The Iranian election becomes another election mess.  The American (the first edition) version requires a Supreme Court to give a final answer.  Iranian one?  A Supreme Leader gives a final say. 

And the Supreme Leader says the incumbent wins.

In a situation like, just like the American original version, a decision made by that few individuals, the decision is ultimately political, whatever the cloak it is actually.  In the American original version, it is under the cloak of law.  In the Iranian version, it is under the religious leader’s cloak.  Note that the Supreme Court Justices are life time appointments just as well.

What ticked?  Not bribe.  As usual, what is the alternative of the decision?  Supreme Leader weighted between incumbent and challenger.  Who is a bigger threat to the Islamic Republic?  Or for that matter, to the power of clergy?

Challenger is always about “change”.  Incumbent is always about “you know what you get.  Don’t rock the boat.”  This applies to any institution (note, not necessarily a country), any selection process (note, not election), any candidate. 

The next question is: what about the protests?  Supreme Leader is confident he can manage the internal crisis.  If the protests get any worse, it will be between a Tiananmen Square (Iranian Edition) and End of Soviet Union (Iranian Edition).  Certainly, Supreme Leader thinks the worst scenario is Tiananmen Square.

Alright, so what does one care about this latest news episode?  Political instability drives up the prices of commodities, in particular, the commodities the geography produces.  So, in this case, oil.

Oil will become more expensive, if this goes on.  The only way oil does not increase further is traders believe the recession is so bad there is no demand for oil anyway, i.e. demand will decrease even if the quantity of supply is not being affected by the political instability of Iran. 

Oil exploration companies’ stocks go down (not up).  The core material of their product gets more expensive, so their profit margins get squeezed.  Consider the following company, BP:

http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=1&chdet=1245437692449&chddm=10220&q=LON:BP&ntsp=0

The companies that get affected less so are the American oil exploration companies who have less exposure to Middle East (or think about the Canadian oil companies).  And if you happen to own renewable energy companies’ stock, you should see prices going up for your stocks.  Given today is Friday, one may be tempted to clear their stock inventory just in case the next episode of this Iranian Election comes up and affect the portfolio. 

The things that really distort the prices of stocks affected by Iranian election are: Obama’s announcement on health care and Obama’s announcement on the merger of OTS and OCC.

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.

The author (John Feehery) of this CNN commentary is a political operative, lobbyist, etc.  He makes his living by using his access to the Republicans.  When Republicans are in disarray, so is his livelihood.  In order to drum up more business, he has to encourage his potential customers to spend money in Republicans.  This article is very consistent in his message about “bottom out”.  He also points out very explicitly that political entrepreneurs will see opportunities. 

He is also very good at organizing his advertisement into 5 bullet points.  These points are also in order to of investment relevance rather than political ideology relevance. 

All his points are very valid.  However, the advertisement taste is a little too obvious.

Since when CNN did distributing ad content in place of news content?

This swine flu became a real political event: California declared a state of emergency; Homeland Security is making moves; Obama is making another TV appearance again.  It so far looks like the market is reacting to the Fed statement rather than this health event.  Banks are up for 3%, S&P are 2% and medical supplies are only up 1.7%.  It is almost a drag in the market today. 

With this swine flu, manufacturers and distributors of over the counter medical supplies are of interests for products like hand sanitizers, wipes, over the counter drugs, surgery gloves, masks, etc.

Certainly, vaccine makers should go up.  However a lot few of those.

Also related industries would be hotel and tourism interests.  Retailers and mall operators which have a heavier geographic exposure in the southern states would get affected (Tex/Mex cuisine chains who have more sites in California and Texas, say).  This issue will fuel more talks around border control. 

Having a tighter border control can be used to divert the attention from gun control once people move their attention back to border violence (if there will still be), drug territory dispute.  We are more connected than before.  However, this forces lobbyist to be more creative to exploit the issue of the day.

Is Obama ready to re-start the Nuremberg Trials?  Or forget Dufar trail in ICC?  His decision of not prosecuting CIA officers employs the “I am only following orders” argument which is the exact defense employed during the Nuremberg Trials.  Obama’s goal is to protect the civil servants, i.e. to preserve their loyalty to his administration, future Democratic presidents, future presidents in general.  Obama transferred a legal issue (defending the officers in court) to a political issue and may in fact undermine these officers’ defense.

During the Nuremberg Trials, war crime defendants like Wilhelm Keitel  used this “following an order” line.  However, Allies pre-empted those arguments by Nuremberg Charter, created before the Nuremberg Trials. 

Obama’s interests are to assure the civil servants to work for him.  Therefore, Obama is spending his political capital to shield the legal liability of those officers.  Employing the “following an order” line now gives legitimacy of the war crimes, thus weakening the authority of Nuremberg Trials.  Is Obama increasing the doubt from the Jewish voters? 

Obama is eroding his extreme left base.  Will Obama gain any votes from the defense hawk voters in 2012 as a result of this?  If not, he is making an electoral loss out of this.

Obama is also weakening the International Criminal Court since ICC mainly prosecutes war crimes.  A legal event is now not only an electoral factor, but also a political risk premium to the international community, which Obama claimed during campaign to want to. 

