Money for Bankers but not for Autoworkers

In this morning's New York Times, there is a full page ad on page A7 that states

We are not bankers

We don't work on Wall Street or for big insurance companies...If we go out of business, so will thousands of other businesses.  If we lose our jobs, so will millions of others...

...if Wall street can get help, so should Main Street"

It is true that the auto makers showed up asking for money after flying to D.C. in their private jets. But didn't the bankers do the same? 

Today's paper shows a photo of the auto guys driving to D.C. It's almost comical.  Why aren't their photos of AIG driving around in cars for middle class people?

Yes, the automakers killed the electric car, ignored the impending environmental pressure to make fuel efficient cars. None of this can be denied. Yet, the bankers made their own share of mistakes, and those mistakes have been felt all over the world.

The bankers and AIG showed up without a plan. Well, I should take that back. AIG showed up with a plan (they didn't talk openly about) to have a fancy party a few days later.

The automakers had not game plan and were laughed at. 

For a few days I've been thinking about the difference between a Wall Street Banker and an Auto Worker. Detroit and Manhattan are two distinct worlds.  Yet, if you think about it, even with a bailout, lots of bankers still lost their jobs.  Seems like the only people that really win in these rescues are the guys at the top.

Even so, it seems like the Congress intends to make a point of the difference between the banks and the car makers.

p.s. We are back to the consumer supporting the provider.  The automakers make big SUV's because WE bought them.  Even Obama owns one.

link to photo

Enron was the Omen --

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Enron was the pit canary, but its death went unheeded
History is repeating itself as companies hide debt, blame the market for their failings and expect the taxpayer to pony up


* Bethany McLean
* The Guardian,
* Saturday October 4 2008
* Article history

Bad experiences are supposed to be good, in a twisted sort of way. That's because we're supposed to learn things that help us avoid the same mistakes the next time around. But it's hard to argue now that anything good came out of the bad experience called Enron. In fact, one thing that is crystal clear amid all the chaos of these days is that the lessons from Enron went unlearned - or were just forgotten.

Start with the Houston-based energy trader's notorious lack of transparency. After Enron's implosion, everyone talked about how important it was to be able to understand how a company makes money. Now raise your hand if you understand how a modern financial services firm makes money. No hands? The truth is, there is no way to understand. These companies are as opaque as Enron. Just as Enron had off balance-sheet vehicles - SIVs - that allowed it to book earnings and hide debt, Citigroup and other financial institutions had structured investment vehicles that did the same. Indeed, Citigroup had to take almost $50bn of SIVs back on to its balance sheet after they ran into trouble. It would be nice if the accounting rule-makers would grasp this basic tenet: if they want to hide it, we want to know about it.

Of course, SIVs are only a small manifestation of the deeper problem, which is the evolution of financial engineering into a dark art. Enron now seems like the canary in the coal mine. After its bankruptcy, Steve Cooper, who was in charge of restructuring it, told the Wall Street Journal his task might leave him "in a wheelchair and drooling" due to the complexity of its financial structures and the "unbelievable amount of debt accumulated around the company". Doesn't that sound like our entire financial system?

Just as Enron packaged bad investments into a private equity fund run by its chief financial officer, Wall Street packaged mortgages given to people who couldn't afford the payments into sleek new instruments called RMBS and CDOs. But Enron's machinations couldn't make the losses go away, and Wall Street's shiny acronyms can't turn a defaulted mortgage into good money.

As for the lessons we've forgotten, how about this one: financial statements aren't supposed to be fairytales. Enron was castigated for its abuse of mark-to-market, or fair value, accounting. This is supposed to allow investors to see what the market says a security is worth, instead of just what the company paid for it. Employed correctly, it makes a company's finances more transparent. But we all joked that Enron didn't mark to market - it marked to myth, to whatever it wanted them to be. In this, the US regulatory agency, the SEC, was complicit, because it signed off on Enron's use of this accounting and never ensured it wasn't abusing the rules.

