The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

The investor capacity to lie to themselves is truly an awesome thing to witness.

The most recent example is the rally in bank stocks ostensibly caused by CEO, Chairman and Board members buying shares.

It is nothing short of absurd.

Bank of America CEO Ken Lewis bought 200,000 shares ($1.2 million), while JPMorgan Chase CEO Jamie Dimon purchased 500,000 shares ($11.5 million). Six other BAC board members bought more than 500,000 common shares also.

The market celebration seems odd, when you consider that the poor strategic acquisitions, inept risk management, and otherwise errant policies that drove these stocks down 90% from their peaks were the brainchilds of these same insiders.

Given the past track record of their corporate investing acumen, the insider purchases by this group of ne’er-do-wells should hardly be cause for jubilation.

Then there is this additional tidbit: These insider purchases were made from the proceeds of ill-gotten gains — the vast sums of money that management has been overpaid for the fine job they did driving these companies into the dirt.

The thought process must have gone something like this: Now that we have been paid 100s of millions for turning our stock price into fertilizer, let’s take a few cents of that money and buy a few shares of stock.

The entire sordid episode is sickening, and hardly cause for investor appluase. Instead of buying stock, these incompetant corporate clowns should be falling on their own swords. If they don’t do so soon, it will be time for investors to start gathering pitchforks and torches, to chase the money losing managers out of town.

Steve Randy Waldman writes the blog interfluidity. His take is usually away from the mainstream, and always interesting.

His most recent discussion on Bank Nationalization is quite interesting

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It will come to no surprise of readers of this blog that I favor nationalization of failed, systemically important banks. But James Surowiecki and Floyd Norris have a point. We absolutely should not nationalize as a means of persuading banks to issue credit more freely. If the government (idiotically) wants looser lending than banks are willing to provide, it oughtn’t take their money and lend it. The government can lend its own damned money (well, our own damned money) if it thinks that profitable loans are not being made, or that for the good of the economy unprofitable loans must be made.

The reason to nationalize a bank is because the bank has failed and its former owners have no legitimate claim to its assets. The government has been forced to offer support with public money, thereby purchasing the corpse fair and square. We take the bank into public ownership because taxpayers who have been conscripted to accept extraordinary losses are entitled to whatever gains follow the reorganization they finance.

When a bank is nationalized, shareholder equity should be written to zero, and existing management should be handled as roughly as the law allows. If we have a bit of courage, we should impose haircuts or debt-to-equity conversions on unsecured creditors, but I don’t think we have that kind of courage. “Toxic” assets should be revalued at pennies-on-the-dollar market bids or else written to zero and hived into “bad banks”. Once we have a conservative valuation of the assets and know exactly what is owed, we’ll know how much public money would be required to cobble a robustly funded bank from the wreckage. However, if we recapitalize “too big to fail” banks without restructuring them, we will quite deserve our next mugging. We had better cut these monsters into little, itty, bitty pieces. We should embed strict size and leverage limits into their itty, bitty charters, restrict their ability to recombine, and then hire management to run the little things on strictly commercial terms. Hopefully we will change what it means for a bank to run on commercial terms — We should create a tax and regulatory structure that penalizes scale and leverage across the board. Better yet we should decouple the payment system from risk investment by reorganizing banking functions into “narrow banks” and credibly not-guaranteed investment vehicles. But whatever the banking industry comes to look like, nationalized banks should be recapitalized once, then managed to compete in it, and for no other purpose. Taxpayers should seek to extract maximum value from their eventual privatization. But should any of the reorganized banks seek a second helping of at the public trough, they should be ostentatiously permitted to fail. Rather than an implicit government guarantee, successors of nationalized banks should face a particularly itchy trigger finger.

Having nationalized “banks” make loans that prudent managers of a well-capitalized bank would not make is just a way of obscuring a subsidy and guaranteeing permanent quasipublic status by requiring on-going guarantees, bail-outs, and capital injections. Further, putting easy-lending public banks in competition with ordinary thrifts would resuscitate the destructive dynamic we have just put behind us, wherein bank managers must match the idiocy of their most foolish counterparts or watch their businesses wither.

If we want to stimulate the economy, put idle resources to work, stoke animal spirits, whatever, we should do that with some combination of transfers, investment subsidies, inflation, and public works. But if we are dumb enough to force-feed credit into the economy, let’s not hide that behind a bunch of puppet banks. And let’s keep it very clear that we are not confiscating private firms in order to make them tools of the state. We nationalize reluctantly, when we have had no choice but to inject public money (or guarantee assets, which amounts to the same thing) in banks that otherwise would have failed. We nationalize because, in a capitalist economy, investors get to keep the profits they endow, even when the investors happen to be taxpayers.

