Dennis the Peasant

The Next Stop On Gordo's Tour Is Obama, Nebraska...

Timmy Spanks Dickie

Richard Murphy really is a knob. Now he's on about financing all his environmentally friendly euroweenie infrastructure projects via some silliness called "green bonds". As if England and the English don't have enough trouble as it is...

(Hey kids, here's Dennis' bit o' wisdom for the day: If you see the word "green" anywhere near a financial instrument, run from said instrument like your life depended on it.)

You'd think Dickie'd have enough sense to see the flaw in the plan, but then Richard wouldn't be Richard if he wasn't bedazzled by the pixie dust clogging up in between his own ears. Anyway, Tim Worstall does a nice job of pointing out the obvious.

 

 

Our Dickie Gets It Wrong... Surprise!

Our favorite tax-and-spend Euroweenie, Chartered Accountant Richard Murphy, is at it again. This time he offers a rousing defense of Prime Minister Gordon Brown's plans to spend England into the third world.

Here's what set him off in the first place: Bank of England Governor Mervyn King mentioning the rather obvious not-so-secret-secret that Brown was close to spending the Treasury's last pound.

This, of course, sets Murphy off big-time:

For all practical purpose Mervyn King is a a civil servant. He’s also one who has over stepped the mark. Civil servants do not contradict their ministers.

He’s wrong on other counts. He’s so god at economics he did not see the weaknesses in his regulatory system. He did not see the crash coming. He kept interest rates up when they should have been cut. He did not see the importance of supporting jobs when Danny Blanchflower did. So why is he right now?

Why is he right now when his prescription is for more unemployment, no greening of the economy and prolonged slump. Why is he right now when his inaction is designed to preserve the status quo for the City that has failed the UK economy? And why is he right now about fiscal policy when he has never had any real belief in it?

Ignore the man I say. Sack him, better still.

And as for what to do on April 22 – lest we forget it, budget day – the answer is simple. We do need a fiscal stimulus. Not less than £25 billion. But I accept not all should be paid for by debt. Minimum tax rate of 32% on those earning more than £100,000 – removing all allowances to achieve this is a start. Make it 40% minimum tax on all earnings at £200,000. Charge NIC at 11% on all investment income over £5,000 pre annum (pensioners apart). Abolish the domicile rule. Introduce a rule that all UK citizens are UK tax resident and taxable on world wide income unless living permanently in a country with a double tax treaty with the UK – and can prove they pay their tax there. Bring in a General Anti Avoidance Provision. Bring in a Stop Tax Haven Abuse Act. And so on, and on.

Oh yes, we can afford a fiscal stimulus. There is ample money available. We just have to chose who should pay for it. Some of us have the answers. Gordon Brown should be listening.

Tax The Rich.

Boy, talk about sophisticated finance...

It should be noted though, it is a little known fact that only Paul Krugman and Richard Murphy foresaw the current global economic crisis. If only we had paid attention then...

Anyway, Gordon Brown might have some difficulty hearing Murphy over MEP Hannan...

And it seems now Brown is starting to have trouble convincing those who - unlike Murphy - live in the Real World that Spending Cures All.

Might we here find ourselves soon with a devalued President of a devalued government?

Question of the Day: Why in the Hell can't the Republican Party find one fucking Republican politician in the entire United States who is this brainy, this articulate, and this fearless? Are Bobby Jindal and John Boehner the best they've got? If so, why?

Disreputable Me...

Sorry for the unannounced disappearance, but a week ago Monday I contracted the mother of all flu bugs, which morphed into the mother of all head colds, which morphed into the mother of all killer sinus infections. I haven't had anything remotely like this since I quit smoking back in 1998.

Anyway...

In my absence Richard "Our Dickie" Murphy was alerted by one of his dim-bulb readers that I, Kenton E. Kelly, CPA, was a complete fraud, and that my sophisticated yet soothingly syncopated moniker was not my real name but yet another devious nom de guerre utilized by the anonymous yet offensive fellow blogging as Dennis the Peasant. As usual, neither Dickie nor his readers can handle a fact without mangling it. As you can imagine, Our Dickie was not amused in the least by my commenting under my real name... It seems that in his world, I'm bringing my profession into disrepute by leaving straightforward, nonabusive questions and comments under my own Christian name at other people's (i.e., his) web sites.

