Saturday, February 28, 2009
Friday March 6, I will be participating in an art show at the Collector's Art Group, 225 East 6th Street in downtown Cincinnati with four other local artists. Today, I have posted three of the five paintings that will be in the exhibit. The first painting is titled "Level Playing Field Out The Window" and is from The Envelope Collection. Painted on a black paper envelope that I once received reports, it measures 12"x9". The second painting is also on a black paper envelope 12"x9", titled "Tribute to Jackie Robinson: Leveling The Playing Field 1947-2007. This piece is a collage, as a photo is used in addition to the acrylic paint. The third painting is on MDO 1/2" plywood and is titled "Tanked: The Wall Street Watch of 2008" and measures 24"x16" and is painted in acrylic. It is framed in a gold metal frame under glass and haning on the wall can easily be mistaken for a broken clock.
I enjoy recycling paper and wood products and making art from them. I have been drawing on envelopes for many years and I have always enjoyed working with wood since I was a very little boy in my father's work shop. Finding new surfaces to paint on or simply to create new objects, such as the shadow boxes from empty Whitman Sampler candy boxes, seems to grab my interest. I know many artist have used discarded materials to create art, and several artists continue to do this. Many Outsider artist use found objects such as wood, pieces of metal, cardboard and even old newspapers to create fine art. Other than it is expensive to always buy new materials to create art, I will leave it to the shrinks and art historians to debate the real reasons behind the artist's motives or motivation.
Friday, February 27, 2009
There has been a lot of talk recently about the Federal Government’s deficit. If you just landed on this planet, you would think it was something invented by the Obama administration. What about the size of the deficit that was left to the Obama administration from the Bush administration? Do we just forget about that?
Given that President Obama inherited the present economic mess, I would think it only sporting to give him four downs to move the ball out to midfield. In fact, I suspect that there are some big savings to be had in Federal spending with more transparency in government programs. I would bet that there is a lot of waste that could be slowed or stopped that would eventually reduce our deficit by a sizable amount over the next four years. But, I think the sporting thing to do is give the man a chance to advance the economy.
The talking heads keep up their talk about the deficit, but have no ideas how we are to move our economy out of this recession, that is moving in the direction of a depression, without spending money. The Republicans have now become the party of NO, and I think that is an excellent place for them to be. Perhaps, after the next election in 2010, there will be NO Republicans in Congress, or, so few that it does not mean anything when a vote is taken.
I think we should all just chill and give President Obama and his administration their four years to move the economy out of the recession that he inherited. Again, I know this is not sports, but politics. If it were sports, the sorry ass Republicans in Congress would be getting their collective asses kicked.
Thursday, February 26, 2009
Today I would like to talk a little about capital expenditures, and how capital expenditures differ from operating expenses. The purpose of this little explanation is because a lot of the criticism of the stimulus package is just plain wrong. Here is why.
What is a capital expenditure? A battleship or an aircraft carrier is an example of a military capital expenditure. I think reasonable people would agree that a battleship or an aircraft carrier will last more than a couple of years. Building a bridge, roads & highways, a new electric grid are also examples of capital expenditures because they too will last more than a couple of years.
How do we finance a capital expenditure? Capital expenditures are usually financed over a period of years equal to the life of the utility of the capital expenditure. This long term financing in the private and public sector is done by the issuance of corporate bonds and municipal bonds. The Federal Government also issues long term bonds, U.S. Treasury bonds, that can be linked to projects that have a utility of more than a couple of years.
A start up company uses seed money for operating expenses because it has no income. The United States, federal, state, county and city governments have income through taxes and fees, and as the economy recovers, those taxes and fees will increase in amount as the recovery takes place. The taxes and fees will pay principle and interest and retire the debt. As new projects are needed, new borrowings will occur, just as new borrowing takes place in the private sector of the economy.
Concern about a deficit should have been under taken at the beginning of the Iraq War, as fighting the war should have been paid for out of the Federal Government’s operating income, taxes and fees. After the war is over there is no utility in what is left, unless Iraq is going to give us free oil for the next 10 years. The idea that Iraq was going to pay for the cost of the war should be revisited. If Iraq pays for the cost of the war to liberate their country, that would reduce our deficit considerably. Personally, I think that subject should be visited again.
Finally, capital expenditures are an investment. Corporations, governments and ordinary people, families, borrow money for major expenditures and pay for these expenditures over time. That is the way the world finances capital investments. The important thing to keep in mind is that we, as a nation, must keep our country competitive with the rest of the world and we must update and improve our own infrastructure. If we do not meet that challenge, we will have hell to pay.
Wednesday, February 25, 2009
Last night, I and millions of Americans watched and listened to President Obama layout what we, as a country, need to do to bring our country out of our economic recession. President Obama’s speech was well crafted and laid out the major sectors of the economy that need support -- energy, healthcare and education. The rest of the world does not even argue anymore about the importance of these three segments to the success and survival of a complex society in the 21st century. It is time that we, as a nation, realize that what holds us back can be corrected. The economic philosophy that the central government has no part or responsibility in bringing a nation’s economy out of a recession is just plain stupid. Stupid because it was under another administration that the national deficit reached a trillion dollars. What do we have here, a semi-permeable membrane where Republicans can create a deficit, but the democrats can not use Keynesian economics to bring us out of the recession?
