Thursday, December 18, 2008

OPM (Other People's Money)

We have said repeatedly that one of the triggers for the crisis was permitting investment banks to go public (prior to 1970, no NYSE member firm could be listed). We had dinner with one of our long-standing colleagues who was responsible for Sumitomo Bank's investment in Goldman Sachs and had (and continues to have) close and frequent dealings with the firm. He said that the change in the firm's behavior after it went public was dramatic. Before, it would deliberate (one might say agonize) important business decisions,. Waiting two years to enter a new field was not unheard of. But after the partners cashed in and were playing with other people's money, the firm quickly became aggressive in its use of capital in expanding the size and scope of its activities.

http://www.nakedcapitalism.com/2008/12/new-york-times-story-pulls-punches-on.html

Sunday, October 12, 2008

It Really Sucks to be Rich right now

http://www.bloomberg.com/apps/news?pid=20601109&sid=aIAWDrA4RSTQ&refer=home

Abramovich, Deripaska, Oligarchs Lose $230 Billion (Update1)
By Yuriy Humber, Greg Walters and Maria Kolesnikova
Oct. 10 (Bloomberg) -- Russian billionaires from aluminum magnate Oleg Deripaska to soccer-club owner Roman Abramovich lost more than $230 billion in five months during the nation's worst financial crisis since the 1998 default on its debt.
The combined wealth of Forbes magazine's 25 richest Russians tumbled 62 percent between May 19 and Oct. 6, based on the equity value of traded companies and analysts' estimates of closely held assets they own. The loss is four times larger than the fortune of the world's wealthiest man, Warren Buffett.
Moscow's benchmark Micex stock index declined 61 percent since its peak in May. The global credit seizure, war with Georgia and falling commodity prices led foreign investors to pull $74 billion out of Russia since early August, according to BNP Paribas SA. While Russia's 1998 default and devaluation of the ruble eradicated savings for most of the population, this year's losses are wiping out its richest citizens' fortunes.
``There was a massive transfer of wealth into the hands of the oligarchs in 1998,'' said Mark Mobius, executive chairman of Templeton Asset Management Ltd., which has about $30 billion in emerging market stocks. ``Now it's going the other way.''
United Co. Rusal's Deripaska, 40, the richest Russian on the list, lost more than $16 billion and in the past week ceded stakes in Hochtief AG and Magna International Inc. Chelsea FC owner and Evraz Group SA shareholder Abramovich, 41, lost $20 billion, based on assets excluding property and cash.
Lisin's Losses
The biggest loser has been Vladimir Lisin, 52, an avid hunter and head of Russia's Shooting Club, whose 85 percent stake in OAO Novolipetsk Steel lost $22 billion in value in the period.
Novolipetsk rival Evraz declined 83 percent, shrinking 49- year-old founder Alexander Ambramov's fortune to $2.2 billion from $13.4 billion. Russia's biggest steelmaker, OAO Severstal, also fell, cutting the wealth of chief executive officer and majority owner Alexei Mordashov, 43, to $5.3 billion.
``They should take us all off the Forbes list,'' said Alexander Lebedev, ranked 39th by the magazine in May with $3.1 billion of wealth. Lebedev, 49, who owns 30 percent of state-run airline OAO Aeroflot, said in an interview on Sept. 23 that ``silly'' rhetoric by the Kremlin over the conflict in Georgia was responsible for 40 percent of the stock market's drop in August.
Lukoil, Alfa
OAO Lukoil Chief Executive Officer Vagit Alekperov, 58, saw his 20 percent stake in Russia's second-biggest oil producer decline to $7.2 billion from $19.5 billion. The fortune of Alekperov deputy Leonid Fedun, 52, declined to $3 billion from $8.4 billion. Both men have said they will continue to buy more Lukoil shares.
Dmitry Rybolovlev, 41, who controls OAO Uralkali and owns 20 percent of OAO Silvinit, the country's only potash producers, lost about $12.8 billion, leaving him with $4.1 billion.
