Friday, October 15, 2010

Franklin Raines On CNBC This Morning

It's difficult to decide which was more surreal this morning- CNBC for inviting disgraced former Fannie Mae CEO Franklin Raines as a guest, or Raines, with his inaccurate, self-serving comments.

There's little doubt the CNBC management made a significant error by lending credibility to Raines via his appearance this morning. By allowing Carlos Whathisname, the morning program's raging liberal, to begin the interview with Raines, a tone of fawning deference was set right off the bat.

Carlos earnestly asked Raines what should be done about the mortgage foreclosure process faux-issue, and whether major banks could be hurt by it. Of course, Raines wouldn't have any special knowledge, having been gone from Fannie Mae for six years. But that didn't stop him from pontificating on the situation while ignoring facts.

For example, Raines alleged that you need Fannie Mae because no private conduits are willing to securitize mortgages.

That's a lie, of course. The truth is that Fannie and Freddie pressed for ever-higher mortgage value ceilings to be eligible for them to buy and securitize, thus crowding out most private mortgage securitizers.

Of course nobody bothered to ask Raines if he's yet complied with the federal court order to return his $90MM bonus payments from his days as Fannie's CEO. Bonuses found later to be unwarranted and unearned, because Fannie engaged, under Raines, in questionable accounting, and overrreached itself, resulting in subsequent losses and, now, 'conservatorship,' a federal equivalent of Chapter 11.

When the more conservative Joe Kernen took his turn with Raines, things got more surreal.

Kernen didn't touch the bonus issue, either, to my regret and disgust, but he did at least challenge Raines on his management of Fannie and its subsequent failure. Raines then said something that you'd have to actually hear to fully comprehend.

He first took credit for Fannie's role, as a former CEO, then, when accused of having set it up to fail, defended himself as only 'one of thousands of employees.'

Pricelessly arrogant.

Raines then went on to declare that, flawed and ruined as Fannie may well be, since all competitors had vanished, the US had to support it now, because there is no alternative. To further the inanity of his responses, he impugned one of Kernen's questions by implying that the co-anchor was misstating the facts. A surefire tactic to attempt to discredit uncomfortable allegations.

All pretty bold and brazen words from the guy who almost single-handedly wrecked the nation's mortgage industry.

Oh, and somewhere in all the questions, Raines naturally tarred the country's commercial and investment banks as the real culprits, contending that they all threw caution to the winds for profit. Technically, his statement is true, but grossly out of context. Fannie and Freddie started the party by buying, guaranteeing and securitizing questionable mortgages to begin with.

To add insult to injury, retiring Indiana Democratic Senator Evan Bayh continued the charade, feeding Raines softball questions to advance their mutually-embraced liberal agendas.

Sadly, this entire episode conferred unwarranted credibility on Raines. The CNBC co-anchors' bowing and scraping to this charlatan only reinforced the impression that he was somehow blameless for starting the mortgage-related excesses that led to the financial sector meltdown of 2007-08.

It provides yet another example of how one must be very wary of what one sees on CNBC as having much resemblance to the truth.

A Spectrum of Economic Doomsayers

The pages of the Wall Street Journal over the past few weeks have featured a number of editorials forecasting economic doom.

For example, Phil Gramm, former Senator and economics professor, wrote a piece comparing the current political and economic climate to those of the Depression. Using updated statistics and an approach echoing that of Amity Schlaes in her important recent book, The Forgotten Man, Gramm at least painted a brighter picture of today's faster-moving electoral changes as a response to federal economic missteps.

Donald Luskin focused on looming trade wars and a technical overlay of recent Dow index performances with those of the late 1930s. Luskin suggested that taking the wrong road now on trade and protectionism could well fulfill the technical pattern of a catastrophic market decline.

Mort Zuckerman, a noted successful entrepreneur and investor, wrote of the continuing damage that the housing sector inflicts on the US economy. In short, he criticized continued government manipulation, i.e., support, of prices, thus prolonging the bottoming and eventual recovery of this sector. Zuckerman noted that, with the recent cratering of housing due to oversupply and overly-generous financing terms, new would-be buyers don't see a home as the automatic, guaranteed, tax-advantaged savings opportunity that it historically has been. Thus, the depressed demand in the face of government-tainted, higher-than-market-clearing prices.

