Was Bear Stearns improperly shut down and sold to Chase this past weekend?
Was there a more equitable process by which markets and counterparties could have been assured of the performance of Bear's book of positions, while providing for a competitive bidding environment on Bear's businesses and assets?
My partner is of the opinion that whatever Paulson, Bernanke & Co. decided to do by the opening of European markets on Monday morning, the explanation of it had to
"fit on a bumper sticker."
With which I agree.
Still, was if fair to indemnify Chase to the tune of $30B for agreeing to buy Bear Stearns? Why weren't Wells Fargo or Wachovia invited to bid on the same terms, with the same $30B guarantee?
Or, for that matter, a consortium of private equity firms?
Could not the Fed and Treasury have acceded to Schwartz's call to declare Chapter 11 bankruptcy, immediately move to name an official in charge of the process, and hire Chase or some other firm with trading facilities to operate Bear's book with loans backed by Fed guarantees? Then take a month to auction the pieces of Bear Stearns?
It seems to me to be a somewhat unlawful taking for the Fed and Treasury to have forced Bear to sell itself in an uncompetitive bidding situation.
Rather than bundle the financing of the firm with its purchase, it seems to me that Fed and Treasury officials could more easily have foreseen this type of meltdown. It's hardly unique, in that LTCM suffered the same type of margin calls and liquidity crisis when it failed ten years ago.
Somehow, giving Chase and Jamie Dimon a sweetheart deal for far less than they were reported to have bid, with a $30B loan guarantee gift is out of character in a 'private sector' solution.
No doubt there will be litigation about this in ensuing months. I'm not arguing for the shareholders getting more for the wreck of their firm. As equity owners, they are last in line, and, sadly, especially the one-third of owners who were also employees deserve what they get for not diversifying their investments from the source of their livelihood.
Rather, I am concerned, as a taxpayer, that the Fed has used my money to guarantee the value of assets involved in the takeover, but only by offering the sweetener to just one firm. Why not to any potential bidder?
Tuesday, March 18, 2008
Glass-Steagall, The Fed & Investment Bank Access
In light of Bear Stearns' demise, and the hand-wringing over Lehman being next, do we need a new equivalent of Glass-Steagall? I wrote about the unintended consequences of its removal here and here recently.
Or do we, as Treasury Secretary Hank Paulson is promising, need a regulatory overhaul to unify regulation of investment and commercial banks, now that Glass-Steagall's absence has finally led to the Fed lending to non-commercial banks? In that regard, the second of the above-linked posts discussed Henry Kaufman's idea for a 'super-regulator.' I still don't see the need for another regulatory body, but this past weekend's historic and unprecedented granting access by non-commercial banks to the discount window suggest regulatory structure has to finally catch up with Glass Steagall's removal.
But what about moral hazard? Are we just seeing the final consolidation of financial services that is long overdue?
For example, mortgage origination and trading capacity could be trimmed. What about trading and asset management in hedge funds and private equity firms? Don't they constitute significant capacities of these product/market segments that don't typically need much capital?
If they are over-leveraged and make unwise investments, they go under. Must we be afraid of these legitimate consequences of our capitalistic system?
Isn't that what Bear Stearns did, except they were publicly owned?
Don't we want to squeeze out excess capacity, a la Schumpeterian dynamics?
Is the underwriting business really so rare and profitable that we need all the capacity the Street had? Even prime brokerage is probably looking a bit over-served right now.
Maybe what we should acknowledge, with Glass Steagall's demise, is that most investment banks and brokerages like Bear Stearns should really be part of commercial banks. They currently exist, for the most part, due to the desire of commercial banks to offer 'broker loans.' Their funding is due to repo's to commercial banks, the latter having always had access to the Fed window.
Maybe now, we should not only allow investment banks access to the Fed, but simply realize that all brokers are implicit extensions of commercial banks, because the latter can do all that the former can, and have permanent, rather than temporary, Fed and banking system access.
This fundamental new reality has become apparent due to mortgage-related CDOs.
As the values of, and markets for these opaque securities have evaporated, the liabilities with which they are funded are being called- by commercial banks.
If only investment banks and brokerages had stuck to existing, fairly understandable assets like bonds and equities. Of course, profits on those are thinner, thanks to competition.
That's why the Street invents vehicles like CDOs. They are less-easily understood, and, thus, more profitable.
Could it be that this latter truth is really an indication of the over-served nature of financial services?
This morning, on CNBC, former Vanguard chairman John Bogle opined that, instead of adding value to our economy, the financial services sector now sucks value out, as witnessed by the sector's recent annual profit which exceeded that of the semiconductor sector.
I believe he has a valid point. By its creation of purely speculative, no-money-down mortgages and the packaging of these mortgages in CDOs, financial services firms have polluted the markets with opaque, now-unmarketable securities, after first taking profits for the creation of both instruments.
The result, as I observed in a recent phone call with my business partner, is what Alan Greenspan sees, correctly, as a financial debacle of historic proportions.
Ordinary, plain-vanilla fixed-income products such as bonds, and equities, tend to have nearly-constantly available markets which provide price discovery. You just don't see those markets ceasing to function unless an issuer goes bankrupt.
Now, however, we have performing structured finance instruments which have no markets because of their questionable asset value, not their income streams. And commercial banks are as culpable as any other financial institution in this mess.
BofA, Chase and Citigroup aren't your father's bank anymore. It's debatable, in the wake of Glass Steagall's demise, that any publicly-held brokers or investment banks should or can really exist independently of a commercial bank. In the new environment of securitized toxic structured finance instruments, a large commercial bank is uniquely able to survive, by dint of its Fed access and judicious use of its 'investment account' provisions.
There's much more to these topics. But for now, those are my initial thoughts.
Or do we, as Treasury Secretary Hank Paulson is promising, need a regulatory overhaul to unify regulation of investment and commercial banks, now that Glass-Steagall's absence has finally led to the Fed lending to non-commercial banks? In that regard, the second of the above-linked posts discussed Henry Kaufman's idea for a 'super-regulator.' I still don't see the need for another regulatory body, but this past weekend's historic and unprecedented granting access by non-commercial banks to the discount window suggest regulatory structure has to finally catch up with Glass Steagall's removal.
But what about moral hazard? Are we just seeing the final consolidation of financial services that is long overdue?
For example, mortgage origination and trading capacity could be trimmed. What about trading and asset management in hedge funds and private equity firms? Don't they constitute significant capacities of these product/market segments that don't typically need much capital?
If they are over-leveraged and make unwise investments, they go under. Must we be afraid of these legitimate consequences of our capitalistic system?
Isn't that what Bear Stearns did, except they were publicly owned?
Don't we want to squeeze out excess capacity, a la Schumpeterian dynamics?
Is the underwriting business really so rare and profitable that we need all the capacity the Street had? Even prime brokerage is probably looking a bit over-served right now.
Maybe what we should acknowledge, with Glass Steagall's demise, is that most investment banks and brokerages like Bear Stearns should really be part of commercial banks. They currently exist, for the most part, due to the desire of commercial banks to offer 'broker loans.' Their funding is due to repo's to commercial banks, the latter having always had access to the Fed window.
Maybe now, we should not only allow investment banks access to the Fed, but simply realize that all brokers are implicit extensions of commercial banks, because the latter can do all that the former can, and have permanent, rather than temporary, Fed and banking system access.
This fundamental new reality has become apparent due to mortgage-related CDOs.
As the values of, and markets for these opaque securities have evaporated, the liabilities with which they are funded are being called- by commercial banks.
If only investment banks and brokerages had stuck to existing, fairly understandable assets like bonds and equities. Of course, profits on those are thinner, thanks to competition.
That's why the Street invents vehicles like CDOs. They are less-easily understood, and, thus, more profitable.
Could it be that this latter truth is really an indication of the over-served nature of financial services?
This morning, on CNBC, former Vanguard chairman John Bogle opined that, instead of adding value to our economy, the financial services sector now sucks value out, as witnessed by the sector's recent annual profit which exceeded that of the semiconductor sector.
I believe he has a valid point. By its creation of purely speculative, no-money-down mortgages and the packaging of these mortgages in CDOs, financial services firms have polluted the markets with opaque, now-unmarketable securities, after first taking profits for the creation of both instruments.
The result, as I observed in a recent phone call with my business partner, is what Alan Greenspan sees, correctly, as a financial debacle of historic proportions.
Ordinary, plain-vanilla fixed-income products such as bonds, and equities, tend to have nearly-constantly available markets which provide price discovery. You just don't see those markets ceasing to function unless an issuer goes bankrupt.
Now, however, we have performing structured finance instruments which have no markets because of their questionable asset value, not their income streams. And commercial banks are as culpable as any other financial institution in this mess.
BofA, Chase and Citigroup aren't your father's bank anymore. It's debatable, in the wake of Glass Steagall's demise, that any publicly-held brokers or investment banks should or can really exist independently of a commercial bank. In the new environment of securitized toxic structured finance instruments, a large commercial bank is uniquely able to survive, by dint of its Fed access and judicious use of its 'investment account' provisions.
There's much more to these topics. But for now, those are my initial thoughts.
Fed Rate Action
In this post a little over a week ago, I cited the errors which I think Bernanke's Fed has recently made, including,
"To date, it's unclear that any of the extra Fed-supplied liquidity has affected the credit markets in a substantial, lasting manner. Instead, equity markets have reacted to the various rate cuts like heroin addict to his latest fix. After the effect wears off, he looks for the next dose, hoping it will be even larger.
The editorial points out that the Fed is notoriously bad at what used to be called "fine tuning." In this case, knowing when to suddenly switch from recession-fighting rate cuts to inflation-fighting rate hikes seems likely to be problematic."
Now we learn that the Fed will certainly cut interest rates at least 50bp tomorrow, with market expectations having reached a full percentage point, or 100bp.
What the heck is going on here?
The Fed's rate cuts going back to this summer haven't exactly lifted either the economy or financial markets out of whatever difficulties they are experiencing. So what will an additional one percentage point cut accomplish?
Brian Wesbury opined, in a discussion on CNBC this afternoon about Bear Stearns, that, ironically, the Fed's rate cuts had helped to drive the firm out of business. Wesbury noted that rates were falling on various risky assets, as the Fed lowered rates, while risks remained high. As returns no longer matched or compensated for risks, instrument prices tanked.
The result, for 'mark to market' securities, which composed much of Bear's book, was a rapid contraction of value.
The Fed's recent actions regarding accepting various types of paper at its windows for discounting, including now allowing non-commercial banks access to these facilities, seems appropriate to me in this market.
But further stoking of inflation through needless rate cuts seems to me to be a major mistake.
"To date, it's unclear that any of the extra Fed-supplied liquidity has affected the credit markets in a substantial, lasting manner. Instead, equity markets have reacted to the various rate cuts like heroin addict to his latest fix. After the effect wears off, he looks for the next dose, hoping it will be even larger.
The editorial points out that the Fed is notoriously bad at what used to be called "fine tuning." In this case, knowing when to suddenly switch from recession-fighting rate cuts to inflation-fighting rate hikes seems likely to be problematic."
Now we learn that the Fed will certainly cut interest rates at least 50bp tomorrow, with market expectations having reached a full percentage point, or 100bp.
What the heck is going on here?
The Fed's rate cuts going back to this summer haven't exactly lifted either the economy or financial markets out of whatever difficulties they are experiencing. So what will an additional one percentage point cut accomplish?
Brian Wesbury opined, in a discussion on CNBC this afternoon about Bear Stearns, that, ironically, the Fed's rate cuts had helped to drive the firm out of business. Wesbury noted that rates were falling on various risky assets, as the Fed lowered rates, while risks remained high. As returns no longer matched or compensated for risks, instrument prices tanked.