The man is dumber than a box of dead crabs.

In any event, Murphy never did get around to actually providing documentation supporting his contention the entirety of 4 years worth of profits earned by the S&P 500 "weren't real", although he did address a meandering and for the most part off-topic post to yours truly entitled "What is profit?". Evidently that was supposed to tide me over. It didn't.

What is of interest to me in this whole episode - beyond confirming that in any battle of wits Richard Murphy will enter the fray virtually unarmed - is just how bad the journalism was in the original New York Times article that Our Dickie quoted. Here's the link to said article.

The first thing I would ask you to note would be the title of the article:

Easy Loans Financed Dividends

That's a pretty straightforward, declarative statement, right? You'd assume - or at least I'd assume - that if some reporter from the New York Times was writing an article with such a title, there would be some evidence of businesses actually borrowing money to pay dividends, right?

Wrong.

Look at this statement from the article:

From the fourth quarter of 2004 through the third quarter of 2008, the companies in the S.&P. 500 - generally the largest companies in the country - reported net earnings of $2.4 trillion. They paid $900 billion in dividends, but they also repurchased $1.7 trillion in shares.

Notice anything? Like the rather minor fact that if you subtract $900 billion in dividends from $2.4 trillion in net profits you end up with a residual net profit of $1.5 trillion? Based on the numbers supplied, it would seem there would be no need to borrow money to pay dividends, right?

Wrong again.

It least you're wrong if you buy into the argument of New York Times journalist Floyd Norris. According to Mr. Norris (and absolutely nobody else), open market share repurchases by companies are a form of shareholder dividend. Why?

Who knows.

When one gets over the hurdle of accepting Norris' rather novel construct, one can then subtract the $1.7 trillion in share repurchases from the residual $1.5 in net profits and voila! - Wall Street has financed dividend payments to customers by borrowing cheap money printed by The Bush Administration. (The bastards.) However, it should be noted that there's a tiny problem with Mr. Norris' analysis, such that it is.

It's wrong.

And meaningless. Other than that, though, it seems to reach the level of journalistic competence one associates with the New York Times. The first problem I noticed is obvious: Mr. Norris has assumed that the S&P 500 companies repurchasing shares did so with borrowed money. Why?

Who knows.

Norris provides no statistics regarding cash positions or debt levels from either the fourth quarter of 2004 or the third quarter of 2008 to support his contention. Evidently it never occurred to Norris that companies could have had on hand (or generated) the $200 billion in cash that was in excess of anticipated needs. In his primitive world, net profits and cash flow move in lockstep (which they most certainly don't in the real world).

Had Mr. Norris a bit of learning, he'd know that when a company finds itself with a pile of cash on hand that exceeds the company's operational needs, the company has a number of perfectly valid options for using that excess cash. Several of those options are as follows:

• investment in new business lines
• a one-time dividend to existing shareholders
• repurchase of shares on the open market
• debt reduction
• investment in existing business lines

Obviously, the decision amongst options is dictated by the individual company's circumstance. And once again, had Mr. Norris a bit of learning, he'd know that when a company repurchases shares on the open market, it can have several reasons for doing so. First, and most obvious, is to attempt to boost share price by reducing the number of shares available. However, there is a second, and we'll mention it here because it demonstrates just how far off base Mr. Norris could be...

Let's say Peasant Enterprises is an S&P 500 company selling chrome balls and plastic pink flamingos in the lawn ornament industry. Peasant Enterprises has 100,000 shares of common outstanding, which is presently selling for $50/share. The common has a yearly dividend of $5/share, and therefore yields 10%. This means Peasant Enterprises pays out $500,000/year in cash as dividends.

Now let's assume that the President of Peasant Enterprises, Mr. Dennis T. Peasant, is a greedy capitalist bastard who votes Republican and drives an SUV. He'd rather pay himself a larger salary for his hard work in looting and pillaging than pay shareholders $500,000 per year so they can retire in poverty at age 65. So what does Mr. Peasant do? If he lowers the dividend, chances are the stock price takes a dive, which will in all probability will get shareholders and analysts all cranky. No, that won't do at all...

