by Andrew Leonard - Mar. 1, 2010 19:11 est
Salon.com

Near the end of “The Big Short,” Michael Lewis’ much-anticipated stab at explaining what just happened to the global economy, the author unloads a dump truck worth of jargon while describing a dilemma facing one of his protagonists.

“How do you explain to an innocent citizen of the free world the importance of a credit default swap on a double-A tranche of a subprime collateralized debt obligation?” writes Lewis.

I’m betting Lewis was grinning as he wrote that sentence, because if you wanted to summarize “The Big Short” in just one line, it might be: the most lucid explanation yet offered to readers as to the importance of a credit default swap on a double-A tranche of a subprime collateralized debt obligation. Which might not sound like a whole lot of fun, but turns out to be a blast. As someone who has struggled for years to penetrate the obtuse world of structured finance and the role it played in blowing up Wall Street, I must give credit where credit is due. “The Big Short” is superb: Michael Lewis doing what he does best, illuminating the idiocy, madness and greed of modern finance.

Even though I have long been a huge Lewis fan, dating all the way back to “Liar’s Poker,” his hilarious and enlightening account of life as a bond broker in the go-go ’80s, I did not anticipate something this good, something capable of carrying its weight as a bookend to “Liar’s Poker’s” delights. My heart actually sank when the galleys of “The Big Short” arrived in the mail. A library of books exploring the financial crisis has already been published, with many, many more yet to come. My bedside table groans under the weight of their unfinished tomes. What could Lewis have to say that hadn’t already been said a million times over?

But then I made the mistake of glancing at the first chapter and literally could not put “The Big Short” down. Lewis achieves what I previously imagined impossible: He makes subprime sexy all over again.

The secret to Lewis’ success is a mixture of strategy and craft. Most books on the financial crisis find their locus inside the Wall Street firms at the heart of the action. The general theme: Hubristic banksters are oblivious to what they’ve wrought until it is too late. Chaos ensues. Lewis takes a different tack. “The Big Short” tells the stories of an odd collection of brilliant misfits who recognize that Wall Street is wearing no clothes, become convinced a massive calamity is nigh, and seek feverishly to profit off of their understanding. They are, in Wall Street parlance, the “shorts” — speculators who bet that the price of a given stock or bond or commodity or any derivative thereof will fall, rather than rise. Most shorts pick on a single company, or have a dour view of the direction of the price of corn or pork bellies. “The Big Short” is a little more ambitious: It’s a bet on financial sector collapse.

That’s the strategy. Today you can find plenty of people who claim to have seen financial disaster looming, but in “The Big Short” Lewis captures protagonists who put their money on the line. That they did so by employing Wall Street’s latest financial innovations against itself makes the story all the more fascinating. A typical Lewis “short” first figures out which mortgage lenders are making the absolutely crappiest loans, then determines which mortgage bonds (or collateralized debt obligations created out of slices of crappy mortgage bonds) are constructed from those loans, and then buys insurance, via credit default swaps, against the chance of those bonds or CDOs going bust.

In doing so these money managers have to war against their own self-doubt, the trepidation of their investors, the arrogance of Wall Street bankers, and the giddy momentum of financial markets that defy all logic for far longer than makes any rational sense. (There’s also a good question as to whether what they are doing should even be legal — the “shorts” are buying insurance on “properties” that they don’t even own!) But the loner-against-the-crowd mentality delivers a dynamic sense of tension that propels “The Big Short” merrily along. We know, as readers, exactly what will happen at the end, and yet still the ride feels nail-biting.

But what truly sets Michael Lewis apart from other writers is his craft. Watch him describe Steve Eisman, a man whose desire to make money shorting subprime mortgage-backed concoctions is inseparable from his growing sense of rage that Wall Street is getting away with a rigged game.

The focal point of his soft, expressive, not unkind face was his mouth, mainly because it was usually at least half open, even while he ate. It was as if he feared that he might not be able to express whatever thought had just flitted through his mind quickly enough before the next one came, and so kept the channel perpetually clear. His other features all ranged themselves, almost dutifully, around the incipient thought. It was the opposite of a poker face.

When you combine an ability to evoke someone’s essential character in a few spare sentences with an equal facility at deconstructing the financial engineering that goes into creation of a collateralized debt obligation, you are dealing with an exceptional talent. There are passages in “The Big Short” that get seriously wonky — where most writers would be content to simply talk in generalities about “slicing and dicing up risk” — but Lewis makes a game effort to communicate the nitty-gritty of how the structured finance con game actually worked. It can be intimidating, but if you stick with it the end result is devastating.

