Wednesday, August 28, 2013

Nasdaq freeze

An anonymous correspondent explained last week's Nasdaq freeze thus.
The truth about what happened Aug 22 to the Nasdaq is that new limit-up/limit-down rules took effect in derivatives (exchange-traded products) listed at Arca at the same time that new options began trading marketwide that day. Since the market is full of complex, multi-leg trades, bad data propagated, affecting Goldman’s options-trading algorithms Tuesday, spawning hundreds of derivatives trading halts by VIX expirations Wednesday, and producing bad data in the consolidated tape by Thur, halting Nasdaq trading. So the real culprit was the SEC. But it’s bad form to say publicly that the regulator is responsible for jeopardizing the market.
I can't vouch for the story, or even for understanding it all. But I'm interested in several emerging stories that some trading pathologies are in part unintended consequences of SEC regulation. It's also not the first time I hear of financial market participants afraid to speak out and earn the disfavor of their regulator.

Tuesday, August 27, 2013

London Whale Supervisor Arrested

Spanish police arrested former JP Morgan Chase trader Javier Martin-Artajo on Tuesday as he prepares to fight possible extradition to the United States over a $6.2 billion financial scandal at the United States' largest bank. The arrest came after the United States charged Spaniard Martin-Artajo and a junior colleague, Frenchman Julien Grout, with wire fraud and conspiracy to falsify books and records related to the trading losses

For more detail see - JPMorgan's former 'London Whale' supervisor arrested in Spain

Monday, August 26, 2013

Macro-prudential policy

Source: Wall Street Journal
Not a fan. A Wall Street Journal Op-Ed. Link to WSJLink to pdf on my website. Director's cut follows:

Interest rates make the headlines, but the Federal Reserve's most important role is going to be the gargantuan systemic financial regulator. The really big question is whether and how the Fed will pursue a "macroprudential" policy. This is the emerging notion that central banks should intensively monitor the whole financial system and actively intervene in a broad range of markets toward a wide range of goals including financial and economic stability.

For example, the Fed is urged to spot developing "bubbles," "speculative excesses" and "overheated" markets, and then stop them—as Fed Governor Sarah Bloom Raskin explained in a speech last month, by "restraining financial institutions from excessively extending credit." How? "Some of the significant regulatory tools for addressing asset bubbles—both those in widespread use and those on the frontier of regulatory thought—are capital regulation, liquidity regulation, regulation of margins and haircuts in securities funding transactions, and restrictions on credit underwriting."

This is not traditional regulation—stable, predictable rules that financial institutions live by to reduce the chance and severity of financial crises. It is active, discretionary micromanagement of the whole financial system. A firm's managers may follow all the rules but still be told how to conduct their business, whenever the Fed thinks the firm's customers are contributing to booms or busts the Fed disapproves of.

Macroprudential policy explicitly mixes the Fed's macroeconomic and financial stability roles. Interest-rate policy will be used to manipulate a broad array of asset prices, and financial regulation will be used to stimulate or cool the economy.

Foreign central banks are at it already, and a growing consensus among international policy types has left the Fed's relatively muted discussions behind. The sweeping agenda laid out in "Macroprudential Policy: An Organizing Framework," a March 2011 International Monetary Fund paper, is a case in point.

"The monitoring of systemic risks by macroprudential policy should be comprehensive," the IMF paper explains. "It should cover all potential sources of such risk no matter where they reside." Chillingly, policy "should be able to encompass all important providers of credit, liquidity, and maturity transformation regardless of their legal form, as well as individual systemically important institutions and financial market infrastructures."

What could possibly go wrong?

It's easy enough to point out that central banks don't have a great track record of diagnosing what they later considered "bubbles" and "systemic" risks. The Fed didn't act on the tech bubble of the 1990s or the real-estate bubble of the last decade. European bank regulators didn't notice that sovereign debts might pose a problem. Also, during the housing boom, regulators pressured banks to lend in depressed areas and to less creditworthy customers. That didn't pan out so well.

More deeply, the hard-won lessons of monetary policy apply with even greater force to the "macroprudential" project.

First lesson: Humility. Fine-tuning a poorly understood system goes quickly awry. The science of "bubble" management is, so far, imaginary.

Consider the idea that low interest rates spark asset-price "bubbles." Standard economics denies this connection; the level of interest rates and risk premiums are separate phenomena. Historically, risk premiums have been high in recessions, when interest rates have been low.

One needs to imagine a litany of "frictions," induced by institutional imperfections or current regulations, to connect the two. Fed Governor Jeremy Stein gave a thoughtful speech in February about how such frictions might work, but admitting our lack of real knowledge deeper than academic cocktail-party speculation.

Based on this much understanding, is the Fed ready to manage bubbles by varying interest rates? Mr. Stein thinks so, arguing that "in an environment of significant uncertainty . . . standards of evidence should be calibrated accordingly," i.e., down. The Fed, he says, "should not wait for "decisive proof of market overheating." He wants "greater overlap in the goals of monetary policy and regulation." The history of fine-tuning disagrees. And once the Fed understands market imperfections, perhaps it should work to remove them, not exploit them for price manipulation.

Second lesson: Follow rules. Monetary policy works a lot better when it is transparent, predictable and keeps to well-established traditions and limitations, than if the Fed shoots from the hip following the passions of the day. The economy does not react mechanically to policy but feeds on expectations and moral hazards. The Fed sneezed that bond buying might not last forever and markets swooned. As it comes to examine every market and targets every single asset price, the Fed can induce wild instability as markets guess the next anti-bubble decree.

Third lesson: Limited power is the price of political independence. Once the Fed manipulates prices and credit flows throughout the financial system, it will be whipsawed by interest groups and their representatives.

How will home builders react if the Fed decides their investments are bubbly and restricts their credit? How will bankers who followed all the rules feel when the Fed decrees their actions a "systemic" threat? How will financial entrepreneurs in the shadow banking system, peer-to-peer lending innovators, etc., feel when the Fed quashes their efforts to compete with banks?

Will not all of these people call their lobbyists, congressmen and administration contacts, and demand change? Will not people who profit from Fed interventions do the same? Willy-nilly financial dirigisme will inevitably lead to politicization, cronyism, a sclerotic, uncompetitive financial system and political oversight. Meanwhile, increasing moral hazard and a greater conflagration are sure to follow when the Fed misdiagnoses the next crisis.

The U.S. experienced a financial crisis just a few years ago. Doesn't the country need the Fed to stop another one? Yes, but not this way. Instead, we need a robust financial system that can tolerate "bubbles" without causing "systemic" crises. Sharply limiting run-prone, short-term debt is a much easier project than defining, diagnosing and stopping "bubbles." [For more, see this previous post] That project is a hopeless quest, dripping with the unanticipated consequences of all grandiose planning schemes.

