Dissing Decoupling

A great little nugget from Ambrose Evans-Pritchard discussing the long lauded idea of decoupling in Europe and abroad. (For those of you who don't know what decoupling is, its the idea that even though the U.S. is heading towards a recession, everywhere outside of the us will continue to grow). A very sobering review of the current situation:

http://blogs.telegraph.co.uk/business/ambrosevanspritchard/april2008/thisbeargrowlson.htm

Level 3 Profits! Hooray For Creative Accounting!

Courtesy of Bloomberg and Johnathan Weil:

April 23 (Bloomberg) -- Here's Rule No. 1 from Wall Street's public-relations
playbook: If the company you run has big losses on hard-to-value assets, scream
your head off about the accounting rules.
And what if the squishy values
result in huge gains instead, as they have in the not-so-distant past? Rule No.
2: Stay mum about it for as long as the rules allow.

There you have it folks. A cliff notes version of how to run a Wall Street firm, when you make bad decsions complain about the accounting rules that force you to admit your mistakes. Then make sure you take all that crap sitting on your balance sheet that has no market and claim that you profited immensely from it:

There has been no commensurate outrage about fuzzy mark-to- market
accounting that lets companies post unrealized gains on illiquid balance-sheet
items. Yet if it weren't for large non- cash profits on hard-to-value holdings, Goldman Sachs Group
Inc. wouldn't have had much profit last quarter. Lehman Brothers Holdings
Inc. would have had significantly less. And Morgan Stanley wouldn't
have had any.
You wouldn't have known those things from the earnings press
releases the three investment banks issued in mid-March. Investors had to wait
until a few weeks later to find out. That's when the banks filed their quarterly
financial statements, including footnotes showing changes in their so-called
Level 3 assets and liabilities.
The rules allow such delays. What's amazing
is that the banks' investors aren't demanding to get this information sooner.

So lets try and get everyone to understand the hierarchy of Level 1, 2, and 3 assets.

1. Level 1: Mark-To-Market Go look up any stock, bond, option, mutual fund on your investment brokerage account. Very easy to value and all gains and losses are reported each quarter on your earnings.
2. Level 2: Mark-To-Model Prices don't exist, so you create a computer program to create a synthenic value for your illiquid product based on price inputs observable in a liquid market.
3. Level 3: Mark-To-Make Believe Essentially a level 2 asset however one of your inputs doesn't have an observable liquid market so you make your own assumptions about its pricing, essentially imagining a market for this input.

Weil Continues:

There isn't anything necessarily wrong with Level 3 measurements. By
definition, though, they are less certain and more prone to bias. There's
nothing new about Level 3 gains and losses either. They just weren't called
Level 3 before FAS 157, which the major investment banks adopted last year, and
didn't have to be disclosed.
Break Down
Here's how the numbers break
down. For the quarter ended Feb. 29, Morgan Stanley reported $4.24 billion of
net unrealized gains on Level 3 assets and liabilities. That was almost twice
the company's $2.21 billion of pretax income.
Those figures included $8.39
billion of net gains on Level 3 derivative contracts, driven in large part by
adjustments on credit-default swaps, which Morgan Stanley used to buy protection
against declines in the creditworthiness of various holdings.
Morgan Stanley
included the $8.39 billion on its income statement as part of trading revenue,
which was $3.39 billion last quarter. So, without those items, Morgan Stanley's
trading revenue would have been negative $5 billion. (Yes, negative.)
At
Goldman, net unrealized Level 3 gains were $2.07 billion for the quarter ended
Feb. 29, equivalent to 96 percent of the company's $2.14 billion of pretax
income.

Please read the rest of his piece here:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a0ZGtAQHLpiA

More Inflation Shenanigans

It just amazes me that Regan and Clinton had the foresight to understand the mess that social security would become and thereby created new methods of calculating inflation so as to tame the exponential growth of social security. I mean why actually try an address a problem when you can mathematically brush it under the rug? Must really be hard for those old folks whose standard of living has dropped precipitously over the last decade or so as their real cost of living has run up while their social security cheques have meagerly risen.

I Guess the Constitution Merely Offers Suggestions

FBI wants widespread monitoring of 'illegal' Internet activity

Posted by Anne Broache | 30 comments

WASHINGTON--The FBI on Wednesday called for new legislation that would allow federal police to monitor the Internet for "illegal activity."

The suggestion from FBI Director Robert Mueller, which came during a House of Representatives Judiciary Committee hearing, appears to go beyond a current plan to monitor traffic on federal-government networks. Mueller seemed to suggest that the bureau should have a broad "omnibus" authority to conduct monitoring and surveillance of private-sector networks as well.

The surveillance should include all Internet traffic, Mueller said, "whether it be .mil, .gov, .com--whichever network you're talking about." (See the transcript of the hearing.)

In response to questions from Rep. Darrell Issa, a California Republican, Mueller said his idea "balances on one hand, the privacy rights of the individual who are receiving the information, but on the other hand, given the technology, the necessity of having some omnibus search capability utilizing filters that would identify the illegal activity as it comes through and give us the ability to preempt that illegal activity where it comes through a choke point."

In response, Issa said: "Can you have someone on your staff designated to work with members of Congress on trying to craft that legislation?"

If any omnibus Internet-monitoring proposal became law, it could implicate the Fourth Amendment's guarantee of freedom from unreasonable searches and seizures. In general, courts have ruled that police need search warrants to obtain the content of communication, and the federal Wiretap Act created "super warrant" wiretap orders that require additional steps and judicial oversight.

In addition, it's unclear whether "illegal activity" would be limited to responding to denial-of-service attacks and botnets, or would also include detecting other illegal activities, such as online gambling, the distribution of "obscene" images of adults engaged in sexual acts, or selling drugs without a license.

Robert Mueller

(Credit: FBI )

To be fair, Wednesday's discussion of the plan was geared toward cybercrime and the Bush administration's classified "cyberinitiative," which includes a shadowy program known as Einstein.

Some politicians have already raised concerns that even Einstein, which is described as dealing only with government networks and not private ones, could infringe upon the privacy rights of American citizens. It's already in place at 15 federal agencies, but Homeland Security has said it's still preparing the necessary privacy impact assessments for a proposed $293 million governmentwide Einstein expansion.

Issa, for his part, referred on Wednesday to malicious attacks being undertaken by foreign and domestic hackers who want to "take control of computers" and harvest the national-security secrets and private information of government agencies, private companies, and individual Americans.

"What authorities do you need to monitor, looking for those illegal activities, and then act on those, both defensively and, either yourselves or certainly other agencies, offensively in order to shut down a crime in process?" Issa asked.

In response, Mueller said he would be happy to have his legislative staff work with members of Issa's committee on creating a bill for a broader-reaching surveillance system.

Issa suggested that perhaps the FBI already has the power to seek voluntary private-sector partners that would like to be "defended" by its agents, provided that they give the FBI their consent. Mueller, however, wasn't so sure, saying, "that's going to require some thought."

[6:00 pm: Updated story with additional quotations from transcript of the hearing.]

CNET News.com's Declan McCullagh contributed to this report.

I Heart Helen Thomas

I would love for someone to try and explain to me how new home sales are at levels last seen in 1991, durable orders were down yet again, there are numerous data points indicating that the consumer is cutting back drastically on spending, CEO opinion believes that we are in a recession, yet the market chooses to ignore everything and continue to flip flop around in a range. over these last couple quarters I have, on numerous occasion, had to refer to my favorite quote by Keynes and today calls for it yet again:

The market can stay irrational longer than you can stay solvent.

sigh.....

My Favorite Data Point of the Week

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