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Latest Comments108 Comments
Three Financial Stocks Worth Holding
WFC, like every other bank, claims to have (say it together now) "a very conservative loan portfolio". Whoopee, so did everyone else. Unless and until WFC publishes for more details on their loan portfolio, we have to assume this is on par with Dick Fuld telling us Lehman is solvent. We all know that WFC's loan portfolio is heavily concentrated in California (where home prices have fallen more than the national average). On that basis alone, real analysts (not the ones on Wall Street) would be worried about any company with a heavy California concentration.
I know in my state WFC sent out **UNSOLICITED** home equity checks through the US mail. Presumably, these went to people with high credit ratings -- meaning the loans will goose up Wells' statistics. But sending unsolicited loans through the mail (only requiring a scribble / signature to start?) is hardly a bank you can call "conservative&quo... I think its more accurate to say WFC knows how to manipulate average portfolio statistics.
As pointed out by another commenter, JPM runs the largest derivative book in the country. I doubt Jamie Dimon fully understands all the risks on (well, really off) his balance sheet -- and I am positive that the author has no clue.
BAC overpaid for Countrywide and Merrill. Ken Lewis is already backpedaling on whether BAC stands behind CFC debt -- its clearly not worth par, and probably not worth much at all. But since he bought CFC under the cover of darkness (and probably with the Fed's gun to his head), its not clear he can legally walk away. On Merrill, Lewis has stated unequivocally that he will shut the trading desks and focus on wealth management -- meaning the traders who actually know the risks on Merrill's books have zero reason to stay. Merrilll brokers can easily go into a private practice and outsource record keeping to Schwab, eTrade, Interactive Brokers, etc... its far from obvious why any of them want to deal with the bureaucracy of a mega bank.
And all three banks you mention face massive integration risks-- the corporate cultures of WFC / JPM / BAC do not match those of any of the companies they are acquiring. Risk systems (such as they are) are incompatible.
And all three banks are likely to face Citi's problem -- being too big to manage. I know CEOs are supposed to be able to leap tall buildings in a single bound and all that -- but the reality has fallen far short of that.
The management style needed to be a successful mortgage underwriter is not the same as the one needed to be a good wealth manager... A bank's best **trading** client might easily be a really bad mortgage risk. Having the same clients borrowing money and investing money is very obviously a doubling down of risk (from the bank's standpoint).
After G-20: The Beginning of the End of the Old Order
Next we have to get you to look at the effect of Keynes policies... Keynes policies completely screwed up the United Kingdom and turned it into an international bailout case by the 1970s. In the U.S., his policies were implemented in the form of the "Great Society" -- which failed in every way imaginable to achieve its goals. When you consider the economic costs dragged on through the 1970s and early 1980s when Paul Volcker finally cleansed the system via a very painful recession.
And yet, we still have head in the cloud college professors / socialist pretending Keynes policies were something other than a failure. Since we failed to learn from history, we now seemed doomed to repeat it.
Lets hope Volcker talks some sense into Obama.
GM Bailout Would Be Agony for Taxpayers
GM pays taxes on its banking businesses -- GMAC and Dietech. Before that, they made money / paid taxes on GM Hughes (which they bought and nearly destroyed) and on the former Perot Systems (which they did destroy). And they make money by selling (really leasing) their clunky cars to captive car rental subsidiaries (Hertz, Avis, etc) -- but again, that is really a financing business -- they dump the unsold cars at cost, and make money by renting the cars out (multiple short term leases).
The auto manufacturing business itself hasn't made money in decades
More Trouble in Store for Citigroup
"Not sure dismissing the highly paid producers is the way to go..."
Labeling traders and salespeople "producers" and the rest of the staff "cost centers" is the sort of thinking that got many banks into the situation they are in.
Many otherwise good sports players have fallen under the delusion that they (singularly) are the team, and all the other players are dead weight. Better coaches quickly rid these divas of their thinking before they mess up the entire team.
Without good back office people, trades won't clear and clients will get upset. Without good IT software, traders have trouble tracking all their trades -- the manual "T-sheets" of yester-year would never handle today's volumes.
