War by Another Means

Israeli commandos boarded five ships trying to break Israel's blockade of Gaza, and according to the Israeli military, came under assault with clubs, knives, and gun fire by people on one ship. A gun fight ensued, and current press reports indicate nine people on the ship were killed with a number injured, including Israeli soldiers.

Since 2007 after the terror group Hamas took control of Gaza, Israel and Egypt have worked to prevent Hamas from smuggling arms into Gaza, which has included Israel enforcing a naval blockade of Gaza.

The ostensible purpose of the flotilla was to bring humanitarian supplies to Gaza. But considering that Israel announced last week that the ships' cargo could be delivered to Gaza so long as the ships first stopped in an Israeli port so the cargo could be screened to make sure military supplies weren't included, the fact that the flotilla's organizers proceeded with the attempted landing in Gaza indicates the mission was about something more:

The purpose of the trip was to provoke a confrontation with Israel, and hope that the resulting casualties would stir up an international uproar directed against Israel.

Clearly, if the purpose of the trip was merely to deliver the ships' cargoes to Gaza, Israel's offer to allow that would have solved the matter without incident or bloodshed. But the organizers instead proceeded with the mission, got its desired bloodshed, and will now get its international uproar.

If there were no condemnation of Israel, then terrorists and their supporters would not pursue tactics to create "incidents" that cause a PR storm for the terrorists' opponents.

So it is up to Americans, and everyone in the international community, to realize the game that the terrorists play to fight their battles. If you want to stop terror, then you need to recognize this reality, blame the flotilla's organizers for embarking on their deadly game, and come to Israel's defense.

Cause and Effect

This Wall Street Journal article highlights one of the sad facts of government regulation and intervention in the economy: one act of government intervention often creates the demand for additional intervention later on.

In 1936, the federal government anointed the ratings on bonds provided by the credit rating firms of the day (Moody's, Standard, Poor's, and Fitch) as the basis for determining whether assets held by banks were of high quality.

Once the idea took hold, the government expanded its use including Securities and Exchange Commission rules in the 1970's that made the ratings agencies a more important part of the financial marketplace.

While it sounds like a good idea, the problem was (and is) that it reduces the need for banks to make their own determination of the credit quality of an investment. It allows regulators to substitute the judgement of the rating agencies for their own when assessing credit risk.

Because investors and regulators relied so heavily on these ratings, banks took on more risk than they otherwise would have. While it isn't the fundamental cause of the financial crisis, it certainly contributed to it.

The government, having made the financial crisis worse with its original regulations, now is using the financial crisis to increase its regulations - no doubt sowing the seeds for future losses due to forseen and unforseend effects from new regulations.

With respect to the ratings agencies, the government needs to get out of the business of promoting their role on assessing investments. If there is a market demand for their services, then let that demand determine their role in deals. Perhaps it looks similar to what occurs today. Perhaps their business model changes.

And in all cases, investors will be forced to be more thoughtful in their investment decisions rather than letting the agencies be their "crutch".

Blaming Corporations

The Wall Street Journal reported that Hewlett-Packard is being investigated by German and Russian authorities for allegedly paying $11 million in bribes to win a contract to supply computers and related products to the office of the prosecutor general of Russia.
It is against the law for U.S. companies to pay bribes, so of course HP shouldn't do so. But it is important to understand, if the allegations are true, that government officials have the greatest culpability for bribery.

It is the government official who wields both the power to decide who wins the contract AND who can use the power of government to aid or punish would-be contractors. Those two elements create a powerful position from which corrupt government officials can extract bribes.

Moreover, as the scope of government power over the economy expands, the opportunity for bribes increases. The best way to reduce bribery is to reduce the role of government in the economy.

By all means we should hold HP and other companies responsible for paying bribes. But government policies and officials who create the conditions for, or demand payment of, bribes need to be held most responsible for such corruption.

The Persecution of Goldman Sachs

If a person wants to buy a home, should he not do so because of the very fact that the seller wants to sell and therefore most "know something" to make it a bad purchase?

If someone wants to make an investment, such as in stocks, bonds, or a certificate of deposit, should she not do so because the seller wants to sell and therefore buying the investment is too risky?

If you think these are ludicrous perspectives on commonplace transactions, you are right.

