Links 5/3/10

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Volcanic ash drives gyrfalcon falcon to Western Isles BBC

Relief Well Was Used to Halt Australian Spill New York Times (hat tip reader Crocodile Chuck)

UMKC in Iceland: interview re the commission report detailing endemic control fraud at Iceland’s Big 3 banks Bill Black. Only the first minute is in Icelandic, fear not!

Iceland’s special investigation: The plot thickens Thorvaldur Gylfason, VoxEU (a nice reader sent this along, which supports the Black control fraud thesis, and I cannot find who it was to h/t, apologies!)

Technical discussion of Deepwater Horizon catastrophic failure at U.S. Coast Guard Eighth District External Affairs Flickr account Tim Solanic

10 Ways the American Economy Is Built on Fraud Alternet (hat tip reader John D)

Exclusive shot: Bob Rubin, cuddling Corrente

Big Money: Debunking the myth of the ‘sophisticated investor’ Heidi Moore, Washington Post

Is China’s Recovery a Fraud The Burning Platform

So, What Happens Next…? Audio Presentation by Rob Parenteau. Please ignore the very sales-y text and listen to the audio.

Junk Bond Sales Set Record as Investors Waiver: Credit Markets Bloomberg and Rally has junk trading at close to face value Financial Times

Senate Financial Bill Misguided, Some Academics Say New York Times

Senate’s Goldman Probe Shows Toxic Magnification Wall Street Journal. Um, this isn’t news….for every $1 of BBB subprime tranches in 2006-7, $10 of CDS were written.

Clients prepare to sever Goldman ties Independent

After Chinese Rate Hike, Faber Warns Of Severe Market Crash In 9-12 Months Clusterstock

Monetary union has delivered a ‘German Europe’ after all Ambrose Evans-Pritchard, Telegraph

Europe’s choice is to integrate or disintegrate Wolfgang Munchau, Financial Times

Antidote du jour:

Picture 5

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  1. attempter

    Re Greece and Europe:

    There is no “Europe”. Not the way they’re talking about.

    The only question is whether the Greek people will let themselves be crucified on a cross of austerity and odious debt in order for German and French banks to be bailed out.

    And also, will German taxpayers let themselves be further looted for the sake of this step of the Bailout.

    We can probably guess the answer to whether American taxpayers (whose taxes contribute a large part of the IMF’s budget) will stand, or cringe, for it.

    1. DownSouth


      You clearly draw the battle lines where they need to be drawn. This is a battle between the rank and file of a nation on the one hand and the political and banking elite, of that very same nation, on the other hand.

      Something Bill Black said in his interview in Iceland really brought it home:

      …the worst people in society prosper, the honest people that take them on, they seek to crush and ridicule.

      What this means is that, for the past 30 years, “the worst people in society” have prospered. This includes not only those who have risen to prominence in the finance industry, but also what Black calls their “enablers”—- audit firms, law firms, rating agencies, regulators and all branches of government. And the phenomenon has been global, the same thing that happened in the US happened, for instance, in Germany.

      It’s now full court press for those who have prospered in the last three decades, trying to deflect blame away from themselves and project it onto others. And in order to do this they are deploying a number of strategies, the most prominent I’ve noticed being nationalism, nativism, classism and racism.

      The German elite, for instance, is deploying nationalism, trying to project blame for its own failures onto Greeks and other demonized nations. Stereotyping is, as always, the weapon of choice in this blame game.

      The US elite, on the other hand, is deploying racism and nativism, trying to project its failures onto a helpless immigrant class. One must ask why, at a time that the flow of illegal immigrants from Mexico has plummeted and crime in Arizona is on the downswing, that illegal immigration has all of a sudden become such a life and death issue. Why now? And one must always keep in mind that the Mexicans that are fleeing to the United States are fleeing a Libertarian-Austrian-Neoliberal hell, the same inferno that US elites, if they go unchecked, will implement in the United States.

