Congress debates Bernie Madoff bailout

"I know the American people will not stand by
and let all my charities fail."

You read it here first.

UPDATE 12/16

Surely $50 billion makes him too big to fail.

Great line from a commenter at Marketwatch: "The market has nowhere to go but up. Everything, including the end of the world, has been 'priced in.'"

G'day, mates! Drop dead.

The state of Victoria in Australia is planning to enforce laws discriminating against white males.

DISCRIMINATION against dominant white males will soon be encouraged in a bid to boost the status of women, the disabled and cultural and religious minorities.

Such positive discrimination -- treating people differently in order to obtain equality for marginalised groups -- is set to be legalised under planned changes to the Equal Opportunity Act foreshadowed last week by state Attorney-General Rob Hulls.

You may have a chance, though, as long as you're a criminal. Not by being a white male, but by having committed a traditional criminal offense.

The laws are also expected to protect the rights of people with criminal records to get a job, as long as their past misdeeds are irrelevant to work being sought.

Of course, the state of Victoria might consider that having been born with a Y chromosome and a melanin shortfall is relevant to any kind of work going.

My image of the Aussie bloke is being sorely tested. They'll be weeping a bit, sensitively, down at the boozer. "Crocodile" Dundee will sort out the muggers. "That's not a mop." (Whips out Bowie mop.) "This is a mop."

Mates, you can hide out halfway across the flaming outback, but the long arm of positive discrimination will catch you up like a 'roo with itchy feet. Can't think what you could do about it.

The Clash: "White Riot"

Tear it down

Brothers and sisters, you look like you need to cheer yourself up a bit. Time to call in the Old Crow Medicine Show.

Canadian Marxmanship trophy

Correctional Service of Canada logo

According to the Canadian Multiculturalism Act 2006–2007, "All federal institutions shall undertake projects or programs in respect of multiculturalism and carry on activities in a manner sensitive and responsive to the multicultural reality of Canada. Ministers of the Crown shall, in the execution of their respective mandates, take such measures as they consider appropriate to implement the multiculturalism policy of Canada."

We are in complete harmony with the Directive. As Director, Ethnocultural Services Section, Offender Programs and Reintegration Branch, I am pleased to present this submission by the Correctional Service. It is of course available in French and 49 other languages.

Q. 2.1 Does your institution's vision, mission, mandate and/or priorities statement(s) include reference to multiculturalism?

Yes, Commissar, a thousand times yes! Your vision is our vision! Consider, if you please, Commissioner's Directive 702 on Aboriginal Programming: "To ensure that Aboriginal Offenders are provided with an equitable opportunity to practice their culture and traditions without discrimination and with an opportunity to implement traditional Aboriginal healing practices."

Q. 2.3 Does your institution have programs related to multiculturalism?

Glad you asked me that, Sir! We consider these programs to be our core mission. Let me give you just a few examples.

"In Ontario, we have contracted with the Black Inmates and Friends Assembly to provide a variety of programs to Black inmates and other ethnocultural groups including the provision of ethnocultural programs and services to ten institutions as well as to provide contact between ethnocultural communities in the Ontario region and federal offenders indigenous to those communities to assist in their successful reintegration back into their respective communities. Specific activities include the provision of training to staff, meetings with ethnocultural groups, establishment of volunteer visiting programs, creation of a network of volunteers from the different communities to work with offenders in the community."

That's only one token of our ethnoculturally centred outcome-directed inclusiveness drive. Take another: "Five new positions will be created for the coordination of ethnocultural services in all regions." Or this: "Inuit Programs on substance abuse are being provided by an Inuk Elder." And people imagine that all we do is keep criminals from preying on them. In fact, I am putting in our budget request for the next fiscal year a proposal to fund a public educational program to increase awareness of how we are at the leading edge of Canada's multiethnic inclusive sensitivity initiative.

Q. 3.1 Did your institution undertake initiatives to foster a corporate culture that embraces diversity?

Does an Inuit club baby seals? Excuse me, that just slipped out. I meant of course, Commissar! I am proud of our proactive, multiethnic solutions-based actions. Let me just bring you up to speed on a few. If you'll turn to page 43, you'll see the following: "In order to encourage staff and recognize their efforts in increasing cross-cultural awareness and sensitivity toward ethnocultural diversity and improving race relations, a multiculturalism award has been created. The award consists of a citation signed by the Deputy Commissioner or Assistant Commissioner and the Deputy Minister of Canadian Heritage. It is awarded every year on March 21; International Day for the Elimination of Racism." Bingo!

