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Thursday, June 30, 2011

If Your Company Doesn't Go Public, Are You Going To Jail?

The federal government may be using its powers of investigation and prosecution to effect economic policy -- namely, that certain types of business failure may result in your prosecution.

An interesting white-collar criminal case has been unfolding in Manhattan federal court this month. The case, against one Ross Mandell of an outfit called Sky Capital, alleges securities fraud. However, the government's case appears to most revolve around the risks of private placement investments and the prospects for going public.

Now, as someone with a background as an investor, a securities transaction lawyer who has taken small companies public, and as a lawyer investigating some complex situations, I can tell you this: The investor should care only about return on investment. (And an investor who does not care about return on investment is not investing; he has a hobby.) 

You can have a small company, a risky company, even a garbage company. But if you sell its stock for more than you bought it at, it's been a profitable investment.

Conversely, you can have a great company that is not likely to fail. But if you sell it for much less than your purchase price, you've had a losing investment. That's true, even if the fundamentals underlying your original investment were solid. In other words, even if your investment was a "smart" investment, meaning that it should have worked, you can lose money on it.

For example, there's a company whose products impact virtually every business in America. It's a computer software company and its stock is down by half since 1999.

If you thought it was Microsoft, take a bow.

The ultimate measure of an investment is the bottom line: did or did you not make money on it?

There are other troubling signs that the government might be trying to create a "crime" out of certain "failures" which, when understood properly, are quite defensible. For example, prosecutors tried to argue that not providing investors in a private placement with audited financial statements of the company whose stock was being offered was somehow nefarious -- in essence, a crime, a felony.

However, here's the truth. Under the securities laws, there is simply no requirement for a privately-held company to give audited financial statements to private placement investors if those investors are "accredited" (a standard which presumes sophistication in making investment decisions on the part of people meeting certain income or asset tests). If nonaccredited investors are involved, just like millions of regular investors in the stock market, then audited financial statements are needed. See the difference?

As for the issue of going public, there is another troubling theme in this Mandell trial: that our federal government asserts a crime has occurred if you plan to go public and don't actually go public.

One can only think of the chilling effect this will have on some entrepreneurs.  It's already tough -- and getting tougher -- to get bank financing (loans)And should you try to save your company and are unsuccessful and have to declare bankruptcy, you also risk prosecution; the same U.S. Attorney's Office in Manhattan prosecuting the Mandell case brought -- and later famously withdrew-- a criminal case against Collins & Aikman CEO David Stockman in 2007 

Again, from the investor standpoint, one should care about return on investment.  And nothing else.

Going public and having a liquid investment is nice, it sure makes it easier to sell, but its not the only way to make money.

There are many privately-held companies whose founders, employees and investors wait until the company is sold or merged into an acquiring company. They cash out, or receive the buyer's stock, or get new employment contracts, at that time. The bottom line is that they get value back, without an IPO.

Admittedly, until the "liquidity event," they don't get their investment back and retain all the risk. During the time they wait for a liquidity event (essentially, a sale), however, their investment retains value; it just is not liquid and therefore cannot readily be sold without having to sustain a significant discount on the price one can realize by trying to sell it. (This is the same phenomenon with real estate.) However, it is misleading -- and downright untrue -- for the government to suggest that there is no value in the stock of nonpublic, small companies. Their stock is merely illiquid, and retains its high risk character; indeed, one can invest privately and lose all of the investment. But that possibility is (or should be) contemplated in every private placement. In fact, agreements routinely warn investors that they must be prepared to do without the capital invested for an indefinite period of time and may lose their entire investment.

Lying to investors certainly needs to be deterred and punished. However, our government should be careful not to set precedents with the cases it chooses to prosecute and how it chooses to prosecute them which risk punishing short-term business failure, in its zeal to protect investors and preserve the integrity of our capital markets.

Finally, our Justice Department must heed its primary mission: to do justice. Its mission is not to make, or implement, economic policy through its selection of cases and methods -- its "prosecutorial discretion." The use of admitted, habitual liars in the Ross Mandell case and, over in New Jersey, in the legendary series of public corruption cases starring the notorious "serial defrauder" Solomon Dwek, is troubling and just disturbing to see.

