Criminal Capitalists:Madoff and Zell

Once again as financial markets collapse they reveal the truth that all capitalism is basically a ponzi scheme.

THE MADOFF AFFAIR: $50-BILLION PONZI SCHEME ALLEGED
Madoff put under house arrest as celebrities, charities, banks disclose exposure

It befits the close of one of the most bizarre years in international finance to look at the collapse of one of its most extraordinary villains, Bernard Madoff, a former chairman of the Nasdaq sharemarket and a Wall Street titan.The crisis in the world financial system has its roots in excessive greed, stupidity, poor regulation and disappearing capital, and the story of Madoff's downfall and a $US50 billion sting bears many of the same hallmarks.

When Enron and World Com collapsed it was revealed that they were in cahoots with their accounting firms, who not only checked their books, but helped them cook those books in order to avoid taxes and to make it appear they were more profitable than they really were. And at the same time the SEC was not doing its job in fact as this recent scandal reveals they acted not as regulators but enablers of Mr. Madoffs criminal scheme.

SEC investigators discovered Madoff violations in 2006: WSJ

We should be surprised by this I think not, after all capitalism began as a joint effort between merchant bankers, pirates and private mercenaries. Why should it be any different four hundred years later.

Bernard Madoff 's $50 billion Ponzi scheme was so breathtaking that investors have been left speechless. But the alleged crook -- universally described as "charming" -- would not have succeeded were it not for the unbelievable gullibility of supposedly sophisticated investors.Madoff knew that just because people were rich it did not not make them smart -- that was the source of his success. All you have to do is talk about an investment philosophy that is vague but sounds really authoritative. Give people nonsensical statements that they glance at quickly. Make sure that the statements indicate steady returns of 10% to 13% a year. Many CFOs, CIOs and portfolio managers were amazed that Madoff produced such steady returns for so long. They were mathematically impossible. Barron's raised questions in 2001 about whether Madoff was "front-running" trades, an allegation he denied. Still, Madoff's rich buddies stood by his side.Maddoff somehow managed to convince a slew of banks and hedge funds, billionaires such as Mets owner Fred Wilpon, Yeshiva University along with charities associated with Steven Spielberg and Nobel Laureate Elie Wiesel that the laws of investing do not apply to them. The odds of anyone getting double-digit returns year after year are laughably small. They, of course, understood that, but figured why fix something that ain't broke. By turning a blind eye to fiscal reality, these victims showed almost as much greed as Madoff.


Madoffs clients are a who's who of the very financial institutions that lined up at the trough to be bailed out, and who claimed if they failed capitalism would collapse. In fact the whole collapse of America's financial market reveals that it was all a ponzi scheme.


After all, Madoff’s scheme -- at least in spirit, if not in its nefarious intent -- wasn’t much different than the business models at some of the nation’s largest failed financial institutions.
Back in May, four months before it collapsed, American International Group Inc. increased its dividend at the same time it unveiled plans to raise $12.5 billion in capital. Later, when its cash ran out, AIG got a government bailout, the size of which has expanded to about $150 billion.
Whether you call that a Ponzi scheme or something less sinister, AIG was paying old investors with money raised from new investors. The same could be said of many banks that blew through billions of dollars in freshly raised capital the past couple of years, continuing to pay large dividends even as their balance sheets quietly imploded. So why have other Ponzi-esque operators emerged scot-free (so far) with taxpayer bailouts, while Madoff gets pinched?

And one of these financial institutions caught up in the Madoff affair is UBS the Swiss banking company recently indited for using its banks in Canada to hide U.S. billionares fortunes offshore in its banks acounts top avoid taxes, which is itself illegal, but just another case of business as usual until we are caught.

Howewver while Mr. Madoff's actions have been declared illegal, another capitalist billionaire Sam Zell is able to do the same thing legally!!! And there really is no difference between them.

Sam Zell, Tribune's billionaire CEO, but rather the thousands of Tribune employees whose stock ownership plan was jerry-rigged to fund the company's buyout last year. Mr. Zell was the architect of the deal, but put up only around $300-million of his own money as a kind of option to later buy financial control of the company for as little as $500-million more. Under the mind-boggling structure Mr. Zell and his advisers came up with, the Tribune ESOP owns 100 per cent of the shares. What happens to them? The Chicago Tribune said it most starkly, quoting an employee conference call with Mr. Zell: “The ESOP, which Mr. Zell said a year ago offered employee “owners” the chance to share richly in Tribune Co.'s eventual success, could be wiped out, leaving thousands of Tribune Co. employees with no company retirement plan besides what they elect to save in a 401(k).”

Tribune’s Chapter 11 filing likely means a court delay for six current and ex-L.A. Times employees who are trying to oust billionaire owner Sam Zell from the board of directors. But in the meantime, they can point to Zell’s bankruptcy-protection filing as Exhibit A in the court of public opinion. “The sort of critique we made in the lawsuit has been borne out,” says plaintiff Henry Weinstein, the Times’ former legal affairs writer and now a professor at UCI’s new law school. In addition to the Times, Tribune’s assets include KTLA-TV, the Chicago Tribune and the Chicago Cubs. In late 2007 Zell took the company private by putting up $315 million and borrowing $8 billion. The class-action suit, filed in September, accused Zell of orchestrating a scam and burying the company in debt. Zell called the suit “a distraction that’s unnecessary.” Says Weinstein: “We are certainly going to try to be heard in the bankruptcy court. There are all sorts of employee interests” ...

