Facebook's IPO - What to do?

Will 'irrational exuberance' drive up the price of Facebook shares at its IPO only to fall back soon after? Many rational folks caution this may be the case, but I'm betting many of FB's 900 million users will want a piece of the action on opening day. I'm not one of them.

From The Economist: "Investors who buy shares in the IPO will also have to accept that Mr Zuckerberg will continue to control more than 50% of the voting rights. “One person owning so much of a potential blue-chip company is more or less unheard of,” says Debarshi Nandy, a professor at Brandeis International Business School. Other tech firms, such as Google, have flourished under the tight control of small groups of founders, and Mr Zuckerberg shows every sign of maturing into an exceptional technology leader. But if something were to go badly wrong at Facebook in future, its shareholders will be able to do little more than give him a big thumbs down."

Banks Build Contingencies for Euro Zone Breakup - NYTimes.com

Markets rule, not Governments!

 "On Friday, Standard & Poor’s downgraded Belgium’s credit standing to AA from AA+, saying it might not be able to cut its towering debt load any time soon. Ratings agencies this week cautioned that France could lose its AAA rating if the crisis grew. On Thursday, agencies lowered the ratings of Portugal and Hungary to junk.
While European leaders still say there is no need to draw up a Plan B, some of the world’s biggest banks, and their supervisors, are doing just that."

'via Blog this'

The Affordable Housing Scam - Reason Magazine

The Affordable Housing Scam - Reason Magazine:

John McClaughry's excellent review of the recent book, Reckless Endangerment, provides a realistic appraisal of the leaders, groups and  and policies that moved the appealing notion of expanding home ownership as a part of the American Dream to the near-collapse of the banking system and the economy. This is well worth reading for a thumbnail sketch of how the mess unfolded. Good work, John.

 "The thesis of Reckless Endangerment is simple: In a rush to orchestrate affordable home ownership—and generate enormous profits—politicians, government-sponsored enterprises, pusillanimous regulators, greedy mortgage brokers, and profit-chasing Wall Street investment bankers combined to drive the American economy into its worst crisis in 70 years, saddling taxpayers with trillions of dollars of debt and leaving the financial landscape littered with the wreckage of ruined lenders, borrowers, and taxpayers."

'via Blog this'

John Fund: The Obama-Pelosi Lame Duck Strategy - WSJ.com

John Fund: The Obama-Pelosi Lame Duck Strategy - WSJ.com

Now that the din of the World Cup vuvuzelas have been silenced, we are hearing and reading about another obnoxious blast concerning proposed actions by a lame-duck Congress. John Fund's column is one of many opinion pieces about the issues that TeamObama may try to push through Congress in the wake of a republican upset of control of the House of Representatives in the November elections.

Some of the the issues that John Fund and others allege might be on the lame-duck table that TeamObama and Democrat candidates do not want to debate on the campaign trail leading up to this fall's elections:

• "card check"—the measure to curb secret-ballot union elections

• Senate ratification of the New Start nuclear treaty

• a federally mandated universal voter registration system to override state laws

• a budget resolution to lock in increased agency spending

• lots of pork for members of Congress likely not returning

• onerous carbon tax and climate change regulation

Coincidentally, the Business Roundtable and the National Chamber of Commerce including some Obama allies have gone public opposing TeamObama's increased anti-business regulatory burden that they argue add billions to the cost of doing business and creates a dampened climate for economic growth in the face of unemployment.

Here's the conclusion of a 54-page letter/report to TeamObama (letter to Peter Orszag):

We believe that a new, comprehensive assessment of federal policies and regulations is fundamental to the U.S. economy regaining its competitive strength. Regulators should assess the financial impact of individual and collective mandates, remove existing mandates that have become redundant and increase efficiency through market competition. They should also establish a system for creating new regulations that do not impede private‐sector investment and job creation.
At the same time, the government must reduce spending to manage down deficit and debt. The current levels of U.S. debt, as well as those required to finance the forecast deficits, will crowd out private capital. If less capital is available for corporate borrowers, it will retard future growth and investment, erode the value of the U.S. dollar, accelerate inflation and, eventually, reduce consumer spending power.
Economic recovery must be lead by the private sector, both large and small, if we are going to create jobs and reduce the unemployment rate. In assessing all regulations, the goal should be to reduce uncertainty, fear and overall cost impact while creating a regulatory system that is business‐friendly, cost‐effective, and encourages efficiency.

