A Simple View of Government Purchase of Structured Finance Instruments

Michelle Caruso-Cabrera and Rick Santelli made a stunningly simple but important point about the proposed Treasury purchase of distressed structured financial instruments earlier this week on CNBC.

Amid the usual on-air drivel of various co-anchors and guests which has been gushing for the past week, Caruso Cabrera asked the question, paraphrased, below

'If there's such profit opportunity in buying these assets that the taxpayer should fund doing so, why aren't private investors doing so already?'

Santelli immediately chimed in with his agreement. I think they are right.

We've seen the reports on private equity funds being amassed for eventual purchase of these mortgage-backed instruments. We've seen the Merrill Lynch deal with the Texas investment group for 22 cents on the dollar, with recourse.

But if no significant purchases are being made by those who don't have unlimited credit, why should taxpayers believe that Treasury purchases of the same securities will be profitable?

Even Bill Seidman, one-time head of the RTC, allowed that, if skilled private investors were buying and managing these portfolios, money might be made. But not in government hands.

To me, that's a very important missing signal. If savvy private investors don't feel they know enough about the value of these instruments, regardless of mark to market issues, about which they, and the Federal government, do not need to be concerned, why should we believe that Treasury knows at what prices its purchases will yield profit, while simultaneously recapitalizing the current owners of those securities.

As I wrote here last week, If the Federal government is aiming to rescue banks, it can't pay low prices. If it's aiming to profit, it can't pay high prices.

Which will it be? If private investors aren't even bidding low prices, or banks aren't hitting those bids, that tells you something about how unprofitable this expensive plunge by Treasury into structured securities is likely to become.

Annheuser-Busch's No-Brainer Choice

This week's news in the beer industry has taken on quite the dramatic quality. European brewing giant InBev is planning a bid to buy the dominant US brewer, Annheuser-Busch.

For entertainment purposes, business media outlets, including the Wall Street Journal, are playing up the family angst angles, but it's really a no-brainer for shareholders. Vote for the acquisition, sell your AB shares, whatever.

I should probably provide a quasi-disclaimer. Although I own no AB stock, and never have, I do have some acquaintanceship with the company and family. My undergraduate alma mater is Saint Louis University in Saint Louis, Missouri. That university's student center is named the Busch Center. At the time I was completing my BS in marketing, one of the Busch children was also a student. The city reveres the first family of American brewing. The St. Louis Cardinal baseball team plays in.... Busch Stadium. At least it did. I believe the newly-built field is also named for the team's owners.

Suffice to say, I am well-acquainted with the family's identification with the company whose shares they sold to the public some time in the last century.

As CNBC co-anchor Michelle Caruso-Cabrera stated so clearly earlier this week, as I paraphrase,

'The family wanted capital and went to the public to sell shares. If they wanted full control over the company, they shouldn't have done that.'

She's right.

Further, look at the nearby five-year price chart of AB (ticker symbol BUD) and the S&P500 Index. The brewer has done its shareholders no favors. Clearly, having Busch as your last name doesn't seem to do much for achieving consistently superior returns for shareholders. Over five years, AB hasn't even made it back to a flatline performance, while the S&P has chalked up a +40% return.

The family situation of the Busch's also reads like that of the Ford family. Bloodlines thinned of talent over the generations. Divorces, underperforming sons, distant father-son relationships.

We read that the current CEO, August IV, was basically estranged from his father, by way of divorce. He, the son, went on to become a typical wealthy bad boy in his younger days.

The most chilling passage of the Journal article is its last, which reads, quotes the current CEO as saying, of his relationship with his father, August III,

"Succeeding atop Anheuser is paramount to the relationship, he says. "I honestly do believe if I failed in my professional life, it would be much harder to ever gain his respect," he says."

Meaning, I guess, that the AB shareholders are hostage to whatever it takes August IV to do to gain his father's respect.

Damn the shareholders- focus on dad!

The Journal piece does a fine job cataloguing the company's fending off Miller Brewing in the 1970s and '80s, then eschewing international expansion via mergers or acquisitions. Now, AB is the lone family brewer among large global players, and its performance is hurting.

This Yahoo-sourced price chart of the brewer and the S&P500 from the early 1980s tells an interesting story.

For nearly two decades, the brewer tracked the index, briefly declining to equal the latter's performance by 2001. At that point, the brewer's performance flattened slightly, but, relative to the bubble-bursted index's decline, posted a few years of outperformance. But by 2003, the index was rising again, while the brewer's performance dipped, then flattened.

Hardly laudatory performance by the Busch family on behalf of their public investors, is it?

It's pretty clearly time for a change. For any of the privileged Busch's to see the brewing company as a personal playground for settling family and personal issues is just wrong and unethical.

Looks like it's time for one less headquarters in Saint Louis, and a new division for InBev.

Michelle Caruso-Cabrera's Sound Thoughts On Our Financial System

Michelle Caruso-Cabrera, one of the brightest on-air personalities on CNBC, and one of perhaps only two with a business or economics degree, had some choice words yesterday afternoon about the US financial markets.

As Steve Liesman whined about market failure, and Dennis Kneale made some fairly forgettable remarks, She conveyed eloquently in just two minutes several complex but important sentiments.

Among the salient points Caruso-Cabrera made in her brief comment were:

-Our financial system is all about risk and innovation, not control.

-Unless it's prohibited, you can do it.

-By contrast, in other countries, like France, if it's new, you must obtain explicit permission.

-Financial service firms will abuse leverage in every cycle. It is, she said, 'addictive- it's their cocaine.'

-So we have to expect some blow-ups in financial markets every few years.

-Regulation won't ever stop this, because we favor innovation and growth over control.


Could anyone capture the essences of US financial markets any better or more succinctly? I doubt it.

In the process of explaining these points, Ms. Caruso-Cabrera implicitly provided the rationale for why there will always be a tendency toward US financial market excesses. Innovation and risk taking lead to the marginal service provider taking the imprudent, marginal risk, in search of excess returns.

The key is not to smother innovation, but to attempt to provide sufficient safeguards, in the manner of clearing exchanges with collateral, margin and settlement rules, to make any one party's downfall less cataclysmic to the entire financial system.

And that is something Treasury Secretary Paulson clearly understands and is moving to do, per my post on his recently released blueprint for regulatory reform of the US financial service markets.