market.  Getting there.  This is crucial for Nevada, and for middle income Americans in all 50 states.   The Crash of 2008 was a cruel blow to everyone, but middle class Americans whose wealth was in large part a function of home-ownership were particularly hard hit.  Between 2007 and 2010 the average American middle class family lost about 40% of their total wealth as property values plummeted. [CNN]  However, we need to be realistic and remember that part of that wealth was illusory:

“For the vast majority of families, “wealth” essentially means, “home equity”. And the relatively high wealth levels of the mid-2000s reflected the inflation of the housing bubble. The bursting of the bubble exposed the wealth gains as having been unreal and produced the sizable declines in net worth revealed in the government data.”  [RCM]

As mentioned previously, American families are de-leveraging, i.e. paying down debt and restructuring their family finances.  At this juncture it appears that stagnating wages and job losses are more pressing concerns than loss of home equity for most families.*  The inflated equity is already gone, the problems associated with wages and job losses remain.

The housing sector is adjusting to reality, home construction may be declining but if we compare year-over-year numbers building permit requests are up 21.5% over last year. [LAT]

#4. Halt the suppressed demand cycle.  Stalled.  Deleveraging is good.  American consumers had piled on the debt during the Housing Bubble. They needed to deleverage.  Financial institutions which grabbed up the mortgages and repackaged them in altogether too many creative ways needed to deleverage.  However, the down side to deleveraging is that when people stop spending  our economic growth slows down.

The necessity of looking at the demand side of the economic equation has been covered here, here, here, and here.  I believe at one point I’ve even threatened to rename this blog something like the Aggregate Demand Review.

At the risk of even more redundancy, let’s review — the formula for aggregate demand is AG = C + I + G + (X-M).  That would be consumer spending + business spending + government spending – (exports – imports).  Demand drives orders, orders drive hiring.  Economic policies which depress orders will depress economic growth.  The current case of Republican obsessive-compulsive discussion of reducing government spending threatens to further diminish the “G” part of the equation AND the layoff of public sector employees tends to decrease the “C” part of the equation.  As if we needed any more reduction in aggregate demand, the Republicans would very much like to reduce government support for SNAP and other social safety net programs which act as our old friend, the economic automatic stabilizer — the shock absorbers on our economic vehicle.

Then there’s the American Jobs Act which is stalled in the 112th Congress.  Obviously, when people have jobs they have money to spend.  When they spend money that creates — you guessed it — demand.  Demand drives orders, orders drive hiring.  The economic concepts involved really aren’t very complicated.

One of the more interesting features of the Republican argument is the “government doesn’t create jobs” line,  but eventually every subsequent argument about cutting defense spending includes a recitation of the number of jobs which will be lost by those employed by defense contractors.   If it’s true in the defense sector, then it ought to be true in the education business — cuts to defense spending mean job losses in defense industries, and cuts to education funding lead to job losses in the education sector — the public safety sector, etc.   Job losses depress demand, depressed demand reduces economic growth.  Now, how hard was that?

The Bottom Line

All it takes to comprehend the terrain on the long hard slog we have ahead of us, is to focus on what really matters.   Reducing the likelihood of another Wall Street Debacle matters.  Stabilizing the housing market matters.   Enacting and implementing measures to increase demand for goods and services matter.  Everything else falls into two general categories: (1) Self serving promotion of policies designed to protect the 1% of the American population already doing well; and (2) Ideological assertions which describe neither the current American economic system, nor present solutions to contemporary American economic problems.   There is a choice.

We can either follow the Voodoo economics of the Supply Side Hoax and dig ourselves more deeply into the pit, or we can pay attention to both sides of the economic equation and start digging some ‘stairs’ in the side and climb up.

* At least one source is counseling against being too optimistic about the current decline in foreclosures, because there is still an inventory of properties in the pipeline, and although foreclosures have hit a five year low, realistically there is more to come.

Melodious Heartened Unchained Fools?

Romney: “On whether Republicans, including Paul Ryan, have used the unshackling/unchaining metaphor: “You know, I can’t speak for anybody else, but I can say the comments of the vice president, as I heard them, I thought were one more example of a divisive effort to keep from talking about the real issues. Look, no one is talking about deregulating Wall Street.” [dkos]  (emphasis added)

Really?? Then what is this from the Romney Campaign site?

