Tack

AIG (AIG) CEO Robert Benmosche tells employees in an internal memo he remains "totally committed to leading AIG through its challenges" despite his frustrations with government curbs on compensation. Benmosche also called the government's limits a "barrier" that "stand in the way of restoring AIG's value" and repaying its debt.

Even after the CDS trading disaster, brought on, basically, by two traders in the UK, out tens of thousands of employees, AIG remains the world's third largest insurance company. As it recovers, it may well regain number one.

Just yesterday, Moody's announced that it expected AIG to pay back the government in full.

Yet, there remain the perpetually antagonistic, who wish to see the company fail, tens of thousands added to unemployment, and the economy and markets taken down in the backwash. Fortunately, such misguided desire doesn't control real-world events. (It does, however, probably prevent those holding such views from making any money in the markets.)

In a Q-and-A, Jim Rogers elaborates on which homework Nouriel Roubini didn't do ("all of it ... I have a problem talking about a bubble when assets are this depressed from their all-time highs") and says it's one of the few times he hasn't been short anywhere in the world - there's "a gigantic amount of money being printed and it has to go somewhere."

Those "sponges" were soaking up all the liquidity because banks had deficient capital ratios. Now, those ratios are expanding quickly with market recovery and incipient economic recovery, abetted by every profitable bank quarter.

Soon, we will see banks --especially, the large ones-- trending toward overcapitalization, and that will result in the liquidity beginning to flow into markets, amping up the process even further and faster.


On Nov 09 11:08 PM surfgeezer wrote:

> You are underestimating the losses the banks have taken. There is
> a tremendous amount of "liquidity" that is really mark to market
> losses. The banks are in a race, every foreclosed home is an immediate
> loss partially offset by down payment and interest payments. Interest
> payments on non foreclosed houses are almost all profit with todays
> interest rates.
> These "sponges" are soaking up a tremendous amount of "liquidity"
> and it will not go into the system.
> We still have a tremendous amount of under utilization on almost
> all fronts, so price appreciation is unlikely

The Unsustainable Lie of Inflation

Everybody always talks about price inflation, but conveniently ignores income inflation. In many cases, if not most, many of the products and services that now cost multiple times the nominal cost of what they may have cost in the 1950's or '60's are now more affordable than then because nominal incomes have increased at similar or greater rates.

Since prices advance at the same rate for everyone, but incomes advance based on a variety of factors, inflation being only one, it's very difficult to analyze for whom and on which items inflation has been a penalty. Absent such a detailed assessment, it's really impossible make blanket conclusions about the impact of inflation, deflation or the absence of either.

Generally, however, most global societies, as a whole, seem collectively to keep enjoying increasing living standards, so the Inflation "robbery" doesn't seem to be very efficient, if it truly exists at all, when all factors are viewed on a normalized basis.

In a Q-and-A, Jim Rogers elaborates on which homework Nouriel Roubini didn't do ("all of it ... I have a problem talking about a bubble when assets are this depressed from their all-time highs") and says it's one of the few times he hasn't been short anywhere in the world - there's "a gigantic amount of money being printed and it has to go somewhere."

Rogers isn't silly at all because most asset prices --especially, real estate-- are priced below averages, means or any other trendline one wishes to choose. When this is considered in the context of the avalanche of fiat currencies printed around the world --which really are at all-time highs, by miles-- we're just on the front end of an extended inflationary cycle.

Bubble? We haven't even gotten started yet.

The "deflationists" all tell us that money printing is being offset by reduced lending, but that's an extremely short-term and shortsighted view. Vast amounts of inflationary capital are poised to re-enter the economic system, in the form of printed capital being held by banks, temporarily, to insure against capital requirements and disguised in the form of loan-loss reserves, which as the economy improves will find themselves reversed and thereby freed up to flow back into the economic system.

The only hope --and, it's a rather remote one-- would be if worldwide governments reined in their excessive spending and gathered back the currency largesse they've loosed on the system. History suggests that they're never good at reeling back economic stimulus and money supplies, always erring on the side of spending, which makes politicians happy, and in having excessive capital in the banking system, out of persistent residual fears of reversals that don't materialize.

The probability of significant inflation appears to be a virtual certainty; it's just the exact timing and severity that remain uncertain.


On Nov 09 02:53 PM ValueInvestor wrote:

> Rogers is getting silly now. He shouldn't compare current prices
> to their all-time highs, he should compare it to their all-time averages,
> means or other normal levels.
>
> Just because something isn't back to an all-time high doesn't mean
> it isn't a bubble.

