State of the "Obamanation"

NEW YORK, New York -- Obama's speech was pretty good, but it could've and should've been better.

A more basic, fundamental, FDR-style explanation of why banks are important -- and why, if necessary, nationalization should not be held up for ideological reasons -- would've been nice.

And all this crap about how people need to get new mortgages and banks need to be forced to lend ... uh, terrible idea. This mess came about because banks were giving too many people too much money. Real disposable income was stagnant for the last 9 years while credit and mortgage lending exploded.

The answer is not to keep giving any schmuck a mortgage to prop up house prices that are still artificially high (remember: during the prime boom years, house prices were rising at nearly 20% nationally while median incomes actually decreased; dangerously easy credit and huge inflows of Chinese Central Bank investment made this possible, not any increase in income). House prices, unfortunately, need to keep falling until demand catches up with supply. The other alternative is to bulldoze the massive housing surplus.

Here're the ingredients in the witch's brew:
-A vacant homes for sale inventory at 2.6 million homes -- versus a historical average of 1.3 million
-A net change in households at approximately 700,000 in 2008
-Historical home ownership rates of 65% (it's closer to 68% now, down from 70% a few years ago, and it will probably fall to the sustainable historical average)

If we assume housing starts stop tomorrow (and they won't, unfortunately -- they're still actually outpacing housing sales!), then we have excess supply of 1.3 million homes, and a net change in home-owning households of about 500,000 per year. That means it'll take 2.6 years -- with no new houses built -- to work out the excess supply.

Obama and Congress need to stop incentivizing builders to construct new homes, and they need to stop giving huge tax breaks on mortgages (encouraging people to buy homes rather than rent, even if they don't have the money for a down payment or have a long-term stable job justifying mooring oneself to a home). The huge pustule of housing inventory needs to be burst either by destroying excess homes, or by slowly letting the people who can actually afford them buy them. Insofar as the second option leads to wrenching, gradual declines in house prices, the first is far preferable.

Instead, Obama seems to want to re-grease the credit wheels. That may mean buyers will burn off the supply a bit quicker, but it'll also encourage irresponsible developers to keep building (bad), and it will result in lots more people who can't afford homes buying them (really bad).

Similarly, Obama's comments that "I intend to hold these banks fully accountable for the assistance they receive, and this time they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer" are a horrible, horrible move. I hope it's populist, political posturing. Banks have lent way, way too much. Debt-service ratios are at record highs versus real personal disposable income.

What's needed is to increase income and get bank leverage (the amount of debt a bank has versus its capital) to normal levels. The first can be done only by creating good, high-paying jobs. And Obama's smart enough to realize that investment in education, healthcare and energy is what'll do that. I'd add immigration reform and infrastructure investment to that list, along with a number of smaller policies, but his Big Three sure kick the crap out of their Detroit counterparts.

And nationalization of banks in order to clean out their debts via asset sales, including to a money-printing Treasury, is needed to get them out of the bad situation they're in -- which was caused by a government that encouraged increased mortgages and lending to people (see a pattern?). Obama needs to bite that bullet and, while I know Taro Aso was in the White House today and Japan's a pretty cool place, stop mimicking Japan on playing coy with bank losses. Clean them up by nationalization sooner rather than later.

The "pretty good" grade I'd give Obama comes from the fact most of his speech excellently pointed out the need for long-overdue in energy, healthcare and education -- the fundamental elements of an equally long-overdue US competitiveness strategy. But the banks, oh, the banks. Stop playing dumb, Barack, and put the silver bullet of nationalization in the heart of the insolvent zombie banks.

Pay Controls on Private Industries? Do We Get Color-Coded Cards to Determine Our Day Off?

NEW YORK, New York -- In a day when a plane crash-landed a few blocks from my office, the most interesting piece of news was not the fate of US Airways Flight 1549.

It was a plan to reform the finance and banking industry, put forth by former Federal Reserve Board chairman and Obama economic adviser Paul Volcker. (The plan can be accessed via a Washington Post article about it here.)


