Quote of the Week

As usual, I've got some catching up to do here on the blog. We'll start things off today with your belated Quote of the Week, then your Clip of the Week will be right behind it. I may throw in an extra post just for kicks, but I'll probably hold off on it until tomorrow—you all know how much I love writing on Fridays.

The leader in the clubhouse for this week's Quote was this post over on the Marginal Revolution blog, which shared some seriously bizarre tidbits about people's intense love for K-Pop (what's K-Pop? This is K-Pop; so is this). Fanaticism knows few bounds, apparently.

But then I came across this post at The Motley Fool, which was frankly so terrifying that I couldn't help but write about it on the blog. So here's your Quote of the Week... go America.

This week's QUOTE OF THE WEEK

"As part of the Dodd-Frank Act, lawmakers directed the [Securities & Exchange Commission] to figure out how much average investors knew about the stocks and mutual funds that they held. Here's what they found: You are an idiot... Statistically, the SEC found that American investors—regardless of age, race, or gender—'lack basic financial literacy,' and that they generally do not understand even 'the most elementary financial concepts such as compound interest and inflation.' The surveys suggest that certain sub-groups, including the elderly... 'have an even greater lack of investment knowledge' of concepts like the difference between stocks and bonds, and are unaware of investment costs and their impact on investment returns.
                                                  - Bill Mann, Motley Fool Funds

What's perhaps most concerning about this post is what Mann later points out—this study didn't consider ALL Americans, it ONLY CONSIDERED THOSE WHO ARE ALREADY DEEMED TO BE ACTIVE INVESTORS. If active investors can't adequately answer a question like "what's a stock", then I admit that I have seriously overestimated the intelligence level of my nation. Unfortunately, it appears that's the case.

Now, granted, my inner tin-foil-hat man does look at this survey data with a fair bit of skepticism, recognizing that the SEC has a vested interest in reporting that investors are gullible fools who need to be saved from themselves (by the SEC, of course). That said, I have a very hard time contradicting the study's results—frankly, it all sounds just about right.

If you watch the Presidential (and Vice Presidential) debates this fall, and you start to notice that the candidates are speaking about the economy and the markets in a way that seems designed to confuse, please know that it's absolutely on purpose—they assume that you don't understand this stuff, so it's in their interest to speak in circles so as to confuse you.

You won't know the difference either way, and you'll therefore be forced to choose the guy who "looked the best" doing it. That is, unless you choose to educate yourself. And if you read this blog, I'd like to think that you're already doing so. Otherwise, I've probably been confusing the hell out of you for a long time now. My bad, guys.

[Motley Fool]

Update to SEC post

In writing my SEC rant this morning, I forgot to include a reference to a very interesting post from Naked Capitalism's Yves Smith, which pointed out a dynamic of which I wasn't yet aware. Here it is:

Alison Frankel at Reuters highlights a new New York appellate court decision where JP Morgan is being hoist on the Rakoff petard. Bear Stearns, which is now owned by JP Morgan, entered into a $250 million settlement in 2006 over allegations that it cheated customers by engaging in impermissible market timing. The agreement contained standard SEC “without admitting wrongdoing or denying” language. The payment broke down into $160 million of disgorgement and $90 million of penalties.

What may surprise many readers is that the $160 million disgorgment was covered by insurance, or at least JP Morgan thought it was. Per Frankel:

The insurance agreements said the bank was covered for damages awards and charges incurred by regulatory investigations, with one catch: The policies excluded claims “based upon or arising out of any deliberate, dishonest, fraudulent, or criminal act or omission,” if there were a final adjudication reflecting that wrongdoing.

The insurers said no dice, and JP Morgan took them to court to try to force them to pay. The lower court decided in favor of JP Morgan, but the appeals court reversed. And the logic is revealing:

But a ruling Tuesday by the New York state Appellate Division, First Department, suggests the boilerplate language that Ramos cited — and Rakoff has derided — may no longer offer defendants much benefit even without judges specifically rejecting it….

