Tag Archives: markets

The Future–Capitalism or Central Planning

There is no question that capitalism as an economic system is under assault at the present time.  Because of the turmoil and downturn some are pushing hard for an agenda that would diminish the power and influence of private enterprise and entreprenuership and replace it with expanded government control over the decisions, marketing, policies and profits of private business.  We need look no further for the proof of this than the Big Three.  Chrysler is already in a Chapter 11 proceeding and Government, Inc. is its creditor, owner, regulator and “management”.  I know there is no formal government official yet on the board but there is no doubt who is in charge of Chrysler and its future.  The Unions will be the largest single owner as a result of its Plan of Reorganization and that matches the wishes of Government, Inc.  The government has now announced its new plans for mileage standards which will dictate the type and style of vehicle that Chrysler can build.  That decision is not market driven or consumer driven but is powered by an envoirnmental lobby within the new administration.    GM will now be known as Government Motors.  Who will want to buy a car from them or Chrysler?  The Chrysler scenario is only one example of this process that is expanding daily.  The banks are in the bag; the insurance companies are going to get TARP money and we know what that means; the private equity funds are soon to be tightly regulated; and Government, Inc. is using the printing press and debt to “solve” our debt problem.  Lastly, the very bedrock of any modern industrial and developed nation, energy, is going to be under the thumb of government through Cap and Trade and EPA regulations.  Without abundant energy we are doomed to very slow growth and restricted advances in all the sciences and our standard of living.  Soon we will be having the same standard of living as Haiti but we will sure have clear skies.  Those donkeys and mules don’t pollute as much as a SUV.  All of this is emanating out of Washington rather than the board rooms and small business shops across the land.  Everyone is having to move in lockstep to the grand vision of the pooh-bahs of brillance in Washington.

Is this the way to go and is this the way that the fastest growing and most progressive economies in the world are going?   Only this week India wrapped up its national elections.  The “right” won there, big time.  India has been on a tear lately and clearly enjoys the benefits of turning loose the entrepreneurial spirit of its people.  The new government there will make an even bigger effort to encourage development and innovation and business enterprise.  They aren’t going green, they are going free enterprise.  Many believe with good reason that the BRIC nations (Brazil, Russia, India and China) are going to be the leaders of the 21st century in economic growth and improved living standards for their people.  Are they turning to more central planning or less?  The Chinese were notorious of decades for tightly controlling all aspects of their people and their economy.  They and the Soviets were infamous for those 5 Year Plans they announced every five years.  They outlined the exact targets and quotas and goals for every segment of their industrial and service entities.  We all know where that got them.  They have turned to greater freedom for their business entities and lower tax burdens and the results are quite obvious.  The Chinese now buy as many new cars each year as the US.  We are going back to the future with Government, Inc. grabbing every rein on the team.  

The Californians yesterday voted down the budget proposals that called for higher taxes on just about everything.   Maybe there were more Tea Parties out there than the main stream media reported.  Only a couple of days ago we wrote about how California has been perceived as the leader of the US in social and economic and envoirnmental policies and agendas.  I don’t believe all the California liberals and even moderates went to sleep on this vote, they were out voted.  Perhaps that vote was the tipping point for Californians and they want government expansion checked and greater business freedom and lower, not higher taxes.  There may be other interpretations of the vote but the overall message was clear–the government taxes too much, spends too much and regulates too much.  I wonder if the big increase in the price of new cars under the Obama mileage proposals if put to a vote in California would pass.   Would the voters like to raise new money for state operations by allowing oil and gas exploration and collect the delay rentals and royalties from that development?   If indeed California is the engine on the train then  the politicians across the land better listen to what that vote told them.  It sure wasn’t only Republicans that voted no.  To reject the government growth it took a broad cross section of the population.

Everyone hollers that we are saddling our kids and grandkids with a huge debt because of the enormity of the spending, borrowing and printing of money that Government, Inc is doing now.  I don’t agree that it is being deferred that long.  I think WE will have to deal with that debt because it is huge and our credit is waning by the month and our dollar will weaken further.  But if we are putting off the debt problem for our kids then why not do the same thing with the alleged Global Warming issue.  Let them figure it out.  I have tremendous optimism about the ability of our people to solve any problem if they are free to pursue their own interest, dreams and passions without interference by the Government.  As is always the case it is government that is the problem not the free market.   Government doesn’t solve anything, it only complicates matters and snips away a little more freedom with every law it passes.  The science and technology will come to utilize non fossil fuel energy sources one day–within decades likely and the alleged problem with be fixed. 

