Paul Singer On Inflation, Dodd-Frank Regulation, & The Next Financial Meltdown

This past weekend's Wall Street Journal main interview was with hedge fund manager Paul Singer. I can't say I was acquainted with his work prior to reading the interview, but I was heartened, in a way, that so much of what he espoused was similar to some of my own previously-written views.

For example, Singer was unequivocal regarding coming inflation. When a guy like this begins citing 1930s era European treatises on the Germany currency debasement, you should be worried. I already am, but, of course, Helicopter Ben keeps telling people like me to have faith and quit being concerned.

Let me put it this way. Singer has built a multi-billion hedge fund by relying on his own analyses, conclusions and instincts. Ben The Bernanke is a high-level civil servant who will probably be offered another high-level, lucrative position after being Fed Chairman, no matter how badly he messes up in that role.

Of the two, Singer or Bernanke, whom do you think has the greater risk in being wrong, and, therefore, is more likely to get the current economic situation correct? And, by the way, Bernanke, as a sitting Fed Chairman, pretty much has to cheer lead on topics like saying economic growth is coming or here, inflation won't be a problem, and the world's investors won't be concerned about continued US monetary debasement.

For once, in Singer, I've found someone who echoes my own views of large US commercial banks as totally unattractive investments. James Freeman's interview quotes him as saying,

"You don't know the financial condition of [Citigroup], JP Morgan, Bank of America, any of them. Mr. Singer believes the big banks still carry too much leverage, and he doesn't trust regulators to monitor them effectively.

The largest financial institutions, he says, are "a random collection of survivors. Almost none of the survivors exist because of their perspicacity, risk controls and sound management- even the ones that are vaunted along those lines...How and why do they exist? Mostly on accident, meaning who got bailed out first and who was saved next and how did people feel and what did people say the weekend Merrill was under pressure [in September 2008]." "

Singer goes further in the next paragraphs, citing one of my own favorite risks- counterparty. He says that his fund complex has removed itself as much as possible from having any of the large US commercial banks and "the Street" as counterparties.

Singer sees Dodd-Frank as I, and many others, do, as described in the interview thus,

"The authors of Dodd-Frank claim that the law prevents the government from bailing out any particular firm, but the Fed can still provide emergency loans to a failing giant as long as it offers similar financing to other firms.

"It's a very important part of this equation that a few survivors exist in this peculiar relationship with government, having to kowtow to government, make relationships with regulators," says Mr. Singer. "Are they puppets of the government? Are they cronies of the government? Will their lending be affected by the perceived whims or beliefs of the particular government regulators existing at a particular time? Yes."
If the government deems a firm not "systemically important," Mr. Singer forecasts, it could spell its doom. "Small and medium-sized financial institutions may be disadvantaged, may be sacrificed in the next crisis to protect these behemoths," he says.
It gets even worse, Mr. Singer says, if the government ever deems a financial giant "in danger of default"—a judgment that can be made without the consent of the firm or its investors. The business is then taken over by the Federal Deposit Insurance Corporation, with its Orderly Liquidation Authority.
Once in charge of the firm, the government can discriminate among similarly situated creditors and transfer assets out of the business at will. Because of this, says Mr. Singer, creditors and trading counterparties might flee even faster than they would from a firm headed toward bankruptcy, where at least there is established law instead of regulator discretion.
"You don't know how you will be treated," he says of financial institutions under the new FDIC regime. "If there are companies that are also counterparties alongside you but they've been designated systemically important, that's a clue. It's like a game of treasure hunt. It's a clue that you're going to get disadvantaged compared to them."

So maybe FDIC chairman Sheila Bair and the authors of Dodd-Frank were right about one thing: Perhaps their new process for resolving failing giants really will discourage some people from lending to the biggest banks—but only at the worst possible moment.
The problem, in Mr. Singer's view, will be the jarring shift from one day being an investor in a member of the "systemically important" club, to the next day being a creditor whose claim is determined by bureaucratic whim. This may be welcome news to government pension funds that will want to be bailed out, but certainly not for private investors.
The speed at which a firm will collapse as word gets around that it might be headed to FDIC resolution could be "amazing," says Mr. Singer. And that "speed will drive the size of the losses."
This "atmosphere of unpredictability" is harmful to America's place in the financial world, he says, and "it doesn't make the system any safer. . . . This is nuts to be identifying systemically important institutions." He views it as a poor "substitute for creating soundness and reasonable levels of leverage throughout the system."


Phrases like "bureaucratic whim" ought to make you cringe. Don't you think they have that effect on investors in, lenders and counterparties to such institutions? I do. Singer's comments confirm what many others, including me, have contended, i.e., that the comparatively predictable existing bankruptcy laws have been replaced by liquidation-by-whim and cronyism. Singer is correct to predict that funds will leave a troubled firm much faster than anyone can imagine. And, ironically, that being in a group of selectively preferred, "systematically important" designated firms lending to or investing in a large bank is actually dangerous, because you will be the least-advantaged party. The one most likely to be at the very end of any line to collect on funds due.

Thus, in Singer's view, you have government-backed large institutions continuing with risky behaviors, and counterparties like them doing the same. This, he worries, is the seed bed for the next financial meltdown. Dodd-Frank and the FDIC have replaced uncertainty with respect to government backing for large firms in the event of another financial crisis with absolute certainty that select "systematically important" banking firms will be rescued. Moral hazard is now legislatively and regulatorily banished, leading to another round of excessive risk-taking.

The final passage of Freeman's interview says a lot about Singer,

"One reason his firm has survived for 34 years, he says, is that "we try to be very respectful of the unpredictability of markets. We try to at all times at least assume that the world is not being properly run." A safe assumption. "

Sad but, in this case, so true.

ATT & T Mobile

This week's announcement of ATT's proposal to buy T Mobile's US network received copious amounts of coverage in the business press.

My first inclination, to be blunt, was to check on the equity price moves of the major US telecoms for the past five years, and more.

It isn't pretty.

The first chart displays ATT, Verizon, Sprint and the S&P500 Index for the past five years. Sprint is clearly the big loser, but the other two could only manage to match the Index.

Think about that. In such a capital intensive, advanced technological business, Verizon and ATT can, at best, only manage to give you the equity market index return, with no premium for the risk of lack of diversification.

The next chart displays the long term price moves of the same series. Sprint, again, is the big loser. But the other two haven't even matched the S&P over the longer timeframe.

Conclusion?

Before you get all amped up over this proposed deal, notice that the whole sector is an investment graveyard.

My hunch, born of my experiences with predecessor AT&T from 1979-82, was right. I can still recall, upon joining AT&T right out of graduate business school, seeing the single most riveting chart describing the company's situation. It was a Yankee Group chart showing the monotonically plunging free cash flow for AT&T. A trend that had begun a few years earlier, and was proceeding at breakneck speed. Everything about the business screamed 'value destruction,' in the classic Schumpeterian sense.

