The Big Picture

Interesting to note how the lessons of history seem to be lost by those benefiting by economic gains that defy both logic and economic fundamentals. It’s fascinating how often I hear the follow kind of analysis from financial managers of substance: “Well, everyone knew that there would be an ‘adjustment;’ but we just didn’t know when or how big it would be.” Ignoring basic concepts, like borrowing more than you can afford to pay back, lending to people whom you know aren’t really going to be able to carry the loan, assuming that real estate prices and the stock market could only continue to rise, fighting a trillion dollar war with borrowed money (while lowering taxes), buying companies with mostly debt and very little equity… well you know the list.

We know the $10+ trillion “borrowed” federal deficit, the approximately $7.2 trillion “borrowed” subprime mortgage aggregation, and now we get to see exactly how borrowed (leveraged) corporate America is (and we know they’re getting taken care of first). The bailout plan (the Troubled Asset Relief Program – TARP to the financial community) is apparently a big attraction on the lecture program circuit, but occasionally, you get a pearl of wisdom or two from what presented.

For example, on November 10, Randal Quarles, a managing director at the Carlyle Group (a huge private equity firm) spoke at the Securities Industry and Financial Markets Association's Summit on TARP (as quoted in thedeal.com), addressing exactly how “borrowed” corporate America is: “How TARP develops from now will be driven by the logic of what's come before… There's been a massive increase in leverage in our financial system. It's at about 350% of GDP… The financial sector and households drove that. The last time that the whole amount of leverage was at this level was at the start of the Great Depression, and we're at twice the level leverage of the early 1930s.”

Wow! America has aggregate borrowings of 3.5 times the entire annual output of all goods and services in the U.S. So it needs to “de-leverage.” Quarles goes on to note that while the U.S. government is the balance sheet of last resort, the future lies in the hands of investors themselves: “Institutions are realizing that in this environment they need to anchor confidence… But I don't think TARP capital will be an effective signal of viability though. The only thing that can do that is due diligence by a private capital investor that's willing to put his money where his mouth is.” Smart financial institutions driven by fundamentals and not by loopholes that allow them to make a momentary buck? Ignore that “everyone else is doing it”? This, I’ve got to see.

Today’s highlights: Circuit City filed for reorganization today under U.S. bankruptcy law, analysts downgraded General Motors to a “zero” value company, and the feds increased their bailout stake in insurance giant, A.I.G, to an aggregate total of $150 billion. I wonder how many years it will take the global financial industry to forget the lessons of the 2004-2009?

I’m Peter Dekom, and I hope I don’t live long enough to see a repeat of this mess.