Friday, March 20, 2009
CNBC billed the first hour as one of 'hedge fund legends' opining on the current state of financial markets and the economy.
It was, to be sure, an interesting hour. But not necessarily for the reasons CNBC expected.
First, there wasn't really anything special about these three particular managers. One might even suggest that CNBC couldn't get the "real" legends- Steve Cohen, Eddie Lampert, or one of the founders of Brahmin or Fortress.
What was on offer was surprisingly transparent, in the cases of Gabelli and Cooperman.
First, Gabelli is really the only large-scale, active manger of the three. And he was recently in danger of doing jail time for abetting a woman who either was his employee, or the wife of an employee, in fronting for Gabelli to acquire a federal spectrum license. The case got a lot of attention, and Gabelli was severely tarnished for having obviously, if not at the level of proof of criminality, played games to get the value of such a license on the cheap by exploiting minority set-asides.
As such, Gabelli presented himself as fast-talking, on the make, and generally shallow. Very marketing-oriented, as if his appearance constituted a great, free sales opportunity.
Cooperman was a bit more interesting. While I have not ever met Cooperman, I have had a fairly close acquaintance and a business partner who know him well. Cooperman was, years ago, the Abbey Joseph Cohen of Goldman Sachs before it was such a prominent post. Since his departure from the investment bank, Cooperman's track record with Omega Partners, his hedge fund group, has apparently been uneven, to say the least.
Looking at him on the CNBC set, one saw, as with Gabelli, a bit of delight at the free marketing opportunity for his fund. Cooperman's Omega is an active fund, but I don't believe he has the assets under management of Gabelli's fund complex.
From my personal contacts, I gather that Cooperman is very tempermental and prone to weight gain when under stress and performing poorly in the markets. It looks like last year wasn't good. He also is sporting what can only be described as a colossal comb-over.
Alone, it might have been less noticeable. Flanked by the snow-haired Gabelli, and the purposely-bald Steinhardt, Cooperman appeared much less natural.
While Cooperman made some decent points about recent market performance and government intervention, he was, on the whole, predictable and safe in his remarks.
Then we come to Michael Steinhardt. I had not seen much of Mr. Steinhardt prior to this appearance. Other than reading about him in years past as a prominent and highly-successful short investor, art collector, and founder of WisdomTree, he was pretty much a mystery.
But, by a country mile, he was the most interesting and compelling of the three "legends" on CNBC this morning.
What impressed me most about Steinhardt was his laser-like focus on what he termed the 'change in morality' in the US during this period of economic uncertainty and deleveraging. His slow, careful, richly-structured comments reflected a very intelligent, philosophical and wide-ranging mind.
Of all his comments, the three which impressed me most were these:
-The recent and ongoing shift in morals and sentiments of US citizens are of paramount importance with respect to our economy and financial sector and markets in the foreseeable future.
-The current administration seems to be attempting to skip the 'restructuring of debt' step necessary to any economic recovery, and moving directly to flooding markets with liquidity, while leaving inept managements, such as auto makers and commercial banks, intact, rather than force them through bankruptcy. Steindhardt clearly indicated a disbelief that this will work or be productive.
-What is meant by a "depression" in our current environment? Due to automatic stabilizers, i.e., transfer payment mechanisms, Steinhardt believes that an unemployment rate as low as 12% will trigger consumer behaviors and public sentiment generally associated with much higher 'depression' unemployment levels.
-With respect to the next six-twelve months, he prefers to not lose any more money and sit tight, rather than allocating assets to the market in long positions.
Overall, Mr. Steinhardt projected an intensely astute, contemplative and really, really intelligent persona. I'd love to spend a long, non-alcoholic lunch with him. It would be a fascinating discussion. His calm demeanor and self-assured Socratic approach to his own thoughts and the comments of his fellow guests marked him as an unusually open-minded, insightful and candid observer of the US economy, its financial markets and citizens.
Doug Dachille joined Steinhardt and Cooperman for part of the next hour, providing an electric and fast-paced disgorgement of opinions. Dachille expressed some very blunt opinions casting doubt on the current government handling of the financial crisis, but also made some fairly silly comments contending that the holding of index funds has been the cause of poor corporate governance.
While it's difficult to recall every exchange among Gabelli, Cooperman and Steinhardt, the lasting impression I have is that it was somewhat less of an "event" than the CNBC producers had hoped. They would have been more successful by simply having Steinhardt on alone, or perhaps with Bob McTeer, Richard Armey or Michael Holland.