Well, how about this: Mr. Peasant goes to the bank and borrows $200,000 @ 6.5%. He has just incurred an annual interest expense of $13,000. However, if he repurchases $200,000 of Peasant Enterprises common stock, he will save himself $20,000 in dividend payments (4,000 shares x $5/share) per year. And if Peasant Enterprises' marginal tax rate is 30%, the company will save itself $3,900 in taxes. All told, borrowing the $200,000 could increase Peasant Enterprises' cash flow to the tune of $10,900 per year ($20,000 - ($13,0000-($13,000 x .3))).

So you see, you could actually increase your company's cash flow while at the same time lowering net profit and increasing debt. Is it the wrong or right thing to do? That's entirely dependent on the facts and circumstances surrounding that particular company. Which is why Mr. Floyd Norris of the New York Times is so completely off base in his assertion. Then again, it seems clear from the tone of his article that he isn't so much interested in providing fact-based analysis as he is providing his readers a quick and easy villain to a economic situation that is well beyond their (and his) comprehension. For Norris, it's less taxing and more rewarding to nudge his readers and remind them that it's all about Greedy Capitalists. That, of course, is what attracted Richard Murphy's attention in the first place.

More Trouble With Our Dickie...

Well, it seems our favorite dim-bulb progressive Euroweenie chartered accountant - that being Richard ("Our Dickie") Murphy, of course - has decided that, based on their operating results for the year ended November 28, 2008, evil capitalist financial giant Goldman Sachs has shown "contempt for the state by avoiding their obligation to pay tax". This despite the fact that Our Dickie clearly hasn't the faintest idea of how much tax (if any) Goldman Sachs was required to pay during the year.

Stupid, silly bastard.

It seems Our Dickie has given Goldman Sachs' Form 8-K a bit of a going over and decided that, irrespective of what various and sundry taxing authorities might have to say about the matter, Goldman Sachs isn't paying enough tax.

Here's the part of the Form 8-K that Our Dickie presents to bolster his case (click on it and you'll get a larger version):

Here's what Our Dickie has to say about that:

There’s a line to note: provisions for taxes. $6,005 million in 2007, $14 million in 2008. The  2007 result shows that most of that $6,005m was current tax.

Sure, profit went down by 86% but taxes fell by more than 99%. The effective declared tax rate fell from 34% to 0.6%.

There’s an explanation in the 8K:

The effective income tax rate was approximately 1% for 2008, down from 25.1% for the first nine months of 2008 and down from 34.1% for fiscal 2007. The decreases in the effective income tax rate were primarily due an increase in premanent benefits as a percentage of lower earnings and changes in geographic earnings mix.

OK, so what do we have here? Goldman Sachs is paying less tax in 2008 than 2007? Maybe, but you surely can't tell that from looking at the line labelled "Provision for taxes", as Our Dickie should well know... but doesn't. Our Dickie continues:

GS has had a $6 billion bail out from the US government. This is how it responds.

The messages are unambiguous: first of all we need country by country reporting. It is absurd that a company can say that it has reduced its tax liability as a result of a change in its geographic earnings mix and not explain precisely where those earnings have moved to and why the change in such a key variable has been so dramatic as a consequence.

Second, it is wholly unacceptable that at a time when banks are utterly dependent upon the state for the provision of their equity that they should show such contempt for the state by avoiding their obligation to pay tax.

The time for change has arrived. We are all equity holders in these enterprises now, whether in the USA or not. Businesses have to account to the world’s population wherever they are for what they do in whichever place they locate.

Yeah, workers of the world unite! Or whatever.

It's bad enough that Our Dickie doesn't understand the function of an audit, but now he's managed to demonstrate that he doesn't understand undergraduate level accounting.

The "Provision for taxes" (income tax expense) does not show (oddly enough) what Goldman Sachs will actually pay in taxes for fiscal year 2008. Nor does it show what Goldman Sachs actually paid in 2007. To come up with those numbers, you'd have to aggregate the tax returns filed and taxes paid. That's not how you calculate income tax expense under generally accepted accounting principles. Here's an explanation from FASB Statement 109, Accounting for Income Taxes:

The objective of accounting for income taxes are to recognize (a) the amount of taxes payable or refundable for the current year and (b) deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an enterprise's financial statements or tax returns.

