Sense on Cents

Welch on Obama: “He’s Fooling People”

Posted by Larry Doyle on May 20th, 2009 11:57 AM |

“Fool me once, shame on you. Fool me twice . . . ”

Jack Welch, former CEO of General Electric scorched Barack Obama’s plans in a presentation yesterday in Boston. Welch, author of Jack, Straight From the Gut, pulled absolutely no punches. Bloomberg reports:

Jack Welch, former chief executive officer of General Electric Co., criticized the government- backed bankruptcy of Chrysler LLC for favoring unions at the expense of creditors and said President Barack Obama’s economic stimulus programs will cause budget deficits.

“I don’t particularly like where he’s taking us,” Welch said, referring to Obama, during an interview yesterday at the Boston Convention Center. Welch, 73, who led GE from 1981 to 2001, was a guest speaker at the New England Business Xpo.

“To get the money he needs, he has to have a fake budget,” Welch said. “He’s fooling people about how we’re going to have the top line support the programs in the middle without enormous taxes and some programs not going.”

Who in Washington and our mainstream media are calling Obama and team on the carpet for this charade? In order for capitalism, free markets, and ultimately democracy to thrive there needs to be accountability and transparency in the process.

We will not achieve the necessary accountability and transparency without serious questioning and rigorous debate on the issues. Given the current makeup of our legislative bodies, the risks to our country are significant. Without a legislative check, the pressure on the media to expose the massive costs – financial and otherwise – of the Obama agenda are paramount. Aside from Bloomberg and typically the Wall Street Journal, what other outlets are holding Obama accountable? Read the rest »

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Bank Stress Tests: Vigorous or Sham? Let’s Review HELOC Losses

Posted by Larry Doyle on May 20th, 2009 9:26 AM |

If you want to know just how inaccurate government loss assumptions were in the recently released Bank Stress Tests, let’s enter the world of HELOCs (Home Equity Lines of Credit).

Before we address loss statistics on HELOCs, let’s go to the Federal Reserve for a clearcut definition of the product. What is a Home Equity Line of Credit?

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because a home often is a consumer’s most valuable asset, many homeowners use home equity credit lines only for major items, such as education, home improvements, or medical bills, and choose not to use them for day-to-day expenses.

With a home equity line, you will be approved for a specific amount of credit. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75%) of the home’s appraised value and subtracting from that the balance owed on the existing mortgage.

This mortgage product, often a second mortgage, developed as an enormously popular vehicle for homeowners to tap the equity in their home, especially during the period of significant home price appreciation earlier this decade. Make no mistake, though, it is just another form of leverage. Read the rest »

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Real Regulatory Review: “Gut Check”

Posted by Larry Doyle on May 20th, 2009 6:00 AM |

The Washington Post reports the “Administration Weighs Creating New Regulator for Financial Products.”

Will the new regulator merely address the effects of lax oversights in certain targeted financial products, or will the public get some satisfaction and the regulator address the causes of the massive regulatory breakdowns? I am not optimistic, but I am adamant to address this topic. The Post offers:

The proposal, which remains fluid, would centralize the enforcement of laws that protect consumers of financial products. That task currently is spread out across a patchwork of agencies, many of whom regard consumer protection as a low priority. Some financial products are not regulated at all.

Any proposal could also trigger a major regulatory turf war, with agencies such as the Securities and Exchange Commission and the banking regulators fighting to preserve authority.

I am all for implementing effective regulation which levels the playing field and promotes free, fair, and equitable business practices. There is no doubt we need a thorough review of our existing regulations to see where they are sufficient and where they are delinquent. That said, as I wrote the other day, “Future Financial Regulations: Not a Question of Sufficiency, But Of Transparency And Integrity.”

In regard to housing finance, we need to develop effective oversight of the mortgage industry. We also need to accept the fact that our mortgage finance problems went a lot deeper than rogue mortgage brokers fraudulently underwriting unsuitable products to unsophisticated borrowers. If Obama and team really want to address the root causes, let’s return to the Congressional hearings throughout the 90s and up until 2006 and replay the testimony of the executives of Freddie Mac and Fannie Mae. The simple fact is the Clinton administration, with Congressional backing, promoted increased rates of homeownership without simultaneously implementing the necessary safeguards in the mortgage origination and underwriting process. Read the rest »

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Increasing Inflation or Playing With Fire

Posted by Larry Doyle on May 19th, 2009 4:09 PM |

There is a reason parents tell their children not to play with matches. Small campfires can take down an entire forest. In similar fashion, heightened levels of inflation also have the potential to explode in a ball of fire. Are our central bankers playing this inflation-ahead1 game as a means of addressing our massive government and non-governmental debt burden? In my opinion, they most definitely are rubbing those sticks together mighty hard.

