This post first appeared on Minyanville.
The great modern American nationalization experiment is underway: General Motors (GM), once the largest automaker in the world, has become a sort of Frankenstein's monster for the US government.
Bloomberg reports the Obama Administration is stepping up pressure on management, unions and creditors to make further concessions, and is considering taking a sizable equity position in the once-proud Detroit firm. The move, which would swap out some of the outstanding $13.4 billion in government loans for stock in a new, slimmed-down, cleaned-up version of GM, is the latest in a series of steps toward outright nationalization.
Analysts say the swap would diminish the rights of creditors, to whom the company offered around 90% ownership in a recent restructuring plan - a plan rejected by government officials. Under the Obama Administration's preferred tact of temporary state ownership, employees owed pension benefits would end up faring better than bondholders.
The government aims to take an ownership interest in GM, then quickly use the cover of bankruptcy courts to hack off the 'bad' parts of the firm. With a fresh start, free of legacy obligations and under performing divisions, Washington says it would quickly divest of it's stake and let the restructuring process continue.
We've by now become almost numb to government-led bailouts of failed companies, most notably American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE). The details are almost an afterthought, as the complexity of each scenario renders casual analysis almost a waste of time. The GM situation, however, could be a blueprint for future intrusion of the federal government into private enterprise.
Secured lenders, as is the government in the case of GM, often prefer a bankruptcy filing when companies get into trouble since it can enable the quickest repayment of their loans in full. Unsecured creditors and equity owners are left holding the bag.
The Bush Administration before him and now Obama have set a precedent: Emergency, secured loans are a likely precursor to state ownership. Notably, the huge bailouts of Citigroup (C) and Bank of America (BAC) were executed through portfolio guarantees and capital injections, not secured loans to the company itself. Not yet, anyway.
Despite efforts on the part of officials to play down the government's role in running GM, or AIG, or Citigroup, or Bank of America, we have entered an economic reality where business success, rather than relying on vision, strategy and good practices, is becoming increasingly reliant on political acumen.
By adding layers of red tape and palm-greasing to our already politicized economy, we move closer and closer to an economic system directed not by the collective will of the many, but rather one controlled by an ever-shrinking group of power brokers and political puppeteers.
This, despite loud proclamations of an impending return to economic vibrancy, is not a welcome development.
Showing posts with label OBAMA. Show all posts
Showing posts with label OBAMA. Show all posts
Tuesday, April 14, 2009
Tuesday, April 7, 2009
The Great SUV Baillout?
This post first appeared on Minyanville.
The double standard continues.
There seems to be no limit to the amount of money the federal government is willing to spend to prop up our broken financial system. But when it comes to putting money in the pockets of average Americans, or support policies that will foster energy independence, Washington cries broke.
The Wall Street Journal reports that Congress is throwing weight behind a so-called "cash for clunkers" program, whereby owners of SUVs and trucks can receive a kickback for scrapping their gas-guzzlers in favor of more energy-efficient vehicles. The catch: The handout is likely to be capped at far less than the clunkers' trade-in value.
To be sure, the program is a step in the right direction. The fewer Escalades (GM) and old Suburbans clogging up our freeways and spitting out carbon dioxide, the better. Not to mention, cars aren't exactly flying off the lot at American dealships - a few new purchases wouldn't hurt the forturnes of GM, Chrysler and Ford (F).
But the initiative would be a lot more effective if it made economic sense. In an environment where making the mortgage payment, putting food on the table, and paying the bills on time are the top financial priorities, eating a few grand to save the trees is barely on the radar.
Sure, a policy that paid full trade-in value for pollution-spewing trucks wouldn't be cheap - but neither is dumping hundreds of billions of dollars into insolvent banks. And it might actually do some good. I mean, insuring more than $300 billion of Citigroup's (C) bloated balance sheet is nice - but my credit line still got cut.
There's clear lesson here: If you want to get on the government dole in a meaningful way, make sure to come as close as possible to bankrupting the entire country. Anything less just won't cut it.
Take GM, whose former CEO Rick Wagoner was fired by the Obama Administration for poor strategic decisions and a turnaround plan that wasn't up to snuff. Meanwhile, Bank of America (BAC) CEO Ken Lewis ran his firm into the ground so thoroughly that he would have taken the entire financial system down with him - had Washington not stepped in with over $200 billion in bailout money and federal guarantees.
The government doesn't seem to have a problem overpaying for toxic financial assets -- in fact, it's encouraging pension funds to do just that -- but when it comes to handing over taxpayer money to, well, taxpayers... The well suddenly runs dry.
The double standard continues.
There seems to be no limit to the amount of money the federal government is willing to spend to prop up our broken financial system. But when it comes to putting money in the pockets of average Americans, or support policies that will foster energy independence, Washington cries broke.
The Wall Street Journal reports that Congress is throwing weight behind a so-called "cash for clunkers" program, whereby owners of SUVs and trucks can receive a kickback for scrapping their gas-guzzlers in favor of more energy-efficient vehicles. The catch: The handout is likely to be capped at far less than the clunkers' trade-in value.
To be sure, the program is a step in the right direction. The fewer Escalades (GM) and old Suburbans clogging up our freeways and spitting out carbon dioxide, the better. Not to mention, cars aren't exactly flying off the lot at American dealships - a few new purchases wouldn't hurt the forturnes of GM, Chrysler and Ford (F).
But the initiative would be a lot more effective if it made economic sense. In an environment where making the mortgage payment, putting food on the table, and paying the bills on time are the top financial priorities, eating a few grand to save the trees is barely on the radar.
Sure, a policy that paid full trade-in value for pollution-spewing trucks wouldn't be cheap - but neither is dumping hundreds of billions of dollars into insolvent banks. And it might actually do some good. I mean, insuring more than $300 billion of Citigroup's (C) bloated balance sheet is nice - but my credit line still got cut.
There's clear lesson here: If you want to get on the government dole in a meaningful way, make sure to come as close as possible to bankrupting the entire country. Anything less just won't cut it.
Take GM, whose former CEO Rick Wagoner was fired by the Obama Administration for poor strategic decisions and a turnaround plan that wasn't up to snuff. Meanwhile, Bank of America (BAC) CEO Ken Lewis ran his firm into the ground so thoroughly that he would have taken the entire financial system down with him - had Washington not stepped in with over $200 billion in bailout money and federal guarantees.
The government doesn't seem to have a problem overpaying for toxic financial assets -- in fact, it's encouraging pension funds to do just that -- but when it comes to handing over taxpayer money to, well, taxpayers... The well suddenly runs dry.
Monday, March 30, 2009
GM Runs Out of Road?
This post first appeared on Minyanville.
Taking money from the US government isn't just risky; it can cost you your job.
Just ask Rick Wagoner, the now former Chief Executive Officer of General Motors (GM). After accepting billions in aid from the Treasury Department -- but failing to produce an acceptable restructuring plan -- Wagoner was forced out of the beleaguered automaker over the weekend.
The Wall Street Journal reports that, in addition to removing Wagoner, the Obama administration’s auto-industry team floated the notion that bankruptcy may be the best option for Chrysler and GM. Although the government said it doesn’t have plans to oust Chrysler CEO Robert Nardelli, it did suggest that it's growing tired of propping up the struggling company.
The shakeup at GM didn’t end with Wagoner: A large part of the board of directors was also asked to leave, and Chief Operating Officer Frederick “Fritz” Henderson was named Chief Executive. He, along with a new-and-improved board and management team, will receive a 60-day credit lifeline by which to devise a more rigorous turnaround plan.
After the AIG (AIG) bonus debacle, financial firms are scrambling to return TARP money, lest they be subject to similar scrutiny (or similar witch-hunts). Goldman Sachs (GS), JPMorgan Chase (JPM) and others have suggested they’re working on plans to repay billions in government aid.
Whether its bonuses at AIG, corporate jets at Citigroup (C), or executive-suite redecoration at Merrill Lynch (BAC), the federal government is taking a rather more active role in any company that's required federal money in order to stay afloat.
The US government now controls some of the biggest companies in the world. And if this weekend's actions are any indication, it plans to fully wield that power.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
Taking money from the US government isn't just risky; it can cost you your job.
Just ask Rick Wagoner, the now former Chief Executive Officer of General Motors (GM). After accepting billions in aid from the Treasury Department -- but failing to produce an acceptable restructuring plan -- Wagoner was forced out of the beleaguered automaker over the weekend.
The Wall Street Journal reports that, in addition to removing Wagoner, the Obama administration’s auto-industry team floated the notion that bankruptcy may be the best option for Chrysler and GM. Although the government said it doesn’t have plans to oust Chrysler CEO Robert Nardelli, it did suggest that it's growing tired of propping up the struggling company.
The shakeup at GM didn’t end with Wagoner: A large part of the board of directors was also asked to leave, and Chief Operating Officer Frederick “Fritz” Henderson was named Chief Executive. He, along with a new-and-improved board and management team, will receive a 60-day credit lifeline by which to devise a more rigorous turnaround plan.
After the AIG (AIG) bonus debacle, financial firms are scrambling to return TARP money, lest they be subject to similar scrutiny (or similar witch-hunts). Goldman Sachs (GS), JPMorgan Chase (JPM) and others have suggested they’re working on plans to repay billions in government aid.
Whether its bonuses at AIG, corporate jets at Citigroup (C), or executive-suite redecoration at Merrill Lynch (BAC), the federal government is taking a rather more active role in any company that's required federal money in order to stay afloat.
The US government now controls some of the biggest companies in the world. And if this weekend's actions are any indication, it plans to fully wield that power.
In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
Tuesday, March 24, 2009
Keepin’ It Real Estate: Going Green on Uncle Sam’s Dime
This post first appeared on Minyanville and Cirios Real Estate.
It’s starting to make economic sense to go green.
Last summer, with gas prices topping $4 per gallon and commodities of all kinds becoming more expensive, renewable energy advocates thought their day in sun -- so to speak -- had finally arrived.
Investors flocked to industry leaders like First Solar (FSLR) and SunPower (SPWRA), whose stocks leapt to new highs. On July 8, 2008, renowned investor T. Boone Pickens announced an ambitious plan to wean America off its dependence on foreign oil. Later that week, crude touched an all-time high of $147.02 per barrel.
Since then, oil -- along the rest of the commodity complex -- has plunged, dashing hopes that renewable energy would soon be as cheap, if not cheaper, than traditional, dirty fossil fuels. But now, with the economy in free fall and Washington scrambling to boost productivity, renewable energy has been taken off life support.
Part of the recently passed $797 billion economic stimulus package gives incentives to homeowners to adopt energy-saving appliances, solar panels and other eco-friendly add-ons. Increased tax credits for qualifying expenditures can reduce tax bills by thousands of dollars a year. The catch (and there’s always a catch when the government is involved): Benefits only arrive if you shell out big bucks for pricey green gear.