(PS: New Jersey federal district judge Jose Linares revoked Dwek's bail and moved up his sentencing after hearing of Dwek's continued lies regarding a rental car in Baltimore, MD.)

Eric Dixon is a New York lawyer with a special interest in investigating complex matters involving the potentially wrongfully accused.  Mr. Dixon has a strong background in the securities laws, corporate governance and complex fraud cases

Wednesday, June 29, 2011

Dog Crap: Why People Don't Pick It Up

Several New England and Mid-Atlantic towns have installed special doggie bags and even more "special" "dog-poop-only" refuse containers along walkways which are known to be Damnation Alley minefields full of dog crap popular with dog walkers.


Presumably, the thought is that dog walkers would gladly pick up after their pets, if only they had baggies.
As if a baggie shortage were the cause of all that dog crap on sidewalks...everywhere.

From a policy perspective: Let's get real. People do not like picking up dog crap. (Some people -- parents, even -- do not like to clean their own babies! That's why we have extra absorbent diapers. Not for the baby; it's for the parent, to reduce the number of cleanups.) They will not pick it up unless compelled to do so. Hence, the special dog crap baggie dispensers are just another boondoggle.

And while we're on the topic, don't ever trust those baggies to be 100% impermeable.  The germs in Fido's steaming pile are separated from your skin by only a thin layer of plastic.  There may be small tears in the bag.  Your hands may be full of fecal coliform and other nasty pathogens...and you'll be spreading that stuff to everything you touch until you wash thoroughly with warm water and soap and scrub for at least 30 seconds.  (That means, no Purell.)

So you'll excuse me if I refuse to shake your hand while you're walking your dog.

Eric Dixon is a New York lawyer, political strategist and comedy writer. 






That's Your Dog Crap! DNA-Testing Dogs To Find, Fine Dirty Owners

Irate condominium owners have had enough with fellow owners who refuse to pick up after their dogs.

A Florida condo association will now DNA-test all dog feces found in common areas, and check the genetic code against the DNA records of dogs owned by residents.  If a "match" is found, the owner could get a fine of up to $1,000.

This might be a great public hygiene idea, and a big revenue-booster in, say, New York City.

Eric Dixon
Eric Dixon LLC
World-Class Strategic Analysis
917-696-2442

Tuesday, June 28, 2011

The Ross Mandell - Jim McGreevey Connection: Machiavellian?

Sometimes familiar names just keep on popping up. Harmless coincidences? Or a sign of a professional government informant who can't stay out of trouble?

In the ongoing trial of the "bad boy" stockbroker Ross Mandell (accused of a $140 million fraud, and formerly of some obscure and now defunct brokerage firm called Sky Capital) in Manhattan federal court, there is an interesting connection between the government witness Mark Halper (a self-styled farmer who grows hay and makes mulch) and former New Jersey Governor Jim 'I am a gay American' McGreevey.

Halper seems to be a professional government informant. His name should be familiar to followers of New Jersey politics: he was the man allegedly shaken down for campaign contributions by a McGreevey fundraiser -- and now convicted felon - named David D'Amiano. (Off the top of my head I would say D'Amiano was indicted back in 2004 and subsequently took a plea deal and prisoin time.)

One government tape caught McGreevey several times using the apparent code word 'Machiavelli' in a way that was not in context with the rest of the conversation.

Bad luck -- or bad people -- strangely seem to follow Halper, like a black cloud. He also referenced the notorious brokerage firm Stratton Oakmont (shut down in the mid-1990s with principals going to jail) as a firm with which he did prior business.

This apparent misfortune might be tragic luck. It is not hard to fall prey to more than one crook, especially if you are someone who does not learn from prior mistakes.  However, it could also be a sign that Halper himself is engaged in some sort of questionable behavior, from which government forbearance (i.e., turning a blind eye to certain acts that are arguably sanctionable or criminal) might require him to seek out bad actors in order to discover and yield admissible evidence of others' sanctionable or possible criminal behavior. 

Generally, people do not become government witnesses unless they are bonafide victims, or they have been caught red-handed and decide to become "cooperating witnesses" who need to produce testimony that yields a conviction in the hope of getting prosecutors' recommendation at sentencing for leniency.

