Why Mortgage Forgiveness Is Just Loan Loss Recognition In Disguise

As the months have gone by since various politicians, beginning with Hillary Clinton, began calling for either a moratorium on foreclosures and/or interest rate adjustments and forgiveness on some aspects of troubled mortgages, I have given a lot of thought to these suggestions.

Initially, I thought the suggestions of mortgage rate reductions and/or balance adjustments for a period of time, or permanently, to be an unwise intrusion of governmental regulation, a la a 'taking.'

Recently, however, several large banks, including Chase, have unilaterally begun to take these steps. By reducing rates and/or modifying the mortgage loan balances at points in time, these lenders are basically recognizing loan losses in a non-traditional manner.

Rather than classify some mortgages as either defaulted or delinquent, the banks are taking a smaller haircut on a larger base of home loans. Either way, the financial consequence is to reduce the effective rate of interest which accrues as revenue, and potentially write down some loan values.

Last week, my business partner and I were discussing this phenomenon. As we thought about what we, if we owned a bank, would do with a delinquent or defaulted mortgage borrower, it became obvious that foreclosures aren't a good idea in this environment, irrespective of governmental pressure.

With most real estate prices having declined in the past year, and credit availability much worse than it was even three months ago, a foreclosed home has virtually no chance of being purchased at a price that will preclude a significant loss for the mortgage lender.

Instead, if the borrower is still employed and able to pay something, it would behoove a bank to simply treat him/her as either: a temporary renter, with the loan conditions to be reinstated in the near future, making the mortgage loan currently delinquent, or; modify the loan's conditions to equate the borrower's ability to pay with a new interest rate and/or balance, or some combination of the two, and record a loss while the (newly modified) loan remains current and performing, or; modify the loan's conditions to be a combination of the first two, both temporarily suspending the loan payments, then returning to a modified mortgage payment and terms in the near future.

All three options provide some cash flow for the bank, and the ability to avoid foreclosure, evictions, and an overall worsening of the probabilities that the lender can recover looming losses.

Because of the gradual spread of what began as a largely technical issue of requiring securities held by banks, backed by mortgages to be marked to market (rather than allowed to be valued based on their economic potential while partially or wholly performing), eventually, to engulf the entire banking sector in hundreds of billions of dollars of writedowns, resulting in a credit contraction, the environment in which troubled mortgages now exist is much worse than it was last year.

The credit contraction has, of course, affected business volumes, economic growth, and job losses. Thus, by late 2008, the unforeseen consequences of Congress' narrow-minded insistence, in Sarbanes-Oxley, on 'mark-to-market' valuation turned what was initially an accounting matter into a a policy choice which has amplified accounting valuations to the point where they have reached out and damaged the entire US economy.

A year ago, the failure of a couple of Bear Stearns mutual funds, due to this dry accounting issue, seemed manageable. But in time, as investors understandably began to recoil from any structured finance instrument potentially containing recent, riskier mortgages, mark-to-market rules caused a chain reaction which has resulted in a real credit and economic contraction that is many times worse than it otherwise might have been.

In this new environment of fallen home values, few new mortgage loans, and rising joblessness, banks really have no choice but to work out non-performing home loans, rather than simply begin foreclosing on every defaulted loan and displacing residents, to no better effect for the bank, the residents, or society in general.

Lloyd Blankfein's Goldman Sachs: Same As It Ever Was?

In this post two weeks ago, I wrote about how merely obtaining a Federal commercial bank charter hardly makes Goldman Sachs and Morgan Stanley real, functioning commercial banks.

This past week, two articles in the Wall Street Journal demonstrated how these two former investment banks are already parting ways.

Goldman CEO Lloyd Blankfein was quoted as saying,

"We're going to consider everything," but won't do "something rash."

The article further noted, regarding Goldman Sachs developing a consumer banking business,

"Mr. Blankfein seemed to knock down that idea, stressing that Goldman has little, or no exposure to credit cards, auto loans, home-equity loans or other consumer loans, all of which could suffer if the U.S. falls into a significant recession."

On the subject of a merger, Blankfein remarked that he'd consider one,

"only if the deals keep Goldman's focus and culture intact."

Understanding that Goldman Sachs currently looks a lot like a hedge fund, it's difficult for me to see how Blankfein expects his firm to be able to simply exist unchanged.

If, as most observers expect, the FDIC and Federal Reserve mandate that the firm reduces its leverage and business mix to more closely resemble those of commercial banks, Goldman will have a very hard time finding non-consumer banking business volumes sufficient to retain its current size, expense and infrastructure bases.

If, on the other hand, it tries to merge with a commercial bank, there's just no way the vaunted Goldman culture will remain intact. Apparently, Blankfein's bid to outs Pandit at Citigroup and merge with that money center bank, came to naught.

Maybe, with the rumors of Citi's board's split over Pandit, Blankfein may have another shot at that merger. Maybe not.

Either way, it's just hard to see how Goldman can tread water and remain as profitable as it has been in the past, with a similar business mix.

Morgan Stanley, on the other hand, was written up on Thursday's Journal as cutting more than 2,000 employees while hiring two outside commercial bankers; Cece Sutton and Jonathan Witter, both formerly of Wachovia.

The two Wachovians are to become Morgan Stanley heads of retail banking and CEO of the retail banking group, respectively.

While in obvious contrast to Goldman Sachs, Morgan Stanley's more aggressive move to build a consumer business calls into question just what it can ever hope to add in an already-consolidating market.

Note that Mack hired two executives from a bank that essentially failed, due to its retail-oriented mortgage banking strategy. And Morgan Stanley took its own licks from mortgage finance, too.

As a consumer, would you have much reason to suddenly drop your current bank and take new credit cards, a mortgage, and open checking accounts with the former investment bank?

New entrants in a product market typically offer some new or unique value proposition. Morgan Stanley's seems to be something like,

'Hi. We used to be a highly-leveraged investment bank-cum-hedge fund. But that didn't turn out so well.

Now, we've decided to try to be a commercial bank, because we might survive that way.

Won't you please do business with us?'

Hardly compelling, is it? Somehow, the former loss-making investment bank is hardly in a position to cross-sell it's asset management/high net worth business skills anymore.

Which brings me to the point I made in that prior, linked post,

"Either way, if Goldman and Morgan Stanley don't soon sell themselves to some decent-sized banks, or buy various consumer loan and deposit-taking operations, they will lose their independence as federally-chartered entities the harder way, in forced marriages arranged for them."

Growing its own consumer banking from scratch is unlikely to do much for Morgan Stanley. Eschewing the segment totally probably won't help Goldman Sachs, either. Right now, based on existing information, I'd say neither is in particularly good, long term shape.

Reality Hits Starbucks' Growth Plans

Starbucks is in the news again this week!



