Sunday, November 30, 2008
The University of Cincinnati has won the Big East Football Championship. They won it after Pitt beat West Virginia on Friday, but UC beat Syracuse on Saturday afternoon at Nippert Stadium 30-10. UC will receive a BCS Bowl bid. It is hard for me to believe that UC might be playing in the Orange Bowl. When I went to UC from 1960-64, UC was in the Missouri Valley Conference. This was a great basketball conference and we all got to see some great basketball in those days. But, now UC has put its energy behind its football program and the results are plain to see. The interesting thing will be whether they can hold on to their football coach after he has had such a great year. There are always big college football programs that need a good head coach.
The Cincinnati Bengals "play" the Baltimore Ravens this afternoon at Paul Brown Stadium. It is nice to have a winning college football team in the absence of a decent professional football team. Our professional football team is not run by its owner to win, in my opinion, or for that matter, in the opinion of a few thousand more fans here in the Queen City. We don't have a professional basketball team to take our minds off the Bengal's poor play. However, Xavier University produces some good college basketball if you are into college basketball. As for waiting for spring for the Reds to get going, that is still a few months away. The longest three months of the year are January, February and March. Once we get through them, it will be time for professional baseball. Hopefully, the Reds can do what the Tampa Bay Rays did this past season.
Saturday, November 29, 2008
In the early 1980's, I designed a t-shirt that I refer to as my SKI CINCINNATI t-shirt. I and my wife sold these t-shirts to gift shops around the city, but mostly downtown where I worked. I was the sales guy and my wife ordered the shirts from our silk screen printer. In 1982, I came up with a t-shirt design for a local ice cream company and we sold them that t-shirt for a few years. Since I have retired, I have been selling the SKI CINCINNATI tshirt again to a few gift shops. They come in short sleeve and long sleeve t-shirts and sizes range from small adult to 2XL. For your shopping convenience, I have listed the places where SKI CINCINNATI t-shirts are available this Holiday Season.
Contemporary Arts Center Gift Shop 6th & Walnut Sts. Cincinnati, OH
Cincinnati Art Museum Gift Shop Eden Park Cincinnati, OH
Cincinnati Museum Center Gift Shop Union Terminal (the old train station) Cincinnati, OH
Good Sam Hospital Gift Shop Clifton Avenue Cincinnati, OH
Benchmark Outdoor Outfitters Kenwood Rd Blue Ash, OH
Cincinnati Galleries Kenwood Mall Cincinnati, OH
Those not from Cincinnati might wonder, Can you really ski in Cincinnati? No, you can't ski in Cincinnati unless we have a big snow storm. The mounts in the t-shirt are neighborhoods and parks in Cincinnati. This is just humor. Those of you who are not in the Greater Cincinnati area and are interested in buying a SKI CINCINNATI t-shirt can buy them on-line at the Contemporary Arts Center web site.
I just want to let all my readers know that I am doing my part to help the economy. All my t-shirts are purchased in Cincinnati and they are silk screened in Cincinnati as well. This is a Cincinnati production.
Friday, November 28, 2008
Black Friday, sounds pretty serious. Well, it is if you are a retailer. This is supposed to be the day that your profits, for the year, enter into the black, as opposed to staying in the red. The American people need to go out and buy what they need while not taking on too much debt, but we need a feeling of confidence. Help is on the way to fix our battered economy.
One old Superman is on the way, and his name is Paul Volcker. President-elect Obama has selected Paul Volcker to be Chairman of the newly formed Economic Recovery Advisory Board. This former Chairman of the Federal Reserve Bank is no rookie to the battles of the economy and money and banking. At 81, he is one of the few people in the United States with the combination of experience and knowledge to do this job and do it well. In August 1979, Paul Volcker took over as Chairman of the Fed from G. Wm. Miller, a guy who had no business being given the job in the first place. President Carter is not one of my heroes. When it comes to money and banking, former President Jimmy Carter, in my opinion, is an idiot. The Carter administration screwed things up so bad that President Carter was eventually forced to pick Paul Volcker to give our central bank the status it deserved in the world. Volcker inherited a mess. Volcker came into the position of head of the Fed at a time when inflation was running wild and he broke the inflationary spiral and put our economy on a sounder monetary track.
At the time of his appointment in 1979, I was working with the bond market every day and could feel the results of his work as interest rates were forced up and then the inflationary fever was broken and rates started their long path downward. His work set the course for the economy that took us to the Greenspan era (Volcker left the Fed in August 1987). Greenspan and his stupid ideology of deregulation along with the Bushes fucked this economy good. President Clinton did not stop Greenspan and the spiral of deregulation went on. Why stop a good thing, everyone was making money in the market, right?
President-elect Obama has said that he wants to hit the ground running on day one. Well, in my opinion, he has at least one guy with the experience and knowledge to do that. The rest of his economic team will need to be tested, but Paul Volcker has already been tested. In the battles of our economy from 1979 to 1987, Volcker ran the Fed and ran it well. He is smart and he is no nonsense. If President-elect Obama wants people that will give it to him straight, Volcker is his man.
