Friday, November 11, 2011

Regarding Investing In Commercial Banks

This week's European government and financial tumult brings me to once again review the position of large US commercial bank CEOs, led by Chase's Jamie Dimon, that their firms should be allowed to take risks, presumably in order to drive high total returns.

At issue currently are two changes which bank managements despise: the Volcker Rule and higher primary equity capital requirements. The former strips large commercial banks of the ability to pursue riskier profits via proprietary trading, while the latter adds capital, which will depress returns on assets.

It's fair to say that, with recent hindsight, on average, the Volcker Rule will minimize societal costs of banks trying, but usually failing, to earn profits on risky trading with their own capital. The recent financial crisis demonstrated that those financial concerns capable of not losing on such risky trades are small in number, and often privately-held, while the larger US commercial banks carry deposit insurance, and, thus, indirectly, are themselves insured by the US federal government. The Dodd-Frank bill has made such insurance of firms explicit.

After several decades of US commercial money center banks cyclically posting large losses on everything from sovereign lending to credit cards, mortgages, and energy lending, requiring higher capital levels doesn't seem so harsh.  For example, as I noted in this recent post, fund manager Ron Baron declined to invest in Jon Corzine's now-failed MF Global in part because, with capital constituting only 3% of assets, the risk of total loss of equity from trading positions was too great. Today's US money center banks are fighting to avoid capital levels only a little higher, i.e., going from 7% to 9%. It seems like a lot when seen as a percentage of balance sheet assets. But it's trivial when seen as the potential loss in a trading position. What's another 3, 4 or 5 percentage points of loss once a derivative or badly-hedged asset goes wrong? It's rounding error.

But to CEOs of these companies, that means relegating them to a role much more like energy utilities than like investment banks or faster-growth firms.

Which brings me to the central point about this debate over permissible money center bank activities and their primary capital levels.

My now-deceased mentor at Chase Manhattan Bank, Gerry Weiss, observed decades ago that since banking is a derivative industry, it can't, in total, grow faster over time than the economy which it serves. Thus, shorter-term, faster growth typically comes by taking more risks. Which pays off for management when it works, and leaves shareholders with losses when it doesn't. Only, in reality, those losses now become spread to taxpayers, as well.

So long as a bank is allowed access to taxpayer money for insuring deposits, and is allowed to become sufficiently large that its collapse would create counterparty problems for the nation, it has to be restricted to a role as a financial utility. Much as CEOs like Dimon want to have the latitude to chase total returns that match the US equity market's best, doing so as a money center bank simply isn't in society's interest.

Time and again over the past several decades, US money center banks and their managements have exhibited poor judgement and incompetence at avoiding bank-collapsing risks. When enough commercial bank assets pursue similar risks, which typically occurs, the resulting systemic risk endangers the US economy.

Dimon and his fellow CEOs like Vik Pandit at Citi or Brian Moynihan at BofA may grouse about being shackled and prohibited from pursuing brisk income growth which outstrips that of their markets. But to allow them to talk their way out of both measures- restraint of proprietary trading and higher equity capital requirements- will more quickly and certainly lead to the occasion of another taxpayer-rescue of a US money center bank.

Thursday, November 10, 2011

CNBC's GOP Event & Flaming Media Liberal Bias

I'm sorry to find out how right I was in my predictions in yesterday's post regarding last night's CNBC GOP presidential candidate roast...errr....event. Because it was on CNBC, and ostensibly about economics and business, I'm writing this review on this blog, rather than my political one.

Here are some of the passages from that post,

" can bet most of the two hours will consist of baiting the GOP candidates with questions designed to create convenient sound bites for the current president's re-election staff to use in subsequent campaign commercials.

This won't be anything remotely resembling an honest, non-partisan attempt to ascertain the candidates' views on the economy and business.

At present, I think it's fair and accurate to say that the truly conservative candidates would, ideally, say that the most they can do is to reduce growth-retarding uncertainty caused by the federal government. This would largely consist of reversing excessive energy- and finance-related regulations, a tax-code overhaul to reduce rates, remove preference items and simplify the code, and the exit of federal government from subsidizing any businesses, such as so-called 'green energy' investing and mortgage bond guarantees, to the detriment of private sector efforts to do the same things.

The problem, of course, is that these reasonable steps will sound insufficient, because they don't purport to immediately "create jobs."

