Tuesday, December 30, 2008

GOING, Going, going - concern?

Going concern - "accountant speak" for assessing the present viability of a business undergoing a financial audit. Know where I'm going with this yet?

Now more than ever, governments at every level - federal, state, county and city are facing a looming reality - how will they get cash to pay for promised services and or benefits and interest on current indebtedness? Answer - from those who have it.
Where does said cash live? We may properly ask "And how do they (still) have it?"- it's what was f/k/a the "rainy day" fund - the prudent among us who saved rather than spent all their money.

The prudent who didn't leverage up far beyond the max on mortgages, credit cards, home equity lines of credit aka helocs, 125% mortgages, cash out mortgage refinancings to splurge on cars (more than 1 per person), 2nd and 3rd homes, condo flips, toys, more toys, vacations, rarely or never prepare a home cooked meal; tell me what it feels like to get whacked by that hockey stick; in a grotesque sadness the most prudent are paying and will continue to pay dearly for the most prurient!

UNTIL those who have it realize we are paying for a small percentage of the US adult population (known as cry babies) largely self inflicted, greedy decisions that turned out to be investment or borrowing mistakes and refuse to pay.
[If I buy a stock and it goes down and I hold out my hand and ask my fellow tax payers to bail me out is that fair? Is it more fair had I margined that stock position and pulled cash out of the account to take a trip or a cruise or bought a new car; of course not - yet that is precisely what some homeowners did - didn't they - why should you or I pay taxes and bail them out? Let them sell their toys and trip photos on ebay!]
Why not? what's the risk? Why not be a deadbeat and wait to get a government handout?
Or just wait until the retailer files for Bk and your store debt is washed out in the rinse cycle of reorganization.

Why pay any bills in full and on time anymore - it pays to be a cry baby deadbeat doesn't it?
Or is it me? Even bona fide tax debts can be settled for pennies on the dollar - why should or would anyone EVER PAY FULL FREIGHT FOR ANYTHING EVER AGAIN???
Is it any wonder why many things in America(n) have been devalued and are / will be at a contunued discount, looking ourselves in the mirror - is it because we have enabled the discounts? Someone please...

Monday, December 29, 2008

Rose Bowl - sponsored by Citi (er..US Taxpayer)

Is Citi; the veritable one and the same "too big to fail" financial institution; the exceedingly lucky recipient of $150 billion in US Taxpayer assets SPONSORING THE ROSE BOWL?

I'd be curious to learn of the list of invitees, junkets, corporate boxes, booths and swag we - the US taxpayer may be paying for.

Just a simple question; as to the prudence in expending same.
Perhaps the taxpayer's employees (Congress and or the GAO) may inquire on our behalf - although I'm afraid that sports fans may need to stay tuned in for a long time before we get an answer much less repayment; in the meantime enjoy the game!

Wednesday, December 10, 2008

Reality vs Hope & Denial

US Money Market rates may soon reach negative returns; Stock market investors (Dow 30 near 8800) are priced at a trailing PE (stock price divided by stock earnings) of ~13 to 15x 2008 reported earnings; 15x earnings is arguably the long term historical norm.

Another, Different and CRUCIAL View is in comparing the "P/E’s".
The “PE” of money markets are about 100x (100 divided by the current near 1% US Treasury bill yield); 10 year bonds are approaching 40x. (100 divided by 2.7%).
Stock investors are pricing the equities market at 25 to 30x or more based upon declining expected 2009 earnings.

The critical difference:
Money markets instruments guarantee return OF principal;
Stock investors hope for a return ON principal.

Who’s right, if either?
IMHO, neither is right – it’s about signals – and the Money Market investors are by definition more careful; yet both asset classes are overpriced at least by historical measures.  
Perhaps are MM investors factoring in some other variable which stock investors are not? Therein lies the value of being more careful, with an eye towards conservation of principal – DEFLATION is being baked into the MM rates; a reflection of the realities befalling Main St.

Job Losses are REALITY
Every job cut is an amputation from the body; the US consumer juggernaut of yore which used to make up well over two thirds of US GDP.  Jobs and more importantly workers do not magically reinvent themselves overnight; they retrench, spend less (not more) and save for tougher times ahead; worse often wind up not paying their debts (mortgages, credit cards, cars, toys,  gambling)  save booze, smokes or smokes and booze; whatever the need for the preferred fix du jour.

