(read to the bottom for a special bonus)
My readership has been crazy, waiting for me to ’suspend’ my sporting insight in order to give some financial advice. After all, like that kid in the FedEx add: I have an MBA. Of course, so does W — the MBA President.
Look, I went to a business school — Wharton — that is considered competitive with the one our illustrious President attended — Harvard Business School (HBS). However, I don’t actually think that Wharton is equivalent to HBS on the metrics that are most pertinent: Number of CEOs; Network. HBS is above Wharton, and for that matter Stanford, too, and by a wide margin.
However, in this case it has a legacy problem. W went there, but it appears that he was too busy with his other vices (this is before he found Jesus), as he gives no confidence when discussing economic issues. In fact, it appears he is reading the menu at Wendy’s.
Now this should not be surprising. If I recall, prior to being Gov of Texas, he ran three companies into the ground, except that Daddy’s (George HW) friends ‘bought’ the companies. Who knew though, that his schooling would allow him to run the world’s largest and most successful economy into the ground. [I know, I know, the President's effect on the economy is limited. However, in this case, the laissez faire attitude and lack of oversight can be tracked to the administration's opinion on most things economic. Read this to understand how we lacked leadership.]
Now I am not much more confident in Congress. These are the a$$-kissing lawyers that get elected and pass laws without any experience or understanding of economics. Personally, I would prefer that the Sikh, who owns a few of my local 7-11s, would run the bailout, as he certainly understands what it takes to run a business, profit-loss, and risk-reward, better than the 536 tools in Washington DC (House + Senate + Prez for those of you not familiar with our bicameral system).
And it is fun to watch McCain say that ‘in this time of crisis’ he will suspend his campaign. C’mon, this is posturing. His tail is visibly between his legs as he postures to avoid the debate in MIssissippi on Friday. Plus, I have heard that the co-eds in Oxford are unbelievable, so how dare he deprive the nation of the opportunity to determine this for itself.
So despite my perceived credentials, I tend to simplify this entire mess, but am willing to be corrected by my more financially sagacious readers. Let’s see, anatomy of a crisis, which I mainly see as an issue of OPM (Other People’s Money) and No Repercussions.
1) Mortgage Lender lends money to those least available to pay — Mr. Jones, with your $40K salary, I don’t see why a $450K mortgage should be a problem. Sign here.
2) Mortgage Lender then packages these mortgages and sells them to others — like Merrill Lynch. Thereby removing mortgage company from the risk, but still collecting the commision. Nice!
3) Securatized mortgage purchasers should understand the risk, but the earnings they generate are too great to ignore. Ahh, housing prices will never go down, just like internet stocks.
4) Amazingly, and this is what perplexes me, these firms over-exposed themselves to the extent that they actually risked going out of business, which some did.
When one is on a business trip, one often orders the Kobe Beef Steak. OPM. When you travel with your family, Sizzler! Not to different the above. The only difference is that I cannot call the Government when the sizzler bill is too high. Which brings to mind the following:
This bailout is rather ridiculous. Say this was the Big 3 Automakers, who happen to be asking for $25B. Is it the taxpayer fault that the Big 3 have been unable to change in the 30 years since the Japanese first started making inroads with better, prettier, more fuel efficient autos? (And to think that they (Big 3) are already protesting the new fuel standards set to go into effect in 2020. 2020!!!!!!!!! In the immortal words of Ted Knight in Caddyshack — You will have nothing and like it!
Should the government bail out Microsoft since it is getting its a$$ handed to it in online advertising by Google?
Yes, the difference is that the risk to the entire economy is too great to ignore. OK, but in that case, the bailout should give the funds to mortgagees who could not pay their bills so they can keep their homes, even if they are idiots for signing mortgages they cannot afford. But Stockholders? Bondholders? Thanks for playing, you get nothing. That is the risk we all take when investing.
And the execs? They should be fired with no parachute and they should have to give back their previous earnings, just like I would prefer for Fannie Mae and Freddie Mac. Now some say you cannot limit their pay as you cannot attract good talent at low pay. What? These are the guys who got greedy and ran the firms into the ground — go take a lead aspirin. Again, my Sikh friend above can be in charge.
If we have learned anything from this crisis as well as Enron, not to mention 9-11, it is this:
1) If it is too commplicated it probably will not end well. These financial mechanisms are overly complex to the extent that they cannot even be understood by their owners. Remember, for all the financial theory, Discounted Cash Flow should still reign supreme. And lending at 5% while you borrow at 3% is still a more solid business model than Default Credit Swaps.
2) Don’t go pass legislation too fast. I find it amusing (in a sort or YOU ARE SO PATHETIC sort of way) that our congress cannot do anything in years, but then can pass incredibly complex legislation in a weekend. Of course, the last time they got bullied into this, they opened the door for eavesdropping and water boarding. My point is that they need to really ensure this legislation will be effective, give relief to those who deserve it (or at least, least don’t not deserve it!), the homeowners, and not bail out Master of the Universe who may be out the second yacht.
OK, the bonus, since I will certainly take flak for such a long economic diatribe — read Tuesday Morning Quarterback. Great take on football, and as he is a Brookings Institute Fellow, great insight into other topics, including the current economic crisis, but also including Movies, Space Travel, and Cheerleaders. A true renaissance man. What Yes MSG aspires to.