03/26/2012 archive

You know my methods Watson.

“But your grandiloquence, and your conduct in swinging the beetle – how excessively odd! I was sure you were mad. And why did you insist upon letting fall the bug, instead of a bullet, from the skull?”

“Why, to be frank, I felt somewhat annoyed by your evident suspicions touching my sanity, and so resolved to punish you quietly, in my own way, by a little bit of sober mystification. For this reason I swung the beetle, and for this reason I let it fall from the tree. An observation of yours about its great weight suggested the latter idea.”

The problem of fake gold bars

Felix Salmon, Reuters

Mar 25, 2012 16:19 EDT

You don’t need to be a conspiracy theorist to find this worrying: a 1kg gold bar, certified as 99.98% pure by XRF (X-ray fluorescence) tests, turns out to have been drilled out and largely replaced with tungsten. This bar was discovered only because it was 2 grams lighter than it ought to have been: the forgers failed to add quite enough gold to the outside of the bar to make up for the weight lost when they replaced gold with tungsten. But if they’d gotten the weight right, it would probably still be circulating today.

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In the case of gold, then, what JK Galbraith famously called “the bezzle” – the amount of wealth that people think they have, which in fact they don’t have – could be truly enormous. If there are 1.3 million salted 400 oz bars in existence, and each one is 75% tungsten, then that makes 390 million ounces of gold which in truth isn’t there. At $1,660 per ounce, that’s over $600 billion which people think they own but don’t. To put that number in context, it’s roughly half the total quantity of subprime mortgages which had been issued at the height of the housing bubble.

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In any case, there’s clearly now serious tail risk for anybody in the physical-gold market. And like most tail risks, measuring and/or insuring against it is extremely difficult. Any store of value has problems, be it fiat currency or sovereign debt or bitcoins. This latest discovery just goes to show that the problems with gold aren’t just the obvious ones surrounding things like the risk that the price of gold might plunge. There are non-obvious ones, too, which have the potential to be even bigger.

From the comments by Doly

Just to get people who worry about this slightly more worried: gold-plated tungsten will fail the density test, but this is because tungsten is slightly too dense. Making sure you leave some small hole of the right size, or add the right amount of almost any other metal (most metals are less dense), should solve this problem. This is an example of a very shoddy forgery. Somebody who took their forgery as seriously as they should when we’re talking some decent money, should have no trouble at all producing bars of the right weight and density. As Felix points out, conductivity would still show… but frankly, I think any competent chemist should be able to produce a gold-plated bar that passes most tests except cutting it in half.

As always, I only traffic in the most scurrilous rumors.

“Punting the Pundits” is an Open Thread. It is a selection of editorials and opinions from around the news medium and the internet blogs. The intent is to provide a forum for your reactions and opinions, not just to the opinions presented, but to what ever you find important.

Thanks to ek hornbeck, click on the link and you can access all the past “Punting the Pundits”.

Paul Krugman: Lobbyists, Guns and Money

Florida’s now-infamous Stand Your Ground law, which lets you shoot someone you consider threatening without facing arrest, let alone prosecution, sounds crazy – and it is. And it’s tempting to dismiss this law as the work of ignorant yahoos. But similar laws have been pushed across the nation, not by ignorant yahoos but by big corporations.

Specifically, language virtually identical to Florida’s law is featured in a template supplied to legislators in other states by the American Legislative Exchange Council, a corporate-backed organization that has managed to keep a low profile even as it exerts vast influence (only recently, thanks to yeoman work by the Center for Media and Democracy, has a clear picture of ALEC’s activities emerged). And if there is any silver lining to Trayvon Martin’s killing, it is that it might finally place a spotlight on what ALEC is doing to our society – and our democracy.

New York Times Editorial: When Other Voices Are Drowned Out

The Supreme Court’s 5-to-4 ruling in Citizens United in 2010 was shaped by an extreme view of the First Amendment: money equals speech, and independent spending by wealthy organizations and individuals poses no problem to the political system. The court cavalierly dismissed worries that those with big bank accounts – and big megaphones – have an unfair advantage in exerting political power. It simply asserted that “the people have the ultimate influence over elected officials” – as if campaigns were not in the business of influencing and manipulating voters.

