June 2010 Mailbox

RE: “From Russia With Cash” May 2010 It would be great if the cards fell so perfectly for all of us. I almost guarantee that in a few years you will be reporting on how it was possible for Mikhail Prokhorov to have lost so much money. Steven Bergh, Cape Town

The transformation of Prokhorov to what he is now is an impressive story in itself. Ashwani Ramachandran, Cambridge Solutions Ltd., Bangalore, India

RE: “How Hassan Nemazee Duped the World’s Biggest Banks” May 2010 This was an enlightening article that confirms the evident: People act on financial interest. The banks made loans because they saw the interest income and maybe a few headlines.

As for Nemazee, someone said the hardest thing about Harvard is getting in; after that, it’s a piece of cake. Given all that has happened, is Harvard really that good? I’m a Purdue University (Krannert School of Management) alumnus. We were taught values and ethics. It’s a pity that more articles are not written about the good managers from the good schools. Christopher Hill, Gland, Switzerland

RE: “Tainted Waters” May 2010 Perhaps there will be some form of Karmic justice for those who carelessly caused illness, but life is often not fair that way. I continue to look forward to reading about further developments related to Chemtura Corp., especially the ones that involve the company cleaning up after its mistakes. Keep up the insightful, investigative journalism. Pierce Ford, Albuquerque, New Mexico

I grew up in Kalamazoo and therefore grew up with Kalamazoo River stories constantly told to me. Your article was very well written, and I enjoyed reading it. Mitchell A. Early, Chicago

RE: “Keynes Reconsidered” May 2010 You quote Robert Skidelsky, biographer and advocate for John Maynard Keynes, who points to the fiscal policy of major governments in the early 1930s as negative examples that support Keynesian fiscal policy. He repeats the canard that governments sat on their fiscal hands, not allowing budget deficits to grow and letting the economy collapse into the Great Depression.

Historical data from the White House Office of Management and Budget show the government did, indeed, allow budget deficits to grow. From July 1930 to June 1931, the U.S. government budget ran in deficit of $462 million, a turnaround of $1.2 billion. For fiscal year July 1931 to June 1932, the deficit increased to $2.6 billion.

That budget deficits weren’t even larger during this time wasn’t because government spending collapsed. Annual federal spending more than tripled over the course of the 1930s. This isn’t the picture of an era of fiscal conservatism. Shawn Ritenour, professor of economics, Grove City College, Grove City, Pennsylvania

Keynes was wrong then, and Keynesians are wrong again today. Politicians of his time received Keynes’s theory with enthusiasm because it suggested doing what they want to do all the time: tax and spend. The true explanation of what happened during the Great Depression has been provided by the Austrian school. The 1920s cycle is an example of what needs to be done: nothing. Markets would have absorbed the assets of AIG, Goldman Sachs, Citigroup and others who deserved to fail. The focus now would be in reforming money institutions around the world instead of continuing to mend a faulty system full of moral hazards and crony capitalism. Jorge Borlandelli, EFG Bank & Trust Ltd., Nassau, Bahamas

RE: “Vietnam’s Growing Pains” May 2010 We manage and consult on investments for European and U.S. investors related to their exposure to Vietnam. Your article goes a long way in helping investors be more informed about the situation in that country. Louie Nguyen, president, Soledad Investment Management, San Diego

RE: “The [Redacted] Bailout of AIG” April 2010 I’m a former Citigroup vice president and real estate mortgage derivative expert (1997 to 2002) with a pristine credit-loss- underwriting track record. Your article really captures the overall mortgage-bond crisis: suboptimal underwriting credit analysis that was exacerbated by faulty derivative-risk calculations. These were all packaged up with unsupportable assumptions to garner misleading ratings from the major firms. Purchasers became complacent, relying on the firms’ ratings and ignoring the underlying faulty assumptions (the fine print).

