Jamming the Banks – Part 2 May 13, 2009
Posted by wonderingin in Banking, Financial Markets, Regulation.add a comment
The Chrysler squeeze on the banks was just the warm up in the Obama Administration’s plan to re-make the economy.
It turns out the the compensation choke hold so far applied only to those banks receiving TARP money will be expanded to an industry wide system for all of financial services. (U.S. Eyes Bank Pay Overhaul – WSJ)
Senator Charles Schumer’s proposed legislation to require stockholder votes on executive compensation among a list of other new requirements would set the stage for the extension of the coming banking rules to the rest of corporate America.
Stay tuned – democracy in action is a wonderful thing!
Banking utilities – Part 2 May 6, 2009
Posted by wonderingin in Banking, Financial Markets, Regulation, The Economy.add a comment
In earlier posts, we spoke to the notion that regulators may be forced into rationalizing the biggest banks as banking utilities – essential players in the economy whose future scope of action will be constrained by regulators’ views about what is good for the economy as a whole rather than just the interests of the banks’ shareholders.
Now the fight is on as The New York Times reports that the private equity community is pushing to allow P/E firms to control as well as invest in big banks – a step in the opposite direction.
Bank managements currently work for shareholders with an eye over their shoulders for the regulators. The utility approach would likely require banks to operate more directly in the interests of the economy while they are allowed to earn a “reasonable return on their capital”.
The dilemma – banks need capital and the P/E firms have a lot. But I do not see the Federal Reserve backing down on the shift toward utility status. The economic stakes are too high and bank managements are already too difficult to control before one considers the predilections of the P/E players.
On the other hand, vultures play a useful role in nature – cleaning up messes. And vulture capitalists, er P/E firms, can play a similar role in cleaning up the current economic mess.
Banking utilities are coming, but the Federal Reserve will ultimately wiggle enough to let the P/E guys help clean up the banking system albeit without the unilateral economic control to which they are accustomed.
Seeing around corners – is the end in sight? April 27, 2009
Posted by wonderingin in Business, Financial Markets, The Economy.add a comment
One of the great surprises of the current economic crisis is that few saw it coming, and worse yet, the first wave of investors jumping in to help (think sovereign wealth funds which invested in the big banks) were brutally savaged by the continuing market decline.
Now comes Wilbur Ross with a plan to invest $1 billion in troubled assets through the government’s new Public-Private Investment Partnership.
Mr Ross is neither the timid sort, nor is he inexperienced in dealing with troubled or distressed assets. In fact, that’s how he made his fortune. He also made a lot more money through the rationalization of the steel and textile industries.
What does Mr Ross see that no one else sees? Maybe, just maybe, he can see around corners. If he can and if he is right, that would be a very good sign for the rest of us.
Making Banking Boring (again) April 10, 2009
Posted by wonderingin in Banking, Financial Markets, The Economy.add a comment
Paul Krugman may have it right this time.
“Thirty-plus years ago, when I was a graduate student in economics, only the least ambitious of my classmates sought careers in the financial world. Even then, investment banks paid more than teaching or public service — but not that much more, and anyway, everyone knew that banking was, well, boring.
“Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans.”
Pining for some ‘Animal Spirits’ April 9, 2009
Posted by wonderingin in Financial Markets, The Economy.add a comment
Where have all the ‘animal spirits’ gone?
John Maynard Keynes briefly used the term in one paragraph when discussing what motivates people to invest and speculate.
In a new book, Animal Spirits, George Akerlof and Robert Shiller describe five categories of spirit:
- Confidence
- Fairness
- Corruption / bad faith
- Money illusion
- Stories
None of these are easily quantified which may explain why economists and bureaucrats who just focus on the numbers so often miss the mark.
People are first led by stories about the successes of others and the possibilities for good in the world. Their eyes often glaze over when you start spouting numbers; stories they get.
The stories build confidence that they too might achieve some modicum of success assuming that:
- the rules of the game are fair,
- the bad guys will be kept in check and that
- the government will maintain a stable currency – not too much inflation and not too much deflation, but just right.
The return of ‘animal spirits’ will take some time.
