Bank Bonuses

Until about now I have had little opinion of the bonuses banks pay out to the people who make money for them. In fact, with respect to Merrill Lynch, I felt the "retail brokers" should get whatever performance bonuses they deserved as long as the cash was in the bank, if for only the reason they had little to do with the risky undertakings of the firm's high profile traders who gambled with the firms own and borrowed capital and lost miserably.

Now, however, I am inclined to get very pissed off when thinking about not only the bonuses being paid by these financial firms but at the exceptional trading profits being made on the backs of the taxpayer through our direct support of financial firms through TARP and the indirect but just as risky support through the FDIC backed loans (TALF) companies are floating at dramatically subsidized interest rates that taxpayers are ultimate responsible for.

To have had the Fed and Treasury spend and allocate several (one estimate is $12 Trillion) trillion taxpayer dollars to "shore up" what is essentially a pool of financial firms that are technically insolvent and then to see the folks running these firms still with the mindset to rake out as much cash from the system as they can, while they can, is an insult to their profession, shows a complete lack of respect for the trauma they caused not only the global financial system but to the lives of at least a billion people who have been financially crushed by their reckless, unregulated activities over the past 10 years (well the latest 10 years in this case),is a travesty.

If I were in any decision making power, I would gather some economists together and apply "market reality" metrics to each one of these firms. I would invite them to a nice lunch where I would spell out in no uncertain terms, they are insolvent, they are not making any money above the losses still on their books and will not likely to be truly "profitable" for 2-3 years as they work off the dead assets. If they have "profitable" divisions (like Citi owning a trading arm that made a killing) they will make it clear to the folks that work there, they work for a government subsidized failed banking firm and they will not be paid bonuses until the entire firm can show "real" profits overall in the firm.

If this does not work for these folks, then those people should leave the bank or the division split off so those folks can continue to run their little profitable firm with the bank holding a minority stake.

The bottom line is the model of large conglomerate banking enterprise does not work. This was sorted out in 1934 and the reason they do not work is you CANNOT HAVE TAXPAYERS BAILING OUT LARGE UNWIELDY FIRMS JUST BECAUSE ONE COMPONENT OF THE FIRM IS RETAIL BANKING. Retail banking, with its FDIC assurances should NOT be combined with other kinds of investment banking, finance, insurance etc. This is well known.

Just like the Enron disaster, where a few guys get together to take over a large regulated (at the time) firm with stable cash flows they could heavily leverage and turn it into a crazy speculative monster and lead it to bankruptcy, the same folks that run investment banks and other financial gambling oriented firms love to get their hands on retail banks for their stable deposits, fee income and seemingly unlimited access to cheap capital.

This should not be allowed. Period. We need to go back to Glass-Steagall Act and separate the various financial businesses for GOOD!

See latest story on banking bonuses from EU remarks today.

TALF Backing after Bailout

This kills me. Bank of America buys the nations worst mortgage lender, Countrywide, then buys the largest retail broker, Merrill Lynch, gets bailed out with government money for the 2 lousy deals, and now floats FDIC backed debt for consumers to buy cars! They are getting government backing on the debt but they keep the profits!! What is wrong with this picture.

Asset-Backed Securities
Bank of America/Merrill Lynch is in the market with a $1.995 billion auto loan-backed deal, according to a person familiar with the matter.

The deal is eligible for a Federal Reserve program, the Term Asset Backed Securities Loan Facility, or TALF, through which investors can procure cheap loans to buy newly created consumer loan-backed and new and existing commercial mortgage-backed bonds.
Bank of America's deal, dubbed BAAT 2009-2, is jointly led by Bank of America/Merrill Lynch, Barclays Capital (BCS), Citigroup, Credit Suisse Group (CS) and Royal Bank of Scotland Group PLC (RBS).

Last month, Bank of America sold a $3.993 billion auto-loan backed deal at 135 basis points over a benchmark. That was the bank's first deal eligible under TALF.

The bank is completely ripping off everyone in their retail banking business, ripping off the government in their participation in government debt issues and is a monolithic monster of a banking organization to boot (yes, "to big to fail").

This program needs to stop. If the "markets" cannot finance consumption at these ridiculously low subsidised interest rates it means the interest rates are not realistic and the Fed needs to allow the markets to operate!!

The longer the Fed subsidises interest rates for everything from consumer loans to mortgages the longer it is putting all of the financial institutions and the FDIC in the tank when the subsidized interest rates are "rebalanced" to the "real" market interest rates down the road and all of the financial institutions freeze up again because their returns on subsidized capital deployed will not allow them to be profitable when they have to pay substantially higher rates to access the markets for liquidity.

This is elementary stuff guys. Stop the subsidized consumption loans NOW before you put our entire financial system (and now the taxpayer) in a real pickle about 12-18 months from now and throw the country into a REAL DEPRESSION with no more options left...

NOW

Fed Urges Secrecy on Banks in Bailout Programs

The out right insult of the title here, the headline in a Reuters article today is indicative of how bad the folks running the Fed are. From their insistence as far back as 2006 that the Trillions of dollars in Insurance Protection floating on unregulated markets would not harm the greater economy to their indiscriminate bail out of multiple unregulated companies while allowing many of them to become banks under accelerated application processes to their obvious ignorance of market mechanisms whereby allowing savvy institutions to rake in Billions in profits from the various Fed programs to float debt and buy back debt (print money) to the absolutely unconscionable allowing of financial and non-financial firms to float Private Debt with direct Public Backing through the FDIC to the complete take over of the consumer and mortgage credit markets to the tune of a couple Trillion Dollars...

Now they want total secrecy. The Fed is paranoid and incompetent and they are "spending" taxpayer money with abandon (flooding the banks with cash through buybacks of debt) while supporting without oversight firms they deem "to big to fail" at the same time they and the FDIC continue to encourage the building of more institutions that are "to big to fail" all the while inviting "private equity" and other unregulated non "financial" firms to buy into their tottering financial system.

Where does this end??? I have had it with these guys and our legislators are complete incompetent, impotent wimps with no backbone to deal with the Fed. Where are they in all this discussion?

From the Article

* Fed urges judge not to enforce order pending appeal
* Banks say disclosure could cause loss of confidence
By Jonathan Stempel

NEW YORK, Aug 27 (Reuters) - The U.S. Federal Reserve asked a federal judge not to enforce her order that it reveal the names of the banks that have participated in its emergency lending programs and the sums they received, saying such disclosure would threaten the companies and the economy....

