Wendys' Fall: Another Case of Schumpterian Dynamics

Wednesday's Wall Street Journal featured a piece on the demise of Wendy's, the fast-food, hamburger chain built by Dave Thomas. It's a classic story of Schumpeterian dynamism, and the ability of otherwise apparently reasonable people to become deluded into thinking that companies last forever.

The real story begins with the absence of founder, builder and pitchman, Dave Thomas, in late 2001, when he focused on the final stages of a cancer that would take his life early the next year. According to the Journal article, Thomas was no longer "deeply involved" in the company's operations by late 2001. The fact is, nobody could convey the chain's quirky image and its food's comparative advantages like Thomas did. At this point, sane people would have begun to question if things could ever be the same.

Would Apple be Apple without Steve Jobs? It wasn't when he left years ago, replaced by John Scully. Some firms are, like it or not, iconic. Shareholders need to be sanguine about this.

After Thomas' death, the remaining management bought a Mexican food chain, Baja Fresh Mexican Grill, for $275MM. But the new unit never performed up to expectations.

Kerrii Anderson, hired as Wendy's CFO in 2000, became interim CEO after the departure of Jack Schuessler in 2006. Her compensation rose from $3.4MM as CFO, to $4.2MM as interim head of Wendy's.

The particulars of how Wendy's performance began to slide are almost immaterial. Take your pick- an accountant running a consumer food business, meddling in the kitchens, manipulating franchisees to push for her as permanent CEO, and her oversight of inept commercials using a male in a wig with red pigtails to replace Dave Thomas as the Wendy's image.

Between disgruntled institutional investors, including Nelson Pelz, and poor sales growth, the company was in trouble. It sold the Baja Fresh unit for only $31MM- a little over 10% of what it paid for the chain four years earlier.

The remaining Thomas family members- his wife and children- were appalled at how the company was faltering. Quotes in the article have them saying,

"You can't tear the company apart to satisfy shareholders," in answer to Pelz' demands to sell Tim Horton's, and that,

"Mr. Thomas's widow and several of his children say they were sick over the news (the sale of Wendy's to another owner) and couldn't understand how management had let the company become so vulnerable (my italics)."

The inept Ms. Anderson 'remained remarkably upbeat' about Wendy's growth prospects. However, as I have written in prior blogs about CEOs such as Jeff Immelt, of GE, when a CEO has earned upwards of $15MM in compensation, they no longer have the same goals as their shareholders. Ms. Anderson had, by this year, been paid at least $20MM (five years as CFO at at least $2.5MM, plus the $3.4MM in 2006, and $4.2MM as CEO). She no longer cares whether the company actually prospers. As my partner, a native of Ohio, noted,

"Do you know how far $4MM goes in Dublin, Ohio? You can't spend that kind of money out there."

The fact is, from a business history perspective, Wendy's had to slow at some point. It was Dave Thomas' passionate creation, and was inevitably destined to either grow too large, or miss some market trend. Companies don't grow forever. Changes in management, especially the loss of a gifted, passionate, insightful CEO, can cause irreparable damage.

If anyone should have had the sense to realize that Wendy's was finished as they once knew it, with Thomas' death, it should have been his family. Odds are, Nelson Pelz is more realistic about Wendy's than the family or its management. He realizes that it now is probably worth more in pieces.

A little perspective, and a lot less emotion, might have saved all the actors in this drama some grief, energy, time and money. Wendy's was destined to falter after the loss of Thomas, without some equally-passionate, experienced leader. Certainly, a relative newcomer, and an accountant, at that, wasn't going to be going toe to toe with McDonalds and winning. Or with Nelson Pelz, for that matter.

Sometimes, it's better to simply acknowledge change and get it over with.

Economies of Scale in Autos and Computers

Tuesday's Wall Street Journal's Marketplace Section featured two seemingly unrelated articles- Acer's purchase of Gateway, and Chinese auto manufacturers making inroads in Africa.

On closer examination, however, I believe the two share an important link and lesson. They both embody some elements of Schumpeterian dynamics.

In the case of Acer, this Asian computer maker has wisely taken the opportunity to buy market share and brands by scooping up the number three US computer manufacturer, Gateway. By combining supply chains and brands, Acer hopes to, and probably will, gain some margin room while obtaining new branding and price-point flexibility. Clearly, Acer understands that the computer manufacturing game is now largely a commodity one, with a few exceptions, such as HP's recent Pavillion line.

However, for large parts of the market, Acer's ability to provide competitive functionality at lower prices may help it drive Toshiba, Lenovo, and others into less tenable market and profitability positions.

The focus of the other Journal article is the emerging market for new cars in West and Southern Africa. Whereas these areas historically were dumping grounds for used European models, the Chinese have arrived with new cars so affordably priced as to compete favorably with the used car stocks.

What's amazing is that all of the new entrants are Chinese, and no American, or even European names, are to be found. Nary a Ford, Chrysler or GM nameplate.

The article suggested that these auto makers can't really afford to aim so low in price as to compete with the Chinese in Africa. However, at least one Chinese manufacturer warned/promised that they would be moving upmarket, and into richer countries, on the back of the African experience and volumes.

I can't help but think that, a decade hence, we'll read various tomes from the likes of BCG, Bain or McKinsey consultants dissecting the final mistakes of the American auto makers. Can it really be so benign to allow the Chinese to gain a vehicle production foothold, uncontested, in an entire continent? Granted, it's Africa, but, still....

You can just see the Chinese lowering costs along expanding volume curves, gaining manufacturing experience and improving quality, as well as the ability to target small, profitable niches in Africa. Then turning these newly-acquired skills on the low end of the American market.

If you needed fresh reasons to explain the slow, inexorable death of US auto production, here's another one. Complete denial on the part of Detroit that a clutch of rising Chinese vehicle manufacturers can use Africa as a springboard to enter the US with small, efficient, low-priced cars and steal another potential market before American producers can respond.

It's been the way most prior Asian auto producers have entered. Plus, with fuel economy and environmentalism running rampant these days, it would be reasonable to expect the Chinese nameplates to be more than competitive on fuel consumption, weight, size, etc. They've got a large market with which to experiment, getting smaller, less expensive cars 'right' before shipping them to the US.

Alan (Mulally), Rick (Wagoner), Bob (Nardelli)? Anyone looking east to see the source of your next competitor?

Ironically, the three blind mice probably won't take note of Acer's recent move, and consider how scale and creativity, together, can both protect against further share erosion, as well as be the basis for new growth and profitability.

Second-Rate Economists & CNBC

They're at it again!


Yesterday, CNBC featured two little-known 'economists,' one from UBS, another from PNC, who agreed that the US economy is now in danger of a recession. Both solemnly lectured that Fed Chairman Ben Bernanke had better cut the Fed funds rate next month by a quarter-point, or he wouldn't be managing the economy effectively.