Thursday, March 19, 2009
This morning's Wall Street Journal noted,
"But the Fed's statement Wednesday dropped any reference to the economy recovering "later this year," hinting at the reasons for its drastic move and a warning sign for anyone piling into stocks."
But, didn't Bernanke just appear on CBS' 60 Minutes last Sunday to spread the word that the US recession would be over later this year?
Am I to believe that, in only two days, the US economic picture has deteriorated so much? Or was Bernanke just lying, to spread confidence? Or, did he simply not really have a well-informed view on the economy?
Here's what else confuses me.
Essentially, beginning in the summer of 2007, with the collapse of two Bear Stearns mortgage-backed instrument mutual funds, there has been a global reduction in leverage. That is, the creation of debt capital by many parties began to be reversed, first by the reduction in the market values of such debt, and, subsequently, the failure of lenders to provide new cash in exchange for maturing debt of various types, especially short term notes financing entities such as mutual funds holding structured finance instruments of dubious value.
As such, we are in the midst of a rare, but clear global contraction of leverage.
Simultaneously, the US began to enter a naturally-occurring recession. Recessions occur periodically as a natural part of economic cycles. They cannot be avoided, but sometimes can be softened.
In this case, however, the combination of the global contraction of credit and the US recession have resulted in GDP and employment declines on an order similar to that of the 1981-82 US recession.
We didn't see an FDR-style New Deal in response to the Carter-induced 1981-82 recession. Spending didn't skyrocket.
In fact, President Reagan quickly moved to cut spending and tax rates. And that worked. Those actions laid the foundation for twenty years of healthy, productive US economic growth, during which the several recessions were relatively mild and short-lived.
What am I missing?
What has changed, besides the tendency of Americans to now believe panicky calls that the economic sky is falling?
Whether you believe Alan Greenspan's recent, continuing self-defense in the Wall Street Journal, that he was right, and Stanford's estimable economist, John Taylor, was and is wrong, or not, it's a fact that too-cheap money in the US, in the wake of the technology equity bubble collapse, led to irresponsible debt financing of risky mortgages.
I wrote recently, here and here, of the phenomenon which we are currently experiencing: the combination of global deleveraging and recession. In the second post, I noted,
"On one hand, there is, based upon the NBER's December statement based upon job losses, a US recession which began in late 2007.
However, within this recession is a secular trend of economic shrinkage that will not be reversed by anything but a return to higher leverage. Thus, no amount of unleveraged economic 'help' will reverse these losses and the accompanying fall in GDP growth.
Seen from this perspective, the only way in which a new, massive Federal stimulus package can provide 'recovery' is to substitute government-issued obligations to return US societal economic leverage back to the dangerous, unsustainable levels at which it was before the current crisis.
How is it that leverage undertaken by the private sector, and judged imprudent, can now be replaced with government-sourced leverage, in the form of either: 1) more printed money, or 2) increased sale of government debt, without creating even more risk by spending the money in less accountable, measurable ways through political channels?
The simple fact is that, for the US economy to lower its capital leverage, and adjust to that lower leverage level, some jobs and business activity will have to simply vanish and not return. Whatever economic level we enjoyed, from which our current recession guideposts are measured, it logically follows that we cannot return there anytime soon unless we collectively decide, as a society, to try to raise financial leverage back to what it was.
If we decide this is unwise, then we have to accept that unemployment will be higher, and business activity levels lower, as the marginal, leveraged activities have been eliminated with the fall in financial leverage.
There is no other way around this fact."
This week's indication by the Fed that it will use newly-printed money to buy Treasuries, and other, less-highly rated assets, in order to effectively provide leverage to the US economy, would seem to be returning us to exactly where we just came in mid-2007.
Why is it so hard for people to simply accept that the economy, and our level of economic activity, will be smaller and lower, until such time that lower-leveraged business activity grows back to GDP and employment levels earlier seen with higher leverage?
Anything done in the meantime to simply "create jobs" or "provide credit" when these are not truly market-driven activities, will be, of necessity, temporary and market-distorting. What deserving business activity is awaiting credit?
Isn't the situation of our commercial banks one of having money for which there are few attractive opportunities to lend?
Isn't this week's Fed statement simply delaying the inevitable? That is, the return of economic activity, leverage, employment, and other related variables back to their deleveraged levels, until such time as genuine private capital investment underpins real economic growth, rather than false, government-stoked temporary inflation, job- and money-creation?
If our government institutions replicated their actions of 1981-82, rather than those of 1932-38, perhaps we would see a faster, healthier and more reliable end to the current recession, rather than the creation of an atmosphere of panic and deep crisis, where none exist.
