STEVIE

I grew up with a kid called Stevie. Stevie was a big kid, a lot
bigger than the rest of us. Stevie was also a mean kid--not for any
particular reason, just because he was bigger and could beat up
anybody on the block. You did what Stevie told you to do and that was
the end of it. Mostly, you just tried to stay away from him. Stevie
was what we called a punk.

As we got older a funny thing happened: Stevie didn't grow as fast as
many of us. One day, one of us...and I really didn't know who it
was...beat the living hell out of Stevie. We never saw Stevie much
after that. About a year later, Stevie's family moved to the
suburbs. Not long after, I forgot about Stevie.

Now let me make it clear that I don't the The Leader is a punk, but
the President of the United States is the biggest, strongest guy
around and he is full grown. It was therefore quite surprising to me
how many people within the media were remarking on how "strong" The
Leader was in dealing with GM and Chrysler. Huh? The only surprise
in my mind was the manner in which The Leader acted yesterday.
Stevie. There was no need for a public execution of Rick Wagoner; a
simple slipping away was all that was needed. There was no need for a
probably unfulfillable ultimatum; a simple statement that the game was
nearly over would have sufficed. We all understand the Power of the
Presidency; less bluster and quiet action is the greatest reinforcer
of this knowledge. Then why?

I hope I am incorrect, but I am afraid that this is a template for the
manner in which this administration plans to deal with the financial
sector because, you see, Our Hero has a stinko and probably unworkable
plan for the so-called "toxic assets" that would probably be an
absolute non-starter without a nudge from The Leader in the form of,
"Sign here, bub, or get out and go home." These boys don't like to
lose and they sure as hell don't like to admit they are wrong. The
Leader's auto council consists of 20 people, none of whom have the
slightest idea as to how to run an auto company but feel uninhibited
in putting forward a strategy that affects hundreds of thousands of
people. Similarly, if there is a task force, formally or informally
arraigned within the Beltway it too, contains not a person who knows
the first thing about the complexity of running a bank much less
having ever run one, including Dear Reader, Our Hero and those above,
below and around him. Nor will they ask for help. It is, I am
afraid, more about their confirmation of their own brilliance than
solving the problem at hand. They have become so concerned with
circling in the glow of one another that they have forgotten their
mission.

Oddly, the one person that could help in this upcoming debacle is
Barney Frank. Think what you will of him, Rep. Frank is a long way
from being a dope and he actually understands many of the problems we
face. I have never ever met a person within the regulatory community
who has been unimpressed with Rep Frank's acumen. Similarly, I have
never met any member of that community who believes that Rep. Frank
would (or has ever) put the public good before politics or the good
that accrues to Rep. Frank. But as the ads for the New York State
Lottery used to say, "Hey, you never know." Now I freely admit when
one is hoping for the assistance of Barney Frank to set his party on
other than a course than might lead to disaster, one is in deep
trouble. But there it is. If we are to face another session of
legislative insanity and pandering to an public ignorant of anything
except well-constructed (and in some cases well-deserved) outrage,
well, why continue. My views are clear.

Thursday if the date for the FASB decision on any changes as to the
application of 157 which could be very useful in our understanding as
to what the future holds. I will attempt to have a full discussion of
the "plan" before us and what effect the FASB ruling might have upon
the same. I know, I'v been promising this for days and keep getting
side tracked but I promise, I WILL DO IT! Also, keep an eye on the
pronouncements coming out of London on global regulatory matters.
Hopefully, nothing of importance will emerge. Nothing ever does.

A thanks to Mr. Ewan Watt for his kind remarks on his most thoughtful
blog site the other day. I have never met Mr. Watt but from the name
I assume he is one of The People. A lady lawyer once said to me,
"Best have the Scots on yer side Laddie. We're all a bit mad ye
know." As a Hatter was she but mor' an a wee smart.

CLEAR AS MUD

I was going to talk about the up-coming G20 meeting and the Geitner Plan--and I will--but the events of the week-end call for a bit of a detour for although they may seem unrelated the decisions made by the administration may have shed a bit of light as to how they will proceed in the future.

This morning The Leader once again went on tv to talk motorcars. "Let me make this clear, we have no intention of running General Motors..." All we are going to do is fire the chairman, restructure the board, reinvent the strategic plan and in the mean time tell Chrysler to do a deal with Fiat within the next 30 to 60 days. Uh huh. The Leader appears to think this is arms length. In the midst of this little diversion from the Endless Campaign, Our Hero announced that the banks are going to need more money, Huh? Forty years or so ago, one of the best sports writers (or any kind of writer for that matter) Jimmy Breslin, wrote a book on the first year of the New York Mets entitled, "Can't anybody here play this game?" Where is Jimmy when you need him? If you aren't confused (and possibly scared to death) at this stage of the game it's because you haven't been listening. The administration's pronouncements of late seem to be a completely disjointed streams of consciousness with no coherency nor sense of plan with either a lack of regard as to the possible consequences or a total lack of understanding of the same. I spent a week one night with Jimmy in an East Side gin mill, but that's another story.

Imagine, placing Chrysler in a negotiating position with a non-American counterparty and giving them 30 days to do a deal. Now place yourself in the position of Fiat. Would you simply sit back and say, "Ima tink Ima gonna wait." Sure you would; that is unless you look at the fact that Chrysler has already taken The Leader's penny at which point you might say, "Ima no wanna no part of dis," and run like hell the other way. If Nardelli and his private equity bosses don't run lickety split into Chapter 11, I would be very surprised.

