Friday, September 17, 2010

CNBC Stacks The Deck For It's Monday President's Town Hall Meeting

CNBC has been loudly trumpeting its upcoming 'Town Hall" meeting featuring the president. I believe it's scheduled for sometime on Monday. The host for the carefully-staged event is uber-liberal CNBC- and NY Times- reporter John Harwood.

As a member of CNBC's Exchange panel, I was invited to respond to 10 questions which will obviously be used to inform the president of their viewers' opinions.

Unfortunately, I didn't copy/paste the questions as I answered them, then found I can't access the poll, now that I've completed it. But I recall several of the questions.

They cover, as you'd expect, whether you think the current administration and party in power have the country on the right or wrong track. Whether the GOP would do better. What, among a list of some 7-8 issues, do you feel are the 2-3 most important facing the country, and how is the administration doing on those issues?

There were 2-3 questions specifically addressing the administration's tax-borrow-and-spend stimulus policies versus the alternative of cutting taxes and spending less. But, in an interesting handling of these issues, the poll, and CNBC, carefully avoided introducing any facts involving spending, unemployment, forecasted effects of the stimulus, etc.

In short, they presented the choices as theoretical, ignoring the obvious failure of the actually-implemented stimulus programs of this administration.

While I can't recall the exact few questions which I found to be misleading and worded to give softball-style results, I had the distinct impression that the entire poll is meant to give the president incredible leeway and running room to claim that those who registered disagreement with his policies and their poor results 'just don't understand,' or are too impatient.

I will give CNBC partial credit for at least asking what one thought was the primary cause of current economic problems, allowing, among the multiple choices, for naming Bush's policies or the current administration's policies. But, even here, the unstated presumption was that, nearly two years into this administration, it is even relevant to claim that the current situation is the fault of a prior administration.

This president has done so much to increase deficits and national debt, empower unions, interfere with business, and much, much more to create uncertainty in the business world, that it's simply impossible, in one question, to cover all the ways in which he and his administration have caused severe economic damage.

Thus, I don't have any confidence that my honest opinions and reflections of reality will be taken seriously. They will, no doubt, like others of my ilk, be spun positively by the liberal management of CNBC, the better to let the president evade responsibility for his actions, claim misunderstanding by voters, and generally be handled with kid gloves by his adoring, friendly host.

Furthermore, CNBC's ads for the event bill it as "America's CEO answers his shareholders," or some such verbiage. But this president has zero business experience or acumen. I don't think anyone, even on his own staff, believes that he knows the first thing about economics or business. Thus, having an event devoted to his taking questions and expounding on these topics is, by definition, a waste of time. You'd be better off having his economic council members, Treasury Secretary,, show up, because at least they are supposed to know something about business. Although none of them, either, as Bernie Marcus noted on CNBC this morning, have skin in the game, or relevant experience, either. But, seriously, can you really believe an hour or more with this president will bring forth any statements of economic insight, or business sense? I rather doubt it.

I wouldn't waste my time on that program, and suggest you not, either. At best, it's a home field love fest for this administration. At worst, it's going to be a free campaign appearance by the president with the intent of rescuing his party's fortunes in the upcoming Congressional elections.

A Reminder On The Ineffectiveness of Basel Capital Requirements

George Melloan, a former Wall Street Journal staffer, made a useful point in his editorial which appeared in Tuesday's edition.

Entitled Basel's Capital Illusion, Melloan notes that, while more capital certainly won't be a bad thing for US and other large banks, nobody should infer that the new capital requirements will prevent any further financial sector problems.

That's because, as Melloan points out, the US financial meltdown was caused by government policies aimed at "affordable housing" beginning twenty years ago.

Though many in the federal government are loathe to acknowledge this fact, the private sector banks only followed the lead of Fannie Mae, Freddie Mac and numerous CRA threats in lending to questionable borrowers. Mortgage banks such as Countrywide, too, only followed in the wake of the GSEs' securitization of low-quality mortgages.

Melloan reminds us that none other than Bill Clinton waived the Basel requirements for Freddie and Fannie because they were engaged in implementing federal policies to encourage more people with lower incomes to become homeowners. He writes,

"This was a laudable goal that ultimately wrecked the housing and banking industries."

Between Alan Greenspan's Fed reducing interest rates to absurdly low levels, and holding them there, while the GSEs revved up the private financial sector's institutions to originate mortgages, upstream them to Fannie and Freddie, then distribute them as private-labeled MBSs, large volumes of toxic, low-quality mortgages came to pollute global investment markets.