In my last post on the coffee retailer, here, I noted that Howard Schultz's vaunted turnaround, for which he returned to the company as CEO, had cratered in a quarterly loss.



This week's Wall Street Journal piece reaffirms the coffee roaster's cutbacks on US store openings, fights with landlords as it closes locations, and even a slowdown in its overseas store openings. According to the Journal piece, same-store sales at Starbucks are down 8% among the conventional 'open at least a year' category.

The nearby 3-month price chart for Starbucks and the S&P500 Index shows the coffee giant falling by more than the market average. Significantly more. Starbucks has lost nearly half its value amidst the market turmoil which began in September.

Clearly, the chain reaction of financial losses to consumer spending has now hit the upscale coffee retailer.



Back in January, I wrote a post concerning the marketing battle brewing between Starbucks and McDonalds. In it, I observed,




"To me, having followed this building story for nearly a year, Schultz' and Starbucks' logic and expectations are wrong. They expanded into more price-sensitive, lower-income segments, and are now struggling to make that business more constant. But it will be precisely those customers who are vulnerable to McDonalds and Dunkin' Donuts. Further, the changes in its product strategies is causing confusion and morale problems among Starbucks' workforce."



This is now coming home to roost big time at Starbucks. As cost-conscious, lower- and middle-income consumers flee the pricey coffee seller's offerings, the other two, more middle-market brands are likely to increase share.

It's not fair to accuse Howard Schultz of not foreseeing this financial-market triggered economic downturn. But he is responsible, never the less. As CEO, he presided over the expansion of the Starbucks brand into ever-lower income customer segments. This was bound to affect sales and profits growth come an eventual economic softening, never mind a serious recession.

Now the full import of the coffee roaster's years of breakneck expansion are coming back to haunt shareholders.

Will Schultz finally admit defeat and just accept that Starbucks' rapid growth phase is over?

Immelt's Mistakes Come Home To Roost: GE Takes Government Money

Tuesday's Wall Street Journal described GE's capitulation to market forces by registering "to sell as much as $98 billion of CP (commercial paper) to the government."



The article even ends with the observation,



"Buying a large bank might be an option. But it might come with assets GE wouldn't want and could force change in GE's overall corporate structure- perhaps even requiring the finance business to be spun off."



Bingo!



As I have written most recently in this blog here and here, Immelt brought GE to this impasse by foolishly retaining the unwieldy, value-destroying diversified conglomerate structure. In the latter piece, I wrote,



"There are several businesses in GE's portfolio that would not, on their own, suffer so badly as GE's financial units. But, thanks to Immelt's insistence on keeping these units needlessly shackled to each other, shareholders don't get to select which they wish to own, and which they do not.


It's likely that, somewhere in GE's business portfolio, there are units which have not lost 40% of their value in the past 12 months.


Thanks to Immelt's poor stewardship and lack of leadership of GE, his shareholders won't get to know which those are, and benefit from their performance."



Look at the nearby price chart for GE and the S&P500 Index for the past three months.

Even with two of the worst months in the S&P's history, Immelt's GE still managed to fall by even more. And not just a little, but a full 10 percentage points, or 33% more than the index.

That's the penalty Immelt has imposed on his shareholders in order to retain an outdated, useless conglomeration of unrelated businesses under the GE moniker.

Now, things have become so dire that Immelt must go, hat in hand, to the US government in order to sell commercial paper to fund its financial services unit.

GM is nearly dead. GE, the other once-mighty US industrial firm, is reduced to government intervention in order to fund itself.

Nice going, Jeff. Any chance, given how much damage you've inflicted on your shareholders this year, that you'll forego any bonus for 2008?

Shareholders, don't hold your collective breaths.

Your Next New Bank: American Express

It seems that almost under the radar, and a month late, American Express decided to come in from the cold and convert its status to that of a Federally-chartered commercial bank. As I wrote in this post last month, it seems odd to think of your neighborhood bank as GMAC, Goldman Sachs or Morgan Stanley.

Now, I'll grant you that an Amex store is more ubiquitous than, say, a GMAC location. At least I've never seen a GMAC site. And existing Amex travel stores are more retail in nature than your typical Morgan Stanley or Goldman Sachs location in a major city.

Still, once again, it's hard to visualize Amex being a full service commercial bank. In fact, in the old days, it never would have needed a banking charter, because its Travelers Cheques and credit card businesses nearly perfectly hedged each other. The former took cash deposits against to-be-written cheques, while the credit card paid cash on the cardholder's behalf, for a fee.

Evidently, the model is no longer remotely like that of the old days. Or perhaps the credit card giant's management simply want to avoid standing out in a crowd of Federally-owned financial institutions, lest that difference cause a mass sell off of their equity and a shunning of the firm as a supplier of credit.

My business partner wondered aloud what possible risk to our financial system Amex represents, being primarily a high-end credit card issuer.

No matter. Now even a major standalone revolving credit provider is running into the arms of the evolving US National Bank. And then, immediately upon gaining bank status, puts it hand out for a $3.8B loan from the Fed.

Truly the only financial sector executives who feel capable of running their own businesses will be private equity shops and privately-owned asset managers. And, in time, perhaps those executives sufficiently prudent and confident of their risk management expertise to open up publicly-held loan and investment companies.

What Has TARP Accomplished?

Back at the end of September, as I note from this post at the time, Congress was wrestling with the passage of the then-claimed, absolutely necessary $700B TARP legislation.

September's S&P return was -8.9%. Clearly, the deteriorating equity market and cessation of lending and markets for structured instruments lit a fire under Treasury, the Fed and FDIC to do something.

As economist Art Laffer noted in a Wall Street Journal article, about which I wrote, here,

"Then we have this administration's panicked Sarbanes-Oxley legislation, and of course the deer-in-the-headlights Mr. Bernanke in his bungling of monetary policy.

Whenever people make decisions when they are panicked, the consequences are rarely pretty."

So, here's my question, inspired by a comment from CNBC's Rick Santelli this morning.

If the TARP was so necessary, and was the right, or an effective solution to our financial turmoil, why did the S&P decline by a further -16.7% in October? That's almost twice September's decline!

Santelli's insightful comment was, as usual, in response to a typically nonsensical utterance by CNBC's Steve Liesman. The latter insisted that the TARP was absolutely essential to the health of the financial system.

Santelli calmly noted that, in contrast to Liesman's description of the September market free fall, we now have 'slow fall.'

Whether fast, or slow, Santelli's point was, I believe, that the TARP's existence has, if anything, apparently accelerated, and certainly failed to halt further market deterioration.

That's when I was inspired to go to my own files and retrieve the monthly S&P performance for September and October. Not only did the TARP have no positive effect, but our current equity market situation is, by some measures, a reflection of the lowest level of confidence in those markets in many, many years.