Existing prices and equipment were under attack. New products would provide incredible productivity increases for customers, while transitioning AT&T from the clunky, labor-intensive world of analog to the much more competitive, less-profitable digital world.

Everywhere I looked, I saw revenue forecasts failing to displace business lost to either competition or technology. People my age received a brutally quick introduction to deregulatory dynamics in telecommunications, airlines, and banking. It hasn't ceased yet.

Now, as to the strategies and tactics of the proposed deal.

T Mobile has the valued asset, with Sprint needing it  to remain relevant. So ATT promised a $3B breakup fee just to keep Sprint's hands off of T Mobile while the proposed merger is vetted by DOJ and God knows who else.

If ATT gets its prize, albeit at a P/E exceeding its own, it immediately increases its physical network assets and, perhaps most importantly, gets its target's valuable spectrum slots, while denying Sprint a viable means to remain competitive. If not, it's at least tied up T Mobile for a while, thus starving Sprint a little longer.

Why the putative architect of this deal, some investment banker from Chase, is so lauded is beyond me. I mean, with so few players, was this really something for which ATT and T Mobile needed a banker? Maybe for the basic funding mechanics, but nothing else.

As for the hoopla involving Chase underwriting the proposed deal with $20B of credit, so what? They're underwriting the purchase of infrastructure and spectrum, more than anything else. Not so risky. Given consumer behavior, even if the oligopolistic aspects of the deal allow some price increases, people are still going to continue to use their smart phones for data- and video-heavy apps, which will ensure the debt being paid off.

Meanwhile, according to CNBC's pundits and the Wall Street Journal, the regulatory issues are hardly trivial. For precisely that oligopoly effect of taking out one of four providers in the sector.

But, to me, win or lose, ATT's CEO, in an interview on CNBC Monday morning, said something that really gave me pause. Something right in line with this recent post.

Jenkins wrote about cloud computing, and smart phones certainly are a major contributor to the phenomenon. Stephens, ATT's CEO, noted that the firm needs more network capacity muy pronto, as even cars are now bringing apps traffic to cell phones. He mentioned some growth figure which, while I forget what it was, stunned me. After all, I, like many people, have already seen the commercial wherein a guy remotely accesses his car for his teen-aged daughter and her friend, then starts it via his cell phone app.

Far more than the old land-line engineers at the old Bell Labs and Long Lines, today's ATT network engineers must be terrified at the expected smart-phone and related device-based traffic coming their way on wireless networks. Meanwhile, nobody wants to pay much more for these conveniences.

Regardless of whether this deal is approved, or not, I doubt it will really make ATT a more attractive equity investment. Take another look at that second chart. None of the three telecom companies has a higher price today than ten years ago. It's just a lousy sector for investment, no matter how much more concentrated it gets. At least barring radical changes in regulatory-driven economics which allow a telco to become a reasonably pure play on market-based pricing for wireless bandwidth. Even then, however, the infrastructure requirements may dampen investor enthusiasm.

But, for now, I'd be surprised if this deal, if consummated, really does a whole lot for ATT's ability to earn consistently superior total returns in the years just ahead.

I Join Groupon- Initial Impressions

I wrote this recent post concerning Groupon. In it, I mused,

"What struck me about this was just how low the barriers to entry may well be in this product/market. I hadn't really given the business a whole lot of thought until I read this piece. Frankly, it just seems to be a tactic- couponing- that no business can afford to do too much of, without suffering serious pricing policy challenges for the long term. There's something about teaching customers to expect discounts that becomes corrosive over time."



In order to learn more about  the company and its activities, and hopefully score half-price tickets to the recently-released movie The Lincoln Lawyer, I joined Groupon last week.

Overall, I've been very underwhelmed and unimpressed. I honestly can't quite figure out what all the fuss is about- for me, at least.

First, I never saw an offer for the movie. Despite being featured in the Wall Street Journal's March 16th edition, the offer never made it to my Groupon account. That's annoying to start with. Perhaps it was sold out instantly. But customer experiences like that only serve to leave a negative impression with potential buyers.

What I have seen isn't particularly earthshaking. The initial coupon was for half off on a dinner at a localish upscale French restaurant. It's disappeared, so it likely either expired or sold out. Upon closely reading the offer, the fine print was less than entirely clear. There were some weird blackout dates, a host of restrictions on how many of the coupons could be used per table, per person, etc. The term to fulfill the offer was, I believe, throughout the summer. However, it called to mind an old marketing aphorism that goes something like this,

'A coupon for something you weren't already planning to buy is no deal and saves you no money.'

In the case of the restaurant in question, while I'm aware of it, I haven't ever actually dined there. Given the circumstances under which I would use the coupon, it's not clear I know anyone who would actually prefer to dine there. So a coupon for a half-price dinner- or maybe two, it wasn't really clear- was of limited value to me.

As I scan the available deals on this Sunday afternoon, while composing this post, I see offers for Persian rugs, Lasik eye surgery, Yoga sessions, and facials. There's another restaurant deal, window treatments, door locks and bar glassware.

Frankly, none of it is compelling to me. And I've provided Groupon with more personal details in order for them to presumably target more appropriate offers to me.

It reminds me a lot of when I used to shop on eBay. If you find what you're looking for, great. If not, you're out of luck. The sort of shopping Groupon, like eBay, provides, is a sort of stream of offers which move past you. Online impulse shopping.

I could see people finding, on reflection and analysis, that they'd spent way more than they realized on unnecessary goods and services because they got caught up in the timed, networked nature of the deal excitement.

For the businesses, it seems to me to be either too small a reach to be very effective or, if it's sufficiently large to be so, then it's really expensive. And it does things like teaches people to refuse to pay full price at a restaurant, waiting, instead, for a Groupon deal.

Is Groupon more exciting than getting a Val-Pak in the mail bulging with coupons? Sure.


Is Groupon actually a significantly better, more efficient way for consumers to use coupons? I'm not sure yet. So far, I'd say no.

CNBC Celebrates A Non-Event

Two weeks ago, I wrote this post critiquing various on-air staff at CNBC. It was a toss up to categorize Bob Pisani as one of "The Bad,", rather than "Ugly." I wrote,

"Pisani spends too much of each weekday looking astonished or surprised by some move in equities. That's when he isn't anthropomorphizing the market and cheering it onward to new heights, rather than simply reporting the facts.



Anchors and reporters who can't add value beyond restating the obvious or bringing some level of knowledge to a topic, so that they can at least ask questions you would, or hadn't considered, are just a waste."


The problem is, Pisani veers dangerously close to dispensing falsehoods, which would have clearly put him in The Ugly category. The salient falsehood that Pisani peddles is that anything happening on the floor where he is stationed actually matters anymore.

Last Tuesday, I happened to see the network hold a little celebratory, self-congratulatory moment at around 3:30 for the 15th anniversary of Pisani's debut reporting from the floor of the NYSE.

In 1996, the floor saw a lot more activity. Technology for crossing trades off of the floor was much less pronounced, and the floor was actually crowded. In those days, reporters from the floor had to fight for space, often getting hip-checked and jostled during their live reports.