As for the case of GM. Remarkably, some of the talking heads are mouthing that this is really great because it shows how "tough" The Leader and his administration really are and how they are going to protect the public purse. I have a somewhat different view which holds that reality has finally caught up with the intense desire to protect the UAW at all costs and the next 60 days are going to be devoted to doing just that in a "pre-packaged" bankruptcy. To be honest, I have no idea what a pre-packaged bankruptcy is but I suspect it's something like all parties going in to court and telling the judge that we are all in agreement that this should be the restructuring plan. Now the last time I looked, GM operated in about 50 countries, every one of the 50 states, had uncountable subsidiaries and multiple thousands of supplier contracts not to mention equity and debt holders at multiple levels os seniority. Of course the Congress will have nothing to say about this either. Sixty days will bring us to the first of June. The weather will be nice by then. We can all pull out our lawn chairs, a case of suds in the cooler, sit in the sun and watch this one unfold because it's going to be better than a twi-nighter at Wrigley. While all of this was going on, Honda announced a new car to compete with the Prius which doesn't quite match Prius' MPG but is bigger, faster and has some pretty neat features. While the pricing is not certain, it appears that the top of the line, the car with all the bells and whistles will sell for under $27,000, including tax, tip and recappable tire. Next time someone gets a chance to communicate with The Leader at some televised town meeting, will you point out to him that Detroit can't MAKE a car for that price much less sell it at a profit.

So, what does this mean for Our Hero and his plan? Wellllll, if I were running a bank, would I really want to get involved with this mob where the deal changes by the hour and despite protestations of non-involvement, they appear to be simply idle comments made at the spur of the moment. And what of this up-coming "stress test" ...(doesn't that remind you of Al Gore's , "Lock Box?") GOD! Seems as though Our Hero has already made up his mind as to what he is going to find. And wouldn't you be wondering if there might be a pay-off at the end to another of the administration's favorite entities...Democrats run hedge funds as well and gave copious amounts to The Leader's campaign. And as to the real formulation of the plan and its structure: wouldn't you wonder about...

But that is for tomorrow. Stay tuned.

ANOTHER TIME FOR REFLECTION...

I was all ready to post this morning then I read Krugman in the Times. Reminded me of a conversation I had a few years ago when I was about to retire. He was a good friend.

"What are you going to do," says he.

'Don't know," says I.

"What are you good at," says he.

"Not much," says I

"Don't do anything then."'

Krugman never had a really good friend I guess when he decided to stop being an economist.

Next week, I hope to take a close look at the development of the new world order hinted at by Our Hero yesterday and expanded upon by the Leader in conversations with the bankers today. I'm also going to try to focus on the G20 meeting and what it might mean for the U.S. Both issues hopefully will be clearer. As of now, I'm seeing as through a glass darkly. A great weekend. Hope your final four selections are there at the end.

BUBBLING BARNEY BUBULA

Our Hero was back up on the Hill again today, and this time the reception of far different. He had the Congresspeople practically eating out of his hand. Barny was just sssooooooo happy. Our Hero told them all that things had to change in a whole bunch of different ways and they, the Congress, was going to be the ones to change it. Now we all know that Congresspeople love nothing more than fixing things through legislation...wait, that's not quite true: they love fulminating in front of a tv camera about issues unknown to them even more but that is neither here nor there. Our Hero was speaking of an entirely new regulatory order: I thought Barney was going to run down and kiss him (boy, wouldn't that be a story) he was so pleased. The Secretary proclaimed that the regulations in place left the regulatory agencies ill-prepared for the events of the past year and things simply had to change.

Now I suppose you might be wondering if any of the Congresspeople asked him what the hell he had been doing for the past five years: no. You might also be wondering if Our Hero got specific about what was needed: no. You might have noticed that he doesn't do much of that. But it's going to be BIG and everybody is going to have a shot at it and in particular, we have to find a new regulator for those entities that are not banks and those that may, in bad times, pose systemic risk. What a sales pitch: "Come bank with us because we are a systemic risk bank and are being watched Veeerrryyy closely!" ...Or not as the case might be. But just think of that poor banking CEO who must come home on that first night and gather his loving family a adoring little gray-haired mother around him to inform them that he is not the CEO of a systemic risk. The wailing, the tearing, the humiliation. Oh, the humanity!!!

Unfortunately, I was able to watch the entire performance, but early on at least, Our Hero was on a real reach; his main full of wind and his shoot practically practically breaking the sheets (little nautical theme there). In fact there was so much wind in that room...never mind. I'm going to read up tonight and tomorrow on what I missed and be back with a few additional thoughts. Sorry for being short. Mazel Barney.

NO GELT FOR GILT

Thought we might tie up a few loose ends in the thinking that we have
floated about over the past week.

Today, the most recent Gilt auction failed with few bids than needed
showing interest in the Bonds being offered. For those not familiar
with the term, a Gilt is the name for a Treasury bond issued by H.M
Treasury--the U.K. equivalent of a U.S. Treasury. From it we derive
the phrase "gilt-edged" meaning the best of the best.

Now whilst not unheard of, an auction failure is a very unusual thing
and not something that should be ignored. The out maturity was 40
years; a very long maturity for even a governmental issue. So I said
to myself, "Self, you may have gotten this one bang on as to why."

