Wednesday, September 30, 2009

Schwab congratulates itself

From the semi-annual report by Schwab money market funds---

"Despite the economic backdrop, Schwab's money funds provided shareholders with safety and liquidity and maintained a stable $1 Net Asset Value during the period. The funds also maintained a positive net yield. However, a low interest rate environment both for taxable and tax-free investments, as well as continued demand for government securities has translated into relatively low yields."
Randell W. Mark, President and CEO of Schwab Investment Management.

So congratulations, you didn't "break the buck" and you paid 0.01% on both taxable and tax free money market funds, the lowest in the industry, while having one of the highest expense ratios in the business. Thanks Chuck.

Tuesday, September 29, 2009

Chicago or Rio, sausage or samba

President Obama's decision to visit Denmark and campaign personally for Chicago's bid to hold the 2016 summer Olympic games seems to be a questionable decision. Chicago is a great city and no doubt would be a excellent venue for the games if chosen. The other apparent main candidate is Rio de Janeiro, Brazil.

As still what some call the "leader of the free world", shouldn't the U.S. President should be thinking and acting broadly, not parochially, in all uses of his, and our, power. Should he be risking his international political capital on a sports event. Should he transparently be representing not only a U.S. city but his hometown, his first political power base, a city and state famed for self dealing and corruption. Valerie Jarrett, his Bert Lance, thinks so, and off he and Michelle go to Denmark.

It would be wonderful if Chicago got the nod. It would also be wonderful and perhaps more important from a geo-political point of view if the games went to Brazil. No South American country has ever hosted an Olympic games, summer or winter. London hosts the 2012 summer games, Vancouver hosts the 2010 winter games, and Russia hosts the 2014 winter games -- two Anglos and a traditional host like the U.S. in recent times. With political tensions and concerns about stability rising in some parts of South America, the inclusion of Brazil into this exclusive club of Olympic hosts would bring another BRIC(Brazil, Russia, India, China) into the fold of one of the international community's cherished platforms, much desired by emerging political and economic powers as China showed last year. With that perspective President Obama is scrapping like a White Sox fan to grab the invitation and the opportunity for an infrastructure construction windfall for his windy city.

Would it have been better for him to cheer on Chicago from afar, more as a representative and leader of the United States as opposed to a political operative from Chicago. Could it be possible for him to look at the big picture here and a larger perspective. Apparently not, and his circle of Chicago insiders led by Jarrett get their way.

AFTERWORD written a day after the above commentary:
The current New Yorker arrived yesterday afternoon and I read Jon Lee Anderson's article "Gangland, life in the favelas of Rio de Janeiro". While familiar with this problem, it is revelatory to read about hundreds of essentially independent criminal and warring city-states within the poor sections of Rio. It certainly casts some doubt on the viability of Rio as an Olympic site. Of the four candidates, Madrid is out of the question it seems as another European location, London, has the 2012 games and Spain, Barcelona, played host to a games in 1992, recent for a relatively small country. Tokyo could potentially come from the back of the pack for both its capacity to pay for the games and the unquestionable security that can be provided. The recent land of the setting sun could rise again. Brazil is a leading candidate, for the reasons detailed above an attractive one, but with an ongoing internal war to control this huge city, will the Olympic committee get cold feet. It may be that the U.S. and Chicago are already the leading candidate and the President is showing up in Denmark to seal the deal rather than plead the case.

Monday, September 28, 2009

Body bombs --- McCarry's future arrives

News reports this evening described a disturbing new phenomenon. Terrorists, specifically Al Qaeda, have begun a practice of inserting explosives within a suicide bomber's body that cannot be detected by any conventional means of screening. This techique was used in an assassination attempt on the head of Saudi counter-terrorism efforts. Never has the word asssassination been more appropriate.

