Regulatory Rethink
By CHARLES SCHUMER (With
March 28, 2008; Page A13

The sudden collapse of Bear Stearns was a shock to our financial systemmeans I can now bash the Bush administration and all it stands for without even using the word "Bush" anymore. This is a huge plus since it makes all the guys in the Senate lounge giggle. and It was also a wake-up call to anyone who believed our financial house was in good order. Last week we Democrats looked into beheld the glory of a financial abyss, glowing political opportunity and the Federal Reserve acted too swiftly and appropriately to prevent permit a potentially much broader failure of the financial system and a legislative mandate the likes of which Democrats haven't even had so much as a whiff of Since the New Deal. Unfortunately, The Fed's actions appear, at least for the moment, to have provided some much needed breathing room to the markets.

But we are by no means out of the woods race when it comes to the long-term prospects for a complete, legislative assimilation of the health of ourfinancial system, or of our economy more broadly. We need to rethink the regulatory framework that governs our financial system.

March 28--

845 AD : (Ragnar Lodbrok: Extortion, Interstate Flight) Ragnar Lodbrok is paid 7,000 pounds of silver by Charles the Bald to leave Paris and take his pesky Viking hoard with him.

1834 AD : (Andrew Jackson: Bank Fraud, Embezzlement, Money Laundering, Counterfeiting) The Senate censures Andrew Jackson for defunding the Second Bank of the United States. A year before, being outwardly hostile to the concept of a national bank, he had diverted the capital to local and state banks. Injecting, one might say, a little liquidity into the system. State banks were in the annoying habit of printing their own currency in 1833, itself a bit of a issue, but combined with the lack of a hard-currency reserve (gold or silver), which most banks did not hold in quantity, the resulting inflation was ruinous. Jackson tried to stem the tide by requiring government land purchases to be paid for in hard currency (again, gold or silver) but this only served to boost the demand for the coins from state banks, which, unable to satisfy the demand owing to their low or non-existent reserves, then collapsed. The result was the Panic of 1837 and the years of economic ruin that followed. Jackson expunged the censure once his allies took the Senate again a short time later.

Ironic, no?

2002 AD : (Multiple Defendants: Securities Fraud, Tax Fraud, Bank Fraud) Enron is given 90 days to turn over documents to Federal Investigators. Most don't turn up.

A blast from the past. So to speak. With echos in the present:

Citigroup said Wednesday that it would pay $1.66 billion to the Enron Bankruptcy Estate, which represents creditors of Enron, the energy trader that engineered one of the biggest U.S. corporate frauds. With a trial scheduled for next month, Citigroup was the last of 11 financial institutions to resolve claims going back to 2003.

Citigroup settles with Enron creditors. [International Herald Tribune]

Equity Q. Private is the author of Going Private and a Guest Editor at DealBreaker.com

The unbiased, neutrally independent American Coalition for Ethanol (it is worth a visit just to absorb- or be absorbed by- the simply eerie animations on the website, but don't forget to check out the "all about ethanol" stuff too. Ethanol 101 is an invaluable source of the latest bullshit, biofuel jargon guaranteed to get the undergarments off of that hottie with the clipboard that you have been oggling since crashing the Democratic fundraiser) released a report earlier this week revealing that Ethanol might save consumers money.

Of course, we only bring it up as a way of talking about the far more interesting publications of Robert "Ethanol Is The Largest Scam In Our Nation's History" Bryce. Seriously, you can't fail to appreciate titles like "Gusher of Lies," especially when they are accompanied by subtitles like "The Dangerous Delusions of Energy Independence." Or perhaps, "Pipe Dreams," paired with "Greed, Ego, and the Death of Enron."

Either way, I think I'll buy corn futures.

Lobby Says Ethanol Helping Reduce Gasoline Costs [Research Recap]

Equity Q. Private is the author of Going Private and a Guest Editor at DealBreaker.com

Ancient joke: What's the difference between god and Larry Ellison?
Ancient answer: God doesn't think he's Larry Ellison.

The list of people who take more flak than Larry Ellison for being rich is pretty short. But, then, Larry Ellison works very hard at maintaining and inspiring hatred. His efforts are so ceaseless, one might almost think he revels in the vitriol. Actually, we like to think that his divine metabolism absorbs energy, not only from the seething hatred of the mere mortals he enslavesemploys, but all of humankind.

It would be easy to chalk his abrasiveness to childhood trauma (born to a 19 year old, unwed Jewish mother, sent away to live with his aunt and uncle, etc. etc.) but it is so pervasive, it is just much cattier to attribute it to a sort of perverse pleasure.

There was that thing with the aircraft noise. After being cited repeatedly by the city of San Jose for noise violations stemming from his insistence that he could take off and land his Gulfstream whenever he damn well pleased, he simply sued the city for an exemption (a suit which, after record legal fees, he won).

