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Wikileaks 2.0

http://bankofamericasuck.com/

Adrian Chen at Gawker:

A member of the activist collective Anonymous is claiming to be have emails and documents which prove “fraud” was committed by Bank of America employees, and the group says it’ll release them on Monday. The member, who goes by the Twitter handle OperationLeakS, has already posted an internal email from the formerly Bank of America-owned Balboa Insurance Company

The email is between Balboa Insurance vice president Peggy Johnson and other Balboa employees. (Click right to enlarge.) As far as we can tell, it doesn’t show anything suspicious, but was posted by OperationLeaks as a teaser. He also posted emails he claims are from the disgruntled employee who sent him the material. In one, the employee says he can “send you a copy of the certified letter sent to me by an AVP of BofA’s [HR department] telling me I am banned from stepping foot on BofA property or contacting their employee ever again.”

OperationLeaks, which runs the anti-Bank of America site BankofAmericasuck.com, says the employee contacted the group to blow the whistle on Bank of America’s shady business practices. “I seen some of the emails… I can tell you Grade A Fraud in its purest form…” read one tweet. “He Just told me he have GMAC emails showing BoA order to mix loan numbers to not match it’s Documents.. to foreclose on Americans.. Shame.”

An Anonymous insider told us he believes the leak is real. “From what I know and have been told, it’s legit,” he said. “Should be a round of emails, then some files, possible some more emails to follow that.” The documents should be released Monday on Anonleaks.ch, the same site where Anonymous posted thousands of internal emails from hacked security company HBGary last month. That leak exposed a legally-questionable plot to attack Wikileaks and ultimately led to the resignation of HBGary CEO Aaron Barr.

Katya Wachtel at Clusterstock:

Anonymous said late Sunday evening, however, “this is part 1 of the Emails.” So perhaps more incriminating correspondence is to come. And to be honest, these messages could be incredibly damaging, but we’re not mortgage specialists and don’t know if this is or isn’t common in the field. The beauty is, you can see and decide for yourself at bankofamericasuck.com.

But for those who want a simple explanation, here’s a summary of the content.

The Source

The ex-Balboa employee tells Anonymous that what he/she sends will be enough to,

crack [BofA’s] armor, and put a bad light on a $700 mil cash deal they need to pay back the government while ruining their already strained relationship with GMAC, one of their largest clients. Trust me… it’ll piss them off plenty.

The source then sends over a paystub, an unemployment form, a letter from HR upon dismissal and his/her last paystub and an ID badge.

He/she also describes his/herself:

My name is (Anonymous). For the last 7 years, I worked in the Insurance/Mortgage industry for a company called Balboa Insurance. Many of you do not know who Balboa Insurance Group is, but if you’ve ever had a loan for an automobile, farm equipment, mobile home, or residential or commercial property, we knew you. In fact, we probably charged you money…a lot of money…for insurance you didn’t even need.

Balboa Insurance Group, and it’s largest competitor, the market leader Assurant, is in the business of insurance tracking and Force Placed Insurance…  What this means is that when you sign your name on the dotted line for your loan, the lienholder has certain insurance requirements that must be met for the life of the lien. Your lender (including, amongst others, GMAC… IndyMac… HSBC… Wells Fargo/Wachovia… Bank of America) then outsources the tracking of your loan with them to a company like Balboa Insurance.

The Emails

Next comes the emails that are supposed to be so damaging. The set of emails just released shows conversational exchanges between Balboa employees.

The following codes pertain to the emails, so use as reference:

  1. SOR = System of Record
  2. Rembrandt/Tracksource = Insurance tracking systems
  3. DTN = Document Tracking Number. A number assigned to all incoming/outgoing documents (letters, insurance documents, etc)

The first email asks for a group of GMAC DTN’s to have their “images removed from Tracksource/Rembrandt.” The relevant DTNs are included in the email — there’s between 50-100 of them.

In reply, a Balboa employee says that the DTN’s cannot be removed from the Rembrandt, but that the loan numbers can be removed so “the documents will not show as matched to those loans.” But she adds that she needs upper management approval before she moves forward, since it’s an unusual request.

Then it gets approved. And then, one of the Balboa employees voices their concern. He says,

“I’m just a little concerned about the impact this has on the department and the company. Why are we removing all record of this error? We have told Denise Cahen, and there is always going to be the paper trail when one of these sent documents come back. this to me seems to be a huge red flag for the auditors… when the auditor sees the erroneous letter but no SOR trail or scanned doc on the corrected letter… What am I missing? This just doesn’t seem right to me.

We suspect this is the type of email that Anonymous believes shows BofA fraud:

leak one

Image: Anonymous

Click here to see why these emails prove nothing interesting, and to see what what Bank of America says about the emails >

Chris V. Nicholson at Dealbook at NYT:

A Bank of America spokesman told Reuters on Sunday that the documents had been stolen by a former Balboa employee, and were not tied to foreclosures. “We are confident that his extravagant assertions are untrue,” the spokesman said.

The e-mails dating from November 2010 concern correspondence among Balboa employees in which they discuss taking steps to alter the record about certain documents “that went out in error.” The documents were related to loans by GMAC, a Bank of America client, according to the e-mails.

“The following GMAC DTN’s need to have the images removed from Tracksource/Rembrandt,” an operations team manager at Balboa wrote. DTN refers to document tracking number, and Tracksource/Rembrandt is an insurance tracking system.

The response he receives: “I have spoken to my developer and she stated that we cannot remove the DTNs from Rembrandt, but she can remove the loan numbers, so the documents will not show as matched to those loans.”

According to the e-mails, approval was given to remove the loan numbers from the documents.

A member of Anonymous told DealBook on Monday that the purpose of his Web site was to bring attention to the wrongdoing of banks. “The way the system is, it’s made to cheat the average person,” he said.

He had set up a Web site to post bank data that WikiLeaks has said it would release, and was subsequently contacted this month by the former Balboa employee. It has been speculated that the documents, which have yet to be released, would focus on Bank of America. The spokesman for Anonymous said he had no direct ties to WikiLeaks, which is run by Julian Assange.

Nitasha Tiku at New York Magazine:

WikiLeaks’ founder, Julian Assange, has threatened to leak damning documents on Bank of America since 2009. And Anonymous has backed WikiLeaks’ mission as far as the free flow of information. But these e-mails date from November 2010. Plus, they don’t exactly amount to a smoking gun. Whether or not the e-mails prove real, it’s clear Bank of America should have expanded its negative-domain-name shopping spree beyond BrianMoynihanSucks.com.

Naked Capitalism:

The charge made in this Anonymous release (via BankofAmericaSuck) is that Bank of America, through its wholly-owned subsidiary Balboa Insurance and the help of cooperating servicers, engaged in a mortgage borrower abuse called “force placed insurance”. This is absolutely 100% not kosher. Famed subprime servicer miscreant Fairbanks in 2003 signed a consent decree with the FTC and HUD over abuses that included forced placed insurance. The industry is well aware that this sort of thing is not permissible. (Note Balboa is due to be sold to QBE of Australia; I see that the definitive agreement was entered into on February 3 but do not see a press release saying that the sale has closed)

While the focus of ire may be Bank of America, let me stress that this sort of insurance really amounts to a scheme to fatten servicer margins. If this leak is accurate, the servicers at a minimum cooperated. If they got kickbacks, um, commissions, they are culpable and thus liable.

