BEWILDERED

I have no idea what happened. Thursday's edition was written, posted--I thought--and disappeared. I don't even have a copy of it. It's just...GONE. Unfortunately, I didn't notice it's absence until yesterday which is really inexcusable. It was all about the IMF meeting and what didn't happen as well as the total capitulation of The Suit in line with The Leader's view that the whole world is one. We are now to allow the IMF the privilege of explaining to us when we have a bubble at what we are to do about it, so silly us do not repeat the mistakes of the past. I wont try to repeat the post but simply raise the question that if the good folks on Cn Avenue miss the timing a tad bit, who's there to clean up the mess? The Suit hadn't figured that one out yet at the time of (mis) posting, but I guess one is to assume that with the IMF standing guard, that issue will never arise. Oh, our girl Shelia Bair was blabbering all over Europe which we pointed out. More on her today.

I also mentioned that Mr. Bernanke a week or so ago had rolled over and exposed his throat to Barnie Frank and Frank's committee. Seemingly, Mr. Bernanke has agreed to a mismash of central regulation containing all of the present regulatory bodies that would clearly fall under the control of Congress and by definition, become a politically responsive body. Now it is in the area of monetary policy in which the Fed is supposedly independent but from this point on can anyone say with any conviction that that independence has a prayer for survival? I think not. In attempt to save his organization (and himself?) from Congressional wrath, Mr. Bernanke has delivered himself and his organizations into the hands of the Philistines. Ok, say you, what's the big deal? Let's take a look at Citigroup for a clearer understanding of the tragedy of this move.

Now those of you who have been with me for a while no I do not have a lot of time for the afor-mentioned Ms. Bair. Ms Bair sits astride the FDIC which really has one role in life and that is to guard depositors in commercial banks and close down institutions which are deemed to have failed. The FDIC does this quite well and has for years, but quite frankly it has no ability to monitor the well-being of the banking system as a whole due to a lack of funds and personnel. Indeed, the FDIC uses contract help in performing the two primary tasks to which it has been assigned. Nevertheless, deep into the negotiations between Citi and Wachovia in which it was agreed that Wachovia would merge with Citi it was our girl, under the guise of protecting the depositors, who APPROACHED WELLS FARGO AND ADVISED WELLS HOW TO SCUTTLE THE CITI DEAL IN A MANNER THAT PROVED TO BE SUCCESSFUL. Why? Quite frankly no one really knows except that it IS known that Ms. Bair has a...ah, the term cannot be used in a family blog...for Citi's management. Except for the critical circumstances of the time, she should have been fired for her actions. She was not. Now of course the lawyering for Citi in this deal was appalling but when one has the Fed and the Treasury brokering the transaction a small excuse can be made for not believing that the very junior partner in the triumvirate would go off the reservation. Consider this: at the time Citi's major weakness was funding. Despite it's size Citi buys its deposits, it does not have a large domestic deposit base. Wachaovia does (or did) and therefore it was an excellent fit. Ms. Bair's claim that she was protecting the depositors is utter nonsense as if there was ever a situation "too big to fail," this was it. Remember my friend Jimmy? Where it comes to the evaluation of the health of our financial system and the maintenance of the same, you want ONE S.O.B running the show not a grab-bag of individual operatives with individual agendas. It is a catastrophe in the making particularly when they do not all have the capacity to accomplish the mission. Ms. Bair played her political cards well and laid the groundwork for all sorts of meddling in the future. Unfortunately, Mr. Bernanke has thrown in the towel. It's open season for every windbag with a microphone.

By the way, dear reader, keep in mind you have a pretty big stake in Citi as a taxpayer. Guess what also happened last week? Remember Citi's commodity trader who was owed $100 million? Well, that problem got solved. The administration's pay czar obviously couldn't allow that payment to be made from a political standpoint but it became more and more apparent that legally, the government hadn't a leg to stand on. The money was contractually due. So what did The Leader & Co. do? They pressured Citi into selling the entire unit to Phibro, a private trading house. Well, that's not quite correct; they pressured Citi into giving it away. The most profitable unit was reportedly sold for the value of it's assets--a ridiculous price--to solve a political problem. And screw the shareholder and taxpayers in the process. Be happy with your government as your regulator. From the gang that brought you Fanny and Freddy (and are about to bring you the FHA) they now have it all. What a country.

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.

HE SPRANG TO HIS SADDLE...

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

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

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

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

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