Musk Admits Tesla “Would Have Gone Bankrupt” Without SolarCity Employees Helping Model 3 Production

Musk Admits Tesla “Would Have Gone Bankrupt” Without SolarCity Employees Helping Model 3 Production

The SolarCity shareholder lawsuit discovery continues to bear highly disturbing insights into how Elon Musk and his merry band of brothers were running their “pyramid” of money losing companies – SpaceX, SolarCity and Tesla – back in 2015 and 2016.

Most recently, it was revealed that Musk shifted resources from SolarCity in order to save Tesla from bankruptcy while it was preparing to produce the Model 3, according to Bloomberg

Musk said in a June pre-trial deposition: “If I did not take everyone off of solar and focus them on the Model 3 program to the detriment of solar, then Tesla would have gone bankrupt. So I took everyone from solar, and said: ‘instead of working on solar, you need to work on the Model 3 program.’ And as a result, solar suffered, as you would expect.’’

Of course, at the time, no such disclosures were made to investors. 

Musk also acknowledged in the deposition that he “probably wouldn’t support” the SolarCity acquisition again given the stress that Tesla faced during its Model 3 push. 

Musk said: “At the time I thought it made strategic sense for Tesla and SolarCity to combine. Hindsight is 20/20. And if I could wind back the clock, you know, I would say probably would have let SolarCity execute by itself; would have let Tesla execute by itself. But I just didn’t realize how difficult it would be to do the Model 3 program. And so that was just a big distraction and sort of offset a lot of things by more than a year, year and a half maybe.’’

To help alleviate the pressure of the Model 3 ramp, Musk took SolarCity employees from engineering, management, sales and service and transferred them to work on the Model 3. Other SolarCity workers were deployed to Tesla retail stores, while some delivered cars to customers. 

The pension funds who filed the lawsuit against Musk are arguing that Tesla was in no condition to buy a $2 billion company that was already basically insolvent. When Tesla reported Q3 earnings, its rooftop solar business increased for the first time in a year. 



Source: @TeslaCharts

And Musk was combative with the lawyer asking him questions about SolarCity’s health at the time, Randy Baron, even calling him “reprehensible” when he questioned whether SolarCity was a viable entity.

Musk continued in the deposition, saying to Baron: “You seem like a very, very bad person. Just a bad human being. And I hope you come to regret your actions in the future, but you probably won’t. And that’s sad.”

When asked if he “bailed out” SolarCity, Musk said to Baron: “Advancing solar is absolutely good for the world. Do you just think about money? What is your purpose in life?’’

“SolarCity would have done just fine by itself and Tesla would have done just fine by itself, but in the long-term, they are better together. And that is what the future will show. That is why I think you should stop wasting your time now,’’ Musk said at one point.

Last week, Tesla introduced its “Version 3” of its solar roof. “It’s been quite hard. Roofs need to last a long time. When you add electrification to the roof, it’s a fair bit of complexity,” Musk said about the product.

Recall, on Wednesday night, we published a comprehensive timeline laying out Kimbal Musk’s SolarCity margin calls that occurred prior to the failing company being bailed out by Tesla. 

Tesla skeptic and short seller @TeslaCharts also appeared on a podcast on Sunday to lay out his thoughts both on Tesla’s recent quarterly results, and on the company’s claims about its “Version 3.0” of its solar roof tiles. 

Recall, we also noted days ago that despite Tesla’s “headline” Q3 numbers, its U.S. sales actually plunged 39% in the quarter. 


Tyler Durden

Thu, 10/31/2019 – 19:45

via ZeroHedge News https://ift.tt/2WuqY5T Tyler Durden

Illinois’ “Fair Tax” Is Actually A “Scare Tax”

Illinois’ “Fair Tax” Is Actually A “Scare Tax”

Authored by Matthew Besler, op-ed via TheCenterSquare.com,

Illinois Democrats are attempting to muscle through a so-called “fair tax” by amending the Illinois Constitution to eliminate the flat tax. Their strategy has all the subtlety of a shakedown.

Given Democrats’ “pass it or else!” attitude, the “scare tax” seems a more appropriate name. Here’s a Halloween peek at the Democrats’ two-step strategy for raising taxes in 2020 and beyond.

Step 1 is eliminating Illinois’ flat tax via constitutional amendment. First, Democrats will try to convince voters why this is necessary. Due to the Trump revenue bump, Illinois enjoyed a surprise revenue surplus. This bit of good fiscal news was the grease for getting a budget passed.

But spending increased much more than revenue did, and overspending in 2019 helps the Democrats as we enter 2020 and 2021. Here’s how:

This year’s spending spree creates room for spending cuts next year, just as rug merchants of lore raised prices to offer exaggerated discounts to lure the unwary. Indeed, Democrats are already rounding up ideas for cuts, but they are not discussing, much less driving, the structural reforms needed to address Illinois’ fundamental financial problems.

That’s because Illinois’ fundamental financial challenges are a result of the Democrats’ “Chicago Way;” offering government employee unions sweet deals in exchange for support. With reforms that impact their governing coalition off the table, Democrats obsess over raising revenue to fund their status quo – and they understand that spending cuts will be demanded in connection with a tax hike.

So, much like Inspector Renault did in Casablanca, Democrats round up spending cuts they can live with to feign fiscal probity.

Spending in 2019 will exceed revenues, creating a deficit in the 2020 budget; we should expect an “unanticipated fiscal crisis,” which will justify the Democrats’ pro-tax push next year.

“Shocked” by this “surprise” deficit, Democrats will argue this crisis can be fixed with more revenue and that all of the revenue will be obtained from the rich – but only if voters know what’s good for them and vote for the “fair tax.”

And if voters don’t agree to do as Democrats demand? Democrats will argue that the government will fail without new taxes. Those taxes have to come from somewhere; so, tax the rich or be taxed yourself!

And what will happen if the people of Illinois approve the “fair tax,” thereby eliminating the constitutional protection against arbitrary tax rates? Will doubling the tax on the rich spare the rest of us from paying more taxes too?

Of course not.

The Democrats’ “scare tax” won’t spare anyone for two reasons:

  • First, their tax won’t raise as much as Democrats advertise because the proposed new tax and Illinois’ entrenched structural problems are already scaring people away to more tax-friendly havens.

