Friday, April 30, 2010

Tomorrow May 1st Let Us Rejoice

Today is Friday April 30th, so, we all know that tomorrow is May 1st. Well, May 1st is the day that I designated as the day we celebrate and say goodbye to those leaving our country because the health care reform legislation passed. A few weeks ago, a number of people said that if the health care legislation passed, they would leave the USA. Well, I thought May 1st, a day known around the work as May Day would be as good a day as any to celebrate the event of those leaving. I want to make it clear, I personally do not care if they stay or leave, that is their choice. I wish everyone in the world had the choice to leave where they are. Unfortunately, we know that is not the case. Some people have no choice as they are where they are, and that is the end of it. Those that are able to leave and have the means to do so, enjoy a special freedom not enjoyed by all of humankind. I was asked if I am having a party May 1st, and my answer is, no there will be no outward celebration. Inwardly, we can take a moment to rejoice in the fact that many more people will have health care in the USA.

Everyone have a safe and happy weekend, and I will be back Monday with more on why the credit rating agencies and the way they do business needs to be changed.

Stay tuned.

Thursday, April 29, 2010

Where May The Next Bubble Come From?

It now appears that the debate can go forward on the financial reform legislation. While there are several items that need to be addressed before a substantive bill can be passed, the issue for me, and for a few others that know how things work, is the issue of the way the credit rating agencies are being paid. This basic conflict of interest, in my opinion, is at the center of the creation of the housing bubble. Yes, there are many other components to this legislation that will help prevent another housing bubble, but bubbles come in many forms, not just housing. For this reason, there needs to be a change in the way investment bankers pay the credit rating agencies for their credit rating on a new issue of bonds. As each bundle of mortgages is different than those previous bundles that have been securitized into mortgaged-backed bonds, the credit rating for each new issue of mortgage-backed bonds is really all the bond portfolio manager has to work with. When the credit rating agencies place a Triple-A rating on a mortgage-backed bond new issue, especially when there is no historical information about the issuer (like in the case of a corporation or a municipality or state), the credit rating is of utmost importance in determining whether the bond will be purchased.

Yesterday, it was the mortgaged-backed bonds, tomorrow it may be something else, such as auto loans, manufactured housing or even credit card debt. Almost any kind of debt can be securitized and then sold off as securitized debt obligations - structured finance debt bonds. Controlling the next housing bubble is good, but the next bubble may come from another direction, and then what? Will we have to go through this whole bond market meltdown and financial crisis again?

Stay Tuned.

Wednesday, April 28, 2010

Senate Hearing Or A Bad Circus?

Yesterday I watched on CNBC a good deal of the hearings of the Senate Sub-Committee on Investigations. Senator Carl Levin chaired the panel of senators that questioned members and former members of Goldman Sachs. Goldman Sachs for those that do not know is now a major bank, having been a major investment bank for about 140 years. They have thousands of employees with offices around the world. And, among many on Wall Street, are considered to be a very bright and aggressive group of people. Unfortunately, for me it was like watching a bad circus. The senators, instead of getting on their horse by grabbing the mane, mounted backwards, or, more accurately, back-asswards, and grabbed hold of the tail. The senators could have used someone that knew the business and could ask the right questions. Someone like Sam Dash of the Watergate era with a knowledge of bonds and how they trade would have gone a long way to make the hearing much more productive, and less a badly orchestrated circus.

The most intelligent questions came from Senator Dr. Coburn (R-OK), as the rest of the senators did not know enough about the business to discuss this subject intelligently. And, I think I am being kind with my assessment.

I do not know how you get it through the senators' heads that the biggest conflict of interest is the CREDIT RATING AGENCIES!!! If only it was as simple as a mathematical formula, I could perhaps take all my money and buy ad space on broadway in mid-town manhattan for the world to see. But, unfortunately, it is not that simple. I wish a simple formula could open the eyes of the senate, but there is little chance for that. The conflict of interest begins with the fact that the people (investment bankers/underwriters) that bring the new issue of structured financed debt, mortgages-backed bonds, to be rated, are the same people that are going to sell them to their clients, and PAY the CREDIT RATING AGENCIES for their credit rating for the new issue of bonds. With the Triple-A rating in hand, the sales force then sells the mortgage-backed bonds to their institutional clients. Without the Triple-A rating the housing bubble would have never been inflated to the extent that it was because, without the Triple-A credit rating the institutional investors would not have bought the bonds.

Attacking Goldman Sachs for shorting mortgage-backed bonds to balance their risk as a firm is plain stupid. Yes, they may have bet against the mortgage market, but that is what market makers do. At a level (price) any trader or portfolio manager may find a market over bought or over sold, and, as a result take the view that there is money to be made by either going long or shorting the market. Don't take the bat out of the batter's hands, fix the umpire that can't tell an ball from a strike.