Never mind that conservatives, and most of the GOP candidates, don't believe government should directly create jobs. They will be pummeled by most of the CNBC panel for being cold-hearted, uncaring and, in effect, promising a priori to do nothing to help millions of unemployed Americans."

There's actually quite a bit to cover, so let me highlight the four themes I'll discuss. The first three are the CNBC panel's:

1. Attempt to criticize GOP candidates for their conservative, non-Keynesian economic views.

2. Attempt to engage candidates on non-economic issues and invite mutual attacks.

3. Cluelessness on the publics' intolerance for liberal media attacks, via my second point, on the GOP candidates.

The fourth is the after-event panel's explicit liberal slant, used to lament how weak the GOP field was.

An example of the first point was the panel's question regarding three issues- student loan debt, housing and health care. The panel characterized the second as 'complex and large,' of which America's housing problem is really only the latter- large. Regarding student loan indebtedness, the panel was clearly looking to draw the candidates into competitive bids to please the student audience. But, in a larger sense, the questions were formed with a Keynesian, government-activist bias. It was a 'what would you do, as President,' not, 'is it appropriate for government to attempt to solve' sort of bias.

Regarding student loans, Gingrich fired back accurately, and quickly, given the usual inane sub-minute time limits. He concisely traced the history of the program, from LBJ onward, and dismissed it as having led to excessively-inflationary higher education costs. Summing up, he essentially pronounced the program a typical failure of government by causing unintended consequences. Newt slipped in a competing model, which was, I believe, College of the Ozarks, where students work while at school. They leave, on average, with no debt, except for students who purchased cars during their enrollment. Gingrich, as usual, had amazing facts at his command, ticking off the lengthier college careers of students borrowing money to attend.

When it came to housing, the CNBC panel focused on Romney, who is already on record, in Nevada, as having called for normal foreclosures and an end to the administration's many attempts to subsidize homeowners who are underwater on their mortgages, relying on market-clearing forces to eventually help the sector find its bottom.

For once, Romney didn't disappoint, reiterating, with vigor, his earlier comments. He chided the panel, asking if they thought the federal government should buy up every home in America to fuel economic growth?

The reactions of the panel members to these replies seemed muted, due in large part to the roars of approval by the audience in each instance.

On health care, Bartiromo asked Gingrich what he would do to solve America's health care mess. Newt grinned and baited his own trap, saying he'd been writing whole books on the topic, and did Maria really expect him to answer this complex question in less than a minute? The audience shouted its approval for his reply, and Bartiromo then said, 'take as much time as you need.'

Newt replied with another question, noting that his fellow candidates wouldn't like him taking up the remainder of the evening. Bartiromo tried to one-up him, arrogantly closing with, to paraphrase,

'Then you don't want to answer how you'd handle health care?'

On the second point, Maria Bartiromo asked Herman Cain if it was appropriate for Americans to elect him as CEO of the country, when he was being assailed for character flaws. Cain shot back fluidly and effectively, explaining that Americans don't want anonymous, unspecified character assassination to decide whom they will elect as president. Cain got cheers, and the audience was clearly cool to the panel.

Then Bartiromo unwisely followed up by asking Romney if he'd retain Cain in management if he were a private equity buyer of a firm including Cain, given the recent sexual harassment allegations.

Romney rose to the challenge and pointedly rejected Bartiromo's bait, while the audience, just after her question, but before Romney began to reply, loudly booed and jeered the CNBC reporter.

What Romney actually said was that he wasn't going to answer, that it was Cain's issue to handle with voters.

Regarding my third point, the CNBC panel seemed really tin-eared and ham-handed in how the audience and general public would react to its attempts to rough up and bait the GOP candidates. The audience reacted quite angrily to Bartiromo's questions regarding Cain and the alleged harassment charges. On Fox News just minutes later, Sean Hannity actually covered that segment, castigating CNBC for trying to manipulate the candidates into non-economic issues during an event ostensibly about economics and business, then bait Romney into criticizing Cain.

Later, in their own after-event program, Carl whathisname congratulated himself, Harwood and Bartiromo, smugly, on their performances in bringing the enemy, i.e., the GOP candidate field, to account, completely ignoring the audience's reaction to their attempted baiting of the candidates. Wildman Jim Cramer went so far as to criticize Romney and Gingrich for daring to take on the panel, rebuking them for pushing back against the media.

