May I Have Your Attention Please, I Repeat, May I Have Your Attention Please:
After analyzing the recent Financial and Economic shocks, we remain dogged by one question: Who is the real Fed Chairman? Who do you think is making the monetary decisions, Bernanke or Paulson? Maybe their prior work experience will reveal the riddle. Our hope, at least, is to give you a glimpse into our psychology and maybe have you take away a couple of shekels worth of knowledge on the mechanics of Politics in Money and Banking. We ask that our supporters set aside all political leanings and conspiracy theories before reading further. However we will salt the facts with some of our considered opinions. Okay?
Take a look at three recent events:
1. The 125 basis point (1.25%) slashing of the fed fund rates (short term bank rates) in January;
2. Last week's $200B Federal Reserve 28 day bond swap plan, and;
3. Friday's announcement of Bear Stearns' liquidity problems.
We can’t help but interpret these as the Fed Chairman reacting to bad business decisions made by Corporate Executives and their board members. When things go well, take full credit; when things sour, don't make excuses! Is it really the Fed's responsibility to save publicly traded Corporations? Whatever happened to shareholder accountability and personal responsibility? Some economists are predicting that the fed funds rate will be lowered by as much as 100 basis points (one full percent) this coming Tuesday. Is that okay with you?
To whom or what do you think this quote from CitiGroup's Robert DiClementi applies: "Aggressive action is needed to stabilize the financial setting". To you, the individual investor/consumer, or perhaps the best interests of CitiGroup? And herein lies the paradox of being a CitiGroup shareholder and an American Capitalist.
Do you want to see the U.S. Dollar continue its slide, in turn driving up the cost of gasoline and imported goods, all for the benefit of a couple of irresponsible Corporate decisions? We recommend to Mr. DiClementi a short story authored by Ursula LeGuinn; "The Ones Who Walk Away From Omelas". The gist of the tale is that Utopia will never exist without "somebody" suffering. So why can't it be CitiGroup instead of the individual for once?
We hope you follow our 11 Commandments, specifically the first, ensuring that you will never have more than 10% your portfolio in any one bad stock (like Bear Stearns last Friday). We think individual investors have good reason to be upset at such biased talking heads like Mr. DiClementi. We apologize to Mr. DiClementi for seemingly picking on him, but we did warn you that you'd get sprinkled with some facts and opinions, right?
We believe the short term gain of this decision will not outweigh the long term pain for the consumer in America and abroad. The current Fed policy will destroy the buying power of the U.S. Dollar. So if you happen to be living in Canada, the UK, China, Japan, or South America, indeed any country that exports goods to America, that is not good news for you, our global trading partners. Granted, lowering the fed funds rate is historically very positive for Banks and investors cheer and buy Financial stocks in anticipation of a rate cut. Money becomes cheaper on the short end of the curve and - in theory - demand for loans increases and Bank margins widen/expand. But is there not another side to this coin?
We argue that a free market banking system is based on the psyche/sentiment of two parties: the "banker/lender" and the "consumer/borrower"; agreed? So in today's environment of rising energy prices and falling U.S. Dollar, who do you feel lowering rates will help most? We don't see this easing policy helping either the Investment Banks who are already knee deep in subprime, or you, the consumer, who may witness the greatest inflation of your life at the gas pump and in the food store. We call for the real Fed Chairman to Plz Stnd Up on the side of the individual investor/consumer for once: show publicly traded companies they are truly free to start up and close shop based on their internal planning and marketing strategies. We believe true American Capitalism should never be rewarded with Government bail out as that could lead to "regulation", a type of monitored Socialistic "freedom." No thanks.
My Investment Finance Professor was adamant in never investing a dime in any regulated sectors. Airlines are one example of a regulated sector he avoided; could Banks be next in line? Our readers should monitor these political events closely. Always remember that politics is often linked to money and banking (unfortunately), and we witnessed it with the Bear Stearns debacle that broke last Friday. Their final chapter is far from over. We think it would be appropriate if it ended miserably because that’s how they managed their business.
