Dimon in the rough to replace Geithner at Treasury..??

Quite honestly, I’m not sure what to make about rumors that have surfaced in recent weeks about the possibility of JP Morgan’s CEO Jamie Dimon as a replacement for Tim Geithner as Treasury Secretary.  It is no secret that Geithner does not enjoy the support of a growing plurality of Congressional representatives, and was asked by a representatives at a recent Joint Economic Committee hearing if he would consider stepping down as Treasury Secretary.  The beef with Geithner in many quarters – a sentiment I happen to share – is that he, in the midst of a need for stronger regulatory reform, is too cozy with the oligarchs on Wall Street and the Lords of Finance in the banking industry. 

Despite what I consider to be legitimate criticisms of Geithner, I hardly see how appointing Jamie Dimon would be an improvement. Confidence in Geithner has waned in recent months precisely because he is considered too close and comfortable with Wall Street (he desires to be a financial industry executive, and was even considered for the CEO of CitiGroup before losing out to Vikram Pandit), and he has pursued rather soft reforms for the industry and is considered industry-friendly rather than consumer-friendly. 

The Administration couldn’t get any cozier than appointing Dimon: it’s like inviting a wolf to the sheep fold — it just doesn’t make sense!   It is simply a bonehead move that will only reap derision and contempt from pundits, and will further erode confidence in the voting public that the Administration is not doing enough, or fighting hard enough for Main Street rather than Wall Street.  I would consider Dimon’s appointment a HUGE! mistake.  Yet, it is clear that Dimon’s star is on the rise in Washington – and disturbingly, in the White House, where he has attended several private (ie, “secret”) meetings with President Obama. Dimon has been the most vocal critic of Obama’s regulatory reform agenda and the staunchest defender of the status-quo in the financial industry.  Dimon has gone so far as to openly criticized the need for a consumer protection agency despite the fact that JP Morgan has had to pay several multi-million dollar fines to regulators in recent years for unethical business practices toward consumers, as well as employees.  

The fact that the primary report originates from the New York Post is, umm, fishy — but perhaps appropriate since that’s all I use the NY Post for after I read the sports page… 

You decide, read more here.

Photo:  Wheelhouse Advisors blog, ERM Current

Too Big To Fail: Insider the financial crisis

Andrew Ross Sorkin is the New York Times’ chief M&A reporter and business columnist.  Sorkin is also the editor of DealBook, the NYT’s online daily financial report he started in 2001. In addition, Sorkin is an assistant editor of business and finance news, helping guide and shape the paper’s coverage. Sorkin also frequently appears on NBC’s “Today” show, on “Charlie Rose” on PBS, and is a frequent guest on the business channel, CNBC.

Too Big to Fail: How Wall Street and Washington Fought to Save the Financial System — and Themselves is Sorkin’s first book.  

The book was recently released, and frankly, I haven’t finished reading it just yet, but what I have read is gripping! If you’ve ever wanted to be a ‘fly-on-the-wall’ in the clubby, heavily wood-paneled board rooms or the glass-encased corner offices of chief executives when the deal is being negotiated, this is it.

The book is interesting, detailed and crammed with an ‘insider’s’ perspective as the drama that precipitated the ‘Great Recession’ unfolded. Sorkin provides a lot of inside information about what was going on inside the Federal Reserve, the U.S. Treasury, the big Wall Street firms and in the Bush White House as the dominoes started falling. You’ll enjoy learning why the original TARP document was only eleven pages long; what made John Mack at Mogan Stanley angry, what Lehman Brothers’ Richard Fuld was doing to try to keep the ship from sinking and what was going on in mind of Hank Paulson and his secret meeting with the Board of Goldman prior to the crash. This is truly a ‘must read’!

In addition, Sorkin was a guest lecturer at FPA earlier this month, and there are really compelling snippets of information that add insight and understanding to unfolding of the actual financial crisis, the major players, and whether or not Wall Street and government regulators have learned anything as a result.  You can see the video clip of his comments at FPA below.

