Regulated Monopoly

Yes, remember that term, "Regulated Monopoly"? I remember it well having worked in the telecommunications industry for 15 years in the "unregulated" paging and cell phone industry after the US system of market duopoly with ass backwards analog technology finally opened up leaving us a minimum of 5 years behind the rest of the developed world. The telecom companies who were regulated monopolies were the worst run companies in the nation, keeping Americans in mid 20th century telecommunications all the way through the Internet creation and evolution as a consumer accessed network that became what it is today. Dealing with them was like dealing with the Kremlin. To this day, America is 5 to 10 years behind other developed nations like S. Korea, Germany, Japan, Singapore etc. in it's telecommunications infrastructure.

So, what I read today from the power industry side was stirring. I can tell you for sure, America's regulated monopolies, the power companies, were just as bad throughout the history of power in America. The problem we have today is as our impotent government "deregulated" the telecommunications and power industries they did so by rubber stamping plans created by the pigs (think tanks, "non-profit" corporate funded institutions and directly from the companies themselves) legislation that did nothing more than deregulate the regulated pricing mechanisms without allowing any competition to gain access to the infrastructure or industry on reasonable terms or at profitable prices. Competitors were sued and the weakly written legislation was challenged in court by the very industries who were "deregulated" using their limitless lawyer bank accounts managing to overturned any hint of "real" competition written into the toothless laws.

I could go on and on just using the pathetic example of the "deregulation" of Constellation Energy in the Mid Atlantic / Maryland market (BGE is our local distributor here) and how it hamstrung any potential competitor for 10 years after the signing of the peace of s*(& legislation. One could also write a dissertation on the "deregulation" of Bell Atlantic (now Verizon) on the same basis.

So why am I babbling about this today? You may have read my previous post about the infrastructure needs to bring power from non fossil fuel creation sites around the US to the population centers where the energy is needed most. Well I read this fascinating quote today from Pepco, also a Mid Atlantic area old regulated monopoly (focusing on other parts of Maryland and Washington, DC):

WASHINGTON--(BUSINESS WIRE)-- Pepco Holdings, Inc. (NYSE:POM) today filed applications with the Public Service Commission of Maryland for authorization to construct the Mid-Atlantic Power Pathway (MAPP), a 230-mile 500-kilovolt electric transmission system that will deliver a much-needed boost in system capacity and electric reliability to customers in Maryland and other states in the Mid-Atlantic region.

"This project is vital for ensuring that stable, reliable electricity will be available throughout the region, including the Baltimore-Washington metropolitan area and the Delmarva Peninsula," said William M. Gausman, PHI Senior Vice President for Asset Management and Planning.

"No major line has been added to the electric transmission backbone in the Mid-Atlantic region in decades, yet the population of the region has risen dramatically and electricity consumption per household has grown significantly," Gausman continued. "The system is stressed. Without MAPP, the region will be exposed to increased risk of experiencing brownouts and blackouts in the future."

OK, so why hasn't a major line been added to the region in "decades" (hence we are in mid 20th century transmission grid)? You PIGS ran the damn grid!

Well deregulation has been around for over a decade in most areas now and it seems that the regulated monopoly model, "suck the cash out of your customer by squeezing as much profit as possible from your third world "network", "distribution system", "generation system" without investing a dime in the future" may be breaking down not unlike the complete implosion of our antiquated ass backwards economic / financial system that was also "deregulated" about 10 years ago along the same line with the same toothless poorly written legislation. Crazy thing is, Pepco is bold enough to stand up and say as much publicly.

These people should be sent to the desert in California to plant rice.

Little Video on Crises

I got this link from a friend today who is in the financial world as a career. It is a cartoon explaining the credit crises in part. Here it is

This one is not bad. I have seen worse. They missed one of the key elements in the whole thing and what actually has exasperated the problem. That is the investors actually used his earlier example of leverage to buy the CDO's, not just mortgages, to increase their returns. They did this by borrowing from the very banks that were selling them the CDO's and when the value of the CDO falls, the "investors" have to put up more collateral to keep their thin slice of equity in the game. The problem arises when they cannot any longer borrow or renew already borrowed money (usually short term borrowings to buy long term investments) and they all try to sell the CDO's at the same time creating a crash in the market which by the way was completely non transparent, hence the exorbitant profits made selling the junk.

Secondly, they failed to demonstrate how the agencies that gave ratings screwed up.

Third, they failed to demonstrate the role of "insurance" (CDS's) have played in the crises and caused bankruptcies.

