Archive | November, 2011

Why Wall Street ‘Gets Away with Murder’

A follow-up to S.E.C. case against Citigroup:

Securities law experts say there are ways that the S.E.C. might be able to strengthen its enforcement efforts and make Wall Street fearful of penalties that sting. Jill Gross, a law professor and director of the Investor Rights Clinic at Pace University, said that as a result of the judge’s decision, companies were now likely to have to admit some kind of fault in their settlements.

“It doesn’t need to be a full admission of all culpability,” Ms. Gross said, “but they are going to need some type of admission that something went awry.”

Goldman Sachs did so last year when it settled S.E.C. charges similar to the case against Citigroup that Judge Rakoff rejected. Both firms were charged with selling a mortgage bond investment without telling investors that the people assembling the portfolio were betting that it would drop in value.

In its S.E.C. settlement, Goldman acknowledged that its marketing materials “contained incomplete information,” and that it committed “a mistake” in leaving the full disclosures out of its marketing documents.

I don’t know what the New York Times meant to say in this piece but it only underscored that, while bankers are complaining about the burden of anti-business regulation, the S.E.C. enforcement regime is actually a farce. Not that the two aren’t related.  If the S.E.C. legal and enforcement regime had teeth, lawmakers would not have to keep making new laws to hide the fact the first ones didn’t work and CEOs could play golf instead of complain

What is the difference between Citigroup giving no examples of what it did that brought about the settlement and Goldman Sachs offering excuses like its materials ‘contained incomplete information’ or we made a ‘mistake’ not giving full disclosure in marketing documents.

Neither company made a ‘mistake.’ They knew what they were doing.  Goldman and otherinvestment houses had clients who wanted to ‘short’ (sell the home mortgage securities market by betting that it would collapse.  So they got busy putting together some of the worst mortgages they found and selling them ‘long’ to other investors betting that the market would go up.  Goldman had clients betting against each other and not knowing it.

In Las Vegas, this would be called a rigged game.  It is illegal.  The action go farther than making mistakes in marketing materials or even in tiny prospectus print.  Transparency and disclosure are touted are guards against fraud and phony schemes like this.  The errors here were only a symptom of a much larger transgression.  Not only should Goldman be punished for disclosure errors, it should be openly found guilty of violating security laws.

People all over the country are asking why Wall Street officials haven’t been charged indicted like bankers were in the late 1980s S&L scandal.  The derivative market has functioned on private contracts between firms and individuals.  Wall Street believes the investors who buy these products are savvy and wealthy enough to handle negative consequences.  However, this time the consequences went far beyond a clubby group of financiers on Wall Street, bringing down the global financial system, robbing retirement funds of years of returns, aggravating unemployment and diverting financing from innovation, entrepreneurs and small business.

Goldman can’t seriously believe Americans will believe that the company’s near collapse resulted from a few ‘marketing errors’?

Then again, the Republican Party has diligently hyped up a strange meme saying liberal politics are worse for Wall Street than bankers lying.



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Israel Shuts Down Dovish Radio

The Israeli Communications Ministry has ordered a peace-oriented radio station broadcasting in Hebrew from the West Bank to shut down.  What’s interesting here is the ham-fisted nature of the shut-down and contradicting reasons being given for it.

According to the Washington Post, the chief of the Ministry said the station was hurting Israeli stations economically!  This is a tactic Israel has used before to stifle the mobile phone industry in the West Bank by forbidding the Palestinian use of a transmission chip used the world over in cell phone technology and blaming it on ‘security’.  Yet, Palestinians can buy phones with similar technologies from Israeli companies.

Regarding the ‘All for Peace’ radio station, right-wing Knesset member, Danny Danon was probably right:

Conservative lawmaker Danny Danon boasted that he had helped close the “All for Peace” radio station. Danon, a member of Netanyahu’s Likud Party, claimed the Communications Ministry shuttered the station at his request, after he claimed it “incited” against Israel.

The station pointed out that it’s been operating since 2004 without any problems with the Ministry and will take the government to court to get the order lifted.







