Obama to Detroit: Drop Dead? Congress to Market Transparency: Drop Dead. And forget iShares - Does Goldman Sachs know something we don't?
The Union Apprentice
People with ropes around their necks don't always hang.
- Angel Eyes in "The Good, the Bad, and the Ugly"
Maybe it comes from supervising stockbrokers for so long, maybe it comes from having raised children. We don't know. But in the dying days of the Bush presidency, while Pelosi & Co were rushing to sell our patrimony to Motown for a mess of pottage, and the auto makers were whining "This Time We'll Behave, Honest We Will", we looked Nardelli, Wagoner, and Gettelfinger in the eye and we knew they were lying.
They swaggered onto Capitol Hill like Athos, Porthos, Aramis and D'artagnan. We watched the bottom-feeders of Congress lash out at the I-Take-Mine-Off-The-Top Four Musketeers over being greedy, venal, wasteful and stupid, until they all had the rug pulled out from under all of them by President Bush who Decided ("I'm the Decider") to out-Democrat the Democrats by just writing a check. We could almost see the tears in his eyes.
As Carl Sagan used to say, "Billions and billions!" Dare we hope that it might be over?
My dog ate it. My brother wiped his nose with it. I thought it was tomorrow. My sister hid my notebook. The world is full of excuses. So far, only Ford looks like it ran its business like a business. The going got tough, and Mulally appears to be the only one of the four who took seriously the notion that he is running a capitalist enterprise. Time will tell. Ford may be the lone Ant, surrounded by a horde of Grasshoppers.
Of course, President Obama was right to fire Wagoner - a man who should have long since been disposed of by the board of directors. But Wagoner was only the handiest symptom of an industry-wide malaise. We would also wish to see the directors of GM in the dock, though we despair of that happening.
President Obama also did the politically easy thing. Or perhaps the only politically permissible thing. His sacking Wagoner fails to cut deeply enough and may rank as a definitional moment in Politics as the Art of the Possible. For all the money the Democrats have funneled to the UAW, President Obama did not fire Ron Gettelfinger.
Paul Ingrassia, formerly the Wall Street Journal's Detroit bureau chief, let it be known that he, for one, thought Mr. Wagoner's departure was overdue (WSJ 31 March, Op Ed "Wagoner Had to Go"). Mr. Ingrassia makes points that we support. We scoff at Michigan Governor Granholm's characterization of Wagoner as a "sacrificial lamb". In capitalism, you eat what you kill. Wagoner has eaten for many years now without killing anything except his shareholders.
Mr. Ingrassia finishes by observing that, despite it being in the best interest of all concerned, the union will not voluntarily redo its compensation, work rules, or benefits. Thus, Gettelfinger emerges from this battle as the Last Klingon Standing. A Wall Street Journal OpEd piece (1 April, "GM Bankruptcy? Tell Me Another") raises the incestuous relationship between the Democrats and the Unions and makes the point that, Wagoner or no Wagoner, there is still no solution in sight. The UAW and the bondholders look ready to have the final say, because firing an overpaid and ineffective Chief Executive is a more effective sop to public outrage than prying loose the stranglehold the UAW has on the throat of an industry that should have died of natural causes a decade ago. Even patients on life support must die one day.
There is also the practical conundrum, that forcing GM and Chrysler into bankruptcy may have the knock-on effect of forcing Ford's suppliers out of business, though the Administration could figure out a way to backstop their business that helps the Good stay in business, and still comes off cheaper than bailing out the Bad and the Ugly.
We like to flatter ourselves that our experience in dealing with repeat offenders has sensitized us not only to the prevarications of Wall Street and Detroit, but of Washington as well. The Obama automotive task force is being praised by folks whose opinions we respect for the quality of its analysis, and for the swift and effective decision making it is bringing forth. But we are sorry that the President could not have followed up his 2 AM call to CEO Wagoner with a 2:10 AM call to Gettelfinger, and we fear the sequel to Too Big To Fail may be Too Politically Hot To Handle. We wonder what we shall see next time we look the President in the eye.