Halper asserted that he is a farmer who grows hay and produces mulch. These can hardly be called "cash crops." So how does Halper support himself, at least to the tune of being able to be an 'accredited investor' (net worth of over $1 million) eligible to invest in private placements? 

Connect the dots. At the very least, it raises a question.

PS: Credit should go to the New York Post, the only media outlet which is consistently covering this trial. Once again, the Post provides the best business and legal coverage of any of the New York tabloids...by far. (I must say that John Crudele remains a must-read.)  As I'm sure the Wednesday coverage will point out...the trial on Tuesday brought out the fact that, as federal judge John Crotty remarked, what happens in Vegas, stays in Vegas.

PS -- Another federal government informant whose activities call into question his basic credibility: bank fraudster and "cunning liar and serial defrauder" Solomon Dwek, thrown into jail by New Jersey federal judge Jose Linares today for lying to the FBI.  The use of Dwek as the star witness compromises several major public corruption cases.

Eric Dixon is a New York lawyer, strategic analyst and political campaign consultant who specializes in securities regulation, government and corporate investigations and election law. 

Monday, June 27, 2011

Christie: Fiscal Conservative, or Deadbeat?

New Jersey Governor Chris Christie is fond of portraying himself as a fiscal conservative. However, the facts indicate that New Jersey's fiscal situation is worsening and that Christie has made only slight progress in tackling the problem of runaway government spending outpacing revenue.

The Wall Street Journal reports today that New Jersey seeks short-term bank loans of around $2.25 billion to cure its budget deficit for 2011. This shows there is no magic to the Christie mantra of providing solutions for irresponsible state governments. Christie recently got a little progress on the issue of union members' contributions towards their own health care, but that is scratching the surface and hardly the type of systemic change that is required.

It also bears noting that New Jersey only balanced its budget in 2010 by totally foregoing all contributions to public employee pensions -- which merely defers the payment for those defined benefit plans into the future and saves nothing. So far, beyond the rhetoric that makes for a nice YouTube moment, Christie's progress has been minimal. State expenses still far exceed revenues. Short-term tricks like offloading state obligations onto local municipalities merely shift around the burden -- when the problems are either how to pay the obligation, or do away with it. 

Frankly, this sounds like the deadbeat economics of the borrower who chooses to go the strategic default route, pocket the cash that would go to paying the loan, and daring the bank to come get him.

If this is government reform, do defaulting homeowners and business managers, who treat contracts as if they're not worth the paper they're printed on, qualify for nomination for a Nobel Prize in economics?

The real test of leadership will come when that question is addressed. Right now, it is being avoided. That is not leadership; that is retreat in the face of crisis. Hardly presidential timber.




Eric Dixon
Eric Dixon LLC
World-Class Strategic Analysis
917-696-2442

Sunday, June 26, 2011

Home Prices Will Crash As Long As Banks Don't Give Mortgages

Homebuyers' ability to finance home purchases has always been crucial to supporting the prevailing real estate market values (a point I have made several times over the last 18 months in prior posts on the housing bubble and its causes).  The anecdotal evidence the last four years linking banks' unwillingness to issue mortgages to anyone but the safest credit risks -- in essence, the polar opposite of the prevailing standards between 2001-06 -- to plunging real estate prices is now showing up in hard data.

There are several major markets in which cash buyers are a near-majority of all buyers.  Such circumstances depress prices.  If and when the dollar strengthens against other currencies, the flood of risk-taking foreign investors from Europe, Asia and South America, buying American properties with cheap dollars and no mortgage, will suddenly recede.  At that point there will be few to no buyers, on any terms, and the effective then-prevailing market value of some properties will approach zero

Real estate values can be tricky and sometimes prone to understatement on account of their illiquidity.  However, there are some markets in which there are far, far too many properties -- condos come to mind --  lacking any redeeming distinguishing feature from multitudes of similar, milquetoast units.  The overhang of unsold new units, unsold existing homes, homes yet to be foreclosed upon because banks don't want to recognize losses, and other homes not yet offered for sale because their owners are waiting for a market rebound to put them on the market, all produce a perfect storm. 

Combine these factors with the move towards mandated down payments of at least 20% of the purchase price, higher mortgage rates and generally stagflationary or recessionary economic conditions, and it is very hard to see how real estate prices will not continue to move steadily downward...or plunge sharply downward at any moment. 

