The paradox of our time in history is that we have taller buildings but shorter tempers, wider Freeways, but narrower viewpoints. We spend more, but have less, we buy more, but enjoy less. We have bigger houses and smaller families, more conveniences, but less time. We have more degrees but less sense, more knowledge, but less judgment, more experts, yet more problems, more medicine, but less wellness. We drink too much, smoke too much, spend too recklessly, laugh too little, drive too fast, get too angry, stay up too late, get up too tired, read too little, watch TV too much, and pray too seldom.
We have multiplied our possessions, but reduced our values. We talk too much, love too seldom, and hate too often. We've learned how to make a living, but not a life. We've added years to life not life to years. We've been all the way to the moon and back, but have trouble crossing the street to meet a new neighbor. We conquered outer space but not inner space. We've done larger things, but not better things. We've cleaned up the air, but polluted the soul.
We've conquered the atom, but not our prejudice. We write more, but learn less. We plan more, but accomplish less. We've learned to rush, but not to wait. We build more computers to hold more information, to produce more copies than ever, but we communicate less and less.
These are the times of fast foods and slow digestion, big men and small character, steep profits and shallow relationships. These are the days of two incomes but more divorce, fancier houses, but broken homes. These are days of quick trips, disposable diapers, throwaway morality, one night stands, overweight bodies, and pills that do everything from cheer, to quiet, to kill.
It is a time when there is much in the showroom window and nothing in the stockroom. A time when technology can bring this letter to you. Remember to spend some time with your loved ones because they are not going to be around forever! Remember, say a kind word to someone who looks up to you in awe, because that little person soon will grow up and leave your side. Remember, to give a warm hug to the one next to you, because that is the only treasure you can give with your heart and it doesn't cost a cent.
Remember, to say, 'I love you' to your partner and your loved ones, but most of all mean it. A kiss and an embrace will mend hurt when it comes from deep inside of you. Remember to hold hands and cherish the moment for someday that person will not be there again. Give time to love, give time to speak! And give time to share the precious thoughts in your mind. And always remember: Life is not measured by the number of breaths we take, but by the moments that take our breath away.
Friday, January 30, 2009
Friday, January 23, 2009
Effects of deregulation and unenforced regulation => current crisis
Taking Stock: Government largesse drives capitalism
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By MALCOLM BERKO
Creators Syndicate
Posted Dec 27, 2008 @ 04:48 PM
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BOCA RATON, Fla. — Dear Mr. Berko: I find it hard to believe that the government is tossing money around like ticker tape at a parade. At some point we or our children will have to pay for the big mess created by Wall Street greed. Ordinary people like us have no choice in the matter and are forced to go with the flow. We get nothing out of this $750 billion giveaway and are forced to lump it or like it. It seems that most Americans are paying for this Wall Street greed twice. We lost our homes, independent retirement accounts, pension funds and our jobs. Now, we have to pay for the losses caused by the hedge funds and big New York Stock Exchange brokerage firms. Meanwhile, they got bailed out with money from our pockets while we get kicked out of our homes, our businesses and are forced to declare bankruptcy. Merrill Lynch, Lehman Brothers, AIG, Citigroup, and Bear Stearns and others stole hundreds of billions from workers like my friends and me and now we have to pay them back. This makes millions of Americans angry. But we can’t do a thing about it. It’s like we are serfs and they are the masters. We have been victims of Wall Street greed for the last eight years, while the suits on Wall Street pay themselves hundreds of billions of dollars in salaries and bonuses. I know many people who think like this, and we are bitter. Does this make sense to you, or do you think all of us are out in left field? — D.P., Columbus, Ohio
Dear D.P.: You’re right as rainbows, daffodils and sunshine. The last few years have witnessed the stink and rank perfidy of unfettered capitalism. Even former Federal Reserve Board Chairman Alan “The Mumbler” Greenspan admits he misjudged Wall Street’s intent to self-regulate. Wouldn’t it be nice to see the executives at AIG, Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs and their hedge-fund affiliates take a perp walk with their alma maters prominently displayed on the front and back of their orange prison coveralls. Harvard, Yale, Stanford, Duke, Wharton, etc. would be so proud.
The following was written several years ago and is relevant today. It clearly explains how Wall Street favors the wealthy and snickers at the poor. Its compelling explanation is derived from a 2005 discussion group in which I participated.
Business activity cannot be sustained unless the rich get richer. And the best way for this to happen is to give more money to the poor! This is where Uncle Sam becomes a modern day Robin Hood and it works like this:
Uncle Sam borrows money from the rich so it can be given to the poor so the poor can continue losing it to the rich. This is the reason why there will always be a budget deficit and an increasing national debt.
To illustrate, let’s assume that there are two classes of people: rich and poor. Rich folks are those with above-medium incomes and poor folks are everyone below. The simple reason the rich must get richer is that they must make an after-tax profit if they wish to continue employing the poor to produce goods and services.
The rich cannot profit from traditional trading among themselves. For example, if there are 10 rich people in a closed room and they have a total of $10 million in cash, they can wheel and deal and trade among themselves to their heart’s content. But at year’s end they still only have $10 million. The value of their real estate or stocks might rise or fall, but that $10 million dollars won’t increase unless another group loses money to them.
Think about it. Capitalism is like a game of poker. The strong players win from the weak, or the rich win from the poor. However, the poor have a finite amount of money to lose, which means our poker game would come to a halt unless a designated patsy can be found. And that designated patsy is the U.S. government. I know it sounds farfetched but listen up and watch the bouncing ball.
Economists who follow money transfers note that in 2006, for example, the poor paid approximately $780 billion more to the rich for rent, food, cars, health care, tools, beer, etc. than they received for their labors at McDonald’s, Wal-Mart, doing yard work, washing dishes or cleaning hotel rooms. So, in order to keep the poor from going completely broke, the government, through taxes, took $320 billion from the rich and returned it to the poor via welfare, Social Security programs and other subsidies. Then, to return the additional $460 billion to the poor so their purchasing power remains intact, the government borrows $460 billion from the rich by issuing new Treasury bonds.
So, after taxes and transfer payments were complete in 2006, the rich made $460 billion, the government lost $460 billion, which was the deficit, and the poor broke even. In effect, the budget deficit equals what the rich keep after taxes. So, if the budget is balanced, the rich can’t make any more money. And if the rich can’t make more money, their incentive to produce will falter, unemployment will skyrocket and the economy will collapse.
I wish I could claim this was my idea, because I think this premise is worth a Noble Prize in economics.
Address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit www.creators.com.
==========================
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LANCE DICKIE: FAITH CRISIS FOR TRUE BELIEVERS IN MARKET
Comments (3) Recommend (0)
BY LANCE DICKIE
Seattle Times
There are true believers suffering a real crisis of faith. They have been worshipping at the Church of the Free Market, and their doubts run deeper than stockbrokers not answering prayers or returning calls.
For decades, their prophets have preached that economic markets function best when left to themselves, unfettered by government regulation or oversight.
Businesses, investors and traditional market forces would self-regulate, self-correct and self-enforce. Oops.
The collapse of the housing and stock markets trace their way back to decisions and choices made at the highest levels of government and commerce. The rest of us get swept along for the ride, both up and down, and suffer the consequences of hubris, incompetence and criminality.
To hear the humbled apostles for markets free of disclosure and rules begin to mumble about the need for government regulation is extraordinary. Chief among the apostates is former Federal Reserve Chairman Alan Greenspan, who humbly confessed his wonderment at mortgage-lending practices to a congressional committee:
"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."
He was reminded he had the authority to prevent the lending practices behind the subprime mortgage crisis -- was advised to do so -- and refused to act. Greenspan is contrite. Millions more are in foreclosure.
Three years ago, a handful of regulators were waving red flags about hedge funds and credit derivatives. Lightly regulated exemptions from most rules, they placed enormous bets -- literally -- around the planet. Dense and esoteric, these trillion-dollar segments of the markets seemed pretty remote until ordinary mutual funds -- yours and mine -- began investing in them.
The effects of deregulation and unenforced regulation were cumulative. In 1994, the Financial Accounting Standards Board changed its rule that stock options must be treated as a company expense.
A year later, Congress limited the rights of investors to sue, let accounting firms off the hook in fraud cases and fudged reporting practices. In 1999, the repeal of lessons-learned regulations from the Depression fuzzed the lines between retail banking and investment banks.
Every opportunity to push the limit was taken, as allowed or ignored by law. Industry lobbyists on Washington's K Street had their back.
My favorite bit of apostasy revealed itself ever so quietly in a New York Times column by Ben Stein, a lawyer, writer, actor and economist. And cheerleader. For Stein, the resilient economy was always peachy keen.
Last month, reality set in for Stein. Near the end of a column about fear and foolishness, he slipped in a hope that President-elect Barack Obama will put meaningful regulation in place -- maybe even repeal the private securities law against suing companies. Oh, and maybe inspire a more vigilant Federal Reserve.
Dare I say, there has been an epiphany. People who understand the complexities and see the connections acknowledge how precarious economic conditions truly are.
Lance Dickie is a columnist for the Seattle Times.
