Contango Corner

Bernanke = Bernstein Bear?

2010-02-24T10:29:00.002-05:00

Anyone ever notice how Bernanke looks like a Bernstein Bear?

Dollar rally failure

2009-11-21T09:13:00.003-05:00

Dollar rally setup failed miserably which is extremely bullish for gold, silver, equities. Cost me a good chunk of change.

Have been long gold, but switching to long silver to $20 given its historical outperformance of gold in bull markets and dual use as store of value and industrial metal.

We're looking for a manager for our gas trading operations:
http://www2.recruitingcenter.net/clients/conedunreg/publicjobs/controller.cfm?jbaction=JobProfile&Job_Id=10410&esid=az

Responsibilities

-Responsible for seeking short-term pipeline and storage opportunities to increase gross margin from wholesale gas trading and asset optimization
-For monetizing the value of existing storage and pipeline contracts through forward trading and day-to-day physical utilization
-For managing gas supply to existing and new Energy Management Agreement electric generation customers
-For managing gas supply to existing and new Energy Management Agreement electric generation customers, including assistance in local transportation and balancing contract negotiations
-Day-to-day utilization of such contracts and implementing a least cost strategy for physical purchases of gas to meet electric hedges and actual dispatch
-Oversee the Energy Trader assigned to physical gas as well as the Natural Gas Scheduler

There seems to be the same listing on Monster via a recruiter that lists the salary range (there is, of course, a substantial bonus scheme in addition to the listed salary):
http://jobsearch.monster.com/Search.aspx?brd=1&q=manager%20nyiso&cy=us&where=valhalla%2C%20ny&rad=20&rad_units=miles&re=130#brd=1&q=manager%20nyiso%20gas&cy=us&where=white%20plains%2C%20ny&rad=20&rad_units=miles&re=95&pg=1&dv=1

If you're interested and I know you personally I can do a resume drop. Otherwise, please apply on your own via the website or recruiter.

Oil unable to break $73

2009-10-02T19:50:00.003-04:00

Oil has been unable to break $73.
Equities also look as though they're topping out, again.
Dollar seems to be scraping bottom.

I've been trading crude between support and resistance to the short side, short every the front month breaches $71 and cover at $68.

Reversed position

2009-09-11T10:16:00.002-04:00

Crude pulled back to $67 from $73, DJIA 250 points, but recovered strongly, and took 100 pip hit on the GBP short. Long biased again

Long USD Short GBP, EUR, flat on equities

2009-08-26T23:26:00.002-04:00

Closed out most of my longs today and went long the USD on expectations of renewed risk aversion.

The equity market is within a rising wedge formation and momentum is quickly dissipating. Rising wedges tend to break violently and the breaking bias looks to be towards the downside in the short term.

I expect crude to weaken on the short term equity market drop and dollar strength as well as a small VIX bounce.

Correcting misconceptions

2009-08-11T22:39:00.002-04:00

Someone commented

"

http://www.autoblog.com/2009/08/11/chevy-volt-gets-230-mpg-but-how/

Summary: unrealistic for overall driving, but very possible in a city-only environment (which is what the 230 mpg rating was, anyway)"

Using that methodology my electric razor gets infinite miles per gallon

Let's learn about efficiency, work, energy, and cars. This diagram should help clarify things: http://www.fueleconomy.gov/FEG/atv.shtml

The engine loss is thermodynamic, you are limited by carnot efficiency. Gasoline combustion engines (i.e. regular cars) are 30% efficient, the average fleet power plant (i.e. the kind that would ultimately power plug in hybrids) is 30-35% efficient. You can't exceed carnot efficiency, it is a theoretical MAXIMUM efficiency. So the 65-70% loss is there to stay. Period. Doesn't matter if you use lithium ion batteries to store electric energy or gasoline to store the chemical energy you have that loss due to thermodynamics.

Hybrids have higher MPG than regular cars because they can recover energy that would be normally lost from braking and idling. It's not because of the magical lithium ion battery or electric motor being more 'efficient.' It's because that energy is no longer being dissipated as useless heat without being harnessed to do work, because it can be STORED thanks to the battery.

So instead of putting in 100 units of chemical energy and only getting 15 units of work with 65-70 units of conversion losses and 15 units of braking and idling losses you have 25 units of work, 65-70 units of conversion losses, and 5 units of braking and idling loss. Voila, your 40 MPG honda civic now gets 60 MPG.

