Saturday Is For Art

What a historic week. A new president elect and a new administration will be going to Washington. Big problems remain to be solved; however, a new spirit of hope and change is in the air. There is much work to be done to repair many segments of our country, our government, our economy and our relations with the rest of the world. Enjoy the weekend.

The above painting is from The Envelope Collection. Painted on a 12"x9" envelope in acrylic. signed prints on 19"x13" paper are available for $100.

OK, Back To Bond Business

The idea that bond ratings are like weights and measures in commerce is a bit too simple because unlike weights and measures that remain constant, or at least on planet earth they remain constant, bond ratings can and should change as their coverage changes.

Let me explain. Bond ratings are more than mere opinions as the heads of the three large rating agencies, spell that companies, gave testimony before a House committee just a few weeks ago. To claim that the AAA rated bond rating is a mere opinion is plain bullshit. Bond ratings are a significant piece of information that goes into a buyer’s decision to purchase a new bond issue whether it be a mortgage-backed bond or the municipal bond of a local school district. Ratings are suppose to mean something. What do ratings mean?

Well, now we are getting to the heart of the matter, “what do bond ratings mean?” Simple put, a bond rating reflects an issuer’s ability and willingness to pay principal and interest in a timely manner. Most bonds, when I was in the bond business, were set up to pay interest twice a year. So, if a $1,000.00 bond had a 6% coupon rate (also known as the interest rate), the bond would pay the bond holder $30.00 twice a year. If for example the bond had a maturity date of June 1st, interest would be paid to the bondholder on June 1st and six months later on December 1st. This process would continue until that bond matured and then a final interest payment along with the principal amount of the bond would be returned to the investor.

In the real world, conditions change as we can see from recent economic events. Bond ratings reflect the ability of the bond issuer to make the semiannual interest payments. The issuer's size and outstanding debt and previous debt obligations are included in the process of determining the quality of the bond rating given to any new debt issued by the bond issuer. Coverage of the interest expense is part of the formula that rating agencies use to determine the proper bond rating. But, coverage, a ratio, like two times or 2.5 times can change with economic conditions. In the case of the asset-backed bond, such as a mortgage bond, the value of the asset behind the debt can change. If the value of the properties that are behind the mortgage bond go down in value, the value of the mortgage bond, even if interest rates do not change, will most likely decline. Now if the mortgage is a fraud from the get go, we have a problem. In fact, if this is a pattern of behavior, we have a big problem.

There was a huge appetite for asset-backed bonds among the institutional investors in the United States and around the world. This appetite for asset-backed bonds, in my opinion, lead to the meltdown. Let me explain. With billions of dollars to be invested, and interest rates staying relatively low, institutional money managers are under pressure to out perform other money managers or lose their accounts. The money managing a few hundred million or a few billion dollars at the institutional level is big business. Portfolio managers will “reach” for yield in order to raise the total return performance of their portfolio. Asset-backed bonds gave portfolio managers that extra yield that they needed if they hoped to out perform their competition. This was the sucking sound that pulled more and more mortgage-backed bonds into the market. With demand for mortgage and other asset-backed bonds so great, the large investment banking firms that did the underwriting of these issues put pressure on the ratings agencies to come through with favorable bond ratings regardless of the fact that many of these new bond issues should have never received a rating in the first place.

Now, perhaps you can understand why I am calling on the Congress to take away the responsibility of bond ratings from the private for profit companies that have been doing this job for too many years and place it within the Federal government. It may not be a total answer, but in my opinion, the profit motive in bond ratings must be removed if we are to rebuild confidence in the markets in a timely fashion.

Stay tuned.

I Painted: The Economy Can Wait

I started another painting yesterday. Another two foot by two foot 3/4 inch plywood piece. Since I really felt like getting this painting under way today, I did not write my usual Moneythoughts blog. From the names I have seen thrown around on MSNBC for positions in the Obama administration, I think Obama gets it. The guys Obama is likely to go with are all pros and have first-class minds and experience. The one name I have not heard mentioned yet, that I would like Obama's staff to get around to, is Arthur Levitt. Arthur Levitt is a former head of the SEC (Securities & Exchange Commision). Whether he would take on that position again, I do not know, but it would not hurt to ask him. He is a first-class human being and, I think, Obama's people need to give him a call. I am back to painting tomorrow, I like this piece and want to flesh it out.

Stay tuned.

Let The Work Begin

Now, let’s get to work.

Banking has a purpose. Finance has a purpose. Investment securities have a purpose. The underwriting of investment securities has a purpose. The purpose of all of the above is to facilitate the movement of capital to businesses that will build companies to provide a product, a service or both.

Incidental to all this, is the money that is made and lost in the pursuit of financing business enterprises. While there may always be “card sharks” in the securities business and “marks” to be taken advantage of, the purpose of finance is to arrange the flow of capital to business for the purpose of building products and services and in turn creating new jobs. As a result of all this, wealth is created.

