munky.org|v3.0

The downward trend in upscale shopping is forcing high end shops to close or go elsewhere, forcing "For Rent" signs like this one on Madison Ave, NY

Amazing how quickly everything changes. One day we’re wanting Gucci and Vera Wang, and now Cheap is Chic. Need anymore proof we’re not in a typical flavored recession, read that article. Bargain divas rejoice, you are now the “in” crowd.

Even though I don’t believe it with be a permanent change to the world order, I’m glad to see more of a movement to this. For one, even if it doesn’t shrink the gap between rich and poor, it visually reduces it. When you’re six figure and up population starts looking for deals at Marshall’s and cutting their own grass, the little guy, like myself, doesn’t feel so little anymore. I might be broke, but hey, I look like him and he’s rich!

We’re seeing less disposable income, and percentage wise, less being disposed of. Of course, I found it interesting talking about buying a good $7,500 watch compared to a great $250,000 watch. I’ll debate you till your blue in the face, but $7,500 ain’t cheap. What do you need a $7,500 watch for anyways? Does it do your taxes for you?

I would pay to see some of these guys cut their own grass. Especially the ones who never have had to cut it. We’ll see how long that $60 is worth saving.

Don’t get me wrong, I’m glad to see some conservation coming across even to the rich divide. It puts less pressure on a lot of people. How? Too many people look up to those with means, allowing them to be their beacon of what’s cool, in, hip, hot, whatever you want to call it. It’s an unhealthy way to live, but for many, it’s their life. Not to mention it’s a shot in the gut when you’re barely scraping by, and some jerk is out there sipping his champagne, checking his quarter million dollar watch, planning what color he wants his next Ferrari to be.

Is this going to be a permanent change though to the well-off spending habits? Probably not. There may be a degree of concealment for a while, but for too many, when they have money, the temptation is too great: they have to spend it.

In the mean time, I’ll enjoy my time feeling like I’m not as bad off as I am (hey, at least I haven’t lost billions because of this), and enjoy bumping into some well-positioned contacts on my next trip to Marshall’s. Hey, we all need an opportunity.

AIG Headquarters

AIG, the largest crook, eh, insurance company around, has accepted another $30 billion from the U.S. Government. If we think Citi and Bank of America are in dire straights, consider this: If you combine the amounts the largest 12 US Banks received in TARP funds, you would still be nearly $6 billion short of the AIG bailout. Thats right, Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, PNC Financial, US Bancorp, Bank of New York Mellon, Suntrust Bank, State Street Bank, Capital One, BB&T, and Regions Financial has received a whooping total of $174.3 billion, as compared to AIG’s $180 billion. Plus the US Government will be taking risky securities from them as well. Us taxpayers will also be taking over partial control of a few business units that AIG has been trying to sell but has come up short.

People scream and complain all day, because the thought of Bank of America receiving $45,000,000,000 (yes, that’s 9 zeros) is mind boggling. Maybe we don’t want to sit down and think about how big $180,000,000,000 really is. There are countries that don’t even have a GDP that high. In fact, there are a LOT of countries with a GDP lower than $180 billion. Yet here we go, giving away medium developing countries to an insurance agent, who should be a master of risk management even more so than a bank, who took on ungodly risks and is paying the piper for it. Their company’s credit rating is being considered for downgrade to junk, which is why the government stepped in again. If it gets downgraded, clauses in insurance contracts will allow customers to close their policy.

Maybe we need to let AIG fail. Not quickly and painfully, since it’s span is webbed throughout the world, and could cause serious withdrawels in places like Japan, China, Hong Kong, among other places.  We need to let it fail gracefully, selling off its pieces as we go along.

How can I say this? Even though I support the bailout and government intervention in times of need, I still believe it goes slap against the core of what a government really is supposed to do. That is to provide infrastructure, emergency services, education. Enticing businesses to come and and stirring up economic activity is of intrinsic interest, but not the first priority (though it is needed for the 1st). AIG is a company that is supposedly too big to fail. Yet if it’s credit ratings drop, customers move elsewhere, investors move elsewhere. While AIG would shrink, it’s competitors would grow. At some point the cost has to outweigh the risk, so is the risk worth at least $180 billion? I dunno, but I think at some point we’re going to find out. That is a tremendous investment, seeing as how most companies in the U.S. have never earned that much money.

