Sometime last year I wrote a piece on the foolishness of many European municipal treasurers who allowed themselves to enter into transactions which under the guise of providing them with lower funding costs actually put them into risk positions far outside the briefs and unfortunately their understanding.
This morning as I sat down to my coffee and the Sunday NYT I was somewhat bemused to see the headline "Wall Street's Tax on Main Street". Bemused on a number of levels. Firstly as the implication was that Wall Street was levying a tax on Main Street which is patently an incorrect use of the word tax.
Wall Street can charge fees to Main Street, and does. But to suggest that Wall Street taxes Main Street in the sense used, is ludicrous.
My bemusement continued as the article shifted from incompetent municipal treasurers to equally ignorant corporate treasurers such as the Boca Raton Medical and Surgical Specialists.
These brain surgeons entered into a 5 year financing with a 25 year swap attached to it. The loan had fees of 3.8% or US$ 800,000 on a 21 million dollar loan.
One can argue the fee structure. What one cannot defend is the bank's sale of a 25 year swap structure nor the corporate treasurer's willingness to enter into such a transaction. Whatever the supposed cost savings sold to the treasurer there is no way that the risk position associated with a 25 year swap could ever be logically explained to someone taking on a 5 year loan.
But annoyingly the article didn't focus on the inappropriate sale of swaps to unsuspecting and obviously incompetent borrowers. Instead it focuses on the level of fees associated with swap transactions and closes with the tired call for transparency in swaps pricing.
Fools have been separated from their money forever. To talk about fees and the "shadowy" nature of swaps pricing while ignoring the fact that the problem lies in the intentional use derivative terminology to bamboozle (obviously) easily fooled borrowers to assume risks they should never even entertain let alone enter into.
Sunday 7 August 2011
Friday 5 August 2011
Growth IS the Answer
So the equity markets have their biggest one day fall since 2010 bringing up fears of 2008 and the fall of Lehman Brothers. The greed that led to the ever increasing leverage and more and more outlandish-some would say criminal-financial products that articulated the bull markets is now being overtaken by the other side of the equation.
Fear is now stalking the corridors of everyman. A continuing employment recession; a government trapped in its' own ideological straitjacket; a European fiscal crisis that keeps threatening to engulf the big players after swallowing the minnows- small wonder that the markets are in a tailspin.
And what is the apparent answer? Austerity. Cuts to the left of us, cuts to the right. It's as if none of the people making decisions, from the politicians at the top to the lowly employed at the bottom, have ever had to make any economic choices.
Throughout my years on Wall Street generally speaking when things got tough or when a new manager took over the first message to come across was the need to cut costs. Now that is not to say that one shouldn't look at the cost side of a business, but it was almost invariably done without any reference to the revenue side of the business other than to state the obvious-'there isn't enough revenue'.
And so the easy response is to cut costs. Easy because except for the guy who actually has to deliver the message it requires no great understanding or strategic insight other than to know-or more likely to think you know that that cutting costs will solve the problem.
But here is the crossover from the business world to the governmental one. One of the most apparent costs is headcount. You look at your headcount and make a quick revenue per headcount calculation and decide to cut 10 to 20%. So far so good.
But then something strange creeps in. How do you determine who to cut? The first to go are generally the youngest, therefore the cheapest and therefore the most expendable. They are followed by the politically inept, the complainers, and those that fall outside the golden circle which basically means are important to someone elses' business but not to the immediate business of the individual making the choices. The last to go are the big salaries who have a good track record and so despite the fact they might be having a tough year are saved.
So where is the crossover. In the range of spending cuts recently being enacted each party searches for cuts in the other's electorate. This is especially true of those congressmen following the dictates of their Tea Party constinuecy- or so the Tea Party members think. The truth is that they should all sit down together and actually come up with a bipartisan agreement as to what is important to cut "for the good of the country"- and what isn't.
And neither in the USA nor in Europe is there a serious discussion as to how to stimulate the economy, which of course would result in an increase in revenue. The focus is exclusively on the spending side. They introduce austerity in a Nimby sort of way and hope to have enough of a populist agenda to attract enough votes to stay in power.
Welcome to the continuing Great Recession.
Fear is now stalking the corridors of everyman. A continuing employment recession; a government trapped in its' own ideological straitjacket; a European fiscal crisis that keeps threatening to engulf the big players after swallowing the minnows- small wonder that the markets are in a tailspin.
And what is the apparent answer? Austerity. Cuts to the left of us, cuts to the right. It's as if none of the people making decisions, from the politicians at the top to the lowly employed at the bottom, have ever had to make any economic choices.
