The Magic Way

We enjoyed this deconstruction of the lastest Geithner plan for big banks like Citigroup and Bank of America from businessinsider.com founder Henry Blodget. Blodget’s post was an instructive and simple explanation of why Geithner’s plan is bunk.

The Geithner plan involves converting the government’s preferred shares, acquired in the first round of the bailout, into common shares. The manoeuvre  will boost an important yardstick of the banks’ financial health called Tangible Common Equity. The best part(and biggest selling point) of this plan is its cost, $0. Since the government already owns preferred shares, it can convert them for free.

Still, Wonk the Plank didn’t need to read Blodget’s excellent post to know something was very wrong with the secretary’s plan because we don’t believe in Magic Ways.

The streets here in DC are mostly a grid of letters and numbers, but once Wonk the Plank astonished Modern Domestic by showing her a shortcut down a diagonal street. She was so charmed by the discovery that she christened it “The Magic Way.”

So very magical!

So this is Geithner’s big plan, to tell us all there’s a Magic Way that we’ve all overlooked all these years to make Citigroup and the rest much stronger than they actually are. We feel like we have been repeating ourselves, but alas, to no avail. One more time: There is no Magic Way to help banks out that doesn’t involve decidedly unmagical pain for someone else. Changing mark-to-market accounting rules is not a Magic Way. Converting preferred shares into common is not a Magic Way. These are sideshows, not Magic Ways.

Wonk the Plank thinks it’s funny that most people, when it comes to personal finance, understand that there aren’t any Magic Ways. Those same people, though, who understand so clearly that they can’t pay $200 in bills if they only have $100 in the bank, don’t seem to realize that those same rules apply to big giant companies like General Motors and Bank of America, or even the U.S. government.

 Banks can’t be made more valuable just by pushing numbers around on a piece of paper. Anyone who tells you differently is vouching for the existence of a Magic Way.

R&D at AIG

With Congress mulling a confiscatory “Bonus Tax” that sounds like something straight out of Atlas Shrugged,they’ve summoned AIG interim CEO Edward Liddy to Capitol Hill to give ‘em the old razzle dazzle.

Liddy, he reminds us in an opinion piece in this morning’s Washington Post, joined AIG in September 2008 to try to clean up the mess there. His annual salary is $1, he reminds us. Oh, and he did he mention he only became CEO in September?

Meanwhile, Treasury Secretary Geithner promised to trim AIG’s $30 billion aid package by $165 million, the amount of the bonuses in question. We know Geithner is smart enough to know realize his recapture is just and sooth the nerves of the dullards who don’t understand that money is fungible. We wonder if it bugs the Secretary to engage in such an intellectually dishonest manoeuvre for the sake of politics and if it’s distracting him from the real work of fixing the economy.

Anyways, it promises to be a spectacle and you can bet Wonk the Plank will be tuning in.

CitiPlank Rescue

“I think part of what we’ve seen is confusion on the part of the market sometimes in terms of what the overall direction [of the rescue package] might be. And we want to make sure that we’re providing as much clarity as possible.”

-President-elect Barack Obama, Nov. 24, 2008.

It seems to Wonk the Plank that the latest bailout – Citigroup, this time – does the exact opposite. It admits a ray of hope to shareholders who should be staring into the abyss.

Previous interventions have preserved the solvency of the underlying institutions but crushed shareholders. Hank “Hammer” Paulson hammered them into dust. Not so the rescue of Citigroup.

The important part of the agreement is the government’s guarantee of Citigroup’s $306 billion in dodgy mortgage assets. In return for a mere $7 billion in preferred stock, the government will take 90% of any loss (and there will be plenty of losses) after Citigroup absorbs the first $29 billion.

The news has propelled Citigroup’s stock to a spectacular gain today…up more than 55% as we type this entry.

There now, that doesn't look so bad...

This time, the government has let shareholders keep Citigroup, unlike previous interventions at AIG, Freddie Mac and Fannie Mae.

An AIG shareholder, for example, who went to sleep on Tuesday, Sept. 16, 2008 woke up the next day to learn she owned 1/5th of what she had the day before. Overnight, the government had taken 80% of the company’s equity in exchange for an $85 billion loan with an interest rate that bordered on usurious. If that wasn’t harsh enough, AIG had to pay interest on the entire credit line whether it borrowed the money or not. The “juice would run,” as they say on the Sopranos, on the full amount.

At the time, Wonk the Plank applauded these “delighfully stiff” terms (though they were toned down in October).  Government takeovers should be extremely unattractive to shareholders and companies.

One week, or Wonk the Plank starts breaking things

Why is the latest bailout so troubling to Wonk the Plank? It suggests yet another twist to the government’s efforts to stabilize the markets. The key to stability, we think, is to eliminate the pie-in-the-sky mentality from company boardrooms. Once they understand that vast sums of money aren’t just going to rain down from heaven, they will be more inclined to make the difficult choices that will get them back on track.

So we are alarmed at the mixed signals the latest intervention sends to the markets. It’s a big step backward, all in the name of goosing err…calming…the stock market.

More and more we have been seeing pundits and even respectable news organizations attribute price movements in the Dow Jones Average as the market’s ebullience or dismay with the various policy options on the table. The “wisdom of the market” is not nearly so farsighted, we would caution.

The market is not applauding a prudent governmental solution to all that ails it. It didn’t rally because it saw the light at the end of the fiscal crisis tunnel. It is a simpler beast than that. It jumped because it heard the sweet squeak of the money spigot being turned on.

Ready, Fire, Aim!