Tax credits are applicable on new expenditures, and since solar-panel systems run in the tens of thousands of dollars, the 30% tax credit isn’t exactly like socking money away in the bank. Still, green construction firms and solar panel installation outfits like Akeena Solar (AKNS) are eager snatch up new business.
Before the credit crunch and the ensuing financial meltdown, Akeena had actually partnered with Comerica Bank (CMA) to offer low interest loans for buyers of new solar-energy systems, a portion of which could be backed by the value of the home. Since monthly loan payments were easier to stomach than plunking down cash to buy a new system, these new lending programs could have made solar available to the masses.
But now that home values have plummeted and lenders are reticent to part with their precious dollars, such borrowing programs are nearly impossible to find. Still, for those homeowners intrepid enough to take the plunge, tax credits offer an attractive reason to get off the green fence.
While solar power isn’t as economically efficient as traditional electricity sources, the more money that’s pumped into new technologies -- even if it’s through a combination of private and public investment -- the sooner we’re likely to reach the parity solar advocates have been promising for decades.
And the sooner that happens, the better.
It’s starting to make economic sense to go green.
Last summer, with gas prices topping $4 per gallon and commodities of all kinds becoming more expensive, renewable energy advocates thought their day in sun -- so to speak -- had finally arrived.
Investors flocked to industry leaders like First Solar (FSLR) and SunPower (SPWRA), whose stocks leapt to new highs. On July 8, 2008, renowned investor T. Boone Pickens announced an ambitious plan to wean America off its dependence on foreign oil. Later that week, crude touched an all-time high of $147.02 per barrel.
Since then, oil -- along the rest of the commodity complex -- has plunged, dashing hopes that renewable energy would soon be as cheap, if not cheaper, than traditional, dirty fossil fuels. But now, with the economy in free fall and Washington scrambling to boost productivity, renewable energy has been taken off life support.
Part of the recently passed $797 billion economic stimulus package gives incentives to homeowners to adopt energy-saving appliances, solar panels and other eco-friendly add-ons. Increased tax credits for qualifying expenditures can reduce tax bills by thousands of dollars a year. The catch (and there’s always a catch when the government is involved): Benefits only arrive if you shell out big bucks for pricey green gear.
Tax credits are applicable on new expenditures, and since solar-panel systems run in the tens of thousands of dollars, the 30% tax credit isn’t exactly like socking money away in the bank. Still, green construction firms and solar panel installation outfits like Akeena Solar (AKNS) are eager snatch up new business.
Before the credit crunch and the ensuing financial meltdown, Akeena had actually partnered with Comerica Bank (CMA) to offer low interest loans for buyers of new solar-energy systems, a portion of which could be backed by the value of the home. Since monthly loan payments were easier to stomach than plunking down cash to buy a new system, these new lending programs could have made solar available to the masses.
But now that home values have plummeted and lenders are reticent to part with their precious dollars, such borrowing programs are nearly impossible to find. Still, for those homeowners intrepid enough to take the plunge, tax credits offer an attractive reason to get off the green fence.
While solar power isn’t as economically efficient as traditional electricity sources, the more money that’s pumped into new technologies -- even if it’s through a combination of private and public investment -- the sooner we’re likely to reach the parity solar advocates have been promising for decades.
And the sooner that happens, the better.
Wednesday, March 18, 2009
Biotech Startups: Nothing Ventured, Nothing Gained
This post first appeared on Minyanville.
It’s a rotten time to be raising money. And for small biotechnology companies, most of which have little or no revenue and are dependent on investor capital to stay afloat, times are tough indeed.
According to the Wall Street Journal, 120 of the 360 publicly traded biotech firms have less than 6 months of cash on hand. And while this isn’t an entirely foreign position for industry upstarts to be in, the challenging fundraising environment means many of these companies could go under.
The business of developing experimental drugs, procedures and devices has always been one of high risk and high reward. Investors, often venture capitalists, are willing to lose their entire outlay many times over for the chance of hitting it big.
During their initial years, biotech startups undertake research, complete lengthy drug trials, and navigate the labyrinthine bureaucracy that is the Federal and Drug Administration, with investors pouring in more cash all the while.
The lucky few either get swallowed up by one of the industry heavy hitters or go public.
As noted in the Journal, the biotech business as a whole had its first profitable year in 2008. As fledgling companies blow through cash, giants like Genentech (DNA), Amgen (AMGN) and Gilead Sciences (GILD) rake in mountains of profits.
The fundraising troubles these startups face are emblematic of the broader difficulties for small businesses. Despite promises of help from the Obama Administration, investors are reticent to back nascent ventures. With investor cash drying up, getting by on a shoe string is becoming increasingly challenging.
This also reflects a sift in time and risk preferences, something discussed at length by Minyanville's Kevin Depew. With a decidedly cloudy economic outlook, investors are drawn to more certain, lower risk bets. Biotech startups represent the pinnacle of investor speculation, as evidenced by their challenge to find fresh backers.
One positive, and something many in the scientific community are pointing to hopefully, is President Obama's support for stem cell research and increased funding for the National Institutes of Health. Greater government assistance, they expect, could give fledgling companies the time and resources they need to make the next big breakthrough.
It’s a rotten time to be raising money. And for small biotechnology companies, most of which have little or no revenue and are dependent on investor capital to stay afloat, times are tough indeed.
According to the Wall Street Journal, 120 of the 360 publicly traded biotech firms have less than 6 months of cash on hand. And while this isn’t an entirely foreign position for industry upstarts to be in, the challenging fundraising environment means many of these companies could go under.
The business of developing experimental drugs, procedures and devices has always been one of high risk and high reward. Investors, often venture capitalists, are willing to lose their entire outlay many times over for the chance of hitting it big.
During their initial years, biotech startups undertake research, complete lengthy drug trials, and navigate the labyrinthine bureaucracy that is the Federal and Drug Administration, with investors pouring in more cash all the while.
The lucky few either get swallowed up by one of the industry heavy hitters or go public.
As noted in the Journal, the biotech business as a whole had its first profitable year in 2008. As fledgling companies blow through cash, giants like Genentech (DNA), Amgen (AMGN) and Gilead Sciences (GILD) rake in mountains of profits.
The fundraising troubles these startups face are emblematic of the broader difficulties for small businesses. Despite promises of help from the Obama Administration, investors are reticent to back nascent ventures. With investor cash drying up, getting by on a shoe string is becoming increasingly challenging.
This also reflects a sift in time and risk preferences, something discussed at length by Minyanville's Kevin Depew. With a decidedly cloudy economic outlook, investors are drawn to more certain, lower risk bets. Biotech startups represent the pinnacle of investor speculation, as evidenced by their challenge to find fresh backers.
One positive, and something many in the scientific community are pointing to hopefully, is President Obama's support for stem cell research and increased funding for the National Institutes of Health. Greater government assistance, they expect, could give fledgling companies the time and resources they need to make the next big breakthrough.
Local Governments Bail Themselves Out
This post first appeared on Minyanville.
Reeling from rising unemployment and the shuttering of local businesses, municipalities are enacting mini-stimulus packages of their own. According to the Wall Street Journal, some are taking the traditional approach: Tax breaks and public works. Others are getting creative, rewarding shopping sprees with gift cards, giving no-interest loans to small businesses, and offering discounted office space for entrepreneurs.
New York City, where much of our current economic malaise originated, even earmarked $15 million of its $43 billion budget to help out-of-work investment bankers start their own companies.
Meanwhile, states like Ohio and Iowa are floating bond issuances to raise funds to put their citizens to work. Governors expect to generate tens of thousands of new jobs from bridge building, road improvements and other public-works projects that President Barack Obama’s $797 billion stimulus package aims to cover. But rather than wait for the funds, or deal with strings inevitably attached to federal money, states are acting now.
This trend isn’t likely to subside any time soon.
With the federal government running a massive deficit -- the Treasury Department spent almost $200 billion more than it took in this February -- states, counties and cities are reluctant to rely on aid from Washington. And with mind-boggling sums being siphoned off by the growing list of firms suckling at the government teat, AIG (AIG), Fannie Mae (FNM), Freddie Mac (FRE), Citigroup (C), and Bank of America (BAC) the worst offenders, it’s no surprise local governments aren’t confident they’ll get theirs any time soon.
Further, as taxes rise to cover massive spending on tap for the next few years, those who had little to do with the housing bubble, Wall Street's collapse, or the credit crisis may begin to wonder why they're being asked to pick up the tab.
It’s only a matter of time before local lawmakers begin to ask the serious question: Do we really want to go down with this ship?
Reeling from rising unemployment and the shuttering of local businesses, municipalities are enacting mini-stimulus packages of their own. According to the Wall Street Journal, some are taking the traditional approach: Tax breaks and public works. Others are getting creative, rewarding shopping sprees with gift cards, giving no-interest loans to small businesses, and offering discounted office space for entrepreneurs.
New York City, where much of our current economic malaise originated, even earmarked $15 million of its $43 billion budget to help out-of-work investment bankers start their own companies.
Meanwhile, states like Ohio and Iowa are floating bond issuances to raise funds to put their citizens to work. Governors expect to generate tens of thousands of new jobs from bridge building, road improvements and other public-works projects that President Barack Obama’s $797 billion stimulus package aims to cover. But rather than wait for the funds, or deal with strings inevitably attached to federal money, states are acting now.
This trend isn’t likely to subside any time soon.
With the federal government running a massive deficit -- the Treasury Department spent almost $200 billion more than it took in this February -- states, counties and cities are reluctant to rely on aid from Washington. And with mind-boggling sums being siphoned off by the growing list of firms suckling at the government teat, AIG (AIG), Fannie Mae (FNM), Freddie Mac (FRE), Citigroup (C), and Bank of America (BAC) the worst offenders, it’s no surprise local governments aren’t confident they’ll get theirs any time soon.
Further, as taxes rise to cover massive spending on tap for the next few years, those who had little to do with the housing bubble, Wall Street's collapse, or the credit crisis may begin to wonder why they're being asked to pick up the tab.
It’s only a matter of time before local lawmakers begin to ask the serious question: Do we really want to go down with this ship?
US to G20: Spend, Spend, Spend
This post first appeared on Minyanville.
The move sparked a sharp 20% rally in the S&P 500. The index has since tumbled more than 30% to lows not seen since the 1990s.
If markets are jittery once again, it’s not without justification: In just under a month, global leaders will once again put their heads together, this time to hash out the best way to solve the deepening economic malaise. Hopes are high lawmakers will dream up new (and better) ways to get the world's largest economies back on track.
On April 2, in London, the US is expected to encourage its counterparts at the Group of 20 Summit to increase government-spending efforts to revitalize flagging economies. According to the Wall Street Journal, President Obama and Treasury Secretary Tim Geithner are expected to butt heads with European officials, who would prefer to shift the focus onto crafting stricter financial regulations.
