Monday, April 27, 2009

"The FDIC is up to the task"

The title is quoting FDIC chair Sheila Bair in her comments today about shutting down banks and disassembling large banks. A starting point here is that she would be so ignorant of markets as to make such a comment during market hours when nothing can be deciphered immediately. More money for the traders, of course, but that's the blind eye of this recovery effort so far.

The FDIC is not up to the task of taking apart a global banking institution even though it has, apparently, a solid clerical bureaucracy. If one has the view that the value of AIG's many powerful attributes have already been impaired in a significant way by the government, then let the FDIC take apart Citicorp to see what a day in the park AIG has been.

Sunday, April 26, 2009

Life in 2009

Passed through the kitchen to watch 15 year old doing dishes for the first time of consequence after making brownies for friends, Macbook on counter, buds on, Netflix on, no awareness of other life.

Perspectives on TARP

TARP has had benefits. It's more compelling to focus on the excesses and problems, which are real and have been discussed periodically here, than to focus on the positives. Those positives are:
---Despite there being better alternatives, the eventual TARP was essential. It was absolutely necessary for the United States to do something, almost anything short of an American Idol competition for bank CEO's, to build confidence in the global financial system. The dollar is a crucial benchmark for many economies, holdings of dollars(real or counterfeit) are ubiquituous anywhere beyond the G-7, the core of financial markets operating systems resides in the United States and secondarily in London, and U.S. securities are the most widely held. TARP, however flawed and neutered by Congress, was a godsend for the global economy at the time.
---No other nation or coalition had the will or capability to act. If one thinks that the U.S. has bureaucratic paralysis, try the E.U. If you want lack of cohesion take a look at China, Japan, and the ASEAN. Want chaos, corruption, and dynastic arrogance, move longitudinally down the globe from Russia, over the Caucasus, east to the Steppes and into the Middle East. There was only the U.S. that could staunch the crisis at the time. In not so many years maybe China or a revitalized E.U. could have stepped up, but not now.
---The outrage inflamed by the politicians and the media over the implementation of TARP has been a comeuppance for the financial companies, and one that was for the most part deserved. The challenge now is to both make sure that the message has been internalized and to be certain that the anger is not continued as destructive vengeance.
---The financial system is in better shape today than it was before TARP and before FED monetary infusions into the the markets system. With TALF as well, the overall effort has been massive and the eventual impact is open to interpretation. Not all scenarios are attractive. Nevertheless, in a global economy linked by technology and communications systems that are for the most part a mere 30 years old at best, there was no choice but to take the risk of action.

More comprehensive regulation and vigilant oversight needs to be put in place. This should be focused not only on major financial companies. The achilles heel of everything that is going on now is the lack of focus on the traders, often based at major hedge funds but also independents, who almost openly manipulate markets. That and of course, a favorite here, the analysis and action that needs to be taken on gaps in regulation that allow this manipulation to take place.

Saturday, April 25, 2009

Merger boom coming

It is highly likely that a huge increase in corporate merger and acquisition activity will begin in the second half of the year. It will cut across most industries and be a global event.

This will happen because the world economy must adjust to a paradigm of reduced demand by consumers and governments in the aggregate. Corporations will see the need to rationalize output and spending, and the opportunity to do so through combinations that create efficiencies and consolidate market share positions. Credit markets, while by no means vibrant, are functioning again with some degree of rationality and equity markets are opening up for well designed ideas. Friendly mergers will be the primary avenue that these combinations will take because they don't necessarily require new equity or debt to be raised. Spin-offs will occur as a way to downsize with a possible material upside, and acquisitions will be available to companies that already have strong balance sheets, preferably with lots of cash.