As we have stated repeatedly, servicers lose tons of money on portfolios with a high level of delinquencies and defaults. The example of Fairbanks, a standalone servicer who subprime portfolio got in trouble in 2002, is that servicers who are losing money start abusing customers and investors to restore profits. Fairbanks charged customers for force placed insurance and as part of its consent decree, paid large fines and fired its CEO (who was also fined).

Regardless, this release lends credence a notion too obvious to borrowers yet the banks and its co-conspirators, meaning the regulators, have long denied, that mortgage servicing and foreclosures are rife with abuses and criminality. Here’s some background courtesy Barry Ritholtz:

When a homeowner fails to keep up their insurance premiums on a mortgaged residence, their loan servicer has the option/obligation to step in to buy a comparable insurance policy on the loan holder’s behalf, to ensure the mortgaged property remains fully insured….

Consider one case found by [American Banker’s Jeff] Horwitz. A homeowner’s $4,000 insurance policy, was paid by the loan servicer, Everbank via escrow. But Everbank purposely let that insurance policy lapse, and then replaced it with a different policy – one that cost more than $33,000. To add insult to injury, the insurer, a subsidiary of Assurant, paid Everbank a $7,100 kickback for giving it such a lucrative policy — and, writes Horwitz, “left the door open to further compensation” down the road.

That $33,000 policy — including the $7,100 kickback – is an enormous amount of money for any loan servicer to make on a single property. The average loan servicer makes just $51 per loan per year.

Here’s where things get interesting: That $33,000 insurance premium is ultimately paid by the investors who bought the loan.

And the worst of this is….the insurance is often reinsured by the bank/servicer, which basically means the insurance is completely phony. The servicer will never put in a claim to trigger payment. As Felix Salmon noted,

This is doubly evil: it not only means that investors are paying far too much money for the insurance, but it also means that, as both the servicer and the ultimate insurer of the property, JPMorgan Chase has every incentive not to pursue claims on the houses it services. Investors, of course, would love to recoup any losses from the insurer, but they can’t bring such a claim — only the servicer can do that.

Note there are variants of this scheme where insurance is charged to the borrower (I’ve been told of insurance being foisted on borrowers that amounts to unconsented-to default insurance, again with the bank as insurer; this has been anecdotal with insufficient documentation, but I’ve heard enough independent accounts to make me pretty certain it was real)

David Dayen at Firedoglake:

Just because something has a lot of anecdotal evidence behind it doesn’t necessarily mean the specific case is true. But the forced-place insurance scam has been part of other servicer lawsuits, so it definitely exists. Whether this set of emails shows that taking place is another matter. Apparently this is just the first Anonymous email dump, so there should be more on the way

Derek Thompson at The Atlantic

Parmy Olson at Forbes:

Yet however inconclusive the e-mails may be, the leak may have wider implications as Anonymous gradually proves itself a source of comeuppance for disgruntled employees with damning information about a company or institution. Once the domain of WikiLeaks, the arrest of key whistleblower Bradley Manning suggested the site founded by fellow incarcerate Julian Assange could not always protect its sources. “A lot depends on the impact of this week,” says Gabriella Coleman, a professor at NYU who is researching Anonymous, who added that “Anonymous could go in that [WikiLeaks] direction.”

Anonymous is not an institution like WikiLeaks. It is global, has no leader, no clear hierarchy and no identifiable spokespeople save for pseudo-representatives like Gregg Housh (administrator of whyweprotest.net) and Barrett Brown.

It has some ideals: Anonymous tends to defend free speach and fight internet censorship, as with the DDoS-ing of the web sites of MasterCard, Visa and PayPal after they nixed funding services to WikiLeaks, and the DDoS-ing of Tunisian government Web sites. It is also great at spectacle. The group’s hacking of software security firm HBGary Federal not only gained oodles of press attention, it inadvertently revealed the firm had been proposing a dirty tricks campaign with others against WikiLeaks to Bank of America’s lawyers.

That hack led, rather organically, to the establishment of AnonLeaks.ru, a Web site where the Anonymous hackers posted tens of thousands of HBGary e-mails in a handy web viewer. While it took just five supporters to hack HBGary, hundreds more poured through the e-mails to identify incriminating evidence, leading to more press reports on the incident.

Such is the nature of Anonymous–global, fluid, intelligent, impossible to pin down–that it is could become an increasingly popular go-to for people wishing to vent damaging information about an institution with questionable practices.

The collective already receives dozens of requests each month from the public to attack all manner of unsavoury subjects, from personal targets to the government of Libya, from Westboro Baptist Church to Facebook. It rarely responds to them–as one Anonymous member recently told me, “we’re not hit men.”

Yet for all its facets as both hot-tempered cyber vigilantes and enlighteners of truth, Anonymous is becoming increasingly approachable, as the latest emails between OperationLeakS and the former BoA employee show. Assuming this particular employee doesn’t end up languishing in jail like Manning, more people may now be inclined to follow suit.

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Filed under Economics, New Media, Technology, The Crisis

Updates On The Cheeseheads

Andrew Sullivan rounds up reacts

Christian Schneider at The Corner:

On Wednesday night, Wisconsin Senate Republicans did what most people thought impossible — they passed Governor Scott Walker’s budget-repair bill virtually intact, without having to split out controversial provisions that limited the ability for government employees to collectively bargain.

A letter Democrat Senate Minority Leader Mark Miller sent the governor today, indicating Miller’s unwillingness to further negotiate any details of the bill, was what prompted the GOP’s decision to take the bill to the floor.

“It was like, ‘I’m in the minority, and I’m going to dictate to you what your options are,’” said one GOP source about Miller’s letter. It was just three days ago that Miller had sent Fitzgerald a letter urging more negotiations, despite the fact that Governor Walker had been negotiating with at least two Democrat senators for nearly a week. “With his recent letter, it became clear that all he wanted to do was stall,” said the GOP source.

Another action that provoked the GOP senators to act was Democrat Senator Lena Taylor’s very public decision to have a spring election absentee ballot sent to her in Illinois. The spring election is scheduled for April 5th, which indicated Taylor’s desire to stay out of the state for another month. “That sure didn’t help,” said one GOP source.

The Wisconsin Constitution requires a quorum of three-fifths of the Senate in order to pass a bill that “imposes, continues or renews a tax, or creates a debt or charge, or makes, continues or renews an appropriation of public or trust money, or releases, discharges or commutes a claim or demand of the state.” For weeks, it had been known that Republican senators could separate the fiscal provisions of the bill from the proposed collective-bargaining changes, which were seen as non-fiscal. However, there was speculation that, if a bill was brought to the Senate floor that contained only the collective bargaining changes, it might not have the votes to pass.

