(Copyright 2004 Elizabeth Smith)
Wednesday, April 30, 2008
Friedman's Back -- And Talking About Energy
And the gridlock in Washington over energy policy:
http://www.nytimes.com/2008/04/30/opinion/30friedman.html?hp
Tuesday, April 29, 2008
Business to Business Phone Book
arrived today, good until November 2008. In it I noticed that my websight of http://www.natgagu.blogspot.com/ (this blog) is listed. So I'm adding the other website to my tag line at the top for those who are looking for a lawyer, and am adding it as a "Label" below. Just for good measure I will repeat it here as a link: www.rule26a1.com
Don't Blame Michael Milken -- I Never Did
Good reading, if only to review the history of Michael Milken:
http://www.nytimes.com/2008/04/29/business/29sorkin.html?hp#
Monday, April 28, 2008
Book Review on Clinton's Afterlife -- Bill's, That Is
But even at its most mean-spirited, the book makes a few stingingly substantial claims. “It is surprising how many people who know and like Bill Clinton come to the same sad conclusion,” Ms. Felsenthal writes: “Monica Lewinsky and impeachment are an implacable part of Clinton’s White House legacy, and all the wondrous works in the years ahead may enhance his reputation as an ex-president but not as a president.” In the words of Don Hewitt, the former “60 Minutes” producer and an outspoken source here, Ms. Lewinsky “did more to change the world than Cleopatra.” And had President Clinton not jeopardized his own position and his party’s chances in the 2000 presidential election so recklessly, “there’s not one kid who has died in Iraq who wouldn’t be alive today.”
Sunday, April 27, 2008
What's Happening in Massachusetts re Heating
Heating crisis looms for low-income residents
December 18, 2007
By CHARIS ANDERSON
Standard-Times staff writer
December 18, 2007 6:00 AM
With more than four months left in the home heating season, many low-income residents across the region already have spent their allotment of federal heating assistance and could run out of oil heat next month, local advocates say.
"We just wanted everyone to be aware there could be some dangers out there of people freezing, and our hands are basically tied," said Liz Berube, director of the fuel assistance program at Citizens for Citizens in Fall River. "It's going to be very scary.
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"We wanted to be honest and say, 'We have no additional funding. There's nothing we can do,'" said Ms. Berube said.
The federal Low Income Home Energy Assistance program is designed to help cash-strapped households pay for their home energy costs. In Massachusetts, the current maximum grant is about $850, which includes some supplemental state funds.
The immediate crisis hits people who heat their homes with oil, according to Bruce Morell, executive director of People Acting in Community Endeavors, which administers the federal assistance program in greater New Bedford. While a moratorium for gas and electric utilities went into effect Nov. 15, making it illegal to cut off their customers' heat, there is no such protection for oil customers.
When someone's tank of heating oil runs out, he must pay to have more delivered. If they don't have the payment, they will not receive a delivery, Mr. Morell said.
For households in the Northeast that heat with oil, estimated heating costs for this winter will reach an average of $1,879, a 25 percent increase from last year, according to a report by the Energy Information Administration.
Statewide, the average cost of heating oil as of Dec. 11 was $3.21 a gallon, up from $2.41 at the same time last year.
Below-average temperatures in November and December have made the heating situation more dire.
According to the National Weather Service, November's mean temperature in the Boston area was 43 degrees, two degrees colder than normal. Thus far in December, the average temperature is just 30.2 degrees, nearly seven degrees colder than normal.
"I'm very worried about our oil clients," PACE's Mr. Morell said. "We're working and doing everything we can, tapping every source that we can, to try and help people from freezing."
A fiscal 2008 budget for the program, which would have raised emergency contingency funding for the program by $250 million over last year, passed Congress but was vetoed by President Bush on Nov. 13.
A new omnibus appropriations bill is now before Congress, according to the office of U.S. Sen. John Kerry. Under this bill, the federal heating assistance program would receive $2.6 billion, of which $2 billion would be available immediately. The remaining funds would be placed in an emergency fund.
The bill was expected to pass the House Monday night, according to a release from Sen. Kerry's office, and will then be considered by the Senate.
In the meantime, both federal and state legislators are pushing hard for additional funding sources for the heating assistance program.
Sens. Kerry and Edward Kennedy, D-Mass., along with 22 Senate colleagues, co-sponsored a bill to provide $1 billion in emergency funding for the heating assistance program.
And last month, Gov. Deval Patrick authorized $15 million in state funds to supplement the federal program, which equated to about 50 gallons of oil for PACE's clients, according to Mr. Morell.
"The reality is this is a federal program, and the state doesn't have the resources to solve the problem," he said. "That's not to minimize what (the state) did. Fifteen million dollars is a lot of money, so you can see the magnitude of the problem."
Mark Wolfe, executive director of the National Energy Assistance Directors' Association, agreed that the program — and its funding — should be addressed by the federal government. But in the absence of action on the national level, the states will have to step in with additional funding, he said.
"What choice will they have?" Mr. Wolfe asked. "You can't have people dying. You can't have people freezing to death."
Statewide, the number of people applying for the heating assistance program has increased this year, according to Ms. Berube, and Citizens for Citizens, which administers the program in the Fall River area, continues to see new applicants.
Many of their clients will run out of federal assistance funds by the second week in January, Ms. Berube said, and, unless a budget is passed that increases the program's funding, those clients will not receive any additional money.
Once the funds run out, people will start to make dangerous choices to heat their homes, such as using electric space heaters, according to local advocates, and others will prioritize heating bills over other expenses.
"What these folks do is, they'll stop paying rent; they'll stop buying food; they'll stop buying medication," Mr. Morell said. "They'll do everything they can to stop their household from freezing."
Both PACE and Citizens for Citizens are urging their oil clients to apply for a heating assistance program run by Citizens Energy, a Boston nonprofit organization. Under this program, residents who already qualify for the federal heating assistance program or who are at 60 percent or less of the state's median income will receive a voucher for 100 gallons of heating oil.
But 100 gallons of oil will only buy people a little time, according to local advocates, and a heating crisis still looms.
"The price of oil continues to go up," Mr. Morell said. "It leaves people who have oil for their primary heating source ... in a tremendously difficult situation."
Ms. Berube agreed. "It's just like a domino effect of disaster."
Strickland's Rate Plan for Ohio
This article actually makes some sense. Names in red are as follows: Dave Boehm represents AK Steel which drives everything in southern Ohio, and perhaps all of Ohio; Bill Coley's dad was financial vice president of Globe Metallurgical and Bill is an excellent trial attorney to both Globe and the financial industry. Janine Migdon represented Enron in its early "glory" days in Ohio.
Energy plan won't cut rates
Electricity likely will get costlier
BY MIKE BOYER
One thing critics and advocates of Ohio's new energy plan agree on is that it won't mean lower electric rates for consumers.
A confluence of factors ranging from higher fuel costs, tougher and more expensive environmental rules and regulatory barriers have combined to push electric rates higher in Ohio and nationally.
That's unlikely to change under the compromise plan finally hammered together last week by legislative leaders and Gov. Ted Strickland.
"Higher rates are inevitable," said Alan Schriber, a Wyoming resident and chairman of the Public Utilities Commission of Ohio, which gets new authority to oversee electric rates under the restructuring plan.
Monthly electric bills have risen about 43 percent since September 2005 for Duke Energy's 680,000 Southwest Ohio customers under the so-called rate stabilization plan the new legislation is designed to replace, according to the Ohio Consumers' Counsel, the state's residential-utility advocate before the commission.
Consumers' Counsel's Janine Migden-Ostrander said that while the legislation includes some consumer-friendly features, it won't stem rising electric rates.
"I'm very concerned about the rate impact on consumers," she said.
Said Dave Rinebolt, executive director of Ohio Partners for Affordable Energy: "Are rates going up? Yeah, probably. But energy prices are out of control across the country."
Ohio Partners for Affordable Energy is a low-income advocacy group and a supporter of the legislation that Strickland is expected to sign this week.
"What this legislation does is give us an opportunity to balance the needs of consumers against the utilities," said Rinebolt.
Cincinnati utility lawyer David Boehm, architect of the Ohio manufacturers' utility re-regulation plan that was the basis of Strickland's original proposal, said the new law might not mean lower consumer rates, but "it sets up rates for consumers more favorable than if we went to market-based rates."
The new legislation, which had widespread support from large industrial users and interest groups such as the Ohio Farm Bureau and the Ohio Hospital Association, also:
Restores the commission's authority over electric rates, slowing a decade-old move by the state toward letting market forces determine the generation portion of electric bills (typically more than two-thirds of the total). Deregulation, which took hold in a number of states in the late 1990s, was fueled by the belief that it would trigger competition resulting in lower rates.
State Rep. Bill Coley, R-Liberty Township, a member of the House Public Utilities Committee, argues that deregulation wasn't given the opportunity to work for a number of reasons. He's not convinced restoring PUCO oversight on rates will be better. "In the 1970s, electric prices in the state rose 352 percent and that was under a regulated system," he said.
One advantage of the new law is that it preserves the ability to move to market-based rates if they prove to be a better deal for consumers, he said.
Establishes a road map for the state's electric-rate structure. Uncertainty over whether Ohio would stick with its plan to deregulate electric rates or return to more traditional rate regulation was discouraging new investment in the state's struggling economy, Strickland said. "This is a big deal for Ohio's economic future," he told The Enquirer's editorial board recently, pointing to a decision by a European-American consortium not to locate a $1 billion steel mini-mill in the state because of uncertainty over electric rates.
Creates, for the first time, requirements for utilities to use environmentally friendly renewable energy and implement lower-cost energy efficiency standards. The law, requiring power companies to increase their use of renewable sources such as wind and solar from 0.25 percent of their total generation in 2009 to 12.5 percent by 2025, makes Ohio the 25th state in the nation to adopt such mandatory renewable standards.
The American Wind Energy Association praised Ohio's renewable energy standard, calling it nationally significant.
The legislation "can jump-start ...Ohio's world-class manufacturing infrastructure and world-class skilled manufacturing workforce in wind energy manufacturing," said Randall Swisher, association executive director.
The new law gives the PUCO power to cut electric rates if it determines utilities' profits are excessive. The legislation allows the state's four investor-owned utilities to remain regulated by filing what are called Electric Security Plans with the commission or opt for what's called a market rate option, which allows them to phase-in market-based rates over a five- to 10-year period.
Another pro-consumer provision of the new law, says Migden-Ostrander, ends so-called regulatory transition charges - basically costs the utilities said they couldn't recover when the state moved toward de-regulation.
But Migden-Ostrander said the legislation doesn't ban so-called "side deals," special discounts utilities negotiate with large customers. Critics claim the deals, focus of a high-profile class-action antitrust lawsuit against Duke by several Cincinnati lawyers, are designed to win corporate approval for utility rate hikes and raise rates for other consumers. Duke says deals it has signed with about 20 unidentified corporations are legal and weren't designed to win support for its 2004 rate hike.
Migden-Ostrander, who successfully won the right to examine Duke's contracts in an Ohio Supreme Court case last year, said the new law allows parties in future rate cases to know who has special contracts but won't open those agreements to public scrutiny.
The new law is a setback for several hundred competitive energy suppliers who've moved into the state over the last decade to offer competing service to the incumbent utilities.
"The success or failure of this new energy policy is clearly on the shoulders of the PUCO," said Lynn Olman, a former state representative and chairman of a coalition of competitive energy suppliers.
The law continues energy aggregation, which allows municipalities and other groups to pool their buying power to negotiate for better rates. Olman said the independent marketers he represents plan to continue to be active in the state.
"This is only round one," he said. Once Strickland signs the legislation into law, the commission will begin a process of determining the specific rate-making rules of the new law. The investor-owned utilities are expected to begin filing rate plans for commission approval so they can be in place by Jan 1.
Steve Brash, Duke Energy spokesman, said the utility will file a 10-year regulated rate plan. Last year, Duke said it wanted the state to clarify cost-recovery for new generation so it could decide whether to build a new clean-coal generation plant to fill its need for more electric supplies.
The new law, Brash said. "provides a clearer road map for cost recovery."
Whether the new legislation is better than the deregulation law it replaces remains to be seen, critics say.
"I think it's questionable whether we're better off," said Migden-Ostrander. "We'll have a better idea when we see what the PUCO does in the next year."
Saturday, April 26, 2008
For All the Nudes That Are Fit to Sprint
A booming thing in the travel industry:
http://travel.nytimes.com/2008/04/27/travel/27nude.html
What the Bank Should Have Done
January 6, 2003
TO THE CHIEF EXECUTIVE OFFICER OF THE INSTITUTION ADDRESSED:
The purpose of this guidance letter is to clarify the New York State Banking Department’s (the “Department’s”) position on Bank Owned Life Insurance (“BOLI”) programs. This letter also provides general guidance to enhance management oversight of these programs.
