Insomma

Toxic Assets: Is the Proposed Cure More Toxic Than the Assets?

What's so toxic about the banks' toxic assets? As I understand it, they consist, mostly, of overleveraged, securitized mortgages. Historically, the average rate of default on home mortgages has been quite low. For the short and medium-term this rate is likely to grow and, undoubtedly, many of the underlying mortgages in mortgage-backed securities are underwater. However, mortgages are long-term instruments and, in a few years, most morgaged homes are likely to be worth once again more than the mortgages and the value of mortgage-backed securities is likely to be back to nearly par. The current problem is that, since no-one wants these securities at present, thay have no market value and banks holding them are virtually bankrupt because of the requirement to mark them to market. But today's market value is way lower that the real value. Allowing banks to value their toxic assets realistically, rather than at market, would be the simplest way to solve the problem but governments always try to scratch their right ear with their left hand: it makes it look like harder work. The main problem with private-public partnerships that will be set up to buy toxic assets is that they will give the greedy jerks who created the present mess an opportunity to earn huge profits with little risk and government fianancing. Since this would be a disgrace that rightly would come back to bite the rear end of the Administration, anyone who was involved in any way in the creation and marketing of the toxic assets should not be allowed to participate in their leveraged purchase at a discount. The very likely large profits to be derived by this operation should be made available only to others and, possibly, through some form of mutual fund, to small investors who sustained heavy losses and who are never close enough to the table to get any of the good food.

Our Elected Hypocrits

What a show today, watching our elected representatives to Congress spit fire and brimstone at Liddy for A.I.G. agreements entered into by Paulson, the previous administration and Congress, before Liddy ever came on board. Liddy is the only one who looked honest and good on the air. It was even more fun than watching the self-righteous "talking heads" who know how to inflame public opinion with little or no knowledge for the sake of increased audience. Congressmen and Senators see their job as bringing the bacon to their constituencies through pork, making certain that statements no one listens to are on record and posturing on the air, whenever possible, in order to score points at home and achieve their main goal: getting re-elected. Where were they when the TARP was passed without string attached and Paulson chose to save his friends at Goldman Sachs by sinking Lehman Brothers? Where were they when Washington catered to Wall Street, deregulating everything and thus bringing back a 1929 scenario? We should form public committees to question all our elected representatives and pass judgement on their performance and, if necessary, with the power to jail them for the ruin they rain upon us regularly. The adage used to be: " A good beginning is one thousand lawyers at the bottom of the ocean." A really good beginning would be to drown with them most Congressmen and Senators as well as many journalists, particularly television hosts of political shows; not all of them, maybe, but many for sure. Fired up by the press we are approaching mob rule and our elected representatives, instead of leading the nation, are bent on following and satisfying the mob. Let's not generalize and throw the baby out with the bath water. Let's take the time to identify malfeasance and then punish it as deserved and needed.