The following is an official statement from Teamsters General President James P. Hoffa.
"When billionaire Sam Zell took Tribune private in an overleveraged, doomed deal that swiftly brought down the 161-year-old media giant, the risks involved were placed squarely on the shoulders of Tribune workers. Now, as Tribune's creditors head to bankruptcy court for payback, these workers should go directly to the front of the line.
By transferring 100 percent ownership of the company and some $13 billion of debt to an S-Corp Employee Stock Ownership Plan (ESOP) in the buyout, Zell insulated himself from tax responsibilities and mortgaged the future retirement savings of Tribune employees. Despite owning 100 percent of the company, employees were given no voice in the governance of the company or in the plan itself. They've had no say in the terms of their own debt obligations or decisions related to how best to service that debt.
Tribune contributions to employee retirement savings for employee-owners changed from a defined benefit plan to a defined contribution plan structured as the ESOP. Employees participating in the ESOP can't diversify their holdings until they reach age 55.
The first of the company's contributions to the ESOP was expected to happen in the first quarter, but now -- with the Tribune mired in Chapter 11 bankruptcy -- it's unclear whether that will happen or whether those shares will have any value.
Not everyone lost on the deal. Tribune executives made millions, including CEO Dennis FitzSimons, who engineered the deal with Zell and raked in $17.7 million in severance and other payments and cashed in his stock for $23.8 million. Shareholders traded in stock rated deep into junk territory for cash representing a 21 percent premium over the stock price just before the transaction. The banks that lent Tribune the money shared some $47 million in fees.
Citigroup and Merrill Lynch who advised Tribune on the deal received $35.8 million and $37 million respectively. And billionaire Zell, who put up only $315 million in the deal, is expected to stand ahead of employees in the creditors' line at bankruptcy court.

Unfortunately Mr. Zell will not be sharing a cell with Mr.Madoff nor with another Chicago paper baron; Lord Black. Though he should.

SEE:
Super Bubble Burst
Hedge Funds, Junk Bonds, Ponzi Schemes




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Subsidizing Criminal Capitalism

Why are we bailing these guys out with taxpayers money while they are guilty of being criminal capitalists. Of course hidden in their bad loan charges will be the costs of criminal charges as well. And in order to offset your criminal charges you can use loosy goosy accounting standards to cook the books. Wait a minute isn't that how we got into this mess in the first place? And there is still no real transparency in the operations of Canada's banks. A profit is still a profit and CEO stock options have not been cut back.

Canada Bails out its banks to the tune of over $1650 for every man women and child. Oh, and ATM fees are going up.

Ottawa to buy $50B in mortgages, hopes to spur loans

Royal Bank of Canada agrees to $10.7M settlement
The Justice Department said Tuesday that RBC Mortgage Co., a subsidiary of the Royal Bank of Canada, has agreed to pay the U.S. more than $10.7 million to settle allegations that the company falsified loan documentation.The Justice Department said the allegations concerned 219 federally insured loans for mortgages submitted to the Federal Housing Administration of the Department of Housing and Urban Development between 2001 and 2005.
CHICAGO - A Canadian bank holding company that purchased a former mortgage company in Rockford will pay the U.S. nearly $11 million to settle claims over bad loans. RBC Mortgage, formerly known as Prism Mortgage, had a lending office in Rockford. Three RBC Mortgage loan officers and 22 other people were convicted of knowlingly setting up 219 loans that failed in the Rockford and Freeport areas between February 2001 and April 2004. Each loan resulted in foreclosure causing financial loss to the government.
Bank of America, Royal Bank of Canada to bail out holders of auction-rate securities
Bank of America Corp. and Royal Bank of Canada will bail out customers stuck with $10.3 billion in auction-rate securities and pay fines to settle state and federal claims that they misled investors in selling the products. Bank of America will buy back $4.5 billion of the securities and pay a $50-million fine in agreements with the Securities and Exchange Commission and New York Atty. Gen. Andrew Cuomo that "closely mirror" a deal last month with Massachusetts. The bank will help clients dispose of an additional $5 billion, the SEC said. Royal Bank of Canada said it agreed to buy $850 million of the debt and pay a $9.8-million fine.Companies including Citigroup Inc., UBS and Merrill Lynch & Co. have agreed to repurchase more than $50 billion in debt to settle claims they touted the instruments as safe, cash-like investments.
RBC takes $1.6B hit on bad loans
RBC said it was avoiding even bigger charges by taking advantage of new looser accounting standards to reclassify impaired assets so the losses would not have to be acknowledged.
Charges cut profit, but RBC expects to make $1.1B in Q4
Gordon Nixon • Born, Jan. 25, 1957, Montreal • Chief executive officer, Royal Bank of Canada (TSX: RY)Years at company: 21 • Age: 51
2007 Earns $8,767,229 in compensation and bonus. Realizes gain of $29,033,072 on exercised stock options. “I think the industry, all of us, anticipated the ability of the markets to recover from those events and to move out of it much more quickly than it has actually happened,” Nixon says. “I think we’ve misjudged the severity of the liquidity crisis.”