Cramer then went on a rant, claiming that voters didn't want candidates reacting to the media, only to answer questions about the economy. Totally off base and, as usual, wrong.

It was, however, quite surreal to see the action on CNBC, then see it covered live on Fox News only minutes later.

Finally, in the CNBC spin zone, two rather bizarre scenes occurred.

One was Larry Kudlow being seated with three prominent former Democratic administration officials to critique the event. All three of course lambasted the performances, trying to essentially close the door on all but Romney. Kudlow didn't look all that comfortable, but it was clear that CNBC's liberal producers and management wanted to give a final, anti-GOP spin to the event with an all-Democratic review of the two hour program.

Separately, minutes prior to that panel, Carl whathisname gave Cramer the stage to spin some false history of his own, while extensively criticizing all the GOP candidates, and the whole party, for good measure.

One has to have some perspective on Cramer's career journey to understand his views and actions. Harvard-educated, he began as a wannabe reporter, eventually realizing a desire to run money, working as a broker at Goldman Sachs along the way. He's not an experienced business person, nor economist. He's politically very liberal.

During his hedge fund running days, he engaged in explicit manipulation of media, including an admission of using CNBC floor reporter Bob Pisani, to spread rumors allowing Cramer to finish the second half of 'pump and dump' schemes. If Cramer were remembered for his hedge fund antics, he'd probably be under indictment, rather than on CNBC.

Thus, he's tickled pink to have exited that earlier career, and been refurbished and rehabbed as a cable business news anchor. To be seen on the panel of a presidential candidate debate is extremely tall cotton indeed for the hotheaded, big-mouthed former hedge fund manager of questionable practices.

In response to GOP calls for the repeal of excessive and ineffectual regulation, Cramer assailed them all as wrong-headed and small-minded. He cited Eisenhower's highway-building program to claim that Republicans needed to act like that again, spending hundreds of billions for public works to employ, well, construction workers.

Never mind that the current administration chose to ignore a key highway bill several years ago, and now has let much nearly-automatic road building lapse. Or that, per this recent post of mine, anything economically worthwhile will be done anyway, and needn't require government funding.

The GOP and its candidates don't believe we should let US highways disintegrate. Simply that, to refurbish them, after decades of excessive social welfare spending instead, other cuts have to be made to do so within balanced federal budgets.

Then Cramer engaged in his personal, wrong history of the recent financial crisis. He began by erroneously contending that the US has to bail out Europe, or the contagion will spread here. That may well occur, but even the US, borrowing, as it does, 40 cents of every dollar it prints/spends from China, doesn't have enough wealth to fix Europe's over-indebted social welfare spending mess.

Cramer routinely, and wrongly, calls the European crisis a banking crisis, when it's a social spending and governmental crisis. US funding won't fix that.

Then Cramer rolled on unabated to charge that the recent US financial crisis was all about criminal capitalistic behavior. Somehow, Jimbo overlooked, and never mentioned, Barney Frank, Kent Conrad, Chris Dodd, Fannie Mae or Freddie Mac. Or how Countrywide's ex-CEO, Angelo Mozillo, is alleged, on pretty good evidence so far, to have bribed Frank, Dodd and Conrad, and maybe more, to mandate Fannie and Freddie to accept Countrywide's low-quality mortgages for securitization.

In short, the Fed's low-rate policies and Congress' mandates of expanded GSE activity set the table for private finance's participation in the crisis. Moreover, there were sufficient agencies and regulations in existence to have stopped wrongful behavior.

The problem is, the regulations don't work. The people aren't adequately skilled, motivated, compensated and/or enabled to ever catch such activity. In fact, the very existence of the regulatory framework fools investors into a false sense of security. Something Cramer will never acknowledge.

Too bad Cramer won't let facts get in the way of his anti-GOP view of the nation's financial and economic history.

That's my current take on last night's GOP event. More to come....

Jerry Yang's Recent Antics At Yahoo

The comedy that is Yahoo continues, even in the wake of Carol Bartz' departure.

Jerry Yang, in a Wall Street Journal article last week, was described as claiming to be 'Chief Yahoo' and wanting to organize holding of a significant percentage of the firm's equity, while also allegedly fielding overtures for sale.

