Unilever Surrenders US Laundry Products Market to P&G

Unilever seems to have shown uncharacteristic candor and courage in assessing its market position in the US in laundry products, and ceding the market to Proctor & Gamble.


What puzzles me is why Vestar Capital Partners bought the businesses at any price.

The Wall Street Journal article in yesterday's edition was silent on what the acquirer intends to do with the brands. Other than forming 'Sun Products Corporation,' there was no information about Vestar or its plans.

If an experienced, global competitor to P&G couldn't make these businesses go, how would a smaller private equity shop do so? Was management at Unilever's American operations so bad that it couldn't make decent brands prosper? Or were the overhead charges and associated red tape of being part of the global giant too much burden for some decent businesses to offset?

Reading the brands involved- All, Snuggle, and Surf, to name a few- I have to say that I haven't seen advertising for any of them in years. They seem to be truly aged brands.

I guess I would have expected Unilever to just fold up those businesses. Finding a buyer for them, at about $1.4B, no less, seems an incredible stroke of good fortune for the European consumer products giant.

I'm really quite curious as to what will become of the brands involved, who Vestar is, and why they saw so much value in the moribund Unilever operations being shuttered/divested.

Congress' Lack of Comprehension of Derivatives

Friday's Wall Street Journal featured an article entitled "The New Chemistry of Speculation" in its Money & Investing section.

For everyone's good, the Journal chose to focus on how mobile and unstoppable global commodities speculation is.

Responding to investor demand, investment and commercial banks are ramping up derivative instruments to cover one of the last un-hedgeable commodities: iron ore. Like other commodity derivatives before it, this provides a more efficient way for producers and/or consumers of iron ore to directly lock in forward prices without clumsily buying, or selling equity positions in iron ore producers.

True, as the article reports, hedge funds have increased their assets allocated to commodities from $13B five years ago to roughly $260B now. But is this not simply investors taking advantage of rising, and volatile prices of 'an' asset? Nobody complains when investors pile into, say, internet stocks. Or tech issues.

Why are commodities special?

And, as the Journal's interviewed source for the article, Kamal Naqvi, points out, these contracts are really for taking positions regarding prices of commodities. They don't allow market squeezes, because no physical delivery is ever taken.

Much like agricultural commodity derivatives allow farmers and food processors to take positions which lock in prices they will receive or pay for the commodities in question, so, too, do these new instruments. They have no effect on the supply.

If only we had legislators who actually understood economics, we might get a decent policy on financial sector and overall economic issues in the US.

Until that happens, we'll have to continue to watch Washington look foolish on the global economic stage while investors move to the exchanges and markets that fulfill their demands for investments.

GM Failing At Both Ends Now

Yesterday's Wall Street Journal contained an article regarding GM's latest problems. To add gloom, the inept Chairman of the firm, Rick Wagoner, made a pathetic appearance on CNBC this morning to reinforce his total lack of grasp of his company's near-fatal situation.

Yesterday's headline was "GM to Cut 5,000 White-Collar Jobs by Nov. 1."

From my proprietary research on large-cap equities, I can tell you that a continually-shrinking firm- both in employees and assets- has little chance of earning consistently superior total returns for its shareholders.

So GM is continuing on the road to, at best, mediocrity, if it survives the next few years at all.

To add to its woes, GM is now following Chrysler and Ford in trimming the availability of leases in the US. This will hit vehicles such as trucks and SUVs, whose after-market values are now falling, due to their low gas mileage performances in the face of high oil and gasoline prices.

Thus, GM is taking it on both ends. It's cutting production capacity, while also cutting the availability of resources to facilitate sales in the manner which have propped up its revenues for the past decade or so.

The nearby Yahoo-sourced price chart for the past six months for GM and the S&P500 Index confirms that the company, under Wagoner's bumbling, is in freefall. Chapter 11 is probably a viable, realistic alternative before too long. GM has lost 60% of its market value in just the past 6 months.

And now they are tying one marketing arm behind their back by curtailing financing programs for leasing vehicles, after having spent years teaching their customers not to 'buy' GM products anymore, but lease them.

Smart, Rick. Really smart.

Now you've extended your mismanagement to the sales end of the business, way beyond inept oversight and leadership of design, manufacture and financing.

Starbucks' Latest Move- Posting Losses!

Only just last month, in this post, I wrote with scepticism of Howard Schultz's most recent plan to revive the company of which he is CEO, Starbucks.

Now comes news, in yesterday's Wall Street Journal, that the coffee roasting giant posted a loss.

The retrenching on which I commented in early July has apparently been a signal that, as I predicted, Schumpeterian dynamics are catching up with Starbucks, and there is little, if anything, they can do about it.

The nearby 6 month price chart for Starbucks and the S&P500 Index shows a net 20% loss of value for the coffee giant- twice that of the index.

It was as bad as nearly 30% only a few days after that post I wrote last month.

In the details of the Journal's article about Starbuck's loss is information that the company is closing 600 US locations. And that

"The company blamed the lower-than-expected revenue growth on a mid-single-digit decline in US comparable-store sales. It described US traffic, measured by average number of transactions per store, as "slow." "

Somewhat comically, at least to me, given my prior posts regarding Starbucks, segmentation, pricing, growth, and Schumpeterian dynamics, the article reports,

"In a conference call with analysts, Mr. Schultz said customers remain loyal, but "they're visiting us less frequently as a result of economic pressures." He said Starbucks will promote value for the fall and holiday seasons, though it will stop short of bundling products at discounted prices. "We're not going to go down the fast-food lane," Mr. Schultz said."

By the way, Schultz reversed himself on breakfast offerings, now keeping them, instead of getting rid of them because their aroma masked that of the coffee in the stores.

Schultz's comments seem to demonstrate he just doesn't understand his market or his own strategy. Some years ago, Starbucks went down market to stoke growth. I noted in articles of that time that this would probably come back to haunt them, and now it is.

Then there was this year's big surprise summer drink offering. What happened to that? Sales are down relative to expectations. And customers apparently aren't buying whatever new brew was introduced.

Now Schultz is promising yet another 'just around the corner' tactical move to rescue the ailing firm.

Can't Schultz and his staff simply acknowledge that they saturated this product/market long ago? That with the more focused competition from Dunkin' Donuts and McDonalds, this market is unlikely, by itself, to be capable of delivering sustained consistently superior total returns anymore?

It's over, Howard. Just admit it, retire, and go spend the fortune you justly earned growing Starbucks in your first era as CEO.

