How JPMorgan Chase Affords Those Big Bonuses —

Alan sez, "Apparently they do it by clogging the court system with dubious - and allegedly fradulent - claims against people for credit card debt. Let's see... massive numbers of lawsuits, hasty filings, breakneck pace, questionable and incomplete records. I wonder if JPMC is taking a page from the Cartel's playbook?" — Cory •

Ben Laurie on BitCoin —

I wrote yesterday about Dan Kaminsky's excellent thoughts on BitCoin, and wished aloud for comparable work from Ben Laurie. It turns out such work exists: here's Ben's critique of BitCoin, and here's his proposal for an alternative. Both are short, clear, excellent reads. — Cory •

Ever since BitCoin appeared, I've been waiting for two security experts to venture detailed opinions on it: Dan Kaminsky and Ben Laurie. Dan has now weighed in, with a long, thoughtful piece on the merits and demerits of BitCoin as a currency and as a phenomenon.

Bitcoin’s fundamental principle of fraud management is one of denial. If we drop our wallet on the street, the U.S. government is not going to compensate us for our lost cash. Bitcoin attempts to make the same deal, to the point where it calls its stores of keys, “wallets.” If we drop our wallet on the street — heck, if someone picks it out of our pockets — the money’s gone.

There have been bitcoin thefts. A few years ago, I tried to break Bitcoin, and failed quite gloriously. The system and framework itself is preternaturally sound. But it too is built on the foundation of buggy technologies we call the internet, and so Bitcoin must experience failures from the code around it. Hackers don’t care whose code they broke on their way to bitcoin, any more than pickpockets care that they’re exploiting the manufacturer of one’s jeans or leather wallet. So they break the server below the money, or the web interface above it. They still win.

At least, that’s the theory. Reality is more complicated. Of all the millions of dollars of purloined bitcoin that’s floating around out there, not one Satoshi of it has been spent. That’s because while most other stolen property becomes relatively indistinguishable from its legitimate brethren, everybody knows the identity of this particular stolen wealth, and can track it until the end of time.

Bitcoin Is Not as Secure, Unregulated, or Lucrative as You Might Think

In Rolling Stone, the amazing Matt Taibbi documents a breaking price-rigging scandal involving the world's biggest banks. The $500 trillion conspiracy to game the interest-rate swaps victimizes every city, town, state and nation that uses bonds to raise money, diverting an unimaginable sum from tax coffers to the pockets of mega-rich bankers. If you've been staring around at the empty storefronts, closed libraries and schools, homeless and breadlines since 2008 and wondering "Where did all the money go?" then wonder no longer.

Though interest-rate swaps are not widely understood outside the finance world, the root concept actually isn't that hard. If you can imagine taking out a variable-rate mortgage and then paying a bank to make your loan payments fixed, you've got the basic idea of an interest-rate swap.

In practice, it might be a country like Greece or a regional government like Jefferson County, Alabama, that borrows money at a variable rate of interest, then later goes to a bank to "swap" that loan to a more predictable fixed rate. In its simplest form, the customer in a swap deal is usually paying a premium for the safety and security of fixed interest rates, while the firm selling the swap is usually betting that it knows more about future movements in interest rates than its customers.

Prices for interest-rate swaps are often based on ISDAfix, which, like Libor, is yet another of these privately calculated benchmarks. ISDAfix's U.S. dollar rates are published every day, at 11:30 a.m. and 3:30 p.m., after a gang of the same usual-suspect megabanks (Bank of America, RBS, Deutsche, JPMorgan Chase, Barclays, etc.) submits information about bids and offers for swaps.

And here's what we know so far: The CFTC has sent subpoenas to ICAP and to as many as 15 of those member banks, and plans to interview about a dozen ICAP employees from the company's office in Jersey City, New Jersey. Moreover, the International Swaps and Derivatives Association, or ISDA, which works together with ICAP (for U.S. dollar transactions) and Thomson Reuters to compute the ISDAfix benchmark, has hired the consulting firm Oliver Wyman to review the process by which ISDAfix is calculated. Oliver Wyman is the same company that the British Bankers' Association hired to review the Libor submission process after that scandal broke last year. The upshot of all of this is that it looks very much like ISDAfix could be Libor all over again.

