Archive for January, 2009
What Did They Expect?
Geez, The Wall Street Journal editorial board really hasn’t fared well during the ongoing mortgage débâcle and liquidity crisis. They’ve come across looking inconsistent and reactionary and kind of weak.
Now, on their opinion page, they start their “About Us” description with the phrase “We are for free markets and free people…”
We suppose they’re for freedom, except when they’re not – like when the editors supported the original TARP plan. It seems that they didn’t consider the risks of further politicization of the economy or how government encroachment might harm “free people.”
It seems that the editorial board rues what was an easily predictable outcome.
In today’s (January 31) edition, in a Review & Outlook piece entitled ‘Idiots,’ Indeed, the editors complain about (1) President Obama denouncing Wall Street executives for paying bonuses; (2) Claire McCaskill attempting to limit compensation and calling Wall Streeters “a bunch of idiots,” and (3) New York Attorney General Andrew Cuomo starting to investigate last year’s bonuses, among other things.
What did they expect would happen?
Did they really believe that the government would hand out cash for free and not seek vengeance for severe (private sector) incompetence? What type of panicky tizzy must the editors have been in not to consider those implications?
We recall the last time a bubble broke they were complaining about prosecutorial over-reach; criminalization of (what we’d call) incompetence; and Sarbanes-Oxley (SOX).
When, in a fit of panic, they abandoned their free market principles why should they expect others, whom don’t even claim such principles, to keep them? See what we mean: kind of weak, inconsistent, and reactionary.
Here’s what we wrote on September 24 in Sorry Mr. Bush, We Respectfully Disagree:
Let’s be clear. Someone should be held accountable, BUT we do NOT mean criminally. We fear that when economic matters becomes politicized as in the current crisis, the feds will look to put someone in jail, e.g., the ongoing FBI fishing expeditions, err, investigations. No, we mean be held accountable economically, which we would prefer to see happen privately.
If a humble ‘burgher such as ourselves could see what would happen with more government intervention – uh, basically, more government intervention – how could the folks in New York, who pretend to defend freedom and liberty not see the imminent loss of it?
P.S. We also disagree with their assessment that “compensation levels are a business judgment made under the pressure of competition.” That might be true if the firms were partnerships or otherwise privately-owned, there was no agency costs, and there was no self-dealing, i.e., the firms were run by independent and knowledgeable boards. Perhaps that’s where their titular pejorative description of intellect best fits.
P.P.S. Yeah, we’re for the nationalization of the weakest large banks, but see no inconsistency with our criticism of the WSJ editorial board. We think those legal entities forfeited their right to exist, and their shareholders lost their rights to control those entities.
Our Cop Show Pet Peeve
Tonight we were watching the CBS crime drama Eleventh Hour, and the two stars were locked in a large, metallic, walk-in freezer.
To escape, the cute, blond female FBI agent shot a magazine full of bullets at the door lock.
We don’t know the total shot count, somewhere between five and ten, but one round would be sufficient for our point.
When she finished, the good Dr. Hood mumbled something to her and she acknowledged him.
Of course, neither character was wearing ear plugs.
Now, this is a long-time, television-related pet peeve of ours – kind of like David Letterman.
If the pair were outside and only one round were fired from, say, a 9MM – her gun doesn’t look like a bigger-bore 45 – then their ears would ring for quite some time, especially since those high-pressure, medium-size rounds sound more like a crack or snap than a boom and are quite annoying to us.
A whole magazine in a stainless steel room? Who knows for how long their four ears would ring, but if he mumbled something to her as soon as she stopped shooting, then her only true response would be “What? Huh? What did you say? What?”
In addition, given the volume and the discomfort, wouldn’t someone as intelligent – as he is supposed to be – hold his ears? He shown no other signs of masochism, and it wasn’t the first time he was around a gun.
We’ve taught a number of folks to shoot pistols, and it seems to us that it is the sound – not the relatively light recoil of most non-compact, semi-automatics – is what causes novices to close their eyes and jerk the trigger, rather than squeeze gently and smoothly.
Moreover, if our plugs are just a bit out-of-place, our ears ring for quite some time, and that is regardless of the caliber – even little 22 pistols are loud. Have you anyone even flinch (due to the sound) on a television show or in a movie?
We guess that inconsistency is like the 555‑1212 telephone number that almost everyone has on TV. Like the cost of TARP and the stimulus package, it’s something we’re not supposed to notice.
The Problem of Induction
If you missed it on Monday (January 26), L. Gordon Crovitz had an interesting article in The Wall Street Journal entitled Bad News Is Better Than No News. In our zeal to complete a project, we missed it when it was published, but now mention to the reader that it is worth their time.
We like it because it is consistent with much that we’ve written on these pages since the blog’s inception, and especially since last September. For example: no one knows what the mortgage thingies are worth, the banks can’t lend because they don’t know how unsound THEY are, and the government’s actions have exacerbated the problem by not providing any resolution to the uncertainty. Our solutions: nationalize the worst banks and provide generous tax incentives to buyers of the thingies to resolve the uncertainty.
