European Bailout

One Helluva Round-Trip

Want to know what stocks are going to do?

Forget financial analysis.

It's all about political analysis: on the strength of a European bailout (announced over the weekend), worldwide stocks are going crazy -- this time on the upside.

Personally, as a long-term, buy-and-hold investor (vs. Wall Street trader), it all has me reaching for the Pepto Bismol.

The large size.

Just call it the "Pepto Bismol" stock market, I suppose . . .

Saving States & Countries vs. Investment Banks

Discretionary vs. Non-Discretionary Bailouts

Watching the latest round of debt problems emerge -- this time involving sovereign states like Greece -- reminds me of my not-so-happy experience as a "newbie" landlord a few years ago (turned off by the experience, I quickly sold the property).

Immediately after taking title, my (long-term, holdover) renter started presenting me with a long list of not-so-dire problems: a squeaky shower door one week, worn (but still decent) carpeting the next, etc.

Interested in keeping her happy, I erred on the side of being accommodating. Too accommodating.

No sooner were the "discretionary" items addressed, than the real, non-discretionary items showed up: a major plumbing issue that was brewing, an expensive HVAC problem that the former owner had thoughtfully deferred, etc.

It could just have been my imagination, but I quickly discerned a strategy: my renter "led" with the discretionary items, because she knew my patience (and money) would be depleted by the "big ticket" items if those were addressed first.

Cue Greece

What's all that got to do with Greece, and broke U.S. states (like California and New York)?

In the big scheme of things, "recapitalizing" (translation: showering with money) then-teetering banks like Goldman Sachs and J.P. Morgan Chase was akin to fixing a squeaky shower door: a nice thing to do -- for them -- but certainly not required for the long-term health of the world financial system.

As numerous financial experts have opined, there were many, less expensive alternatives to shoring up the financial system, starting with actually focusing on saving the system, rather than individual entities. A system which, trillions later, arguably still needs fixing.

Of course, now that trillions have been committed (borrowed, really) toward making Wall Street whole -- surprise, surprise! -- the truly systemic threats to the global financial system have come into plain(er) view.

Those include the plight of sovereigns like Greece, and over-a-barrel states like California and New York -- entities whose duress, incredibly, have been exacerbated by shady credit instruments created by guess who?

Maybe we tell the latest busted entities -- truthfully -- that Wall Street already got their bailout money.

Call it the "I gave at the office" excuse.

Goldman Sachs' 9-Plus Lives

Hen House Preservation Principles

"Goldman to make record bonus payout."
--headline, guardian.co.uk (6/21/09)

Principle #1: When presented with overwhelming evidence that the foxes have taken over the hen house . . . stop adding chickens!

Principle #2: It's not hard to figure out -- at least in the short run -- which foxes stole the most chickens: look for the ones with the bulging bellies (see, headline).

At the height of the financial crisis last fall, Goldman Sachs "shapeshifted," in record time, from a Wall Street investment bank to a bank holding company. As an investment bank, Goldman Sachs wasn't eligible for direct aid from the Federal Reserve; as a bank holding company, it was.

Such aid was promptly forthcoming -- by the tens of billions. Exactly how much of a lifeline that aid constituted isn't known (and may never be). However, it never hurts to have another $10 (or $30) billion of capital and federal guaranties backstopping you in the midst of the worst financial melt-down since The Great Depression (one that you helped precipitate).

Now, of course, the financial markets (if not the broader economy) appear to be recovering, and Goldman Sachs has decided that the pay restrictions that came with the federal aid are unduly onerous.

Voila! The government gets its money back.

Want to bet what the company's next move is? (assuming, of course, that the financial markets remain benign):

Take itself private, so it doesn't have to publicly disclose its pay practices anymore.

[Not sure how much any of that had to do with real estate -- but it sure felt good!]

"All Legal Means"??

Dealing with AIG: More Ideas

One day after [the President's] economic advisers insisted that their hands had been tied by contracts requiring the payments, Mr. Obama ordered the Treasury Department to “pursue every single legal avenue to block these bonuses” and make the American taxpayers whole.