By David Einhorn (Wiley & Sons Publishing, 2008)

Fooling Some of the People All of the Time 

In 2002, David Einhorn, the fresh 32 year old President of Greenlight Capital – a New York based hedge fund and research company – gave a speech at a charity investment conference to benefit a children’s cancer hospital. He was asked to share his best investment idea. Subsequently, he described his reasons why his firm had sold short the shares of Allied Capital, a publicly traded leader in the private finance business. Greenlight bet that the stock would decline because the company’s business was in trouble and its accounting was corrupt despite duplicitous efforts of the firm’s management “spin” a positive story to investors.  Einhorn’s speech was so compelling that the next day, when the New York Stock Exchange opened for trading, Allied’s shares remained closed. So many investors wanted to sell or short the stock that the NYSE could not balance all the sell orders to open Allied’s trading in an orderly fashion.

What followed was a firestorm of controversy. Allied responded with a Washington-style spin job – attacking Einhorn, and disseminating half-truths and outright lies. Rather than protect investors by reviewing Einhorn’s well-documented case against Allied, the SEC — at the behest of the politically connected Allied — instead investigated Einhorn for stock manipulation. Over the ensuing six years, the SEC allowed Allied to make the problem bigger by approving more than a dozen additional stock offerings that raised over $1 billion from new investors.

Fooling Some of the People All of the Time is the gripping chronicle of that revealing saga. Page by page, it delves deep inside Wall Street, showing how the $6 billion hedge fund Greenlight Capital conducts its investment research and detailing the maneuvers of an unscrupulous company. Along the way, you’ll witness feckless regulators, compromised politicians, and the barricades our financial markets have erected against exposing misconduct on Wall Street. This is an important read because the book gives you an excellent “insider’s” perspective of where the Markets were in the years immediately preceding the collapse of Bear Stearns – the event in March 2008 that precipitated the financial crisis. You will also discover the immense difficulties that prevent the government from sanctioning politically connected companies — making future Enrons inevitable.  Further still, this book is important because Einhorn and the research methods that his firm uses to uncover accounting scams and other balance sheet tricks publicly traded companies employ to hide financial weakness was among the first to start shorting Lehman Brothers stock in April 2008 after their overly confident quarterly report.

This revealing book shows the failings of Wall Street: its investment banks, analysts, journalists, and especially our industry regulators.  At its most basic level, Fooling Some of the People All of the Time is an important call for stronger regulatory enforcement, more effective regulatory reforms, and fair play in the financial markets.

China leading global economy in recovery

China’s industrial production and trade surplus posted robust double-digit gains in October, indicating a strengthening recovery in the world’s third-largest economy. China, unlike the U.S. and other western industrial nations, has managed well in the advance of the global economic crisis. Such economic strength is also likely to increase pressure on policy makers to let the yuan appreciate as a hedge against inflation risks.

The announcement came days before leaders from the Asia-Pacific region gather in Singapore this week, and a visit by President Obama to Beijing next week, where he plans to raise the issue of China’s currency policy and a more “helpful” role that China can play in the global economy.  China’s Premier, Wen Jiabao, and Zhou Xiaochuan, China’s Central Bank Chairman, have so far resisted pressures to loosen reins on the renminbi (yuan), awaiting a bigger rebound in exports in an effort to secure social stability and job gains.

“For China, it is necessary and appropriate to allow the currency to be more flexible,” Asian Development Bank President Haruhiko Kuroda said in an interview with Bloomberg Television in Singapore yesterday. “Crisis response by the Chinese authorities has been excellent,” and “they’ve brought about a very strong economic recovery,” he added.  As a result, production rose 16.1% year-over-year, the most since March 2008, according to China’s state statistics bureau in Beijing.  Meanwhile, retail sales gained an annual 16.2% in October.  In addition, the trade surplus almost doubled from September, to $24 Bn, as the slide in exports eased to the slowest pace this year.  The rise in retail sales is promising. If Chinese households can spend and consume more, and more capital investments by corporations, it can go a long way to leading a global economic revovery. Like most Asian nations, Chinese households and corporation are notoriously tight-fisted when it comes to spending, consumption and capital investment. 

Hours after the economic indicators were released, the central bank said foreign-exchange policy will take into account global capital flows and changes in major currencies, prompting speculation it will allow the currency to strengthen. The yuan’s peg to the dollar since July 2008 has left it dropping along with the greenback against the Euro and the Japanese yen.  Successively, China’s central bank holds more than $2Trn in U.S. Treasury reserves — enough to wipe-out the entire current U.S. federal budget deficit. 

