“Where’s the Beef?”

Remarks of President-Elect Barack Obama
As Prepared for Delivery
American Recovery and Reinvestment
Thursday, January 8, 2009

“We have to make tough choices and smart investments today so that as the economy recovers, the deficit starts to come down. We cannot have a solid recovery if our people and our businesses don’t have confidence that we’re getting our fiscal house in order. That’s why our goal is not to create a slew of new government programs, but a foundation for long-term economic growth.

“That also means an economic recovery plan that is free from earmarks and pet projects. I understand that every member of Congress has ideas on how to spend money. Many of these projects are worthy, and benefit local communities. But this emergency legislation must not be the vehicle for those aspirations. This must be a time when leaders in both parties put the urgent needs of our nation above our own narrow interests.

“Now, this recovery plan alone will not solve all the problems that led us into this crisis. We must also work with the same sense of urgency to stabilize and repair the financial system we all depend on. That means using our full arsenal of tools to get credit flowing again to families and business, while restoring confidence in our markets. It means launching a sweeping effort to address the foreclosure crisis so that we can keep responsible families in their homes. It means preventing the catastrophic failure of financial institutions whose collapse could endanger the entire economy, but only with maximum protections for taxpayers and a clear understanding that government support for any company is an extraordinary action that must come with significant restrictions on the firms that receive support. And it means reforming a weak and outdated regulatory system so that we can better withstand financial shocks and better protect consumers, investors, and businesses from the reckless greed and risk-taking that must never endanger our prosperity again.” (source: http://www.whitehouse.gov/agenda/economy/)

U.S. Department of Treasury
Washington, D.C.
January 26, 2009

“In the world we confront today, Treasury has to be, and Treasury will be, a source of bold initiative. We are at a moment of maximum challenge for our economy and for our country. And our agenda, Mr. President, is to move quickly to help you do what the country asked you to do: to launch the programs that will bring economic recovery sooner; to make our economy more productive and more just in the opportunities it provides our citizens; to restore trust in our financial system with fundamental reform; to make our tax system better at rewarding work and investment; to restore confidence in America’s economic leadership around the world.” (Source: http://www.whitehouse.gov/Secretary_Geithner_tightens_the_reins/)

Good Evening: The speeches above, along with many others given by both our President and our Treasury Secretary during the preceding weeks, set the stage for the type of change the Obama administration promised to bring to Washington, D.C. The stimulus plan was promised to be pork-free, and the initiative to overhaul the U.S. financial system was promised to be swift and bold. Today, less than a month after the inauguration of Barack Obama, his stimulus plan (which the Senate approved today) is larded down with the very pet projects and earmarks he promised wouldn’t fly. This pig of a bill now slips to a joint conference of the House and Senate for final disposition, and it looks nothing like what the President described back in January. Change it may not be, but investors were willing to forgive President Obama for being outflanked by Congress as long as his economic team delivered on the “bold initiative” promised by Secretary Geithner.

Unfortunately, Mr. Geithner’s plan — if it could be called that — fell well short of this mark. Rather than bold, the plan struck many as timid. Rather than an initiative bristling with details, Mr. Geithner’s announcement better resembled an outline. U.S. stocks, especially U.S. financial stocks, had rallied in recent days in the hopes that the Treasury Secretary’s vision for the financial system would at least offer clarity. The following reactions from two different market participants pretty much sums up the disappointment investors felt this morning:

“Everybody is disappointed in the lack of details,” said Diane Garnick, who helps oversee $354 billion as an investment strategist at Invesco Ltd. in New York. “They came out and said, ‘We want you to believe that we’re still working on this.’ Well, we knew that last night.” (source: Bloomberg article below)

“There’s still a lack of clarity,” Dan McMahon, director of equity trading at Raymond James Financial Inc. in St. Petersburg, Florida, said of Geithner’s proposal. “These are smart people and they’re supposed to have it figured out. We’ve been waiting all week and then he said nothing.” (source: Bloomberg article below)

Our capital markets wasted little time in registering their displeasure with the administration, and equities were aggressively sold once the news hit. The major averages sank almost all day and closed only just above the lows of the session. Financial names were hardest hit, and no index was left behind as the damage ranged from -4.2% (NASDAQ) to 5% (Dow Transports). Treasurys once again welcomed the type of flight to quality bid they haven’t received since before the 2008 holiday season. Prices rose and yields fell between 12 bps and 22 bps. The dollar also enjoyed a relative flight to quality as the dollar index rose 0.8%. Like stocks, though, commodity prices were drubbed. Precious metals (+2.5%) represented the only sector within the CRB that could manage a gain, while the CRB index itself posted a 2.5% loss. Interestingly, gold and the dollar continue to move in the same direction on most days, which is contrary to their historical relationship. This newfound correlation may be an aberration, but it may also signal (at least for now) that Mr. Market views both the dollar and gold as the currencies best suited for hiding from the current storm.

Twenty five years ago, Clara Peller uttered during a Wendy’s commercial what would soon become an iconic phrase. “Where’s the beef?” became more than just a tagline for Wendy’s; it became a catch-all phrase for any person or product that promised more than it delivered. Walter Mondale even used it during a primary debate with Gary Hart over the Colorado Senator’s “new ideas” platform and it helped secure for Mr. Mondale the Democratic presidential nomination in 1984. Over-promising and under-delivering (OPUD to the cognoscenti) may not have been born in 1984, but Clara Peller certainly popularized it. And, since 2007, Wall Street has embodied it.

President Barack Obama and his Treasury Secretary Geithner promised to bring change to Wall Street, but Mr. Geithner’s speech today instead brought OPUD to the corner of Wall and Broad. “Where’s the beef?” was the question on the minds of many investors who had hoped for details but received very few (for BAC-MER’s take, see below). Mr. Geithner’s defense in the face of these accusations amounted to roughly the following in testimony he gave today before the senate: “This is an enormously complex process, and we want to get it right before releasing all the details”. I think we can all identify with Mr. Geithner’s plight, since any government-based “solutions” will indeed be complex. But if a group of economics professors was asked to grade Mr. Geithner’s plan, such as it is, I’m guessing an overwhelming number of them would mark it “incomplete’.

It’s possible that investors are over-reacting by ditching equities and embracing Treasurys, but today’s market action is certainly understandable in light of all the build up prior to Mr. Geithner’s speech. And the anticipation was created, as can be seen in the public addresses that precede this comment, not by the media but by the administration itself. Given the mandate for change, the stimulus package and Mr. Geithner’s half-measures look all too familiar. To be sure, there are some aspects of Geithner’s “plan” that will help. The expansion of the TALF will be welcomed by those who toil in the world of asset-backed securities, and other helpful programs may yet emerge once the details finally become public.

Perhaps the best news of the day came from the New York State Lottery, which formally announced it would soon end its reliance on “safe Treasurys” in favor of riskier investment alternatives. If other large investors follow suit in deciding to seek risk, then credit spreads will undoubtedly narrow. The ironic twist, of course, is that an arm of one government (New York) is eschewing the securities of another (the U.S.), all while seeking a handout from Uncle Sam. At least this wholesome, return-seeking process is guided by market-based factors as opposed to political ones. Mr. Geithner and Mr. Obama are lucky to have such a fine example of how the public sector can be marshaled to invest in the private one. The new administration may not have instituted much in the way of change yet, but there is always hope they will one day show us the beef!

— Jack McHugh

Stocks Decline, Treasuries Gain on Skepticism Over Bank Rescue

Geithner Says ‘Comprehensive’ Bailout to Be Costly

New York Lottery Shuns Treasuries in Bid for Riskier Investment

A plan for a plan.pdf

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