Too Big To Fail

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Ubi Dubium ibi Libertas

This will likely be the last post on Too Big to Fail.

To the half-dozen or so people that have actually read my blog over the last 11 months, thank you. I have enjoyed following the aftermath of the most severe financial crisis in the last 70 years. It is my hope each American takes more personal responsibility not only for their own economic well-being, but also for their own financial acumen. We must take the initiate to know the issues, and be dubious of what lawmakers, CEOs, and journalists tell us of the outside world. 

Ubi Dubium ibi Libertas.

Best,

David Ryan Williams

Vote Yea For Big Ben

Fed Chairman Ben Bernanke did not perfectly handle the most recent financial crisis. But he is the best person for the job and should be renominated for a second 4-year term. This endorsement comes from a financial layman (relative to Mr. Bernanke) who consistently criticized him for not letting Citi and AIG to fail, which in my mind were his greatest mistakes.

Now look at some of the antics employed by our not so financially bright lawmakers. Bernie "The Socialist" Sanders wants to make the up-or-down vote on Big Ben subject to a filibuster. Marvelous. Richard Shelby said he wasn't sure whether to vote yea or nay. Same goes for Jim Bunning and Jim Demint. Thank God Ron Paul and Alan Grayson (two hapless House members who are trying to end the Fed as we know it) are not in the Senate.

Like the rest of us, history and not politicians (with less than stellar financial acumen) will ultimately judge Mr. Bernanke. Of course I am dubious that the failures of Citi and AIG would have led to a Great Depression as Big Ben has repeatedly said. But he still is the only captain I trust to steer our economic ship back to the straight-and-narrow. 

CIT Turns to the Next Chapter

Who would have thunk it? Letting failures fail can yield something positive.

Just six weeks after filing for Chapter 11 protection, CIT Group received approval from a judge Tuesday to emerge from bankruptcy. They were able to negotiate and reduce their outstanding debt to the tune of $10.5 billion. Creditors also will be repaid in three years (recall that CIT had a few billion in debt maturing this year and could not restructure its debt arrangements to avoid bankruptcy).

This news is a relief for two reasons. One, CIT has the potential, like GM, to become a viable company again now that it is much leaner. Second, that regulators FINALLY had it right and did not bailout CIT with more TARP funds (it received about $2.6 billion the first time). It wasn't too big to fail. Too bad we had to waste a few billion dollars to find it out.

Blame Bush and Create Real Jobs (Finally)

Some genius made a YouTube video of Allen Iverson's unforgettable "practice" rant press conference. It's to die for. In about two and a half minutes, the future NBA hall-of-famer said "practice" 22 times as he criticizes former Philadelphia 76ers coach Larry Brown.

Some other astute observer should do the same for the number of times Barack Obama (in slightly more time than Mr. Iverson) has blamed the current economy on his predecessor, George W. Bush. 

In his jobs program speech Tuesday, the president, while praising himself for taking "ambitious" and "sweeping action" to save the economy from a precipice, also found time to making the following less than nobel - er, noble statement:

"We were forced to take those steps (to jump-start the economy) largely without the help of an opposition party which, unfortunately, after having presided over the decision-making that had led to the crisis, decided to hand it over to others to solve."

Another point of contention with his speech. Using approximately $200 billion left unspent from the bank recapitalization program, Mr. Obama now wants to stimulate the real engines of our economy (which any half-wit can tell you is not the National Endowment of the Arts): small business. According to press reports, the administration is looking to use between $20 billion and $40 billion in unused TARP funds for increased small business lending, and to implement between $25 billion and $30 billion for tax credits to encourage small businesses to take on new workers. 

This is encouraging. But why not do it with the unused funds from the $787 billion "stimulus" bill that was supposed to keep unemployment at 8%, but came up just a touch short (if you consider millions more of unemployed Americans a "touch")? That would be creating real jobs, Mr. President. And instead of spending billions more, you could save and do the right thing a help salvage a bill that hasn't even worked yet. 

BofA Breaks Away From Government Tentacles

Well it took BofA long enough, but the banking behemoth is about to free itself (for now) from the tentacles of the U.S. government. According to media reports, the Charlotte, N.C. firm will repay $45 billion in TARP funds using "excess liquidity," more secondary offerings, and asset sales. 

Of course the congratulatory fluff out of Treasury is that this shows how successful TARP was. Well, ok it did work for the institutions that just needed to be recapitalized and weren't insolvent (and by definition failed). Point taken. But TARP was grossly mismanaged and still several investments will never be recouped. CIT and GMAC come to mind. 