A rough translation, courtesy o' Dennis, reads like this:

You don't just write down the amount of income tax you paid and call it a day. You calculate your provision for income taxes using the operating results arrived at under generally accepted accounting principles. That's the number that shows up on the financial statements.

You see, tax law and GAAP accounting don't always mesh. In fact, they rarely mesh. For example, I have a client who is a rather successful building subcontractor. Using generally accepted accounting principles to calculate his income, I would arrive at a figure somewhat north of $350,000 for 2008. My client doesn't want to pay taxes on that $350,000 any sooner than is required by law. To facilitate nirvana, I have elected that the company be a cash basis taxpaying entity (as opposed to using the accrual basis accounting required by GAAP). In addition, I will be electing to expense large amounts of my client's equipment purchases using Section 179 (which is not GAAP). End result? My client will end up paying tax in 2008 on roughly $35,000 of income. The estimated tax on the difference of $315,000 is a deferred tax liability. When the tax is paid (in later years), the liability goes away.

So, if my client's company was reporting its operating results via a Form 8-K, it would show a "Provision for taxes" based on the tax that would be paid on $350,000, not the actual tax paid on $35,000. I won't argue that it seems silly to do so, but theoretical consistency demands it. In any event, the point here is simple: Looking at the tax expense recorded in GAAP basis financial statements will not tell anything about a company's actual tax expense. And just so we're clear about this, every accounting major graduating from college in the United States of America has been exposed to this.

Every last one.

And you know what? If Richard Murphy is going to sit around boviating about the violence inherent in the system, he should take the time to gain an understanding of what he's going on about. The bottom line is this: Richard Murphy hasn't the faintest idea of what Goldman Sachs has paid or is going to pay in taxes. And if Richard Murphy is going to hold himself out as an expert in taxation in accounting, it'd help if he would demonstrate a level of accounting knowledge befitting a junior in college.

So to wrap up, let's look at Our Dickie's screed point-by-point:

Fact the First: Our Dickie doesn't understand generally accepted accounting principles. Nor does he understand the concept of "book-to-tax" differences. All of which is Accounting 101 stuff.

Fact the Second: Our Dickie doesn't have the faintest idea of what Goldman Sachs pays in income taxes. Actually, that's not quite true: He has a completely wrong idea of what Goldman Sachs pays in taxes.

Fact the Third: Our Dickie identifies the changing geographical mix of income earned as the key component in Goldman's lower 2008 tax expense. Our Dickie has no way of knowing that one way or the other, having clearly ignored one key component of the explanation provided on the 8-K.

Fact the Fourth: Country-by-country reporting doesn't change the amount of income tax expense presented in GAAP-basis financial statements. Evidently Our Dickie was having a bit of an episode about tax havens when he wrote that. In his world, everything comes back to tax havens.

Fact the Fifth: Our Dickie thinks companies have an obligation to pay taxes even when not required to do so by prevailing tax laws. This is, once again, Our Dickie's very egalitarian nature asserting itself. Goldman Sachs isn't illegally avoiding taxes, they just aren't paying enough to satisfy Our Dickie. Ergo, Goldman Sachs is showing " contempt for the state by avoiding their obligation to pay tax".

All I can say is this: Richard Murphy is the Amanda Marcotte of accounting, and his analysis of Goldman Sachs' taxes proves it.

Time for Some Adult Supervision of Richard Murphy...

Our favorite progressive Euroweenie accountant, the ever-dim Richard Murphy (known forever more as 'Our Dickie' in these here parts), was a very busy boy last week, and judging from the results it appears some adult supervision is in order...

First, he whipped up a laughable "explanation" of the laughable Green New Deal proposal he co-authored with his fellow Euroweenies at the New Economic Institute. Had either the manifesto itself or Our Dickie's explanation thereof been a bit more detailed, we'd have been sorely tempted to distribute bingo cards and commence with a game or two of Buzzword Bingo.

Alas, it was not to be. Anyway...

Not satisfied with the degree of lasting damage to his reputation such silliness has no doubt brought about, Our Dickie then moved on to ruminate on the immediate need for a financial transactions tax because, as we all know, what is needed in a period of massive deleveraging and illiquidity is a new tax guaranteed to decrease the velocity of money.

