WHAT, ME WORRY?

Inventory report from Chicago came out this morning and the stock market promptly tanked on less than glorious information. Then about 1:30 the dollar hit it's lows for the day and the market turned right around and lept into positive territory. I guess the FX traders were telling the markets that given the inventory number the Fed was probably going to kept its policy of selling money for nothing and the stock guys like free money. Makes sense I guess--not to me but to someone.

There doesn't appear to be any bottom as far as the dollar is concerned and if the is concern among The Leader's gang, I sure can't find any. I keep wondering what effect this is going to have on the major holders of dollars as the reserve currency but so far there appears to be little overt reaction. As of end August, according to Mayor Bloomburg's boys the major holders were (in millions)
China 2.100
Japan 992
Russia 403
India 261
Brazil 219
With the possible exception of Japan (and they just changed governments) among that list I can't really find a real good friend of Uncle Sammy. This continues to make me unhappy especially when there is a growing nexus in the BRIC countries--Brazil, Russia, China, India--that perhaps their interests in the world are not being respected in the manner in which their respective checking account balances should command. An added degree of unrest is created now that The Leader has just granted them oversight via the G-20 of the way we run things around here.

Having said that, my really smart friend, Larry, is still on his "dollar trap" deal with the Chinese arguing for the status quo on the basis that there is no other alternative for the time being. He may still be right but at least he's more in my camp these days in regard to switching dollar investments from straight Treasuries to inflation protected instruments such as TIPS. Larry's an economist and in this case like any economist the thought process is, "assume a back-room deal." Uh-huh. Lawyers and bankers take one look at that assumption and ask, "do you have any idea what effect that would have on all the other investors out there?" Treasury would never sell another straight bond except to the Fed. The fact is fewer and fewer people want to hold out debt given this administration's fiscal posture which leads me (and Larry) to believe that you are going to see a ramping up of independent monetary zones for the RMB and the Euro as well as a growing international pressure on the U.S. to put our house in order which has not yet appeared. Commodities and energy I suspect will become more and more the investment of choice as no other market really has the depth for all the liquidity floating around out there. This too, aint good for Uncle.

Of course, one can never discount a political event coming into play in this very dangerous situation where some many of our rivals (a relative term) hold so much leverage in their dealings with us. It is clear, for example, that China's long term interests in Iran are far different than ours. A short term vs. a long term trade-off in regard to Iran would be a difficult decision for them in my view. I don't like the prospects facing us right now. I'm not at all certain that events may move much quicker than my friend Larry anticipates. One thing we tend to forget from time to time is that we are all playing in the same arena but some of us are playing vastly different games or the same game under vastly different rules. What is logical for us needn't be for anyone else and the building of a democratic consensus is at an extreme disadvantage as opposed to management and governance by fiat. Then again, given the past eight months, maybe The Leader has figured that out.

See you next week.

QUE PASSO, CHE?

Now with Argentina watching us like a hawk, The Leader sallied forth today on the first step of implementing the "Framework for Sustainable and Balanced Growth"--I'm not kidding, that's what he calls it--by announcing he and Ma Belle are off to Copenhagen to bring back the Olympics to Chicago. The fact that half the people in Chicago want no part of the Olympics in 2016 for goodness sakes but seem to be focused on jobs for today and an end to children murdering children in the streets has not swayed the Dynamic Couple. 8-5 neither of them have been to Copenhagen. Oh well...

Anyway, this Framework is going to require the U.S. to borrow less and import less. One assumes that The Leader asked the remaining G-19 what they thought about that import less part but I'm sure in his mind there was little need for that. The reciprocal is that the rest of the world (read, China) is going to export less and focus on internal demand. Riiiight. Last time I looked there are about 1,000,000,000 people in China and only about 3-400,000,000 of them have a day job. Now if 600,000,000 people aren't working it's pretty hard to make goods for people who have no money and if they stay among the mass of the unemployed it's a pretty sure bet that one might experience some domestic unrest before long. Hence, the shift in economic emphasis might be a difficult act to pull off. Indeed, if memory serves (and I'm not yet THAT old) this sermon has been repeated over and over for the last 10 years and we still have sinners. As for the U.S. reducing it's trade deficit, that might be a touch easier but not by much as with the fiscal deficit estimated to increase by 10 TRILLION dollars by 2018 and debt-to-GDP to settle around 100% of GDP (up from 60% IN 2007) one wonders who will have any money to spend on anything except for the fact that we would have to increase our exports and in case you haven't been watching closely dear reader WE DON'T MAKE ANYTHING ANYMORE.