The effect of this will be:
---A fee bonanza for the remaining large investment banks, with Deutsche and CSFB moving up in the league tables as they have both retained and attracted talent while not being under the auspices of TARP.
---The rise in stature and market share of boutique investment banks, existing ones like Lazard and Greenhill and many new ones formed by star managers who have been deserting their TARP sensitive employers or who were set loose by Bear, Lehman, or Merrill. Boards of Directors will be attracted because of the perceived lack of conflicts of interest relative to the remaining traditional houses.
---An improvement in the financial markets, especially the equity markets, all things being equal, meaning no more significant disruptions.
---A continued increase in unemployment rates that will be focused on middle managment white collar jobs and on traditional but obsolescing manufacturing jobs.
---A political dialogue in the developed countries that continues to sharpen as the visibility of M&A driven prosperity contrasts with the employment outlook and the ongoing effects of the global property retrenchment. In the U.S., the Republicans will embrace this division, and replace their "values" driven approach to their message to one that ironically casts them, they hope, as populists playing to what will be rising popular resentment.

Friday, April 24, 2009

Better tone in Manhattan and the burbs --- is it really spring

Beginning in October and through most of the winter the on the ground, gut feel, gauge of economic health just felt terrible. From diners to ethnics, to the bistros, to the pricy, the restaurant scene had a diminished, in some cases devastated, look except for those few in any category that are just bulletproof due to fame or service or location or, how could I forget, food. I say literally "gut" feel because this is an economic observance based on food in an area where, for many people, if they are not eating at a restaurant odds are fifty/fifty that they're getting take-out. Now, things are looking up.

Is it just the change of season, or is it that the economic shock and awe of October and November that had everyone running for cover has been put into perspective, or better yet are the majority of U.S. consumers who have not lost their jobs, have not been completely demolished by equity losses, have not been taken in by subprime loans or overextended themselves on credit card debt, all of these, have decided that life goes on.

Whatever the reason, activity has picked up visibly. Marginal ideas, locations, and food that would have survived two years ago are still going down, and out, but the good restaurant businesses are on an uptick, at least for now.

While the supposedly venerable lipstick test is still negative, the eyes on restaurants is taking a positive turn. Time for dinner - take-out to be picked up.

"Stress Tests" and bank reserves --- a look back

As we await what will likely be an anticlimatic disclosure from Treasury on the stress test scenario, we see headlines like "Banks may struggle to raise money after stress tests..." which appeared on this morning. This alarmist tone about credit losses called to mind another culprit in the current plight --- a change to accounting treatment of bank reserving policies in the mid-1990's.

Following the early 1990's recession and under pressure from an over zealous OCC and an SEC that was extremist on mark to market accounting, the FASB changed the accounting rules for bank reserves, or the allowance for loan losses. Up until that time banks traditionally were able to use some discretion, with the oversight of their accountants and regulators, to determine how much of their earnings to set aside to protect prudently against future loan losses. Squirrels know enough to store up nuts, bears know when to fatten up, and believe it or not even bankers know that credit cycles are just that, cycles, and that putting away some money in good times is the right thing to do. The OCC, SEC, and FASB decided that doing so was managing earnings and not reflecting true performance, so the rules were changed to allow reserving for loan losses based only on current non-performing assets and on formulaic percentages of assets in the weakest categories of performance. This meant that in good times reserves were set aside that were appropriate for the good times and that in bad times there were no longer adequate reserves to cover losses that any veteran banker knew would eventually come around.

Of course the old system could be abused and used to manage earnings, and it was done precisely by some banks who could always tell the analysts what they would earn in any given quarter to the penny. That was a failure in oversight, however, and not a failure of the rules. Regulators and accounting firms covered their incompetence in the early '90's in a way that scapegoated the banks and destroyed a basic principle of reserving for credit losses.

It's unlikely that the old ways would have prevented the mortgage debacle, forever a sleazy business that is highly cyclical and one that attracted the worst kind of business people from the 1960's onward, but for credit card, small business, and corporate loans there were clear historical models that suggested that reserves be bolstered even when times are good. While equity investors may have been deprived of some tradeable volatility by banks using these models, fixed income investors could be heartened by a better economic model than exists under current rules that were put in place in the early '90s.

"Stress Tests" today might have highlighted levels of expected credit challenges that had already been anticipated at some level in an accounting sense. Boring stuff maybe, but it's right.

