Power And Dollar

AIG The Sacrifice: The Reflection Of America’s Political Risk


I agree quite a few points of this article in regard to the AIG episode.


Of course, nothing is perfect.  I would change a word here:

It will certainly make Mr. Obama’s task much more difficult when he tries to sell the public [my version would be:  investors] on his administration’s ability to manage the rest of the bailout, and when he tries to sell private firms on the public-private partnership that will be needed to make the recovery work.”


Obama will have more difficulty to convince investors his future plans work (already stated in the article).  Also, Obama will have more difficulty to get troubled entities to take the bailout.  Look at AIG.  This bailout actually bites! 


AIG was politically insensitive.  This story alone will make firms in the future to invest more to mitigate political risk or at least reputation risk (branding), which is not a good news.  


In addition, a good portion of the reason for these companies to require a bailout is that their valuation (capitalization) fluctuated so greatly they were literally worthless.  So, some companies may realize taking themselves off the exchange is not a bad idea, at least they can insulate themselves from the volatility.  Is that what we want: fewer choices for mutual fund managers and pension fund managers?  If they have fewer options and social security is running out, then what are to do?


Fewer choices on the exchange also means quicker wealth concentration.  Gini coefficient will spike up very quickly.  Is that what Obama wants?


March 20, 2009 Posted by | activism, advocacy, america politics, banking, business, Current Affairs, Current Events, 美國, Democrats, economics, legislation, mccain, obama, opinion, politics, Regulation, Republican, US politics, wordpress-political-blogs | Leave a comment

Gimmick? What Difference Does It Make?

Obama did not actually ask for pay limit.  Obama pretty much asks for pay through options: exercise to sell the stocks when you pay back the money to the government.  Obama also asks for more say for the shareholders.  Some will say such an ask is ridiculous.  Some will say if you want the money this badly, then this is the price to pay.  


Obama will likely get his way, not because of media bias, but because he is likely to get the votes for this one.  


Ideologies aside, what is really at stake?  This proves American economy is increasingly political.  Very soon, America will have a government with hands so full in the operations of the economy that it is not too different from China or India.  


Pay limit takes the headline.  However, if you read the content, the other point is the more important one: “bank shareholders will have a greater say about the salaries paid to company heads.  The measures will put in place greater transparency for costs such as holiday parties and office renovations.”  This actually follows the same concept of SOX. 


Obama is actually addressing quite a few things here.  


In large corporations, small shareholders never get a say.  The big shareholders usually end up being mutual fund companies.  Mutual fund companies tend to be silent partners.  So, they do not say much.  In fact, they do not even want a seat on the board.  Boards are still running the way it used to be 50 years ago, 100 years, old boys club.  However, the number of shareholders these days is: way too many.  However, 100 years ago, a large corporation did not have hundreds of thousands of shareholders.  These days, if you count the mutual fund holders, you easily have millions of shareholders.  Large shareholders get ways to take care of themselves, preferred shares or even board compensations for the lucky dozen.  The theme of transparency in this issue is actually consistent to one of his campaign messages.


Annual reports are informative.  For a large publicly traded company, say 100 million operating budget or 1000+ employees, tucking in ridiculous expenses on executives is too easy.  Even though SOX asks for any small thing that is “material”, what is half a million to a 100 million?  Obama essentially is having one stepping further: SOX is about relative to the nature and complexity of the business, let’s have it relative to ordinary people.  


Impact on economy?  For people who have >500k, do they spend all the money and let the money circulate in the economy and create jobs?  No, they tuck half of it in their 401k anyway.  In a way, Obama is actually tying up all their 401ks into their own company’s stocks.  Now, since these executives will have no diversification of the assets, they now have complete vested interests in the survival of the company.


So, political gimmick or not, this move actually does make a difference. 

February 4, 2009 Posted by | activism, advocacy, banking, Barack Obama, business, Current Events, 美國, Democrats, economics, legislation, obama, politics, wordpress-political-blogs | Leave a comment

Obama Administration Begins! (Or ?)

Obama settled on his economic team late Friday afternoon, sending Dow 400 points higher, just above 8,000 points.  Then, news about Citi’s (NYSE:C) bailout came about.  This news probably marks the beginning of Obama administration.  Here is also why this signal is important.  