New Basel accords won't prevent any of that sort of governmental policy mistakes from tanking our financial sector in the future.

Thursday, September 16, 2010

Larry Summers On CNBC This Morning

I'm sitting here having a hard time believing what I heard out of Larry Summers' mouth for the past 10 or so minutes.

Summers' credentials as an economist have led him to a professional life split between Harvard University and various federal government administrations.

But this morning, Summers put the 'political' back into political economy, the original name of his chosen field of study.

In answer to all sorts of questions, Summers pounded away with just these themes,

-This administration is committed to fixing the disaster brought about by the last one which was solely a function of financial deregulation.

-There are pictures of Treasury Secretaries of former administrations sawing...SAWING....regulations in half. Clearly, this alone led to the 2007-08 financial meltdown.

-There are people in banks who have constructed algorithms to maximize the number of customers who will overdraw their account and, thus, pay overdraft fees. Their days are numbered.

-This administration will work with anyone from the other end of Pennsylvania Avenue who wants to meet our goal of doubling exports in five years.

It's hard to know where to start debunking Summers' obvious untruthful statements. In a post appearing tomorrow, I cite George Melloan's recent Wall Street Journal article noting that the Basel Accord's latest bank capital rules won't change the fact that the recent financial sector crisis was initiated by governmental agency actions involving risky home loans to lower income individuals.

Summers' contentions to the contrary, deregulation had nothing to do with the recent crisis. In fact, then-existing regulators had sufficient powers and obligations to have prevented, or at least identified, the crisis while it was building. They did not. This had nothing to do with their regulatory power.

Larry's wrong.

It's hard to understand, per Summers' statements, how some people "writing algorithms" at money center banks, can thus trigger overdrafts by individual consumers. But that's what Larry contends.

Again, Larry's wrong.

Finally, Summers baldfacedly misrepresented this administration's openness to the economic ideas of others. It's reasonable to believe that, right now, most Americans, including business owners and investors, think that job creation in the US should be government's economic priority. Whether that involves exports should be a decision left up to the companies which may elect to grow through exports.

Regardless of that, the administration's record for the past 19 months has been to ignore any ideas from the other political party, or those which weren't originated in the White House.

Jim Nussle, the guest host on CNBC in the final hour this morning, and a former budget director, rushed to say, immediately after Summers went off-air, words to the effect,

'Yes, just let Larry Summers direct the economy and choose investment priorities from Washington. That'll work.'

Nussle's glib comment underscored the reality of Summers' remarks. When Larry wasn't ignoring the truth, he was engaged in centralized planning of the worst sort.

Why Isn't Michael Porter Emeritus Yet?

I just saw Harvard's Michael Porter on CNBC this morning.

Frankly, it's beyond me why they keep trotting out a guy who's clearly in his dotage. I guess name recognition, although I'm unaware of any recent work of originality or import that Porter's done in at least a decade.

And even his long-ago strategy books were derivative of SPI's research and existing data, crossed with conventional microeconomics.

However, this morning's appearance provided fresh evidence of Porter's irrelevance to today's economic debates.

Carlos whatshisname, the co-anchor on assignment in Boston today, listened raptly as Mike solemnly declared that the big economic question of the day is whether the free market approach works for everyone.

As an aside, to show how totally out of touch Porter is with America, he gratuitously stated,

'You'd be amazed at how many people in America still want to start their own business.'

No, Mike, I, and millions of other educated Americans, would not be amazed. Apparently, only you and your Harvard colleagues are amazed. Amazed that one of the two founding liberties of the nation- religion and vocation- are alive and well as aspirations even today.

Porter then went on to assert that 'we are debating' whether more free markets or more government intervention is 'the right answer' to the 'problem' that starting a business has become so burdensome and complex, thanks to, much existing government intervention.

When asked what "the right answer is," by Carlos, Mike replied, as you'd expect, grinning,

'Well, it's really a mix of the two.'

Gee, why am I not surprised? Pick the safe middle ground.

Honestly, Porter seemed completely out of touch with the real world of American business and government regulatory interference.

Unfortunately, CNBC apparently didn't choose to interview the Harvard professor who co-wrote a provocative recent Wall Street Journal piece reporting the results of empirical research on different governmental fiscal policies. No surprise that his work found lower taxes and governmental spending were associated with higher GDP growth.

