January 31, 2009
Obama on Profits
The press has well covered President Obama's remarks on "shameful" Wall Street bonuses paid last week. As it should. One phrase in his remarks is odd, however. He added:
"There would be time for them to rake in profits and bonuses later in the economic cycle," he said. "But now is not that time."
Why are "profits" bad? Bonuses without profits is looting by executives. But do we not want our companies, such as Ford and GM, to return to profitability? "Raking" in profits at American companies would be great, anytime.
Government's Knee-Jerk Responses in an Economic SlowDown
Reading the country's economic history one cannot help but be struck by the pattern in government responses to any economic slowdown. In order the government will: 1) Attack market players (short sellers,speculators, and those who use leverage), 2) Attack the markets themselves (bank holidays, stock market closings, wage and price controls, industry cartels, foreclosure moratorium, import restrictions, buy American clauses), 3) Set interest charges below market rates (attacking the valve of its currency), 4) Provide government funds (first in loan then in grant), in order, to banks, companies, states, and unemployed workers, 5) Start large government works projects, and 6) Nationalize private industry (very similar to 5)). 4)5) and 6) are done with deficit spending (borrowed money). One could also argue that step 7) is Engage in a major war. I hope not. The answer to critics of FDR's New Deal (which did not pull us out of the depression) is that the government did not spend enough; perhaps the answer to critics of Bush is that the war in the Middle East was not big enough. An alternative 7) which we have not tried but dictators in many countries have is 7) Inflate (devalue) your currency once the government debt builds up to intolerable levels.
Roche's "Hostile" Bid for Genentech
Roche has announced a "hostile" bid for Genentech at $86.50 a share. Sounds simple enough. It's not. Roche already owns 54 percent of the stock. It is making a hostile bid for the remaining shares in a company it already controls. A special negotiating committee of the Genentech board had rejected the Roche offer of $89 a share. The bid comes in a falling market, with financing very difficult to secure, on the eve of a drug approval, and for a company that has most of its value in employee knowhow. Very risky stuff. Roche will hope to close a negotiated offer with the new pressure and then defend in court the value paid. Keep in mind that much of this is to convince a judge that the price paid for a minority shares is "intrinsically fair."
January 30, 2009
The press and commentators are picking apart the House and the Senate Stimulus Bill, noting many (most) of the items are not directly related to quick job creation because they are, among other things, 1) time delayed, 2) promoting social goals, or 3) promoting regional goals (pork). We should not be surprised. Members of Congress are elected by regional voters and supported (with campaign contributions) by groups promoting social goals (environmentalists, unions, trial lawyers, health care advocates). Give the members of Congress $800 to $900 billion to spend and they have an overwhelming incentive to favor local causes and social causes that provide party funding support. Congressmen Barney Frank's recent comment is choice. When Geithner put in place rules to log all calls on spending the TARP money and will, apparently, put the logs on the Internet (I will believe this when I see it), reported tracked down Frank, who was front page news in the Wall Street Journal for pressuring Treasury to put TARP money in a Boston bank that did not deserve it (TARP bails out only healthy banks; this one should be wound up). Frank's response, and I paraphrase: "Glad to see the log made public. My constituents will know I am going to bat for them." This Bill will be a very crude approximation of a true Stimulus Bill. And there are huge costs for not getting the Bill right; the government borrowing to support the bill will deplete funds for private investment and deplete funds for borrowing by other suffering countries. If the gains from the Bill do not outweigh the costs (the so-called multiplier is less than one), the Bill will be a domestic and international dead weight loss. We will have to beat the recession despite the Bill's increased burden.
Geithner the Pragmatist
Geithner is know as a "pragmatist." This is why he only paid two years of back taxes when he owed four; the statute of limitations had run on the two years. He passes strict new anti-lobbying rules and then hires for his Chief of Staff and very, very well connected lobbyist with Goldman Sachs. A pragmatist, indeed. Odds are he will run Goldman when he leaves the Secretary's office.
Hedge Fund Whipsaw
In the UK, Parliament had three of the leaders of its largest hedge funds on the hot seat. The members wanted to know whether they were making too much money off the bank difficulties in the country. Some of the funds had shorted bank stocks. To defend themselves the fund managers showed their market losses. This apparently made the members feel better. So hedge funds, had they collapsed like the domestic banks, would have been pilloried for taking on too much risk, were not pilloried for making money. Their defense was that they also lost some money. In the United States we will regulate hedge funds for taking on too much risk even though they are not the cause of our troubles and we are begging, begging them to put their money in the market. Hedge fund managers had better have a very good sense of humor or humour.