Or — you'll pardon me if I swell with pride a little — how about this: "In Atlantic region Watoto an event organized to raise $27,000 to build a house in Africa. Many activities surrounding African-Canadian culture such as African Children's Choir were organized at Nova - prison for women in April 2007." Kind of takes your breath away, I know. But there's more: "Change of Seasons Gathering! Black History Month! Asian Heritage Month Events! Violence Against Women events! Human Rights Day Observance! Aboriginal Cultural Awareness Sessions/Forum!" And (I'm bound to admit to having had a hand in advancing this) "Talking Circles with Native Liaison Officer or Aboriginal Elder."

Q. 3.3 Did your institution undertake initiatives to celebrate Canada's cultural heritage with the general public?

In a word — yes! "Under New Employee Orientation Program, in some regions, staff are offered the opportunity to participate in sweat lodge ceremony in one of the Aboriginal communities."

Steering committee, Multiethnicity Command Centre,
Correctional Service of Canada

Q. 4.1 Did your institution develop policies that took into consideration multiculturalism and diversity?

Sir, you can take that to the bank. I direct your attention to page 77: "Personal Effects policy now has added culturally sensitive items such as hair care products. Policies must align with a Diversity and Cultural Sensitivity Checklist."

Q. 5.1 Does the workforce in your institution reflect Canada's diversity?

Absolutely. Number of visible minority employees: 786!

Aboriginal employees: 1026!

I am in a position to assure you, Commissar, that a substantial number of these employees also meet guidelines for inclusiveness of women, differently abled, lesbian/gay/bi/transgendered warm and wonderful people. In reading the complete report, I am sure you will agree that we are fully meeting our responsibilities under the Multiculturalism Act. And we will continue to press for changes to the law mandating that ethnic and indigenous persons be incarcerated only in numbers that are exactly proportional to their representation in our great multicultural Canadian society.

Treasury island

Hair shirt, popular with penitent
medieval monks, in updated model.

Martin Weiss, publisher of the investment newsletter Money and Markets, believes that the astounding amount of money banks worldwide have put into derivatives (a fancy word for leveraged bets) could bring down the whole system:

Unlike the Mafia, established stock and commodity exchanges, like the NYSE and the Chicago Board of Trade, are entirely legal. But like the Mafia, they understand these dangers and have strict enforcement procedures to prevent them. When you want to purchase 100 shares of Microsoft, for example, you never buy directly from the seller. You must always go through a brokerage firm, which, in turn is a member in good standing of the exchange. The brokerage firm must keep close tabs on all its customers, and the exchange keeps close track of all its member firms. …

For the most part, the global derivatives market has no brokerage, no exchange, and no equivalent enforcement mechanism. In fact, among the $181.2 trillion in derivative bets held by U.S. banks at mid-year 2008, only $8.2 trillion, or 4.5%, was regulated by an exchange. The balance — $173.9 trillion, or 95.5% — was bets placed directly between buyer and seller (called “over the counter”). And among the $596 trillion in global derivatives tracked by the BIS at year-end 2007, 100% were over the counter. No exchanges. No overarching enforcement mechanism.

This is not just a matter of weak or non-existent regulation. It’s far worse. It’s the equivalent of an undisciplined conglomeration of players gambling on the streets without even a casino to maintain order.

As usual, before we buckle at the knees, let's remind ourselves that in financial forecasting no one is objective. Vested interests are everywhere. This gentleman has a newsletter to sell, and extreme positions attract more attention (like this posting) and perhaps more subscribers than a more cautious and hedged outlook. I am not suggesting Weiss is writing anything other than his honest opinion, but even honest opinions can be influenced by a person's situation.

With that out of the way, let's follow his views further:

This is why super-investor Warren Buffett once called derivatives “financial weapons of mass destruction.” This is why the top leaders of the world’s richest countries panicked after Lehman Brothers failed, dumping their time-honored, hands-off policy like a hot potato, jumping in to buy up shares in the world’s largest banks, and transforming the world of banking literally overnight.

This is also why you must now do more than just find a strong bank.

You also must find a safe place that has the highest probability of being immune to these risks. The reason: As I warned at the outset, at some point in the not-too-distant future, governments around the world may have no other choice but to declare a global banking holiday — a shutdown of nearly every bank in the world, regardless of size, country, or financial condition.