Lewis does not attempt to explicitly resolve some of the bigger questions as to how it was possible for Wall Street to run so far off the tracks. If you’re looking to plug “The Big Short” neatly into a political narrative you may find it wanting. By now everyone has chosen their own favorite villain — some blame the dismantling of regulatory oversight, others point at government efforts to boost lower-class home ownership. Everybody’s mad at housing speculators and people who take out loans that they can’t afford. The ratings agencies, regulators, mortgage lenders and banks all clearly failed us.

It’s quite the toxic stew. But sitting at the center of the spider’s web are the investment banks — Goldman Sachs, Morgan Stanley, Merrill Lynch, Deutsche Bank, Bear Stearns, Lehman Brothers. These banks were not creating complex derivatives tied to subprime mortgages because of government policy pushing homeownership or because individual homeowners were irresponsibly prone to lying about their income. Far from it; these banks had discovered that billions of dollars could be made transforming lousy mortgage loans into securities supposedly safe enough that they could be sold to pension funds or anyone else. So they had a huge financial incentive to encourage the creation of even more crappy loans.

And even then, there wasn’t enough raw product! The hunger for garbage that could be turned into gold was beyond anything the craziest real estate markets in California or Arizona or Florida or Nevada could provide. The smart brains at Goldman Sachs found many innovative ways to get around this obstacle, to the point of taking the collateralized debt obligations that already, uh, sliced and diced subprime bonds, and reslicing those into synthetic CDOS that were even further removed from actual humans living in real houses.

And even that wasn’t enough, so they created a superstructure of credit default insurance swaps to buy and sell, ostensibly to protect against the possibility that their synthetic CDO or subprime mortgage bond might collapse, but really, just to have another way to make another speculative bet, in a world where there actually were physical limits to how many real mortgages could be created.

It all adds up to an extraordinary demonstration of how markets can fail disastrously. The tragedy, however, is that we appear, as a society, not to have learned anything lasting from this debacle. The most depressing part of “The Big Short” is realizing that now, more than a year into a new presidential administration, we have done nothing substantive to prevent a similar mess from occurring again in the future. The investment banks are minting money again, while millions of Americans have lost their jobs and their homes.

In the introduction to “The Big Short,” Lewis observes that when he wrote “Liar’s Poker” he thought he “was writing a period piece about the 1980s in America, when a great nation lost its financial mind.” He “never imagined … that the future reader might look back on this … and say, ‘How quaint.’ How innocent.” But he was wrong. The madness continued. “There was no scandal or reversal, I assumed, sufficiently great to sink the system.”

And here we are, in 2010, shell-shocked after witnessing and living through the “most purely financial economic disaster in history” and absolutely nothing has changed.

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Mar. 1st, 2010 01:29 PM mt
MSNBC.com

ANNAPOLIS, Md. - It’s hard enough to find a job in this economy, and now some people are facing another hurdle: Potential employers are holding their credit histories against them.

Sixty percent of employers recently surveyed by the Society for Human Resources Management said they run credit checks on at least some job applicants, compared with 42 percent in a somewhat similar survey in 2006.

Employers say such checks give them valuable information about an applicant’s honesty and sense of responsibility. But lawmakers in at least 16 states from South Carolina to Oregon have proposed outlawing most checks, saying the practice traps people in debt because their past financial problems prevent them from finding work.

Wisconsin state Rep. Kim Hixson drafted a bill in his state shortly after hearing from Terry Becker, an auto mechanic who struggled to find work.

Becker said it all started with medical bills that piled up when his now 10-year-old son began having seizures as a toddler. In the first year alone, Becker ran up $25,000 in medical debt.

Over 4½ months, he was turned down for at least eight positions for which he had authorized the employer to conduct a credit check, Becker said. He said one potential employer told him, “If your credit is bad, then you’ll steal from me.”

“I was in a deep depression. I had lost a business, I was behind on my bills and I was unable to get a job,” he said.

Hixson calls what happened to Becker discrimination based on credit history and said his bill would ban it.

“If somebody is trying to get a job as a truck driver or a trainer in a gym, what does your credit history have to do with your ability to do that job?” Hixson said. He said he knows of no research that shows a person with a bad credit history is going to perform poorly.

Under federal law, prospective employers must get written permission from applicants to run a credit check on them. But consumer advocates say most job applicants do not feel they are in a position to say no.