A plan like Citi is facing must have been laid in advance.  What has been in the dark is if the plan gets proper continuity through its execution.  Therefore, the first priority is people.  The people had to be properly identified.  The team had to understand what is involved.  Geithner’s appointment had a lot to do with his familiarity in the financial crisis as well as the solution already in place.  He probably had a hand in the solution as well.  For an announcement that spans through two administrations, Obama had to approve.  Bush had to approve this plan as well since Obama is doing to take the credit for its success but Bush will take the blames if it fails.  Geithner’s appointment is an additional (in addition to James Jones’ appointment) indication of the desire for smooth transition. 


Of course such a “smooth” transition means a blend of old and new, ie some more of Bush people, and some of Bush ideology gets carried over.  However, media is very willing to forget about these things, when it is done by Obama.  


The importance of the news, in addition to sending DJ and S&P up another 3% in the first 2 or 3 hours of a Monday morning, is this: Obama already replaced Bush; expect more consequential news from now on.  Obama’s administration is not going to begin on 2009.01.20.  His administration starts now.  Therefore, if you thought your decisions could wait until 2009.02, then you may want to re-juggle your vacation schedule.  Your Q4 board probably is going to get busier than usual, not only the economic news and your company financials matter, but also Obama will deliver statements earlier than previous presidents.  Decisions about your public relations firm, lobbyists, policy research contracts will have to be revisited now rather wait after Christmas.  

Fund managers have to get busy too.  Just look at Citi’s stock this morning: 2 hours and 66% increase.  Obama’s statements will make big swings.  So, don’t slack. 

November 24, 2008 Posted by | banking, Barack Obama, business, Current Events, 美國, Democrats, economics, obama, politics, Republican, wordpress-political-blogs | Leave a comment

How Long Can You Wait For A GM Bailout?

GM (NYSE: GM), Chrsyler and Ford (NYSE: F) are asking for a nagging for an auto industry bailout.  This is what should have been expected once the $700B bailout flood gate is open.  After the auto industry will be the steel industry, the building industry.  If you bailed one, you need to bail all. 


Obama said the auto industry is important.  That may be an electoral language.  It may be too early to tell if he will deliver or break the promise.  However, one thing is certain: he should focus more on transition than governing.  For that reason, he is likely to remain mute on this issue.  


What about Bush?  Bush already said he will not bail out.  Some think Bush is using that to bait Senate to rectify trade treaties.  It is more likely Bush is being a prudent and a responsible out going president – do nothing.  This is best described by Treasury Secretary Paulson’s article on NYTimes.  During a transition period, the stunt show could have been to advocate for McCain (“who else can steer us through this mess?” Not that it worked).  Once the election is (or was) out of the equation, the job (Paulson’s job) is make sure the ammunition is available for Obama and hope that Paulson does (did) not have to use the ammunition or use all the ammunition.  Here is why: Paulson’s reputation will be the first for crucifixion under the Obama administration when Obama is up for a recovery failure.   The best Paulson can offer is to recommend the best talent he can find.  


The starting point to any bailout is the House.  Will House give the money?  Even if Pelosi wants it, she is unlikely to get the ammunition to push it through, given the controversy of the $700B and the margin that vote had.  Suppose it passes, it does not have enough votes to override Bush.  


Will Obama ask for it?  Who will take credit for the bailout?  Or the blame?  Who will have to be accountable to the execution of the bailout, if the money actually goes through?  Obama administration or Bush administration?  Obama wants no ambiguity.  Bush is unlikely to want to create another potential mess for a Democrat to manipulate against him.  The $700B stunt show is already enough for both Bush and Obama.  


So, the story is then: forget about trading auto stocks based on political news or even the hearing.  No matter how appeal the hearing will turn out to be, the earliest possible actionable news is after Obama’s cabinet becomes clear, if not after inauguration.  

November 19, 2008 Posted by | Barack Obama, business, Current Events, Democrats, economics, Investment, legislation, Money, obama, politics, Republican, stock, wordpress-political-blogs | 1 Comment

Did You Want A Rejection?

The bailout plan got voted down: 205 vs 228.  The House still cannot get a full house for such an important vote.  Someone please check if those 2 seats are vacant.  Are you upset that it got rejected?  Some people are upset (S&P has fallen >6% already), some not.  NYSE is certainly down.  Is there any good out of this rejection?


