Contemptuous

The House Oversight and Government Reform Committee voted last Wednesday to hold Obama’s Attorney General, Eric Holder, in contempt of Congress for refusing to turn over documents requested by the Committee in connection with DOJ’s Fast and Furious gun-running scheme. Predictably, the vote split right down party lines.

The next step was this week’s floor vote by the full House of Representatives. Prior to Thursday’s vote, the Congressional Black Caucus had called an emergency meeting to coordinate their walk-out. Since Holder is black and Obama is black, this had to be a racial thing. In the end, 100 Democrats refused to vote, most of them by walking off the House floor. Yet 17 Democrats voted with the Republicans to hold Holder in contempt of Congress while two Republicans voted against the resolution – Steve LaTourette (R-OH) and Scott Rigell (R-VA). The motion carried 255 for and 67 against with one abstention. This marks the first time in history that an Attorney General has been held in contempt of either legislative chamber. On the day of the vote, Holder went to Disney World to give a speech and maybe catch a few rides.

“No Justice Department is above the law, and no Justice Department is above the Constitution,” said House Speaker John A. Boehner (R-OH). Nancy Pelosi (D-CA), who spoke for the Democrats, pled with her caucus to vote against the contempt resolution, while assuring the House chamber that her party’s members were equally interested in getting justice for the family of Brian Taylor. The slain agent’s name is Brian Terry.

With passage of the contempt resolution in the full House, and Pelosi’s assurance that the Democrats want justice for whatshisname, it will now be referred to the US attorney for the District of Columbia, who is required to call a grand jury, ask for an indictment, and then represent the House Committee in the ensuing trial. However, he was appointed by Obama and reports to Holder as his boss. Therefore, he will predictably inform the Committee Chairman that he will not prosecute the man to whom he reports. This will force a second floor vote of the full House to authorize Committee Chairman Issa (R-CA) to file suit on behalf of the House of Representatives` in US District Court directing Holder to obey the subpoena of documents. Holder will lose. But all of this will take time and likely put the court arguments into next year after the election. That was the plan all along.

As the contempt proceeding chugs along in the legal system, it won’t be fun for Holder, however. Apart from the distraction, he could lose his license and in the worst case, go to prison for two years. So last week, just as he was about to walk the plank, King Obama intervened prior to the Committee vote and announced by letter to Chairman Issa that he would be invoking executive privilege. The vote happened anyway, but this is where, as Alice said in Wonderland, things got “curiouser and curiouser.”

The assertion of executive privilege is a throwback to the powers of English kings, who were annoyed by the meddling of Parliament in the conduct of statecraft in the same way that Obama is annoyed with having to co-govern with Congress. The use of executive privilege by American presidents goes back to George Washington, but it has always been used sparingly. And, except in the case of Nixon, it has not been used to hide a crime.

George W. Bush invoked executive privilege only six times in eight years. Clinton used it 14 times in eight years. Obama, who hopefully won’t have eight years, has never used it – until now. Why now in regards to this failed Fast and Furious policy? After all, it’s an election year. Why draw attention to a gun sting and its botched execution?

Who’s paying attention to it? Only those who get their news from the alternative media. The mainstream media has covered it up. Now the MSM will be forced to carry the story, if for no other reason than to show what bad guys the Republicans are for trying to embarrass Obama politically.

Uninformed voters will now start asking, “What the heck is ‘Fast and Furious’ and why is the President covering it up?” Polls are already beginning that show by a two to one margin voters believe that Obama shouldn’t have invoked executive privilege.

The invocation of privilege is therefore curious – or curiouser, in Alician terms.

Holder’s excuse for refusing to relinquish the documents requested by the House Committee is that they are part of an ongoing investigation. If that’s the case, it would be inexplicable and illegal for DOJ officials and White House advisors to discuss an ongoing investigation or to reveal related documents to the White House staff. Technically the DOJ represents the American people, not the President, so why would anyone need protection? A case and its documents may only be discussed among people involved in the investigation. Legally, that would exclude the White House staff and the President himself.

The White House has claimed all along that their guy wasn’t involved, so Sen. Charles Grassley (R-IA), who has worked with Issa to try to get answers out of Holder, correctly observed, "How can the president assert executive privilege if there was no White House involvement? How can the president exert executive privilege over documents he's supposedly never seen? Is something very big being hidden to go to this extreme?"

Good question.

As I blogged last month on Fast and Furious in Part I and Part II, the real purpose of this debacle was about limiting the Second Amendment rights of citizens to own and carry guns, a constitutional provision hated by both Holder and Obama. Leaks are beginning to corroborate this. The way Fast and Furious was conducted – letting guns “walk” across the Mexican border where drug lords used them to conduct murder and mayhem – makes no sense unless there were a higher purpose: to indict gun trafficking and thereby indict the easy availability of guns in America. If successful, it would lead to gun control.

Look at these excerpts from Obama’s book, Audacity of Hope, to get a sense of his attitude toward guns:

In certain parts of Illinois, the mention of gun control constitutes sacrilege… people feel about their guns as they feel about their library books … we continue to argue about reasonable search and whether the Second Amendment prohibits gun regulation … I believe keeping guns out of our inner cities, and that our leaders must say so in the face of the gun manufacturers’ lobby.

Are these the words of a moralist obsessed with gun violence? Gun violence is an outcome. Gun control is a method. No, they are the words of a politician for whom gun control, if not gun elimination, became a political, and likely deeply emotional, issue.

First, a little background. Meet Rep. Bobby Rush (D-IL), a high school dropout who joined the Army, went AWOL, and yet managed to get an honorable discharge. Rush founded the Illinois chapter of the Black Panthers, named his son after Huey Newton (a noted Panther), was almost killed in a police raid on a Panther meeting, served time in prison for illegally carrying a firearm. In 1999 his son was murdered in a contract “hit” for reneging on a drug deal he’d been paid $100,000 to deliver. Rush thereafter got gun religion and has been a steadfast opponent of guns since, introducing bill after bill in the US House in an attempt to neutralize the Second Amendment. He recently appeared at the House podium dressed in a hoodie and sunglasses while delivering a speech after Trayvon Martin was killed – a stunt that got him escorted out of the House chamber for violating its rules.

In 2000 then-State Senator Obama challenged Rush for the open House seat Rush now holds. In their debates, Rush called Obama “an educated fool,” who wasn’t sufficiently rooted in the black neighborhoods of south Chicago, where Obama had only a 10% name recognition. Obama countered that he could build bridges to whites, and indeed, he was the candidate of choice for whites, living as he did among them in the Hyde Park suburbs of Chicago where streets were safer and the University of Chicago was located.

Prior to the congressional seat election, State Senator Obama had supported a bipartisan bill called the Safe Neighborhoods Act, which would have made carrying a gun a felony in Illinois instead of the misdemeanor it was at the time. As we have seen so often in the Obama presidency, he took a vacation in Hawaii and was absent on the crucial day of the vote. The measure failed by three votes – one of them the vote of missing-in-action Obama. His enemies and the media pounced on him for his legislative indolence in gun control and he lost to Rush, who had made it a key issue, by 30% to 60%.