Now Larry Summers may be a lot of things but stupid is not one of them. Summers, The Leader's head economic hummer was at one time the chief economist of the World Bank and surely he has seen this sort of thing before, usually in places to which one didn't travel without a bodyguard. But do we hear a peep from Larry about the nonsense that was being spouted in Pittsburgh last week? Of course not. And was there disagreements or mutterings from any other point on the compass on the rubbish being put forth? Nah. Why, you may ask? Simple, is my answer. Unless you are willing to sail a gun boat up the River Platt nobody gives a damn and nations will continue to act in their own best interest just as they always have since the beginning of time. There was a time when I was willing to believe that this mob showed some promise but after this nonsensical display, I doubt it. Platitudes, nothing but platitudes.

Oddly enough, I received a call this morning from an old friend of mine, a Brit who has managed to do rather well for himself in the foreign service and who actually was in Pittsburgh last week, I think in an official capacity. He stayed over for a bit of a holiday and was making the rounds of old friends.

"Quite a gathering," says I.
"They're all the same, Charlie, they never change."
"What did you think of our guy," says I?
"Oh, we absolutely love him," says he. "An absolute breath of fresh air."
"Really. Still?"
"Absolutely! He's a rock star."
"Well, that's good to hear, I guess," says I.
"Indeed. You have a real winner. Of course, he's a total prat as well."
"Why did I see that coming."
"Because, you're not entirely dumb ol' boy. Never have been."
"Thank you, I suppose."
"Don't mention it."

We'll talk about the dollar tomorrow in what will be a short week. We have a Brit arriving on Thursday.

WHA' HAPPENED?

I guess there was a G-20 meeting in Pittsburgh last week but for the life of me I can't quite figure out what went on if anything.
That isn't a surprise of course, little if anything has been accomplished at any the the predecessors to one of these things when they were called the G-5, the G-8 or the G-14. We are now fulfilling the wishes of The Leader by making all things more inclusive and inviting half the world that has two sous to rub together which of course insures that nothing from this point forward will ever be accomplished. This new mob apparently did agree to peer review of their policies, however, which I guess means that the policies of the U.S. of A will now be subject to the oversight of...Argentina? Makes sense.

On the regulatory front, The Suit apparently laid out his idea for insuring that the financial melt down of last year will never again occur and from what is being reported it seems to all start with increasing bank capital around the world and chucking Basel II. Now that's not a bad idea--it's not particularly a good one but it will probably not do a great deal of harm but it also tacitly recognizes that The Suit and the boys have thrown up their hands on the issue that everyone wishes to address which is TOO BIG TO FAIL (TBTF). So, what these guys have done is to attack the problem that last occurred rather than focusing on the looming dangers ahead of them. More on that at another time. The Euros are reportedly not too happy with the capital approach and what The Suit has missed is the fact that the great populist rant that exists in this country against financial institutions is far more muted in Euroland where finance and the governments have been traditionally far more closely linked and where at least tacit governmental support for financial institutions during difficult periods has always been accepted if not actually acknowledged; take for example the case of the Landesbank network in Germany, half of which has been bust for 20 years and yet survives. We shall not even get into the case of China where if there has ever been a poster child for running a financial sector without tangible capital or net worth, this is it. But, he seems happy and if The Suit is happy, I'm happy.

Then of course is the issue of the incredibly shrinking dollar which apparently received little or no consideration over the course of two or three days. Ah yes, we must all adjust our economies says the communiques and there stands Argentina to assist us with doing just that so I suppose I shouldn't worry too much but somehow I do. My really smart friend Larry has written about this over the weekend so I'm going talk to him before I get off on this but Larry still believes that the Chinese are in a dollar trap. I'm going to ask him if they are in one or have they set one? I'll find out and let you know. Later.

GAZUMPED

Look, I know you're not going to believe this, but so help me it's true. I was working on a follow-up to yesterday's post and had it pretty well worked out when I sat down to read the Wall Street Journal and there it was, right at the top of the op-ed page some damned COLLEGE PROFESSOR for cryin' out loud gazumped me! Now it's not often you find a college professor writing about the real world who has a clue as to what is going on but this guy apparently does. So here's to you Mr. Jeffrey Friedman of the University of Texas for getting it right.

Anyway, I'll be damned if at this late hour I'm going to wing it so here's what I was going to say, cut down a bit because of good ol' Jeff.