--------------------------------------------------------------------------------
By MALCOLM BERKO
Creators Syndicate
Posted Dec 27, 2008 @ 04:48 PM
--------------------------------------------------------------------------------
BOCA RATON, Fla. — Dear Mr. Berko: I find it hard to believe that the government is tossing money around like ticker tape at a parade. At some point we or our children will have to pay for the big mess created by Wall Street greed. Ordinary people like us have no choice in the matter and are forced to go with the flow. We get nothing out of this $750 billion giveaway and are forced to lump it or like it. It seems that most Americans are paying for this Wall Street greed twice. We lost our homes, independent retirement accounts, pension funds and our jobs. Now, we have to pay for the losses caused by the hedge funds and big New York Stock Exchange brokerage firms. Meanwhile, they got bailed out with money from our pockets while we get kicked out of our homes, our businesses and are forced to declare bankruptcy. Merrill Lynch, Lehman Brothers, AIG, Citigroup, and Bear Stearns and others stole hundreds of billions from workers like my friends and me and now we have to pay them back. This makes millions of Americans angry. But we can’t do a thing about it. It’s like we are serfs and they are the masters. We have been victims of Wall Street greed for the last eight years, while the suits on Wall Street pay themselves hundreds of billions of dollars in salaries and bonuses. I know many people who think like this, and we are bitter. Does this make sense to you, or do you think all of us are out in left field? — D.P., Columbus, Ohio
Dear D.P.: You’re right as rainbows, daffodils and sunshine. The last few years have witnessed the stink and rank perfidy of unfettered capitalism. Even former Federal Reserve Board Chairman Alan “The Mumbler” Greenspan admits he misjudged Wall Street’s intent to self-regulate. Wouldn’t it be nice to see the executives at AIG, Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs and their hedge-fund affiliates take a perp walk with their alma maters prominently displayed on the front and back of their orange prison coveralls. Harvard, Yale, Stanford, Duke, Wharton, etc. would be so proud.
The following was written several years ago and is relevant today. It clearly explains how Wall Street favors the wealthy and snickers at the poor. Its compelling explanation is derived from a 2005 discussion group in which I participated.
Business activity cannot be sustained unless the rich get richer. And the best way for this to happen is to give more money to the poor! This is where Uncle Sam becomes a modern day Robin Hood and it works like this:
Uncle Sam borrows money from the rich so it can be given to the poor so the poor can continue losing it to the rich. This is the reason why there will always be a budget deficit and an increasing national debt.
To illustrate, let’s assume that there are two classes of people: rich and poor. Rich folks are those with above-medium incomes and poor folks are everyone below. The simple reason the rich must get richer is that they must make an after-tax profit if they wish to continue employing the poor to produce goods and services.
The rich cannot profit from traditional trading among themselves. For example, if there are 10 rich people in a closed room and they have a total of $10 million in cash, they can wheel and deal and trade among themselves to their heart’s content. But at year’s end they still only have $10 million. The value of their real estate or stocks might rise or fall, but that $10 million dollars won’t increase unless another group loses money to them.
Think about it. Capitalism is like a game of poker. The strong players win from the weak, or the rich win from the poor. However, the poor have a finite amount of money to lose, which means our poker game would come to a halt unless a designated patsy can be found. And that designated patsy is the U.S. government. I know it sounds farfetched but listen up and watch the bouncing ball.
Economists who follow money transfers note that in 2006, for example, the poor paid approximately $780 billion more to the rich for rent, food, cars, health care, tools, beer, etc. than they received for their labors at McDonald’s, Wal-Mart, doing yard work, washing dishes or cleaning hotel rooms. So, in order to keep the poor from going completely broke, the government, through taxes, took $320 billion from the rich and returned it to the poor via welfare, Social Security programs and other subsidies. Then, to return the additional $460 billion to the poor so their purchasing power remains intact, the government borrows $460 billion from the rich by issuing new Treasury bonds.
So, after taxes and transfer payments were complete in 2006, the rich made $460 billion, the government lost $460 billion, which was the deficit, and the poor broke even. In effect, the budget deficit equals what the rich keep after taxes. So, if the budget is balanced, the rich can’t make any more money. And if the rich can’t make more money, their incentive to produce will falter, unemployment will skyrocket and the economy will collapse.
I wish I could claim this was my idea, because I think this premise is worth a Noble Prize in economics.
Address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit www.creators.com.
==========================
==================================================
LANCE DICKIE: FAITH CRISIS FOR TRUE BELIEVERS IN MARKET
Comments (3) Recommend (0)
BY LANCE DICKIE
Seattle Times
There are true believers suffering a real crisis of faith. They have been worshipping at the Church of the Free Market, and their doubts run deeper than stockbrokers not answering prayers or returning calls.
For decades, their prophets have preached that economic markets function best when left to themselves, unfettered by government regulation or oversight.
Businesses, investors and traditional market forces would self-regulate, self-correct and self-enforce. Oops.
The collapse of the housing and stock markets trace their way back to decisions and choices made at the highest levels of government and commerce. The rest of us get swept along for the ride, both up and down, and suffer the consequences of hubris, incompetence and criminality.
To hear the humbled apostles for markets free of disclosure and rules begin to mumble about the need for government regulation is extraordinary. Chief among the apostates is former Federal Reserve Chairman Alan Greenspan, who humbly confessed his wonderment at mortgage-lending practices to a congressional committee:
"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."
He was reminded he had the authority to prevent the lending practices behind the subprime mortgage crisis -- was advised to do so -- and refused to act. Greenspan is contrite. Millions more are in foreclosure.
Three years ago, a handful of regulators were waving red flags about hedge funds and credit derivatives. Lightly regulated exemptions from most rules, they placed enormous bets -- literally -- around the planet. Dense and esoteric, these trillion-dollar segments of the markets seemed pretty remote until ordinary mutual funds -- yours and mine -- began investing in them.
The effects of deregulation and unenforced regulation were cumulative. In 1994, the Financial Accounting Standards Board changed its rule that stock options must be treated as a company expense.
A year later, Congress limited the rights of investors to sue, let accounting firms off the hook in fraud cases and fudged reporting practices. In 1999, the repeal of lessons-learned regulations from the Depression fuzzed the lines between retail banking and investment banks.
Every opportunity to push the limit was taken, as allowed or ignored by law. Industry lobbyists on Washington's K Street had their back.
My favorite bit of apostasy revealed itself ever so quietly in a New York Times column by Ben Stein, a lawyer, writer, actor and economist. And cheerleader. For Stein, the resilient economy was always peachy keen.
Last month, reality set in for Stein. Near the end of a column about fear and foolishness, he slipped in a hope that President-elect Barack Obama will put meaningful regulation in place -- maybe even repeal the private securities law against suing companies. Oh, and maybe inspire a more vigilant Federal Reserve.
Dare I say, there has been an epiphany. People who understand the complexities and see the connections acknowledge how precarious economic conditions truly are.
Lance Dickie is a columnist for the Seattle Times.
Wednesday, January 21, 2009
Advice on getting money for business from 401k
Dear Mr. Berko: I have a great idea (please don't share it with your readers) that I believe can be turned into a very successful business. Here's my problem: In June, my bank really liked my idea and was willing to lend me all the money I needed. Well, things have changed, and I'm short about $115,000. As you know, I have invested all the money I have, quit my job, and now I'm at an impasse. But my attorney came to my rescue. I have $383,000 in my 401(k). My attorney suggested I take $191,000 out. It has to be $191,000 because I have to pay a 10 percent early takeout penalty plus ordinary income taxes of 30 percent to net $115,000. That's $76,000 of taxes, which really kills me because this account was worth more $600,000 a year ago. I've enclosed my 401(k). Would you please tell me which of these 12 mutual funds you think I should sell to raise the money I need.
-- R.S., Cincinnati
Dear R.S.: I think your idea is sensational and should provide you and your family with good financial comfort for the future. However, you are 57 years old, and it took you 31 working years to accumulate that 401(k) money. Before you liquidate some of your 401(k), you might ask your wife if she's comfortable with this new decision. She has a right to voice an opinion.
And please tell your attorney to kiss a fish, stick to legal matters and, if he gives you any more financial advice, tell him you'll sue him! This puttering jackass is $76,000 dangerous to your financial health. Please tell him I said so.
I'm not going to tell you which mutual funds to sell because there's an easy way to withdraw that money without paying a pfennig, peso or penny in taxes. Visit your certified public accountant, and I hope he has more brains then the fool you have for a lawyer. Tell your CPA that you need to form a corporation and you want to call it RS Enterprises. Tell your CPA that RS Enterprises must have a 401(k) plan. Then tell your CPA to complete all the papers to transfer the 401(k) plan from your previous employer to the new plan with RS Enterprises, who is your new employer.
Now, under 401(k) rules, your new plan can sell $115,000 in mutual funds without incurring a tax obligation. Then, as easy as one, two and three, your 401(k) can buy $115,000 worth of shares of RS Enterprises. That $115,000 can be used by RS Enterprises to purchase inventory, pay salaries, rent, utilities and other business expenses. So, by reinvesting this money in RS Enterprises stock, rather than taking a cash withdrawal, you eliminate the 10 percent early withdrawal penalty plus ordinary income taxes on the amount you withdrew.
If you follow this advice, you won't have to withdraw $191,000, and you won't have to pay $76,000 in federal taxes. You just liquidate $115,000 of market value mutual funds, buy $115,000 in RS Enterprise stock and put the proceeds into your business checking account. When you have completed the paperwork, send me an e-mail, and I'll recommend how many shares of each of your dozen funds to sell to raise $115,000.
-- R.S., Cincinnati
Dear R.S.: I think your idea is sensational and should provide you and your family with good financial comfort for the future. However, you are 57 years old, and it took you 31 working years to accumulate that 401(k) money. Before you liquidate some of your 401(k), you might ask your wife if she's comfortable with this new decision. She has a right to voice an opinion.
And please tell your attorney to kiss a fish, stick to legal matters and, if he gives you any more financial advice, tell him you'll sue him! This puttering jackass is $76,000 dangerous to your financial health. Please tell him I said so.
I'm not going to tell you which mutual funds to sell because there's an easy way to withdraw that money without paying a pfennig, peso or penny in taxes. Visit your certified public accountant, and I hope he has more brains then the fool you have for a lawyer. Tell your CPA that you need to form a corporation and you want to call it RS Enterprises. Tell your CPA that RS Enterprises must have a 401(k) plan. Then tell your CPA to complete all the papers to transfer the 401(k) plan from your previous employer to the new plan with RS Enterprises, who is your new employer.
