Archive for March, 2009

Obama Gets Tough on Auto but Not on Financial

As  my 3 year old niece would say, “oh but why?”  A good question, to which I say perhaps it is a signal that the Obama administration facing growing public outrage of endless risk taking with the exorbitant lending of public money to failed corporations, has reached a tipping point.

The Washington Post wrote:

…Moreover, GM must move forward without its chairman and chief executive G. Richard Wagoner Jr., who met with administration officials on Friday and has agreed to step down.

The White House’s insistence that Wagoner step down is an extraordinary intervention of the federal government into the management of a private company. A senior administration official said Wagoner’s resignation was required because the company needs a “clean sheet”…

But why force the largest American automaker with so many democratic union constituents to restructure and perhaps force even more labor jobs to be lost?  What is the strategy or is there even a strategy?  Perhaps its Obama’s desire to please all parties not just his own in his “unification and inclusivity” approach to governing.  But wouldn’t this draw ires from the Left feeling somewhat betrayed by his campaign promises of “change” and “yes we can” for the nation to reform from the far right of Bush’s?

Politico.com reports:

A stark image of Paul Krugman, the bearded New York Times op-ed columnist and Princeton economist, appears on the cover of next week’s Newsweek, with the headline “OBAMA IS WRONG: The Loyal Opposition of Paul Krugman.”

Krugman, who won the Nobel Prize in economics last fall, has been arguing that Obama is doing too little to respond to threats to the nation’s banking and economic system, and he has contended that the $787 billion stimulus bill should have been bigger.

Krugman personifies a conundrum for Obama: He has to cope with complaints from the political left, as well as the more predictable opposition of the right.

The prolific professor has been pushing his views in his column, on his blog and in Rolling Stone.

Newsweek Editor Jon Meacham explains the choice in a letter to readers: “Every once a while, … a critic emerges who is more than a chatterer—a critic with credibility whose views seem more than a little plausible and who manages to rankle those in power in more than passing ways. As the debate over the rescue of the financial system—the crucial step toward stabilizing the economy and returning the country to prosperity—unfolds, the man on our cover this week, Paul Krugman of The New York Times, has emerged as the kind of critic who, as Evan Thomas writes, appears disturbingly close to the mark when he expresses his ‘despair’ over the administration’s bailout plan. …

“There is little doubt that Krugman—Nobel laureate and Princeton professor—has be come the voice of the loyal opposition. What is striking about this development is that Obama’s most thoughtful critic is taking on the president from the left at a time when, as Jonathan Alter notes, so many others are reflexively arguing that the administration is trying too much too soon.

“A devoted liberal, Krugman hungers for what he calls ‘a new New Deal,’ and he prides himself on his status as an outsider. (He is as much of an outsider as a Nobel laureate from Princeton with a column in the Times can be.) Is Krugman right? Is the Obama administration too beholden to Wall Street and to the status quo, trying to save a system that is beyond salvation? Does Obama have—despite the brayings of the right—too much faith in the markets at a time when prudence suggests that they cannot rescue themselves? We do not know yet, and will not for a while to come. But as Evan—hardly a rabble-rousing lefty—writes, a lot of people have a ‘creeping feeling’ that the Cassandra from Princeton may just be right. After all, the original Cassandra was.”

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Forget Bailout Says Economist-Break the Bank and Put Into Receivorship

How will Wall St respond to this?  Not well I imagine, but no short term pain then no long term gain.  Isn’t this the type of change President Obama was promising or was that just another unfulfilled Washington campaign promise long gone by.

Part I: Geithner’s Plan “Extremely Dangerous,” Economist Galbraith Says

From The Business Insider, March 23, 2009:

Tim Geithner has finally revealed his plan to fix the banking system and economy.  Paul Krugman, James Galbraith, and others have already trashed it.

[We spoke with noted economist Galbraith this morning. In the accompanying segment, he calls the Treasury Secretary’s plan “extremely dangerous.”]

Why?

In short, because the plan is yet another massive, ineffective gift to banks and Wall Street. Taxpayers, of course, will take the hit

Why does Tim Geithner keep repackaging the same trash-asset-removal plan that he has been trying to get approved since last fall?

