Good Evening: The only truly meaningful news today came in the form of a delay in Treasury Secretary Geithner’s much anticipated speech as to how the Obama administration intends to engage the multiple problems known as the financial crisis of 2007-2009 (and counting). The early reaction by market participants was one of disappointment, and stocks broadly fell at today’s open. Upon further review, however, investors decided the delay was unworthy of the speculation it generated, and the capital markets settled in for what can only be described as a yawner of a day.
The major stock averages finished mixed, Treasurys finished mixed (though the yield curve did flatten), the dollar fell 0.5%, and the CRB index dropped a negligible 0.25%. The only market move worth noting was a fair-sized decline in precious metals. Gold and silver both dropped more than 2%, perhaps as recent longs fear that Mr. Geithner has somehow stumbled upon a form of financial alchemy that turns leaden mortgage assets into the investment equivalent of gold. Other than time and some forbearance, I very much doubt such a formula exists, but my view will not stop others from proclaiming the magic formula has been discovered.
Since there is little to opine about today, I thought I would attempt a light-hearted review of the poor financial choices available to policy makers as they tackle the credit crisis. This examination takes the form of one of modern society’s quirkier conversation games. Many call this game “…and death is NOT an option”. It refers to one person asking another to make a definitive choice from an unpalatable pair (or set) of possible circumstances. The person being given the choices MUST select one of the given possible answers and may not choose to invoke the ancient warrior credo of “death before dishonor” (hence the title of the game). “Owning an equal stake or either the Detroit Lions or Citigroup” is one of the better questions I’ve recently heard posed, and below is my attempt to bring this game to high finance. We shall hear tomorrow from Tim Geithner as to how the Obama administration has chosen from a poor decision set as they attempt to combat the credit crisis, and here are just some of the ones both they and the Fed have been forced to consider. There are others, and I encourage readers to come up ones that didn’t make this list of 10:
1. Liquidate bad debt (deflate — U.S. during the 1930’s); suspend the rules and then spend 15 stagnant years rolling bad debt (Japan during the 1990’s); or monetize bad debt by printing currency (inflate — modern day Zimbabwe)?
2. Directly give taxpayer money via the TARP to the idiotic bankers who brought us this mess, or directly give taxpayer money via the TARP to idiotic government bureaucrats and let them run the banks?
3. Have the Fed lower rates to zero and ask prudent savers to bail out reckless spenders, or have the Fed reward savers by keeping rates high while crushing the banks into dust?
4. Encourage the American people to save and pay them zero interest, or induce them to borrow and let them run up their charge cards even further while paying 20% interest?
5. Foster a weaker dollar that “helps” export-related industries but weakens our nation’s ability to finance increasing deficits, or push for a stronger currency that hampers corporate profitability and job growth but makes our ever-growing debt more attractive to foreign investors?
6. Hold on to fiat currencies that pay no interest, or hold on to the legacy currency (gold) that also pays no interest?
7. Having a strong and independent central bank that guards both its balance sheet and its credibility by refusing to touch toxic assets, or having a central bank that increasingly suborns itself to government policy and political expediency in an effort to stem a financial crisis?
8. Suspend mark-to-market accounting because today’s prices may be “artificially low”, or keep these rules intact because suspending the only discipline left in banking would lead to asset prices that are marked in a way that’s “artificially high”? (See Goldman Sachs CEO Lloyd Blankfein’s take below)
9. Do nothing and let Mr. Market take his sweet time revaluing toxic assets, or set up a “bad bank” that takes advice from some of the same firms that brought us our current mess, and then let this “bad bank” use taxpayer money to overpay for assets that will later be sold cheaply to funds run by former employees of the very firms that got us into this mess?
10. In this weekend’s edition of Barron’s, Alan Abelson had the following to say about restricting the bonus pay for banking executives:
“Now, as one who has long felt that “smart banker” is an oxymoron, we might be expected to gush happily that bankers, if they scrounge for money from the government, have to learn somehow to get along on half a million bucks a year. But, in fact, it worries us.
“Not because it is going to deprive the financial industry of uncanny and irreplaceable leadership (who else could have so cleverly contrived to make the sector what it is today?). No, the reason we are all for the fat cats keeping their bountiful bonuses and not being lured away by greener pastures is far more transcendent.
“What inspired this unwonted generosity on our part, we readily admit, was a letter in the New York Times which warned that, absent those bonuses, investment bankers and their ilk would be impelled to seek employment elsewhere. And, the writer asks, do we really want them building our houses, teaching our children or driving our cabs? We wholeheartedly agree: Obscene bonuses are a small price to pay to forefend such dread prospects.” (source: Barron’s article below)
Mr. Abelson’s point is more than just a humorous one. Who do we punish more, the bankers or our society, when we try to limit compensation of banking executives? Though the previous nine questions are meant to be rhetorical, this last one merits an answer and I will side with HCM’s Michael Lewitt in providing one. Mr. Lewitt has long maintained, and I agree, that far too much talent and brainpower have been induced to chase Wall Street bonuses in lieu of pursuing productive careers in industries that actually make the things that raise our long term standard of living. If more societal resources are allocated toward real engineering and away from the financial kind, then perhaps it will represent one of the silver linings generated by the very dark clouds still hovering over the financial world. Far from representing the death of modern finance, having bright people and newly minted MBAs flock to technology-related careers instead of ones on Wall Street would eventually breathe new life into our entire economy. Jack McHugh