You know, for the cost of a bed a few meals and some money for someone to watch my dog Bud, I would have gladly gone to Washington and been their Sam Dash. I would have done it for free.

Stay tuned.

Tuesday, April 27, 2010

Simple Survival Rules The Day

There has been a number of books written about the most recent financial crisis in the United States. I have either read a review of many of them, or, I read the book itself. Add to this the number of newspaper and magazine articles that have been written about the financial crisis by knowledgeable and experienced people and we have a serious body of work detailing what took place over several years. We know what worked for approximately 50 years, from 1930s to the end of the 1970s, and we have seen what happened when regulation was suppressed and markets were let to correct themselves. The whole idea that markets are self correcting is a false choice. Regulation is most certainly needed and indeed necessary for the safe and orderly movement of markets. Those that claim this is not the case are dead wrong. All we have to do is look where we have been and where we are now.

But, it is the indifference that strikes the fatal blow to better markets and more transparent accountability. In simple English, not enough people give a damn. To be more fair, I could say that not enough people understand what is taking place in an industry that is much more complicated than buying a car. If I had a formula for a drug to stop cancer in its tracks, I could print it out and others could test it to see if it works. If my drug manipulated certain proteins so that no blood would supply a tumor with nourishment, and I listed every type of cancerous tumor it would work on, the formula could be tested and verified. But, finance, investment securities and their regulation is not so clearly observed or tested. And, as a result, the amount of disinformation in the banking and securities markets is abundant.

As I have written many times before, economics is easy, politics is hard. People that have a stake to protect what they have will not go quietly or without a fight. There is a lot of money being poured into Washington, D.C. and the politicians know they need that money to win re-election. Simple survival rules the day. Let us hope that the survival of the overwhelming majority of the people will rule the day.

Stay tuned.

Monday, April 26, 2010

Rules & Common Sense Must Prevail

Almost from the beginning of MONEYTHOUGHTS, I have written about the role that the credit rating agencies played in the financial crisis. I have taken the reader, step by step, through the process. But, I am not a PhD. in economics nor am I a professional writer or journalist with a column in a newspaper or magazine. Today, one of my brothers, I have two, sent me an email with a link to Paul Krugman's article about financial regulation and the credit rating agencies and the lack of needed reform to prevent the conflicts of interest that the credit rating agencies have with the investment bankers that underwrite the mortgage-backed bonds. So, because a person with a Nobel Prize in Economics and a teaching position at Princeton University is more creditable (I wish I could have thought of another word) than me, I will give you all an opportunity to read what he has to say about this subject - the credit rating agencies and financial regulation. So, below please find the link to Paul Krugman's article.

Those that know and understand how a bundle of mortgages becomes a mortgage-backed bond and then sold to pension funds and other institutional clients around the world, also know that without a change in the way the system works as far as the credit rating agencies and the investment bankers are concerned, that we are indeed heading back down that same road that brought us to the point of the bond market meltdown in 2007-08. Getting the politicians in Washington, D.C. to understand this is a whole different kettle of fish. Lobbyists do not get those big bucks for sitting on their hands. They work hard to tell their side of the story. The only problem is their story brought this country to the point of a financial crisis that the Federal Government needed to rescue. If you do not want the Federal Government coming to the rescue, rules and common sense must prevail.

Stay tuned.

Sunday, April 25, 2010

Sunday Morning & The Bengal's Draft

If you are a Cincinnati Bengal fan, I think you have to be pleased with the Bengal's draft class of 2010. If half of these guys work out and contribute, I think they will have done well. My son and I agree that you can't have too many good defensive players. In a 16 game season, where any number of defensive players can get hurt, real depth on defense can only be a plus. Giving the offense the ball on a short field, over a 16 game schedule, can add up to points. Points and great defense equals wins, and wins give the Bengals another shot at the playoffs. A healthy and off-field trouble free football team should be able to return to the playoffs with the talent the Bengals have put together. Good luck to the organization - players and coaches!

Let me say that I am not a talent scout for the NFL, but over the years, I have watched my share of college and NFL football. My comments are now directed at those that think Tim Tebow will be a bust in the NFL. I would not bet on it. I have watched this young man and I have listened to and read a few articles about him, and while I do not subscribe to many of his off-field beliefs, I nevertheless, recognize that this is a great football talent. Desire and motivation are, in my opinion, not given enough credit for the success of players in the NFL. We have seen great raw talent wasted because of off-field behavior or a lack of a strong work ethic. I think Tebow will do well in the NFL. I am not prepared to predict a Hall of Fame career, but for all of those that talked about why they think he wouldn't make it, I think you all are dead wrong. I plan to follow this young man's career and I wish him the very best. Left handers have to stick together.