Not anymore. Now you see a few people in the distance, and nobody usually comes within camera-range.

The funny thing about CNBC making a big deal out of Pisani's tenure is that the guy is a no-value-added chump. That is, he adds no value to viewers, but has been known to allow himself to be manipulated by institutional fund managers to great effect, and for tremendous value.

I recall seeing an interview with Jim Cramer, in which he admitted blatantly manipulating a stock by pumping Pisani with rumors, sending the issue's price up during the day. Cramer than sold before the close, making nice profits, so he said.

How is it that CNBC, upon learning this, even considered leaving the hapless Pisani down on the floor? Doing so was tantamount to explicitly allowing fund managers a wide-open door through which to manipulate markets in favored equities.

Just incredible. Rather than celebrating the guy's tenure reporting from the floor of the NYSE, they should have pulled him years ago, out of a sense of propriety and concern for retail investors, if nothing else.

As for Pisani, you wonder whether he is too dense to understand what Cramer's interview did to his role and crediblity, or is just so arrogant as to ignore the obvious import of it.

FX Coverage on CNBC

Sad to say, I was spot-on in this recent post regarding CNBC's plans for covering foreign exchange trading. In it, I wrote,

"Within the past week, I was asked to complete a CNBC survey on the topic. The network's surveys are typically pretty obvious in their focus. This one probed my unaided recall of advertising by various FX trading vendors, then segued into how I felt about the companies and the concept of CNBC airing an FX trading program.



You can see what's coming here. One or more retail FX platform vendors approach CNBC about sponsoring a program focusing on their instruments. With all the cross-currency plays available, plus various forces- interest rates, trade, intervention, etc.- driving FX valuations and expectations, there would be a lot to discuss."


Sure enough, for the past few weeks, CNBC has been advertising it's new program, Money in Motion, which debuted yesterday in the 5:30PM time slot.

So, once again, we see the network bow to its entertainment nature, and tout trading behavior that few, if any, retail viewers should ever venture near.

It would be fitting if Vanguard founder John Bogle boycotted appearances on the network in protest of this latest move that is diametrically opposed to his message to retail investors.

I haven't seen the details of the program's staffing, and I didn't watch its inaugural appearance, though I may have elected to record it. However, at half an hour one day a week, it's reasonable to assume that the network, to start, is borrowing resources to staff it. At least until it knows whether it can expand it sufficiently to merit its own staff and budget.

That won't change my feelings about the program, which I wrote in that prior linked post,


"I continue to feel that CNBC knowingly entices retail investors to believe they can and should engage in investing activities for which they are unsuited. Most retail investors should stick to managed equity and fixed income funds. Few really have the time, knowledge and skill to add unique value by selecting individual equities or bonds, let alone derivatives thereon. For CNBC to devote so much air time- as much as 2 1/2 hours now, including two Fast Money programs and Cramer's Mad Money- is, in my opinion, irresponsible. To add FX to this brew is even worse."

Cloud Computing, Net Neutrality, Regulation & Economics

The Wall Street Journal columnist Holman Jenkins, Jr., wrote an interesting piece last week entitled What Price the Cloud?

In it, he reviewed  the evolving situation regarding heavy internet capacity usage by firms like Netflix and Google, who, of course, want no pricing actions taken against them.

Jenkins wrote, in reference to "once-great firms like Digital Equipment and Wang Labs,"

"The scariest part: Even leaders who grasp what's happening to them often can't change cost structures and business models fast enough to survive."

That's actually a misunderstanding. DEC and Wang really never had a chance once the PC began to spread. No change in cost structure for producing a Wang system could save the company, because the product was just archaic in the face of a multi-functional PC of the late 1980s.

I'm rather surprised Jenkins made this mistake. Schumpeterian dynamics don't typically allow for accommodation by older firms to the newer trends which supplant them. There is little or no effective response. Rather, the older approaches simply disappear.

Still, the core of Jenkins' piece involves whether repricing of bandwidth will hurt companies like Netflix. Everyone's nightmare, of course, is that the cable companies begin to meter individual usage and charge for such usage volumes over a certain level. Jenkins notes how the introduction of ever lower-priced smart phones is driving up bandwidth demand from mobile sources.

He refers to an A.T. Kearney report which finds current economics of the internet unsustainable without some transfer of bandwidth costs to those that generate traffic. But for me, the key passage is this one,

"...but who's to say consumers can't judge for themselves if the restrictions are worth the price?"

Just the other day, I went online and selected three Netflix movies to view on my television. Into the instant queue they went, and I watched them, with no particular interruption, that afternoon (Although, I should note that Netflix has had some recent problems, disappearing from my Tivo unit for a day or so, and freezing up the system on occasion. I suspect usage overload).

What's that worth? For a flat monthly fee, I could watch 30 movies/month. I think that comes out to about 50 cents/film, and considerably less on a per/hour basis for entertainment.

If my cable bill rose by $10 for this level of service, will I really care? Is $10 so much that I'd revert to mailing discs back and forth to Netflix? Unlikely.

I saw the excellent movie Barney's Version in an art house theatre last weekend with a friend. It cost about $25 all in. The price differential between first-run movie experiences and arm-chair selection and viewing off of Netflix remains enormous. Temporarily raising the price of using bandwidth, until the traffic generators respond with more efficient delivery to economize on bandwidth usage, probably won't be crippling for most consumers.

What's really at issue here is this. Having learned the ability to buy, perhaps at artificially low prices, cloud-based experiences involving high-speed transfers of video and other high-volume communications applications, will consumers just return to old, pre-cloud habits, or will they willingly pay something for the ability to maintain their new levels of cloud-based information consumption?

But, in the short term, Jenkins is entirely correct when he writes of Apple, Netflix, Amazon and Google,

"All are betting heavily on the cloud. All need to start dealing realistically with the question of how the necessary bandwidth will be paid for."

Current enjoyment of on-demand, large swatches of bandwidth for free can't last much longer. The electronic highway is getting crowded, and sooner or later, tolls will have to be charged to allocate usage, or we'll all experience an inability to view full motion video in a manner that's appealing or worthwhile.

Bill Dudley's iPads

Tuesday's Wall Street Journal carried an editorial describing audience reactions to New York Fed President Bill Dudley, a Goldman Sachs veteran, as he tried to explain that the cost of living isn't rising.

Apparently, Dudley said,

"Today you can buy an iPad2 that costs the same as an iPad  1 that is twice as powerful. You have to look at the prices of all things."

Well, all things except food and energy, if you're the Fed.

According to the Journal, amidst laughter over Dudley's remarks, someone in the audience replied,

"I can't eat an iPad."

While another shouted,

"When was the last time, sir, that you went grocery shopping?"

In yesterday's post regarding inflation, I noted that not everyone ascribes all price movements to inflation or, for that matter, deflation. Those terms are reserved for monetary creation in excess of, or less than, the growth of an economy.

