Swiss Secrecy Subtly Subdued

How do you say "drop a dime" in French? Ok then, how about in German?

Looks like UBS struck a deal with US authorities that includes (1) payment to Uncle Sam for his troubles ($780 million) and (2) disclosure of private info on American clients who thought they were just out of the Tax Man’s reach.  And then they’re going to close the offshore accounts of their American clientele, you know, for shits & giggles.

This raises such a lot of operatic questions -  is the fat lady belting out her final aria and is she nearing the last note that signals the end of a banking era being the two most heard in these parts.  Such drastic, far reaching moves by UBS has undoubtedly raised the specter that the traditional role of Swiss banking as a haven for those chasing financial anonymity may not be long for this world.

It’s easy for me to sit here and say “good riddance” because I don’t have the kind of funds that would make a non-interest bearing account in the middle of Europe an attractive proposition.  Were I on the other side of the table as a full-fledged member of the financial patricians, my feelings might not be so plebeian.

But I’m not, so they are.

Plus, and this to me is the really important part, it sets a precedent for The Hague to go after the funds accumulated by all the corrupt Third World rulers (and some in the First and Second, too) who have stashed their ill-gotten gains in Swiss accounts while simultaneously giving their people the finger.

I, Hambricscurvus Maximus say: “Let The Games Begin!!!!!!!!  Release the Lions!!!!!”

Gimme More, Timmy, Or I’m Outtie!

How tired are you of listening to shills and mouthpieces for the status quo in executive pay for finance industry welfare kings?

This morning on Bloomberg TV, there was another one being interviewed about the new restrictions attached to the stimulus bill set to be signed into law later today in Denver by President Obama. I’m sure you’ve heard the reasoning against restricting the top pay in those businesses receiving financial assistance from the federal government.

The argument I’m hearing that grates the most is the threat that those in charge of these sinking ships being thrown tax-payer funded life savers will leave due to the new caps on top salaries. When will an interviewer follow up this statement with the simple question: “Where will they go?” Really, it’s hard to understand how that question doesn’t just flow out with an air of incredulity. It’s like watching some guy bluff in a game of 5 card draw when he’s only holding 2 cards. Makes you wonder if he really understands how the game is played, or if he knows that WE understand the rules of the game.

The next shill who voices those words really needs to be called to expand on this theory of brain drain. The only game left in town, so to speak, is Shanghai, where Wall Street bankers are being hired, but that’s probably so that down the road, when the global economy is recovering, the Chinese banks can swoop into New York with teams of experienced professionals ready to take control. Or at least, that’s one theory I heard. Otherwise, all this talk about offending the delicate financial sensibilities of the finance industry’s eliteis all just so Dubai.

The Real Source of High Gas Prices

The following is a paper I wrote a few months ago to respond to the question what should the federal government do about the skyrocketing price of oil & gas. I’m pasting this now, because of tonight’s 60 Minutes report.

In recent months, the price of gasoline has set record after record on its seemingly unending upward surge.  The jump in price has ignited a debate in the US as people seek to understand why the price of gasoline is high and rising, and to determine what policy prescriptions are available to bring it back down to Earth.  The most popular explanations for rising prices have focused on the standard economic relation of gasoline’s supply and demand curves, the US dollar’s weakening performance against other major currencies and the impact on prices of speculation in the futures markets.  Logic and anecdotal evidence tends to support the argument that US demand for gasoline, in the face of apparent supply constraints, have led to a series of upward shits in the supply curve, resulting in the rising price per gallon.  The rising price of gasoline is further exacerbated (from the consumer’s perspective) by the oil companies’ firm grip on pricing power, as one would expect from an oligopolistic industry, and the widespread lack of viable alternatives. The result is a commodity with inelastic demand and consumers best described as price-takers.  Yet a closer look at the events revels the current price of gasoline may be due to increased speculation outside of government oversight.

In May 2008, the nationwide average price of gasoline stood at $3.60 per gallon, climbing above $4.00 by mid-June 2008.   John Moroney, an economics professor  at Texas A&M, asserts that supply constraints are at the heart of soaring gas prices, citing production declines in Mexico, an unstable oil industry in Venezuela and possible shrinking production capacity in the Middle East as supporting evidence.    If one adds to this the increased demand for oil and gasoline in Asia and rising geopolitical tensions in the Middle East, the conclusion that starts to emerge is that the global demand for oil (and by extension gasoline) has shifted outward, outstripping the commodity’s supply.  From a straight forward application of the economics of supply and demand, one would therefore expect the price of gasoline to rise under such circumstances.  According to the International Energy Agency, global oil demand in 2008 is expected to grow by 1.7 million barrels a day, up from 0.9 million in 2007, in spite of record prices and an economic slowdown in the US.   Under the circumstances, one would expect supply to increase as oil companies are able to tap previously uneconomic sources of oil, such as the oil sands in Canada, and deepwater sites in the Gulf of Mexico.