“Repeal Dodd-Frank and replace with streamlined, modern regulatory framework

Amend Sarbanes-Oxley to relieve mid-size companies from onerous requirements”

Evidently only the mystagogues, properly initiated into the mysteries of what former Massachusetts Governor Mitt Romney really means when he says anything, understand what repealing the Dodd-Frank Act and replacing it with something “modern” might include.   And, what pray tell, constitutes a “mid-sized company?”  Would that include Washington, D.C. lobby shops or capital management companies with fewer than 500 employees?  Repealing the Dodd Frank Act means de-regulating Wall Street.  Replacing the law with something appealing to the former CEO of Bain Capital Management sounds quite like de-regulating Wall Street.

Biden: “The details are there. Here’s what Congressman Ryan said. He said, ‘We believe a renewed commitment to limited government will unshackle our economy.’ The Speaker of the House said, used the word ‘unshackled’ as well, referring to their proposals. The last time these guys unshackled the economy, to use their term, they put the middle class in shackles. That’s how we got where we are.” [Fox]

Fox, not unexpectedly, headlined something like Biden doubles down on racist rhetoric. Well, now who knew Ray Charles was being racist when he sang, “Unchain My Heart!”  And to think, Joe Cocker covered Unchain My Heart;  clutch Pearls everyone — the racism is everywhere.

Or when the incomparable Aretha Franklin sings, “Chain of Fools” is she doubling down on racist lyrics?  Who was aware of the racism impartible in the Righteous Brothers’ Unchained Melody?

Enough of the silliness — What did happen the last time we Unchained, Unshackled, Unfettered, Unfastened, Unloosened, or Unconfined Wall Street?

** As of October 28, 2008 the Guardian reported the Bank of England calculating global economic losses of $2.8 trillion.

** By April 2010 the Pew Trusts reported the following impact on U.S. economic growth:

The financial crisis cost the U.S. an estimated $648 billion due to slower economic growth, as measured by the difference between the Congressional Budget Office (CBO) economic forecast made in September 2008 and the actual performance of the economy from September 2008 through the end of 2009. That equates to an average of approximately $5,800 in lost income for each U.S. household.

** In May 2012 PBS reported:

With home prices tanking, the Treasury report estimates a loss of $7 trillion in the real estate industry. The stock market decline has brought another $11 trillion in losses, and retirement accounts have lost $3.4 trillion.

** On June 11, 2012 USA Today reported the total loss to U.S. median household income attributable to the 2008 crash and recession as 39% between 2007 and 2010.  And who got hurt? “The median family’s net worth dropped to $77,300 from $126,400 in 2007, the Fed said. The wealthiest 10% of families saw their median net worth rise 1.9% to $1.17 million.”

In case we were all so naive as to believe that the Bankers have learned their lessons from the 2008 Debacle, consider the following:

The London Whale

JPMorgan Chase said Friday that a bad trade cost the bank $5.8billion this year, almost triple its original estimate, and raised the prospect that traders lied to cover up the multi-billion blunder. The bank said managers tied to the bad trade had been fired without severance and that it planned to revoke two years’ worth of pay from each of those executives.

The infamous so-called ‘London whale’ trader Bruno Iksil, who  placed the extremely risky bets on the credit market prompting the massive loss, has also left the bank. [DailyMail]

The Libor Scandal

“Caught with its hand in the cookie jar, Barclays agreed to pay nearly half a billion in fines to British and American authorities, and as many as 20 other megabanks  are under investigation, including Deutsche Bank, Citigroup, UBS,  HSBC, and JPMorgan Chase. As one MIT authority on finance told CNN, “This dwarfs by orders of magnitude any financial scams in the history of markets.” [Salon]  See also: AOLonline News.

Standard Charter Iran Deals

Standard Chartered may be looking to wrap things up quickly as it defends itself against allegations it hid $250 billion in transactions tied to Iran.

The bank is scrambling to reach a settlement early, ahead of a Wednesday showdown with New York regulators, and has discussed a settlement figure, Reuters reported, citing sources familiar with the situation. [NY DailyNews] [PolicyMic]

There’s more:

Standard Chartered Plc may have to pay as much as three times more than the $340 million it was fined by a New York regulator to settle all the probes by regulators into its transactions for Iranian clients.

