This post first appeared on Minyanville.
As data pours in from the holiday shopping season, stories of tight purse strings and a general rejection of the extravagant abound.
But bucking the trend, Amazon.com (AMZN) reported strong sales and record buying activity. The world's biggest online retailer called the otherwise bleak environment it's "best ever." Still, online sales are expected to slow from the previous year for the first time ever.
On December 15, according to the Wall Street Journal, Amazon's customers snapped up items at a clip of nearly 73 per second, or 6.3 million for the day. That's the busiest the site has ever been.
Leading the record-breaking sales were Nintendo's (NTDOY) Wii video game consul, Samsung's 52-inch HD television and Apple's (AAPL) 8-gigabyte iPod Touch. In addition, Acer Inc.'s Aspire One netbook attracted buyers looking for cheap access to the Internet. The tiny laptop, with a screen that measures just 8.9 inches, sells for less than $500.
Amazon's strong results are in sharp contrast to most brick-and-mortar retailers, which rang up weak sales despite aggressive discounting. Consumers, hunting for bargains and reticent to brave harsh winter weather across much of the country, shunned malls, preferring instead to shop from the comfort of home.
The site's relative success is evidence that, even during recession, the cream of the corporate crop can still thrive. Economic activity doesn't grind to a halt just because Apocalyptic headlines seem to be without end.
Instead, downturns weed out the weak hands, building a stronger foundation for future growth.
Monday, December 29, 2008
Friday, December 19, 2008
Bush Bails Out Detroit
This post first appeared on Minyanville.
The holidays just got a bit brighter for Detroit.
This morning, President Bush authorized up to $17.4 billion in loans to rescue General Motors (GM) and Chrysler from imminent collapse. The 2 troubled automakers had asserted they'd run out of money by year's end without government assistance.
According to Bloomberg, the bailout money, which will come from the Troubled Asset Relief Program, or TARP, will provide a 3-month window for the 2 firms to devise a restructuring plan to ensure their long-term viability. At the end of March 2009, the loans are callable if the government doesn't feel its demands have been met, forcing GM and Chrysler to immediately pay the money back.
Ford (F), which said it didn't need an emergency loan, wasn't included in the proposal.
In exchange for the cash, the government will receive warrants on non-voting stock, in addition to the right to block transactions of $100 million or more. Both companies must limit executive pay, give lawmakers access to their financial records, and are barred from issuing dividends until the debt is repaid. Debt must be slashed by two-thirds.
Detroit's powerful union lobby, the United Auto Workers, accepted concessions on retirement contributions and payouts for downtime.
Bush, in saving the US auto industry at a time when the economy can ill-afford further job losses, told CNN "I have abandoned free-market principles to save the free-market system."
Rumors swirled in recent weeks about the possibility of an "orderly bankruptcy," after Congress failed to agree on terms for a bailout. The President said this morning that allowing the carmakers to collapse, given the ongoing financial turmoil and recession, would "not be a responsible course of action."
Evaluating the relative success of the industry's turnaround plans will largely be left up to the incoming Obama administration. The Wall Street Journal reports metrics for determining the firms' financial viability are "relatively lenient." And though the agreement doesn't specifically refer to a so-called "car czar," it does say the government must put someone in charge of ensuring the terms of the bailout are being met.
After months of pleading for money, GM CEO Rick Wagoner and Chrysler boss Robert Nardelli can finally return to Detroit with their pockets bulging. Payrolls can be met, vendors paid, and the books closed in January without a visit to bankruptcy court.
However, for 2 firms that seem inordinately adept at losing money -- and lots of it -- one would be hard-pressed to find too many people surprised if, before March, Wagoner and Nardelli are back on Capitol Hill explaining why they deserve a second chance.
The holidays just got a bit brighter for Detroit.
This morning, President Bush authorized up to $17.4 billion in loans to rescue General Motors (GM) and Chrysler from imminent collapse. The 2 troubled automakers had asserted they'd run out of money by year's end without government assistance.
According to Bloomberg, the bailout money, which will come from the Troubled Asset Relief Program, or TARP, will provide a 3-month window for the 2 firms to devise a restructuring plan to ensure their long-term viability. At the end of March 2009, the loans are callable if the government doesn't feel its demands have been met, forcing GM and Chrysler to immediately pay the money back.
Ford (F), which said it didn't need an emergency loan, wasn't included in the proposal.
In exchange for the cash, the government will receive warrants on non-voting stock, in addition to the right to block transactions of $100 million or more. Both companies must limit executive pay, give lawmakers access to their financial records, and are barred from issuing dividends until the debt is repaid. Debt must be slashed by two-thirds.
Detroit's powerful union lobby, the United Auto Workers, accepted concessions on retirement contributions and payouts for downtime.
Bush, in saving the US auto industry at a time when the economy can ill-afford further job losses, told CNN "I have abandoned free-market principles to save the free-market system."
Rumors swirled in recent weeks about the possibility of an "orderly bankruptcy," after Congress failed to agree on terms for a bailout. The President said this morning that allowing the carmakers to collapse, given the ongoing financial turmoil and recession, would "not be a responsible course of action."
Evaluating the relative success of the industry's turnaround plans will largely be left up to the incoming Obama administration. The Wall Street Journal reports metrics for determining the firms' financial viability are "relatively lenient." And though the agreement doesn't specifically refer to a so-called "car czar," it does say the government must put someone in charge of ensuring the terms of the bailout are being met.
After months of pleading for money, GM CEO Rick Wagoner and Chrysler boss Robert Nardelli can finally return to Detroit with their pockets bulging. Payrolls can be met, vendors paid, and the books closed in January without a visit to bankruptcy court.
However, for 2 firms that seem inordinately adept at losing money -- and lots of it -- one would be hard-pressed to find too many people surprised if, before March, Wagoner and Nardelli are back on Capitol Hill explaining why they deserve a second chance.
Thursday, December 18, 2008
Keepin’ It Real Estate: The Other Side of the Rock-Bottom Mortgage
This post first appeared on Minyanville and Cirios Real Estate.
It’s wishful thinking that artificially low interest rates alone are enough to rehabilitate the housing market.
The mortgage industry has undergone a swift and ruthless downsizing over the past 18 months. While a necessary part of the corrective process, the market is ill-equipped to handle the onslaught of new loans that regulators are hoping to incite.
Last week, the Wall Street Journal reported the Treasury Department is considering pushing down mortgage rates to levels not seen since the heyday of the housing bubble. Through the recently nationalized mortgage giants, Fannie Mae (FNM) and Freddie Mac (FRE), loans would be offered to qualified homebuyers with rates as low as 4.5%.
It’s wishful thinking that artificially low interest rates alone are enough to rehabilitate the housing market.
The mortgage industry has undergone a swift and ruthless downsizing over the past 18 months. While a necessary part of the corrective process, the market is ill-equipped to handle the onslaught of new loans that regulators are hoping to incite.
Last week, the Wall Street Journal reported the Treasury Department is considering pushing down mortgage rates to levels not seen since the heyday of the housing bubble. Through the recently nationalized mortgage giants, Fannie Mae (FNM) and Freddie Mac (FRE), loans would be offered to qualified homebuyers with rates as low as 4.5%.
The story sparked a wave of refinancing as rates on all types of mortgages tumbled. Coupled with the Federal Reserve’s plans to buy agency debt and freshly originated mortgage-backed securities, the stage is set for renewed buying activity.
Although Treasury Secretary Hank Paulson has since denied that he’s planning such a move, he did say that he’s “always looking at new ideas” and that “the key thing to get us through this period is getting housing prices down.”
Whether there’s an official program of 4.5% mortgages is immaterial, as Washington is doing everything in its power to push rates as low as possible.
It’s hard to argue cheaper mortgages won’t encourage buyers to leave the sidelines and jump into the market. However, as Bloomberg noted this morning, layoffs at mortgage companies and banks like Citigroup (C), JPMorgan (JPM) and Bank of America (BAC) have greatly diminished origination capacity. Lenders, having already tightened underwriting standards, have limited resources to process new applications.
Many are hoping low rates will encourage refinancing and help clear out the toxic subprime and Alt-A securities still plaguing the financial system. Unfortunately, the loans originated for securities in 2005, 2006 and 2007 – the ones causing all the trouble — were done with minimal down-payment requirements. Falling home prices mean most of these borrowers are underwater - and thus unable to refinance.
Furthermore, any renewed buying is likely to be met with a flood of new supply. There’s a concept in real estate known as “phantom inventory,” which refers to homeowners who want to sell, but keep their homes off the market while they hope for conditions to improve. Some experts believe actual inventory levels, when these would-be sellers are taken into account, is as much as 25% higher than official data show.
Anecdotally, this makes sense. For each buyer waiting for lower prices to step in, there’s a seller waiting for a better market. So any pop in buying activity will offer sellers an opportunity to list their homes in a seemingly stronger market. As foreclosures continue to spread into previously unaffected areas, inventory levels are likely to remain high throughout much of the country.
And while attractively-priced, well-maintained homes in desirable neighborhoods will continue to sell, more of the same will be available in each successive month. Patience remains the best ally for the prospective buyer.
Wednesday, December 17, 2008
Fed Slashes Interest Rates; Nothing Happens
This post first appeared on Minyanville.
You can't say they didn't try.
Nevertheless, the Federal Reserve's drastic moves aimed at jumpstarting lending, highlighted by dropping interest rates to nil yesterday, just aren't working. To be sure, conditions are better than they were just months ago during the height of the financial panic, but a normally functioning credit market is likely still months away.
Bloomberg reports banks are still hoarding cash and shunning loans from their counterparts around the world, preferring instead to borrow from the Fed directly. The interbank lending markets are basically nonexistent.
The spread between LIBOR -- the London Interbank Offer Rate, which measures what big banks like JPMorgan (JPM), Bank of America (BAC) and Citigroup (C) charge one another for loans -- and Treasury bills still 6 times wider than it was last June.
Companies, specifcally ones with less-than-stellar credit ratings, are paying record amounts to borrow from skittish bond investors. In fact, never before have buyers of corporate debt demanded more yield on their investments, according to data compiled by Bloomberg.
As Minyanville's Kevin Depew is apt to say, back on Main Street, everyday Americans "are getting shot from both sides."
Each time the Fed lowers interest rates, savers earn less on the money they sock away in the bank. This, combined with our ballooning national debt and struggling economy, are torpedoing the dollar, which has a punitive effect on those responsible enough to shy away from immediately parting with every penny they earn.
Washington is sending a clear message that the only way out of this mess is precisely what got us here in the first place: More spending. By providing paltry returns on savings and continuing to debase the currency, regulators and lawmakers alike are punishing responsible, conservative economic actions.