The only way to improve on that number is to have a more efficient engine. That means higher operating temperatures, which aren't really feasible in an internal combustion engine in a car. Hence an electric car would allow for higher efficiencies through 'economies of scale' really just very efficient large scale power plants (50%-60% efficient). Even then youre MPG would be ~120 MPG. There is no goddamn way you could get 230 MPG unless your car accelerated slower than molasses and had 30" rims that were 2" wide running on slick tires.

230 MPG + My Arse

2009-08-11T17:29:00.003-04:00

Sorry, unless the Chevy Volt is using racing slicks as its tires or GM plans on buying 60% efficient combined cycle plants to generate all the power for the vehicle there is no way it will get 230 MPG. More like 1/2 that. At most.

Short term long biased again

2009-07-18T11:23:00.002-04:00

Results coming in for 2Q earnings, better than apocalyptic expectations...as expected...

Market is at top of sideways trending channel of last 8 weeks, back at the June highs.
Unusual in that it took 27 sessions to drop and 5 sessions to recover. Market hasn't established a new uptrend, but at the same time the market failed to establish a downtrend.

Chinese equities trading on US exchanges cheap enough again to buy. Going long Chinese equities next week.

Sounds kind of familiar

2009-07-15T00:53:00.002-04:00

The Economy is Even Worse Than You Think

Well.. maybe not worse than I think, but he does bring up the points that I've mentioned with some interested new data.

Not a V-shaped recovery, but an EKG shaped recovery

2009-07-10T19:25:00.003-04:00

The market is finally starting to realize the recovery will not be V-shaped or W shaped but EKG shaped. Economic apocalypse has been prevented but the rebound will not return us to our original peak anytime soon (which is implied by all the talk of a V-shaped recovery).

Rather, we are in a short period of rapidly improving results as a result of a combination of factors: the realization that the panic induced selloff priced in the end of the free world, which, while the economy is quite a basket case, is not going to implode, an excessive wind down of inventory, and considerable refundable tax credits for new cars. The operative word in that sentence is short, that is 2Q 2009, and maybe 3Q 2009 as well will show improvements over 4Q 2008 and 1Q 2009. This will be followed by a period of stagnation as the credit cycle will take much much longer this time around to rewind itself (secondary markets will remain poor).

I covered my crude short and vix long today. I'm contemplating going long JPY short GBP as risk aversion returns in ample quantity to the marketplace.

Back to reality?

2009-06-22T17:48:00.003-04:00

Went long equities in mid-April, 100% of portfolio to ride this bear market rally. Up xxx% last two months.

2Q almost over, 20/50/200 EMA and SMA moving average supports ALL broken on S&P 500, second leg down to come?

I'm thinking this move down is precipitated by market's false belief mortgage crisis is over: the reason median housing prices are actually increasing is contagion moving upmarket to alt-a, prime, jumbo market forcing sales in those higher priced categories from real economic distress, not outright fraud (as occurred in subprime markets). Read Mr. Mortgage.

Sold portfolio today, and went short equities, short oil, long vix today. We'll see...we are at a key juncture..this week's action will be critical to how the market plays out in 3Q

Improvement in Home Inventory Levels Marks a Bottom?

2009-05-28T10:52:00.006-04:00

"Sales increased 0.3 percent to an annual pace of 352,000, lower than forecast, after a 351,000 rate in March, the Commerce Department said today in Washington. The median sales price

decreased 15 percent from April 2008, while the number of homes on the market fell to the lowest level in almost eight years.

Near record-low mortgage rates, bargain pricing and tax credits for first-time buyers are helping to put a floor under purchases after almost four years of declines. Still, rising unemployment and tight credit indicate sales will not rebound much in coming months, even as the worst recession in half a century begins to ease.

“The good news is probably the continued improvement in inventory levels,” said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina. “We’ll take the improvement in the new-home market as a sign we’re getting closer to the bottom and we might see some stability in the housing market by the summer.”"

I see stories like this printed constantly in the financial media, constantly touting improved inventory levels marking the bottom and the worst being behind us in terms of the housing market. Sorry, that is absolutely the wrong conclusion. What is happening is that subprime mortgage resets have worked their way through the system and the subprime mortgage borrowers have long-since defaulted, with the houses at the low end of the market having worked their way through the system. What will happen now, and what we are starting to see is a huge uptick in Alt-A and Prime mortgage defaults.