Some economists and financial guru may say why this bill would not work anyway.  Some people (say Bush, Paulson, to name a few) may also say why we must pass this legislation (not that this bill will work.  Interesting, huh?). 


At least democracy works.  Main Street is not too happy about this bailout.  The Representatives listened and voted accordingly (if not for their re-election is in a few weeks).  


Yes democracy is slow.  Democracy could be an emotional device as well.  This vote is more of an emotional vote rather than a vote of competing proposals.  This is the kind of occasion that time is of essence and some may argue democratic mechanisms are just road blocks.  


This same emotional body delivered an emotional vote last time to appropriate a budget for PATRIOT Act and Iraq war.  This emotional body again delivered an emotional vote, this time to reject another big budget item, although this item is again in a time crisis for the good of the people.  Is it a simple distrust of Bush or is democracy actually at work?


September 29, 2008 Posted by | banking, Barack Obama, business, Current Events, Democrats, election, Election 2008, John McCain, mccain, obama, politics, Republican, Sarah Palin, wordpress-political-blogs | 3 Comments

$700B buys a Wall Street PATRIOT ACT

Warren Buffet has called the credit derivatives the “financial weapons of mass desctruction”.  To combat this financial weapon of mass destruction, Bush administration is getting another Patriot Act with a price tag of $700B.  Pentagon runs about $500B.  Paulson is essentially asking to run the biggest show now.  The best part of this proposal is that Paulson left out the oversight part.  Even McCain is screaming about oversight now.


$700B of spending without oversight.  Hm… does it sound like the No-fly list created by PATRIOT Act?


Patriot Act was the last option before the Al Qaeda Armageddon.  Paulson now delivers the rescue of last resort (the latest?) before the financial weapon of mass destruction.  A nice parallel.


Forbes gives a good article about all the major points of the Paulson proposal here.



The foreign participant part is just special interest (executive compensation too), no different from any other legislator who wants a dip.  The interesting part is, so far, this plan seems to only focus on bailing the banks and leaves out the individual homeowners.


Working off these assets is a huge task.  If this bail out effort has the budget constraint of 700B, then prioritizing the assets itself is highly political, especially during an election year.  


The unfortunate part of this story is that he only gets to stage the show, not really running it since he will be leaving office by the time everything is running.  Is this thing going to be cost effective?  Is it going to be worth the money?  Or is it another gig of pork barrel and plum jobs?  Remember how the contractors got nice deals out of the war against terrorism? And somehow quite a good amount of them are friends of Cheney?  Is this the Paulson version now?

Fear is the best friend of politicians.

September 22, 2008 Posted by | banking, Barack Obama, business, Current Events, Democrats, economics, election, Election 2008, Investment, John McCain, mccain, obama, Palin, politics, Regulation, Republican, Sarah Palin, wordpress-political-blogs | 5 Comments

Why AIG? Why Not Lehman?

Bush administration has been acting already.  We just don’t know if the actions are effective.  Why did the government bail out AIG (NYSE: AIG) and not Lehman (NYSE: LEH)?  And now with US$180B from central banks all over the place, would that not be enough for Lehman?  Why did the market react so well to the AIG bail out news initially and fell flat the following day (449 points)?


Lehman’s failure is expected to be well contained within the market.  Federal Reserve considered AIG’s failure to be contagious.  Since asset seller always knows more about the sale than the buyer, Federal Reservemay have advanced knowledge (they must have studied the books and saw it coming.  Else Federal Reserve cannot come up with a number, any number, just enough to be a lifeline.) about AIG’s books and prompted the bail out.  Furthermore, Lehman, Merrill (NYSE:MER) (sold, not bail out), and AIG may give a strong appearance of cascade effect.  Therefore, propping up someone may be necessary to give the signal that Treasury continues to back up the market and will not let a free fall. 


Bailing out AIG gave confidence on the day of bail out news release because the market thought “Thank God they bailed out AIG”.  However, the fall on 2008.09.17 is the result of an after thought: “Since AIG is not a primary dealer to the Federal Reserve, its exposure should not be the greatest.  Therefore, if AIG can go down, ….”


The not bail out of Lehman is giving some other information. 


Is Federal Reservebeing selective about the bail out based on the quality of portfolio rather than the dollar amount required?  After all, Federal Reservebailed AIG, Freddie, Fannie and Bear Stearns and not Lehman.  On top of that, Federal Reserveengineered Countrywide and Merrill sales.  Bear Stearns was just the first time.  By the time Freddie and Fannie got their bailouts, Treasury should have a good experience by then (sadly).  


