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.
Wednesday, November 26, 2008
Why Should I Care: Timothy Geithner, Your Next Treasury Secretary
This post first appeared on Minyanville.
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.
Monday, November 24, 2008
Down Goes Downey
This post first appeared on Minyanville and Cirios Real Estate.
Looks like all those option adjustable rate mortgages (ARMs) weren’t such a good idea after all: 1% teaser rates and loans that grow, rather than shrink, over time just aren’t meant for questionable borrowers buying overpriced homes.
Newport Beach-based Downey Savings (DSL), the fifth largest originator of option ARMs, was seized by federal regulators late Friday. The scraps were sold to US Bancorp (USB) for a song, which included almost $10 billion in deposits. Pomona First Federal, another Southern California lender highly levered to the real estate market, was also taken over by Minneapolis-based US Bank.
According to Bloomberg, the 2 failures will cost the FDIC more than $2 billion to clean up. US Bank agreed to assume the first $1.6 billion in losses from the banks’ loan portfolios, but anything above that will be split with the FDIC.
Each of the 5 biggest option ARM writers have now collapsed. Countrywide was purchased by Bank of America (BAC) in July; IndyMac collapsed into the arms of the FDIC just a few weeks later; Washington Mutual was scooped up by JP Morgan (JPM) in September; October saw Wells Fargo (WFC) best Citigroup (C) for the right to buy Wachovia (WB); now Downey is gone.
It didn’t have to end this way.
Traditionally meant for savvy borrowers capable of managing multiple payment options, Washington Mutual is often cited as having invented the option ARM in the early 80s.
The loan gives a borrower a series of payment choices, the lowest of which is so tiny the loan balance increases each month instead of being paid down. ARMs also typically include a teaser rate -- sometimes as low as 1% -- which can last anywhere from1 month to 5 years.
Ideal for real estate investors, salespeople with choppy income or families hopping between 1 and 2 earners, the flexible payment options and strict underwriting guidelines made option ARMs some of the best performing loans on the market.
But that was then.
As securitization took off, interest rates fell and the housing market heated up, lenders turned these once-safe loans into jet fuel for their ballooning mortgage businesses.
Option ARMs came to epitomize the irresponsible lending that ran rampant during the boom. Lenders abused their ability to qualify borrowers at absurdly low rates, jamming them into homes they could never afford once their mortgage payments rose.
Due to their complexity, mortgage brokers and loan officers rarely bothered to make sure borrowers fully understood the loan terms. A complete explanation would have lasted hours, providing adequate cover for the fraud already so prevalent in the business.
Banks loved option ARMs because accounting rules allowed them to book the fully indexed mortgage payment as income, even if the borrower made the minimum payment each month. That meant a juicy bottom line, even if cash barely trickled in the door.
Mortgage brokers and loan officers loved option ARMs because they could earn fat commissions on loans that were easy to sell - since they never had to explain them.
And borrowers loved option ARMs because they could buy their dream homes, rationality be damned.
Option ARMs flourished in boom states like California, Florida, Arizona and Nevada since homeowners could simply sell or refinance their way out of any problems as home values kept rising. Delinquencies remained remarkably low, creating years of "historical" data upon which to base assumptions about future loan performance.
Back in New York, Bear Stearns pioneered Wall Street’s foray into Option ARMs. The mortgage gurus at Bear figured out how to turn them into highly profitable mortgage-backed securities.
After that, it was a race to the bottom. Bear, Countrywide and IndyMac literally competed for business based on who could buy the loans faster - and with less scrutiny.
When home prices stopped rising, however, it all came crashing down.
Faced with a rising loan balance, higher monthly payments as teaser periods ran out and falling property values, borrowers were stuck. Defaults rose, losses mounted and banks couldn’t unload the paper without taking significant hits. Instead, they chose to hold on and try to ride it out.
We now know how that strategy ended.
As I have written previously, in the face of unprecedented government intervention, the free market has still managed to punish the mortgage boom's worst offenders. Not every guilty party will be brought to justice, but the firms that have failed thus far were deserving of their fate.
To be sure, not every employee at the likes of Bear, Lehman, Countrywide and Downey were culpable, but when the dust settles, the weak hands will have been truly cleaned out. Banks that maintained even marginally prudent lending standards are now reaping the benefits.
This fact gives me hope - hope that despite their best efforts, bureaucrats will always lose in their battle against the free market.
Looks like all those option adjustable rate mortgages (ARMs) weren’t such a good idea after all: 1% teaser rates and loans that grow, rather than shrink, over time just aren’t meant for questionable borrowers buying overpriced homes.
Newport Beach-based Downey Savings (DSL), the fifth largest originator of option ARMs, was seized by federal regulators late Friday. The scraps were sold to US Bancorp (USB) for a song, which included almost $10 billion in deposits. Pomona First Federal, another Southern California lender highly levered to the real estate market, was also taken over by Minneapolis-based US Bank.
According to Bloomberg, the 2 failures will cost the FDIC more than $2 billion to clean up. US Bank agreed to assume the first $1.6 billion in losses from the banks’ loan portfolios, but anything above that will be split with the FDIC.
Each of the 5 biggest option ARM writers have now collapsed. Countrywide was purchased by Bank of America (BAC) in July; IndyMac collapsed into the arms of the FDIC just a few weeks later; Washington Mutual was scooped up by JP Morgan (JPM) in September; October saw Wells Fargo (WFC) best Citigroup (C) for the right to buy Wachovia (WB); now Downey is gone.
It didn’t have to end this way.
Traditionally meant for savvy borrowers capable of managing multiple payment options, Washington Mutual is often cited as having invented the option ARM in the early 80s.
The loan gives a borrower a series of payment choices, the lowest of which is so tiny the loan balance increases each month instead of being paid down. ARMs also typically include a teaser rate -- sometimes as low as 1% -- which can last anywhere from1 month to 5 years.
Ideal for real estate investors, salespeople with choppy income or families hopping between 1 and 2 earners, the flexible payment options and strict underwriting guidelines made option ARMs some of the best performing loans on the market.
But that was then.
As securitization took off, interest rates fell and the housing market heated up, lenders turned these once-safe loans into jet fuel for their ballooning mortgage businesses.
Option ARMs came to epitomize the irresponsible lending that ran rampant during the boom. Lenders abused their ability to qualify borrowers at absurdly low rates, jamming them into homes they could never afford once their mortgage payments rose.
Due to their complexity, mortgage brokers and loan officers rarely bothered to make sure borrowers fully understood the loan terms. A complete explanation would have lasted hours, providing adequate cover for the fraud already so prevalent in the business.
Banks loved option ARMs because accounting rules allowed them to book the fully indexed mortgage payment as income, even if the borrower made the minimum payment each month. That meant a juicy bottom line, even if cash barely trickled in the door.
Mortgage brokers and loan officers loved option ARMs because they could earn fat commissions on loans that were easy to sell - since they never had to explain them.
And borrowers loved option ARMs because they could buy their dream homes, rationality be damned.
Option ARMs flourished in boom states like California, Florida, Arizona and Nevada since homeowners could simply sell or refinance their way out of any problems as home values kept rising. Delinquencies remained remarkably low, creating years of "historical" data upon which to base assumptions about future loan performance.
Back in New York, Bear Stearns pioneered Wall Street’s foray into Option ARMs. The mortgage gurus at Bear figured out how to turn them into highly profitable mortgage-backed securities.
After that, it was a race to the bottom. Bear, Countrywide and IndyMac literally competed for business based on who could buy the loans faster - and with less scrutiny.
When home prices stopped rising, however, it all came crashing down.
Faced with a rising loan balance, higher monthly payments as teaser periods ran out and falling property values, borrowers were stuck. Defaults rose, losses mounted and banks couldn’t unload the paper without taking significant hits. Instead, they chose to hold on and try to ride it out.
We now know how that strategy ended.
As I have written previously, in the face of unprecedented government intervention, the free market has still managed to punish the mortgage boom's worst offenders. Not every guilty party will be brought to justice, but the firms that have failed thus far were deserving of their fate.
To be sure, not every employee at the likes of Bear, Lehman, Countrywide and Downey were culpable, but when the dust settles, the weak hands will have been truly cleaned out. Banks that maintained even marginally prudent lending standards are now reaping the benefits.