For example, one of my equity long/short allocation signals is at its lowest level since 1982. The other, which is the trailing S&P return over a period of fixed length, has never been this low in over 30 years. Which, considering the time periods involved, probably means perhaps not even in the entire time that there has been an S&P500 Index.

Now, with this week's clamoring by Congress to release TARP funds to rescue GM, Chrysler and Ford, we see it has become, predictably, a general-purpose feeding trough for desperate firms, financial or otherwise.

Former Federal Reserve Board member Fred Mishkin warned, in extended comments this morning on CNBC, that including less-regulated, non-financial companies in the TARP is a very, very dangerous step. He noted the necessity of a healthy financial system, most of the players in which are already subject to heavy regulation.

Adding various weak and dying companies on an ad hoc basis, Mishkin noted, is to essentially open the Treasury to anyone who wants help.

Hardly the conditions under or terms on which the TARP was rushed through Congress.

GM's Final Chapter

So many currents are swirling around GM right now that it's hard to know where to begin writing about it. I last wrote about the failing, near-death auto maker in this post, almost one month ago. Perhaps a good starting point is my old squash partner Paul Ingrassia's well-written and -reasoned piece in yesterday's Wall Street Journal.


The salient passages in Paul's essay are these,


"Let's assume that the powers in Washington -- the Bush team now, the Obama team soon -- deem GM too big to let fail. If so, it's also too big to be entrusted to the same people who have led it to its current, perilous state, and who are too tied to the past to create a different future.


In return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver -- someone hard-nosed and nonpolitical -- should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.


That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.


These are radical steps, and they wouldn't avoid significant job losses. But there isn't much alternative besides simply letting GM collapse, which isn't politically viable. At least a government-appointed receiver would help assure car buyers that GM will be around, in some form, to honor warranties on its vehicles. It would help minimize losses to the government's Pension Benefit Guaranty Corp.


The current economic crisis didn't cause the meltdown in Detroit. The car companies started losing billions of dollars several years ago when the economy was healthy and car sales stood at near-record levels. They complained that they were unfairly stuck with enormous "legacy costs," but those didn't just happen. For decades, the United Auto Workers union stoutly defended gold-plated medical benefits that virtually no one else had. UAW workers and retirees had no deductibles, copays or other facts of life in these United States.


A few years ago the UAW even waged a spirited fight to protect the "right" of workers to smoke on the assembly line, something that simply isn't allowed at, say, Honda's U.S. factories. Aside from the obvious health risk, what about cigarette ashes falling onto those fine leather seats being bolted into the cars? Why was this even an issue?


A thorough housecleaning at GM is the only way to give the company a fresh start. GM is structured for its glory days of the 1960s, when it had half the U.S. car market -- not for the first decade of this century, when it has just over 20% of the market. General Motors simply cannot support eight domestic brands (Cadillac, Buick, Pontiac, Chevrolet, GMC, Saturn, Saab and Hummer) with adequate product-development and marketing dollars. Even the good vehicles the company develops (for example, the Cadillac CTS and Chevy Malibu) get lost in the wash.


As for Ford and Chrysler, if they want similar public assistance they should pay the same price. Wiping out existing shareholders would end the Ford family's control of Ford Motor. But keeping the family in the driver's seat wouldn't be an appropriate use of tax dollars. Nor is bailing out the principals of Cerberus, who include CEO Stephen Feinberg, Chairman John Snow, the former Treasury secretary, and global investing chief Dan Quayle, former vice president.


Government loan guarantees, with stringent strings attached and new management at the helm, helped save Chrysler in 1980. But it's now 2008, 35 years since the first oil shock put Japanese cars on the map in America. "Since the mid-Seventies," one Detroit manager recently told me, "I have sat through umpteen meetings describing how we had to beat the Japanese to survive.
Thirty-five years later we are still trying to figure it out."

Which is why pouring taxpayer billions into the same old dysfunctional morass isn't the answer."


Contrast Paul's sensibility with this quote from the Journal's article concerning GM's stock price falling to a low not seen since 1946,


"But Mr. Wagoner added in the interview that he would not be willing to resign in return for aid.


"I think our job is to make sure we have the best management team to run GM. It's not clear to me what purpose would be served" by his resignation. "


So, there you have the business-oriented analysis in a nutshell. No less an objective and savvy analyst than Pulitzer Prize-winner Ingrassia, who co-received the prize for his reporting about Detroit's resurgence during the 1980s, sees Wagoner and his team as the problem. Ingrassia's solution is a variant of the one I've suggested for several years, most recently in that linked post from last month, i.e., file bankruptcy for the faded auto maker, sell what can be sold, and let the Federal government do what it can for line workers and middle managers.


Wagoner, ever the poster boy for 'greedy' large-cap CEOs, claims he's just 'doin' his job the best way he knows how.'

As if.


Paul is right. Wagoner and his team of inept misfits have to go. A bankruptcy court-appointed receiver can dismember GM as s/he sees fit. One point on which I disagree with Paul is whether GM can exit bankruptcy, government-aided or not, as an independent firm. I just don't see the few profitable car models justifying a standalone entity. Dealerships wouldn't survive on that kind of volume. Nor would production costs, etc., be competitive on such a small market share.


Now to the political angle.


No less a leading auto industry executive than Mike Jackson, CEO of AutoNation, boldly asserted on CNBC this morning that GM must be saved, and bankruptcy was unthinkable. According to Jackson, nobody will buy a car made by a company in Chapter 11.


Really? I thought we used to trust market forces to determine the clearing price for virtually anything. In this case, you know that NAPA and other aftermarket vendors will always supply parts for high-volume cars, no matter what the make. There'll be no shortage of mechanics to service GM vehicles, either. Warranties on existing vehicles are a balance sheet liability. Warranties on newly-purchased cars and trucks will either become third-party issued with the cars, or available from them as aftermarket extras.


Of course, Jackson would like to reduce all risk associated with his current inventory, not to mention maintain his negotiating leverage with non-GM vehicle producers. That's why he prefers GM to be bailed out by the Federal government.


Politicians see votes. Pumping taxpayer dollars from fifty states into the failed companies in primarily one state is a slam dunk for Dingell, et.al. Additionally, as Ingrassia notes, there's the PBGC liability hanging over the Federal government.


If Ingrassia's (and my) recommendation was followed, the union which supports the current Congressional majority party and the President-elect would, as Paul notes, be forced, in bankruptcy, to see their existing contracts and benefits vanish. The UAW gets a much better deal by feeding off a government-subsidized, barely-living GM corpse than it does in bankruptcy court. Any chance this explains the Congressional insistence on last month's multi-billion dollar loan to the auto makers? And their further desire to shovel more aid without demanding bankruptcy?


