Bailout

Is Wall Street Evil?

Pres. Obama is in New York right now for a couple of fundraisers. Last night in front of an audience that included some folks in the world of finance, he chided them to join him in his effort to implement financial industry reform rather than fight his efforts to do so, as many have been doing.

Ever since the first bailouts of Wall Street firms with billions of dollars in loans, the world of finance has been in the sights of the Obama administration. The alleged greed of these folks is a big part of what caused all the problems we are now facing, in particular with regard to predatory lending practices convincing people to buy houses with mortgages they could not afford whose interest rates reset to much higher levels. Ignore that it all started with the Clinton administration’s effort to dramatically lower the lending standards at Fannie and Freddie back in 1998, and that the Bush administration continued to support and fan this. It’s just this idea that everyone should have a home went a little too far.

But yes, some people took advantage. Yes some lenders were predatory. But does this mean that the head of Goldman Sachs shouldn’t have a nice pay package? It’s a bit of a stretch I think. There is, of course, a much broader question of executive compensation in general in the US, which is dramatically higher, as a percentage of profit, than in just about any other country.

But the market forces are what they are. It takes what it takes to get great talent to join a company at a senior level. Would it be better if execs took a hit when things are bad more than they usually do? Probably. But how to fix that? The good old democratic way. If shareholders think a board is not exercising proper judgment in pay packages, it can simply throw the board out. Is that not easy? It’s not. But it can be done.

Why just pick Wall Street? Aren’t there a bunch of bad people in a lot of industries (real estate, construction, entertainment just to name a few)? But don’t those same industries have lots of good people? For most people business is about making money, and that is the core of our capitalist system. Let’s hope the regulators don’t tweak it too much.

Markets Steam Ahead, Hiccup Notwithstanding

We just finished the best quarter in the market since 1998, and the best two quarters in a row since we came out of the 1987 market crash in a mere six months, according to The Wall Street Journal online. Granted there’s a lot to make up for – the market is still 31% off its October 2007 highs. But we’re up 48% from the March lows, 11% for the year, all in all beats the alternative. The last few days went down a bit, but every rally has its profit-taking moments. We had one in early July and then bounced right back. Let’s hope that’s all this is.

We are still going to have some bad economic news (like the unemployment data last week) and must accept that this recovery will be slowish. But in many ways, as I have said many times here, it’s up to us. Expectations drive a huge portion of the economy. If we get positive about the future, that will make the future more positive. Not to get all Tony Robbins on y’all, but it’s what they taught us in biz school. The next boost for confidence will probably be the arrival in the next few weeks of everyone’s quarterly 401(k) statements showing, hopefully, a solid increase in their retirement money. With the IPO market waking up, housing starts staying pretty strong, yes the stimulus money having some effect and the markets continuing their upward trend, I’m glad I renamed our site! Let’s just hope our government spending now gets into control so we don’t get hit in a year or two with…well, you know what…

It’s Over, But…

Yesterday Fed chair Ben Bernancke said the recession is “very likely over.” Unfortunately, we usually don’t know the start or end dates of a recession until months after it actually occurs. But he warned that we will not feel like we are in recovery for awhile and that the rebound likely will be very slow.

Now some questions for the President: do we still need the rest of the stimulus? Might it be worth considering scaling back the stuff that doesn’t start until next year? Are we still worried about a “double dip” in which another mini-recession comes now before the real recovery? What about the government being in the car and bank business? Maybe Obama should set an outside date by which he intends to exit the government’s ownership, either with new funds raised to buy out the government or transitioning some of the invested money into loans vs. equity investments. How can the government regulate these huge industries and companies when it also owns them? This is going to become a difficult conflict at some point. And the TARP money loaned to so many companies? We should push harder to get more of that repaid, no?

While Washington and the news are busily distracted by Pres. Jimmy Carter suggesting that much of the opposition to Pres. Obama is racially driven, and by the Congress rebuking Rep. Joe Wilson’s inappropriately blurting out “you lie” to the President during his speech to Congress (even though the President had accused his critics, sitting before him, of lying multiple times during his speech), the deficit is ballooning out of control. We should have that discussion about race, but let’s also focus on where we want to be a year or two from now.

The Day I Freaked Out

A year ago tomorrow, Lehman Brothers Holdings, Inc. filed for bankruptcy. That was a very scary day for all of us, but in particular those of us whose livelihoods are connected to Wall Street.

But a few days later, the rumor started. Goldman Sachs may not make it. There was a fear of a run on the brokerage firms. Similar whisperings about Morgan Stanley. Many felt that if this happened a cataclysmic collapse of our entire economic system could follow. I really started wondering if the US would simply cease to be able to function as an economy, and how we could have gotten to that point.

As I watch Pres. Obama on TV speaking right now about the financial system at Federal Hall in downtown Manhattan, I am remembering those few freak out days. Luckily, on September 21, both Goldman and Morgan Stanley agreed to be regulated as banks and this ensured they would not, in fact, collapse. Both have returned to profitability and this is good.