Fourth, they fail to demonstrate the way Wall Street made most of their profits by not only buying mortgages but actually buying mortgage companies so they made money all the way up the food chain from the origination to the credit derivative and insurance products on the debt (I think there are at LEAST 5 layers of profit on each loan)

Fifth, they fail to demonstrate how all of this "mortgage" based debt was purchased by money market and other short term investment funds even though they were technically long term debt and how when the market for these products dried up we had near collapse of several money market funds and how the money market funds provided liquidity to the rest of the consumer credit cycle and how this collapse has effected "main street".

Sixth they failed to demonstrate how banks got into the game by creating Structured Investment Vehicles to buy mortgages off of themselves so they could make money off of themselves instead of lending it to outside investors and how this was nothing more than Enron financing (off balance sheet) that they had ultimately to bring back on balance sheets basically making them insolvent as the funds they absorbed.

I could go on and on and on. These are all not that difficult to insert in here. No cartoon video I have seen does more than a 25% job explaining any of this but at least this one gets the first part right and makes some simple concepts visual for people.

Perhaps they could go into the Trillions of dollars borrowed short term by private equity to consume ever more companies with the same debt and leverage ratios. They will be imploding as their companies fail to generate the cash flow in this weak economy to pay back the debts they took out. Some of these companies employ north of 200,000 people with a mix of companies. One of the key reasons I am still a MAJOR bear on the stock market and think after a crazy near term fall then bounce we will have a blood bath going into late spring and beyond, is these private equity guys have been off the radar but when there is a major collapse (like Cerberus from the Chrysler fiasco) of a private equity fund, the market will really tank.

Finally an "Authority" Advocates Re-regulation

I was in University in the late 1980's and early 1990's studying economics at the University of Maryland when I was faced with two options, grow the company I started or pursue my masters in Economics with my thesis being the need for an international financial regulatory authority. At the time I had lofty ideas of becoming a global economic guru who would advocate the abandonment of the archaic, inefficient, unfair, and destructive way economics was dealt with on an international level. Human beings had managed to create highly sophisticated financial "systems" and global financial "markets" that were rapidly evolving but unfortunately the perspective of human beings was Neanderthalistic.

I had the benefit of studying Economics during the collapse of the S&L industry in the US along with a real estate bust, junk bond market implosion and fairly severe recession. I also was a "student" of economics and finance through real world experience and investing from 1981 which allowed me to experience the severe 1982 recession in the US, the Latin American debt crises, gold price explosion and implosion, oil price implosion and the first destructive false economic "growth" experiment of supply side economics by the Reagan Administration (accompanied by military welfare spending and enemy creation) and brilliantly orchestrated junk bond bubble and accompanying corporate buy out craze.

It was obvious to me during my studies we had a systematically flawed economic model functioning on a national and global scale and there were no way the idiots with ass backwards motivations who ran this model and all of its intuitions would be able to do anything that would be a net benefit to humanity. The same holds true today.

So I had the absolute pleasure of reading this article today on Marketwatch about what Henry Kaufman thinks of the global mess we are in.

Notably his statement:

A: The expectation certainly has to be that the banks are undercapitalized, quite a number of them. There are still probably some additional write-offs to be taken. The value of assets are not down yet to what they are supposed to be marked down to. This would seem to me to be an ongoing problem until we see some improvement in economic activity.

There are further issues facing the banking system. There will have to be a re-regulation of the financial system.

My recommendation has been the centralization of the supervision of the financial markets. Let there be one major oversight institution over markets and institutions. The head of that oversight group should sit as a vice-chairman of the Federal Reserve Board. The chairman of the Fed and the head of this oversight group [should] render an annual report to Congress showing what the financial health is of, say, the 25 largest financial institutions of the U.S. And that body should also provide a credit rating for each of those 25 institutions.

And his further remarks:

A: The Federal Reserve has admitted that the deregulation that has occurred has been a mistake. The Fed will support some re-regulation. It has not indicated what the magnitude of that re-regulation will be. Neither will the U.S. Treasury.

The Federal Reserve and the Treasury over the last two decades have let the financial markets be on a deregulated basis. We did not supervise financial institutions tightly. The assumption by the authorities, the kind of belief by the Treasury and the Federal Reserve was that those who do well will prosper in the financial markets, those who do poorly will fail. That of course was not allowed to happen because we just don't allow big institutions to fail because of the systemic risks they pose to the entire world and the system at large in the U.S.

As a result, financial markets were allowed to end up in all sorts of risky ventures, and this contributed to the mishaps that we have today.

