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HomeRecommended Weekend Reading
Posted by Larry Doyle on July 11th, 2009 1:28 PM |
I found these two pieces of writing to be insightful and hope you find them to be enlightening, as well.
The Crisis is Morphing Again
by Mohamed El-Erian
Pimco; July 2009
Are we entering a new stage in our economic crisis? A stage in which government officials are ill equipped to handle upcoming challenges? El-Erian maintains:
The bottom line is a simple yet powerful one. The global crisis is morphing again. Having already contaminated (in a sequential and cumulative manner) housing, finance and the consumer, it is now threatening the potency and credibility of the economic policy making apparatus. As far as I can see, there are no first best policy responses that are readily available and easy to implement. Instead, the economy will continue to struggle, navigating both the adverse implications of last year’s financial crisis and the unintended consequences of the experimental policy responses. Given the inevitable socio-political dimensions, this story will play out well beyond the realm of the economy, policymaking and markets.
Ouch….not exactly very calming.
The second treatise I recommend is one I addressed last December, but it is so powerful and so encompassing that I am compelled to resubmit.
The Aftermath of Financial Crises
by Carmen Reinhart of the University of Maryland and
Kenneth Rogoff of Harvard University
December 19, 2008
This 13-page historical economic review of past recessions is widely referenced. Please save it and use it for your own reference purposes as you navigate your own economic landscape.
Reinhart and Rogoff provide insightful analysis supported by compelling charts of housing, employment, GDP, equities, and overall debt levels. What did they learn and share? I won’t steal their thunder, but I’ll give you a hint . . . we may be here a while.
Do yourself a favor and review their work so you can have a broader perspective from that offered by our government officials, market analysts, and media mavens. Do your friends a favor and share it with them as well.
Enjoy!!
LD
Uncle Sam Giveth and Taketh
Posted by Larry Doyle on July 11th, 2009 7:46 AM |
Give a penny, take a penny? How about give $50 billion, take $50 billion, if not a lot more . . .
Welcome to a Saturday morning chapter of “Uncle Sam Giveth and Taketh.”
While reviewing a number of news outlets, I was struck by the juxtaposition of two reports from The Washington Post:
White House Eyes Bailout Funds to Aid Small Firms and Democrats Agree on Tax Hike to Fund Health Care.
Standard fare, right?? Let’s not be quite so hasty.
From the former, we learn that:
The Obama administration is developing an initiative to take money from the $700 billion rescue program for the banking system and make it available to millions of small businesses, which officials say are essential to any economic recovery because they employ so many people, according to sources familiar with the plan.
The effort would represent a striking shift from the rescue program’s original mandate, since it would direct billions of bailout dollars toward a plan that aims more at saving jobs than at righting the financial system. Some economists estimate that small businesses, defined as firms with fewer than 500 workers, employ most of the country’s workforce.
From the latter, we learn that:
House Democrats agreed yesterday to raise taxes on the wealthy to pay for a sweeping expansion of the nation’s health-care system, proposing a surtax on the highest earners that could send the top federal tax rate toward 45 percent.
Republicans assailed the idea, saying the new tax would fall heavily on small-business owners, who tend to report business income on their personal tax returns.
Don’t think for a second that our political wizards in Washington are capable of precision execution on either of these fronts. Given the size of the respective programs, I think jobs saved (via increased SBA assistance) versus jobs lost (via higher taxes on small business) will be at best a push.
A few questions and comments:
1. How does Uncle Sam, in the name of the Small Business Administration, determine who receives assistance? Can Uncle Sam be influenced in picking winners and losers? Hmmmm . . .
2. Does it even matter anymore that the TARP legislation was not written for purposes of allocating funds to small business? Does the rule of law count for anything in our country?
3. On the tax front, to think the Obama administration is going to increase taxes on upper incomes (both individuals and small businesses) to as high as 45% and not touch tax rates below that is beyond naive. There is NO doubt in my mind the taxman cometh across the board at the federal, state, and local levels.