Now, under 401(k) rules, your new plan can sell $115,000 in mutual funds without incurring a tax obligation. Then, as easy as one, two and three, your 401(k) can buy $115,000 worth of shares of RS Enterprises. That $115,000 can be used by RS Enterprises to purchase inventory, pay salaries, rent, utilities and other business expenses. So, by reinvesting this money in RS Enterprises stock, rather than taking a cash withdrawal, you eliminate the 10 percent early withdrawal penalty plus ordinary income taxes on the amount you withdrew.
If you follow this advice, you won't have to withdraw $191,000, and you won't have to pay $76,000 in federal taxes. You just liquidate $115,000 of market value mutual funds, buy $115,000 in RS Enterprise stock and put the proceeds into your business checking account. When you have completed the paperwork, send me an e-mail, and I'll recommend how many shares of each of your dozen funds to sell to raise $115,000.
Ratings Firms provide a "santa claus" story; commercial real estate next to collapse
Dear Mr. Berko: Our investment club has three questions: First, how is it that Standard & Poor's can give Fannie Mae an A rating, and four weeks later it declares bankruptcy? Second, what is the next big concern in the stock market? Could it be a possible rise in the cost of oil, a huge federal deficit, or higher taxes? What do you anticipate? Third, all of us are older than 74, and all of us take a required withdrawal from our independent retirement accounts. In my case, I must withdraw $9,700 this year. But I have huge losses in DuPont, Bank of America and closed-end funds too numerous to mention. One of our members said moving shares to another account could do it, and he thinks his brother did it in 2007. Can you explain this to us, because many of us would like to know how that works. It doesn't make sense to sell so many good stocks that we paid higher prices for years ago when they are so low today. We think that is criminal. We all look forward to hearing from you.
-- S.R., Columbus, Ohio
Dear S.R.: Several months ago, I asked an old college semi-chum, who retired six years ago as a low-level big shot executive at one of the world's influential rating agencies the following question: "How can Standard & Poor's, Moody's or Fitch assign an A or AA rating to a bond or preferred stock and a month later watch it go bankrupt? Are you the guys on the take?"
My retired semi-chum told me that Standard & Poor's, Moody's and other rating services are paid huge, handsome fees by the companies they rate. If they fail to give a paying customer a good rating, the likelihood is that the company will solicit a competitor. I quote: "We are in a very competitive business, and on occasion, when it's necessary, we can inflate a company's rating, just like our school system inflates student grades or appraisers inflate the value of a home."
These rating companies are in business to make money and perform a service for investors. Hopefully, they should be able to do both so the investor prospers, too. However, if it's a choice between making money or performing a good service to investors -- think about today's politicians and corporate officers -- I think they'd chose the former, and make the buck! Some psychologists suggest that lying to hundreds of millions of children every year about Santa Claus to achieve a favorable behavior outcome is a good training ground for children to learn to lie to the public 30 or 40 years later.
==
The next stock market concern is the near certain collapse of the commercial real estate bubble. Huge companies like Sears Holdings Corp., Office Depot Inc., Starbucks Corp, The Home Depot Inc., Circuit City Stores Inc., Sprint Nextel Corp., and Chicago Title are vacating their leases and branch banks are closing their windows. Small, neighborhood strip centers are losing tenants and vacancy signs are sprouting like weeds. Commercial vacancy rates in New York City are expected to exceed 18 percent in 2009, Dallas expects 22 percent, Metropolitan Chicago 18 percent, Atlanta expects 20 percent, and Phoenix expects commercial vacancy rates to exceed 21 percent. Foreclosures last year were up 30 percent from 2007, and that number is expected to move higher this year. Huge, debt-laden shopping mall developers like General Growth Properties can't meet their loan obligations and many smaller, well-known developers like Florida's Sembler & Co. are holding a fraying rope.
Many of the large commercial real estate investment trusts are foundering, and others could founder. Banks are reluctant to extend loan agreements because property values are significantly lower than loan amounts. Cash flows cannot meet mortgage payments. The only solution is twofold: The lenders must take equity interests in the properties in lieu of some payments, or borrowers must enter Chapter 11 bankruptcy proceedings.
======================================================
The system, which is flawed, hurt you, and there's no recourse. I remember what the late Sen. Daniel Patrick Moynihan, D-N.Y., once told me: "Most members of Congress, most lawyers and most big shots on Wall Street are crooks and liars until proven otherwise."
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net.
-- S.R., Columbus, Ohio
Dear S.R.: Several months ago, I asked an old college semi-chum, who retired six years ago as a low-level big shot executive at one of the world's influential rating agencies the following question: "How can Standard & Poor's, Moody's or Fitch assign an A or AA rating to a bond or preferred stock and a month later watch it go bankrupt? Are you the guys on the take?"
My retired semi-chum told me that Standard & Poor's, Moody's and other rating services are paid huge, handsome fees by the companies they rate. If they fail to give a paying customer a good rating, the likelihood is that the company will solicit a competitor. I quote: "We are in a very competitive business, and on occasion, when it's necessary, we can inflate a company's rating, just like our school system inflates student grades or appraisers inflate the value of a home."
These rating companies are in business to make money and perform a service for investors. Hopefully, they should be able to do both so the investor prospers, too. However, if it's a choice between making money or performing a good service to investors -- think about today's politicians and corporate officers -- I think they'd chose the former, and make the buck! Some psychologists suggest that lying to hundreds of millions of children every year about Santa Claus to achieve a favorable behavior outcome is a good training ground for children to learn to lie to the public 30 or 40 years later.
==
The next stock market concern is the near certain collapse of the commercial real estate bubble. Huge companies like Sears Holdings Corp., Office Depot Inc., Starbucks Corp, The Home Depot Inc., Circuit City Stores Inc., Sprint Nextel Corp., and Chicago Title are vacating their leases and branch banks are closing their windows. Small, neighborhood strip centers are losing tenants and vacancy signs are sprouting like weeds. Commercial vacancy rates in New York City are expected to exceed 18 percent in 2009, Dallas expects 22 percent, Metropolitan Chicago 18 percent, Atlanta expects 20 percent, and Phoenix expects commercial vacancy rates to exceed 21 percent. Foreclosures last year were up 30 percent from 2007, and that number is expected to move higher this year. Huge, debt-laden shopping mall developers like General Growth Properties can't meet their loan obligations and many smaller, well-known developers like Florida's Sembler & Co. are holding a fraying rope.
Many of the large commercial real estate investment trusts are foundering, and others could founder. Banks are reluctant to extend loan agreements because property values are significantly lower than loan amounts. Cash flows cannot meet mortgage payments. The only solution is twofold: The lenders must take equity interests in the properties in lieu of some payments, or borrowers must enter Chapter 11 bankruptcy proceedings.
======================================================
The system, which is flawed, hurt you, and there's no recourse. I remember what the late Sen. Daniel Patrick Moynihan, D-N.Y., once told me: "Most members of Congress, most lawyers and most big shots on Wall Street are crooks and liars until proven otherwise."
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net.
Investment Idea: Why I like MVIS Microvision PicoProjector
Newsletter Recommendation: MVIS 20-Jan-09 02:12 pm This message is an update on the recommendation to buy Microvision, issued last week. If you did not receive
To summarize the opportunity, Microvision has devoted the last 12 years to developing the world’s smallest, full-color laser projector. The device is small enough and power-efficient enough to be embedded in cell phones, not to mention a wide variety of other consumer electronics devices, including iPods, laptops, video cameras, game devices and much more.
To give you an idea of the potential for these devices, consider that cell phones alone represent an available market of one billion units per annually.
To the right, you can see the company’s latest projector engine compared to a penny. It might not seem like much, but this highly advanced device can project an image with DVD quality resolution up to 100 inches across in a dark room. In a dimly lit room, the image is brilliant at around five feet diagonal. And under normal to bright indoor lighting you can produce a crisp, colorful image about 20 inches diagonal – larger than the monitor on most laptops.
And all of this coming from a device the size of your cell phone.
The Dues Have Been Paid… Now It’s Time to Collect
Microvision’s technological achievements are phenomenal. And the high-volume markets the company will serve could provide life-changing returns for today’s investors. Even so, the earliest investors in Microvision – those who have been waiting more than a decade for the company’s disruptive technology to become commercial-ready – are likely a bit weary and impatient by now.
But the good news is that you don’t have to wait like they did. All the major development milestones, hundreds of millions of dollars in investment, and years of miniaturization efforts and design improvements have already been made. The company is just months away from launching high-volume production of their ultra-miniature projection engine.
And you can buy shares today with less execution risk and at a lower cost than ever before.
At the recent Consumer Electronics Show in Las Vegas and Macworld show in Los Angeles, Microvision confirmed that they will begin shipping limited quantities of their standalone accessory projector by the second quarter, with high volume production to follow shortly after.
Next Milestone: Purchase Orders from World-Leading OEMs
While the company may also launch the product under their own brand name, the goal is to license the technology to original equipment manufacturers (OEMs) to market under their own brands and configure within their own products and designs.
Already, Microvision has several partnerships with high profile companies, including Corning, Motorola and a manufacturing relationship with Asia Optical (one of the world’s largest manufacturers of digital cameras and cell phone cameras, whose products are sold under numerous household consumer electronics brand names).
As well, the company has a number of contractual relationships with world-leading companies whose names are still confidential (consumer electronics is a secretive and highly competitive business). I expect initial purchase orders and named partnerships to continue to be announced in the next few months. These announcements should provide a significant boost to the stock price.
Add a name like Apple, Sony or Nokia to the press release and I expect the stock to trade several multiples above where it is today. I fully expect Microvision technology will be integrated into devices made by these companies (and many more).
Part II
The Market for Pico Projectors is HUGE
Do you think there are people out there who might want to project images, video clips, music videos, movies, television shows, websites and games from their iPhones and iPods, smart phones, digital cameras and portable computers? I believe so. And so do many of the world’s largest technology and consumer electronics companies. In fact, they’re betting on it.
Pico Projectors will start out as accessory supplements to mobile devices. Then in a growth path similar to cameras in cell phones, they will ultimately become ubiquitous.