In the current debate over who will be the next Fed chair, we should not look for a soothsayer who will clairvoyantly spot trouble brewing, and then direct the tiniest details of financial flows. Rather, we need a human who can foresee the future no better than you and I, who will build a robust financial system as a regulator with predictable and limited powers.

Bonus extras. A few of many delicious paragraphs cut for space.

Do not count on the Fed to voluntarily limit its bubble-popping, crisis management, or regulator discretion. Vast new powers come at an institutionally convenient moment. It’s increasingly obvious how powerless conventional monetary policy is. Four and a half percent of the population stopped working between 2008 and 2010, and the ratio has not budged since. GDP fell seven and a half percent below “potential,” in 2009 and is still six points below. Two trillion didn’t dent the thing, and surely another two wouldn’t make a difference either. How delicious, in the name of “systemic stability,” to just step in and tell the darn banks what to do, and be important again!

Ben Bernanke on macroprudential policy:
For example, a traditional microprudential examination might find that an individual financial institution is relying heavily on short-term wholesale funding, which may or may not induce a supervisory response. The implications of that finding for the stability of the broader system, however, cannot be determined without knowing what is happening outside that particular firm. Are other, similar financial firms also highly reliant on short-term funding? If so, are the sources of short-term funding heavily concentrated? Is the market for short-term funding likely to be stable in a period of high uncertainty, or is it vulnerable to runs? If short-term funding were suddenly to become unavailable, how would the borrowing firms react--for example, would they be forced into a fire sale of assets, which itself could be destabilizing, or would they cease to provide funding or critical services for other financial actors? Finally, what implications would these developments have for the broader economy? ...
As if in our lifetimes anyone will have precise answers to questions like these. In case you didn't get the warning,
... And the remedies that might emerge from such an analysis could well be more far-reaching and more structural in nature than simply requiring a few firms to modify their funding patterns.
A big thank you to my editor at WSJ, Howard Dickman, who did more than the usual pruning of prose and asking tough questions.

Sunday, August 25, 2013

Taylor Jackson Hole Blog

John Taylor is blogging from Jackson Hole

Day 1: Skepticism of unconventional policy  Academics say quantitative easing does't do much. I happen to agree

Forward guidance Is "forward guidance" clarification of a rule, i.e. here is what we think we'll feel like doing in the future, or a precommitment? To the Bank of England and ECB, the former.

This looks like an interesting series to watch.

Friday, August 23, 2013


I will be running a MOOC (massively online) class this fall. Follow the link for information. The class will roughly parallel my PhD asset pricing class. We'll run through most of the "Asset Pricing" textbook. The videos are all shot, now I'm putting together quizzes... which accounts for some of my recent blog silence.

So, if you're interested in the theory of academic asset pricing, or you've wanted to work through the book, here's your chance. It's designed for PhD students, aspiring PhD students, advanced MBAs, financial engineers, people who are working in industry who might like to study PhD level finance but don't have the time, and so on. It's not easy, we start with a stochastic calculus review!  But I'm emphasizing the intuition, what the models mean, why we use them, and so on, over the mathematics.

Banyan Partners Buys Two RIAs

It what might be an indication of a consolidation in the RIA segment of the industry, Independent wealth management firm Banyan Partners is nearly doubling its assets under management to $4 billion by acquiring two firms simultaneously. The two firms are Rushmore Investment Advisors, in Dallas, and Holt-Smith Advisors, in Madison, Wis.; Banyan is based in in Palm Beach Gardens, Fla.

Consolidation in the RIA space is bound to happen, as medium size RIA look to increase their geographical market share and their coverage.

We have been working with RIAs of all sizes for decades in their compliance, regulatory and business transactions. Give us a call at 212-509-6544 or send an email to see if we can help you with your RIA issues.

RIA Deals: Banyan Buys Rushmore and Holt-Smith

Marijuana Stock Scams

I have a bit of a hard time believing this is actually an issue, but according to FINRA, with medical marijuana legal in almost 20 states, and recreational use of the drug recently legalized in two states, the cannabis business has been getting a lot of attention—including the attention of scammers.

The potential for marijuana stock scams is certainly present, but the potential huge payday that is involved in these stock scams is not there - I cannot imagine anyone pitching a huge score in a company that produces a product that people have been growing and "processing" in their own homes for decades.

However, FINRA is concerns, and believes that the scammers will be out, with  pitches to invest in potentially fraudulent marijuana-related companies by faxes, email or text message invitations to webinars, infomercials, tweets or blog posts.

FINRA claims that one company promoted its move into the medical cannabis space by issuing more than 30 press releases during the first half of 2013. These releases publicized rosy financial prospects and the growth potential of the medical marijuana market. The company was also touted on the Internet through the use of sponsored links, investment profiles and spam email, including one promotional piece claiming the stock "could double its price SOON" and another asserting the stock was "poised to light up the charts!" Yet the company's balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan.

The lesson of course is to avoid these pitches. Take a moment to read FINRA's release, which has some tips on how to avoid a scam - Investor Alert - Marijuana Stock Scams - FINRA

Thursday, August 15, 2013

Two JPMorgan Employees Face Criminal Charges in the London Whale Case

The "London whale" trading scandal that forced JP Morgan to book a $6.2 billion loss took a new turn on Wednesday as U.S. authorities announced criminal charges against two of the bank's employees.

US charges two in JP Morgan 'whale' case - NBC

Tuesday, August 13, 2013

Cold Calling is Out?

Cold calling has traditionally been an accepted method of gaining new clients, and plays an important role in the development of a new book of business. It is also one of the most frustrating and time consuming methods of finding new clients. has a series of suggestions for the new financial advisor in building new relationships - without cold calling in their article First Timers - Cold calling is out; networking is in. 

The attorneys at Sallah Astarita & Cox have been working with advisors of all experience levels for decades. For more information on how we can help you, call us at 212-509-6544 or email us. 

Monday, August 12, 2013

Morgan Stanley Fined By NJ for ETF Sales

Morgan Stanley and Co. has agreed to pay $100,000 to the New Jersey Bureau of Securities in a consent order on July 29, after the Bureau found the company was in violation of state securities laws and regulations in its sale of non-traditional exchange-traded funds to investors.

Non-Traditional ETFs are leveraged funds which are designed to deliver multiples oft the performance (usually 2x or 3x) of the index or benchmark they track. For example, a leveraged EFT which tracks the Dow Jones Industrial average is designed to deliver 2 or 3 times the return of the Dow Jones 30. There are also non-traditional ETFs which deliver the reverse of the tracked index.

These Non-Traditional ETFs can deliver significant returns, but also have the potential for significant losses. While an ETF may go up three times more than the Dow 30 goes up, it will also go down three times more. The loss potential is significant. We represented an investor who lost millions of dollars in a few months following the advice of a broker who was recommending the use of Non-Traditional ETFs, including ProShares Ultras and ProShares Ultra Shorts. We were able to obtain recovery for the investor after filing a FINRA arbitration against the broker and his firm.