Throughout my years on Wall Street generally speaking when things got tough or when a new manager took over the first message to come across was the need to cut costs. Now that is not to say that one shouldn't look at the cost side of a business, but it was almost invariably done without any reference to the revenue side of the business other than to state the obvious-'there isn't enough revenue'.
And so the easy response is to cut costs. Easy because except for the guy who actually has to deliver the message it requires no great understanding or strategic insight other than to know-or more likely to think you know that that cutting costs will solve the problem.
But here is the crossover from the business world to the governmental one. One of the most apparent costs is headcount. You look at your headcount and make a quick revenue per headcount calculation and decide to cut 10 to 20%. So far so good.
But then something strange creeps in. How do you determine who to cut? The first to go are generally the youngest, therefore the cheapest and therefore the most expendable. They are followed by the politically inept, the complainers, and those that fall outside the golden circle which basically means are important to someone elses' business but not to the immediate business of the individual making the choices. The last to go are the big salaries who have a good track record and so despite the fact they might be having a tough year are saved.
So where is the crossover. In the range of spending cuts recently being enacted each party searches for cuts in the other's electorate. This is especially true of those congressmen following the dictates of their Tea Party constinuecy- or so the Tea Party members think. The truth is that they should all sit down together and actually come up with a bipartisan agreement as to what is important to cut "for the good of the country"- and what isn't.
And neither in the USA nor in Europe is there a serious discussion as to how to stimulate the economy, which of course would result in an increase in revenue. The focus is exclusively on the spending side. They introduce austerity in a Nimby sort of way and hope to have enough of a populist agenda to attract enough votes to stay in power.
Welcome to the continuing Great Recession.
Thursday 4 August 2011
The Fears of Contagion-but of what Malady?
The history of Europe has been a constant battle for Continental hegemony. The power players on the board have changed over the centuries with Germany taking pride of place as the most persistent contestant for the last 125 years albeit with a respite following the end of the Second World War until the game was continued following German reunification in 1989.
So it is with mixed feelings for much of Europe to see the rise of Germany yet again although this time in a much more acceptable fashion.
According to Fritz Fischer Germany's aims in the First World War were actually to create a ZEP of Central Economics Zone which at the time was looking to central and eastern Europe.
In the Second World War one of the underlying themes was to create Lebensraum-again in the east, for the future generations of Germans.
This time around Germany's rise to continental preeminence didn't ride in on the coattails of tanks and didn't include warped ideologies and armies of occupation.
No, this time around the virtues of organisation, a strong work ethic and the willingness to accept austerity measures on themselves-and now to expect that others follow-have led to a German-led Europe.
There are many, outside and even inside of Germany who have their doubts that the Greeks, for example, will be able to adjust to a German-style approach to solving their fiscal problems. There are also concerns that the Portuguese, and following the fears of contagion coursing through the psyche of the European markets these concerns are voiced on Portugal and Spain.
In France however, there are outright fears that the old enemy has completely and comprehensively outmaneuvered them and that the French star is setting for the foreseeable future.
The recent statements out of Britain actively accepting that they are on the outside looking in regarding continental developments highlights the comprehensive nature of the German renaissance.
Coupled with this German resurgence is the reappearance on the European stage of the Russians who also had a brief hiatus following the collapse of the Soviet Union. The real question is whether the contagion of which one speaks is a southern European one, or yet again a meeting of the minds between the Russians and the Germans.
Historically this has not been good.
So it is with mixed feelings for much of Europe to see the rise of Germany yet again although this time in a much more acceptable fashion.
According to Fritz Fischer Germany's aims in the First World War were actually to create a ZEP of Central Economics Zone which at the time was looking to central and eastern Europe.
In the Second World War one of the underlying themes was to create Lebensraum-again in the east, for the future generations of Germans.
This time around Germany's rise to continental preeminence didn't ride in on the coattails of tanks and didn't include warped ideologies and armies of occupation.
No, this time around the virtues of organisation, a strong work ethic and the willingness to accept austerity measures on themselves-and now to expect that others follow-have led to a German-led Europe.
There are many, outside and even inside of Germany who have their doubts that the Greeks, for example, will be able to adjust to a German-style approach to solving their fiscal problems. There are also concerns that the Portuguese, and following the fears of contagion coursing through the psyche of the European markets these concerns are voiced on Portugal and Spain.
In France however, there are outright fears that the old enemy has completely and comprehensively outmaneuvered them and that the French star is setting for the foreseeable future.
The recent statements out of Britain actively accepting that they are on the outside looking in regarding continental developments highlights the comprehensive nature of the German renaissance.
