Isaac Laquedem

Not every investor reads the newspaper

Proponents of the efficient market hypothesis hold that stock prices reflect everything that is publicly known about a company, meaning that the greed and fear of buyers and sellers causes the prices of individual stocks to more or less reflect their fair value, relative to the prices of other stocks.  One bit of evidence against this theory is that the market capitalization (the number of shares times the price per share, meaning what the market values the entire company at) of CityBank of Lynnwood, Washington (its ticker symbol is CTBK), at $5 million, exceeds that of Cowlitz Bancorporation (CWLZ), of Longview, Washington at only $3 million.

Why is this strange?  CityBank was seized by the regulators on April 16. It's out of business.  Cowlitz, on the other hand, continues to make loans and accept deposits.

The FDIC pays a return call to the Emerald City

The word on the street is that the FDIC staff enjoyed their visit to Seattle earlier this month so much that they're coming back this week to move another failing Washington bank into new hands.

How other states' employees observe the appearance of propriety

A Laquedem friend in the business of managing private money says that he's attended some dinner and entertainment events, courtesy of the investment companies that want his business, at which the employees of public funds and state treasuries (not, apparently, including Oregon's) got up and left after dinner, skipping the entertainment, because under the ethical rules of their states the value of the entertainment when added to the cost of the dinner would exceed the amounts that they were permitted to accept from vendors.

Golf and cigars, yes; muffins, no (third in a series)

If I were the mayor of a small Oregon town who insisted that we each pay for our own muffin when we met to talk over a dispute, I, too, would be mad as hell to read that employees of the state treasury were accepting free golf trips, cigar parties, and expensive entertainment from people who wanted the state's business.

An essay contest for Ted Wheeler's staff

If Ted Wheeler, the new state treasurer, hadn't already put the kibosh on a few of his employees enjoying first-class air travel at the state's expense, I would have suggested to him that he allow the practice to continue, but require each employee, before being issued a ticket in the front cabin, to write a short essay on why the state's taxpayers should pay the extra $500 to $3000+ for him or her to fly first class, and then to post the essays on the internet.  If someone could show that the state made an extra $10,000 because he or she flew first class instead of coach, I'd be all in favor of paying the extra cost.

Golf, yes; coffee, no (second in a series)

If I were the Benton County employee who was on duty when the county clerk's cashbox lacked a dime to give me correct change for some copies I bought, and who wouldn't accept my offer to put the extra 10c in the employee coffee fund, I, too, would be mad as hell to read that employees of the state treasury were accepting free golf trips, cigar parties, and expensive entertainment from people who wanted the state's business.

The SEC goes into the products liability enforcement business

The Securities and Exchange Commission has accused Goldman Sachs of devising a financial product that it intended to fail: that is, designing an "investment" that was doomed from the start, so that one of its customers, an investment bank named Paulson & Co. (no relation to the Paulson & Co. brokerage based on Front Avenue in Portland) could bet against the investment.

Two Puckish thoughts occurred to me.  First, Oregon and (I presume) many other states have products liability laws, which make a manufacturer of a product strictly liable to the ultimate consumer if the product is defective and causes a death or personal injury.  Those laws apply to tangible products only, not to intangibles such as investment contracts.  Also, a legal rule called the "economic loss doctrine" says that a consumer can't recover damages in tort from the manufacturer of a product who didn't sell the product directly to the consumer if the consumer's damages are purely economic and not physical.   So for example a farmer who buys a defective tractor from a dealer can recover damages from the tractor's manufacturer if the tractor destroys the farmer's wheat, because the tractor is physically damaging the crop, but not if the tractor casts the harvested wheat to the four winds without physically damaging it.

Second, Sections 2-314 and 2-315 of the uniform commercial code, adopted in every state except possibly Louisiana, imply two warranties for goods sold in commerce.  One implied warranty is that the goods are merchantable, meaning that they conform to their labeling and are of ordinary quality, suited for the purpose for which similar goods are ordinarily used (I'm leaving out some things that don't affect my argument).  The other implied warranty is that, if the seller knows the buyer will use the goods for a particular purpose, the goods are fit for that particular purpose.

The implied UCC warranties apply to "goods," which is defined to exclude investment securities.  A legislature might, however, extend this concept to investment securities, and in particular to securities such as derivatives that don't represent a share in any productive enterprise but are simply bets on how other securities will perform.

And a creative lawyer might argue that the economic loss doctrine should not prevent the buyer of securities that were designed to fail from recovering its economic losses from the manufacturer of the securities, since the function of securities investment contracts is to provide a chance for economic gain or a buffer against economic loss.  If the buyers can prove that Goldman Sachs designed these securities to fail (and at this point I'm not suggesting that they can) then they have an appealing theory under existing products liability law, and several sets of state laws from which to choose.  Why should manufacturers of securities be held to lower standards than manufacturers of security systems?

Golf, yes: coffee, no

If I were the public employee who told me a few days ago that ethics rules prevented him from accepting my offer to buy him a $2 cup of coffee while we discussed a dispute, I would be mad as hell to read that employees of the state treasury were accepting free golf trips, cigar parties, and expensive entertainment from people who wanted the state's business.

Earth Day reminds me of January joggers

The excitement we have for cleaning the environment on Earth Day, and how quickly it fades afterward, reminds me of the sweating joggers I see in the gym in early January making up, briefly, for their excesses of February through December.

The FDIC visits Seattle today

After a respite of a few months, the bank closure team is again in the Northwest.  From two different sources comes the news that the FDIC has stationed more than 100 of its agents at a Seattle-area hotel, where they're poised to close a local bank at the close of business today, possibly to the minor inconvenience of a much larger bank with a similar name.