Sunday, January 25, 2009

America in Recovery/ The Beginning

I loved the celebration, don’t get me wrong.  I was just apprehensive. From that moment  when California and Pennsylvania had been decided, and those words flashed on the screen – “Barack Obama is the 44th President of the United States.” Exhale. 

 Then, the interminable three month wait. Three months is an eternity, especially when wolves are guarding the henhouse. $750 billion later we had set the stage for the most difficult road a President has traveled since FDR.

 I understand that we haven’t had anything to celebrate for 8 years and it was a great relief to be rid of the Bush Administration. In the recent words of Liz Holtzman, “we had come dangerously close to a military dictatorship, and we have to admit that”. There were times that I imagined this election not coming off.  Perhaps that’s one of the reasons that the celebration was so incredible.

 Then, it was finally here, and he spoke. He was serious, focused, direct, confident, no nonsense. From the first,  it was clear that we were not going to hear a reprise of  “I have a dream”. There is no time for dreaming. This was the wakeup call.  No cheerleading, no pom-poms, and for good reason. Pick yourself up, dust yourself off, get going.

 The immediate reactions to the speech ranged from disappointment at the serious tone, the lack of a memorable phrase, a “hook” as was described by Rush Limbaugh. The flap over the benediction, over the flub during the “oaf of office.” It was clear that the words  “ it is time for us to set aside childish things “ had been misunderstood.

 In his first days, we saw a clarity which has been sorely missed. Wage freeze for his senior staffers, restrictions that will safeguard against the influence of lobbyists. China put on notice regarding currency manipulation. Close Gitmo, end the War in 16 months. As Emeril might say, BANG!

 But in the ensuing days it is clear that there is misunderstanding throughout finance, as the insanity continues. They’re still talking about sectors, asset allocation, market timing. How long will this “cycle” last. Buying low, and selling high. Amazingly, perceived value still exists. If you’re looking for direction from the financial talking heads that populate the airwaves, you deserve what you get. Stop waiting for a green arrow up, or some other “signal” that a market correction might be over. As a matter of fact, stop thinking in terms of  “markets” at all. If you listen to that noise, shame on you.

 The time to learn is now, to make money real. Understand the problems, invest in the solutions. It has been my mantra for years now. The problems? To begin with, there’s Energy, Water, Food and Nutrition, and Healthcare. There is much more. There was much in the speech that we could absorb.

 We must transform our energy use, moving toward reclaiming our “threatened planet. “ We think we choose growth, when in effect we choose our demise. We much change our relationship with Earth. Now.

 “We cannot prefer leisure over work.” I translate that to mean that nothing worth having, is earned without sacrifice.

 “We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together. We will restore science to its rightful place, and wield technology's wonders to “raise health care's quality and lower its cost. “ “We will harness the sun and the winds and the soil to fuel our cars and run our factories. “

 And we will “transform our schools and colleges and universities to meet the demands of a new age. All this we can do. And all this we will do.”

 How do we begin? We take our part. We understand what has happened, and we vow never to let this happen again. 

 We have “ failed to make hard choices “ take responsible action.

In recovery terms, we wanted an easier softer way. When the banks were having their party, we were borrowing money like drunken sailors. As long as our home prices were soaring we questioned not. That was our part. We kissed Alan Greenspan’s ring, thanked him for sending our kids to college. The housing bull market ran on and on, beyond all reason. Now, three million homes have been lost and the collapse in housing prices accelerates. We were co-conspirators. True, Greenspan now has the nerve to place the blame on investment banks, says he assumed that they knew what they were doing. Alan, you were the gatekeeper. Now they’re writing checks, out of our checkbook. Astonishing.

There are some who are guilty of “greed and irresponsibility”.

AIG, the largest insurance company in the world has been absorbed by the U.S. Treasury. If this doesn’t worry you, consider that the value of the Credit Default Swaps held by AIG is estimated to be 45-50 trillion dollars (yes, that’s a “T”.) In rough terms, that’s equal to the Gross National Product of the entire world for a year. These supposed insurance vehicles had nothing to do with insurance. Insurance dictates that there are reserves against losses. No reserves here. All they did was allow ratings agencies to assign ratings as high as AAA to portfolios that were  essentially worthless. Worse than that, they are so complex and convoluted, that they cannot be valued. Did I hear someone say “due diligence? There are responsible parties, and we need accountability, we want restitution.

 Bank of America bought Merrill Lynch for $50 billion dollars in September, with just a mere shred of due diligence, but with government guarantees.  The deal was closed in one hour.  A mere 4 months later it is estimated that 20 billion dollars in equity is lost, an albatross to hang on future generations of taxpayers. John Thain, who crafted the plan, and has been in charge of the Merrill rehab, resigned today.  

It is learned that Mr. Thain spent $1.2 million on a renovation of his office, while Merrill crumbles. Rug, commode, just a few knick knacks here and there. Chump change for a man who earned over $83 million in 2007. It’s outrageous.  More outrageous is his decision to bonus executives at Merrill just three days before the deal closes.

Bank of America posted a fourth-quarter loss of $1.79 billion, down from net income of $268 million in the period a year earlier. Much of that was caused by growing consumer loan losses. Merrill Lynch, which posted results separate from Bank of America, lost $15.3 billion in the quarter, on a fresh round of write-downs.

We have  contributed $45 billion in bailout money to this deal so far, with undoubtedly more to come. Terms of the Merrill Lynch deal set up the Treasury and FDIC to absorb more than 90% of all future losses. Insane.

The questions remain. How did this deal get done? Who signed off on it? Treasury Secretary Paulsen? Who approved the ML bonuses in the 11th hour?  Why the pittance of equity when we are providing the cash, and the guarantees?  The problems? Corporate governance issues to be sure , a lack of supervision, transparency, accountability. Abuse of power. Greed. This cannot stand.

In the coming weeks I will publish excerpts from my new book “America in Recovery.”  The principles have been proven for decades. We are approaching the day when we will have to admit that we cannot manage, nor control what we have created. We must begin anew. Surely, there is no quick fix.

 Those days are over.







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