Alfa Group partners Mikhail Fridman, 44, German Khan, 46, and Alexei Kousmichoff, 45, ranked seventh, 10th and 17th, respectively, lost at least a combined $12.1 billion.
Alfa's shareholdings include BP Plc's Russian oil venture TNK-BP, mobile-phone operators OAO VimpelCom and Turkey's Turkcell Iletisim Hizmetleri AS, supermarket chain X5 Retail Group and television broadcaster CTC Media Inc.
Spokespeople for companies including Deripaska's Basic Element, Evraz, Nikolai Tsvetkov's UralSib Financial Corp. and Rybolovlev's Uralkali declined to comment on the losses.
Cashing Out
At least one of Russia's wealthiest got out in time.
Mikhail Prokhorov, 43, sold his 25 percent stake in OAO GMK Norilsk Nickel to Deripaska's Rusal for an undisclosed amount in April, just before nickel prices began to slump. The value of that stake plummeted from $13 billion on April 24 to $3.38 billion on Oct. 6.
Prokhorov received $7 billion in cash as part of the Norilsk transaction, the Kommersant and Vedomosti newspapers reported then, citing unidentified people familiar with the deal.
``Are you criticizing me for feasting amid the Black Death,'' Prokhorov joked with reporters in Moscow on Sept. 30, after buying half of Renaissance Capital for $500 million. That was less than a quarter of the value the investment bank had a year ago when VTB Group sought to take it over, according to a Vedemosti report. ``Crisis time is a peak for opportunities,'' Prokhorov said. ``An absolute peak.''
Trading Delayed
Russia's Micex and RTS stock exchanges delayed the opening of trading today on orders of the market regulator. It was unclear when trading would start, a spokesman for Micex said. The RTS won't resume stock trading until ``further notice,'' the bourse wrote in an e-mailed statement.
``You can now buy the free float of the entire Russian energy sector with the market cap of Coca-Cola, and still have change to buy all the Russian banks,'' Merrill Lynch & Co. emerging markets equity strategist Michael Hartnett said in a note to clients today.
The unprecedented loss of wealth may set the stage for a new round of asset redistribution, said Pavel Teplukhin, president of Troika Dialog Asset Management in Moscow.
``We've seen quite a significant inflow of fresh money by our wealthy individuals to acquire at these very attractive levels that we haven't seen since 2003, 2004,'' Teplukhin said in a Bloomberg Television interview on Oct. 9, a day the Micex Index climbed 9.8 percent.
Next Round
The next round of wealth building may be the most intense yet, according to Renaissance Capital. The first came between 1995 and 1998 as Russia's first president, the late Boris Yeltsin, agreed to sell stakes in the nation's biggest industrial assets in return for loans from bankers including Potanin, who helped organize the state bailout.
``It will be a game with bigger stakes than in early 1990s privatizations and the redistribution after the 1998 crisis,'' said David Aserkoff, chief strategist for Russia at Moscow-based Renaissance Capital.
``Oligarchs with cash will be able to use their knowledge of the business and political landscape to find the next billions,'' Aserkoff said in a research report on Oct. 6.
``The market will grow back,'' billionaire Viktor Vekselberg, 51, one of BP Plc's four partners in oil company TNK-BP and founder of Renova Group, told reporters yesterday. ``The only issue is when. I don't think it will be soon.''
To contact the reporters on this story: Yuriy Humber in Moscow at yhumber@bloomberg.net; Greg Walters in Moscow gwalters1@bloomberg.net; Maria Kolesnikova in Moscow at mkolesnikova@bloomberg.net. Last Updated: October 10, 2008 05:44 EDT

Thursday, October 9, 2008

Relief

Maybe i'm crazy, but i feel better now than before. I was on the trading floor in the crash of 87, and life didn't change a whole lot. (not that i don't think this is a LOT bigger deal). I don't want to link all this, but i feel better because