What's interesting is that this technique was well known but has only now surfaced. It was a part of Charles McCarry's 1979 book "The Better Angels" in which Arab terrorists had explosives inserted into and sewn into their bodies in order to get close to their targets in a heavily controlled society in the future. That future was around the year 2000 and that future also included a global energy crisis, a stolen election through computer fraud(hanging chads were not quite the progress McCarry envisioned), a huge segment of the U.S. population imprisoned, the threat of planes being used for kamikaze like purposes over cities, and nuclear weapons looted from a failed Soviet Union by Islamic extremists.

This new development in terrorism is terrifying now when one thinks of air travel, as it was in McCarry's book published 30 years ago.

"Bored to Death"

"Bored to Death" is the new well-publicized comedy on HBO written by Jonathan Ames as Ames further develops his body of work exploring himself through fact and fiction. In fact the lead character in "Bored to Death" is Jonathan Ames as played by Jason Schwartzman. Based on an Ames short story, Jonathan as a just jilted fledgling private detective, his best friend Ray, and his boss George navigate Brooklyn and Manhattan with their quirks, phobias, and various dysfunctions. George, played by Ted Danson, would win best supporting actor in a comedy hands down if there was a fast forward to next year's Emmy awards.

Looking at the promotion for this series, I thought Ted Danson? Somehow he never stopped playing the guy from "Cheers" or just his own mug, one dimensional it seemed. There was that scene in "Saving Private Ryan". After a mesmerizing first 40 minutes of the horrific storming of Omaha Beach and the climb to the overlooking bluff, Ted Danson shows up in some role as an officer and the spell is broken. How'd the guy from "Cheers" get up here. It was a good film but it never recovered its intensity after that cameo.

Improbably, in "Bored to Death" Danson is incredibly right for the role, written so perfectly for him. Virtually every line he has is worth a laugh, some a guffaw. What a surprise. Then there's Zach Galifianikis as Ray who plays that kind of smart but woeful character that might come and take up residence on your college dorm bed and just hang out, talking about himself, a loyal but hapless friend. He's got the slacker prodigy role just right.

I like "Bored to Death".

Iran invites Israeli attack

Yesterday Iran tested its medium range missiles. In the midst of the controversy over the revelation of a previously undisclosed underground uranium enrichment site, this is hard not to see as a provocation. How odd that a country with a viable middle class and professional class takes exactly the same course as North Korea in its defiance. One of the medium range missiles tested has the capacity to reach Israel and the tests, shown gloriously on Iranian state television, were a success.

It seems clear that Amadinajab and the conservative segment of the ruling mullahs, including the current Ayatollah, do not have a unified country supporting them, especially in the urban areas. They may welcome the attack that they are risking, as an excuse to eradicate all opposition and take the next page of North Korea's playbook, that's the absolute dictatorship one.

Friday, September 25, 2009

Yonder 40 outpaces Dow and S&P in 2009

The Yonder 40, an index of 40 companies that reflect the U.S. rural economy, is up 32% year to date 9/18 as compared to the Dow being up 12% and the S&P up 18%. The Nasdaq narrowly leads the Y40 with a gain of 33%. This is not as a result of the Y40 playing catch up. For the first two years of its existence, 7/1/07 to 7/1/09, the Y40 endured this rough stretch with a loss of 27%, while losses were 29% on Nasdaq, 37% on the Dow, and 39% for the S&P. A bittersweet victory for the Y40 perhaps, but outperformance nonetheless.

In this bounce back from the dead rally, measured from the beginning of March to 9/18, the pattern continues. The Y40 is up 53%, the Nasdaq 55%, S&P 45%, and Dow 39%(using March 9 as a starting point would have led to higher numbers across all four indexes but the pattern would be consistent).

So what does this mean? Rural America is not generally depicted as an economic segment that would be vying with the technology laden Nasdaq as the market leader. Are agriculture, mining, sporting goods(aka guns), and small town Main Street in a race with IPhones, flat panels, server farms, and biotech to lead the American economy. The Y40 is the product of "The Daily Yonder", a web based journal of news, commentary, and research on rural America and its 55 million residents. As both a news source for and an advocate of this part of our country, they look for perspectives that aren't necessarily covered by the dominant urban based media outlets. This is an example.