This fact gives me hope - hope that despite their best efforts, bureaucrats will always lose in their battle against the free market.
Powering Down
This post first appeared on Minyanville.
With each passing day, it becomes clearer this is no ordinary economic downturn.
Data show Americans aren’t just cutting back in traditional ways: Paring non-essential purchases and getting by with fewer luxuries. Rather, there are fundamental shifts going on in the way we live.
These emerging trends evidence a shift not just in purchasing habits, but in lifestyle.
According to the Wall Street Journal, businesses and households alike are using less energy. Specifically, large utility companies like Minneapolis-based Xcel Energy (XEL), Charlotte’s Duke Energy (DUK) and American Electric Power (AEP) in Ohio are seeing steeper drops in electricity consumption than in previous downturns.
To be sure, energy demand weakens as the economy slows. Consumers buy fewer electronic gadgets, drive less and generally use less stuff that needs to be turned on.
This time, however, executives are worried fundamental behaviors are changing. Jim Rogers, CEO of Duke Energy, told the Journal consumption is falling even in places where prices are stagnant. “Something fundamental is going on.”
Xcel CEO Dick Kelly said for “the first time in 40 years [he’s] seen a decline in sales” to homes.
If the pattern persists, it could cause utilities to drastically change their business model. Typically, purveyors of power count on small, but consistent growth in energy demand. They build this assumption into their business models, which plays an integral role in expansion plans and breaking ground on new plants. Coupled with the rising cost of capital resulting from the credit crisis, this means Americans are likely to see higher energy prices in the future.
And while the data is far from conclusive, it could be an early sign that we are (begrudgingly) embracing the concept that less is, actually, more.
Minyanville’s Kevin Depew and others have been cataloguing this shift in consumer behavior, as broad deflation grips society. More than just lower prices, deflation is taking hold in all aspects of our lives. It’s a slow process, to be sure, but one that is undeniably gaining momentum as social mood darkens and the public rejects consumerism.
Despite lower gas prices, Americans are still driving less. Ever hungry for bigger offerings from McDonald's (MCD) and Burger King (BKC), restaurants are increasingly being forced to inform their customers just how bad an idea it is to eat a Triple Whopper with cheese. Someday, the lesson may actually stick.
Confucius once said a journal of a 1000 miles begins with a single step. Turning off the lights when you leave a room may be that first step. Watching less television may be the second. Maybe, just maybe, spending less time on Facebook could be that third step that sets the whole thing running down hill.
Hey, a guy can dream right?
With each passing day, it becomes clearer this is no ordinary economic downturn.
Data show Americans aren’t just cutting back in traditional ways: Paring non-essential purchases and getting by with fewer luxuries. Rather, there are fundamental shifts going on in the way we live.
These emerging trends evidence a shift not just in purchasing habits, but in lifestyle.
According to the Wall Street Journal, businesses and households alike are using less energy. Specifically, large utility companies like Minneapolis-based Xcel Energy (XEL), Charlotte’s Duke Energy (DUK) and American Electric Power (AEP) in Ohio are seeing steeper drops in electricity consumption than in previous downturns.
To be sure, energy demand weakens as the economy slows. Consumers buy fewer electronic gadgets, drive less and generally use less stuff that needs to be turned on.
This time, however, executives are worried fundamental behaviors are changing. Jim Rogers, CEO of Duke Energy, told the Journal consumption is falling even in places where prices are stagnant. “Something fundamental is going on.”
Xcel CEO Dick Kelly said for “the first time in 40 years [he’s] seen a decline in sales” to homes.
If the pattern persists, it could cause utilities to drastically change their business model. Typically, purveyors of power count on small, but consistent growth in energy demand. They build this assumption into their business models, which plays an integral role in expansion plans and breaking ground on new plants. Coupled with the rising cost of capital resulting from the credit crisis, this means Americans are likely to see higher energy prices in the future.
And while the data is far from conclusive, it could be an early sign that we are (begrudgingly) embracing the concept that less is, actually, more.
Minyanville’s Kevin Depew and others have been cataloguing this shift in consumer behavior, as broad deflation grips society. More than just lower prices, deflation is taking hold in all aspects of our lives. It’s a slow process, to be sure, but one that is undeniably gaining momentum as social mood darkens and the public rejects consumerism.
Despite lower gas prices, Americans are still driving less. Ever hungry for bigger offerings from McDonald's (MCD) and Burger King (BKC), restaurants are increasingly being forced to inform their customers just how bad an idea it is to eat a Triple Whopper with cheese. Someday, the lesson may actually stick.
Confucius once said a journal of a 1000 miles begins with a single step. Turning off the lights when you leave a room may be that first step. Watching less television may be the second. Maybe, just maybe, spending less time on Facebook could be that third step that sets the whole thing running down hill.
Hey, a guy can dream right?
Friday, November 21, 2008
More Heads Will Roll
This post first appeared on Minyanville.
The world’s bankers, besieged by the credit crisis, may soon be busting out the bellbottoms.
According to CTPartners, an executive search firm, the ranks of financial professionals are shrinking so fast we could “go back to the investment banks of the 1960s and 70s.”
Brian Sullivan, the firm’s chief CEO, told Bloomberg layoffs in the financial industry could double by the middle of next year. As many as 350,000 people may lose their jobs before it's all said and done. “This is the financial equivalent of World War II. It’s unprecedented. You’re seeing a seismic shift in the population of banking.”
With Citigroup’s (C) recent announcement of more than 50,000 job cuts, the headcounts at banks, insurance companies and other financial service firms continue to shrink.
As credit markets seized up last year, banks began to lose access to easy leverage. For years, Citi, along with former investment banks Goldman Sachs (GS) and Morgan Stanley (MS), grew massive trading operations to supplement their traditional role as transaction advisors, research firms and brokerages.
Now that those business lines are suffering massive losses, forcing banks to shutter operations and pare back risky positions. Former traders, structured finance wizards and salespeople are finding their services are no longer needed.
And job losses aren’t just being felt in the ivory towers of Wall Street.
Washington Mutual, the Seattle-based thrift that collapsed in September and was snatched up by JPMorgan (JPM), announced this morning it would lay off 1,600 workers in the San Francisco Bay Area. As part of its efforts to merge with JP Morgan, WaMu is closing operations centers in San Francisco as well as Pleasanton, about an hour to the east.
Yesterday, Bank of New York Mellon (BK) said it would fire 1,800 of its 43,000 employees. The firm blamed a need to cut costs in response to the weakness in the global economy.
As firms across industries hand out pink slips, consumers will further retrench, spurning the superfluous and buying only what they need.
This doesn’t bode well for purveyors of the unnecessary, say, for example, Coach (COH). A $800 handbag just isn’t that cool if you’re holding it in the queue at the unemployment office.
The world’s bankers, besieged by the credit crisis, may soon be busting out the bellbottoms.
According to CTPartners, an executive search firm, the ranks of financial professionals are shrinking so fast we could “go back to the investment banks of the 1960s and 70s.”
Brian Sullivan, the firm’s chief CEO, told Bloomberg layoffs in the financial industry could double by the middle of next year. As many as 350,000 people may lose their jobs before it's all said and done. “This is the financial equivalent of World War II. It’s unprecedented. You’re seeing a seismic shift in the population of banking.”
With Citigroup’s (C) recent announcement of more than 50,000 job cuts, the headcounts at banks, insurance companies and other financial service firms continue to shrink.
As credit markets seized up last year, banks began to lose access to easy leverage. For years, Citi, along with former investment banks Goldman Sachs (GS) and Morgan Stanley (MS), grew massive trading operations to supplement their traditional role as transaction advisors, research firms and brokerages.
Now that those business lines are suffering massive losses, forcing banks to shutter operations and pare back risky positions. Former traders, structured finance wizards and salespeople are finding their services are no longer needed.
And job losses aren’t just being felt in the ivory towers of Wall Street.
Washington Mutual, the Seattle-based thrift that collapsed in September and was snatched up by JPMorgan (JPM), announced this morning it would lay off 1,600 workers in the San Francisco Bay Area. As part of its efforts to merge with JP Morgan, WaMu is closing operations centers in San Francisco as well as Pleasanton, about an hour to the east.