Please stop trying to job your own shareholders.

My Prediction On Lucent-Alcatel Comes True

Last October, I commented on then-current Wall Street Journal pieces warning of Lucent-Alcatel's struggles, and CEO Pat Russo's probable departure. Earlier, I had written posts here and here about the folly of Lucent's actions under Russo, including the merger.



I wrote, in part,



"Given the sub-par performance of both companies, doesn't it make you wonder why so much air time and/or ink is being spent on this combination? And why nobody seems to be asking how Pat Russo, based upon her dismal track record running Lucent, could possibly take the combined firm somewhere, performance-wise, neither company has ever been before?"



It took two years, but the board of the merged firm finally realized what I, and others, saw much earlier.



As the nearby Yahoo-sourced chart depicts, Russo's Alcatel-Lucent has failed miserably since the 'merger.' It has lost more than 40% of its market value, while the S&P500 has remained flat.

Russo, as quoted in the Journal article, alleged,

"Last year was really tough, but since we put in place the turnaround plan in the fall, we've made concrete, positive progress."

Maybe she should try to tell her shareholders that. The company's share price continued to plummet in the fall of last year, into this spring. It briefly rose, but has cratered once more.

For this abject managerial failure, Ms. Russo will receive parting gifts of "as much as" $9.4MM.

Shameful.

Merrill's Capital Squeeze

Yesterday, I wrote about Merrill Lynch's recent writedowns/sale of some CDO assets.

Today's (and yesterdays, in the Lone Star article) Wall Street Journal divulged some more details about the transactions. Details so tortured as to give me even less confidence that Merrill can ever return to anything approaching 'normal.'

To begin with, just consider what the firm is really doing. Sure, Thain is asking investors to buy $8.5B in new equity. But Merrill has, according to the Journal, written off $46B in losses since June of last year.

Good money after bad? You bet. "Bet" being the operative word!

We do not know at that price investors will answer Thain's call.

We do, however, know that Merrill sold $30B of mortgage-related securities for $6.7B, to Lone Star. That's 22 cents on the dollar.

But Merrill also financed 75% of the purchase as the recourse holder for losses. Meaning it's not clear of losses yet. And didn't really flush the assets off of its balance sheet, so much as lend the money to Lone Star to take title, at a 78% discount, to $30B of untradeable securities.

Thus, we see that Thain isn't so much raising capital externally, as being forced to raise it internally by selling assets. And even dodgy assets at that, the removal of which trigger horrendous losses. And perhaps even further losses in the future, should 22 cents be too high a value per dollar sold.

But wait...there's more.

Lone Star received financing and a recourse condition for the $6.7B purchase. Doesn't that, in reality, mean the plain vanilla value of the $30B of securities, absent the special financing conditions, is, in truth, even lower than 22% of face value?

Could it be as low as, say, 18%?

Isn't Merrill really already clouding the true losses on this $30B chunk of assets?

What will other investment and commercial banks with similar assets now do to value theirs? Shouldn't Wachovia, Chase, Citi, BofA, Morgan Stanley and Lehman all be observing this 'market pricing' of some 18% of face value of these assets?

Or is this not even a 'market price?' Does its arranged nature make it not a basis on which other financial institutions should price their similar assets?

One thing is sure, though. John Thain's Merrill Lynch is now so crippled that it can't even tap capital markets reliably anymore. It must begin disgorging badly damaged assets just to free up internal capital, in lieu of having confidence that any sane investor would touch a share of Merrill common equity for years to come.

"Financials Are Still Reeling".....

I recently wrote this post concerning what will need to happen to speed recovery in US fixed income and housing markets. In that post, I discussed the continuing damage that 'mark to market' accounting valuation is doing to investment and commercial banks holding untradeable CDOs and other structured finance instruments.

In its weekend edition, the Wall Street Journal published a piece by breakingviews.com, entitled "Financials Are Still Reeling."

No kidding. And why not?

Merrill's recent capital infusion of yet another $8B to cover even more writedowns makes the point quite elegantly. Today's Wall Street Journal attempted to suggest, via its article's title, "Thain's Housekeeping Spiffs Up Merrill," that the ailing brokerage firm is on the mend.

Don't you believe it.

As the nearby Yahoo-sourced one-year price chart for Merrill and the S&P500 Index shows, the financial services giant's price has collapsed by over 60% in just a year. Yes, a little blip of a daily 8% or 12% pop will occur, but on a pitifully-low base price. The bleeding is just not going to stop.

You see, this entire financial services debacle is unique because it involves tradeable instruments. Whole loans could be valued at par so long as they were performing. But once magically transformed via financial engineering into CDOs and their ilk, market price became the dominating valuation metric. And, as I and others have noted for some time now, markets for structured instruments can vanish in an instant. Thus, zero price.

There is no ability for anyone to know how much is a sufficient writedown of an asset with no trading market, except 100%. And who wants to do that?

Thus, over the past five years, as the nearby Yahoo-sourced price chart for Merrill and the S&P500 Index displays, the brokerage is down nearly 50%. Any outperformance managed through 2006 evaporated beginning in mid-2007.

Yes, financials are still reeling. And it won't stop until all the CDOs are basically written off. Totally.

Or, short of that, a vibrant market suddenly erupts all at once as a few hedge funds and private equity groups, like Paulson's ,written about in yesterday's Journal, swoop in and briefly create a market in the instruments for pennies on the dollar.

The holders will get to value the instruments, though probably at lower values than they wished. But above zero.

As I've written elsewhere, these private firms will then enjoy a spectacular rise in value of these structured instruments which are mostly still performing assets.

But for publicly-held companies, there's absolutely no reason for any investor to take a chance on what has become a blind pool of assets which are valued based upon non-existent markets for complex instruments.

Why Do We Need Publicly-Listed Commercial & Investment Banks? Part Two

Last Friday I wrote this post about why publicly-listed commercial and investment banks are not, in my opinion, necessary any longer in our advanced, sophisticated economy. In that post, I wrote, in part,

"We don't have a financial/bank crisis in the US. We have an oversupply of mediocre management running too many mediocre, publicly-listed financial service firms.

Now is the time to weed them out and let them die/consolidate.

As I will discuss in part two of this post, the Blackstones, TPGs, KKRs, Blackrocks, SACs, etc. of the financial sector are where the most competent, astute managers are. They have done a better job of risk management. Because, like financial partnerships of old, they own their risk.
Our modern, heavily-overseen and -regulated, publicly-listed financial services sector is a testament to the fact that all the regulatory oversight in the world can't take the place of good risk and business management in financial services.