Preska (Chief Justice Loretta Preska) said the Fed failed to show that revealing the names would stigmatize the banks and result in "imminent competitive harm." The Fed asked the judge not to require disclosure while it readies an appeal.
"Immediate release of these documents will cause irreparable harm to these institutions and to the board's ability to effectively manage the current, and any future, financial crisis," the central bank argued.

It added that the public interest favors a delay, citing a potential for "significant harms that could befall not only private companies, but the economy as a whole" if the information were disclosed.

Give me a break. At this point does it matter? We all know the firms that almost went under, the ones that are technically insolvent and only operating because of the accounting changes instituted early this year. There is no "news" to be revealed in disclosing this other then for the Citizens of this Nation to have the right to see how the Washington Financial Elite bailed out the Wall Street Financial Elite after their House of Cards came crumbling down.

Give me a BREAK!!

Goldman Tentacles

For a company like Goldman Sachs to make something like 60% of it's profits from commodities / currency trading it is no wonder why they are so good at it. As I said before, they have heavily invested directly in the production, transportation, storage and processing of all of the commodities they trade for themselves and their "clients". In addition to their business tentacles they have in house knowledge of all of the funds and traders they handle accounts for, what they are buying and selling, hence they know the inside and outside of what many folks are doing.

This is another example of their investment in an industry that allows them a good view what what is happening with respect to transport. (taken from The Virginian-Pilot, Norfolk, Va.)

A 140-plus-page proposal from a partnership of Carrix Inc. and Goldman Sachs Group Inc. would form either an "operational partnership" with the Port Authority, a "financial re-engineering of the balance sheet utilizing Goldman's extensive knowledge and experience in the capital markets," or both, according to a cover letter from Bob Watters, Carrix's vice president/director of business development.

Carrix Inc. is the Seattle-based parent of SSA Marine, Tideworks Technology and RMS Rail Management Services, which makes it the world's largest privately held marine and rail terminal operator, according to its Web site.

Goldman Sachs Infrastructure Partners, a unit of the New York investment bank Goldman Sachs, acquired a 49 percent stake in the company in July 2007.

Diverting Foreign Aid

I must comment on the idea that pulling down our $100 billion in foreign aid to help other initiatives in the US is somehow going to be “good” for America. This argument pops up every time the US Mindset returns to focus on the disastrous budget deficits we have been running for nearly 2 generations now. Unfortunately, like the ups and downs of our economy, all discussion related to the deficit dies as soon as the economy turns the corner and people go back to focusing on making money in the latest paper bubble. It is also unfortunate that these incredible "peace time" budget deficits do little more than expose the underlying reality that the US economy has become so reliant on consumer spending and non manufacturing "industries" that our bubble to burst cycles have become more frequent (about every 10 years) and more dramatic. Obviously, with the economy based on businesses that have no physical infrastructure and or physical output capacity (the production of intangible products) they are able to grow rapidly when able to exploit the latest economic / financial gimmick and can just as rapidly shrink when that "event" is played out. Consumption as we all know is primarily of foreign made products of all varieties.

Getting back to the argument that somehow reducing our "foreign aid" and bringing back a few billion dollars back to the US as having any tangible ability to "enhance" our economic development. This is a completely false argument and even when foreign aid has been reduced during tough economic times, it quickly returns during boom times and is usually a greatly celebrated event stamped by whoever happens to be in the White House as an example of the how "generous American" people are willing to back whatever pop-charity is prevalent at that time.

Before I go on, I will preface my argument with my own jaded view of the machine that functions in Washington of ex-piece-corp / lobbyist / international "aid" how to make $200k a year "non-profits" with "do gooder" figurehead cronies "leaders" related to the various politicians, lobbyist, ex-politicians etc., all of whom are very good at raking money out of the Federal Government to feed themselves using their idealistic agenda. These many folk are professional and very good at making carriers for themselves, backed by US Gov money under the guise of "international aid" and normally spend most of their time traveling the world, speaking, living in posh neighborhoods of DC and otherwise justifying their idealistic agenda to other folks who look just like them or aspire to create their "careers" picking up in their footprints. The vast majority of US Foreign "aid" goes in the pockets of these folks and their extended networks and little of it gets anywhere near the end "user" or "target" of the program or individuals it was designed to "help". I could go on but you get the point. In addition, the "International Aid" machine in Washington and associated labyrinth of non-profits (most often not of international focus) are also often the best way to pay for access to the political machine. "Give $50k to my wife's / sister's / friend's / ex-business partner's / other relative's charity and we can talk" kind of politics.

Having said all of that, I will go back to the argument that somehow reducing foreign aid is going to better our economy if we redirect that cash. We have directly spent since our pointless invasion of Iraq no less than $1 Trillion. I remember Bush's speech during the height of the financial crises when talk of $700 billion to bail out financial institutions was being thrown around and thinking, "George, why don't you just say it? You know how much $700 billion is, you spent more than that battling your fictitious "enemies" on the other side of the planet for the past 5 years." George could have just said, "T-ain't anything America. Just deal with it. I know the war was a great excuse to use my access to the largest "bank" on the planet to write checks to my friends and buddies, esp. the ones who lost so much money in the .dot com crash and Enron like debacles of the early part of my presidency, but this, well, now we have another "crises" primarily created by my friends and I got no nation to invade so please excuse me if I just hand this money over directly to them this time!"

Well, that is reality you know. So what about "foreign aid"? What about pulling our vast military presence out of Japan, 2/3 of it out of Korea and Europe? What about exiting Iraq? Can we get that Trillion Dollars (plus the estimated Trillion or so legacy costs) back? Never. What about the pointless war in Afghanistan? Does anybody ever ask themselves what the real long term ramifications of a decade war against Muslim extremist around the globe will have on the long term desire of these folks to one day actually organize themselves some kind of multi-nation alliance and truly threaten other nations? I mean really, right now and for the years going back to the beginning of radical Muslim movements against nations outside of Israel (the true root of all this mess), was there ever a time in modern history they had the potential to do anything more than cause a bit of terror by blowing something up with some rudimentary explosive devises or come up with more creative ways to use our own technology against us like in the 9.11 "attack"? Come on? Help me out here. How many Americans ever went to bed worried that some "army" from the middle east would invade their shores? We and a few other developed nations feed our "allied" Muslim nation friends all of their military technology for crying out loud. These folks cannot even make a microphone or CD player in their own nations let alone a computer or sophisticated guidance system, navy fleet, air force or any other mass weapon arsenal necessary to threaten other nations. Isn't it true the primary reason we don't want Iran to develop the technology to enrich uranium is that we really don't want any of the nations on the planet that do not align themselves with our capitalist / "democratic" value system to have the ability to create ANY technology or products which could head them in the direction of being able to create real weapons of mass destruction like we do?

