T.G.I.F.

I'm beaten. I have no idea what's going on. I checked with all the smart guys I know and they left me with the impression that in the capital markets things are looking a bit dicey. The 10 year is up 30% in a couple of months. My son and his wife refinanced their mortgage for 30 years at around 4.60 last month and today the rate would be over 5.00%., Seven year auction stank, the dollar is sliding against everything but the Yen, Chicago Purchasing report today was simply awful, GM is about to go into Chapter 11, Chrysler is gone, the price of oil has more than doubled in 5 months, Our Hero is crawling on his knees to the Chinese--or at least that is the perception everywhere but in D.C.--the spikey-haired dwarf sets off a big one, BiBi tells the Leader to mind his own business, Europe's economy is almost in free-fall and he DJI closes up 93 points in the last 10 minutes. I have this terrible feeling that it's Berlin and the music is from "Cabaret." Then again, what do I know.

From all reports there is a hell of a fight going on in D.C. over what the new regulatory regime is going to look like with sides being drawn up all over the place. That of course is just what we need...a political brawl when there is a bit of light at the end of the tunnel. I have to admire my favorite gal regulator, Miss Shelia and how she plays things. Jockeying for a place at the head of the table she just hammered Our Hero early in the week with one of the great backhand shots of all time in proclaiming Mr. Geithner's public/private partnership, "essentially dead" as a result of the position of the major banks being so much better that there is very little interest in any of them in participating. Next great idea, Tim? She knows how the game is played or else she is an avid reader of this Blog. Somehow, I doubt the latter. This is not a sideshow, however. Who winds up with the reins going forward is vitally important to the ongoing success of the rebuilding of the financial institutions and the financial markets. One would wish that Ms. Bair restricted herself to trying to get our good ol' boy Ken fired as she has been trying to do for the past year. Why? who knows. But it was good theater without much consequence. Last time she got involved with something serious she went off to advise the Stagecoach boys how to screw poor ol' Citibank with the take-over of the OTHER North Carolina bank. Girl is a pain.

Speaking of regulation, I've been thinking about this quite a bit and would like to share with you a couple of very unconventional thoughts next week. In the mean time, keep this thought in mind; a great deal of focus has been spent on what was done and why it went wrong--with good reason. Very little time has been spent on who did it. Ultimately, it always comes down to the people.

Have a great weekend. My tomatoes get planted tomorrow.

A PAUSE IN THE DAY'S OCCUPATIONS...

Treasury sold a bundle of 7 year notes today at a 3.30 yield. This was a debt replacement operation, debt that was carrying a yield of some 85-90 basis points lower. Coupled with the stinker of an auction on Wednesday in the 10 year there seems to be a gereral theory that interest rates are going to be one a one-way street for a while. BUT, the DJIs closed UP 103 points as though nothing was amiss, AND at the end of the session, the 10 year ticked slightly down to a 3.67 yield even in the face of the Pimco Pundit who likes the 10 year at 3.75--4.00. Go figure...which is what I am going to do with reactions from some smart people I know. The coverage ratio was good in both operations so maybe that's the answer. Who bought em? Back tomorrow.

...AND MOVING RIGHT ALONG

Barca beat Man United tonight in the Stadio Olympico 2-nil. Fittingly, United played as though they were in a Fellini movie. A huge disappointment of a match that was eagerly anticipated by all football fans. Sad.

Anyway, the issue we raised yesterday is a very real one; how does one regulate risk taken by non-financial institutions and which brings up the related question of who is the regulator? In reverse order, AIG is a very good, highly profitable insurance company. It was not the insurance business the got buggered, it was the financial subsidiary that was based in London. AIG's regulator was the State of New York as in this country, insurers are regulated in the state of their incorporation. NY State hadn't a clue about the business of the London subsidiary or at best, had only a notion. See the problem? The business being done across the pond turned out, because of the volume conducted to be in the nature of a "systemic risk" or at least it was in the minds of Our Hero who was running the NY Fed at the time and the then-Secretary of the Treasury, Hank Paulson. Problem was it grew like Topsy before anyone in real authority could put a stop to it. There are a number of similar situations in place as I write; just consider hedge funds and private investment funds not to mention trading subsidiaries of a number of otherwise non-financial corporations--both public and private--world-wide.

