OMAHA CALLING

Uncle Warren took pen in hand today and wrote the New York Times. He's worried that "excessive monetary emissions threaten the health of our economy." He praises the actions taken last year to rescue the financial system with a gusher of federal money playing "an essential role in the rescue." So far, so good. Mr. Buffet continues by stating that, "enormous doses of monetary medicine continue to be administered," and warns that the threat of this action might be as ominous as the financial crisis itself.

Quoting the entire piece might be useful as Mr. Buffet makes some excellent points, but none, perhaps, as the quotation from Lord Keynes, every politician's favorite economist who laid out what he describes as a road map in order to avoid hard choices. "By a continuing process of inflation," Lord Keynes wrote, "governments can confiscate, secretly and and unobserved, an important part of the wealth of their citizens..."

One of course wonders where Mr. Buffet was when he threw his considerable weight of opinion behind The Leader in the past election when it was as clear as a thunderstorm in Nebraska that the economic policies proclaimed by The Leader had a real good shot at creating the sort of economic situation about which he now warns. That is not to say that the road to economic perdition did not begin back in the Bush administration just that Mr. Buffet seemed to ignore all the warning signs that there was to be no U-turn in some of the follies of the past. One wonders why might be but most revealing is the penultimate paragraph of the piece. "Our immediate problem is to get our country back on its feet," writes Mr. Buffett,..." and whatever it takes still makes sense."

No dummy, "whatever it takes," makes no sense at all for despite your vast wealth you seem not to understand that it will not be the expenditure of trilions by the Federal and State Governments that will get the country back on its feet; it has NEVER been thus. There is a toll booth at the end of this road and it will exact a mighty cost. Mr. Buffett's fear that we may not be able to finance the prolificacy of this administration will come true at some point and as he rightfully points out, the signs are already there as has been written in this blog. I just get a bit tired of these elucidations of the obvious from those who take no responsibility for the change in direction of American political and economic culture to which they surely contributed. Sorry for the rant but it made me feel good.

In the next couple of weeks we will be wandering around the country visiting children, grandchildren, going to christenings, birthdays and weddings. It should be great fun but the writing will be spotty at best. Stick with me. I'll do my best. Stay well out there and enjoy the remainder of the summer.

ZIP, ZERO, NADA, RIEN, NIENTE

...which is what I got for today. No point in prolonging the agony. See you tomorrow.

SOMEBODY FIGURED...

Every market went to hell today, the equity markets I mean. It started in Asia, spilled over to Europe and then ended up here with the Dow down around 185. Financials got hammered in the face of notsobad retail credit loss numbers and retail was murdered in its bed. It was ugly. I'm getting that feeling again that somebody out there knows a lot more than I do (ok, stop laughing) and that we are heading for a retrace of the down markets of last year albeit without the panic selling and crisis atmosphere that accompanied the down-turn. It just appears that the feeling of confidence is not there and this down-atmosphere is not helped in any way by the monstrous mess made by The Leader and his mob over health care. To me, it appears that a great deal of the country is not only concerned as to the invasion of privacy issues that the government's intervention might cause but certainly out here in the fly-over zone, everyone is beginning to ask the question as to how all this gets paid, and for many the nonsense coming out of D.C. doesn't ring true.

Perhaps we are not the only ones. I try to make it a habit to watch the delicious Miss Burnett and her sidekick Mark, every morning on CNBC; they are far and away the best 1-2 act on tv. I hope whomsoever paired those two is making a lot of well-earned money as they are not only entertaining they are informative. This morning, seemingly not realizing the full import of the reportage, Erin elicited from the head of Norway's sovereign fund the fact that he wasn't investing in Treasury securities and, in fact, didn't like them much at all given the future outlook. Her matter of fact response to this little tid-bit of info was to me a bit surprising although I must admit that as the morning went on she seemed to grasp to a greater extent the full import of this info given the Norway has the second largest investment fund in the world. I was perhaps even more surprised as just prior to this interview she revealed that China had been a net seller of Treasuries in the near-term and didn't really like the two facts more closely. In a financial sense, this seems to have violated the first rule of news reporting, "If it bleeds, it leads," but then I may be reading more into this than the facts deserve. Gotta love the Norwegians though: look you square in the eye from 3500 miles away and tell you your country's debt stinks from an investment standpoint. I suspect they are the most brutally frank people in the world and always have been. Good on 'em.