But consider what this means as the bank shops around for a new CEO. They won't have to comply with pay czar Kennith Feinberg's curbs on executive pay. Goody goody. Lewis is stepping down and some of the preliminary rumors indicate that former New Jersey Governor Jon Corzine (who also used to run Goldman) is being considered for the position. Corzine isn't going to come out of pseudo retirement for peanuts. BofA will need to show him a sweet package to come aboard.

Today's Best Person in the World

If I wasn't graduating in two weeks I would start a daily post to show my exasperation for Keith Olbermann: The Best Person in the World. 

But I will do it just once. Today, it's Rupert Murdoch. I commend his recent statements that journalism should be paid for, with plans to play Bing and Google off each other to bid for News Corp's content. I could just visualize the proverbial middle digit he held up to all the online geeks who trumpet that news and content must be free. News flash to them: "free costs to much," Les Hinton, CEO of Dow Jones, said this week.

I also give big ups to him for his statements yesterday about letting those who fail to fail. No matter how much whining the public hears from dying newspaper publishers and journo nerds, there should be absolutely positively no bailouts for them. They need to accept that those who are surviving and thriving have done so because they are remarkably Darwinian. They are either providing a valuable product - WSJ - or some high demand perspective - HuffPo or Fox. Newspapers saw the effects of the web from a mile away and it's not the public's fault they have not adapted. 

You're right, Mr. Murdoch, let the failures fail and let the more enterprising media moguls pick up the wrecks from the unprofitable outlets.

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Don't End the Fed

There are a whole host of issues that I don't see eye-to-eye with many of my conservative colleagues. Auditing the Fed is one of them.

Texas Rep. Ron Paul is far-and-away the most vocal critic of our central bank (he has a book out - "End the Fed"). I had the pleasure of meeting many of his conservative and libertarian followers at the Conservative Political Action Conference (and at various tea parties) last February in Washington. They sure have some loony ideas when it comes to the Federal Reserve.  

So it shouldn't be much of a surprise after Paul's op-ed in the Journal last week with S.C. Senator Jim Demint, that some new onerous legislation is in the pipeline. Sure enough this week the Paul-Grayson (yes THAT representative Grayson who justified his vote on government run health care by saying we have to prevent a "second Holocaust" in America) amendment to Barney Frank's massive banking regulation bill passed committee 43-26. With that, the bill would allow Congress to open up the Fed's books, examine exactly what it buys, who precisely it extends credit to, etc... MarketWatch is reporting that the Paul-Grayson would also cap the Fed's spending at $4 trillion.

Considering the financial literacy, or rather illiteracy, of Congress, there is no way I ever want 535 people mostly influenced by the media, public polling, and lobbyists to have any control over monetary policy. They already, as we now are fully aware, screwed up fiscal policy for generations to come.

Auditing the Fed is just another political ploy only made possible the financial crisis, and the public outrage of bailouts and lax monetary policy to begin with. And while I do distrust the Fed at times, I'm almost always dubious of Congress messing with things they have no capability of understanding. This is one of them.

The Fed operates best by being somewhat secretive. It cannot perfectly telegraph its policy nor open up its books for the planet to see. Institutions, foreign and domestic, getting help must be protected from "stigma risk." Policy makers can't become wedded to their initial targets of inflation/economic growth, and if they were forced to fully disclose these - they would. And most importantly the Fed needs to stay independent of the government.

Nothing is TBTF

Sometimes I feel bad for repeating one of the most overwrought phrases of the day. But too big to fail has become far-and-away the preferred nomenclature in financial circles for anything that could collapse.

Now consider the sorry greenback. As of this morning the USD has fallen to a 14-year low against the yen and is almost at parity with the swiss franc. Also, Bloomberg news is reporting that Russia's central bank will add the CAD to its reserves (presumably dumping another currency, the USD, to do so). The loonie rose almost 1% on the news versus the USD, edging closer to parity.

Unlike some of my colleagues, I'm hesitant to automatically apply the TBTF mantra to an ailing USD. Our currency will not fail in the literal sense of the word, but let's define what an alternative definition of failure. Would it be a depreciation to a certain price level versus the EUR, say 2.50? Would it portend 15%+ inflation? 

To me it would be the discontinuation of the greenback as the number one reserve currency, either for an international body like the IMF or possibly even a major economy, like China. And it certainly seems from some of the language overseas, leading finance ministers and the like are intimating their intentions to wane off the USD in search of another existing currency and a new "world" reserve money altogether. 

We'd like to fantasize that the USD could never fail. It can. And if we don't stop the unsustainable fiscal path, it will. Nothing is too big to fail. Not even America.