Category Archives: News

Under the microscope

With the bank bailouts, we’re seeing an interesting phenomenon – the increasing scrutiny of the spending of the banks.  Now that some taxpayer money is directly injected into these companies, any spending they do is seen (rightly or wrongly) as use of public funds.  As an example, this story “Bailed Out Bank of America Sponsors Super Bowl Fun Fest” from ABC News:

Despite a near collapse that required $45 billion in federal taxpayer bailout funds, Bank of America sponsored a five day carnival-like affair just outside the Super Bowl stadium this past week as President Obama decried wasteful spending on Wall St.

The event – known as the NFL Experience – was 850,000 square feet of sports games and interactive entertainment attractions for football fans and was blanketed in Bank of America logos and marketing calls to sign up for football-themed banking products.

The bank staunchly defended its sponsorship, saying it was a “business proposition” and part of its “growth strategy.”

Now normally a private company does not get this type of scrutiny.  People don’t pay too much attention to their marketing budget or the bonuses they pay, etc.  It’s also true that commonly it’s not in either the company’s or their customer’s interest to publicize a dispute or screwup… quiet settlements are more likely.  (Note: I’m not saying that B of A’s marketing decision was good or bad, it’s just that in previous years this would not be news; and so this is new for B of A to have to respond to this type of report).

In the public sector, however, it’s common for screwups and inefficiencies to be exposed, since groups like Citizens Against Government Waste are constantly looking for these things and have little reason to stay silent (not that they catch everything, obviously, but they are looking!).

I suspect that most private companies would find that they could find a lot more efficiency if they were constantly under the microscope in this way.  So I guess the question is whether our shareholders would benefit from more stringent monitoring of how companies operate (whether they’re profitable or not), and if so, how could they achieve it?

Update on Feb 4: Yesterday news came out about a proposed pay cap of $500K for bank execs.  I think the point here is to make sure that taking bailout funds ‘hurts’ – the last thing you want is for every company and industry to line up at the government cash window.  I think it sends the right message.

Confidence game?

The unfolding news of Merrill Lynch just about boggles the mind.  From “Merrill paid employee bonuses before sale to Bank of America” on

Despite Merrill reporting a massive loss of $21.5 billion in the fourth quarter of 2008, the report noted that the company had “set aside $15 billion for 2008 compensation, a sum that was only 6% lower than the total in 2007, when the investment bank’s losses were smaller”.

“The bulk of 15 billion dollars compensation was paid out as salary and benefits throughout the course of the year,” the report said. Further, attributing to a person familiar with the matter, the report said that an estimated $3 to $4 billion dollars was paid out in bonuses in December.

Merrill and the Bank of America shareholders had approved the takeover on 5 December. “Three days later, Merrill’s compensation committee approved the bonuses, which were paid on 29 December,” it added.

It’s one thing for a profitable company to pay out big bonuses.  It’s another thing altogether for a company that is losing money to do it, then add the fact that the company is in the middle of being sold to a company that is being propped up with taxpayer funds.  This is the kind of thing that makes people very cynical.  Sooner or later it may even make them mad…

Here’s a take from a fellow I knew in college who writes a financial blog called Mean Street for the Wall Street Journal, Evan Newmark, in a recent post “Rise, Taxpayer, Rise”:

…it is amazing that Washington is still considering sending more tax money Chrysler’s way.Not that Chrysler isn’t pulling out all the stops to get it. This week, it announced a “global strategic alliance” with Fiat, another marginal, cash-starved automaker.

This “alliance” is not a plan for Chrysler’s viability. It’s a plan to wring another $3 billion in funding out of Congress to go along with the $5.5 billion of taxpayer money that’s already been put in.

Is Fiat putting any money in? No. Is Cerberus, Chrysler’s principal shareholder, putting any more money in? No. Will any investors put any money in? No.

It’s all up to you, the taxpayer. And with a trillion dollars in government stimulus in the making, that’s not going to change anytime soon.

But after another outrageous week like this last one, you may soon come to the conclusion that enough is enough.

Bob Reich’s calling it ‘Lemon Socialism’.

Put it all together and at this rate, the government — that is, taxpayers — will own much of the housing, auto, and financial sectors of the economy, those sectors that are failing fastest.

What’s left? Most of high-tech, entertainment, hospitality, retail, and commodities. So far, at least, we taxpayers are not propping them up. And when the economy turns up — perhaps as soon as next year, most likely later — these sectors have a good chance of rebounding.

But the others — the ones the government is coming to own or manage — are less likely to rebound as quickly, if ever. If anyone has a good argument for why the shareholders of these losers should not be cleaned out first, and their creditors and executives and directors second — before taxpayers get stuck with the astonishingly-large bill — I would like to hear it.

It’s called Lemon Socialism. Taxpayers support the lemons. Capitalism is reserved for the winners.