Honestly, this kind of thing just turns my stomach. Who do these guys think they are? They are so far from being credible it isn't even funny.

This morning, on CNBC, for the eighteen-thousandth time since the end of July, the anchors are holding a 'debate' among various guests and pundits, as to whether the Fed should cut rates next month. You're not going to hear much else for the next few weeks, until that magical afternoon when the Fed announces its rate action, or inaction.

It seems to always be this way now. If there's anything but blue sky and sunshine in the financial markets or on their horizons, then CNBC spends most of its air time on "Fedwatch," conducting unending discussions, day after day, week after week, as to what the Fed will and should do at its next meeting, and why. Nevermind that there's insufficient data released daily, let alone weekly, to justify this. It's merely 'entertainment.'

However, as Brian Wesbury, a better-known and credible economist, wrote of the business media's tendency to hold pro vs. con on camera "debates," these mistakenly give people the impression that, say, economists are evenly divided on the subject of the likelihood of a recession, when, in reality, they are not at all 'evenly divided.'

In his August 9th editorial in the Wall Street Journal, Wesbury wrote,

"Any reasonable sample of economists these days would include at least 80% optimists. So why all the bad news?"

And, again, this very morning, while listening to/watching CNBC in background, I heard Erin Burnett report that in phone calls she had (Yes! She actually talked to real people- not just regurgitated her own journalistic opinions.) with banking executives around the country, most of them saw no reason for a Fed rate cut.

For what it's worth, Wesbury believes that,

"...people gather knowledge about the rest of the economy, the part they cannot see, from watching news. As a result, it could be that the format behind most business journalism skews perceptions and creates pessimism.....But what seems clear is that in the name of producing an entertaining product, and in an attempt to provide contrasting views, the true consensus of experts is rarely reported."

As I discussed this with my partner the other day, we returned to a topic we've touched on before. That is, when Harry Markowitz developed efficient market theory and the concept of portfolios, he probably never imagined a world in which the white noise would crowd out true information.

Recall, if you will, the world of the late 1950s, in which Markowitz formed his theories. Markets were telephone order-driven, brokerage rates were astronomical, there was no cable television, nor on-going business news throughout the day. With trading so expensive at retail, investment was the order of the day. Computers were non-existent, so forget program trading, too. Most business "news" was just that, and the amount of commentary on it was a lot less than today. Magazines like Fortune, Forbes and Businessweek (if it existed then) held much more sway than they do today.

It's hard to set a hard and fast rule among today's surfeit of business 'information,' but, surely, the babbling of some third-rate economist at a third-tier financial institution hardly qualifies as similar in quality, or, probably, 'information,' next to, say, a Fed president's remarks, or those of a Nobel Laureate in economics. Or the CEO of a well-performing, large hedge fund or private equity group. Not all the utterances we hear on CNBC, booked to fill up air time, are deserving of the description 'information.'

Most of it is, in reality, just noise. Recycled worries and warnings, and hand-wringing by people who, otherwise, would never be exposed to the wide world of business media viewers. Nobody said these guests and commentators are actually credible, or competent.

Yesterday, I actually heard one of the less intelligent CNBC morning anchors say something like,

'well, if bank CEOs aren't believable, don't you have to listen to large company CEOs, who have their ears to the ground?'

My laughter was immediate. CEOs with ears to the ground? You've got to be kidding!

When you hear drivel like that from a CNBC on-air anchor, you know you should heavily discount most of what you hear on the network that is not breaking news, and carefully choose which of their guest pundits to believe.

Confirmation of My Views on CDOs and Securitization

Yesterday's Wall Street Journal featured an editorial by Ethan Penner, one time Nomura employee in the mortgage banking group. Penner replaced my friend B, who had built the group some years ago.

It was very satisfying to read Penner echoing my own comments from this post, two weeks ago. Specifically, he confirms two of my contentions. First, that the manner in which differing asset types have been combined into CDOs, is far different in purpose, and effect, than the original uses of the securitization vehicles. Second, the ratings agencies played important parts in the debacle, highlighting their conflict of interest.

In one of my posts, I wrote,

"Second, to paraphrase Wilbur Ross, a self-made tycoon via conventional buying, improving and selling mundane businesses, and CNBC's guest host this morning,'when someone mentions two words, financial engineering, you know it's really an attempt to underprice risk.'

I could not say it any better. Rather than microscopically price risk correctly to the nth degree, CDOs have, instead, allowed originators to bury risk in amongst tranches of some portfolios of loans, and, in some cases, further mix them with other types of loans. That's not how the instruments were originally marketed, but that's how they now are used."

In his piece, Penner phrased it this way,

"Of course, it is very important here to distinguish between CDOs that make sense and are a healthy part of the market, and ticking time bombs that should never have been created. As an example of the former, there are those issuers, the NYSE-listed REIT Capital Trust, who utilized the CDO structure to pool their homogeneous real estate credit assets and create a financing that matched up ideally. This sort of CDO is not only sensible but an example of how securitization can help foster a healthy financial system -- creating a liability for the issuer, Capital Trust, that matches exactly the term of the assets.

On the other hand, many CDO issuers bought all sorts of assets and combined them into proverbial "witches brews" that they foisted onto the bond market, sucking out profits and fees at issuance in a game that was ongoing as long as the deals held up. The buyers of these concoctions, reliant upon the rating agencies' models, were unlikely to ever get their arms around the risks that they were asked to underwrite. How a trader would be able to traverse the various markets represented by the diverse collateral underlying these bonds to provide a suitable secondary market bid is beyond me.

My guess is that a healthy CDO market will return, but it will only be available as a source of financing to those few professional risk managers with real expertise and only for homogeneous asset pools. I have pity for bond buyers with the other type of CDOs, as it is difficult to imagine how liquidity will ever return to their holdings."

Penner also reinforces points I made in this post, the following day, regarding how the ratings agencies abetted the mortgage originators/CDO packagers. In my post of a few weeks ago, I wrote,

"Yesterday's Wall Street Journal carried a fascinating article concerning how S&P's and Moodys' rating of so-called 'piggybacked' sub-prime mortgages, in 2000, led to today's credit turmoil.

Amazingly, the ratings agencies first allowed the CDOs backed by these mortgages to be investment grade, then changed their minds last year. It evidently took five or six years for S&P and Moodys to sample and test the payment history of such mortgages, leading them to downgrade them to junk status.

Now, as Wilbur Ross said on CNBC yesterday morning, nobody should simply blame a rating agency for their own bad investment decision. And I agree with that.However, when buyers included institutions which could not buy those CDOs with today's ratings, but could earlier, you have to wonder how much the agencies' appetites for fees led them to inappropriately collaborate with the issuers, and look the other way over an obviously riskier type of home loan."