And without a competent risk management department, banks would end up -- well, like they did end up. Over-emphasis on so-called "producers", while ignoring all the other producers that make the traders/salespeople's job possible -- is just another example of poor management on the part of CEOs.
If your bank has more than one employee (never mind 300K) -- it is a team sport. If the line guys don't do their job well, your star quarterback is just a target waiting to be sacked. Tell your linemen they are an expendable "cost center" and prepare to carry your quarterback out on a stretcher and loose the game.
And in the case of most banks, a lot of what the "producers" supposedly produced was really garbage. If the risk management department hadn't been gutted, the CEO might have known the difference.
Employee Healthcare Deductibles Are Becoming Punitive
www.washingtonpost.com...
www.nytimes.com/2008/0...
A co-worker of mine who talks a little too loud on the phone was recently speaking with her doctor and checking for drug interactions by listing all the medication she is on. The woman is about 40 years old and yet she is on dozens of medications. And her situation is far from unique.
Drug companies spend millions advertising directly to consumers-- my TV is filled with ads for everything from Zocor to Prilosac to ambien to who knows what. You may think consumers have no control over health care spending -- but I doubt the greedy profit seeking drug companies are advertising just for fun. They know you are wrong.
We are a country that takes a pill for absolutely every tiny little pain. We take pills to help keep us awake and vibrant during the day, and more pills to help us sleep. Are kids are doped up on Ritalin, while adults have a wide array of anxiety medications. Cholesterol drugs. Depression drugs. Blood thinner / thickening drugs. Biotech and pharmaceutical company stocks have been winners for years. There isn't enough room on this blog to list all the surgeries Americans insist on having. We are also a nation of couch potatoes who complain endlessly about obesity -- oh wait, we have expensive pills for that too.
Get off your lazy butt and go exercise outside. You will burn off some energy (no more anxiety pills) making you able to sleep. The sunlight and activity will treat your depression naturally. You won't be as obese, and your eyes won't hurt as much from staring at the TV all day.
Our healthcare costs are off the charts because of the choices we all make in our daily lives. Short of mandatory morning exercise, there is little the government can do to fix the problem and a lot they are likely to do to make it worse (facilitating fraud). We choose to take dozens of medications when we make life/work choices (stress) and when we make TV / exercise choices.
Whatever Obama does or doesnt do, he isn't going to get anyone's lazy butt off the couch and away from the TV
The Humility of Realism
Younger generations will get their turn, and they might be as bad as baby boomers -- but being young, they haven't yet reached the age where they have the greatest influence. Those positions belong (right now and for the last 15-20 years) to Baby Boomers.
Being fair though, we can't blame the Baby Boomers for Alan Greenspan. He was a failure of an earlier generation
The Humility of Realism
I do wonder about your second to last paragraph which starts, "Yes, the markets have failed because we let the credit creation inherent in a fiat money system run out of control. For the last 20 years, the Fed would never let a recession be severe enough that it would bring debt levels down, as the Fed did from the forties to the mid-eighties."
The Federal Reserve is **NOT** "the markets" no matter how big Alan Greenspan's ego ever gets. Alan Greenspan failed, just as he failed as a private economist. You argued quite effectively that it was the "Greenspan Put" that failed.
With all the interference from inept regulators (including Cox at the SEC, the inflating of GSEs by Congress, and Paulson recently) but mostly Greenspan -- we cannot draw any conclusions on the efficacy of markets. They were not allowed to function.
There is no place for a Federal Reserve in a truly free market. One could argue that a lender of last resort (who lends freely but dearly as advocated by Paul Volcker and others) is an improvement over a "pure" free market.
But the constant meddling and goosing and back seat driving of Greenspan cannot be called anything but a disaster. The U.S. is a victim of central economic planning -- the very same stuff that has screwed up so many other economies around the world.
In the end, that is why everything Paulson/Bernanke do to "fix" the problem is just making it worse... Central economic planners were and are the problem.
The G-20 Sings a Song of Sixpence
Keynes did not bring down the UK by himself, but his bone-headed theories on central economic planning certainly contributed.
