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HomeNoQuarter Radio’s Sense on Cents with Larry Doyle, Sunday Night at 8PM
Posted by Larry Doyle on August 22nd, 2009 6:07 PM |
SORRY for not having the show this evening. We had a tremendous storm roll through our area at 7pm. Lost phones and power. I just finished bailing the basement. I think I’ll be friends with a Wet-Vac tomorrow….LD
As the markets rebound and the economy seems to recover, please join me this Sunday evening for NQR’s Sense on Cents with Larry Doyle as we dig deeper and work harder in navigating the economic landscape. Is the market and economy truly rebounding as quickly as it may appear? Is Wall Street back to ‘business as usual?’ Is the banking system properly portraying its overall health? Let’s explore and traverse not only Wall Street, but more importantly Main Street. Who is declaring victory in this battle while who is cautioning us to remain on guard as we navigate? What are the credit markets and credit availability telling us?
These are truly historic times in the global economy. Let’s “navigate the economic landscape” without the pandering or nonsense found elsewhere! What is on your mind? What would you like to address? Please share your questions and thoughts by calling in to (347) 677-0792, and also join our live chat room, which I’ll start up about 10 minutes before the show begins.
As a reminder, all of my radio shows are archived and can be listened to right here at Sense on Cents by clicking on the NoQuarter Radio tab located under the page header. (FYI, I keep an audio player of my most recent episode in the right sidebar). In addition, all NoQuarter Radio programming is available as a free podcast on iTunes. From the iTunes Store page, type “NQR podcasts” in the search window.
Many thanks to Larry Johnson and the rest of the team at NoQuarterUSA blog for providing such a vibrant vehicle as NoQuarter Radio. I look forward to having you join me Sunday evening as we collectively navigate the economic landscape!!
Will Goldman Sachs Be Bulls, Bears, or Pigs?
Posted by Larry Doyle on August 21st, 2009 4:46 PM |
There is no doubt that Goldman Sachs is currently the preeminent shop on Wall Street. JP Morgan is a respectable second. I am not sure if there is a close third.
Despite Goldman’s resurgence, they have a major problem — that being their public image. What are some of Goldman’s issues? They include:
1. the firm’s close ties with Washington insiders . . .
2.their agggressive trading and risk profile . . .
3. the proprietary nature of their business . . .
4. the mere fact that they have made so much money (with the assistance and in the presence of Uncle Sam), while the economy continues to suffer . . .
Charlie Gasparino of CNBC addresses a number of these points as well as the fact that Goldman will likely face the public’s wrath when they pay out billions in bonuses come year end. The Goldman execs exacerbate the situation by playing the ethnic angle as Gasparino writes, Goldman Execs Blame Anti-Semitism. In my opinion, Goldman makes a huge mistake playing that card.
The fact is the public sees Goldman specifically and Wall Street in general benefitting from taxpayer dollars injected into the system along with a host of Fed and Treasury programs. While Goldman has paid back its TARP funds, they have still benefitted from financing backed by the FDIC. Moreso than direct benefits to the firm, Goldman has clearly benefitted indirectly from the gamut of Uncle Sam’s largesse.
Uncle Sam clearly has a large amount of ‘skin in the game.’ Goldman can address its image and burgeoning reputation problem by increasing its own ‘skin in the game.’ How can they achieve this? They should compensate employees in stock to a much greater extent and have that stock vest over a longer time period.
Typically, senior executives, traders, and bankers are paid approximately 35% in stock and the stock would vest over a three year time frame. As such, individuals would typically have one year’s worth of compensation tied up in the firm.
Let’s see Goldman pay people 65-70% in stock and have it vest over a 5 to 6 year time frame. If Goldman is concerned about losing people, that pay structure would serve as a real disincentive for other firms to hire Goldman people. Make no mistake, Goldman employees would NOT be happy to be paid in this format . . . BUT there would be plenty of people on Wall Street who would take that pay structure right now to work at Goldman Sachs.
Goldman has the opportunity through this bonus cycle to display whether they are bulls, bears, or pigs.