Thursday, April 23, 2009

Bare knuckles ambition --- Ken Lewis vs. Andrew Cuomo

Ken Lewis must be feeling up against the ropes. He apparently told Spitzer wannabe Andrew Cuomo that he was pressured by the government to not give any disclosure about Merrill Lynch's deterioration as the deal was up for a shareholder vote. Ignoring the fact that he sought the deal, set the price, and praised it to no end in September and was praising it again in January and February as a great contributor to earnings, he now wants to be seen as having been forced by the big bad government to do the deal. This is so Nations Bank, a behavior pattern that began with the takeover blame mentality of his mentor Hugh McColl. Go back through all of the acquisitions and you'll need most of your fingers to count the number of times that NB and then BofA trashed the reputations of managers whose companies they absorbed for any flaws and accepted the praise for any benefits. This may not be abnormal, in general, but with this crowd it was almost always included ugly personal attacks. Lewis is under pressure and hand grenade Hugh's training is what he is falling back on. By December the deal was ironclad, and disclosure was the ultimate choice of the company. He wanted to get the deal done, he always has.

Lewis's action might be seen as subjectively defensible as he was being questioned under an action by NY Attorney General Andrew Cuomo. Did Lewis know that his comments would become national headlines, or did Lewis presume that there was some legal and ethical propriety that would dictate a New York attorney general's disclosure and actions. Wouldn't it have been a plausible assumption that his testimony in a civil action would be part of an overall mosiac that would lead to a court ruling. Not with Andrew Cuomo of course. The transparently politically ambitious Cuomo had an opportunity for a hat trick: national headlines for himself; an attack on a Republican from the Bush admnistration; and a reputation as standing up to and bringing to justice a powerful corporation. How could he miss the opportunity. He didn't, Spitzer used the same tactics, Rudy too in the City. Cuomo may feel like a real smart guy now but somehow one would think these tactics may no longer work in the later rounds. This is not a new punch, just an old low one.

Wednesday, April 22, 2009

Geithner's tough job

As the Obama administration's efforts to stabilize and then revive the economy and the financial system continue, it has become clear that the toughest job in D.C. belongs to Secretary of the Treasury Geithner. He is the nuts and bolts guy. The President sets the tone, gives the overviews, and expresses frustration, confidence, outrage, or encouragement as the day's events dictate. Larry Summers does occasional sessions on the Sunday talk shows, going into the rationale for various programs in the manner of an insightful economist. Senior statesman Volcker occasionally weighs in with big picture comments that are sobering or worse, Christina Romer and Sheila Bair play supporting roles, but the person who has become primarily responsible for explaining how everything works is Geithner. Since the comments of other members of the team are not always perfectly stated or more likely are taken out of context by the media or members of Congress, Geithner's seemingly daily challenge is to put it all together for a generally negatively disposed audience, that and of course to run the Treasury Department. Since the success of the multiple programs is dependent on the vagaries of the financial markets around the world Geithner's ability to precisely define outcomes is limited, an obvious comment but not one that many want to hear. He can be earnest, calm, and inoffensive, and hopefully have the skill to get through it all. Even with that, he needs the programs to work, or we do.

Saturday, April 18, 2009

At the local U.S. government post office

Waiting in line for an hour and ten minutes this morning at our local suburban post office, this thought came to mind. Everyone seems to complain about and blame our banks for just about everything, but go into a bank today and usually there is pleasant smiling service within a few minutes. The post office is run by a government bureaucracy. Do we want these people who have health and retirement benefits that most people can only dream of and are oblivious to the concept of customer service to run more of our economy. Hmmm.

With this long wait I couldn't help but notice that the walls of this post office had a giant picture of George Bush with the local postmaster, an even bigger autographed picture of John McCain with his family, two autographed photos, young and old, of Bill O'Reilly who lives here, plus other residents like Boomer Esiason and Sean Landeta. There is no picture of our President.