A great deal of derivative business being conducted is for entirely legitimate purposes, for example to hedge commodity positions , future price movements and interest rate movements as we have discussed. A great deal of this business is proprietary, i.e. knowledge of it can give a competitor a huge advantage as to a corporation's positioning, future views and strategy. Hence, a central clearing house, open and available to the public may not be in the best interest of the very parties directed to use the same. Further, clearing houses present their own form of risk; if everything is going through a few shops what happens if something goes wrong within one of the shops? The advantage of the availability of information in centralized locations is very possibly off-set by the additional risk being created. Some have advocated a special regulator and control functions for "systemic risk" be created. I guess systemic risk is like pornography; you know it when you see it. Problem is by that time everybody's got their clothes off and all you can do is prosecute it. Defining it is a topic for another day, but you get the idea. Before we all run out and do something it might be a good idea to first decide what we are about to do is a good thing.

I must confess, I am rapidly running out of my league here, but I just have a feeling that as the buzzwords of "regulation," "disclosure" and my all-time favorite, "transparency" dominate the conversation, we are likely to end up with a mish-mash of regulation that provides little of the above and a whole lot of hoops to jump through in order to maintain a very useful series of products that used properly do a lot more good than harm. If the industry allows congress and the administration to draft the rule, there's trouble ahead. Now is the time to be "proactive" (does anyone really know what the hell that word means?) and get out in front. An old friend and colleague once asked of me,

"Why do you get to a meeting early?"
"Don't know"
"So you can pick up all the chalk. That way you're the only one that can write on the blackboard."

Good advice even today, but I have no idea what the solution might be in the age of Power Point. Steal the whiteboard?

...AND TO CONTINUE

We talked last week about how it was that everything went so badly wrong and promised to discuss what might be done to prevent such a mess from occurring again. In regard to CDSs, the solution (if there is one) might be fairly simple and one without a good deal of disagreement. What set the dire events in motion was the total lack of knowledge on the part of the participants as to the volume of the market and the exposure of the individual participants, not only in aggregate but to one another. There were intelligent and in some cases accurate guesses to be sure, but real time information was woefully lacking due to the fact that there was no central body through which transactions were cleared; the business was conducted as they say in the trade in an over-the-counter market...companies delt directly with other companies directly on their own books with no one keeping score.

CDSs were considered by some (many?) to be just another derivative--a creation whose value is based on something else. Derivatives have been around for some time starting with simple interest rate swaps--you pay me a steam of money on a fixed rate basis and I pay you a stream...based on the same principal amount...on a floating rate basis and VOILA, we have created a fixed rate obligation out of a floating rate one thereby transforming the underlying debt into one or the other. Cleaver and useful, no? Now there is a chance that on side may get it wrong and pay a floating rate during a period of rapidly rising interest rate but the loss suffered will never be the principal amount; it will only be the difference in the cost of money during the period that the transaction is outstanding which in most cases will be only a small percentage of the nominal amount. Not so with Credit Default Swaps. That, my friends, can be a zero sum game for if the underlying obligor defaults, the loss can be 100% for the poor slob who wrote the contract.

AIG and others wrote A LOT of contracts about which no bod ee knew nuttin'. Think of the different result if all of there transactions would have been through a central clearing house. Three things would have been accomplished:

1. Counterparties would have been revealed
2. Outstanding exposures would have been revealed
3. There would have been a hell of a lot fewer contracts written due to the now-revealed exposure which would have tempered the zeal for dealing with companies that were perceived as becoming overexposed

I suspect there will shortly be a clearinghouse for transactions of this type, as there should be, for there is very little disagreement among regulators as to its need.

As to other forms of derivative transactions, there seems to be apparent agreement among regulators around the world that some additional forms of control are required. However, there is yet to be agreement as to who the regulators are to be and how the regulation is to be accomplished. If the institutions involved are banks, the control is fairly simple: bank regulators have long controlled the businesses in which banks participate through reserve requirements; take this risk and you have a reserve requirement of x; do that, x + y; do THAT, (x + y)2. But if they are not banks like AIG? Ah ha, a subject for another day as well as a discussion on rating agencies.

ALERT -- ALERT!

The first business page of the New York Times this morning (below the fold) details a major story on what readers of this blog have known for weeks. With respect to the dramatic transformation of the maturity profile of U.S. Government obligations held by the Chinese...the New York Times confirms that Chinese investments are going short. By the end of this year, as previously stated, the Chinese will hold very close to 1 trillion dollars of U.S. obligations at maturities less than a year.