Obviously, the national business community fears the same possibility. Fortunately, they seem to have gotten TeamObama's attention.

Here's a brief video excerpt of a recent speech by Ivan Seidenberg, Chairman of the NBR, to the Economic Club of Washington DC.





We should contact our Congressmen and Senators advising against any attempt to push through such controversial legislation/regulation using such a naked abuse of power. I for one will vote against my Senator and Representative if they support a lame-duck session for this purpose.

Many Will Make Money From the Gulf Disaster

With adversity there is always opportunity in a reasonably free global marketplace for energy and related services.

While you might not want to own BP stock or Transocean shares right now, this fellow offers some advice for investors about companies and sectors that may well benefit from the Gulf mess and the reasons why.

David Brooks on Greed and Stupidity - NYTimes.com

David Brooks summarizes the two dominant views of what caused the financial meltdown. Read his full analysis to understand these two schools of thought.

I don't think its as simple as Brooks describes. There are many sub-themes playing in this tragic opera. Greed may not only be about money. Power and the desire of bankers, lawyers, and Congressional and Executive branch people to 'hold sway' and be 'in charge' is also at work. Remember, these are people with massive egos that need stroking.

The greed and stupidity jingles also played at the bottom of the scale with stupid home buyers unable to afford the ridiculous mortgage terms offered by unscrupulous brokers that played on this stupidity.

For years our culture has been infused with the background hum that borrowing is better than saving and many have bought into the credit culture. Now they struggle with crushing debt. Some argue that the savings mentality that has come into vogue in this recession will lengthen it. Consumer spending is what's needed. Humbug! What's needed is personal responsibility and accountability for one's actions. Savings is one action that instills that trait. We need it for the long-haul health of our society and culture

This debacle is much more than a two-note song. I am convinced that Government has a very important role to play to prevent the country and the world from collapsing into a Depression. Nevertheless, we need to exert great caution to avoid undermining the market system on which representative democracy rests. We must be extra careful that we do not manipulate our flawed system of commerce into one that is worse.

"The greed narrative leads to the conclusion that government should aggressively restructure the financial sector. The stupidity narrative is suspicious of that sort of radicalism. We’d just be trading the hubris of Wall Street for the hubris of Washington. The stupidity narrative suggests we should preserve the essential market structures, but make them more transparent, straightforward and comprehensible. Instead of rushing off to nationalize the banks, we should nurture and recapitalize what’s left of functioning markets.

Both schools agree on one thing, however. Both believe that banks are too big. Both narratives suggest we should return to the day when banks were focused institutions — when savings banks, insurance companies, brokerages and investment banks lived separate lives."

Op-Ed Columnist - Greed and Stupidity - NYTimes.com

Response to an Email from a Friend

Our government exists on this basic premise: ".. in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity..."

Inherent in this ideal is the expectation that people will be reasonably free to conduct commerce, business and trade to enrich themselves in order to participate in and benefit from the framework of government created under the Constitution.

Certainly much has changed with respect to commerce and government in the intervening centuries, but one thing has not changed. That constant is the nature of Man.

While Man is capable of noble thoughts and deeds, our basic nature is inherently sinful, selfish, and greedy. Else why do we need laws to regulate and punish errant behavior and protect us from each other?  Laws are necessary to control the limits of greed and other destructive behaviors carried to extremes by some.
As long as we expect men and women to provide for their personal and family well-being and to create wages and wealth to be taxed for the 'general welfare and 'common defense,' the inherent traits of 'selfishness and greed' are a far more effective stimulus for individuals than any government decree or general prohibition.

I don't want my government prescribing how I should earn my living, regulating how much money I should earn, how much or how little wealth I can own or what business I can engage in. A framework of laws and sensible regulation for the common good, yes, but our Founders wisely recognized the inherent nature of man and intended that it flourish within a system of necessary  laws and common sense. This is the essence of freedom and an appeal to, but no guarantee of, nobler motives.

Yet because the interconnected systems of banking, finance and commerce have become so entwined and interconnected in this digital age, we are in uncharted territory. This calamitous complexity certainly could not have been envisioned by our Founders, perhaps not even by Mr. Friedman.

To avoid collapse, intervention by government is necessary, but we should recognize they are only human, too, and none of them have been down this road before. To some degree, they are winging it.