We live in global financial markets. We have institutions that operate on a global basis. Therefore, we should have an international oversight group over major financial institutions regardless of whether they're in London, New York, Paris or Tokyo. They should come under one major supervisory authority. That authority should set requirements for capital should set rulings for types of leverage that the institution can undertake, should set training practices for the major markets.
If we do not have a unified supervision, the business will flow to those markets that are most liberal. And those markets will then create havoc for the rest of the international financial groups.

I think there's more support coming for that now than when I first wrote about this 15, 20 years ago because I see France pushing in that direction. The Europeans on the Continent are pushing in that direction. The only ones I haven't heard from on this are the Federal Reserve and the U.S. Treasury.

Yes it pleases me greatly to know I was thinking ahead of this smart man. In fact what his article brings to mind were the few (far to few when I think back) conversations I had when I took the liberty of knocking on the door of one of my professors from time to time to ask their opinion of what was happening in the "real economic world" outside of the somewhat antiquated textbooks I had to study with.

If I had a chance to do it all over again I am still not sure I would have taken the path of furthering my economics education instead of pursuing my business. I was very turned off by the bureaucratic and pathetic "counseling" at the state university. When I initially inquired about the masters program they looked at my completed transcripts and suggested I had 2 semesters of classes that were required just to apply (I was like, why in the hell didn't you spell that out when I started my major, idiot?) and the fact that the University of Maryland for all it's efforts was basically churning out graduates to fill a cube at the Department of Labor crunching boring ass stats for yet more bureaucrats. Economics was going through it's "mathematicization" phase and I did not see the subject in the same light.

Perhaps this has something to do with the mess we are in now. Not unlike the "magic" of any idiot being able to create an impressive business plan and financial projection with the wider use of computers and the newly accessible spreadsheet programs in the 1980's that in my view had a great impression on the flow of money then, the movement of Economics by people determined to make it more of a "science" through the use of statistics, mathematics and computer models totally devalued what I saw as the beauty of economics as a social science that could have better application using some of the emerging technologies but not for those technologies to "take over" the discipline in entirety.

I strongly believe the current crises once again came greatly by application of sophisticated mathematics and technology in the creation of financial products that on paper made "investors" believe anything and any return was possible if you could "hedge", "buy protection for" and or otherwise "remove responsibility for losses" through securitization which resulted in the explosion of credit and unbelievably cheap prices.

I have been saying for more than three years now that all of this "protection" was nothing but a house of cards, not to mention the "false" profits created in the sale of the products themselves and it would not last longer than early 2008. Well here we are. We are nowhere near bottom and finally some "smart" people who did stay in the wonderful discipline of Economics, and who shared my views, are being listened to. God bless them...

Deals Dry Up... No Recovery in Sight

I have done my basic math and based on most of what I have learned all current government attempts to rescue the financial markets will have run their course by around April 2009. The interesting thing about the new Treasury plan is the move from a couple billion dollars of debt market support to a Trillion dollars in debt market support.

Given that in a healthy debt market about $50 billion a month in various consumer debt offerings would be needed, I really don't know how the financial system has avoided complete implosion to this date because this market is virtually non existent at the moment. The caveat in the Trillion dollar debt market plan is this also includes mortgage backed securities leaving much to other areas of consumer debt issuance.

The inquires by various senators holding up loan documents and lines of credit by borrowers in their respective jurisdictions asking banking CEO's why their banks have called loans and refused to extend terms to borrowers who are making payments on time are a clear indication of the stress financial firms are facing to shrink their balance sheets in the face of being unable to gain access to capital.

Interestingly enough this quote from a Marketwatch article shows that of the top 10 debt offerings in 2009 all have been by banks except one.

If banks aren't lending, you can bet that companies will be turning to the bond market. They are, but they're not exactly driving the market's 10% increase so far this year. Of the top 10 debt deals this year only one, a $10 billion offering by General Electric Co. GE, was not issued by a bank, the government or a government-backed entity such as Fannie Mae FNM.

The article does not go on to show how many of those bank debt offerings were also backed by the FDIC under the Treasury plan announced back in October 2008. Details of this part of the plan are as follows:

FDIC GUARANTEE PLAN

* The Federal Deposit Insurance Corporation, the government agency which traditionally guarantees deposits at banks, will guarantee senior unsecured debt issued by U.S-regulated banks, thrifts and other depository institutions issued before June 30, 2009, including promissory notes, commercial paper, inter-bank funding and any unsecured portion of secured debt. This must not exceed 125 percent of debt outstanding on Sept. 30, 2008.

* This debt would be full protected in the event that the issuing institution subsequently fails, or its holding company files for bankruptcy. Coverage would be limited until June 30, 2012, even if the debt's maturity exceeds that date.