On Wednesday night, the bill passed with a number of provisions that could be considered “fiscal,” such as the requirement that many government employees contribute 5.8 percent of their salaries to their pensions and pay 12.6 percent towards their health-insurance premiums.

Conn Carroll at Heritage:

The courage of the Wisconsin Senate conservatives cannot be understated. Before the vote, lawmakers were threatened with death and physical violence. After the vote, thousands of protestersstormed into the capitol building, ignoring announcements from police that the building was closed. Once inside, and at great risk to the public welfare, activists handcuffed some doors to the capitol shut. When security escorted the Senators to another building, a Democrat tipped off the mob, which then surrounded their cars and tried to break their windows as Senators returned home.

Senate Democrats, who are still hiding in Illinois, are now claiming that the majority’s committee meeting that broke up the budget-repair bill violated Wisconsin’s Open Meetings Law. But the Open Meeting Compliance Guide clearly states that when there is “good cause,” only two hours’ notice is required. The Senate majority did provide the two hours’ notice. If the Senate Democrats’ 19-day refusal to show up for work wasn’t “good cause” enough, certainly minimizing the opportunity for union mob violence is.

The passion coming from liberal activists is understandable only if one believes in their apocalyptic rhetoric. Democratic Senator Timothy Cullen said the bill will “destroy public unions.” And Senator Chris Larson has said, “collective bargaining is a civil right” that if removed will “kill the middle class.” This is all false. First of all, since unions care more about seniority than good government, public-sector unions kill middle-class jobs; they do not protect them. Second, collective bargaining is not a right. And finally, Walker’s bill will in no way “destroy public unions.” Government unions are still perfectly free to practice their First Amendment rights to freedom of association, and in fact still retain more bargaining power than all unionized federal employees. They only difference is that now they will have to actively recruit members instead of forcing government employees to join them, and they will have to collect their own dues instead of getting the state government to take them directly out of workers’ paychecks. And there are many more benefits as well. Governor Walker writes in today’s Wall Street Journal:

When Gov. Mitch Daniels repealed collective bargaining in Indiana six years ago, it helped government become more efficient and responsive. The average pay for Indiana state employees has actually increased, and high-performing employees are rewarded with pay increases or bonuses when they do something exceptional.

Passing our budget-repair bill will help put similar reforms into place in Wisconsin. This will be good for the Badger State’s hard-working taxpayers. It will also be good for state and local government employees who overwhelmingly want to do their jobs well.

Even in good economic times, the case for government subsidies for radio stations, cowboy poetry, and union dues is very weak. But in a time of fiscal crisis, all of these subsidies are patently absurd. Taxpayers throughout the country should be inspired by Walker’s stand for common sense. We need more leadership like this in every state capitol and here in Washington.

E.D. Kain at Forbes:

And now conservatives have chosen public-sector workers and teachers as their hill to die on. They have followed the most radical voices in the party and the movement, and elected Scott Walker, Rick Scott, and various other Tea Party candidates. Heavily funded by big campaign donors like the Koch brothers and other corporate interests, the Republican party has made a concerted effort across the country to take on unions, public pensions, and social services for the poor.

Enabled by a strong school-reform movement within the Democratic party, emboldened Republicans have waged an all-out assault on teachers, public education, and public unions and masked it all in the language of school choice and accountability. And now, in Wisconsin, they have side-stepped the Democratic process and ended collective bargaining rights for public sector employees, even amidst huge protests and popular condemnation.

Republicans have a long history of union-busting and anti-labor rhetoric, but taking on teachers and cops is a big mistake. This blatant effort to weaken the Democratic party will have precisely the opposite effect.

The healthcare debate gave Republicans a chance to capture the narrative, spin the entire debate into one about fiscal ruin and deficits. Now Scott Walker has given progressives their chance. This is the Democrats chance to recapture that narrative, to turn the discussion back to the dignity of the middle class, to the importance of policies that do not simply push power and capital ever upward. This is the Republican’s Waterloo.

Nate Silver:

The quality of polling on the Wisconsin dispute has not been terrific. But there’s a general consensus — including in some polls sponsored by conservative groups — that the Republican position was unpopular, probably about as unpopular as the Democrats’ position on health care. And the most unpopular part of their position — limiting collective bargaining rights — was the one that Republicans passed last night.

Nor is the bill likely to become any more popular given the circumstances under which it passed. Yes, there’s some hypocrisy in claims by Democrats that the Wisconsin Republicans used trickery to pass the bill — they did, after all, approve it with an elected majority, just as Democrats did on the Affordable Care Act. Nevertheless, polling suggested that Wisconsinites, by a two to one majority, expected a compromise on the bill, which this decidedly was not.

One question is how much this might hurt Republicans at the state level. As David Dayen notes, Democrats will have opportunities to fight back almost immediately, including in an April 5 election that could swing the balance of the Wisconsin Supreme Court, as well as in efforts to recall Republican state senators. Essentially all of Wisconsin outside of the Madison and Milwaukee metropolitan areas is very evenly divided between Democrats and Republicans, so there could be a multiplier on even relatively small shifts in turnout or public opinion.

Andrew Samwick:

I refer to the passage of this bill as the end of the beginning — the opening salvo was to write the bill and find a way to pass it.  The next phase is to see if it can withstand legal challenges and recall efforts to change the legislative balance.  There will be some drama in that phase, but that’s not what really interests me.  The real issue comes in the next phase, assuming the law survives.  There will be two important questions:First, what will the strike that follows the implementation of the law look like?  Narrow or general?  How much support will the public sector unions get from other unions and non-union workers?  Will the disruptions to commerce be enough to get taxpayers and their representatives to fold?  Now that’s drama.

Second, what will happen in specific cases of local public sector employers negotiating with a stronger position?  Governor Walker defends his efforts partly as follows:

Local governments can’t pass budgets on a hope and a prayer. Beyond balancing budgets, our reforms give schools—as well as state and local governments—the tools to reward productive workers and improve their operations. Most crucially, our reforms confront the barriers of collective bargaining that currently block innovation and reform.

Suppose his intentions are borne out — teachers regarded as ineffective are not renewed, teachers regarded as effective are rewarded, or some combination of higher quality and lower cost emerges for people to see.  I am a strong believer that in a well functioning market, workers are protected by their ability to take their talents to another employer (Free to Choose, Chapter 8).  The key question will be whether the markets for public services at the local level function well enough for this to happen.  For an economist, that’s even more dramatic.

mistermix:

If the Wisconsin Republicans’ plan was to jam through the defeat of collective bargaining with a sketchy parliamentary move, they should have done it the minute that Democrats vacated the state. If that had happened, the howls would have been loud but fairly short-lived, since it’s easier to energize people when they’re trying to prevent something from happening, rather than complaining after the fact.

