Rap mogul Marion “Suge” Knight has placed his $6.2 million Malibu mansion on the auction block as part of his Chapter 11 bankruptcy. The head of Death Row records, Knight filed bankruptcy in April 2006. He listed debts of more than $100 million for both himself and for his company, while listing assets of only $50,000.

The 8,272 square foot, 7 bedroom, 9 ½ bath, Mediterranean style home was built in 2001 and sits on a 6.79 acre lot overlooking the Pacific Ocean. The house has access to two beaches and is being packaged with an additional 2.11 acres.

In the early to mid-90s, Death Row was instrumental in the success of such notable rap stars as Dr. Dre, Tupac Shakur, Snoop Dogg and Tha Dogg Pound.

For more information, please see: http://www.eurweb.com/story/eur34547.cfm

Ray

Here is an article on Stephen Schwarzman, one of the two owners of the huge hedge fund, Blackstone Group. The article points out how he has raised his public profile through certain vain and sometimes wrongheaded actions, and in so doing, may have indirectly harmed his fellow hedge fund owners.

"As the Financial Times reported http://www.ft.com/cms/s/9c83e87c-de28-11db-afa7-000b5df10621.html ($ required), the preliminary prospectus said the firm planned to "book profits from private equity at the time an asset is bought"—not when the assets are sold, as most businesses do. More significantly, the offering was structured as a "publicly traded partnership" to take advantage of an absurd wrinkle in the tax code. Under current rules, the asset-management fees that private-equity partnerships like Blackstone reap are taxed not at the 35 percent corporate income-tax rate, but at the 15 percent long-term capital-gains rate, allowing Blackstone to save tens of millions of dollars annually on its tax bill. Finally, in May, at a time when concerns about China's role in the global economy and its influence on the United States were at a fever pitch, Schwarzman agreed http://www.blackstone.com/news/press_releases/05-20-2007.pdf to sell a 10 percent stake in Blackstone to an entity controlled by China's government.
...
Last Thursday, Sens. Max Baucus and Charles Grassley introduced legislation http://online.wsj.com/public/resources/documents/taxes06142007.pdf aimed at publicly traded partnerships like Blackstone. (Andrew Ross Sorkin of the New York Times reports that it has already been dubbed Blackstone's law. http://www.nytimes.com/2007/06/17/business/yourmoney/17deal.html) The law, if passed, would ensure that a publicly held Blackstone Group would essentially pay taxes as an ordinary corporation rather than as a partnership—i.e., its tax rate would soar from 15 percent to 35 percent. What's more, there's a possibility that Congress, in its wisdom, could extend this tax treatment to the hundreds of other massively profitable, privately held partnerships that enjoy similar tax benefits. Since private-equity types calculate net worth in terms of after-tax income, such a change would require the nation's private-equity titans—from Henry Kravis to Stephen Feinberg of Cerberus—to take a significant haircut. Each dollar earned as profit based on fees would be worth only 65 cents instead of 85 cents, which would significantly reduce the net worth of their businesses. (The vast profits of funds make from taking real capital gains wouldn't be affected.)

Here is the link to the rest of the brief but interesting article:

http://www.slate.com/id/2168650/nav/ais/

Mike

This issue was recently addressed in Texas v. Soileau (In re Soileau), 2007 U.S. App. LEXIS 12015 (5th Cir. 2007).

Geraldine Soileau (“Soileau”), a licensed bail bondsman, was sued by the State of Texas for her failure to pay fifty-five bonds on the criminal defendants that she was acting as a surety for, after they absconded. The State obtained state-court money judgments against Soileau to the amount of $650,897.71. Soon thereafter, Soileau sought to discharge these judgments under Chapter 7 of the Bankruptcy Code. The State moved to dismiss Soileau’s Chapter 7 proceedings on the grounds of the Eleventh Amendment, sovereign immunity. The Eleventh Amendment provides, “The Judicial powers of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.” In addition, the Supreme Court has interpreted the Eleventh Amendment to include immunity for suits by its own citizens. The State argued that the Bankruptcy Court’s action in allowing Soileau’s Chapter 7 discharge would violate the State’s right to be immune from suits brought by its own citizens through federal judicial powers. The Bankruptcy Court denied the State’s motion and, after subsequent Appeals brought by the State, both the District Court and the Fifth Circuit Court of Appeals affirmed the Bankruptcy Court’s ruling.