Obama could have chosen to use state resources to defend them in United States courts.  Does Obama consider the defense to have a poor chance?  By not prosecuting, Obama cedes the initiative to choose the court of battle.  The federal government can still provide defense wherever the trail will take place since the officers’ conduct were by the state.  Any country can choose to prosecute them in any court, whose legal proceedings will be unfamiliar to the defendants.  Would arguing the case in an American court provide better legal defense than in a foreign court for these officers? 

Obama probably does not gain any vote from defense hawk voters, alienate his left base, make Jewish voters more doubtful, breaks his promise to mend the international community’s trust toward the States, weakens ICC and future trials (say Sudan’s Dufar trial), weakens the defense of the officers by provoking the case to be argued in a foreign rather than a domestic court.  All for buying 4 (or eight) years of honest work for Obama?

Many countries (Russia, India, China, …) talk about multi-polar world.  Some think this financial crisis marks the end of American unilateralism.  This G20 probably is not that marker.  However, this G20 is going toward the direction of containing political risks within America.

However, these countries did get some concessions from this G20.  The news release from this G20 news release gives us some ideas what concessions are:

More voting power will be allocated to the other countries, although the details of the future votes are unclear.  We will only know by 2011.01, says point 20.  The critical element will be if US will remain above 15%, since any vote of 15% against a resolution makes it a veto and US has 17% of the votes right now.  Russia has 2.74%, India has 1.91% and China has 3.72%.  Even Brown supports China’s quest for more votes (direct quote lacking).

One interesting China did in this G20 is that China insist on the new capital injection to be in bonds and not a loan.  Is China using some minute difference to make SDR more tradeable?  

If true, over the term, it will be a negative to companies like Merrill (NYSE:MER), Goldman (NYSE:GS), Citi (NYSE:C) etc.

China wants to weaken the dominance of USD.  To do so, China recently advocates a new global currency.  That is definitely not doable in this G20.  However, the direction is very clear.  And China has the time to wait for this objective.  Since China is not a democracy, its political objectives are not bounded by the election cycles.  China can wait for another one or two decades for this kind of things.  Making IMF’s loans more tradeable will facilitate the future steps (another 10 years) of making IMF’s SDR a financial product available to all, including the amateur day traders at home.  Remember how long it took Euro from an inter-government toy to become tradeable among banks and then in exchanges and then in print.  China has the time for this. 

Argentina and China recently signed a currency swap deal.  Such a swap helps Argentina’s currency stability or abates its currency devaluation, thus economic stability.  Why is China so into this matter?  Any international trade involving two non-US countries is still priced in USD.  Therefore, completing a trade actually involves two currency exchanges: currency A to USD and then USD to currency B.  Such a swap is to reduce these transactions.  Is it a big deal?  If a company operates 10% margin, currency exchange can easily eat up a 1% of the 10% margin.  So, in the very micro sense, a company can increase profit by 1%/ 10% (10%).  However, China is not simply looking at this bread crumb.  

When USD is this intermediary currency, USD has a lot more money in circulation than any other currency.  For that reason, USD is able to get a lot of it printed than it is actually needed domestically.  Internationally active entities end up having to keep a lot of its financial resources in USD.  What will they do with these US dollars?  Buy more US bonds, or even simply a DJ index for the day.  These actions make US government financing cheaper, US stocks higher P/E ratios.  All these ultimately gave Wall Street firms more experience in international finance.  American firms have been the drivers of the most large international mergers and acquisitions.

The positive spin of having a USD replacement to the global economy is it will contain a good portion of political risks within America. 

Little reaction (criticism, actually) is out there considering the scale of Geithner’s proposal unless everyone is used to the lack of details from Obama Administration and is waiting for the real deal or no one understood what just happened. The financial weapons of mass destructions, along with aggressive and unethical lending practices, lack of regulation in some areas (say appraisal), + many more are to blame. Geithner’s solutions reacted to them. However, no one really asked if Geithner’s way makes sense. I am writing to argue that systemic risk regulation only requires stronger enforcement from or even enhancement of other existing regulation.

The best synopsis of Geithner’s proposal, so far, that I can find is this one from Reuters. However, the best one to articulate the central ideas of the proposal is Times. Four tools are actually these: prevention (safety and soundness regulation), reaction (market insurance, FDIC like), bailout (Federal Reserve) and exit (IndyMac). Please don’t think an article that lists more central themes is a better article to read, like this one.

Two of the four tools a government can have already been deployed: protect and bailout. In fact, the administration already made up the rules as they went along. Prevention and exit require more legislation to make them work (and budget too).

Combating a commercial entity that is too big is the central idea of anti-trust legislation. Anti-trust is tricky for Justice to pursue and tricky to defend. However, it is no more difficult to enforce if one is “too big to fail” or differentiate between “too big to fail” versus “too big”.

This “Too Big” can be applied and extended to every industry. In fact it is being extend to the auto industry. Geithner is creating a framework for the United States to become Venezuela in the north.

Geithner is not purposefully exploiting a political opportunity (Democrats are if they are tucking a truck loads of other reforms in this crisis). He simply believes governments work. Otherwise, he would not be a civil servant for this long. However, politicians love to along on this one since the decisions to bail out and take over are ultimately political. The success of this proposal will extend their powers (and more political contributions). What will really save the risk of extending the power of the government is to re-examine anti-trust.

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.

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?”

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?