Obama needs to print dollars

That is the only way out. Print more dollars and weaken the almighty dollar. There is no point trying to tax the rich. Firstly you cannot simply tax them on their assets just for being rich.. You can only tax income. Most of these people have thier income tied up as carried interest in hedge funds. That is capital gain and not current income. The ceo's and other corporate highly talented people get paid in stock or options - again capital gain. So there is no easy way of getting these people to share.

So, there you have it. Banks will not lend and the rich will not share the tax burden plus they have their tea party puppets peddling trickle down economics in Congress. That is a perpetual stalemate. If this was a game of chess, you would simply resign at this point.

Anyway, printing dollars is the best way to redistribute. Inflation will make your worthless homes more expensive relative to the mortgages. Stocks will go up since prices are in Nominal dollars, so everyone's 401k will look a lot healthier. The dollar will weaken and make US goods more competitive. Saudi Arabia and China will lose the real value of their Treasury holdings - we will pause here to shed a tear for them. There you have done it - you screwed the banks on the mortgages, hedge fund managers on their billions stashed away in dollars and some other countries that you do not particularly care for. Sure grandpa's social security checks will be worth less but hey the current plan calls for throwing grandpa over the cliff anyway. This way will be somewhat slower.

So Obama, get your hands on that printing press...

Death by a thousand cuts

The banking industry in New York is dying. It is death by a thousand cuts and indiscriminate layoffs. If you ask Goldman Sachs, they are only top-grading, and getting rid of the bottom segment of the industry. In reality, the bottom feeders are really at the top, making these decisions to cut. The banking industry has been in-bred, and corrupted for years with crony capitalism, and nepotism being the main talents for survival. Anyone that has any real talent, capability, or ethics, has been systematically purged from the system.

So now we finally have the inevitable death throes of the industry. After facing the reality of the consequences of their actions in 2008, and refusing to accept this reality, finally Bankers are at a point where the golden goose is not laying any more eggs. So instead of trying to save the industry, they have decided to kill the goose, and make a last meal of whatever remains.

It is all fine in the free market text books, to allow for a hire and fire environment, that allows a bloated manufacturing firm to trim their costs, and remain competitive in a global environment. However, we are talking about banking and not manufacturing. These same banks were hiring last year. In reality, they have no idea how many people they need, because they have no idea as to their purpose in the economy. The Wall street firms are just serving up BS, and consequently there is no set number of people required to do this job. It is an extremely variable number.

The real reason the banks costs are high is because of the number of Managing Directors on the payroll. Do the math. If you have a thousand MD's earning over a million dollars a piece, that is a billion dollars in expense. It is hard to make any money when your costs are so high. Instead of turning out thousands of low level grunts into the streets, they need to lose the MD's. Since the MD's are the ones doing the firing, this is not likely to happen unless you have a very brave CEO.
Since the situation is as it is, we need the government to mandate (hey if the firms did what was good for them, we would not need big government to step in) that for every thousand workers they fire, they need to lose an MD.

The current situation is bad on many levels. Due to the bottom feeders having moved up to running the firm, they have no other talents besides surviving at all costs. They do not have any actual technical abilities to run anything. So after each round of firing, they have to go back in the market and hire some people back, because someone has to do the work! Then we go to the next round of firings because the MD cost situation will continue to be a drag on the firm. Which is why we are seeing these endless hire and fire cycles.

The other option that the firms are following, is to move all the support jobs offshore, so that atleast on a short-term basis, the cost situation is alleviated. Which brings us back to why this will kill the industry in New York. The derivative products that the banks are peddling,despite their fancy names, can really be whittled down to four or key five asset classes - Equities, interest rate derivatives like interest rate swaps, Foreign Exchange products, Commodities and the infamous credit derivatives. These products are pretty much commoditised on the front-end, and a used car salesman could peddle them. No real irreplaceable talent is required to trade or sell these products. The real technical know-how which differentiates one firm from another is in the infrastructure, systems, regulatory framework, Accounting and everything else that has been built-up in the Banking industry, over the last century. If all of these functions are moved offshore, then how long will it take your overseas competition to pick up the front-end of the business, and own the industry end-to-end ? All we will have left will be proprietary hedge funds, masquerading as brokers and Banks.

