Obama administration is finally using anti-trust as a treatment for “Too big to fail”. That is exactly what this blog asked for: http://poweranddollar.com/2009/03/27/anyone-understands-geithner/
Had Bush used this treatment during his time, systematic risk could have been reduced, although not eliminated nor sufficiently managed.
Did Sherman and Clayton (as in Sherman and Clayton Acts, the anti-trust legislations) have systematic risk in mind? Certainly not. However, they were more in the line of if market entry cost is too high due to market makers, then something bad is bound to happen.
Was that line of thinking new at the time? No. That is why monopolies have to be granted by the governments in England, as in Crown corporations. This practice is still in place, just to highlight how much consideration should be given for monopolies.
Interestingly enough Obama administration is trying to enforce tougher antitrust, Obama administration may be guilty of antitrust as well, if Obama administration is in “restraint of trade” or “price discrimination” on health care costs when the administration is trying to “contain cost”. Unfortunately, critics are only concerned with “quality” or “ration care”.
The problem does not need to get that complicated.
May 11, 2009
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http://www.reuters.com/article/newsOne/idUSTRE52O6JP20090325?sp=true
Geithner had a hearing, not quite an announcement on future regulation framework. And you cannot get much out of a hearing. So, if you were looking for a pdf of details that can help you get a feeling if Citi (NYSE:C) will get more oversight versus Northern Trust (NASDAQ:NTRS) or Union Bank of California, then sorry.
This is the best article I can come up with so far:
http://www.reuters.com/article/newsOne/idUSTRE52O6JP20090325?sp=true
This article says merger of regulators is now a lower priority than before. The consequence for that is the work force continues to be in limbo. This is not the time to make these regulator employees second guessing where their jobs will be. The administration would want them to strengthen enforcement. The impact of this is on banks, not banks regulated by Federal Reserve (largest banks), but OCC and OTS.
Another interesting point is about Mark-To-Market. Is Geithner really thinking about modifying Mark-To-Market? This will be a plus for the banks that operate in metropolitans since theirs assets more volatile.
Securitization: Congressmen maybe simplifying the problem. However, that can be one of the fixes. Just don’t believe that is THE fix.
Most of the consumer protections make sense. However, it looks like one thing is forgotten, unless will be included in the details: education loans got loads of undesirable business practices behind the scene. This is a good time to take care of that too.
Provision standard: be careful with this one. Geithner may end up hurting the small banks as well. The original intent was to decrease systematic risk, i.e. reduce largest banks’ influence and increase the market share of the small ones.
Credit rating agency: Geithner may as well talk about appraisal firms.
The international settlement part will play well with countries who want more multi-polar settings.
It is now becoming a pattern that Geithner / Obama always gives expectation of a “plan” and then end up with a power point presentation.
March 26, 2009
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Geithner announced the Detox plan. Stocks went up for a great deal. Investors probably are hungry for any positive headlines and don’t really want to read the content. AP writes that the taxpayers will actually fund 93% of the purchase. Krugman of course slams it like the first time he read it when it actually is the same plan half a year ago. In a way, why does Krugman write as if it were a surprise to him?
Gergen writes much more succinctly than what I did yesterday (and Eurasia Group): “there is a second question lurking that really only the President and Congress can answer: that is, whether private investors can have confidence that if they do invest, the lynch mob mentality we saw last week in Washington won’t come and plague them in the future. As the managing director of a major hedge fund told me recently, if this plan is good enough, our firm stands to make money. But then why should we invest if Washington is then going to get mad, take 90% of our profits from us retroactively and if I may be hauled up before Congress and vilified?”
March 23, 2009
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I agree quite a few points of this article in regard to the AIG episode.
Of course, nothing is perfect. I would change a word here:
“It will certainly make Mr. Obama’s task much more difficult when he tries to sell the public [my version would be: investors] on his administration’s ability to manage the rest of the bailout, and when he tries to sell private firms on the public-private partnership that will be needed to make the recovery work.”
