Thursday, December 24, 2009

AIG, The Fed, & Financial Collapse

Almost a month ago, in the November 27/28th weekend edition of the Wall Street Journal, Peter J. Wallison of the American Enterprise Institute wrote a thought-provoking piece regarding the "lack of candor" surrounding the federal government's reasons for bailing out AIG.

He wrote,

"Since last September, the government's case for bailing out AIG has rested on the notion that the company was too big to fail.

Last week's news that this was not in fact the motive for AIG's rescue has implications that go well beyond the Obama administration's efforts to regulate CDSs and other derivatives."

According to the TARP's inspector general, Neil Barofsky, Geithner did not, in fact, believe AIG's credit default swap exposures were "a relevant factor" in the rescue.

Wallison's point is that, based upon the government's initial reasons for bailing out the insurer, Congress has rushed through some bad new regulatory legislation promulgated on the theory of unsupervised interconnectedness of large financial institutions.

If this weren't the reason for AIG's "rescue," then what was? And why are we so worried about something that Geithner contends wasn't the reason for taking over privately-owned AIG?

This sort of quasi-Constitutional, quasi-political question has somehow escaped notice in all the furor over private sector companies- insurers, commercial and investment banks- which were simply distributing the government's own flawed, low-quality mortgage-backed securities.

Perhaps that fact that the two major architects of Fannie Mae's and Freddie Mac's demise, Barney Frank and Chris Dodd, are in charge of all things financial in Congress, has a lot to do with why there has been no in-depth investigation of a Republican administration's concerns over interconnectedness that, upon closer inspection, was actually nowhere to be found.

Considering Congress' headlong rush to another piece of bad legislation, this time redrafting financial sector regulations, it would be a good time to pause and go through the AIG debacle slowly, with a fine-toothed comb, to learn exactly who was worried about the insurer, and why.

Wednesday, December 23, 2009

Regarding Downward Revised 3Q GDP: 2.8% to 2.2%

Yesterday morning I saw the news on CNBC that 'actual' 3Q GDP has been revised down to 2.2% from 2.8%.

With so much was made of a piddling .2% unemployment drop the other month, what are we to deduce from this huge downward GDP restatement? After all, it's about nearly one-quarter of the prior 2.8% total, and slightly more than 20% of that amount.

That the equities indices rose yesterday, despite this news, is not necessarily remarkable. One day moves don't necessarily produce interpretive results.

But you have to wonder about what this restatement means for the near term US economic growth rate, ex federal spending. After all, this is a 2.2% rate with quite a bit of federal intervention in so many areas of the economy- autos, housing, $787B of fiscal appropriations, nearly-infinitely extended jobless benefits, etc.

Just this morning, before writing this, I happened to see Harvard economics professor Ken Rogoff on CNBC giving some rather gloomy outlooks on the economy going forward. He foresees continuing increases in unemployment, noting that we need to replace 11 million jobs now to regain pre-recession employment levels. He also expects rising foreclosures.

In the midst of such huge federal economic interventions, it's simply difficult to see how anyone can tease economic health out of a single quarter's positive growth rate, especially when it is revised downward so sharply.

Tuesday, December 22, 2009

Brian Moynihan New CEO of BofA- Who Cares?

Late last week's business news was abuzz with BofA's selection of Brian Moynihan to replace Ken Lewis.

Really, who cares?
Look at the nearby chart of major surviving US bank equities since the late 1980s versus the S&P500 Index.
For all of Hugh McColl's acquisitions, and Ken Lewis' continuation of that approach, the average investor would have been much better off simply holding the index.
This isn't an isolated phenomenon. Chase and Citigroup are in the same boat. Only Wells Fargo, for years truly primarily a consumer and asset management bank, broke with the pattern.
Even since 2005, almost a full four years ago, the pattern holds. Wells about equalled the index, while the other three fell by more.
Moynihan made some forgettable comments about leaving the vaunted BofA business model intact.
Again, who cares? The bank has been stuck in underperformance mode for decades. Moynihan is just the latest caretaker of a bank so large as to impede its own ability to offer reasons to own it, instead of the S&P.
It's very unlikely Moynihan will do anything to change BofA's historic equity price trajectory. Especially when he's announced he doesn't plan to do anything significantly different.
Unless these large bank CEOs do something horrendously bad, such as, oh, buying a failing mortgage bank or retail brokerage, the best they can tend to do is tread water below the S&P's performance level.
I doubt Moynihan will be any different during his term as CEO of BofA.

Monday, December 21, 2009

Regarding Alan Blinder's Reliance On Inventory Rebuilding

Alan Blinder wrote an editorial in Wednesday's Wall Street Journal extolling his summer prediction of growth later this year in the US economy. In addition, he laid out a case for continued growth and, to read Blinder's views, an essentially normal US economy.

There were, however, three aspects to his editorial which I found questionable.

First is his seemingly blithe dismissal of Fed and fiscal intervention as being so important for what growth we've seen in the past two quarters. For all that, Blinder calls himself "cautiously optimistic."

Second, he is betting on personal savings rates remaining anemic. He more or less blows off the recent rise in the rate, claims everyone is overstating it, and then effectively determines that the savings rate won't really factor into the economy's near term recovery.

If the deleveraging about which I've written, and others have observed, is real, Blinder is underestimating the effect that consumer savings will have on the economy. It will result in less growth than he expects.

But the point Blinder makes about inventory builds was what really caught my eye. He asserts that "firms will not want to deplete their stocks indefinitely."

A quick canvass of some business colleagues confirmed that Blinder has missed the transition from inventory cycles to more smoothly-linked supply chains. Of course, government data collection measures inventories. But that doesn't mean they exist as they did 10, 20, or 40 years ago.

In a similar fashion, SIC codes are laughably out of date. You can see how companies are classified, but the density of GDP among the codes is totally skewed from what it was at their inception.

Back to inventories.

One of my friends is the chief engineer for a lab equipment supply firm. They don't even order raw materials until they have orders in hand.

Four years ago, a friend of mine with a major consumer products company said, to paraphrase him,

'We've been studying warehousing, and we think in the future, it will look a lot like JB Hunt.'

That's the trucking firm. He meant they were transitioning to a steady, constant supply of goods from their factories onto trucks to major customers.

I personally don't believe the inventory rebuild that so many pundits believe will rescue the US economy is coming.

Economists who don't work in industry may not be realizing how much has changed in the US economy in the past few decades. Perhaps they are the same economists who still believe modern recoveries will bring job growth, despite that not being true for nearly 30 years.

Near-seamless, contemporaneous producer builds for end customers has been a holy grail for decades. With modern IT, intra-vendor links and the internet, it's come to the point of being essentially here for many firms and sectors.

In the ideal business world, inventories don't exist. In time, perhaps they'll only exist in the minds of economists and old, antiquated government economic data series.