Tuesday, November 25, 2008

Cash for Thrash...Part II

I came out of the gate swinging at September ending that the "cash for thrash plan" by Paulson was doomed to fail; guess what, it is an utter failure! After tweaking the plan i.e. putting a lipstick on a pig, and then changing course to ape Britain's own more successful nationalization program, without going as for as Britain for obvious ideological reasons- Paulson finally had to show his hands and bail out Citigroup even after that "too big to fail bank" got its share of the kitty theh first time go around. This bail out fiasco is even getting ridiculous, with the Feds having spent 250 billion on banks, with no recovery in site, and with some even stil paying dividends, and lining up bonus for the same CEOs that damaged them e.g. Wachovia! Of course, even by Paulson's own admission yesterday, credit dried up in October and the 250 billion is not even making them lend. The bail outs to AIG and hand outs to the merger deals JPM and WAMU, or JPM and Bear Stearns is beginning to make this look like a bottomless pit. At Bloomberg's last count this bail out might cost tax payers $7.4 trillion! 

Of course instead of fezing up and outrightly nationalizing these banks, the Federal reserve is doing just that by nationalizing their assets through the back door by buying $500bn directly, or socializing their risk by guaranteeing trillions more. We now even know that Citigroup has 1.2 trillion dollars off book assets that it might be on the hook for, and that are mostly bad debts which is of course an unknown in all these equations. Add these to the credit default swaps - the hidden WMD- which were supposed to be mortage insurance contract that speculators bought against these bad debts for a penny and hope to reap billions in rewards as they go under: of course who will pay is a whole other story as no one expects these dead banks to step up to take care of those obligations. 

Of course, not to mention an auto industry that is going under, and the magnitude of the mess these disastrous eight years of republican misrule begins to get clearer...one dominated by ideological conveniences instead of pragmatism...the same ideology that made them let Lehman go under but reversed course as soon as the dire consequences became clear. The same ideology that is not making them outright nationalize the big banks for which $125 billion have been used to buy equities the market is valuing at less than $40bn today. Makes no sense...

What makes sense is:

1. A mechanism to immediately invalidate credit default swap (CDS) contracts- see below: (I didn't originate the idea), effectively recognizing that these were speculative instruments that were traded in  unregulated markets at buyer's risk. The loss of capital by these buyers estimated at mere millions is more tolerable than the billion dollar havoc their WMDs is wrecking on the market. 

2. An immediate requirement that banks transfer off book assets - known as SIVs - not currently acounted for on balance sheets into a specially created government entity. This transfer should have net zero balance sheet impact, but force the banks to forego the future profits from such assets when they recover. 

3. An immediate requirement that banks that drew government funds in the current TARP fund offer some form of mortgage modification program as supervised by FDIC to ALL homeowners that request for one. The homeowners are the taxpayers and they deserve a break too if they are bearing the risks of all these banks - bad decisions. Until the homeowners, who also double as the tax payer, are helped- then the assets now owned by the government on behalf of the tax payers will not recover. Hence, it is in everybody's interest that the homeowners are helped, and that the ridiculous return projections on these securities are moderated with the reality of slowing income, and tighter purses going forward.

4. A moratorium on dividend payments by all financial insitutions that have gotten any form of government assistance in the past two years- and for the next three years forward.

5. Immediate legislation to fix the remuneration of all CEOs in the financial and auto industries as a multiple of the lowest paid staff on the payroll...contract or direct hire. The lowest paid staff should effectively be somewhat paid close to the minimum wage- but this is an indirect correlation that should help lift the tide of the poorest class in the future. 

6. Investigation of all past decision makers for fraud and greed...and a moral pressure on CEOs and executives to return obsene remuneration earned in the past 8 years,..a name and shame campaign spearheaded by law makers and the media will help.

7. And last but not the least- in fact the most important- an immediate application of the trust busting laws of Teddy Roosevelt to break up any institution that was helped because they were deemed too big to fail. First on my list will be Citigroup and AIG.

Another big idea is to resolve the CDS issue. Credit default swaps total trillions in value, and in many cases the contracts were purchased not as genuine insurance (by the holder of a bond) but as a speculative investment that will pay off if the bond defaults.

Whalen calls for a mandatory unwinding of these contracts, in which purchasers who were genuinely hedging a risk would be covered, while speculators would lose much of their potential gains from the investment.

