RIP Hostess

Hostess will finally cease
Mixing flour and sugar & grease,
And many are sad,
But is it so bad
After making the nation obese?

For me, the bankruptcy and liquidation of Hostess was a bit like reading of the death of a former celebrity that you had thought was long deceased. I have not seen, much less eaten, a Twinkie in twenty years. The company's demise has been met with an outpouring of grief fit the passing of a national icon, which in a way it was. But was it a good way? This was a maker of products whose nutritional emptiness and questionable chemical content were so widely known that their consumption once comprised part of the psychological testimony for the defendant in a murder trial. While I do mourn for the 18,000 jobs lost, the death of Hostess leaves me feeling... curiously empty.

Cause of Death

Said the mayor of a municipality
Whose failure was filed with finality:
"The medical fees
Of our retirees
Were the cause of our fiscal mortality."

The city of Stockton, California is the latest US locality to conclude that the cure is worse than the disease. The city declared bankruptcy with $700 million in debt overwhelming the resources of its 300,000 residents. Among the insurmountable costs were Stockton's pension and healthcare outlays for its retired workers, along with falling property values and an expensive downtown-revitalization project. The Wall Street Journal reports that healthcare costs are expected to rise for all of the US states, regardless of the outcome of the Supreme Court decision on the Affordable Care Act, indicating much work to do to bring health care costs on a sustainable path.

MF Global Trustee's Report

When financial wrongdoing's unveiled,
Of a scope that can scarcely be scaled,
One is sadly resigned
That justice will find
There are none to be judged and/or jailed.

The trustee in the MF Global bankruptcy has issued his report, but it will disappoint those looking for a swift path to justice against those responsible for the misuse of $1.6 billion of customer funds. James Giddens, who is unwinding MF Global US brokerage unit, offered little insight beyond the well-known facts: "My investigation has concluded that management's actions, along with the lack of sufficient monitoring and systems, resulted in customer property being used during the liquidity crisis to fund the extraordinary liquidity drains elsewhere in the business." Although he may pursue legal action against former CEO Jon Corzine and others for taking excessive risks and failing to safeguard customer funds, Mr. Giddens drew "no conclusions" about criminal wrongdoing or regulatory violations, citing his lack of authority in those matters. Well, no worries - that should leave the field open to the unrelenting avengers of the SEC and the Justice Department... right?

Lulled by Fuld?

Said the Lehman bankruptcy inspector
Of the repo transactions that wrecked 'er:
"The Feds, who were looking
At books that were cooking,
Had fraud, but could never detect 'er."

In a rare attempt to explain the financial crisis to the average American, CBS's 60 Minutes brought "The Case Against Lehman Brothers" on Sunday evening. Steve Kroft interviewed Anton Valukas, the Chicago attorney appointed by the federal bankruptcy court to determine what led to Lehman Brothers' collapse. Mr. Valukas found that "there was enough evidence for a prosecutor to bring a case against top Lehman officials and one of the nation's top accounting firms for misleading government regulators and investors."

One of the most damning pieces of evidence was the letter written by Matthew Lee, the firm's top internal accountant, to senior management. Mr. Lee refused to sign off on Lehman's 2007 fiscal year end balance sheet, citing "possibly unethical and unlawful" conduct in their preparation. The so-called "repo 105" transactions were employed to make Lehman's balance sheet appear $50 billion lighter on reporting dates, and thus mask the extent of its over-leveraging. Mr. Lee was let go for his trouble, and the SEC, which was on the premises while repo 105 trades were occurring, has never brought charges against CEO Richard Fuld or others. Why didn't they catch the fraud? Says attorney Valukas: "They were getting the material. Whether they understood it is another question."

The entire interview is embedded below for your viewing pleasure, outrage and incredulity.

Cold Water on Lotto Fever

The lotto's a game of slim chances,
Though the jackpot immense at first glance is;
Of the fortunate few
Whose numbers come through,
Most end up in bankrupt finances.

With a record-setting $540 million jackpot up for grabs on Friday night, the Mega Millions game has given the country lotto fever. However, the cold fact is that nine out of ten lotto winners squander their prize in five years or less. CBS Moneywatch editor Jill Schlesinger has advice for those who feel lucky tonight: if, against impossible odds, you actually win, keep the news to yourself while you carefully hire an accountant, lawyer and financial advisor to help you work out a sustainable plan for your incredible windfall. Remember, the prize is always less than it sounds; the after-tax, lump-sum value will likely work out to half of the stated jackpot amount. Moreover, if you want it to last, you've got to leave most of it invested and live on the earnings. The bottom line is, if you can live on the $10 million or so annual earnings that the $540 million nest egg might throw off after taxes, then you, your new-found friends and your long-lost cousins will live happily ever after.
Hat tip to Tess Vigeland of Marketplace Money.

MF Global: An Arresting Question

Said the trustee: "It's funny perhaps,
In this great MF Global collapse,
That there aren't any 'collars',
Despite all the dollars
Misplaced by those capable chaps."

Francine McKenna, a former Price Waterhouse Coopers auditor who writes on auditing issues for Forbes as well as her blog "Re: The Auditors", says that it's remarkable that the investigation of the missing $1.2 billion in MF Global customer funds is not leading to any arrests, and those involved have not opted for an escape to Switzerland. Could this be a case of "plausible deniability" on the part of top management? Managers at the bankrupt company moved a lot of money around on Hallowe'en, evidently in an attempt to make it through the weekend, probably in the hope that a friendly takeover would allow its return. Instead, the firm was shut down, but without any paper trail linking top management to the missing customer funds.

Hat tip to Jesse's Café Américain.

