A Drop in Unemployment Payments is NOT Good News

by Odysseas Papadimitriou on June 19, 2009

UnemploymentWe, at Wallet Blog, are as anxious for good news about the economy as is everyone else.  We’d love to concentrate on giving money management advice for the vast fortunes the nation reaps in boom years, rather than discussing the pros and cons of economic rescue plans and the need to overhaul the financial industry.  However, there’s a fine line between finding a ray of hope in this recession and simply misreading statistics.

A recent Associated Press headline read: Jobless benefit rolls drop sharply to nearly 6.7M.  Good news right?  Less people are receiving unemployment benefits.  That can only mean one thing:  all the people who’ve lost their jobs have found new employment.   How could a drop in unemployment payouts be anything but evidence that the nation is finally on the upswing?  After all, the AP article recounts the various highlights of this statistical evidence and calls them encouraging signs… 

Dow Jones Accurately Priced? Don't Count on That

by Odysseas Papadimitriou on June 10, 2009

dow-jonesAccording to CNNMoney, all of the news surrounding the stock market in the past few months, “has been good news, or at least neutral news,” but nothing bad.  The rationale for all of these happy feelings is that the market has the ability to prognosticate for the worst of times, and did so in March when we saw the Dow dip to around 6,500.  Additionally, it’s believed that 6,500 represented a worst-case scenario that never actually happened, and that therefore we’ve seen the lowest of the low. 

While this perspective fueled the three-month surge, it lacks fundamentals that can be found on page one of Investing for Dummies.  Before we fall for the hype, let’s face the facts.  We are in uncharted economic conditions, and face headwinds that we’ve never seen before and that cannot yet be fully understood. 

In Public Companies, If You Don't Vote it Still Counts

by Odysseas Papadimitriou on June 4, 2009

Vote does not countThe thing about corporate democracy, as it has been allowed to flourish, is that it isn’t very much like a “real democracy”.  Basically, in a “real democracy” that you and I would recognize, people either vote for or against something.  If there are more votes for yes then yes wins the day, otherwise, no.  What we don’t think about as much is the number of people who don’t really vote yes or no, but who don’t vote at all.  In a “real democracy”, these people don’t really count.

On the other hand, in a corporate democracy when it comes to counting the votes from shareholders in publicly traded companies, those votes that aren’t cast, still count.   Officially, the votes not voted are given over to the brokers.  The brokers in charge of these votes are likely to defer their position to the suggestions made by the board of directors.  Thus, whatever the directors put up to a vote, they can be assured of having it go their way because they are supported by a silent majority.

We are still vulnerable to the CDS Scandal

by Brian Johnson on May 26, 2009

ScandalThe most infamous offshoot of the derivative market, the Credit Default Swap (CDS), is continuing to operate in an unregulated manner.  This despite the various collapses that this $60 Trillion unregulated market has caused, and the resulting government bailouts that have forced all of us to become financially responsible for lumbering economic giants such as AIG – a company which was deemed too big for the government to allow its collapse. 

Surely, given the damage caused by this unregulated market, the first order of business for lawmakers should be, and should have been, to put laws into place which would end derivative trading in its current form.  In short, we would expect that the current recession would inspire lawmakers to make laws that would prevent another recession of this kind in the future…but they haven’t.  They’re now trying, and that’s admirable, but those laws haven’t been passed as of yet. As recently as May 13th, Treasury Secretary Timothy Geithner sent a two-page letter to congressional leaders urging them into action.

A Government of Zero Accountability

by Odysseas Papadimitriou on April 30, 2009

ZeroThe barbarians, so the saying goes, are no longer at the gates.  They’ve stormed through.  In many cases, they were practically let in by negligence of the regulators whose job it was to protect us from greedy swindlers, inventive accountants, and fraudulent lenders.  The gatekeepers themselves, the various federal regulators, have not been punished for failing in their duty to protect America.  They remain, even now, at their posts as the country reels from the damage it has taken from the various scandals and crimes committed against its economy and its taxpayers.  Those whose job it was to police against these crimes have failed us and we wonder why they have not been made accountable.

Why, for instance, didn’t Christopher Cox, the head of the SEC, not resign after the Madoff scandal?  Surely the crime was glaring enough to call his competency into question.  Shouldn’t he have taken some responsibility as the scheme was carried out on his watch?  Cox offered no public apology and was never taken to task for the calamity that resulted from his oversight.  He just stayed in, despite the very real complaints of his critics, until he was replaced by the next administration.

