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Larry Doyle’s (LD’s) Dollars and Sense “Central Station”

By Larry Doyle on January 10, 2009 at 9:30 AM in Current Affairs

monte-carlo_train_station-f

***China is beginning to allow exporters to be paid in yuan and not U.S dollars given the volatility in our dollar. If this isn’t a potentially ominous development I do not know what is. If China ever started to sell their holdings of U.S Treasury securities, look out!!!

Read more on this story from China Daily,

http://www.chinadaily.com.cn/bizchina/2009-01/07/content_7373626.htm

As we chug along from Central Station, the ride got a little bumpy this week:

– the labor situation, highlighted by Friday’s unemployment report wasn’t a very pretty sight.

– there was a massive fraud that occurred in India

– in looking at Obama’s stimulus proposal, we saw a few surprises.

– there were more developments on Freddie and Fannie.

– Did you see the news about the proposed principal reduction program for mortgages nearing default?

There’s so much to talk about and there’s so little time during the week. So let’s catch up with whatever is on your mind.

Come on down to LD’s Dollars and Sense “Central Station” and get a jolt of financial wisdom and Wall Street insight. Grab a seat and settle down . . . you’re amongst friends here.

For our newer readers and followers, “Central Station” is a Q/A forum for all financial matters large and small. The only rules on this track are:

1. there are NO bad questions

2. I am not a professional financial planner. I am selling nothing but honest opinions!!! Your “conductor” worked on Wall Street for 23 years as a mortgage trader, salesman, and sales manager at First Boston, Bear Stearns, and JP Morgan Chase. I hope to make the current ride a little smoother for you!!!

We’ll try to make some sense out of the current economic madness and provide an insider’s look to the world of Wall Street.

Aaaaaaaaaall Aboard !!!

wodiej

thank you for the financial threads. I love trains btw so your references are right on.

Pat Buchannan had a rational analysis of Obama’s stimulus plan on World Net Daily. I have found out some interesting facts about past Presidents that I was totally misinformed about. Such as:

Was the country going into rececssion and interest rates and unemployment rising when Carter was President due to his failed policies or was it “Reaganomics”?

When Clinton was President, was the economic boom more attributed to Bush Sr or Clinton policies? Or was it due to a majority Republican congress?

Buchannan’s analysis tells us history is not always truthful. The New Deal was not such a great idea and created alot of debt but did not lower unemployment rates. WW II did.

Obama wants to spend money but not cut any. Obama wants to take from those who have and give to those who have not. While helping others is a American trademark, where do we draw the line with “God helps those who help themselves”? There is alot of truth in that. When people make excuses, blame others, blame their past, blame the dog next door….they may as well be running in place because they are not going to get anywhere. $500 stimulus checks are not going to create any jobs. Sometimes hard times is the only way people learn. This may be that time.

Me….I am prepared to weather the storm.

LD

Wodiej,

There is little doubt that people in this country are passionate about their politics. We can see that from the level of engagement in this past election. The internet has certainly accelarated this development.

IMO, the optimal approach to managing one’s finances is the optimal approach to managing our country. What do I mean by that?

Balance, diversity, proper risk management, fiscal disscipline within a portfolio that allocates capital wisely and where need be charitably.

When we lose track of these principles in the course of our personal and collective lives, I think we underperform. While our markets and country have become exceedingly focused on the short term, we neglect the building and development of our long term foundation. Everybody needs to be accountable.

Enough on that. In regard to the specifics, based upon my knowledge, our country experienced massive inflation coming out of the Carter administration and needed the discipline imposed by Reagan and Fed chairman Volcker to crush inflation. Remember in the early 80s inflation was running rampant and short term interest rates were upwards of 20%. Unemployment was north of 10%.

Under Clinton, our economy improved after the ’94 election when there was more of a balanced approach coming from Washington and greater fiscal discipline.

For me the key to our long term growth hinges on our education system. We currently rank in the high teens as far as academic performance amongst industrialized nations. We’re kidding ourselves if we think we will compete long term with that ranking.

I am all for helping people. I am also all for requiring people to be accountable and work to help themselves.

I keep coming back to those principles highlighted above.

Thanks for your thoughtful post!!

MrMike

Enough on that. In regard to the specifics, based upon my knowledge, our country experienced massive inflation coming out of the Carter administration and needed the discipline imposed by Reagan and Fed chairman Volcker to crush inflation. Remember in the early 80s inflation was running rampant and short term interest rates were upwards of 20%. Unemployment was north of 10%.