You heard it here first.

EASY ISN'T IT?

Thinking like Mike, that is. The answer to yesterday's question is of course greed. You had a number of firms doing a nice, easy business, making a bit here and a bit there when some really smart guy said, "Hey, why can't we apply this business model to other area, guaranteeing debt for banks, corporates, ANYBODY!" Of course the anybodies of the world didn't have any real taxing power and no one gave much of a thought to the fact that if their credits were not rated triple A there must be a reason. And it was off to the races.

Now guaranteeing the primary obligations of a corporate's direct obligations is one thing; there is historical evidence of performance, usually sound projections, products to be analyzed and assets to be valued. Remember, it is not the issuer that is rated but the paper that is issued meaning that multiple bonds of a single issuer may be rated at different grades depending upon structure, security, maturity and a host of other different criteria. The funds obtained are used in the growth of the business. That of course is the case if there is a "real" business involved. But what happens if the issuer has been created just to issue debt, relying on the income stream from debt instruments purchased by the same debt of the newly created issuer? Whoa, you say, this gets dicy. Yep, sure does. Nobody can figure out these so-called special purpose corporations ("SPCs") so the easiest thing to do is to get a company, such as AIG, which has a Triple-A rating to guarantee the debt issued by the SPC and we all go home happy. This is a highly complex exercise made particularly so by the nature of the debt purchased to support the issuance that I've made to sound easy; trust me it's not. What has to be determined is the odds against non-performance of these myriad slices of debt and for that you need a whole bunch of really smart math guys, known in the trade as "quants" to tell you what the odds are. They create models for each circumstance and based upon these models a risk profile is created and the price at which one is prepared to guarantee is agreed. The mathematics is, by definition, always correct; the assumptions, however, may be very, very wrong. But it was easy money; what good is a Triple-A rating if you can't use it? The problem of course was that much of the SPC issuance that was credit enhanced was related to real estate debt, and when folks began to realize that the massive creation of such debt had led to ridiculous liquidity which led to mother of all bubbles is when the excrement hit the revolving device.

Spreads on all credit enhanced products widened, even those on "normal" debt and especially those relating to emerging market debt. You see, any holder of a debt instrument could ask for it to be enhanced; indeed you didn't have to be a holder at all, you could purely speculate in the instruments themselves. No one knew who had guaranteed whom and for that matter the exposure of an institution on one risk could not be determined with any certainty. It was the wild west with the market creating and pricing credit risk that may or may not have existed with the result predictable to many and forecast by some. In a nutshell what happened was that holders of these guarantees began to suspect that certain guarantors were overexposed and, as was their right, demanded collateral--read CASH-- to be put up in support of the guarantee. To use AIG again as an example, they ran out of cash or near cash and the game ended. By this time no one knew what the ultimate exposure was as the problem was not simple AIG but the solvency of many of their clients in relation to AIG exposure and other risk in the case of an AIG bankruptcy. The risk became systemic. There is a first law in the credit business: You never make as much in interest or fees as you lose in principal. Could this have been prevented? Perhaps. Next week, we will try to explore how and what might be done to protect the future. You see, we are off to The Large Apple for the wedding of an old friend's daughter tomorrow. For those of you in the business I know I've made this so plain vanilla as to be ridiculous but there are folks out there who really don't know what happened. My apologies if some have been bored to tears. We'll liven in up next week. Back on Monday.

MY FRIEND MIKE

I have a friend named Mike who I have always considered to be the world's third smartest man. A number of years ago we were in the midst of a lavish party being hosed by a sorvereign debt trader of our acquaintance (he used to work for me). Sovereign debt in those days consisted of old bank loans from the eighties, most of which had been restructured under various agreements and which were trading at various discounts with spreads thru which one could drive a truck. At some point in the evening my friend Mike wandered up to our host who was engaged in explaining the intricacies of the business to a knock-out reporter from Reuters to whom I had introduced him and said: "Let me get this straight. You guys make a great deal of money selling debt that nobody else wants to each other." Our host was aghast, the knock-out retreated in horror and I dissolved in gales of laughter. Mike, to this day, has the ability to reduce the seemingly complex to the mundane. We proceeded to get very, very drunk and left knowing that we had won one for the average man.