A few years back, I ran into Paul Volcker at a private equity annual meeting in Washington D.C. I tried to tell him how much I felt he did to put this country back on track when he was Chairman of the Fed. He waved me off as if he did not want to hear my praise of the work he had done. Paul Volcker saved this country’s monetary system at a point in time when our position among the other major central banks in the world was going to hell. That is a fact. Some might say that is my opinion, but just look at the interest rate numbers and inflation numbers from the time he took over the Fed to the time he departed. Paul Volcker did one hell of a job for his country. In my book, Paul Volcker is a real American hero.
Thursday, November 27, 2008
Thanksgiving in America is a time to be thankful for so many things, but for each of us it may mean a slightly different thing. The pilgrims that came those many years ago, came to this new land in pursuit of religious freedom. I certainly can understand that. I come from a tribe that has been kicked out, beat up, driven out and murdered from several countries over the last two thousand years. It goes back further than that, but after a few centuries who counts. The United States of America is not perfect, but for me, it is about as perfect as perfect gets for a country. Yes, we have a lot of problems right now, but we will solve our problems. For over 200 years we have had an orderly change of government and in just a few weeks, we will have our 44th president. When you look back at history over the last 2,000 years, there are few if any countries that compare with our record of self government. Mother England, where so much of our heritage comes from, has had a democracy just a bit longer, but we do it better.
I would like to wish all my readers of MONEYTHOUGHTS a Happy Thanksgiving.
Wednesday, November 26, 2008
Yesterday I dropped in on my neighborhood Kroger’s to buy some Gala apples. I love fresh fruit, but it usually is so expensive; however, apples at $1.69 a pound are well within my budget. I pushed a small cart around the store and eventually decided to check out the magazine rack to see if anything caught my eye. There on the rack at the top was Conde Nast Portfolio. I had seen this magazine before, but I was turned off by its glitzy cover and really never seriously checked it out. This time the words greed, stupidity and the writer of financial articles, Michael Lewis, caught my eye. I took the magazine off the shelf and flipped through the pages until I came to his article. After looking through the rest of the magazine, I decided to buy it. Michael Lewis was no stranger to me. I had read his little “tell all” book about his experiences at Salomon Brother’s that he wrote around 1989. It is a nice little book titled Liar’s Poker, that rang true to me when I read it some 20 years ago. Anyone that really wants to know what kind of assholes ran Wall Street should read this book. It is dead on.
Last night I read the article Michael Lewis wrote titled THE END. I recommend the article and the magazine to anyone that is looking for a magazine that seems to get it right. I am only sorry that I did not take a closer look at it when it first came out in April 2007. I had seen it on the magazine racks at Supermarkets and book stores, but just thought the cover was too glitzy to hold any valuable information. I guess the old saying that you should not judge a book by its cover can apply to magazines too. Well, for $12 a year, I plan to subscribe. There are a number of good articles in this December/January 2009 issue. There is even an article about Paul Krugman the economics professor who recently won a Nobel Prize in economics and also writes for the New York Times, and teaches at Princeton University. The article about Krugman is also worth reading.
One more thing, as we are all adults, I guess I should mention that it is not uncommon for any article or book about Wall Street to be sprinkled with four letter words, and usually the worst ones, so don’t be surprised when they show up. Use of profanity is no excuse for a poor vocabulary, but if you want to know how these guys felt and the language they used, then you just have to accept that this is the way they talked.
The article THE END is well written. I wish I wrote as well as Michael Lewis. I have a lot of stories about the investment business that I have not shared in this blog because I thought I would some day put them down in a little book, but that is another story. This article, in addition to being well written, is on the mark. Some of you out there after reading this article will not believe what you have read, but let me tell you, as someone who has worked in the investment business for 35 years, Michael lewis did not have to embellish one bit. These are the facts and this was the state of the industry. After you read this article, you will understand why I have been beating the drum about the need for regulation, oversight and transparency. The other drum I have been beating is the one to move the rating of all bonds to the responsibility of the Federal Government. The rating companies, known as the rating agencies, suck. They have failed the industry and the investing public. So little time has been spent on this point about the role the rating companies played in the financial meltdown. While they are not responsible for all the greed and abuses by individuals in the business, they played an important role. Look at it this way, they were not the bomb, they were the trigger that set off the bomb. Without the AAA ratings on the mortgage bonds that were nothing more than junk repackaged, the huge meltdown would never have occurred.
Conte Nast Portfolio should send a copy of the Dec/Jan 2009 issue to every member of Congress. Better yet, they should just send them Michael Lewis’ article THE END. If, after reading this article, they do not see the need for more regulation, oversight and transparency in the investment securities industry, then we all better start rethinking where we want to live.
Tuesday, November 25, 2008
Unfortunately, talking about economics is very different than talking about two plus two or gravity. If a mathematician or a physicist appeared on one of the many news shows on TV and said that two plus two is no longer four, or that the law of gravity is suspended during the present administration, most people would say something out loud or under their breath, but few if any would just sit there and accept it. This is not the case when it comes to economics or for that matter a discussion of the present financial and economic crisis.
For the most part, the talking heads on TV news programs are just that, talking heads. They pick up some of the jargon and they ask sometimes a few very good questions, but for the most part the politicians that appear on their shows and talk about economics, the markets and regulations that have been “burned”, don’t know what they are talking about, or, have a political philosophy that they cling to, regardless of how stupid that philosophy might sound, when measured against the reality of the present financial and economic situation.