One of the risks in Non-Traditional ETFs that is no obvious to investors is the fact that they “reset” daily, meaning that the value of a Non-Traditional ETF is adjusted daily in order to maintain the proportional exposure to the index or benchmark it is designed to track. Due to the effects ofthis daily “reset”, Non-Traditional ETFs are intended to achieve their stated objectives only on a daily basis. When held for periods longer than a single day, Non-Traditional ETFs can begin to generate returns that differ significantly from the performance ofthe underlying indices or benchmarks that they are designed to track.

Tracking error in Non-Traditional ETFs is particularly evident in volatile markets due to the magnified effects of compounding. When held for periods longer than a single day, the volatility present in the index or benchmark that the Non-Traditional ETF tracks can affect the returns generated by the Non-Traditional ETF, even when the index or sector moves in the general direction that the purchaser predicted or expected. The greater the volatility in the market during a particular period, the greater the likelihood that a particular Non-Traditional ETF will produce an extreme and unpredictable result — thereby increasing the risk associated with that product.

Because of this issue, and the lack of broker and investor awareness of this hidden risk, in June 2009 FINRA released Regulatory Notice 09- 31 reminding member firms of their sales and supervisory practice obligations in connection with Non-Traditional ETFs. The Notice described Non-Traditional ETFs as “highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis.” The Notice concluded that “due to the effects of compounding, [Non Traditional ETF] performance over longer periods oftime can differ significantly from their stated daily objective,” and that “therefore, inverse and leveraged ETFs that reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.”

The Bureau found violations in Morgan Stanley's sale of ETFs to investors included a failure to provide adequate training to its sales force,  the failure to properly supervise the sales of Non-Traditional ETFs, and the recommendation of unsuitable ETFs to investors.

The settlement is $65,000 in civil penalties, $25,000 for reimbursement of the Bureau's investigative costs and $10,000 for Bureau use in investor education. New Jersey investors previously received $96,940.34 in restitution from Morgan Stanley.

The Morgan Stanley Consent Order is available at the Bureau's website.

The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at email us
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Thursday, August 8, 2013

Cell Phones Do Not Avoid Insider Trading Charges

While we have successfully defended professionals and investors in insider trading cases, those defenses are usually based on the fact that the client did not trade on such information. We do not win such cases because the investor hid his trading activity, but it is interesting to see what those trading on inside information do in order to avoid detection.

English: A cell phone tower in Palatine, Illin...The most recent example, the SEC announced insider trading charges against a former systems administrator at Vermont-based Green Mountain Coffee Roasters who repeatedly obtained quarterly earnings data and traded in advance of its public release. According to the Commission, they traded out of the money options before earnings announcements and gained $7 million dollars in profits. The Commission alleges that they communicated with each other by voice and text messages using their wives' cellphones.

Pretty clever. No one would ever think of issuing a subpoena for my wife's cell phone in an insider trading investigation!

None of this works. First, let's keep in mind that the Commission and the exchanges have extensive records of trading activity. The regulators know, at a minimum, which brokerage firm had clients purchasing stock, or options, in the days, weeks, or even months leading up to an event. It is not difficult for the regulators to issue requests to the firms for the identity of the customer who made suspicious purchases.

From there the SEC Staff issues a document request to the customer, his brokerage firm, and ultimately his bank, his telephone company and any other entity, following the money. Ultimately the Staff takes the customer's testimony under oath,

At that time, the customer is faced with a choice - assist the investigation and testify, or refuse to testify and assert his rights under the Fifth Amendment. The latter choice is not always the right choice, and there are complications in doing so, but it is an option, and one that we sometimes recommend to our clients. Of course,there is a third choice - testify and lie - but that is not an option, as many targets of investigations have found, including Martha Stewart. She did a year for obstruction, and then settled the insider trading case.

The reality is that if you are going to trade on inside information, you are probably going to get caught, and if you are not trading on inside information, you don't have to go through hoops to hide your activity. In this case, this team of investors correctly predicted the company's stock price reaction to 12 of the past 13 quarterly earnings announcements. I once had a federal court judge tell me, during an insider trading trial, that "you don't pull a royal flush in 4 out of 5 poker hands." So too here.

But what I found interesting was the that the SEC alleges that as an information technology employee, McGinnis had access to shared folders on Green Mountain Coffee’s computer server where drafts of pending press releases and earnings announcements were stored.  He also had access to other employees’ e-mail accounts.  Both sources provided McGinnis with details about upcoming Green Mountain Coffee earnings announcements before they became public.

Plus, although the technology officer lives in Vermont, and his partner lives in Connecticut, according to the SEC, much of the insider trading in their online brokerage accounts occurred through McGinnis’ home Internet service.  They communicated frequently around earnings announcements, but infrequently otherwise.
But I am sure they thought they were being clever, according to the SEC, around trading times, they exchanged numerous phone calls and text messages  using cell phones belonging to their spouses.
It doesn't work. The SEC will figure it out eventually, and when they do, the penalty is THREE TIMES your profits. Not three times your net trading profits; three times the profit on the trades that the SEC says were made with inside information. They ignore the losers, by the way.

The solution? The obvious one is not to trade on inside information. More importantly, be careful when you trade on tips received from friends or colleagues, and document the trades that you do make. And if you are in the unfortunate position of being investigated for insider trading, retain an experienced securities attorney at the start of the investigation. Do not go it alone, the downside, which can include criminal charges, are simply too great. | SEC Charges Former Green Mountain Coffee Employee And Friend In $7 Million Insider Trading Scheme

The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of insider trading investigations and enforcement actions. We represent investors, financial professionals and investment firms nationwide. For more information contact Mark Astarita at 212-509-6544 or at

JP Morgan Facing Criminal and Civil Charges For Mortgage Security Fraud

On the heels of the announcement of charges against Bank of America for fraudulently selling investors mortgage backed securities, JPMorgan Chase disclosed on Wednesday that it faced a criminal and civil investigation into whether it sold shoddy mortgage securities to investors in the run-up to the financial crisis,

According to the New York Times, JPMorgan has acknowledged fthe existence of the investigation — one of several mortgage-related problems looming for the bank — in a quarterly regulatory filing. It said that the civil division of the United States attorney’s office for the Eastern District of California, has “preliminarily concluded” that JPMorgan flouted federal laws with its sale of subprime mortgage securities from 2005 to 2007. The parallel criminal inquiry, according to one person briefed on the matter, is in a more preliminary stage.