Eric Dixon is a New York lawyer, strategic analyst, management and business consultant in the real estate and energy industries, and political consultant.  Mr. Dixon may be reached for further comment or consultation (for a fee) at edixon@NYBusinessCounsel.com.




Friday, June 24, 2011

Housing Crash Coming? Shiller Expects 2012 Recession

This blog has, since its inception in 2009, repeatedly predicted a serious housing price decline due to a convergence of several factors which did not abate during the relative "recovery" of 2009-10.

Now throw into that mix the latest recession prediction by Yale University professor Robert Shiller. See http://www.marketwatch.com/story/new-recession-begins-next-year-shilling-says-2011-06-24.


Eric Dixon
Eric Dixon LLC
World-Class Strategic Analysis
917-696-2442

Tuesday, June 21, 2011

Huntsman Shows Weakness in Opening Campaign

Former Utah Governor Jon Huntsman inadvertently conveyed weakness by pledging to run a civil campaign for the Republican presidential nomination, which he officially kicked off earlier today in Jersey City, NJ.

Our campaigns need candidates to draw sharp distinctions amongst each other on issues, principles, character, judgment and temperament.

It is not uncivil to make these distinctions; it is a sign that one puts the needs of the nation first. It is likewise not civil to intentionally blur or ignore these distinctions; it is cowardice (both intellectual and emotional).

In politics, civility is a dangerous code word. To accuse one of incivility is to impugn the character and motives of the person being accused, and to ascribe some of the worst motives and traits to that person. Such an accusation is thus often as effective as the slanderous accusation of racism -- and so often as unjust.

Our politics need fewer civil candidates, and more real men (and women) who are not afraid to confront the real issues, make tough decisions and risk being unpopular.

Eric Dixon is a New York lawyer who handles election law and ballot access for political candidates. Mr. Dixon has previously helped two presidential candidates qualify for the New York State primary. Mr. Dixon is presently not working with any declared candidates for President.

Monday, June 20, 2011

Home Prices May Drop Below 'Fair Value' Without Bank Credit

Economists are beginning to notice how banks' tight lending for mortgages imperils the housing market and promises further price declines.

I was among the first to point out in February 2010 how the inability to finance home purchases would virtually guarantee price declines.  Now a housing economist at Berkeley, Kennethh Rosen, confirms my earlier hypothesis, and is now quoted as saying that "We're not going to get a recovery in housing until the average borrower can get a mortgage."

Very simply, the lack of available credit reduces the ability to borrow and caps purchasing power. (It also makes a mockery of the record-low mortgage rates, which are meaningless if there's no credit.) Combine this factor with the proposal to require minimum down payments equal to 20% of the purchase price and you have two serious constraints on purchasing power.  Add in the general recession, wage stagnation, effective inflation and numerous other real estate-specific factors like the glut of unsold units, overhang of properties waiting to be put up for sale, and the clogged foreclosure pipeline, and it is too easy to see a perfect storm for a new housing price plunge.

Eric Dixon is a New York lawyer, strategic analyst and business consultant who has been following the real estate market over the last decade. 

Saturday, June 18, 2011

False Rape Accusation Leads To ABC Weathercaster's Indictment

A made-up false claim of being sexually assaulted by a Hispanic male has led to the indictment of former ABC weathercaster Heidi Jones(Forecast: Cloudy with a good chance of jail.)

Jones made up the claim last November and December, and told New York Police Department detectives that she was the victim of an attempted attack in Manhattan's Central Park by an assailant whom she falsely described as a middle-aged Hispanic male.  The strawberry-blonde (and evidently dysfunctional) Jones allegedly claimed she made up the story to get attention.

The now-disgraced weathercaster was reportedly discussing a plea deal with prosecutors earlier this year.





Why Chris Christie Really Isn't Running in 2012

New Jersey Governor  Chris Christie offers some great reformist rhetoric.  However, his temperament -- if not his judgment and emotional maturity -- often reveals itself to be a major and potentially politically fatal flaw.

Such was the case today when Christie smacked down the mother of a public school student.  The exchange went as follows:
WOMAN:  “You don’t send your children to public schools. You send them to private schools, so I was wondering why you think it’s fair to be cutting funding to public schools?” 