Just because prices rise, or fall, doesn't mean they are due to (monetary) inflation.

It's pretty distressing that the New York Fed's President can't distinguish between prices which fall due to improved productivity or value-added, prices which rise due to demand, and price moves resulting from reactions to excessive money creation.

More Shameful Behavior by CNBC

Only a few months ago, I wrote this post concerning CNBC prominently showcasing the ethically-troubled Steve Rattner.

It simply stuns- and sickens- me that CNBC continues to kowtow to and butter this guy up. He was introduced as if he's God's gift to finance. As if we all know that Rattner 'saved the economy' by allowing GM to wriggle out of a proper bankruptcy, and, in the process, pay off the administration's labor cronies.

Then they proceed to ask the guy's opinions on things which, according to even his swollen bio, seem out of his normal sphere of interest.

Is this really the best guy they can get for this program? What's next- a guest spot for Bernie Madoff, live from jail? Or an hour guest-host spot on SquawkBox?

Disgusting. Just disgusting.

When a major business network so arrogantly panders to someone who violated ethics rules, you know how hypocritical that network is regarding business ethics.

Kelly Evans On The Fed & Oil Prices

Monday's Wall Street Journal had an Ahead of the Tape column by Kelly Evans entitled The Federal Reserve Faces an Oil Dilemma.

In her piece, Evans offered the pros and cons of the Fed's prospective sterilization of oil's price increases. She dutifully trotted out the usual arguments involving effective taxation, consumer spending consequences, QE2, monetary easing and how all of these effects might relate to US economic growth.

What I found odd was that Evans, who is typically very well-versed in both economics and business, completely missed the obvious point.

That is, the Fed's primary job remains dollar price stability. In reality, it really shouldn't be so overly-concerned with adjusting for oil's price, or the various follow-on effects on the US economy. Rather, by maintaining stable prices, in dollars, given supply and demand forces, and money supply growth in concert with some variant of the Taylor Rule, the Fed can provide at least one fairly consistent, if not constant, in an otherwise rapidly-changing economic landscape.

In truth, the Fed isn't going to 'get it right' if it really tries to solve all the simultaneous equations which are theoretically required to arrive at the correct, perfect economic policy prescription for the US economy.

The fact is, despite the Fed or Congress, the US economy, like all economies, must suffer through cycles. And that includes slowdowns and recessions.

The Fed can mitigate (monetary) inflation, and the US economy may still experience rises in the prices of some goods due to demand-supply imbalances. When I learned economics, we called that a price signal. If prices rise, some demand ebbs, while more supply is coaxed into the market, and others seek to replace the goods, the price rises of which have provided opportunities.

To suggest that the Fed can somehow, with just one monetary lever, sterilize the effects of so many disparate inputs to our economic system is laughable. And wrong.

I'm surprise Evans didn't go that route in her column. It would have been more helpful than writing in such a way as to suggest that the Fed has choices which include actually resolving these conflicting economic forces in some perfect or preferred manner beyond simply maintaining price stability.

US Outsourcing: A Race To The Bottom?

About a week ago, a friend and I were at our fitness club when he ran into another guy as we were talking.

The third man began to converse, and, in time, mentioned he had been laid off from a New York-based insurance company. He then briefly recounted that, though an IT professional with an electrical engineering degree, he'd been laid off from Bell Labs, then a second firm, and, most recently, from the IT department of the insurance firm.

Understandably disappointed, he railed that there was no manufacturing left in the US, while companies are engaged in what he termed a "race to the bottom," hollowing out high-paying jobs from America and outsourcing them to India, China and Southeast Asia.

However, the laid-off engineer isn't entirely correct. As I wrote in this recent post concerning a recent Wall Street Journal editorial,

"A related common complaint by some pundits is the oft-proclaimed death of US manufacturing.



In a well-written editorial entitled The Truth About U.S. Manufacturing, in last Friday's Wall Street Journal, economics professor Mark Perry (University of Michigan at Flint) debunks that complaint.


Perry observes,


"In every year since 2004, manufacturing output has exceeded $2 trillion (in constant 2005 dollars), twice the output produced in America's factories in the early 1970s. Taken on its own, U.S. manufacturing would rank today as the sixth largest economy in the world, just behind France and head of the United Kingdom, Italy and Brazil. Despite recent gains in China and elsewhere, the U.S. still produced more than 20% of global manufacturing output in 2009.


The truth is that America still makes a lot of stuff, and we're making more of it than ever before. We're merely able to do it with a fraction of the workers needed in the past.


The average U.S. factory worker is responsible today for more than $180,000 of annual manufacturing output, triple the $60,000 in 1972."


It's not that the US doesn't produce things. It's that high value-added goods don't require as many workers per capital dollar to do so. The sorts of manufacturing jobs the engineer had in mind aren't competitive with those in other countries where such lower-value work is done for lower wages.

But this guy wasn't even in manufacturing. So let's consider his general concern- about outsourcing and a 'race to the bottom.'

I don't know where the guy earned his BS in EE, but it seems as if he was a fairly recent employee of Bell Labs. Probably within the last decade. Let's just say, as kindly as possible, that it's not the same Bell Labs of the pre-Lucent era. And it hasn't exactly been associated with lots of Nobel Prizes since ATT was broken up, as it was in the organization's salad days from the 1950s to 1970s.

Further, while the conversation was fairly brief, he typified himself as just a 'financial IT' guy. Working in such a capacity for a garden-variety general insurer is hardly a unique sort of job.

While he complained that it was no longer useful for Americans to earn EE degrees, as engineering jobs went overseas, I thought of Google, Facebook, Cisco, Apple and lots of other technology firms which still appear to be growing and using engineering talent.

Part of being an American is the freedom to educate yourself and then pursue a chosen field and skill set. If you make poor choices, you may find yourself challenged to maintain the career path you envisioned. For example, there are a lot fewer telecommunications engineers now than there were a decade or more ago, when so much more of the existing systems were analog. That's partly why communications are so much less expensive and more powerful.

It's the same with jobs in steel, autos, and even airlines.

In one respect, the laid-off engineer was correct. American companies, in order to remain competitive, for the good of their shareholders, do locate functions where they are most productive. For lower value-added functions, that can mean lower-wage countries outside the US.

Sometimes, companies have gone too far in this direction, as Boeing's CEO recently admitted, and reverse course,
"Then there's the recent comments of Boeing CEO Jim McNerney on CNBC. In answer to questions concerning the Dreamliner's continuing delays, McNerney confessed that the firm had overreached with its design outsourcing. He said that they won't be doing that again, focusing instead on more onshore engineering and design.



If one of the most sophisticated engineered systems we have, a modern jetliner, has failed to be reliably designed and produced globally on time, what are the prospects for equally-sophisticated systems? At least the Dreamliner results in a testable product on which quality control may be performed before it actually goes live in its initial commercial flights. And Boeing has been building such systems for decades.


I think it says a lot that they got the mix and management of global design of the various parts and subsystems of their newest jet fouled up, and are planning to move back to more centrally-sourced services in the future."