The trouble -- and why these fantastic efforts to rain money down on our broken economy will ultimately fail -- is that years of robust spending were driven by free and easy access to credit. Artificially low interest rates, loose lending guidelines, and a social mood that fostered spend-happy trips to the mall are a thing of the past.
Try though they may, bureaucrats cannot squeeze blood from the proverbial turnip. They spent the past 20 years hammering away at it, until finally the poor root couldn't take any more. It rolled over, returning to its shallow hole in the earth, to wait for brighter days.
The American consumer has followed suit.
You can't say they didn't try.
Nevertheless, the Federal Reserve's drastic moves aimed at jumpstarting lending, highlighted by dropping interest rates to nil yesterday, just aren't working. To be sure, conditions are better than they were just months ago during the height of the financial panic, but a normally functioning credit market is likely still months away.
Bloomberg reports banks are still hoarding cash and shunning loans from their counterparts around the world, preferring instead to borrow from the Fed directly. The interbank lending markets are basically nonexistent.
The spread between LIBOR -- the London Interbank Offer Rate, which measures what big banks like JPMorgan (JPM), Bank of America (BAC) and Citigroup (C) charge one another for loans -- and Treasury bills still 6 times wider than it was last June.
Companies, specifcally ones with less-than-stellar credit ratings, are paying record amounts to borrow from skittish bond investors. In fact, never before have buyers of corporate debt demanded more yield on their investments, according to data compiled by Bloomberg.
As Minyanville's Kevin Depew is apt to say, back on Main Street, everyday Americans "are getting shot from both sides."
Each time the Fed lowers interest rates, savers earn less on the money they sock away in the bank. This, combined with our ballooning national debt and struggling economy, are torpedoing the dollar, which has a punitive effect on those responsible enough to shy away from immediately parting with every penny they earn.
Washington is sending a clear message that the only way out of this mess is precisely what got us here in the first place: More spending. By providing paltry returns on savings and continuing to debase the currency, regulators and lawmakers alike are punishing responsible, conservative economic actions.
The trouble -- and why these fantastic efforts to rain money down on our broken economy will ultimately fail -- is that years of robust spending were driven by free and easy access to credit. Artificially low interest rates, loose lending guidelines, and a social mood that fostered spend-happy trips to the mall are a thing of the past.
Try though they may, bureaucrats cannot squeeze blood from the proverbial turnip. They spent the past 20 years hammering away at it, until finally the poor root couldn't take any more. It rolled over, returning to its shallow hole in the earth, to wait for brighter days.
The American consumer has followed suit.
Tuesday, December 16, 2008
Car Czar, Treasury Could Force Automaker Bankruptcy
This post first appeared on Minyanville.
As 2008, a year most market participants would just as soon forget, draws to a close, the endgame approaches in the fight to save Detroit.
After Senate Republicans blocked a $14 billion rescue package for General Motors (GM) and Chrysler last week, the ball landed squarely in the court of the Bush Administration. Both GM and Chrysler have warned they'll be insolvent by the end of the year without government assistance.
Bloomberg reports the Treasury Department is considering a plan giving the yet-to-be-named “car czar” or the Treasury Secretary power to force GM or Chrysler into bankruptcy if either firm can't survive on its own. Officials said the troubled automakers would be required to submit turnaround plans by March 31st, but would not release further details of the plan.
Moody's Investor Services wrote in a note that a rescue would most likely include a so-called "prepackaged bankruptcy," which would remove certain roadblocks to restructuring the companies.
In a letter urging President Bush to withhold assistance, South Carolina Governor Mark Sanford asserted that using TARP money to rescue the auto industry would open the floodgates to other troubled industries. Sanford, a Republican, said “We are at a tipping point in moving from a market-based economy to a politically-based economy.”
Meanwhile, Ford (F) supports plans to rescue its beleaguered competitors, saying any failure of a major auto maker would have ripple effects throughout the industry.
The White House promised to keep tabs on any taxpayer money it decided to dole out, saying “There will be rigorous oversight to make sure that these companies are doing what they promised to do, and we want to make sure that everyone is making the concessions that they’re going to have to commit to make.”
The Treasury Department, however, doesn’t have a stellar track record on transparency and accountability. Earlier this month, the Government Accountability Office found critical oversight, transparency and regulation problems and recommended the Treasury hire additional personnel to manage TARP. All the Treasury appears to excel at is spending money.
As dire as the situation has become, it's hard to find many that truly believe Washington will allow the automakers to fail. Whether the money comes from TARP, the Federal Reserve or some yet-to-be-announced slush fund, conventional wisdom would be in for a very rude awakening if Detroit is hung out to dry.
As 2008, a year most market participants would just as soon forget, draws to a close, the endgame approaches in the fight to save Detroit.
After Senate Republicans blocked a $14 billion rescue package for General Motors (GM) and Chrysler last week, the ball landed squarely in the court of the Bush Administration. Both GM and Chrysler have warned they'll be insolvent by the end of the year without government assistance.
Bloomberg reports the Treasury Department is considering a plan giving the yet-to-be-named “car czar” or the Treasury Secretary power to force GM or Chrysler into bankruptcy if either firm can't survive on its own. Officials said the troubled automakers would be required to submit turnaround plans by March 31st, but would not release further details of the plan.
Moody's Investor Services wrote in a note that a rescue would most likely include a so-called "prepackaged bankruptcy," which would remove certain roadblocks to restructuring the companies.
In a letter urging President Bush to withhold assistance, South Carolina Governor Mark Sanford asserted that using TARP money to rescue the auto industry would open the floodgates to other troubled industries. Sanford, a Republican, said “We are at a tipping point in moving from a market-based economy to a politically-based economy.”
Meanwhile, Ford (F) supports plans to rescue its beleaguered competitors, saying any failure of a major auto maker would have ripple effects throughout the industry.
The White House promised to keep tabs on any taxpayer money it decided to dole out, saying “There will be rigorous oversight to make sure that these companies are doing what they promised to do, and we want to make sure that everyone is making the concessions that they’re going to have to commit to make.”
The Treasury Department, however, doesn’t have a stellar track record on transparency and accountability. Earlier this month, the Government Accountability Office found critical oversight, transparency and regulation problems and recommended the Treasury hire additional personnel to manage TARP. All the Treasury appears to excel at is spending money.
As dire as the situation has become, it's hard to find many that truly believe Washington will allow the automakers to fail. Whether the money comes from TARP, the Federal Reserve or some yet-to-be-announced slush fund, conventional wisdom would be in for a very rude awakening if Detroit is hung out to dry.
Madoff Fraud Hits Investors Worldwide
This post first appeared on Minyanville.
As the full extent of crooked money manager Bernard Madoff’s crimes becomes clear, losses are being felt around the world.
This morning in Europe, Spain’s Grupo Santander and France’s BNP Paribas announced clients and shareholders may be out billions of dollars, according to the Wall Street Journal. In Japan, Nomura Holdings (NMR) admitted to losses of as much as $302 million.
Back in the US, the Associated Press is reporting that Goldman Sachs (GS) and money manager BlackRock (BLK) are claiming no exposure. Bank of America (BAC), Citigroup (C) and Merrill Lynch (MER) declined to comment.
Meanwhile, well-known individuals ranging from movie director Steven Spielberg to Nobel laureate Elie Wiesel are likewise seeing their investments evaporate. Spielberg’s Wunderkind Foundation, according to regulatory filings, had a sizable portion of its assets with Madoff as recently as 2006. Wiesel’s Foundation for Humanity was one of a host of Jewish charities said to be tallying up losses.
The $50 billion fraud is even wiping out certain funds of funds. Funds of funds invest money in hedge funds on behalf of their high net-worth clients; losses at once such fund, Maxam Capital Management, appear significant enough to have forced it to close up shop.
Stories are emerging about investors who acted as unofficial sales agents for Madoff’s fund. Many were dependent on the income for their retirement. The Journal cites one such case, in which a Boca Raton, Florida resident, a former securities analyst, brought in dozens of new clients without ever soliciting a single one; instead, people would come to him and ask how they too could receive what seemed like guaranteed income.
Madoff managed to generate consistent returns for years, appearing impervious to market ups and downs. And while many questioned the validity of his performance, evidence of any wrongdoing couldn't be found.
As the investment community beings to fully grasp the implications of the fraud -- the biggest in the history of Wall Street, easily dwarfing the infamous schemes of Enron and WorldCom -- it’s unclear just how shaken investor confidence in opaque investment vehicles now is.
During a time when money managers are desperately trying to assure clients they can navigate highly volatile markets, the Madoff debacle certainly isn't going to help their cause.
As the full extent of crooked money manager Bernard Madoff’s crimes becomes clear, losses are being felt around the world.
This morning in Europe, Spain’s Grupo Santander and France’s BNP Paribas announced clients and shareholders may be out billions of dollars, according to the Wall Street Journal. In Japan, Nomura Holdings (NMR) admitted to losses of as much as $302 million.
Back in the US, the Associated Press is reporting that Goldman Sachs (GS) and money manager BlackRock (BLK) are claiming no exposure. Bank of America (BAC), Citigroup (C) and Merrill Lynch (MER) declined to comment.
Meanwhile, well-known individuals ranging from movie director Steven Spielberg to Nobel laureate Elie Wiesel are likewise seeing their investments evaporate. Spielberg’s Wunderkind Foundation, according to regulatory filings, had a sizable portion of its assets with Madoff as recently as 2006. Wiesel’s Foundation for Humanity was one of a host of Jewish charities said to be tallying up losses.
The $50 billion fraud is even wiping out certain funds of funds. Funds of funds invest money in hedge funds on behalf of their high net-worth clients; losses at once such fund, Maxam Capital Management, appear significant enough to have forced it to close up shop.
Stories are emerging about investors who acted as unofficial sales agents for Madoff’s fund. Many were dependent on the income for their retirement. The Journal cites one such case, in which a Boca Raton, Florida resident, a former securities analyst, brought in dozens of new clients without ever soliciting a single one; instead, people would come to him and ask how they too could receive what seemed like guaranteed income.
Madoff managed to generate consistent returns for years, appearing impervious to market ups and downs. And while many questioned the validity of his performance, evidence of any wrongdoing couldn't be found.
As the investment community beings to fully grasp the implications of the fraud -- the biggest in the history of Wall Street, easily dwarfing the infamous schemes of Enron and WorldCom -- it’s unclear just how shaken investor confidence in opaque investment vehicles now is.
During a time when money managers are desperately trying to assure clients they can navigate highly volatile markets, the Madoff debacle certainly isn't going to help their cause.