Most of the bills being proposed this year resemble laws in Hawaii and Washington that prevent employers from using credit reports when hiring for most positions. The laws contain exceptions in cases where such information could be relevant to the job — for example, if the person is applying to work in a bank or an accounts-payable office.

On a national level, Rep. Steve Cohen, D-Tenn., introduced a similar bill last summer in Congress, where it is still bottled up in committee.

Even though more companies are using credit checks, only 13 percent perform them on all potential hires, according to the Society for Human Resources Management’s most recent survey. Mike Aitken, the group’s director of government affairs, said a blanket ban could remove a tool employers can use to help them make good hiring decisions.

Aitken pointed to a 2008 survey by the Association of Certified Fraud Examiners that found the two most common red flags for employees who commit workplace fraud are living beyond their means and having difficulty meeting financial obligations. The same survey estimated American companies lost $994 billion to workplace fraud in 2008.

Aitken said someone who cannot pay his or her bills on time may not be more likely to steal, but might not have the maturity or sense of responsibility to handle a job like processing payroll checks.

In Maryland, where the state Chamber of Commerce opposes a bill banning most credit checks, employers at a recent legislative hearing said they are not interested in applicants’ credit scores.

Instead, they said, they are concerned about things like debt collections and legal judgments rather than poor credit because of medical bills or school loans. They also said companies give job applicants a chance to explain their credit problems.

Last year California lawmakers voted to curb the use of such checks, but Gov. Arnold Schwarzenegger vetoed the bill under pressure from Chamber of Commerce leaders who called it a “job-killer.”

But Maryland Delegate Kirill Reznik, who drafted the bill being considered in his state, said people struggling to get jobs need help.

“We are in the great recession and this creates a vicious cycle,” Reznik said. “People lose their jobs, that naturally precipitates them getting behind on bills, their credit scores go down, they are trying to find a job to pay off the bills, and employers won’t hire them because of their credit score.”

Maryland public school employee Jen Harwood said running credit checks on job applicants “perpetuates the divide between the haves and the have-nots.”

“If you continue digging into people’s past and not looking into what people have to give today, you are making a bigger divide,” Harwood said.

Consumer advocacy groups are also lining up behind the legislation, pointing out that credit reports can contain inaccurate information.

Becker, the Milton, Wis., resident with bad credit, has found work dismantling cars at an auto recycling company that did not ask to run a credit check. He worries, though, about friends in the auto industry are looking for work and coming up empty-handed because of credit problems.

“It just seems like once you fall behind, you’re behind,” he said. “It’s really hard to get back on the right financial track.”

- The Associate Press

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by Bruce Watson - Mar. 01, 2010 06:25 PM
Daily Finance

On Monday, some of Bernard Madoff’s former clients received bad news, as bankruptcy Judge Burton R. Lifland decided that many of them are not eligible to receive compensation for their losses. The ruling, which seems likely to be appealed, endorsed the methods established in April 2009 by Irving Picard, trustee for the case.

Picard decided to use a “cash in/cash out” measure to determine which of Madoff’s victims deserved compensation and which might be liable for some of the investment company’s losses. Under this system, Picard measured customers’ losses by weighing their withdrawals against their deposits; people who received less money than they deposited were net losers, while those who received more money than they deposited were net winners.

Other members of Madoff’s fund have received even worse news: In the last few years before Madoff’s scheme came to light, many of his customers withdrew their money under suspicious circumstances. This trend accelerated in the last three months of 2008, when Madoff’s friends and family withdrew $735 million from the fund. If these customers withdrew money because they knew or suspected that the Madoff fund was a fraud, they may be guilty of fraudulent conveyance, which could make them legally responsible for returning at least part of their money.

Madoff’s net winners have argued that Picard’s cash in/cash out method is unfair and that they should be compensated based on their account balances at the time of Madoff’s arrest. In his published opinion, Lifland’s noted that his decision was based on the fact that Madoff’s account statements were entirely fraudulent

Judge Lifland’s decision also limits the number of victims who can claim recompense from the government. While Madoff’s former clients are each eligible for up to $500,000 from the Securities Investor Protection Corporation (SIPC), if Lifland’s decision stands, Madoff’s net winners will not be able to claim SIPC compensation. Given that more than half of Madoff’s clients are net winners — Picard has identified 2,568 net winners and 2,335 net losers — this will have a major effect on the ultimate dispensation of the case. It will also have a major impact upon the ultimate cost to taxpayers.

