WHAT’S A FED TO DO?

Rarely has there been a Fed meeting proking more market anxiety when the the chance of an interest rate increase is absolutley nil than the ongoing meeting that will end Wednesday June 24.

Rarely has the role of the Fed as market psychiatrist-in-chief been more front-and-center in the market’s consciousness — or unconsciousness, for that matter.

The market would, it thhinks, like the Fed to tell it when it will get concerned enough about potential inflation to take the wraps off interest rates; whether and when it will continue to buy Treasury securities and government agrency paper; whether and when the nation’s bansk will collecively no longer present a “systemic rsik’ without direct governmental aid; what the ‘top’ willl be in unemployment and the “bottom’ will be of housing; whether tit sees “green shoots” in the economy or ‘”ellow weeds”?

The honest answer to each of these questions is “We’ll see.” And Chairman Bernanke will probably find a way to say just that and not much more — the good doctor found out long ago that a placebo works just as well as Valium when it comes to market anxiety, and he must bear in mind that he is running for re-eelction in a primary where there is only one Voter-in-Chief.

Besides, if the Fed actually could answer those questions with precision and did so, the market would quickkly remeber the phrase “Be careful what you wish for”. The markets eyes want answers, but its stomach surely does not — precisley because the fed would lose all credibility if it actually tried to forecasrt beyond the macro numbers it ususally deals in.

We will have to be satisfied with a “steady as she goes” statement even if where she is going isn’t all that clear yet. What is more or less clear is that we have dodged Armageddon — whether that fact drives the US dollar’s relative value up or down in the wake of expanded fiscal deficits remains to be seen, and will be the first signal of how the market views what the Fed has to say — the markets for oil, commodities, and yes even fertilizer, not to mention banks (which have been dealing in fertilizer of sorts over the past couple years) will follow.

California TARPing?

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Can a State qualify for TARP assistance; would its financial collapse threaten to create a “systemic risk”?

For the municipal bond market, the answer to the latter question is probably yes. The situation in the Golden State bears an uncanny resemblance to AIG last fall:  financial mismanagement; floundering leadership; profligate spending and risk-taking with it’s balance sheet; excessive leverage. And, perhaps most importantly, no good tools available to the Federal government for an orderly restructuring of its affairs.

FDIC receivership is of course out of the question as the State is not a bank. And under our bankruptcy laws, municipalities can file for bankruptcy, but not states. Nor does the new legislation making its way through Congress to provide a framework for winding up the affairs of financial holding companies like Lehman and AIG and Citigroup will apparently  not apply to states, either. GM and Chrysler can get their  contracts reshaped in Chapter 11 to preserve their “wasting assets” and keep their workforces alive as going concerns, but not California.

What’s a Governator to do? Perhaps by cutting expenses  wherever he can by declaring a state of “disaster” and going over the legislatures heads. Perhaps by trying to substitute Federal stimuklus money for currently budgeted California’s own budgeted  expenditures.

But the guess here is that, just when you thought that TARP was being shunted at least to the recycle bin by the post-”Stress Test” rush by the systemic risk banks to raise capital “on their own”, along comes yet another systemic risk petition, this time from Sacramento. Maybe not today or tomorrow, but July 4? — then we’ll know what it cost to prop GM and Chrysler to their next lives post-bankruptcy, and a few banks may have even met the terms for repaying the TARP. But California, like it or not, will then be the next systemic shoe to drop on Washington’s table.

We are not likely to see an analogy to the famous New York Daily News headline in the mid-70’s  “Ford to NYC — Drop Dead”  — but we may well see similar intervention to what eventually occurred in New York by way of the State government– a sort of ad hoc receivership of California’s government in exchange for a Federal Aid package — like a domestic IMF loan. What a comeuppance for the world’s seventh-largest economy. But if it could get disciplined about its finances, what an engine of change it could once again be for the country. This could be a TARP loan worth the effort.

Bankrupt Network

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Much of what passes for thought on cable news coverage of the Great Recession is as bankrupt as Chrysler and desperately in need of a “Chapter 11″ restructuring.

Witness today: Larry Kudlow on CNBC claiming the Obama Administration is directing GM to stop making trucks and produce only two-door hybrids. Utter fabrication; exaggerated nonsense; yet this kind of drivel goes unchallenged by anyone other than the increasingly isolated Steve Leisman.