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Capitalism Dead or in Hibernation?

It seems as though every other day for the last couple of months there have been comments about the demise of capitalism or at least a radical governmental intervention into the market place to correct the perceived shortcomings of capitalism.   That has been  the lead story on the TV news networks and in the print media of late and has captured the front cover or front page on a few occasions.   That prediction has been made before for the US.  You are referred to the 1930’s and the very active movement of the left and the Socialist to bring socialism to these shores.   With the economic and social turmoil of that era and the aura of benign disregard of the abuses of the Soviets portrayed in the press of that time there was much talk then that the US would have socialism here.   The Roosevelt administration was on the march to a huge expansion of government and the unions were in the ascendency.   That union growth continued right into the ’60’s and then plateaued into the ’70’s and then began its  long but steady decline since then.

We Americans love our freedoms.  I believe this is true for all stripes of our political spectrum.  The far left and the far right both echo the calls for freedom.  They differ on which freedoms should be stressed and which should be more curtailed but the concept of maximum freedom for the people is a bedrock of our founding.  It has been true since the earliest Pilgrams first stepped ashore almost 4 centuries ago.   They were seeking greater freedom than allowed in their homelands in religion and in the broader area of personal freedom to move about and make of your life what you could with your own endeavors.  They were farther removed from the yoke of government and when the yoke became too heavy again we rebelled and our nation was born.

The Constitution and the Bill of Rights are all about freedom and freedoms granted and guaranteed to the people and the states.  No other country was founded on the same basis in all of history.  Usually a country was created from common language, natural geographic boundaries, common religion and a consensus view of the power afforded the Emperor, King and autocrat in charge.  Freedom is at the heart and soul of capitalism.  Only and puny and diminished capitalism can exist with restricted freedoms.  The less freedom the less capitalism flourishes.  It has been with us in one form or another for several centuries now.   Capitalism as we would define it only came as the power of the monarchy or empire was lessened.  The greater the freedom the more vigorous the capitalist society.  The early experiments in capitalism were quite different than what we would recognize.  Under the Tzar there was a capitalism but it was based on favoritism and royal dispensation more than merit or worth of services or products offered.  The British used Mercantilism for quite some time to direct and control capitalist enterprise.   The capitalists had to conform to the needs of the state and its favorites more often than not regardless of whether the business made sense in the market place.  

The US has had the most productive and adaptive of the capitalist systems in the world.  It has been filled with abuses and downturns and dislocation throughout our history but over the long haul has served us extremely well.  For every Bernie Madoff we’ve had an Alexander Graham Bell, for every Enron there has been a Microsoft or Apple, for every downturn we’ve had an era of enormous growth.  It was bad in the ’30’s but great in the ’50’s, rough in the ’70’s but splendid in the ’80’s.  We should take care not to kill that golden goose.  The more freedoms the more capitalism and it has been ever thus.  If our capitalism is reduced you can be assured so will our freedoms. 

I recommond some reading for you.  Fernand Braudel wrote a triology about economic development.  The books are: Structures of Everyday Life; Wheels of Commerce and Perspective of the World.  Be advised he is left wing.  But the works do examine economic life going back for centuries and the facts are of great interest.  He does get on his socialist high horse.  He was a very bright fellow.  Of course he wrote the last of them before the ’80’s and was predicting the complete demise of the capitalist system.  It is always good to review a different way of thinking.  His history is quite good, his analysis of what events and facts mean are something else again.  No doubt if he was around today he would be one of the talking heads on CNN telling everyone that capitalism is finished.  He was an admirer of the socialist agenda even in spite of the abuses of the Soviets.  He thought there would be a kinder and gentler socialism even though he supported the general concept of the ruling party elite being in charge of everyone’s life.  Funny how those who disparage capitalism also always believe they know what is best for everyone and are willing to impose their view with the force of law.

Many smart people have written off capitalism before.  Smart doesn’t mean you are always right and certainly doesn’t mean you are decent or honorable–I offer Adolph Hitler and rest my case.

