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April 18th, 2009
Call me a pessimist. (Everyone else does.)
But I just can’t bring myself to feel exactly bullish about the news from last week, when euphoria gripped the country as stocks ticked upward and interest rates ticked downward.
It was a great week for the Obama administration, which took advantage of near-record-low mortgage rates to tell every American homeowner to refinance their home loans.
“We are at a time where people can really take advantage of this,” President Barack Obama said last week.
It made my hair stand on end.
Granted, I tend to be a little gun shy. But I’m a big believer in the “fool me once” philosophy.
And Obama’s remarks sounded an awful lot like former President George W. Bush’s throughout the early — and increasingly euphoric — days of the decade.
Back then, of course, the prevailing wisdom was that everyone needed to own a house. In 2002, Bush announced an aggressive program to provide down payment assistance, increase the supply of affordable homes, increase support for self-help homeownership programs and simplify the buying process.
He also told the real estate and mortgage-finance industries (back when we had them) to increase the number of minority homeowners.
“Five-and-a-half million families by 2010 will own a home,” he said triumphantly at the time. “That is our goal. It is a realistic goal.”
Was it ever. Briefly, at least.
Ever since, I’ve been fairly bearish about declarations from my federal government. For sure, it’s a great time to refinance. Of course, in 2002 (and in the five years after), it was a great time to buy a house.
So a few glimmers of possible improvement here and there are hardly enough to convince me that a global economy mired in a recession for more than a year is finally “starting to level off,” as The Associated Press proclaimed happily last week.
Especially when I hear something like this:
“The sense of a ball falling off a table, which is what the economy has felt like since the middle of last fall … we can be reasonably confident that that is going to end within the next few months and we will no longer have that sense of a free-fall.”
That’s Lawrence Summers, one of Obama’s top economic advisers.
So much for euphoria.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
April 18th, 2009
Among the many object lessons to be learned from the financial crisis, one or two come through loud and clear:
If you’re going to sin, sin big. And take a lot of people down with you.
Disgraced financier Bernard Madoff, for example, didn’t do it right. Sure, he took lots of people down with him, but in the end, he was the only one standing when it was time to pay the piper.
If, on the other hand, you’re Maurice Greenberg, who for 38 years ran American International Group, you can testify to Congress — with a straight face — that you had nothing to do with AIG’s financial peccadilloes because you left in 2005. And, apparently, get away with it.
In other words, all manner of transgressions will be forgiven, or at least overlooked, in this new era as long as enough people have been damaged.
If Madoff had only managed to make the major financial institutions on Wall Street complicit in his Ponzi scheme, he’d probably be getting a bailout, not a jail sentence.
Are you too big to fail, even though you helped mire the global economy in a recession worse than any in recent memory? Get trillions of dollars in bailout money from the federal government.
Bought a house you can no longer afford? You could get a bailout of your own. And even if you don’t qualify for the Obama administration’s program, so many homeowners are either in trouble or under water that you may suddenly find yourself with a little more leverage when approaching your banker.
If your lender balks, however, and your last resort is bankruptcy or foreclosure, you probably shouldn’t lose sleep over your credit score, either. After all, a foreclosure or bankruptcy filing this year or last won’t bear the same weight as one in 2005.
Even the vaunted New York Stock Exchange is re-evaluating how to delist companies. To protect itself from a wave of delistings, NYSE Euronext approached the Securities and Exchange Commission about relaxing its requirement that companies listed on the New York Stock Exchange maintain a share price of more than $1. Nasdaq OMX already suspended its minimum-bid price and market-cap requirement.
And I’m sure there’s plenty more to come. Hopefully, this won’t be the only lesson learned from the economic comeuppance of 2008.
But recessions keep coming back to haunt us, no matter how many times we’ve been through them. It makes me wonder how long it will take us to forget this time.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
March 28th, 2009
There seems to be a financial Bad Cop/Bad Cop scenario playing out these days.
And I’m not sure which is worse.
On the one hand, the federal government is telling me not to worry because it’s keeping an eye on my money — and not just my taxpayer dollars. It’s also keeping a close watch on banks these days.