Yesterday, Bank of New York Mellon (BK) said it would fire 1,800 of its 43,000 employees. The firm blamed a need to cut costs in response to the weakness in the global economy.
As firms across industries hand out pink slips, consumers will further retrench, spurning the superfluous and buying only what they need.
This doesn’t bode well for purveyors of the unnecessary, say, for example, Coach (COH). A $800 handbag just isn’t that cool if you’re holding it in the queue at the unemployment office.
Electric Cars: Be Careful What You Wish For
This post first appeared on Minyanville.
The rhetoric is eerily familiar: A green, viable alternative to gasoline. What's not to love?
Any purported "cure" for America’s gasoline addiction should, however, be regarded with the utmost skepticism - just think of the ethanol debacle. Ethanol helped spur rampant food-price inflation -- resulting in riots throughout the developing world -- while doing little to curb oil imports from unfriendly nations.
The promise of electric cars could similarly be remembered as a massive swindle - one that cost taxpayers billions and still failed to find a green solution to our dependence on foreign oil.
Nevertheless, California -- ever at the heart of the green revolution -- is getting an early Christmas present this year: A planned $1 billion charging network for electric cars. The Wall Street Journal reports that Better Place, a startup founded by former SAP AG executive Shai Agassi, will begin construction on a series of charging stations throughout the San Francisco Bay Area in 2010.
Most electric cars, including General Motors’ (GM) Chevy Volt, go a mere 40 miles on a single charge. Agassi hopes this new fad will take hold; to that end, his company is offering charging services and an exchange service by which fresh batteries can be swapped for drained ones.
Following the cultish success of the Toyota (TM) Prius hybrid, Chevy’s Volt and Ford’s (F) Hybrid Escape aim to capitalize on environmentally friendly commuters.
But widespread acceptance of electric cars could create more problems than it solves: Without adequate sources of green electricity, fossil fuel emissions could actually increase if plug-in Hummers catch on.
Critics argue that, as long as American power companies continue burning coal to produce the vast majority of our power, any benefit to “clean” electric cars would be wiped out by busier furnaces and dirtier smokestacks.
According to the Energy Information Association, utility companies still produce more than half their total power from coal. And although clean alternatives like wind, solar and hydroelectric are seeing sizable gains in market share, they still represent a tiny fraction of our total energy output.
Meanwhile, natural gas and nuclear power, which collectively come close to totaling coal production, are controversial clean-power alternatives.
Natural gas is notoriously tricky to store and transport, although methods for getting this clean-burning alternative to market are improving. Nuclear energy, despite its capacity for creating massive amounts of power with few environmental side effects, suffers from public-health concerns. The stuff is certainly toxic and tricky to handle, but there hasn’t been a serious nuclear accident in the US since Three Mile Island in 1979.
To be sure, breaking our addiction to foreign oil won’t happen on its own. We do not, however, have a great track record at finding permanent solutions that meet both economic and social requirements.
Gas prices are tumbling back to earth, and driving is once again becoming affordable. Americans would do well to remember the scary summer of 2008, when we were finally forced to be green - whether we liked it or not.
The rhetoric is eerily familiar: A green, viable alternative to gasoline. What's not to love?
Any purported "cure" for America’s gasoline addiction should, however, be regarded with the utmost skepticism - just think of the ethanol debacle. Ethanol helped spur rampant food-price inflation -- resulting in riots throughout the developing world -- while doing little to curb oil imports from unfriendly nations.
The promise of electric cars could similarly be remembered as a massive swindle - one that cost taxpayers billions and still failed to find a green solution to our dependence on foreign oil.
Nevertheless, California -- ever at the heart of the green revolution -- is getting an early Christmas present this year: A planned $1 billion charging network for electric cars. The Wall Street Journal reports that Better Place, a startup founded by former SAP AG executive Shai Agassi, will begin construction on a series of charging stations throughout the San Francisco Bay Area in 2010.
Most electric cars, including General Motors’ (GM) Chevy Volt, go a mere 40 miles on a single charge. Agassi hopes this new fad will take hold; to that end, his company is offering charging services and an exchange service by which fresh batteries can be swapped for drained ones.
Following the cultish success of the Toyota (TM) Prius hybrid, Chevy’s Volt and Ford’s (F) Hybrid Escape aim to capitalize on environmentally friendly commuters.
But widespread acceptance of electric cars could create more problems than it solves: Without adequate sources of green electricity, fossil fuel emissions could actually increase if plug-in Hummers catch on.
Critics argue that, as long as American power companies continue burning coal to produce the vast majority of our power, any benefit to “clean” electric cars would be wiped out by busier furnaces and dirtier smokestacks.According to the Energy Information Association, utility companies still produce more than half their total power from coal. And although clean alternatives like wind, solar and hydroelectric are seeing sizable gains in market share, they still represent a tiny fraction of our total energy output.
Meanwhile, natural gas and nuclear power, which collectively come close to totaling coal production, are controversial clean-power alternatives.
Natural gas is notoriously tricky to store and transport, although methods for getting this clean-burning alternative to market are improving. Nuclear energy, despite its capacity for creating massive amounts of power with few environmental side effects, suffers from public-health concerns. The stuff is certainly toxic and tricky to handle, but there hasn’t been a serious nuclear accident in the US since Three Mile Island in 1979.
To be sure, breaking our addiction to foreign oil won’t happen on its own. We do not, however, have a great track record at finding permanent solutions that meet both economic and social requirements.
Gas prices are tumbling back to earth, and driving is once again becoming affordable. Americans would do well to remember the scary summer of 2008, when we were finally forced to be green - whether we liked it or not.
Thursday, November 20, 2008
Keepin' It Real Estate: Homebuilders Facing Extinction
This post first appeared on Minyanville and Cirios Real Estate.
For as bad as things are in the housing market, it’s remarkable that none of the country’s big homebuilders have gone bust. The industry’s resilience is a testament to how much money the firms raked in during the boom.
Just ask guys in charge.
The Wall Street Journal reports many homebuilder CEOs socked away such obscene amounts of cash over the past 5 years that they out-earned their Wall Street counterparts. As profits soared, Toll Brothers (TOL) CEO Robert Toll and his brother Bruce together took home $773 million, while Dwight Schar, chairman of Virginia-based NVR (NVR) earned more than $625 million from stock sales.
By contrast, vilified Countrywide CEO Angelo Mozilo earned a mere $471 million during the same period.
Sitting on huge -- but dwindling -- stockpiles of cash, big builders like DR Horton (DHI), Lennar (LEN) and Ryland Homes (RYL) have thus far ridden out the bloodletting. According to JPMorgan analyst Michael Rehaut, these 3 may yet see positive cash flow in 2009.
Their smaller rivals, however, may not be so lucky.
Rehaut predicts that Pulte Home (PHM) and KB Home (KBH) could see negative cash flow next year - and some analysts believe 2009 could finally be the year that weaker hands start to fold. Credit protection for Hovnanian (HOV), Standard Pacific (SPF) and Beazer Home (BZH) is trading like the companies’ failure is a foregone conclusion.
Meanwhile, one key characteristic of market bottoms is notably absent: Consolidation.
Just as strong American banks have swallowed up the weak, no meaningful housing market bottom will be found until homebuilders begin to feast on one another.
Let’s face it: We don’t need 10 different multi-billion dollar companies churning out indistinguishable cookie-cutter "mansions" on tiny lots in cramped subdivisions miles from the nearest grocery store. We’ve got our hands full already, thank you very much.
Yesterday, the Commerce Department said October housing starts registered the lowest reading since 1959. Since just 4 of the 10 builders mentioned in this article existed 50 years ago, it looks like 6 are pretty much dispensable.
For as bad as things are in the housing market, it’s remarkable that none of the country’s big homebuilders have gone bust. The industry’s resilience is a testament to how much money the firms raked in during the boom.
Just ask guys in charge.
The Wall Street Journal reports many homebuilder CEOs socked away such obscene amounts of cash over the past 5 years that they out-earned their Wall Street counterparts. As profits soared, Toll Brothers (TOL) CEO Robert Toll and his brother Bruce together took home $773 million, while Dwight Schar, chairman of Virginia-based NVR (NVR) earned more than $625 million from stock sales.
