Retirement Take Two

I have retired again, for the second time, after a very interesting and dare I say taxing two years with an agency broker in London where I ran their European Fixed Income Business. As is normal for Europe I am now on garden leave for the 30 days and so am on vacation for the moment and will be back in the "writing saddle" on I hope what will be on a more regular basis sometime early October. After almost 18 months of trying to rebuild a fixed income business under somewhat extreme circumstances I am looking forward to having time to reflect and analyse what is going on around me instead of tring to put out fires with gasoline. The world has not gotten any saner....

The End of our Dreams?

I met recently with a senior member of a major european bank who has to deal with his regulators in numerous jurisdictions. As is often the case in my meetings our discussions were wide-ranging. In this case we focused on the precarious state of the Euro in general and Spain's position as the next line in the sand. He was not optimistic and didn't mince his words. His opinion hung between two main pillars-the pure bloody mindedness of the national regulators and his conviction that the experiment was doomed from the start. His recent experiences with the regulators demonstrated that regardless of the the protestations of their national politicians that the Euro was sacrosanct and that they would do whatever necessary to protect it the fact of the matter was that behind closed doors their interest was always to protect their taxpayers above else, and defintetly at the expense of other the Euro nations. This was a perfect backdrop as to why he felt the euro experiment was doomed to failure. Monetary union without fiscal and political union was never going to work. And the only way to fiscal and political union would be to surrender sovereignty. What politician was going to run let alone win on that platform-unless he had 100 armored divisions at his back. Unfortunately the only thing constructive from the conversation was that despite his prediction that after the Arab Spring we would have the European Fall-a complete social disintegration brought about by austerity programs-it would not result in a continental war. No, he foresaw a slow collapse of Euro, perhaps of the European Union, dragging on for the next couply of years. Sell bank shares. Sell the periphery. And I guess buy Germany.

A Picture is Worth a Thousand Words

The cover of the August 15-22,2011 New Yorker says it all.

Three Fat Cats in a lifeboat drinking champagne and smoking Cigars while the Titanic sinks in the background, with the smoke from the cigar morphing into a graph of massive economic decline.

All those people who think the problem with America is that we pay our workers too much and thereby make them uncompetitive must be sitting in that lifeboat.

For they advocate cutting worker's rights and removing pension and health care subsidies as a means of stimulating growth. What it will actually do is make it cheaper today for the owners of business who are also the (non)payers of taxes.

Their vision is one subsistence living in the land of plenty for the many so that the few may prosper?

The Republican politics as directed by the tea party resulted in a budget compromise which didn't address the cost of health care of medicare and medicaid and provided for no increase in tax revenues.

This is why Standard and Poors downgraded the USA. The main drivers of the deficit remain and the ability of the government to increase revenue i.e. tax income remains muted which will perpetuate deficit spending with no rational solution in the offing.

There are two ways out of deficit spending. Growth, or War- and their policies certainly aren't designed to stimulate Growth. They scream for austerity with nothing to increase employment which would increase GDP growth which increase tax income.

So are they preparing for the next war? I know they think they have god on their side?

What's Good for the Goose.....

I just love the fact that the big banks are upset with the Federal Mortgage Agencies who have decided to sue them for having sold them mortgages with shoddy if not outright fraudulent documentation.

Now our friends at the banks are using as a defense that the Federal Agencies were "the epitome of a sophisticated investor" and that "the forensic analysis of the mortgages" proposed should have been part of Fannie and Freddie's underwriting when they bought the securities.

The list of angry responses goes on ending, as always, that this suit will be "bad for the economy".

Now to be fair the last thing the banks need right now is a gazillion dollar lawsuit. But then again, when the banks were making a gazillion dollars selling "toxic" securities they were happy to pay themselves handsomely.

And when the music stopped and there were basically no chairs they fell over themselves to take TARP dollars. Goldman and Morgan Stanley even became banks to ensure their eligibility!

Now, when their balance sheets are relatively healthy again thanks to government support they revert to their old habits.

I am sure some of you are wondering what happened to "Buyer beware". Yes. There is definitely that aspect. But it is stretching the limits of that warning when the activities are fraudulent.

That is perhaps why the lawsuits are apparently aimed not only at the banks, but at the individuals who signed off on loan documentation which allegedly contained "materially false" statements about the quality of the underlying mortgages.

The proverbial "gander" in this case however is my friends at Halliburton who, interestingly enough, are suing BP over "inaccurate information" and "negligent misrepresentation" with regards to the Gulf of Mexico disaster.

Now that wording sounds vaguely familiar....

Separate the Fools from Their Money-Part II

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.

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.

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.