As to the meaning of the Y40's performance, time will tell. The numbers are fact and the index is well researched in its composition. The equity markets look forward, discounting future cash flows into a current price. While that fundamental premise of corporate finance was temporarily abandoned during the recent debacle, it's operative now and is suggesting a relatively more sustainable rebound in a part of our economy and our heritage that is more often viewed as quaint rather than dynamic.

It's all interesting. Who knows what the future may bring, but don't overlook the Yonder 40. It goes down easy with pulled pork or chicken fried steak.

For weekly analysis of Yonder 40 performance go to

Thursday, September 24, 2009

On credit default swaps, the Fool has it right

At a "Motley Fool" roundtable, the following question was asked -- "What financial regulation would you like to see implemented?"

Fool staffer Morgan Housel answered as follows.

"My Foolish colleague Ilan Moscovitz and I have discussed that if we can't find the will to regulate something as absurd as credit default swaps -- with which derivatives investors can insure debt they don't even own -- then the odds of passing any meaningful financial reform are nil. Simple talk of reforming the credit default swap market has been met with fierce opposition. That worries us about the prospect of overhauling more sensitive areas of the industry."

Over a year ago here, ENS became obsessed with the credit default swap issue. When the dust began to settle in early 2009 and we learned that there were by some estimates $60 trillion* of credit default swaps written against no more than $2 trillion of subprime mortgage backed securities, it seemed obvious that this was a starting point of reform to prevent hair trigger panics in the financial system for the benefit of a few. The only rationale for the roadblocks set up against reform on this important issue seems to be that many Republicans are dedicated to unfettered free markets while many Democrats are dedicated to uninterrupted free money. Is that the same thing?

Those at the pinnacle of the trading based segment of the hedge fund industry are powerful and well connected.

*The estimated $60 trillion is notional value, meaning the value of the instruments being insured versus the actual exposure of a swap. In the case of most derivatives notional value is a meaningless exposure number. Unfortunatately in the case of credit default swaps on subprime mortgages the ride down was so abrupt that notional is not completely irrelevant. Also it should be noted that there is no information on at what points in the collapse process many of the swaps were written. This is important as a swap written when a security was already trading at 40% of original value represents much less negative value to the writer of the swap than one written when the security was originally issued at par. The important point remains. CDS's were written on multiples of the securities that existed.

Wednesday, September 23, 2009

Bernanke maintains credibility with modest Fed statements

Today's commentary from the Fed was as forecast. Traders appeared confused after the 2pm release of the Fed statements, sending the equity markets up sharply after the announcement, stalling out for an hour, and then trading off quickly after that.

The Fed confirmed that a recovery was underway but then pointed out that unemployment levels were still likely to grow, credit availability remains constrained, and real estate stabilization is still not certain. "Is that all good or bad?" traders shouted at each other.

The one bit of news that ultimately may have driven the end of day sell-off was the Fed's statement that they were slowing the purchase of mortgage backed securities in order to insure an orderly transition to normal markets when that part of Fed run stimulus ends early next year. That was the only thing that opened eyes here when the statement was released because I have no clue how much that program has been underpinning the credit markets.

From this perspective the Fed's commentary underscored trends that are benefitting the overall economy but may bedevil the political and social atmosphere. While aggregate numbers may well continue to show the beginning of meaningful growth, more granular numbers will show that a recovery will not, at least at first, have an even distribution. Unemployment will get higher and then eventually settle back to levels that don't look like the good old days and credit availability will stay constrained by more conservative lenders pressured by tighter capital requirements from regulators and more vigilant internal credit controls. Aggregate inflation numbers will stay very modest but at ground level there will be inflation in things that people really must have like fuel, food, education and health care, which will rob purchasing power and keep prices flat or even declining in discretionary spending areas.