• Buiter — Time to take the banks into full public ownership
• Clusterstock — More Cries For “The Swedish Model” To Fix Banks, Why Are We So Afraid To Fix Banks The Right Way?
• Cowen — Why bank nationalization is a last resort, Is the Sweden plan so much better?
• Dillow — Arguing about bank nationalization
• Drum — Kevin Drum Smackdown Watch, Nationalization Revisited, Nationalization
• Fama — Government Equity Capital for Financial Firms
• Fox — Why hasn’t the government nationalized Citigroup? Hank Paulson’s sort of answer, The case for nationalizing Citigroup and Bank of America, and getting Robert Reich a fact checker
• Free Exchange — Why not nationalise?
• Hempton — Nationalisation after due process
• Jones — Nationalisation linkfest
• Kedrosky — Bank nationalization: Why Are We Pretending?
• Krugman — Wall Street Voodoo
• Gaius Marius — nationalization now!
• McArdle — Why not nationalize, like Sweden?
• Quiggin — What to do with nationalised banks?
• Salmon — The Urgent Financial Crisis Facing Obama, Insolvent Banks: Why a Debt-for-Equity Swap Won’t Work, Felix Salmon Smackdown Watch, More on Bank Nationalization, Why Nationalization is the Best Alternative, Why We Should Nationalize Now, Nationalize Citigroup and Bank of America
• Surowiecki — Nationalization will not be easy, Where would bank nationalization stop?
• Yglesias — The grain

Steve Randy Waldman — Tuesday January 20, 2009 at 12:16pm

The Daily Deal brings us this updated, short list of seized banks (with Friday’s 2 additions):

Below is the full list of bank’s seized by the FDIC since July 2008:

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Sources:
Two more banks fail, bringing tally to 27
Daily Deal, January 20, 2009 at 2:09 PM

http://www.thedeal.com/dealscape/2009/01/two_more_banks_fail.php

FDIC: Failed Bank List

http://www.fdic.gov/bank/individual/failed/banklist.html

“Chairman Cox has increased to 34 percent of the S.E.C. work force from 32 percent in 2005 and 29 percent in the 1990s. This investment in investor protection already is paying significant dividends.”

The baldfaced lie above was issued under SEC Chairman Cox about how he had improved the agency enforecement staff to protect investors.

Only not so much.

As Floyd Norris noted, this was a very misleading statistical sleight of hand: “The commission’s enforcement staff had declined in size under his chairmanship. It had just declined at a slower rate than the rest of the staff. When I asked if the enforcement staff would look askance at a company that made a similarly disingenuous claim in an S.E.C. filing, his staff seemed surprised.”

Cox, like his two predeccessors, were wholly unsuitable to be running the SEC.

From Bailout Nation:

Then there is Christopher Cox, a stumblebum of an SEC Chair. Cox was more hapless than anything, unable to successfully navigate the fierce lobbying thrown up by Wall Street.

In July 2007, Cox eliminated the so-called uptick rule, removing a key restraint on shorting just as the credit crunch was getting started. (Not very smart). The market peaked shortly afterwards, and began heading south — with no uptick rule to prevent indiscriminate short selling. Then in September 2008, with the crisis in full flower, the clueless dolt made shorting financial stocks illegal. Apparently, he was unaware that fierce market selloffs are often slowed by short sellers covering their positions (to lock in profits on their bearish bets). Without any short-sellers in the market, the downturn became even worse. From the market highs of October 2007, the S&P 500 and the Dow Jones Industrial Average were cut in half in 12 months. Much of the damage came after the no-shorting rule went into effect. (As GOP Presidential candidate in 2008, Sen. Johh McCain called for Cox’s resignation.)

All I can say is good riddance!

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Previously:S.E.C. Chairmen, 2001-08 (December 2008)

http://www.ritholtz.com/blog/2008/12/sec-chairman/

Source:
Christopher Cox Leaves
Floyd Norris
NYT, January 21, 2009, 4:53 PM

http://norris.blogs.nytimes.com/2009/01/21/chris-cox-leaves/

Good Evening: A day after stocks endured their worst pounding ever on the inauguration day of a U.S. president, investors decided to take back most of yesterday’s losses. It seems that decent earnings news out of IBM, some purchases of BAC stock by senior management, and some further hints about Mr. Obama’s economic plans combined to push prices higher. In movie parlance, “take 2″ of the inauguration rally turned out to be a keeper.

Equity index futures were higher prior to this morning’s open in the wake of a surprisingly good earnings report from IBM. I don’t know enough about Big Blue’s business to comment on the quality of their “beat”, but market participants certainly liked the news out of Armonk. Also on the positive side were reports from Northern Trust and BONY/Mellon, showing that yesterday’s poor showing by State Street was an anomaly among the asset-gathering banks. Equities jumped 2% in the early going today, but an awful housing market index reading thirty minutes into the day put an immediate halt to the rally (see Merrill’s take below). The major averages headed back down and tested the unchanged mark before stabilizing.

But hopes for some positive news out of Apple this evening (and they delivered) and some assurances from team Obama that the economy was indeed priority #1 helped spark a rise in stock prices that didn’t stop until the closing bell rang. It was disclosed during the trading session that Bank of America CEO, Ken Lewis, and 5 directors bought BAC stock. The whole financial sector levitated on the news. By day’s end, the Dow’s 3.5% gain paled in comparison to the 5.3% advance in the Russell 2000. Treasurys, however, choked at the prospect of absorbing more than half a trillion of new debt issuance during the next three weeks (see below). The yield curve steepened in response, with 10′s and 30′s seeing their yields rise 15 bps and 18 bps respectively. Also reversing today was the U.S. dollar, which gave back 1.3% against its major competitors. Commodity prices responded by posting a nice gain of their own. Led by a 6% rise in crude oil, the CRB index gained almost 2% today.

