Power And Dollar

Did Obama Plagiarize Glass And Stegall?

Did Obama’s Volcker’s Rule announcement contribute to the drop of DJ?  Did Obama plagiarize Glass and Stegall?  Pundits all over the place say that is the result of the Volcker’s Rule.  One, Volcker’s Rule alone did not necessitate the fall.  Two, who among these pundits actually read what the White House press release, and not the Bloomberg announcement, is about?  Three, Volcker’s Rule is not “new”.  Volcker’s Rule is actually a re-tro.  Four and finally, what is the implication/impact (theoretical or academic) of Volcker’s Rule?  What can we learn from Geithner’s opposition to this Volcker’s Rule?

Yahoo (of all places) actually hit it right: there are plenty of reasons for DJ to fall.  Realizing the profits from Massachusetts Senator election is quite a good reason already.  In fact, the rise of DJ on Tuesday contradicts the fall of DJ on Thursday: DJ rose because the market expected that having 1 more Republican in the Senate would derail the agenda of Obama.  If investors believed in that, then the investors could not have believed Obama’s Volcker’s Rule would become law.  So, Volcker’s Rule alone did not create the fall.

The White House press release regarding Volcker’s Rule actually gives very little information.  And luck would have it that everything covered by Obama’s 01.21 announcement is already covered by H.R.4173 – Wall Street Reform and Consumer Protection Act of 2009.  Quite possibly, nothing is new. 

Worse, nothing is new: Glass-Steagall Act probably covered everything Volcker’s Rule is about.  Since Volcker’s Rule is not in the legislation form, no comparison can be done.  In fact even Volcker calls it “in the spirit” of Glass-Steagall Act.  It further proves that Obama named it Volcker’s Rule for political purposes: to show he is doing something to punish the bad guys (banks) for the rest of us. 

Preventing banks from having private equity funds, hedge funds et etc do decrease profits of the banks.  However, these funds make up 5% of revenues of Bank of America (NYSE: BAC), Citi (NYSE: C) and the like.  Yes, it does strengthen the point that this rule is for show, especially after the Massachusetts’ loss.  However, Volcker’s insistence on this issue has a point: it takes 5% of their revenue.  However, these banks are using depositors’ money to play these large bets, using FDIC’s insurance to back themselves up, and twisting their risk adjusted return on capital (RAROC).  Here is an example:  How much can $1000 bet if you were to trade on currencies?  Answer: with $1k, you can trade the equivalent of $100k of Japanese yen, British pound, Euro and so on.  If the currency fluctates 1%, the $1k is already gone.  If the market swings more than 1%, the bank has to lose all of its money (the $1k depositors’ money) and more.  So, these banks are misappropriating depositors’ money (which would be illegal in insurance laws), making taxpayers pay for their risk, and presenting themselves before the eyes of investors. 

What it really does is to draw out a lot of hot money from the market: less money will change hands on a daily basis.  That affects all industries.  Investors (institutional espeically) will have to play with real money, if this works.  Retail investors will make up a greater proportion of money in the market than before.  Market will be more difficult to be manipulated than before by a few players.  Will that shrink the whole market? Probably.  However (or hopefully), it will mean everyone will be trading with a saner head since no one will be playing with free money.

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January 25, 2010 Posted by | banking, Current Events, Investment, legislation, market, Money, obama, opinion, Palin, politics, Thoughts, trading, US politics, wordpress-political-blogs | 3 Comments

Will Haiti Lead 2010 Legislation Agenda: Immigration?

 

One week after Haiti earthquake, CNN finally talks about Haiti refugees, not that there is any yet.  Washington Post started this thread on the 5th after the earthquake.  Obama spoke of “unwavering support” to Haiti exactly because of the cost of refugee management.  Will Haiti refugee make the border security or immigration issue any easier? 

One certain outcome is that support to Haiti will be proportionally to the risk of refugee exodus from Haiti.  Will this be pushed into a fiscal policy management issue instead during the 2010 mid term election?