According to Edward Klein’s new book, The Amateur, the defeat almost cost him his marriage. Michelle considered divorcing him – what a woman – and stopped speaking to him. Obama went into a deep funk. Depressed and in debt, his friends were concerned that he was suicidal. When he won the seat for the US Senator for Illinois, however, things were hunky-dory with Michelle, my belle – especially when he hardly warmed his new seat before he launched a campaign to become President of the United States! … which would show his wife that he could be the man she wanted him to be.

Most of us learn from our mistakes, and some of those mistakes leave lasting emotional scars. His embarrassing loss to Bobby Rush caused Obama to confront his identity. Who was he? Read his books. He decided that he was a half-white black man rather than a half-black white man. Therefore, he moved to the political left and embraced the leading left causes – racism, poverty, big government solutions and regulation, and of course, gun control, the issue that had cost him dearly the only election he’s ever lost.

In the heady days of the new Obama administration, Secretary Hillary, Holder, and Obama formed a veritable Greek chorus in asserting that Mexican drug violence was being fueled by guns purchased in the US. DOJ memos and emails show that their real agenda was to use Mexican drug violence as a red herring to win public support for gun control, including a tight interpretation of the Second Amendment. One email spoke of tying the flow of guns – which Holder’s agency facilitated – to a justification for an assault weapons ban. In 1995, Eric Holder spoke to a Women’s National Democratic Club event, saying we must convince people that it’s unacceptable to carry guns, that we must “brainwash” people in to thinking quite differently about guns.

Fast and Furious was the Obama administration’s way of accomplishing the American mindset change about guns. The fact that a couple of hundred Mexicans were killed in their gambit and the fact that the President of Mexico was unaware the US DOJ was funneling guns into the murder machine seemed to cause none of the operation’s leaders pause. But when two American agents were killed, the agents’ disgusted colleagues blew the whistle on Fast and Furious and Congress got involved, demanding an explanation.

Holder’s response was that Inspectors General are inspecting and ongoing investigations are ongoing. But it was obvious that he was covering up a larger fiasco than a failed government operation. He stonewalled the House Oversight Committee, refusing to release documents that would show his culpability – and perhaps Obama’s – in a greater anti-gun scheme. Several times he has had to correct his prior statements, including accusing the Bush Attorney General of knowing about the operation and letting it continue until he, Holder, stepped in and ordered a halt. Senator Grassley rose in high dungeon, demanding proof of this scurrilous accusation. But Holder was unable to produce any, so he had to retract his misspeaking.

Holder and Obama couldn’t get their stories straight, causing one to contradict the other about who knew what and when. When the stonewalling strategy became blatant, Issa drew a line in the sand with a date, causing Holder to appeal to Obama to invoke privilege. In a sense, it was a shrewd move. Either Obama will be out of office, and the American people have shown little patience for going after the sins of the previous administration, or Obama and Holder will be able to delay the court fight until after Obama is reelected, even if he ultimately loses and Holder is forced to resign.

Throughout the mounting confrontation, the weak-willed John Boehner has shown his reluctance to allow another constitutional crisis reminiscent of the Clinton lying scandal which led to the House impeachment and a Senate show-trial that was worthy of an Academy Award for best acting. The 1996 election cost the Republicans enough seats to lose their majority and Clinton survived the crisis he had caused. Thus Boehner’s support of Issa’s Committee has been tepid to say the least.

This speaks volumes about Boehner’s ineptitude for the Speakership position. He fails to recognize that Clinton’s crime was obstruction of justice by lying under oath – a relatively benign misdeed when placed beside quite possibly a criminal cover-up of a government sting operation which may have had a politically motivated agenda that got two federal agents killed. OSHA does a better job of investigating accidental deaths than the DOJ has done investigating two murders which it likely caused.

The foot-dragging and invocation of presidential privilege should have caused Boehner to realize that unhappy circumstances arise in every human enterprise which require a leader to get out in front and lead even when he doesn’t like the outcome that will likely occur. This is one of them. The fact that he doesn’t see it as such puts his fitness to lead the Republican caucus in question.

The Eric Holder affair and Obama’s executive privilege cover-up is not a political or election year issue as Democrats claim. It’s a moral issue. And the families of Brian Terry and Jaime Zapata deserve answers.

Were their sons killed by criminals – or politicians?

The UN Threat to American Sovereignty

In his Farewell Address to the American people, George Washington warned of the hazards of foreign entanglements. Unlike the political pygmies who inhabit the Land of Oz inside the Washington Beltway today, the hero of the American Revolution understood that while emergencies may require provisional alliances with foreign powers, he opposed them as a general principal in foreign policy. Here’s what he had to say in his Farewell:

Against the insidious wiles of foreign influence (I conjure you to believe me, fellow citizens) the jealousy of a free people ought to be constantly awake, since history and experience prove that foreign influence is one of the most baneful foes of republican government.

The great rule of conduct for us in regard to foreign nations is, in extending our commercial relations to have with them as little political connection as possible. So far as we have already formed engagements let them be fulfilled with perfect good faith. Here let us stop. ...

… constantly keeping in view that it is folly in one nation to look for disinterested favors from another; that it must pay with a portion of its independence for whatever it may accept under that character …

It is our true policy to steer clear of permanent alliances with any portion of the foreign world … let [existing] engagements be observed in their genuine sense, but in my opinion it is unnecessary and would be unwise to extend them.

Keep Washington’s warnings in mind vis-à-vis the United Nations, an aggregation of 193 foreign influences. Its Law of the Seas Treaty, appropriately referred to by the acronym LOST, is currently being debated in the Senate with the collusion of a surprising number of Republicans and military top brass. The ringleader, Sen. John Kerry (D-MA), Chairman of the Foreign Relations Committee, apparently sensing that there may be fewer Democrat derrières filling Senate and White House seats after November, is pushing the treaty toward a vote during the lame duck session before the moving vans arrive.

Kerry is short-listed to take over the State Department from Hillary, who is “retiring” even if Obama cons enough people to reelect him for four more years of national sabotage And, if Kerry could get LOST (no pun intended) passed into law, his name might be top-listed. Moreover, one of the treaty’s most passionate supporters on the other side of the aisle, Sen. Richard Lugar (R-IN), was dumped last month by Indiana Republicans for going native after 36 years in the Senate, so he won’t be around to cheer Kerry on next year.

Although this horrible treaty has been hanging around the halls of Congress for 30 years, don’t feel like the Lone Ranger if you’ve never heard of it. That’s by political design. Lugar never mentioned in his primary race (wonder why?) and Obama, while an enthusiastic supporter of it, isn’t bringing it up in his reelection campaign either (wonder why?).

When the UN was created after World War II as a means for ignoble world leaders to work together for noble purposes, UN representatives of the Soviet bloc in concert with Third World dictators drafted the original treaty in 1968 in a not-so-subtle scheme to limit the power of the US and transfer the wealth of industrialized democracies to developing nations. The treaty has bounced around looking for sponsors among the mostly poor, mostly anti-US member nations and so far has 161 of them among the 193 UN members.

As the treaty was being negotiated during the 1970s, it was apparent to other nations that US interests were twofold: unrestricted navigation of the seas and the right to fishing and oil, gas, and mineral recovery beyond the 200-mile US continental shelf. We also wanted access to the oceans for research. The 77 developing nations quickly discovered that they could wring concessions in return for our concern for navigation freedom – and that they did with a vengeance. Ocean research was the first victim followed by restrictions on ocean mining to prevent competition with developing countries that engaged in land-based mining. Their next target was fishing, except Congress passed the Magnuson-Stevens bill that prevented foreign and domestic fishing fleets from over-fishing – a bill fought tooth and claw by our own State Department!