Honestly, at this point I’m feeling taken by AIG.  Citigroup is getting to me too, with their 36% move, which unless they get up to like, say $30 a share or so (rough estimate), we the taxpayers are getting a really big short end. At least Bank of America has been repaying their interest to the government, so I can tolerate that $45 billion.

Too many things are still uncertain, but I do think that we are going to see some bad things happen or nearly happen to Citi and AIG this year. Just an opinion. Think differently, then put it out there.

FDIC Insures Deposits Up To $250K

I ALMOST FORGOT TO MENTION THIS! Jeeze, I could get on myself for that. Two banks collapsed into the FDIC’s waiting arms this weekend, bringing the total number to 16 for 2009. There were 25 in 2008 total, so you decide. That’s 16 banks in 2 months, and there are another 10 to go (not to mention a number of other problems, such as commercial real estate, that may implode at any moment). It was another couple of small banks, Heritage Community Bank and Security Savings Bank. Heritage Community Bank was a bank out of Glenwood, IL, while Security Savings Bank was from Henderson, NV. MB Financial, NA and Nevada State Bank were the recipients, respectively.

The grand total to the FDIC (::cough:: taxpayers)  for these two? $100.7 million. A small number, if you consider a small number to be more money than most of us will ever see in our lives. Hope that puts that into perspective.

The FDIC said that the current crisis will probably cost the fund $65 billion by 2013. Or in other words, less than AIG’s bailout.

To finish off tonight, the government did announce that it will take control of 36% of Citigroup. That is 14% + 1 share of nationalization the good ol fashioned way. Now we know what government and private equity has in common.

We all know what that means. In a few hours the FDIC will release the names of 1 or more banks that probably failed this weekend. The usual hoopla about customers will continue to be able to use their debit cards over the weekend, and that the bank(s) will be showing a new name come Monday.

This week was looking somewhat positive, then today the banking sector sank, and quickly. Once again a mad rush to sell the news. Citigroup shareholders have a legitimate concern with having their shares diluted, although it shows how few people really do have a one track mind. The move to other banks shows the point that the market still has a lot of fearful speculators, trying to guess the next one to tank.

We’ll be finding out over the next few hours which banks will be standing with flags half mast in the morning.

New York Stock Exchange

It’s sad that one of the key components of this downturn goes across the grain of basic, sound economic practices. CDS, or the credit default swap, is a financial instrument created by JPMorgan Chase that allows banks to offset their risks.

Without getting to technical, the premise of the CDS is simple. Banks can sell of the risk of default on a form of credit. Some investor makes payments, and if the credit it is built on defaults, then the bank pays the credit through various means. That’s the very simple explaination of it.

Why would banks do this? To offset their risks. By nature, banks tend to be risk adverse. Yet many of the bad loans out there were risky by nature, so this seems to contradict that. The banks would make these loans because others would be they would go into default. If they don’t default, the bank picks up an extra chunk of change, and if they do, then the extra money helps soften the blow. It’s a risk insurance policy of sorts.

Yet the principle’s behind the CDS don’t make much sense. They were thought to help soften the blow of a default by spreading the risk around. Even Alan Greenspan loved them.

However, just because you somehow make the cost go away for the banks, the cost has to be made up from somewhere. Instead of real cost, we end up having a societal cost involved.

In economics you can have costs that a company doesn’t have to pay, so society picks up the bill. Think about a coal power plant. An additional cost would be the pollution spewing from it, harming plants and animals, and polluting the air. That’s where pollution taxes come from, and make for a good reason for environmental enforcement. This helps shift the cost from society back to the company, who was responsible for it in the first place.

So now lets look at the CDS. Banks could now take riskier positions in regards to who to give credit too and how much.  They could then package the risk up in a CDS, and charge an appropriate amount. In their eyes, the risk was now down to that of a more credit-worthy borrower. The problem is, the risk didn’t go away.

Once the banks had shifted the risk burden from bank to society, it was only a matter of time. Without society, banks are worthless, remember that.

I’ll go back into this subject a little bit later. Some of us still have jobs, and I need to head back to mine.

Has the administration done its homework?