Toronto Domion Bank Ex-Commerce Bank CEO to pay $4 mln to settle probe
WASHINGTON, Nov 17 (Reuters) - Vernon Hill, former chief executive of Commerce Bancorp Inc, agreed to pay $4 million to settle allegations of unsafe banking practices, regulators said on Monday.
Commerce forced Hill out in June 2007 after regulators complained about dealings between the bank and partnerships controlled by Hill as well as an architectural design firm run by Hill's wife, Shirley.
Under the settlement with the U.S. Office of the Comptroller of the Currency (OCC), Hill must also pay $4 million to TD Bank, which acquired Commerce in March. But the iconoclastic banker incurred no fines or prohibitions in the settlement, paving the way for the launch of Metro Bank, a new venture based on the Commerce model of service and convenience. Meanwhile, a U.S. District Court judge in Camden issued an injunction Tuesday forbidding Hill to use materials reflecting Commerce signage and colors at a banking conference in Orlando, Fla. The injunction was sought by TD Bank, whose Canadian parent bank acquired Cherry Hill-based Commerce in March for $8.5 billion. The OCC said Hill failed to comply with sound corporate governance principles related to real estate purchases, leases and joint real estate development transactions involving Commerce that financially benefited him.The bank announced in August 2007 that Hill would receive an $11 million severance payment, subject to regulatory approval. After resigning, Hill started a private investment group that will invest in financial industry stocks. This past summer, he doled out $6 million to become and investor and consultant in Philadelphia’s Republic First Bancorp, which announced last week that it would be acquired by former Commerce affiliate Pennsylvania Commerce Bancorp of Harrisburg, Pa., for $109 million.
TD's capital ratio fell significantly on Nov. 1 under global banking rules, Basel II, that require it to change the way it counts its stake in TD Ameritrade. The decision to issue equity is a dramatic about-face for Mr. Clark, who told analysts on a conference call just Thursday that “raising common equity would be extremely difficult” at the moment. He signalled that the bank would rather increase its capital levels using other methods, such as issuing preferred shares. As a result, the bank had to count 50 per cent of its $4.6-billion stake in TD Ameritrade in its ratio. “That meant we immediately lost $2.3-billion of Tier 1 capital, and that's what brought our Tier 1 capital ratio down,” Mr. Clark said. TD had already raised $1.25-billion of Tier 1 capital during the quarter, Mr. Mihelic noted.TD still has room to issue “more than a couple billion dollars of preferred shares under the rules,” Mr. Clark said.The decision to issue common shares was made yesterday afternoon, because markets improved since Thursday and investors were signalling they wanted a higher capital ratio, he said. TD last week disclosed a surprising $350-million after-tax writedown from credit losses and further investment declines that will not show up in results because of new accounting rules.

Bank of Montreal Rogue gas trader admits to fraud A disgraced natural gas trader at the centre of Bank of Montreal's $853 million commodity trading scandal has pleaded guilty to intentionally mismarking his trading book in a "criminal scheme" to pad his bonus, Manhattan's district attorney announced yesterday ... The charges stem from a joint investigation by the U.S. Attorney's Office for the Southern District of New York and the New York Office of the FBI into Bank of Montreal's natural gas trading losses, which topped $850 million
BMO net rises 24%; dividend is frozen
BMO's high yield should set off warning bells Globe and Mail
First, those results weren't as good as they looked. The headlines say earnings were up 22 per cent to $1.06 a share. Nice, but considering, for example, that the tax rate was not low, not zero but negative, you have to take that with a grain of salt. Reclassifying assets as available for sale added $123-million to the bottom line. Only a very recent rule change allowed that - thank you regulators. Trading revenues were abnormally high too. And here's another reason: no one understands how a modern bank works. During yesterday's conference call, analysts were scratching their heads trying to understand the repercussions of the Apex commercial paper trust, which the bank sponsors; BMO has about $1.6-billion on the line there. If the investments and its attendant risks are hard for professional and experienced analysts to follow, they're practically incomprehensible for the average retail investor - and even some professional investors - to understand as they salivate over a juicy yield.
Bank of Montreal profit climbs The Gazette (Montreal)
Quarterly profit rose 24 per cent at the Bank of Montreal, helped by tax recoveries, higher profit at its Canadian retail banking unit and new accounting rules,
Bank of Montreal Profit Rises on Consumer Banking
Bank of Montreal, Canada’s fourth- biggest bank, said higher revenue from consumer banking helped boost fourth-quarter profit by 24 percent from a year ago, when it had debt writedowns and trading losses. Canadian consumer-banking profit rose 20 percent to C$344 million from a year earlier as personal loans rose 21 percent and it added more mortgages. Commercial loans and credit-card revenue also rose from a year earlier. Investment-banking profit soared to C$285 million from C$46 million a year earlier, when the firm had C$275 million in losses from trading, bad bets on natural-gas options contracts and writedowns on debt investments.
BMO head urges Ottawa to act decisively
Bank chiefs on Bay Street are urging Ottawa to commit to making a major injection of cash into the economy to help stem a rising tide of bad loans, after internal bank figures showed Canadians were increasingly struggling to make payments on money they've borrowed. Bill Downe, chief executive of BMO Financial, said strong and timely fiscal stimulus was needed from government, arguing it would be "positive for employment" and facilitate "constructive investment," while reviving growth for banks.

Let's not bank on the banks
Given this risk and the serious economic consequences of the banking crisis, it may be appropriate that premiere events at the Air Canada Centre are becoming notable for the scarcity of bank executives, who earn up to 500 times more than arena staff. Mark Carney, governor of the Bank of Canada, said yesterday he had been somewhat troubled by the nature of his conversations with chief executives during the last five years. He suggested in a BBC interview that bank chiefs should perhaps have spent more time reviewing their loan portfolios and less time thinking about the "opera or the ski slopes."
Carney signals more rate cuts
In a sign that the global credit crisis is seeping across Canada's borders, Bank of Canada Governor Mark Carney warned yesterday that the country "has been importantly affected by global events" and hinted that another interest rate cut may be in the offing. Pointing to "a tightening in credit conditions," Carney said in a speech to the Canada-United Kingdom Chamber of Commerce in London that "the risks to growth and inflation in Canada identified (in October) appear to have shifted to the downside." He said the crisis has essentially ended for Canada's banks, and short of a complete global market failure, he expects financial and credit markets to improve in Canada
Canada Purchases C$1.05 Billion of Non-Mortgage Debt (Update1)
By Alexandre Deslongchamps and Greg Quinn
Nov. 24 (Bloomberg) -- The Bank of Canada bought C$1.05 billion ($839 million) of securities from investors, less than the C$2 billion it offered to purchase, in an effort to restore normal trading in credit markets.
The central bank will hold the non-mortgage loan portfolio assets as collateral for 28-day loans. The bank has offered to buy C$8 billion or more of such securities by Dec. 9.
Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty said last week in separate speeches that they will take whatever steps are needed to shore up the economy and help mitigate the global credit crisis. The central bank has another program under which it will inject up to C$35 billion into the financial system this year through loans to major bond dealers.
Tomorrow, the Bank of Canada will offer loans of C$6 billion to major bond dealers, instead of the minimum of C$4 billion it announced on Nov. 3. On Nov. 27, the central bank will sell C$1.45 billion of treasury bills, to offset the increased value of assets on its books from its special loans