In 1982, President Reagan saw the treaty for what it was – a UN-backed heist of 70% of the earth’s surface and the largest redistribution of wealth in history – and he not only refused to sign it, he fired the State Department staff that helped negotiate it.

The history of the United Nations is not top of mind among stuff informed Americans know, but at least know this. When the UN was created as a forum for nations to resolve differences without war, many believed it would be little more than a debating society unless it became more empowered for its task. None other than Albert Einstein, Winston Churchill, Bertrand Russell and Mohandas K. Gandhi, pushed their governments to go beyond debating and take steps to essentially form a federal world government. In subsequent years, the UN has grown more feckless and corrupt so thankfully it never has achieved world government status, but treaties like LOST would help move it in that direction.

If you have a bad case of insomnia some night, you can read the treaty in all its verbosity. Pay special attention to Section 82 – “payments and contributions with respect to the exploitation of the continental shelf beyond 200 nautical miles,” which says:

1. The coastal State shall make payments or contributions in kind in respect of the exploitation of the non-living resources of the continental shelf beyond 200 nautical miles from the baselines from which the breadth of the territorial sea is measured.

2. The payments and contributions shall be made annually with respect to all production at a site after the first five years of production at that site. For the sixth year, the rate of payment or contribution shall be 1 per cent of the value or volume of production at the site. The rate shall increase by 1 per cent for each subsequent year until the twelfth year and shall remain at 7 per cent thereafter. Production does not include resources used in connection with exploitation.

3. A developing State which is a net importer of a mineral resource produced from its continental shelf is exempt from making such payments or contributions in respect of that mineral resource.

4. The payments or contributions shall be made through the Authority, which shall distribute them to States Parties to this Convention, on the basis of equitable sharing criteria, taking into account the interests and needs of developing States, particularly the least developed and the land-locked among them.

Sorta’ takes your breath away, doesn’t it? This piece of work cedes US sovereignty to the UN, redistributes the fruits or our labor through royalties paid to the International Seabed Authority – royalties that come out of American pockets or its Treasury – and, thanks to Article 144, we would be forced to give away our drilling and sea floor mineral harvesting technology.

This thinly-disguised UN “constitution for the oceans” would push nations toward world government as Einstein, Churchill, Russell and Gandhi wanted. Especially troubling is Part XI, which sounds like the executive, legislative, and judicial methodology for governing the mineral resources of the ocean for the “benefit of mankind.”

The UN appropriation of 70% of the earth’s surface to regulate its oil, gas, and mining and its tax scheme called royalties is outrageous. Royalties are paid to owners. The oceans belong to everyone, not the UN. This treaty would funnel an enormous revenue stream to the UN corrupt bureaucracy which it would spend with little oversight. Hel-loooo! … anybody remember the UN-sponsored Iraq Oil for Food program that implicated the ethically-challenged UN Secretary General Koffi Annan and his family in its corruption?

When my children were small, I would read to them the story of the Little Red Hen who asked the other barnyard animals to help her plant wheat. No takers. She asked for help in tilling and weeding. Still no takers. Also no help in harvesting, grinding, and baking the bread. But all the animals were around the table when eating time came. This treaty is the Little Red Hen on an international scale. The UN will be capitalized to advance its agenda of international socialism by transferring royalties to developing and landlocked nations, no doubt with sticky UN fingers – nations which didn’t participate in the capital investment, exploration, extraction, and risks. The fact that most or all of the money would end up in the bank accounts of the dictators of these thugocracies, as it always has, seems not to trouble the UN socialists.

LOST would expropriate the technology and intellectual property of industrial nations as part of its redistribution scam, giving it to the “developing world” most of which hates America. The developing world can’t operate this technology’s ON-OFF switch!

The treaty would regulate Americans and their businesses without being politically accountable to the American people. It would ignore our constitutional processes in deference to the UN’s. In our country a person can only be tried in a court that has jurisdiction of him. Not so with this treaty. Disputes among the signers would be resolved by mandatory resolution processes with no constitutional underpinnings. The Secretary General of the UN has established an unelected, unaccountable 21-person tribunal in Hamburg as the final arbiter of disputes from which there is no appeal to an American court.

LOST contains provisions to stop “marine pollution.” Predictably, its broad definition of “pollution” could include anything that junk science says causes global warming and rising sea levels – like greenhouse emissions from ships. The radical environmentalists will have a field day.

“The Law of the Sea Treaty would help radical environmentalists achieve what they haven’t been able to achieve through legislation,” one authority stated. “Greenpeace has said ‘the benefits of the UN Convention on the Law of the Sea are substantial, including its basic duties for states to protect and preserve the marine environment and to conserve marine living species.’ The Natural Resources Defense Council has already challenged the “intense active sonar” used by the US Navy, arguing that it violates the treaty by posing a danger to marine life. We aren’t a signatory to the treaty, still our brave Navy agreed to scale back use of this technology, making it harder to track the bad guy’s subs.

LOST was used by Australia and New Zealand to shut down an experimental blue fin tuna fishing program. Ireland used it to try to halt operation of a land-based plant in England. Such is the meddlesome nature of the treaty. I would make it easier for countries to muck around in the affairs of other countries whose activities they didn’t like.

Our Navy’s top admirals say we need LOST to assure safe transit through dangerous waters like the Strait of Hormuz, which Iran has threatened to blockade, and the South China Sea, which China claims as its domain. I thought that’s why we put guns on our Navy ships. Freedom of the seas has been recognized for centuries and has been enforced by our Navy since the beginning of the Republic. Since the UN has no navy, guess who will enforce LOST treaty provisions on the high seas? Us. Just as the US Navy has assured safe seas for over 200 years. Putting our navy’s decision-making under the authority of the UN would limit our ability to defend our own interests, especially when we have a bowing, genuflecting president like Obama.

Some of the military brass has said LOST would improve national security and it would enhance US standing in the world. (The latter is really high on my priority list! I toss and turn worrying about it for at least a second before dropping off to sleep.) So, in recent hearings for the treaty, one senator asked the Chairman of the Joint Chiefs of Staff, General Martin Dempsey, if failure to ratify compromises our ability to project force and help our allies around the world. Martin’s answer was essentially “no.” "Our ability to project force will not deteriorate," he said, if we refrain from ratifying the treaty. Well then, why sign a treaty that makes us no safer? At the end of the day, what keeps America safe is a strong military and a president with a backbone.

Pontificating at one of the Senate Committee hearings, Secretary Hillary told the committee members, “Whatever arguments may have existed for delaying US accession [to LOST] no longer exist and truly cannot even be taken with a straight face,” adding that some critics (like the author of this blog) seem to believe that because the treaty was negotiated under the auspices of the United Nations, “the black helicopters are on their way.”

This is the same woman who wants to cede American Second Amendment rights to the UN under the United Nations Arms Trade Treaty whose provisions extend even to accessories like scopes and magazines – a treaty that requires every country to keep track of weapons sold or transferred and to report transactions to the UN.

This is the same woman who wants to cede to the UN the power to regulate Internet content, charge user fees, limit access to outbound traffic originating in the US (Google, Facebook, Apple), and replace ICANN, which assigns Internet addresses, and has done so quite well I might add, to a UN bureaucracy which has never done it.

