Archive for February 2nd, 2009
February 2nd, 2009
Published Jan. 25:
This week’s news flash:
The $700 billion bailout plan isn’t working. In fact, it was doomed to fail from the start. And everyone knew it.
Alas, what you have no doubt already suspected is true — the billions of dollars that have been pumped into dozens of financial institutions in the past four months aren’t going to work because they don’t address the cancer eating away at the economy.
TARP, in essence, is like taking an aspirin after being shot — it might ease the pain a little, but it won’t stop the hemorrhaging. And in the end, the pain won’t kill you. The hemorrhaging will.
The original Troubled Asset Relief Program, as envisioned by former Treasury Secretary Hank Paulson, was going to use the money to buy the bad assets breaking the backs of U.S. financial institutions.
The idea was scrapped because there is no easy way to do it and the banks needed the money yesterday. So the hastily contrived and implemented TARP settled for writing blank checks (“loan” money no one has bothered to track so far) and crossing our fingers.
But as it turns out, the banks’ problem was never really about illiquidity. It was about outright insolvency.
Put simply, an illiquid business is out of cash. An insolvent one has so much debt that even if it sold — or made liquid — every asset it owned, it couldn’t cover the spread.
The banks needed the cash, certainly. Trillions of dollars of potential bad debt were piling up. At some point, the piper was going to come calling, and they’d need to pony up to cover those debts.
Had it been a simple liquidity problem, TARP should have solved it — or at least put a dent in it.
It didn’t because it couldn’t. The culprit is the same knotty dilemma that foiled Paulson when he thought to buy up those bad assets: Nobody knows how much the bad debt is worth.
Some of it is the same debt that brought the banks to their knees last year. But more and more of it may have to be written off as foreclosures, joblessness and consumer inactivity continue to swell.
And there is no market value for bad debt.
Which brings us to TARP2, the new multi-billion-dollar bailout problem being debated by President Barack Obama’s administration — the most popular one calling for the formation of a “bad” bank. The government would buy all those poisonous assets still on the banks’ books and hide them all in their bank. It could then rewrite the mortgage securities to prevent foreclosures. And when the market stabilizes, it would unload all that debt, hopefully at a profit.
But if the government sets the price for those bad assets too high, taxpayers end up paying through the nose for a bag of rotten debt. If the price is too low, the banks would be in the same bind they’re in now.
As loath as I am to support it — to tell the banks they’re off the hook for getting us in the middle of this — I don’t think the economy has any chance of meaningful recovery until that bad debt is off the books.
Bring on the bad bank, I say.
Look at it this way: Bank of America posted a net loss of $1.8 billion in the fourth quarter, blaming its ill-conceived and last-minute acquisition of Merrill-Lynch, which posted “unexpectedly strong” losses.
John Thain, who was fired as CEO of Merrill a week or so ago, has managed — since Jan. 1, when the deal was finalized — to rack up more scandals than former Illinois Gov. Rod Blagojevich.
Thain demanded a $10 million bonus last quarter even though the company’s very future was in doubt. He rushed, in the final days of December, to pay billions in bonuses to Merrill employees — right before the feds pumped another $20 billion into Bank of America. He was subpoenaed last week by New York Attorney General Andrew Cuomo, who is also looking closely at Bank of America’s role in all of it.
Keep in mind, though, that this is a “good” bank. You and I will own the bad one.
February 2nd, 2009
Published Jan. 18:
Call 2008 the Year of the Great Flameout.
As in your investment bank. Or, more to the point, your retirement account. Record bankruptcies. Record foreclosures. The auto industry. Real estate. Wall Street. Iceland, for crying out loud.
You get the point.
But (theatrical sigh of relief here) we’ve moved on. It’s 2009. We’ve gratefully shed the uncertainty of the past for the … uncertainty of the future.
But at least it isn’t 2008 uncertainty.
It’s 2009 — or, as I’ve come to think of it, the Year of the Great Cramdown.
And trust me. There’s going to be a lot of it this year. Enough to choke on.
A cramdown is lingo for a bankruptcy action, when a creditor is forced to accept less than he is owed. In other words, instead of collecting the $100 you’re owed when your neighbor declares bankruptcy, the judge forces you to close the account after you’ve collected just $25.
At that point, consider the deal “crammed down” your throat.
As you might imagine, mortgage bankers and credit card companies tend to oppose the idea. They want all of their money back, bankruptcy or not.
But allowing bankruptcy judges to modify mortgages, often reducing the principal so the homeowner can afford it, has been gaining steam on Capitol Hill.
Initially, it was a condition of the $700 billion Troubled Assets Relief Program that Congress passed in October. It was eventually removed because it was so bitterly opposed by banks, homebuilders and mortgage brokers.
Luckily for our elected officials, times have changed. Today, most of the big brokerage and financial institutions are owned by the federal government, at least partially.
