Planet Ponzi

by Mitch Feierstein

  16 ‘Study says most corporations pay no U.S. income taxes,’ Reuters, Aug. 12, 2008.

  17 National Taxpayer Advocate, 2010 Annual Report to Congress, www.irs.gov.

  18 David Lynch, ‘Why corporate tax reform is so tricky,’ Bloomberg Businessweek, April 7, 2011.

  19 www.taxpayeradvocate.irs.gov/files/ExecSummary_2010ARC.pdf.

  20 ‘Building the U.S. tax code, break by break,’ Washington Post, Sept. 18, 2011. The same source provides a useful graphic detailing the various breaks and exemptions.

  21 See Stockholm International Peace Research Institute (SIPRI), Military Expenditure database, www.sipri.org/databases/milex, data retrieved Aug. 2011.

  22 See Robert Moeller, ‘The truth about AFRICOM,’ Foreign Policy, July 21, 2010; also Thomas Eddlem, ‘Can we cut “defense” spending?,’ New American, March 8, 2011. The quotation printed in the text has been withdrawn from the AFRICOM website.

  23 Data sourced from the AFRICOM website, www.africom.mil, data extracted Aug. 2011.

  24 Calculated from Stephen Trimble, ‘F-35 strikes trillion-dollar mark for maintenance bills,’ Flight International, June 6, 2011.

  25 ‘The last manned fighter,’ The Economist, July 14, 2011.

  26 Nathan Hodge, ‘Gates takes aim at navy, questions carrier fleet,’ Wired, May 3, 2010; also, ‘Aircraft carriers and Chinese missiles: time to rethink the U.S. naval doctrine,’ East West Institute, Jan. 21, 2011.

  27 Steve Schifferes, ‘The dilemma for US car workers,’ BBC, Feb. 21, 2007, http://news.bbc.co.uk.

  28 Medicare is a federal insurance program, primarily there to help the elderly. Medicaid is an assistance program for those on low incomes (of any age), and bills are paid from a mixture of federal, state, and local funds.

  29 Timothy Carney, ‘Tick, tick, tick: The cost of Obamacare is a time bomb,’ Washington Examiner, Jan. 16, 2011.

  30 Congressional Budget Office, letter from the Director to the Honorable Nancy Pelosi, March 2010.

  31 Jill Jackson and John Nolen, ‘Health care reform bill summary: a look at what’s in the bill,’ CBS News, March 21, 2010.

  32 Data available from the Department of Finance, Canada (www.fin.gc.ca).

  33 Sally Pipes, ‘RomneyCare’s unhappy anniversary,’ Forbes, April 26, 2011, www.forbes.com.

  34 You can get the exact level of the US debt by going to one of the Treasury Department’s websites – www.treasurydirect.gov – and navigating to the page on ‘The debt to the penny and who holds it.’

  35 Warren Buffett reacted angrily to the S&P downgrade, commenting that the US would be AAAA rated if such a rating existed. But Warren Buffett doesn’t know his history. The US government has defaulted twice, in 1790 and in 1933. If something has already happened twice, it can happen again.

  36 As you’d expect, there’s a lot of material available on this. See e.g. Louise Story, ‘U.S. inquiry is said to focus on S.&P. ratings,’ New York Times, Aug. 17, 2011; Zachary Goldfarb, ‘Political parties trade blame for downgrade in U.S. credit rating,’ Washington Post, Aug. 6, 2011; For the Warren Buffett comments, see Betty Liu and Andrew Frye, ‘Buffett says S&P’s downgrade mistaken, still doesn’t see another recession,’ Bloomberg, Aug. 6, 2011, but also Alex Pollock, ‘Was there ever a default on U.S. Treasury debt?,’ American Spectator, Jan. 21, 2009 (or via www.aei.org), and Catherine Rampell, ‘Fearing (another) U.S. debt default,’ New York Times, Jan. 4, 2011.