It's the higher value-added functions and services that will remain onshore. American productivity is often superior in those areas, especially when requiring large and sophisticated amounts of capital to work so productively.

Sadly, the engineer's comments seemed to signal, more than anything else, that he'd perhaps made some sub-optimal educational and career choices in the past, which led to his having too few highly-valued skills, despite his degree.

The US does have a challenge to continue to create business growth which will employ highly-educated and -skilled Americans in highly-productive jobs which create high value-added. We can continue to expect lower value-added jobs to migrate to lower-wage locales, often offshore.

But that's not the same challenge as every worker to constantly evaluate whether her or his skills will remain competitive and highly-prized in our economy.

My Hate/Love Relationship with Dunkin' Donuts

I've written in prior posts of how much I admire and respect companies or employees who provide an excellent service experience.

By contrast, I typically feel equally passionate, but negative, when a company or its employees or franchisees deliver poor service.

Unfortunately, one of my usually-favorite retail firms, Dunkin' Donuts, has earned a place in the second category. Twice in one week.

Last week, I visited the nearest DD franchise outlet, at the foot of Morris Avenue in Summit, New Jersey, one evening. I ordered several donuts and a small cup of coffee. Very simple. And there was nobody else in the shop. Not only did I have to coach the counter employee on finding the right items, but he didn't pay attention, resulting in my leaving with less than my full order of pastries.

But that was a minor gaffe compared to what I experienced on Saturday morning.

As background, it's worth noting that DD has begun having monthly themes to spur customer visits. For example, February was chocolate lovers' month. They baked and sold a few special varieties of chocolate-filled donuts and pastries which are no longer available.

Right on cue, beginning in March, the chain began promoting, via televised and radio spots, its Big N' Toasty Breakfast Sandwich (hereinafter BNT). Here's the prose describing it:

Start your big day with 2 fried eggs, 4 slices of Cherrywood smoked bacon and American cheese on thick Texas Toast.

With such an onslaught of expensive media, and no mention of a date on which the food item would be offered, it seemed reasonable to assume it is already available. Especially considering that, upon walking into any DD location in the past week, it is already prominently featured on POP display signs and on the permanent menu board located high on the back wall. It's even priced, so you know they are serious about selling it.

In short, all the advertising and marketing cues point to its widespread availability.

So on Saturday morning, I drove the short distance to the Morris Avenue DD to buy a few donuts and take home a BNT sandwich. With 2 eggs and four slices of bacon, plus cheese, it's not the sort of thing I want to consume all at once.

Imagine my dismay when, upon ordering it, I was told, in very broken English-well, actually, I'm not exactly sure what I was told. The first employee babbled incoherently, so I repeated my request. He babbled some more. I caught the word "Friday," and asked if he was saying it was only available on Friday?

Then his colleague babbled with a different accent, letting loose with a stream of words, the only ones of which I initially understood were 'don't have it,' and something about 'that's corporate.'

At this point, I turned to the man in line behind me, offering to let him go ahead of me, as it was becoming clear my order would be neither simple, nor fast. He declined, evidently wanting some free entertainment.

For the next minute or so, I was put through more pigeon English, while three of the store's employees, none of whom spoke clear English, apparently attempted to tell me that DD, the parent, had initiated a media campaign for a new breakfast sandwich which was not yet actually physically available in the stores.

It seemed, if I understood the extremely-poor communications of the employees, that the first items don't hit the retail outlets until this coming Friday.

Can you believe the ineptitude of DD's corporate management? It's owned by a private equity firm, so there's limited machinery to easily contact the firm. I tried once before, when another DD store refused to sell me a bag of espresso beans, although they admitted to having them to make espressos, cappuccinos and lattes. At that time, I emailed the parent on their website, giving them my contact information, but never heard back at all.

Now, the same management team is committing one of what is, to me, the most egregious mistakes a retailer can make- spending heavily on promotion of a new product which isn't yet available in its stores.

That's why I have such a hate/love relationship with DD. I find their atmosphere, usual service, and espresso-based coffee products to be better and less expensive than Starbuck's. But screwups like the BNT sandwich introduction are a real pain.

Just in case, however, the franchisee of that one outlet was at fault, I tried another DD store in a nearby town on Saturday evening. I walked in at 10PM to a mostly-empty shop. There was nobody in line, so I stepped up to the counter immediately. What happened next just cemented my recent sense of DD as having declining service levels.

In this case, at the store on Valley Road in Stirling, an employee looked directly at me, only a few feet away, then continued to talk on his cell phone and walked through a door into the back of the store, deliberately leaving me unserved, and no employees in sight.

Now I'm not sure when I'll return to one a DD store to try the new food item. Or anything else, for that matter. I guess you can characterize me as a formerly loyal DD customer whose patience with the firm's product introduction policy and store service has just about worn out.

KKR, TPG & The TXU Private Buyout Fiasco

Tuesday's Wall Street Journal featured an article on the mess that's become of KKR's and TPG's private buyout of TXU.

When you think of private equity, you often think of wealthy, savvy private capitalists buying underappreciated companies and assets, sprucing them up, then spinning them back out to the public, coining money in the process.

Sometimes, of course, we read about one of the leveraged buyouts which essentially just looted the firm of value by loading it up with debt, paying a 'special dividend' to the buyout firms, then letting it go under or stagger under the onerous debt service costs.

But one paragraph of the Journal story gave me pause.  It contained this passage,

"The biggest leveraged buyout of all time has boiled down to an expensive bet on the price of a commodity. Natural gas has fallen 43% since TXU's buyout, and settled at $3.927 a million British themral units on Monday."

Makes you think twice about how smart some of these private equity guys are, doesn't it? Like Cerebrus' purchase of GMAC and Chrysler just before the mortgage-backed mess collapsed in 2008.

Somehow, one is left feeling that TXU should have been left alone, and these private equity guys could have just gone long natural gas futures, if that's really all they were effectively trying to do.

CNBC's On-Air Staff & Yesterday's Equity Market Sell-Off

US equity markets sold off yesterday. We got that.

But if you watched CNBC after 3PM that afternoon, you saw some priceless comedy featuring Maria Bartiromo's breathlessly asking a guest, to paraphrase,

'We've had a two-year bull market during which some have been calling for this pullback. Calling for it for years. Now we finally get it.'

Two years? Are you kidding me? Someone's been predicting an equity market drop for two years, and yesterday they were suddenly heroes? I'd like to see one of those anchors or reporters try to manage a live portfolio where you weren't allowed to just guess that sometime during the next few years the market may decline. You had to go long or short for real.

Around 3:45PM, the network shifted into high gear with a multi-camera'd navel-gazing session that looked, onscreen, like the old Brady Bunch intro. Among the cognoscenti were the network's own David Faber, Sue Herrera, ex-anchor Ron Insana, a few other staffers I can't recall, and one or two guests. The first few participants, of course, were CNBC talking heads.

