Revenge Best Served Hot? Carbon Trading "Enron-Style Accounting Tricks" & "Derivative" Reshuffling

Do you think it's possible a posse is forming? The news from Raw Story fathoms much worse.

Too bad no one in this country wants to play fair. (Emphasis marks added - Ed.)

Bankers Might Be Feeling Public’s Wrath — Literally

A Los Angeles lawyer who had represented a failed subprime mortgage lender is found dead outside his home, having been shot in the head.

Three men allegedly invade the home of a former subprime lender, and are arrested after reportedly injuring three people inside.

Vandals target the home of the former CEO of the Royal Bank of Scotland, smashing windows in the banker's home and car.

Those are just three notable incidents of violence aimed at people who were in some way linked to the financial crisis that has unfolded over the past year. And while in many of those cases it's unclear whether the incidents were politically motivated, or motivated by financial issues, or just a coincidence, the cases fit into a pattern of escalating crime and violence in the wake of the recession.

Matthew Padilla of the Orange Country Register reports on a series of violent incidents in California in some way linked to the financial collapse.

"While fortunes were won during the credit boom, reports of violence are now surfacing as California continues to struggle with the credit bust and fortunes lost," Padilla writes, noting the case of lawyer Jeffrey Tidus, who was found dead outside his home in Los Angeles on Monday." "The Associated Press reports that Tidus had represented New Century Financial, which was the US's second-largest subprime lender until the company went bust in 2007. Coincidentally or not, the SEC began legal proceedings against three New Century executives the day before Tidus was shot."

The same day that Tidus died, three men allegedly forced their way into the Newport Beach, California, home of Daniel Sadek, who had reportedly made billions in subprime loans before his company, Quick Loan Funding, went bankrupt in 2007. The Orange County Register reports that, two weeks earlier, a Mercedes parked in Sadek's driveway was set on fire.

And these incidents are by no means limited to California. In a highly-publicized incident this spring, the home of a former CEO of Royal Bank of Scotland, one of the UK's biggest banks, was vandalized. A local newspaper "received an email from an anonymous address reporting the house had been vandalised ... in connection with the row over Sir Fred’s £700,000 [$1.2 million] pension payout," the Daily Telegraph reported.

Criminologists have long noted a correlation between violent crimes and recession, but the phenomenon of business leaders being targeted - potentially for their roles in a financial loss of some kind - appears to be unique to this recession. Northeastern University criminologist Jack Levin told the Christian Science Monitor that during the recession of the early 1990s, for example, there was a trend towards employee violence against employers and co-workers. The early 1990s "saw a dramatic increase in workplace violence committed by vengeful ex-workers who decided to come back and get even with their boss and their co-workers through the barrel of an AK-47," Levin said.

The CSM reported: And in the midst of this downturn, one study released Monday in Florida finds a link between domestic violence and economic tragedies like job loss and foreclosures. The Sunshine State saw an almost 40 percent jump in demand for domestic-violence centers, an increase related to the state of the economy, the study says. George Sheldon, secretary of Florida's Department of Children and Families, calls the situation "the worst I've seen in years," according to the Associated Press.

And a report released this year linked an upsurge in violence among teenagers to the recession.

BLACKMAIL ON THE RISE

In the wake of the much-publicized attempt to blackmail late night talk show host David Letterman, security companies are reporting a rise in the number of blackmail incidents, most of them apparently targeted at wealthy individuals, the Wall Street Journal reported Thursday.

Some private security experts say a growing number of clients are calling on them for protection from extortion threats. The severe recession and high unemployment rates, as well as general turmoil following last year's economic meltdown, appear to be swelling the ranks of blackmailers, they say.

"The economy is at low ebb, and people are looking for a mark," said security consultant Michael Guidry, chief executive of the Guidry Group, in Montgomery, Texas.