In an article titled, The Pico Projector Gold Rush for the trade publication, Information Display, Chris Chinnock highlights a scenario where a combined 85 million standalone and embedded pico projectors could be sold in 2012 (still a slower introduction than cameras in cell phones).
I hope the following will give you an idea what the potential market opportunity is for Microvision…
These Two Corporate Giants are Betting Big
There are only a handful of companies in the world that have the capability to produce extremely small, fast-switching, efficient green lasers. Green lasers of this type were only invented just a few years ago. Corning and Osram are two of these companies. Both are multi-billion dollar operations. They are scientific and technological leaders that have each been around for more than 100 years.
Corning and Osram are both suppliers to Microvision and have made significant research, development and manufacturing commitments to align themselves with the growth of the company. That is because they see Microvision’s disruptive technology as the platform to get their product (in this case green lasers) into millions, and then billions of consumer electronics devices.
Every year, Corning makes a decision to push just a handful of technologies to the forefront of their efforts. Some of these technologies in the past have included LCD glass and fiber optic cable, where the company is the world leader. To even be considered, the new technology must have “jackpot potential”. For a company the size of Corning that would constitute revenues in the hundreds of millions, if not billions.
On numerous occasions (and most recently just two weeks ago in an Associated Press article), Corning has confirmed the highest commitment to green lasers. Here are a couple of passages from that article:
“While ensuring an unusually high 10 percent of revenue is allocated to research, Corning's management imposed a rigorous, company-wide system for nurturing the best ideas step by step. Out of hundreds of projects a year, it keeps pursuing just a handful seen as likely to hit a jackpot.
“Among the latest high-wager hopefuls, in addition to mercury filters for coal plants: green lasers to equip cell phones with projectors, micro-reactors to enhance chemical processing and silicon bonded to glass to extend battery life for handheld electronics.”
But why don’t you take it directly from the source...
The following is a brief clip of Corning’s Chief Technology Officer, Joseph A. Miller, who oversees more than 1,800 engineers, scientists and technicians. In this two minute clip, he outlines Corning’s firm commitment to producing green lasers for Microvision and highlights Microvision’s inherent advantage over the competition:
http://www.youtube.com/watch?v=cbqUylYUcws
If green lasers (one small component within Microvision’s display engine) have enough revenue potential to make a significant impact on the bottom line of Corning AND Osram, what does that say for Microvision, with a market cap under $125 million?
What it says to me is that this is a prudent speculation worth making.
Part III
A Few Words about the Competition
As of the Consumer Electronics Show in January 2009, there are three Pico Projectors on the market. These products utilize technology developed either by Texas Instruments or 3M.
While I do not underestimate the ability of these companies to innovate, and I do salute them for rushing their products to market first, from a performance standpoint, these products lag what Microvision has produced by a wide margin.
Being the first company in a brand new market rarely guarantees dominance. The iPod wasn’t the first “portable MP3 player” by a long shot. But it is the device by which all others are measured today. The term “portable MP3 player” is hardly even used.
Based on performance characteristics, there is a good chance that Microvision will dominate the pico projector space. If that holds true, then this will be one of the greatest investment opportunities of your lifetime.
But the company doesn’t have to dominate the market for this to be a phenomenal opportunity. Nokia is not the only handset maker. Dell is not the only computer maker. And Intel is not the only chip maker. The market for pico projectors will be huge and there will be room for many players. Even if Microvision captures just 5% of the worldwide market, today’s investors will be looking at a home run.
I won’t go into the technology again in this update. All the details are in the full report and last week’s recommendation letter. But I would like to point out why Microvision is in a superior position.
The Advantages that Set Microvision Apart
The device that Microvision showed off last week at the CES and Macworld is the highest performing display in its class. It comes in the smallest and thinnest package (thinness is a big issue when it comes to embedding a device in a cell phone or iPod).
It also has:
The highest display resolution
The widest color gamut
The highest brightness
And the lowest power draw
But there is a HUGE advantage to Microvision’s technology that might be easy to overlook on paper. The image is always in focus, at any distance, on any surface (even curved or angled surfaces). And it doesn’t need a projection lens or focus adjustment to accomplish this (meaning less cost and complexity and a smaller package size).
With the devices offered by Texas Instruments and 3M you would need to refocus the image every time you moved your hand. This is not only inconvenient, it detracts from performance. Microvision has none of those limitations.
Over the years, the military has invested significantly in Microvision’s development efforts, including two military related contracts in the past month alone. Given a choice, do you think the military would choose a device that must constantly be focused, when a better option exists? Can you imagine: “Hold on a minute. I know they’re shooting at us, but I can’t get this map to stay in focus.”
But rather than take it from me, here just are a few recent snippets from articles following the Consumer Electronics and Macworld Shows last week, illustrating Microvision’s key attributes.
Part IV
From Techworld:
“The concept of ultraportable, pocket projectors isn't new: Mitsubishi and Samsung both have models they refer to as "pocket" size. By comparison with Microvision's new prototype projector, those models are boulder-sized rocks.”
“The PicoP uses red, green, and blue lasers to project a WVGA (848 x 480) 16:9 widescreen image with 10 lumens of brightness and a contrast ratio of better than 5,000 to 1. It was adequately bright under ambient show floor lightning, and substantially brighter than any of the other micro projectors we’ve seen this week. In a dark room it projects an image up to a staggering 100 inches, but the best part is that since it uses lasers, it’s always inherently in focus. This is an important feature, since the whole point of a microprojector is that you can whip it out and use it anywhere.”
From the Houston Chronicle:
“My favorite product at the show was Microvision’s way-cool SHOW WX Pico Projector. Smaller than an iPhone, it’s a tiny video projector that uses laser light rather than lamps or LEDs to project an image from 6 inches to 100 inches and is always in focus on any surface. It looks incredible and should be available later this year for under $500.”
Hearst Electronic Products Magazine:
“Some devices already in the market are challenged to provide bright projected displays. Then too, they seem to require careful focusing. A MEMS-based device called the PicoP engine from Microvision (www.microvision.com) being demonstrated at CES this year overcomes these drawbacks, and is scheduled to hit shelves sometime in 2009.”
Before I conclude, I should point out that in addition to the two recent shows and the company’s announcement that they will begin shipping product in just months, Microvision also recently announced to military related development contracts totaling $1.5 million.
In the grand scheme of things, that is not a lot of money, but the deliverables for both contracts involve high definition pico projectors and see-through eyewear displays. This is truly a game changer. Compared to the competition, Microvision already has a brighter and much smaller engine with almost double the resolution.
And the company has already mapped out a path and has contracted for the development THIS YEAR of devices that will take the display resolution to high definition format. The future is looking VERY bright for Microvision.
The original recommendation to buy Microvision went out about 10 days ago, when the stock was trading at $2.05. I mentioned in that report that the price could be volatile, and that after the 100% run from $1.11 to $2.20 it could be due for a pullback after the excitement of the Consumer Electronics Show.
That is why I only advised buying one quarter of a full position.
However, you might ask why I would have recommended it if I expected the stock to pull back. The reason is simple. There is a small downside risk in this stock right now… but there is an even greater risk of being out of the stock for a major move up.
Part V
Numerous household name OEMs are currently concluding their evaluation of Microvision’s technology. The device has already passed third party drop tests with flying colors. There is a real possibility that you will wake up one morning to a press release stating that Nokia… or Apple… or Sony… or RIM has issued a purchase order for pico projector engines with “Microvision Inside.”
You do not want to be on the sidelines when that day comes. If you have not already taken a position, buy one quarter of a full position. If are holding the company already, consider adding to your position incrementally over the next several weeks or months.
Remember, the price will be volatile in the near term. But we could care less about “price”. We’re concerned with value. The value is there. This technology is likely to be “the next big thing” in consumer electronics. And Microvision is the only pure play.
If you missed buying the other “Micro” based in Redmond, Washington when it was trading under $2 a share, don’t miss this one. I daresay it could be just as profitable.
To summarize the opportunity, Microvision has devoted the last 12 years to developing the world’s smallest, full-color laser projector. The device is small enough and power-efficient enough to be embedded in cell phones, not to mention a wide variety of other consumer electronics devices, including iPods, laptops, video cameras, game devices and much more.
To give you an idea of the potential for these devices, consider that cell phones alone represent an available market of one billion units per annually.
To the right, you can see the company’s latest projector engine compared to a penny. It might not seem like much, but this highly advanced device can project an image with DVD quality resolution up to 100 inches across in a dark room. In a dimly lit room, the image is brilliant at around five feet diagonal. And under normal to bright indoor lighting you can produce a crisp, colorful image about 20 inches diagonal – larger than the monitor on most laptops.
And all of this coming from a device the size of your cell phone.
The Dues Have Been Paid… Now It’s Time to Collect
Microvision’s technological achievements are phenomenal. And the high-volume markets the company will serve could provide life-changing returns for today’s investors. Even so, the earliest investors in Microvision – those who have been waiting more than a decade for the company’s disruptive technology to become commercial-ready – are likely a bit weary and impatient by now.
But the good news is that you don’t have to wait like they did. All the major development milestones, hundreds of millions of dollars in investment, and years of miniaturization efforts and design improvements have already been made. The company is just months away from launching high-volume production of their ultra-miniature projection engine.
And you can buy shares today with less execution risk and at a lower cost than ever before.
At the recent Consumer Electronics Show in Las Vegas and Macworld show in Los Angeles, Microvision confirmed that they will begin shipping limited quantities of their standalone accessory projector by the second quarter, with high volume production to follow shortly after.
Next Milestone: Purchase Orders from World-Leading OEMs
While the company may also launch the product under their own brand name, the goal is to license the technology to original equipment manufacturers (OEMs) to market under their own brands and configure within their own products and designs.
Already, Microvision has several partnerships with high profile companies, including Corning, Motorola and a manufacturing relationship with Asia Optical (one of the world’s largest manufacturers of digital cameras and cell phone cameras, whose products are sold under numerous household consumer electronics brand names).