President Obama mentioned better regulation of the banking and securities industries in his speech last night. I hope he will direct some of that regulation towards the need to rebuild the credit rating agencies (CRAs) and the serious role they play in the world wide credit markets. The economic recovery, as President Obama said, can not take place without the flow of credit to the people that need money for education, to start a business, to buy a car or to buy a house. The extension of this thought is the smooth operation of the structured finance market. This can not take place until the conflicts of interest in the CRAs is confronted and dealt with successfully. The flow of capital to and from the points within our economy that needs credit to grow must be addressed in light of the financial vehicles of the 21st century. Collateralized debt obligations are not going to go away, but they must be made safe for investors. Credit to build this nation is much more than the U.S. Treasury issuing debt instruments to foreign governments, it is the movement of capital in the private sector that will rebuild the middle class. This was what President Obama was talking about in his speech last night, and why it is critical for the flow of credit to be flowing again. But this time, with credit ratings that mean something.
Tuesday, February 24, 2009
It has often been said that to find the answer, you just need to follow the money. Well, today I am going to lay out some facts about three sacred cows, the credit rating agencies (CRAs). I hope you will find this interesting.
Moody’s Corporation (NYSE: MCO) is the holding company for Moody’s Investors Service. The company has a 40% share in the world credit rating market. Two of the top institutional owners of Moody’s Corporation are Berkshire Hathaway and Davis Selected Advisers. I do not know anything about Davis Selected Advisers; however, I do know that Warren Buffett is the head of Berkshire Hathaway. Warren Buffett was also a big supporter of Presidential Candidate Obama. Whether the Obama administration owes Warren Buffett anything for his support, I do not know, but Moody’s is what is known as one of three Nationally Recognized Statistical Rating Organizations (NRSRO) that is designated by the U.S. Securities & Exchange Commission.
Standard & Poor’s is a division of McGraw-Hill. Standard & Poor’s is a credit rating agency that issues credit ratings for the debt of corporations both public and private. It is one of several Credit Rating Agencies (CRAs) that have been designated a NRSRO by the U.S. Securities & Exchange Commission.
The Fitch Group is the third of the three major credit rating agencies. Fitch Ratings is an international credit rating agency with dual-headquarters in New York and London. It is also a Nationally Recognized Statistical Rating Organization (NRSRO), and was designated by the SEC in 1975 together with Moody’s and Standard & Poor’s.
The technical term to describe what I have been referring to as asset-backed or mortgage-backed bonds are called collateralized debt obligations (CDOs), and the credit ratings on the CDOs were assigned top ratings by the CRAs. Got that?
For instance, losses on $340.7 million worth of CDOs issued by Credit Suisse Group added up to about $125 million, despite being rated AAA by Standard & Poor’s. Standard & Poor’s also failed to predict the bankruptcy of Iceland in 2008, a country that had a very high credit rating until the country collapsed.
It is no secret that the U.S. Securities & Exchange Commission has failed the investor at several points. The Madoff fraud makes good copy, but for size, it can not compare to the screw up of the whole arena of CDOs held world wide by the largest of the institutional investors. These are your toxic assets. The meltdown is the fact that no traders want to take a position in bonds that they do not know what is really behind them and which the rating is meaningless. The housing bubble was inflated by the money that poured into the CDOs. And, all of these can be traced back to the failure of the SEC and Congress. We have followed the money, but no one, it appears, is ready to take on the three sacred cows. Until the CRAs are made right and credit ratings mean something more than the paper they are written on, the economic recovery will not take place in the United States. In the 21st century, CDOs are a major part of the capital markets, and their credit ratings must stand for something. They must be creditable and give confidence to the world wide debt markets. When this problem is tackled the economic recovery will begin.
P.S. I am sorry about the misspelling on sacred. I guess I should wake up before I start to write in the morning.
Monday, February 23, 2009
For those few people that read MONEYTHOUGHTS, I am going to once again try and explain what happened and what it is going to take to correct the fraud and mistakes of the past as it pertains to banking and the securities industry and the credit rating agencies.
The use by the media of such words as “toxic assets” and “meltdown” do not clarify just what is at stake. I would like to use a term I remember President Nixon often used, “crystal clear”, because our inaccurate use of language, I think, can keep us from solving our problems. The words “toxic assets” and “meltdown” do not tell us very much about what really happened or what needs to be fixed. The word “bubble” is another word that needs to be examined too.
What is a toxic asset? One definition of a toxic asset is that it is a loan or a bond where a market value can not be determined because no one is making an active market in the security. In the case of a loan, it is often a non-performing asset. It does not pay interest on the loan. Someone owes some one and the loan or bond’s value is uncertain because there is a meltdown and no one is making an active market in the note or bond and so they say it is toxic. The Federal Government buying up these toxic assets from the banks will free up a lot of capital because the toxic assets must be marked at market value under current banking and accounting rules. But, if there is no one making a market in a note or a bond, how does the bank determine the value of that asset without a bid or asked price? If the asset is down in price from book value or the cost basis, how can the bank know for sure what the asset is worth?