A sign of things to come? March 26, 2009
Posted by wonderingin in Financial Markets, The Economy, World affairs.add a comment
Kevin Chau, a currency strategist for IDEAglobal, when ask whether the U.S. is declining as a political and financial power:
“Eventually, but that will take time. You will see the emergence of China and the emergence of India eventually. Those are primarily export-driven countries. Once they start to develop a more-domestic economy they’re going to pull more weight. But that will be 10 to 20 years from now. It’s clear to see that the Chinese yuan will be the world’s reserve currency in the future. Many currency experts believe that the U.S. will not be No. 1 in the world in the future; it will share the No. 1 spot with China.”
Economic dominance drives military dominance drives political dominance. The U.K.’s 19th century empire gave way to the U.S. in the 20th century, and we will eventually give way to someone else, most likely the Chinese.
Nothing lasts forever.
The Bonus Tax Train Wreck March 20, 2009
Posted by wonderingin in Financial Markets, The Economy.add a comment
The bonus claw back excise tax legislation hurtling through Congress this week will be an economic train wreck at warp speed. It will:
- severely hamper the financial industry’s ability to clean up the mortgage mess
- decimate the ability of banks receiving TARP funds to recruit top drawer talent
- embolden Congressional, labor and other anti-business groups as they try to dismantle the economy’s wealth creating engines
I am just as unhappy about the AIG retention bonuses as anyone, but the proposed excise tax legislation is a legal version of a lynch mob.
If Congress does this to the bankers and traders, no one is safe.
AIG Bonuses – a dangerous distraction March 19, 2009
Posted by wonderingin in Banking, Financial Markets.add a comment
The hue and cry about the AIG retention bonuses is a dangerous distraction on several fronts. Here are two:
The real question is how much money are the Feds going to put down the rat hole and will it really make a positive difference for the economy?
To paraphrase Ross Perot’s famous line, “There is a giant sucking sound” coming from AIG headquarters as the company vacuums up ever more taxpayer dollars.
What’s needed to unwind the mess? Talent. Talent must be paid or it leaves. Draconian claw back taxes and limits on compensation are a sure way to drain the banks of their top talent. This is not a good precedent for the financial services industry or the American economy.
Better to regulate the products and reward the talent.
AIG – When Principles Collide March 16, 2009
Posted by wonderingin in Business, Financial Markets, Politics, Regulation.add a comment
The mess at AIG represents a colossal conflict between two almost sacred principles of a free market democracy – the sanctity of contracts and accountability for taxpayers’ money.
Contracts – The insurance industry, more than most businesses, rests squarely on the sanctity of its contracts. In return for their premiums, policyholders literally receive nothing but a contractual promise from an insurance company that lawful claims for damages will be honored (and paid) by the company. Indeed, the very foundation of our financial and commercial markets rests on the reliability of contractual arrangements and customary business practices among companies and their suppliers and customers.
Taxpayer Accountability – On the other hand, the screaming about where the AIG bailout money went and the bonuses proposed to be paid hits raw nerves everywhere. People expect companies and individuals being helped by the government to comply with a higher standard including that they sacrifice themselves by not taking advantage of taxpayers.
How this conflict gets resolved will inevitably set a dangerous precedent. Contracts will either become increasingly vulnerable to involuntary politically motivated modification or abrogation, or growing taxpayer cynicism about bailouts will lead to taxpayer demands for a dramatic increase in government regulation of the markets and the economy.
Neither outcome will be good for the American economy in the long run. In hindsight, bankruptcy might have been a better choice.
Ratings Agency Rope-a-dope March 14, 2009
Posted by wonderingin in Banking, Financial Markets, Personal Finance.add a comment
The ratings agency downgrades of Warren Buffet’s Berkshire Hathaway after the company recently reported some large paper losses for 2008 remind me of the old joke about the job of an auditor -
he’s the guy who comes in after the battle to shoot the wounded.
Throughout the financial crisis, the ratings agencies (Fitch, S&P, Moody’s) have been more than a few days late and a lot of dollars short. They have been just one more cog in Wall Street’s investment banking black box.