The European Union, many believe, is facing an even worse economic outlook than the US. But those across the pond could need fewer new spending initiatives, since they have further-reaching social programs already in place. In addition, the European Central Bank, or ECB, is far more hawkish (read: concerned) about inflation than is our Federal Reserve.
Digging ourselves out of this mess with more borrowing could spark renewed inflation.
The ECB took longer to lower interest rates last year despite deteriorating economic conditions, citing worries about rising prices. In contrast, Fed Chairman Ben Bernanke aggressively reduced borrowing costs in the hope that companies would borrow to jumpstart new growth. Frozen credit markets didn’t cooperate, plunging the financial system into widespread disarray.
Of the countries that make up the G20, only Saudi Arabia, Spain and Australia plan to spend more propping up their economy than the US, according to data compiled by the International Monetary Fund. Of course, that doesn’t include the hundreds of billions already wasted - um, injected into the likes of Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).
Also left out of these figures are the trillions of dollars the Fed has pumped into the financial system to keep credit flowing -- however reluctantly -- throughout the economy.
The upcoming meeting marks President Obama's first chance to woo world leaders on the global stage. And while his social programs may gain favor among certain European lawmakers, his country's role in creating this mess certainly won't.
The rest of the world increasingly feels its being forced to clean up a problem that was largely American-made.
The move sparked a sharp 20% rally in the S&P 500. The index has since tumbled more than 30% to lows not seen since the 1990s.
If markets are jittery once again, it’s not without justification: In just under a month, global leaders will once again put their heads together, this time to hash out the best way to solve the deepening economic malaise. Hopes are high lawmakers will dream up new (and better) ways to get the world's largest economies back on track.
On April 2, in London, the US is expected to encourage its counterparts at the Group of 20 Summit to increase government-spending efforts to revitalize flagging economies. According to the Wall Street Journal, President Obama and Treasury Secretary Tim Geithner are expected to butt heads with European officials, who would prefer to shift the focus onto crafting stricter financial regulations.
The European Union, many believe, is facing an even worse economic outlook than the US. But those across the pond could need fewer new spending initiatives, since they have further-reaching social programs already in place. In addition, the European Central Bank, or ECB, is far more hawkish (read: concerned) about inflation than is our Federal Reserve.
Digging ourselves out of this mess with more borrowing could spark renewed inflation.
The ECB took longer to lower interest rates last year despite deteriorating economic conditions, citing worries about rising prices. In contrast, Fed Chairman Ben Bernanke aggressively reduced borrowing costs in the hope that companies would borrow to jumpstart new growth. Frozen credit markets didn’t cooperate, plunging the financial system into widespread disarray.
Of the countries that make up the G20, only Saudi Arabia, Spain and Australia plan to spend more propping up their economy than the US, according to data compiled by the International Monetary Fund. Of course, that doesn’t include the hundreds of billions already wasted - um, injected into the likes of Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).
Also left out of these figures are the trillions of dollars the Fed has pumped into the financial system to keep credit flowing -- however reluctantly -- throughout the economy.
The upcoming meeting marks President Obama's first chance to woo world leaders on the global stage. And while his social programs may gain favor among certain European lawmakers, his country's role in creating this mess certainly won't.
The rest of the world increasingly feels its being forced to clean up a problem that was largely American-made.
Saturday, March 7, 2009
Desperately Seeking Dollars: Greenback Catches a Bid
This post first appeared on Minyanville.
And while the answer to this conundrum is indeed complicated, its roots lie in how economic participants react to economic crisis and, ultimately, to deflation.
According to Bloomberg, in banking panics past, lenders tended to focus on doing business at home, rather than abroad. This makes logical sense: Bankers want to begin by helping those in their own backyards. The ongoing spat between Western and Eastern Europe, with the latter begging the former for help, is evidence that saving one’s own skin tends to take precedent when times get tough.
As a result, countries heavily reliant on foreign lending tend to fare poorly when such currency “protectionism” takes hold. Despite profound troubles at Citigroup (C), AIG (AIG) and Bank of America (BAC) -- to name but a few US financial institutions swimming in shark-infested waters -- many believe our banks, and indeed our economy, will fare better than those around the world.
Furthermore, as an economy spins out of control, politicians respond by firing up nationalistic rhetoric, urging a country’s citizens to band together. The widely-discussed “Buy American” provision in President Obama’s economic stimulus plan is but one example of lawmakers asking the electorate to “turn inward” in the face of danger.
Returning to the dollar, in addition to investors betting on the American economy to outperform its international counterparties, ongoing deleveraging favors the American currency. Dollar-denominated debt must be repaid with dollars, and as debtors scrounge up greenbacks to pay back their creditors, dollars become more scarce, driving their value upwards.
Deflation, which goes hand-in-hand with deleveraging, encourages consumers to hold on to cash, since as prices fall their dollars stretch further tomorrow, than they did today. Housing is a perfect example -- why buy a home today that will be worth less tomorrow?
The dollar is now approaching a near-term high not seen since the last time equity markets plunged to new lows (last November). This echoes Toddo's persistent theme of "asset class inflation vs. dollar devaluation." It's no doubt policymakers and the Plunge Protection Team are acutely aware of this relationship -- it's now a question of when, and how, they'll act.
Stay tuned, as Mr. Practical is apt to say: Risk is high.
And while the answer to this conundrum is indeed complicated, its roots lie in how economic participants react to economic crisis and, ultimately, to deflation.
According to Bloomberg, in banking panics past, lenders tended to focus on doing business at home, rather than abroad. This makes logical sense: Bankers want to begin by helping those in their own backyards. The ongoing spat between Western and Eastern Europe, with the latter begging the former for help, is evidence that saving one’s own skin tends to take precedent when times get tough.
As a result, countries heavily reliant on foreign lending tend to fare poorly when such currency “protectionism” takes hold. Despite profound troubles at Citigroup (C), AIG (AIG) and Bank of America (BAC) -- to name but a few US financial institutions swimming in shark-infested waters -- many believe our banks, and indeed our economy, will fare better than those around the world.
Furthermore, as an economy spins out of control, politicians respond by firing up nationalistic rhetoric, urging a country’s citizens to band together. The widely-discussed “Buy American” provision in President Obama’s economic stimulus plan is but one example of lawmakers asking the electorate to “turn inward” in the face of danger.
Returning to the dollar, in addition to investors betting on the American economy to outperform its international counterparties, ongoing deleveraging favors the American currency. Dollar-denominated debt must be repaid with dollars, and as debtors scrounge up greenbacks to pay back their creditors, dollars become more scarce, driving their value upwards.
Deflation, which goes hand-in-hand with deleveraging, encourages consumers to hold on to cash, since as prices fall their dollars stretch further tomorrow, than they did today. Housing is a perfect example -- why buy a home today that will be worth less tomorrow?
The dollar is now approaching a near-term high not seen since the last time equity markets plunged to new lows (last November). This echoes Toddo's persistent theme of "asset class inflation vs. dollar devaluation." It's no doubt policymakers and the Plunge Protection Team are acutely aware of this relationship -- it's now a question of when, and how, they'll act.
Stay tuned, as Mr. Practical is apt to say: Risk is high.
Tuesday, February 24, 2009
Banks Brace for Stress Tests
This post first appeared on Minyanville.
The tests, designed to ensure banks will survive even if economic conditions continue to deteriorate, focus on the books of 20 of the country’s largest banks. According to Bloomberg, the stress tests begin today.
The approach harkens back to tactics used during the Great Depression - yet another reminder of just how bad things have gotten for the US banking system.
Last week, Federal Reserve Chairman Ben Bernanke explained how a similar approach in 1933 solidified confidence in the nation’s banks:
“Roosevelt shut down the banks for a week and said we are just going to check the books and open them up only when we think they are solvent. And a lot of the banks opened up pretty quick. So, it's not really clear how much they really looked through the books, but when they opened them up again, people felt much more comfortable, and more confident in the bank.”
The current plan doesn’t just aim to “check the books.” Instead, regulators will evaluate the strength of banks like Citigroup (C), Bank of America (BAC) and JPMorgan (JPM), already up against the ropes, based on how the'll perform if put through a more “stressful” economic test.
In other words, what happens if the wheels really fall off the wagon.
For example, let’s assume most economists believe housing prices, which have already corrected more than 20%, will stabilize after having fallen 30%. The last 10% of declines would have a certain effect on residential mortgage losses (among other assets), so Treasury bean-counters try to estimate whether banks could withstand the losses such a scenario would create.
After injecting the requisite capital to keep banks alive if things get really, really bad, newfound confidence could entice private capital back into the market. At least, that's the theory. If instead they find out certain banks wouldn't survive without massive amounts of capital, they could then become targets for nationalization.
Myriad troubles arise with this approach, bold as it may be. A few to consider:
First, selecting the “worst case” is problematic, particularly since conditions during this crisis have gotten worse than almost anyone expected. Anyone in Washington, that is, since many private commentators had been saying the sky is falling for years. Still, regulators have to make guesses about how bad things could possibly get, and their guesses could be wrong.
Second, any assumptions about future losses are based on guesses based on assumptions based on guesses based on assumptions based on wild stabs in the dark. In short, the complexity of the global financial system, the unintended consequences of various government actions, and a general difficulty predicting the future, make predictions exactly that - predictions.
Third, and possibly most importantly, regulators have lost almost all credibility over the past 18 months.
Some may argue that the guys in charge are different, but that’s just not the case. Ben Bernanke still runs the Federal Reserve, Tim Geithner ran the New York Fed for the past 5 years, Lawrence Summers is back at the economic helm, and Barney Frank and Chris Dodd are still mouthing off on Capitol Hill. Sure, there's a different face in the White House - but by and large the same folks who got us into this mess are now trying to get us out.
The American public recognizes this, investors recognize this, and the world recognizes it.
Even if the stress tests go off without a hitch and Geithner and Obama loudly proclaim the banking system is safe and sound, the market may simply, quietly shrug - and continue heading south.
The tests, designed to ensure banks will survive even if economic conditions continue to deteriorate, focus on the books of 20 of the country’s largest banks. According to Bloomberg, the stress tests begin today.
The approach harkens back to tactics used during the Great Depression - yet another reminder of just how bad things have gotten for the US banking system.
Last week, Federal Reserve Chairman Ben Bernanke explained how a similar approach in 1933 solidified confidence in the nation’s banks:
“Roosevelt shut down the banks for a week and said we are just going to check the books and open them up only when we think they are solvent. And a lot of the banks opened up pretty quick. So, it's not really clear how much they really looked through the books, but when they opened them up again, people felt much more comfortable, and more confident in the bank.”
The current plan doesn’t just aim to “check the books.” Instead, regulators will evaluate the strength of banks like Citigroup (C), Bank of America (BAC) and JPMorgan (JPM), already up against the ropes, based on how the'll perform if put through a more “stressful” economic test.
In other words, what happens if the wheels really fall off the wagon.