  • the air is finally coming out of the equity bubble.
  • the air is coming out of the income disparity bubble
  • paulson is getting the message of the right way to use the 700 billion
  • he seems to have the authority to do so
  • europe is in worse shape than us, leveraged more and it is all a game of relative
  • oil is down.....oil is down....oil is down.... that is so good for business in america
  • income for the oil producing economies is down
  • depression hurts china more than us (i have nothing to back this up but instinct)


    Hubby is mortified that his 401k is down. All asset classes are getting re-evaluated. No one could really predict which ones come out on top, so to a great extent it's really random where you're standing right now.

    Obama is probably going to end up being the best man for his time. Read something that he is in negotiations for a half hour block of time. That's perfect. Reassure a worried nation. He's very smart and style may matter more than substance for the next 4 years. Substance will be all around him.

    Obama might win. We might have control of all three branches.

    The opportunities are insane.

Remember to Breathe


The dow at 8579. Between the hedge funds liquidating, the cds swaps trying to settle, a lack of shorts in the market to cover, a lack of traders willing to trade, (Does anyone else wonder what all those masters of the universe at the investment banking trading desks are doing these days? They have to be exhausted, not to mention the strain of wondering if you have a job, who you work for, whether or not your cash is in insured deposits...) that last little drop was a doozy.

Thursday, September 25, 2008

Unwinding

So, the POTUS has gone on national television and described unspeakable (literally unspeakable) horrors that are going to come down the pike if we don't hand 700 billion to wall street but the american public (to their credit) are not buying it. In an election year, no less, only 7% of americans polled support the bailout. Oh, yea, congress is going to pass this and go face their constituents!

Of little note in the economic blogosphere (which, imho, has been very instrumental in rallying the public to scream, kick, yell and fight this within an inch of their lives) is this from bloomberg:

http://bloomberg.com/apps/news?pid=20601110&sid=a3PO453H_A58

Sept. 25 (Bloomberg) -- Credit-default swap dealers reduced outstanding contracts for the first time amid efforts to cut risk by cleaning up the derivatives market. The volume of trades in the worldwide market fell to $54.6 trillion from $62 trillion in the first half, the International Swaps and Derivatives Association said in a statement yesterday. It was the first decline since New York-based ISDA started surveying traders seven years ago.

That's a pretty big drop, suggesting to me that the POTUS may not have been talking to us, but them.

Sunday, September 21, 2008

A Day of Mourning

700 billion with absolutely no, (i know you don't believe me, so i'll repeat it, louder, NO) oversight. Here's the text:

Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

2.5 billion to the terrorists at lehman who are now holding us for ransom because no one understands their complicated bs but them.

cohen is one of my heroes, as is kris (freedom's just another word for nothing left to lose.) Cohen is currently trying to recoup from theivery so i bet he won't mind if i quote his words in full:

Everybody Knows
by Leonard Cohen
Everybody knows that the dice are loaded

Everybody rolls with their fingers crossed
Everybody knows that the war is over
Everybody knows the good guys lost

Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That's how it goes
Everybody knows
Everybody knows that the boat is leaking

Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died

Everybody talking to their pockets
Everybody wants a box of chocolates
And a long stem rose
Everybody knows
Everybody knows that you love me baby

Everybody knows that you really do
Everybody knows that you've been faithful
Ah give or take a night or two
Everybody knows you've been discreet
But there were so many people you just had to meet
Without your clothes
And everybody knows

Everybody knows, everybody knows
That's how it goesEverybody knows
Everybody knows, everybody knows

That's how it goesEverybody knows

And everybody knows that it's now or never
Everybody knows that it's me or you
And everybody knows that you live forever
Ah when you've done a line or two
Everybody knows the deal is rotten
Old Black Joe's still pickin' cotton
For your ribbons and bows
And everybody knows

