Mr. Goodwrench

President Obama has unilaterally guaranteed the warranties on the autos sold by General Motors and Chrysler. See U.S. Auto Warranties. Now this is a pretty far-reaching commitment of taxpayer dollars for not having any public or Congressional input. To see how profound this might be consider the following: these two U.S. automakers sell roughly eight million cars a year (some years more, some years less) and I estimate the effective cost of a three-year warranty on a new car to be about $1,000 per car. So Obama has committed the U.S. taxpayer to $8 billion of cost per year in the first year and accumulating up to $24 billion per year in year three (after layering each new model year). Once these two car companies went under, this guarantee would theoretically last for at least three years after they disappeared under the waves. Now this is just problem one. There are two more serious issues:

1) What about Ford Motor? How can they compete with GM and Chrysler when these latter two companies have free access to the U.S. taxpayer’s wallet from which to extract even larger amounts of pelf.

2) What about foreign auto makers? Can they not now claim unfair trading practices for this U.S. warranty backstop? In fact, just the current Obama loan guarantees to GM and Chrysler could also be construed to be the start of an auto-industry world trade war. We know that the degeneration of world trade was a major contributing factor to the great depression. Have we just let this genie out of the bottle once again?

The Obama administration is moving so fast in its attempts to improve our economy that I am concerned that it has not spent enough time worrying about unintended consequences. Maybe they need to follow that oft-used phrase from the Clinton administration and "stop and take a deep breath".

Good Riddance

George W. Bush is comfortably ensconced back in Texas … making Laura’s morning coffee and licking his wounds. And I say, “Good riddance!” Clearly, our worst President can no longer run up huge budget deficits which our children and grandchildren will have no hope of repaying. He no longer can escalate military offenses in far away lands where American sons and daughters will go the die or lose their limbs. He can no longer gaff his way through unscripted press conferences and photo ops. He can no longer try to reward all this nation's illegal aliens with citizenship and Social Security benefits. He can no longer nominate people to his administration who are tainted with malfeasance or unethical pasts. He can no longer sully America’s standing with our foreign friends and enemies alike with his naïve diplomatic judgments. He can no longer reward his supporters with larded-up government spending. He can no longer ruin our economy with his constant doom and gloom predictions. He can no longer wage his petty “war on terror.” He can no longer endorse steps to alleviate global warming. He can no longer keep Guantanamo open so that peace-loving Islamists are constantly tortured and kept in subhuman conditions. And he can no longer fiddle-fart around while Rome burns.

Thank God for the wisdom of the American electorate.

The Piker

U.S. DEFICITS BY YEARS

Yes, George W. Bush took a budget surplus from the latter part of the Clinton administration and turned it into a deficit. This was the result of the bursting of the dot-com bubble, the 9/11 terror attack with its resultant financial meltdown, and then the wars in Afghanistan and Iraq. It was not the result of the Bush tax cuts as these did nothing but encourage economic growth and vigorous employment expansion up until the time of our current financial freeze-up (the reasons for which I will not argue here). But Bush was a piker when it comes to fiscal irresponsibility. As one can see from this chart, the Obama administration, under Rahm Emanuel’s leitmotif that “we should never waste a good crisis,” is pushing social spending and our federal deficits to undreamed-of levels … and this will occur despite a planned gutting of our defense budget. This chart shows the dramatically growth of deficits under the current Obama/Emanuel plan as projected by the White House and also the impartial Congressional Budget Office (CBO).

One picture is worth a thousand words.

The Face of American Politics

- Friend of Angelo (mortgage rate payola)

- Refusal to release mortgage paper trail
- Wife involved with AIG (on board of IPC)
- Flip-flopper on AIG bonus provision (fessed up) - Waitress "sandwich" maker w/Ted Kennedy

- Irish vacation home shady self-enrichment

- John Huang 1996-97 Chinagate scandal

- Cozy relationship with Fannie Mae

And to think, he might have been the Democrat nominee for President ...

Turd on the Table

A boss of mine once derided me for leaving him a “turd on the table.” In other words don’t bring him a problem without bringing him a solution. I guess I’ve done just that with “The Camel's Nose” blog entry. So, I will try to solution things. Unfortunately the riposte isn’t easy. The answer needs to rein in excessive executive compensation without the heavy hand of government which, if we have been awake these last twenty years, invariably brings with it more problems than it solves (witness the “Community Reinvestment Act” of 1992 which is the genesis of our current economic meltdown.)