Penner seconds this by noting in his article,

"However, it's become apparent in these last months that the free market, combined with a complete dependence upon the three main bond rating agencies, may not, in its current format, be the perfect answer either.

Securitization may be the only business in the world where the appraiser is hired by, paid by, and thus works for, the seller rather than the buyer. It would be unthinkable, for example, in a real estate transaction for the seller of a property to expect that the buyer would accept a seller-provided appraisal as the basis of their valuation.

Yet, this is exactly what transpires in the bond market, where the sellers, Wall Street firms that aggregate assets and pool them into carefully "sliced and diced" securities, hires and works carefully with the appraiser, the rating agencies, to maximize their arbitrage. Importantly, appraisers at the rating agencies are paid a small fraction of the pay of the investment bankers they work with, and many aspire to work at one of the firms that they are representing, thereby creating a heightened conflict.

The potential for conflicts and misaligned incentives are more potent over time than even the best of intentions.

So, the first place one may look when tweaking the securitization model would be to re-align the interests of the governing bodies, that is, the rating agencies, more precisely with those they truly represent -- the bond buyers. There are numerous ways that this might be accomplished; suffice it to say here that a change is probably healthy and long overdue."

So true. Finally, we have confirmation from an ex-senior manager of a securitization manufacturer that the process finally went overboard. Rather than allowing the marketing of loans, suitably repackaged, to clarify risks, with concommitant returns, the process became a method for creating opaque securities with respect to risk.

Meanwhile, the ratings agencies- S&P, Moodys, Fitch- stood by and kept quiet, while accepting payment for blessing the evolving practices.

Still, as Wilbur Ross noted, shame on any investor, especially institutional investors, who try to blame the agencies and securitizers, when, as buyers, they bore the ultimate responsibility for knowing what they bought and elected to hold. Some investors will continue to find ways to make bad investment decisions, and blame the markets, regulators, rating agencies, etc. We can't really stop that. But we can at least identify the need for buyers of securities to be intimately knowledgeable about that which they are buying.

More on Mortgage Lending and Lower-Income Homeowners

Last Wednesday's Wall Street Journal carried Holman Jenkins' weekly editorial, which dealt with homeowners on the low end of the income distribution.

Citing the work of Carolina Katz Reid, then a graduate student at the University of Washington, Jenkins wrote,

"But a home financed by a mortgage is not just an asset. It's also a liability. We owe thanks to Carolina Katz Reid, then a graduate student at University of Washington, for a 2004 study of what she dubbed the "low income homeownership boom." She considered a simple question -- "whether or not low-income households benefit from owning a home." Her discoveries are bracing:

Of low-income households from a nationally representative sample who became homeowners between 1977 and 1993, fully 36% returned to renting in two years, and 53% in five years. Suggesting their sojourn among the homeowning was not a happy one, few returned to homeownership in later years.

Even among those who held on to their homes for 10 years, the average price-appreciation gain was 30% -- less than if their money had been invested in Treasury bills. This meager capital gain was about half that enjoyed by middle-income homeowners.

A typical low-income household might spend half the family income on mortgage costs, leaving less money for a rainy day or investing in education. Their less-marketable homes apparently also tended to tie them down, making them less likely to relocate for a job. Ms. Reid's counterintuitive discovery was that higher-income households were "twice as likely to move long distance if they're unemployed." "

I have to admit, I was stunned by this research. So much for the 'ownership society,' at least at the really low end of the incomes distribution curve. However, when you think about it, it's very sensible.

As a sometime homeowner, I can vouch for a home being a lumpy, often-illiquid investment which requires substantial cash for for maintenance. And it certainly can restrict mobility.

It's eminently reasonable to conclude that lower-income people are better off spending their assets on education and the ability to remain mobile, for employment purposes. Saddling them with a large, illiquid fixed asset does not actually make much sense.

Jenkins goes on to note,

"The irony is, were the owners of the subprime paper inclined to make themselves known and realize their losses, the majority of these loans would likely end up paying off. Buyers of the severely discounted paper would make a killing and the market's dispersed decision-making, which recently became its weakness, would return to its normal role as a strength. In any case, subprime lending accounts only for about 15% of outstanding mortgages, with an uncataclysmic $90 billion worth facing foreclosure.

Fluctuations in the S&P 500 wipe out as much wealth every ho-hum day without drying up credit globally. But today's caginess problem is partly a regulatory and legal problem, because something is clearly stopping holders of temporarily unmarketable mortgage paper from sidling up to their bankers and asking forbearance on the loans financing these positions.

His comment about a corresponding loss in equities from an S&P Index decline is a point I've made in a prior post. The current market turmoil is overblown, in that too much is made of the source of the losses, rather than the rather modest likely net losses when the dust settles. Capital markets is all about taking risks, and sub-prime-based paper is just another example of how that can result in losses. It's part of investing.

The Democratic presidential contenders are currently outbidding each other in ways to help "homeowners" (a dubious term in the present instance) avoid foreclosure. What might really benefit these citizens is being freed to return to renting, where some real bargains will likely be had in the months and years ahead."

Now there's a good point. With a swollen residential housing supply, rents will probably be on the softer side for years. Good news for lower-income citizens seeking to save money for investment in assets such as their children's, and their own, educations.

On Students As Marketing Research Subjects

Being a double marketing major, there was a recent Wall Street Journal article which caught my attention. Two Fridays ago, the paper reported, in an article by Carl Bialik, on the pitfalls of too often using college students in marketing research studies.

I recall a marketing professor from my graduate days lamenting the amount of bad research and horrific consumer behavioral inferences based upon how college students evaluated stereo equipment. Back in my day, that seemed to be a favorite combination in which many marketing professors, no doubt on the tenure track, embedded their research concepts.

The Journal article details quite a few examples in which either products and concepts not really germane to college students are tested among them, or college students, as a group, are considered to be homogeneous. Neither of which makes for particularly valid conclusions.

A Professor Robert Peterson, marketing professor at University of Texas, Austin, found 63 examples in published research involving psychological relationships where students differed significantly from non-students.

Despite the Mr. Bialik's admonishment that the real fault lies with those who would apply such narrowly-based research results to non-students, I don't believe that's quite true. Studies using students for the sample, if they involve PhD work, are probably held out as offering real world conclusions. It's doubtful that so many student-based research projects would be done for nothing more than methodological validations.

No, I think the entire ethos of business school professors and graduate students using the available student population is an age-old, and recurring problem. Who knows how many products or services have had their basic concepts 'proven' this way?

It's an illuminating window onto a rather sordid and well-kept secret among the marketing department cognoscenti of academia.

David Malpas On The Current Financial & Economic Outlook

A little over two weeks ago, which now seems like a year ago in these markets, David Malpass, chief economist of Bear Stearns, wrote a wonderful editorial in the Wall Street Journal concerning the distinction between credit markets and the 'real' economy.