Monday, December 15, 2008
White House Bails Out Auto Bailout
This post first appeared on Minyanville.
Bailouts are now being bailed out.
After the Senate failed to agree on terms for the rescue of General Motors (GM) and Chrysler, Detroit asked the Bush Administration to jump in and play savior. Over the weekend, White House officials pored over the 2 automakers' books, trying to figure out how much cash the Treasury Department would need to cough up to keep them alive.
According to the Wall Street Journal, estimates for the total amount vary from $10 billion to as much as $40 billion, but no one can seem to agree on how best to spend the money - any of it. GM, Chrysler and Ford (F) have been asking for money for months, to no avail. Ford, for it’s part, claims it doesn’t need an emergency loan - but still likes to remind lawmakers just how bad things would get if GM or Chrysler were to fail.
Since the $25 billion allocated earlier in the year for renewable energy investments appears too politically costly to touch, the money has to come from somewhere. While Congress, the United Auto Workers, and the Big 3’s top brass slog it out on Capitol Hill over the terms of a potential bailout, bean counters are scurrying around Washington scrounging up the cash. That's a tall order, since all but a paltry $15 or so billion is left of the first tranche of the $700 billion financial system bailout.
If Treasury wants to tap TARP, it needs to ask Congress to release the rest of the money. And if there were ever a day to keep the television locked on C-SPAN, this will be it. Watching irate senators and appalled members of the House rail at Treasury Department officials and their smug Federal Reserve cohorts who've been begging for more money like spoiled teenagers asking for bigger allowances would be better than even the best reality TV.
Access to the money, however, would require plans for a host of prickly topics, such foreclosure prevention and federal aid to struggling municipalities. The immediacy of the problem -- GM and Chrysler both say they won’t make 2009 without a cash infusion -- eliminates the possibility of designing programs to effectively use the rest of the bailout money.
The Fed, up to this point, has been reluctant to get involved. Chairman Ben Bernanke claims car-makers are outside his realm, and that the Fed doesn’t want to overstep its bounds. Such a claim borders on the absurd, since Bernanke’s stated vision is to protect the economy by any means necessary. His supposed fear of politicizing the "apolitical" Fed is akin to closing the barn door a few months after the horses left.
In previous government-sponsored bailouts, such as AIG (AIG) and Citigroup (C), taxpayers received warrants for ownership of the companies the government deemed worthy of propping up. Now that state-owned companies are bleeding into the broader economy, the Great American Socialist Experiment can finally begin in earnest.
Bailouts are now being bailed out.
After the Senate failed to agree on terms for the rescue of General Motors (GM) and Chrysler, Detroit asked the Bush Administration to jump in and play savior. Over the weekend, White House officials pored over the 2 automakers' books, trying to figure out how much cash the Treasury Department would need to cough up to keep them alive.
According to the Wall Street Journal, estimates for the total amount vary from $10 billion to as much as $40 billion, but no one can seem to agree on how best to spend the money - any of it. GM, Chrysler and Ford (F) have been asking for money for months, to no avail. Ford, for it’s part, claims it doesn’t need an emergency loan - but still likes to remind lawmakers just how bad things would get if GM or Chrysler were to fail.
Since the $25 billion allocated earlier in the year for renewable energy investments appears too politically costly to touch, the money has to come from somewhere. While Congress, the United Auto Workers, and the Big 3’s top brass slog it out on Capitol Hill over the terms of a potential bailout, bean counters are scurrying around Washington scrounging up the cash. That's a tall order, since all but a paltry $15 or so billion is left of the first tranche of the $700 billion financial system bailout.
If Treasury wants to tap TARP, it needs to ask Congress to release the rest of the money. And if there were ever a day to keep the television locked on C-SPAN, this will be it. Watching irate senators and appalled members of the House rail at Treasury Department officials and their smug Federal Reserve cohorts who've been begging for more money like spoiled teenagers asking for bigger allowances would be better than even the best reality TV.
Access to the money, however, would require plans for a host of prickly topics, such foreclosure prevention and federal aid to struggling municipalities. The immediacy of the problem -- GM and Chrysler both say they won’t make 2009 without a cash infusion -- eliminates the possibility of designing programs to effectively use the rest of the bailout money.
The Fed, up to this point, has been reluctant to get involved. Chairman Ben Bernanke claims car-makers are outside his realm, and that the Fed doesn’t want to overstep its bounds. Such a claim borders on the absurd, since Bernanke’s stated vision is to protect the economy by any means necessary. His supposed fear of politicizing the "apolitical" Fed is akin to closing the barn door a few months after the horses left.
In previous government-sponsored bailouts, such as AIG (AIG) and Citigroup (C), taxpayers received warrants for ownership of the companies the government deemed worthy of propping up. Now that state-owned companies are bleeding into the broader economy, the Great American Socialist Experiment can finally begin in earnest.
Thursday, December 11, 2008
Auto Bailout Still Has to Get Past Senate
This post first appeared on Minyanville.
Here we go again.
It all sounds eerily familiar: Old, white guys getting harangued on Capitol Hill as they beg for billions to save their dying industries. The House of Representatives, in its infinite benevolence, offers up a rescue package at the 11th hour. Sure, there are strings attached and it's a far cry from what the old white guys asked for, but hey, this is Washington.
Last night, House Democrats hammered out a $15 billion rescue for the General Motors (GM) and Chrysler, allowing the struggling automakers to draw on emergency loans to avoid imminent collapse. Their fate now rests in the hands of the Senate, where the financial system bailout met stiff resistence just months ago. Act II is playing out just as you'd expect, with Senate Republicans vowing to block the House's bill.
The rationale, again, for handing out billions of dollars in taxpayer money is to ostensibly save the American economy from sort of alternative too terrifying to imagine. As John Dingell, a Democrat from Michigan told Bloomberg, "Without this bridge, we're going to fall into the biggest calamity this country has known since the Great Depression. A terrible disaster looms."
The money is meant to keep the 2 firms alive (apparently Ford (F) isn't sick enough to be bailed out, yet) until restructuring plans can be drawn up and approved by the soon-to-be-appointed "Car Czar," who will oversee an overhaul of the 2 firms.
Taxpayers could receive stock warrants for as much as 20% of the amount of the loan, which in the case of GM means Joe Taxpayer will own almost the entire company. Still, the bill could die in the Senate as House Speaker Nancy Pelosi claims her brethren won't come back to the negotiating table if the Senate passes a materially different bill.
What a mess.
Proponents claim allowing the automakers to go bankrupt is foolish, risking millions of American jobs while they've provided a workable alternative.
Opponents to the bailout on the other hand, contend the rescue simply delays an inevitable bankruptcy filing and complete restructuring.
One contentious issue (of many) is whether or not consumers would buy cars from a bankrupt automaker. As I wrote last month, if American Airlines (AMR) and United (UAUA) could fly planes through Chapter 11, Detroit can certainly make cars during bankruptcy.
And a marked difference between the environment in which this bailout is being debated versus the one for the financial system, is the election. Now that representatives know their fate and no longer have to pander for votes, they're much more likely to play political hardball.
This doesn't bode well for Detroit.
Here we go again.
It all sounds eerily familiar: Old, white guys getting harangued on Capitol Hill as they beg for billions to save their dying industries. The House of Representatives, in its infinite benevolence, offers up a rescue package at the 11th hour. Sure, there are strings attached and it's a far cry from what the old white guys asked for, but hey, this is Washington.
Last night, House Democrats hammered out a $15 billion rescue for the General Motors (GM) and Chrysler, allowing the struggling automakers to draw on emergency loans to avoid imminent collapse. Their fate now rests in the hands of the Senate, where the financial system bailout met stiff resistence just months ago. Act II is playing out just as you'd expect, with Senate Republicans vowing to block the House's bill.
The rationale, again, for handing out billions of dollars in taxpayer money is to ostensibly save the American economy from sort of alternative too terrifying to imagine. As John Dingell, a Democrat from Michigan told Bloomberg, "Without this bridge, we're going to fall into the biggest calamity this country has known since the Great Depression. A terrible disaster looms."
The money is meant to keep the 2 firms alive (apparently Ford (F) isn't sick enough to be bailed out, yet) until restructuring plans can be drawn up and approved by the soon-to-be-appointed "Car Czar," who will oversee an overhaul of the 2 firms.
Taxpayers could receive stock warrants for as much as 20% of the amount of the loan, which in the case of GM means Joe Taxpayer will own almost the entire company. Still, the bill could die in the Senate as House Speaker Nancy Pelosi claims her brethren won't come back to the negotiating table if the Senate passes a materially different bill.
What a mess.
Proponents claim allowing the automakers to go bankrupt is foolish, risking millions of American jobs while they've provided a workable alternative.
Opponents to the bailout on the other hand, contend the rescue simply delays an inevitable bankruptcy filing and complete restructuring.
One contentious issue (of many) is whether or not consumers would buy cars from a bankrupt automaker. As I wrote last month, if American Airlines (AMR) and United (UAUA) could fly planes through Chapter 11, Detroit can certainly make cars during bankruptcy.
And a marked difference between the environment in which this bailout is being debated versus the one for the financial system, is the election. Now that representatives know their fate and no longer have to pander for votes, they're much more likely to play political hardball.
This doesn't bode well for Detroit.
Keepin' It Real Estate: Chinese Investors Smell Blood in California
This post first appeared on Minyanville and Cirios Real Estate.
Speculators have been flocking to California for centuries. Gold, computers, absurd dot.com start-ups, real estate - if it’s an asset, it’s probably boomed and busted in the Golden State.
The bursting of the latest bubble -- real estate -- is still in progress, as foreclosures push up inventory and drag down prices. Nevertheless, for every speculator that got burned on the way down, reinforcements are flooding the state with new money, hoping they’ll be lucky enough to pick the bottom.
In a trend that's just beginning to emerge from the smoldering ashes of California's housing market, the next wave of buyers could be armed with armloads of cash that’s red, rather than green. The Chinese are coming.
The Los Angeles Times paints a colorful picture of “Caravans of cash-rich Chinese in Hummers and Lincoln Navigators weaving through American neighborhoods in recent months, looking for foreclosures and other bargain properties to buy.”
What used to consist of small-scale, individual trips by wealthy Chinese buyers to scout for properties have turned into massive, safari-like operations. According to the Financial Times, SouFun.com, the biggest real estate website in China, received over 300 inquiries within days of announcing a home-prospecting trip to California.
For now, the groups are focusing on areas with existing Chinese populations, making San Francisco and Los Angeles prime targets. Almost 20% of San Franciscans hail from China; parts of LA, specifically the UC Riverside area and the San Gabriel Valley, boast large Chinese American communities.