Mr. Volcker, don't overcorrect for Mr. Greenspan's failings

The plan calls for a number of regulations, but the most important and frightening is some sort of government control over executive pay. This idea, a populist measure meant to soothe the irate masses (but are they really so irate?), reeks of Bolshevism, and is the one regulation of the banking industry that I think could torpedo the economy. Here's why:

1. The banking industry, as fashionable as it currently is to despise it, has been one of the most successful segments of the US economy in recent years. In 2007, banking was responsible for 40% of all corporate profits (one of the major sources of individual wealth, along with inheritance and housing prices -- and we can forget about that one) in the US. And bankers love money. Telling them that Congress will determine their salaries is the one single measure that can actually have the effect of pushing huge amounts of money, jobs and brainpower to some unscrupulous hole like Abu Dubabi. So let's assume a migration of banking brains to Abu Dubabi. What happens? Well, Abu Dubabi has a huge new industry that we no longer do. And the same bankers doing trades there still have the same sway over the US economy. They'll still be buying shares and bonds in US markets. Finance is global; you can't wish it away or push it to another country -- nor should you.


The real threat to US businesses that politicians won't touch

I realize Congress wants to end the long run of inequality we've had and let other industries prosper. But there's no reason to cut off the nose to spite the face. Rather than punish the golden hen, why not take measures to make the less-successful industries more competitive (cough, cough, Chinese protectionism and dumping and our total lack of spine to stand up to that)?

2. Finance is essential for the normal workings of any other business. Car makers, farms and mom-and-pop stores all need loans from banks. The job of the financier is to determine who is the most creditworthy and deserves that loan -- in other words, to determine where the markets want money to go. Yes, bankers have screwed up recently, but that's not because they made loans to Target or Honda or John Deere. It's because they were trading derivatives that are a separate function of a bank altogether. Now, you tell bankers they can't by law make any more than some arbitrarily determined number, rather than what their own ability would have them earn, and nobody will want to be a banker. That puts us in a bind: I don't think we want C-students who are content with making $100,000 a year overseeing capital flows and determining what US businesses deserve to receive what amounts of money.

<-- He actually does us good

3. Limiting executive (or bankers') pay would remove one of the biggest draws of educated foreigners to the US. I know it's cool to hate on immigrants, but my God, people, that's what built (and builds) America. While you're playing Wii and feeling your friend with benefits' boob, immigrants are hard at work making money so you can find a job at Daddy's company.

4. This is just plain misguided. Regulation to make the industry less of a structural risk to the economy and push down indebtedness and sketchy credit default swaps is another question entirely; that's necessary, but it is most certainly not achieved by telling bankers that the law somehow prohibits them from making above some arbitrary number. If salaries are somehow a contributor to the problem (and they aren't compared with investors and the short-term profits they desire which put the long-term health of financial firms at risk) this is best addressed via stronger corporate governance, not congressionally mandated pay levels. Mandate independent boards of directors and forbid CEOs from serving on boards, then let enhanced corporate governance determine what a company itself wants to pay its employees, including executives.

5. Is this constitutional? I can't imagine on what constitutional grounds government can tell a private industry how much it can pay people. Why not have pay limits on lawyers, plastic surgeons, or people who lisp?

But here's a better idea: why not cap the salary of A-Rod and every other baseball player at $20,000. After all, as a monopoly, the MLB is regulated by Congress as well -- and unlike bankers they neither significantly effect the US economy nor produce anything that we've been able to export. Why the rage at bankers working 90-hour weeks year-round who make $2 million, but not at 22-year-old uneducated pitchers who make $28 million for playing a kid's game 6 months of the year, a few days a week? Let's give them mandated pay levels, too, and maybe Cuban players will stay in the Cuban leagues with their Raul Castro-mandated pay levels.

On another note, it's unbelievable how Congress (probably correctly) thinks the American people find it palatable to pay baseball players huge money to play a child's game but thinks the same American people can't stand a middle-aged, highly educated banker making much less. Do we really want Congress to make a law ensuring that the highest-paid Americans are steroid-soaked baseball players? Is that what we aspire to as a people? Hitting balls with sticks? It's an interesting philosophical/cultural/sociological point, and it's pretty damn messed up.