Stay tuned.

Saturday, April 24, 2010

Saturday Is For Art

The painting is almost completed. I need to finish it. The title: Mother & Child: Level Playing Field Out The Window, Chicago Edition. acrylic on MDO plywood.

Have a safe weekend.

Stay tuned.

Friday, April 23, 2010

And Now The Rest Of The Story

It now appears that the investigation into the bond market meltdown and the financial crisis that followed has finally reached down to what I will call, "the cellular level". Namely, the credit rating agencies that slapped their Triple-A ratings on all those mortgage-backed bonds are now going under the microscope. Documents have been subpoenaed from Moody's and soon the whole story will unfold.

As I have written many times, this is not rocket science or brain surgery to understand how the credit rating agencies were the conduit through which the mortgage bubble was inflated.

Many years ago, when I was a bond trader/municipal bond portfolio manager with a trust department in Cincinnati, and even before that, when I was a municipal bond salesman, I had come to know the credit rating agencies and their weakness to political pressure. In the early 1970s, the City of New York had their general obligation (GO) municipal bonds downgraded by Moody's on one day, and on the very next day, their single A rating was restored. You see, a trust department could hold onto a Baa credit if it was already in the portfolio, but they could not buy a new issue of City of New York GOs with the lower credit rating.

Later Michael Milken, after studying credit ratings and the small number that actually went into default, created a junk bond market also known as high yield corporate bonds. Bonds that had been downgraded were referred to as "fallen angels", but Milken took it one step further by bringing lower rated bonds(below investment grade) to market as new issues. This period was followed by the creation of structured finance and collateralized mortgage obligations (CMOs).

But, during all of this, the credit rating placed on a new issue remained a very important factor in any bond portfolio manager's decision to purchase a new issue that had no track record. This is where the Triple-A credit rating came in. The underwriter of a new issue of mortgage-backed bonds with a Triple-A bond rating could then offer this attractive yield bond in a climate of low interest rates. Pension funds and every other institutional investment portfolio that had to invest a portion of their assets in fixed income securities was looking for higher yields and thus a higher total rate of return for their clients. The mortgage-backed bond with its Triple-A credit rating and higher relative yield filled that need for portfolio managers to outperform their benchmark.

The only thing left to do to ensure that the flow of bond rating business continued to come in was that the Triple-A bond rating had to be given to all the new issues brought to the credit rating agencies for their stamp of approval. The underwriters made it clear that if the Triple-A bond rating was not forth coming that other credit rating agencies would then get the business. The credit rating agencies were publicly traded corporation with boards of directors and CEOs needed to show growth in earnings. The growth in the bond rating business was coming from the CMO business, and thus the earning per share (EPS) of these corporations grew. It should not be too hard to trace the growth in EPS to the explosion of the CMO market.

The fraud that the investigation will uncover will be the conspiracy to mint mortgage-backed bonds that did not qualify for the Triple-A rating, but were given the Triple-A rating regardless of the fact and numbers that they simple did not qualify for the highest rating given by the credit rating agencies. Once the new issue is placed by the underwriters of the mortgage-backed bonds, the underwriters have nothing to do with the issue of bonds. What happens now rests on the heads of those bond portfolio managers that bought those new issues. When the credit rating agencies downgraded the mortgage-backed bonds as a result of the mounting mortgage defaults, the ratings were lowered. When the ratings were lowered, the trading desks stopped bidding on these bonds. When the bond traders stop bidding on bonds, you have a bond market meltdown. End of story.

Stay tuned.

Thursday, April 22, 2010

Medical Payments = Chickens: A Bird Brain Idea?

This morning is going to be a short post because I am helping my good friend Stert with my pick up truck.

Yesterday I saw on the TV news a piece about a woman in Nevada running for the U.S. Senate that suggested that medical payment could be made with chickens like in years past. My mind started to work with this idea and I started wondering how many chickens would it take to pay for a hip replacement, a knee replacement, or, possibly a whole chicken farm for open heart surgery? Then because I was once a portfolio manager a long time ago, and sometimes my mind makes crazy detours, I had an idea. I decided to share my idea with a group of guys I have coffee with on some Sunday mornings. So, I sent them an email. Below is that email.

