1-2 Knockout

I'm Scared; Hold Me

 "To be honest, I've been actively trying to avoid writing this for quite some time. 

Each day seems to bring more evidence of impending doom.  While I'm ecstatic to still have a job this week - not to mention surprised - who knows if I'll still have a job next week.  Many of you out there have been out of work for months already.  I've been there myself, and I feel your pain.  Hopefully, you saved for the proverbial rainy day and and haven't (yet) got to the point of selling your body for money or slingin' crack rock just to get by. 

Both the domestic and Global Economies seem to be slipping further into the abyss on a daily basis, despite the best intentions efforts of Central Bankers and their Political puppet masters.  Sure, there's a light at the end of the tunnel somewhere around 2011 (+/-), but for many of us, there just doesn't seem to be much about which to be optimistic in the interim.  Our Industry, our Country, and the World are all undergoing fundamental changes that will forever alter our futures in ways we cannot yet predict, at least not with any more accuracy than S&P's ability to predicts defaults.  Moving on.

Those of us who work(ed) "in Finance," regardless of whether it was on Wall Street, The City, Dubai, or wherever, have collectively been labeled "Public Enemy #1."  The ire directed upon us from several directions evokes memories of 17th century Massachusetts, untimely deaths and all.  While we've yet to witness Stan O'Neal's public hanging in front of the NYSE, we are no-doubt in the midst of our generation's version of a Witch Hunt, except this time the mission is to find convenient scapegoats for a decade (again, +/-) of widespread financial irresponsibility.  Frankly, I'm a bit surprised we haven't seen the pitchfork & torch crowd marching down Broad Street yet, although its probably only a matter of time before they're on the steps of Federal Hall calling for the head of anyone who walks by in well-tailored suit. 

I digress.

Our "leaders" - epitomized by the House Financial Services Committee - have shown themselves to possess nothing even approaching rudimentary understanding of the situation at hand, or any of its underlying facts or concepts.  This ignorance, by itself, is hardly anything new.  Nor, should we be surprised with the incendiary political grandstanding and finger-pointing,  best exemplified by likes of Maxine Waters. 

Lawmakers and Regulators alike seem intent on giving us (much) more of the same crap that helped enable the bad decision making that got us here in the first place.  Heaven forbid they actually address the root-causes and underlying issues, or dare I suggest, put their careers aside and take their own advice and do what's "best" for the Country.  The best part of this whole show is that people who can't evevn comprehend the basics of Business 101 are now exerting their political will on systematically important corporations, corporations that some of the most experienced, best-educated people on the planet can't even fix. Axing Rick Wagoner from GM, I think, might not have been the best idea (or the worst, obviously).  He's educated and a GM "lifer," to say nothing of the fact that he basically took the helm of the Titanic long-after it'd already hit the iceberg.  He's no superstar, but in my humble opinion, he seems comfortably in the middle 50% of Fortune 500 CEOs in terms of efficacy.  More broadly speaking though, this action made a huge statement:  If you're running a "Least-Favored Company" ("LFC"), take whatever $ you have left and get the hell out of Dodge (no pun intended). 

Its so pathetic its almost humorous, or perhaps the other way around.  When we desperately need people committed to getting the job done, people with intimate knowledge of their firms and industries, the Powers That Be are more concerned with scapegoating, and thereby ostrasizing the very people who perhaps have the best chance of acheiving the virtually impossible.  I've been thinking, if I were a top exec at a "LFC", say sitting on $10 million liquid, maybe another $5 million illiquid, why the hell would I still be showing up for work?  If I could swallow my pride and put the ego aside for a moment, I'm pretty sure the obvious solution would be to give the Government the middle finger (but ever so politely) and sit on the sidelines for a while, or until they come back begging you to help dig them out of the even bigger mess they've created. 

Our other "leaders," they mostly of the corporate variety, generally haven't shown much more spine than their Legislative counterparts.  When times were "good," it seems many just rode the gravy train with the proverbial "if it ain't broke, don't fix it" mentality.  When crap hits the fan though it seems many emperors truly wore no clothes, just like many formerly "superstar" hedge fund managers have been shown to be little (if anything) more than highly-leveraged mutual funds.  The underlying causes of such behaviour are outside the scope of this post, as are the clearly flawed incentive structures that enables them, so once again, I digress.  Just as firms overshot on the "way up," there is a decidedly non-zero probability that they will overshoot on the "way down" due to general ass-covering, short-sighted decision-making, and other examples of shoddy management. 