As opposed to just about every other nation in the Group of 20, and
quite a few others as well the Union of English Speaking Peoples--in
this case the U.S. and the U.K. have decided that the way out of this
nasty little patch in which we find ourselves is to spend every Pound
and Dollar that can be found or manufactured as quickly as possible by
the respective governments involved and if you can't raise the funds
through normal channels by selling bonds to the Great Unwashed, have
our Central Banks buy the damn things themselves. Somewhere, someone
got this foolish idea that a policy such as that might, somewhere
down he line result in a touch of inflationary pressure and that in
the period from now to 40 years out this just might affect the
purchasing power of a fixed rate debt instrument of that maturity. As
to the price in the midst of this thing if you own it, the trading
lads might advise you that you are long and very, very wrong.
Unfortunately, H.M. Treasury had the lads on today and got hammered.
Perhaps they had no choice but today's result does not auger well for
the next auction on this side of the pond, but of course Ben's Boys
stand ready to scoop up the excess if the long dated stuff doesn't
sell as confirmed on Monday by the Fed.

Which brings us back to our friends, the Chinese. I speculated that
they were becoming increasingly unhappy with the state of play and
were signaling that changes needed to be made while at the same time
reducing dramatically the maturity profile of their portfolio. Within
two days of that posting they floated the idea that perhaps what was
needed was either a brand new reserve currency or an alternative to
help out the dollar. SDR's were bandied about in an IMF setting.
Now, in the real world little is known about SDRs and none of it any
good, but even with that being the case I would have thought that no
rational person would if could be avoided, place any responsibility
with the IMF for anything greater than country profiles and almost
immediately the idea was dismissed throughout Europe and by
commentators in the U.S. Wrong again Charlie. I spokesman for Our
Hero, Tim announced today that there might be merit in a discussion on
the subject. One wonders whether this was the same guy that stuck in
the reference to currency manipulation in Our Hero's earlier foray
into Asian finances, our whether the D.C. gang was merely buying time
to try to figure out how to address the question more fully--having
nothing else much better to do. Of course with this mob there's
always the chance that it just might be another mistake, but it did
engender a call from Europe today asking me if, "You chaps have cone
stark raving mad?" (he was a Brit). I demurred.

Anyway, it seems to me that the place to be in a couple of weeks time
is at the G20 meeting in Praha. I sincerely hope that our side has
it's act together and doesn't try to turn this thing into a discussion
on greater governmental intervention and oversight in the financial
world for I suspect the Euros are going to have none of it. Which
means that Our Hero and his boss had best get their act together. The
Boss was a long way from having it together at his presser last
night. The specter of U.S/U.K. provoked inflation is not a welcome
sight to these folks who don't care much for us for starters. But I
guess The Boss will be ready for he is a really smart guy...or so they
tell me.

TIME FOR REFLECTION

Had to go lecture over at the local U today, hence no blog. But we might all think about the latest musings of our Chinese friends regarding the dollar which they seem to like less and less--so much so that they are even proposing to get the IMF involved(shudder, shudder). As predicted, I don't like the way this thing is going. But, to help combat the onslaught, Our Hero is filling up the staff. And he was actually pretty good in front of Barnie & Friends today...at least in the morning. More on all this tomorrow. Boy, I wowed them today!

...COMES A PAUSE IN THE DAY'S OCCUPATIONS...

Our Hero was center stage today. True to his reputation, The Secretary put together every idea that had been put forth over the past six months, mixed them together, shook them up and came forth with his plan to save the financial sector. At last look the Dow was up 380 points with financials leading the way which put a smile on my son's face, he of the long positions, and the talking heads on TV. Not a bad day's work.

Forgive me if I am not quite as ebullient, because for the life of me I can't yet come to grips as to how...much less whether...this is going to work.

As I understand it, Our Hero and his guys are going to partner up with a bunch of investors in the public, each put in a bunch of capital and then Our Hero is going to drop on the private guys a bunch of non-recourse debt to fund the biggest Dutch Auction in history after which, if all goes well, we'll be out of the woods as the banks will be out of "toxic" debt. Shelia Blair has made it clear that she and the FDIC will provide the highest of scrutiny to the entire operation. I'm telling you, this gal must have photos because why in the world bones have to be thrown her way is beyond me but that is a subject for another day.

The private guys must be thrilled. For a small slug of equity, they get a huge load of taxpayer's money that they never have to pay back except from the corpus of the purchases--i.e. non-recourse TO THEM--financing, and the possibility of a huge upside ROE if all goes well. Tim gets a hugh upside as well for the People of America if all goes well but undertakes a huge downside if it doesn't. Funny, it sounds exactly like how Wall Street has been run ever since everybody went public: big risks, high returns but what the hell, it's not your money. This boy learns quick!

Once everything is in place, there will be an auction, conducted by someone, on assets (yet to be determined) held by the banks. Now it has not yet been announced if these assets will be differentiated (or how), size of tranches, maturities or whether there will be reserves placed on the assets (the bid must be at or above an agreed-upon level or else no deal) but there is the belief that all these little details--and others--can be worked out. No mentioned has been made of due diligence or timing but again, details, details. Once again, dear friends into the breach!

Our Hero was on TV today with Erin Burnett on CNBC--where I suspect we would all wish to be--musing that if we could only get a few of these auctions off, we would be able to get a better view of the real value of these assets. Huh? Let's see if I understand this. The consortium bids for 5 million of a certain asset held by a bank and wins. What is the effect? Does this mean that every like asset at every institution WORLDWIDE need be marked to the purchase price? There is no question that many of these assets have been marked to a level well below there intrinsic value at certain institutions but not at others. If the seller of the 5 million has a mark of 40 and he bid is 50, simply to get rid of a small problem a bank may well be willing to lose the asset even though it believes it will be money-good in the end. But what happens at another institution whose mark is 60...and the asset level is 100 million? Are they forced to change the mark to 50 and lose 10 million in capital (tax neutral)? Does the first bank book a profit? Do you mean that due to the size of a relative holding we create a situation in which one bank books a gain and another a loss ON THE SAME ASSET? Riddle me that one Bat Man.