Now, many economists and other pundits are declaring that we are on the edge of a recession, and that recent credit market problems have crippled, or are crippling, the 'real' economy.

To the contrary, Malpass wrote,

"Equity markets have recently lost over $2 trillion in the U.S. and even more globally -- many times the likely amount of mortgage and corporate debt losses in the foreseeable future. This is in part a correction from the sharp global equity run-up through mid-July. Current prices still signal growth ahead.

Another aspect of the market disruption is a dramatic stand-off between bond buyers and sellers: Buyers in both housing and debt markets are using the market discontinuity to claw prices and terms back to Earth. The slowdown talk weighing on equities also reflects the Wall Street view that debt, mortgage and takeover businesses have replaced General Motors as the economy's bellwether. According to the bears: As goes the credit market, so goes the economy.

Fortunately, Main Street is not that fickle. Housing and debt markets are not that big a part of the U.S. economy, or of job creation. It's more likely the economy is sturdy and will grow solidly in coming months, and perhaps years.

U.S. growth has endured other waves of equally loud pessimism -- over high gasoline prices, low (pre-revision) estimates of job growth, a supposedly negative personal savings rate (revised to positive on July 27 by the Commerce Department) and even the 2003 tax cut on labor and capital. Remember the argument that tax cuts would put the economy on a path toward fiscal collapse and recession? Now, the U.S. deficit is set to fall below $150 billion by Washington's September fiscal year-end, thanks to strong tax receipts."

Thus, Malpass calls our attention to some pretty badly mistaken prior economic calls by some of these so-called 'experts.' On the subject of using housing as a piggy-bank, Malpass wrote,

"The bearish view is that Americans live, breathe and spend their houses and mortgages. Yet the July 31 consumer confidence survey by the Conference Board jumped to 112, the highest in the six-year expansion. Data and theory show clearly that houses are not the be-all and end-all of the economy. Jobs matter more. For many, the value of future employment is much greater than their home equity. The low jobless claims and unemployment rate -- clear signs of a strong labor environment -- raise confidence and likely future wages. This outweighs changes in wealth, whether from declines in house prices or the stock market, especially for lower-income workers.

Neither the economy nor job growth has been dependent on housing. Residential construction declined to 4% of GDP in the second quarter -- right on the 1990s average -- having boomed excessively in 2004 and 2005 and subtracted heavily from GDP in 2006. But strength in commercial construction more than offset the weakness in residential construction, allowing overall construction to add to GDP for the first time in a year.

Concerns about high inventories of unsold homes are exaggerated. At 537,000 per the Commerce Department, the June inventory equals 7.4 months of 2007's average sales. This is only a bit above the 6.7 months average inventory from 1980-1995. The leaner inventories in the 1996-2005 "sellers' market" resulted in part from the super-low interest and mortgage rates earlier this decade, and the 1997 cut in the capital-gains tax on houses.

Those overstating housing's impact on jobs often use dates spanning the 2001 recession, as in the widely quoted calculation that 37% of the net new jobs were in housing. That was true only between March 2001 and September 2005, because housing jobs grew in the recession while other jobs shrank. A fairer picture of the role of housing in the expansion is to start counting from any month after the recession. From the end of 2003 through present, jobs from residential construction plus real estate and mortgage brokers created only 3.6% of the net new jobs, 5.3% if all credit intermediation jobs are also included.

Nor has consumer spending been dependent on "cashing in" on the housing boom. The increase in mortgage equity withdrawals in 2004 and 2005 funded big net additions to household financial assets, while consumption growth remained steady. Mortgage equity withdrawals slumped throughout 2006, yet consumption growth was particularly fast in the fourth quarter of 2006 and the first quarter of 2007."

Thus, Malpass dispels the common notion among many in the business media that all Americans have done for the past decade is borrow against their rising home values to spend, spend, spend! Rather, Malpass notes they have invested, invested, invested! A housing value decline might cause some loss of demand for financial assets and, thus, some price declines, but not wholesale loss of consumer spending as a driver of the overall US economy.

On that theme, what about the egregious rises in sub-prime mortgage payments coming soon? Won't those rises in monthly mortgage payments be the final death blow to the US economy? Not so, wrote Malpass,

"In the long list of worries about consumption, the threat of mortgage-rate resets is providing the latest fixation. It shouldn't. Payments on some $500 billion of adjustable rate mortgages are scheduled to go up in 2007. If the mortgage rate is adjusted upward by an average two percentage points, that's $10 billion in added payments. To put this in perspective, wages for nonsupervisory workers increased by $296 billion over the last 12 months. The July 27 revision alone added $130 billion to the last year's total U.S. personal income, raising it to $11.5 trillion, reflecting the hard-to-track dynamism of the U.S. economy.

The constant warnings of a housing-related collapse in domestic consumption overstates the importance of housing in the economy, while understating the importance of jobs and economic growth, both of which have been solid. Of course, sellers of both houses and bonds would like more froth in their markets. But buyers, and likely the economy as a whole, will probably benefit over time from the wrenching return to more normal market conditions."

It is truly a pleasure to read a balanced, reasoned, informed opinion in a major news medium which contradicts the current hand-wringing that, thanks to a few sub-prime mortgages that were made, securitized, and sold as investments, our entire economy is about to be brought to its knees.

It's not. The sliver of the housing market that is sub-prime is but a piece of an otherwise dynamic and resilient US economy, still the envy of the world's other economies.

Brian Wesbury's Excellent Analysis of The Current Credit Market Situation in the WSJ

We're very fortunate to have a lucid, informed and competent economist of the stature of Brian Wesbury writing frequently in the Wall Street Journal.

On Monday, Mr. Wesbury wrote an inspired piece entitled "The Fed's Job."

In brief, he makes the point that, throughout our country's history, people have wrongly diagnosed economic problems as 'a lack of liquidity.' Now, Wesbury explains, the problem is leverage and uncertainty- but not liquidity.

This is at variance with such biased commentators as financial entertainer Jim Cramer, self-interested Senator Chris Dodd (Democratic Presidential candidate and Senator from the home state of many hedge funds, Connecticut), and CNBC economist wannabe, Steve Liesman. All three of these observers have been shouting loudly for various 'liquidity' bromides, ranging from the Fed cutting the interest rate by one-quarter to one-half of a point, to allowing Fannie Mae and Freddie Mac to 'invest' in jumbo mortgages.

Thankfully, Wesbury explains why all of this is unnecessary, but, never the less, in the long tradition of populist blowhards crying for easy credit.

To wit, Wesbury wrote,

"Blaming monetary policy for economic and financial market turmoil is a time honored tradition. Maybe the most famous bashing was in 1896 when William Jennings Bryan, an original populist, ranted against hard money and for inflation: ". . . we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."

