Tuesday, September 30, 2008
Should global investors have faith in the ability of US government to raise taxes? Are you kidding me? Neither current presidential candidate dares to say that they will increase taxes and any person who learned a little about American politics hasn't heard the famous phrase "Read my lips: no new taxes"?
Will the politicians/regulators follow the rule below for the U.S.?
Rule No.1: Appropriate regulation and oversight is needed for a well-functioning financial market in the U.S.
Rule No.2: If you consider deregulation, refer to rule N0.1.
Monday, September 29, 2008
Sunday, September 28, 2008
Added on Oct 29, 2008: the current situation is this -- the credit market broken after a sequence of adverse events (Lehman Br. AIG, and bad earnings of banks etc.), the Fed is working very hard to re-inflate the liquidity flow in the economy, which is why the Fed has started to directly lend to businesses. Even if they do not sterilize the liquidity they are injecting into the economy, there may not be inflation pressure since the monetary multiplier has broken down.
However, once the order in the credit market/monetary multiplier is restored, inflation pressure will pile-up if the Fed does not shrink the monetary base fast enough. At that time, financing the deficit may be harder if the global investors are reluctant to buy US Treasury bonds/bills.
So, for now, US dollar looks good and Treasury is still safe. The danger is on the way of recovery after the credit market back-up working again. Since US Treasuries are denominated in the US dollars, if the Treasury decides to print money in order to avoid default, the default will take the form of depreciation of US dollars.
Friday, September 26, 2008
If no bailout plan get through this time and economic disaster does occur, will American people regret about their anger now or will they say that it is a price they would like to pay in order to punish the greedy bankers?
Ohio, no matter how low key it is in the U.S. economy now as it is, provided some biggest political riddles starting from the second term of George W. Bush and now another Ohio man, John Boehner, from the west part of Ohio just helped to created another dismey on wall street in years. I cannot imagine what will happen after today's opening bell, not to mention this shock comes with together with the fall of WaMu. Or let's just say that the falling knee of the former CEO of Goldman Sachs says it all. Who have deep pockets should just buy anything and Warren Buffet is going to make more money.
The long term credit problem for the U.S. economy now is materializing day by day. Various liquidity drains show up in the economy. If this economic disaster actually happens, it states that the interruption of the flow of wealth from the rest of the world to the US leads to an immediate drop in the U.S. consumption. Market economy really has its own way to make everything happen just according to what it should be, except that this time the should-be event is really bad. I am sorry for the fact market economy has to work in its own way and the title of my yesterday's post.
Thursday, September 25, 2008
1. If it get passed, the rest of the world may loss their trust on the US government and raising money to finance fiscal deficit will become problematical.
2. If it cannot pass and no other bailout plan get passed, the above problem still exist.
It seems that Japanese firms are stepping in and we have to wonder how they will manage this wind-fall of management responsibility and liabilities in the future. The track record for Japanese is that they changed their wealth into a bubble and after the bubble burst, they got stuck in recession and stagnation for almost two decades. Do they have a big plan for their future? Doesn't seem to be the case if you look at Japan's political turmoils these days. But let's hope Japanese can once again be as innovative as they are for electronics.
So, if there is a good bailout plan get passed and the rescue of the economy is successful, the US economy may be able to hold on longer and experience a slower period of transforming. The problem is not even which bailout plan is good, people like an easy plan!
by Barry L. Ritholtz
Most people are unfamiliar with the evolution of financial management over the years. It began as a clubby old boys network, who you knew mattered more than what you knew. It evolved over time. Starting in the late 1970s, retail stock brokerage became a telemarketing sales business. Although that model is clearly changing, there is still trillions of assets under management today that got that way via the cold call.
The cold calling sales approach was developed and refined at Lehman Brothers (perhaps their collapse was Karma). It was encapsulated by a man named Martin D. Shafiroff, who wrote up, refined and perfected various phone techniques. These include the straight line, the first trade, the trust close. All of his various techniques were published in the book "Successful Telephone Selling in the '80s" and subsequent editions ('90s, etc.)
Having worked on the Sell side for the first decade of my Wall Street career, I am intimately familiar with the various pitches the retail world uses to obtain clients and assets. There is not a single retail broker of my acquaintance that does not have Shafiroff's how-to on his bookshelf.
The reason I bring this up today is due to the latest sales pitch from various people, aggressively pushing the bailout plan. The newest spin on the massively expensive plan is "Hey, its a jumbo money maker!"