If I was the producer of these TV news shows, I would add in addition to the political analyst, an economist with a knowledge of banking and the markets. Unfortunately, Paul Krugman has another job teaching economics at Princeton University, or he would be my first choice, and I would tell him not to pull his punches. When Krugman is on one of the TV news shows he is so careful to be polite. TV news needs more not less economic commentary from people who know economics. Politicians and political analysts do not know economics, but they might think they do.
There are still people appearing on TV news show telling the audience that regulation is the problem and no one is brought on to rebut this nonsense.
Building a house with 50% fewer supporting studs than structurally required and then placing a heavy tile roof on top of such a structure and being surprised when the weight of the roof brings down the house, is about what we have in our surprise of the shape of the present financial crisis. The asset-backed bond market was built on bond ratings that did not support the “weight” of these poor quality bonds. When the bondholders ran for the door to sell their asset-backed bonds, the buy side had no interest in bidding on the junk they had sold.
They, the TV commentators, talk about Wall Street and Main Street, as if they are two separate places, is a little misleading. Wall Street underwrites the securities and sells them, and Main Street buys them. The people on the sell side of the investment business have always thought they were smarter than the people on the buy side. Wall Street sells on the “ask” side of the market and buys on the “bid” side, while Main Street buys on the “asked” side and sells on the “bid” side. The difference is the spread that the Wall Street firms, the brokers and traders, make on one side of the transaction. They put up their capital, the firm’s capital, to position their inventory. When their inventory becomes almost worthless, they need a bailout.
“Burning” up the guidelines that were set down in law in the 1930’s and 1940’s that dealt with investment securities has lead to the present financial crisis. Anyone who tells you that regulation, oversight and transparency is not needed in the investment securities industry is full of shit. Much of what has happened to this country, its people and their economy could have been avoided had the current administration and Congress had an understanding of financial markets and a little more knowledge of economics. Stupid people pay a big price for their stupidity, and for all of us, it is running into the trillions.
Monday, November 24, 2008
This week the Obama administration is announcing several of the positions as “secretary of “ as part of their economic team. On Friday, word was leaked as to who the Secretary of the Treasury would be and the stock market reacted in a very positive way by running up some four hundred plus points before the closing bell. But, can a Secretary of the Treasury make such a positive impact? The answer is yes and no. Let me try to explain.
I remember reading an interview in FORTUNE magazine back in the late 1970’s between one of the writer’s for the magazine and the former Secretary of the Treasury in the Carter administration W. Michael Blumenthal. One of the things I remember from that interview was that the Secretary can only appoint about five or six people to key positions as the rest of the positions were civil service. The problem for Blumenthal was that the Carter administration left him out to dry on several occasions. For example, he would be giving a speech about Treasury policy and other members of the Carter administration in the White House would be saying the opposite thing. This under cut Secretary Blumenthal’s position within the Treasury Department and led to his eventual resignation.
W. Michael Blumenthal was well qualified for the position with a doctorate in economics and having run several large corporations. Unfortunately, President Carter and his gang from Georgia did not understand money, markets or how they worked. For someone who was a peanut farmer and dealing with a commodity, I thought Carter would have had a better understanding of money and markets. It is my opinion that President Carter was an idiot when it came to money and markets and economic policy. President George W. Bush has given Carter a good run for taking over the position as this country’s biggest economic idiot while in the White House.
President-elect Obama and his White House staff, I hope, will remember how important it is for everyone to be on the same page. Letting the Secretary of the Treasury appear to be not plugged into the White House will under cut that person’s effectiveness among the career troops in his department.
I do not think there are very many people who would not want President-elect Obama to take over the government right now. President Bush and his administration have little if anything to offer at this point except to continue talking about too much regulation. The idiots that think it was too much regulation that got us in the present financial crisis which has lead us to the present economic crisis can not, in my opinion, be educated. They have married themselves to an ideology and they are going to stick with it even if it brings this country’s economy to the brink.
January 20, 2009 can not come fast enough for the United States of America, and for that matter the rest of the world. Believe it or not, we still are the economic engine pulling the world’s economic train. Let us count the days together.
Sunday, November 23, 2008
The Ohio State University football team beat the University of Michigan Saturday afternoon in Columbus 42-7. The score was so bad, Washington is considering a bailout for Ann Arbor along with Detroit. That win made it five in a row over UM and next year the Bucks go up there and play.
The University of Cincinnati beat Pittsburgh in Cincinnati last night 28-21. The Bearcats football team this year beat West Virginia, Lousiville and now Pittsburgh. I guess they can start saying good bye to their football coach as I think his won-lost record at UC has earned him a ticket out of here.
Cincinnati is in the unique position of having a major league (Big East) college football team and a less than minor league professional football team, the Bengals. I guess we should be thankful that Mike Brown isn't the City Manager of Cincinnati, things could be worse.
Saturday, November 22, 2008
The top painting is titled TIME FOR A LEVEL PLAYING FIELD. The piece is painted in acrylics on 3/4 inch birch plywood and measures 24"x24". I re-worked the piece as I was not happy with the infield. This piece represents before the presidential election of 2008. The bottom painting is titled OUR TIME IS NOW. This piece is painted in acrylics on 3/4 inch birch plywood and measures 24"x24". The "O" with the number 44 represents Obama the 44th president. The baseball field is one of the icons I use and it represents the level playing field. The level playing field is something the is never achieved, but rather a ideal that we all strive for. The next 60 days can not go fast enough.