Meanwhile, the similar incessant blubbering about the “sanctity of contract” on behalf of hedge fund investors in Chrysler’s secured debt by  Kudlow and Melissa Francis and Michelle Caruso-Cabrera and Dennis Kneale, along with the rants against “Socialism” from the morning host Mark Haynes,  continue to position CNBC as the clone of its competitor Fox News in vying for the title of the most vitriolic anti-Obama network on the air, and useless in terms of actual market perspective, not to mention actual knowledge of bankruptcy procedures.

No problem with critiquing Obama’s administration or his policies; but how about fair and balanced — somebody — All these people who supposedly “report” on the market during the trading day are becoming specialists in ideological ranting, so that those of us who would like not to be shouted at but rather be more informed are left with only Bloomberg TV as a choice. Dull, but at least not a GOP pep-rally.

If Kudlow wants to run for the Senate in Connecticut,  let him stand and deliver elsewhere other than as a supposed market reporter from 10 AM to 11 AM — he has a commentary show later in the day, for example, where  unbalanced opinion is at least properly positioned as such. Reporting on Anit-Obama sentiment among traders of course is entirely appropriate in terms of market-color. Fanning the flames of that sentiment, however,  is like the umpire taking a swing — interesting, but outside the rules of the game. Because then you know you have no umpire, and that the game is rigged.

Interestingly, the CNBC “commentary” shows like  Jim Cramer and Fast Money later in the day after the markets close show more balance of opinions, however exaggeratedly ludicrous (”all numbers coming out of China are false”).

Maybe the CNBC management believes they’ve got a winner with the hysterical rants of their anchors against all things Obama, but I’m not so sure they aren’t driving away an audience of serious people who want to find solutions to the Recession problems in something other than the simple mantra of unbridled capitalist animal spirits, which did us so much good between 2004 and 2007.

Notice how quiet so many of these day-anchors  are the past few days after the catastrophe they predicted when the “stress test”‘ results were announced failed to materialize, and many of the financial institutions in question were able to raise private capital in the public markets: something they said was impossible under  our “socialist” regime.

It’s enough to hear Dick Cheney laying the groundwork for a coup in the event of another terror  attack (which he pronounced as inevitable even during his own Administration, by the way). We don’t need to see the best financial news apparatus turned over lock, stock and barrel to one particular  political viewpoint hour after hour in a way that clearly frustrates some of its best on-air reporters who are trying to deal with the real as opposed to the ideological world.

After months of raving about “too big to fail” — an easy shot when you have no public responsibility for the financial system — the so-called anchors now rail against the very procedures of the bankruptcy courts that they argued should be left to handle the mess. We need something better from CNBC during the market day than shills for the hedgies  and would-be Treasury Secretaries in the Palin Administration.

Finally, there are those who argue what’s the difference with CNBC going one-sided political while MSNBC has its leftists Chris Matthews and Keith Olberman and Rachel Maddow — it’s real simple, those folks’ programs cover politics , and their political opinions are balanced by regular contributors like Pat Buchanan and Joe Scarborough and others who always get a full shot with their views and aren’t summarily cut- off by serial interrupters like Kudlow and Kneale. Moreover, the Fox lineup from dawn to dusk is more than a match with O’Reilly and Hannity (who like CNBC simply use contrarian political sentiments as punching bags).

Let’s hope CNBC finds a way to de-politicize its market day reporting and brings more balanced people like Steve Leisman and Julia Boorstin and the increasingly marginalized Erin Burnett back into prominence.

Days of Consequence

We are approaching a pivotal time in the US financial markets, where things that have gone before will be forgotten and the future will become more clear.

Between April 27 ans May 4 — the time of a long road trip in the new baseball season — we will learn the following;
–1: Third quarter 09 GDP initial estimate;
–2; Federal Reserve interest rate decision and economic outloook;
–3: Chrysler bankruptcy, merger or both;
–4: Bank stress test results — first the leaks and then the real thing;
–5: April unemployment.

The key dates are Thursday, April 30 for items 1, 2 and 3, and Friday May 4 for items 4 and 5. But the dates are not nearly so important as the numbers and the directions to the economy and national policy that will be revealed.

And the market action may be more volatile and frantic in the days immediately preceding and following the official announcements.

What will be the difference between good results for the markets and bad one– or as the Las Vegas traders might say, what is the “over-under”?