The spin reminds me of the classic retail stock jockey. The guy has buried his clients in a series of bad trades, bad judgment, poor risk management -- all motivated by his self-interested, commission-generating trades. The only way out of the money losing mess, pitches the broker, is a big, Hail Mary trade.
This technique is one of the last ones in the the Shafiroff book. Once an aggressive retail broker is upside down, the plea goes out for raising more money from the
mark client. "Believe me, I hate being under water more than you. I pulled in some favors, this is the trade that makes it all back for us and then some. I could even get in trouble telling you this, so don't mention this to your pals. This is the one -- but I need you to send in more capital so we can recoup the prior trades that went bad on us."
I guess Paulson read the book in the early days of his career. That line of bullshit is identical to what the public is now being fed. A series of OpEds in the Washington Post and the Wall Street Journal (and who knows where else) are all pushing the same nonsensical line: The bailout plan is a big money maker:
Andy Kessler in the WSJ:
"My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury...
Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.
Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion."
"The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that."
Now, I have a few question for Messrs. Kessler & Gross: What does this say about the private sector? Why can't the all of the private equity funds, sovereign wealth funds, and enormous pools of capital do this themselves? There are trillions of dollars sitting around in cash, yet none of it that sees any value here?
I guess that Hank Paulson, George Bush and Ben Bernanke -- all of whom have been been unequivocally, expensively, tyrannically wrong about the entire crisis from the beginning -- are smarter than both the markets, and all of the private equity pools, about this paper?
Does that sound right to you? The guys who missed this from day one -- despite many many admonitions from many people -- only they see the value in this paper, whereas the smart guys who saw the shitstorm coming in advance, and bet against it, don't?
I am in the same camp as Michal Lewis, who writes at Bloomberg "the Treasury plan also creates this wonderful hidden opportunity for Goldman Sachs to make a killing, and thus preserve its bonus pool for a long time to come."
Put me down as sympatico with Anatole Kaletsky, who writes in the London Times:
"Mr Paulson may be a former chairman of Goldman Sachs, but as US Treasury Secretary he does not know what he is doing. His recent blunders, starting with the “rescue” of Fannie Mae, have triggered unintended consequences around the world, resulting in the death-spiral of financial values. But last Friday Mr Paulson outdid even these Rumsfeldian achievements, when he demanded $700 billion from Congress for a “comprehensive and fundamental” solution to the global financial crisis, without apparently having any idea of what he would actually do."
I have a 10 year bet for those folks now pushing the "Trust me, we will make it all back on this one trade" spin. If you who think the Paulson plan is a money maker, a cash winner, and a net after-fees taxpayer surplus creator, put your money where your mouth is. I bet you one million dollars, to the charity of the winner's choice, that the current plan is ginormous money loser.
Wednesday, September 24, 2008
Free market is some time is used synonymously with perfect competition but today's politicians have abused this term and it no longer means perfect competition but a market without government oversight.
This is why: Democrats Are Better Republicans than Republicans Are, copied from Brad Source: Doug Henwood, Liscio Report.
Tuesday, September 23, 2008
Wait a minute, I thought Hank and Ben were saying the economic system will collapse into a depression if this bailout plan did not get passed by the congress. Now, its only about have a high risk of recession? No need to bailout then. There has been several recessions and people are still alive.
Why not to use a complete override plan and mandate every institution that holds toxic assets to participate the auction. How much different is there between a partial market bailout and a complete government takeover bailout? The later may be more reasonable and effective for now and the government can release the tight control of financial institutions after the housing market recovers. Since everybody already agree to reform the financial system, why don't the government just do it now: cap the executive pay, setup renegotiation rules for the home owners facing foreclosure and order the banks to conduct business viewing each other as a government owned entity until the conditions get back to normal. This way will set a good precedent to deter future moral hazard since the CEOs will know that if they again recklessly take risk and put the whole financial system on the edge of total collapse, they will be punished by the government in a ruthless manner so as for the shareholders of these banks and future shareholders of banks will watch carefully on the risk-taking behaviors of the CEOs. "Hank" is simply too nice to his old buddies.