And so with all this, is taking $25 or $50 billion out of our "foreign aid" going to solve anything? We are directing hundreds of billions of dollars every year to our global military infrastructure; billions more are spent subsidizing our agricultural and agricultural exports; billions more are being spent / or credited to companies for the removal of fossil fuels from all corners of the planet; billions of dollars are being sucked out of our economy, from each individual, by companies operating within pathetically designed regulation / lack of regulation of our energy companies and infrastructure; billions of dollars are being sucked out of the American taxpayer every year for the construction of and maintenance of a transportation infrastructure designed specifically for the single most destructive product in use on the entire planet, the automobile; billions of dollars in energy literally escape right in the atmosphere by the pathetically designed and geographically dispersed regulation of building standards that allow millions of structures to be built annually with the environmental soundness of a mid 20th century box; billions of dollars are being spent incarcerating millions of Americans each year instead of educating them (with more of these dollars going into private hands each year);billions of dollars are being sucked out of the wealth of people, their pension plans and their governments around the planet monthly by the vast unregulated financial industries that have learned to rake as much cash out of the planet's financial wealth as possible with no nation, government, regulatory authority or power to answer to but the pursuit of as much wealth as humanly possible... I could go on about how many ways $25-$50 billion a year are completely wasted, lost, sucked into the coffers of companies riding the "free economic" poorly regulated and wasteful economy we have created but I will rest here.

Suffice to say, any person who decides to go after the politically easy, populace target of "foreign aid" when the true causes of our financial mess and destructive economic model lies right in front of us, is only succumbing to a failed logic and worse, exposing themselves to a deeper sense of "America is right and great and we should look after ourselves even if much of what we do economically and militarily is pathetically harmful to the planet and humanity in general."

CFTC Derivatives Limits

I am forever amused by Washington's half-hearted and weak attempts to "regulate" various aspects of the financial markets. All of the approaches they are taking or attempting to take are weak and useless and easy to circumvent.

Most amusing is when a company like Goldman Sachs says out of one side of their mouth that they support limiting exposure to commodities contracts to speculators and at the same time out of the other side of their mouth they are saying, "We are the exception because of our unique offerings and the need to be able to have unlimited access and exposure to 'protect ourselves' against the exposures we offer to our clients.

There is nothing Goldman would like better than to limit other's exposure so they can have even more power in the market place. Goldman is nothing but a big gambling house. Look at the "products" they offer regularly. They are like, "I will pay you X amount of money if you buy this "contract" and the value of the underlying "asset" or "index" increases or decreases in value over Y amount of time". They limit ones gains but not losses. They also "protect" themselves against losses with derivatives.

There is NO limit to the amount of these types of products they can and do offer. This is only one example of how Goldman "creates" products based on underlying derivatives and commodities and indexes and hedges themselves against losses.

There is no legitimate reason for these products to exist. Goldman simply games the market. They use the billions they earn with massive leverage in the derivative markets to buy real assets where they control and monitor the output of the various commodities they are trading. They own directly or indirectly all types of commodity storage facilities, distribution facilities and outright production.

Goldman and Morgan Stanley should be immediately stripped of their bank holding status they were granted during the financial crises (along with Cap One, American Express, State Street and a host of other non retail bank finance companies as well as forced to repay all government guaranteed debt outstanding at artificially low government backed interest rates. They are fast back to their old formulas of risk taking and gambling.

The CFTC is NOT the agency to be doing piecemeal regulation. The financial industry needs total overhaul and total regulation and we desperately need a return to the Glass-Spiegel Act days of separating retail banking from insurance from investment banking etc. We need total regulation of the hedge fund industry and we need to come up with completely new ways to deal with the way in which the financial industry has learned to game the entire market with technology, leverage and control.

Apple's Great Mistake

It has occurred to me for some time now that Apple is shooting itself in the foot by going with exclusive deals with carriers. So I thought I would write this down.

Sell AAPL. Unless they open up to all carriers very soon, they are creating a situation where the vacuum in availability for their product amongst the other major carriers is causing those carriers to scramble and throw money and resources at makers of competing products.

Palm would have no chance, no matter how good the current version of the Palm and how good the operating system, against Apple if iPhones were widely available. Palm has had the most buggy and lousy PDA on the market for some 5 years now and this is why they are insignificant player in the market.

RIM has the best product on the market for what it does and they are playing catch up to Apple on consumer applications with the benefit of a large share of the corporate market and very strong presence there. Apple is not taken seriously in this space yet so they are essentially "split market" products.

The Android and other products by LG and Samsung are like always, doing the best they can to copy the real innovators in this space. Having said that, the Korean manufactures are light years ahead of the US companies in technology in many other aspects because they have had 3G for a while now and their smaller countries and dense populations are breeding grounds for testing all kind of advanced applications using high bandwidth while the US is in the 3rd world in many areas of application due to the old regulated monopolies doing everything in their power to resist investment and rake as much cash out of their customers with inferior technology as possible, the American Way, and it always fails.

Mr. William Poole's Comment on Goldman

Funny, the former president of the St. Louis Fed, William Poole, makes comment about Goldman's raking AIG over the coals before their collapse. His comment:

It’s not the responsibility of any private firm to determine what the public interest is -- that’s why we have a government.

Strange when someone who basically resigned because of his interest in Goldman was seen as a complete contradiction to his job "protecting" the financial system, hence the citizenry, would make such a comment.

I have been arguing for years now that the reason the credit markets and the hugely profitable unregulated, opaque derivative markets have not been regulated is because those that have a hand in regulating were just making to much money off the same markets they supposedly regulated to do anything about it. Look at the impotent SEC, Fed, Treasury, Legislative bodies and White House over last 8 years and you get the picture.

Now, for someone who is no longer in their highly powerful and influential position to come out and say, "Hey, I know I was in government when all this was happening and I know we did not do shit about it, but that is tough cause it's nobody else's responsibility either." is kind of a joke.

Finally Agree with Geithner on Regulations Needed

I was pleased to read on Bloomberg today that Mr. Geithner has a plan to regulate over-the-counter derivatives. This is so overdue and I have been frustrated for 3 years by various leaders in Washington do anything about this market even though it was largely responsible for the collapse of the global economy.

Not only was it largely responsible for the collapse but very dangerous precedents are being set as I write this where these exotic financial products are being used as a gauge to price debt.

These contracts represent a $684 trillion over-the-counter derivatives market and they are now typically conducted over the phone between banks and customers!

