Friday, October 31, 2008


“Government likely has a role to play in supporting mortgage securitization, at least during periods of high financial stress,” said Federal Reserve Chairman Bernanke on Friday to a symposium on the mortgage crisis and the economy at the University of California, Berkeley. Glad you noticed, Ben. Think Henry shares your feeling? Ben even mentioned some possible directions, like federal insurance for bonds used to back mortgages. Keep thinking, Ben, ‘cause I’m sure that, in time, you and that Treasury guy might figure all this out. Glad this little issue finally crossed your radar screen; kind of thought you might have missed it.

The folks at JP Morgan Chase seem to have got the picture… even as the feds just muse about the alternatives. They actually heard the cries of angry consumers, more than you can say for our elected and appointed representatives. According to an Associated Press report on Friday: “JP Morgan 's expanded program aims to help avoid foreclosures on an estimated $70 billion in loans, which could help as many as 400,000 customers. The New York-based banking giant has already modified about $40 billion in mortgages, helping 250,000 customers since early 2007… JPMorgan will not put any loans into foreclosure as it implements the expanded program over the next 90 days.”

What’s so stunning is that this restructuring comes from a big boy financial institution, operating in a period of falling values, consumer prices and increasing joblessness – a period of possible prolonged “deflation” where positive growth of any kind becomes difficult – without the possibility of “syndicating” loan packages (sharing the risk) with other banks, because banks don’t trust each other enough to lend to each other. I’ve trashed a few financial institutions in the past, but this time, I’ve got to give some serious kudos to the men and women of JP Morgan Chase. That took guts.

Some people who aren’t homeowners are wondering why this matters to them; they are angry that some folks might get federal help while others do not. Maybe it’s easier to think of this mortgage crisis as a tornado that touched down and took out a bunch of your neighbors’ homes – looking like a random assault from an aerial map. If your neighbors’ homes remain unfixed, even if you are a renter, you won’t like living in that neighborhood very long. Values will crash, and the very character of the neighborhood will change for the worse. And let’s face it, some of those neighbors’ homes may just have to be cleared for new parkland… not everybody deserves to be bailed out (not to mention that there should be a way for the taxpayers to get paid back too).

The shame of all this is that a big old bank has come up with answers, when our government can’t seem to get out of its own way to begin the fix. JP Morgan’s already implementing a solution while the government’s still playing with “possibles.” Please send the moving trucks to Washington at little earlier than January… I’ve got this list of people in D.C. that need to be moved out right now!

I’m Peter Dekom, and I approve this message.

Pushing String

How will Americans cope with a world where borrowing, even after the credit crunch de-crunches, has a whole new set of rules? Household debt sits at around $13.8 trillion! The people have actually borrowed more than their government, and as I have said in a recent blog, U.S. households have borrowed 139% of their disposable income.

Big investment banks, allowed under that infamous April 28, 2004 SEC ruling I have written so much about to borrow well above the 12 to 1 debt to equity ratios imposed on the smaller financial institutions (Lehman Bros. and Bear Stearns died at somewhere between 32-22 to 1), now have to de-leverage (reduce their debt). This is especially true for companies like Morgan Stanley and Goldman Sachs that have voluntarily elected to become commercial banks, where the debt-to-equity ratios remain at that 12 to 1 level. Guess where they are getting some of the money they need to pay off that debt (and create enough balance sheet solidity to handle any crises that may fall in the coming months)? Yeah, that hoarding thing again.

Besides the fact that the “home equity” is just a house, and in spite of the fact that losing a job (or the prospect of losing a job or getting less overtime, etc.) puts a damper on spending, exactly how are Americans going to cope with a world that has moved one giant step towards “pay-as-you-go” versus “go-now-and-pay-later”? Credit card limits and restrictions, discussed in earlier blogs, make borrowing for consumer goods much more difficult. Car purchases have all but ceased. Restaurants are experiencing severe drops in customers, and travel is something that seems to be relegated to necessity, business or a “virtual” trip on a computer or on television.

Empty stores and restaurants don't make Christmas look bright. We spent $460.2 billion last year in the 2007 holiday season, but don't expect anything but down this year. If you are looking for bargains – except for Japanese electronics (sorry, even with the Japanese stock market down, the yen is even stronger than the dollar) – boy is this going to be a great shopping season! And escapist movies – forget the serious stuff – are doing gangbusters at the box office.