  37 Jagadeesh Gokhale and Kent Smetters, Measuring Social Security’s Financial Problems (National Bureau of Economic Research, Jan. 2005); also, ‘The $64 trillion question,’ Wealth Manager, Sept. 2007. The IMF estimated world GDP at $61.8 trillion for 2010 (IMF, World Economic Outlook, April 2011).

  Chapter 4: A hole as big as the world

  1 Robert Novy-Marx and Joshua D. Rauh, ‘The liabilities and risks of state-sponsored pension plans,’ Journal of Economic Perspectives, vol. 23, no. 4, 2009.

  2 ‘State and municipal debt: tough choices ahead,’ Committee on Oversight and Government Reform, April 2011, Documents for the April 14th Hearing.

  3 ‘A gold-plated burden,’ The Economist, Oct. 14, 2010.

  4 See data cited in Dennis Cauchon, ‘Government’s mountain of debt,’ USA Today, June 6, 2011. Note that federal debt appears lower and federal pension liabilities appear higher than normally quoted because of the way in which federal pensions are funded.

  5 The 2011 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, May 2011, p. 67, www.ssa.gov.

  6 The 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, May 2011, pp. 130, 146, www.cms.gov.

  7 US Census Bureau, 2011 (www.census.gov).

  8 Evolutionary biology isn’t my strong suit, but I used a useful article in the New Scientist (‘Timeline: the evolution of life,’ July 2009). And I’ll admit to making use of Wikipedia on this one too.

  9 See 10-Q filings for Fannie Mae and Freddie Mac (or, more formally, the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation). The filings are available at www.fanniemae.com and www.freddiemac.com respectively.

  10 Lorraine Woellert, ‘S&P lowers Fannie, Freddie citing reliance on government,’ Bloomberg, Aug. 8, 2011.

  11 FDIC, Annual Report, 2010, www.fdic.gov.

  12 FDIC, Annual Report, 2010. The FDIC’s liabilities exceed its stock of assets by some $7.4 billion. If however, we take the corporation’s total stock of assets and subtract only its actual (not contingent) liabilities, the corporation has net assets of approximately $10 billion. It’s that $10 billion which underpins the contingent liability associated with support of the entire US banking system. If you need more help in understanding the logic of this arithmetic, I recommend studying the FDIC’s balance sheet a little further. A cup of strong coffee might also help.

  13 ‘The Budget and economic outlook: an update,’ Congressional Budget Office, Aug. 2011.

  14 Kotlikoff, ‘US is bankrupt and we don’t even know it.’

  Chapter 5: How to win friends and influence people

  1 Go to the CBO website (www.cbo.gov) and search for ‘average after-tax income.’ You have to do a little crunching to get the data in the graph, but nothing too challenging.

  2 Data available from Center for Responsive Politics, lobbying database, at www.opensecrets.org/lobby. Data include partial data for 2011. Data retrieved Nov. 4, 2011.

  3 Hui Chen, David C. Parsley, and Ya-wen Yang, ‘Corporate lobbying and financial performance,’ April 28, 2010, available from the Social Science Research Network (www.ssrn.com).

  4 See ch. 3 above, nn. 14, 15, 16, 20, 24, and 25; also Mark Knoller, ‘White House exults in General Motors repayment,’ CBS News, April 21, 2010, and William Greider, ‘The AIG bailout scandal,’ The Nation, Aug. 6, 2010.

  5 See also ‘U.S. bailout recipients spent $114 million on politics,’ Reuters, Feb. 4, 2009.

  6 You’re confused? Perhaps you thought GM had already paid back its loans. Well, yes, so it has – using one pot of bailout money to repay another pot of bailout money. Neil Barofsky, the inspector general charged with overseeing the Troubled Assets Relief Program (TARP), commented: ‘Remember that the source of this money is just other TARP money.’ That’s how you repay a loan on Planet Ponzi.

