Spero Consulting

Archive for January, 2009

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.

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.

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.

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 27^th) 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.

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:

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.

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.)

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:

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.

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.

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.

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.

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.

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?

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:

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?