For example, let’s assume most economists believe housing prices, which have already corrected more than 20%, will stabilize after having fallen 30%. The last 10% of declines would have a certain effect on residential mortgage losses (among other assets), so Treasury bean-counters try to estimate whether banks could withstand the losses such a scenario would create.
After injecting the requisite capital to keep banks alive if things get really, really bad, newfound confidence could entice private capital back into the market. At least, that's the theory. If instead they find out certain banks wouldn't survive without massive amounts of capital, they could then become targets for nationalization.
Myriad troubles arise with this approach, bold as it may be. A few to consider:
First, selecting the “worst case” is problematic, particularly since conditions during this crisis have gotten worse than almost anyone expected. Anyone in Washington, that is, since many private commentators had been saying the sky is falling for years. Still, regulators have to make guesses about how bad things could possibly get, and their guesses could be wrong.
Second, any assumptions about future losses are based on guesses based on assumptions based on guesses based on assumptions based on wild stabs in the dark. In short, the complexity of the global financial system, the unintended consequences of various government actions, and a general difficulty predicting the future, make predictions exactly that - predictions.
Third, and possibly most importantly, regulators have lost almost all credibility over the past 18 months.
Some may argue that the guys in charge are different, but that’s just not the case. Ben Bernanke still runs the Federal Reserve, Tim Geithner ran the New York Fed for the past 5 years, Lawrence Summers is back at the economic helm, and Barney Frank and Chris Dodd are still mouthing off on Capitol Hill. Sure, there's a different face in the White House - but by and large the same folks who got us into this mess are now trying to get us out.
The American public recognizes this, investors recognize this, and the world recognizes it.
Even if the stress tests go off without a hitch and Geithner and Obama loudly proclaim the banking system is safe and sound, the market may simply, quietly shrug - and continue heading south.
Government Moves Into Citi?
This post first appeared on Minyanville.
Last night, the Wall Street Journal reported the federal government is considering taking a large step closer to outright control of Citigroup (C). Having already sunk tens of billions of dollars into the troubled bank, the Treasury Department may now convert its non-voting preferred stock into Citgroup common stock. This would give government officials voting rights and more control over management's decisions. The Journal reports the government could own as much as 40% of the company, although bank executives are hoping the stake will come out closer to 25%.
And while taxpayers wouldn’t be asked to pump in additional funds, the move would further dilute current shareholders. But there isn’t much left to dilute: The company’s shares traded below $2 Friday, and were off more than 50% as recently as February 10.
Reeling from credit losses and worsening economic conditions in the US and abroad, Citigroup is at the leading edge of the financial storm. And nervous politicians are taking a more active role in bank management, concerned that capital injections, debt guarantees and loss-sharing agreements may not be sufficient to allow banks to retain their independence.
The Obama administration did say on Friday, however, that nationalization isn't in the cards for Citi and Bank of America (BAC). Nevertheless, nationalization calls are being heard loudly across the globe. Politicians, academics and pundits are weighing in, many arguing state control is the system's only hope to survive.
Banks, for their part, claim they don’t need the help: They claim that fear, rather than fundamentals, are driving their shares into the ground. In addition to Bank of America CEO Ken Lewis, JPMorgan (JPM) chief Jamie Dimon and Wells Fargo (WFC) CEO John Stumpf have asserted that their institutions are solvent enough to go it alone.
In his public remarks on Friday, Stumpf even managed to sound upbeat about the future. “There is so much to look forward to. I don’t know what we’re going through today, but it will probably define our generation. This can be the next greatest generation.”
Indeed. As Toddo often says, “In order to get through this, we need to go through it.” And with stress tests on tap for the nation's biggest banks, we may soon find out just how much we'll have to go through to get to the other side.
Last night, the Wall Street Journal reported the federal government is considering taking a large step closer to outright control of Citigroup (C). Having already sunk tens of billions of dollars into the troubled bank, the Treasury Department may now convert its non-voting preferred stock into Citgroup common stock. This would give government officials voting rights and more control over management's decisions. The Journal reports the government could own as much as 40% of the company, although bank executives are hoping the stake will come out closer to 25%.
And while taxpayers wouldn’t be asked to pump in additional funds, the move would further dilute current shareholders. But there isn’t much left to dilute: The company’s shares traded below $2 Friday, and were off more than 50% as recently as February 10.
Reeling from credit losses and worsening economic conditions in the US and abroad, Citigroup is at the leading edge of the financial storm. And nervous politicians are taking a more active role in bank management, concerned that capital injections, debt guarantees and loss-sharing agreements may not be sufficient to allow banks to retain their independence.
The Obama administration did say on Friday, however, that nationalization isn't in the cards for Citi and Bank of America (BAC). Nevertheless, nationalization calls are being heard loudly across the globe. Politicians, academics and pundits are weighing in, many arguing state control is the system's only hope to survive.
Banks, for their part, claim they don’t need the help: They claim that fear, rather than fundamentals, are driving their shares into the ground. In addition to Bank of America CEO Ken Lewis, JPMorgan (JPM) chief Jamie Dimon and Wells Fargo (WFC) CEO John Stumpf have asserted that their institutions are solvent enough to go it alone.
In his public remarks on Friday, Stumpf even managed to sound upbeat about the future. “There is so much to look forward to. I don’t know what we’re going through today, but it will probably define our generation. This can be the next greatest generation.”
Indeed. As Toddo often says, “In order to get through this, we need to go through it.” And with stress tests on tap for the nation's biggest banks, we may soon find out just how much we'll have to go through to get to the other side.
Thursday, February 19, 2009
Keepin' It Real Estate: A Real Fix for Housing
This post first appeared on Minyanville and Cirios Real Estate.
Such an undertaking would remove distressed homes from the market and spur community revitalization efforts throughout areas desperately in need of the hope they were promised in November.
According to real-estate analytics website Realtytrac.com, foreclosures were filed on 2,330,483 homes in 2008, up 83% from the year before. The median home price in the US is $180,100 - which means 1,526,929 of those homes could be bought with $275 billion. And since foreclosures are centered primarily in areas with low home values, the true number of properties the bailout money could be used to buy is likely much higher.
While the logistics for such an outrageously common-sense solution to the nation’s housing woes are daunting, they’re no less challenging than the massive loan modification efforts already in place. And their results continue to prove underwhelming, at best.
Such a solution also addresses the rapidly mounting discontent over bailing out those homeowners who made bad decisions. Distressed borrowers wouldn't directly receive any taxpayer money - though they would indirectly benefit from the massive government expenditure in their community.
Cash would be funneled down to the local level, where cities and counties could more effectively distribute it. To be sure, local governments can be as bureaucratic and inefficient as Washington -- not to say corrupt -- but by allocating capital to localities, each community would be responsible for its own clean-up efforts.
Private investors, developers, nonprofits and real-estate professionals could compete for business, adding a free-market component to rescue efforts - and even spurring a little sorely-needed economic activity.
Some cities aren't content to wait for federal money to trickle down from the White House. Menlo Park, California, best known for its devotion to the bubble lifestyle, is considering using city money to buy and refurbish foreclosed homes.
The town, like many others in America, is split by a highway that acts as a major dividing line between the haves and the have-nots. While there are just 97 homes in foreclosure in Menlo Park, the vast majority are on “the other side of the tracks,” away from the mansions and quiet, tree-lined streets of West Menlo. The proposal will use money from a $2 million fund already seeded by developers who opted not to allocate units for low-income housing.
The city plans to tap Habitat for Humanity to refurbish the homes, using community volunteers and local experts to oversee the improvements. The president of the local Homeowners Association, Ash Vasudeva, said “When rehabilitation is going on, it uplifts the entire community.” A simple statement, but true.
And while this is one small city undertaking one small project, it could serve as a model for other communities around the country. Not to mention the fact that the mere announcement of $275 billion in real-estate investments would hasten the price discovery the housing market so sorely needs.
Furthermore, banks stand to gain little from such a use of public funds - which could be why such a plan has yet to be proposed on Capitol Hill. When a bank forecloses on a home, JPMorgan Chase (JPM), Wells Fargo (WFC) or Citigroup (C) is forced to write the asset down to at least the amount of the outstanding loan. But since most properties are worth far less than the loan amount, selling the property at market prices would require further writedowns.
So, as banks soak up billions in bailout money under the auspices of massive loan modification efforts aimed at stemming foreclosures, vacant homes lay in disrepair, vagrants loot the pipes - and communities continue to deteriorate.
But instead of allocating funds for such grassroots efforts, Washington continues to issue broad, vague orders aimed at helping many, but in very small amounts. Such programs have failed before, and they'll fail again.
Maybe it's time for a new approach.
Such an undertaking would remove distressed homes from the market and spur community revitalization efforts throughout areas desperately in need of the hope they were promised in November.
According to real-estate analytics website Realtytrac.com, foreclosures were filed on 2,330,483 homes in 2008, up 83% from the year before. The median home price in the US is $180,100 - which means 1,526,929 of those homes could be bought with $275 billion. And since foreclosures are centered primarily in areas with low home values, the true number of properties the bailout money could be used to buy is likely much higher.
While the logistics for such an outrageously common-sense solution to the nation’s housing woes are daunting, they’re no less challenging than the massive loan modification efforts already in place. And their results continue to prove underwhelming, at best.
Such a solution also addresses the rapidly mounting discontent over bailing out those homeowners who made bad decisions. Distressed borrowers wouldn't directly receive any taxpayer money - though they would indirectly benefit from the massive government expenditure in their community.
Cash would be funneled down to the local level, where cities and counties could more effectively distribute it. To be sure, local governments can be as bureaucratic and inefficient as Washington -- not to say corrupt -- but by allocating capital to localities, each community would be responsible for its own clean-up efforts.
Private investors, developers, nonprofits and real-estate professionals could compete for business, adding a free-market component to rescue efforts - and even spurring a little sorely-needed economic activity.
Some cities aren't content to wait for federal money to trickle down from the White House. Menlo Park, California, best known for its devotion to the bubble lifestyle, is considering using city money to buy and refurbish foreclosed homes.
The town, like many others in America, is split by a highway that acts as a major dividing line between the haves and the have-nots. While there are just 97 homes in foreclosure in Menlo Park, the vast majority are on “the other side of the tracks,” away from the mansions and quiet, tree-lined streets of West Menlo. The proposal will use money from a $2 million fund already seeded by developers who opted not to allocate units for low-income housing.
The city plans to tap Habitat for Humanity to refurbish the homes, using community volunteers and local experts to oversee the improvements. The president of the local Homeowners Association, Ash Vasudeva, said “When rehabilitation is going on, it uplifts the entire community.” A simple statement, but true.
And while this is one small city undertaking one small project, it could serve as a model for other communities around the country. Not to mention the fact that the mere announcement of $275 billion in real-estate investments would hasten the price discovery the housing market so sorely needs.