I'm not particularly an Obama fan, primarily because of his inexperience and understandable lack of wisdom. Perhaps he will mature in office. I am deeply concerned that 'team Obama' intends to implant an ideological agenda in our country disguised as an economic recovery plan and likely to spend ourselves into servitude to crushing debt and rampant inflation resulting in the country's rapid economic demise.

Op-Ed Columnist - An Economy of Faith and Trust - NYTimes.com

Op-Ed Columnist - An Economy of Faith and Trust - NYTimes.com

As clever as Brooks is, he fails to mention at least two basic realities that affect how people react to choices.

One is the profound influence of our world of instant communications in which information and money move at nearly the speed of light. In this world, reflective, rational decision making is dramatically altered. Market and economic theories were predicated on slower, more contemplative mental processes. That is not today's reality.

The other key factor is greed. This human trait has always been present, of course, but it has been set loose in markets and financial systems by a not-so-slow erosion of society's morals. "Do your own thing."

His basic point, though, that the mechanistic views of politicians and political ideologies built on outmoded theory are unlikely to help much in the economic recovery. This begs the question: Do we have enough faith to borrow and spend again or are we in a long period of conserve and save? Or the more basic question may be can we realistically grow ourselves out of this recession?

David Brooks on the Leadership Meltdown

Op-Ed Columnist - Revolt of the Nihilists - Op-Ed

David Brooks is as frustrated as the rest of us that we find ourselves in this painful fiscal crisis. The credit markets are not operating because the basics of credit and risk have been ignored by the financial titans. Now they have no confidence and no solutions outside of massive government intervention to right their balance sheets. Brooks is not right in all respects, but this nugget should be heeded by people who consider themselves leaders (Many in Washington's leadership positions are anything but.).

We’re living in an age when a vast excess of capital sloshes around the world fueling cycles of bubble and bust. When the capital floods into a sector or economy, it washes away sober business practices, and habits of discipline and self-denial. Then the money managers panic and it sloshes out, punishing the just and unjust alike.

What we need in this situation is authority. Not heavy-handed government regulation, but the steady and powerful hand of some public institutions that can guard against the corrupting influences of sloppy money and then prevent destructive contagions when the credit dries up.

The Congressional plan was nobody’s darling, but it was an effort to assert some authority. It was an effort to alter the psychology of the markets. People don’t trust the banks; the bankers don’t trust each other. It was an effort to address the crisis of authority in Washington. At least it might have stabilized the situation so fundamental reforms of the world’s financial architecture could be undertaken later.

A Professor and a Banker Bury Old Dogma on Markets - NYTimes.com

A Professor and a Banker Bury Old Dogma on Markets - NYTimes.com

Worth a read for a description of Bernanke's and Paulson's actions, perosnalities and response to the crisis in the capital markets and unfolding events last week. The ~$700 billion insertion of taxpayer dollars in an attempt to provide liquidity and stability is a monumental step. There seemed no other choice.

Now, what will the Congress do?

An excerpt:

"Befitting their roles and personalities, Mr. Paulson has become the public face of their team — he plans to appear on four Sunday talk shows — while the less visible Mr. Bernanke provides the historical underpinnings for their strategy.

Along the way, they have cast aside the administration’s long-held views about regulation and government involvement in private business, even reversing decisions over the space of 24 hours and justifying them as practical solutions to dire threats.

“There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told colleagues last week, according to one meeting participant.

The improvisational nature of their effort has turned President Bush and Congressional Democrats into virtual bystanders, sometimes uncertain about what comes next and left to wonder about the new power dynamics in the capital. Seemingly every time lawmakers tried to get a handle on what was happening and what role they might play with elections around the corner, Mr. Paulson and Mr. Bernanke would show up again on Capitol Hill for another evening meeting with another surprise development."

Op-Ed Columnist - The Post-Lehman World - Op-Ed - NYTimes.com

Op-Ed Columnist - The Post-Lehman World - Op-Ed - NYTimes.com:

David Brooks, ever the sage, speaks truth to panic and calls the shots correctly, particularly his parenthetical comment below, in discussing regulation.

"We’d need regulators who could spot a bubble and squelch a boom just when things seem to be going good, who can scare away foreign investment and who could over-rule popularity-mongering presidents. (The statements by the two candidates this week have been moronic.)

To sum it all up, this supposed new era of federal activism is going to confront some old problems: the lack of information available to government planners, the inability to keep up with or control complex economic systems, the fact that political considerations invariably distort the best laid plans."