GOVERNOR: “Hey Gail, you know what, first of all it’s none of your business. I don’t ask you where you send your kids to school. Don’t bother me where I send mine.” 
Christie has a point; although he is a public figure, where and how his children are educated is a private matter.  It is likewise reasonable for his opponents to infer that his sending his children to private school while advocating public school funding cuts is either elitist or hypocritical.  However, the tone and manner of Christie's response -- how he says it, not necessarily what he says -- is the major issue. 

The temperament, the hotheadness, reveals a major vulnerability.  Christie has a thin skin and can be baited into emotional and potentially indiscreet responses and reactions.  Although he was the former U.S. Attorney in Newark, it is relevant to note that he was never a "line prosecutor" and never had to work his way up and prove his mettle before judges, juries and adversaries handling trials, motions and appeals.  He never has developed the thick skin -- or the confidence -- to cope with criticism or attacks.

In short, he has exposed his own weaknesses... and with little provocation.   These are "unforced errors," as they say in tennis.  Christie's opponents -- Republicans and Democrats -- now know how to exploit and expose him.

Strategically, this is a huge blunder.

Politically, this is a major Achilles' heel.

Governor Christie needs to show much more emotional intelligence and maturity -- in short, the trait of restraint -- in order to further advance the agenda implied by his rhetoric.

Until then, these traits offer the strongest explanation for why Christie is not running for president in 2012.  

Quite frankly, he is not ready.  

Eric Dixon is a New York election lawyer who handles crisis management, litigation stress counseling and sensitive legal and political matters for businesses, political candidates, public figures and other clients. 

Thursday, June 16, 2011

The Least Free States: New York and New Jersey

A new study calls New York and New Jersey the "least free" states in the nation.

The Mercatus Center study is based on a variety of factors including regulatory policies, regulatory compliance and tax burdens, government spending and levels of government debt.

Although it is hard to quantify and could not be directly measured in this (or any) study, many parts of the nation suffer under a recession-driven prosecutorial career-ambition which results in a propensity to overprosecute certain actions which are arguably neither criminal nor harmful. I contend this is not driven so much by malice as by an organizational culture to "produce results," and in the current employment depression for lawyers, the need to enhance credentials to land any better-paying private sector job.  

There is another cause diminishing our freedoms which this study either ignores or fails to measure.  The prosecutorial culture -- embodied by many federal prosecutors and state attorneys general seeking to advance politically -- feeds an executive branch expansion of power in proscribing and punishing conduct which Congress and state legislatures often have declined to prohibit.  In short, the government's prosecutorial function becomes another often-out-of-control abuse by the bureaucratic class. 

Another nationwide problem is the overcriminalization of unintentional behavior, such as negligence. Your involvement in an accident can often result in an investigation that starts with the conclusion that you are guilty -- of something -- and proceeds to find anything that can be used to threaten you into pleading guilty -- to anything -- even if that "crime" is unrelated to the accident that put you on the radar.  The problem for society is that, with prosecutorial and investigative resources (e.g, manpower, technology) at a premium, every waste of resources means that "real crime" gets a pass.



Sadly, the Mercatus Center study ignores the roles of overcriminalization and the prosecutorial culture, which often seeks to use executive branch power to punish or deter behavior, in making us less free.  Although it is helpful, the study paints a portrait that is far from complete.

Eric Dixon is a New York lawyer who handles investigative and regulatory matters, business due diligence and sensitive matters for business owners, entrepreneurs, public figures including elected officials and candidates for public office.  Mr. Dixon works to protect the innocent.  Mr. Dixon can be reached at edixon@NYBusinessCounsel.com.

Thursday, June 9, 2011

Leaking U.S. Secrets Gets Spy Soft Plea Deal

A National Security Agency employee is being allowed to plead guilty to a misdemeanor charge of misusing the agency's computer system, escaping much more serious felony charges for violations of the Espionage Act.

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This soft deal sends a curious message to government employees who disclose confidential government information to the news media and possibly endanger American lives, investments or other national interests.  The misdemeanor charge and dismissal of felony charges weakens any possible deterrent effect of such prosecutions -- the strongest reason to undertake the criminal prosecution of employees who, perhaps in misguided loyalty to principles or succumbing to an overactive (and equally misguided) sense of self-righteousness, decide to become the arbiters of justice and seek to right certain government "wrongs." 