Is Federal Reservebeing selective about the bail out based on the exposure of counter party risks (I doubt this part of AIG’s books is public information.  I can only suspect that LA Times is making a speculation.)?  Is that why Lehman is not saved?  Therefore, “Too Big To Fail” is based not on dollars but counter parties.  Will that encourage other firms to increase its counter party risks in order to secure itself to be bail-able?


Federal Reservehas been trying to implement other controls to fix the market.  Is Federal Reservestudying the second wave of controls based on Lehman’s failure?  In this case, it would be very clear that we can expect more failures since the previously implemented controls failed to prevent more meltdowns.

September 18, 2008 Posted by | banking, Barack Obama, business, Current Events, Democrats, economics, election, Investment, John McCain, mccain, obama, Palin, politics, Republican, Sarah Palin, wordpress-political-blogs | 3 Comments

The Danger Of The Merrill Purchase To You

Thank God, they bailed out AIG”?  Can we say “Thank God, Bank of America bought Merrill”?

Do you think the Merrill (NYSE:MER) take-over by Bank of America (NYSE:BAC) is better than the bankruptcy of Lehman (NYSE:LEH)?  Because at least the company is saved?  Not really, unless you are an employee of Lehman.  In fact, the Merrill take-over by Bank of America is worse to all tax payers and to anyone who is a depositor of Bank of America (Bank of America has overseas operations).  


Investment banks take high leverages.  Investment banks have a different nature in their business from retail or commercial banks (or wholesale banks).  That is why investment banks have a much more volatile nature than other banks.  For instance, take the year 2000 instead of 2008.  The market capitalization variation of Citi (NYSE:C) is only 29% while Goldman (NYSE: GS) is 62%.


The danger of this merger is that since investment banks are a lot more volatile, having a deposit bank and an investment in the same balance sheet puts the retail depositors’ money in danger.  It comes down to one question: what if the hole of investment bank is big enough to suck out all the depositors’ money?  Exactly for this reason, America got a thing called Glass-Steagall: separating investment banks and deposit banks.  This requirement is removed by another law Gramm-Leach-Bliley during Clinton Administration.


Glass-Steagall was created to contain the risks from the investment banking industry, preventing their risks to spread out to all over the place.  Investment banks make loads of money during the good time, i.e. high M&A seasons.  During the bad times, like we have now, investment banks sink harder than Titanic. 


This merger means more of FDIC’s money is now exposed to a greater risk, the hole of Merrill.  Bank of America’s Tier 1 capital is now at best 7.4% Once we see formal filing, we will probably see that the Tier 1 will be even lower than 7.4%.  What is the cost to the depositors?  What can be done about it?  The fed can actually give Bank of America a greater pressure on the Tier 1 capital requirement.  It cannot fix everything, but something. 


Bank of America already swallowed LaSalle and Countrywide.  However, Countrywide is more about swallowing client list.  LaSalle is more about geographic expansion.  Merrill is about a new business line and new clientele.  This will be a great test of Bank of America’s management.  It’s just that Bank of America is not known for management integration.


Certainly Bank of America got the biggest brand in the investment bank.  What is the price in addition to the stock swap?  What is the management cost of this merger?  This will take years or even a decade to work out the integration.  How long will it take to get a divorce out of this one?


September 17, 2008 Posted by | banking, Barack Obama, business, Current Events, Democrats, economics, finance, Investment, John McCain, market, mccain, Money, obama, opinion, politics, Regulation, Republican, Sarah Palin, wordpress-political-blogs | Leave a comment

Where Do Mccain And Obama Want To Go With This?

Lehman was still crying about loss of the Korean (KDC, sold at SEO, not in any of the US exchanges) sale last Friday.  And now, poof, gone!  Merrill is now a subsidiary of Bank of America!  Certainly buying Merrill is a smarter buy when one compares the balance sheets.  However, what about the management cost to make the transition?  What kind of clienteles do they have in common?  Of course, Bank of America may just want to buy the asset portfolio and client list and start cost elimination (layoffs).  However, this event is more than Merrill, more than Merrill and Lehman, more than the whole today’s S&P.  Lehman and Merrill have become a political issue in this election year.  It has been given its own life and it will take to all sorts to directions.  Its political impact will probably exceed Katrina or Ike and Katrina combined.  


