Jeff Skilling former CFO of Enron, has his 25 year conviction on appeal. IN short order the Court of Appeals wil decide whether he shoudl be a free man. Frankly I would think he would do better on the outside preaching about the lack of board oversight and external accounting audit failures as Barry Minkow (ZZZZ Best) does. But this article is an interesting retrospecitve of what happened and how Arthur Andersen and the Enron Board failed in their duties.

You will recall that CEO Ken Lay cheated the hangman's noose so to speak by handily dying of a heart attacke before his sentencing… 

Observers at a Conference suggest that the FED is too closed to Wall Street. It is therefore too prone to bail out bad decisions.  Good point, I just mentioned in the last post that large insurance firms did not engage in such folly. Yet the FED has 'bailed out' Bear Stearns.  I also mentioned that Congress is now being asked to 'loan' $50 B to essentially re capitalize Ford and GM. Shortly after 9/11 Congress worte poorly managed airlines checks for $15 B. LUV had $2B in the bank at the time, why didn't the others?  WHy didn't Congrfess demand improved financial management in exchange for your money, bad deal I would say.

What is both the ethical and financial imperative that the FED should follow? IF you or I open a deli at  down the street from this campus and go bust, will Bernake bail us out, not likely.  What is your take?

Again as I have mentioned before, when these bad investments are folded into another company we never really learn what the failed company did, their errors are not on display as a lesson to others. Or as Jim Rogers put it, the guys at Bear Stearns get to keep their Maseratis bought with bonuses paid on these failed schemes while you and I get the bill for their mistakes. Funny I don't hear the candidates talking about this, do you?

Readers will redcall that Erin Callahan was ousted as the Lehman CFO when she failed to 'rally investor confidence in their financials.'  Apparently she should have spent more time studying cheerleading in college and less in finance. But I digress…

Now Lehman CEO Fuld faces a rebellion. LEH is down 80% this year. We are reading Warren Buffet's 2007 letter to shareholders in Inermed II and Statement Analysis. What are the two precepts that Warren uses to evaluate how well one of his companies are doing?  YOu will recall that  they are

return on invested capital

how much wider is the moat around the company, is this company doing something unique that other companies cannot easily duplicate.

Okay how well did LEH do in this regard, the answer is that it was or is a disaster.

They operated on a razor thing capital of only 3%.  They borrowed short term in the commercial paper market to invest long term in mortgages. When a few mortgages failed to pay, their 3%n capital was wiped out. So there was no return on invested capital.

LEH did not construct a moat at all, they simply mimiced what CITI, MER and others were doing. Once the ship of sub prime started to sink, everyone wanted to sell those 'assets' at once, of course there were no buters, at least not at market prices. MER, see previous post, sold $30 B at 22 cents on the dollar, whoops. One has to look at a different industry, say insurance to find firms that did not succumb to this folly. One is not hearing such disaster stories about Travelers or New York Life for example.

THe collapse of the oil prices in 1986 resulted in virutally everyhttp:/bvank in Odedssa, TX failing. The FDIC was created as a resutl fo the Craqsh of 1929.  FDIC stands for Federal Deposit Insurance Corporation.  It insures customer deposits to a ceiling level. Amounts in the bank over this amount are not insured.

Columbian Bank had deposits in excess of this limit. Apparently the FDIC is not going to cover those deposits. The Crash of 1929 was not just a waterfall decline in stock prices. Banks at that time were allowed to loan  money on stock purchases. In fact banks could loan 90% of the purchase price. When stock prices declined more than 10% the collateral was gone.  The Crash occurred in Oct of 1929. By March of 1930 prices had  declined such that one third of the banks in the US would close, along with the loss of all the depositors' money.  This wiped out one third of the money supply in the US as the Dow Industrials fell from 390 to a low of 41.  Such borrowed money purchaseds are known as going on MARGIN. The margin is the deposit the customer makes to purcdhase the stock.