Another important factor that has contributed to rising gasoline prices in the United States is our currency’s declining value.  Oil, like many other commodities, is priced in US dollars and the dollar’s decline in this environment has benefited consumers based in relatively stronger currencies – Euro, Yen and GBP – as they can pay more per barrel in dollars without felling as much of an effect at the gasoline pump as is felt in the US.

Despite this evidence, there are those that share the opinion of Michael Lynch, president of Strategic Energy & Economic Research, Inc., who states “[t]he fundamentals don’t justify anywhere near these prices, even when you factor in geopolitical problems,”  adding that demand has begun to wane. On April 30, 2008, the Associated Press reported that although gasoline prices have followed crude prices upward, the rate of change has not been the same.  Because gasoline demand fell for several months, refiners were not able to raise gas prices fast enough to keep up with the rising cost of crude, which was up about 76% year-on-year compared to the 22% increase in gasoline prices during the same period.  Speculation in the futures markets for oil and gasoline is the additional factor believed to be a major driver of the upward surge in gasoline prices:  “[t]he price of crude oil is not made according to any traditional relation of supply to demand.  It is controlled by an elaborate financial market system,…” according to Mr. F. William Engdahal,  who goes on to estimate that “[a]s much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds.”  At the root of this development is the change of trading platform for speculators in West Texas Intermediate crude futures contract.

In the US, the Commodities Future Trading Commission (CFTC) is tasked with “ensuring the integrity of the futures and options markets,” including the New York Mercantile Exchange (NYMEX).  Traditionally, US futures contracts on West Texas Intermediate (WTI) crude oil traded on exchanges, such as the NYMEX, subject to extensive regulatory oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud.   In 2000, the US Congress passed the Commodity Futures Modernization Act of 2000, which exempted OTC electronic exchanges from CFTC oversight,  severely limiting the CFTC’s ability to ensure the integrity of the OTC electronic exchanges through ongoing monitoring to detect price manipulation or fraud.  In January 2006, the CFTC further relaxed its oversight abilities by allowing US-based traders to route orders for WTI futures contracts, as well as US gasoline and heating oil futures contracts, through the ICE futures exchange in London.   By Mr. Engdahl’s estimation, more than 60% of the price of crude oil as of May 2008 is due to speculation on OTC electronic exchanges outside the CFTC’s regulatory purview.  In early May 2008, the Associated Press reported the price of oil neared $124/barrel as “investors captivated by the market’s upward momentum looked past the government’s report of an increase in crude and gasoline supplies.

A roll-back of that portion of the Commodity Futures Modernization Act of 2000 that exempted US-based OTC electronic exchanges from regulatory oversight is one viable policy prescription available to the government.  Such a move could potentially uncover manipulative or fraudulent activities related to pricing of oil and gasoline on US exchanges, and perhaps reduce price volatility through increased transparency.  A second, bolder remedy would be to restore the CFTCs oversight responsibility and authority with respect to US-based traders routing orders through OTC electronic exchanges, especially with respect to WTI, gasoline and heating oil futures contracts traded on London’s ICE.

Other remedies to lower the price of gasoline, such as the gas tax holiday and the increase of oil companies’ federal taxes, are unlikely to affect the price of gasoline as suggested by politicians.  If the federal tax paid at the pump were temporarily eliminated, politicians have intimated that the effect would be a one-for-one reduction of the consumer’s cost for gasoline.  Given the industry’s pricing power, which makes the consumer a price-taker, the more likely result would be a one-for-one increase in oil company profits.  Similarly, should Congress succeed in increasing the tax oil companies must pay, the pain would be passed on to the price-taking consumers, who would see the price of gasoline driven higher by the increased taxes.

In short, the government’s best route toward alleviate consumers’ pain at the pump is not to create new policies, but to undo two of their current ones.