Monetary policy makes an easy scapegoat because printing money (like drinking a cup of coffee) is an easy way to give an economy a temporary boost. But if what ails the economy or markets was not caused by tight money in the first place, a temporary boost will not help. It may cover up the symptoms temporarily, but in the end it does not solve the underlying issue (a lack of sleep).

In fact, easy money always leads to greater problems down the road -- either rising inflation, or a reduced sensitivity to risk, as markets come to expect rate cuts to bail them out.
Lately, modern-day William Jennings Bryans have been loudly calling on the Fed to cut interest rates and inject cash into the banking system. They believe more money would stop financial markets from seizing up any further.

This would make sense if money was already tight -- or to put it another way, if a lack of liquidity was the real issue. But trades are clearing, banks are well capitalized, commercial and industrial loans are growing, credit-worthy borrowers are getting mortgages, and the economy is still expanding.

...the current turmoil in the financial markets has nothing to do with a lack of liquidity. More importantly, there is little hope that any liquidity the Fed would inject into the banking system would actually get to the sectors of the market where only sporadic, fire-sale pricing of securities is taking place.

Some are arguing that a sharp decline in the three-month Treasury bill yield, to 3.85% from roughly 5% during the past few days, shows the need for a huge infusion of cash that would force the federal funds rate down. But the drop in T-bill yields is a reflection of three issues: a flight to quality, a guess that the Fed will lower rates at its next meeting and a very liquid market."

Well, if liquidity, per se, is not needed, then what precisely is going on currently in financial markets? Wesbury continues his article with this explanation,

"The real problem with the financial markets is that extreme leverage and extreme uncertainty have met in the subprime loan market. No one knows how many loans will go bad, who owns these mortgages and what leverage they have applied. We do know that subprime lending is just 9% of the $10.4 trillion dollar mortgage market, and delinquencies are running at about 18%. The Alt-A market is about 8% of all mortgages and about 5% of this debt is delinquent.

As an example, let's take a very low probability event and assume that losses triple from here. Let's assume that 54% of all subprime loans and 15% of all Alt-A loans actually move to foreclosure. Then, assume that lenders are able to recover 50% of the value of their loans. In this scenario, total losses in the subprime market would be 27%, while total losses in Alt-A would be 7.5%.

From this we can estimate a price for the securitized pools of these assets. Without doing any actual adjustment for yields, or for different tranches of this debt, the raw value of the underlying assets would be 73 cents on the dollar for subprime pools and 92.5 cents for the Alt-A pools. Getting a bid on this stuff should be easy, right? After all, the market prices risky assets every day.

But this is the rub. A hedge fund, or financial institution, that uses leverage of 4:1 or more, would be wiped out if it sold subprime bonds at those levels. A 27% loss on Main Street turns into a 100% loss on Wall Street very easily. But because hedge funds can slow down redemptions, at least for awhile, and because they are trying desperately not to implode, they hold back from the market. At the same time, those with cash smell blood in the water, patiently wait, and put low-ball bids on risky bonds. The result: No market clearing price in the leveraged, asset-backed marketplace."

Thus, Mr. Wesbury comes to the logical and sensible conclusion that what we are witnessing is not a shortage of liquidity, but the realization on the part of a lot of supposedly-smart hedge fund managers and other institutional investors, that they weren't so smart in their headlong use of sub-prime mortgage-based instruments without understanding the underlying risks to those mortgages. It's no different than any other case of sophisticated and/or institutional investors making poor investment choices- they lose money. In the cases of many of the hedge funds, some of whom call Senator Dodd's state home, they have used leveraged money, and are, quite likely, now insolvent.

So we have populists crying for the relief of wealthy hedge fund investors and managers, at the same time that they also cry for relief for the sub-prime mortgage borrowers! At least it's equal-opportunity financial forgiveness. However, it's unnecessary.

In his conclusion, Mr. Wesbury goes on to state,

"There is a lesson here. Populism is in the air these days, and the threat from tax hikes, trade protectionism and more government involvement in the economy, is rising. This reduces the desire to take risk. Congress is working on a legislative response to current mortgage market woes as well. And as with the savings and loan industry (forcing S&Ls to sell junk bonds at fire-sale prices), and Sarbanes-Oxley, the legislative response almost always compounds the problems.

The interaction of an uncertain regulatory and tax environment with a highly leveraged, illiquid market for risky mortgage debt creates conditions that look just like an economy-wide liquidity crisis. But it's not. A few rate cuts will not help.

What William Jennings Bryan was really complaining about in 1896 was falling commodity prices, especially falling farm prices. What he and the other populists ignored was that these prices were falling because of productivity, not tight money. His "Cross of Gold" speech was a clear stepping stone to the creation of the Fed in 1913. Since then, inflation has been much higher than it would have been under the gold standard. But all that inflation never did save the family farm.
Similarly, even very easy money today can't put off the day of reckoning for subprime mortgage holders who bought homes with no money down and thought interest rates would stay low forever. It can't help overly leveraged investors who thought they were getting risk-free 20% annual returns. Providing enough liquidity to allow markets to function, while keeping consumer prices as stable as possible, is the best the Fed can do. It should be all we really ask."

Amen, Mr. Wesbury. Ben Bernanke is wisely providing 'liquidity' to banks, in order that they may accept and offer, for repos, paper of dubious quality, in order to assure that credit markets continue to function, and do not impeded the normal course of our non-financial economic sectors. Truly, that's all for which we should ask from the Fed. Beyond that, borrowers and investors must accept the consequences of their own financial decisions.

How New Exotic Investment Products Misled Retail Investors

Last Tuesday's Wall Street Journal carried an article detailing the many exotic financial investment opportunity's available to the average retail investor in today's market environment.

Between ETFs covering many asset classes, mutual funds implying "market neutral" performance, and vehicles allowing relatively easy entry into foreign currency, foreign market funds, and commodities investment/trading, today's retail investor can enter the realm of complex financial instruments, electronically, totally unaided.

According to the Journal story, this is bringing the sort of results you'd expect- margin calls, losses and bewildered retail investors.

What seems to be happening is that uneducated retail investors are entering financial markets which are largely dominated by sophisticated institutional traders and investors. In such environments, it's almost a given that any sort of turbulence, as we have been experiencing of late, will leave the retail investors holding the losses. Typically being late to market gains, and late exiting declining positions.

Then there is the damage done by implying to retail investors that they, too, can construct effective asset hedges. The same non-performing hedged positions which have caused so much financial loss among leveraged institutional investors and traders is, of course, also causing losses among less-leveraged retail investors.

This brings to mind the opposing forces of financial innovation and regulatory vetting of individuals and institutions as qualified to invest in various instruments.

Basically, it's another version of the old liberal versus conservative viewpoints,

'Should we protect people from themselves?'

Liberals would tend to say "yes," while conservatives would tend to say "no."