The flood of money unleashed this election season is a direct consequence of this naïve, damaging view, which has allowed wealthy organizations and individuals to drown out other voices in the campaign. The decision created a controlling precedent for other legal decisions that made so-called super PACs the primary vehicles for unlimited spending from wealthy organizations and individuals. In theory, they operate independently of candidates. In reality, candidates are outsourcing their attack ads to PACs, so financing a PAC is equivalent to financing a campaign.

On his March 23 program, Bill Moyer had a fascinating interview with Andrew Bacevich, West Point graduate, Vietnam vet and author of The Limits of Power: The End of American Exceptionalism on how America needs to start moving beyond war:

Nine years after Baghdad erupted in “shock and awe,” we’re once again hearing in America the drumbeat for war in the Middle East. Now, the bull’s-eye is on Iran. But what we need more than a simple change of target is a complete change in perspective, says Andrew Bacevich, a West Point graduate and Vietnam veteran-turned-scholar who’s become one of the most perceptive observers of America’s changing role in the world. [..]

“Are we so unimaginative, so wedded to the reliance on military means that we cannot conceive of any way to reconcile our differences with groups and nations in the Islamic world, and therefore bring this conflict to an end?” Bacevich tells Moyers.

Bacevich also answers the question of whether Iran is a direct threat to America with a definitive no. “Whatever threat Iran poses is very, very limited,” he tells Moyers, “and certainly does not constitute any kind of justification for yet another experiment with preventive war.”

But it is the last five minutes of the hour interview served up by Moyers that bring into perspective the foreign policies of President Barack Obama and how he has not only adopted the neocon policies of American exceptionalism but is publicly on board with them.

BILL MOYERS: We have to hope a copy of Andrew Bacevich’s new book makes its way to Barack Obama. He could use a dose of the reality served up in its pages. A reality quite contrary to the book the President has been waving around in public for all to see. This book: The World America Made, by Robert Kagan. Kagan’s a well-known figure inside the Beltway, that matrix of think tanks, policy intellectuals, and research centers that have so long and faithfully served to uphold the empire. In it, Kagan dismisses what he calls “the myth of American decline,” and compares the United States to Jimmy Stewart’s character in the Frank Capra movie It’s a Wonderful Life. America is to the world, Kagan contends, what Stewart was to the town of Bedford Falls.

HARRY in It’s a Wonderful Life: To my big brother George, the richest man in town.

BILL MOYERS: Which without him would have fallen into unseemly hands and disrepute, as the world would have without America. To think otherwise, he writes, is “wishful thinking.”

Not surprising that President Obama, according to The New York Times, has “brandished Mr. Kagan’s analysis in arguing that America’s power has waxed rather than waned.”

And just who is Robert Kagan? Well, he served in the State Department when Reagan was president. He advised John McCain in 2008 and these days is special advisor on national security and foreign policy to Mitt Romney.

MITT ROMNEY: Let me make this very clear, as President of the United States, I will devote myself to an American century and I will never, ever apologize for America.

BILL MOYERS: Oh, yes, back in the late nineties, six years after the first Gulf War and four years before 9/11, Robert Kagan and fellow neo-conservative Bill Kristol founded the Project for the New American Century and signed a letter to then-President Bill Clinton urging him to get rid of Saddam Hussein once and for all – by any means necessary.

In 2002, Kagan wrote, “A devastating knockout blow against Saddam Hussein, followed by an American-sponsored effort to rebuild Iraq and put it on a path toward democratic governance, would have a seismic impact on the Arab world — for the better.” Hindsight is 20-20, as the saying goes, and nine years later we look back and see with perfect clarity how well Jimmy Stewart’s America delivered in Iraq. Talk about wishful thinking.

So next time President Obama’s looking for a book to read, better he pick up a copy of this one: The Short American Century: A Postmortem. In it, several distinguished historians – including Andrew Bacevich – urge us to take off the rose-colored glasses and see the world as it is. It is not a movie.

Iran is not a threat. Yet here we are, the bullseye is Iran and President Obama repeating neocon analysis.