Anyway, this didn't make me feel any better about the state of things. My friend Larry keeps repeating that the Chinese are in a dollar trap and as smart as he is he's probably right, but i keep wondering as to how those one billion or so Chinese are feeling these days? I can't seem to forget that last year's collapse was preceded by a turn-down in China and I just wonder if Joe Chinaman feels as spooky as I do. If so, things could get ugly very quickly and the end of the recession that was being touted in Germany and France last week might not be so final, fueled, if it was, by China trade. Then again, the college football season begins in just two weeks. Maybe things aren't so bad after all.

I HATE IT WHEN...

...I have to correct myself, but a loyal reader called to tell me that I should have said, "...it appears that Mr. Feinberg will refuse..." He is of course correct. The pay czar has made no final decision but I will lay 8-5 that what we will get in this case is a lot of, "Outrageous, Unconscionable, Undeserved," blah, blah and little else. I tend not to get too excited about this pay czar thing, stupid though it might be, because it will certainly whither and disappear as the financial sector emerges from this latest collapse which if the Fed continues to hand out free money will not be too long from today (mind the regionals, however). The signs are already emerging in the U.K. where the FSA blinked on the supposed mandated pay schedules, and are speaking only in terms of pay "guidelines" as the outlook for the sector improves. I suspect that good deal of this is to let bygones be bygones, after all boys will be boys and all of the stuff we love, what--but let us remember that the FSA has already been pronounced dead and buried by the Conservative Party if it is successful in the next election (less of a bet but still odds-on) and why get the City all riled up at this stage? The feeling on the Street here across the pond is that this too shall pass.

However, this tendency on the part of The Leader and Our Hero to control practically everything is not just a passing fancy. Has one noticed that not only are there discussions as to the need for the free flow of credit to resume but that in addition, there is a very clear undercurrent as to what locations it should be directed? The cash for clunkers program, while great for dealerships is about as dumb a use of money the country doesn't have as one can find. (Full disclosure: I checked on my clunker with messrs.Toyota and Honda: my old Acura was made with two different catalytic converters; one qualifies the other doesn't. Of course there is no way to tell which is which. You can't make this stuff up). I though we had seen this movie before when, in an attempt to eliminate "Redlining," mortgage lending was expanded by government fiat with, shall we say, somewhat uneven results. Or billions to the UA...ah, GM and Chrysler on the biggest come-line bet ever made. Oh, as an aside, GM announced its Chevy Volt yesterday with a milage rating of 240 per gallon if you have a 400 mile extension cord. I's supposed to have unlimited milage in city driving. Memo to The Leader: WE DON'T WANT BLOODY CARS IN THE BLOODY CITY!!! But of course, it's clean; it's a shame 2.5 billion Chinese and Indians aren't. In the good old days we used to say,"Hell, it's not our money it's the depositors." Wonder what these guys say?

As a final note to this week, jobless claims went up, retail sales were lousy and the Dow was up 36+ points. Go figure. I guess the continued uptick was based on the fact that France and Germany said the recession was over and it was onward and upward. Did someone, somewhere, care?

See you on Monday. It's too nice outside to write inside

AND THE BEAT ROLLS ON...

It remains Christmas in August for the banking business as the Fed announced that they aint doin' nuttin' for the foreseeable future in regard to interest rates. As the saying goes, even a banker can make money when his cost is zero, so look for continued excellent bank earnings through the third quarter. Having said that, I don't mean to imply that ALL banks are looking at a rosy future for earnings. As we pointed out a month or so ago, those banks with large trading business will be the ones coining it but perhaps things might not be so cut and dry for main street and what we have taken to call the regionals.