Risk transfer provides another view – the exchange of a day’s labor for a paycheck and job security is broken; especially in industries colored by non-market forces for decades;

The global conscience recognizes (yet may not be ready to admit or implement) that much business activity is hollow i.e. not nearly as value added as transacted.  What is the fully loaded accounting of the value added of many of the products and or services whose ENORMOUS sums starting with fees earned for M&A advisory fees in particular or investment banking in general? And who benefits the most from these deals?
Would it be better to answer (rather than continue to ask) the question, would the world be a better place – if we as global stewards of the earth and its current and future citizens – would devote a fraction of our resources to the basics – food, shelter, health care for those less fortunate and to act in the best interests of the environment for the benefit of future generations?

US Dollars – past, present and future
Too many dollars (yes Elizabeth, there are a few too many dollars especially those whose ink is still wet) have to find a home – and they often find them in the stock markets based on notions (although promulgated as "theories") which are dislocated from today’s REALITY; see below.

It is acknowledged that the US consumer has enjoyed, rather overstayed its place at the head of the table of the world's consumers due to a debt-induced buzz; aided by the overlooked, undervalued and imprudent risk transfer inherent in securitization since the early 1980s.

The future of the US Dollar, interlinked global currency and trade exchange mechanisms is as currently practiced untenable. Unless and until the inputs of labor, land (natural resources and rents), capital and entrepreneurship / innovation / intellectual capital / human rights / environmental obligations signals are openly priced and align with demand and recycle in alignment – we may experience persistent disruption.

Mr Kashkari - misplaced and or misguided LOYALTY?
Perhaps I may be wrong, I hope so, however during Mr Kashkari’s testimony today before the House finance committee showed that he was not crystal clear on an implied fact – that is this: he is Under Secretary of the US Treasury i.e. his paycheck comes from and on behalf of the people.

IMHO he needs to vigorously respond to the question of whose interests he represents and act accordingly; communicate with Congress (the people) before he acts and DEMONSTRATE a transparent, prudent investment process and an ARMS-length relationship with borrowers or else as one congressman suggested he could or should step aside.

Sunday, October 19, 2008

Turning DARKNESS into light = Office of Financial Stability / Bailout "POTS"

Much of what ails the financial markets WAS CREATED IN DARKNESS - hence disclosure in the "full light of day" and attendant scrutiny needs to dawn upon same.
  • Hedge funds and other similarly unregistered entities compete with a huge advantage, over Mutual funds, Investment companies.
  • Mutual funds, both open end, closed end and unit investment trusts (all Investment Company Act of 1940 entities) operate primarily in regulated "open" markets.
  • Hedge funds enjoy a veritable blanket of secrecy, undisclosed securities positions, borrowing / leverage, insurance, credit default swaps.
  • Having seen the trades that generated enormous profits at its hedge fund clients through Prime broker operations, certain banks / broker dealers, despite SEC, AICPA and FASB efforts in the 2004/5 era to rein in certain risky activities in off balance sheet  / so called special purpose entities  (think Enron) - SIVs special / structured investment vehicles being the most recent moniker, got into the leveraged spread trades, only in a much more leveraged fashion and as the music was beginning to fade (the end of the real estate asset bubble).
  • Hedge funds and the securities, insurance contracts CDS (Credit default swaps) in which they invest and real or synthetic (explicit or implicit) leverage thereon NEED to be exposed to the full light of day to address this most fundamental information imbalance.
  • As a result mutual funds, having to operate openly, are by definition placed at a competitive disadvantage due to having to disclose positions - twice a year;  causing an "information" drain of a portfolio managers "best ideas" - to the disadvantage of shareholders.   It's as if an NFL football team would disclose its playbook - long ago protected as trade secrets.  Notwithstanding the common lack of authority to short securities. 
  • I believe, although am a bit unsure, that few, if any mutual fund boards (not to mention the industry's lobbying arm Investment Company Institute) took any action to "protect" its funds' shareholders from the above information disclosure disadvantage; I'd be much obliged if any bloggers may have data to address this point (Max are you out there?)
  • I'd also be grateful if there is a data set that may show what if any deliberation(s) on this point may or may not have been part of any mutual fund board minutes.
  • Shareholders, all Americans, except those high net worth accredited investors,  in same - are negatively disadvantaged.
  • Importantly, the vast majority of 401k holdings are in mutual funds; in the "open" market.
  • All securities, contracts, CDS (whether registered or not) should be standardized to the extent possible and be required to trade on new or adapted open / regulated exchanges - not allowed to remain, and potentially subject to abuse by rogue OTC (over the counter) market makers and traders and or colored counterparties.
  • Technology exists to enable an "anonymous" reporting of same trades; open, transparent verifiable price discovery affords ALL market participants with indicators / sources of value; vastly reducing "judgment calls" implicit in mark to models and so called level 3 "difficult to value assets".