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Judge Overturns S.E.C. Deal

Judge Jed Rakoff is furious. He should be. We all should be. On Monday, the Federal District Court judge rightly rejected a plan by the Securities and Exchange Commission to settle a securities fraud case against Citigroup, saying that the $285 million dealwas “neither fair, nor reasonable, nor adequate, nor in the public interest.”It’s not only that the money was not enough, though it certainly seems puny compared with the damage done. The S.E.C. charged that Citigroup had not adequately disclosed to investors its role and interest in creating and selling — and betting against — a mortgage-backed investment that was intended to fail. When the investment did, indeed, tank, the bank made $160 million, according to the S.E.C., while investors lost $700 million. – New York Times

The Judge found that the deal did not properly disclose what Citigroup did.  The SEC routinely allows banks and other financial institutions to pay a fine while admitting no wrong-doing.  And the puny fine of $250 million is a drop in the bucket for Citigroup, certainly far below the punishment needed to keep them from withholding information from investors again.

Banks mostly fear consumer/investor lawsuits

For too long the SEC has said it does not have the money or staff to go forward with trials involving complicated financial dealings, especially since the financial institutions being sued have big pockets that can hire a phalanx of lawyers.

This is the problem with the government and Congress.  Congress could either allocate more money to these cases or allow Federal prosecutors to ‘hire’ big law firms on a contingency basis.  Or the SEC could detail their investigations to meet Judge Rakoff’s standards (at least).

The SEC isn’t going to take the chance.  A ruling that finds Citigroup engaged in fraud would be a savior for investors who lost money on a deal full of secret agreements and want to sue Citibank themselves.

Obviously, a negative SEC finding could cause a run on Citibank’s money or incur so many liabilities that the company falls into bankruptcy. The financial institutions have effectively neutered regulation that is supposed to prevent malpractice and fraud in the financial sector.

Or maybe it’s another example of Citigroup being ‘to big to fail’.  If so, it is too big to be in business.






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In Depth on Syria

Joshua Landis’ Syria Comment brings breaking news and in-depth analysis to an American audience starved for information.

For example:

The Syrian crisis may or may not have entered its final phase, but it undoubtedly has entered its most dangerous one to date. The current stage is defined by an explosive mix of heightened strategic stakes tying into a regional and wider international competition on the one hand and emotionally charged attitudes, communal polarisation and political wishful thinking on the other. As dynamics in both Syria and the broader international arena turn squarely against the regime, reactions are ranging from hysterical defiance on the part of its supporters, optimism among protesters that a bloody stalemate finally might end and fears of sectarian retribution or even civil war shared by many, through to triumphalism among those who view the crisis as an historic opportunity to decisively tilt the regional balance of power.   – Peter Harling

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Arab League & UN Assail Syria

UN investigators have released a new report accusing senior Syrian government officials and leaders of the country’s military and security forces of ordering mass atrocities in efforts to crush anti-government protests since March.

The Independent Commission of Inquiry on Syria said on Monday that Syrian government forces committed crimes against humanity, including the killing and torturing of children, and held state officials responsible for murder, rape and torture.

“The commission believes that orders to shoot and otherwise mistreat civilians originated from policies and directives issued at the highest levels of the armed forces and the government,” the panel said in its report.

The UN actions and claims that over 200 children have been killed in months of violent clashes came in the wake of the Arab League voting to impose sanctions on the Assad government.  The US and Germany are pushing the Security Council to take ‘decisive’ action against the regime.

“Now with the Arab League having acted and it becoming increasingly clear even for those that would rather deny it, that the Assad regime has participated in outrageous and now documented atrocities. The patience of its neighbors and now the international community has evaporated.”

Turkish Foreign Minister Davutoglu continued his country’s criticism of Assad, adding,

“If the current pressure will open the way for a large-scale refugee movement, if tens, hundreds of thousands of people start advancing towards Iraq, Lebanon, the Turkey borders, not only Turkey, then the international community may be required to take some steps. But it will not be up to Turkey’s appeal only.”

Even without military intervention, Assad’s days are numbered.  For the West, the stakes are higher than just Syria.  The collapse of the Assad regime would be a blow to its ally, Iran, not to mention Hamas and Hezbellah.



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Tehran Protesters Attack British Embassy

Hundreds of Tehran demonstrators, possibly members of the hard-core Banji militia, demonstrated at the British embassy where a number of them broke into the compound, threw rocks, gasoline bombs, burned flags and threw documents out the window.

New York Times:

There were conflicting accounts of whether any hostages were taken in the embassy assault, which appeared to be a pre-orchestrated event sanctioned by the Iranian authoritiesl. Iran’s semi-official Mehr news agency said six people from the embassy were seized by Iranian students from Tehran universities but inexplicably withdrew the report minutes later.