Congress passed the Glass Stegall Act to prevent banks from lending on securities. Phil Gramm sponsored legislation repealing this provision in 1999. His time, he is an economist by the way, could not have been worse.  Banks got into the sub prime mortgage and well if you read the blog you know the rest- CITI, USB and many others have essentially gone broke and had to be re capitalized.

Today margin requirements are 50%. While this sounds realistic, consider that leverage or potential margin is actually infinitely higher. ONe can now deal in all sorts of sophisticated derivatives (which means Wall Street knows what it is doing right up to the point of going broke in which case they need a bail out as they are ttoo big to fail) such as puts, calls, indices, derivatives, reverse interest rate swaps, sliced and diced mortgages, etc.  Witness the fall from Dow 14,000 last year to 11,500 today.

We study accounting and the blog attempts to link finance and economics into a more understandable curriculum palette so that students can see the big picture.

On reader asked that I post some comments on the situation in Georgia, okay let's do that.

Basically this calls into question, exactly what is the role of the US foreign policy  or military policy (we have been in Iraq longer than we were in WW II)

What is the role of NATO

How do we best respond to get what we would like in a nuclear world and in theaters separated a world away by two oceans

My thoughts are straightforward. Putin is a KGB trained Politburo thinker. He is not a capitalist unless you count moving oil gains into his bank account.  He dreams of the Russia that never was but might be if it controls  all the energy supplies of Europe.   Pthreaten GeoUtin invaded as much to secure a pipeline as to  threaten Gerogia.

Yet we ring Russia with missles and dare Putin to lose face, he is not going to do that, Europe in a French led 'peace agreement' did nor threatened to do anything to Russia.  We are not going to war or at least I hope not over things we cannot control a world away on Russia's doorstep.

ONe might step back here and contemplate what Tom Sowell has been discussing in several recent columns (tomsowell.org or townhall.com)  Sowell notes that France become virulently anit war after WW I, a fact that did not escape Mr. Hitler.  Hitler studied French society and what it was saying and doing rather than its supposed Maginot Line. When the French did nothing as Hitler occupied the No Man's Sudetenland, Hitler became bolder.  For that matter the Americans and Brits did nothing in the same fashion.  It was probably no surprise to Mr. Hitler that France fell in a mater of weeks.

The drumbeat of voices agsint Iraq, whatever one thinks of Iraq, has surely given Mr. Putin the same sort of courage to move unchecked.  And so he planned an 'invasion' during the Olympics when in fact he would be seated next to Mr. Bush.  Check. With a tepid response from the West, it is nearly checkmate in terms of moving these small countries back to the Soviet orbit.   It was foolish to include small states like Latvia in NATO, if indeed NATO is not coming to their rescue which in fact it cannot do. Does the left really think we can reason Putin out of Georgia?  Do they care? 

So what can we do? What should we do?  Clearly Russia is not the new glasnost Gorbachev let's raise a glass of Stoli Russia but the same old Bear. I have mentioned in class and posted link to the diagram of Napoleon's invasion.  After Hitler's attack Russia is rightly terrified of a Western Invasion.   Never fight the other man's fight, take the high ground that we can hold. I would suggest the following.

Get serious about an energy policy here, nuclear power now for generating electricity,it works in France and Japan. Russia must not think we will do nothing to help ourselves. The policy of not drilling in ANWAR or off Florida as Brazil discovers oil in the Gulf of Mexico is absurd.

Get serious about duplicating the same high speed trains in France and Japan between major centers like Houston, DFW, SA Austin and around the rest of the country. Instead we build footbball and baseball stadiums, what message does that send?

Get serious about allowing alternate transportation ih urban areas, govts use Kawasaki Mules on the street, why not ordinary citizens, a two ton empty pickup going to the grocery store is ridiculous.

The world is internet connected, like Teddy Roosevelt, use the bully pulpit. NO favored trade status for Russia, no membership in the G 8.  IF they are not part of the world that elects gtovernments let them try the Warsaw Pact again.

