The issue of stock buybacks vs. dividend policy has been frequently discussed on this blog. However, today’s NYT article once again stoked the fires of my frustration with conventional wisdom around this topic.

Consider these two paragraphs from the article referenced above:

In other words, the stock market teaches a tech company that it shouldn’t keep its cash, and it shouldn’t give it to shareholders. The cash can be used for big acquisitions, but those can turn into bombs that really hurt a company. The safest thing to do, the chief financial officers have learned, is to buy back stock, even if that turns out to be a bad investment.

This works out well because of another odd reality: Share buybacks are a useful way to increase per-share earnings. With fewer shares outstanding, the same amount of money parcels out to a greater amount per each share. Of course,

My recent post, in which I shared my experiences as a derivatives salesman, elicited very strong reactions both on my blog and on Seeking Alpha. Many of the comments equate derivatives with scandal, fraud and loss, which is an unfortunate by-product of their mis-application, lack of transparency and disclosure.

The fact is, derivatives are powerful and valuable tools that, when used properly, can expand the value for all parties involved: the hedger, the speculator and the investor. And with standardized hedging instruments, a centralized clearinghouse for managing counterparty risk, accounting rules that support detailed disclosures and transparency and Boards of Directors that monitor their prudent use, derivatives will regain their rightful place in the capital markets - as a powerful tool for good.

Consider the hedger. It might be a corporation that has very cyclical cash flows, like a manufacturer of construction equipment. The manufacturer's cash flows

I spent over 10 years in derivatives, from 1993-2003. My role was a transactor in the Structuring and Origination part of the business, advising corporations on all manner of risk management strategies. During this time I saw the power - and the risks - of inappropriate derivatives transactions, either due to unnecessary complexity or blatant mis-application.

The 1994 derivatives blow-ups of Procter & Gamble (PG), Gibson Greetings, Air Products and Orange County, the 1998 leveraged bets of LTCM and assorted scandals ranging from MG to Barings to various municipalities marked the ebbs and flows of the industry. I spent the better part of 1994-95 restructuring broken transactions and giving "best practices" presentations, only to see many of the same mistakes made again and again over the subsequent decade. I have seen the "it" asset class move from interest rates to equity to credit, and transaction volumes move from billions

Barack Obama's historic victory has given many in this country, and across the world, hope for a brighter future. But make no mistake; the President Elect is facing a global political and economic landscape more hostile and challenging than it has been in a generation. He has to lead with confidence and decisiveness, but with actions that are grounded in facts, common sense and broad-based support wherever possible. While it is tempting for him to completely distance himself from the policies and practices of the current administration, the fact is that abrupt shifts, if ill-considered, could do immense damage to the economy and the country at such a delicate time.

There are a few guiding principles I believe President Elect Obama should follow, some of which might not comport with Democratic dogma but which are necessary to deal with a perilous social and economic situation that could plague us

Get rich QUICK. Lose weight FAST. Fix problems NOW. Think State lotteries, the South Beach Diet and TARP (or Social Security for that matter). These are merely three examples of what appears to be the endemic short-term thinking prevalent in our society. We, as a people, often times have little tolerance for the time and hard work it takes to build wealth, personal wellness or durable economic strength. People's perspectives are often measured in days and weeks, not in months and years. The problem is that such quick-fixes are rarely lasting, or are unsatisfying from the start.

Statistically, playing lotteries and gambling in general are losing propositions, and while people certainly extract utility from the rush of playing the games it wears off fast and results in a negative outcome - no wealth, no lasting utility. Faddish diets are the same way. Everyone knows that losing weight and keeping it

The fact that the global financial system is in crisis is not longer up for debate. But how we solve the problems both here in the U.S. and abroad is still very much in question. The Treasury plan to make direct injections into ailing firms, and to offer participation to firms that are not currently unhealthy but want additional liquidity, is akin to offering strong medicine to a sick patient whom you have not yet diagnosed.