At the time of The Great Collapse, credit default swaps (CDSs) totaled in some estimations $40 trillion. They were surrounded by mystery but after all is said, they are insurance policies written by one party to cover the obligations of another to someone who doesn't like the credit but yet owns it. Now if you were to ask my friend Mike about this stuff he would probably say why the hell would you want to get into a business where you are guaranteeing the investment of professional lenders when they are supposed to know the credit to whom they lend? He would also question why one would do this with the same credit again and again and again. Told you Mike was a smart guy. Now insurance is a pretty straightforward business: there is a single asset at risk that has a certain value, such as a house. If you are going to collect on a policy you have to have the insurable risk...i.e. you own the house. You can't go out and buy 100 policies on the same house because in the insurance business the minute a risk is insured a record is created that is available to the public so everybody knows what has occurred. It's impossible to game the system. Not so with CDSs. Anybody could write a policy and you could have a claim even without an insurable interest. Or. to put it another way, you could speculate on both ends. You could also sell the damn things or create your own on the very same credit, and this is precisely what happened. There was a very large market in the trading of CDSs with quoted and recognized spreads that were adjusted as the perception of the underlying credit changed but also changed as a result of the perceived change in the credit of the underwriter. All sorts of risk could be written; senior debt, sub-debt, mezzanine etc. It is a complex business, totally driven by market perception and subject to the brutalities of the market.

I wasn't always such. The business of guaranteeing debt goes back centuries but for our purposes, one can say that it was the municipal bond market that marked the emergence of the idea of credit enhancement. Like all other debt instrument, the cost to a municipal issuer is dependent upon its credit rating supplied by well-known rating agencies. A triple-A rating gets the best deal and the cost rises to every issuer further down the rating scale. But what if a low-rated issuer could somehow enhance its debt rating? Well, that would mean a lower cost of issuance and as long as the cost of that enhancement was lower that the premium which would be paid without it, it was a win-win. An important point: The risk of default with a municipality was practically nil: it never happened because governments HAVE THE POWER TO TAX on various levels. Given this fact, firms were only too happy to substitute their credit for a fee to help out the issuers and the investors were more than happy to trade a lower yield for a better credit risk (in actuality, the yield was always a bit higher for an enhanced deal that for a primary issuer of the same credit standing) and in addition, there are many investors who are unable to invest in any credit below a certain credit rating by charter, so this was a boon to all. It was a nice, safe business that made everyone happy. So what went wrong? Tune in tomorrow and try to think like my friend Mike. It's simple, really.

YO, TIMMY! WHO DROPPED THE DIME?

I should be writing about derivatives and I promise I will, but my son told me that nobody writes anything important on Friday 'cause nobody reads anything over the weekend. I'm not sure he's right but for a relatively slow Friday there is one wonderful story which hopefully will see some traction in the coming days. Indeed, it damn well better see some traction!

Anybody ever heard of options? I'm sure most of you have. Options are essentially bets made on the direction of an individual stock or market which are extremely popular with professionals as a tool for leveraging directional moves or hedging positions already taken. Options are terrific financial tools in the hands of the right people. I am not one of those; I have never made a bean.

The two most common forms of options are puts and calls. A put option gives one the right--but not the obligation--to sell a certain stock within a certain time frame. A call is the opposite of a put. The form of the transaction is a contract between two parties and puts and calls are quoted on exchanges around the world. If the subject of either form of contract acts as expected WITHIN THE TIMEFRAME a lot of money can be made because each contract controls 100 shares of stock for a fraction of the outright cost. If the timeframe runs out, the contract is a total loss.

Well, it came to pass that yesterday, after the close of business, it was announced that six insurance companies had been made eligible to enter into the TARP program. No big deal 'cause everybody had expected that this announcement would be made at some point but the identity of the companies was still and object of speculation. But on the way to the close, a funny thing happened. The six companies that were to be announced saw a dramatic rise in the volume of call contracts traded. One of them, the Hartford, saw a volume of over 120,000 call contracts (that is a bet in the rise of the stock) as against an average daily volume of 20,000 contracts. The five other to be mentioned names also saw a remarkable increase in contract volume. What made this action even more remarkable was that ALL of the contracts were for May and ALL had two days to the expiry date. Today, the contracts were sold assuringly at a very substantial profit based on the after-hour release of the Treasury's decision.