Obama will have more difficulty to convince investors his future plans work (already stated in the article). Also, Obama will have more difficulty to get troubled entities to take the bailout. Look at AIG. This bailout actually bites!
AIG was politically insensitive. This story alone will make firms in the future to invest more to mitigate political risk or at least reputation risk (branding), which is not a good news.
In addition, a good portion of the reason for these companies to require a bailout is that their valuation (capitalization) fluctuated so greatly they were literally worthless. So, some companies may realize taking themselves off the exchange is not a bad idea, at least they can insulate themselves from the volatility. Is that what we want: fewer choices for mutual fund managers and pension fund managers? If they have fewer options and social security is running out, then what are to do?
Fewer choices on the exchange also means quicker wealth concentration. Gini coefficient will spike up very quickly. Is that what Obama wants?
March 20, 2009
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Obama’s message in the first presidential TV press conference was straight forward. Who was he talking to? Sure we all want get going with the recovery. Where is the problem? If there were not problem, Obama would not have been talking. Can the TV appearance be credited for the Senate passage? Hardly.
Stimulus (by now, it should be stimuli) bill got going because 3 Republicans voted with the Democrats. Nancy Pelosi is having the no-compromise stand. However, the margin in the Senate is 2 Republican votes. Nancy Pelosi may actually get hurt at the end. Republicans have no problem with sinking since they are sinking a Democrat president. The remaining Republicans got fairly safe seats. Even if there is a backlash against Republicans, they felt they got their seats firmly. House Republicans’ attitude is the proof. Senate Democrats understood this fully. That’s why Senate Majority Leader Reid says “the differences are minor”. They are minor only when you want to compromise. Reid is basically telling Pelosi to get it over with.
Was Obama talking to Nancy Pelosi? Or Senate Republicans? Does public opinion carry weights on the Senate Republicans? Hardly. May be to someone like Palin who has national inspiration. For the Senate Republicans, it cannot be appealing, at least not for another one and a half year when the midterm election is up or Republican primary is up. So, could Obama be trying to build public support against Pelosi? That would be an entertaining idea.
$838B to create how many jobs? The up side says 3.8M jobs. Let’s say 4M. So, we will spend $209,500 per job creation. And let’s round it down, say 209K or even 200k per job and take the general rule of thumb that another $20 is needed for payroll tax and benefits. We are looking at $174k per job (round down again). What kind of job are these, actually? And I guess $174k / job is okay because they are not $500k executive pay?
Gary Becker (1992 Nobel and right wing) gives the lowest multiplier so far I have read, below 1. Let’s take that multiplier as half of 1.5 (the consensus he claims). We are looking at 0.7. In that case, the actual $ per job creation is $130k per job creation. Does it make you wonder if you want to drop you current job and take one of these 4M jobs that are to be created by the government?
Yes, this is very cynical. That is very inefficient. That is exactly the point of the Senate Republicans. Here is the however.
However, what is the cost of inaction? How little is “just enough” for recovery? This is not a typical recession. A lot of this recovery is related to confidence: consumer confidence and investor confidence. Any kind of stimulus of this magnitude cannot really afford a staged approach. The stimulus has to be big enough to create a reverse shock effect to ignite activities. The problem with staged approach is each new stimulus actually reinforces the perception that “We are doomed. We have tried so many times and we failed. Give it up. We should not try it again.”
So you may agree to Senate Republican’s message. However, can you afford to err on the “right” side? Or would you rather err on the left side?
February 10, 2009
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Obama did not actually ask for pay limit. Obama pretty much asks for pay through options: exercise to sell the stocks when you pay back the money to the government. Obama also asks for more say for the shareholders. Some will say such an ask is ridiculous. Some will say if you want the money this badly, then this is the price to pay.
Obama will likely get his way, not because of media bias, but because he is likely to get the votes for this one.
Ideologies aside, what is really at stake? This proves American economy is increasingly political. Very soon, America will have a government with hands so full in the operations of the economy that it is not too different from China or India.