How much capital do damaged firms really need? This requires understanding the extent of the damage. But by providing capital in the absence of such an accounting, the Treasury is deferring the day of reckoning, the time when the damage becomes apparent and the true magnitude of the capital required is known. Such a deferral, without the need to face into problems today, will set us - the U.S. taxpayer - up for yet

In my earlier post on bailed-out banker pay, I argued that we need a simplified compensation regime that more closely aligns corporate managements with their shareholders:

The whole issue of executive compensation - both on and off Wall Street - needs a redo. I have a hard time with the concept of large single-year cash payouts. Senior executives should be paid for value creation over time. Just like hedge fund managers. If you want to be assessed on creating long-term value, which should be every Board's goal, than executive compensation needs to fit this mold. Same with hedge fund managers. With performance comes payout, and if performance is long-term then payout should be long-term as well. With hedge funds implementation would be easy; only pay management fees currently and pay performance fees either based upon P&L realization (as opposed to P&L realized and unrealized that is

I had breakfast with a friend who happens to be a quant. A very good quant, in fact. As he began sharing his thoughts concerning his own strategies in light of today's environment, I found that they squared pretty much with my own.

Clearly, a massive de-leveraging had taken place, and quants were running far less levered strategies than they had previously. Further, quants are beginning to place greater emphasis on high-frequency trading, strategies that place far less capital at risk and require much less balance sheet than approaches with longer signal horizons.

Problem is, of course, that when quants pile into the high-frequency, statistical arbitrage, quasi-market making space, it becomes very crowded very quickly. This style of trading is far less scalable than more systematic, longer-term strategies, and returns get crushed much faster as new capital enters.

So what will happen? Before long high-frequency trading will become too crowded,

I was having a conversation with my friend Paul Kedrosky and, as usual, it got me thinking. Our banter is usually rapid-fire, centered around the markets and technology, and generally leaves me with a quizzical look on my face, a look towards the heavens and an utterance of "hmm." Today was one of those days.

On the macroeconomic front, I continue to be very, very disturbed by several factors. The fact that anyone cares about third-quarter earnings is beyond me. They are, to my mind, approaching irrelevance. The real story, yet only the beginning of the story, will be what fourth-quarter earnings look like. And while I'm not a betting man, I am pretty confident that they will suck. Hard. It's not that earnings for durable goods manufacturers will fall by 5%, 10%. They could drop by 50% or more. We are in the early stages of a consumer

Much of what has been written about the financial crisis has focused on the why, as opposed to the what now? This has led to the inevitable finger-pointing, posturing, grandstanding and the like. Personally, I'm sick of it. We're in trouble: the time has come for the conversation to shift from bad guys and witch hunts to what the hell are we going to do now?

Greg Mankiw, in an Op-Ed in Sunday's New York Times, summed up the key question when thinking about policies and actions to be taken to extricate us from this ongoing chaos: But Have We Learned Enough? Based upon the steps taken to date: probably not.

While I'm neither economist nor policy-maker, I've got a few thoughts on what I think has to be done before we can even entertain the possibility of a macroeconomic recovery.

#1: Rigorous application

Without question, we live in a society where media plays a huge role in shaping our perceptions and tastes, whether we like it or not. We are constantly bombarded with explicit and implicit forms of marketing, branding and messaging, and it effects the way we feel about things and our decision-making.

Now if one applies this effect to the current financial crisis, and the importance of consumer and business sentiment in driving financial markets, it may well be that the media is playing a larger role in fomenting the historic levels of market volatility we've witnessed over the past 30 days, more than anyone could have imagined.

Every day, whether you are watching CNBC, CNN, Fox Business News or the online equivalents, there are countless numbers of talking heads discussing their views with passion and intensity. "This is an historic buying opportunity; market value to replacement cost has never been

A good friend of mine raised this very question, and I have to admit it gave me pause. Sure, we're all aware of certain limitations placed on executive compensation within the Economic Stabilization Act of 2008. The rules are specifically geared towards towards institutions that take advantage of the Troubled Asset Relief Program [TARP]. But when you look at these rules they really lack teeth; you will still have bailed out executives making seven-figure sums. And when you juxtapose this against a backdrop of economic weakness, rising unemployment, and a population that is growing less fond of the bailout by the day, it could make for a toxic cocktail of disbelief, hostility and rage. TARP has created an odd situation where those doing the bailing out (the US taxpayer) may well be funding compensation 10x, 20x, 50x greater than their own, with an average employee at a bailed

Let's say, for the moment, that the US Treasury, the Fed and their European counterparts have fired a shot across the bow: we will not let our financial institutions go under without a fight. By stepping up with what is essentially an unlimited guarantee of broad swaths of the financial sector, Western governments are hoping that both consumer and inter-bank confidence will be rebuilt such that a complete market melt-down and economic ice age is abated. As noted yesterday, there remain many, many unanswered questions but at least our Administration has gotten off the dime and done something.