Now one can explain away this kind of sudden movement in one name, but in SIX...and the very SIX that were to be the subject of the Treasury's decision? Somebody dropped a dime and tipped off someone or somebodies on the Street...or somewhere...what was about to occur. Our Hero may have one hell of a problem on his hands for the first place the SEC and whoever else is about to get involved will look is inside the Treasury for that is the logical place from which the info on all six names could emanate. It was either a deliberate leak from a single source or a monstrously stupid act of informing the involved six individually of all of the collective names. Pay peanuts, you get monkeys...or crooks. I don't mean to constantly berate the guy but before we start talking about putting together plans to regulate world-wide markets, let's convince a few more people that we have our arms around the job at hand? I may be wrong in my concern but every day I keep asking myself, "Self, who's in charge here?"

Have a lovely weekend.

WHAT WILL CHUCKIE SAY?

I'm a bit surprised at the so far muted reaction to the latest plan being floated by Our Hero and The Leader regarding compensation at financial institutions. Seemingly not content with cutting the pay checks for the good folks who work at TARP aided institutions, the latest idea seems to be to in some way control compensation at ALL financial institutions or at least those which could pose a systemic threat (to be defined) whether in the TARP program or not. The scope of this idea, to use one of the New York Time's favorite words. is breathtaking. Maybe that's why the response has been so muted; no one has the breath to say, "SAY WHAT!!!!" You have to give these guys credit; they don't think little thoughts. Of course it is hardly a stretch to go from systemic (to be defined) financial institutions to systemic (to be defined) energy companies, to systemic (to be defined) software companies, to systemic...the list could be endless...and "to be defined." Apparently, as the theory goes, the compensation plans at financial institutions are set up to encourage individuals to take outrageous risks in long term bets where the true outcome is not known until many years after the compensation is paid out. In as much as neither Geitner or Obama ever worked in the private sector (or had a real job as some lesser admirers might say), they must be getting some really good guidance--perhaps from Rahm Emmanuel who worked for Bruce Wasserstein for about 15 minutes and was paid $18 million--but that was catty I suppose.

Now I have a buddy who is still in the business who couldn't be a bigger Obama fan. I am told he donated beaucoup bucks to see The Leader become The Leader. I called him yesterday to get his take (or spin) on the proposal

Me: So, waddaya think? (he's in New York)
Stu: "Communist bastard!"
Me: Come on, it's just another regulatory approach.
Stu: "Nobody signed on for this crap!"
Me: Yeah you did, he told you about wealth distribution. Elections count
Stu...(I'm not sure what the sputter was supposed to convey)
Me: Why don't you talk to Chuck?
Stu: I'll call you back

He hasn't called back yet so maybe he hasn't reached Chuck, but Stu and the Senator are pretty tight...at least as tight as about 500 LARGE gets you to be over the years. So I wonder what Chuckie will say having used the money of people in the business like my friend Stu to get a lot of Democrats elected over the years. Money, the mother's milk of politics. In Stu's case, momma may just have left town.

Moving right along, there was a most interesting duet of op eds in the Times today. Prof Roubini of NYU, he who saw last year his 25 year prediction come true, and V. Z Gao an exec. dir. of the Beijing Private Equity Asso. chatting about the dollar vs. renminbi and role of a reserve currency. Prof Roubini is precisely correct in asserting that it wouldn't be all that of a good thing if the dollar were to lose that role in the world, but totally fuzzy as to how to stop the slide "We must shift our priorities...investing in our crumbling infrastructure, alternative and renewable resources...rather than unnecessary housing and toxic financial innovation. This is the only way to slow down the decline of the dollar and sustain our influence in global affairs." The fact of projected deficits of 11 trillion dollars over the next few year appears to be of little importance.

Mr. Gao, on the other hand says the following: "The United States may want to consider offering inflation-protection measures for China's existing investments in America, and offer additional security or collateral for it's continued investments."..."We still call the dollar gold, but the United States should not assume that this will never change."

Readers of this space will remember that on two occasions we predicted that this would be--PRECISELY--the Chinese position. Prof Roubini makes a number of good points in his piece--both should be must reading--but the quoted portion is crap. The apparent unchecked--and uncheckable--fiscal policies of this administration will spell disaster and it is on these that he should focus. I continue to fear the worst.

RANDOM THOUGHTS

Mother's Day was wonderful. We visited Number Two Son and the wife reveled in a passel of grandkids. Stayed longer than expected, hence the slippage. Apologies.