Many of these "leaders" have yet to grasp the concept that the Global Economy was over-inflated with cheap/easy/too-much credit, to oversimplify, money that didn't, ya' know, actually exist.  They speak (and worse, act) as if all we have to do is pass a few laws, beef (pork) up regulation, bail out a few companies and voila, we'll be back to the good ol' days when asset prices only went up, and any Joe Schmo could buy a million-dollar house with a 200-year, NINJA IO Option-Arm mortgage.  Far too often, I find myself feeling compelled to remind friends and family that comparing present-day to the artifically high price levels of mid-to-late 2007 is self-defeating, at best.  While we're likely not headed back to the Stone Age, we're similarly unlikely to get back to boom-time highs anytime soon..." 

I wrote the above, incomplete rant the last week of March, 2009.  Truth be told, I can't remember exactly why I never finished, although I suspect it had something to do with the inexplicable upward-march in asset prices since then.  Anyway, I think its interesting that despite everything that's happened over the past 4-5 weeks, my general outlook hasn't changed very much, if at all.  I should clarify explicitely that despite sounding like a crazy cynic, I'm (still) a closet optimist.  I think prosperity is possible, and likely;  I just don't think its going to happen overnight.

Since I penned the above though, most of the data I've examined indicate we're nowhere close to returning to economic growth and prosperity in the near-to-immediate future. And by that, I mean I have no freaking idea how anyone calling themselves an "Economist" (hell, or even "Pundit") can rationalize projected GDP growth by the third quarter of this year.  Even if their forecasts are based upon massive Federal spending and all sorts of bonkers bailout bullshit, I still just don't get it.   Sure, savings rates are showing signs of increasing - as are a few other pieces of data - indicating we're starting to make some progress towards sustainability, but the "bad" is still grossly overshadowing the "good."

As far as I can tell, the Administration's economic triage thus-far has been, and continues to be predicated upon widening of the "Hope & Change Spread," coupled a wholesale failure to identify, address, and ameliorate the underlying causes of our socio-politico-economic malaise.   Populist pandering and vague promises rooted in fantasy only serve to delay the inevitable.  I won't presume for an instant to have all or even some of the answers, but it seems painfully obvious that until we're ready to address reality, any interim gains or impression thereof won't mean squat over any meaningful period of time. 

So long as we consider economic and social prosperity a worthwhile endeavor, we must acknowledge that nothing worthwhile ever comes easy.  No doubt, if we are to acheive these goals many sacrafices and difficult decisions need to be made at every level of the game, and by all participants.  Absent these, I don't see how anyone can presume to declare us back on the road to sustainable prosperity, of any sort. 

Reg FD: All cash.  May have/be initiating limit short trades.

SAT Review: Fun With Analogies, Legislative Edition

Pro:Con::Progress:_________

Methinks those in Washington D.C. would be well-served to remember the law of unintended consequences.

Pandering morons.

Gretchen Morgenson, Please Step Down From Your High Horse

Back in March, 2008, I sent an emal to Gretchen Morgenson regarding the Bear Stearns/JPM debacle, and her populist, Wall Street-hating coverage surrounding the situation.  For some strange reason though, I hoped, despite all indications to the contrary, Mrs. Morgenson would clean up her act, knowing that people who actually have some semblance of financial/economic knowledge read her nonsense work.

Alas, almost a year later, she's one-upped herself, this time with a new, more vengeful ignorance that by now I've regrettably come to expect from the paper that employs such Financially illiterate (arrogant, annoying, etc) types as herself and Floyd Norris.

Curiously, now Mrs. Morgenson fancys herself an expert not only in all things Wall Street, but all things involving compensation, incentives, and policy.  While I'm not particularly surprised or dissapointed at this point,  readers should understand the righteous indignation with which I'm tempted to rain down upon her with, and the restraint I'm showing by avoiding the use of expletives, ALL CAPS, various other means of expressing such feelings in text.  To clarify, explicitly, the following is not an attack on an individual (per se), but on the argument(s) which she presents, and will be sent to her in an email, again.

