Wednesday, April 29, 2009

One Mistake of the First 100 Days

Here’s your assignment:  You’ve just been elected President of the United States.  Your most urgent Cabinet appointment is Treasury Secretary, the person who will lead us out of the worst financial abyss since the Depression.

Obviously, this person must have not only the leadership skills and charisma to inspire and mobilize the country’s efforts, but must understand what got us into this mess in the first place and what will get us out.  The Secretary has to have demonstrated in the last two years a record of comprehending the financial system’s (1) high risk, (2) deteriorating capital base, (3) innovation dangers, (4)soaring leverage and (5) increasing instability.

Unfortunately, you failed the assignment.  You selected a person who, judging by his own words, comprehended none of these.  But before getting to his words, consider the crescendo of disparaging commentaries from others.  Timothy Geithner hasn’t had a lot of good press since taking over as Treasury Secretary.  Now, if possible, it’s getting worse.

In my last blog post, I lamented the appointments of both the Treasury Secretary and the head of the National Economic Council, Larry Summers. Portfolio magazine just chimed in with a less-than-flattering cover story on Geithner.  And now, the New York Times weighs in with a 5,330-word front-page piece that can only be described as a public servant’s worst nightmare -- but a must read. It takes him to task for his past actions (erratic), associations (Wall Street) and record (unimpressive).

For me, the most valuable part of the article was pointing me to the speeches that Geithner delivered during 2007 when he was president of the Federal Reserve Bank of New York, by far the most important and influential of the 12 Federal Reserve regional banks. He was delivering about a speech a month.  They varied little in their optimism.  In essence, this was the message:

Despite some serious shocks to the financial system so far, don’t worry.  The system has handled it before, and can handle it again.  You’re in good hands.

Let’s look at one of these speeches, delivered on May 15, 2007, at the Financial Markets Conference of the Federal Reserve Bank of Atlanta. Remember, the subprime mortgage mess was getting into full swing and it was just over  a year before the bankruptcy of Lehman Brothers, the forced merger of Merrill Lynch into Bank of America, and the beginning of the world economic system’s falling off a cliff. Read these remarks, and then ask yourself these questions: What in the world was Obama thinking when he nominated Geithner to be Treasury Secretary, and what was the Senate thinking when it ratified him?

“…There has been a marked improvement in global economic performance, with strong growth, relatively low inflation, and less volatility in both growth and inflation. This seems to have reduced concern about future fundamental risk, in terms of the potential damage of future shocks and in the ability of governments and central banks to both avoid the policy errors of the past and to competently manage some daunting longer–term policy challenges…

“Changes in financial markets, including those that are the subject of your conference, have improved the efficiency of financial intermediation and improved our confidence in the ability of markets to absorb stress. In financial systems around the world, the capital positions of banks have improved and capital markets are becoming deeper and playing a larger role in financial intermediation. Financial innovation has improved the capacity to measure and manage risk. Risk is spread more broadly across countries and institutions…

“These changes in economic conditions reinforce each other. The long period of relative economic and financial stability has reinforced expectations of future stability, reducing implied volatility and risk premia, increasing comfort with higher leverage, and encouraging flows of capital into riskier assets…

“The dramatic changes we’ve seen in the structure of financial markets over the past decade and more seem likely to have reduced this vulnerability. The larger global financial institutions are generally stronger in terms of capital relative to risk…”

Timothy Geithner, May 15, 2007
[emphasis added]

How could one person in such a responsible position be so wrong?   He was wrong not on a few things, not on a lot of things, but on everything.  He had no clue as to the banking system’s increasing risks, vanishing capital, innovation consequences, dangerously high leverage, and impending collapse.

Given his record for perspicacity, how can we now put credence into anything Geithner says? Is there any reason to believe he understands the   unintended consequences of  subsidizing and supporting too-big-to-fail banks, insurance companies  and automobile manufacturers; of throwing trillions dollars of taxpayer money at the economic problem;  and of buying banks’ toxic assets with highly leveraged public-private purchases.

The answer is we can’t put any credence into them. But fortunately for us, throwing trillions of taxpayer dollars pell-mell at the problems will help solve them; maybe not efficiently, maybe not fairly, and maybe not rapidly; but eventually.

Meanwhile, most of the other Cabinet appointments, in my opinion, range from pretty good to superb (e.g., Steve Chu at Energy).  And almost all the bold new initiatives in infrastructure, science, energy, health, defense, international relations, et al., are laudatory and long overdue.  Kudos, indeed.

But in dealing with the economy, by far our most critical problem, why, oh why, couldn’t we have done better?

Wednesday, April 1, 2009

It's Time for a Change

On December 8, I wrote that the praise for “Obama’s initial slate of financial appointments has been almost unanimously effusive. But not from me.” I lamented “that a great opportunity was missed – the appointment of Joseph Stiglitz to either Treasury Secretary (instead of Timothy Geithner) or head of the National Economic Council (instead of Larry Summers).”