While whistleblowers serve an effective function, some government employees forget that disagreements over government policy do not justify or excuse the conscious disregard of rules, orders and laws -- particularly when such disregard can endanger the lives of American spies, diplomats and military working abroad.
Eric Dixon is a New York lawyer, political strategist and business consultant.  He can be contacted at edixon@NYBusinessCounsel.com.

Most Evil Lawyer in New Jersey?

Interesting feature on criminal defense lawyer Paul Bergrin, who has been held in federal custody for several years (still awaiting trial) on a variety of charges including conspiring to kill witnesses.  Bergrin faces what essentially is a life sentence if found guilty.

If the charges are true, this is taking the concept of zealous representation way, way too far.

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Also interesting: the implication at the end of the article that Bergrin knows and could speak (although credibility would surely be an issue) as to misconduct in either the Essex County Prosecutor's Office or the Office of the U.S. Attorney.

Protecting Your Reputation on the Internet

Your best chance of protecting your reputation may be yourself.

Self-control may be your best weapon in the arsenal of tools to guard your personal and professional reputation.  This means self-editing your own content.  An effective way to do this is by hiring an experienced lawyer and damage-control expert to evaluate your content before it is sent out.

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This also means avoiding putting your "face" out on Facebook and other social media.  The new revelation about Facebook's use of facial recognition technology is a concern, because at its core it means that individuals lose control of the power to decide what to reveal about themselves.  Once others have that control over you -- in any regard, and this extends far beyond Facebook and Google but reaches any type of human relationship -- they may gain (or, worse, think they have) the power to manipulate you.

Of course, there can be little defense against sheer idiocy.  The current scandal that threatens to end the political career of Congressman Anthony Weiner is but one example.  In that case, technology is helping to reveal the truth and limiting the opportunity of a scoundrel to deceive, lie and hide. 

Eric Dixon is a New York lawyer, strategic analyst and business consultant.  Mr. Dixon handles internet risk assessment and technology risk assessment.   

Tuesday, June 7, 2011

Weiner Must Quit To Start Damage Control

Anthony Weiner must quit.  ASAP.  While he can still hold his head up high.

As Crime, Politics and Policy first speculated last week, Weiner should resign as soon as possible. The damage is too great.   

I write this, not because of any official misconduct (as to which there is no evidence) or possible criminal conduct (frankly, a ridiculous and hysteric claim), but solely to preserve his reputation in order to have any chance of making an orderly and financially successful transition to the private sector.
_______________________________

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In short, the damage has been so complete already that Weiner is now risking his ability to make a living doing anything other than appearing on the Howard Stern Show. 

Even worse, Weiner has managed to infuriate the press corps, which reacts very badly to being lied to and is pursuing this story (and pushing for resignation as well as utter personal ruin) out of sheer fury.  This has sealed his doom. 

In the meantime, the public humiliation continues. 

The New York Post calls him a "dork knight."  The Post calls on him to resign, in another innuendo-laden editorial that makes it clear the humiliation will continue until he disappears from public life. 

Drudge is -- aside from being addictive news -- a repository for some of the most salacious reports out there, of which some are simply not repeatable in a family website.  Read at your own risk.

And perhaps the best aggregation of Weiner articles comes from the Daily News' Celeste Katz, whose Daily Politics blog is worth reading even in the political off-season.  

Eric Dixon is a New York election lawyer, political strategist and business consultant. 

Saturday, June 4, 2011

Bond Crash Could Send Mortgage Rates Soaring, Home Prices Tumbling

In prior articles I have warned that residential real estate prices could crash again when mortgage rates start moving up much higher than the lifetime-historic-low-rates (at 50 year lows, according to one report) we have seen in the last few years.

Mortgage rates may be just about to skyrocket.  This report states that China has gotten rid of almost all of its U.S. Treasury bills (maturities of less than one year). (See this Treasury Department chart, go to column 9 and then compare the May 2009 figure with the March 2011 figure.)  Declining demand for Treasury bills indicates that our federal government may need to boost yields (the interest rate paid on the security, and which move inversely to prices) to attract buyers.  As the era of essentially free money ends, conventional mortgage rates (pegged somewhat to Treasuries) will also move up as banks pass on the higher cost of accessing capital to borrowers.
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Another interesting chart shows that two countries have sharply reduced their holdings of all Treasury securities (bonds, etc.) in the last six months:  Russia and Australia.  I think many countries are doing a "flight to quality" but there may be some savvy sovereign nations out there who are less concerned about return and more concerned about preservation of capital and not taking a loss on securities which, quite frankly, have little room left in which to appreciate in value but plenty of room -- loads of it -- in which to depreciate in value.