Citigroup Provides Further Proof that the Board of Directors System is Broken

by Brian Johnson on April 23, 2009

Board RoomAP Business Writer Madelein Reid, in a recent article summarized the conflict between Citigroup Inc. and its shareholders at the company’s annual meeting.  The shareholders were rightfully outraged.  The Board seems unwilling to change most of its procedures or to give up any of its power to decide the future of the company.  It alone decides executive compensation packages—not the shareholders just as it alone decides that the company will fund a new stadium.  The shareholders, simply put, have no say.

Reid points out that the chairman of the board of directors amiably listened to the shareholders’ many complaints while keeping in good spirits and remaining polite and unflappable.  And of course, offering no indication that the shareholders’ opinions would have any affect on the business of the board or in the method by which the board would be run.  If the shareholders don’t want to support a new stadium, too bad for them.  As unhappy as the shareholders of Citigroup Inc. are with the company’s performance, all returning directors and the four new recommendations were voted in without much difficulty.  The board had not recommended anybody to run against the contenders for these positions…

Who is responsible for the CDS Scandal?

by Brian Johnson on April 15, 2009

ScandalHere at Wallet Blog, we have been reporting on the fallout of the CDS scandal by looking not only at the issue as it is affecting us now, but also at who is responsible for allowing unregulated trading of Credit Default Swaps (CDS) to occur in the first place.  We have pointed out that the laws that made Credit Default Swaps illegal, which had been in place for over 90 years, were repealed by congress in its passing of the Commodity Futures Modernization Act in December of 2000.  The repeal of these laws has cost hundreds of billions of dollars in tax payer money, including the $180 billion that taxpayers are paying for the collapse of AIG alone.

Since our reportage, some of our readers have asked us for an explanation as to why there has been no significant mention of congress’s role in the production of the CDS scandal within mainstream media.  Here at Wallet Blog, we too are troubled that the media has, in general, avoided taking lawmakers to task for their votes.  We are equally troubled by the overwhelming number of congressmen and women who voted this bill into law and who are, therefore, responsible for the legislation that is currently devastating the American economy.  In the House of Representatives, the bill passed 291 with only 60 representatives voting no.  In the senate, the bill passed unanimously without a single voice of objection.

Companies that still don't get the role of bonuses

by Odysseas Papadimitriou on April 10, 2009

BonusesFannie Mae and Freddie Mac are planning on paying out $210 million dollars in bonuses despite the fact that both these companies had to be seized by federal regulators so as to prevent dire repercussions across the economy.  Their failure has been one of the central low points to the economic devastation of this past year

James Lockhart, federal regulator for Fannie Mae and Freddie Mac, defended these bonuses for two reasons.  First, he suggests that the bonuses are needed because of the destruction wrought upon the company employees’ savings by the crash of their stock.  The scene for such workers is, of course, tragic, but we wonder if bonuses should go out to those who lost money in the stock market, then don’t we all deserve some of that cash?  The plight of the employees at Fannie Mae and Freddie Mac is hardly unique—it is the plight of every American hurt in this recession.  But of course, the average American doesn’t get government bailouts for the money that they’ve lost in the various markets—we pay for them.  When all is said and done, investment is a gamble.  In other words, the people at Fannie Mae and Freddie Mac gambled their life savings, like so many of us, and lost.  We don’t get a safety net, why should they?

We're All In This Together…Except For Bondholders

by Odysseas Papadimitriou on April 8, 2009

Boat WavingAs more and more big name companies become insolvent, taxpayers and shareholders in these companies are losing money.  Bondholders, on the other hand, are not feeling the hit and are actually making money out of bailed out companies.  Given the size of America’s economic problems and the ways in which these problems seem to affect all of us, it makes no sense that bondholders aren’t feeling the effect as well.

A bondholder is essentially someone who has loaned money to a company.  When a company needs cash, it either issues stock to shareholders or takes out loans.  Thus far, if the stock goes down, investors take the hit.  If the company requires government bailout, taxpayers must pay for the company.  However, even when a company is on the brink of total collapse, and must be brought under federal regulation to keep it from failing, that company is still expected to pay off its debt at the rate set at the time of the loan.  So long as the company has not gone bankrupt, it must still repay its creditors, including its bondholders.

Misleading Stock Charts

by Odysseas Papadimitriou on March 31, 2009

Misleading ChartsAll the leading providers of online stock quotes (Yahoo Finace, MSN Money, Google Finance) supply a chart that shows the price of a stock over time.  This type of chart is handy for people who already own the stock as it allows them to track their investment as it rises and falls.  People who are hoping to invest, however, need to know the value of the company over time.  The current charts are not useful for this purpose and are actually misleading because they create a false impression of the company’s value over time.

As we all know, the market capitalization of a company is the number of its shares times its stock price.  The current charts used do not show how the value of a company changes when that company issues more equity (i.e., more shares) in order to raise more cash, a common practice in a recession.  These charts simply show the stock price.