Details are sketchy, but my initial "blink" is positive. This plan is not a panacea by any stretch, but is helping to underpin a measure of confidence in the global financial system that didn't exist only a few days ago. That said, we've got a long, long way to go, and after the initial euphoria wears off investors will still be staring at a future laden with fiscal deficits, declining consumer activity and a shell-shocked public that will take a long time to recover.

That said, a few of my thoughts are:

• Direct investment by the Treasury is smart. Was clearly a necessary step. Focusing initially on the largest and riskiest institutions attacks both systemic issues and market sentiment, the latter of which is critical for the stock market and the real economy to turn around.

• Raising the FDIC-deposit insurance ceiling is a no-brainer. Directly attacks consumer sentiment.

• Providing

Everyone has an opinion, yet nobody knows anything (myself included) about what the future holds for the U.S. economy, the global economy and the true depth of the impact of the financial markets crisis. We all know that what happens on Wall Street eventually hits the real economy, and the data bear this out - rapidly rising jobless claims, weaker consumer sentiment, poor business sentiment, sharply lower housing prices, etc.

And higher levels of unemployment, coupled with falling real asset prices, means that consumption, by definition, must fall. Falling consumption will hurt most companies, durables companies worse than non-durables, luxury retailers worse than supermarket chains and health care providers, etc. And none of this says anything about the consumers' access to credit, which will likely be crimped for the foreseeable future. What this means for stock prices, and whether enough bad news is already reflected in current stock prices, is

The past few weeks have yielded some very strange behaviors, some of which reflect a lack of understanding of what needs to be accomplished while others display the sheer fear and panic felt by many in the financial markets. This will make for good entertainment at some point in the future, though right now there is nothing funny about the recent turn of events. 

Here are just a few items that raised eyebrows, though why they happened is perfectly understandable in light of the current financial crisis.

1. Treasury Secretary Paulson argues for the need to pay above-market prices for illiquid assets
2. The SEC proposes relaxing FAS 157 (mark-to-market accounting rules)
3. The SEC's selective ban on short selling
4. GE sells $3 billion in 10% preferred stock plus warrants to Berkshire Hathaway
5. 2-year swap spreads exceed 160 bps

Paulson and mark-to-market: I understand the arguments for why Secretary Paulson, and many

A startup depression? Nah. Jason's missive notwithstanding, I'm seeing something distinctly different. Sure, it's harder to raise money. Sure, the osmotic effect of bad feelings in the public markets and the job market challenge one's optimism and perspective. But net net, opportunities abound, the same if not better opportunities than before the financial markets started to melt down.

The crisis forces the survivors to place an even greater emphasis on efficiency, customer intimacy, value creation and relevance. Historical ways of doing business are being challenged by new ways of accessing content, the push towards open-source solutions, the different ways in which influence is created and disseminated and the high-value goods and services being created and delivered from low-cost, offshore sources. In today's world you are either moving forward or moving backward - stasis is not an option. Inertia is death. And it is at this intersection of creativity,

Lack of transparency. Intellectual dishonesty. Failure to read the pulse of the nation. In my adult life I have never seen a backlash so powerful or so well-timed as this. The voting public called bull#$%& on Hank Paulson, the President, Congress, Ben Bernanke, and anyone else associated with the current proposal, right in the midst of an election year. It could have been so easy. See problem. Identify key elements of problem. Quantify magnitude of problem. Develop plan to address problem in conjunction with needs of key constituencies. Clearly and thoughtfully articulate the plan to solve the problem. Put plan on floor of Congress. Pass plan. Implement. Repeat if necessary. But this is not how it came to pass.

I have been a Paulson supporter since his appointment. But he has bungled the handling of the bailout worse than an intellectual midget. This is one circumstance where IQ points, hubris

It's only Monday morning and two items have already hit my BS detector:

1. The ability of the SEC to suspend mark-to-market accounting rules on a case-by-base basis. From today's New York Times:

While the bill does not drop the accounting rule that requires banks to report on the market value of their assets — a rule that some banks believe has forced them to report excessive losses — it gives the S.E.C. permission to suspend the rule for any individual company if it thinks that is in the public’s interest. That is likely to lead to intensive lobbying of the commission.

2. Citigroup's (C) acquisition of Wachovia (WB) assets with the FDIC's assistance. From this morning's Wall Street Journal:

"The FDIC has agreed to provide loss protection in connection with approximately $312 billion of mortgage-related and other Wachovia assets," Citigroup said in a statement.

The