And that time when he offered to "donate, as in free" the software to create the largest Big Brother database in the world along with a national ID program. (He didn't mention that Oracle planned to charge significant "maintenance fees").

And when accused of insider trading after dumping $1 billion in Oracle stock? He donated $100 million to charity in lieu of paying a fine. (The little detail that it was to his own charitable foundation seems to have attracted little notice until after the settlement was final). We'll let you guess if he claimed a deduction.

Oh, he pledged $115 million to Harvard- but decided he didn't want to pay- and so he didn't.

And now, he is stealing from school children. The cad!

The Oracle chairman, who is the fourteenth richest person in the world, recently had the value of his 23-acre Woodside, Calif., home reassessed from $173 million to about $70 million. That dropped his annual tax bill by more than a million dollars. The biggest loser: Local schools that depend on tax revenue for the lion’s share of their budgets, according to the Almanac.

The Portola Valley School District, for one, will lose an estimated $250,000 to $300,000 a year as a direct result of the Ellison reassessment, Tim Hanretty, the district’s assistant superintendent, tells the Business Technology Blog. That’s a healthy chunk of the district’s $11 million annual budget, and Hanretty tells us the district will have to lay off about six of its 100 or so employees to make ends meet. The cuts won’t come in the classroom, but in administrative and facilities positions.

Count on Larry Ellison to make subprime work for him, at the expense of helpless school children.

Ok, so the headline is a bit of a stretch. But he's been asking for it for years! (Even his Wall Street Journal "hedcut" is unflattering).

Yes yes, what a jackass. (Admit it, you want to be Larry Ellison).

Larry Ellison’s Tax Cut Breaks School’s Budget [WSJ]

Equity Q. Private is the author of Going Private and a Guest Editor at DealBreaker.com

Shocked into an inconsolable state, Presidential Candidate Hillary Clinton feared out loud yesterday that injecting liquidity into the economy might reduce the United States to the economic level of post 1990s Japan.

We might be drifting into a Japanese-like situation. I don't think we can work our way out of the problems we're in in the broad-based economy with monetary policy alone. I think the Japanese tried that and tried and tried that.

The phenomenon Mrs. Clinton is grasping for is the "Liquidity Trap." With interest rates so low that monetary authorities have no where left to go with rate cuts, and where the economy is stagnate, expectations for long term returns in, e.g., equity investment are low and market participants keep their assets in short-term vehicles or cash. This, of course, makes matters even worse.

Liquidity isn't the answer, you see. Instead, we have to use liquidity.

Details after the jump.

Phil Schoonover was pretty sure it would be a bad idea to sell Circuit City. At least that's what he told Reuters back in February.

Schoonover came over to Circuit City three years ago from rival Best Buy, to increasingly underwhelming investor enthusiasm. Of course, by the time Schoonover was talking to Reuters, Mark Wattles, head of Wattles Capital Management had disclosed a 6.5% stake in the retailer along with a vague warning that he might press for a sale, or buy more stock, or both, or neither. This had the effect of turning some heads. Wattles owns a controlling interest in Ultimate Acquisition Partners, that, in turn, owns Ultimate Electronics, and that owns 32 consumer electronics stores.

Back in February, Circuit City quickly and aggressively moved to expand its borrowing, a fairly transparent anti-takeover move, even given the company's deteriorating cash position. For a company that had a very limited debt profile, this was unusual. Circuit City's credit line was blown out by $800 million for a total of $1.3 billion with an option to tack on another $300 million whenever they liked. Not bad for a company that earlier that month had a mere $49.7 million outstanding against their credit facility, held nearly $500 million in cash, and commanded sales of only $2.9 billion.

It is probably fair to say that Wattle was irritated by the move. Wattle Capital Management announced on February 25 that they were nominating a slate for five seats on Circuit City's 12 person board.

Schoonover (Swoonover?) responded with a cost-cutting plan (which presumably would reduce the need for Circuit City to take on $1.3 billion in debt) and the prospect of selling some or all of Circuit City's Canadian stores. To say that few people were impressed might even be generous.

Since then, the plot has thickened. Wattles turned up the heat and proposed a total sweep of Circuit City's board on February 29th. Circuit City, desperate to look like they were in control of matters, quickly showed the door to Steven Pappas the Company's "Small Store President," and Peter Weedfald the Chief Marketing Officer. Circuit City had dropped $6 million in bonuses back in December to retain 10 Vice Presidents and another $3 million to retain Executive Vice presidents, including Pappas and Weedfald. Circuit City then declared a $0.04 dividend last week. Too little, too late as the firm now faces being replaced in the S&P 500 by Philip Morris on March 28th. How humiliating. And disastrous for the stock price, as the shares were quickly dumped by institutions holding S&P 500 mirroring portfolios. Firms like Wellington Management and TCW Group turned nearly 20% of the shares over by themselves.