This, of course, is the same federal government that has racked up a multitrillion dollar deficit and spent most of the last two quarters sprinkling free money — our money! — over Wall Street like so much pixie dust.
It’s not exactly confidence-inspiring.
In the meantime, the country’s tottering financial institutions are telling me not to worry because they’re keeping my money safe — in between shouts of “nationalization!” at the top of their lungs to keep Bad Cop No. 1 from spending any more time than absolutely necessary in their midst.
(“Any more time than absolutely necessary,” by the way, is code for “just long enough to hand out more pixie dust.”)
As I suspected, the financiers of Wall Street — Bad Cop No. 2 — opened themselves up to a hell of their own making last year when they begged the government for a little monetary intervention … undoing nearly two decades of fierce lobbying for looser regulations in the process.
They’re getting their intervention. With a vengeance.
Last week, Treasury Secretary Tim Geithner rolled out his plan to impose stricter standards on financial institutions, the derivatives market, and hedge and private equity funds.
In other words, the federal government — and by extension, taxpayers, many of whom can’t balance their own checkbooks — are now firmly entrenched in the banking business.
So who should be watching your money?
Like I said, I’m not sure which is worse.
The financial sector is contritely pointing out its expertise in money management — forget that little subprime mortgage issue that collapsed the global economy. It has learned its lesson, its titans claim.
And the federal government, which isn’t quite sure where all its pixie dust is, just wrapped up a banner week in which it first bowed to popular rage by excoriating the Obama administration, Geithner and American International Group executives — then meekly backing off at the realization that it needs the financial sector to help solve the financial crisis.
That leaves us taxpayers — presumably those who have balanced their checkbooks at least once.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
March 14th, 2009
In the general scheme of things, a little Monday-morning quarterbacking can be a useful, even necessary, tool.
Granted, few of us look forward to the boss (or worse, the spouse) saying something along the lines of “So, Ed, I’ve made a list of everything you did wrong yesterday, and …”
But when it comes to learning from our mistakes, few things teach us so well as history.
Take, for example, the nation’s 31st president.
For the past 70 years, Herbert Hoover’s response to the market meltdowns of the 1930s — higher taxes and interest rates, a Corporate America that was left to rise or fall (mostly fall) on its own — has been studied and debated and researched and probed, and in the end proclaimed an almost perfect example of what not to do.
So I found it amusing that Congress called everyone except my mom to Capitol Hill last week — most notably Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner — to give them a firm drubbing about the various bailout plans, particularly the Troubled Asset Relief Program and the way it is being administered.
Where’s the money? they blustered. No oversight! they thundered, threatening to withhold any more until someone gives a solid accounting of where the money went — and more importantly, it seems, who exactly is at fault for the recession that has gripped the economy.
They’re fairly certain, for example, that American International Group, which has received $180 billion from the TARP, bears some of the blame. Apparently, they now also want to know which AIG worker brought down the global economy.
Not that they don’t have a point. But it’s ultimately a fruitless, not to mention incredibly ill-timed, pursuit.
No doubt, Faithful Reader, you want to find whoever is to blame as much as the lawmakers. After all, there is something grimly satisfying in holding someone accountable. Besides, once we’ve identified the villain, we can all move on, safe in the knowledge that the Bad Guy has been caught.
I know I wouldn’t mind. But I also know it’s a primal reaction, a need for vengeance born in the reptilian part of my brain.
By giving in to that, I’d be no better than the financial geniuses who did the same thing, except their first reaction was greed. And we all know where that got us.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
February 28th, 2009
Three or four times a week, someone will ask me why They were allowed to do it.
“They,” of course, are the Wall Street bankers who thought slicing and selling mortgages was a terrific idea — until it wasn’t. Or the mortgage lenders who pushed too many people into subprime loans — even buyers who qualified for lower-yield mortgages — then sold the mortgages to eager Wall Street firms. Or the homebuyers who bought more house than they could afford and need taxpayer dollars to climb out of the red.
Now, these people fume, we’re paying for Their greed.
Too true. However, there’s another culprit at work here, one I suspect has contributed to quite a few of our economic troubles these days: the fundamental conflict between our 401(k) plans and Wall Street.