By claiming that banking, economic activity, and housing are all in a deep crisis, our various governmental entities seem to be prolonging our economic difficulties. Why treat a recession as worse than it is, and ignore conventional, previously successful tools, like tax and spending cuts?
I think what we need is properly-scaled, fairly routine actions like those of 1981-82, which led the US out of that recession, rather than unusual, crisis-oriented actions like those of the 1930s, which we now know prolonged and deepened that depression, without ever actually ending it.
Faced with a 0% interest rate, all the Fed can now do is to pump money into the US and global financial markets by purchasing financial instruments.
But, as I wrote in this post earlier this month, where is the money coming from? By what means will investors continue to value US dollar obligations as the Federal Reserve either prints more money or borrows more money with which to buy more questionable assets from US financial institutions.
This approach may have led to a one-day equity market rally, but, longer term, it has to have inflationary implications. And that, of course, is bad for equities.
In a healthy US economy, or one in a normal recession, the Fed can command sufficient confidence to add liquidity to the economy without necessarily causing long term economic damage via inflation.
But the US economy is currently deleveraging in the midst of a recession. What Bernanke is proposing, in conjunction with the federal government's many spending plans in excess of several trillion dollars, is to essentially releverage our economy.
But isn't that what we now believe was a mistake? Private over-leveraging of our economy led to unsustainably low interest rates which fueled bad lending and overconsumption of housing.
Isn't Bernanke's solution of adding a trillion dollars to global capital markets just repeating, with government money, what was viewed as a mistake by private markets only last year?
Wednesday, March 18, 2009
One reader left a comment that merits being reproduced here, for direct rebuttal. It's typical of the sort of rant one hears from uninformed, narrow-minded union members who tend to reject reality and view the situation through the lens of their own denials. The capitalization has been left as it appeared in the reader's original comment.
"AHEM...TRY GETTING YOUR FACTS STRAIGHT ABOUT THE MAJORITY OF IL. PENSIONERS AND the il pension sytem......know what you're talking about...
HERE'S THE TRUTH....... JUST DON'T BLAME THE ILLINOIS BUDGET CRISES ON THE PENSIONERS...OR THE PENSION SYSTEM...!
Debunking Illinois Pension Myths!.
Myth: Illinois has too many public employees.
Reality: Illinois actually ranks 49th among the states, next to last in the nation, in number of state employees per capita.Historically, Illinois has not been a high public employee head count state. Instead, Illinois is mostly a grant making state– that is, rather than hire state employees to provide services; Illinois disburses grants to independent providers such asLutheran Social Services or Catholic Charities, which in turn deliver the service to the public
Myth: Public employee benefits are too generous.
Reality: For most Illinois public employees, their pension is all they receive upon retirement – fully 78% are notcovered by and do not receive Social Security. This is unlike workers in the private sector, who receive both SocialSecurity and private retirement benefits.
4. Myth: Illinois’ current defined benefit system is too expensive.
Reality: The ‘normal cost’ of a pension system is the contribution required from an employer to fund the plan’s benefits.The weighted average ‘normal cost’ across all five Illinois pension systems, as a percentage of active members’ payroll,averages 9.13 percent. The national average for state and local government is 12.5 percent, placing the normal cost ofIllinois’ current defined benefit program far below the national average.IL PENSION SYSTEM BENEFITS ARE ONLY ABOUT 49TH AS GOOD AS OTHER STATE PENSIONSSTATE HAS A NUMBER OF EMPLOYEES FAR FAR BELOW OTHER STATESPENSIONS ARE ONLY 18K A YEAR AVERAGE AND BECAUSE OF PENSION SYSTEM RULES... 78 % HAVE NO SOCIAL SECURITY EITHER....!y
J. Allaman, "
M. Allaman makes a number of errors of logic.
First, simply to allege that because a group of people don't qualify for Social Security says nothing about their other pension arrangements.
Neither does the number of a state's employees deal with the richness of their pensions, or the timeframe within which such pensions may be vested and become payable.
Without knowledge of the full distribution of pension costs, as a percentage of active governmental employee costs, we can't know whether any single state is "FAR BELOW" the costs of mean or median cost of state or local employee pensions.
Of course, discussing only costs of pension systems avoids, as you would expect, the discussion of the tax base available to service said pensions. The reader omits any comparison of Illinois' ability to actually pay its AFSCME- and related union employees. This, however, would seem to be of great import.
States with fewer resources would seem to be less able to afford rich public employee pensions.
Finally, merely referencing a mean point of a distribution of mostly poorly-managed states proves nothing.