Jim Harrison quotes

These Jim Harrison books are good for travel, airport and flight reading. I cannot say that they are great books, but there are simple statements that just catch a thought perfectly. James Lee Burke, one of his fellow Montana summer residents, quotes Jim as saying "We love this earth but we don't get to stay here, so why not enjoy a few sunrises", and I read now "David didn't say all that much about depression. He thought that one of the central diseases of our culture was that meaningful work was available to so few".

Wednesday, April 15, 2009

Musee du quai Branly

This museum that opened several years ago was new to us, and a wonderful visit. The permanent collection of what I guess would be called primitive art was full of really interesting finds. The only odd thing was that it seemed like a miner's helmet with a lamp attached would have been helpful as the museum lighting was so low, perhaps to protect the objects, no other reason is apparent. A temporary exhibition, Le Siècle du Jazz, was an exceptional treat of old films, paintings, performance posters, sheet music, and odds and ends that can`t be categorized. One other comment - the architecture of the museum is justification for a visit by itself, eccentric and worth a smile.

Tuesday, April 14, 2009

Economic troubles less apparent

While the Hotel de Seine manager says bookings are down, she also says that the recession is less visible here than in the United States. Everything seems normal in the main sections of Paris, no store closings visible, and cafes full. Restaurant reservations for the haphazard traveler are easier to come by, and that's not bad at all. The dignity of work is apparent from the street cleaners that I had coffee with yesterday morning in a St. Germain cafe to the taxi drivers and newstand operators. It's a different feeling of égalité from the USA.

Sunday, April 12, 2009

Paris liberation, as in travel now

Several days in Paris have already been a stunning example of the liberating feeling of travel. Since this French keyboard is frustrating and hampering any ability to write this short post, I will only say that the Grand Palais exhibitions were exceptional, the weather is perfect, and more will come later.

Wednesday, April 08, 2009

"I won every argument and I was always wrong"

That's a quote from A.D. in the prior post on "The English Major". It could apply to the current view of U.S. equity markets by U.K. investors. For so many years a tried and true adage was that if you wanted to pick a bottom, go to Edinburgh and when they are most negative it's time to load up. You can never fault the Scots homework. It's completely irrefutable from any Yanks point of view. They quote history, precedent, statistics, and have an extreme tendency to want to overwhelm any listener with their intellect, which is without question substantial. The Scots are almost always polite, as contrasted occasionally to the Londoners who seem to know less, can be charmingly pompous, and just as negative if not more so at bottoms. Apart from Edinburgh's Standard Life there is only gloom and doom now coming from the Scottish Widows types in Edinburgh, Glasgow, and London. It is possible that these firms have never bought and always sold a U.S. bottom with the most persuasive articulation of the reasons why, often entertaining I might say.

Apart from the major prognosticators like Soros and Rogers, and the major career building attention and money seekers like Roubini and Taleb, most U.S. observers are just on the sidelines and not cheerleading for a downturn. Stunned maybe, jammed up with withdrawals perhaps, but not seeing any benefit in throwing all of their chips on a felt called doom. That the diligent analysts in the U.K. are so obsessed with understanding the negative is a positive indictor, or certainly has been in all recent downturns. The more self righteously outraged they become, the better the expected returns.

This time may be different, it certainly feels worse, it does not feel like a situation that can be remedied in short order. The biggest issues coming out of this ultimately may be more political and social than economic. If the past, however, can be any guide, our U.K. brethren and their pent up resentment which has legs after hundreds of years is an almost flawless indicator of an impending rebound in U.S. equities and financial markets. It may last for some time if it happens but it does not resolve the bigger issues that have not been touched at all in recent years.