By contrast, vilified Countrywide CEO Angelo Mozilo earned a mere $471 million during the same period.
Sitting on huge -- but dwindling -- stockpiles of cash, big builders like DR Horton (DHI), Lennar (LEN) and Ryland Homes (RYL) have thus far ridden out the bloodletting. According to JPMorgan analyst Michael Rehaut, these 3 may yet see positive cash flow in 2009.
Their smaller rivals, however, may not be so lucky.
Rehaut predicts that Pulte Home (PHM) and KB Home (KBH) could see negative cash flow next year - and some analysts believe 2009 could finally be the year that weaker hands start to fold. Credit protection for Hovnanian (HOV), Standard Pacific (SPF) and Beazer Home (BZH) is trading like the companies’ failure is a foregone conclusion.
Meanwhile, one key characteristic of market bottoms is notably absent: Consolidation.
Just as strong American banks have swallowed up the weak, no meaningful housing market bottom will be found until homebuilders begin to feast on one another.
Let’s face it: We don’t need 10 different multi-billion dollar companies churning out indistinguishable cookie-cutter "mansions" on tiny lots in cramped subdivisions miles from the nearest grocery store. We’ve got our hands full already, thank you very much.
Yesterday, the Commerce Department said October housing starts registered the lowest reading since 1959. Since just 4 of the 10 builders mentioned in this article existed 50 years ago, it looks like 6 are pretty much dispensable.
Tuesday, November 18, 2008
Insurance Companies Position Themselves for Bailout
This post first appeared on Minyanville.
Insurance companies have now joined the growing list of American firms vying for a piece of the bailout pie.
According to the Wall Street Journal, large insurance companies are snatching up small regional banks to speed up their transition to savings-and-loan holding companies, thereby qualifying them for capital infusions from Washington.
Like Goldman Sachs (GS) and Morgan Stanley (MS), who recently made similar conversions, insurance companies are looking for billions of dollars in government money to shore up their battered balance sheets.
Over the last week, Hartford Financial Services (HIG) purchased Federal Trust of Sanford, Florida; Genworth Financial (GNW) bought a thrift in Maple Grove, Minnesota; and Lincoln National (LNC) agreed to buy a tiny bank in Goodland, Indiana, which has a mere $7 million in assets. For Lincoln, a company with over $180 billion in assets, that’s just not very much money.
Insurers take in premiums from policy-holders, which they then use to buy up securities. As long as the income generated from those investments covers their payouts on claims, they turn a profit. Traditionally believed to be stogy, conservative firms, in recent years insurers dabbled in risky securities to juice profits. Using leverage, they added mortgage-backed securities to their core holdings of highly-rated corporate bonds.
The poster-child for these bad investments was, of course, AIG (AIG), which has now gobbled up almost $150 billion in taxpayer-funded bailout money.
And while AIG was the worst offender, its competitors have likewise seen the value of their investments erode in value in recent months. Last month, Met Life (MET), the largest US insurer by assets, raised capital to cover expected losses. Investors initially cheered the move, optimistic that the firm could get money at all.
In the last month, however, Met Life shares have lost almost 50% of their value.
And the bailout money is running thin. Treasury Secretary Hank Paulson has said he won’t petition Congress to release the second half of the $700 billion allocated for the bailout of the financial system. Confident the bailout is working, Paulson is urging lawmakers to hold on to the money for that proverbial rainy day.
The question, of course, is in what form the deluge will come. General Motors (GM)? General Electric (GE)? Or something else entirely?
Insurance companies have now joined the growing list of American firms vying for a piece of the bailout pie.
According to the Wall Street Journal, large insurance companies are snatching up small regional banks to speed up their transition to savings-and-loan holding companies, thereby qualifying them for capital infusions from Washington.
Like Goldman Sachs (GS) and Morgan Stanley (MS), who recently made similar conversions, insurance companies are looking for billions of dollars in government money to shore up their battered balance sheets.
Over the last week, Hartford Financial Services (HIG) purchased Federal Trust of Sanford, Florida; Genworth Financial (GNW) bought a thrift in Maple Grove, Minnesota; and Lincoln National (LNC) agreed to buy a tiny bank in Goodland, Indiana, which has a mere $7 million in assets. For Lincoln, a company with over $180 billion in assets, that’s just not very much money.
Insurers take in premiums from policy-holders, which they then use to buy up securities. As long as the income generated from those investments covers their payouts on claims, they turn a profit. Traditionally believed to be stogy, conservative firms, in recent years insurers dabbled in risky securities to juice profits. Using leverage, they added mortgage-backed securities to their core holdings of highly-rated corporate bonds.
The poster-child for these bad investments was, of course, AIG (AIG), which has now gobbled up almost $150 billion in taxpayer-funded bailout money.
And while AIG was the worst offender, its competitors have likewise seen the value of their investments erode in value in recent months. Last month, Met Life (MET), the largest US insurer by assets, raised capital to cover expected losses. Investors initially cheered the move, optimistic that the firm could get money at all.
In the last month, however, Met Life shares have lost almost 50% of their value.
And the bailout money is running thin. Treasury Secretary Hank Paulson has said he won’t petition Congress to release the second half of the $700 billion allocated for the bailout of the financial system. Confident the bailout is working, Paulson is urging lawmakers to hold on to the money for that proverbial rainy day.
The question, of course, is in what form the deluge will come. General Motors (GM)? General Electric (GE)? Or something else entirely?
Monday, November 17, 2008
Copper Prices Fall, Deflation Takes Hold
Looting abandoned homes just ain’t the fun it used to be.
Stripping foreclosed homes of their copper pipes became big business when commodity prices soared, driven by easy credit, a weak dollar and a robust global economy. Since the summer, however, the prices of base metals have fallen precipitously, with copper's decline being the most dramatic.
Analysts don’t expect the trend to reverse any time soon. Despite a massive economic stimulus package from China, the world’s largest copper purchaser, some experts believe the metal could slide as much as 40% further.
Bloomberg reports global inventories have risen twofold in the past 4 months, as auto sales have slumped, new home construction has all but ground to a halt, and fears about a worldwide economic slowdown are becoming reality. Bigger stockpiles, coupled with faltering demand has led to a collapse in commpodity prices: The S&P GSCI Index, which tracks 24 raw materials, has fallen by more than half since July.
Minyanville’s Ryan Krueger regards copper as a proxy for global productivity. Unlike gold or silver, copper is unaffected by speculation, since demand for it is purely pragmatic: It serves as the essential material for construction of all types.
Miners like Freeport MacMoran (FCX) and BHP Billiton (BHP) have been hauling the stuff out of the ground at record rates in the past few years in order to keep up with skyrocketing demand. Shares soared, reaping big profits for investors.
Since its low in 2000, Freeport rose almost 1800% to its high just a few months ago. Shares have since come back to earth: Freeport and BHP are down 81% and 66%, respectively.
According to the Wall Street Journal, miners are now racing to cut production in reaction to slumping demand. US Steel (X) will lay off 2% of its workforce, as mining companies around the world are forced to cut overhead to stay alive.
Meanwhile, construction costs are tumbling, fueling fears about central bankers’ worst nightmare: Deflation. It seems like yesterday that Federal Reserve Chairman Ben Bernanke and his ilk were scared stiff about inflation; rising prices have already sparked riots in developing countries around the world.
As Professor Kevin Depew put it last week,
"The argument against deflation and inflation is both academic and political. Present economic elites benefit from inflation and suffer terribly in deflation. Therefore, there is great incentive for the small minority -- the 2-3% of wealthy who control the vast majority of assets in this country -- to continue to press government and the Fed to maintain the present course of inflation over deflation."
Deleveraging is lowering the value of all assets, from stocks to bonds to houses to steel. Those whose wealth is tied up in these commodities are scrambling to halt the accelerating evaporation of their value.
After years of watching the rising tide lift their boats, they now find themselves foundering on the shore - which is already littered with those who never set sail in the first place.
Stripping foreclosed homes of their copper pipes became big business when commodity prices soared, driven by easy credit, a weak dollar and a robust global economy. Since the summer, however, the prices of base metals have fallen precipitously, with copper's decline being the most dramatic.