I would venture to guess that the majority of readers of this blog who reside in the US are unhappy with their state governments, as well as the federal government.
To cite statistics of a group of mismanaged states hardly justifies lush pensions for public employees, especially when most of the private sector long ago moved to defined-contribution plans.
Tuesday, March 17, 2009
Everybody from US Senators and Representatives of both parties, to talk show hosts such as Bill O'Reilly and Sean Hannity decried the payment of these bonuses. Iowa Republican Senator Chuck Grassley, in perhaps the worst excess, called for Ed Liddy and his executive team to publicly apologize, then either resign or "commit suicide."
This sort of demagoguery is precisely why government intrusion into private companies, whether they be publicly- or privately-held, is to be avoided at all costs.
The clearest, most illuminating explanation of the situation was provided yesterday by former federal judge Andrew Napolitano on Fox News. The judge, a Fox News contributor, laid the blame on the very same federal government whose senior members are now outraged at what they have wrought.
Napolitano noted that the Fed, in its rush to save AIG, twice, simply took over the firm, fired its CEO and board, asked Ed Liddy to head the firm, filled the board with its own slate of directors, and put no effective constraints on the arrangement. In short, as Napolitano explained, the government did no due diligence, did not become aware of the contractually-required bonus payments, and, therefore, did not take necessary steps to void them.
By the way, this is yet another instance in which a proper Chapter 11 filing would have allowed AIG to continue operating, but given a court-appointed referee the power to void or alter contracts such as the ones requiring the recent payments of several hundred million dollars of bonuses.
It's all well and good for various pundits to declare that without the federal intervention, these bonuses wouldn't even be payable. But that is precisely the point. Bankruptcy would have precluded this embarrassing example of federal ineptitude.
Now that taxpayers own AIG, we are being subjected to the rantings of the third-rate, relatively-unintelligent people we elected to Congress and the executive branch. Having just spent more than a trillion dollars of our money, between the so-called stimulus bill and the 'regular' budget, these public trough-feeders now express outrage- outrage!- at the requirement that their hasty actions have necessitated, i.e., paying a few comparatively measly hundred million dollars to employees of AIG.
But, if spending a trillion dollars on largely pork barrel projects is a good thing, isn't putting a few hundred million dollars into the pockets of AIG employees good, too?
Where's the consistency in the logic that certain spending waste is okay, but other spending that goes directly to consumers is not?
But, as judge Napolitano noted, the feds have only themselves to blame. They rushed in and unwisely seized AIG. Now, their hasty and ill-conceived action is generating unwanted consequences.
Is it too much to hope that maybe government officials will use existing means for processing insolvent companies in the future, i.e., Chapter 11, and refrain from ham-handedly seizing private property without due process?
I don't know if Cuomo is married and, if he is, he cheats on his wife. But in every other respect, he sure does resemble his predecessor, Eliot Spitzer, in grandstanding over financial sector activities taking place in his state.
We all know about New York's Martin Act. Well, perhaps I should write that we have all heard about it- til we're sick enough to vomit- but may not know its details. The link to the New York Observer article provides sufficient shorthand explanation for my purposes.
Back in 2001, Spitzer trained his Martin Act guns on various brokerage analysts, including, if memory serves, Mary Meeker and Henry Blodget, resulting in the "settlement" which created a few so-called independent research houses. And required then-existing investment banks to buy some research from these allegedly independent research sources, thus supposedly ending biased research, which was, in reality, marketing by another name, in their own departments.
But if the Martin Act, thanks to Spitzer, and, according to the Observer, Dinallo, had been effectively used in the early 2000s, why did we have the recent mortgage-securities financial meltdown?
What was the point of all that Martin Act-driven investment banking and research restructuring?
Now we have Andy Cuomo going after John Thain, Ken Lewis, and AIG, all over bonus payments. The theory being, I guess, that companies which took federal money, either at the request of the feds, or as part of a shotgun-bailout, as at AIG, should not comply with pre-existing contractual obligations to pay promised bonuses.What exactly does Cuomo do for anyone by tilting at windmills like the already-purchased Merrill Lynch, or the federal government-owned AIG?
Aside from keeping his own name in the headlines, and bullying CEOs, I doubt Cuomo's antics materially improve anything about financial markets.
As I noted earlier in this post, Spitzer's sound and fury directed at the research practices of brokerages and investment banks almost a decade ago did nothing to prevent the structured-financial instrument-sourced problems we face today.