But the decision’s implications may be broader than that. In an opinion written by Justice Richard Andrias, the state judges simply didn’t pay much heed to the SEC “neither admit nor deny” boilerplate. “Read as a whole,” the decision said, “the offer of settlement, the SEC Order … and related documents are not reasonably susceptible to any interpretation other than that Bear Stearns knowingly and intentionally facilitated illegal late trading for preferred customers, and that the relief provisions of the SEC Order required disgorgement of funds gained through that illegal activity.” Moreover, in a footnote, the opinion referred explicitly to Rakoff’s criticism of SEC boilerplate in SEC v. Vitesse Semiconductor.

Putting on a public policy, rather than a legal hat, insurance that has the effect of letting companies and boards buy their way out of the economic consequences of bad conduct is a terrible idea.

While it doesn't exactly surprise me, I officially had no idea that banks held (or even had the capability to hold) insurance policies to protect them against penalties arising from SEC enforcement actions. This fact only lends credence to the concept that banks are internalizing fraud-based fines as a general cost of business, and it only makes Rakoff's ruling that much more critical. More importantly, it adds another judge--Judge Richard Andrias--to the ever-growing roster of justices who are fed up with the way that the financial watchdogs treat bank fraud.

The SEC has been played as puppets here, as the banks have simply purchased insurance against anything the SEC might do. This plan only works as long as the SEC continues to allow “without admitting wrongdoing or denying” language to be a standard part of its settlements, and this is exactly what must stop.

Judge Andrias and Judge Rakoff are onto something here, and the SEC therefore has a choice--assemble a legal team that will actually prosecute instances of bank fraud, or else assemble a similar team that will appeal every like-minded judicial ruling in the Andrias-Rakoff vein. Only one of these options is consistent with the SEC's mandate, and only one of them is an acceptable use of taxpayer dollars. I think you know which one.

[Naked Capitalism]

The SEC and the politics of intimidation

Just two days ago, I posted a chart detailing the serial fraud that has been perpetrated by our largest financial firms--and allowed to continue by an apparently disinterested SEC. In my conclusion, I opined that we need "more Eric Schneidermans and Jed Rakoffs," the latter referring to the judge who threw out a proposed settlement between the SEC and Citigroup.

I had previously written that Rakoff's ruling was an incredibly important one, while noting that Rakoff had "faced a significant amount of scrutiny from people who think that the SEC 'can't afford' to prosecute cases like these, because the cases are too expensive and the banks have such amazing legal resources". Still, I was hopeful that Rakoff's rebuke might force the SEC into action, as public pressure mounted and opinion coalesced against the banks. No such luck.

Judge Rakoff got to have his insurrection when he rejected the SECs $285 million settlement with Citigroup last month.

Now it's the SECs turn. According to the Wall Street Journal, the agency is planning an insurrection too — against Judge Rakoff. The agency will expend its resources creating a five person panel to appeal the Judge's decision.

You'll recall that instead of allowing the agency to take Citi's money and be done with its mortgage-backed security suit against the bank, Judge Rakoff asked both parties to go back to the drawing board.

In doing so, Judge Rakoff bucked a practice that's been in play since the 1970s. The SEC has allowed banks to pay small sums ('pocket change," in Rakoff's words) and neither confirm nor deny their guilt in civil suits against the agency. Rakoff thinks that practice is unjust.

So given the Judge's order, you would think the SEC might prepare itself to go to trial with Citi so the bank could maintain its innocence (a scary prospect for both parties). Or that both parties, at the very least, would get their calculators out to tabulate a sum that might make the Judge happy.

Not so. The SEC would prefer to create a 5 person commission to appeal the Judge's ruling and nip this problem in the bud.

Right. So the SEC "can't afford" to prosecute cases against banks that consistently and repeatedly perpetrate fraud against the American public, but it can afford to mount appeals against judges who stand in their way. Sounds great.

What's so disheartening about this turn of events is that it's seemingly indicative of a new way of doing business in Washington, that of the politics of intimidation. The first clear example of this wave of bullying came after S&P's well-publicized downgrade of U.S. sovereign debt in August--rather than humbly taking their lumps and acknowledging some flaws in the way that they did business, Washington instead elected to turn their ire on S&P with a clearly retaliatory investigation of the agency's business practices.

