Bailouts and Begging

It is only the poor who are forbidden to beg.

— Anatole France


Citi is hiring! . . . or NOT

They're hiring?

Citigroup announced today that they are revising their plans to downsize their workforce. The new plan is to lay off 53,000 employees, or 20% of their workforce.

Driving home to Chapel Hill from Greensboro earlier this week, I noticed this sign on the Citi office building. I wish they would get their story straight.

Consumers Go On Strike

As the economy continues to sour, consumers have gone on strike. For the past few months, I have been contemplating the following economic and social trends that seem to explain why.

Rising productivity is what enables companies to increase employee’s pay. Increases in pay result in the overall rise in our standard of living. However, in the last decade, this relationship between productivity and rising employee pay seems to have been fractured.

Instead, the benefits from rising productivity over the last decade have been channeled primarily to executives. Their incomes and bonuses have continued to rise to unprecedented levels. Unfortunately, someone forgot to tell the masses that they were not included. Accustomed to general increases in standards of living and inspired by the rising wealth of the top earners, the majority of consumers mortgaged their homes and leveraged their credit cards to maintain an upward trend in standards of living. We borrowed to keep up with the Jones’s and maintain the illusion that we were making progress.

Enter the economic collapse of 2008.

Consumers have stopped spending. How could they do otherwise? Their credit cards are tapped and their mortgage options have evaporated. The pundits and the economists are pleading with consumers to resume spending but where is the disposal income supposed to come from?

It seems to me that the consumers are on strike. I can’t say that I blame them.

Simple Financial Recovery Plan

My new favorite podcast is Planet Money. As the economic turmoil has progressed from frightening to surreal, the NPR crew at Planet Money have done a wonderful job explaining the intricacies of the complex financial world in terms that are easy to understand.

Here is what I have been able to figure out so far. Forget about the subprime mortgage crisis. A huge part of the problem is these credit default swaps – to the tune of $55 trillion dollars. These “insurance policies” were not only taken out by people who lent money to protect themselves against potential loss. Financial gamblers were also taking out credit default swaps on other people’s loans! This is raw gambling. Some analysts estimate that for every CDF taken out to by a lender to protect a loan, ten other CDFs were sold by and for third parties on the same loan.

I am growing weary of the daily refrain that what we have here is a failure of confidence. The bankers no longer trust one another and, consequently, are refusing to lend to one another or worthy customers. Nine months ago these cowboys were lending to anything that could breath, and then doubling down 10 to 1 on the loan. Now they don’t trust one another. I can’t say that I blame them.

Here is my simple solution to solve the crisis:

  1. Declare all credit default swaps null and void. Nobody pays. Nobody is on the hook. The overlapping, hedged, web of CDFs is too complicated for anyone to “unwind.” Just wipe the slate.
  2. Give all of the bankers and most of the traders a good smack and then send them to a ropes course – preferably somewhere in the vicinity of the Grand Canyon. I don’t think these guys ever really trusted one another. Now is a good time to learn.
  3. Exercise the clause in the bailout plan that allows the federal government to take stock in the banks that need cash infusions. Then throw the bums out who have made this mess and start lending to the businesses that are desperate for “commercial paper” to keep their businesses running.

There, now that wasn’t so hard, was it?

On the Financial Meltdown

As they say on Wait, Wait, Don’t Tell Me, “and now for some quotes from this week’s news.”

First, a delightful  blog I discovered called The Big Picture by Barry L. Ritholtz. In a post titled The Underlying Basis of Finance and Credit, Mr Ritholtz observes:

Over the entire history of human finance, the underlying premise of all credit transactions — loans, mortgages, and all debt instrument — has been the borrower’s ability to repay.

Except for [the 5 year period from 2002 to 2007] the entire history of human finance was rather reasonable about the basis for making loans in general, and extending mortgage loans in particular.

For 99.9996% of the last 1.2 million years, loans were granted primarily on the condition of whether or not the lender believed that the borrower could repay. Between 2002 and 2007 this condition was dropped. Instead, loans were granted based on the lenders ability to sell the loan to someone else. Wow! I call that misaligned incentives.

Second, I am reading a delightful book called Traders, Guns and Money. In it Satyajit Daj offers an insider’s look at the complex world of financial derivates. Today I read the simple, self-evident line:

To make money, you need to make it from someone else.

For several years now I have been baffled by the absurd amounts of money being earned in the financial sector. How can it be that these analytical magicians could continue to generate such enormous profits? Where is this money coming from? Today I understand. With $700 billion taxpayer dollars (and some say up to a trillion could be required), the scoundrels of the financial sector were simply taking profits on future payments from the US taxpayers.

Finally, I was moved by Senator Bernie Sanders’ Four Point Plan in his article in the Huffington Post. I particulalry like his fourth point:

We need to protect ourselves from being at the mercy of giant companies that are “too big to fail,” that is, companies who are so large that their failure would cause systemic harm to the economy. We need to assess which companies fall into this category and insist they are broken up. Otherwise, the American taxpayer will continue to be on the financial hook for the risky behavior, the mismanagement, and even the illegal conduct of these companies’ executives.

I couldn’t agree more.