Now, while the default rate is lower % wise for these two segments, the total size of these types of mortgage outstanding is much much greater than subprime, and hence the wave of defaults, in dollar amount, will be as large if not larger than the subprime wave we just endured. Since these buyers tend to buy higher priced homes, the median sale price will undoubtedly increase as the distressed sale cancer moves upmarket, however the price Y-o-Y on the properties for sale will tank. It will take 2-3 years for this wave to work through the system.

NY Times has the data which is depicting this: http://www.nytimes.com/imagepages/2009/05/25/business/economy/25foreclose.grfx.ready.htm

Subprime defaults rose rapidly in 2006-2007, plateauing in 2008 while ALT-A defaults began to rise rapidly in 2007 continuing through today, and prime mortgages defaults began rising in earnest in 2008. Already the total dollar amount of ALT-A and Prime mortgages defaults individually exceed the total amount of defaulted subprime mortgages ($250B), and we are only partially through the ALT-A default wave and just beginning the prime default wave. This default wave is being caused less by fraud (though still a significant part of the ALT-A default wave) and more by macroeconomic factors (job losses mostly).

Mortgage issuance:

2003:
$2,445B in Conforming (62% of 2003 issuance)
$ 631B in Jumbo's (16% of 2003 issuance)
$ 315B in HEL's ( 8% of 2003 issuance)
$ 79B in Alt-A ( 2% of 2003 issuance)
$ 237B in Subprime ( 6% of 2003 issuance)
$ 237 B in FHA/VA ( 6% of 2003 issuance)

2004:
$1,198B in Conforming (41% of 2004 issuance)
$ 526B in Jumbo's (18% of 2004 issuance)
$ 526B in HEL's (18% of 2004 issuance)
$ 204B in Alt-A ( 7% of 2004 issuance)
$ 321B in Subprime (11% of 2004 issuance)
$ 146B in FHA/VA ( 5% of 2004 issuance)

2005:
$1,092B in Conforming (35% of 2005 issuance)
$ 560B in Jumbo's (18% of 2005 issuance)
$ 374B in HEL's (12% of 2005 issuance)
$ 374B in Alt-A (12 of 2005 issuance)
$ 624B in Subprime (20% of 2005 issuance)
$ 94B in FHA/VA ( 3% of 2005 issuance)

2006 (Start of subprime default wave):
$983B in Conforming (33% of 2006 issuance)
$477B in Jumbo's (16% of 2006 issuance)
$417B in HEL's (14% of 2006 issuance)
$387B in Alt-A (13% of 2006 issuance)
$596B in Subprime (20% of 2006 issuance)
$ 90B in FHA/VA ( 3% of 2006 issuance)

2007 (Start of Alt-A default wave):
$1166B in Conforming (48% of 2007 issuance)
$340B in Jumbo's (14% of 2007 issuance)
$364B in HEL's (15% of 2007 issuance)
$267B in Alt-A (11% of 2007 issuance)
$194B in Subprime ( 8% of 2007 issuance)
$ 98B in FHA/VA ( 4% of 2007 issuance)

5 year totals:
$ 6,884B in Conforming (45% of 2003-2007 issuance)
$ 2,534B in Jumbo's (16% of 2003-2007 issuance)
$ 1,996B in HEL's (13% of 2003-2007 issuance)
$ 1,311B in Alt-A ( 9% of 2003-2007 issuance)
$ 1,972B in Subprime (13% of 2003-2007 issuance)
$ 665B in FHA/VA ( 4% of 2003-2007 issuance)
-------------------------------------------------------------
$15,362B total, $7T in Conforming, $3T in Jumbo's, $2T HEL, $1T Alt-A, $2T in Subprime

See http://www.growthology.org/photos/uncategorized/2008/07/11/litanhousing1.gif

There is a lot more pain to come in the housing market, except now it will be the better off and those with jumbo mortgages who are in trouble. Take an optimistic simple hypothetical.