The Fifth Circuit Court of Appeals relied heavily on two U.S. Supreme Court cases, Central Virginia Community College v. Katz and Tennessee Student Assistance Corp. v. Hood. In its application of Hood and Katz, the Appellate Court found that because the Bankruptcy Court focused only on Soileau’s estate, it was an in rem proceeding. Stating that, “Katz and Hood, at the very least establish beyond cavil that an in rem bankruptcy proceeding brought merely to obtain the discharge of a debt or debts by determining the rights of various creditors in a debtor’s estate – such as it brought here – in no way infringes the sovereignty of a state as a creditor.” In applying Katz, the court found that there are three facets in an in rem jurisdiction that prevent it from infringing on state sovereign immunity: (1) exercise of jurisdiction over the estate of the debtor, (2) equitable distribution over the estate’s property among creditors, and (3) granting a debtor’s discharge from his debts.

The Fifth Circuit Court of Appeals found that Soileau was merely asking a bankruptcy court to exercise its in rem jurisdiction over her estate by adjudicating the rights of the State as her creditor, and because Soileau was not seeking the return of any funds already in the state’s possession and was not bringing an adversary proceeding against the state, the Appellate Court affirmed both the Bankruptcy Court’s and the District Court’s determination that the State’s sovereign immunity rights were not infringed by the Bankruptcy Court’s ruling. Mr. Soileau’s discharge may be granted.

Hunter

U.S. home foreclosures jumped approximately 90% this past May from the same time period a year ago. The foreclosure forecast for the rest of 2007 is just as gloom. RealtyTrac uses default notices, bank repossessions, and auction notices to obtain their foreclosure numbers.

“The number of filings in May was the largest amount since RealtyTrac started tracking foreclosure activity in January 2005.

After a barely perceptible dip in April, foreclosure activity roared back with a vengeance in May,” James Saccacio, chief executive office of RealtyTrac, said in a statement.

“Such strong activity in the midst of the typical spring buying season could foreshadow even higher foreclosure levels later in the year,” said Saccaci.” Certainly not every community nationwide is seeing an increase in foreclosures, but foreclosed properties are becoming more commonplace and adding to the downward pressure on home prices in many areas.

But are the numbers at RealtyTrac reliable or hyped up?

As was stated previously RealtyTrac compile default notices, auction sale notices and bank repossessions.

“Does that mean that some properties get counted multiple times? You bet it does.”

"Were there 176,137 foreclosures in May? Nope. A house can go through several permutations: first the default, then the bank repossession, then the auction, and in some states this can go on for many months with many different filings; therefore, many of these homes are counted multiple times. So do I trust that 176 thousand? Nope. But I do trust the percentage increases?

If RealtyTrac has been counting the homes in the same way for many years, then the monthly and yearly increases are in fact apples to apples, and in fact relevant. Are they perfect? Of course not, but they are credible in showing real movement in foreclosure activity. Make Sense???”

The complete articles can be found at: http://www.cnbc.com/id/19193611
http://www.cnbc.com/id/19206921

Pam

Here is a very interesting interview with an economist from the Austrian School, Friedrich Hayek. His popularity has waxed and waned over the years (he died in 1992), but his views on inflation and deflation may again become relevant. Contrary to what Chairman Bernanke has written, Hayek's economic view does not favor continued inflation in order to stave off any deflation. Instead, Hayek wrote:

"There is little need to take precautions against any practice [i.e. deflation] the bad effects of which will be immediately and strongly felt; but there is need for precautions wherever action [i.e. inflation] which is immediatley pleasant or relieves temporary difficulties involves much greater harm that will be felt only later . . . It is particularly dangerous because the harmful aftereffects of even small doses of inflation can be staved off only by larger doses of inflation. Once it has continued for some time, even the prevention of further acceleration will create a situation in which it will be very difficult to avoid a spontaneous deflation . . . Because inflation is psychologically and politically so much more difficult to prevent than deflation and because it is, at the same time, technically so much more easily prevented, the economist should always stress the dangers of inflation. (Hayek, The Constitution of Liberty, pp. 330-333, cited by Joseph Salerno, Quarterly Journal of Austrian Economics, vol 6, no. 4) and in the Feb 2006, "The Gloom, Boom & Doom Report"