Greenspan at Gethsemane

 Then Wonk the Plank told them, “This very night you will all fall away on account of me, for it is written:
   ” ‘I will strike the shepherd,
      and the sheep of the flock will be scattered.’ But after I have risen, I will go ahead of you into Recovery.”

 Greenspan replied, “Even if all others fall away on account of you, I never will.”

 ”I tell you the truth,” the Wonk the Plank answered, “this very night, before the rooster crows, you will disown the free market three times.”

 But Greenspan declared, “Even if I have to die, I will never disown the free markets.” And all the other market idealogues said the same.

 The teachers of the law and the elders had assembled at Congress to conduct hearings on oversight. But Greenspan followed at a distance, right up to the courtyard of the high priests. He entered and sat down with the guards to see the outcome.

 The chief priests and the whole Sanhedrin were looking for false evidence against the free market so that they could put it to death and embrace socialism. But they did not find any, though many false witnesses came forward.

 Now Greenspan was sitting out in the courtyard, and a servant girl came to him. “You also were a proponent of free markets,” she said.

 But Greenspan denied it before them all. “I don’t know what you’re talking about,” he said.

 Then he went out to the gateway, where Henry Waxman (D-Calif.) saw him and said to the people there, “This fellow here was another deregulator.”

 He denied it again, with an oath: “I swear I don’t know these subprime loans!”

 After a little while, those standing there went up to Greenspan and said, “Surely you are one of them, for your accent gives you away.”

 Then he began to call down curses on himself and he swore to them, “I tell you again, I don’t know these wretched derivatives!”

 Immediately a rooster crowed. Then Greenspan remembered the words Wonk the Plank had spoken: “Before the rooster crows, you will disown the free markets three times.” And he went outside and wept bitterly.

Yes, We Have No Bailouts

Yesterday, Wonk the Plank watched the House vote down the $700 million bailout while at work.

Later that afternoon, the powers that be summoned us to their office and told us that in such uncertain economic times, the company could no longer afford the luxury of having a Plank on staff we went about our regular business.

Afterwards, we hit the grocery store and found panic in the aisles. Hundreds of shoppers fought and snarled over non-perishable staples like bottled water, canned goods and other staples. The checkout line snaked around the bend into the frozen food aisle. A stampede nearly erupted when management tried to ration out bags of rice and bought the same Wonk food we buy every week.

When we tried to to pay for the groceries, we found our credit card was cut off by jittery lenders and we had to volunteer to bag groceries for an hour just to pay for our own we paid with our credit card and headed home.

Yes, Wonk the Plank has a 401(k) and other investments, and yes, they lost value yesterday. Yes, we could still be headed towards a recession.

But all the same, Wonk the Plank is delighted that this bailout failed.

Short Fuses

Boo. Hiss. That’s the sound of Wonk the Plank’s disapproval of Securities and Exchange Commission Chairman Christopher Cox for caving to political pressure, not even from the President, but from a presidential candidate.

On Friday, Cox’s SEC issued new rules banning short selling in some 800 financial stocks, just a day after being called out by John McCain for doing nothing and allowing speculators and hedge funds to turn the markets into a “casino.” McCain said he would fire Cox if he were president (though the campaign later backtracked when someone pointed out the President doesn’t have the right to ax SEC commissioners).

Last time we checked, the SEC’s mission was to ensure fair, orderly and efficient markets, not prevent stocks from going down. The agency’s job is to provide fair and transparent rules of engagement for investors, not pick winners and losers during a financial panic.

For his reactive and ill-considered ban on shorting financial stocks, we think Cox has shown himself less committed to fair, free markets and more committed to keeping his own job. Boo.

I’m John McCain And I Approved This Lie

The New York Times’ Paul Krugman wrote last week that “the McCain campaign keeps making assertions that anyone with an Internet connection can disprove in a minute, and repeating these assertions over and over again.” Enter  “Expensive Plans.” 

Even after being called out by Factcheck on the original spot, McCain recently unveiled a new radio version. We couldn’t locate a primary source, but here’s a link to Politico’s Ben Smith, where we found it.

“Barack Obama and congressional leaders want to raise income taxes on middle class Americans,” the ad says. Wrong. Obama’s plan, as disclosed, calls for broad middle class tax relief. “Middle class families will see their taxes cut – and no family making less than $250,000 will see their taxes increase,” Obama’s plan says.

It’s interesting contrast the language of the two ads. The older television spot says Obama plans “painful tax increases on working American families.” In the new spot, Obama wants, rather than plans, such increases, and the tax hikes affect middle class Americans, not working American families. The wording changes, we think, were made to avoid such an explicit contradiction by the facts. Progress, of a sort.

Privatized Losses, Socialized Profits

Today Barack Obama announced an “Emergency Economic Plan” to give working families $1000 each, fully funded by a windfall profits tax on big oil.

 

“Obama simply asks that big oil companies contribute a reasonable share of the windfall profits they receive from high oil prices over the next five years to pay for emergency assistance for families right now,” the proposal says.

 

Checks could be mailed as soon as this fall, the proposal says, and they could pay for higher gas prices or heating bills.

 

The plan is an unabashed transfer of wealth from oil companies to citizens, and we think that undermines some very basic property rights. 

 

We don’t think anyone should be able to simply appropriate money from a wealthier party, no matter how great the disparity.

 

It will be interesting to watch McCain’s response to the plan. Earlier in the campaign, Obama successfully neutralized McCain’s “gas tax holiday” on the grounds that it was a “gimmick” voters could see right through.

 

McCain’s best bet is to use a similar strategy and paint the Obama statement as pandering masquerading as policy (which it most assuredly is).  We just wonder if someone without Obama’s silver tongue can successfully make that nuanced case.