I hate to beat a dead horse, but FASB 157 became effective in November of 2007. From that moment the stock market tanked. Hello? If this doesn't get fixed we accomplish nothing because we will never be able to fix the valuation question unless the volatility of these valuations is ended and they are approached on a different basis. Or to put it another way, there ain't gonna be no way to price these things at an auction. Surely, the government will attempt to bully the banks into participating if it gets to that point but that, I am afraid, is more than questionable. This is a moment in time...WHICH WILL BE KNOWN AS THE CHILDREN'S HOUR

..."THIS DEAR, DEAR, LAND: IS NOW LEASED OUT...

I suppose I should have expected this. When Ben Bernanke was nominated for the Chairmanship of the Federal Reserve, the nomination got a big thumbs up from Paul Krugman. Oh well, one academic from Princeton having nice things to say about another. Wrong. Central Bankers used to be thought of as exterminators and the cockroach they hunted remorselessly was inflation. Oh sure, our Fed as opposed to the Europeans always had the other job of helping out the economy through monetary action but even in this, the institution was fiercely independent and, while not ignorant of the political process, tended to chart it's own course. No longer. Whether on pure ideological grounds, a true concern as to the state of the economy, panic or merely an attempt to protect a second term from the long shadow of Larry Summers (unless Our Hero Tim gets thrown off the bus) Mr. Bernanke has become a full partner in the politics of the Obama Administration. The remarkable action of the Fed yesterday in announcing their intention to purchase mortgage related debt and newly issued Treasury securities in initial amounts of up to a trillion dollars marks a sea change in activity. In the past the Fed has purchased Treasuries and has always operated in the repo marrket, but yesterday's announcement, specific to longer dated issues, was more than surprising. The reaction was not surprising; the dollar tanked and yield on medium to long term issues sank, bringing the rate on new 30 year mortgages to below 5.00% in some areas. Great result, said many pundits, but of course there is the risk of a bit more inflation down the road explained away by the Fed statement today that if that were to be the case, they could always reverse the process. Somehow, this is beginning to feel like 1974, but there is another, even greater concern on my part as to what may be an additional major reason for this approach.

Do we remember Our Hero Tim's friends, the Chinese's reaction at the unfortunate statement during his congressional hearings on currency manipulation? They were not amused. Despite every indication that he was simply reading what was put in front of him (he's done only that since being confirmed) the Chinese remain unamused. More importantly, their confidence in the financial stability of this country seems also to be coming into question especially in their statements of the past few weeks. Most importantly, their holdings of U.S. debts which at this point total over $1.5 trillion have changed not only in their make-up but in their maturity profile. By the end of this year, the Chinese will be on track to hold $1 trillion of our debt that has an average maturity of approximately 300 days. If the mortgage on my house was in the form of a demand note, I wouldn't sleep well.

I have the very uncomfortable feeling that the Chinese have indicated that would not be buyers of our debt as in the past. I have the uncomfortable feeling that the Chinese view the purchasing power of the dollar as sharply deteriorating over the relatively near term. I would not be the least bit surprised if the Chinese would soon indicate that they would not be interested in any purchase of medium term U.S. dollar denominated securities that did not contain a hedge against inflation--think TIPS gang. I'm pretty sure we have a problem. With a now-projected deficit of $1.5 Trillion (Congressional Budget Office as of today) which is probably a couple of hundred billion too low but who cares anymore, can we expect the Fed to finance this alone or must they inevitably give up the and lose the impending with the Chinese and if so, can Japan be far behind? I can envision no scenario in which inflationary pressures do not merely tick up but head skyward in the fiscal environment this administration has created, I can also see no way that they can possibly achieve the 25% rise in GDP they assume which will be needed to reach their deficit target by 2013...wait that's not quite right...they can if the rise is all inflation. As I said it's really beginning to feel like the seventies. Then again, Tall Paul is still lurking but Reagan is gone. I HOPE I DON'T DIE PRONOUNCING IT.

Addendum. Our Hero has yet to come up with his banking solution. Sadly, given what has occurred in Congress the past few days he may never get the chance. But we must be thankful for one thing: Congress has demonstrated that when you pay peanuts, you get monkeys. Do you think they groom each other?

Back to the banks next week. A good weekend.

..I HOPE YOU GOT YOUR S--- TOGETHER...

This is going to be pretty short. When, between visits to the Mayflower Hotel, Bad Boy Eliot scared the AIG Board into getting rid of Hank Greenberg and installed Messr. Sullivan & Co., there was a Bad Moon Risin'. No one at the time saw it. Whoever was supposed to be watching didn't notice that the new management had "doubled down" on products, the risk of which they clearly did not understand, with the result that we see today. Mr. Bernanke rightly expressed his rage at what had occurred and revealed his feelings on 60 minutes last Sunday. But talk about doubling down!

The Chairman has just placed the biggest bet the world has ever seen. He has monetized the debt of the United States. Now I'm a long way from being the brightest guy in the world and I know that the Fed has a hell of a lot more info than I do, but there is no immediate understanding of this move that comes to mind. Forgive me but I'm going to sit and think about this one for another day before waxing poetic. But I've lived a reasonably long life and the last time I was involved in an environment like this the folks around me were speaking Spanish. More tomorrow.