And, still not satisfied with the degree of lasting damage that bit o' intellectual dreck has done to his reputation, Our Dickie then went on hit the trifecta with a post entitled Time for Adult Supervision of Auditors, which becomes - at least for ol' Dennis - an instant classic.

Here goes:

The F[inancial] T[imes] has reported:

Top accounting firms were hoodwinked by Bernard Madoff's alleged $50bn fraud as several leading banks and some of the world's biggest hedge fund investors, according to lists of service providers to Madoff-linked funds.

PwC, KPMG and Ernst & Young, three of the "big four" accountants, and an arm of BDO International, the fifth largest were all auditors of the feeder funds which channeled money into accounts at Mr. Madoff's New York Brokerage.

Mr. Madoff, who has been charged with fraud and electronically tagged, told investigators his business was "one big lie", according to prosecutors. The head of the US brokerage industry's compensation scheme said records at Bernard L Madoff Investment Securities were "certainly falsified".

Before we launch into Our Dickie's screed about how the Affaire d'Madoff conclusively proves the unreliability of auditors and auditing, it's worth our time to review several facts... largely because Our Dickie will mangle each of them at some point:

Fact the First: The fraud (as alleged) was committed by Bernard L Madoff Investment Securities, not the feeder funds audited by PriceWaterhouseCoopers, KPMG, Ernest & Young or BDO International.

Fact the Second: Bernard L Madoff Investment Securities was "audited" by the firm of Freihling & Horowitz, a three person accounting firm with exactly one active CPA, David Friehling, and not by either PwC, KPMG, E&Y or BDO.

Fact the Third: Financial audits aren't designed to detect fraud, in no small part because the express purpose of an audit is to allow the auditor to express an informed opinion as to whether the company's financial statements conform with generally accepted accounting principles (GAAP), are free of material misstatement, and present an accurate representation ("true and fair view") of financial position and operating results.

Got that? Good. Now here's Our Dickie:

Do not expect them [PwC, KPMG, E&Y and BDO] to have any liability though. Remember, because auditing firms changed the rules of auditing there is no requirement that they report that the accounts of an entity now show a true and fair view. They have only to report that the financial statements give a true and fair view in accordance with the applicable financial reporting framework. This is something very different.

This is genuinely bizarre, coming as it does from a trained accountant, which is what Our Dickie is.

First of all, the auditors noted did not audit the books of account of Bernard L Madoff Investment Securities. Madoff contracted with Friehling and Horowitz for the audit of Bernard L Madoff Investment Securities. This fact seems to have eluded Our Dickie. Either that, or his expectation was that the four accounting firms should have formed a strike force of elite auditors, created a diversion, stormed Madoff's offices and then audited the company by force. I'm not really up on how audits are conducted in the U.K., but what I can say is that paramilitary accounting strike forces performing forced audits on non-client companies has not yet found much acceptance within the accounting profession, regulators or the business community here in the U.S..

Secondly, Our Dickie seems to be of the opinion that companies are no longer required to present their accounts in a "true and fair view" because sinister audit firms have changed the rules so that companies need only show their accounts in a "true and fair view" that is "in accordance with the applicable financial reporting framework".

Think about that for a moment.

If not "in accordance with applicable financial reporting framework", then in accordance with what? In the U.S. we have what are called generally accepted accounting principles (known as GAAP), and their usefulness is that they define and codify what Our Dickie calls "true and fair". Evidently Our Very Egalitarian Dickie prefers the idea that every soul on the planet have the ability to define what constitutes a "true and fair view" of a company's accounts.

Personally, we don't see any problem with that.

Note the Third is this: Audit firms don't set either accounting or auditing rules in the U.S.. Generally accepted auditing standards (GAAS) are set by the American Institute of Certified Public Accountants (AICPA) and are supplemented by requirements set forth by governmental agencies (such as the Securities and Exchange Commission) and legislative bodies (such as Congress).

Undeterred by his own ignorance, Our Dickie continues:

If, as was the case when I was trained as an auditor, you had to ensure that the accounts gave a true and fair view then you had to look to beyond [sic?] the evidence that the client is presented to you and assess whether it was credible. Now, however, the relevant and applicable financial reporting framework is fair value, mark to market, reporting. In that circumstance all the auditor has to prove is that there is a market for the security that is traded, and no doubt there was the those [sic?] that Madoff was supplying. There was no obligation on the alter [sic?] to look behind act [sic?] to check whether the security has real worth.