I'm not sure we can ever really protect retail investors from foolish behavior. Going back to the go-go equity markets of the 1960s, or the Bonneville Power Authority bond defaults of the 1980s, it doesn't take much in the way of financial opportunities to allow average retail investors to lose their money via bad management.

What astounds me, though, now, is how a retail investor can so nearly replicate, albeit at higher costs, the sorts of financial investment and trading strategies which many sophisticated institutional traders and investors also employ. It's a frightening realization.

Damned If You Lend, Damned If You Don't.....

Yesterday, in this post, I provided a clear example, thanks to the Wall Street Journal's excellent article from last week, of how inappropriate financial behaviors on the part of everyone from borrowers to investors have helped to create the current, sub-prime mortgage-based credit market turmoil.

One point which I had planned, but neglected to add, was that, had the mortgage banking industry failed to provide something like sub-prime, piggyback mortgage loans, they almost surely would have been excoriated by some parties for denying 'affordable' housing finance to the less-economically well-off.

As if sensing my omission, today's Wall Street Journal carries a front page piece detailing Illinois' new steps to mitigate the assumption of undue financial risk and obligations, in the form of risky mortgages, by the economically less well-off in that state.

Sure enough, within the first few paragraphs of the article, regarding an earlier attempt at the same task, we read,

"Instead of winning plaudits, the pilot program quickly became mired in charges that it would make it harder for minorities to buy homes."

So, there you have it. At the same time that some are criticizing lenders and mortgage brokers for rapaciously victimizing the poor or less financially-educated who want to buy homes, attempts to minimize the recurrence of such inappropriate lending are already being branded as racist and discriminatory.

Damned if they lend to the poor, and damned if they don't.....the financial sector has become today's whipping boy for some who want the current credit turmoil magically vaporized, yet not by returning to older, tested home lending standards which resulted in higher-quality mortgages which could be more confidently securitized.

The Sub-Prime Mortgage Chain: Borrower to Investor

Last week's Wall Street Journal carried a detailed example of how sub-prime mortgages originate. I found the story both shocking and heartbreaking. Mostly, though, I found it emblematic of a culture of greed, at every step of the home loan process, from borrowers to investors.

For the full impact of the story, I've reprinted large sections of it below,

The price was a major stretch at $567,000. But the couple, who had sold a home a few years earlier to move to a better area, was tired of renting. Mr. and Mrs. Montes convened a meeting with their two teenage daughters around the kitchen table to hash out the implications. "We agreed we wanted to be homeowners again," says Mr. Montes, "even if it meant the end of vacations and not eating out as often."

Like many people who jumped into the rising housing market in recent years, they had little money for a down payment and chose a loan that would hold their monthly payments down for the first two years, then "reset" to a much higher level. Mr. and Mrs. Montes say their mortgage broker assured them they would be able to refinance in a couple of years to keep their payments affordable.

With a December "reset" on their loan looming, however, the refinancing option now looks impossible. A friend who works as a loan officer called with some bad news this week: Similar homes in their area have been selling for $535,000 to $565,000 recently. That means the Monteses' loan balance may exceed the value of their home.

And with thousands of mortgage banks and brokers threatened with extinction, lenders that embraced all kinds of risky loans two years ago are enforcing increasingly strict standards. They are refusing even to consider extending new credit to people like the Monteses who lack any equity in their homes.

They live in a solid neighborhood and are both employed and in good health. "My wife and I make pretty good money," says Mr. Montes. Mrs. Montes works as a school secretary. Together, they earned nearly $90,000 last year.

But they already pay about $38,400 a year on their home loans, even before taxes and insurance. In December, when their primary loan "resets" to a higher rate, that cost will rise to about $50,000 a year, Mr. Montes says.

When the Monteses decided to buy the bungalow in 2005, they had only a so-so credit record and little savings. So they settled for a "subprime" loan, with costlier terms than those available in the prime market.

The Monteses' primary loan is the type that became the dominant subprime mortgage during the housing boom of the first half of this decade -- and now has become a symbol of misguided lending, swept away by regulatory fiat and investors' flight from mortgages deemed too risky. These loans are known in the trade as 2/28 mortgages. The interest rate is fixed at a relatively low rate for the first two years (5.45% in the Monteses' case), then floats at a predetermined margin above an interest-rate index for the next 28 years. In many cases, that "reset" of the interest rate after two years leads to a monthly payment increase of 30% or more.

U.S. lenders originated about $600 billion of subprime home loans in 2006, or 20% of all home mortgages, according to Inside Mortgage Finance, a trade publication. About 56% of those subprime loans were 2/28 mortgages, says Keith Ernst, senior policy counsel at the Center for Responsible Lending, a nonprofit research and lobbying group in Durham, N.C.

The Montes family got their loan through a mortgage broker in Rancho Cucamonga. Using what was then a common formula, the broker offered to arrange for two loans, one to cover about 80% of the home price and the other, a so-called piggyback loan, for the rest. For the first two years, their total monthly mortgage payments are about $3,200. The loans are initially interest-only.

Mr. Montes recalls feeling edgy about whether he would be able to afford the higher costs -- about $900 more per month -- due to take effect after two years. But he says the broker assured him he could refinance before those costs kicked in.

Mrs. Montes says she was apprehensive about the broker's assurances. "But I blame that on that I don't understand the lingo they were talking," she says. "It's a scary experience.... All I could see was all these numbers flash before me.... I said, 'Mario, I hope you don't get into something that is going to hurt us.'"

The Monteses received a letter informing them their property taxes had been reassessed based on the $567,000 sale price instead of its previous $389,000 value. That raised their taxes to $6,000 from $2,900 a year and would have increased their monthly payments (including the mortgages and taxes) to $3,931.

Mr. Montes says the family may try to sell the house, but that would be tricky in today's weak market. Or they could try to trim other expenses and keep meeting the higher monthly home payments that are due to take effect in December.

There is very little wiggle room. Mr. and Mrs. Montes also have two car loans, with payments totaling about $700 a month, and are borrowing more money to help put their elder daughter through college.

Those are the basic facts.

To me, it was shocking that the Monteses didn't even plan on affording the added cost of their original mortgage after the reset point, being advised by their mortgage broker that they would refinance before then. Not to mention that the wife of the couple confessed to not even understanding the loan document which she would be signing. Yet, this is the most expensive purchase most people will ever make.

Their income was insufficient to make the original mortgage payments even as low as 30% of that base. The article notes that fully 20% of all mortgages in 2006 are now this type, which is surprising to me.

The last time I applied for a mortgage, I kept my total mortgage-related (PITI) payments to 25% of my income, took an ARM with a repricing cap of 2.5 percentage points of interest each five years, and planned on affording it.

What I saw in this article is an example of people who should have waited until they actually had the money for a reasonable down payment, and then should have been more sanguine about their prospects of affording the mortgage they chose. Additionally, they seem gullible, in that they simply believed a mortgage broker's promise that they could refinance the mortgage. Perhaps they should have planned on affording the one for which they applied?