The future confidence of all investors from sovereign wealth funds to individual shareholders will benefit when they can truly see "what's going on"!   

Tuesday, October 14, 2008

What is the HALF-LIFE of the Bailout drug? 1-2-3 Back to reality…

When the temporary effects of the bailout drug placed into the hands of the doctors (Wall St and other financial services entities), the creators of this over leveraged, toxic debt induced time bomb wear off, or worse fail to perform the hoped-for-magic; what and how will Mr Paulson and Bernanke treat the patient aka the “real economy” consumer, consumption-dependent / capital expenditure-reliant corporate earnings?

POTS - Part of the solution:
DIRECT AID to the US TAXPAYER and to the underlying major asset class.
Tax support for renewed Real Estate investment as described in last blog.

Bailouts of banks and Wall St firms are NOT the solution to the REAL problem.
They band aid a fracture only, in fact, are nearly completely misplaced, misguided and misinformed use of US Taxpayer monies.

NEED we state the OBVIOUS again?
NOT ALL financial institutions are in trouble; most are / should be allowed to seize the present opportunities they (boards, management and shareholders) so patiently waited for by foregoing the illicit models and paper profits of yore and compensation thereon (2004 to 2007).

Repeating the CAUSE OF THE MAGNITUDE of this problem:
LEVERAGE - admittedly we would face a problem, more on the scale of OTS / Resolution Trust of the early 1990's; due to recent vintage homeowners having been allowed to own homes with no skin in the game required (i.e. no down payment).

TODAYS problem
WAS exacerbated BY WALL ST and related entities astounding piling on of debt / leverage to capture spread, in the relentless PURSUIT OF MAXIMUM PROFITS, regardless of the AAA credit quality assigned by the ratings agencies and or implicit Fannie Mae, Freddie Mac, Sallie Mae government-backed issuers. Oblivious (perhaps failed to or sorely and inadequately even performed due diligence) upon the true insurance capacity of the ultimate counterparty, major issuer of CREDIT DEFAULT SWAPS insurance; AIG.

With scant, if any attention to the fact that Real Estate, as an asset class, with a readily observable 200 year track record of low to mid single digit appreciation, that ejaculated beginning in 2004 and kept on ejaculating for 3 years - COME ON, GIVE ME A BREAK!

Where are (were) all the fans of ELVIS & Johnnie (Carson)?
Millions of Americans, listened to these artists with rapt attention FOR YEARS.
Did you realize the MOST IMPORTANT financial message was sent from their graves?
By their respective estate executors, in May 2006 both estates sold Real Estate - and it was noted in the proprietary "Fiduciary Alert" as a reminder to those in positions of fiduciary responsibility to assess, monitor and document the continued appropriateness (risk / reward) of
holding real estate; some "fans" may have been listening to "new, but fleeting" music.

It's not about being right, or lucky - IT'S ABOUT RECOGNIZING THE OBVIOUS, especially by those who know / and should have known better, with access to ALL the models, necessary information about asset-backed, mortgage-backed real estate-related securities; notwithstanding the stratospheric appreciation of homes in their VERY OWN NEIGHBORHOODS!! All the while, ignoring the dislocation, rather rupture of same value from jobs / job security, productivity and income.

Friday, October 10, 2008

Give me & the US Taxpayer a break (NOT them)!

Mr Paulson and Mr Bernanke stated we must commit US Taxpayer dollars for each of the previous "Once in a lifetime, extraordinary, critical rescues".
Bear Stearns $29B, Indy Mac (FDIC), Fannie Mae $100B, Freddie Mac $100B, Washington Mutual (FDIC), Wachovia (merged Wells Fargo), Lehman Brothers (allowed to file BK), Merrill Lynch ("encouraged" merger with BofA), AIG $85B + $37.5B (plus NY Ins Comm. ok'd dip into its Insurance reserves) PLUS Office of Financial Stability $700B

Today's date is Ocotber 10, 2008
According to Messers Paulson & Bernanke TODAY'S extraordinary, critical, must do is: "Equity stakes in banks, brokers, insurance companies"; when will it stop?