As well, the company has a number of contractual relationships with world-leading companies whose names are still confidential (consumer electronics is a secretive and highly competitive business). I expect initial purchase orders and named partnerships to continue to be announced in the next few months. These announcements should provide a significant boost to the stock price.
Add a name like Apple, Sony or Nokia to the press release and I expect the stock to trade several multiples above where it is today. I fully expect Microvision technology will be integrated into devices made by these companies (and many more).
Part II
The Market for Pico Projectors is HUGE
Do you think there are people out there who might want to project images, video clips, music videos, movies, television shows, websites and games from their iPhones and iPods, smart phones, digital cameras and portable computers? I believe so. And so do many of the world’s largest technology and consumer electronics companies. In fact, they’re betting on it.
Pico Projectors will start out as accessory supplements to mobile devices. Then in a growth path similar to cameras in cell phones, they will ultimately become ubiquitous.
In an article titled, The Pico Projector Gold Rush for the trade publication, Information Display, Chris Chinnock highlights a scenario where a combined 85 million standalone and embedded pico projectors could be sold in 2012 (still a slower introduction than cameras in cell phones).
I hope the following will give you an idea what the potential market opportunity is for Microvision…
These Two Corporate Giants are Betting Big
There are only a handful of companies in the world that have the capability to produce extremely small, fast-switching, efficient green lasers. Green lasers of this type were only invented just a few years ago. Corning and Osram are two of these companies. Both are multi-billion dollar operations. They are scientific and technological leaders that have each been around for more than 100 years.
Corning and Osram are both suppliers to Microvision and have made significant research, development and manufacturing commitments to align themselves with the growth of the company. That is because they see Microvision’s disruptive technology as the platform to get their product (in this case green lasers) into millions, and then billions of consumer electronics devices.
Every year, Corning makes a decision to push just a handful of technologies to the forefront of their efforts. Some of these technologies in the past have included LCD glass and fiber optic cable, where the company is the world leader. To even be considered, the new technology must have “jackpot potential”. For a company the size of Corning that would constitute revenues in the hundreds of millions, if not billions.
On numerous occasions (and most recently just two weeks ago in an Associated Press article), Corning has confirmed the highest commitment to green lasers. Here are a couple of passages from that article:
“While ensuring an unusually high 10 percent of revenue is allocated to research, Corning's management imposed a rigorous, company-wide system for nurturing the best ideas step by step. Out of hundreds of projects a year, it keeps pursuing just a handful seen as likely to hit a jackpot.
“Among the latest high-wager hopefuls, in addition to mercury filters for coal plants: green lasers to equip cell phones with projectors, micro-reactors to enhance chemical processing and silicon bonded to glass to extend battery life for handheld electronics.”
But why don’t you take it directly from the source...
The following is a brief clip of Corning’s Chief Technology Officer, Joseph A. Miller, who oversees more than 1,800 engineers, scientists and technicians. In this two minute clip, he outlines Corning’s firm commitment to producing green lasers for Microvision and highlights Microvision’s inherent advantage over the competition:
http://www.youtube.com/watch?v=cbqUylYUcws
If green lasers (one small component within Microvision’s display engine) have enough revenue potential to make a significant impact on the bottom line of Corning AND Osram, what does that say for Microvision, with a market cap under $125 million?
What it says to me is that this is a prudent speculation worth making.
Part III
A Few Words about the Competition
As of the Consumer Electronics Show in January 2009, there are three Pico Projectors on the market. These products utilize technology developed either by Texas Instruments or 3M.
While I do not underestimate the ability of these companies to innovate, and I do salute them for rushing their products to market first, from a performance standpoint, these products lag what Microvision has produced by a wide margin.
Being the first company in a brand new market rarely guarantees dominance. The iPod wasn’t the first “portable MP3 player” by a long shot. But it is the device by which all others are measured today. The term “portable MP3 player” is hardly even used.
Based on performance characteristics, there is a good chance that Microvision will dominate the pico projector space. If that holds true, then this will be one of the greatest investment opportunities of your lifetime.
But the company doesn’t have to dominate the market for this to be a phenomenal opportunity. Nokia is not the only handset maker. Dell is not the only computer maker. And Intel is not the only chip maker. The market for pico projectors will be huge and there will be room for many players. Even if Microvision captures just 5% of the worldwide market, today’s investors will be looking at a home run.
I won’t go into the technology again in this update. All the details are in the full report and last week’s recommendation letter. But I would like to point out why Microvision is in a superior position.
The Advantages that Set Microvision Apart
The device that Microvision showed off last week at the CES and Macworld is the highest performing display in its class. It comes in the smallest and thinnest package (thinness is a big issue when it comes to embedding a device in a cell phone or iPod).
It also has:
The highest display resolution
The widest color gamut
The highest brightness
And the lowest power draw
But there is a HUGE advantage to Microvision’s technology that might be easy to overlook on paper. The image is always in focus, at any distance, on any surface (even curved or angled surfaces). And it doesn’t need a projection lens or focus adjustment to accomplish this (meaning less cost and complexity and a smaller package size).
With the devices offered by Texas Instruments and 3M you would need to refocus the image every time you moved your hand. This is not only inconvenient, it detracts from performance. Microvision has none of those limitations.
Over the years, the military has invested significantly in Microvision’s development efforts, including two military related contracts in the past month alone. Given a choice, do you think the military would choose a device that must constantly be focused, when a better option exists? Can you imagine: “Hold on a minute. I know they’re shooting at us, but I can’t get this map to stay in focus.”
But rather than take it from me, here just are a few recent snippets from articles following the Consumer Electronics and Macworld Shows last week, illustrating Microvision’s key attributes.
Part IV
From Techworld:
“The concept of ultraportable, pocket projectors isn't new: Mitsubishi and Samsung both have models they refer to as "pocket" size. By comparison with Microvision's new prototype projector, those models are boulder-sized rocks.”
“The PicoP uses red, green, and blue lasers to project a WVGA (848 x 480) 16:9 widescreen image with 10 lumens of brightness and a contrast ratio of better than 5,000 to 1. It was adequately bright under ambient show floor lightning, and substantially brighter than any of the other micro projectors we’ve seen this week. In a dark room it projects an image up to a staggering 100 inches, but the best part is that since it uses lasers, it’s always inherently in focus. This is an important feature, since the whole point of a microprojector is that you can whip it out and use it anywhere.”
From the Houston Chronicle:
“My favorite product at the show was Microvision’s way-cool SHOW WX Pico Projector. Smaller than an iPhone, it’s a tiny video projector that uses laser light rather than lamps or LEDs to project an image from 6 inches to 100 inches and is always in focus on any surface. It looks incredible and should be available later this year for under $500.”
Hearst Electronic Products Magazine:
“Some devices already in the market are challenged to provide bright projected displays. Then too, they seem to require careful focusing. A MEMS-based device called the PicoP engine from Microvision (www.microvision.com) being demonstrated at CES this year overcomes these drawbacks, and is scheduled to hit shelves sometime in 2009.”
Before I conclude, I should point out that in addition to the two recent shows and the company’s announcement that they will begin shipping product in just months, Microvision also recently announced to military related development contracts totaling $1.5 million.
In the grand scheme of things, that is not a lot of money, but the deliverables for both contracts involve high definition pico projectors and see-through eyewear displays. This is truly a game changer. Compared to the competition, Microvision already has a brighter and much smaller engine with almost double the resolution.
And the company has already mapped out a path and has contracted for the development THIS YEAR of devices that will take the display resolution to high definition format. The future is looking VERY bright for Microvision.
The original recommendation to buy Microvision went out about 10 days ago, when the stock was trading at $2.05. I mentioned in that report that the price could be volatile, and that after the 100% run from $1.11 to $2.20 it could be due for a pullback after the excitement of the Consumer Electronics Show.
That is why I only advised buying one quarter of a full position.
However, you might ask why I would have recommended it if I expected the stock to pull back. The reason is simple. There is a small downside risk in this stock right now… but there is an even greater risk of being out of the stock for a major move up.
Part V
Numerous household name OEMs are currently concluding their evaluation of Microvision’s technology. The device has already passed third party drop tests with flying colors. There is a real possibility that you will wake up one morning to a press release stating that Nokia… or Apple… or Sony… or RIM has issued a purchase order for pico projector engines with “Microvision Inside.”
You do not want to be on the sidelines when that day comes. If you have not already taken a position, buy one quarter of a full position. If are holding the company already, consider adding to your position incrementally over the next several weeks or months.
Remember, the price will be volatile in the near term. But we could care less about “price”. We’re concerned with value. The value is there. This technology is likely to be “the next big thing” in consumer electronics. And Microvision is the only pure play.
If you missed buying the other “Micro” based in Redmond, Washington when it was trading under $2 a share, don’t miss this one. I daresay it could be just as profitable.
Tuesday, January 13, 2009
WSJ Says it's Atlas Shrugged Coming to Pass/ Critique has got it straight however There is no such thing as a human that is motivated by Rationality!
Atlas Shrugged: From Fiction to Fact in 52 years
By STEPHEN MOORE
Some years ago when I worked at the libertarian Cato Institute, we used to label any new hire who had not yet read "Atlas Shrugged" a "virgin." Being conversant in Ayn Rand's classic novel about the economic carnage caused by big government run amok was practically a job requirement. If only "Atlas" were required reading for every member of Congress and political appointee in the Obama administration. I'm confident that we'd get out of the current financial mess a lot faster.
Many of us who know Rand's work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that "Atlas Shrugged" parodied in 1957, when this 1,000-page novel was first published and became an instant hit.
Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated "Atlas" as the second-most influential book in their lives, behind only the Bible.
For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.
In the book, these relentless wealth redistributionists and their programs are disparaged as "the looters and their laws." Every new act of government futility and stupidity carries with it a benevolent-sounding title. These include the "Anti-Greed Act" to redistribute income (sounds like Charlie Rangel's promises soak-the-rich tax bill) and the "Equalization of Opportunity Act" to prevent people from starting more than one business (to give other people a chance). My personal favorite, the "Anti Dog-Eat-Dog Act," aims to restrict cut-throat competition between firms and thus slow the wave of business bankruptcies. Why didn't Hank Paulson think of that?