Bit by bit, we will rebuild this economy. For all those who missed the Great Depression (almost all of us), the Great Recession (2008-????) will be the life lesson that generations of Americans will carry with them into the future. This is not a short-term fix which changes because we have a new President and a reconfigured Congress.

The key for the next administration is to recognize that government spending falls into three general categories: 1. Stuff we can't stop or limit, like paying our national debt or keeping us safe from criminals and our enemies, 2. stuff that really brings us no or very limited value (like the Iraq War, ethanol subsidies and pure pork), and 3. investments in our future growth (such as infrastructure development and repair, energy research, education and health care). The second category is where a President and the Congress have to cut the most, and the third category, despite rising deficits (don't worry about that!), is actually how we invest and fund our recovery and our future. Simple plan on a vicious political battleground. We will be back… but it will take years… Sometimes, it just feels like we're pushing string.

I’m Peter Dekom, and I approve this message.

And We Thought the “Me” Generation Died in the 1970s?

There are lots of words for it – rainmaker, master of the universe, senior managing director – and we even have polite words for making money by feeding on failure and misery – turnaround specialist, reorganization expert, distressed properties specialist. Strange thing is that at some level, we need this senior level financial expertise to make American business work. The anachronism, as today’s points out, is the underlying compensation system in our financial institutions, not the services we need to continue.

The problem is that the “Street” encourages “deal flow,” almost at any expense and exorbitantly over-compensates the originating dealmaker (sometimes the deal-making team). Congress is looking at pay levels for CEOs and maybe the top ten most highly-paid executives in publicly-traded companies that have been and will continuing feeding at the Federal trough; it is struggling with Wall Street bonus pools, even in recessionary times, that can fund the governmental budgets of small nations. Sometimes the seven and eight figure pay levels can extend way beyond the “top 10” in any one company. When one person can get an eight or nine-figure payout from “deal flow” alone, something is terribly wrong.

Today’s put it this way: “The practice of giving outsize rewards to big-time risk-takers based mainly on their results in a given year is one of the main reasons we have a financial sector that's too big and too self-serving. As financial firms become more and more focused on maximizing compensation for employees, they get more and more distracted from their basic reason for existing: managing society's wealth and directing it to productive purposes.”

The solution isn’t so easy. If you significantly reduce these deal-related mega-bonuses by taxation or fiat, the smart traders and rainmakers simply will move to a jurisdiction where such caps do not exist. You can try and regulate them when they deal in U.S.-based assets, but these loophole experts can easily navigate around that barrier. As damage mounts from the derivative asset meltdown and the crass manufacturing of toxic securities that have sucked the life-blood out of many middle-class American dreams, it is very clear that the federal government, whether dealing with industries that require federal licenses or simply applying the “commerce” clause of the Constitution, has the power to regulate this compensation trend and limit if not stop the madness.

This becomes an even bigger problem as we allow, even encourage, huge financial institutions to swallow smaller, under-performing structures, amplifying their long term power and reducing free market competition – literally giving single companies the ability to create macro-economic impacts on global markets by themselves. With that increase in size and power, there needs to be a concomitant increase in oversight, regulation and responsibility.

The problem is that the United States cannot accomplish this task without the full cooperation of those nations who also operate global financial centers – but I would suspect that there is a global appetite for change. The upcoming November “Group of 20” economic summit, hosted by the United States, is an excellent forum to begin solving this issue. The list of attendees is impressive: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, Britain, the United States and the European Union.

The underlying issue, however, is whether financial institutions can literally afford to anger entire nations, inflict catastrophic financial damage on the global markets, and continue to reward individual deal effort at the expense of everything else.

I’m Peter Dekom, and I hope someone is listening.

Thursday, October 30, 2008

The Other Liquidity Crisis - Even Scarier than Halloween

Beer sales are up, and bars seem to be one segment of the economy that’s doing well; plenty of gasoline at even cheaper prices; we know there’s no grassroots lending money, but Dekom has blogged that one to death… hmmm? Liquidity? Give us a hint. OK, that little map up there seems to give it all away.