I see that there is finally some talk about putting guards on the ships passing the Gulf of Aden and the Somali coast.  I urged several weeks ago to revive the Armed Guard navy force from WWII to do just that.  It w0uld work and be very economical.   I would give the Armed Guard the same rules of engagement as in any other war–if it looked like a duck, quacked like a duck and smelled like a duck then open fire.  You could hail the vessel but it must respond or that lack of response would be considered hostile intent.  If it really was an innocent fishing boat then that is truly collateral damage.  Real fisherman would have no hesitancy in responding and identifying themselves. 

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Bailout–Solution or Problem

It rankles me that  many of the elitist from Wall Street and Washington seem to think that they are much wiser and more sophisticated than all us yokels west of the Hudson and the Potomac.   First the folks in Washington  lay all the groundwork for this financial disaster by encourgaging and even mandating the very loan procedures that caused these problems i.e., the affordable housing agenda of some that put people into homes with bad credit and no money down and the protecting of Fannie and Freddie.  Barney Frank and Chris Dodd were their two best friends in Washington.   Then the Wall Street types get even more creative than Michael Millken and add more bells and whistles to every mortgage transaction because with each layer of paperwork there were more fees to be earned.   Lastly, there are the high doom investors not only here in the US but around the world who committed the oldest mistake when it comes to investing in real estate–they bought without “seeing” the dirt.  In this case it was buying without taking a look at the mortgages and the dirt and buyers behind the mortgages.  All the while planning on making a much higher than normal return on their money.  The higher the return the greater the risk, that is a truism of investing since Biblical days.

Then this same cabal of folks tell us exactly how to fix everything.   About 95% of us have been paying our mortgage on time, we could afford it and probably made some other sacrifices along the way to get that house we wanted so badly.   Most of us even had to come up with down payment money and pay all the closing costs also.   I frankly  don’t have a lot of sympathy at all for those who bought a house they could not afford and defaulted.  Some may not have understood what they were signing, but if they are really that dumb they would have figured out another way to mess things up anyway and the mortgage would probably have gone into default.   But if you feel for them we could help out just that five per cent.  It galls me to even consider that.  No one helped me with my payments and no one is helping out you.  Other than stupidity what quality do those folks have that warrants our help?  What makes them worthy of special consideration.  Do I really care about the investors in China or Indonesia who bought these weird investments?   Those Wall Street types were rolling in the dough and flaunting it when the money machine was still working and the politicians were obviously happy with everything.   The blame is broad enough to cover both parties.   There are no innocents in this mess.  

Now these bright people tell us we “don’t understand” and that this is just what we need.   Again the blame for the mess of a bailout bill cuts across all lines.  We can do many things that cost either nothing or far less than is being proposed.   If some version of this bailout does pass then both candidates need to be pressed hard to answer the question if they will follow its dictates or will seek adjustments and amendments as soon as they are elected.   I don’t trust Reid or Pelosi.   They know damn well that whatever they pass can be changed come next spring if their guy wins.   There will be no oversight then.  That scares me.  Who checks on and overlooks the work of Reid and Pelosi?    The people are overwhelming against this measure and for good reason.   The only oversight we have is with the ballot.   With such strong opposition in hte heartland they should have realized this approach would crater.   All those very smart people in Washington and on Wall Street got us here in the first place.  They forget that some of us can remember that less is usually more.  You have all heard the adage of KISS–keep it simple stupid!  Yes, and it normally is very good advice even in complex situations, perhaps truer then than any other time in fact.

Change the mark to market rule.   That will save many of the banks right there and is more “real world” anyway than an artificial accounting rule.   We can think Sarbanes-Oxley for that.  Again the results of unintended consequences and regulation–yes that is a SEC regulation accounting requirement.   Take the 5% of bad loans and place them in a pool.  Have the Government, not buy but guarantee a large portion of the loans.  Go through the loans one by one and the debtors who can’t pay should be foreclosed.  Others that can pay a significant amount with adjustments can  get a new loan.   Sell these new loans into the private market place.   This would cost less than the Government spent to bail out AIG.  We would even get a return of a goodly portion of our money and more quickly than under the current proposal.  All those holding crazy mortgaged backed securities will either get paid or not depending on the underlying mortgages just like the original deal they made.  If they make money fine, if they lose money then so be it.   Focus on just the houses and the bad mortgages.  It is all those mendacious security instruments that are causing the heartburn on Wall Street.  Send them a truck load of Tums.  

I am certainly open to other suggestions and I have no doubt there are even better ones out there.  Like simply having the FDIC and SIPC increase significantly their insurance coverage for deposits and Brokerage accounts.  That would sure calm down the markets a lot at home and wouldn’t cost a dime up front.  