Coupled with this German resurgence is the reappearance on the European stage of the Russians who also had a brief hiatus following the collapse of the Soviet Union. The real question is whether the contagion of which one speaks is a southern European one, or yet again a meeting of the minds between the Russians and the Germans.
Historically this has not been good.
Wednesday 3 August 2011
Into the Wilderness
I had a number of heated conversations around my analysis of the Deficit Reduction Deal just signed in to law by Mr Obama. The gist of the arguments ranged from "what did you expect there weren't really any alternatives given the intransigence of the right" to "don't worry, Obama will get reelected in 2012 and then he will get down to business".
I am quite concerned by the whole range of the counter-arguments. I know that politics is the art of the possible and by definition that means compromise. But compromise means a move to the middle. I saw this as a lurch to the right.
Of course there are extremists on both sides of the aisle, but there is no question that the rise of the right within an already right leaning Republican party completely overshadows the supposed extremism of the Democratic left.
We need to keep this in context. Left or right, they are all capitalists. The question is merely one of unfettered versus regulated, and more importantly, the invisible hand of the markets versus the visable hand of a social conscience.
What makes America great is the opportunity open to all to get ahead. And what is crushing that opportunity is the use of base populism on an ignorant electorate manifesting itself as the Tea Party who are puppets dancing on the strings of crony capitalism-American style.
Look at the response to the deficit compromise. Stock markets retreat, spreads widen and the safe-haven trade marches relentlessly on. Cash, Treasuries and Gold continue to be the investments of choice and in the stock markets even the defensive stocks of Health Care and Defense are slaughtered on the altar of uncertainty.
The great American consumer in the form of individual equity investors is running for the hills. Hedge funds, the majority of which sold alpha and delivered beta are 75% in cash and still charging 2 and 20.
Instead all eyes are on China and how it will react in the event that the US is downgraded-which is still a strong possibility. The spending cuts voted in without any tax increases to help balance things leaves the government's hands tied as far as any stimulus spending is concerned to help stimulate employment.
We have the uncertainty of when, and frankly, what the rating agencies will do. In all likelihood they will wait and see. Wait and see who gets on the Committee of Twelve. Wait and see if more compromises are possible or if there will be six Republicans continuing their mantra of "No" and if the six Democrats suddenly find some steel in their spines only to realise that it is too late and that their line of defense has already been breached and the only thing left is to also say no leaving us with a government without the ability to govern.
Now I am not a student of the Great Depression but I know it lasted over a decade with many false dawns. I also know that what got the US out of it was the Second World War.
A "relatively" unified nation was able to put aside many of their differences and focus on the more pressing challenges of a world war. I don't think however that we need to wait for a military war to get our act together. We are in the midst of an economic war of epic dimensions.
This compromise was supposed to deliver stability. It was supposed to take the uncertainty out of investing, our of consuming-out of our everyday lives. It smells much more like hope, that false comforter in times of need. If American capitalism is to survive, rational compromises are going to have to be made. If not, we just might be on the edge of a great wilderness.
I am quite concerned by the whole range of the counter-arguments. I know that politics is the art of the possible and by definition that means compromise. But compromise means a move to the middle. I saw this as a lurch to the right.
Of course there are extremists on both sides of the aisle, but there is no question that the rise of the right within an already right leaning Republican party completely overshadows the supposed extremism of the Democratic left.
We need to keep this in context. Left or right, they are all capitalists. The question is merely one of unfettered versus regulated, and more importantly, the invisible hand of the markets versus the visable hand of a social conscience.
What makes America great is the opportunity open to all to get ahead. And what is crushing that opportunity is the use of base populism on an ignorant electorate manifesting itself as the Tea Party who are puppets dancing on the strings of crony capitalism-American style.
Look at the response to the deficit compromise. Stock markets retreat, spreads widen and the safe-haven trade marches relentlessly on. Cash, Treasuries and Gold continue to be the investments of choice and in the stock markets even the defensive stocks of Health Care and Defense are slaughtered on the altar of uncertainty.
The great American consumer in the form of individual equity investors is running for the hills. Hedge funds, the majority of which sold alpha and delivered beta are 75% in cash and still charging 2 and 20.
Instead all eyes are on China and how it will react in the event that the US is downgraded-which is still a strong possibility. The spending cuts voted in without any tax increases to help balance things leaves the government's hands tied as far as any stimulus spending is concerned to help stimulate employment.
We have the uncertainty of when, and frankly, what the rating agencies will do. In all likelihood they will wait and see. Wait and see who gets on the Committee of Twelve. Wait and see if more compromises are possible or if there will be six Republicans continuing their mantra of "No" and if the six Democrats suddenly find some steel in their spines only to realise that it is too late and that their line of defense has already been breached and the only thing left is to also say no leaving us with a government without the ability to govern.