Sympathy slight for banking blues
The Royal Bank of Canada (RBC), for instance, announced yesterday that its estimated profits for the last three months plunged a frightful $200 million from a year ago. That left the nation's largest bank with a paltry profit of only $1.1 billion -- for its worst quarter of the year.
Putting it another way for those of us who can't quite fathom a billion of anything, the so-called credit crisis engulfing the globe has reduced the Royal to making a little over $12 million a day, including weekends when its branches aren't even open for business. One can only imagine the terminal indigestion all this must be causing in the bank's executive dining room these days.
Only a year ago, the Royal was boasting "a record-busting profit of almost $5.5 billion (for 2007), achieving the highest annual income ever for a Canadian bank despite global capital-market turmoil that has engulfed the entire industry." The Royal, for instance, reports a tidy $330-million increase in revenues over the past three months from an improved credit spread.
Turns out that while most public and media attention has been focused on the near-collapse of the financial system in the U.S. and overseas, the highly regulated Canadian big banks have escaped relatively unscathed. No matter. Nothing like a good global banking scare to sneak through a bit of consumer gouging here at home.
It started in the middle of the recent federal election when the Bank of Canada unexpectedly cut its key lending rate by a full half-percentage point after the first wave of the market meltdown.
The move was intended precisely to get the Canadian banks to cut their lending rates to consumers and businesses in an effort to keep the economy rolling.
But a funny thing happened on the way to the banks -- they decided to cut their rates by only a quarter-point, and keep the rest.
This was not an isolated bit of banking robbery.
According to Bank of Canada figures, its key lending rate has declined 45 per cent from a year ago, from 4.5 per cent to 2.5 per cent. But the prime business rate that banks lend money to their best commercial customers has only dropped 33 per cent -- from six per cent to four per cent.
But no one is getting burned more than consumers and, in particular, homeowners.
In the year that the central bank rate has dropped 45 per cent, the banks have passed along to consumers a tiny fraction of the savings.
For example, according to the Bank of Canada, the average five-year conventional mortgage that was 7.39 per cent a year ago, was being offered to homeowners in October at 7.20 per cent.
Even the average one-year mortgage dropped barely 12 per cent in the year, from an average 7.2 per cent to only 6.35 per cent in October.
All of which clearly helps to explain why Stephen Harper's government has generously provided the big banks with $75 billion of public money with which to further gouge, um, the same public. Finance Minister Jim Flaherty said the move would help average Canadians by "making consumer and mortgage loans more affordable."

SEE:
UBScandal
Casino Capitalism
Money Laundering Canadian Style
Bank Theft
Credit Card Fraud
The Cone of Silence Bank Presidents and the RCMP
RBC Centre
Greedy Banks
BMO More ATM's Less People
A Day in the Life of Corporate Criminals

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UBScandal

As capitalism melts down the rich always find a way to hide their taxable income. In the best of times and the worst of times. If they don't get the tax cuts they demand c'est lavie. They can always hide their money in Swiss bank accounts courtesy of the Gnomes of Zurich.In this case courtesy UBS. As we found with Enron, capitalism breaks down because those who play in the market know that rules are made to be broken and so they break them.


UBS executive indicted in US

UBS executive charged with aiding tax evasion

The Swiss Banker and 'Toxic Waste'

Gee could that have anything to do with this;

Top Executives at UBS Will Not Get Bonuses

Or maybe its actually because of this;

UBS warns earnings will be squeezed for rest of year

After being Europe's first major credit crunch victim, writing down $37.0 billion in the first two quarters of the year, there has been a shift in focus in the concerns that investors have about UBS. Its balance sheet is looking decidedly less frightening, now that it has shifted $60.0 billion of illiquid mortgage-backed securities into a vehicle created by the Swiss national bank, while it managed a profit in the third quarter.

And before we get all warm and fuzzy about those poor bankers UBS will still pay em heaping amounts of gold, just not all at once....

UBS said its new compensation model would be "focused on the long-term" and "closely aligned with the value creation of the firm." Executive board members whose bonuses had depended on annual performance alone will now be paid according to the new system that tracks their performance and the bank's share price over a three-year period. The two variable parts of their compensation--in cash and equity--will both be performance linked and the chairman of the bank will no longer get so-called "variable compensation."

And like that other Republican Investment Banker; Dan Quayle, who works for Cerebeus, lookee here UBS has one in their pocket too.

Phil Gramm: A Deregulator Unswayed
RGE Monitor, NY - , he left Capitol Hill in 2002 to work as an investment banker and lobbyist for UBS, a Swiss bank that has been hard hit by the market downturn,

You remember Phil he advised the McCain campaign until last summer when he called Americans concerned about the meltdown appearing on the horizon a bunch of 'Whiners'.

In an interview with the Washington Times,

Phil Gramm, a former Texas senator who is now vice chairman of UBS, the giant Swiss bank, said he expects Mr. McCain to inherit a sluggish economy if he wins the presidency, weighed down above all by the conviction of many Americans that economic conditions are the worst in two or three decades and that America is in decline.
"You've heard of mental depression; this is a mental recession," he said, noting that growth has held up at about 1 percent despite all the publicity over losing jobs to India, China, illegal immigration, housing and credit problems and record oil prices. "We may have a recession; we haven't had one yet."