Adding to scrutiny of the bank, the NYT is also reporting that federal prosecutors in Philadelphia are examining whether JPMorgan duped investors into buying troubled mortgage securities that later imploded, The prosecutors are investigating whether JPMorgan churned out the mortgage-backed securities without ensuring that the investments met underwriting standards,

Representatives for the bank and the federal prosecutors declined to comment.

For more information - JPMorgan Reveals It Faces Criminal and Civil Inquiries
The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the representation of individual and institutional investors who have been defrauded. We represent investors, financial professionals and investment firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at email us
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SEC Halts Ex-Marine’s Fraud

Seal of the U.S. Securities and Exchange Commi...
The Securities and Exchange Commission today obtained an emergency court order to halt a hedge fund investment scheme by a former Marine living in the Chicago area who has been masquerading as a successful trader to defraud fellow veterans, current military, and other investors.

The SEC alleges that Clayton A. Cohn and his hedge fund management firm Market Action Advisors raised nearly $1.8 million from investors through a hedge fund he managed.  Cohn lied to investors about his success as a trader, the performance of the hedge fund, his use of investor proceeds, and his personal stake in the hedge fund.  Cohn only invested less than half of the money raised from investors and instead used more than $400,000 for such personal expenses as a Hollywood mansion, luxury automobile, and extravagant tabs at high-end nightclubs. He used his lavish lifestyle to carefully contrive the image of a successful trader and investor, when in reality he lost nearly all of the money invested through the hedge fund.

In order to cover up his fraud and continue raising money from investors, Cohn generated phony hedge fund account statements showing annual returns exceeding 200 percent. “Cohn lured fellow military and other investors into his hedge fund by portraying himself as a successful trader who generated massive returns for his investors,” said Timothy L. Warren, Acting Director of the Chicago Regional Office.  “But Cohn’s hedge fund investors didn't have a chance to make a profit since he never invested most of their money and promptly lost the portion he did invest.”

According to the SEC’s complaint filed in federal court in Chicago, Cohn targets mostly unsophisticated investors and has solicited friends, family members, and fellow veterans to invest in his hedge fund.  Cohn controls a so-called charity called the Veterans Financial Education Network (VFEN) that purports to teach veterans how to understand and manage their money.  Cohn has touted his Marine Corps pedigree in VFEN press releases and encourages veterans to find “a money-manager who is both trustworthy and knows what he is doing.” VFEN’s website identifies Cohn as a money manager who “manages millions of dollars.”
According to the SEC’s complaint, Cohn managed his hedge fund Market Action Capital Management through his investment advisory firm Market Action Advisors, which is registered with the state of Illinois.  Cohn solicited investments by falsely claiming that he had major success as a personal trader and invested $1.5 million of his own money in the hedge fund.  He also misrepresented that an accounting firm would audit the hedge fund’s financial statements.

The SEC alleges that Cohn had a record of trading losses, invested no more than $4,000 of his own money, and absconded with far more money for his personal expenses.  The audit firm named by Cohn never agreed to audit the fund’s financial statements.  Cohn continued to deceive investors after their initial investment by issuing account statements that showed annual returns of more than 200 percent for 2012 when the hedge fund actually lost money.   The SEC’s complaint charges Cohn and Market Action Advisors with violating the antifraud provisions of the federal securities laws.  The court granted the SEC’s request for emergency relief including a temporary restraining order and asset freeze.  The SEC further seeks permanent injunctions, disgorgement of ill-gotten gains, and financial penalties from Cohn and Market Action Advisors.

For more information - | SEC Halts Ex-Marine’s Hedge Fund Fraud Targeting Fellow Military
The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at email us

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Wednesday, August 7, 2013

Investors Optimistic According to Fidelity Survey

Fidelity Investments surveyed customers with at least $250,000 in investable assets and the outcome was positive.

Survey results showed that more than three-quarters (77%) of high-net-worth investors expect to beat or match the market this year with approximately half (48%) feeling the stock market is appropriately valued and 17% feeling it is undervalued.

However, 70% of investors are concerned about the Federal Reserve reducing support for the bond market and, as a result, 88% of those investors are holding an average of 20% of their portfolio in cash for the opportune moment to invest.

Investors Optimistic According to Fidelity Survey 

Litterman on carbon finance

I just read a very nice article by Bob Litterman in CATO's "Regulation" on the finance of carbon taxes. It includes a review of some of the recent academic calculations.

(Related, Ronald Bailey at takes on the Administration's latest cost of carbon estimates, and reviews Robert Pindyk's recent NBER working paper "What do the models tell us?" also covered by Bob.)

Like just about every economist, Bob favors a carbon tax or tradeable emissions right over the vast network of regulatory controls on which we are now embarked. I might add that getting rid of the large subsidies for carbon emissions implicit in many country's policies would help before we start taxing.

But let's get to business, how big should the carbon tax be?

It's a hard question. The economic costs of warming are hard to assess. Moreover, they come in a century or more, when presumably our descendants are much wealthier than we are, and hopefully have technologies we have not imagined. Or civilization will have collapsed so they have a lot more pressing problems. How do we trade off costs now and uncertain benefits in a century?  What discount rate should we use?

Bob has good points on this question that I hadn't thought of, and are good applications of finance thinking (as you'd expect from Bob) which is sort of my excuse for covering it here.

Carbon beta

First, climate costs are likely to have a strong negative beta, and thus climate investments have a large positive beta.

Here's the thinking. The rate of economic growth over the next century is a major uncertainty. Will the historically unprecedented growth of the post WWII era continue, say 2% real per capita? Or does our current scleroscis settle us into 1% growth? Or are the end-of-growth prognosticators right? When you compound over a century, these add up to truly major uncertainties over how wealthy our descendants will in fact be.

But they also add up to truly major uncertainties over how much carbon we will emit in the meantime. If growth stops, carbon emissions stop too. Yes, it's not one for one (a perfect correlation). Technology choice matters; everything from windmills to deregulated nuclear power to driverless cars and trucks makes a difference. But there is a strong positive correlation.

So, if carbon is a bigger problem, our descendants are more likely to have lots of money, technology, and resources to deal with it. If they are poorer, then carbon is likely to be a lesser problem. In finance language, projects with a strong positive beta require a much higher expected return, and a high equity-like discount rate. This consideration drives us to tax less now.


But, Bob goes on, how do you price catastrophe risk? Though the central tendency of the present value of economic costs of carbon emissions are surprisingly low -- even moving all of Florida up to the Georgia border is only money after all, and you have a century to do it -- there is a chance that things are much worse.

We're all thinking about "black swans" and "tail risk" these days. Shouldn't we pay a bit more carbon tax now, though the best guess is that it's not a worthwhile investment, as insurance against such tail risks?