Gretchen,

Regarding your recent article, "Fair Game: Bailout Needs Some Strings Attached to Limit Pay", I'm not quite sure where to start?  At the beginning, perhaps:

“The panel’s analysis revealed that in the 10 largest transactions made with TARP funds, for every $100 spent by Treasury, it received assets worth, on average, only $66,” the report said. “This disparity translates into a $78 billion shortfall for the first $254 billion in TARP funds that were spent.”

More taxpayer money down the drain, alas. And all the more reason to focus closely on executive pay restrictions at any bank that receives TARP funding.

Lets ignore, for a second, the fact that claims of "value" are for all practical purposes useless, given that no one can actually value the instruments in question, but frankly, I mean, holy non-sequitur Batman!   If I'm following your "logic" here, because the Treasury overpaid for assets to which no one can accurately value, you conclude that we should limit the pay of the bank Executives that convinced them to do so, despite the fact that their job is to do precisely that, to get the highest possible price for assets?  Seriously?  Give me a break.

I think you'll agree that most of the ladies and gentlemen who sit at or near the tops of these firms are already financially well-to-do, no?  Your plan is, to summarize, that we give the people who have the knowledge, ambition, and wherewithal (if anyone can be said to posses such things), a disincentive to fix the mess they may very well be responsible for creating?  This, sense does not make. 

Given the enormity of the task at hand - restoring the stability of the Global Financial System - perhaps we should be primarily focused not on punishing those deemed "responsible", but on creating an incentive structure to make sure those to which this task is left are those best equipped, and most likely to succeed. 

I realize, however, because this concept makes sense, it has no place in your column, especially since it does so without fueling the indignation of the ignorant pitch fork & torch anti-capitalism crowd. 

Much to my chagrin, It gets worse (much):

Although our long-running financial despond has produced few real positives, surely this is one: Investors are finally seeing just how regally executives live on their shareholders’ dimes. Maybe now they will do something about it.

Yes, Gretchen, making it, per your own admission, the Shareholders' problem, not the Government's.  

During good times, banks either hide or try to justify such perks as fleets of corporate jets and Las Vegas junkets. But as companies run to taxpayers for their bailout billions, they are now being forced to forgo the Gulfstreams, the tee times at Pebble Beach and those sumptuous spa treatments.

No, Gretchen, these perks are not restricted purely to the Executives and Employees of Financial firms.  As a matter of fact, firms (yours included, I'd imagine) rely on such perks in their every-day course of business.  Are you suggesting that, at a time when Banks are already up the proverbial creek in terms of retaining, nay, generating new business, that we further restrict their ability to do so?  Do you ever engage your brain before you put pen to paper (or fingers to keyboard, as it were)? 

Considering this suggestion, if put into practice, would necessitate further layoffs and bankruptcies amongst the very firms that depend on corporate travel and entertainment spending,  which we do not need any more of, I highly doubt it.

Could shame, that long-lost American character trait, be making a comeback? Not likely. So it’s important to make Washington’s plan to rein in executive pay airtight. Loud rebukes against executive excess are amusing, but a $500,000 cap on salary means only that the executives will be paid some other way. And requiring companies to recover compensation only if an executive is found to have lied on financial statements? Good luck with that.

Well, the voice of reason speaks, kind of.  This is really the best part though, where you, Gretchen, presume to teach us all how you think we'll get out of this mess, thank god!

Here’s an alternative approach. How about requiring that any severance pay over $1 million be subject to an excise tax of 20 percent? This is the amount levied on golden parachutes, and it could easily be applied to severance at companies tapping the TARP.

Ahhh, the inevitably arbitrary, yet impressively chosen "million dollar" threshold, what better way to rile the masses?  Far be it from me to point out that this approach simply amounts to a redistribution of money to The State, which I should remind you has such a great track record when it comes to deciding how best to allocate capital, but let's not let things like "logic" or "history" get in the way of your arguments here.

Furthermore, why not extract a 20 percent tax on all perquisites exceeding $50,000 that are given exclusively to top executives each year? These include such delectables as cars and drivers, country club memberships and personal use of corporate aircraft. If the government won’t bar perks outright, then executives should have to give something back for the freebies.