In our opinion, because Tim Geithner formed his view of this crisis last fall, while sitting across the table from his constituents at the New York Fed: The CEOs of the big Wall Street firms.  He views the crisis the same way Wall Street does–as a temporary liquidity problem–and his plans to fix it are designed with the best interests of Wall Street in mind.

If Geithner’s plan to fix the banks would also fix the economy, this would be tolerable.  But no smart economist we know of thinks that it will.

We think Geithner is suffering from five fundamental misconceptions about what is wrong with the economy.  Here they are:

The trouble with the economy is that the banks aren’t lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it.  As consumers retrench, companies that sell to them are retrenching, thus exacerbating the problem.  The banks, meanwhile, are lending.  They just aren’t lending as much as they used to.  Also the shadow banking system (securitization markets), which actually provided more funding to the economy than the banks, has collapsed.

The banks aren’t lending because their balance sheets are loaded with “bad assets” that the market has temporarily mispriced. The reality: The banks aren’t lending (much) because they have decided to stop making loans to people and companies who can’t pay them back.  And because the banks are scared that future writedowns on their old loans will lead to future losses that will wipe out their equity.

Bad assets are “bad” because the market doesn’t understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are.  House prices have dropped by nearly 30% nationwide.  That has created something in the neighborhood of $5+ trillion of losses in residential real estate alone (off a peak market value of housing about $20+ trillion).   The banks don’t want to take their share of those losses because doing so will wipe them out.  So they, and Geithner, are doing everything they can to pawn the losses off on the taxpayer.

Once we get the “bad assets” off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they’ll sit there and say they are lending while waiting for the economy to bottom.

Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they’ll be working it off for years.  House prices are still falling.  Retirement savings have been crushed.  Americans need to increase their savings rate from today’s 5% (a vast improvement from the 0% rate of two years ago) to the 10% long-term average.  Consumers don’t have room to take on more debt, even if the banks are willing to give it to them.

The two charts below from Ned Davis illustrate the real problem: An explosion of debt relative to GDP.  The first is Nonfinancial Debt To GDP.  The second is Total Debt To GDP.

In Geithner’s plan, this debt won’t disappear.  It will just be passed from banks to taxpayers, where it will sit until the government finally admits that a major portion of it will never be paid back.

For more coverage including charts, see The Business Insider.


Part II: Geithner, Obama Kowtowing to “Massively Corrupted” Banks, Galbraith Says

Like it or not, many people seem to be resigned to the idea there’s no alternative to the public-private investment fund scheme Treasury Secretary Geithner detailed this morning. (Click here for part one of our discussion of the plan.)

That’s hogwash, says University of Texas professor James Galbraith, author of The Predator State. Of course there’s an alternative: FDIC receivership of insolvent banks.

Aside from being legally proscribed, the upside of FDIC receivership is the banks are restructured and reorganized for potential sale (either in whole or parts), Galbraith says. Such was the fate in 2008 of, most notably, Washington Mutual and IndyMac.

Crucially, FDIC receivership also means new management teams for insolvent banks; and Galbraith notes new leaders will have no incentive to cover up the fraudulent or predatory lending practices of their predecessors. Given the entire system was “massively corrupted by the subprime debacle,” the professor believes criminal prosecutions on par with the aftermath of the S&L crisis – when hundreds of insiders went to jail – is a likely (and necessary) outcome of the current crisis.

But don’t expect to see many “perp walks” if Geithner’s current plan comes to fruition. That’s one reason Galbraith called the plan “extremely dangerous” in part one of our interview.

So why isn’t the Obama administration pushing for FDIC receivership? “Political influence of big banks,” the economist says.

Other renown economists agree.  One is Paul Krugman of Princeton University, NY Times Columnist and Nobel Prize winner feels Geithner’s plan won’t work and disagrees with with Larry Summers and Ben Bernanke in addition to the Secretary of the Treasury.

