Sunday, December 28, 2008

Gianrico Carofiglio --- Italian legal noir meets midlife stasis

Gianrico Carofiglio's crime and courtroom novels provide entertainment with a sense of ironic detachment, whatever that means. There's wry introspection combined with old style crime antics; compelling legal arguments and negotiating ploys accompanied by wise and unwise romantic liasons; and stories that develop at a reliably rapid pace. Three of Carofiglio's novels have been translated into English and published by Bitter Lemon Press. They certainly can't be classified as literature but there's a degree of literacy, humor and thought that's not often found in most of this genre. Easily more rewarding than almost any television program the stories tend to carry the reader, at least this reader, along for the ride with a focused yet relaxed style.

"Involuntary Witness" is the first in the series. It introduces the protagonist, the 40'ish lawyer Guido Guerrieri, in the process of a full blown psychological meltdown as his wife leaves him. Picking up the pieces slowly Guido defends a Senegalese peddler accused of murdering a child despite flimsy if any evidence. "A Walk in the Dark" finds Guido allied with a karate chopping nun who runs a refuge for battered women, allied against the well connected son of a senior judge who can ruin his career. Both the nun and a beautiful ex-alcoholic upstairs neighbor fall for Guido so his love life is revived, ultimately not with the nun of course. "Reasonable Doubts" has Guido on the ropes again as his now girlfriend ex-alcoholic upstairs neighbor jilts him for a girlfriend, hard on even an enlightened Guido, but he soon is engaged in defending a former neo-Fascist thug against drug charges, encouraged by said thugs stunning and willing Japanese Italian wife.

Despite this artless summary, the fact is that these books are really good if one has any interest in this genre. Whenever the next one comes along I will grab it immediately.

Saturday, December 27, 2008

The perception of money lost --- the Madoff swindle

Bernard Madoff says that he has lost at least $50 billion of investor money in a long sustained Ponzi scheme. An intriguing question is whether money that never existed except in fictional statements can actually be lost. That's not to say that his clients weren't royally cheated, but look at this.

Madoff started his investment firm in the 1970's. If the assumption could be made that he had $5 billion under management by 1985, then 10% returns annually for the next 24 years on that initial $5 billion would be $49.5 billion by the beginning of 2009(that's almost now). He generally reported 11 to 12% returns so this calculation is apparently conservative. This analysis is so simple that it is either stupid or brilliant. There were lots of ins and outs of course, but Madoff was so esteemed that until 2008 he always had more money waiting to get in then redemptions needed for life(and death) expenses of his clients. Madoff and those who worked with him managed the in and outs of cash accounts, and it is unclear whether they invested in any successful manner at all.

Did he siphon off large amounts of money? He actually didn't need to do that. He received at least 1% in annual fees on money raised by third parties and more on that directly raised. In addition his clients were charged trading fees and it is reported that the account statements received by clients showed active trading. Digesting that, on $50 billion of clients money Madoff and the 20 or so workers at his firm were likely receiving somewhere between 800 million to 1.2 billion a year in fees. Who knows how much money there was to divert since it's all part of the in and out accounting of the Ponzi scheme, but Madoff was certainly making enough to maintain an extravagent lifestyle money just on the fees generated by the fictional accounting.

One aspect of the reporting on this episode that to some extent supports this total "fabrication of statements" perspective is that a number of market participants have expressed shock that Madoff and his firm managed this much money. How could someone manage as much as $50 billion and never be associated with rumors around the movement in a stock, never be seen by securities analysts, never attend an investor conference, in fact be completely invisible. The firm was not in the Caymans or in Switzerland, it was at 54th and 3rd Avenue in Manhattan. They did not have a name like Alpha X fund or Uppity Lane fund, they were Bernard Madoff LLC. Yet who ever found Madoff as a top ten or top fifty shareholder, or in the case of one Dow stock the top 25o shareholders in required SEC 13-F filings. It is likely that the reason that the Madoff firm was invisible is simply because they did not manage much money in an investment sense. They managed cash inflows and outflows, and lived off of the proceeds. With all that said, it is unclear how much money there is to be found and returned to the clients of the firm.