Come to think of it, let's ditch's  the UN. Let's start another, membership only to capitalst coutnries with elected governments, you know the kind with two parties Vlad.  It should be pretty clear pretty fast which outpaces the other. This idea of letting dicators in Sudan and Venezuela use the UN as a sprfingboard is riduculous also.

Challenge the Russians to finally become a consumer economy.  What is it that they have to offer the Georgians or anyone else?  Seventy years after WW II, there is not a single market in which the Russians are competitive other than natural resourcess like oil. Why not?  The answer is that their system does not work. This would be a great chance to make this point in South America by the way.

Get our fiscal house in order. The dollar continues to sink.  Stop spending federal money to rescue any and eveyrone be it Bear Stearsn or GM.  Balance the budget.  Tighten the belt. Stop promising to be the nanny state to the world or those with $200 running shoes here that claim to be in poverty.

Get ourselves back in the manufacturing business.  The anti green anti people policies of China et al doe not deserve out business. The actions of China and Russia demonstrate just how dangerous such outsourcing can be.

Yes we can but not by taxing the proudcers in this country,

I could go on but we need to make it clear that Russia is the bully they are and will not be allowed to play in the capitalist sandbox as a result. No Goldman Sachs going to Russia, no Moscow becoming an intl finance center.

But that would take resolve and ending all the promises we are making like that $50 B loan we are making to Ford and GM. Is there a politican or an electorate tough enough to do that, I doubt it…

Merrill 'bullish on America' Lynch has agreed to buy back $7 B in bonds.

Okay let's try to connect the dots here.  MER gets involved in subprime mortgages.

MER sells these as solid investments to their clients.

Clients hit the roof and courtroom when they discover their investments are not paying off.

MER suffers massive write downs as they initially buy some bonds back.

MER seeks capital

Maria Bartiromo questions John Thain CEO over $30 B sale for 22 cents on the dollar

And the exam question is

would you want these guys running your retirement fund?  Just wondered, this is after all why we study accounting and investments

Did you know the auto industry wants $50  billion in 'loans?'  Did you realize that Congress approved $25 B in last years' energy bill?  WE continually examine the deteriorating condition of the domestic auto companies here on the blog. I and others have suggested that Ford and GM have no net worth. This request would seem to cement that idea.  Hm that would be $75 B in loans, right?  Are you connecting the promises that candidates made in Michigan and Ohio with this request.  Does this make youi as a taxpayer happy? Okay the Federal government has re capitalized Bear Stearns, now GM and Ford (will Cerebus owner of Chrysler get part of this deal), and is promising to rescue lots of homebuyers?  Hmm, how much money is in the Bernake cookie jar I wonder?

HEB  operates itw own leadership and trianing academy to develop leaders.  Click to read DAve Hendricks' article on how it works. The article features 's youngest store manager, age 34.  He started as a bagger and worked his way up.  I do not see any mention of college, hmmmm.  And HEB picks ab out 35% of the cadidates from restaurant and military backgrounds to diversify the idea mix rather than just promote internally.  This re3flects the are HEB is in.  HEB started in Waco.  Between Ft. Hood in Killeen and the former five bases in San Antonio,military would be a big part of its base.

My p;oint here is that the leading retailer has decided to train its own rather thaqn outsource to community colleges or universities.  I wonder if this makes an impression on Higher Ed?

Maria Bartiromo interviewed the CFO of Lehman Brothers this spring in Business week, it was on the blog at that time. Back then I stated that I doubted the CFO knew what was in the billions of dollars of so called assets. Since then Lehman fired her for not 'increasing confidence' among investors in their financials.  Now this morning  Lehman is trying to raise capital and sell assets (a Wall street euphemism for trick or treat) and cannot do either. Is Lehman too big to fail, I doubt it but will Bernake arrange another 'sale' as he did for Bear Stearns?

Market Watch linked to a story about the sharp fall in the price of gold, silver, and other commodities.  One 'analyst' stated that metals had 'risen beyond the scope of their fundamentals' implicitly suggesting that after the fact it was obvious that prices were too high.  Well…….