Finally, on Monday of this week, Carnegie Mellon economist Allan Meltzer wrote another version of the now-familiar tale of the Fed fixing a problem that doesn't exist. Specifically, stoking inflation with too-low rates, when what ails business is uncertainty regarding Washington's heavy, erratic regulatory hand and demonizing tone.

Providing evidence that prolonged deflation has rarely occurred, and the one time it indisputably did was during the Great Depression, when the gold standard caused the money supply to shrink due to hoarding in the wake of bank failures. Reading Meltzer's editorial, it's difficult to see how we are not sowing the seeds for both the next investment bubble and long-term inflation. And, as he suggests, eventually, "a flight from government bonds."

It's all scary, and, yet, equity markets have rebounded since late 2008 and early 2009. Unemployment remains high and sticky, but corporate profits have grown.

Still hanging out in the ether is Art Laffer's June WSJ editorial predicting wholesale economic disaster in 2011 if the planned tax hikes are allowed to take effect.

What to think?

It's really hard to simply write off all of these concerns and predictions of continuing economic dislocation, misallocation of resources and under-performance of the US economy in the face of attempts to micro- and macro-manage so many elements of this complex system. Short term equity market moves can reflect short term profits, sentiments, etc. The very existence of liquid equity markets allows for the belief by investors that, come the time it's necessary, they can sell quickly and even go short.

I do know this. Reviewing  equity portfolios and performances from earlier in the decade, and the mid-1990s, today's economy and equity markets just don't look healthy. The number of companies passing muster as investments is much fewer than in the past, while the pattern and strength of the S&P is much more erratic, and weaker.

This doesn't appear to be a truly healthy equity market, yet, and it's certainly far from a healthy US economy, too.

Thursday, October 14, 2010

Further Politicization of Financial Sector Bankruptcies

Last Friday's Wall Street Journal carried an article about the FDIC and bank dissolutions with this chilling subtitle- FDIC Expected to Use Discretion to Rank the Creditors; That Can Be Tricky.

Among the more ludicrous parts of the article was the report that current FDIC chair Sheila Bair,

"said at a board meeting last week that the authority to differentiate among creditors "will be used rarely" and only in instances where additional payments to certain creditors are "essential" to maximizing the value of a firm or to conduct its operations."

There is so much subjective judgment loaded into Bair's statement as to make it meaningless.

Essentially, recent new regulations have made financial sector bankruptcy a completely subjective, politically-determined process.

Whoever heads the FDIC has the power to effectively choose which firms will be propped up, which will be chosen to 'fail,' and, for the latter, which counterparties will be rewarded with better repayment terms than others.

Bair can talk until she's blue in the face, but it won't change two realities.

One, Bair can't bind subsequent FDIC chairpersons to her allegedly-limited intended use of the newly-granted powers to favor some creditors over others, with no basis in law.

Two, the simple existence of these powers means that all counterparties to financial institutions now realize they may lose their capital at risk at the whim of an FDIC chair. Whether their debtor is declared insolvent and, if so, what treatment the lender/counterparty receives, will potentially be totally a function of the subjective feelings that the sitting FDIC head has for that firm.

Nothing else has to matter.

The article continues,

"John Douglas, a partner at Davis Polk LLP and a former general counsel at the FDIC, said such differentiation could foster instability by driving more Wall Street financing to the short-term. The problems of both Bear Stearns and Lehman Brothers were exacerbated by short-term creditors, who pulled out amid concerns about the firms' health.

"You're giving the FDIC the authority to differentiate and....people are going to try to game the system in a way to minimize the possibility of getting hurt," he said, "If you're a short-term've got a chance every night to decide whether to fund or not."

In another astute observation, the article quotes Kenneth Scott, a Stanford law and business professor, as saying,

"Discretion breeds uncertainty; it creates additional risk. Despite what your intent might be, it may lead creditors to cut off funding sooner and accelerate the process, not in any sense ameliorate it."