What an absolute trip. I know with the "trillion" word being passed around like water lately another "trillion" figure may not sink in but Think about this number for a moment. What is the US debt, $10 Trillion? We are talking $684 trillion here. Yes, yes many of you will say, "So what." there are trillions of dollars in "derivatives" out there on every other product, commodity, stock etc. traded every day. Yes, "traded" on "open markets" with clear pricing and risks born by those who trade them and these types of "products" are not "insuring" against default of debt.

I was so incensed when I heard a clip by Lloyd Blankfein where he made this point with a straight face. The guy is a raving lunatic in my book to be able to do so. He is a "Hitler" of finance. There is no question. Some may call him a genius but he defends destruction and annihilation of all around him from a financial perspective and as I have said a million times and will continue to say, with 6 billion people on the planet all more interconnected every day, guys like Blankfein and the businesses they run no longer serve any benefit to humanity, on the contrary, they are destructive to humanity, our "capital system" and serve no allegiance to any good on the planet other than to do whatever is necessary to return 30% plus to their investors irrespective to the damage they cause economies and individuals and they operate without rules governed by any sovereign state, territory or jurisdiction (except for the strings now on his firm after taking money from the government and borrowing to feed his machine with the backing of the FDIC).

So some reasoning has entered Washington and they seem to understand the importance of regulating these derivative products. Now what about the unregulated pools of global money driving this, Hedge Funds?

Bailout Goldman

The more I think about the bail out of firms like Goldman Sachs I really get fired up. Goldman is / was a gambling firm, nothing more, nothing less. They did business with the biggest gamblers out there, hedge funds, private equity, off balance sheet firms of banks and individual investor / speculators.

We bailed them out. They were not a regulated bank / financial firm. The Treasury had no right to bail them out with taxpayer money, or Morgan Stanley or any other unregulated entity.

The fact that the Treasury and Fed rushed through applications to make these firms "regulated banks" infuriates me. This was a complete hijack of sensible regulations and laws in place to define what firm is a regulated entity that has to conform to routine inspections and a certain legal framework and those that can gamble at will with money from people who wish to be involved in their conduct.

As far as I am concerned, the folks in Washington who orchestrated the bail out of unregulated financial institutions and who are now making over a trillion dollars of taxpayer money available to unregulated industries to buy debt should all be indicted and tried for wrong doing.

I am very firm on this opinion. In addition, I read yesterday in the WSJ about the way banks are treating business lines of credit. It appears no only have hedge funds and unregulated (now regulated) gambling institutions have figured out how to make a killing on CDS products but now the banks are using the CDS market pricing of institutional debt as a guide on pricing that debt. From article:

Now, lenders are cutting the length of many commitments to less than a year. They are charging higher fees for the lines of credit, known as revolvers. And instead of promising an interest rate determined mainly by the company's credit rating, banks will now charge more if the cost of insuring the company's debt against default is higher.

I feel this is very dangerous. Although the traditional credit rating agencies completely failed to do their job correctly for the last 5+ years with respect to the secondary market for various types of debt and companies who engaged in selling various secondary products, to resort to making credit available and at what price based on what speculators are paying and or charging for credit default products is very dangerous and will lead to very distorted pricing and benefit money lenders and speculators at the cost to real companies that create real products and employ people in industries that ad real economic output to our GDP (unlike the financial products / debt "industry")

The time has come to fire the Washington insiders, tell congress to get a spine and regulate the CDS and other derivative markets, pull the cash out from the unregulated firms who were fast tracked into becoming "regulated" entities and force them to fend for themselves. All this BS about "to big to fail" is baloney. The sooner these financial companies who have come to dominate our economy through debt products are gone the better for the long term health of our economy.

Utter Insanity in Treasury Plan to Aid Homeowners

I could not believe my eyes when I read this article on the evening of the 28th of April on Bloomberg.
In my life and yours there will never be another program like this. It is the biggest payoff to the mortgage industry / banks / speculators who hold mortgage debt ever devised disguised as a "homeowner bailout".

Our government has wrapped legislation designed to benefit big business with "consumer friendly" titles for years. Why? I guess it works. People in this country live by headlines and PR spouted by the loudest paid idiot so I guess it is fitting that congress and or the White House has long ago learned to give corporate legislation a consumer friendly title and all will be fine. Shame I use "consumer" to describe the American "citizen" but that is what American citizens are, consumers and nothing more (well solders but nobody will admit that).

The insanity of the government paying $2500 to "loan servicers" to rework a loan needs no explanation. This is taxpayer money going to help "homeowners" refinance their mortgage. Needless to say, "homeowners" (debtors) in this country already get the biggest damn government subsidy on the planet, living "rent free" as they write off the "interest" (majority of mortgage cost for the bulk of the loan) from their income on their taxes. Secondly, the spoiled, spoon fed, suburban raised baby boomers, were given the biggest "gift" in the history of tax giveaways under the Clinton administration (yea Clinton not Bush) with a $250,000 tax exemption on the sale of a primary residence with the only stipulation that one have lived in the property for 2 of the last 5 years.

So, "homeowners" live rent free, get to keep $250,000 in cap gains when they sell their home and NOW, they get a $2500 benefit from the mortgage company that refinances their tax free loan PLUS mortgage servicers (the people who collect the mortgage payment each month, first mortgages only) can get $4500 over three years if the loan stays on their books that long PLUS the BORROWER or the person refinancing their loan gets $5000 over five years as an "incentive" to pay their mortgage! An "incentive" to pay their mortgage? This money goes directly to towards reducing their principal balance.

Help me out here. Please? What in the hell is on the minds of the folks at the Treasury? I will tell you. Their G** D*** buddies! That is what is on their minds. They created the house of cards; this "economy" based on Usury, which has been advised against by every religion, every economic textbook of any useful significance and anybody with any common sense. We don't produce anything anymore so we have to base our economy on something right?

We cannot build tangible products in this country any longer at anywhere near the rate to maintain employment because we have dumbed down our economic expectations and wages as much as humanly possible to fatten the real "tax" in this country, huge profit margins on national oligopolistic business that control the sale and distribution of over 50% of the value of goods and services sold in this country, so we create an economy engineered by mathematicians with computer models that make it possible for one loan to one person to generate income and profits 5 different ways. Then when this pathetic, manipulated, unregulated house of cards comes crashing down we look to Washington (taxpayers) to finance the bail out?

I am absolutely disgusted by this entire thing and economically speaking, the Fed / Treasury / Government has borrowed, guaranteed, bought, lent and backed enough of the "economy" to last till about October 2009. After that, the entire thing comes crashing down big time. Get out now!