David Leonhardt's look at how wages are rising - up 1% in real terms - has Derek Thompson thinking deflation, and he's not sure if wage increases are "good news, or bad news with lipstick."

Yeah, sure.

Let's see:

wages are rising, commodities are rising, inventories are shrinking, production has been cut back severely, the dollar is dropping daily, unproductive government spending is mushrooming and trillions of other newly-printed dollars are hovering out there in the banking system that the government is reluctant with withdraw.....

but, we're going to have deflation?

Not the slightest chance in the world, as those invested in all those "safe" Treasuries and other fixed-rate investments will soon discover to their dismay.

Analyzing the U.S.'s Four Largest Banks

The $136B in reserves is a huge wildcard in the equation. Contrary to making it difficult to make profits, the reserves, themselves, represent the greatest source of potential future earnings.

Assuming the economy continues to improve, at some point it will become apparent that the companies are over-reserved, and when that happens, reserve reversals will have a far greater impact on earnings than other invested capital. This is because when reserves are released, the capital, itself, passes back through the income statement in addition to being freed up for other more risk-based investments.

So, the reserves, themselves, represent potential pure profit, and not just an increase in available capital.

CDS Regulation: Just One Simple Rule

Tom:

Perfectly, accurately stated.

I'd even add an addendum to the "one rule:" that CDS issuance be limited to the amount of the insurable interest. That prevents even a holder of an insurable interest from "overinsuring" the potential loss, thereby creating the same incentive for failure that exists now.


On Nov 09 05:31 AM Tom Armistead wrote:

> CDS levels affect the perceived creditworthiness of a company and
> their cost of funds. Financial companies that rely on credit can
> literally be put out of business by these perceptions. CDS were widely
> used in conjunction with naked short-selling in short and distort
> manipulations to take down financial firms leading up to the meltdown.
>
>
> Naked CDS are gambling contracts, and contrary to your apparent belief
> system Wall Street is an inappropriate location for a casino operation.
>
>
> Lack of insurable interest creates a motive to cause a loss - something
> that can be done be spreading rumors. The exemption from regulation
> of CDS was a primary cause of the financial crisis.
>
> The correct "one rule" is a requirement of insurable interest: you
> have to own the bond in order to buy the insurance.

World leaders publicly snub U.K. PM Gordon Brown's bold pitch for a global tax on financial transactions, which would be used to fund future bailouts. Treasury's Geithner says economic leaders don't think taxpayers should have to pay for future financial sector foibles.

The only thing these anti-capitalistic, anti-free-market taxes will accomplish, whether on a regional or global scale, is the suppression of commercial enterprise, sapping growth and ensuring the worldwide unemployment is higher and global standards of living lower.

Grantham on the Financial 'Titanic'

I'm probably not going to garner much support from the hate-all-banks crowd, but it constantly amazes me how misdirected, at least in my opinion, average observers have been by the causes, effects and villains in the financial crisis. Among the government, investment banks/brokers (like Goldman, Morgan Stanley, etc) and commercial banks (Bank of America, Citigroup, etc.), I'd rank the commercial banks least culpable and most vilified by the popular media and the public.

When the government made huge excess financial resources available to banks at near no cost, and the investment banks offered the mechanism (RMBS) for the banks to sell off all their loans at a profit, the banks did what almost any organization would have done, they processed loans and moved them off their books. In essence, they reacted very logically to the circumstances that were presented to them.

The investment banks, especially Goldman, were the most unethical culprits because they knew full well that the instruments they were peddling were of poor quality, but that didn't give them a moment's hesitation about any fiduciary responsibility to buyers. In fact, they shorted the very instruments, as they were selling them! That says it all.

The government was a party to all this in multiple respects: 1) providing way too much "free money" for too long, 2) not enforcing rules against naked short selling, not regulating an out-of-control CDS market, etc., etc.

It's not to say that the banks didn't make errors, some of them grievous, but they were set on their course and sailed into a wall by the actions of the government and the investment banks and were ultimately destroyed, in some cases, or nearly so in others.

For the government to have assisted some banks from destruction due to direct causes they set in play, and due to their own lack of regulation and enforcement in the trading arena, is not entirely irrational in many respects. It confounds me how we'd be better off individually or as a nation if the destructive forces unleased by the government and the Goldman's of the world had been allowed to proceed to their natural conclusion.