Friday, November 21, 2008
Friday is finally here. I used to love Fridays and I still do, but when I was working in the investment business and the markets took a break for the weekend, I was able to let it go for the weekend, most of the time, and just enjoy my family. Now that I am retired, it just is not the same.
This morning I read on the Internet that a group of French, German and Hungarian scientists, working in Paris, have proven Albert Einstein’s formula, E=MC2. One hundred and five years later, with the help of mighty computers, Einstein’s theory that lead to the atom bomb has been proven to be correct. You know, 105 years ago when Einstein sat at a table with a pencil and piece of paper and came up with his formula E=MC2, there were no computers or even calculators. What is the point?
The point is, machines can only take us so far, there is no substitute for thinking. With all the data that is amassed today with computers, we still have to think. Perhaps, someday computers will think for us, but I do not think so. Creative thinking and adding up numbers are two very different things.
I would like for economists to use their numbers as a guide, and not as a substitute for reasoned thought. Our latest economic and financial problem involves the three American auto makers. Making a decision about the loan when only viewing whether the three American auto makers can build a car as cheap as the Japanese car makers, to me, misses the point. The situation is much bigger for our domestic and the world economies for such a narrow view. Take a look at the video of the Ford plant in Brazil and tell me we can not build car competitively (see Butch’s comment and link). This is just not the case. But we need leadership to take us to the next level.
Hopefully, before January 20, 2009, steps can be taken toward rebuilding this country which has been left to deteriorate over the years. There is plenty of work to be done to build a nation for the 21st century. It just needs a little leadership and imagination. Remember what Einstein said, “ imagination is more important than knowledge.” See the complete quote below.
Einstein's complete quote. "I am enough of an artist to draw freely upon my imagination. Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world."
Thursday, November 20, 2008
When they, the economic historians, write the economic history of this period, it will be interesting to read where they will place the blame for all the unnecessary pain and suffering that millions of Americans went through. Some where in their analysis of the period they will discuss the lack of responsible leadership in both the White House and the Congress to meet the challenges that eventually drove first the American economy and later the rest of the world’s economies into the depression that consumed us all.
Unfortunately, the debate as to whether the federal government should loan the auto makers $25 billion is merely an ego trip for some to demonstrate their knowledge of a few economic numbers, while for others it is covering themselves and protecting their job in Congress. Few seem to be able to see beyond their little area of expertise or self interest.
Inaction on this loan will cause problems that even the smartest economists have not considered. To argue the three American auto makers’ cost per vehicle at this point in our economic recovery and stabilization is absurd. Such an argument misses the trauma that awaits us.
Perhaps there are people in the world, or governments, that are wise enough to realize what the American government is dancing with, and will enter the debate. The Japanese, who are forever being thrown up in our face as an example of a country and people that do it right, would not hesitate for a second to save their auto makers if the situation was reversed. They are of a different culture. The safety of the group, their society takes importance over the ego of the individual. When Japan’s steel industry was in trouble they came to its aid out of necessity and national pride. Perhaps it is time for them to explain to our leaders what real national pride means.
I repeat, this short sighted decision to not loan the three American auto makers the $25 billion will be felt around the world. More than just Americans will suffer from this stupid decision not to act and act now.
Wednesday, November 19, 2008
Yesterday I listened, while I painted, to the Senate hearings on the auto industry “bailout.” First, calling it a bailout is the wrong word. It is a loan. Why does the federal government have to loan the three American auto makers money in the first place? Well, this is where the debate begins.
The auto makers claim that the financial crisis has made it more difficult for people to borrow money to buy cars. They also claim that the banks, where they usually go for a loan, are not willing to lend them any money. Banks, as we all know, now are tightening their borrowing requirements after they left them too loose for too long. So, now car buyers find it more difficult to qualify for a loan. The fact that the economy is in the toilet does not make the situation any better for the auto makers.
The auto makers and the president of the auto workers’ union now claim that they have improved their cars and trucks and that without the financial crisis, which has taken funds out of the equation, that the auto makers would not need a loan from the federal government to get them through this difficult period. However, there are those that don’t believe that line of reasoning.
Here is my take on the whole thing. First, I would make the loan as I do believe they are making a better product and that the reason they are in trouble is because of the financial crisis which they really were not a part of. Remember it was mortgage loans and in particular sub prime mortgages that has brought the whole world into the economic recession we all now face. Wait. You mean the whole world is having an economic crisis and it was brought about by the few people that signed up for a sub prime mortgage? How can that be? Relax, I do not believe for one second that the sub prime mortgages caused this world wide financial crisis. But, it plays well in the old game of class warfare. What is class warfare?
Class warfare is when you blame the problems on the class least able to defend themselves. The people that took out sub prime mortgages and the union auto workers make great targets for those that wage class warfare under the title of economic debate. Management will come out of this much better than the union worker if the three American auto makers are forced into bankruptcy. Does anyone not agree with that statement? Everything gets thrown on the high priced American worker. What about the less than level playing field when it comes to American car makers exporting their cars and trucks? Oh, that is another story to be discussed later? No, let us talk about that right now. The trade deals stink. Let us have a few union guys in on the trade talks the next time we sit down to negotiate a new trade agreement on cars and trucks.