This will, no doubt, be a matter of some considerable relief to the partners of the firms in question.

Of course, it's [sic] fundamentally undermines the whole meaning of audit. And it undermines the whole credibility of the audit profession.

It's at this point that we started suspecting Our Dickie had gotten into the brandy.

He contends that back in the Good Old Days, auditors were manly men: They rolled up their sleeves, gave their clients a mean, don't-screw-with-me glare with their steely gray eyes, and growled "Prove it, Pardner." All of which suggests Our Dickie, besides getting into the brandy, might have watched one too many Clint Eastwood westerns while the bottle was in hand.

The reality of the matter is this: The appropriate auditing procedures used when testing marketable securities haven't changed simply because they are now presented at market value on the balance sheet (as opposed to lower of cost or market). The amount of work the auditor has to do on a marketable security is determined by the state of the market for that security. If the security is widely traded, less audit testing is needed to establish a reasonable valuation than when the security is thinly traded. It is that simple.

There are four other factors to note here.

First, given that Madoff had billions in the marketplace, arriving at a reasonable valuation probably wasn't an issue. The Madoff securities had a market and valuation was readily determinable.

Second, and we repeat ourselves here, none of the four auditing firms were in a position to demand that Bernard L Madoff Investment Securities allow them to "look behind" anything. In the real world (as opposed to Our Dickie's world) there's this thing called privity of contract, and what it does is keep total strangers - who may or may not have brandy on their breath - from walking into your business and demanding to go through your books of account.

Third, what exactly does Our Dickie mean when he says auditors used to "look behind" things to "check whether the security has real worth"? The last time I checked, the market determined the real worth of a marketable security. Just what would Our Dickie be looking at? Madoff's hedge positions? Madoff was running a criminal enterprise, complete with elaborately forged documentation to cover the Ponzi Scheme he was running. Had Our Dickie "looked behind" to Madoff's documentation, he would have been duped. Even if there had been no fraud, in the interests of getting it really, really right, would Our Dickie have then decided it was necessary to "look behind" Madoff's documentation? And if so, to what? At what point has one "looked" enough to satisfy Our Dickie?

Fourth, it should be noted here (and again, we realize we repeat ourselves) that Our Dickie clearly hasn't the faintest idea that (in the United States, at least) financial audits are not designed to detect fraud. They are designed to allow the auditor to express an opinion on whether a company's financial statements conform to GAAP, are free of material misstatement and accurately present the company's financial condition and operating results for the period of time in question.

The bottom line is this, if Our Dickie thinks Affaire d'Madoff has undermined the meaning of an audit, it's only because he doesn't understand either the meaning or the actual purpose of an audit in the first place. And Our Dickie being Our Dickie, then goes on to prove our point for us:

That is an issue [mark to market] that does, however, have to be addressed. Auditing has been degraded to the point where it is utterly meaningless. Financial reporting standards allow the preparation of accounts that are meaningless. The profession's credibility is in tatters and real people are losing. Yes, I know this was a fraud [my emphasis], but some apparently saw it coming. As the Guardian has reported:

A Boston fraud investigator, Harry Markopolos, has revealed he waged an unsuccessful eight-year campaign to alert the SEC [my emphasis], sending documents and peppering officials with phone calls arguing that the financier's purported 10% to 12% annual returns were illusory.

Markopolos, who used to work for a rival fund management firm, became suspicious in 2000 when he analysed Madoff's investment method to see whether he could emulate it. He calculated that there were insufficient options in existence to support the amount of hedging Madoff claimed he was doing.

I believe him. I know that feeling of crying out about a system that is obviously corrupt and no one wants to listen.

Wow. It seems Our Dickie's in some serious pain here. Makes us want to cry out. And we would... if only anyone would listen.

But since they won't, let's skip the drama and look at the facts.

Fact the First: Harry Markopolos went to the Securities and Exchange Commission, not the four dastardly audit firms of the feeder funds. Now why would he do that? Well, my guess is that Markopolos - unlike Our Dickie - actually understood that as regulator of marketable securities and the firms that sell them, the SEC was the appropriate place to make his suspicions known.

