ABOVE THE FOLD

The positioning of a news story is usually a good indicator as to its importance. With respect to the New York Time"Above The Fold" always indicated that the story was important(the paper being folded in the middle for newsstand presentation). less known is what the positioning as to the right or left above the fold means with everybody knowing that right column, above the fold is reserved for THE story of the day...but the left? Ah, that's an important story but over the years regular readers have figured out that the Times didn't have to work quite as hard for that one. That position is usual a spot for an important leak; a tale the pols want run up the flag pole to see who salutes. So it was today.

The Times released a story indicating that the administration had reached the decision that it would be the Treasury that would be the overseer of systemic risk...or something like that. What was suggested that the Secretary of the Treasury would chair the effort with the Chairman of the Federal Reserve serving as vice-chair. What that means of course is anybody's guess but that's about as far as the discussion got. Interesting enough, what was NOT said was that there was broad, general agreement to this policy decision either within the administration or within Congress...or at least that's the way I read it.

Now we all know that Helicopter Ben had pretty much caved on everything to insure his re-confirmation but what is less widely know is that there has been a hell of a push-back not only in the D.C. Fed but in the reserve banks as well. And rightfully so I might add. On top of this it is the systemic risk issue that has gotten everyone's knickers in a twist around the world (although no one has a better handle on what they are talking about than we do) but that is coupled with a concern that Uncle hasn't really gotten its act together especially on the political level. Nobody wants to deal with this Treasury which is generally considered to be disorganized and in some areas quite inept. On a issue such as this where a full and in depth understanding of all things international, not the least of which is the payments system, few consider the Treasury to be the peer of the Fed. But as is becoming more and more clear, everything in this administration is political and to a great extent everything is being run by the policy boys who in matters such as this are precisely the people you DON'T want running things.

I've said before that I haven't a clue what is a systemic risk institution except that it undoubtably one that is BIG in size and BIG in functions. It is one that is too big to fail but as Volker the Great has put it if you're too big to fail, you're too big. Consequently, at some point somebody is going to come to reach the startling conclusion that everybody is talking in circles and the answer is not in the appointment of some mess of poor schnooks who are given all the responsibility but none of the authority to prevent what is probably unpreventable by those not endowed with the foresight and wisdom of the Deity and to focus more clearly on governance of the institutions themselves for as much as we may hate to admit it I suspect we have reached to point--for a variety of reasons--where regulation and regulatory infrastructure have reached their limits. More on that in the days to come.

CHANGE OF PLANS

No C. Fred today. Today was simply too bizarre to let slip by without comment

The day started slowly with the stock market in a bit of a funk primarily over the reports of monetary tightening in China. The, right on the dot for a change at 11:40 came The Leader, flanked on one side by Paul Volker and on the other by Bumbles Biden who rumor has to be the Vice President. The topic was the banks but rather than talk of taxes which everyone expected came this rambling, almost incoherent attack in the most populist of language culminating in the announcement that banks would no longer be able to trade for their own account (I think), have hedge funds (I think) use their deposits (I think) plus a whole bunch of other stuff...then exit stage left. The market, especially for financial shares tanked as The Leader was speaking. Even the talking heads, who are never at a loss for words didn't know what to make of it.

That wasn't bad enough. Two hours later, Barney Frank popped up to say that yeah, he supported what The Leader said, but it wasn't about to happen except on Barney's timetable which was 3-5 years. The market recovered for a brief period then really tanked as everyone seemed to realize that nobody knew what the hell was going on.

I'm exaggerating for effect of course and what everyone meant will come out in the clear tomorrow but I'd like to make a couple of points apart from the actual meaning of the two statements today.

1. What the hell The Leader is doing with a show like this with confidence in his administration a a low ebb and having just gotten his butt kicked in Mass is beyond me.

2. That Barney Frank can feel confident enough to stand up and in effect say I don't care what The Leader says, this is happening on my watch in my time frame tells me The Leader aint got much for street creds.

3. On every international initiative up to this point, The Leader has been essentially ignored. After this week we could be looking at the greatest collapse of American influence since the War of 1812 . If Barney feels he can tell the leader of his party to mind his own business, Foggy Bottom has a problem.