First, the bankruptcy is the last thing we need right now with so many other things happening to our domestic economy. The macroeconomics professor can lecture all he wants about our cost to their costs to build cars and trucks, but the bottom line is do no harm to the patient. Letting the three American auto makers fail at this point is bad for several economic reasons, but also for our national security. I can wrap myself in the flag too. The flag is not just a symbol of the conservatives, it is everyone’s flag and liberal economists can wrap themselves in it too.
I hope that each member of Congress will put themselves in the place of the auto worker when they make their decision on the loan. Remember, since the first oil embargo in 1973, many politicians have had the chance to put together a national energy policy and they took little or no action. The president for the last 7 years has shown no leadership on this issue as well. Now is not the time to stick it to the union worker. These are the same union workers who fights our wars. This is just another war, but without the bullets. Let us not make it a bloody one if we have a choice.
Monday, November 17, 2008
At coffee Sunday we discussed the so called “bailout” of the once “Big Three” auto makers. Many were against the “bailout.” The government should not be in the business of bailing out businesses that can not make it, period. That all sounds nice, but if we take a look at recent history, does that make sense or good economic policy. What do I mean? Let me explain where I am coming from, but before I do, let me say I drive a BMW and I have bought and owned only foreign made cars. While that is my choice, it is not a reason for or against an economic policy that includes loans, which I think is a better word than bailout, to the three American auto makers.
Let me take you back a few years to the period of the Cold War. Japan was just getting herself back on her feet and given her place in the world geographically, the United States was eager for the Japanese Government to move in the direction of democracy and capitalism. An opportunity was made for the Japanese auto makers to sell their cars in the United States. At the beginning, their cars were not that popular, but with time the Americans were won over to the nice smaller cars that sold at a competitive price. Given the world’s political stage at that time, it was in our interest for Japan to be successful and for their economy to thrive. In Europe, with the Soviets on the eastern border of Europe, the United States was again interested in seeing Germany, her infant democracy and her economy be successful as well. As a result of our policies concerning the Soviet Union, it was in our interest that Germany and Japan not just survive, but that their economies do well. Democracy and the capitalist system were on the line. If Japan and Germany failed, we would fail too. The policy of containment of communism had been waged on the battlefield in Korea, but also on the economic battlefields in Germany and Japan.
The trade policies of the United States made it easy for the products from Japan and Germany to enter the United States and compete with American made products. After the Second World War, it was the United States that became the economic engine for the world.
The problem as I see it, was that after Japan and Germany and several other of our trading partners became competitive, we did not require that the playing field be level. Furthermore, Japan’s government has helped her industries (steel) when they have needed a hand. If the rest of the world would make it as easy for us to export our cars as we make it as easy for them to export their cars, I would say we could make a fair comparison of the virtues of the so called “bailout”.
That said, and given the numbers of jobs involved, I come down on the side of a loan to the three American auto makers, if they are willing to make some changes to improve their competitive position in the industry. We may not be able to change every trade agreement that involves our exporting of American made cars, but knowing that this problem exists and the history of what got us to where we are today, I think the so called bailout should be approved. The last thing we, as a nation, need now is to have our auto industry file for bankruptcy. The extra problems that this move would entail, is not worth the trouble it will cause the economic recovery. Along with a loan, the government in Washington needs to get our autos and trucks on a level playing field for trading purposes around the world. I would bet that if our trucks were permitted to compete, the so called bailout would work.
Saturday, November 15, 2008
It is raining this morning in Cincinnati.
Old men, when they retire, sometimes take part-time jobs. I am one of those old men that is on his second part-time job. My first part-time job, after I retired, was working as a gallery attendant at the Contemporary Arts Center in downtown Cincinnati. The building is new and beautiful, but the contemporary art that traveled in sometimes left a lot to be desired. There were several good shows, but there was also a lot of so so stuff. Well, in the afternoons, I would some times fall asleep, so I quit. Now I work at a historic cemetery and arboretum not far from my house. The grounds at this time of the year are quite beautiful, so I thought I would put up a few photos I took. I am not a photographer. I take pictures. So, on this cold and rainy day, here are a few pictures of a beautiful place I drive around when I am doing my new part-time job.
Friday, November 14, 2008
Those that understand the role politics plays are way a head of me when it comes to a discussion of the economy. I admit, I am one of those backward individuals that thinks that when you are discussing economics, you talk about economics and not politics. How can I be so naive?
Yesterday, I listened to the President talk about the economy while I was painting. President Bush was talking about the economy and what brought about the current economic crisis. A lot of information was thrown out there, but one piece of information that I hear continually being thrown around is the myth, in my opinion, that this whole economic crisis was brought about by sub prime mortgages. This explanation is not right, in fact, I think this explanation places or shifts the responsibility of the economic crisis to those who had the least to do with it. Let me explain.
The sub prime mortgages in and of themselves could not have brought about the present economic crisis. It is my opinion that those that use this line of reasoning are more interested in directing blame and responsibility away from the real sources of the disaster. To make the poor that took out sub prime mortgages the reason for the crisis is to make the people least able to defend themselves the scapegoat for the meltdown. This is not the case if you look at the facts and understand how this crisis came about and how the pieces of the crisis fit together.
