If you look at the headline on Bloomberg.com titled "Bernanke’s AIG Blast May Mean More Curbs on Risk, Concentration" and read the following intro, you may be fooled into thinking that things will really change to a smaller, stable financial system that works behind the scenes to support wealth creation without dominating the scene. The piece begins:
Federal Reserve Chairman Ben S. Bernanke's blast at American International Group Inc. in Senate testimony yesterday suggests regulators plan further curbs on risk and concentration in the financial-services industry.
Yes, Dr. Bernanke claimed to have been shocked and disappointed that AIG wrote the insurance contracts called credit default swaps without providing reserves. Of course, he knows but does not emphasize that Clinton's Treasury Department explicitly refused to regulate these same credit default swaps. What is the Bernanke solution? It is to adopt a version of the recommendations of the "Group of Thirty" (or, "G30"):
Paul Volcker, chairman of Obama’s economic advisory board and a former Fed chairman, has also advocated curtailing risk- taking by systemically vital institutions. In January, Volcker led a panel of former central bankers, finance ministers and academics known as the Group of Thirty in calling for capital limits on proprietary trading and a ban preventing large banks from running hedge funds.
The G30 purports to be an authoritative source that diagnoses and can treat our financial ills. Guess who is the Chairman and CEO of the G30? Jacob Frenkel. Who is Jacob Frenkel (emphasis added)?
"Jacob A. Frenkel
(Israel), Vice Chairman, American International Group; former Governor, Bank of Israel
Dr. Frenkel is vice chairman of American International Group, Inc. (AIG). He also serves as chairman and CEO of the Group of Thirty (G-30). Previously, he was chairman of Merrill Lynch International. Between 1991 and 2000 he served two terms as Governor of the Bank of Israel. From 1987 to 1991, he was economic counselor and director of research at the International Monetary Fund, and from 1973 to 1987 he was on the faculty of the University of Chicago where he served as the David Rockefeller Professor of International Economics. Dr. Frenkel is a laureate of the 2002 Israel Prize in economics and the recipient of honorary degrees and awards from various universities and governments."
-Source: Council for Foreign Relations
What has been going on the past year is that Louis the cop has been allowed to win at Rick's crap game. He puts on a show of reforming Rick's when the heat's on, so the music and gambling stop for a while.
The G30 piece from 2009, "Financial Reform: A Framework for Financial Stability", was created by a group heavily weighted to input from members who were simultaneously very senior executives at the same financial companies that are being bailed out right and left. The Project Director was Stephen Thieke, of RiskMetrics. RiskMetrics is a private company. Just guess how it makes its money? Selling "solutions" to manage risk, that's how.
The same crew that caused this mess cannot be the crew that truly reforms the system. They are fighting tooth and nail to retain and, if possible, extend the dominance of finance in the U.S. and global economy. The cost of the war in Iraq is nothing compared to the costs of the bail-outs these people have exacted and are prepared to exact upon us in support of this fight.
Rather than Ben Bernanke ruining the balance sheet of the Federal Reserve Bank and claiming to be shocked while speaking to lawmakers who sat idly by accepting campaign contributions from companies such as AIG and Merrill Lynch that have undoubtedly made Dr. Frenkel a very wealthy man, they should be investigating these corporations and their leaders. They should have been researching the applicable laws, beginning with Depression-era securities laws and ending with Sarbanes-Oxley, to see how many fraudulent financial statements and incorrect public statements have been made by corporate executives broke the law.
They should be investigating why the SEC arbitrarily put short-selling restrictions in re financial or quasi-financial stocks twice last year, and then lifted those restrictions. Who benefited from these actions other than insiders? Certainly it could not have possibly made any difference to the ultimate value of the stocks.
Vast amounts of money were taken by insiders in the financial industry to feather many individual nests over the past decade since Glass-Steagall was repealed. Cumulatively this totals in the hundreds of billions or trillions of dollars. Now that the inevitable down-cycle is occurring, it is clear that little of any of this money was really "earned". They took their (good) money out and left the junk in the companies. Why that junk should be any of the taxpayers' responsibility or should end up on the Fed's balance sheet has never been adequately explained. Private companies have private owners of their equity, and these companies have also borrowed money as corporations from lenders. If the companies are bankrupt, it has always been the case that the owners and creditors of those companies take the hit.
These companies and their friends in the Fed and Government keep claiming to be shocked, and they keep threatening that the whole "system" will collapse if the unstable financial house of which they were both the architect and builder is not "strengthened" by "reforms" they want to create. Is this change? Do you believe in it?
Capitalism really does work well, but only when failure really fails.
The people should be set free.
Let any bankrupt companies go.
Copyright (C) Long Lake LLC 2009
Showing posts with label Glass-Steagall. Show all posts
Showing posts with label Glass-Steagall. Show all posts
Wednesday, March 4, 2009
Saturday, January 10, 2009
Hex and the Citi
The "hex" is both Robert Rubin and Citigroup's importance to the markets and the economy.