Investment Banks (IBs) like Merrill Lynch, Bear Stearns, UBS, Raymond James, Morgan Stanley, and Goldman Sachs tap several springs for profit. Some are more concentrated in one spring than another. For example, Goldman Sachs does more Merger and Acquisition (M&A) business than Bear Stearns and unfortunately Bear Stearns did a lot more bond business than Raymond James. So should our Government reward Bear Stearns for taking on too much business risk and bail them out? Once again, where's the Corporate and personal accountability of the executives and boards? With that in mind, our readers must understand that the foundation of their "wire houses/banks" relies on healthy balance sheets. With the current credit freeze they will all have difficulty in the near term regardless of what how much the Fed drops rates.
Psychology and sentiment is what these corporations must worry about more than simple short term rates. In an earlier piece entitled "Equity Market Insight for Wednesday", a former executive of Monster Worldwide and client Lance commented, "they can lower rates to Greenspan levels of 1.25%, or even ZERO, but that doesn't mean people will want loans, or that Banks will be willing to offer the loans on favorable terms".
We then pointed out "the foundational crack" in the Real Estate mortgage market is something that will take time to correct. "Hang over" (inventory) is still a factor we must work through, regardless of what the cost of money/interest rates will be.
Are free markets not about winners and losers? Ironically, IBs wouldn't be around if there weren't two sides to a trade. After all they’re called brokers/middlemen for a reason. Just as in nature, forest fires are normal and necessary events, regardless of the short term shock and temporary destruction they bring. New life soon sprouts up and the forest thrives again. We thought free markets had to do with survival of the fittest, no? Many people get bent out of shape when separation of Church and State is called into question; maybe those people should be more concerned with separation of Government and Corporations?
We feel the Fed's decision Tuesday will reveal the real Fed Chairman. The two players are Economist and Professor Ben Bernanke, versus the ex Goldman Sachs (GS) CEO Hank Paulson. Here are a few details on the players.
Dr. Ben Bernanke, 14th Chairman of the Federal Reserve. Born December 13th, 1953 in Augusta, Georgia. Bernanke was appointed by President George "Walker" Bush on October 24, 2005. He succeeded Alan Greenspan who served 18 years. Bernanke graduated summa cum laude from Harvard College in 1975 with a B.A. in Economics. He went on to earn a PhD in Economics from MIT in 1979. From 1996-2002 Bernanke was a tenured professor in the Dept. of Economics at Princeton University. Are you still with us? It is a well known fact he has written extensively about the Great Depression. Bernanke has not been known to comment on Fiscal Policy (taxation policy), rather he feels his only responsibility is monetary policy, and we agree. He once stated publicly that fiscal policy was none of his business.
During the emergency meeting today between President Bush, Paulson, and Bernanke, do you think Bernanke will be giving or taking more advice? In our opinion Tuesday's interest rate decision should be his and his alone, without any cronyism or arm twisting from Paulson. Here is the good looking bunch of Fed governors for our readers to view, remembering that the charter calls for 7, and today we are relying on just the 4:
Isn't "7" a luckier number than "4"? We'll leave that to the gamblers in Vegas, Monaco, and Macau to figure out ~
Mr. Hank Paulson, 74th United States Treasury Secretary and International Monetary Fund member. Paulson was born on March 28, 1946 in Palm Beach, FL and grew up in Barrington Hills, IL, 30 minutes northwest of Chicago. In 1970, he received a MBA degree from Harvard. Paulson left GS, one of the largest and most talented Investment Banking Firms on Earth in 2006.
He was officially sworn in as Treasury Secretary on July 19, 2006 by President Bush.
Over the last two years of financial credit turmoil and now crisis, GS out performed its peers by making incredibly gutsy trades on the short side of subprime. Pundits on CNBC are always left scratching their heads with every quarterly report, even in the face of the competitors to GS suffering through huge trading losses and set backs. Please read the first paragraph of this piece:
We remain steadfast in our beliefs that GS is the premier IB firm on the planet and whoever made those trading decisions deserves full credit, period. But please remember we mentioned how politics are often times involved in money and banking. ALL political leanings aside now, please: have you seen a chart of Halliburton(HAL) since 2002/3?