Instead, we have today’s trainwreck. Walker got his number one item, but he paid a huge price. He’s almost certainly a one-term governor. There’s a dissenting Republican in the Senate, and presumably we’ll hear more from him. If there’s a general strike, the union’s side of the case is now clearly outlined in the public mind. If the unions don’t strike, they look like paragons of restraint. And what about the recalls? No matter the outcome, they’ll occupy the press and public attention for the next few months.

The Democrats and unions took a sad song and made it better, as far as I can tell. One of the side-effects of our distraction-oriented media and low-information voters is that only one issue can be front-and-center in the public debate. Unions haven’t had much attention recently, so the slippery lies that blame them for all of our many ills have gone unchallenged. In Wisconsin, that’s not going to be the case for the next year or so.

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Filed under Economics, Legislation Pending

On The Third Wednesday Of Christmas, My Wall Street Elite Gave To Me…

Louise Story in NYT:

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.

In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.

Banks’ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small, like Dan Singer’s home heating-oil company in Westchester County, north of New York City.

This fall, many of Mr. Singer’s customers purchased fixed-rate plans to lock in winter heating oil at around $3 a gallon. While that price was above the prevailing $2.80 a gallon then, the contracts will protect homeowners if bitterly cold weather pushes the price higher.

But Mr. Singer wonders if his company, Robison Oil, should be getting a better deal. He uses derivatives like swaps and options to create his fixed plans. But he has no idea how much lower his prices — and his customers’ prices — could be, he says, because banks don’t disclose fees associated with the derivatives.

“At the end of the day, I don’t know if I got a fair price, or what they’re charging me,” Mr. Singer said.

Derivatives shift risk from one party to another, and they offer many benefits, like enabling Mr. Singer to sell his fixed plans without having to bear all the risk that oil prices could suddenly rise. Derivatives are also big business on Wall Street. Banks collect many billions of dollars annually in undisclosed fees associated with these instruments — an amount that almost certainly would be lower if there were more competition and transparent prices.

Just how much derivatives trading costs ordinary Americans is uncertain. The size and reach of this market has grown rapidly over the past two decades. Pension funds today use derivatives to hedge investments. States and cities use them to try to hold down borrowing costs. Airlines use them to secure steady fuel prices. Food companies use them to lock in prices of commodities like wheat or beef.

Emily Lambert at Forbes:

Forget baseball, football, or any other sport. For the past two decades, the most interesting rivalry involving these cities has been in derivatives. It’s been the most important rivalry, too. Sports match-ups affect civic pride, but the derivatives battle affects the structure and stability of the financial system.

The rival teams are like the blue bloods versus the scrappy underdogs. The Wall Street club includes the country’s biggest dealers and needs little introduction. The Wall Streeters represent banks, institutions and exclusivity. They play the game of unregulated (or differently regulated, they argue) derivatives, to the tune of $600 trillion.

The Chicago team, based on and around La Salle Street, include the small traders and street fighters. They also have a club, and it too was private and pretty exclusive for years. It’s now the publicly-traded CME Group. But their club included its fair share of taxi drivers, policemen, train conductors, and other everyday folks. This team trades regulated derivatives, better known as futures and options. That market is huge but nowhere near as big as the unregulated (or differently regulated!) side.

These rivals have butted heads since the 1970s, when the Chicago club expanded beyond the world of agriculture and into financial products, New York’s domain. Chicagoans have had a chip on their shoulder for over a century, and traders often portray this head-butting as epic, their struggle to bring much-needed transparency to New York’s murky markets.

The teams fought it out at the Chicago Board of Trade, long the dominant exchange in Chicago, in the boardroom and in the clearinghouse. On one side, you had smaller firms owned by Chicago guys. On the other side, you had representatives from New York firms like Goldman Sachs and Morgan Stanley. A few years ago, the New York firms won the clearinghouse. That became, to a large extent, the reason that the two Chicago futures exchanges merged in 2007. The rallying cry was to save Chicago from New York.

The current derivatives duel is the latest fight, and it could have been Chicago’s moment of triumph. The Chicago crowd made a jab for transparency when CME Group teamed up with Kenneth Griffin at neighboring Citadel Group to create an exchange that would make the derivatives trade less murky. Congress, in its attempt to bring order, took a page from Chicago’s playbook and instructed the bankers to use clearinghouses, a staple in futures.

But as Story recounts, the banks didn’t like the exchange idea. “So the banks responded in the fall of 2008 by pairing with ICE, one of the Chicago Mercantile Exchange’s rivals, which was setting up its own clearinghouse.” CME Group, she later writes, dropped the effort with Griffin to create an exchange and instead has allowed its clearinghouse’s risk committee be “mainly populated by bankers.”

Chicago has represented something special over the years, a counterpoint to Wall Street. Its futures market wasn’t perfect, but it worked. When Wall Street’s derivatives market broke down in 2008, Chicago rightly held its regulated market, its way of doing things, up as a potential model. It may be too simplistic to say that one model is right and the other wrong, but the challenge itself is vital. Especially in a complex business like this one, you need different ideas and sparring to keep the game honest.

Now Chicago’s exchange is a public company. Duffy and Donohue are tasked with maximizing shareholder value. The banks are directly or indirectly responsible for the vast majority of derivatives trading, and CME Group has to involve them in decisions. But it doesn’t have to sell out to them. In Story’s story, CME Group looks less like a counterpoint to Wall Street than like the Midwestern arm of it. I hate to think that the rivalry is dead. There are plenty of people in Chicago who seem to hate New York with a passion I associate more with religion or the Bears (ouch, by the way). I hope that in this fight, which could prove decisive, those people recover their voice.

Kenneth Anderson:

Although I have a few reservations about the tone of the article being just slightly conspiratorial, Louise Story’s front page NYT story today on the evolution of derivatives clearinghouses is highly informative and very well done.  The graphics showing how the bilateral trades would turn into centralized clearing are quite good and would be useful with a class.  On balance,  I think the overall shift to centralized clearing is a good move.  But I also have a bad, bad feeling about this in the context of Dodd-Frank and future expectations.  As I have said in past posts, in a future of financial regulation in which the central question of systemic risk and moral hazard has not been addressed, the result of what is otherwise a sensible move (yes, yes I’m skipping over all the concerns about end-users and Main Street, etc.) could turn out to create not so much a central clearing house but instead … a central address for depositing unwanted risk.

After all, why should any of these leading market participants believe at this point that the government would allow the central clearinghouse to burn down in a crisis?  And if they don’t believe that, then what is their incentive to set terms that will adequately address the risk as a matter of private ordering of fees, margin, whatever form of insurance the central risk-clearer needs? Having a central clearing counterparty is a great idea — if it and the actors that run and control it have the private incentives to make sure it is not a mechanism for accumulating and compounding risks.

