Category Archive 'Enron'

07 Apr 2009

Geithner-Summers Plan Opens Door to Gaming

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Jeffrey Sachs, at the Huffington Post, explains that the Geithner-Summers toxic asset plan will allow banks selling such assets to bid on the same kind of assets being sold by other banks, setting up the opportunity for massive wealth transfers from the Treasury to the banks involved.

Insiders can easily game the system created by Geithner and Summers to cost up to a trillion dollars or more to the taxpayers.

Here’s how. Consider a toxic asset held by Citibank with a face value of $1 million, but with zero probability of any payout and therefore with a zero market value. An outside bidder would not pay anything for such an asset. All of the previous articles consider the case of true outside bidders.

Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total.

Citibank thereby receives $1 million for the worthless asset, while the CPPIF ends up with an utterly worthless asset against $850K in debt to the FDIC. The CPPIF therefore quietly declares bankruptcy, while Citibank walks away with a cool $1 million. Citibank’s net profit on the transaction is $925K (remember that the bank invested $75K in the CPPIF) and the taxpayers lose $925K. Since the total of toxic assets in the banking system exceeds $1 trillion, and perhaps reaches $2-3 trillion, the amount of potential rip-off in the Geithner-Summers plan is unconscionably large.

The earlier criticisms of the Geithner-Summers plan showed that even outside bidders generally have the incentive to bid far too much for the toxic assets, since they too get a free ride from the government loans. But once we acknowledge the insider-bidding route, the potential to game the plan at the cost of the taxpayers becomes extraordinary. And the gaming of the system doesn’t have to be as crude as Citibank setting up its own CPPIF. There are lots of ways that it can do this indirectly, for example, buying assets of other banks which in turn buy Citi’s assets. Or other stakeholders in Citi, such as groups of bondholders and shareholders, could do the same.

Mike Rorty explains further:

I was out at “Debaser Night”, a 90s-music dance party in San Francisco, with some friends. A riot grrl rock cover band opened, followed by lots of great singles. I was getting a bit nostalgic. A friend of mine, who used to be on an energy trading desk back in the early 2000s, was listening to me talk about the government plan. He couldn’t believe what I was telling him about letting the banks that are selling auctions also bid on them. In the middle of my explanation, he had his own wave of nostalgia: “Man does that bring back memories….” …

[W]hy did my energy trading friend get all nostalgic? “Because what you are telling me brings back some great memories from what Enron was up to back in the day. All of us energy traders back then watched with our jaws on the floor. 2000 was a hell of a year.”

It is August, 2000. Let’s say you are a trader for Enron. You know your energy in California is worth $50, and you also know the energy that Reliant Energy has is worth $50. You call your buddy up, the trader at Reliant, and make a deal. Happens all the time – you even have a nickname for it, The Daisy Chain Swap. You go to bid, and you bid $80 for Reliant’s energy. Then you wait. If Reliant doesn’t come through, you are screwed out a lot of money. And hey, isn’t this wrong? Well, you are pretty sure one of those Rubin-protégé government whiz-kids has given someone who knows someone you know a wink-wink about this. You take a drink, steady the nerves. Then, the bid comes back for your energy – $80 from Reliant. You have each bid up each others assets and traded them. And now the government is screwed, because it has to pay you $80. …

What is really exciting, from the evil point of view, is the idea that we are going to get to see one giant, massive, Enron Death Star put into play.

The Death Star strategy (yes, they called it that) was where Enron would take a fee for relieving a congested market of its excess supply by moving it elsewhere. Just like our legacy assets! There are too many of them, it is clogging up trade, let’s get them to someone else who wants them. However Enron would just move the energy in a circle, collecting a fee for not doing what it was supposed to. As their memo famously said, they are paid “for moving energy to relieve congestion, without actually moving any energy or relieving any congestion.” And, it appears, that the large banks are gearing up to do just that; with the Geitner Death Star that they’ll just be collecting a large fee to run them in a circle, without actually moving any of them off their collective books. …

Mind you that was the electrical grid of California – this appears to be at the scale of the entire financial market. In case you are wondering, traders out there are licking their lips to try and find ways to game this even better than Enron.

See? Obama is really an equal opportunity redistributionist. He’s not only redistributing taxpayer monies to ACORN and the désoeuvré; he’s redistributing to the bankers, too.


Hat tip to Daniel Lowenstein

11 Sep 2007

For the Sake of a Salamander

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Natural Resources Canada photo
Gyrinophilus porphyriticus porphyriticus

A single Northern Spring Salamander spotted across the road from the site of Jake Halpern‘s family’s intended vacation retreat in 1988 resulted in a building ban twelve years later, two years of negotiations with the state, a compromise involving the construction of two bridges, one 76 feet (23.16 meters) long.

Then, Massachusetts took the Spring Salamander off its Endangered Species list.