Lenin's rotting lips have probably curled into a smirk in the tomb. By the way, it was Lenin who gave workers color-coded cards to determine what day they would have off, since people should work on Sunday in an atheist society. Will Paul Volcker arbitrarily give us color-coded cards determining our salary?

Wall Street Frats? It All Makes Sense Now

NEW YORK, New York -- Ever wonder in college how all the dumbest lacrosse players with the easiest major (i.e., Economics) all wound up in Wall Street jobs where the "cream of the crop" were supposedly off overseeing the world's capital flows?

It turns out you may have been onto something. Wall Street's grand poobahs actually have a fraternity for themselves. It's not the cocaine-strewn vortex of free time that your college frat was, though. This frat meets just once a year -- and last week's incarnation of the annual frat party/roast (held, as always, at the fantastical St. Regis Hotel in Midtown Manhattan) featured a rendition of Don McLean's "Miss American Pie" in which the fallen angels of finance sang the doggerel "Bye bye / to my piece of the pie."

The frat is named Kappa Beta Phi -- a corruption of Phi Beta Kappa, the best-known academic honor society. And while PBK's insignia features a hand pointing at three stars, KBP's key (see left) includes a hand pointing at a champagne tumbler, a beer stein and five stars representing Hennessey cognac.

Since this is the Wall Street Journal's story and I'm just parroting their enjoyable piece, just read it here. After all, pick-ups of other people's stories are crap. Which is why blogs are not journalism (at all) and can never replace newspapers (at all) -- but that's another story.

Although I realize I sound like a whiny bitch in writing about KBP, I actually think the idea of this sort of vaudeville roast is pretty intriguing. I'm somewhat impressed, knowing how much bankers (at least at Goldman Sachs) work, that they have time to be this creative. The idea of a night of wit and performance sounds pretty fun -- we'd probably think of it as pretty bohemian today, but I doubt that was the case in 1929. But still ... it does seem appropriate that Wall Street channels its creativity via a fraternity. ... Lehman! You're dead meat, nerd! Ah, finance.

Visions of Citi Division and a Curious Interview

NEW YORK, New York -- Citigroup, recently not only the world's largest bank but the world's largest company according to Forbes, is on the verge of splitting in two, according to media reports.

Lacking kryptonite and holding plenty of depressed real estate securities and CDOs, Citi has been hit hard by the financial maelstrom. A division of the company -- reportedly into "core" and "noncore" assets (likely splitting many of the struggling securities assets from the successful, less-exciting international commercial bank) -- would undo the years of deal-making by former Citi CEO Sandy Weill that famously created a banking behemoth.

Amid that backdrop, I am reminded of an interview of current Citi CEO Vikram Pandit that I saw in November on Charlie Rose.



Charlie has a reputation for being a "serious" interviewer, and I think this is generally fairly well deserved. But to imply that he generally tries to trip up his interviewees or push them too hard would be a bit much.

So when Pandit appeared generally at a loss when asked basic questions about the economy and financial markets on Charlie Rose, I was a bit alarmed. (If you can't access it above, the interview can also be seen here.)

I haven't seen Pandit speaking anywhere else. It's eminently possible he's an extremely smart, cognizant and capable man, banker and manager. And it's very possible that he's nervous when giving television interviews, or that his mind was preoccupied with other matters on November 25, 2008. But in his interview that day with Charlie Rose, I sensed an unconfident man with uncomfortable tics, someone with a surprising apparent lack of knowledge about his own bank's operations, and an interviewee generally dominated by Charlie Rose (compare it to David Miliband's interview in May, when it was he who made Charlie look stupid). Pandit seems to dodge many questions and defers like a novice cheerleader to commonplaces like "Citi is a unique place. We want to bring that uniqueness to the 109 countries we're in around the world." After watching that interview, you had to think, "I'd be surprised if he was still in this position in a year."