I do hope those pin stripes and politicos will stop looking down their noses at the ordinary folks.  Trust the people.  I always trust the people more than the Government anyday.  I know we argue and disagree and espouse weird ideas at times but we do reach a loose consensus and that consensus here is don’t do a bailout.   Rather than us listening to them maybe they should try listening to us.

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Cliches to heed for today’s world

Many of the old tried and true quips and truism that have been with us for decades or even centuries sure do still have applications that are relevant to today’s world of business , personal conduct and relations with foreign countries.   It would do some of our leaders well to recall them as they consider the Bailout mess and all the other important issues we are dealing with that have been subsumed by the coverage of the Wall Street/Bailout mess.   Here are a few that occur to me and maybe you will find them apt as well.

“A Stitch in time, saves nine”.    Boy I bet there are lots of folks on Wall Street about now who wished they had applied that one several years ago.   Same goes double for the Congressional cronies who ran Fannie and Freddie.  I mean what exactly did the people in Congress expect when they mandated that people who couldn’t really qualify for a mortgage loan should get one anyway?   A little planning ahead and some quick corrective action when a problem first emerges usually does save lots of grief later down the road.  Efficient action, decisively and timely taken is always better then patches and redos at a later date.  Plan ahead and think about if there are unintended consequences.    If only our Congresses over the last 50 or so years had given that some thought.   It was laws that caused the current problems, not the markets.

“Not worth a Continental”.   That was the saying about the first currency issued by the Continental Congress as it became apparent that that body had little power to produce revenues and even less political will to impose the necessary steps to raise revenues to support the Revolutionary War.   Many merchants and farmers were very reluctant to sell any provisions to the Army of G. Washington because they knew they would be paid in Continental coin, not coin of the Realm.   And when they did get paid in Continentals no one else would accept them for payment of their debts.  Thus the phrase.   I sure hope we are not saying the same thing about the American dollar soon.  We must watch inflation.  We need a very strong dollar for our economy to flourish.  We want everyone around the world to crave getting paid in American dollars.  Importing foreign oil doesn’t help either.  It erodes the value of the dollar; drill American, pay Americans to do it and keep the dollars for the oil at home for investment and new other jobs, especially  in science and new innovative methods to extract power or create power.

“In for a penny, in for a pound”.   Once you have reasonably and carefully thought through a particular issue and reached a reasoned course of action to follow be decisive.   Don’t take half measures.   The market hates indecision and always punishes it.  Look at the market the last week as Congress has debated the Bailout issue; it has floundered and mostly dropped.  The dollar has weakened and credit markets and treasures spreads are non existent.  When you do something half-heartedly it shows and does not instill confidence in anyone.  That applies in your personal life and in the business world.  It is also an axiom that even applies in military theory.   Once committed, allocate the resources to get the mission accomplished.   More than one military commander has lost a battle because he decided to attack but was wary and only committed part of his command to the task rather than his full force.   Dribs and drabs have little effect when you are trying to achieve big goals.   I am ‘agin’ the bailout but if they are going to do it, do it.  Don’t break it up into installments like some are  proposing now.   That will not build confidence but merely raise more doubts about the efficacy of the plan.

Don’t know about you but I think the Chevy Suburban was the best American made car/truck of the last 50 years.  For its intended purpose it can’t be beat.  It is rugged, large and I always found it very well constructed and reliable.   It won’t ever win a beauty contest but then it wasn’t designed to enter beauty contests.  I am sure you have your own favorite choice.  Remember my criteria for this selection was — did the vehicle  do what it was engineered to do.  

It is time for you moms to start thinking about those Halloween costumes for the little guys.

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With or Without Parachute–continued

We left off with the building boom and the coincident lending that went with it last time in the Southwest and the sharp drop in oil prices that did affect the economic health of that region.  Two banks had already collapsed.   One deservedly so and another merely as a wiping boy in my opinion.  That second bank in Abilene had its holding company file for chapter 11.   I handled it.  All the creditors got paid and the shareholders even got a return of a portion of their capital investment.  The depositors at the bank did not lose any money either because the Feds made it “sell” those banks to another banking company.   I always wondered what would have happened if my guys had refused to sign the transfer documents that were required by the Feds.  But that was water under the bridge and happened before I was engaged.   Maybe they would have been waterboarded until they signed.