26 Apr 2007

This Year’s Brokeback Mountain

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Opening this week in New York fresh from Robert Redford’s Sundance Festival, this year’s answer to Brokeback Mountain takes the contemporary cinema’s defense of forbidden love one step further.

New York Times:

The director Robinson Devor apparently would like viewers who watch his heavily reconstructed documentary, “Zoo,” to see it as a story of ineluctable desire and human dignity. Shot on Super 16-millimeter film, with many scenes steeped in a blue that would have made Yves Klein envious, “Zoo” is, to a large extent, about the rhetorical uses of beauty and metaphor and of certain filmmaking techniques like slow-motion photography. It is, rather more coyly, also about a man who died from a perforated colon after he arranged to have sex with a stallion.

05 Jul 2006

Ken Lay, R.I.P.

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The Blogosphere was filled today with howls of savage satisfaction at the sudden death of Ken Lay.

How can I not respond?

My wife is persuaded of Lay’s villainy, having read two of the books produced by journalists in the aftermath of Enron’s demise.

I wouldn’t read those books, but I remember reading the attack story spread across the front page of the Wall Street Journal by members of its leftwing news side, and I remember being unpersuaded that pushing the edge of the accounting practices envelope was necessarily either illegitimate or criminal.

In America, when the hound pack of the Press chases a conspicuously wealthy defendant, the prosecutor/huntsman always wins. The readily-provoked envy of the masses invariably ensures a guilty verdict. And such was Ken Lay’s unhappy fate.

The honest WSJ editorial side was skeptical of the prosecution’s case as well:

There is no doubt that Mr. Lay is guilty of bad management. He admitted Thursday that his trust in Mr. Fastow was misplaced, and there must have been other missteps. But Mr. Fastow had plenty of help in covering his tracks, both within Enron and from its outside accountants. In a criminal trial, it is not enough to say that Mr. Lay should have known. No CEO can know all that is going on in a large corporation, and the fraud at Enron was so complex that it took prosecutors more than two years to unravel.

The government’s Exhibit A will presumably be a videotape of Mr. Lay’s now-famous pep talk to employees in August 2001, telling them Enron was still “doing extremely well” and encouraging them to hold on to their stock. Many followed his advice and ended up losing much of their life savings. That aroused an understandable anger with the CEO, who was paid salary and bonuses in the millions.

But Mr. Lay was also putting his money where his mouth was. During the long slide of Enron’s share price, he continued to keep the vast majority of his personal wealth in the stock and even bought more shares, selling only when forced by margin calls. This is not consistent with the theory that he knew the company’s true situation and was out to defraud shareholders.

Mr. Lay’s co-defendant, former CEO Jeffrey Skilling, claimed that he resigned from the company for personal reasons and allegedly made $89 million in profits from selling Enron stock. By all accounts Mr. Lay came back to the company to replace Mr. Skilling as CEO because of his personal connection to it. He then did what captains are supposed to do, which is go down with his ship.

I’m not sure I believe the heart attack story, but I see no reason to inquire. The young boy from Tyrone, Missouri who delivered newspapers and mowed lawns made good, made a lot of money, lived the good life, and like many a good man was brought low. If he escaped prison and degradation by his own hand, good for him.

Perhaps Ken Lay behaved in extremis as the ancient Romans did, when Fate turned on them. Thinking of Ken Lay today, I remembered the end of Walter Pater’s Marius the Epicurian:

For there remained also, for the old earthy creature still within him, that great blessedness of physical slumber. To sleep, to lose one’s self in sleep–that, as he had always recognised, was a good thing. And it was after a space of deep sleep that he awoke amid the murmuring voices of the people who had kept and tended him so carefully through his sickness, now kneeling around his bed: and what he heard confirmed, in the then perfect clearness of his soul, the inevitable suggestion of his own bodily feelings. He had often dreamt he was condemned to die, that the hour, with wild thoughts of escape, was arrived; and waking, with the sun all around him, in complete liberty of life, had been full of gratitude for his place there, alive still, in the land of the living. He read surely, now, in the manner, the doings, of these people, some of whom were passing out through the doorway, where the heavy sunlight in very deed lay, that his last morning was come, and turned to think once more of the beloved. Often had he fancied of old that not to die on a dark or rainy day might itself have a little alleviating grace or favour about it. The people around his bed were praying fervently–Abi! Abi! Anima Christiana! [“Depart! Depart! Christian Soul!”] In the moments of his extreme helplessness their mystic bread had been placed, had descended like a snow-flake from the sky, between his lips. Gentle fingers had applied to hands and feet, to all those old passage-ways of the senses, through which the world had come and gone for him, now so dim and obstructed, a medicinable oil. It was the same people who, in the gray, austere evening of that day, took up his remains, and buried them secretly, with their accustomed prayers; but with joy also, holding his death, according to their generous view in this matter, to have been of the nature of martyrdom; and martyrdom, as the church had always said, a kind of sacrament with plenary grace.

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