Thursday, March 26, 2009

What AIG Wants . . .

As predicted in EBR months ago, the "G30" organization, which cooked up a plan to codify all the gambling tactics such as credit default swaps and collateralized debt obligations that have helped cause the unnecessary and sad turmoil of the past two years, is going to have the Obama administration support their plan to continue to allow "too big to fail financial firms" to exist, to allow these toxic derivatives to continue to exist, but to enlarge government which will allegedly "regulate" them better.

While Paul Volcker is associated with the G30, the real leader is Jacob Frenkel.  He is (was?) a senior executive at a large multinational financial firm that has recently been in the news because of certain bonuses.  Care to guess?  Obviously, AIG.  So a group led by an AIG exec, and is apparently sponsored by Riskmetrics, which wants to make more money by purporting to manage financial risk, is going to get its way.  Whatever AIG wants, AIG gets, apparently.  

It is easy to forget that S&L's were regulated and then collapsed, banks and financial companies are and have been regulated, etc.  Regulation of crooks does not work.  What did work was Glass-Steagall.  Bring it back.  And channel FDR, who repeatedly inveighed against letting banks ever get too large again.  He was right.  Ban over-large banks.  Ban credit default swaps.
Banking should be simple, safe, boring, etc. 

We need a re-examination of modern finance, not AIG's recommendation to regulate our industry so we can outfox our regulators again.  We also need to re-examine why there should be insurance for other than small depositors of banks.  Australia, which until the current crisis had no depositor insurance, has never had a bank failure.  The way it is now, it is easy for a couple to put a million dollars into the same bank with somewhat different account titling and have it all insured by the FDIC, even if the couple knows the bank is in financial trouble.  Any couple with a million dollars can afford to do a little homework and deposit that money with a financially strong bank and not have the system guarantee such a large amount of money.  If that couple wants absolute security, it can buy Treasuries directly. 

Financial bubbles are historically rare events, yet we have had the bursting of two of them this decade.  This can only be in relation to the corruption that I heard about personally near the end of the Clinton presidency from a very, very well-connected individual from a very, very well-connected family, which was that his family, which had been well-connected for generations, had never seen Washington so corrupt as then, in a bipartisan manner.  Bull markets can occur and go to excess, but it takes regulatory forbearance (or worse) to allow a bubble to be blown to the size that its crash is heard round the world.

This is why we have seen no Pecora Commission to investigate matters.  

People have begun to realize that Bernie Madoff was no isolated loon.  The American International Group, which in some sense has written the regulatory proposal that Tim Geithner is presenting today, outdid him.  And Madoff at least "paid" dividends.  AIG hardly even deigned to pay other than completely nominal dividends until the jig was nearly up, and then in a desperate attempt to keep investors on board, it began a program of dividend increases.

The stock market made its final bottom of the 2000-2003 bear market at about 7500 about six years ago.  That would roughly relate to 9000 Dow points in today's depreciated dollars.  So, in real dollars (the only kind that economists use), stocks are still well below the 2002-3 lows.  A form of futures in stock dividends forecasts an over 40% decline in dividends in the next two years. So on the most fundamental aspect of investing- income stream on the invested funds- stocks appear to face major headwinds, as well as having a weak chart pattern.

In contrast, stocks were fundamentally undervalued relative to Treasuries for a long period from the 1940s into the 1960s, when secure (in retrospect) and rising dividends, often in the 5-7% per year range, contrasted with 3% or lower Treasury rates.  This situation does not exist today, even without adjusting for the expected substantial dividend cuts.

What is the one financial asset that has continually trended upward ever since the Internet/stock bubble burst in 2000?

Gold.


Copyright (C) Long Lake LLC 2009



No comments:

Post a Comment