Mr. Crovitz mentions: “Bankers now recall the fine print of VaR analysis, which is that it always includes low but real risk that some new element could make the historical data a poor measure of the future.”
This, of course, is the Problem of Induction, but unlike Mr. Crovitz, we don’t think that there is necessarily a low risk that past is not predictive of the future. (We could provide many citations to our old posts, but point new readers to our essay, Uncertainty Management, Or, Ignoramus et ignorabimus, Or How Trading is Like Playing in a Culvert on a Hot, Sunny, Summer Day. You can still drown from a flash flood on a sunny day. Actually, you could do it even without a flood.)
Feel free to search other posts for complaints about boards and senior managers, but here’s a brief recap of what we think happened: many experienced traders left the big banks for more lucrative options, and they were replaced during times of unusual placidity by junior traders without much of a historical perspective. Through lax control, e.g., greed combined with poorly-designed incentives, and because the folks who generate (short-term) revenue tend to win internal arguments with risk managers – if those arguments even occur – the organizations were over-confident and unprepared for adversity.
Moreover, the over-reliance on mathematical models, which were perfectly fine when nothing was happening, allowed the banks to avoid the consideration of tail-events. Those event are so unpleasant to comtemplate, anyway, so why bother?
To even hypothesize that really bad things could happen could be taken as a sign of weakness or incompetence by undisciplined managements, and probably were. (We think that is a silly perspective in the financial markets and in life in general, and it is one of the reasons that although we don’t hunt, we’re a huge proponent of second amendment rights. As we mentioned previous posts, we view guns as the equivalent of deep, out-of-the-money puts: they’re generally an inconvenience, but they do help manage tail risk.)
Back to our story: bad stuff starts to happen, and no one admits they’re wrong – prices will bounce back, right – or knows how to react (until everyone panics at the same time).
Mr. Crovitz quotes a late J.P. Morgan executive as saying that traders should earn their big money for managing the tail-risk, not the typical, daily volatility, but that advice seemed to have been ignored in hopes of profits and continued stability.
We think that another water analogy is appropriate. Placid times are like slow moving streams: it’s easy to wade out into the deep parts without too much concern. That’s despite the fact that algae thrives in such environments (and makes the bottom quite slippery). It doesn’t take much of a change in current – or even a misstep – to turn that confidence into panic. Moreover, it doesn’t even have to be your misstep when there are other folks nearby grasping at anything when they start to fall – especially ones who overestimated their own ability or the stream’s constancy and overstepped the bound.
The Catholic Madrassa?
In earlier days, we spent a decent amount of time reading essays and blog posts on conservative web sites – not the extremely agitated ones, just the normal ones.
Last Fall we got tired of the silliness of both the pundits and the politicians. For example, we recall reading that Melissa Hart, our former Congresswoman, wouldn’t take a position on – what can to be know as – TARP until her election opponent, Jason Altmire, did, and then, regardless of his position, she planned to attack him. That seemed kind of lame and duplicitous to us, and made us that silly or stupid conservatives are political allies; they’re just silly and stupid.
In that vein, we recall reading at some point during the past two years that Barack Obama spent time as a child at various Islamic madrassas in Indonesia.
If he did spend time in an Islamic school, then he had a particularly diverse upbringing because William McGurn reports in yesterday’s (the January 27th) edition of The Wall Street Journal that Mr. Obama spent several of his formative years at St. Francis of Assisi School in Indonesia.
Now, if that was an Islamic school, then that’s quite a strange name, don’t you think? Either that, or it’s an especially bad translation from Arabic, which seems doubtful, don’t you think?
You see, Mr. McGurn’s column, Obama Should Acknowledge His Roots, is a story about Catholic schools (probably because it is National Catholic Schools Week). So, we’re guessing that Mr. McGurn knows that a school named after St. Francis was really a Catholic school. Big surprise, huh?
Although we disagree with almost all of his political positions – not that he cares – we like Mr. Obama, and we’re glad that this part of his past has been cleared up.
Those early attempts to impugn him as some fanatical, religious subversive would be sickening if the truth weren’t so ironically amusing.
We always joke that there is no better place to see the fallen nature of man than Catholic school sports. We know it’s not true as long as politics exists, and we’d guess that there are only two places where politics doesn’t exist: (1) Heaven, now that Satan is gone, and (2) Utopia.
Where Will the Obama Presidency Lead?
Or, Will Blacks Be the New Catholics?
Yes, the subtitle is purposely provocative, but we’re interested in certain long-term implications of the Obama Presidency and what it means for choice and freedom among certain voting blocs.
This weekend, like most weekends, Peggy Noonan has an interesting essay in The Wall Street Journal. It is entitled, What I Saw at the Inauguration.
