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What We Read Today 01 May 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • Russia experiencing recession now, says IMF (BBC News) The IMF (International Monetary Fund) says that international sanctions are damaging the economy and threatening investment, pushing Russia into an economic contraction in the first three months of this year. The IMF says the contraction is expected to continue through the second quarter marking the start of an official recession.
  • Euro zone inflation edges up, swift ECB action seen less likely (Robin Emmott and Anna Nicolaou, Reuters) Inflation for the Eurozone edged up to 0.7% after hitting a five-year low in March (0.5%). Reuters says the slight increase reduces the probability that the ECB will act soon to ward off inflation. But the inflation rate remains below 1%, an area that has been labeled the "danger zone".
  • U.S. government says it lost $11.2 billion on GM bailout (Eric Beech, Reuters) Hat tip yo John O'Donnell. The government has written off $826 million equity it held in "old GM" which increases the loss from the bailout to $11.2 billion and closes the books on the deal. The loss had been $10.3 billion after the government sold the last of its stock in the "new GM" back in December.
  • Acid Rain: Supreme Court Revives Cross-State Pollution Rule (Editorial Staff, The Adirondack Almanack) A rule which lower courts had struck down in 2011 1nd 2012 was reinstated by the Supreme Court of the United States (SCOTUS) a 6-2-1 decision yesterday. Justices Antonin Scalia and Clarence Thomas dissented, while Samuel Alito recused himself. The rule is known as the Cross State Pollution Rule. It prohibits states from creating pollution that impacts on neighboring states. A primary form of pollution affected by this rule are power plant emissions in midwestern states creating sulfur and nitrogen oxides which pollute eastern and northeastern states in the form of acid rain (nitric and sulfuric acids). Over the past half century acid rain has decimated higher altitude trout fisheries in New York and and northern New England and created extensive boreal forest damage there (see picture) and all the way up and down the eastern mountains (Appalachians, Blue Ridge, Smokies). Buildings, bridges, monuments, cemeteries, outdoor sculptures and other structures are also damaged by acid rain. The oxides of nitrogen and sulfur prohibited by this rule also are harmful to human health.

Today there are 14 articles discussed 'behind the wall'.

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  • The Rise of Corporate Impunity (Joseph Eisinger, ProPublica) Co-published with The New York Times Magazine. A great piece of writing about the scandal that is the Great Financial Crisis. Eisinger details the case of the only major bank/firm Wall Street executive prosecuted and convicted as a result of the fraud that removed tens of trillion dollars from the economy. That man was Kareem Serageldin, a second tier executive with Credit Suisse.

Eisinger compares Serageldin's trasgressions to those of hundreds (probably thousands) of other more senior Wall Street executives who lied, cheated, concealed, obfuscated with impunity.

He compares the current lack of prosecution to that which occurred after the S&L crisis, after the accounting fraud scandals following the bubble and after the financial crisis 1929-1932. The combined convictions for those three events which produced less economic damage (per capita and adjusted for inflation) than the Great Financial Crisis (GFC) of 2008 (see analysis) were well over 1,000. The S&L crisis alone produced 1,100 convictions. Even the head of the New York Stock Exchange went to prison after the 1929 crash. CEOs served time after the corporate accounting fraud at the turn of the 21st century. And the Great Financial Crisis produced just one lower level executive prosecution. See also the article discussed yesterday: Two Giant Banks, Seen as Immune, Become Targets. As discussed then, yes they are big banks but the incipient prosecutions have nothing to do with the GFC. See next article.

DOJ is now admitting that from 2009-2014 it operated under the old GBH "strategy" (aka its unilateral disarmament doctrine) of not prosecuting elite banks or bankers even when they committed massive frauds that endangered public safety (HSBC), national security (Standard Chartered), and the global economy (all the SDIs) - and failed even to recover the bankers' fraud proceeds. Consider how damning DOJ's assessment is of the costs of DOJ's unilateral disarmament.
"Mr. Bharara said this dynamic created a 'gaping liability loophole that blameworthy companies are only too willing to exploit.'"
I have only one friendly amendment to Bharara's assessment - it should read "bankers exploit." The bankers' frauds will frequently involve looting the bank. Bharara's prosecutions of insider trading largely involve frauds that made hedge funds more profitable, but I'm sure he would agree with my friendly amendment were he to consider the matter.
  • Settling the Bets of the Private-Equity Megadeal’s Golden Age (Julie Creswell and Michael J. de la Merced, The New York Times) In the biggest leveraged buy-out in history, TXU Corporation was taken private in 2007. The venture capital backed deal was $45 billion, with lots of debt issuance to pay for it. Everything went downhill from there and TXU Corporation has finally declared bankruptcy, driven into the ground by low natural gas prices. The deal only made sense if natural gas prices had risen from 2007 levels. And they didn't so the gamble failed. With all who lost money on this deal are there any winners? Creswell and de la Merced say the winners include a group of hedge funds and other investors led by the financiers Leon D. Black of Apollo Global Management and Bruce A. Karsh of Oaktree Capital, who bought pieces of the company's debt on the cheap. As holders of senior debt they have negotiated to take over ownership of TXU's lucrative power generation business.
  • Mexico sets out oil and gas reforms (Jude Webber, Financial Times) New laws and constitutional amendments have been spelled out which will open oil and gas development in Mexico to private investors for the dirst time since 1940. The laws and amendments are expected to be quickly ratified and become law.

Click on chart for larger image at Rick's Picks.

  • South Carolina Resists as U.S. Seeks to Shut Down Disposal Site (Matthew L. Wald, The New York Times) With billions spent for partial construction and the reactor grade plutonium output no longer in high demand, the Obama administration has proposed stopping construction of the weapons-grade plutonium reclamation facility in Aiken, S.C. The states of South Carolina and Georgia are raising objections because they do not want to lose the 1,600 jobs involved in the construction. If the construction is halted then the U.S. will not have a means to dispose of weapons-grade plutonium and fall into non-compliance with a disarmament agreement reached with Russia in 2000.
  • MBA: Mortgage Applications Decrease in Latest Survey, Refinance Activity Lowest Since 2008 (Bill McBride, Calculated Risk) Not surprising that refinancing applications (see graph below) are down with mortgage interest rates up nearly a full percentage point in the past year. But it is surprising that the purchase applications are also dropping rapidly as we are into the spring buying season when sales are normally rising. The number of mortgage applications are now down to levels not seen for 18 years. (Graph at Calculated Risk.)

Click on graph for large image at Calculated Risk.

  • WellPoint to have 600,000 PPACA exchange enrollees (Allison Bell, Life Health Pro) WellPoint is pleased with the Obamacare policies sold, saying the profiles of coverage matched their expectations. They did remark (as well have discussed before) that they do not understand the low pricing of co-op policies which have undercut commercial insurers.
  • What Piketty’s Conservative Critics Get Wrong (Kathleen Geier, The Baffler) The most interesting thing about this review of book reviewers is the number who have written review who have not read (admittedly) or have apparently not read the book. One of those non-readers said the book was not economics but ideology. Geier's review of reviewers is a very amusing piece.


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