Tuesday, April 07, 2009

"The English Major", Jim Harrison

"The English Major" is classified as fiction and no doubt the story on the surface is, but the book is less of any kind of structured novel than just 250 pages of the mind of Jim Harrison. It's a road trip by a 60 year old looking for the next step, having lost his farm, his wife and his dog in short order, not necessarily in order of importance, and therefore his bearings. The story sometimes begs for an edit, it wanders and repeats, themes surface, disappear, and then are reconstituted, and none of that matters much because the treat is Harrison as raconteur. When reading there were many lines that jumped out as perfectly funny, low key wisdom about these current days. Looking back for those lines now they're hard to find, not hard to find on a page but almost impossible to quote because the humor is part of the fabric of the narrator's storytelling. It's Cliff the protagonist as literate farmer on the lam and his always broke doctor friend A.D. as the perpetual unrestrained celebrant who proffer the observations that make the book work. Despite my comment, let's try a few of those lines that worked so well in the context of the book.

"Time tricks us into thinking we're a part of her and then leaves us behind."

"I said about her favorite novels that there didn't need to be any conspiracy, they own it all anyway, she said, what do you know of the world."

"Normal people don't try to be normal people, they're just hopelessly normal people."

"Reality seemed to be crumbling and I was wise enough to understand that reality stayed the same so it was my mind that was crumbling."

"At age 55 A.D. was finding it hard to be A.D."

"Some men will climb the same mountain hundreds of times while other men need to climb hundreds of mountains."

"There was a sudden troubling thought that nobody seems to know much of anything."

For the most part not exactly Mark Twain quotables but within the book they really sneak up and work. The most often repeated theme was "the farmer doesn't own the farm, the farm owns the farmer" which is pretty much the narrators concept of life as a whole as well. But as he is mired in his travels in the rural midwest and southwest, trying to find a place where "they put coffee in coffee" he is buoyed by a memory of his Dad. "Jesus Christ, toughen up. That's what Dad would say. 'Toughen up.' He would make up awful stories to prove a point insisting they were true. An example: 'There was a little ranch boy with a crippled foot. He left his muddy boots outside and one morning when he slipped his crippled foot into the boot a baby rattlesnake that had crawled into the boot during the night lay in wait. The boy's crippled foot had to be amputated." With Harrison the story can meander slowly and then turn in any direction, with the turns being the fun part.

Harrison can write with what seems like such unrestrained free flowing confidence I guess because he is a larger than life character himself in some ways. In the non-fiction "Heat" by Bill Buford(wonderful book about restaurants, crazy cooks, New York, the history of Italian cooking back to the 13th century etc.) there is a scene described in which Jim Harrison shows up in New York and he, Mario Batali, and Buford go out to dinner and share between them 28 bottles of wine, intermittant grappas and cognac, and forty different food orders over eight hours, talking all the time. Harrison, however, "turns down an oyster because he had recently eaten 144 of them at once, testing the calculation that a gross of oysters, less their shells, was only about three pounds of meat. Harrison, having performed the task, 'could not recommend the practice'." In fact, word is that he is bigger than most of his characters.

The jacket photo shows a man who has not obsessed over a youthful appearance, sort of a Keith Richards of the written word. I enjoyed the book immensely.

Monday, April 06, 2009

Good news must start somewhere

Over two months ago I sent the following note to a Tampa resident who had a real estate related business and who is now constantly on the move with her adventure travels. It read as follows: "Wherever you are at this point, you should look at this week's New Yorker for the article "Ponzi State" by George Packer. It's about your area, and the business you were in to some extent, and that you sold out of, I would guess, at a propitious moment..." She was in Laos or Cambodia at the time but I knew that she would eventually catch up and let me know what she thought of this well written article on the exurban development disaster around Tampa.

Her note came today and is as follows, "The article was really interesting - things were crazy in Lee County for a couple of years - I've heard reports since then, however, that with the number of investors flocking in to take advantage of the much lower prices, now prices are starting to go up and the bottom feeders are whining that they can no longer get the real good deals."