"We have sort of become a nation of whiners," he said. "You just hear this constant whining, complaining about a loss of competitiveness, America in decline" despite a major export boom that is the primary reason that growth continues in the economy, he said. "

Now he says the push to deregulate the market had nothing to do with the current meltdown.

<'>The retired Texas senator claims that deregulation “played virtually no role” in the current economic turmoil engulfing the globe, nor the housing collapse or the credit crisis. The exempting of any regulation of derivatives, including state insurance supervision, reserve requirements or clearing information was not significant to the crisis. The nonfeasance of the Fed in supervising all of the non-bank lenders that lay at the heart of the housing boom and bust was not the cause either (it was “Predatory Borrowing”). And the payola scandals at the ratings agencies — Moodies, S&P, and Fitch — that slapped triple AAA ratings on paper that turned out to be junk would not have been prevented via better oversight.
Gramm said placing any blame on deregulation was simply “an emerging myth.”

The whole UBS scandal comes home to Canada where we specialize in White Collar Crime....Corporate Captialist criminals get away with murder in Canada. We have no single national regulator liie the SEC, and clearly our bank laws are not enforced effectively, if UBS can set up a secret offshore account for wealthy Americans called the 'Canada Desk' because the deals were done on Canadian soil.

Top Firm Accused Of Having Illegal 'Secret' Desk


This scandale has caused the Montreal Gazzette to pick up on the popular slogan of the Communist Party of Canada Marxist Lenninist in its latest editorial; Make The Rich Pay.

Government has obligation to make the rich pay, too
Raoul Weil, a senior executive of the Swiss bank UBS, has been indicted by the U.S. Department of Justice on charges of helping his U.S. clients hide some $20 billion in assets from the taxman. Americans will be glad to see their government pursue this sort of case aggressively.
In Canada, however ....
The Globe and Mail reported last week that Weil was also in charge of a secretive team of senior bankers whose job was to help Canadians hide as much as $5.6 billion from the Canada Revenue Agency, this country's tax collector.
So what has that agency, and the rest of the Canadian government, been doing about these allegations, the outlines of which have long been known? Nobody knows. Maybe nothing. And that's not nearly good enough.
Nothing is more corrosive to the sense of fairness and transparency that society needs to function well than the idea that there are two standards - one for the wealthy and one for everyone else


And in light of this scandal this failure to collect what is due the people of Canada or to prosecute UBS for breaking our banking laws, what does the Government and Revenue Canada do? Wait for it....

Ottawa targets online merchants who pay no taxes

Canada Revenue Agency to focus on so-called 'power sellers' on eBay

Pound foolish, pennyt wise.



SEE:

Crime Pays If You Are Rich

Whining and Dining with the Irvings

Hedge Funds, Junk Bonds, Ponzi Schemes

Criminal Capitalism Business As Usual

Tax Cuts For All

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Robbing the Bank From the Inside

Bad news just gets worse...not only do we have the collapse of the paper credit market.... can you say junk bond scandal of the eighties.. now we have a flashback to bank scandals of the nineties...wait a minute shouldn't the market have regulated itself so this didn't happen, again...once again the myth of self regulation is exposed for the sham it is...global markets are not self regulating never have been that is why Capitalism created the State in its own image.



French bank hit by worst scandal ever

SocGen trader's $7.1B loss dwarfs Barings debacle

PARIS - A junior computer whiz at the French bank Societe Generale has been accused of racking up a $7-billion loss in bad bets on stocks in the biggest trading scandal in banking history.

France's central bank and government scrambled to shore up confidence in the banking system after the 144-year-old SocGen told investors already battered by the credit crisis that it had discovered the "exceptional" fraud late last week.

The trader had circumvented the bank's risk controls through in-depth knowledge of its computer systems, but was caught when he tried to cover up his losses.

The country's central bank chief dubbed the trader "a genius of fraud" while French police announced a criminal probe.

Richard Fuld, the chief of Wall Street firm Lehman Brothers, called the debacle "everyone's worst nightmare" at the meeting of policy and business leaders in Davos.

The losses spiralled to ¤4.9-billion ($7.1-billion) -- nearly its net profit in 2006 -- as the bank tried to close out the rogue trader's stock index futures positions in Monday's sliding market.

2002: Former currency trader John Rusnak accused of hiding US$691 million in losses at Allfirst bank of Baltimore, at the time under parent Allied Irish Bank, pleads guilty to one of the largest bank fraud cases in U.S. history. Rusnak was sentenced in 2003 to 7 1/2 years in prison.

_ 1996: Sumitomo Corp., a 300-year old Japanese metals trader, discovers that its star copper trader, Yasuo Hamanaka, amassed $2.6 billion in losses in unauthorized trades over a decade. The revelation caused copper prices to plummet worldwide. Sumitomo has paid millions of dollars in class action lawsuits and Hamanaka served more than seven years in prison.

_ 1995: Collapse of Britain's Barings Bank after a trader in Singapore, Nick Leeson, lost 860 million pounds (then worth US$1.38 billion) on futures trades. The fraud prompted banks worldwide to tighten internal checks. Leeson spent four years in prison.

_ 1995: Toshihide Iguchi, a New York bond trader for Japan's Daiwa Bank, charged with hiding $1.1 billion in trading losses he accumulated over 12 years. The bank later pleaded guilty to failing to notify U.S. authorities sooner. It was hit with $340 million in fines and ordered to shut its U.S. operations. Iguchi was sentenced to four years in prison and fined.