The result, for 'mark to market' securities, which composed much of Bear's book, was a rapid contraction of value.
The Fed's recent actions regarding accepting various types of paper at its windows for discounting, including now allowing non-commercial banks access to these facilities, seems appropriate to me in this market.
But further stoking of inflation through needless rate cuts seems to me to be a major mistake.
Monday, March 17, 2008
On Bear Stearns' Demise & Its Purchase By Chase- Part One
Just two weeks ago today, I wrote this post on commercial banking concentration. Little did I know that I would be so close to the truth, and by such a short amount of time.
Rather than the collapse of a commercial bank, it is an investment bank/brokerage- Bear Stearns- that has failed. But the thrust is the same, as has become clear from comments of many pundits in the last 24 hours. And from an analysis of the current condition of financial markets.
As I most recently wrote on the 'mark to market' issue here, a few days after the other linked post,
"As I began to suggest in my earlier post, businesses and companies in the business of trading and investing with the constant expectation of selling and buying securities should probably mark their assets to market daily. If that causes them to use less leverage or avoid exotic structured finance instruments, so be it.
Financial service businesses intending to hold assets, whether they be whole loans, exotics, or what have you, beyond a pre-determined duration, should probably be able to value those assets on the basis of performance, rather than immediate market value."
In essence, Bear Stearns got caught in the former situation, holding large amounts of exotic securities, for which there is no current 'market,' with borrowed money. Between increased demands for collateral and worries over its liquidity, its counterparty risk made it an unsustainable trading entity.
Goodbye Bear Stearns.
Because of the genesis of this current financial turmoil, exotic, somewhat opaque structured finance instruments, I wrote this post last September. In it, I opined,
"Now, with this latest credit market debacle, the first since really heavily asset securitization of mortgages and corporate loans have kicked in, we are learning that there are market conditions under which non-banks may not be viable for very long, if they originate and/or hold volatile fixed income assets.
It's an interesting phenomenon. Who would have guessed that there was life in the old commercial bank model, yet?
Back in my days at Chase Manhattan, our group's boss, Corporate Planning & Development SVP Gerry Weiss, attempted a number of efforts calculated to move Chase into some sort of arrangement with a US investment bank, in order to, as he put it, so to speak,
'get their management in charge of our assets, with the advantages of our regulatory structure.'
Therefore, it's ironic to me that something like this might happen. Sure, Sandy Weill agglomerated a bunch of different piece parts to form the now-unwieldy Citi bank. But Salomon and Smith Barney are now almost lost inside of it. And the bankers remained in power, as the investment banks they took over had been weakened by various events.
Now, it would be possible to see a Chase or BofA take Bear Stearns, for example.
An interesting development in the quest for a viable, efficient, profitable organizational structure with which to transact fixed income businesses."
So I guess I did sort of foresee this development. But, being no particular fan of Jamie Dimon, I wouldn't give him too much credit just yet.
For one, Chase is the only true money center bank left standing which can absorb Bear Stearns right now. Citigroup and BofA both damaged themselves with unwise capital markets activities last year.
Second, it's not clear that Chase has really bought much of value. At $2/share, it would seem that the bank doesn't put more than notional value on the 'assets' it has purchased. Mostly, it seems this is a favor to the Fed and the US banking system, as a sort of quid pro quo for the status Chase enjoys as one of the largest US commercial and money center banks.
Now there are some who allege that Bear's CDO book will eventually become quite valuable, yielding a profit windfall to Chase, and, thus, making Dimon look like a prescient hero in a few years.
If that's true, though, again, it's not through any particular wisdom of Dimon's that this has occurred. If Citigroup had been healthier, there would have been a bidding war. And what is the fairness of making Bear Stearns mark such a book to a non-existent, zero-value market, force it to sell itself to Chase for a song, only to allow Chase to hold zero-value instruments in case they do, and, probably will rebound in value over time?
According to CNBC this morning, the Fed preferred Chase to J.C. Flowers as the rescuer of Bear Stearns.
Why? Perhaps Flowers correctly understood the longer-term value of Bear's exotics, and was willing to pay a bit more than $2/share to own them. In fact, it was reported that Chase had bid up to $15/share when competing with Flowers to buy Bear.
I'll add some more thoughts shortly in part two of this post topic.
Rather than the collapse of a commercial bank, it is an investment bank/brokerage- Bear Stearns- that has failed. But the thrust is the same, as has become clear from comments of many pundits in the last 24 hours. And from an analysis of the current condition of financial markets.
As I most recently wrote on the 'mark to market' issue here, a few days after the other linked post,
"As I began to suggest in my earlier post, businesses and companies in the business of trading and investing with the constant expectation of selling and buying securities should probably mark their assets to market daily. If that causes them to use less leverage or avoid exotic structured finance instruments, so be it.
Financial service businesses intending to hold assets, whether they be whole loans, exotics, or what have you, beyond a pre-determined duration, should probably be able to value those assets on the basis of performance, rather than immediate market value."
In essence, Bear Stearns got caught in the former situation, holding large amounts of exotic securities, for which there is no current 'market,' with borrowed money. Between increased demands for collateral and worries over its liquidity, its counterparty risk made it an unsustainable trading entity.
Goodbye Bear Stearns.
Because of the genesis of this current financial turmoil, exotic, somewhat opaque structured finance instruments, I wrote this post last September. In it, I opined,
"Now, with this latest credit market debacle, the first since really heavily asset securitization of mortgages and corporate loans have kicked in, we are learning that there are market conditions under which non-banks may not be viable for very long, if they originate and/or hold volatile fixed income assets.
It's an interesting phenomenon. Who would have guessed that there was life in the old commercial bank model, yet?
Back in my days at Chase Manhattan, our group's boss, Corporate Planning & Development SVP Gerry Weiss, attempted a number of efforts calculated to move Chase into some sort of arrangement with a US investment bank, in order to, as he put it, so to speak,
'get their management in charge of our assets, with the advantages of our regulatory structure.'
Therefore, it's ironic to me that something like this might happen. Sure, Sandy Weill agglomerated a bunch of different piece parts to form the now-unwieldy Citi bank. But Salomon and Smith Barney are now almost lost inside of it. And the bankers remained in power, as the investment banks they took over had been weakened by various events.
Now, it would be possible to see a Chase or BofA take Bear Stearns, for example.
An interesting development in the quest for a viable, efficient, profitable organizational structure with which to transact fixed income businesses."
So I guess I did sort of foresee this development. But, being no particular fan of Jamie Dimon, I wouldn't give him too much credit just yet.
For one, Chase is the only true money center bank left standing which can absorb Bear Stearns right now. Citigroup and BofA both damaged themselves with unwise capital markets activities last year.
Second, it's not clear that Chase has really bought much of value. At $2/share, it would seem that the bank doesn't put more than notional value on the 'assets' it has purchased. Mostly, it seems this is a favor to the Fed and the US banking system, as a sort of quid pro quo for the status Chase enjoys as one of the largest US commercial and money center banks.
Now there are some who allege that Bear's CDO book will eventually become quite valuable, yielding a profit windfall to Chase, and, thus, making Dimon look like a prescient hero in a few years.
If that's true, though, again, it's not through any particular wisdom of Dimon's that this has occurred. If Citigroup had been healthier, there would have been a bidding war. And what is the fairness of making Bear Stearns mark such a book to a non-existent, zero-value market, force it to sell itself to Chase for a song, only to allow Chase to hold zero-value instruments in case they do, and, probably will rebound in value over time?
According to CNBC this morning, the Fed preferred Chase to J.C. Flowers as the rescuer of Bear Stearns.
Why? Perhaps Flowers correctly understood the longer-term value of Bear's exotics, and was willing to pay a bit more than $2/share to own them. In fact, it was reported that Chase had bid up to $15/share when competing with Flowers to buy Bear.
I'll add some more thoughts shortly in part two of this post topic.
Saturday, March 15, 2008
Kneale v. Gasparino On CNBC This Week
Today's blog visits saw quite a few readers seeking information for searches generally described by a phrase like
'gasparino dennis kneale cnbc'
Being on vacation and away from television during most of the market hours this week, I was clueless as to the reason for the search. Well, I should say clueless as to the particular reason.
If Charlie Gasparino was involved, I could guess it was some sort of ugly, on-air fracas.
Following one of the search results which also appeared along with one of my older posts, I found this YouTube video of Thursday's CNBC incident involving Dennis Kneale and Gasparino.
I have to say, I was surprised at how baseless and inappropriate Gasparino became during the exchange. The source which featured this clip noted that both Gasparino and Kneale were former Wall Street Journal staffers, which may account for the vehemence of the words they parried. It would not be hard to imagine the slightly-geeky Kneale and steroidish, hulking Gasparino not getting along well at the business paper.
Sad to say, this on-air exchange reinforces my perception of Gasparino as not much more than a business gossip reporter. There's very little 'news' in the stories that he 'breaks' which really affects me, or my view of markets or business. His stories tend to accentuate personalities, feuds, and other non-substance-oriented topics.
In contrast, I find Kneale to be insightful, intelligent and possessing much common sense.
It's a pity that CNBC so prominently showcases an on-air reporter like Gasparino. In my opinion, he cheapens the network's programs by comments and behavior like that in the clip from Thursday. Why he thinks an unsubstantiated on-air, live accusation of Kneale as a fellow customer of Eliot Spitzer's call girl service of choice matters to viewers is beyond me.
'gasparino dennis kneale cnbc'
Being on vacation and away from television during most of the market hours this week, I was clueless as to the reason for the search. Well, I should say clueless as to the particular reason.
If Charlie Gasparino was involved, I could guess it was some sort of ugly, on-air fracas.
Following one of the search results which also appeared along with one of my older posts, I found this YouTube video of Thursday's CNBC incident involving Dennis Kneale and Gasparino.
I have to say, I was surprised at how baseless and inappropriate Gasparino became during the exchange. The source which featured this clip noted that both Gasparino and Kneale were former Wall Street Journal staffers, which may account for the vehemence of the words they parried. It would not be hard to imagine the slightly-geeky Kneale and steroidish, hulking Gasparino not getting along well at the business paper.
Sad to say, this on-air exchange reinforces my perception of Gasparino as not much more than a business gossip reporter. There's very little 'news' in the stories that he 'breaks' which really affects me, or my view of markets or business. His stories tend to accentuate personalities, feuds, and other non-substance-oriented topics.
In contrast, I find Kneale to be insightful, intelligent and possessing much common sense.
It's a pity that CNBC so prominently showcases an on-air reporter like Gasparino. In my opinion, he cheapens the network's programs by comments and behavior like that in the clip from Thursday. Why he thinks an unsubstantiated on-air, live accusation of Kneale as a fellow customer of Eliot Spitzer's call girl service of choice matters to viewers is beyond me.
Friday, March 14, 2008
The Dollar's Value, Foreign Investment & Innovation
Last weekend in the Wall Street Journal, former Dallas Fed President Bob McTeer wrote an insightful editorial entitled "Valuing The Dollar."
In his half-page piece, McTeer gave a learned, yet comprehensible tutorial on various factors affecting exchange rates. He differentiated capital flows from trade flows, explaining why sometimes the former offset effects one would expect from the latter.
Near the end of his editorial, McTeer wrote,
"The accumulation of massive dollar reserves in China led to worry that they would diversify those holdings at some point, a diversification that would involve moving the dollar into other currencies, especially the euro -- with such a sell-off depressing the dollar and leading to higher U.S. interest rates. Instead, the diversification so far has been from Treasury securities into private-sector dollar assets. To continue the current account deficit is to continue the fire sale of U.S. assets to foreigners.