A 401(k) is a retirement plan. It’s a long-term investment strategy.
Wall Street has no such design, operating as though every minute is its last. These days, in fact, it seems to double as the applause-meter for the Obama administration, reacting almost instantaneously to every burp or gurgle emitting from Capitol Hill.
Last week, Ben Bernanke’s optimistic comments about the second half of 2009 drove share prices up, followed almost immediately by a sharp downturn when it occurred to investors that we still seem to be weathering banking and housing crises.
Only in such a setting could the housing bubble have expanded so rapidly and to such an extent — not one company could resist it.
And not one shareholder would have allowed such a thing. If you own shares of XYZ Co., and XYZ’s CEO calls for restraint in an environment as improbable and unpredictable as an asset bubble, you start calling for the CEO’s head.
When everyone else’s 401(k) is making money hand over fist, you want a piece of the action, too.
In that rapid-fire, do-or-die environment, a corporate CEO has little interest in planning for the company’s future. He is too busy planning for his year-end bonus, which requires daily progress, than positioning the company for the future.
In that environment, then, we place our hopes for our future comfort.
Perhaps most peculiarly of all, it works — as long as we don’t concentrate on Wall Street every day.
February 28th, 2009
When I was young, my grandfather would tell stories of a heroic band of freedom fighters who earned a place in history with their message of justice and fair play, with their dedication to the cause of the American worker.
Today, many of their names are lost in the annals of history: Richard Frankensteen, Robert Kanter, Henry Kraus. One of the greatest of those young warriors is largely unknown today.
But while he lived, and for years after his death in the 1970s, Walter Reuther was an icon among American workers, catapulted to greatness in the 1930s as he strove to unionize the auto industry.
My grandfather was one of the workers who helped break GM’s anti-union resolve during the 1937 sit-down strike at the General Motors Corp. plant in Flint, Mich. Reuther’s brother, Roy, helped organize that one.
When I covered the auto industry in Detroit, I came to know many of their contemporaries, men who, like my grandfather, hadn’t led the charge but fought in it all the same.
They took part in the 1932 Hunger March, when thousands of workers — hungry and desperate after being tossed unceremoniously off the job as the Depression tightened its grip — marched to Henry Ford’s massive Rouge complex in Dearborn, Mich.
Five died when the marchers were met by Ford’s personal “Service Department” as well as police and firefighters, who used fists, clubs, tear gas and fire hoses to disperse the crowd.
I still own a copy of the very first agreement between the fledgling UAW and the virulently anti-union Ford, a tiny booklet of few pages written at the end of the 1930s.
The man who gave it to me, the last surviving member of that first negotiating team, told me to remember.
“They were good men,” he said, his voice breaking.
I promised I would. I meant it.
I’m proud of all of those men. I’m proud of my grandfather, who helped fight the contempt and negligence with which companies treated their blue-collar workers.
Sadly, those noble beginnings are all but forgotten, hazy and indistinct after decades of concessions led to fat, insular unions and corporate managers who failed to recognize the value of those workers.
But saddest of all, I think, is the us-against-them mentality that still plagues both sides.
It was necessary once. It isn’t any longer, especially when the company that feeds both sides teeters on the brink.
If a country divided against itself cannot stand, could we really expect a different outcome from a mere corporation?
February 3rd, 2009
A few months ago I wrote a column about the rich-and-in-charge guys. These are typical Type-A executives who have led a company for decades and been well compensated for it. After a while, they forget that they actually answer to somebody whether it’s the board of directors or company shareholders. They’ve spent their time successfully dismissing concerns or objections to their corporate governance and running things how they think things should be, instead of how they really are.
This is where too many of the former titans of Wall Street are.
Case in point: bailed-out banking giant Wells-Fargo, which is planning more than a week of corporate junkets in Las Vegas this month.
And that’s not even the best part. According to early reports, it’s a sales conference to honor — wait for it — their top mortgage lenders.
Granted, the bank’s only received a paltry $25 billion in public bailout money, and besides, a company spokesman says it’s important that employees know they’re valued.
That’s certainly true. Maybe they could focus their job satisfaction on the fact they still have jobs.
Just a thought.
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.
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