Thoughts and opinions, especially from those involved in small business, are deeply appreciated!!
LD
No ‘Get Out of Jail Free’ Card for CIT
Posted by Larry Doyle on July 10th, 2009 11:37 AM |
Green shoots? Stop the madness.
Despite all the disguises and shams perpetrated on the American taxpayers to this point, the simple fact is our economy is awash in excessive debt. The inability to refinance debt will be with us for a while. No company is more reflective of this dynamic than CIT.
Who and what is CIT? You should take the time to quickly study this company because it may very well be the linchpin that drops and causes the next leg down in our economy. Are they too big to fail?
From the CIT corporate web site:
CIT (NYSE: CIT) is a bank holding company with more than $60 billion in finance and leasing assets. For more than 100 years, CIT has provided lending, advisory, and leasing services to small and middle market businesses guided by unparalleled industry expertise and focus. Headquartered in New York City, CIT is a Fortune 500 company and member of the S&P 500.
CIT operates CIT Bank, a full service Utah state bank, which is regulated by the Utah Department of Financial Institutions and the FDIC.
Deep industry expertise
Operating in more than 50 countries, we have deep expertise across 30 industries. Our areas of expertise are:
Corporate Finance is a top 10 lead arranger for small and middle market level loans (less than $150 million) with more than 3,000 customers. Businesses include Commercial & Industrial, Communications, Media & Entertainment, Energy, Healthcare, Investment Banking Services, and Small Business Lending.
Trade Finance is a leading factoring company in the U.S. with customers in the U.S., Canada, Europe and Asia. CIT factoring services provides funding to thousands of small manufacturers which, in turn, sell to small and large retailers that also rely upon CIT for the flow of goods into their stores.
Transportation Finance is the third largest rail car leasing firm in the U.S. with more than 116,000 railcars and the third largest in aircraft financing worldwide with over 100 commercial airline customers and more than 300 business air customers.
Vendor Finance is the #1 independent leasing company in the U.S. serving more than 500,000 commercial end customers ranging from small businesses to Fortune 500 companies. It maintains customer relationships with a variety of marquee technology and office equipment companies providing trusted business equipment leasing.
Commitment to small business and the middle market for more than 100 years
Since 1908, CIT has driven success by delivering three types of capital to clients. We believe that the combination of relationship capital + intellectual capital + financial capital can yield infinite possibilities for our customers.
Relationship Capital: Our employees and the long-term partnerships they have created with thousands of clients are our biggest asset.
Intellectual Capital: We understand that it takes more than money to help our clients grow and prosper. Our knowledge and ideas, combined with relationship and financial capital ensures client success.
Financial Capital: The funding we provide is critical to our clients’ success.
CIT does have CIT Bank in Utah. Can CIT utilize that vehicle to get government funding or government backstops on debt financings much like Hartford Financial, Lincoln Financial, GMAC, and GE Capital? As of now, CIT has not received a “get out of jail free” card. As Bloomberg reports, FDIC Said to Withhold CIT Debt Guarantees Due to Risk.
If CIT were to fail, there would be a significant ripple effect across our economy. There is no sugarcoating that reality. The fact of the matter is, these are not new developments for CIT. Their predicament is simply a function of the timing of the maturities of their debt. They have plenty of company.
Where do you draw the line?
LD
Does Wall Street Run ‘One Way’?
Posted by Larry Doyle on July 10th, 2009 8:47 AM |
Does the American public appreciate the essence of Wall Street? Is it as cutthroat and greedy as many would attest?
As with anything, I do not think it is fair or productive to generalize. There are plenty of world class people on Wall Street and the world is a better place for them. There are also plenty of people for whom I have no personal or professional regard. That’s life. Who couldn’t say the same about every industry.
While individual firms and certain executives would want the American public to focus on single situations, for our purposes currently let’s focus on the financial industry as a whole.
In so doing, it becomes very apparent that Wall Street is now showing it runs “one way.” How so?
