Growth Industry 2009: Criminal and Constitutional Law

It’s going to be all lawsuits all the time, as filings and indictments come fast and furious after January 20. In fact, a number are in the works already.

From the perspective of Wall St. crime, it will be interesting to see what Elliot Spitzer and Rudy Giuliani do. Keeping his hand in by writing for Slate, Spitzer’s wounded and has nothing to lose. Giuliani has got to smell blood and a loyal-to-the-point-of-absurdity Republican he is not.

Let’s start with . . .

Criminal Law

There’s a big one pending of the type that made the reputations of Spitzer and Giuliani in their US Attorney days—Insider Trading! As you remember, Giuliani’s high-profile conviction was Ivan Boesky and Spitzer’s was Martha Stewart. (No disrespect intended. What comes to mind when you think of Spitzer . . . let me qualify that, during his days as a US Attorney?)

Conveniently domiciled in their former district, Robert Rubin—former co-Chairman of Goldman Sachs, former Treasury Secretary under Clinton and on the board of, counsel to and briefly Chairman of Citigroup— was on the short list to be Treasury Secretary again. What happened?
When you want the low down, the New York Post is the paper of record. On December 4 it reported: "A new Citigroup scandal is engulfing Robert Rubin and his former disciple Chuck Prince for their roles in an alleged [CDO-related] Ponzi-style scheme that's now choking world banking. [The two] are named in a federal lawsuit for an alleged complex cover-up of toxic securities that spread across the globe, wiping out trillions of dollars in their destructive paths.” However—and here’s the indictable offense—before Citi's stock collapsed, Rubin and other top insiders cashed out of more than $150 million in "suspicious stock sales" according to the lawsuit filed on behalf of investors. They never know when to stop, do they.

An Astounding Conflict of Interest

The disposition of this case is going to set quite a precedent. Apparently, stealing investors’ money is a crime.

Bernard Madoff, former head of the NASDAQ, surrendered to the FBI on December 11, after having been turned in by his sons Mark and Andrew for running a several-decades-long Ponzi scheme. Investors have been wiped out to the tune of $50 billion. What makes this case interesting is not only Madoff’s insider status, but that Mary Schapiro, nominee for SEC Chairman, has recently announced the appointment of Mark Madoff to a prominent role with the security-industry oversight agency. And there’s more.

According to the FBI, the SEC and other regulatory bodies received several written complaints about Madoff over the years, which were never pursued. It now has been learned that “Ms Schapiro, currently chief executive of the Financial Industry Regulatory Authority (Finra), employed (son) Mark Madoff to serve on the board of the National Adjudicatory Council — the division that reviews disciplinary decisions made by Finra,” according to the UK TimesOnline on December 18.

Madoff père is currently confined to his Park Avenue apartment awaiting trial.

Strange Treatment of Small Fry
This next case is small in terms of money—what’s a few hundred mil these days—but has an interesting twist. In another action by federal prosecutors of the Southern District of New York, they have arrested attorney Marc Dreir for stealing at least $380 million in “a brazen swindle of some of New York’s savviest investors by one of New York’s more accomplished lawyers,” as reported in the New York Times on December 14. Another $35 million is missing from escrow accounts at his 250-member law firm.

Why this case stands out is that the accused is actually in jail being held without bail. Can you believe it. He must be really dangerous. Or he lives in New Jersey.

Constitutional Law
This should be getting more ink, imo.

On December 10, the WSJ reported that the Fed “is considering issuing its own debt for the first time . . . which . . . would provide the central bank with more flexibility to tackle the financial crisis.”

Ordinarily, when short of cash the Fed turns to the Treasury. The Treasury can no longer fund the Fed because of its own massive borrowings set for 2009 and debt limits imposed by congress.

Issuing debt is not in the Fed’s charter. According to the Constitution as it is currently written, only congress through the Treasury has the power to borrow against the credit of the United States. What’s proposed by the Fed would give it extra-legal authority to exceed the debt ceiling set by congress. It also would usurp powers of congress and the Treasury and transfer them to the Fed, which is a private entity owned by member banks.

Paul Volker would be turning in his grave if he were dead.

mg

Five Useful Websites in these Hard Times

Today's article isn't about the Fed, unless you think it's responsible for all our problems, as many do.

We’re in for some really tough times. Prepare as though a major hurricane, a war even, is coming your way. It is.

Here are a few practical websites to help you prepare:

This site has a List of 100 Things that will Disappear. What makes it better than some of the others with the same list is that it also has forum comments suggesting other items that should be included. http://goldismoney.info/forums/showthread.php?t=2738

What if my bank fails? Both the Chairman of the Federal Reserve, Ben Bernanke, and the Chairwoman of the FDIC, Sheila Bail have warned that there will be more bank failures. This site, http://www.bankingquestions.com/bankfailures/bankfailures.html provides answers to questions about your various bank accounts. This information will change from time to time depending on who or what is being bailed out.

