The Appearance of Propriety…But Bankers Like it Too!

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Now, on to what I read today…




1. Markets

The market was up 46 points, led by Boeing.  Boeing shares rose 7%, as their Q4 earnings beat estimates.  They also said that lending is becoming more available (so Boeing won’t have to finance as many of their customers) and that the deferral rate (of orders) slowed.  Caterpillar dropped 4% as they missed earnings and lowered estimates for 2010.




Fed maintains language. The Fed said it would keep rates low “for an extended period,” – language that has been used for the past year.  The President of the KC Federal Reserve Bank said that the markets were strong enough for rates to increase (and he voted against the majority).  The Fed made positive comments about the economy, saying that it continued to strengthen and that business spending is picking up.  The FOMC said that the recovery would be “moderate for a time” which is an improvement from when they had previously said it would be “weak for a time.”  The Fed confirmed that they will conclude their purchase of $1.25 trillion of MBS at the end of March.




Investors continue to worry about the weak EU countries. After Portugal reported a larger budget deficit than expected (9.3% of GDP), investors worried that the EU has many problems: Greece, Portugal, Spain, Italy and Ireland.  Credit default swaps (think of this as “insurance on bonds”) rose in price for Greece, Spain and Portugal.

Investors were also alarmed when Greece stated that they were not making any sales to China.  Earlier reports had said that they were going to issue $35 billion of debt to China and that China might invest in the National Bank of Greece.  Now, there’s a belief that China doesn’t have interest in that much Greek debt.  China issued a statement that “if we wanted more crappy securities, we’d just buy Treasuries – and you don’t have to censor these comments.”  Okay, China didn’t really say that, but it could have happened…

On a related note, the dollar hit a six month high against the euro.




2. The Economy

New home sales hit a nine month low in December.  Sales dropped 7.6% (from November) to an annualized rate of 342,000.  To give you perspective, new home sales peaked in July 2005, at an annualized rate of 1.4 million.  In today’s world, it’s hard to compete with the price of foreclosures.  In addition, the supply of new homes is at the lowest level since 1971.  (Why would builders want to build homes in this environment?)




I must be wrong…I agree with the French. French President Nicolas Sarkozy gave a fiery speech at the World Economic Forum where he (1) criticized countries that under-value their currency (China); (2) said that we have to make capitalism more moral (US); and (3) argued that we need coordinated efforts to regulate the financial system.  I agree with these ideas.  The problem is that no one was listening – everyone was looking around trying to see if his wife was there.




What a bummer. Once the participants realized that Sarkozy’s wife wasn’t there, things got even worse.  Economists and investors predicted that the recovery could slow later this year.  Governments have too much debt (which will result in higher interest rates).  Nouriel Roubini said that the world faces a slow recovery that will end in subpar growth.  Roubini and Soros said that we need more regulation than Obama has called for.  Raghuram Rajan, a finance professor at Chicago said that 10% unemployment in the US and 10% growth in China will result in calls for protectionism and populism.  As the resident dumb-ass populist, I know that I think it’s incredibly unsophisticated of me to want governments to compete fairly, protect intellectual property rights and maybe even respect human rights.




The IMF predicts that the US will grow 2.7% this year and 2.4% next year. The growth will not be high enough to substantially reduce unemployment.  They also said that banks need to increase their capital in order to handle upcoming commercial real estate losses.




3. The Bailout and Other Stories That Will Piss You Off

I think we’re missing the point here! An interesting WSJ article said that some investors are starting to bet that when the Fed stops buying MBS, it won’t be catastrophic for the mortgage market.  Investors will buy government backed MBS in order to get higher yields.  I think that this is right, but this misses the point.  This is still a government subsidy.  I remember when Fannie, Freddie and the government used to say that the government does not guarantee Fannie and Freddie debt.  Fannie and Freddie guarantee these securities and now we guarantee Fannie and Freddie.  As I have argued previously, the government will use Fannie and Freddie to promote their rescue activities.




Currently, you can buy MBS issued by a government backed agency and get 138 basis points above Treasuries.  That’s almost as much as you can get from a “A” rated bond.  But with the MBS, you are backed by the government.




Perfect – it has the appearance of propriety, but bankers like it too! BAC and C are giving compensation in stock, but it’s stock that can be sold within a few months (rather than a few years).  GS and MS are letting employees borrow money.  Some banks are using the deferred stock as collateral for a loan!  This isn’t much different than receiving your bonus in cash.  Some U.K. banks are considering raising salaries – because only bonuses result in the 50% penalty tax.  Some US banks are giving bonuses in “deferred cash.”  Deferred cash is a cash bonus that’s put in an interest-bearing account for some time.  That allows the bank to say that they are giving smaller cash bonuses, but in reality it doesn’t lower compensation and it doesn’t do anything to reduce risk taking.




The whipping boy fights back. Geithner was grilled in a House hearing on AIG.  He fought back, arguing that if they didn’t pay 100 cents on the dollar to AIG’s counterparties, the economy would have had a disaster.  He said that the government was choosing between “tragic” and “terrible.”  He also turned the issue on the Representatives and told them that if they were horrified by AIG, they should be committed to financial reforms that will prevent excessive risk taking.

The Inspector General of TARP (Neil Barofsky) testified that the negotiations (with AIG’s counterparties) could have been handled a lot better.  He said that they should have been done at a high level, rather than with midlevel executives.




Tiny program for business lending. The Obama Administration is putting together a plan where they are going to lend $30 billion to community banks at low rates.  The rates will be particularly low if the banks can show that they are increasing lending.  The $30 billion is left over TARP money.




Signs of things to come. Oregon voters have approved two tax measures which would (1) raise the marginal tax rate by 2% on residents earning more than $250,000 and (2) increase the state’s minimum corporate income tax and tax revenues of companies that don’t have earnings.  Since states have huge budget deficits (totaling about $256 billion between now and 2011), you can expect more plans like this to arise.




4. Companies

Truly amazing! Apple released the new iPad – the gadget that is somewhere between an iPhone and a computer.  I’m not sure what to make of the device, but what’s amazing is that this is the top story on wsj.com and cnn.com tonight.  From what I’ve read about the iPad, it doesn’t excite me (and realize that I’m a Mac user and a big Apple fan).  If I was going to read on it, I’d probably prefer the Kindle.   In addition, the iPad is not going to have great wireless.  You can buy a more expensive model with 3G, but even that doesn’t really do it for me.  Of course, I’m a balding, 45-year old man, so I’m not sure that I’m the target market.

One more gripe (this time about the Kindle)…I’ve looked at subscription prices for The Wall Street Journal and other newspapers on the Kindle and it’s just not economical.  I can read these things on a bigger screen and cheaper on my laptop.  The pricing discrepancy just doesn’t work for me.




Interesting speculation. I read an interesting piece by William Pesek (Bloomberg) who argued that if Google leaves China, it may result in other American tech companies losing interest in China.  This may help India.  He said that while India is much more bureaucratic and less efficient, they are much more innovative, they have more international companies and they have better laws on intellectual property.

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