Presumably the answer is that government regulators will set those requirements and solve the problem.  But the general theory of financial regulation used to be that systems would be monitored for risk-taking, after private parties (with well-structured incentives forcing them to internalize the risks) had already made the first round of risk-decisions.  Regulators would be kicking the tires for safety and soundness, as a second line of regulatory defense, not the first.  I am an admirer overall of Gensler’s efforts, but he cannot be Batman to Financial Gotham.  The peculiarity is that a structure that ought, in principle, to reduce risk might wind up leveraging it.  The clearing house might turn out to be the one address market participants need to send their unwanted risks.

Kevin Drum:

Banks can talk all they want about capital requirements and governance structures, but if they’re unwilling even to admit publicly who runs their clearinghouses, it’s pretty obvious their primary interest is focused on keeping the derivatives club very, very small and very, very private. In other words: no aggressive competition needed here, thankyouverymuch. Big commissions and big bonuses will remain the order of the day.

Unless, of course, regulators take a tough line and force banks to genuinely open up derivatives trading. What do you think are the odds?

Anthony McCarthy

Barry Ritholtz at The Big Picture:

I keep coming back to this simple fact: If you understand what caused the crisis, the first step in preventing another is working backwards and undoing each of the causes. Front and center is the Commodity Futures Modernization Act that allowed the rampant shadow banking system to develop. It still needs to be overturned . . .

Philip Davis at Seeking Alpha:

The secrecy surrounding derivatives trading is a key factor enabling banks to make such large profits and the banks guard that secrecy very closely. In theory, the Dodd-Frank bill will eliminate much of the abuse that is going on in the derivatives market. But already, the newly-elected House and Senate Republicans are looking to turn back to clock. This is apropos because, as Barry Ritholtz points out: It was the dreaded Commodity Futures Modernization Act that allowed the rampant shadow banking system to develop.

John Carney at CNBC:

Half of Story’s piece seems built around the complaints by financial companies—such as Bank of New York Mellon and State Street—that want to become clearing dealers for derivatives. The other half is built around customers who feel the fees they pay to existing dealers are too high—thanks to the anti-competitive cabalization of the derivatives market.

The irony of all this, of course, is that the cabalization of the derivatives market was one of the goals of regulators, who demanded that market participants set up centralized derivatives clearing houses in an effort to contain counter-party risk. Central to the successful operation of any such clearing house, however, is the exclusion of would-be dealers who seem too risky.

One of the ways a centralized clearing house reduces counter-party risk—that is, the risk of someone on the other side of your trade not doing your deal—is by being the strongest and biggest counter-party that is on the other side of every trade. The idea is that even if a single seller fails—and doesn’t deliver on the sale—the derivatives clearing house has access to enough capital and liquidity that the trade itself can still be completed. You don’t have to worry, in other words, who is on the other side of your trade—it’s always the clearing house.

Importantly, however, a clearing house has to guard against the possibility of its members failing. Without proper capitalization and collateralization requirements, the clearing house could find itself unable to complete trades in a time of financial distress. It would go from being a risk-reducer to a risk-multiplyer, with all the risk concentrated in one place.

The odds of getting a clearing house that is properly capitalized are rather low on the face of it. Competition between clearing houses will result in a downward pressure on fees, collateral requirements, and dealer capitalization requirements. In short, the clearing house will be captured by its customers in a manner that undermines its financial soundness.

To make matters even worse, the natural market counter-balance to this pressure toward riskiness on the part of the clearing house is undermined by the perception—indeed, the reality—that any important clearing house is too big to fail. In a free market, the customers of a clearing house would balance out the demand for lower collateralization/capitalization/fees with a wariness about the increased risk associated with this lowering. But in reality, customers don’t worry about a major clearing house failing because the US government will intervene to bail it out.

This is, ordinarily, an argument made by proponents of government regulation. The tendency toward riskiness plus moral hazard means the clearing house cannot be self-policing. To balance out this situation, the government steps in an imposes collateralization and capitalization requirements on the clearing house. There’s even a sort of fairness argument here—the higher costs associated with the regulations are paying for the implicit guarantee.

If we could be confident in the competence of regulators, the story might end there. Unfortunately, regulators have a poor track record of regulating risk. On the one hand, they often simply lack the tools to effectively predict risk—which means they are simply guessing about the types and levels of capital and collateral that should be required. On the other hand, they are subject to political pressures that influence their view of risk. So what starts out as an educated guess winds up as a politicized guess.

If that’s too theoretical, here’s an example drawn from history. In the 1980s, global regulators were meeting to discuss bank capital requirements. One of the issues at hand was what risk weighting different assets should get. All of the countries agreed that their own highly rated sovereign debt should get zero percent risk weighting—which essentially meant that banks didn’t have to set any capital against losses. Ask the banks with Irish and Greek debt how that is working out.

The same global regulators argued about what risk weighting to give mortgages. The Federal Reserve thought mortgages should get a 100 percent risk weighting—the same assigned for highly-rated corporate debt, and requiring an 8 percent reserve against losses. The West Germans, however, wanted to gin-up interest in their residential real estate market and pushed for a 50% risk weighting. This risk weighting more or less held through the later capitalization reforms, resulting in banks over-investing in mortgage-backed securities. How’d that work out?

So we’re left with a problem from hell. Market participants cannot be trusted to govern a clearing house. The clearing house itself cannot be trusted to be self-governing. And the regulators cannot be trusted to govern properly either.

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Look, We’ve Got A Heartbeat!

Heather Horn at The Atlantic with the round-up. Horn:

GM has had a fantastic second quarter, reporting a $1.3 billion profit. That “set[s] the stage,” reports Bill Vlasic for The New York Times, “for the automaker to file for an initial public offering, possibly as soon as Friday.” How well GM stock does, he explains, “will determine how much money American taxpayers will recoup from the $50 billion government bailout of G.M.”

Steve Schaefer at Forbes:

A year ago, General Motors was fresh off a spin in bankruptcy court and an IPO was the light at the end of a very long tunnel. By January the automaker’s executives were laying out the key checkpoints on a journey back to the public markets and now, just over 14 months since filing for Chapter 11 GM is on its way to a public offering that is widely anticipated for the fourth quarter.

Everybody’s got a view on the GM story and on Thursday the IPO specialists at Renaissance Capital offered their own take on how the automaker should go about returning to the public market, offering up a four-point plan for how GM can get out from under the government’s thumb and ensure it is offering a valuable opportunity for IPO investors.

Here are a few highlights from the four-point plan outlined in the Renaissance Capital commentary, which I encourage you to read in its entirety:

Transparency means full and fair disclosure. The Treasury has the duty to ensure that all material fundamental and governance issues are fully disclosed to potential public investors. Thus far, GM has largely avoided specifics on its strategy, but the company now must clearly lay out a chronology for regaining market share, realigning costs and transitioning from government control.   Assuming that GM does a $20 billion raise in this upcoming IPO, what’s the plan for the other $30 billion held by the government?

Assure IPO allocation transparency.  Prior IPO bad practices included spinning shares to favored executives or giving hot IPOs as “free money” to institutional investors as a quid pro quo for other business.

Decision-making roles must be clarified. GM and the government have been silent on how the competing interests of shareholders, the administration and the United Autoworkers will be resolved.