Mr. Rubin is stepping away from his consultancy to Citi and will leave the board when his term expires. He is not stepping away from his 9-figure total compensation over the years. This despite the unrefuted reports that he was the person who pushed Citi to up its risk profile in mid-decade. Citi is a failed company primarily for two reasons: it never integrated its acquisitions, and it went wild on its risk profile. Everywhere Meredith Whitney, financial analyst extraordinare at Oppenheimer and Company, reviews riskiness of a financial company's strategy, loans, capital base, etc., Citi is there.
Mr. Rubin reportedly did a fine job as co-chief of Goldman Sachs. As Clinton's Treasury Secretary, he was, along with Greenspan, the face of the good times that enabled the stock-buying bubble in the late 1990's. However, the reason I knew to broadly get out of the stockmarket in 2000 is that it was reported that the 1990s economic expansion was the only one in U.S. history in which the financial strength of companies declined. Given how much equity was raised in IPOs, and how many deals were done for stock rather than debt, this (now old) news sounds surprising. Many want to think that financial irresponsibility began in the Bush years, but this is a seamless matter. Rubin and Greenspan: what a reassuring pair.
Very near the end of the Clinton Presidency, I had lunch with a man who was a third-generation Washington political insider. He said that he and his family had never seen Washington so "for sale" as then. He said the corruption was bi-partisan.
In that context, let us put the repeal of Glass-Steagall. The company that pushed hardest for this was Citi. Is it a surprise that Mr. Rubin ended up co-Chiar of Citi, after having pushed for the legislation that removed the Depression-era safeguards embodied in the Act?
Now we are faced with the possibility of another depression, and the reality of a significant recession. Citi is effectively already in receivership. Smith Barney appears to be headed to another zombie, Morgan Stanley, which may know how to run a brokerage. (I was a Smith Barney client for years and know whereof I speak re Smith Barney.)
Given how badly Lehman's failure roiled the markets, what will the reality of an actual rather than virtual bankruptcy or receivership of Citigroup do? And could BofA be next? (Their stock charts are similar.) Though "C" is below $7/share, it still has a $36 B market value. I say it's worthless absent political decisions. If, with this history, Mr. Obama wants to make Mr. Rubin an advisor to him or wants to offer him an actual position, I would both be surprised and disappointed.
For a more pointed and trenchant commentary on Mr. Rubin, please see the following: "Jesse's Cafe Americain" and yesterday's post, Citi Unloads Robert Rubin and Salomon Smith Barney. (As someone who has had a professional relationship with some members of Mr. Rubin's family, I cannot endorse Jesse's quote from Pliny the Elder, but I'm always impressed by erudition. I checked the validity of the Latin and its attribution, and they are accurate, so far as I can tell.)
With this backdrop, consider that the recent stock rally, which was widely taken to be an Obama rally, stalled as soon as the following occurred:
Diane Feinstein complained publicly both about Leon Panetta's nomination to head CIA and (perhaps more important) that she was not "consulted" about it;
Rahm Emanuel has reportedly been "knifing" rivals;
Leading Democratic Senators have criticized the Obama "stimulus" plan as "trickle-down";
Criticism of Obama in the press has surfaced, such as by decrying the use of poll-tested words such as "recovery" rather than "recession";
In short, while all observers expect him to give a marvelous speech on Inauguration Day, reality is setting in. From a markets perspective, a great speech is already "in" the market. Bill Clinton had been a Governor for many years but still had a steep learning curve as President. Mr. Obama has had virtually no executive experience and is from the Senate but not of it. Imagine if FDR came into office not 8 or 9 months after the stock market bottomed, but instead was elected in 1930 and took office when all the financial and economic action was to the downside. Now imagine that he had never been a Governor, that his uncle had not been President, that he had not had a senior role in the Navy. Would he be more FDR or Hoover in our collective memory?
One final point. Last year, Barry Ritholtz at published a marvelous cartoon at his blog, now reachable at www.ritholtz.com/blog. It showed firemen putting out the fire at the bank while they ignored the fires blazing in retail, manufacturing, and other sectors of the economy. The follow-up now, with Citi on life-support and others perhaps teetering, is that the firemen used up a lot of water but did NOT put out the bank fire. And the other sectors, medical excepted, are still on fire. Not good.
Thus, the point of view here is that while Mr. Obama is on the right track with his calls for better regulation, and Paul Volcker is a superb choice as an adviser, the focus is excessively on multi-year construction projects and a tax cut, neither of which will work any magic immediately. Meanwhile, the banks are still burning. And tent cities have been springing up in Reno, Seattle and many other cities. These people need help now. And since the states by and large are maxed-out financially, there is lots of traditional help-the-poor work for the Feds to do.
(I would much prefer to help those so disastrously hurt by this economy rather than try to resurrect the previous high level of construction activity that helped lay us so low.)
It's therefore looking more likely that the stock market has made another lower high. Louise Yamada has a 6000 target for the Dow Industrials. Could Citi going into formal receivership put it there, and perhaps more rapidly than one would like to think possible?