Gretchen, by what calculus did you arrive at these numbers?  Even if you're speaking only of use of jets, drivers, and the like for personal use, $50,000 is still an arbitrarily low number, when a country club membership alone can cost $100,000+/year for a mid-to-fairly high-level club around a major metropolitan area.  A driver, often included in compensation packages since an Executive's role is sometimes a 24/7 job, can cost substantially more than $50,000.  

And while we are on the subject of excise taxes, the government should ban the deplorable corporate practice known as the gross-up, in which shareholders pay to cover an executive’s tax bills. Rank-and-file employees at these companies, who have been hit hard by the crisis, don’t get these deals. Why should anyone?

Gretchen, I'm sorry, you are either a shameless pandering hack playing to the already-angry masses to sell Papers, or an ill/un-informed idiot. 

 If shareholders don't want the executives of their portfolio firms receiving gross-ups as part of their compensation, then can - get this - not hold, or sell their shares in that firm or firms.  Incredibly, they can also attend what we call a "shareholder meeting," among a variety of other ways they can air their grievances.  Feel free to return to the realm of reality at any point, we'll be waiting for you.

IT is also important for the government to provide as many incentives as possible to get taxpayers’ money paid back quickly. So any executive pay restrictions might also state that if TARP funds are returned within a certain period — say, 18 months — the penalties can be avoided or refunded.

Oh, because this proposition won't incentivize Executives to do anything silly, like maximize short-term results to the detriment of long-term sustainability, no, we'd never expect anyone to do something so preposterous!  Of course, this says virtually nothing of the fact that as long as Banks keep paying interest (preferred dividends) on TARP funds, repaying loans later, rather than sooner, may actually work out better for shareholders, as over a more distant time horizon, many asset values will likely increase closer (albeit likely not to) par.  This is a gross oversimplification for which I apologize, but you should be comfortable with such shortcuts, so bear with me.

That which does not kill you makes you stronger, as the saying goes. If out of this near-death economic experience, shareholders emerge stronger and tougher on directors about me-first executives, more to the good.

Yes, you've hit the nail on the head, finally!  Shareholders, not the Government, need to demand more accountability and results, more performance for the pay, so-to-speak.  I do not disagree with the basic premise that when Government (or, as you're careful to say, "Taxpayer") funds are used, certain restrictions may be a good idea to ensure that said funds are not abused.  However, not a single suggestion if your article comes close to making any sense whatsoever.   If adopted, your proposals would, as I've already pointed out, likely accomplish the complete opposite results for which we should be desperately hoping.

Please, I implore you, issue a public defense of my criticisms, of your work.  Nothing would make me happier than to see some actual supporting evidence or logic to back-up your claims and suggestions, that is, to prove my criticism unwarranted; I am not excited about my seemingly ever-declining faith in traditional media outlets and traditional Journalists like as yourself.  Seriously, please, I beg of you, restore my confidence once more!

Regards,

Anal_yst

What Do You Value?

The "American Dream" upon which Obama routinely waxes-bullshit (McCain is just bad on this front, in fairness) is not - contrary to what he and many of his supporters think - that everyone has the god-given right to be financially well-off.

Before the Obama freaks inevitably jump down my throat, let me state this as clearly as possible.  

Warning:

This is a non-partisan post.  I do not support Obama or McCain.  Let me repeat:  I am completely Party and Candidate-neutral in this election.   This is an examination of concepts central to this election, and the philosophies behind them.  This post is not intended to be, and in no-way represents an endorsement or criticism of any Candidate beyond the issues discussed.  In the next few weeks, we'll likely be posting new material lambasting both McCain and Obama, so please don't be so quick to judge.   

Now that we've gotten that out of the way (although I expect the attempt will inevitably be in vain), the WSJ describes the differences between Obama and McCain's "value-based" tax plan:

Sen. Obama replied that it's a matter of values. His plan values work, not just wealth, he said. And after largely dodging Joe the Plumber, Sen. Obama referred to him on Saturday as one of the working people who would receive a tax cut under his plan.

"It's time to give a tax cut to the teachers and janitors who work in our schools; to the cops and firefighters who keep us safe; to the waitress working double shifts, the nurses in the ER," he said. "And yes, the plumbers, fighting for the American dream."