The first go around of the bank bailout has had mixed results. Things didn’t get much better, but they didn’t get much worse either for the most part. So it can be considered both a success and a failure, depending on who you ask. Instead of taking a seat and crunching who needed what, they forced the big banks to take a check, then handed out funds to the others who requested them.

Now we are in phase 2. The calamity that surrounded the first bailout has diminished – however relative – and everyone has more time to think and act. This time, the government is going to use a “stress test” on the banks to figure out who needs what and how badly. These tests are supposed to see if the banks can handle not only what the government expects will happen, but will also test to see if they can stand on the “worst case” scenario: 10% unemployment and another 20% drop in home prices.

Some thoughts on this whole bailout mess. I supported the first bailout. I knew it wasn’t perfect at the beginning, but the price for perfection was too high. America’s financial institutions were in dire straights, and needed help quickly. I was furious at the congressmen and women who were quoted as saying things like “I don’t see the need for it” or “how is this going to help main street?” Some pushed back saying that they wouldn’t support it because their constituents wouldn’t get any benefit from it. Since then we’ve learned just how much Wall Street affects main street. I’m glad it passed, I just hated it took so long. I remember just after one senator – I believe Jim Inhofe of Oklahoma (what a character) – made a comment about not seeing the need to rush things, WaMu failed and Wachovia teetered into competing suitors. These was an urgent need.

Now onto the next $350 billion. I like the concept of the stress test. Now that we have some time to breath, let’s size up the team. My only concern is the worst case scenario may be a bit optimistic. Although a number of good signs have come across throughout the markets (more in-depth studying of our recent lows find that they were not as bad as 11/20 and 11/21), there is still more than can hit the fan, and probably will. Our economy is being shaken up, and there are still more feathers to ruffle. I should hope that home prices don’t drop more than another 20%, but unemployment may hit the 10% mark. Lets hope neither happens.

After the tests, the government (and the banks) will be in a better position to judge their capital positions. If more capital is needed to maintain solvency, then that bank has 6 months to raise private capital before the government purchases preferred convertibles to boost it’s financial position. In theory, eventually these preferred convertibles will later be converted to common shares, increasing its health in the stock market and potentially giving the taxpayers a reward (maybe).

Will it work? That we’ll see. As a long term bailout program, it is much better than our original TARP program. Although I think the option to invest directly in the banks was better than asset recovery (which would’ve taken much longer), it was not designed to be an everlasting measure. I am hopeful that this administration used its time and political chips wisely on this one. It could still fail, but with careful planning and a little luck, it might just work.

Our poor investors

To prove the point of investors on a leash, look at today’s movements. Friday we had Christopher Dodd make a statement about nationalizing banks, which shot bank stocks into the cellar. Monday people digested the bank economic news announced, and shot the rest of the market into the cellar.

Now today, Bernanke announces that the U.S. should be able to pull the economy out of recession by the end of the year, then everything shoots up.

People are flocking around news. They are scared of the unknown territories that come along with stock ownership. Yet more often than not, they overreact. Sure the problems are bad, but they aren’t as bad as most people think. Sure the news is good, but things are as good as we think.

If more people took the time to think things through, they would be surprised at their own reactions. Take a period of “sell sell sell” the bad news. If these guys sat down and thought about it, by the time they could consider selling, they stock has probably crept back up. And without getting caught up the in the moment, they didn’t go brain dead and take an avoidable loss.

Let this be a lesson to the politicians who supposedly want to turn this thing around so badly: a little bit of good news goes a long way in a bad economy. Too bad I feel sorry for the other suckers out there who aren’t willing to think for themselves.

What awaits at the bottom?

The stock markets went free falling today, matching numbers we haven’t seen since May, 1997. Wow, I wasn’t even a freshman in high school. For the first time, these numbers weren’t dragged down by financials. In fact, most of the financial stocks were up for the day, outside of AIG. Maybe the thought of the U.S.A. becoming a near majority stockholder was a success?

Is this is a sign that Wall Street has met Every Street? The only stock weathering the storm is Walmart, and even they are losing ground. As bad as things seem though, I don’t believe they are as bad as the pessimists think. Pessimists being the investors in the stock market: you know, the guy who is so smart but can’t manage his own money.