All of the above steps were direct aid to shareholders and bondholders and each necessitated further surgery. It's as if the Mr Paulson and Bernanke believe that the US economy was ONLY comprised of financial institutions which warranted commitment of US Taxpayer funds and which could not be allowed to fail, merge or fold; why not? What did they know and when did they know it?

Not all financial firms are in danger - in the past some chose (an action verb) despite investor and analyst pressures, to be prudent, forego profits from said risky behavior and should be allowed to seize new markets, business opportunities for their patient shareholders.
In the interim Part of the solution POTS
Requires NO immediate US Taxpayer funds:
The root aid that's required is to DIRECTLY enhance the UNDERLYING, temporarily impaired assets (NOT the securities, not bailout the institutions or investors of yore rather):
  • Real estate

  • Autos

  • Tax incentives for FUTURE investment in OLD assets; greater tax incentives the longer the holding periods.

  • As a jump start - NEW investments (as of a date in the near future for a 45, 60, 90 day period) qualify for tax free status; undoubtedly many are sitting on the sidelines waiting with CASH to invest for such an opportunity - at least it will stimulate a greater level of investment / risk capital activity.

  • Further any investments in repairs, maintenance, landscape, or capital improvements, labor costs for same would qualify for favorable tax treatment. If same are GREEN friendly could qualify for even further tax incentives.

  • Creates jobs, stimulates demand for the underlying assets and would be more Green friendly; what's wrong that solution? Its the American way! NOT BAILOUTS or EQUITY STAKES!

Thursday, October 9, 2008

Is a prudent fiduciary result at all possible? US Treasury - Crossing the LINE into partnership with TARP banks?

As a result do TARP recipients, the Big 5 banks, receiving good US taxpayer dollars for toxic assets owe a fiduciary duty to the US Treasury / taxpayer?

What is the US Treasury thinking, contemplating?
What is, if any, the training in fiduciary responsibility of civil servants at the US Treasury, Federal Reserve and TARP banks management?
What is the fiduciary capacity of all of our elected officials - federal, state, county and local?

If parties are not trained, educated and informed what result is likely to befall the taxpayer.

For example.
Upon receipt of US Taxpayer monies, is the Treasury requiring acknowledgement of a duty of undivided loyalty or is it arms-length, perhaps even an adverse relationship?

Monday, September 29, 2008

Now what? before & after - parsing the interests of bailout

Who has money at risk? The US taxpayer.

Since this is an EXTRAordinary event a more balanced set of risks can be fashioned if:

SOME SKIN IN THE GAME if ANY commitment of US taxpayer funds

As previously suggested, in "RECYCLING OLD Wall St compensation" Wall St and the other financial services institutions managements, boards and employees should contribute some personal funds to a set of solutions. AND take a second place interest BEHIND the return OF and the return ON US taxpayer money.

The taxpayer rightly or wrongly feels that:

  • They get to keep their jobs, get a paycheck (at taxpayer expense!), in cleaning up their own problems - things could be a lot worse; just ask an auto worker, flight attendant or pilot.

  • The US treasury proposal fails to pin money responsibility on those most in the position to have known better;

  • Same proposal will, as previous extraordinary rescues (at taxpayer expense), fail to deliver a cure as promised;

  • Liquidity band aids the fracture - it can act as a temporary solution only;

  • Liquidity DOES not, as stated on http://www.fiduciaryexpert.com/ in JULY 2007, address the REAL immediate problem - that is credit default, due to asset values continued decline;

  • The REAL cure is to allow all markets to proceed on their own - let private market players balance it all out - no matter how painful.

  • The taxpayer understands that markets need to self - correct; not all goes up (or down) in a linear fashion.

ONE FINAL Q-U-E-S-T-I-O-N FOR THE TV Business media

Today is Monday, September 29, 2008

TV Business media (the usual cast) is in such a questioning frenzy TODAY - stirring up debate, looking for answers, one even chest thumping "WE own this story" really?

Where were they in the 16 quarters spanning 2004, 2005, 2006 and 2007?

Watching the PARADE of analysts-estimate-beating, RECORD Wall St EPS announcements get what? A Cheer! When scrutiny was the more appropriate news angle, not to mention the primary job descriptor and RESPONSIBILITY of a journalist.