* The FDIC will guarantee all funds in non-interest-bearing transaction deposit accounts held by FDIC-insured banks until December 31, 2009. These are mainly payment processing accounts, such as payroll accounts used by businesses.

* Fees for these guarantees would not rely on taxpayer funding. They would be paid by participating banks that would pay a 75 basis-point fee to protect their new debt issues and a 10 basis-point surcharge for deposits not otherwise covered by the existing deposit insurance limit of $250,000.

All FDIC-insured institutions will be covered under the program for the first 30 days without any costs. After this initial period, banks not wishing to continue their participation will have to opt out or be assessed for future guarantees.

(Obtained from nice Reuters Treasury plan article Here)

As I have mentioned many times before, having the government backing debt virtually unconditionally here for regulated banks they are saying, "We are the government and we have invested directly in banks and we do not want to loose our investment so we are allowing the banks to borrow money from the market with our backing."

This is all good and well if you seriously think the government should become the debt market but think of what has happened. The debt markets have further seized up for any institution not backed by the government. I mean, "investors" are looking out the window and seeing a falling economy and thinking, "If I am going to buy debt, why should I buy anything not backed by the government?"

In fact all this government meddling in the debt markets is getting way out of hand. I believe for all the "good" intentions of the Fed and Treasury to "support" a non existent market, they are creating serious traditional economic imbalances that will delay a recovery in the market, exaggerate the need for additional capital support by financial institutions and make it virtually impossible for non-financial institutions to borrow money on acceptable terms.

As for that $1 Trillion in debt support, it may buy us another 6 months. Will the market recover by then? Time will tell. I said many times early in this crises, the government does NOT have the resources to forestall this crises and frankly the lax regulation and poor oversight of the financial markets since laws created in the 1930's were overturned over the last decade leaves little to no options to stop the bleeding in our economy. The beast had become to large and fat to handle.

Sir Lloyd Blankfein calls for More Controls?

Are you kidding? Mr. Blankfein, head of Goldman Sachs, was quoted in the Financial Times saying almost exactly (one word exception, key word of course) what I have been saying for some time. Here is the quote:

"All pools of capital that depend on the smooth functioning of the financial system and are large enough to be a burden on it in a crisis should be subject to some degree of regulation."

This completely blew me away. I read it like three times, then read the entire article over again. My statement used many times, though more harsh, read something like this:

In a world of over 6 billion people, having a couple trillion dollars of unregulated money leveraged 10 to one or greater doing everything they can on a global scale to earn 30% on their money with no allegiance to any nation, no regulatory authority to answer to and no rules on what they can or cannot buy, sell, create or destroy (not to mention being serviced and lent to by regulated entities) no longer serves the human race any useful purpose, period.

OK so it is a little different but if you just changed the word "some" in Blankfein's quote to "the same" and added the words "as other regulated financial institutions" to the end of the sentence you would have what I have been saying.

The idiots that run our financial world are almost there. Maybe some day they will "get it".

Read article here (subscription may be required)

Japan printing "new" money...

I just read one of the most fascinating articles from an economic perspective in my lifetime. Japan is planning to print Y50 Billion ($546 Billion) in "new" money.

Think of this. I think the last President in the US to finance the nation's needs by "printing" money was Lincoln and he was shot. Jackson tried and an attempt was made on his life as well. It has also been suggested Kennedy was thinking on these lines and we all know what happened to him.

Way to much money is made off "debt" by to many people for the financial world to be keen on paying off national debt or to even think of creating money without "borrowing" it. More money in history has been made lending to nations, especially during times of crises or war, for any interest by money lenders to see their power of the purse adverted. Hence the first actions of both presidents Reagan and Bush II were to 1) Create / Declare a global enemy, 2) Dramatically increase the nations debt through the Defence Industry Welfare System. During both 8 year reigns of these two men, the debt increased dramatically, Wall Street got filthy rich, the share of income received by middle America declined and the percentage of our tax dollars to pay the debt increased demonstratively.

So you know I am not pulling your string just think of the amount of our tax dollars that are transferred to the holders of the nations debt each year. 2008 saw $412 Billion dollars of your tax dollars being handed over to the holders of our National Debt. This is serious cash. As of the writing of this post, the national debt stood at over $10 Trillion.

Now, the most interesting aspect of this article is this quote by Koutaro Tamura:

"We are facing hyper-deflation, so we need a policy to create hyper-inflation. We have to do something to undermine the central bank and government's credibility or else we won't be able to halt the yen's rise. So, while we know this is drastic medicine, we will do it," said Koutaro Tamura, a upper house Diet member who will chair the new group.