They want to get into U.S. assets when the dollar is cheap and get out when the dollar is dear. The more the dollar depreciates, the sooner it will be expected to reverse, and the sooner foreign investors will resume their participation in the most dynamic, creative economy in the world."
The term 'fire sale' caught my eye. McTeer, like so many other learned, experienced businessmen or economists, wail about the sale of US economic assets to foreigners at distressed prices, due to the dollar's current value, relative to other currencies a year or so ago.
I would like to argue the proposition that the assets being bought 'on sale' are, for the most part, assets that are no longer as valuable as they once were, and probably not the most dynamic, attractive part of our economy.
For example, the 'fire sale' of US banking assets- Citigroup, Merrill Lynch, and Bear Stearns- is often used to prove the point that we are selling ourselves to foreign countries, companies or individuals.
However, Goldman Sachs, Lehman, Wachovia, and many private equity groups and hedge funds have not sold interest in themselves to foreigners.
Furthermore, how hard would it be for the healthier private firms to compete with the publicly-held, weakened banks and brokerages? This is a business which, we are reminded, has its most important assets walking out of the doors every night.
What is so special about an ailing Citigroup or Merrill Lynch that can't be duplicated, or improved upon, by fresh capital behind better managers in new companies doing the same things.
By contrast, nobody seems to be buying our economy's more successful and innovative firms, such as Google, H-P, FreeportMcMoran, bio-pharmas or manufacturers.
Could it be that Schumpeterian dynamics is at work here? The weak firms are being bought by foreign acquirers, while the stronger firms remain above the fray.
Then there is the issue of dynamism. To wring one's hands over our economy being 'bought' by foreigners is to ignore our pace of innovation and value creation.
Firms like Google weren't anywhere near as strong and dominant even five years ago as they are now. Five years from now, new companies we've yet to completely understand will be joining them as dominating forces in their business sectors.
It seems to me that, for example, the financial services firms which are the target of overseas investment are engaged in mostly commodity businesses. And poorly managed at that. What's the fuss about?
Are we worried that foreigners will do a large amount of US unsecured consumer lending? Or corporate lending? These businesses are easily started by competitors, if that is a problem.
Are we worried about foreigners' access to the US financial system? They already have it. And they already must submit to US regulatory scrutiny. It's unlikely that we will suffer because Citigroup sells more diluted equity to some Arab interests.
Personally, I think we are not so sure.
Mr. McTeer's excellent article opened my eyes to a key point that has, I believe, been overlooked in the current panic over the dollar's value, foreign investment, often via 'sovereign funds,' and US economic innovation.
Even with a currently weaker-than-recently US dollar, our vital engines of economic growth and competitive advantage seem to be firmly in US hands, while lesser companies fall to investment by foreign interests.
In his half-page piece, McTeer gave a learned, yet comprehensible tutorial on various factors affecting exchange rates. He differentiated capital flows from trade flows, explaining why sometimes the former offset effects one would expect from the latter.
Near the end of his editorial, McTeer wrote,
"The accumulation of massive dollar reserves in China led to worry that they would diversify those holdings at some point, a diversification that would involve moving the dollar into other currencies, especially the euro -- with such a sell-off depressing the dollar and leading to higher U.S. interest rates. Instead, the diversification so far has been from Treasury securities into private-sector dollar assets. To continue the current account deficit is to continue the fire sale of U.S. assets to foreigners.
They want to get into U.S. assets when the dollar is cheap and get out when the dollar is dear. The more the dollar depreciates, the sooner it will be expected to reverse, and the sooner foreign investors will resume their participation in the most dynamic, creative economy in the world."
The term 'fire sale' caught my eye. McTeer, like so many other learned, experienced businessmen or economists, wail about the sale of US economic assets to foreigners at distressed prices, due to the dollar's current value, relative to other currencies a year or so ago.
I would like to argue the proposition that the assets being bought 'on sale' are, for the most part, assets that are no longer as valuable as they once were, and probably not the most dynamic, attractive part of our economy.
For example, the 'fire sale' of US banking assets- Citigroup, Merrill Lynch, and Bear Stearns- is often used to prove the point that we are selling ourselves to foreign countries, companies or individuals.
However, Goldman Sachs, Lehman, Wachovia, and many private equity groups and hedge funds have not sold interest in themselves to foreigners.
Furthermore, how hard would it be for the healthier private firms to compete with the publicly-held, weakened banks and brokerages? This is a business which, we are reminded, has its most important assets walking out of the doors every night.
What is so special about an ailing Citigroup or Merrill Lynch that can't be duplicated, or improved upon, by fresh capital behind better managers in new companies doing the same things.
By contrast, nobody seems to be buying our economy's more successful and innovative firms, such as Google, H-P, FreeportMcMoran, bio-pharmas or manufacturers.
Could it be that Schumpeterian dynamics is at work here? The weak firms are being bought by foreign acquirers, while the stronger firms remain above the fray.
Then there is the issue of dynamism. To wring one's hands over our economy being 'bought' by foreigners is to ignore our pace of innovation and value creation.
Firms like Google weren't anywhere near as strong and dominant even five years ago as they are now. Five years from now, new companies we've yet to completely understand will be joining them as dominating forces in their business sectors.
It seems to me that, for example, the financial services firms which are the target of overseas investment are engaged in mostly commodity businesses. And poorly managed at that. What's the fuss about?
Are we worried that foreigners will do a large amount of US unsecured consumer lending? Or corporate lending? These businesses are easily started by competitors, if that is a problem.
Are we worried about foreigners' access to the US financial system? They already have it. And they already must submit to US regulatory scrutiny. It's unlikely that we will suffer because Citigroup sells more diluted equity to some Arab interests.
Are we so sure that the companies being 'lost' to foreigners are where we have sustainable competitive advantages which will result in long term, consistently superior total returns?
Personally, I think we are not so sure.
Mr. McTeer's excellent article opened my eyes to a key point that has, I believe, been overlooked in the current panic over the dollar's value, foreign investment, often via 'sovereign funds,' and US economic innovation.
Even with a currently weaker-than-recently US dollar, our vital engines of economic growth and competitive advantage seem to be firmly in US hands, while lesser companies fall to investment by foreign interests.
Thursday, March 13, 2008
GE's Earnings Report & Immelt's Equity Purchases
My last post on GE was just last week. The occasion was the release of CEO Jeff Immelt's 2007 compensation. For details, see my post. suffice to say, I found his latest year's compensation pretty much unrelated to GE's posting another year of total returns which under-performed the S&P500 Index.
This morning on CNBC, a network owned by GE, passages from Immelt's letter to shareholders were shown. Immelt is refusing to consider selling the entertainment sector of the conglomerate, while once again attempting to focus attention on his 'Ecoimagination' unit.
It was heartening to see one of the network's co-anchors clearly note that GE has under-performed the index during Immelt's entire reign, with a price chart to support the fact.
Immelt is to appear on CNBC tomorrow morning in an 'interview,' if you can call it that when the co-anchors interview the guy who can fire them.
But perhaps Immelt's most daring ploy this year is his announcement that he has bought $4MM of GE shares on the open market with his 'own' money, i.e., not via granted options.
Mike Holland, a guest host on CNBC's morning program today, noted the share purchase and touted the stock to viewers.
Here's my take on Immelt's GE share purchase move.The first Yahoo-sourced chart nearby depicts the price of GE stock and the S&P500 for the past twelve-month period. It's clear that both have fallen sharply since the mid-2007 credit market problems. The index has fallen about 15% in that period, while GE has fallen in the vicinity of 22%.
Thus, per Mike Holland's comment this morning on CNBC, it's a buyer's market in the index and probably GE for investors with money and patience. Jeff Immelt has the first, thanks to GE shareholders, and probably the second, again, thanks to shovelsful of cash and options compensation over the past seven-plus years.
Since the S&P rises in roughly 70% of months, and it just fell nearly 15% in eight months, it's a safe bet that it will be rising by the end of this year.
If Immelt bought $4MM of S&P Index fund shares, it would be a signal to investors, especially in GE, that even Immelt thought the index would be, as usual, out-performing Immelt's company this year.
By purchasing $4MM of GE stock, Immelt will likely get a return similar to, but lower than that of the index over a like period. The nearby Yahoo-sourced 5-year price chart for GE and the S&P500 Index demonstrates how closely together the two tend to move.Even if Immelt gives up some return on his $4MM by buying the lower expected return equity, he probably goes a long way toward saving his job, which is worth more like something north of $15MM/ year. If GE under-performed the index by 5 percentage points in the next twelve months, Immelt would only lose some $200K, but reap a public relations windfall that could easily stave off calls for his scalp.
I don't think Immelt is actually investing in GE as a vote of confidence in his management or the company's promising near-term opportunities and potential for a unique total return.
Rather, I think Immelt is simply making a very public bet on the direction of US equity markets for the remainder of this year, and probably next. After such a significant drop in price level of the S&P, there are several stocks with betas near 1 that would be relatively safe buys for a wealthy investor. GE's beta is .72, according to Yahoo.
I wrote in that linked post last week,
"As I have written in previous posts, when a CEO has been paid north of $10MM in cash, does anyone think he really cares what happens to the company's stock price anymore? Added to Immelt's prior $23MM of cash compensation, GE has now paid him over $30MM in just six years."
Immelt certainly has the money and, thus, the investing horizon to buy GE shares now and bet that, due to the broader market's recovery in the next twelve months, GE's share price will rise with the market, regardless of the company's actual operating performance.
I'd never say Immelt is not a smart man. In fact, he's extremely clever- for his own welfare. Too bad he hasn't been as smart or clever for his shareholders' benefit for the past six and a half years.
Wednesday, March 12, 2008
Another Fix For The Addicted Equity Markets
Yesterday's surprise move by the Fed to purchase up to $200B of troubled mortgage-backed securities from its primary dealers gave equity markets the sort of news that makes them look like a drug addict on their latest fix. The S&P500 Index rose 3.7% in response to the news of help in the credit markets.
This morning's Wall Street Journal front-page article states,
"The Fed said it would lend Wall Street as much as $200 billion from the central bank's own trove of sought-after Treasury bonds and bills for 28 days in exchange for a roughly equivalent amount of mortgage-backed securities, including some that can't ordinarily be used in transactions with the Fed. Uncertainties about the value of the underlying mortgages, plus forced selling by some investors to repay broker loans, have led many investors to spurn these securities, making them especially difficult to trade.
By taking some of these securities on its own books, the Fed is seeking to make its primary dealers -- the network of 20 Wall Street firms with which it typically does securities business -- more comfortable buying them from their own clients. It hopes this could lead to higher prices and thus lower yields on the mortgage-linked debt. A decline in those yields could help banks offer lower interest rates to prospective homebuyers.
Still, the Fed's efforts won't eliminate the root cause of the economy's problems: falling home prices and a mounting wave of mortgage defaults.
As collateral, the Fed will accept debt or mortgage-backed securities issued or guaranteed by Fannie and Freddie, also known as "agency" securities. It will also accept other residential-mortgage-backed securities, provided they are rated triple-A and not on watch for downgrade, though it didn't specify what type. Such "private label" securities have been especially difficult to trade, in part because the Fed doesn't accept them as collateral for ordinary money-market operations."
Of all the Fed actions of the past few months, and rate cuts extending back through last fall, I believe this one is very shrewd and probably will be productive.
As I wrote in this post yesterday, the current deleveraging-fire sale cycle of fixed income securities due to bank margin requirement increases has resulted in somewhat irrational temporary valuations on some fixed income instruments.
This move by the Fed is a very clever way of providing a floor under the prices of these assets in the marketplace. With participation by the primary dealers, whether directly or with paper purchased or taken as collateral from their customers, virtually any qualifying fixed income paper will immediately have a minimum price set in the market.