Value the stock for success. In thinking about valuation, the government and management need to understand that the GM IPO is in a similar position as a debt-laden private equity company with backers eager to monetize an investment. Recent sales of shares by such highly motivated selling shareholders have been accomplished only with deep discounts.  Over the last two years, between 50% and 70% of private equity IPOs have been forced to price below the originally proposed ranges.  GM needs to adjust its expectations accordingly.

Among the other issues that need addressing according to Renaissance Capital’s roadmap: the post-IPO succession plan for CEO Ed Whitacre; how GM’s product mix will be driven by the administration’s environmental policy and will the Treasury take a backseat to management as it offloads its stake in the automaker over time.

John Ogg at 24/7 Wall Street:

We are expecting somewhere around $15 billion per discussions we have had with others.  Here is the big question… Will the GM IPO become a busted IPO right out of the chute like so many others have?

The company recently secured a new $5 billion credit line and when the IPO will actually come, that may be as long as 45 to 60 days after the filing and will be somewhat dependent upon market conditions.

Richard Read at The Car Connection:

The line of credit has been pieced together from ten banks, including big-hitters like Bank of America and Morgan Stanley — two corporations that have shared GM’s pain of bankruptcy and bailout. More may join the ranks, since the line of credit is a potential cash cow for lenders.

But today’s news isn’t just important for GM, it’s also a major development for politicians. GM and the Obama administration both took a lot of heat for last year’s controversial bailout, and the nickname “Government Motors” still hangs around GM’s neck. Filing for an IPO now means that GM’s return to the stock exchange could happen before November’s mid-term elections. That would be a boon for Democrats, who could point to the IPO as evidence that the bailout was successful and that taxpayers will eventually recoup their loan from GM.

But even if the IPO runs on schedule, Republicans will probably still be able to point to government ownership of GM, which currently hovers at 61%. GM wants the Treasury Department to sell off about $10 billion of its $43 billion stake in the company as soon as the IPO launches, which would bring the government’s position below the 50% mark. However, the Treasury isn’t completely onboard with that plan; they’re afraid — as they should be — that selling off that much equity at once would dilute the value of the company and the government’s remaining shares. And right now, “diluting” is the last thing that probably needs to happen for GM.

That said, demand could be high for GM stock when it does relaunch — not least because of the company’s earnings, which are rumored to ring in above the $1 billion mark for the second quarter. We’ll have more about that later, but in the meantime, check John Voelcker’s post about Ed Whitacre’s sudden retirement.

John Neff at Autoblog:

The announcement today that General Motors will soon be welcoming its fourth CEO in just 14 months was startling news, but the real unanswered question is just who is Dan Akerson? We’ve already told you what his business chops are and it’s clear the man can run a lemonade stand, but there’s virtually no other information available out there besides his resume. And as for pics, the entirety of the internet has but one to offer, which is Akerson’s glamor shot as a member of GM’s board of directors. Flattering? No. Looks like a high school principal’s year book picture.

Well, we dug a little and found some interesting info on one Mr. Daniel F. Akerson. For one, he lives in McLean, Virginia and is reportedly an avid golfer. Ok, not too surprising, as most corporate executives can swing a club. How about this: He’s said to be worth an estimated $190 million. Yeah, CEOing is a good gig if you can get it. Also, he currently drives a Cadillac CTS.

Finally, we’re told that Mr. Akerson’s first car was an MGB roadster, which he quickly traded in for a 1970 Oldsmobile Cutlass. Now, we don’t have confirmation on which Cutlass he had, and it makes a difference. The 1970 Cutlass was nothing special, unless you’re talking about the 442, which was a legitimate muscle car. The fact that Akerson first had an MGB makes us hopeful that he is a car guy after all and that the Olds in question was the 442… or at least was powered by a Rocket V8 of some sort.

Derek Thompson at The Atlantic:

The good news is coming from good places. Although the company cut 20,000 jobs and a dozen U.S. plants, the profits aren’t coming all from cost cuts. Revenue grew from $32 billion to $33 billion in the second three months of the year. What’s more, the company is seeing a strong North American market for its goods. While it’s certainly not bad to have a strong overseas market, any indication that the American consumer is actually breathing out there is nice to hear.

There’s lots of silver lining, but the dark cloud for tax payers is that an IPO won’t end the government’s significant stake in the company. As the Michigan Messenger reports, the federal government will reduce its stake in the company from about 60 percent to below 50 percent in the initial IPO, and sell off the rest of the taxpayers’ stake in the company bit by bit.

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We Won’t Have Tony To Kick Around Anymore

Jad Mouawad and Clifford Krauss at NYT:

BP’s board is expected on Monday to name an American, Robert Dudley, as its chief executive, replacing Tony Hayward, whose repeated stumbles during the company’s three-month oil spill in the Gulf of Mexico alienated federal and state officials as well as residents of the Gulf Coast.

The planned appointment of an American to run the London-based company, which was confirmed by a person close to BP’s board, would underscore how vital the United States has become to BP. About one-third of the company’s oil and gas wells, refineries and other business interests are in the United States, and 40 percent of its shareholders are Americans.

The move would also be a recognition by the board that even though the oil has stopped spewing into the gulf, dealing with the consequences of the Deepwater Horizon accident — from tens of billions of dollars in claims to possible criminal charges and new regulations on offshore drilling — is likely to dominate the company’s agenda for years.

Bryan Walsh at Time:

When Tony Hayward became CEO of BP in 2007, replacing a disgraced Lord John Browne, he was taking over a company in turmoil. BP was still recovering from a 2005 fire at its Texas City refinery that killed 15 people—one of the worst industrial accidents in recent memory, and a result of Browne putting profits over safety. Hayward—a skilled geologist and dedicated BP lifer—was meant to be a practical antidote to the flashy, globe-trotting Browne, a professional executive who promised to consolidate the company’s sprawling multinational operations. Most of all, Hayward would change BP’s careless corporate culture; he pledged in an early speech to focus “like a laser” on safety.

It was a line that, like much else, Hayward would come to regret. The Deepwater Horizon accident showed that there was still something deeply wrong with BP, and Hayward’s tone-deaf performance during the early days of the oil spill only made things worse. By mid-June Hayward had stepped back from the oil spill, ceding day-to-day control of the response to the American BP executive Bob Dudley. Now it seems Hayward is gone for good. According to a senior U.S. official speaking to the Associated Press early Sunday afternoon, Hayward will be replaced as BP’s CEO, possibly as early as Monday when the company’s board meets in London.

Though BP was officially denying the rumors, Hayward’s departure has long been considered of when, not if. Since the spill began on April 20, Hayward has been a gaffe machine.

Christopher Helman at Forbes:

The timing of this move is significant for two reasons. First, it coincides with the Tuesday release of BP’s sure-to-be-disastrous second-quarter results. Second, and more importantly, it indicates that BP believes the blowout at the Macondo well has been stopped, that the cap in place now will continue to hold back the gusher until the relief wells can kill it for good.