In the old days, if we wanted to buy a basket of assets, we went over to the selling institution’s office and reviewed each asset file ourselves. There was no substitute for your own firsthand due diligence and credit analysis. Sophisticated purchasers and investors would never rely on a third-party ratings firm’s assessment as the end-all of quality, especially when the seller was paying the firm for the rating in the first place. Richard Henry, Toronto

Clearly written pieces like this that shine light on the murky trades espoused by organizations such as Goldman Sachs are imperative if lawmakers are to be subject to enough public pressure to embolden them to curb such crony capitalism. Your article, in the simplicity of its telling, helps debunk the myth that these transactions are too complex for mere mortals to understand. A greater confidence trick has never been played! Nick Nabarro, head of global business development, IPD, London

I am in India, but as we also felt the effects of the crisis over here, we’re interested in the latest developments. Thanks for this brilliant story, which has exposed crucial coverups. Who knows which skeletons are yet to tumble out! Anirvan Ghosh, Bangalore

Updates

Muni Document Names Names Papers filed in U.S. federal court in March named names in the Justice Department’s investigation of bid rigging in municipal finance. JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms alleged to have conspired to pay below-market interest rates to state and local governments on investments, according to a federal court document filed in the criminal antitrust case by lawyers for a former CDR Financial Products Inc. employee. The government says the alleged scheme delivered profits to Wall Street at taxpayers’ expense.

Bloomberg Markets began reporting on tainted municipal finance deals five years ago. In “The Banks That Fleeced Alabama” (September 2005), we reported that JPMorgan led a group of banks that overcharged Jefferson County by more than $60 million for interest-rate swaps. In “Broken Promises” (November 2006), we wrote that JPMorgan led banks that sold $7 billion in municipal bonds intended to fund housing and schools but were, in fact, ruse deals. Banks and Los Angeles-based advising firm CDR put the money into so-called guaranteed investment contracts and collected millions of dollars in gains. The public got nothing. The stories helped spark the largest-ever criminal investigation of the $2.8 trillion municipal securities market.

The Justice Department has indicted CDR and three of its executives, who pleaded not guilty. Three former CDR employees pleaded guilty and agreed to cooperate with investigators. The government says CDR ran sham auctions that allowed banks to make investment gains from the proceeds of municipal bonds. CDR and each bank named declined to comment, as did the Justice Department.

The March filing, in U.S. District Court in Manhattan, marks the first time the companies have been identified as co- conspirators, providing the broadest look yet at alleged collusion by banks and advisers in public finance. A government list of previously unidentified co-conspirators contains more than two dozen bankers at firms such as Bank of America Corp., Bear Stearns Cos., Societe Generale SA, two General Electric Co. financial businesses and former Citigroup Inc. unit Salomon Smith Barney. None of the firms or individuals on the list has been charged with wrongdoing. Nine bankers have been notified by the Justice Department that they’re likely to be indicted. William Selway and Martin Z. Braun

Toxic Case for Supreme Court? The U.S. Supreme Court may weigh in on whether a company in bankruptcy can shed the environmental claims against it. In “Tainted Waters,” Bloomberg Markets reported that bankruptcy provides an advantage for companies with liabilities because it can clear legal claims against them. Firms often argue that those claims extend to toxic-removal costs. A lawyer in the story said a Supreme Court ruling that addresses the circumstances under which a bankrupt company is responsible for environmental claims could prevent the lengthy and expensive litigation that creates a financial drain on both bankrupt companies and the U.S. Environmental Protection Agency.

Apex Oil Co., a Clayton, Missouri-based corporate successor to Clark Oil & Refining Corp., has asked the Supreme Court to address the issue. In its Feb. 23 filing, Apex asked, “In what circumstances is a debtor’s obligation to clean up pollution a claim under the bankruptcy code?” If the Supreme Court follows its normal schedule, justices could decide whether to take up the Apex case before recessing for the summer at the end of June. Tiffany Kary

#<535521.2245115.2.1.46.17993.811># -0- May/05/2010 16:25 GMT

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