How much was due to the end of the Vietnam war and subsequent failures of defense contracting businesses and OPEC turning off the spigot?

Under Clinton, our economy improved after the ‘94 election when there was more of a balanced approach coming from Washington and greater fiscal discipline.

I’ve argued one of the reasons we did so well is investors knew the tax rates weren’t going to yo-yo up and down under Clinton. No cutting taxes to get votes then raising them to prevent the government from going broke.
As to Social Security, we have “illegal” aliens working here why dot document them and have them pay taxes? Medicare/caid was designed to fail because Bush didn’t want to have drug companies and providers give discounts.

wodiej

Since our government refuses to enforce immigration laws and deport the illegal aliens, then at least make them pay taxes. Get them all documented, registered. Then they will be covered by labor laws etc. Employers will then have to pay SS tax, unemployment tax, medicare tax and all kinds of other nice taxes on them. When employers can’t take advantage of them anymore, how quickly will they be out of work??

LD

Seems self-evident doesn’t it. What is the argument against this being enacted?

mountainaires

Unemployment isn’t 7.2%; it’s 13.5%. And, always remember: They’ll come back in another month and revise it upward. It’s their fave trick to fool the peasants, so they don’t march on Washington with their pitchforks.

Chart here:

http://3.bp.blogspot.com/_nSTO-vZpSgc/SWdtrPsxZNI/AAAAAAAAFLE/XzwSeAnKdiQ/s1600-h/table-a-12-2008-12.png

Analysis here:

http://globaleconomicanalysis.blogspot.com/2009/01/jobs-contract-12th-straight-month.html

Dawnelle

Life is but an illusion
albeit a stubborn one (Einstein paraphrased)

lol
LD

Mountainaires…Thanks for providing these links. It is interesting to see the different definitions of unemployed.

This reminds me of investors asking what the yield was for a certain investment and the response being “well, what yield do you need”.

We ALWAYS need to look behind the numbers.

mountainaires

So, what’s your thinking, LD? Is this a case of a rat jumping off a sinking ship?

They said the Titanic was too big to fail…

“Ruinis inminentibus musculi praemigrant:” When collapse is imminent, the little rodents flee.

[quote from Jesse's Cafe Americain]

Wall Street Journal
Rubin to Leave Citigroup
By DAVID ENRICH

Robert Rubin, the former Treasury secretary who has been sharply criticized over his role in the financial turmoil at Citigroup Inc., is leaving the bank.

Mr. Rubin is senior counselor and a director at the New York company, which has suffered $20 billion in losses over the past year and got a government bailout of at least $45 billion. Citigroup’s troubles cast an awkward spotlight on Mr. Rubin, who received $115 million in pay since 1999, excluding stock options.

Citi said in a statement that Mr. Rubin retired decided to retire as senior counselor effective Friday and decided not to stand for re-election as a director at the company’s next annual meeting.

LD

Mountainaires,

Rubin is a very proud man. I do not know what happened here but based on my experience and instinct I would envision the following:

1. he was pushed out the door or off the ship
2. this is an acknowledgment of the failed approach at Citi…
3. Citi badly needs more capital despite the $300 billion injected by Uncle Sam a month or so ago…

what are they going to do about that??

Citi is going to sell divisions to raise capital
4. Citi has announced that they are looking to sell their brokerage unit, Smith Barney. Specualtion is that Morgan stanley may buy it. What will MS pay for a division like that. A LOT less than they would have a few years ago.
5. Additionally, Citi will inevitably sellother units at discounted prices.

In summary, it is not outside the realm of possibilities that this institution ends up being nationalized much like has occurred with some banks in the UK.

Against this backdrop, do not expect access to credit to improve anytime soon. Credit is the fuel for growth. Thus I think our equity markets will run in place at best and more likely continue to move lower.

To add insult to injury, Rubin collected $100 million dollars during his tenure at Citi. What a travesty!!

Thanks for the prompt.

BARB

OBAMA PLANS CUT BACK ON SOCIAL SECURITY AND MEDICARE

http://www.nytimes.com/2009/01/08/us/politics/08obama.html?_r=1&th&emc=th

Speaking at a news conference in Washington, he provided no details of his approach to rein in Social Security and Medicare, which are projected to consume a growing share of government spending as the baby boom generation ages into retirement over the next two decades. But he said he would have more to say about the issue when he unveiled a budget next month.