MARCH MAD.......NESS

Woo-ee! Boy, was he pissed off yesterday. Didn't even need a teleprompter to express his rage. The subject of course was AIG and the bonuses about to be paid to the London derivative group that was at the center of the loss-making operation. The President was so outraged that he seen off Our Hero Tim, to reverse the entries. When you send off your Treasury Secretary on a mere $165,000,000 mission, you gotta be mad...or a bit forgetful. Our Hero, Tim deals only in TRILLIONS boss, not millions. Terrible waste of talent.

Now one might ask, "wasn't the info about the bonuses known a year ago." Or, "Wasn't the restructuring of AIG handled jointly by the Fed (Our Hero again) and Treasury?" Or, "Wasn't the fact of the bonuses revealed in the annual report." One would of course get a "yes" to all of these questions, but then again, doesn't the government own about 80% of AIG and isn't Congress exercising oversight in the manner of a board or directors? Well, they are supposed to be. Then why all the fuss? It's a rhetorical question.

But, there may well be a silver lining to this farce if the American people come to realize what an incompetent collection of people is this Congress and Administration. Yesterday, the Financial Accounting Standards Board (a committee thereof) agreed to recommend that a change to the manner in which FASB 157 was applied to financial institutions in light of the extraordinary disruptions of financial markets that have been witnessed. As we have discussed the requirement that financial institutions value their portfolios essentially on the basis of the price received for the last sale of the same or comparative assets has resulted in hugh losses affecting the capital adequacy of some of the largest institutions worldwide resulting in the crisis of confidence we se today and the near collapse of all financial markets. The answer to this crisis has been the shoring up of tier one capital by central banks around the world, especially by the Federal Reserve, in an attempt to maintain the solvency of the system (see AIG above). This proved as effective as trying to fill a bucket with no bottom. As quickly as capital was inserted, it was lost to the constant revaluation of the asset book as a result of FASB 157. Mind you, in many cases this was not a cash loss; as early results have indicated the banks this quarter are profitable on an operating basis...some will be wildly so as market conditions are perfect. But because of the absence of any sort of rational assessment of asset values (marking to a non-existent market isn't a real good idea) the true understanding of systemic or individual institutional risk has remained unknown. Yesterday's suggestion if adopted, may well prove to be a magic bullet in solving this mess.

Here's a little secret: in past years both regulators and bankers have lied like the devil in regard to the true state of the system. Oh, not BIG lies but little one, all pretty much dealing with the valuation of banking assets. As I have said, banking was a wonderful business because it was so subjective. Maintain the trust and we all survive. Here's what I suspect might well happen in the coming weeks.

The Treasury is in the process of conducting a "stress test" on the major players in the system. What this will entail is really not known because Our Hero, while making it plain that the viability of the institution will be 'tested" against various economic scenarios, we are not really sure what those scenarios will be except that one set will probably be akin to the estimates made in the preparation of the recently signed budget (which might mean that we are doomed). But the Standards Board has given all parties a real opening: if, for example, a cash flow test were to substituted for a mark to market test, the health of the banks under any scenario may well be completely different. Regulators and institutions could, probably in a very short period of time, agree to asset valuations at the present lever OR SOMEWHAT HIGHER that would address the capital adequacy issue in a most positive manner. Having witnessed and taken part in such an exercise I can say with great confidence that the banks, having broadly valued their portfolios at considerably less than par at this point in time, are interested in one thing alone: a constant value that, with the acceptance of the regulators will find acceptance in the market place. In other words, "Here's our true value guys, now let's move on." If the valuation requires new capital, the banks should be forced to find it at whatever cost or failing that, it will be provided by the government with harsh conditions attached. Further, revaluation of written down assets could occur in only one manner; through open sale. Book entries would not be allowed.

What does this accomplish. Firstly, it leaves the "toxic" assets (they may not be so toxic) under the management of those who created them negating any need for a government purchase and the corresponding need for the government to hire somebody to manage them or the sale of the same, either of which one can be sure will result in enormous cost to the taxpayer. Secondly, it structured properly, it avoids the congress having to take ownership and demonstrating once again as in the case of AIG how incompetent it really is. Thirdly, it reestablishes a market for the assets. Now there is a real bid and offered: the level of valuation is the floor offered price, now BIG SWINGING VULTURE FUND, what's your bid? This is hardly a blue print but a broad suggestion as to how we can fix this thing. Hopefully, this approach will gain some traction in the weeks ahead and not be run off the road by the ego maniacs who inhabit the hill. Let the pros deal with it. Some have done it before.

Answer to yesterdays question. In 1990, Japanese banks were practically the sole source of credit to Japanese corporates, supplying over 80% of the credit. Last year, American banks provided about 23% of all credit extended. The idea that Zombie banks in this country would affect the economy in the same manner as occurred in Japan is somewhat north of stupid.

I'm off to have a cocktail or six. Happy St. Patrick's Day!!

A WALK IN THE SUN

One of the greatest WW II movies (later ripped off to a fair thee well by Saving Private Ryan) was the magnificently casted film "A Walk in the Sun." In it is the classically cynical American G.I. brilliantly played by Richard Conte whose showcase line was, "Nobody Dies." Watching The Chairman on Sixty Minutes last night I continually returned to that line; "Nobody Dies." The Chairman was remarkably upbeat; one could almost see the green shoots emerging from beneath his feet in the form of the rebirth of the American economy which will hide the blood from all vision. Nobody dies.

Conte; "I am going to cut that farmhouse in half."

Loader: "If the ammo holds out."

Conte; "It had better hold out."