Take Me Out To The Ballgame
Don't move, I'll get you water. Don't die until later.
- Tuco in "The Good, the Bad and the Ugly"
Both New York baseball teams are preparing for their home openers. The Yankees will be at that perennial symbol of taxpayer largesse - the greatest ongoing American bailout story of all - the new Yankee Stadium. The Mets, meanwhile, are gearing up to take their practice swings at Citi Field, which may have a name change before the season is over. We vote for cutting to the chase and renaming it right now, before we get into embarrassing mid-season T-Shirt and souvenir beer mug moments. We think it should be renamed Geithner Field, and have done with it.
We remember going to the Polo Grounds to watch New York's newest franchise, back when the Mets were loveable losers. To a ten-year-old boy, watching the grounds crew protecting the turf during a summer downpour was as mesmerizing as the game itself. This season, rolling out the tarp at Citi field will take on a whole new meaning.
Meanwhile, Tuesday's Wall Street Journal ran the banner headline "US Threatens Bankruptcy for GM, Chrysler". It looks like the Journal is trying to paint an equivalency to the famous Daily News headline, "Ford to City: Drop Dead." And for all its buttoned-down, white-shoe propriety, the Journal often gives the tabloids a run for their money in terms of sensationalism. It's just that the Journal's hyperbole is couched in tones redolent of William F. Buckley, Jr, while the Daily News sounds more like Leo Gorcey.
One notion raised in the WSJ article is the idea of separating the auto manufacturers into a "Good Company" and a "Bad Company", along the conceptual lines of a Bad Bank, to hold toxic assets. We fear that not merely biting the bullet will create a prolonged illness, where a quick death would be most merciful to all. Who is going to drive the Toxic cars? Will they be sold off to the same Third World countries that are the principal market for Marlboro cigarettes?
It pays to remember, as our CEO, Keith McCullough has pointed out, if it is "toxic", it ain't an "asset". I guess you had to go to Yale to be able to see that one.
Bad bank. Bad auto maker. What's next? We suggest: Bad Government, as a way of getting rid of those lawmakers who have put pedal to the metal while steering us off a cliff. Surely there must be some country that can put them to good use?
We remember sitting next to Vince, the head OTC trader on a small desk in the early 1980's - back when life, and risk, were simpler. Each day, Vince held a series of short telephone conversations, each one identical to the others. The phone would ring, he would answer, listen for a second, then say: "I'm an eighth, a quarter. What do you want to do?" We submit that what has been wrong with the Government's approach to the banks - from TARP, to TALF, to PPIP - is the insistence on an unrealistic level of complexity, when after all, it is ultimately one big trade.
No matter what price the toxic non-assets are sold for, someone will be mightily unhappy, and someone else will stand to make a profit. The banks have refused to unwind their CDS at even a farthing's discount, because they would have to restate all the assumptions on which their accounting rests, which would result in a restatement of their assets, book value, net worth... the variables used to calculate bonuses and CEO compensation... do you see where this could lead?
From the beginning, we wanted President Obama to simply fix a price and just sit on the bid. Does Secretary Geithner's best guesstimate put the value of $1.6 trillion in CDS at 27 cents on the dollar? Well then, instead of writing checks to the banks for free, the Government should have hung out a sign saying COME AND GET IT, and bid 27 cents across the board. But the Administration has refused to play even one round of Chicken with the banks, funneling endless sums of cash into the banks without any promise of cooperation, transparency, or even contrition.
Secretary Geithner's new plan - finally off the drafting boards - looks like a roll-up of the biggest offenders into a win / win deal where they will be overcompensated for the non-risk they are about to assume, and will also be paid off for their past poor investment decisions and inept risk management.
In order to participate as a Private Investor in the PPIP, a bank must already be a non-selling holder of $10 billion in toxic assets. The restriction, that the bank must not sell any toxic assets, but must only buy, is far less draconian than it appears. The Financial Times (2 April, Comment: "Why Geithner's Plan Is The Taxpayers' Curse") calculates that the expected return calculation for banks participating as private buyers starts at almost 300 percent, with risk limited to 7.5% of the original purchase price.