LD
Let’s Look at Housing
Posted by Larry Doyle on August 21st, 2009 12:16 PM |
The National Association of Realtors just announced that existing home sales rose to the highest level in the last two years. This is obviously a good sign. What drove the increase and what is going on within the housing market broadly speaking? Can we assign a clean bill of health to the entire housing market based upon this report? Let’s dig deeper.
Bloomberg looks into this morning’s report and highlights the following in writing Existing Home Sales in U.S. Jump to Two Year High:
> Foreclosure-driven declines in prices, government credits for first-time buyers and near-record-low borrowing costs may keep stoking demand, helping the economy recover from the worst recession since the 1930s. Ongoing job losses are a reminder that more Americans will probably lose their homes, indicating a rebound will be slow to take hold.
Sense on Cents commentary: as I attested on August 11th in writing the “U.S. Mortgage/Housing Market has a Split Personality,” the economy has a decidedly different dynamic at work between lower priced homes which can be financed with conforming mortgages (ultimately purchased by Freddie Mac and Fannie Mae) and higher priced homes needing to be financed with Jumbo mortgages (not readily available by our friendly banks!!).
>Purchases of existing homes increased 5 percent compared with a year earlier. The median price dropped to $178,400 from the $210,100 in July 2008.
Sense on Cents commentary: do not look for price appreciation anytime soon. In fact, while home prices on the lower end may begin to stabilize on a relative basis, higher priced homes (those needing Jumbo financing) will remain under pressure.
> The number of previously-owned unsold homes on the market jumped 7.3 percent to 4.09 million in July, a “notable” increase, according to Lawrence Yun, the Realtors’ chief economist. At the current sales pace, it would take 9.4 months to sell those houses, the same as in June.
>About $3.4 trillion worth of houses are at risk of default because the owners owe more than the property is worth, Santa Ana, California-based First American CoreLogic said last week. By putting more homes on the market, foreclosures are keeping inventory higher than levels consistent with stable prices.
Sense on Cents commentary: the increase in unsold homes will keep prices under pressure which will help promote sales activity but will also serve to keep pressure on retail sales as consumers feel a negative wealth effect. Additionally, the supply of homes does not fully address the shadow inventory of homes held by banks but not yet put on the market. This shadow supply will likely increase given what is in the delinquency and foreclosure pipeline. (more…)
Banks Want to Continue Rope-a-Dope Accounting
Posted by Larry Doyle on August 21st, 2009 8:04 AM |
If a financial position is hidden, disguised, or in some manner unreported, does that mean it does not exist or is not impactful? Will the American taxpayer continue to bear the burden of unsafe and undisciplined lending and investment practices on behalf of our banking system without being able to demand truth and transparency? Make no mistake, these very practices have brought our economy and financial system to its knees and if the banking system continues to get its way, we will remain subject to the massive risks connected with them. Let’s navigate this corner of our economic landscape and see what the implications are going forward.
CFO Magazine highlights the growing pressure from within the banking industry to delay the implementation of accounting rules requiring banks to bring investment positions onto the balance sheet and raise sufficient capital to support them. In short, these accounting rules would strike at the nexus of the off-balance sheet vehicles which crippled many banks. CFO reports:
Bank regulators are set to discuss accounting standards next week, with an aim toward determining the potential affects that off-balance-sheet rules may have on some financial institutions. During the past year, bankers have fretted about new accounting rules that would force them to bring back on their balance sheets billions of dollars worth of assets — a move bankers have argued will throw regulatory capital ratios into chaos.
Bankers may fret, but taxpayers are picking up the tab on an ongoing basis. If these bankers really want to see ‘fretting,’ then they should start talking to the American public.
Why are the bankers concerned about implementing these new accounting rules? They believe it will force them to raise new capital, dilute their stock value (which will most likely negatively impact their own personal wealth), and increase the potential of a takeover or some other form of business transfer, including potential liquidation. The bankers would prefer to continue to operate in an undercapitalized fashion while they ‘hope and pray’ for a turnaround in the housing market which is at the very core of their investment holdings and overall franchise. (more…)
Uncle Sam Winks Again at Citigroup’s Credit Card Fees
Posted by Larry Doyle on August 20th, 2009 3:14 PM |
When a company, which is a ward of the state, increases credit card fees can it be said to be the equivalent of a tax increase? I believe it can. In that vein, Citigroup is raising taxes on its credit cards by initiating annual fees. The Wall Street Journal highlights this development and reports Citigroup to Initiate New Annual Fees on Some Credit Cards:
Citigroup Inc. is instituting annual fees on some current credit-card accounts in an attempt to offset strict new legislation that could dent its profits.