What's just starting to hit the system:

Prime default rate (for ALL loans in this category):

(1.11% Q1 2008, 2.4% Q4 2008, 5% peak) vs. 2003-2007 issuance: $9,400B

What's just starting to hit the system:

HEL default rate (for ALL loans in this category):

(2.9% Q1 2008, 4.4% Q4 2008, 6% peak) vs. 2003-2007 issuance: $2,000B

What's partially worked through the system:

Alt-A default rate (for ALL loans in this category):

(5.2% Q1 2008, 9.1% Q4 2008, 12% peak) vs. 2003-2007 issuance: $1,300B

What's been worked through the system:

Subprime default rate (for ALL loans in this category):

(11% Q1 2008, 17% Q4 2008, 20% peak) vs. 2003-2007 issuance: $2,600B

Banks Aiming to Play Both Sides of the Coin

2009-05-27T07:52:00.002-04:00

Banks Aiming to Play Both Sides of the Coin

I find it impossible to believe the Treasury didn't see this coming.
See the post from Tuesday, March 24, 2009 to get some idea of what the banks want to do.

Example: Bank A puts put up $3B of their capital (maybe some TARP funds? who knows, capital is fungible) into an off-balance vehicle (essentially a hedge fund) and receive $97B of government leverage to buy its OWN securities and loans from itself (i.e. overbid).

Their goal here is not to make a profit by purchasing the securities and loans at fair value, but rather, to DUMP the securities and loans into the off-balance sheet structure so they no longer have to take loss provisions. If the loan book turns out to be decent, they can re-absorb the off balance sheet vehicle.

$3 to DUMP $100 B of securities, what a swell deal!

BrIC, not BRIC

2009-05-14T20:32:00.008-04:00

An acronym thrown around recently:

BRIC countries are supposedly fast growing emerging economies that are somewhat independent of US driven demand and supposedly are going to become the dominant four economies by 2050:

Brazil
Russia
India
China

Russia does not belong in this group.
Its economy is extraordinarily hydrocarbon and metals export dependent, in fact, such a huge proportion of the economy is natural resource driven that even the UAE has a more diverse economic base. Its GDP imploded in the recent economic malaise, contracting a staggering 9.5% in q1.

In fact, its economic performance has been so horrific that a recent strategic blueprint released by the Kremlin and signed by President Medvedev listed the current resource export economic structure as a major threat to Russia's future.

Furthermore, its life expectancy is abysmal, its population is on the decline, it has decreasing business transparency, and it has decreasing rule of law.

BrIC, not BRIC. Russia should be categorized with natural resource dependent nations, such as Saudi Arabia and Venezuela, not multi-faceted economies such as Brazil, India, and China.

Chavez Nationalizes Oil Services Companies Operating in Venezuela

2009-05-08T18:48:00.002-04:00

Chávez, Extending Control, Seizes Assets of Oil Contractors

In 2002 PDVSA's engineers and oil workers went on strike along with other unions as well as businesses to protest Chavez placing his men on the board of directors of PDVSA. In 2003 the Venezuelan NOC fired all PDVSA's striking engineers and oil workers and replaced them with Chavez cronies. In the immediate aftermath, oil production never recovered to the pre-strike value of 3 MM bbl/day and has continued its steady decline to 2.4 MM bbl/day.

Most of the oil in place in Venezuela is extra-heavy, sour (high in sulfur), and requires significant upgrading. Most of these upgrading facilities were joint ventures with international oil companies and the oil services companies were providing secondary recovery techniques to help stem the drop in Venezuelan production (Venezuela's field output is steadily degrading and require more complex secondary and tertiary extraction techniques to maintain output).

Firing the PDVSA engineers was disastrous enough, but now nationalizing the oil services companies who have been the only thing keeping production from imploding, that is an incredibly dangerous move on Chavez's part. I would gamble that Venezuelan output is going to be hindered significantly by his actions.

Financial Tempest

2009-05-04T21:06:00.002-04:00

Luckily, the upper right quadrant packs the largest punch.

From the hall of Montezuma, to the shores of Tripoli?

2009-04-14T18:44:00.006-04:00

From the Halls of Montezuma,
To the shores of Tripoli;
We fight our country's battles
In the air, on land, and sea;
First to fight for right and freedom
And to keep our honor clean;
We are proud to claim the title
Of United States Marines.

The US has dealt with African piracy once before, in the Barbary War at the very start of the 19th Century. We landed our Marines in Libya and destroyed Tripolitan cities. Unfortunately this approach will not work in Somalia in the present day without risking another Mogadishu, though it's being touted on Fox News.