Why is government leaderships on both sides of the aisle so hesitant from exploring other options such as the one presented by Galbraith and Krugman?  Is it because it does involve the take over of many of these banks into receivorship and hence breacking the control of current management, shareholders and the contracts that these institutions hold?

Or is it the special interest money that finds its way to campaign funds that make politicians hesitant to be as objective as they should and need to be in the full interest of all Americans and their long term interests but not just those that are tied to the banks?

Looking at the tally of money (source:  opensecrets.org) contributed to our federal government campaigns by commercial banks, it is no small amount.

Election Cycle Rank† Total Contributions Contributions from Individuals Contributions from PACs Soft Money Contributions Donations to Democrats Donations to Republicans % to Dems % to Repubs
2008* 14 $36,596,575 $25,461,187 $11,135,388 N/A $17,382,130 $19,188,294 47% 52%
2006* 10 $25,556,994 $14,171,801 $11,385,193 N/A $9,593,806 $15,718,285 38% 62%
2004* 12 $30,712,741 $20,304,454 $10,408,287 N/A $11,055,108 $19,575,158 36% 64%
2002 17 $19,990,341 $7,832,719 $8,669,773 $3,487,849 $7,287,686 $12,642,527 36% 63%
2000 14 $25,909,905 $11,034,100 $9,619,581 $5,256,224 $9,388,944 $16,443,924 36% 63%
1998 10 $17,736,407 $5,611,846 $8,759,627 $3,364,934 $6,105,895 $11,471,053 34% 65%
1996 10 $19,237,898 $6,775,437 $9,394,731 $3,067,730 $6,474,350 $12,709,248 34% 66%
1994 9 $13,356,699 $4,410,141 $8,029,818 $916,740 $6,459,487 $6,886,612 48% 52%
1992 8 $14,780,020 $5,482,094 $8,234,315 $1,063,611 $7,445,336 $7,314,787 50% 49%
1990 9 $9,769,910 $2,867,784 $6,902,126 N/A $5,159,968 $4,609,142 53% 47%
Total 12 $213,647,490 $103,951,563 $92,538,839 $17,157,088 $86,352,710 $126,559,030 40% 59%

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More Corporate Greed on Its Way But Not in Financial at Least on the Surface

Eddie Lampert ex-Goldman Sach’s Executive Turned Hedge Fund Founder…A Retail Genius?

Sears Holdings, the third largest US retailer, on Thursday highlighted the growing pressures it will face this year from mandatory payments to its pension plan, following the steep decline in asset values seen last year.  The retailer said that it had made cash contributions of $224m to its pension plan in its financial year ending on January 30, as it seeks to meet federal requirements to ensure that pensions are fully funded by 2011.

….However, Mr Lampert also called on Congress to ease pension plan regulations to give companies additional time to make required cash contributions to make up losses caused by the financial turmoil….

So basically, Lampert wants help to bailout his obligations to employees or find some loophole to stiff the employees after he has taken over Sears using his ESL Hedge Fund and ran it into the ground.  Of course Wall St and the financial analysts calls him the next Warren Buffett at the time.

Sears under Lampert’s leadership has performed miserably ever since he has assumed the role of its Chairman.  Many retail experts believes he simply doesn’t understand how to be a retail operator.  Even when the stock has shed 80% of its value,  Eddie Lampert continues to play the blame game but himself.

Meanwhile, “Venture capitalist William “Bill” Ackman, founder and CEO of investment and hedge fund firm Pershing Square, has announced to the chagrin of Target’s board and management that he shortly will wage a proxy battle for control of the discount-store giant.”, as reported by “Weekly Retail Fix” of Retailing Today.  Ackman’s hedge fund has accumulated 10% of Target’s stock since April 2007 and is attempting to muscle its way into the company’s board.  What does Target executives and current board think?

We are disappointed that Pershing Square has decided to pursue a costly and disruptive proxy contest, especially in light of our previous dialogue. Target has a long history of being responsive to shareholders and has engaged in numerous discussions with Pershing Square over a 20 month period.

So you think Government should be sympathetic and soft on regulation?  Is leverage of a perfectly healthy company such as Target in the best long term interests of shareholders, the economy, and American employment?

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