I want to focus on one clause in that statement for a moment, "His plan values work, not just wealth." Let that sink in for a second.  Obama tacitly acknowledges that work is valuable.  However, based off the subsequent paragraph, above, he fails to make the connection that not all work has the same value, which in capitalistic society is commonly measured by the price paid for that work.  (ed: A deeper discussion of the price paid for work being an accurate measure of the value society attributes said work is beyond the scope of this discussion, for another time though for sure, 1-2 care to give it a shot?) My job, for example, is not nearly as valuable or more accurately, not priced as highly as that of a surgeon, an all-star trader, a talented architect, etc, all of whom likely make several times what I do (just take my word for it). 

The Great Obama!

Looks like ol' Rupe (Murdoch) isn't sitting idly as we head towards election day.  Reprinted in full from the WSJ, in all of its sarcastic, bullshit-calling glory:

And now, America, we introduce the Great Obama! The world's most gifted political magician! A thing of wonder. A thing of awe. Just watch him defy politics, economics, even gravity! (And hold your applause until the end, please.)

To kick off our show tonight, Mr. Obama will give 95% of American working families a tax cut, even though 40% of Americans today don't pay income taxes! How can our star enact such mathemagic? How can he "cut" zero? Abracadabra! It's called a "refundable tax credit." It involves the federal government taking money from those who do pay taxes, and writing checks to those who don't. Yes, yes, in the real world this is known as "welfare," but please try not to ruin the show.

Oh Sh*t

Because at midnight on a Sunday night, this is what we do with our lives...(stalk the "Paulson")

I'm paraphrasing here, but the point is, well, we have no idea what the f*ck is going on.  Apparently theres a massive "bailout" package that just got approved by Congress, and We hear that there's some d-bags in the "Senate" that oh-I dunno, just might pull their heads out of their asses and f*cking approve it. Lets not get into the fact that no-one involved has any idea wtf is going on, but hey, thats what Glenfiddich is for, right?

Per the WSJ, uh, um, (go to cash ASAP).

Happy Monday, Happy whatever, and, uh, lets just sing some freaking Kumbaya

Slow News Day: Al Gore, Raging Hypocrite

Strategically placed between tonight's Daily Show and Colbert Report was the 1st ad I've seen on cable from Al Gore's current muse, the We Campaign.  Basically, its the same empty crap we've heard from him for years, except with a "viral" edge (because when you think Al Gore, you really think viral...) 

The best part about this one commercial (I haven't even delved into whats surely plenty of other silliness on the website) is the blatant contradiction that sits at its very core:

So friends, which is it?  Do you want 100% clean energy in 10 years, or do you want cheap gas, cus, uh, hate to be the one to point out the obvious, but you most certainly can't have it both ways.  Sorry, but reality sucks, maaaan.

This (er, Last) Week in "Duh": Price Hikes Work

In modern economics (slash for the purposes of this post), price hikes have two effects:

1. Discourage consumption
2. Encourage consumers to seek lower-priced substitute goods

Politicians like to think they can operate in an alternate reality where the basic laws of economics don't apply.  Of course, since most of their constituents also like to think they're immune from these very same laws, the pols get to act all surprised when their best laid plans invariably go to hell, but thats another story for another time.   From Monday's WSJ:

Politicians in Annapolis are scratching their heads wondering what happened to all those chain smokers who were supposed to help balance Maryland's budget. Last year the legislature doubled the cigarette tax to $2 a pack to pay for expanded health-care coverage. Eight months later, cigarette sales have plunged 25% and the state is in fiscal distress again.

Amazing, all it took to get people to buy less cigarettes (not smoke less, per say), was to make cigarettes more expensive.  Of course, the best laid plans of mice and men oft' go awry, all that much more often when the men in question happen to be politicians.   

A few pols are pretending to be happy that 30 million fewer cigarette packs have been bought in the state so far this year. As House Majority Leader Kumar Barve put it, fewer people smoking is "a good thing." Yes, except that Maryland may be losing retail sales more than smokers. Residents of Maryland's Washington suburbs can shop in nearby Virginia, where the tax is only 30 cents a pack, and save at least $15 per carton.