      The true test of the United States now will be whether blame can be focused where it belongs—-on the fraudulent elite who have prospered over the past 30 years—-or whether this prosperous elite will indeed be successful in projecting blame onto others. How this blame game goes will determine whether we end like the US did in the 1930s, with the financial reforms of the New Deal, or whether we end up like Germany did in the 1930s, with the racial ideologies of the Nazis.

      1. DownSouth

        I’d also add that the Mexican elite is a huge beneficiary of this blame game. They’ve wasted no time jumping upon this opportunity to talk about the racist Gringos, thus drawing attention away from their own dismal failures.

          1. DownSouth


            I agree.

            The estimates I’ve seen put the number of persons of Mexican birth living in the US at around 10 or 12 million. Mexico is a nation of about 100 million. If one considers only those of working age (18 to 65), that means a substantial portion of those of working age (25%, maybe?) are living and working in the US, sending money back to their families in Mexico.

            If it weren’t for that “social safety-valve,” as you call it, Mexico would certainly have blown soon after Mexico became the Libertarian-Austrian-Neoliberal (LANie) paradise, on steroids, that it became following the financial crisis of 1994-1995, if not before.

            Mexico’s descent into the LANie hellhole began with the proliferation of debt under the Lopez Portillo regime (1976-1982). From that time on, Mexico has been cursed with a continuous descent into the LANie inferno.

            The “social safety-valve” you speak of helped to let off some of the pressure. But with the work opportunities in the US now diminishing due to the recession in the US, the pressure is building, and Mexico is descending into social chaos.

      2. attempter

        Any kind of lie and misdirection that can work.

        I’d add to the list the “technology will save us” lie, which is always propagated as a version of trickle-down ideology. Like the way Peak Oil deniers explicitly say “it’s not a problem, in the future alternative neergy will be ecologically sound and be distributed on a socioeconomically equitable basis”, and so are implicitly saying “don’t fight back, don’t try to change the way we live or oppose consumerism, just repose faith in the power elites, and the cornucopia will someday trickle down.”

        It’s part of still trying to prop up the trickle-down globalization lie, that if we keep suffering and sacrificing today, someday in the future our progeny are promised utopia.

        That’s the political agenda of Peak Oil denial and green cornucopianism. Those who propagate it are agents of the rackets.

        1. DownSouth



          If one takes a close look at the political landscape, the classism, the racism, the nativism, the xenophobia, the nationalism, the anti-environmentalism and the anti-peak oilism, along with free-market fundamentalism and laissez-faire, all seem to come as a package.

          1. psychohistorian

            If all that obfuscation doesn’t work they will just start another war…..

        2. Toby

          We’ve had this out elsewhere, but I want to ask you again (if you’re still looking at this thread); what is technology?

          My working definition is “human ingenuity made real.” I’ve even heard nature itself defined as technology, in that it is a process of solving problems over time.

          You wrote: “I’d add to the list the “technology will save us” lie”

          If technology can’t save us, what can? And what does “save us” mean? Are we simply doomed, no matter what? Or is there some better path to pursue, minus “technology”? This is where a good definition of technology becomes important. As far as I’m concerned, the whole process of fixing something broken is a technological one. Language is a communications technology for solving problems of complex organisation, policital infrastructures are a societal technology for larger scale organization, and so on. So if not technology, then what?

          One of the reasons we face such terribly difficult problems is because we have a flawed relationship with abundance and scarcity. The presumption of scarcity so deeply embedded in ‘capitalism’, which has circuitously given birth to the silly selfish gene meme, has engendered a greed-based, conspicuous consumerism that is tearing us slowly (though lately more quickly) apart. If it is not technology that is to address this, then what? If it is not via technological developments that energy replacements for fossil fuels are implemented, then how? If we are to address successfully the blind greed, the stupid addiction to GDP growth, the mind-numbing consumerism, how could these efforts not be a technological process?