Without regulation, oversight and transparency in the securities markets, we will witness again the destruction of wealth as we have seen over the last year.

With the new Obama-Biden administration, I hope their advisers will bring to their attention the importance that finance plays in rebuilding our domestic economy. Therefore, the need for adequate regulation, oversight and transparency is an essential ingredient to a stable economy. Naturally, one of the first things I think they should under take is the creation of a Federal responsibility for the rating of all fixed-income securities. Thus removing that responsibility from the private for profit companies that have failed the investment community and in turn the people of the United States. The time is now for a level playing field. The era of shopping a bond rating for an asset-backed bond should end now. While this recommendation may be only one small piece of the economic puzzle, it is, in my opinion, a very important one. Markets require a delicate balance, and confidence in the rating of debt securities will go a long way in rebuilding the confidence that was destroyed in the recent meltdown. The “weights and measures’ of the finance industry must be established if we are to repair our economy.

Stay tuned.

Election Day 2008

It appears that this presidential election is going to be a big voter turn-out. That's good. I hope a vast majority votes for the men I support, OBAMA-BIDEN. Our economy has a long way to go to being brought back on track. Everyone knows the crisis in the financial markets and with the banks has shaken the people's confidence with our economy and has caused many many people to tighten their purse strings. Hopefully, a new presidential administration, with a respect for the balance of markets will lead us out of our present condition. The president and his administration's enforcement of the laws does make a difference for our economy. The philosophy of deregulation is bankrupt. The emperor is wearing no clothes, there is no magic suit of clothes. Naked greed drapes Wall Street. The time for change is now. It is time for a level playing field. The investor should not be allowed to be a mark for Wall Street's greed whether they be big institutions or a single individual. The recovery will take time, but today is our first step in a new direction.

Stay tuned.

The Predator State: Shady Operators & Card Sharks

One of the many nuggets I enjoy reading in The New York Times on Sunday are the interviews by Deborah Solomon in The New York Times Magazine. Yesterday, November 2, 2008, Deborah interviewed the economist James K. Galbraith. John Kenneth Galbraith, his father, was a well known economist who advised several presidents and wrote a number of books on economics. I even bought and read one of his books years ago when I was trying to get my arms around the fields of economics, finance and investment securities. I liked John Kenneth Galbraith’s style and the way he viewed economics. Let me just say John Kenneth Galbraith was vastly different from the likes of an Alan Greenspan.

James K. Gralbraith has written a new book titled “The Predator State”. In his interview, he has the following exchange.

Q. “You’re referring to the Washington-based conservative philosophy that rejects government regulation in favor of free-market worship?”

A. “Reagan’s economists worshipped the market, but Bush didn’t worship the market. Bush simply turned over regulatory authority to his friends. It enabled all the shady operators and card sharks in the system to come to dominate how we finance.

Shady operators? Card sharks? James K. Galbraith sounds like an old man in Cincinnati who has been writing about people being treated as “marks” by the securities market. I am happy to see someone has even gone to the trouble to write a book about the predatory state of our present politico-economic administration.

The problem now, much like sharks feeding in a frenzy, is that a lot of the sharks got eaten along with everyone else. When this happens in banking, who is left with any confidence that they are not going to be the next shark to be eaten? The $700 billion band-aid is now suppose to get everyone in the water to trust each other? Trust takes time to develop and can be destroyed in seconds. Secretary Paulson, if he has ever created anything with his hands, other than money, will find this out.

This is not a story of Republicans vs Democrats. This is a story about a level playing field for all players in the market. Those that can open their eyes and their mind and understand just what has happened to our economy will understand the need for regulation, oversight, transparency and direction from our leaders that enforcement be the order of the day. Such a small number of individuals have benefitted from the feeding frenzy and so many many have suffered from this lack of regulation and leadership.

Tomorrow the people have a choice. Do they want to continue down the road of an economic philosophy that takes care of a very narrow few, or do they want to elect a president and vice-president that will bring regulation, oversight and transparency to the financial markets. I think this country has seen enough suffering at the hands of the “shady operators and card sharks”.

I strongly recommend that if you feel you have seen enough of the philosophy of deregulation then you should vote for OBAMA-BIDEN.

Stay tuned.

Saturday Is For Art

This is my latest painting, "TIME FOR A LEVEL PLAYING FIELD". Painted in acrylic on 3/4 inch plywood, 24x24 inches, it brings together one of my icons I have used before, the baseball field, but without the flag, and a time piece to show the time is now.. Senator Obama has said "now is our time." Those of you who feel that the playing field has been tilted away from you and your family, now is the time for a level playing field. This Tuesday is Election Day in the United States. Each of us has the power of one vote, but together we can level the playing field for ourselves and our families. I voted for OBAMA-BIDEN, and I hope you will too.

Stay tuned.