Tuesday, September 22, 2009

Those money market funds

A post here on August 26 focused on the imperceptible yields at most money market funds today and wondered what the margin of error had become. I'm still wondering about that. Last week the Fed, as planned, ended its one year guarantee of all money market funds that was put in place when everything was unraveling. Last year we learned that in financial markets there is nothing without risk.

So what I'm thinking about and acting on is this idea that there might be risk in money funds now. When a money market fund "breaks the buck" a panic sets in and illiquidity takes hold. Unless we repeat last year's almost unprecedented freeze up of credit markets, the Fed will not again step in with a blanket guarantee if some funds begin to have trouble. It's the "moral hazard" issue, you know, if nobody loses why play safe. So that won't happen again. The thought here is that if some funds have trouble, the Fed will step in with a liquidity line at a harsh interest rate that will be backed by every bit of cash and every asset that the respective mutual fund has. That will provide stability, but as it is worked out there will be a period of illiquidity for the clients, and maybe small losses, as the clearing banks work to untangle the mess. To the fund firm it would mean some losses or, if they are not well diversified, a shut down.

So for years money market funds made me a lazy investor for the most conservative part of a portfolio. Completely liquid, 4% or 5% yields(higher effective yield on muni funds at times), and no principal risk, I took it for granted and spent my time on equities. A yield and risk forced shift from money markets has been underway this past spring and summer, a shift to short term and intermediate term Treasury ETF's, to intermediate corporate and muni bond indexes, to a broad commodity ETF(DBC), an agribusiness ETF(MOO), and some other more risky but interesting funds like Fidelity Strategic Value(FSICX) and Putnam Master Intermediate Income Trust(PIM). Those last two both combine investments in U.S. governments, emerging markets, and high yield bonds. The Fidelity fund has a higher level of governments at 40% and is more stable but with a lower yield than the Putnam fund.

I still have some money market fund exposure and much more substantial bank savings exposure than last year with 75 to 90 basis yields, but these newer investments are working fine. They need to be watched, so it's no naptime like when I just parked liquidity in the money markets, but it's more interesting.

All of this may be wasted breath or keystrokes as markets are continuing to slowly improve. When the insightful, entertaining but almost constant bear Jim Grant is quoted in the Wall Street Journal yesterday saying "not only does the rise and fall of the averages reflect economic reality, but it also changes it" as part a bullish call for an extended rebound, money market funds could represent no risk other than lack of return and active portfolio moves could be a good bet.

Sunday, September 13, 2009

A hopeful look at hometown Danville, VA

Spending time once again in hometown Danville, a different perspective is emerging. Here at ENS there periodically have been posts on Danville with the most comprehensive being "Walking downtown Danville" on November 19, 2007. The general theme of comments has focused on the challenges of reviving a large rural city after losses of its core traditional industries in textiles and tobacco. Losing wages, a tax base, and many productive people has led over the years to challenges in education, health care, general employment, and crime. Posts here have addressed those issues while stressing the plight that affects many of the fine people that live here. This post, taking a different tact, is meant to look at what's going right.

One thing that always impresses this metro New Yorker is a pervasive attitude of appreciating the small things of day to day life. It's apparent in routine daily behaviors , in a sense of humor, and respectful, polite, eye contact real interactions that cut across all strata of society. There remain some remnants of Danville's legacy, a seemingly small but noticeable group of resentful white malcontents whose more extreme opinions would probably seem repulsive even to someone like Sean Hannity, but on the whole there is a laid back "we're all in this together" sensibility. Going to the community market on Saturday mornings is a place to feel this buzz, a place where one could know no one and have pleasant exchanges right and left and straight ahead. There are many nice people here, not a bad place to start.

Despite significant challenges, Danville is a city that has not given up, far from it. What is immediately noticeable is that despite a traditional downtown that is more than half empty storefronts, the streets and sidewalks are immaculately maintained, and that's true throughout the city. Well kept shrubs, trees, and plantings adorn most major ramps and intersections. Not far behind the scenes there's much more.