There was actually a brave soul at Lehman, who suggested that if the Bankers skipped their bonuses for one year, they could save the firm. He/she was laughed out of the firm. Obviously, it made more sense for the MD's to simply change the flag, and get paid by someone else, rather than sacrifice their bonus for one year and save the firm that had enriched them for so many years. Nothing can save this industry without a real change in the leadership.

Obama needs to print dollars

That is the only way out. Print more dollars and weaken the almighty dollar. There is no point trying to tax the rich. Firstly you cannot simply tax them on their assets just for being rich.. You can only tax income. Most of these people have their income tied up as carried interest in hedge funds. That is capital gain and not current income. The CEO's and other corporate highly talented people get paid in stock, or options - again capital gain. So there is no easy way of getting these people to share.

So, there you have it. Banks will not lend and the rich will not share the tax burden plus they have their tea party puppets peddling trickle down economics in Congress. That is a perpetual stalemate. If this was a game of chess, you would simply resign at this point.

Anyway, printing dollars is the best way to redistribute. Inflation will make your worthless homes more expensive relative to the mortgages. Stocks will go up since prices are in nominal dollars, so everyone's 401k will look a lot healthier. The dollar will weaken and make US goods more competitive. Saudi Arabia and China will lose the real value of their Treasury holdings - we will pause here to shed a tear for them. There you have done it - you screwed the banks on the mortgages, hedge fund managers on their billions stashed away in dollars and some other countries that you do not particularly care for. Sure grandpa's social security checks will be worth less but hey the current plan calls for throwing grandpa over the cliff anyway. This way will be somewhat slower.

So Obama, get your hands on that printing press...

Prime Broker lending

Dodd Frank is making a lot of noise about making sure that Banks and Broker dealers should put up enough collateral to fund their exposures. The setting up of exchanges to clear Otc trades is supposed to solve the "credit crisis" problem. But the real funding for Brokers and hedge funds happens in what is called the "Prime Brokerage " market. This is the cesspool that the regulators should really be regulating. All the money from the safe Banking vehicle, along with their excellent credit, gets channeled into their Broker dealer arm and on to this Prime Broker market. Here they sell this credit for Prime Broker fees from hedge funds and others, in exchange for funding.

So what you may ask, is the big deal ? This is some complicated mechanism that market participants use to fund their positions. Well the big deal is leverage, poor credit management and large exposures. The very problems that caused the crisis.

Lets start from the beginning. When a speculator, Hedge fund A, takes a position in a Bond, they do not put up the entire face value of the Bond. They borrow the money and buy the Bond, then enter a repurchase agreement with one of the Banks where they sell the Bond today and buy it back tomorrow, then take the cash and pay off their borrowing. Is that too complex - lets take a step back. I want to go long a Bond, but I borrow money from my banker friend to buy it, and then I do a trade with him selling it every night and buying it back in the morning. The difference in price between what I sell at night and buy it back in the morning equals interest that I pay my Banker friend for his kindness. If I do this with stocks, it is a little more expensive. Basically you buy the stocks, pay for it in cash, then you can lend the stock out in the stock lending market up to a maximum of 50% of the value of the position. You get 50% of your cash back, and pay down your borrowing by 50%.

The point of all this is that if you have the credit and relationships in the market, you can take any positions you want. When a Bank lends money, it needs to keep at least 8% of the face amount as regulatory capital. There are all kinds of rules being setup through Basel II & Basel III to make the Banks safe. But the real risk, which is in the Broker dealer market (remember Lehman was a broker- dealer) is simply not addressed. The Repo borrowing that I described above is not limited to “safe” Treasury Bonds. Basically, any kind of junk paper that is issued by the Banks through securitization, ends up in the Repo market. If a Broker/Bank issues a dud note backed by subprime mortgages, a hedge fund that bought that note would then turn around and give the same note back to the Bank, and ask for cash in the Repo market. The Bank/Broker that has one arm that issues the note and another arm that funds borrowings in the Repo market, cannot refuse to take back its own paper as collateral.