I claim no exceptional financial expertise or insight, but an out-of-control, greed and fear driven financial system does not serve our world and country well. A meltdown would be even worse. Neither the President nor Presidential candidates personally have a clue about the intricacies of this mess. Congressional leaders seem equally clueless. Should we expect them to know more?

In any event, Treasury Secretary Paulson and the Fed's Ben Bernanke seem to understand the vast financial morass and its dire implications and are willing to act boldly to salvage it.

When the dust settles, the boards of directors of these failed firms and the chief executives should be forced to suffer financial pain and not be rewarded for this mess. I would also like to know how the curricula of the nation's top business schools will be revamped to teach tomorrow's business leaders how to act differently.

More importantly, I want Congress to tell us how they will revamp their profligate spending habits in order to afford the massive increase in debt and debt service created by this commitment of up to a trillion (Can you say TRILLION?) dollars for bailout services.

Worst Crisis Since '30s, With No End Yet in Sight - WSJ.com

Worst Crisis Since '30s, With No End Yet in Sight - WSJ.com

The WSJ analyzes the problem as the financial markets rock and roll. This is not a pretty picture and most people think it will get worse before stabilizing. As people cast about for villains and point fingers of blame, one name seems to be missing: Alan Greenspan.

He  was the man in charge of the huge increase in borrowing enabled by the Fed's providing easy credit during the years leading up to this deleveraging.

I wonder what's being taught this week is the business schools of our major universities. Perhaps the previous teaching about 'complex financial instruments'  is tempered with some basics such as 'understand your assets and value them properly.

"Fed and Treasury officials have identified the disease. It's called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can't pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.

At least three things need to happen to bring the deleveraging process to an end, and they're hard to do at once. Financial institutions and others need to fess up to their mistakes by selling or writing down the value of distressed assets they bought with borrowed money. They need to pay off debt. Finally, they need to rebuild their capital cushions, which have been eroded by losses on those distressed assets."

Worst Crisis Since '30s, With No End Yet in Sight - WSJ.com

How others assess the economy - Los Angeles Times

Enuf said!

How others assess the economy

March 11, 2008

What others say

The UCLA Anderson Forecast says the economy will avoid recession. Here's what other prominent observers have said on the topic.

* Warren E. Buffett, chief executive of Berkshire Hathaway Inc.: "By any common-sense definition, we are in a recession."

* Lawrence H. Summers, former U.S. Treasury secretary: "We are facing the most serious combination of macroeconomic and financial stresses that the U.S. has faced in a generation -- and possibly, much longer than that."

* Jack Welch, former General Electric Co. CEO: "If I had to bet a dollar or two, I'd bet we'll have a positive GDP in the first quarter, and the second quarter. But it certainly is a slowdown of enormous proportions from what we were experiencing."

* Donald H. Straszheim, vice chairman of Roth Capital Partners: "It's clear to me that the U.S. economy is in a recession."

* David Rosenberg, Merrill Lynch economist: "According to our analysis, this [recession] isn't even a forecast anymore, but is a present-day reality."
Research by Scott Wilson

How others assess the economy - Los Angeles Times

Overseas Investors Buy U.S. Holdings at a Record Pace - New York Times

Are you comfortable with the long-term consequences of globalization? More of America is owned by non-Americans, and this has increased recently as the big banks have sought overseas investments to shore up their balance sheets and increase their cash available after writing down so much bad debt.

Current new U.S. government debt is 75% owned by foreigners. Within 20 years America will be an 'also ran' country, economically. What will that mean for the radical Islamic terrorist fanatics who hate us so much? Will they also hate and attack other non-Islamic countries who have prospered and are secular as well?

If it's Western style secularism they hate, China, Korea, Singapore and Japan should be among their targets. Perhaps it's our financial strength and our military prowess they are eager to diminish by causing us to spend so much on security and securing our economy.

From the NY Times:

Graphic

A Flood of Investment

"For much of the world, the United States is now on sale at discount prices. With credit tight, unemployment growing and worries mounting about a potential recession, American business and government leaders are courting foreign money to keep the economy growing. Foreign investors are buying aggressively, taking advantage of American duress and a weak dollar to snap up what many see as bargains, while making inroads to the world’s largest market.

Last year, foreign investors poured a record $414 billion into securing stakes in American companies, factories and other properties through private deals and purchases of publicly traded stock, according to Thomson Financial, a research firm. That was up 90 percent from the previous year and more than double the average for the last decade. It amounted to more than one-fourth of all announced deals for the year, Thomson said."