Keynesian economics stays in economic textbooks mostly because college professors have a well documented socialist leaning. The country usually votes somewhere close to 50/50 Democrat/Republican -- even after Bush's bumblings, the country voted about 55/45 Obama/McCain. The country is somewhat centrist, as one would expect. College professors have done research on their peers and found that professors vote closer to 98/2 Dem/Rep. You are entitled to your opinion -- but the thinking of you and your colleagues is rather incestuous and not representative of the country as a whole.
The problems with Keynesian economic theories led to the rise of monetarists, neo-classical macro theorists, and a reincarnation of Austrian theories-- just to name a few. Prominent market theorists like George Soros completely reject the whole idea of markets finding any equilibrium. If Keynes' theories were as widely accepted as you claim, there would not have been a need for all these other schools of thought. You might emphasize Keynesian theories in your classroom, but that doesn't make the theories mainstream. Outside your classroom, you cannot threaten people with a bad grade if we don't agree with you.
Any analysis of the experience of Japan (and the US in the last couple years) thoroughly refutes the argument of a "liquidity trap". The Bank of Japan threw so much money at their "liquidity trap" that their govt debt is now over 300% of GDP -- and they have nothing to show for it. Bernanke has slashed interest rates and doubled the Fed's balance sheet -- and after all that Lehman failed while Merrill and Wachovia were days away from collapse.
A liquidity issue happens when banks won't lend to solvent borrowers. When people won't lend to insolvent borrowers, that is called common sense. Everyone -- from consumers to hedge funds to corporations to the government -- have more debt than they are able to service. Everyone needs to de-lever. No amount of extraordinary lending on the part of the Fed is going to change that.
Home prices got way too high as a multiple of income-- several standard deviations higher than the "norm" that existed before Keynes and several decades after Keynes. People do not have the income level to support home prices; making a loan (providing liquidity) to someone who cannot service the debt makes no sense.
An economy with too much debt already cannot be stimulated with more debt. There is no liquidity trap -- the whole idea is simply a shameless way for socialists to justify shifting more power to central economic planners like the Fed and Treasury. While Bernanke has issued some limited mea culpas, he hasn't had the courage to just come out and admit that Greenspan's policies were a major contributing factor to the bubbles and collapses of the last couple decades-- including housing.
Why Feds Shouldn't Regulate Insurance, Nor Own Insurers
Longer term though -- I was complaining about the over-emphasis on sales. I was very specific in saying that sales are not unimportant -- but that they are only PART of the business.
Too many inept managers focused 110% on sales and completely neglected everything else. This led to absurd levels of hubris on the part of sales staff, many of whom were glorified phone operators (many salespeople add lots of value, but during the "boom" many did not).
When a salesman "produces", how can you be so arrogant as to suggest that 100% of the credit should go to the salesman? If the firm has a reputation for not processing claims properly, clients won't do business. Clearly, some of the credit for the sale should be going to the claims processing people. If the firm doesn't manage risk well, than the firm will collapse and won't be able to pay claims -- so clearly, some of the credit must go to the risk management / actuaries. I could go on and on about other departments, but the basic message is this: it takes teamwork for a firm to be successful. Sales people often get very confused and think they are the whole team. During the boom, many big firms actually were so stupid that they labeled back office personnel as "cost centers" because they didn't bring in revenue like the head in the cloud sales force. If the rest of the team doesn't do its job, then you sales guys have nothing worth selling. The rest of the team must be recognized for its contribution as well.
It is ridiculous for talentless CEOs to fall over backwards for their top performing sales people -- but then not make a similar fuss over the top performing people in other departments. I have to keep saying this because the current thinking is so out of touch: if the rest of the staff doesnt do their job, YOU HAVE NOTHING TO SELL.
Sales people are simply worthless without something to sell. That's really just common sense-- but inept CEOs of late have forgotten. They focused 110% on sales and completely neglected everything else. Wall Street collapsed because moron CEOs forgot to reward risk management people. GM and Ford collapsed because they have neglected everything from cost controls to new product design.
Sales are important, and cannot be neglected... but so are many other facets of a business. The current crop of worthless CEOs forgot that. We have all seen sports teams where one player thinks he is God's gift to whatever sport -- coaches that are dumb enough to play along and neglect the rest of the team end up like AIG or GM or Lehman or Bear.
In the long term, there needs to be a balance ... but in the short term, most of these companies are going to have to over-compensate and over-emphasize risk management, and under-emphasize sales.