Who stepped in? D.E. Shaw & Co., HBK Investments, Royal Capital Management, and Wattles. The activists are closing in, so you might not want to sell any of the executive corps employment insurance.

Activists Circle Circuit City
[WSJ - Heard on the Street]

It seems my background check, part of my new-hire process, has pulled up some flags. My postings here on DealBreaker will, therefore, not appear in my name. Whoever that woman in the back office is, she won't add my name to the system until the little issue with the FBI is resolved, so in the meantime I'll just have to make do with this somewhat crippled account.

The great binge-purge cycle of investment bank human resources has drawn, it seems, into its second half. (Maybe we laid off completed a headcount reduction in our IT group this week and no one told me). Be that as it may, I happened across a recent victim of the vomitous expulsion of bankers onto the porcelain sidewalks of Wall Street, and took some time to interrogateinterview the poor soul.

10:49:58 AM equityprivate: I've always been curious about this big bank layoffs and the process. How did you find out? Was it a "pink slip" literally or what?

10:51:27 AM FormerBBEmployee: They call you into a private area, away from where you normally work, and explain what's happened. As for the pink slip, not at all. It's a packet of information that details what you get for being canned.

10:52:26 AM equityprivate: A packet? Like the reverse of a "New Hire" packet? What's in it?

10:53:08 AM FormerBBEmployee: Actually, it is similar to a new hire packet. It goes into what money they owe you, benefits, contacts in H.R. ... Of course, there is no mention of anything being "at will" ...

10:53:44 AM equityprivate: So, there is a... what... printout of what the bank thinks it owes you?

10:54:26 AM FormerBBEmployee: Even better. A legal document they want you to sign. It says what you get, what you get if you sign, and what you were getting.

10:54:49 AM equityprivate: That's insidious.

(See the rest after the jump)

Well the soon to be former Governor Eliot Spitzer’s limousine brigade is stuck in traffic (and the networks are giving him the OJ Simpson treatment, with helicopters flying overhead showing his slow-motion progress through Manhattan traffic), so let’s take a few moments to reflect on the shabby legacy of the financial press when it comes to Spitzer.

This morning Kimberly Strassel points out on the editorial pages of the Wall Street Journal that Spitzer played the press like a Stradivarius. (Bess Levin would surely have come up with a much more apt and colorful description.) Many reporters built careers on the prosecutor's leaks intended to bully innocent people, Strassel explained.

Yet from the start, the press corps acted as an adjunct of Spitzer power, rather than a skeptic of it. Many journalists get into this business because they want to see wrongs righted. Mr. Spitzer portrayed himself as the moral avenger. He was the slayer of the big guy, the fat cat, the Wall Street titan -- all allegedly on behalf of the little guy. The press ate it up, and came back for more.

She details the instances of his bully-boy tactics, smearing opponents from behind the scenes with the financial press all to eager to repeat his attacks. The worst seems to be his attack on John Whitehead, a respected Wall Street figure who has never been publicly accused of wrong doing but who had the temerity to defend Spitzer target Ace Greenberg. Spitzer called him on the phone to threaten him, and when Whitehead publicized Spitzer’s threats, the press suddenly got calls hinting at corrupt connections between Whitehead and Greenberg.

We covered the press enabling Spitzer’s slimy tactics long ago. It’s nice to see this issue getting more attention.

Spitzer's Media Enablers [Wall Street Journal]

Sponsored by Financial Times

Stocks jumped in the last minutes today, trading up after continued credit market concerns drove prices down most of the session. Like the rest of the week, trading was characterized by heavy volume and high volatility.

By four, all S&P sectors were up and the Dow had a triple-digit gain. It closed up 113.47 or .86% to 13325.46. The Nasdaq was down 10.61 or .42% to 2535.66; and the S&P 500 traded up 5.14 or .35% to 1460.41. The Pharmaceutical company Merck traded up 1.41% with news that British can’t sue them for health problems caused by Vioxx.

Expect more of the same credit induced vicissitudes.

Market intelligence everyday at FT Alphaville.

In an Overstock.com quarterly conference call yesterday, CEO Patrick Byrne said he does not post anonymously on internet message boards like the detestable Rahodeb Mackey, a claim Gary Weiss proved fallacious long ago.

What’s interesting about yesterday’s call, which ran for over an hour in the late morning and early afternoon, is that Byrne actually posted under his sobriquet, Hannibal, while the call was in progress. He wrote, “ thanks dude” at 11:43 on the Investor Village message board.

We suspect that the overstock board of directors are all Byrne creations as well. Joseph J. Tabacco, Jr., come on.

Overstock.com CEO Patrick Byrne Posts on Internet During Conference Call [Gary Weiss]