Saturday, March 21, 2009


If there is no such thing as a free lunch how can anyone believe there is such a thing as a free market? The concept of free flowing markets has been conflated, confused, and corrupted with the notion of a market free from regulation. No where else but in the mind set of American financial markets has the concept of less regulation been erroneously equated to more efficient markets. We are now paying the price of that.

There is no sport and even no society where even a single player is free of all rules. For anarchy can be defined as the albescence of all rules. Once fairness and orderliness has been reasonably addressed, only the degree and effectiveness of enforcement determines how well the title may fit of a free and fair market.

More than a decade ago, when President Clinton was granting China MFN (Most Favorite Nations) Trade Status, I was openly critical of that policy. How can USA expect a foreign dictatorship to abide by rules of fair trade? It should be obvious they will use much less restrictive environmental rules, much less restrictive labor practices, and probably more lax trade rule enforcement to unfairly undercut American jobs and industries while increasing their own treasury reserves at our expense? It has been said that we buy poisoned products from China in exchange for worthless U.S. debt.

Truth is U.S. government was not too worried because they had plenty of practice everywhere from Latin America to South East Asia. Getting right wing military dictators to open up their markets to foreign multinationals in exchange for American diplomatic recognition and military support against local “leftist movements” was modus operandi for decades. Because internationally, for even a long time now, our corporations’ best interests has become synonymous with our national security interest. Threfore it was our multinational corporations wanting access to China’s vast markets that pushed hardest for this change. Because a corporation’s first requirement is only to the bottom line, they do not care about providing jobs, saving the environment, protecting its employees from injury, or even fully complying with rules. All those things require a referee to insure the system work free and fair . And for system to be fair and effective those officials must be free of corruption and incompetence.

We are in a situation our Founding Fathers could not foresee, because back then corporations did not have virtually the same legal status that individuals have. Now days, corporations contribute the most to political campaigns and by far buy the most lobbyists. They bought the politicians, got them to re-write the rules and create a new reality to enhance their profitability. This happened from everything from pharmaceuticals to the elderly to oil companies writing energy policy to immunity for telecoms to bonus and bailouts for banks and AIG. Construction companies and military companies are the other biggest winners as the wars were outrageously outsourced and completely cost overrun. Should we expect anything better for allowing oil men to be selected to lead us and then let them lead us into a war of preemption and deception?

Wall Street broke and broke us because the biggest most successful companies would now be able to operate in wild west style markets with little funding for the sheriff and plenty of golden parachutes and revolving doors: to mix many metaphors. Corporate tax loopholes, salaries, and bonuses explode.

The Federal Reserve was the first to evaluate the situation at AIG. Without congressional authorization or consultation they started it was too big to fail and gave them $85 billion to maintain operations. Part of the justification in too big to fail is that there is value in the brand names of these companies. Well that is pretty damaged for Bank of America and completely gone for AIG. Employees have been told not to wear company logos, or travel alone at night. One unit of this triple A rated company found a way to legally bet about $450 billion they did not have. They realized about two years ago that they lost their bets but have stuck us, the U.S.. with the bill. They sold financial insurance but did so in an environment where they did not have to maintain any reserves or even have any real oversight.

Being distracted about bonus schedules only means we are not focusing on the 99% of the money we have given to that company and how we got that way and how we can stop it from continually happening. But it sure is the easiest spot to understand wrong doing and try to hold someone accountable for retained bonus of people that were not retained and led us into disaster.

In the Crash of 1929 the assets in U.S. financial system was about 50 percent of GDP. But now thanks mostly to loosely regulated derivatives that figure is now 150 percent of GDP. In now bankrupt Iceland the figure was 900 percent. It is no wonder the Federal Reserve just decided to create another trillion dollars of debt to try and stabilize our real estate market and by connection the overall economy. Good luck to us all.

Wednesday, March 11, 2009

The Stank of America - Too Bad to Bail!

What I am & What the hell?

I have an outstanding credit history about 30 years long. Some ten years ago, when I was being approved for membership as a commodity floor trader, the person who checks the application for review said that they had never seen a perfect credit rating before me. I replied you mean I am the only fool that pays all their bills on time? For years prior to this bank credit crisis and even since I have been offered extremely low teaser rates on my credit cards. My assets far exceed my debt and I am entrepreneur who is using my personal to fund my new venture that is now operational after three years in development..