Mike Mayo pulls out an old analyst move

You know, it may be ok for Mike to do what he did today because he is becoming "old" by analyst standards. Now at the heretofore unheard of Calyon Securities, the well known Mayo downgraded U.S. banks to underweight and said that bank loan losses will exceed those in the Great Depression. There are two hallmarks here of a classic attention getting analyst maneuver. First, after a run up over several weeks the banks were already a shooting duck for a fall, or retrenchment, giving Mayo a solid chance of getting a meaningful vindication of his call in the market today. Second, words like exceeding losses in the Great Depression are a perfect hook for the journalists and sure to be on the lips of every suit on business news channels, even mainstream network news with appropriate serious intonation. Given that the U.S. economy in the 1930's was a fraction of what it is today it is likely that bank loan losses are already higher in absolute terms than they were at that time, and there hasn't been any discussion of performance as percent of total loans.

Mike has likely been seething for a year and a half after he made a distinctly negative call on Citibank in the fall of 2007 that was followed two weeks later by Meredith Whitney's repeat of his downgrade but one in which she led with the thesis that Citi would not be able to maintain the dividend. She got all of the attention as the hedge fund folks that some have said laid the groundwork for her work pointed the journalists in her direction. Her previously undistinguished career was lifted to the heights as her spunk and the praise from the constituency that adopted her made attractive copy, attractive television. Mike got beat at his own game, and has been low key ever since.

Now Mike's back, unleashed at a small firm. While his attention getting efforts have almost always been on the negative side as he seems to enjoy taunting managements and companies, he likes the fight, he does and can come back. He will eventually turn positive on a few, then more, but never all. It's a good assumption that he will now join Dick Bove as a regular go to guy for media looking for regular analyst commentary that is not hemmed in by the rules at major firms.

Meanwhile his cute "seven deadly sins of banking" will keep the Maureen Dowd types of the world atwitter for the week.

Sunday, April 05, 2009

A moment of truth at the NCAA tournament?

In the final minutes of the Connecticut/Michigan State game, one of those ever enthusiastic play by play announcers said, "Well, when Coach Calhoun was recruiting Hasheem Thabeet he told him that he would get him two things, a million dollar contract and a national championship. It looks as if he'll only get one of the two." The fellow pepped up announcer echoed, "but he'll get that million and much more". And seamlessly back to the play by play they went.

It is easy to visualize leaders like Duke coach Mike Krzyzewski or former Carolina coach Dean Smith among others cringing at those remarks. College education, team ethic, character building --- no, it's money and a trophy.

Saturday, April 04, 2009

The Larry Summers brouhaha

Larry Summers, the director of President Obama's National Economic Council, received millions of dollars --- GUILTY --- in compensation the 16 months --- GUILTY --- before assuming his office. The compensation came both from his job at a hedge fund --- GUILTY --- and in speaker fees before myriad groups including investment banks --- GUILTY --- and foreign banking organizations --- GUILTY. Popular sentiment is clear these days on this. Politicians as panderers jump all over it and the media as the entertainment medium it really is, including all major networks and the New York Times, go orgasmic with indignation.

Thank God that we have Larry Summers in the Executive Branch. Isn't it a good thing that the country has someone that is so highly regarded for his extensive knowledge that he would be compensated like a mid-level CEO. Look at it the other way people. He left this compensation to work for what, probably $300,000 a year and take all of this flak as well. Do we want someone who has made their mark in the world of influence coming in, or someone like the many Senators and congressmen who get their payoffs when they leave office as lobbyists, trade advisors, corporate schills, and the like. K Street is jammed with these folks. Or do we want someone coming in who is an academic or a politically connected mid level finance executive, both types with no clout in or first hand knowledge of the markets, but attractive because they have not been compensated highly.

The levels of compensation that the entire country is now enraged at have been no secret for years, not to anyone in Congress except maybe the now defeated Virgil Goode, not to any reporter who covered the financial beat for print or television or the web. Most of it has been available in public disclosure. That Larry Summers was compensated highly was due to the world he lived in and the protocols of compensation that ruled prior to our current debacle. That world is changing radically and those compensation levels are coming down across board. He should not in anyway be judged by this and to suggest that he has already been purchased by that compensation is a joke. The money is already in his pocket, and on top of that he's the type of person, from this perspective, who is motivated first by the job and secondarily by the money. The people we should be worried about are members of Congress, Bill Clinton, and reporters seeking bigger followings, which equal bigger bucks, that get their money after the fact.