  • Second, Illinois’ structural problems are simply too severe to be fixed by raiding the pockets of a few thousand people.

Which brings us to Step 2 of the Democrats’ strategy: tax everyone else.

Lower-than-projected revenues from the “scare tax” will leave a large and growing hole in Illinois’ finances. Guess whose pockets Democrats will raid in 2021, seeking the billions they inevitably need. Having doubled tax rates on the vanishing rich, Democrats will seek a “much lower” increase in taxes on everyone else.

Make no mistake: taxing the rich is only a speed bump on the road to higher taxes for everyone. The only way to avoid higher taxes is to stop enabling Democrats by raising taxes every time Democrats yell “Boo!”

It’s time to force Democrats to fix the structural financial issues fueling Illinois’ demise. That means voting no on the “fair tax.” Cutting off new tax revenue will force Springfield politicians to deal with its fundamental problems. That is the first step toward inviting back to Illinois the productive and ambitious who have been scared away.


Tyler Durden

Thu, 10/31/2019 – 19:25

via ZeroHedge News https://ift.tt/337Wjxu Tyler Durden

Popeye’s Is Escalating Its “Beef” With Chick-Fil-A

Popeye’s Is Escalating Its “Beef” With Chick-Fil-A

For two chicken companies, the “beef” is starting to reach a fever pitch.

On Sunday, November 3, Popeye’s will be bringing back its chicken sandwich, specifically targeting a day of the week when rival Chick-Fil-A isn’t open, according to Bloomberg

The chain hopes that the sandwich will bring in more customers as competition in the world of fast food continues to grow, as we pointed out in a recent article about the industry’s growing debt problems. 

The sandwich made its original debut in August and sold out within weeks. Now, for the second go-around, franchisees are making sure they are fully staffed to meet the demand. 

Popeye’s reported comp sales of 9.7% on Monday, almost twice analyst projections, as a result of the sandwich’s popularity. It was called one of the company’s “best quarters in two decades” by parent company Restaurant Brands’ CEO Jose Cil. 

Competitor Chick-Fil-A has closed on Sundays since 1946, when the practice was made tradition by the company’s founder. 

Restaurant Brands also owns Burger King and is not only facing leverage headwinds and a slowing global economy, but also declining customer traffic. Competitors like McDonald’s are raising prices in order to try and offset the slowdown. 


Tyler Durden

Thu, 10/31/2019 – 19:05

via ZeroHedge News https://ift.tt/2WtBb2r Tyler Durden

A Fiscal Policy “Flop”: The US Gov’t Spent Hundreds Of Billions, And GDP Slowed

A Fiscal Policy “Flop”: The US Gov’t Spent Hundreds Of Billions, And GDP Slowed

Submitted by Joseph Carson, Former Director of Global Economic Research, Alliance Bernstein

Its now nearly two year since the Trump Administration and Congress passed major tax cuts for businesses and individuals and followed that legislative initiative up with a relatively large increase in spending for defense and discretionary non-defense programs. The economic results from these tax and spending programs are in and the overall growth numbers are disappointing to say the least, and it would not be wrong to characterize these legislative initiatives as a fiscal policy “flop”.

Over the last seven quarters real GDP growth has averaged 2.4%, which matches the 2.4% growth in 2017, the year before the entire fiscal stimulus took place. Simply put, even though the federal government spent more money (estimated to be $300 billion for various programs) and reduced taxes for businesses and individuals the underlying growth rate of the economy did not change one iota.

As disappointing as the growth numbers have been, the fiscal bill from these legislative initiatives is growing and contrary to public assertions these fiscal stimulus programs will never pay for themselves.

In the fiscal year ending on September 30, the US recorded a $984 billion deficit, more than $300 billion above the budget deficit recorded in fiscal year 2017, the year before the tax cut and spending programs were passed by Congress.

Measured in relation to GDP, the budget deficit equaled 4.6% of GDP in the fiscal year ending at the end of the third quarter of 2019, almost 100 basis points above the 3.7% growth in nominal GDP over the same time frame.

That unbalanced relationship – the budget deficit as a percent of GDP running above the growth in nominal GDP – has been a unique feature of the current decade long business cycle and is something that never ever happened during any other economic expansion of the post-war period. Even if money was free (which it isn’t) there is something wrong with this math.

Budget projections from the Congressional Budget Office indicates that the scale of the budget deficit will continue to outpace the growth in nominal GDP by nearly one percentage point over the next decade. Critics may argue that long run forecasts are notorious for being off the mark, but it is worth pointing out that budget forecasts by CBO in the summer of 2009 under-estimated the growth in the budget deficit for the next 10 years by more than $2 trillion – so to be fair there are upside and downside risks to future budget projections.

It’s premature to say that the US government has entered into a “debt trap”. Unlike businesses and individuals which at some point run into market-determined borrowing limits and face margin calls, the federal government has deep pockets in the form of a “printing press”. Nonetheless, it is impossible to deny that recent fiscal decisions have not worsened the US short run and long run outlay and revenue imbalance. Politicians show no appetite to address the growing budget imbalance so “market forces” (i.e. dollar re-alignment since the US is massively dependent on foreign capital) will eventually at some point reduce the scale of the imbalance.

Let’s hope it’s an orderly adjustment.


Tyler Durden

Thu, 10/31/2019 – 18:45

via ZeroHedge News https://ift.tt/2WxWRdv Tyler Durden

“You’re Bull*hit Beto!” O’Rourke Flattened By Female Trump Supporter In Viral Pro-Gun Rant

“You’re Bull*hit Beto!” O’Rourke Flattened By Female Trump Supporter In Viral Pro-Gun Rant

Democratic presidential candidate Beto (Robert Francis) O’Rourke was taken to task by an angry Trump supporter in Newtown, Connecticut – who slammed the former congressman for trying to ‘hijack this town’ and ‘make an issue out of getting guns out of good people’s hands.”

“This is bullshit,” said Rebecca Carnes – a vocal Trump supporter who says she’s a “third-generation” resident of Newtown – where the Sandy Hook elementary school shooting took place in 2012. “It’s about mental health and it’s about this war on boys and masculinity,” she added. “You’re bullshit by being here, shame on you Beto.”