When I went on-line to take advantage of one of these offers from Bank of America’s - a 0% offer for six months - to pay down another credit card at a higher rate, they denied it a week later. They cut my existing credit line by 7 thousand dollars on that card and canceled my other credit card with a line of 8 thousand. Adding insult to irony a letter arrives the same day offering a rate of 8.9% on that now cancelled card. The only explanation was “currently owe sufficient amounts on your revolving lines of credit with other creditors.”
Who or What is Really a Risk?

This incredibly incompetent institution acts like it believes it can behave in away that is analogous to a lapse in airport security. They want to kick everybody out and re-screen them for credit worthiness. As far as I can tell this bank is not turning over for prosecution those that committed fraud by lying about their income on their mortgage application. In fact some of those people are actually going to get a bank and government subsidy to lower their mortgage to 31% of whatever income they actually have now. Liars who got “liar loans” may get a pass and a subsidy while someone that acted honorably and responsibly will pay the price with reduced credit and a larger federal deficit.

I am especially furious by the fact that I never opened up any credit card accounts with this “Bank of America”. They acquired one of my accounts when they paid 35 billion dollars for MBNA in 2005 - a company that specialized in credit cards for people with great credit scores. And second account they got when they acquired Fleet Bank for 47 billion dollars back in 2003.

In less than six years, Bank America spends 82 billion for those two intuitions plus another 50 billion more for the toxic asset laden Merrill Lynch last fall. Then they turn around and almost immediately need 45 billion in emergency funding from Treasury and God know what from the Fed to remain solvent and to allegedly keep credit flowing. I consider it incredible that they have the nerve to imply that I don’t have the fiscal responsibility to manage my own pre-existing credit line. But if I ever do get in trouble and have to decide who is not going to get their money back at least I now have an obvious choice.
Call for a Fall!
In a legal sense, I am injured, for this so called bank hurts my credit rating by cutting the amount of credit I already had available. This is because they are directly raising the percentage of debt relative to my credit line. They offer the possibility to reinstate some or all of the credit line but only if I give them the what information is needed to open up any new account any where else. Therefore what they are really saying is, “no more of your available credit. So would you like to apply for some more credit” Well certainly not with them.

Can anybody say class action suit? If you search that topic with Bank America in Google you will see an array of lawsuits that clearly display the character of this company. There is an axiom from the restaurant business that applies here: a happy customer tells three friends an unhappy customer tells twenty. I have submitted this story to ABC and complained to my congressman and senator.

I intend to move my bank accounts over to another less irresponsible institution and I strongly encourage others to do the same. Too big too fail? Not if we make it so. If government won’t or can’t make them do the right thing from a consumer stand point the counter argument should be…. TOO BAD TO BAIL!

Tuesday, March 3, 2009

Nationalized Firms & Socialst Govenment

Privatized Profits & Socialized Losses

Government has changed the tax payer investment in Citibank from 5% preferred stock into plain common stock that is paying a dividend about half that rate. We have now invested at least 45 billion in exchange for a third of a company that the market currently values at 6.5 billon dollars. I was the first to comment last September that from a corporate governance stand point, the ultimate success is to be labeled “too big to fail”. They need to make a new version of the game Monopoly to reflect the new reality of these global behemoths.

Senator Bernie Sander (I - VT) said that as far as he is concerned, “too big to fail is too big to exist”. And a congressman on banking committee asked the Fed Chairman an interesting question, “at what point does too big to fail become too big to save?” His answer was that no one has been able to devise a way of saving the banking system without saving the banks. There was also a reference to brand name value of these franchisees that could be destroyed. But I don’t think these brand names are worth much at the moment. The real answer came next day to Senate Finance committee when Fed head said there is no authority or mechanism to shut down a global institution like Citibank or AIG. But allegedly it was not our own financial experts or government that decided to save those firms last fall. They were preparing to do just that. But pressure put on the treasury from foreign capitals from London to Hong Kong convinced them that this would lead to a global financial collapse.

Black Hole

Lets not even get into Fanny or Freddie for now. But that 45 billion to Citi maybe even higher because the Federal Reserve has loaned out some two trillion dollars to troubled financial companies. And the Fed will not to disclose who got this money let alone how much under the guise that no one would borrow from them if were to be public. As if a multinational conglomerate is going to decide they are going to be shy about borrowing money in a crisis. So what is Bernake saying, instead they might borrow from someone else at a secret higher rate? They are not allowed if they are public company. To me the real message here seems to me to be that if the full truth were really known the financial system might just collapse completely instantly.

GAO report says we over paid for what we got with our first capital injection. That was obvious as Warren Buffet got much better rate of return from Goldman Sachs then US Government. And now we have converted to an even worse deal for the taxpayer meaning a better deal for Citibank.. But it is with the caveat or the guise that this will stabilize the institution for a possible worst case scenario.