I would like to know if there is any interest out there to start a chicken farm for the purpose of paying medical bills? A woman running for the U.S. Senate from Nevada has indicated that doctors may be taking chickens in payment for medical services now as in years past. I was thinking that there just might be an arbitrage if we act quickly before chickens go up in price. After our chickens appreciate in value, we could reverse the arbitrage and go back into cash. Naturally, there is risk in any arbitrage, so, worst case scenario is we are left eating a lot of chickens. Anyone interested in pursuing this bird brain idea, please get in touch.

Stay tuned.

Wednesday, April 21, 2010

Wall Street: A Standard of Conduct?

Perhaps we will have new financial regulation. Perhaps the weight of public opinion is being felt by the Republicans in the Senate. My Republican Senator from Ohio, George Voinovich, who will retire soon, should jump at the opportunity to do something meaningful before he steps down from his career of public service. He was the Governor of Ohio when I arrived in Columbus, Ohio in July, 1996 to begin my tenure at the Ohio Bureau of Workers' Compensation. He was the man-in-charge of Ohio when the OBWC funded some 86 investment managers in 1997-98 that included the politically well connected coin dealer Tom Noe. Unfortunately for all, the Coin Funds that were funded during the Voinovich and Taft administrations should never have been funded in the first place. But, here again we see that raising money for political campaigns can lead to rewarding those that raise the money with opportunities to destroy the trust people have in their government. While the remaining 85 investment managers behaved in a responsible manner, it took only one bad apple to spoil the opportunity for so many.

The idea that Wall Street can run without the necessary regulations, or the Securities & Exchange Commission (SEC) can operate with no teeth and luke warm enforcement, is pure crap. That's right. I said pure crap, and I mean it too. Even with a new set of regulations to govern the way business is done on Wall Street, the idea that the markets will regulate themselves is also pure crap. The idea that certain people are clients of Wall Street is also pure crap. When things get tough and survival becomes upper most in the minds of those that run the biggest banks, there are only marks at the table. Everyone is a mark because everyone is looking out for his own survival. As I have written many times, economics is easy, politics is hard, and enforcing a standard of conduct may be the hardest thing to do, but that is no reason why we should not attempt to do so.

Stay tuned.

Tuesday, April 20, 2010

The Only Mark For Me Today Will Be My Ball On The Green

This morning I am going to play golf with a good friend, and for a few minutes I will get away from the world of money, banking and the political-economy. But, before I do, I want to tell a story that for some of you might enlighten as to the kind of world Wall Street and big time investing is.

A few years back, when I was still working for the State of Ohio, we had one of our many investment meetings with fund managers presenting us with ideas for the State Insurance Fund to invest. This particular day we were meeting with one of our many private equity managers that we had invested in a couple of their funds. Today, they were pitching an energy fund that we should have invested in as I had suggested to no avail. The meeting opened with the usual small talk, pleasantries and introduction of the new man at the table from the private equity fund. He had been formerly with Goldman and proceeded to tell us all this piece of advise he had learned at his father's knee. "Son, he began, "when you sit down to play cards, you look around the table and see if you can spot the mark. If you can't spot the mark, then you are the mark, and you better get up from that table because you are going to lose your money." And, with that introduction, the meeting began.

Well, that little piece of philosophy runs Wall Street. No one is a client, and everyone is a mark. So, just as when you sit down at a table to play cards, no one is a client, so too, when you take on the responsibility of being an investor, you are looked at as a mark. Forget that at your own peril.

Stay tuned.

Monday, April 19, 2010

Volcanic Ash-Onomics

Today, I am not going to write about Goldman Sachs or the alleged fraud that the S.E.C. says occurred. There are plenty of articles now being written about this. Over a year ago, I wrote about the conflicts of interest in the investment banking business. Now that the S.E.C. is being run by someone other than Christopher Cox, perhaps we all will learn more about the games that went on behind the scenes. As I have said many times, you do not have to be an Einstein to understand this stuff. While you may not be able to follow the arithmetic of bonds and their pricing, the fact that the credit rating agencies were paid a fee to give credit ratings to structured debt financings, and that these credit ratings were shopped by the underwriters of the collateralized mortgage obligations (CMOs), requires little or no math knowledge. If the investigators have a big enough budget to pursue a complete investigation of the activities that took place and lead to the bond market meltdown and the financial crisis that followed, everyone will know just how the fraud was put together and who got stuck and why with worthless bonds. But, today I want to talk about another topic - the volcanic ash from Iceland.

As a result of the volcanic ash from the volcanic eruption in Iceland, just about all air travel has been grounded because of the danger to jets flying through the hot volcanic ash that is being blown across Europe. As a result, some nations are sending their naval ships to bring their citizens back home. Fortunately, for those on the continent of Europe, train travel is still a very much used form of transportation. At least Europe has the good sense to keep her trains for moving people as well as cargo.