As we noted in the past, Ms. Noonan is an extremely astute observer of the zeitgeist, and there was much on display this past week in Washington, D.C.1
In this weekend’s column, Ms. Noonan mentions that given the number of furs she observed worn by black ladies attending the inauguration, “PETA just took one on the chin,” meaning that she doubts that PETA would attack the outer apparel choices of some in the black establishment. (We recall hearing a similar, but less race-specific comment on FoxNews regarding the number of fur-wearers in D.C. this past week, which per Ms. Noonan’s column, would seem to grate on many on the left.)
Her brief anecdote made us wonder whether Ms. Noonan didn’t miss a bigger potential implication of that and others observations she made – in this case, a possibly very large implication regarding the direction of politics in America. Will Mr. Obama’s election allow blacks to vote more conservatively?
Let’s start with two quite disparate fact: (1) there are few activities more culturally conservative than wearing fur, and (2) it has often been remarked that many blacks – especially those involved in the church – are very, socially conservative.
The first point’s more for fun than serious, but it was the impetus for our conjecture and is still worth mentioning.
Despite what our children think, we don’t predate culture.2 However, it’s easy to imagine that wearing fur does predate culture by many years. That would indeed make it quite a traditional and conservative activity.3
Perhaps better evidence than fur for our conjecture is this very pro-life ad by CatholicVote that ran on BET – that’s Black Entertainment Television – this past week.
(By the way, the ad’s look and message is similar to an independently designed tee-shirt that is offered for sale at one of our affiliates: www.BWAMShop.com.)
Socially conservative blacks and Catholics uniting to protect the weak and vulnerable. Why, it’s almost a match made in heaven!
We wonder: with the election of Mr. Obama, will Democratic but socially conservative blacks realize their power and position and feel free to push harder on issues that seems quite at home in black churches – well, actually, in almost all churches. (We think the fuss about Mr. Obama’s former minister may have obscured the mainstream, conservative social values of many traditionally black congregations. As MLK said, it is the content of the character, not the color of the skin that should matter.)
Will that sense of arrival, pride, and confidence permit socially-conservative blacks to argue against other Democratic Party interests and positions in which they do not believe? If they do, will that pressure moderate the party or cause the social conservatives to seek a new political home?4
As we recall, the percentage of Catholics who were Democrats decreased after the election of JFK – although it did take awhile. So, we think it is possible to argue that the election of the first Catholic President – a Democratic one – permitted Catholics to realize their power and move to a Republican party that better expressed their social views, especially after Goldwater in 1964 and the ascendancy of Ronald Reagan in the late 1970’s?
Will we be correct? Who knows, but it is fun to speculate and even better to have the liberty to do it in a public forum like the internet – with no threat of censorship or government interference.
That gratitude for living in the USA and our prayers that God watch-over and bless Mr. Obama and the nation during the next four years (and into perpetuity) is something that all believers can agree upon.
Footnotes:
- Hey, perhaps sometime next month, die-hard Steeler fans will realize that we have a new President. There’s a separate, seasonal, and yet permanent zeitgeist in Western PA that ignores almost everything but the Black and Gold. ↩
- We were once asked “What was it like to be alive during the time of the dinosaurs?” ↩
- Of course, PETA could argue that not wearing fur actually predates wearing it, but that’s a different story. ↩
- There is a number of imbeciles who are amazed that folks don’t just vote their (presumed) economic interests. ↩
The Stimulus Package: Robbing Peter to Pay.…
Err, Um, Peter?
That’s seems to be the way that the $825,000,000,000 “stimulus” package will work. We know it’s “only“a mere $550,000,000,000 in spending, after $275 billion in tax cuts, but we’re getting old, and that still seems like a lot of money to us.
The only way these projects can create wealth is if the completed projects have a present value greater than the cost of $550,000,000,000, and we know that measuring items like “wealth” and “value” and “utility,” which we did not use above, is extremely difficult. (See our short comparison of Warren and Jimmy Buffet that illustrates a few of these value and utility issues.)
However, over $100,000,000,000 involves transfer payments; so, there’s no wealth creation there.
Tens of billions have been set aside for state and local governments, including school districts, but those entities aren’t known for wasting money, are they? (We write this as we sit a few miles from our $10 million high school football stadium.) Oh wait, we’re going to spend billions on making the federal government “more” efficient; spending billions while protecting government unions usually doesn’t improve the ratio of outputs to inputs, which is, of course, the definition of efficiency.
Congress plans to spend about $6,000,000,000 to provide broadband to rural and under-served parts of the country. Perhaps our nation lacks the ingenious entrepreneurs needed to determine ways to serve these markets, or perhaps those same ingenious entrepreneurs determined that it wasn’t worth it. We know, we know, the five-year, $288,000,000,000 farm bill that was passed last summer just wasn’t enough money to allow farmers to modernize on their own.
So, as we see it, the nation is going to commit a rather large portion of our society’s current resources to permit the government to select value-creating projects. Hmm, there is a certain audacity to that hope. We just don’t see much empirical evidence for it.
That being said, we think that TARP was a bigger waste of our tax dollars.