It seems that we should be grateful that Summers, one of the few broadly focused visionaries in the world of finance and public policy, would take this job. We need him.

No one should be surprised, however, that these compensation numbers are tough for an American public under such economic distress to stomach. What kind of society pays one member $75,000, as an example, for a 40 minute speech followed by 20 minutes of Q&A(or for that matter playing four innings of a baseball game) while families of four or five struggle to get by on half that much in a year with two adults working. There are and have been serious issues, no question about it. These concerns, however, are being exploited by those who have been foot soldiers for the status quo all along. Now these folks who have been elected and expected to lead and those whose words are supposed to seek the facts and the truth with some balanced perspective have simply joined a finger pointing chorus with nothing to add.

Time out John, and get downstairs to the Carolina/Villanova game.

Taxing issues

Here taxes are done the old fashioned way, they are not assigned to an accountant or to H&R Block and they are done manually. It's a stubborn habit and it's damn tedious. A possible benefit would seem to be that it allows one to understand the tax code and experience its intricacy, but that may be a pipedream at this point. Three IRS returns were completed this past week and another overseen from afar. Some observations follow:

---The Alternative Minimum Tax remains as perverse as ever, no longer having anything to do with the very wealthy that it was originally meant to tax appropriately but instead hitting a strata of the middle and upper middle class that basically "earns" their keep in this country. I'll not go further and get on my high horse about that again. Instead here's something specific. For people who live in high tax states, New York for one, the AMT basically wipes out any Schedule A benefit for state and local taxes paid. So the effect is that if an AMT impacted family lives in a state with a high income tax and high property taxes they're both paying into public coffers big time on their home turf and then paying a higher percentage of their income, much higher, than the original 1040 calculation suggests into the national treasury. Alternatively folks who live in low tax states don't pay much at home and also pay less to the feds. Someone explain the logic and fairness here.

---There has always been a Form 8615 that requires that children with some investment income, threshold at least $1800, be required to pay taxes at their parent's rates. For many years the age level that this applied to was 14 or under, a few years ago it was raised to 18 and under, and for tax year 2008 it was raised to 23 and under for young adults who are still supported by their parents, as in going to college. As with almost any tax issue, inflation adjustment of any dollar amount is not a concept that is accepted in Congress so the impact becomes more regressive year by year as in the AMT. Is saving and having a nest egg for a young person's future to be discouraged by the tax code. That said, up until the age of 18 one could grit their teeth and say the concept has some possible merit event though the non-inflation adjusted number was annoying. The new age requirement is, to repeat a word, perverse. So a young person is going to college, their parents are paying an arm and a leg and maybe some more important body parts to keep them there, and if the kid gets a summer job to help, or takes some part-time work during the school year for living expenses, that money is taxed at their parents often much higher tax rate than what theirs would, should, ordinarily be. OK, kid, I sure admire your gumption and congrats on that $6000 you made between a summer job and your three nights a week at a sporting goods store during school, but you, or certainly we, will pay my tax rate on it. Great incentive right. Great help for a family that's paying for college. Right.

---Here's another favorite mentioned before here, and that's the $3000 limit per year on capital losses, something that really burns this year, and again never inflation adjusted in memory. Hell, anyone without more losses this year than that who has some investments just did a ride and slide, making no appropriate action to exit and salvage. Gee thanks, the losses can be carried forward, until arthritis sets in I guess.

---The foreign tax credit rules are particularly out of touch with the world we live in. They were no doubt set up in the days when owning a foreign stock or bond was considered exotic. Now it is absolutely normal for investors to have a mutual fund that has overseas stock positions or to own a stock like Honda or Schlumberger, or to have an Australian or Chinese ETF. Hey tax code, ask Tom Friedman, the markets have globalized. Therefore it is absolutely normal for a retail investor to have "foreign taxes paid" as a line item on their brokerage report. More than $300 leads to the necessity of Form 1116 which is so byzantine as to be impossible, leading to the only reaction possible of just forget it. This was designed for those days of yore when the only taxpayers with the need for the form were wealthy enough to have accountants on retainer. Does the tax code want us peons to participate in the other 95% of the world and have some awareness through the markets of what's going on. I guess not.