Obama's Dwindling Credit Line

There are many reasons I voted for Obama. I want reinstated regulations that protect the public from unsound and risky fianancial practices. I want new regulations that protect shareholders from being robbed blind by management, with the collusion of management-friendly Boards of Directors. I want fair rules by which to play the capitalist game. I want a more liberal attitude towards social issues and rigorous separation between Church and State. I want a reduction in waste and a health care net for all that will not bankrupt the country for the benefit pharmaceutical and health insurance companies. I realise that all this cannot be attained without some tax increases and I am prepared to pay my share. What i did not bargain for, what would stop my support and what would sink the Obama presidency is an attempt to redistribute income substantially. We are, have been and wish to go on being a capitalist country, not a socialist one and, already, we tax the wealthiest among us more and the poorest among us less than most Western countries. We are one of few countries with a staggering death tax and crippling state and city income taxes on top of the federal one. We may consider whoever earns annually $250,000 as rich, rich enough to be overtaxed. This, however, depends on where one lives. While in Podunk it may represent a fortune, in New York City for example, where State and City taxes take another 14% slice and where the cost of living is much higher, it is barely enough to make ends meet. The one thing Obama got right is taxing hedge funds and other such income as ordinary, rather than as capital gain. If one is in the hedge fund business whatever he earns is and should be taxed as ordinary income and the annual income of those guys is $250,000 with two, three, or even four zeros added at the end. But  my rediness to pay additional taxes goes hand in hand with Obama's promise of fiscal responsibility and the curbing of earmarks. I am not willing to see the additional taxes I pay go to finance bridges to nowhere in countless counties and states.  If Obama wants to keep my support, and that of most other moderates, he will have to use his authority and popularity to put an immediate stop to earmarks and defuse the impression that he is, after all, a classic left-wing democratic demagogue whose goals are big government and income redistribution. Most of his goals seem to be worthwhile and admirable; unfortunately, in today's economic environment, in spite of their urgency, they cannot be attained all at the same time. The Republicans failed because they deregulated recklessly and with too much haste, without fully considering the consequences. If Obama will try to do all, and pay for all, at once he shall fail as well. With the Republicans in disarray, he has the opportunity to set the stage for a prolongued Democratic hegemony but, if he goes too far left, the stage he will set will be for an overwhelming Republican victory in 2012.

Recoup The Recoupable

I have a hard time understanding the Madoff Affair. How did a man who ran a very successful, respected and profitable business get himself into such a mess? How could his brother and his two sons - who are reputed to be very bright - not have known what was going on and that Bernard was a psychopath? How could so many august financial institutions not have figured out what the representatives of Societe Generale realized during the course of a two-day visit at Madoff's offices, after which they put his fund on their internal black list? Why did the authorities not follow up on the suggestion, made years ago, that Madoff was running a Ponzi scheme? How could individuals and - even worse - non-for-profits and large funds of funds have place a very large portion of their assets -in some cases all their assets - with one money manager? Why did large international banks place billions of dollars entrusted to them by clients in a fund with which they didn't place any of their own assets? I fear that, once more, the main answer is unchecked greed. Retirees, trustees and fund managers thought they had found a safe way to invest their money conservatively and with an excellent and steady return without bothering to do any significant do diligence. Banks and middlemen made out like bandits by pocketing huge commissions to channel funds for management by Madoff. Rich people have become, overnight, candidates for soup kitchens and many charities have been forced to cease operations; however, the Madoff family, probably, has tens of millions stashed away in tax-heaven accounts and all those who collected commissions are happily living off their huge profits. Much of what has been lost is gone forever but it is still possible to recoup enough to recover, say, 10 or 15 cents on the dollar for all those who were duped. While a receiver is trying to sell Madoff's brokerage and trading businesses, authorities should repossess all payments made during the last five years to early investors in his fund using funds contributed by later investors, as well as all bonuses paid to management and employees just before the shit hit the fan. Furthermore, a concerted effort should be made to find and recuperate any hidden Madoff family funds and to realize as much as possible from the sale of Madoff's real estate assets. Finally, all those who collected commissions for channeling funds to Madoff - middlemen, international banks and funds of funds - should be forced to return this money to the appointed receiver; we are talking, probably, of billions of dollars. We have seen once more the nefarious effects of deregulation and non-enforcement of regulations that still exist. Anyone who manages other people's money should be checked annually by the SEC to ensure that it is done honestly, banks and funds of funds should be liable for not doing sufficient do diligence before investing funds that have been entrusted to them and the commissions paid for channeling money to a given manager or fund should be limited. Investment is always a risky business but fraud should not be part of the equation.