Of course, there is a sort of perverse silver lining to all of this.


Schumpeter would note that companies in these straits are hardly the ones from which you will expect any more innovation. So if taxpayers end up owning GM, Chrysler and/or Ford, you can stop worrying that vital American corporate spirits will be crushed. Our government typically 'rescues' those who private capital will no longer touch. It's unlikely that, no matter how badly a government-run GM does, the opportunity cost will be significant.

It's not like anyone will buy a car from a government-run and -owned company. Does anyone seriously believe any good designers and managers will hang around such a company?


In fact, as my friend B and I discussed this morning, GM & Co. aren't even really important as defense contractors anymore. And America has other auto makers, as Ingrassia pointed out. They just happen to be profitable, foreign-headquartered, and located in states that typically vote Republican.


The end result of these various forces is probably going to be a government-influenced, if not run, domestically-headquartered auto sector. My prediction in this post just over three years ago will have finally, definitively come true. At least one, and perhaps three CEOs in Detroit will be gone.

AIG's Failed Quantitative Risk Models

Last Monday's Wall Street Journal featured a page one piece on the failure of AIG's risk management models.


It definitely caught my attention, because I had written recently on the fallacy of composition in risk management on Wall Street in this post just over a month ago.


"Here we have an unintended consequence affect the situation, due to the fallacy of composition.


Such a downgrade leads each counterparty of such an affected, downgraded firm to require more collateral on each position held with that firm as a counterparty. Thus, in the blink of an eye, or the stroke of a pen at a rating agency, the financial collateral requirements for a firm's book of positions with other trading partners rises significantly.


This is what actually drove AIG into ownership by the US Treasury. Its downgrading by a credit rating agency caused AIG's counterparties to require more collateral for swaps and other insurance arrangements it had sold than the firm had capital available to provide for such needs.


Do you suppose any of the quantitative, computer-based risk management systems of any of AIG's counterparties had the capability to model, forecast and integrate into their risk estimations such an occurrence? Did any of AIG's counterparties have enough knowledge of AIG's exposures to allow it to reasonably estimate the effects on that firm's capital position, and, thus, its risk as a counterparty, if it were downgraded?


I doubt it.


Thus, in yet another perverse way, the individual, similar actions of many financial service players, collectively, lead to a result which causes more risk and uncertainty in the system, even as each individual party seems to act to reduce its own risk to its positions and its counterparties."


Well, the Journal's AIG piece basically confirms my suspicions. Specifically, the article begins by describing how AIG's risk modeling was dependent upon the work of an outside consultant, Gary Gorton, who teaches at Yale's management school. It notes,


"Mr. Gorton, who teaches at Yale School of Management, is best known for his influential academic papers, which have been cited in speeches by Federal Reserve Chairman Ben Bernanke. But he also has a lucrative part-time gig: devising computer models used by the giant insurer to gauge risk in more than $400 billion of devilishly complicated deals called credit-default swaps.

AIG relied on those models to help figure out which swap deals were safe. But AIG didn't anticipate how market forces and contract terms not weighed by the models would turn the swaps, over the short term, into huge financial liabilities. AIG didn't assign Mr. Gorton to assess those threats, and knew that his models didn't consider them. Those risks have cost AIG tens of billions of dollars and pushed the federal government to rescue the company in September.


The swaps expose AIG to three types of financial pain. If the debt securities default, AIG has to pay up. But there are two other financial risks as well. The buyers of the swaps -- AIG's "counterparties" or trading partners on the deals -- typically have the right to demand collateral from AIG if the securities being insured by the swaps decline in value, or if AIG's own corporate-debt rating is cut. In addition, AIG is obliged to account for the contracts on its own books based on their market values. If those values fall, AIG has to take write-downs.


Mr. Gorton's models harnessed mounds of historical data to focus on the likelihood of default, and his work may indeed prove accurate on that front. But as AIG was aware, his models didn't attempt to measure the risk of future collateral calls or write-downs, which have devastated AIG's finances."


Thus, AIG used a fairly simple set of assumptions which neglected to consider both the effects of actions by other investors in similar assets, and the resulting changes in collateral, should those investors' actions lead to downward price spirals.

It should give you pause to realize that there has been a fairly widespread knowledge of the cascading effect of position liquidation ever since the failure of 'portfolio insurance' in the 1987 Crash. That's over twenty years ago.

Where have Mr. Gorton and AIG's senior and risk management executives been during that time? How could they have possibly believed that a quantitative risk management system which deliberately omitted effects of panic selling and attendant collateral increases due to other position value declines would have much relevance to the real world facing AIG and its trading and investment books?

Yet, even with such glaring holes in its approach to risk measurement and management, AIG paid Mr. Gorton a small fortune to do an inadequate job. Nice work, indeed, if you can get it. You can bet that Mr. Gorton will not be liable for any damages to AIG.

To understand how out of touch with real market behavior Gorton is, the article quotes his comments to one of his classes at Yale recently,


"On a rainy morning last week, Mr. Gorton briefly discussed with his Yale students how perplexing the struggles of the financial world have become. About 30 graduate students listened as Mr. Gorton lamented how problems in one sector caused investors to question value all across the board. Said Mr. Gorton: "There doesn't seem to be a fundamental reason why." "



Of course there is a fundamental reason why. That 'one sector' just happened to be one involving sophisticated investors and traders valuing structured and arcane financial instruments. When the CDOs, MBSs and swaps all went untradeable due to real, identifiable underlying trends, e.g., the cooling of the mortgage origination market and the observable rise in alt-a and subprime mortgage defaults and delinquencies, the broader markets began to realize that the so-called 'sophisticated' investors had gotten valuations terribly wrong.

In effect, the fact that many institutional investors who were presumed to be so astute were seen either holding untradeable paper, worth little in a 'mark-to-market' world, or dumping that paper at large losses, when possible, caused bystanding investors to wonder what the value of anything now was. Especially the equity and debt of the publicly-held institutions visibly undergoing value evaporation due to having misunderstood the values of these exotic structured instruments.

This whole mess didn't start because your grandmother worried about the value of Google's equity.

It began because sharp-elbowed asset managers and traders at opportunistic investment banks and hedge funds, such as Bear Stearns, Lehman, Goldman Sachs, and Citadel, began to react, logically, to the news of economic trends in mortgage markets which had all-too-obvious implications for holders of structured finance instruments and swaps.

That's why it only took one sector's actions to cause the resulting cascade of value destruction and, eventually, AIG's demise amidst a sea of poorly-understood risks on its balance sheet.

Being Used...And Loving It

I've been used! And I loved it!

Last week, I wrote this objective piece in regard to a Wall Street Journal article reporting on Boeing's latest snafu, the further delay of its 787 Dreamliner.