(1) On the Q1 GDP: bearing in mind that the first estimate reflects merely an educted guess about the March contribution, any number “less” than a negative 5% (ie, -4.7%) would probably be considered a “win” for the economy, and a negative 6% or worse would doubtless be viewed negatively. Here is definitely a case where “lesss is more” — so let’s go with -5% as the tipping point.

(2) The Fed is surely going to leave interest rates unchanged, so the swing issue is how they will characterize the economy. Will the statement cite anything positive about the housing, credit or consumer markets (forget anything positive about the job market for now)? Noting the very recent drop in new home inventory would be good for starters. For once, the Fed’s statement will come after the GDP estimate is released earlier that morning, and they can craft their post-meeting words acordingly. Our bet — some reference to the Fed’s continuing commitment to do “whatever it takes” to restore the economy to health while inflation risks remain subdued.

(3) Chrysler: many are betting on a bankruptcy filing before Thursday — it could even be a “trial ballon” of sorts to scare the wits our of GM’s unsecured creditors and unions. Chrysler’s creditors are in the main secured, so they may even figure to fare better in a bankruptcy, even if their TARP-lender friends at the Us Treasury, which is also trying to resolve Chrysler, disagree. The US Government would seem to have more conflicts of interest in this situation than a rating agency back in the old days (say, 2006). But the truth is that the secured creditors are in the drivers seat here more so than Fiat or Geithner, so a deal will have to be made because the Treasury will not risk pulling their TARP out from under them or exercizing its inchoate equity voting rights to the detriment of other shareholders’ best interests (although that apparently was not the case last December with Bank of America and Merrill Lynch). Bet on a structured dismemberment of our generation’s Studebaker, with Fiat getting a reasonalby good deal.

(4) Stress test results are best kept between you and your cardiologist, but these results are going to be shared with the victims’ (oops, patients’) creditors. This would be like your primary health insuance carrier having a direct feed from you EKG and adjusting your premium rates accordingly. Since no one expects that any bank fingered for having serious capital adequacy problems would ever be able to raise it in the public or private markets, look for a couple of forced dismemberments or forced marriages (somewhat like Bank of America/Merrill, but without the subterfuge, since the results would be thoroughly disclosed). And some bank heads will roll in the process (the over-under is 1.5, like an NFL point-spread).

(5): Unemployment above another 600,000 for the month would be a clear negative to the markets, and less than 500,000 something of a positive, so let’s go with this range as the margin of the moment for the markets by next Friday, if all this has not been drowned out by the latest swine flu news — one enemy we can all agree on how to fight.

Stressing the Stress Test — Wedding Bells in the Offing?

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

When you or I take a stress test on the treadmill, the results of this “annual physical” routine are between you and me and our cardiologist. But if we need open heart surgery and a quadruple bypass, sooner or later somebody is going to know that we’re not fit for the annual corporate  challenge race. This is the dilemma some are now raising about the Fed’s “stress test” for the 19 largest financial institutions in the US.

While Federal officials have been at pains to point out that it’s not a “pass-fail” exam, still the intention is to give those banks that need more capital to handle the projected “stress” six months to find it and if not, then force them to take Federal money — all to accomplish the goal of not allowing any of these institutions to fail.

Some commentators believe that some of these institutions should indeed be allowed to fail, so for them the idea of disclosing stress test results should make elemental sense; the test will separate those out who might wind up like, say, Lehman or Bear Stearns, without additional capital, and the market will react accordingly, trash their stock, pull their credit, and low and behold, they will fail.

But Congress has yet to enact the new legislation to provide for an “orderly windup” of one of these gigantic holding companies , which do not fit within the existing FDIC “takeover and close down” structure: thus the Government is opting to provide for those at the bottom of the stress test pile with a six month grace period to put their balance sheets right by raising more equity capital.

But how in the world can they raise capital once the capital markets know how low they rank on the stress test? Lehman and Bear couldn’t raise capital when their problems were only rumors; what will happen to institutions where the rumors are confirmed by the US Government? They probably will not be able to raise even  their usual overnight operating funding, much less additional equity capital.

It would seem that the Government then will have no choice but to come up with the additional capital itself  — right now, not six months from now —  since it has no “orderly wind-up” tools in place as yet, and it has committed not to let these institutions fail and not to ‘nationalize’ them either. But it only has between $100 and $140 billion (depending on who estimates it) in TARP money at its disposal, which may not be nearly enough (consider that Citigroup already has $50 billion, which it is not about to return to Uncle Sam any time soon).