From Los Angeles’ CBS radio affiliate (KNX), October 30, 2008: “The [California] Department of Water Resources announced it will deliver just 15 percent of the amount that local water agencies throughout California request every year. That marks the second lowest projection since the first State Water Project deliveries were made in 1962… Farmers in the Central Valley say they'll be forced to fallow fields, while cities from the San Francisco Bay area to San Diego might have to impose mandatory water rationing.”

When a surveyor plotted the precise border between Tennessee and Georgia back 1818, he seems to have missed the Tennessee River (in Tennessee, of course) by a mile. They call it a “flawed survey,” but it didn’t seem to matter until Atlanta, in northern Georgia, began to run completely out of water. The Georgia State Legislature has often tried to fix this anomaly by legislative force, but the border is the border. Northern Georgia didn’t get a break even as to its own local reservoir: a federal appellate court ruled in February of 2008 that the state could not withdraw as much water as it had planned to from the reservoir that supplies the city. Seems that to fill northern Georgia’s reservoirs and to keep a good chunk of Florida out of recent droughts, they need lots of nasty tropical depressions and hurricanes, stuff that tends to kill folks and destroy property on the coast.

The above map and this little summary come from the University of Nebraska, Center for Agricultural Meteorology and Climatology: “The Ogallala Aquifer underlies approximately 225,000 square miles in the Great Plains region, particularly in the High Plains of Texas, New Mexico, Oklahoma, Kansas, Colorado, and Nebraska.” In short, if your farm isn’t on the Mississippi or Missouri Rivers (or one of their tributaries), and you are a farmer near this giant underwater lake (once the size of Lake Huron of the Great Lakes), this aquifer is your lifeline. When they didn’t have pumps modern enough to pull enough water out of this aquifer – and excessive grazing blended with a drought – the great depression era Dust Bowl was the result. We’re pumping a lot now, and there has been some heavy rain in the region.

But water expert Marc Reisner (who wrote a great book about water and American policy: Cadillac Desert: The American West and Its Disappearing Water) still thinks there’s pretty good chance the Ogallala Aquifer could run basically dry in a quarter of a century (or less). Today, we grow a lot of subsidized corn in the area served by that aquifer – to burn as ethanol – that sucks this water out of the ground like almost no other grain!

So what else is around that could supply water to America’s heartland? Maybe the Great Lakes? They provide 20% percent of the world's fresh surface water and supply eight states and two Canadian provinces – home to roughly 40 million people. On October 3, the President signed into law (the “Great Lakes Compact”) a federal statute that bans virtually any attempt to divert water from the Great Lakes to any outside region. Hmmm? We’ll just have to get it somewhere else. The oceans – minus the salt?

Moving water uphill – a necessity given America’s topography – is a very expensive solution (read: a huge energy requirement – just think how heavy a bucket of water is – although you can pick up some electricity from the downhill flow). That means even with cheap desalinization (it isn’t yet; still takes lots of energy to covert salt water into fresh water), just getting water to where it needs to be is not cheap or easy.

As a part of America’s going-forward rebuild of her infrastructure and focus on alternative energy, we also need to prioritize maximizing our water resources, conservation and new methods for pulling potable water out of the oceans and even thin air (yes, the technology exists!). Because if you think that a gasoline shortage would hurt this country, just think what life would be like with a major water shortage!

I’m Peter Dekom, and I approve this message.

Exxon Shatters Its Own Profit Record

Linger with that thought a moment. How does that make you feel right now? It’s the headline in an Associated Press article this morning that described the third quarter earnings report of this largest of the publicly-traded oil companies. You can pretty much take this as an industry report. By the way, these earnings exceeded those of any other U.S. publicly-traded companies in any area. $14.83 billion in the third quarter; $11.68 billion in the second quarter. We can expect these numbers to decline since oil prices fell significantly in the fourth quarter, but oil companies are not suffering.

Let’s try another term – depletion allowance. This concept, very much a part of the United States Internal Revenue Code, addresses the notion that the more you extract minerals from the earth (including oil), the less such minerals are left to extract in the future, so you should be able to reduce your deemed taxable revenues by some number that reflects the reduction in future potential. Great concept when you put it that way. So effectively, big oil pays taxes on less than they actually earned, because they can deduct a percentage “depletion allowance” against their income.