Any way you slice it, informed observers of this new regulatory power resident at the FDIC think it will drive more funding to shorter terms, so that such funding may be curtailed faster than the FDIC can freeze it.

Once again proving how often legislation causes unintended consequences.

By ignoring prudent, risk-averse behavior of capital-providing financial institutions, Congress has, in its idiocy, written laws injecting more uncertainty and subjectivity into the bankruptcy process for large banks, thus driving their funding counterparties to take steps in the future to limit their risks to such subjective, unpredictable processes for repaying counterparties to a seized institution.

Wednesday, October 13, 2010

Jeff Bewkes' Misdirection with "TV Everywhere"

Last Wednesday's Wall Street Journal featured an editorial from TimeWarner CEO, Jeff Bewkes, concerning the firm's latest public relations concept, called "TV Everywhere."

Bewkes' people carefully orchestrated a one-day media blitz. He appeared on Neil Cavuto's Fox News program on the same day that the Journal editorial was published. I believe he was also on CNBC that day, but I'm not completely certain.

Reading the Journal piece, it's not really clear just what is new or valuable in Bewkes' new initiative. Other than to get a regulatory leg up on a select group of his competitors. Who could those competitors be?

Here's a passage from his editorial,

"But let's be clear about what these new entrants are not: distributors. Of course, many of them want to turn themselves into content retailers or aggregators of programming, or they want to create another layer between content creators and their audiences.

However, to be anything more than incremental, I believe these nascent services must meet two requirements. First, obviously, they must provide consumers with a superior TV experience. And second, they must also support or improve the industry economics that have led directly to the cultural and commercial renaissance that television is now experiencing."

Elsewhere, Bewkes mentions those competitors by name,

"...the glitz factor of new devices and services recently announced by Amazon, Apple, Google, Sony and others."

What Bewkes is trying to do with ,TV Everywhere, is enshrine the notion that it's wrong to get content free from Silicon Valley, internet-based providers or distributors, while it's okay to pay Bewkes' company, TimeWarner, and its ilk, high prices to access their content on any consumer device, i.e., iPad, laptop, iPod, etc.

It's a measure of how scared Bewkes is that he and his network-oriented allies are trying to conjure up 'cultural' bases of value for 'TV Everywhere,' while also attempting to define all video as 'TV.'

It's an interesting and bold sleight of hand trick, isn't it? First, before you notice, subtly redefine "TV" as content, rather than distribution. Then, accuse anyone who distributes "TV" elsewhere for free as inferior and not legitimate.

But I doubt it will work, without totally political interference by Washington regulators in the plans of the so-called "new entrants."

It's an old story in business. The last refuge of failed or failing business models is to seek unfair and anti-competitive regulatory relief, as well as to cast aspersions on the motives and societal benefits resulting from the effects of new competitors.

This reveals just how desperate Bewkes' approach truly is.

Tuesday, October 12, 2010

Chase's Commodities Chief Blythe Masters & Her Bad Bets

If you want to understand why it's so dangerous to allow US commercial banks with access to federal deposit insurance to engage in proprietary trading, you need look no further than this past weekend's article in the Wall Street Journal describing Chase commodities chief Blythe Masters' missteps, and the bank's continued support of her activities.

The Journal piece observes,

"One of J.P. Morgan's most powerful executives, the 41-year-old Ms. Masters is charged with turning around the commodities operation and building it into the biggest on Wall Street. And though the blunt executive has been given many resources, her division recently has suffered defections and miscues while falling far short of expectations in 2010.

Barring a remarkable turnaround, commodities will end the year far behind a $1.78 billion revenue goal. Part of the problem was a loss on a bad coal bet in the second quarter. The third quarter improved, with a gain of about $154 million in revenue through Sept. 30. But commodities is up only about $189 million in revenue for the year, said a person familiar with the results.

That disappointing performance comes after a costly and bold effort to build the commodities division, one of the bank's biggest bets. Since 2008, the bank spent more than $2 billion buying commodities-trading operations, including Bear Stearns, parts of UBS Commodities and, most recently, assets from RBS Sempra Commodities in 2010.