The world is still not a happy place, and while corporate earnings have been good, the results come as a response to massive cost-cutting and an exceptional rise in the productivity index of well over 6.00%. There has been little to no top line (revenue) growth and without that, an upward tic in the employment picture is not on. The economy is fragile at best and while it is universally agreed that the worst may be behind us a bright economic picture is not ready to be painted. I am worried about regional bank earnings, opportunities to extend credit on a sound basis and deteriorating credit portfolios especially in the commercial real estate sector. The big guys got a bail-out and rightfully so, (more about that in a bit) but I doubt if the same kind of largess is going to be available to their regional brethren.

This dichotomy, to an extent explains why the papers have been full of stories of a scramble for talent on the street with exceptional compensation packages being offered especially to capital market mavens. Make hay while the sun shines seems to be the rule and the bet is that in these exceptional times, exceptional performers can earn their weight in gold. This was reinforced today when The Leader's pay czar, Mr. Feinberg, refused to intervene in the $100,000,000 reportedly owed to the afor-mentioned head of the Citigroup subsdiary, Phibro under his employment contract. Look for rock-solid contracts to be the future norm--until interest rates move up. Funny, the big bucks get paid when it's a sure thing, not when you really have to earn it. One would have thought that it should be the other way around, but hen, what do I know.

So, in past weeks I've been knocking the Too Big To Fail theory of regulation and as a result, I got a call from a friend of mine, a very senior regulator Somewhere Out There in the great world of finance.

"You're mad, you know."
'Why?"
"Do you have any idea how many clearing functions Citibank performs worldwide?"
"More than a handful I suspect"
"A handful?! It's in the hundreds!"
"I should be impressed?"
"No. You should be bloody terrified! They stop, everything stops. Same with B of A. In the U.S., 39% of credit card are issued by them. God know what the number is outside the U.S."
"Hummm. You mean if they go sneakers up, I probably wont have to pay my bill for months, if ever?"
"Means nobody pays you either if your damn pension is paid through them."
"Ah. I see."
"Now you know what systemic means, not just your bloody stupid, "That's when everyone gets the crap scared out of them at the same time."
"You make a point. I might have to revisit my reasoning a bit."
"A bit!" You sound like that fool Krugman."
"He has a Nobel."
"So does Yasir bloody Arafat."
"A valid evaluation of the award I must admit. But tell me, would you not concede that things have gotten a bit out of hand? Institutions have gotten perhaps a bit too big?"
"And if I say I would, do you have a solution?"
"No."
"THEN DON'T BLOODY PRINT THAT!!!"......."Oh, and Charlie..."
"Yeah?"
"Your description of systemic risk."
"Yeah?"
"We use it all the time. Stay well."

I'll try.

BACK HOME AGAIN...AGAIN

Loyal reader, Anonymous, raised an interesting quest in response to last week's musings about corporate pay concerning the role of the compensation committee of a Board of Directors. The question went to the independence of such a committee, but that is only a portion of the real question regarding the proper disposition and activities of such groupings, or as been too often the case in past years, groupies.

You might remember that in my posting MY FRIEND DICK, I described a man who was not afraid to tell David Rockefeller that he was looking at an early termination of his banking career unless the performance of the Chase Bank improved immediately. Frankly, it is the CHARACTER of the individuals on a Board that is important rather than personal or corporate relationships that they may or may not possess that will determine their performance. If the character of the man (or woman) is such that there is a full understanding that he or she represents the shareholder in all matters, any relationship, no matter how close is irrelevant and all questions become moot. In recent years the character of too many board members must be questioned and I know that this will bring shouts of outrage from some readers who have sat, or now sit on corporate boards but consider this: could or would you walk into the office of one of your closest friends--David Rockefeller or not--and tell him he's about to get canned? If your answer is not an unequivocal YES, resign immediately. And yet, I must admit that the movement especially in regard to financial holding companies to replace retiring directors with ostensibly completely independent ones is a welcome development. IMHO, Citigroup has greatly upgraded its board in recent months. But somewhere along the way, we have lost our way. You are correct, Anon., we have a problem still.