There is a big difference between a sub prime mortgage and a sub prime mortgage bond. Without the securitization of sub prime mortgages into mortgage bonds with AAA ratings, this current economic disaster, crisis, meltdown never gets off the ground. Once the mortgages were bundled into mortgage bonds and sold, and sold and sold, did the potential crisis become armed.
With interest rates low, investors were all too eager to “reach” for yield with the higher yielding asset-backed bonds. These bonds, which included the sub prime mortgage bonds, were priced attractively to sell to portfolio managers around the world. When interest rates were held down by the actions of the Federal Reserve Bank to keep the economy going for political reasons, investors that needed to buy and managed portfolios of fixed-income securities were faced with the problem of lower yielding and safer bonds, such as U.S. Treasury bonds and notes, or reaching for higher, yet more risky, yields that were available in the asset-backed bond market. Couple this with the failure of the rating companies to give these asset-backed bonds, which included the sub prime mortgage bonds, their appropriate ratings, given the risk involved, and you now have everything in place for the current meltdown that has lead us to the present economic crisis.
Do not blame this whole thing on sub prime mortgages. To place the blame on these poor people that took out these mortgages is nothing more than a lie or a serious distortion of the facts.
There is a reason to shift the blame away from Wall Street and that reason is regulation. The biggest cheers the President received in his speech the other day was when he said we do not need more government regulation of the markets.
If you have enough dots and lines, and you stand back and place a little light on the subject, a picture starts to come into focus. I can not draw a better picture if I had Rembrandt at my side. Blaming the people that took out sub prime mortgages for the present economic crisis is just plain wrong. To me, it smacks of scapegoating, and that is something that has gone on for thousands of years. Attack those least able to defend themselves has a long history. This economic crisis was brought about by the lack of regulation, oversight, transparency and finally enforcement of the securities laws on the books. The financial products that were created and their derivatives were not the creation of those people who took out sub prime mortgages. For the President of the United States to lay the blame for this crisis at the feet of the poor who took out these mortgages is just wrong, and people that know better have a responsibility to speak up.
Wednesday, November 12, 2008
I read or heard recently that the NFL is considering placing cameras on the goal lines of football fields. That is great that the NFL wants to get it right on every touchdown. Now all we need to do is put "cameras" on Wall Street so we get the bond ratings right.
It was just a few weeks ago that the three heads of the three largest rating companies sat before a committee of Congress and told our Representatives that the bond ratings they gave out were only opinions.
I know for many of you that read my blog, the few that put themselves through this torture, bond ratings are not the most pressing thing for our economy to correct. Nevertheless, like playing with a bad deck of cards, bond ratings and the confidence that flows from the financial concepts that these ratings nail down are vital to the flow of capital and the creation of jobs throughout the country.
By restoring confidence in the entire rating system and process would go a long way towards rebuilding the confidence in the financial instruments that are traded everyday in the fixed-income markets.
Back 40 or 50 years ago bond ratings did not mean as much to the financial system as they do today because the size of the debt instruments outstanding were not as large and everything then was "plain vanilla" as far as bonds were concerned. Today, the creation of asset-backed bonds and their derivatives has made the situation a lot more complicated as well as the size of the bond market.
Without some serious changes to the rating of debt in this country, and a rebuilding of confidence in the debt securities that are underwritten and sold, the economic recovery will not get off the ground. Secretary Paulson, if you are any kind of a financial mechanic you will understand this. The head of the Fed, Ben Bernanke, better get on top of the rating disaster too. This problem will not take care of itself.
I guess I will never understand why, we as a nation, are more interested in getting our touchdowns right than our bond ratings. But, I will leave that one to our professors of sociology to answer.
Tuesday, November 11, 2008
To all the veterans, Happy Veterans Day. To those who are serving and their families, the American people are in your debt. I can not imagine what it is like to be in the service and have a family back in the States to support. Unless, you are an officer fairly high up, field grade or better, it has to be a struggle to make ends meet. Especially for young families the task must be difficult. When I was in the army in the mid 1960's, I was young single and had really nothing to worry about. I hope the new administration can bring the troops home soon after January 20, 2009. We need to rebuild this country and we need our best young people to be a part of that. To my fellow veterans, have a great day.
Monday, November 10, 2008
Change the dimensions of the field the game is played on, causes a change in the strategy in which the game is played. The markets react to change in much the same way.
The Federal Reserve Bank’s strategy of keeping interest rates low to help our economy to continue to grow over the last several years may have held the seeds of the economy’s eventual meltdown. Let me try and explain.
With interest rates low, investors needed to “reach” for yield if they were to remain competitive with their competition in the world of professional money management. This “reaching” for yield itself created a strong demand for riskier bonds and the game was on.
Mortgage and other asset-backed bonds are a relatively new animal on the investment scene. The plain vanilla bond that has existed for centuries has been improved upon because of the technological advancements of the computer. Taking a stack of mortgages and turning them into an investment security such as a mortgage bond created a whole new strategy and changed the field on which the game was played. Now, add to this the creation of synthetic bonds and credit default swaps on top of the creation of this whole class of debt known as asset-backed bonds, and you have the making of an entirely new, complex and unregulated ball game.
Keeping interest rates low for the purpose of encouraging economic growth has unfortunately a flip side to this story. I often refer to this as the knife cuts both ways. In economics, like many things, the knife has a double edge. Be careful on the back stroke.