Why don’t you debate me?

Here are the top five reactions to Beto’s beatdown on Fox 61‘s YouTube channel, in order of popularity:

Bitchy Beto can’t say shit cos it’s not Anderson Cooper who’s asking him the questions.”

“It would have great to have seen Beto’s face after that dress down.”

“In Beto’s defense, it is important to remember that Epstein did not kill himself.”

I’d say that she probably has more testosterone in her system than Beto O’Dork, but I think most women probably do.”

“Good for her.

More people need to be made aware that Newtown has voted more for the republican candidates, in many of the recent local and general elections.

Newtown is not anti gun.”


Tyler Durden

Thu, 10/31/2019 – 18:25

via ZeroHedge News https://ift.tt/2NuHxKH Tyler Durden

Should federal Indian law be textualist?

Last year, the Supreme Court heard arguments, and requested extensive supplemental briefing, in Royal v. Murphy (now called Sharp v. Murphy) a complicated murder case involving federal Indian law. The Court was unable to decide the case last year and so it remains on the docket this year and for that reason alone seems poised to be complicated and quite intricate.

My colleague Todd Henderson teaches Indian Law here at Chicago and we’ve repeatedly discussed this case, so I wanted to pass along his thoughts about this case, and the problem that the Supreme Court’s precedents in this area have created for itself.

Is half of Oklahoma—home to nearly 2 million people, many in the city of Tulsa—an Indian reservation? The Supreme Court will decide this year, and the answer may turn on the text of various statutes and treaties signed over a century ago. The laser-focus the specific words of these laws is a form of legal interpretation known as “textualism”—if the text is clear, so the theory goes, then inquiries into context or consequences is irrelevant. While there is much to be said for such a simple approach, in this case, the Court is being led astray by it.

The jurisprudential story starts in 1984 with a case called Solem v. Bartlett. In Solem, the Court considered whether in opening 1.6 million acres of the Cheyenne River Sioux Reservation to homesteading in 1908, Congress intended to “disestablish” the Reservation in the opened lands. Writing for a unanimous Court, Justice Thurgood Marshall held that it did not. Marshall ignored the fact that Congress—”to a man”—believed that Indian reservations would “cease to exist” within a short time after passage of the Act, concluding “[t]he most probative evidence of congressional intent is the statutory language used to open the Indian lands” rather than what everyone knows they intended.

The statute in question authorized the Secretary of the Interior to “sell and dispose of all that portion of the . . . reservation[] . . . within the following described boundaries. . ..” Finding the language somewhat ambiguous as to whether it intended merely to transfer title while keeping the land part of the reservation or to disestablish it as Indian land, Marshall supported the former conclusion with other language in the Act. Specifically, that some of the land was set aside for religious and other purposes for the tribe “reserved as long as needed” and that geological surveys should be done on the land for the benefit of the tribe.

Significant parts of the text pointed to the opposite conclusion. Indians were permitted to purchase land in the area of the reservation “thus diminished” and to harvest timber “only as long as the lands remain part of the public domain.” Moreover, land in the opened area was set aside for schools to be operated by South Dakota. At the same time, another act was passed that banned liquor sales in the opened area, something already banned in Indian lands. The Court elided these textual counterweights in passing, while purporting to base the decision on the text.

The real basis of the decision was not the text, but rather the reality of the situation. Textualism was the new, cool thing in law then, and by nodding to it, Marshall likely cemented his majority.

At the end of the opinion, we can see why the case came out as it did. Marshall notes that “two-thirds of the Tribe’s enrolled members live in the opened area,” that the seat of the tribal government is in that area, and that it is “where most important tribal activities take place.” Coupled with the fact that the opening to homesteaders was “a failure,” to declare the reservation diminished made no sense. It would take an area that was clearly Indian Country, and make it not simply because of congressional intent a hundred years earlier.

The outcome is sensible, but the analytical test Solemannounced was the opposite of what was really driving the decision. If the spirit rather than the letter of Solemwere followed, the case in Oklahoma would be seen in a much different light. But, an intervening case made matters much worse. So, we need a quick detour to Pender, Nebraska.

In 2016, the Supreme Court considered whether an 1882 Act to sell land occupied by the Omaha tribe diminished their reservation. Justice Thomas wrote for an unanimous Court. As a true blue textualist, Thomas took Solem‘s pronouncements more seriously than its reality. Examining the text of the Act, he found no words that expressed a desire to diminish the reservation, and found in the logistics of opening the land—the manner in which the proceeds were to be determined and distributed—a suggestion of non-diminishment.

But, unlike Solem, where the facts on the ground today ran strongly in favor of non-diminishment, in Nebraska v. Parker, they ran quickly in the other direction. The Court made clear the obvious absurdity of its result—the Tribe was “absent from the disputed territory for more than 120 years”; “does not enforce any of its regulations” in the area; and it does not “maintain an office, provide social services, or host tribal celebrations or ceremonies” there. In fact, everyone, from Nebraska to the Tribe to the United States treated Pender as not part of the reservation for over a century.

And yet, Justice Thomas declared it so. After all, it was a perfect case to demonstrate his fealty to textualism. Declaring that “justifiable expectations” are not enough—even overwhelmingly clear ones—Justice Thomas wrote that “[o]nly Congress has the power to diminish a reservation.” Of course, there was no doubt that this is what Congress intended to do to this reservation, and all others, as even Justice Marshall admitted in Solem. They just didn’t use the right words.

Solem made the bet, but Pender cast the die. With the Court on record as being willing to declare part of Nebraska an Indian reservation despite no one thinking this for a century and virtually no Indians living there, the value of mining the historical record for other textual loopholes to reestablish reservations was made clear and extremely valuable.

A lawyer for a convicted murderer facing the death penalty in Oklahoma mined this vein. The brutal killing took place in a part of eastern Oklahoma that was once Indian Country—part of the Creek territory—but that had long since been considered part of the state, not a reservation. If Congress did not make clear that the former Indian territory was disestablished when Oklahoma was admitted as a state in 1907, then under Penderand Solem, the land would be Indian Country, and, importantly for the murderer, the federal government would have jurisdiction, not the state. This matters because there is no federal death penalty for murder.