But fundamentally, that is the essence of the SEC's allegations against Goldman Sachs it in the Abacus transaction involving subprime mortgages.

The Abacus deal required some parties to be "long" the deal (meaning they think the investment will increase in value) and others to be "short" the deal (meaning they think the investment will decrease in value). The SEC alleges that Goldman Sachs didn't disclose material information by not disclosing the name of the investor who was "short" the deal.

The "long" investors specialized in mortgage investments, managing billions of dollars, and as Warren Buffet said about the incident, knowing who the "short" is in the deal is irrelevant to making a proper investment decision.

Putting it another way, if you buy (taking the "long" position) a stock through your broker, you never know who the seller (analogous to taking the "short" position) is. Does that mean you shouldn't buy the stock until you know the name of the seller? Why would that matter? Clearly, the SEC doesn't think that is important since billions of shares a day are traded in the United States without the buyer knowing the identity of the seller.

This reflects a fundamental fact about economic transactions: the buyer and seller have different views on the items being bought/sold, and transact with one another to allow each to have their own view realized. Differences of opinions are fundamental to many economic transactions, particularly financial ones.

Even Bill Clinton concluded that Goldman Sachs broke no laws in the Abacus deal.

Moreover, it is worth noting how unusual the SEC's process was in deciding to bring the case. Goldman Sachs last spoke to the SEC in September 2009, and next heard from the SEC in April 2010 when the lawsuit was announced. Normally, the SEC notifies a party of its intent to sue them and then tries to negotiate a settlement before publicly disclosing the case.

Adding to the unusual nature of the case, the SEC's commissioner voted 3-2 to commence the lawsuit, with the three Democratic commissioners voting in favor of the suit and the two Republican commissioner opposing it. Again, such a partisan split isn't the norm for such prominent SEC suits.

If the SEC lawsuit against Goldman is so baseless, and was pursued in such an unusual manner, what might have motivated the agency to bring the case as it did?

First, one of the relatively unreported aspects of the matter - and a scandal of first order in its own right - is that on the same day the SEC announced its suit against Goldman, the SEC posted to its website, buried in a hard-to-reach link, an investigative report in its handling of the Bernie Madoff ponzi scheme.

The report revealed that the SEC's investigative arm had recommended that its enforcement arm pursue Madoff for orchestrating a ponzi scheme, but the enforcement division declined to do so because it preferred easier to win cases against more prominent firms. Literally, the SEC's shocking negligence cots investors many billions of dollars in a real, unambiguous fraud.

But that story got lost due to the sensational charges against Goldman Sachs. So the case against Goldman allowed attention to be deflected from the SEC's failure.

In addition, the partisan nature of the commissioners' vote highlights that the suit against Goldman serves a useful purpose for Democrats seeking to pass their financial services regulatory bill.

The SEC's gambit worked. It hid the Madoff report and whipped up the frenzy against Wall Street to help secure Senate approval of the new regulatory bill.

Only a small thing like justice got trampled in the process.

Weak Presidents

The nuclear deal that Turkey and Brazil negotiated with Iran demonstrates what happens when the world perceives America, and its president, as weak.

Turkey and Brazil both aspire to play a larger role in world affairs. Turkey is a powerful and relatively modern Muslim nation, and under its Islamic-oriented government has changed its foreign policy course decisively in the past few years. Turkey had been a reliable ally of America and had developed an important strategic relationship with Israel, cooperating on various defense and security matters.

Turkey now sees Iran as likely to become the regionally dominant power, once it obtains nuclear weapons, so naturally wishes to develop good relations with Iran to minimize tensions with a powerful neighbor.

Brazil has a growing trading relationship with Iran and currently runs a $1 billion trade surplus, so maintaining good relations with Iran is important. Moreover, Brazil wants America's role in the world in general, and Latin America in particular, to be reduced so Brazil can be the local power of significance.

And in fairness to both nations, if America is going to allow Iran to develop nuclear weapons, why shouldn't Turkey and Brazil try to win some diplomatic points in helping Iran and securing "peace"?

Herein lies the problem with Obama's appeasement of Iran, Hugo Chavez's Venezuela, Putin's Russia, and other thuggish regimes: if America won't stand up to oppose these bad actors, other nations aren't powerful enough to do so on their own or in concert with others - so they will accommodate the thugs too in their own way.