The President seems ready to roll out “reforms” of the financial system regulatory environment. He is not being greeted with great cheers from those sitting steps from Wall Street listening to him. He is giving them a little trip to the woodshed, claiming the free market is good, but the lack of regulation a year ago may well have been a major cause of the meltdown and the naysayers best come aboard with his plans.

Many of the wealthiest Wall Street leaders are Democrats. But they always strongly resist any left-leaning efforts to add more regulation to the financial system. But this time it looks like they are going to have to accept it, in some form. It is a shame that a group of fraudsters causes the entire sector, including the tons of legitimate players, to pay the price.

More on Health Care, Grandma, Death Squads and the Post Office

I watched much of the President’s town hall meeting yesterday on health care that took place in Colorado. He seemed very glad to be anywhere but Washington, and the audience was very supportive and cordial. He made a point that is correct – there is one thing everyone agrees on – health care, which represents a huge portion of our GDP, has got to be reformed. Not just health insurance as the President now likes to call his attempt at fixing things.

So then what? Obama complained in the meeting about both the right and the left taking jabs at him. The left would like only a state-run enterprise much like Canada and the UK. The right wants a way to get some uninsured in the ranks, and would like to rein in Medicare and Medicaid spending. Both sides are using scare tactics. Former Alaska Gov. Sarah Palin suggested that with Obama’s plan, so-called death panels will gather to determine whether Grandma should live or die. There does not appear to be such a thing in any current plans.

I’m still shaking my head, though, at Obama’s defense of the government-run health care plan. He says don’t worry that they’ll be an unfair competitor, since UPS and Fedex are doing just fine whereas the US Post Office is struggling. As a commentator stated earlier this week, is he suggesting that we are going to get the health insurance version of the Post Office? I would think that would not be a good thing.

The other current problem – it’s just not, as we lawyers say, a ripe issue. He’s going around defending a plan that doesn’t even exist yet. There are five different plans running around Congress, and that’s just on the Democratic side.  One would think the President doesn’t have to go around the country at town halls to convince his own party of the merits of what he would like. Shouldn’t he wait until Congress is ready to pass something then go out defending something specific? Some suggest that is the last thing he wants, that once it gets specific, people simply will not like it.  And it will all be paid for, he says. How? Two-thirds through eliminating waste and excess. Didn’t Al Gore try to do that and fail in the 90s? And the other third, well we’re still working on that, get back to you. It’s just getting harder and harder for us to buy this Mr. O.

Oh, sorry, one last comment about the town hall. He started with kind of an economics lesson about the federal budget and the deficit. He disappointed me greatly when he sounded like so much the politician people like to believe he is not, when? When he talked about inheriting a $1 trillion budget and that’s why we’re in this mess. But the bloggers are going crazy about this, noting that Obama’s deficit will be four times that of Bush. Just ask the economists what they think about that. B. Obama doesn’t mention what he’s about to do, and that puts him, in my book, officially and disappointingly in the politician camp.

Consumer Sentiment: Not Out of the Woods

Fox Business News reports that Consumer Reports‘ monthly review of consumer sentiment about the economy took an unexpected dive in July. This after steady increases since October when it hit its low. The CR polls judge eight important measures of confidence in the future. In July, credit card rates went up for people and more and more people found themselves unable to pay a major bill (other than their mortgage). This at the same time as the Fed and others are saying it appears the recession is at least easing, and possibly over.

The recovery that appears to have begun likely will not be fueled by jobs, but rather increasing corporate profits earned by cutting costs and people, not necessarily by growing revenues. Our GDP will grow when people start spending money. Those that are getting some are saving more than ever, a good thing in general but not in terms of stimulating the economy. The Obama stimulus will have some effect but not significant, say most. If jobs continue to be lost and not replaced (although the latest jobs data suggests that unemployment has stopped increasing and maybe is starting to go down), that money simply will not go into the economy. Every dollar spent on goods is multiplied throughout our system, as anyone who took Econ 101 remembers.

At the same time, some are reporting that some goods are beginning to move off the shelves. If you need a new car, maybe the clunker program got you there. If you need a new refrigerator there is only so long you can hold out before you have no choice. Yes the luxury items and optional things will take longer. Yet our local Haagen-Dazs was packed the other night- the classic “recession luxury” trend seems real this time again. But for some reason Starbucks is hurting. Go figure.

Yet I digress, as too often I do. This sentiment issue is another reason I think our recovery will look like a soup ladle…

For Good or Bad, the Stimulus is Helping…Go Clunkers!

I am not the biggest fan of the roughly $800 billion stimulus package, for a variety of reason. Too much of it is in out years when the economy might be humming along. Some felt big chunks of the stimulus were really disguised efforts at forwarding the President’s (or House Speaker Pelosi’s) social agenda. Others have complained too much of the money is going to Democratic “blue” states (who ever assigned red to Republicans anyway?). Others feel it’s better to stimulate through tax cuts, putting more money back in the hands of consumers (though with the savings rate growing so rapidly, that might not have been as effective these days, to be honest).  And of course everyone realizes that it is going to dramatically increase the country’s debt load, and runs a risk of causing inflation.

