Monday, September 29, 2008

Hang on to your sneakers

The bad debt recovery plan failed to pass the House. CSPAN has the roll call.

No word yet on when, or if, it will come up again, or what the next step might be. In the interim, this would be an excellent time to see how your Congressman voted and send thanks or concern as appropriate.

Where to draw the line?

When is a company too big to fail?

That's one of the critical questions in the current credit mess. The Wall Street Journal explains how the decision to let Lehman Brothers fail turned out to be disastrously wrong.

It was wrong because it turns out that no one knows which investors have exposure to which financial instruments. Including the investors themselves. It's something like a financial butterfly effect: a subprime loan defaulting in Cleveland can cause a storm in Hong Kong.

That appears to be the logic behind the Treasury plan's focus on the underlying assets. If the bond secured by that subprime loan doesn't default -- or if the default is absorbed by the taxpayers -- then the damage to holders of related securities can be contained. We hope. Since no one knows how the various assets are connected, no one knows who the ultimate winners and losers will be.

(Wall Street Journal links; subscription required.)

Saturday, September 27, 2008

Elitist is as elitist does

Another campaign season, another chance for charges of "elitism" to fly back and forth. Let's leave aside for the moment the fact that the word has no meaning if Lady Lynn Forester de Rothschild can use it to describe anyone. And let's skip over the question of why mediocrity is more acceptable in a president than in, say, a surgeon or an airline pilot. Would you want a doctor who bragged about being last in his class at med school?

Instead, I'd like to look at the idea that attending a top school necessarily hangs that red 'E' around your neck. I can't say what the Ivies are like, but I did go to MIT, where any notion of one's personal specialness lasts about as long as it takes for the grades on the first exam to come back. Most MIT students were near the top of their high school class. Most will be merely average at MIT. Far from reinforcing arrogance, my time there was a four year lesson in humility.

Do some people come out of top-tier schools convinced that they are God's gift to the world? Of course. But would those people be any less arrogant if they'd floated through a less challenging program with fewer intellectual peers? Somehow I doubt it.

Thursday, September 25, 2008

And still more about credit

Megan McArdle at The Atlantic has lots of good discussion about the financial markets and why the rest of us should care. Worth a visit.

Wednesday, September 24, 2008

Why credit matters

As the dimensions of Treasury's plan to buy bad debt become clear, I'm seeing lots of rumblings along the lines of "So what if credit gets tight? Lax credit standards got us into this mess! Maybe we should live within our means for a change!"

Which is true, as far as it goes. Certainly giving no down payment mortgages to anyone with a pulse turned out to be a remarkably bad idea.

But last week's problems weren't about mortgages, they were about commercial paper. Commercial paper is the short term loans that companies like Intel and Toyota use to finance their businesses. It's about the safest non-government debt there is, and it usually pays an interest rate only a hair above short term Treasury bills. Last week, the interest rate on short term Treasuries went to almost zero, and the rate on Intel's commercial paper went to six percent. (Why? Because the money market funds who invest in commercial paper started hoarding cash to meet a flood of redemptions.)

Well, okay, so what does that mean?

Suppose I decide to go to a conference. It's related to a particular project, so either a client has agreed to reimburse my travel or I'll pay for the conference from the project fee. The hotel and the airline want their money upfront, though, while the project fee won't come in for a month or so. My credit is good, so I just use a credit card, paying the card company a nominal fee to use their money for a month or two.

But what if the card company suddenly doubled or tripled my interest rate? Or refused to authorize the transaction? I might have the money socked away, in which case paying for the conference displaces whatever I was planning to buy instead. Or I might decide to stay home. Staying home cuts that amount of revenue from the hotel and airline, and it might even mean that I'd have to cancel the relevant project altogether. The credit environment changed for reasons that have nothing to do with me, but the way I run my business still has to change.

Companies like Intel are in the same position. When Intel builds a fab, it has to make substantial investments long before chips start rolling off the line. It has to buy equipment (and the equipment suppliers have to pay their vendors), it has to facilitize the building, it has to pay the designers and all the overhead they incur. Some of that money comes from existing operations, but some of it comes from credit. If the cost or availability of credit changes radically--as it did last week--suddenly the whole economic model for the project changes. Again, the economic model changed for reasons that have nothing to do with Intel: their business remains fundamentally healthy. Still, Intel might have to rethink their investment in the project.

Repeat that experience across the entire economy, and you have big big problems. If companies don't invest, they can't grow, and if they aren't growing they aren't creating jobs. People who scoff at the implications of a credit freeze just don't know what they're talking about.