          I agree with the majority of your observations and think of you as a very intelligent observer. Only on this general point do you become too (it seems this way to me) emotionally attached to the idea of impending, total collapse as a kind of puritanical punishment for human hubris as characterised by technology, and lose me. In case I have misread you, what are you actually for?

          I’m trying to learn. This is a singularly fascinating and frightening phase of human development, in which everything is back on the table. Some kind of coherent and effective new consensus must be found. I do my best to stay away from conviction and certainty, to stay as flexible as possible in my thinking. In that vein, and without sarcasm, I’m all ears.

          1. attempter

            For me the basic definition of technology is using materials to achieve material results. Within the realm of human ingenuity I differentiate it from, for example, creativity, which I regard as an attribute of the mind (or soul, to use a more figurative term). The same goes for animal cleverness.

            So in my terminology, creativity can be self-sustaining, and is the quintessentially human quality. Cleverness, however clever it becomes, is an animal trait. Technology is developed in the first place through either a combination of creativity and cleverness, or just cleverness. Then, how technology is deployed could in theory be dictated by creativity, but in practice usually ends up being dictated by cleverness in the service of materialism, greed, and powerlust. Eventually, these also dictate which technology is developed at all.

            So maybe my definition of technology is more narrow than yours, and maybe we sometimes talk at cross purposes, I don’t know.

            The basic dispute we came to, if I recall correctly, is that I see us as living under a terminal kleptocracy which can never be reformed. I don’t think that’s some “puritanical” dogma – I’m confident that the evidence fully supports me on that. I regard it as a foregone conclusion that all further steps in the direction of centralization and high capitalization will serve (and be intended to serve) only to further concentrate wealth and power for the criminal elite.

            Since I place all things in this political context, given any e.g. technological proposal I ask cui bono?, and the answer always seems to be that the elites will benefit while the position of the non-rich is further eroded. So it always looks to me like we’d be better off if something didn’t exist than if it exists to further enslave us. This would be true even if something really did improve our material situation while further enslaving us politically and spiritually.

            That’s what it boils down to – I love freedom, and would rather live free under spartan material conditions than enjoy luxury but as a slave.

            And of course, all the lies of trading freedom for material well-being are now coming undone anyway. The “middle class” who made the opposite choice of the choice I would make is being economically liquidated anyway.

            Now, as I recall you agreed that the technology you exalt must be kept out of the hands of corporate elites, but you never explained how this can be done. I think large-scale energy generation, high capitalization, and high tech as such imply the existence of large, centralized structures. You say you don’t think this is necessarily so, but you don’t explain what the alternative political and economic structure would be.

            And in the end, like I said I’m content to live as a spartan, materially speaking. I think the artists, philosophers, and spiritualists of antiquity proved humanity doesn’t need massively materialized and capitalized technology to exercise its ingenuity, its creativity, while ample production of food and shelter was always possible, and only thwarted by flawed political structures. But in principle we’ve learned enough by now that we could be more sapient regarding our politics, and we don’t need hyper-technology for that either.

            So I’m also left puzzled over why it’s allegedly so necessary to keep building these massive high-energy high-maintenance structures, always at such dire political risk.

            So that’s what I’m for. This system is unsustainable and must collapse anyway, and it’s simply our choice whether we do it the hard way or the not-as-hard way, whether we make it a complete disaster, or can salvage something from it.

            If we resolved to live within our means, in all ways, and renounced all versions of trying to get something for nothing, which in practice has always meant exploiting others and trashing the planet, we’d find that we’d still have sufficient material lives (indeed probably more bountiful than under the serfdom toward which we’re now heading), while our truly creative existence could be as boundless as our imaginations. We never needed technological crutches for that.

          2. Toby

            I find your distinction between creativity and technological endeavour interesting and useful when highlighting unsustainable technological development versus sustainable, while sticking by my definition that technology is always problem solving.