And while not every potential Chinese investor is itching for a foreclosed tract house, a penchant for paying cash makes them desirable buyers in troubled markets. Big lenders like JPMorgan (JPM), Bank of America (BAC) (thanks, in part, to Countrywide) and Citigroup (C) have massive portfolios of foreclosed homes they’re trying to unload. Countrywide has over 6200 in California alone, up from 3900 just a year ago.
With mortgages increasingly tough to come by, banks are typically willing to knock 10% or so off the asking price for a cash bid. Countless sales have been falling through because the buyer can’t line up a loan, and cash is now king in the world of distressed home sales. This is no secret, and investors trying to snap up foreclosed properties at the courthouse steps tell stories of buyers showing up with millions of dollars in cashier’s checks at the ready.
Experts in China, however, are urging caution. Home prices in California are down 40% by some measures, but few expect the declines to taper off any time soon.
One tour operator told the LA Times he aims to give visitors a better sense of what life is like in America before they take the plunge: "What we sell is the culture, American culture."
And what better souvenir to take home from a trip to the US than a shiny new...house.
Speculators have been flocking to California for centuries. Gold, computers, absurd dot.com start-ups, real estate - if it’s an asset, it’s probably boomed and busted in the Golden State.The bursting of the latest bubble -- real estate -- is still in progress, as foreclosures push up inventory and drag down prices. Nevertheless, for every speculator that got burned on the way down, reinforcements are flooding the state with new money, hoping they’ll be lucky enough to pick the bottom.
In a trend that's just beginning to emerge from the smoldering ashes of California's housing market, the next wave of buyers could be armed with armloads of cash that’s red, rather than green. The Chinese are coming.
The Los Angeles Times paints a colorful picture of “Caravans of cash-rich Chinese in Hummers and Lincoln Navigators weaving through American neighborhoods in recent months, looking for foreclosures and other bargain properties to buy.”
What used to consist of small-scale, individual trips by wealthy Chinese buyers to scout for properties have turned into massive, safari-like operations. According to the Financial Times, SouFun.com, the biggest real estate website in China, received over 300 inquiries within days of announcing a home-prospecting trip to California.
For now, the groups are focusing on areas with existing Chinese populations, making San Francisco and Los Angeles prime targets. Almost 20% of San Franciscans hail from China; parts of LA, specifically the UC Riverside area and the San Gabriel Valley, boast large Chinese American communities.
And while not every potential Chinese investor is itching for a foreclosed tract house, a penchant for paying cash makes them desirable buyers in troubled markets. Big lenders like JPMorgan (JPM), Bank of America (BAC) (thanks, in part, to Countrywide) and Citigroup (C) have massive portfolios of foreclosed homes they’re trying to unload. Countrywide has over 6200 in California alone, up from 3900 just a year ago.
With mortgages increasingly tough to come by, banks are typically willing to knock 10% or so off the asking price for a cash bid. Countless sales have been falling through because the buyer can’t line up a loan, and cash is now king in the world of distressed home sales. This is no secret, and investors trying to snap up foreclosed properties at the courthouse steps tell stories of buyers showing up with millions of dollars in cashier’s checks at the ready.
Experts in China, however, are urging caution. Home prices in California are down 40% by some measures, but few expect the declines to taper off any time soon.
One tour operator told the LA Times he aims to give visitors a better sense of what life is like in America before they take the plunge: "What we sell is the culture, American culture."
And what better souvenir to take home from a trip to the US than a shiny new...house.
Wednesday, December 10, 2008
Obama's New Deal
This post first appeared on Minyanville.
Ideology, it appears, has taken a backseat to expediency.
72 hours ago, President-Elect Barack Obama announced plans to reinvigorate the American economy with the biggest public-works project since the 1950s. Criticism of what's being called the “New New Deal” has been scant, as even ardent capitalists seem willing to wax socialist if it gets the country back on track.
After all, with unemployment on the rise, the financial system crumbling around us, General Motors (GM), Chrysler and Ford (F) facing extinction and a host of other economic maladies plaguing the system, anything has to be better than the status quo.
Details of Obama’s intentions remain sketchy at best, but fixing highways and bridges, updating the rail system, new telecommunications infrastructure, modernizing health care and improving the public school system are atop the President-Elect’s holiday wish list.
Commodity Prices soared on the heels of the announcement, as investors poured money into US Steel (X), Freeport McMoRan (FCX) and others who pull stuff out of the ground that hurts when it falls on your foot, as Dennis Gartmen is now famous for saying. With all that new construction, steel, copper and the like will once again be in high demand.
If, of course, the plan even works.
Detractors cite impracticality as one of the primary flaws of the massive spending program. Many wonder if it’s realistic to expect the government to spend hundreds of billions of dollars efficiently, getting money and jobs to where they’re needed most. The $700 bailout plan, now half spent, hasn’t exactly been a model of prudent use of taxpayer funds.
Others wishing to rain on Obama’s populist parade question the economy’s ability to absorb millions of jobseekers, few of which have been trained to lay new railroad, pour cement or install fiber optic cables. America’s labor pool has become increasingly focused on service-sector jobs, yet the new public works focus on traditional blue-collar employment. Structuring debt securities doesn’t exactly translate into structural engineering.
Finally, there’s that whole pesky issue of the national debt. Obama has repeatedly vowed to ignore near-term budget deficits in favor of getting the economy back on track. But at some point, the printing presses will seize up, and Washington’s debt experiment will run aground.
The world seems able, although not altogether thrilled, to absorb an American budget deficit now running at around $1 trillion per year. Can it handle $2 trillion? What about $3 trillion? Or $5 trillion?
At some point, trillions do in fact start to matter. If holders of US Treasuries start to get skittish and demand a higher return on their not-so-safe-haven investment, government debt will become that much more expensive, deepening the deficit and resulting in the mother of all feedback loops.
No one’s quite sure what will happen if we really do bankrupt the country trying to save it - some mildly terrifying cocktail of deflation, a dollar collapse and hyperinflation all rolled up in one. It’s an outcome no one really wants to provision for.
To be sure, it’s hard to find many who hope Obama fails, preferring instead to look back at 2009 and chuckle, remembering when the country went all in and made that straight flush on the river.
Ideology, it appears, has taken a backseat to expediency.
72 hours ago, President-Elect Barack Obama announced plans to reinvigorate the American economy with the biggest public-works project since the 1950s. Criticism of what's being called the “New New Deal” has been scant, as even ardent capitalists seem willing to wax socialist if it gets the country back on track.
After all, with unemployment on the rise, the financial system crumbling around us, General Motors (GM), Chrysler and Ford (F) facing extinction and a host of other economic maladies plaguing the system, anything has to be better than the status quo.
Details of Obama’s intentions remain sketchy at best, but fixing highways and bridges, updating the rail system, new telecommunications infrastructure, modernizing health care and improving the public school system are atop the President-Elect’s holiday wish list.
Commodity Prices soared on the heels of the announcement, as investors poured money into US Steel (X), Freeport McMoRan (FCX) and others who pull stuff out of the ground that hurts when it falls on your foot, as Dennis Gartmen is now famous for saying. With all that new construction, steel, copper and the like will once again be in high demand.
If, of course, the plan even works.
Detractors cite impracticality as one of the primary flaws of the massive spending program. Many wonder if it’s realistic to expect the government to spend hundreds of billions of dollars efficiently, getting money and jobs to where they’re needed most. The $700 bailout plan, now half spent, hasn’t exactly been a model of prudent use of taxpayer funds.
Others wishing to rain on Obama’s populist parade question the economy’s ability to absorb millions of jobseekers, few of which have been trained to lay new railroad, pour cement or install fiber optic cables. America’s labor pool has become increasingly focused on service-sector jobs, yet the new public works focus on traditional blue-collar employment. Structuring debt securities doesn’t exactly translate into structural engineering.
Finally, there’s that whole pesky issue of the national debt. Obama has repeatedly vowed to ignore near-term budget deficits in favor of getting the economy back on track. But at some point, the printing presses will seize up, and Washington’s debt experiment will run aground.
The world seems able, although not altogether thrilled, to absorb an American budget deficit now running at around $1 trillion per year. Can it handle $2 trillion? What about $3 trillion? Or $5 trillion?
At some point, trillions do in fact start to matter. If holders of US Treasuries start to get skittish and demand a higher return on their not-so-safe-haven investment, government debt will become that much more expensive, deepening the deficit and resulting in the mother of all feedback loops.
No one’s quite sure what will happen if we really do bankrupt the country trying to save it - some mildly terrifying cocktail of deflation, a dollar collapse and hyperinflation all rolled up in one. It’s an outcome no one really wants to provision for.
To be sure, it’s hard to find many who hope Obama fails, preferring instead to look back at 2009 and chuckle, remembering when the country went all in and made that straight flush on the river.
Tuesday, December 9, 2008
Fannie, Freddie Knew About Risks, Ignored Them
This post first appeared on Minyanville and Cirios Real Estate.
Unprecedented. Unpredictable. Unparalleled. Extraordinary.
These are the adjectives offered by mortgage industry executives defending their relative innocence in the collapse of the housing industry. Conditions, they argue, deteriorated so rapidly and in such unpredictable ways they couldn't possibly batten down the hatches fast enough.
As it turns out, that's not exactly true.
The Washington Post reports that chief executive offers at both Fannie Mae (FNM) and Freddie Mac (FRE) ignored warnings about their firms' exposure to risky loans. The findings of the House Committee on Oversight and Government Reform are being discussed today on Capitol Hill.
At Freddie, an internal report explicitly warned that certain types of loans might default at a higher rate than expected if borrowers' true financial positions were to be made known. Furthermore -- and troubling insofar as these firms and their Washington backers actively pushed these risky loans on low income immigrant communities -- senior executives were told many such mortgages could be particularly harmful for non-English-speaking homeowners, since many didn't fully understand the confusing loan terms.
At Fannie, no smoking gun was produced, but the oversight committee discovered what it called an "underground" effort to actively buy subprime loans.
For their part, former Fannie CEO Daniel Mudd and deposed Freddie chief Richard Syron are directing the blame elsewhere - not surprising, given their well-documented penchant for obfuscation and finger-pointing. To Mudd and Syron, responsibility for the crash lies squarely at the feet of regulators and Congress: One was asleep at the wheel while bad loans ran rampant through industry as a whole; the other all but forced lenders to give out loans to under-qualified borrowers under the auspice of the Community Reinvestment Act, or CRA.
The CRA, introduced in the late 1970s but used by the Clinton administration to support the now-maligned American dream of home ownership, aims to give low-income borrowers equal access to cheap mortgages and other banking services. Think of it as reverse "red-lining," which is the outlawed practice of refusing to lend in certain neighborhoods that may be perceived as riskier than others.