Sources:

Chapman, Michael.  Pain at the Pump, Georgetown University, McDonough School of Business, May 2008.
Douglass, Elizabeth and Ronald White, Soaring costs are squeezing gas station owners too, Los Angeles Times, June 10, 2008.
Associated Press, Will oil prices continue to stay high?, April 25, 2008.
Blas, Javier and Neil Dennis.  Oil flirts with $110 as demand remains robust, FT.com, March 11, 2008.
Associated Press, Will oil prices continue to stay high?, April 25, 2008.
Mouawad, Jad. Oil Prices Pass Record Set in ‘80s, but Then Recede, The New York Times, March 3, 2008.
Associated Press, Will oil prices continue to stay high?, April 25, 2008.
Engdahl, William F., Speculators knock OPEC off oil-price perch, Asia Times, May 6, 2008.
Ibid.
Ibid.
Ibid.
Associated Press, Cost of oil nears $124 as gas starts to rise again, May 7, 2008

Detroit and Bankruptcy: Like Peanut Butter and Jelly?

Jeeves? I'm going for a spin.

As GM, Ford and Chrysler continued their vaudevillian act in two parts up on Capital Hill today, the likelihood that the largest of the three automakers (GM) will be forced to restructure through bankruptcy continues to grow.  Both GM and Ford (F) touched 52 week lows today ($2.52 and $1.46, respectively), with their market capitalizations hitting $1.6 billion and $3.5 billion.  Wow. GM’s market cap is $1.6 billion.

At this stage, holding equity in GM is a risky proposition, but then again, I think the company needs to reorganize and management’s consistency in failing to find fault with themselves points to bankruptcy as being the most likely path to change.

This is the quote from the NYT.com piece on day 1 of the Big Three leaders’ testimony before the Senate that says so little but yet so much (emphasis added):

The cause of their misfortunes was not management mistakes, they said, but the weak economy and the inability of consumers to obtain credit to buy cars.

Really?  It’s the weak economy and lack of consumer credit that has brought the American auto industry’s leadership to my fair city, hats in hands, Armani-clad knees tastefully genuflected before Senate banking committee?  Poor strategic management decisions have played no part in creating the mess that is now the American auto industry?  Really?  Yeah, uhmm.  No, I don’t think so.  Furthermore, by their logic, it would make more sense to bail out the car buyer instead of the car maker if the only problem is a lack of consumer credit.

Sorry gentlemen three of Detroit, but you have failed to make a compelling case to the American taxpayer (many of us struggling with fear, doubt, uncertainty and our own goddamn problems).  Why should we collectively put ourselves $50 billion deeper in the hole just so you can prolong this tragedy?

Next!

The Splurge Is Going Mobile? To the Detroit Automakers: “Really?”

I’m not going to deny that I find the increasing talk about bailing out the Big Three Detroit automakers more than a little worrisome.  Frankly, as someone else said, the car buyers should be bailed out before any this lot.

Immediately jumping to the defense of giving government welfare money to this bunch of managers are those who raise the specter of a potential domino effect that would result were they allowed to fail.  They point out that a large chunk of Americans will loose their jobs as the effect ripples through the industry.  Well to that, I add my voice to Bernie Sanders and everyone else who says that any company that is “too big to fail is too be to exist.”

Let’s be honest, whether or not the $25 to $50 billion is given to these automakers, their sales are not going to pick up for a couple of very compelling reasons:  (1) the potential pool of buyers has shrunk and (2) their product is less attractive than that offered by other automakers with plants in the US  (Toyota and Honda, primarily).  So this “emergency” bailout would be little more than a means to increase the US national debt by $25 to $50 billion while delaying the inevitable restructuring or death of these poorly managed companies.

What really burns me up about this whole situation with the Big Three is that over the years all the signs pointing to the industry’s changing direction were seemingly ignored by their respective leaders.  They ignored the call for higher quality vehicles.  They ignored the call for more fuel efficient vehicles, fighting any regulatory increase in standards tooth and nail the whole way.  They ignored the increasing US sales of their Japanese and Korean competitors, completely discounting any need to effectively compete in their own home market.

When they were generating revenue, how well did they reinvest proceeds?  Not very, to say the least.  It’s not until we are in the midst of a full blown crisis that this lot seem to realize that the brown stuff on the fan has been there so long that its dry and that’s why it doesn’t smell as bad as it use to.  The fvck?  And now they want $50 billion from the US taxpayer to help them stave off their imminent demise?  How do they propose to pay that back?  Are they going to put up equity as collateral?  Short answers: they don’t propose to repay any debt (because they won’t be able to) and any equity used as collateral will become worthless once they slip into that lasting sleep.  At most, the US taxpayer assumes ownership of and responsibility for Detroit’s auto manufacturing facilities.  Not Good.