For more comical reading try this (subscription may be requred)

CDS's and their Twisted Incentives

I love this stuff. I wrote some time ago about how the CDS market was dictating the rates that companies were forced to pay when trying to borrow money. This implied the CDS market knew best which is a dangerous president.

Today Henry Sender of the FT reported about how lenders who covered their loans through the CDS market are actually pushing their own borrowers into default so they can collect the CDS payoff instead of negotiating with the borrower. This is perverse and brings to light again the reality that these "derivative" contracts are insurance and if enough companies with significant debt are forced into bankruptcy, there will be great strains on companies who sold these products and we could see more "bail outs" in the near future if the government is stupid enough to continue throwing money after the idiots who wrote them.

The articles (may require subscription) states in part:

Credit default swaps, the derivatives instruments that have figured prominently in the global financial crisis, are now being blamed for playing a role in two bankruptcy filings this week.

Bankers and lawyers involved in restructuring efforts say they are concerned some lenders to troubled companies, such as newsprint producer AbitibiBowater and mall owner General Growth Properties, stand to benefit from a default because they also hold default swaps, which entitle them to payments in such events.

“We have seen CDS becoming a significant factor” when negotiations on out-of-court restructurings fail, said Alan Kornberg, the partner in charge of the bankruptcy practice at Paul, Weiss, Rifkind, Wharton & Rice, speaking generally. “We used to talk about the practice theoretically but now we see cases where it is hard to get lenders to agree to tender or to compromise and then you find out that these holdouts had significant CDS protection.”

Such exchange offers require the support of a significant number of lenders, 97 per cent in the case of bondholders in this case. But those who withhold support often have powerful incentives to do so, either because they hope to be made whole or because they are seeking to force a filing that would trigger payments under their credit protection agreements, bankers and lawyers say.

So lend with abandon because you can "cover yourself" with some of those profits from writing the loans by buying "protection" from whatever idiot is crazy enough to write a contract on the debt. This reality has much to do with why we are in the mess we are in and how our US spineless government continues to fail to regulate this industry or it's players and instead shoves cash into the accounts of incompetent idiots who wrote the contracts for the benefit of those who purchased the contracts. Now the government owns the banks that benefited from the bailout and the company of the largest number of idiots who wrote them. Is there a conflict here? Are there conflicts everywhere? Can the government "be the market"? Hell no.

Have fun with this rant to my friend James...

Hello James,
I don't have Doug's email but I thought of him today when I was reading about new solar power plants being built in Arizona and Nevada.

My fear is that all these solar power plants we are building to "capture" the sun's energy are actually going to exaggerate our planet's move toward global warming. See, even though burning fossil fuels create CO2 and soot (which gets in atmosphere and lands on ice helping it to absorb sunlight and thus melt faster) which trap warm air in our atmosphere, at least burning fossil fuels are net planet neutral for now ie; we get fossil fuels out of the ground and burn them and create pollution but the earth is still getting the same amount of sun light as before and hence since we simply "wasted" all the energy of the sun since the beginning of man (except for with respect to planting crops). We were essentially ignoring the real power and energy of the sun.

Now the dilemma is, if we start "capturing" the sun's energy with solar banks covering thousands and even millions of square miles, over time, we are essentially capturing high amounts of the sun's energy and feeding it into transmission lines and sending it to where it is then "used". Anywhere energy is "used" it generates heat at the "use source". Now this heat is released into the atmosphere and it is real heat that did not originate from "within" the earth's crust.

Let me put it another way. If we are going to be "using" or "burning" fossil fuels this is really no big deal because the earth is a zero sum energy source over the short term ie; it took heat and pressure of the earth's crust to create the "energy" sources we use such as coal and oil and now we are simply transforming that "energy" from the earth to usable sources on the surface again. We are not really sure where oil and coal come from, ie; were they once organic matter that pressure and heat and biological happenings over time converted this organic matter into an "energy source"? Not to try and answer that question here, suffice to say, it took millions if not billions of years for the earth to "absorb" enough of the sun's energy to create enough organic matter to ultimately turn into a burnable energy source which we pull from the earth's crust.

Back to the solar thing. So if you get my drift, what we are essentially doing is accelerating dramatically the earth's absorption of the sun's energy, shoving that energy into our "energy transportation infrastructure" and exporting it back out again as heat. Allot of heat. More heat than the earth would be remotely capable of absorbing without the added technology of the solar panels to be able to absorb. These panels are not "reflecting" the sun's energy and heat back to the atmosphere, they are absorbing every bit of the sun's Light or better put the Sun's electromagnetic radiation. In fact the more they absorb the better the technology for capturing the sun's energy and the more efficient the energy production and unfortunately the more heat is released when the energy is used.

Another technology which provides power from the sun is called concentrated solar power" (CSP). This essentially means creating an array of large concentrators (not unlike you concentrate the sun with a magnifier as a kid and can burn stuff), concentrating the suns energy and using that energy to boil water which turns turbines and creates energy in a more traditional way. (Note: I am more in favor of this type of power generation from sun's energy as these plants can be run by natural gas when the sun's energy is not sufficiently strong and can be use in more northern and southern hemispheres and the boilers store enough energy to run the turbines at night acting as stores of energy.)

To summarize, I thought of Doug because even though we were quite trashed when we were out in the woods talking about wind power and Doug's hilarious observation that the windmills would somehow alter the rotation of the earth and or currents (in the case of under water "current mills") his observation has stuck in my mind and I do believe there is a real need to study the long term effects of so effectively "capturing" the sun's energy in such a way that produces real heat upon it's output.

Hope I did not bore you to death:-)

Patrick

Goldman upgrades REIT's

So Goldman put Simon Property Group (SPG) on conviction buy list and upgraded SL Green Realty (SLG) today. Can anybody guess why? The commercial property sector is the next potential dominoe to fall in the credit mess we are in. This is a funny quote also from Wachovia analyst Carl Reichardt from Dow Jones:

"As a result of lower interest rates, aggressive pricing and the Federal Government's tax credit program for first-time homebuyers, we expect macro-news flow related to customer/builder sentiment and new home sales activity to be increasingly positive over the next four to six weeks,"

He does not say the industry is going to improve, only that the "spin machine" will be touting a "recovery" in these stocks over short term.

Now, why is that? Why is Goldman upgrading these stocks at levels where they have already recovered by nearly double their recent lows? You guess. Yea, Goldman has a huge amount of exposure to the commercial real estate sector as do other "investment" firms and they need to get out before the thing crashes bring wave 2 of losses to their books.