Furthermore, banks stand to gain little from such a use of public funds - which could be why such a plan has yet to be proposed on Capitol Hill. When a bank forecloses on a home, JPMorgan Chase (JPM), Wells Fargo (WFC) or Citigroup (C) is forced to write the asset down to at least the amount of the outstanding loan. But since most properties are worth far less than the loan amount, selling the property at market prices would require further writedowns.
So, as banks soak up billions in bailout money under the auspices of massive loan modification efforts aimed at stemming foreclosures, vacant homes lay in disrepair, vagrants loot the pipes - and communities continue to deteriorate.
But instead of allocating funds for such grassroots efforts, Washington continues to issue broad, vague orders aimed at helping many, but in very small amounts. Such programs have failed before, and they'll fail again.
Maybe it's time for a new approach.
Hollywood Hits the Bailout Trough
This post first appeared on Minyanville.
According to the Wall Street Journal, states like Louisiana, Michigan and Minnesota started offering attractive tax incentives for studios to film within their borders. Feature-film production days in Hollywood hit a 15-year low in 2008.
Now, in an attempt to lure big-name producers and directors back to its sunny shores, California is proposing a 25% tax credit of its own. The proposal would reimburse studios for a portion of their expenses, in the hopes that peripheral spending and job creation will help prop up the state’s flagging economy. Besieged by the housing market collapse, California has one of the nation’s highest unemployment rates at 9.3%.
The new proposal could be funded partially out of California’s allocation from President Obama’s economic stimulus package, although it isn’t likely to put money into the pockets of the country’s most downtrodden. High-profile actors aren’t exactly standing on bread lines just yet.
And while the initiative could provide employment to gaffers and dolly grips throughout Hollywood, critics argue movie shoots rarely generate long-term, sustainable jobs.
Instead, they argue, bloated payments to actors and eye-popping special effects have raised movie budgets beyond reasonable levels. Meanwhile, states vie for filmmaker dollars with ever-more-outsize kickbacks - kickcbacks that simply perpetuate the unsustainable economics of making movies.
Big studios like Disney (DIS), Universal (GE), Columbia (SNE) and Warner Brothers’ (TWX) are smarting as consumers rein in spending on luxuries of all kinds. Movies do offer a semi-affordable entertainment option.
California's attempts to win back the industry it birthed decades ago is further evidence of the private sector's increasing dependence on government handouts for survival. And while tossing a few bucks to filmmakers to generate local jobs may seem like a worthy trade-off in a rough employment environment, it creates a dependency - and perpetuates unsustainable business practices.
It's no wonder movie budgets soared as states upped their kickbacks: Spending someone else's money is a lot easier than spending your own.
According to the Wall Street Journal, states like Louisiana, Michigan and Minnesota started offering attractive tax incentives for studios to film within their borders. Feature-film production days in Hollywood hit a 15-year low in 2008.
Now, in an attempt to lure big-name producers and directors back to its sunny shores, California is proposing a 25% tax credit of its own. The proposal would reimburse studios for a portion of their expenses, in the hopes that peripheral spending and job creation will help prop up the state’s flagging economy. Besieged by the housing market collapse, California has one of the nation’s highest unemployment rates at 9.3%.
The new proposal could be funded partially out of California’s allocation from President Obama’s economic stimulus package, although it isn’t likely to put money into the pockets of the country’s most downtrodden. High-profile actors aren’t exactly standing on bread lines just yet.
And while the initiative could provide employment to gaffers and dolly grips throughout Hollywood, critics argue movie shoots rarely generate long-term, sustainable jobs.
Instead, they argue, bloated payments to actors and eye-popping special effects have raised movie budgets beyond reasonable levels. Meanwhile, states vie for filmmaker dollars with ever-more-outsize kickbacks - kickcbacks that simply perpetuate the unsustainable economics of making movies.
Big studios like Disney (DIS), Universal (GE), Columbia (SNE) and Warner Brothers’ (TWX) are smarting as consumers rein in spending on luxuries of all kinds. Movies do offer a semi-affordable entertainment option.
California's attempts to win back the industry it birthed decades ago is further evidence of the private sector's increasing dependence on government handouts for survival. And while tossing a few bucks to filmmakers to generate local jobs may seem like a worthy trade-off in a rough employment environment, it creates a dependency - and perpetuates unsustainable business practices.
It's no wonder movie budgets soared as states upped their kickbacks: Spending someone else's money is a lot easier than spending your own.
Stanford Takes Page from Ponzi Playbook
This post first appeared on Minyanville.
In a story conveniently drowned out by President Obama’s signing of the $789 billion economic stimulus package and the auto industry’s latest plea for taxpayer money, the Securities and Exchange Commission raided Stanford’s Houston headquarters yesterday morning, alleging he perpetrated an $8 billion fraud based on “false promises and fabricated historical data.”
According to the Wall Street Journal, Stanford lured in investors by promising steady, safe returns for cash deposited in a bank he owns in Antigua, one of the many Caribbean banking havens. Instead of investing in liquid, low-risk assets as promised, Stanford allegedly funneled the money into high-risk private equity and real estate deals. Oversight was scant, as decisions were reviewed by 2 people: the bank’s chief financial officer, James Davis, and Stanford himself.
Much like Madoff’s much-publicized Ponzi scheme, consistently high returns that seemed impervious to market gyrations were the hallmark of Stanford’s scam.
The SEC claims Stanford International Bank returned between 6-10% from 1992-2006 on its certificates of deposit, or CDs. Yields on comparable investments issued by American banks like JPMorgan (JPM), Bank of America (BAC) and Wells Fargo (WFC) are significantly lower - but carry FDIC insurance to protect depositors from loss.
Strong returns on its investment portfolio, Stanford claimed, allowed the bank to pay out the oversized returns. In 2008, a year that saw the S&P 500 lose 39%, the bank said its portfolio lost just 1.3%.
The SEC says Stanford used these inflated returns to woo investors, many of which hailed from Latin American countries. Shaky banks in South America led many wealthy individuals to invest with Stanford, believing he could earn them strong returns with little risk.
But as their North American counterparts have learned from the ongoing Madoff affair: Where there’s return, there’s always risk.
This lax attitude towards risk, one that was fostered for decades by the Federal Reserve's overly accommodating monetary policy, was instrumental in sowing the seeds of our current financial crisis. It also helps explain how so many investors around the world were so easily duped by cons that, in retrospect, seem so easy to identify.
“Malinvestments,” a term popularized in recent years by Texas Congressman Ron Paul, occur when cash is poured into assets that return a yield that isn't commensurate with their risks.
When times are good, losses remain low and Washington comes to the rescue of the financial industry every time it gets into trouble, investors become accustomed to earning high rates of return without taking much risk. As this belief becomes the status quo, more and more money is funneled towards these seemingly low-risk, high-return opportunities.
Peddlers of financial instruments, from Madoff and Stanford to Goldman Sachs (GS) and Morgan Stanley (MS), dream up increasingly complex places for investors to park their money. Risk, they claimed, was as low as ever, thanks to their financial wizardry.
When real losses did occur, loan defaults began to rise, and the government wasn't deft enough to stem the tide, investors got burned. Badly.
Assets that suddenly become very risky lost value rapidly, since they carried such a low rate of return. Losses beget losses, which beget more losses. We all know how the story ends.
Meanwhile, even as it acted as enabler to Wall Street's (and Main Street's) incessant greed, the federal government now insists on pointing fingers and acting as savior for a system it was complicit in creating.
Where was the SEC to root out Madoff and Stanford before investors lost billions? Where was the Federal Reserve to act on its own findings about the risks of exotic mortgage lending?
Yet, even now, we're counting on these same institutions and politicians to invest nearly $1 trillion of our money to rescue us.
How low-risk is that investment strategy?
In a story conveniently drowned out by President Obama’s signing of the $789 billion economic stimulus package and the auto industry’s latest plea for taxpayer money, the Securities and Exchange Commission raided Stanford’s Houston headquarters yesterday morning, alleging he perpetrated an $8 billion fraud based on “false promises and fabricated historical data.”
According to the Wall Street Journal, Stanford lured in investors by promising steady, safe returns for cash deposited in a bank he owns in Antigua, one of the many Caribbean banking havens. Instead of investing in liquid, low-risk assets as promised, Stanford allegedly funneled the money into high-risk private equity and real estate deals. Oversight was scant, as decisions were reviewed by 2 people: the bank’s chief financial officer, James Davis, and Stanford himself.
Much like Madoff’s much-publicized Ponzi scheme, consistently high returns that seemed impervious to market gyrations were the hallmark of Stanford’s scam.
The SEC claims Stanford International Bank returned between 6-10% from 1992-2006 on its certificates of deposit, or CDs. Yields on comparable investments issued by American banks like JPMorgan (JPM), Bank of America (BAC) and Wells Fargo (WFC) are significantly lower - but carry FDIC insurance to protect depositors from loss.
Strong returns on its investment portfolio, Stanford claimed, allowed the bank to pay out the oversized returns. In 2008, a year that saw the S&P 500 lose 39%, the bank said its portfolio lost just 1.3%.
The SEC says Stanford used these inflated returns to woo investors, many of which hailed from Latin American countries. Shaky banks in South America led many wealthy individuals to invest with Stanford, believing he could earn them strong returns with little risk.
But as their North American counterparts have learned from the ongoing Madoff affair: Where there’s return, there’s always risk.
This lax attitude towards risk, one that was fostered for decades by the Federal Reserve's overly accommodating monetary policy, was instrumental in sowing the seeds of our current financial crisis. It also helps explain how so many investors around the world were so easily duped by cons that, in retrospect, seem so easy to identify.
“Malinvestments,” a term popularized in recent years by Texas Congressman Ron Paul, occur when cash is poured into assets that return a yield that isn't commensurate with their risks.
When times are good, losses remain low and Washington comes to the rescue of the financial industry every time it gets into trouble, investors become accustomed to earning high rates of return without taking much risk. As this belief becomes the status quo, more and more money is funneled towards these seemingly low-risk, high-return opportunities.
Peddlers of financial instruments, from Madoff and Stanford to Goldman Sachs (GS) and Morgan Stanley (MS), dream up increasingly complex places for investors to park their money. Risk, they claimed, was as low as ever, thanks to their financial wizardry.
When real losses did occur, loan defaults began to rise, and the government wasn't deft enough to stem the tide, investors got burned. Badly.
Assets that suddenly become very risky lost value rapidly, since they carried such a low rate of return. Losses beget losses, which beget more losses. We all know how the story ends.
Meanwhile, even as it acted as enabler to Wall Street's (and Main Street's) incessant greed, the federal government now insists on pointing fingers and acting as savior for a system it was complicit in creating.
Where was the SEC to root out Madoff and Stanford before investors lost billions? Where was the Federal Reserve to act on its own findings about the risks of exotic mortgage lending?