The meltdown of the asset-backed bond market simply means that no one is making an active market in those securities and that it is not possible to determine the value of these assets.
The whole problem goes back to what caused the real estate bubble? What is a bubble? What causes a bubble to grow? What is a bubble filled with? If this was a science question, I think just about everyone would agree that air fills up a bubble and more air makes the bubble bigger. The air that expanded and prolonged the real estate bubble was money. Money flowed into asset-backed bonds because of a few reasons.
First, asset-backed bonds had higher rates and higher yields. Second, US Treasury notes and bonds were lower in rates and yields and investors were reaching for the higher returns. The AAA ratings that were given these asset-backed bonds by the major rating agencies acted like the valve on an inner tube and let the tube get bigger and bigger until the tube burst. Without the AAA ratings, money in the United States and around the world would not have been poured into this class of assets. Money permitted the bubble to grow and a faulty “valve” the rating agencies, that could have prevented the bubble from enlarging by giving these bonds their proper rating, but failed again in their mission.
Bad loans and bad asset-backed bonds have the country’s banking system in a mess. The mess is because investors, here and abroad, do not know what the Federal Government’s plan to deal with the failed banks is going to be. As a result of this uncertainty, the market for all bank stocks has gone to hell.
The Federal Government needs to make itself clear and speak with one strong voice about the plan of action to stabilize and resurrect our banking system. A significant part of that resurrection must be a new rating system where conflict of interest is eliminated from the process of rating all debt securities.
No one that I read or listen and see on TV news programs is talking about fixing these problems, but rather just keep repeating words like “toxic assets”, “meltdown” and “bubble”. It is time to start examining, in detail, the parts of the problem and take quick action to correct the inadequate parts of the capital markets process.
Saturday, February 21, 2009
I am posting my drawing of two houses in the historic neighborhood of downtown Dayton, known as the Oregon District, to show my support for the President's new housing program that is aimed at keeping 9 million families in their homes. We, as a nation, are going through some very difficult economic times for many of our fellow citizens. While we all have a responsibility to ourselves and our families, we also have a responsibility to our neighbors and each other. Yes, some abused the system, but many many people played by the rules and yet they and their families have been caught up in this economic downturn. Now is not the time to be mean spirited (if there ever is a time to be mean spirited?), or resentful of our government giving those in need of help a helping hand. The deflationary spiral affects us all. This plague will pass, but until we can pull ourselves out of this downward spiral, it is in everyone's self interest that we all try to help each other to survive. We will all be losers if we lose sight of this fact.
From the time I could hold a pencil, I have enjoyed drawing or just making lines. This piece of work has quite a few lines and I have not done anything this big since. There are two drawings 16"x22" set side by side and placed in an old wood window frame. The thing I was trying for besides capturing the beauty of these two old houses, is the feel of looking out this "window" and seeing these two houses from across the street.
Friday, February 20, 2009
I had wanted to take the day off and not write on my blog, but something happened on CNBC yesterday that makes my silence impossible.
There was this outburst by this TV talking head yesterday on CNBC about the fact that the Federal Government now has a program to help people who are having trouble with paying their mortgage. This man, his name is Rick, mouths off in front of a bunch of guys who are working on the commodity exchange in Chicago, and naturally finds a very like minded response from the men around him. Rick thinks that the people who can not pay their mortgage and need government help are a bunch of losers. Sure he is entitled to have his opinion, but is he right to call people who may have lost their job, their health insurance and can’t find a job right away losers? I do not think these people are losers.
Rick and those assholes like Rick need to walk in one of the millions of people that have lost their jobs shoes for a while. I have no problem with Rick or any one else having their own opinion about the role of government in helping people. In a free society, we can have millions of opinions. But I do have a problem with calling people that have worked their whole lives, paid their taxes, done volunteer work for their community and perhaps even served their country in the armed forces, to be called losers because they need a government program to help them pay their mortgage to stay in their home.
That NBC would continue to rerun Rick’s outburst even the next day causes me to question the sensitivity of the people running NBC. If Rick loses his job with CNBC for whatever reason, is he a loser?
Corporate welfare is OK, but helping to keep American families in their homes is wrong? I do not see it that way. NBC and Rick need to realize that the quality of life for all Americans is linked. We, as a nation, need to keep as many families in their homes as possible. Everyone has lost money in the market, but that is no excuse to call people, who have lost their jobs and need to take advantage of a government program to keep current with their mortgage, losers.
Thursday, February 19, 2009
Today I am going to give it a rest, as I am going to visit an art gallery in downtown Cincinnati, the West End, as a guest of my friend, Sam, who teaches a class for retired adults about the process of making art. The house cleaning project is moving along and I am discovering new things doing it almost every day. My art making is on hold until after the art show March 6.