Pay limit takes the headline. However, if you read the content, the other point is the more important one: “bank shareholders will have a greater say about the salaries paid to company heads. The measures will put in place greater transparency for costs such as holiday parties and office renovations.” This actually follows the same concept of SOX.
Obama is actually addressing quite a few things here.
In large corporations, small shareholders never get a say. The big shareholders usually end up being mutual fund companies. Mutual fund companies tend to be silent partners. So, they do not say much. In fact, they do not even want a seat on the board. Boards are still running the way it used to be 50 years ago, 100 years, old boys club. However, the number of shareholders these days is: way too many. However, 100 years ago, a large corporation did not have hundreds of thousands of shareholders. These days, if you count the mutual fund holders, you easily have millions of shareholders. Large shareholders get ways to take care of themselves, preferred shares or even board compensations for the lucky dozen. The theme of transparency in this issue is actually consistent to one of his campaign messages.
Annual reports are informative. For a large publicly traded company, say 100 million operating budget or 1000+ employees, tucking in ridiculous expenses on executives is too easy. Even though SOX asks for any small thing that is “material”, what is half a million to a 100 million? Obama essentially is having one stepping further: SOX is about relative to the nature and complexity of the business, let’s have it relative to ordinary people.
Impact on economy? For people who have >500k, do they spend all the money and let the money circulate in the economy and create jobs? No, they tuck half of it in their 401k anyway. In a way, Obama is actually tying up all their 401ks into their own company’s stocks. Now, since these executives will have no diversification of the assets, they now have complete vested interests in the survival of the company.
So, political gimmick or not, this move actually does make a difference.
February 4, 2009
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Obama settled on his economic team late Friday afternoon, sending Dow 400 points higher, just above 8,000 points. Then, news about Citi’s (NYSE:C) bailout came about. This news probably marks the beginning of Obama administration. Here is also why this signal is important.
A plan like Citi is facing must have been laid in advance. What has been in the dark is if the plan gets proper continuity through its execution. Therefore, the first priority is people. The people had to be properly identified. The team had to understand what is involved. Geithner’s appointment had a lot to do with his familiarity in the financial crisis as well as the solution already in place. He probably had a hand in the solution as well. For an announcement that spans through two administrations, Obama had to approve. Bush had to approve this plan as well since Obama is doing to take the credit for its success but Bush will take the blames if it fails. Geithner’s appointment is an additional (in addition to James Jones’ appointment) indication of the desire for smooth transition.
Of course such a “smooth” transition means a blend of old and new, ie some more of Bush people, and some of Bush ideology gets carried over. However, media is very willing to forget about these things, when it is done by Obama.
The importance of the news, in addition to sending DJ and S&P up another 3% in the first 2 or 3 hours of a Monday morning, is this: Obama already replaced Bush; expect more consequential news from now on. Obama’s administration is not going to begin on 2009.01.20. His administration starts now. Therefore, if you thought your decisions could wait until 2009.02, then you may want to re-juggle your vacation schedule. Your Q4 board probably is going to get busier than usual, not only the economic news and your company financials matter, but also Obama will deliver statements earlier than previous presidents. Decisions about your public relations firm, lobbyists, policy research contracts will have to be revisited now rather wait after Christmas.
Fund managers have to get busy too. Just look at Citi’s stock this morning: 2 hours and 66% increase. Obama’s statements will make big swings. So, don’t slack.
November 24, 2008
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The financial crisis in America has over rode the presidential election to carry the most political risk in the global economy. While the American presidential election is a cyclical event and its political risks are more within control than many other political events, such as change of leadership in China. However, the risks associated to the financial crisis have not only spoiled into arena of political risk, but its impact is immeasurable yet. This is because its impact is now beyond the financial impact.
The first impact is the presidential election. This financial crisis is now driving the voter emotion, which is of course in favor of Obama. The scarcity of information coming out from the candidates implies the candidates are literally clueless – They do not even attempt to own the issue. This scarcity of information by itself carries a risk premium to any organization that has a budget to be executed in, revenue or input driven from America.