However, in regard to the direct question of compensation, there seems to be a new mind-set that the object is not to have everyone compensated to the greatest extent in regard to their contribution but to level the compensation playing field. This of course fits in with The Leader's idea of the redistribution of wealth within this society. The disagreement arises not where one individual objects to another making a dramatically higher salary but where the solution is to reduce the top tier rather than raising the lower tier and doing so through fiscal measures such as taxes to fund either direct transfer of monetary wealth or services. I can remember being an ex-pat in England a number of years ago and having an English colleague approach me with the Brit version of his W-2 at the end of the years. He was a managing director of our bank and according to the law, he owed us money for working there in the last two months of the year due to his tax bracket and the lack of adequate withholding. Now there's redistribution!! The effect upon the higher earners was as imagined. Either one lost all incentive to earn beyond a certain level or one engaged in every legal--and illegal--method available to reduce one's tax bill--not to mention the "Brain Drain" that was crippling to the UK until the Thatcher revolution. Human nature being what it is, the same can happen here. Unintelligent compensation and tax theorists can and will create a generation of tax cheats and avoiders to an extent not yet seen in this country. Consider a few free-standing facts.

We have a voluntary tax system. Oh, forget about all the penalties one faces for tax cheating. Very few people in this country cheat on their taxes. Very few people hide income by working off the books. That is NOT the case with a great number of countries in the world. NOBODY pays taxes in Italy. NOBODY pays taxes in Argentina. NOBODY pays taxes in Mexico or certainly not the full amount of what is owed. MY FRIEND DICK knew a lot about Latin America and when he spoke of Argentina he used to say, "Twenty feet of top soil," and laugh! The richest country in the world and the most corrupt. Why did Argentina regress? There was no money for the government to supply the services a government is meant to supply and it became every man for himself with class and social warfare a very real environment. Change the attitude of this country"s people, especially the most productive, make them feel oppressed, and you begin to change the very fabric of society. My advice to The Leader and his followers? Be very, very careful of that which you propose. Comprende, Che?

STUMPED

I have nothing to say. That would surprise more than a few that know me I am sure, but this is really a slow time although the summer has really turned glorious here in the fly-over zone to the point where my tomatoes are actually showing signs of life. Lat month was the coldest July in the history of the state and I was beginning to believe that Al Gore was either a myth or he had died until I saw him yesterday welcoming the two gal journalists home. Letters to the Editor in the NY Times today proclaimed the power of negotiation. There's one born every minute but good job all around to get them home.

It would appear that the Fed and the Old lady are getting back on the same wave length as there is talk in the U.K. as to how the Mother of Central banks is going to drain liquidity from the system when the time comes, much like the conversations we've been having on this side of the pond. Not an unimportant topic, so much so that I have yet figured out how to deal with it (the World of Central Bankers Awaits)! Next week, after I talk with some of my smart friends. In the mean time I'm going out to talk to my tomatoes (they enjoy a conversation) and perhaps try to make a fool out of myself with a round of golf. As The Leader's head button man says, "Never waste an opportunity"...or some such thing

Next week.

BACK HOME AGAIN...

In Indianaaaaaa! The Leader came back for the fifth time in the last year today, and said...well, nothing. Said Elkhart County had to reinvent itself. Like Detroit, like South Bend, like Michigan City, like the great swath of the rust belt here in the mid-west that has been waiting for the return of Studabaker, U.S. Steel, Bendix, Wheelebrator Fry, and the Edsel for all I know. He's still trying to fix all the wrong things, just as Mike said. And The Leader said it all from the floor of a bankrupt RV manufacturer at which location will soon be an electric motor factory. Sometime ago The Leader proclaimed that we needed electric cars and green fuel and a 37 mpg standard for all that moves on American Roads. RV's really can't do that; I wonder what the audience was thinking practically all of whom depended on that industry 'cept for those who have been doing a little Meth on the side. It was a monumental waste of time. Plane is real pretty tho--or so I am told.