Sunday, September 28, 2008

Where do I sign? - now that I'm a fiduciary (to the US Taxpayer)

Prudent fiduciary governance applicable to the US Treasury (for and on behalf of the US Taxpayer) requires a signed written acknowledgement of fiduciary responsibility from the Wall St firms, banks or other financial institutions which are to receive cash from the US Treasury.

Lets see how many firms do so.
  1. Let's see how the US treasury uses this historic event as a-once-in-a-lifetime opportunity for learning / educational tool for ALL investors.
  2. That an upfront planning process is critical.
  3. That the asset to liability match is critical.
  4. That full disclosure (Reg. FD) is the best disinfectant to financial accounting issues; off balance sheet financing / insurance is a slippery slope.  Let the analysts do what they do best; analyze board and management representations.
  5. That diversification is more important than profits.
  6. That a respectable business reputation is earned every day; the result of a cycle of evidence-based continuous improvement in people, process and philosophy.
  7. That fiduciaries raise their hands when they FIRST realize that they can't outperform a benchmark or other investment mandate; inform the beneficiary it's now time to consider another asset manager.
  8. That protecting, taking steps to insure the return OF and the return ON US Taxpayer monies is more important than supporting a financial institution or insurance company.
  9. That "protecting" US financial institutions does not require so much NEW regulation; NEW regulators; rather enforcing existing - example; not all banks got into trouble; JP Morgan is the most prominent example of a money center bank - it's management chose (an action verb!) NOT to use as much leverage as their competitors.
  10. That the interests of the US Taxpayer / beneficiaries be in UNdisputed first place; not best interests; SOLE interests.

It's all about protecting the interests of the US Taxpayer!
Prudent Fiduciary Governance is where it begins. 

Saturday, September 27, 2008

Why not? - Private Investors - Targeted Tax Holiday for MBS & ABS

The US Treasury proposal to commit up to $700 Billion to "shore up" banks and Wall St's balance sheet is The Riskiest for the US taxpayer because it sends cash today (or in drips) OUT of the Treasury.

Policy makers state today's values of MBS and other Asset backed securities (ABS) are at, as Chairman Benanke suggests, "at fire sale prices" indicating a belief in a transient diminution of value; if correct then private investors may have appetite given the correct set of incentives.

A much less risky solution, requiring no UPFRONT outlay of US Taxpayer cash could be fashioned with an IRS-supported targeted tax holiday for private investors; such as for example.

For MBS and ABS securities purchased from today thru end of 2008 - gains on sale / marks qualify for a tax free basis.

Later variations on this theme should gradually increase the incentives to establish positions / basis sooner than later; with later positions subject to a less generous set of tax incentives.

Another potential solution
Title IX housing program policy could be reworked and applied to an investor's purchase of MBS / ABS today - such that tax incentives enhance the private market's opportunity set.

If as another blogger suggests, that the US Treasury enjoys a spread capture of over 10% due to it's structural borrowing advantage; given similar incentives the private investor SHOULD be first extended the opportunity to bid; it's a prudent, natural step in the US Treasury's fiduciary duty to the taxpayer.

Thursday, September 25, 2008

Did previous bailouts cure what they promised? NO

BEFORE the PREVIOUS bailouts

we were politely informed of the threat that
IF WE DID NOT agree to:

+ BEAR STEARNS - $29 Billion
+ FANNIE MAE, FREDDIE MAC - $200 Billion (early estimate)
+ AIG - $85 Billion

Rates on loans to the people for:
+ Mortgages,
+ Autos,
+ Student loans,
+ Small business
would spike much higher; Mr Paulson and Mr Bernanke implied more draconian consequences.

Loans IN FACT have not dried up; rates have NOT spiked!

None the less each bailout has been billed as something "extraordinary" “we had to do” and “this time will be the last” - when will the hyperbole and bailouts stop? That has an obvious answer – when the “monkey” is back in the hands of those who created the problems. And our government officials learn what independently determined cause and effect truly is!

How did the “monkey” grow into a “gorilla”?
Wall St / Financial Services may have, either implicitly or explicitly, borrowed and leveraged, reportedly as high as 30, 40, 50 to 1 against long term paper, borrowing short term, to capture the spread.

Recognizing the obvious – "when not if" problems
Isn't it curious how the masters of the universe’ / financial engineers' models failed to recognize the obvious unsustainable rise in real estate values.

POTS - Part of the Solution

The Treasury / SEC should create (but not commit taxpayer dollars) an anonymous virtual "auction" agency and let all potential investors see what might be put up for sale / bid - NOT who's selling it!