Chinese central bank policymakers have indicated they will improve the setting of the yuan’s foreign exchange rate in a “proactive, controlled and gradual manner and based on international capital flows and movements in major currencies,” the People’s Bank of China’s said in a quarterly report yesterday. Officials have previously aimed to keep the yuan “stable.”

“The change in description of the yuan policy may signal an early warning to the market,” said Shi Lei, a Beijing-based analyst at Bank of China Ltd.  Read more here.

Source:  Bloomberg; Globe & Mail         Photo: LIU JIN/AFP/Getty Images

Asian corporate savings glut..??

As the major Asian powers lead the path to global economic recovery, it is going to have to tackle two issues which have direct impact on U.S. economic foreign policy, and which are also constraining Asia’s long-term growth potential.  Namely, (1) Asian firms that have strong net income (profitability) yet still do not make investments to expand or build their franchise; and (2) increasingly wealthy households have strong accumulated savings, but are reluctant to spend and consume. Failing to accomplish either of the two can stifle a global recovery, amplify stagflation, devalue the greenback, and can drive even larger trade imbalances in the U.S.  The IMF has examined this dilemma and their findings are compelling.

At first glance, such behavior seems inexplicable and counter-intuitive.  Let’s imagine for a moment you are an investor—you may well be— you put quite a bit of money into a company to back its expansion plans. Initially, these plans prove successful, and the company makes quite a bit of money. But then the firm ran out of investment ideas. What would you expect them to do?  Surely, you would expect them to return the money you provided, for example by paying it out as dividends. But in the past, prosperous decade before the current downturn this hasn’t been happening in emerging Asia. Firms have been sitting on their profits, not investing them, but not paying them out in dividends, either. That is a puzzle, and a problem.

It’s a puzzle because it’s not obvious why firms should sit on money when they don’t have any need for it. When firms initially started doing this after the Asian crisis of the late-1990s, they had a ready rationale. They wanted to pay down their excessive levels of debt, which during the crisis had brought some of Asia’s largest companies low. But as the years went on, and debts fell, first to safe and then to low levels, it was clear that something else must be going on.  There’s a further puzzling aspect. Economic theory states that households can “pierce the corporate veil” and extract value from a company even if it doesn’t actually pay out profits as dividends. That’s because the retained earnings would increase the firm’s net worth, which would be reflected in its share price. Households could then sell the shares, or borrow against them.

Either way, they could spend more. This theory has been tested in empirical research and found to hold in advanced countries, and some emerging markets. But it doesn’t hold true in China or the rest of emerging Asia. Households simply do not consume more, despite holding valuable financial assets. Why does this matter?

Also see Danny Quah’s comments on RGE’s Asia Monitor

It matters because Asia’s corporate savings puzzle lies at the heart of its economic imbalances. It is precisely the substantial and growing excess of savings over investment in the corporate sector, coupled with subdued household consumption, that over the past decade has produced the region’s large external current account surpluses.

We tried to analyze this mystery in Chapter III of the Asia-Pacific Regional Economic Outlook. We discovered two vital clues:

• Corporate governance. The higher the level governance, the more shareholders are able to exercise their rights and prevent firms from hoarding cash.
• Financial sector development. The more liberalized the financial market, the less firms hoard cash, because they have easier access to funding and are less worried about being shut out of financial markets. Financial liberalization also allows households to consume against their corporate wealth, because they can borrow using their financial assets as collateral.

These finding have profound implications for policy. For example, the econometric estimates imply that if Asia were to reach the average level of corporate governance in advanced economies, it would be able to lessen corporate savings by as much as 2½ percent of GDP. Similar advances in financial sector liberalization could reduce savings by 5 percentage points.  Resolving the conundrum of firms that save but do not invest, and households that hold this wealth but cannot consume may enable Asia to finally catalyze domestic demand.  It could help to  restore rapid growth, even in a “new world” of softer advanced country demand. Improved corporate governance and further financial sector development may be two remedies worth exploring.

Source: IMFdirect posted by Anoop Singh.   Image:  fotosearch.com