Well, as predicted, The Leader and the mob pounded the secured lenders involved in Chrysler into submission and the quickey bankruptcy can move forward apace. The TARP banks involved had already folded like a bunch of cheap suits as chronicled in a wonderful front page story last week on good ol' Jimmy Lee at J.P.Morgan who talked tough and carried a limp noodle when it came to backing it up. The pundits on both political spectrums have been having a field day with the secured guys, one set wailing about the trampling of the 5th. amendment while the other has been proclaiming the brilliance of The Leader and his team in doing the "right thing" in the face of heartless opposition. Don't know why such a big deal is being made of all this. The secured guys for the most part, were bottom feeders who owed the stuff at a considerable discount hoping to make a quick killing. That being said, the law was on their side and the "willingly" agreed to relinquish their claims not being prepared to stand up to the political and financial pressure but knowing that their downside was certainly way less than 100 cents on the buck. Sometimes you win, sometimes...In any case, the GM situation is considerably different and it is here we shall see if anyone has the guts to stand up to The Leader.

The fall-out, however, may well well be the mother of all unintended consequences. The price of finance just went up for everybody and the financing normally available in bankruptcies may well disappear. Ask yourself: would you be dumb enough to provide debtor in possession financing to an entity that possibly could have a politically connected class of creditors...i.e. unions? Count me out. The landscape could change. I also look forward to watching the UAW bargaining with themselves in the future with taxpayer's money in the balance. This is a sorry scene but for blog writers, a gold mine. I think I'll be around for a while.

Also last week was the Treasury's $16 billion 10 yeqr auction. It wasn't a disaster but it was close. Yield shot up to 4.3% on tepid demand. For those of you who don't know how this works, there is in place a group of financial institutions know as "Primary Dealers." At one time they numbered around 40; today they are fewer than half that number. To be in this club you have to bid on Treasury auctions, assuring the "success" of the issuance by the Treasury. The price at which you bid is very much dependent on the demand you have from the market into which you resell the issue. If things go as they are supposed to go, you are guaranteed a profit, but if you miscalculate demand...well, lets just say you're wearing Treasury paper for a while and if this situations persists you may well sell it at a loss. Predictably, the dollar was hit but not as hard as some thought would happen. Nevertheless, the predicted future is coming into focus. The Fed keeps pumping money out short term and medium to long term rates continue to rise on fears of the future inflation that is all but a certainty. On top of all this, the CBO revamped its budget deficit numbers upward (they are still underestimated) and commodity prices continued in their rise. As The Yogi Man used to say about left field in the Big Ball Park in October, "It gets late early out there." But with yield curve, the banks should make a bundle short term--the big banks that is with big trading operations--and it was a beautiful Mothers Day. What, me worry?

And speaking of banks, Our Hero has been all over the place--including another unfortunate little skit on SNL--preaching the gospel of regulation, redistribution and redemption, in language so flowing that it is nearly impossible to understand what the hell he is really saying. He's still flogging the idea of his public/private partnership although one would think that any rational human being witnessing the treatment of the private sector in the car business would run like hell in the opposite direction. We shall see. He also wants a systemic risk regulator: I thought we had one in the Congress of the United States as Per Freddie and Fanny...who by the by, just announced that they had lost another gazillion dollars and need another $8 billion or so of new taxpayer money. Those regulator-things sure do work. He was speaking to the itsy-bitsy bankers' association today and promised that he was going to take money from the big guys and give it to them. Huzzahs all-around. Boy sure know how to wow a crowd.

Finally, a political comment. I watched The Leader this morning accepting the pledge of the Congressional leadership to have the reform of health care settled before the August recess. Joy unbounded. At the end as he was about to head North, Nancy Pelosi planted a kiss on his Southernmost feature in a manner unseen even in a town famous for such drooling acts. Now it is well-known that Nancy has gotten both of hers in a wringer over these "torture briefings" and Rahm's buddy Stenny has expressed the view that maybe their should be some hearings on what Nancy didn't hear and why, but this?! Is Nancy long for the Speaker's Office? Jeeze, she may have to fly commercial.

A follow-up tomorrow

MUCH ADO ABOUT....