1994: Joseph Jett, a government bond trader at Wall Street brokerage Kidder Peabody & Co., was fired after the firm accused him of faking $348 million in profits to fatten his bonus. Jett denied wrongdoing and wasn't charged criminally. Last year a federal judge upheld a March 2004 order by the Securities and Exchange Commission saying Jett had booked fake profits of approximately $264 million and had to return $8.2 million of bonuses and pay a $200,000 civil penalty. The scandal contributed to the demise of the venerable Kidder.

_ 1991: Bank of Credit and Commerce International (BCCI), operating in nearly 70 countries, is seized by bank regulators, acting on auditors' reports of huge losses from illegal loans to corporate insiders and from trading transactions. Some 250,000 depositors left without funds. Claims exceeded US$10 billion.

© 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Bank of America Settles Suit Over the Collapse of Enron - WSJ.com

By Rick Brooks and Carrick Mollenkamp Staff Reporters of THE WALL STREET JOURNAL

Companies Featured in This Article: Bank of America, Citigroup, J.P. Morgan Chase, Merrill Lynch, Deutsche Bank, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank

Bank of America Corp. became the first bank to settle a class-action lawsuit alleging that some of the top U.S. financial institutions participated in a scheme with Enron Corp. executives to deceive shareholders.

The Charlotte, N.C., bank, the third-largest in the U.S. in assets, agreed to pay $69 million to investors who had billions of dollars in losses as a result of Enron's collapse amid scandal in 2001. In making the settlement, Bank of America denied that it "violated any law," adding that it decided to make the payment "solely to eliminate the uncertainties, expense and

Why the Blowup May Get Worse

Not since 1966 -- when the term "credit crunch" was coined after the Fed pushed market interest rates above the legal limits banks and thrifts then could pay on deposits and thus stopped lending in its tracks -- has the nation's mortgage apparatus been so close to breaking down.

The current crisis arguably has the potential for more economic disruption than the celebrated 1998 Long Term Capital Management meltdown. Then, as Northern Trust economist Asha Bangalore points out, the economy cruising along -- in contrast to the past four quarters, which have seen below-potential growth on average.

Moreover, mortgage borrowers perversely benefited from the LTCM fiasco. Not only did the Greenspan Fed lower rates, sparking a huge bond rally, but, also, the government-sponsored enterprises Fannie Mae (FNM) and Freddie Mac (FRE) went on virtual buying sprees. As a result, the biggest part of the credit market -- mortgages -- remained flush. Now, Fannie is looking to expand its portfolio beyond the $727 billion limit imposed on it after its accounting and governance scandals -- a move viewed skeptically by the White House but supported by some congressional Democrats.

Indeed, the full impact of the mortgage crisis still lies ahead. From the beginning of 2007 through mid 2008, interest rates on over $1 trillion of adjustable-rate mortgages are slated to be reset, many from low "teaser" rates.

THE SUBPRIME MESS ALSO RECALLS another crisis -- the virtual collapse of the commercial-paper market in the wake of the Penn Central bankruptcy of 1970. Back then, the paper market consisted of relatively simple short-term corporate IOUs. Now, so-called asset-backed commercial paper is backed by all manner of things, from credit cards and auto loans to collateralized debt obligations, and comprises over half the CP outstanding. Moreover, notes MacroMavens' Stephanie Pomboy, money-market funds own 27% of CP outstanding.

While the Fed managed to soothe the financial markets' nerves by week's end, the potential for future upheavals remains. As a result, the futures market is looking for the central bank to ride to the rescue with rate cuts. Fed-funds contracts are fully discounting a quarter-point cut, to 5%, at the Sept. 18 Federal Open Market Committee meeting, and a further reduction to 4¾% in December.

As the chart here shows, financial crises have tended to coincide with peaks in the fed-funds rate and subsequent Fed easing. The subsequent rate relief would be hailed by the markets as the start of a new bull run.

There is a new wrinkle -- the precarious state of the dollar. No longer is the greenback viewed as a safe haven in the world, contends Barclay Capital's currency team.

Indeed, as MacroMavens' Pomboy has posited, a Fed rate cut that sends the dollar tumbling could have a perverse effect. The influx of foreign capital has kept U.S. interest rates low and provided a flood of credit for everything from leveraged buyouts to, of course, subprime mortgages. If there's an exodus of foreign capital fleeing a declining dollar, credit could tighten even as the Fed eases. Be careful of what you wish for.

High-yield debt - Wikipedia, the free encyclopedia

The original speculative grade bonds were bonds that once had been investment grade at time of issue, but where the credit rating of the issuer had slipped and the possibility of default increased significantly. These bonds are called "Fallen Angels".

The investment banker, Michael Milken, realised that fallen angels had regularly been valued less than what they were worth. His time with speculative grade bonds started with his investment in these. Only later did he and other investment bankers at Drexel Burnham Lambert, followed by those of competing firms, begin organising the issue of bonds that were speculative grade from the start. Speculative grade bonds thus became ubiquitous in the 1980s as a financing mechanism in mergers and acquisitions. In a leveraged buyout (LBO) an acquirer would issue speculative grade bonds to help pay for an acquisition and then use the target's cash flow to help pay the debt over time.

In 2005, over 80% of the principal amount of high yield debt issued by U.S. companies went toward corporate purposes rather than acquisitions or buyouts.

High-yield bonds can also be repackaged into collateralized debt obligations (CDO), thereby raising the credit rating of the senior tranches above the rating of the original debt. The senior tranches of high-yield CDOs can thus meet the minimum credit rating requirements of pension funds and other institutional investors despite the significant risk in the original high-yield debt.

Hedge funds have gotten rich from credit derivatives. Will they blow up?

From:	"Kevin McKern"
Received:	10/19/2006 11:45 AM
Subject:	Will they blow up?