            Yes, it all boils down to how we harness technology sustainably. My thinking is always evolving on this, but I won’t go into it here. You mention freedom, which is a whole other kettle of fish, an area in which there is a lot of self-delusion, culturally, in my view, not to mention romantic thinking, but that aside, I am with you on decentralisation and the break-up of those institutions which lever too much power. I am for a system which fosters healthy individual expression by the opposite means of the current, which says; ‘be selfish, and society (whatever that is) will take care of itself’. I favour; ‘support the ecosystem and human society generally, and you’ll be as free as it is possible to be.’

            In the end, for the reasons you cite, this system must crumble. It is harnessing human ingenuity (technology) along the wrong lines. And yes, living within our means ought to be a vital part of whatever new system emerges from the old. The big, I think unanswerable, question is: what are our means capable of?

      3. Francois T

        It’s now full court press for those who have prospered in the last three decades, trying to deflect blame away from themselves and project it onto others. And in order to do this they are deploying a number of strategies, the most prominent I’ve noticed being nationalism, nativism, classism and racism.

        You forgot a favorite of the US psyche: personal responsibility. “They should have known” when the obfuscation was complete, “Nobody forced them to buy this house” when the buyer was not even aware that the papers had been modified ex-post facto etc., etc.

        In a word, blame the victim, attack the defenseless.

        1. DownSouth

          Some things never change, no? The ruling class in the United States also tried a rhetorical strategy based on classism in the 1930s, but it didn’t work.

          As Frederick Lewis Allen wrote in Since Yesterday, Hoover “with a tory heartlessness” permitted “financial executives to come to Washington for a corporate dole when men and women on the edge of starvation were denied a personal dole.” He urged a Red Cross campaign and recommended an appropriation to enable the Department of Agriculture to loan money ‘for the purpose of seed and feed for animals,’ but fought against any handouts by the Federal government to feed human beings.”

          “In all this Hoover was desperately sincere,” Lewis goes on to explain. “He saw himself as the watchdog not only of the Treasury, but of America’s ‘rugged individualism.’ “

          Hoover exhorted the poor to help themselves: “I do not feel I should be charged with lack of human sympathy for those who suffer,” he exhorted, “but I recall that in all the organizations with which I have been connected over these many years, the foundation has been to summon the maximum of self-help.”

          “The test of our progress is not whether we add more to the abundance of those who have much,” Roosevelt fired back, “it is whether we provide enough for those who have too little.”

          The privileged elite in turn denounced Roosevelt as “coddling and spoiling of the unfit,” and branded him as a “communist” and a “socialist.”

          The end result of this dialouge in the US is that, as Lewis points out, “the governmental center of gravity…moved to the left.”

          My concern is that it doesn’t always work out that way. In Germany things worked out quite the opposite. The economic hardship, instead of moving things to the left as it did in the United States, moved things to the right.

  2. Abhishek

    I think that Greece goes through a massive upheaval.Its only a matter of time before the EMU becomes history. Monetary union without any political union can’t survive

  3. Percy

    Heidi’s point is correct. We need to fix this in our rearrangement of the obligations of dealers to supposedly “sophisticated investors.” The recent testimony of the SEC Chairman on this point the other day shows that she still doesn’t get this or for some reason resists it (probably because the whole idea of allowing private placements without going through the more expensive process of SEC registration and full dislosure is built on the phoney equivalnce between wealth and having the ability to understand investments). Susan Collins, on the other hand, does get it. Why she did not nail the SEC Chairman on this when the latter retreated from it is unclear. Just being polite, I suppose.

  4. Bill

    As usual, Bill Black’s Iceland interview is a must-watch, as he lays out the case for fraud so anyone can understand it.

    The link worked for me w/o any Icelandic, it must have been fixed.

  5. lambert strether

    Thanks for the link, Yves, and especially for the opportunity to rectify Felix Salmon’s “off by one” error on Bob Rubin’s base running abilities.