Yang, as the piece noted, can't be both buyer and seller, and acting CEO. There are too many conflicts.

Personally, I can't understand why anyone takes Yang seriously. Or, for that matter, Yahoo while Yang remains at the firm in any capacity.

Carol Bartz must be kicking herself for ever accepting Yang's invitation to his home to discuss taking the CEO job at Yahoo. Before then, she was a widely-respected leader due to her phenomenal accomplishments at AutoDesk.

Now, she's criticized for her Yahoo tenure and, I think, misunderstood. In my opinion, she shares company with Lou Gerstner, Art Ryan and, to some extent, John Thain. All had some accomplishment at a firm which they headed, although Ryan didn't really do anything at Chase, but sort of seat-warmed the CEO job.

Gerstner moved from RJR Nabisco to IBM, Ryan to Prudential, then in the throes of litigation, and Thain from Goldman to the NYSE to Merrill Lynch. In each case, I believed that they couldn't really lose. If any of them succeeded in turning around the mess they inherited, they'd become even more wealthy, and receive credit for their work. If they failed, many would view the situation as too far gone for rescue.

I think Gerstner did that at IBM, and Thain at the NYSE. Ryan didn't tank Prudential, but I wouldn't say he worked miracles. But Thain at Merrill and Bartz at Yahoo clearly weren't able to succeed. Thain exhibited some bizarre behavior. Remember the extravagant office redecoration? And then there were the conflicting stories regarding year-end bonuses paid out amidst the firm's near-collapse.

Perhaps Bartz' reputation will be regained if and, as I expect, when, Yahoo slides further in valuation. So long as Yang remains a part of the firm's grappling with its future, it's almost certain that shareholders will see Bartz in a different light.

Wednesday, November 09, 2011

Andrew Sorkin's Revealing Limousine Liberal Moment On CNBC This Morning

If you doubted that CNBC co-anchor, and New York Times columnist Andrew Sorkin is a limousine liberal, consider this moment from this morning's Squawk Box program.

A guest who was a former CEO of Staples was discussing the effects on the average American household of increasing taxes. He explained how most Americans would react to threats of higher taxes by cutting spending elsewhere and treating the planned tax increases as a negative uncertainty.

Sorkin chimed in with this gem, as closely paraphrased as I can recall,

'Do you really think people do that? Do they really notice tax increases?'

I think Sorkin has finally marked himself as a liberal now completely out of touch with the average American, what with his three careers- columnist, CNBC anchor, and published writer with an HBO movie based on his book.

You can't make this stuff up, can you?

Tonight's CNBC GOP Presidential Candidates' Event

It appears to be CNBC's turn to create havoc among the sheep-like field of GOP presidential candidates this evening in a 2-hour event I won't dignify with the term 'debate,' but, rather, the more appropriate term 'event.'

I've written a series of posts over on my companion political blog regarding the prior events here, under the 'debate' label.

After the September Fox News/Google event, I wrote this post wherein I suggested a better format for cable channels to provide voters with access to candidates and their ideas,

"I think what would be more meaningful to me would be something like the following. A network provides a weekly two-hour slot for its 'candidate of the week.' One of the GOP presidential hopefuls sits on a set with one or two moderators and answers questions from online feeds and a live audience. Moderators provide follow-up questions and/or fill in background on the candidate's prior remarks on the topic. Or contrast their stance with other candidates, etc.

And, for good measure, the original audience/online questioner gets a few minutes of give-and-take with the candidate, so if the latter evades the question, the questioner can complain about that and note it for everyone else.

I really don't care so much what Mitt thinks about Rick. Or what Newt thinks about anyone. Or what Rick (Santorum) does to try to look relevant.