The 10th Circuit Court of Appeals examined eight various federal statutes from the early twentieth century and found “no clear textual evidence [that] Congress disestablished the Creek Reservation.” The Supreme Court considered the case last year, but could not reach a verdict—it is scheduled to be reargued this year as Sharp v. Murphy.

At oral argument, Solemand Pendertook center stage. Justice Sotomayor pressed lawyers for the state to show which specific statute contains the text that clearly demonstrates congressional intent to disestablish the Creek Reservation. There is none. As the 10th Circuit showed, compared with other acts to reduce reservation land, the statutes in the Oklahoma case are wanting: “None of these statutes disestablished the Creek Reservation. The State’s case for termination of the Creek Reservation thus falters at the first and most important step.” That step being the one allegedly established by Solemand given real weight by Parker.

But this decision, and Parker, are based on a flat misreading of Solem. What mattered in Solemwas the facts on the ground and that if the case had come out the other way, it would have worked an injustice on the tribe. Fetishizing the text didn’t matter so much in Parker, since it was a town of about 1000 people, but it will have profound impacts in Oklahoma. As Justice Breyer noted during oral argument, the lives of nearly 2 million Oklahomans unaffiliated with the Creek or other Indian tribe will be impacted in a wide range of ways by having their land declared as part of a reservation. While it is true that much of eastern Oklahoma is populated with native communities, the status quo—various townships and land is owned and operated by tribes working hand in hand with non-tribal communities—works pretty well. Reversing the 10th Circuit would not be an injustice, as would have been the case had Solemcome out the other way, but would avoid the risk of an injustice running in the other way.

If the Supreme Court wants to disrupt settled expectations based on old texts written at a time when no one thought Indian tribes would be around in a hundred years and regardless of the absurdity of the results, they certainly have that power. But pointing back to Solemas binding precedent for that proposition is bad lawyering. Solemwas as much or more about practical consequences today than about parsing statutory text.

The Court has done this before. In a 2005 case called City of Sherrill v. Oneida Indian Nation, the Court considered whether large portions of upstate New York were illegally purchased from Indian tribes by the State of New York—a federal law then required the federal government’s approval for all land sales by Indians—and thus actually part of the Oneida Reservation. As a matter of text, the case was a clear winner for the Oneida. But, in a highly pragmatic opinion, Justice Ginsburg rebuked the claim.

Today, we decline to project redress for the Tribe into the present and future, thereby disrupting the governance of central New York’s counties and towns. Generations have passed during which non-Indians have owned and developed the area that once composed the Tribe’s historic reservation. And at least since the middle years of the 19th century, most of the Oneidas have resided elsewhere. Given the longstanding, distinctly non-Indian character of the area and its inhabitants, the regulatory authority constantly exercised by New York State and its counties and towns, and the Oneidas’ long delay in seeking judicial relief against parties other than the United States, we hold that the Tribe cannot unilaterally revive its ancient sovereignty, in whole or in part, over the parcels at issue.

The opinion is more apiece with Solem—with its focus on the conditions on the ground and the “Indian character” of the place—than with Parker, which purports to follow Solem. In City of Sherrill, Justice Ginsburg resists the Court from “rekindling embers of sovereignty that long ago grew cold.” This logic seems to apply powerfully to Oklahoma as well.

A final point is worth making. Although if Murphy deems the land in question to be Indian Country it would seem to be a win for the sovereignty of Indian tribes in America, I’m not so sure they should want that result. The day after a decision for the Creek comes down, there will be disputes about a whole range of governance and regulatory matters impacting non-members of the tribe that now controls the territory. In a series of cases, the Supreme Court addressed this problem—being governed or regulated without a vote—and held that the ability of tribes to regulate non-tribal members is limited. If half of Oklahoma is deemed Indian Country, expect there to be many more cases pushing this law further, thus diminishing Indian sovereignty in Indian Country. A more gradual approach might better serve the interests of Indian sovereignty in the long run.

I should add that as somebody with much more textualist sympathies, I am not at all sure that I agree with the cure Todd proposes, even if the diagnosis is correct. But given the difficulties that have been posed by the case, I found Todd’s thoughts on the broader context to be very interesting.

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Repo Madness: The Rest Of The Story

Repo Madness: The Rest Of The Story

Submitted by Chris Whalen, The Institutional Risk Analyst

The Federal Open Market Committee cut the target for short-term funds another quarter point last night, raising the question as to whether the central bank can actually defend the 1.75% upper bound of the new policy range.  Fact is, demand for short-term funding is pulling rates higher as the year draws to a close.



Ray’s Camp, The Flowage, Princeton, Maine

We got to dine with the risk committee this week, revealing new aspects of the recent repo kerfuffle that deserve mention. Chief among them was the idea of competition and, indeed, even conflict between the retail bank side of the house and the capital markets component inside the Fed’s primary dealers.

It seems that when the Federal Reserve Board was caught napping in mid-September, the bank treasury side of one of the largest US banks basically took a line from the 1990 Martin Scorsese film “Goodfellas” and told the bank’s capital markets side: “Fuck you, pay me.

Under Regulation W, which implements what we traditionalists know as Section 23A of the Federal Reserve Act, transactions inside the bank holding co do not count against the bank’s statutory allocation for transactions with affiliates.  But when market rates spiked, the retail treasury representing a very large insured depository, essentially told the traders to pound sand when it came to price. Reg W requires transactions with affiliates to be at market on an arm’s length basis, even with risk-free collateral supporting the trade.



Source: NY Fed

The lesson here is that regulators do not want the cash-rich retail bank to give carte blanche to the traders, either with respect to the amount of liquidity or the price.  The regulatory system worked – but also caused a new problem. A rush of fully motivated capital markets banksters suddenly turned outward and sought funding in the broader market for federal funds.

A squeeze ensued on or around September 16th, needless to say.  Risk free collateral went begging for funding.  Effective rates to finance Treasury and GNMA collateral spiked to double digits.  So then, ask not whether one aspect of federal prudential regulations or another caused the liquidity squeeze seen last December and in June and later in September.  

Ask instead why the Fed and other regulators cannot cooperate to tweak the system and fix da plumbing.  December is just a month away.  The reality, as F.A. Hayek described in his classic 1988 essay “Fatal Conceit: The Errors of Socialism” is that fine tuning the markets is an impossibility. The Fed suffers from the “fatal conceit” that “man is able to shape the world around him according to his wishes.”