In fact, it can be argued, and I do argue and contend, that regulatory oversight has taken the place of good management. The result is a crowd of less-talented people mismanaging publicly-listed, privately-owned financial services companies."

Perhaps it's just best to view publicly-owned and -listed banks as distributors of other people's risk-managed lending. A sort of storefront with a shingle bearing one name- Citi, Chase or BofA- while the money being disbursed inside is supplied by another- TPG, KKR, Blackstone.

Who would know the difference? Would you really care if your loan officer is simply executing Blackstone's credit standards and approval process?

The major commercial lenders and underwriters seem to only be capable of safely operating retail financial sites or making connections between lenders/investors and borrowers. Beyond that, every one of them, save Goldman Sachs, proved itself incapable of prudent, proper risk management during a time of temptation.

As I wrote here, in March, there is a sort of 'wheel of financial services,' similar to that in retail merchandising. Only, in financial services, the wheel revolves through private and public ownership of the risk management institutions providing the capital. I wrote,


"It's a sad commentary on the acumen of the CEOs and senior managements running these firms: Citigroup, BofA, Merrill Lynch, Morgan Stanley, and Bear Stearns. The natural, if erratically-timed governmental response, is to save the financial system, and, thereby implicitly restructure the sector.

Risk and capacity are likely to be further concentrated, but, in exchange, more tightly overseen and regulated.A natural consequence to this will probably be even more smart financial services people migrating back to the privately-financed arena. Just like consumer goods merchandising has the 'wheel of retailing,' whereby new entrants compete at the low-cost end of the market, as existing players migrate upwards in terms of quality, service, selection and price, so, too, it seems, will financial services now have its own version of this 'wheel.'

Only in financial services, the 'wheel' is between publicly- and privately-held concentrations of capital and risk management. Again, viewed from afar over decades, the story of commercial and investment banking for the past forty years has been a gradual selling of transactions, asset and risk management businesses at their 'tops,' as formerly-private banks of both stripes went public, followed by managerial ineptitude, decline in risk management, and excesses in pursuit of growth via more risk.

Now that the public is absorbing the brunt of the losses, via equity ownership of these firms, the logical next step is for the better executives to join the early-adopters in forming new, or joining existing private equity and hedge fund shops."

I'm not sure that, in the long term, our financial services capital provision businesses are not better off in unlisted hands. Managers of publicly-held and -listed growth-oriented financial services firms, a relatively new creation, have generally demonstrated an inability to provide shareholders consistently superior returns. Rather, they tend to cycle through credit booms and busts, exercising no real risk management, pay themselves well during the booms, and wreck the companies during the busts.

Surely, companies owned by the managers who make the risk decisions can't do worse than this, can they? For both the economy and any of their private investors?

The Evolution of Breakfast in the Lodging Industry

Recently I took one of my daughters on a fishing trip to West Virginia. Along the way, I wrote few observations- here and here- about economic activity levels in various locales along the road.

One of the enduring lessons for me anytime I travel is the evolution of the provision of breakfast at hotels over the past 40 years.

Going back to Revolutionary War days, taverns provided a bed and probably a breakfast with the room. The room, or even the bed, might be shared.

Fast forward to the 1960s, when I was young, and hotels and their kitchens had become big business.

By doing some estimating of inflation, salaries, and room rates as far back as the late 1970s, I would guess that the nightly room rate for a mid-priced, Holiday Inn-style hotel of the mid-late 1960s was about $25.

Breakfast for our family of five in the hotel's dining room would probably have run around $15-20. Almost as much as the room. Maybe more.

As I recall, you might get a hot breakfast- bacon and eggs, etc.- for something like $4, but then there was the tip and tax.

From the hotelier's viewpoint, breakfast must have been a regal pain in the ass. You had to have a kitchen crew to cook, and waitresses showing up at 6:30 or 7AM. Plus the omnipresent 'host' or 'hostess.'

As I recall, an interstate highway-sited Holiday Inn, Ramada, or other comparable chain of the era didn't usually do a land office dinner business. The dining rooms typically served pretty similar, average beef and poultry meals. Nothing to distinguish them from other restaurants, but their prices were, of course, higher, than nearby local or then-expanding national chain dinner houses.

Building and operating that full restaurant kitchen must have been a nightmare for hotel management and owners.

How much more elegant is today's solution. I really marvel at how, with time and technology, the lodging industry solved what must have been a horrific labor management, staffing, cost and operations headache, and even managed to get customers to pay more, implicitly and automatically, for less.

I'm referring to, of course, the now-ubiquitous in-hotel lobby served buffet breakfast. Most modern mid-priced chains- Hampton Inns, Fairfield Inns, and even the lowly MicroTel- provide a 'free hot' breakfast of some sort.

Now, you never explicitly reach into your pocket to pay for breakfast at a mid-priced hotel. And you can enjoy fairly decent spreads of cereal, fruit, a hot protein dish, such as pre-made scrambled eggs and a breakfast meat, or waffles, plus the usual beverages- juices and coffee. In essentially unending supply.

Of course, the cost is built into your room rate. Which also pretty routinely includes wireless internet service, too.

For the hotel management and owners, there's no kitchen to build, operate or maintain. Just a utility room near the lobby with some sinks, freezers, refrigerators and microwave ovens. A normal hotel staffer is assigned the duty of maintaining food stocks in the lobby, and cleaning up debris. Guests serve themselves and clear their own plastic and paper tableware. No chef, waitstaff or hostess to pay every morning.

How much simpler can it get? Few guests will pass up a 'free' breakfast. Yet the hotel actually has recaptured the revenue, if not the stomach, of each and every guest for their share of the cost of this decent, hot, but minimalist breakfast service.

Plus, there's no need to rouse sleeping children all at once. Each family member knows they can meander down to eat within a set time period, with no reservations required.

If you stay long enough to notice, or visit the lobby at various times, you'll see the breakfast crowd change from business people to childless couples, adults eating before their children and, finally, children with one or both parents finally making it to the lobby before the food is removed.

To me, this is just a marvelous solution that hoteliers have developed to actually make more money by providing a somewhat less-extravagant to the problem of feeding guests in the morning. Both capital and operating costs are lower, yet the revenues from the service are assured.