The Fed's ammo had better hold out as it became clear that the U.S. is going to find itself pretty much alone after the results of the G20 meeting this past weekend are tabulated. Not only are the Europeans not on the same page as the U.S. it would appear that they are not on the same page with one another. There are the Richard Contes among us who always questioned whether a group of nations whose constant efforts over the past 900 years or so were directed to the destruction of each other, could at some point come together in a political union that might force one or two of them to take a bullet to help out historical enemies. The answer seems to be not yet and to continue along the WW II theme, to take a bullet for good old Uncle was probably always A Bridge Too Far. Yet, fair try by our Hero, Tim and the reaction was at least civil. The Brits appear to be on our side (more or less--no difference there) and the Volk had made it quite clear that Ms. Merkel was to be on a short leash. The Euros tend to get a touch nervous when the Germans get stroppy. There is always the thought that in the back of the closet hangs Grandpa's fetching gray uniform. Oh well.

The Chairman did say one remarkable thing, however; he took zero off the table and bank equity investors reacting by bidding up bank shares today as though nobody would die. I think they are right but it is now clearly on the shoulders of the Fed to grasp the reins of the restructuring of the system whose future well-being the Chairman essentially guaranteed. To me, that is the best development we have witnessed in weeks because if the Fed with the resources at its disposal leads, the outcome may well be better than feared should the politics-first Treasury have grasped the mandate.

Surely, there will be a tremendous effort on the part of Congress to interfere with the restructuring of the system and it might well be argued that with the taxpayers' monies at risk the politicians should certainly be involved. They will certainly wish to create legislation that will increase oversight and control of the financial system. Nothing can be done to stop that effort and indeed, in some area more and certainly better regulation is needed. I always seem to get in trouble when I state that give me any new regulation and with 3 bright MBAs and a really good lawyer I can get around it in 72 hours if the price is right. I don't mean by breaking laws; I simply mean that in my 30 years in the business I have never seen a bullet-proof piece of legislation yet. We will not solve the problems we have uncovered by allowing Congress to convince us that it has the answers; it does not. More critically, if the upcoming legislative sessions are to be conducted in the confrontational, adversarial environment we witness today, what will result will be a disaster. Sadly, there aren't five legislators in either body that have any clue of what the business we call banking entails in the modern era. It is also critically important that before the politicians get to the point of working their craft that the crisis management approach of dealing with our banking sector give way to a reasoned understanding of where the problems lie and clear, understandable and reasoned cures be put in place and that those be clearly disseminated to the public. This is extremely important for as a result of ignorance, fanciful and dangerous solutions have gained traction for which there was no reason. "Nationalize the Banks" has been one of the greatest calls, supported by a whole host of those who should know better, the latest being former Secretary of the Treasury, James Baker. "We don't want zombie banks like Japan." We don't want to lose a generation!"" Dumb and dumber. Think about the role played by Japanese banks c.1990 and the role played by our institutions today. Compare the two and the role played by the MOF. More later this week and remember, "Nobody Dies."

GRAY SPOTS IN THE GRAY LADY

One of my loyal readers wrote this morning: "I think I agree with you but I'm not sure I understand all the issues you raise well enough to say I'm sure."

Honesty. Not much of that going around but of course I was grateful for the support. I must say it did occur to me to question why the writer would be reading this blog if he (or she) didn't have the facts or knowledge upon which to reach considered decisions. Then I read Floyd Norris in the New York Times this morning and I asked myself, "If you don't have the facts or the knowledge, why are you writing a column?

Mr. Norris, who is the chief financial writer for the Times, weighed in this morning on the subject of mark-to-market accounting with a somewhat passionate defense of the practice and a sarcastic assault on all who would argue that it is a huge hinderance to a solution to the problem before us. He seems to have been smitten with the idea being floated about Washington of the government financing those who would be a buyer of so-called toxic assets from financial institutions which would, in theory, unlock a major obstacle in the way of the increased extension of credit. Mr. Norris seems to believe that the bankers are standing in the way of this concept because in their eyes, "Cheap volatile assets with a huge upside are precisely the kinds of optionlike investments that clever zombie managers are looking for. If they soar, the banks' stock may be worth something..." he writes, quoting Prof. Edward Kane of Boston College. Well, we certainly can't allow THAT to happen, I guess. But, "if we knew which securities each bank owned and where it was valuing them, we...could reach our own conclusions as to values." Wow! Isn't that easy! "The final step would be to get the market for such securities functioning," writes Mr Norris. Damn! why didn't I think of that?!

The birth of this idea having been reported to taken place in the administration, I can just see Larry Summers, a brilliant academic economist proclaiming, "Assume a market..." and things falling right into line. Mr. Norris feels that markets are created in this manner for as he states in his piece as soon as we have accomplished the forgoing all we have to do is find the buyers.