It may be that the $50 billion lost was never important to the economy in a traditional sense because it was not being invested and risked as capital to build companies, finance r&d, or train labor. It can't be missed because the Madoff firm did not really exist in the role that it presented itself.

This money was, of course, extremely important to the clients of the firm, the wealthy and the foundations that invested, and any alternative to Madoff would have yielded real returns at some level or at a minimum for the last investors in preserved a good portion of their initial investment.

More will be learned, but at this point it is absolutely amazing that this man and some of his colleagues are not in the Tombs or Rikers. I've watched enough Law and Order re-runs(way too many in fact) to have heard the judge say "REMAND" countless times. Perhaps the investigators feel that the best path to the money is one the lets the criminal think about it in his $7 million Park Avenue apartment. Apart from the Madoff family mansions, limousines, jets and toys, can what never existed possibly be found?

Friday, December 26, 2008

"Vitus", PG and still somewhat profound

This 2006 Swiss film could be categorized as a well-done feel-good story that is predictable at every turn. So what. It is extremely "well-done", entertaining, and reflects a subtle elegance throughout. With that also comes some allegorical possibilities that are much more interesting to ponder.

Thursday, December 25, 2008

A few passages from "Netherland" by Joseph O'Neill

"Netherland" is one of this year's best novels, a distinctly New York story centered on a Holland born and raised London banker who worked in New York during four years encompassing pre and post 9/11. Rather than comment, what follows are a few passages from the book.

page 64 --- "Perhaps the relevant truth -- and it's one whose existence was apparent to my wife, and I'm sure to much of the world, long before it became apparent to me -- is that we all find ourselves in temporal currents and that unless you're paying attention you'll discover, often too late, that an undertow of weeks or years has pulled you into deep trouble."

page 89 --- visiting his old neighborhood in Holland -- "I found it idiotically distressing that a sharp finger whistle could no longer summon them(his childhood friends) outdoors into a playful twilight. An ancient discovery was now mine to make: to leave is to take nothing less than a mortal action...The pleasantness of my Holland was related to the slightness of its mysteries. There obtained a national transparency promoted by a citizenry that was to all appearances united in a deep, even pleased, commitment to foreseeable and moderate outcomes in life."

page 178 --- "Londoners remain in the business of rowing their boats gently down the stream. Unchanged, accordingly, is the general down-the-hatch, who-are-we-fooling lightheartedness that's aimed at shrinking the significance of our attainments and our doom, and contributes, I've speculated, to the bizarrely premature crystallization of lives here, where men and women past the age of forty, in some cases even the age of thirty, may easily be regarded as over the hill and entitled to an essentially retrospective idea of themselves; whereas in New York selfhood's hill always seemed to lie ahead and to promise a glimpse of further, higher peaks: that you might have no climbing boots at hand was beside the point ... We are in the realm not of logic but of wistfulness, and I must maintain that wistfulness is a respectable, serious condition. How, otherwise, to account for much of one's life?"

page 215 --- "My work, that morning, went passably--I was a panelist in a conference discussion with the could-mean-anything title 'Oil Consumption: The Shifting Paradigm'--and, better still, finished well ahead of schedule."

page 253 --- at the London Eye -- "My son's voice calls out. Daddy! Turning, I see my family and its superlong shadows. We are all beaming. Reunions in unfamiliar places have this effect, and maybe the great wheel itself is infectious: the stupendous circle, freighted with the circumferential eggs, is a glorious spray of radiuses."

page 256 --- "Which makes me remember my mother. I remember how I turned and caught her -- how could I have forgotten this until now? -- looking not at New York but at me, and smiling.
Which is how I came to face my family with the same smile.
'Look!' Jake is saying, pointing wildly. 'See Daddy?'
I see, I tell him, looking from him to Rachel and again to him. Then I turn to look for what it is that we're supposed to be seeing."