The bank's push into commodities roiled a lucrative sector dominated by Goldman Sachs Group Inc. and Morgan Stanley as J.P. Morgan poached executives from rivals and boosted its work force from roughly 125 in 2006 to 1,800 today. That makes the commodities desk the biggest on Wall Street that trades everything from power to silver.

Yet it remains trailing its top two rivals in market share. According to people familiar with the situation, the unit has duplicative systems and overlapping technical and support staff, despite 100 job cuts this year. Company executives, acknowledging the problems, are addressing them, the people say.

On a July 22 conference call with her group, she speculated about whether competitors had planted stories about the business and encouraged her employees to speak up if they knew the source, according to a recording of the call. She assured employees on the call that rivals are "scared s—less of us" and promised that "we are going to build and finish building the No. 1 commodities-trading franchise on the planet."

When she took over the commodities business in 2006, Ms. Masters clashed with several high-profile traders who weren't as enthusiastic about their new boss and where she wanted to take the unit, people familiar with the matter said."

Scary, isn't it? your tax dollars are basically underwriting Masters' risky plan to build Chase into a pre-eminent commodities trading presence. Competing with notionally-commercial, ex-investment banks Goldman Sachs and Morgan Stanley.
Doesn't this begin to smack of the mortgage financing bubble all over again?
Let's review the situation. Commodities are hot in part because of globally-competitive sovereign currency devaluations. As currencies are depreciated by their own governments, prices of commodities rise. Many central banks, notably the US Fed, claim that inflation is running below targets. However, as CNBC's Rick Santelli has explained earlier this year, and, again, recently, commodity prices are heading out of sight. Surely, these prices are a type of inflation. Just not what the Fed wants to measure and observe, because, well, it's an inconvenient exception to the Fed's chosen story line.
Of course, eventually, commodities of the non-investing sort, such as agricultural, steel and the like, depend upon demand. And if global economic demand isn't sustained, recent commodity price rises will turn out to be a bubble.
My point is, it's not such a simple, one-way bet. There's risk. But Chase's Masters is moving full speed ahead to become a major, risk-taking player in this always-risky market.
Does this sound like an activity which you want your federally-insured bank to be ramping up?

Monday, October 11, 2010

David Faber's CNBC Program: Goldman Sachs: Power and Peril

I didn't see David Faber's CNBC program Goldman Sachs: Power and Peril, when it first aired on October 6. But I did record it for later viewing.

While I like Faber's wit and style, it seems pretty obvious that CNBC is having difficulty using his intellect for entertainment purposes. It's just not  good fit, and this latest Faber effort illustrates this point yet again.

The hour-long program broke virtually no new reporting ground whatsoever. If you are already familiar with investment banking and trading, this was nearly a wasted hour of your time. If you don't, it was too narrowly focused on Goldman Sachs to really give you a proper, broad sense of the topic.

Faber's House of Cards documentary on CNBC, aired last year, was better, but also deeply flawed, with its complete omission of Fannie Mae, Freddie Mac and Congress as the first movers in America's mortgage finance and, then, general banking system meltdown.

This hour-long examination of Goldman Sachs was, for me, an odd mix of the company's history, now largely irrelevant, combined with what I believe to be an unfair portrayal of the firm in its current state of evolution.

The first and last thirds of the piece merely recounted information you could find elsewhere. While the firm's history from the 1950s was mildly interesting, it's really of no particular import today. The later part of the program, focusing on various mortgage-finance-related activities of the firm before, during and after the 2008 financial crisis, was both unfairly one-sided and largely a repetition of old news.

But, for me, the truly interesting portion of Faber's program was about 10-15 minutes of the middle third of the documentary. This portion contained the most revealing interviews with Goldman personnel, past and present. At this point, Faber also explained that the promised, conclusive, long interview with Lloyd Blankfein had been cancelled.

There are two major aspects of Goldman Sachs which this handful of interviews revealed in a rather startling fashion. Mind you, again, they are not 'news' to anyone remotely familiar with the firm, but they conveyed the points in a rather chilling manner.