--"Obama in Effort to Undo Bonuses at AIG"; The New York Times (3/16/09)

Warren Buffett has called the ongoing financial melt-down an "economic Pearl Harbor." Government officials, to rally support for various bailouts to date, have warned of economic collapse if their measures were rejected.

It sure seems like a national (if not global) emergency, albeit the financial kind.

And doesn't the President have extraordinary powers in such crises, like suspension of habeas corpus?

"Economic Treason"

In times of war and other crises, the Constitution contemplates that the President may arrest and indefinitely hold those who pose a threat to the country.

What AIG executives have done -- and are continuing to do -- arguably constitutes such a threat, on many levels (appropriating taxpayer money, destroying public confidence in government and the markets, etc.).

If there was such a thing as "economic treason" -- and there should be -- executives at AIG and several other companies have committed it.

AIG, cont.

AIG Creditors' Hold on U.S. Treasury

"I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter, but now I want to come back as the bond market. You can intimidate everybody."

--James Carville

If Carville were to update his answer today, he'd no doubt substitute "AIG creditor" for the bond market.

In a world where equity investors have been chopped in half and and Lehman Bros. creditors were fed to the (bankruptcy) lions, AIG's creditors are being made whole. By the U.S. Treasury -- in other words . . . us.

So far, the amount paid out to AIG's creditors is approaching $200 billion.

The two questions dominating the "blogosphere" at the moment are: 1) exactly why are AIG's creditors being bailed out -- at 100 cents on the dollar, no less?; and 2) who are they?

AIG Bonuses: How Big?

AIG Tries to Bury (the latest) Bad News

Anyone reading the *Sunday papers is likely to notice the blaring headlines: AIG senior executives are being paid millions in bonuses. That, notwithstanding the almost $200 billion of taxpayer money already injected into the company.

What's interesting, though, is how the news first broke online, then changed rapidly.

Around 6 p.m. tonight, both The New York Times and The Wall Street Journal web sites broke stories saying that AIG is paying out $100 million in bonuses (amazingly, largely to the executives who worked in the unit responsible for most of the company's losses).

However, by later evening, the number in the Times story had morphed into $165 million, while the Journal article backed off on the number altogether, only reporting that AIG was to pay "millions in bonuses." Then, just before midnight, the Journal reported a dramatically higher bonus amount: $450 million.

Do I hear $700 million??

What on earth is going on?

Obviously, there's some confusion about the amount.

One possibility is that the news got buried -- or at least there was an attempt to bury it -- on a late Sat. afternoon, and the media are still digesting it. Not having seen the news release, one might further guess that it was not exactly a model of clarity.

This most recent, sordid episode involving AIG is eerily reminiscent of the Sept. weekend last fall, just before the government "rescued" the company, and just after Lehman Bros. collapsed.

Anyone who was glued to the financial news that weekend, as I was, recalls the "SOS" AIG put out, accompanied by its ever-rising estimates of its total losses.

First the number was pegged at $20 billion, then $40 billion. By the end of the weekend, the loss estimate had ballooned to $80 billion -- and then the government stepped in.

Since then, of course, the number has grown to almost $200 billion . . .

*I get practically all my news online, so don't usually know what the print headlines are.

Enron: Just Ahead of its Time

[Note to Readers: I originally published the following post in mid-December. At that time, the cumulative federal bailout bill was about $2 trillion. Including guarantees of dubious bank assets, that number now is closer to $4 trillion -- $173 billion of which has been pumped into just one company, AIG.

Given these developments, I thought this post was even more topical now. The only other new information is the size of the '08 bonuses Wall Street exec's paid themselves (not known in December). Suffice to say, they didn't go with "the low end of the range."]

Is it Too Late to Bail Out Enron??

"Supreme Court Overturns Bush v. Gore"--Headline; The Onion (12/9/2008)

Watching what's going on in Washington and on Wall Street, the Enron guys must be turning over in their . . jail bunk beds.

Consider the following:

--The audited financial statements of AIG, Citigroup, Bear Stearns, etc. obscured or omitted billions in company liabilities.
--Enron's audited financial statements obscured or omitted billions in company liabilities.

--Senior management at AIG, Citigroup, Bear Stearns, etc. reaped hundreds of millions in compensation and bonuses based on (dubious) asset values they determined.
--Enron senior management reaped hundreds of millions in compensation and bonuses based on (dubious) asset values they determined.