There aren't that many really clever, productive and elegant business solutions to problems like that of the provision of breakfast in far-flung hotels. But this is one I just continually admire.

Why Do We Need Publicly-Listed Commercial & Investment Banks? Part One

With all the capital-raising activity of various publicly-listed, privately-owned commercial and investment banks- Chase, Citi, BofA, Wachovia, Lehman, Morgan Stanley, Merrill- it occurred to me this week to ask:


"Why do we need these banks?"

How much investor equity has been written down- destroyed- in the past twelve months by the managements of the financial service firms I listed above, plus Bear Stearns? It surely tops $200 billion. And to those firms, you can add UBS, a foreign bank with substantial US operations.

Fannie and Freddie are now in danger of having to be resuscitated because they imprudently risked their investors' capital, too.

But with all this capital vanishing down the drain in less than a year, has our economy seized up? It has not.

I can still use my credit card. If I chose to buy a home in my locale, with 20% down, I could.

I don't read about any going concern complaining that they cannot finance operations.

So, let's ask the question again, in a modified form,

"If the largest US commercial money center and investment banks- except Goldman Sachs- vanished tomorrow into a single entity, would it matter to the US economy and its consumers?"

I believe it would not.

In this first of a two-part post, I'll explain why I believe that contention. In part two, appearing within a few days, I'll describe what I believe a perfectly functional, better-managed, private capital solution would look like.

Banks essentially do six things:

-take deposits

-lend to consumers for housing

-provide installment lending- a/k/a credit cards- to consumers

-finance business operations and underwrite their capital issues

-manage assets

-operate and participate in the financial 'plumbing system' of the US.

So let's review the potential outcomes of removing publicly-listed, privately-owned, meaning not government owned, commercial and investment banks from each of these activities.

Deposits below something like $100,000 are FDIC-insured. So if tomorrow, every commercial bank were replaced by a US Treasury or FDIC branch on the same corner, dispensing your cash and taking new deposits, you wouldn't really know the difference.

Consumer lending has been more successfully done by non-banks for decades. MBNA, Capital One, First Card, to name three, were or are non-bank credit card startups. MBNA was spun out of the Maryland Bank, but it ran and grew as a standalone firm.

You don't need to be a bank to be a successful credit card firm. These companies ravaged commercial bank credit card customer bases for a decade, than let themselves be bought back, at premiums, by the same banks off of whom they made their fortunes.

Mortgage lending has actually never been a big commercial bank business. That's why S&Ls were around. Before Countrywide, there were other national mortgage lending companies, the most recent from the 1980s being Lomas & Nettleton. Again, banks would buy these standalone mortgage lenders at premiums. No need for a publicly-listed bank here, either.

What about lending to and underwriting of businesses? Private equity can do that. And does. Or dozens of smaller investment banks which are still private partnerships.

In fact, due to the loss of their AAA credit rating by most commercial banks two decades ago, they have used their balance sheets as staging areas to securitize commercial loans and capital offerings.

What about asset management? That's not even a commercial or investment bank business to begin with. It's probably one of the two (the other being retail brokerage) largest cottage industries in the financial services sector. Think: Fidelity, Vanguard, T Rowe Price. Commercial banks buy these units. Or compete half-heartedly with second-rate employees who aren't paid as much as their more skilled colleagues at hedge funds, private equity shops and the better fund management complexes.

What's left? Financial plumbing.

The one thing that a Federally-chartered US commercial bank can do that nobody else can do is access various secure financial transaction networks. Fedwire, Chips, etc. Somebody has to provide secure, identity-assured means for clearing and settling any transaction in the US that requires cash to be exchanged. From your debit card to settling large-scale asset sales of businesses, DDA accounts and electronic transfers have to be made. Foreign exchange transactions have to be settled.

But a 'bank' that does these things, like BONY-Mellon or State Street Bank, doesn't have to even be a big player in anything else. And their risk is nearly microscopic, next to the tens of billions of losses being taken by their lending brethren.

You could easily have just two or three financial plumbing-oriented competitors in the financial clearing-systems sector, and most Americans- consumers or business- would never know the difference.

So if, on Monday morning, only one or two 'banks' existed where once Citi, Chase, BofA, Wachovia, Wells Fargo, Lehman, Merrill Lynch and Morgan Stanley had once been, doing the same businesses with the same inept class of employees and senior management, would anyone really notice, from a functional perspective?

Credit would be available. Deposits would be available. Capital offerings would be underwritten. Assets would be managed.

We don't have a financial/bank crisis in the US. We have an oversupply of mediocre management running too many mediocre, publicly-listed financial service firms.

Now is the time to weed them out and let them die/consolidate.

As I will discuss in part two of this post, the Blackstones, TPGs, KKRs, Blackrocks, SACs, etc. of the financial sector are where the most competent, astute managers are. They have done a better job of risk management. Because, like financial partnerships of old, they own their risk.

Our modern, heavily-overseen and -regulated, publicly-listed financial services sector is a testament to the fact that all the regulatory oversight in the world can't take the place of good risk and business management in financial services.

In fact, it can be argued, and I do argue and contend, that regulatory oversight has taken the place of good management. The result is a crowd of less-talented people mismanaging publicly-listed, privately-owned financial services companies.

Don't prop them up. Don't rescue them- including Fannie and Freddie. Let them consolidate/fail, and make room for the more astute practitioners in the privately-owned, unlisted world of finance.

Jeff Immelt's Deal In PalookaVille

Much has been made this week of GE's arrangement with Abu Dhabi's ruling Al Nahyan family.

Ostensibly, GE's financial unit will, according to 'breakingviews.com' in the Wall Street Journal,

"invest surplus cash generated by its enormous oil resources. Over three years, each side will invest $4 billion. That total of $8 billion will be leveraged up to five times with debt, and the pot of as much as $40 billion will be invested in the Middle East and beyond."

Honestly, I don't see all that much that is special here. So GE found someone to co-invest with in the Mideast. May I remind people that GE hasn't managed to move the total return needle under Immelt in six years?

What is suddenly going to change now? Sand, surf and sun?

But the really telling aspects of the deal come later in the article,

"It is like private equity, with GE-friendly twists. The company gets orders for products ranging from gas turbines to clean-energy technology for Abu Dhabi's "carbon-neutral, zero-waste" Masdar City. GE will even establish a local version of its management-training program. Unlike an investor in a buyout fund, GE has an open-ended investment horizon.

