Obama preserving the monopoly that Wall St. has over leverage

August 4, 2009

Its still astonishing that people would rather spend a ton of money to hire people to pour cement than utilizing that money to invest in human capital in an important industry like health care. 2 trillion dollars folks. You can buy out all the best doctors and medical professors with 2 trillion dollars. For all the talk about public/private vehicles to invest in financial ‘toxic assets”, there is no talk at all about a public/private investment in medical schools, practices or anything else. Instead of fronting a few hundred billion dollars to private equity so that they can leverage up their financial returns, why not provide the same cheap financing to anyone or any group that aspires to start a medical school or practice? In exchange for this cheap and non-recourse leverage and a fraction of the equity, the potential practitioner or the medical school den can equally leverage up the returns from the expanded scale of operations and would naturally demand less in return for tuition or other expensive to meet the desired returns. Sadly, our current financial genius in the administration and elsewhere are not capable of conjuring up a plan as simple as this.


Pax Americana…enjoy while it lasts….

April 12, 2009

With the appearance of new classes of nuclear submarines and advanced warships in Hainan, many observers have concluded that China is building up its forces to thwart any attempts by powers to blockade its shipping lanes from the Middle East. The power in question is the United States, whose navy operates freely and with impunity in that part of the world. So it must comes as a shock that it wasn’t an Aegis destroyer but a fleet of low tech Somali pirates that has been constantly harassing Chinese cargo ships near these shipping lanes. If anything, the Chinese have been a beneficiary from the presence of US naval ships in those regions.

One of the biggest beneficiaries of the strength of the US military is China. The focus on potential arenas of conflict between the armed forces of US and China misses the point, because it assigns the probability of conflict too high. While a conflict in the Taiwan could certainly break out in the future and the US navy could stop oil shipments to China, it’s undeniable that China has benefited from the presence of stable regimes in the Gulf states aided by the USG, from which her growing appetite for oil are satiated. Along the same line, it’s possible that growing American presence in South and Central Asia could jeopardize the long term interests of China and Russia, but who can deny that both have benefited tremendously from the relative stability in the nuclear South Asia and the diminished operational capabilities of Islamic fundamentalists in the region? And not to mention that the US has kept the lid closed on the Japanese, Taiwanese, and SK nuke programs.

The importance of these contributions are magnified by the fact that China lacks the power projection capabilities and influence to fully contain any of these situations. Except for direct conflict, China benefits from the world policing mentality of the US. After all, there are a lot of thieves and robbers around the world.

Geithner tries again

March 22, 2009

Geithner’s plan is the biggest condemnation of Mark to market accounting yet, and by association, also a condemnation of government officials and academics who favor M2M accounting. The whole purpose of providing a trillion dollars of financing to private parties steams from the realization that there is not enough capital in the private system, that assets are depressed not due to belief in their true economic value, but due to the lack of capital. Why is that Treasury officials and other academics who are rolling out this financing plan are also the ones who believe in MTM accounting? Truly baffling.

Is O(bat)ma a bird or a mammal?

March 4, 2009

It was announced yesterday that the Term Asset-backed Security Loan Facility will be launched in March. That means the Obama administration will begin providing up to $200 billion of initial financing to financial institutions that would like to hold asset backed securities related mostly to the consumer market on their balance sheets. The plan sounds benign enough, since on paper, it would simply be a reversal of the flow of funding from the private markets to the Treasuries that sparked off tremendous stress in the credit markets ever since Lehman’s collapse. What is terribly misleading is the claim that the entire notional value of the assets will be rated AAA, which is only assigned to the most creditworthy debt instruments. It would only be delusional to assume that the distressed households, where the cash to repay these loans would come from, should be slapped with a trip A rating. There has to be an equity cushion in the loan structure that protects the Triple A tranche of the loan. So who or what is this cushion?

I believe that this equity cushion, or a bad loan provision, whatever you want to call it, is the $20 billion of TARP money assigned to provide credit protection against the asset portfolio. In other words, taxpayer funds from the TARP will take the bullets so that the private equity guys can still get their principal payments for participating in the asset program. If we assume that the $20 billion is only a provision for the first $200 billion of this asset program, then taxpayers could be looking at $100 billion in credit losses if this program expands to $1 trillion like Geithner stated that it might. Triple As indeed.

In the first couple of months in office, Obama has already pledged to forcibly alter mortgage contracts for those who can’t afford the homes that they had speculated on. Everything he has done so far has contributed to a stellar resume as a leftist. So why is this robin hood proposing to use taxpayer money to subsidize   the evil and greedy fund managers’ portfolios? At some point, the bat has to choose sides between the birds and the mammals, or risk abandonment from both camps. Likewise, Obama would be well advised to start picking a mask that he could wear for all next four years.

Not feeling so dilutive today…

February 24, 2009

The preferred/common share swap proposed by Citi to USG should be rightfully labeled as anti-dilutive, rather than dilutive. For one, you can’t really dilute a share that’s posting one penny of dividends per share. Secondly, USG is practically already calling the shots on management and certain loan policies, as outlined by Mr. Pandit’s promise to add $36.5 billion on its books to ease political pressures. More importantly, the measure takes away the government’s priority to Citi’s cash, softening the terms of the government’s loan/investment. Now, I do not expect the government to be holding on to its common shares after Citi restores its financial health, a sentiment expressed by the Fed’s statement today. More likely, I see an offering of government shares to private hands or a buyback at a premium price commensurate with the political demand to make a profit on the taxpayer investment.

This sounds all too benign, but if true, this might be the first step to restoring market confidence, provided that the government communicates its intentions clearly.

And I thought it was illegal to buy votes in the US….

February 18, 2009

Apparently, the Obama administration is going to subsidize $75 billion in mortgage payments to nine million American households in the name of debt relief. So now we now have a government put-option aimed to help speculators in the event that they paid for too much on the speculation and can’t dump it off at a profit. Aside from the fact that the government is encouraging speculative behavior with this outrageous subsidy,  how important are nine million votes (mortgaged for 30 years) in national elections? For the first time in history, we might have a situation where the term on someone’s mortgage isn’t related to a household economic decision but a ploy to keep the allegiance of a group of voters.

Today’s random thought:

February 15, 2009

-The transmission mechanism from the forex market to the real goods market is all messed up. When countries have faced massive capital outflows in the past, they were able to export their way out of the problem thanks in part to weaker currencies. But the countries facing massive outflows today, particularly those in Eastern Europe, carry liabilities denominated in foreign currencies (USD, Euro). To stay solvent and retire their foreign debt means that they won’t have the luxury to lower the price of their exports.