For companies in their position and condition, the best alternative I can see for them going forward is one characterized by a radical restructuring.  It starts with replacing top management, but will require a considerable about of time, capital, leadership, viable products and consumer demand.  Looking at my score card, I see gaps in leadership, viable products and consumer demand.  Now is not the time to invest $25 – $50 billion, and not with these leaders.

Mortgages to Be Restructured Thanks to Hambric’s Curve (?)

Hardwick Hall, More Glass than Wall

I don’t want to brag too much, but I think someone important at JPMorgan Chase may have read one or two of my recent posts and decided the shame was too great to bear. Posted on this week-end’s WSJ.com was a report that JPMorgan Chase launched a plan that would modify the terms of some $70 billion in mortgages. What they’re proposing to do involves reworking the mortgages with lower interest rates and lower principal amounts “or other more-affordable terms.”  They are basically going to throw out the current mortgages and replace them with ones more favorable to borrowers in terms of interest rates, outstanding principal or “other more-affordable terms.”  What’s the word I’m looking for?  Begins with an ‘h’?  Huge!

This is huge! (That’s the word!)  All that ranting I did about the consumer’s need for an equity infusion, how the bailout was not for Americans and how what we really need was something closer to ‘trickle-up’ economics, not more b.s. trickle-down, corporate welfare economics. The power of the Curve! Yeah!  Feel it!

Now, some would say that the bank was probably putting this together before I joined finger tips to keyboard and unleashed the Curve’s power to bring the shame, but they’re just haters. So forget them.

This sets the precedent, raises the bar, if you will, for the other banks that are feeding at the Treasury’s gilded trough.

Now is the Time to Put Venture Capital and Private Equity Funds to Work

AltAssets reports on the musings of Bruno Raschle, CEO of the private equity firm Adveq. Bruno makes a few points that bear repeating (because I agree with him!) with respect to the current economic environment and the private equity/venture capital industry going forward.

The up shot of our shared view is that what has happened, and continues to happen, will impact company valuations through what I expect to be an even deeper contraction (or correction, according to Bruno) of EBITDA valuation multiples, a reduction in corporate earnings due to lower GDP growth, and an increase in liquidity constraints, especially for those dependent on credit.  What does that environment scream to you if you’re an investor?  buy! Buy! BUY!  Under these conditions there is likely to be a wider selection of potential portfolio companies to choose from, greater power on in-going valuation for the buyer, and greater availability of skilled human capital writ large.  Now is the time to start making deals.

GMAC Wants Some Government Cheese!

Donnez-moi du brie, Sammy. Oh la la!

The Wall Street Journal reports that GMAC, the lender co-owned by General Motors and private equity group Cerberus Capital Management, has been pushing the Federal Reserve to allow the finance company to become a bank holding company. Now you’re probably thinking: “Why the fuck am I even reading this? And what’s up with the picture of brie? Hambric’s Curve has gone round the bend.” First of all, screw you. My mental state is ‘Phasers Set to Stun, Dano’, and, um. Uh. Oh yea. The reason they want to transmogrify into a bank holding company is so that can have access to chunk of Uncle Sam’s $700 billion cheese. That’s right, they want some bailout welfare.  At this time, it is not known if they also requested a dozen cases of Cristal champagne to wash it all down.

There are several ways this can be interpreted, but I’m just going to go ahead and look at it as equivalent to the mythical welfare queen popping out babies to get more government handouts. GMAC wants to become the latest form of welfare queen! Only this isn’t a myth and the cheese ain’t cheap. To wit, GMAC would join such venerable institutions as Goldman Sachs and Morgan Stanley who have taken the step of changing stripes and subjecting themselves to deeper regulatory probing in exchange for money (in the form of a goodish size slice of $700 billion).

On the one hand, the higher regulatory oversight would add a degree of consumer confidence with respect to the institution, down the road any way, and provide additional financial support to the needy in these lean times. On the other hand, they probably have a lot of subprime debt (what the ‘pros’ would term “financial STDs”) that they want to pass on to our Uncle Sam in exchange for some $$$ and end up making him all itchy down there.

Hey! America! That “Bailout”? Not For You! HA HA HA!!!!

How many figures am I holding up, America?

Well, average Americans (which excludes you, Joe the Plumber), I have some good news and some bad news. The good news? The chance of you getting more credit that will only drive you further in debt has been substantially reduced. Whew!  That was close!  The bad news? That doesn’t include the additional $700 billion you now owe since its been given to a small group of financial industry swells, which doesn’t include you, obvs. Yeah, you can’t win. Say it.