4. The Suit was nowhere to be found in all this. Methinks The Suit is toast.

5. Business confidence in this mob is slipping fast. We could be in deep do-do by mid year.

C. Fred tomorrow unless this tale has legs

...AND THE WORLD TURNED UPSIDE DOWN

...which is what the band of the British army played at Yorktown when it surrendered and indeed, in so doing, did change the world forever. By the by, the wonderful painting of Cornwallis surrendering to Washington is a nonsense, did you know that? Cornwallis refused to surrender to ol' Georgie, demanding that a French General receive his sword. The admirable Frenchman said "Non," and the surrender was accomplished by lower ranking officers. Lord Cornwallis was a slug and an idiot of a military tactician but stood a good deal higher on the food chain than Chris the Crook whose announcement of yesterday will certainly not change the world but sure as heck will bugger up finance regulatory matters for a bit.

Speculation as to why he took this step in rampant but to me it is clear that he was about to get his brains beat in electorally and either decided or was strongly urged to retire with whatever grace he had left from the field. Like Cornwallis he placed himself in an totally untenable position and chose surrender rather than defeat. What next? Well, if true to form in about a year he will resurface in D.C. as some kind of K Street maven working both sides of the political street for the finance industry. Given that, one can be fairly certain that the complete populist positions he had been staking out in regard to his proposed "financial reform" are about to get rethought because folks you've just screwed are not likely to dole out a couple of hundred large a year later.

Oddly, this is not a bad thing and a rather good way for it to occur as bringing some sanity back into the discussion and getting rid of this guy is a twofer devoutly to be wished. It might also allow some saner voices to be heard--such as that of Paul Volker--who's continued mantra of the return of Glass-Steagle in some form might gain some traction. If at least the insane one regulator idea through the creation of another massive oversight governmental group employing thousands of new union members who know not a damn thing about their responsibility gets killed, the world will be a better place. If you think I overstate the case, allow me to refer you to Dec. 24 in the skies over Detroit. But now of course The Leader is going to fix that little hiccup so we can all rest easy. Heard him today; I was involved a bit in Intel work in an earlier life. This is another thing about which he hasn't a clue, but I digress.

There is actually a chance that both sides of the aisle get together and talk about this thing as Lame Duck Chris is no longer capable of ramming any totally partisan bill through even if he had the notion to so do. God knows where that might lead as a new approach to things? A functioning government? In Congress? Who would have thunk it! Ah, isn't high finance a wonderful thing!! As Mr. Blankfein put it, "We are doing the Lord's business." Yeah.

DOWN THe RABBIT HOLE

A couple of journeys are underway that probably should have a GPS attached before they go any further.

Bernie Sanders, Senator of Vermont, an avowed socialist and therefore a man to be recognized for at least being honest, has proposed a two page bill giving someone--forgive me, I'm not quite sure who--the proposed authority to close down or break up a financial institution deemed too big to fail (TBTF). The great thing about Bernie is he is right up front; no nonsense, no hidden agendas, no subterfuge. Bernie wants financial institutions either nationalized or tightly controlled by the government to the extent of de facto nationalization...the big ones that is. Bernie's argument is that his idea gets rid of the TBTF risk. Sure would. Bernie is the Mad Hatter in our little adventure, understanding little but expressing much. Sort of sets all notions of corporate governance and regulatory affairs back a notch, eh? Some clown wakes up one morning and says, "Think I'll shut down Goldman Sachs today, wonder how that might affect their debtors and creditors?" Counterparty risk? Don't give it a thought. Continuing obligations? Who cares. Shareholders? Win some, lose some. To guys like Bernie, the chance to play God is really appealing.

The other road down the hole is presently being explored by our good buddies, the Euros. Their immediate solution to things they don't like is to tax them--hopefully, out of existence. They are proposing that certainly banking activities they don't like be taxed. Quite remarkably, The Suit has expressed his displeasure. Could it be, unlike the Euros, The Suit hasn't realized that his boss desperately needs every source of revenue under the sun and here's another way to get some more from the bad guys in our little tea party? The Euros figured out this approach a long time ago. Of course if the business is worth doing it will get done; a tax only raises the cost of the doing and that of course is ultimately paid by the client. But perhaps I am too harsh. Perhaps The Suit recognizes that this really isn't such a good idea.