Today's mark-to-market saga has a new twist. The SEC is facing political pressure to abolish mark-to-market accounting requirements for financial institutions, and some in Congress would like to dig mark-to-market's grave. Said in another way, now financial services firms may be allowed to deceive investors about their status, with the regulators blessing that deceit. (An aside here. Those who say mark-to-market should be abolished argue that because there is no market, firms are being forced to value these securities at artificially low levels. But there is no market precisely because firms aren't willing to sell at a price at which a reasonable investor would buy.)

While for a short period in the aftermath of Enron, we did understand that short-sellers serve a good purpose, we have also forgotten that. Short-sellers were the first to warn there were problems at Enron. But today, nobody is thanking short-sellers like David Einhorn, a hedge fund manager who began to warn investors about Lehman's problems in March, when the stock was worth about $50. Instead, companies say the short-sellers are to blame for their problems. And the SEC has gone along with this and banned short-selling in a number of stocks. Poor Washington Mutual and Wachovia, which plummeted after the ban on short-selling. How will they explain what happened to them now they can't blame short-sellers?

Which leads to the most sobering repeat lesson of all. Most of the believers in the free market only believe in it when it is going their way. When it doesn't, it's someone else's fault. Enron's former leaders often cited their free-market beliefs. Its demise, they said, was due to a short-sellers' conspiracy.

Indeed, when all was booming, Wall Streeters said they deserved their pay because the market said they were worth it. But now things are falling apart, they say the market doesn't work, and we need to stop short-selling, and taxpayers need to pony up. If there is a tiny bit of good in all this, it's that Wall Street, although it was complicit in the Enron mess, managed to walk away relatively unscathed. This time, Wall Street has brought itself down. Then again, maybe it really isn't a good sign for the future that there don't seem to be any smart guys anywhere in the room.

• Bethany McLean is a contributing editor at Vanity Fair and co-author of The Smartest Guys in the Room bethany.mclean@gmail.com

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Stephen King (the banker) on the U.S. Financial Crisis

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Stephen King: In Mexico, they've seen it all before. And there are lessons for all of us

Monday, 29 September 2008
Independent.co.uk

On a business trip to Mexico last week, I was talking to some local economists and financial experts. They know a thing or two about financial crises. Mexico, after all, has had more than its fair share of problems over the last 30 years, what with the Latin American debt crisis in the early Eighties and the "Tequila crisis" in the mid-Nineties.

Their view was simple. The US – and, for that matter, parts of Europe – is experiencing the kinds of problems associated with emerging economies. It is easy to see why. The sub-prime market is a market where creditors lend to very risky borrowers, in much the same way as investors have poured money into sometimes risky emerging markets.

The growth of the US sub-prime market, in turn, depended on the increased participation of foreign investors, many of whom snapped up mortgage-backed securities in ever-larger amounts. Judged by its widening current account deficit in recent years, the same is true in the UK, too. Emerging market bubbles, of course, are also associated with heightened foreign interest.

And, as banks and other financial institutions have seen their reputations shredded in recent months, some would argue that crony capitalism – which was rife in parts of Asia in the mid-Nineties in the run-up to the 1997 crisis – has also been widespread in the US. Fannie Mae and Freddie Mac spent approaching $200m (£108m) lobbying Washington to maintain a regulation-light environment for their mortgage businesses (intriguingly, one of the big recipients of campaign funds from the mortgage giants was Barack Obama).

The similarities, though, aren't just restricted to the experience of emerging economies. Worryingly, the US and UK experiences increasingly resemble Japan's economic and financial progress at the beginning of the 1990s.

It's often forgotten that, at the end of the Eighties, Japan was considered to be something of a miracle economy. Most economists thought Japan's output would be able to grow through the 1990s at a rate of between 3 and 4 per cent a year. With falling equity and land prices and with failing banks, these hopes floundered. As the decade progressed, Japan experienced an unwelcome dose of deflationary reality.