Since the Board of Directors and the Executive Compensation Committees of corporations are where these problems start, this is where the solution must also begin. Therefore, I suggest the following remedies be enacted into law:

1) All senior executives and Board of Directors members must disclose annually in each company’s Annual Report and 10K what other corporate boards they sit on, what all their compensations, perks and considerations are from this company, and what conflict of interests they might have or have had to the financial well being of said company or to the benefit of some other entity. (For instance Edward Liddy, CEO of AIG would have to disclose that he previously sat on the Board of Goldman Sachs to which AIG funneled $12.9 billion of federal bailout monies.) These disclosures must be made fully, without obfuscation, and under the threat of severe penalties from the SEC and/or the civil justice system. I might even consider a special federal tribunal being set up that overarches state courts in these specific cases.

2) No Board member or corporate executive of a public company may also be involved, either directly or indirectly, in the political arena whatsoever.

3) All members of the Executive Compensation Committee must be outside Directors, must have had experience in constructing executive compensation packages, and the majority must come from entities which have meaningful investments in said company. They must state in writing in the 10K the specific reasons for each executive’s compensation package and disallow any variance from the terms of these packages. The SEC and general public would have the same redress options for failures under these terms as in #1) above.

4) No corporate executive or Board member can be an officer or in any way benefit from the operations of a subsidiary or non-public entity of said corporation. In fact, all off-balance sheet transactions must be fully disclosed and accounted for in the 10K of said corporation.

5) All offshore subsidiaries of said corporations need to comply with these laws as though they were operating in the United States.

6) Corporations should stop indemnifying directors from bad decisions AND paying them the big fees, stock options and perks -- possibly one but not both.

This, at least, is a start … and relies as little as humanly possible on the government actually running things.

The Camel’s Nose

The House of Representatives this past week overwhelmingly passed a 90% income tax on bonus compensation for executives earning over $250,000 per year and working for companies receiving over $5 billion in TARP or other bailout monies. This includes companies like AIG, Fannie Mae, Freddie Mac, and possibly Citigroup and Merrill Lynch (now part of Bank of America). And, in the process, Congress is ignoring the thousand fold bigger issue of how these TARP and other bailout monies are being distributed. See my blog Golden Goldman).

Although I think this was misguided legislation and may be mollified in the Senate, still executive pay packages have been soaring into the stratosphere in recent years primarily, I believe, because the checks on such largess have all but disappeared. Company shareholders are now mostly mutual funds, hedge funds, and other amalgams of monies whose investment time horizon are very short and whose managers themselves have been caught up in the frenzy of mega-salaries. (When I was an investment analyst on Wall Street in the 1970s, a top pay package for this profession was a few hundred thousand dollars … now, for essentially the same work, it is many millions.)

So, into center stage steps President Obama who is now proposing to limit the pay packages of all corporate America independent of whether any government monies have been given to them. (See Executive Pay Limits). Now while I don’t take issue with the need to reestablish some sanity into the executive pay process, I do question if the Federal Government in the form of Chris Dodd and Barney Frank have the expertise and disposition to be the arbiters of this process. In fact such a development downright frightens me. The AIG executive bonuses uproar has allowed the nose of the government camel into the tent of corporate governance which, if I read the Obama administration’s intentions correctly, will be just the first of a series of baby steps with the ultimate objective of dismantling capitalism.

The road to Socialism is paved with camel’s noses.

Breaking the China

Federal Reserve Chairman Bernanke announced yesterday that his organization will pump over one trillion dollars into the U.S. economy by buying up U.S. Treasury securities and mortgage-backed debt. (See Bernanke Buyback). This bold move has caused interest rates to plummet, the price of Treasury securities to rise, and the U.S. dollar to weaken around the world. It is now predicted that long-term mortgage rates will now decline to the 4% - 4.5% range. This buyback should include as much as $300 billion of long-term treasuries and cause the government printing presses to work overtime to print all the required dollars. Now, there may be an interesting wrinkle to this announcement. China has recently complained about its massive holdings of U.S. debt obligations (See China Complaint). It is estimated that they hold as much as one trillion dollars of U.S. debt and, if they were to decide to unload these holdings back to us, the price of such debt would plummet and U.S. interest rates would increase in step.

Now I have to wonder if these news stories are linked? Is Bernanke perhaps rubbing China’s belly by allowing it to sell a bunch of their U.S. debt holdings back to us under more favorable conditions? Isn’t it funny that effectively the same action (the Federal Reserve Bank buying back U.S. debt) can have totally opposite effects depending on who initiates the transaction? And, if my speculation turns out to be correct, then the U.S., under the wing of our International President, Hillary Clinton, clearly has blinked first.