So, given that the Hayek view is so at odds with the current Chairman of the Federal Reserve, it is perhaps useful to read this interview with the man which took place in 1977. Here are some excerpts from that introduction/interview which is published in 1992 in Reason magazine:

From the article introducing the interview with Hayek:
On the fundamental questions of economic policy, the debate pitting Professor Hayek of the London School of Economics against Professor Keynes of Cambridge University sparked a memorable confrontation between classical economics and the new-fangled "macroeconomics" of Lord Keynes's 1936 General Theory.

The Keynesians swept academic arguments in a virtual shut-out. With Keynes's death in 1945, in fact, Hayek (and the classical trade cycle theory) quickly faded from public view. Economic policy entered a golden age of "demand management" in which the business cycle was rendered obsolete, and Hayek moved out of economic theory altogether.
...
From the 1920s until the '40s, Hayek and his countryman Ludwig von Mises argued that socialism was bound to fail as an economic system because only free markets--powered by individuals wheeling and dealing in their own interest--could generate the information necessary to intelligently coordinate social behavior. In other words, freedom is a necessary input into a prosperous economy.
...
But within the economics profession it is no secret that Hayek was an academic outcast, a throwback, a marginal character whose ideas had been neatly disproven to all reasonable men in the scientific journals of his day.

But then something bizarre happened. The late 20th century decided to provide a reality check on the academic scribblers. The 1960s and '70s saw post-war prosperity ignite into an inflationary spiral in the very countries that had embraced Keynesianism (mainly the United States and the U.K.). Shocking to the peer-review process, which had rigorously proven otherwise on many occasions, full employment could not be maintained via off-the-shelf Keynesian bromides. The traditional therapy-stimulate consumption and penalize savings with a healthy infusion of government deficit spending-was now being refereed by the real world, and the results were found "nonrobust." The macro models of Cambridge, Harvard, Berkeley, and MIT fell apart, and by the 1980s the very solutions that Keynes had hustled were being painfully thwacked as precisely the root of our troubles. Suddenly the old classical medicine-savings, investment, balanced budgets, competition, and productivity growth-were popularly claimed to be the economic-policy goal of good government. Even the politicians, so bubbly to receive Keynes's prescription for government spending as the magical elixir with which to treat an ailing economy, had publicly abandoned Keynesianism.

And the possibility of rational economic planning under socialism? Yes, we ran that experiment as well. The Third World tried it and promptly dropped to income levels last recorded in the Pleistocene Epoch. The Second (Communist) World tried it in massive police-state doses and...well...dissolved.

From the interview itself:
Reason: So trade cycles are caused solely by government monetary authorities?

Hayek: Not that directly. As you put it, it would seem that it results from deliberate mistakes made by government policies. The mistake is the creation of a semi-monopoly where the basic money is controlled by government. Since all the banks issue secondary money, which is redeemable in the basic money, you have a system which nobody can really control. So it's really the monopoly of government over the issue of money which is ultimately responsible. Nobody in charge of such a monopoly could act reasonably.
Reason: You have written that the period from about 1950 to 1975 will go down in history as the Great Prosperity. If the Keynes thesis is incorrect, why the tremendous economic success? Why, for instance, haven't we experienced a hyperinflation on the order of Germany in 1922?

Hayek: Because the inflation in Germany was not for the purpose of maintaining prosperity but was forced upon them due to financial difficulties. If you inflate for the purpose of maintaining prosperity you can do so at a much more moderate rate.
The prosperity did last longer than I anticipated. I always expected its breakdown, but I thought it would come much sooner. I was thinking in terms of the collapse of the inflationary booms during past trade cycles.

But those collapses were due to the gold standard, which put a brake on those expansions after a few years. We never had a time where a policy of deliberate expansion was unlimited by any framework of monetary order. We've come to an end only when has been seen we cannot accelerate inflation so fast that we can still maintain prosperity.

Here is a link to the entire article/interview:
http://www.reason.com/news/show/33304.html
Mike