Below you will find the latest “Investment Outlook” from PIMCO’s Bill Gross. Entitled, “Andrew Mellon vs. Bailout Nation”, Mr. Gross tackles the subject of our government’s response thus far to the credit crisis still roiling our markets. Not only does Mr. Gross not apologize for backing the “bailout nation” approach, he points out that we would likely be much worse off if we had taken Andrew Mellon’s advice (he was Treasury Secretary under Herbert Hoover) and let Mr. Market sort it all out. I agree with him in that I think our entire financial system would have utterly collapsed, followed by a collapse in the economy that would have made the recession now under way look robust by comparison. I also agree that we cannot “prove a negative nor recreate history to show what might have been”. We’ve chosen our interventionist path, says Mr. Gross, so let’s get on with deciding the best way forward.

President Obama may have his own ideas, but given all the positive feedback I’ve received about my “matching gift” idea for the TARP, I want to revisit the concept to answer concerns posed by readers. More than one worried about the pricing of the toxic assets that would wind up in the TARP, and they especially worried about the government’s role in picking the proper price. Fear not, I say, since the government doesn’t have to make these pricing decisions. The banks themselves pick the price that their bonus pools are willing to pay and the government simply matches by paying the same price (either 1 to 1, 2 to 1, or some other, debatably optimal ratio). If the banks pick too low a price, then both the bonus pool and the TARP will do well. If the banks pick too high a price, then they are only sticking it to themselves, as well as to taxpayers. The banks will thus have an incentive to mark the assets properly for sale to both their employees and the TARP.

Other readers were quite enthusiastic about this “matching gift” idea, so much so that a few want to forward it to Washington. I can only say that I don’t see why it couldn’t work. Warren Buffett came up with a similar idea (find a market price and then match with government funds), so I’m just building on his idea using Credit Suisse’s equally excellent plan. The concept is to put the employees and senior management at the banks on the hook while giving them an incentive to properly mark all this drek. Done well, with market-based incentives and help from the taxpayers who will have to pay up, anyway, we could all win. I know of at least two readers who are trying to find a way to get my idea in front of the Treasury Department, and I’m sure there are other good ideas out there. Let’s share them, improve upon them, and forward them on for consideration. It would be a shame if good ideas simply received a quiet nod before the delete key rendered them to electronic heaven.

– Jack McHugh

U.S. Stocks Jump on Obama Plan, Insider Buys at Bank of America

Treasuries Drop Amid Concern Rescue Effort to Swell Debt Sales

Andrew Mellon vs. Bailout Nation — Investment Outlook, by Bill Gross, PIMCO

No floor for housing pdf

Lovable financial curmudgeon, goldbug, and activist Max Keiser has a new show on BBC Worldwide: The Oracle, in which he predicts the future outcomes of today’s financial chaos.

THE ORACLE January 16th 2009 part 1 of 2 with Max Keiser and Stacy Herbert ;

guests are : Ullrich Fichtner , Nigel Eccles, Alec Baldwin and Carrie Quinlan ;

sujects are : what free spending and credit addicted economies like the US and UK can learn from the more prudent Germans, and what difference an Obama presidency might make?

via boingboing

Part II tomorrow evening!

By Dutch cartoonist, Jos Colligno:

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Oath of Office

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Here’s a link to other cartoons he did for inauguration day, poking fun at Obama and Bush.

Thanks, Esme!

Fascinating discussion via Wired‘s Clive Thompson, and Stanford historian of science Robert Proctor, on Agnotology:

“When it comes to many contentious subjects, our usual relationship to information is reversed: Ignorance increases.

[Proctor] has developed a word inspired by this trend: agnotology. Derived from the Greek root agnosis, it is “the study of culturally constructed ignorance.”

As Proctor argues, when society doesn’t know something, it’s often because special interests work hard to create confusion. Anti-Obama groups likely spent millions insisting he’s a Muslim; church groups have shelled out even more pushing creationism. The oil and auto industries carefully seed doubt about the causes of global warming. And when the dust settles, society knows less than it did before.

“People always assume that if someone doesn’t know something, it’s because they haven’t paid attention or haven’t yet figured it out,” Proctor says. “But ignorance also comes from people literally suppressing truth—or drowning it out—or trying to make it so confusing that people stop caring about what’s true and what’s not.”  (emphasis added)

Fairly amazing, and when it comes to certain issues, its dead on.

What an awesome definition:

Agnotology: Culturally constructed ignorance, purposefully created by special interest groups working hard to create confusion and suppress the truth.

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Source:
How More Info Leads to Less Knowledge
Clive Thompson
WIRED MAGAZINE: 17.02TECH BIZ

http://www.wired.com/techbiz/people/magazine/17-02/st_thompson

Amusing flow chart telling you which chart to use:

via Flow Chart

Be sure to check out the Volcker report we published over the weekend . . .

Paul Volcker / Group of 30 Report on Reform