Folks who made bad decisions need to pay the price; if you want to profit from the upside, then you have suffer on the downside.  Enough with the giveaways that prop up undeserving losers (who don’t seem at all embarassed to be paying themselves off with the funds).

Inauguration Day

On the eve of the U.S. Presidential Inauguration (“ observe formally the beginning of”), just a few thoughts.  The election of Barack Obama has stirred many people’s hopes, and while I think it’s all well and proper to mark the occasion well, it’s an awful heavy burden for anyone to carry.  So far Obama has more than met my expectations of continuing to come across as thoughtful, calm yet fully in control, and genuinely interested in avoiding the pitfalls which have greatly limited the success of our last two presidents.

On this occasion, I can only wish Obama, his family, and his inner circle of advisors and deputies, great success in office.  Between economic meltdowns, foreign policy debacles, climate change worries, and a host of other pressing issues, they will have their hands full.  But of course there’s only so much that can be done from Washington D.C., and I know that Obama is fully aware that only if Americans really pull together can we jointly get through troubled times.

Changing attitudes…

I found this story interesting, as it indicates the way that change in thinking sometimes takes place over generations…

It’s from “Car-free? In Japan, that’s how a generation rolls” by Yuri Kageyama, running in today’s Oregonian.

To get around the city, Yutaka Makino hops on his skateboard or rides commuter trains. Does he dream of the day when he has his own car? Not a chance.

Like many Japanese of his generation, the 28-year-old musician and part-time maintenance worker says owning a car is more trouble than it’s worth, especially in a congested city where monthly parking runs as much as 30,000 yen ($330), and gas costs 100 yen a liter (about $3.50 a gallon).

That kind of thinking — which automakers in Japan have dubbed “kuruma banare,” or “demotorization” — is a U-turn from earlier generations of Japanese who viewed car ownership as a status symbol. The trend is worrying Japan’s auto executives, who fear the nation’s love affair with the auto may be coming to an end.

Now the U.S. is a different place – much bigger and more spread-out; but similar changes in attitudes would not surprise me.  Certainly few young people would look to GM or Ford as a ‘shining beacon’ for the future – Apple would be a much more likely aspiration.

Thoughts on money, interest, etc.

Well, today the Fed has decided to “boldly go where no man has gone before” taking rates essentially down to zero.  I can’t help thinking that they may be pushing on a string here.  I doubt that the reason that loan volume is way down (i.e. banks aren’t lending) is because rates have been too high – I think instead that it’s a combination of fear that things are so bad that no one will repay, along with rational re-thinking of risk (i.e. things really are pretty bad, so don’t make risky loans anymore).  Note also that with the fed paying interest on reserves, there’s even less reason for banks to make loans!  The Fed seems to want to lower long-term mortgage rates, which will presumably keep housing prices a bit higher than otherwise (since people can borrow more for the same income), but may make it very hard to unwind out of these really low rates, since that move will inevitably slow things right back down.

I always found it a bit odd that during the housing price run-up, this was never spoken of as ‘inflation’ (we were constantly assured that we had low inflation – and we did in some areas, such as Chinese-made goods), but clearly it was inflation (since the reversal of housing prices is surely thought of as deflation).  Now that the correction is happening, the consequences are so painful that no one ‘in charge’ wants to let it continue, so they will try all sorts of things to keep certain asset prices propped up.  The question is whether this approach will simply let the problem slowly drag on…

A whole lot of money/wealth has gone up in smoke in recent months (401k’s are now 201k’s), and despite the fact that the Fed and the Treasury are creating lots of new money, it’s not nearly as much as has disappeared.  Still many are worried about longer-term inflation…  See this bit from today’s NYT story “Fed Cuts Benchmark Rate to Near Zero” by Edmund Andrews:

“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating,” said Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve, said the central bank. “Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”

I see that the dollar is now resuming its drop (I suspect the main reason it was strengthening is that many people were having to get dollars to cover other losses).  Here’s my prediction: continued drop in the dollar, leading to an inflation of all imported things, simply due to loss of buying power of the dollar.  Sooner or later lending volume will start back up, and in general business will pick up, but we may have taken a pretty big long-term hit on the American ‘standard of living’.

President Obama!


Congratulations to Barack Obama and his family, Joe Biden and his family! This is a huge event in America’s history, a day not only when the first African-American president was elected, but a day when the reins have been passed to my generation (Obama’s just about 6 months older than me). There are plenty of pressing issues that will need attention, and I’m hopeful that Obama will put together a team that will work hard and work smart, finding ways to use the resources we have to encourage all Americans to rebuild and invest in the future. It won’t be an easy job, but I believe he’s ‘ready to go’ and he’s got the right attitude and the right temperament to ‘fire it up!’.

Photo from (This isn’t happiness site)

House of Cards, part 5

Well, the bailout was passed, and the contagion keeps spreading.  It appears that many banks are severely undercapitalized, so even good borrowers can’t get short-term loans.