While it is possible to criticize nearly every aspect of the spending package, given that it’s likely to pass into law, we’d prefer that you read our proposal to use the stimulus package to legitimize many of current illegal aliens, and to finish necessary infrastructure renovations in a relatively cost-effective manner: A Solution to Illegal Immigration.
The Wall Street Journal Widget
We have a cool new widget at the bottom of our left column. It provides links to daily editorials in The Wall Street Journal. It requires Macromedia Flash, but we thought that prerequisite was at least as universal as the alternative: javascript.
Since we reference the Journal so frequently, we thought it was the least that we could do for it: provide it with a bit of free publicity for our readers who have never heard of the newspaper. (That’s a joke.)
Of course, of the reader-observable Plugins in our humble little WordPress installation, our current favorite is the visitor map. If you ever go to the page and get an error message, click refresh, and the map will usually appear on the second try; can’t complain, it was free.
The translation feature as evidenced by the 35 little flags to the right is quickly growing on us: our international readership has expanded quite a bit since installing it on New Year’s Day. (We’ve been told that the translation isn’t great, but if it gets you here, we’re happy and not that particular. Readers can always use their own translation service. We’re sure some wish there were a translation-into-English option.)
A Solution to Illegal Immigration
The “Stimulus” Package, Public Works, and a Reasonable Path to Citizenship
We’ll have a post later today or tomorrow criticizing the proposed $550,000,000,000 stimulus package. Our basic point: how often has the federal government spent our tax dollars wisely, especially recently?
However, it seems that the eventual passage of the massive bill is inevitable; so, we propose a solution to spend some of the money, in a wiser, more humane way than most can imagine. In fact, we believe that the country may be able to recoup much of the upfront cost if our plan is followed.
Before continuing, it’s important to note that we’re strongly opposed to illegal immigration. We think that if a person’s first action in a new country is to break its laws, then he or she generally don’t deserve citizenship.
That being said, while we’re against illegal immigration, it is difficult to be against illegal immigrants as individuals. In particualr, we certainly can’t blame otherwise law-abiding individuals from trying to enter the country and seek a better life for their families and themselves. Our country is the closest thing to heaven-on-earth for such folks (and for us, too). 1
We know that given the many domestic problems the nation faces, little has been said about illegal immigration recently, especially since it seems that last year’s two Presidential candidates were of a similar mind on the issue.2
However, today’s editorial in The Wall Street Journal, How to Save $40 Billion, reminded us of a solution we had proposed to the infrastructure crisis back in August, 2007, but had never written about in our posts. In it, the Journal’s editorial staff calls for the suspension of the Davis-Bacon Act.
In August 2007, the debate about illegal immigration was in the news, and I-35 bridge in Minneapolis, not far from our old office, had just collapsed. That’s when we hit upon a solution to the dual problems of (1) illegal immigration and (2) the crumbling infrastructure.
In our mind, amnesty for illegals is out-of-the-question. It only encourages more of the same anti-social behavior from future generations of foreigners. Regardless of the humanitarian issues, a substantial and just debt/penalty must be paid by the offenders; people forgive, governments can’t; they must seek justice.
At a minimum, that debt must include the payment of all taxes and related interest and penalties during their illegal work careers, as well as some minimal level of fines based upon both (1) their tenure here and (2) their past criminal records here. That debt balance must be calculated and contracted upon by the individual and the government.
Since FDR seems to be back in vogue – at least among a small set of the populace that excludes us – we recommend voluntary, public works, work camps for illegal aliens similar to the WPA camps of the 1930s. Let the illegals come forward and commit to work-off their debt to our society. When the debt is paid-in-full, permit them the opportunity to apply for citizenship.
Set their wages at, say, half-way between the Davis-Bacon prevailing wage and the minimum wage. They would likely earn more than they current do, and can use the difference to repay their debt. The project could be initially funded with the proposed wage savings.
In that way, the country benefits from low-cost labor for the quite necessary infrastructure improvements and rehabilitations, and the illegal aliens get the opportunity to be full and proud citizens of this great nation.
Because we don’t take either of our state’s U.S. Senators seriously, we haven’t bothered sending our idea to them.3 Moreover, we’d propose the solution to our local Congressman, Jason Altmire, but we suspect we’d get another insipid e-mail from an uninformed junior stapher.
We think it is a viable, humanitarian solution, and slices the Gordian Knot of the illegal immigration conundrum. Is Mr. Obama enough of a pragmatist to attempt such a solution against what would certainly be an uproar from his union allies? Let’s see. We doubt it, but we are a hopeful pessimist.
Copyright © 2009 Spero Consulting.
Footnotes:
- People who came here to commit crimes are a different story, and like almost everyone else, we have absolutely no sympathy for them. ↩
- We haven’t written much about illegal immigration other than to note that as nearly residual claimants, they were most hurt by the collapse of the housing construction industry in the South and Southwest. ↩
- We prefer to let Mr. Casey deal with issues that seem to be within his capacity, like the brand of potato chips sold at the Capitol. ↩
Were There a Lot of Bank Stock Splits Today?