To my great surprise, it was picked up by this engineer's union website. As of Monday morning, November 10, as I write this, my blog post has slid off of their 'News Clips' section. But visitors to my blog from that site accounted for at least 50% of the near-record 217 visits here on Friday.

The record was 315 on the day I posted this piece about the commercial bank aspirations of GMAC, Goldman Sachs and Morgan Stanley.

It's not hard to see why the engineer's union chose to publicize my piece. And it's very instructive concerning modern media and not only business, but politics, as well.

The Wall Street Journal might highlight the Dreamliner's problems, but, due to its need for continued access to sources and advertising revenues, it was unlikely to be brutally honest about how badly Boeing's management has messed up the Dreamliner.

I, however, have no such constraints. So, as do thousands of other bloggers, I objectively opine on news articles, adding a bit more bite and candor to softer business news stories already available in the general media.

For the engineer's union, my post must have seemed like a gift. I focused responsibility squarely on the company's surprisingly-unaccomplished CEO, Jim McNerney, and the management which allowed fastener specifications to be made with too little specificity.

For a labor union to find an objective business writer taking this position is sweet, indeed. Rather like Bill O'Reilly finding my blog to be, in the words of his producer, the only place where an objective assessment of Jeff Immelt's dismal misleadership of GE, and the firm's awful performance under his oversight, were available among all the print and electronic media they canvassed.

When I was discussing my blog with a friend at my fitness club recently, he asked why I wasn't trying to find a paid, syndicated writing gig somewhere. As I considered his question, I replied that I guessed I'd first have to approach someone like King World, to get syndication.

I can't imagine that is very easy. Probably a lot like getting your first book published.

Then there's the question of how much the shrinking pool of print media would pay for my writing? The Wall Street Journal doesn't use syndicated writers, and they don't need another Holman Jenkins, whose work my own closely resembles. Neither, I'm guessing, do the best-known business weekly or monthly magazines, such as Forbes, Fortune and Businessweek.

What's left? USA Today and a few large city dailies?

After a few remarks about this, I told my friend, Larry, that probably my best bet would be to hope to be hired as a contributor to either Fox Business News or CNBC, based upon their reading of my columns.

It's an interesting revelation that, were I to want to attempt to make a living writing as I do on this blog, it's not clear that it is really possible anymore. And, ironically, I write more frequently than your average WSJ columnist, because they editorialize weekly, while I write daily.

Multiply me by a few thousand, and you essentially have the free availability of reasonably informed and educated opinions on business ruining the for-fee business editorial market.

In the meantime, the combination of Google's search engine and its free blogging platform have allowed it to affect a large element of business and, as importantly, political writing.

The emergence of person-to-person communication, in a thoughtful and respectful manner, will certainly continue to augment and, perhaps eventually, in the not too distant future, even supersede print editorials.

Thus is Brian Wesbury's 'internet time' arriving at an accelerating pace.

A Refreshing Retail Experience- LifeTime Fitness

The first Northeastern location of a LifeTime Fitness facility opened this weekend in Northern New Jersey only a few miles from where I reside. Watching the progress of the company as it built the fitness club and its customer base has been a lesson in superb retail marketing.

Beginning earlier this year, in the summer, the advance party of LifeTime employees began to launch direct mail shots and fulfill them from a storefront office located a mile or so from the eventual facility site.

Word began to spread among members of the fitness club to which I have belonged for some 25 years.

Lifetime facilities come in four levels of quality, but all are geared to family fitness and offer a desirable mix of activities, including several swimming pools, racquet sports, and large exercise spaces with an equally large quantity of machines.

Dwarfing even the local YMCA's in size and range of services, the Lifetime facilities do for the communities into which they enter, and to the existing, small-scale fitness clubs, what Home Depot did for these communities in hardware. And, of course, to the small, old-line hardware store.

You might think the Lifetime fitness clubs are impersonal, being as large as they are. Certainly, the owners and manager of my longtime fitness club, and others, hope so. And warn their members of the lack of friendly, familiar staff at the large new facility.

But this isn't so. In fact, far from being cold and impersonal, the staff of the newly-opened Lifetime Fitness facility has clearly been thoroughly and well-trained in cheerful, courteous, friendly service.

The things that the firm has done right are easily enumerated. They have chosen two sensible locations in the area, which is one of the more densely-populated, higher-income sections of the state, but underserved in terms of fitness facilities. Their price points and service offerings provide a compelling value propositions for middle-income and higher families.

No doubt the firm's national scale, use of standardized club designs and their own construction company serves to put them in a position of having significantly lower costs than a smaller, local club would have for the same physical facility.

The staff are all customer-focused, fit-looking and efficient. Far from being overwhelmed by the size of their membership base, they seem to connect well with their customers. The woman responsible for the metabolic analysis and services remembered me, though we had met only once, for an assessment several weeks ago.

As part of the opening process of the first location, the management held a 'get acquainted' cocktail party a few weeks ago, followed by an opening night in the facility two days prior to it opening for business.

Both events served to expose the staff to their customers, answer questions, and prospect for more members through the people who had already taken advantage of early-membership deals.

Lifetime's new facility opened for business yesterday morning in flawless style. They obviously had all of their staff on duty for the opening weekend, and it resulted in a very positive experience.

The place was packed, yet without a sense of chaos.

The building is designed so that the two highest-margin services- a cafe and a spa/massage service- open onto the front lobby. It's no secret that Lifetime aims to make fitness a business. Their employees are all trained to offer, in a polite, non-pressuring manner, additional, fee-generating services. But they also are trained in a general sense to solve problems, answer questions and generally provide a very positive customer experience.

For example, when I asked a cafe staffer about using my member card to charge items, she instantly explained how that was done, where to sign for the service, and, if one's card was not handy, what information they use to allow charging to one's account.

Current economic conditions notwithstanding, the spa and cafe were doing land office business this weekend. Between the people I saw from my longtime fitness club, and the stories of other customers in the locker room coming from other fitness clubs, it's clear that Lifetime has successfully taken significant market share from existing fitness competitors.

It's difficult to see how any local, general fitness businesses, except for the YMCA's, will be capable of prospering, let alone surviving this new competitor's entry into the fitness market.

I checked Lifetime's last five year price chart, as depicted nearby. While roughly even with the S&P500 Index for the period, the company's price soared well above the index for the early part of the term.

I don't follow individual companies for investment purposes, and I don't own any positions in Lifetime Fitness. Looking at the chart, I can't say definitively why the company's stock price began to plummet late last year.

Perhaps it is viewed as a discretionary service which will be hard hit by the likely recession.