Unlikely? Probably, but today's headlines are full of events that would have been beyond unlikely a couple of years ago. Anyway, Weiss thinks that the smart thing to do now is go into full defensive mode, protecting your capital — not just against market losses, however severe, but against the temporary crack-up of the financial structure.

Under the latest Federal Reserve plan,
bank assets are to be moved to a secure location
in a disused mine in Nevada.

Even in what passes for normal times in the investment world, many renowned theoreticians (Benjamin Graham, Charles D. Ellis, John Bogle, and Burton Malkiel among them) have strongly argued that success comes not by trying to outsmart everyone else, which is impossible over the long run, but by avoiding big losses. (A lesson most of our banks have obviously never learned or have forgotten.)

I've never been totally convinced by the "efficient market" hypothesis, which says that every investment is correctly priced on the basis of all known information — if that were true, what would be the point of buying or selling at all? But these are, obviously, not normal times. The risk-reward ratio for the short to medium term seems abysmal. Weiss is worth considering seriously when he argues that the imperative now is to avoid losing money. But how to do that, if you can't even count on a bank to preserve your cash and keep its liquidity (the ability to access your money and use it when you want)?

For capital conservation and liquidity, Weiss says, "the single investment in the world that’s at the top of the charts is short-term U.S. Treasury securities. These enjoy the best, most direct, and most reliable guarantee of the U.S. government, over and above any other guarantees or promises they may have made in the past, or will make in the future."

He answers three key questions that skeptics might reasonably ask. The first is, "The FDIC is also backed by the U.S. government. So if I have money in an FDIC-guaranteed account at my bank, what’s the difference? Why should I accept a lower yield on a government-guaranteed 3-month Treasury bill when I can get a higher yield on a government-guaranteed 3-month CD?”

Weiss says:

Without realizing it, you’ve answered your own question. If the yield is higher on the bank CDs, that can mean only one thing — that, according to the collective wisdom of millions of investors and thousands of institutions in the market, the risk is also higher. Otherwise, why would the bank have to pay so much more to attract your money? Likewise, how can the U.S. Treasury get away with paying so much less and still have interested buyers for its securities?

It’s because the risk is higher for CDs, but much lower for Treasury securities. It’s because even within the realm of government guarantees, there’s a pecking order.

• The first-priority guarantee: Maturing securities that were issued by the U.S. Treasury department itself.

• The second-priority guarantee: Maturing securities that were issued by other government agencies, such as Ginnie Mae.

• Third: The Treasury’s backing of the FDIC.

This is not to say the Treasury is not standing fully behind the FDIC. Rather my point is that, in the event of serious financial pressures on the government, the FDIC and FDIC guaranteed deposits will not be the first in line.

I won't review the other arguments; read his post if you're interested. (Weiss needs an editor; there's too much throat clearing and background filling at the beginning. You can scroll a third of the way down and still get the points.) Your comments here are, as always, welcome.

Now what?

Further news, speculation, and disinformation from Mumbai seem to change the details but not the big picture.

Perhaps most surprising, the story is now that the killers may have been as few as a dozen. Hard to believe such a small number could have taken over two large hotels, held captives at the Jewish Center, caused havoc at the train station, and held off police and security forces for most of three days. I suppose with automatic rifles, grenades, and lots of ammunition, and a well-planned operation, it's possible. Equally possible, the official low body count is because some of the perps got away.

If the inventory of operatives is correct, it's more ominous than reassuring. It shows just how effective asymmetrical or "fourth generation" warfare can be. The insurgents don't have to tackle the state head-on; with a few strikes at key pressure points, designed as much for psychological as tactical effect, they can cause both chaos and fear that conventional security and military defenses aren't equal to.

As to "who were the villains?" the preliminary analysis suggests the answer is nowhere near as simple as the alternatives I'd presented in the last posting. Islamic terrorist groups apparently exist in a fantastically complex, constantly changing kaleidoscope of splinter groups, ad hoc organizations, criminal networks, and sponsorship by cadres within states and military forces. Richard Fernandez's latest post at Belmont Club offers a picture.

His closing thought seems bang on target: "Perhaps the Mumbai operation is an intersection of several organizations. If so the specific name of the perpetrator may matter less than we think. Terrorism, crime and religious fanaticism have become a way of life in parts of the subcontinent. Maybe the real question is not who … but what now?"

Terrorism is morphing into new and dangerous forms, but counterterrorism strategy is also developing. We should worry. We should not despair.