In recent years the city has built Riverwalk, an eight mile walkway along the Dan River through woods and fields. Heading east it links the Community Market, Science Museum, and train station area with a park downstream that has the minor league baseball stadium, a skateboard park, and baseball fields, and continues further through Ghost Island(a name derived in the 1700's from its stand of sycamores) to a fishing marina. Above the path through this area are multiple soccer and game fields, more than it seems possible for a town the size of Danville to use. This surfeit of fields now attracts an annual international college rugby tournament each spring that is organized by schools such as Duke, Yale, and other notables, and over 400 players participate. One local friend said to me, "the ambulances never stop going back and forth to the hospital on that long weekend". Riverwalk, walked extensively yesterday, has a steady flow of walkers, runners, picnickers, bicylists, and skateboarders, as well as lots of folks fishing, couples holding hands, and students cracking their books on the riverbank. Everything here is perfectly maintained. It's really a remarkable community amenity.

Here's another example of planned positive redevelopment. The area known as Liberty Hill in a traditionally black neighborhood had been the site of a run down housing project that had generally been known to be dominated by a criminal element that the residents had no choice but to tolerate. With Federal grant money that project was razed and in its place today is a large, attractive neighborhood of duplexes with yards, porches, and children out front playing. This income adjusted rent stabilized housing is an amazing change. Virtually all legal residents of the former projects have been relocated to these duplexes, if families, or to an assembly of subsidized apartments two miles away. While problems have apparently almost completely disappeared, a new police substation has been located in the area to make sure that stays the case.

No more than a half mile beyond the Liberty Hill duplexes is another eye opening project. The Tiger Woods Foundation, through some connection with Danville, bought a large parcel of land and donated it to the city for development of an 18 hole public golf course. With Federal grants the project is underway with land clearing apparent, a large putting green already in place, and a pre-existing warehouse type building that has been refurbished and updated into a maintenance garage and facility for the eventual course.

On the business front, attracting new jobs that provide security and adequate compensation is the priority. There has been some success in recent years, but it is very limited relative to the number of jobs lost in recent decades. Danville persists. With the leadership of their tobacco settlement funded Advanced Technology Institute, the city now has an up and running scaleable fiber optic network for commercial enterprises and city government.

That has apparently been the hook for buyers of the "White Mill", a huge abandoned textile mill structure on the river near downtown. This recent transaction not only includes the mill itself but through eminent domain all parcels on either side of the old mill between two major bridges. Promises for development of this site have been huge in terms of dollars to be invested and jobs to be created, but detail on this is somewhere between vague and non-existent. Is it a maneuver to take advantage of a dirt cheap price and government subsidies and then flip the property or is it a real and beneficial, even game changing, project. No one seems to know. Rumors abound. The most prevalent one is that it will be a major high tech data site for Homeland Security and that's why there has been no public announcement. Cover blown if that's true as this rumor is whispered by both the general population and some presumably well connected business and legal types. Server farm, foreign owned industrial tech business, low cost incubator site, other thoughts are out there and when this mystery will be resolved is unknown. Hope is not a bad thing.

On the more traditional industrial and infrastruture development front, Danville's new Democratic representative in Congress arranged for $29 million of TARP money to rebuild the decaying and constantly backed up Robertson Bridge at the far west side of the city, and the underside of the new bridge will be used as a conduit to lay power and communication cables that connect to yet another but more sizeable industrial park. The major construction will begin in 2010. This park is possibly looking for the really big fish that would create a more meaningful number of jobs as opposed to the 150 jobs here, 200 there, kind of development in other areas locally that don't begin to offset textile and tobacco, much less the loss of 400 well paying jobs at Goodyear and the shut down of a small Corning facility in 2009. The effort is there and, while one could argue that some of it is naive or misguided, it speaks to the active nature of the community in working for revival.