Experts, Feelings, & Inflation

So far the entire crisis has exceeded worst case projections from 90% of the experts. Reminds me of the global warming projections and realities. Radio talked show host Lionel pointed out that having views on economics is not like having an opinion on the abortion issue. This is not about values and faith but about science and reason. Sure economists can differ but they are all operating on an education of accepted theories. No reputable economist is currently worried about inflation in the next few years and almost all would say that any inflation but stagflation would be an improvement over current crisis.

Whole Lot of Stimulus

There will be a highway bill, an energy bill, an education bill, a series of health care bills, all adding to the legs of the financial rescue package. Much more money for States, the unemployed, and corporations. There will be huge outsourcing to private sector and their will be jobs. Will it be enough? Will it be in time? Will it be the right thing to do? Will we get our house in order to prevent our demise? If you the face of Japanese finance minister at recent emergency economic summit you might be very scared.. Stay tuned with me.

A crisis of confidence has been greatly exacerbated by cast of characters that even Hollywood would not think plausible. A crook named Madoff made off with billions of money from the wealthy and charities. The head of the SEC had multiple opportunities to stop that scam was a dick named Cox. I am appalled that Paulson was the person put in charge of saving the banks having made a half billion dollars and a lot of friends running one of them. Oh Henry gave money to biggest failing banks and nothing for the banks that behaved responsible. Talk about competitive disadvantage. And finally it was downright scary that the guy he chose to carry out this cash infusion was named Kashkari. Is there a Shakespeare here? I smell a tragedy.

Friday, February 27, 2009

Re-Capitalization, Moral Hazard, & Class Warfare

Trying to Do the Right Thing in the Wrong Way?

Famed hedge fund manager and head of Sears, Edward Lampert contends that government is putting capital into the banks incorrectly to try to ease credit. CNBC anchor and analyst Larry Kudlow recently asserted that banks do not loan out the banks’ own capital; they treat most of their own money most safely, investing in things like….ready for this… t-bills.

According to a recent Frontline documentary, the bankers were essentially forced in a single day last November to each accept a 25 billion dollar TARP loan from former Treasury Secretary Paulson . Therefore if Kudlow, Lampert, and my analysis is correct U.S. Treasury insisted for the good of the country that the biggest ten banks must accept a quarter trillion dollars and pay 5% interest on it each year for next five years. Then for the good of their own bank, these bankers turn around and buy treasury bills anywhere from say .25% to 2% ? If true, that government plan would actually remove more capital from the banks: at least 3% of 250 billion dollars every year.

But hey its okay; the taxpayer is making money here. We were demanding a bank pay treasury 5% while we pay them less than half to keep their new cash safe. We tell them its non-voting stock because we don’t want to interfere in your bank business. Then we tell them how to run their business from acquisitions, to bonuses, to corporate jets, to company parties, to sports sponsorship, to demanding they show they are lending more than they otherwise would be. Sounds soundly Soprano like to me (Tony - not an opera singer). No wonder bank stocks fall,! Who wants to invest in airlines where the pilots are flying a plane wearing handcuffs? Kudlow said that banks really only loan out their deposits not their own capital. Therefore the most efficient way to recapitalize banks is to expand their deposit base. And the only good way to do that then is …..TRICKLE UP

USA Today: Roll the Dice, Crap-Out, & Meet Robin Hood!

Sadly bailouts now for banks, insurance, and auto companies make the same sense as bailing out the airlines after 9-11. About every other country that has one is subsidizing their automobile companies in this crisis. Not to do so ourselves would be folly and the loyal opposition reluctantly agrees. But bailouts focusing on individuals, those in most trouble? The loyal opposition scream moral hazard, they gambled, they lost, they pay. Why the difference? Follow the campaign money! Who gives more money to politicians: citizens or corporations? The answer tells you who they really work for first and foremost. Remember who got congressional immunity for illegal wiretaps? And recall who wrote and benefited from the last Prescription Drug Bill.

If it were not such dire economic times, if the middle class had not been encouraged to go deeply in debt, it the working class had plenty of work, the burden might be shared a little more equally. But currently there is only sector of society that can afford to pay more and it just happens to be the same demographic that has benefited the most if not all of the last 25 years. The evidence from Malcolm Gladwell’s Outliers and countless other sources is that it takes more than hard work, determination, family, and luck. It takes a community and a society. Everyone’s success is built on the shoulders, backs, and often graves of those that came before them or along with them. No man is an island.