Image is everything, and the image that BP needs to present is one of a heroic Dudley Do-Right arriving on the scene to rescue Nell from the clutches of Snidely Whiplash. Tall, blondish Robert Dudley even looks kind of like his namesake hero from The Rocky and Bullwinkle Show, though with none of the bombast. No matter that Dudley has been with BP for a decade, having come over in the 1998 acquisition of Amoco. As we wrote in this piece when he assumed responsibility for oil spill oversight a month ago, Dudley has proven his managerial toughness over the years (especially in tangles with the Russian government when he was head of TNK-BP). And vitally, Americans will find another American a more trustworthy oil spill cleaner than they would another Brit.

Jim White at Firedoglake:

Yes, the twit who famously told us that this pesky spill had been such a nuisance that he wanted his life back is about to get just that.

And what a life it will be. Despite being at the helm as the company’s negligence unleashed the worst oil spill in US history and the subsequent loss of almost half the company’s value, Hayward will still be rich beyond the wildest dreams of almost anyone.

CNN gives us the details on Hayward’s likely exit package and current compensation. First, CNN informs us that Hayward won’t get a huge, American-style Golden Parachute. I don’t know about you, but I certainly would settle for the chrome bungee jump or whatever this is that Hayward is getting:

“He will be lucky to get a single year’s salary,” said Paul Hodgson, a senior researcher at The Corporate Library, a governance group. “And even that could be mitigated in certain circumstances.”

His compensation package — including salary and bonuses — was worth 3.158 million British pounds ($4.87 million), according to the company’s 2009 annual report. He’s also due an annual pension of 584,000 pounds ($901,000).

Additionally, he held more than 535,000 shares in the company as of December 31, which would currently be worth about 212 millon pounds (about $327 million).

That’s right, Hayward will be “lucky” to get an extra lump of almost $5 million to go away, while pulling in a pension of almost a million dollars a year on top of his stock worth $327 million.

Poor thing, I sure hope he doesn’t feel insulted by that paltry package.

If Hayward’s exit package, pension and stock ownership are indeed as reported by CNN, I’d like to nominate his life as the ultimate definition of moral hazard. He will have destroyed the Gulf of Mexico, made billions of dollars worth of stock held around the world go poof and still will walk away with riches beyond imagination. If he is to suffer nothing more uncomfortable than the “humiliation” of losing his job, then there simply is no incentive for other CEO’s to act responsibly in the future.

Joe Gandelman at Moderate Voice:

TV and other stand-up comedians had a ball making fun of a CEO could not keep a lid on his enjoyment of his “Lifestyles of the Rich and Famous” lifestyle for even the comparatively fleeting few moments of his life required to do press briefings and who could not put off avoid being photographed in settings that underscored the stark contrast between wealthy him and those who face losing their livelihoods in the Gulf. To wit:

“BP CEO Tony Hayward said recently, ‘No one wants this thing over more than I do. I’d like my life back.’ Tony, I’m so sorry you had your summer disrupted. I’d buy you a drink, but you’d probably spill that too … and make me clean it up.” –Craig Ferguson

“This Tony Haywire guy, whatever his name is, he told the BBC on Sunday that he believes the new oil cap that they’ve installed will eventually capture the vast majority of oil spewing from the well. You know, if they could capture half the BS spewing from Tony Hayward, people would be thrilled.” —Jay Leno

“BP CEO Tony Hayward said he would just like to get his life back. He wants to get his life back. You know, I say give him life plus 20.” —Jay Leno

…..”Obama’s not the only one on the hot seat right now. The CEO of BP is taking a lot of flak. His name is Tony Hayward. Today, President Obama had a meeting with Hayward at the White House. It got off to the wrong start. Hayward arrived in a Hummer limo powered by baby seals.” –Craig Ferguson

A Tony Hayward doll was even marketed in the U.S.:

Modelled on BP oil spill hate figure Tony Hayward, it’s the toy no kid wants – Inaction Man.

The 12-inch doll depicts the gaffe-prone boss as jobless with a placard reading: BP Executive Needs Work.

Made by American firm Hero Builders, it sells for £22.75 and describes Hayward’s qualities as “whiny little b*tch”, and an “all around w*****”.

Toy company boss Emil Vicale said: “We don’t expect to sell any. That’s how reviled he is.”

The doll – which does absolutely nothing – is the latest insult to Hayward, 53.

Meanwhile, BP doesn’t seem to want to let go of its image as a company that isn’t above board but will say what it thinks it needs to say in a given moment – even if everyone thinks or knows it’s just saying what it thinks it needs to say:

BP Sunday refused to confirm reports that its embattled chief executive Tony Hayward is on the verge of leaving the oil giant.

“Tony Hayward remains our chief executive and has the full support of the board and senior management,” company spokesman Mark Salt told CNN.

So expect the Tony Hayward spirit to linger on at BP long after Tony Hayward has left the leaking oil well.

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Uh… They’re Number One?

Frank James at NPR:

The U.S. is no longer the single largest consumer of the world’s energy resources. That distinction now goes to China, according to the International Energy Agency.

The IEA says that according to an analysis of its data for 2009, China, with a population of 1.33 billion compared with the U.S.’s 310.2 million, has outstripped the U.S.

It’s been known for some day that this day would come. But it happened faster than was forecast because China was hurt less by the global recession than the U.S.

Nicholas Deleon at Crunch Gear:

The actual numbers are pretty impressive, particularly when you consider that a mere 10 years ago China was quite a bit behind the U.S.

China consumed some 2,252 millions tons of the oil equivalent of sources such as coal, nuclear power, natural gas, and hydropower. The U.S. consumed 4 percent less. These are numbers from last year, by the way.

But that’s where energy efficiency comes into play. Since the year 2000, the U.S. has increased its energy efficiency by about 2.5 percent annually. China? 1.8 percent. So not a huge difference, but a difference nonetheless.

Does this really mean anything to you? Eh, maybe. Certainly it’ll have implications for the world at large though. Now that China is the biggest consumer of energy, it alone is in the position to tell energy providers, “Look, we’re willing to pay X for Y units of energy.” If China’s X is bigger than the U.S.’s X, then we may be looking at a situation where energy prices will go up simply because “someone else” is willing to pay more.

Which could mean that all the factories that produce all the lovely electronic gizmos we talk about day in, day out, could see their costs of doing business go up. And who would make up the difference? Yes, you!

Then again, it could have the very opposite effect, and end up lowering prices.

Mark Wilson at Gizmodo:

A different metric? Three years ago, China was the world’s biggest exporter of coal. Now it’s the leading importer. And last year, for the first time ever, Saudi Arabia sold more oil to China than the US.

Given that China’s consumption will give them more negotiation power in the world’s power market, it may be a good time to buck our trend of a mere 2.5% energy efficiency increase per year.