About the same time a real promoter type in Dallas went under.  He had led a very ostentatious life and flaunted his money like hillbilly come to the big city.  He was no doubt living on the edge and turns out there was indeed criminal activity regarding the loans and appraisals to fund his deals.   He had developed many apartment projects and they all went into foreclosure and the lending instituion he used went under.   So the perfect storm was almost complete.  The elements were an overheated building boom, but manageable by itself; a drop in oil prices that did indeed cause a loss of steam in the southwestern economy, but again nothing that wouldn’t have corrected itself in a few years; the failure of a couple of banks, one justified and  one not; and then a high profile developer going under and taking an S and L with him, combined with  actually criminal wrong doing; then add to that mix the media and its insatiable desire to “expose” and titilate with juicy stories and dire warnings that more was to come.  Then came the politicians, the very ones who had promoted all this activity in the first place and had laws in place to encourage it.  No economic storm occurs without politicians behind it, that is a truism.   You can take it to the bank.   The politicians don’t ever, ever like to accept blame for anything (read the headlines of the last few weeks and compare them to the facts about Fannie/Fredie, etc.) and when the media up east gets excited they start calling hearings for oversight and putting extreme pressure on the regulators to correct things.  The regulators depend on Congress for their funding and their prestige and power so they will always respond to the wishes of Congress.

Almost overnight in late 1985 and into early 1986 the FDIC, FSLIC and the Comptroller of the Currency were descending on the southwest in groves and so was the FBI to investigate the “corruption” in the lending business for oil and real estate in the southwest.    They set up special tasks forces.  That always means they are going to find something for sure.   You usually find what you are looking for when you know the conclusion you want to reach.  The politicians acted shocked that people had gotten loans without a personal guarantee and only mortaged the land for collateral on multi-million dollar loans.   They were as shocked as the French cop in Casablanca to learn that gambling went on in Rick’s.   As is always the case, when the Feds really want to find a crime involving paperwork, a so called white collar crime, they almost do so everytime.  They pour over ever document you have ever produced or signed.  If any of those documents have any error then you can be in real trouble if the document ended up even indirectly in the hands of a Federally insured bank or S and L.  I mean routine loan applications and balance sheets showing values or net worth or appraisals.  The courts ruled that you were cheating the Federal government with any of these errors because the banks were insured by the Feds and thus an “agency” of the US!  I had one client who was investigated by the FBI for three years looking for some  crime involving his multi-million dollar loans for real estate deals.  He was convicted for a personal balance sheet that listed his wife’s car at a vaule they said was wrong by a few thousand dollars.  I mean really!  His wife’s car.   What value would you have put on your wife’s car?   And what if later the Feds got several experts to say your value was wrong by at least several thousand dollars–out of a balance sheet listing millions in both assets and liabilities.  I am not making this up.

With all that pressure to examine everything under the sun, of course when the bank examiners started going through the banks’ books they would question everything.  The examiners required new proof that values were genuine on the banks books and often required new appraisals.   This should sound familar with today’s headlines about “mark to market” requirements.   Appraisers can read the papers.  These events were not happening in a vacuum.  The press was breathlessly reporting each little tidbit of rumor or inuendo.   Naturally all the new appraisals came in at lower vaules.  The banks pressed their borrowers to make more payments or starting calling loans due.   The deal almost everytime had been that the banks would renegotiate the short term loans and rework them.  It had been going on  that way for several years.   But now with the pressure from Washington and reporters crawling all over the place they demanded immediate payment.   You should also know, which most of you won’t and there is no reason you should, that in many cases the banks were really “partners” with the developers on the deal. 

Naturally things got much worse and the whole real estate market collapsed.  The lower appraisals made the loans in default and woe to the bank that tried to work out something sensible with a developer.  The market for real estate evaporated overnight.   The banks weren’t making any more of those loans.  The pressure was too intense.  The more the pressure was applied by the Feds and the banks the worse things got.  It spread throughout all of Texas and Colorado and other parts of the country.  

The banks often structured the loans such that they got a piece of the action on the sale or development of the land.   I handled many such cases.   Some were documented exactly that way.  I won’t go into the legal niceties but the courts later ruled that even though the banks had signed such deals that they were not partners because the board of the bank had not approved that arrangement in the board minutes, only a loan and the word “partner” was never used.  But if it looks like a duck, walks like a duck and quacks like one.   A real technicality that overlooked the facts and reality but once again let the Feds look like the innocent lamb that had been hoodwinked by the corrupt developers in the southwest and was costing the tax payers money due to failed banks. 