These acts and edicts sound farcical, yes, but no more so than the actual events in Washington, circa 2008. We already have been served up the $700 billion "Emergency Economic Stabilization Act" and the "Auto Industry Financing and Restructuring Act." Now that Barack Obama is in town, he will soon sign into law with great urgency the "American Recovery and Reinvestment Plan." This latest Hail Mary pass will increase the federal budget (which has already expanded by $1.5 trillion in eight years under George Bush) by an additional $1 trillion -- in roughly his first 100 days in office.
The current economic strategy is right out of "Atlas Shrugged": The more incompetent you are in business, the more handouts the politicians will bestow on you. That's the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies -- while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers. With each successive bailout to "calm the markets," another trillion of national wealth is subsequently lost. Yet, as "Atlas" grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate "windfalls."
When Rand was writing in the 1950s, one of the pillars of American industrial might was the railroads. In her novel the railroad owner, Dagny Taggart, an enterprising industrialist, has a FedEx-like vision for expansion and first-rate service by rail. But she is continuously badgered, cajoled, taxed, ruled and regulated -- always in the public interest -- into bankruptcy. Sound far-fetched? On the day I sat down to write this ode to "Atlas," a Wall Street Journal headline blared: "Rail Shippers Ask Congress to Regulate Freight Prices."
In one chapter of the book, an entrepreneur invents a new miracle metal -- stronger but lighter than steel. The government immediately appropriates the invention in "the public good." The politicians demand that the metal inventor come to Washington and sign over ownership of his invention or lose everything.
The scene is eerily similar to an event late last year when six bank presidents were summoned by Treasury Secretary Hank Paulson to Washington, and then shuttled into a conference room and told, in effect, that they could not leave until they collectively signed a document handing over percentages of their future profits to the government. The Treasury folks insisted that this shakedown, too, was all in "the public interest."
Ultimately, "Atlas Shrugged" is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand's political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear -- leaving everyone the poorer.
One memorable moment in "Atlas" occurs near the very end, when the economy has been rendered comatose by all the great economic minds in Washington. Finally, and out of desperation, the politicians come to the heroic businessman John Galt (who has resisted their assault on capitalism) and beg him to help them get the economy back on track. The discussion sounds much like what would happen today:
Galt: "You want me to be Economic Dictator?"
Mr. Thompson: "Yes!"
"And you'll obey any order I give?"
"Implicitly!"
"Then start by abolishing all income taxes."
"Oh no!" screamed Mr. Thompson, leaping to his feet. "We couldn't do that . . . How would we pay government employees?"
"Fire your government employees."
"Oh, no!"
Abolishing the income tax. Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax "for purposes of fairness" as Barack Obama puts it.
David Kelley, the president of the Atlas Society, which is dedicated to promoting Rand's ideas, explains that "the older the book gets, the more timely its message." He tells me that there are plans to make "Atlas Shrugged" into a major motion picture -- it is the only classic novel of recent decades that was never made into a movie. "We don't need to make a movie out of the book," Mr. Kelley jokes. "We are living it right now."
Mr. Moore is senior economics writer for The Wall Street Journal editorial page.
================================
And more (and better!!) intelligence from the critique of Ayn Rand http://www.aynrandcontrahumannature.blogspot.com/
Schumpeter’s challenge. The economist Joseph Schumpeter created quite a stir in the forties when he warned that “the capitalist order tends to destroy itself.” Schumpeter issued this warning despite his belief in what he described as “the impressive economic and the still more impressive cultural achievement of the capitalist order and at the immense promise held out by both.” Capitalism would destroy itself because it would undermine its own “protecting strata” and “institutional framework.” One of the reasons he gave for this pessimistic assessment seems rather prescient in relation to the current economic crisis:
Capitalist activity, being essentially “rational,” tends to spread rational habits of mind and to destroy those loyalties and those habits of super- and subordination that are nevertheless essential for the efficient working of the institutionalized leadership of the producing plant: no social system can work which is based exclusively upon a network of free contracts between (legally) equal contracting parties and in which everyone is supposed to be guided by nothing except his own (short-run) utilitarian ends.
In one sentence Schumpeter has put his finger on the greatest flaw of capitalist order. Contrary to what Rand and her followers believe, “rational” self-interest is not an entirely benign psychological force. Rand’s faith in self-interest (and it is only a faith) is not warranted by the facts. In the first place, it is absurd to regard human desires and sentiments as rational. A desire or sentiment can only be criticized in reference to an opposing desire or sentiment.
As Spinoza famously put it: “an emotion cannot be destroyed nor controlled except by a contrary and stronger emotion.”
Consequently, rationality, as an ideal, can only apply to the means by which desires and sentiments are satisfied. Yet this is not all. Even if there were (per impossible) such a thing as a “rational end,” it is very doubtful that very many human beings would be interested in pursuing it.
If we make history and experience our guide in such matters—and whatever guide could possibly lead us to the truth besides history and experience?—then we are forced to conclude that the majority of human beings are largely non-rational in their conduct and are probably not even capable of being rational about any issue in the least complex (as rational methods of analysis tend to break down when applied to complex situations). W
hen Schumpeter talks about “rational” habits of mind, he is not writing in the Randian sense of the word. He means something more along the lines of rationalism—i.e., the belief that no doctrine is true unless it can be proved “verbally,” through clever patter and other exercises of blatant sophistry. As a consequence of this sort of perfervid rationalism, individuals no longer believe in “higher” values or “lofty” moral ideas. Short-term self-interest and “immediate gratification” become the main desideratum, with sophistry being brought in to give the whole thing a window dressing of moral justification.
We see this played out in the financial sector. The birth of complex financial instruments based on computer generated formulas has allowed finance capitalism to mask what ultimately amounts to a vast ponzi scheme which yields huge profits in the short-run but ends in bankruptcy and dishonor. This sort of finance capitalism fits into what is known as the “Minsky cycle”:
Firms participating in the early stages of the cycle typically are not leveraged; Minsky called them hedged firms because their cash receipts cover their cash outlays. The success of the first movers draws in additional players. Speculative firms then engage in leverage to the point where they must borrow to meet some of their interest payments—usually borrowing in short-term markets to finance higher-yielding long-term positions. None of this is irrational behavior; market players are chasing short-term gains, and some of them are getting very rich.
The final stages of the Minsky cycle arrive with a proliferation of Ponzi firms, which must borrow to meet all their interest payments, so their debt burden continuously increases. At some point, a disruptive event occurs, … and markets abruptly reprice—the further along in the cycle, the more violent the repricing. [Charles Morris, The Trillion Dollar Meltdown, p. 133-4]
In other words, what we find in the world of high finance is a system which, by giving individuals the hope of huge rewards in the short-run, encourages them to behave in a ways that are destructive in the long-run. It takes strength of character to resist such huge short-run gains.
Unfortunately, the very success of capitalism tends to create a prosperous society that weakens the moral fibre of individuals. Add to this situation the tendency of individuals—particularly intelligent individuals—to cloak their real motives under a thick shroud of ingenious rationalizations (e.g., “portfolio theory,” the “efficient market hypothesis,” “laissez-faire” ideology, etc.), and we have all the elements required to create market failure leading to widespread and socially harmful externalities, as can be readily corroborated by examining the 2008-2009 financial crisis.
By STEPHEN MOORE
Some years ago when I worked at the libertarian Cato Institute, we used to label any new hire who had not yet read "Atlas Shrugged" a "virgin." Being conversant in Ayn Rand's classic novel about the economic carnage caused by big government run amok was practically a job requirement. If only "Atlas" were required reading for every member of Congress and political appointee in the Obama administration. I'm confident that we'd get out of the current financial mess a lot faster.
Many of us who know Rand's work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that "Atlas Shrugged" parodied in 1957, when this 1,000-page novel was first published and became an instant hit.
Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated "Atlas" as the second-most influential book in their lives, behind only the Bible.
For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.
In the book, these relentless wealth redistributionists and their programs are disparaged as "the looters and their laws." Every new act of government futility and stupidity carries with it a benevolent-sounding title. These include the "Anti-Greed Act" to redistribute income (sounds like Charlie Rangel's promises soak-the-rich tax bill) and the "Equalization of Opportunity Act" to prevent people from starting more than one business (to give other people a chance). My personal favorite, the "Anti Dog-Eat-Dog Act," aims to restrict cut-throat competition between firms and thus slow the wave of business bankruptcies. Why didn't Hank Paulson think of that?
These acts and edicts sound farcical, yes, but no more so than the actual events in Washington, circa 2008. We already have been served up the $700 billion "Emergency Economic Stabilization Act" and the "Auto Industry Financing and Restructuring Act." Now that Barack Obama is in town, he will soon sign into law with great urgency the "American Recovery and Reinvestment Plan." This latest Hail Mary pass will increase the federal budget (which has already expanded by $1.5 trillion in eight years under George Bush) by an additional $1 trillion -- in roughly his first 100 days in office.
The current economic strategy is right out of "Atlas Shrugged": The more incompetent you are in business, the more handouts the politicians will bestow on you. That's the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies -- while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers. With each successive bailout to "calm the markets," another trillion of national wealth is subsequently lost. Yet, as "Atlas" grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate "windfalls."
When Rand was writing in the 1950s, one of the pillars of American industrial might was the railroads. In her novel the railroad owner, Dagny Taggart, an enterprising industrialist, has a FedEx-like vision for expansion and first-rate service by rail. But she is continuously badgered, cajoled, taxed, ruled and regulated -- always in the public interest -- into bankruptcy. Sound far-fetched? On the day I sat down to write this ode to "Atlas," a Wall Street Journal headline blared: "Rail Shippers Ask Congress to Regulate Freight Prices."