Without some action along that line, CDS obligations could become a black hole for the banking system, he and others warn.

"These things are like land mines," says Michael Greenberger, a former regulator of derivative contracts at theCommodity Futures Trading Commission. "Every indication is that they are at the heart of the financial crisis."

He says a first step is to take an inventory of CDS contracts, since poor regulation makes this market opaque.

He also says it may be necessary to push speculators to take a hit on the value of their contracts. This might be in their interest, he says, since the companies offering the contracts might not survive if they must pay the full amount


Saturday, November 15, 2008

The President-Elect's Agenda???

After the lights are out, the cofetti has fallen and the last shouts of the campaign trail has been drown out- the new President - will be left with a nation in dire need of leadership. Barack will have to lead in a time of national distress: both a recipe for success/opportunity (check FDR, JFK, LBJ and to a lesser extent Clinton) and for disaster (Check Hoover, Carter, Bush post-911).

Why not a fuller extent Clinton? Well, Clinton started awefully disastrously, adjusted quite well at the middle and ended omniously in a plateful of scandal. The difference usually is in the beginning and how much effective planning goes into one's presidency. Any attempt to try to do everything can become a disaster. Lack of priorities and an assumption that the political sphere can absorb an infinite amount of change can spell stalemate as the Clinton health plan revealed.

While Barack is going in with a lot of ideas on how to improve or change how business is done in DC he is best advised to check his ideology at the door and get realistic. Oftentimes his own party can be his greatest albatross: and the democratic is one heck of an indisciplined fold. first, none of his program is more important than tackling the global financial crisis and restoring confidence in the financial markets while ensuring a somewhat healthy stock market. This task is more important than health care this, energy plan etc. that he might have. The genius of his presidency will be how he systematically links all these plans with curing the short term ills confronting the market:

For example, how he can use the leverage of trying to strenghten the dollar to force congress to dump earmarks and draw down faster on troops in Iraq which reduces deficit spending. Or how he leverages his clean energy plan into jobs, IPOs and bonanze and new economy for wall street as well as main street. Or how his healthcare plan can be clad a tax reduction on business that makes doing business more competetive in the US and creates and preserve jobs at home. To do these, he will have to distinguish between a plan (achievable by legislative action or executive fiat: eg. stopping the Iraq war, stimulus spendings,regulatory reforms) versus initiatives (largely the healthcare and education promises) which are multiyear and multi-cycles.

In summary a grouping similar to below may be aquick sheet and insight into how an Obama presidency might and should look:

1. Stopping the Global Economic Crisis:
* Coordinated Regulatory Reforms across the world with other governments to modernize financial system
* Targetted spending designed to spur short term growth: infrastructure, middle class tax cuts & relief for small business
* Bankruptcy and Home ownership relief reforms: holiday on foreclosures for invested banks, reserve $100bn for refinancing option @ market value, allow keeping first home in case of bankruptcy and modifying mortgage thru government program
2. Creating Jobs & New Economy through Energy
* Begin massive alternative energy initiative (using windfall profit tax); emphasize new energy and job creation with eye at equity market lead
* Revise CAFÉ standards in exchange for loan guarantees for Detroit
3. Initiate steps to halt the fall of dollar by decreasing deficit spending
* Wind down on Iraq war rapidly
* Close corporate tax loopholes (alongside middle class tax cut)
* Cut spending (e.g. medicare payments) with eyes on saving $50bn yearly

4. Health Program Initiative (To Span all 4 years)
* Health care reforms starting with industry deliberation to cut cost, and steps to go electronic
* Open drugs importation window to force down prices
* Open cheaper government plan
* Extend CHIP for children and begin immediate mandates
5. Education Initiative (to Span 4 years)
* Create a coalition led by private charity- Buffet and Gates- to tackle inner city education;
* Target building 1000 charter schools solely privately funded by private donors to provide alternatives, competetion and reduce pressure in the inner cities with the worst schools
* Replace No Child Left Behind with open curriculum standards and funding for increased pay for (performance) teachers

Thursday, November 06, 2008

President Barack Hussein Obama

"Power, Joy, Grief And Fatigue, All In One Whole Person"
When Obama took the stage, we saw a man embodying a complex array of feeling. This is a key to his personality -- it takes enormous strength to let your vulnerabilities be so readily seen.


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