But even Picard’s net losers are unlikely to get their money back: while Lifland’s decision drops the fund’s losses from $65 billion to $20 billion, investigators have only recovered $1.5 billion thus far, suggesting that some of Madoff’s biggest victims may still be left out in the cold.

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Visit msnbc.com for breaking news, world news, and news about the economy

Really???

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by Rachael King - Mar. 1, 2010 10:02 PM est
Businessweek.com

Reused electronics may be good for the environment, but they are feeding the counterfeit tech industry and poisoning some foreign workers

Recycling used tech gear—a practice generally considered good for the environment—has a far less desirable, unintended consequence. It is contributing to a rise in fake computer chips and other products that make their way into everything from satellites to weapons systems, medical devices, and routers that connect corporate networks. “Electronic waste has turned into an abundance of electronic components and microcircuits for counterfeit parts,” according to a January 2010 report from the U.S. Commerce Dept.

A foremost destination for e-waste and source of resulting counterfeit parts is China, according to reports by the U.S. government and the United Nations. By 2020, electronic waste in China will have reached a level 200% to 400% over that of 2005, according to a UN Environment Programme report released on Feb. 22. That document cites the “alarming and increasing reports on the e-waste situation” in China and other nations.

Much of the waste comes from inside the country: China produces about 2.3 million tons of its own e-waste each year and has banned imports of it. Still, some electronic waste finds its way into China from developed countries via unscrupulous recyclers, according to environmental groups that include Greenpeace and the Basel Action Network.

Some developed countries, including the U.S., do not bar exports of electronic waste. An estimated 50% to 80% of the e-waste collected for recycling in the U.S. is exported to developing countries, according to Greenpeace.

Once at their destination, used electronics are mined for reusable parts and some are repurposed by counterfeiters. “The world is sending their e-waste to unregulated regions where e-waste is converted to counterfeits,” says Debra Eggeman, general manager of Independent Distributors of Electronics Assn., a trade organization of distributors striving to meet high quality standards.

At home, families dismantle e-waste

Tom Sharpe, vice-president at SMT, an independent distributor of electronic chips and other parts, watched the creation of counterfeit tech first hand as he traveled to Shantou, China, in July 2008. “Everything was being taken apart for chips and they were being sanded down and counterfeited while we were in Shantou,” Sharpe says of an area that lies near Guiyu, a town often called the electronic waste capital of the world. He watched scraps of computers growing into huge piles in the front and back yards of homes and saw women washing components in a river after they were sanded. “E-waste generates the feedstock for counterfeiters and as the e-waste problem grows, so does the counterfeiting problem,” he says.

The environmental and health risks of improper handling of e-waste have been well-documented. Workers—often parents and their children—dismantle these parts by hand, releasing toxic chemicals that contaminate the air, soil, rivers, and groundwater of Guiyu. In response, some corporations have banned the export of electronic waste. On Feb. 11, Hewlett-Packard (HPQ) said it would no longer permit its e-waste to be exported from developed countries to nondeveloped countries, either directly or through intermediaries. In May, Dell (DELL) became the first major computer manufacturer to ban the export of e-waste to developing countries.

It’s too early to tell how the moves by HP and Dell might ultimately affect counterfeiting activity. Meanwhile, distributors and companies are taking further steps to fight fakery by helping create standards and sharing knowledge about the detection of counterfeit parts. SMT is investing in sophisticated equipment to test and verify their authenticity of components, Sharpe says.

The tide of fake chips and other components bound for the U.S. is nevertheless rising, he says, driven in part by extreme poverty in developing nations. “There are areas of China or India where there’s poverty and nothing else,” he says. For some, producing fake tech is “a way of life and a means to feed a family,” he says. Still, Sharpe is confident that SMT and other distributors are better equipped to fight the tide. Says Sharpe: “The problem is worse, but more counterfeiters are being caught and identified.”

King is a writer for BusinessWeek.com in San Francisco.

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by Allison Hurtado - Feb. 26, 2010 06:02 PM
The Arizona Republic

A person wearing scuba gear apparently tried to sneak two bundles of marijuana across the Mexican border through a sewer system on Friday, Border Patrol officials said.

Border Patrol agents operating infrared cameras noticed several individuals illegally crossing into the United States near a sewer outlet.

The Douglas Station’s bike patrol went to the sewer system and saw one person carrying two bundles that were suspected to be marijuana.

That person was wearing a wet suit and scuba gear and was wading through waist-high water with the bundles, officials said.

The person saw the agents, dropped the bundles and began wading back toward Mexico. Apparently the other people spotted by the Border Patrol also fled, officials said.