Something is missing from this picture. The issue cannot be resolved by keeping the stress tests results secret, now that the cat is out of the bag. Could it be that the stress test scenario will become a stalking horse for some “forced marriages” in the financial sector? Is it the case that the Chrysler-FIAT negotiations going on this week and next are the forerunner of what will come to pass after we know which financial institutions need some sort of “bypass” surgery? And if so, do the merged entities become yet another version of “too big to fail”?

Geithner

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

OK: the financial markets seem to want a Patton or a Grant for the War on Recession; and for a long time they have viewed Secretary of the Treasury Tim Geithner more like Lincoln’s famous young General McClellan — brightest guy in the Army, but he couldn’t bring himself to battle, just kept circling.

Now perhaps there is another analogy at work. Sure, Geithner has a “staff guy” background. But so did another famous General, who had an equally complex battle to engage. Dwight Eisenhower was famously dissed by his former superior, Douglas MacArthur, as “the best clerk I ever had.” But what Ike had, besides a winning grin, was a mental toughness (needed to deal with Churchill’s monumental ego and equally large strategic flaws), tenacity, and the capacity to get his arms around the whole problem and drive to a comprehensive  solution.

Could it be that in this moment of need, President Obama has found his financial General Eisenhower in Mr. Geithner? No one watching his testimony this week before the Congress could doubt his intelligence, dedication, toughness and capacity to see the whole chessboard and calibrate his moves accordingly. And, like Ike, the Secretary seems to be able to learn from his mistakes — a capacity heretofore notably lacking in senior Government officials.

Financial Dialysis

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Citigroup just got the cliff notes for the stress test.

While Bernanke may say the test is not “pass/fail”, the financial markets think otherwise, and Citi was heading into the finals with a D- minus average, at least until this morning.

The capital infusion engineered by the Government (and still subject to the actions of preferred shareholders, who are being effectively crammed into common by the terms announced today), will operate as a cushion against the “worst case scenario” assumptions being used to redetermine Citi’s ability to survive further downturns in the value of its toxic assets.

Effectively, Citi is on financial dialysis provided by the US taxpayers. Why is it in their interest to do so — as they have also already done with AIG?

The fundamental reason has not really been stated by either the Fed Chairman or the Obama Administration — perhaps because that reason may be even more galling to taxpayers than what has been said publicly. Both Citi and AIG are core players in the globalized financial marketplace, intimately linked with the operations of foreign central banks (many of whose Chairs are Citi alumni) — and it is these banks who control the relative-value fate of the US dollar. For them, the stability of Citi is more important than a few more trillions in the official US deficit.

When Treasury Secretary Geithner says he’s for a stong dollar, he really does mean it in the worst way.  If he and the rest of our financial industry overseers were to let Citi go, or directly nationalize its bank subsidiary, like so many cable TV commentators urge — they apparently think they have the chops to be Treasury Secretary because they read financial news –  our distinguished lenders across the globe could come down with a very bad case of cold feet when it comes to holding US dollars.

In that circumstance, the Fed would be forced to buy US Treasuries by the bushel just to keep mortgage rates at something below stratospheric levels.

As Obama has said about this crisis, “it’s all connected”. Just be sure we connect ALL the dots — fundamentally, this calamity is about a  margin call on America from our financial landlords abroad, so we have some things that are pretty ugly EXCEPT when compared with the alternatives. Not everyone on dialysis is a zombie — many indeed live to a ripe old age (or can even hide out in the hills of Pakistan). Citi should be so lucky!

Don’t Quit on Your Country

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

Professor Obama held us after class tonight with a candid and confident, tutorial on the future with a textbook focus on clearly-articulated understood forward priorities: energy independence; health care reform; educational opportunity; and repaying our debts. But the emotional heart of the President’s first address to Congress was clearly the symbolic call to young men and women in high school not to quit on themselves or their country by dropping out.

The message to the rest of America – younger and older; parents and CEO’s; teachers and technicians; Wall Street traders and cable commentators; bankers and bricklayers – was unmistakable: the future is ours if only we’ll
take responsibility for it.

The politics of the speech will sort out in due time and course; the precise words of the speech will fade in memory; but the music of the speech was intended to resonate for a while longer.