In one chapter of the book, an entrepreneur invents a new miracle metal -- stronger but lighter than steel. The government immediately appropriates the invention in "the public good." The politicians demand that the metal inventor come to Washington and sign over ownership of his invention or lose everything.
The scene is eerily similar to an event late last year when six bank presidents were summoned by Treasury Secretary Hank Paulson to Washington, and then shuttled into a conference room and told, in effect, that they could not leave until they collectively signed a document handing over percentages of their future profits to the government. The Treasury folks insisted that this shakedown, too, was all in "the public interest."
Ultimately, "Atlas Shrugged" is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand's political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear -- leaving everyone the poorer.
One memorable moment in "Atlas" occurs near the very end, when the economy has been rendered comatose by all the great economic minds in Washington. Finally, and out of desperation, the politicians come to the heroic businessman John Galt (who has resisted their assault on capitalism) and beg him to help them get the economy back on track. The discussion sounds much like what would happen today:
Galt: "You want me to be Economic Dictator?"
Mr. Thompson: "Yes!"
"And you'll obey any order I give?"
"Implicitly!"
"Then start by abolishing all income taxes."
"Oh no!" screamed Mr. Thompson, leaping to his feet. "We couldn't do that . . . How would we pay government employees?"
"Fire your government employees."
"Oh, no!"
Abolishing the income tax. Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax "for purposes of fairness" as Barack Obama puts it.
David Kelley, the president of the Atlas Society, which is dedicated to promoting Rand's ideas, explains that "the older the book gets, the more timely its message." He tells me that there are plans to make "Atlas Shrugged" into a major motion picture -- it is the only classic novel of recent decades that was never made into a movie. "We don't need to make a movie out of the book," Mr. Kelley jokes. "We are living it right now."
Mr. Moore is senior economics writer for The Wall Street Journal editorial page.
================================
And more (and better!!) intelligence from the critique of Ayn Rand http://www.aynrandcontrahumannature.blogspot.com/
Schumpeter’s challenge. The economist Joseph Schumpeter created quite a stir in the forties when he warned that “the capitalist order tends to destroy itself.” Schumpeter issued this warning despite his belief in what he described as “the impressive economic and the still more impressive cultural achievement of the capitalist order and at the immense promise held out by both.” Capitalism would destroy itself because it would undermine its own “protecting strata” and “institutional framework.” One of the reasons he gave for this pessimistic assessment seems rather prescient in relation to the current economic crisis:
Capitalist activity, being essentially “rational,” tends to spread rational habits of mind and to destroy those loyalties and those habits of super- and subordination that are nevertheless essential for the efficient working of the institutionalized leadership of the producing plant: no social system can work which is based exclusively upon a network of free contracts between (legally) equal contracting parties and in which everyone is supposed to be guided by nothing except his own (short-run) utilitarian ends.
In one sentence Schumpeter has put his finger on the greatest flaw of capitalist order. Contrary to what Rand and her followers believe, “rational” self-interest is not an entirely benign psychological force. Rand’s faith in self-interest (and it is only a faith) is not warranted by the facts. In the first place, it is absurd to regard human desires and sentiments as rational. A desire or sentiment can only be criticized in reference to an opposing desire or sentiment.
As Spinoza famously put it: “an emotion cannot be destroyed nor controlled except by a contrary and stronger emotion.”
Consequently, rationality, as an ideal, can only apply to the means by which desires and sentiments are satisfied. Yet this is not all. Even if there were (per impossible) such a thing as a “rational end,” it is very doubtful that very many human beings would be interested in pursuing it.
If we make history and experience our guide in such matters—and whatever guide could possibly lead us to the truth besides history and experience?—then we are forced to conclude that the majority of human beings are largely non-rational in their conduct and are probably not even capable of being rational about any issue in the least complex (as rational methods of analysis tend to break down when applied to complex situations). W
hen Schumpeter talks about “rational” habits of mind, he is not writing in the Randian sense of the word. He means something more along the lines of rationalism—i.e., the belief that no doctrine is true unless it can be proved “verbally,” through clever patter and other exercises of blatant sophistry. As a consequence of this sort of perfervid rationalism, individuals no longer believe in “higher” values or “lofty” moral ideas. Short-term self-interest and “immediate gratification” become the main desideratum, with sophistry being brought in to give the whole thing a window dressing of moral justification.
We see this played out in the financial sector. The birth of complex financial instruments based on computer generated formulas has allowed finance capitalism to mask what ultimately amounts to a vast ponzi scheme which yields huge profits in the short-run but ends in bankruptcy and dishonor. This sort of finance capitalism fits into what is known as the “Minsky cycle”:
Firms participating in the early stages of the cycle typically are not leveraged; Minsky called them hedged firms because their cash receipts cover their cash outlays. The success of the first movers draws in additional players. Speculative firms then engage in leverage to the point where they must borrow to meet some of their interest payments—usually borrowing in short-term markets to finance higher-yielding long-term positions. None of this is irrational behavior; market players are chasing short-term gains, and some of them are getting very rich.
The final stages of the Minsky cycle arrive with a proliferation of Ponzi firms, which must borrow to meet all their interest payments, so their debt burden continuously increases. At some point, a disruptive event occurs, … and markets abruptly reprice—the further along in the cycle, the more violent the repricing. [Charles Morris, The Trillion Dollar Meltdown, p. 133-4]
In other words, what we find in the world of high finance is a system which, by giving individuals the hope of huge rewards in the short-run, encourages them to behave in a ways that are destructive in the long-run. It takes strength of character to resist such huge short-run gains.
Unfortunately, the very success of capitalism tends to create a prosperous society that weakens the moral fibre of individuals. Add to this situation the tendency of individuals—particularly intelligent individuals—to cloak their real motives under a thick shroud of ingenious rationalizations (e.g., “portfolio theory,” the “efficient market hypothesis,” “laissez-faire” ideology, etc.), and we have all the elements required to create market failure leading to widespread and socially harmful externalities, as can be readily corroborated by examining the 2008-2009 financial crisis.
Monday, January 5, 2009
Banks became loan originators not loan holders and Credit Default Swaps grew from $631 billion in 2001 to $54.6 trillion in 2008
Risk and the capitulation of capital
Commentary: The simple solution to the crisis is hard to execute
By Hernán T. Narea
Last update: 5:38 a.m. EST Dec. 31, 2008Comments: 13NEW YORK (MarketWatch) -- I was at yet another, sparser-than-usual reception of bankers in Manhattan the other day. Foregoing some sad looking canapés, I embarked on an informal survey. The mood? Decidedly resigned to the prospect of more failures to come.
Anyone whose business card had a valid email, held it like gold bullion, judiciously traded only with others who had the same ingots, in case they were next on the chopping block.
And the blame for our economic ills, running the gamut from eviscerated 401-Ks to sports car fire-sales in Palm Beach? Without exception, everyone wanted to throw a Ferragamo lace up or Blahnik heel at the likes of Bernard Madoff, sub-prime mortgages and the entire regulatory universe. But I think they're all getting a bum rap. They aren't the real culprits.
The underlying problem is risk; more exactly, the disguising of it. Too many people (let's call them herds), convinced themselves that the era of volatility was fading fast in the rearview mirror and that the super-highway of capital markets we all traveled on had crossed the border into a promised land of zero-risk. However, the only thing crossed was the way real risk was being dressed up to look like a sure bet. Think of it as financial transvestism, except in this show, John Travolta in a dress was no competition for the securitizers of our collective wealth dreams.
Earlier this year, Emilio Botín, chairman of Spain's Santander Group, was quoted giving extremely sound advice as it related to the mortgage crisis, "If you don't understand an instrument, don't buy it. If you wouldn't buy a product for yourself, don't try to sell it. If you don't know your customers well, don't lend them money." Unfortunately, his own bankers didn't heed these warnings, as Santander (STD:banco) revealed this month they had placed up to $3.1 billion of investments on behalf of private banking clients with Mr. Madoff. Where many thought there was no risk, there was indeed quite a lot of it.
Disguised risk, and the poor management of it, is at the core of our sleepless nights. In his 1996 bestseller, "Against the Gods," Peter Bernstein aptly described the mastery of risk as "the notion that the future is more than the whim of the gods". The news continues to remind us that we've been at the mercy of unruly risk gods and we're all pretty desperate to get them to behave again, no one more so than Secretary Paulson.
The lasting solution is fairly simple in approach, but much harder to execute. Look risk square in the eye, measure it, understand it, mitigate it as best you can and come to terms with it. You should either live with risk or just walk away. We need to stop obsessing with the output of predictive models and instead focus intellectual energy on the assumptions we stick in them. Hiding risk under some creamy, rating agency sauce won't work either. Also, your vision shouldn't be clouded by pitch-books touting financial products with over-engineered structures and cute acronyms. Clarity and transparency should be everyone's new obsession. Disguised risk can affect all asset classes, but one place to look at how these trends started is lending -- remember those mortgages.
I used to work for one of those mega-galactic banks managing a portfolio of corporate loans. Loans. Not bonds, not equity. Just good ole loans; a borrower on one end and the lender on the other with principal and interest repayment in between. About a decade ago, my boss started throwing around terms usually reserved for the different animal of securities, like 'mark-to-market', 'yields' and 'ratings'. He also developed a knee-jerk reaction to risk that has now been broadly diagnosed as 'credit default swap-itis'; at the mere mention of risk, he rang up the swaps desk plying them for a quote. He shouldn't feel bad, he wasn't the only one. According to the International Swaps & Derivatives Association, the CDS market grew from $631 billion in 2001 to $54.6 trillion this year, an impressive 9,000% growth.
On top of that, my boss required me to sell 90 cents of every dollar we lent. I can't fault him for wanting to ride the wave of financial deregulation and innovation to higher levels of trading fee income, and, ahem, bonuses. But in so doing, we were trying to trick those risk gods by altering the centuries-old structure of loans; one party with excess capital judging the credit-worthiness of another party in need of capital, and importantly, asking those tough questions, until final maturity do them part.