And everybody knows that the Plague is coming
Everybody knows that it's moving fast
Everybody knows that the naked man and woman
Are just a shining artifact of the past
Everybody knows the scene is dead
But there's gonna be a meter on your bed
That will disclose
What everybody knows

And everybody knows that you're in trouble
Everybody knows what you've been through
From the bloody cross on top of Calvary
To the beach of Malibu
Everybody knows it's coming apart
Take one last look at this Sacred HeartBefore it blows
And everybody knows
Everybody knows, everybody knows

That's how it goes
Everybody knows

Oh everybody knows, everybody knows
That's how it goes
Everybody knows
Everybody knows

Tuesday, September 16, 2008

It's a New World

This is the war of our generation.

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)3rd president of US (1743 - 1826)

As the world scrambles to err on the side of caution, protect the financial system, sacrifice our children to these banker-pigs, we need to hold hands, take a deep breath and treat this like any other natural disaster. We will be fine.

Bankers won't.

Err on the side of caution? What if the revolutionaries felt that way? What about Lincoln?

Americans are woefully unprepared for this, but nothing is going to convince them to include money and economics in the curriculum faster than this mess. We have to get up to speed.

Thursday, September 11, 2008

A Day Unlike Any Other Day

At least the sky is grey. Almost no one who lives in the shadows of the towers can ignore this day with a deep blue sky.

Watching Lehman go down fills me with such sadness. I was there when Shearson/Amex bought our firm back in the early 80's. A long, rich tradition, shattered with the closing of the books. At the time of the merger, all of Lehman's windows on the trading floor were boarded shut. The rumour was that Lou Glucksman had read that withholding natural light would make us more aggressive. As it began to sink in that regime change was imminent, salesman and traders started to tear down the boards and let the light in. I'll never forget the image of watching Lou's henchmen (like Mr. Fuld) rushing around to put them back up, disoriented in the wake of the tidal wave of change.

And now Mr. Fuld will shutter the firm, after a run that left him the longest-running CEO on wall street.

More upsetting is watching the destruction of our country. A blog i've been following reports:

I was briefed on the proposed US financial reforms which will be shoved through with minimal review. Short version is that the Fed wins an explicit "financial stability" role which gives it powers and secrecy to do pretty well whatever Tim Geithner chooses to do for his capitalist crony clientele. The role will include comprehensive, global data collection which will give the Fed visibility of all open positions. In the wrong hands, this insight could be used to selectively induce volatility and margin calls which would selectively hurt some and advantage others. That could help the Fed's friends over time.The FDIC will be stripped of financial supervision and prudential intervention powers in favour of the Fed. That makes the Fed totally unreviewable and unchallenged by other authority in the USA.Additionally, the SEC will be forcibly reformed to be more like the CFTC - a service entity for the interests of those who pay good money for bad regulators. Instead of fixed rules, SEC regulation will become "principles based" which will mean that no one is ever held accountable for breaking the law unless they have done something to break the code of omerta and anger their peers.Federal law and regulation will pre-empt all state laws, and states attorney generals will be stripped of authority to investigate or sue. That means no more inconvenient Elliot Spitzers to get in the way of Wall Street excess.This may not meet Professor Roubini's recommendations, but the deal is going through with little review so far because the cries for reform are only going to be met with this one pre-agreed proposal. After all, who in Washington or Wall Street would ever suggest that Geithner, Bernanke and Paulson didn't have the best interests of American and global investors at heart?
Written by London Banker on 2008-09-11 10:27:14

Tuesday, September 9, 2008

In this interview by Charlie Rose
http://calculatedrisk.blogspot.com/2008/09/charlie-rose-fannie-and-freddie.html
Charlie Rose asks Roubini what should we be talking about and what should we be doing. One of the things that Roubini talked about was 'jingle mail' and he said that at some point 40% of all people with a mortgage will be under water.

One thing that is getting missed is that people who are stable stay in their homes even when they are underwater. They aren't 'walking away' because they think it's fun. The reason that the number is so scary is because those people have very limited options WHEN THINGS GO WRONG.