  7 Jeffrey Birnbaum, ‘Clients’ rewards keep K Street lobbyists thriving,’ Washington Post, Feb. 14, 2006.

  8 Matt Miller, ‘Make 150,000% today!,’ Fortune, Jan. 27, 2006.

  9 Jacob Hacker and Paul Pierson, Winner-Takes-All Politics (Simon & Schuster, 2010), p. 25.

  10 ‘Pinched,’ The Economist, Sept 17, 2011.

  11 Tax Policy Center, www.taxpolicycenter.org.

  12 ‘IMF finds “trillions” in undeclared wealth,’ Tax Justice Network, March 2010, www.taxjustice.net.

  13 Warren Buffett, ‘Stop coddling the super-rich,’ New York Ti
mes, Aug. 14, 2011.

  14 See the full breakdown at www.forbes.com.

  15 ‘Treasury preserves bank payday with AIG rescue cash,’ Bloomberg, March 24, 2009.

  16 Graham Bowley, ‘Strong year for Goldman, as it trims bonus pool,’ New York Times, Jan. 21, 2010.

  17 Gretchen Morgenson, ‘An A.I.G. failure would have cost Goldman Sachs, documents show,’ New York Times, July 23, 2010.

  18 Bradley Keoun, ‘Morgan Stanley speculating to brink of collapse got $107 billion from Fed,’ Bloomberg, Aug. 23, 2011. I also recommend a data visualization by Bloomberg (‘The Fed’s secret liquidity lifelines’), made available online at www.bloomberg.com/data-visualization/federal-reserve-emergency-lending.

  Chapter 6: The $50,000,000,000 egg

  1 Chris McGreal, ‘What comes after a trillion?,’ Guardian, July 18, 2008.

  2 ‘Zimbabwe rolls out Z$100tr note,’ BBC News, Jan. 16, 2009.

  3 www.cnbc.com/id/42551209/Inflation_Actually_Near_10_Using_Older_Measure.

  4 See Williams’s discussion in his August 2006 newsletter, available at www.shadowstats.com.

  5 The results are online at www.shadowstats.com if you care to take a look.

  6 PJ Huffstutter, ‘Cheap food may be a thing of the past in U.S.,’ Los Angeles Times, March 16, 2011.

  7 On Nigeria, see e.g. ‘Nigerian army clashes with militants in oil delta,’ Reuters, May 11, 2011. On Venezuela, see e.g. ‘Oil leak,’ The Economist, Feb. 24, 2011.

  8 www.indexmundi.com/commodities. Data extracted 19 Aug. 2011.

  9 You can get the data from the Federal Reserve Bank of New York (www.newyorkfed.org). Look for the page entitled ‘Historical changes of the target federal funds and discount rates.’

  10 You can get a good long-term historical graph of long-term rates at www.multpl.com/interest-rate.

  11 Joe Weisenthal, ‘Dallas Fed chief: the Fed is monetizing the nation’s debt for the next 8 months,’ Business Insider, Nov. 8, 2010.

  12 Stephanie Kirchgaessner, ‘Perry compares Fed stimulus to treason,’ Financial Times, Aug. 16, 2011.

  13 Indeed, Governor Gideon Gono of the Bank of Zimbabwe has recently warned against money-printing in the US, advising that the effect is likely to be excessive inflation. And he should know. [See John Carney, ‘Zimbabwe bashes Bernanke – on Inflation!’, CNBC, Dec. 2, 2011.]

  Chapter 7: After Beachy Head

  1 Phillip Inman, ‘Bank of England governor blames spending cuts on bank bailouts,’ Guardian, March 1, 2011.

  2 Inman, ‘Bank of England governor blames spending cuts on bank bailouts.’

  3 Robert Chote, ‘Post budget presentations: opening remarks,’ Institute for Fiscal Studies, June 2010, www.ifs.org.uk.

  4 Nick Mathiason, ‘Hedge funds, financiers and private equity make up 27% of Tory funding,’ Bureau of Investigative Journalism, Sept. 30, 2011, www.thebureauinvestigates.com. See also Lucy Keating, ‘Tory tax breaks for the wealthy,’ Bureau of Investigative Journalism, Sept. 30, 2011, www.thebureauinvestigates.com.