Such is the consequence of foreign entanglements – those “insidious wiles of foreign influence” which, Washington warned, is one of “the most baneful foes of republican government.”

In the days before the Republic existed, people thought of themselves in deeply partisan terms. The 55 men who gathered in Philadelphia to write the Constitution never thought of themselves as Americans. John Adams thought of himself as a Massachusetts man. Benjamin Franklin would have referred to himself as a Pennsylvanian, just as Edmund Randolph, James Madison, and George Mason considered themselves Virginians. They were rightfully suspicious of this new thing that would join them together as “united” states with a federal government. That a constitution ever got written was, as Catherine Drinker Bowen has rightfully called it, the miracle at Philadelphia.

In like manner, the United States is not a citizen of the world. It’s a sovereign nation that exists in the world. Our pin-headed politicians need to remember that important distinction. Otherwise, we need to get rid of them and elect people who will devote themselves to protecting American sovereignty.

In a little over 200 days, we’ll have that opportunity.

The Bane of Bain

Nowhere has Obama’s ignorance of capitalism become more apparent than his recent attacks on Romney’s tenure at Bain

"I think my view of private equity is that it is set up to maximize profits," the smartest man ever to be President said, proving his cluelessness about private equity, business, and capitalism.

“Maximize profits”? Well, duh, yeah. When I took Economics 101, which is only an elective in the Bachelor of Community Organizing curriculum, I do recall reading something about profit maximization as the goal of business. Doing that requires jumping through a lot of hoops – like creating a product or service that free markets will buy, finding and keeping good employees, and taking lots of risks (like losing everything if management fails to stay on its toes.) Detroit and the rust belt are good examples of what happens when profit maximization ceases to be a business goal.

Having no record to run on, the Obama reelection campaign launched a broadside against Mitt Romney’s long association with Bain & Company. One video ad shows a former steel worker calling Bain a “vampire” that “sucked the life out of us.” Another worker adds that Bain “walked away with a lot of money that they made off of this plant.” Joe Biden, who would have made a better carny barker for the bearded lady tent than VP, chimed in with his canned anti-Wall Street rhetoric babbling something about America ought to be a country that makes things again.

A few words about the steel company that Bain allegedly raped and pillaged … before Bain even got into the picture, its management had driven the workforce down from 4,500 to less than 1,000. As is the modus operandi in private equity (PE) firms, Romney and Bain thought this was a potential turnaround under good management. It acquired the company, GST Steel, in 1993, replaced management, merged it with another steel company Bain had acquired, making it one of the largest mini-mills in the country, persuaded banks to lend money to it, spent $100 million in modernization, and held it for eight years – hardly the acts of a looter. The plant was unionized, one of several factors that has kept American steel from being competitive in a global marketplace in which the Japanese have driven the price of steel below the cost at which Americans can make it. The company bankrupted in 2001.

That union part, incidentally, was conveniently left out of the Obama ad, and oops, I forgot to mention … Romney had left Bain two years before the GST bankruptcy to become President and CEO of the Salt Lake Organizing Committee for the 2002 Winter Olympics and Paralympics. Darn facts – they are such pesky things!

As a follow-up, the Obama campaign released another video ad featuring Bain’s past investment in American Pad & Paper, known as Ampad. The story spin was to show Ampad as another victim of PE avarice, driven into bankruptcy and job losses. Bain's $5 million investment resulted in more than $100 million in profits. Bain neutralized the attack ad with a written statement saying that during the four year that Bain owned Ampad, the business grew and jobs were created. Ampad’s bankruptcy occurred four years after Bain had sold the company. Minor detail.

Out of the mouths of fools foolishness comes. Such is the fodder for the Reelect Barack Obama to Four More Years of Economic Black Holes and Lost Years campaign. If private equity firms bought companies, gutted them, and left the carcass to move on the next victim, the industry would be out of business quickly. Banks would no longer lend the millions needed to restructure PE-owned companies. Investors, mostly institutions – i.e. pension funds, including $220 billion of public employee unions’ pension funds – which hate publicity, especially when it’s bad, would cease providing capital.

Private equity makes money by enhancing the value of the firms they buy or invest in – not by looting them. They are not long-term investors. Generally a PE firm will hold a company for an average of about five years before making its exit because the providers of private equity – institutions and wealthy people – want their capital back (with a return) so they can redeploy it in other investments even if it means foregoing future profits. But nobody loses money taking a profit, sooner rather than later. So, private equity’s strategy is to get in, fix what’s broke, and sell its stake at some future time either to another PE firm or to the public in an IPO. The only way this exit strategy works is the new buyer sees value that can grow in the future and earn more profit.

The history of PE – aka venture capital – is long and varied. The American colonies were created with an early form of venture capital. Later, planters created plantations that were backed by capital sponsors in England who were called “adventurers” – a term that morphed into venture capital in the ensuing years.

Around the beginning of the 20th century, railroads were the new, new thing. Building them required more capital than one person or family could supply. The risks of building the cross-country lines required stern stuff in addition to capital. Most railroad entrepreneurs lost their shirts. A few didn’t, among them Cornelius Vanderbilt, Leland Stanford, James Hill, Edmund Harriman, and Mark Hopkins whose names would head family dynasties in later years.

The 1890s were years of economic turbulence and a third of the railroad track mileage then existing went into receivership. A primitive form of PE financing existed then in the form of merchant and investment bankers. Merchants who had the wealth to finance their own activities began to finance the activities of other merchants and ultimately became merchant bankers. J.P. Morgan was among the first and best known of them in this country. Investment banks were an outgrowth of the need for foreign capital in the development of railroad lines. J.P. Morgan blurred the lines distinguishing merchant and investment banking by stepping into distressed railroads, taking management control, and restructuring the underlying capital. He was hated and feared because he was good at it.

Morgan later expanded into other industries. Approaching Andrew Carnegie to sell his steel company to him, which he intended to merge with other steel companies he controlled, Morgan asked Carnegie to name his price. Carnegie wrote $480 million on a sheet of paper – a staggering sum at the time which Carnegie thought would kill the deal. Morgan glanced at the figure and said, “I accept this price.” The steel companies were merged into the new United States Steel Company, which was capitalized at $1.4 billion in bonds – the currency Morgan used to pay Carnegie and his partners in perhaps the first leveraged buyout. “How does it feel to be the richest man in the world?” Morgan asked Carnegie, knowing he had made the wealth possible. The Federal government spending for that year was $524 million.

After World War II, there was a dearth of capital available to start new businesses during the boom following the war. American Research and Development Corporation (ARDC) was founded in 1946 to provide “venture” capital. In 1957, two MIT engineers formed a company to make computers that were smaller, cheaper, and easier to use. They called their company Digital Equipment Company (DEC) and sold a 70% interest to ARDC for $70,000. When DEC went public eleven years later, ARDC’s stake was worth $450 million – an annualized return of more than 100% -- a rapacious vampire if there ever was one. Of course, this return was netted against the many ARDC investments which failed, which is the nature of venture portfolios.

Two years after receiving a joint Juris Doctor and Master of Business Administration from Harvard University as a Baker Scholar, Mitt Romney entered the management consulting industry at Bain & Company. He rose to become its Chief Executive Officer during a period in which Bain was in serious financial crisis. Noting that when consultants were successful they increased the value of their client companies substantially, Romney reasoned that if the consultants could buy their troubled clients’ companies, they could pocket the gain in value on an exit instead of a relatively small consulting fee. Thus, in 1984, he co-founded Bain Capital, a private equity investment firm spin-out that became one of the largest PE firms in the nation and quite profitable.