Well, I didn't get any help at all yesterday which is why nothing appeared. That was bad, then the day turned awful as Barcelona drew with Chelsea 1-1 at Stanford Bridge to win the semi-final on a well-earned goal 2:45 into extra time. Bummer. The ground was an hour walk from our old digs in London or a 15 minute ride down the King's Road on the #12. This was personal. On top of all that the match was refereed by Mr. Ovrebo, a Norwegian, who, among other things managed to miss a hand ball in the box by Gerard Pique of Barca that was witnessed by 65,000 in the ground and 200,000,000 across Europe, two other probable penalties in the box and then, just to show he was impartial, issued a red card to Barca's last starting defender for very little which means they face the dreaded Manchester United in two weeks at Il Stadio Olympio nella Roma with a back line of four guys named Schwartz. Not good. Now for those who don't follow this sport too closely, Norway does not have professional referees. Mr Ovrebo has a day job which means these two sides had the most important match of the year and in the case of many of the players, their lifetimes, refereed by an amateur. Mr. Ovrebo receives a fee for the evening and expenses. You pay peanuts, you get monkeys. Got the picture.

Anyway, this morning we awakened to the results of the stress test and an explanation of the same by Our Hero on the Op Ed page of the New York Times. Neither the results nor the explanation told us anything. It would appear that Bank of America was designated as the institution that led the hit parade of those in need of more capital and on the other end of the list was Citigroup who was long expected to be in the most dire straits. Not so. Bank of America's need was listed at $35 billion but C came in at only $5 billion. Equity markets yawned and promptly bid up bank stocks as they had been doing all week. Mr. Geitner proclaimed that this exercise replaced uncertainty with transparency and would bring more private capital to the financial system. Well, I guess I, like St Paul have to get knocked off my ass on my ass, but I am still seeing through a glass darkly. I don't know any more about the true state of the banks any more than I did 6 months ago other than for Our Hero telling me all will be fine now that he and The Leader are on the case. One might keep in mind that most of this went down the gurgle tube when he ran the NY Fed and while I don't for one moment wish to blame him, there remains a suspicion that he provides little to the solution. He sure can play to the markets, however. I don't wish to be misunderstood. I am not for a moment suggesting the this exercise was a white wash. The Fed ran it and the Fed does not play games. I'm sure what was done was fully professional.

One thing that was revealed, almost by accident, is that all of the banks have rather high capital ratios; certainly higher than the regulatory ratios of the Basel Accord. The shortfalls discussed are all related to primary capital or common equity which we have discussed earlier in the week. The yawn of the markets was probably a result of all the equity geniuses realizing that, 'Hey, these guys need but convert some of what they already have and everybody is home and dry." It also has probably provoked some thought that there may be something else involved here than just the designation and then recategorizing capital that was there in the first place. Now some of that preferred is Uncle's money and given what has already transpired, banks will probably be loath to provide any more direct ownership to the government. But the problem, if there was one, appears to be quite manageable. Now, provided Our Hero and his mob get the hell out of the way, stop this ridiculous asset swap/sale idea and keep positive, confidence and the liquidity which always follows will return. And that, boys and girls was what it was all about in the first place.

Mother's day this weekend, bless them all. We are off to see one of them and one pack of grandchildren. See you next week.

I NEED SOMEBODY TO HELP!

This is becoming very difficult. There is very little going on and it appears that the entire world is awaiting the results of the "stress test" scheduled for Thursday. Well, that is inaccurate. Not the entire world. It appears that the International Monetary Fund has found a mission that of predicting with unerring accuracy the condition of the U.S. Banking system an the requirements facing the same for new capital. Excuse me if I am underwhelmed, then again, one must keep in mind that the Fund has friends in high places as it was no other than Our Hero was once an employee. It was there that he became confused as for the need to pay payroll taxes for you see, you salary from the Fund is essentially tax free (they pay it) and it's easy to become confused...oh, why bother. Suffice to say, it has been a dull day in a fairly dull week.

But, we labor on to report that rumor has it the Wells Fargo, Citibank, B of A and apparently a few others are a bit short of the ready according to the Regulator mob. Oh that ominous note, the bank index has traded up big time. Go figure. Or maybe it's not so hard. Part of the report is supposed to set guidelines for "tangible common equity" for each individual bank and it may well be that the stock boys have no more idea than yours truly what the hell "tangible common equity" is supposed to do to make anyone of us sleep better at night. Oh I know the definition;this is the stuff that is supposed to be there at the end of the day after a bankruptcy. The percentage being floated about is 4--4 1/2% of total footings. Last time I looked the Incredible Shrinking Citicorp had about $2 TRILLION in total footings. If any among you feel that 4% of that number is just about right, would you contact me with your reasoning and the best reasonoer will win a prize. I case of ties, duplicate prizes will be awarded. Employees or any member of the family of a Citicorp employee are not eligible. This offer is available to only members of this planet. Advanced life forms from other galaxies are not eligible. All entries must be postmarked by tomorrow at midnight, eastern daylight time. We are going to get to the bottom of this thing.