As such, this should stop much of the panic dumping of fixed income securities of still high quality which are not otherwise in a non-performing condition. In that regard, it's a good move for US financial markets and the economy in general.
What concerns me somewhat is the equity markets' reaction. I suppose I should remind myself that it is just a one-day move, not necessarily a trend. But I cannot help thinking that the index's and various individual equity's prices moved unsustainably higher based upon this surprise move by the Fed.
As the Journal article, and various pundits noted, it won't make US housing prices rise, or prevent mortgage defaults. But it will remove credit markets as another source of potential US economic weakness in the months to come.
This morning's Wall Street Journal front-page article states,
"The Fed said it would lend Wall Street as much as $200 billion from the central bank's own trove of sought-after Treasury bonds and bills for 28 days in exchange for a roughly equivalent amount of mortgage-backed securities, including some that can't ordinarily be used in transactions with the Fed. Uncertainties about the value of the underlying mortgages, plus forced selling by some investors to repay broker loans, have led many investors to spurn these securities, making them especially difficult to trade.
By taking some of these securities on its own books, the Fed is seeking to make its primary dealers -- the network of 20 Wall Street firms with which it typically does securities business -- more comfortable buying them from their own clients. It hopes this could lead to higher prices and thus lower yields on the mortgage-linked debt. A decline in those yields could help banks offer lower interest rates to prospective homebuyers.
Still, the Fed's efforts won't eliminate the root cause of the economy's problems: falling home prices and a mounting wave of mortgage defaults.
As collateral, the Fed will accept debt or mortgage-backed securities issued or guaranteed by Fannie and Freddie, also known as "agency" securities. It will also accept other residential-mortgage-backed securities, provided they are rated triple-A and not on watch for downgrade, though it didn't specify what type. Such "private label" securities have been especially difficult to trade, in part because the Fed doesn't accept them as collateral for ordinary money-market operations."
Of all the Fed actions of the past few months, and rate cuts extending back through last fall, I believe this one is very shrewd and probably will be productive.
As I wrote in this post yesterday, the current deleveraging-fire sale cycle of fixed income securities due to bank margin requirement increases has resulted in somewhat irrational temporary valuations on some fixed income instruments.
This move by the Fed is a very clever way of providing a floor under the prices of these assets in the marketplace. With participation by the primary dealers, whether directly or with paper purchased or taken as collateral from their customers, virtually any qualifying fixed income paper will immediately have a minimum price set in the market.
As such, this should stop much of the panic dumping of fixed income securities of still high quality which are not otherwise in a non-performing condition. In that regard, it's a good move for US financial markets and the economy in general.
What concerns me somewhat is the equity markets' reaction. I suppose I should remind myself that it is just a one-day move, not necessarily a trend. But I cannot help thinking that the index's and various individual equity's prices moved unsustainably higher based upon this surprise move by the Fed.
As the Journal article, and various pundits noted, it won't make US housing prices rise, or prevent mortgage defaults. But it will remove credit markets as another source of potential US economic weakness in the months to come.
Tuesday, March 11, 2008
DeLeveraging & Valuation
My partner and I recently discussed this post, and the Wall Street Journal editorial by Holman Jenkins which motivated it.
After some initial back-and-forth comments during which it appeared that he and I disagreed, my partner's remarks focused on the duality of valuation in the recent case of various financial instruments whose values have plunged due to forced sales from margin calls.
How does one consider securities sold at incredibly low prices due to financing decisions? When the valuation is driven by temporary current market forces, not long term value, is 'mark to market' really valid? Specifically when the cause of the valuation change is a global deleveraging brought on by a change in bank collateral requirements of many institutional investors who have heretofore employed leverage in their strategies?
What is 'value' in such a case? As my partner noted, there is a duality, because perspective really determines it. The value is driven more by some bank's tougher margin requirements than the intrinsic value of the instrument, per se.
Is it reasonable for the balance sheet of a firm to reflect instantaneous market forces valuing its assets?
My partner initially decried anything but 'mark to market,' but then relented, somewhat, when I pointed out that all 'mark to market' really does is try to make an historically-based balance sheet become market-priced.
We have 'par' values on accounting books, and then each person's analysis to translate historically-costed assets into 'market values.'
At least one thing that is happening is that investors with cash are gorging themselves on improperly under-valued long term assets in a temporary meltdown.
For the purposes of accounting rules, we see real, tangible functioning financial service firms go out of business due to 'market valuation' rules simultaneous with bank lending contraction by way of margin rule changes.
As my partner, trained as an accountant, noted, using GAAP is simply following one set of rules, rather than another. But they are not etched in stone. I had a graduate accounting course professor who delighted in demonstrating that, by perfectly acceptable use of accounting assumptions and GAAP principles, he could not only vary earnings per share more than a marketing or production function could, but that he could accurately forecast that EPS for December 31 of the year on the day after New Year's of that same year.
Is the forcing a mostly historically-priced balance sheet to suddenly need to approximate real-time market values of use beyond the reasonable intent of financial accounting? Isn't it actually a sort of cash-like, dumbing down of GAAP principles, so that any idiot viewing the company's balance sheet and asset 'values' knows they are current?
But we have analysts and counterparties to also perform these tasks, with a more adversarial bent. Providing a 'market value' approximation for a firm is, as my partner and I agreed, a matter of perspective. Thus, a single, 'market value'-based of assets of a firm is probably an oversimplification anyway.
After some initial back-and-forth comments during which it appeared that he and I disagreed, my partner's remarks focused on the duality of valuation in the recent case of various financial instruments whose values have plunged due to forced sales from margin calls.
How does one consider securities sold at incredibly low prices due to financing decisions? When the valuation is driven by temporary current market forces, not long term value, is 'mark to market' really valid? Specifically when the cause of the valuation change is a global deleveraging brought on by a change in bank collateral requirements of many institutional investors who have heretofore employed leverage in their strategies?
What is 'value' in such a case? As my partner noted, there is a duality, because perspective really determines it. The value is driven more by some bank's tougher margin requirements than the intrinsic value of the instrument, per se.
Is it reasonable for the balance sheet of a firm to reflect instantaneous market forces valuing its assets?
My partner initially decried anything but 'mark to market,' but then relented, somewhat, when I pointed out that all 'mark to market' really does is try to make an historically-based balance sheet become market-priced.
We have 'par' values on accounting books, and then each person's analysis to translate historically-costed assets into 'market values.'
At least one thing that is happening is that investors with cash are gorging themselves on improperly under-valued long term assets in a temporary meltdown.
For the purposes of accounting rules, we see real, tangible functioning financial service firms go out of business due to 'market valuation' rules simultaneous with bank lending contraction by way of margin rule changes.
As my partner, trained as an accountant, noted, using GAAP is simply following one set of rules, rather than another. But they are not etched in stone. I had a graduate accounting course professor who delighted in demonstrating that, by perfectly acceptable use of accounting assumptions and GAAP principles, he could not only vary earnings per share more than a marketing or production function could, but that he could accurately forecast that EPS for December 31 of the year on the day after New Year's of that same year.
Is the forcing a mostly historically-priced balance sheet to suddenly need to approximate real-time market values of use beyond the reasonable intent of financial accounting? Isn't it actually a sort of cash-like, dumbing down of GAAP principles, so that any idiot viewing the company's balance sheet and asset 'values' knows they are current?
But we have analysts and counterparties to also perform these tasks, with a more adversarial bent. Providing a 'market value' approximation for a firm is, as my partner and I agreed, a matter of perspective. Thus, a single, 'market value'-based of assets of a firm is probably an oversimplification anyway.
Monday, March 10, 2008
Wagoner's New Reduced Role At GM
This week we have a change in GM's top management, and more excuses from Rick Wagoner for its continuing problems.
Wednesday's Wall Street Journal carried an article detailing the elevation of 'Fritz" Henderson's rise to COO. The piece states,
"Two years ago, General Motors Corp. Chairman and Chief Executive Rick Wagoner won a battle to keep his job, in large part by convincing his board he had the best plan for restructuring the auto giant.
Now, with GM still not making money, Mr. Wagoner has turned over responsibility for the company's sprawling day-to-day operations to Frederick "Fritz" Henderson. Speaking to reporters yesterday at the Geneva auto show, Mr. Wagoner outlined what his role will be in the auto maker's hierarchy, saying that he will focus on global growth, advanced technologies and environmental lobbying.
"At the top of the company, we've been somewhat stretched," Mr. Wagoner said. With "two people doing three or four jobs," he said, he "always felt like I was running from pillar to post." "
As CEO of GM, why didn't Wagoner do what was necessary years ago to be properly staffed and handle the company's problems? The Journal article continues by noting,
"But some investors are still unhappy with Mr. Wagoner's restructuring. GM is widely expected to lose money this year -- the fourth in a row -- even though it has cut $9 billion in fixed costs, shed a third of its hourly work force, and improved the quality of its cars and trucks.
"Where is the multipoint plan from Wagoner?" said SAM Asset Management President Bill Smith, whose firm owns about 30,000 shares. "When I got involved in GM shares two years ago, Rick was out there with a plan. He cut the dividend and so forth ... but where is the plan now?"
GM shares spiked last fall on enthusiasm about its new labor contract with the United Auto Workers, but since have lost almost half of their value. Yesterday, they closed at $23.07.
GM's market value of $13.06 billion is about a third of its value at the beginning of the decade when Mr. Wagoner became CEO."
Call me sceptical- hey, it's the name of the blog- but I don't see how the same guy who, as CEO, lost 1/3 of GM's value, is going to magically become an asset to the firm once he has a COO. If this were so important, why didn't he do it several years ago?
Perhaps GM shareholders, of which I am not one, have the pleasure of seeing Wagoner at last stop wrecking the company by his operational role as CEO. The piece concluded with Wagoner opining on performing less operational duties,
"Now, without having to manage daily operations, Mr. Wagoner plans to spend more time on so-called transformational issues such as environmental regulations and new technologies likely to reshape the auto industry down the road.
Mr. Wagoner said he also hopes to at least double his amount of annual visits to China, a fast-growing new market where GM has become well-established. Visiting roughly twice a year in the past "didn't feel right," he said.
At the Geneva show, he unveiled a new type of hybrid power train that GM plans to offer in a range of vehicles in the U.S. by 2010."
Translation- keep Rick on the road making appearances and let someone more competent actually try to pull GM out of the ditch?
Wednesday's Wall Street Journal carried an article detailing the elevation of 'Fritz" Henderson's rise to COO. The piece states,
"Two years ago, General Motors Corp. Chairman and Chief Executive Rick Wagoner won a battle to keep his job, in large part by convincing his board he had the best plan for restructuring the auto giant.
Now, with GM still not making money, Mr. Wagoner has turned over responsibility for the company's sprawling day-to-day operations to Frederick "Fritz" Henderson. Speaking to reporters yesterday at the Geneva auto show, Mr. Wagoner outlined what his role will be in the auto maker's hierarchy, saying that he will focus on global growth, advanced technologies and environmental lobbying.
"At the top of the company, we've been somewhat stretched," Mr. Wagoner said. With "two people doing three or four jobs," he said, he "always felt like I was running from pillar to post." "
As CEO of GM, why didn't Wagoner do what was necessary years ago to be properly staffed and handle the company's problems? The Journal article continues by noting,
"But some investors are still unhappy with Mr. Wagoner's restructuring. GM is widely expected to lose money this year -- the fourth in a row -- even though it has cut $9 billion in fixed costs, shed a third of its hourly work force, and improved the quality of its cars and trucks.