In the end, I care more about how these people interact with prospective voters than how they fence with each other. I don't expect them to agree with each other, so what's the surprise in these bear-baiting formats?"
Fox News subsequently began something like that with Brett Baier's Special Reports "Center Seat" segment. Once each week, they invite a major GOP candidate to spend about 10 minutes taking questions from and discussing issues with Baier's panel, usually including Charles Krauthammer, Juan Williams or Mara Eliason, and Steve Hayes. Last night Newt Gingrich was the guest candidate. It's a far better approach, because the focus is on one candidate and his/her positions.
For example, coming immediately after Herman Cain's tension-filled press conference to address his anonymous and named accusers of sexual harassment, Juan Williams asked Newt, point blank, if his various marriages, infidelities and the story of his serving divorce papers to his wife while she was in the hospital, didn't constitute too much baggage for him to win the Oval Office. Gingrich answered calmly, referring to his daughter's accusations, which he never the less labeled as false.
With this as background, let me comment on the face which will take place on CNBC this evening from 8-10PM, EST. With a panel including Maria Butt-iromo and her annoying lisp and general air-headedness, and socialist political commentator and New York Times correspondent "Red" John Harwood, you can bet most of the two hours will consist of baiting the GOP candidates with questions designed to create convenient sound bites for the currend president's re-election staff to use in subsequent campaign commercials.
This won't be anything remotely resembling an honest, non-partisan attempt to ascertain the candidates' views on the economy and business.
I've been hearing CNBC's self-aggrandizing promos for this event for days now. Breathless soundbites alleging that this is what voters have been waiting for, it's the big moment to underpin their decisions. That we'll learn how each candidate plans "to jumpstart the economy." That's a direct quote.
So let's examine it.
A conservative's approach to the economy specifically eschews the belief that government can 'jumpstart the economy" in some direct, active manner.
At present, I think it's fair and accurate to say that the truly conservative candidates would, ideally, say that the most they can do is to reduce growth-retarding uncertainty caused by the federal government. This would largely consist of reversing excessive energy- and finance-related regulations, a tax-code overhaul to reduce rates, remove preference items and simplify the code, and the exit of federal government from subsidizing any businesses, such as so-called 'green energy' investing and mortgage bond guarantees, to the detriment of private sector efforts to do the same things.
The problem, of course, is that these reasonable steps will sound insufficient, because they don't purport to immediately "create jobs."
Never mind that conservatives, and most of the GOP candidates, don't believe government should directly create jobs. They will be pummeled by most of the CNBC panel for being cold-hearted, uncaring and, in effect, promising a priori to do nothing to help millions of unemployed Americans.
You need to remember that most CNBC on-air anchors believe in failed Keynesian economics and the current administration's economic policies.
However, with the exception of Rick Santelli, a former CME trader and executive, who I believe will be on the panel of questioners, the rest of the CNBC panel will likely be liberals who simply don't believe, if they even understand, how conservatives approach government's role in the US economy.
Which brings me to a post entitled Ronald Reagan's 11th Commandment & The CNN Las Vegas GOP Event, which I wrote on my political blog late last month. In it, I opined,
"Why aren't the top 8 candidates coordinating how they will control so-called debates at which they appear? Didn't anyone's communications directors or campaign managers realize that attending a CNN event was to invite disaster and humiliation?

Perhaps the RNC should get between the candidates and the networks, brokering formats so that the focus is on moderator or audience questions, not candidate-to-candidate criticism. Honestly, voters are smart enough to figure out what they want to know from each candidate. They don't need other candidates to help them on that score.

Networks want to create newsworthy events, which typically means force in-fighting and embarrassing gaffes. The RNC and the candidates should all want to provide voters with opportunities to learn more about each candidate's positions, not how the candidates feel about other candidates' positions.

I would really love to see the RNC chair now step forward and take control of future candidate events, mislabeled as 'debates,' and enforce formats that minimize violations of Reagan's 11th commandment, i.e., Thou shalt not criticize a fellow Republican."
How I wish the RNC had taken my advice prior to tonight's CNBC event.
Will I watch it- almost certainly not. I'll likely Tivo it, in order to fast forward through the questions from the more liberal, less intelligent CNBC staffers, stopping where I see Santelli participating.

MF Global's Regulatory Lessons

Holman Jenkins, Jr., wrote a thoughtful piece in his weekend edition column regarding MF Global's demise. Jenkins rebuked those who were disappointed with the regulatory failure involving the firm. He celebrated that a financial firm engaged in overly risky activity and paid the price with bankruptcy, without government intervention.

I agree with him on that point.

However, I think he misinterprets the motivation for some, including me, to express consternation that new regulatory agencies, powers and legislation did nothing to prevent the collapse of MF Global.

I actually don't support the bulk of existing financial regulatory legislation and agencies. In my opinion, they represent the foolish wishes of largely inept, naive members of Congress and various administrations that it is practical or effective to have our existing, expensive and intrusive regulatory machinery.

