October 31, 2008
Lehman Bankruptcy and the Presidential Race
John McCain was up in the most of the polls (and the Intrade markets) the weekend before Lehman declared bankruptcy on Sept. 15, 2008. After the bankruptcy of Lehman, McCain has trailed in every poll ever since. The economy soured after the bankruptcy and McCain's fortunes went down with the market. One could ask, had Paulson given an 60 to 80 billion guarantee to a Lehman suitor (he had, a few weeks earlier, guaranteed 29 billion in bad assets in the Bear Stearns acquisition), would the market have held up better and would we have had another President (or a least a closer race)? Did Paulson doom McCain?
Bank Bailout Compensation Limit Problems
The bank bailout bill bans severance payments to bank executives over 3 time salary and puts vague limits on salary. Yet the banks covered are under a contractual obligation for "billions" to their executives. See "Banks Owe Billion to Executives," by Ellen Schultz in the Wall Street Journal. Can the government force banks to breach compensation agreements? What legal rights are retained by executives with breached compensation agreements?
October 30, 2008
Commerical Paper Market Recovering
The Fed program to guarantee commerical paper, one of the few government programs I support, is having a positive effect.
The Early Results of the Government Bailout: Classic Complaints
An amazing combination of stories today show already show problems with government bailout money that, I suggest, we will see repeated over and over for the next decade.
1) The Cash is Lost. See "Where Did the Cash Go?" by Mary Walsh in the New York Times. AIG took $123 billion in just a few days and spent it. Ms. Walsh cannot trace the use of the cash in the company's financials.
2) The Cash is Not Spent the Way It is Supposed to Be Spent. Banks Are Not Lending Bailout Money (multiple stories). They are using the cash to pay dividends, make acquisitions, and just as hoarding fodder.
3) Government Guarantees (or government ownership) Do Not Lower Capital Costs for Guaranteed or Owned Companies. See Mortgage Plan Isn't Cutting Rates, by James Hagerty in the Wall Street Journal. Lenders to Fannie Mae and Freddie Mae are demanding high interest rates and therefore increasing mortgage rates for consumers even though the banks have been seized by the government.
4) Government Money Comes with Non-Financial, Political Strings. See "Cuomo Asks Bonus Data From Banks" by White and Glater today's New York Times. Any getting bailout money must pay executives what government officials want them to pay. See also the recent articles on Cuomo's forcing environmental disclosure's by energy companies.
5) Government Bailouts Are Empty Holes for Money: See "UK Bank Bailout May be Costlier Than Planned," by Munoz and MacDonald in todays Wall Street Journal. See also the new tax break for bank mergers and the Democrats plan for another $300 billion in stimulus grants.
6) Government Bailouts Lead Government to Try and Restructure (Unsuccessfully) Entire Industries. See "As Merger is Pursued, G.M. Sales Plummet," by Vlasic in the New York Times. Government officials are now brokering mergers in the automobile, banking, insurance and airline industry.
7) Government Bailouts Stimulate Socially Wasteful Expenditures on Government Lobbying: "Factions Lobby to Shape Possible New Stimulus," by Conkey in the Wall Street Journal.
This is one day's stories. These stories will keep on coming.
3rd Quarter GDP Estimates Slightly Negative
Estimates of the 3rd Quarter GDP figures show a decline of .3%. If 4th Quarter GDP figures are negative were are in a recession, starting at the beginning of the 3rd Quarter (July 1). Estimates change, however. The 1st Quarter figures increased from estimate to actual by, you guessed it, .3%.
October 28, 2008
US Steel (X) announced its 3rd quarter profits tripled from last year. The stock fell to 28 dollars a share, 3 times earnings. It is exhibit A in the case for the total zaniness of the stock market.
Dynegy Agrees to Environmental Disclosures
Dynegy is the second company to negotiate a settlement with the Attorney General of New York, Cuomo, that includes a promise to include environmental disclosures in its Form 10-K filings (annual report). Cuomo issued subpoenas to four companies under a state securities act, the Martin Act, seeking information on whether the companies had adequately disclosed "increased financial, regulatory, and litigation risks" triggered by environment regulations. Xcel was the first to cave, negotiating a similar agreement in August. Al Gore announced the settlement historic. Dynegy, building and operating coal-fired electrical power plants was the second to cave. Dynegy will disclose all material financial and physical risks related to climate change and all material effects of climate change regulation. Dynegy also agreed to disclose an array of environmental data and plans for reducing environmental effects of its operations. Negotiations with AES, Dominion Resources and Peabody Energy are continuing -- expect them to cave as well.
The disclosures will, of course, facility strike suits under whatever is disclosed. Plaintiffs will allege disclosures are either inaccurate or incomplete. Federal judges, under the guise of disclosure regulation, will, in the end, regulate the energy policies of these companies.
October 27, 2008
This morning we learned that two Ohio banks received bailout money, Huntington and Key City, while two others have not, Fifth Third and National City. The refusal drove National City into the arms of PNC. What do not know what standards are being applied or by whom. We do know that someone in the government is personally reorganizing the Ohio banking industry.