A Few Random Stories Which Should Irritate You

1. The WSJ argued that the government misled us when they said that lending declined 2.2% among the 21 largest banks that have received bailout money. The WSJ said that the 2.2% is the median (half the banks saw loans decrease more than 2.2% and half the banks saw loans decrease less than 2.2%). The WSJ argues that the number should be the average. I agree with the WSJ – if we care about the amount of lending that is going on, we care about the average. Imagine 10 banks cut lending by 2.1%, one bank cut lending by 2.2% and ten banks cut lending by 60%. In that case, the median is a drop of 2.2%. While I’m irritated at the government’s use of median, I’m even more irritated by the WSJ, as they left out Wells Fargo (which accounts for 24% of the new loan market!!!) and increased the amount that they loaned. The WSJ said that they couldn’t break out WFC’s numbers because of the Wachovia acquisition.



2. There is a program called Trade Adjustment Assistance that gives added benefits to workers who are displaced because of imports or production shifts out of the country. I’m pissed that this ever existed, but I’m particularly irritated that we have enhanced the benefits and we are going to start offering them to service workers (such as call service reps). Among other benefits, these people will get 2.5 years of cash benefits plus schooling. There are two huge problems with this: (1) there’s no way to distinguish who is being hurt by shifts outside of the country – we could argue that for every industry; and (2) there’s no reason that this person is deserving of more benefits than someone who has lost his job due to American competition, a slowing economy, a dishonest employer, etc. It makes no sense to me. Apparently, the program costs $1 billion. If we didn’t piss that money away, we could have subsidized bigger bonuses at Merrill Lynch.



3. Pepsi made an offer to buy its two largest bottlers. Just ten years ago, they wanted to focus on soft drinks, so they spun off the bottlers. It’s got to be great to be a banker – sell an idea and then put it on your calendar to unwind the idea in the future. Nice work if you can get it.



4. Pepsi is being advised by Bank of America and ML. So here’s my question…BAC drove themselves into the ground by overpaying for Countrywide and ML. Who thinks, “wow, I need to get BAC to advise me on a deal?”



5. The government is raising the possibility of converting more of their preferred stock investments into equity (of the troubled banks). Supposedly, this will be done to protect our investment. Here’s my question…you are giving capital to a failing business…would you rather receive fixed preferred stock dividends or speculate on their survival and not receive dividends? This is just part of the “bailout two step” where we make an investment and then give up our right to earn money on our capital.



6. AIG is considering expanding their Board. Currently, they have 11 directors. Here are the problems with this: (1) 80% of the company is owned by one shareholder – the US; and (2) there’s plenty of academic research showing that larger boards are ineffective. Common sense tells us that we can’t have 20 people overseeing something.



7. Neil Barofsky, the inspector general in charge of overseeing the bailout plan, issued a report to Congress blaming the Treasury dep’t for not making banks disclose how they will use bailout funds. While this makes sense in theory, it’s moronic in practice. Imagine I’m giving money to my child in college and I tell him to use the money for books, not beer. He puts the money into an account, buys books and sends me the receipts. The bottom line is that he now has extra money to buy beer. It’s no different with the banks. They use money to make loans or replenish capital…they are now more able to pay bonuses or provide perks. You can’t win this game. You can, however, put restraints on a bank before you provide funds – e.g., “no beer.” If you don’t have those restraints, you have problems.



8. In his report, Barofsky made two points that I completely agree with. He complained that the non-recourse loans create the possibility that the private investors (in the public private partnership) may just walk away and stick the government with more losses (see my earlier discussion of Geithner’s plan for the same argument). He also complained that the Fed will not be examining these legacy assets – they will be relying on credit ratings agencies. That’s awesome – we’re going to rely on the same people who originally rated these securities AAA. This is like hiring Bernie Madoff to handle the investments of the people who he defrauded – to help them recover. If we were any dumber, we’d reward ratings agencies with higher compensation for higher ratings.



9. Chinese Premier Wen Jiabao called for more surveillance of countries that issue major reserve currencies. He was indirectly criticizing the United States. Here’s a news flash China: our currency would be a lot stronger if the Chinese actually paid for all of the intellectual property that they steal and use.



10. GM is apparently willing to sell their Opel brand and their Saab brands (separately) in transactions in which GM will receive zero. I’m relieved to see that we’ve finally accurately valued these brands…they’re worth zero. In reality, GM should have to pay others to get some of their brands taken off their hands.