The move comes on the heels of several warnings from the banking industry, which has said that issuers would be forced to rewrite the playbook on plastic because new credit-card laws would take a bite out of their income.
Rates of between 20% and 30% aren’t sufficient for income purposes? The fact is, current card holders are paying for the undisciplined lending practices of the bank over the last 5 years.
These laws include new limits on interest-rate increases on existing balances and greater disclosures.
The legislation was written to prevent abusive practices on the part of the banks. The fact that it allows for the implementation of practices such as these paints the legislation as the equivalent of a ‘show trial.’ (more…)
Book Review: House of Cards by William D. Cohan
Posted by Larry Doyle on August 20th, 2009 12:53 PM |
Was the failure of Bear Stearns a function of excessive greed, poor risk management, a weak Board, a lack of diversity in business lines, or all of the above?
Having worked at Bear Stearns from 1990-1996, I have a real appreciation for the depth of penetration William D. Cohan brings to this enormous failed enterprise in his book, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.
Cohan does an excellent job in capturing the culture of Bear. What were the key points within the culture? In my opinion . . .
1. Everything (including principles) was secondary to maximizing profits each and every day
2. Silo mentality promoted a lack of teamwork and allowed ‘people without principle’ to advance as long as they generated profits.
3. As people progressed and careers grew, senior management openly promoted individuals to ‘have at it’ in order to move forward.
4. The most senior management at Bear ultimately did not fulfill their responsibility of protecting shareholder interests. Why? They were totally consumed with maximizing their own wealth. On Wall Street, it is often said, there are bulls, bears, and pigs. At Bear Stearns, certain senior managers fell into the pig category. (more…)
“Capitalism Without Failure is Like Religion Without Sin”
Posted by Larry Doyle on August 20th, 2009 8:54 AM |
Did our markets and economy look into the abyss during the 1st quarter of this year only to be saved by the policies and programs of Uncle Sam? Are we on the road to recovery or have we merely papered over the problems embedded in a host of our larger institutions?
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City
The decision to effectively bail out certain financial institutions deemed ‘too big to fail’ was not unanimous amongst the Federal Reserve governors. The head of the Kansas City Fed, Thomas Hoenig, believes the Fed, Treasury, and other members of Uncle Sam’s family should have allowed more institutions to fail.
Hoenig addressed this topic last Spring in writing Too Big Has Failed. I resubmit his review simply because I do not believe the underlying issues have changed or been effectively addressed. What are these issues?
1. Losses must be identified and realized.
2. Management must be replaced.
Until both these steps are taken, true health can not return to the system.
Hoenig discounts the systemic risk argument put forth by government officials and believes we have chosen a path of slow recovery with an increased cost borne by the American taxpayer. The powers that be are effectively transferring the losses from the institutions to the public. (more…)
Cash Register Closing on Clunkers
Posted by Larry Doyle on August 19th, 2009 2:17 PM |
The Wall Street Journal is reporting that the Cash for Clunkers program is soon winding down. It highlights this development in writing, White House Will Outline Plan to End ‘Cash for Clunkers.’
The Obama administration will release a plan this week to wind down its “cash for clunkers” incentive program, signaling that one of Washington’s fastest-acting stimulus programs is nearing an end.
Transportation Secretary Ray LaHood said Wednesday he would disclose within two days updated figures on the program, including how much of the $3 billion in funding was left. He said he would also offer a blueprint for how the administration will wind down the program to ensure all vouchers issued by dealers are reimbursed by the government before the money runs out.
“They’re going to get their money,” Mr. LaHood said, responding to dealers’ complaints of payment delays. “There will be no car dealer that won’t be reimbursed.”
He said the government has “more than 1,000 people processing paper 24-7,” to speed payments to dealers, and continues to add workers.
Mr. LaHood previously said that he expected the program to last through Labor Day, Sept. 7. He declined to say Wednesday whether he still expected the program’s budget to last that long. (more…)