Anyway, as madness goes to the fore, the name and looming presence of Paul Volker has reappeared. The Leader has figured out that if he were to put all the credibility attached to his band of merry men in a basket, it wouldn't amount to a bucket of spit next to that of Volker. Re-enter Paul after being badly used by this mob at the start of the year. I hope the grand old man has learned his lesson but then again, no one is more correct in the approach to TBTF than he and if what comes out of this is a return to the future through a re-examination of the merits of Glass-Stegle considerable good will have been done. However, I am completely distrustful of this administration and I fear that he is back only once more to be used as a frontace to their designs. Then again, I've been wrong before...at least once.

There is a common theme emerging throughout all this and that is one of complete and total control of all things this bunch touches. It is still a bit too soon to see how this works out and much has yet to occur. I think I might wait and see but in the mean time I'm going to wax a bit philosophical over the next few days with some more random thoughts. A friend has asked for a couple of ideas as to what is on the horizon and I think I may just do that here. I'm beginning to like this God-like role. Maybe there's more commonality between Bernie and me than I realize. Scary, eh?

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.

THE BUNNY TRAIL

Back from a wonderful Easter weekend with all of the grandkids. If you think dealing with the financial crisis is hard, try dealing with 2 year old triplets produced by son #2 and bride. It's like herding cats. How those two do it I have no idea but The Leader and Our Hero should give them a call for some advice. It will undoubtedly be better than some they have been receiving.

When we last visited the state of play, Wells Fargo had just released spectacular earnings as predicted by your humble scribe (see: "He sprang to his saddle..." March 11) Today, Goldman Sachs "beat the street" with a reported net of $1.8 billion. That's a lot of money for a firm reportedly in dire straits just a few short months ago. I'm willing to admit Goldman is good...better that most probably...but I still find it difficult to figure out how they manage to pull off coups such as that today where they successfully issued 5 million shares of common at $123 a share which and then watch it crash to $113 at the close. The $1.8 billion came almost exclusively from trading, and fixed income trading if one believes the release (there is no reason not to) but that is a hell of a lot of profit from a business with razor thin margins. Before September last, Goldie was an investment bank with gearing applicable to their position in the business.; read HIGH. Today, they are a commercial bank with gearing supposedly governed by the Basel Rules and monitored by the Fed. Forgive me, I love the number, but $1.8 Bil out of one facet of the business leads me to believe that the balance sheet mid-month was a Tad bit larger than one might expect it to be for a good, commercial bank leverage-wise. But it is what it is and there is $6.5 Billion more in tier one capital and a real headache for Our Hero.

Goldman has wasted no time in letting it be known that Plan A is repay the TARP money as soon as possible so that they can get beck to paying themselves obscene amounts of money unhampered by the silly thoughts of The Leader and and those of the dimmest of legislators. With a new injection of capital and bright prospects for the future (at least in their minds) they seem to have a strong argument. Although one might think that the return of taxpayer's dollars, the evidence of the ability to attract permanent capital at remarkable levels and the hope of a bright tomorrow fulfills all that the Administration has been asking for, there seems to be more than a bit of hesitation of its part. Mind you, there is still the sticky question of how does one price the warrants that the Government holds and would be forced to cash if the TARP funds are to be repaid (raising the specter of how does one price Our Hero's plan in general), but surely this can be worked out? Could it be, one asks, that the Administration has a bit more on its mind than a mere "tiding over" of the financial sector until a better day, and that the implied control that TARP and Our Hero's plan is at least as important? The implications of this position, long whispered in the press and on the Street, are perhaps being focused far too quickly for the Administration's liking as a result of the surprising strength of a portion, at least, of the financial sector. A plethora of good results over the next few weeks in, once again, a wonderful banking environment may well focus this issue and none too soon.

A bit of a sad note. last week, the Wall Street Journal carried a story about the absence of Paul Volcker from the public view despite his highly publicized joining of the Administration's financial team, his appointment as Chair of an advisory commission and the very public promise by The Leader that Mr. Volcker would have an important role to play going forward. Now some of you might have gotten the impression that I am not entirely happy with some of the positions taken by this Administration but this was not one of them. Paul Volcker is one of the giants (no pun intended this time) in the financial sector and his presence and learned counsel is needed and would be most welcome. Unfortunately, he did nothing to dispel the implications in the article that he is being...ah, underutilized. This is more than unfortunate and one would hope would be reversed. If not, one can only come to the view that in the twilight of a distinguished career of public service, a very fine man was used quite shamelessly to lend credibility to an otherwise less than ready group. I hope I am wrong, but I fear that I am not.