Background
BOLI includes all life insurance that a bank owns or has a beneficial interest in. The Department has previously opined that State chartered banks and thrift institutions may invest in BOLI under their “incidental powers,” as set forth in Sections 96(1), 234(1), 234(23) and 383(14) of the Banking Law, as the case may be. A purchase of life insurance must address a legitimate need of the bank for insurance. Purchases of life insurance that have been found to be incidental to banking include insurance taken as 1) security for loans, 2) insurance on borrowers, 3) key-person insurance, and 4) insurance purchased in connection with employee compensation and benefit plans. In general, the purchase of insurance coverage must meet a business need to fall within authorized activities. Life insurance may not be purchased to generate funds for the bank’s normal operating expenses (except in connection with employee compensation and benefit plans), for speculation, or for the primary purpose of providing estate-planning benefits for bank insiders unless it is a part of a reasonable compensation package.
Management Oversight
The safe and sound use of BOLI is dependent upon effective oversight by the board of directors and senior management. The board must understand how BOLI fits into the overall business strategy of the bank. This begins with a comprehensive and documented pre-purchase analysis by the board of directors and senior management which, at a minimum, includes the following considerations:
Determination of the need for insurance
Quantification of the amount of insurance needed
Vendor selection (if a vendor is used)
Carrier selection
Review of available insurance products
Analysis of BOLI benefits
Reasonableness of benefits provided to insured employees (if BOLI results in additional compensation)
Analysis of associated risks and the ability to monitor and manage them.
Evaluation of BOLI alternatives
Documentation of the decision to institute a BOLI program
The use of insurance should be explicitly evaluated in comparison to non-insurance alternatives such as loan reserving, cash compensation, succession planning and ongoing benefit plan expensing. Moreover, non-insurance alternatives should be quantified. Most often a combination of insurance and non-insurance risk management strategies will be optimal.
Besides consideration of non-insurance alternatives, the impact of a BOLI program on capital should also be included. A unique feature of some BOLI programs is that assets (Cash Surrender Value – “CSV”) will accumulate over long periods of time with few anticipated reductions (death benefit payments). For risk-based capital weighting, CSV is assigned a risk weighting of 100%.
The surrender of insurance before maturity (the death of the insured) could result in a loss in value or the imposition of early termination penalties. In addition, the early termination of an entire BOLI program could have an adverse effect on the financial condition of an institution, with significant impact upon its capital position. Purchases of life insurance should be accounted for in accordance with Generally Accepted Accounting Principles, i.e. FASB Technical Bulletin No. 85-4 “Accounting for Purchases of Life Insurance.”
Risk Management of a BOLI Program: Policies, Practices and Procedures
Basic risk management for any BOLI program should minimally include: a) a written statement of business purpose approved by the board of directors; b) quantification of need; c) identification of risks and benefits; d) establishment of authorization and approvals appropriate for the complexity of the program; and, e) requirement for periodic program evaluation. Risks associated with BOLI must not only be assessed at the inception of the program, but continually over the program’s life. Since the risks associated with BOLI can impact the institution’s earnings, capital and liquidity, a BOLI program should be reviewed and assessed by management at least on an annual basis.
This annual review should include analysis provided by external consultants and an independent internal comparison of the risks and returns. The due diligence supporting the purchase and ownership of BOLI should have unique elements tailored to the specific type of insurance coverage. BOLI provides death protection and investment returns. The more comprehensive assessments include an evaluation under a range of assumptions including stress scenarios. The evaluation should identify the most critical variables (investment returns, taxes and interest rates) and extend beyond estimating the cost of insurance to estimates of earnings stability and net worth growth.
Investment results under BOLI contemplate substantial tax benefits arising from interim deferral of taxes on investment income held within the policy and the absence of taxation upon payment of the death benefit. To achieve intended investment results the institution must comply with tax and insurance rules regarding business purpose, insurable interest and lack of investment control. Most often, investment returns will be sub-par without tax considerations. As such, these compliance factors are critical and warrant use of outside legal and tax counsel.
Under some insurance programs, New York State insurance regulations require that employees approve the purchase of life insurance at initiation of coverage and have a notification and terminate right when they leave employment. Procedures that standardize notification and documentation should exist to ensure compliance with these insurance requirements and other applicable laws and regulations. Failure to comply could jeopardize the tax benefits associated with the insurance.
In addition, when BOLI is part of a management compensation program, documentation should support the absolute and relative appropriateness of the amounts, and should be reported to the board of directors or a designated committee thereof. The transfer of economic value (cash surrender value and death benefits) to management is a particularly sensitive matter and should be disclosed to shareholders.
Compliance and “appropriateness” are key factors that help ensure a BOLI program does not adversely affect an institution’s reputation. Programs should be transparent to shareholders and employees, and be simple to explain. Benefits should cover a broad rather than limited group, with the insured group matching as closely as possible the beneficiary group.
Monitoring
Besides the evaluation of compliance, reputational and legal risks, credit and liquidity risks need to be considered. For credit risk, the institution should perform a credit analysis on selected carriers consistent with safe and sound banking practices for commercial lending. Although CSV does not fall within the definition of a credit exposure, it should be added to other extensions of credit (loans, etc.) to determine the aggregate exposure to a single insurance company.
Concentrations
Concentrations need to be assessed. A concentration is considered to exist when more than 25% of an institution’s total capital is at risk in one industry or group of related entities. Each institution should carefully evaluate its overall investment in life insurance (CSV) to determine an appropriate aggregate level. Institutions should not automatically assume that a concentration level as high as 25% is justified.
Individual Limitations
CSV may be supported by the general assets (general account) or segregated assets (separate account) of an insurance company. In order to provide effective security, a separate account must satisfy the following three conditions: 1) availability of a legal opinion providing support that the insurance obligation is, in fact, a separate account; 2) availability of a legal opinion confirming that relevant state insurance law provides policyholders with a preference to separate account assets; and, 3) the presence of a recent valuation establishing that the separate account assets equal or exceed the related separate account policy liabilities.
It is the Department's position that a maximum of 15% of total capital is appropriate as a single exposure limit to any one insurance company when the CSV is held in a general account. CSV due from any one insurance company may equal, but not exceed, 25% of total capital provided that the amount in excess of 15% of capital is fully supported by assets (based on market value) held in a separate account.
If a bank's BOLI program currently exceeds these recommended limitations, the bank is expected to develop and present to the Department a plan outlining the steps to be taken to bring the program within these guidelines.
Restrictions
Banks may purchase separate account insurance products that hold equity securities only for the purpose of hedging their obligations under employee compensation and benefit plans (i.e. where the amount of a deferred compensation obligation is measured by the value of a stock market index). Documentation must support the designation and effectiveness of the hedge. At a minimum, this includes: analyzing the correlation between the liability and the equity securities; analyzing the expected returns for the securities and current and projected asset and liability balances; measuring hedge effectiveness and establishing a target hedge effectiveness ratio; and, analyzing and reporting the effect of the hedge on the bank’s income statement and capital ratios.
If the insurance cannot be characterized as an effective hedging transaction, the presence of equity securities in a separate account would not be permitted. The holding of a bank’s own stock is not permissible under any circumstance.
It should be noted that under recently passed Sarbanes-Oxley legislation, some types of split dollar life insurance are potentially prohibited. Institutions should check with their legal and tax advisors to determine if modifications to their plans are necessary.
Regulatory Oversight
Department examiners, as part of their overall supervisory examinations, will review an institution’s BOLI program. Examiners will focus on reviewing: a) written policies and procedures approved by the board of directors; b) periodic risk assessment of the program; c) compliance with applicable New York State Insurance Department rules; d) compliance with Department guidelines regarding concentrations to an individual insurance company or in aggregate insurance products; and, e) transparency of disclosure of executive compensation utilizing the BOLI program.
Questions concerning the topics discussed in this letter should be directed to:
Mr. James SchmidbauerSupervising Risk Management SpecialistDivision of Market RegulationNew York State Banking DepartmentOne State StreetNew York, New York 10004-1417Telephone: (212) 709-1539Facsimile: (212) 709-1634E-mail address: James.Schmidbauer@banking.state.ny.us
Very truly yours,
Elizabeth McCaulSuperintendent of Banks
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Astounding VII
Let's just give someone else $600 million without any checks and balances and then sue them when they say it's all worthless. And this money was for our employees' retirement benefits!
From Upcoming Sunday Review of Books
and a review of the new book by Amis:
"You get the feeling, reading these pages, that for his side Amis will say almost anything, because being noticed is as important to him as being right."
Dick Cavett Today
On Petraeus and why he wears so many ribbons to appear in front of Congress:
http://cavett.blogs.nytimes.com/2008/04/25/petraeus-custer-and-you/index.html?hp
Got a "Win" From Supreme Court Justice
Stevens on April 23, 2008. Found out about it yesterday. An extension to June 26th to file a Petition for Certiorari. This brings more in line the entire case, as I argue another part of the case before a panel of the Sixth Circuit this coming Friday.
Friday, April 25, 2008
Oh Oh, It Was Bound to Happen
I was wondering how the Northeast survived the winter's high cost of heating oil:
http://www.nytimes.com/2008/04/25/us/25heating.html?_r=1&hp=&adxnnl=1&oref=slogin&adxnnlx=1209114383-hSYydTGoq4bAhyu5WJv74g
Thursday, April 24, 2008
Excellent on Solar
Excellent on Solar
Wait a Minute -- Biofuels Are Not the Problem
Roger Cohn in today's New York Times, puts things in perspective:
http://www.nytimes.com/2008/04/24/opinion/24cohen.html?_r=1&hp&oref=slogin
Wednesday, April 23, 2008
Give Cramer His Due
His core selections last April are up 76%, environmentally-friendly stocks. Without First Solar they are up 35%!
Astounding -- A New Complaint in Federal Court
shows the complexity and stupidity of a $600 million blind "investment"
Fifth Third made in a derivative run by Citicorp through Transamerica Life Insurance Company.
Fifth Third made in a derivative run by Citicorp through Transamerica Life Insurance Company.
This is just the tip of the iceberg of what's ahead around the world, lawsuits like this.
Who's to Blame For Subprime Mess?
Very, very complete. So much so that I have only read the first page of many in this upcoming Magazine Article for next Sunday:
http://www.nytimes.com/2008/04/27/magazine/27Credit-t.html
Tuesday, April 22, 2008
A Good Explanation re Sales of Stock by P&G Executives
Monday, March 31, 2008
Does P&G owe back taxes in Russia; a clarification
This story came up in my Google alert on P&G this morning. According to the Moscow Times, officials in Russia hit the company with a $28 million tax bill for what the government says is unpaid taxes on royalties. Not a huge amount for a company the size of Procter but interesting given Russia is a pretty big growth market for Procter (something I plan on addressing in a story pretty soon).Now for a clarification: a few weeks ago I posted about Procter executives exercising stock options and I pointed out that in its SEC filings showed that many of them were selling shares at the same time they were buying, and it looked like they were essentially selling old shares to cover the cost of buying the new ones.I had a meeting with Procter's CFO Clayt Daley this morning and found out that's not exactly how it works. The deal is this: the shares executives get when they exercise stock options typically come at a discount, for example, A.G. Lafley might be given "options" to buy 5,000 shares for $25 apiece, while P&G shares might be trading for double that. It's a good deal, but Lafley still has to pay the government taxes on the other $25 for each share. So Procter allows its executives to sell enough shares to pay those taxes, and that's what was happening at the time I posted about it.
posted by Keith T. Reed at 2:58 PM 2 comments links to this post
There's a Reason Why We Have Banks...
Except for a few sectors like energy, you can forget about making money in the stock market for a few years:
http://www.nytimes.com/2008/04/22/business/22bank.html
Monday, April 21, 2008
Farmers etc.
Fred Grieder has been farming for 30 years on 1,500 acres near Bloomington, in central Illinois. That has meant 30 years of long days plowing, planting, fertilizing, and hoping that nothing happens to damage his crop.
The Food ChainWithering Staple
Articles in this series are examining growing demands on, and changes in, the world’s production of food.Previous Articles in the Series »
“It can be 12 hours or 20 hours, depending,” Mr. Grieder said.
But Mr. Grieder’s days on the farm in Carlock, Ill., are getting even longer. He now has to keep a closer eye on the derivatives markets in Chicago, trying to hedge his risks so that he knows how much he will be paid in the future for crops he is planting now. And the financial tools he uses to make such bets are getting more expensive and less reliable.
In what little free time he has, Mr. Grieder attends Illinois Farm Bureau meetings to join other frustrated farmers who are lobbying officials in Chicago and Washington to fix a system that was designed half a century ago to reduce uncertainty for food producers but is now increasing it.