Should he follow through with a serious effort to cut back the rates of growth of the two programs, he would be opening up a potentially risky battle that neither party has shown much stomach for. The programs have proved almost sacrosanct in political terms, even as they threaten to grow so large as to be unsustainable in the long run. President Bush failed in his effort to overhaul Social Security, and Medicare only grew larger during his administration with the addition of prescription drug coverage for retirees.

#######

I am fortunate not to have to depend on Social Security or Medicare…but millions do. Evidently it’s quite alright to bail out Wall Street, Banks…Fannie and Freddie…but there seems to be plans in the works to reduce the incomes of the most venerable elderly population in the US. The average monthly income from Social Security recipients is between $890 – S1109. So…what kind of “overhaul” is planned??? Meanwhile the MSM has finally estimated the cost of the wars in Iraq and Afghanistan is between 1.6 and 3.0 TRILLION DOLLARS…BUT…who’s counting.

LD

Barb….

We had an extensive discussion about Social Security specifically in one of our other rides from Central Station.

IMO, the government will eventually restrict or limit those available for Social Security and Medicare based on a measure of net worth. I would also not be surprised that the age when people become eligible to collect is extended given that the average age of our population is increasing.

wodiej

I would like to know who is eligible for SS besides seniors-there are others who can get it correct?

LD

Wodiej,

I honestly do not know the answer to this question.

Let’s reach out to some of our other riders. Can anybody offer any insights to this question?
LD

Wodiej….it appears that SS benefits can also be paid to those who are disabled and also for families who lose a spouse or parent.

That to me seems like a fair and charitable use of funds along the lines that I mentioned in my initial post.

Learn something new everyday.

MBC

Social Security is available for Retirement, Disability and Family Survivors. Medicare is available to those with straight Social Security and Social Security Disability.

I know folks may consider the drug companies and providers the “bad” guys, but I can tell you from direct experience, that approx. 2/3′s of patients using specialty pharmaceuticals are on Medicare or Medicaid. The reimbursement from these government payors is in many if not most cases, below cost. There is also a significant percentage of patients that have commercial insurance, but cannot afford their co-pays, co-insurance, out of pocket expenses, etc. Generous grants are available from the drug manufacturer’s (in addition to the federal rebates that are provided to the individual state Medicaid’s from the manufacturers).

wodiej

Instead of cutting benefits to seniors how about cutting benefits to all the lazy people in this country who have done nothing to deserve any help. I’m sick of the mooches. Drug and insurance companies should be ashamed.
MBC

Oh that’s just great. The 401K, the profits from the sale of our residence, the stocks, etc. have all been reduced to zip and now the pittance we were going to receive from SS may be reduced. Swell, can’t wait.
rolling_thunder

OBAMA PLANS CUT BACK ON SOCIAL SECURITY AND MEDICARE

We were out there going to assisted lving homes and warning the people about this. This is no suprise. They voted for Barry anyway.

Always Learning

Thank you, LD, for this engaging forum.

What are the new Freddie/Fannie developments that you referenced?

LD

Always Learning….

Thanks for the plug. In regard to Freddie and Fannie, it seems like a long time ago but it was just this past August/September when Paulson pushed for and implemented the massive injection of capital into these quasi-governemtn agenices. The question remained open as to how these agencies would be run going forward.

With Paulson and the entire Bush crowd leaving in ten days, it is no surprise that Hank is offerring his opinion on this F/F matter and I would think we will see more opinions on other fronts over the next ten days.

Paulson promoted the concept that F/F should be run as entities that strictly pool mortgages, securitize the pools, collect a guarantee fee of approximatly 40 basis points (.40%) for the guarantee of the principal and interest, and then sell the securities into the private secondary market.

In taking this approach they will be run very much like Ginne Mae (Government National Mortgage Association). They will cease and desist from running the massive ($1.5 trillion) internal portfolios.

What does this mean for mortgage rates? The private market will set mortgage rates based on the equilibrium created by demand for mortgages by borrowers and the demand for those mortgages by investors.

Why do I think those rates will actually move higher? As F/F are taken out of the “investing” equation which they had an advantage in through beneficial funding rates as quasi-government agencies, real private money will determine where they are willing to buy these mortgages. While mortgage rates may move up in this process it is actually MUCH healthier for the system as a whole because we will eliminate entities that had incentives that were not properly aligned, that is “private profit but social risk/loss” that was clearly evident with F/F.

Does this make sense?