I guess this sort of eliminates the notion that as minerals get scarce (from excessive drilling, extraction, etc.), as long as folks need ‘em, the price automatically goes up and adjusts for the reduction in available resources. Silly me, why would I think economics would have anything to do with subsidizing big oil? They are big campaign contributors; I just forgot. Sorry.

Let me put it yet another way that might make this tax deduction sound even “less” fair. When oil soars in price, shatters all records, makes more money than anyone believed possible, is there the slightest rationale for continuing to give big oil a break that they not only don't need but are probably even embarrassed about?! If you're going to give big oil (and other “big mineral” companies) a big fat deduction to cover their “expected bad times” in the future, shouldn't you at least have an off-setting “windfall profits” tax in exceptional times – when they blow their profit records off the charts – especially in particularly bad economic times when the government needs lots of money to feed a recovery plan?

Maybe in a future life, I can come back as an oil company. Meanwhile, I've got to get back to work so I can pay my share of taxes. At least I still have a job.

I’m Peter Dekom, and I approve this message.

Why Jolly Old England Isn't So Jolly

We understand why the Euro dropped in relationship to the dollar – lots of toxic Euro-based countries (like Iceland, Hungary and Belarus) pulled down the overall value of the currency well beyond the fall experienced in other markets – but why in the world would a country like England, which has had a strong pound sterling, fall against the decrepit U.S. dollar? After all, the U. K. didn't have a mortgage meltdown, was not party of emerging market fear-frenzy and didn't have a currency dragged down by being packaged with nations in deep trouble.

My personal belief is because they spoke “English” and lived in Europe . Sounds far-fetched? The British Empire , which once included us, spread its commercial power globally for more than a century. They were in Asia, Africa, Australian and North America in a huge way. English was and still is the language of commerce as any good corporate executive based in Hong Kong, Sydney , Singapore or India can tell you. Russians, Arabs and mega-wealthy magnates from "all over" maintained "flats" and offices in London.

When Wall Street banks decided to expand into Europe, they picked a legal system that looked just like the one we have in the States (common law allowing courts lots of flexibility to build judicial laws required for commerce versus, for example, civil law practiced in places like France, which is must more statute-oriented), a language they already spoke and labor laws that resembled American practices (you could actually fire people). Hey, England gave birth to America ! But daddy and mommy are in trouble?!

The truth is in the numbers, and thanks to this week’s Time Magazine (Global Business Section), we begin to learn why. Between 2001 and 2007, the U. K. almost doubled the gross domestic product generated from financial services (from 5.5% to 10.1% - add lawyers, accountants, etc. and that number rises to 14%). “About 70% of the international bonds, one-third of the world’s foreign exchange and almost half the volume of international equities are traded in London .”

So when the global markets fell, by definition, the British markets felt the pain in direct proportion to their participation in the global economy. They got killed. Banks dived in value, and on October 8th, the British government began bailing out banks (a few slipped through the net and died) and partially nationalized some pretty big financial institutions that would probably have melted without intervention: Royal Bank of Scotland , HBOS and Lloyds TSB. 4,500 people who worked in the London office of Lehman Bros. joined a mass exodus of overpaid executives from the financial sector.

And while the Brits weren't drinking toxic subprime mortgages, they weren't immune from the “good times borrowing” syndrome that plagued the U.S. “Buoyed by rising property prices, households ratcheted up their borrowing to a massive 173% of disposable income, vs. 106% in 1995.” Even profligate Americans only borrowed 139% of such income! U. K. jobs are disappearing (especially in London), property values are falling, the credit crunch is crunching… and well, I guess that’s why the British pound, which had been trading at more than double the value of the U.S. dollar, has dropped about 40+ cents.

We're not alone! The good news for anyone with any money left: there are bargains for European travel (fuel costs are down and airlines are desperate for customers), and you might be able to afford a bad hotel room and a cheap meal in London (or was that a bad meal and a cheap room?) again!

I'm Peter Dekom, and I approve this message.

The No Oink Solution

The Federal Reserve cut the internal bank lending rate by a further half percent. More fixes at the top. Yet, with 23% of American homes underwater (loans are higher than the equity), what is the government “thinking” about? After all, there’s very little “bailout” money left after the pigs are the top bellied up to the trough. Well more than a day late, and vastly more than a dollar short!