Many people went to jail.  A handful did deserved that.  There was some lax lending practices here and there but those were business decisions of the banks and borrowers.   There in fact was very little fraud.   Probably a half dozen out of all the people put under the microscope had committed crimes.  The others were  thrown under the train by politicians wanting to blame anyone but themselves and a media that likes to denigrate the blood and gore watching crowds in the colleseum but love to report about each drop of blood in excruciating detail; and the prosecutors lusting for those trophies on the wall regardless of the correctness of the action.  

In many, many of these cases the original developer could and did offer to renegotiate the loan, get new terms such as a lower interest rate or even some reduction in principle but keep the project moving and maintain it and bear all the costs of managing the properties.  After all the developers were much better at managing these properties than the banks or later the RTC.  This would have reduced the size of the losses to the Government by literally billions.  The universal response from the banks/FSLIC/RTC was no.  They took them and ran them terribly and made the losses much worse than they would have been.

Guess I really should stop about here.  This is a much bigger topic than I realized and can’t be condensed very much.   I won’t go into the role of the RTC.  Suffice it to say that it was a boondoggle.    Don’t believe a word you hear now that it was a success and therefore we should be comfortable that any new agency the Government creates to deal with the current subprime bad loans will be able to come out whole or even make a profit.   What all those anaylysts overlook is that the RTC got the properties it took at a very steep and artificially Government-created discount.  The values were low on its books.  Yes, it technically came out fine on its books, but the losses had already been absorbed by the banks and the ordinary Joes here in the southwest.   The overall Government effort was the cause of huge losses and the real estate market took about 7 or 8 years to fully recover.

The Government as usual made things worse and the law of unitended consequences proved itself once again.   What would have been a few banks failing, a handfull of miscreants sent to jail and a significant but manageable slowdown in the southwestern economy became a real disaster due to those people saying “we are from the Government and here to help you”.  Many details in this story have been left out.  Which I could go into all of them but that would I fear test the patience of the reader.   Please check into this yourself and certainly use some of these thoughts as you evaluate the current bailout proposals being bandied about by the same folks who brought it to you.  Yeah, I know about the greed on Wall Street, but the heart and soul is always in Washington.

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Bailout — With or Without Parachute?

The current debate about a bailout of the financial mess with subprime mortgages reminds me of that scene in The Bridge Over the River Kwai when William Holden is ordered to jump into Jap territory on the mission  to destroy the bridge with Jack Hawkins.  Holden’s character had never jumped before and when they looked into it they decided that the odds of injury were too great on a practice run so that he would have to just go the first time.   So he was told you’ll just have to jump and hope for the best.  Holden replied “with or without a parachute”?   I have already expressed my opinion about bailouts generally and I oppose them.  They won’t solve the problem as efficiently as the market and will inevitably lead to more Government oversight which just means more opportunity for the Government to manipulate our economy and make things worse.   You are reminded again that the majority of the subprime loans bought up by Fannie and Freddie were those that were mandated by the Government in the first place to support the politically correct goal of affordable housing for those who couldn’t really qualify for a loan.  The Government got what it asked for–an increase in home ownership among certain groups in our society regardless of the merits of the loans.

This is  like the situation in the S and L meltdown we had in the mid ’80’s and that is something I know a little about up close and personal.   I was very active at that time representing many land developers, bank holding companies and individuals in those industries.  You must remember then that oil had been pushing up hard for years.   The last Arab oil embargo was only a couple of years removed and the disasterous way it was handled by Carter and the FERC agency created by the Government to “solve” the problem was still skewing oil markets.  As usual the solution of the Government with its regulation to help everyone just made things much, much worse with shortages and even higher prices.  After all, the Government couldn’t regulate the world markets for oil.  Oil was expected to hit the astonishing price of $100.00 per barrel in  1982.   Inflation had been rampant but was finally ebbing some due to Reagan’s policies.  I attended seminars where the topic was the price of oil and how it was going to change the face of America in that decade.  The suburbs were going to die because no one would be able afford commuting and everyone would be moving back into the inner cities.  The auto industry was gearing up as fast as it could for smaller cars and that is when the Japanese cars first made a significant impact on the auto market.  Then as now the  price of everything was influenced by oil prices because it is utilized in so many of our products.   The price however did not continue to go up; it peaked in 1982 at just under $40.00 per barrel.  Inflation was coming down, the country was more confident than it had been in years with Reagan in the White House and the Arabs were willing to sell us all the oil we wanted.   They wanted to make up for the lost revenues from the two embargoes on oil they imposed in the ’70’s.   Most of the country was enjoying a real growth spurt and especially in the Sunbelt of the west and southwest.   The Rustbelt was continuing its slow decline that has been going on since the end of the War.