Happy Halloween

Softbank Denies WeWork Control??

Meanwhile in the world of finance, a couple of notable events and comments occurred that deserve comment.  PIMCO announced that it is reducing allocations to corporate debt, another data point on our worry beads regarding corporate credit in 2020.  

Our favorite was the blasé Street reaction to the announcement by Softbank that its 80% stake in the insolvent WeWork did not mean control. Hello??  Further, Masayoshi Son indicated that therefore the company would not be consolidated onto Softbank’s balance sheet.  Really? If this transparent evasion of leverage disclosure does not qualify for securities fraud in the US, then we need to buy some new textbooks. 

Several managers, ratings firms and former shareholders complained about a “lack of controls” at Softbank in a Wall Street Journal article by Phred Dvorak and Justin Baer, but when one man is in charge is this even up for debate?  We have always viewed Softbank as an investor driven Ponzi scheme, but we suspect our readers already knew that. 

Of note, we also were reminded over dinner that no less than Deutsche Bank AG (DB) has been the advisor and lender for much of Softbank’s issuance of securities. Would be funny were it not so very sad, especially for the credulous sovereign investors in Softbank.  The whole vision thing strikes us as a grotesque speculation verging on outright fraud. On Wednesday, DB reported a third-quarter loss of $955.1 million or about 10% of total revenue, after reporting a profit in the same period a year earlier.

The Softbank strategy goes like this: Give me and lend me enough capital and I will corner the market for innovation or some such version of that theme. We recall that Jim Fisk and Jay Gould attempted a similar operation in the late 1860s. Their machinations resulted in Black Friday September 24, 1869, the first modern financial crisis. Their scheme to corner the gold market – and ensnare President Ulysses Grant in the operation — collapsed in spectacular fashion, leading the US into a credit crisis.  Gold, after all, was money in those days.  

DOJ/HUD Accord Reached

Hannah Lang of National Mortgage News reports that Department of Housing and Urban Development Secretary Ben Carson announced that HUD and the Department of Justice released a joint a memorandum of understanding, stating that HUD will deal with False Claims Act violations — involving Federal Housing Administration (FHA) lenders — mainly through administrative proceedings. This is a big deal for HUD and the mortgage industry, which has been brutally raped since 2008 to the tune of tens of billions of dollars by a succession of ambitious politicians. 

One of the main reasons why Senator Kamala Harris (D-CA), who served as the state’s AG during the 2012 National Mortgage Settlement, won higher office was the billions she extracted from the shareholders of JPMorgan (JPM), Bank America (BAC) et al.  And this is why a very angry Jamie Dimon publicly took Chase out of the FHA loan market immediately after, followed by hundreds of other banks. 

Today only Wells Fargo & Co (WFC) and Flagstar Bank (FBC) remain as significant bank issuers and servicers of GNMA securities in the FHA/VA/USDA loan market. As former GNMA President Ted Tozer told us last week, without the bond market execution of GNMA-guaranteed securities the FHA/VA/USDA programs are moribund.

We salute Secretary Carson and FHA chief Brian Montgomery for getting this interagency understanding done, but the banks won’t come back to the FHA/VA loan market until 1) the cost of servicing GNMA securities is brought into line with the GSEs Fannie Mae and Freddie Mac and 2) profitability on origination of FHA/VA loans improves a lot more.  GNMA MSRs should trade even yield to conventional mortgage servicing assets.

Perhaps the bigger challenge for HUD is convincing the Fed, OCC, FDIC and other prudential regulators to allow large banks to return to the FHA market.  So long as the federal regulatory community sees small, low FICO, high LTV loans as being “unsafe and unsound,” the banks are unlikely to return fully to the GNMA market. Small loans are loss leaders.  Would you rather service a $280,000 FHA loan for 32bs per year gross or a $3 million prime jumbo loan at 25bps per year?


Tyler Durden

Thu, 10/31/2019 – 18:05

via ZeroHedge News https://ift.tt/2JAz5Z5 Tyler Durden

Should federal Indian law be textualist?

Last year, the Supreme Court heard arguments, and requested extensive supplemental briefing, in Royal v. Murphy (now called Sharp v. Murphy) a complicated murder case involving federal Indian law. The Court was unable to decide the case last year and so it remains on the docket this year and for that reason alone seems poised to be complicated and quite intricate.

My colleague Todd Henderson teaches Indian Law here at Chicago and we’ve repeatedly discussed this case, so I wanted to pass along his thoughts about this case, and the problem that the Supreme Court’s precedents in this area have created for itself.

Is half of Oklahoma—home to nearly 2 million people, many in the city of Tulsa—an Indian reservation? The Supreme Court will decide this year, and the answer may turn on the text of various statutes and treaties signed over a century ago. The laser-focus the specific words of these laws is a form of legal interpretation known as “textualism”—if the text is clear, so the theory goes, then inquiries into context or consequences is irrelevant. While there is much to be said for such a simple approach, in this case, the Court is being led astray by it.

The jurisprudential story starts in 1984 with a case called Solem v. Bartlett. In Solem, the Court considered whether in opening 1.6 million acres of the Cheyenne River Sioux Reservation to homesteading in 1908, Congress intended to “disestablish” the Reservation in the opened lands. Writing for a unanimous Court, Justice Thurgood Marshall held that it did not. Marshall ignored the fact that Congress—”to a man”—believed that Indian reservations would “cease to exist” within a short time after passage of the Act, concluding “[t]he most probative evidence of congressional intent is the statutory language used to open the Indian lands” rather than what everyone knows they intended.

The statute in question authorized the Secretary of the Interior to “sell and dispose of all that portion of the . . . reservation[] . . . within the following described boundaries. . ..” Finding the language somewhat ambiguous as to whether it intended merely to transfer title while keeping the land part of the reservation or to disestablish it as Indian land, Marshall supported the former conclusion with other language in the Act. Specifically, that some of the land was set aside for religious and other purposes for the tribe “reserved as long as needed” and that geological surveys should be done on the land for the benefit of the tribe.