And speaking of extortion, anyone seen the data about carbon trading lately? I have no idea whether this is really happening or not, but the folks at the normally reliable Washington Blog do:

Copenhagen Framework Demands Huge Amounts of Spending, But Allows Enron-Style Accounting Tricks So That Carbon Isn't Actually Reduced

The UN and other agencies calling for a war on global warming say the price tag will be trillions. But - according to top experts on climate and cap and trade - the regulatory framework being rammed through in America and internationally won't actually reduce carbon to any meaningful degree. See this, this, this and this. Now, the Independent notes that the Copenhagen framework uses Enron-style accounting tricks to give the impression of cutting carbon, without really doing so: The first week of this summit is being dominated by the representatives of the rich countries trying to lace the deal with Enron-style accounting tricks that will give the impression of cuts, without the reality. It's essential to understand these shenanigans this week, so we can understand the reality of the deal that will be announced with great razzmatazz next week . . . .

A study by the University of Stanford found that most of the projects that are being funded as "cuts" either don't exist, don't work, or would have happened anyway. Yet this isn't a small side-dish to the deal: it's the main course . . . .

Trick one: hot air. The nations of the world were allocated permits to release greenhouse gases back in 1990, when the Soviet Union was still a vast industrial power – so it was given a huge allocation. But the following year, it collapsed, and its industrial base went into freefall – along with its carbon emissions. It was never going to release those gases after all. But Russia and the eastern European countries have held on to them in all negotiations as "theirs." Now, they are selling them to rich countries who want to purchase "cuts." Under the current system, the US can buy them from Romania and say they have cut emissions – even though they are nothing but a legal fiction.

We aren't talking about climatic small change. This hot air represents 10 gigatonnes of CO2. By comparison, if the entire developed world cuts its emissions by 40 per cent by 2020, that will only take six gigatonnes out of the atmosphere.

Trick two: double-counting. This is best understood through an example. If Britain pays China to abandon a coal power station and construct a hydro-electric dam instead, Britain pockets the reduction in carbon emissions as part of our overall national cuts. In return, we are allowed to keep a coal power station open at home. But at the same time, China also counts this change as part of its overall cuts. So one tonne of carbon cuts is counted twice. This means the whole system is riddled with exaggeration – and the figure for overall global cuts is a con.

Trick three: the fake forests . . . the Canadian, Swedish and Finnish logging companies have successfully pressured their governments into inserting an absurd clause into the rules. The new rules say you can, in the name of "sustainable forest management," cut down almost all the trees – without losing credits. It's Kafkaesque: a felled forest doesn't increase your official emissions . . . even though it increases your actual emissions.

There are dozens more examples like this, but you and I would lapse into a coma if I listed them. This is deliberate. This system has been made incomprehensible because if we understood, ordinary citizens would be outraged. If these were good faith negotiations, such loopholes would be dismissed in seconds. And the rich countries are flatly refusing to make even these enfeebled, leaky cuts legally binding. You can toss them in the bin the moment you leave the conference centre, and nobody will have any comeback.

And about those mysterious derivatives? (Derivatives, by the way, are financial securities whose value is derived from another "underlying" financial security. Options, futures, swaps, swaptions, structured notes are all examples of derivative securities. Derivatives can be used hedging, protecting against financial risk, or can be used to speculate on the movement of commodity or security prices, interest rates or the levels of financial indices. The valuation of derivatives makes use of the statistical mathematics of uncertainty, which is very complex.)

If you're already tired of reading, this won't help. It will, however, enlighten you immensely about how and who stole your savings.

. . . it is virtually certain that the same will be true of derivatives markets even if HR 4173 passes. In short, the problem is not really opaque and unregulated derivatives trading, but rather the fact that we allow protected and regulated institutions to gamble with house money. They put down a dollar of their own funds and place bets of $30 or more that interest rates or prices will move in a favorable direction. Congress has proposed nothing that will change this — and putting derivatives onto exchanges will make little difference.

L. Randall Wray is a professor of economics and research director of the Center for Full Employment and Price Stability at the University of Missouri–Kansas City who writes for New Deal 2.0 and explains what is happening right now in Congress' financial reform bill machinations in fairly simple language.