That banking black box has worked much like the chicken pie machine in the children’s movie, Chicken Run (“chickens go in; pies come out”) until the machine broke down and its owners had no idea what to do to fix it.
Ratings and default insurance have allowed investors to avoid doing their own homework much to their current dismay. If you don’t know what you are buying and why, you are a chicken waiting to be plucked.
Real change or just Mea Culpa for the moment? March 12, 2009
Posted by wonderingin in Banking, Financial Markets.add a comment
“The events of the past months have shaken the foundation of our global financial system … And they’ve made clear the need for profound change to that system. At Morgan Stanley, we’ve dramatically brought down our leverage, increased transparency, reduced our level of risk and made changes to how we pay people…. We didn’t do everything right. Far from it. And make no mistake: as the head of this firm, I take responsibility for our performance.” – John Mack, CEO of Morgan Stanley before a Congressional Hearing, February 2009
John Mack has been one of the few banking CEOs to publicly acknowledge that his company’s business went off the rails in recent years. CEOs of failed firms (Bear, Lehman, Merrill) continue to deny that any of the problems were their fault- it was a tsunami in the market! Certainly the remaining solvent firms have declined to take any responsibility.
Maybe real self-directed change only comes about through a near death experience. After all, Morgan Stanley is the only investment banking firm which has come close to failing without actually doing so.
Financial market success is like doing drugs – the longer the fat profits continue, the more bankers and traders seem to think that the good times will never end. And the current generation of players has never experienced the pain of withdrawal – until now.
Wall Street could benefit from Andy Grove’s advice – Only the Paranoid Survive. Unfortunately, a high proportion of addicts forced off drugs cold turkey eventually revert to their former habits.
Damming the flood of foreclosures March 7, 2009
Posted by wonderingin in Financial Markets, Personal Finance, The Economy.add a comment
Much is being written about slowing the mortgage foreclosure crisis and “keeping people in their homes.” According USA Today, 50% of the foreclosures in 2008 occurred in 35 counties (mostly in CA, AZ and FL), and just seven counties accounted for 25% of the foreclosures.
But many of the proposed government programs amount to little more than damming up the river after the flood has begun – the water still has to go somewhere.
“Why can’t the government find the right way to bail out the financial system and the housing market? Historian Tom Woods has a provocative answer: it’s a fruitless war against reality. No matter what steps we take, prices will fall to their market levels. What’s worse, all the attempts to prevent this are just making things worse by creating chaos in the markets,” writes John Carney at the Business Insider.
Maybe the better answer would be to let the flood wash through and then clean up the mess. Declare the worst counties disaster areas, focus the federal aid there, and let housing in the rest of the country proceed in the normal fashion.
Incentivizing attitude adjustments March 6, 2009
Posted by wonderingin in Financial Markets, The Economy.add a comment
“What Wall Street and the markets need is an attitude adjustment [says Todd Thomas]. Thomas is the founder of organizational consulting firm Impact Consulting & Development and a former DaimlerChrysler executive who oversaw the car maker’s organizational and executive development for 10 years. He says executives, particularly at Wall Street firms, were too focused on meeting financial goals at any cost. In the process, not enough were focused on old-fashioned integrity, consistency, honesty, treatment of employees, transparency, self-awareness and accountability.”
Read the interview in Deal Journal.
Attitude adjustments are notoriously difficult to bring about. Compelled change is not lasting change. Only when the target of the change decides that change is in his or her best interest does real change occur.
On that score, incentives tend to be more effective than penalties – either creating incentives for proper behavior or reducing the incentives for unacceptable behavior.
Regulators should take a page from Parenting 101. One mother regularly bribes her small children to be good during extended car trips. It’s a lot easier than threats and punishments, and the “bribes” also serve as the trip money. The kids can spend or save the money as they wish but are not allowed to ask the parents to buy other stuff in the stores.
Shorting Obamanomics March 4, 2009
Posted by wonderingin in Financial Markets, The Economy.add a comment
Wall Street is shorting President Obama’s economic plans:
“The more investors have learned about the state of the economy and Obama’s plans for it, the less they rate the stock market’s prospects.