"Where is the multipoint plan from Wagoner?" said SAM Asset Management President Bill Smith, whose firm owns about 30,000 shares. "When I got involved in GM shares two years ago, Rick was out there with a plan. He cut the dividend and so forth ... but where is the plan now?"
GM shares spiked last fall on enthusiasm about its new labor contract with the United Auto Workers, but since have lost almost half of their value. Yesterday, they closed at $23.07.
GM's market value of $13.06 billion is about a third of its value at the beginning of the decade when Mr. Wagoner became CEO."
Call me sceptical- hey, it's the name of the blog- but I don't see how the same guy who, as CEO, lost 1/3 of GM's value, is going to magically become an asset to the firm once he has a COO. If this were so important, why didn't he do it several years ago?
Perhaps GM shareholders, of which I am not one, have the pleasure of seeing Wagoner at last stop wrecking the company by his operational role as CEO. The piece concluded with Wagoner opining on performing less operational duties,
"Now, without having to manage daily operations, Mr. Wagoner plans to spend more time on so-called transformational issues such as environmental regulations and new technologies likely to reshape the auto industry down the road.
Mr. Wagoner said he also hopes to at least double his amount of annual visits to China, a fast-growing new market where GM has become well-established. Visiting roughly twice a year in the past "didn't feel right," he said.
At the Geneva show, he unveiled a new type of hybrid power train that GM plans to offer in a range of vehicles in the U.S. by 2010."
Translation- keep Rick on the road making appearances and let someone more competent actually try to pull GM out of the ditch?
Friday, March 07, 2008
Bernanke's Recent Errors
By and large I have found Fed Chairman Ben Bernanke to be qualified, informed and vigilant in his position.
Beginning last summer, however, with the onset of the private sector's self-inflicted financial troubles, I have questioned Bernanke's ability to remain objective amidst media attacks.
Two recent pieces in the Wall Street Journal drew my attention to actions by Bernanke which I find to be troubling, and would even label as 'errors.'
The first was the Journal's lead editorial two Fridays ago, on February 29. In that piece, the authors noted that commodities such as gold, food and energy have been hitting record highs lately. Retrospectively, these are typically signs of coming inflation at the consumer level.
Meanwhile, Bernanke and the Fed have rather recklessly cut rates since this summer, attempting to solve a counterparty risk dilemma with lower rates and easier monetary policy.
To date, it's unclear that any of the extra Fed-supplied liquidity has affected the credit markets in a substantial, lasting manner. Instead, equity markets have reacted to the various rate cuts like heroin addict to his latest fix. After the effect wears off, he looks for the next dose, hoping it will be even larger.
The editorial points out that the Fed is notoriously bad at what used to be called "fine tuning." In this case, knowing when to suddenly switch from recession-fighting rate cuts to inflation-fighting rate hikes seems likely to be problematic.
As the Journal editorial put it so eloquently,
"For readers under age 30 who are wondering why they are suddenly paying $3.15 for gasoline and $2 for milk, the answer is that this is what an inflation looks like. Those of us of a certain age remember it well, if painfully, and judging by the noises coming from the Federal Reserve of late we had all better get used to it again.
First, Fed Vice Chairman Don Kohn declared that, while inflation was worrisome, the Fed now views recession as the more urgent danger to fight. Then on Wednesday, Fed Chairman Ben Bernanke told Congress that the Fed will do whatever it takes to stop the credit squeeze from becoming a recession. That's about as close as a central banker will get to saying that he's thrown price stability to the wind. If inflation rises -- as it now surely will -- then the Fed will worry about that later, after the economy is safely past the credit crunch."
Personally, I could not care less about Humphrey-Hawkins, the poorly-designed Senate law which foolishly commands the Fed to pursue both price stability and full employment.
The Journal concludes by noting,
"Then as now they were also dismissing such forward-looking price signals as gold and oil and instead focusing on such misleading indicators as "core inflation" and the money supply. Mr. Mishkin may be seen as a monetary wizard at the Fed, but to investors around the world he is beginning to look more like a high-class inflationist.
The people who aren't being fooled by all this are the American people. They don't pay their bills with "core" dollar bills, and they know those dollars buy less with each passing month. This explains their rising economic anxiety -- and anger -- better than trade or job losses do, especially since the job market has remained relatively healthy. Inflation is the great thief of the middle class, as even Americans who don't recall the 1970s are learning. With its all-in reflation bet, the Bernanke Fed is gambling with their money."
I have to admit, I am not happy with Bernanke. Rather than insulate himself from external critics and have the courage Paul Volcker did when he wrung inflation out of our economy over 25 years ago, Bernanke seems to actually be afraid of the Congressional Committees before which he must periodically appear.
As if all of this were not bad enough, yesterday's Journal reported that in Bernanke's recent speech to a conference of bankers, he said,
"In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure" than reducing the interest rate."
Meaning unilateral loan forgiveness under quasi-duress from the Federal government. In other language, this would known as a "taking-" the unlawful seizure of property without compensation. For the record, Barney Frank was thrilled to welcome Bernanke aboard his ideological investment confiscation train.
Reactions to Bernanke's sudden socialist uttering included,
"Reducing the principal rather than the interest rate is a "very different framework for thinking about the problem," said Andy Laperriere, an analyst at ISI Group, a brokerage firm. He said with so many borrowers under water, "any proposal that helps them will be very expensive for either the financial institution or the taxpayer," and a large program would potentially sweep in millions of borrowers who weren't going to default anyway.
Industry reacted coolly to Mr. Bernanke's proposal. The American Securitization Forum, which represents participants in the market for mortgage-backed securities -- pools of mortgages originated and sold by banks and other lenders -- said it had already developed procedures for modifying loans, including through principal reduction. To reduce principal, firms that service MBS pools on behalf of the end investors need "a clear basis for concluding that the related borrower is unable...rather than simply being unwilling" to repay."
No kidding! Doesn't Bernanke realize to what this sort of reward for an ultimate moral hazard- buying a home you can't afford- this will lead? Potential borrowers will never again take loss of their equity via foreclosure seriously. They'll simply wait to be part of a massive wave of subprime borrowing, the better to be part of those receiving the resulting Federal largess of loan forgiveness.
At a time when Congress complains that the Federal government is living beyond its means, but won't cut its own budget, we see it now demanding lenders allow US consumers to live beyond theirs, too.
I'd pay some extra tax dollars if it were targeted at bringing Tall Paul back out of retirement to lead the Fed for a few years. Not that I don't think Bernanke had been doing a good job until recently. Or that he doesn't understand the various aspects of his job. I just think Volcker was a Godsend whose discipline is now sorely missed, and will be, much more, I'm afraid, before too much longer.
Beginning last summer, however, with the onset of the private sector's self-inflicted financial troubles, I have questioned Bernanke's ability to remain objective amidst media attacks.
Two recent pieces in the Wall Street Journal drew my attention to actions by Bernanke which I find to be troubling, and would even label as 'errors.'
The first was the Journal's lead editorial two Fridays ago, on February 29. In that piece, the authors noted that commodities such as gold, food and energy have been hitting record highs lately. Retrospectively, these are typically signs of coming inflation at the consumer level.
Meanwhile, Bernanke and the Fed have rather recklessly cut rates since this summer, attempting to solve a counterparty risk dilemma with lower rates and easier monetary policy.
To date, it's unclear that any of the extra Fed-supplied liquidity has affected the credit markets in a substantial, lasting manner. Instead, equity markets have reacted to the various rate cuts like heroin addict to his latest fix. After the effect wears off, he looks for the next dose, hoping it will be even larger.
The editorial points out that the Fed is notoriously bad at what used to be called "fine tuning." In this case, knowing when to suddenly switch from recession-fighting rate cuts to inflation-fighting rate hikes seems likely to be problematic.
As the Journal editorial put it so eloquently,
"For readers under age 30 who are wondering why they are suddenly paying $3.15 for gasoline and $2 for milk, the answer is that this is what an inflation looks like. Those of us of a certain age remember it well, if painfully, and judging by the noises coming from the Federal Reserve of late we had all better get used to it again.
First, Fed Vice Chairman Don Kohn declared that, while inflation was worrisome, the Fed now views recession as the more urgent danger to fight. Then on Wednesday, Fed Chairman Ben Bernanke told Congress that the Fed will do whatever it takes to stop the credit squeeze from becoming a recession. That's about as close as a central banker will get to saying that he's thrown price stability to the wind. If inflation rises -- as it now surely will -- then the Fed will worry about that later, after the economy is safely past the credit crunch."
Personally, I could not care less about Humphrey-Hawkins, the poorly-designed Senate law which foolishly commands the Fed to pursue both price stability and full employment.
The Journal concludes by noting,
"Then as now they were also dismissing such forward-looking price signals as gold and oil and instead focusing on such misleading indicators as "core inflation" and the money supply. Mr. Mishkin may be seen as a monetary wizard at the Fed, but to investors around the world he is beginning to look more like a high-class inflationist.
The people who aren't being fooled by all this are the American people. They don't pay their bills with "core" dollar bills, and they know those dollars buy less with each passing month. This explains their rising economic anxiety -- and anger -- better than trade or job losses do, especially since the job market has remained relatively healthy. Inflation is the great thief of the middle class, as even Americans who don't recall the 1970s are learning. With its all-in reflation bet, the Bernanke Fed is gambling with their money."
I have to admit, I am not happy with Bernanke. Rather than insulate himself from external critics and have the courage Paul Volcker did when he wrung inflation out of our economy over 25 years ago, Bernanke seems to actually be afraid of the Congressional Committees before which he must periodically appear.
As if all of this were not bad enough, yesterday's Journal reported that in Bernanke's recent speech to a conference of bankers, he said,
"In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure" than reducing the interest rate."
Meaning unilateral loan forgiveness under quasi-duress from the Federal government. In other language, this would known as a "taking-" the unlawful seizure of property without compensation. For the record, Barney Frank was thrilled to welcome Bernanke aboard his ideological investment confiscation train.
Reactions to Bernanke's sudden socialist uttering included,
"Reducing the principal rather than the interest rate is a "very different framework for thinking about the problem," said Andy Laperriere, an analyst at ISI Group, a brokerage firm. He said with so many borrowers under water, "any proposal that helps them will be very expensive for either the financial institution or the taxpayer," and a large program would potentially sweep in millions of borrowers who weren't going to default anyway.
Industry reacted coolly to Mr. Bernanke's proposal. The American Securitization Forum, which represents participants in the market for mortgage-backed securities -- pools of mortgages originated and sold by banks and other lenders -- said it had already developed procedures for modifying loans, including through principal reduction. To reduce principal, firms that service MBS pools on behalf of the end investors need "a clear basis for concluding that the related borrower is unable...rather than simply being unwilling" to repay."
No kidding! Doesn't Bernanke realize to what this sort of reward for an ultimate moral hazard- buying a home you can't afford- this will lead? Potential borrowers will never again take loss of their equity via foreclosure seriously. They'll simply wait to be part of a massive wave of subprime borrowing, the better to be part of those receiving the resulting Federal largess of loan forgiveness.
At a time when Congress complains that the Federal government is living beyond its means, but won't cut its own budget, we see it now demanding lenders allow US consumers to live beyond theirs, too.
I'd pay some extra tax dollars if it were targeted at bringing Tall Paul back out of retirement to lead the Fed for a few years. Not that I don't think Bernanke had been doing a good job until recently. Or that he doesn't understand the various aspects of his job. I just think Volcker was a Godsend whose discipline is now sorely missed, and will be, much more, I'm afraid, before too much longer.
Thursday, March 06, 2008
More on Marking To Market
Last week I wrote this post regarding the hazards of applying 'mark to market' to every balance sheet in sight. In the post, I asked,
"Why should a firm be forced to keep its balance sheet on a 'breakup' valuation basis? If the firm doesn't plan to sell itself or liquidate, why must every scrap of every asset be current-valued?