Geez, we’ve been so busy with our web design business that we turned our head only slightly away from the market to digitize our good taste (for the benefit of others, of course) and watch a bit of the inauguration. The next thing we know the large banks seem to be worth about half of what they were last week.
Did they collectively decide on simultaneous stock splits today?
It sure seems that way.
Other than the inauguration, which can’t be viewed as anything worse than neutral news and wasn’t really a surprise for anyone except the most-recently-awakened-long-term-comatose, there really wasn’t much news today. Was there? Did we miss something? We didn’t think so.
Back in September and October, when we were less of a diversified conglomerate, we wrote much about the senseless and counterproductive governmental flailings as our leaders panicked and hyperventilated.
If the best laid plans of mice and men often go awry, then we must ask: what chance did/does TARP have when our leaders couldn’t muster the foresight of a hibernating rodent. No, seriously, they couldn’t (and didn’t) think a few months ahead.
For readers new to the site, we encourage you to surf or search through our archives as we’ve spent much of the past four months writing about the crisis and proposing simple, feasible, alternative solutions. There’s far too many posts to link to, but here’s a brief synopsis: the mortgage débâcle, which was caused by poorly-designed incentives and lax risk management, showed many bank managements to be incompetent; that created a much larger and much more severe crisis-in-confidence – the liquidity crisis; and almost nothing the government has done has mitigated that justifiable lack-of-confidence. In fact, one could easily argue – and we have – that TARP has exacerbated the problem.
What caused today’s losses?
Mostly likely, a long, winter weekend and only a few football games to divert attention, and – perhaps, just perhaps – a chance for at least a few market participants to mull over last week’s news.
You see, last week the news hit that Bank of America faced bigger losses than were previously known at its new subsidiary, Merrill Lynch. Last week the focus was on the very largest banks – Bank of America and Citigroup – and the personalities, the intrigue, the stories, etc.
Perhaps – just perhaps – last weekend folks realized that if despite B of A’s best efforts at “due diligence” when buying Merrill, it still didn’t know the extent of Merrill’s losses, then there is a good chance that less-scrutinized banks don’t have a handle on their own losses, either. That makes sense to us because in our view neither the Treasury, the Fed, nor their love child, TARP, have done much to thaw “frozen” markets. Of course, they are frozen because would-be participants lack sufficient cash or sufficient confidence in their own valuation methods and models to gamble on a purchase.
Let’s hope – no, let’s pray – that Mr. Obama and his advisers can stave-off their panic attacks to think and consider and deliberate upon solutions beyond (1) throwing good money after bad and (2) subsidizing and rewarding incompetence on a scale rarely scene since the Carter administration.
For our friends in banking, especially those who we privately advised in October, we certainly hope that you took our advice to sell as soon as the third quarter blackout period ended. If not, still consider it despite the very low prices.
As we wrote in early December, we see no end to the volatility and losses. Unfortunately, we’ve not been wrong.
Good Luck, Mr. Obama!
May God bless you, watch over you, and help you to take the right actions for the nation and its current and future citizens: born and unborn.
Agility, Grace, Roethlisberger and Bush
Agile, but not graceful: Roethlisberger
We’ve often remarked to acquaintances that we believe Ben Roethlisberger is underestimated by his opponents because he possesses a rather rare, almost incongruent, combination of characteristics: he is quite agile, but not very graceful.
Usually, if one is agile one also graceful, and vice versa. Mr. Roethlisberger seems to be an exception.
He is often very elusive in the backfield, but to our eyes, he is rarely smooth or fluid. His movement seems non-differentiable – like jagged angles or like Brownian motion, not beautiful, sweeping, artistic strokes and actions like, say, old-time Steeler Lynn Swann.
Now, Mr. Roethlisberger is clearly a tremendous athlete, and he is both tough and determined – besides being quite large. Obviously, given his success it should be much harder for opponents to maintain their bias, but we do think he has benefited from the misleading appearance of awkwardness on the football field. (And it is only on the football field. His statements and charitable actions off the field show him to be quite gracious.)
We wish him well in the Super Bowl.
Gracious, but not agile: Bush
George W. not Reggie.
On his last day in office, we’d be remiss not to mention that George Bush seems to possess the complementary characteristics: grace without agility, but here we don’t mean physical gracefulness; we mean his demeanor of graciousness but his lack of verbal agility.
We ask: has there ever been a major public figure, who has been on the receiving end of more vitriol and criticism for a longer period of time but who has been more reserved and polite with his critics than Mr. Bush? We can’t think of anyone that comes anywhere close.
We must admit that we’re not the first to make that point, and we do believe that he should be commended for that trait.
Unfortunately, his lack of verbal agility has been detrimental to his cause(s), and has obscured his graciousness.
While we completely disagree with Mr. Bush’s handling of the liquidity crisis among other policies, we know that he in no Chance, no Chauncey Gardner (from that great 1979 movie, Being There). Chance was gracious with absolutely no mental ability.