The President sought to explain to Americans how Government has a central role to play in getting us out of the economic hole we have dug for ourselves, especially in the case of the banking system. But there was an equivalent call for personal responsibility, especially for fathers and mothers. And there was a call for common sacrifice of pet projects by both Democrats and Republicans, and by the White House itself. The tests will come soon enough in the budget negotiations – to be followed quickly by debate on health care and the future of Social Security.

The Republican response sounded like it had been recorded before the President’s speech; it was noteworthy to hear Governor Jindal complain about a stimulus package passed without being read, as he responded to a speech he obviously hadn’t read (or if he did, he obviously plagiarized). Obama will be happy enough for Jindal’s modest echo of his praise of America’s potential.

It will be interesting to see if CNBC will again attempt to trash this articulation of Administration policy as insufficiently detailed to please the derivative traders that network has come to represent. This was not a speech for Wall Street but for Main Street, and Main Street will understand it: the President is being “doctor beat the recession” - his audience will understand that. Except for our financial institutions, America is on its way out of intensive care and on its way to the “recovery room”. As for the banks, it will take a while, but at least it looks like the “stress test” from this doctor will be serious business, and that there may be some banks put on Federal dialysis in the form of  common equity.

Chairman Bernanke of the Fed indeed earlier said that the stress test is not “pass/fail” – any more than the traditional annual treadmill cardiogram simply concludes that if you’ve got cardiovascular disease,   you’re going to die soon! The question is what does the test diagnose and prescribe: a pill, a bypass, or the paddles. Different banks will get different medicines.

 

 

Just Pass Me the Damn Bill!

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.  

 It was Keyshawn Johnson, then of the New York Jets, who titled his not so famous book very similarly to the above.  President Obama may have better luck than Keyshawn, who is now in broadcasting, not on nay active roster. But to get there, the President, who seems quick to own up to his mistakes, needs to reposture his approach, especially with respect to BOTH the far left Democrats and the far right Republicans who are each trying to see if this new guy can be rolled.

 We know the Democrats game — since the stimulus bill gets around the “pay-as-you-go” formula they themselves insisted on, the House loaded the bill up with every pet Democratic project whether stimulative or not, to get them in under the tent: wholesale earmarks, rather than retail, but still a huge burden for their new leader in the White House.

Why? Becasuse they handed the demoralized and defeated Republicans an issue and a a weapon with which to beat Obama about the head — “business as usual”. Veterans of the hypocrisy game suddenly were able to credibly (if not quite fairly) accuse Obama of the same sin — although it wasn’t really his bill anymore, but some guy from Wisconsin named David Obey who wasn’t even on the ballot in 49 other States in November.

So it was a mistake for the President to let the House Committee chairs and Nancy Pelosi write his bill. Now he must use the moderation gang in the Senate to get back some measure of control of the package, and pull out all the stops to get back in control of the debate.

Suggestion: If John McCain and Lindsey Graham want to filibuster the bill, “bring it on”. The public won’t stand for it, and the Republican right knows it. Forget about pleasing the Cable TV folks — they just want to keep the election going because it appears to help ratings. Go right to the people — even Joe the Plumber — and remember the great phrase from the election campaign:  “Enough already!”

Ringfence the Financial Trash

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

One way or another  — a governmental “bad bank” to buy toxic mortgage and other asset-backed financial assets and get them off US banks books, or governmental guarantees against certain levels of excess loss on such assets effectively separating them from the rest of the banks’ balance sheets — the Us needs to act quickly and decisively at the heart of the financial and economic crisis. No time for blame, or who didn’t do what, or how impossible it seems to fairly price these assets or calculate the risk premium on an insurance package. Pick a number!

Maybe the number should just be whatever the Congress and White House decide to put to the program overall — since there is only one ‘bidder’, let the bidder set the price. pouring money into bank equity, which had only a short-term palliative effect, has clearly not been a good deal for the taxpayer, and it will henceforth come with so many stings as to be relatively useless equity for the banks.

One way or another, we need a ‘”Yucca Mountain” for the toxic waste to let normal financial processes begin to take hold; ringfencing these assets either by a national “bad bank” or a national balance sheet insurance scheme is a better solution than the three alternative: outright nationalization of the leading US banks (which we are creeping towards like sleepwalkers in the Fun House); doing nothing and letting the chips fall where they may (isn’t that where we came in, with Lehman Brothers); or waiting for “private capital” to step up (so far, no one has followed Buffett’s lead).