Private money bids - are the most efficient at assessing risk, and the most efficient use of resources. This requires very little US taxpayer money; admittedly it may take a bit longer - but offers promise of a "better market-based solution".

Wednesday, September 24, 2008

SHINE the light, shine the light...

Where it properly belongs - a high powered spotlight needs to be cast on the:





Wrapped and Blessed in


shaken and stirred with the extra garnish;


(Specifically, borrow in the short term market against long term paper to capture the spread or so it is hoped - as long as the spreads exist!)

ON THE CONTRARY - the future of consumer banking:

Local bankers, I believe, will revisit the deep roots of their communities, extend a loan to a neighbor, someone who they can look in the eye and whose handshake seals the loan for a house, car or student loan or small business capital. Loans such as these are the easiest credits to evaluate - banks have made these types of loans for decades - why would this time be any different?

Defeat US Treasury Bailout - Previous bailouts did not prevent...

Do our elected representatives have a fiduciary duty to the US taxpayer? It seems to be YES

Therefore vote: NO - The bailout as proposed may cause certain aspects of the credit markets, especially short term, to choke up; it is abundantly unclear that any such rescue would PREVENT consequences predicted by Mr Paulson and Mr Bernanke. The past has told us - Previous bailouts have not worked as billed.

A bit o' history - a bit o' future

Michael Milken always said a AAA rating is the best it will ever get; it's all downhill from there; perhaps the proud owners of today's handful of corporate, government and agency AAA ratings might pause to reflect on what they can do to honor, respect and do whatever it takes to insure that they continue to maintain that extreme level of confidence. If not, what will a new benchmark for sovereign debt consist of?

Tuesday, September 23, 2008

US Treasury Bailout - Mandatory Puts if US Taxpayers rescue the patient

The US Treasury proposed $700 Billion bailout of Wall St and the Financial Services industry (FSI) assumes the patient has total cancer. Implying an absolute necessity that the US taxpayer must pay good $ to the patient in exchange the people get to hold onto ONLY the cancer; something again does not pass the smell test.
MOST IMPORTANTLY - If the repercussions of not enacting are that great, then have the US taxpayer support the future issuance of credit, did you hear that? The Future issuance of student loans, car loans, mortgage loans. etc. - NOT THE BAD LOANS from the PAST!

Mandatory Puts back to Wall St!
If the US taxpayer puts up even one dollar sopping up Wall St's leveraged errors in judgment (securities) then we should insist that in 3 or 4 or 5 years time a "put" triggers Wall St or its assigns (not dischargeable in bankruptcy) repurchase from the US taxpayer with interest.

This time is DIFFERENT - make no mistake - it's not the nostalgic era of 1990's RTC; nor is it the 1987 stock market crash, nor the 1998 Russian ruble / LTCM panic; it is more like the 1930's given the elephant in the room - LEVERAGE. The public must recognize, Wall St's / FSI institutional and hedge fund leverage in the late 1980's / early 1990s was a nanospeck compared to today's $62 Trillion credit default swaps market - much of which relates to real estate and mortgage backed securities and derivatives thereon.
Reminder, implicit or explicit leverage was the "cause" of the excellent profits from back in the day AND those huge bonus checks the masters of the financial universe took home...now they cry out for the rest of us to share in the pain; hey bro we didn't begrudge your remuneration in the past so what right do you have to come to us for help now? It doesn't and shouldn't work that way.

Showdown at "Bailout Alley" - will Congress blink?
Mr Paulson and Bernanke would have us believe, if Congress does not grant these "authorities" great harm would occur to the US economy; really? Economies, sectors or industries naturally experience ups and downs, BOOMS and RECESSIONS; go ask the citizens in the Detroit and Cleveland areas. The Administration has trumpeted very recently that the economy is not in a recession and is "strong" hmmmmm.... what changed in the past 2 weeks? "What did they know and when did they know it" should jump to mind.

Bailout does not address / cure the problem for the people
Although Mr Paulson and Bernanke state "great harm" is in store for Main St. if we don't give them the $700 Billion authority
1- I'm hard pressed to find a direct cause and effect link to that premise. Very few, if any, upside down homeowners are unlikely to see ANY benefit from this "cure-all".
2- Secondly, where are those with memory? I thought we heard both of them say that Bear Stearns would be the first and last bailout, or was it Fannie and Freddie or AIG? It's beginning to look like a pattern here; or is it not a surprise that Mr Paulson is using the only tools he knows? Lets make a deal! More glaringly where was the SAME SENSE OF URGENCY during Katrina?