Significant parts of the text pointed to the opposite conclusion. Indians were permitted to purchase land in the area of the reservation “thus diminished” and to harvest timber “only as long as the lands remain part of the public domain.” Moreover, land in the opened area was set aside for schools to be operated by South Dakota. At the same time, another act was passed that banned liquor sales in the opened area, something already banned in Indian lands. The Court elided these textual counterweights in passing, while purporting to base the decision on the text.

The real basis of the decision was not the text, but rather the reality of the situation. Textualism was the new, cool thing in law then, and by nodding to it, Marshall likely cemented his majority.

At the end of the opinion, we can see why the case came out as it did. Marshall notes that “two-thirds of the Tribe’s enrolled members live in the opened area,” that the seat of the tribal government is in that area, and that it is “where most important tribal activities take place.” Coupled with the fact that the opening to homesteaders was “a failure,” to declare the reservation diminished made no sense. It would take an area that was clearly Indian Country, and make it not simply because of congressional intent a hundred years earlier.

The outcome is sensible, but the analytical test Solemannounced was the opposite of what was really driving the decision. If the spirit rather than the letter of Solemwere followed, the case in Oklahoma would be seen in a much different light. But, an intervening case made matters much worse. So, we need a quick detour to Pender, Nebraska.

In 2016, the Supreme Court considered whether an 1882 Act to sell land occupied by the Omaha tribe diminished their reservation. Justice Thomas wrote for an unanimous Court. As a true blue textualist, Thomas took Solem‘s pronouncements more seriously than its reality. Examining the text of the Act, he found no words that expressed a desire to diminish the reservation, and found in the logistics of opening the land—the manner in which the proceeds were to be determined and distributed—a suggestion of non-diminishment.

But, unlike Solem, where the facts on the ground today ran strongly in favor of non-diminishment, in Nebraska v. Parker, they ran quickly in the other direction. The Court made clear the obvious absurdity of its result—the Tribe was “absent from the disputed territory for more than 120 years”; “does not enforce any of its regulations” in the area; and it does not “maintain an office, provide social services, or host tribal celebrations or ceremonies” there. In fact, everyone, from Nebraska to the Tribe to the United States treated Pender as not part of the reservation for over a century.

And yet, Justice Thomas declared it so. After all, it was a perfect case to demonstrate his fealty to textualism. Declaring that “justifiable expectations” are not enough—even overwhelmingly clear ones—Justice Thomas wrote that “[o]nly Congress has the power to diminish a reservation.” Of course, there was no doubt that this is what Congress intended to do to this reservation, and all others, as even Justice Marshall admitted in Solem. They just didn’t use the right words.

Solem made the bet, but Pender cast the die. With the Court on record as being willing to declare part of Nebraska an Indian reservation despite no one thinking this for a century and virtually no Indians living there, the value of mining the historical record for other textual loopholes to reestablish reservations was made clear and extremely valuable.

A lawyer for a convicted murderer facing the death penalty in Oklahoma mined this vein. The brutal killing took place in a part of eastern Oklahoma that was once Indian Country—part of the Creek territory—but that had long since been considered part of the state, not a reservation. If Congress did not make clear that the former Indian territory was disestablished when Oklahoma was admitted as a state in 1907, then under Penderand Solem, the land would be Indian Country, and, importantly for the murderer, the federal government would have jurisdiction, not the state. This matters because there is no federal death penalty for murder.

The 10th Circuit Court of Appeals examined eight various federal statutes from the early twentieth century and found “no clear textual evidence [that] Congress disestablished the Creek Reservation.” The Supreme Court considered the case last year, but could not reach a verdict—it is scheduled to be reargued this year as Sharp v. Murphy.

At oral argument, Solemand Pendertook center stage. Justice Sotomayor pressed lawyers for the state to show which specific statute contains the text that clearly demonstrates congressional intent to disestablish the Creek Reservation. There is none. As the 10th Circuit showed, compared with other acts to reduce reservation land, the statutes in the Oklahoma case are wanting: “None of these statutes disestablished the Creek Reservation. The State’s case for termination of the Creek Reservation thus falters at the first and most important step.” That step being the one allegedly established by Solemand given real weight by Parker.

But this decision, and Parker, are based on a flat misreading of Solem. What mattered in Solemwas the facts on the ground and that if the case had come out the other way, it would have worked an injustice on the tribe. Fetishizing the text didn’t matter so much in Parker, since it was a town of about 1000 people, but it will have profound impacts in Oklahoma. As Justice Breyer noted during oral argument, the lives of nearly 2 million Oklahomans unaffiliated with the Creek or other Indian tribe will be impacted in a wide range of ways by having their land declared as part of a reservation. While it is true that much of eastern Oklahoma is populated with native communities, the status quo—various townships and land is owned and operated by tribes working hand in hand with non-tribal communities—works pretty well. Reversing the 10th Circuit would not be an injustice, as would have been the case had Solemcome out the other way, but would avoid the risk of an injustice running in the other way.

If the Supreme Court wants to disrupt settled expectations based on old texts written at a time when no one thought Indian tribes would be around in a hundred years and regardless of the absurdity of the results, they certainly have that power. But pointing back to Solemas binding precedent for that proposition is bad lawyering. Solemwas as much or more about practical consequences today than about parsing statutory text.

The Court has done this before. In a 2005 case called City of Sherrill v. Oneida Indian Nation, the Court considered whether large portions of upstate New York were illegally purchased from Indian tribes by the State of New York—a federal law then required the federal government’s approval for all land sales by Indians—and thus actually part of the Oneida Reservation. As a matter of text, the case was a clear winner for the Oneida. But, in a highly pragmatic opinion, Justice Ginsburg rebuked the claim.

Today, we decline to project redress for the Tribe into the present and future, thereby disrupting the governance of central New York’s counties and towns. Generations have passed during which non-Indians have owned and developed the area that once composed the Tribe’s historic reservation. And at least since the middle years of the 19th century, most of the Oneidas have resided elsewhere. Given the longstanding, distinctly non-Indian character of the area and its inhabitants, the regulatory authority constantly exercised by New York State and its counties and towns, and the Oneidas’ long delay in seeking judicial relief against parties other than the United States, we hold that the Tribe cannot unilaterally revive its ancient sovereignty, in whole or in part, over the parcels at issue.