Mr. Grieder, 49, is shy about complaining amid so much prosperity. Prices for his crops are soaring on the updraft of growing worldwide demand, and a weak dollar is making those crops more competitive in global markets.
But today’s crop prices are not just much higher, they also are much more volatile. For example, a widely used measure of volatility showed that traders in March expected wheat prices to swing up or down by more than 72 percent in the coming year, three times the average volatility for that month and the highest level since at least 1980. The price swing expected in March for soybeans was three times its monthly average, and the expected volatility in corn prices was twice its monthly average.
Those wild swings in expected prices are damaging the mechanisms — like futures contracts and options — that in the past have cushioned the jolts of farming, turning already-busy farmers into reluctant day-traders and part-time lobbyists.
One measure of the farming industry’s frustration is the overflow crowd expected at a public forum on Tuesday at the Commodity Futures Trading Commission in Washington. Interest is so high that the commission, for the first time ever, will provide a Webcast of the forum, which it says is being held to gather information about whether key markets for hedging the price of crops “are properly performing their risk management and price discovery roles.” The Webcast link is available on the commission’s Web site, www.cftc.gov.
The additional costs that stem from volatility in grain prices — higher crop insurance premiums, for example — are not just a problem for farmers. “Eventually, those costs are going to come out of the pockets of the American consumer,” said William P. Jackson, general manager of AGRIServices, a grain-elevator complex on the Missouri River.
Prices of broad commodity indexes have climbed as much as 40 percent in the last year and grain prices have gained even more — about 65 percent for corn, 91 percent for soybeans and more than 100 percent for some types of wheat. This price boom has attracted a torrent of new investment from Wall Street, estimated to be as much as $300 billion.
Whether new investors are causing the market’s problems or keeping them from getting worse is in dispute. But there is no question that the grain markets are now experiencing levels of volatility that are running well above the average levels over the last quarter-century.
Mr. Grieder’s crop insurance premiums rise with the volatility. So does the cost of trading in options, which is the financial tool he has used to hedge against falling prices. Some grain elevators are coping with the volatility and hedging problems by refusing to buy crops in advance, foreclosing the most common way farmers lock in prices.
“The system is really beginning to break down,” Mr. Grieder said. “When you see elevators start pulling their bids for your crop, that tells me we’ve got a real problem.”
Until recently, that system had worked well for generations. Since 1959, grain producers have been able to hedge the price of their wheat, corn and soybean crops on the Chicago Board of Trade through the use of futures contracts, which are agreements to buy or sell a specific amount of a commodity for a fixed price on some future date.
More recently, the exchange has offered another tool: options on those futures contracts, which allow option holders to carry out the futures trade, but do not require that they do so. Trading in options is not as effective a hedge, farmers say, but it does not require them to put up as much cash as required to trade futures.
These tools have long provided a way to lock in the price of a crop as it is planted, eliminating the risk that prices will drop before it is harvested. With these hedging tools, grain elevators could afford to buy crops from farmers in advance, sometimes a year or more before the harvest.
But that was yesterday. It simply is not working that way today.
Futures, for example, are less reliable. They work as a hedge only if they fall due at a price that roughly matches prices in the cash market, where the grain is actually sold. Increasingly — for disputed reasons — grain futures are expiring at prices well above the cash-market price.
When that happens, farmers or elevator owners wind up owing more on their futures hedge than the crops are worth in the cash market. Such anomalies create uncertainty about which price accurately reflects supply and demand — a critical issue, since the C.B.O.T. futures price is the benchmark for grain prices around the world.
“I can’t honestly sit here and tell you who is determining the price of grain,” said Christopher Hausman, a farmer in Pesotum, Ill. “I’ve lost confidence in the Chicago Board of Trade.”
“We know that the current global environment is creating challenges for many of the traditional users of our markets, and we are very concerned,” said David D. Lehman, director of commodity research and product development for the C.B.O.T.’s owner, the CME Group. “But there are a lot of things that are changing and there is no silver bullet, in terms of a solution.”
Many farmers and people in related businesses blame the tidal wave of investment pouring in from hedge funds, pension funds and index funds for the faulty futures contracts and rising volatility. . But those institutional investors’ money actually adds liquidity to the market, which in theory should reduce price volatility, Mr. Lehman noted.
In any case, at current levels of volatility, options trading becomes riskier, and therefore more expensive — too expensive for many farmers like Mr. Grieder, who now has to hedge with the recently less reliable futures contracts.
That exposes him to the risk of having to put up more cash — to maintain his price protection — whenever a weather threat, shipping disruption or a fresh surge of money from Wall Street suddenly pushes up grain prices.
“If you’ve got 50,000 bushels hedged and the market moves up 20 cents, that would be a $10,000 day,” he said. “If you only had $10,000 in your margin account, you’d have to sit down and write a check. You can see $10,000 disappear overnight.”
On an unusual day, he said, he might get four phone calls a day from his broker seeking additional margin. “But usually, the margin calls come in the mail, in a little blue envelope,” he said. “You don’t have to open it to know what it is.”
When it arrives, he sometimes has to rely on his bank to advance him the margin he needs to keep those hedges in place — a worrisome requirement even for a successful farmer in an economy already beset by a credit squeeze.
“The nightmare scenario is when you have to make margin and you’re looking out your back door and seeing, maybe, a crop problem,” he said. “Everybody has a story about a guy they know getting blown out of his hedge” by unmet margin calls.
Farmers used to leave the market-watching to traders who work for big grain elevator companies. But with some of those companies now refusing to buy crops in advance because hedging has become so expensive and uncertain, farmers have to follow and trade in those markets themselves.
“This is something the farmer didn’t have to worry about before,” said Curt Kimmel, a commodity broker at Bates Commodities, the advisory service Mr. Grieder uses. “It’s a cruel and unforgiving market.”
John Fletcher, a grain elevator operator in Marshall, Mo., started pressing the C.B.O.T. to address the flaws of futures contracts almost two years ago — even before his futures hedge on a million bushels of soybeans failed to fully protect him last September, hitting him with a cash loss of $940,000.
Mr. Fletcher does not blame the big institutional investors stampeding into the market. “But they have contributed to the problem by making these markets so much larger — so large that they have outgrown their delivery system,” he said. “And that has detached the futures market from the cash market.”
Frustrated over the flawed futures contract, Mr. Fletcher is voting with his feet. Last year, he entered into a contract with A.I.G. Financial Products, a leading sponsor of commodity index funds, which allows him and the index fund to hedge their risks without using the C.B.O.T.
Instead of using futures or options, A.I.G. simply buys the commodity directly from Mr. Fletcher, who stores it for a fee and buys it back six months later. His storage fee is lower than the one built into the C.B.O.T. contract, so A.I.G. pays less for its stake in the market. And he has a hedge he can rely on.
“I did a deal with them for corn a year ago, and this year I’m doing a deal on soybeans,” he said.
But private deals like these do not provide pricing data to other farmers and to the rest of the food industry that has long relied on the Chicago Board of Trade as the best measure of supply and demand. If such bilateral contracts become more common, it will be harder for everyone in the industry to anticipate costs and potential profits — which could also push prices up.
This growing uncertainty about prices and hedging “just makes the market less efficient,” said Jeffrey Hainline, president of Advance Trading, an agricultural advisory and brokerage service in Bloomington, Ill. “And anything that makes these markets less efficient increases the cost of food.”
Robert E. Young 2d, chief economist for the American Farm Bureau Federation, has held meetings on this topic around the Farm Belt over the last month and has gotten an earful from distressed food producers and elevator owners, he said.
Interview Las Week on NPR -- Kevin Phillips, Author of "Bad Money"
Although my computer is not loading it, here is the lead-in:
http://www.npr.org/templates/story/story.php?storyId=89642189
"Bad Money" by Kevin Phillips
By BARRY GEWEN
Published: April 21, 2008
At a time when the Cassandras of finance are looking like realists, there is no gloomier prophet than Kevin Phillips. The author of 13 previous books including at least one classic, “The Emerging Republican Majority,” Mr. Phillips sees a perfect economic storm coming. The final pages of his bleak new book, “Bad Money,” tell of an “unprecedented” number of Americans planning to leave the country or thinking about it. Readers of “Bad Money” may come away with a similar impulse to flee.
By Kevin Phillips
239 pp. Viking. $25.95.
Mr. Phillips begins with an overview of the current debt debacle. The 1980s were the start of “three profligate decades,” when the expansion of mortgage credit and the invention of financial instruments like collateralized debt obligations (C.D.O.’s) led to an orgy of leveraging and irresponsible speculation. The Federal Reserve kept the bubble afloat with easy money, while regulators and ratings agencies looked the other way.
By 2007 total indebtedness was three times the size of the gross domestic product, a ratio that surpassed the record set in the years of the Great Depression. From 2001 to 2007 alone, domestic financial debt grew to $14.5 trillion from $8.5 trillion, and home mortgage debt ballooned to almost $10 trillion from $4.9 trillion, an increase of 102 percent. A crisis in the mortgage market in August 2007 brought the party to an end. Since then we have been living in a twilight zone of what a security analyst quoted in the book calls “one of the slowest-moving train wrecks we’ve seen.”
The second component of the perfect storm is the upheaval in the oil industry. Domestic production peaked in 1971, and there are signs that production worldwide is also peaking. (Mr. Phillips cites experts who believe it already has.) And with the emergence of new economic powers like China and India, demand has risen dramatically and prices have been climbing steadily; by 2004 a rapidly growing China had become the second largest oil consumer, after the United States. Despite the bad news at the gas pump, however, America has actually been getting a cost break, because the major suppliers price their oil in dollars. But with the dollar falling, OPEC has been talking about moving into other currencies. Were that to happen, “the effects,” Mr. Phillips says tersely, “could be painful.”
Finally, Mr. Phillips turns to what he terms America’s “calcified” political system. We may need new regulations to deal with the debt mess, along with an energy policy to address the changing world of oil, but Washington, he says, has become dedicated to “the politics of evasion,” reluctant to pass dramatic reforms or to call for sacrifice from the public. Democrats and Republicans alike are so entrenched, so dependent on campaign money and special interests, that “the notion of a breath of fresh air has become almost a contradiction in terms.” Instead of a “vital center” in Washington, we now have a “venal center.” Mr. Phillips holds out little hope of improvement from a new president; he doubts that any administration could do much, even though “the crisis is no longer in the future, but upon us.”
Is such pessimism justified? Mr. Phillips says he is making no predictions, but that’s not quite true. Throughout his book he tends to lean on the darkest analyses, though others might be less grim. And as readers of his earlier books know, he has a penchant for seeing parallels between the current situation in the United States and the declines of 17th-century Spain, the 18th-century Dutch Republic and early-19th-century Britain.
But historical comparisons are always dangerous playthings (remember all those foreign-policy analogies to Munich?): you necessarily have to cherry-pick eras and evidence from history’s panorama. Perhaps there are similarities in the financial arrangements of monarchical Spain and democratic America, as Mr. Phillips says, but the differences between the two societies are far greater. It’s hard not to feel that Mr. Phillips’s argument has been shaped not only by his facts but also by his temperament.
Still, even if his pessimism doesn’t seem wholly warranted, a sense of foreboding surely is, which is why his warnings have to be taken seriously. Mr. Phillips writes that the inventors and marketers of the new financial instruments didn’t entirely understand them. An executive of Fidelity International says a panicky feeling has set in on Wall Street because no one knows where the risks really are. The finance minister of France observes that investments may have reached such a level of complexity that no one can assess them. And Charles R. Morris, in his own gloomy book, “The Trillion Dollar Meltdown,” reports that even Citigroup’s chief financial officer “did not know how to value his holdings.”
The screenwriter William Goldman once declared that in Hollywood “nobody knows anything.” When Wall Street begins to resemble the American Dream Factory, it’s a safe bet that something has gone terribly wrong.
Barry Gewen is an editor at The New York Times Book Review.
Here's a Book I Want to Buy
As it mimicks exactly what I, and apparantly a lot of Americans, feel:
http://www.nytimes.com/2008/04/21/books/21gewen.html?_r=1&scp=2&sq=books&st=nyt&oref=slogin
Sunday, April 20, 2008
Milton Friedman Discussion
A reprise of his life and influence.
http://www.nytimes.com/2008/04/13/weekinreview/13goodman.html?scp=19&sq=&st=nyt
The Very Best Dinner Party
Very entertaining with lots of ideas.
http://query.nytimes.com/gst/fullpage.html?res=9F06E2DB1631F931A35752C1A9659C8B63&sec=&spon=&pagewanted=1#
The Media
Copyright 2008 F. Bruce Abel
Ever since I listened to WLW's Bob Trumpy talk privately I realized that the sine qua non of radio and TV is to entertain. So take outrageous positions. Ask dopey questions at a debate.