Which is not to say that the Treasury plan is without flaws. As originally proposed, it gives way too much power to an unelected political appointee whose term expires in four months. It offers way too little upside to taxpayers who are, for the most part, completely blameless. And it's not at all clear that it will even fix the underlying problems. Congress needs to address all of these issues.

But Congress can't sit on its hands, either. The partial solutions we've been seeing for the last several months seem to be making things worse, not better.

Monday, September 22, 2008

Who watches the watchdog?

The web is drowning in discussion of the current financial tsunami. For a reasonably accessible explanation of what's going on and what it all means, I like the economics columnists at The American Scene. Their conclusion seems to be that the Fed and Treasury had to do something to help the markets deal with all those bad assets (mortgages, but mostly over-leveraged financial instruments based on pieces of mortgages). Going forward, though, the massive transfer of debt from private actors to the US taxpayers raises the potential for all kinds of other bad consequences. It's critical to re-establish accountability, both among the executives who got their companies into this mess in the first place, and within government. It's not at all clear that Treasury's current proposal will do that.

Tuesday, September 16, 2008

Wanna buy an insurance company?

This evening, the Federal Reserve agreed to take an 80% stake in AIG, the world's largest insurer. Between Fannie Mae, Freddie Mac, and now AIG, the portfolio of shaky assets owned by US taxpayers is becoming quite impressive.

More important, I think we can say that the notion that financial markets can be trusted to regulate themselves has now been well and truly kicked in the head.

I don't pretend to understand credit default swaps -- apparently the people investing in them didn't either -- but I can accept the argument that the Fed had to act because the consequences of AIG's collapse would be catastrophic. The corollary, though, is that market discipline can only be trusted if one is willing to accept the occasional catastrophic collapse. Which, clearly, we are not.

History repeats

Last year, American house cats. This year, Chinese infants. Apparently melamine is still the food adulterant of choice.

Friday, September 12, 2008

Fox guards henhouse

From the New York Times article about corruption at the Interior Department's Minerals Management Service:

They also said they did not view socializing with oil company representatives and taking gifts as inappropriate because they said they needed to be part of the marketing culture in order to market the program’s oil and gas. Several of the lower-ranking program officials have been transferred out of their old jobs, the report said. It recommended stronger supervision and a series of changes to make clearer the limits of acceptable behavior, some of which Mr. Luthi said have already been implemented.

Let's be clear here. Socializing is one thing. But on what planet does anyone believe that the "limits of acceptable behavior" include things like having sex or snorting cocaine with customers? Is there any manager reading this who wouldn't fire such an employee on the spot?

One of the arguments for government investment in renewable energy has been that oil and gas technologies have had a cozy relationship with government for years. Investments in renewable energy have ample precedent, and simply serve to level the playing field. But leveling the playing field is pointless if the other side has bribed the referee.

Update: Energy Outlook offers more context, explaining why anyone would bother trying to corrupt a bunch of accountants in Denver in the first place.

Thursday, September 11, 2008

The limits of talking points

I don't talk to a lot of politicians, but I interview plenty of business executives and technologists. The difference between someone who really knows the topic and someone who is repeating prepared talking points is obvious almost instantly. In this interview, Governor Palin is clearly repeating prepared talking points.

There's nothing wrong with talking points. They're a quick way to summarize a complex position, a business strategy, or a technical argument. They're a good starting point for further discussion. The public relations people I work with use them all the time.

But most of the public relations people I know understand their limitations, and will happily connect me with someone knowledgeable when I ask questions that require more expertise. They present the strategy, but they don't decide the strategy, and they know it.

Unfortunately, Governor Palin isn't running for White House press secretary.

Eight US presidents have died in office. One has resigned, and two more have been (unsuccessfully) impeached. Does even Senator McCain believe that this pick truly puts "Country First?"

(More politics, I know. I keep trying to stop, but the election keeps making smoke come out of my ears. I do promise to work on topical balance, though. Thank you for your patience.)

Saturday, September 6, 2008

Your way or the highway, Senator?

There are two kinds of political bipartisanship.

On one hand, there's the kind that realizes that, as Americans, we all share a lot of common interests. It seeks to use those common interests to build consensus. That's Barack Obama's kind of bipartisanship, much to the dismay of his more partisan supporters.

On the other hand, there's the attitude that says, "be reasonable, do it my way." Under this approach, prominently displayed during the last few years, calls for bipartisanship are just a weapon with which to bludgeon your opponents into supporting your most extreme policies.

John McCain's acceptance speech, with its call to "put the country first," sure sounded like the first kind of bipartisanship. Good for him! Except most of the rest of the Republican National Convention, and of McCain's campaign to this point, sounded depressingly like the second. Actions speak louder than words.

Yeah, I know, another political post. I should really ignore the news until November, huh?