The problem is,
Massachusetts Institute of Technology economist Robert Pindyck... argues that too many non-GHG-related low-probability, high-damage scenarios exist. He writes, “Readers can use their imaginations to come up with their own examples, but a few that come to my mind include a nuclear or biological terrorist attack (far worse than 9/11), a highly contagious ‘mega-virus’ that spreads uncontrollably, or an environmental catastrophe unrelated to GHG emissions and climate change.” He concludes that society cannot afford to respond strongly to all those threats.
Indeed. (Fun for commenters: come up with more. Asteroid impact. Banking system collapse. Massive crop failure from virus or bacteria. Antibiotic resistsance....) If we treat all threats this way, we spend 10 times GDP.

It's a interesting case of framing bias. If you worry only about climate, it seems sensible to pay a pretty stiff price to avoid a small uncertain catastrophe. But if you worry about small uncertain catastrophes, you spend all you have and more, and it's not clear that climate is the highest on the list.

This thought fits nicely into the modern research on "ambiguity" and "robust control" (for example see Lars Hansen and Tom Sargent's webpages for a portal). This line of thought often argues that you should pay a lot of attention to unlikely catastrophes, especially when it's hard to quantify their risks. And Pindyck's point (as I see it) gets to the central problem with that line of thought: you have to draw an arbitrary circle about which unlikely events you pay a lot of attention to, and which ones you pay no attention to.

If you worry about anvils falling from the sky, maybe you miss the piano falling from the sky. And if you worry about anvils, pianos, dynamite, and so on,  you just don't get out of bed in the morning.

It's also related to the tendency people have, in Kahneman and Tversky's famous analysis, to overweight some small probability events -- nuclear reactors, airplane crashes, terrorism -- and to ignore others -- coal dust, cab crashes on the way to the airport.

The same observation: One of my skepticisims of the current almost exclusive focus on carbon and global warming in the environmental community is that we may miss the real environmental problems. Most of the world breathes awful air and drinks awful water. Climate change is not even on their list of environmental problems. And the environmental effects of social or economic collapse or another war might dwarf warming.

All in all, I'm not convinced our political system is ready to do a very good job of prioritizing outsize expenditures on small ambiguous-probability events.

Alternative investments

Once we reduce things to money, which is what economists do, a bunch of unconventional and unsettling analysis opens up. (This isn't in Bob's piece, mea culpa only.) The economic case for cutting carbon emissions now is that by paying a bit now, we will make our descendants better off in 100 years.

Once stated this way, carbon taxes are just an investment. But is investing in carbon reduction the most profitable way to transfer wealth to our descendants?  Instead of spending say $1 trillion in carbon abatement costs, why don't we invest $1 trillion in stocks? If the 100 year rate of return on stocks is higher than the 100 year rate of return on carbon abatement -- likely -- they come out better off. With a gazillion dollars or so, they can rebuild Manhattan on higher ground. They can afford whatever carbon capture or geoengineering technology crops up to clean up our messes.

Put that way, though, the first question might be why we are leaving our descendants with $18 trillion of Federal debt, and a bill for $70 trillion or so of unfunded liabilities. Once we reduce the question to investment now to benefit the economic well-being of our descendants, it's not at all clear that investing in carbon reductions is the best place to put our money.

The greatest thing we can invest in for the economic well being of our 100 year descendants is strong, decades-long  economic growth. Needless to say, the overall economic policy mix and especially the environmental policy mix is not pointing in that direction. A lot of environmental policy actively discourages growth.


Bob points out one good case against this analysis. It is possible that carbon abatement is a very special investment with very special state-contingent rate of return.
There is a very small chance that climate effects may not just reduce subsequent growth, but may cause it to plummet catastrophically. Such scenarios require positive feedbacks; for example, warmer temperatures cause the release of methane from the currently permanently frozen tundra, triggering catastrophic warming impacts beyond the ability of future generations to adapt. How should society today rationally price the possibility of such unknown, very-low-probability outcomes in the future?
In my investment context, reducing carbon emissions now has a very special property that alternative ways of investing money don't have -- it turns off this low probability but huge negative-return scenario.

That's a good point -- but it means the entire case for a strong carbon tax now relies on how likely such extreme nonlinearity is.

Economics after all? 

I suspect this sort of analysis will be profoundly unsettling -- how about infuriating -- to people who worry about carbon and other greenhouse gases. It's not just about money, I suspect they might say, it's not about giving our descendants wealth; it's about giving them a healthy planet. The economist might say, so what's that worth to you? Some finite number, no? Sure, we inundate Florida, but our descendants are $100 trillion richer, so they can afford to rebuild Florida on higher ground. Problem solved with $90 trillion extra in the bank. Somehow I doubt Greenpeace will go back to saving whales even if that argument were decisively proved.

As much of a died-in-the wool economist as I am, I have to admit some sympathy. (Or maybe "ambiguity?") Consider species extinction. Our short time on Earth coincides with a greater mass extinction than the asteroid that killed off the dinosaurs. And the extinction rate is not abating.

Now, I can't point to an economic cost, and people who hold up development projects to save some small species have a hard time doing the same. The best arguments I have read (admittedly not an expert) is of the sort that there might be some snake in the rain forest has a medically useful venom. More generally, "biodiversity is good." These is again, the  small probability of huge but unquantifiable benefit option-value argument.

Really, is that the best we can do when staring at the K-T boundary, and realizing that future alien geologists will see a more dramatic layer, with far more interesting chemistry, where we lived? The feeling nags that it can't be a good thing for us to move on from the dinosaurs to see if we can beat the Permian-Triassic extinction in the spectacular-geology department. (Global warming is a is a tiny component of extinction -- we got megafauna with spears.) I welcome suggestions on how to voice this view in economic terms.

Perhaps systematically worrying about small and unquantifiable probability events isn't such a bad thing. But paying attention to vague unquantifiable worries leads to a lot of stupidity, like banning genetically modified crops.

Back to carbon taxes

With all that in mind, where do I stand on carbon taxes? Usually, when something is this muddy, it means we're asking the wrong question, and I think that's the case here.

I think we're way too focused on the amount of the tax and way too unfocused on its operation.

I think we should be talking about a carbon tax in place of  all the rest of our rather calamitous energy policy. Subsidies for windmills, for rich people to buy Tesla cars, HOV lanes, fuel economy standards, subsidies for photovoltaic roofs, tax credit for energy efficient appliances, certified buildings, ethanol, high speed trains, low speed trains, and on and on. Throw out the whole department of energy, the EPA's ability to regulate climate emissions, and every other nagging energy regulation, and give us a carbon tax instead (and real-time tolling to eliminate congestion). Set the level of the carbon tax at the cost of all this other junk, and achieve better results at a fraction of the cost.

The first-order issue is the monstrous inefficiency and increasing corruption of our energy regulation. Get the clean carbon-tax system in place, then we can talk about the level of the tax. In that world, a tax rate twice or even three times too high will have much fewer distortions than what we have now, and will produce both better growth and a cleaner environment.