Despite all this historical evidence, there has been an institutionalised denial of financial dangers in the US, the UK and elsewhere in the industrialised world. Whether this reflects arrogance, hubris, feelings of Western "superiority" or plain stupidity, I don't know. What's clear, however, is that the warning signs stemming from the experiences of the emerging markets and of Japan were simply ignored.

At the heart of the problem is an insistence at the macroeconomic level on the pursuit of price stability without any real reference to other signs of economic imbalance. For much of the late Eighties, Japan successfully delivered price stability, yet this achievement didn't prevent Japan from having one of the biggest financial bubbles of all time. The tell-tale signs were there in the form of big increases in equity and land prices, but the Bank of Japan and others chose to ignore them. It was only later on, when equity prices were already falling, that the Bank of Japan really began to fret about inflation and, by that stage, the seeds of future deflation had already been sown. Much the same story applies to many of the Asian countries which succumbed to economic and financial collapse in 1997 and 1998. Before the meltdown, these countries ran budget surpluses. Their inflation rates were low. What could possibly go wrong? As it turned out, many Asian countries had borrowed heavily from abroad, reflected in widening current account deficits. The foreign inflows, in turn, were often invested in madcap property ventures. Sound familiar?

Then there are the similarities with Mexico's bubble in the Nineties. Mexico did well for all sorts of reasons at the beginning of the 1990s but one key source of external support was the advent of very low interest rates in the US, put in place by a Federal Reserve keen to deal with America's early-1990s credit crunch. Low interest rates encouraged capital to leave the US. Some of it ended up in Mexico, adding rocket fuel to the growth rate south of the border. In the end, the Mexican rocket exploded and the economy fell to earth.

Low interest rates have also played a role this time around. Following the collapse in stock prices in 2000 and 2001, the Federal Reserve slashed interest rates in response to the economic chill pervading company balance sheets. Having borrowed too much through the Nineties' boom, companies chose to repay debt. The Federal Reserve feared that a sudden increase in corporate saving might throw the US economy into protracted recession. But the consequence of lower US rates was not so much additional borrowing in Mexico but, extra borrowing from US households: at the margin, much of this additional borrowing was of the sub-prime category, providing a link with emerging market crises of old.

Spotting economic and financial bubbles is no easy task. To pretend, though, that bubbles are confined only to emerging markets, is plain folly. They are a persistent feature of capitalism, whether crony or otherwise. Some bubbles might arguably serve a useful purpose – technology-related bubbles, for example, help to steer resources into the most socially-useful areas of economic activity (railways in the mid-19th century, computers in the late 20th century). Others might not cause too much lasting damage, particularly if the authorities are able to clear up the mess in a bubble's aftermath.

Bubbles related to property, though, are almost always bad news. Whereas new technologies can add to the level of well-being, property speculation too often diverts resources away from welfare-enhancing projects towards short-term monetary gain.

Most emerging market crises are violent affairs, associated with savage losses of activity in the first one or two years. That's less likely in the US this time around because of the dollar's status as the world's reserve currency. Unlike most of the emerging economies, the US borrows from abroad in its own notes and coin. When things go wrong in the US (the housing crisis is currently the biggest single problem) it's initially a bigger challenge for the overseas creditor – who discovers that the domestic value of his dollar assets is beginning to decline – than for the domestic debtor.

But that story only works for a while. As foreign creditors have chosen to steer clear of US assets, so US banks have been left with all manner of toxic waste. The counterparty risk associated with this has been instrumental in explaining why the US financial system is today in such a parlous state, and why the US economy is now threatened with a multi-year period of low growth and high unemployment.

The Paulson plan is, in effect, a taxpayer bailout designed to protect the US banking system from the consequences of foreign aversion towards US assets. It's needed because the US has, for too long, survived through the sale of dodgy assets to unsuspecting foreign creditors. Might the US, then, be the world's largest emerging market in disguise?

Stephen King is managing director of economics at HSBC

©independent.co.uk

http://www.independent.co.uk/news/business/comment/stephen-king/stephen-king-in-mexico-theyve-seen-it-all-before-and-there-are-lessons-for-all-of-us-945378.html
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