The bank may have to disburse a total of $1 billion as regulators including the U.S. Treasury, Federal Reserve, Justice Department and Manhattan District Attorney negotiate settlements with the bank, according to Simon Morris, a regulatory lawyer at CMS Cameron McKenna in London. Cormac Leech, an analyst at Liberum Capital, put the total cost at $700 million.  [Business Week]

Unchained, unshackled, unfettered, unconstrained, unfastened, and unloosened the melodies sung from the heartless to the chain of fools who advocate for de-regulation aren’t music to the ears of anyone who’s been paying attention to the fiascoes and frauds in the financial industry of late.  Perhaps Governor Romney and Representative Ryan, and their sidekick Senator Heller, might want to change tunes?

LIBOR suction

That sucking sound from across the Atlantic is the echo of Bob Diamond’s attempt at explaining why Barclays fiddled with the LIBOR, and what is now becoming a predictable litany of excuses from bankers as to why they are not accountable for the “culture of cynicism” which has given us Lehman Brothers, Bear Stearns, The Reserve Fund, and all those other dubious contributions to the history of the Great Recession of 2008.

Excuse Number One: “I didn’t know.”

Diamond: “He said he only learned the true extent of the scandal this month, and felt “physically ill” when reading incriminating emails from traders.”  [BBC]

Remember When?  Mr. Ken Lewis, CEO Bank of America was not advised of the state of Merrill Lynch’s Q4 report prior to advising the Board of BoA to accept the sales terms.  “Mr. Lewis was aware of no red flags suggesting the considered judgment of these professionals was was incorrect, based on inadequate information, or should be questioned for any reason.”  [ProPublica doc]

Rock meets hard place — either the handsomely compensated CEO is making the Big Bucks because he or she is managerial gold, capable of calm in the turbulent economic waters, willing to be accountable (after Sarbanes-Oxley) for financial policies and transactions, and a gifted hand on the rudder of the  corporate craft, OR the CEO is sadly isolated from the real news that should have made it through the corporate grapevine but was lost along the way among the multitudes?  So, which is it?  One can’t have the Buck Stopping Here only in good times.  However, it seems when the rains come the Buck is magically transformed into an eukaryotic cell replicating so quickly that there are enough bucks to scatter upon almost every desk in the firm.

There’s another problem with Mr. Diamond’s response. If he didn’t know “it,” then he didn’t “know it” for a very long time.  Consider this article from Bloomberg News May 29, 2008:

“Banks routinely misstated borrowing costs to the British Bankers’ Association to avoid the perception they faced difficulty raising funds as credit markets seized up, said Tim Bond, a strategist at Barclays Capital.

“The rates the banks were posting to the BBA became a little bit divorced from reality,” Bond, head of asset- allocation research in London, said in a Bloomberg Television interview. “We had one week in September where our treasurer, who takes his responsibilities pretty seriously, said: `right, I’ve had enough of this, I’m going to quote the right rates.’ All we got for our pains was a series of media articles saying that we were having difficulty financing.”  [Bloomberg] (emphasis added)

A strategist at Barclays Capital is quoted in an international news source in 2008 about LIBOR fiddling…and Mr. Diamond didn’t find out about it until 2012?  This must qualify for the slowest corporate grapevine in the history of corporate grapevines.   It’s a wonder how they ever get a birthday celebration together?

Excuse Number Two: “It’s just a few bad apples.”

Diamond: “He said that just 14 traders were to blame and that they had tainted the reputation of the 140,000 people who work for Barclays. He repeatedly stressed his “love” for the bank and its pride in what it has done.” [Guardian]

Remember When? “We had one person who was very earnest about what he had written, but 30,000 people who felt the opposite,” Blankfein said, referring to other Goldman employees, “and clients who were unbelievably supportive.” Lloyd Blankfein in response to an article about the culture at Goldman-Sachs. [HuffPo 2010]

It really doesn’t take very many apples to sour the barrel.  In this instance the unfortunate tale of Barings Bank and Nick Leeson should be recalled.  Barings was established in 1762, it had financed the Napoleonic Wars, the Erie Canal, and the Louisiana Purchase.  In 1995 it was gone, sunk beneath a £827 million really bad bet by trader Nick Leeson.   Yes, there were good people at Barings, but there was also the incredibly unlucky and evidently unsupervised Mr. Leeson.  Yes, there are good people at Barclays, but there are also the happy fingered people sending e-mails to one another like the following:

“Dude. I owe you big time!” wrote one trader to a submitter. “Come over one day after work and I’m opening a bottle of Bollinger.”  Another Barclays trader emailed a submitter: “If it’s not too late low 1m and 3m [rate] would be nice, but please feel free to say ‘no’…Coffees will be coming your way either way, just to say thank you for your help in the past few weeks”.  His friendly submitter responded: “Done…for you big boy.”  [IBT]

The Barclays correspondence is rather reminiscent of Kevin and Bob from Enron, remember Grandma Millie?