This month, for example, a Senate bill to allow mortgage cramdowns cleared one roadblock after Citigroup Inc., one of the country’s biggest mortgage lenders, helpfully decided that it didn’t hate the idea after all.
At the time, the feds were into Citi for $45 billion, a loan made the month after TARP passed. Then Friday, Citi posted a loss of more than $8 billion for the fourth quarter of 2008. Anyone else think Citi might be open to a few billion more from the feds?
I suspect that fewer big banks (of those that are left, anyway) will be publicly airing their opposition to the idea. They might leave it to their various lobbying groups — the Mortgage Bankers Association comes to mind — but we probably won’t hear much from the companies.
So the banks stand to get crammed down twice — once by Capitol Hill, which really seems to like the idea of helping out struggling homeowners, and then by bankruptcy judges.
Not that I have a great deal of sympathy for the banks. They’re getting their bailouts despite their objections, despite their irresponsibility, which helped get us into this mess.
So the banks get their money. And it looks like homeowners on the verge of foreclosure will get a bailout of their own. Even the U.S. and European auto industries get bailouts.
Who, then, is left holding the bag for the still-collapsing $11 trillion subprime-mortgage market? After all, somebody has to pay for it.
In the past, losses from mortgage or credit card debt would have been spread throughout the financial sector. The institution holding the pink slip took the loss.
But these days, all that debt was long ago chopped into tiny little pieces and mixed into thousands of financial casseroles euphemistically called derivatives.
The people holding the derivatives? Financial institutions, which are busily hiding their government handouts.
So who will be forced to accept the biggest cramdown this year? That’s left, again, to you and me — those of us who don’t qualify for any kind of bailout because we didn’t overburden ourselves with too much debt, bought houses we could afford and continue to pay our bills.
Like I said, it’s enough to choke on.
February 2nd, 2009
Published Jan. 11:
There was some good-natured groaning at the start of the new year when the keepers of the world’s time added an extra second to the last day of 2008.
It was good-natured, of course, because it was only one second. Had the Royal Observatory opted to add another minute or — horrors — another hour to Dec. 31, worldwide looting probably would have broken out.
Quite a few people, it seems, were eager to begin the new year. Or, at least, to get as far away as possible from the old one.
The longing for a fresh start after a rough period, to escape cold reality and wake up in friendlier climes, is inherent in the human condition. It’s certainly true on New Year’s Eve, which coincides perfectly with our need for a symbolic gateway to shed the old and start anew. Especially if we can start without the stupid party hat.
Part of the escapist allure, of course, is its tendency to obfuscate one of the stark realities of the human condition: “No matter where you go, there you are.”
The problem is that a new calendar year won’t change you in any fundamental way. You entered 2009 carrying the same baggage from 2008.
Nor did the advent of 2009 automatically readjust your 401(k) balance. Banks didn’t return to the days of easy credit — to the days of any credit, for that matter — and too many homes are still overvalued and underwater.
In other words, a global recession looks very much the same whether you’re in Pecatonica or Paris. And location only matters in real estate (well, usually).
Perversely, this actually means good news for us hapless consumers.
Maybe not “good” news, exactly — more along the lines of “no news is good news.”
I suspect that 2009 will bear the same hallmarks of 2008, even though we might not recognize it right away.
As we entered 2008, we were besotted. The economy captivated us, clad as she was in lustrous silks and sumptuous fur. Beribboned and bejeweled, she overcame us with her siren song. And we wanted to be like her: healthy, wealthy, revered and beautiful.
Then, like the legends of old, our eyes were opened (a few major bank collapses will do that) and we saw her for what she was: a consumptive old bat in a tarnished tiara who left destruction in her wake.
So we ran, hiding wherever we could find a foxhole, forgetting in our panic that we — with the help of some slick Wall Street financiers — created both visions. And, of course, when we stopped running, there we were.
But human beings are great adapters, and we were facing a new reality of cataclysmic proportions. We’ve since grown accustomed to the economy’s new face and are changing to accommodate it.
2009 will be marked by headlines similar to 2008, but we will have grown accustomed to them. Most won’t generate nearly the attention as those heralding the unmasking of our once-proud economic vision.
The old witch will try to fool us again, of course — we’ll catch a glimpse of satin ribbons fluttering around the next corner, or spy a bright swath of silk against the bleakness of the landscape.
We may even try to chase it down (Wall Street traders certainly will). But we’ll come to our senses before we get too far and back off once we recognize her for what she is.
I think we’ll be content to hunker down in the first half of the year, barring any extraordinary events. It probably won’t get much worse, but I doubt it’s going to get much better.
We may not like it, but after all, here we are.
February 2nd, 2009
Published Jan. 4:
I could be in the market for a new car right about now.