And herein lies the beauty of politics: Despite the fact that Maryland's legislation was inherently flawed and doomed to fail from the very beginning, the fault lies not with the State's elected officials, but with those uncooperative bastards from the neighboring states.  Rule #1 (or is it #2?) of politics: make sure you can always, ALWAYS blame the other guy (who(m)ever that may be). 

While we can never be 100% certain, the sad(est?) part is that most of the brain trust that is the Maryland Legislature probably thought it was a good idea.

Funny how basic economics works.

Duh.

(note: This post was started back on 8/12, its just...uh...yea took a while, deal)

Lake Wobegon Tax Policy

Presented with minimal comment.  From Rasmussen Reports.

The latest Rasmussen Reports national telephone survey found that 47% believe it's most important for tax policy to support economic growth. Nearly as many--44%--believe it's more important to establish a policy in which everyone pays their fair share (ed. best definition of "fair" left in comments wins lunch on me). Most Democrats favor an emphasis on fairness while most Republicans prefer a focus on economic growth. Unaffiliated voters are evenly divided.

The survey also found results reminiscent of Garrison Keillor's world where everyone is above average--most voters believe they already pay more than their fair share of the tax burden. Fifty-three percent (53%) hold that view while 30% say they're not paying more than they should. Voters who earn more than $60,000 annually are more likely than other voters to believe they're paying too much.

Just 45% of voters under 30 or over 65 think they're paying more than their fair share of the tax burden. A solid majority of those aged 40-64 think they're paying too much.

Fifty-nine percent (59%) of voters believe that tax cuts help the economy while just 15% believe they hurt. Looked at from the other perspective, 50% believe that increasing taxes will harm the economy while just 19% disagree.(ed. define cognitive dissonance)

Despite this, 48% would vote for a candidate who promised to raise taxes only on the rich while 41% would vote for a candidate who opposed all tax increases. This clearly reflects the importance of tax fairness rather than a simple focus on economic growth. Voters believe taxes are far more likely to go up with a President Obama rather than a President McCain . However, Obama continuously repeats his claim that he would not raise taxes on anybody making less than $250,000 annually. As a result, neither candidate has a significant advantage when it comes to voter trust on the tax issue.

I do love this idea of "tax fairness", especially since everyone thinks they know how everyone else should be taxed: my legitimate deductions are your tax shields.  You received tax breaks because you're politically well connected and gaming the system; I need the tax breaks to live.

There will never be a rational tax policy now that <50% of Americans pay income taxes.

I'm Moving to Guatemala

Not that this is news to anyone who, uh, actually reads the news, but the two men running for President of the U.S. are, how to put this gingerly, economically retarded.

Karl Rove did a piece in the WSJ yesterday, calling out these two pandering politicos on their blatant b.s., the most painful example of which may be the idea of taxing "windfall" profits (of course, avoiding any discussion of what, exactly, constitutes said "windfall".  Not to go off on a rant here, but wtf is up with the wind references, "windfall", "headwinds", etc?) 

Rove accurately points out that margins for the current corporate pariah du jour, oil/energy companies such as Exxon Mobil, are amongst the slimmest in any industry.  So, if these populism-promoting politicians aren't defining windfall profits by margins, they must mean by sheer size, right? 

Wrong. 

It's not the profit margin, but the total number of dollars earned that is the problem, Mr. Obama might say. But if that were the case, why isn't he targeting other industries? Oil and gas companies made $86.5 billion in profits last year. At the same time, the financial services industry took in $498.5 billion in profits, the retail industry walked away with $137.5 billion, and information technology companies made off with $103.4 billion. What kind of special outrage does Mr. Obama have for these companies?

It's one thing when the most liberal senator on Capitol Hill blabbers incoherently about things which he clearly does not understand (as a matter of fact, its pretty much par for the course, no?), but when a so-called "Regan Republican" like John MCcain allows himself to sound similar ignorant, its a sign that we're all in serious trouble.

This past Thursday, Mr. McCain came close to advocating a form of industrial policy, saying, "I'm very angry, frankly, at the oil companies not only because of the obscene profits they've made, but their failure to invest in alternate energy."

So yea, about the title of this post.  I'm not kidding.  When the next leaders of the free world (ha!) not only say stupid things, but I fear, will actually follow their rhetoric with action, bad things will happen.  Very bad things.