I have highlighted three means for central bankers to address excessive debt: default, restructure, devalue. Individuals and corporations are increasingly defaulting and will default at an increasing rate as evidenced by my post earlier this morning highlighting the surge in delinquencies. Individuals and corporations are looking to renegotiate and restructure debt burdens wherever possible. Our government is restructuring debt through the legislative process and not always consistent with generally accepted market and legal principles. Despite words to the contrary, I am convinced that Ben Bernanke and Tim Geithner are on course to devalue our debt, as well, via a promotion and acceptance of higher inflation.

I was somewhat surprised to read that two economists whom I highly respect are encouraging Bernanke specifically to raise the inflation target. Greg Mankiw, an Economics professor at Harvard, shied away from providing an actual inflation target but did offer that Bernanke should work towards a “significant” level of inflation. Kenneth Rogoff, also a Harvard professor and former chief economist at the IMF, believes Bernanke should target an inflation rate of 6%.

Rogoff and Mankiw are both highly regarded. In my opinion, they are calling for higher inflation because they are clearly concerned that the mix of stimulus programs (monetary, fiscal, and budgetary) will not be sufficient to jumpstart our economy. Read the rest »

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In Speaking with the New York State Society of CPAs

Posted by Larry Doyle on May 19th, 2009 12:22 PM |

I spoke to the CFO’s Committee of the New York State Society of CPAs this morning. I thoroughly enjoyed the engagement with a very responsive and inquisitive audience.

My presentation was well received. I addressed a number of issues, including the current state of the economy, debt levels, banks, the Uncle Sam economy, regulation, and my outlook.

A number of individuals offered how they were not fully aware of the potential losses within the Federal Home Loan Banks along with ongoing losses at Freddie and Fannie (LD: death by a thousand cuts at all of these institutions). Another individual questioned how the Federal Reserve can continue to buy up MBS at these rate levels without assuming real long term risks in the process (LD: they can’t). Other questions addressed issues within the commercial real estate space (LD: a buyer’s market which will get cheaper) and the potential success of the TALF and PPIP (LD: moderate success at best, with some managers making huge returns on certain deals). It was an engaging dialogue and I thoroughly enjoyed it.

My greatest takeaway revolved around the disappointment within the audience on the regulatory front. A number of individuals anticipated an increase in demand for accounting services consistent with real regulatory changes. As with any industry connected to finance, accounting has lost a number of jobs. The expectation of increased opportunities given new and stronger regulations were highly anticipated. Regrettably the message from Washington as asserted by a society spokesman is that in regard to regulatory changes “the pedal is off the metal.”

Given the very nature of their job, other CFOs in the audience also voiced their disappointment with that development. One CFO went so far as to inquire where the “profiles in courage” are today in our government and regulatory bodies.

It would appear that both Wall Street and Washington seem more focused on cosmetic changes without tackling the hard issues. Our markets will ultimately price the subsequent risks accordingly.

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The Most Critical Economic Statistic

Posted by Larry Doyle on May 19th, 2009 6:37 AM |

Which economic statistic is the most important? Unemployment? Housing starts? Trade deficit? Inflation? Retail sales?

Well, they are all important . . . but as I review the many statistics, the economic data that I believe most significant are loan delinquencies. Now, mind you a delinquency does not mean that the loan has defaulted and been foreclosed upon. A delinquency is merely a late payment. Typically loans are classified as 30 day, 60 day, or 90 day delinquent. There is a very high correlation between delinquent loans and those that default.

Loans become delinquent for a whole host of fairly typical reasons. That said, in this economy the nature and array of reasons are growing. As a result, the ability of lenders to forecast and manage delinquencies is increasingly more challenging. Lenders will typically increase reserves as loans become more delinquent in anticipation of a natural rate of default.

Loan delinquencies will often occur even before unemployment hits or sales falter. As individuals or companies feel increasingly squeezed, the monthly loan payment becomes more difficult to make and delinquency results. Read the rest »

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Real ‘Green Shoots’ or Merely Mini-Golf?