What does the listener get? Garbage, and distorted looks at the candidate. More important, what does he not get? What the candidate thinks on serious issues.
On the other hand it's too early to get the latter. Give them room to breathe! And learn.
Gretchen Morgenson and Notrary Signing Agents, and Mortgage Brokers
A dark corner examined:
http://www.nytimes.com/2008/04/20/business/20gret.html?hp
Rich Today in Full
By FRANK RICH
Published: April 20, 2008
“THE crowd is turning on me,” said Charles Gibson, the ABC anchor, when the audience jeered him in the final moments of Wednesday night’s face-off between Hillary Clinton and Barack Obama.
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I can’t remember a debate in which the only memorable moment was the audience’s heckling of a moderator. Then again, I can’t remember a debate that became such an instant national gag, earning reviews more appropriate to a slasher movie like “Prom Night” than a civic event held in Philadelphia’s National Constitution Center:
“Shoddy, despicable!” — The Washington Post
“A tawdry affair!” — The Boston Globe
“A televised train wreck!” — The Philadelphia Daily News
And those were the polite ones. Let’s not even go to the blogosphere.
Of course, Obama fans were angry because of the barrage of McCarthyesque guilt-by-association charges against their candidate, portraying him as a fellow traveler of bomb-throwing, America-hating, flag-denigrating terrorists. The debate’s co-moderator, George Stephanopoulos, second to no journalist in his firsthand knowledge of the Clinton White House, could have easily rectified the imbalance. All he had to do was draw on his expertise to ask similar questions about Bill Clinton’s check-bearing business and foundation associates circling a potential new Clinton administration. He did not.
But viewers of all political persuasions were affronted by the moderators’ failure to ask about the mortgage crisis, health care, the environment, torture, education, China policy, the pending G.I. bill to aid veterans, or the war we’re losing in Afghanistan. Those minutes were devoted not just to recycling the Rev. Jeremiah Wright, Bosnian sniper fire and another lame question about a possible “dream ticket” but to the unseemly number of intrusive commercials and network promos that prompted the jeering at the end. The trashiest ads often bumped directly into an ABC announcer’s periodic recitations of quotations from the Constitution. Such defacing of American values is to be expected, I guess, from a network whose debate moderators refuse to wear flag pins.
Ludicrous as the whole spectacle was, ABC would not have been so widely pilloried had it not tapped into a larger national discontent with news media fatuousness. The debate didn’t happen in a vacuum; it was the culmination of the orgy of press hysteria over Mr. Obama’s remarks about “bitter” small-town voters. For nearly a week, you couldn’t change channels without hearing how Mr. Obama had destroyed his campaign with this single slip at a San Francisco fund-raiser. By Wednesday night, the public was overdosing.
Mr. Obama did sound condescending, an unappealing trait that was even more naked in his “You’re likable enough, Hillary” gibe many debates ago. But the overreaction to this latest gaffe backfired on the media more than it damaged him. For all the racket about “Bittergate” — and breathless intimations of imminent poll swings and superdelegate stampedes — the earth did not move. The polls hardly budged, and superdelegates continued to migrate mainly in Mr. Obama’s direction.
Thus did another overhyped 2008 story line go embarrassingly bust, like such predecessors as the death of the John McCain campaign and the organizational and financial invincibility of the Clinton political machine against a rookie senator from Illinois. Not the least of the reasons that the Beltway has gotten so much wrong this year is that it believes that 2008 is still 1988. It sees the country in its own image — static — instead of as a dynamic society whose culture and demographics are changing by the day.
In this one-size-fits-all analysis, Mr. Obama must be the new Dukakis, sure to be rejected by white guys easily manipulated by Lee Atwater-style campaigns exploiting race and class. But some voters who lived through 1988 have changed, and quite a few others are dead. In 2008, they are supplanted in part by an energized African-American electorate and the young voters of all economic strata who fueled the Obama movement that many pundits didn’t take seriously before Iowa. And that some still don’t. Cokie Roberts of ABC predicted in February that young voters probably won’t show up in November because “they never have before” and “they’ll be tired.”
However out of touch Mr. Obama is with “ordinary Americans,” many Americans, ordinary and not, have concluded that the talking heads blathering about blue-collar men, religion, guns and those incomprehensible “YouTube young people” are even more condescending and out of touch. When a Washington doyenne like Mary Matalin, freighted with jewelry, starts railing about elitists on “Meet the Press,” as she did last Sunday, it’s pure farce. It’s typical of the syndrome that the man who plays a raging populist on CNN, Lou Dobbs, dismissed Mr. Obama last week by saying “we don’t need another Ivy League-educated knucklehead.” Mr. Dobbs must know whereof he speaks, since he’s Harvard ’67.
The most revealing moment in Wednesday’s debate was a striking example of this media-populace disconnect. In Mr. Gibson’s only passionate query of the night, he tried to strong-arm both Democrats into forgoing any increases in the capital gains tax. The capital gains tax! That’s just the priority Americans are focusing on as they lose their houses and jobs, and as gas prices reach $4 a gallon (a subject that merited only a brief mention, in a lightning round of final questions). And this in a debate that took place on the same day we learned that the top 50 hedge fund managers made a total of $29 billion in 2007, some of them by betting against the mortgage market.
At least Mr. Gibson is consistent. In the ABC debate in January, he upbraided Mrs. Clinton by suggesting that a typical New Hampshire “family of two professors” with a joint income “in the $200,000 category” would be unjustly penalized by her plan to roll back the Bush tax cuts for the wealthiest Americans. He seemed oblivious not merely to typical academic salaries but to the fact that his hypothetical household would be among America’s wealthiest (only 3.4 percent earn more).
Next to such knuckleheaded obtuseness, Mr. Obama’s pratfall may strike many voters as a misdemeanor. He was probably rescued as well by the typical Clinton campaign overkill that followed his mistake. Not content merely to piously feign shock about Mr. Obama’s San Francisco soliloquy (and the operative political buzzword here is San Francisco, which stands for you-know-what), Mrs. Clinton couldn’t resist presenting herself as an unambiguously macho, beer-swilling hunting enthusiast. This is as condescending as it gets, topping even Mitt Romney’s last-ditch effort to repackage himself to laid-off union workers as the love child of Joe Hill and Norma Rae.
The video of Mrs. Clinton knocking back drinks in an Indiana bar drowned out the scratchy audio of Mr. Obama’s wispy words in San Francisco. Her campaign didn’t seem to recognize that among the many consequences of the Bush backlash is a revulsion against such play acting. Americans belatedly learned the hard way that the brush-clearing cowboy of the Crawford “ranch” (it’s a country house, not a working ranch) was in reality an entitled Andover-Yale-Harvard oil brat whose arrogance has left us where we are now. Voters don’t want a rerun from a Wellesley-Yale alumna who served on the board of Wal-Mart.
Privileged though they are, Mrs. Clinton and Mr. Obama do want to shape policy to help the less well-heeled. Mr. McCain, who had a far more elite upbringing than either of them and whose wife’s estimated fortune exceeds the Clintons’, is not just condescending to working Americans but trying to hoodwink them. Next week, in a replay of the 2000 Bush campaign’s “compassionate conservative” photo ops among black schoolchildren, he will show he’s a “different kind of Republican” by visiting what he calls the “forgotten” America of Alabama’s “black belt” and the old steel town of Youngstown, Ohio. What he wants voters to forget is the inequity of his new economic plan.
That plan’s incoherent smorgasbord of items includes a cut from 35 percent to 25 percent in the corporate tax rate. For noncorporate taxpayers, Mr. McCain offers such thin gruel as a battle against federal pork (the notorious Alaskan “bridge to nowhere,” earmarked for $223 million in federal highway money, costs less than a day of the war in Iraq) and a temporary suspension of the federal gas tax (a saving of some $2.75 per 15-gallon tank). Now there’s a reason for voters to be bitter — assuming bloviators start publicizing and parsing Mr. McCain’s words as relentlessly as they do the Democrats’.
That may be a big assumption. At an Associated Press luncheon for newspaper editors in Washington last week, Mr. McCain was given a standing ovation. (The other candidate who appeared, Mr. Obama, was not.) Cindy McCain, whose tax returns remain under wraps, has not received remotely the same scrutiny as Michelle Obama and Bill Clinton, except for her plagiarized recipes. The most damning proof of the press’s tilt toward Mr. McCain, though, is the lack of clamor for his complete health records, especially in the wake of his baffling serial factual confusions about Iraq, his No. 1 issue.
But that remains on hold while we resolve whether Mr. Obama lost Wednesday’s debate with his defensive stumbling, or whether Mrs. Clinton lost it with her ceaseless parroting of right-wing attacks. The unequivocally good news is that ABC’s debacle had the largest audience of any debate in this campaign. That’s a lot of viewers who are now mad as hell and won’t take it anymore.
Rich is, Well, Rich and Wonderful
On the "press" and the last debate Wednesday night.
http://www.nytimes.com/2008/04/20/opinion/20rich.html?_r=1&hp&oref=slogin
Saturday, April 19, 2008
Prize-Winning Birthday Invitation
Barefoot Advertising Company
Cincinnati, Ohio
Doug Worple, President
Done by Jodie.jpg)
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Gail Collins in Full
By GAIL COLLINS
Published: April 19, 2008
George W. Bush says we’re on track to meet the nation’s goals for curbing global warming.
I see some hands waving out there. Didn’t know we had any goals for curbing global warming? Where were you in 2002 when the president put us on the road toward reducing the growth of greenhouse gas emissions by 18 percent by 2012?
So there.
Bush held a press conference in the Rose Garden this week to give us a warming progress report or, in his words, “share some views on this important issue.” He almost always refers to global warming as an environmental “issue.” As The Times’s Andrew Revkin noted on his blog, Dot Earth, most people talk about environmental problems. But perhaps the White House regards that as overly alarmist.
“I’m pleased to say that we remain on track to meet this goal,” the president said, in a tone that sounded rather belligerent considering this was supposed to be good news.
Let’s back up here. I don’t know about you, but I’ve always had trouble getting my head around goals that involve reducing the rate at which something is growing. To appreciate the administration’s efforts on the, um, issue, let’s try to imagine it in terms other than greenhouse gas emissions. (As the president noted: “Climate change involves complicated science.”)
Suppose that two years after taking office, George W. Bush discovered that because of the stress of his job, he had gained 40 pounds and was tipping the scales at 220.
The real-world Bush would immediately barricade himself in the White House gym, refusing all human contact or nourishment until the issue was resolved. But imagine that he regarded getting fat as seriously as he regards melting glaciers, rising oceans and drought and starvation around the planet. In that case, he would set a serious, management-type goal — of, say, an 18 percent reduction in the rate at which he was gaining weight, to be reached within the next decade.
Cut to the Rose Garden in 2008 where partial victory is declared. “Over the past seven years, my administration has taken a rational, balanced approach to these serious challenges,” the 332-pound chief executive announces. He delivers this good news sitting down.
2012: Bush hits his final goal and 400 pounds at approximately the same time.
I hope now you can appreciate just how useful the Bush global-warming initiative is. But the president isn’t satisfied with merely delivering on his promises. In his Rose Garden address, he upped the ante, vowing to stop the growth of U.S. greenhouse gas emissions entirely by 2025.
Let us forget, for a second, that this is a man who’s only going to be in office for nine months of the 17 years in question. Furthermore, let us skip lightly over the fact that Bush did not give any hints whatsoever as to how this goal is supposed to be reached except to say that “the wrong way is to raise taxes, duplicate mandates or demand sudden and drastic emissions cuts.”
Since the president never suggests actual behavior changes on the part of American citizens, that leaves us with what? More efficient refrigerators?
Lots of things! There is, for instance, the ambitious new fuel economy standard of 35 miles per gallon by 2020; we sure do have a lot to look forward to in the future, people. There’s new federal spending on biofuels. Much of this is for ethanol, which has the unfortunate side effect of creating more greenhouse gases than it eliminates, and, of course, helping to create a planetary crisis over rising food costs. But nothing’s perfect.
The president’s real focus seemed to be on fighting the strategies for global warming that he doesn’t like: the Kyoto Protocol, court challenges and legislation pending in Congress. Almost all of them, interestingly, were referred to as “problems.”
Instead of Kyoto, the administration is pushing for “a new process” in which the countries that do most of the polluting will get together and work on a climate agreement. That process was in fact chugging along this very week at a gathering in Paris, where Bush’s speech was greeted with a round of excited reviews. Germany’s environment minister, for instance, dubbed it “losership instead of leadership.”
The Europeans have a perfect right to look down on the United States since they’ve set much more ambitious targets for reducing global warming. While they do not appear to be likely to meet any of them, it’s the thought that counts.