Analysts don’t expect the trend to reverse any time soon. Despite a massive economic stimulus package from China, the world’s largest copper purchaser, some experts believe the metal could slide as much as 40% further.
Bloomberg reports global inventories have risen twofold in the past 4 months, as auto sales have slumped, new home construction has all but ground to a halt, and fears about a worldwide economic slowdown are becoming reality. Bigger stockpiles, coupled with faltering demand has led to a collapse in commpodity prices: The S&P GSCI Index, which tracks 24 raw materials, has fallen by more than half since July.
Minyanville’s Ryan Krueger regards copper as a proxy for global productivity. Unlike gold or silver, copper is unaffected by speculation, since demand for it is purely pragmatic: It serves as the essential material for construction of all types.
Miners like Freeport MacMoran (FCX) and BHP Billiton (BHP) have been hauling the stuff out of the ground at record rates in the past few years in order to keep up with skyrocketing demand. Shares soared, reaping big profits for investors.
Since its low in 2000, Freeport rose almost 1800% to its high just a few months ago. Shares have since come back to earth: Freeport and BHP are down 81% and 66%, respectively.
According to the Wall Street Journal, miners are now racing to cut production in reaction to slumping demand. US Steel (X) will lay off 2% of its workforce, as mining companies around the world are forced to cut overhead to stay alive.
Meanwhile, construction costs are tumbling, fueling fears about central bankers’ worst nightmare: Deflation. It seems like yesterday that Federal Reserve Chairman Ben Bernanke and his ilk were scared stiff about inflation; rising prices have already sparked riots in developing countries around the world.
As Professor Kevin Depew put it last week,
"The argument against deflation and inflation is both academic and political. Present economic elites benefit from inflation and suffer terribly in deflation. Therefore, there is great incentive for the small minority -- the 2-3% of wealthy who control the vast majority of assets in this country -- to continue to press government and the Fed to maintain the present course of inflation over deflation."
Deleveraging is lowering the value of all assets, from stocks to bonds to houses to steel. Those whose wealth is tied up in these commodities are scrambling to halt the accelerating evaporation of their value.
After years of watching the rising tide lift their boats, they now find themselves foundering on the shore - which is already littered with those who never set sail in the first place.
Friday, November 14, 2008
Treasury Defends Bailout Bait-and-Switch
This post first appeared on Minyanville.
It's the classic bait and switch: Offer up a shiny, too-good-to-be-true trinket and hook the buyer - only to deliver a rusty old spoon.
The bailout sounded like it was just that: Too good to be true. $700 billion deftly injected into the financial industry to sop up toxic assets, an end to ad-hockery that would not only rescue the financial system from imminent collapse, but would also turn a hefty profit for taxpayers.
With almost half the bailout money spent, Ford (F), General Motors (GM), and Chrysler teetering on the brink, only marginal improvement in credit markets, and an economy that's badly lost it's way, a rusty spoon isn't sounding all that bad.
Yesterday, in what can only be described as a rather unprecedented show of cowering to the American media machine, the Treasury Department defended itself ... from the Washington Post.
The Post ran a piece entitled "Bailout Lacks Oversight Despite Billions Pledged," detailing failures on the part of bureaucrats to keep tabs on their Frankenstein-ish bailout machine.
Oversight behind schedule, opaque initiatives and a program whose initial focus -- and what was sold to the American people -- has been all-but-scrapped: The Post tore Treasury a new one.
The Treasury, for its part, shot back.
Arguing that the Post's assertions omitted many key facts, Henry Paulson and company issued a press release dubbed "Setting the Record Straight" to try to quash the public's growing discontent with the bailout. They trumpeted disclosure of contracts and other pertinent information on their website, efforts to choose a new Special Inspector General for the TARP program, the immediate convening of the Financial Stability Oversight Board, and regular briefings to Congress.
That Treasury even responded at all is astounding. Their continued focus on an aggressive media campaign to sell what our friends at BTIG like to call "half-baked ideas" is evidence of just how little credibility regulators have left.
Surely, the officials dealing with a financial crisis they call the worst in our lifetime have better things to do.
It's the classic bait and switch: Offer up a shiny, too-good-to-be-true trinket and hook the buyer - only to deliver a rusty old spoon.
The bailout sounded like it was just that: Too good to be true. $700 billion deftly injected into the financial industry to sop up toxic assets, an end to ad-hockery that would not only rescue the financial system from imminent collapse, but would also turn a hefty profit for taxpayers.
With almost half the bailout money spent, Ford (F), General Motors (GM), and Chrysler teetering on the brink, only marginal improvement in credit markets, and an economy that's badly lost it's way, a rusty spoon isn't sounding all that bad.
Yesterday, in what can only be described as a rather unprecedented show of cowering to the American media machine, the Treasury Department defended itself ... from the Washington Post.
The Post ran a piece entitled "Bailout Lacks Oversight Despite Billions Pledged," detailing failures on the part of bureaucrats to keep tabs on their Frankenstein-ish bailout machine.
Oversight behind schedule, opaque initiatives and a program whose initial focus -- and what was sold to the American people -- has been all-but-scrapped: The Post tore Treasury a new one.
The Treasury, for its part, shot back.
Arguing that the Post's assertions omitted many key facts, Henry Paulson and company issued a press release dubbed "Setting the Record Straight" to try to quash the public's growing discontent with the bailout. They trumpeted disclosure of contracts and other pertinent information on their website, efforts to choose a new Special Inspector General for the TARP program, the immediate convening of the Financial Stability Oversight Board, and regular briefings to Congress.
That Treasury even responded at all is astounding. Their continued focus on an aggressive media campaign to sell what our friends at BTIG like to call "half-baked ideas" is evidence of just how little credibility regulators have left.
Surely, the officials dealing with a financial crisis they call the worst in our lifetime have better things to do.
Thursday, November 13, 2008
Keepin’ It Real Estate: Housing Crash to Reach NYC
This post first appeared on Minyanville and Cirios Real Estate.
Constrained supply, continuous demand and wealth beyond imagining: There’s a reason New York City real estate is the most expensive in the country.
Easy lending, a weak dollar and gobs of Wall Street money pushed already sky-high Manhattan property values into the stratosphere during the housing boom. Now, finally, after the rest of the country has succumbed to the housing crisis, the city that never sleeps could be facing a real-estate crash of its own.
According to Bloomberg, commercial real-estate transactions plummeted more than 60% this year; lending has dried up and buyers have backed off. Despite all the fundamental reasons for New York real estate to remain strong, it’s Pollyanna-ish to believe it will remain an island of calm in an economy deteriorating by the day - especially when the epicenter of the economic calamity can be found at the southern tip of the island.
Tuesday, Toll Brothers (TOL) CEO Robert Toll issued a dour outlook for Manhattan property prices: “Up [till now], New York City was a nice stand-alone, and a beacon, but it has now joined the ranks of the rest of the country… I would expect the financial business in New York to probably lose 100,000 people.”
Toll went on to explain that “The foreign market, which supported in large measure the pricier condos in New York City, is not there in force as it was… what with the euro going down in comparison to the dollar lately, and with their own economic crisis."
And when New York City real estate goes, it goes big.
The last housing slump in Manhattan began in at the end of 1987 and lasted for nearly 10 years. During that time, according to data compiled by quadlet.com, prices fell 40%. Adjusted for inflation, they tumbled almost 60%.
The New York Metro area is poised for a similar fall. According to the S&P Case/Shiller Home Price Index, home prices have slipped just 6.9% in the last year, compared with 26.7% in the Los Angeles area, 27.3% in San Francisco, and 9.8% in Chicago.
As the housing slump spreads into previously strong markets, these pockets of strength are starting to crack.
The longer credit markets remain under duress -- and when firms like Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C) are laying off ever more employees in their ongoing cost-cutting efforts -- the deeper the slump is likely to be. A strengthening dollar and floundering economies around the world will continue to keep foreign buyers away.
What goes up, must come down.
Constrained supply, continuous demand and wealth beyond imagining: There’s a reason New York City real estate is the most expensive in the country.
Easy lending, a weak dollar and gobs of Wall Street money pushed already sky-high Manhattan property values into the stratosphere during the housing boom. Now, finally, after the rest of the country has succumbed to the housing crisis, the city that never sleeps could be facing a real-estate crash of its own.