Corzine's Congressional Testimony

"A billion-point-two, evidently,
Has failed to be found, accidentally;
Though we foundered, it's true,
When our funding withdrew,
Our finances were fine, fundamentally."

Ex-MF Global CEO Jon Corzine told the House Agriculture Committee that he was "devastated by the enormous impact on many people's lives" when the giant futures broker went bankrupt. In his first public appearance since the firm's collapse, Mr. Corzine expressed regret but not remorse. MF Global's failure was, in his view, precipitated not by his misjudgment in holding a $6.3 billion leveraged position in European bonds, but rather the market's sudden lack of confidence in in the firm's balance sheet. Regarding the notoriously missing $1.2 billion in MF Global customers' funds, Mr. Corzine testified: "I simply do not know where the money is."

Those M*F* Risk Controls

A risk manager, naturally prone
To deny an improvident loan,
Heard the boss say: "We're wishin'
To cut this position;
Not that of the loan, but your own."

The Wall Street Journal reports that the Chief Risk Officer of MF Global found himself out of a job after he questioned that firm's big bet on European bonds, arranged by CEO Jon Corzine (pictured). CRO Michael Roseman had argued that the "repo to maturity" trades - in essence, leveraged long bets on treasury bonds of Italy and other sovereigns - could endanger the firm's capital if markets went strongly against them. Both privately and in front of the MF Global board, Mr. Corzine had responded that Mr. Roseman's dire scenarios were unlikely or even impossible. Eventually, Mr. Corzine is said to have grown annoyed with the CRO's persistence; whatever the reason, Mr. Roseman soon found himself assisting in the transition to his successor. Of course, soon afterward, his impossibly dire scenarios came true and the firm was bankrupt.

Overheard at American Airlines

"The market immutably sets
The fares and the fuel in our jets,
But a bankruptcy filing
May turn back the dial in
Our benefits, pensions and debts."

AMR Corp has filed for Chapter 11 bankruptcy protection in an effort to bring its cost structure into line with that of the airline industry. The parent of American Airlines is the last of the big "legacy" carriers to restructure its balance sheet and compensation costs in court. Mindful of its proud, 91-year history, American had long avoided a judicial reorganization, but in an environment in which fares are driven by the lowest-cost competitor, the Fort Worth-based carrier's position became untenable.

Liquidators Liquidated?

There's many a bold innovation
That may end up in sad liquidation,
When its marketing might
Would seem to invite
A bigger, upstart imitation.

Though it once brought the deal-hunting pros out,
Filene's, like a candle that blows out,
Couldn't counter attacks
From Marshall's and Maxx,
And is headed for one final close-out.

The news that discount retailer Syms filed for Chapter 11 was made more poignant by the fact that its subsidiary, Filene's Basement, originated the off-price liquidation business at its Boston department store in 1909. This was a second trip to bankruptcy court for Filene's Basement, which was auctioned off to Syms two years ago. The original bargain-basement legend enjoyed great customer loyalty for decades, but found it hard to compete with the influx of larger competitors such as TJX (owner of TJ Maxx and Marshalls) and Ross Stores.

MF = Money is Fungible

Said the Feds, in a stern admonition,
At a broker's insolvent petition:
"We place our reliance
That money of clients
Is far from your trading position."

Commodity broker MF Global filed for Chapter 11 bankruptcy on Monday, after weekend in talks with potential acquirers fell through. Due diligence inquiries revealed a $900 million discrepancy in the amount of customer funds on hand, inviting due diligence of a different sort from the FBI. The case of MF Global, in which leveraged bets on European sovereign bonds did not turn out as hoped, highlights once again the necessity of the industry's avowedly strict segregation of customer funds. Clients may be wiped out, but only because of their own bad bets. Against those of the firm, they are federally insured.

Euro Yes, Drachma No

There'll be many a Euro bank run done
If the euro's allowed to come un-done,
But Greece in the ranks
Will be best for the banks
In Frankfurt and Paris and Lon-don.

With all the Greek unrest, European can-kicking and German resistance, many ask: why keep Greece in the euro zone? After all, they're effectively bankrupt and everyone knows that they will default sooner or later. However, those who have thought the situation through say that, while an orderly Greek default within the euro will bring pain, a chaotic default in a "new drachma" would bring disaster, both for the Greeks and their European creditors. As a Bloomberg editorial put it:

"The possibilities range from runs on European banks to violent rioting in the streets of Athens -- or even civil war... a prepackaged, well-managed bankruptcy, not unlike the ones arranged by the Obama administration for General Motors Co. and Chrysler Group LLC in 2009, would be better than letting the chips fall where they may."

Borders Closing

The consensus in literate quarters
On the shuttered locations of Borders
Is now that the name
Of this publishing game
Is e-book and internet orders.

Only months after filing for bankruptcy, Borders book stores announced that they would close for good. Attempts to find a private equity savior proved unsuccessful, against a backdrop of a changing industry, increasing prevalence of e-readers such as the Kindle and Nook, and a fitful US economy. As a "bookseller selling just books," Borders has found it impossible to compete in this new era.

Please Turn to Chapter 11

What with Kindles and iPads and Nooks,
It's now the rare reader who brooks
The paper and ink,
So the outlook will shrink
For a bookseller selling just books.    

The Chapter 11 bankruptcy filing of the Borders bookstore chain points to the upheaval in the publishing industry, caused in part by the advent of online retailers and e-readers, of which Borders has none to offer.

Warren Week: I

Dr. Warren has laid out a map  
In her book called The Two-Income Trap,  
To explain how la vie works,  
When he works and she works,  
To widen the middle class gap.

This week Limericks Économiques looks at the strains on middle class America through the groundbreaking work of Elizabeth Warren.