Skin the Cat

Goldman Sachs is now making loans to its cash-strapped employees. See: Goldman Loans. This, most likely, is in response to the public outrage that has arisen over the bonuses that AIG recently gave to many of its managers. Like AIG, Goldman was also a recipient of taxpayer largess to the tune of $10 billion of TARP funds last fall PLUS a $12.9 billion pass-through of taxpayer funds from AIG (which I wrote about in my previous blog post). This loan program pretty much substitutes for what would be standard bonuses at Goldman. Instead, it is loaning its employees the money necessary to meet their internal capital calls.

Now the rub … I would be willing to bet a good steak dinner that many of these “loans” will be eventually forgiven by Goldman. Thus they effectively will turn out to be retroactive bonuses without the pejorative label. (And this legerdemain also allows recipients to defer income taxes on these payments.) So you see … there is more than one way to skin a taxpayer.

Golden Goldman

(Goldman Sachs Tower -- New Jersey)

American International Group (AIG) just released the ordered list of counterparty payments that it had made last fall from the taxpayers’ and the Federal Reserve Bank’s initial $115 billion in bailout money to this company. According to this morning’s NY Times, Goldman Sachs was second on this recipient list at $8.1 billion. However, since then, AIG has received an additional $58 billion from the U.S. Treasury and Goldman now tops the list at $12.9 billion in total bailout largess … presumably to make good on additional Credit Default Swaps or other financial derivatives that Goldman took out with AIG. (Other large benefactors from U.S. taxpayer’s and Fed’s money, via AIG, include Deutsche Bank @ $11.8 billion, Societe Generale @ $11.9 billion, Merrill Lynch @ $6.8 billion, Barclays Bank @$8.5 billion, and UBS @ $5 billion.)

Now, there are many questions surrounding such counterparty payments … such as:

- Did Goldman Sachs or any other counterparty buy these Credit Default Swaps at a discount and then turn around and sell them back to AIG at 100 cents on the dollar? (Question originally posed by Senator Shelby from Alabama in a recent Senate hearing.)

- Did AIG negotiate with any or all these counterparties to pay them something less than full par value for these CDSs as would be expected? (Question originally asked in a recent House hearing on AIG).

- Since Hank Paulson, the then Secretary of the Treasury under G.W. Bush, was a former Goldman Sachs Chairman and CEO … were such pass-through payments to Goldman Sachs from the U.S. Treasury and Federal Reserve Bank a possible conflict of interest? At the time, was Paulson made aware of this seeming breach of faith?

- The new Obama administration, under which an additional $58 billion has been funneled into AIG (and, as a consequence, an additional $4.8 billion into Goldman Sachs) also seems somewhat cozy with Goldman Sachs. Robert Rubin, a transition team economic advisor to Obama is an ex-Goldman co-Chairman and, according to Wikipedia, "Goldman was the second largest donor to the Barack Obama campaign." It is estimated that Goldman Sachs execs gave close to a million dollars to Obama (see Obama Donors) including James Johnson, a Goldman Sachs board member and former chairman and CEO of Fannie Mae, and Bruce Heyman, Managing Director, Private Wealth Mgt at Goldman. Also Larry Summers, Director of the President Obama’s National Economic Council; and Tim Geithner, the new Secretary of the Treasury and last fall’s head of the NY Federal Reserve Bank are both former protégés of Robert Rubin.

As far as I am concerned the current kerfuffle about the $165 million in bonuses paid out to AIG executives is a mere distraction from the much bigger mega-scandal of over $170 billion of make-good payments that AIG is funneling into the world’s financial counterparty community. This is the true AIG, Federal Reserve Bank, and U.S. Treasury misfeasance that Barney Frank and the rest of his masked bandits in Congress need to be investigating with their typical grandstanding vigor … instead of trying to grab headlines with this AIG bonus sidebar.

Obey

My wife and I recently visited the new Institute of Contemporary Art (ICA) museum, a spectacular cantilevered building overlooking Boston harbor. We spent at least 45 minutes waiting in a serpentine line of neo-hippies to pay an outrageous price (I think $12 @ plus expensive parking) to view, at best, a sparse and mediocre exhibit of “modern art” that rivaled the Rhode Island School of Design’s students’ exhibit in its schmaltzy glitz. (Note: the RISDI museum’s other standing exhibits, however, are well worth the entrance fee.)

