Tuesday, September 30, 2008

Goodbye Bailout!

Ok, so the bailout isn't truely dead. In fact, it's a given some version will pass. And maybe something needs to be done. It's just this version was phenomenally vague in its specifics, and looked like it could dramatically alter the nature of American capitalism. Oh yeah, and raise the national debt while we are at it.

My objection isn't simply an economic one, although that is a valid point. The brilliant John Hussman wrote a wonderful piece titled You Can't Rescue the Financial System if You Can't Read a Balance Sheet, explaining why this does little to improve bank balance sheets and the likelihood they will fail.

My objection isn't even centrally the price tag, although $700 billion is enough to make you gasp for air. That works out to $5,072 per taxpayer in the US to buy distressed assets and flip them.

What I really dislike is that Uncle Sam would actually own the debt and potentially the stock of American companies. YUCK! For how long? What would the process be to unload these investments? As someone in most developing countries will attest, once the feds take a stake, privatization is not simple. That means we could see a landscape where we have companies with substantial governmental ownership in the US of A!

When the government maintains ownership, even if it is a modest minority stake, how does that influence government policy? As anyone with concerns about US beef will attest, the dual role of the US Dept of Agriculture in regulating and marketing beef often raises questions about the regulatory environment. On the other hand, government ownership could result in politicians trying to twist arms of the corporate leaders for political gains.

And how does the process of government divesture work? If the government sells, would it be perceived as a vote of no-confidence? What might be the rumblings of that? The government is no ordinary trader.

The stock markets have to fall. Earnings have been inflated by artificial methods and will have to normalize. But to save the taxpayer some, the Feds would do better to put a temporary hold on the 'mark-to-market' accounting rule, so they can look into other methods of valuation. 'Mark-to-model' was always bad, especially if there was no regulatory control of the model, but this mark-to-market nonsense is just as bad. Just because someone claims your house is worth $100,000 doesn't mean it is! There is a cash flow stream that has a value - maybe the accounting boards just need to firm up the assumptions used in their DCF model.

Meanwhile I won't hold my breath that another phenomenally bad bill doesn't emerge. All I hope is that the House Republicans managed to prevent the socialization of America! (Senate Repubs, way to show spine!)

Saturday, September 20, 2008

Villain of the Day: The SEC?

A lot has been made of John McCain's statement that SEC chairman Cox should be fired. I thought it was a silly demand - after all, a lot of what happened is not Cox's fault. Until I saw this, from the Maudlin newsletter:
It is going to cost the taxpayers a lot of money. While I think the losses on AIG will be rather minor in the grand scheme of things, if you add up Fannie and Freddie and a new RTC, coupled with the stimulus package, you can easily get to $500 billion, and that is probably a low number. For such a price, we had better get a new regulatory scheme which requires reduced leverage. Want to get really mad? Up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. Three down.


Chart of the Day: Commercial Paper

From John Maudlin, here's why the panic - the commercial paper market is what runs the economy!

Quote of the Day: Mark to Market

If you don't follow these things, a lot of the present financial crisis comes from a change in accounting rules! Seriously! The FASB changed from a "mark-to-model" approach, where companies could value financial instruments such as mortgage-backed securities using a computer model based on default rates, to "mark-to-market", which is the price you'd get in the open market, based on the last sale of that asset. John Maudlin writes:
The current mark to market rule, while nice in theory, works in normal times. But it has the unintended consequence of making things worse in crisis times. Why should an institution have to write down a security which over time is going to pay back the lion's share or more of its value just because a severely stressed institution was forced to sell that security at a very low price in a time of crisis?

Yes, there needs to be transparency and we as investors need to know what is on the books of the companies that we invest in. But it is somewhat like my bank asking me to mark to market my home and pricing my loan daily based on that new price. If my neighbor loses his job and sells his home at auction, does that mean my home is now worth less two years from now. Maybe an even better analogy, if I am renting that home to a very good tenant, does my neighbor's price impair my income?