First, an ex-Goldman staffer, now an asset manager and CNBC 'contributor,' told a story of being required to attend a 5pm meeting on a Friday starting the Labor or Memorial Day weekend. The partner holding the meeting did not arrive until 10pm, by which time an unspecified, but significant number of the recent hires had left in frustration. The staffer recalled that when the partner arrived, he circulated a sheet for signatures of the remaining employees, then explained the reason for the meeting, i.e., that they were junior in rank to him, a more important person, and this meeting was to teach them patience for when they would, one day, have to wait, or be forced to wait, on some large, important client, with no recourse other than to simply endure until the client allowed them access.

He then replied to Faber that those who left the meeting before 10pm were soon fired from Goldman.

When I heard this story, I knew I'd made the right choice in graduate school by never interviewing for either consulting or investment banking positions. Back then, seeing who applied for those slots, and having a friend at Booz Allen Hamilton, I guessed that, at least early on, success in those two fields was more a matter of submitting to indefinite face time and groveling, more than intellectual prowess and performance. That the main ingredient in the early years of the jobs was simply time, which everyone could provide and, thus, did not play to the strengths of those with particular skills or intelligence.

The other aspect of Goldman Sachs which surfaced from the interviews was perhaps the most important one which now defines the firm, and differentiates it from the days of its last unimpeachable leader, John Whitehead.

Back in Whitehead's day, the firm was explicitly aware of the problems of conflict of interest. So it eschewed proprietary trading, or any activities in which it would knowingly meet its clients elsewhere in the financial marketplace as a principal.

After Whitehead's reign, the firm simply ignored the problems and plunged headlong into a wide range of activities, in order to book proprietary business profits otherwise unobtainable.

Thus, several of the interviewees now give voice to a ludicrous notion that Goldman accepts conflicts of interest as a fact of life, and simply strives to 'successfully manage' them, whatever that means. Despite this charade, several staffers, and Blankfein, in a recorded phone address to the firm's employees, claim that Goldman still puts its clients first, and that this therefore prevents any true conflicts and solves everything.

It's a lie, of course. The Big Lie, if you will. Made worse by the mock-candor with which so many Goldman employees repeat it with a straight face. A very Stepford Wives-like robotic expression of the lie over and over by every Goldman employee.

Faber related that some customers do business with Goldman because they have to, or want the firm's talent working for them, but remain fearful of the firm and, on balance, don't trust it to work in their- the customer's- best interests.

Simply put, Whitehead's clear, simple, true statements regarding conflicts of interest when doing too much principal business, have been conveniently forgotten and trampled.

In their place is a new attitude which seeks to pretend to serve clients while, in truth, serving only one real client- Goldman Sachs itself. In that, Faber was correct as he closed the program.

I've written plenty of posts discussing Goldman's hypocrisy on this point. And that every responsible party who hires Goldman to do work for them, or trades with the firm in any capacity, should be wary and not trust it. So, again, Faber's interviews and assertions are hardly news. And I'm certainly neither the first, nor only other person to have elaborated these views before Faber.

But, in this regard, Faber loads up the program with Congressional members blustering about Goldman's shoddy, deceptive practices. Numerous clips of Congressional testimony and hectoring of Goldman staff by members of the House and Senate are included in the program.

Ironically, the only real video clip of merit in all of it is the few seconds in which Blankfein responded to questioning by Carl Levin that buyers of Goldman's own CDOs didn't know, nor care to know, whether or not Goldman was taking other positions on the same underlying instruments, possibly on the other side of the trade.

When Levin stated that he 'knows how Wall Street works,' then excoriates Blankfein for his answer, Levin only displays his ignorance of the Street's practices, and, further, his arrogance regarding his ignorance.

Blankfein correctly noted that his firm's customers want to buy, or sell, various specific risks. They don't necessarily care who differs with them in assessing those risks. Or whether others, including Goldman, are selling the risk when that party is buying, or vice versa.

That said, Goldman is potentially everywhere in the financial markets, potentially on any side of a particular risk situation. That's what being, in effect, as one guest pundit echoed, a publicly-traded hedge fund means. Which is what Goldman Sachs currently is.

Again, this is hardly news. Entertainment, when packaged sensationally in an hour-long format? Probably for the less-informed viewers.

But certainly not news. Not really fair....and incredibly biased.