One could say that good book reviews can never be completely objective, that they must be to some extent personal. The choice of these passages, masquerading as a book review, has my fingerprints all over them.


Wednesday, December 24, 2008

Equities---early 2009 challenges

Over the last six weeks there has been a commonly expressed point of view that after year-end there was reason to believe that the equity markets could begin to be revived. No one was predicting a robust turnaround but many were speculating that companies with quality balance sheets and strong franchises in products or services that are needed would begin to see value buyers step in, cautiously of course, but the turn would begin. This thought was based on the expectation that investors, especially hedge funds, would have worked through their flight to cash, tax selling, and required redemptions. This no longer appears to be the case.

The number of hedge funds that are shutting down is not known, at least not here, but that number is large. There is no incentive to stay open for many with the earn-back agreements that are standard for most(no % take out on future gains until current losses have been recouped). Even big funds, like the two Tontine funds that totalled $11 billion earlier in the year, are shutting down. This means that instead of just accomodating redemptions at the year end calendar date, the closing funds will be going through an "orderly liquidation". They will continue selling in the coming months in a process that is intended to preserve what value is left for themselves and their investors. The selling will continue and any rallies in stocks, especially those that were top heavy with hedge fund investors, will be quickly met by what once was called "profit-taking" but now should be named "loss-mitigating".

Another shoe has dropped as well. The Madoff fraud has demolished confidence in the high net worth investing model globally, at least in the near term. Money invested based on reputation and trust will head for the exits and new money will be slow to come in. That's more selling of equities that's focused on 2009.

With any belief in the viability of equity markets longer term, there are without question many good companies that could now be categorized as "deep value". Choosing them is not like shooting fish in a barrel, far from it, but there will be a time when doubles, triples and home runs will come from some of these investments. The beginning of 2009, however, is not likely to provide the relief that some had anticipated.

Tuesday, December 23, 2008

People who live in glass houses...

It's interesting to see the frequent commentaries in the media recently about China's vulnerability to political unrest due to the economic downturn. "If China's growth rate dips below 8%..." or "If unemployment continues to grow..." types of comments are followed by a discussion of the potentially dire popular reaction. To this one could say, what about us, here in the U.S.A. We have no growth, plummeting housing prices, rising unemployment, the beginnings of a commercial real estate debacle, and a credit crisis that will not stabilize until the credit card companies go through their inevitable catharsis. Is there the, should this be said, arrogant assumption that because we are a democracy we will not have popular unrest or a significant political reaction.

True, Americans do not need to storm the Capitol building to make an impact. Enough pressure on members of Congress could lead to a disasterous series of protectionist trade measures that would lock in a recession or depression for the world, exacerbating nationalist tendencies and setting the stage for something terrible. In the U.S., political unrest can manifest itself in many ways. The commentators and the media want to focus on China and the fact that its growth rate may slip from 11% to 7.8%. Looks like a good problem to have from here.

This also brings to mind the media's focus on China's refusal of American aid after the devastating earthquakes there early in the year. Not that it wasn't a nice offer, but they are a powerful country now with the resources to address their problems. They're not Burma. At this point, what media pundit would dare compare the recovery from the earthquakes in China to the recovery from Katrina here.

Monday, December 22, 2008

Seasonal news---the grim and the hopeful

Seasons Greetings is a positive salutation. It's meant to be an acknowledgment of relationships, a recognition of the holidays and, I think, a positive outlook on what's ahead. The news this year has made the latter a bit more challenging than usual.

Hopefulness and new opportunities are the desired watchwords but who can ignore all of the bad news of recent months. It has not been a "here today gone tomorrow" type of news, it's a "we're going to live with this mess for quite a while" type of news. This grim outlook can be highlighted by the following statement in a Bloomberg story yesterday, "General Motors, Ford, and Chrysler will shutter 59 factories over the next month as sales plunge". The factories will stop, some forever and some until sales pick up, and even if severance payments or union unemployment payments keep many workers solvent for now, the ripple effects are much broader. The parts suppliers, the tax base of communities, the small businesses that serve the workers, and consumer confidence in general will all be hurt. If this example is just a microcosm, and it's not so micro, of the economic distress that 2009 will bring, then hope requires a faith in the future that's not so short term. For many of those directly affected, it may be a time when the only relevant time frame is the short term. In the spirit of the season, however, it's seems appropriate to look for what could go right.