But it was eventually going to help. According to the lastest GDP numbers, about 20% of the difference between the 6.4% decrease in GDP in the first quarter and the roughly 1% annualized decrease in the second quarter is due to the stimulus money. So that’s pretty good, I guess. All the numbers are going in the right direction. For now.

Also, here’s one part of the stimulus I like. The slightly controversal “cash for clunkers” program. Bring your old gas guzzler in and as long as you go down at least 10 mpg in your new purchase you get up to $4500 off. Right now. Some dealers are matching that for a total $9000, which is pretty big! And yes we are all for every effort to reduce greenhouse emissions. The $1 billion authorized was used up in less than a week. I hope Congress reinstates the extra $2 billion they are contemplating and maybe even more.

There are stories of problems. Dealers who send in the massive paperwork for reimbursement getting rejected three times. Dealers who are supposed to destroy the cars in two days taking the parts or secretly trying to resell them. The slight panic as the program ran out of money. But this is a good one. It has immediate positive impact on a significantly beleaguered and critical part of our economy. There has never been this much rapid growth since the zero interest loans were started after the September 11 terrorist attacks to jumpstart sales. Hopefully this will do nothing to dissuade the US automakers from retooling their strategy, building cars more suited for the American taste today, and maybe work harder to overtake the Japanese and other foreign manufacturers.

So as to things now, the stimulus is here, so at least it’s good to know it’s doing some good.

The Soup Ladle Recovery?

As mentioned in a prior post, I have begun suggesting that the recovery might be in the form of a soup ladle, think about its shape. Pretty stiff downturn followed by very slow but prolonged recovery. How do I know? I don’t. I simply sit in my armchair and pontificate. I’m not an economist (nor did I excel at economics at Wharton), and when I hear “chief economists” give speeches with 30 pages of charts I tend to listen by imagining myself on a quiet beach with the ocean lapping up in front of me.

But from my armchair, some thoughts. The economy will recover. There is no doubt. The business cycle will never be broken, despite some thinking that was the case during at least the last two recoveries. I’m sure people thought during the Depression that it would never end. And then there were not the many stopgaps and protections against crisis that now exist (although we had a little scare there for awhile last fall).  The stock market also will recover fully. Since 1929, it has always been better during any 10 year period to invest in large cap equities than just about any other thing.

So the only question: when will the economic and market recovery start and how long will it take to hit full steam? Some say it will be 5 years before things are better. Some say we are already beginning to come out of things. And everything in between. We have taken a big hit during this recession. No “soft landing” this. So yes there will be a recovery, but because of the damage done in virtually every sector (the last downturn didn’t effect real estate too much, for example), I think it will take longer to come back. But come back it will. So slow and steady is what seems to be in order. I hope to be proven wrong, and we shoot back in a “V” recovery as some have predicted, but that doesn’t seem likely. The stimulus will ultimately help, but not so much as to make the recovery come fast. And the cost in terms of future debt is for others to assess the cost-benefit.

I think a soup ladle recovery, which maybe starts around the end of this year, would be OK with me.

And the Economy….?

We have heard much from the President in recent days. About Michael Jackson (super talent who faced troubles in his personal life) to North Korea (very concerned) to Russia (give us some fly-overs and we’ll give you some stuff) to Iran (also very concerned but can’t “meddle” and still willing to have direct talks) to health care (still determined but beginning to realize it will be tough going in Congress).

But we’re not hearing as much about the economy, except comments from VP Biden essentially saying that they underestimated how bad the economy was. When did that take place? January 21? Last week? Who underestimated? The “experts”?  None of this is clear. It reminds me a little of Reagan Budget Director David Stockman’s famous comment about the budget process in his first year on the job, saying, “None of us really understands what’s going on with all these numbers.” And this gives them the ability to continue to blame things on the past administration.

We don’t go political here. But I have been consistent in my view that the stimulus package, less than 10% of which has been spent all these months after passage and with jobs numbers still horrible, was more for the benefit of the President’s social agenda than a true stimulus. Even staunch Obama supporter Colin Powell has begun to wonder if the President is simply trying to do too much too fast. And there is no appetite in Congress for another stimulus just for its own sake. I still believe Sen. McCain’s amendment to the stimulus would have made sense – as soon as the economy recovers, all future stimulus spending ends. Alas that was not approved.

So what’s the answer? Not easy. The Fed is out of tricks short of printing money, which is basically what they are doing. Obama can’t spend any more. They’ve shorn up the most struggling big companies by taking them over (but hopefully not for long). Hey, how about looking at taxes? Historically, tax cuts have almost always had a very positive effect on the economy. Sadly that will not happen. Thus, there simply ain’t much to do except cheerlead the old stimulus into working. At some point. And this is why we’re not hearing much from the President other than his being pleased when jobless numbers are not quite as horrible as the previous month. In the meantime the rest of us are waiting. And hoping.

Finance Industry Regulatory Reform: Not So Much

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