Mr. Bush is not lacking in mental ability, only in a certain verbal sparring agility and that may deficiency may only be in his public discourse. Unfortunately, his lack of agility made him seem clumsy and stiff, and that illusion was very detrimental to his cause.
Still, we wish him well in his retirement.
The Pittsburgh Diaspora
There is an excellent essay in the weekend edition of The Wall Street Journal, Sports Mania Is a Poor Substitute for Economic Success. In it, Jerry Bowyer discusses the failure of city government planning – with plenty of federal assistance – to revitalize rust belt cities. His focus is on Pittsburgh, Philadelphia, and Baltimore, which represent three of the four finalist cities in this weekend’s NFL playoffs, but he could have been talking about many other cities with less successful football teams, including Cleveland, Buffalo, Detroit, etc.
Rather than writing about recent revitalization attempts, Mr. Bowyer could have written about failed initiatives dating back to at least to the sixties, if not earlier. We have in mind the concrete monstrosities (buildings) that only a government, communists, or Satan could love, and attempts to turn inner-city shopping districts into pedestrian malls like East Liberty – S’liberty to yinzers – or Allegheny Center on Pittsburgh’s North Side.
We’ve briefly mentioned our observations about Pittsburgh in these posts: Patience Please! They Just Need More Time! that explains the prevalence of Steeler fans at away games and Concentration Risk and Correlation, which we subtitled “Or how banking in ‘08 in Charlotte might be like steel in Pittsburgh in ‘72.” (’72 was about 600,000 county residents ago.)
At some point, we’ll probably write a longer essay about the economic destruction wrought by one-party rule and the cumulative, deleterious effects of arbitrarily-enforced local regulations, but unlike many of the local inhabits, there is no reason to dwell upon the past. There are plenty current examples to cite, including Pittsburgh’s new subway extension, as well as Mr. Bowyer’s mention that the city school district spends an average of $18,000 per student for, well, not much.
The subway extension to the North Side has an estimated cost of about $552, 800,000. We guess that walking slowly, it takes about fifteen minutes to cover the distance; so, there will be no time savings. The only things that will be saved are the things that are in most need of expenditure: calories.
For years, the city had a half-finished bridge to the North Side nicknamed “The Bridge to Nowhere.” Soon, it will have a subway to the same nowhere. Well, actually it’s not nowhere, it is to the same stadia that Mr. Bowyers mentions in his article.
We wonder: when the other Rooney brothers recently sold their share of the Steelers to their brother, Dan, did they repay the local and state citizenry for the approximately $300,000,000 stadium courtesy of our tax dollars?
Yes, it is a silly question.
Weekend at Bernanke’s
We think the current government and industry strategy of attempting to prop-up the dead as a way to re-energize the party and stay alive (or relevant) is bound to fail. In reminds us of the plot from the 1989 comedy, Weekend at Bernie’s. Is TARP II nothing more than a remake of the 1993 sequel?
We read in The Wall Street Journal today that Bank of America to Get Billions in U.S. Aid, and as usual we wonder whether it is necessary.
We doubted the necessity of TARP the first time our money was wasted, and continue to do so now. Well, we did more than doubt the necessity, we predicted that the government’s plan – and, again, plan is too strong, too “organized,” of a word to describe the sequence of actions – would exacerbate and elongate the crisis.
And three months later…well, here we are. The weather is colder, but little else has changed – much as we predicted.
According to today’s article, last month Mr. Paulson, in another – and hopefully final – fit of panic, promised our tax dollars to B of A to complete its merger with Merrill Lynch. Perhaps, we should say “to survive its merger with Merrill Lynch,” because surprise, surprise, the article mentions that Merrill lost even more than it had previously guessed.
Now the regular reader may ask: why do we continue to criticize this corporate welfare and crony-capitalism? For all of the same reasons we’ve used in the past, but also with a new one, too.
Despite the continuing volatility and losses – as we write, the DJIA is near 8,000, again – the financial world is a different place today than it was a mere three months ago. Either out of sheer panic or self-preservation, many organizations have reigned in their trading operations and have attempted to limit or eliminate their counter-party credit risk. (Uh, that’s the nature of a liquidity crisis, which we’ve joked is the psychological projection of financial statements; see the top two posts.)
So, we doubt that the demise of Merrill in late December or the demise of other firms today would have been as “harmful” as the demise of Lehman, AND we seriously doubt that the demise of Lehman was as harmful as our panicky policy-makers and corporate propagandists and blame-shifters would like to have others believe.
For example, in another article in today’s paper, Deutsche Bank Warns of Loss, Blaming Its Trading Misfires, it is mentioned three times that Lehman was the cause of much of Deutsche’s troubles. (That thrice-repetition reminds us of ancient Greek literature and Bible passages. As we’ve been told by both educators and priest, when you see it in threes, then you should know that it must be important! Ha!)
We’re sure that Lehman’s demise caused substantial pain to many firms and individuals. But all the pain? No, much of that pain should be attributed to lax controls, including poorly designed incentive schemes, and lax risk management. We view much of the blame currently put upon Lehman to be a school of red herrings (either of the top two definitions will suffice).