It doesn't work. It gives investors, borrowers and depositors false hope. It risks making those parties insensitive to the realities of the marketplace and the vendors with whom they choose to do business.

I'd prefer to see government leave the business of deposit insurance, financial statement regulation, and most other detailed, intrusive financial regulatory areas.

Without such government-provided, monopolistic services, private solutions would arise. Firms would offer competitively-priced deposit insurance, differing by bank, thus providing an implicit credit rating. The same would be true for the purchase of various levels of audit attestation.

I'm not upset that government regulatory personnel failed to understand MF Global's condition until it was too late, or that it may have failed to identify the wrongful use of customer funds by the firm, if that occurred.

Rather, I see MF Global as the latest poster child for throwing in the towel on regulatory solutions and ripping out most of them as ineffective and overly expensive.

What's worse, looking out for your own interests, or wrongly believing the government's regulators will inform you, in advance, when your interests are in jeopardy?

Tuesday, November 08, 2011

Recent Odds & Ends

Barry Knapp, US equity strategy chief of Barclays, was cited in a Wall Street Journal article saying that a European recession won't really affect US firms. Maybe it will trim sales 2%, and that Europe is only 13% of US economic GDP

But later that same day, on Neil Cavuto's Fox News program, another pundit forecast crushing effects on Apple and some other US firms with sizable European operations.

They can't both be right, can they? Being that Knapp is responsible for a sizable equity book, I would doubt he'd be completely candid. That would be rather like yelling "Fire!" in a crowded theater when you are near the doors. So I guess I lean more toward the guy on Cavuto's program.

Ron Baron was on CNBC as they hosted a segment from his investing conference at the Metropolitan Opera of New York. He disclosed that Jon Corzine had solicited his firm to invest in MF Global. In an all too rare example of common sense, Baron declined. His explanation?

First, MF Global's business was a bit too complicated for him to fully understand. Second, what Baron did understand that at 33x leverage, a mere 3% loss would wipe out the firm's equity.

Case closed.

Evidently Baron didn't need the CFTC, SEC or any other regulatory agency to assure him of anything.

Re Greece, Europe & Global Economic Conditions

There's so much political turbulence in Greece this week that it's challenging to write anything at a point in time which purports to be current.

So, rather than focus on that, let me opine on what has already transpired.

I thought Papandreou's call for a referendum was a breath of fresh air, and real sensibility, amidst all the political maneuvering among other European national leaders and bankers. As CNBC's Rick Santelli opined, let the Greek people speak out once and for all to either suffer and stay in the Eurozone, or return to the Drachma and experience the consequences of that move. Pain either way, but, in the latter, perhaps a bit more controllable.

What was, I think, as important about Papandreou's call, even though it was subsequently rescinded, is that it reminds everyone who is affected by the European debt crisis, which is pretty much the global economy, that the entire mess among all the free-spending European countries depends on the people of those countries.

I have heard, even after Papandreou's referendum announcement, several pundits recite, for the umpteenth time, how leaving  the Euro would be so costly for Greece. How, if the ECB will just print money or buy bonds, which is another variant of printing money, the major French banks can probably squeak by. One of those pundits was, I believe, CNBC's wild man, Jim Cramer.

What pundits of that belief miss, yet Papandreou demonstrated, is that this isn't about a few large European banks, the ECB, the ESFS, or just Germany's economy's ability to cover Europe's debts.

On a much deeper level, it's about, now, Europe's populace's and, later, that of the US, tradeoff between significant economic pain now to fund benefits promises that aren't otherwise affordable, or less pain now and probably fewer benefits later, too. The various banks' and nations' debts are simply the circulated, legal instantiations of those promises, and, thus, subject to the vagaries of actual funding over time.

Post-WWII societal structures and benefit schemes were always going to be unaffordable, since they were, for the major European nations and the United States, inappropriately designed as communal defined benefit plans, rather than more sensible and affordable individual defined contribution plans. As such, now, Greece is the proverbial canary in the coal mine, signaling that one nation has reached the point at which its spending can no longer be continued on affordable terms. Other nations aren't far behind, as we know from credit downgrades or problems in Spain and Italy, to name two largish EU members.