Second Thoughts On The Auto Bailout

Now they have scared me. They tell me that letting GM, Ford and Chrysler fail would wipe out some 3 million jobs, 10% of all US jobs. Components factories would close forcing the closure of the US auto manufacturing facilities of foreign makes as well as that of thousands of Ma and Pa shops, stationary shops, pharmacies, butchers, grocers, restaurants, etc. that are servicing those who will have lost their jobs. This would result in additional unemployment, home mortgage defaults and shrinking of the economy. I am also offended. The Government has bailed out the "Wall Street Gang", those greedy, parassitic crooks, and it is dragging its feet to do the same - with a much smaller outlay - for those poor blue collar workers who, with the sweat of their brow, are the underpinning of this country's economy. Poor Government! It finds itsel in a pickle because of the greedy finance speculators and the incompetent mangement of the auto industry. But wait a second: am I ready to swallow all the above hook, line and sinker? Hell no! It is the Government that is the number one culprit. For years they have deregulated irresponsibly and have pushed Fannie Mae and Freddy Mac to lend irresponsibly, totally disregarding something that was obvious from the founding days of the Republic: that man is greedy and, uncontrolled, he will always put his own interest ahead of the interest of the community. Unfortunately, most self-serving members of Congress cannot be held legally accountable for all the messes they create - I would love to see most of them in jail - and when the next election will come around they'll find, no doubt, a way to talk their way out of trouble and blame for their own incompetence and greed - yes greed - circumstances or someone else. So why was the finance industry bailed out? Because almost every American has a bank account and credi cards, because widows, orphans and holders of 401K retirement plans could not be allowed to lose everything and because failure to intervene would have landed us streight into a depression. The amoral bankers certainly did not deserve to be saved and many more strings should have been attached to the bailout money; I hope that the next government will regulate the hell out of what compensation top management can get and under what circumstances, since the owners (the small shareholders) deserve to be and should be protected from these corporate predators. Clearer accounting of the use of the money should have been mandated but this is, once more, Washington catering to special interests and, of course, to their own. As for Detroit, today's problems are the inheritance of over 50 years of mismanagement, arrogance fed by an initial lack of domestic competition and abuse of power by the unions, who never understood that you cannot eat the goose that lays the golden eggs. Since we are a capitalist society - imperfect but better the the alternatives - maybe we should stop fearing the bogeyman and tell GM, Ford and Chrysler that they must go into Chapter 11 and, since we shouldn't cut off our nose to spite our face, the Government should help them put together a pre-packaged Chapter 11. Any Government money should go to back warrantees for the cars that will be sold by the Big Three and to help any components company that may need to borrow.  It is likely that only under Chapter 11 the US auto manufacturers will be able to restructure quickly, bringing the salaries they pay and the number of their dealerships in line with those of their foreign competitors and saving as many as possible of the Detroit jobs. Do I have no feeling for the auto workers who will earn substancially less than they earn now, have smaller benefit packages and some of whom will lose their great jobs? I do but the restructuring beats by a mile not having a job at all. Most American industries have gone through the same pains in order to become globally competitive and now, unfortunately, it seems to be the auto industry's turn. Most American retirees have to make do with an imperfect Medicare system; it is unfortunate but from now own the UAW's retirees will have to make do the same way, They've had it good for a long while and have taken full advantage of the situation. As the adage goes "all good things come to an end"; apparently, the end is now, unfortunate though this may be. Should the auto industry succeed in convincing the UAW and the dealerships to make all the concessions necessary to constructively complete a successful restructure, let's bail them out; however, experience teaches that short of Chapter 11 this will not be possible. Yes! I am scared. But there comes a time when one must swallow the bitter medicine and suffer through its side effects. Experience teaches as well that once any high gasoline price crisis is over the American public demands once more large, gas guzzling cars. While this cannot be prevented in a free society, it certainly could be regulated by a responsible Government, not owned by Detroit's Big Three and by the oil companies. As I had suggested in my previous blog, the cost of yearly car registration should be set geometrically progressive according to engine displacement. Anyone who must have an inefficient, unecological car should pay dearly for the privilege, the money going to alternative energy research. There are solutions but I trust our Government to set its sights on ideology and on the self-interest of individual members and to screw up once more. Who knows, maybe Barak Obama will have the charisma, the power and the perseverance to bring about positive change and actually change Washington's modus operandi.