If you wish to follow FASB 157 Mr. Norris it's the market that sets the price with bids an offers being freely made and accepted or rejected , not a forced pricing mechanism (by the by, who is the "WE" in your example) and a fire sale enriching a whole class of vulture funds at the expense of bank equity and debt holders. FASB 157 works only when there is a functioning market...the eccomist's "Poof, let's make a market," doesn't work. We do not have a mechanism by which these assets can be priced in any objective manner, and to do otherwise is to bare the risk of fraud and outrageous political influence, for the mechanism to obtain the pricing to fulfill the prerequisites of any such scheme will be a political one. I would also like to point out Mr. Norris that your claim that financial institutions were already subject to market-to-market treatment is not entirely correct. Certain assets were indeed subject to such treatment but vast categories of other assets were not. For years, a bank's loan portfolio was not subject to mark-to-market treatment; unless impaired, assets were held at par until maturity and not subject to a market test until sold or otherwise disposed. The movement towards securitization (now THERE'S a subject) certainly enhanced the argument for different accounting treatments but one can argue which came first; securitization or the movement to securitize as a result of mark-to-market. This is the General Patton theory of banking: "The object is not to die for your country but to make the other poor dumb son-of-a-bitch die for his!" Don't hold a loan whose value is not under your control. Securitize and sell it! Not your problem any more. Was the requirement to market-to-market an advance, providing greater transparency or something quite different? Let's think about it over the weekend. But for now, someone had best make it go away. Next week, we'll talk solutions

Final comment. The name of Rogin Cohen was floated out last week as possibly the new Dep Sec. of Treasury.. Mr. Cohen, the managing partner of Sullivan & Cromwell had represented the N.Y. Clearing House since the sun first rose in the East and individually, at one time or another, every bank of any size in the world. He is a brilliant lawyer and appeared to me to have been conflicted as all get-out. He was also dead set against any attempt to nationalize any bank. Why he would even consider working for this mob is beyond me. But from the administration's standpoint they would do well to take the advice of the ESPN crew...JUST SHUT UP!

TALES FROM DOWN EAST

There is the old story about the flash banker from New York who drove
his flash girl friend up to Maine in his flash motor car to the newest
hot getaway retreat he had just read about in the New York Times.
Screeching to a stop in front of two old gents sitting on a porch in
the center of a small town, our hero tipped back his Gucci shades,
leaned over his female position and inquired:

"Tell me old timer, do you know the way to Amity Falls?"

The two old gents look at one another and around the town square.
One, slowly, turned to our hero and said, "If I were you, I wouldn't
move a Goddamn inch."

Now that there is hopefully the understanding of what ails us in this
mess, it might be a good idea to try to figure out where we are and
who is along with us in this ride.

A major problem confronting us at this moment and what will be a
continued inhibitor in finding a solution is trying to figure out just
who is in charge, and perhaps the best way to do this is to agree on
who is NOT in charge. Shelia Bair is NOT in charge, has never been in
charge and SHOULD NEVER be in charge. She and her agency have no role
to play...nil, none, niente rien, nyet etc., etc. If the Fifth Ninth
bank of Podunk goes under, by all means turn her loose. The FDIC has
neither the resources (people, money) nor the understanding, and
certainly not the mental capacity to contribute ANYTHING to this
situation other than nonsensical interviews such as that given on PBS
this week by the aforementioned Ms. Bair. The woman is a toxic asset
and should be shuttered. Let us agree without objection

My view, tempered in the crucible of experience with issues such as we
face is that it is never a good idea to allow politicians too close to
stew pot as they will, at some point, surely tip it over. The
politicians are in this piece is of course the Treasury and not
because of Sec. Geithner who I took to task yesterday. Despite have a
goodly long lead time to get organized and what should have been a
clear understanding of what the problems were, this administration has
allowed Sec. Geithner to function essentially without a staff for the
past 50 days. Known as a consensus builder and not as a top down
leader, the Secretary must by finding it damn hard to form a consensus
with no one. He has been put in a truly tough spot. It would appear,
therefore that the point in this exercise must be given to the Fed--
where, IMHO it belonged in the first place--it has the people and the
understanding to accomplish the goals to be set. I have been an
admitted admirer of the Fed for some time but even without my bias we
simply do not have the time to wait for the Cavalry to arrive at
Treasury and get set up. I think we have a small, but very
interesting and exciting window of opportunity to grasp this thing by
the neck if the administration were to move forcefully and without
regard to the politics of the Hill or bit players in this play.

A further thought: the further involvement of the politicians either
through Treasury or directly by the Congress may well have
consequences that are not only undetermined but immensely harmful to
the future of the financial industry and the country as a whole. We
are not dealing with just our financial system: this is a global
order. Before we hop into bed, we had better be sure in what town
Down East is the Inn.

More tomorrow.

HE SPRANG TO HIS SADDLE...

Well, well. Our Incredibly Shrinking Secretary of the Treasury has been posted off to far distant lands to organize a "future fix" for what we are now experiencing. One might remember the last time Our Tim was given such a task--to fix the Asian crisis--by his then boss, The Greatest Secretary of the Treasury Since Alexander Hamilton, he managed to mis-diagnosis the disease, confuse the treatment, nearly wreck what reputation the IMF still had and...oh well that's ancient history. To the task at hand.

Yesterday, Warren Buffet whilst dismissing four major initiatives of the Obama administration and at the same time reaffirming his support for the President ("I support the troops, not the war..."), Entered into the mark to market debate in a generally unreported moment. Mr. Buffet, who has VERY substantial interests in a number of financial institutions, noted that in his opinion the regulatory effect that mark to market has in the present circumstances is, "Not helpful." Mr. Buffet was careful in not dismissing the concept but only the effect.

I've never quite understood the notion that something is a really great idea except for the fact that bad things happen. Sort of like, "it's a great drug, it just kills people," eh? But given Mr. Buffet's greatly deserved reputation, I'm sure there will be some traction here.

The other major news event of yesterday was Mr. Pandit's announcement that CITI Group is quite profitable on an operating basis causing the stock market to have a banner day led upward by the financials. Given the shape of the yield curve why anyone should have been surprised that with a positive carry of over 600 basis points it might be possible to make money as a bank is perhaps the more surprising news, but the exploration of Genius of the Street is another story. "Gee," said the talking heads this morning, "if we can only get a handle on the toxic assets..."The "Heads" continue to associate the toxic assets with capital adequacy, but as I posited in yesterday's post, this is false issue.