Since monthly affordability, the measure upon which banks rely to determine the size of the loan to offer, is viewed as a constant factor, increasing interest obligations will result in a corresponding drop in principal payments from each monthly payment, and hence a drop in offered loan principal.  This acts as a reduction in credit -- a smaller loan.  This outcome, combined with a proposed requirement for buyers to put down a minimum of 20% of the purchase price for a home, can send buyer demand plummeting and home values down sharply as a result.

One item to remember:  the housing crash (with average home prices down one-third since 2006) has occurred despite mortgage rates remaining at all-time lows.  As the housing bubble was fed in part by sharply dropping interest rates (from the nine-percent level in 2000), one can and should expect the reverse effect (plunging values with skyrocketing interest rates).

Housing may be back to 2002 levels and much less expensive than five years ago.  And some measures of home prices to income suggest homes are now undervalued and make an attractive long-term investment.  But there are undeniably strong economic forces that indicate that housing is susceptible to a renewed price crash. 

Eric Dixon is a New York lawyer, strategist and business consultant.  For inquiries, please contact Mr. Dixon at edixon@NYBusinessCounsel.com.

 

Friday, June 3, 2011

Under Investigation: Are You Tough Enough?

If you were under criminal investigation, could you handle the pressure?

Would you be a piece of coal that turns rock-hard into a diamond, or crumbles into dust?

This morning's New York Times details a commodities trader's recent suicide after the revelation in an ongoing insider trading criminal trial in Manhattan that the trader had been taping conversations with colleagues since 2008.

The Times story makes it sound as if the trader, Ephraim Karpel, was some poor soul. In fact, he had been cooperating (and his wife claims this was the legal advice he had gotten) with federal investigators. This almost always means that the "cooperator" has done something wrong and arguably criminal.

One must ask what drove someone like Karpel to suicide. After all, there are many successful people in finance or other professions who get investigated. Many find the experience highly unpleasant and stressful -- and these are the people who are innocent and withstand government pressure. Others decide to succumb to pressure, even if it means committing perjury, because it is the easy way out.

One item from the article stands out. Karpel's wife, Fran Karpel, said that they had no one to talk to. They kept the investigation an absolute secret.

I offer counseling and advice to people who are involved in life-altering litigation, investigations or prosecutions. These situations are unpleasant, but survivable. I help people develop and discover their mental strength, the monster within, to help them withstand the pressure and develop the courage to fight and win.

If your reputation, freedom and sanity are of value to you, and you find yourself in this situation, you need to call me.

Eric Dixon is a New York lawyer and strategic analyst.  Mr. Dixon is the principal of Eric Dixon LLC.  Mr. Dixon is a 1994 graduate of Yale Law School and has significant experience in business and securities matters and election law issues.  Mr. Dixon may be reached at 917-696-2442  and by e-mail at edixon@NYBusinessCounsel.com.

Wednesday, June 1, 2011

Are Banks Encouraging Strategic Default By Lending?

Some banks may be feeding the housing downturn and encouraging strategic default.

An interesting trend is unfolding whereby banks are extending credit to people who have defaulted on their mortgages. The kicker: these defaults are often the only missed payments. This is interpreted to mean that the defaulter is still a good credit risk -- and often is perfectly capable of paying -- but just decided not to pay the mortgage.   (Continued below)

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As in business where many borrowers will default on purpose to squeeze better terms, people are increasingly viewing strategic default as a course of action that risks neither legal consequence nor social stigma. The extension of credit to defaulters means that one can default and still get funded by others, thus removing perhaps the tallest barrier still discouraging people from walking away from loans.

In this corner, anything tending to encourage -- or not discourage -- strategic defaults will risk endangering the housing market even more.

Eric Dixon is a New York investigative lawyer, business consultant and independent energy consultant.