To Bail Or Not To Bail...

After years of downward spiraling, the American Automobile Industry is on life support in the intensive care unit. Its lobbyists, those for Big Oil and Congressmen and Senators whose pockets they filled and lifestyles they improved have constantly prevented retooling for fuel efficient cars and have kept indulging the American public's hunger for excessively big automobiles with excessive horse power. Their powerful unions demanded and obtained prohibitively large and comprehensive compensation packages that cannot be sustained under present economic conditions. The most logical scenario would be to let the Big Three go into bankrupcy. The piper must be paid and it is unfair to ask the taxpayer to foot the bill. Let the greedy management and the greedy unions take their well-deserved punishment and we can go on driving Japanese and Korean cars. But it's not so simple. A wise man told me once that one should always owe the banks a lot of money since it would be unecomonical to put in Chapter 11 a large debtor. In order to do the right thing we would have to let millions of jobs go down the drain and this would, in all likelyhood, send us streight into a 1929-type deflationary depression. We have no choice but to bail out the Automobile Industry; however, we should do this with lots of strings - nay, cables - attached. Managment should be forced to cash-in their options at their strike price by year end or lose them; they shouldn't profit, thanks to the injection of taxpayers money, from the rebirth of the firms they have killed and their ongoing compensation packages should be brought in line with the new reality. Labor contracts should be renegotiated to a sustainable level and, should the unions not be prepared to do so, let their members remain jobless while their employers go bankrupt. Furthermore, the new government should appoint an 'Automobile Tsar' who will have wide supervisory powers over the industry and will oversee labor negotiations and wholesale retooling to produce fuel efficient, hybrid cars. There should be a national car registration fee - a few tens of dollars for cars that can do over 40 miles on a gallon; say $1,000 for cars doing between 30 and 40 miles to the gallon; $5,000 for cars doing between 20 and 30 miles to the gallon and, say, $10,000 for cars doing less than 20 miles to the gallon - and a variable tax should be levied that would fix the price of gasoline to $5 per gallon. The proceeds from the gas tax and the registration fees should go towards research for alternative sources of fuel to power automobiles. All this would be hell to implement but we are already on the brink of hell and, unless we want to land right in the middle of it, there is no choice.

Kaput!