As my boss proved, the minute you whisper 'secondary market' in a lender's ear, you open a Pandora's Box of "Originate-to-Sell." The lender inevitably succumbs to selling his loans and taking that tempting bite of immediate fee income, rather than sticking around to see if that borrower actually pays. After that nibble, he's ready to originate more and more loans for the sole purpose of selling them to third parties. My boss wasn't the only one. Reuters Loan Pricing Corporation tracks the U.S. secondary loan market as growing from a mere $8 billion in 1991 to a healthy $342 billion last year.
With loans off their books, lenders are challenged to maintain the same credit due diligence when it's someone else's capital at risk. You only need to look at the growth of rating agencies' business in corporate loans to understand who was given the task of due diligence; it was the paid evaluators of risk who had no capital skin in the game. By Standard & Poor's count, in 1998, only 20% of U.S. syndicated loans were rated but after only six years, that number approached 80%.
If you lend your own precious capital to a borrower, you will hopefully ask every possible question beforehand, to make sure you're going to get it back. But what if you work in Düsseldorf and the mortgage loan you just bought from your trusted Wall Street counterparty, financed someone's home in Sandusky, Ohio? Well then it's going to be harder to inquire how those house payments are going, or be aware of massive lay-offs in town which will result in a whole slew of mortgages going sour in the next payment cycle. And this isn't just a negative for that Düsseldorf investor. The next wave of pain comes when the Sandusky homeowner finds it difficult to re-negotiate his mortgage with the impatient debt holders on the other end, who turn out to be vast anonymous pools of capital sitting on the banks of the Rhine instead of Lake Erie.
Unquestionably, the innovations of CDS, secondary loan trading and rated loans allowed the loan market to become more efficient and expand by bringing new classes of investors to the party. But unfortunately, it was taken to extremes as these new investors became too reliant on what others were saying, and originators continuously moved on to the next slice of the fee income pie.
Moderating any extreme human behavior isn't easy. Many have called for a stricter financial regulatory environment. Will that help? Yes, of course, but in the long run, not as much as taking stock of our fundamental relationship with risk. A far more lasting, positive impact will be felt if the originators and buyers of risk stop trying to convince each other that it can be eradicated like a disease.
Instead, investors should begin to rely on their own judgment calls, and originators should own a larger risk share on their books to justify keeping their eyes on the ball, call it an 'Originate-to-Partially Sell' strategy.
Is it time for rating agencies to be paid by the buyers, versus the sellers, of risk? Can regulators or market-governing bodies find ways to make sellers' minimum hold positions more transparent to buyers? These are questions that will be bantered over the next months as markets seek normalcy. At the core however, the issue of risk remains. We either embrace it, or you just walk away. The long history of financial panics and manias prove that those pesky risk gods will raise their ugly heads again, each time, when and where we least expect it. There are always Ponzis-in-waiting -- or should we now be calling them Madoffs-in-waiting?
Comments: 13
Apt analysis. The real problem has stemmed from selling risk, as the author states, without transparent linkages to the source of risk. He/she who originates the risk should own more than 10% of it.
- svkris
Commentary: The simple solution to the crisis is hard to execute
By Hernán T. Narea
Last update: 5:38 a.m. EST Dec. 31, 2008Comments: 13NEW YORK (MarketWatch) -- I was at yet another, sparser-than-usual reception of bankers in Manhattan the other day. Foregoing some sad looking canapés, I embarked on an informal survey. The mood? Decidedly resigned to the prospect of more failures to come.
Anyone whose business card had a valid email, held it like gold bullion, judiciously traded only with others who had the same ingots, in case they were next on the chopping block.
And the blame for our economic ills, running the gamut from eviscerated 401-Ks to sports car fire-sales in Palm Beach? Without exception, everyone wanted to throw a Ferragamo lace up or Blahnik heel at the likes of Bernard Madoff, sub-prime mortgages and the entire regulatory universe. But I think they're all getting a bum rap. They aren't the real culprits.
The underlying problem is risk; more exactly, the disguising of it. Too many people (let's call them herds), convinced themselves that the era of volatility was fading fast in the rearview mirror and that the super-highway of capital markets we all traveled on had crossed the border into a promised land of zero-risk. However, the only thing crossed was the way real risk was being dressed up to look like a sure bet. Think of it as financial transvestism, except in this show, John Travolta in a dress was no competition for the securitizers of our collective wealth dreams.
Earlier this year, Emilio Botín, chairman of Spain's Santander Group, was quoted giving extremely sound advice as it related to the mortgage crisis, "If you don't understand an instrument, don't buy it. If you wouldn't buy a product for yourself, don't try to sell it. If you don't know your customers well, don't lend them money." Unfortunately, his own bankers didn't heed these warnings, as Santander (STD:banco) revealed this month they had placed up to $3.1 billion of investments on behalf of private banking clients with Mr. Madoff. Where many thought there was no risk, there was indeed quite a lot of it.
Disguised risk, and the poor management of it, is at the core of our sleepless nights. In his 1996 bestseller, "Against the Gods," Peter Bernstein aptly described the mastery of risk as "the notion that the future is more than the whim of the gods". The news continues to remind us that we've been at the mercy of unruly risk gods and we're all pretty desperate to get them to behave again, no one more so than Secretary Paulson.
The lasting solution is fairly simple in approach, but much harder to execute. Look risk square in the eye, measure it, understand it, mitigate it as best you can and come to terms with it. You should either live with risk or just walk away. We need to stop obsessing with the output of predictive models and instead focus intellectual energy on the assumptions we stick in them. Hiding risk under some creamy, rating agency sauce won't work either. Also, your vision shouldn't be clouded by pitch-books touting financial products with over-engineered structures and cute acronyms. Clarity and transparency should be everyone's new obsession. Disguised risk can affect all asset classes, but one place to look at how these trends started is lending -- remember those mortgages.
I used to work for one of those mega-galactic banks managing a portfolio of corporate loans. Loans. Not bonds, not equity. Just good ole loans; a borrower on one end and the lender on the other with principal and interest repayment in between. About a decade ago, my boss started throwing around terms usually reserved for the different animal of securities, like 'mark-to-market', 'yields' and 'ratings'. He also developed a knee-jerk reaction to risk that has now been broadly diagnosed as 'credit default swap-itis'; at the mere mention of risk, he rang up the swaps desk plying them for a quote. He shouldn't feel bad, he wasn't the only one. According to the International Swaps & Derivatives Association, the CDS market grew from $631 billion in 2001 to $54.6 trillion this year, an impressive 9,000% growth.
On top of that, my boss required me to sell 90 cents of every dollar we lent. I can't fault him for wanting to ride the wave of financial deregulation and innovation to higher levels of trading fee income, and, ahem, bonuses. But in so doing, we were trying to trick those risk gods by altering the centuries-old structure of loans; one party with excess capital judging the credit-worthiness of another party in need of capital, and importantly, asking those tough questions, until final maturity do them part.
As my boss proved, the minute you whisper 'secondary market' in a lender's ear, you open a Pandora's Box of "Originate-to-Sell." The lender inevitably succumbs to selling his loans and taking that tempting bite of immediate fee income, rather than sticking around to see if that borrower actually pays. After that nibble, he's ready to originate more and more loans for the sole purpose of selling them to third parties. My boss wasn't the only one. Reuters Loan Pricing Corporation tracks the U.S. secondary loan market as growing from a mere $8 billion in 1991 to a healthy $342 billion last year.
With loans off their books, lenders are challenged to maintain the same credit due diligence when it's someone else's capital at risk. You only need to look at the growth of rating agencies' business in corporate loans to understand who was given the task of due diligence; it was the paid evaluators of risk who had no capital skin in the game. By Standard & Poor's count, in 1998, only 20% of U.S. syndicated loans were rated but after only six years, that number approached 80%.
If you lend your own precious capital to a borrower, you will hopefully ask every possible question beforehand, to make sure you're going to get it back. But what if you work in Düsseldorf and the mortgage loan you just bought from your trusted Wall Street counterparty, financed someone's home in Sandusky, Ohio? Well then it's going to be harder to inquire how those house payments are going, or be aware of massive lay-offs in town which will result in a whole slew of mortgages going sour in the next payment cycle. And this isn't just a negative for that Düsseldorf investor. The next wave of pain comes when the Sandusky homeowner finds it difficult to re-negotiate his mortgage with the impatient debt holders on the other end, who turn out to be vast anonymous pools of capital sitting on the banks of the Rhine instead of Lake Erie.
Unquestionably, the innovations of CDS, secondary loan trading and rated loans allowed the loan market to become more efficient and expand by bringing new classes of investors to the party. But unfortunately, it was taken to extremes as these new investors became too reliant on what others were saying, and originators continuously moved on to the next slice of the fee income pie.
Moderating any extreme human behavior isn't easy. Many have called for a stricter financial regulatory environment. Will that help? Yes, of course, but in the long run, not as much as taking stock of our fundamental relationship with risk. A far more lasting, positive impact will be felt if the originators and buyers of risk stop trying to convince each other that it can be eradicated like a disease.
Instead, investors should begin to rely on their own judgment calls, and originators should own a larger risk share on their books to justify keeping their eyes on the ball, call it an 'Originate-to-Partially Sell' strategy.
Is it time for rating agencies to be paid by the buyers, versus the sellers, of risk? Can regulators or market-governing bodies find ways to make sellers' minimum hold positions more transparent to buyers? These are questions that will be bantered over the next months as markets seek normalcy. At the core however, the issue of risk remains. We either embrace it, or you just walk away. The long history of financial panics and manias prove that those pesky risk gods will raise their ugly heads again, each time, when and where we least expect it. There are always Ponzis-in-waiting -- or should we now be calling them Madoffs-in-waiting?
Comments: 13
Apt analysis. The real problem has stemmed from selling risk, as the author states, without transparent linkages to the source of risk. He/she who originates the risk should own more than 10% of it.
- svkris
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