Many observers AND ALL WALL STREETERS know that ALL markets hit speedbumps; are NATURALLY prone to extremes: at the zenith of hope and optimism (2004 thru 2006/7) and despairs at its depths, 2008 thru ?? However, eventually begin to function again ON THEIR OWN; there is no shortage of smart people on Wall St. who could figure out how to make money.

This time is different - YES but we need to see the actual bottom first
We find ourselves in a VERY unusual UNcomfortable position - this time is different; the pain will be intense (it's only money though) in the future the recovery I believe may be the strongest ever seen; however we need to let the absolute bottom happen; push through it.
IF we let the patient recover on its own.

NO US taxpayer dollars to bail out Wall St - it simply requires a little lifestyle change from business as usual!

Recycling OLD Wall St Compensation = POTS

Would recycling those greenbacks from back in the day be part of the solution?

IMAGINE, yes imagine if Wall St.'s boards, management and employees aka financial engineers commission, bonus checks, stock grants of yore could be placed on the table; at the same table, importantly as a second place-holder, behind the interests of the US Taxpayer.

If recycling is not palatable or acceptable to Wall St. ask anyone in the Airline business - what salary concessions, compensation cuts are all about; and the sacrifices that are required when times are tough.

Further; be reminded that Wall St.'s wildly profitable successess of the recent past & problems of today are indeed ALL SELF CREATED; not so with the airlines; innocent victims of 9/11.

Yes these monies may not be much compared to the proposed $700 Billion but could be seen as at least a symbolic demonstration of confidence in their own cooking and a modicum of good faith Wall Streeters are asking the US Treasury and US Taxpayer to contribute to their collective rescue; corporate, jobs, families and communities. 

It's all about alignment of interests and resources to a common goal!

L - E - V - E - R - A - G - E = root of Wall St. Financial Services crisis

In testimony today before the Senate banking committee, Secretary of the Treasury Paulson fails to state the word LEVERAGE; the crisis IS CAUSED by Wall St's extensive leverage of complex, illiquid mortgage backed securities, derivatives and insurance thereon. It's not just that these firms invested in mortgage securities - no matter how complex - it's the fact that they DECIDED to leverage investments in same! Why? To make even more money.

In the past 5 years NO ONE, I REPEAT NO ONE ON WALL ST, UPON RECEIVING A PAYCHECK OR A BONUS CHECK OR STOCK OPTION GRANT - raised their hand or voice to state; "Something's not right - my compensation is too high!!!" DID THEY?

Many Wall St firms aka the Financial services (FS) industry learned what hedge funds were doing; outperforming a benchmark by juicing performance with leverage, they imitated that behavior and added even more leverage, especially to securities related to an asset class that was black & white overvalued by ANY measure; real estate.

Wall St (FS) borrowed, also leveraged heavily against other asset backed securities including credit cards, auto loans, boat loans, aircraft loans, student loans and other exotic assets and cash flows - these assets were then securitized (another source of revenue) in various classes, traunches and to many different investors.

Further, credit enhancements on these "securities" so called default insurance, (in a further incarnation, credit default swaps) was underpriced; perhaps due to one particular player's (lacking true capacity) actions, market share gobbling, anti competitive behavior; often sanctioned / blessed by the "independent" credit ratings agencies. Can you spell AIG?

In the past Mr Paulson promised Congress that Bear Stearns rescue bail out was EXTRA ordinary, really?

Since then we've Fannie Mae, Freddie Mac, AIG, now it's just cash - now "we need the (tax payers) cash" to preserve the management of FS companies; to even consider that company management be allowed to continue to run these companies is imprudent and revolting.

  • Why should or would the US taxpayer let the decision makers of the past continue at the helm?

  • Where is the US Treasury's prudence - in selecting / allowing agents of better decision making on behalf of the US Taxpayer?

  • How does the judgment or process of the US Treasury lend example / teach the FS industry, or demonstrate a prudent fulfillment of its fiduciary duty to the US taxpayer?

Keeping it REAL

Markets ultimately exist to serve the people - it needs to be a real market - let the chips fall where they may - yes some companies will fail and restructure but the clearing price will signal to ALL that markets work - for better or worse. That's the risk / price / value of an asset or collection of assets or set of investment behaviors.