Copyright (C) Long Lake LLC
Mr. Rubin is stepping away from his consultancy to Citi and will leave the board when his term expires. He is not stepping away from his 9-figure total compensation over the years. This despite the unrefuted reports that he was the person who pushed Citi to up its risk profile in mid-decade. Citi is a failed company primarily for two reasons: it never integrated its acquisitions, and it went wild on its risk profile. Everywhere Meredith Whitney, financial analyst extraordinare at Oppenheimer and Company, reviews riskiness of a financial company's strategy, loans, capital base, etc., Citi is there.
Mr. Rubin reportedly did a fine job as co-chief of Goldman Sachs. As Clinton's Treasury Secretary, he was, along with Greenspan, the face of the good times that enabled the stock-buying bubble in the late 1990's. However, the reason I knew to broadly get out of the stockmarket in 2000 is that it was reported that the 1990s economic expansion was the only one in U.S. history in which the financial strength of companies declined. Given how much equity was raised in IPOs, and how many deals were done for stock rather than debt, this (now old) news sounds surprising. Many want to think that financial irresponsibility began in the Bush years, but this is a seamless matter. Rubin and Greenspan: what a reassuring pair.
Very near the end of the Clinton Presidency, I had lunch with a man who was a third-generation Washington political insider. He said that he and his family had never seen Washington so "for sale" as then. He said the corruption was bi-partisan.
In that context, let us put the repeal of Glass-Steagall. The company that pushed hardest for this was Citi. Is it a surprise that Mr. Rubin ended up co-Chiar of Citi, after having pushed for the legislation that removed the Depression-era safeguards embodied in the Act?
Now we are faced with the possibility of another depression, and the reality of a significant recession. Citi is effectively already in receivership. Smith Barney appears to be headed to another zombie, Morgan Stanley, which may know how to run a brokerage. (I was a Smith Barney client for years and know whereof I speak re Smith Barney.)
Given how badly Lehman's failure roiled the markets, what will the reality of an actual rather than virtual bankruptcy or receivership of Citigroup do? And could BofA be next? (Their stock charts are similar.) Though "C" is below $7/share, it still has a $36 B market value. I say it's worthless absent political decisions. If, with this history, Mr. Obama wants to make Mr. Rubin an advisor to him or wants to offer him an actual position, I would both be surprised and disappointed.
For a more pointed and trenchant commentary on Mr. Rubin, please see the following: "Jesse's Cafe Americain" and yesterday's post, Citi Unloads Robert Rubin and Salomon Smith Barney. (As someone who has had a professional relationship with some members of Mr. Rubin's family, I cannot endorse Jesse's quote from Pliny the Elder, but I'm always impressed by erudition. I checked the validity of the Latin and its attribution, and they are accurate, so far as I can tell.)
With this backdrop, consider that the recent stock rally, which was widely taken to be an Obama rally, stalled as soon as the following occurred:
Diane Feinstein complained publicly both about Leon Panetta's nomination to head CIA and (perhaps more important) that she was not "consulted" about it;
Rahm Emanuel has reportedly been "knifing" rivals;
Leading Democratic Senators have criticized the Obama "stimulus" plan as "trickle-down";
Criticism of Obama in the press has surfaced, such as by decrying the use of poll-tested words such as "recovery" rather than "recession";
In short, while all observers expect him to give a marvelous speech on Inauguration Day, reality is setting in. From a markets perspective, a great speech is already "in" the market. Bill Clinton had been a Governor for many years but still had a steep learning curve as President. Mr. Obama has had virtually no executive experience and is from the Senate but not of it. Imagine if FDR came into office not 8 or 9 months after the stock market bottomed, but instead was elected in 1930 and took office when all the financial and economic action was to the downside. Now imagine that he had never been a Governor, that his uncle had not been President, that he had not had a senior role in the Navy. Would he be more FDR or Hoover in our collective memory?
One final point. Last year, Barry Ritholtz at published a marvelous cartoon at his blog, now reachable at www.ritholtz.com/blog. It showed firemen putting out the fire at the bank while they ignored the fires blazing in retail, manufacturing, and other sectors of the economy. The follow-up now, with Citi on life-support and others perhaps teetering, is that the firemen used up a lot of water but did NOT put out the bank fire. And the other sectors, medical excepted, are still on fire. Not good.
Thus, the point of view here is that while Mr. Obama is on the right track with his calls for better regulation, and Paul Volcker is a superb choice as an adviser, the focus is excessively on multi-year construction projects and a tax cut, neither of which will work any magic immediately. Meanwhile, the banks are still burning. And tent cities have been springing up in Reno, Seattle and many other cities. These people need help now. And since the states by and large are maxed-out financially, there is lots of traditional help-the-poor work for the Feds to do.
(I would much prefer to help those so disastrously hurt by this economy rather than try to resurrect the previous high level of construction activity that helped lay us so low.)
It's therefore looking more likely that the stock market has made another lower high. Louise Yamada has a 6000 target for the Dow Industrials. Could Citi going into formal receivership put it there, and perhaps more rapidly than one would like to think possible?
Copyright (C) Long Lake LLC
Subscribe to:
Posts (Atom)