There was a new and high binder bank in Oklahoma City called Penn Square.  It wanted to grow and it did by making loans to every oil man with a rig or even a dream of a rig when the price looked like it was going up forever.  They also heavily promoted themselves as a depository and their capital base grew.   Then when the price of oil hit the wall, everything changed quickly.  Suddenly those oil deals weren’t so good with oil at $15.00 a barrel rather than $35.00 or more.   Their loans started going south.  The deterioration was fast.  The FDIC came and shut them down to show everyone a lesson that was in that financial business.  Many other banks were in the same business in the southwest and even though they operated much more prudently they were beginning to hurt.  Things were not desperate but tough for them.   There were lots of headlines about Penn Square and their risky loans.  Some were risky, some weren’t so much so.   Investigative reports were made by the media.  Calls for punishing the greedy were loud.   The FDIC deposit insurance was only $25,000.00 at that time and some folks lost their money.   So now the Feds were on the warparth.  Just so happens the next bank up on their list for audit was one in Abilene.   It had made many loans in the oil patch and some of those loans had become shaky but nothing that couldn’t be managed over a period of years and some reworking of the loans.  The FDIC decided the Abilene bank was under capitalized and gave them a weekend to raise and additional $20 million in capital. They managed to raise $10 million in two days and asked for a couple more weeks for the balance.  The Feds said no and shut in down that monday morning.   There were more headlines and outrageous allegations of phony loans, bribes, etc.  None of which turned out to have any merit.  But as always it was several years later before that was determined.  But the Feds had “taught” those high flying banks and S and L’s in the southwest that they were going to be punished for imprudent loans.   Everyone from the Congress to the media forgot that markets in any industry have cycles and that those drops in oil prices would adjust upward a bit later.  But no, everyone forgets history and only lives in the “now” and that is what the Government did at that time.  They were already finding the scapegoats for making the banking regulators look bad to the media.   It was about perceptions more than sound policy.

During those early years of the ’80’s there was a tremendous building boom going on in the southwest.  Fueled in part by the oil industry growth and the increasing migration of those snowbirds from the Rustbelt to the southwest.   We forget that then the majority of newcomers to the southwest were Americans moving from the northeast.  The S and L’s and banks were making loans for building deals hand over fist.  They were for residential projects,  commercial buildings, apartments and raw land deals for future development.   The land  and improvements were there as collateral and the lenders started to take the land as it only collateral and not require personal guarantees from the developers.   The competition among the banks was very intense in the early ’80’s for the real estate deals.   I had many  clients who were contacted first by the bank asking them if they needed to borrow some money for one of their deals!  Can you believe that.   All of this was known to the bank regulators and Congress and was encouraged.   They wanted that economic activity and thought it was good for America to build, build, build.  The encouragement cut across party lines.  Each had their own motives but the result was applause for such phenomenal growth.  There was some jealously in the Rustbelt because it was in decline and they resented the “rednecks” making all this money.

We are going to stop today but continue this tomorrow.  You really do need to understand this episode in our financial history to guage your opinion of today’s headlines about Government regulation and bailouts.  It will give you a better perspective.   Many of you were not even born then or were only children.  I lived through this time and don’t have to consult archives–I lived it with my clients.  We will examine the FDIC and the FSLIC  and bank examiners more tomorrow.  Naturally, we will take a look at the politicians and their views and actions to fix that meltdown and take a look if there had to be a meltdown at all and if the Government helped or hurt the situation.

My peach tree leaves are beginning to really show the color now.  The pin oaks are starting to have that dull brown tint to them.   Even if you live in the city you might start watching in a couple of weeks for the geese flying south.  They often flying at night but you can hear them.  With all the background noise and lights of the cities we often miss them entirely but they will be there.   Very comforting to know that some things do remain constant.