Isn't if odd- maybe amazing, to quote Porter- that the two most prominent business phenomena associated with Harvard didn't come from it's business school? I'm referring, of course, to Bill Gates, who dropped out of Harvard undergrad, and Mark Zuckerberg, who co-founded Facebook as a Harvard undergrad.

If he's not emeritus yet, Porter probably should be now.

Tim Geithner On Economics

Monday's edition of the Wall Street Journal published a news article entitled Geithner Warns of Risk of Washington Inertia.

Citing the Treasury Secretary as concerned about sluggish US economic performance due to a lack of federal action, the piece states,

"He said the U.S. can no longer rely on consumer spending, which has long powered the economy, to be the growth engine that leads the recovery this time around and said Washington needed to plant the seeds for investment and exports."

If that passage doesn't chill the blood of US private sector business people, what will?

Thinking that perhaps Geithner is, unbeknownst to me, an economic sage, I checked his educational background. His undergraduate degree was in international and Asian studies. The closest thing to a PhD in Economics he possesses is an MA in International Economics from the Johns Hopkins School of Advanced International Studies. I think it's fair to characterize that as more of a political science degree, and less of a hardcore macroeconomic or microeconomic degree.

Thus, Geithner would not appear to have academic credentials to utter credible pronouncements on the seismic shift in drivers of the US economy.

As a former manager of functions and departments in several companies, including consulting firms, I'm used to making decisions involving matters on which I may not have personal academic expertise.

For those situations, I do what most effective managers do. I ask questions, identify assumptions and uncertainties, gather information from credible sources, and choose an option.

In this blog, I've often opined on economic matters, but only in light of, and with explicit references to the views of and evidence provided by esteemed, degreed, generally respected economists.

It causes me more concern than I have already had regarding Geithner that he issues silly, apparently unsubstantiated statements as if they were established or empirically-supported economic fact. No reference to the work of legitimate economists.

Instead, we have the Treasury Secretary simply declaring a preference for government-directed spending on investment and exports. Meaning that he believes a few Washington bureaucrats, elected and/or appointed, are more capable of directing our nation's economic resources than are the millions of investors and business people to whom those resources they ultimately belong.

Very scary stuff, indeed.

Wednesday, September 15, 2010

This Is Banking Leadership? Moynihan's "Strategy" for BofA

Yesterday's Wall Street Journal covered BofA Brian Moynihan's earth-shaking new strategy for the financial utility. According to the article, Moynihan's brilliant conception,

"revolves around cross-selling to customers, companies and institutional investors who interact with the retail, corporate and wealth-management parts of the bank."

Wow! Deep, stunning stuff, isn't it?

In fairness to Moynihan, in about nine months he's been able to at least articulate one of money center banking's oldest standby strategies, which is considerably more than the hapless Vik Pandit of Citigroup has ever managed.

In admitting his stroke of genius "is just hard work," and nothing fancy, I think Moynihan has made a good case for his current $800K cash compensation to be substantially reduced in this and future years.

While the Journal piece quotes a typical analyst claiming that BofA is poised for juicy growth and returns due to its having banking relationships with half of the households in America, and any economic uplift will propel it to stellar performance, I'm not so sure.

We are in an era of financial utilities. The era of reckless growth of large commercial banks, at any price, and risk, is apparently over. With little ability to pump the few growing subsectors of finance while ignoring risks, it's unlikely that banking has the same future potential for consistently superior total returns that some members of the sector experienced in the past decades.

When regulators and new laws have proscribed so much of behaviors which led to unsustained growth of financial institutions in past years, it's hard to see how that growth will continue in the future.

Frankly, you could put a mediocre manager in terms of any of the three remaining US money centers- Chase, Citigroup or BofA- and, for that matter, Wells Fargo, too, and probably not notice any difference from current management.

Moynihan's choice of the retread approach of cross-selling and efficient operations have never actually provided any financial institution with consistently superior total returns in the past. Every institution which tried them, including James Robinson's American Express and Sandy Weill's Citigroup, failed miserably and expensively.

Moynihan's appointment as BofA CEO, and subsequent recycling of the oldest, dullest "strategies" in commercial banking, illustrates the bankruptcy of ideas in the sector, the lack of alternatives, and the reliance on old, failed approaches.