"It's obviously reminiscent of the Libor manipulation issue," Darrell Duffie, a finance professor at Stanford University, told reporters. "People may have been naive that simply reporting these rates was enough to avoid manipulation."

And just like in Libor, the potential losers in an interest-rate-swap manipulation scandal would be the same sad-sack collection of cities, towns, companies and other nonbank entities that have no way of knowing if they're paying the real price for swaps or a price being manipulated by bank insiders for profit. Moreover, ISDAfix is not only used to calculate prices for interest-rate swaps, it's also used to set values for about $550 billion worth of bonds tied to commercial real estate, and also affects the payouts on some state-pension annuities.

So although it's not quite as widespread as Libor, ISDAfix is sufficiently power-jammed into the world financial infrastructure that any manipulation of the rate would be catastrophic – and a huge class of victims that could include everyone from state pensioners to big cities to wealthy investors in structured notes would have no idea they were being robbed.

Everything Is Rigged: The Biggest Price-Fixing Scandal Ever (Thanks, Elix!)

A new ACLU report called The Outskirts of Hope (PDF) documents the rise of illegal debtors prisons in Ohio. A majority of municipal and mayors' courts (an unregulated and rare system of courts only permitted in two states) surveyed by the ACLU routinely imprison people for their inability to pay fines, a practice banned in both the US and state constitution. 20 percent of the bookings in the Huron County Jail are "related to failure to pay fines."

Taking care of a fine is straightforward for some Ohioans — having been convicted of a criminal or traffic offense and sentenced to pay a fine, an affluent defendant may simply pay it and go on with his or her life. For Ohio’s poor and working poor, by contrast, an unaffordable fine is just the beginning of a protracted process that may involve contempt charges, mounting fees, arrest warrants, and even jail time. The stark reality is that, in 2013, Ohioans are being repeatedly jailed simply for being too poor to pay fines.

The U.S. Constitution, the Ohio Constitution, and Ohio Revised Code all prohibit debtors’ prisons. The law requires that, before jailing anyone for unpaid fines, courts must determine whether an individual is too poor to pay. Jailing a person who is unable to pay violates the law, and yet municipal courts and mayors’ courts across the state continue this draconian practice. Moreover, debtors’ prisons actually waste taxpayer dollars by arresting and incarcerating people who will simply never be able to pay their fines, which are in any event usually smaller than the amount it costs to arrest and jail them.

The report documents heartbreaking cases, like Samantha Reed and John Bundren, a couple with a nine-month-old who were both ordered to pay fines they can't afford. John diverts whatever seasonal/part time wages he earns to Samantha's fines so she can look after their baby, while he goes to jail for ten-day stretches for failure to make payments. They are effectively indigent, but are not given access to counsel when they appear in court over their debts.

(via Reddit)

We already know that Congresscritters make huge bank through insider trading, exploiting a loophole that lets them place bets on the stock market based on rules they have yet to announce. But this game-rigging con isn't limited to elected officials: a whole class of unregulated beltway insiders make their living by wheedling "political intelligence" (that is, insider information about upcoming regulations and laws) out of politicians and their staff, and then selling it on to consultants who package it up into legal insider trading recommendations for the hyper-rich.

The U.S. Government Accountability Office has released Financial Market Value of Government Information Hinges on Materiality and Timing, a 34-page report on this practice, trying to figure out how pervasive the scam is. They didn't get any great answers:

"The political intelligence industry is flourishing, enriching itself and clients in the stock market, yet the report notes that it could not document who these people are or how much they profit," [Craig Holman, government affairs lobbyist for government watchdog Public Citizen] said. "Without full transparency of the activity of these political intelligence consultants and their clients, it is nearly impossible to know if they are trading on illegal insider information."

Government Report Examines 'Political Intelligence,' But Questions Remain [Legal Times/Andrew Ramonas]

(Thanks, Alan!)

I'm not normally a fan of corporate commercials designed to be "viral media," but one's very clever. The Dutch financial giant (and money launderer for Iran) ING paid to have a group of actors play out a dramatic reenactment of the events depicted in Rembrandt's classic painting The Night Watch, climaxing with a posed, framed tableau that re-created the painting itself. It's awfully fun to watch Rembrandtian cosplayers charge around a Dutch shopping mall while the shoppers stand agog.