So short term: yes, cancel the sales trips. Long term, successful firms will recognize outstanding contributors throughout the firm.
The G-20 Sings a Song of Sixpence
Keynes economics were simply a means to an end -- he believed in central economic planning by all-knowing government bureaucrats and elitist academics like himself, which melded well with socialist ideas of the time. That makes him in the right place at the right time -- but hardly worthy of being called "brilliant"
The G-20 Sings a Song of Sixpence
Most academics and political scholars would say Harry Dexter White was the architect of Bretton Woods.
You also discredit yourself by blaming Bush for stuffing the IMF with washed up hacks. You are a college professor, so I suppose an extremist bias is to be expected. The facts are that the IMF hasn't been relevant since 1972 -- no President has paid much attention to it or the World Bank.
Bush has done plenty of bad things -- but you attributing super-human evil powers to him is ridiculous and makes you sound foolish.
Finally, you are pretty much alone in expecting great things this weekend. The biggest economy in the world is represented by a lame duck president -- with the president elect not even present. The French delegation thinks it can impose some sort of Francophile system on the rest of the world -- a strategy that has failed miserably within the EU never mind globally.
The IMF isn't relevant because its mission WAS to maintain a currency system that ceased to be more than 30 years ago. It has been floundering in search of a purpose ever since.
Its unlikely to become relevant this weekend. Just as an example, France thinks it should retain its influence (and voting power), but its economy is now much smaller than that of Brazil, which has less voting rights. China's economy is also substantially bigger than its voting share.
The only way the IMF can become relevant is if the "insiders" (basically the western powers) give up a lot of power and influence to emerging economies. The long standing tradition of having the president of the world bank and IMF come from western Europe and the US respectively can't continue if either organization is to be considered relevant.
Finally, the emerging economies generally have a very poor opinion of the IMF and its policies; so they are unlikely to support any regime that resembles the IMF of the past.
Why Feds Shouldn't Regulate Insurance, Nor Own Insurers
The U.S. over-valuing of sales people, and complete neglect of all other positions, is a big contributing cause of the current crisis. If Wall Street had placed equal importance on risk management as it did on sales, would they have caused the damage they did?
The Shallowest Generation (to quote another article on Seeking Alpha) has over-estimated the value of sales, and completely neglected everything else. Its not that sales are unimportant -- but they are only PART of the picture.
Wall Street failed because they thought sales were important, but risk management was not. GM (and Ford and Chrysler) are failing in spite of having a great dealership / sales network -- their products stink because the engineers were told they were unimportant.
Simple common sense here folks: sales people need something to sell. Period. No buts. The Shallowest Generation has completely neglected everything other than sales -- we are a nation of spin and promos, with no product substance underneath.
AIG should be canceling their sales vacations-- they should be giving fancy trips to risk modelers who can help get the company out of the mess the sales force created yester-year.
The best engineers / risk managers / product development staff in general need to be told, and SHOWN, that they are as important to a company as sales -- because they are. AIG and GM are textbook cases of what happens when sales are emphasized at the neglect of everything else.
The Underwhelming Frannie Loan-Mod Plan
No matter what alphabet soup government bureaucrats use to describe their latest stupid idea, they ALL boil down to this:
Tax the people who acted prudently and live within their means, and use the proceeds to reward the irresponsible and the foolish.
Even if these morons "stabilize" the housing market, what possible incentive do future home buyers have to behave economically or live within their means? heads, I profit from a government induced bubble market, tails I stick the losses on some poor schmuck who is stupid enough to play by the rules
Should We Really Bail Out the Big Three Automakers with $73.20 Per Hour Labor?
It is wrong for Bush to ask taxpayers to bail out poorly run banks, and it is equally wrong for Obama/Pelosi to ask taxpayers to bail out poorly run auto companies.
I am fed up with stupid politicians (both parties) punishing people who act prudently in order to reward inept, but politically connected, failures
Should We Really Bail Out the Big Three Automakers with $73.20 Per Hour Labor?
Let the bankers and the auto companies compete on their own -- the same as the rest of us.
If they can't make it -- it is because their products stink. It is not the fault of the taxpayers. We can get our bank loans and our cars from better run companies