Lockboxes & Patriotism

The economic choice presented back in the election of 2000 was to stash our then annual budget surplus away in a “lockbox” versus “let the people have their money back, tax cuts make the economy grow”. One can only wonder how many more options and how much quicker could we pull out of this mess if we were currently a creditor nation instead of debtor nation. The idea that raising taxes on the wealthy and closing corporate loopholes would somehow cause less government revenue is disproved by the fact that the fastest growing or biggest economy in the world has never existed with say a 1% percent tax rate. It has now been well documented that tax cuts for the upper class do not result in greater spending but greater savings by them. So now more than ever, all tax breaks must be directed towards those that spend it paid for by those that can most afford it. There is your moral hazard.

But perhaps here is something conservatives, independents, progressives, liberals, Obama idealists, and maybe even some libertarians can agree. Instead of looking around for worst of us for who is most to blame let us look around at who is the best of us for who to reward.

I propose some or most or all of the TARP or TALF money be used to do something extraordinary and unexpected. As a simultaneous stimulus, tax cut, re-capitalization of the banks and rewarding our heroes: the ones that let us have these discussions: for the next two years cut enlisted military taxes to zero and officers, firemen, policemen, nurses, and teachers by 50%. And for every solider that served more than a year in Iraq or Afghanistan or was wounded there additionally let us put 20 to 50 thousand in the bank for every them to spend on education, and/or owning a home. For those that made the ultimate sacrifice that bonus would be banked for their children's education, or for their spouse, or for parents’ retirement.

But let us start with an investment here: update, expand, and modernize our Veterans Administration hospital system to accommodate every solider and their dependent and every veteran that ever served. Finally let us bring home the vast majority of the half million Americans under arms in foreign lands. America must learn what to let go of or risk losing itself, its hopes, and its dreams. Values will need to be prioritized but surely we can live up to our Key ideal of “land of the free and home of the brave.”

Wednesday, February 25, 2009

Starting first post with the universally fundamental truth of mathematics as it applies to our current economic crisis. Our economy is the sum total of all goods and services, aka Gross Domestic Product ( GDP ) so….

GDP = Consumer Spending (70%) + Business Spending + Government Spending

If consumer and/or business spending should falter from say increased unemployment there is only one source that can make up the difference. It seems intuitive that some government spending would create more jobs quicker than others but according to the math it ultimately does not matter. What we spend on reflects our value choices as a society. But just any government spending on domestic goods and services is the most important aspect of keeping the economy from contracting as much as it otherwise would. That is why most economists say the stimulus was not big enough now nor in the Great Depression of the 1930s.

GDP = Money Supply x Velocity

Our economy in dollar terms equals how much money is in circulation multiplied by how many times each dollar changes hand every year. When people lose their homes and especially their jobs or even fear that they might the velocity of money plunges. That is why printing money is not inflationary at a time like this. In fact velocity has fallen so fast and so much that despite multiple massive government capital interventions in numerous ways from Federal Reserve and Treasury prices have fallen on almost every asset class in the last six months. These formulas are so accepted that Richard Nixon said in 1971 that “We are all Keysians now.”

We are not bankrupt as a nation unless our citizen creditors and foreign debtors say so with their money. And if fact, right now, they say the opposite. They feel the book value of America far exceeds its debt. So despite having a government and people that lived long time beyond their economic means America is in a much better strategic position than every other major country. The cost of capital for our government has never been cheaper as fearful investors seek the relative safety of government t-bills and bonds. Not taking advantage of that opportunity to make wise and valuable investments in our country and people would be the true economic calamity.

I am not saying all is guaranteed and rosy path to the future. Quite the opposite. We face our own explosion in poverty and a world that will be worse shape than us. I have heard phrases that I have never heard before like “pet food bank” and “Police prepare for ‘Summer of Rage’” on a CNN crawl. Gas mask supplier says business is “through the roof”.

Whether it ends with orderly markets and good visibility or ends with no markets and new currency is still a real question at this point. The Saudi Arabian and the Chinese government each independently have the option of ending western capitalism as we know it simply by selling their t-bills and buying gold. Will they? Probably not but thought that they could still makes me uneasy and a bit queasy. I got to think a growing 10 to 20 percent of their leadership would ,now favor cutting off their own nose to spite America’s face. Their feeling is that they could end up as the world’s economic powerhouse on the other side of the chaos. On the other hand I heard Art Cashman say recently, “Don’t bet on the end of the world, it only happens once.”