    The image is definitely NSFW, though — at least at some places of work…

  6. LeeAnne

    Yves, credit where credit is due. I thought Bill Black’s Iceland interview sounded familiar. “In those circles” it may be the first time Looting: Bankruptcy for Profit, is mentioned, but you posted on that last year in great and eloquent detail.

    at 3:40 Bill Black referring to Paul Krugman says “…finally, 2 weeks ago he [Paul Krugman] used the F [fraud] word and he cited this article by George Akerlof and Paul Romer in 1993 and that’s the first that that’s been given that kind of prominence in those circles.”

    Yves post:
    Monday, October 5, 2009
    Quelle Surprise! New York Times Fails to Call Private Equity Looting by Its Proper Name

    The New York Times tonight features a generally very good piece, “Buyout Firms Profited as a Company’s Debt Soared,” by Julie Creswell that falls short in one important respect: it fails to call a prevalent and destructive practice of private equity firms by its proper name.

    PE firms in the risk-blind environment preceding the credit crunch got into the habit of producing good to stellar returns by modifying their usual formula. The traditional model was to buy companies with a ton of debt, then improving their bottom line by a combination of partial asset stripping (selling off ancillary operations), cost cutting, and once a blue moon, actually doing something to improve operational performance. Then the company would be sold, either privately, usually to a corporation, or taken public.

    But the PE firms found a much easier approach: just pile on more and more debt, and pay themselves a special dividend. No need to do any work, just keep borrowing until you had recouped your investment and then some. And that way you did not need to care how the company fared. If you destroyed the business, it was of no mind to you and your investors. Other saps were left holding the carcass.

    George Akerlof and Paul Romer called that activity looting in a famous 1993 paper and depicted it as criminal:

    Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations….

    Our description of a looting strategy amounts to a sophisticated version of having a limited liability corporation borrow money, pay it into the private account of the owner, and then default on its debt…

    First, limited liability gives the owners of a corporation the potential to exploit lenders. Second, if debt contracts let this happen, owners will intentionally drive a solvent firm bankrupt. Third, when the owners of a firm drive it bankrupt, they can cause great social harm, just as looters in a riot cause total losses that are far greater than the private gains they capture.

    This version wasn’t sophisticated. It was done in broad daylight. The Akerlof/Romer article describes how looting occurred (among other places) in Chile and in the US during the savings and loan crisis. But the New York Times article is robbed of its punch by its inability (due to Grey Lady conventions) or reluctance to call this form of chicanery what it is, a fraud perpetrated on society as a whole.

    From the New York Times:

    For most of the 133 years since its founding in a small city in Wisconsin, the Simmons Bedding Company enjoyed an illustrious history….

    Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company — the seventh time it has been sold in a little more than two decades — all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.

    For many of the company’s investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company’s downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees — more than one-quarter of the work force — laid off last year.

    But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.

    Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years.

    A result: THL was guaranteed a profit regardless of how Simmons performed. It did not matter that the company was left owing far more than it was worth, just as many people profited from the mortgage business while many homeowners found themselves underwater.

    Yves here. While the NYT does not use our preferred terminology, it does correctly connect the dots between this sort of looting and the mortgage industry variant. Back to the story:

    From my experience, none of the private equity firms were building a brand for the future,” said Robert Hellyer, Simmons’s former president, who worked for several of the private equity buyers before being asked to leave the company in 2005. “Plus, the mind-set was, since the money was practically free, why not leverage the company to the maximum?”…

    A disproportionate number of the companies that were acquired during that frenzy are now struggling with the enormous debts. More than half the roughly 220 companies that have defaulted on their debt in some form this year were either owned at one time or are still controlled by private equity firms, according to analysts at Standard & Poor’s.

    Yves again. Of course, the article offers the hollow defenses of Thomas Lee, that the company was a casualty of the downturn. But that reasoning is spurious. Companies need reserves for bad times, in the form of cash on hand and spare borrowing capacity. PE firms, by contrast, hollowed out their charges, assuring failure if not very much went wrong. And in the real world of commerce, things go wrong all the time.