Bain has done quite well for its investors, the companies it invested in or acquired, and therefore it has done well for itself. Since Bain Capital was formed, its portfolio at various times has included AMC Entertainment, Aspen Education Group, Brookstone, Burger King, Burlington Coat Factory, Clear Channel Communications, Domino's Pizza, DoubleClick, Dunkin' Donuts, D&M Holdings, Guitar Center, Hospital Corporation of America (HCA), Sealy, The Sports Authority, Staples, Toys "R" Us, Warner Music Group, and The Weather Channel.

Bain’s success and the important need it and other PE firms fill in providing high-risk capital caused the leading lights of the Democrat party to criticize Obama’s reelection campaign tactic of demonizing Romney’s Bain tenure. Moreover, when Romney left the Bain firm, which he had turned around, he successfully turned around the failing Salt Lake Winter Olympics. Thus, Cory Booker, the mayor of Newark, Ed Rendell, former two-term Governor of Pennsylvania, former Representative Harold Ford Jr. (D-TN), and Deval Patrick, Governor of Massachusetts believed Obama’s demonization of Romney would only draw attention to Romney’s successes.

Moreover, at the same time Obama was criticizing Romney and Bain on one hand, he was taking in money with the other hand from fundraisers hosted by PE leaders such as Hamilton E. James, COO and president of Blackstone whose website claims it to be “one of the world's largest private equity fund businesses." Other bagmen (Obama’s handlers call them “bundlers”) are significant players in the PE industry and didn’t like being slandered by the guy for whom they were raising campaign cash.

In 2008, PE firms donated $3.5 million to Obama’s campaign, and he has gotten more for his 2012 campaign. Pinning the “destroyer of jobs” label on Bain in particular and PE firms in general wasn’t enthusing the PE bagmen, and it doesn’t square with facts. Firms restructured by private equity lost only 1% more jobs than other comparable companies in their industry, according to the National Bureau of Economic Research. The bane of Bain is a loser’s pitch – just like the people who put it together and the guy who delivered it.

It’s hard to make the distinction that Romney’s association with Bain was bad whereas firms like Vestar Capital, which resuscitated Birds Eye are good. In 2002, Birds Eye, the famous frozen food company, was losing $131 million on $1 billion in sales. Vestar shrunk the workforce from 4,000 to 1,700, provided the needed capital and management, and by 2009 had Birds Eye making a $54 million profit on $936 million in sales. Despite the job loss, was society better off? With a $185 million positive profit swing on virtually the same level of sales before and after the restructuring, does anyone wonder what the 2,300 “lost” jobs ever did for Birds Eye?

In contrast let’s look at Obama’s kind of capitalism – crony capital projects. They are little more than politically-motivated handouts from government which are disguised to look like “investments.” His green energy fiascos come to mind.

The Obama administration granted SunPower, a green energy venture, a $1.2 billion loan guarantee. At the beginning of this year, it owed more than it was worth. Then there’s Brightsource, another green energy black hole and the recipient of a $1.6 billion loan guarantee. Its major accomplishment to date has been to lose $177 million. Oh, and there’s Solyndra, which I blogged about last year. It got $535 million in loan guarantees from us taxpayers and went bankrupt, leaving us standing at the alter like a jilted bride.

As revealed in in his book, Throw Them All Out, Hoover Institute scholar Peter Schweizer revealed that 71% of the Obama Energy Department grants and loans went to "individuals who were bundlers, members of Obama's National Finance Committee, or large donors to the Democratic Party." In a gambit that would make the PE firms green with envy, these Obama cronies raised a total of $457,834 for his 2008 campaign, but they got grants or loans of nearly $11.4 billion. PE firms, eat your hearts out. That’s a return on their campaign “investment” of almost 25,000%! Organized crime isn't that profitable!

Last month when Obama was trying to draw a distinction between Romney’s success at Bain and the role of the presidency, in which business success, according to Obama, means zilch, The Great One said that the president's job isn’t "to make a lot of money for investors …" Well, he sure seems to be making a lot of money for his political investors, albeit at taxpayer expense.

Unlike private equity, in which investors voluntarily put their money at risk, crony capitalism takes money from taxpayers by force of law and “invests” it in government-favored projects, like those listed above. The taxpayer/investor has no say in the use of the funds appropriated by force. And government bureaucrats, who lack the business success derided by Obama’s critique of Romney’s PE background, make incompetent investment decisions, as is clearly evident in the results of their misadventures. These were never viable business ventures to start with … they were scams cooked up by political con artists, which explains why more than 100 green energy criminal investigations are underway in the office of the Energy Department’s Inspector General.

Team Obama is about to release a third video campaign ad about the bane of Bain targeting the “Wal-Mart Moms” whom they believe will be the swing in the swing states. The focus is on the job losses caused by Bain PE investments – and by implication, Romney’s fault. How they expect to spin this into a positive for reelecting Obama is anyone’s guess. Lying might work.

To that end, the Gaffe of the Week prize goes for this Obama lollapalooza: "We've created 4.3 million new jobs over the last 27 months, over 800,000 just this year alone. The private sector is doing fine."

Let’s unpack Obama’s assertion.

The Bureau of Labor Statistics publishes employment data. According to these tables, in January 2009, the month in which Obama was crowned, the private sector employment was 110,985,000. The latest figures are preliminary and for the past 18 months the preliminary figures have been adjusted down by the actual figure, but let’s use the preliminary number. In May 2012 private sector employment was 111,040,000. Thus far during Obama’s tenure, the private sector has created 55,000 jobs. That’s 0.05% or five one-hundredths of one percent! And that’s through May; we have months to go.

If we look at total employment – private and public – the BLS data tables show January 2009 employment at 142,187,000 and May 2012 employment at 142,287,000. That’s 100,000 jobs or a job growth of 0.07%. Now, in the part of the country where I live, we call that flat – not 4.3 million new jobs.

But during the time Obama has been President, working his Obamanomics magic, the available labor force has grown but employment has not. What happened to the rest of the available labor force? They are unemployed. James Pethokoukis of the American Enterprise Institute puts the real unemployment rate at around 11% rather than the official unemployment rate of 8.2% published by BLS, because the latter is based on a sample of 60,000 households and counts as “unemployed” only those actively looking for employment. Those who have ceased to look for a job, given up, or taken a part-time job are not counted.

No sitting President since Franklin Roosevelt has won re-election when unemployment was over 7.2% on election day.

And Obama … you ain’t no FDR.

California Dreamin’

Jerry Brown, the once hip now aged Governor of California, earned the charming and ever so appropriate moniker, Governor Moonbeam, during the eight years in which he first held the office, 1975 to 1983. The “moonbeam” sobriquet was laid on him by the late journalist Mike Royko who said Brown attracted the moonbeam vote from the flighty and the flaky inhabitants of the Left Coast’s largest state. Royko later called California “the world’s largest outdoor mental asylum.”