If the Bush strategy seems a little ... little, go back to our metaphor. Imagine it’s 2025, and you’ve got a 486-pound ex-president being wheeled in to accept the congratulations of the world on his excellent physical fitness program. Really, that’s big.
Gail Collins Rocks
One brilliant analogy! In today's New York Times.
http://www.nytimes.com/2008/04/19/opinion/19collins.html?hp#
Friday, April 18, 2008
GE
You Gotta Watch This!
Getting back at husband:
http://www.youtube.com/watch?v=hx_WKxqQF2o
When the "Ex" Blogs, Dirty Laundry Airs:
http://www.nytimes.com/2008/04/18/style/18divorce.html?hp
Thursday, April 17, 2008
Well Said!
10.
April 17th,20086:05 am
Basic problem is that Americans are voting for public relations perfect people. The real experienced people with talent and ability to put America back on course will never run for high office. They have lived a life with both successes and failures triumphs and mistakes. These are the trials and tribulations that make us men, that forge real leaders.
Observing a modern American election is like watching a bunch of mouthy beauty pagant contestants trying to show us just how perfect they have been and hence just how much they deserve to win. Their messages are tailor made for the specific state, the specific town but in the end it is all hot air. One of these public relations hounds is elected and political business returns to normal.
Change will come only after Americans learn to vote for those who are not perfect, who have climbed high mountains and sank to low valleys, who will really bring the interest of the little guy to bear on all issues. This person is you and me. He is in all of us.
Until we change we must resolve ourselves to a long slow slide into the status of second rate nation talking of the good old times and imagining that we still are rich and prosperious.
RobertWashington, DC
— Posted by Robert
This One
new_york_times:http://www.nytimes.com/2008/04/16/business/16wall.html
By JENNY ANDERSON
Published: April 16, 2008
Hedge fund managers, those masters of a secretive, sometimes volatile financial universe, are making money on a scale that once seemed unimaginable, even in Wall Street’s rarefied realms.
John Paulson of Paulson & Company earned $3.7 billion.
James H. Simons, once a code breaker, made $2.8 billion.
George Soros earned $2.9 billion for the year.
One manager, John Paulson, made $3.7 billion last year. He reaped that bounty, probably the richest in Wall Street history, by betting against certain mortgages and complex financial products that held them.
Mr. Paulson, the founder of Paulson & Company, was not the only big winner. The hedge fund managers James H. Simons and George Soros each earned almost $3 billion last year, according to an annual ranking of top hedge fund earners by Institutional Investor’s Alpha magazine, which comes out Wednesday.
Hedge fund managers have redefined notions of wealth in recent years. And the richest among them are redefining those notions once again.
Their unprecedented and growing affluence underscores the gaping inequality between the millions of Americans facing stagnating wages and rising home foreclosures and an agile financial elite that seems to thrive in good times and bad. Such profits may also prompt more calls for regulation of the industry.
Even on Wall Street, where money is the ultimate measure of success, the size of the winnings makes some uneasy. “There is nothing wrong with it — it’s not illegal,” said William H. Gross, the chief investment officer of the bond fund Pimco. “But it’s ugly.”
The richest hedge fund managers keep getting richer — fast. To make it into the top 25 of Alpha’s list, the industry standard for hedge fund pay, a manager needed to earn at least $360 million last year, more than 18 times the amount in 2002. The median American family, by contrast, earned $60,500 last year.
Combined, the top 50 hedge fund managers last year earned $29 billion. That figure represents the managers’ own pay and excludes the compensation of their employees. Five of the top 10, including Mr. Simons and Mr. Soros, were also at the top of the list for 2006. To compile its ranking, Alpha examined the funds’ returns and the fees that they charge investors, and then calculated the managers’ pay.
Top hedge fund managers made money in many ways last year, from investing in overseas stock markets to betting that prices of commodities like oil, wheat and copper would rise. Some, like Mr. Paulson, profited handsomely from the turmoil in the mortgage market ripping through the economy.
As early as 2005, Mr. Paulson began betting that complex mortgage investments known as collateralized debt obligations would decline in value, much as Wall Street traders bet that shares will drop in price. In that case, known as shorting, they borrow shares and sell them, wait for the price to fall, buy the shares back at a lower price and return them, pocketing the profit.
Then, over the next two years, Mr. Paulson established two funds to focus on the credit markets. One of those funds returned 590 percent last year, and the other handed back 353 percent, according to Alpha. By the end of 2007, Mr. Paulson sat atop $28 billion in assets, up from $6 billion 12 months earlier.
Mr. Soros, one of the world’s most successful speculators and richest men, leapt out of retirement last summer as the market turmoil spread — and he won big. He made $2.9 billion for the year, when his flagship Quantum fund returned almost 32 percent, according to Alpha. Mr. Simon, a mathematician and former Defense Department code breaker who uses complex computer models to trade, earned $2.8 billion. His flagship Medallion fund returned 73 percent.
Like Mr. Paulson, Philip Falcone, who founded Harbinger Partners with $25 million in June 2001, cast a winning bet against the mortgage market. He pulled in returns of 117 percent after fees in 2007 and made $1.7 billion. The trade thrust him from relative obscurity to hedge fund heavyweight: he now manages $18 billion. Harbinger recently won agreement from The New York Times Company to add two members to its board.
Hedge fund managers share their success with their investors, which include wealthy individuals, pension funds and university endowments. They typically charge annual fees equal to 2 percent of their assets under management, and take a 20 percent cut of any profits.
With a combined $2 trillion under management, the hedge fund industry is coming off its richest year ever — a feat all the more remarkable given the billions of dollars of losses suffered by major Wall Street banks.
In recent months, however, scores of hedge funds have quietly died or spectacularly imploded, wracked by bad investments, excess borrowing or leverage, and client redemptions — or a combination of those events.
“To some degree it’s a very gigantic version of Las Vegas,” said Gary Burtless, an economist at the Brookings Institution.
As Alpha’s list shows, managers who reap big gains one year can lose the next.
Edward Lampert, the founder of ESL Investments and a member of the 2007 Alpha list, was absent this year. His fund fell 27 percent last year, according to Alpha. About 60 percent of ESL’s equity portfolio is invested in Sears, whose shares plunged 40 percent last year. ESL is also a major holder of Citigroup, whose abysmal performance matched that of Sears.
A manager who ranked high in the 2007 list and fell off in 2008 was James Pallotta of the Tudor Investment Corporation, who was 17th last year and earned $300 million. Mr. Pallotta’s $5.7 billion Raptor Global Fund fell almost 8 percent last year, according to Alpha.
A few who did not make the cut still made buckets of money. Bruce Kovner of Caxton Associates and Barry Rosenstein at Jana Partners didn’t make the top 50. But Mr. Kovner earned $100 million, and Mr. Rothstein earned $170 million, according to Alpha. Spokesmen for the hedge fund managers either declined to comment on Tuesday or could not be reached.
Since 1913, the United States witnessed only one other year of such unequal wealth distribution — 1928, the year before the stock market crashed, according to Jared Bernstein, a senior fellow at the Economic Policy Institute in Washington. Such inequality is likely to impede an economic recovery, he said.
“For a recovery to be robust and sustainable you can’t just have consumer demand at Nordstrom,” he said. “You need it at the little shop on the corner, too.”
Despite the explosive growth of the industry — about 10,000 hedge funds operate worldwide — it is relatively lightly regulated. On Tuesday, two panels appointed by Treasury Secretary Henry M. Paulson Jr. advised hedge funds to adopt guidelines to increase disclosure and risk management.
And Mr. Gross, the fund manager, warned that the widening divide among the richest and everyone else is cause for worry.
“Like at the end of the Gilded Age and the Roaring Twenties, we are going the other way,” Mr. Gross said. “We are clearly in a period of excess, and we have to swing back to the middle or the center cannot hold."
Full Article on Hedge Fund Pay
By REUTERS
Published: April 16, 2008
Filed at 1:09 p.m. ET
LONDON (Reuters) - Bets on a U.S. housing crisis earned hedge fund manager John Paulson $3.7 billion in 2007, ahead of industry legend George Soros and 2006's highest-paid manager James Simons, according to Alpha Magazine.
Paulson, whose bet that investment grade mortgage bonds would be subject to default in record numbers came good in the subprime meltdown last summer, was one of five managers earning more than $1 billion, Alpha said in a note on Wednesday.
His earnings were more than double those of 2006's top earner -- mathematics professor-turned-investor James Simons, who founded Renaissance Technologies Corp -- who in 2007 earned $2.8 billion.
George Soros, whose Quantum Endowment Fund returned 32 percent last year, earned $2.9 billion.
The top 25 managers earned, on average, $877 million in 2007, up from $532 million in 2006.
This "may well prove to be the greatest display of individual wealth creation in any year in the modern history of finance," Alpha said in the note.
(Reporting by Laurence Fletcher, editing by Will Waterman)
John Paulson and Billion-Dollar Fees
Bill Paulson is on Squawk Box this morning. I had to check to see if this was the same Paulson who hit the home run last year. It wasn't. But it is good to have the billionaires on CNBC, because it gives a face to the Private side of Wall Street. Ross being one example. Soros also appears on TV quite regularly.
The article, which is sickening really:
http://www.nytimes.com/reuters/business/business-hedge-earnings.html?_r=1&scp=1&sq=paulson+billion&st=nyt&oref=slogin
Tuesday, April 15, 2008
Yes, Yes, and Yes!
The turning point of the Bush Administration, in my opinion, was the appointment of Paulson to be Secretary of the Treasury. Here another Goldman man switches to a pro-regulation stance on controlling Wall Street.
http://www.nytimes.com/2008/04/15/business/15steel.html
Steve Leasman is Moving Up
His comments on GE yesterday were "spot on." I forget what they were, but they were insightful and, considering his job, courageous. Probably something along the line that GE's SEC filings didn't disclose much.
No "fresh" Cramer yesterday, either Stop Trading or Mad Money.
More From Floyd Norris Blog on GE
9.
April 14th,20086:44 pm
We Should Decide On What Exactly Size Of Capitalization Is “To Big To Fail”.Then Force the Breakup Of Such Entities Into Smaller “Failure Acceptable” Sized Parts So That the Macro-Economy Is Protected From Them Collapsing On Our Economy -And Crushing It.
We Broke Up Ma Bell And The Phone Still Works.There Was No Massive Public Bailout Necessary & The Markets Did Not Reel.
If We Would Regulate These Ridiculous Greed Driven Giants Down To Manageable Sizes, & Let Them Fold When Their Management Screws Up; Then We Won’t Have To Pay For It With Our Taxes Anymore.
Our Economy Should Not Be The Captive Of Predatory Monopolistic Market Giants.
Just Because Something Is Really Big Doesn’t Also Make It Really Good.
— Posted by John Ralston
And the Retailers and Shopping Centers
Now this:
Retailing Chains Caught in a Wave of Bankruptcies
By MICHAEL BARBARO
Published: April 15, 2008
The consumer spending slump and tightening credit markets are unleashing a widening wave of bankruptcies in American retailing, prompting thousands of store closings that are expected to remake suburban malls and downtown shopping districts across the country.
To avoid bankruptcy some chains are closing stores. Foot Locker said it would close 140 stores over the next year.
Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.
But the troubles are quickly spreading to bigger national companies, like Linens ‘n Things, the bedding and furniture retailer with 500 stores in 47 states. It may file for bankruptcy as early as this week, according to people briefed on the matter.
Even retailers that can avoid bankruptcy are shutting down stores to preserve cash through what could be a long economic downturn. Over the next year, Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100.
The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.
Retailing is a business with big ups and downs during the year, and retailers rely heavily on borrowed money to finance their purchases of merchandise and even to meet payrolls during slow periods. Yet the nation’s banks, struggling with the growing mortgage crisis, have started to balk at extending new loans, effectively cutting up the retail industry’s collective credit cards.
“You have the makings of a wave of significant bankruptcies,” said Al Koch, who helped bring Kmart out of bankruptcy in 2003 as the company’s interim chief financial officer and works at a corporate turnaround firm called AlixPartners.
“For years, no deal was too ugly to finance,” he said. “But now, nobody will throw money at these companies.”
Because retailers rely on a broad network of suppliers, their bankruptcies are rippling across the economy. The cash-short chains are leaving behind tens of millions of dollars in unpaid bills to shipping companies, furniture manufacturers, mall owners and advertising agencies. Many are unlikely to be paid in full, spreading the economic pain.
When it filed for bankruptcy, Sharper Image owed $6.6 million to United Parcel Service. The furniture chain Levitz owed Sealy $1.4 million.
And it is not just large companies that are absorbing the losses. When Domain, the furniture retailer, filed for bankruptcy, it owed On Time Express, a 90-employee transportation and logistics company in Tempe, Ariz., about $30,000.