Here’s the “talk in Washington”: The FDIC and Treasury are considering a plan to apply a small portion of the bailout money – estimated to be on the order of magnitude of $50 billion – to encourage lenders to refinance existing mortgages with lower rates for at least five years. Under this plan, the lender and the government split potential losses equally in the event of a default, which the government believes could support as much as $500+ billion of loans. Hey, the fix needs to impact trillions of dollars of loans! Note the disparity between the amount of money being deployed to bailout millions of individual taxpayers versus a pretty small number of corporate biggies: ten to fifteen times more for the companies!

There may be better plans, but here's one (I’ve presented a shorter version before) that multiplies the value of federal bailout money well beyond the federal investment and out-sources vetting and implementation to the originating banks. For those hedge fund managers, in order to protect their toxic balance sheets, who plan on suing banks that readjust mortgages, might I recommend simple Justice Department investigation towards a possible massive prosecution under the federal Racketeer Influence and Corrupt Organizations Act.

Here goes:

1. Impose a 120 day moratorium on foreclosures, and a 60 day grace period (loan extension) for those in current default. Act of Congress.
2. Impose a cap on all mortgage interest rates (I recommend 6.5%) on U.S. based owner-occupied residential real estate. Act of Congress.
3. Congress should direct the Department of the Treasury (and the FDIC) to establish reasonable criteria ("Federal Standards") on what constitutes a creditworthy borrower and the basis of the appraised value of a home.
4. Congress would mandate that the bank or thrift originating the loan (including successors that bought these banks) be charged with dealing in good faith with residential owner-occupied real estate borrowers who meet the above Federal Standards. They would be required, as a condition of maintaining FDIC status, to make the requisite reevaluations, but of course, they can require applying homeowners to pay appraisal fees.
5. The meat of the new law I would suggest: On petition of a federally regulated bank or thrift, based on reasonable due diligence by that lender, Treasury and/or the FDIC would be required (perhaps to a cap to keep the mega-wealthy from benefiting) to pay the petitioning bank a sum equal to the amount that value of the home in question exceeded the loan against the property if the borrower and the property meet the above Federal Standards provided that: the homeowner accord the government a flat percentage of the gross selling price (whenever they sell with no time limits) reflective of that "underwater" contribution by the feds and that the homeowner would then continue to service the readjusted loan and occupy that house as the primary residence.

This keeps people who can afford the "carry" in their homes, reduces foreclosures (but clearly cannot eliminate foreclosures on property where there is no economic justification to subsidize a loan with a borrower who simply cannot pay a real mortgage), helps stabilize the housing marketplace (only bad credit borrowers would be defaulting), begins to restore consumer confidence (since most our economic perception is based on our jobs and our homes), gives taxpayers a real shot of getting their money back (maybe even a profit), does not create a massive federal bureaucracy to deal with millions of homes, does not reward the institutions who built their net worth on buying derivatives by bailing them out, and takes a smaller tranche of money - only enough to cover that part home loan that is underwater (not the whole loan) - which effectively supports the rest of the loan (a huge multiplier of value).

By addressing one huge grassroots problem, the rest of the markets can find that bottom that will trigger a recovery, albeit a long slow process that could take years. We want a stock market recover that is sustainable? The Dow reacts faster than any other indicator... but let's face it, the markets need to see a s ustainable path to react to.

I’m Peter Dekom, and I approve this message.

Tears in Their Coffee

‘Tis a sad day on Wall Street. For they have had to endure the pain of slorping at the federal bailout trough. How humiliating! Recovering from an insane April 28, 2004 SEC deregulation of the debt-to-equity ratios applied to the mega-investment banks that permitted all this insanity in the first place (a certain Goldman chairman named Henry was one of the supplicants), those poor decimated “remaining and surviving” big financial companies were forced to use the federal access to capital to shore up their balance sheets and to acquire weaker financial institutions or pick-up inexpensive "bolt-on" companies - even if that meant buying U.S. Treasuries with borrowed money and losing money on the interest differential.

They called it "de-leveraging" (now that Morgan Stanley and Goldman were banks, the rules on debt-to-equity were rational), creating "risk" reserves (somebody has to pay on those credit default swap calls) and/or "consolidation." What these large financial players didn't do is release money into the grassroots lending markets to shore up receivable financing and fund the underlying payrolls. They elected not to be “team players” as the government had hoped.