Will the Government bail them out again? Can one say "Awe, those poor commercial real estate developers" the way they can spin "Awe, those poor homeowners"?

Be VERY wary of buying any REIT stock right now, very wary.

Good little post by Adrian Salbuchi

http://www.youtube.com/watch?v=xnnajAVspWU

This summary deserves merit because of a couple good points. One being the idea that the "derivative" market has become so huge no government has the resources to bail out the system. I have mentioned this many times. The other value is his analysis of the global financial situation based on four parts, as the four sides of a pyramid.

However, he should technically have a pentagon since his rant about the derivative markets are really a 5th side but he obviously would loose his theses title of the pyramid in global financial markets. To bad, the guy is smart bout could not figure out a catchy way to use a 5 sided analysis.

There are also 2 areas he is weak in presentation (first part of video):

1) Ponzi analysis flaw 1 second side of pyramid: "Private money exercises control over central banks." Actually, in the US the "central bank" is a "private bank" so this analysis does not work. However, he could have said the "private banks" (including the central bank or fed reserve bank in US) exercises control over the "government" through the insufficient supply of money, hence forcing not only private industry to borrow but also the government to borrow (since the government no longer issues money directly) and thus the "central bank" has the power to control interest rates and the cost of money to both private industry and the government and ultimately it's populace since they pay for government through taxes.

2) After analysis of privatising profits but socializing losses he mentions the Fed Reserve issuing "fake money" which "we all" pay for. Actually the rest of the world does not pay for this unless the issuance of money causes a collapse in the dollar which much of the rest of the world holds as a reserve currency. If in fact the dollar is highly devalued then his statement holds up. The world will indeed pay for the recklessness of the Fed's actions.

Secondly, the Fed is buying back it's debt with "new money" not necessarily "fake money". The "new money" is "real money" and is not being "borrowed" by the government. Instead it is being "printed" new. Now "printed" is also a term to be not misunderstood. This money is actually not being "printed" in the way we all think of $20's rolling off a printing press. The money is being lets say "injected" into the accounts of those who purchased the government debt in exchange for that debt. So even though the institution holding the debt could have simply "sold" the debt to the open market, this action would have resulted in no net gain in "money" in circulation. By the Fed "issuing new" money to buy this debt they are adding "money" to the financial system the institution can then use to expand lending to others or more likely as banks hoard money, simply buy more government debt at the next offering. All these actions are quite unprecedented and these actions have also been taken in Japan and the UK from what I know.

I will not critique the second part of his video as it is all speculation and offers no tangible solutions (Idea about the "good gold vs bad gold" is interesting). To bad, the guy has lived through so many of these crises and still does not tell us what the hell to do but "citizens hold your leaders to account". Like who knows what in the hell to hold them account to? Why does he not say, create a new model of economic / financial regulation and rules of the game so this cannot happen again not unlike what they tried in the 30's before all was reversed in the last 15 years?

Once again, this is a good summary but offers nothing else.

Mad as Hell

I thought I was mad as hell a few weeks ago. That was after reading about the $200 Billion the Fed was going to offer to Hedge Funds or anyone else willing to take the money and buy consumer debt with it while the Fed automatically was willing to take a 10% "haircut" on the deal assuming it would be lost up front. There were many reasons why this pissed me off.

Now I am madder! Reading an article in the Wall Street Journal today made me so mad I am not even finished reading it yet and I had to write this post.

I just got finished reading an article on Bloomberg about the incompetent SEC and their blatant and pointed failure to investigate short sellers or otherwise enforce any of the rules on the books with respect to short selling for years. It appears anyone with half a brain in the industry will tell you the shorts drove Bear and Lehman out of business. I mean this game has been going on for over a century. The fines that were levied were by the NYSE or the AMEX and who got the largest fine since July 2006 from the NYSE? None other than J.P. Morgan Securities. This is all old school BS from the Blue Blood firms on Wall Street who have been putting their competitors out of business when the opportunity arises for over a century.

Yea, that article did not piss me off so much because I have been writing for years how incompetent the SEC is / was / and will be for to long to be surprised or pissed off by anything those num-nuts did or did not do.

But this WSJ article... That is a different story.

So we have this Geithner protégé of Paulson and his infinite wisdom of continuing the print money and bail out Wall Street mentality he was trained into talking about is brilliant scheme to pump over $1 Trillion of cash into the hands of hedge funds or whoever is willing to then buy debt with it. Yea, OK, so it is bad enough that the Treasury / Fed / Guaranteed debt program has practically BEEN the debt markets for going on 6 months now but now we are going to expand it for another 6-9 months only through the avenue of the unregulated markets.

Yea, that is what I said. We are asking the pigs in the unregulated markets to bail out the "shadow banking system" i.e.; the business model that you borrow money from the "markets" and lend it to consumers to buy shit when you are not a bank and are not regulated like the banking industry.

Side note: I remember back in 1989, during the last real estate / banking / S&L / junk debt market bubble imploded and my mother was taking money from investors and buying foreclosures with it and flipping them and she got a letter from the MD State Banking regulator inquiring whether she was acting as a bank, taking deposits and paying a rate of return. This was basically harassment instigated by a local bank that obviously was not pleased by the competition she may or may have not posed to the property developer owners of the bank. Needless to say, since then it seems any organization could raise money from just about anywhere and lend it out so long as they did not open "retail" branches.

OK, so the Obama Administration's stance on pay for the participants:

To encourage investor participation, the Treasury believes participants in the program shouldn't be subject to executive-pay rules imposed by Congress. The law authorizing the $700 billion bailout and a provision in the $787 billion stimulus package impose tough pay restrictions on firms that receive government funds, including limits on bonuses.

Of course not. These people are hurting. I mean I just got finished reading about Greenwich's "Rodeo Drive" and the impact of these hedge fund folks declining income levels. God forbid we subject an unregulated industry to some kind of cap on how much of the cash they can strip from the government handout. I mean, the government is already willing to take a 10% loss. Now if I were a smart hedge fund manager, I would be willing to jump in and buy assets now only if I thought 1) they have fallen so far there is little to no risk buying them and 2) with a 10% write-off by the government up front, I know I can take my cut because I can easily beat the pathetic odds a desperate bunch of rookies in Washington are willing to give away to play this game.

This is a good one:

Administration officials are hoping the public will draw a distinction between financial firms that receive a government rescue, such as AIG, and those such as hedge funds and private-equity firms that participate as investors in broad government programs.