“We’ll be lucky to see pennies on the dollar, if we see anything,” said Ross Musil, the chief financial officer of On Time Express. “It’s a big loss.”
Most of the ailing companies have filed for reorganization, not liquidation, under the bankruptcy laws, including the furniture chain Wickes, the housewares seller Fortunoff, Harvey Electronics and the catalog retailer Lillian Vernon. But, in a contrast with previous recessions, many are unlikely to emerge from bankruptcy, lawyers and industry experts said.
Changes in the federal bankruptcy code in 2005 significantly tightened deadlines for ailing companies to restructure their businesses, offering them less leeway.
And the changes may force companies to pay suppliers before paying wages or honoring obligations to customers, like redeeming gift cards, said Sally Henry, a partner in the bankruptcy law practice at Skadden, Arps, Slate, Meagher & Flom and the author of several books on bankruptcy.
As a result, she said, “it’s no longer reorganization or even liquidation for these companies. In many cases, it’s evaporation.”
Several of the retailers that filed for Chapter 11 bankruptcy protection over the last eight months, like the furniture sellers Bombay, Levitz and Domain, have begun to wind down — closing stores, laying off workers and liquidating merchandise.
In most cases, the collapses stemmed from a combination of factors: flawed business strategies, a souring economy and banks’ unwillingness to issue cheap loans.
Bombay, a chain with 360 stores, was considered a success in the furniture world, after its sales surged from $393 million in 1999 to $596 million in 2003.
http://www.nytimes.com/2008/04/15/business/15retail.html?hp
Monday, April 14, 2008
Credit Markets Will Be Affected for a Decade
No end to repercussions:
[Reuters] The credit crisis will affect financial markets for at least a decade and lead to greater regulatory powers for central banks, analysts at JP Morgan said.
"Market participants and regulators will focus intensely on controlling the risks that were at the core of the crisis," analysts led by Jan Loeys and Margaret Cannella wrote in a note on Monday.
These risks include lending standards in mortgages, leverage in the funding of securitized products, and the use of short-term financing for illiquid long-term assets outside of the regulated banking sector.
This will change behavior for market participants "for at least a decade," they wrote, in line with fallout from previous crises.
"We had the Nasdaq, we had LTCM (Long Term Capital Management), we had the various forms of emerging-market crises in the '90s, we had the real estate crisis of 20 years ago," Loeys told Reuters in a telephone interview. "In most of these the direct impact on the behavior of the parties involved lasted more than 10 years. It looks like it takes a generation for the memory to fade and for the same mistakes to be made again."
He noted, for instance, that global equity markets remained extremely cheap on all risk measures even five to six years after the end of the dotcom crash.
Investor Takeaway
As a result of these changes in behavior, banks will become "bigger, safer and somewhat less profitable" as they will retain more assets on balance sheet, the analysts wrote.
Securitization will be reduced, and no longer rely on short-term funding structures that assumed liquidity as a given, although it will survive, they said.
Meanwhile, premia for term, liquidity and credit risk will be higher on average over the next cycle, they said.
JP Morgan is regarded as having steered a relatively steady course through the credit crisis, turning a profit last year where others posted huge losses. It took centre stage in March as it announced a deal to buy Bear Stearns , averting a collapse that could have set off fresh turmoil in already battered financial markets.
The biggest change as a result of the crisis will be in regulation, Loeys said, with the focus on the off-balance sheet structures that the financial world has created.
"This looks like a recession caused by financial markets, which clearly policy makers are not going to take kindly to ... There will be a lot of follow-up," Loeys said.
"This was a run on the securitized world. The bank regulation and the structure of the supervisory system was created for a banking world of taking deposits and making loans. That world has moved towards capital markets, which were regulated from the point of view of consumer protection, but not from a systemic stability point of view," he said.
"Banks did not have the tools to try to protect the capital market from its own excesses."
As a result, central banks will be forced to take on more power as they are the entities extending support to the markets, Loeys said.
"Central banks' extension of liquidity to broker-dealers and (the) securitized world is permanent, and will be followed by regulatory control," the analysts wrote.
http://www.cnbc.com/id/24110064
GE -- Do You Suppose?
8.
April 14th,200811:44 am
Do you suppose GE was using quarter-ending new positions in derivatives to “sculpture”/”show” huge amounts of “earnings” from GE Money and to balance shortfalls in other divisions, (or GE Money itself) at the close of each quarter, like the Japanese Banks did before they “fessed up” and cleaned up the practice? If so, then when the first quarter came to an end they (GE) found there were no counterparties who were willing to play that game, even for a fee?
— Posted by f bruce abel
Watch What I Do, Not What I Said
This applies to Supreme Court justices:
http://www.nytimes.com/2008/04/14/opinion/14mon3.html
Andrew Ross Sorkin -- Wachovia
Andrew Ross Sorkin contributed to this article on Wachovia.
http://www.nytimes.com/2008/04/14/business/14cnd-bank.html?_r=1&hp&oref=slogin
Two More Comments From Floyd Norris Blog on GE
6.
April 13th,20089:50 pm
I was particularly shocked GE missed as well. When Immelt came on CNBC just over a month ago saying he was buying up shares I thought that was a pretty good sign GE may at least meet expectations.
That clearly wasn’t the case, and if GE (aka the most boring stock / company ever) can miss their earnings, so can every other stock out there.
TraderMDhttp://tradermd.wordpress.com
— Posted by TraderMD
7.
April 14th,20081:58 am
What we have seen from GE so far is only the tip of the iceberg. Experience shows that the first disappointment is rarely the last. The financial side is just beginning to crack and the industrial side of the business probably doesn’t look so hot either right now.
Why do analysts rely on guidance? With these large global conglomerates with a high finance content, they don’t have a clue. When it comes to managements they don’t either, as shown by recent experience.
Anyway, Floyd, there is no real research done any more by Wall Street.
— Posted by jimsep
We must re-regulate:
http://www.nytimes.com/2008/04/14/opinion/14krugman.html?hp#
Yes.
Sunday, April 13, 2008
More on GE
Floyd Norris's Blog at New York Times:
April 12, 2008, 12:49 pm
Lessons of G.E.
Pondering the G.E. earnings miss yesterday leaves me with a handful of observations:
The economic downturn is accelerating. As Kathleen Shanley of Gimme Credit writes, “If there is another company that is as close a proxy for the overall economy as General Electric, we’re not aware of it.”
G.E. had a reputation of being a master at meeting the numbers, something its bosses were confident they could do only a month ago. So you have to figure that something really bad happened in the final few weeks of the quarter.
It is in that regard that G.E.’s blame of Bear Stearns for the failure makes sense. In the earnings call, G.E.’s bosses talked of the inability to complete planned end-of-quarter transactions. I suspect a purpose of those transactions was to produce the reported profits needed to make the numbers.
The shock of G.E. analysts is in some ways amusing. I never have understood how anyone could forecast that company, given its many parts, and it makes sense that those who are supposed to make such forecasts rely heavily on management guidance, and they now feel betrayed.
No one should be shocked by signs of weakness in the financial sector, and I doubt any of the analysts are surprised by that. What has surprised them is the inabilty of G.E. to do the earnings dance.
In that light, the bearish case is that G.E.’s miss signals that the rot is deep. The bullish case is that the Bear Stearns fiasco provided only a temporarty setback at a critical end-of-quarter time. Three months from now, we may get indications as to which view is accurate.
1.
April 12th,20082:04 pm
Downturns are cyclical and eventually GE’s stock and reputation will be back up. But if GE’s missed profit target was due to the collapse of Bear Stearns, this demonstrates how widespread the subprime mortgage crises has become.
Any ’shareholder’ or mutual fund owner who opened their quarterly earnings report this week can validate how widespread this downturn has become.
Let’s just hope all this is just the result of the subprime mess, and not an indication of something deeper, such as persistent decline of real income for middle class Americans, continued rising oil and food prices, continued weakening of the dollar, etc. etc. etc.
— Posted by Anne R.
2.
April 12th,20082:42 pm
Never thought GE would cease to be one of my core holdings. Just couldn’t put up any longer with its stodgy grossly overpaid mediocre management. The decline in GE shares since 2000 when denominated in euros shows the nominal loss in dollars is catastrophic.
More broadly I’ve significantly lightened up on major industrials and consumer powerhouses like 3M and PG. Just don’t see how they’ll show any significant growth in the foreseeable future. Given the weakness of the dollar their payouts are very inadequate.
The credit meltdown sent the unmistakeable message the mega financials will not be allowed to fail. Their underlying strength is pretty impressive as demonstrated by all but Citigroup maintaining their excellent dividends. Citigroup didn’t need to cut its. Pity it folded so easily to Meredith Whitney’s criticism.
When the credit mess sorts itself out credit is really going to cost the earth. Think bank profit margins absent writedowns are strong now just you wait when things return to normal.
Lucked out with the GE. Put the money into Fording Canadian Coal Trust whose performance over the past year more than made up for GE’s dismal record since 2000.
Allow me add to a 4th item to my Rx for senior happiness in yesterday’s blog. Buy all the Visa you can. Impossible not to make a bundle over time getting an itsy bitsey crumb from each of more than half the world’s credit and atm transactions. Visa will declare a small dividend as early as the 3rd quarter. That will broaden the shareholder base considerably with trusts and institutions barred from owning non dividend paying stocks.
There’s also a 5th Rx. No one stays for breastfast alone.
— Posted by MARK KLEIN, M.D.
3.
April 12th,20083:35 pm
I don’t understand all this fuss about GE missing their numbers…. If you take a close look at GE, it is obvious that GE Finance is a substantial part of their business model and no one including them is immune from the credit meltdown.
When I downgraded Nortel in 1999-2000 timeframe due to vendor financing schemes and for building up a phony balance sheet, I also advised my clients to stay away from GM, GM Credit, Ford and GE.
I remember the punch line of my report, “these guys have more debt than most countries and I doubt that in a downturn the lenders will be coming to the rescue without asking for a pound of flesh and some….”
— Posted by Hassan Azarm
4.
April 12th,20083:44 pm
Anne R–”Let’s just hope all this is just the result of the subprime mess, and not an indication of something deeper, such as persistent decline of real income for middle class Americans, continued rising oil and food prices, continued weakening of the dollar, etc. etc. etc.”
It’s the latter I’m afraid. My comments in this brief live Memphis t.v. interview addresses the evaporation of middle class life in America over my lifetime. http://www.youtube.com/watch?v=5oQdn6NvhIU
I did get on that straw poll as a write-in beating Guiliani, Brownback, Hagel, Gingrich, Barbour, Tancredi, and JC Watts. McCain beat me by around 20 votes. The downside to the above video is I likely so p.o.’ed the GOP my straw poll results were reported as “Other”. Heaven forbid I should be become the voice of Republican party replacing the warmongers and financial feudalists now in charge.
Absent premiers playing musical chairs with government falling almost monthly America’s turned into a clone of the 4th French Republic. The old franc collapsed with politicians recycling failed policies together with the moral and financially sapping stalemated war in Algeria. It took DeGaulle to bring France’s inflation to heel and by executive order end the Algerian War. Took a lot of guts to do the latter. I was in Paris when the attempted coup happened. The police brandishing submachine were all over the heart of Paris.
To the extent I could get heard I spoke quite frankly about the issues which concern you. The American brain fried as it is with bread and circuses just wants to party. This election is really about who will be the master of ceremonies.
— Posted by MARK KLEIN, M.D.
5.
April 13th,20084:00 pm
Thank you Hassan Azarm! GE is a quazi-bank, and the “shocked” financial press has seemed to forgotten that fact in the aftermath of the earnings announcement.
Bank CEOs consistently complain in private (GE is also one of their major relationships, so complaints might not be made on the record)about GE being a bank that is free of intrusive Fed or OCC oversight. The Fed correctly considers GE (and a few large insurance companies)an institution that poses systemic risk to financial markets and the banking system.
Of course their earnings were hit. They are in the same sandbox as the banks. If 3M, Procter and Gamble, or Johnson and Johnson get hit like GE, we should be shocked; otherwise, relax, another bank had a bad quarter.
— Posted by Uncle Ho
Saturday, April 12, 2008
Historic Glendale Greenville Group
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June 3, 2008 Vol. I, Issue 1
Remember 1997? Here is a beautifully-drawn “Party-Invite” – no, not now! -- from the past, done by Arlene Hoeweler, when we lived two doors north at 885 Greenville, the house that is featured in the Glendale Logo (for what that is worth).
Our family has many great memories of this home of 32 years and many parties. However when the family home at 970 Laurel became available, we decided to move to that one floor home. Now we are faced with two mortgages. (Yeah, we know…)
For the next few days we are “going naked” in the real estate market.