Alas, as with the consumption tax and any other perfectly obvious policy, we can't seem to trust that the deal will be kept.

Oppenheimer Adds Technology Merger & Acquisition Group

Oppenheimer & Co. Inc., a unit of Oppenheimer Holdings (OPY), today announced that Jason "Hutch" Hutchinson has joined the firm as Managing Director to lead the firm’s Technology Mergers & Acquisitions Group. Hutch joins Oppenheimer as part of a team of bankers that includes Michael Lippert, Executive Director, and will continue to deliver a wide range of M&A advisory services to the Firm’s clients across all sectors of technology, media and telecom. The team will be based in Oppenheimer’s San Francisco office.

Oppenheimer Adds Technology Mergers & Acquisitions Group


The attorneys at Sallah Astarita & Cox  have decades of experience in securities litigation matters, including broker transition, bonus payments, employee forgiveable loans and employment agreements, as well as the negotiation and litigation of resignations and terminations. For more information contact Mark Astarita at 212-509-6544 or by email

More Detail on the Bank Of America Mortgage Backed Fraud Allegations

The SEC has released its civil charges against Bank of America and alleges alleges that Bank of America failed to tell investors that more than 70 percent of the mortgages backing its offering – called BOAMS 2008-A – originated through the bank’s “wholesale” channel of mortgage brokers unaffiliated with Bank of America entities.

Bank of America knew that such wholesale channel loans – described by Bank of America’s then-CEO as “toxic waste” – presented vastly greater risks of severe delinquencies, early defaults, underwriting defects, and prepayment.  These risks all directly impact the returns to RMBS investors, however Bank of America only selectively disclosed the percentage of wholesale channel loans to a limited group of institutional investors.  Bank of America never disclosed this material information to all investors and never filed it publicly as required under the federal securities laws. | SEC Charges Bank of America With Fraud in RMBS Offering

The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the representation of individual and institutional investors who have been defrauded. We represent investors, financial professionals and investment firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at email us

UBS Fined $50 Million In Mortgage Security Fraud Case

In another in a series of mortgage backed securities fraud cases against major investment banks, the SEC announced on Tuesday that UBS agreed o to pay $50 million to settle federal accusations that it misled investors about a complex mortgage security, a transaction that loomed over the government’s recent legal battle with a former Goldman Sachs trader blamed for his role in creating a similar security. Among the allegations made by the SEC was that UBS pocketed $23 million dollars that should have been placed in the invesment pool, and that UBS marketed the deal, according to the S.E.C., “using materials that omitted any reference to its retention of the upfront payments,” making it an “undisclosed fee.”
UBS kept $23.6 million that under the terms of the deal should have gone to the CDO for the benefit of its investors,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement.  “In doing so, UBS misrepresented the nature of the CDO’s collateral and rendered false the disclosures about how that collateral was acquired.
The SEC's complaint and press release detail allegations of UBS senior employees discussing how to keep the 23 million dollars without disclosing the retention.

According to the New York Times, while UBS did not deny the SEC's allegations, it stated that it was “pleased to put this investigation behind us, which involved a legacy business that was closed almost five years ago.”

That's very cute. UBS calls its CDO Group, which wrote tens of billions of dollars in business, and ultimately collapesd, a "legacy business" as if it was something UBS acquired, had nothing to do with, and closed. It is a legacy business only because the rampant fraud that came to light in 2008 caused that business to collapse, which is also the reason that the business closed "almost 5 years ago." That means late 2008 as the financial crisis was collapsing our economy. The business was not shut down voluntarily by UBS.

For more information - UBS to Pay $50 Million to Settle SEC Charges of Misleading CDO Investors

The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the representation of individual and institutional investors who have been defrauded. We represent investors, financial professionals and investment firms  nationwide For more information contact Mark Astarita at 212-509-6544 or at email us.
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Tuesday, August 6, 2013

DOJ Sues Bank Of America Over Mortgage-Backed Securities

The housing/banking/mortgage crisis may finally be catching up to Bank of America. The Feds have sued the bank for what the Justice Department and securities regulators said was a fraud on investors involving $850 million of residential mortgage-backed securities.

The Justice Department and the U.S. Securities and Exchange Commission filed the parallel suits in U.S. District Court in Charlotte, according to the court filings.

The securities date to about January 2008, the government said, putting them just at the beginning of the global financial crisis.

Apparently Bank of America is defending by claiming that its investors were all sophisticated and fully understood what was involved with the securities. Is that true? If you were an investor in mortgage backed securities sold by Bank of America, we would like to hear from you. Call me at 212-509-6544. We represent investors and financial professionals across the country, and have been doing so for decades.

DOJ Sues Bank Of America Over Mortgage-Backed Securities

Rajan to run the central bank of India

My colleague Raghu Rajan has just been appointed governor of the central bank of India. See Financial Times and Reuters. Congratulations Raghu!

Let me add two little notes to the songs of praise for this decision.

Traditionally, academic central bank governors come from the world of monetary policy, people who think about interest rates and inflation and all that. Raghu comes from the academic world that studies finance and banking. Look at his vita and you'll see great article after great article thinking about how banks work.

Just in time. Central banks are now all scrambling to understand banking and financial markets, regulating the financial system, avoiding crises, and so on. This is their central new task. (Or you might say, a return to their age-old task after a short interlude.) You can't ask for a person on the planet who has thought more clearly and productively about these issues.

His popular book “Saving capitalism from the capitalists” with Luigi Zingales is also revealing. Yes, he sees how over regulation and corruption are at the heart of India’s problems (and many of our own). But he also sees the strong political forces that keep the dysfunctional system in place. If anyone can understand and resist the political pressures that central bank governors face, it will be Raghu. And he won’t be tempted to think that any monetary magic or financial dirigisme from a central bank can fix all of India's problems.

He is also about the most polite person I know, while never shying away from standing for what's right. That means he will be far more effective than typical bull-in-a-china-shop academics like myself would ever be in steering a ponderous bureacracy.

Good luck, Raghu. I think you'll need it.

Reuters already expreses the view that it's too bad he's out of the running for the US Fed job.

Better markets often bring happy investors, and brokers changing firms, looking for a better fit for themselves and their clients. Now U.S. Bank is geting into the act, staffing up to serve the ultra-wealthy in San Francisco.

The bank’s ultra-high-net-worth unit has hired four managing directors at its newly opened office. The hires include a new CFO, a director of investors, a wealth planning director and a private banking director.

The new hires follow the appointment of a regional managing director to for the San Francisco office. In addition to San Francisco, Ascent has ultra-high-net-worth offices in Minneapolis, Denver, Seattle and Cincinnati.