The sadness doesn’t stop there. Oh no! Their upcoming end-of-year bonuses – $20 billion many say – were under Congressional scrutiny. That could be devastating! And those poor “private equity” firms – the cash cows supported by large minimum investments only the super-rich could afford [a few have since gone public] that plied their trade of “leveraged buyouts,” “buy, fix and flip” strategies often predicated on massive “restructuring” (read: lots of layoffs)… well they clearly were suffering. Experts were predicting that bonuses and overall compensation in those Wall Street “private equity” companies would fall by as much as 75%. Woe is their plight. And they really did post huge losses. Citing the 2009 Private Equity Compensation Report by Glocap Search LLC and Thomson Reuters, noted Kohlberg Kravis Roberts & Co. posted a loss of $1.1, Blackstone Group LP posted a net loss of $156.5 million, etc.

Bonus cuts? The facts seem to have proved otherwise. According to today’s “The average salary not including bonus for senior associates at large buyouts is now $435,000, a 4% increase over their 2007 levels. (Don't be misled by the "senior" in senior associate; these are first year M.B.A.s...) At the principal level, large buyout funds pay an average salary (not including bonus) of $885,000, also a 4% increase from last year. Bonuses for principals at these funds rose 6% to an average of $607,000…

“But here they are, reporting increases of 6% to the average bonus?... [How is that possible? The] driving force behind the increases in compensation is [these private equity firm’s] growing asset base. Yes, deal volume has slowed considerably, but 2008 has been a relatively strong year for fundraising. When combined with 2007, which set a record for capital inflows, private equity funds continued to have the resources to maintain compensation levels and in many cases increase them, according to Glocap. This jibes with what Blackstone reported in their last quarterly: [Assets under management] of $119.4 billion, up 30% from a year ago.”

The funds indicated that pay scales and bonuses might not be so rosy next year. Tissue futures must be up. I am so sad.

I’m Peter Dekom, and I approve this message.

Circular Reasoning - Helping Default Rates Rise

We've moved passed greed as the major motivator on Wall Street (trust me, it will be back, unchecked as ever), into basic fear. Trying to picture that the Michael Douglas character in Wall Street, if you remember that film – who touted greed – saying, “Fear, for lack of a better word, is good.” Just doesn't seem to fit the character. Hoarding capital and not lending it, investing in Treasuries producing an effective “negative interest rate” (you pay more to borrow than the interest you receive on the investment you make with the borrowing) – fear at its jolly best.

But it is near Halloween, and scary stuff is in vogue. So here’s another fun fact. As the market explores the depth and damage of the loan default insurance market (the lovely credit default swaps I've detailed in earlier blogs), the criteria for corporate borrowing just added one more variable. In addition to routine reviews of the company’s credit rating (which produces a formulaic interest rate based on the U.S. prime rate or the European equivalent – LIBOR), major lenders have added the cost and pricing of credit default swap (CDS) paper on the prospective borrower.

Today’s Washington Post’s Dealscape noted: “Tying the [credit] lines to swaps could leave corporate borrowers in the lurch since the derivatives are often used by speculators to bet on a default by those who don't actually hold the company's debt and aren't listed on any government-regulated exchanges.” So the non-kindness of strangers, trading your risk profile in unregulated derivatives (CDS paper), could cause your corporate interest rates to rise high enough to trigger the very default that the CDS paper is supposed to insure against.

Sounds really stupid until you realize that, according to Bloomberg, “Citigroup Inc., Credit Suisse Group AG and other banks are starting to shift away from basing the rates of $6 trillion in revolving loans solely on a combination of the borrower's debt rating and a mark-up to LIBOR.” And this has actually happened to food-processor Nestle SA, cellphone maker Nokia Oyj, and electrical power-generating FirstEnergy Corp.

I can see sympathy lacking in this issue. No tears. So let me add one more variable to the mix. Those credit lines fund payrolls! They keep people in jobs, who pay mortgages, and buy “stuff.” So the circle is indeed vicious.

Fear on Wall Street also arises as Congress drills down on this $20 billion set aside for Street traders and bankers – year-end bonuses the companies claim are essential to retain the best and the brightest (who caused this mess?) – in light of the taxpayers’ sacrifices in the bailout plan. Some Congressmen want to expand the coverage of salary reductions to the top ten highest compensated folks in any company (but in large investment banks, there could be hundreds receiving significant seven figure and even eight figure bonuses!).