January 19, 2010 Posted by | Barack Obama, Current Events, Election 2010, obama, opinion, politics, US politics, wordpress-political-blogs | Leave a comment

Massachusetts Is Pushing Up Your 401k

As Massachusetts comes to a close to their choice US Senator, investors from the rest of world are approving their expected result: Republicans will win this election.  How does a local election affect your 401k?  Is that the only factor that drives up your 401k value?  No, certainly not.  However, the spike of not only a few companies (Aetna, NYSE:AET; Johnson and Johnson, NYSE:JNJ), but also industries’ stock value and the appreciation of US dollars against most currencies and in particular against Chinese yuan (CNY) is a good indication that this fluctuation is not due to some company quarterly earnings but some political event (Cadbury is the exception, NYSE: CBY).

NYSE and S&P500 are going up today.  What is the top concern of investors these days?  The future US fiscal deficit.  What will be the greatest contributor to future US fiscal deficit?  Health care.  Obama’s health care reform will have a direct impact to US fiscal deficit.  Not having an one-sided US Senate also means banking reform will have to have greater compromise.  Rumor has it that Consumer Financial Protection Agency may be dropped. 

Are investors disapproving Obama administration?  Investors probably will donate to his re-election campaign as well as his opponent’s in 2012, not to mention both parties’ 2010 congressional election funds.  Investors simply see that the new policies do not provide more values.  Investors like risk management tools that enhance certainties of any kind.  Risk certainty is what helps investors choose their company ownerships (i.e. how your mutual fund manager buys stocks for you).  Therefore, one cannot assume investors hate governments at all times. 

Health care reform in the States will create a higher demand for health care products, such as health care insurance, drugs, and equipments.  The list will be endless.  Financial industry reform will provide greater risk control or at least monitoring over systematic risk.  However, health care reform is so broad that no one can understand while financial reform favors the establishment of the financial industry and not the investors (you, a typical 401k or IRA investor).  

Obama’s options?  House (Nancy Pelosi) will have to pass the legislation at its current form or suffer a longer and more arduous negotiation between House and Senate for any bill senate passed, including the health care bill.  Divert attention from anything unpleasant to immigration legislations.  Haiti will induce refugee problems.  Mexican border violence will induce debate about border security, for instance border fence.

January 19, 2010 Posted by | america politics, banking, Barack Obama, Current Events, health care reform, obama, opinion, politics, US politics, wordpress-political-blogs | Leave a comment

Obama’s Another Banking Show

Taxing on banks is politically convenient since people are angry against the financial crisis.  Thus, it is a populist solution.  Furthermore, a mid-term election is coming up where the incumbent party is expecting to lose seats.  What is interesting about this item is: who will (and will not) get taxed among these banks?  What other options does government actually have to achieve the stated goals?

Community banks will get excluded.  Community bankers are still very influential in the local communities, i.e. they affect a lot of voting behavior in the congressional districts.  The key about this where is the cut-off point for community banks or non-community banks?  There are more than 8,000 banks in the country.  Of those, the top 3 banks take up about one third of the assets, more than $3T altogether.  About 100 banks are over $10B in asset.  If $10B is the cut-off, then we have 100 banks for this tax.  But is it $10B or $1B for a bank to be considered a community bank?  How much room is there?

The government says it wants to not affect consumers and investors.  That is rhetoric.  We all know it will get passed on to consumers AND investors.  It’s just who gets more of it. 

If eliminating fat cat is the goal, are there options?  There are always options.  The only question is: what kind of trade-offs are there?  A company is able to pay huge sum to executives (still employees) is that there are so few companies occupying the market space that investor have no choice but to part the profit to these critical employees.  Making the profit margin among these companies thinner by taxing is only one way to minimize the profit.  The more market oriented approach is to introduce more competitors in the market, for instance,

1)      Enable smaller banks to eat into the market share of the big markets;

2)      Disable banks from entering too many different markets, such as the old law that says a retail/mortgage bank cannot enter investment banking;

3)      Banks cannot perform house trade with depositors’ money.