With the unemployment rate around 12% and many of the existing jobs at minimum wage or just above it, Danville has an economy that continues to slow down as the ripple effects of the recession continue. Favorite restaurants that would have been full 18 months ago have only three or four tables taken today, and feeding patterns could possibly be the most reliable economic indicator for what at times seems to be a calorie unconscious town. Someone close to Danville says that it is just the beginning of saving for Christmas, but this is still a concern.

Ending where this started, the challenge of economic revival is huge. Danville needs to rebuild a trained labor force and attract a new entreprenurial class. It's easy to point out the problems. Solutions are not simple or easy or necessarily even achievable. What's clear, however, is that this game is not over. Not being able to predict the future, the city of Danville is making a stand, nurturing some hope, and looking for a little luck, hoping to move out of the past and on to a period of good karma.

Saturday, September 12, 2009

Small caps resurgent

In recent weeks, and overwhelmingly in the last week, U.S. small caps have been leading the way. Following three Fidelity run 10bp expense ratio index funds here, S&P 500, Total Return(roughly Russell 1000), and Extended Market(roughly Russell 2000), the Extended Market Fund has significantly outperformed in recent weeks.

One of the much discussed anomalies of the entire rally since March 9th has been the outperformance of higher risk equities, many small cap, relative to large cap bellweathers like JNJ that have fortress balance sheets and outstanding businesses. It appears that there are three reasons for this. First, many of these smaller stocks fell much more dramatically during the period of near financial collapse as their financial flexibility, code for access to liquidity, was in doubt. Second, the extent of many small caps fall led to the more speculative, risk tolerant investors to come in and take a flyer on baskets that could potentially bring outsized returns in the aggregate. Third, now that there has been a run-up, we are entering a period in which the M&A market is heating up as cash on the sidelines at large corporates and with private investors is getting antsy and active. Investors in small companies with competitive product niches could be loathe to part with their investments and risk forgoing a merger premium that may be in the offing.

The market will no doubt eventually tell us whether this thought process is flawed.

Thursday, September 10, 2009

International leading U.S. --- ?

International "green shoots" may be sprouting in a more visible way than in the country where the cute phrase was coined. There is a renewed vibrancy to many overseas markets. They are still working with challenges from the crisis, as we are here, but there is beginning to be a feeling that those sprouts are more tangible. That combined with the fact that once the contagion started in the fall of '08 many overseas equity markets declined as much as U.S. markets and in some cases much more, the rebound going on now could just be the beginning of a much bigger move in these non-U.S. markets. At the moment that may be underpinning the U.S. rally.

To date the focus has primarily been on China, and the Chinese have done more things right than wrong to address the crisis and, more importantly, their dictatorship/market economy has allowed them to implement stimulus quickly. That's not admiration, just a fact that they jumpstarted infrastructure spending almost immediately. There has been stability there and already they are concerned about overheating again.

Other areas in Asia are percolating, especially the export engine of South Korea and the banking and finance focused Singapore. Japan has a new government that is saying all the wrong things but the guess here is that the market doesn't care because nothing has worked for almost 20 years. Regardless of what the new government is saying, it is possible that any change is good, anything that shakes up the bureaucracy and shadow power structure of their rigid system.

Western Europe is a mixed picture but France and Germany have been relatively resilient. While their leaders refuse to be optimistic and stress more difficult times ahead, the economic numbers aren't so bad and the confidence surveys have not fallen off the table. Observation suggests that the leaders are sandbagging, not wanting to get ahead of themselves and wanting to take credit for the turnaround that may be in the works.

Emerging markets is the biggest story in the nascent global recovery. The fact that they did not collapse and are at the least tracking the recovery of major economies is amazing relative to post WWII history. Corporates in emerging Asia and Latin America went into this downturn, generally speaking, with limited leverage and hedged currency exposures. That was a first and given the growth potential of many of many of these economies, they not only are not a drag but may be an engine of global growth that will absorb more Asian exports to at least partially offset the sluggish U.S. consumer. Some may feel that, from an investment point of view, the emerging markets train has already left the station though it may be a long ride.