I'll end this tirade with a letter from Henry Waxman, Chairman of the House Oversight Committee:

"While I understand the need to pay the salaries of employees, I question the appropriateness of depleting the capital that taxpayers just injected into the banks through the payment of billions of dollars in bonuses. Some experts have suggested that a significant percentage of this compensation could come in year-end bonuses and that the size of the bonuses will be significantly enhanced as a result of the infusion of taxpayer funds."

He’s Henry Waxman, and I approve his message.

“Dominoes” is Not a Pizza

People used their home equity in lieu of a savings, until their equity was worth less than their home loan… and these were not even the subprime miscreant-borrowers who couldn't afford to buy a house in the first place. HELOCs (home equity lines of credit). But at least they had jobs to pay the loans that kept them in their houses… until the layoffs. Big companies too, not just the neighborhood retailers – Yahoo, the car manufacturers, financial services, GE, and the list just kept growing.

No credit? Can't borrow on your house (or pretty much on anything) or your stock portfolio? Don't worry, the Department of the Treasury is bailing out the big boys on top – the ones with $20 billion socked away for annual “end-of-year” bonuses – and in four to six months, that money will arrive to the rest of us (so they promise). Hey, the stock market just rose 11%, so things are great! The “scare” is over. We'll just sit back and watch the Dow go back to above 14,000… any time now… OK, the markets opened a little down this morning; that will pass. Is that the Easter Bunny over there? Meantime, if I need a couple of bucks, there're always my credit cards.

I've mentioned this “next shoe” before, but here are the numbers. Today’s New York Times: “Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.”

Credit card limits are dropping, folks are having their credit cards pulled and the standards for getting and even keeping credit cards have risen substantially. Some are even getting notices that they have exceeded the credit card limit, full and immediate payment is required… except when they reached their limit, they were well below what the company had told them the limit was. It seems the limits were reduced (the “fine print”) retroactively, putting credit card customers “retroactively” in a default situation. And know that if your credit card limits or credit lines change for any one item, odds are pretty good that you will be reduced across the board. In a time when the Federal Reserve is cutting rates for the banks, credit card companies are raising consumer interest rates to cover the higher market risks and defaults.

So foreclosures come from job losses which create credit card defaults which tank the big financial players who issued the credit behind the credit cards. But the Treasury and the federal government, who love to talk about helping the consumer and the homeowner, have the situation very much under control. They're focused only on the “big financial players who issued the credit behind the credit cards” part of the problem and are hoping the rest of the issues just go away.

The Treasury can't even provide bailout money to most small banks that actually service small businesses and consumers, because these lenders aren't publicly traded (6,000 out of 8,500 banks in the U.S. ) – they're working on fixing that “glitch.” Where is that damned Easter Bunny when you need her?! Wanna buy a pile of credit default swaps I got on eBay?

I’m Peter Dekom, and I approve this message.

Wednesday, October 29, 2008

The Switch on the Wall

Consumer spending accounts for about 70% of the economic activity in the United States . There’s a Conference Board that measures consumer confidence, and this analysis, along with a host of other factors, is an economic indicator of the immediate future. The consumer confidence index reported today fell to 38 (from a revised 61.4 in September and well below analysts' expectations of 52). An Associated Press article today put this measurement in perspective: “The 23.4-point drop in the consumer confidence index from September to October is the steepest since it fell 36.9 points from October 1973 to December 1973, when the economy was in the throes of a severe recession.”

If you deal with consumers or companies that deal with consumers, this is bad news, but no surprise. Retail is turning tail. What is a surprise is the chorus of Congressional voices calling for an infusion of spending cash – in the form of a “tax rebate” (the failed $600/$1200 rebate concept we saw in February of this year) – to give consumers money to spend. The theory goes that if they have money, consumers will immediately go out, in a patriotic moment, and spend that rebate on stuff, maybe Christmas gift-stuff. Then we will stimulate the economy, and things will look up.