If the results indicated by CITI are at all reflective of the industry, and I believe that they are, we have a far different situation than most people realize. Instead of an industry flat on it's back, unable to function and incapable of making a profit, what we may well have is an industry that has received a hell of a body blow but exhibits many of the signs of having absorbed that blow and rising up to once again do battle. Like individual boxers, not all will survive, but many will and as we have already discussed, others will not be allowed to stay down. ..they are too important to the game. What all need is time IF...and this is a big IF...one believes in the viability of the individual institutions in the manner as CITI apparently demonstrated yesterday. Therefore, the most important element going forward is, AS WE HAVE DONE IN THE PAST ON MULTIPLE OCCASIONS IN LIKE SITUATIONS BOTH HERE AND INTERNATIONALLY, create the environment through which the financial institutions are afforded the time to work and earn their way out of the problems they face. First and foremost is the need to curtail this constant Sword of Damocles in the nature of the constant concern over capital adequacy, this constantly moving target which every three months destroys the very real gains that appear to be accruing to the industry as a result of the brutal restructuring that it has undergone. IN ADDITION, THERE MUST BE A CONCERTED EFFORT TO INSURE THAT SUCH EVENTS AS WITNESSED OVER THE PAST YEAR DO NOT OCCUR AGAIN otherwise all will be for naught. If Sec. Geithner can make progress towards this goal, good on him. I suspect, however, that the timing is very wrong for such an initiative and he would be far better served in attempting to set straight our situation first. I plan on providing him with a few suggestions in the coming days. Advice would be welcome.

A glimmer before a gleam of light?

There was actually movement today. Speaking before the Council on Foreign relations, The Chairman of the Federal Reserve, while not yet quite ready to abandon mark to market accounting for financial institutions did suggest that the issue should be examined and that it might appropriate to modify the practice in some manner.

The Chairman actually knows better and has been advised as such. Without the suspension of this practice, arguably the most manifestly stupid exercise in recent years, the "crisis" in banking will not only continue but may well become worse.

A bold statement? Consider this: Mark to market accounting exacerbates one of the most foolish beliefs surrounding the current state of affairs, to wit, that the concept of bank capital is meaningful one. Bank capital is a myth: it is probably a myth at all levels of banking but it is certainly a myth at the level where, as everyone now admits, there are banks, "Too big to fail." "Bank Capital" and it's extension, "Capital Adequacy" are Regulator creations designed to assuage the unsuspecting--and unknowing--Public, that someone is actually looking after the condition of banks with an all-knowing eye, with tested and true rules to assure the safety of the Publics' purse. And yet, at least three times in the past 35 years in this country alone, major baking institutions and in certainly one case the entire system has been operated very nicely thank you when by any objective standard there was the insolvency of if not of the system, a goodly number of banks within that system. Within our hemisphere, over those same 35 years the banking systems of Mexico, Brazil, Colombia, Argentina and lesser states have been operated while insolvent countless times--not without interruption to be sure--but with relative success.

Banking depends upon two things: Trust and liquidity. The latter springs (every pun intended) from the former but the absence of either leads to catastrophe. At the level of too big to fail, the loss of either or both of these critical elements can only be corrected by government action, be it passive or aggressive, and in the most critical of time by government intervention. We find ourselves at this point in our history.

I think there is very little point in debating what went wrong or who was at fault or whether deregulation was the catalyst. Historians can debate that. But we find ourselves in "interesting times" as the Chinese would probably put it with unfortunately the need for clear, pointed and intelligent direction need from regulators and governments (the plural is deliberate). The response has been weak, at first, muddled and foolish and under the present Obama administration, to this point, dismal. Overlying the scene of financial wreckage are politicians anxious to deflect any blame for the past and determined to insert their control wherever possible without the slightest understanding of the nature of the problem or the possible result of their actions. Regulators unsupported and to this point apparently not up to the task and a Federal Reserve which appears to be underutilized and--reading between the lines--un-listened to despite being staffed (especially in the case of the New York Fed) by individuals who have seen and lived through similar scenarios in previous lives.

Faced with this chamber of horrors, solutions are being sought in a regulatory maze and actually works against the achieving of the desired result and first among them is the afore-mentioned concept of mark to market, imposed on the financial and corporate communities in 2007 in the form of FASB 157. Throughout history little good has emerged from either California (save my wife) and the accounting profession but FASB 157 has proven, given the circumstances in which we find ourselves, to be particularly annoying. Admittedly, this rule came about as a result of the demand for greater "transparency" as a result of the Enron debacle, requiring all corporations to revalue their assets on a regular basis using what is essentially a "willing buyer" test in the marketplace. One might well ask what mindless dodo would require financial assets, many of which have a designed life of 30 years or more to be valued in essentially a spot market as though held in a trading book and one would probably have a dearth of volunteers stepping forward, but the situation becomes even more incredulous when one considers the fact that FASB 157 expressly calls for the existence of a market (yes, yes there are silly exceptions). Seemingly without any regard to history, and recent history at that, the framers managed to overlook the fact that at time markets disappear as occurred just 10 years before resulting in the global crisis of 1997 centering around LTCM. And here we sit, marketing to market God knows how many assets in a market that doesn't exist, resulting in the loss of capital in financial institutions which is being replenished by taxpayer funds designed to be lost again in three months time. Does anyone see something wrong with this picture?