The price America is paying for electing Barack Obama president is incalculable. The end result will either be utter appeasement of a multitude of enemies (which is well underway) or war to escape the consequences of such appeasement - a war fought from a weaker position and fewer allies scared off by previous appeasement.

Political Capital

The Wall Street Journal reports on the efforts to save ShoreBank, a Chicago-based bank that is on the verge of being taken over by the FDIC due to bad loans it made. ShoreBank lends to poor communities.

Remarkably, Goldman Sachs, Citigroup, JP Morgan, and Bank of America have tentatively agreed to invest money as part of a $125 million capital raising process to stave off insolvency.

A person involved in the process to save the bank said: "Sometimes a bank like ShoreBank has to rely on karma, and the planets seem to have aligned to provide some karma with respect to this particular deal."

And here I thought that capital raising was about providing attractive returns for shareholders, and not about karma.

In reality, this is about Wall Street firms, facing intense government and PR scrutiny, looking to appease a politically-connected bank and score points with the Obama administration and Democrats.

It takes the phrase "political capital" to a disturbing, new level.

Crime and Punishment

The New York Times notes that New York City police stopped and frisked minorities nine times more often than whites in 2009 despite having similar arrest rates after being stopped and frisked.

The article implies the police are doing something wrong by stopping minorities so often, but the opposite appears true: if their stop and frisk approach leads to similar arrest rates, then the police are able to gauge a similar degree of criminality across the population.

This also sheds some interesting information on the current controversy with Arizona's law on allowing the police to stop people to see if they are illegal immigrants. The U.S. Supreme Court, in Terry v. Ohio, allowed police to detain someone briefly under a "reasonable suspicion" standard, rather than the more stringent "probable cause" standard. New York City is currently stopping over 570,000 people per year and arresting about 6% of them.

That is a large number of people being stopped, with a fairly small percentage being arrested. If such a tactic is appropriate to deal with New York's crime problem, I wonder if the courts will overturn Arizona's attempt to deal with its illegal immigration challenge?

Where's the Outrage II?

Coming Oon the heels of Freddie Mac asking for another $10.6 billion from the federal government to cover its first quarter losses, Fannie Mae has requested another $8.4 billion.

Since the Obama administration is using Fannie and Freddie to prop up the housing market while keeping their liabilities off the balance sheet of the U.S. government, Obama will continue to fund their losses without looking to reduce taxpayer losses.

The financial "reform" legislation that Obama and the Democrats want to pass has no reforms of Fannie and Freddie, despite their seminal role in the financial crisis and their staggering losses.

Where's the Outrage?

Freddie Mac, one of the two government-sponsored mortgage companies that played a central role in creating the financial crisis by spurring lending in lower credit quality mortgages, announced another $6.7 billion loss and asked the government for another $10.6 billion.

If this were Citigroup, Goldman Sachs, or any other private company, it would be a major news story and lead to cries of outrage directed against Wall Street, the company, and management.

So why is the story on the back pages of the Wall Street Journal and the New York Times?

Here's a hint. Precisely because it was created by the government to spur mortgage lending; precisely because Democrats blocked regulatory reform of Freddie Mac and its related company Fannie Mae; and precisely because blaming Wall Street helps avert attention from the government's role in the financial crisis, the press doesn't want to make a big deal about the catastrophic losses Freddie and Fannie have experienced.

Freddie and Fannie have cost taxpayers $136 billion, with more losses projected. Meanwhile, TARP funds invested in Wall Street banks will likely turn a profit.

Inconvenient Facts

Barack Obama has said he wants America's exports to double over the next five years.

That's certainly a laudable goal, but it is instructive to review the categories of products which were America's top exports in February 2010.

Pharmaceuticals were America's number 1 export that month, and medical products were the seventh highest.

It is ironic that ObamaCare, which will lead to restrictions on the development and growth of the pharmaceutical and medical device industries over time, will hurt important parts of our export industries.

On the other hand, the auto industry, which received unprecedented government assistance that will never be fully repaid, is no where to be seen.

So Obama attacks some of our most successful industries and assists some of our least successful ones. While that is a terrible investment strategy, it is consistent with government intervention in the economy, which seeks to aid troubled industries and hurts successful ones.

The proper government policy is one which plays no favorites, maintaining a level playing where success and failure are earned in the marketplace.