Power And Dollar

Powell, What Makes A Good Endorsement?

An endorsement is similar to an advertisement.  The endorser would want to make a difference.  What is the difference to an election? Win or lose.  You can win by 1 vote (W) or by a landside.  They all give you the presidency.  An endorsement that takes a black horse to the main field is a good endorsement.  An endorsement that pushes the last block of voters to tip the scale is a good endorsement.  Anything after it is tipped over is an accessory.  Measuring the impact of an endorsement is to measure the size of votes it affects.  For that reason, you and I probably can save the time, in terms of endorsements.  

 

Analysts give their opinions about what Powell’s endorsement means.  An endorsement can mean a lot of things.  “What is the meaning” is a fun question to ask by media.  It is an interesting content.  It is not an important question to ask.  The good question to ask is: is this endorsement consequential?  is this endorsement relevant?

 

Is Powell’s endorsement a good endorsement?  Did Powell push Obama to the main field to compete against Hilary Clinton?  Oprah did that.  If the race is already tipped over, then this endorsement is an accessory.  Therefore, the impact of Powell’s endorsement is very questionable.  Powell may end up merely making a public statement about his differences with Republicans rather than making an impact to the race, or grabbing a 3 second media attention for no self gratification (I do not believe Powell has that self gratification need), or showing his political misjudgement or miscalculation (not knowing that the race may already be over).  Powell’s endorsement may end up being no more powerful than John Edwards (Edwards endorsed after it was crystal clear that Hilary Clinton was going to lose).

 

Powell may not have had polling results to inform him the value (votes) of his endorsement.  Therefore, he is unable to draw a dividend out of this endorsement effectively.  

 

The only thing that can make such an endorsement into an incentive is to secure a political appointment in the back room.  However, Powell does not need that, even if Powell were to cleanse his past actions.  

 

Is Powell making this endorsement to reach a resolution for himself before the world (repentance is between Powell and God.  No one else can have that privilege to know)?  What is to gain by exposing Powell’s own differences with Republicans?  

October 20, 2008 Posted by | Barack Obama, Current Events, 美國, Democrats, election, Election 2008, Electioneering, John McCain, mccain, obama, Palin, politics, Republican, Sarah Palin, wordpress-political-blogs | 2 Comments

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.

http://www.forbes.com/home/2008/09/20/banking-bailout-paulson-biz-wall-cx_lm_0920questions2.html

 

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

Bail Out: Fannie/Freddie or McCain?

S&P responded very well on Monday to the bailout news of Fannie Mae and Freddie Mac.  We should also expect more news generated from Bush administration to lift the economy when we move toward November.  Actions taken will be timed to trickle into the economy by late October.  We are now 54 days to November.  If this bailout were aimed to ease the credit market, then this bailout maybe a little late to help McCain.  It may work to lift a little more support, if McCain is lucky.  

 

This response also coincides with the surge of McCain in polls.  Yes, they are clearly unrelated, they got their own different causes as well.  This surge is more related to Palin, of course.  Polls don’t mean much. It is the electoral votes that matter.  if we look at the electoral votes, then we see that Obama has lost 11 electoral since 08.29 (Obama: 228; Mc Palin 185; Toss Up 125).  Obama now has 217 (Mc Palin 189, Toss Up 132).  If there is no toss up, both sides stay the same.  McCain Palin has not earned much but destabilized Obama’s electoral votes.  However, it does seem like Palin has made firm gain. 

 

This bailout is not the kind of solution Paulson has vowed to implement.  Bailout is a patch, not even a fix.  Yes, this is costly, costly enough that it now became an item into next year’s budget.  What is the next step for the federal government?  Is there an exit strategy for this bailout?  Federal government ought not to own these enterprises, although they are Government Sponsored Enterprises.  With such a huge price tag, how can the federal government unload them?  What kind of effect will it then be when the government unloads?

 

The kind of solution Paulson wanted probably meant to make both Fannie Mae and Freddie Mac to have smaller market share so that there will be more competitors in that segment.  However, bailing them out means that option is shut for another one or two presidential administrations.  Subsidizing for political purpose does not mean it is economic for the whole society.  However, bailing them out may mean suffocating all competition in that market.  Fannie Mae and Freddie Mac are now nationalized.  If they continue to monopolize that portion of mortgage market, it may become more and more difficult for the small retail banks to keep their residential mortgage portfolio healthy.  That is another risk Paulson has chosen to take.  So, is this bail out for the health of economy or for presidential election?

September 10, 2008 Posted by | Barack Obama, Current Events, Democrats, election, Election 2008, John McCain, mccain, obama, Palin, politics, Republican, Sarah Palin, wordpress-political-blogs | 2 Comments

Obama vs Palin vs Stock Performance

Since Tuesday, S&P has fallen more than 3%.  Certainly, reasons like retail and job data can point to that direction.  On the other hand, oil is easing as well which should have facilitated a spike.  A political news that may have played a bit is the announcement of Sarah Palin, the presidential contest is finally set since all the tickets are finalized.  On top of that, Palin has little experience may also point south: investors are holding cash to understand what is going on.  

 

People usually compare the presidential candidates.  However, both candidates do not have executive experience this year.  The most executive experience one has among the 4 (which should have been 2) of them has only 2 years.  Investors could be thinking: Can anyone run the show? 

 

It would be interesting to see how much of that 3% can be contributed to Palin.  With the energy Palin accentuates and the media attention she attracts (at least for now), McCain has created an instant celebrity just as well.  The question moves to: how much of that is her and how much of that is manufactured by professionals?  

 

Palin already generated more google searches than Obama (please compare to the media attention Biden against Palin).  If this trend can sustain after the Republican National Convention, then we may end up seeing the presidential race contested by Palin and Obama in the TV box.  

 

In the polling figures, Obama’s lead has been shrinking.  Given an unpopular incumbent, a flash back memory of Katrina, it is a nice surprise that a party convention (namely Republican now) gave McCain a lift in polling.

 

If Palin is really a pit bull, an effective campaigner and a quick study, then this contest between Obama and Palin probably will turn out more interesting than Obama versus Clinton.

September 4, 2008 Posted by | Barack Obama, clinton, Current Events, Democrats, election, Election 2008, Hillary Clinton, John McCain, mccain, obama, Palin, politics, Republican, Sarah Palin, US politics, wordpress-political-blogs | 2 Comments