The President continues to do a good job in trying to get our economy, and in fact the rest of the world's economy, back on track. Inflation is hardly a concern at the moment as deflation's foot print has hit nearly everyone. Solving our economic problems with Keynesian spending will help, but if I had the President's ear for two minutes, I would talk to him about the importance of a level playing field with regards to the rating of structured debt.
I may be the only person that believes that without the complicity of the rating agencies, the housing bubble could not have taken place. The Fed holding down interest rates caused the large investors to reach for yield and mortgage-backed bonds gave the investors that extra yield and return. There were other things that helped to throw our economy into this recession, but the fraud of the bond rating process, in my opinion, enabled the housing bubble to grow. Take away the securitization of structured debt and the financial world is a whole different place. I still believe that a federal agency is the best way to ensure and rebuild the buyer's confidence in the rating system. Money corrupts and that will not change. Therefore, a new era of a government run rating system should be begun.
Wednesday, February 18, 2009
We all know that money can corrupt, and large pools of money can corrupt more people than small pools of money. Welcome to Wall Street, where there are many many large pools of money and corruption was a way of life. Winslow, in his comments to my post of Tuesday, mentioned that there should be a Ministry of Business Ethics. I think that is an excellent idea if we could just find the right people to fill the positions.
My favorite people, the talking heads on TV news, are now trying to come up with what went wrong in the financial services industry and why we are where we are today. Everyone has an opinion, and I have my opinions too. Here is a slightly different twist on the events over the last 40 years.
While the financial services industry has an assortment of products to sell to clients, such as stocks, bonds, mutual funds and other forms of investments, the big thing that has changed over the last 40 years is the dissemination of information. In the old days, there was The Wall Street Journal, The Blue List of Municipal Bond Offerings, the Pink Sheets, all on paper and sometimes a day old. As desk top computers, the Bloomberg Company and other electronic forms of information came on the scene, information became available electronically, and everyone and anyone could have access to information and prices. Spreads narrowed and profitability became a tougher thing to come by. Firms merged to hold down costs, and the best traders followed the money to the better firms with the larger pools of capital. All this took place, and yet the enforcement of a “level playing field” disappeared as the philosophy of those in political power was one of deregulation. You can thank a host of characters, but two deserve special mention, Alan Greenspan, former chairman of the Federal Reserve Bank, and former Senator Phil Gramm. These two men did more to destroy wealth in this country, the United States of America, than any foreign army could have ever dreamed of doing.
The attitude of those on Wall Street, the traders and brokers, was that the buyer was not as smart as them. If they were, they would be traders and brokers and not on the “buy side.” This attitude flourished for many years and developed into a business culture of entitlement, or right, to take advantage of the “dumb buyer” on the buy side of the transaction. But, electronic information leveled the playing field and made it tougher for the institutional client to be taken advantage of. The retail buyer for the most part was still at risk.
The clear fraud that I saw in the late 1980s when I was a broker with a firm headquartered in Baltimore, now appears to be just the tip of the iceberg. That the New York Stock Exchange would list a new product, with no track record, and that the sales pitch would include the fact that the NYSE listed the product, and that that product would go belly up in six months and no one went to jail, probably only emboldened those that were a part of it or simply observed how innocent investors lost all their money in an investment product that should have never seen the light of day. The firms that participated in the underwriting of this fraud made money as did the brokers that sold it to their clients. The attitude that investors, whether private individuals or institutional clients, are marks or fish to be shot in a barrel did not just spring up in the last few years. All this behavior took place and more and the SEC stood by and watched. When you see what was gotten away with in the 1980s and 1990s, is it any wonder that the corruption of bond ratings for mortgage-backed bonds would be the next target for the unbridled greed of Wall Street?
Yes Winslow, we need better enforcement of the laws and perhaps we need better laws to deal with an industry where greed is as much a part of things as sweat is to sports.
Tuesday, February 17, 2009
Today President Obama signs the Stimulus Bill into law. Many economists say that the package is not big enough to do all the infrastructure building that our country needs. That is correct, but the political reality required that less not more be placed in the Bill. Infrastructure is not spending, infrastructure is an investment in our country. The New Deal built infrastructure that carried this country’s needs for a few generations, but now new infrastructure needs are necessary for our country to continue to grow in the 21st century.
The Republican Party could have pushed for more infrastructure spending, but their political game plan is to do nothing when they are out of power. The Republican Party has no rational political philosophy because they have taken the view that government is not the right vehicle for such projects. Other than defense spending, where their supporters reside, everything else should be taken care of by each individual or left to the states.
For those of you too young to remember the 1960’s, or from outside the USA and not familiar with our history, this country fought a second civil war in the 1960s. This war was not as bloody as the first Civil War, as far fewer people died, but people died. The second Civil War was known as the Civil Rights Movement. The signing of the Civil Rights Act by President Johnson gave the Republican Party the political victories that they could never have achieved without President Johnson doing the right thing and signing the Civil Rights Bill. With the signing of the Civil Rights Bill, the Republican Party’s Southern Strategy was born. Nixon was the first presidential candidate to employ the Southern Strategy in a presidential campaign. On November 4, 2008, presidential candidate Obama defeated the Republican candidate and defeated a political strategy that had lasted more than a generation.