Let me rephrase this for you. The Administration officials are hoping the public is just stupid enough to allow them to take taxpayer money and give it to a bunch of unregulated pigs who are directly responsible for much of the malign in the financial markets right now and differentiate between those pigs and the other ones that Paulson bailed out last fall when he gave AIG $80 Billion that promptly went into the accounts of his former firm who was made whole on the worthless paper they held from AIG while managing to make a fortune shorting the stock and on AIG CDS's bought from third parties. Goldman knew the contracts AIG sold them would bankrupt AIG as there was no way in hell any company could cough up the kind of collateral needed to cover the contracts AIG sold for pennies on the dollar that covered billions in debt.

Read this:

Targeting mortgages that banks no longer want to hold, the Treasury and the FDIC will provide financing to buyers. The FDIC will auction off pools of loans that a bank wants to sell and will become a co-owner by forming a partnership with the highest bidder.

The partnership will then raise FDIC-guaranteed debt to finance a portion of the purchase price, with the Treasury willing to kick in between 50% and 80% of the equity needed to buy the assets. The Treasury will be an equal investor in the partnerships.

Why the F*** are they bothering with the private industry at all? Because the government is trying desperately to figure out how to make their buddies "whole" again. I mean, when the dot com crash hit shortly after dragging some long established companies in the toilet with them (along with the telecom industry, the Enrons' etc.) what a better way to dole out big fat government checks then to have a war?

Well the peace-nic administration is up to its eyeballs in war, debt, bankruptcies and the like. So how in the hell are they going to keep the artificial free market economy with it's consolidated global financial industry (not to mention almost total consolidation of every other GD industry in the US) afloat? Print money! Yea. And don't forget, include the unregulated financial markets, and don't forget, take the vast majority of the risk for further write downs or financial collapse, and don't forget, we are all partners here:-) Smiles for everyone. Back to Greenwich and "Rodeo Drive".

Oh don't forget:

Lastly, the government will expand the Fed's Term Asset-Backed Securities Loan Facility, or TALF, to help absorb risky assets dating back several years.

Yea, ingenious.

Lastly I am absolutely dumfounded pissed at the insistence of calling the s*** the banks bought over the past few years "assets".

In an op-ed piece in Monday's Wall Street Journal, Mr. Geithner wrote that the efforts will help tackle the glut of assets clogging bank balance sheets and will help provide some kind of normal price for these assets, which the Treasury believes are currently undervalued.

God Damnit, the stuff is worthless paper. Get over it. It is gone, lost, worthless. Write the S*** off and if you go under so be it. There are plenty of folks out of a job from the financial sector who are perfectly capable of opening a fricken retail bank to serve the rest of us lowly servant citizens...

Madagascar’s president steps down

I have been lightly following the turmoil in Madagascar through the FT over the past couple weeks and I would love for someone to do a dissertation on the island country. Economically speaking, they seem to have quit a wealth of natural and land resources and as usual a tiny elite exploiting the resources while most live on about $1.00 equivalent per day.

This quote from the latest FT article is fitting:

While a business elite – of whom Mr Ravalomanana is among the most successful – has grown rich through agriculture and other ventures, the average Malagasy survives on about $330 a year. They have yet to see much benefit from the arrival of foreign investment in biofuels, bitumen and titanium.

The collapse of the vanilla market, and, as the tensions spilled over into violence, the tourist trade, only added to resentment stoked by a agreement last year to lease half the country’s arable land to a conglomerate planning to use it to feed South Korea. That the deal was subsequently halted did not assuage the outrage the Mr Rajoelina was able to harness.

You know, I feel very strongly that this dynamic has been strongly applied to the developed world over the past 10-25 years (depending on when you start the cycle) by private equity and hedge funds who's main objective is to do everything possible to harness all productive capacity and resource production with the use of high degrees of leverage and suck as much of the profit as humanly possible from the enterprises regardless of the plight of the citizens of the planet they squander.

I agree this is nothing new in our short and pathetic experiment with "free economic" models. But I have said and will continue to say, with 6 billion people on a very interconnected planet there simply no longer exist any positive value to trillions of dollars sloshing around in the hands of a few in unregulated markets trading anything and everything to suck as much wealth out of the "economic system" as humanly possible without respect to the plight of the population of the planet.

Credit Default Swaps on US Government Debt

OK, correct me if I am wrong but the US currently has over $7 Trillion in debt floating around out there. Now, those are no small potatoes.

Correct me also if I am wrong, but our current financial mess, including the bailout of AIG, greatly owes it’s thanks to the CDS market.

A quick Wikipedia definition is in order here:

A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument - typically a bond or loan - goes into default (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded. Credit Default Swaps can be bought by any (relatively sophisticated) investor; it is not necessary for the buyer to own the underlying credit instrument.

Now can someone explain to me exactly WHO has the ability to guarantee or pay off $10 Million in US Government debt (the usual denomination for a CDS) multiplied by millions if the US Government actually defaulted on it’s debt?

Isn’t this what got us into much of the mess we are in? Idiots actually sold Credit Default Swap contracts on debt securities backed by garbage mortgages, car loans, credit card loans, personal loans, loans for leveraged buyout firms, loans to hedge funds and others taken out to buy yet more debt securities in a kind of vicious circle / pyramid scheme, loans issues by banks to firms they created to buy their own garbage securities so they would not exist on their over-leveraged balance sheets…

Come on now. Help me out. Why in the Hell hasn’t the CDS market been shut down? I am completely baffled by the fact that anyone is crazy enough to issue, buy or trade CDS’s right now since it has become painfully clear that the sellers of the shit have for years not had the collateral to back their issuance and this has been proven over and over again. These are “insurance” products that require no regulated capital to guarantee payment in case the debt they are written against actually defaults.

So why is this stuff floating around guaranteeing US Government debt? And why in the HELL is Geithner calling on the unregulated Hedge Fund industry to take $1 Trillion in new government money to buy more garbage debt from the defunct credit markets? Help me out here? I read an article this week that claimed the price of insuring $10 Million in US Debt had risen to $90,000 per year. Brilliant. Now who in the hell is going to pay the $10 Million if or when the US Government defaults? Isn’t the idea that there ended up layers of these “insurance” products valued at something like $70 Trillion that contributed greatly to the “credit crises” we now face? The idiots who originated the “insurance” products bankrupt their companies and to this day, the US Government is bailing out institutions like AIG with tax payer money so they can continue shoveling the cash to the counterparties of these instruments.

On top of that, the firms and the government agencies involved in the bailouts refuse to tell us who those counterparties are or why they don’t just force a settlement of these contracts and for all parties to take their losses and walk. Instead, our future tax dollars (cause none of this is today’s money, it is all being borrowed for us to pay tomorrow) are going directly into the coffers of God knows whose buddies and they are getting downright rich off of it.