We've lost 20% of our net worth over that last year and an additional 20% over the last two weeks and, probably, we have not hit bottom yet. I've been railing about deregulation for years; I believe in capitalism and in a free economy but there must be rules by which to play. As Eric Lane and Michael Orskes so eloquently explained in "The Genius of America", there is a basic difference between the Articles of Confederation and the Constitution; the former assumed that man is unselfish and ready to sacrifice self-interest for the common good while the latter - drafted fourteen years later and after the new republic had almost collapsed because of individual self-serving - acknowledged that man is selfish and that the social conract must recognize this and enact a set of rules aimed at protecting the common good from individual greed. It is thanks to this underlying principle that the USA became the greatest democracy and has enjoyed unparalleled success both politically and economically. After the economy last collapsed, in 1929, FDR enacted regulatory agencies and laws aimed at protecting us from the greed of those who had great economic power. After decades of prosperity the laissez-faire, Republicans believed it was time to deregulate and what followed was an orgy of greed. They should have learned their lesson from the Savings and Loans Banks debacle but, since we do not hold our politicians accountable for the disasters they create, after the taxpayer paid the bill the banquet went on. Top executive salaries were totally out of proportion with their actual contribution to the companies they were managing and kept growing even as operating results worsened. These bonuses were geared to short term results; consequently, being greedy humans, the CEO's operated their companies so as to maximize short-term results - and their bonuses - and believed, like King Louis XIV: "apres nous le deluge". Banks looked for ever-more risky venues to lend money they had in abundance and credit card companies offered their clients what seemed to be an easy way to live above one's means. The Domocrats, however, share in the blame. They didn't realize that the light some were seeing at the end on the tunnel was an oncoming train and they didn't do much to stop the excesses. Furthermore, wanting to give all Americans a better shot at owning a house, they encouraged Fannie Mae and Freddy Mac to give out mortgages with little or no down payment even to purchasers that would, otherwise, not have been considered credit worthy. Now we are all paying for our government's irresponsible behaviour and those who created the mess are still not accountable. It will take years to regain what has been lost and, of course, most of FDR's regulations - and maybe more - will be reinstated. Had we not chosen to overlook man's natural greed - which was ever visible and obvious - we could have avoided this mess. I hope that in the future we shall remember that a game can be played succesfully only if there are well established and recognized rules that evryone is held to play by. So what can be done now? If I knew for certain I'd interrupt my blogging and fly to Washington to fix things... All I can do is to conjecture, so here it goes. I would have the government buy from the banks all the bad mortgages and all the greatly devalued securitized mortgage paper at a maximum discount, giving the sellers just enough to keep them from going bankrupt. They and their shareholder would take a big hit but, with conservative management, they would be in a position to do profitable business and to pull themselves up by their shoestrings. Then I would set up an agency - if one doesn't exist already that could fulfill this role - that would try to workout with deserving homeowners refinincing that the latter can live with. For example, a $100,000 mortgage the government will have bought for 40 cents on the dollar could be reissued as a $50,000 or $60,000 mortgage that the borrower could sustain while giving the government (ergo the taxpayer) a margin to cover expenses and, maybe, make a small profit. This would clear the balance sheets of the banks and provide them with the liquidity needed to go on operating. I would establish a minimum downpayment percentage to purchase a house, would give mortgages only to credit worthy buyers and forbid any mortgage that is not fixed rate. Both of the above should help resolve the housing problem and put home purchases back on a healthy path. As I had already suggested in 1989, I would forbid automatic, computer generated sale programs: they turn a small snow slide into an avalanche and give those who operate them an unfair advantage over the small investor who needs to follow the market, make a sale decision and then put in an order. I would not forbid short selling but I would instruct the SEC to keep a close eye on this activity and stop it when it appaers to get out of hand, influencing unduely to market. I would review the activities of credit card companies, put some limits - based on credit-worthiness - on how much any individual can borrow in total on credit cards and, having reduced the risk of the lender, I would lower substantially the maximum interests that can be charged on credit card debits while regulating also the amount of fees that can be charged for late payment. Undoubtedly, this would haver a deflationary effect and shrink a number of industries but, from there, we could grow in a healthy fashion rather than running once more like lemmings toward the cliff. Finally, I would regulate executive compensation. If I have learned anything over the last 45 years it is tha no one is indispensible. We must debunk the myth that, having scratched and clwed his or her way to the top of a publicly owned company an executive should be able to secure him/herself much of the cream before the shareholders, whose capital is at risk, can earn their profit. I had believed that the junk bond fenomenon had opened the tower of power to many who had been excluded from it, finally putting a break on executive abuses such as company paid country club memberships, private school tuition for their children, etc. Unfortunately, it is obvious that, if unregulated, top executives will always find ways to steel from the absentee owners of their companies, the shareholders. I am certain that neither Republicans nor Democrats would like my suggestions; that is why we need leadership that cares about the future of the country  and can detach itself from right wing or left wing demagoguery.

The $700 Billion Question

I cannot see Congress agreeing to the $700 billion (or more) bailout package as requested by Secretary Paulson. He has given no details as to how he would use these funds nor has he indicated that Main Street will also be helped and that the salaries of on-the-brink-of-bankrupcy companies CEO's will be kept in check. Representatives and Senators voting for the package "as is" would jeopardize greatly their chances at reelection in November. Yet, something needs to be done urgently. My suggestion is to grant the package but not to Paulson; as ex CEO of Goldman Sachs and the hand on the stearing wheel when and before the shit hit the fan he is not to be trusted. I would draft immediately Mayor Bloomberg and put him in charge of the bail-out.