Almost four months and hundreds of billions of misdirected dollars later, I feel even stronger about what might have been. But see what you think. Consider what has been done by our crack economic team since January 20 in attempting to solve our financial mess. Then look at the results so far (by whatever metric you wish to choose). Finally, read Stiglitz’s
 op-ed piece in today’s New York Times, “Obama’s Ersatz Capitalism.”

He describes the administration’s proposal to deal with the ailing banks as one that replicates “the flawed system that the private sector used to bring the world crashing down…overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency…

“What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socialization of losses. It is a ‘partnership’ in which one partner robs the other. And such partnerships – with the private sector in control – have perverse incentives,
 worse even than the ones that got us into this mess.” [Emphasis added]

The appeal of such a proposal? He describes it as a “kind of
 Rube Goldberg device that Wall Street loves – clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets.”

As to the alternative of temporary nationalization, Stiglitz suggests that “that option would be preferable to the Geithner plan. After all, the FDIC has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).”

As I mentioned in my December piece, Stiglitz was shut out of the administration’s economic team because of longtime bad blood between him and Summers (the same issue that has kept Paul Krugman on the sidelines). But it’s not too late for the administration to admit mistakes of commission and omission. Should they make a change in our economic leadership? Yes. Will they make a change? Alas, no. In Washington, politics trumps rationality.

Wall Street and the Automobile Industry

The U.S. automotive industry is now being “overseen” by Steve Rattner, head of an leveraged-buyout firm (pardon me, private equity). Chrysler was purchased two years ago by an LBO firm (oops, there I go again) started by a former Drexel bond trader. General Motors was run for almost two decades by a former finance guy, a long tradition at GM. (At least Ford’s CEO had built something tangible before – airplanes.) However the industry emerges from its current dysfunction, is there any reason to believe that there’s anyone in charge today who knows the first thing about running a successful auto manufacturer; someone who can design and build cars that people
 want without rebate incentives; someone who can recapture the two generations of youth that have eschewed the American automobile?

There are those students of management who believe that any good manager can manage a company in any industry. Call me crazy, but I always thought that one should know
 something about the business one runs. (Come to think of it, real-estate moguls running newspaper companies haven’t been too successful, either.)

Speaking of the auto industry and of Wall Street, the then family-owned Ford Motor went public on January 17, 1956, in one of the largest IPOs ever (to that date). It was not only large in dollars, $658 million, but in the size of the underwriting syndicate. Over three hundred broker-dealers participated in the offering. (Apologies for the poor quality of the tombstone; your eyes are OK.)


Well, we know what’s happened to Ford and to the auto industry since then, and it’s not pretty. But what about all those securities firms that helped make Ford a public company? That’s not pretty a pretty sight, either.

There were seven managers of the offering: Blyth, First Boston, Goldman Sachs, Kuhn Loeb, Lehman, Merrill Lynch, and White Weld. Today, only Goldman Sachs remains; the others all died or were acquired. Of the eight firms in the next largest allocation bracket, only the name Lazard remains today as an independent entity (they’ve jettisoned the Frères from their earlier name.)

Ford UW analysis

As to the other 300 or so national and regional firms, most have long ascended into that Great Stockmarket in the Sky. It’s sure a different business today from when I was plying the Street in the 60s and 70s as a technology analyst. Very few IPOs, fewer still underwriters, and even fewer technology analysts.

My Favorite Bank Advertisement of the Month

Bank of America ran a full-page in newspapers around the country with this opening line:

“We’re taking the trust and faith that America has put in us and getting to work…”

The “trust and faith” that we put into you? As John McEnroe might say, “Are you kidding me?”

This rather presumptuous claim almost rivals the one in Bernie Madoff’s pre-incarceration letter to fellow apartment owners at 133 E. 64th St. apologizing for the media frenzy in front of the building

Dear neighbors,

Please accept my profound apologies for the terrible inconvenience that I have caused over the past few weeks. Ruth and I appreciate the support we have received.

Best Regards,


“Support we have received?” "Trust and faith put into us?"

Bizarre, or what?

Where Maureen Gets Her Material

With this economy, as William Goldman famously said of Hollywood, “Nobody knows anything.” [Emphasis added.]
Maureen Dowd, New York Times, February 21, 2009

In 1983, screenwriter William Goldman (Butch Cassidy, Marathon Man, All the President’s Men, Princess Bride, et al.) wrote Adventures in the Screen Trade, a brilliant and entertaining analysis of the movie industry. His unforgettable takeaway line that summarized the entire 436-page book, the phrase that captured the essence of Hollywood, and now the single best explanation of why we’re in such an economic mess: “Nobody knows anything.”
Through Rosen-colored Glasses, September 24, 2008 

By the way, Maureen, just to pick a grammatical nit, Bill Goldman didn’t famouslysay “nobody knows anything.” He happened to coin a phrase that became famous.

And another BTW: There is somebody who does know something: Joe Stiglitz. He just happens not to be where we need him.