Abu Dhabi gets something for its dirhams, too. GE's products and services may be useful, but they should come with a bonus for a developing economy: the transfer of technology and know-how. Compared to some of the emirate's previous ventures -- a Ferrari theme park and an affiliate museum of the French Louvre, for instance -- bringing GE in looks like a step up."

In effect, here's what GE/Immelt are really doing.

As the nearby Yahoo-sourced price chart for GE and the S&P500 Index displays for the past five years, the industrial conglomerate has failed to give investors a total return even remotely similar to that of the market. It has barely remained flat over the five years. Over the entire course of Immelt's nearly six-year reign, the result is essentially the same, at best.

What this means is that many intrinsic "technology, know-how," brand and other intangible values on GE's balance sheet have become worthless in terms of market value.

Immelt's inept leadership have nullified decades of prior value creation.

As such, Jeff is basically hauling out the family silver, setting dinner for the Al Nahyans with it, and letting them take it with them after the meal.

Immelt is training Abu Dhabians in management and transferring GE's vast technological prowess, undervalued by global investors, to the desert Muslims.

As such, he's both giving away valuable American know-how to get some cheap financing, as well as exporting knowledge-worker jobs to the Gulf.

Where's the Congressional outrage over this deal?

Having struck out- miserably- on the global stage while managing GE, Jeff headed to Palookaville to get a deal with some investors whose last shrewd deal was "a Ferrari theme park and an affiliate museum of the French Louvre."

What's next, Jeff? An investment deal with South Africa? Trade jet engine technology for rights to invest diamond revenues?

Equally sadly, CNBC, GE's wholly owned toady-business-news network, and other business media, fail to notice and report on the real implication of this deal. That GE can't get respect or earn appropriate total returns for its shareholders in major equity markets.

So the company has turned to hooking up with novice investors in far-flung corners of the globe, giving away valuable technology and future white-collar jobs to attract capital.

Is this the portrait of a well-run American large-cap company?

The Minimum Wage Rises Today

Did you buy gasoline today in a state that mandates attendant service?

Was that fillup more valuable? Today, according to Congress, it was.

Because, according to an AP wire story,

"About 2 million Americans get a raise Thursday as the federal minimum wage rises 70 cents. The bad news: Higher gas and food prices are swallowing it up, and some small businesses will pass the cost of the wage hike to consumers.

The increase, from $5.85 to $6.55 per hour, is the second of three annual increases required by a 2007 law. Next year's boost will bring the federal minimum to $7.25 an hour."

So whether you think so, or not, many vendors whom you patronize are being forced to pay some of their employees more just....because.

Is more value being created? Probably not. Will those minimum-wage employees work more than 10% harder and more creatively?

Doubtful.

This is one classically-defined manner in which we invite inflation into our economy. Paying more for no more value creation.

If, like me, you covered this topic in economics in college or grad school, you know that today's minimum wage hike probably will result in the under- or unemployment of a few tens of thousands of low-end laborers whose new minimum pay won't be justified.

Moreover, if the AP story is correct, this only affects 2 million workers. Out of how many? 153.1 million estimated in 2007, according to this CIA factbook entry. Less than 2% of workers.

Yet another instance of government wrong-headedly propagating antiquated notions of 'fairness' from an era in which labor, capital and other markets were much more primitive and functioned less effectively.

God save us from ill-conceived and continued legislation like this, e.g., mortgage foreclosure moratoria, energy production prohibition, and more government-guaranteed housing financing.

None of which would seem to be adding value in our economy. Because, if they did, producers would already be doing them.

Regarding The Length of The Period of Turmoil in US Fixed Income Markets

I recently had lunch with a friend to discuss investing and the current economic conditions.

In her opinion, the equity markets are poised for more declines.

I don't disagree with her. Right now, my partner and I are positioned in puts, and our equity allocation signal is to the short side.

Regarding the economy and credit markets, I believe that the longer and deeper various regulatory and legislative authorities muck around in the current turmoil, the longer it will take to arrive at market clearing prices and, thus, recovery in various markets and the economy.

Two areas in particular come to mind: structured financial instruments and home values.

In discussing these with my friend at lunch, I reiterated that structured financial instruments such as CDOs may have no current, tradable market value, while still being performing assets.

Thanks to the genius of the latest batch of young Wall Street wunderkinds, we have a conundrum in which an instrument which possesses intrinsic value by virtue of the normal operation of the underlying assets and payment streams is forced to be valued, for accounting purposes, as having virtually no value.

If we decided to focus the question of valuation on performance, rather than market value, then some of the recent value destruction at various investment and commercial banks would have been unnecessary.

Paradoxically, I think that structured financial instruments are causing much unnecessary damage due to some wrong-headed valuation decisions, when their long-run values are actually fairly robust. At this rate, some hedge funds and private equity shops will surely reap most of the longer-term value from these instruments, if only to buy them at fire-sale prices and simply collect the interest. Not having to meet public valuation standards, these firms logically will bottom sweep the market and realize most of the profits.

Does it not seem somehow mistaken that our regulatory and accounting structure make it impossible for publicly-held banks to do the same?

Then we turn to housing values.

Here, Congressional ass-covering and regulatory power-grabbing are conspiring to prevent the useful and natural fall in housing prices until they reach market-clearing levels.

So long as bribe-taking Senators like Dodd and Conrad push for Federal forbearance of mortgage defaults and the implicit support of home prices, nobody in their right mind will be buying distress housing.

When you know someone is artificially propping up prices, why bother paying good money for over-priced real estate?

The longer this continues, in its many forms, including FDIC freezing of foreclosures at IndyMac Bank, expanding Freddie's and Fannie's lending authority, and the attempts by Congress to forgive defaulting homeowners, the longer credit will avoid returning to finance housing.

And the longer buyers will wait to purchase excess/distress housing stock.

Of course, the Resolution Trust Corporation solution of the 1980s worked in the opposite direction, and very effectively at that.

Naturally, then, the current Congress is heading in the other direction.

If Congress has its way, who knows how long housing values could take to reach market-clearing levels, thus opening the way for new financing to enter the sector?

Thus, I'm rather jaundiced about any particular economist's call for the date or quarter at which these markets will be healed.

Valuation rules for structured finance could keep the publicly-held banks undercapitalized for quite some time, while political meddling in housing finance could delay the return of those markets to normalcy for years.

Shorting Bank Stocks

This past week's introduction of new rules for shorting a selection of financial service stocks was evidently calculated to shore up confidence in institutions which are deemed by governmental and regulatory officials to constitute the necessary core of the US financial services system.