In the financial markets, a successful trip through year end is an important hurdle. Regulators, investors, rating agencies, creditors, and vendors to financial institutions, industrial corporations, and smaller businesses all look at year-end balance sheet numbers as a barometer of viability. In many cases this is not just the function of an important accounting date. It is built into loan agreements and oversight arrangements as a date that will determine the access to credit, the price of credit, the terms of payment, and even the viability of an enterprise. It's important. Liquidity is hoarded even in good years to make sure that no accidents happen. This has not been a good year. The hope is that making it through year end will loosen the credit markets and that there will be a slow but certain easing of tension that will allow investors and lenders to be driven by the hope of opportunity rather than abject fear. That's hope twice in one sentence.

There's also the hope that Madoff and Balgojevich represent defining bottoms in ethics, at least in the United States. One could fear that they are the tip of the iceberg but that's not seasonal thinking. Their actions were extraordinary in their brazen disregard for accepted norms of behavior, even disregard for their own eventual self interest, and have contributed to the sapping of confidence in what lies ahead. They will, however, make greater regulation and oversight inevitable, no debate now. That's more hope.

With the arrival of the Obama presidency there's hope even though there can be no quick or easy solution to the new foundation, foundation liberally used here, of 2008. That said, it does seem that achievement and intelligence will now, for the most part, become a prerequisite for significant responsibility in the executive branch. Congress still remains a big concern but hopefully the Obama administration can strike a balance between urgently needed action and damaging overreaction.

As for now, Seasons Greetings and Best for the New Year.

Wednesday, December 17, 2008

Films of the year

---Slumdog Millionaire
---Man on Wire

Awaiting Revolutionary Road, a favorite novel, a recent James Wood retrospective on the author in The New Yorker, I would like to add it to the list, do not know yet. In fact there are so many movies that I have not seen that this short list only has meaning as a suggestion.

Tuesday, December 16, 2008

Good news---housing starts down 18.9%

Housing starts in November were down 18.9%, to an annual rate of 625,000 units. The number was lower than the estimate of all 71 economists surveyed. One of them was quoted on Bloomberg saying, "The horrifying thing is that we're likely to keep going down from here".

Lower housing starts mean fewer construction jobs and lower purchases of building materials and related products. The economy will continue to weaken. That's not good news of course. What if, however, housing starts were not declining. That would mean more new inventory into a market that is dead in half of the country and stalled in the other half. 625,000 new houses underway in an economically distressed country of 300 million people, many of whom obviously live together, intuitively seems like a number that can easily replace deteriorating properties. If prices are to stabilize and then to rebound supply needs to be restrained. Three cheers for lower housing starts. It must happen in order to stop the bleeding of wealth from middle class America's largest asset.

Monday, December 15, 2008

Two inexplicable frauds---two observations

This past weeks two shocking frauds, perpetrated by Bernard Madoff and Marc Dreier, have one thing in common. Apparently both men were the absolute leaders of their firms, the chief rainmakers, the chief financial officer, and the sole executive decision maker. They have been much discussed in the media, such that no detailing of these events is necessary here. Two observations here, or really just guesses, have not yet surfaced in any broad commentary to date.

With Madoff, he absolutely must be taking a bullet for his sons and others in the firm. Despite his dominance, it is impossible that he, on his own, could pull off a ponzi scheme of this magnitude that was supported by fraudulent brokerage reports, phony cleared trades, and false accounting statements. It all fell apart and he has decided to take the fall.