With a FS industry as concentrated as Paulson suggests we need to let that industry rise and fall ON ITS OWN - as the players (they all wear BIG BOY pants) have clamored for, pounded the table, kicked their heels, indeed demanded and lobbied for the past 25 years! To state that the industry is too interconnected and requires a bailout fails to appreciate that diversification, as in all other businesses and more importantly credit markets- is one thing; PRUDENT. Look it up!

Sunday, September 21, 2008

US Treasury Bailout for MBS - NO!

Chris McConnell & Associates
Independent Qualified Fiduciary
Audits Training Expert Witness

Rather a better solution requires the Financial Services Industry; FSI to propose, implement and accept the risks of a multi-year solution; but not the US taxpayer; however cloaked.
1) VOTE No to government bailout, US Treasury plan.
2) The financial services industry, FSI inclusive of commercial & investment banks, broker dealers, insurance companies, credit ratings agencies created the problem; an artificial “market” for Mortgage backed securities, MBS.
3) FSI accepted the fruit from leveraged gains of the past - not the US taxpayer.
4) Therefore the US taxpayer should not bail out these entities.
5) The US Treasury plan simply does not address an inescapable issue; real estate values have been and remain dislocated from personal incomes.  Further, regrettably the US’ jobs picture is negative and getting worse; overcapacity exists in most industries, notably the Financial and real estate related industries.

An FSI – based solution has the best chance of success, in keeping with a self policing / self regulatory regime / market – based approach
There is no perfect solution, however, a better use and alignment of interests / resources, free market approach, best chance of success is an industry (Financial Services Industry) solution including the credit ratings agencies (S&P, Moodys, Fitch, et al) and hedge funds.
Temporary, extraordinary waiver of anti-trust regulation may be required.
ALL of those parties need to band together now – as they ALL did in the past in creating this “artificial” market for toxic MBS securities, derivatives and insurance thereon.

The FSI collectively is in the best, most advantaged position to model, price & evaluate risks of RMBS & CMBS and derivative securities.

The Cause - No one in FSI raised their hand in the past did they?
The outsize FSI profits were earned in the full light of day of boards, officers, auditors, regulators, shareholders and debt holders.
The FSI didn’t complain in the past when the models were showing huge "paper" profits; paying out vast sums to officers and employees.
Same profits INCLUDED a CEO’s personal certification of internal controls.

Closing comment – greed and or failure to admit mistakes, take losses
Many have criticized Wall St. CEOs, like Richard "Dick" Fuld that he or LEH board could have, in the recent past, raised capital and increased the chance of his firms’ continued survival.
Similarly, AIG, by way of example, but not in isolation, could have, in the past 12 to 24 months sold off or at least reduced some of its concentrated holdings in its non-Life, Property / Casualty FPG (Financial Products Group) correct? Rather they decided to hold these contracts; the epitome of self interest, hubris and ultimate greed!

Lastly where is the voice, the voices of self - regulation?
Those loud voices of SIFMA (the creation of the SIA and BMA), ICI and US Chamber of Commerce NOW?
Let them:
Stand up
Raise their voices
Take responsibility now
accept fiduciary responsibility to the US taxpayer
i. A more impressive, peerless collection of intellectual capital does not exist.
ii. Let’s see if they have, when times are tough, collectively the character to propose and implement a prudent plan of action;
iii. In the sole interests of the US taxpayer, as fiduciaries should.

The VERY LAST WORD - Leverage & Margin
Drastically reduce it – come on, 2 to 3% margin on MBS and related is like an Indy race car, trying to maintain speeds of over 200 mph on city streets; endangers innocent bystanders, indeed plainly perilous and reckless.

Stocks require initial margin of 50%; some have more; but when it comes to MBS and related securities, derivatives margins could and SHOULD BE raised to levels that approach prudence.

With over 25 years combined securities and expert experience Chris McConnell & Associates provides independent, conflict-free fiduciary training, audits, expert witness and litigation support in FINRA (NASD), ERISA and 401k plans, Non-profits, Foundations and Endowments; Trust, Estate & Probate and Marital Dissolutions regarding issues of fiduciary duty, suitability, diversification, employment benefits and compensation for the financial services industry.


If you would like more information about this topic, request a CV Brochure or to schedule an interview kindly contact Chris McConnell, AIFA at (310) 943 – 6509 or visit http://www.fiduciaryexpert.com/