Several observations occurred to me as I read about the new regulations which took effect yesterday.

First, why were such loose applications of the already-extant rules regarding the borrowing of shares to short not simply enforced?

In a parallel to the recent introduction of criminal statutes focused on intent, e.g., 'hate' crimes, these new regulations seem superfluous. There were already perfectly adequate rules in effect, if only they were correctly and uniformly enforced.

Second, much as Truman invited the invasion of Korea when he drew the US security perimeter of the 1940s as excluding that country, the focus on a few financial institutions implies that the others don't matter to US financial system stability.

Doesn't this more or less declare open season on shorting those institutions not on the list?

Finally, does anyone really believe that a governmental propping up of presumed weak, or vulnerable financial institutions, will truly eliminate danger?

In finance, due to counterparty risk, perception of strength or weakness is far more important than actual strength or weakness.

Ringing the favored institutions with a special set of regulations designed to make it harder to easily short those equities in an illegal manner may safeguard their equity values, but, surely, investors also realize that it also will tend to prevent true price discovery in a significantly downward fashion.

It's an interesting question, though. Did illegal shorting contribute to Bear Stearns' downfall? Will prohibiting such illegal over-borrowing of shares to short merely bring correct price discovery back? Or will it actually inhibit price discovery?

It seems like another reason, in my opinion, to steer clear of most financial sector equities for a while longer. There just seem to be too many 'special' situations and allowances being made for them at present.

What the real value of a mediocre US financial utility is in the long run is anybody's guess now. So many questions exist regarding Fed window access, equity market regulations, and mark-to-market rules, that it just seems too risky to hold them when plenty of other opportunities exist in equities and derivatives in which to invest and outperform the S&P500 Index.

The Yahoo Circus Continues

Today's breaking news regarding Yahoo is that investor Carl Icahn has settled for three board seats, including one for himself, rather than offer a complete hostile slate at next month's election.

I wrote this post last Tuesday, which included some thoughts about Icahn's activities at Yahoo. At the time, I, like most everyone else, expected a bare-knuckle brawl between Icahn and Yang-Bostock.

To be honest, I think it's a bad thing for Yahoo shareholders that Icahn felt it necessary to compromise- or capitulate- to Yahoo's management and board.

The nearby 5-day price chart for Yahoo and the S&P500 Index illustrates that, from a peak last week of about a +7% gain, Yahoo is now down to a flat performance. The S&P, for comparison, is still up a few percentage points.

From a longer perspective, this six-month chart of the same information shows Yahoo pretty much in steady decline since the initial Microsoft offer drove it up to a +40% return.

Since that time, in early February, the company's stock has declined to a return of only about +10%, a loss of 3/4 of the value pumped into it by Microsoft's original interest.

You can see the bump due to Icahn's jumping into the fray in the past month, but even that effect has now attenuated by about half its peak strength.

All of which suggests that investors aren't particularly happy about Yahoo's prospects now, either. Icahn may have had a long shot at replacing the firm's board and firing Bostock and Yang when he was running his own competing slate of directors.

Now, he has only 3 votes on an enlarged, 11-member board. And according to CNBC this morning, major institutional holder Bill Miller of Legg Mason supports the current Yahoo board.

Can Icahn make a difference anymore? Will his 3 votes actually convince 3 more on the firm's board? You can bet he won't be getting Bostock's or Yang's votes for anything material.

I wouldn't dispute Carl Icahn's instincts. But at this juncture, is he playing for a gain in his Yahoo position, or just a smaller loss?

Either way, as I have stated as far back as my initial post regarding the Microsoft bid for Yahoo, this deal won't be any good for Microsoft's shareholders. And Yang and Bostock already botched the best financial deal their shareholders were likely to see for a long, long time.

Carl Icahn is trying to salvage some value for kindred shareholders of Yahoo, but I'm not sure the situation is really going to work to his advantage in this case.

The next month should be very revealing, including the outcome of the annual meeting.

What About Those Banks & Mortgage Loans?

My friend B is a banker and mortgage banker of many years and great wisdom. A few days ago, he sent me the following email, as part of an exchange regarding the turmoil at Freddie and Fannie, and my recent post about them,

"I don't know what a "best option" is in the longer-term. Too much is unknown and seen through a political fog. We have not dealt with the consequences of moving towards the "financial utility" (or "supermarket" take your choice) dominated banking system without the constraints of a Glass-Steagle-like control for the transition. Some of the consequences of this are playing themselves out, e.g. the placing of investment banking under the sway of the Fed. The problems at Fannie and Freddie resulted at least in part from the excesses of firms controlled by incompetent and management and regulators, the blur between banking and investment banking, greed, housing policy, real estate cycles, ignorance and huge, highly concentrated risky holdings and murky politics, not securitization, standardization , etc.

In the short-run the U.S. government needs to assure bond (mortgage-backed and debentures) holders that the credits in the holdings are secure (I am far less concerned about share holders). Too much is at risk in pension funds, banks (commercial and thrifts), governments (foreign and domestic) , insurance companies, etc. The current means being adopted are probably OK in the short-run but should not be a surrogate for a longer-term solution. In the longer-run we need to come to grips with the world of the financial utility and its mechanisms.

As to the Indy Mac's (arguably a creature of the housing bubble) of the world, it seems that the market and the regulators are properly handling things.

I believe we are into a very long process of "hunt & peck" solutions, driven at least as much by political as economic motives. Giving Americans a piece of the rock has been a core philosophy of our society for quite some time. It is a bedrock (no pun intended) of an enlightened capitalism and a protective edifice against unsettled populaces. The governments at the Federal and local levels have been intimately involved in facilitating home ownership and Fannie and Freddie are just pieces of this environment.

Perhaps the inertia resident in the world of banking has been impacted by a outside forces great enough to change things, but to what end?"

B makes a great point as to why our government has the goal of home ownership. It tends to keep citizens viewing society as owners and participants with something to protect, rather than a mobile rabble prone to discontent. And it fosters healthy values along the lines of community welfare.

But the much, much larger picture seems to me to be, as always, B's focus on 'financial utilities.' B is the guy who, to my knowledge, first used the term in a phone call with me back in 1996, when I was the (first) Director of Research for the then-independent financial consultancy, Oliver, Wyman & Co.

Today's Wall Street Journal added perspective to this mess when it reported on Chase posting losses for last quarter that were 'not as bad as expected.'