By raising the barrier to entry to effectively exclude anyone who has not already been responsible for creating this disaster - and by building in guaranteed profits in the hundreds of percentage points - Secretary Geithner's program looks like having the (un-?) intended consequence of bailing the participants out of their original toxic assets, while also allowing them to make a substantial profit on buying other institutions' portfolios.
Why, for example, a consortium of solid and well capitalized regional banks should be precluded from raising $100 million, applying their own risk management and assessment tools, and bidding on portions of a troubled bank's CDS portfolio is beyond our ability to comprehend.
By maneuvering the lion's share of the profit potential from this program into the hands of the Usual Suspects, Secretary Geithner damages both the capitalist model and - at a time when neither America nor the world can afford it - America's credibility in the global marketplace.
It would appear that President Obama has hinted to Secretary Geithner that, since we can not beat 'em, we might as well join 'em. This would explain why Goldman CEO Blankenfein found himself the sole member of the private sector to attend a meeting between the Government and AIG - and walk out with a handsome payoff, to the tune of one hundred cents on the dollar on billions of high risk CDS.
Major League Baseball has troubles of its own. If the PPIP fails, Secretary Geithner will have plenty of explaining to do. We wonder whether he will be any more articulate than A-Rod when his turn comes to explain why the majority of legitimate market participants were effectively barred from participating in the PPIP.
Surely it can not be that the risk is too high?
Beating Swords Into iShares
We figure that, if anyone knows, Goldman knows. Thus, the news that Barclays' iShares business looks about to be sold to CVC Capital Partners, we wondered what this might mean for the regulatory future of the ETF sector.
Call us conspiracy theorists, but it is not lost on us that, out of the list of potential buyers mooted in the press in recent weeks - Goldman, Charles Schwab, Hellman & Friedman, Bain Capital, Colony Capital, and TPG Partners - all but one are US-based firms. The sole exception being a UK entity. If CVC - which came apparently out of nowhere to carry the day - emerges the winner, its Luxembourg-based operation will become a significant player in the US equities markets, in addition to the influence it already wields in the global private equity market.
We do not believe that Goldman loses a bid that it wants to win. Therefore we permit ourselves to indulge in an Oliver Stone scenario where the US regulators tell Goldman that they are going to clamp down on the ETF markets and Goldman should pick its battles. Realizing that, even for Goldman Sachs, this is not the environment to be seen dictating to the regulators, they bow out graciously. The prize now goes to a secretive company based in Luxembourg.
So what?
Here's what.
One of President Obama's successes at the G20 meeting was a seemingly impromptu conversation he held with French President Sarkozy and China's Premier Hu, in which he obtained their acquiescence to the G20's list of rogue tax havens. Mr. Obama, by all accounts, is acquitting himself admirably on the world stage, and at least in demeanor appears to be very much delivering on his campaign promises. We sincerely hope (pace Mr. McCullough: Hope is not an investment process, and not a political process either) that this bodes well for looming confrontations that abound on all sides.
The list in question, referenced in the Financial Times' article (2 April, "Obama Brokers Pact On Tax Havens") references jurisdictions and progress they have made on implementing the OECD internationally agreed tax standard. There are three Western European countries remaining which have not yet fully conformed to the revised standard for prevention of tax evasion: Austria, Switzerland, and Luxembourg. Austria may not be a big enough target for immediate US action, but we all saw what happened to the Swiss in the latest row over bank secrecy and offshore tax cheats.
Our speculation is that the iShares transaction will lead to an ugly showdown. As we have reported in earlier columns, the Senate is proposing legislation to curb speculation in commodity contracts, and the Mercantile Exchange deems issuers of commodity and futures-based ETFs to be speculators. Is CVC about to buy a slaughtered pig in a poke, which can be turned to a significant source of leverage over Luxembourg's banking system?
What does Goldman know that the Luxembourgeois don't?
Off With Their Heads!