Dreier had been described as an elegantly dressed man who was every bit the well put together and dapper New York lawyer. Harvard and Yale educated, with his own 250 lawyer firm, he looked the part. The news photograph of Dreier being released from detention in Canada was not at all flattering. In fact, his face was pale and distorted, his eyes blank and his hair a mess. One could guess that he was going through an unplanned detox without medical attention, alcohol, cocaine or both , who knows. That would help to explain the insanity of his sales of fraudulent securities that, without question, would be discovered in the short term.

Madoff's fraud, to the contrary, could have been perpetuated for a much longer time period it seems had there not been the huge market sell-off this fall, and the accompanying need for significant redemptions. He had trust, a willing herd of investors, more waiting at the door, and the record keeping scam down pat. The SEC had no questions.

Friday, December 12, 2008

Snapshots of the recession in New York

What follows are observations over two days:
---Costco is packed. This company seems to be building market share in this recessionary environment. It's the best of the big boxes.
---Gonzo's, a burrito shop that is a favorite, is being hit by a run of take-out orders as I walk in. Joe, the owner, tells me things are ok but the dinner trade is dead in this place near the courthouse. His other Gonzo's, the flagship so to speak, is actually doing even better than usual. While in a working class neighborhood that loves the place, this shop is located no more than two miles from Garden City, a wealthy suburban enclave. Joe tells me that the trade from there has picked up substantially in the last two months as some GC'ers are foregoing the tablecloth places now and spending more with him. Joe may close the slow restaurant, or relocate it, if things don't pick up, but he's encouraged by his first born.
---At the gym I was on the elliptical treadmill next to two mid-thirties folk whose chat was breaking my mood, chat about the family, the young kids, the usual. The woman then said casually to the man "so are you are you taking a day off from work today?". "No, I was fired Tuesday." replied the man, "you know, financial services." Then followed one of those falsely upbeat it'll work out conversations. This didn't sound like a situation that was remotely anticipated.
---I called a high-end mail order food company at night to make a gift order. It's somewhat of an extravagant move but the food is always appreciated and delivered promptly. Almost every Christmas I make this call and more often than not there's a wait to reach a human being on the line and then some choices of less expensive items are always sold out. This year, no problem, real person immediately, all choices available, plus a first, free shipping that I did not even request.
---Now this story is a strange one that may have nothing to do with anything but it's worth telling. Thursday morning I went into Manhattan early. Walking up Seventh Ave. I realized that I was hungry and began keeping an eye out for some low key place to eat. The Hard Rock Cafe on 43rd had a flashing sign on its marquee saying "Buffet Breakfast Everyday". That sounded appealing but I passed by assuming that it would have some big midtown tourist price, then reconsidered, turned back and went in to check it out. Walking through the store and down some stairs, a young man answered my question with the phrase "It's free." "Free!" I said and he responded "free, lanala(last a long)". OK, fine?, so I was given a ticket and entered a large dining room that was perhaps three quarters full, helped myself to a complete breakfast buffet, sat down and then found out that the purpose of my ticket was raffle participation. I did not win anything. There were no sales come-ons, no one spoke to me, and my newspaper and I were fine. When leaving I said thank you to the hostess at the door and then was handed a bundle of stuff---a rolled large blanket and a t-shirt inside of which were perfume samples, a stress ball, and a spatula. The spatula said Land O Lakes. I get it, or do I. Out on the street I pointed a few reasonably put together but obviously not so prosperous older folks in the direction of the Hard Rock, whose free breakfast would no longer be a secret.
---Later, 10am opening time at the Museum of Modern Art the lines for tickets quickly filled, at least 80% tourists from other countries. New York is still a destination.
---The Madison Avenue Hermes store is the source of the filler for my wife's petit modele annuelle, a yearly Christmas expectation, or errand. It was raining and I arrived at their beautiful store soaked, in my jeans, baseball cap, and not so new jacket. What followed is 100% proof that the economy has changed. I was waited on immediately. When the saleperson did not find what I wanted right away a manager came over and helped as well, pleasantly chatting and asking if I wanted to be on their mailing list. Just a few years ago, properly business suited, it would inevitably be at least a 20 minute wait for service with the awkward feeling that I was invisible.
---A late lunch at the 23rd street Mangia was another shock. This popular casual Northern Italian self serve eatery is always packed and getting a seat is sometimes uncertain. It was at most one quarter full, and the take out business was slow as well. It's certainly much more expensive than McDonalds but the price is not much more than that of a decent diner for what is generally exceptional food. This was different.
---At Penn Station, with a few minutes to spare before catching my train, I too participated in the recession. At the Haagan Daz stand I asked for a cup of ice cream for the ride. "Small, medium, or large" was the question. "Small", I said, "but how much is that?" "$3.45" was the reply. I paused and spontaneously passed, wondering what a medium would have been, $5.00?