It then went on to note that PNC's net income actually rose for the quarter, because it had never strayed from its simple, regional focus on traditional commercial banking.

Therein, I believe, lies the lesson regarding B's 'financial utilities.'

Banking is a derivative business. Unlike, say, Google or Intel, banks don't really 'create' value, beyond some simple, liquidity- and time-shifting aspects of financial management. And, if done properly, by some risk-sharing which diminishes overall financial risks of lending, a/k/a diversification of portfolios.

That being said, how can banking ever really be, as a sector, a long-term, consistent growth business?

It cannot. Pure and simple. It cannot.

Thus, B's comment that regulators have some good short-term fixes working, but a long term solution is, as yet, undetermined.

I believe this is because of human nature and the effects of technology on banking. As I wrote late last year, regarding Henry Kaufman's comments on financial services sector regulation in this post,

"In the process of their evolution, various financial systems came to increasingly on technology. This reliance, as it has in other industries, drove two important structural changes. First, the rising costs of technology made size profitable, driving consolidation in businesses such as credit card issuance and processing, as well as mortgage loan origination and servicing. Second, concurrent with this consolidation came lower fees for the same services.

In business after business, save, perhaps, for boutique services such as high-end private banking and investment banking M&A activities, scale has become important for driving costs down and making financial services ubiquitous to those who need them, be they retail consumers, investors, or institutional investors or credit customers.

In the decade since, commercial banks, contrary to accepted financial theory that an investor can diversify his/her own holdings better than a company can do it for him/her, sought these types of businesses to attenuate variation in their reported earnings, as well as pursue the mythical 'cross sell' opportunity amongst various retail businesses.

The results have not been impressive, as I noted in this post two months ago.

My point is that, over time, financial conglomeration does not, in fact, lead to consistently superior shareholder total returns. In fact, the only currently, or, for that matter, historically frequently-appearing large financial institution in my equity portfolio is Goldman Sachs. It's not a widely-diversified financial services company. Rather, it tends to specialize in two areas- institutional businesses, such as underwriting and trading, in which superior knowledge, modeling and risk management matter, and asset management, which shares the same salient characteristics.

The price that US consumers have paid for financial services innovation and cost reductions over the past five decades has been the concentration of many financial services into fewer, larger entities, which concentration has increased risks to the banking and credit system.

In fact, one of the few benefits, besides technological innovation, that recent consolidation affords is larger capital bases with which to absorb the effects of mistakes.

Looking back over nearly 50 years of US financial system innovation and evolution, I think one could fairly say that the benefits we have enjoyed have far outweighed the realized risks that have accompanied such changes. "

But what we now face is the problem of name CEOs of very large banks- Chase, BofA, Wachovia, Citi, Lehman, Morgan Stanley, Merrill Lynch- who wanted to attain star status through asset and profit growth way beyond the natural limits of the financing needs of the population.

My proprietary research on what factors drive consistently superior total returns in companies vary markedly between higher-growth and lower-growth companies.

The former group, to which banks, over longer terms than, say, three years, belong, succeed by managing ROE and expenses, not by investment in growth.

I hate to say it, but Jamie Dimon is probably the right kind of CEO for Chase. He is not very skilled in anything but taking out expenses and micro-managing his managers. A chip off of his old mentor Sandy Weill's now-discredited block.

But ironically, whereas Sandy came a cropper trying to gun for growth with a hybrid of insurance, investment banking, brokerage and commercial banking, Dimon has only to squeeze down on businesses at the typically-staid and slow-moving Chase.

I'm not saying Dimon will ever make Chase a consistently superior total return company. But I do think he has the potential to manage the financial utility, now, according to the Journal, the largest US commercial bank by assets, in a manner that avoids catastrophic losses.

And that, frankly, is just about what my friend B prophesied to me back in 1996. A few very large financial behmoths which would be incapable of fast growth or nimbleness, but would dominate share in the conventional, everlasting banking businesses of: deposits, revolving credit, mortgage finance, various service/processing businesses and basic asset management.

Which brings me to my conclusion for this post.

What about those banks and mortgage loans?

Well, the loans were made by inept bankers, allowed by their CEOs, in hopes of attaining unattainable consistent long-term revenue, profit growth and total returns. Eventually, the shareholders of the companies which made those loans must foot the bill.

And the banks?

Well, this morning's Wall Street Journal announced that Freddie is contemplating selling new equity.

Who, honestly, would be so stupid as to buy any, short of a pure political/regulatory play?

I believe that the financial utilities will rarely be investments that can consistently outperform the S&P500. As such, they won't be candidates for my equity or options portfolios. The nearby, two-year price chart for Wells Fargo, Chase, Citi, Wachovia, BofA and the S&P500 Index clearly demonstrates my point.

Not one of these banks beat the index.

I suppose if you want a bond-like return in a necessary enterprise, you could do worse than owning a less-ineptly-managed large financial services conglomerate.

But why would any intelligent person hold a money-center or large publicly-owned investment bank as a long term asset anymore?

More Evidence of Economic Strength 'From the Road'

In this recent post, I discussed the economic evidence I've seen on my road trip that argues against a widespread recession.

In the last week, further evidence reinforces my belief that any recession currently underway in the US is either fairly stealthy, or not occurring in parts of the country that would seem to be candidates for it.

On the drive back from southern West Virginia, we stopped in Morgantown again, for lunch. Quizzing the staff of the restaurant, we learned that traffic this year is no different from last year. No difference due to gasoline prices.

In fact, the hostess remarked that spending was, if anything, up. People are filling restaurants and spending normally. The woman remarked,

'If they want to travel, they're going to travel.'

The major amusement park at which my daughter and I spent a day was as crowded as always. Hotels were full. Upon trying to find a room for an additional night's stay, we had to drive 45 miles away to get a room.

The parking lot of the park was as full as in past years.

Taking a slightly longer perspective, the people I spent time with in West Virginia told me that real estate foreclosures were not abnormally high. Down there, nobody had gotten carried away to begin with.

Two of the guides rather proudly announced that as of next year, they will be totally debt-free. Their purchases of electronics- computers, music players, etc.- have been strong this past year.

What's interesting to me is that these people, who represent a fair chunk of the American economy, simply behave far differently than the highly-leveraged consumers on both coasts.

Do the people who guided us raft fishing in West Virginia work several jobs each year? Yes. They always have. And they are not badly off.