Are these above new and bright ideas?  No.  These are all recycled ideas America has already tried and ditched or tried in other industries.  The first one is congruent to the anti-trust law.  The second one is Glass-Steagall Act.  The third one is from insurance industry and pension industry.  Obama can achieve the goal without being overly creative.  This creation simply tells us he is on another political show.

January 11, 2010 Posted by | america politics, banking, Barack Obama, 美國, Election 2010, legislation, obama, opinion, politics, Regulation, wordpress-political-blogs | 2 Comments

Obamacare and Copenhagen Accord: Non-Events

US dollar continues its rise against Euro and British pound.  The recent news regarding the development of health care bill and Copenhagen accord did very little to reverse this movement.  Why does it matter?  What does it mean?

The appreciation of US dollar indicates the development of the Obamacare does at best not weaken the confidence of the US economy or even improve the fiscal deficit in the future years and at worst not prevent US from being the temporary safe haven being the money parking lot.  Similarly, since Copenhagen accord is not a binding document, it provides no teeth to decrease carbon emission.  Thus, the mod of economic activity will not run into the risk of major shuffling in the United States.

Certainly a series of quarterly earnings following Copenhagen accord in the United States helps.  However, Obamacare and Copenhagen accord could have set how the future game rules will be structured not only in the States but also in the world, only that the States may have to bear the biggest brunt of this episode. 

In particular, Obamacare is not sending health insurance companies’ stock price downward.  On the contrary, health insurance companies have been performing very well in light of the Great Depression.   Either the market has already factored in all the political risk premium or the market actually considers them as non-events thus far.

December 22, 2009 Posted by | advocacy, america politics, health care reform, opinion, politics, US politics, wordpress-political-blogs | Leave a comment

Obama’s Public Administration Philosophy

No polling result is available to serve as a reaction gauge to Obama’s Afghanistan deployment speech.  Obama was an anti war candidate.  Now he is making a deployment decision.  Is he contradicting himself?  What is he after?  What does it mean to us?

He is after his re-election, as every politician is.  Having said that, what also went on in his mind must have been the 2010 mid-term election, although he knew (and everyone else knew) that Democrats will lose seats in that election since all president lose seats in the first term’s mid-term elections. 

War is expensive.  Unemployment is still high.  He acknowledges with Eisenhower’s quote very well that “Each proposal must be weighed in the light of a broader consideration: the need to maintain balance in and among national programs.”  After all, war is still a budget item. 

He is not appeasing his own base.  That is for sure.  Is he reaching middle ground?  Considering a much greater proportion of rural area voters have military ties, having a higher expense on military could be Obama’s way to secure a wider base.  But at the expense of sending more people to battle field?

Obama’s speech stresses on one point to justify his approach to this war: the primary nation of nation-building exercise is his own nation.  Will the rural electorate see this as a venue to reward Obama’s core constituency, the urbanites?  Of course, this will be dictated by what Obama will do with the resources or energy freed up by this management approach.

This Eisenhoweran philosophy is simply a reflection of budget constraint.  This is consistent with Nancy Pelosi approach to this portfolio item: war tax.  If you want it, then pay for it.  If you do not want to pay for it, then you probably don’t think it is worth it.  Will the war tax actually fly?  Hard to say.  However, if this Eisenhoweran approach to military conflict will be applied consistently over time and therefore will establish a new foreign policy doctrine, then this war tax idea will eventually take roots.  That will establish another kind of precedence: purpose dedicated tax.  Not that purpose dedicated tax is completely new since social security is funded by a dedicated tax as well.  However, this war tax will definitely take this idea to the next level. 

This is what affects us the most.  America is facing a fiscal crisis and will continue to face a fiscal crisis for decades to come even after paying down the costs incurred by the Bush’s Iraq war, Bush’s Afghanistan war and now Obama’s Afghanistan war, because of the expecting expenses for baby boomers.  Due to this budget constraint, conflicts different interests group will compete harder for this federal budget.  Purpose dedicated tax will then be the weapon for different groups to secure their own funding, especially for new issues, such as green issues. 