  Chapter 8: A statistical anomaly

  1 All value-added data in this chapter are from Bureau of Economic Analysis (www.bea.gov), ‘Gross domestic product (GDP) by industry data.’

  2 ‘Forty years on,’ The Economist, Aug. 13, 2011.

  3 A junk bond is the common term given to any non-investment-grade debt security – that is, one rated BBB− or lower. The market is also known as the market for ‘high-yield debt.’

  4 ‘Gross value-added in the financial sector,’ Deutsche Bank Research, March 2007, www.dbresearch.de.

  5 Bureau of Economic Analysis, ‘Corporate profits by industry.’

  6 Greta R. Krippner, ‘The financialization of the American economy,’ Socio-Economic Review, vol. 3, no. 2, May 2005, pp. 173–208.

  7 Steven Levitt and Stephen Dubner, Freakonomics (Allen Lane, 2005).

  Chapter 9: A house for Joe Schmoe

  1 You can view the entire document for yourself. Just go to the Senate Committee on Homeland Security and Governmental Affairs (www.hsgac.senate.gov) and search for ‘Timberwolf.’

  2 ‘How panic gripped the world’s biggest banks,’ FT Magazine, May 8, 2009. The FT article comprises an edited extract from Gillian Tett’s worthwhile Fool’s Gold (Little, Brown, 2009).

  3 Maurna Desmond, ‘IMF: subprime losses could hit $1 trillion,’ Forbes, April 8, 2008.

  4 It’s strangely hard to get precise figures for this filing. Your best bet is probably to enter ‘Lehman Brothers bankruptcy filing document – EPIQ systems’ into a search engine and review the data that come up. Note that there are a small amount of nonfinancial liabilities to be included, as well as the (much larger) quantum of financial ones.

  Chapter 10: How to hide a neutron bomb in ten easy steps

  1 Landon Thomas Jr, ‘Greek rail system’s debt adds to economic woes,’ New York Times, July 20, 2010.

  2 Menelaos Tzafalias, ‘Greece to call time on cushy pension deals for “unhealthy” jobs,’ Independent, May 21, 2010.

  3 You can get a full view of historical Greek rates by going to the Bank of Greece website (www.bankofgreece.gr) and searching for ‘drachma money market rates.’

  4 Manuela Saragosa, ‘Greece warned on false euro data,’ BBC, Dec. 1, 2004.

  5 Or check a good online resource such as Investopedia (www.investopedia.com). Search for ‘Advanced bond concepts: yield and bond price.’

  6 Emma Charlton and Keith Jenkins, ‘German bunds slide most in 8 weeks; Greek two-year notes rise,’ Bloomberg, Sept. 17, 2011.

  7 Though rumor has it that banks are trying to recreate these now.

  8 Search Bank of International Settlements (www.bis.org) for ‘Amounts outstanding of over-the-counter (OTC) derivatives.’

  9 Fawn Johnson, ‘SEC queries firms on repos,’ Wall Street Journal, March 30, 2010.

  10 Tett, Fool’s Gold, p. 241.

  11 Eric Dash and Sewell Chan, ‘Panel criticizes oversight of Citi by 2 executives,’ New York Times, April 8, 2010.

  12 See JP Morgan Chase’s financial statements, most easily accessed via investor.shareholder.com/JPMorganchase/earnings.cfm.

  13 James Kirkup, ‘The path to Northern Rock’s nationalisation,’ Daily Telegraph, Jan. 14, 2008.

  14 Kirsty Walker, ‘Northern Rock chief’s offer to resign,’ Daily Mail, Oct. 16, 2007.

  15 ‘Northern Rock bosses: A board profile,’ Daily Mail, Sept. 18, 2007.