Overseas Investors Buy U.S. Holdings at a Record Pace - New York Times

Not a Pretty Picture

The Economist writes a gloomy assessment for 2008. It's hard to fathom that rational, albeit greedy, people would loan these huge sums to others with shaky credit. If banking is regulated, should other financial enterprises and complex debt instruments also be bound by similar rules? I'd be the last to want a huge bureaucracy created to do this, but massive amounts of debt writedown, in the range of $200-300 billion by The Economist's and others' reckoning is way over the top.

Financiers and others seem to think little downside risk is possible in a growing global economy. Reality has proven them wrong. Is all this the result of the web-like interconnectedness of financing these days?

American banks Unhappy new year Economist.com

Microsoft Rolls Out Personal Health Records - New York Times

HealthVault is a Very Big Deal

This will take a little time to mature and all the privacy wonks will rant about trusting Microsoft (or any company) with important personal information, but I think momentum will build rapidly. It really is time for a rapid move to Electronic Health/Medical Records. If consumers push this option with their health care providers while Microsoft pulls the health care industry into it, we may have a very significant achievement. Meanwhile, a host of others are planning similar services. Uncharacteristically, Microsoft is first in this space. They must believe in a first mover advantage. Perhaps we are on an accelerated path where inertia will not rule.

The really big issue, though is standards. With the critical nature and broad uses of EHR, the standards issue looms very large and is not easy to resolve. Some industry and government groups are surely working on these issues, but I don't know if the process has matured. I doubt that Microsoft has a set of open standards for HealthVault.

Here's a good description of the problem from the Forbes article referenced below:

"There is no shortage of skeptics for a dozen reasons. "The concept behind it is dead on track, but it won't work very well" without a better way to integrate data from local doctors, predicts medical data guru Brent James, vice president for research at Utah's Intermountain Healthcare. The bottleneck, he says, is that there is no universal way to get blood test results, imaging scans and other basic data from thousands of local doctors and labs onto the Web.

"The intercommunications don't exist to get the data from where they now live into this central format and back out again to the physicians and nurses who would use them," James says."

In thinking about our health care conundrum (cost too high; quality not as good as it could be; private vs. public insurance; too many without coverage, etc.), I'm reminded of Milton Friedman's (a world-respected free market advocate and Nobel prize winning economist) answer to a question using health care in the U.S. as an example of the need for more market-based medicine.

Question: Is there an area here in the United States in which we have not been as aggressive as we should in promoting property rights and free markets?

Answer: Yes, in the field of medical care. We have a socialist-communist system of distributing medical care. Instead of letting people hire their own physicians and pay them, no one pays his or her own medical bills. Instead, there's a third party payment system. It is a communist system and it has a communist result. Despite this, we've had numerous miracles in medicine. From the discovery of penicillin, to new surgical techniques, to MRIs and CAT scans, the last 30 or 40 years have been a period of of miraculous change in medical science.

On the other hand, no one is happy: physicians don't like it; patients don't like it. Why? Because none of them are responsible for themselves. You no longer have a situation in which a patient chooses a physician, receives a service, gets charged, and pays for it. There is no direct relation between the patient and the physician. The physician is an employee of an insurance company or an employee of the government. Today a third party pays the bills. As a result no one who visits the doctor asks what the charge is going to be - somebody else is going to take care of that. The end result is third party payment and, worst of all, third party treatment.

Question: Following the recent expansion in prescription drug benefits and Medicare, what hope is there for a return to the free market in medical care?

Answer: It does seem that markets are on the defensive, but there is hope. The expansion of drug benefits was accompanied by the introduction of health savings accounts - HSAs. That's the one hopeful sign in the medical area, because it's a step in the direction of making people responsible for themselves and for their care. No one spends somebody else's money as carefully as he spends his own." *

HealthVault is a step in the direction of 'making people responsible for themselves.' I hope we can absorb this thinking, rather than trot down the gloomy path of 'socialized' medicine.


Update: 10/5/07

More here on HealthVault:

Microsoft: We’re good for your health by ZDNet's Mary Jo Foley -- Microsoft has been signaling its intentions to enter the health-records-management space for more than a year. On October 4, the company finally provided an official game plan of what it's readying on the health care software and services front.

Here is The Economist's take on the announcement.

Forbes has a piece on HealthVault, too.

*quote from Imprimis, a publication of Hillsdale College, July 2006 -Volume 35, Number 7