Now come back with me the United States. We have limited train consumption by passengers as we depend on car and air travel for moving most of the population around. What would happen if we had a volcanic eruption in United States and we had to ground nearly all air travel? Certainly, one can argue that a more balanced platform to move people around the country can be made. And, if a more balanced platform to move people could be made, could an argument be made that a balance of our industrial base should be maintained too? What would happen if because of weather related events we saw our domestic economy grind to a halt because we were solely dependent upon imported resources? I think that is something our Federal Government should be thinking about before we export all of our manufacturing abroad.

Stay tuned.

Sunday, April 18, 2010

The Happy Guppy (Restaurant)

The other night I was thinking about my grandson, and the fact that in the near future, he will be eating in restaurants with his parents much the same way as my wife and I took our children to various restaurants as they were growing up. Back in the 1970s and 1980s, fast food restaurants like McDonald's and their Happy Meals were very popular. But, do I want my grandson eating all those fried foods? I don't think so, so here is an idea.

What about a sushi restaurant for little kids? That is where the name Happy Guppy comes in. The menu would have no fried foods, no soft drinks and no meat products like beef, pork, lamb or fowl. The menu would consist of several types of raw fish, rice and seaweed and fruit wraps for dessert. Drinks would include juices and soy milk for those children allergic to cow's milk. Portions would vary to the size and age of the child, but parents could eat sushi with the kids too. Guppy meals will come with toys too, but these toys will center around the sea and all the good things that come from the sea.

The restaurant's tables would look like sand dollars and the seats would resemble clam shells. The atmosphere of the place would be clean and bright and the decor would be influenced by life from the sea. Now some people will think that I have lost my mind or that I am crazy to even suggest such an idea, but I think it is time that we realize that we have a health crisis in the United States that is of our own making. I think it is time for little children to have a choice between a Happy Meal and a healthy body. What do you think?

Stay tuned.

Saturday, April 17, 2010

Saturday Is For Art & Three Old Sketches

The weekend is finally here, and it is time to put away all those other things and think about art. During the week, I wrote my blog, read other blogs, read the book I am reading, cut grass, planted sunflowers seeds, watched too much TV and rode my bike in Spring Grove Cemetery. These three pieces that I have posted were done around nine years ago when i went to a sketch group at the Cincinnati Art Club. The bottom piece is a collage of sketches that I put together for the club's annual sketch group show in 1996. The fact that I cut up several sketches and assembled them in an old window frame did not go over very well with the more conservative members of the club, and they let me know what they thought of my collage. Oh well, even in art, I don't seem to be able to please everyone. So, if you want to see the collage in more detail, click on the image and it will be enlarged. Then, you can either agree with those that didn't like my collage, or, you can enjoy the humor of the piece. (The sketches are all of women and the postage stamps, also in black and white, are all men, and postage stamps help to hold the sketched pieces in place.)

Have a safe and wonderful weekend.

Stay tuned.

Friday, April 16, 2010

For The Good Of All The American People

When you find someone that says it better than you can say it, I think it is appropriate to pass their words along. Here is an editorial that appeared in the Lexington (Kentucky) Hearld-Leader about Senator Mitch McConnell (R-KY) and the financial reform legislation. I hope a few million people would take the time to read it. I think it sums up what I would have liked to have said, only better, so here it is.

McConnell to big bank's rescue (editorial)

FOXBusiness reported on Monday that Senate Republican leader Mitch McConnell recently called on about 25 Wall Street executives, many of them hedge fund managers, to hear their complaints about proposals for regulating the financial industry.
With him was Sen. John Cornyn of Texas, chairman of the National Republican Senatorial Committee, which raises campaign money for Republican candidates for Senate.
"The undercurrent of the gathering," FOX reports, "was undeniably political. ... McConnell and Cornyn made it clear they need Wall Street's help" to defeat the reforms by electing more Republicans in November.
On Tuesday and again Wednesday, McConnell took to the Senate floor to denounce a bill sponsored by Democratic Sen. Christopher Dodd, chairman of the Senate banking committee.
Interestingly, McConnell is disparaging the proposed reforms in words recommended by a pollster.
"If the outline of his speech sounds familiar," wrote Adam Sorensen on Time's political blog, "it's because it is the exact argument pollster Frank Luntz urged Republicans to make earlier this year in a widely publicized memo."
(Comparisons of McConnell's statements and the Luntz memo can be found at
McConnell's statements are perfectly calibrated to inflame the public. He insists the bill would "allow endless taxpayer-funded bailouts for big Wall Street banks."
Their resemblance to the truth is another matter.
The provision that McConnell claims would allow endless bailouts emerged from a bipartisan collaboration by Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn.
Warner, who learned a thing or two about capitalism as a successful entrepreneur before becoming Virginia's governor, told The Washington Post: "It appears that the Republican leader either doesn't understand or chooses not to understand the basic underlying premise of what this bill puts in place."
The provision to which McConnell particularly objects creates an orderly process for letting "too big to fail" banks fail, at the industry's expense, without taking down the entire economy.
The losers would be the management and shareholders, not the taxpayers. So onerous would this process be for failing financial institutions, says Warner, that it would serve as a deterrent to reckless decision-making.
McConnell, it should be remembered, voted for the bailout of the big investment banks in the fall of 2008, when it was the only alternative to global economic meltdown.
We have read that the Republicans have a plan for financial reform, but McConnell isn't talking up any solutions, just trashing the other side's ideas with no respect for the truth.
While the intricacies of financial regulation are complicated, McConnell's calculus is pretty obvious.
The high-stakes gamblers on Wall Street, luxuriating again in big bonuses, don't want any new oversight or regulation. Why would they, knowing that the government would have to bail them out again if their trading of worthless financial instruments goes bust and threatens to bring on the next Great Depression?
McConnell, unabashedly courting Wall Street bankers for political money, is happy to scratch their backs if they'll scratch his.