If so, the experience of the past few months in New Jersey suggests that they are far better managed than that. Nearly everyone with whom I've spoken at the new facility feels the services are much less expensively priced than what is comparably available. The staff performs in a manner that makes you feel you are watching a well-oiled retail machine at work. It doesn't take much thought to understand that Lifetime's size and growth potential allow its employees to consider career development options which are simply nonexistent in your local, smaller-scale fitness business.

I've always liked the people who own and operate the fitness club to which I have belonged for nearly a quarter of a century. Were it not for Lifetime, I would have had no reason to sample another competitor, nor plan not to renew my membership when it expires early next year.

However, there's no realistic way in which that business can compete for my fitness dollar now. Due to a mistake made locating on a wetlands parcel, the owners cannot add more fitness services, such as swimming or tennis. The relatively high fixed cost nature of fitness clubs means that just a small loss of customers will have a severe impact on my current club's profitability.

Faced with, by March, two Lifetime fitness facilities bracketing it within a few miles on each side, my old club won't be able to raise prices and retain members. They obviously can't lower prices to retain members and still maintain profitability.

On both financial and service offering bases, it would appear that the club has a relatively short future. Schumpeterian dynamics, in the nature of a large, lower-cost, more service-rich chain of fitness clubs, has irrevocably altered the local competitive landscape for fitness facilities.

And, true to form, it has resulted in more and better fitness services for the customer's dollar.

Dreamliner Delayed Again: McNerney's Continued Troubles At Boeing

Wednesday's Wall Street Journal described the new delays in its 787 Dreamliner. I last wrote about this continuing problem here, last April.

Interestingly, nowhere in Wednesday's article was any mention of Boeing's CEO, Jim McNerney. Yet, this latest setback seems to continue the company's woeful failures of management in its most visible, bet-the-company project.

You'd think McNerney would be at least addressing it personally, if not in public. As I noted in the earlier post, McNerney hasn't exactly left a trail of successes in his prior positions. And Alan Mulally, although having his hands full at Ford, is probably feeling that his erstwhile senior management is getting its just desserts for passing him over for a guy who never ran something so complex as an airplane maker.

This latest snafu on the Dreamliner involves the improbable widespread use of the wrong special fasteners on dozens of parts fabricated by the many subcontractors for the plane spread around the globe. According to the Journal's article,

"Boeing's Ms. Leach said engineers traced the latest problem to "specifications that weren't specific enough.""

You cannot make this stuff up, can you?

Wouldn't you have guessed that Boeing would have its own quality control employees in a few pilot subcontractor plants to supervise the entire process? This sounds like an overall failure of program management at Boeing. If this process was allowed to continue in this manner for so long, what does that say about the capabilities and effectiveness of Boeing's middle- and senior-management?

Thanks to this latest delay, and the little matter of Boeing's recent strike, the first Dreamliners aren't expected to be ready for delivery until 2010.

Any guesses as to how many more of these delays Boeing can take before McNerney is asked to take the fall for them?

Michael Dell Seals His Company's Fate

Yesterday's Wall Street Journal contained an article discussing Michael Dell's efforts to cut $3B from his company's expenses.

From my proprietary research on company performance, Dell has now entered a pattern that will leave it very little chance of outperforming the S&P in the foreseeable future.

The nearby, Yahoo-sourced chart displays Dell's last five years' performance, along with that of the S&P500 Index. The company hasn't outperformed the index for several years, and has underperformed significantly over the period.

My research indicates that companies which attempt to turn around from a formerly-successful, high-growth strategy have little chance of success.

Furthermore, the total return performance premium over the index shrinks dramatically from what it was in the company's better days. The result is a very minimal expected return premium from a shrinkage of the firm, followed by an attempt at a return to growth from its 'right-sized' base.

The second chart illustrates Dell's price performance since the late 1980s. It obviously roared past the S&P in its prime, but has flattened since the dot com crash of 2000. In effect, this decade has been a 'lost' one for the company.

At this late date, Michael Dell's attempts to cut his way back to superior performance is basically wrong-headed.

Sometimes, companies are just outdated, with business models which no longer merit investment.

Michael Dell would do himself and his shareholders a favor by declaring the end of the era in which his model excelled. Next, he should merge Dell with another retail tech product provider, or close it, and spare his shareholders further needless loss of their remaining capital.

My First Trip To Whole Foods

I recently had the occasion to visit a Whole Foods store for the very first time. Separately, Monday's Wall Street Journal contained an article discussing the company's recent troubles extending its growth in the current economic environment.

My first impression of the store was how different is its layout is from most other chains. It reminded me of Trader Joe's, whose aisles are also laid out in odd patterns, and similarly narrow.

These aisle patterns and widths seem to discourage fast, volume-oriented shopping. Supporting this, shopping carts are smaller, too.

In line with the Journal's piece, I noticed some fairly high prices on many items. Not uniformly so, but sufficient to make it clear that spending most of one's grocery dollar at Whole Foods would quickly make a major dent in your budget. Following up on my daughter's questions about some cuts of beef, I noticed that Whole Foods' offerings were literally triple the price of the same items at Costco, from which we had just come.

The mix of customers were more like those I saw in Trader Joe's, too, and less like other, larger local grocery chain stores. For example, there seemed to be fewer parents with young children. Perhaps the largest difference I noted was that lack of pace of other shoppers. Some were obviously married, empty-nesters, taking a lot of time strolling through the store.

On a Sunday afternoon, the store did not seem especially crowded. Then again, maybe it never is. As I noted, this was my first visit.

Turning to the article about Whole Foods in Monday's Wall Street Journal, it seems that perhaps what I observed on Sunday echoes what the chain is experiencing nationwide.

Nearby are the 2- and 5-year price charts for the company's stock and the S&P500 Index.

For the past 24 months, Whole Foods' equity price has fallen by some 80%. It's decline really accelerated in the past 12 months.

Looking back further, the 5-year chart shows the company's rising fortunes in 2004 and 2005. Beginning in 2006, however, the peak of the company's equity price had been realized.

Thus, there may be a lot of truth in a quote appearing in the Journal piece by Bob Summers of Pali Research,

"It's kind of the wrong time, wrong concept."

For what it's worth, the local, lower-priced Stop & Shop chain has organized its own product portfolio into a private-label organic brand. Further, it has grouped those items into one section of the store. So the organic-based differentiation of Whole Foods has already been competitively addressed by other chain stores in the area, including BJ's and Costco.

That makes the overall tone of the Journal's article quite believable. It notes the lack of cash on Whole Food's balance sheet, and its Starbucks-like wrangling with landlords in various shopping centers as it attempts to back out of prior lease commitments.

It's not hard to see the company continuing to appeal to a segment of high-income, small-family or empty-nest couples and singles who wish to consume only organic food and can pay the higher prices for it. That's a reasonable strategy, but for a niche player, not a nationwide chain of large grocery stores.