If there is a job loss, health crisis, divorce, selling the house as a way to ease the strains is no longer an option, and at that point they walk away.

What should we be doing? Reducing the strains on american workers. How?

Universal health care. We are putting billions upon trillions propping up financial entities. We could be taking a HUGE monkey off of everyone's back in this one move.
Tuition relief. Make a peace corp program or something, but get the stress of college costs off of our backs.
Credit relief. Put an instant max of 12 or 13% on credit cards. Let the chips fall.

do these things and put the american worker on more solid footing and he/she will spend again.

Friday, September 5, 2008

On the Responsibilities of Lenders

HUDSON. Bad loan managers were facilitated by repeal of the Glass-Steagall Act. Bad management has been built into the conflict of interest that goes hand in hand with vertical integration of the banks, brokerage houses, Wall Street and mortgage lenders. You find this particularly in Citibank and Countrywide Financial. The October 2007 Columbia Journalism Review includes an article, “A Tale of Two Citis,” that describes how Sandy Weill built his empire on subprime lending. Much of the research was done by Michael Hudson of the Wall Street Journal (not me, a different Michael Hudson). In his article “Banking on Misery: Citigroup, Wall Street, and the Fleecing of the South,” he describes how the banks found it in their interest to
have affiliates that wrote mortgages way beyond the ability of borrowers to pay, because they knew they could turn around and sell these mortgages to someone else and avoid liability. Nobody knows who is liable for the defaults. Is it the current mortgage holder? Is it the mortgage originator? Is it the mortgage brokers who are now going out of business and therefore can’t be held liable? All of this is going to take a long time in the courts.
ACRES U.S.A. Is there a remedy for this situation?
HUDSON. I’ll describe one solution I think is a good one. This approach was prevalent in New York State, where I live, before the American Revolution, and it’s a law that is still on the books here — the law of fraudulent conveyance. Around the time of the Revolution, a lot of New York farmers borrowed from British lenders who would come over, make a loan to a farmer far in excess of the normal ability to pay, and then, just before the crop was harvested, just before the farmer had liquidity, they would call in the loan, that is, demand that it be paid. The farmer
couldn’t pay because he hadn’t sold his crop yet or because the loan was too big to begin with, and the British creditor would foreclose. To stop this practice, New York State passed the law of fraudulent conveyance, which said that if a creditor makes a loan to a borrower without having any idea how the borrower can repay the loan, then that loan is nullified. That law is still on the books, as I mentioned, and it was often brought up in court in the 1980s, when corporate raiders would load down companies with corporate debt. If this law were implemented nationwide, it would apply to subprime borrowers and other borrowers who signed loan agreements far in excess of what they could pay, once the teaser interest rates adjusted to much higher levels.


Debtor Nation
The Hijacking of America’s Economy

http://www.michael-hudson.com/

Soros on bubbles

http://www.nybooks.com/articles/21792
"Some are suggesting that margin requirements for commodity transactions should be raised. Margin rules determine how much in cash or Treasury bills must be deposited when buying or selling a contract. An increase in margin requirements would have no effect on the commodity index buying strategies of ERISA institutions because the transactions are in cash, not on credit. But such an increase could discourage speculation by investors other than financial institutions. Varying the margin requirements and minimum reserve requirements for loans by financial institutions are tools that ought to be used more actively, as market conditions warrant, in order to prevent asset bubbles from inflating further. That is one of the main lessons to be learned from the recent financial crisis."