However, we’ll use those convenient excuses to turn the argument against the call for further bailouts. If Lehman’s demise – whether alone or in concert with other events – did cause markets to seize and did cause many organizations to begin to avoid risk and limit the extension of credit, then it would seem that the failure of another large firm would have less impact today than in September. So, what’s the harm.
Of course, as we written about on numerous occasions, despite our near Libertarian stance on economic issues, we’d prefer to see the government nationalize the worst offenders as a way to motivate the remaining firms to rationalize their operations: wipe-out existing shareholders, except non-executive employees; fire the boards and senior managers; take 100% ownership; and resell it as soon as possible.
Also, we’d still like to see changes in tax policy to motivate the exchange of the mountains of currently illiquid and devalued mortgage securities: either residential mortgage investment tax credits or the immediate write-off of the purchase price would suffice to provide purchasers with a cushion against overly-optimistic valuations. (You might as well include commercial mortgage-backed securities, too.)
As we wrote in early October, the government’s solution will extend the crisis because no one knows how to value those securities, and by the government’s own admission, that hasn’t changed.
We think that combination of motivating the sellers with sticks and the buyers with carrots, so-to-speak, would work.
Our Middle-class Morality
We chuckled when we saw this headline in The Wall Street Journal today, January 15: Fed Officials Say Ailing Banks Require More U.S. Funds.
That’s not really news, and – by the way – it’s tautological or true by definition. (Uh, otherwise, they wouldn’t be ailing now would they, precious.)
Anyway, our point is always the same – we’re consistent that way. Just because they need the money, doesn’t mean that they deserve the money nor does it mean that they’ll spend it wisely.
In that way, they’re not much different the the homeless alcoholics who beg for drinking money on the Roberto Clemente bridge in the city of Pittsburgh, and presumably – this is just a wild hunch – in other cities around the country, too.
Now, we know that some drug addicts get monthly Social Security checks from the federal government because their drug addiction technically – or, at least, bureaucratically – disables them, but we don’t think that usage is wise governmental policy, either. Maybe it’s just our narrow way of thinking, but such policies not only subsidize but also seem to condone such undesirable, anti-social behavior, and we, as a society, end-up with more of the dysnfunctionality that we should be trying to eliminate.
The only compeling argument that we’ve ever heard for such subsidization was presented by the aptly named, Alfie Doolittle, Eliza’s father, in My Fair Lady. His was a strictly utilitarian argument. Mr. Doolittle didn’t really deserve the £5 he was asking for (her). In his own words, he was undeserving and planned to continue to be undeserving, but he’d certainly enjoy spending it on a spree for he and his missus; so, in that sense, the payment would be used to maximize societal welfare and create jobs for those serving him.
We don’t see the validity of that argument in the government’s response to the current financial crisis, and it seems that many other members of the middle-class feel the same way.
By the way, in an article yesterday, U.S. Seeks Rest of Bailout Cash, the reporters Deborah Solomon and Damian Paletta wrote: “Congress rejected Treasury Secretary Henry Paulson’s initial request, sending markets tumbling. A second version of the law passed several days later, allowing Treasury immediate access to $350 billion.”
Perhaps those two slept through the wealth destruction that followed passage of TARP, as they make no mention of that drop in equity values. The DJIA was at 10,831 on September 30; so, talk about rewriting history! More precisely, talk about an extremely weak argument to waste more of our money!
Perhaps if the ailing banks and their regulators were a bit more straightforward and bit more like Alfie Doolittle, we’d personally be a bit more sympathetic. Until then, we’ll point readers to our other posts, including the last few (What Is Citigroup Worth? and When Is Enough Enough?) and our entry from three months ago when we first called for the nationalization of the weakest banks as a lesson to the remaining healthy ones: It’s Time!
So, we conclude by asking rhetorically: why subsidize irresponsible, anti-social behavior, regardless of the recipients’ hygiene, connections, or cronies, especially when – unlike Alfie – it and they are not the least bit amusing?
What Is Citigroup Worth?
The Wall Street Journal has an editorial in today’s paper – January 14 – that seems to be ripped from our headlines: it calls for the dismemberment of Citigroup, and it implies that Citi has lost its right to exist. (See When Is Enough Enough?, for example, or any of our calls to nationalize it.)
As we’ve seen in various news reports, Citigroup has lost about $30,000,000,000 or so in the last five quarters and has received about $45,000,000,000 in TARP funds, and the federal government has guaranteed another $250,000,000,000 or so of its debts.
And yet, and yet, Citigroup’s stock price is about $5, which gives it a market value, according to Google Finance of about $32 billion. That’s less than 10% of its share price two years ago and about 20% of its share price this time last year.
As a point of comparison, if the federal government gave us $45 billion, we would be worth $45 billion. (Well, almost $45 billion, but a lot closer to $45 billion than $32 billion. And, yes, we know there is a difference between the government’s preferred investment and market value of the common shares.)