If Obama will be employing Eisenhower approach and Pelosi will be playing her cards, they will create a new policy management philosophy that will last long beyond their political accomplishments.

December 3, 2009 Posted by | activism, advocacy, Afghanistan, america politics, Current Events, Election 2010, opinion, politics, US politics, wordpress-political-blogs | Leave a comment

Why Can’t America Happy Talk With Pakistan And Save 2010 Election?

Did anyone foresee that US-India relationship has an impact in 2010 election?  Or that it may cost $20B annually?  US Secretary of State Clinton is visiting Pakistan for three days to have a frank and open discussion and is in no time to have a “happy talk”.  Pakistan is the most important ally to US in the anti-terrorism war.  Therefore, US should be happy to have such an important ally and Pakistan should happy to see it is an important ally to the most powerful country on earth.  What made this strong Pakistan-US relationship to the point where there is no time for happy talk?  What sours the relationship?  Is US able to fix it?  Is US going to find a new friend?

The sore point is about the future of Afghanistan.  US want to remove terrorist heaven in the area and be done with it.  The core interest of Pakistan is its relations with India.  The US’ version of the Afghanistan future is not advancing Pakistan’s interests with India. 

Pakistan, relative to India, has no strategic depth.  Of all its fronts, Afghanistan is the only front where Pakistan can develop, cultivate and incorporate as Pakistan’s back.  That was why Pakistan would have supported US’ interests in Afghanistan during the Soviet Union’s Afghanistan invasion and created resistance forces where Pashtuns, Pakistanis cousins, had the controlling stakes.  If US’ version of Afghanistan is to dilute the influence of Pashtuns, open Afghanistan to more international players (say India) or US itself develops a stronger ties with India and marginalizes Pakistan as a result, then this ally relationship may not be simply a bargaining chip for Pakistan, but actually may become contrary to the self interest of Pakistan. 

US have developed an undisputable interest with India in the eyes of Pakistan.  Both India and Pakistan have nuclear weapons (not just capability, unlike Israel).  However, US scold Pakistan and promise to assist India to develop civilian nuclear abilities (Hyde Act).  Of course, US see India as a counter weight to China.  However, in doing so, US are compromising its anti-terrorism objective by alienating Pakistan. 

If India serving as a counter weight to China is more important than losing Pakistan, then can US find a replacement ally in the area to fight terrorism?  Ironically, the only player adjacent to Afghanistan available in the area is China.  All other countries are either unavailable (Is Iran available?  At what price?) or they have their own problems to deal with, say Turkmenistan, Tajikstan, Uzbekistan.  Do these countries listen more to Russia or China since they love their Shanghai Organization so much?  Do US want to invite China to extend its influence to Afghanistan?  Or have US ever invited China to play in Afghanistan?  Can US impose this arrangement to Pakistan, i.e. can US tell Pakistan to fight a war and strengthen Pakistan’s nemesis at the same time?  Worse, what if this arrangement actually is eroding the supporting base of the Pakistan governing elite?

More likely than not, Clinton’s trip means this relationship management has gone beyond the authorities of Special Representative for Afghanistan and Pakistan Richard Holbrooke.  If this frank and open discussion is meant to be a give and take negotiation, then we can wait and see if a resolution will come.  If this frank and open discussion is meant for Pakistan to rant and move on to live with this arrangement, then this military campaign in Afghanistan will drag on as other NATO allies plan to return home.  If Clinton’s trip is meant to facilitate Obama’s final decision on Afghanistan’s troop level, then considering its fiscal policy consequences and electoral consequences in 2010 and possibly 2012, Clinton is actually carrying one heavy responsibility.

October 30, 2009 Posted by | Afghanistan, Current Events, election, Election 2010, Hillary Clinton, India, politics, wordpress-political-blogs | 1 Comment

Want A Solution? Or Want A Political Solution?

Regulations suffocate businesses, so we have been hearing from the right side of the political spectrum.  Can you imagine a case where businesses, big businesses, want to have more regulation? 

