October 2008

Demanding Accountability

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Treasury Secretary Henry Paulson’s
Ship of State
Market to Market Accounting -
To be suspended until further notice

By Michael Minns
Houston, Texas Lawyer

America - The news is awash in many things even though the headlines are only about the sellout…whoops, sorry, bailout. Buried in the far back pages is the hardly interesting, or seemingly minor, news of such things as Venezuela’s dictator, pardon me, duly elected King, having just made a nuclear agreement with Russia’s, dictator, whoops, duly elected whatever. This, to me, is more worrisome than the Cuban Missile Crisis was in the ‘60s, and it isn’t even making headlines. Now that we are publicly broke, with our “King” announcing it on the airways, and his “Prince” Henry Paulson ordering us to make way for his 700 Billion dollar program, we can’t do anything because we have no more soldiers, no money, no…. well you get it - the simple truth is staring us in the face.. All we can do is spit in their direction and hope a strong wind picks it up.

But Pirates, who now wear collared shirts and government outfits, how are they tolerated? Now the old Barbary pirates that our country went after 250 years ago who are back bigger and meaner than ever. These Pirates are back seizing ships and demanding ransom. The ransom used to be a few hundred grand, now they want millions. And the nations of the world pay the ransom in hope they get their ships back. And they usually do. Honor among thieves and dictators, so to speak. We can’t go after these little pirates going after cargo ships and barges anymore. The big pirates are after our Ship of State, the biggest plunder of all, and they won’t settle for millions of dollars or even mere Billions. Their demands are in the hundreds of Billions, the Trillions. And so far, after close to a Trillion dollars in a matter of weeks, the collared shirt pirates have taken more money than all the floating pirates in the world over the last millennium…and they haven’t even suggested they will return our ship of state.

What about the bailout?

King Bush and Secretary Prince Paulson, formerly of the Pirate company Goldman Sachs, held Congress, the next election, and all our hopes for loans and stocks in the future at ransom. They said: “Pass this $700 Billion Dollar bail out…or else?” We have been swash-buckled by this man. Now the pirate is land bound, and he’s telling us how to negotiate with his crew back on the Sach’s pirate ship. Yo-ho-ho and a bottle of Rum!

The Market the Way It Used To Be

The market is an amazing thing. Let’s say Burger King decides to sell its big product, the Whopper for a buck. That’s a pretty good value. So, to avoid loss of business McDonalds offers its Big Mac for a buck. Neither can sell it for less than it costs to make, unless the market will encourage the buyers to buy other things, like French fries that cost almost nothing to make, or coke that is also pretty cheap (especially since we stopped using sugar in Coke in the United States - a story to think about later). If it costs $1.05 to hand someone a big Mac and if we know that person will spend another $5 on coke and fries, which cost only a small amount, it’s worth it to keep the customer in the store.

If you really love the Big Mac you might pay a little extra for their product over the Whopper - maybe a buck and a half. But the market will put a price on the hamburger at the fast food shop and when it passes that price, few will buy it. Then the company goes under. If you can buy a whopper for a dollar no one will pay five bucks for a Big Mac - unless something really unusual happens.

The Recent Original Formula?

Now back to Coke … In Mexico they don’t like the new Coke made with corn syrup, so Coke bottling factories south of the Boarder still makes it with Sugar. Texas consumers, who know, mostly from Mexico, but some enlightened Texicans, too, pay extra to have Coke made in Mexico, imported back into the United States and sold here. They charge a premium because it costs extra to ship it, and because there is a limited supply shipped here. Customers are willing to do that because the Coke tastes better and because Sugar is healthier than artificial corn syrup - no matter what the current “lobbying” scientific community is trying to tell us in their primetime advertising scheme.

In Texas, Mexican coke is worth about 50% more than US coke (coke meaning the soft drink, Coca Cola, not the illegal drug in the not so recent “Original Formula,” or the fuel). When you hit the areas around Canada, where you would expect it to be very expensive because it takes more fuel to carry it there, the difference in value drops to nothing. Why? No one in the Northern States has ever tasted the real thing with real sugar in it, like they use to make it. So, no one will pay an extra nickel for it. There is no demand.

These things are what we call, or better yet, what the people at the Securities and Exchange Commission (SEC) call, market to market value. Actually, in the world of real estate appraisal, it’s called “Fair Market Value.” That means, roughly, what a normal person in a normal buying mode would pay for it on a normal day.

For the Big Mac, that can vary from a dollar to two dollars, based on the location in the world and the competition and the promotions for the competition - same with the Whopper. But, if you buy the Whopper at an airport you don’t get a discount on its best day! Why? Because you just went through security, after parking your car and being searched and pawed and x rayed and told that there is a code orange security alert, so you should look out for strange people, and it’s not worth a couple of bucks to leave and come back. Again, supply and demand creates the market. If the market price is less than the cost of making the Whopper and selling it at the airport, then Whoppers quit getting made.