The message to S&P was clear, as is the message here to Judge Rakoff--we don't care who you are, or what you think. If you disagree with the way we do business, we will do everything we can to make your life miserable, or at least marginalize your voice. That's not the America that I know and love, and I think it's a very sad turn of events for all Americans. Our political system and democratic process must be respected, even when that means that government bodies may (on occasion) face steep criticism for their actions.

While you may not agree with the assertion that "dissent is the highest form of patriotism" (or, as some have reminded us, "descent the highest form of patriotic"), you must certainly acknowledge that the politics of intimidation lead us down a very dangerous path. A government that bullies its opponents into silence is not a democracy at all--it's a thinly veiled dictatorship, with "free speech" a mere mirage.

If there is any hope for our democracy going forward, here's hoping that whichever judge hears the SEC's appeal affirms Judge Rakoff's decision. It's the only way that we can ensure that equality under the law persists (or returns) in our country--without equality under the law, there cannot be a true democracy at all.

Of course, even with an affirmation of Rakoff's ruling, the SEC can still simply begin making its settlements outside of the court system entirely, which still misses the point. I yearn for a time that government bodies treat dissent as an opportunity for soul-searching and reform, rather than as an opportunity for chest-pounding and muscle flexing. In my opinion, the tighter these agencies try to hold onto their power and preserve their existing processes, the more they lose credibility altogether. And a government without credibility cannot survive.

[Business Insider]

Another link dump

Yes, even though I generally hate link dumps, I'm once again staring at a pile of interesting-but-not-interesting-enough-for-a-full-post items, so you know what that means... as usual, I'll post the links, with a quick blurb summarizing my thoughts. Click through for the full articles if you're interested.

Is the SEC Covering Up Wall Street Crimes?
Matt Taibbi; Rolling Stone

I'm always posting Taibbi articles here, and the hits keep coming. This time, our favorite malcontent is taking on the Securities & Exchange Commission (a group I've mentioned briefly here, but probably not enough), levying some pretty serious charges at the SEC's leadership.

I've tended to be fairly understanding of the SEC's shortcoming in the past, since I recognize that given their (lack of) funding, they are essentially set up to fail in their fight against an industry that is politically well-connected and has extraordinarily deep pockets. But if Taibbi's accusations here are accurate, I may have to reconsider my position. To wit:

For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation's worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – "18,000 ... including Madoff," as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.

Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency's records – "including case files relating to preliminary investigations" – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term "Orwellian," devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation.

In at least one case, a senior SEC official allegedly prevented the pursuit of a case against a bank--thus ordering the files to be destroyed--only to turn around and accept a job with that very same bank. You know what, maybe this article deserves its own post, after all......

Wells Fargo's $3 Debit Card Charge: A Sign of More Bank Fees to Come?
Ron Dicker; Daily Finance

In response to legislation (put in motion by the Dodd-Frank Act) that has placed a cap on fees that banks charge to retail outlets for debit card purchases, it seems that the banks are trying to recoup this lost income by passing the charges directly onto its customers. Wells Fargo is leading the way by proposing a $3 monthly charge for customers to use their debit cards, and other banks like Chase are primed and ready to fall in line behind them. There's a laundry list of other proposals by the banks to recoup this lost income, none of them good for individual bank customers.

When the swipe-card fee cap was passed, it was hailed and presented as a boon to small businesses, many of whom felt overly burdened by onerous fees. But by passing the fees along to individual consumers, the banks have ensured that there won't be any overall macroeconomic impact from this fee cap--we've just changed who's making the payment, making a transfer from individuals' pockets into business (and bank) coffers.

Of course, with the consumer directly bearing the impact of the fees, retailers won't have to raise their prices any more to compensate for increased bank fees--therefore, inflation statistics as collected by the government will remain lower than they otherwise would (the rising Consumer Price Index doesn't take into account bank fees, only "retail price paid"), possibly fueling a misguided belief that inflation is under control... it's not. The consumer is once again worse off, regardless of what "official" inflation statistics might say--but I'm sure you already knew that.