The “highlight” of ICA’s current exhibits is the “Obey” section of graphic posters by “street artist,” Shepard Fairey, an iconoclast in the Andy Warhol genre from Los Angeles. See Shepard Fairey . Fairey is best known for his Andre the Giant posters and stickers (first created when he was at RISDI) and his recent “Hope” portrait of Barack Obama. This section is housed in 4 or 5 ICA exhibit halls and includes many posters filled with vitriol (greedy capitalism, George Bush as Satan) or adoration (Che Guevara, Angela Davis, Obama). These posters are so politically polarizing that it is difficult to judge their true artistic worth. However, grudgingly, they do show a modicum of creativity along with clever use of replicated computer-generated graphics.

But, I must also admit that I also foster an obsessive urge to return to the ICA with a few cans of spray paint hidden under my coat and tag many of Fairey’s more outrageous posters with my own political messages. I would continue this civil disobedience until I was hauled away in cuffs to spend the rest of my life in a Cambridge, MA gulag.

Closing observations:
- Of the many hundreds of attendees at this museum, we saw only one person of color (plenty of Asians though.) Strange?
- If you must visit ICA, spend some time sitting on the benches overlooking the serene Boston harbor (just before the “Obey” section). It will steel you for what is to come.

World’s Most Admired

FORTUNE Magazine has just published its list of the “World’s Most Admired Companies”. (Full disclosure: I was involved in the electronic publishing of this survey data for many years … when it was called “America’s Most Admired Companies”.) Even though this survey was done last Fall, it is quite revealing in which companies are leading in their industries and which companies are lagging:

Megabanks: Bank of America (#1, of all things! BAC stock now sells for $3.50))
Megabanks: Citigroup not even in the list of 7
Motor Vehicles: General Motors (#7, just ahead of Renault … stock sells for $1.60)
Computers: Xerox (#1, yes Xerox! When was the last time you saw a Xerox computer?)
Electronics: General Electric (#1, GE recently hit a 17 year low in the stock market)
Insurance: AIG, the world’s largest insurance company is no longer in the top 8
Infotech Services: IBM (#1, right ahead of Accenture)
Software: Microsoft (#5, behind Intuit, Adobe, Electronic Arts and Autodesk)

Now tell me that U.S. industries are not going through performance paroxysms.

Killing Capitalism

The stock market keeps going down hardly without a pause (see Market Plunge) … pretty much since it was clear that Obama was to be elected President. The nagging question is -- why? I have finally and reluctantly come up with my answer and it is not pretty – President Obama seems bent on killing capitalism. (Gasp!) What better way to slay the bourgeois notion of private ownership of the factors of production than to eliminate the shining symbol of this private ownership -- the stock market? Given what we learned about Obama’s friends and mentors during his campaign, I seriously doubt if this result would be inadvertent.

As a child in the 1940’s and 1950’s I remember that the Soviet Union would often use “Wall Street” as their bete noire representing the United States in their crusade to vilify and defeat us. So, someone who wants to “change” forever the fundamental character of this country might well first attack and eliminate this symbol. And Barack Obama seems to be performing creditably in his job one. For example, he has:

- continually talked down the economy and the stock market with his drum-beat doomsday pronouncements.

- systematically attacked U.S. industry groups with his plans for fundamental “change” – the pharmaceutical industry by planned drastic reductions in the government’s Medicare drug reimbursements; the coal industry by his threat to eliminate coal-powered electrical plants within ten years; the utility industry by his call for alternative energy sources without ever focusing on nuclear power and by his call for carbon “cap and trade” taxing; the health care industry by his thinly-disguised plans for the government eventually to be the sole health care insurer; the banking industry by his Treasury Secretary’s reluctance to spell out a workable rescue stratagem; the petroleum industry by backtracking on his party’s pre-election promise to begin more offshore drilling and by his eliminating tax incentives for new oil discoveries; the defense industry by his easy willingness to abandon our missile shield initiative and his implied coming draconian reductions in defense spending; the auto industry by making them effective wards of the state; and all industries in general by the crowding-out of future financing opportunities by the massive government borrowing that will be required to fund his stimulus bill (and other pork spending).

- shown little or no concern that trillions of dollars of wealth that has been destroyed by this stock market slide (reference Jim Cramer’s rants: Cramer Rants).

And apparently Jim Cramer and I are not the only people who think so. See also: Power Line and The Wall Street Journal

If this speculation of mine turns out to be true (and, believe me, we will know soon enough), it will be considerably ironic since it was many fat-cat Wall-Street capitalists who financed much of Obama’s campaign. (Sorry, no take-backs.)