The Bailout Bill and its New Small Print

The bailout bill which your Senate and House of Representatives just passed, and which your King, President Bush just signed, has hundreds of pages of small print. My favorite ambiguity (lawyers call it a loophole - this hole is big enough to place the grand canyon in) is the clause which suspends market to market accounting. What does that mean to you?

The banks, who are now salivating to sell their “discount paper” to us, the tax payers, already know that we have agreed to spend $700 or so billion or more. They already know the same companies who caused the problem to begin with will be spending the money. They already know that Prince Paulson has already brought people on board who worked for him at Goldman Sachs and that they are already starting to divide up your money and their new commissions. How much will the paper be discounted? What is a discount? And, what backs up the paper?

The paper is a promise to pay money, called a promissory note, and is often backed-up by a house. If the paper promises to pay $100,000 and if the promissor, the person who promised to pay, is bankrupt, then the only way to get the $100,000 back is to sell the house. What is the house worth? It is worth what someone will pay for it. If the house is actually worth 3-4 hundred thousand dollars, then that paper is likely worth the full $100,000. You could sell the house in an hour for $150,000, pay-off the note, a few lawyers and judges and congressmen and bankers, and still have change. But what if the house is damaged? What if the value of the house was only $50,000? What if the lawyers, judges, congressmen and bankers want $20,000 off the top before the tax payer gets paid? In that case, the paper is worth less than $30,000. And, what if there are ten such houses on the same street, all foreclosed? Then fellow citizen, we can’t give the house away, and we walk away from the Promise to pay as though it were worthless, which it will be. We lose everything the Congress and President purchased with our (future) tax dollars. Someone will have to pay of course, to tear the worthless home down - tax-payers again, to the rescue?

We have no clue at this point where the bad paper promises fall in this scheme of things, or how they will be sold to “we” who don’t want them, but must buy them. We only know that the banks are selling them and that a price has to be figured out and that Market Value of the Security has a lot to do with finding a fair price. We assumed, since they couldn’t sell it, that it is not worth face value, so it is sold for less than the price on “the ticket,” at a discount.

Market Value, Fair Market Value - maybe it’s better to just say, “what it’s worth” - can, for the first time since Richard Nixon froze all prices in a so called “conservative administration” (while also taking us off the silver standard) in a so-called capitalistic country, today, be suspended.

How can anyone do that? It is about as easy as saying that we will not obey the laws of gravity today… we will suspend them so that our citizens can all fly to work to save gasoline.

The bailout wording gives the SEC chairman - the man John McCain said he would fire when he becomes president, even though he can’t be fired; the man who was appointed by King Bush - the legal right to suspend “market to market” valuation. Fear trying to figure out how they will do this.

The goal is to say that, in the future, the house will go back to what it should be worth, when the market acts the way it should act; and therefore, we will declare that the house is now worth what we say it is worth.

That logic of this bailout bill, which is now law, is that the SEC chairman can simply declare that houses have an X value, and then they legally have that value - even if they have no value at all, because no one will pay anything for them.

With that logic, one could freeze a Big Mac and say that its true value is not a dollar at the discount window. Its true value is what it will be worth in 1000 years, when the market has had time to figure it out, with 1000 years of inflation. Thus, its true value is One Thousand Dollars. And, since, by then, it will not have to be unfrozen by microwave, but will be unfrozen by free solar power there is no added cost to unfreezing it.

This new bill makes the Enron accounting look like “Fair Market Accounting.” In fact, under this new bill the SEC could take old Enron stock certificates, which are worth nothing (unless you get something from the law suits) and say that it is likely in 100 years Enron will revive and the stock will be worth Two Million Dollars per share (certainly it is worth more than a frozen hamburger 1000 years in the future).

So what’s the point? Where is this shell game going?

Banks have to get their money and value their stock based on their accounting. It lets them create even more false accounting than the accounting that got us into this mess to begin with. Accountants do the figuring, usually, under what they call Generally Accepted Accounting Principles, instead of Market to Market. Now we have a Magic Market.

For the Trillion dollars government spends next week or next month (or the half Trillion spent last week - without an act of Congress) we could have created solar and wind energy for the entire United States and charge about 5% of what you pay now to keep the equipment running. Foreign oil based energy dependence would be over in a year. That’s not magic. It’s logic, physics and science - courtesy of the magazine “Mother Earth.” But, the Magic Market doesn’t require anything except a law. Logic is definitely out.

So, what’s the next step? Can King Bush suspend the laws of gravity or does that require an act of Congress?