This snippet from today’s NY Times “A Day (Gasp) Like Any Other” by Joe Nocera does not sound encouraging, but then again Oct 23 is so far away that the whole picture may be different by then…

 … certain ominous dates are fast approaching. One is Oct. 23, when the auction will take place to settle the credit-default swaps relating to the Lehman bankruptcy. I saw one estimate that the amount of money firms will owe each other could be as much as $400 billion. Why? Firms that insured against the risk of a Lehman default are going to owe billions to other firms — but they’ll want to collect from the firms with whom they laid off the risk. And so on down the line. The upshot is that many firms are not going to have the money to pay off the insurance claims they owe, and they are likely to be ruined.

Nocera’s done a number of good analysis pieces on the current events.

The whirlwind!

I got back to the U.S. on August 19, and in the time I’ve been back, the following highlights have come and gone so fast it’s hard to remember them all:

  • Beijing Olympics – here we found that certain individuals are capable of amazing feats… and the Chinese stage-managed the whole thing pretty well, though they don’t seem to like public protests much more than the U.S. does.
  • Democratic Convention – went almost too smoothly, despite all sorts of talk that the Clintons would hijack things. Obama’s stadium speech was historic, not stirring, but a clear statement of what he wants to do. The choice of Biden was not exciting, but added experience to the ticket.
  • Republican Convention – in a brilliant political move, McCain’s choice of Palin sucked the air right out from the Democrats (while basically invalidating the logic of McCain’s attacks on Obama up to that point). I know Palin can read a speech, but there’s precious little evidence of greater ability so far. Only one direction for 90% favorable ratings, and that’s down.
  • Two hurricanes – one that spared New Orleans, one that was pretty hard on Galveston and Houston.
  • Financial meltdown – still ongoing drama of Wall Street that is growing to epic proportions.  There’s a growing undercurrent of suspicion on both sides about this latest alarm (see for example “Don’t Believe the Hype” by Daniel Larison over at the American Conservative).

What’s next??

Today I was able to get my ballot for the November election, so I’ve already placed my vote, regardless of the events of the next few weeks. Both tickets are led by Senators who have little background as executives, both have a combination of younger and older. We really can’t know what the person who is elected will do once in office, nor do we know what they will be faced with, so the vote is a bet on the judgment and capability of the candidate. I hope the debates shed a bit more light on the differences of the tickets, but I fear they will be more about ‘gaffes’ and ‘gotchas’.

My vote goes to Obama, based on what I’ve seen over the last year or so in terms of how he’s run his campaign, beaten long odds, and pretty much kept his cool.

Tomorrow morning I fly back to the Netherlands for about 7 weeks, so when I get back the election may be old news! For America’s sake I hope things settle down a little.

House of Cards, part 4

Lots of interesting commentary out there on the blogs.

Hank Paulson tells us that we really better give him a blank check for $700 billion, with essentially no oversight.  Is it true that this is the only solution?

“Many Economists Skeptical of Bailout” by Avi Zenilman at

Arnold Kling posts an open letter to Ben Bernanke, reminding us of an earlier time when a Treasury Secretary performed radical acts on the economy…

House of Cards, part 3

Is the Paulson bailout plan the right way to go?

I’m increasingly thinking it’s not.  But let’s hear from some others:

Luigi Zingales, professor at University of Chicago, in his short paper “Why Paulson is Wrong”:

If banks and financial institutions find it difficult to recapitalize (i.e. issue new equity) it is because the private sector is uncertain about the value of the assets they have in their portfolio and does not want to overpay.  Would the government be better in valuing those assets? No. In a negotiation between a government official and banker with a bonus at risk, who will have more clout in determining the price?  The Paulson RTC will buy toxic assets at inflated prices thereby creating a charitable institution that provides welfare to the rich – at taxpayers’ expense.  If this subsidy is large enough, it will succeed in stopping the crisis.  But, again, at what price?  The answer: Billions of dollars in taxpayer money and, even worse, the violation of the fundamental capitalist principle that she who reaps the gains also bears the losses.

Zingales recommends a debt forgiveness plan which keeps the taxpayer out of the mess (and of course acknowledges that the financial folks far prefer a bailout!).

More points are made in this article, “Concerns about the Treasury Rescue Plan” by Douglas Elmendorf at Brookings.

First, the affected debt instruments are quite heterogeneous, which makes setting appropriate prices and quantities very difficult.

A second problem with buying troubled debt is that it provides the most help to the financial institutions that made what are, in retrospect, the worst investment decisions. Banks that stayed clear of this debt or sold such debt at cut-rate prices earlier this year in an effort to move beyond the crisis would receive no direct gain from such a program, while banks that made the biggest commitments to low-quality mortgages and have delayed dealing with their balance-sheet problems would be the biggest beneficiaries.

I’d suggest that we slow things down just a bit, rather than ramming a plan through Congress before anyone understands the ramifications…