In the Sunday New York Times Business section were several articles written by college professors of economics. Now there is nothing wrong with having college professors of economics writing articles for the Sunday Business section of the New York Times, except if you really want to know what needs to be done to help the economy, you need to talk with the players on the field, not the fans. Economists, for the most part, are good at studying past economic events, running numbers, drawing graphs and writing boring commentaries. As a group, they do not know much about the markets and the present. If the New York Times wants to know what can be done in the future when President Obama takes office in January, then they need to talk with the people in the street and on the trading desks. The vast majority of economists are historians of past economic events. They run numbers and write papers. Bond traders trade bonds, they do not write papers.
I still think the responsibility for the rating of all debt instruments, I mean all bonds and notes, needs to be placed in the authority of the Federal Government. The era of for profit companies giving ratings to debt paper is past. It has been a terrible failure and will continue to hold back the economic recovery. In a card game the values of the cards dealt need to remain constant or else you do not have a card game. In the bond market the bond’s rating may not be able to be held constant, but the initial rating has to be worth the paper it is written on.
Saturday, November 8, 2008
What a historic week. A new president elect and a new administration will be going to Washington. Big problems remain to be solved; however, a new spirit of hope and change is in the air. There is much work to be done to repair many segments of our country, our government, our economy and our relations with the rest of the world. Enjoy the weekend.
The above painting is from The Envelope Collection. Painted on a 12"x9" envelope in acrylic. signed prints on 19"x13" paper are available for $100.
Friday, November 7, 2008
The idea that bond ratings are like weights and measures in commerce is a bit too simple because unlike weights and measures that remain constant, or at least on planet earth they remain constant, bond ratings can and should change as their coverage changes.
Let me explain. Bond ratings are more than mere opinions as the heads of the three large rating agencies, spell that companies, gave testimony before a House committee just a few weeks ago. To claim that the AAA rated bond rating is a mere opinion is plain bullshit. Bond ratings are a significant piece of information that goes into a buyer’s decision to purchase a new bond issue whether it be a mortgage-backed bond or the municipal bond of a local school district. Ratings are suppose to mean something. What do ratings mean?
Well, now we are getting to the heart of the matter, “what do bond ratings mean?” Simple put, a bond rating reflects an issuer’s ability and willingness to pay principal and interest in a timely manner. Most bonds, when I was in the bond business, were set up to pay interest twice a year. So, if a $1,000.00 bond had a 6% coupon rate (also known as the interest rate), the bond would pay the bond holder $30.00 twice a year. If for example the bond had a maturity date of June 1st, interest would be paid to the bondholder on June 1st and six months later on December 1st. This process would continue until that bond matured and then a final interest payment along with the principal amount of the bond would be returned to the investor.
In the real world, conditions change as we can see from recent economic events. Bond ratings reflect the ability of the bond issuer to make the semiannual interest payments. The issuer's size and outstanding debt and previous debt obligations are included in the process of determining the quality of the bond rating given to any new debt issued by the bond issuer. Coverage of the interest expense is part of the formula that rating agencies use to determine the proper bond rating. But, coverage, a ratio, like two times or 2.5 times can change with economic conditions. In the case of the asset-backed bond, such as a mortgage bond, the value of the asset behind the debt can change. If the value of the properties that are behind the mortgage bond go down in value, the value of the mortgage bond, even if interest rates do not change, will most likely decline. Now if the mortgage is a fraud from the get go, we have a problem. In fact, if this is a pattern of behavior, we have a big problem.
There was a huge appetite for asset-backed bonds among the institutional investors in the United States and around the world. This appetite for asset-backed bonds, in my opinion, lead to the meltdown. Let me explain. With billions of dollars to be invested, and interest rates staying relatively low, institutional money managers are under pressure to out perform other money managers or lose their accounts. The money managing a few hundred million or a few billion dollars at the institutional level is big business. Portfolio managers will “reach” for yield in order to raise the total return performance of their portfolio. Asset-backed bonds gave portfolio managers that extra yield that they needed if they hoped to out perform their competition. This was the sucking sound that pulled more and more mortgage-backed bonds into the market. With demand for mortgage and other asset-backed bonds so great, the large investment banking firms that did the underwriting of these issues put pressure on the ratings agencies to come through with favorable bond ratings regardless of the fact that many of these new bond issues should have never received a rating in the first place.
Now, perhaps you can understand why I am calling on the Congress to take away the responsibility of bond ratings from the private for profit companies that have been doing this job for too many years and place it within the Federal government. It may not be a total answer, but in my opinion, the profit motive in bond ratings must be removed if we are to rebuild confidence in the markets in a timely fashion.
Thursday, November 6, 2008
I started another painting yesterday. Another two foot by two foot 3/4 inch plywood piece. Since I really felt like getting this painting under way today, I did not write my usual Moneythoughts blog. From the names I have seen thrown around on MSNBC for positions in the Obama administration, I think Obama gets it. The guys Obama is likely to go with are all pros and have first-class minds and experience. The one name I have not heard mentioned yet, that I would like Obama's staff to get around to, is Arthur Levitt. Arthur Levitt is a former head of the SEC (Securities & Exchange Commision). Whether he would take on that position again, I do not know, but it would not hurt to ask him. He is a first-class human being and, I think, Obama's people need to give him a call. I am back to painting tomorrow, I like this piece and want to flesh it out.