According to Bloomberg, commercial real-estate transactions plummeted more than 60% this year; lending has dried up and buyers have backed off. Despite all the fundamental reasons for New York real estate to remain strong, it’s Pollyanna-ish to believe it will remain an island of calm in an economy deteriorating by the day - especially when the epicenter of the economic calamity can be found at the southern tip of the island.Tuesday, Toll Brothers (TOL) CEO Robert Toll issued a dour outlook for Manhattan property prices: “Up [till now], New York City was a nice stand-alone, and a beacon, but it has now joined the ranks of the rest of the country… I would expect the financial business in New York to probably lose 100,000 people.”
Toll went on to explain that “The foreign market, which supported in large measure the pricier condos in New York City, is not there in force as it was… what with the euro going down in comparison to the dollar lately, and with their own economic crisis."
And when New York City real estate goes, it goes big.
The last housing slump in Manhattan began in at the end of 1987 and lasted for nearly 10 years. During that time, according to data compiled by quadlet.com, prices fell 40%. Adjusted for inflation, they tumbled almost 60%.
The New York Metro area is poised for a similar fall. According to the S&P Case/Shiller Home Price Index, home prices have slipped just 6.9% in the last year, compared with 26.7% in the Los Angeles area, 27.3% in San Francisco, and 9.8% in Chicago.
As the housing slump spreads into previously strong markets, these pockets of strength are starting to crack.
The longer credit markets remain under duress -- and when firms like Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C) are laying off ever more employees in their ongoing cost-cutting efforts -- the deeper the slump is likely to be. A strengthening dollar and floundering economies around the world will continue to keep foreign buyers away.
What goes up, must come down.
Obama Floats $50 Billion Automaker Bailout
This post first appeared on Minyanville.
So much for one president at a time.
Bloomberg reports President-Elect Obama is urging lawmakers to rush through a $50 billion bailout for the struggling U.S. automakers.
With no formal executive power until January, Obama is asking Democratic friends in the House and Senate to get their Republican counterparts behind a rescue plan. Any plan would also require the support of President Bush, according to Bloomberg.
Also at issue is whether the money would come from TARP -- essentially depleting the first $350 billion installment of bailout funds -- or from fresh legislation.
General Motors' (GM) situation is particularly dire, as many analysts believe that the once-largest carmaker in the world won't survive through January without federal funds.
Obama also wants to see emergency loans extended to GM, Ford (F) and Chrysler to buoy their weakening financial position. The President-Elect would appoint a czar or independent board to oversee the companies if the rescue plan becomes law.
A GM failure, which many argue would likely push Ford and Chrysler towards a similar fate, would have dire consequences for the American economy. Parts suppliers, dealers and Rust Belt communities already reeling from the housing slump; years of already lackluster economic growth would be decimated.
It appears the alternative to a bailout is too terrifying to even consider. There is, however, a precedent for bankrupt industries operating their way through restructuring efforts.
After September 11th, United (UAUA) and other defunct airlines flew throughout their bankruptcy. Service was shoddy at best, layoffs were severe, but the industry did not die.
Economic conditions are admittedly more dire now than in 2001, but at some point, the bailout parade must stop. Each company that fails, only to be saved from collapse by Washington, simply pushes genuine economic recovery further into the future.
As Minyanville's Kevin Depew wrote Monday,
"With continued bailouts we will emerge from a lost decade with an economy and society crippled by the cost of bailng out businesses that operated with irresponsibility and a near total disregard for not just taxpayers but for their very own shareholders."
Taxpayers watched the pricetag of AIG's (AIG) $80 billion bailout double in a matter of months. With Ford and GM collectively bleeding over $4 billion in cash every month, it's not unreasonble to think any automaker handout would similarly expand.
At some point, our elected officials may actually have to take a stand. Unfortunately, holding one's breath for that to happen should be considered a serious hazard to one's health.
So much for one president at a time.
Bloomberg reports President-Elect Obama is urging lawmakers to rush through a $50 billion bailout for the struggling U.S. automakers.
With no formal executive power until January, Obama is asking Democratic friends in the House and Senate to get their Republican counterparts behind a rescue plan. Any plan would also require the support of President Bush, according to Bloomberg.
Also at issue is whether the money would come from TARP -- essentially depleting the first $350 billion installment of bailout funds -- or from fresh legislation.
General Motors' (GM) situation is particularly dire, as many analysts believe that the once-largest carmaker in the world won't survive through January without federal funds.
Obama also wants to see emergency loans extended to GM, Ford (F) and Chrysler to buoy their weakening financial position. The President-Elect would appoint a czar or independent board to oversee the companies if the rescue plan becomes law.
A GM failure, which many argue would likely push Ford and Chrysler towards a similar fate, would have dire consequences for the American economy. Parts suppliers, dealers and Rust Belt communities already reeling from the housing slump; years of already lackluster economic growth would be decimated.
It appears the alternative to a bailout is too terrifying to even consider. There is, however, a precedent for bankrupt industries operating their way through restructuring efforts.
After September 11th, United (UAUA) and other defunct airlines flew throughout their bankruptcy. Service was shoddy at best, layoffs were severe, but the industry did not die.
Economic conditions are admittedly more dire now than in 2001, but at some point, the bailout parade must stop. Each company that fails, only to be saved from collapse by Washington, simply pushes genuine economic recovery further into the future.
As Minyanville's Kevin Depew wrote Monday,
"With continued bailouts we will emerge from a lost decade with an economy and society crippled by the cost of bailng out businesses that operated with irresponsibility and a near total disregard for not just taxpayers but for their very own shareholders."
Taxpayers watched the pricetag of AIG's (AIG) $80 billion bailout double in a matter of months. With Ford and GM collectively bleeding over $4 billion in cash every month, it's not unreasonble to think any automaker handout would similarly expand.
At some point, our elected officials may actually have to take a stand. Unfortunately, holding one's breath for that to happen should be considered a serious hazard to one's health.
Wednesday, November 12, 2008
Everyone Agrees: Worst. Economy. Ever.
This post first appeared on Minyanville.
As the global economy continues to melt down, the use of superlatives is on the rise.
According to economists surveyed by Bloomberg, “The drought in consumer spending may be the worst ever.”
Meanwhile, Best Buy (BBY) CEO Brad Anderson, after reporting disappointing earnings and offering a dour forecast for profits going forward, said “Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we’ve ever seen.”
Not to be outdone, Jeffrey Frankel, of the National Bureau of Economic Research told Bloomberg Monday, “We’re in for a pretty serious recession - there’s a chance it’ll be the worst postwar recession.”
As data from last month begins to trickle out, it’s becoming clear the global economy basically shut off at the end of September, and went on outright hiatus during October. Despite massive, coordinated efforts by the world’s central bankers and lawmakers, fears of a worldwide economic slowdown are becoming a reality.
Circuit City (CC) filed for bankruptcy protection Monday, retail-sales data is bleak, and regulators shut down 2 more American banks over the weekend. Las Vegas Sands (LVS) is fighting for its survival and facing a cash crunch; most agree General Motors (GM), Ford (F) and Chrysler won’t survive without a federal bailout.
Commodity prices are tumbling and miners, steelmakers and industrialists are scrambling to adapt to the rapidly shifting economic landscape.
What many once believed would be contained to the small, esoteric world of subprime mortgage-backed securities has spread like wildfire, as years of lax lending and easy credit is being unwound in a manner of months. Firms are slashing jobs at an astounding rate, policymakers still can’t seem to get a handle on the housing mess and the effects of the financial crisis are rippling through the global economy.
Estimates for economic growth over the next 6 months are abysmal at best, as American consumers lead the trend towards thrift - both voluntary and involuntary. Most economists agree the holiday shopping season will be the worst in years, and the US economy could contract by as much as 3%.
Gloom and doom are ubiquitous.
What's notably missing -- and this should be considered marginally positive -- is hope. Hindsight often tells us that when the news is at its worst, expectations at their lowest, and when fear trumps rationality at every turn, the worst may be over.
Unfortunately, we've heard that story before. It has yet to come true.
This May, in an ominous prediction, Ellen Hughes-Cromwick, chief economist at Ford and president of the National Association of Business Economists, offered that the entire US economy will "slowly return to health" this year.