Below I have listed 11 projects printed in The New York Times this past Sunday so some can see what an infrastructure project looks like.
1) California High-Speed Rail $45 billion
2) NextGen(eration) Air Traffic Control $15 to $22 billion
3) California Drinking Water - tens of billions of dollars
4) Gulf Ports $1.04 billion for New Orleans, $1 billion for Gulfport, Miss.
5) Seattle Highway Tunnel $4.24 billion
6) Hudson Rail Tunnel $8.75 billion
7) Chicago Rail Network $2.5 billion
8) Miami Port Tunnel $1 billion
9) Second Avenue Subway $4.35 billion
10) Bridge to Canada $1.8 billion
11) Dulles Airport Train $5.2 billion
There is no doubt in my mind that more not less infrastructure building is necessary today given the fact that our country has not made the necessary infrastructure investments over the last 29 years.
Perhaps a clever economist would be so kind as to convert these 2009 U.S. dollars into 1933 U.S. dollars so we could have a fair comparison of the actual spending that will take place some 76 years later. Knowing how much inflation has occurred in the last 76 years, makes me think that the New Deal may have been bigger.
Monday, February 16, 2009
The Stimulus Bill has passed Congress and now will be signed into law by President Obama on Tuesday February 17.
The Republican Party is fighting for its life. And, it should be no surprise that no one in the House of Representatives voted for the economic stimulus plan. After eight year of President George W. Bush, a President whose policies almost destroyed the middle class, the Republicans are in serious trouble. As the old saying goes, you can fool all of the people some of the time, but you can’t fool all of the people all of the time, has placed our two party system at risk. The Republican Party will, if it is to survive as a major political party, have to turn to serious thinkers with a sound political philosophy. It will have to be based on something more than the destruction of the middle class. As I am not a Republican, and never have been, this is not my problem, but if I was, I would not be looking to talking heads on the radio to rebuild the party. There is a conservative political philosophy, and while I do not agree with it in this age of interdependence and a very complex economic society, there may be areas for discussion that have not been explored. Perhaps men like George Will and a few other thoughtful, and not mean spirited souls, will emerge to lead them.
Money and banking in today’s world can be summed up in one word, securitization. Securitization is the process where a number of unrelated borrowers of mortgages, car loans or credit card debt is bundled into a large package of like debt and then divided up in to securities, bonds, and sold around the world. This process brings together, in a very efficient way, borrowers and investors. The problem we have seen as a result of the housing bubble and the eventual meltdown of the structured debt financing market is the fraud that crept into the process of correctly rating this kind of debt obligations. As a result of this wide scale fraud, the markets do not operate for these debt vehicles and they have now become referred to as toxic assets.
The challenge for the U.S. Treasury is to get the markets to function again, because in the 21st century, money and banking is on an international scale, and, while English is not a requirement, mathematics is the universal language, and everyone who trades these bonds knows that without confidence in the rating system, there is no market. The issue of “mark to market” was discussed last week and how it impacts the capital requirements and lending ability of banks was covered.
So, now that the Stimulus Bill has been passed and is ready to be signed into law by the President, the only thing left for the smartest people in the room is to take care of the conflict of interest inherent in the rating agency business. Once these bright fellows solve that problem, I would think that next to buying up some of those toxic assets, the capital markets would once again be ready to trade structured financial assets.
Saturday, February 14, 2009
Today is Valentine's Day. Empty candy boxes from any time make great shadow boxes for some fun art projects. Art does not have to be an oil painting on canvas or a sculpture made of marble. Art can be made from paper, cardboard, cereal boxes, glue, and acrylic paint. Kids can have fun making shadow boxes too. Today, I am going to post two shadow boxes I made from Whitman Sampler candy boxes, with some cardboard, glue, gesso and acrylic paint. The first one is The Butterflag and the one below is Level Playing Field. Everyone have a happy Valentine's Day, and don't forget to visit your local art museum. Go to an art museum and experience a trip back in time.
Friday, February 13, 2009
Have you ever looked closely at a piece of rope or metal cable? They are made up of smaller pieces that are braided together. The braiding of the small strands gives the larger piece of rope or cable its strength. The economy of a highly complex and developed society works the same way. Each strand is woven into each other strand and together they form the whole economy.
Money and banking, which includes credit, which is a big piece of the economic cable, touches every strand of the cable that represents our society. Money, banking and credit make up the smaller strands that are at the core of the cable. Without the core strands of the cable functioning the economy has little if any strength.
What I have written for the most part over the last year, today is the one year anniversary of MONEYTHOUGHTS, about the relationship that the smaller strands of money and banking (credit and debt instruments) have with each other.
Mark to market, bid and ask, credit ratings, reserves requirements, the relationship of yield to price and much more are the small strands that make up the core piece of the cable that represents our overall economy. Without correcting these small yet important pieces, the whole economy, which is so dependent upon money, banking and credit, will not function and grow. Hopefully, there are some smart people out there in positions of authority that will correct what is not working and repair that which is damaged. Our highly complex economy can not function without credit and debt instruments, and until this is corrected the overall economy is not going to recover and grow.