A couple days ago I asked myself why isn't the US military utilizing killer-scout Predators and hunter-killer Reapers to deal with the Gulf of Aden Somali Pirate issue?

Deploying frigates, PT boats, amphibious assault ships (aka chopper carriers), destroyers, guided missile cruisers, even traditional aircraft carriers is more or less useless.

Why?

What is needed is situational awareness and instant strike capability stemming from the fact that the area that needs to be patrolled is the size of Texas (difficult to have constant situational awareness using traditional means with an area this size), and it is difficult to identify the pirate attack ships and motherships until an attack is under way (need instant strike capability).

The US has moved three assets there:

the USS Boxer, an amphibious assault ship (basically a huge chopper carrier)
the USS Bainbridge, a destroyer
the USS Hallyburton, a guided missile frigate

However, by the time any of these assets are aware of a developing situation or even if they become aware of an attack launched from one of these pirate motherships (these attacks are occurring over a hundred miles off the coast of Somalia) the fast attack pirate ships have already reached their targets and taken them over. Tomahawks are not suitable for destroying these small ships, and rarely are the US Naval assets aware of an attack underway until a ship is boarded. Short of dropping in a Navy SEAL team after a ship takeover, which would likely result in casualties, there is nothing to be done with the current tactical setup. The US Navy is designed to fight Russia and China, and ill equipped against insurgents or pirates (though Gates is attempting to turn that around).

What is needed is the use of the scout-killer/hunter-killer platform,designed for situational awareness, interdiction, and counter insurgent duties. The ship or base would launch and retrieve the Reapers and Predators. Possible ships are the older aircraft carriers set to be decommissioned in the next few years (might be overkill since these aircraft do not require catapult based launching), such as the USS Enterprise or USS Kitty Hawk, a converted tanker with escort, or the conversion of US use of Thumrai Air Base in Oman from refueling for B-1, C-130, and other aircraft to a launching point for interdiction Predator and Reaper aircraft.

The Predator and Reaper have over 24 hour loiter times, speeds of 150 and 250 mph, ranges of 2000 miles and 3000 miles, and can carry 4 hellfire and 14 hellfire air to ground missiles, respectively.

They can be controlled via Ku band satellite uplink for non line of sight control beyond 400 nm or to avoid radio jamming, or via C band radio uplink for line of sight control, and their hellfire missiles have a 5.5 mile operational range.

The Reapers and Predators can also be armed with guided munitions, such as GPS guided JDAM's, which might be useful for taking out the pirate motherships (but not accurate enough to take out the small attack vessels, which require the use of hellfires (which have been used numerous times to take out moving cars).

These aircraft are the ultimate in deadly persistence, think of them as instant air strikes. That is how they are being used in Iraq and Afghanistan. Merchant ship convoys, and mass patrols via ship have been proposed by the US and allies operating in the area to respond to the pirate threat, but they are ill suited for the task and would be much more costly than a couple squadrons of these craft.

What is needed is persistent situational awareness and instant interdiction capability at minimum cost and the Predator / Reaper setup provides just that. Destroyers and frigates, unless en masse, cannot provide pirate free shipping lanes. However, a squadron of Predators and Reapers in flight in the Gulf would easily be able to track all mothership vessels and obliterate any pirate attacks before they reached their targets.

Think about it, it costs $340 MM for an amphibious assault ship like the USS Boxer, $450 MM for Aegis Missile Destroyers like the USS Bainbridge, and at least $70 MM for guided missile frigates like the USS Hallyburton, all of which are totally unsuited for small craft interdiction.

A complete squadron of Reapers, consisting of 12 aircraft, the ground stations, and all other hardware runs $200 MM per squadron of 12 aircraft, while a Predator squadron runs $90 MM. For the cost of a single Aegis Destroyer, you could field a squadron of Reapers for long range interdiction (out to 1500 miles) and three squadrons of Predators (out to 1000 miles), using less fuel, fewer men, and putting no lives in harms way. You would have much much higher situational awareness and interdiction capability, assuming 3/4 of units are deployed at any given time that's 36 flying missile truck surveillance planes.

Surprise Surprise: Higher State Taxes

2009-04-12T15:22:00.002-04:00

From the WSJ this week:

The Tax Capital of the World: New York

More States Look to Raise Taxes

Paid Magazine Subscriptions

2009-04-10T19:53:00.002-04:00

In my previous post I discussed using frequent flyer miles for magazines.