Money, TV Shows, & Entertainment

by Brian Johnson on March 30, 2009

CassandraMoney shows should not treat finance as entertainment by turning the buying of stocks into a joke or by turning a discussion of serious economic situations into an occasion for groundless argument.  These shows discuss issues directly involved in the managing of people’s money, pensions, savings, and 401ks. The networks that produce these shows, then, have a moral responsibility to treat the subject matter with the seriousness that it requires. 

To fulfill this obligation, the networks should do two things.  First, the network should only invite experts to discuss financial topics.  Participation should be limited to those who have actually worked in the field that they will be discussing.  All too often, financial reporters who have little or no work experience in a particular field are invited to comment on very serious economic issues and their presence drowns out the founded insights of real experts who should be listened to.  Second, the networks should see themselves as obliged to foster a healthy debate founded on factual evidence and cogent argument, and not gut feeling.  The moral obligation of these networks should be a constant pursuit of the truth.

To AIG Executive: Who is your boss?

by Brian Johnson on March 29, 2009

BossHaving read in the NY Times the open letter of resignation sent by Jake DeSantis, Vice President of AIG’s financial products unit, we would like first to extend our sympathy to Mr. DeSantis for having borne some of the brunt from his company’s hardships. We would also like to acknowledge and recognize Mr. DeSantis for essentially not taking a salary as he worked towards putting this company back together.

That said, we couldn’t help but notice that Mr. DeSantis addressed his letter to the wrong person. Clearly, as it is a letter of resignation it should be officially addressed to AIG CEO Mr. Liddy. However, Mr. DeSantis does not seem to be aware that his letter ought to at least extend an explanation to the owners of the company particularly since it was the owners who demanded that his bonus, and the bonuses of his coworkers, be returned. As taxpayers, you and I own 80% of AIG. As taxpayers, you and I demanded that Mr. DeSantis return the money.

Analysis: Obama's Plan for a Financial Overhaul

by Odysseas Papadimitriou on March 28, 2009

OverhaulAccording to the Associated Press the Obama administration has released its new proposal for dealing with the economy.  In response, we would first like to recognize the effort made by Treasury Secretary Timothy Geithner for realizing the need for an overhaul.   We feel that 50% of solving a problem is recognizing its scope.  Here at Wallet Blog, we’d like to throw our own advice into the mix, point-by-point, as outlined by Martin Crutsinger in his article.  The administrations proposals are:

  • “Imposing tougher standards on financial institutions that are judged to be so big that their failure would threaten the entire system.” AND “Creating a regulator to monitor the biggest institutions. Geithner did not say which agency should wield such authority, but the administration is expected to favor the Federal Reserve.”

We agree to the principal of tougher standards for larger institutions, but we should be weary of allowing any financial institution to grow to such a size that they would threaten the entire system by their failure.  Institutions of this size are unmanageable (Citibank and Bank of America are great examples in proving the point).  They are unmanageable for the executives and definetely unmanageable for the regulators. Their value to the market place is questionable given how difficult they are to run and is disproportionate to the damage they can cause through failure, as we all learned recently. So what are the market benefits of allowing an institution to become so big that if the regulators do not do their job it can bring down the entire economy?

Analysis: Financial Experts on TV

by Brian Johnson on March 25, 2009

Just because they’re on television doesn’t mean that they’re experts. Watching this video from Fox News Cavuto On Business, August 18th, 2007, we have five experts talking about the economy: Ben Stein, Tracy Burns, Charles Payne, Stuart Varney, and Peter Schiff.

[video http://www.europac.net/media/Schiff-Fox-8-18-07_lg.wmv nolink]

HYPOCRISY times a thousand

by Odysseas Papadimitriou on March 23, 2009

HypocrisyEveryday the headlines are filled with news of public and political outrage at AIG, their shady business practices, the various scandals in which their executives seem to be involved.  The latest of these scandals is, of course, the $165 million in bonuses that AIG paid out using taxpayer money through the government bailout.  Don’t get us wrong, here at Wallet Blog, we too are appalled that AIG turned around and used taxpayer money to essentially pay out staff who helped run their company, and as a result, the American economy, into the ground.

However, we need to keep in mind that 165 million dollars, while a lot of money, is more than 1000 times smaller than the amount of money that the government has given AIG in bailouts thus far…and that’s just AIG.  Why is the American financial news community concentrating on 165 million of mismanaged funds, when there’s the subject of 180+ billion dollars that have been handed over to AIG as a direct result of the CDS SCANDAL, which Congress and President Clinton passed into law, in December of 2000, after being illegal for 91 years?