Those are a few examples of how much fun the past week has been. Conclusions are: the tax code is there to bring in money to the government and any rule that does so, no matter how out of date or misguided, will remain in the code and untouched by the Congress or the White House until, or if ever, there is a total revamp; the process of going through a return and all of the counterintuitive schedules that are required is so complex as to show a complete disdain by the government bureaucracy for the taxpayer; and the only way to ever get through completing a 1040 with any in an outs to one's finances at all is to follow this rule --- Don't think, don't ever try to logically understand the instructions, just read them , force yourself to do as told blindly, and then live with the results.

What a government.

Note: All of the above is a bipartisan commentary.

Thursday, April 02, 2009

Former AIG CEO Greenberg's comments

Former AIG CEO Maurice Greenberg appeared today before some House committee. His opening remarks can be found on YouTube and are worth a listen. In the ten minutes that he was allowed for opening, he explains what happened, why the government's structure of the AIG bailout is a disaster, and what to do about it now in order to salvage a former great company and to get the taxpayers' money back. All that in ten minutes. He primarily reads the statement but they are assuredly his words, unlike the committee chairs who opened by reading their staff's comments.

From this attentive and injured perspective, his remarks are as close to completely correct as anything you will hear. I say "injured" because what I manage contained AIG in a size that was not trivial based on the image of the company that was widely shared in the investment community, an image, and until he left a factual one, that was shaped by Greenberg.

Watch the video if it's of interest.

As an aside I must say, again, that the AIG disaster caught even some of the most experienced money managers in the world by complete surprise as a result of the CDS market with its lack of disclosure, absence of any clearinghouse, and no regulatory oversight. The only people who knew what was going on were the most professional traders that worked in this discreet corner of the derivatives markets. In an article in either Vanity Fair or Conde Nast Portfolio, can't remember which, a hedge fund manager named Steve Eisman, once knew him well enough, explained that he was introduced to the opportunities of the CDS market by one of the firms that eventually failed, presumably Bear or Lehman, and he saw it for what it was, an almost unbelievable risk/reward tradeoff in a bear market. What is most interesting in this is that Steve, a cynical market savvy guy, was not aware of what was going on in this market until a salesman alerted him, which shows how much chance those of us out here had.

And my points are --- one, this is exactly what Jon Stewart was talking about when he lashed into Jim Cramer. Cramer was a hedge fund manager, is as market smart as they come, and as networked as anyone. He had to know what was going on. He had played these games aggressively before --- two, there are professional traders who live off of the markets being a rigged game, and who will contribute as much money or influence as necessary to both Democrats and Republicans to keep the rules in their favor. Many of the major short term trading hedge funds are in fact supporters of Democrats which is why my suspicious mind has been so angry of late, fearing that the influence of the traders was preventing the Congress and the White House from taking on the need to regulate the CDS market, short selling, and rating agencies. At least today there has been some FASB move, under pressure, to address the challenge of mark to market reporting in illiquid markets(have not read the details yet) --- three, retail investors can be truly screwed by the insiders in the market and truly misled by the media hype of such programs as Mad and Fast Money. Their names are the only truth certain.

Wednesday, April 01, 2009

"I've loved you so long"

Finally caught up with this film which I had at first passed on due to its grim sounding synopsis. As many reviewers have said, it's exceptional. There are performances large and small that are just right, with the two most extraordinary being the lead actress and an actor in a supporting role as a probation officer. The story is somewhat predictable and at times the devices to pull at the viewers emotions might be a little too transparent but those characteristics are trivial, overwhelmed by the impact of the film and the many scenes that are memorable in and of themselves.