The car I have is nearly 10 years old and sports more than 100,000 miles — rather jauntily, if I do say so. I love my car, but it’s probably about time to be looking for a replacement.
I’m not.
I could also be in the market for a house, now that I think about it. I’m an apartment dweller, so I don’t have a house to unload first, with a decent credit rating. I might be a favorable candidate.
I’m not really pursuing that, either, even though I hear this economic climate has created a marvelous environment for negotiation.
As it turns out, I — like many of you — have fallen victim to the economy’s long-running con game.
Or should I say its ex-con game.
For thousands of years, as long as one guy had something another guy thought was valuable, the confidence game — so called because it relies on the mark’s certainty that he’ll get his money back and the grifter’s certainty that he won’t — has been a profitable profession. Usually for the bad guy because there seems to be no end to the number of scams grifters can dream up and the number of people who can be convinced that the MetroCentre is for sale. Cheap.
Sadly, that inflated confidence, plus a prolonged absence of reason and a healthy dose of arrogance — that we are smarter and more wily than the grifter — has been the driving force behind the financial climate in which we find ourselves.
Ladies and gentlemen, I give you the economy, the most expensive con game ever created.
Consider the humble Beanie Baby.
People I formerly considered reasoned, rational human beings used to ask me — with a straight face — how much I thought they could get for a chicken or bulldog.
I could only shrug because I never really saw the value in a stuffed chicken.
“Whatever somebody thinks it’s worth,” I’d say, utterly nonplussed.
It’s Wall Street 101. The value of every company on the market is determined using variables including revenues, earnings, investments, debt, return on equity, return on invested capital and so on. But in the end, it all boils down to our confidence in the company — what we believe that company is worth.
Two years ago, everybody was confident. Banks and mortgage brokerages played fast and loose with lending rules, global financial markets gorged on those questionable loans, governments didn’t examine the practices of those markets, consumers racked up more debt than income, and corporations leveraged themselves to the hilt.
Today, we’re reeling from the consequences of those actions. And the circuitous nature of the U.S. economy is what will keep us in this cycle for a couple more years.
Consumer spending makes up about 70 percent of the economy. But we have no confidence in the future right now. So we’re not spending.
That’s enough to bring the economy to a near-standstill.
Still, the economy is driven by more than just consumers. About 20 percent comes from corporate spending. Except consumers aren’t spending, which means there’s no demand for the company’s products. So they hunker down, slashing production, cutting jobs and creating even more uncertainty among consumers.
The good news is that the government, which contributes about 10 percent to the gross domestic product, is chugging merrily along.
The $1 trillion it has spent, plus the estimated $1 trillion the new administration pledges, mean the government will be in business for quite a while yet.
I take little comfort from that. It doesn’t really help as I consider my vehicle options.
Even if the government was kind enough to buy us a couple of car companies.
February 2nd, 2009
Published Dec. 21:
If the past few months were tense, the mood in Detroit must have been downright rapturous this weekend.
It gets to keep its automakers. Which seems to be OK, because nobody else wants them.
Despite President Bush’s tough talk about forcing two of the former Big Three companies into bankruptcy — a toothless threat likely meant to force concessions from General Motors, Chrysler and the United Auto Workers — he promised them more than $13 billion Friday, with $4 billion in reserve, from the Troubled Assets Relief Program.
To keep the money, the automakers must come up with a plan, by the end of March, to prove that they can show positive cash flow and fully repay the government loans. If they don’t, they have to give the money back.
But because both companies have said they are a whisper from bankruptcy — and that the bailout money is just enough to keep them in business through March — they won’t actually be repaying anything. Next stop, bankruptcy.
Of course, they just have to show a plan. They don’t actually have to accomplish anything. Which is also OK because the UAW, not surprisingly, is already objecting to the concessions outlined in Bush’s loan conditions and planning to make its case to President-elect Barack Obama.
I used to do that, too, when I was a kid. If Dad said no, I’d try for better luck with Mom. It never worked. My parents were too smart for that.
Luckily for UAW, however, there will be no such obstacle. Instead, there will be a Democratic administration in the White House.
Just to make sure everyone’s keeping up, let’s recap: Billions upon billions of dollars are being loaned to the automakers because they don’t want to file for bankruptcy. They have to come up with a plan that lays out how they will return to profitability. The only real timetable in the program is the one that requires this plan to be filed by March 31. The union is saying it won’t play along.
But the real issue is that two companies, which Bush said are so fundamental to the U.S. economy that he couldn’t let them fail now (March, apparently, is a different story), either can’t or won’t be profitable until someone else is keeping an eye on them.
So really, all Bush has done is put off the automakers’ bankruptcies until it’s someone else’s problem.
In the meantime, taxpayers will be part-owners in two bankrupt companies.
Only in America are you so richly rewarded for such abject failure.