AIG Needs to Go into Prepackaged Bankruptcy

by Odysseas Papadimitriou on March 22, 2009

AIG BankruptAs an insolvent company of this size, the government really has only two options for dealing with AIG.  They can either keep pumping money in, allowing AIG to fulfill all of its obligations (i.e. what the government is currently doing), or take AIG through a prepackaged bankruptcy to remove AIG’s Credit Default Swap (CDS) obligations. AIG has huge CDS obligations as a result of their greed in exploring the regulatory loophole that was created from CDS scandal.

By AIG not paying off its CDS obligations, there will be ripple effects throughout the banking/insurance industry.  However, we believe that dealing with these individual crises on a case-by-case basis, will be a much more efficient use of tax payer’s money. The President needs to work towards the best solution for taxpayers’ money. Clean house Mr. President! 

Piggybacking Must Come to an End

by Odysseas Papadimitriou on March 17, 2009

Piggybacking Must Come to an EndThe current recession has brought to the spotlight the dire consequences of piggybacking by the U.S. Congress. Piggybacking is the term used to describe the process of grouping unpopular legislation together with the popular so that the unpopular legislation passes into law.  The legislation attached to one another needn’t concern the same subject.  Piggybacking is very dangerous because it further impedes the ability of congress to vote in a responsible and well informed manner.

There is no greater example of the danger of piggybacking from the passing of The Commodity Futures Modernization Act which, after 91 years, legalized CDS. This irresponsible piece of legislation is currently costing hundreds of billions of dollars of tax payer’s money thru all the bailouts.

Politicians Keep Quiet About The CDS Scandal

by Odysseas Papadimitriou on March 16, 2009

Politicians Keep Quiet About The CDS ScandalCredit Default Swaps (CDS) are one of the primary reasons for the crash of the American financial system.  Given their impact, one would expect to see a political backlash against the practice through the various media outlets that report on Washington’s finger pointing, but the backlash hasn’t happened.  What reprimands have been handed out have been quietly conducted so that the average taxpayer, now suffering in a broken economy, hasn’t heard about the CDS scandal or its implications.  Politicians don’t want taxpayers thinking about Credit Default Swaps because congress is responsible for making them legal after 91 years of their being a felony offense.  It is not incidental that Warren Buffett famously described CDS and other derivatives that are bought speculatively as “financial weapons of mass destruction.”

Though there are a number of different varieties of Credit Default Swaps, and all are fairly complex, the easiest way to think about them is that they are like betting without any assurance that either party has the money to cover their bet. The impact of a Credit Default Swap (or a bet) can be collectively illustrated by this simple example: imagine some Company A makes a $1 million bet with Company B that “John Smith” will default on his $200,000 mortgage.  When the mortgage is defaulted, Company B owes Company A $1 million.  The financial problem, ignoring for a moment the Credit Default Swap, is that the bank holding John’s mortgage is $200,000 out of pocket. The CDS compounds the problem because, not only is the bank out $200,000 but Company B is also out another $1 million. In the end, the $200K mortgage had a $1.2 million impact. If Company B had money on the side specifically to cover the bet, then this financial crisis would simply be Company B’s to handle, but our elected representatives did not bother to ensure that these companies had the money to cover their bets.

Recession: Give Credit Where Credit Is Due

by Odysseas Papadimitriou on March 6, 2009

Recession: Give Credit Where Credit Is DueResponsible citizens are getting higher interest rates on their credit cards and loans.  Their retirement funds and investment portfolios are evaporating.  In the midst of their attempt to deal with this financial upheaval, they are losing their jobs.  Future generations will inherit an untold surplus of debt because of our mistakes and yet no clear accounting has been made of all the problems we must fix so as to not repeat those mistakes going forward.

We must learn from our errors. Stimulus packages, tax cuts, interest rate cuts, etc., may help to stave off the immediate crisis, but what we desperately need is a thorough assessment of what went wrong so that, long term, the processes that led us to this economic disaster can be repaired or replaced.

The Current Board of Directors System Must Go

by Odysseas Papadimitriou on March 5, 2009

Board RoomThe original reason to put a board of directors system into place was to give representation to the stockholders. The job of the directors is to act in the best interest of the company’s investors, to hire executives so as further those interests, and to make decisions so as to keep the company healthy.  The board system has failed at these tasks because it inclines members to work towards other interests even when those interests run contrary to those of the investors.  The system, simply put, requires a complete overhaul.

Such failure at the top is a problem because it sets the tone for the rest of the company.  If the board makes bad decisions, they ripple down across the entire management chain.  An incompetent board will hire incompetent executives who will surround themselves with incompetent subordinates. The system promotes a spread of bad decisions.  Moreover, if an incompetent board of directors allows executives to keep their jobs despite poor performance, it creates a corporate environment in which there are no repercussions for bad decisions.

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