The economics of the desire to print new money are worth exploring. I will not do so here but suffice to say, the ideas are brewing so stay tuned.

I just hope we don't find Mr. Tamura "under a bridge" anytime soon.

Read the article here: (May need subscription)

Pay Cap and Obama Stimulus Package

My recommendation is to cap TARP at $1.2 million instead. Secondly, I would set up a repayment schedule for all TARP recipients along with metrics each company must meet within a period of time, not unlike the metrics applied to EU States wishing to enter the Euro Common Currency, where companies must meet these metrics within a period of time of face a wind up of their operations, NOT additional TARP money!

Finally, I would like to stress my view that it is way to early to create any large "stimulus package" per se, but instead we should be focusing on immediate government spending on areas of our nation that have been neglected for far to long (well lets say areas left to private companies to run / manage / profit from where they had no incentive to improve or make better their business infrastructure). Key areas are:

1) Passenger rail transportation. It is absolutely essential we invest rail infrastructure allowing metro systems, above ground tram / trolley systems to be developed and built and that we re-ignite old passenger rights of way around the nation to allow us today to begin connecting all of the suburban cum-urban areas within regions that have grown so fast (connecting Annapolis, MD with Baltimore and Washington, DC by rail is an example in my region) into a regional rail infrastructure.

2) Energy distribution infrastructure. The time has come to step in and invest in the infrastructure necessary to get energy form natural sources to the urban areas that need it most. This requires investing in high tech distribution technology so that solar fields in the dessert and wind farms in the plains, mountain and coastal shores can be efficiently transported.

3) Renewable energy creation. Increasing investment in solar farms, wind farms, Concentrated Solar Power (CSP) plants, geothermal (for industrial and individual use), and Ocean Current Generation technologies where the investment yields the best results.

4) Telecommunications / Internet infrastructure and access. It is pathetic the US is so far behind on the basic utility of Internet Access when we created the darn thing. The old monopoly that ran our telecommunications infrastructure was de-monopolized nearly 30 years ago and since then our telecommunications infrastructure has been like the "wild west" with a regulatory structure that remained stuck in the monopoly mindset with 5 regulated monopolies for telephone and regional regulated monopolies for cable for way to long. We have both stifling unofficial monopolies still running our local telecommunications infrastructure and cable systems nationwide with the only area of early competition, Long Distance, being virtually not an industry any longer. This must change and be fixed by vast regularity overhaul and direct investment in our infrastructure.

5) Residential housing construction regulation overhaul. This is a very hot issue with me. I travel the world to other developed countries and find every time how far behind our construction methods and technologies lag these countries. Building residential housing in the US is to build using the lowest common denominator available. With single family units we have still have stick built box houses wrapped in plastic with modest insulation, plastic siding, composite wood products built with toxic epoxies, plumbing and plumbing fixtures based on early 20 century design and installation, HVAC systems that are completely wasteful and inefficient applying again mid 20th century "technology", water heating and distribution on completely outdated inefficient models, overall design construction methods that take no account of environmental considerations and wasteful and inefficient appliances. There is little to nothing about an American built single-family house to brag about.

In commercial housing we are applying often the same technology to a large-scale multi-unit housing with the same disastrous results. In addition, I have watched American Cities be "revitalized" over the past 15 years with virtual cities being built within urban areas and no consideration taken in commercial multi-unit housing even being taken for providing playgrounds for children once all the single Americans who have moved in the cities over the last few years decide to have children. So it is not only construction regulation but design considerations we must be looking at.

6) We need to seriously look at creating national development standards. With so many of the "urban" areas built outside of our major cities and the "mini-urban" areas built in redevelopment zones in our cities, in nearly every example I have witnessed, little or no attention is being paid to alternative transportation options. To find a simple bike rack is a challenge in most places let alone bike lanes built into sidewalks and redeveloped streetscapes. Walking options are often completely overlooked with the famous "American Sidewalk to Nowhere" dominating all development where sidewalks may be installed but they often do not lead to pedestrian friendly intersections, urban shopping districts or walkways. They are basically useless sidewalks.

In 5 and 6 above, what is often overlooked is that higher standards of development and construction lead to higher investment in technology and standard of living. It is no mistake that these technologies exist in other developed nations and their standard of living in many of these country far exceeds that of America. When I hear arguments about "increased cost" of smarter development and construction I almost NEVER hear of the positive sides of their argument, mostly because of the ignorance of most Americans to the existence of these technologies and infrastructures. In addition, while the housing "boom" was going on in the US for over a decade, not once did I see the implementation of greater standards and technology accompany the doubling and often tripling of house prices over the
period. Enough said.

More Later...