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...

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!

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.

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"!   

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:
HAS TO INCLUDE:
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.

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?

DO WE NEED TO STATE the OBVIOUS?
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!

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?