Central bank veterans like Volcker (Federal Reserve) and Mervyn King (Bank of England) and politicians like Gordon Brown and Barrack Obama (or Timothy Geithner) are advocating opposing positions.  The first interesting story is that central bankers (or bureaucrats) are advocating less regulation.  The more interestingly part is the affected businesses want more regulations.  What is at heart of this debate?

King advocates that in order to prevent another financial tsunami, we should prevent having banks that are too big to fail in the first place.  To suffice that, we need to break up banks that are big enough to pose systematic risk to the economy.  In this case, they see financing the whole economy as a portfolio.  Diversification is the solution.  It is simple, very simple.  Cost of regulation is minimal.  Markets will regulate and therefore reduce some of the problems.  Easy on the government (read: central banks will not get blamed), easy on the consumers.  Who would have a problem?  Big banks: Citi (NYSE: C), HSBC (NYSE:HBC) etc because they are everywhere.  The market share of big banks is already big.  The top three banks (BOA, NYSE: BAC; Citi, NYSE: C; JPMorgan Chase, NYSE:JPM) in the US take up already 1/3 of the assets in the bank sector.  NYT has an article about how Volcker is doing with this effort.

Another angle to view the cause of this financial tsunami is that some financial institutions carried risky activities that were not lending in nature (i.e. not banking) and relied on government bailouts where the money came from deposit insurance funds when such funds were designed to protect depositor’s money and not to finance the risk of activities unrelated to banking, i.e. lending.  That is why CNN is saying the cost of the bailout will be higher than previously thought.  To suffice that, we can separate lending from the risky activities (trading).  This is actually the Glass-Steagall Act, which got repealed.  Again, who has a problem?  Again, big banks: Citi (NYSE: C), HSBC (NYSE:HBC) etc because they have activities of all kinds, from boring first lien mortgage lending to exotic trading activities that only the math PhDs in that specific department would understand and not even the CEO can speak to them intelligently in any kind of congressional hearings. 

Gordon Brown and Barrack Obama are advocating neither of these.  They want compliance enforcement agencies (Financial Services Authorities in UK and Federal Reserve and others in the States) to create new rules/laws for the governments to check on.  These would involve reserve requirements and so on.  In both countries, central banks will have more oversight powers, which should be what bureaucrats want (more government jobs!).  However, both (and Nobel laureate Stiglitz) argue against it.  Why aren’t politicians listening to their advice?  Since central banks still carry high credibility in the society, central bankers do not typically have aspiration for high political office, elected officials want central banks to mitigate this systematic risk and thus be liable to the failure of systematic risk.  The proposals by central bank veterans are fundraising poisons. 

Why is Alan Greenspan silent?  His position is that this systematic risk a financial tsunami.  Nothing could have prevented it (and thus it was not his fault).  If some compliance enforcement could have prevented this tsunami, then he would take the blame.  Thus staying silent serves his best interests.

October 21, 2009 Posted by | banking, Current Events, 美國, obama, politics, Regulation, US politics, wordpress-political-blogs | Leave a comment

Did Centrists Republicans Just Defeat Obama-Care?

Democratic Senator Baucus is presenting a compromise health care bill in the Senate without public option whereas CNN reports that Obama is finally drafting his own version with a trigger for public option.  The Gang of Six has three Republicans.  They are: Enzi, Snowe and Grassley.  Grassley says in CNN that public option is Obama Care.  Now that Baucus proposal does not have it, Grassley and the like may actually have a way to claim victory that they will have defeated Obama Care.  If so, then health care will pass a giant step. 

 

With the sections 2701 to 2703 and 2706, 152, Baucus essentially creates an analogous health care version of Equal Credit Opportunity Act.  The impact of this idea will be long lasting, much more profound than Equal Credit Opportunity Act not because of any anti-discrimination, but because insurance business is completely centered on selecting good risks, i.e. choosing the less risky applicants, in any kind of insurance product.  One example is that insurers give a different price of life insurance based on occupation of applicant.  If you are a fireman, then your rate is higher.  If you are in the army, you rate is higher.  That is the reason insurance companies are not allowed to use DNA to determine price of health or life insurance.  Similarly, if you are younger, your auto insurance is higher.  While your age can be a factor in auto insurance application, your age cannot be a factor in your credit application, as prescribed by Equal Credit Opportunity Act.