--Senior management at AIG, Citigroup, Bear Stearns, etc. publicly reassured investors, creditors, and employees that all was well, and exhorted them to buy "cheap" company stock, even as they dumped their own holdings.
--Enron senior management publicly reassured investors, creditors, and employees that all was well, and exhorted them to buy "cheap" company stock, even as they dumped their own holdings.

Enron's leadership is in jail (or in CEO Ken Lay's case, dead). Wall Street's senior management is . . . deciding what their 2008 bonuses should be. (My advice: go with the low end of the range, guys.)

Enron wasn't corrupt -- it just had the misfortune of being ahead of its time.

Bailout Math

Bailout Money Bolsters Banks
Against Prospective Losses?

"A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be. "

--Wayne Gretsky

It's a stretch to compare Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson to the incomparable Wayne Gretsky; their ad hoc and inconsistent handling of the credit crisis more often conjures up images of the Keystone Cops.

It's also the case that the lack of disclosure and accountability expected of the recipient banks is truly appallling, and to many (including me) offensive, given the hundreds of billions of taxpayer funds involved.

That said, if you're looking for a rationale for and defense of the bailout(s), however strained, here it is:

--Wells Fargo just bought Wachovia and its $150 billion portfolio of toxic mortgage loans (mostly option-ARM's and the like).

--Two-thirds of those loans, or $100 billion, are now expected to default.

--The loss ratio on the aforesaid defaults is expected to be 25%, or $25 billion.

So guess how much Wells Fargo has received in bailout funds to date? Yup: about $25 billion.

Thanks to Tyler Zimmerman, Edina Mortgage, and Josh Kaplan, City Lakes office manager, for the foregoing numbers and proofreading, respectively.

Enron Just Ahead of Its Time

Is it Too Late to Bail Out Enron??

"Supreme Court Overturns Bush v. Gore"
--Headline; The Onion (12/9/2008)

Watching what's going on in Washington and on Wall Street, the Enron guys must be turning over in their . . jail bunk beds.

Consider the following:

--The audited financial statements of AIG, Citigroup, Bear Stearns, etc. obscured or omitted billions in company liabilities.
--Enron's audited financial statements obscured or omitted billions in company liabilities.

--Senior management at AIG, Citigroup, Bear Stearns, etc. reaped hundreds of millions in compensation and bonuses based on (dubious) asset values they determined.
--Enron senior management reaped hundreds of millions in compensation and bonuses based on (dubious) asset values they determined.

--Senior management at AIG, Citigroup, Bear Stearns, etc. publicly reassured investors, creditors, and employees that all was well, and exhorted them to buy "cheap" company stock, even as they dumped their own holdings.
--Enron senior management publicly reassured investors, creditors, and employees that all was well, and exhorted them to buy "cheap" company stock, even as they dumped their own holdings.

Enron's leadership is in jail (or in CEO Ken Lay's case, dead). Wall Street's senior management is . . . deciding what their 2008 bonuses should be. (My advice: go with the low end of the range, guys.)

Enron wasn't corrupt -- it just had the misfortune of being ahead of its time.

"The Market Has to Clear"

Friedman's Prescription:
'Painful and Quick' Action

Add Tom Friedman to the very short list of commentators who: a) understand what just happened in -- and to -- the global financial system; and b) actually have some sort of coherent proposal about what to do about it.

According to Friedman, we have just witnessed a "nuclear financial explosion." That's what happens "when you take this much leverage and this much globalization and this much complexity and start it in America, and then blow it up."

Friedman gets that, in the Internet age, it's all about the network. You don't save a damaged network by pouring resources into the parts that just malfunctioned. Instead, you bolster the parts that are still (relatively) strong:

Do a real analysis of what the major banks are worth in a worst-case scenario. Then determine, if, on that basis, they have viable, survivable equity-to-asset ratios.

Those that do should get more government investment. Those that are close should be forced to find new investors and merge. And those not viable should be shut down and have their bad assets bought by a government-owned body (which would sell them over time) and their deposits shifted to healthy banks to make those banks even healthier . . .