The next 12-18 months should be interesting ones in which to observe Whole Foods adapt to economic changes in the US.

Bernanke's Next Step To US Bank Nationalization: MBS Insurance

This weekend's Wall Street Journal reported on Fed chairman Ben Bernanke's comments, delivered to a mortgage finance conference via video link, on a continuing Federal role in housing finance.

My business partner and I have reasoned, since the Fannie and Freddie takeovers, that the government is unlikely to allow the past levels of profitability in mortgage finance to continue in the future. It's the simplest way to avoid a repeat of the excesses of the past few years and recent real estate lending cycle.

I've written a few posts on the nationalization of US banks, both recent, and, ideally, in the future.

Part of those futuristic musings of mine came a step closer to reality with Bernanke's comments. I actually saw part of his address live on Friday, but didn't know the context of what I was viewing.

In his remarks, Bernanke sketched out a continued role for the Federal government in housing finance in at least one of three ways: heavily regulated covered bonds to back mortgages; a 'public utility' model which featured a cooperative between private mortgage originators and GSEs, or; Federal mortgage bond insurance.

Taken in conjunction with Bernanke's comments concerning the difficulty in making the current GSE model function, it's not clear how the 'public utility' model is really any different than the current one.

But his description of government-issued mortgage bond insurance sounds like the sort of step that will further cement a nationalized banking system into place.

Can you imagine trying to sell mortgage-backed bonds in a market without such Federal insurance, when all the competing, similar bonds carry the Federal insurance? It would seem foolish.

About the only way you could do so would be to market the mortgage equivalent of high yield, or junk bonds. And we just saw what has happened to those in the past year. Much like the original junk bonds, such a mortgage-backed variant, even without the CDO overlay, would only be attractive during periods of risking markets.

But, back to Bernanke's comments. Introducing government-sourced mortgage bond insurance would encroach upon the conventional, private-sector bond insurers, such as MBIA and AMBAC. However, observing their disastrous plunge into insuring CDOs, it's unclear whether they could credibly re-enter the non-municipal bond insurance market again and offer simple mortgage-bond insurance.

With government provision of mortgage bond insurance, there would likely be a permanent foreclosure of the market to private enterprise, much like the effective elimination of private mortgage conduits when Fannie and Freddie were allowed to dominate that market.

We are probably seeing, therefore, the next concrete step along the road to heavy governmental regulation and de facto nationalization of core banking and lending functions in the US.

Nassim Taleb's Black Swan Appeared

Nassim Taleb, author of the recent hedge-fund-related book, "The Black Swan," directly influenced the optionization of the equity strategy which my business partner and I have been operating for over a year. In this second Taleb-related post, based upon a Wall Street Journal piece, I noted the likely inconsistency of returns to Taleb's strategy,


"In it, Taleb's approach is described in more detail than prior articles I have read. It reinforced my feeling that his is a very inconsistent strategy. That is, he is constantly buying puts, losing a little money routinely, in hopes of profiting from the really big market meltdowns. This is what I more or less sensed from my prior reading about Taleb's hedge funds.

In the Journal piece on Friday, however, Taleb's performance is discussed. His last fund earned a 60% return in 2000, then lost money in 2001 and 2002, with only low single-digit gains for the next two years. He closed the fund on the heels of such mediocre performance, during years when conventional hedge funds rack up much higher gains.

Thus, Taleb's approach, and, probably, that of the new fund using his ideas, tends to be erratic, and depend upon high volatility to earn large returns."

Of course, the events of September and October, with their double-digit negative monthly returns, provided the once-in-several-decades windfall that is the payoff of Taleb's deep out-of-the-money put strategy.

The question now, of course, is how the Taleb-inspired fund will do in the coming months. Yesterday's Journal piece noted,

"He also helped start a hedge fund, Universa Investments L.P., which bases many of its strategies on themes in the book, including how to reap big rewards in a sharp market downturn. Like October's.

Assets under management at Universa have neared $2 billion since the fund launched early last year with $300 million under management. While Mr. Taleb frequently consults with Universa's traders, the Santa Monica, Calif., fund is owned and managed by Mark Spitznagel, who worked for several years in the 1990s as a pit trader on the Chicago Board of Trade.

The strategy, which keeps more than 90% of assets in cash or cash equivalents such as Treasury bonds, either breaks even or loses small amounts in most months while waiting for periodic, infrequent spikes in volatility.

While the black-swan strategy has paid off handsomely this year, it hasn't always. Mr. Taleb's previous fund, Empirica Capital, which used similar tactics, shut down in 2004 after several years of lackluster returns amid a period of low volatility. The strategy may face another test after the current bout of market turmoil."

The piece goes on to question whether investors will remain with the fund, once the prospect of more deep market downdrafts has lessened.

My partner and I have considered this question, of course. It's a variant the one which was resolved for me years ago by a wealthy private investor during a brief stint doing research with him. A former economics professor who ventured out on his own and made a tidy fortune, he was interested in developing the equity strategy engine for a potential hedge fund group, and wanted to assess my strategy for that purpose.

While not putting it into quite these words, this investor was unequivocal in noting that, in some market conditions, one simply has to be out or short. Long-only strategies get so badly mangled in a downturn like the one of the last two months that they struggle to repair the resulting damage. Especially since most equity strategies which outperform in up markets tend to lose a lot more in serious down markets.

This brings me to Taleb's work, because he has a viable approach for the rare, but spectacularly damaging sudden bear equity market of short duration.

Few investors correctly saw the sudden wind shear-like drop coming, thinking, instead, that the evolving financial markets troubles and looming recession would temporarily dampen equity returns.

Truly, these past two months were the sort of 'black swan' event for which Taleb is so well-known.

The trick to being able to maintain a long-running equity or derivatives strategy is to have functioning approaches for both healthy, upwardly-trending market periods, and the few, dramatically falling periods. Effective transition between these two different types of market conditions is key.

It seems that Taleb's huge gains in short periods of tremendous market declines are not matched by his provision of any type of reasonably competitive long-oriented equity or derivative strategy. But investors will look for either a strategy capable of switching gears to match market conditions, or will simply switch allocations out of such single-market condition funds.

Gasparino's Strange Behavior Last Week On CNBC

Quite a few readers were searching recently for a CNBC video of Charlie Gasparino 'losing it' on air.

After a few days, this clip surfaced on YouTube. I think it is the one for which those readers have been searching.

Les Moonves' Missteps At CBS

Friday's Wall Street Journal featured Les Moonves' CBS in its 'Heard On The Street' column. It's an instructive piece because it describes how much of a step up the job of CEO can be, and frequently is, from merely running a business unit within a multi-business company.