Irresponsible comment by Mitch McConnell

"We have had before us this whole question of the viability of the American automobile manufacturers. None of us want to see them go down, but very few of us had anything to do with the dilemma that they have created for themselves." Senate Republican leader Mitch McConnell quoted in the NYT today

Unfortunately McConnell is so limited that he may not even be aware that his comment is irresponsible and absurd. Energy policy, environmental policy, health care policy, almost any policy that the Senate has exerted power over, or failed to exert power over, has impacted the countries largest manufacturers and influenced their actions. The consumer activity and tax receipts generated by the auto industry have been one of the underpinnings of prosperity since the 1950's and therefore have funded much of the profligacy of Congress during McConnell's tenure. The comment is just stupid.

Meanwhile, Rome burns.

Thursday, December 11, 2008

Turmoil in Greece---frustration not ideology

"Our generation is facing a tougher future than our parents. This is unheard of because things normally get better." quote in yesterday's NYT from a 22 year old Greek college student demonstrator(or worse)

For several days it was unclear what had led to the upheaval and violence in Greece. The tragic death of a 15 year old in a confrontation with police was obviously the catalyst. The reaction, however, has been a societal tsunami. At least from this distant perspective there did not seem to be an organized, or even tacit, political movement, thought process or ideology that was leading the chaos(an oxymoronic phrase for sure). The comment above explained it all.

This college student's feelings are certainly understandable, but one could suggest that he missed his history classes. A perspective learned there would have suggested that "normal" is not a word that works well except in the short term. That said, the riots now appear to be an explosion of frustration by unemployed or underemployed teens and twenty somethings across all but the wealthiest socio-economic strata. The current conservative and free market oriented Greek government seems unable to react, as this is more spontaneous combustion than politics. A Wall Street Journal article today developed this issue and reported that Spain and Germany in particular have a similar serious problem, and that it may be endemic to much of Europe. This is one European product that we don't want to import.

Wednesday, December 10, 2008

Please give my money back

Treasury bills of up to three month maturities are being sold by the U.S. at zero interest. This is unusual. In the last few days almost $60 billion of this short term paper has been sold and market talk is that demand was four times that amount. For a short while some 4 week paper was being sold at negative interest, meaning investors were paying to have a place to put money over year end.

There are many explanations. Apart from the fact that there is no mattress big enough for the money seeking safety, the most credible reasons here are:
---Any fund or institution that is expecting further redemptions or financial obligations as year end approaches simply wants the money available in the safest most liquid instrument in order to avoid any last minute year end liquidity crisis.
---Despite the U.S. recession and attendant challenges, the safe haven status has returned. Foreign investors see the dollar as the safest store of value once again, and zero return is in fact better than zero if they anticipate that their home currency will decline against the dollar as year end approaches.
---Everyone just wants this year to be over. Losses have been taken, performance has been poor, and there is absolutely no appetite for any further risk. If capital levels and liquidity are just adequate, commercial corporations and financial institutions alike want to get through the crucial year end marks as is, and they'll even pay to just get past Boardwalk and start over again in the new year.