Miles for Magazines has a rotating selection of magazines, for example, right now they do not offer The Economist in exchange for frequent flyer miles.

Alternatively, the lowest priced subscriptions I have seen for magazines has been:
http://www.ioffer.com/selling/superstoremags

The pricing is even lower than the lowest rates available anywhere for renewals or students:
$39 for a 1 year subscription to Barron's (lowest anywhere else is $52)
$59 for a 1 year subscription to the WSJ or the FT (lowest anywhere else is $79)
$59 for a 1 year subscription to the Economist (lowest anywhere else is $77)

Miles for Magazines and Newspapers

2009-04-10T17:58:00.003-04:00

This past September I traded in stranded airline miles on American, US Airways, and Delta, all three of which I rarely fly and have no frequent flyer credit cards for, to receive six-nine month newspaper and magazine subscriptions. The conversion rate is excellent, for example, I received a 39 week subscription to the WSJ for 3,300 miles, worth $80.00 (discount rate). After reading these magazines and newspapers for 6 months I have to say...

not worth renewing:
ESPN Magazine (Garbage, stick to Sports Illustrated)
Gentleman's Quarterly (Disappointing, I'd read it if it were free)
Forbes (Complete bastion of yellow journalism in the business world)
Business Week (Another bastion of yellow journalism)
Inc (Good...but only for small businesses)

worth renewing:
The Wall Street Journal (Must have for good micro and macro perspectives)
The Economist (Must have for excellent macroeconomic perspectives)
Barron's (Must have, many excellent trading ideas, comprehensive manager performance tables across mutual funds, hedge funds, and commodity trading advisors)
New York Magazine (Nice to have, great reviews of local culture)
Conde Nast Traveler (Nice to have, interesting destinations, well written reviews)

The links for Magazines for Miles are:

Northwest: https://nwa.mpmvp.com/magazine/choose.asp
Delta: https://delta.mpmvp.com/magazine/choose.asp
American: https://americanairlines.mpmvp.com/magazine/choose.asp
US Airways: http://www.usairways.com/awa/content/dividendmiles/usemiles.aspx
Continental: http://www.continental.com/web/en-US/apps/onepass/magazines/productList.aspx?CATID=5
United: None

Genius alert: Sun Microsystems

2009-04-06T09:43:00.005-04:00

Picture this: you are a dying, has-been tech company, whose extinction is just around the corner, with no real long term vision and multiple failed turnarounds, with competitors eating your lunch and soon your dinner.

A successful goliath who has reinvented itself and shown ability to adapt to any environment offers you a substantial premium and synergy savings through acquisition. The acquisition isn't a drop dead slam dunk for them but it is for you (i.e. this isn't even Yahoo - Microsoft, where Microsoft absolutely NEEDS Yahoo).

Do you
a) Negotiate in good faith
b) Reject the offer outright
c) Negotiate, seemingly in good faith, and then open up the negotiations to other bidders (who don't exist) even though you know that will cause your suitor to drop their bid

Well, Sun Microsystems chose c, and is likely doomed to extinction. It should have learned from Silicon Graphics and Unisys. I'm short Sun all the way down to $2. Jerry Yang looks positively like a rocket scientist compared to Sun management...

Update: 04/20/09: Wrong call on my part, ORCL is said to be acquiring Sun in order to gain control of MySQL, Java, and Solaris, which I admit is a much better strategic fit. 35% hit on this trade.

Starting a Hedge Fund

2009-03-24T20:29:00.004-04:00

I'm starting a hedge fund, El Caudillo & Company.

I plan on asking for Citigroup, Goldman, Morgan Stanley, Bank of America, and JPMorganChase to be limited partners, with a total investment of a measly $3B each. The hedge fund will invest only in 'toxic' assets that banks hold. Also, I want Goldman to be my prime broker.

In exchange, I will be buying $500B in 'toxic' assets from .... Citi, Goldman, Morgan Stanley, Bank of America, and JPMorganChase. The other $485B is courtesy of the Treasury and the Fed, who have so generously offered to provide this leverage via low interest loans for which I don't need collateral.

Hmm. Does anyone else see the hazard here? Anyone?

Pandit the Bandit

2009-03-22T13:12:00.004-04:00

I've received mixed responses on my Pandit post, especially vis-a-vis John Thain.