The sad thing about fear is that it motivates rational people to do irrational things. If you have been bitten by an animal that might have rabies, you might take the painful rabies shots and suffer the painful side effects, and, essentially, the thought is, “do something, anything to keep me from getting rabies.”

But the thought is wrong, dead wrong. Before you take the series of rabies shots, that on rare occasions can be fatal, you should do everything in your power to find the animal that bit you. You should consider whether or not there are symptoms. And then you need to figure out if there have been any dead animals lately in the area, or animals that are acting out of character - when a farm has rampant rabies, nearby you will find nocturnal animals, like skunks, running around in the day light, and find more than normal amounts of, let’s say, dead raccoons in the streets, and other such signs. If there are no signs of rabies in the area, then that should be evidence that the animal might not have had rabies and you should consider that, because whenever you get shots you take risks. If the bitten human has a lot of drainage then maybe it’s not rabies, maybe it’s a cold or the flu. And, if you actually find the animal and have it tested, you will know for sure! I mean, come on, if you treat the flu with a rabies shot, you’ll still have the flu.

So, rational people figure out what the symptoms are before trying to treat the illness. The illness of America is not that the government didn’t spend enough money, or that there wasn’t enough credit for legitimate capitalism. The illness was spending too much and extending too much credit. If the sick American economy is suffering from the flu, you don’t cure that by giving it a rabies shot and then immersing the economy in a bath of ice water. That’s for a fever that’s pitched so high that if you don’t lower it you will have brain damage.

If the bank robbers of Wa Mu, and Wachovia are holding someone hostage, you don’t fix the problem by firing a shot gun wildly into the crowd of hostages, hoping for the best. You take out the robbers with your marksmen - or you negotiate and try to talk them out of their position. You don’t say to them: “We will let you take the hostages and $700 Billion dollars, and a big jet, if you will just promise to get back with us later.”

Unfortunately, the one thing we have guaranteed through our fear and failure to slow down, like the advice in the famous sixties song: “you move too fast,” is that the pirates have heard our response, they like it and they will be back. You can take that to the bank - that is, of course, if yours is one of the few special federally sponsored banks that will still be open when this is over.

The Banks and the Not So Free Market

Which leads us to more shame, and more fear and more blame. The giants of finance who caused this mess are not bailing out the little guys, or even the big guys if they don’t have as much political clout as Goldman Sachs. The small local bank which made responsible loans, watched over its customers and paper, is not getting all these breaks. Not only does the small local bank have to compete with the economic power of giants, artificially created and supported in the past by government, now, like the Reagon/BushI RTC days, they have to compete with Big Government…this time in a much bigger way. A big bank gets its big mess purchased by Big Government. The little bank, with a few small problems that are normal in capitalism…eats its own problems, and likely becomes a take-over target for the big bank financed by big government. More consolidation through artificial means and less competition, results in fewer bankers you actually know on a first name basis. And a message: Don’t buy stock in your local Bank. Buy the new Bank, Goldman Sachs, or Bank of America, which banks by the way will get huge tax cuts soon. How? The regulators at your friendly IRS are allowing them to buy the losses from other banks and take tax deductions for losses they never suffered. Let’s say Bank of America buys a million dollars in debt from Wa Mu for one hundred dollars. Then they sell that debt at a discount to the US treasury for $400,000. On paper it looks like about a $400,000 profit. On a tax return with the regs now in force, they get to deduct the loss of $600,000 from the original value of the note. So they get a credit on past returns of $200,000 and a refund. Who pays for the refund? The same hostages who paid the pirates nearly a Trillion dollars this month. You!

Michael Minns is a lawyer and a former boxing champion who defends citizens from the IRS, sues crooked lawyers, and wrote the best selling books "The Underground Lawyer" (available on Amazon.com) and "How to Survive The IRS: MY Battles Against Goliath".

His cases have been published by the New York Times, Fortune Magazine, People Magazine, and his face has appeared on the Good Morning America Show, Hardball, and many others; but when he decided to write about this current financial disaster, he chose the US~Observer. His victories include the largest tax refund case in US history, the first and second disbarment of IRS lawyers for misconduct in US history, and the largest number of off shore acquittals in a single case in US history. The largest legal malpractice judgment against a divorce lawyer in US History, and the only “not guilty” verdicts in the famous series of “Harboring” cases and murder charges in the Gordon Kahl Arkansas trials. Quite a “partial resume.”

Lawyer Michael Minns’ website is: Minnslaw.com.

Editor’s Note: Mr. Minns recently wrote the commentaries: "The Largest Tax in the History of the World • 2008’s $700-Billion Emergency Proposal" and "The Bail-Out Sellout".

© 2008 Michael Minns

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