Homeownership rates -- not to mention political backslapping -- surged as the housing market boomed, even as borrowers became increasingly exposed to predatory lending and risky loans. Wall Street and banks like Bank of America (BAC), Citigroup (C) and JPMorgan (JPM) saw loan portfolios balloon as low interest rates, securitization and an influx of foreign money fueled the red-hot market.
A lucky few managed to sell at the top; the rest are now left holding the bag, with everything tenuously held together by an ad-hoc glue of taxpayer money and a ballooning national debt.
And while we now know how the story ends, the future, as they say, has yet to be written.
Mortgage regulations, as much as they've been tweaked since the crisis began, will undergo an even further-reaching overhaul by the time we emerge on the other side of this mess. Along with the rest the financial industry, laws regarding borrowing and lending are slated for massive changes in the coming years.
Regulators could choose to punish the industry and homeowners alike with oppressive rules and regulations, which will will push up interest rates and prolong the housing market's eventual recovery. It will, however, do little to punish those actually responsible, since most have either lost their jobs or are living high off their spoils. Sadly, we appear well along this path.
The other option, however politically inexpedient it may be, is to once and for all remove the government crutch from the mortgage industry and let the free market determine interest rates, borrowing terms, and home prices.
To be clear, this is not to advocate lawless cowboy lending, but simple, prudent rules that protect borrower and lender alike without home loan subsidies in the form of artificially low interest rates.
At the center of any responsible regulatory regime is a realignment of incentives. The current system still rewards housing-market actors like real-estate agents and mortgage brokers for encouraging borrowers to make bad decisions. The higher a buyer's price, the more an agent is paid; the more the terms of the loan favor the bank, the more a mortgage broker stands to profit. This needs to change.
And until it does, as George Santayana said, "Those who cannot remember the past are condemned to repeat it."
Unprecedented. Unpredictable. Unparalleled. Extraordinary.
These are the adjectives offered by mortgage industry executives defending their relative innocence in the collapse of the housing industry. Conditions, they argue, deteriorated so rapidly and in such unpredictable ways they couldn't possibly batten down the hatches fast enough.
As it turns out, that's not exactly true.
The Washington Post reports that chief executive offers at both Fannie Mae (FNM) and Freddie Mac (FRE) ignored warnings about their firms' exposure to risky loans. The findings of the House Committee on Oversight and Government Reform are being discussed today on Capitol Hill.
At Freddie, an internal report explicitly warned that certain types of loans might default at a higher rate than expected if borrowers' true financial positions were to be made known. Furthermore -- and troubling insofar as these firms and their Washington backers actively pushed these risky loans on low income immigrant communities -- senior executives were told many such mortgages could be particularly harmful for non-English-speaking homeowners, since many didn't fully understand the confusing loan terms.
At Fannie, no smoking gun was produced, but the oversight committee discovered what it called an "underground" effort to actively buy subprime loans.
For their part, former Fannie CEO Daniel Mudd and deposed Freddie chief Richard Syron are directing the blame elsewhere - not surprising, given their well-documented penchant for obfuscation and finger-pointing. To Mudd and Syron, responsibility for the crash lies squarely at the feet of regulators and Congress: One was asleep at the wheel while bad loans ran rampant through industry as a whole; the other all but forced lenders to give out loans to under-qualified borrowers under the auspice of the Community Reinvestment Act, or CRA.
The CRA, introduced in the late 1970s but used by the Clinton administration to support the now-maligned American dream of home ownership, aims to give low-income borrowers equal access to cheap mortgages and other banking services. Think of it as reverse "red-lining," which is the outlawed practice of refusing to lend in certain neighborhoods that may be perceived as riskier than others.
Homeownership rates -- not to mention political backslapping -- surged as the housing market boomed, even as borrowers became increasingly exposed to predatory lending and risky loans. Wall Street and banks like Bank of America (BAC), Citigroup (C) and JPMorgan (JPM) saw loan portfolios balloon as low interest rates, securitization and an influx of foreign money fueled the red-hot market.
A lucky few managed to sell at the top; the rest are now left holding the bag, with everything tenuously held together by an ad-hoc glue of taxpayer money and a ballooning national debt.
And while we now know how the story ends, the future, as they say, has yet to be written.
Mortgage regulations, as much as they've been tweaked since the crisis began, will undergo an even further-reaching overhaul by the time we emerge on the other side of this mess. Along with the rest the financial industry, laws regarding borrowing and lending are slated for massive changes in the coming years.
Regulators could choose to punish the industry and homeowners alike with oppressive rules and regulations, which will will push up interest rates and prolong the housing market's eventual recovery. It will, however, do little to punish those actually responsible, since most have either lost their jobs or are living high off their spoils. Sadly, we appear well along this path.
The other option, however politically inexpedient it may be, is to once and for all remove the government crutch from the mortgage industry and let the free market determine interest rates, borrowing terms, and home prices.
To be clear, this is not to advocate lawless cowboy lending, but simple, prudent rules that protect borrower and lender alike without home loan subsidies in the form of artificially low interest rates.
At the center of any responsible regulatory regime is a realignment of incentives. The current system still rewards housing-market actors like real-estate agents and mortgage brokers for encouraging borrowers to make bad decisions. The higher a buyer's price, the more an agent is paid; the more the terms of the loan favor the bank, the more a mortgage broker stands to profit. This needs to change.
And until it does, as George Santayana said, "Those who cannot remember the past are condemned to repeat it."
Friday, December 5, 2008
Legalize Drugs: Everybody's Doing Them Anyway
This post first appeared on Minyanville.
If ever there were a day to lift a glass in celebration, today’s the day.
On this date 75 years ago, the United States repealed the 18th Amendment, thus ending what Ethan Nadelmann has called “the nation's disastrous experiment with alcohol prohibition.”
After 15 years of moonshine, underground beer halls, and a dramatic spike in organized crime, America realized that its relentless effort to keep people away from liquor was in fact more dangerous than booze itself.
Nevertheless, today we seem determined to make the same mistakes our Depression-era counterparts did; unlike them, however, we haven't set our errors right.
The debate over the legalization of illicit drugs isn't new, but with lawmakers scrounging for additional tax revenues to offset a ballooning national deficit and social mood yearning for change, getting high could soon become a whole lot easier.
As well it should.
For all the economic, political, and social arguments over relaxing our oppressive anti-drug policies, the issue ultimately comes down to ideology: Do we, as a country, believe the government should dictate our morality, or should such decisions be left to individuals themselves?
The relative legality of drugs is determined -- arbitrarily -- by bureaucrats in order to please this or that Washington lobby. And to ensure Molson Coors (TAP), the Boston Beer Company (SAM) and Altria (MO) keep their monopoly on government-sanctioned debauchery.
Alcohol -- nothing more than flavored poison that encourages domestic violence and drunk driving -- is not only legal, but is advertised ad nauseum; meanwhile, possession of hallucinogenic mushrooms, which grow naturally and merely make the walls wiggle, the clouds purple, and the meaning of life totally clear, is a felony in certain states.
Cigarettes, which cause cancer and kill millions each year, remain available at the corner store; marijuana, a plant, which has a fraction of the negative physical and societal side effects (not to mention documented medicinal qualities), is shunned by teetotalers and drunks alike.
It’s pretty hard to argue that a pothead munching potato chips on his couch is a greater menace to society than a party-goer hopping in his car after 6 or 8 cocktails. Yet for some reason, our society accepts these irrational laws, as if desperately clinging to some sort link to our irrational Puritanical origins.
The decision over what drugs we put into our bodies should be our own. Period. To the extent those decisions harm others (or have the potential to do so), they should be dealt with accordingly.
To be sure, drug abuse of any kind has its ugly side, which no rational argument for legalization can ignore. But rehabilitation and the treatment of addiction as the disease it is makes far more sense than turning petty drug offenders into hardened criminals by locking them away in our overcrowded prison system.
And the international ramifications of our “War on Drugs” are reason enough to reconsider this ill-conceived battle. As Nadelmann points out in the Journal, one need look no further than violence in Afghanistan, Colombia, and Mexico to see what fighting a multi-billion war on an amorphous, impossibly fragmented foe achieves.
There are 2 sides to every market: Supply and demand. We have chosen, as a country, to attack the latter, because it makes for better headlines and takes the fight outside our borders. It’s far easier to support spraying pesticides in the Andes, polluting rivers and killing farmers, than it is to face the stark reality that millions of Americans, most of whom are perfectly responsible, functioning members of the community, may enjoy the occasional toke now and again.
If ever there were a day to lift a glass in celebration, today’s the day.
On this date 75 years ago, the United States repealed the 18th Amendment, thus ending what Ethan Nadelmann has called “the nation's disastrous experiment with alcohol prohibition.”
After 15 years of moonshine, underground beer halls, and a dramatic spike in organized crime, America realized that its relentless effort to keep people away from liquor was in fact more dangerous than booze itself.
Nevertheless, today we seem determined to make the same mistakes our Depression-era counterparts did; unlike them, however, we haven't set our errors right.
The debate over the legalization of illicit drugs isn't new, but with lawmakers scrounging for additional tax revenues to offset a ballooning national deficit and social mood yearning for change, getting high could soon become a whole lot easier.
As well it should.
For all the economic, political, and social arguments over relaxing our oppressive anti-drug policies, the issue ultimately comes down to ideology: Do we, as a country, believe the government should dictate our morality, or should such decisions be left to individuals themselves?
The relative legality of drugs is determined -- arbitrarily -- by bureaucrats in order to please this or that Washington lobby. And to ensure Molson Coors (TAP), the Boston Beer Company (SAM) and Altria (MO) keep their monopoly on government-sanctioned debauchery.
Alcohol -- nothing more than flavored poison that encourages domestic violence and drunk driving -- is not only legal, but is advertised ad nauseum; meanwhile, possession of hallucinogenic mushrooms, which grow naturally and merely make the walls wiggle, the clouds purple, and the meaning of life totally clear, is a felony in certain states.
Cigarettes, which cause cancer and kill millions each year, remain available at the corner store; marijuana, a plant, which has a fraction of the negative physical and societal side effects (not to mention documented medicinal qualities), is shunned by teetotalers and drunks alike.
It’s pretty hard to argue that a pothead munching potato chips on his couch is a greater menace to society than a party-goer hopping in his car after 6 or 8 cocktails. Yet for some reason, our society accepts these irrational laws, as if desperately clinging to some sort link to our irrational Puritanical origins.
The decision over what drugs we put into our bodies should be our own. Period. To the extent those decisions harm others (or have the potential to do so), they should be dealt with accordingly.