Posted by Larry Doyle on May 18th, 2009 4:42 PM |

Every respected economist and market analyst is trying to determine if each piece of economic data is a hint of a “green shoot.” If we see green shoots, can a return to days of wine and roses be all that far behind? To steal a golf analogy, if we see green shoots, can we take out the big stick and go for it? Well, I am both an optimist and a pragmatist. If, in fact, we are seeing green shoots on our economic landscape, in my opinion, the best we may do with them is play an upscale version of mini-golf. Why is that?

Our supply of water, fertilizer, and manpower to properly develop our course is currently in very short supply. We will get to enjoy some fresh air and the company of quality friends, but for now any real fun will be limited to getting the ball into the clown’s mouth.

Bloomberg offers more on our economic future in an article, ‘Green Shoots’ Like ‘Decoupling,’ Bank of America Analysts Say:

Sightings of so-called green shoots in the debt markets and economy will turn out to be no more valid than the debunked view that the U.S. slowdown wouldn’t spread, Bank of America Corp. strategists said.

While government moves to ease the flow of credit have eliminated the risk of an immediate surge in borrower defaults, weak economic growth and “unintended consequences” of the actions will create a “protracted credit cycle,” probably with a high level of defaults through 2016, according to a May 15 report by Bank of America credit strategists in New York led by Jeffrey Rosenberg.

“Like last year’s ‘Decoupling’ theme that global market performance could un-tether itself from the problems in the U.S., ‘Green Shoots’ underlying premise, a quick return to normalized credit markets and normalized earnings, rests on a shaky fundamental foundation and an overly optimistic view of global economics,” the analysts wrote.

Declining interest rates on mortgages and business loans led Federal Reserve Chairman Ben Bernanke to tell “60 Minutes” on March 15 that he sees “green shoots” in some financial markets, and that the pace of economic decline “will begin to moderate.”

Other commentators have picked up on the phrase, which refers to the early stages of plant growth, as markets rallied. The Standard & Poor’s 500 Index climbed 31 percent to 882.8 through last week from March 9. The difference between yields on high-yield, high-risk corporate bonds and U.S. Treasuries has narrowed to 11.6 percentage points, from 16.8 percentage point, according to Barclays Capital index data.

‘Debt-Fueled’ Growth

“Decoupling” proved fleeting as the MSCI Emerging Markets index rose 19 percent from the start of 2007 through June 30, 2008, before plunging 54 percent through the end of February. The S&P 500 fell 12 percent in the earlier period, and then 42 percent in the later one.

The world must now engage in a long transition to a new source of growth after 30 years of “debt-fueled” U.S. consumers driving expansion, the Bank of America analysts wrote. Read the rest »

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Future Financial Regulation: Not a Question of Sufficiency, But of Transparency and Integrity

Posted by Larry Doyle on May 18th, 2009 12:38 PM |

Will our future regulatory structure of the financial industry allow capitalism to thrive? Will the political wizards in Washington prioritize personal agendas and expediency over unquestioned transparency and integrity? I believe we are at a critical regulatory crossroads not seen since financial regulations implemented in the Securities Act of 1933.

Do the powers that be both in Washington and Wall Street understand the magnitude of responsibilities and obligations involved in this process? Initial returns are decidedly mixed. The debate by those intimately involved in the regulatory oversight is typically framed as a question of sufficiency. That is, does the industry have enough regulation or not?

The media often frame the debate in political terms between laissez-faire proponents and those favoring increased government intervention. Both camps are missing the bigger picture, because both camps are feeding from the same trough. Allow me to expound.

The critical regulatory question facing our markets is not of sufficiency but is one of transparency. Regrettably, both ends of the regulatory spectrum do not want to address this glaring shortcoming because it exposes the very nature of the incestuous relationship between Wall Street and Washington.

The mainstream media, to a large extent, is dependent on both Wall Street and Washington for their financial well being so they do not press or pursue the need for total regulatory transparency. Fortunately, Sense on Cents and other leading financial websites are not under this restriction.

Let’s dig deeper and review where regulatory developments stand currently. As the Financial Times reports, U.S. Poised For Finance Regulation Shake-Up:

Congress will next month start the biggest regulatory overhaul of the US financial system in decades, bringing into the open a frantic lobbying effort between banks, regulators and policymakers on what it contains and who pays for it.

The House financial services committee, chaired by Democrat Barney Frank, will hold hearings early in June into reforms outlined by Timothy Geithner, Treasury secretary, say people familiar with the timetable.