This is an idea that needs more exploration. I would argue that we DID use margin requirements actively, to PROMOTE the bubble. When we allowed downpayments to get to zero, and then allowed debt to income ratios to get really high, we basically lowered the margin requirements on the real estate market dramatically. Fundamentally, that is the root cause of this crisis. No one can make the margin calls. (i.e., pay off their mortgages.)
Here Are Five Things Republicans Won't Tell You: Caroline Baum
Commentary by Caroline Baum


"4. Reality of Bush tax cuts underperformed theory.
President Bush reduced the top marginal tax rate to 35 percent from 39.6 percent and cut the rate on long-term capital gains and dividends to 15 percent. Such ``supply-side'' tax cuts are touted as an incentive to work, save and invest.
Oops. Saving and investment were ``anemic'' during the Bush years, according to Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago.
The plunge in the personal savings rate to a post-World War II low of zero during the Bush years coincided with a decline in the labor participation rate, Kasriel says.
Business investment seems to have missed the tax-cut incentive as well.
``The only time the net stock of nonresidential fixed assets grew slower than in recent years'' was when Poppy Bush was president, Kasriel says. "

http://bloomberg.com/apps/news?pid=20601039&sid=a33YVKQ7OoaU&refer=home

Money for oil

Do we really want to be independent of foreign oil? It occurs to me that all we are giving the mideast for a valuable resource like energy is dollars. Dollars come and dollars go. Oil gets hot.

Wednesday, September 3, 2008

The two-step crisis

One of the things that is very confusing about this crisis is that it is at least a two-edged sword. The first edge is the huge bubble created in the housing market. People who live in california, or florida or las vegas have visible evidence of this every day and can see the devastation all around them.

In my neighborhood, though, we didn't have land to build, so there are no new developments, no new houses. Turnover is relatively slow, so we don't have a lot of people who bought/built in the last couple of years, borrowing bubble-amounts of money that they can no longer pay back. Most people have been in their houses for at least 5 years, if not 15 or 20 (or 25, like me). Unless they pushed home equity loans to the max, the falling of housing prices simply means that they will make LESS on their investment than they thought, a disquieting thought, but not terrifying.

People in my neighborhood, unless some crisis presents itself, have no real reason to sell, and can afford to tell themselves that the market will improve, and so they will wait.

It's an uneasy quiet. It's astounding how few sales one can find on zillow. In a town of nearly 8000 homes, zillow shows that 6 or 7 have sold in the last couple of months. Those sold at reasonably high prices, so our politicians and such are all patting themselves on the back like they have averted all the troubles.

The real mortgage crisis will hit us in the second wave. The fact that seems to be missing from much of the analysis is that the BANKS have all gone national and their lending was heavily concentrated in the go-go areas of california, nevada and florida for the last couple of years. Even worse, as the market got saturated and competition got stiff, more and more of them found ways to get around the inconvenience of finding a buyer for the mortgages they were creating and kept them on their balance sheets (or so barely off their balance sheets that they are quickly finding their way back home.)

The BANKS are insolvent. They are hemming and hawing and such, but bottom line is that their assets are less than their liabilities. They were so leveraged that a crisis less than this one could have brought them down, but this crisis is so big that there isn't anyone out there big enough to prop them up.

That leaves no one to lend, and that is when we will begin to see the crisis hit us. When someone finally does need to sell, the pool of likely buyers has been greatly reduced by tighter lending standards, requiring bigger downpayments and higher incomes.

This credit crunch will take no prisoners.

Wednesday, August 27, 2008

Real Estate is in Everything

The lesson I learned from the 70's (although i was a mere wisp then) was that OIL IS IN EVERYTHING. As we watched prices skyrocket and the redistribution of wealth take off at a breathless pace, we realized oil was in everything we ate, drank, read or did.

The first decade of the 21st century (whatever we end up calling it) is going to teach us that REAL ESTATE IS IN EVERYTHING.

It's in your pizza, your haircut, your taxes, and your schools. The cost of everything flies to cover the costs of renting (or buying) at every stage of the process. We have found ourselves consigned to shop in huge boxes in inhospitable locations in order to flee this hidden tax. (IKEA sitting out next to the Newark Airport would seem to be the pinnacle of this phenomenon.)

Prices coming down will make us all winners, particularly our kids.