But it’s like assuming that the light switch on the wall is connected to the light that you want to turn on. What if that switch actually went somewhere else, and if you wanted to turn the ceiling light on, you'd actually have to go to the real switch on the other side of the room. Trust me, if you are worried about losing your job or your home, the last thing you'd do is buy stuff unless you want to go out in a blaze of spending glory before you file for bankruptcy or just plain don't need the money. Putting a band aid on a piece of skin near the wound but not on it… well you get it.

Until there is a moratorium on mortgages, a reasonable ceiling on mortgage interest, a serious reevaluation of the existing homeowners’ viability to sustain the homes they live in and a targeted federal intervention to help those who actually might be able to stay in their homes and carry a reasonable mortgage… until we shore up payrolls (and business credit liquidity) and incentivize new job creation… we're flicking the wrong light switch and throwing taxpayers’ money into a bottomless pit of bad ideas.

There’s enough help at the top of the economic food chain… and an expected Federal Reserve cut tomorrow in the discount rate (the rate accorded to banks by the government) still does not solve the immediate problems, since very, very few of us can even borrow money at any interest rate, even with the best collateral, because there is no loan money, no job certainty, no leveling off in housing price declines down here where most of us live.

I’m Peter Dekom, and I approve this message.

Tuesday, October 28, 2008

Dangerous Words

I've said it before, but it is worth saying again. It seems, with rhetoric heating up on both sides of this election (and I'll admit that there are probably vastly more than two sides), defaulting to a label instead of addressing the real issues is the sign of a person’s weakness, not his/her strength. Here are some of the words and phrases that have particularly bothered me:

Socialism – Sounds menacing. Grrrr. You can tell if you are a socialist easily. You are a follower of Karl Marx. You want to redistribute the wealth. You want to impose restrictions on commerce. You believe in stuff like: If you want to be perfect, sell what you own. Give the money to the poor, and you will have treasure…” We can't have government shifting wealth from one group and giving it to another!!! We should have one tax rate for everyone! The Federal Emergency Management Agency is wrong; let fire and flood victims fend for themselves! Let children pay for their own educations! Social security makes us lazy. We don't need the Food and Drug Administration – companies that put out tainted milk products will be eliminated by the marketplace; we don't need rules. Polluters are creating jobs; regulating their smokestacks will cause unemployment. Derivatives and subprime mortgages are just fine, because a few can get rich on the corpses of many – it’s a free market (and it will adjust). Oh, the above quote, for Bible readers, is Matthew 19:21.

Free Market – Two words in there. “Free” suggesting that rules are bad. And “market” which tells you that a willing buyer and seller will establish what is right. If produce is tainted, after a few folks die of food poisoning, the marketplace will put the seller out of business, assuming he or she stuck around for the after-effects. If a factory stinks up the water and makes the air unbreathable, that will so alienate consumers that they won't buy the products… so we'll move the factory outside of town where they can't see it.

Countries with Lower Taxes Create Jobs – Ireland is the example folks like to use most often. They lowered taxes, created subsidies to get businesses to relocate, and they postured the appearance of success… for a decade and a half! The October 7, 2008 observed: “For a number of years Ireland , with only 1% of Europe's population, attracted up to 25% of all US greenfield [non-polluting]industrial investment in our continent.” Then, it began to unravel. Without sustained subsidies (oh my, is that socialism?), the business models did not work. Unemployment began to creep up in 2007, and the return-on-investment numbers were not so rosy.

But Irish unemployment numbers, long touted as the “lowest in Europe,” were understated, new job creation was overstated – the government “cooked the books”… until it all collapsed, and goes on: “The dramatic events in Dublin, early on Tuesday, September 30th, when the Irish Government agreed to issue a State guarantee, with a value in the range of €400 - €500 billion, underwriting the Irish banking system, tolled the death knell of the Celtic Tiger and definitively brought down the curtain on the remarkable 15-year period of economic growth in Ireland. While some advances will endure as the fairytale ends, the debunking of the myths that have become ingrained during the period and the exposure of the reality of foundations built on quicksand…”

Investors ran; U.S. investment capital, much from hedge funds, retreated back to the U.S. , literally in days after the financial collapse… the U.S. ? With those higher taxes? Why would they do that?

Outsourcing your opinion to a label is doing yourself a profound disservice. In a modern complex world, simple labels don't really seem to describe anything that would really matter anymore. Time for a vocabulary update! Life ain’t that simple!

I’m Peter Dekom, and I approve this message.