H/T to a close friend who brought the Moyers’ video to my attention. He knows who he is. 😉

The full transcript is below the fold

Anger at Goldman Still Simmers

By GRETCHEN MORGENSON, The New York Times

Published: March 25, 2012

Copper River relied on Goldman to handle its negative bets, known as short sales, in compliance with securities laws. These regulations require that before a short sale can be made, the shares must be borrowed; Mr. Cohodes said his fund had paid Goldman approximately $100 million to borrow shares over many years.

In his testimony, Mr. Cohodes said he and his partners at Copper River had even come to wonder if Goldman had in fact borrowed the shares for the firm. Without the shares, Copper River faced losses, while Goldman could have come under regulatory scrutiny.

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Along with a handful of traders at smallish firms, Goldman’s securities lending unit has been cited by regulators for lapses. In 2010, the S.E.C. sued Goldman on accusations that it “willfully” had failed to preborrow shares as required for its short-selling clients in January 2009, shortly after Copper River went out of business. The improprieties involved 385 short sales in which the firm had not located shares for its brokerage clients to borrow.

Goldman paid $450,000 to settle the case without admitting or denying the accusations.

Failing to borrow shares on behalf of customers is illegal because of concerns about market manipulation. But it can also leave a brokerage firm’s client who is short a stock dangerously exposed to an escalating price in the shares. If a stock shorted by an investor began to trade higher and the shares were not borrowed, closing out the transaction would require the fund to buy them in the open market. That could propel the already rising price of the shares even higher, adding to the costs of the trade.

On the Meaningless of Contracts and the New Optionality

Yves Smith, Naked Capitalism

Monday, March 26, 2012

With a rise in an options-based view of business, it isn’t hard to see how a pernicious dynamic sets in. It used to be that only occasional scumbags would behave this way, and you’d write it off as bad luck and a reminder to do a decent amount of due diligence on new customers. But when this sort of behavior becomes common, the cost of doing business escalates since no one can trust anyone’s commitments. You can see this now in the way many types of contracts have changed. It used to be possible to do business with a short agreement. In many fields, they’ve now become excruciatingly long, since the odds of them being litigated is correctly seen as higher, so nailing down all sorts of possible outcomes is more important. And longer agreements means more protracted negotiations. It amounts to a tax on commerce.

And this pattern is particularly devastating to small businesses. It’s comical to see the Administration talk up the need to help entrepreneurs yet gut the rule of law to help banks.

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We can see the damage of the breakdown of the norms of commerce. The private label securitization market, which functioned fairly well when originators and servicers acted in accordance with their agreements with investors, is now dead. The securitization market, which was 60% private label prior to the crisis, is now effectively 100% government guaranteed (there was all of one private label deal last year). Various reform proposals have been suggested; some have been well thought out enough that past investors reacted positively. But of course, the sell side nixed anything far-reaching enough to make a real difference. The investors I know say there won’t be a private label securitization market ex root and branch changes for at least ten years.

So it looks like Marx is being proven correct, that capitalism sows the seeds of its own destruction, although not by the route he envisaged, that of a worker revolt. Instead, it comes about via the capitalists turning on each other to try to secure an even better deal.

This is your morning Open Thread. Pour your favorite beverage and review the past and comment on the future.

Find the past “On This Day in History” here.

March 26 is the 85th day of the year (86th in leap years) in the Gregorian calendar. There are 280 days remaining until the end of the year.

On this day in 1964, the musical, Funny Girl makes its premiere on Broadway.

Funny Girl is a musical with a book by Isobel Lennart, music by Jule Styne, and lyrics by Bob Merrill. The semi-biographical plot is based on the life and career of Broadway, film star and comedienne Fanny Brice and her stormy relationship with entrepreneur and gambler Nicky Arnstein. Its original title was My Man.

The musical was produced by Ray Stark, who was Brice’s son-in-law via his marriage to her daughter Frances, and starred Barbra Streisand.

I apologize for not keeping up with my normal posts, but I have developed a rather serious neurological disorder, the common name being wrist drop.  It has to do with damage to the nerve that serves to flex, in my case, the right wrist and fingers.

It also has a minor sensory component in that the dorsal surface of my thumb and surrounding part of my hand feels pressure poorly but is fully responsive to heat and cold.  It happened literally overnight, as when I awoke Monday morning my hand was fully involved.

I am much improved now, and thought that I should share some of my findings with you.  I also plan to resume My Little Town and Popular Culture next week.