Our contributor, Anonymous, pointed out that banks were on both sides of the CDO market both selling the things to market but in many cases holding vast amounts of double rated obligations for their own book. Now one might ask why in heavens name would a bank engage in such a strategy knowing full well that the stuff, like some high-class street skag had been stepped on numerous times having had most of the kick (profit) taken out of it? Well, it really is a function of banks performing the age old task of "maturity transformation" as a central banker friend of mine likes to describe it which in the parlance of we who breath less rarified air call "borrowing short and lending long." Now, if this stuff is 'Triple,Triple" carrying the imprimaturs of both Moody's AND MBIA most normal humans would consider it 99.44% without risk so even if the yield was tiny, free money could be made if one purchased A LOT of the product...without assuming any risk...or so the thinking went.

But wait, it gets better. Remember the Basel Agreement of which I have spoken? Sure you do. Among other things it classified risk and set capital requirements for various types of risk taken by banking institutions. Triple A rated securities under Basel II attracted very little by way of capital whereas the underlying assets--home mortgages --attracted a hell of a lot more. Cowabunga! No risk, no use of capital! Back up the truck and load it up boys! And that's what they did save for a few. In this case those who by every measurement were dead right turned out to be just dead. There are no sure things.

The plane has landed and The Leader is now in Pittsburgh. The game, as the detective would have said, is now afoot. I hope the dear...wait, that's the other guy...The Leader is given Mr Friedman's article to read and dare I hope that a few of my better efforts a slipped in among the pages of the WSJ. The road to you-know-where is paved with good intentions and regulation, unless carefully considered by those who actually know the business and have participated in it usually walks in lock-step. The corollary is the biggest mouths usually have the least knowledge. So here's to you, Mr. Friedman. Hook 'em Horns!

Oh yeah, forgot. Gazumped comes out of the British property business. It's when you bid on a house, have your bid accepted, and just before you close, the seller accepts a higher bid and you are Gazumped. I have no idea of the derivation of the word but one must remember that in many things, Britannia waves the rules...wait, did I get that right?

See you on Monday. By then all will be known.

IN A GALAXY FAR, FAR AWAY

I watched The Leader at the U.N. today along with a couple of other "world leaders." A while back, someone (I really don't know who it was) described a meeting of the General Assembly as the clear inspiration of the bar scene from "Starwars," one of the most hilarious and absurd scenes in the history of film. The Leader did nothing to improve the organization's image. Enough political comment.

A few light years closer, they are gathering in the Steel City for what The Leader today described as the start of a new World Order. Im still going to wait until the Fat Lady sings, but I will bet that all that will come out of this is some general agreement that the way to insure that the great financial collapse will never reoccur is to limit the pay of chief executives, high producers and a whole assortment of risk takers...details to follow. In addition, the call for new guidelines for capital will be shrill. Order relating to anything else will remain for future meetings in venues--if the rest of the world has anything to say about it--more hospitable than Pittsburgh. The funny thing about all this is that even at this late date, none of these guys understands what really happened and why because to make such an effort in self-education would remove all possibility of the populist rant so popular among the politicians at this moment in time. Well, that's probably an overstatement as they aren't quite bright enough to do much else.

The fact of the matter is these guys about whom every one is screaming, are pretty conservative and though they were adopting pretty conservative models to their businesses. Now you say, "but look how high they leveraged themselves!" True, but like Long Term Capital Management 20 years before, given what they believed to be the risk the leverage taken did not appear to be excessive. The vast majority believed--truly believed--that their assessments of risk were conservative and correct. They, the best and the brightest, made for them the worst mistake possible: they were wrong. This was not some grand conspiracy to screw over the American people, this was a colosal mispricing of risk pure and simple. A brilliant exposition of this can be found in a reader's comment to yesterday's post. For the Great Unwashed out there the monolines were the MBIAs of the world. My GI Vietnamese can't get through all of the final comment but it's "Hail" to somebody or thing. Hail to Anonymous for this most instructive effort and thanks.

And so we wait for the great solution to the problem that the formulators have yet understand. But success will be proclaimed I suspect and in time we will have a new generation of financiers operating under a new set of rules only they wont be quite as smart as the old set. Those will have gone off to places were the long arm of regulation and government cannot reach them and some other industry will be better for it. Cui bono? The Pols I suppose. Don't they always?

EARLY THOUGHTS

The Leader was at the U.N. today talking about God knows what but it seemed to have to do with Global Warming. Seems as though we are going to be the world leader in staying the path of the warming planet. Its always good to be the leader of something. It appears according to the New York Times today that the world hasn't gotten any warmer for the past eight years so maybe we are already winning. Of course the Times goes on to explain hat scientists believe that changes in the world's oceans have caused this "temporary" cooling. Although last year the Times told us that the world was warming ever year. Then again the Times...oh hell, I'm confused.