It's now a commonly held notion that Pandit's predecessor, Chuck Prince, was a dolt with little real knowledge or understanding of the massive bank he was running. But in his day, Prince certainly won the respect of many, just as Pandit enjoys today. (To be fair, recent days and poor share performance have seen a cavalcade of doubt in Pandit, but he had previously been quite highly regarded publicly.) After seeing his Charlie Rose appearance, I wasn't too sure I'd place any faith in him. But then again, Citi seems to be facing imminent division. Maybe with a banking "supermarket" the size of Citi, nobody really knows what's going on.

Film Recommendation: "The Ascent of Money" and Regaining Competitiveness

NEW YORK, New York -- PBS tonight aired a documentary that tells a history of capitalism and banking to trace the roots of the current economic crisis. I would recommend it for anyone unclear on the details of what got us here, to a global economic sinkhole, sclerotic stock market, and frozen banking system (that's probably almost all of us) and for those of us who may know the general story but are curious to see the people involved tell it to the cameras.

The 2-hour program (click HERE to watch it online in its entirety) is hosted by author, historian and Harvard professor Niall Ferguson, who based the documentary on his recent book of the same name. The film has its cringe-inducing moments. Any talk of "black swans" or admonitions that "but then again, they thought they were on Planet Finance; they were in fact on Planet Earth" were unfortunate.


Phantom of the NYSE.

Yet large swaths of the history, distant and recent, of capital markets are told in a limited time -- and told fairly well. Paul Volcker, George Soros, Enron executives and Bill Gross of Pimco are all bundled in with (somewhat awkwardly) cattle ranchers.

The biggest question mark, and one of the biggest conclusions, is the role of China in the US's economic mess -- "Chimerica," as Ferguson has coined this symbiotic Faustian bargain. The housing bubble and consumption bubble (bursting as we read) were inflated by China putting government-mandated savings from exports into US bonds, keeping money cheap for us Americans to grow ever fatter off China's wares. And Ferguson makes it clear that the future relationship between the two will have to change if our economy is to grow back its limbs (I've suddenly given the US economy starfish-like properties).

But, though Ferguson throughout chides bankers who didn't know enough history to understand the present and future, he doesn't himself wager any conjecture as to what will happen to the mixed blessing of "Chimerica," and to the US and global economies.

Ferguson's fellow Briton, the Jordie and Yale historian Paul Kennedy (and, given his surname, a potential ethnic Scotsman), is much quicker to offer a forecast for the future, and in today's WSJ he foresees a geopolitical and economic decline for the US in the coming years. This is of course not a new thought -- after all, the US intelligence services had it before -- and it lies on presuppositions about the ability of China and India (a tiny, extremely defective economy) to continue growing at world-record paces. But Kennedy's vision of the future is certainly a possibility, and must thus be guarded against.

One truly interesting point of his is to note the glibness with which politicians seem to be assuming foreign governments (with China front and center) will eagerly lap up the bonds to be issued to pay for President-elect Obama's proposed stimulus package. Kennedy contrasts the spendthrift ways of today's United States -- reminiscent of the wastrel monarchies of Louis XIV in France and Philip II in Spain -- with the way America issued debt as recently as WWII. Back then, we relied on ourselves to buy bonds, rather than sell our future to the Chinese Communist Party-animals (would that they were real college party-animals!).


Which of these is not like the others? ... And which will Obama be like?

Once again, the difficulties and limits (which we seem to be reaching rapidly) of "Chimerica" are evident. Maybe Obama will sound the call for Rosies the Riveter, but even if he doesn't, individual Americans need to issue and heed their own calls to stop spending all their earnings at Wal-Mart buying another Chinese lamp they don't really need. We need to impose some self-restraint on ourselves again, and rediscover the ethos that once made us productive, imaginative, frugal and visionary. Maybe I'll even go dust off my Emerson.

P.S. More on the above: David Sanger, New York Times correspondent and author of "The Inheritance: The Challenges Obama Confronts," speculates on Charlie Rose (here) that, had George W. Bushtard not invaded Iraq, the US would have used his second term to engage a debate about our economy and economic competitiveness with China. That did not happen. It didn't happen with a bang. Hopefully, in 3 years, as Obama gears to run for re-election and recession slowly slips away, we'll be able to return to that topic.