Read more:

I think, whether you are a Republican or a Democrat, you should try and understand the deceit that is taking place and who has who's back, and who is looking out for the majority of the American people. You do not have to be all that knowledgeable about the banking and investment industry to be able to tell who is protecting a stream of campaign contributors and who is looking out for the good of all the American people.

Stay tuned.

Thursday, April 15, 2010

Bond Credit Ratings Have To Hold Water

It is simply amazing how bad so many people are being fooled and taken in by what the Republicans in Congress are saying about financial reform. I think, if it was almost anything but financial regulation that we are talking about, that the deceit could not be pulled off with such ease. Making a calculated bet that even with TV news and cable news programs lighting up the screen with a rebuttal to the Republican's outlandish assertions about the financial reform legislation, that because so many people do not understand what is taking place that they can get away with saying, "up is down", "black is white", and needed regulation that would help prevent "too big to fail" would do just the opposite.

If the Republicans in Congress can pull this off (their opposition to financial reform legislation), they should be given an Oscar, an Emmy, and a Nobel Prize for Bullshit. They are the masters of deceit!

The economy is showing signs of coming back. However, the housing problems that were, in my opinion, at the center of the financial crisis have not been settled. Give me one week, and the power to clean up the credit rating fiasco that masquerades as our credit rating system, and I will have the housing market moving in the right direction again. The creation of mortgage-backed bonds is a legitimate way to finance our housing needs, but the credit ratings that are placed on these bonds must mean something. When they mean nothing, they undermine the whole system of financing housing. Toxic assets are mortgage-backed bonds that are not worth the paper they are printed on. (I know, they are not printed on paper anymore, that they are in book entry form, so give me some literary license.)

Bottom line, fix the credit rating agencies and the flow of credit can once more begin. However, the Triple-A rating must mean something this time around. That is why the Federal Reserve Bank should pass on the validity of all Triple-A ratings before they are brought to market by the underwriters. The use of mortgage-backed bonds can work to bring back the housing market, but this time the bond credit ratings have to hold water.

Stay tuned.

Wednesday, April 14, 2010

Where Will That Get Them This Fall?

I have written about the genius of the Republican party in the past. They, members of Congress that are Republicans, like Mitch McConnell, are so very clever. They understand the level of knowledge of their constituents, and they take full advantage of that ignorance to keep their people in the dark with a barrage of disinformation and lies. Listen or read Senator McConnell's comments about the new financial regulations that is making its way through Congress. Even Elizabeth Warren said his interpretation of the legislation with regards to the bailouts is "nuts." But, just how many Republicans are going to examine the stupidity of what Senator McConnell said? How many people in Kentucky will examine the validity of his criticism of the legislation with regards to too big to fail?

My hope is that there are a few Republicans in the Senate that will realize that the new financial regulatory legislation is necessary to protect us from another "too big to fail" bailout, not guarantee that a bailout will be forth coming from the Federal Government! This is a complete misread of the legislation. But Senator McConnell knows that, as he is no dummy. But, the Republican Party can not let this black President continue to repair and fix damage after damage what his Republican predecessor left for him in the Oval Office. The Republican Party is at the end of its rope, especially in the South and Southwest. With nothing more than fear to pedal, where do they go after President Obama fixes their mistakes? So, in their desperation they move further to the right and into the hands of the tea party. Let's see where that gets them this fall.

Stay tuned.