Anyway, did you think about the issue I was wondering about yesterday? I was also wondering about how much those wonderful folks who bought all those CDOs rated Triple-A by those wonderful folks at Moody's, Fitch and S & P got paid as well. You know, these creations were not purchased by little white haired old ladies. They were purchased by funds run by highly paid guys in which little white haired old ladies invested. And I betcha that these guys (and gals...let's be fair) got paid based on the yield provided to the funds through the investments they made. Now what we have to determine is whether these guys and gals got their arms twisted by the buy side people who were creating this stuff irrespective of demand or did they actually create the demand that got the stuff created? And if they were investing for little white haired old ladies or on behalf of YOUR 401K, shouldn't their due diligence have been of a higher standard--like was it too much to ask of them if they had a clue as to what they were buying or was blind reliance on the rating agencies who were mandated by Congress to perform the role not the best idea they ever had or should they have thought about the fact that Fanny and Freddie were geared up a 100 times? Or were they getting paid cash bonuses for investing in instruments whose performance would not be known for years? And if all of this is true why aren't they getting hammered like the banks? If anybody has a clue, call me. One thing you will discover is that their activities, on paper at least, were more closely regulated than those of the banking sector. Can anybody say Bernie Madoff? Regulated? That implies politicians might be involved. Anyway, as the guy on the street corner says, "Check it out."

As you can see, I'm still waiting for the results from Pittsburgh. So far it looks as though The Leader is going to take another shot at world leading despite the fact that he seems to be having a bit of a problem leading at home. I fear that he may well be more successful at financial regulation than in anything else that really counts which means that at the end of the day we could well wind up with a reserve currency that isn't worth very much and banks that don't make very much money. That is if he stops playing Blind Man's Bluff with poor old David Patterson. If he doesn't do that, aint nuthin' gonna happen. Who knows, maybe a Ward Healer from the South Side is what the World needs. We will soon find out

JUST WONDERING

This is going to be quite short. I decided that what with all that was going on this week it would be a bit silly to jump the gun and comment on things that might well have changed my comments...or to put it another way I am determined not to make a fool of myself. Or a bigger fool as the case may be.

Anyway, there is no doubt that the banks are under the gun regulatory-wise and the world is probably going to change a bit. No one wants a repeat of the past 12 months but coming up with the proper formula is the tricky part. Also putting a fence around the likes of Chris Dodd who is clearly a nincompoop at best and a crook at worst is going to be very important. Dodd is now proposing a merger of the four major oversight bodies in to one super oversight agency, now doubt to make it easier for Congress to exercise oversight over that new monstrosity ignoring, among other things, the fact that under a change of government which will almost surely occur, the U.K., our traditional partner and home to the second largest financial market in the world will move in precisely the opposite direction. Caution: Genius at work. Just a random thought.

Now have you ever thought about which came first the chicken or the egg? We all have but did you know that in the finance world there is a question almost as old and just as perplexing: what comes first the product or the market? Or, as bankers like to phrase it, the buy side or the sell side?

We have been spending great deal of time wacking bankers upside the head and with good reason but do half the Great Unwashed out there know which side of this conundrum they are wacking? Betcha they don't. Betcha they don't realize it's the buy side. Any bets? No? Well you see without the people to whom one can sell this ugly stuff that was created, there would have been no problem. Therefore, the question that really should be asked at some point is who created the market?

When I was a young man well back in the last century I was told that before we could (or should) create (buy) product we should have a distribution system into which to sell it. I always wondered what one sold if one had no product but that is the crux of the question, isn't it. Now there is no question that there was some God-awful crap created over the past few years but it was sold to someone who bought it. Now was the demand created by the creators or was it demanded by the buyers? And if the latter, does that throw a whole new light on the issue? And if does, should we also attempt to limit the creation of demand? Just wondering...more tomorrow as we await the great events of the week.

DO YOU THINK...

Was watching CNBC this afternoon. Steve Liesman, the almost economist, was interviewing the deputy head of the IMF. By the way, do you know the deputy head is always an American while the managing director is always a Frenchman? You didn't? Now see what this blog does for you? Anyway, they were talking great thoughts such as global recovery and new financial regulation. Out of no where Liesman asked whether or not there was an issue as to whether greater financial regulation might interfere with global recovery. Indeed replied the deputy head and the politicians and regulators are aware of the risk. Now you don't think...I mean they couldn't ...would they...I mean is there a chance they read the Blog?Then again, maybe it's just a co-incidence. I wonder what these guys get paid for those great thoughts.