 The attorneys at Sallah Astarita & Cox  have decades of experience in securities litigation matters, including broker transition, bonus payments, employee forgiveable loans and employment agreements, as well as the negotiation and litigation of resignations and terminations. For more information contact Mark Astarita at 212-509-6544 or by email

U.S. Bank Staffs Up UHNW Team in San Francisco

The Republic of Paperwork

Mark Steyn, while writing on other matters, came up with this gem:
40 percent of Americans perform minimal-skilled service jobs about to be rendered obsolete by technology, and almost as many pass their productive years shuffling paperwork from one corner of the land to another in various “professional services” jobs that exist to in order to facilitate compliance with the unceasing demands of the microregulatory state. The daily Obamacare fixes — which are nothing to do with “health” “care” but only with navigating an impenetrable bureaucracy — are the perfect embodiment of the Republic of Paperwork.

Thursday, August 1, 2013


WSJ Op-Ed on immigration, with extra comments.  Original here.

Think Government Is Intrusive Now? Wait Until E-Verify Kicks In

Source: Wall Street Journal
Massive border security and E-Verify are central provisions of the Senate immigration bill, and they are supported by many in the House. Both provisions signal how wrong-headed much of the immigration-reform effort has become.

E-Verify is the real monster. If this part of the bill passes, all employers will be forced to use the government-run, Web-based system that checks potential employees' immigration status. That means, every American will have to obtain the federal government's prior approval in order to earn a living.

E-Verify might seem harmless now, but missions always creep and bureaucracies expand. Suppose that someone convicted of viewing child pornography is found teaching. There's a media hoopla. The government has this pre-employment check system. Surely we should link E-Verify to the criminal records of pedophiles? And why not all criminal records? We don't want alcoholic airline pilots, disbarred doctors, fraudster bankers and so on sneaking through.

Next, E-Verify will be attractive as a way to enforce hundreds of other employment laws and regulations. In the age of big data, the government can easily E-Verify age, union membership, education, employment history, and whether you've paid income taxes and signed up for health insurance.

The members of licensed occupations will love such low-cost enforcement of their cartels: We can't let unlicensed manicurists prey on unsuspecting customers, can we? E-Verify them! And while the government screens employee applications, they can also check on employers' compliance with all sorts of regulations by looking at the job applications they submit for verification.

E-Verify proponents imagine some world in which a super-accurate government database tracks each person's legal status, and automatically enforces straightforward rules. Maybe on Mars. In our world, immigration and employment law is a complex mess, and our government's website-building capacity (see under: "health-insurance exchanges") can't possibly handle millions of people who are trying to evade the law. Permission to work inevitably will rely at least in part on the judgment calls of an army of bureaucrats.

Political abuse is just as inevitable. Consider Catherine Engelbrecht, reportedly harassed by the Federal Bureau of Investigation, the Internal Revenue Service, the Bureau of Alcohol Tobacco and Firearms and the Occupational Safety and Health Administration, all for starting a tea-party group. But the E-Verify bureaucrats would never cause her trouble in getting a job or hiring someone, right?

Soon, attending a meeting of a group that is a bit too enthusiastic about the Constitution or gun rights—or being arrested at an Occupy Wall Street rally—could well set off a "check this person" when he applies for a job. If the government can stop you from working, how can you be free to speak out in opposition?

It's the need for prior permission rather than ex-post prosecution that makes E-Verify so dangerous. A simple delay in processing or resolving an "error" in your data is just as effective as outright denial, cheap to do, and easy to cover up.

Every tyranny silences opponents by controlling their ability to earn a living. How is it that so many supposedly freedom-loving, small-government Republicans want to arm our nation's politicized bureaucracy—fresh from the scandals at the IRS and elsewhere—with the power to do just that? Why are we so afraid of immigrants that we would jeopardize this most basic guarantee of our political liberties?

Many opponents of immigration worry that immigrants will overuse expensive social services. The fear is misplaced. The Congressional Budget Office estimates more than $100 billion of net fiscal benefit from the limited expansion of immigration that's allowed by the Senate bill. And this fear does not make any sense of the system's preferences for current citizens' family members—who are less likely to work and more likely to consume services—over workers and entrepreneurs.

Perhaps some Republicans worry that immigrants will vote Democratic. But then limiting entrepreneurs and workers makes even less sense. These Republicans should have confidence that their ideas on freedom will attract ambitious, hard-working migrants.

Others say they want to protect the wages of American workers. Like all protectionism, that is demonstrably ineffective. Migrants come for jobs Americans won't or can't do, and businesses build factories abroad if workers can't come here.

The Senate bill promises higher caps for "guest workers." Ponder what "guest worker" really means. Come to America, pick our vegetables, clean our bathrooms and tend our gardens at the invitation of a powerful employer. Pay taxes. And when your visa runs out, go back where you came from—there is no place for you here. This is how Middle East sheikdoms treat Filipino maids and Palestinian construction workers. Is this America?

In the current vision of immigration reform, millions will still be trying to sneak in, and millions more will remain here working illegally. E-Verify and the border security wall prove it. If people could work legally, there would be no need for a system that endangers everyone's liberty to "verify" them. And there would be no need to build a $45-billion monument to imperial decline— our bid to outdo the walls of Hadrian, China and Berlin—to stop them. [Only the ruins won't be pretty enough to attract Chinese tourists a few centuries from now.]

Here is the crucial question for genuine immigration reform: How do we respond when someone says, I have heard of your freedom. I am tired of the corrupt police in my country, the bought-off courts, the oppression of rulers, the tyranny of the religious or ethnic majority. I want to join the one country on earth defined by an idea, not by conquest, religion or ethnic identity. No, I don't have a special skill or a strong back useful to your politically connected employers. I want to come, drive a cab, open a convenience store in a poor neighborhood, work long hours, pay taxes, send my children to school and, eventually, vote.

The answer in the Senate bill and emerging House debate remains: Stay home. America is closed. [The question is, why?]


A few more comments.

Boiled down to one sentence, where this all started. Grumpy reads the news. Reaction: "You guys want every American to have to ask the permission of the Federal Government in order to get a job??? Have you lost your minds? How many founding fathers are rolling over in their graves?"

Space is at a premium in an oped so a lot of fun stuff got cut including the few [] above.

I know there is a serious empirical literature on how much immigrants do or don't affect wages here, and whose wages. Also, I said jobs that Americans "can't or won't do," and any economist should always ask "at what wages."  I had one sentence, so give me a break. (Though, from what I've read, the wages it would take to get Americans to work at a poultry processing plant or pick fruits and vegetables would imply pretty astronomical price increases - or wholesale movements of those industries abroad.)

But... If it raises the welfare of Texans to keep out workers from old Mexico, why does it not make sense for them to keep out workers from New Mexico? National borders have no meaning in economics.

