Joshua Morgan Brown's  Instablog

I'm not a political blogger, but this needs to be said...

The treatment of institutional and hedge fund bondholders in both the Chrysler and General Motors situations has one very apropos historical parallel that comes to mind, the Anglo-Norman invasion and conquest of Ireland.

In the year 1166, a deposed Irish king, desperate for help in his efforts to reclaim his lands and position, sought the assistance of King Henry II of France and England (of the Plantagenet Dynasty).

They don’t make ‘em smarter than King Henry…he sent Richard Le Clare along with an army of Welsh bowmen to aid the Irish king in the reclamation of these lands with an eye toward the future.

Le Clare, who would become known as Strongbow as a result of his archers’ lethal arrow attacks, would ultimately become the ruler of a great swath of Ireland, including Dublin, which lead to a mass colonization of the Emerald Isle by the British.  Once Strongbow had sufficient control, Henry II showed up in Ireland personally, intimidating Strongbow back into submission and naming himself Lord of Ireland.

What does this have to do with Barack Obama and the auto industry?  If you’ve managed to stay awake during my ad hoc history lesson, you will have surmised by now that I mean to compare Obama to Henry II.

Henry, you see, owed a lot of Norman and Anglo-Saxon noblemen big time for their help and loyalty in the endless series of wars they fought for him.  Henry meant to bestow these long-overdue rewards in the form of land and titles in Ireland.

He was somewhat judicious and respectful toward the local Irish gentry in his redistribution, but by the time his haughty son Prince John came along, lands pretty much got confiscated left and right, with absolutely no regard for the indigenous population whatsoever.

It is in this way that I see the creditors of the auto companies being treated by the Obama administration and his henchman, Car Czar Steve Rattner (who in this analogy, would be Strongbow).  Contracts are nullified by the sheer fact that they can be, and forced offers of pennies on the dollar to classes of bondholders that would normally be at the top of the queue are the status quo in these “negotiations&am...

Obama’s staunchest backers during his presidential campaign were the unions, the United Auto Workers being the most powerful and prominent.  They are being made whole on healthcare benefits and being awarded with the dominant equity ownership in the restructurings much the same way that the Planatgenet king awarded vast farmlands to the adventurers who helped conquer much of France, England, and Ireland.

Ancient Irish clans like the O’Byrne’s and the O’Neill’s, some of whom could trace their ownership of these lands back to a time before the Roman Empire, were eventually cowed into tenant-at-will status, which transformed them from lords and princes to sharecroppers and peasants almost overnight.  GM and Chrysler bondholders, many of them investment firms and hedge funds, have gone from being called creditors to predators, liquidity providers to “speculators&...

Henry II and his staunchly Roman Catholic English lords were able to pull this land grab off legitimately, by turning the Pope in Rome against the Celtic Church, and by extension, Irish rule itself.

The Pope was informed that the Irish Church was still sanctioning un-Roman Catholic practices such as priests getting married, legal divorce and men marrying their own brothers’ widows.  When the English vowed to reform the Celtic Church, the Pope consented to the takeover.

In my analogy, the Pope would be Oprah Winfrey, who’s support of Obama was more important to his election efforts than any other single factor.  Pope-rah Winfrey clearly approves of the making-whole of the unions and their health benefits, lack of public comment notwithstanding.

By calling the hedge funds and other bondholders speculators, Obama’s been able to wield the new form of populism as a weapon against them, even though under the law, they should be senior to any union concerns.  This is no different than the English calling the Irish Church heretical as a precursor to the taking of Leinster and othr regions of the country.  Obama’s rewarding of his union supporters with way more than they deserve under the rule of law echoes the rewarding of English and Norman lords by Henry II with Irish lands.

The danger for American business is clear.  My comparison has a proper cautionary coda, the ugly result of this type of make-up-the-rules environment:

The old-line Irish clans retreated into the hills and spent the next several centuries as trouble-making outlaws; rebelling, looting and plundering whenever the urge came over them.  They generally withdrew from the English society that developed in Dublin and the surrounding area.

In fact, Dublin and it’s suburbs became known as the “English pale” and the wild lands of the Irish outside of it were referred to as “Beyond the Pale“.  We still use this phrase today to describe areas over which we have no influence or control.

We need to ask ourselves a very simple question:  Do we really want our liquidity providers and creditors retreating from our capital markets, no longer participating in the system and remaining beyond the pale?

I don’t think so.