Fact the Second: Harry Markopolos didn't take his suspicions to either the feeder firms or their auditors after being brushed off by the SEC. Why not? Well, my guess is that Markopolos - unlike Our Dickie - actually understood that as regulator of marketable securities and the firms that sell them, the SEC was the appropriate place to make his suspicions known. It also seems to suggest Markopolos understood the concept of privity of contract and the legal limitations it would impose of third parties (such as the audit firms).

Fact the Third: Our Dickie will no doubt opine that had PwC, KPMG, E&Y and BDO been doing their jobs, they would have done the same sort of analysis that Harry Markopolos did. It sounds wonderful, but the reality of the matter is simple: Harry Markopolos suspected fraud. That's why he performed his analysis in the first place. Lacking any reason for suspicion (let alone evidence of fraud), why would the audit firms spontaneously decide such analysis was needed? And sans evidence, why the feeder funds pay their auditors go above and beyond generally accepted auditing standards to perform such an analysis?

Fact the Fourth: Where Our Dickie a bit more familiar with finance, he'd know that if there was any sort of burden to "prove" what was "behind" the Madoff securities, it rested with the feeder funds, not their auditors. Those of us in the real world call it due diligence on the part of management. If any party was obligated to test Madoff's investment strategies for validity, it was the management of the feeder funds, not their auditors.

And so it goes. Having misunderstood the facts of the Madoff case, the function of an audit, the responsibilities of the SEC, as well as various and sundry legal and accounting concepts, Our Dickie gives us The Big Wrap-Up:

There's no doubt that auditors are amongst those who will now need to be subject to 'adult supervision' of the sort Barack Obama described yesterday. It's well overdue.

The days of the 'chaps looking over the shoulder of the chaps' has to end.

What Our Dickie fails to note is this: Based on what we know to date, if there is any entity in need of 'adult supervisor' in the Affaire d'Madoff, it is the Securities and Exchange Commission, not any of the audit firms mentioned. The facts point not to audit failure, but to regulatory failure.

Why this escapes Our Dickie is obvious; it doesn't mesh with either his professional world view or his preconceived notions about the largest of the international accounting firms. In Our Dickie's world, all auditors, and all audit firms are part and parcel of an evil capitalist financial system. So it follows that all difficulties encountered by that system must, in some way, demonstrate the evil nature of the auditor. To Our Dickie, the auditor is a sort of flawed superman, incapable of surmounting any and all economic problems encountered not because of the inherent limitations of the audit process, but because of the inherent (capitalist-inspired) greed of the auditor.

Fortunately for us, and just as unfortunately for Our Dickie, the sort of men Barack Obama has selected to provide 'adult supervision' include people of the caliber of Tim Geithner and Larry Summers who, not surprisingly, correctly understand the role of the SEC, audit firms and financial audits within the world of securities markets.

When one notes Richard Murphy's inability to master some of the most basic concepts of his profession, and his inattention to the facts of the Madoff case that are known to date, it seems clear that irrespective of whatever supervision is needed elsewhere, Our Dickie could use as much adult supervision as the profession of accountancy can possibly provide. Will the U.K.'s chartered accountants rise to the occasion? If not, we suppose we'll have verified that the days of 'chaps looking the shoulder of the chaps' hasn't ended quite yet.

Right?

 

More Enviroweenie Pixie Dust ...

Earlier this week I posted on one of the funnier enviroweenie fantasies floating around: The Green New Deal of the New Economic Foundation. Evidently I wasn't the only one who found the Green New Deal to be a tad vague. Fortunately for us, U.K. progressive enviroweenie and champion tax misunderstander Richard Murphy has jumped in to explain it all in the appropriately entitled post, WHT IS THE GREEN NEW DEAL?

People have asked those of us who wrote the Green New Deal to summarise what it is about. So we’ve produced this summary:

It’s about a massive environmental transformation of the economy to tackle the triple crunch of the financial crisis, climate change and insecure energy supplies.

Now I'll just be that what Dickie really meant was a massive structural transformation of the economy. Economies don't possess environments, they reside within them. Anyway, whether it's an environmental transformation or a structural transformation, what's missing is an explanation of either.