Almost at the outset of his first term, Governor Moonbeam began running as the Democrat candidate for President in the 1976 campaign. He entered the race about a year after most candidates had begun campaigning. Maybe it took a year to get the mansion furniture arranged to his liking, but His Moonbeam-ness gave this reason for forsaking the office he’d just won for a presidential bid: “The country is rich, but not so rich as we have been led to believe. The choice to do one thing may preclude another. In short, we are entering an era of limits." Oooooo-kay, Jerry. That’s the way it is with choices – make one and it precludes others … it has nothing to do with limits or richness.

Jimmy Carter won the 1976 election and the American people lost. After four years, Carter was safely in possession of the Worst President Since Millard Fillmore award, although he may lose it to the current White House incumbent. The weak Carter sought a second term, which attracted a competitive challenge from Senator Ted Kennedy, renowned for his ability to escape from submerged automobiles, and none other than Governor Moonbeam again whose reason for leaving his second win as Governor for a second run for President was to “protect the earth, serve the people, and explore the universe." Oooooo-kay, Jerry. Sounds a bit like a Star Trek mission to me but whatever gets you going. Carter won re-nomination but thankfully lost the White House to Ronald Reagan.

Brown chose not to run for a third term as governor, and therefore lost his platform to run for other offices. After bouncing around for a couple of years, as moonbeams are wont to do, he decided to run for the senatorial seat being vacated by Republican Senator S.I. Hayakawa. No, this Hayakawa was not the actor who played the Japanese camp commander in The Bridge on the River Kwai. Lacking another mind-expanding rationale for running for this office, San Diego Republican Mayor Pete Wilson handed Moonie’s back porch to him in a landslide victory, winning Hayakawa’s senate seat.

Since there were no offices to run for at the moment, ex-Governor Moonbeam left for Japan to study Zen Buddhism. Later asked why he was studying Zen, Moonbeam said, “Since politics is based on illusions, zazen definitely provides new insights for a politician. I then come back into the world of California and politics, with critical distance from some of my more comfortable assumptions." O-oooookay, Jerry. Wish I’d said that but you beat me to it.

After “gaining sufficient distance from some of his more comfortable assumptions,” Moonbeam was in the political arena once again in 1992, this time seeking to deny George H.W. Bush a second presidential term. His rationale for running this time was to "take back America from the confederacy of corruption, careerism, and campaign consulting in Washington" promising to stop Congress from being a "Stop-and-Shop for the moneyed special interests". Wow, Jerry, you’re just full of these moonbeamisms … and some other stuff too, I think.

Limiting his individual campaign contributions to $100, Moonie was overwhelmed by Bill Clinton who was handing handfuls of the C-notes to poll watchers as “walkin’ around money.”

Several more years of moonbeam bouncing followed because all of the state-level positions were occupied by long-termers and His Moonbeamship was allergic to real work in the private sector. He thus decided to advance his political career at a municipal level, and when the opportunity to run for Mayor of Oakland opened, Moonbeam ran as an Independent, leaving the Democrat party after blasting what he called the “deeply corrupted” two-party system – not quite the zinger rationale he had used to justify running in past elections. But he won the race and true to his idiosyncratic moonbeamness, he bought an industrial warehouse in a rundown area of Oakland and refurbished it as his home where he slept on a futon with his companion, a Labrador named Dharma. Mayor Moonbeam held the position for two terms before the “deeply corrupted” two-party system no longer bothered him, whereupon he rejoined the Democrat party to run for California Attorney General, the usual launching pad in most states for a gubernatorial run.

It was no surprise, then, that Brown squared off against Meg Whitman in perhaps the most important California governor’s race in modern times, if not the most important gubernatorial race in the country. California’s economy makes the economy of Greece look well-managed, and whoever won would have to straighten out the mess past administrations had made of the state’s affairs. Those troubles really began during the first Brown administration when, as one of the inmates of the world’s largest outdoor mental asylum, Moonbeam had given public employee unions collective bargaining “rights.” For those living in Palm Beach County Florida, that means regardless of who is elected to represent the people’s interests, the unelected unions have the final say if it affects their interests.

Meg Whitman, an incorruptible billionaire and a woman of great talent in business and management, who took a venture concept called eBay and grew it into a multi-billion dollar enterprise, was the ideal person to take over from an Austrian former Mr. Universe with a penchant for creating little extra-marital earthlings despite his 25-year marriage to a member of the Kennedy clan.

However, in further proof of H.L. Menken’s observation that no one ever went broke underestimating the intelligence of the American public, the voters of California turned again to the clueless74-year old former Governor whose first terms had made a fiscal train wreck of the state’s economy, later helped by the ineptitude of Ahhh-nold, the RINO. Whitman went on to become President/CEO of Hewlett Packard, much to its shareholder’s good fortune, where she immediately began turning the company around, shutting down losing operations and shedding 27,000 jobs.

In January 2012 Governor Moonbeam announced that the state would suffer a $9 billion budget deficit this year. Unfortunately, this past Monday he had to tell Californians that his budget assumptions were slightly off. In a mere four months since the original announcement, the deficit had ballooned to $15.7 billion because overtaxed Californians produced 20% less tax revenue than expected. In fact, the original deficit estimate was based on budget assumptions as ephemeral as California dreamin’ and critics had said as much. Governor Moonbeam’s rationale for missing the numbers? “The capitalist system is not coincident with your expectations of exactitude.” By golly, I believe he’s got his groove back!

Speaking of a lawyer whose name is lost in history, Abraham Lincoln once said, “"He can compress the most words into the smallest ideas of any man I ever met." I believe Brown, also a lawyer, must be a descendant of that man.

The road to fiscal hell is paved with liberal ideas of government. Governor Moonbeam’s plan calls for spending cuts and tax increases. Spending cuts? What spending can he cut that doesn’t impact public employees? He’s only the Governor, after all. The public employee unions will have the final say about spending cuts.

Moonbeam is calling for an increase in the sales tax from 7.25% – high already when you think about how much it adds to big ticket items – to 7.5%. But more importantly, he’s calling for a millionaire’s tax. Ahhh … there’s that favorite of all liberal politicians. Those making over a million would see their state income taxes rise from 10.3% to 13.3% making it the highest in the nation. But – here’s the fun part – the millionaire’s tax increase starts at $250,000. Huh? How can someone making $250,000 be a millionaire? Uncle Moonbeam has the answer: "Anybody who makes $250,000 becomes a millionaire very quickly, if you save" Geez! Why didn’t I think of that? We’re all millionaires if we just start saving instead of spending. If that’s the answer, why don’t politicians practice it – start saving instead of spending? It’s so obvious! We could solve our deficit and pay off the national debt “very quickly.” Jerry says so.

California is an equal-opportunity plunderer. Not only does it overtax the rich, but also people who make between $37,005 and $46,766 pay a whopping 8% state income tax. Only six states and the District of Columbia have a higher rate in that income range. From $46,766 up to $1,000,000 of income, the California state tax rate is 9.3%, and only two states, Hawaii and Oregon, have higher tax rates.

If Moonie can’t intimidate the voters to approve his taxpayer hostage-taking, he is going to pull the pin on a $5.5 billion grenade that will cut public schools and higher education spending. Make the voters feel a lot of pain, that’s his plan. A third-rate education system will certainly attract new residents to the Golden state.

Like Greece, California has a spending problem, not a revenue problem. One-eighth of the nation lives in California but so do one-third of the nation’s welfare recipients. How can that be? Because, according to Business Week, "[California] is one of the few states that continue to provide welfare checks for children once their parents are no longer eligible."