 

This piece of legislation is about health insurance.  Therefore, life insurance can continue to legally discriminate life insurance applicants based on existing conditions. 

 

Health insurance companies underwriting procedures will have to change, industry wide, nationally.  Health insurers are Cigna, Aetna (NYSE:AET), Humana (NYSE:HUM), UnitedHealth (NYSE:UNH) Blue Cross Blue Shield (http://bcbs.com).  Here is an example: Just like some life insurers give better rates for their life insurance policies, some companies may have been marketing well among smokers for health insurance policies.  If Baucus proposal goes through, all health insurance companies may have the same application procedure to underwrite a smoker.  Smokers market is now thinner than before for this smoker specializing insurer.  We do not quite know if discrimination against occupation is covered by Baucus, or age or anything else.  However, a lot of compliance work will get involved in the future. 

 

How will it enforced?  Is Baucus planning to have Department of Labor to have a stronger role in health care enforcement?  Insurance is completely state regulated, for now.  Will this kind of enforcement be incorporated in Treasury? 

 

We will know by the time our speech entertainer Obama gives another performance tomorrow.

September 8, 2009 Posted by | activism, advocacy, Barack Obama, Current Events, 美國, health care reform, opinion, politics, Regulation, US politics, wordpress-political-blogs | Leave a comment

Will Obama’s Health Care Bill Be A Plagiarized Product?

If Obama is drafting his own version of the health care bill, and that CNN is correct regarding a “trigger option”, then at least Obama actually wants it done, although fairly late in game since almost no Republican is left for negotiation.  One good example: Grassley says he will defeat Obamacare.

This trigger option seems to suggest Obama will be plagiarizing Bipartisan Policy Center’s ideas.  In the world of policy development, being violated (the copy right of your policy idea, of course) is a good thing.  What does Bipartisan Policy Center say?  Why does Obama listen to this one?  Remember there are thousands of “think tanks”, advocacy groups and lobbyists who have plenty of ideas (guess where lobbyists’ policy ideas come from?).  So why Bipartisan Policy Center

Bipartisan Policy Center is created by all the living Senate Majority Leaders (Dole, Republican; Baker Republican; and Daschle, Democrat).  Taking their work probably does not only symbolize that Obama is buying a plan that has 2/3 of Republican input, but taking Republican ideas seriously into lasting piece of foundation to the country.  Is it a tactic or philosophic in substance?  Hard to say.  Does it increase the probability of getting done?  Yes, but how much?  That will have to depend on the sales delivery mechanism.  Will it be LBJ style where Obama will be calling each Congressmen, their donor, mother, children, gardener and babysitter?  Will it be an air war about Republicans defeating their own ideals?  It reads like Obama will want to avoid fighting. 

If you want to have advanced information about how this policy will affect your favorite health insurance companies such as Cigna, Aetna (NYSE:AET), Humana (NYSE:HUM), UnitedHealth (NYSE:UNH) Blue Cross Blue Shield (http://bcbs.com), then consider reading Pillar 2.  The main piece of recommendation from Bipartisan Policy Center that is related to health insurance companies such as is in Pillar 2.  If you want to find out how it will affect balance sheet of health care delivery companies (hospitals and so on) like Health Management Associates (NYSE:HMA), Community Health Systems (NYSE:CYH), then Pillar 1 and Pillar 4.  Pillar 3 has something interesting about laws concerning patients.  Of course all 4 pillars are important to all vested parties, be they practitioners, insurers, buyers, support systems (technology service providers).

September 4, 2009 Posted by | activism, advocacy, america politics, Current Events, obama, opinion, politics, US politics, wordpress-political-blogs | Leave a comment