Monday, September 22, 2008
Things US can offer to the world have been movies, English, education, food and IT product. It is hard to sell cultural product once US lose her status of an admirable country. It is very hard to believe American heroes can actually save the world after 9/11, and Hollywood has been repeating its stories for several years by now with the mentality getting lower from Napoleon Dynamite to Superbad. The high-tech movie making skills can be transferred easily. In the development of the their own economy, the rest of the world would want to maintain food security and their own technological independence and advantage. It seems that education is still valuable at college and graduate level in the US but the dim job prospectus make the foreign students more reluctant to come and with the huge amount of US PhD produced, the education level in the rest of the world will also catch-up. The financial sector used to the be largest in the US economy and now its in peril, what's next?
The game has been the financial sector of the US channeling the wealth from the world to the US so that Americans can consume what are provided from the rest of the world without pay it back for a while, evidence from the huge trade deficits. Deleveraging this debt is a taunting task!
The investment banking industry dead on Sept 21, 2008 and today, Sept 22, 2008 let's hold a solemn funeral for this suicidal industry and speculate some day in the future it will resurrect.
The post is named after this movie.
Saturday, September 20, 2008
"Power corrupts and absolute power corrupts absolutely"A gentleman from the post office recited this to me today when he was delivering my package and he thought the current turmoil was a result of corruption from power fostered by money. May be the big picture can be viewed as "the get rich fast = American dream" leads money to seek power and use power to get more money and when the money-making is in trouble, power now come to rescue. Like Luigi Zingales said: "The time has come to save capitalism from the capitalists."
The observation I would like to make is that, actually, nobody has really shown obvious sign of corruption in the after mess. Two trouble makers to blame are the kept-too-long low interest rate by Greenspan and the predatory lending. People who are now trying to prevent the system from collapsing have good reasons for doing what they are trying to do. The problems lie more in the social-economic system itself than something can be simply attributable to power and corruption. What people are worrying about is that it is very possible the quick fixes for the current crisis are only short term patches with hidden agenda to even rob more from the poor or middle class and feed the riches. If things go better in next week, next month and next year but no fix for the social-economic system itself, a bigger crisis can still be looming and the U.S. can be totally wracked. I think that's the problem most people worry and I think it is very hard to fix, which is the reason I start to write this blog.
Friday, September 19, 2008
In sum, the American people have to save more and slowly retire their debt to the world with what ever American products that they are willing to export, such as food or movies.
The domestic political sentiment of the U.S. focused on the manufacturing job loss and the trade deficits to China, which a country viewed by the U.S. not as a friend. So, the U.S. politicians started to demand the Chinese currency, Yuan or RMB, to appreciate. There is domestic demand for the appreciation of Yuan in China as well. In more recent years, China's wealth has accumulated to a level that can feed its own bubble in the stock market and her domestic housing market. The Chinese officials hope the appreciation of Yuan can help to keep the wealth produced by the cheap domestic labor remain in the country and benefits Chinese people, and they also passed a labor law to protect workers' rights for the same purpose. This consensus between the Chinese and Americans led to the depreciation of US dollar. The devaluation on the US dollar denominated assets owned by the Chinese government make the Chinese realize the depreciation of dollar is actually a default on the liability owed by the U.S. to China thus the wealth flow from China to the U.S. is disrupted abruptly both intentionally by the underweighting of USD denominated assets holding by the Chinese government and unintentionally by the higher labor costs for the Chinses suppliers. It is generally thought that to shift production of the exporting goods out of China will take time and incur higher production costs. Ultimately, very soon the cost of living in the U.S. will be higher than had the Sino-US trade relationship not been broken abruptly.
The U.S. can repay its debt by transferring wealth through trade or selling its assets to the Chinese or the Arabs, which is a choice that neither the U.S. government nor business leaders would like to make. However, when there is no obvious way to repay the debt through international trade, the U.S. have to sell its assets one way another once the process of wealth transfer from China to the U.S. is disrupted. The U.S. authorities realized that cheap dollar lead to higher oil price and higher inflation eventually a deep recession so they decided to reverse the depreciation of dollar. Then the only way to sell US assets is the the prices of these assets to collapse, as seen in the stock market and the housing market in the U.S. Even so, the barrier for Chinese to purchase U.S. assets is still extremely high due to the Chinese capital flow restriction and the reluctance of the U.S. government to accept this choice. So the U.S. government step in and bailed out the U.S. assets by either have direct stakes in some U.S. firms or now, an entity to hold toxic MBS derivatives. The question remains, however, how the U.S. economy will repay the liability to the rest of the world in general and China or OPEC countries in particular.
In the short term, if the U.S. economy is stabilized through the above government actions, the depreciation of dollar is inevitable since the market still needs to enforce the repayment of the liability owed by the U.S.