I want to emphasize that I am not saying John Thain is a great guy. In fact, like many banking CEO's, he might be on a different plane of the universe when it comes to his personal (not legal) values of right and wrong. All that I am saying is that he has done the best for his shareholders of the CEO's who have been in burning banks, far better than Cayne, Fuld, or now, Pandit, whose respective performance numbers are -100%, -100%, - 95%.

Thain, unlike all these other CEO's who were in a constant state of denial, saw the writing on the wall after he was brought in to fix Stan O'Neal's mess in late 2007 and he prevented Merrill Lynch from going bankrupt thereby preventing a total wipe out of whatever brand equity and human capital it had left, saving ML shareholders, creditors, and employees in the process. What other course of action should he have taken? He took the best one available for ML. His fiduciary responsibility was to his bondholders, shareholders, employees, and customers, ML's institutional strengths were in areas that BOFA has always been weak in, e.g. Bank of America has always wanted a real brokerage arm and a real commodities operation, and he knew that it was his best bet to save the firm.

Yes, Thain spent $1.2 MM to renovate his office, two conference rooms, and a reception area in December 2007, after he was named CEO of ML from his then current post running the NYSE. Of that $1.2MM, $800,000 went to the designer, and $400,000 for the contents. In hindsight, he said it was not a good thing to do, he apologized and reimbursed the firm for the expenses. It was clearly not the greatest idea in world. But better than flushing 95% of your firms value into the toilet.

Furthermore, recent events emphasize my previous post. Pandit just announced he is spending $10 MM renovating his office while his stock is on the McDonald's dollar menu. So my point stands. Thain has had the best performance of any of the banking CEO's whose house is on fire. Pandit needs to be fired as he obviously lacks even the most basic common sense and foresight. How about learning from Thain's mistake?

I have been so aghast and so appalled at the recent behavior of many captains of industry, that I am building a new website, Greediest.com, that will contain all the gory details on this incredibly callous, often illicit, and generally distasteful behavior. It will have an action reaction pair:

Payouts
Bailouts
Golden Parachutes
Job Losses

and

Arrests
Convictions
Bankruptcies
Lawsuits

Stay tuned, it should be interesting.

Bonuses bonuses bonuses

2009-03-21T21:30:00.006-04:00

Yes, the AIG bonuses are atrocious

Yes, many of those executives do not deserve them

Unfortunately, passing this 90% bonus tax bill into law in order to recoup the bonus payment would be creating an unconstitutional law.

First off, the proposed law is an ex post facto law, a law passed after an act has been committed that acts retroactively to change the legal consequences of the act committed.

Second off, the federal government is prohibited by the Constitution from taxing property, and can only tax increases in wealth (wages, bonuses, dividends, etc..). The accession already occurred, and since ex post facto laws are illegal, modifying the law to tax the bonuses would likely result in a property tax, which is also illegal at the federal level.

Lastly, the law is clearly intended to punish a very select group of individuals without trial, namely the executives at the AIG financial unit, meaning it is likely a bill of attainder, also prohibited by the Constitution.

Besides these factors, has Congress bothered to think of the unintended consequences of their actions? Goldman Sachs and Morgan Stanley will raise capital from investors, return the necessary funds to the government to fall below the $5B threshold, and proceed to poach every last rainmaker from the four remaining large commercial banks JPMorganChase, CitiGroup, Bank of America, and Wells Fargo, effectively imploding them by grabbing their primary asset, people, thus concentrating power in these two investment banks.

The Problem with Pandit

2009-03-02T19:40:00.004-05:00

Pandit is a design engineer who specializes in designing houses that are fire-resistant.

Unfortunately, the house he's standing in is rapidly burning to the ground.

That makes Pandit more than useless, like a design engineer whose house is in a three alarm fire.

Were Pandit running Citigroup six or seven years ago, much of what has happened the last year could have been avoided. Unfortunately, timing is everything and he is not the right person to be running Citi at this time.

That said, what do you need when your house is rapidly burning to the ground?

You need a firefighter, someone like John Thain, who will do whatever is necessary to protect the company and save it from complete destruction. Criticize Thain all you want for his $1,000 waste paper basket, but he very handedly saved Merrill from implosion.

Once the fires are under control and some sense of normalcy returns, that could be Pandit's time to shine, but until then, he's about as useful as a deep fried rotisserie chicken.