Now I am not a student of the Great Depression but I know it lasted over a decade with many false dawns. I also know that what got the US out of it was the Second World War.
A "relatively" unified nation was able to put aside many of their differences and focus on the more pressing challenges of a world war. I don't think however that we need to wait for a military war to get our act together. We are in the midst of an economic war of epic dimensions.
This compromise was supposed to deliver stability. It was supposed to take the uncertainty out of investing, our of consuming-out of our everyday lives. It smells much more like hope, that false comforter in times of need. If American capitalism is to survive, rational compromises are going to have to be made. If not, we just might be on the edge of a great wilderness.
Tuesday 2 August 2011
All to be Reelected?
I have to admit that my thoughts today are much more of a visceral response as opposed to a well researched piece, but I am devastated at the continual "caving" on the part of President Obama in the face of ridiculous Tea Party demands.
As if to say that the ravings of a right wing fringe who are not even aware of the fact that they are being completely manipulated by a phalanx of the nation's ultra-wealthy to perpetuate a system that is totally skewed to their purposes should determine the economic future of the entire nation.
I am baffled by Obama's either unwillingness or inability to confront these fringe elements and force the imposition of tax increases in conjunction with spending cuts augmented by a stimulus program designed to put the nation back to work.
Instead we are presented with a President who continually depends upon a Republican Party do to the "right thing" when they have shown time and time again that they are incapable of doing so.
It is a perpetual "jam tomorrow" approach to governing. Holding out the fact that the next onslaught against the budget deficit will occur after the 2012 elections is a political victory which could quite easily turn out to be Phyrric.
The Republican solution to the challenges facing the nation of cutting spending in the middle of an employment recession; keeping tax cuts for the wealthy; and blathering on about a balanced-budget amendment to the constitution comes as close to guarantying a continuing if not an accelerating recession as I can imagine. And all at the altar of misplaced ideology.
Just look at the ideological bloody mindeness of the the current British government which has imposed an austerity budget of such magnitude that they are breaking one campaign promise after another as their cutting zeal drives a struggling economy into the ground.
nAnd what is the Tory solution solution? Taking a page from the Repulichans they now want to lower the 50& top rate of taxation which hits the top 6% of the population as a means of stimulating the economy.
All it takes is to look to the Chinese and their adherence to one overriding tenet-everything to ensure employment of the great masses as that is the only way to maintain the supremacy of the ruling party to recognise the fallacy of the current compromise in the US.
The greed of American hardball capitalism is to pursue the tenet of low taxes-for the wealthy-to ensure the continued supremacy of the wealthy.
There is perhaps a revolution coming in the United States- and it just might not come for the Tea Party.
Yes, with a nod to the evangelical American Right- "And you shall reap what you have sown..."
As if to say that the ravings of a right wing fringe who are not even aware of the fact that they are being completely manipulated by a phalanx of the nation's ultra-wealthy to perpetuate a system that is totally skewed to their purposes should determine the economic future of the entire nation.
I am baffled by Obama's either unwillingness or inability to confront these fringe elements and force the imposition of tax increases in conjunction with spending cuts augmented by a stimulus program designed to put the nation back to work.
Instead we are presented with a President who continually depends upon a Republican Party do to the "right thing" when they have shown time and time again that they are incapable of doing so.
It is a perpetual "jam tomorrow" approach to governing. Holding out the fact that the next onslaught against the budget deficit will occur after the 2012 elections is a political victory which could quite easily turn out to be Phyrric.
The Republican solution to the challenges facing the nation of cutting spending in the middle of an employment recession; keeping tax cuts for the wealthy; and blathering on about a balanced-budget amendment to the constitution comes as close to guarantying a continuing if not an accelerating recession as I can imagine. And all at the altar of misplaced ideology.
Just look at the ideological bloody mindeness of the the current British government which has imposed an austerity budget of such magnitude that they are breaking one campaign promise after another as their cutting zeal drives a struggling economy into the ground.
nAnd what is the Tory solution solution? Taking a page from the Repulichans they now want to lower the 50& top rate of taxation which hits the top 6% of the population as a means of stimulating the economy.
All it takes is to look to the Chinese and their adherence to one overriding tenet-everything to ensure employment of the great masses as that is the only way to maintain the supremacy of the ruling party to recognise the fallacy of the current compromise in the US.
The greed of American hardball capitalism is to pursue the tenet of low taxes-for the wealthy-to ensure the continued supremacy of the wealthy.
There is perhaps a revolution coming in the United States- and it just might not come for the Tea Party.
Yes, with a nod to the evangelical American Right- "And you shall reap what you have sown..."
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