Thursday, February 12, 2009
Yesterday I caught some of the House Committee hearings on Financial Services that was held with several CEOs of our major banks. To say these men, the CEOs, could think of 1,000 or more places they would have rather been yesterday than in front of this panel of questioners is to understate a fact. These men knew who they were and they knew what they did as bank CEOs. They had no doubt had some ups and downs in their lives before they got to the biggest of brass rings, the position of chief executive officer. The members of congress that asked the questions of these CEOs did not know enough about banking in the 21st century, or for that matter, any century, to be questioning these men. Yes, they are members of congress, but you would think if they are placed on a house committee of financial services that they would read a book or two about money and banking so they did not come off as so stupid. The way I saw this whole thing was a waste of time and opportunity to get some important answers, if possible.
What is the issue about “mark to market”? Mark to market means that a bank must value their assets, specifically investment securities, at their market value. If the market value drops, the bank must hold back reserves against those assets. This then reduces the amount of money that the bank can lend. When this happens to all the banks at the same time, we have a credit crunch. The problem is that when there is a market meltdown there is no market value because no one is willing to make a market in those assets/investment securities. Under normal conditions, when securities markets are up and running, and I am talking mainly about the bond market, and more specifically structured financial debt obligations such as mortgage bonds, not the U.S. Treasury market which is working just fine, there are traders at the various bond departments actively making a market in these securities. In other words, these traders will commit their firm’s capital to position several million dollars of par value of structured debt obligations. The traders will buy bonds from investors, position those bonds until they sell them to other investors. These trades, the buying and selling, establishes a market value for nearly every bond. The mark to market value or price becomes the price between the bid and asked price. The trader buys bonds on the bid side of the market and sells bonds on the ask side of the market, while the investor, the portfolio manager, sells their bonds on the bid side and buys bonds on the asked side of the market. The difference between the bid and the ask is called the spread and that is what the trader makes on the trade if interest rates don’t go up before he sells the bonds he has just bought. Each firm risks their capital every second they position an inventory of bonds. When the inventory gets into the hundreds of millions of dollars or billions of dollars, you can see how any move in interest rates can either cause more profit to be made or, if interest rates go up, the spread, or profit is wiped out. Now multiple this going on around the world 24 hours a day and you get an idea of what is going on in the world wide bond market. Now when you have a meltdown in the bond market, none of the above is taking place. No traders are buying and no investors are selling. So, the problem is: how do you value assets on the books if there is no active market? That is why the federal government is talking about buying up some of these toxic assets.
I have spoken a few times before about the role that the bond ratings play in this whole business. Yesterday, unless I missed it, not one word was mentioned about the rating agencies and the role they played in the bond market meltdown. There was fraud in the rating of structured debt obligations by the rating agencies and no one would touch this topic. Until the banking industry and the federal government deal with this problem of the conflict of interest in the rating agency business, there will be no market for structured debt obligations.
In the 21st century, banks need the investment vehicle of structured debt financing to carry on the economic recovery of the country and in turn the world. But, no firm, or bond department, is going to risk their capital on new mortgage, manufactured housing, car loan or credit card debt obligations as long as they have a rating system that is worth less than the paper it is written on.
Members of congress need to understand how the capital markets work in the 21st century before they can fix them. Because they do not know how the capital markets work, yesterday was a waste of time for the nation. Other than getting some satisfaction out of putting these CEOs down for living their life style that is common place for them, the day, in my opinion, brought no new light to the problems at hand.
I wish the right people would read my blog, or, I wish the federal government would say I am crazy and have me committed. One or the other, but let us please do something.
Wednesday, February 11, 2009
The Republican Party as we have known it is about to disappear. Stupidity is a dangerous thing and what we are seeing today by the Republicans in Congress and their new head of the RNC, Michael Steele, is a level of stupidity that may very well do them in as a relevant political party.
To say the Stimulus package does not create any jobs, it just makes work, is about as boneheaded as one can get. Even the talking head George Stephanopolis on THIS WEEK could not believe his ears. Would the Republicans like to say that all the men and women in the Armed Forces of our nation do not have jobs, they just have work? Even the Republican Governors of California and Florida know how important the Stimulus package is to this country’s economic recovery. The poor people of my neighbor state Kentucky have a Senator Mitch McConnell who will lie through his teeth and try to make the argument that the New Deal did not help bring us out of the Great Depression. Such misreading of American History is a little too much to stomach given the situation at hand. I feel sorry for the people of Kentucky that are trying to keep their families together under one roof. To all the other southern and western states whose senators and representatives play politics with their lives, I say the vote is in your hands. Wake up and see who is working in Washington for your interests.
This Stimulus Bill will get through Congress, but the Republican Party is about to become a thing of the past. Even Rush Limbaugh’s fans will eventually wake up and see the light. This President is cut from a different piece of cloth, it is known already by many to be the case and more will come to know it in the near future.
Tuesday, February 10, 2009
Today is a day to read and listen. The U.S. Treasury speaks today about banking and hopefully some reform. I am off to help my good friend Stert with my pick-up truck this morning, so MONEYTHOUGHTS will take a day off.