It’s about an investment now to tackle the current recession, and an investment for the future: there are lots of ways we can invest in the future - as a country public spending on a green new deal will reap economic, environmental and social benefits. We can spend ‘better’ by reforming taxes, so that we tax more what we want less of (like pollution and reckless speculation) and less what we want more of (like green goods and services). Investment can come from public and private sources, as well as our savings. Shutting tax havens and ensuring that corporate tax reporting accurately reflects profits made in a country, would raise billions more for public investment in both rich and poor countries.

Ah yes, the whole "investment for the future" thingy. Points off for forgetting to mention "the children". It's interesting to note there's no mention of precisely what sort of economic, environmental and social benefits will be reaped via the Green New Deal. Nor is there much detail on what constitutes "reckless speculation". Or what constitutes "green goods and services". If you find the mention of tax havens to be oddly out of place in this sort of manifesto, be aware that Our Dickie is a bit of a monomaniac on the subject.

It’s about new checks, balances and directions for a banking system that has become unfit for purpose: everyone agrees that new rules are needed to prevent a repeat of the bank’s catastrophic errors, but there’s also a new opportunity for change. With the taxpayer now owning several banks we can make sure that they invest and lend at low, affordable interest rates to support the economy’s environmental transformation.

Holy Sweeping Generalizations, Batman! Everybody agrees? Everybody? Other than that, what's a little bank nationalization and command economy between friends... Especially when it's for The Future... And of course, The Children...

It’s about greater security for our pensions and savings: many people’s pensions have taken a battering, but now there’s a chance to create new, low risk steady return vehicles for saving. New bonds and pensions targeted at the green renewal of the nation’s infrastructure could help bring mutual long-term benefits to both savers and the nation as a whole.

So let me get this straight, this plan will allow U.K. investors the once in a lifetime chance at investing in Welsh windmill farms. And that's considered "low risk"? By whom? Mr. Bean?

It’s about warm homes in winter, protecting us from high and volatile energy prices and ending fuel poverty: too many people can’t afford to keep warm in winter. Whatever the international price of fuel, homeowners seem to have to pay ever higher prices. A Green New Deal will begin by improving insulation and energy efficiency in UK households and start to break our dependence on volatile, expensive and ultimately declining fossil fuels.

Notably absent from this rousing proclamation is any analysis of the costs associated with such a scheme, as well as any estimates of savings. It also doesn't seem to be doing much to replace fossil fuels dependency in any way. I realize it is a "start", but couldn't we get a hint as to what is supposed to come next?

It’s about the UK showing real world leadership, setting an example and helping to build global security: unless rich nations like the UK show that they can implement change at home, poorer countries are unlikely to make the shift. The Green New Deal is about setting the economy, nationally and globally, on a path to live within its environmental means. It is also about fair play in a warming world and calls for the new financial mechanisms to help the majority world adapt to climate change as well as breaking the carbon chains of fossil fuel dependence.

I defy any reasonably intelligent, reasonably sane individual to read the above statement aloud without bursting into laughter.

Anyway, now that Richard has clarified things for us, it seems obvious that a more appropriate title for his post would probably be...

WTF IS THE NEW GREEN DEAL?

 

Pixie Dust and Cute Fuzzy Bunnies...

Well, I had a huge post put together razzing this bit of dreck from a bunch of progressive weenie types from the U.K.. The operative word being "had". Typepad being Typepad, it somehow ended up launching a fatal error in Exploder each time I went to post it.

God, Typepad sucks, and I really need to find the time to move this blog to WordPress.

Anyway, read the Green New Deal and try to count the number of instances of each of the following:

• meaningless buzzwords,
• inherent contradictions of various policy positions,
• explicit contradictions in policy positions regarding finance, and...
• number of policy positions likely to involve lowering the general standard of living.

Now I know these are U.K. progressive weenies, but for the most part what they are advocating isn't much different from what Saint Al and U.S. enviro-weenies are advocating.

And what is scary, at least for the U.K., is that some of the morons populating the New Economic Foundation (such as the remarkably foolish Richard Murphy) actually have experience in the business world.

Given all that, isn't it downright reassuring that Barack Obama hasn't put a progressive within one thousand miles of any lever of power?

Note: I'll buy anyone a frosty can of Fresca who can give me a definiton of what a "green collar job" is that doesn't make me laugh out loud.