Hmmm, without bothering to check the tax implications, let’s gross-up the loss of about $30,000,000,000 to the $45 billion. That means that the government has subsidized all of the recognized losses to date.
So, despite the guarantee of debt, which could be valued the same way that banks estimate values of their insured deposits, and despite the additional deposit insurance coverage, etc., society and the world economy think that Citigroup isn’t worth a whole lot.1
Diligent, and younger readers with good memories, may recall that as far back as September we separated the mortgage fiasco from the larger, and far more serious, liquidity crisis in confidence. (Here’s an entry from early October: Even A Perfect Bailout Will Fail.)
We cite Citigroup as prima facie evidence of that distinction. Based upon equity values – despite the government’s massive injection of funds and its guarantees – we’d say that the mortgage fiasco has informed investors throughout this country and across the world that’s Citi’s management excels at value destruction, and that’s the consensus prospective estimation. That is, of course, unless investors estimate that recognized losses, which appear on financial statements, are only a fraction of Citigroup’s true losses so far.
This wouldn’t be the first time that Citigroup under-estimated its losses. As the Journal editorial notes, in October, 2007, Citi officials claimed that it had only “$70 million in indirect exposure to subprime assets.” Now, how many orders of magnitude is that from the truth? So whether clueless or duplicitous, “why trust them?” the market seems to be saying.
In this case, it seems hard to argue with that logic.
By the way, the front page headline of today’s paper is “Citigroup Ready to Shrink Itself by a Third.” We wondered – in jest – why the second line didn’t read, “In Small Attempt to Align Assets with Equity Values.”
Like always, we may edit this post in the future, in case our early-morning, frostbitten fingers have erred.
Copyright © 2009 Spero Consulting.
Footnote:
- Banks believe that liabilities have value if they fund operations less expensively than alternative sources. In non-volatile times, banks discount – in a present value sense – the difference between their interest cost of deposits with guarantees (and service) and their cost without those guarantees – of borrowing on the open market – and that difference is the “value” of the deposits. Normally, they use the LIBOR as their discount rates. Lower long-term rates and flatter yield curves make those deposits less valuable, but using LIBOR for long-term borrowing for Citi just doesn’t seem correct to us, i.e., given that it must rely on government funding, Citi’s rates should be substantially higher. By the way, the difference isn’t due to just guarantees, but customer behavior, too. For example, ignoring the cost to service the accounts, customers who keep money for long periods of time in checking accounts that pay no interest are deemed to have value. ↩
When Is Enough Enough?
Last Monday, The Wall Street Journal published a small survey of mostly academic economists in Experts’ Rx on How to Get Out of This Mess. (Perhaps “academic economist” is redundant.)
We couldn’t tell whether a few of the replies were poorly edited or were inherently trite, e.g., to paraphrase we need long-term solutions, new risk measures, and the ability to separate the good and bad firms. You don’t say!
Anyway, we did like Douglas Diamond’s response: “You have lots of carrots and no sticks right now.”
The reporter, Justin Lahart, must have paraphrased the rest of Mr. Diamond’s reply because there were no other quotation marks. He wrote: “One alternative would be legislative changes that would allow regulators to quickly wipe out existing shareholders at problem banks without invoking bankruptcy, and convert long-term debt issued after the legislation went into effect to equity. That would effectively recapitalize the bank without the need for government money. And it would give big incentives to investors to buy banks’ debt, and to banks to raise capital in order to keep their shareholders from being wiped out.”
Now, we’re noting his remark a week after that article was published because, today, we saw on the same web site that it’s estimated that Citi lost another $10,000,000,000 in the fourth quarter of 2008. That means that it’s lost about $30,000,000,000 since Halloween, 2007, and that seems like a lot of money to us. We haven’t bothered to check it, but that $30 billion would be after-tax, which means gross losses were even larger.
Of course, Citi was one of the firms that “rescued” by the government, and of that much has been written about that by many people, including at our site.
Sadly, today we also saw Mr. Bush request the “other” $350,000,000,000. (When the Feds decide to urinate our tax dollars away they do it on a scale rarely seen outside of Niagara Falls.)
These recent losses and the government’s willingness to subsidize make us ask: when is enough, enough?
To be clear with our readers, we don’t do this out of vengeance or spite or envy nor, unfortunately, even a sense of amusement. In fact, we write in the spirit of the following excerpt from Leviticus 19:17 — 18, which we saw in our Magnificat last week:
You shall not bear hatred for your brother in your heart. Though you may have to reprove your fellow man, do not incur sin because of him.
Take no revenge and cherish no grudge against your fellow countrymen. You shall love your neighbor as yourself. I am the LORD.
In that spirit, and consistent with Mr. Diamond’s recommendation, we ask, when do we get to see the official reproof? When do these folks lose their right to control assets, and when do these corporations – legal entities – forfeit their existence and charters?
If you’re familiar with our writings, then you know that we think they are far past that point of no return for many corporations. Exactly how less trustworthy must they become before the government intervenes per ours or Mr. Diamond’s recommendations?