What this shows is our economy is not being run on thought, it’s being run on fear. Sure, not everyone is panicking, but the majority of people have gotten to the point where they press the sell button without even thinking. Investors are in a fight or flight mode, flying being the preferred option. Whatever happened to long-term, disciplined investing? It’s apparently out the window.

This takes us back to an old adage: Things are never as good as their appear, nor are the ever as bad as they appear. The markets will get worse still, I’m afraid we still haven’t seen the bottom territory. The only thing that has me concerned is how low these undisciplined, scare investors will take us. Yet I hope you don’t fear it, because the only thing to fear is fear itself.

But since we are back in ’97, let’s reflect a moment where we were at back then. For most of the year the markets were on their ride up during the dot-com era, minus the pain we felt from the Asian financial crisis. We also met Monica Lewinsky for the first time – discovering why Bill had an affection for cigars – and we lost a beloved public figure, Princess Diana. A civil panel found OJ Simpson guilty that year, and Mike Tyson took a bite of Evander Holyfield. More info is available at thepeoplehistory.com.

We also saw the Dow break 7000 for the first time, a number we may wind up below. And to bring up my next point, the New York Stock Exchange halted trading – by invoking a circuit breaker rule – on November 24th when a 554.26 point free fall happened from a scare of a global economic crisis. Too many people hitting the idiot (sell) button.

Here’s a radical solution to keep the markets here from continuing to slide: let’s halt the stock markets for a week. Hopefully this will give investors a break, a chance too cool off. Then they can seriously sit down and digest the news, the be able to make an informed decision when they can buy or sell again. Unfortunately, it probably won’t work, given the propensity of people to sell out of fear.

Scratch that idea, I don’t think people are smart enough for it to work. Maybe next time.

Microsoft Headquarters

This latest blunder at Microsoft – no matter how cruel it is to its recently unemployed workers – is fitting for the software giant. If you haven’t heard already, a glitch in the system gave laid off workers a larger severance than they were supposed to get. Now Microsoft is asking it back.

For years people have complained about glitches in Microsoft software. Their current mainstream operating system, Vista, may be the most notorious of recent history. Yet when a glitch in their software costs us money (lost productivity, lost information, etc), they point to the EULA and say “sorry.”

Yet Microsoft comes out and demand those former workers to return the extra money, cash, money orders, personal check. Can we rub anymore salt in the wound for these poor people! They’ve just lost their job (probably with a decent salary knowing Microsoft) in the middle of the worst recession in recent memory. Odds are they are going to have a really hard time finding work, and if they do, it may be for $7.75/hour at the local supermarket.

Microsoft does have a legitimate claim for wanting a refund, but of all companies, should Microsoft expect one?

Hoover's Remove from Reality

I was watching 60 minutes last night, and when Andy Rooney came on he talked about the past presidents. A group of 65 historians had come together to rank the former presidents from best to worst. The worst was James Buchanan, who was also a bachelor: I agree with Rooney that no lady would want to be associated with America’s worst president.

Then he went on about the Bushes. George H. was listed as 18th, while his son, our most recent G.W., was ranked 36th. What shocked me was that Herbert Hoover was ranked 34th. He was the man in charge when the Great Depression hit.

What’s surprising for all of his problems, at least Bush admitted things were getting worse, he even made sure we had those stimulus checks. While there is a great deal more he could have done, he still did a world more than Hoover.

While people in Kentucky were eating wild-grass, people in Chicago were living out of garbage piles, a million mean were living out of railway cars, Hoover had the audacity to so that nothing was wrong. Americans were living better than they ever had, even the hobos were better fed than ever.

Hoover was a man too far out of touch with not only the people, but with human spirit. He also didn’t believe that people should ask the government for money. He was known as the great humanitarian for a while, organizing and managing relief supplies to European victims in WW1 and to Americans that had suffered disasters before he became president. However, he didn’t think that the funds were from government aid; he believed they were private donations.

Hoover had too much a blind eye driven from his own instinct of making it on your own. Unfortunately, there comes a time when you need to relent such thoughts for the sake of the public good. Hoover was a let down of epic proportions. So although I don’t hold Bush in regards, I cannot agree with considering Hoover to be the better president.