Obama’s higher taxes and antibusiness policies have shaken investor confidence. And Wall Street hasn’t found his budget credible. Unemployment cresting at under 9%? GDP growth of more than 3% next year? Wall Street thinks not.”
Read Evan Newmark’s Mean Street.
President Obama won the election largely by promising to fix everyone’s problems but without providing any details. Now he is providing those details, and he is in fact planning to turn the economy upside down just like he promised during the campaign.
The good news – unlike many people running for public office, he appears to be who he said he was.
The bad news – you’re not going to like the results and neither does Wall Street.
The stock market is generally seen as a leading indicator of where the economy is going to be six to nine months into the future. By this point in a typical recessionary cycle, we would expect to see the stock market making the turn.
But capital is on strike, and it will likely stay on strike for awhile. With a 30% decline in stocks since the beginning of the year, the roller coaster ride is about to get nasty.
The economy has the flu January 10, 2009
Posted by wonderingin in Financial Markets, Politics, The Economy.add a comment
The Democrats proposed spending and tax cut stimulus plans remind me of the old sales recruiting tactic – “let’s throw them [new sales people] up against the wall and see if enough stick to make our numbers.”
Many others seem to agree:
“We have very few good examples to guide us,” said William G. Gale, a senior fellow at the Brookings Institution, the liberal-leaning research organization. “I don’t know of any convincing evidence that what has been proposed is going to be enough.”
The stimulus plans are being driven by a fear (mainly by politicians) that doing nothing or doing too little will cause the recession to be worse or last longer than otherwise might be possible.
All of this economic stimulus is a bit like taking antibiotics for the flu – you hope it will help and you feel better by doing something. But in reality, most of the time the flu must simply run its course.
Economic activity is cyclical – the business cycle has not been banished and it likely never will be. Cycles are also driven by momentum. A growth cycle gains momentum as it feeds on itself until it becomes unsustainable or suffers from some external shock.
By the same token, down cycles gain downward momentum as businesses and individuals pull in their financial horns in acts of self-protection. No government program is likely to prevent that from continuing for a while.
We should treat the current economic contagion like we would treat the flu - with plenty of rest, fluids, and pills for the fever while keeping the patient quiet and warm.
What does that mean in economic policy terms?
- Continue to stabilize the financial system through capital injections, loss sharing and regulatory reform
- Comfort the worst afflicted with direct assistance including extended unemployment insurance, healthcare assistance, and mortgage foreclosure mitigation
- Do not pervert normal economic incentives with more government subsidies, tax law law changes or regulation which do little to support long-term economic growth or job creation
- Be patient and wait it out.
Investing to sleep well – Part II January 8, 2009
Posted by wonderingin in Financial Markets, Personal Finance.add a comment
In an earlier post, we wrote about asset allocations to sleep by. Yesterday, John Bogle added his Six Lessons for Investors. With a few comments from us, they are:
1. Beware of market forecasts, even by experts – no one really ever gets this right. Even the prognosticators who hit on a big one, do not necessarily have good overall forecasting track records. We merely remember (they tout) the one time they got it right.
2. Never underrate the importance of asset allocation – To my way of thinking, asset allocation must go beyond stocks, bonds, emerging markets, etc. Proper asset allocations should include significant amounts of cash (for safety) and directly owned real estate (the value never goes to zero) without significant leverage.
3. Mutual funds with superior performance records often falter – I personally prefer to own stocks directly for transparency.
4. Owning the market remains the strategy of choice – This is a classic indexing strategy, Mr. Bogle’s favorite hobby horse and claim to fame, but it may not be sufficient, especially in times like now when the markets are swooning.
5. Look before you leap into alternative asset classes – This should be true for any investment decision. What are the risk and return profiles? How much can you lose? How much can you afford to lose?
6. Beware of financial innovation – Welcome to Wall Street where the pros get rich and investors may or may not make a nickel depending on the timing. On the flip side, the Wall Streeters would not have a chance to make money from new products unless at least some investors were clamoring for higher returns or a better deal.
Regardless of the asset class, no one should expect above market returns unless they know something that others don’t. Saving money with steady interest compounding often beats all the other options.