Anyway, M. Le President seems to have backed off a bit in his statement that he was prepared to walk out of the G-20 unless the position of La Republique in regard to compensation is adopted. I suspect that in the next week there is going to be a lot of backing off of previously held "firm positions" and "agreements in principal." After all, these are the least principled humans on the face of the earth save perhaps for the Congress of the United States. But in the end, they have an admittedly hard task. It wasn't made any easier by a speech made by paul Volker yesterday on the Left Coast calling for the prohibition of proprietary trading by commercial banks. He also spoke out in favor of the Fed as the regulator for financial institutions, greater leverage restrictions for non-commercial banks--read Goldman Sachs--higher capital requirements and against the sponsorship of hedge funds and private equity firms by commercial banks.

Over 20 years ago, Sen. Bill Bradley, who is a hell of a smart guy and a guy who loved to get out at the head of a parade, sponsored a very hush, hush meeting in Washington brought on by the Latin American financial crisis and the changes needed in bank regulation. All the major players from both an institutional and individual standpoint were present save one exception: your humble blogger who received an invitation from Sen. Bradley himself as a result of a conversation we had some weeks previous. No other banker agreed to show up. My institution thought me to be harmless I guess. I was was seated next to Alan Greenspan the spanking new Head of the Fed (who has terrible halitosis by the by...most unpleasant and uncomfortable) when his predecessor, Tall Paul launched into the very same speech he gave yesterday save for the hedge fund and private equity remarks there being...by God's good grace...none of them in existence at that time. I remember asking Paul why the hell he was singling out the commercial banks for all this new regulation when there were institutions like the Pru doing the same damn thing. Gruffly; "Yeah, yeah, you"re right." "And try to put a fence around them as well, wouldn't that lead someone else--somewhere else--doing the same thing?" says I? "Yeah, you're right," says my hero. I took a deep breath and turned to look at Greenspan. He never moved but stared silently ahead. Nothing came out of that meeting. 23 years ago.

As you know I feel Mr. Volker was bagged by this administration. He is testifying before Congress next week. Volker has always been the ultimate team player. For once, I hope he is not. He may not have been wrong 23 years ago, but undoing what brothers Rubin, Clinton and Bush did just 10 years ago may not be in the cards.

Have a nice weekend.

CROSS-CURRENTS

Gentle Ben proclaimed yesterday that the recession is just about over in a technical sense (whatever that means) and today with upward trending economic numbers the Dow surged ahead by 108 points bringing all the other indexes along with it. The dollar, however, fell to a yearly low against the Euro and a 7 moth low against the Yen causing, in the mind of a lot of experts, gold to roar ahead to $1018 an oz. Commodities, including natural gas which has been so low that my gas bill last month was below $20 (it's a big house as well) were soaring. Sentiment is so bullish that there seems no end to this and the Fed seems firmly locked into a belief that it can maintain the flood of cheap (no cost?) money that many credit to be the salvation of the economy. I guess the theory is that if inflation shows up the Fed has a lot of things it can do to knock it down and the Euros will maintain a historically more conservative monetary stance thereby insuring the dollar/euro exchange rate. And away we go.

My problem with all this is the fundamentals are all messed up. At some point this scenario has to end and if the euphoria we have seen in the past couple of weeks is based on a set of conditions that are impossible to remain in place, what happens when folks start wondering whether this is Nivarna or fairy coo-coo land? A long, long time ago some people were actually believing that the housing boom was real and not a bubble. The answer then was go until the day the music dies and when it does, don't be caught without a chair. This is beginning to look like deja view all over again. At the same time there is a coming convergence of a couple of competing macro conditions that I would just like to touch upon as briefly as I can.

All of this discussion regarding banking regulation cannot be expected, should various idea come to fruition, to result in anything less than a continuing of the tight credit conditions that exist in the market place today. Whilst the results at the money center banks and the newly-created bank holding companies such as Goldman and Morgan Stanley are remarkably good, the result mainly from trading profits and as we have pointed out if you can't make huge amounts in this trading environment you are surly without a beating heart. Remove or begin to limit the Fed's free lunch coupled with increased regulatory oversight and prohibitions profits will surely slip and lending will decrease from today's dedacted levels. Taxes will rise next year, the deficit is heading to the stratosphere. the body politic is at one another's throats. commercial real estate is yet to be dealt with and no one is predicting a dramatic improvement in the employment outlook. Mr. Bernanke is a hell of a lot smarter guy than I am, but it just seem to me that there are a lot of conflicting parts to the present state of our economy that just may run into each other at precisely the wrong time with no one in a place of omniscience capable of directing traffic. I hope I'm wrong. Back tomorrow with more on the regulatory issues...promise.