    Expect more wreckage, and expect the perps to get off scot free.

  7. LeeAnne

    should have highlighted this from Yves post above:

    This version wasn’t sophisticated. It was done in broad daylight. The Akerlof/Romer article describes how looting occurred (among other places) in Chile and in the US during the savings and loan crisis. But the New York Times article is robbed of its punch by its inability (due to Grey Lady conventions) or reluctance to call this form of chicanery what it is, a fraud perpetrated on society as a whole.

  8. b.


    Without explaining the months-long delay — something Congress should examine — the Federal Reserve on Friday finally released the transcripts of its rate-setting meetings in 2004.

    There’s some pretty damning stuff, some of which is directly relevant to Yellen’s upcoming Senate confirmation.
    If those responsible for the disastrous policy mistakes that led to the bubble and bust had either been driven from office or had the decency to quit, these transcripts would be little more than historical curiosities at this point. Which means they are much more than that, unfortunately.


  9. SalmonRising

    Thanks for the heads up on the Deepwater Horizon strategic failure….sigh. No doubt we will be treated to a post hoc congressional investigation which will obfuscate these basic issues.

    1. Cynthia

      Since I live only about a four-to-five hours drive away from the Florida Panhandle, this oil spill, which can better be described as a volcanic eruption of oil, has me weeping more than most of you here. I weep as I think about the untold amounts of death and destruction sweeping across the Gulf. I weep as I think about all of its wildlife being soaked and poisoned to death by oil. And no amount of money in the world can ever replace the incredible beauty of its beaches and the incredible taste of its seafood. :’-(

      And even though Dick Cheney managed to beat the rap for creating a needless war in Iraq, I was hoping that I’d have the pleasure of seeing him and other warfare-driven, welfare Queens at Halliburton all behind bars, wearing orange jumpsuits, eating baloney sandwiches and drinking kool-aid for improperly cementing this ultra-deepwater oil rig to the sea floor. But upon further examination, I’ve come to see that the culprits in this catastrophe go far deeper and much broader than Dick Cheney and Halliburton: the Bush Administration’s unwillingness to require all deepwater oil rigs to have emergency shut-off valves, called blowout preventers, and British Petroleum’s as well as Transocean’s unwillingness to play it safe by having these valves installed on their oil rigs in the Gulf.

      1. Cynthia

        I was wrong in saying that Deepwater Horizon lacked a blowout preventer that can be triggered from the rig. I should have said that it lacked a remote control device, capable of shutting down the rig from a distance. The article from the WSJ goes on to mention that both Norway and Brazil require that all offshore rigs be equipped with remote control devices to prevent blowouts.

  10. MyLessThanPrimeBeef

    Ten ways to built something on fraud… We have come a long way from ‘sorry, I cut down the cherry tree.’

    Now, we are all sophist philosophers pondering over what ‘is’ is.

    This generation is first and the smartest among all the gernations so far.

  11. emca

    The division between Main Street and Wall is particularly poignant. Main Street pays twice: first for buying crappy financial products that fail from organizations and individuals with a “you stupid, I’m smart” trading ethic, the second for bailing out just those individuals and organizations when ‘smart’ also means doing stupid and needing more ‘stupids’ to back your smartness.

    What a system!

    Hard to imagine this kind of chicanery a large part of sustainable program for a nation’s wealth. Someone needs to cut the cord, now.

  12. Karen

    Regarding the video at “So, What Happens Next…? Audio Presentation by Rob Parenteau”:

    My browser seems to be too slow to download this video in any reasonable timeframe, and stops downloading if I leave it unattended too long, so I’ve only been able to get about one-third of the way through it – and that was with great difficulty.

    Is there a transcript, or can someone give me the Cliff-Notes version? Many thanks…

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