To be sure, drug abuse of any kind has its ugly side, which no rational argument for legalization can ignore. But rehabilitation and the treatment of addiction as the disease it is makes far more sense than turning petty drug offenders into hardened criminals by locking them away in our overcrowded prison system.
And the international ramifications of our “War on Drugs” are reason enough to reconsider this ill-conceived battle. As Nadelmann points out in the Journal, one need look no further than violence in Afghanistan, Colombia, and Mexico to see what fighting a multi-billion war on an amorphous, impossibly fragmented foe achieves.
There are 2 sides to every market: Supply and demand. We have chosen, as a country, to attack the latter, because it makes for better headlines and takes the fight outside our borders. It’s far easier to support spraying pesticides in the Andes, polluting rivers and killing farmers, than it is to face the stark reality that millions of Americans, most of whom are perfectly responsible, functioning members of the community, may enjoy the occasional toke now and again.
Keepin' It Real Estate: Treasury Tries to Re-Inflate Housing Bubble
This post first appeared on Minyanville and Cirios Real Estate.
Treasury Secretary Hank Paulson is hoping he's found the magic bullet to solve the US housing market's seemingly never-endless woes.
He hasn’t.
By throwing around the weight of recently nationalized mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), the Treasury Department is considering a plan to push interest rates on purchase money mortgages down to 4.5% - well below the current market rate of around 5.75%.
Artificially lowering rates so buyers can afford more house led us into this mess; it’s doubtful the same tactics will lead us out.
According to the Wall Street Journal, the plan is in the early stages of development, but officials expect the initiative to spur buying activity. The aim is to prop up home prices by enabling borrowers to afford more expensive houses. Columbia University economists believe such a program could help between 1.5 million and 2.5 million Americans buy new homes. In order to qualify for the low rate, borrowers have to meet Fannie and Freddie’s now-stricter loan underwriting requirements. But even with more affordable monthly payments -- the lower rate amounts to savings of $150 per month on a $200,000 loan -- precious few prospective buyers are willing and able to pony up the tens of thousands dollars still required for a down payment.
Combined with the Federal Reserve’s recent $200 billion lending program for securities backed by newly originated mortgages, bureaucrats are pulling out all the stops to buoy falling property values.
This is the latest in a series of botched attempts to re-inflate the housing bubble. And like the others before it, the plan fails to address the root causes of ongoing home price declines: Negative equity, over-supply and mounting job losses.
The flood of recent loan modification programs championed by FDIC Chairman Sheila Bair and rolled out by JPMorgan (JPM), Citigroup (C) and Bank of America (BAC) also miss the point. Like any distressed market, the housing market badly needs price discovery. And like any other asset class, the true price of a house is only discovered when someone buys it on the open market.
By creating unnaturally low interest rates and allowing buyers to purchase bigger homes than they could normally afford, Paulson and Bernanke are preventing home prices from falling back to where responsible, fiscally minded Americans can buy without the crutch of government subsidies.
These continued distortions of the free market end up running in contrast to their intended goals: As long as the charade continues, as long as the real estate market is prevented from finding a natural bottom, home prices will continue to fall.
The silver lining -- for those brave enough to uncover their eyes and look -- is that just as it overshot on the way up, the housing market will likewise overshoot on the way down.
A protracted period of stabilization will ensue, during which time the opportunity to purchase high-quality residential real estate below its long-term intrinsic value will be extraordinary.
Savvy investors with the ability to identify attractively priced properties will, eventually, have the buying opportunity of a lifetime.
Treasury Secretary Hank Paulson is hoping he's found the magic bullet to solve the US housing market's seemingly never-endless woes.
He hasn’t.
By throwing around the weight of recently nationalized mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), the Treasury Department is considering a plan to push interest rates on purchase money mortgages down to 4.5% - well below the current market rate of around 5.75%.
Artificially lowering rates so buyers can afford more house led us into this mess; it’s doubtful the same tactics will lead us out.
According to the Wall Street Journal, the plan is in the early stages of development, but officials expect the initiative to spur buying activity. The aim is to prop up home prices by enabling borrowers to afford more expensive houses. Columbia University economists believe such a program could help between 1.5 million and 2.5 million Americans buy new homes. In order to qualify for the low rate, borrowers have to meet Fannie and Freddie’s now-stricter loan underwriting requirements. But even with more affordable monthly payments -- the lower rate amounts to savings of $150 per month on a $200,000 loan -- precious few prospective buyers are willing and able to pony up the tens of thousands dollars still required for a down payment.
Combined with the Federal Reserve’s recent $200 billion lending program for securities backed by newly originated mortgages, bureaucrats are pulling out all the stops to buoy falling property values.This is the latest in a series of botched attempts to re-inflate the housing bubble. And like the others before it, the plan fails to address the root causes of ongoing home price declines: Negative equity, over-supply and mounting job losses.
The flood of recent loan modification programs championed by FDIC Chairman Sheila Bair and rolled out by JPMorgan (JPM), Citigroup (C) and Bank of America (BAC) also miss the point. Like any distressed market, the housing market badly needs price discovery. And like any other asset class, the true price of a house is only discovered when someone buys it on the open market.
By creating unnaturally low interest rates and allowing buyers to purchase bigger homes than they could normally afford, Paulson and Bernanke are preventing home prices from falling back to where responsible, fiscally minded Americans can buy without the crutch of government subsidies.
These continued distortions of the free market end up running in contrast to their intended goals: As long as the charade continues, as long as the real estate market is prevented from finding a natural bottom, home prices will continue to fall.
The silver lining -- for those brave enough to uncover their eyes and look -- is that just as it overshot on the way up, the housing market will likewise overshoot on the way down.
A protracted period of stabilization will ensue, during which time the opportunity to purchase high-quality residential real estate below its long-term intrinsic value will be extraordinary.
Savvy investors with the ability to identify attractively priced properties will, eventually, have the buying opportunity of a lifetime.
Bottom's Up, 2009 Gonna to Be Bubbly
Ask anyone who didn't live throughout it what color the Great Depression was and "gray" will be the likely response.
Sure, maybe that's because color photographs were yet to be invented, but gray likewise invokes images of dour faces and winding queues of destitute Americans in heavy overcoats donning sad fedora hats.
Not this time.
Yellow, it appears, is the new gray. Or, more specifically, "mimosa."
Yesterday, despite fears General Motors (GM) could go belly up without a multi-billion dollar government bailout and dire economic warnings from across the globe, the Pantone Color Institute made bold prognostications of optimism, hopefulness and joy in the coming year.
Pantone, the self-proclaimed authority on color, announced that 2009's fashion color of the year would be mimosa, a gentle hue most Americans associate with pre-noon cocktails and tipsy brunches.
"The color yellow exemplifies the warmth and nurturing quality of the sun, properties we as humans are naturally drawn to for reassurance," according to Pantone executive director Leatrice Eiseman. "Mimosa also speaks to enlightenment, as it is a hue that sparks imagination and innovation" she continued.
Such blissful words in these dark times are sorely needed. For, amidst the ubiquitous doom and gloom, the forecasters of fear and carnacs of carnage are missing the point. As Minyanville's Kevin Depew wrote back in July about the Modern Stealth Depression, "The time for preparations and battening down the hatches has passed. It's finally here. Let's party."
Indeed, bottom's up.
Sure, maybe that's because color photographs were yet to be invented, but gray likewise invokes images of dour faces and winding queues of destitute Americans in heavy overcoats donning sad fedora hats.
Not this time.
Yellow, it appears, is the new gray. Or, more specifically, "mimosa."
Yesterday, despite fears General Motors (GM) could go belly up without a multi-billion dollar government bailout and dire economic warnings from across the globe, the Pantone Color Institute made bold prognostications of optimism, hopefulness and joy in the coming year.
Pantone, the self-proclaimed authority on color, announced that 2009's fashion color of the year would be mimosa, a gentle hue most Americans associate with pre-noon cocktails and tipsy brunches.
"The color yellow exemplifies the warmth and nurturing quality of the sun, properties we as humans are naturally drawn to for reassurance," according to Pantone executive director Leatrice Eiseman. "Mimosa also speaks to enlightenment, as it is a hue that sparks imagination and innovation" she continued.
Such blissful words in these dark times are sorely needed. For, amidst the ubiquitous doom and gloom, the forecasters of fear and carnacs of carnage are missing the point. As Minyanville's Kevin Depew wrote back in July about the Modern Stealth Depression, "The time for preparations and battening down the hatches has passed. It's finally here. Let's party."
Indeed, bottom's up.
Wednesday, December 3, 2008
Paulson Rolling Out Rest of TARP?
This post first appeared on Minyanville.
$350 billion sure didn't last very long.
Just 60 days ago, Congress allocated $700 billion in TARP money to rescue the financial system, half of which was available immediately. Now, according to the Wall Steet Journal, Treasury Secretary Hank Paulson may ready to ask for the second half.
If he does, he's likely to face stiff opposition on Capitol Hill. A recent Government Accountability Office report rebuked the Treasury for insufficient oversight and staffing to ensure the money it has already poured into banks like Goldman Sachs (GS), Bank of America (BAC), JP Morgan (JPM) and Morgan Stanley (MS) is achieving the intended goals.
Meanwhile, Congress is eyeing the remaining bailout funds for other uses. First, and most immediately, lawmakers are likely to spring for an aid package for floundering automakers General Motors (GM), Ford (F) and Chrysler. The Big 3 said yesterday it would take $34 billion to save them from collapse.
Lawmakers are also pushing for more help for homeowners. The debate over loan modifications and how best to prevent foreclosures has intensified in recent weeks, as banks, loan servicers, investors, academics and regulators squabble over the best solution.
FDIC Chairman Sheila Bair has advanced an aggressive plan for the government to share potential losses with banks and streamline the modification process. Critics, however, argue Bair's program -- currently being stress-tested at failed California thrift IndyMac -- is falling short of lofty expectations and that claims of it's successes are overblown.
Compounding the complexity of deploying the bailout money is the transition to a new presidential administration. The Journal reports the Obama team is in close communication with the Bush administration, but is shying away from taking the lead in negotiations.
It's all but certain the $700 billion Congress allocated to prop up the financial system will simply be round one of a widescale capital infusion into American banks. Eroding economic conditions, falling consumer confidence and the ongoing credit contraction will continue to result in heavy losses for financial institutions across the country.
A broad-based stimulus package due to be announced on inauguration day is likely to include more help for troubled banks.
Still, short of outright nationalization, Washington is powerless to force banks to start lending again. Economic recoveries are typically spurred by an expansion of credit, making it cheaper for firms of all types to borrow, spend and start growing again. This time, however, banks won't part with their precious dollars for fear loans won't be repaid and losses will continue to spiral.