The postcards are ready for the art show that I am in March 6, 2009 at the Collector's Art Group, so I need to pick up my postcards and address them later today. I have not exhibited my art work in Cincinnati for over 10 years. Is Cincinnati any more ready for my political art now than it was over 10 years ago? Cincinnati, or more correctly Hamilton County is one of the most conservative counties in Ohio and my art work is not conservative in its point of view. New York, Los Angeles, San Francisco or even Washington, D.C. would be better places for my political art to be seen, but as Cincinnati is where I live, it is Cincinnati where my art will be seen. Remember this art fans, art can be much more than a pretty picture. Art can can cause people to think.
Monday, February 9, 2009
The Stimulus Bill has been in the news for days now and while many knowledgeable economists, both conservative and liberal, have said that the stimulus package needs to be bigger, there remains for me the nagging questions about fixing the playing field.
The politicians, like the talking heads on TV, do not have an understanding of the problems at the cellular level when it comes to economics or the way the capital markets function, and I find this very frustrating. It is like talking about a cure for cancer and no one in the discussion is talking about the work being done with proteins at the cellular level to stop the flow of blood and nutrients to the cancer cells in the body. Shut down the capillary development of blood to the cancer cells in the body and the cancer cells die. It is that simple, but doing that without killing the patient is the challenge.
The movement of capital within our economy today is a big piece of the puzzle, but there are few people around that understand what appears to be a small thing is actually holding back the renewed movement of capital from the borrower to the investor. Yes, the investor. Banks do not hold onto the loans they give like they did in the old days. The era of structured financial products have changed the way America does business.
Mortgage-backed bonds, manufactured-housing bonds, car loan bonds, credit card debt bonds are all part of the capital market today. The market for these bonds extends around the world. Investors don’t have to speak a word of English to understand what they are buying as the numbers tell the story. The only English that needs to be improved on is the English that goes into the letters AAA, or AA, or A. Yes, bond ratings need to be dealt with before the fixed-income markets can function effectively again. Until the conflict of interest between the underwriters and the rating agencies is corrected, the capital markets as far as structured finance is concerned is not going anywhere. And, structured finance is the way Americans are able to drive our domestic economy.
The U.S. Treasury is coming up with some new ideas with regards to the banking industry in the very near future. I hope that some of their energies are directed at solving the problems of the movement of capital within the capital markets.
Sunday, February 8, 2009
What is going on in Washington with regards to the Stimulus Bill is shameful. A bunch of politicians that don't know very much about economics are debating what the word stimulus means. The Republicans that are against the Stimulus Bill because it spends money is just too dumb to try and answer. As President Obama said, that is what a stimulus is. The part that is so sad is the fact that the Republican Senators against the Bill are from states in the south and west that need as much help as any states in the union. And these poor people still believe that these Senators are looking out for their interests and well being. Is there some kind of twisted irony in all this? Remember the Southern Strategy? This first came on the political scene in 1968 when Nixon won the Presidency. Good old Senator Strom Thurmond was the first Democrat to bolt from the party and become a southern Republican. And why? Because of the Civil Rights law and the southern reaction to the Federal Government telling the southern states that black people had civil rights. I know for some people that is ancient American history. Now here we are 40 years later, and we now have a black man as President of the United States. And, the Bush administration has turned over the country to President Obama in a mess. In all fairness, even President Bush could not do this in eight years. You have to go back to President Reagan to trace the beginning of the path of deregulation and small to no government enforcement of the security laws, etc. Here we are in 2009, and we have a President that has a brain, a heart and courage and he is trying like hell to help rebuild the middle class that was destroyed by the Republican Party and their philosophy of deregulation. This is not going to be easy, even for President "Bat Man" Obama. To turn this economy around, given the number of jokers in Congress will take a team of super heros. It will take Paul "Superman" Volcker and a host of super heros to turn this economy around. Good luck Mr. President! May the Force be with you.
Saturday, February 7, 2009
The above painting was inspired by the cover of a Vanity Fair magazine and the work of Romare Bearden (1911-1988). Bearden used many different materials in his creation of his pieces of art. While this is a painting and not a collage, I nevertheless, copied Bearden's use of solid black for areas of the body as he had done in his piece "Saxophone Improvisation" (1986). This painting is 24"x16" and is painted in acrylic on MDO plywood.
Friday, February 6, 2009
While millions of people have lost their job or are having their hours cut back, the Congress debates the Stimulus Bill. The debate attempts to address concerns of Republican legislatures about the amount of money being spent, but the real reason for the debate is politics. The Bush administration would not have seen the same debate had they purposed a Stimulus Bill before leaving the White House, but Bush and his administration had their heads in the sand. The situation now is beyond economics, it is what it is, just plain old fashion politics.
Regardless of how much money is spent by the Federal Government to stimulate our domestic economy, unless there are changes in the regulatory environment in banking and the investment banking industries, very little if any improvement will be realized in the efficiency of the capital markets. The problem of the conflict of interest remains concerning the rating agencies and underwriters, and the methodology used in the rating of structured debt instruments such as mortgage-backed bonds. This problem of bond ratings for structured debt may appear small to those outside the workings of the capital markets, but it is just enough to keep the housing market from getting back on its feet. The same is true for car loans and manufactured housing. The ability to finance consumer debt is critical to a healthy economy in the 21st century.
