Name Calling

So the McCain-Palin campaign has now devolved into a rancid whirlwind of name calling: "terrorist," "socialist," "Muslim," etc. If you have even one neuron in the upper brain regions firing, there's no logic, and nothing is consistent. It's a cruder version of Hillary Clinton's late primary strategy, and it simply isn't working.

What I think many pundits have so far missed is how profoundly disruptive a GOP loss (much less a rout, which looks possible) will be to the party. Starting in 1968, the modern Republican Party has had one go-to-market strategy: the Southern strategy. The Southern strategy depends on non-thinking, ignorance, hate, and division. It's profoundly un-American, but it has been enormously successful for decades. The only exceptions have been conservative Southern Democrats (Carter and Clinton). This year is the strategy's grand finale.

You can already see signs of disbelief. There are going to be a fair number of hardcore cult members, the folks who still approve of President Bush's job performance, who might experience something resembling a political nervous breakdown. And as we approach the last days before the election, you already see signs of that breakdown. An African-American Democrat is poised to live at 1600 Pennsylvania Avenue. He will be their president, our president. And when you've been doing everything possible to avoid all facts and evidence for so long, it'll be a shock to some. Their world is changing, our world is changing. And it's wonderful.

Brownshirts and Hoods

The McCain-Palin ticket continues its descent into the gutter.

Critique of the GOP Backbenchers' Plan

CNBC reports on a new Republican plan aimed at addressing the U.S. credit crisis. In general terms I'm happy there's a competing plan for the simple reason that more plans mean more gridlock and less likelihood of passing the Paulson/Bush/Leadership plan, ceteris paribus. I prefer no action to that awful plan, and Harry Reid just managed to make that plan even worse. DeFazio's No BAILOUT Act is still my favorite choice. Surely Congress can at least agree to raise the FDIC deposit insurance limit to $250,000, which is the heart of that simple plan.

The new GOP plan has some silly and even dangerous elements, and many elements are simply expressions of dogma rather than practical steps to solve current challenges. For example, the GOP plan calls for allowing corporations to apply losses in 2007 through 2009 back 5 years, so they can claim a refund. Why reward companies who are losing money? If I managed a profitable business, I'd be livid! That particular element is eerily similar to bad Japanese policy, propping up money-losing companies which should fail. Another example: suspending the capital gains tax for two years. That would only exacerbate selling pressure on assets, and at exactly the wrong time. We should be indexing capital gains and tax them at equal rates to ordinary income, to encourage long-term investment and discourage speculation. Repealing the Humphrey-Hawkins Full Employment Act would have no effect on the Fed (which obviously ignores the Act already) but might heighten anxieties among workers who would suddenly feel even more concerned about losing their jobs. Such fears would depress consumer spending, again at exactly the wrong time. And do Republicans really want to go to the voters in November and say they championed abolishing full employment? Seriously?

Where are the public hearings, by the way? Shame on the House and Senate leadership (majority and minority) for not insisting on public hearings before even thinking about a $700B bailout. Fortunately everyone in the House and one third of the Senate is about to face the wrath of America's voters on November 4th. The whole rotten and corrupt cabal deserve every bit of it. Have you written your congressman and senators yet?

"No BAILOUT" Act: A Sensible Bill

Representatives DeFazio, Edwards, and Kaptur have introduced the "No BAILOUT" Act as an alternative to the $700B Paulson/Bush Wall Street bailout plan which failed in the U.S. House. I am very happy with the No BAILOUT Act, especially the increase in FDIC insurance limits up to $250,000 which has essentially universal support and which would protect a lot more small businesses that are simply meeting payroll each month.

My only minor quibble with the bill is suspension of "mark to market" rules. Currently financial institutions must value their assets according to what they would fetch if sold now. Try to sell your house in the next 5 minutes. Would you get a lot less money than the house is worth? Of course you would. Most assets are, to some degree anyway, illiquid. But allow, say, 90 days to sell and that house price is much more reasonable.