On of the next big fights it seems is going to be over executive pay especially pay in the financial area. This is going to be really interesting as many of the packages, especially for the highest paid guys and gals, are spelled out in fairly tight contractual form and now the question of the sanctity of contract may well meat a real test.. I mentioned the head of Phibro, a sub of Citigroup a couple of days ago who is apparently owed something in the nature of 100 VERY LARGE for his success at trading commodities--read oil--last year. It is an outrageous amount of money but apparently only a small percentage of what he made for the corporation. Frankly, I think it is nuts for a public corporation to put itself in the position of having to pay out that much but having done so, can one really justify its non-payment to a guy with whom the corporation entered into an agreement freely and where the guy performed in precisely the manner to earn his pay? Aside from the shock stemming from the big number, this is a tough question. Of course, Citigroup being owed by the taxpayers complicates the issue. One guy getting this amount of taxpayer money? Then again, if he is making a bundle for the taxpayers, why not? Then again, could he do it without the cache of Citigroup and the U.S. Treasury? How much is that worth? Knotty questions all. We shall be watching.

I think this conundrum serves to highlight one of--and in my mind--the most important issues about which we have had a great deal of discussion. Could these numbers have ever existed if the corporations and managers involved been playing with their own money or without the imputed knowledge that at some point at sometime if all went down the gurgle tube, Uncle would be there with a life-line? I think not. It is not adequate to suggest as a leading article in the WSJ did today that the situation is somewhat different when the biggest shareholder is the taxpayer; that is clearly evident. But the de jurie ownership and support provided to a Citigroup or a Bank of America by the taxpayer is NO DIFFERENT that for J.P. Morgan or Goldman Sachs on a risk assessment if we have a reprise of 2008. And we will sports fans, we will unless we change the rules.

Speaking of B of A, our buddy Ken and his boys--new though they be--did it again. Out they went and hired Sally Krawcheck, late loser of a pissing match over at Citi to run global wealth and management...that's Merrill Lynch...and out the door went Dan Sontag who was Merrill down to his toes for the last 30 years. Ms. Krawcheck no doubt still remembers that when you called the dealers at Citi the phone was answered, "Solomon" even 10 years after the merger. She never got that to change. Bye, bye synergy and bye, bye the best of Merrill that B of A bought. When your most important assets can walk out the door at the end of every day, you better be damn sure what you do in attempting to merge cultures. There is dumb and there is DUMB. You pick it.

MORE ON MIKE

So, we're sitting there and Mike says to me, "Do you remember ol' Daniel?"
"Daniel who?'
"Daniel Patrick Moynahan of course."
"Sure. He was the smartest guy in Washington since jefferson."
"Remember what he said about the poor?"
"Not really."
"He said the only difference about the poor is that they had no money. I think he said that at some Congressional hearing"
"Then, he walked out didn't he?
"Yes he did! (laughing). He was right."

Mike loved Moynahan because he was just like him. Moynahan had the ability to take a complex subject and explain it with devastating logic in about two sentences. Just like Mike. I could see where he was going...

"Moynahan's solution to the poor was just to give them money! And he was right!"

I thought about that for a minute.

"You mean like cash for clunkers?"
"No,no, no. Just give them money! Don't give them money to buy things. Just give them money and have them decide what to do with it. Cash for clunkers, what does that do?
"It gets them a car that they otherwise wouldn't have."
"No it doesn't! It gets them three years of car payments that they can't afford! It's like buying a house with no down payment and no income! It's Never, Never, again! Just give them the damn money and get the hell out of the way!"

Which is why I like my friend Mike.

On other matters of great import, the battles over who does what to whom in the regulatory area appear to be getting strident if not more intense...that is if one can believe the obviously Shelia Bair-planted story in the WSJ today. Seems as though over the weekend Our Hero lit into the regulators then-assembled with a profanity laced diatribe as to how they had better get their act together, shape up and get with the program. Quel horror! Is this intended to make us believe that Our Hero is breaking under the strain? Shelia baby was portrayed as the one who attempted to sooth the searing rage of the Tres Sec with calm, well-spoken thoughts, at a point where he was flying a bit out of control. What a gal, 'cept anyone who has been around Our Hero knows that his ability to adapt the four-letter favorite to use as a noun, verb, adverb or conjunctive in varying tenses and has done so over the course of his career would not be amused or surprised. She's a Dubya appointment for heaven's sake; can't Rahm or some other button man in this administration off her? She is really becoming a bore.