So net result is that the speculators can take all kinds of dangerous and illiquid positions and then have the Banks fund it through the Repo market. The Repo and Stock Loan funding markets need to be regulated to ensure that speculators do not take excessively risky positions. Leaving this market up to the self-regulation of Banks is leaving the Barn door open after the last set of horses have bolted and you just spent a ton of money buying new horses. The Bankers have every incentive to put the Bank at risk in exchange for prime broker fees. Hey, if the Bank blows up, we all know the terrible consequences. Basically you get a large Bonus for pulling the Bank through troubled times while Uncle Sam will step in to pick up the check.

Hey Dodd-Frank, nevermind over regulating the banks. Look at the Broker-dealer, Hedge fund Prime brokerage funding nexus.

The American dream is the root cause of expensive healthcare

So here is my thesis - I think this country is just too big. So we have all these small towns each with their own school, fire station, police station and hospital. This is just too expensive to maintain. Specifically healthcare, is really a luxury item. I was talking to this doctor friend of mine and asked him why medical services do not follow the law of economics. If a certain good becomes expensive you should be able to flood the market with supply and bring down the price of the good. So for instance, if doctors are expensive, why not import cheaper doctors from overseas and bring down the cost ? Paradoxically, for medical providers, the cost goes up when you increase the number of providers. The private healthcare system we have in place is based on capitation. This means that regardless of whether you fall sick or not, each doctor gets paid on capitation. They get paid per number of members, regardless of whether their services are used. So the trick to controlling costs is to reduce the number of providers. It is not possible to maintain a system of having millions of small towns each of them with thousands of podiatrisits, Physical therapists, all kinds of specialists and hospitals without causing a huge cost burden. So comparing the US healthcare system to any geographically smaller country's system is meaningless. We need to understand that maintaining the suburban life along with the availability of all these medical services, is a luxury. We can either suck it up, and pay for medicare, as it is a necessary item to maintian our standard of living. In that case, stop whining about the costs, and especially stop bitching about Obama's public healthcare plan. You do not want to create a system of haves and have-nots in healthcare. That is a recipe for social unrest. Otherwise, give up the current system and go to a National scheme that has fewer specialists, and other high-end doctors. This is what works for Canada, and other such systems. We cannot have it both ways.

Why is QE (Quantitative easing) not working ?

Banks are not lending. Why are Banks not lending – because they can (not lend). Banks can afford to not lend, atleast for a while. Banks are very contra useful entities. They will lend when you do not want them to lend and they will squeeze out all access to liquidity when you need it the most. Very perverse, but that is just the nature of the beast.

Ok so to go back to basics. Banks create money. Money is not longer just the total supply of paper money. Money is the number of times this stock of money circulates. This is the infamous bank multiplier, where the bank keeps a small fraction in reserve and lends the rest of the money out. So the same stock of money expands to none or 12 times (whatever is the multiplier). So now we have the opposite problem. Banks call in their loans and keep the money, to shore up their capital. So our money supply is contracting, by several multiples. It does not matter if you reduce interest rates to zero. The banks are not going to lend. People are not going to borrow.

So now that interest rates are zero, we have to look for new tricks. The new trick is quantitative easing. The Treasury issues Bonds. The Fed prints money and buys the Bonds. This increases the stock of money. But that does nothing for the multiplier. A little extra paper money floating around is not going to offset the contraction resulting from the Banks calling back their loans. At the same time we have regulators asking the Banks to increase their cash reserves – the exact opposite of what we need the Banks to do now! As usual we bolt and lock the stable door securely after the horse is several miles away in the next town.

Basic fallacies. The President can create jobs. Why and how did we ever get this notion that the President is supposed to create jobs. Can you go back in history and point to one President has had a real impact on the economy ? Sure all of them have claimed to create jobs. But that is just political rhetoric to get elected. Nobody should take this kind of claim seriously. If any of the Republicans are going to point to their god Ronald Regan as having created jobs. Please! Ronald Regan is the man who along with Maggie Thatcher sold all your jobs to China. Sure it made his economic numbers look good, but we are all paying the price of that genius thinking.