The bill sponsors and I may be thinking of the same thing here, but there should be some reasonable valuation for these assets. And I think 90 days is about right. That is, assets should have a value equal to their liquidation value within the next 90 days. Said another way, "mark to market" should be "mark to the 90 day market." Now, establishing those values in non-functioning markets could still be difficult, but conceivably there could be a secondary market which helps establish these values. Also, there might be short-term "relief valves" that the SEC establishes. I think SEC should be allowed to declare "asset valuation freezes" if they observe that markets are not functioning. Such a freeze could be for 30 days, roughly similar to the short-term short selling suspension that the SEC declared recently. However, any such freezes should be as narrowly tailored as possible (by geographic area, market segment, corporate entity, etc.)

All that said, the No BAILOUT Act is an outstanding piece of legislation at this moment in time, and I urge both Democrats and Republicans to support it. If the Paulson plan, or anything remotely like it, comes back up for a vote, all Congressmen should kill it again.

As an aside, while I overwhelmingly support Barack Obama, shame on him for surrounding himself nearly exclusively with Wall Street executives and others who deserve ample blame for the current mess. As one example, Dr. Laura Tyson is an Obama advisor on the economy and financial markets who also sits on the Morgan Stanley Board of Directors. Conflict of interest? You bet, and it's outrageous, especially considering Obama's otherwise decent stance against lobbyist influence.

Wall Street Bailout Fails in Congress

The House of Representatives voted down the $700B Wall Street bailout package earlier today.

Good! Congressmen felt the wrath of the American voters they are about to face on November 4th, and that's a very healthy impulse. This bill was a rotten turkey, opposed by nearly all professional economists, with some saying it could do more harm than good.

The Fed, Treasury, and FDIC have ample tools at their disposal. (Paulson begrudgingly conceded as much.) It's ridiculous for political leaders to try to ram this turkey through without a fully transparent process, including public hearings, expert testimony, committee votes and review, open amendments, and open debate. The American financial system is suffering due to a lack of transparency, so why would anyone think that a closed political process could solve that?

Japan faced similar problems with their real estate market several years ago, and the government took a similar path to the one in the Wall Street bailout package. Experts now understand that the Japanese government deepened and lengthened the economic downturn, and Japan still has not recovered. (In fact, Japan is falling into another serious recession now.) Bad companies must fail, wiping out their shareholders and (hopefully) executives. The faster that happens, the more quickly the economy can recover. Otherwise financial companies will pause, waiting for government handouts and not taking the necessary steps promptly to correct their structural problems.

Some politicians seem to think that "painless" is still an option. It's not. This process will be painful. (It will be personally painful, too.) But let's get this process going, now, so we can recover more quickly. The Treasury, Fed, and FDIC still have awesome powers to provide liquidity, together with their central bank allies around the world, but solvency issues must be allowed to correct themselves. The rest of the U.S. Government can take a few simple steps: increasing unemployment insurance benefits, adopting the Obama tax plan (which would be highly stimulative since it is progressive), raising FDIC insurance limits to $250,000 and providing 90% coverage up to $1,000,000, indexing capital gains and equalizing the rate with ordinary income, and a few other, noncontroversial steps.

Lehman Brothers' Government Bailout?

Over this weekend a group of Wall Street executives and U.S. Federal Reserve leaders are meeting to discuss what to do about troubled Lehman Brothers. Lehman could declare bankruptcy any moment now. Lots of "experts" claim that Lehman is too big to fail and that its collapse could cause widespread financial panic.

Oh really?

For perspective, stockholders currently value Lehman (at the close of trading on Friday) at a paltry $2.53B. Another company with the same market value is Thomas & Betts Corporation (who?), Memphis-based manufacturer of electrical, steel structural, and HVAC equipment. In other words, stockholders have already discounted Lehman, so those losses are already reflected in world markets. Investors are already giving high odds that Lehman will collapse, and that assessment is also already reflected in global financial company stock prices.

Lehman is a brokerage. Would investors holding brokerage accounts lose money? Probably not. Lehman participates in the Securities Investor Protection Corporation (SIPC). It's a bit complicated, but let's suppose you have a 401(k) retirement account with Lehman valued at $3M. (You're doing well!) That account consists of various stock and bond holdings, and SIPC rules require Lehman to keep your account and others separate from their own assets. That rule should protect you automatically, but in the unlikely event it doesn't you still have an extra $500K of protection. That is, if Lehman's assets are liquidated and the money available doesn't quite cover the value of the underlying assets in your account, SIPC protects you against $500K of such "gap" losses. Since 1970, SIPC has protected over 99 percent of investors in brokerage bankruptcies, so very few people have lost anything.