Ms. Hughes-Cromwick may have been just a bit premature in her rosy outlook.
As the global economy continues to melt down, the use of superlatives is on the rise.
According to economists surveyed by Bloomberg, “The drought in consumer spending may be the worst ever.”
Meanwhile, Best Buy (BBY) CEO Brad Anderson, after reporting disappointing earnings and offering a dour forecast for profits going forward, said “Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we’ve ever seen.”
Not to be outdone, Jeffrey Frankel, of the National Bureau of Economic Research told Bloomberg Monday, “We’re in for a pretty serious recession - there’s a chance it’ll be the worst postwar recession.”
As data from last month begins to trickle out, it’s becoming clear the global economy basically shut off at the end of September, and went on outright hiatus during October. Despite massive, coordinated efforts by the world’s central bankers and lawmakers, fears of a worldwide economic slowdown are becoming a reality.
Circuit City (CC) filed for bankruptcy protection Monday, retail-sales data is bleak, and regulators shut down 2 more American banks over the weekend. Las Vegas Sands (LVS) is fighting for its survival and facing a cash crunch; most agree General Motors (GM), Ford (F) and Chrysler won’t survive without a federal bailout.
Commodity prices are tumbling and miners, steelmakers and industrialists are scrambling to adapt to the rapidly shifting economic landscape.
What many once believed would be contained to the small, esoteric world of subprime mortgage-backed securities has spread like wildfire, as years of lax lending and easy credit is being unwound in a manner of months. Firms are slashing jobs at an astounding rate, policymakers still can’t seem to get a handle on the housing mess and the effects of the financial crisis are rippling through the global economy.
Estimates for economic growth over the next 6 months are abysmal at best, as American consumers lead the trend towards thrift - both voluntary and involuntary. Most economists agree the holiday shopping season will be the worst in years, and the US economy could contract by as much as 3%.
Gloom and doom are ubiquitous.
What's notably missing -- and this should be considered marginally positive -- is hope. Hindsight often tells us that when the news is at its worst, expectations at their lowest, and when fear trumps rationality at every turn, the worst may be over.
Unfortunately, we've heard that story before. It has yet to come true.
This May, in an ominous prediction, Ellen Hughes-Cromwick, chief economist at Ford and president of the National Association of Business Economists, offered that the entire US economy will "slowly return to health" this year.
Ms. Hughes-Cromwick may have been just a bit premature in her rosy outlook.
Monday, November 10, 2008
Fed Lends $1.1 Trillion, Won't Say to Whom
This post first appeared on Minyanville.
So much for transparency.
Since September 14th, when the Federal Reserve relaxed collateral requirements for new lending, it’s doled out over $1.1 trillion to faltering financial institutions. Now, Chairman Ben Bernanke and company won’t say where the money went.
Bloomberg reports the Fed is refusing to release details on which banks took out loans, fearing such disclosure would be blood in the water for short sellers and other financial mercenaries. Bloomberg News even went so far as to file a lawsuit on November 7th under the Freedom of Information Act to try to force disclosure.
Speaking to the Senate Banking Committee on September 23rd, Treasury Secretary Hank Paulson said of the $700 billion Troubled Asset Relief Program, or TARP: “We need oversight. We need protection. We need transparency. I want it. We all want it.”
However, since the Fed’s 11 new lending programs fall outside the scope of the bailout -- and indeed outside any federal supervision at all -- it can pretty much do whatever it wants, accountability be damned.
Regulators fear knowledge of which banks are short of cash could spark short-selling and additional runs on deposits, which arguably contributed to the demise of Bear Stearns, Lehman Brothers and Washington Mutual. Market participants, however, argue disclosure of the Fed’s pricing methods could help unclog dangerously illiquid markets.
Ever one to shed light into opaque government actions, House Financial Services Committee Chairman Barney Frank told Bloomberg, “[Disclosure would] give people clues to what your pricing is and what they might be able to sell us and what your estimates are.” I believe, Mr. Frank, that’s precisely the point of disclosure.
Last month, the biggest banks in the country -- Citigroup (C), JP Morgan (JPM), Wells Fargo (WFC), Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) -- soaked up over $100 billion in capital injections from the Treasury Department under TARP. In order to obscure who needed the money most, Paulson forced the banks to accept similarly sized investments.
At a time when record amounts of taxpayer money are being put on the line to prop up the economy, elected and non-elected officials alike deem it necessary to keep us in the dark. Their concern for the integrity of the system and their desire to protect us from nefarious market participants seems to have blinded them to the concepts of accountability, transparency and simple honesty.
We're witnessing a dangerous period in which information is tightly controlled, available only to the privileged few, while the many wander aimlessly, groping for half-truths and innuendo transmitted via an elaborate game of telephone.
Some would argue this has always been the case, and this may very well be true. However, never have the stakes been higher; never have our livelihoods been so completely in control of the handful of people we've blithely sent up to Washington to control our collective fate.
This is a disturbing trend - one which we can only hope will be reversed come January.
So much for transparency.
Since September 14th, when the Federal Reserve relaxed collateral requirements for new lending, it’s doled out over $1.1 trillion to faltering financial institutions. Now, Chairman Ben Bernanke and company won’t say where the money went.
Bloomberg reports the Fed is refusing to release details on which banks took out loans, fearing such disclosure would be blood in the water for short sellers and other financial mercenaries. Bloomberg News even went so far as to file a lawsuit on November 7th under the Freedom of Information Act to try to force disclosure.
Speaking to the Senate Banking Committee on September 23rd, Treasury Secretary Hank Paulson said of the $700 billion Troubled Asset Relief Program, or TARP: “We need oversight. We need protection. We need transparency. I want it. We all want it.”
However, since the Fed’s 11 new lending programs fall outside the scope of the bailout -- and indeed outside any federal supervision at all -- it can pretty much do whatever it wants, accountability be damned.
Regulators fear knowledge of which banks are short of cash could spark short-selling and additional runs on deposits, which arguably contributed to the demise of Bear Stearns, Lehman Brothers and Washington Mutual. Market participants, however, argue disclosure of the Fed’s pricing methods could help unclog dangerously illiquid markets.
Ever one to shed light into opaque government actions, House Financial Services Committee Chairman Barney Frank told Bloomberg, “[Disclosure would] give people clues to what your pricing is and what they might be able to sell us and what your estimates are.” I believe, Mr. Frank, that’s precisely the point of disclosure.
Last month, the biggest banks in the country -- Citigroup (C), JP Morgan (JPM), Wells Fargo (WFC), Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) -- soaked up over $100 billion in capital injections from the Treasury Department under TARP. In order to obscure who needed the money most, Paulson forced the banks to accept similarly sized investments.
At a time when record amounts of taxpayer money are being put on the line to prop up the economy, elected and non-elected officials alike deem it necessary to keep us in the dark. Their concern for the integrity of the system and their desire to protect us from nefarious market participants seems to have blinded them to the concepts of accountability, transparency and simple honesty.
We're witnessing a dangerous period in which information is tightly controlled, available only to the privileged few, while the many wander aimlessly, groping for half-truths and innuendo transmitted via an elaborate game of telephone.
Some would argue this has always been the case, and this may very well be true. However, never have the stakes been higher; never have our livelihoods been so completely in control of the handful of people we've blithely sent up to Washington to control our collective fate.
This is a disturbing trend - one which we can only hope will be reversed come January.
Friday, November 7, 2008
A Second Stimulus Package?
This post first appeared on Minyanville.
The votes have barely been tallied from Tuesday’s election, and politicians are already rushing to heave more money into American’s sinking economic ship.
California Democrat and Speaker of the House Nancy Pelosi is urging lawmakers to push through a second stimulus package in short order. Arguing economic conditions have deteriorated such that waiting until President-Elect Obama takes office in January would be unwise, Pelosi floated a $60 to $100 billion relief package to be passed by the end of the month.
According to the Wall Street Journal, the Speaker believes tax cuts implemented by adjusting tax-withholding tables, rather than more rebates or reductions in capital-gains taxes, would immediately inject cash into the economy.
The proposal comes in conjunction with the convening of Obama’s 17-member economic advisory board, which includes such notables as Berkshire Hathaway (BRK-A) CEO Warren Buffett, Google (GOOG) CEO Eric Schmidt, former Treasury Secretary Robert Rubin, former Federal Reserve Chairman Paul Volker and others.