The broker, of course, hardly did anyone a favor by putting the Monteses into a barely-affordable mortgage. The institution which lent the money for the house didn't seem to have done a very careful job stress testing the Montes' ability to afford the mortgage.

Then the loan was likely bundled up into a security. I don't know what the 'seasoning' period is nowadays, but years ago, lenders typically had to hold their mortgage loans for a year, if I'm not mistaken, before other investors would buy them in CMOs.

This story displays a shocking tale of greed and overreaching on everyone's part, including the Monteses. They should never have expected, in their financial position, with other loans to service, to be paying as much as 42% of their income for housing, before taxes and insurance.

It's no wonder that this is the last year of the housing expansion. With loans like these, to borrowers like these, it was clearly time for mortgage merry-go-round to stop. I can't honestly express any sympathy for investors who purchased instruments backed by loans like those of the Montes.'

This was a total lending, underwriting and investing system failure. But it's not a banking failure, per se. Those who bought these loans, packaged as whatever, deserve the losses they take, just as if they had made unwise equity or currency investments.

Henry Kaufman's Mistaken WSJ Editorial

Henry "Dr. Gloom" Kaufman wrote an editorial in the Wall Street Journal on Wednesday in which he makes some serious errors in his diagnosis and prescription for the current credit market dilemma.

One could write chapters on all the detailed issues involved, but it really boils down to just a very few points.

Kaufman is correct to note that debt instruments- e.g., CDOs, credit derivatives- have become much more complex than those which predominated credit markets in 1987 or 1998. However, he is wrong to suggest that, because so many quants at hedge funds have modeled relationships between the instruments, and ignored the potential for markets for these instruments to vanish, the Fed and other authorities need to add/improve/modify regulatory frameworks and procedures.

In truth, I am, and you should be, thankful that commercial banks no longer bear so much of the rate and default risk, due to portfolio lending, that they did as little as a decade ago. The same securitization of assets, such as home loans, credit card receivables, and corporate loans, that have resulted in the CDOs and credit derivatives which Kaufman views negatively, has largely insulated commercial banks from dramatic losses in value of the underlying loans.

To the extent these banks have lent to private equity or hedge fund firms, whose assets, some of which may be complex, risky assets, then, yes, they are still liable for some risk.

However, in the past decades, we have seen the movement of loans from bank balance sheets, where they used to be the subject of dubious reserve and loss recognition treatment, to the marketplace, where their prices and risks are now determined by buyers and sellers.

As such, in my opinion, the current situation is not that serious in terms of overall financial system solvency. Some borrowers misrepresented their ability to handle loans, and secured mortgages which they probably should not have been given.

Some mortgage brokers and lenders looked the other way, or not at all, while processing these sub-prime loans. Some financial engineers at investment banks packaged up these suspect loans into CDOs, and some unwise investors bought pieces of these CDOs, wrongly believing they were earning above-average returns for average-risk assets.

I don't own any CDOs. I don't know anyone who does.

It's my opinion that some large hedge funds, pension plans, etc., own a lot of CDOs which are backed by some sub-prime loans.

Those investors have lost a lot of value in the past few weeks, as market prices for such instruments have plummeted.

So what? How is this different than if they had bought badly performing corporate equity, foreign equities, foreign currencies, corporate debt of weak firms, etc.

Essentially, some large investors thought they could buy risk cheaply, and were wrong.

Better some hedge funds and pension funds lose value and, in the case of the former, go out of business, than our commercial banking system implode as those institutions hold bad loans in large amounts.

See, the beauty of the last decade's financial instrument innovations is that investors know they are taking risks with their money. Or ought to know. They don't receive deposit insurance, and have no guarantee of the return of their capital.

Commercial banks, on the other hand, do have deposit insurance, and guarantee those deposits.

Far better the suspect loans become property of investors with appetites for risk, than remain as collateral on the balance sheets of our large commercial banks.

In the end, this 'credit crisis,' to the extent there is one, involves large hedge funds, investment banks, and wealthy individuals. All of whom are sophisticated, and were capable of understanding the risks they took in buying assets underpinned by sub-prime mortgages.

The Fed might need to offer some temporary collateralized lending to commercial banks, in order for them to extend the time in which their hedge fund customers can repay short term loans. But overall rate decreases to bail out sophisticated investors is a mistake, and will only result in greater moral hazards going forward.

Other than very limited, temporary loans, at high rates, the Fed should remain on the sidelines during this period in which some large investors are realizing losses in their investment portfolios. Because, regardless of what assets are incurring those losses, the losses are the business of those managers and investors, not that of the general financial system.

How Rating Agencies Abetted The Sub-Prime Mortgage Situation

Yesterday's Wall Street Journal carried a fascinating article concerning how S&P's and Moodys' rating of so-called 'piggybacked' sub-prime mortgages, in 2000, led to today's credit turmoil.

Amazingly, the ratings agencies first allowed the CDOs backed by these mortgages to be investment grade, then changed their minds last year. It evidently took five or six years for S&P and Moodys to sample and test the payment history of such mortgages, leading them to downgrade them to junk status.

Now, as Wilbur Ross said on CNBC yesterday morning, nobody should simply blame a rating agency for their own bad investment decision. And I agree with that.

However, when buyers included institutions which could not buy those CDOs with today's ratings, but could earlier, you have to wonder how much the agencies' appetites for fees led them to inappropriately collaborate with the issuers, and look the other way over an obviously riskier type of home loan.

While issuers observed S&P guidelines for how much, apparently 20%, of a CDO could be sub-prime mortgages, over time, some just incurred the rating penalty and stuffed much more of the sub-prime originations into CDOs.

The result is something which I was not aware was now common- that CDO would contain a mix of types of home loans. Thus, evaluating these would have become a nightmare for any purchaser. And, again, thus why an S&P or Moodys rating became so important.

Unless, of course, the buyers should have perhaps just passed on paper like this at all.

And therein lies the lesson, per Wilbur Ross's comment which I quoted in yesterday's post,

"Rather than microscopically price risk correctly to the nth degree, CDOs have, instead, allowed originators to bury risk in amongst tranches of some portfolios of loans, and, in some cases, further mix them with other types of loans. That's not how the instruments were originally marketed, but that's how they now are used."

Adults who should have known better chose to buy this paper, to earn returns which they thought were not really all that risky.

Honestly, I am not at all sure the Fed should be doing much to bail these non-bank institutions out.

What Hedge Funds Have Not Learned Since 1998

As I have read more accounts of the unfolding turbulence in the credit markets, and its spillover into equity markets, a few cardinal lessons continue to loom large.

First, as I noted last week in this post on risk, there exist arcane, exotic debt instruments which, in many cases, simply have no market. No bids are available, and, so, the effective 'market' price falls to zero.