Too bad none of the nation's four largest bank CEOs, and their managements, can admit that US commercial banking just isn't, and shouldn't be, a high-growth sector anymore. Such growth doesn't come without risk, and, as protected, publicly-insured institutions, it's inappropriate for them to attempt such growth any longer.

Tuesday, September 14, 2010

US vs. Health Insurers: Why It's Tough To Analyze Sectors/Companies Now

Wisconsin Republican House member Paul Ryan co-wrote an editorial in the Wall Street Journal yesterday contending,

"Every day, more see that the road to serfdom in America does not involve a knock in the night or a jack-booted thug. It starts with smooth-talking politicians offering seemingly innocuous compromises....."

Yet, on the opposite page that morning, in the lead staff editorial, entitled Sebelius Has a List, the Journal's own countered Ryan's contention.

Moreover, that lead staff editorial offers yet another example to explain, again, why my own posts of the past few years have become less strategy-focused, and much more politically- and macroeconomically-focused.

The editorial suggested,

"Witness Kathleen Sebelius's Thursday letter to America's Health Insurance Plans, the industry trade group- a thuggish message even by her standards. The Health and Human Services secretary wrote that some insurers have been attributing part of their 2011 premium increases to ObamaCare and warned that "there will be zero tolerance for this type of misinformation and unjustified rate increases."

Zero tolerance for expressing an opinion, or offering an explanation to policyholders? They're more subtle than this in Caracas."

And that, dear readers, provides the example. Look at how much qualified judgment is evident in Sebelius' letter? She and her minions deny that ObamaCare is putting pressure on insurers' costs, despite prior admissions of same by the president. Further, she finds, a priori, that any attempt by insurers to communicate these truths to customers or investors will be judged as "misinformation," the accompanying rate increases "unjustified."

As I wrote here recently in my companion political blog, Massachusetts' own insurance commissioner was against similar moves by that state's governor. It seems that many senior bureaucrats forget that when they move to cap and/or control insurers' rates and revenues, they unwittingly threaten the solvency of same, and their ability to actually pay legitimate claims.


But you can see how Paul Ryan may be a bit myopic, or simply optimistic.

It seems that the jack-booted state is alive and well at HHS. And this type of capricious regulatory punishment of private sector firms is why strategy matters so much less today than it used to, while perceived political correctness, singing the party line, and generally avoiding political persecution and prosecution is the new order of the day for American business.

Monday, September 13, 2010

US Debt Levels & Interest Rates

Jason Trennert wrote an interesting little editorial in Friday's Wall Street Journal reminding us of the nature of short-term funding, and the folly of relying on it.

He ends his piece with a quote from Hemingway,

"In this context, it might be wise to remember Hemingway's Mike Campbell from "The Sun Also Rises," who, when asked how he went bankrupt, responded, "Gradually, then suddenly." "

Trennert is doing us all a service by reminding us of what happened to Bear Stearns and Lehman. When markets lose confidence, what was gradual bankruptcy, often in the form of higher interest rates and shorter lending maturities, suddenly becomes no funding at all.

He notes that the US Treasury has shortened our funding cycle to the point that we now owe "$5.2 trillion due in the next three years out of the $8.3 trillion outstanding."

That's more than 60% of our total outstanding debt, with much more being anticipated from increased deficits in the coming years.

Trennert also tells us that the current weighted-average funding cost is 1.21%- an absurdly low rate for the condition of the US government's financial situation. Much of that ultra-low rate is due, no doubt, to two factors. One, the massive holdings of US dollar-denominated debt by global investors, so that they can't easily just stampede out of dollars. And the lack of a viable, liquid alternative of sufficient capacity to absorb inflows if/when dollars are dumped.

Trennert notes, sagely,

"But the time to secure long-term funding is when you can and it is mildly expensive, not when you have to and the costs are exorbitant."

Or worse, you have to, and there is no cost at which you can extend your debt maturities.

To begin cutting our debt levels, the US will have to either save more, invest less. Both of these will slowly erode our GDP growth rates.

But continuing to rely on global investors to absorb ever more US debt with no end in sight is foolish.

Our current administration may, or may not, as Trennert points out, be using short-term funding to disguise the real costs of debt. But reliance on such short-term funding is ill-advised and too risky when betting on the ability to continue to place US debt while increasing its deficits.

But recent average 5-year note rates are 3.77%, roughly triple the current weighted-average, which would add $133 billion to the US government's annual interest rate bill.