Other than lending the current New York AG a bully pulpit with which to make his name recognizable nationally, I don't think the Martin Act does anything relevant nor material. In fact, if anything, its enabling the AG to drag anyone in for questioning, without promise of charges to be filed, pretty much makes it a poster child for the worst in legislative excess and untrammeled exercise of government power in a truly horrific and improper manner.
Monday, March 16, 2009
It is a topic for which I've been waiting to see become a mainstream media coverage.
Right after recounting some of the troubles various localities are having complying with pension funding for government and related workers, the article made a reference to voter outrage,
""It's going to be huge showdown" between taxpayers and public employees, said Susan Mangiero, president of Pension Governance Inc., a consulting and research firm in Trumbull, Conn. "The anger is more acute today when people are feeling economic hardship."
The specter of higher pension bills comes as many states and cities are struggling to balance their budgets or, in some cases, avoid drastic measures, such as filing for bankruptcy protection, amid falling tax revenue, foreclosures and rising unemployment costs."
I was discussing exactly this point with my business partner this weekend. I have friends who are teachers, and I firmly believe they are going to be in for a major disappointment by the end of twenty years. Especially the ones who are public school employees.
It won't be too long before a growing number of states' voters realize how much their governments have given away in unsustainable "30-and-out" or less packages to various governmental employees over the decades since WWII.
Side by side with unions such as the UAW, Teamsters and Steelworkers, AFSCME members reaped huge pension promises from governments during an era from the 1950s-1970s when the US experienced a temporary growth bubble resulting from the absence of competition from WWII losers Japan and Germany. Beginning in the early 1970s, American industry began to suffer from these competitors, but the prior decades' pension promises, made by dimwitted, myopic CEOs, governors and legislators, remained.
Now that global competition is a major force influencing the movement of industries among countries and the compensation of employees in many industries, many pension promises made long ago are simply unrealizable.
Some of the solutions being advocated by panicked governments are seen by AFSCME as extreme. To wit, from the Journal piece,
"Proposals pending elsewhere would move new public employees to a 401(k) plan. Some state lawmakers believe they would save money with a 401(k), which requires employees to pay a higher percentage of the contribution rate than they do under defined-benefit plans, said Alicia Munnell, director of the Center for Retirement Research at Boston College.
Municipal unions said they would oppose such a shift, and note that such efforts have failed in the past, including four years ago in California. "It's not a program that is attractive to state employees," said Richard Ferlauto, director of corporate governance at the American Federation of State, County and Municipal Employees. "It's doesn't work because you wouldn't be able to hire people."
But soaring pension costs are emboldening critics of public plans. They said local governments cannot afford to pay what are often perceived as generous benefits to government employees when the 401(k) plans held by others have shrunk, and as taxpayers already are looking at higher taxes and fewer services.
The pain is about to start in Wisconsin. The state has an unusual policy of adjusting the amount of benefits paid based on the pension fund's performance. Now, for the first time in 25 years, the majority of retirees will receive a benefit reduction.
Some states may decide it is easier to cut public employee benefits than it is to raise taxes, especially during hard economic times. In the Virginia General Assembly, a bill would freeze the current pension plan starting in July and replace it with a 401(k) plan for all future hires.
A state senator in Pennsylvania introduced a similar bill in 2007, and it went nowhere. But this year it is attracting attention.
If employer contribution rates in Pennsylvania jump as high as 28%, "the pension system is just not manageable," said Pat Browne, the Republican state senator who sponsored the bill. He said he expects it to be voted on this year.
"We need to get it passed quickly if we are to phase out the existing plan in time to make an impact.""
As long ago as the summer of 2006, my father, then residing in Illinois, told me that the state was already effectively bankrupt, if you put its total pension-related obligations up against the state's earning power for the foreseeable future.
My partner and I have debated for months what the implication of a California or Illinois bankruptcy would be. What happens when citizens leave a state in droves, while the state's obligations remain?
In one of the larger unintended consequences of federal mortgage policy mistakes of the past decade, the looming pension shortfalls at the state, county and municipal levels across America are going to pit voters against government employees.
Why should AFSCME members remain unaffected, while their private-sector union brethren have taken haircuts, both in and out of bankruptcy? They won't.
Do you think government union members will seriously risk striking, only to see their jobs given to new applicants during this recession, as state and local legislators move to either file bankruptcy and tear up the old contracts and pensions, or simply hire new replacements on the condition that they accept 401Ks in lieu of defined benefit pension plans?
That's really the rub, isn't it? With most of the US workforce losing defined benefit pensions, why should a select, privileged few enjoy such perks, amidst a nationwide asset-value meltdown?
Look for a struggle between state and local governments and AFSCME of epic proportions, beginning.....now.