Bank of America's back-door TARP
Abigail Field; CNNMoney

Yes, we've got a bit of a financial theme going on here in this link dump, but so be it. While you were all busy worrying about debt ceilings and official government spending statistics, your government was busy unofficially spending more taxpayer dollars to prop up a financial institution.

As you're no doubt aware, Fannie Mae and Freddie Mac (as well as AIG, to a different degree) have been in government-sponsored conservatorship since the financial crisis in 2008. Therefore, anything done by those organizations is essentially being done by the U.S. taxpayer, and must be watched very closely--if they lose money, we lose money. So keep your eye out for stuff like this:

Taxpayers may not realize it, but they just bailed out Bank of America again, this time to the tune of more than a half billion dollars.

The Charlotte, NC-based bank was one of the biggest recipients of bailout funds during the financial crisis. But Bank of America continues to face deep problems related to its troubled mortgage portfolio and investors have battered the stock, which has plunged over 40% so far this year. That's escalated concerns that the bank may need to raise more capital. Yves Smith at Naked Capitalism has even started a BofA death watch.

But apparently the federal government is determined to resurrect BofA: the Wall Street Journal reports the feds have just used Fannie Mae, which is controlled by the U.S. government, to infuse BofA with $500 million and ease one of the bank's biggest headaches...

According to the WSJ, Fannie Mae spent $500 million to buy the servicing rights to a big chunk of the "seven million loans still causing the most problems." Although the $500 million is a paper loss to BofA, in that the rights were "originally worth more," it looks like BofA is still getting a good deal because the portfolio's "value is expected to deteriorate further."

In fact, the deal is worth much more than $500 million to BofA, because getting rid of those servicing rights lifts a huge cost burden off BofA's shoulders. And if securitized loans are involved, which they most likely are, the sale also limits the BofA's potential liability to investors for its current servicing violations. Finally, the $500 million is surely more than the servicing rights are worth in an arms-length transaction. How do we know? Beyond the comment that the loans are expected to "deteriorate further," the goal of the intervention can only be to fix Bank of America's capital structure, which is easier for the government to do if it overpays for the rights.

In short, purchasing these servicing rights was another Troubled Asset Relief Program.

So there you have it. It's not "official" government spending--at least not until those losses are realized by Fannie Mae--but it's government spending nonetheless. And when you're throwing around $500 million like this without anyone noticing, it certainly makes that supposed $2 trillion in "savings" look a little less significant, doesn't it?

Southampton engineers fly the world's first 'printed' aircraft
News Release; University of Southampton (UK)

You may remember my Clip of the Week featuring a 3D printer that "printed" a usable wrench seemingly out of thin air. That same type of technology seems to be popping up everywhere now, including at the University of Southampton, where engineers have created (and flown) a small airplane using 3D printing technology.

From their News Release announcing the achievement:

The SULSA (Southampton University Laser Sintered Aircraft) plane is an unmanned air vehicle (UAV) whose entire structure has been printed, including wings, integral control surfaces and access hatches. It was printed on an EOS EOSINT P730 nylon laser sintering machine, which fabricates plastic or metal objects, building up the item layer by layer. 

No fasteners were used and all equipment was attached using ‘snap fit’ techniques so that the entire aircraft can be put together without tools in minutes... 

The electric-powered aircraft, with a 2-metres wingspan, has a top speed of nearly 100 miles per hour, but when in cruise mode is almost silent. The aircraft is also equipped with a miniature autopilot developed by Dr Matt Bennett, one of the members of the team. 

Laser sintering allows the designer to create shapes and structures that would normally involve costly traditional manufacturing techniques. This technology allows a highly-tailored aircraft to be developed from concept to first flight in days. Using conventional materials and manufacturing techniques, such as composites, this would normally take months. Furthermore, because no tooling is required for manufacture, radical changes to the shape and scale of the aircraft can be made with no extra cost.

Very cool. It'll be interesting to see how scalable this technology is, and how economical it may (or may not) be to put into wide usage. Either way, the concept fascinates me, and it's an example of the innovation I'm always saying we need more of.

Definitely more uplifting than bitching about banks all the time...