What about industry sectors in which substantial investment is required in assets whose value will grow with time, such as cable, mining, or technology? Or commercial banks which legitimately desire to be portfolio lenders to the housing sector, and, thus, are not affected by performing loans whose values are temporarily depressed due to market or credit conditions?"
I guess I'm in good company, because in yesterday's Wall Street Journal, Holman Jenkins echoed my post and sentiments in a column entitled "Mark to Meltdown?"
Jenkins wrote,
"Overstating the importance of accounting rules is, indeed, the essential error that leads to excessive twiddling with accounting rules. Whether a company values its assets at historic cost or market value or a value derived by some other formula, investors still have to make their own forecasts and judgments. A thermometer is equally useful whether it says water freezes at 0 degrees or 32 degrees -- though it still doesn't tell what the temperature will be next week.
But loose as well is a fear that exaggerated writedowns in the current credit crunch are rapidly chewing through the banking system's capital cushion. Banks will be forced to dump assets at fire-sale prices, leading to yet more writedowns and more fire sales. At best, banks will have to keep shopping cheap equity to foreign potentates to keep themselves afloat. At worst, massive regulatory insolvency lies ahead.
This horror show, we hasten to add, has proven more theoretical than actual, but it plays a key role in the meltdown scenarios of NYU economist Nouriel Roubini, which he recently retailed for a congressional hearing. And it's hard to doubt that fears of accounting-prompted distress sales are partly behind the melodramatic yields now available in the corporate and municipal bond markets."
Which is pretty much what I further opined in my earlier post,
"It's one thing to force market valuations on assets which are purposefully traded frequently, such as bond or equity funds. But forcing firms which own significant amounts of assets that are not intended to be liquid seems silly, especially if the 'market' for those assets temporarily dissolves, creating an apparent value of zero."
We therefore have the Law of Unintended Consequences extracting perverse, severe penalties from today's credit markets. Somewhat arbitrary accounting rules are now governing the behavior of financial service firms to issue margin calls and trigger the unwinding of highly-leveraged positions in credit instruments, which is causing further, temporary cratering of values of otherwise-performing assets.
As Mr. Jenkins informs us,
"Mark to market was a gift to the world from SEC Chief Richard Breeden in the early '90s. With the help of accounting mavens, he argued that requiring banks and other companies to account for financial assets at current market prices, as if the institutions were being sized up for liquidation, would provide a rough-tough discipline for the edification of investors, regulators and managers.
A rose would smell as sweet if it were called skunk cabbage -- so we always maintain when somebody predicts either dire or utopian results from a mere accounting change. Still, many questioned Mr. Breeden's initiative at the time, among them Fed Chairman Alan Greenspan and Bank of America's Richard M. Rosenberg. Particularly notable were their warnings that the new rule, when combined with risk-based capital standards, might lead banks to hold fewer loans on their own books, packaging more of them as complex securities for sale to investors.
Overlooked, too, was a phenomenon we perhaps understand better today -- the propensity of the speculators who provide much of the market's day-to-day liquidity to go on strike during moments when their services are most needed. "Mark to market" then becomes something else, because markets no longer exist for many of these abstruse securities. Banks are left oxymoronically trying to estimate what market prices would be if markets existed."
Which, again, echoes something I've written about many times in the past year- the tendencies of younger trading mavens to fail to understand that sometimes markets simply cease to exist, in the classical sense of the definition. If you hold such instruments with borrowed money, you are in a bind. If you are forced to mark such positions to market in the face of a non-existent 'market,' you are also in a bind.
Mr. Jenkins closes his piece with this passage,
"But the best argument was articulated by the late Citibanker Walter Wriston, and it applies equally to most of the accounting innovations with which the world has been oversupplied in recent decades: "Consistency of accounting treatment is always more useful to managers and investors than the latest fad of accounting aficionados." "
Just so. And perhaps we should allow for context, too. As I asked at the end of my prior, linked post, why isn't this a subject on which FASB should rule? Have they been attending to it since, oh, last June, when the effects of this accounting policy began to send credit markets in a downward valuation spiral of 'devalue-sell-devalue-sell-devalue-sell-writedown-close?'
I think the much, much larger issue now is to consider, for the entire financial services sector, the contexts in which mark-to-market makes little sense, and should be suspended, versus when it is appropriate.
As I began to suggest in my earlier post, businesses and companies in the business of trading and investing with the constant expectation of selling and buying securities should probably mark their assets to market daily. If that causes them to use less leverage or avoid exotic structured finance instruments, so be it.
Financial service businesses intending to hold assets, whether they be whole loans, exotics, or what have you, beyond a pre-determined duration, should probably be able to value those assets on the basis of performance, rather than immediate market value.
As I wrote here in September of last year,
"Could it be that, rather than a uni-directional march toward market pricing and underwriting, credit markets are, in reality, about to swing between extremes? Moving from all-bank balance sheet valuation and warehousing, to heavily market-priced and securitized, and now back toward the original pole of bank-sourced and distributed credit instruments?
It's not something I've read anyone else hypothesizing. Even I just assumed that banks had pretty much become a mere origination platform for credit.
Now, with this latest credit market debacle, the first since really heavily asset securitization of mortgages and corporate loans have kicked in, we are learning that there are market conditions under which non-banks may not be viable for very long, if they originate and/or hold volatile fixed income assets.
It's an interesting phenomenon. Who would have guessed that there was life in the old commercial bank model, yet?"
More than anything else, it seems that commercial banks began behaving like investment banks, and have effectively eliminated an institution which used to anchor the US economy- the bank that judges credits based upon the prospect of actually holding them to maturity.
"Why should a firm be forced to keep its balance sheet on a 'breakup' valuation basis? If the firm doesn't plan to sell itself or liquidate, why must every scrap of every asset be current-valued?
What about industry sectors in which substantial investment is required in assets whose value will grow with time, such as cable, mining, or technology? Or commercial banks which legitimately desire to be portfolio lenders to the housing sector, and, thus, are not affected by performing loans whose values are temporarily depressed due to market or credit conditions?"
I guess I'm in good company, because in yesterday's Wall Street Journal, Holman Jenkins echoed my post and sentiments in a column entitled "Mark to Meltdown?"
Jenkins wrote,
"Overstating the importance of accounting rules is, indeed, the essential error that leads to excessive twiddling with accounting rules. Whether a company values its assets at historic cost or market value or a value derived by some other formula, investors still have to make their own forecasts and judgments. A thermometer is equally useful whether it says water freezes at 0 degrees or 32 degrees -- though it still doesn't tell what the temperature will be next week.
But loose as well is a fear that exaggerated writedowns in the current credit crunch are rapidly chewing through the banking system's capital cushion. Banks will be forced to dump assets at fire-sale prices, leading to yet more writedowns and more fire sales. At best, banks will have to keep shopping cheap equity to foreign potentates to keep themselves afloat. At worst, massive regulatory insolvency lies ahead.
This horror show, we hasten to add, has proven more theoretical than actual, but it plays a key role in the meltdown scenarios of NYU economist Nouriel Roubini, which he recently retailed for a congressional hearing. And it's hard to doubt that fears of accounting-prompted distress sales are partly behind the melodramatic yields now available in the corporate and municipal bond markets."
Which is pretty much what I further opined in my earlier post,
"It's one thing to force market valuations on assets which are purposefully traded frequently, such as bond or equity funds. But forcing firms which own significant amounts of assets that are not intended to be liquid seems silly, especially if the 'market' for those assets temporarily dissolves, creating an apparent value of zero."
We therefore have the Law of Unintended Consequences extracting perverse, severe penalties from today's credit markets. Somewhat arbitrary accounting rules are now governing the behavior of financial service firms to issue margin calls and trigger the unwinding of highly-leveraged positions in credit instruments, which is causing further, temporary cratering of values of otherwise-performing assets.
As Mr. Jenkins informs us,
"Mark to market was a gift to the world from SEC Chief Richard Breeden in the early '90s. With the help of accounting mavens, he argued that requiring banks and other companies to account for financial assets at current market prices, as if the institutions were being sized up for liquidation, would provide a rough-tough discipline for the edification of investors, regulators and managers.
A rose would smell as sweet if it were called skunk cabbage -- so we always maintain when somebody predicts either dire or utopian results from a mere accounting change. Still, many questioned Mr. Breeden's initiative at the time, among them Fed Chairman Alan Greenspan and Bank of America's Richard M. Rosenberg. Particularly notable were their warnings that the new rule, when combined with risk-based capital standards, might lead banks to hold fewer loans on their own books, packaging more of them as complex securities for sale to investors.
Overlooked, too, was a phenomenon we perhaps understand better today -- the propensity of the speculators who provide much of the market's day-to-day liquidity to go on strike during moments when their services are most needed. "Mark to market" then becomes something else, because markets no longer exist for many of these abstruse securities. Banks are left oxymoronically trying to estimate what market prices would be if markets existed."
Which, again, echoes something I've written about many times in the past year- the tendencies of younger trading mavens to fail to understand that sometimes markets simply cease to exist, in the classical sense of the definition. If you hold such instruments with borrowed money, you are in a bind. If you are forced to mark such positions to market in the face of a non-existent 'market,' you are also in a bind.
Mr. Jenkins closes his piece with this passage,
"But the best argument was articulated by the late Citibanker Walter Wriston, and it applies equally to most of the accounting innovations with which the world has been oversupplied in recent decades: "Consistency of accounting treatment is always more useful to managers and investors than the latest fad of accounting aficionados." "
Just so. And perhaps we should allow for context, too. As I asked at the end of my prior, linked post, why isn't this a subject on which FASB should rule? Have they been attending to it since, oh, last June, when the effects of this accounting policy began to send credit markets in a downward valuation spiral of 'devalue-sell-devalue-sell-devalue-sell-writedown-close?'
I think the much, much larger issue now is to consider, for the entire financial services sector, the contexts in which mark-to-market makes little sense, and should be suspended, versus when it is appropriate.
As I began to suggest in my earlier post, businesses and companies in the business of trading and investing with the constant expectation of selling and buying securities should probably mark their assets to market daily. If that causes them to use less leverage or avoid exotic structured finance instruments, so be it.
Financial service businesses intending to hold assets, whether they be whole loans, exotics, or what have you, beyond a pre-determined duration, should probably be able to value those assets on the basis of performance, rather than immediate market value.
As I wrote here in September of last year,
"Could it be that, rather than a uni-directional march toward market pricing and underwriting, credit markets are, in reality, about to swing between extremes? Moving from all-bank balance sheet valuation and warehousing, to heavily market-priced and securitized, and now back toward the original pole of bank-sourced and distributed credit instruments?
It's not something I've read anyone else hypothesizing. Even I just assumed that banks had pretty much become a mere origination platform for credit.
Now, with this latest credit market debacle, the first since really heavily asset securitization of mortgages and corporate loans have kicked in, we are learning that there are market conditions under which non-banks may not be viable for very long, if they originate and/or hold volatile fixed income assets.
It's an interesting phenomenon. Who would have guessed that there was life in the old commercial bank model, yet?"
More than anything else, it seems that commercial banks began behaving like investment banks, and have effectively eliminated an institution which used to anchor the US economy- the bank that judges credits based upon the prospect of actually holding them to maturity.
Wednesday, March 05, 2008
Green Corporate Subsidies- Another Third-Party Payer Disaster In The Making?
A week ago yesterday, the Wall Street Journal carried an article entitled "Workers Get Incentives to Live Greener," written by Kelly Spors.