Do they have health care? I doubt it- at least, not provided. They are entrepreneurs. Their sense of self-responsibility for their economic welfare is notable. Not one of them complained that some local or state agency wasn't finding them work or providing for them.

Rather, they use their considerable skills to do jobs that pay well, if are not always attractive to others. One guide has laid gas pipelines through the southern US swamps and donned "Gamma jammies" to clean up nuclear sites.

It's just a completely different picture of human economic behavior than you see in the major media. Self-reliance, restraint in consumption, a strong sense of saving for planned activities, and moderation in all things.

None of these people bought and flipped houses recently. But one of the guides, who works several jobs throughout the year, owns at least two rental properties, plus 7 acres on which he plans to build his last, largest home. Substantially by himself, of course. His child goes to private school and has a horse.

Does this sound economically disadvantaged or like an economic recession?

Not to me.

If you think stereotypically and assume that states with less income/capita and lower educational levels are therefore in economic trouble right now, think again.

Could it be that the better-educated, socially upwardly-mobil members of our economy are the ones in trouble, because they simply have lost their moorings regarding prudent personal economic behavior?

I'll write some thoughts about that in conjunction with the banking/real estate mess tomorrow.

Irresponsible Investment Advice On CNBC

A few days ago, I saw an unbelievable segment on CNBC concerning investing in financial service company equities.

CNBC on-air personality Dennis Kneale was discussing how badly the valuations of commercial and investment banks have slipped, thanks to their owning untold numbers and types of 'mark to market' securities.

These, Kneale remarked, make the equities of these firms equivalent to 'blind pools.'

That's a pretty harsh comment, but, I think, absolutely true. It certainly would prevent me from owning any of these equities.

My large-cap equity selection process, thankfully, measures and evaluates equities based on factors which basically rule out financial equities at this time.

The amazing part of the CNBC segment was that, following Kneale's comment, a guest bank analyst repeated her assertion that now was the time to look for bargains by bottom fishing the sector.

Her only cautionary remark was something like 'you have to evaluate each one individually, and be careful!'

I suppose in a roomful of professional analysts and investors, her words might be appropriate. But to retail viewers/investors, I think it bordered on, or was, completely irresponsible.

I'm sure you can find, right now, a lot of institutional investors who wrongly believed they could safely hold financial service equities, other than Goldman Sachs, with impunity. And even Goldman has suffered.

How, then, are garden-variety occasional, non-professional investors supposed to decipher and correctly guess at how much 'mark to market' junk is on the balance sheet of each and every financial service firm, and how much more it needs to be discounted?

Simply unbelievable that CNBC actually airs nonsense like this.

I'll have more to write about the financial service mortgage-related mess later this week, as well as my concluding 'from the road' piece about whether we are actually in a broad-based recession.

Updates on Anheuser-Busch & InBev, Yahoo, Icahn & Microsoft

Last month I wrote this post concerning what I believe the term "shareholder democracy" does not mean.

In that post, I discussed current examples of interest, including: Lehman, Yahoo-Microsoft-Icahn, Citigroup-Rubin, and Anheuser-Busch & Inbev.

Yesterday's Wall Street Journal reported on two of these stories. And the silver lining is that at least one situation actually turned in shareholders' favor.

Anheuser-Busch's board is to be congratulated for doing the right thing. That is, they played somewhat harder to get, and coaxed another $5/share out of InBev before acceding to the acquisition by the larger Belgian brewer.

Despite August Busch IV's silly whinings, the board correctly understood that Busch's lackluster performance. I wrote about it here.

Chalk one up for a board that actually did its job.

Then, in contrast, we turn to this week's news out of Jerry Chang's Yahoo. I wrote here about Carl Icahn's move into Yahoo two months ago.

Despite the obvious long-term problems at Yahoo,Chang and his board's chairman, Roy Bostock, have some idiotic notion that what Terry Semel didn't do, and Jerry Yang hasn't done in a year, somehow, Yahoo will accomplish for shareholders in the future.

Meanwhile, Icahn has correctly taken advantage of Microsoft's Ballmer's wrong-headed belief that his company can somehow benefit from Yahoo's search business, and already prospectively split up the firm, once his board slate is elected.

It is truly difficult to see how, if you still own Yahoo, or bought it after Icahn did, you'd do anything but vote for Icahn's slate.

Yang and Bostock will, hopefully, be sued by some shareholders for malfeasance in this whole mess.

We see pride and obstinacy getting in the way of what is a fairly obvious and simple decision- break Yahoo up or at least let someone else try to wring some value out of it.

Of course, if you had owned Yahoo, you really should have been out of it years ago, when its performance had underrun the S&P's for a few years. To me, as I noted in my earlier post, that is the real meaning of shareholder democracy.

Sell what you don't want, inexpensively.

Fannie And Freddie's Mess

I'm on the road, and not enjoying access to daily print versions of the Wall Street Journal. Reading it online is not as practical an option as I'd like it to be.

However, I had a chance to read the headline stories of the weekend edition of the paper. What I read about the developments in the mess involving US mortgage markets, Fannie and Freddie are scary.

I think my overall view of the situation is that it is a mistake to give more capital access to the same crew that got into this mess.

The implicit Federal Government guarantee clearly led to an imbalanced strategy over the last decade. Both institutions enriched employees, especially senior management, while failing to pay careful attention to the growing risks on their own balance sheets.

For this, we have Congress to thank, since it tends to view Fannie and Freddie as a large real estate finance cookie jar for their own pet agendas.

Of the choices which the Journal's article suggests, I think I would go with the Bush administration's desire to replace the current boards with members whose stated objective would be to clean up the balance sheets of the two firms and gradually shrink their role in the housing markets.

In this day and age, if a government-affiliated lender can't do a decent job securitizing housing loans, why allow it to exist?

We'll always get better performance from the private sector, assuming adequate regulation. Now, we have the worst of both worlds- shareholders losing value due to entrenched, incompetent management, and the Federal Government picking up the tab.

Shareholders chose to own the companies' stocks (I have owned equity in both firms in the past), so they deserve to lose their capital.

But to prevent a replay of this fiasco, I think it's time to remove the governmental connection to the two mortgage securitization firms as soon as it is possible.

Perhaps the most unfortunate aspect of this mess is its timing. Coming at the end of one US Presidential administration, it's unlikely that the clear, sensible and quick action required to begin cleaning up the problem will occur as it should. Instead, everyone except Secretary Paulson will look for reasons to delay until next calendar year.

That could be a fatal mistake for credit markets and the economy.