From the Dept. of Things That Sound Totally Illegitimate

New York, NY -- Um, right, so the Chinese Communist Party is now telling Bank of America it can't sell its stake in China Construction Bank, one of China's biggest lenders. The CCP, in other words, has effectively frozen BoA's assets.

That's great. That doesn't sound sketchy in the least. I see a bright future for us all, given that the management of a bank deemed "way the hell too big to fail" is run by people with the decision-making capabilities to allow a significant amount of their assets to be held by the CCP.

(On a side note, I'm beginning to understand how it is that the dumbest lacrosse players managed to get jobs after college with the biggest banks: Because banks aren't morally lacking; they're lacking in brains and sense. Finance, like a Wal-Mart, is full of half-witted, low-skilled salespeople who aren't allowed to unionize.)


Heckuva job, Kenny!

Anyone know of any good Icelandic banks?

And now for your moment of zen: The FT reports the following:

BofA shelves $3bn plan to cut CCB stake

By Sundeep Tucker in Hong Kong and Jamil Anderlini in Beijing

Published: December 18 2008 23:32 | Last updated: December 18 2008 23:32

Bank of America has shelved a $3bn (€2.1bn) sale of China Construction Bank stock following objections from Beijing, igniting fears that some cash-strapped overseas investors could struggle to offload their lucrative holdings in the country’s banks.

The US bank, which in 2005 was part of a wave of foreign investment into Chinese banks, last week hired UBS to help sell a chunk of Hong Kong-listed shares to reduce its overall ­holding in CCB to less than 17 per cent.

The offer was priced at a discount of 15 per cent to CCB’s current share price and was quickly covered by US and European institutional investors, said people familiar with the matter.

However, only hours before it was due to be unveiled on ­Monday morning, the share sale was pulled on the instructions of Ken Lewis, BofA chairman and chief executive, following a phone call with Guo Shuqing, his CCB counterpart, according to people familiar with the situation.

The precise reason for the 11th-hour abandonment remains unclear, but dealmakers in the region believe that the Chinese government was unhappy about the timing of the share sale, the first such attempted divestment by a foreign investor following the expiry of a lock-in period.

The share sale could have triggered a fall in CCB’s share price just as Beijing is trying to garner support for its largest banks and arrest a stock market slide.

Foreign financial institutions, including Goldman Sachs, Dresdner Bank, Temasek and Royal Bank of Scotland, hold shares in China’s leading banks worth billions of dollars and analysts say they could be tempted to sell down stakes to raise capital when their three-year lock-in periods start to expire from next month.

“Bank of America cancelling those trades has made the other foreigners realise they don’t exit at their discretion; they exit at the discretion of the Chinese government,” said one Asian dealmaker who asked not to be identified.

The Chinese government cannot prevent trading of Hong Kong-listed shares, but deal­makers said it was likely that BofA was warned of repercussions to its future business on the mainland if it carried out the sale.

Roast Beef and Leftover Turkey: Michael Lewis' "The End"

WINDSOR LOCKS, Connecticut -- In the December issue of Portfolio, Michael Lewis chronicles the Wall Street collapse and ensuing global financial crisis, tracing its roots back to the financial innovations - and excesses - of the 1980's.

The article opens with some reflections on his brief career at Salomon Brothers 20 years ago, an experience he described in his book Liar's Poker:

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.

I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.

In an earlier post, we discussed how this may have, in fact, come to pass as the big downtown firms gut their staffs. Hopefully, the chaff has been discarded, and the truly talented remain, though the reckoning came several decades too late, and at far too high a cost. Let's hope, for the sake of us all, that an Ivy League diploma and a letter in varsity lacrosse are no longer the most important qualifications for a six-figure salary on Wall Street.

Here's another tip, courtesy of my father: never invest your money with a publicly-traded investment firm. People are far less likely to screw around when their own money is on the line. And former Salomon Brothers CEO John Gutfreund - the man that took his firm public, a move that was soon followed by most of the big investment banks - basically admits that they started screwing around. "When things go wrong, it’s [the shareholders'] problem."

No, John, you dumb shit. It's everybody's problem now.