I find it not accidental that August saw the 40th anniversary of Nixon taking the US off the gold standard. Similarly, at least one pundit on either CNBC or Bloomberg this week pronounced the Euro the least-credible, purest fiat currency of all. In a post I wrote on the occasion of Lew Lehrman's Wall Street Journal editorial commemorating Nixon's act, I referred to his chart that showed how inflation galloped out of control after that severing of gold and the dollar's value.

Recently, the Vatican has picked up the same theme. Few people are doing an adequate job of seeing the larger global finance and economic picture at work now.

When money supply was related to gold, money supplies had some countervailing pressures which reined in excessive printing or borrowing of a currency.

Fiat currencies have only confidence in a nation's economic capability to fund the government's debts. When that confidence is shaken, as it has been now with a handful of European nations and, imminently, the US, the lack of any real basis for valuation becomes clear.

Beginning with offshore Eurodollar liabilities in the 1960s, in reaction to a tax on Treasury interest, and accelerating with the closing of the gold window, US dollar liability creation has outpaced what anyone can reasonably forecast as the nation's ability to generate wealth to repay such obligations. When US corporations were able to sell dollar-denominated bonds in Europe, dollar obligation creation left the province of just the Fed or Treasury.

But, ultimately, the total claims against a nation's currency lead back to its citizens. Honoring or defaulting upon those obligations, whether by the sitting government, or a change in government, is a decision the citizenry ultimately makes.

In Greece, Papandreou stepped down after surviving a no confidence vote. The referendum will not take place, but it is, again, an open question what Greece will do. Rumors continue that the new coalition will seek better terms from the EU.

I continue to believe that the dry, economic arguments by some pundits focusing just on rational, economic costs and implications of whether this or that country leaves the Euro are misplaced.

We are seeing a rare spectacle of many large countries simultaneously coming to terms with their swollen, unsustainable obligations, whether held by private parties, the nation's banks, or other governments. As I conjectured several years ago, during the 2008 financial crisis, it would seem reasonable that a long term outcome is a global deleveraging. I think we're seeing that now. But when too much money has been created relative to the value being forecast to support it, eventually, some parties will have to take losses for the gap between what was created/borrowed, and what actually can be counted on to support the monetary bases outstanding.

Monday, November 07, 2011

Mike Mayo's Book & Essay In The Weekend WSJ

I read Mike Mayo's extended article/book excerpt in this past weekend's edition of the Wall Street Journal. Sad to say, I was underwhelmed.

My memory of Mayo as a capable bank analyst goes back to my days with Chase Manhattan Bank in the the early 1980s. Back when Dick Bove, Bob Albertson, Tom Brown and Sally Pope were frequently on page one of the daily American Banker.

Despite taking two pages to write it, Mayo's point boils down to one he doesn't actually state, and apparently doesn't choose to acknowledge, i.e., equity research shouldn't be housed in the same firm as underwriting or other services bought by the banks and non-bank financial firms being evaluated by the analysts.

We already learned this in the late 1900s when technology analysts fawned over the companies that their firms brought to market via IPOs. It's not a new revelation.

Mayo tells the same story over and over. How he virtuously made tough 'sell' calls, only to be reprimanded, gagged, taken aside and 'talked to,' cut off from contact with management of the firms he followed, etc.

I don't doubt that Mike made those tough calls. Somehow, I don't think he's so naive as to be ignorant of what would happen when he did. He is evidently still and MD these days, but now has slipped to being one at Credit Agricole Securities.

Perhaps he should note that Tom Brown and Meredith Whitney finally just struck out on their own. Brown runs a financial sector portfolio, and, thus, is suspect every time he opens his mouth to tout the shares his fund owns. Whitney went the pure research route, and appears to be keeping her firm afloat.

It's no secret that analysts who truly have conviction eventually want to, or ought to, run portfolios. Mayo would have been able to have achieved legendary status, according to the article, had he shorted massively in late 2007, when he went on CNBC to predict the coming financial crisis.

Of course, one problem with the transition from analyst to portfolio manager is that the former are industry-focused. So when they run sector portfolios, they necessarily are exposed to sector cycles, which I would think could make for some pretty lean times. Not to mention the tendency to hype positions which are losing money, as Tom Brown now does with sickening regularity concerning BofA.

Still, I expected more, and better, from Mike Mayo. If all he has to tell us is whining about a conflict of interest that's existed since the dawn of sell-side analysis, well, that's not news.