Great question.

http://sonicninjakitty.wordpress.com Sonic Ninja Kitty

Dear LD,

Here’s a more micro question for you: since rates are down when should we refinance our house? We are thinking to do it next week but maybe we should wait until March. Thanks for any opinions you can give!

LD

Sonic…

I do know that JP Morgan Chase is currently offering 30 yr mortgages at 4.75%. That is obviously a great rate. Bank of America is offering mortgages at 5% or just lower than that.

While I do think that it may be prudent for people to pursue other “investment” opportunities vs prepaying a mortgage, I do think that now is a very opportune time to refinance.

The question obviously is whether mortgage rates will come down even further.

Based on my estimation the risk/return here is skewed to rates moving much higher vs much lower. While rates may come down another .25% or perhaps .50% it is not outside the realm of possibilities that they move higher than .25% or .50% from here. Thus, I think now is a great time.

A few other points.
1. You will need to show that the loan to value (LTV) is probably in the realm of 80% of what you are looking to borrow.
2. You will need to show that your credit rating is “excellent”.
3. I would shop around and put the banks in competition depending on other charges attached to the refinancing. It could very well be that charges and closing costs are higher at one bank despite a rate being lower.
4. I would also inquire as to the ability to refinance again without closing costs and fees in case rates do continue to move lower. What I mean by this is if rates come down to 4.25% can you refinance to that rate without incurring fees/charges again.

I would also check with your local credit union as we have seen and heard that they have mortgage money. Comparison shopping and keeping lenders honest should benefit you. Remember, ALL these institutions are in the business and want to make QUALITY loans.

Best of luck with the process.

Hope this helps.

rolling_thunder

Rates are likely to go higher. Refi now.

TeakwoodKite

Smith Barney is “talking” about selling a controlling interest to Morgan Stanley, Which would make it the largest firm of it’s kind in the world, on the ticker this am. I did not know Citi had acquired Smith Barney. This article state that Citi is “under increasing pressure” to monetize assests….

The worst financial crisis since the 1930s has recast rivals in the financial industry as merger partners and transformed the U.S. government into one of the biggest investors in Wall Street firms, including Morgan Stanley and Citigroup.

LD, if one of the issues of our current state of affairs is bailing out entities that are “too big to fail” is this a wise move? It would seem the long term reaction to current conditions would be to manage risk when it comes to economies of scale.

Might I get your take on the influx of islamic banking “models” as they relate to Western investment models infastructure?

Thanks for the thread.
Oh yeah, Last night my sane half was concerned that if we zero balance the credit cards the bank will lower our limit which is a negitive on the credit score…You hear anything about this “trend”?

LD

Teak….a few comments and questions.

Smith Barney merged with Salomon Bros in the early 90s after Salomon was involved in a Treasury bid rigging scandal.

Salomon-Smith Barney was then purchased by Citigroup a few years later.

I am reading your question as to whether it is wise that Morgan Stanley purchase Smith Barney. First off, it is plainly obvious that Citi badly needs capital. There has been pressure on Citi to break up the massive firm because of an inability to manage the total risk. They always resisted. Now it appears that the pressures are too great and I would envision that we will Citi dismantled.

Smith Barney is primarily a retail brokerage network. They act as brokers, have very little principal risk taking activities and simply generate earnings through their retail brokerage business.

By selling SB, Citi will generate some of that badly needed capital but also inhibit or lessen future growth.

Not sure if that answers your question. Is that what you were driving towards with your question? Or were you inquiring whether the government should be an equity holder in these companies?

I am not a student on the Islamic banking models so I do not want to pretend that I am. I do recall discussing at one point the topic of primarily utilizing arbitration in settlements and how the arbitration process was a key component of the Islamic banking model. Let me do a little homework.

I have not heard anything about the credit card trend. My response to that would be that you very pointedly nad emphatically tell the company that you may very well take your business elsewhere if they tried to impose a lower limit. Stand up and fight them. I do not carry a balance and if they eevr tried to impose something liek that, I would tell them that they are likely to lose a customer and that I would share that news with every friend, relative, and family member.

Have any of our followers heard anything about this?

Let me knwo if I addressed your initial question properly. I think I may have misinterpreted it.

TeakwoodKite

Thanks LD for answering my questions as it can be difficult for a novice like myself to formulate a question clearly. I appreciatte your response.

What I caught my eye was that after this possible transaction with Morgan Stanley, it would become the largest in the world ahead of B of A.