PROMISES KEPT

Barney Frank was interviewed on CNBC yesterday. Standard political stuff. This was all due to the lack of regulation, unconcern, the other guy's fault, blah, blah blah. But at the end of the interview he dropped a real bomb.The subject of the rating agencies came up and he said he was well aware that they had not performed well which had a great deal to do with the making of the crisis and one could well be sure that he was going to undo the regulations surrounding them. There was no follow-up to that stunner and not a word has been said regarding the single most definitive state made all of yesterday and one, if fulfilled (and if I heard correctly) could have the most immediate and far reaching effects on the financial business as we know it.

The agencies in question, primarily Moody's and Standard and Poors have a unique status in the financial world. By Congressional mandate, they are the only institutions allowed to issue value judgements as to the credit worthiness of debt issued in the public markets. When one hears the terms, "Triple A" or, Double B" this refers to the judgement made by these agencies as to a particular issue of debt. Keep in mind that the rating does not refer to the issuer but only to the rating on a particular piece of an issuer's debt. An issuer may have debt outstanding with different ratings; for example debt guaranteed by the U.S. Government or backed by collateral rated triple A will be rated triple A whilst a unsecured piece of debt from the same issuer may be rated well below triple A. Why is this important? Well, the rating is an assessment of risk and the lower the perceived risk, the lower the cost is to the issuer. Almost as important is the breath of the market for a particular issue as many investors are limited by law, statute, by-laws or internal investment guidelines as to how far down the risk matrix they may invest. Therefore, both the cost and the liquidity of a particular issue are greatly affected by the assigned rating.

Why, one may ask does an investor need rely on a rating agency? The answer is a part realistic and a part cynical. In some case a rating is require as explained above, but there is also a practical--and cynical--answer. Investors farm out the business of risk assessment because they have neither the time, personnel or, quite frankly, the inclination to do the job themselves. An investor is a yield whore: if he can find an appropriately rated risk at 5 basis points higher than the next guy, he gets the bonus. An investor seeks yield and leaves the assessment of risk to somebody else.

One can therefore easily understand what went wrong over the past few years. Investors blindly purchased all forms of highly rated debt instruments yielding slight better that comparatively rated instruments relying entirely on the assessment of the rating agencies. World-wide liquidity demanded more and greater opportunities for investment and these "structured financings" were churned out a record pace. It should have been clear that the sheer volume of issues had to raise questions regarding the ability of the rating agencies to do their job properly, but it did not. What resulted was a massive mispricing of risk that led to the debacle we have witnessed, or to put it another way, the rating agencies screwed up big time. There is far more that can be said but that is of no purpose.

Now, what did our boy Barney mean when he said he's going to overturn the legislation which grants this unique position to the rating agencies? To end their monopoly would be a good thing but politicians really love monopolies as long as they can control them. Did Charlie mean that they would be subject to massive government oversight in the future? Did he mean that their method of remuneration was to be changed from the rather quaint and ridiculous policy of having the issuer pay for the rating (no conflict there) to a concept of that the issuer pays (don't ask me how that works)? Does he mean to scrap the practice altogether which would throw a spanner into the works of the debt market of unimaginable size? Will the government mandate and delineate the guidelines and prerequisites ("In order for an issue to be rated Triple-A, cash flow must be...") for the obtaining of a sought-for rating? I sure wish somebody would ask Barney just what he meant cause this is not a little thing on the way to salvation. This affects trillions of dollars of debt issuance now and in the future.

THE SOUND OF SILENCE

The Leader appeared in New York today on the sight of Washington's farewell address to the nation. He spoke to the leaders of the financial community as to the future and to the plans his administration has for its continued success. From one in attendance there was a smattering of applause regarding the need for a consumer regulator and for the rest of the address, the sound of silence...stony silence. I listened to the speech or lecture, which might be a better word, and began to realize that the silence that greeted The Leader was not as a result of what he said for as usual there was absolutely nothing but vague generalities but the dawning understanding that this guy really didn't know of what he was speaking. More and more when forced to deal in specifics he is a reader of words fed into the teleprompter from some unknown source without and understanding or a care as to what is being said. One wonders if this guy is in fact The Leader or is he the spokesman for a greater force.