Eastern Europe and Russia are a wild card still, resource rich but in some areas terribly managed.

This international landscape, as projected here, should be good news for U.S. multinationals and a continuing opportunity for agile investors.

What's ahead for equities---momentum or adjustment

The equity markets keep inching up. News reports remark on record rallies compared to this or that. Market pundits warn of an "elevator adjustment" as a necessary component of a rally, and that's the bulls, or a bear market rally that will obviously end badly because it's unsupported by the fundamentals. Who really knows, except that both camps have been wrong for longer than anticipated at this point.

How big is this rally. Rough numbers ahead---by March 9th of this year the U.S. equity markets had declined 50%. In order to recover that loss it would require a 100% rebound. As of today we have rebounded 54%. That's a huge rally, but relative to the market peak in this recent cycle it is still priced at roughly at 75% of where it was before the financial debacle began. Is that inappropriate given that the market looks forward, expectations for 2010 and 2011 are improving, U.S. multinationals have vast opportunities, and emerging markets are not a drag on the world economy as they were in all other post WWII recessions.

Will this momentum continue and go too far. Are the shorts covered and ready to come back in or is the market trying to hop on board the train as it is now pulling out of the station. Who knows, and some might say that's what makes it interesting, or dangerous. Even odds on spike up or spike down, but if this sublimely moderate every day rally is sustainable that would be unprecedented.

Wednesday, September 09, 2009

The final days of Ken Lewis

Today's NYT has a story in the business section that details the firing of BofA's general counsel on the day the Board was informed of losses hemorrhaging at Merrill Lynch prior to conclusion of the acquisition. The details of the reporter's story are worse than that, and if it is even close to accurate Lewis is now in even more trouble. BofA's days of thinking they can get away with distorting the truth and villifying others in their public comments, a tradition that began at NCNB with former CEO Hugh McColl, may finally be over.

Worse yet, a front page article on the abusive fees on debit cards throughout much of the banking industry highlights BofA as among the worst, detailing their practice of reordering clients overdrafts from high amount to low, rather than chronological order, such that the bank receives the highest amount of overdraft fees.

Lewis will certainly be out by the end of the year, if not the end of the week.

Postscript: Notwithstanding some executive management practices, BofA has many fine businesses and the branch banking business that earlier in his career Ken Lewis helped knit together has top of the line integrated technology as well as, in my family's experience in New York, Missouri, and Virginia, skilled face to face customer contact practices.

Monday, September 07, 2009

Postscript thought on the insurance business

Late last night in reflecting on yesterday's post, I remembered a quote attributed to Carl Lindner, the Cincinnati financier who parlayed his father's Depression era dairy and egg home delivery business into a multi-faceted empire that puts him today into the middle of the various 400 richest people in the world lists. This quote may not be widely known, but it was told to me in the early 1980's, in an admiring way, by someone very close to him. Lindner's comment, roughly remembered, is as follows:

"First I started a bank, a business where people give you their money but you have to give it back. Then I discovered savings and loans, a business where people give you their money and then pay you to give it back. But finally I discovered insurance companies, a business where people give you their money and you don't have to give it back."

Sunday, September 06, 2009

Is all complexity bad?

When it comes to finance, the New York Times lead front page article today seems to suggest that. The article, "New Exotic Instrument Emerging on Wall Street", discusses possible securities backed by purchased life insurance contracts as well as repackaging of some types of residential mortgage securities as if they were another looming conspiracy. Anyone can read the article at, so here are a few thoughts.

Complexity can be creative and productive. Before Fannie Mae and Freddie Mac were browbeaten by Congress into going downmarket in the late 1990's and before those firms, essentially back office processors, began paying everyone there like superstar traders, they served a wonderful and productive purpose. The process and role that they served was complex but it worked. Congress had virtually direct oversight authority over these entities and encouraged greater complexity for perhaps well intended but more often blatently self serving ones. The point of this paragraph is to remind people that all misguided or dangerous complexity does not originate on Wall Street.