This process will be painful, but probably by the end of a year the market will clear, investors will come in, and the surviving banks will be ready to lend to each other and you and me . . . "

--"Cars, Kabul, and Banks"; The New York Times (12/14/08).

Just one year, albeit "excruciatingly painful"? Where do I sign up??

The Coming Bank Bailout Backlash

Boycott Citigroup . . .
Pay Higher Taxes?

How do ordinary citizens disgusted by serial government bailouts of Wall Street register their displeasure?

Assume that you are not prepared to join the ranks of the posse comitatus, and mail in your 1040 next April with just an expletive scrawled in crayon at the top, no payment enclosed.

Further assume that you do not have the ear of anyone in a position of authority, either on Wall Street or in Washington, and therefore are powerless to stop extremely good money -- trillions of money -- from being thrown after merely very good money.

Finally, assume that you have neither the inclination nor the aptitude (let alone the time!) to become a latter-day Howard Jarvis (of Proposition 11 fame in 1970's California); a Frank Capra-style Mr. Smith, bent on cleaning up a corrupt system; or even a Howard Beale ("Network"), decrying its ills.

What's left?

The one course of action remaining to the "little guy" would seem to be to vote with your consumerist feet. In other words: commit acts of financial civil disobedience.

Financial Civil Disobedience

Purely hypothetically, say the object of your displeasure is Citigroup. (Unfortunately, AIG has fewer retail lines of business.)

You could cut up your Citigroup credit card and replace it with one issued by another bank; withdraw your (diminishing) savings from Citigroup branches and open up an account across the street; and vow not to apply for a mortgage from Citigroup (not that you'd get one, anyways).

After all, it's supposedly a free country, and a free marketplace. What better way to punish an especially irresponsible financial scofflaw than to pull all of your business, modest as it may be?

Unfortunately, there are at least three problems with such an approach.

One. It might boomerang.

Imagine that such financial civil disobedience actually caught on, and Citigroup's business began to suffer as a result (the term's relative).

Citigroup would lose even more money, bringing it close to collapse (again). To prevent that, the government might very well feel compelled to inject yet more of your money into Citigroup to save it.

Perversely, the greater the public's resolve to kill Citigroup . . . the more expensive the government rescue.

"To Tell The Truth" -- Banking Version

Two. No good alternatives.

What if the bank across the street is just as bad? That is, what if every bank did what Citigroup did, and is now getting federal bailout money?

Imagine for a moment that you run a bank, and all your competitors who screwed up are getting cheap -- or free -- no-strings-attached, government money. Wouldn't you grab some, too, even if your bank was run conservatively (and profitably)?

Given that you compete with the "bailee-banks" for loans, deposits, etc., your competitive position would suffer if you didn't.

Now imagine that the government purposely obscured the distinction between "bad banks" and "good banks," by forcing the latter to accept bailout money. (Unfortunately, you don't need to imagine this -- it just happened.)

The result would be a surreal game of "To Tell the Truth," in which millions of ordinary consumers-cum contestants have to figure out which banks are genuinely virtuous, and which are impostors.

Three. Financial temptation/co-option, or, "cutting off your nose to spite your face."

The reason that Fannie Mae and Freddie Mac, so-called government sponsored entities ("GSE"s), had such spectacular access to cheap money was that its lenders believed -- correctly, it turned out -- that the federal government guaranteed their loans.

Now, the government is not only guaranteeing a big chunk of Citigroup's debt -- it's a shareholder! To protect its investment (and Citigroup's market share), the government logically should now make sure that Citigroup's rates on everything from mortgages to car loans are competitive. Perhaps too competitive.

Calling Howard Jarvis

If 30 year mortgages are available from Citigroup for 5%, and Hometown Bank for 5 1/2%, which are you going to choose? Ditto for CD's yielding 4% vs. only 3% at the competition. H-e-l-l-o . . . Citigroup!

These conundrums (and more) are exactly why government shouldn't decide which financial institutions should live and which should die, and why doing so leads to absurd and potentially disastrous outcomes.

In a market economy, the marketplace -- and the millions of consumers who comprise it -- make those decisions.

Sadly, the expression, "you can run, but you can't hide" now describes the futility of trying to shield your wallet -- and your descendants' -- from a federal government bent on ever-more expensive and wrongheaded bailouts.