Teachers in the state are the highest paid in the nation, making an average salary of $68,000. Their retirement plans allow them to hang it up after 30 years and draw 75% of their salary for life, sticking taxpayers with a $65 billion unfunded liability in the teacher’s retirement system.

California’s cap and trade law has raised energy prices in California making them 50% higher than the national average. That and real estate prices make California living the most expensive of the lower 48 states. Unemployment in California is 11% – virtually tied with Rhode Island for second place. Only Nevada, which reelected Harry Reid, that paragon of fiscal restraint, is higher at 12%. While only New York has a higher cost of doing business, in the annual survey for the Best and Worst States for Business, CEOs ranked California dead last.

Austerity must mean something different in California than is does anywhere else, because for all of his talk about it, Governor Moonbeam is as committed as ever to build a “bullet train to nowhere” – a high speed line from San Francisco to Los Angeles – which has been his dream since he earned the Moonbeam handle. Its cost to taxpayers is estimated at $68 billion, but those not drinking Kool-Aid say it will exceed $100 billion. The 300-mile distance can be covered by plane in an hour and by car is seven hours, but the Moontrain will cover it two and a half hours and cost $123 one way. A recent poll showed 70% would never or rarely use it and 60% of the taxpayers are opposed to a California version of Amtrak. But it most surely will pass in the Democrat-controlled legislature, which must vote August 1 to authorize $6 billion to build the first 130-mile section of track from nowhere to nowhere in the middle of California's Central Valley near Merced, a town of 80,000 people known for having one of the highest home foreclosure rates in America. That section won’t be complete until 2028 and the project won’t be complete until 2033 – if ever.

Taxpayers are revolting by leaving California where one-tenth of the taxpayers pay most of the taxes – similar to the progressivity of the federal tax system. It’s hard to escape federal taxes, but state residents vote against state taxes by leaving or establishing residencies in other states. Moreover, as the loony tunes in Washington have discovered, increasing tax rates and increasing tax receipts aren’t the same thing. Most highly paid people can choose when they want to be paid, how much they want to be paid, and where they want to be paid, which makes tax receipts highly volatile in states where taxes are too high.

When I was a small child, my grandmother told me an apocryphal morality tale about the town drunk in a country village who’d passed out and was lying in a muddy gutter next to a pig. “You can always tell a person by the company he keeps,” one priggish grand dame sniffed to another as they passed the pair, whereupon the pig got up and left.

The pigs are leaving the tax drunks in California. A recent Wall Street editorial piece described the California exodus: "Nearly four million more people have left the Golden State in the last two decades than have come from other states. This is a sharp reversal from the 1980s, when 100,000 more Americans were settling in California each year than were leaving…. [M]ost of those leaving are between the ages of 5 and 14 or 34 to 45" – the current workforce in the latter group and the future workforce in the former. Immigrants and births have accounted for virtually all of California's population growth over the last two decades.

This was a good week for common sense. The recall election of Wisconsin’s Governor Scott Walker belly-flopped, vaporizing $36 million from union coffers, and in San Diego and San Jose, over two-thirds of the votes cast were in favor of cutting retirement benefits for city workers – something Governor Moonbeam is either unwilling or incapable of doing at the state level. With all of its earmarks and creative accounting, he blames his fiscal impotence on a state budget that is a "pretzel palace of incredible complexity."

O-oooookay. I think I’ll end on that note.

How to Lose a Couple of Billion (or More)

When Jamie Dimon, Chairman and CEO of JP Morgan Chase, made his curious announcement earlier in the month that it had lost $2 billion in one of its trading units, all of the Henny-Penny regulators and politicians, including the full-time campaigner and part-time President, went on full alert as if the financial sky was falling. Congress called for hearings, the FBI and DOJ jumped into the act, and the SEC began an investigation.

The reason I call Dimon’s announcement curious is because JPMC is a public company and thus required to make regular SEC filings. Instead of calling attention to it, why not disclose the losses in a filing and let the analysts – the only people who read those things – ask questions? That way Dimon could have shrugged his shoulders and said, “Hey, we’re in a business that requires us to manage risk; sometimes we don’t do a good job at it.” Then he could have pointed out that JPMC had net income of $5.4 billion in the first quarter so it’s not like a $2 billion trading loss is going to sink it, and after the loss, the bank still has $127 billion in equity. Moreover, the trading unit in which the loss occurred had made over $5 billion during the last three years while the bank’s profit during that period was more than $48 billion, according to SEC filings.

Keeping in mind that most of the career politicians in Congress and the one in the White House have never held a real job, (those jobs exist only in the value-creating, risk-taking private sector) they are clueless that it isn’t a crime to lose money. More regulations will fix everything, they quickly announced. They obviously don’t understand that big banks don’t make money by taking deposits from little old ladies with blue hair and lending them out to the community in small loans. To meet the expectations of Wall Street – the provider of capital – there isn’t enough economic activity for big banks to deploy all of their assets. Therefore, in order to generate the earnings per share growth that makes their shares more valuable, at least half of the bank’s activity is related to credit speculation, interest rate arbitrage, and other such activities. Big banks have to make money in many different ways, and more regulation is just going to slow the economy down as government regulations do. Think Sarbanes-Oxley, which has been estimated to have an average compliance cost of over $5 million per public company and has caused firms to deregister from American stock exchanges.

Dimon’s curious announcement immediately vaporized $12 billion in market value – six times the amount of the loss – so shareholders and a few execs who won’t have as big a bonus as they’d hoped ought to be the ones stamping their feet in anger, not regulators, politicians, and a former community organizer whose banking experience is limited to giving ACORN legal advice on how to shake down banks for not making loans to bad credit risks.

The other thing that makes Dimon’s announcement curious is that it came just as regulators are on the cusp of interpreting the Volcker Rule, an arcane limitation on activities banks can do, and Dimon’s announcement will no doubt cause the regulators to take a second look and make the rule even more rigid. Dimon has been an outspoken critic of the Dodd-Frank bill and the Volker Rule along side a number of Republican legislators. By calling attention to the loss in a press conference, instead of an SEC filing, he played right into the hands of the anti-capitalist lawmakers. Dimon is the guy that Obama called “the smartest banker we’ve got” when the Prez last appeared on The View where he makes all of his really important policy pronouncements. By the way, while he was gushing all over Dimon, a Democrat, Obama didn’t mention that he and Michelle have a “JPMorgan Chase Private Client Asset Management” checking account with a million bucks in it, according to his latest financial disclosure. Obama’s new-found pontifical banking expertise apparently pays well.

The JPMC losses occurred in the treasury department of its commercial bank. The function of this department is to invest most of its demand deposits in overnight money markets. But since interest rates are nearly zero, some of the deposits – those that are not demand deposits (which can be withdrawn without notice or penalty) – are invested in longer term investments with higher yields. This is where the losses occurred.

The risk in managing long term investments, bonds for example, is in interest rate fluctuations which will affect the bond value. If you hold a $100 bond paying a 5% yield, you can sell that bond for its face value as long as comparable risk bonds or other investment instruments pay 5%. If the interest rates in the market fall to, say 3%, your 5% bond gets more valuable because it pays above-market rates. Its owner will continue to receive $5 annually. But since competitive yields are 3%, theoretically the bond price will appreciate from $100 to $167 where its $5 yield now represents 3%, making its yield comparable to similar risk instruments. The price of fixed income securities moves oppositely to its interest rate.