If the new securities discussed in the article seem dangerous, they don't need to be. The SEC by now, after all we've been through, should be awake as far as doing its job. If rating agencies don't do an intelligent and thorough analysis, at this point they should be quickly shut down. The SEC can and should mandate that securities with a certain degree of complexity only be sold to institutional or presumably savvy investors who get paid to do analysis, and not get chopped up into small illiquid pieces and sold to retail investors--- just put in a limit, no sale or distribution in pieces below $500,000. The point of this paragraph is that there should be and can be regulation and regulatory agencies should do their job.

If any complexity is scorned, and used by some inexperienced reporter and allowed by an editor to seek attention, where could that lead. This may sound silly but it could lead back to a system with minimal distribution of risk and banks limited by their capital to what they can originate. What's wrong with that one might ask and the answer is that credit availabity, which is essentially risk capital for small businesses and individuals that don't have a high net worth, will not rebound at all from current subdued levels. Job growth will not rebound. Complexity and creativity are necessary to rebuild our global credit infrastructure. It needs to be transparent to analysts, regulators, and investors, but it needs to be.

As an aside, I found some of the discussion in the article about the "life settlements securtization" idea amusing. With the reporter's razor vision focused only on catching Wall Street in their latest heist, she treated the life insurance companies' dilemma in a matter of fact way, if not with sympathy. Basically she was pointing out that this type of securitization would disintemediate the life insurers from their ongoing scam of the last 100 years or more and pay individuals who need money early far more than the insurers would. It was interesting to read how the insurers actuarily calculate how many policyholers as they age, pay health bill, and live on fixed incomes can no longer pay their premiums, so after maybe 40 years of payments they forfeit all or maybe 95% of their beneficiarie's death benefit. But this new security is a bad thing because it would blow up the insurer's scam, pay elderly people much more of their money back, and because it is complex?

Wednesday, September 02, 2009

Putin's visit to Poland

Few have ever questioned the audacity of Vladmir Putin, a tyrant by any measure, but this week's visit to Poland has been appalling. Why would Poland even allow such an unapologetic Russian in its territory. He precedes his visit by releasing so-called "classified documents" that detail Polish government complicity with Nazi Germany.

The Russian massacre of 20,000 Polish officers at Katyn Forest is finally now well documented and the forced migrations at that time into slave labor is less so but fact, and that happened when their pact with Nazi Germany allowed Russia to take over Eastern Poland. What is less well documented is the "liberation" of Poland. It was approved at Yalta in a compromise with Stalin by the very sick Roosevelt and opposed by Churchill. The Russian troops that took over Poland attacked the rural areas out of any world attention, and raped almost any female between 10 and 60, and castrated and then hung males who rejected their authority. Apart from the Holocaust itself, "liberation" was a Mongol like devastation that only has Cambodia as a comparison in 20th century history.

That Putin can even pretend to represent any normalization with Poland, any common beliefs, is just bizarre and disgusting.

Tuesday, September 01, 2009

Fragile equity market reflects financial system worries

After several weeks of equity market gains that were welcome but had a feeling of speculation to them, there's an unwinding underway. As we move toward the anniversary of the Lehman collapse and the AIG nightmare, it's completely apparent that the credit markets have not returned to anything like what was once considered "normal". Putting the sub-prime mortgage madness aside, as an aberration, there is still something amiss in the credit markets. There is plenty of credit availiable for those who don't need it, and little for those who do, business and consumer alike. While liquid money markets are repaired from last year's debacle, they offer no yield because institutional buyers are still finding their way, staying conservative on all trades. Without vibrant and deep credit markets there will be an undertow on the equity markets and a nagging fear that what happened in the fall of 2008 can be revisited.