The opinion is more apiece with Solem—with its focus on the conditions on the ground and the “Indian character” of the place—than with Parker, which purports to follow Solem. In City of Sherrill, Justice Ginsburg resists the Court from “rekindling embers of sovereignty that long ago grew cold.” This logic seems to apply powerfully to Oklahoma as well.

A final point is worth making. Although if Murphy deems the land in question to be Indian Country it would seem to be a win for the sovereignty of Indian tribes in America, I’m not so sure they should want that result. The day after a decision for the Creek comes down, there will be disputes about a whole range of governance and regulatory matters impacting non-members of the tribe that now controls the territory. In a series of cases, the Supreme Court addressed this problem—being governed or regulated without a vote—and held that the ability of tribes to regulate non-tribal members is limited. If half of Oklahoma is deemed Indian Country, expect there to be many more cases pushing this law further, thus diminishing Indian sovereignty in Indian Country. A more gradual approach might better serve the interests of Indian sovereignty in the long run.

I should add that as somebody with much more textualist sympathies, I am not at all sure that I agree with the cure Todd proposes, even if the diagnosis is correct. But given the difficulties that have been posed by the case, I found Todd’s thoughts on the broader context to be very interesting.

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‘We Can Fact Check Your Ass,’ but Not When It Comes to Political Ads

On the heels of Facebook announcing it would allow misleading or even factually-incorrect political advertisements, Twitter has announced that it will forego running all paid ads for individual candidates and issues. As Reason‘s Scott Shackford notes, Twitter has not yet released its final guidelines (Twitter head Jack Dorsey has promised to deliver them by November 15) and both platforms are clearly responding to threats by legislators seeking to regulate social media.

The differing approaches to the issue of paid speech provide a good opportunity to discuss not just how political communications work in a post-broadcast world but also how the internet is falling short of its promise to radically alter the way people communicate and connect. There are many reasons to criticize Twitter’s decision (which, as a private platform, it has every right to make), but the ultimate reason is this: It represents a near-complete lack of faith in users to function as critical consumers of information.

In a long thread, Dorsey extols the virtue of organic “reach” on Twitter, writing:

A political message earns reach when people decide to follow an account or retweet. Paying for reach removes that decision, forcing highly optimized and targeted political messages on people. We believe this decision should not be compromised by money.

He immediately recognizes that the very same argument can be made against all forms of advertising, which is how Twitter makes money, so he feels a need to claim that political speech is uniquely serious:

While internet advertising is incredibly powerful and very effective for commercial advertisers, that power brings significant risks to politics, where it can be used to influence votes to affect the lives of millions.

Internet political ads present entirely new challenges to civic discourse: machine learning-based optimization of messaging and micro-targeting, unchecked misleading information, and deep fakes. All at increasing velocity, sophistication, and overwhelming scale.

This sort of thinking represents a fundamental betrayal of the ideals that helped build the internet into an unparalleled, open system of knowledge and information. Dorsey is effectively saying that we—you, me, and the typical Twitter user—can’t manage to sift wheat from chaff online.

Go back to the mid-1990s, as the World Wide Web was becoming a mass medium, and you’ll find everyone talking excitedly about “disintermediation,” or the removal of middlemen and gatekeepers from all sorts of cultural, economic, and political transactions. Finally, we would all be able to find and connect directly with like-minded souls in hyper-personalized, ultra-niche communities and markets (this spirit is alive and well in the bitcoin/blockchain space, with boosters celebrating the end of the need for “trusted third parties” to issue currency and validate transactions). Transactions would become more direct—and thus cheaper and more efficient. That attitude fit hand-in-glove with a belief that people could generally be trusted to act honestly and forthrightly, either because they were freed of the corrupting influence of intermediary institutions or because of forced transparency.

We can fact check your ass,” crowed pioneering online journalist Ken Layne in the early 2000s, announcing an ostensibly brave new world in which untruths, half-truths, and patently false claims would be readily debunked by legions of readers and writers who now had access to the means of publication. What was true for journalism was true for everything else, too: The reputations of once-sanctified professionals such as doctors, lawyers, and even college professors (remember Rate My Professors?) suddenly became matters of public record rather than recommendations passed along in semi-secrecy to the advantaged few. For the first time, car dealers had to face customers who had something approaching equal information about automobile costs (look upon Edmunds.com and despair, old school salesmen!). Online merchants were subjected to publicly accessible reviews. Piping up about the food and service at restaurants quickly became the province of amateur critics. Anti-tax activist Grover Norquist pushed to put all government transactions online on the theory that somebody somewhere would be interested in sifting through checks and bringing meaningful information to light (that spirit is alive and well in groups such as Open the Books).

There were, of course, more than a few complications. It turns out that middlemen often provide massive value for customers by sifting through a lot of information, data, or choices and presenting a few items in a given field. It’s a good thing that the power once held by, say, record labels has faded, but there’s no question that the A&R guys at Columbia or Atlantic listened to a lot of bad music so the rest of us didn’t have to. The same is true of publishing houses, clothing stores, and a lot of institutions and structures that literally and figuratively brought things to market. If you ever deputized a friend to pick movies or restaurants or clothing for you, you understand the value of middlemen or guides or editors. In 1994, former Reason Editor Virginia Postrel argued persuasively that as more raw information, news, and data became available we’d enter the “age of the editor” precisely because we would need trusted people who could help us navigate all the choices in front of us.

But the biggest complication to the simple idea that the internet and disintermediation would bring us the whole truth and nothing but the truth is simply this: We have different definitions of what is true, what is good, and what is meaningful. This is especially the case in politics, which is a lot more like religion than math. Most religions claim some monopoly on “truth,” but what they’re really providing is a way of seeing and understanding the world in ways that are subjective. Same with politics. Is Donald Trump’s vision of what is wrong with America and how to fix it true or is Bernie Sanders’? I’d say neither is. But what the internet does (especially platforms like Facebook and Twitter) is enable more of us to directly enter the discussion—the argument over who is right and who is wrong. That’s a great and liberating development but one that is mostly ignored by Twitter’s Dorsey, who instead focuses on the creator of content rather than the consumers of it:

We need more forward-looking political ad regulation (very difficult to do). Ad transparency requirements are progress, but not enough. The internet provides entirely new capabilities, and regulators need to think past the present day to ensure a level playing field.