Vermont Sen. Bernie Sanders introduces legislation that would give Treasury Sec. Timothy Geithner 90 days to compile a list of banks, funds and insurers deemed too big to fail, and then break them up within a year.

Yeah, it's a great idea, another populist sap that would put U.S. banks and our nation at a huge competitive disadvantage against all the large multinational banks based elsewhere. How would all our nice, little parochial banks compete to finance huge multinational corporate deals and expansions? Answer: they wouldn't.

In a large global economy you need large financiers to play ball. To pretend otherwise is foolish and self-destructive. That doesn't mean there should not be properly established and enforced regulations, but suggesting breaking up all large banks is just plain silly fodder for the indignant masses.

While we're at it, why don't we go back to being an agrarian society and grow our own vegetables?

In a brief reaction to a "sobering" jobs report, President Obama said he's examining new measures to spur growth and ran off a list of five: road/bridge investment, energy retrofitting, additional tax cuts for businesses to create jobs, boosting credit to small businesses and support for exporters.

Yeah, let's punish all those "evil" businesses, trying to make profits. I mean, why do we need them at all? We can just have the government run everything, right?

After all, that worked swell in the old Soviet Union, didn't it?


On Nov 06 12:38 PM Michael Clark wrote:

> How about a HUGE TAX INCREASE for companies that export jobs overseas?
>
>
> And how about a universal health care system that takes the burden
> off businesses in form of employee benefits business currently pays
> (and which forces many to export jobs overseas)?

A new rule that caps the interest rates paid to depositors by banks deemed "not well capitalized" will likely accelerate the rate of bank failures. The cap - 0.75% above the U.S. average - is meant to prevent weaker banks from driving up costs for the rest of the industry.

Hey, they can cap how many gallons of water your toilet uses each flush, so why stop anywhere? Next, there'll be a limit on the number of times you can go each day, and if you exceed it, you'll pay a surtax.


On Nov 06 12:23 PM Tony Petroski wrote:

> We know this doesn't end well, but if you can cap banker's pay you
> can cap interest rates and then you can cap...

Delta Air Lines (DAL) reported October passenger traffic fell 6.5%, on 8.3% lower capacity. The load factor (percentage of available seats filled) increased to 84.2% from 82.6%.

The big airlines, like so much they do, have it backwards, yet again. They think that increasing "load factors" by decreasing capacity is the road to better performance. Of course, it's not because in a huge fixed-cost business reducing volume reduces costs hardly at all, but does reduces revenues constantly.

For a simplistic example, which of the following would you rather have?

1) 1000 planes flying at 80% load factor and 100% of total costs

or

2) 800 planes flying at 85% load factor and 90% of total costs

A quick calculation shows that while load factors increase, revenues decrease faster than cost cutting. The net result is even more losses.

This all makes about as much sense as airlines making last-minute flyers pay punitive rates for seats. The intelligent course, naturally, would have seat prices fixed or actually reduce last-minute walk-ons, if empty seats were available.

As can be seen rather clearly, airlines with more intelligent pricing models, like Southwest and Airtran, make money, while the "old guard" cannot find their way and constantly do things that alienate the public and are contrary to their health and survival.

Warren Buffett tells the WSJ his $100/share bid for Burlington Northern Santa Fe (BNI) was his first and only offer. The man can bargain.

Also, there's been a lot of dialogue about this being an "investment in America," etc., and that Buffet would not have made the move had he thought the economy or markets were about to tank. While that all sounds plausible, the even greater implication of this acquisition is that Buffet believes we're headed for a decidedly inflationary period. Rail transport is much more efficient than trucks and performs decidedly well in inflationary, high-fuel-cost periods.

Plus, he knows that China will be using ever greater amounts of coal, regardless of what our economy may be doing, and a lot of that coal will be exported from America and transported to western ports by rail.

A savvy buy, I'd say.

German officials were outraged by GM's surprise decision to keep Opel, abandoning a long-expected sale to a Magna- (MGA) led group that the German government had agreed to back with €4.5B of state aid. GM said improving business conditions and the strategic importance of Opel had prompted the move, and expects restructuring Opel to cost about €3B.

The second the U.S. Government chose to backstop GM, it made utterly no sense to sell one of the company's most profitable and strategically important assets. That's the kind of move that would have been applicable to a desperate attempt to raise cash, before the company went under, but made no sense in a reconstituted worldwide auto manufacturer.

Why it took this long for sanity to assert itself about this relatively obvious reality, one is only left to ponder.