Yet, even now, we're counting on these same institutions and politicians to invest nearly $1 trillion of our money to rescue us.
How low-risk is that investment strategy?
Auto Bailout: Part Deux
This post first appeared on Minyanville.
In a scene reminiscent of last year’s near-collapse, General Motors (GM) and Chrysler LLC told government officials that, without more than $20 billion in additional rescue money, bankruptcy is their only option. Required to submit restructuring plans under the terms of the first federal bailout, GM and Chrysler outlined a strategy for revitalizing their firms and returning to profitability.
Twenty billion dollars, GM’s CEO Rick Waggoner argues, is a paltry sum when compared to the estimated $100 billion the firm would need to make it through a traditional bankruptcy process, according to the Wall Street Journal. Chrysler, for its part, said $24 billion would suffice to skate through bankruptcy proceedings, should Washington fail to produce the requested funds.
In addition to squeezing taxpayers for more cash, the firms announced tens of thousands of layoffs and other cost-cutting measures.
GM plans out phase out its Hummer brand as early as this year, since no buyer emerged for the production facilities that crank out the oversized gas guzzlers. Saturn could be gone by 2011, as could Pontiac, and the company is trying to sell Saab. Five factories will be shut, 47,000 jobs will be cut, and dealerships will be closed as GM tries to rein in its bloated cost structure.
Chrysler is fighting battles of its own, as Congress is becoming increasingly hostile toward the company’s majority owner, private-equity firm Cerberus Capital Management. Lawmakers want to see Cerberus pony up cash for its struggling investment before any additional taxpayer funds are put to work.
Progress has been made by GM, Chrysler as well as Ford (F) in negotiations with the powerful United Auto Works union, but there are still outstanding items that need to be resolved before any restructuring can be pushed through.
Earlier this week, President Obama announced that the so-called “car czar” would never be crowned, opting instead to task Treasury Secretary Tim Geithner and Lawrence Summers, chairman of the National Economic Council, with cleaning up Detroit’s mess.
And quite a mess it is.
With the economy in free fall and the nearly $1 trillion stimulus package now approved, allowing the automakers to fail could be a severe setback for the Obama administration. On the other hand, growing public discontent over handouts to industries that brought about their own demise makes this a prickly political issue.
Ultimately, Obama may be looking to treat the situation in Detroit as a trial run: The relatively simple task of unwinding 2 cash-starved companies will be child’s play compared to fixing the country’s ailing financial system.
The nation's biggest banks, Bank of America (BAC), Citigroup (C), JPMorgan (JPM) and Wells Fargo (WFC), continue to reel as losses mount, and the economic crisis deepens. And as Treasury Secretary Geithner muddles along with his bank-rescue package, officials may be biding their time and sharpening their management skills.
In a scene reminiscent of last year’s near-collapse, General Motors (GM) and Chrysler LLC told government officials that, without more than $20 billion in additional rescue money, bankruptcy is their only option. Required to submit restructuring plans under the terms of the first federal bailout, GM and Chrysler outlined a strategy for revitalizing their firms and returning to profitability.
Twenty billion dollars, GM’s CEO Rick Waggoner argues, is a paltry sum when compared to the estimated $100 billion the firm would need to make it through a traditional bankruptcy process, according to the Wall Street Journal. Chrysler, for its part, said $24 billion would suffice to skate through bankruptcy proceedings, should Washington fail to produce the requested funds.
In addition to squeezing taxpayers for more cash, the firms announced tens of thousands of layoffs and other cost-cutting measures.
GM plans out phase out its Hummer brand as early as this year, since no buyer emerged for the production facilities that crank out the oversized gas guzzlers. Saturn could be gone by 2011, as could Pontiac, and the company is trying to sell Saab. Five factories will be shut, 47,000 jobs will be cut, and dealerships will be closed as GM tries to rein in its bloated cost structure.
Chrysler is fighting battles of its own, as Congress is becoming increasingly hostile toward the company’s majority owner, private-equity firm Cerberus Capital Management. Lawmakers want to see Cerberus pony up cash for its struggling investment before any additional taxpayer funds are put to work.
Progress has been made by GM, Chrysler as well as Ford (F) in negotiations with the powerful United Auto Works union, but there are still outstanding items that need to be resolved before any restructuring can be pushed through.
Earlier this week, President Obama announced that the so-called “car czar” would never be crowned, opting instead to task Treasury Secretary Tim Geithner and Lawrence Summers, chairman of the National Economic Council, with cleaning up Detroit’s mess.
And quite a mess it is.
With the economy in free fall and the nearly $1 trillion stimulus package now approved, allowing the automakers to fail could be a severe setback for the Obama administration. On the other hand, growing public discontent over handouts to industries that brought about their own demise makes this a prickly political issue.
Ultimately, Obama may be looking to treat the situation in Detroit as a trial run: The relatively simple task of unwinding 2 cash-starved companies will be child’s play compared to fixing the country’s ailing financial system.
The nation's biggest banks, Bank of America (BAC), Citigroup (C), JPMorgan (JPM) and Wells Fargo (WFC), continue to reel as losses mount, and the economic crisis deepens. And as Treasury Secretary Geithner muddles along with his bank-rescue package, officials may be biding their time and sharpening their management skills.
Friday, February 13, 2009
Americans to More Debt: Talk to the Hand
This post first appeared on Minyanville.
While congressmen berating bank CEOs for their unwillingness to lend out their bailout money makes for a nice media clip, it reflects the growing disconnect between our elected officials and any semblance of reality. Not that the relationship was ever particularly close - but lawmakers are floundering for good press while the nation’s economic future slips further and further from their tenuous grasp.
Bloomberg reports American consumers are wary of taking on more debt, as expectations about eroding economic conditions are forcing people, to *gasp* make responsible decisions about their personal finances.
Bloomberg cites Midsouth Bancorp (MSL) president C.R “Rusty” Cloutier, who says that, despite aggressive marketing, town hall meetings, and $20 million in TARP money, Midsouth's customers just aren’t taking out new loans.
This is the rejection of debt Professor Depew speaks of when discussing the structural deflation we’re currently experiencing.
Credit is based on trust. And while conventionally we view this relationship as one in which the lender must trust the borrower to repay his debt -- at least to an extent that’s commensurate with the interest rate -- it does go both ways.
As lenders like Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) are increasingly being painted as corporate marauders out to rape and pillage the American public, would-be borrowers are wary of putting their financial future in the hands of these men of questionable repute. And with credit-card companies rushing to alter terms, it’s no surprise consumers are reluctant to extend themselves further.
Still, lawmakers are pushing through an economic stimulus package that depends, in part, on a willingness on the part of consumers to keep spending. Their delusion is only outmatched by their hubris - the belief that a bunch of self-interested politicos can coerce the average American into making ruinous financial decisions for the betterment of the country.
Floundering industries -- notably automakers and homebuilders -- are counting on government subsidies to encourage Americans to keep borrowing to buy their products. But what General Motors (GM), Ford (F), Centex (CTX) and KB Homes (KBH) don't understand is this: We just don't want what they're peddling. And we certainly don't want to borrow against it.
The transition from a debt-dependent, credit-drunk consumerist society won't be immediate: It's taken 18 months of financial panic for evidence of the shifting social mood to make its way into the mainstream.
But as the economic outlook continues to darken, the country becomes more disenfranchised, and the government grows ever-more addicted to sound bites and empty promises, reality will set in.
For the past 20 years, we've been blithely driving along an economic road that ends in a cliff. And that cliff is now in our rear-view mirror. We're tumbling, groping for any branch that can save us from the fall. But each one of these new government programs, bailouts and rescues simply tries to set us gently back on the road from which we only just plummeted.
We already know where that path ends, and it ain't pretty. What say we try another road?
While congressmen berating bank CEOs for their unwillingness to lend out their bailout money makes for a nice media clip, it reflects the growing disconnect between our elected officials and any semblance of reality. Not that the relationship was ever particularly close - but lawmakers are floundering for good press while the nation’s economic future slips further and further from their tenuous grasp.
Bloomberg reports American consumers are wary of taking on more debt, as expectations about eroding economic conditions are forcing people, to *gasp* make responsible decisions about their personal finances.
Bloomberg cites Midsouth Bancorp (MSL) president C.R “Rusty” Cloutier, who says that, despite aggressive marketing, town hall meetings, and $20 million in TARP money, Midsouth's customers just aren’t taking out new loans.
This is the rejection of debt Professor Depew speaks of when discussing the structural deflation we’re currently experiencing.
Credit is based on trust. And while conventionally we view this relationship as one in which the lender must trust the borrower to repay his debt -- at least to an extent that’s commensurate with the interest rate -- it does go both ways.
As lenders like Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) are increasingly being painted as corporate marauders out to rape and pillage the American public, would-be borrowers are wary of putting their financial future in the hands of these men of questionable repute. And with credit-card companies rushing to alter terms, it’s no surprise consumers are reluctant to extend themselves further.
Still, lawmakers are pushing through an economic stimulus package that depends, in part, on a willingness on the part of consumers to keep spending. Their delusion is only outmatched by their hubris - the belief that a bunch of self-interested politicos can coerce the average American into making ruinous financial decisions for the betterment of the country.
Floundering industries -- notably automakers and homebuilders -- are counting on government subsidies to encourage Americans to keep borrowing to buy their products. But what General Motors (GM), Ford (F), Centex (CTX) and KB Homes (KBH) don't understand is this: We just don't want what they're peddling. And we certainly don't want to borrow against it.
The transition from a debt-dependent, credit-drunk consumerist society won't be immediate: It's taken 18 months of financial panic for evidence of the shifting social mood to make its way into the mainstream.
But as the economic outlook continues to darken, the country becomes more disenfranchised, and the government grows ever-more addicted to sound bites and empty promises, reality will set in.
For the past 20 years, we've been blithely driving along an economic road that ends in a cliff. And that cliff is now in our rear-view mirror. We're tumbling, groping for any branch that can save us from the fall. But each one of these new government programs, bailouts and rescues simply tries to set us gently back on the road from which we only just plummeted.
We already know where that path ends, and it ain't pretty. What say we try another road?
The Mortgage Rescue Plan: Will It Work?
This post first appeared on Minyanville and Cirios Real Estate.
The Obama administration’s scheme to help troubled borrowers centers on subsidizing interest payments, which would help borrowers make ends meet without angering those investors expecting full payments each month. This marks the first time the government is intervening directly with taxpayer funds to ease the burden of monthly mortgage payments.
Bloomberg reports the plan will be voluntary for lenders like Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC), and will employ many of the tactics previous modification efforts have used (ineffectively), such as loan extensions and principal reductions. Modifications identified as having a net present value will be targeted, where foreclosing would be more expensive than changing the loan terms.
The program aims to establish a standard for loan modifications that can be used industry-wide. That's an absurd claim, which demonstrates the extent to which lawmakers misunderstand the scope of the problem. It's a bit like saying every American must cut their hair the same way: It would be laughable it weren’t so sad.