Al Jazeera:

The semi-official Fars news agency said security forces were trying to eject the protesters, who were a minority from a larger group staging an anti-UK demonstration outside the compound…Al Jazeera’s Dorsa Jabbari, reporting from Tehran, said that the police and various ministries had prior knowledge of the protest, which was organised by the student arm of the Basij armed group

“Any such action of this could scale can never be independent in the Islamic Republic. These gatherings are always approved by higher officials,” said Jabbari.

In an appearance on state television on Sunday, Sardar Mohamad Reza Naghdi, the commander of the Basij, said that the unit was “counting the moments” until it could strike against “Zionist forces”.

Jabbari said there a number of protesters had been taken into custody and that as of Tuesday evening, there was no official response from the Iranian government on how the protest unfolded.

Reaction to New UK Sanctions

The actions were in response to Britain’s tightening of sanctions against the Islamic Republic, including forbidding transactions with the Central Bank, and it followed an Iranian Parliament vote to downgrade diplomatic relations with Britain.

Information is still murky and ‘facts’ are subject to change.  It’s unclear if the break-away group was sanctioned by the Iranian government or not.  Regardless, the incident is a serious breach of international law and the duty of host countries to protect foreign embassies.


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Reality Check on Chinese Military Build-Up

Yes, China is increasing its military spending.  And as of this year, it now has one aircraft carrier.  It is modernizing its Navy and testing drones capable of carrying out air/sea combat which China believes would be the core of any future war with a foreign nation.

China is aggressively seeking out and securing mineral and energy resources far from its shores.  In Africa, it is building infrastructure and development projects in return for commercial rights to oil and mineral extraction.  Whether China is a positive force in African economic development or exploits the continent, as Europeans did during the era of colonial rule, is still an open question.

Ironically, the claims China is today making in the South China Sea were first drawn under the US-allied Kuomintang in the early 1940s. China has already signed agreements with a couple of the other nations claiming ownership of islands in the SCS to resolve their territorial conflicts peacefully though negotiation.  China, which during the 19th century was called the ‘sick man of Asia’ has not suddenly become ‘the stomping giant of Asia’.  China, in fact, has not one military base off-shore, in stark contrast with our own hundreds all over the world..

Nevertheless, many US politicians perennially raise fears of China within the US public, as if China were stationing war ships off the coast of Hawaii.  Yet, those same politicians insist that the US military has every right to hold war games with other nations in China’s backyard.

This type of slow drumming rancor and needless suspicion over a period of years breaks down communications and good will when a real crisis occurs.  It is the first step in demonizing an enemy – except China is not in any way an enemy of the US, but is a strong competitor.

There is no doubt that the US and China are and will be in ever sharper competition for mineral and energy resources.  Add Russia and India to the equation and pipeline projects being built through multiple countries and anyone familiar with the 20th century shudders at the potential for conflict.

But we in America have to have a bit of perspective.  Overestimating the strength of competitors will mislead a country as assuredly as underestimating them.  The charts below show the actual imbalance between US and Chinese military spending in absolute and as percentage of GDP.  Next time you hear from a US politician that ‘China is engaged in a long-term military build-up’ (true) and that the US is ill-prepared you might find it amusing instead of frightening.

SIPRI Yearbook 2011

The world’s top 5 largest military budgets in graph.
(also permanent members of the United Nations Security Council)
Figures sourced from SIPRI.

The following is a table of the top 15 countries with the highest military expenditure for 2010 published in the Stockholm International Peace Research Institute (SIPRI) Yearbook 2011 using current market exchange rates in current (2010) US dollars.[5][6]

Rank Country 2010 Spending ($ b.) Share of 2010 GDP (%) World Share (%)
World Total 1 630 2.6 100
1 United States United States 698 4.8 43
2 China Chinaa 119 2.1 7.3
3 United Kingdom United Kingdom 59.6 2.7 3.7
4 France France 59.3 2.3 3.6
5 Russia Russiaa 58.7 4.0 3.5
6 Japan Japan 54.5 1.0 3.3
7 Germany Germanya 45.2 1.3 2.8
7 Saudi Arabia Saudi Arabiab 45.2 10.4 2.8
9 India India 41.3 2.7 2.5
10 Italy Italya 37.0 1.8 2.3
11 Brazil Brazil 33.5 1.6 2.1
12 South Korea South Korea 27.6 2.8 1.7
13 Australia Australia 24.0 2.0 1.5
14 Canada Canadaa 22.8 1.5 1.4
15 Turkey Turkeya 17.5 2.4 1.1
^ SIPRI estimate
^ The figures for Saudi Arabia include expenditure for public order and safety and might be slight overestimates.
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Video: Egyptian Electoral Parties and Procedures Explained

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