How in heavens name can he announce that Barney Frank and Chris will have, by the end of the year legislation in place that will prevent another financial melt-down when everyone in the room knows full well that Messrs. Frank and Dodd were the key players, ON MULTIPLE OCCASIONS in the prevention of legislation that sought to rein in the madness that went on at Fanny and Freddie which will probably cost the American taxpayers a trillion dollars before all of this is over. How can he suggest that Sen. Dodd, receipient of sweetheart loans from Countrywide for which he may well lose his seat next November, be in any position to have the moral authority to captain this legislation? The mind boggles. And yet he lectured on, displaying a complete non-understanding of the complexity of the world-wide financial establishment whose agreement in our plans shall be shepherded to conclusion by The Suit. "We're going to solve the systemic risk problem," as if he or anyone else has a definition of systemic risk any better than the throw-away line I have used over the last few weeks. Derivatives, those awful things? Yeah, we're going to solve that problem too. Uh huh. Compensation? We'll straighten that out. Capital? We're going to require more as though that will do any good. How much more? Hell, I thought the Basel accords solved that some time back? But The Suit is going to get that all straightened out in Pittsburgh in the G-20 meeting The Leader will chair.

While all of this was going on he proudly announced that it was because of his love for free markets that he slapped a 33% tariff on the Chinese for tires. Ah, Mr. Leader, we know you have to act up for your union buddies, but let's keep in mind that we owe these guys 2 trillion with maturities that are getting shorter and shorter. I know my friend Larry says they are in a dollar trap but they have constituents as well and in the context of their political system, there are IOUs that come due. Another thing that you should keep in mind Mr. Leader is that our importance in their neck of the woods aint what it used to be. Do not expect the universal support we once enjoyed there or anywhere else. Not once today did you mention the enormous fiscal mess we are in other than to blame it on the previous administration. No one outside of your constituency cares or is listening. What is needed is a plan for the future--especially abroad. Arranging deck chairs on the Ship of State is not the solution for which many good folks here and abroad are looking.

A bit of a rant I realize but a final note i I think is in order. Do you, like me, smirk at the obvious stage managing and imputed symbolism in all of these addresses to the Nation? Come to New York. Where do I speak? Why, where Washington once spoke. Perfect! Comparisons will certainly be made. Arguably, our greatest, or certainly one of our greatest Presidents was ol' George. The people will get it. Yes they will Mr. Axelrod except like Hamlet the comment might be, "Such a falling-off there were."

I'll try to stick to the facts regarding what the future might hold for our financial institutions for the rest of the week. By the way, hope you caught college football on Saturday. Great stuff.

NNAME CHANGE

I was going to simply comment on The Leader's speech yesterday but decided to wait and tie it all up in a nice bow with the comments of Our Hero in the town hall meeting on CNBC with the fetching Erin. So I watched and in the space of the first 20 minutes, Our Hero managed to give five answers to four questioned asked none of which were responsive. Indeed, his answered were pre-packaged to questions he had seemingly asked himself..."Self, what do you think..." Well, Self I'm sure..." And I'm sitting there saying to myself, "Self, THIS is the Secretary of the Treasury of the United States?"

Among those answers to questions never asked was his admission that he never had a real job; that he had been in the public sector all his life. He seemed proud of it, and I'm saying to myself, "Self, of course he hasn't. The guy's a suit. Put him among those who he supposed to be regulating and without the regulatory clout and weight of the position this guy is lunch in a New York Minute." Self agreed by the way. If there was ever any doubt that we have is a, "Yes sir, yes sir, three bags full sir," and "How high am I supposed to jump Messrs. Emmanuel and Summers, sirs?" that was dispelled the other evening. On top of it all he was snide while trying to be funny, arrogant while attempting to appear in control and evasive where clarity was needed. In short, the perfect public sector suit. And so, from this day forward let the word go forth that Our Hero has become.....THE SUIT.

As for The Leader, as my late friend Jimmy would have said, "Nothing of importance was discussed (that we hadn't heard before)."' I know, I know I promised not to be political, but one has to ask, "Where do we get such men?"

And the beat goes on. Gold closed above $1000 today; the ten year slipped down to around 3.25% in yield; the dollar is slipping into oblivion and not a soul appears to really care or understand what's happening. Maybe that's why they don't care. I mean, after all, if the geniuses around the globe don't care that the world's reserve currency has no value, why should we? The Chinese continue to invest in it (having no place else to go, or so we are told) projective deficits are at levels heretofor unimagined with no concrete plan to reduce them other than placing faith in The Suit who assured us last night that they will be reduced along with the assurances that the mostly unspent stimulus package created or saved 1,000,000 jobs. Right. At least my short term future is looking up. Michigan/Notre Dame followed by OSU/USC tomorrow on the Tube. You know where to find me...if the beer holds out.



Today is a tough one. I lost my Mom many years ago and a lot of friends a few years back. 9/11 is a date which is impossible for me to forget. Rest in peace.

WAS SOMEONE READING?