Flashmob brengt 'De nachtwacht' tot leven (via Making Light)

A couple weeks ago, I listened to Unfit for Work: The startling rise of disability in America an interesting program on the supposed rise in disability claims produced by Planet Money and aired on This American Life (where I heard it). The program raised some interesting points about the inaccessibility of certain kinds of less-physical jobs to large numbers of people, but it also aired a lot of supposed facts about the way that parents and teachers conspired to create and perpetuate disability classifications for kids.

Many of the claims in both half of the report are debatable, and many, many more and simply not true. A Media Matters report called This American Life Features Error-Riddled Story On Disability And Children systematically debunks many of the claims in the story, which NPR has modified slightly since posting online (though NPR and Ira Glass continue to stand behind the story).

FACT: Medical Evidence From Qualified Professionals Is Required To Determine Eligibility

Government Accountability Office: "Examiners Rely On A Combination Of Key Medical And Nonmedical Information Sources." A Government Accountability Office report found that disability determination services (DDS) examiners determined a child's medical eligibility for benefits based on a combination of school records and medical records, and that if medical records in particular were not available, they were able to order consultative exams to review medical evidence:

DDS examiners rely on a combination of key medical and nonmedical information sources -- such as medical records, effects of prescribed medications, school records, and teacher and parent assessments -- in determining a child's medical eligibility for benefits. Several DDS officials we interviewed said that when making a determination, they consider the totality of information related to the child's impairments, rather than one piece of information in isolation. Based on our case file review, we estimate that examiners generally cited four to five information sources as support for their decisions in fiscal year 2010 for the three most prevalent mental impairments.

[...]

If such evidence is not available or is inconclusive, DDS examiners may purchase a consultative exam to provide additional medical evidence and help them establish the severity of a child's impairment. [Government Accountability Office, 6/26/12]

The Media Matters report cites high-quality sources like the GAO throughout, and makes an excellent case for a general retraction of this report by NPR. I hope that they, and Glass, will reconsider their endorsement of this report.

This American Life Features Error-Riddled Story On Disability And Children (via Naked Capitalism)

Queen goes on austerity footing, receive mere £5M pay-rise from the taxpayers —

At only £36.1M from the public purse (up £5M from last year), the poor Queen is positively underpaid. After all, she was divinely chosen to be monarch. God will be angry. — Cory •

Game theory and bad behavior on Wall Street —

An opinion piece by Chris Arnade on the asymmetry in pay (money for profits, flat for losses), which he describes "the engine behind many of Wall Street’s mistakes" That asymmetry "rewards short-term gains without regard to long-term consequences," Chris writes in a new guest blog at Scientific American. "The results? The over-reliance on excessive leverage, banks that are loaded with opaque financial products, and trading models that are flawed." [Scientific American Blog Network] — Xeni •

A redditor called joelikesmusic reported that a friend of his had been checked into a weird, narrow dungeon-like theme room at the Hotel Zaza in Houston (it's got lots of theme suites -- I once stayed in their awesome space-themed one with my family, on the way to my honeymoon). When he complained, the front desk apparently told him that it was a mistake -- no one was supposed to use that room.

The ZaZa's management told the press that it was a "prison" themed room, and that there was no mystery, but intrepid redditors have been examining the pictures (especially the portrait of Jay Comeaux, a banking exec from the disgraced Stanford Banking Executive, and have been spinning out theories about secret societies and rituals in the comments.

However, one commenter called lejefferson makes a plausible case that the room is a sex-dungeon with a one-way voyeur's mirror, used by rich weirdos:

What person that you know keeps a creepy picture of a guy over their television. This is obviously a secret room either personal or for a small group of people for sexual liasons/ S&M prostitution or worse. The mirror and small space of the room also indicates there is a good chance that the mirror is two way and that people could pay to come watch the sexual/S&M events occuring. The photo of a Stanford Banking Executive, (Jay Comeaux), on the wall further indicates that this is a high society sex room. The fact that the clerk said, "This room isn't supposed to be rented out" indicates that there was a big mistake and they didn't want anyone to find out about the room. The bricks on the wall line up exactly with the placement of the mirror suggesting that they do not continue behind it but that this is a two way mirror.

ZaZa insiders question - what's up with room 322? (self.houston) (via Super Punch)