Pelosi is also busying herself with the troubled automakers, meeting with representatives from Ford (F), General Motors (GM) and Chrysler, LLC over their request for federal money to stay afloat. With Ford and GM burning through over $2 billion in cash every month, Pelosi has her work cut out for her to “ensure the viability of [the] industry” while “looking out for taxpayers.”
President Bush’s 2-month stint as a lame duck couldn’t come at a more trying time for the economy, or for Americans as a whole. Stock markets have plunged, lending has all but dried up, and the financial crisis continues to come in waves.
We have now passed the point where arguing for rational, market-based solutions to our economic woes is given any credence by lawmakers. Instead, government is viewed as the only viable solution, and arguments now focus on how, not whether, politicians should step in to control the economy.
As the sage Mr. Practical wrote this week, on the nature of government intervention:
It does much more harm than good, because it operates from imperfect information and non-economic motivation. They try to “fix” one thing, and another breaks.
Eventually the government by nationalizing/socializing markets will plug all the leaks by throwing enough “money” at things. But logic tells us this has major consequences: It will significantly lower productivity and profits.
Politicians are rushing to save the system, jamming through opaque rescue plans the relief-recipients themselves don't even understand. Even if one assumes for a moment our elected officials do in fact mean well, their attempts to deftly put out economic fires mirrors that of a skilled arsonist, loping from home to home with a jug of gasoline, pockets bulging with matches.
The votes have barely been tallied from Tuesday’s election, and politicians are already rushing to heave more money into American’s sinking economic ship.
California Democrat and Speaker of the House Nancy Pelosi is urging lawmakers to push through a second stimulus package in short order. Arguing economic conditions have deteriorated such that waiting until President-Elect Obama takes office in January would be unwise, Pelosi floated a $60 to $100 billion relief package to be passed by the end of the month.
According to the Wall Street Journal, the Speaker believes tax cuts implemented by adjusting tax-withholding tables, rather than more rebates or reductions in capital-gains taxes, would immediately inject cash into the economy.
The proposal comes in conjunction with the convening of Obama’s 17-member economic advisory board, which includes such notables as Berkshire Hathaway (BRK-A) CEO Warren Buffett, Google (GOOG) CEO Eric Schmidt, former Treasury Secretary Robert Rubin, former Federal Reserve Chairman Paul Volker and others.
Pelosi is also busying herself with the troubled automakers, meeting with representatives from Ford (F), General Motors (GM) and Chrysler, LLC over their request for federal money to stay afloat. With Ford and GM burning through over $2 billion in cash every month, Pelosi has her work cut out for her to “ensure the viability of [the] industry” while “looking out for taxpayers.”
President Bush’s 2-month stint as a lame duck couldn’t come at a more trying time for the economy, or for Americans as a whole. Stock markets have plunged, lending has all but dried up, and the financial crisis continues to come in waves.
We have now passed the point where arguing for rational, market-based solutions to our economic woes is given any credence by lawmakers. Instead, government is viewed as the only viable solution, and arguments now focus on how, not whether, politicians should step in to control the economy.
As the sage Mr. Practical wrote this week, on the nature of government intervention:
It does much more harm than good, because it operates from imperfect information and non-economic motivation. They try to “fix” one thing, and another breaks.
Eventually the government by nationalizing/socializing markets will plug all the leaks by throwing enough “money” at things. But logic tells us this has major consequences: It will significantly lower productivity and profits.
Politicians are rushing to save the system, jamming through opaque rescue plans the relief-recipients themselves don't even understand. Even if one assumes for a moment our elected officials do in fact mean well, their attempts to deftly put out economic fires mirrors that of a skilled arsonist, loping from home to home with a jug of gasoline, pockets bulging with matches.
Thursday, November 6, 2008
Bonus Stockings To Be Filled With Coal
This post first appeared on Minyanville.
Every November, delis, pizza parlors and sushi joints throughout Manhattan enjoy a boon to their evening takeout business: Wall Street traders and bankers start putting in late night face time to juice their annual bonuses.
Every November, that is, except this one.
The ongoing financial crisis has forced firms around the world to take almost $700 billion in losses, according to Bloomberg. As bonus season looms on Wall Street, expectations are bleak.
Two studies, released today by the Options Group and compensation consultant Johnson Associates, will detail just how bad things are. Estimates vary, but Wall Street bonuses will likely drop by between 20-70%, depending on position in the pecking order. The departments most responsible for the massive losses, primarily structured credit and mortgage-backed securities, will face the steepest reductions, but no group will be left untouched.
According to the Wall Street Journal, firms like Goldman Sachs (GS) and Morgan Stanley (MS) typically hand out half of all revenue to employees. Particularly at these bulge bracket companies, the bulk of that money comes in the form of end-of-year bonuses.
Now that these firms have accepted government money to help shore up their balance sheets, increased scrutiny is being placed on bonus payouts - especially at the top. Goldman Sachs CEO Lloyd Blankfein is being urged to forgo his 2008 bonus, despite his firm’s ability to ride out the crisis better than most.
But financial firms aren’t just cutting bonuses in an attempt to keep cash close to home. They’re also handing out pink slips.
Bloomberg is reporting Goldman started a round of layoffs yesterday that will result in a reduced headcount of around 3,200, or 10% of its total employees. Many analysts expect Goldman to post its first quarterly loss since the financial crisis began last year, when it reports earnings for its fiscal fourth quarter in December.
Not to be outdone, Citigroup (C) is said to be eliminating 9,100 positions over the next 12 months, or 2.6% of its massive workforce. CEO Vikrim Pandit has been aggressively cutting costs since he took the helm last year, and this would not the first time Citi has laid off staff to slim down its bloated operations.
These and other job cuts in industries throughout the economy all add up to one ugly jobs report, due out before the market opens tomorrow. Some expect job losses for the past month to be as high as 200,000, bringing the year’s total to over one million.
If things don’t turn around quickly, those delis and sushi joints may have to start in with some layoffs of their own.
Every November, delis, pizza parlors and sushi joints throughout Manhattan enjoy a boon to their evening takeout business: Wall Street traders and bankers start putting in late night face time to juice their annual bonuses.
Every November, that is, except this one.
The ongoing financial crisis has forced firms around the world to take almost $700 billion in losses, according to Bloomberg. As bonus season looms on Wall Street, expectations are bleak.
Two studies, released today by the Options Group and compensation consultant Johnson Associates, will detail just how bad things are. Estimates vary, but Wall Street bonuses will likely drop by between 20-70%, depending on position in the pecking order. The departments most responsible for the massive losses, primarily structured credit and mortgage-backed securities, will face the steepest reductions, but no group will be left untouched.
According to the Wall Street Journal, firms like Goldman Sachs (GS) and Morgan Stanley (MS) typically hand out half of all revenue to employees. Particularly at these bulge bracket companies, the bulk of that money comes in the form of end-of-year bonuses.
Now that these firms have accepted government money to help shore up their balance sheets, increased scrutiny is being placed on bonus payouts - especially at the top. Goldman Sachs CEO Lloyd Blankfein is being urged to forgo his 2008 bonus, despite his firm’s ability to ride out the crisis better than most.
But financial firms aren’t just cutting bonuses in an attempt to keep cash close to home. They’re also handing out pink slips.
Bloomberg is reporting Goldman started a round of layoffs yesterday that will result in a reduced headcount of around 3,200, or 10% of its total employees. Many analysts expect Goldman to post its first quarterly loss since the financial crisis began last year, when it reports earnings for its fiscal fourth quarter in December.
Not to be outdone, Citigroup (C) is said to be eliminating 9,100 positions over the next 12 months, or 2.6% of its massive workforce. CEO Vikrim Pandit has been aggressively cutting costs since he took the helm last year, and this would not the first time Citi has laid off staff to slim down its bloated operations.
These and other job cuts in industries throughout the economy all add up to one ugly jobs report, due out before the market opens tomorrow. Some expect job losses for the past month to be as high as 200,000, bringing the year’s total to over one million.
If things don’t turn around quickly, those delis and sushi joints may have to start in with some layoffs of their own.
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