In 2007, Lehman had $282B of assets under management according to their annual report. That's a reasonably big number, but those assets don't disappear in a bankruptcy. They are stocks, bonds, cash, etc. Some of those assets (about $60B) are mortgage-related assets, and some percentage of those are nonperforming. Lehman wanted to spin off these bad assets into a separate publicly traded company, selling those assets at a big discount to new investors to raise cash and write them off for good. Wall Street nixed that idea, probably because it would highlight problems at other firms even while saving Lehman. The biggest problem, but still small compared to the size of global markets, is the number of employees suddenly out of jobs, many of them high income employees with lavish lifestyles. Like the Arthur Andersen collapse in Chicago, their losses will be felt locally in New York to some extent. (Expect further declines in the local housing market as employees downsize and relocate.) Worldwide there are about 28,000 Lehman employees. Many of them (but certainly not all), especially the biggest earning (i.e. most "successful") individuals, will be offered employment to continue running whatever is left of Lehman. Secretaries and other junior employees will bear the brunt of the collapse both because they are more likely to lose their jobs and because they do not have as much financial cushion. No, life is not fair.

This Lehman situation is really a big game of chicken. To their credit, the Federal Reserve leaders do not seem interested in spending taxpayer money on a Lehman bailout. Wall Street executives, on the other hand, are doing their best to pretend that Lehman's collapse would be the End of the World(TM), in large part because Lehman is highlighting their own asset problems. I think what's going on here is that the Fed is happy to provide a conference room and a pot of coffee, but it's up to the private sector (and the bankruptcy code) to figure out Lehman's fate, and to continue the process of unwinding these bad assets throughout the industry.

"Presumptuous and Arrogant"?

According to Dictionary.com, a synonym for presumptuous is arrogant. Another synonym is...uppity. As in, uppity negro. All class, that John McCain, isn't he? Josh Marshall decodes the dog whistle.

Meanwhile, McCain already crowns himself President. How...presumptuous.

Although I've got another couple words to describe McCain: pathetic and desperate.

UPDATE: Obama is exactly correct....

Bye Bye Citibank U.S.

I managed to close my Citibank account. Oddly enough their exclusive procedure for "global executives" to do so involved sending a fax. How very...Reagan Era. But it worked.

I still bank with Citibank Japan, though. And I do hope Citibank, which is undergoing tremendous turmoil right now, recovers.

Meanwhile, this past weekend the FDIC seized control of IndyMac Bank in one of the U.S.'s largest bank failures ever.

Congratulations Senator Obama

Many people around the world are fascinated with this year's U.S. presidential election. These beautiful ladies, fully aware of Barack Obama's Hawaiian heritage (also a plus in Japan), hail from the city of Obama in Fukui Prefecture, Japan. Understandably the city of Obama is enthusiastic about one of the two presidential candidates, and city leaders welcome any potential financial boost given their slightly ragged local economy. (Photo credit: Toru Yamanaka, AFP/Getty Images.)

But interest in Japan does not compare to feelings in Africa as Obama officially clinched the Democratic Party's nomination this week. (He mathematically clinched some time ago.) These positive feelings are deep and profound.

I must say it's wonderful to see so many people around the world viewing the United States and her people much more favorably.

Worst Banking Service Ever

I completely concur with this report: Citibank's "Global Executive Banking" is absolutely terrible. In my case, it has been at least six months since I opened my account and Citibank still cannot figure out how to unblock the account after my company's personnel department has made countless attempts to verify with them that I do actually work for my company. During one of these attempts I literally sat next to the head of our personnel department who stayed on the phone with them at 10:00 p.m. Tokyo time. He was told they had everything they needed, but I later find out that the block is still in place.

Conveniently Citibank is now holding a fairly substantial sum of money and paying 0-point-trivial interest. (If you're not a "global executive" they'll pay more interest, about 2% more.) I also cannot fathom why "Global Executive Banking" is only open from 9 to 5 Eastern U.S. time Monday through Friday. On top of all that, it seems impossible to link my Citibank Global Executive Banking account with my Citibank Japan account. They might as well be Royal Bank of Scotland and HSBC in terms of their interoperability.

UPDATE: In this blatantly false advertising which aired this year, the Citi Never Sleeps except of course for "global executives":