Each mortgage, each borrower, each lender, each home is unique; each situation is different. Individual banks can barely standardize the documents required to close a loan, so the notion that there can be one standard for approving a loan modification -- an intensely complicated procedure involving countless interested parties -- is ridiculous.
It would be one thing if the plan offered even the remotest possibility of stabilizing the housing market. It doesn't. The few borrowers who may be helped will have little effect on a massive, disjointed housing market that remains determined to run its course despite government efforts to stop the bleeding.
The societal implications of this program are downright frightening.
Washington cutting checks to borrowers who can’t make their mortgage payments sounds like a benevolent act attempt to reach down to struggling families -- and in some cases, it may certainly help. But it also fosters dependency on the federal government and incentivizes bad behavior.
It now appears we've reached a point in this crisis where differentiating between those worthy of help and those left to pick up the tab is determined primarily by how poorly one managed their personal finances. The worse the decision, the greater the federal assistance - and it's true for government bailouts of bad choices on the part of individuals and institutions alike.
The message this sends to the rest of us - those who are still living up to their obligations and trying in good faith to eke out a living during tough times: Throw in the towel.
The Obama administration’s scheme to help troubled borrowers centers on subsidizing interest payments, which would help borrowers make ends meet without angering those investors expecting full payments each month. This marks the first time the government is intervening directly with taxpayer funds to ease the burden of monthly mortgage payments.
Bloomberg reports the plan will be voluntary for lenders like Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC), and will employ many of the tactics previous modification efforts have used (ineffectively), such as loan extensions and principal reductions. Modifications identified as having a net present value will be targeted, where foreclosing would be more expensive than changing the loan terms.
The program aims to establish a standard for loan modifications that can be used industry-wide. That's an absurd claim, which demonstrates the extent to which lawmakers misunderstand the scope of the problem. It's a bit like saying every American must cut their hair the same way: It would be laughable it weren’t so sad.
Each mortgage, each borrower, each lender, each home is unique; each situation is different. Individual banks can barely standardize the documents required to close a loan, so the notion that there can be one standard for approving a loan modification -- an intensely complicated procedure involving countless interested parties -- is ridiculous.
It would be one thing if the plan offered even the remotest possibility of stabilizing the housing market. It doesn't. The few borrowers who may be helped will have little effect on a massive, disjointed housing market that remains determined to run its course despite government efforts to stop the bleeding.
The societal implications of this program are downright frightening.
Washington cutting checks to borrowers who can’t make their mortgage payments sounds like a benevolent act attempt to reach down to struggling families -- and in some cases, it may certainly help. But it also fosters dependency on the federal government and incentivizes bad behavior.
It now appears we've reached a point in this crisis where differentiating between those worthy of help and those left to pick up the tab is determined primarily by how poorly one managed their personal finances. The worse the decision, the greater the federal assistance - and it's true for government bailouts of bad choices on the part of individuals and institutions alike.
The message this sends to the rest of us - those who are still living up to their obligations and trying in good faith to eke out a living during tough times: Throw in the towel.
Tuesday, February 10, 2009
Bank Rescue? What Bank Rescue?
This post first appeared on Minyanville.
So as not to distract Congress from imminent debate on the $800 billion economic stimulus package, newly minted Treasury Secretary Timothy Geithner delayed a speech outlining his bailout plan for the financial markets till tomorrow.
Details about the latest initiative are still cloudy, but over the weekend, reports by both Bloomberg and the New York Times focused on difficulties pricing illiquid, toxic assets, which seem to be new scheme’s the biggest sticking point.
Banks, laden with hard to price and impossible to sell assets, can’t make new loans since any fresh capital they receive is simply eaten up by mounting losses. And while big lenders like Wells Fargo (WFC) and JPMorgan (JPM) would love to unload troubled assets onto the government above their market price, politicians are wary of the negative press such a taxpayer burden would cause.
Even though the Treasury, the Federal Reserve and the FDIC have guaranteed almost half a trillion dollars in lousy debt owned by Citigroup (C) and Bank of America (BAC), bureaucrats have now found it politically expedient to play hardball with the nation’s bankers. And by hardball, I mean slow-pitch softball.
The Wall Street Journal reports President Obama’s much-heralded executive-compensation restrictions, far from squaring off with Wall Street fat cats in the UFC Octagon, is attacking Manhattan’s uber-rich with kid gloves.
Executive-pay experts and management attorneys have identified loopholes in the President’s plan, which could allow the very executives Obama means to punish to reap the very same benefits he seeks to limit. This shouldn’t come as much of a surprise, since Wall Street’s expertise lies in staying one step ahead of regulators and lawmakers, figuring how to bust new, supposedly tough rules the moment they’re announced.
As the ongoing efforts to rescue the American economy and fix the banking system roll on, the extent to which Washington is waging primarily a public relations campaign, rather than a true battle against the demons of Depression, becomes increasingly clear. Even the most well-designed stimulus takes months to filter into the economy and effect actual economic decision-making, so in the mean time politicians are focused on swaying public opinion.
Oddly, the current tactic is to frighten the public with ominous warnings about the risks of doing nothing. This is just exacerbating the contraction, as purchasing decisions are delayed for fear things may keep getting worse.
The focus on social mood rather than actual, sound policy highlights the extent to which the turmoil of the past 18 months has altered the American psyche.
Consumers are recoiling, shunning debt and extravagance for savings and thrift. Washington and Wall Street, more joined at the hip than ever, know this combination could topple their carefully constructed house of cards - economic expansion founded on unsustainable levels of debt.
We'll know more tomorrow about the latest in a string of attempts to fix our ailing financial system - unless of course something more important gets in the way.
So as not to distract Congress from imminent debate on the $800 billion economic stimulus package, newly minted Treasury Secretary Timothy Geithner delayed a speech outlining his bailout plan for the financial markets till tomorrow.
Details about the latest initiative are still cloudy, but over the weekend, reports by both Bloomberg and the New York Times focused on difficulties pricing illiquid, toxic assets, which seem to be new scheme’s the biggest sticking point.
Banks, laden with hard to price and impossible to sell assets, can’t make new loans since any fresh capital they receive is simply eaten up by mounting losses. And while big lenders like Wells Fargo (WFC) and JPMorgan (JPM) would love to unload troubled assets onto the government above their market price, politicians are wary of the negative press such a taxpayer burden would cause.
Even though the Treasury, the Federal Reserve and the FDIC have guaranteed almost half a trillion dollars in lousy debt owned by Citigroup (C) and Bank of America (BAC), bureaucrats have now found it politically expedient to play hardball with the nation’s bankers. And by hardball, I mean slow-pitch softball.
The Wall Street Journal reports President Obama’s much-heralded executive-compensation restrictions, far from squaring off with Wall Street fat cats in the UFC Octagon, is attacking Manhattan’s uber-rich with kid gloves.
Executive-pay experts and management attorneys have identified loopholes in the President’s plan, which could allow the very executives Obama means to punish to reap the very same benefits he seeks to limit. This shouldn’t come as much of a surprise, since Wall Street’s expertise lies in staying one step ahead of regulators and lawmakers, figuring how to bust new, supposedly tough rules the moment they’re announced.
As the ongoing efforts to rescue the American economy and fix the banking system roll on, the extent to which Washington is waging primarily a public relations campaign, rather than a true battle against the demons of Depression, becomes increasingly clear. Even the most well-designed stimulus takes months to filter into the economy and effect actual economic decision-making, so in the mean time politicians are focused on swaying public opinion.
Oddly, the current tactic is to frighten the public with ominous warnings about the risks of doing nothing. This is just exacerbating the contraction, as purchasing decisions are delayed for fear things may keep getting worse.
The focus on social mood rather than actual, sound policy highlights the extent to which the turmoil of the past 18 months has altered the American psyche.
Consumers are recoiling, shunning debt and extravagance for savings and thrift. Washington and Wall Street, more joined at the hip than ever, know this combination could topple their carefully constructed house of cards - economic expansion founded on unsustainable levels of debt.
We'll know more tomorrow about the latest in a string of attempts to fix our ailing financial system - unless of course something more important gets in the way.
Thursday, January 22, 2009
Will Obama Optimism Boost Stocks?
This post first appeared on Minyanville.
The months between Barack Obama's election and his inauguration on Tuesday were downright ugly for the stock market. So ugly, in fact, that the 14% drop marked Wall Street’s worst performance ever in expectation of a new president, according to Bloomberg.
During the 77-day span, markets swooned, unemployment spiked, Bank of America (BAC) was rescued by the federal government, and the country’s biggest banks fell to levels not seen in decades.
It should come as no surprise that the second worst drop took place while nervous Americans waited for Franklin Delano Roosevelt to take office in 1933. What transpired for the rest of that year, however, gives Wall Street historians hope that the sky might not actually fall in 2009.
The stock market, led by familiar names such as General Electric (GE) and Proctor & Gamble (PG), rallied as much as 75% in 1933.
In fact, a few weeks back, I posted a chart on the Buzz and Banter which showed that the market’s darkest times often yield its finest returns. Two of the S&P 500's 5 best years occurred during the 1930s, a time not widely known to have been kind to stocks.
And while myriad differences are often cited between the Great Depression and our current economic malaise, the lessons of 1933 shouldn't be lost on investors. Even if one’s long-term outlook is negative, to be blind to the possibility that stocks could rally -- for longer than may seem rational -- is to miss out on ample opportunities.
In just the past 2 days, more than a few friends, family and colleagues have said that the changing of the guard in Washington left them markedly more optimistic than before. Psychology is as essential to market actions as are dollars and cents, and the pervasive optimism Obama brings to the White House cannot be ignored.
It’s a fool’s errand to claim meaningful prescience when it comes to the movements of markets or individual stocks, but it remains useful -- and profitable -- to recall that, though history rarely repeats, it often rhymes.
The months between Barack Obama's election and his inauguration on Tuesday were downright ugly for the stock market. So ugly, in fact, that the 14% drop marked Wall Street’s worst performance ever in expectation of a new president, according to Bloomberg.
During the 77-day span, markets swooned, unemployment spiked, Bank of America (BAC) was rescued by the federal government, and the country’s biggest banks fell to levels not seen in decades.
It should come as no surprise that the second worst drop took place while nervous Americans waited for Franklin Delano Roosevelt to take office in 1933. What transpired for the rest of that year, however, gives Wall Street historians hope that the sky might not actually fall in 2009.
The stock market, led by familiar names such as General Electric (GE) and Proctor & Gamble (PG), rallied as much as 75% in 1933.
In fact, a few weeks back, I posted a chart on the Buzz and Banter which showed that the market’s darkest times often yield its finest returns. Two of the S&P 500's 5 best years occurred during the 1930s, a time not widely known to have been kind to stocks.