Why do you suppose a crew of people whose job is to make every day in the markets seem like the most important day ever would have a clue as to what yesterday's equity market decline implied? Didn't occur to any of the CNBC production staff to arrange participation by some respected portfolio managers or equity strategists, rather than their own largely credential-less crew of reporters and talking heads?

Here's a test. Bartiromo wrung her hands over the day's losses. Others decried the rise in volatility.

Since the market's post-2008 crisis bottom on 9 March, 2009, how many days has the S&P500 Index experienced a loss greater than yesterday's?

The answer appears below, in a table of the 50 worst daily percentage declines since the market's bottom. I've highlighted yesterday in red. It's only the 32nd worst day in two years.

The champ? April 1, 2009, at -4.28%

At -1.89%, yesterday's Index decline didn't even make it into the -2% range, of which there 18 days of such magnitude.

       Date      Level      Return


1 4/20/2009 832.39 -4.28%


2 5/20/2010 1071.59 -3.90%


3 3/30/2009 787.53 -3.48%


4 6/4/2010 1064.88 -3.44%


5 5/6/2010 1128.15 -3.24%


6 2/4/2010 1063.11 -3.11%


7 6/29/2010 1041.24 -3.10%


8 6/22/2009 893.04 -3.06%


9 7/2/2009 896.42 -2.91%


10 7/16/2010 1064.88 -2.88%


11 8/11/2010 1089.47 -2.82%


12 10/30/2009 1036.19 -2.81%


13 5/13/2009 883.92 -2.69%


14 10/1/2009 1029.85 -2.58%


15 8/17/2009 979.73 -2.43%


16 4/7/2009 815.55 -2.39%


17 5/4/2010 1173.6 -2.38%


18 6/15/2009 923.72 -2.38%


19 4/27/2010 1183.71 -2.34%


20 1/22/2010 1091.76 -2.21%


21 9/1/2009 998.04 -2.21%


22 5/11/2009 909.24 -2.15%


23 2/22/2011 1315.44 -2.05%


24 3/27/2009 815.94 -2.03%


25 3/24/2009 806.33 -2.02%


26 4/14/2009 841.5 -2.01%


27 3/20/2009 768.54 -1.98%


28 7/7/2009 881.03 -1.97%


29 10/28/2009 1042.63 -1.95%


30 5/27/2009 893.06 -1.90%


31 1/21/2010 1116.48 -1.89%


32 3/10/2011 1295.11 -1.89%


33 5/14/2010 1135.68 -1.88%


34 1/28/2011 1276.34 -1.79%


35 11/27/2009 1091.49 -1.72%


36 6/1/2010 1070.71 -1.72%


37 8/19/2010 1075.63 -1.69%


38 6/24/2010 1073.69 -1.68%


39 5/21/2009 888.33 -1.68%


40 4/30/2010 1186.68 -1.67%


41 11/16/2010 1178.34 -1.62%


42 4/16/2010 1192.13 -1.61%


43 6/22/2010 1095.31 -1.61%


44 10/19/2010 1165.9 -1.59%


45 3/1/2011 1306.33 -1.57%


46 5/7/2010 1110.88 -1.53%


47 8/30/2010 1048.92 -1.47%


48 8/24/2010 1051.87 -1.45%


49 11/23/2010 1180.73 -1.43%


50 5/18/2010 1120.8 -1.42%

What about volatility? Well, everyone has their favorite measure. By mine, yesterday's volatility value isn't even close to levels that should worry you about a significant, short-selling type of market sell-off. In fact, volatility was more than twice as great while the market rebounded in March of 2009. There were at least two more periods of higher volatility since then.
So before you get all shook up by Bartiromo's breathy rhetoric and anxious tone, never mind her typical loss for words and inability to get her sentences enunciated properly, check the facts.
 
As market hurricanes go, this isn't even a tropical storm yet.

A Twitter-Based Hedge Fund

I saw one of the most unusual segments on CNBC a few days ago involving a hedge fund announcing it will use Twitter-based inputs for trading.


If I recall correctly, a psychology professor and his grad student played with data and found an alleged leading indicator of Tweets, classified by sentiment, to the Dow's performance 3-4 days later.


Then a British guy with money from some other, distinctly non-financial venture, the exact nature of which I've forgotten, but think it had something to do with hair care, together with his colleague or brother, is investing some millions of pounds in a hedge fund- and promptly arranged to use the Twitter-based approach. The investor was presented in a brief clip extolling the importance of jumping on such a hot, 'leading edge' concept as Tweet-based trading.


This is almost too funny for words, isn't it? If it were three weeks from now, I'd think it was an April Fool's Day joke.


There are so many things about this story that don't make sense that it makes you wonder how it even made it onto CNBC a few afternoons ago.


First, it's clearly a high-frequency trading strategy. That means it's expensive. We learned nothing about how much and how rigorous was the backtesting the creators did on the strategy.


Of course, being psychologists, selling or licensing their technique to novice hedge fund owners, one wonders if any of them- concept originators or hedge fund owners- actually have any idea how professionals actually test these things?


Then there's the rather non-trivial question of just how it works. Believe it or not, most sophisticated investors don't want to invest with novice fund managers who operate a total black box investing strategy. Think, well, Bernie Madoff.

Especially one which relies, we are told, on the daily attitudes of the tweets of samples of several million users. Which are then, we're told, classified into one or more of six sentiment buckets, the disposition of which apparently creates a signal to buy or sell the Dow in anticipation of its level 3-4 days hence.

The actual example given in the interview on CNBC was a Tweet by a person stating that they were going to their gym to work off some excess weight. The psychologist sagely intoned that this was a negative market indicator.


Then there's the ease with which this could probably be cloned, with the market inefficiencies beaten out of it within a year- or less.


Or perhaps a competitor will clone it, then go one step further and poison the general Twitter feeds, while retaining their own pristine stream, the better to confuse others trying to trade on such sentiment.

Having been introduced to adapting what a novice equity strategist thinks is an investment-ready approach to actual operational status by experienced fund managers, I speak from experience when I say that I am sceptical of the Twitter-based fund concept. There just don't seem to be any experienced adults in sight to vet the idea.

But I guess time will tell whether we'll hear more about this one.

BofA's Moynihan Proves My Point

You have to laugh at BofA's CEO, Brian Moynihan, trying to make a virtue out of a vice.

As the chart in this recent post illustrated, BofA has performance problems. It has no business even thinking about expansion and acquisitions. And Moynihan, being a lawyer, is probably over-matched as it is trying to run such a large, diverse company. Remember the last time a lawyer ran a large US commercial bank?

That's right- Chuck Prince tanked Citicorp so badly the government had to step in and buy part of it to keep it from dissolution.

Anyway, back to our story. Moynihan gave a carefully-timed interview to CNBC the other afternoon, echoing a recent Wall Street Journal article announcing his "peace dividend." That's Moynihan's term for the value he plans to return to shareholders by not pursuing acquisitions. Considering the last two large BofA acquisitions cost Moynihan's predecessor, Ken Lewis, his job, you can understand his attitude toward expansion.