Tuesday, April 13, 2010

Back Down The Same Road We Go

What caused the financial crisis that lead to the economic recession? The Congress held hearings last week and the people involved went before the Congressional Commission and lied through their teeth. It is never called lying, but rather the term CYA, known as "cover your ass", is perhaps a better description of what these people were doing.

To believe that no one realized what was happening is pure crap and we all know this. You don't have to be an Einstein to figure out what created the trillions of dollars of toxic assets. I have written over the last two plus years about the mortgage-backed bond market meltdown and how the credit rating agencies played a key role in inflating the housing bubble. The people at the top, such as the Chairman of the Federal Reserve Bank, the President of the New York Fed, the Secretary of the Treasury and a host of advisers, all played a part in the disaster known as the financial crisis of 2008.

I refer to our economy as the political-economy for a reason. No country's economy runs without some influence from the political powers regardless of the kind of government. Lobbyists cleared the way for this financial disaster to occur, and yet despite the severity of the recent economic disaster, these same lobbyists are once again pressuring Congress not to put in place safeguards, regulations, transparency and accountability for the future.

And, you know what? The lobbyists will succeed. Why? Because financial regulation is boring and the vast majority of the people don't know anything about this industry and don't care. Well, you get what you pay for, and in the case of the banking and investment industries, the people that are doing all the paying are going to get their way. And, back down the same road we go.

Stay tuned.

Monday, April 12, 2010

Even A Small Fire Can Destroy The World

"Art is a lie that makes us realize truth" was reportedly said by Pablo Picasso. But, what about lies that are repeated and repeated so that people may be deceived into believing they are the truth?

It has been said that politics is a rough and tumble sport and not for everyone. Yes, I agree, politics is not for everyone and not everyone is so inclined to ferret out the truth. Years ago, in a darker time, there was the BIG LIE. A known falsehood told over and over again so that people would come to accept it as truth.

What I see today from the political right and the Republican Party, their politicians and those that purportedly speak for their ideology both on radio and TV, is a barrage of lies. Lies repeated over and over in the hope that people who do not want to take the time to ferret out the truth, will accept these lies.

It is far easier to vilify someone than to challenge their ideas. Even the great Albert Einstein was vilified by the Nazis. His work was referred to by Nazis as "Jew Science".

Lies must be addressed. They can not be ignored. Nor can we pretend that if enough time passes, they will go away. Lies must be challenged head on. They must be taken seriously and they must be answered seriously.

Even a small fire, left to burn unattended, can destroy the world.

Stay tuned.

Saturday, April 10, 2010

Saturday Is For Art & The DIA

I am back home from my trip to Detroit and my visit to the Detroit Institute of Arts (DIA). What a fabulous art museum! I could not see everything in one visit, so, I know I need to return and start on the third floor. The Detroit Industry Murals by Diego Rivera were simply stunning and beautiful. And, while the museum and all I could see were so well displayed and presented, this room that is home to the 27 panels that make up Diego's mural was something special to see. Anyone that loves to see great art, and finds themselves in Detroit with the time to explore, could not find a more rewarding place than the DIA.

Stay tuned.

Wednesday, April 7, 2010

People Can Disagree Without Being Disagreeable

Today, I am off to do more economic research, so, I might be absent for a few days. My plans are to visit a "new" art museum too. New for me as I have not been to this one and it is one I have wanted to visit for some time.

In the news recently was Senator Tom Coburn's comments about the Speaker of the House, Nancy Pelosi. He said something that needed to be said, that we can disagree with someone, and yet, that person can be a good person. I applaud Senator Coburn for having the wisdom to come out and say that. It is something that needs to be said in light of the behavior of some people towards members of Congress. We can disagree with each other without being disagreeable.

Stay tuned.

Tuesday, April 6, 2010

Butler University: The Real Winners In My Book

Did you watch the basketball game last night? Duke won on the scoreboard 61-59, but the kids from Butler University were the real winners. Some might say I am exhibiting poor sportsmanship to complain about the three men that called the game on the floor - the officials. But, I have watched my share of college hoops this past season on my HDTV, and I know when a game is being called correctly and when there is, for lack of a better word, a political agenda in the air. A few missed calls can be expected in the course of any basketball game even with three experienced officials calling the game. But, the last two games of the Final Four were different. Duke, in not just my opinion, but that of a former pro and college basketball player and announcer, committed a number of contact fouls last night that simply were not called. As Bob Huggins said Saturday night to one of his players, "they don't foul." We would have to be naive to believe that CBS and the NCAA would have not preferred to have had another big name college basketball program in the finals against Duke. In my opinion, the lack of calls against Duke for contact only substantiates my claim that the game was not on the up and up. The kids from Butler can be very proud of their team. In my book, those kids, the players and the rest of the student body are all winners. They also learned that they can play with the best, but they also learned another valuable lesson, you can't beat the officials.