Frank Holmes at Wall Street Pit:

While most, if not all, had predicted China would become the world’s largest energy user, many didn’t think it was going to happen for another five years. China’s rise to the top can largely be attributed to a decline in energy usage in the U.S. China’s 2009 energy usage was below that of the U.S. from 2004-2008, before the financial crisis.

In fact, just ten years ago China’s energy consumption was less than half that of the U.S., according to the Wall Street Journal. The U.S. remains the biggest energy consumer on a per capita basis, the IEA economist said, consuming three times more per citizen than China. The U.S. also consumes more than twice the amount of oil that China does in a day.

But like most things with China, that statistic won’t last long. The IEA reported in last year’s World Energy Outlook that China and India will represent more than half of all incremental demand increases by 2030.

Well aware of the global politics of energy, the Chinese government was quick to dismiss the story as an overestimation by the IEA. Probably not the last time we’ll see modesty from Beijing as the country continues to put “world’s largest” in front of more and more resources.

Paul Denlinger at Forbes:

This is why the Chinese government has chosen to invest in developing new green energy technology.

The country is very fortunate in that most of the discovered deposits of rare earths used in the development of new technologies are found in China. While these deposits are very valuable, up until recently, the industry has not been regulated much by the Chinese central government. But now that Beijing is aware of their importance and value, it has come under much closer scrutiny. For one, Beijing wants to consolidate the industry and lower energy waste and environmental damage. (Ironically, the rare earth mining business is one of the most energy-wasteful and highly polluting industries around. Think Chinese coal mining with acid.)

At the same time, Beijing wants to cut back rare earth exports to the rest of the world, instead encouraging domestic production into wind and solar products for export around the world. With patents on the new technology used in manufacturing, China would control the intellectual property and licensing on the products that would be used all over the world. If Beijing is able to do this, it would control the next generation of energy products used by the world for the next century.

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Do They Break Out The Vuvuzelas For This?

Katherine Rust at The Atlantic with a round-up. Rust:

While American soccer fans reveled in the glory of Landon Donovan’s game-winning goal yesterday, for the nation’s tennis supporters victory was not so sweet–until today. American John Isner and Frenchman Nicolas Mahut spent the better part of Wednesday, and Tuesday, and Thursday playing in what was to become the longest tennis match in history. Battling for some 11 hours over the course of three days, the contest finally came to an end when Isner slipped a backhand past Mahut, winning the match and leaving commentators exhausted, overwhelmed and awe-struck. Regardless of the result, the day had several winners. Who came out on top?

Kamakshi Tandon at ESPN, before Isner won:

At 41-41, the net broke down. At 47-47, the scoreboard broke down. John Isner and Nicolas Mahut, however, were still standing at 59-59 in the fifth set as the match was suspended for darkness a second day.

All of tennis’ longest match records lay in tatters. And all over the grounds, all over the world, people got up knowing they had witnessed something truly historic in the annals of tennis. The longest match ever. By far.

At the end, both players were able to walk off the court without losing and everyone else was left to consider the statistical enormity of what they had just witnessed.

“What I can tell you? It’s just unbelievable. I can tell you 10 times in a row, unbelievable,” said Arnaud Clement, whose 6-hour, 33-minute match against Fabrice Santoro at the French Open in 2004 had been the previous record for the longest-ever match.

Isner and Mahut have gone longer than that in the fifth set alone, playing for 7 hours, 6 minutes.

“Everybody is watching in all the TVs here,” Clement reported of the locker room. “Players … all the staff.”

Walking off the court shaking his head in incredulity, Isner’s coach Craig Boynton said, “It’s all uncharted territory right now. The match is going to be over three days, they’ve played over seven hours. It’s nuts. What do you do? There’s no playbook.

“Physically, we’ll get him ready [for Thursday]. We’ll make a few adjustments tactically. What do you say — ‘It’s 59-59. Go have fun?’

“I’m going to put my arm around the kid and tell him how proud I am, win or lose here.”

Hal Spivack at Fanhouse:

Here is the record-setting time breakdown of the first-round match for the ages (all London time):

On Tuesday, the match began at 6:13 PM.

On Tuesday, the match was suspended due to darkness at 9:07 PM after Isner won the fourth set and tied the match up at two sets apiece.

On Wednesday, play resumed with the players square at the start of the fifth set at 2:04 PM.

After 118 games on Wednesday with no breaks of serve in the fifth, play had to be suspended due to darkness again at: 9:10 PM, tied 59-59 in fifth-set games.

On Thursday, the match resumed at 3:43 PM at 59-59.

The match finally ended on Thursday at 4:48 PM in the 138th game of the fifth set, with Isner winning 70-68, finally breaking Mahut’s serve.

The fifth set alone – at eight hours, 11 minutes – took more time to complete than any other previous completed match in the history of Open Era tennis.

Fabrice Santoro
and Arnaud Clement had previously held the record for the longest match in Open Era history by playing a six-hour, 33-minute contest over two days at the 2004 French Open. Santoro defeated Clement 6-4, 6-3, 6-7 (5), 3-6, 16-14 at Roland Garros that year.

The match lasted longer than any Major League Baseball game ever played. The White Sox played the Brewers in an eight-hour, six-minute contest that spanned 25 innings in 1984.

James Fallows, before the Isner win:

Last summer my wife and I went to the Legg-Mason tennis tournament in DC, early in the week’s play. By far the best part of seeing any pro tennis tournament in person is on the first couple of days, when you don’t have to sit in the stadium seeing matches from a distance but can wander around the side courts and see players from a few feet away.

At one of the practice courts, I saw what seemed to be an absolute giant warming up with a partner. It was Isner, whom at that point I’d never heard of, and some also very tall Eastern Europe person. I was able to stand directly behind the fencing — that is, 20 feet behind Isner’s opponent as he waited behind the baseline to deal with Isner’s incredible serve. On TV it is really hard to get an idea of the velocities, reflexes, and different-from-the-rest-of-us skills of top-level athletes. I watched Isner wallop serves for about an hour and was amazed that anyone could touch any of them. He is said to be 6’9″ but appeared to be about 11’2″, hitting serves more or less straight down

Peter J. Schwartz at Forbes:

Whether or not John Isner’s name is ultimately engraved on the Wimbledon trophy next weekend, he’s already emerged as this year’s champion. Earlier today, the former NCAA standout won what was, by far, the longest match in tennis history, measured in both games (183) and elapsed time (11 hours, five minutes). He obliterated the records for aces (112) and winners (246) in the process. Afterwards, his opponent, Nicolas Mahut, called it “the greatest match ever.” The three-day marathon was Isner’s Tin Cup moment, an event so dramatic that it is likely to overshadow the rest of the tournament. (It already stole the limelight from the Queen, who visited the All England Club on Thursday for the first time in 33 years).

What’s more, Isner’s win could make him rich. The retirements of Pete Sampras and Andre Agassi created a huge vacuum in American tennis. Try as they might, Andy Roddick and James Blake haven’t been able to fill that void. Last year, those two players pulled in a combined $19 million in endorsements and appearance fees, $6 million less than Agassi’s take five years prior.

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