The marijuana weighed 55 pounds and was estimated to be worth $44,000.

The would-be smugglers were not found, according to Omar Candelaria, spokesperson for the Border Patrol.

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The Administration is proposing that large banks pay a tax based on .15% of total assets minus high-quality capital, such as common stock, and disclosed and retained earnings. Federal Deposit Insurance Corp.-covered deposits and insurance-policy reserves would be untaxed because such assets are already subject to federal fees. The burden of this tax would be on the 50 or so largest financial firms in the US including the subsidiaries of foreign banks. The target is firms assets over $50 billion. The White House calls the new levy the “Financial Crisis Responsibility Fee.” It could raise as much as $90 billion over the next ten years.
The idea of this bank tax comes as a new proposal in Congress to tax American bank executive bonuses much the way that the UK has is being considered. There will be more calls to take money from financial firms and their employees for two reasons. The first is the perception that the largest banks are most to blame for the credit crisis that did so much to damage the economy. The second is that the federal government desperately needs the money. It may as well use righteous indignation to get it.

Banks may have enough expert accountants to find a way around some of the tax, but eventually a diligent government is likely to squeeze most of the money out of Goldman Sachs (GS), JPMorgan (JPM) and their peers. The $90 billion won’t be enough to offset even a small part of the deficits the federal government will have over the next decade. The level of the 2009 portion of those deficits is about $1.4 trillion. The ten-year burden of deficits is almost unimaginable.

Several bank CEOs said that using the tax system as a means of punishment is a poor idea. Car companies lost money and needed government capital. They will not be forced to pay the tax. But, that misses the point. The Administration is clever enough to know that populism can seize on the nation’s negative reactions to a number of industries, trends, and national habits to raise taxes that it cannot increase by simply levying new burdens on the average American, or the average American business.

The attempt to raise tax dollars without an increase in the standard individual tax rates will probably take the form of levies on industries and “sin taxes”. The oil industry is a favorite target because of the costs of gasoline, heating oil, and petrochemicals. Exxon did make $4.7 billion in net income in the September quarter. The price of crude is back above $80 which means it have more than doubled in a year.

Another target for higher taxes is likely to be on the sale of cigarettes and liquor. They are easy targets. The Administration can make a strong case that smoking and drinking lead to higher healthcare costs which a reform of the system is not set up to directly address.

High deficits always make Washington scurry to find new sources of income. This time is no different except that the hole to fill is the largest ever.

Douglas A. McIntyre

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The Slide

by Tony Pringle - Dec. 19, 2009
Market Mix Up

Looking for a great stocking stuffer for Christmas can sometimes be tough.  But here at Market Mix Up, we found the best stocking gift that fits right into the stocking.

The Slide is a unique sunglass holder that fits right on your visor in the car. As common as it is to lose sunglasses, scratch them and even sit on them while getting in the car. Why not get your loved one a gift they’ll use forever, while allowing them to keep their expensive sunglasses shiny and new for a lifetime.

I just purchased the The Slide and I’m in love with it! I use to lose my sunglasses, scratch them and even break them. Now I have one less thing to worry about. The Slide never touches the lenses and secures your glasses gently by the temple bars. It’s the gift that keeps on giving!

For more info and to make an order, visit TheSlide.net.

Market Mix Up is a proud partner of The Slide!

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Dec. 17, 2009 03:11pm EST
Reuters.com

LONDON (Reuters) - Stuck for Christmas gift ideas? Is your marriage or a friend’s going through a rocky patch? How about a divorce voucher?

In an unusual take on the season of giving, a London law firm is offering Christmas gift vouchers for divorce advice.

The firm, Lloyd Platt & Company, which normally charges 325 pounds ($530) an hour, said it had been swamped with enquiries since it launched the vouchers early last week.

So far, more than 60 have been sold — a snip at 125 pounds for a half hour session with a divorce lawyer.

The firm’s founder, Vanessa Lloyd Platt, said she had been amazed at the response to the vouchers. “They seem to appeal to an enormously widespread spectrum of people looking for that ‘must have’ gift for Christmas,” she said.

A spokesman for the Church of England called the vouchers sad.

“Divorce is a very personal matter and not really suitable for the idea of gift vouchers which are presents from other people,” he said.

Demand for the vouchers could soar over the next few weeks.

Christmas tends to be a particularly stressful time for families, with a huge rise in people seeking advice each January, Lloyd Platt said.

(Reporting by Elizabeth Fullerton; Editing by Steve Addison)

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