Regrettably, before the debate even begins the premise of sufficiency versus transparency is accepted without question. Well, Sense on Cents is questioning the lack of transparency and resulting integrity of the process, which by its very nature strongly influences the outcome. Allow me to be more specific. Much as the Parliament in the U.K. is being rocked by a current scandal over expenses submitted by legislators, I strongly exhort those who truly care about capitalism, free market principles, and our democracy to address the very nature of the relationship betwen the banks, regulators, and policymakers. Read the rest »

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Wall Street Pit Welcomes Sense on Cents

Posted by Larry Doyle on May 18th, 2009 8:12 AM |

I am humbled by the request of the editors of Wall Street Pit to be a contributing author. Wall Street Pit is a leading financial website covering the economy, markets, and global finance. There are currently 51 contributing authors, including leading economists, research analysts, professors, central bankers, and corporate titans from around the world affiliated with:

Education: Harvard University, University of California-Berkeley, Dartmouth College, UC-San Diego, London School of Economics, Koc University, Chuo University, Trinity College Dublin, University of Michigan, University of Oregon, University of Wisconsin, Peking University’s Guanghua School of Management, Stanford University, University of Leuven (Belgium), MIT, Graduate Institute/Geneva, Northwestern University, Sloan School, Goethe University of Frankfurt.

Central Banks: International Monetary Fund, Federal Reserve Bank of Cleveland, U.K. Cabinet Office, Central Bank of Turkey.

Corporate: Carl Icahn, McKinsey, Bloomberg Personal Finance, DailyFX.com, Mark Cuban, Ockham Research, Q1 Publishing, IA Capital.

A number of these individuals are also connected with voxEU.org, a leading European based financial website. In fact,

VoxEU.org is partnering with the UK government to collect the views of economists from around the world on what the G20 should do to fix the global economy.

I am thrilled to be a contributing author. I am also thrilled to bring the wisdom of such an esteemed coterie of individuals to Sense on Cents. I look forward to my affiliation with Wall Street Pit and the impact it will have on all who visit Sense on Cents. Please visit Wall Street Pit as we collectively navigate the economic landscape.

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Europe Sneezes, Asia Gets A Cold

Posted by Larry Doyle on May 18th, 2009 5:00 AM |

The European Union reported a 2.5% decline in 1st quarter GDP the end of last week. Market pundits claim that this report and quarter will represent the trough for the recession in Europe. I personally do not see any meaningful evidence to support that assertion. Europe has been slow to address the massive capital shortfalls in its banking system. The EU has reluctantly adopted measures of quantitative easing and has been slow to drop its overnight lending rate.

What have been the ramifications of the EU’s tardiness on the monetary and fiscal stimulus fronts? RTT News reports, Euro Moves Lower Versus Rivals After GDP Report. 1st quarter output in Europe plummeted and economic growth revisions across individual countries showed greater declines.

I have always viewed eastern Europe as being The Weakest Link in our global economy. The EU’s enormous exposure to eastern Europe is a MAJOR drag on its financial institutions and, in turn, its economy. The 1st quarter GDP report is a clear indication of the impact that the Weakest Link Is Weakening, much as I had written a few months ago.

Can this European weakness be contained? Can stronger economies pull Europe out of the economic ditch? Weren’t these the same questions we posed in regard to the rising delinquencies and resultant foreclosures in sub-prime mortgages?

The immediate reaction to the European weakness in Asian markets is a swift selloff. Japanese equities are down almost 3% overnight (10pm EST) due primarily to the weakness in Europe. As Bloomberg highlights, Japanese Stocks Slump on Panasonic Loss Forecast, Europe GDP. Bloomberg asserts:

“Europe’s spending less on stimulus, so their ability to recover from the recession is weaker than the rest of the world.”

Additionally, Bloomberg provides further European color:

Gross domestic product in the 16-member euro region fell 2.5 percent from the fourth quarter, the biggest decline since the data were first compiled in 1995, the European Union’s statistics office in Luxembourg said on May 15. That exceeded the 2 percent contraction economists expected in a Bloomberg survey and followed a 1.6 percent drop in the prior three months.

“Concerns are building about the health of Europe,” said Ryuta Otsuka, a strategist at Toyo Securities Co. in Tokyo. “That’s having an effect on the currency market and creating a headwind for export companies.”

Why isn’t Europe more swift and aggressive in providing fiscal and monetary stimulus? Germany’s hyperinflation during the post World War I era has left an indelible scar upon that country. I found the insights into Germany’s period of hyperinflation provided in an excerpt of Paper Money by ‘Adam Smith’ (George J.W. Goodman) to be highly informative.

In pausing to review the depth and magnitude of these economic issues, it is readily apparent that our global economy is connected not only across borders but also across historical eras.

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