I have completely had it. Our legislators are ignorant impotent pushovers. The people running the treasury are bailing out their buddies and the Fed is going to go bankrupt trying to “be” the credit market. The dollar, or the confidence in it, is in real long-term trouble. What in the hell is going on here?

If the Chinese were worried about US Government debt a year ago they should have bought ALL the CDS’s people were ignorant enough to write. Hell they could have bought US Government protection for $40,000 per $10 Million and be cashing out here at over 100% profit on the CDS contracts alone not to mention still collecting interest on the underlying debt.

Have I said enough? Shut down the CDS markets. Force settlements of all outstanding contracts and regulate the hedge fund industry TODAY.

Thank you Bernie

Driving and listening to NPR this evening I heard two guests talking about the Bernie Madoff guilty plea. One guest had, at best, a trailer park knowledge of the workings of the investment world and continuously refered to "her sources" an could do no more than focus on the few million dollars Bernie and his wife managed to squirrel away in her name. Listening to this woman was worse than listening to a bunch of impotent Senators talk about Wall Street bonuses. The more I listen to the "news" and "news shows" with supposed "knowledgeable" reporters and other industry appointed "experts" the more incensed I get with the ignorance being blatantly displayed about the world of international finance and the workings of unregulated funds.

Every time I hear "the SEC 'investigated' Madoff's business" and gave him a clean bill of health my eyes roll. Since when in the last 20 years did the SEC do a damn thing? Anyone who has known me for a while will remember my outrage when Eliot Spitser had to do their job for them for 5 years and the how pissed off I was when he came to DC to sit in front of our spineless, impotent government while being sneered at by the SEC for making them look like the complete fools there were.

So the media saying "the SEC did nothing to stop Bernie Madoff" is like saying its hard to light a match when it is raining. Duh. The SEC did nothing for 20 years.

Then I hear people suggesting the SEC is responsible for them loosing money with Madoff. Well this is just as comical. Madoff operated his "fund" like a "hedge fund" and from what I know, they are not regulated. The SEC only looked into his clearing operations, not his "fund". They apparently had him register as an advisor, but about that time, the SEC had started a program requiring certain Hedge Funds to register with the SEC. However, the Hedge Fund industry sued and had that requirement overturned. So if (and I don't know if this is the case in Madoff's fund) Madoff was required to register under the then "new" SEC requirement, he could have withdrawn his registration like many Hedge Funds did after the overturning of the rule in court.

So what is the moral of this story and why am I thanking Bernie? It is because as far as I am concerned, Bernie may have done more harm to the reputations of unregistered pools of cash burning every asset class on the planet then any impotent SEC or government body possibly could have. And, until unregulated pools of capital and their wrath of unregulated insurance products and the like are completely removed from the global financial system, we are going to have serious problems.

Thank you Bernie. You are scum. But the Banks, Wall Street firms, Insurance companies, and other "financial firms" that have been allowed to become "regulated banks" who have all taken taxpayer money and cannot or will not explain where it went are all the same right now. They take taxpayer money, put in a pool of cash and pay out others with it. What is the Fricken difference?

All the pigs became ridiculously over leveraged and lost the capacity to segregate any aspects of their Enron structured, far fledged, business. All of them have done everything possible, including stealing from their clients funds, instituting ridicules arbitrary fees, charging for services that were supposed to be free or included in certain types of accounts, raising interest rates or any other scheme they could think of to stay afloat.

I have personally witnessed each of these in my bank, investment and credit cards in the past 9 months. Just ask me and I will give you an example of each one listed above.

Blackstone Numbers

I just looked over the Blackstone numbers and although I am no genius in understanding their business model, it looks like they took some hits in their portfolio values and more will come in 2009. This is how the FT presented the story:

Blackstone reveals $827m quarterly loss
By Henny Sender in New York, Published: February 28 2009 02:00 | Last updated: February 28 2009 02:00

Blackstone yesterday revealed a fourth-quarter loss of $827m, reflecting extensive markdowns in the value of its private equity and real estate investments, and told investors it would not pay them a dividend for the quarter...

"Last year was the year investment banks and hedge funds were undressed," says the co-founder of one of Blackstone's peers. "This year, it is the turn of private equity."

Blackstone said its corporate portfolio lost almost $4bn in value for the year, a 29 per cent decline. The value of its property holdings plunged 40 per cent.
Neither the earnings announcement nor remarks on conference calls gave investors reason to believe that earnings growth was likely to pick up soon, given the dramatic downturn in the global economy.

Tony James, Blackstone president, referred to current economic conditions as a depression.

Fascinating to me is Blackstone is a "manager" of the assets they bought hence, their "fee" income will decline if those "assets" they have in their portfolio fail to perform but Blackstone itself seems to have structured itself as a fee earning company while all of the "assets" are off the Blackstone balance sheet.

So, if I have it correctly, Blackstone gets investors together, does a major leveraged buyout (when money was available), pays itself handsome transaction fees, might put a little skin in the game up front, then does a "management contract" with the entity they arranged the buyout of, thus earning more fees, but allows the bought asset to operate "off the books" of Blackstone. I guess it is kind of like the hotel model. Some investors put up some cash and borrow more money and build a hotel then hire a "brand" company to come in and manage the property. The "brand" in this case is Blackstone, carrying a management fee for managing the bought business (hiring CEO and upper management etc.) but the "investors" are "holding" the asset off the Blackstone books.

I am more than fuzzy on where the now $94 billion of assets under management reside. They took something like over $4 billion in write-downs in the 4th quarter with total assets under management declining like $8 billion for the year. But where are these assets?

Interestingly, "fee earning assets" increased by nearly the same amount. So how does this figure? In addition, it looks to me like the "partners" of Blackstone pulled nearly all of their own equity out of their real estate portfolio so Limited Partner Capital Deployed fell from nearly $15 billion to about $5.5 billion.

Well during the buyout hey day I wrote about how these "private equity" funds were literally robbing the banks of the corporate entities they took over, stealing all the cash through all kinds of "fee" transactions, bizarre payouts, "commissions", funding payouts etc. all the while leveraging them to the hilt. I had no idea they were so creative in removing these entities from any liability of Blackstone itself. So, I guess if there are bankruptcies in their assets under management they will figure out how to earn "fees" managing the bankruptcy, financing the bankruptcy, taking huge chunks of assets for pennies and eventually making a killing again when / if the companies emerge from bankruptcy and get floated back on the market. Gotta hand it to these guys.

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...