The downfall of Amaranth Advisors, the hedge fund that lost $6 billion in a single week by betting on natural gas, was a special case. There was no domino effect taking down energy traders generally, no meltdown of an industry. But if you want to fret over the next financial catastrophes, turn your gaze away from energy futures and focus on something far more obscure: credit default swaps. Hedge funds are neck-deep in these derivatives, and if something goes wrong, the pain will be widespread. A credit swap is an insurance policy on a bond, often a junk bond. The fellow selling the swap--writing the policy, that is--collects a premium. If nothing goes wrong, he pockets the premium and looks like a financial genius. But if the bond defaults, the swap seller has to make good. The notional amount--the aggregate of bonds, loans and other debt covered by credit default swaps--is now $26 trillion. This is a staggering sum, twice the annual economic output of the U.S. Hedge funds account for 58% of the trading in these derivatives, says Greenwich Associates, a financial research firm. Selling protection has been a big moneymaker for funds like $23 billion (assets) D.E. Shaw and $12 billion Citadel, say market participants, and for specialized outfits like Primus Guaranty (nyse: PRS - news - people ) in Bermuda, which took in $57 million in the first half of 2006 selling protection on $1.6 billion in debt. With corporate debt defaults low these days, the temptation is high to write insurance policies on bonds. A hedge fund can make $60,000 to $1 million a year selling protection on $10 million in bonds. It's like finding money in the street. Unless, of course, the economy suddenly enters a recession. If that happens, hedge funds addicted to the credit market will be in deep trouble. "A lot of [hedge funds] have sold insurance, are sitting on the premiums--and are bare-ass," says Charles Gradante, cofounder of Hennessee Group, which tracks hedge fund performance. "If there is a Long Term Capital-type systemic risk potential out there, it's in the [credit swap] market." There must be a lot of investors--or credit speculators--who are cavalier about corporate defaults because junk bonds are trading at yields only modestly higher than the yields on safe U.S. Treasury bonds. The chart displays the yield spread, as calculated by Moody's Investors Service, between junk bonds rated speculative and seven-year Treasurys. Saks bonds with a 97TK8 coupon due October 2011, for example, are now yielding 7.6%, or 287 basis points (2.9 percentage points) over seven-year Treasurys, compared with a 700-basis-point spread to Treasurys four years ago. Today's tight spreads don't leave much of a cushion to cover defaults. There is a close correlation between yield spreads and credit default swap prices. That's because selling a credit swap is equivalent to buying the corporate bond on margin. If you buy a junk bond with borrowed funds, you collect the high coupon on the bond while paying out a lower amount, presumably not too much more than what the U.S. government pays to borrow money. Either way--with a swap or a margined bond trade--you pocket the spread, unless and until the corporate bond gets into trouble, at which point you're sitting on a painful capital loss. The credit-derivatives business is dominated by 14 dealers. Among them: jpmorgan Chase, Citigroup (nyse: C - news - people ), Bank of America (nyse: BAC - news - people ), Goldman Sachs (nyse: GS - news - people ) and Morgan Stanley (nyse: MS - news - people ). All have staggering amounts of derivatives on their books: JPMorgan's notional exposure was $3.6 trillion as of June 30, according to the Federal Deposit Insurance Corp., which is almost three times assets and 30 times capital. Credit derivatives at Wachovia Corp. (nyse: WB - news - people ) have jumped sevenfold since 2003 to $170 billion, more than three times capital. Banks love derivatives because they provide multiple ways to make money. Revenue from all types of derivatives will hit $34 billion or so this year at U.S. banks and securities firms, says Tower Group (nasdaq: TWGP - news - people ), a financial-research outfit, with hedge funds generating much of the money. Hedge funds also buy the potentially toxic waste that banks create when they bundle credit derivatives into so-called synthetic deals. By separating a portfolio of derivatives into different tranches, banks can create virtually default-proof securities for conservative investors--if somebody else is willing to buy riskier "equity" tranches whose value vaporizes when as few as one or two of the underlying bonds default. Banks once kept such tranches on their books as a cost of doing business. Now, says Fitch Ratings, hedge funds are buying them to goose returns. Regulators say there's no reason to worry--yet. All big banks require hedge funds to back up their swaps with cash collateral that is adjusted daily, says Kathryn Dick, deputy comptroller for credit and market risk at the Office of the Comptroller of the Currency. But banks can make only rough guesses at the value of swaps and thus how much collateral their counterparties need to ante up. Even the smartest guys can come up shorthanded. Ask Charlie T. Munger, vice chairman of Warren Buffett's Berkshire Hathaway (nyse: BRKA - news - people ), which lost $404 million unwinding credit, interest-rate and foreign-exchange derivatives positions in its General Re unit. "When we ran it off, it didn't run off at anything like book value," Munger says. "I would bet a lot of money there are some terrible valuations on the books of corporate America." JPMorgan, the most forthcoming of the big derivatives dealers, figures it could lose $65 billion over several years if everybody on the other side of a derivatives trade went broke. A scary number when compared with the bank's $110 billion in capital. Implausible, too, because most of its counterparties are big financial institutions. Hedge funds and other smaller players are much more exposed. Like swaps on interest rates and foreign currency, credit swaps outstanding dwarf the underlying bonds in circulation. That can be a problem when a creditor defaults, as with Delphi (nyse: DPH - news - people ) and other auto parts makers earlier this year. With most swaps, the buyer of protection has to hand over defaulted bonds to get its money, tough to do if, as with Delphi, $20 billion in protection has been written on just $2 billion in bonds. Calamity was averted by the International Swaps & Derivatives Association, which held an auction to determine the amount of cash protection buyers would get. The derivatives market weathered its last near-death experience in early 2005, when credit agencies downgraded the debt of General Motors (nyse: GM - news - people ) and Ford (nyse: F - news - people ), devastating the value of the most risky synthetic derivatives. Hedge funds thought they'd been smart by locking in a three-to-four-percentage-point spread by selling protection on those tranches and buying it on less risky ones. Suddenly, though, they had to close out their moneylosing positions. So many funds had made the same bet that it "magnified the deleveraging process," in the dry words of the Bank for International Settlements. Translation: "Banks refused to buy or sell," says Randall Dodd, a former Commodity Futures Trading Commission economist who now runs the Financial Policy Forum, a Washington think tank. "These guys couldn't trade out of their positions." Bottom-fishing investment banks eventually bailed hedge funds out of their problems. But Dodd and other critics wonder if banks have extracted enough collateral from their hedge fund clients to protect themselves in a wider crisis. "No one has good facts on these things," says David Hsieh, professor at Fuqua School of Business at Duke University, "because hedge funds are private investments."