Second, to paraphrase Wilbur Ross, a self-made tycoon via conventional buying, improving and selling mundane businesses, and CNBC's guest host this morning,

'when someone mentions two words, financial engineering, you know it's really an attempt to underprice risk.'

I could not say it any better. Rather than microscopically price risk correctly to the nth degree, CDOs have, instead, allowed originators to bury risk in amongst tranches of some portfolios of loans, and, in some cases, further mix them with other types of loans. That's not how the instruments were originally marketed, but that's how they now are used.

As we see in the current market turmoil, risk has come to be defined by qualitative factors, such as a security not being a CDO, or having anything remotely to do with housing finance.

Third, despite the post-LTCM crises shift away from leverage usage by hedge funds, such usage has, it turns out, returned with a vengeance. Nothing like an up market to give comfort to even institutional investors, and sustain unwise, lax policies.

By using leverage again, these hedge funds have been caught on margin calls while holding hard-to-price exotic securities. Usually CDOs or other debt instruments.

Fourth, when many smart people pile into an investment style by starting hedge funds, borrow money, and use similar, programmatic trading models to hedge and invest, it is not surprising that, when risk becomes important, and some of the instruments used by these funds to hedge suddenly lack 'markets' into which to sell. The result is for those funds to essentially lose most of their value.

My partner asked,

"But what else should they have done to earn returns? What other options did they have?"

My response is that they were always excess supply in the investment world. Many large, sophisticated institutional and individual investors will now lose a lot of money because they chased a chimera- outsized returns with no perceptible incremental risk.

It's unclear whether, except under purely bull market conditions, these funds, with their similar automatic hedging programs, ever really offered sustainable excess returns over the market, for the risk they incurred.

Put lessons three and four together, and you get the new hedge fund whiz kids borrowing to the hilt to buy and hedge exotic instruments. Then, as the credit concerns began to erode the value of those instruments, all of these funds began to try to unload the same types of instruments, causing a failure of markets for them. It's a sort of perfect storm for hedge fund mismanagement.

A few thoughts on the markets, risk, and fund management during a day in a week of yet more equity and debt market turmoil.

More to follow......

More On Female Business News Network Anchors: Who Really Likes Liz Claman?

Yesterday, I wrote about former CNBC anchor Liz Claman's much-desired departure from that network last month. I wrote, in part,

"I have found Claman to be ill-informed and of no particular added value to any business topic which she covered. Her interviews with people like Warren Buffett are notable for their cloying obsequiousness and adoring, softball questions. Following the Barbara Walters approach, she gets these plum interviews because her subjects know she will paint them in a soft, glowing light and never surprise them with any truly probing, potentially uncomfortable questions.

With Claman, you know she'll never ask the questions you'd ask if you had her subject on camera with you."

As is so typical with blogs, the heavy weight, more important posts rarely draw comments. But the fluffy ones do. For example, "Anonymous" (seems they usually are) wrote, in response to my post,

"Oh god, You're so effing in the minority here that it's not even funny. She had the #1 show on CNBC and judging by todays little tidbit in the NYDN, Looks like she has tons of offers on the table.....Hofefully she'll be on Fox Biz soon"

For clarification, Claman did not "have" a show on CNBC. She appeared with other anchors in the mid-morning slot. So it is difficult to understand how she could have had the "#1show" on the network.

But anonymous' comment about Claman's purported, rumored offers got me to thinking. With whom is Claman so popular? According to the blurb for which 'anonymous' provided a link, it is CEOs.

However, networks sell advertising on the basis of viewers, not CEO viewers, per se. Yes, I know CNBC likes to show ads with CEOs who watch their network. But that is not what pays the bills.

What's the likelihood that a network full of Claman-type interviewers could actually succeed? CNBC has Donnie Deutsch and Michael Eisner doing CEO interview shows. But not all day long.

Then there's the issue of how long such a rich diet of CEO interviews will last, before viewers realize that these have simply become well-orchestrated, safe publicity opportunities for the CEOs and other 'leaders' in question. This is my major bone of contention with Liz Claman as an interviewer. She just gushes over her subject, literally, and then lobs softball questions which smack of adoration and wonderment, rather than scepticism and objectivity.

Interestingly, nobody claims that Claman actually added value at a desk on air. Most of her appearances, as I recall, tended to be either in live interviews, or running taped interviews. For good measure, I followed the NYDN link (it's a daily updated page, so the Claman story is already gone), and the Claman paragraph stressed her popularity with CEOs because of her reputed feminine attractiveness.

Wonderful. Women try to be taken more seriously as business people, and we have people celebrating a plump, middle-aged woman for her physical features, overlooking her lack of intellect.

If loading up on this sort of 'talent' is what Fox is planning as major content for its business news channel, then I don't think they'll do very well. On the other hand, it's just possible that CNBC will become more attractive with the loss of its Wall Street Journal connection.

For example, Joe Kernen routinely cites Journal articles on the CNBC early morning program with Becky Quick. Since I watch the network primarily for breaking business news and market news, that works for me. They have occasional guests and hosts whom I respect, like Mike Holland, Brian Wesbury, or John Rutledge. But these are, frankly, exceptions among a parads of also-ran analysts and fund managers of whom you have never heard, prior to their 2 minutes of fame on CNBC.

Either way, it should be fun to watch the competition between Fox's new business channel, and CNBC. Who knows, maybe competition will result in one, or both, channels focusing on news and intelligent commentary, rather than glamour interviews with primping CEOs.

Belated NewsFlash: Liz Claman Departs CNBC...for Fox's Business Channel?

CNBC did not publicize Claman's departure last month, but I suddenly realized that I have not seen her massive, somewhat dim-witted presence on the network's midday programs for a while. At first, I chalked it up to her being on vacation. Now, after googling her name, I have learned that she left CNBC in July, amid rumors that she is going to be an on-air personality with the new, yet-to-be-unveiled Fox Business Channel.

Heaven help us, and Rupert Murdoch. Let's hope this is not a precursor of the kind of moves that Fox will be making in relation to its new cable business news channel. Murdoch didn't need to buy Dow-Jones for this.

I have found Claman to be ill-informed and of no particular added value to any business topic which she covered. Her interviews with people like Warren Buffett are notable for their cloying obsequiousness and adoring, softball questions. Following the Barbara Walters approach, she gets these plum interviews because her subjects know she will paint them in a soft, glowing light and never surprise them with any truly probing, potentially uncomfortable questions.

With Claman, you know she'll never ask the questions you'd ask if you had her subject on camera with you.

With the considerably more-talented female anchors available on CNBC- Becky Quick, Erin Burnett, Michelle Caruso-Cabrera- it's hard to believe that Fox would bother with Claman.

After my hopes have been raised by the promised arrival of a competitor to CNBC, I would truly be unhappy if watching the new business channel meant I had to tolerate seeing even more of Claman.