The second part of the economic problem is the amount of money being spent to import oil and goods made in China. Without a plan to reduce the wealth that is being exported to pay for the oil and goods made overseas, the domestic economy will continue to find difficulties. Money spent on infrastructure is probably the best bang for the buck along with cutting taxes for people in the lower tax brackets. Cutting corporate taxes at this point, in my opinion, will have very little stimulative effect. People and families making less than $50,000 a year could do more for the overall economy if they did not have to pay any income taxes until this economy got back to near full employment. People on Social Security should have their tax burden eliminated as they are not saving their money, but using almost every dollar to survive.
The state governments need this Stimulus Bill as much if not more than the Federal Government because it is the state governments that are being forced to cut payrolls and eliminate jobs for teachers, police and fire fighters.
Hopefully, by next week sometime a Stimulus Bill will be passed by the Congress. That is only a start. Much work needs to be done to correct the regulatory environment on Wall Street and rebuild the Securities & Exchange Commission.
Tuesday, February 3, 2009
To break down the game that is unfolding in Washington today, is to grab some insight into party politics and the ultimate prize, political survival.
The Republican Party is betting that they can obstruct, hold up, delay and finally perhaps defeat the Stimulus Bill in Congress and yet survive to be voted in another day should the economy not recover. This reminds me of the history of the United States and The League of Nations after World War I. President Wilson won the war and the Republican Senators stood in his way to winning the peace by voting down the Treaty that would have put the United States in The League of Nations. President Wilson had his Fourteen Points and he was mocked by the Republican Senators that said Moses only needed 10 Commandments, but President Wilson needed 14. As a result, the vote to join The League of Nations failed and the United States was unable to help craft a peace that would last. Historians site that it was President Wilson’s reluctance to put Republican Senators on the team that went to Europe to write the treaty ending World War I that ultimately lead to the defeat of the treaty in the U.S. Senate. Certainly it can not be said that President Obama and his administration have not tried to be inclusive by adding Republican input to the process.
But, this is not about the economy or what is good for the American people. This is about the political survival of the Republican Party. Rather than joining the majority and fearing that their cooperation will be lost or forgotten, the Republican members of Congress have decided to fight against the success of the Democrats in power. This is a sad state of affairs, but this is how politics in 2009 is played. If the Bush administration could send men and women to die in a war that did not need to be fought, how much more difficult is it for the Republicans in Congress to vote against a Stimulus Bill?
While the Stimulus Bill is needed to accelerate the speed of the economic recovery, there still remains a regulatory environment that needs to be repaired. That along with a plan to use less foreign oil can together speed the economy back towards full employment.
Monday, February 2, 2009
Wanting to write strictly about economics and our economy was my objective when I started my blog MONEYTHOUGHTS about one year ago. Unfortunately, talking about our domestic economy without talking about the political impact on our economy is not looking at the complete picture. Politics plays a role and that role is here to stay. And, while I understand that role is here to stay, the level of discussion at times is so bad that I wonder if it is possible for us to get out of our own way.
Listening to Republican politicians talking about “American solutions” to our economic problems as if a German or French solution that works would be un-American is just upsetting. This kind of nonsense is not nonsense, this is, in my opinion, stupid. Economic solutions that work should not be discarded because someone outside of America came up with them. Would we turn down a cure to Cancer or Parkinson because it came from a scientist in another country? This whole idea that the United States must only use “American solutions” to her economic problems is just plain stupid, but some people are trying to sell this idea.
The economy of the United States has both elements of capitalism and socialism as do much of the world’s largest economies. No country is without some aspects of a socialist economy. Social Security, Medicare and a standing army, navy, air force and marines are socialists aspects of the same Federal Government. Do we want to remove the police and fire protection from our communities as well? These are all socialist aspects of our economy. Anytime the government takes on a role or a job that is not handled by the private sector, it is socialism. Socialism is not the problem. Corruption and waste are the problems.
Americans need to wise up. The crap they are being feed on the radio and TV by politicians, radio guys and talking heads about socialism is just so much nonsense. Our form of government and our economy has aspects of socialism and has had them for many many years. The Stimulus Bill before Congress is necessary to our well being. It is time to wise up and not be scared by labels like socialism.
Sunday, February 1, 2009
Super Bowl Sunday is a good time to say a word or two about organizations. Not all organizations are a like, as each organization has its own culture, sometimes referred to as the corporate culture of an organization. The Pittsburgh Steelers as an organization not only have a great corporate culture, but have great leadership. Just five hours by car to the southwest is Cincinnati. Like Pittsburgh, Cincinnati has an NFL team, the Cincinnati Bengals, but unlike Pittsburgh, Cincinnati's organization has poor leadership and lacks a winning corporate culture. Leadership and corporate culture matter, we have seen what can happen to a country when both are lacking. Enjoy the Super Bowl.