Once there is agreement, the short-fall institutions will scurry out into the market to raise the necessary capital from private sources or failing that, Our Hero will make up the difference after about six months...assuming that anyone is left after six months. Actually, I was in favor of this approach a few months back but the major difference in my thinking was that there are some things that are best done in private. Announcing to the world that the First National Bank of Boothill (apologies, Chris Fides) is in extremis is not exactly the best way to prepare the market for a fund raising operation on behalf of FNBB or at least in my experience it never has been. But, I have been wrong before (two or three time to be exact) and there is a price for everything so this could become really interesting. Then again, if people believe that the fund raisers are in the nature of a Government Sponsored Organization ala Fanny and Freddie...well, we shall see. Only thing is those two didn't come out well in the end did they? Neither did Mr. & Mrs. Tax Payer. Then again, the Treasury could provide the funds directly as suggested, but that might result in more howls and shouts for ownership on the part of the government rising to a fever pitch. You pay peanuts, you get monkeys. $2 TRILLION in assets run by monkeys? Hummmmm.

You can see my problem. I'm just sitting out here in fly-over country waiting for a bit of inspiration. Worse yet, of the 10,000 Peonies in the world the wife just bought at least 500 of the 1500 she doesn't already own. She buys, she doesn't plant. They are pretty, however. I've left a pass and not at the gate house for John Lennon in case he comes by to visit. HELP!

A GOOD DAY

Awakened to a perfectly lovely spring morning and what with the perfectly timed rain we've been having I thought I would test my luck. Walked around the property and across the street at the neighbor's and came back with about half a pound of Morels. Turned them into a wonderful omelette, brewed a pot of coffee and sat back to read the newspapers. It is highly rewarding to know that you have just finished a breakfast that probably would have cost at least $50.00 in all of the power capitals of the world and probably more than that in some of them. Will anyone really miss Balducci's? Finished the local Blat and started on the N Y Times. I like to HOLD a newspaper when I read it, not scroll down on a keyboard and this morning even the Times felt good.

We had a few kids from the local U over the other night talking about current events. There's a lot that's not so hot about growing old but one good thing is that age gives one perspective which I was dolling out in copious form the other evening. If you have been following this blog you may have noticed that I have been comparing the events of the past few months to a period with which I am quite familiar, the 1970ies. Perspective. One also, over the course of a lifetime is able to experience and evaluate a large number of people and, in relation to one's own views and in the course of history, grade them. More Perspective. Allen Meltzer, presently resident at Carnegie Mellon is one individual I have followed over the years with interest and appreciation. His Op Ed piece in the Times today entitled, "Inflation Nation" is an absolute must read. He chronicles the seventies, citing the mistakes that were made and puts them in perfect perspective with the actions that we have sen over the past few months. I could have written it myself. He also points out that when the inevitable result of the inflation-producing actions must be faced and reversed, the consequences are often dire; just as they were in the seventies. He also points out that in those days we had a strong, independent Chairman running the Fed in the person of Paul Volker who was granted his independence by two successive administrations of vastly different political persuasion and used his independence to achieve the maximum result. It was ugly both here and abroad for the unintended consequence of Volker's assault on inflation was the destruction of a large number of over-leveraged economies leading to the Latin American debt crisis and what is known south of the border as, "The Lost Decade." Paul Volker is still with us and though still part of this administration he has been marginalized. We are the vastly over-leveraged economy depending upon the continuing faith of those, many of whom with which we have little in common either morally or politically, to support our efforts. Indeed, in some cases these states can be considered our competitors both politically and economically. There is no perspective of age, only the rashness of relative youth and the fervor of the True Believer driving us along this path. It is a fearful time, yet if one cam wake up to Alan Meltzer echoing what one has been saying for a few months, it is a Good Day. Free Morels aren't a bad thing either.

We'll try to get back to the banking business tomorrow.