Who is Brian Deese?

You’re going to love this one.  He’s the latest heartthrob out of the Obama administration who’s been called up to run the GM bailout/ bankruptcy/ clusterf&ck.  And he’s, like, 31 years old.

From the New York Times:
A bit laconic and looking every bit the just-out-of-graduate-s... student adjusting to life in the West Wing — “he’s got this beard that appears and disappears,” says Steven Rattner, one of the leaders of President Obama’s automotive task force — Mr. Deese was thrown into the auto industry’s maelstrom as soon the election-night parties ended.

OMG, he has a little scruffy beard….adorable!

So Deese, who has clearly worked hard to get to his position, now finds himself at the center of the General Motors dismantling process.  He’s been on Obama’s “Auto Taskforce” aka Mission Completely Impossible since last November.

It seems that Deese was one of the most important voices behind allowing Fiat to take over Chrysler, as opposed to just allowing it to liquidate:

Mr. Deese was not the only one favoring the Fiat deal, but his lengthy memorandum on how liquidation would increase Medicaid costs, unemployment insurance and municipal bankruptcies ended the debate.

So where did this kid grown-up come from?

Mr. Deese’s role is unusual for someone who is neither a formally trained economist nor a business school graduate, and who never spent much time flipping through the endless studies about the future of the American and Japanese auto industries.

Deese paid his dues working under Gene Sperling for the Clinton White House, then became the top economic staffer for Hillary’s campaign.  When she conceded, Deese signed on to the Obama cause.

Good luck, Brian Deese…the taxpayers and auto industry totally got your back, dog.

Full Story:  The 31-Year-Old in Charge of Dismantling GM (NYT)

Over the long holiday weekend, I was asked the same question in different settings by friends, neighbors and family members again and again. “Is the market going to go up or back down from here?”

Don’t get me wrong, it’s a nice change of pace from the big question from January and February, “Why would anyone ever be in the market ever again?” or “How much was your bonus, pig?”

That said, I hate the market direction question and I’m sick of it being debated on every street corner, on every economic or financial website and on business television day and night.

And then I came across Michael Santoli’s column in Barron’s this week, Shell Game, and one paragraph in particular completely summed up how I’m feeling about the market these days.  Santoli’s quip is not a tidy enough answer to deliver to my Poland Spring delivery guy the next time he asks me about the market, but I think you guys will understand (italics for emphasis are mine):

The market isn’t cheap, as measured by, say, the Dow industrials’ trailing price/earnings ratio above 40, or even the S&P 500’s P/E of 17 on 2009 operating-earnings forecasts. Some conservative valuations based on long-term normalized earnings settle around a fair value of 900 for the S&P 500 (we’re there now). Yet the median P/E of S&P 500 companies, based on 2009 forecasts, is 12.7,, meaning half the index is cheaper than that. The whole isn’t a bargain, but there are plenty of well-valued particulars.

OK, so the market is about where it should be, and not undervalued…but half the S&P 500 is notably cheaper than the heaviest-weighted names.  OK, this is starting to feel constructive and purposeful again!

That’s exactly where my head is at right about now.  I’m sick of the buy the index/short the index trade.  The volatility was fun while it lasted, watching guys buy the triple long ETFs in the morning and fade the rally with the triple short ETFs in the afternoon, but the VIX is back down to 30ish and as BB King once sang, “The Thrill is Gone“.

I’d love nothing more than a range-bound market once again where the macro wasn’t all that mattered and a stockpicker could not only out-perform the broader averages, but beat the rest of the sector as well with good timing and well-done homework.  The lockstep up-and-down thing has lost it’s appeal to me (and it’s profitability) as everyone is now doing the same trade.  It’s crowded and boring.

I’ll let the rest of the blogosphere debate the concept of whether or not the market has seen the lows, has to retest the lows, will break new lows, is a bull market, is a bear market, is a cross-dressing wombat market….I’m so over that discussion.

Let the market do what it’s going to do, up or down, just please let it start to reward research and insight again.

The index trading thing is so five minutes ago, like Facebook or this little Adam Lambert girl that everyone thinks is cool (you will hate yourselves in 5 years and cringe, he’s a huge cheese).

Thanks for summing up my outlook and hopes for the coming market environment so succinctly, Santoli.  I needed that.

Anyone else want to start picking stocks again?  Let’s have some fun and make some money in ‘09, bull or bear market.

Full Story:  Shell game (Barron’s)