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Money, Markets and Politics

With all the ado the last couple of days about Lehaman, Merril Lynch and reports on AIG it would do us all well to review a few of the basics of our economic system and the real world implications of any bankruptcy of these companies.   Of course the politicians will put their own spin on events to promote their personal agendas–which is to get elected, not necessarily solve any problems.  We are told that this is a credit and liquidity problem and that may be partially true but for whom is it a problem.   Per the stats at least 95% of you have a job and 98% of you are current on your mortgage and other debts.   The default rates remember are very small and clustered mostly around the government mandated loans of just the last few years to people who in fact were not credit worthy enough to get a loan on their own merit or they were speculators buying second, third or even fourth homes in the hopes of flipping them for a quick profit.  You make your investment and take your risk like the rest of us.  

The creditors of Lehman or Merril Lynch are the ones who face losses.  More than likely that won’t be any of you.  To keep the explanation simple, if you bought your stocks in your 401 or just in your own account with either of the brokerages you will be fine.  You are not a creditor as such.  Those are your assets, not theirs.  They in effect are the guardians for you assets.  I know they buy lots of the shares in “street” name but that really doesn’t change the fundamentals.   Also the SPIC has protection up the $500K which will cover most you if it is needed.  The reality is that the straight, heads up brokerage business will be sold by both of them in or out of any bankruptcy.  That is a money making proposition for the buyers and there will be plenty of other brokerages that would love to step into their shoes and take over your account for you.   That far and away is the most likely scenario.   It is the creditors of Lehman and Merrill who might suffer harm.  They actually loaned money to Lehman and are owed money.   They may  have to settle for cents on the dollar.  When they took their position they had counted on a nice profit.  But they did their own reserarch and are big boys.   They have the same consequences you and I do when we loan money or make an investment.   I know everyone says it will affect credit generally and that it will cause values to fall farther and make it harder to get a loan for a house or car.   There may be some effect but the consequences of this are being exaggerated wildly.  Hell, go back and read the comments in the early ’30’s or from 1987 after the market lost 22% of its value in one day!  We always think what is happening right now is the most important and stupendous event ever and lose sight of historical context.   Yeah, things might be a little slow for a bit, but this is not the end of the world as we know it; in fact you can’t even see the end of the world from  here.   The only fly in the ointment would be the Government stepping in to “solve” the problem.    As usual they muck things up more than they ever help.  Remember the operations of Fannie and Freddie were completley controlled by Congress for decades.  Those institutions did what they were told to do by Congress.  You are also reminded that corrective action was proposed by the Republicans several times over the last decade or so but it was blocked by the Democrats in the Senate and House even when the Republicans were in the majority.   This is not a defense of the Republicans.  They could have pushed harder and didn’t.   Let’s hope that time will heal most of the wounds  from this before Congress can do any more damage.   The market will correct itself.    The “market” is us and we’ll make decisions in our best interest if we are allowed to.

AIG is similar in that the consequences really won’t affect you.  First when they speak of bankruptcy they are talking about the parent company, the holding company, not the individual insurance  companies.  Insurance companies are not allowed to file bankruptcy under the Bankruptcy Code.   Insurance companies are controlled and regulated by the States and if they get into trouble they go into Receivership.   What happens then is that their “block of business” (the policies) is usually sold to another insurance company.   If you had a car insurance policy  with an AIG company you would keep paying the premiums and the policy would remain in force.  The insurance companies are required to have collateral if you will  behind the policy obligations they might owe.  Even if there were no buyers for the policies then the States all  have a requirements where they would make other insurance companies in their respective States take over all the policies.  So, the ordinary Joe with a policy for life, property, or homeowners coverage would have nothing to fear if AIG went down.   It is not  burden for the insurance companies taking over the policies because they would get all those new customers and the cash stream of their premium payments.

It is the creditors of AIG who are at risk.  Apparently that includes many foreign banks and sovereign investors.   I don’t care if they get paid or not.   When I have lost money on a stock purchase I never noticed anyone moaning about it and certainly no one stepped forward to bail me out of my bad investment.   Again the sound and fury from some quarters will be dramatic.    Please think about why they are squealing so much.   Is it possibly because it is their ox being gored?   The big boys on Wall Street promoted these deals and were paid handsome fees for their time.   And I ask who put their ox in that position in the first place.  It sure as hell wasn’t me or you.    The market will recover.  The American economy will be Ok after a short while.  The WORLD needs our economy.  They all want a piece of this American pie.  Never forget that.  The last thing any of them want is for the US to have long term financial difficulties.  We are their primary source of revenue–think China and the Arab States.

God bless to all.

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