The Wall Street Journal highlights how the financial industry is haggling over the valuation of warrants purchased by the U.S. Treasury as part of the TARP (Troubled Asset Recovery Program). The WSJ reports, J.P. Morgan to Send Warrants to Market.
I believe the WSJ ‘s choice of title for this article is amazingly weak. The simple fact is that Wall Street firms are complaining loud and clear about the price they may have to pay to repurchase warrants currently owned by the U.S. Treasury (that’s you and me, folks).
The WSJ writes:
Several Wall Street firms seeking to buy back warrants held by the government as part of the $700 billion financial bailout are complaining that the Treasury Department is demanding too high a price, according to people familiar with the matter.
The Treasury has rejected the vast majority of valuation proposals from banks, saying the firms are undervaluing what the warrants are worth, these people said. That has prompted complaints from some top executives. J.P. Morgan Chase and Co. Chief Executive James Dimon raised the issue directly with Treasury Secretary Timothy Geithner, disagreeing with some of the valuation methods that the government was using to value the warrants.
The inability to agree on a price has already prompted J.P. Morgan to take the next step in a complex process to remove the warrants from the hands of the government. The bank has waived its right to buy the warrants and will allow the Treasury to auction them in the public market, which bank executives say will result in an actual market price.
How gracious of Mr. Dimon! Who would be bidding on these warrants? Other Wall Street banks. Do you think there is a chance for more than a little bit of collusion in the bidding process to keep the warrant valuations excessively low? Of course. Who loses? The American taxpayer . . . again. (more…)
About That Stimulus . . .
FROM the ARCHIVES: “An $800 Billion Mistake”
Posted by Larry Doyle on July 9th, 2009 3:59 PM |
Is our economy so weak that we will need another Stimulus Package? In my opinion, the American public has become so numbed by the depth and breadth of the government bailouts and fiscal follies as to not fully appreciate their overall magnitude.
Let us not forget that in current dollars the initial Stimulus Package passed under the Obama administration was only exceeded by Uncle Sam’s funding of World War II. The development of the interstate highway system under the Eisenhower administration was of comparable size to this initial Stimulus. For those who care to compare and contrast the size and scope of federal programs over the years, I submit from the January 6, 2009 edition of the Wall Street Journal “Feel Like a Trillion Bucks”.
While politicians and bankers receiving federal bailouts throw “OUR” money around liberally, let us hold them to account. On that note, let’s revisit commentary from noted Harvard economist Martin Feldstein just prior to the passage of the initial Stimulus.
I resubmit “An $800 Billion Mistake.”
LD
Pimco Punts on the PPIP
Posted by Larry Doyle on July 9th, 2009 2:27 PM |
Did Bill Gross just flip off Uncle Sam? It would appear that he did. While the U.S. Treasury is touting the official launch of the Public Private Investment Program (PPIP) as a noteworthy event, the most significant aspect is the absence of Mr. Gross and Pimco as one of the managers. As Bloomberg highlights, U.S. Treasury Opens Distressed-Debt Program Without Pimco:
The U.S. plan to help buy as much as $40 billion in assets from banks got started almost four months after it was proposed and without Pacific Investment Management Co., the world’s biggest bond manager and an early supporter.
The Treasury Department picked nine money managers yesterday for the Public-Private Investment Program, or PPIP, including BlackRock Inc. and Invesco Ltd. Pimco, which in March announced plans to apply, said it withdrew its application in June because of “uncertainties” about the initiative’s design.
Uncertainties? How about if we return to Mr. Gross’ May 2009 Investment Outlook, in which he cautioned us all about business dealings with Uncle Sam:
If the government indeed becomes your investment partner, you should keep the big Uncle in clear sight and without back turned.