Finally, The Leader is coming this way again...to Wakarusa In. of all places. Taking AF One. Pretty plane. Only costs a zillion dollars to get it up in the air. Now this was never intended to be a political blog, but I know Wakarusa In. Nice town, a bit down on its luck perhaps as it is right smack in the center of the RV industry but filled with good, God fearing Hoosiers...all 1500-2000 of them. Has a bit of a Meth industry but who doesn't these days. For what the hell The Leader is going to Wakarusa nobody can figure out including the good, God fearing Hoosiers in Wakarusa. He could have taken his G-5 in which he goes on dates to NYC with Michelle and landed in Elkhart and saved a half a zillion, but he's not going to do that. Gonna land in South Bend one county over and cause two counties that don't have two bucks to rub together to pay time and a half to every cop for 40 miles around. Change. Sounds like Never, Never to me.

Sorry. I promise not to do this again.

NEVER, NEVER

Remember my friend Mike, the world's third smartest man? His daughter was married last weekend in Darien Cn. and that's where we have been for the past week along with a few other stops to see old friends on the Right Coast. Wonderful wedding, wonderful young couple. It's been a while since I have tooled up and down I-95 and even for an old New Yawker the experience is now maddening and terrifying. It's not that we don't have rush-hours; we do--they run from 5:23 to 5:41 every day. We try to avoid them, but the volume of traffic on that stretch of road from the Westchester border to Darien is astounding. Apparently bumper to bumper every day. I simply can't understand how the good folks do it.

Anyway, I expressed my view that having been so close to the endoftheworldasweknowit things didn't seem to have changed all that much. Damn few Fiat Cinque Centos on I-95, not many houses in Darien on therightsideofthehighway for sale under a couple of mil, the hotel was jammed and the shops seemed to be prospering. 'Yeah" said Mike, "things go on."

"We came very close," said I.
"Yeah, said he, "but it's Never, Never."
"Still?"
"Certainly! You didn't think this was going to change anything did you?"
"Rather silly of me I guess."
Not silly, bloody stupid."
"Now Michael..."
"No, I really mean it. Look, even these guys in Washington don't really understand. They're off trying to fix things that don't matter any more. They're trying to fix the car companies because that fixes the Unions and nobody cares. They're trying to fix the banking system and it's changing right in front of them and they can't see it. They're trying to fix health care and nobody wants it fixed because it really isn't broke and nobody understands it anyway. And that's the real problem; nobody cares except those trying to fix all the wrong things."
'Because it's Never, Never."
"Exactly, it's Never, Never."

I've been thinking about that conversation and there's a big element of truth in it. Apparently the pundits are now in full agreement that the greatest financial and economic disaster since the Great Depression lasted a little over 9 months and is now over. The stock market has gained 50% in four months and people are feeling flush again. Some guy at Citibank is about to make $100,000,000 which I guess he needs to keep up the castle in German he bought a few years back and Goldman is making more money than anybody can believe by just being there and having the fastest computers on the street. The Leader and Our Hero along with the rest of the mob are telling us it's all their doing, despite having done essentially nothing of any note and insisting that it would have happened even quicker except for Dubya. Maybe they're right. Remarkably, they keep selling debt on and off the street (and keep making more of it) and no one seems to care. Oh there is the occasional hiccup as when The Leader, sans teleprompter, steps on it but hey, we all do that, don't we? And when Our Hero demolishes The Leader's promise that the middle class(as hereinafter defined) will not have their taxes raised by "One Dime" as he did yesterday. But it seems that our friends, the Chinese, have decided that they are in a bit of a dollar trap after all and may not be prepared to rock the boat for a while, so why worry. A while may be forever. It's Never, Never.

What we are witnessing is truly a remarkable period and the past few months has been without precedent. Can the trend continue? If my friend, Mike, is correct, it will. Because it's Never, Never.

Oh, I guess I should have done this at the start. When credit cards were introduced to England, the conversations went something like this...

"What's that then?"
"It's a credit card"
Wat's it fo'"
"To buy things"
Wha', you don't need money?"
"No."
"Serious?"
"Yes."
"You really don' need money?"
"Right."
"Never?"
"Never."

Got it?