Second fallacy. The Fed chairman has a magic silver bullet to kill the ghost of Recessions. Alan Greenspan was a fake shaman who played to the CNBC galleries. The truth is that the Fed chairman can only do so much with monetary policy. The Fed cannot make the Banks lend. Only the Banks can create money and only the Banks can make other banks lend.

So what is the answer great one ? Will we never see the end of this economic funk and see happier times ? Of course we will. There is a natural order of things. As prices fall, they will hit a bottom. People will wake up one morning and say, the heck with it, let me go out and borrow and start buying things again. They just need confidence that the world is not ending today. Soon the banks will run out of accruals on their old loans and need to lend again. Some upstart bank will figure out they need to get on top of the rankings by lending more aggressively. And everything will work again – magic!

So Mr. Bernanke my advice to you is don’t just do something. Stand there and let things take their natural course. And Mr. Obama I know things may not come up to speed by re-election time. But there is squat you can do about it. Easier to take a step back and talk sense to the sensible part of the population. Get the fear index down. And don’t make silly promises that you will not be able to keep. You should be just fine.

Credit default swaps should only be allowed with an offsetting credit exposure

Michael Moore could not seem to pinpoint exactly what is wrong with a Credit default swap. Here are some pointers

1. A naked credit default swap (without an underlying exposure )creates the incentive to bankrupt companies.

Say we have a hypothetical strong company B that has issued very little debt. Maybe one five year bond. The stock is doing middlin to ok depending on the state of the overall market. However, it may still have short-term borrowings and lines of credit to finance its day to day activities.Say another smart master of the universe broker-dealer, lets say G, buys credit protection from dumb insurance company A. G has no real credit exposure to B. However, it has a clear incentive to buy a credit default swap (these are cheap relative to the Notional. The premiium is an accrual and does not have to be paid right away. It has to be paid over the life of the swap). G has every incentive to short the stock of B and create an artifical credit panic for B. If the market is shaky, the fundamentals of the company do not matter. Banks will pull the credit lines of Company B and push it into a liquidity crisis. G will get away with the equivalent of collecting protection money. If dumb insurance company A does not post collateral, its friends in the Federal government will post margin. Depends on how big and dumb is A (or just corrupt).

2. A CDS exchange will not solve the above problem.

3. A CDS should be allowed only for the legitimate creditors of the company to buy protection against any outstanding exposure. A naked CDS is evil. It should be banned atleast till the CDS market is symmetrical and very liquid.

4. A CDS should require upfront payment. If they quote a 1000% CDS spread, the guy buying a CDS should put up a 1000%. This will quickly cap all CDS rates to a 100% of the exposure. The 1000% default spread is a bogus number and should not be allowed as an indicative price.

So there. Can someone please forward to Obama, Barney Frank, Michael Moore and the other CDS-haters ?

Equity compensation is the root of all Corporate evil

What Obama and Barney Frank need to focus on is the nefarious practice of Bankers being compensated through restricted stock or stock options. The basic premise of equity compensation is that Manager interests are aligned with shareholder interests through this practice. This theory is flawed for the following reasons

1. The actual cash value of payments in shares are never recognised in the Financials of the company. Share payments are recognised as part of the capital account and not in the operational earnings, as a cost.

2. The amount paid is not a fixed expense amount. Instead, it is a share of the company.

3. You cannot give away the farm to align a managers interest with the owner. To provide an analogy, if I pay my housekeeper, a share in my property so as he does not damage my property, eventually he will own my house and I will be the housekeeper.This is the same concept.

Are we there yet ?

It is time to buy. But not yet. We must wait for the market to hit the bottom. Till then we need to bide our time and drink to it. Bottoms up!

Capitalism has run out of capital. Ich machst nixt Das Kapital! (no it is not really German I just made something up from my Rosetta stone).

However note the profoundity of the statement - Capitalism has indeed run out of Capital! We need a new system. We need communism from China to provide us Capital. What happened to all our capital? Did someone madoff with it ?

We probably spent all our capital on Christmas gifts that nobody wants. We need to figure out a way to grow more capital. Capital does not grow on trees. It needs to be harnessed and managed so that it grows into more capital.

So it is not really a liquidity problem. We just need more money. Stop burning cash and conserve. Only way to build capital is by not wasting it.