Wednesday, November 5, 2008
Now, let’s get to work.
Banking has a purpose. Finance has a purpose. Investment securities have a purpose. The underwriting of investment securities has a purpose. The purpose of all of the above is to facilitate the movement of capital to businesses that will build companies to provide a product, a service or both.
Incidental to all this, is the money that is made and lost in the pursuit of financing business enterprises. While there may always be “card sharks” in the securities business and “marks” to be taken advantage of, the purpose of finance is to arrange the flow of capital to business for the purpose of building products and services and in turn creating new jobs. As a result of all this, wealth is created.
Without regulation, oversight and transparency in the securities markets, we will witness again the destruction of wealth as we have seen over the last year.
With the new Obama-Biden administration, I hope their advisers will bring to their attention the importance that finance plays in rebuilding our domestic economy. Therefore, the need for adequate regulation, oversight and transparency is an essential ingredient to a stable economy. Naturally, one of the first things I think they should under take is the creation of a Federal responsibility for the rating of all fixed-income securities. Thus removing that responsibility from the private for profit companies that have failed the investment community and in turn the people of the United States. The time is now for a level playing field. The era of shopping a bond rating for an asset-backed bond should end now. While this recommendation may be only one small piece of the economic puzzle, it is, in my opinion, a very important one. Markets require a delicate balance, and confidence in the rating of debt securities will go a long way in rebuilding the confidence that was destroyed in the recent meltdown. The “weights and measures’ of the finance industry must be established if we are to repair our economy.
Tuesday, November 4, 2008
It appears that this presidential election is going to be a big voter turn-out. That's good. I hope a vast majority votes for the men I support, OBAMA-BIDEN. Our economy has a long way to go to being brought back on track. Everyone knows the crisis in the financial markets and with the banks has shaken the people's confidence with our economy and has caused many many people to tighten their purse strings. Hopefully, a new presidential administration, with a respect for the balance of markets will lead us out of our present condition. The president and his administration's enforcement of the laws does make a difference for our economy. The philosophy of deregulation is bankrupt. The emperor is wearing no clothes, there is no magic suit of clothes. Naked greed drapes Wall Street. The time for change is now. It is time for a level playing field. The investor should not be allowed to be a mark for Wall Street's greed whether they be big institutions or a single individual. The recovery will take time, but today is our first step in a new direction.
Monday, November 3, 2008
One of the many nuggets I enjoy reading in The New York Times on Sunday are the interviews by Deborah Solomon in The New York Times Magazine. Yesterday, November 2, 2008, Deborah interviewed the economist James K. Galbraith. John Kenneth Galbraith, his father, was a well known economist who advised several presidents and wrote a number of books on economics. I even bought and read one of his books years ago when I was trying to get my arms around the fields of economics, finance and investment securities. I liked John Kenneth Galbraith’s style and the way he viewed economics. Let me just say John Kenneth Galbraith was vastly different from the likes of an Alan Greenspan.
James K. Gralbraith has written a new book titled “The Predator State”. In his interview, he has the following exchange.
Q. “You’re referring to the Washington-based conservative philosophy that rejects government regulation in favor of free-market worship?”
A. “Reagan’s economists worshipped the market, but Bush didn’t worship the market. Bush simply turned over regulatory authority to his friends. It enabled all the shady operators and card sharks in the system to come to dominate how we finance.
Shady operators? Card sharks? James K. Galbraith sounds like an old man in Cincinnati who has been writing about people being treated as “marks” by the securities market. I am happy to see someone has even gone to the trouble to write a book about the predatory state of our present politico-economic administration.
The problem now, much like sharks feeding in a frenzy, is that a lot of the sharks got eaten along with everyone else. When this happens in banking, who is left with any confidence that they are not going to be the next shark to be eaten? The $700 billion band-aid is now suppose to get everyone in the water to trust each other? Trust takes time to develop and can be destroyed in seconds. Secretary Paulson, if he has ever created anything with his hands, other than money, will find this out.
This is not a story of Republicans vs Democrats. This is a story about a level playing field for all players in the market. Those that can open their eyes and their mind and understand just what has happened to our economy will understand the need for regulation, oversight, transparency and direction from our leaders that enforcement be the order of the day. Such a small number of individuals have benefitted from the feeding frenzy and so many many have suffered from this lack of regulation and leadership.
Tomorrow the people have a choice. Do they want to continue down the road of an economic philosophy that takes care of a very narrow few, or do they want to elect a president and vice-president that will bring regulation, oversight and transparency to the financial markets. I think this country has seen enough suffering at the hands of the “shady operators and card sharks”.
I strongly recommend that if you feel you have seen enough of the philosophy of deregulation then you should vote for OBAMA-BIDEN.
Saturday, November 1, 2008
This is my latest painting, "TIME FOR A LEVEL PLAYING FIELD". Painted in acrylic on 3/4 inch plywood, 24x24 inches, it brings together one of my icons I have used before, the baseball field, but without the flag, and a time piece to show the time is now.. Senator Obama has said "now is our time." Those of you who feel that the playing field has been tilted away from you and your family, now is the time for a level playing field. This Tuesday is Election Day in the United States. Each of us has the power of one vote, but together we can level the playing field for ourselves and our families. I voted for OBAMA-BIDEN, and I hope you will too.