Tuesday, September 16, 2008

Quote of the Day: Stanford at the Olympics

From a newsletter by Ajit Dayal, Quantum Funds:
An interesting statistic: students (former and existing) of Stanford University in USA won 25 Olympic medals in China, of which 8 were gold, 13 were silver, and 4 were bronze. If Stanford were an independent country, it would have ranked as the 9th in terms of gold medals won and 11th in terms of total Olympic medals won.

Monday, September 15, 2008

Quote of the Day: Leveraged Lehman

John Hussman of the Hussman Funds writes:
Last week, Lehman reported $600 billion in assets, on less than $20 billion of common shareholder equity. ... Put another way, a markdown in the value of Lehman's assets by just over 3% would wipe out that reported shareholder equity. One would need to have a great deal of faith in that asset valuation to be willing to buy the company out at any price, since an outright buyer would have to agree to pay off Lehman's bondholders (in excess of $100 billion).

Wow, think homeowner with a $300,000 house, but his equity in the house is only $10,000, and with the house, and credit card and other debts of $50,000. Hmm, so turns out our most esteemed financial firms are no different from the lay homeowner?

Saturday, September 13, 2008

Chart of the Day: Real Estate Predictions

Predictions by John Burns of John Burns Real Estate Consulting, reported by the always brilliant John Maudlin.

Friday, September 05, 2008

ANWR Oil Reserves

Some numbers to mull on ...

Mean estimate of ANWR Area 1002 Technically Recoverable Oil
7.7 billion barrels**

US proven oil reserves
21.8 billion barrels

**This estimate is only for the federally controlled area, and was done when oil was at $20/bl. Given that oil is more than 5 times that number, ANWR could have substantially larger oil reserves.

Wednesday, September 03, 2008

RNC: Day Two Impressions

I only watched the RNC from about 9 or so. And I must say, it was quite a view. The one thing the GOP does better than the Dems is stay on schedule. Especially this year in a truncated convention where time was critical.

The video tribute to Michael Mansoor literally had me in tears. At a time of so much selfishness and cynicism, here was a young man who leaped on a grenade to protect his fellow soldiers. That, and the tribute to the veterans of different wars, set the evening in a really good way for me.

The Dems lost steam too often with breaks. Not the Republicans. Immediately after the tribute was what I thought was a pretty good speech by First Lady Laura Bush. There's something pretty awesome about her - she has so much grace and class! And she went to point out the stats the media have not bothered to point out - especially the highest ever minority performance on achievement tests, and what I think should be the legacy of the Bush administration - increasing the number of Africans receiving antiretrovirals from 50,000 to about 2 million.

President Bush was decent - he had a few good lines, but I don't know if it was the fact that he was speaking by satellite, or what, but he's been better at public speaking. But it was short, and kept the momentum going into the video tribute of Reagan.

The Reagan piece was ok. Seriously, how do you ever make a vid on Reagan and not include the famous "Tear Down these Walls" speech? But there were moments when it was touching.

Fred Thompson was the best speaker of the evening. Talk about knocking it out of the park. Best line was talking about hope ... the hope that McCain had as a POW, that is the true hope. His re-telling of the McCain story was incredibly moving, and for someone like me who has already heard it, I still found myself tearing up.

Joe Lieberman was decent, but entertaining if only because I was surprised how aggressive he was. I won't expect to see calls for his censure within his causus, but it truly motivated the folks at the convention center, and the base in general to see the former VP pick of the Dems come over.

Overall, I thought it was a pretty good night. I think the GOP candidates have less of a need to be specific since they are running on an experience platform. And their experiences have been of surviving torture, reforming government ... not how their candidate met his wife, and asked her out!!

I'm real excited about the Palin speech tonight. The more I see her old interviews, the more I like her. She's been viciously attacked by the jerks like the DailyKos and the far left, but that's a post for another time.