We read the headlines -- “Home Sales Down 14%!” -- Homes in the $150,000-350,000 Range, “Down 27%!” (latter not a headline but contained in Sunday’s New York Times article about Greensboro, N.C.), and last month lowered 885 Greenville to well below the auditor’s appraised value of $352,000. (Gulp!) Without a realtor we wish to realize $305,500.
We intend to sign up with Sibcy Cline shortly, so this low price is not going to last.
Data about the housing market, we all know, draws on what has already happened in the housing market, but we’d ask you and your friends and family to consider: (1) the lower temporary price due to “no realtor;” and (2) the fact that, starting June 1, Fannie Mae and Freddie Mac, are loosening restrictions on the sorts of loans they’ll buy in many markets. This is a good time to buy a home with a low down payment of 5 percent, or even less.
So if you know of a family or relatives who might be interested in relocating to Glendale, please pass on this information now!
Yours,
Eunie & Bruce Abel
970 Laurel Avenue
Glendale OH 45246
513-772-0298
email: babel2@fuse.net
During the selling of 885 Greenville we will be having periodic discussion-meetings at the house on the topic of the coming changes to the selling of real estate, somewhat of the nature of the meeting at the Harry Whiting Brown House last year, but more focused. We will buttress the current furnishings of one round table and four chairs, and will let you know when, if you email us at above.
Kerviel and Societe General
"firstly, he ensured that the characteristics of the fictitious operations limited the chances of a control: for example he chose very specific operations with no cash movements or margin call and which did not require immediate confirmation;"
How, how, how?
Good Writing Today
Herbert today in the New York Times:
http://www.nytimes.com/2008/04/12/opinion/12herbert.html?hp
"A country that used to act like Babe Ruth now swings like a minor-leaguer. The all-American can-do philosophy has been smothered by the hapless can’t-do performances of the people who have been in charge for the past several years. It’s both tragic and embarrassing."
"The war in Iraq stands like a boulder in the road, blocking progress on so many other important issues that are crucial to our viability as a society. We’ve seen this before. Lyndon Johnson’s Great Society, which included the war on poverty, was crippled by the war in Vietnam."
"On the evening of April 4, 1967, one year to the day before he was assassinated, the Rev. Dr. Martin Luther King Jr. went into Riverside Church in Manhattan and said of the war in Vietnam: 'This madness must cease.'"
"Forty-one years later, we can still hear the echo of Dr. King’s call. The only sane response is: 'Amen.'"
Friday, April 11, 2008
GE's Breakout
GE remains a Black Box because of GE Money. But overall there is some insight in this Bloomberg article of today.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5Frrde7VT44
In Detail
Paris le XX January 2008
Explanatory note about the exceptional fraud
Paris, January 27th 2008
The present document describes the arbitrage activities, the method behind the fraud, the conditions in which the fraud was uncovered, the unwinding of the fraudulent position and the measures taken with immediate effect, as revealed by Société Générale’s investigations at January 26th 2008. On January 29th, the Audit Committee will take a decision on an additional external audit.
1. The arbitrage activities and an explanation of the size of the nominal amounts used in the fraud.
It is not the role of Société Générale’s Equities businesses to take directional positions on the equity markets (i.e. to speculate on rises or falls). The division where the trader worked is assigned to arbitrate financial instruments on European stock markets. This is a proprietary trading business which is completely independent of the Equities activity’s client businesses.
For example, this arbitrage business involves purchasing a portfolio of financial instruments A and selling at the same time a portfolio of financial instruments B with extremely similar characteristics, but with a slightly different value. The arbitrage business generates its profits or losses from these differences in value.
Because these differences are both small and temporary, the arbitrage activities rely on a very large amount of operations involving very high total nominal amounts.
The fact that portfolios A and B have very similar characteristics and that they offset each other, means that these activities generate very little market risk.
However, these risks do exist and, as part of the development of its arbitrage activities, Société Générale has put in place a large number of controls designed to monitor the risks involved: control of operations and control of market risk linked to the changes in the prices of portfolios of financial instruments.
The exceptional fraud which we have suffered consisted of avoiding these controls or making them inoperable: the trader inserted fictitious operations into portfolio B in order to give the impression that this portfolio genuinely offset portfolio A which he had purchased, when this was not the case.
These fictitious operations, were registered in Société Générale’s systems but did not actually correspond to any economic reality.
2. The method behind the fraud
• The trader involved had been employed at the Group since 2000. He first spent five years working in different middle-offices (one of the departments which
controls traders). Consequently, he had a very good understanding of all of Société Générale’s processing and control procedures. In 2005 he became a trader in the arbitrage department.
In the course of his arbitrage activity, the trader developed an initial portfolio A comprising genuine operations using financial instruments (futures) which reproduced changes in the main European stock market indices (Eurostoxx, the Dax, the FTSE, etc.).
The financial instruments in the portfolio, which were genuine and consistent with the volumes traded by a large investment bank, were subject to daily controls and in particular margin calls with the main clearing houses. Insofar as these instruments were actually purchased and considered as such by Société Générale, the margin calls were checked and settled by or paid to the bank.
• The risks generated from commitments made by the bank are managed and controlled on a daily basis. With regard to this fraud, the financial instruments in portfolio A were in appearance offset by the fictitious operations housed in portfolio B, which meant that the only visible risk was very low residual risk.
As a result, the trader was able to hide a very sizeable speculative position, which was neither consistent with nor related to his normal business activity for the bank.
In order to ensure that these fictitious operations were not immediately identified, the trader used his years of experience in processing and controlling market operations to successively circumvent all the controls which allow the bank to check the characteristics of the operations carried out by its traders, and consequently their real existence.
In practice, the trader combined several fraudulent methods to avoid the controls in place:
�� firstly, he ensured that the characteristics of the fictitious operations limited the chances of a control: for example he chose very specific operations with no cash movements or margin call and which did not require immediate confirmation;
�� he misappropriated the IT access codes belonging to operators in order to cancel certain operations;
�� he falsified documents allowing him to justify the entry of fictitious operations.
�� he ensured that the fictitious operations involved a different financial instrument to the one he had just cancelled, in order to increase his chances of not being controlled.
3. The conditions in which the fraud was uncovered
• Friday January 18th
�� Abnormal counterparty risk on a broker is detected several days earlier. The explanations provided by the trader result in additional controls.
�� On January 18th, the trader’s superiors are informed and in turn they alert the management of the division.
�� In the afternoon of January 18th, it appears that the counterparty for the recorded operations is in fact a large bank, but the confirmation e-mail raises suspicions.
�� A team is immediately created to start investigating the situation.
• Saturday January 19th
�� Management cannot obtain a clear explanation from the trader.
�� The large bank in question does not recognise the operations.
�� The trader finally acknowledges committing unauthorised acts and, in particular, creating fictitious operations.
�� The investigation team starts piecing together his real position.
• Sunday January 20th
�� During the morning, all of the positions are identified.
�� In the early afternoon, the extent of the total exposure is known.
�� Daniel Bouton immediately informs the Governor of the Banque de France.
�� A meeting of the Audit Committee has been convened in the afternoon of Sunday January 20th to examine the estimated results for 2007 and the write-downs related to US residential mortgage assets (in particular CDOs), prior to the meeting of the Board of Directors at 18:30 on the same day.
The Chairman informs the members of the Committee of the trader’s position which has just been uncovered. He indicates that he has decided to close the position as quickly as possible and, in accordance with market regulations, to postpone all communication on this issue and on the estimated results until said position has been closed.
�� Daniel Bouton then informs the general secretary of the AMF.
�� At the Board meeting, the Chairman explains that it is impossible to communicate on the estimated results for 2007 on account of the discovery of problems in certain market activities, which could result in substantial losses.
• Monday January 21st
�� The unwinding of the fraudulent position begins in particularly unfavourable market conditions.
• Wednesday January 23rd
�� The unwinding of the fraudulent position is completed.
�� Another Board meeting is convened on Wednesday January 23rd, the day when the position is closed, and its members are fully briefed on the facts and their repercussions.
• Thursday January 24th
�� Before the markets open, the existence of the fraud and its repercussions are relayed to the markets. Société Générale asks for trading in its shares to be suspended.
Investigations are under way by Société Générale’s General Inspection division and the Banque de France and will confirm the exact circumstances of the fraud. The police have begun an inquiry.
4. The unwinding of the fraudulent position
The equivalent nominal amount of the fraudulent position uncovered on Sunday January 20th was approximately 50 billion euros.
The priority was to unwind the fraudulent position as quickly as practicable, given the risk generated by its size.
The unwinding could only start on Monday January 21st and in a measured fashion so as keep volume levels under 10%, in order to respect the markets’ integrity.
Conditions in the market were very unfavourable. In the afternoon of Friday January 18th, there had been a sharp downturn in the European markets. In the night of January 20th to January 21st, there was a significant drop in the Asian markets (Hang Seng down –5.4%) before the European markets opened.
The position was unwound over three days in a controlled fashion, thus ensuring that Société Générale did not exceed around 8% of volumes traded on the relevant futures indices (EUROSTOXX, the DAX and the FTSE).
volumes of positions unwound on the Futures Indices markets (as a %)
Eurostoxx
DAX
FTSE
21 January 2008
8.1%
7.8%
1.7%
22 January 2008
6.8%
5.7%
3.1%
23 January 2008
5.9%
6.1%
0%
The position was finally fully closed or hedged on the evening of January 23rd. Overall, movements in the market triggered by the sharp fall in the Asian markets during the night of January 20th to January 21st resulted in a final total loss of 4.9 billion euros.
Our statutory auditors and the relevant regulatory authorities were informed of the details of the initial positions and of the unwinding operations.
On January 26th 2008, the regulatory authorities were informed of the analysis of the methods used to perpetrate the fraud and the corrective measures taken.
5. Measures taken with immediate effect
Over the last week, teams at Société Générale have reviewed all the operations which took place from the trader’s workstation and any transactions bearing a possible resemblance to the fraudulent operations discovered. Moreover, the futures position has been checked against our counterparty (clearer). This review has strengthened our conviction that all the fictitious operations had been identified as of January 20th.
Specific control procedures have been implemented so that the techniques devised by the trader to avoid controls can no longer be applied. The regulators have been informed of these changes and of the dates of their deployment.
Lastly, beyond these specific measures, additional controls will be launched. Significant human resources will be mobilized for this project, with the support of external specialists in fraud techniques. It will be supervised by the Audit Committee.
Societe Generale Explains Kerviel's Trades and Fraud In More Detail
Still not clear why there were no margin calls which would have drained the bank of huge assets, whereas the "bogus" hedges would not bring in a similar amount.
http://www.socgen.com/sg/upload/comm24012008/en/fraudnote.pdf
The Great Forgetting -- A Must Read
Herein David Brooks does humor, and Wow!
http://www.nytimes.com/2008/04/11/opinion/11brooks.html?hp
Thursday, April 10, 2008
Wednesday, April 9, 2008
Tuesday, April 8, 2008
Andrew Ross Sorkin Today in NYT
The leverage is gone for Private Equity, so they are now trying to play in the sandbox of investing in public companies, with about the same results as the average Main Street investor:
http://www.nytimes.com/2008/04/08/business/08sorkin.html?scp=2&sq=andrew+ross+sorkin&st=nyt
Deregulation Caused This -- SEC Decimated
More of the same thoughts I have previously expressed. Deregulate everything! Throw out the lessons of the 1920's!
http://www.nytimes.com/2008/04/08/business/08sec.html?_r=1&oref=slogin
Cognative What?
Too much for me. the Monty Hall Problem.
http://www.nytimes.com/2008/04/08/science/08tier.html?_r=1&8dpc&oref=slogin
Monday, April 7, 2008
Rutgers Leads -- Philosophy Rather Than Wall Street
Things might be turning around in the next generation:
http://www.nytimes.com/2008/04/06/education/06philos
ophy.html?em&ex=1207713600&en=6690d92b7d7470f8&ei=5087%0A
Krugman Today -- Grains Gone Wild
He explains why there are food riots around the world.
http://www.nytimes.com/2008/04/07/opinion/07krugman.html?_r=1&hp&oref=slogin#
Sunday, April 6, 2008
A Major, Major Article by Gretchen Morgenson
in the New York Times tomorrow.
http://www.nytimes.com/2008/04/06/business/06gret.html?ref=business
How the mortgage lenders had the tools readily available to check on the stated incomes of each borrower -- but did not want to do so for fear of upsetting the game. The tools -- virtually everybody signed written statements saying the mortgagor could get IRS documents and figures of the individual doing the borrowing.