Why beat around the bush: we're in a severe recession and will soon be in a depression. Here’s a great blog by a young father and husband in Argentina. He’s been living through economic collapse and hyperinflation for several years and has great day-to-day living advice. http://ferfal.blogspot.com/

So far this year more than 1.5 million people have lost their jobs. This site addresses your emotional and physical health, as well as answering questions related to searching for a job. http://www.careerplanner.com

If you have lost your health insurance or expect to, this site, www.insure.com answers questions about all sorts of insurance in addition to health.

Startling News from the Fed and Economic Wrecks from Around the World

The derivatives time bomb that Warren Buffet warned about several years ago has exploded. Here’s how it’s playing out around the world.

From the US:
The Fed:
“Federal Reserve chairman Ben Bernanke acknowledges he was wrong in believing that there would be limited fallout to financial markets from risky mortgages that soured after the housing market's collapse.” ***Is this possible? Not his admission of having been wrong, but that he really didn’t know? I knew. Since you’re reading BlownMortgage you knew too*** ''I and others were mistaken early on in saying that the subprime crisis would be contained,'' Bernanke says in an article in the December 1 issue of The New Yorker magazine. The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict,'' he said in the piece titled ''Anatomy of a Meltdown.''

***Actually no, it wasn’t hard to predict at all. One thing has followed the other in—guess what—predictable fashion. The blogosphere has been plotting the course of the meltdown with stunning precision for a few years***

Almost as an aside, as of early this week, the Fed has now spent, guaranteed or promised about $8.5 trillion. This is up from $4.3 trillion on November 19, which was up from $3.8 trillion on October 31. And now we know that this spending is based on the judgment of someone who thought subprime could be contained.

Car dealers stage a protest using this year’s unsold vehicles.

The Auto Industry:

The WSJ reports: “Though it’s under pressure to trim costs and update its business plan to get federal bailout funds, Ford doesn’t like the idea of cutting its CEO’s salary. CEO Alan Mulally made $21 million last year; was asked in testimony last week on Capitol Hill if he’d accept a $1 salary, he replied, “I think I’m OK where I am.”

Via Bloomberg: General Motors doesn’t want the public tracking a private jet used by its executives, and has asked the Federal Aviation Administration to block it from its public service. “We availed ourselves of the option, as others do, to have the aircraft removed,” said a GM spokesman, though he didn’t say why the automaker, blasted on Capitol Hill for using private planes, took the step.

***The auto industry is a long way from sanity let alone solvency***

If your house fell off this cliff you might be eligible for a bailout.

Real Estate:

The latest S&P/Case-Shiller Indices are out. What could I possibly add except to say that the chart will have to be redrawn since the Y axis does not go far enough into negative territory to plot next month’s decline.

Banks:
There have been 73 mergers and 10 bank failures so far this year plus bailouts for Citigroup (2x), a little help from friends for JPMorgan and Bank of America, and a little something under the table for Goldman Sachs and Morgan Stanley. The FDIC has just added 54 more banks to its watch list, which now stands at 171.

Car of local bank manager in France who does not know which end is up.

From Europe:
Things are no better in the EU countries. The Baltic Dry Index, the most reliable measure of international trade, is down significantly. Deutsche Bahn AG, the German railway company, is planning on 40% fewer cargo trains for next year, another leading indicator.

Christmas spirit in China: Rioting over toy factory layoffs.

From Asia:
On November 26, China cut interest rates by 1.08 percentage points to 5.58%, the lowest level in 11 years and the largest one-off cut since the Asian Financial Crisis in 1997. The economy is crumbling and millions of jobs will be lost before Christmas.

It is also the fourth interest rate cut by the Chinese central bank in the last ten weeks. "China is out to save itself," said Patrick Bennett, an analyst with Societe Generale in Hong Kong.

In recent weeks, laid-off factory workers have rioted across central and southern China. Government officials in Beijing have warned that dissent and threats to social stability will be crushed.
***Some things never change***

From the Middle East:

According to the UKTimesOnline, Gulf sovereign wealth funds (SWF) are now investing in their own struggling economies with several Gulf-based banks getting American-style bailouts. Local stock markets have collapsed and some sovereign wealth funds are supporting markets by buying shares of local companies. Investment in the West is being reduced, in particular in the UK and US where the SWFs have lost billions of dollars this year. *** I thought these people had a lot of money—our money, in fact—I guess not***

Fires in the UAE have spread from the oil fields to the highway. Accident on road between Abu Dhabi and Dubai.

Sovereign wealth funds are among the few sources of liquid capital available in the world and many companies have sought cash injections from the Middle East. Fund managers feel they were lured into investing before the full extent of the crisis was known. One fund, the KIA, said two months ago that it had lost $270 million on a $3 billion investment in Citigroup, which was made at the beginning of 2008. Citigroup's stock has fallen by two thirds since then, and it the bank is now being supported by the US government. *** This sounds like another wrong-headed judgment call by Bernanke. If this was the reason Citi was bailed, it would have been cheaper, way cheaper, to give KIA their money back ***

The Ship of State

There are only four more weeks left in 2008. We’re headed into a new year, with a new President, but with a number of the same people who laid the groundwork for the world we’re living in today. What else can go wrong? We’ll see, won’t we.