My question was more about economies of scale and the global market. Under the heading of “to big to fail”, is it right direction to go? I was thinking in terms of you saying the “the model is broken” and have been pondering what models will emerge.

I have the impression that after all the farm equipment auctions now the same banks are them selves on the block. Ironic, isn’t?

Larry Doyle

Teak….I am fairly certain that when the article refers to the “biggest firm of it’s kind” they are not referring to the holding companies or parent companies but rather the brokerage divisions within the holding companies.

The brokerage division of Citi is Smith Barney, while th ebrokerage division within Morgan Stanley was a combination of the former Dean Witter and Morgan Stanley brokers.

Thus this article is referring to the combined brokerage divisions as being the largest, not an entirely new firm that is larger than any of the current bank holding companies sucha s Bank of America or JP Morgan.

The models that emerge will likely be a few massive bank holding companies. JP Morgan, Bank of America, Goldman Sachs. I would not be surprised to see Morgan Stanley purchased by HSBC. Goldman Sachs may end up merging with another large global banking firm as well. After we have these handful of behemoths I think we will have a lot of boutique investment banks.

What a mess!!

Hope that makes sense.

TeakwoodKite

Thanks LD for your patience in splanin’ it so well.

With these consolidations it would seem to make any point of falure more critical and far reaching…

More food for thought, I need more string.

Annie Oakley

To the week’s news lets add Bill Richardson’s withdrawal from commerce secretary, an event that “offers a rare glimpse into a long-simmering investigation of possible bid-rigging, tax evasion and other wrongdoing throughout the municipal bond business.”

This story might be much closer than it appears in the rearview mirror, and surely as we look to cut costs to balance budgets, we should first look to rid the system of corruption.

LD

Annie….the “pay to play” approach has ALWAYS been a HUGE problem in the municipal finance business. In very simple terms, the political appointees who are handling the allocation of capital in the determination of which banks get business typically get paid less than 6 figures. The bankers have been paid multiples of that and generate fees that are multiples times multiples of that. Add it all up and it is not difficult to see how the individual making 75k would say “some of this is being kicked right back here.”

Your point is very well taken and regrettably a simple reality. Where is the decency, honestly, and integrity in our country?

Annie Oakley

Ah yes, business as usual. The NYT article I quoted above also has this from a retired IRS overseer of muni bonds: It’s rare to sell a Senate seat, but it’s not rare to sell a bond deal. Pay-to-play in the municipal bond market is epidemic.

Maybe they need more tapped lines and orange jumpsuits. That working people who barely get by pay for this infuriates me. Maybe that could be part of Obama’s stimulus package: quadruple investigations and prosecutions of white collar crime. And speaking of which, congress has been a solid partner in the worst of it. I saw Sen. Schumer tut-tutting hedge fund managers and remembered that congress had been unable to pass legislation that merely would have required managers like Madoff to pay regular income tax on their hedge fund “earnings.”

Oy, I am so steamed, LD. Please don’t take it personally, I appreciate what you’re doing here and read most.

LD

Annie….believe me I am with you. I too detest contemptible and corruptible actions of people on both sides of illegal transactions. Just because I worked on Wall Street does not mean that I would willingly accept anything and everything that goes on there. Similarly it is not right to blanketly indict eevrybody in an industry for the crimes of those few committing them.

There is no immunity for anybody because ultimately we all pay the price for these crimes!!

getfitnow

LD is it true that under the Obama plan, the banks continue to get “bailout” funds from the government at 0% interest and can turn around and lend that money at a rate of– I think it was 36 or 38%?
LD

Getfitnow….always good to hear from you.

The bailout funds that have been directed to the banks so far were in the form of “preferred stock” which paid the government a 5% dividend. Thus the cost to the banks is 5%.

The 0% that you are likely referring is the Fed Funds rate which is the rate at which banks can borrow from the Federal Reserve for overnight money. The Fed has indicated that that FF rate will stay between 0-.25% for an extended period.

Where do the banks put that cash to work? Across all lines of business, including but not exclusively:

1.mortgages at rates between 4.75% to 7% for “prime” credits depending on the amount of the loan.

2. other consumer credits from home equity lines to credit cards can range from 5% to north of 20% again depending on the balance and the quality of the credit of the borrower.

3. corporate credits likely range from 7-20% again depending on the credit quality of the borrower.

I have not heard of rates approaching 36-38% for anything. Nor would I envision any person or entity paying that rate.
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