As well they should: Defaults across loan categories are rising as the economic malaise spreads up the credit spectrum. American consumers, strapped for cash and credit alike, are cutting back, reining in the rampant spending the propped up the domestic economy.
The road to recovery will be long, and not without potholes and hairpin turns, but it is a road nonetheless. As Toddo often says, "In order to get through this, we have to go through this.
$350 billion sure didn't last very long.
Just 60 days ago, Congress allocated $700 billion in TARP money to rescue the financial system, half of which was available immediately. Now, according to the Wall Steet Journal, Treasury Secretary Hank Paulson may ready to ask for the second half.
If he does, he's likely to face stiff opposition on Capitol Hill. A recent Government Accountability Office report rebuked the Treasury for insufficient oversight and staffing to ensure the money it has already poured into banks like Goldman Sachs (GS), Bank of America (BAC), JP Morgan (JPM) and Morgan Stanley (MS) is achieving the intended goals.
Meanwhile, Congress is eyeing the remaining bailout funds for other uses. First, and most immediately, lawmakers are likely to spring for an aid package for floundering automakers General Motors (GM), Ford (F) and Chrysler. The Big 3 said yesterday it would take $34 billion to save them from collapse.
Lawmakers are also pushing for more help for homeowners. The debate over loan modifications and how best to prevent foreclosures has intensified in recent weeks, as banks, loan servicers, investors, academics and regulators squabble over the best solution.
FDIC Chairman Sheila Bair has advanced an aggressive plan for the government to share potential losses with banks and streamline the modification process. Critics, however, argue Bair's program -- currently being stress-tested at failed California thrift IndyMac -- is falling short of lofty expectations and that claims of it's successes are overblown.
Compounding the complexity of deploying the bailout money is the transition to a new presidential administration. The Journal reports the Obama team is in close communication with the Bush administration, but is shying away from taking the lead in negotiations.
It's all but certain the $700 billion Congress allocated to prop up the financial system will simply be round one of a widescale capital infusion into American banks. Eroding economic conditions, falling consumer confidence and the ongoing credit contraction will continue to result in heavy losses for financial institutions across the country.
A broad-based stimulus package due to be announced on inauguration day is likely to include more help for troubled banks.
Still, short of outright nationalization, Washington is powerless to force banks to start lending again. Economic recoveries are typically spurred by an expansion of credit, making it cheaper for firms of all types to borrow, spend and start growing again. This time, however, banks won't part with their precious dollars for fear loans won't be repaid and losses will continue to spiral.
As well they should: Defaults across loan categories are rising as the economic malaise spreads up the credit spectrum. American consumers, strapped for cash and credit alike, are cutting back, reining in the rampant spending the propped up the domestic economy.
The road to recovery will be long, and not without potholes and hairpin turns, but it is a road nonetheless. As Toddo often says, "In order to get through this, we have to go through this.
Wednesday, November 26, 2008
Why Should I Care: Timothy Geithner, Your Next Treasury Secretary
This post first appeared on Minyanville.
Tears of joy streamed down your cheek as you saw your eldest son off to his first day of school this morning. And ever since he left, Spider-Man backpack slung over his left shoulder and transformer in hand, you’ve been eagerly expecting his return.
You wonder: Did he behave? Was he polite? Did he manage to learn anything?
Finally, the door flies open. A shock of blond hair rushes toward you, arms extended for a bear hug.
“Mommy, mommy, I love school! The kids are so nice, the teacher is funny and we played games all day.”
“That’s wonderful. Did they teach you anything?”
“Yes! We talked about what we want to be when we grow up. Mommy, when I grow up, I want to be the Treasury Secretary of the United States.”
Wait a second.
A doctor, an astronaut, a baseball player - those make sense. But Treasury Secretary? Is this kid for real?
Turns out little Billy’s sharper than you think.
Only 2 months ago, newspapers were calling Henry Paulson, the current Treasury Secretary, the most powerful man in the world.
And for good reason.
The US economy -- the largest in the world -- is in the throws of financial calamity, and he’s the man charged with doing something about it.
After Inauguration Day on January 20th, the torch will be passed - most likely to Timothy Geithner, the head of the New York Federal Reserve Bank. His nomination by President-Elect Barack Obama was cheered by Wall Street to the tune of a 6% late-day rally.
Secretary Paulson’s notoriety is a sign of the times, but by and large Treasury Secretaries are low-profile, old white guys that really, really, like finance. If you rattled off the names Donald Reagan, Lloyd Bentsen, Paul O’Neill -- all former holders of the job -- most people would return a blank stare.
The Treasury itself describes the job of Secretary as “the principal economic advisor to the President” with a “critical role in policy-making.” In other words, he tells the Commander-in-Chief how much stuff costs.
Furthermore, the Secretary is responsible for managing the public debt. And a $10.6 trillion burden isn’t something to be taken lightly.
The incoming Timothy Geithner will assume the additional responsibility of doling out what’s left of the $700 billion bailout package.
With half the money already spent, and thousands of banks -- some struggling mightily to survive -- squabbling over their share, his role in shaping the future of America’s economic landscape will be especially critical.
So, who is this Geithner fellow anyway?
Very possibly, the kid who ran home from school and told his mother he wanted to control America's purse strings. His credentials are, indeed, impeccable.
Born in Brooklyn, Geithner received a first-rate education. After attending the International School in Bangkok for post-secondary studies, he graduated from Dartmouth with a Bachelor of Arts in government (foreshadowing!) and Asian studies. Next came a Masters degree in international economics from Johns Hopkins. Dumb guy.
Out of graduate school, Geithner worked for 3 years with Kissinger Associates in Washington before joining the Treasury in 1988. No stranger to international relations, he’s lived in East Africa, India, Thailand, China and Japan - and for a time was the assistant attaché at the American Embassy in Tokyo.
Prior to being appointed director of the Policy Development and Review Department of the International Monetary Fund, Geithner served as Under Secretary of the Treasury for International Affairs from 1998 to 2001.
He was named President and Chief Executive Officer of the New York Fed in 2003.
Throughout the last 12 months, Geithner has been repeatedly shoved into the national spotlight, as financial institutions in his native New York have sputtered.
Earlier this year, he kept watch as Ambac (ABK) and MBIA (MBI), the country’s biggest bond insurers, nearly collapsed. He played an integral role in the sale of Bear Stearns to JPMorgan (JPM) and got his hands dirty in the bailout of AIG (AIG). Some even point to him as an advocate for letting Lehman Brothers fail.
When he takes the reins from Secretary Paulson in January, he’ll be charged with preventing what many believe could become this generation’s Great Depression. The next economic stimulus package and any rescue of beleaguered automakers General Motors (GM), Ford (F) and Chrysler will bear Geithner’s mark. Additionally, the entire regulatory framework of the US financial system is expected to be overhauled in the not-too-distant future. The secretary is likely to preside over that initiative.
Geithner has his work cut out for him, but it wouldn’t be too much of a leap to say he’s been preparing to do this job his whole life - maybe even since his first day of school.
Wish Lists Shrink, Happiness Expands
This post first appeared on Minyanville.
You can't always get what you want
You can't always get what you want
But if you try sometimes you might find
You get what you need.
- The Rolling Stones
The holiday shopping season, aside from being the raison d’être for retailers across the country, serves as a barometer for the whims and fancies of the American consumer.
Whether it’s the latest iteration Grant Theft Auto (TTWO), a big screen HDTV, or a sparkling amulet from Zales (ZLC), tallying up December receipts is an easy way to find out what the public deems important. After all, buying stuff is a reflection of the natural human inclination to maximize economic utility - or, in layman's terms, happiness.
For anyone paying attention to recent media reports of empty stores and vacant strip malls, however, it seems Americans are becoming nihilists: We care about nothing.
One can’t open the newspaper without reading about some company laying off thousands, postponing new hires, or shutting down altogether. The Grinch, no doubt, is giddy.
But, amidst the dire warnings and grim prognostications, there's hope some of these changes may be for the better.
The New York Times reported this morning that mothers are forgoing purchases for themselves this year to shower their kids with holiday cheer. One young Floridian will receive a new play kitchen and Elmo doll, while her mom makes do with the same old jeans as last year. Denim couturier Diesel will no doubt rue the decision, but Wal-Mart (WMT) will be happy to see Elmo fly off its shelves.
Other parents are taking thrift a step further, gathering like-minded neighbors to swap old toys, DVDs and discarded playthings of holidays past. Some are even resorting to the time-honored tradition of the White Elephant exchange, where gifts are passed around according to numbers drawn from a hat.
These trends may reduce the piles of superfluous electronic gadgets under Christmas trees and Hanukkah bushes, but they also encourage thoughtfulness, selflessness and a wholesale rejection of the rampant consumerism that's come to define our country - particularly around the holidays.
This is a welcome trend.
To be sure, Best Buy (BBY) and its ilk could miss profit estimates, and MasterCard (MA) may process fewer transactions, but in the long run, the country will be healthier for it.
Many scientists believe caloric restriction is the only thing that extends life in and of itself. We should eat less, they argue, since a body that processes less will hold up longer. The economy, itself a massive and deeply complex organism, is not dissimilar.
Like the body, it’s constantly growing, changing, evolving to adapt to the prevailing environment. Thriving on efficiency and shunning excess, it operates at peak performance when waste is kept to a minimum.
That's not to say there's no place for luxury in an economy - but during recessions, goods and services wanted by too few people simply disappear. Uncompetitive firms die off, making room for new entrepreneurs and innovation.
This cleansing process is what allows an economy to grow healthier and stronger. Sure, we may not get everything on our wish list this year - but maybe you shouldn't always get what you want.
You can't always get what you want
You can't always get what you want
But if you try sometimes you might find
You get what you need.
- The Rolling Stones
The holiday shopping season, aside from being the raison d’être for retailers across the country, serves as a barometer for the whims and fancies of the American consumer.
Whether it’s the latest iteration Grant Theft Auto (TTWO), a big screen HDTV, or a sparkling amulet from Zales (ZLC), tallying up December receipts is an easy way to find out what the public deems important. After all, buying stuff is a reflection of the natural human inclination to maximize economic utility - or, in layman's terms, happiness.
For anyone paying attention to recent media reports of empty stores and vacant strip malls, however, it seems Americans are becoming nihilists: We care about nothing.
One can’t open the newspaper without reading about some company laying off thousands, postponing new hires, or shutting down altogether. The Grinch, no doubt, is giddy.
But, amidst the dire warnings and grim prognostications, there's hope some of these changes may be for the better.