Some guy at the New York Times has let the cat out of the bag. All that jawboning about using Treasury funds to unstick the stuck credit markets in order to help the average American get more in debt is turning out to be little more than b.s. I’m just floored that people still buy the whole notion of trickle down economics – give the rich a lot of money and eventually some of that juice will dribble down their chins and file your glass with a quenching liquid.  Or they’ll just boot you in the head and put you out of their misery.

NYT.com’s Joe Nocera found a way to access the tape of an employee conference call held by JPMorgan and discovered the bank plans to use the $25 billion it pulled down from Treasury to fund acquisitions or some such shit.  Increased consumer loans did not appear to be a significant part of its plan, and by “not significant” I mean not at all, or so Joe the Reporter would have his readers believe.  An this is despite the bank’s recent acquisition of Washington Mutual.  By way of “damning words,” Joe attributes the following quote to the verbose JPMorgan executive:

We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.

So yeah, consider yourself lucky that you dodged that bullet!  No more debt for you, America, because the credit spigots will not be open all that much to spew forth the liquidity that drives your economy.  I mean, no debt except the $250 billion already out the door (10% of which went to JPMorgan) and the remaining $450 billion to be distributed among a few swellegants.

But hey, look at the bright side, at least you won’t have some material possession staring you in the face, reminding you of your recent $700 billion credit binge.  I mean, after all, that’s what you voted for, right America?

The Consumer Needs an Equity Infusion. Stat!

Despite all the talk comparing our current economic situation to the Great Depression, the FT.com’s Krishna Guha hits a bit closer to home when he writes that the US is likely to plunge “…into what many experts believe will be its worst recession since 1982.”  Today, this comparison carries more weight psychologically because more people can relate to 1982 than they can to 1932.

The impact of the current credit market collapse on the banking and finance industries has been unexpectedly wide-spread and deep-rooted, no doubt, presenting our leaders with the opportunity to transfer more than $700 billion from the public coffers to the private sector.  I say “more than” because there has yet to be a government program with an estimated cost in the “B” billions that has not just come in over budget, but in some cases astronomically so.  But that’s a different discussion.  The one point that has not been totally absent but nonetheless rather down-played from the high-minded talks about how best to spend US Treasury funds is the supreme importance of the consumer in all of this.  You and me (and Joe the Plumber, if he ever gets his shit together and buys that damn business.  In today’s economy, he defs has the upper hand in negotiations with respect to an in-going valuation.)

The US economy is driven by consumer consumption.  How much of that $700 billion+ is being ear-marked for the consumer’s pocket?  Not enough, apparently, in light of falling consumer confidence coupled with rising unemployment that has reduced the consumer’s propensity to spend.  As reported in Guha’s article, the unemployment rate is expected by some to jump from its 6.1% level to somewhere north of 8%.  “Oh shi!#.”  In other words, people are thinking more about how to pay their bills and make sure there is enough cash set aside in the much ignored Emergency Fund.  So despite the credible stories of tighter consumer credit lending standards (have the banks done too little too late?), I’m also curious about the metrics out there on the rate of consumer demand for such products.  My logic tells me that the tighter lending standards were accompanied (if not preceded) by reduced demand for consumer loans in the face of rising uncertainty.

So if the credit markets do “thaw” and the lending spigots reopen, it is the institutional side of the market that will be back in play, but the consumer side is likely to take longer to come back to life.  More important than the the consumer’s access to credit is the state of the consumer’s balance sheet, which is in pretty bad shape following the substantial decline in its equity account.  In other words, the level of liabilities relative to equity has shot up because of the decline in value of real estate values (the major piece of equity on the balance sheet).  That’s not good, to be technical about it.

For example, before the economy swan-dived into the shitter, let’s say I owed $400,000 on my mortgage (my liabilities), but the market value of the my house (my equity) was $650,000 and my stock portfolio was valued at another $250,000 so I was feeling rather flush.  I might have even considered taking out $100K in equity to buy stuff (Hello MacBook Pro!).  But now, I still owe $400 large, but the market value of the property has declined to $450,000 and my equity portfolio is now worth a $1.49, so now I’m feeling like I just lost a shitload of money and not really in the mood to spend (It’s a Dell, Doooode).  In order to boost my confidence and get me back to spending, I’m gonna need my liabilities to decline, my equity to increase or some combination of the two.  And in all honesty, at this point, I’d prefer that increase to be more liquid (like stocks) than not (property value).  [This last point is for another post on the volitility of the equity markets - any gain in stocks' value will be quickly followed by people looking to cash out, (sell) which will then push down equity values.  What a fucking see saw.]

Hobo Soup, monsieur?