The non political impacts are obvious: oldest brands in the investment banking world are gone (who will do my next merger deal?); financial consequences are global (where to park my money?); confidence in the America investment banking is immediate; confidence in the financial industry is also weaken (Countrywide, Freddie and Fannie, Merrill, Lehman, AIG.  Anyone left?). 


The political impacts are very unpredictable:  Republicans are calling regulation overhaul; Democrats are taking shots at the McCain’s subscribed philosophy.  


Are the Republicans are talking about a reform in mortgage underwriting?  Or retail banking? Investment banking? Hedge fund?  Speculative commodity trading?  Or accounting practices so that nothing is off the balance sheet?  Or are the Republicans talking about payday loans?


Are the Democrats talking about getting rid of exchanges?  McCain’s POW philosophy (if there is such a thing)?  


The candidates are so vague not only because they need to have the flexibility, but also they are clueless of what is going on.  You may laugh.  But that is the dangerous part.  Any piece of the finance industry is now part of a tighter regulation cycle.  This situation is no different than FDR’s power grab. 


Mortgage companies were in trouble.  Now, investment banks.  The connection is not “Wall Street” industry.  The connection here is the work flow.  The problem started out from the mortgages, the product.  Next, the buyers of these mortgage investment products.  Bond underwriters and the like are obviously the first one in line to take a hit.  However, the next ones are insurance companies, especially re-insurance companies.  AIG is the best exchange.  UK’s Lloyd is another one.  These companies are no different than multi-line banks: making money out of interest rate spread.  These insurance companies employ similar financial products to make their money.  


We may want to think about what kind of creative regulations politicians can think of.  However, the more myopic question is: where does it end?

September 15, 2008 Posted by | banking, Barack Obama, business, Current Events, Democrats, election, Election 2008, John McCain, mccain, Money, obama, opinion, Palin, politics, Republican, Sarah Palin, wordpress-political-blogs | 5 Comments

Whose Money Get Hurt In The Middle Of This Cold War 2?


Russia invaded Georgia to show Russia is still a superpower.  Certainly, Russia caught the US off guard.  And of course Russia is dragging its own feet to leaveIs the objective of “being a superpower” achievable for Russia?  What are the impacts?  What companies will get hurt the most?


Russia is no longer financially strapped like they were in the 90’s, thanks to the oil.  Military is a very costly adventure to archive national interests.  To assess if the objective is achievable is equivalent to ask if the economy can support such an activity.  Since exchange rate is different daily and purchasing power is different in each country.  A good way to measure the GDP is GDP by purchasing power parity (PPP).  This is a link to 2008 GDP PPP. 


Russia is about the scale of France, both are less than $2.1T.  The US is $13.9T while China is half of the US ($7T) and India is $3T.  Russia’s scale of economy is about 1/7 of the US and less than 1/3 of China.  Russia’s export is mainly natural resources (or defense sales).  Its exporting countries are mainly EU countries, i.e. NATO countries.  


Its economic structure is heavily dependent on 1 type of product to 1 geography (or even 1 buyer).  Anyone could have given a warning to a company that is so heavily dependent on 1 product to 1 buyer.  It is then very obvious that this strategy cannot last long.  


Since Russia’s size of economy is so small (1/7 of US), a new Cold War cannot get started.  The scale of this Cold War 2 is either small or short.  Russia’s fuel will get burnt out very fast, when compared to THE Cold War.  With the energy price keeps falling, this strategy will fail even faster.  Russia’s only hope with this strategy is to have more support from China and India to build a multi-polar world.  


The impact will be felt most heavily on companies where Russia constitutes a major part of their operation similar to their operation from NATO countries.  It need not be revenue, operation such as production or material input would be enough.  BP is an obvious example.  Energy is an industry where everyone will have to look for.  Heavy industry is another.  Anyone who has production sites in Russia can get stuck.  Russia’s militarism will increase friction with the NATO countries.  Pressures will not only come from international sanctions (if any), but also Russia’s suspicion against these companies’ operation in Russia and other CIS countries.  

August 19, 2008 Posted by | Barack Obama, business, Current Events, economics, Investment, John McCain, mccain, Money, obama, politics, wordpress-political-blogs | Leave a comment