The New York Times reported this morning that mothers are forgoing purchases for themselves this year to shower their kids with holiday cheer. One young Floridian will receive a new play kitchen and Elmo doll, while her mom makes do with the same old jeans as last year. Denim couturier Diesel will no doubt rue the decision, but Wal-Mart (WMT) will be happy to see Elmo fly off its shelves.
Other parents are taking thrift a step further, gathering like-minded neighbors to swap old toys, DVDs and discarded playthings of holidays past. Some are even resorting to the time-honored tradition of the White Elephant exchange, where gifts are passed around according to numbers drawn from a hat.
These trends may reduce the piles of superfluous electronic gadgets under Christmas trees and Hanukkah bushes, but they also encourage thoughtfulness, selflessness and a wholesale rejection of the rampant consumerism that's come to define our country - particularly around the holidays.
This is a welcome trend.
To be sure, Best Buy (BBY) and its ilk could miss profit estimates, and MasterCard (MA) may process fewer transactions, but in the long run, the country will be healthier for it.
Many scientists believe caloric restriction is the only thing that extends life in and of itself. We should eat less, they argue, since a body that processes less will hold up longer. The economy, itself a massive and deeply complex organism, is not dissimilar.
Like the body, it’s constantly growing, changing, evolving to adapt to the prevailing environment. Thriving on efficiency and shunning excess, it operates at peak performance when waste is kept to a minimum.
That's not to say there's no place for luxury in an economy - but during recessions, goods and services wanted by too few people simply disappear. Uncompetitive firms die off, making room for new entrepreneurs and innovation.
This cleansing process is what allows an economy to grow healthier and stronger. Sure, we may not get everything on our wish list this year - but maybe you shouldn't always get what you want.
Tuesday, November 25, 2008
What's Another $200 Billion?
This post first appeared on Minyanville.
The burden of pulling the US out its economic tailspin is being placed squarely on those responsible for it in the first place: Spend-happy consumers and a financial system too eager to lend.
The Federal Reserve announced today plans to lend up to $200 billion to financial institutions interested in buying new securities backed by credit cards, auto loans and student loans. The Treasury Department will pony up $20 billion of Troubled Asset Relief Program (TARP) money to help support the new initiative, the latest in the government’s attempt to help struggling American consumers tap the credit markets.
The facility will be managed by the New York Federal Reserve, which is chaired by Timothy Geithner, likely the next Treasury secretary.
Fed Chairman Bernanke and current Treasury Secretary Paulson hope the lending program will encourage new issuance of asset -backed securities, which, prior to the credit crunch, were the primary source of funding for consumer loans.
Banks and other issuers of credit cards and auto loans prefer to bundle these loans into packages, selling slices to investors with various risk preferences. This allows the banks to offload a portion of the default risk and make better use of their limited cash.
According to the Treasury Department, last year this type of financing accounted for $240 billion in new issuances, but is down precipitously this year as credit markets have seized up. As a result, banks like JP Morgan (JPM), Bank of America (BAC) and Citigroup (C) are being forced to keep more of the loans on their balance sheets. Since massive losses on bad debt have shrunken their capital bases, lenders are reticent to hand out new loans.
In a separate announcement, the Fed said it will also buy up to $100 billion in debt issued by Fannie Mae (FNM) and Freddie Mac (FRE) - and $500 billion in securities backed by the 2 government-sponsored enterprises, or GSEs. The action is aimed at reducing mortgage rates that have remained stubbornly high, even as the Fed has pumped billions into the mortgage market.
Despite massive intervention into the credit markets, myriad new lending facilities and hundreds of billions in new equity, banks are still being stingy. New loans are hard to get and expensive to boot.
As well they should be.
Americans are up to their eyeballs in debt. The government understands, however, that as long as credit cards stay maxed out, economic activity will continue to contract. Without savings to fall back on, purchasing decisions that aren't absolutely essential are being delayed indefinitely.
Giving consumers easier access to credit is a bit like handing a drug addict a pill, asking him to use responsibly and wandering off, leaving him to his own devices. The immediate problem may have been avoied, but the inevitabe crash is just that - inevitable.
The burden of pulling the US out its economic tailspin is being placed squarely on those responsible for it in the first place: Spend-happy consumers and a financial system too eager to lend.
The Federal Reserve announced today plans to lend up to $200 billion to financial institutions interested in buying new securities backed by credit cards, auto loans and student loans. The Treasury Department will pony up $20 billion of Troubled Asset Relief Program (TARP) money to help support the new initiative, the latest in the government’s attempt to help struggling American consumers tap the credit markets.
The facility will be managed by the New York Federal Reserve, which is chaired by Timothy Geithner, likely the next Treasury secretary.
Fed Chairman Bernanke and current Treasury Secretary Paulson hope the lending program will encourage new issuance of asset -backed securities, which, prior to the credit crunch, were the primary source of funding for consumer loans.
Banks and other issuers of credit cards and auto loans prefer to bundle these loans into packages, selling slices to investors with various risk preferences. This allows the banks to offload a portion of the default risk and make better use of their limited cash.
According to the Treasury Department, last year this type of financing accounted for $240 billion in new issuances, but is down precipitously this year as credit markets have seized up. As a result, banks like JP Morgan (JPM), Bank of America (BAC) and Citigroup (C) are being forced to keep more of the loans on their balance sheets. Since massive losses on bad debt have shrunken their capital bases, lenders are reticent to hand out new loans.
In a separate announcement, the Fed said it will also buy up to $100 billion in debt issued by Fannie Mae (FNM) and Freddie Mac (FRE) - and $500 billion in securities backed by the 2 government-sponsored enterprises, or GSEs. The action is aimed at reducing mortgage rates that have remained stubbornly high, even as the Fed has pumped billions into the mortgage market.
Despite massive intervention into the credit markets, myriad new lending facilities and hundreds of billions in new equity, banks are still being stingy. New loans are hard to get and expensive to boot.
As well they should be.
Americans are up to their eyeballs in debt. The government understands, however, that as long as credit cards stay maxed out, economic activity will continue to contract. Without savings to fall back on, purchasing decisions that aren't absolutely essential are being delayed indefinitely.
Giving consumers easier access to credit is a bit like handing a drug addict a pill, asking him to use responsibly and wandering off, leaving him to his own devices. The immediate problem may have been avoied, but the inevitabe crash is just that - inevitable.
Treasuries: Not So Safe?
This post first appeared on Minyanville.
And when the financial panic abates, the safety of Treasuries will cease to be the trade du jour. Slowly, risk appetite will return - and those late pulling their money from the Treasury market could face steep losses.
The Wall Street Journal reported yesterday that, since professional money mangers can’t park their millions in wobbly US banks, they’ve flocked to the security and liquidity of the Treasury market.
Government-backed bonds, despite offering essentially no yield, have attracted billions in “smart” money in recent months. As banks failed and credit markets all but stopped functioning, the Treasury market was the only game in town. Seeking the perceived safety of the US dollar, investors drove up Treasury prices and sent their yields towards nil.
But at some point, when the willingness to take on risk returns, investors could leave the Treasury market in droves. If this were to happen, whether it be today, next week or next year, that safe trade may no longer be so safe.
In the past 2 trading days, the dollar -- for which Treasuries offer a proxy investment -- has fallen sharply, giving up recent gains. Shorts rushed to cover profitable bets on falling asset prices - and commodities responded by spiking upwards.
Respectively, gold and crude oil jumped more than 2% and 7% yesterday, while companies for which the price of “stuff” is hugely important, like US Steel (X) and Freeport McMoRan (FCX), soared.
To be sure, one day does not a trend make, and despite the longer term deflationary pressures affecting the economy, the road to lower prices won't be without its share of speed bumps. The massive amounts of liquidity injected into the financial system by the Federal Reserve and multi-billion bailouts of financial giants like Citigroup (C) and AIG (AIG) are, in the short run, inflationary.
Since the greenback is being used around the world as the equivalent of financial toilet paper, a dollar just isn’t worth what it used to be. This in turn makes imports more dear and pushes up the price of commodities, many of which are denominated in dollars.
Longer term, however, deleveraging will require the accumulation of dollars to repay debts, driving up its value. The cost of stuff, in dollar terms, will fall. And while this may sound good for a shopping trip, economists fear deflation almost as much as socializing with the opposite sex at the company Christmas party.
To find out why, just put yourself in the position of a store owner, faced with the prospect of selling everything for less. Expansion plans: Postponed. New hiring: Next year. Computer upgrades: Not a chance.
Deflation is an economy's kryptonite.
And when the financial panic abates, the safety of Treasuries will cease to be the trade du jour. Slowly, risk appetite will return - and those late pulling their money from the Treasury market could face steep losses.
The Wall Street Journal reported yesterday that, since professional money mangers can’t park their millions in wobbly US banks, they’ve flocked to the security and liquidity of the Treasury market.
Government-backed bonds, despite offering essentially no yield, have attracted billions in “smart” money in recent months. As banks failed and credit markets all but stopped functioning, the Treasury market was the only game in town. Seeking the perceived safety of the US dollar, investors drove up Treasury prices and sent their yields towards nil.
But at some point, when the willingness to take on risk returns, investors could leave the Treasury market in droves. If this were to happen, whether it be today, next week or next year, that safe trade may no longer be so safe.
In the past 2 trading days, the dollar -- for which Treasuries offer a proxy investment -- has fallen sharply, giving up recent gains. Shorts rushed to cover profitable bets on falling asset prices - and commodities responded by spiking upwards.
Respectively, gold and crude oil jumped more than 2% and 7% yesterday, while companies for which the price of “stuff” is hugely important, like US Steel (X) and Freeport McMoRan (FCX), soared.
To be sure, one day does not a trend make, and despite the longer term deflationary pressures affecting the economy, the road to lower prices won't be without its share of speed bumps. The massive amounts of liquidity injected into the financial system by the Federal Reserve and multi-billion bailouts of financial giants like Citigroup (C) and AIG (AIG) are, in the short run, inflationary.
Since the greenback is being used around the world as the equivalent of financial toilet paper, a dollar just isn’t worth what it used to be. This in turn makes imports more dear and pushes up the price of commodities, many of which are denominated in dollars.
Longer term, however, deleveraging will require the accumulation of dollars to repay debts, driving up its value. The cost of stuff, in dollar terms, will fall. And while this may sound good for a shopping trip, economists fear deflation almost as much as socializing with the opposite sex at the company Christmas party.
To find out why, just put yourself in the position of a store owner, faced with the prospect of selling everything for less. Expansion plans: Postponed. New hiring: Next year. Computer upgrades: Not a chance.
Deflation is an economy's kryptonite.
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