Over and above Pimco’s absence, the other notable development within the PPIP is the fact that Uncle Sam plans on injecting 75% of the initial equity capital while the private managers inject 25%. Given that equity split, why wouldn’t the taxpayer receive 75% of the returns? In my opinion, Treasury is injecting more capital simply because a $20 billion or even $30 billion launch would render this initiative as nothing more than PPIP: A Virtual ‘Odd Lot’, as I had written the other day.
. . . ‘without back turned’ . . . ‘odd lot’ . . . two strikes before the game has even begun.
Mr. Gross’ absence speaks volumes!!
LD
Banks Build Better Mousetrap
Posted by Larry Doyle on July 9th, 2009 7:54 AM |
Is there truly any reason to trust financial institutions these days?
Developments within the credit card space have exposed the true colors of these institutions . . . not that there was ever any doubt. Recall how consumer outrage at rapidly rising interest rates on credit cards pressured Washington to rein in the usurious business practices of the financial industry.
New legislation was badly needed as banks clearly utilized abusive business practices. The Wall Street Journal highlighted these developments in writing on May 21st, Credit-Card Fees Curbed:
“Credit cards are a tremendously valuable and useful tool for consumers, providing them with relief during critical moments,” said Senate Banking Committee Chairman Christopher Dodd. “This is a very important industry….We just want it to work better.”
The legislation marked a major defeat for the credit-card industry, as lawmakers complained that consumers are being hit with tricks and traps on their cards.
Well, while the legislators were in the front room having the photo ops, the bankers were in the back room building a new and better mousetrap, at least from their perspective.
The Los Angeles Times sheds light on how Credit Card Firms Try End Run Around New Federal Rules:
Banks are quietly changing the terms of millions of credit card accounts as they brace for a tough new law that will limit rate hikes.
The law would restrict interest rate increases unless a credit card has a variable rate. So at least two major lenders are switching their cards with fixed rates to — you guessed it — variable rates.
“It’s completely unfair,” said Linda Sherry, a spokeswoman for Consumer Action. “It’s an end run around the intent of the new law.”
That law is the Credit Card Accountability, Responsibility and Disclosure Act, which President Obama affixed with his signature in May. Its various provisions will be phased in between next month and February.
Who are these two major lenders? Bank of America and JP Morgan Chase. Given the size of their operations, watch every other credit card issuer set the same trap. (more…)
Warren Buffett: “Wall Street Owes the American People”
Posted by Larry Doyle on July 9th, 2009 11:36 AM |
Oracle of Omaha, Warren Buffett
When the Oracle of Omaha speaks, people listen. What is Warren Buffett saying now? What does he see on our economic landscape? How do we prepare? We can let Warren be our guide, but let’s make sure we question him aggressively as we manage our own finances.
ABC News reports, Warren Buffett Backs Second Stimulus:
Not for nothing, but where was Warren at the time the initial bill was rammed through Congress? Warren is a close economic adviser of Obama’s but he does us no favor by playing his political cards when our country is screaming for real economic leadership.
In regard to the PPIP? What does Warren think about this government program to help banks cleanse their books of toxic assets?
How about the economy? What does the Oracle see in his crystal ball? The grand swami believes that:
I concur. Warren is not totally clear, but in so many words he is saying the American economy is adjusting to the lack of a shadow banking system.
How about over the long haul? Does Warren think America will rebound? He is very optimistic, as ABC reports:
That’s great. I am also eternally optimistic. That said, things do not just happen and we will not have better days without reinstilling strong discipline and values throughout our economy and our country. In my opinion, those disciplines and values need to encompass the following:
1. honesty on where we currently stand across all aspects of our economy and society. Publicize our successes and, more importantly, our failures so we can properly address them.
Do not allow urban education dropout rates of 50% to be swept under the rug. Promote the correlation between those figures, single parent birth rates, income levels, and criminal behaviors. BE HONEST ON THESE TOPICS!!!
2. Expose the lack of integrity and transparency in our financial and political institutions. Hold people accountable!!
That is a good start. Warren has the bully pulpit. Perhaps he could speak aggressively on these topics in the future.
LD
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