“Financial Reform, or, Rearranging Chairs on the Titanic”

Congress is nearing completion of its financial reform bill HR 4173 (Wall Street Reform and Consumer Protection Act of 2009), which appears to amount to shifting chairs on the deck of the sinking Titanic. The monstrous legislation is too big and too complex to analyze in a short blog. Instead I will discuss three areas in which Congress is failing to address the real issues: dangers posed by derivatives, the folly of bailing-out troubled “systemically important” institutions, and reformation of credit ratings agencies.

Title III of the Act would attempt to get derivatives trade onto formal exchanges. However, as Mike Konczal demonstrates, there are enough loopholes in the draft to drive Goldman Sachs right through it. In truth, it won’t make that much difference whether derivatives are exposed to the standardization and daylight that exchanges could bring. Note that a large portion of commodities futures are run through formal exchanges without dampening the speculation that is driving yet another commodities boom that will go bust next year. Yes, there are loopholes that allow commodities traders sitting in front of computers in the US to escape exchange rules by pretending they are offshore, and it is likely that the majority of futures contracts trades go unreported. But it is virtually certain that the same will be true of derivatives markets even if HR 4173 passes. In short, the problem is not really opaque and unregulated derivatives trading, but rather the fact that we allow protected and regulated institutions to gamble with house money. They put down a dollar of their own funds and place bets of $30 or more that interest rates or prices will move in a favorable direction. Congress has proposed nothing that will change this — and putting derivatives onto exchanges will make little difference.

The House is also proposing to grant to the Fed the ability to create and spend money to rescue any financial institution it deems to be “too big to fail,” including investment houses, insurance companies, hedge funds and any other private pools money whose collapse might endanger the financial system. (See William Greider’s recent post). We all remember former Treasury Secretary Paulson’s gambit in which he held a gun to his head and demanded that Congress give him three-quarters of a trillion dollars to spend any which way he chose, with no oversight and no accountability. Congress wisely told him to go shoot himself. Now Congress is proposing to give such powers to Chairman Bernanke.

Why? Has Gentle Ben exhibited any predilection to indicate that his instincts are better than St.Paulson’s? I don’t think so. This is just a proposal to institutionalize the favors that a Predator State (Jamie Galbraith’s felicitous term) can grant to cronies.

Finally, in spite of great hope that the ratings agencies that blessed all the toxic waste with triple A ratings might be subject to some sort of retribution, Congress proposes to let them continue as if nothing happened. To recap, the Big 3 ratings agencies — which have a virtual monopoly of the business — prostituted themselves in a “pay-to-play” scheme in which they would give to garbage securities any rating sellers desired, so long as the assessed fees were sufficiently high. At a very minimum one would have thought that reforms would align incentives, with buyers of rated securities paying for assessment of risk. But, no, Congress worries that such a massive change to the industry might reduce business for the monopolies. Hence, there will be no significant changes required of ratings agencies, who are encouraged to continue pimping their ratings.

Is there an alternative to the ineffective and wimpy Congressional “reforms?” Sure. Forget about reforming derivatives markets, ratings agency behavior, or too big to fail doctrine. Here are three easy steps to real reform.

So here is the main point. We do not need to regulate the “markets.” Personally, I do not care whether hedge funds and other pools of unregulated funds gamble in opaque derivatives rated by incompetent ratings agencies. But I do want them to fail when their bets go bad. Nor do I want them to be rescued in the event of a run to liquidity - if they leveraged and cannot come up with cash, they should fail.

It will be painful for their creditors - so be it, the more pain, the better. That is the downside to private property. Greed is good, but must be balanced by the fear of failure. Without failure there is no fear.

On the other hand, I want to have a protected and closely regulated portion of the financial sector for those who do not want to take excessive risks. And any institution that bets with “house money” - that is, that has access to the Fed in the case of a liquidity problem and to the Treasury in the case of insolvency must be constrained. That is the direction that true reform ought to take.

Clear to everyone yet? And do we agree? I'm thinking we need a whole lot smarter representation in Congress myself.

Stay tuned. Suzan ____________________