Kevin: So the rumor’s true? They’re [expletive] takin’ all the money back from you guys? All those money you guys stole from those poor grandmothers in California?

Bob: Yeah, Grandma Millie, man. But she’s the one who couldn’t figure out how to [expletive] vote on the butterfly ballot.

Kevin: Yeah, now she wants her [expletive] money back for all the power you’ve charged for [expletive] $250 a megawatt hour.  [NYT]

Steven Pearlstein described this culture in a 2010 business column:

“It’s been decades since the old investment and banking cultures gave way to a trading culture in which the driving principle behind every dollar traded or leveraged is to use whatever advantage you have to “rip the face” off some other trader, brag about it on the interoffice e-mail and take 20 percent off the top as a bonus. Raising and efficiently allocating capital for businesses and households are mere pretexts for a financial system that is now focused on reaping profits from high-frequency trading and sales of purely speculative instruments like synthetic CDOs.”

Mr. Pearlstein’s analysis could apply as easily to Barclays today as to Lehman Brothers not so long ago.   No, Wall Street and The City aren’t going to revert to the days when investment banking was a client based enterprise, not when trading is more profitable than capital allocation.  However, that doesn’t excuse unethical, dishonest, self-serving behavior even if the practices aren’t technically illegal.

Excuse Number Three: “It’s the regulator’s fault, they should have stopped us.”

Diamond: “Barclays had raised concerns with the regulators about other banks being involved, he said. “There was an issue out there and it should have been dealt with.” [Guardian]

Remember When?  The  Valukas Report came in on the Lehman Brothers debacle? (Especially in reference to Lehman’s risk controls.)

“The SEC did not know about the practice,” said Valukas in prepared testimony. “But it is difficult to understand why not. In the post-Enron world, it would be logical, if not obvious, to ask public companies to explain their off-balance sheet transactions. I saw nothing in my investigation to suggest that the SEC asked even the most fundamental questions that might have uncovered this practice.” [ProPublica]

Not that the SEC covered itself in glory, but it should be noted that the agency relied on Repo 105  reports that came from Lehman Bros. auditors.   Apologists flocked to the conclusion that if the SEC, or if the almost thoroughly captured OCC, or even the CFTC,  had ridden into the fray in 2007 all might have been set aright.  Yes, and we saw just how far that got CFTC chair Brooksley Born in 1999. [WaPo] The former CFTC chair certainly earned her “Cassandra” appellation, always to be right and never to be believed in time to prevent a catastrophe.

If Mr. Diamond is to earn his compensation on his way out of the Barclays premises in the City, then the least he could do would be to come up with some excuses and rationalizing that hasn’t already become hackneyed and common on Wall Street.

—————–

Background reading:  “Why I Am Leaving Goldman Sachs,” Greg Smith, New York Times, March 14, 2012.   Bank of America Merrill Lynch Suit Lewis Motion, Pro Publica, documents. Cora Currier, “How Bank of America Execs Hid Losses…,” Pro Publica, June 4, 2012.   Ray Fisman, “The Real Reason CEO Compensation Got Out Of Hand,” Slate, May 11, 2009.   Steven Pearlstein, “Wall Street’s know it alls can’t tell right from wrong,” Washington Post, April 23, 2010. Joris Luyendijk, “Barclays emails reveal a climate of fear and fierce tribal bonding…” Guardian, June 28, 2012.   Mary Shapiro, “Preventing Another Crisis…,” Investment News, March 25, 2012.   Finch & Gotkine, “Libor banks misstated rates,” Bloomberg News, May 29, 2008.

GOP: Se Habla Anything?

** You have to love the consternation amongst anti-immigration factions in the U.S. and Nevada who “court” the Hispanic vote while calling for the “self-deportation” of undocumented persons.  The Nevada View notes:

Dean Heller has been trying real hard lately to massage his image with Hispanic voters in Nevada.  He wants Latinos to forget his long record of unfriendly rhetoric, votes against bills like the DREAM Act, and general disregard for the issues that matter most to their community.