The article provides insights into a new trend which goes beyond corporations working to reduce the environmental impact of their business operations. As Spors writes,
"It irked Greg James to see some of his employees roll up to work in hulking, gas-guzzling sport-utility vehicles -- often driving more than 40 miles a day round trip.
So in 2005 he finally did something about it.
The chief executive and founder of Topics Entertainment Inc., a Renton, Wash., DVD and software publisher, Mr. James established an incentive program that offers its 55 employees $1,000 to trade in their automobiles for one with fewer cylinders in the engine. Buying a hybrid or biodiesel vehicle earns them $2,500, while car pooling at least three days a week pays $300 annually split between the ride sharers.
Ten employees have claimed the auto-purchase bonus so far. Mr. James estimates that by getting those new vehicles and boosting their gas mileage an average 10 miles per gallon, employees cut last year's gasoline consumption during commutes by 2,400 gallons."
It sounds pretty harmless, doesn't it? A well-meaning small-business owner does his bit to further his own environmental beliefs by rewarding employees who follow his own precepts?
But wait. Isn't that unfair? What about a handicapped employee who can't drive? Shouldn't s/he be entitled to some offset for not being able to buy a car and earn that bonus?
What about a struggling single mother of a handicapped child who can't afford a new car? Or carpool?
What about employees who live next to the plant and walk to work? Should they be denied eligibility for the carpooling bonus?
Call the Labor Department!!! Call the union!!!!
Spors continues by noting,
"Many companies, large and small, have become greener by reducing office waste and pollution or buying so-called carbon credits, which companies purchase to offset the impact of their pollution. But a growing number of small companies like Topics also are seeing value in encouraging employees to make environmentally friendlier choices as well -- at home, at work and in their commutes.
Among the incentives: giving bonuses to employees who buy more fuel-efficient vehicles and outfit their homes in more energy-efficient ways, as well as helping employees support environmental causes. Even low-cost measures, such as letting employees purchase energy-efficient light bulbs at the employer's bulk price, are making a difference in employees' behavior and energy use.
In an era when more young workers are seeking out employers with a socially responsible mission, such green incentives can help bolster recruitment efforts and foster goodwill. At small companies especially, green benefits can be an easy and effective way to ingrain a workplace's eco-friendly mission."
"Some companies find that the participation of even a few employees can have an impact. Green Mountain Energy Co., an Austin, Texas, renewable-electricity provider, lets employees buy renewable-energy credits to offset their carbon-dioxide emissions. It also matches donations to environmental groups made through payroll deduction, up to $10 per two-week pay period.
In addition, the company hands out prizes like gift certificates based on points that employees rack up by finding alternatives to driving to work, such as biking or taking public transportation.
Though only about 25 of Green Mountain's 150 employees participate in the commuter program, the impact has been substantial, with those people collectively driving about 21,000 fewer miles in 2007, says Gillan Taddune, the company's chief environmental officer."
As I read this example, I was reminded of our current healthcare mess. Didn't we get into this dilemma by creating, somewhat recklessly, in retrospect, third-party payers for necessities?
Do we really want transportation costs of employees twenty years hence dependent upon the whims of employers? What if employers secure a deal for mass transit for their employees, forcing them to commute via bus, and discriminate against those who wish to drive?
Why, in God's name, can't employers just pay employees cash, shares or options, and have done with it? Haven't we learned over the past 100 years that paying employees in kind eventually creates distortions in consumption, improper influence of the corporation into the private lives of its employees, and suspect values impositions?
What if Topic Entertainment's owner was a racist or anti-Semite? What if he awarded bonuses for employees sending their children to single-race schools? Or contributing to the Aryan Nation?
What if the owner of a firm was a Southern Baptist, and provided cash bonuses for every employee who attended a Southern Baptist church each week?
Would we think that such an imposition of values by a business owner on his employees was proper?
Who is to judge when an owner's values are appropriate, and when they are not? What is laudable mobilization of society's members for a desirable goal, and what constitutes improper manipulation of workers by their employer in an illegal manner?
I loved the article, and found it important in a very unexpected manner.
In 2008, after nearly 100 years of an organized labor movement in this country to protect workers' rights, we still see business interfering in the private lives of its employees. Creating yet more entanglements between workers' consumption patterns, affordability of choices, and employer funding.
Will we ever learn?
The article provides insights into a new trend which goes beyond corporations working to reduce the environmental impact of their business operations. As Spors writes,
"It irked Greg James to see some of his employees roll up to work in hulking, gas-guzzling sport-utility vehicles -- often driving more than 40 miles a day round trip.
So in 2005 he finally did something about it.
The chief executive and founder of Topics Entertainment Inc., a Renton, Wash., DVD and software publisher, Mr. James established an incentive program that offers its 55 employees $1,000 to trade in their automobiles for one with fewer cylinders in the engine. Buying a hybrid or biodiesel vehicle earns them $2,500, while car pooling at least three days a week pays $300 annually split between the ride sharers.
Ten employees have claimed the auto-purchase bonus so far. Mr. James estimates that by getting those new vehicles and boosting their gas mileage an average 10 miles per gallon, employees cut last year's gasoline consumption during commutes by 2,400 gallons."
It sounds pretty harmless, doesn't it? A well-meaning small-business owner does his bit to further his own environmental beliefs by rewarding employees who follow his own precepts?
But wait. Isn't that unfair? What about a handicapped employee who can't drive? Shouldn't s/he be entitled to some offset for not being able to buy a car and earn that bonus?
What about a struggling single mother of a handicapped child who can't afford a new car? Or carpool?
What about employees who live next to the plant and walk to work? Should they be denied eligibility for the carpooling bonus?
Call the Labor Department!!! Call the union!!!!
Spors continues by noting,
"Many companies, large and small, have become greener by reducing office waste and pollution or buying so-called carbon credits, which companies purchase to offset the impact of their pollution. But a growing number of small companies like Topics also are seeing value in encouraging employees to make environmentally friendlier choices as well -- at home, at work and in their commutes.
Among the incentives: giving bonuses to employees who buy more fuel-efficient vehicles and outfit their homes in more energy-efficient ways, as well as helping employees support environmental causes. Even low-cost measures, such as letting employees purchase energy-efficient light bulbs at the employer's bulk price, are making a difference in employees' behavior and energy use.
In an era when more young workers are seeking out employers with a socially responsible mission, such green incentives can help bolster recruitment efforts and foster goodwill. At small companies especially, green benefits can be an easy and effective way to ingrain a workplace's eco-friendly mission."
When I read this, I felt vaguely uneasy. Recollections of being taught about the personally intrusive methods of the late Henry Ford came to mind. And company towns in the coal fields of Kentucky and West Virginia.
Didn't Walter Reuther and company fight large corporations in the 1930s to stop corporate America from controlling employees' private lives?
Wasn't society eventually repulsed by Ford's in-home audits of the families of his employees, whereby his auditors assessed the extent of a family's abiding by a code of conduct of Ford's own making? If I recall correctly, employees were paid extra for scoring highly on the assessment.
The article mentions near its conclusion,
"Some companies find that the participation of even a few employees can have an impact. Green Mountain Energy Co., an Austin, Texas, renewable-electricity provider, lets employees buy renewable-energy credits to offset their carbon-dioxide emissions. It also matches donations to environmental groups made through payroll deduction, up to $10 per two-week pay period.
In addition, the company hands out prizes like gift certificates based on points that employees rack up by finding alternatives to driving to work, such as biking or taking public transportation.
Though only about 25 of Green Mountain's 150 employees participate in the commuter program, the impact has been substantial, with those people collectively driving about 21,000 fewer miles in 2007, says Gillan Taddune, the company's chief environmental officer."
As I read this example, I was reminded of our current healthcare mess. Didn't we get into this dilemma by creating, somewhat recklessly, in retrospect, third-party payers for necessities?
Do we really want transportation costs of employees twenty years hence dependent upon the whims of employers? What if employers secure a deal for mass transit for their employees, forcing them to commute via bus, and discriminate against those who wish to drive?
Why, in God's name, can't employers just pay employees cash, shares or options, and have done with it? Haven't we learned over the past 100 years that paying employees in kind eventually creates distortions in consumption, improper influence of the corporation into the private lives of its employees, and suspect values impositions?
What if Topic Entertainment's owner was a racist or anti-Semite? What if he awarded bonuses for employees sending their children to single-race schools? Or contributing to the Aryan Nation?
What if the owner of a firm was a Southern Baptist, and provided cash bonuses for every employee who attended a Southern Baptist church each week?
Would we think that such an imposition of values by a business owner on his employees was proper?
Who is to judge when an owner's values are appropriate, and when they are not? What is laudable mobilization of society's members for a desirable goal, and what constitutes improper manipulation of workers by their employer in an illegal manner?
I loved the article, and found it important in a very unexpected manner.
In 2008, after nearly 100 years of an organized labor movement in this country to protect workers' rights, we still see business interfering in the private lives of its employees. Creating yet more entanglements between workers' consumption patterns, affordability of choices, and employer funding.
Will we ever learn?
Tuesday, March 04, 2008
GE CEO Immelt's 2007 Compensation: The Comedy Continues
It's nearly spring, and just about a year since the Wall Street Journal last published GE's disclosure of its underperforming CEO's, Jeff Immelt's most recent annual compensation. My post on his 2006 compensation may be found here. In that post, to reprise history, I wrote,
"So, the news today is that Immelt received $8.3MM in "salary and bonus."... that makes a total of roughly $23MM in cash Immelt has now managed to loot from his employer since late 2001, when he began his reign as a failing CEO at GE. If the firm meets certain (fairly low-ball, as I recall from earlier articles) revenue, earnings and cash generation targets, and meets some stock price performance relative to the S&P, Immelt will receive as much as $18.6MM in 2007.
Immelt's base salary was $3.3MM in 2006, to which was added, unbelievably, a cash bonus of $5MM,"citing Mr. Immelt's 'offensive portfolio moves' and GE's 15% earnings-per-share growth in 2006."
Offensive indeed. It's another black day for corporate governance and responsible boards of directors."
Did anything change this year?
Well, according to today's Wall Street Journal,
"Chairman and Chief Executive Jeffrey Immelt received a salary and bonus totaling $9.1 million last year, a 9.6% increase over 2006, but GE's board granted him less new equity than in the prior year.
In 2007, Mr. Immelt exercised 180,000 stock options that were about to expire and acquired 79,000 shares of previously restricted stock. Together, those shares were valued at $5.9 million; Mr. Immelt retained all the shares, except those used to pay taxes."
So, did GE's CEO do as well for his shareholders as they did for him, via the always-generous GE board?
This year, GE's stock price performance, and the S&P500 Index, are depicted in the Yahoo-sourced chart on the left. The company's share price peaked in October, finishing the past twelve months lower than it started, and effectively tied with the S&P.
For a longer-term perspective, I've included 2- and 5-year charts of the same two series in the next two Yahoo-sourced charts.Looks like the shareholders lost in 2007- again. For one and two years, GE's share price tied and under ran the S&P's. Over five years, a much more fair time period, allowing for more variance in economic conditions, the index clearly and handsomely outperformed Immelt's pathetic leadership of the closed-ended-fund cum diversified industrial giant.
Of course, these are just price charts. How about total returns? How did GE do when dividends are included?For this view, I went to my Compustat data and analyzed GE's performance on some of the key variables which I have found distinguish consistently superior from other large-cap firms. The nearby table may be enlarged by clicking on it to open it in a separate window.