Balancing the Books
A Legacy Worth Disinheriting: The Federal Reserve remains spooked by the specter of the Great Depression
Edited by Jay Palmer
03/03/2003
Barron's
32

A History of the Federal Reserve Volume 1: 1913-1951

By Allan H. Meltzer

University of Chicago Press; 800pp; $75

Reviewed by Randall W. Forsyth

Central bankers, like generals, often are accused of fighting the last war. The Federal Reserve remains haunted by its most humiliating defeat -- an utter failure not only to prevent the Great Depression, but its ineptitude in countering the most severe downward spiral in American economic history. That failure arguably has a profound impact on Fed policy to this day.

Serious students of monetary policy will be familiar with the broad outline of what's told in Allan H. Meltzer's monumental "A History of the Federal Reserve: Volume 1: 1913-1951." The Great Depression is the most crucial period covered in the book, which encompasses the span from the Fed's founding to the Treasury Accord of 1951, when it gained its independence as a modern central bank.

Unlike others who lay the blame for the Depression on a single cause -- the stock-market Crash of '29, the Smoot-Hawley tariff, the collapse of the international gold standard or the Fed's permitting a one-third contraction in the money supply -- Meltzer reasonably attributes the catastrophe to the confluence of these shocks. But the Fed, which was established after a succession of financial panics in the 19th and early 20th centuries -- precisely to prevent their recurrence -- failed in that narrower mission.

That failure, as Meltzer keenly describes, was a result of misguided policies and political infighting. Policy was ruled by the (wrongheaded) conventional wisdom of the day, that said that the collapse of the 'Thirties was necessary to purge the excesses of the 'Twenties. The Fed was to restrict itself to providing credit solely to meet the private sector's needs -- by buying only "real bills" and not purchasing government securities, which supposedly only pumped up speculative credit, according to the prevailing notion of the time. The reestablishment of the gold standard in the 1920s was considered a success then, but Meltzer describes how it sowed the downturn's seeds. Britain needed to deflate while France and the U.S. had to inflate, so all resisted. New York Fed President Benjamin Strong, who de facto ran policy in the 'Twenties, eased to help the pound. But his jealous counterparts would posthumously blame him for inflating the bubble that burst in 1929.

More important, Meltzer details the dithering that prevented the Fed from taking the most basic monetary action -- large-scale purchases of government securities to add liquidity to the banking system. Fed officials thought policy already was easy because interest rates were near zero and banks didn't borrow from the Fed, ignoring the rise in real interest rates caused by deflation and the contraction in the money stock.

The Bank of Japan repeated those blunders through most of the 'Nineties. The Fed, having learned from history, has not been doomed to repeat it. The U.S. central bank already has slashed its key interest rate target 12 times since January 2001 to a nearly irreducible 1 1/4%. And in a speech last November that still reverberates, Fed Governor Ben Bernanke pointed out that the central bank hasn't run out of monetary bullets even if it runs out of basis points. Even at 0%, the Fed still has a magical device -- the printing press. With a steward of the dollar trumpeting the power to debase it, is it any wonder that gold has rallied and the spread between TIPS (Treasury inflation-protected securities) and fixed-return Treasuries has widened?

Yet the circumstances of the bursting of the bubbles of the 'Twenties and the 'Nineties were markedly different. Ahead of the '29 Crash, the Fed was actively trying to curb speculation. Greenspan & Co. claim no part in the recent bubble, with the Maestro contending that actions to curb the inflation in asset prices posed risks to the economy.

His protest, however, ignores the role played by the Fed in encouraging soaring asset inflation. As previously noted in Barron's, the central bank provided the monetary fuel for the Nasdaq bubble and then throttled it back ("Fed Inflated, Then Burst IPO Bubble," Dec. 11, 2000). Investors and traders also comforted themselves with the notion that the central bank would (and could) rescue the financial markets if they collapsed. That belief, which gained currency especially after the Long Term Capital Management debacle of 1998, came to be known as "The Greenspan Put" -- a get-out-of-jail-free card for speculators.

Now, even though the world enjoys expanding international trade and growth in output and income-exactly the opposite of the 'Thirties -- the Fed still worries about deflation and depression. Moreover, every indicator -- money supply, negative real rates, a steeply sloped yield curve, a weakening dollar and rising commodity prices -- is full-tilt expansionary. Indeed, William Silber of New York University's Stern School recently wrote in the Financial Times that the Fed may not act to curb inflation soon enough -- its blunder of the 1970s. How the Fed failed to foster stable prices after 1951 should be the basis of Meltzer's second volume, which I eagerly await.

---

RANDALL W. FORSYTH is an assistant managing editor at Barron's

SEE

Wall Street Mantra

Black Gold

U.S. Economy Entering Twilight Zone

Hedge Funds, Junk Bonds, Ponzi Schemes

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