Therefore it works the same way when rates rise, causing bond prices to fall. If competitive rates rose to 7%, your $100 bond paying $5 annually will depreciate to about $71 in order for its yield to be 7%. If you borrowed the $100 originally to buy the bond, when the redemption time comes you owe the lender $100. Currently, you can only sell the bond for $71, meaning $29 of the redemption comes out of your pocket, or in the case of a bank, out of its equity capital.

The lender of the $100 also expects to get a return for letting you use her $100 for a while, so depending on the deal you originally made, some of the interest earned before redemption must be paid to her. In some cases the interest paid to her will vary as interest rates fluctuate in the market, affecting the bank’s profits further.

Banks, therefore, try to mitigate the impact of interest rate fluctuations and other risks by hedging in a transaction called a credit default swap. A CDS is essentially an insurance contract. You buy life insurance to hedge against untimely death and home and car insurance to hedge their loss and replacement cost. CDS contracts work similarly by protecting a lender in case a borrower of the bank’s capital can’t repay. CDS contracts can be detached from their derivative risk and traded separately. Here’s how.

Suppose I needed some money and all I had of value was a life insurance policy. Obviously, I’m not going to be around to collect its benefits so if I have no heirs, I can sell that policy to a third party. Let’s say that upon my death, my insurance will pay $300,000. The third party buyer won’t pay me the full death benefit because there would be no way to make a profit, but perhaps the buyer is willing to pay $150,000. He might pay more if I’m old and in poor health, or he may pay less if I’m young and in good health because he has to wait longer to make the profit. Yes, it may sound a bit ghoulish that the buyer is waiting for me to die, but there is a small market for buying and selling life insurance policies. It works because the owner of the policy can designate anyone to be the beneficiary, and if the person to whom I want to give the death benefit isn’t a relative, I could sell it.

In a similar manner there is a market for selling and buying CDS insurance contracts. They can be sold to third parties, they are traded Over-the-Counter, where there is less scrutiny and regulation than the New York Stock Exchange, and the market is small and illiquid compared to the stock and bond Exchange markets.

The JPMC treasury department held a large amount of corporate bonds and hedged interest rate increases using CDS contracts to buy insurance with a one maturity date while selling insurance contracts with a different maturity date. The bond portfolio was so large that the treasury trader, who happened to live in London, moved the market (i.e. affected prices) with his large buy and sell trades. Because of this, he earned the nickname “The London Whale.” Other traders in this small market – hedge funds and other investment banks – saw this happening and began to arbitrage against JPMC.

Quick side note: In a financial market some people sell when they don’t believe the market will go higher. But in order to sell, there have to be other people who become buyers because they think the market will go higher. They can’t both be right, so someone is going to win and someone is going to lose. Moreover, when there are a lot of sellers or a really big seller, like the Whale, prices go down. When there are a lot of buyers or a really big buyer, like the Whale, prices go up. The smaller the market, the more it magnifies larger transactions to sell or buy. To avoid getting into the specifics of arbitraging, suffice it to say that the moves the Whale was making were working against the arbitrageurs. When they bet the market would go down, he bought and drove prices up.

What the Whale was doing was the equivalent of “cornering the market,” which in a regulated market would have been illegal and preventable. A “cornered” market is controlled by one or a few people. The Hunt brothers tried it a number of years back in an attempt to drive up the price of silver and make a windfall profit doing so.

The Over-the-Counter market is allegedly “self-regulated” as I’ll explain in a moment. Having no regulator to turn to, the arbitrageurs turned to the media to complain about the Whale whom they had renamed Voldemort after the fictional villain in the Harry Potter series. The media reports reached the ears of analysts and investors who began asking what was going on in London. In the meantime, the treasury team had begun to run out of maneuvering room to hedge their risks.

Rather than rethink their risk management strategy, the team apparently began using more complicated, riskier, and volatile hedging transactions. Somebody, perhaps Dimon, decided that it was time to start unwinding what had been done in London. In order to do that the JPMC treasury team had to switch places – i.e. they had to sell contracts they had bought and buy some they had sold. That finally gave the arbitrageurs the relief they were looking for and they made JPMC pay – dearly.

No one knows what the final bill for the damage will be. If JPMC “dumps” its portfolio, the cost will be high because it will drive down market prices; if they are able to liquidate slowly, the market may rebalance and may even move favorably so the bank doesn’t take as large a loss. Shareholders have already suffered a loss of market value as New York Stock Exchange sellers drove down the JPMC share price after Dimon’s announcement.

Despite what critics say, CDS transactions and derivative instruments are not intrinsically bad any more than guns are intrinsically bad because some people use them badly or incautiously. The strategy and execution was at fault. It’s not a crime to make bad decisions or lose money. If it were, most politicians would be in prison, some for life.

But as with any insurance product, a decision has to be made concerning how much risk someone wants to keep and how much he wants to lay off on a third party. If he hedges all of the risk he eliminates any opportunity to make a hedging profit. A hedge ratio of 100% means laying off all risk; a ratio of less than 100% means he keeps some of the risk. Obviously, a number of considerations affect the choice of a hedge ratio and what was an acceptable ratio once may not be later.

When market trades move the market, the trades are too large or the market is too small or both. That should have given pause to the person supervising the London investment group. It didn’t. Moreover, there are many differences in Exchange trading, such as is done on the New York Stock Exchange where the Exchange itself is the counterparty of a trade, and Over-the-Counter trading, which is a bilateral transaction between the buyer and seller. For that reason the OTC is presumed to be “self-regulating” since the buyer and seller are responsible for evaluating their risks. Exchanges are centralized and participants must be members, so there are more enforcement mechanisms, and Exchange trading is more expensive than the OTC. But if it’s illegal to run a red light in Ohio, the risk and consequence should make illegal in Iowa or Georgia or Texas. Similarly, an activity that is illegal on an Exchange should be illegal in OTC trades where non-standard derivatives are now traded. It isn’t.

Dimon has called the bank's losses an "egregious failure," “stupid”, “sloppy,” and “bad thinking.” He is right. Senator Carl Levin (D-MI), the co-author of the Volker Rule, calls the losses a “textbook” example that Wall Street needs further regulation. He is wrong. Anti-capitalist politicians like Levin use every pretext to gather more power under the control of the federal government.

The fact that Levin fails to grasp is that risk management in the real world with real markets is more difficult than business managers and politicians understand. The difference, however, is that business managers will learn from experience. Politicians and regulators won’t. Managers have to learn because their future profits and incentives depend on it. Politicians never learn because they never make decisions based on profits, value, and costs. Most politicians are dead or out of office when the real consequences of their fiascos come home to roost. Social Security, Medicare, Medicaid, $900 billion in stimulus spending, $500 million lost on the Solyndra debacle, the auto bailout, ObamaCare, and the government-enforced, taxpayer-subsidized green car, the Chevy Volt (or is it the Chevy Vote?) all come to mind.

The vain conceit of politicians and regulators is thinking they have a clue in managing economic behavior they themselves have never engaged in. But the JPMC losses showed that private markets, so despised by politicians, function better than government regulations. The market immediately punished JPMC shareholders with a decline in market value which was 600% of those losses.

That’s regulation which really works. And it wasn’t invented in Washington.