Saturday, April 5, 2008
Cramer on First Solar
Should be a core holding in anyone's portfolio:
http://www.madmoneyrecap.com/daily_recap_openingsegment_040308.htm
My Notes Updated From Listening to April 3 Bear Stearns Hearings
copyright 2008 F. Bruce Abel
Before: "Sissy, these will be the biggest thing since the Army-McCarthy Hearings."
Not! as it turned out.
Democratic-led Committee; cross-examining Bernanke and Republican "bureaucrats," -- probably too harsh a term for these very smart guys -- presumably; Bush appointees and nominees nevertheless, I think;
SEC, what a joke. No one in our government is assigned to sit back and ask What the Hell is Wall Street Up To?????
Pretty sad performance by Committee Chairman Chris Dodd of Connecticut. (D) Moved everything along fast (which is ok). Connecticut too close to Wall Street, perhaps. Greenwich, certainly, the haven for derivatives.
Still, the Big Guys did save the system that week and weekend.
The Public is too innocent to see the fraudulent derivatives themselves:
“Let’s see one of these [derivatives].”
“Oh no, only for the Committee’s eyes.”
"Liquidity" vs "reserves." Said without the blinking of an eye. Once said everybody acts like they knew the distinction all along. So why allow Schwartz to go un-cross-examined (two days before the crisis) by saying "our reserves are fine?" and limiting it to that?
This brings up a point known to all trial lawyers: if the [CNBC/trial attorney] is not an expert, misleading answers go undetected.
Or probably Schwartz himself did not know the difference when he said it the day before all Hell broke loose.
This hearing killed all possibility of the Class Actions based on Shwartz's CNBC statement before the weekend. The main witness, Schwartz, comes off clean. Just appearing takes the fizzle out of it.
New York Fed has always had my utmost respect. Not sure now. Too wooden, too "party line" if that applies?
Jamie Dimon – it’s really something to see The Big Guy. A little "gangsta:" Not polished. Brooklyn? Would be interesting to Google him.
The Bear Stearns CEO who played bridge during all this – now it is clear why he sold all his shares the prior week. No bringing him on before the committee for unnecessary snickering, etc.
Wasn’t it Bear Stearns who told edgy employees: “Don’t worry we are the casino, not the sucker?”
Pretty weak analysis by he staff of CNBC also, focusing on the small picture and Steve Leasman's pet points.
Steve Leasman – does he really say anything?
Spot across the screen later:
97.32 = 1 month libor 2.68%
2 yr 1.91%
5 yr 2.75%
10 yr 3.59%
30 yr 4.39%
us dollar 72.24
gold 908.9
oil 104.15
Later in day CNBC generally:
Rob Arnoff
Cap-weighted indexes vs. fundamental index. (not based on stock price) -- pretty good distinction. Fundamental is what people should want.
A Most Awesome Interview With Steve Coll on Charlie Rose
Friday night.
His book on Bin Laden got rave reviews in the NYT recently.
Old Ways, New Pain for Farms in Poland
Very very interesting.
http://www.nytimes.com/2008/04/04/world/europe/04poland.html
A Core Article on Health Care Shortages
and what this country is facing, not just in Massachusetts.
http://www.nytimes.com/2008/04/05/us/05doctors.html?hp=&adxnnlx=1207370494-FAabPZRyp2P6pQrW%20pvpEg&pagewanted=all
Thursday, April 3, 2008
Krugman on Health Care
He writes the best on this topic. McCain's Plan is a joke.
http://www.nytimes.com/2008/04/04/opinion/04krugman.html?hp
Floyd Norris Nails it Again
How sappy the SEC looks. Etc.
http://www.nytimes.com/2008/04/04/business/04norris.html?ref=business
MyBestTime
From my favorite "stumbled-upon" blog, MyBestTime:
http://mybesttime-mybesttime.blogspot.com/2008/04/do-you-like-jokes.html
Fear of Regulating
In my "opinion" the market should not really straighten out until the Bush Administration pleads openly for significant, meaningful, financial regulation, or the Democrats come in and do the required re-regulation.
Otherwise Wall Street will always "game" Main Street, and the World (equivalent to "Main Street" for awhile).
The following is the Op Ed referred to in full, given the large text it deserves:
To understand the White House’s blueprint for regulating the financial markets, start with what the Bush administration did not do. It did not offer America a plan to respond to the ongoing credit crisis or to the Federal Reserve’s dramatic intervention to prevent the collapse of Bear Stearns. It certainly did not provide a roadmap for avoiding this sort of meltdown in the future.
The Fed’s role in the Bear debacle has put taxpayers at risk of having to shoulder big losses, but the administration’s so-called regulatory reform does not address what the Bear mess made obvious: if something goes badly wrong in under-regulated or unregulated corners of the financial markets, it could topple the whole system.
In fact, the blueprint was mostly developed before the current financial crisis and accordingly comes across as outdated. The message of the administration’s proposals is that the markets will — and should — return to where they were before the near-collapse of Bear Stearns. It’s doubtful whether many of its suggested policies would have been apt even in that earlier context. It’s indisputable that they are inapt now.
It will be up to Congress — and the next administration — to create the necessary new rules for 21st-century financial markets. These include requirements that firms engaged in risky financial behavior maintain large amounts of high-quality capital, other limits on borrowed money and complex derivatives and incentives for bankers’ pay that hold them accountable for losses.
There may be nuggets in the administration’s blueprint that would be worth saving for that serious work. The proposal for a regulator whose authority is defined by the type of financial product, rather than by industry, could benefit consumers and investors — if the regulator has the power to enforce standards. But as Congress moves forward with its investigations of the credit crisis, it’s important for lawmakers and the public to realize that the administration’s ideas are fundamentally flawed.
Its proposals are premised on the notion that market discipline is the most effective tool to limit risks to the financial system. Current events show how absurd that is. Discipline was utterly lacking as today’s problems were being created. In the absence of rules — and regulators who are willing and empowered to enforce them — market discipline is a fantasy.
Sure enough, the Bush blueprint is weakest when it comes to regulation of the financial system beyond banks. One key proposal would allow the Fed to gather more information from such entities as Wall Street firms, hedge funds and private equity partnerships, but it could take action only if overall financial stability was threatened. That would institutionalize the Fed’s role as bystander while bubbles inflate and crisis manager when they burst. That’s a recipe for more crises. Ben Bernanke, the Fed chairman, told Congress on Wednesday that broader reach would have to be accompanied by “adequate powers, authorities, expertise and so on.”
It’s probably useless to hope for anything better from Bush administration officials. They are complicit in the credit crisis because the anti-regulatory ethos and practices of the administration fostered the conditions for the debacle. It’s difficult to solve problems of one’s own making and impossible to respond effectively if you don’t first face up to your role in causing them. The administration apparently prefers to perpetuate the myth of self-policing, self-correcting global free markets, rather than own up to the fatal flaws that are now so evident in that myth.
In the end, Mr. Bush’s regulatory blueprint will allow him to leave office with that ideology in tact — in his mind at least. The real work will be left to others.
My Sentiments Exactly -- Fear of Regulating Drives Bush Administration
This Op Ed today in the New York Times says the obvious:
http://www.nytimes.com/2008/04/03/opinion/03thu1.html?_r=1&oref=slogin#
But it must be said, over and over.
But the Fear of Regulation really is, inter alia,
...fear of Rush Limbaugh;
...hubris;
...fear of being laughed at at the country club, which relates to the above;
...for Bush, fear of Carl Rove (although supposedly he's not "there");
...fear of facing one's neighbors at the cook-out;
...fear of Milton Friedman (although he's not on this earth);
...fear of William F. Buckley, Jr. (ditto);
... fear of Ronald Regan (ditto)
Wednesday, April 2, 2008
Bill James on When a Lead is Safe in Basketball
He's the hailed statistitian for the Boston Red Sox, featured on 60 Minutes Sunday.
http://www.slate.com/id/2185975/
Maureen Dowd -- Very Good Today
Very, very good on Hillary's "instruction" of Obama:
http://www.nytimes.com/2008/04/02/opinion/02dowd.html?_r=1&hp&oref=slogin
Tuesday, April 1, 2008
Leverage
By Allan SloanTuesday, January 8, 2008; Page D01
Do you want to know how to make 50 percent a year by putting your money into things that return only 15 percent? Welcome to the wonderful world of leverage, which is Wall Street speak for "using borrowed money." Leverage is the secret sauce that lets buyout firms (which now call themselves "private-equity houses") and hedge funds and smart traders make huge returns on their investments -- when they get it right, of course.
Leverage works great when the assets you're buying (or betting against) generate more cash than it takes to pay the interest bill on the money you've borrowed to boost your investment returns. But if the market moves against you, leverage magnifies your losses on the way down the same way it magnified your profits on the way up.
If we do some simple arithmetic, you'll see what I'm talking about. And you'll see how people who borrowed a lot of money in the good times -- such as 2006 -- could look like geniuses, but looked considerably less smart at other times. As part of our exercise, you'll also see why you'd better have enough in financial reserves to hold on during sharp, nasty downturns -- like the first three trading days of this year.
Now, to the numbers. To show you how simple this can be, let's assume that you'd decided in 2006 to put a dollar of your own money into the boring old Standard & Poor's 500-stock index, then put in another four dollars of borrowed cash. How much do you think you made on your personal investment? Would you believe 55 percent? You don't believe it? Okay, watch.
In 2006, the S&P earned 15.79 percent in capital gains and reinvested dividends, according to my handy-dandy Bloomberg machine. Say you'd put $10,000 of your own cash into the S&P for the year, and put in another $40,000 that you'd borrowed at a 6 percent annual interest rate. You had $50,000 working for you, producing, before expenses, a gross return of $7,895. (That's 15.79 percent of $50,000.) Your interest cost was $2,400: 6 percent of $40,000. Subtract the interest from the gross return, and your net return was $5,495 -- or 54.95 percent on the $10,000 of your own money that you'd put into the deal.
The purists among us will notice that I haven't counted taxes or investment expenses, I haven't allowed for the fact that dividends trickle in throughout the year rather than coming in all at once, and that my arithmetic differs from the calculations that professional investors use to compile their investment returns. But you get the basic point: Borrowing heavily can amplify the return on even the most mundane investment if things go your way.
Now, let's say that earning more than 50 percent in 2006 inspired you to roll the dice again last year. Once again, you used $10,000 of your own cash and borrowed $40,000 at 6 percent. The year 2007, however, was mediocre, with the S&P producing only 5.49 percent of gains and dividends.
To the calculator once more. Last year, your S&P play produced $2,745 (5.49 percent on $50,000) of gross returns, less the same $2,400 of interest. This left a return of only $345, a crummy 3.45 percent on your 10 grand. For that, you could have put the dough in a money market mutual fund at considerably less risk.
But what the hey. The third time's the charm, so you play the same 10/40 game one more time. But in the first four trading days of this year, the S&P dropped 3.55 percent. It's like having the football team you're rooting for give up a touchdown on the opening kickoff -- before you can blink, you're in the hole. In our case, you're looking at a three-day loss of $1,775, a hefty 17.75 percent of your investment. (To make life simple, I'm ignoring the three days of interest expense and dividend income. If I included them, the loss would be somewhat larger.)
You can see how this can get nasty quickly. If the S&P ends this year with a 10 percent loss after reinvested dividends, you'd lose almost three-quarters of your $10,000 investment. (The math: $5,000 of losses plus $2,400 of interest costs divided by $10,000 equals a 74 percent loss.) If the S&P loses 15.2 percent, you're wiped out. By the time the market recovers, which it always does sooner or later, you're out of the game.
The moral of our math lesson: When you hear that the private-equity houses or hedge funds or someone on some trading desk has put up eye-popping numbers, make sure to find out how much of the return comes from using leverage.
It's easy to look like a genius when things are good. But if you want to keep your money, make sure you know how to avoid total wipeout when things are bad.
Allan Sloan is Fortune magazine's senior editor at large. His e-mail address isasloan@ fortunemail.com.
Good Description of Auction Rate Securities
Gretchen Morganson:
http://www.nytimes.com/2008/03/30/business/30gret.html?
Why Do I Keep Labeling My Posts "Liar's Poker?"
It's because this book spelled out the mortgage derivative problems long ago and yet Wall Street and the Parties in Power have papered over any remedies, over and over again. And, if I were to bet, will do so again.
Cable Out
I now know how dependent I am on Warner Amex. Since 10:30 am yesterday it has been out and will be restored mid-day today. Possibly a squirrel, as the rest of the neighborhood does not have a problem, according to Warner Amer.
This makes me aware for the first time that headings such as "Cramer Yesterday" (in actuality often a commentary on Cramer the same day) are not possible the way I do it -- watching and recording his live appearances on CNBC.
And that makes me aware that many of my readers never get Cramer live and may be hard-pressed to understand What the Hell I'm Talking About.
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