Sunday, December 07, 2008

Changing a few lyrics in this year's tune

Cutting through the financial market commentary here throughout this year are a number of repeated themes that remain a focus and to some extent an obsession. There's one, however, that is somewhat troubling. Those issues, not to be explained again here, have been:

1. reinstating the uptick rule in short selling
2. the SEC's need to actively enforce existing rules against naked short selling
3. the unequivocal flaws in current mark to market accounting rules
4. the need for hedge fund regulation and oversight
5. unless securitization markets for consumer debt begin to function banks will be unable to meaningfully extend credit
6. a Congress that, in general(meaning not everyone), is so politicized and untalented that it is embarrassingly dysfunctional
7. an American public with short sighted views focused more on payback than solutions
Numbers 1-6 are issues that are absolutes here, but number 7 is the troubling one.

Obviously not included above are what could be a very lengthy list of the reasons and scapegoats that led up to the mess we are in such as the regulation,structure and function of the securities industry over the last umpteen years, the excesses in the mortgage markets, the low/no consumer savings rate coupled with record credit card debt, the ever widening gap between the wealthiest and everyone else, the list could go on and on. This list, if it were fully developed, would be why we are where we are. The numbers 1-7 issues of focus have been viewed as areas to fix or improve to stop the bleeding.

Somewhere along the way I obviously never learned to write a good formal essay with a solid opening thesis paragraph, so arriving at the real purpose of this post has taken some time and that purpose is, trumpets blare, that issue number 7 just needs to be accepted, not obsessed about, and not seen as something that can be immediately changed or voted out of office. The American public will make up their own minds with or without a rationale that is appreciated here.

It is a fact that there has been an, at times, overwhelmingly negative public view of the various efforts to react to the problems in the credit markets. The so-called "bailouts" have been met with a gut reaction NO from much of the American public. The frustration here has been that this reaction has slowed down and at times prevented actions that were needed as fast as possible to restore global financial confidence. That said, the frustration voiced here could be seen as condescending or patronizing or out of touch. Maybe it has been, but it has not been intended as such.

What is going on may be a bigger deal than is generally thought. There are no natural limits to swings in opinion. Not to make too wild of a comparison, but epoch changing events have had as a catalysts severe economic downturns that unleashed pent up popular opinion, little events like the French Revolution and the Russian Revolution. Acceptance of the existing paradigm gets thrown out, chaos ensues, and ultimately a new order is in place. That comparison is way too far fetched, of course, but all of the seeds for change being sowed today are not just coming from President-elect Obama. Whether or not recent events lead to a groundswell of populism in the next few years and what shape that takes is unknown, but "something's happening here, what it is ain't exactly clear..", take it away Buffalo Springfield.

Different times, different issues, could be the same feeling.

"Cold Cash" defeated

This is a great story and it's not about political parties. Republican Joseph Cao defeated Democrat William "Cold Cash" Jefferson in a New Orleans congressional race. Jefferson was a nine term congressman representing an overwhelmingly Democratic and African American district. Cao will be the first Vietnamese American to go to Capitol Hill. Despite Jefferson's indictment for obvious crimes, it is still a major upset victory. In a city that today has a sizeable minority population of Vietnamese, most visibly as owners of so many of those old style small grocery, take-out, and spirits stores that are on every other corner, it's an example of persistance and inclusion that is inspiring.

"Thirteen Conversations About One Thing"

Perhaps this 2001 film is well known but when I stumbled across it late last night on PBS it was all new, and an unexpected pleasure. It's an unusually thoughtful set of interlinking vignettes that tell a subtle story about life in New York. As low key as it is low budget, there's plenty of despair and contrition that play out in an unvarnished manner, but there's also hope and an underlying message of the importance of humility and small gestures of warmth and shared experience.