The second impact is American financial industry is now so dependent on the government that its operational independence is questionable. How far are they from being a “for profit organization”? Why would a company’s compensation be political for it not because its owner is now a government? AIG is the perfect example. How much time will it take for these organizations to get political appointments? These are unlikely events within a foreseeable future. However, they are at least academic questions at the table rather than unimaginable.
The third impact takes even a longer horizon. Who is financing the bailout? Do you think this $700B is coming out from cash? This money is financed. Who is lending the money? Japan, China, Taiwan, Middle East oil producing countries are all big lenders to America. All exporting countries will take a beating, however not because of their control weaknesses in their financial industry but because the demand in America is weakened. A smaller pie in America will make the rest of world economy larger in proportion to the States. Countries like China have a big domestic economy that can sustain a good hit. Bush asked “Is UN relevant?” A post 2008 financial crisis world may start to wonder “Is US relevant?” How much influence from America will be reduced not only by the reduction in moral authority of Bush Administration but also by the scale of US economy in relation to the rest of the world.
A corollary of this impact is the influence of global institutions. A lot of the existing global institutions are founded on the premise of asserting American influence. A good example is G7. Who were the G7 countries? The non communist Security Council holders of WW2 and the losers of WW2 plus the most American loyal country Canada. This set was to assure that the strongest industrialized nations can be voted to affirm America’s wishes. World Bank continues to take the most money from the States, not that no other country is willing to offer more. And money drives the votes in World Bank. Head of UNICEF is appointed by America to an American citizen because of budget contribution. All these institutions will see an erosion of America influence.
October 10, 2008
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A 3 page rescue package became 400 page rescue package. A lot of improvement? A lot of pork barrel? Are the lobbyists now worth the money of the clients? Who Changed the vote? Who did not? Anyway, the bill passed!
There is 1 vacancy in the House.
There are 46 House seats who had a margin of <10% in 2006. Of the ones who had a margin of greater than 10%, I would consider them as safe seats. There was 1 abstain in the first vote who had a safe seat.
The Representatives who are in close contests have no little choice. They have to respond to their constituents’ pressure of the day.
If you think the Republicans were dissatisfied about spending money to bailout, you may expect them to continue to vote no. Or even some of them would change from YES to NO. Well, this is not quite the case. They are the ones who really changed their vote this time.
WHAT HAPPENED?
The Republicans held the biggest swing block. Either voters’ sentiment alone was unable to swing these safely seated Republicans to change their vote or these Representatives were actually following their constituents’ pressure to vote NO. So, the only way to get them change was to buy them over. Thus, the new spendings. Since House majority belong to the Democrats, less incentives were provided to the Democrat Noers.
The biggest losers are the Democrats who were on safe seats and voted YES initially. They had nothing to gain whatsoever.
The biggest winners of the second vote are these NtoYer Republicans. They are the ones who made the difference, either by the new spending or they suddenly “realized” the importance of the bailout. Ideology is great, as long as you are ready, able and willing to compromise your ideology!
October 3, 2008
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The bailout plan got voted down: 205 vs 228. The House still cannot get a full house for such an important vote. Someone please check if those 2 seats are vacant. Are you upset that it got rejected? Some people are upset (S&P has fallen >6% already), some not. NYSE is certainly down. Is there any good out of this rejection?
Some economists and financial guru may say why this bill would not work anyway. Some people (say Bush, Paulson, to name a few) may also say why we must pass this legislation (not that this bill will work. Interesting, huh?).
At least democracy works. Main Street is not too happy about this bailout. The Representatives listened and voted accordingly (if not for their re-election is in a few weeks).
Yes democracy is slow. Democracy could be an emotional device as well. This vote is more of an emotional vote rather than a vote of competing proposals. This is the kind of occasion that time is of essence and some may argue democratic mechanisms are just road blocks.
This same emotional body delivered an emotional vote last time to appropriate a budget for PATRIOT Act and Iraq war. This emotional body again delivered an emotional vote, this time to reject another big budget item, although this item is again in a time crisis for the good of the people. Is it a simple distrust of Bush or is democracy actually at work?
September 29, 2008
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