Right on cue, the Chinese began chattering again about the dollar. Must have been reading the blog for they answered the question about gold as well. They appear not to like the direction of our currency, complained about fiscal policy and announced that they are buyers of gold which they will do carefully so as not to upset the price. Can the phrase, "A Peking Put" be far behind? As expected, the dollar continued to meander downward, oil and other commodities creeped upward and interest rates remained in place as the latest economic report--the Fed "Beige Book," was appropriately beige in its outlook. I'm going to ask my smart buddy Larry what this is all about but he'll probably tell me the Chinese are just making a bit of noise and are still caught in the dollar trap about which we have spoken. I wonder. While all of this was going on then went off and borrowed a bunch of SDRs from the IMF which they need about as much as Carter needs more pills.

While all of this international intrigue was going on, the G-20 mob was back from Basel tutting and putting about not having to worry because new, tough, regulations were just around the corner, echoed by Barney Frank who assured the American people on TV this afternoon in a conversation with the fetching Ms. Burnett that HE hadn't forgotten about new regs either. I'll sleep better tonight. In the mean time, the big banks must be just coining it in their trading rooms with the dollar showing one way traffic in an FX sense whilst at the same time becoming the new "carry trade currency" replacing the Yen in that role. Now what's the carry trade you ask? Well, simple. You simply borrow a gazillion in a currency with a low interest rate and invest it in a currency with a slightly higher interest rate. Or to put it another way, Goldman Sachs goes to their friends at the Fed in N.Y. and says, "I'd like to have a gazillion dollars at no interest, please" (they are always the gents), exchanges it into Euros, and buys Bunds at 3% or so. So here they are with a 3% positive "carry" but what makes it even better is that they are about as sure as they can be that with the fiscal and monetary policy we have in place at this time there aint no way they are going to see the Euro lose value against the buck. In fact, in addition to the interest carry, they will probably make a profit on the FX or if they are not risk takers (HA!), they can hedge the thing forever. What a country! And everybody is doing it. Not just our guys. Deutsche Bank doesn't even have an FX risk on the other end. Meanwhile, down on the farm, the local commercial real estate biz aint so good. Unfortunately, there isn't a simple answer or any way to make it "fair." Of course, at the end of the year a lot of money is going to be paid out in bonuses to folks whose magic trick was to maintain a beating heart. I think I'll go make myself a drink.

WE'RE BAAAAACK!

Marvelous time wandering around the East Coast seeing family, friends and especially grandchildren. Woke up in northern Virginia on the morning of August 31 and the temperature was 52 degrees fahrenheit. 52! In August! I thought Al Gore had died. It was lovely.

Many, MANY years ago we were negotiating a particularly unpleasant piece of financing with a company whose CEO was on the board of my institution. Representing the other side was a high powered and high priced counsel from the firm of Pillsbury Madison & Sutro of San Francisco. The good guys put forward James Marshall Esq. of White & Case. Jimmy was a 6th generation lay-yer from Virginia; 6th removed that is from Chief Justice James Marshall of that court in D.C. From the git-go Jimmy had little time for the head hummer from Pillsbury and made his dislike clear. In the midst of an oration from said head-hummer, I had to leave to take a phone call which I announced shouldn't take more than 5 minutes. 45 minutes later I returned to an ice-cold room at what was, apparently, the exact moment of conclusion of the oration, apologizing at great length for my absence. "That's all right Charlie," said Jimmy, "in your absence, nothing of importance was discussed." Little was accomplished that day.

Jimmy is long gone but it seems that his observation would be appropriate today. In my absence, the ridiculous "cash for clunkers" program has ended, the health debate goes on, political change promised by The Leader is no where in sight and on the financial front nothing of importance has been discussed. Well, that may not be true as all of the financial head hummers from the G-20 are now winging their way home from the BIS in Basel where great matters of state were discussed.

I can remember clearly the Basel II accords which were designed to prevent a reoccurrence of the financial melt-down of the early eighties through new requirements for Tier I capital and alike. I expect we shall over the next few weeks hear more of the same coupled with the regulation of morality in the form of pay limits, bonus limits, gearling limits yada, yada, yada which of course in the long run will do no good whatsoever in the real world. Wonderful theater, however, but as this economy goes nowhere fast, unemployment advances inexorably towards 10% and a new election year just over three months away may well be overtaken by the reality of how The Leader and his congressional mob are going to hold their majorities in the face of a very European-like recovery. Which leads me to wonder why gold broke $1000 today in the face of no inflation and stable interest rates, the dollar tanked in the morning and oil spiked above $71? Who's afraid of what and where does one hide? And yet, the stock market marched on up 56 at the close and the general feeling is overseas economies are on their way up. Back to School sales seem to have been above expectations and credit card losses are declining. Maybe we are out of this thing. And maybe I should go visit the family some more. It's nice to be back, however.