Winners and Losers 2

So, everybody thinks that the people that are losing their homes in the mortgage mess are the big losers. But I read about a guy moving out of his home into a rental, reducing his monthly payments from 3600 a month to 1200 a month. As a renter, he is buffered, somewhat, by the ratcheting property taxes, the over-the-top maintenance expences and possibly even the utility costs of heat.

Sounds really rough. I bet, after the initial shock wears off, that guy feels like the burdens of the world have been lifted.

But what about the guys making the big bucks lately? Dick Fuld, Jimmy Cayne? That much money isn't under anybody's mattress. So where was it?
Stock (in their own company) way down
Housing (they are all in 3-5 million homes...cayne bought in manhattan for 28 million or something) wayy down.
Stock market? Down
Bond market? OUch

Remind me again, who is the loser here?

Winners & Losers

The most counterintuitive thing about this whole credit crisis is figuring out who wins and who loses.

It occured to me, as i pondered the growth in exports from a company like cummins, who apparently produces high powered engines for big trucks and whose products are in demand overseas, sitting in Columbus, Ohio using an american labor force. I'm thinking that the investment in that factory and the knowhow to do what they do is probably substantial, the demand for their products integral to the growth of economies around the world, and that they would be one of the winners in this mess.

We've talked a lot about china, and the cheap products that they create for the us market. Those factories, too required substantial investment, organization of their labor force, setting up supply chains, etc. As their economy weakens, the downside of fast growth could be seriously disruptive.

So maybe americans have some hope after all. We've been struggling (and i bet cummins execs are not earning the big salaries of the wall street titans) to build legitimate companies while struggling to attract capital while hot money was dazzled by the short term profits of creating junk and selling it for too much money.

So china has factories that are set up to produce things nobody needs and we have factories built to make complex engines that are mission critical to building infrastructure.

Score one for us.

Friday, August 8, 2008

Somethin for Nuthin

A great post at Credit Slips about the "Business Model" of the credit card issuers. In a national 'doh' moment, it has occured to a lot of us that the banks are not TRYING to lend to people who can reasonably be expected to pay back their loans. They are LOOKING for people right on the edge, desperate enough to pay whatever fees, charges or rates they can cook up until it's all gone and they are crushed like bugs.

I don't know if i can describe it, but they are on to something that is getting so pervasive in modern american life that hardly a day goes by without another smack in the head by one of these schemes. Maybe we can start by just listing a few of them that small businesses run into:

1. credit card machines. they are ludicrously expensive to buy upfront. In an age when you can get a decent computer from Dell for under 400, the little machine that hasn't really changed in a decade is an easy $1000. No worries...they will 'lease' it to you, forever, so that you will pay many times the value of the machine in just a couple of years. This scheme doesn't work if the machines were priced right in the first place.

2. The leases that never end. So a small business goes to dell and leases computers and buys them for a $1.00 at the end. Except they never end. They know that harried small business owners will pay on that lease for years after it's over, and they are more than happy to keep sending you bills, even though they know you don't owe them any money.

3. Everything costs double as soon as they know you are a 'business'. Phones, cable, internet connections, refrigerators. A blender from Costgo for $50.00 works fine for years (even in commercial use) but buy a blender from a restaurant supply place and expect to pay a minimum of $600.

4. Checking accounts. Make it 'corporate' and they start charging you when you deposit CASH. How DARE you deposit cash into a checking account?

5. Cascading bounced check charges. This one is a doozy. You write 5 checks, 4 of them for $10 and one for $1000. The four for $10 show up on your online account on tuesday as dutifully paid. On wednesday, the $1000 one shows up and you are overdrawn. The 4 from the previous day are MIRACULOUSLY now 'pending', the big one is cleared first, and you now have fees for bouncing 5 checks at $30 each. They call it 'batching'.

6. Health insurance. You are covered until you get sick. Then you're not. It works for them.

7. Homeowners insurance. This one is even better. You are covered unless you need it. Then you can't get it again.