In a 
word, GE's performance since Immelt took over in late 2001 has been anemic. Average annual revenue growth was just 3.4%, while NIAT has grown only 4.4% per anum, on average. GE's average annual total return for the period is a -2.4%, while the S&P's average annual total return for the same period is a healthy 9.5%, almost its long-term average of over 11%.
word, GE's performance since Immelt took over in late 2001 has been anemic. Average annual revenue growth was just 3.4%, while NIAT has grown only 4.4% per anum, on average. GE's average annual total return for the period is a -2.4%, while the S&P's average annual total return for the same period is a healthy 9.5%, almost its long-term average of over 11%.
The same data, in chart form, appears here. Again, clicking on it will open it in a separate window for a better view.The green and red lines representing, respectively, revenue and NIAT growth, display jagged, inconsistent paths. Total return for GE, while initially shadowing that of the S&P, departed downward precipitously in the past few years of Immelt's reign.
Once again, GE's board has shown gross insensitivity to the idea of corporate governance, paying Immelt more than $9MM in cash, while telling shareholders.
"GE spokesman Gary Sheffer said the board gave Mr. Immelt more cash and less equity because Mr. Immelt is already heavily invested in the company. Mr. Immelt owns 1.36 million shares and has options and restricted-share grants for millions more; he has pledged not to sell any shares while he leads the company."
Amazing, isn't it? As I have written in previous posts, when a CEO has been paid north of $10MM in cash, does anyone think he really cares what happens to the company's stock price anymore? Added to Immelt's prior $23MM of cash compensation, GE has now paid him over $30MM in just six years. He can't have spent or paid so much in taxes to not have at least $15MM remaining. Then there are the share grants.
So Immelt has underperformed the S&P500 for yet another year, and for the period in total during which he has been CEO. How does GE's board justify paying more than $15MM total compensation to a guy who can't outperform a passive index? According to the Journal article, by announcing,
"The board of directors' compensation committee stated it "believes Mr. Immelt performed very well in 2007," having met or exceeded targets for growth in GE's earnings from continuing operations, revenue and cash flow, among other targets. The board said his performance "in a difficult economic environment" helped the company keep risk at "acceptable levels" and maintain its triple-A bond rating.
The proxy said Mr. Immelt received $396,267 of "other compensation," including $260,980 for personal use of company aircraft."
I won't go on ranting about this clear example of corporate excess and pay for non-performance. You can read my earlier comments on Immelt's lush overcompensation by reading posts on this blog under the "Immelt" label.
For this post, I'll just restate my belief that Immelt is in a job that shouldn't exist, as CEO of a corporation that no longer has economic justification. Until GE is split apart by private equity firms, which looks less likely anytime soon in this credit environment, he'll continue to effectively steal literally tens of millions of dollars of compensation from his shareholders while providing absolutely no added value over what they would earn by simply buying the Vanguard S&P500 Index fund.
Monday, March 03, 2008
Scale vs. Concentration Risk in US Commercial Banking
Have we unwittingly invited looming disaster in our commercial banking sector?
Declining prices and margins for banking services have driven consolidation for several decades.
The share of deposits among the top 5-6 banks is much greater now than a decade ago, and certainly much more than two decades ago. BofA is at the point of being prohibited from further acquisitions, without some careful accommodations, due to its deposit share bumping up against single-bank limits.
Surely a great benefit of this consolidation has been the expansion of consumer and housing credit, as well as more competitive and competitively priced asset management services.
But the flip side of these low cost, ubiquitous products and services is concentration of banking risk in only 5-6 firms.
Now, one large mistake has a much greater impact on US deposits, loans, money trading, etc.
Have we unwittingly gone to far in fostering consolidation, while also removing Glass-Steagall?
Wouldn't it be ironic if Sandy Weill, a non-banker, and not even an investment banker, at that, but merely a low-end retail brokerage 'consolidator,' was the ultimate cause of severe risk in the US commercial banking system?
By forcing the repeal of Glass-Steagall with his merger of Travelers and Citibank in the 1990s, Weill removed a major barrier to risk concentration in the US banking sector.
Was that really wise?
Would the current credit crisis have become so serious if the commercial banks, notably Citi and BofA, were not allowed to engage in securitization of their loans to customers, but, per Glass-Steagall, were prohibited from engaging in anything resembling investment banking and the issuance of such securities?
If those two banks had been forced to either be portfolio mortgage lenders, or package their loans through Fannie or Freddie, would the SIV debacle have occurred? Would they have engaged in subprime lending or issuing or holding suspect CDOs?
My long-ago mentor at Chase Manhattan Bank, then-SVP of Corporate Planning & Development, Gerry Weiss, was fond of saying, when asked about working to remove Glass-Steagall, something like,
'Are you kidding? We'll just find some new ways to lose a lot of money on badly risk-managed positions. Not to mention that, being commercial bankers, once we get into these businesses- M&A, underwriting, equity trading- we'll cut prices to gain share and ruin the business' profitability for all concerned.'
Judging by the behavior of Citigroup and BofA in last summer's CDO, SIV and other fixed income messes, I'd say he was right on the money, as it were, as usual.
Commercial banks appear to be no better off in terms of profitability, risk management or total return after the repeal of Glass-Steagall.
I'll go so far as to say that, for the safety of our banking system, we probably should reinstate the law. Because, at the rate the large commercial banks are making risk-management mistakes, it's only a matter of a few years before one of the big five - Citi, Chase, BofA, Wachovia, Wells Fargo- commercial banks blows a hole in its balance sheet to large to self-repair, and will require Federal intervention to stabilize it and sell the remnants.
Declining prices and margins for banking services have driven consolidation for several decades.
The share of deposits among the top 5-6 banks is much greater now than a decade ago, and certainly much more than two decades ago. BofA is at the point of being prohibited from further acquisitions, without some careful accommodations, due to its deposit share bumping up against single-bank limits.
Surely a great benefit of this consolidation has been the expansion of consumer and housing credit, as well as more competitive and competitively priced asset management services.
But the flip side of these low cost, ubiquitous products and services is concentration of banking risk in only 5-6 firms.
Now, one large mistake has a much greater impact on US deposits, loans, money trading, etc.
Have we unwittingly gone to far in fostering consolidation, while also removing Glass-Steagall?
Wouldn't it be ironic if Sandy Weill, a non-banker, and not even an investment banker, at that, but merely a low-end retail brokerage 'consolidator,' was the ultimate cause of severe risk in the US commercial banking system?
By forcing the repeal of Glass-Steagall with his merger of Travelers and Citibank in the 1990s, Weill removed a major barrier to risk concentration in the US banking sector.
Was that really wise?
Would the current credit crisis have become so serious if the commercial banks, notably Citi and BofA, were not allowed to engage in securitization of their loans to customers, but, per Glass-Steagall, were prohibited from engaging in anything resembling investment banking and the issuance of such securities?
If those two banks had been forced to either be portfolio mortgage lenders, or package their loans through Fannie or Freddie, would the SIV debacle have occurred? Would they have engaged in subprime lending or issuing or holding suspect CDOs?
My long-ago mentor at Chase Manhattan Bank, then-SVP of Corporate Planning & Development, Gerry Weiss, was fond of saying, when asked about working to remove Glass-Steagall, something like,
'Are you kidding? We'll just find some new ways to lose a lot of money on badly risk-managed positions. Not to mention that, being commercial bankers, once we get into these businesses- M&A, underwriting, equity trading- we'll cut prices to gain share and ruin the business' profitability for all concerned.'
Judging by the behavior of Citigroup and BofA in last summer's CDO, SIV and other fixed income messes, I'd say he was right on the money, as it were, as usual.
Commercial banks appear to be no better off in terms of profitability, risk management or total return after the repeal of Glass-Steagall.
I'll go so far as to say that, for the safety of our banking system, we probably should reinstate the law. Because, at the rate the large commercial banks are making risk-management mistakes, it's only a matter of a few years before one of the big five - Citi, Chase, BofA, Wachovia, Wells Fargo- commercial banks blows a hole in its balance sheet to large to self-repair, and will require Federal intervention to stabilize it and sell the remnants.
Will Commodity Prices Trigger Higher US Inflation?
CNBC's Rick Santelli had a very interesting debate with another regular commentator on the networks Squawkbox program one morning last week.
Santelli holds that commodity prices are soaring because producers are selling larger quantities of gasoline, upscale food, etc., to formerly third-world countries which are now growing significantly wealthier. Thus, their consumption is adding pressure to demand for grains, beef, oil, and other basic commodities.
The other fellow on the program that morning, whose name I forget, alleged, mostly, that because US product costs are predominantly labor, which is not getting more expensive, we won't see inflation.
Who is right? It's an important question.
Personally, I believe Santelli.
First, my own experience working with company-level cost data for over two decades leaves me believing that labor costs have become much smaller components of total costs in the average US firm. Due to investments in capital, in the form of tools, information, technology, etc., the productivity of the average US worker has remained high, relative to the rest of the world. Employment levels and, thus, costs, haven't grown at the same rates as they may have in prior decades.
In fact, one commentator opined that there isn't currently a lost-jobs-based recession yet because after the economic troubles of 2001-02, businesses didn't go on a hiring binge. By carefully retaining productivity levels and using fewer new workers, they aren't having to lay the workers off so quickly now.
Further, it's very believable to me that the world's commodity producers, operating, as they typically do, in an environment of either boom or bust, try not to produce too much excess supply. Thus, the rather sudden, relatively unexpected, in the West, rise of demand for energy and pricier food inputs in Asia have caught those commodity producers flat-footed. As demand outstrips supply, for a while, prices have nowhere to go but up, to clear the markets.
As an anecdotal example, I bought some pasta-based processed food products for my children recently. As recently as last fall, the item cost $1/box at retail. This past week, it was $1.5/box.
Sure, only 50 cents more. But a 50% rise in consumer-level price. Milk, baked and processed products using wheat or corn are the same.
If Santelli's debate opponent were correct, I doubt I'd be seeing these price increases. Instead, Santelli's logic already seems to be finding its way onto the prices of items on US grocery store shelves.
Santelli holds that commodity prices are soaring because producers are selling larger quantities of gasoline, upscale food, etc., to formerly third-world countries which are now growing significantly wealthier. Thus, their consumption is adding pressure to demand for grains, beef, oil, and other basic commodities.
The other fellow on the program that morning, whose name I forget, alleged, mostly, that because US product costs are predominantly labor, which is not getting more expensive, we won't see inflation.
Who is right? It's an important question.
Personally, I believe Santelli.
First, my own experience working with company-level cost data for over two decades leaves me believing that labor costs have become much smaller components of total costs in the average US firm. Due to investments in capital, in the form of tools, information, technology, etc., the productivity of the average US worker has remained high, relative to the rest of the world. Employment levels and, thus, costs, haven't grown at the same rates as they may have in prior decades.
In fact, one commentator opined that there isn't currently a lost-jobs-based recession yet because after the economic troubles of 2001-02, businesses didn't go on a hiring binge. By carefully retaining productivity levels and using fewer new workers, they aren't having to lay the workers off so quickly now.
Further, it's very believable to me that the world's commodity producers, operating, as they typically do, in an environment of either boom or bust, try not to produce too much excess supply. Thus, the rather sudden, relatively unexpected, in the West, rise of demand for energy and pricier food inputs in Asia have caught those commodity producers flat-footed. As demand outstrips supply, for a while, prices have nowhere to go but up, to clear the markets.
As an anecdotal example, I bought some pasta-based processed food products for my children recently. As recently as last fall, the item cost $1/box at retail. This past week, it was $1.5/box.
Sure, only 50 cents more. But a 50% rise in consumer-level price. Milk, baked and processed products using wheat or corn are the same.
If Santelli's debate opponent were correct, I doubt I'd be seeing these price increases. Instead, Santelli's logic already seems to be finding its way onto the prices of items on US grocery store shelves.
Subscribe to:
Posts (Atom)
