Sunday, February 01, 2009

Great Superbowl by two mediocre teams

Maybe I'm just bitter because the 9 and 7 Cardinals won 3 more playoff games this season than the Dallas Cowboys have won in the last 13 years or because Santonio Holmes was on my fantasy football team and he was awful for the entire regular season!!

Well, onto happier thoughts.

Bill Gross is not a household name in most households, but he is an extremely influential bond fund manager out of California that puts out a monthly newsletter on the economy. Due to the amount of money he manages and his industry contacts, he has a better feel for the economy than anyone in NY or Washington. His February newsletter (with my comments):

- Says that only when home prices stop declining will the new households be more willing to own, but the efforts to halt the decline have been "numerous" and "uncoordinated".

Well, there is no reason for home prices to stop declining. Demand is falling, supply is increasing and employment is falling rapidly. We can't put an artificial floor under prices and expect any type of sustainable recovery.

- Says banks capitalized by TARP have once again started lending, but "shadow banks" (hedge funds, investment banks, and structured financial conduits) are still undergoing deleveraging due to continued scarcity of fresh capital. These institutions are not likely to be rescued by new administration, and some will fail.

He'd know better than I if the TARP banks are lending (I suspect that they may be lending, but on a much smaller scale than in the past). The deleveraging of the other non-bank banks - GE, IBM, hedge funds, etc - more than offsets any small improvement in lending.

- Says "commercial real estate and credit card receivables, as well as plain old-fashioned municipal bonds, must stop going down if the real economy has any chance to revive by 2010."

Boy this sounds familiar. Commercial real estate and credit cards are the next big land mines facing our economy and I don't see any way to avoid this trouble short of throwing more trillions down the tubes.

- Advises policymakers to expand the narrow focus of supporting large institutions and "recognize that supporting critical asset prices such as municipal bonds, CMBS, and even investment grade corporate bonds is a necessary step towards eventual economic revival."

It takes some guts to say this is public. Mr. Gross invests in MUNICIPAL BONDS, CMBS and CORPORATE BONDS. I wonder why he thinks it is important to SUPPORT these assets?!?!? Some people are very transparent.

Thankfully there seem to be some cooler heads prevailing with regards to the idea of "Bad Bank" that was floated over the past couple of weeks.

It may gain steam again at some point, but the weekend provided a platform for some reasoned voices against this idea. I love it when Nobel Laureates are on my side:

"Nobel laureate Joseph Stiglitz said any decision by President Barack Obama to establish a so-called bad bank to rid financial companies of toxic assets risks swelling the national debt.

Obama’s administration is moving closer to buying the illiquid assets currently clogging bank’s balance sheets and preventing them from boosting lending, people familiar with the matter said this week.

That amounts to swapping taxpayers’ “cash for trash,” Stiglitz said yesterday in a panel discussion at the World Economic Forum in Davos, Switzerland. “You shouldn’t chase good money after bad. We’re talking about a national debt that’s very hard to manage.”

I couldn't agree more. There is a new plan emerging that should be further investigated. It's the opposite of the Bad Bank - call it the Good Bank/Old Yeller Banks.

Under this plan, the government would create 10 - 15 new banks - New Citibank, New Chase, etc. The old legacy banks can transfer any marketable assets to these banks if they chose. The old banks would wind down their business without conducting new business. This is probably the least expensive proposition that I've heard, but it would be very painful on the existing banking industry (you'd be giving them the Old Yeller treatment out behind the barn). Since, our new treasury secretary seems to be confused on who he works for, I'm not convinced we'll see any progress on this plan (Mr. Geithner works to preserve the interest of the US citizens, not the banking industry).


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