As a matter of history, it should send a chill down everyone’s spine when anyone talks about regulating political speech. Campaign finance laws, including innocuous-sounding transparency requirements, are routinely used to penalize outliers such as the Socialist Workers Party. More than that, “the entirely new capabilities” provided by social media include the ability to engage, critique, and research any and all claims that come our way. We can indeed fact-check the ass of every advertiser we stumble across. Even more radically, we can block them at the click of button. If Dorsey wants to improve political discourse in cyberspace, he would do far better to give users more tools to tailor their experience as they see fit than to start banning whole categories of ads (which will be much harder in practice than theory; will Twitter ban paid endorsements by popular users as unfair? What about unpaid ones?).

“At some point,” writes Jeff Jarvis, an early theorist of the ways in which online culture was empowering individuals in powerful new ways. “We must trust the public, the electorate, ourselves. If we cannot, then we are surrendering democracy. We must put our faith in the public conversation.” Jarvis is a critic of both Twitter’s and Facebook’s political ad policies for reasons that are different from mine. But what is great and unique about the internet and social media is precisely that it allows more of us to participate in ever-changing and always-contested definitions of what is good, true, and relevant. Yes, yes, Twitter and Facebook and all the other platforms have every right to make whatever decisions they want, but when those choices are at odds with the internet’s essential spirit, they deserve to be criticized.

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Are ‘Green Bonds’ The “But It’s For The Children” Trojan Horse For MMT?

Are ‘Green Bonds’ The “But It’s For The Children” Trojan Horse For MMT?

While still small, sustainable financing is growing. There’s been $165 billion of so-called “green”-bond issuance from companies and countries this year – more than double 2016’s total – according to data compiled by Bloomberg

And, under pressure from ‘the people’ demanding policymakers “do something” to save the world from almost certain climate-driven doom, Bloomberg reports that central banks are putting their money-printing malarkey to work in sustainable financing, opening up a new source of demand for the budding asset class.

Most major central banks have signed on to promote sustainable growth, offering incentives that encourage green financing.

“Central banks are important institutional investors, and the fact that they are participating in this market, it gives the market almost like a seal of reliability and maturity,” said Christian Deseglise, global head of central banks and global sponsor of sustainable finance at HSBC Holdings Plc, the biggest underwriter of the bonds this year.

“It’s not so much about adding demand, because we already have demand,” he said. “It’s the quality of that demand that’s really important.”

The European Central Bank has been buying the debt as part of its asset repurchase program.

Hungary and France’s central banks have each created funds dedicated to ecological investments.

Now Peru is considering buying green bonds, too.

While the Federal Reserve, with nearly $4 trillion on its balance sheet, is notably absent from the Network for Greening the Financial System, regional branches have published research on the topic, and Chairman Jerome Powell maintains that it’s a “longer-run issue.”

However, as Bloomberg notes, pricing and liquidity are still limiting factors. As green bonds become more mainstream, investors are offered little additional incentive to buy them as they price comparably to non-green debt.

“As soon as the green-bond market becomes sizable you’ll see central banks investing more in green bonds,” according to Massimiliano Castelli, head of sovereign strategy at UBS Asset Management.

Of course, as most are aware, “green”-bonds are largely a marketing gimmick, and if central banks really do escalate their buying, then you don’t need a crystal ball to forecast that there will be a rise in companies’ “Greenwashing” their issuance – using green labels to spend on not so green things!

Nevertheless, The San Francisco Fed is quick to explain the ‘benefits’ of these “Green bonds” – and

The Forest Resilience Bond (FRB) is a financial tool that enables private invest­ment in forest enhancements on public land. The FRB promises to accelerate the pace and scale at which critical work to restore the health and functioning of the nation’s forested landscapes is undertaken.

It does so by engaging private capital to cover the upfront cost of activities to improve forest health and by bringing together stakeholders that benefit from this work to share in the cost of reimbursing investors over time. These beneficiaries sign contracts that jointly cover the project cost plus a modest return to investors, meaning that no one stakeholder shoulders the burden of repayment alone. The result is a collaborative finance model that yields clear ecological, social, and financial returns.

While perhaps less obvious, the FRB model also unlocks opportunities for positive social impact in rural communities across the country. In addition to the direct impact of job creation, FRB projects can catalyze infusions of capital into rural areas by sending signals to the market that there is a steady supply of raw material to fuel forest-based industries. Against a backdrop of declining rural prosperity, this article envisions how the FRB could play a role in assisting rural areas – especially those with historically forest-based econo­mies – transition to a more resilient ecological and economic future.

What differentiates the Forest Resilience Bond (FRB) from other approaches is not only its use of investor capital to fund restoration quickly and at scale, but the collaborative model of cost sharing between beneficiaries.

This approach engages a range of stakeholders to split the cost of repaying investors and involves them in project development. As such, the FRB model encourages a collaborative systems-level response to forest health challenges that makes use of funds, experience, and expertise from a range of public, private, and civic stakeholders.

Or, put another way, it’s a public-private partnership that levers taxpayer funds to support ‘green’-led initiatives, without the need for voting (because the central banks are unelected!)

So, to summarize, the concept of “green”-bonds is becoming more and more mainstream – who cares if we don’t get any yield, at least we are signaling just how virtuous we are – and as various ‘wealthy’ western nations hit the monetary and fiscal policy wall, the rhetoric around “People’s QE” or a Modern-Monetary-Theory-driven (MMT) redistribution spreads positively among many (especially the socialism-supporting Millennials).

While common-sense destroys the radical concepts behind MMT, we would argue that “green”-bonds are the perfect trojan horse to create a narrative that monetizing debt “that’s good for the world” is something ‘no one’ can argue with… Let’s just hope not, for the sake of our children’s future loss of purchasing power.

“Central banks are already buying green bonds and they should be buying more,” said Ulrich Volz, director of the SOAS Centre for Sustainable Finance in London. “But at the end of the day we need a mainstreaming of responsible investing across all assets.”

Of course, we look forward to the issuers of “green”-bonds explaining how their bonds mature past the world’s apparent sell-by date in 10-12 years depending on which climate-extremist you ask.


Tyler Durden

Thu, 10/31/2019 – 17:45

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