It would be so nice if something made sense for a change.
- Alice in Wonderland
Rep. Mike Castle, of the House Financial Services Committee, has introduced legislation to create a systemic market risk regulator. There is a Senate companion bill introduced by Senator Susan Collins, to create a federal systemic risk regulator to monitor the financial markets and oversee financial regulatory activities.
We are not above taking the occasional cheap shot, and we note that, in the recent legislative mauling of FASB, this same (Republican) Representative Castle was heard to say that the committee was looking for "some solution in the middle."
How a politician can be pushing for greater oversight, disclosure and transparency on one side, while browbeating an independent standards setter into muddying its own waters was almost beyond our poor ability to comprehend. But then we realized that, after all, we are talking about a Politician.
Not to be unduly unfair to Representative Castle. We do not wish to be more than duly unfair. This trend started last year, when the Nasdaq sought SEC relief to relax its listing standards.
SEC release 34-58809 of 17 October details Nasdaq's request to suspend listing requirements based on minimum bid price. The filing reads, in part, "In the last several weeks, US and world financial markets have faced almost unprecedented turmoil... this turmoil has resulted in a crisis in investor confidence and concerns about the proper functioning of the securities markets. As a result, the number of securities trading below $1 has increased dramatically. Nasdaq believes that during this time there was no fundamental change in the underlying business model or prospects for many of these companies..."
Nasdaq thus took the lead, being the first regulator to step out of its role of overseeing the mechanism of the markets, and start essentially putting out Buy recommendations on the securities that list on its facility.
Holders of the shares of GM should take note: the price of your shares may be artificially depressed, owing to nothing more than global investor panic, unreasonably exacerbated by the recent launch of North Korea's test warhead, and the fact that Israel is planning all-out airstrikes against Iran's nuclear facilities.
Into this mess strides Congress. Perhaps no comment is more telling than the statement issued by Chairman Barney Frank's office, saying that the FASB, by caving in to this political hammering, "has made significant progress toward addressing inaccurate asset valuations in the market."
We are at a loss to explain how Chairman Frank is better armed than the Marketplace to know the true value of an illiquid piece of paper, or to determine the accuracy of the market's valuations. But we do know that anything that diminishes transparency is not good for markets.
Not only does the new standard permit companies to define which of their assets will be categorized as "distressed", and to redefine them if it sees fit. It does not even require them to clarify how they arrived at that conclusion. The new FASB guidance requires a firm to disclose changes in valuation technique, and to quantify the effects of those changes, "if practicable." During an open Q&A session, New York Times Chief Financial Correspondent Floyd Norris wondered "how many firms will find that it is not 'practicable' to quantify the effects of the change."
Bingo, Mr. Norris.
It is nothing short of astonishing that, in the teeth of this crisis, the nation's lawmakers gang up on one of the few independent standards-setting boards, forcing less transparency, rather than more. We recall that this is the same Congress which, only days before, passed a law targeted at punishing a handful of people who - deservedly or not - had bonuses coming to them under their employment contracts.
By the way, we do not fault Secretary Geithner over the AIG bonuses. Of course he knew about them. But they were truly Beside the Point and of such small order of magnitude, in the face of the entire AIG mess, that it would have been an act of malfeasance on his part to divert the resources necessary to attack these Done Deals. The fact that Congress, setting aside the well-being of the Nation, and the stability of the world's financial markets, chose to make political hay of this is a testament to the depth of stinking corruption to which the political class in this country has fallen.
As we opined last week, the evisceration of the Early Warning and admittedly highly conservative accounting standards plays directly into the hands of the firms now contemplating joining up for the PPIP. These standards were not created for ordinary risk, but to act as red flags to prevent explosive risk that could lead to systemic meltdowns. Day to day risk and reward tend to smooth out over time, while disasters happen at the margins. The private buyers of Mr. Geithner's illiquid assets will now get to state the value of those assets, and no one will have a standard upon which to challenge them.
Once you control the market, it is astonishing how much money you can make.
Just ask Goldman Sachs.