Perhaps Senator Heller would like to explain his vote (#121) opposing the nomination of Maria Carmen Aponte to represent the U.S. as ambassador to the Republic of El Salvador?   The Republican filibuster of Aponte’s appointment was broken on a 61-37 Senate vote.   “Republicans had opposed Aponte over unfounded rumors that her boyfriend of years ago was a Cuban spy and over conservative outrage at an opinion piece she wrote last summer on gay rights. ” [Deseret News] (emphasis added)

Lest we consider the Hispanic community some sort of monolithic amalgam, Senator Heller’s opposition to Aponte’s appointment is a direct slap at Americans of Puerto Rican heritage.  The appointment also serves to increase the number of a traditionally under-recognized group: Hispanic women.  Aponte follows in the footsteps of Maria Luci Jamarillo, who served as ambassador to Honduras from 1977 to 1980. [USDip]

** Meanwhile back at the DREAM Act.  President Obama’s announcement of enforcement guidelines regarding children who were brought to this country by undocumented parents has candidate Romney on his back foot.   As of January 1, 2012 former Governor Romney was unequivocal:

Reporting from Des Moines — Republican presidential front-runner Mitt Romney has pledged to veto the so-called DREAM Act, which would provide a path to citizenship for children of illegal immigrants if they attend college or serve in the military. [LATimes]

That was before he was equivocal.   As of 36 hours ago the former Massachusetts governor was still dodging:

“But rather than flatly decrying the White House’s new policy as a reward for illegal behavior, as he did throughout the primaries, Romney has yet to explain what he’d do instead or even whether he’d even reverse Obama’s orders.”  [TPM]

It’s only June, so we have lots of time before Governor Romney invokes his best known position on all things: “I’m not familiar precisely with exactly what I said, but I stand by what I said whatever it was.”  [TPM]

** The former Governor has had yet another Etch-A-Sketch moment on alternative energy.  Dismissing his record promoting alternative energy during his tenure in Massachusetts, the Governor has moved:

Today he is a proclaimed skeptic on global warming, a champion of oil and other fossil fuels, a critic of federal efforts to develop cleaner energy sources and a sworn enemy of the Environmental Protection Agency. [NYT]

This is a bit out of step with the efforts of the Las Vegas Sanitary Sewer Enterprise Fund which has invested in solar power to 20% of the power needed to operate the Water Pollution Control Facility in Las Vegas.  One official reported:

When the solar array project at the wastewater treatment plant is finished, the city will be up to nearly 5 megawatts of total solar energy installed across 28 city facilities and will provide up to 20 percent of the city’s peak energy demand, Perrigo said. “That will save the city anywhere from $800,000 to $1 million on its energy bill,” he said. [LV Sun]

Isn’t the idea to save tax dollars?  Current estimates project city power costs at $15 million per year.  Reducing total power costs by about 6.7% annually means better value for Las Vegas water and sewer customers.

** Governor Romney is on record supporting the repeal of the Dodd Frank Act, which may not make some small investors very comfortable.  The Facebook IPO story keeps moving along, and we’re now informed that Facebook and Morgan Stanley stuffed Facebook stock into small investors’ accounts while the “smart money ran for the hills.” [BusinessInsider]   Mike Mayo (analyst for Credit Agricole CLSA) has some blunt words for the bankers — fix your system or it will get fixed for you, “and rightly so.”   And, if we think the problems in money market funds (MMF) were all finished with the issues of the Reserve Primary Fund in September 2008,  please think again:

“In particular, MMFs can still take risks similar to those that destroyed the Reserve Primary Fund and triggered the damaging run in 2008: MMFs still use the same set of tools, including rounded NAVs, to maintain principal stability; and investors still have incentives to run at the first sign of trouble. Thus, the SEC’s current efforts to modify the structure of MMFs to reduce incentives to run may be essential not only for protecting MMF investors—especially retail investors—but also for protecting the stability of the U.S. financial system and maintaining the access of businesses, consumers, and governments to credit. In a future post, we intend to describe a proposal for improving the stability of MMFs by making them less vulnerable to runs.”  [LibertyStreet]

“Vulnerable” and “runs” are NOT two words a person wants to see in any discussion of money market funds.  Perhaps we can be reassured by Governor Romney’s position on de-regulation of financial markets: “I’m not familiar precisely with exactly what I said, but I stand by what I said whatever it was.”  [TPM]