In Moonves' case, he was unhappy being cast as CEO of the slow-growth component that was spun out of Sumner Redstone's Viacom when that conglomerate failed to generate promised returns.

The nearby, Yahoo-sourced price chart for CBS and the S&P500 Index shows how badly Moonves has performed at the helm of CBS since its 2005-06 spin off from Viacom. A 50% loss in price, with a significantly faster decline in the recent market turmoil than the S&P hardly provides evidence of his successful leadership of the one-time radio and television network.

As the Journal piece notes,

"With radio and TV ad revenues declining sharply amid the slump, analysts are questioning whether CBS can maintain its generous dividend that has the stock currently yielding 11%. CBS dismisses such concerns. Indeed, CBS's indebted chairman, Sumner Redstone, can ill-afford a dividend cut.

Still, that the question is being raised at all suggests CBS hasn't husbanded its cash resources as well as it should.

Since splitting from Viacom at the end of 2005, CBS has generated more than $4 billion in free cash flow. Prudently managed, and together with well-timed asset sales, CBS should by now have accumulated a decent cash hoard to tide it comfortably through a downturn.

But CBS Chief Executive Leslie Moonves never made any secret of his impatience with CBS's slow-growth image. So while he raised more than $2.3 billion selling small radio and TV stations as well as theme parks, he has spent about as much buying digital businesses, including CSTV, Last.fm and the $1.8 billion all-cash acquisition of CNET last summer.

Moreover, he squandered $3.4 billion on ill-timed stock buybacks last year, paying an average of $32, which was only a little below the stock's high point of $35 since the split and more than three times the approximately $9.40 where the stock is now trading.

Along the way, he also steadily raised the dividend. CBS is now paying $1.08 a share at an annual cost of roughly $725 million.

If Mr. Moonves wanted to build a growth business, he would have been better off jettisoning the "high dividend" promises. He then could have been more aggressive at reshaping the CBS portfolio, potentially through the complete sale of the fast-declining radio group two years ago.

By aiming for two goals at once, he is likely to fall short on both."

What seems clear is that it hasn't been simply Moonves' desire to pursue growth business in media that has caused problems for CBS.

The financial skills of managing balance sheet liquidity and squaring that management with the company's mix of businesses seems to have eluded Moonves.

Even if Moonves' defense is that Sumner Redstone imposed dividend policies, due to his continued role in CBS, that does not excuse the results.

It doesn't take much observation of technology- and growth-oriented companies to see that investors in those enterprises give up dividends in exchange for superior growth in value.

Unfortunately for Moonves, he pumped out cash for dividends and acquisitions just as systemic liquidity are at a record low for at least fifty years. Not only has Moonves gotten the mix of liquidity management and business mix wrong, but he got the timing of that mistake wrong, as well.

It's a good lesson in why it's actually rare to find a CEO and a company which fit together such that the former can manage the latter to consistently superior total returns for shareholders over time.

Could Dick Fuld Have Been Legally Stopped From Destroying Lehman?

Quite a bit of ink- real and electronic- has been spilled regarding Dick Fuld's failed Lehman Holdings.

Last week, or perhaps the week prior, there was an interesting discussion on CNBC concerning the timeline and actions, or inactions, of various players surrounding the Lehman bankruptcy.

For example, there are stories of several in-person meetings between Fuld and Treasury Secretary Paulson. Some say that Paulson pointedly told Fuld to raise more capital or suffer the consequences. Others say this was not the case.

Fuld is clearly under the microscope for potentially having told his staff and executives one thing about Lehman's capital adequacy and plans to raise more, while telling investors and analysts something different. If this is proven to be true, with bad intent, Fuld could be facing jail time.

Stepping back, the larger question would seem to be this:

Can and/or should the US Federal government, either through cabinet officers or regulators, intercede with financial sector firms and either take possession of them, or direct them to take various actions, prior to a bankruptcy?

Is a concern that a firm's reckless or ill-advised courses of actions will 'cause some problem' or 'cause something bad to happen to the financial system,' of an undefined nature or magnitude, sufficient to justify the taking of personal property in the form of a publicly-held financial services firm?

Several people, including John Gutfreund, former Salomon Brothers CEO, have opined that Fuld should have known sometime late last year that he wasn't going to be able to maintain Lehman's independence for very long into 2008, as a solvent company.

Even if this were true, does that mean the Federal government should have interceded just based on fears, rather than facts?

Was Fuld's continued running of Lehman as an independent firm criminal?

These are not trivial questions.

For example, Treasury, the Fed and the FDIC have all taken actions in the third quarter of this year which would have been totally unacceptable, had they taken place one year earlier. Yet, had they taken place in 2007, the serious meltdown of fixed income and equity markets might not have occurred to the extent they have in recent months.

Was AIG necessary, or an overstepping of legal boundaries? WaMu? Fannie and Freddie?

In the case of the latter two GSE's, given that Congress and at least two Presidents encouraged these firms to securitize problematic home loans, is it fair for citizens to have lost equity value due to government's incompetence?

What is the desirable path in our mixed-economy? What are the appropriate uses of, and curbs on Federal power in maintaining the health of our financial system, while also respecting private property rights?

Motorola's Impressive New CEO

Wednesday's Wall Street Journal featured Motorola's new co-CEO, Sanjay Jha, in an article in the Marketplace section.

Based on what I read, Mr. Jha is one impressive executive.

The article provides details on Mr. Jha's scrapping of a large part of Motorola's existing cell phone line because it uses too may different operating systems. He seems like a very decisive, hands-on co-CEO.

But these passages in the article really got my attention,

"Within days of arriving, Mr. Jha told employees gathered at the mobile-device division's Libertyville, Ill., headquarters, that he was proud to be a part of the pioneer in wireless communications, and asked employees to focus on developing the applications and services that could restore Motorola's leadership.

By late September, however, Mr. Jha noted that the company's problems were more basic, ranging from late deliveries to clumsy user interfaces. Mr. Jha told employees his wife carried an LG Voyager and refused his offer of a Motorola phone. She, like other consumers, didn't want to have to read a user's manual to figure out how to use it. "When my wife switches, then you'll know," he said, according to a person at the meeting.

Mr. Jha has restricted his visits to a few important partners, including Google, calling others by phone to introduce himself. "I'd love to come see you, but first I have to figure out what to tell you," he told the head of a European carrier. "My hands are full." "

I'm a big believer in senior executives being plugged into the real world, and Mr. Jha's story about his wife hit home.

So did the brutally honest phone calls he's made to customers.

You have to love a CEO that blunt and realistic, even with his customers.

One look at the nearby price chart of Motorola and the S&P500 Index for the past five years demonstrates that Mr. Jha both has his work cut out for him, but also has little risk, considering how far the company's stock price has plummeted since its high in late 2006.