  16 Ashley Seager and Angela Balakrishnan, ‘Rock liabilities added to the national debt,’ Guardian, Feb. 8, 2008.

  17 For a scarily huge number, see table on p. 192 of JP Morgan’s annual report for 2010, accessible at investor.shareholder.com/jpmorganchase/annual.cfm. Total derivatives notional amounts: $78,905 billion. That number is not a misprint.

  18 Just as it is freezing now. French and Italian banks are currently finding it all but impossible to issue commercial paper or certificates of deposit.

  19 Patrick Jenkins and Megan Murphy, ‘Banks brace for hits on Greek bonds,’ Financial Times, July 21, 2011.

  20 Data for Maryland’s GDP from the Bureau of Economic Analysis. Data for Greece from IMF, World Economic Outlook, April 2011.

  21 Hugh Son, ‘BofA posts record quarterly loss on costs of bad home loans,’ Bloomberg, July 19, 2011.

  22 ‘Strife of Brian,’ The Economist, Sept. 17, 2011.

  23 Text available from www.propublica.org. Search for ‘Squared CDO 2007-1 Ltd. Prospectus.’

  24 Linda Sandler, ‘Lehman paid bankruptcy lawyers, managers $27.1 million in fees in April,’ Bloomberg, May 23, 2011. For a taste of some of those uncertainties, see also Peter Henning, ‘Legal fees keep surging in Lehman class-action suit,’ New York Times, Aug. 1, 2011.

  25 ‘Too big a fail count,’ The Economist, June 2, 2011.

  26 Tom Lauricella, Kara Scannell, and Jenny Strasburg, ‘How a trading algorithm went awry,’ Wall Street Journal, Oct. 2, 2010.

  27 ‘Too much of a good thing,’ The Econom
ist, June 23, 2011; ‘Explosive,’ The Economist, June 23, 2010.

  28 And, what do you know, not long after I wrote this paragraph an alleged $2 billion fraud was uncovered on the ETF trading desk of Swiss bank UBS. Speaking as a financial expert, I’d say that $2 billion is quite a lot of money. Can you imagine operating a bank with risk management systems so slipshod that you can simply lose $2 billion? Do you not think that somebody might have noticed after, let’s say, the first few hundred million went missing? It’s astonishing how much money Wall Street handles – and how chaotic its control systems continue to be.

  29 Javier Blas, ‘High-speed trading blamed for sugar rises,’ Financial Times, Feb. 8, 2011.

  30 Peter Guest, ‘Volatility will go on in world’s largest cocoa supplier,’ CNBC News, April 28, 2011.

  Chapter 11: Collecting nickels in front of steamrollers

  1 Michael Lewis, The Big Short (Allen Lane, 2010), p. 62.

  2 Lewis, The Big Short, p. 61

  3 Lewis, The Big Short, p. 63. See also Max Abelson, ‘Mr. Bubble bounces back,’ New York Observer, Sept. 7, 2011.

  4 See an interesting discussion by Steven Malliaris and Hongjun Yan of the Yale School of Management: ‘Nickels versus black swans: reputation, trading strategies and asset prices,’ March 2009. Document available online via www.ssrn.com. Also see Reuters, ‘Nickels and black swans,’ May 26, 2009.

  5 ‘Many unhappy returns,’ The Economist, Aug. 20, 2011.

  6 Roger Lowenstein, ‘Long-Term Capital Management: it’s a short-term memory,’ New York Times, Sept. 6, 2008. See also ‘The story of Long-Term Capital Management,’ Canadian Investment Review, Winter 1999, accessible via www.investmentreview.com.

  7 Alternative payment models could be envisaged. See e.g. Larry Harris, ‘Pay the rating agencies according to results,’ Financial Times, June 3, 2010.

  8 Rupert Neate, ‘Ratings agencies suffer “conflict of interest”, says former Moody’s boss,’ Guardian, Aug. 22, 2011.

  9 Gillian Tett, ‘Rating agencies in a bind as pressures mount,’ Financial Times, Dec. 16, 2010.