Laughably, according to the article, BofA thinks it will break new ground trying the oldest large commecial bank trick of all- cross-selling.

The short story on this vain attempt is that the customers with money know better than to give all their business to one giant mediocre banking firm, while the customers who want to do this aren't profitable enough to make it worthwhile.

Of course, being new to managing a bank, Moynihan probably doesn't realize this yet.......

Meanwhile, the firm is buying back its equity and closing branches. That sounds like a bank that acknowledges the over-banked nature of the US market.

Hardly a reason to invest, is it? I stand by my conclusions of the prior, linked post.

Groupon & Its Competitors

I was very intrigued by a recent Wall Street Journal article discussing competitive risks for Groupon, the company that combines couponing, social networking and local business.


The article cites Groupon as potentially earning $1B in revenue for 2011, but then notes that the online couponing business has low barriers to entry. The trick, it contends, is pairing large pools of email addresses/subscribers with large pools of merchants. For that, it names Google and Amazon as the two most obvious potential competitors to Groupon.


Google's $6B offer wasn't sufficient to buy Groupon, but it does have the necessary pools of potential customers, as well as existing merchant relationships. Amazon, the Journal piece notes, currently backs LivingSocial, Groupon's most significant existing competitor, with 20 million subscribers to Groupon's 60 million.


The article mentions a national coupon deal LivingSocial did for movie tickets through the online service Fandango. It drew a million responses as of noon of the day the article went to press. It also cited Groupon's largest offer, which was with Barnes & Noble, garnering 700,000 respondents.


What struck me about this was just how low the barriers to entry may well be in this product/market. I hadn't really given the business a whole lot of thought until I read this piece. Frankly, it just seems to be a tactic- couponing- that no business can afford to do too much of, without suffering serious pricing policy challenges for the long term. There's something about teaching customers to expect discounts that becomes corrosive over time.


Regardless, it's clear that by starting with national vendors, an online coupon competitor can rapidly build a subscriber base, then slowly move, locale by locale, into individual markets. Of course, once you have even three competitors, the revenue split becomes a weapon to be used to lure vendors to a specific competitor.

As the Journal article noted in closing, perhaps the Groupon owners should hurry along on an IPO, while they still have such a high market value. Once large competitors really get rolling, that value could shrink surprisingly quickly.

Starbucks Again- Still Trying To Talk Itself Back To Growth

I read Starbucks CEO Howard Schultz' Wall Street Journal interview in the Monday edition and immediately headed for a price chart of the firm and the S&P500 Index. Two, actually.

The first shows the two series for the past five years. The second covers a period from the early 1990s, when Starbucks went public. The two charts provide some interesting perspectives on the firm's recent performance.

In the Journal piece, much is made of revenue and profit growth from 2009, as well as even more recent growth statistics. That's all well and good if you are a prescient market timer. Few investors- even professionals- are successful at that.

What the first chart actually reveals is that Starbucks' performance collapsed much more deeply than the Index during the recent recession. It's pretty clearly become highly correlated with economic activity.

Schultz, in the interview, admits that "we were growing the company with such speed and aggression that we lost sight of the customer experience."

Translation: Starbucks won't be even attempting such levels of growth, apart from riding economic cycles, again.

Over the past five years, owning Starbucks basically got you a return not significantly different from the S&P, but with far more risk.

The second chart provides a larger view of just how volatile the firm's returns have become. Looked at since inception, we see the predictable rocket-like trajectory as the firm grew across the nation, changing coffee consumption habits during some periods of economic growth. But 2005 clearly marked a watershed year.

After that, monotonic share price growth ended. Volatility arrived on an unheard of scale, making the stock a much different type of issue than it had been. Prior price declines were nothing, in retrospect, compared to the cliff off of which the stock price fell for about three years.

Thus, the recent rebounds in fundamentals which have powered a seeming-comeback may mislead investors. Perhaps even Schultz, too.

Wilbur Ross vs. Liesman on CNBC This Morning

This morning, on CNBC, viewers were treated yet another example of why the network must fire Steve Liesman.

Under discussion was the proposition that the Dodd-Frank law has solved nothing, and only added to regulatory costs and uncertainties. Wilbur Ross opined that nothing in Dodd-Frank that was new would have prevented any of the of the recent mortgage-related financial excesses. Another guest echoed Ross' comments.

Leave it the networks senior economic idiot, Liesman, to begin yelling over and at Ross, claiming that he disagreed. Not once, but two or three times, did Liesman interrupt or shout over guests with actual, successful experience in the sector, to object to their opinions and tell them they were wrong.

When he finally sputtered to a stop, the uncredentialed reporter uttered some barely-comprehensible, feeble and, frankly, unbelievable reason that he felt Dodd-Frank would have improved upon prior regulatory schemes. I seem to recall him repeatedly yelling,

'but Fannie and Freddie......,'

so it's likely his mistaken belief had something to do with safeguards involving the GSEs.

You had to see this exchange, though, to truly appreciate just how clueless and pompous Liesman has become. It would have been one thing for him to ask Ross and the other guest a question focused on what he believed was a feature of the recent regulatory law that may have had a positive effect on the crisis. But without any credible basis for his comments, to simply try to shout down two more involved and experienced businessmen on the topic, was just deplorable.

Liesman has become a glaring liability for CNBC. It would not surprise me if Ross conditioned his next appearance upon Liesman being banned from the set for the duration of his visit.

Evolution of Equity Portfolio Selections

I recently had the opportunity to focus on how my quantitatively-driven portfolio selection process has captured current trends in business.

It began when I noticed a former business partner using selections from a prior month for which he had not compensated me. Without going into the details of the situation, suffice to say he continued to buy equities and options, in January, based upon two-month old portfolio selections.


With his old portfolios, and using only some of the prior selections, for comparison, I have noted how the February and March portfolio selections have, in just those several months, begun to shift into new areas.


For example, one new holding is a cloud computing firm. Another is in solar energy.


Since its inception in 1997, the selection process has included various energy firms- Royal Dutch Shell at the outset, and, over time, natural gas, oil exploration and service firms. Now, reflecting the economy and government subsidies to alternative energy production, a solar-related firm has performed well enough to become part of the portfolio.


Similarly, my very first portfolio included Intel and Microsoft. Over time, the selection process moved to PC manufacturers, other software providers, security firms, network gear providers, then online-oriented firms. Now, with so much content stored off-site and so many programs which are net-based, a cloud computing firm has demonstrated sufficient strength on the necessary attributes to be included in the latest portfolio.


I don't think I could ever make such changes subjectively. Just the other morning, on CNBC, I listened to a portfolio manager bemoan having owned Microsoft, instead of Apple, for several years. I suspect that when one subjectively analyzes forecasts, it becomes very difficult to reshuffle one's portfolio. So much of the decisions become based on quality of estimates or forecasts, or simply emotions concerning old favorites.

Along the lines of that last point, I found it hard to believe a conversation I heard last Friday on CNBC regarding Wal-Mart.