Vice President Dick Cheney's former employer has returned 100% per year since 2002. Do you see how politics and cronyism may play a role in money and banking? If we offended Cheney’s friends or business colleagues, we apologize; it could all be simple coincidence. We will not stoop so low to say Paulson was giving advice to his former GS on the subprime crisis, but after seeing Eliot Spitzer's demise on ethics last week, who can tell.
In one sense we must blame Paulson for being a waffler/hypocrite. When Paulson was the CEO of Goldman, his mission was to hate and seek to destroy the competition. I know this from my personal experiences at Morgan Stanley; we were taught to hate our competitors, specifically Merrill Lynch (ML). Now it seems Paulson has done a "180", going from the greatest "Capitalist Dream Job" to a Socialist kind of mentality:
But please be patient as maybe this 180 degree turn isn't as extreme as we first had you believe. Maybe there is an explanation for his behavior.
On March 14th (this past Friday), Paulson gave a speech that was broadcast on CNBC. He said, "implementation of regulations and new standards must keep up with innovations". In a statement later that day, Bernanke agreed. In our view the word "innovations" is a sad excuse for the subprime trading derivatives created by mortgage banker greed, and now those derivatives are worth less than the paper they were printed on. Paulson went on to suggest that there are "no excuses for fraud, therefore no Government bail outs". Here's where we feel Paulson is speaking out of both sides of his mouth. On one hand, it's OK for Bear Stearns to get bailed out, but not Country Wide Financial (CFC), for instance? If you didn't know, the Government has launched an investigation into fraud at CFC.
We agree with Paulson on this point: we don't believe CFC should be bailed out if they did in fact commit securities fraud, but we also feel Bear Stearns bears responsibility for cooperating in bond transactions with companies like CFC, no? You know the guy driving the getaway car is usually found as guilty as partner who walked in to scoop the bank loot. So when Paulson says it's okay to bail out Bear Stearns, he’s basically rewarding them for driving the car in a sense, no? Don't worry, we don't fully get it either and we don't see this being resolved for several months. Regardless, many could argue Bear Stearns was an accomplice of sorts to the subprime crisis initiated by overly aggressive CEOs like Leo Mazilli of CFC. So is Paulson the Secretary of the Treasury or the Chief Justice of the Supreme Court? Who is really running that Fed?
Paulson's Investment Banking back ground may have influenced monetary policies of late. Shouldn't everyone involved in this credit crisis be questioned before any Government bail outs are handed out? Shouldn't the authority of whether to bail out or not be placed in less biased hands than those of an ex GS CEO? Maybe if John Snow was still signing U.S. currency the decision of bailing out Bear Stearns would be different, maybe not, but his signature sure is different:
Do any of you have currency signed by Hank Paulson in your wallet? (Just making sure you're still with us.. almost done.)
Tuesday's Fed decision will show whether Paulson is more than the Secretary of the Treasury. If the Fed lowers by 50 or more basis points (1/2% or >), then Paulson's power will be evident. If Bernanke's Professorial experience is able to convince the ex Wall Streeter of the bloody pain more rate cuts will cause consumers, then we see rates staying unchanged to maybe down 25 basis points (1/4%). Got it?
In closing, our readers should now visualize both Bernanke and Paulson sitting down. Then at exactly 2:15PM ET Tuesday when the announcement reverberates through CNBC and around the globe, imagine one of them standing up and revealing the mystery of who the real Fed Chairman is, and maybe we'll be able to finally thank Ben Bernanke for standing up for the individual investor/consumer and our free market system envied by most countries.
And speaking of sovereign nations, a very Happy Monday to our readers in all 42 countries worldwide! We are so happy having you back. We hope you enjoyed the Psychology of this Call and we leave you with a “Cheers” to true Capitalism.