Stay tuned.

Monday, April 5, 2010

Opening Day In Cincinnati 2010: Go Reds!

Today is Opening Day in my hometown. The oldest professional baseball team, the Cincinnati Reds, takes the field today after the Findlay Market Parade moves to the center of town, Fountain Square. But Major League Baseball (MLB) no longer gives the Reds the honor of opening the new season as MLB had done for so many years. Sunday night opened this 2010 season in Boston with the Red Sox taking on the World Champion New York Yankees in prime time TV. You see, MLB is all about the money these days, tradition be damned if a few owners can make more big bucks. But, that is the message in so much we see in our society today.

Banking is big bucks too, and politicians in Washington will do almost anything to keep the bankers, who fund their campaigns, happy and making the big bucks.

Play Ball! calls the umpire, and the politicians run out onto the field and grab the money.

Stay tuned.

Level Playing Field Out The Window, acrylic on paper envelope by F.D. Zigler.

Saturday, April 3, 2010

Shalom Means Peace

Enjoy the weekend. Come Monday, the political-economy returns.

Stay tuned.

Friday, April 2, 2010

Good Friday 2010

Today is Good Friday, April 2, 2010, and as such I will take a break from writing about the political-economy, and wish everyone that celebrates Easter this Sunday a safe and Happy Easter.

While I am not a Christian, I do believe in the historical Jesus. One does not have to accept Jesus as the messiah to recognize that he was a man who spoke up and against the status quo. He and others that followed him have challenged conventional wisdom over the last 2,000 years. Baruch Spinoza challenged the thinking of his day and was excommunicated by the Dutch Jews of his day. Men like Karl Marx, Sigmund Freud and Albert Einstein also wrote and gave voice to ideas that were new and different. Pushing back against the darkness, the fear, the ignorance and the status quo is never an easy proposition, and yet, this is what some people do. Because there are new people with new ideas that come forward to challenge the status quo that we have the opportunities to make this a better world.

Stay tuned.

Thursday, April 1, 2010

A Plan For Success? The Case for Better Regulation

How much regulation is too much regulation? And, can regulation hurt American bank holding companies' ability to compete with other banks from around the world? Both of these questions are important questions and deserve an answer. But, I doubt if I can answer these two questions in less than a book, but here is winging it.

The Glass-Steagall Act of the 1930s was a simple, yet smart piece of legislation. Basically, the Act provided that commercial banks and investment banks not be combined under the same roof. The running of a commercial bank has its own unique problems. Every time a Commercial bank makes a loan or enters into a syndicate to make a large commercial loan with other banks, it is placing its deposits at risk. Deposits come in in the form of checking and savings accounts and CDs. Money goes out in loans to individuals and businesses. In the old days, banks borrowed short term money and turned around and loaned it out for longer terms. Now banks take the extra precaution to try and match assets with liabilities under a risk management department. Banks are also more concerned with fee business as this helps the overall earnings per share. Trust departments and the fees they earn contribute to the bank holding company's earnings too.

Investment banks underwrite bonds and equities and put the firm's capital at risk much the same way a bank puts its deposits at risk. The big difference is that investment banks make a market in bonds and equities and carry an inventory that fluctuates in value as the prices for these securities go up and down in the market. At one time, investment banks were not publicly traded corporations and their gains and losses were divided among the principal partners. Today, with these corporations being publicly traded, investors in these investment banks know that they are placing their money at risk. Unfortunately, in the Lehman case, assets were misrepresented in value or even removed (hidden) from the balance sheet altogether.

Trying to regulate a corporation engaged in commercial banking, investment banking and insurance (credit default swaps) is in my opinion nearly impossible to do. For the simple reason that near worthless assets can be bounced around from one location to another and a deception can go on until the house of cards falls under its own weight. Regulating each entity so that there is transparency, accountability and enforcement is a huge responsibility in today's world of financial products.

A financial system that places the whole economy at risk is, in my opinion, bad public policy. The situation, in the future, that we should be trying to protect against, is one where risk takers are not encouraged to place their corporations at great risk thinking that the government can not afford to let them go under, for the simple reason that their financial operations extend into almost every other financial operation in this country and quite possibly around the world. To go with such a system, puts us right back in the position of too big to fail. No one in their right mind wants the Federal Government to be using tax payers' dollars, as well as weakening the value of our currency by inflating our US dollar, by the continual process of bailing out mismanaged financial holding companies. This is not a plan for success.

Stay tuned.