The hapless Maria Bartiromo was asking a guest- either a portfolio manager or buy-side analyst- why Wal-Mart's size and market shares didn't guarantee that it exhibit excellent equity price performance.

I don't really recall the guest's reply. I know what he didn't say. What Bartiromo, with all her presumed experience covering financial markets didn't already understand.

Simply put, Wal-Mart has lost its potential to surprise investors and markets.

Firms like Apple which design and manufacture products can develop radically new, innovative items- then enhance them. But retailers must typically on just store growth. Perhaps occasionally the addition of a new product line or fighting brand. But, for the most part, once they gain lots of attention, are followed by a hundred analysts, and saturate their primary markets, it's hard for them to surprise with results on a consistent basis.

Wal-Mart reach that point about a decade ago, as the nearby price chart indicates. After several decades of torrid total returns which massively outpaced the index, it has settled into maturity. Probably never to regain the performance characteristics of its earlier days. That's why the firm hasn't been among my portfolio selections for over a decade.

How is it that this fairly common phenomenon escaped the understanding of the veteran CNBC anchor and her presumably experienced guest?

US Commercial Banking, Evolution & Commoditization

My years with the Chase Manhattan Bank were spent under the tutelage of Gerry Weiss, SVP of Corporate Planning & Development. It was a privilege to work for such a bright, secure and gifted strategist.

Gerry didn't win a lot of new friends among his senior executive colleagues at the bank for holding the view that banking was one of the most commodity-like businesses in existence. With a few exceptions, most of the businesses at Chase were extremely difficult to differentiate because, at the end of the day, you were either borrowing, lending or processing money. Not exactly a patentable good.

Further, as technology became more important in more banking businesses, any single bank's ability to maintain a competitive edge for very long became increasingly difficult.

With all this in mind, I read a piece in the Wall Street Journal last week regarding federal arm-twisting of the major US banks on mortgage foreclosures. Leaving aside the subject of that article, which was the unwise attempt to force banks to forgive negative equity for borrowers, I was struck by the pedigrees of the few banks mentioned- Chase, Wells Fargo and BofA, and the one absent bank- Citicorp.

I realized, as pondered these names, how few people today probably recall that these, including Citi, are no longer the banks which originally had those names.

For example, Wells Fargo is really just the name of a former San Francisco-based bank acquired by what was once a staid Midwestern outfit- Norwest Bank of Minnesota. If I'm not mistaken, Norwest itself was acquired by a one-time rival, First Bank System. Along the way, it hoovered up the crippled Wachovia during the recent financial crisis, giving it, ironically, the old Golden West S&L, too. That was a product of Ken Thompson's wrong-headed mortgage bank acquisition at the peak of the real estate bubble. It cost him his job.

Meanwhile, BofA is just the surviving name of another San Francisco-based bank that took too many risks and became the prey of another regional US bank- Nationsbank, the renamed North Carolina National Bank. Hugh McColl busily assembled a large group of basic banking franchises beginning in the 1980s. The drive to aggregate assets and relationships culminated in the takeover of the once-proud BofA. McColl's successor, Ken Lewis, overreached when he bought Countrywide and Merrill Lynch during the recent financial crisis. That latter deal's murky details sent Lewis packing early from his CEO job at BofA.

Chase, as we know it today, is simply the name hung on the agglomeration of assets of most of the old money center banks of New York City, except for Citi and Bankers Trust. Back when I worked for Gerry Weiss, he once referred to Chase Manhattan, Chemical and Manufacturers Hanover Trust as three fairly interchangeable, mediocre banks. When asked about merging them, he snorted derisively,

'All you'd get is a much bigger mediocre bank that would be even more difficult to manage than what we've already got.'

Never the less, Chemical took over MannyHanny, then the two picked off Chase after its CEO, Tom Labrecque, finally ran the latter into the ground and attracted the unwanted attentions of fund manager Michael Price. In time, the CEO job went to Jamie Dimon, who had fled New York City to run the remaining Midwest regional commercial bank, Banc One- by then a product of a merger of the Ohio company of that name and the old First Chicago.

Citicorp wasn't mentioned among those in the foreclosure-related article because it essentially died, only to be resuscitated as a ward of the federal government after 2008. Before that, however, it was taken over from outside banking, when Sandy Weill prevailed upon then-Treasury Secretary Bob Rubin to allow him to 'merge' with John Reed's Citibank. Weill then hip-checked Reed out of the C-suite, hired Bob Rubin, and proceeded to build the most unwieldy, unmanageable financial supermarket ever attempted in the US.




My point is that if you were to have surveyed the national and regional banking field in the mid-1980s, as my colleagues and I did as part of our jobs as corporate and business strategists at Chase Manhattan, you'd have classified BofA, Chase Manhattan and Citicorp as the nation's three most important international money center banks. Chicago had just lost Continental Bank, but still had First Chicago. Bankers Trust and JP Morgan were smaller, more focused money center banks. All of these had senior management which felt and behaved as if their banks were special, different, and able to take risks which other US banks couldn't handle.

Fast forward almost 30 years, and you can see how wrong they were. The three premier US money center banks all lost their managements via takeovers.

In truth, the managements of what we now know as the leading US banks are products of duller, less-ambitious banks. Less ambitious in terms of scope, though, rather than size. And the businesses which are now part of these banking companies which aren't historic mainline banking units- brokerage, underwriting and merger and acquisition advisory- have become, as my old boss Gerry Weiss predicted, less lucrative due to the commoditization of them by the large commercial bank entrants.

In true Schumpeterian form, most of large commercial banking has become commoditized amidst growing competition. Thus, their equity price performances are, for the most part, anemic. Only Wells Fargo has a 35-year price performance which eclipses the S&P500 Index. Chase, BofA and Citi all trail it substantially.

What's different about Wells? Notice, first, that its outperformance slackened significantly around 2000. So it's not a function of recent management skill.

More likely, its earlier outperforming of the S&P resulted from its having avoided combining with any of the leading money center banks- ever. A host of old mid-sized California banking franchises- First Interstate, Crocker, and Security Pacific- if I recall, comprised the Wells Fargo that Norwest snared. As such, while predecessor banks got into some troubles, they tended not to be on the gigantic scale of the messes into which the three largest US money centers stepped throughout the past three decades.

Of the other banks, Chase managed to about match the S&P, while the Citi and BofA plunged noticeably.

So, from a perspective of over thirty years of large US commercial bank performance, it's evident that the risk-taking of the old international money center banking companies didn't result in their consistently superior performance. Rather, to the contrary, that strategy failed, as evidenced by the managements of more cautious, smaller commercial banks ultimately owning the marquees previously associated with their larger one-time rivals.

Now, no matter what you hear on CNBC or read in the Wall Street Journal, for the most part, the four major US commercial banks have become financial utilities which will, for the most part, fail to consistently outperform the S&P500 for any significant period of time. They've become large, slow-moving purveyors of financial commodities.