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.

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.