And while myriad differences are often cited between the Great Depression and our current economic malaise, the lessons of 1933 shouldn't be lost on investors. Even if one’s long-term outlook is negative, to be blind to the possibility that stocks could rally -- for longer than may seem rational -- is to miss out on ample opportunities.
In just the past 2 days, more than a few friends, family and colleagues have said that the changing of the guard in Washington left them markedly more optimistic than before. Psychology is as essential to market actions as are dollars and cents, and the pervasive optimism Obama brings to the White House cannot be ignored.
It’s a fool’s errand to claim meaningful prescience when it comes to the movements of markets or individual stocks, but it remains useful -- and profitable -- to recall that, though history rarely repeats, it often rhymes.
Wednesday, January 21, 2009
Hope in DC, Panic on Wall Street
This post first appeared on Minyanville.
Amid much fanfare, President Barack Obama was sworn in yesterday as the forty-fourth president of the United States. A few short hours later, shares of the largest American banks tumbled, as if to remind the incoming Commander-in-Chief that, though America was jubilant, Wall Street remains in dissaray.
Shares of Wells Fargo (WFC), JPMorgan (JPM), Citigroup (C) and Bank of America (BAC), the backbone of what remains of the world’s financial system, reached lows not seen in decades. Investors fear what some have called “creeping nationalization,” as monetary and fiscal authorities appear content to let equity holders suffer the worst of the losses.
Obama is now expected to rush through a sweeping economic stimulus plan, which, by most accounts, could pump upwards of $800 billion into our floundering economy through a patchwork strategy of tax relief and government spending.
And while pundits, academics and bureaucrats bicker about the best way to spend our precious taxpayer dollars, an arid swath of suburban California desert could serve as a valuable test case for effective (and ineffective) public spending.
Just a few years ago, homebuilders like Lennar (LEN), DR Horton (DHI) and Centex (CTX) flocked to Riverside and San Bernadino County to capitalize on the nascent housing boom. McMansions were frantically shoehorned between strip malls and clogged freeways. The 2 counties, which together make up the Inland Empire, a vast tract of urban sprawl east of Los Angeles, are now home to more than 2 million people.
The housing bust, well into its fourth year, has crippled the local economy.
Bloomberg reports unemployment in the Inland Empire matches Detroit at 9.5% - the highest of any metropolitan area in the country. 17,400 construction jobs have been lost in the last 12 months, home prices have slid almost 40% and previously dependable employers are closing up shop.
Local governments, however, are pushing ahead with over $1 billion in spending projects, from much-needed widening of freeways to a new $300 million jail. As Bloomberg notes, the projects illustrate both the potential and the limitations of government-led economic stimulus.
While infrastructure projects have helped limit layoffs, job openings are still virtually nonexistent : In one city, as many as 100 people per day may compete for a single minimum wage job. Local economists fear unemployment could reach 12%.
Outside construction, job creation has essentially stagnated. While a few intrepid entrepreneurs have sought out the region's now dirt-cheap office space and homes, anemic consumer spending is damaging traditional retailers, restaurants and other consumer-centric employers.
The biggest project -- the jail, naturally -- will create 4,500 jobs. But building new jails is hardly the economic stimulus the country should be depending on for job creation.
Obama’s strategy has shifted in recent weeks, as his plans to revive the American economy are becoming increasingly focused on tax relief, rather than on massive infrastructure projects. Tax cuts and rebate, while widely viewed as a less immediate way to jumpstart an economy, would reach into all industries, not just those tied to infrastructure.
Obama would be wise to spend a few minutes contemplating the dilapidated developments and barren strip malls of the Inland Empire. Although the area certainly represented the worst of the real estate bubble’s excesses, its woes are emblematic of the broader crisis the country now faces.
Amid much fanfare, President Barack Obama was sworn in yesterday as the forty-fourth president of the United States. A few short hours later, shares of the largest American banks tumbled, as if to remind the incoming Commander-in-Chief that, though America was jubilant, Wall Street remains in dissaray.
Shares of Wells Fargo (WFC), JPMorgan (JPM), Citigroup (C) and Bank of America (BAC), the backbone of what remains of the world’s financial system, reached lows not seen in decades. Investors fear what some have called “creeping nationalization,” as monetary and fiscal authorities appear content to let equity holders suffer the worst of the losses.
Obama is now expected to rush through a sweeping economic stimulus plan, which, by most accounts, could pump upwards of $800 billion into our floundering economy through a patchwork strategy of tax relief and government spending.
And while pundits, academics and bureaucrats bicker about the best way to spend our precious taxpayer dollars, an arid swath of suburban California desert could serve as a valuable test case for effective (and ineffective) public spending.
Just a few years ago, homebuilders like Lennar (LEN), DR Horton (DHI) and Centex (CTX) flocked to Riverside and San Bernadino County to capitalize on the nascent housing boom. McMansions were frantically shoehorned between strip malls and clogged freeways. The 2 counties, which together make up the Inland Empire, a vast tract of urban sprawl east of Los Angeles, are now home to more than 2 million people.
The housing bust, well into its fourth year, has crippled the local economy.
Bloomberg reports unemployment in the Inland Empire matches Detroit at 9.5% - the highest of any metropolitan area in the country. 17,400 construction jobs have been lost in the last 12 months, home prices have slid almost 40% and previously dependable employers are closing up shop.
Local governments, however, are pushing ahead with over $1 billion in spending projects, from much-needed widening of freeways to a new $300 million jail. As Bloomberg notes, the projects illustrate both the potential and the limitations of government-led economic stimulus.
While infrastructure projects have helped limit layoffs, job openings are still virtually nonexistent : In one city, as many as 100 people per day may compete for a single minimum wage job. Local economists fear unemployment could reach 12%.
Outside construction, job creation has essentially stagnated. While a few intrepid entrepreneurs have sought out the region's now dirt-cheap office space and homes, anemic consumer spending is damaging traditional retailers, restaurants and other consumer-centric employers.
The biggest project -- the jail, naturally -- will create 4,500 jobs. But building new jails is hardly the economic stimulus the country should be depending on for job creation.
Obama’s strategy has shifted in recent weeks, as his plans to revive the American economy are becoming increasingly focused on tax relief, rather than on massive infrastructure projects. Tax cuts and rebate, while widely viewed as a less immediate way to jumpstart an economy, would reach into all industries, not just those tied to infrastructure.
Obama would be wise to spend a few minutes contemplating the dilapidated developments and barren strip malls of the Inland Empire. Although the area certainly represented the worst of the real estate bubble’s excesses, its woes are emblematic of the broader crisis the country now faces.
Monday, January 5, 2009
Obama's Massive Tax Cuts
This post first appeared on Minyanville.
As Inauguration day nears, details of President-Elect Barack Obama’s huge economic stimulus package are emerging. In today's meeting with Congressional Democrats, Obama begins to lay out his vision for reviving the nation’s catatonic economy.
According to the Wall Street Journal, around 40% of what could be an almost $800 billion plan may come in the form of tax cuts. Rather than mailing rebate checks, as the Bush administration did last summer -- which by most accounts did little to boost real economic activity -- Obama wants to reduce tax withholdings to get more cash into the hands of middle-class workers with every paycheck.
The plan also calls for the widening of so-called “tax look-backs,” which allow companies to apply today's losses to future tax bills. The new proposal would let firms book losses against past tax payments, freeing up money for the current tax period.
To encourage businesses to buy new machines, factories and make other capital investments, Obama is considering allowing newly purchased assets to be more quickly depreciated. Along with tax breaks for hiring new workers and delaying layoffs, the new administration wants to discourage downsizing and prevent firms from delaying expansion plans.
These and other tax-specific initiatives would come on top of previously announced plans for heavy infrastructure investment. When news of the impending stimulus package began to trickle out toward the end of 2008, peddlers of all things metallic enjoyed a strong bounce into year-end.
Freeport McMoRan (FCX), the world's second-largest copper producer, is up almost 100% from its December lows, Nucor (NUE), America's largest steelmaker has bounced more than 90% since November and US Steel (X) is approaching levels not seen since last October. Still, these and other commodity-centric firms are well off highs seen just last summer.
Ultimately, dollars earmarked for businesses and consumers alike are being sent out with a single mission: To be spent. With consumer and business spending making up almost 85% of gross domestic product, it’s no wonder politicians are urging Americans to part with their precious pennies for the greater good.
As the sage Mr. Practical reminded us this morning, however, the true path to economic recovery is through saving, not spending. With each dollar the Federal Reserve prints to finance this massive deficit-spending program, our paychecks -- though they may be increasing in size -- are worth less every month.
Economic stimulus is all well and good, but handing out a currency that’s constantly being debased is akin to tires spinning in the mud: With each rotation, they just bury themselves deeper, and the task of unburying gets longer, more difficult, and infinitely dirtier.
As Inauguration day nears, details of President-Elect Barack Obama’s huge economic stimulus package are emerging. In today's meeting with Congressional Democrats, Obama begins to lay out his vision for reviving the nation’s catatonic economy.
According to the Wall Street Journal, around 40% of what could be an almost $800 billion plan may come in the form of tax cuts. Rather than mailing rebate checks, as the Bush administration did last summer -- which by most accounts did little to boost real economic activity -- Obama wants to reduce tax withholdings to get more cash into the hands of middle-class workers with every paycheck.
The plan also calls for the widening of so-called “tax look-backs,” which allow companies to apply today's losses to future tax bills. The new proposal would let firms book losses against past tax payments, freeing up money for the current tax period.
To encourage businesses to buy new machines, factories and make other capital investments, Obama is considering allowing newly purchased assets to be more quickly depreciated. Along with tax breaks for hiring new workers and delaying layoffs, the new administration wants to discourage downsizing and prevent firms from delaying expansion plans.
These and other tax-specific initiatives would come on top of previously announced plans for heavy infrastructure investment. When news of the impending stimulus package began to trickle out toward the end of 2008, peddlers of all things metallic enjoyed a strong bounce into year-end.
Freeport McMoRan (FCX), the world's second-largest copper producer, is up almost 100% from its December lows, Nucor (NUE), America's largest steelmaker has bounced more than 90% since November and US Steel (X) is approaching levels not seen since last October. Still, these and other commodity-centric firms are well off highs seen just last summer.
Ultimately, dollars earmarked for businesses and consumers alike are being sent out with a single mission: To be spent. With consumer and business spending making up almost 85% of gross domestic product, it’s no wonder politicians are urging Americans to part with their precious pennies for the greater good.
As the sage Mr. Practical reminded us this morning, however, the true path to economic recovery is through saving, not spending. With each dollar the Federal Reserve prints to finance this massive deficit-spending program, our paychecks -- though they may be increasing in size -- are worth less every month.
Economic stimulus is all well and good, but handing out a currency that’s constantly being debased is akin to tires spinning in the mud: With each rotation, they just bury themselves deeper, and the task of unburying gets longer, more difficult, and infinitely dirtier.
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