And even if it did work, it would merely be a pure transfer, a zero-sum game. If we want to subsidize wages of some Americans, do we really to tax the wages of poor Mexicans to do it?  Is this America's place in the world, to engineer transfers form poor Mexican migrants to our workers? The tax also shows up on the prices Americans pay, often the same Americans whose wages we're trying to subsidize. A most basic principle of economics is: don't engineer wealth transfers by distorting prices. If you can understand that for ethanol, you can understand that for labor.

The one-sentence shot about moving factories abroad is serious. The studies showing some benefit from keeping out foreign workers typically document short-run effects.  We've been keeping out foreigners for two generations now, and it doesn't seem to have helped the wages of workers who compete with foreigners a lot! People also choose which occupations to enter.

I didn't have room to talk about the 11 million already here. One decent thing in the Senate bill is to recognize that we can't go on like this with 11 million people relegated to second-class status. However, making them wait another 13 years before they can become citizens... Didn't we once have a revolution about "taxation without representation?"

The "guest" worker visas only allow them to work in "qualified" industries and for limited amounts of time. That means e-verify is already set up to check that you're allowed to work in specific industries, and for specific time periods, not the simple in or out you might imagine.

"Soon, attending a meeting of a group that is a bit too enthusiastic about the Constitution or gun rights—or being arrested at an Occupy Wall Street rally—could well set off a "check this person" when he applies for a job" Besides the grammar getting a bit mangled in the edits, we lost sight of just how plausible this is. Of course "terrorists" shouldn't be allowed to work in the US, right? How many congresspeople would vote against a bill adding "potential terrorists and national security threats" to the e-verify system?  But of course bureacracies' idea of "terrorist" and yours and mine might be a bit different. Mark Steyn (a favorite of mine) is illuminating here
The other day, The Boston Globe ran a story on how the city's police and other agencies had spent months planning a big training exercise for last weekend involving terrorists planting bombs hidden in backpacks left downtown. Unfortunately, the Marathon bombers preempted them, and turned the coppers' hypothetical scenario into bloody reality. What a freaky coincidence, eh? But it's the differences between the simulation and the actual event that are revealing. In humdrum reality, the Boston bombers were Chechen Muslim brothers with ties to incendiary imams and jihadist groups in Dagestan. In the far more exciting Boston Police fantasy, the bombers were a group of right-wing militia men called "Free America Citizens," a name so suspicious (involving as it does the words "free," "America," and "citizens") that it can only have been leaked to them by the IRS. What fun the law enforcement community in Massachusetts had embroidering their hypothetical scenario: The "Free America Citizens" terrorists even had their own little logo – a skull's head with an Uncle Sam hat. Ooh, scary! The Boston PD graphics department certainly knocked themselves out on that.
Do you really want people like this deciding who can work -- and in what industries -- in America? The e-verify system is already connected to homeland security!

The opposite is just as worrisome. The big data miners at the NSA and homeland security will surely be interested to monitor every time a "suspected terrorist" applies for a job, no?

I had a lot more examples of past political persecution in this country.  Historically the left has been persecuted by the government a lot more than the right. The FBI harassed civil rights leaders. Remember the red scare, and the blacklist. Good thing we didn't have e-verify back then.

Henry Miller (also Hoover) had a lovely NRO post on Thursday with detailed accounts of politicized discretion at work in Federal Agencies. Read this and think about how e-verify will work.

The worry that Federal control of employment will  misused is not a new thought. See chapter 1 of Milton Friedman "Capitalism and freedom."

An economic e-verify consequence I didn't have space for: expansion of the underground economy. There will still be millions of people here trying to work illegally. If not, what's the point of e-verify? Many of the 11 million here who won't qualify for the rather strict program to stay, and the slightly looser caps will still leave many shut out.

OK, so there's this much more effective e-verify, you need a job, and your employer needs a worker. What do you do? Answer: go fully illegal. The current system, in which illegal (or maybe I should use the new word "unauthorized." I like that one!) workers can get fake social security numbers and continue semi-legally, paying taxes, paying social security and medicare (on which they will never collect), and enjoying some legal protection, goes down the toilet. Now it's cash under the table.

And once employers get used to cash under the table, why stop with the immigrants? Benefits, health care, taxes, red tape, unions, NLRB, OSHA, it's all getting to be such a pain. Why not pay the Americans cash under the table too?

It's one more step to a two-tier economy, like much of southern Europe. There are a few "good" full time legal jobs with benefits, pensions, etc. And a vast amount of black-market work. Especially for young people, recent migrants (authorized or unauthorized), minorities, and so on.  Even a true-blue libertarian wants work to operate with protections afforded by the legal system -- enforceable contracts and all that. And anyone with a vague soft spot for labor laws including safety, health, worker rights and so on, ought to worry about the consequences of expanding completely illegal labor.

Just because you pass laws against things doesn't mean they stop.

Oh those looser caps. A bureaucracy has to certify that economic conditions are strong enough before more people get let in. The lobbying on that one will be fun to see. Maybe they can import some retired Fed governors. My forecast: labor markets will be strong enough to admit immigrants when there is no American voter who wants a better job, i.e. when hell freezes over.

For a half century, we decried that the Soviet Union controlled who could work where, and ruining the lives of dissenters. We decried that they posted soldiers at the border with guns to stop people from leaving. "Mr. Gorbachev, tear down this wall!" Do we really want to set up the system that allows the former. And does it really matter which side of the border has the soldiers with guns? Certainly to the people trying to pass, it matters not one bit.

Thanks without blame to Tom Church at Hoover for a lot of help on facts.

If you're still reading, here's an earlier post with more


Richard Sobel has a nice piece making an important point that I totally missed. E-verify will have to mean a national, biometric identity card. Now, you submit a social security number. What stops people from submitting false names and social security numbers? Hmm need to make sure they are who they say they are...

I also didn't think to point out another danger. Now the Federal government and its Big Data base know every time you apply for a job. Hmm, why is that guy Cochrane applying for a job again? Checking how often you apply for a job will naturally be an important way to check against false social security numbers.

Et tu, Brute?

Politico's Byron Tau has a hilarious story:
Pot legalization activists are running into an unexpected and ironic opponent in their efforts to make cannabis legal: Big Marijuana...

Medical marijuana is a billion-dollar industry ... and like any entrenched business, it’s fighting to keep what it has and shut out competitors. Dispensary owners, trade associations and groups representing the industry are deeply concerned — and in some cases actively fighting — ballot initiatives and legislation that could wreck their business model. ...

...their businesses — still illegal under federal law — benefit from exclusive monopolies on the right to sell legal pot... those same federal laws that prohibit growing, selling and using keep pot prices high.

This spring, the Medical Marijuana Caregivers of Maine joined the usual coalition of anti-pot forces that includes active law-enforcement groups, social conservatives and public health advocates to oppose a state bill that would legalize possession of small quantities of the drug.