Wednesday, December 03, 2008

Late night financial thoughts---better than still thinking about them when I should be sleeping

---Senator Durbin is pushing hard for a "temporary" change in bankruptcy laws that would allow bankruptcy judges to modify the terms of residential mortgages. He's apparently worked unsuccessfully on this for much of the year but the tide may be turning in his favor. He argues that "that this is a bailout that wouldn't cost anyone a dime". Now wait a minute. Foreclosure relief is an important idea but let's tell the truth about what we're getting into. Most of those mortgages are components of mortgage backed securities that are already down significantly in price. Those mortgage backed securities are owned by pension funds, mutual funds and individual investors. Isn't it fair to say that there is the possibility that all of those mortgage backed securities would decline further in price if unlimited discretion to cut principal, cut rates, or forgive even to only the consumers ability to pay today were given to every bankruptcy judge in the country. All financial markets hate uncertainty and this could be chaos, and would definitely be an almost impossible task for the mortgage servicers and for the custodian banks that manage the bonds.
There would be a ton of money lost. And just think, at a time that the Treasury's goal has been to stabilize credit markets and build lost liquidity this would be like taking a shotgun out and blowing Paulsen's foot to smithereens, as well as assuring that much of the TARP already money spent would be down the drain.
There are so few experts who can see the whole picture on this, and I am certainly not one of them but "it wouldn't cost anyone a dime" is a simply naive statement. That makes the likelihood of passage in Congress excellent.
Foreclosure relief needs to be thought through with uniform limits for all bankruptcy judges, with provisions that investigate the ramifications for the processors, meaning the servicers and the custodians. It needs to exempt developers and flippers from any relief. This is not simple. Apparently even Obama has voiced his support for this. Does he want foreign investors to ever buy securitized consumer assets from the U.S. again, if they know the terms and conditions of the bonds can be changed at any time just like in some developing countries.
The thoughts are now out on that one so sleep may come later.

---There is nothing anyone can really add to the car company financial commentary. It's all up in the air. Bankruptcy would be so dangerous now as the cascading impact could add another crushing blow to this perilous economy. As I've said before, take the risk, give them some money whether they deserve it or not, and let them go under a year from now if there's not radically aggressive and enlightened management demonstrated. Extract from them through government mandates a "green" program with time limits and production targets and research commitments while their backs are against the wall. That's a positive for both the environment and national security.
The idea of pre-arranged bankruptcy for GM and Chrysler as a quid pro quo for funding has been raised tonight apparently. That would avoid liquidation and would reassure suppliers that the factories are still running. It could attract new private credit because in a bankruptcy new creditors(debtor in possession financing) are senior to everyone else on the credit heirarchy. Maybe that's a good compromise. Maybe it's not considering that this would put Ford, the company that has managed its balance sheet better, at a competitive disadvantage and lead them unfairly down the same path. But it's not clear that anything can overcome the leadershipless and simplistic populist consensus that has developed in Congress.
Just as on the foreclosure issue, the simplest and most dangerous ideas are viewed as the most attractive. Why go back home for a Christmas holiday and have to explain a thoughtful decision that you(congressman)have no understanding of whatsoever when you could pass some piece of legislation that can be explained in one sentence.
Whew, I'm now tired.

60's perspectives

Not the 1960's, but becoming 60. Two 60'ish British authors writings on this found my armchair recently. I first read Julian Barnes' "Nothing to be Frightened of" two weeks ago. Written earlier this year it is an undisguised set of musings on death, aging, and the possibilities that one could dwell upon. The style is fluid, conversational, and has no shortage of humor, but after a compelling first half the book itself dies a slow death as it meanders toward its non-conclusion. Better on this subject, but not transparently so, is Martin Amis's 2006 novel "House of Meetings"which I read yesterday afternoon and night, really a couldn't put it down combination of Russian history, intertwined families, and an old man's memoirs and observations before death. Most reviews focus on the story of the gulags, the post WWII period in Russia and the lives of two brothers. The singularity of Russian culture is put into a bleak historical context. What is not discussed is the search for meaning by the lead characters up until the end. That story is woven throughout as the old man writes his tale to his early 20's stepdaughter in America. One review that I found suggested that this was done clumsily and detracted from the book. On the contrary, I think it's brilliant.