Nik's Laws: Profit

If profit is outlawed, only outlaws will profit.

No Funny Business to See Here ... Please Keep Moooving!

At the risk of stating the obvious, money is the raw material of the financial industry. Banks need a constant stream of new money, just as a microchip factory needs silicon. In fact, most banks can't go even a single day without new money (a dangerous strategy that has not gotten the attention it deserves through our recent little trouble). For a period of weeks in late 2008, even good banks couldn't raise money at a rate they would accept.

Enter Uncle Sam, who agreed to do what most other countries have done for years: guarantee bonds issued by banks (called GGBs by most, TLGP-IDIDGP by the Feds). This was a tacit subsidy. It meant banks could issue bonds (=borrow new money) at a much lower interest rate than the panic-driven market rate they could otherwise get. The argument was, with all the turmoil and tumult, nobody could tell the good banks from the truly bad, so they had to throw them ALL a lifeline.

The panic has more or less subsided, but the subsidy has persisted (as Reagan predicted). By now, its clear which banks are bad (Bear, Lehman, WaMu, MS, Citi, GMAC). Absent government guarantee, these zombies were or would be gone in 60 seconds just like Memphis Raines.

Then there are the "Chosen" banks. These banks have carped all along that they're fine, they're healthy, they don't need government help ... but in the interest of a strong, patriotic esprit de corps, they'll take a share of whatever the government doles out to help Uncle Sam's PR campaign.

Suuuuure, dude. Not for nothin' the definitive book about Wall Street is titled Liar's Poker. Bankers are bulldog deal-makers. They're ruthless prestidigitators. They're voracious precision-tuned, profit-hunting machines. They're self-proclaimed Ayn Rand Dollar-worshipping Capitalists ... though I'm not sure Ayn would agree.

Clearly, the Chosen banks saw the meltdown coming last fall and realized that the winning strategy was to get as cozy with the US Government as possible. Led by the ultimate opportunist Jamie Dimon (who had spent 15 years kissing and conniving his way to the helm of JPMorganChase), the Chosen banks played lapdog to the Treasury and the Fed. "See that maimed bank in Seattle, Jamie? See it? See it? GO FETCH!" And he did. Time and again. Tacit, of course, was the agreement that Hank, Ben, and Timmy would make sure his dog food bowl always runneth over and that he got a steady diet of Scooby Snacks.

Which is where the GGBs come in. The Chosen banks don't need the subsidy, but as it tuns out, they're some of the biggest beneficiaries of it. By borrowing at artificially cheap rates, they're able to artificially boost their bottom line. Deals and businesses that would be unprofitable at market rates suddenly look brilliant. Recent headlines tell the tale:

• WSJ: Goldman Flexes Its Profit Muscle
• Times of London: JP Morgan reports record revenue

Last week, the quarterly summary was published on these GGBs, the vast majority of which are bank bonds. The numbers are telling...

• The Zombies and the Chosen continue to gain huge advantage from the GGB program, issuing mountains of the stuff.
• Uncle Sam is clearly routing the business of creating these GGBs to the Zombies and the "Chosen." The list reads like a junior high BFF list. Each bank's rank in the list is exactly commensurate with the level of coziness they've achieved with the government.
• The same is happening worldwide. If you want to know the Chosen banks worldwide, look no further than the 5th through 10th ranked bookrunners in this list (see link below). HSBC and Barclays in the UK, BNPP in France, Deutsche in Germany, and Commonwealth in Australia

So much for Geithner's and Obama's promises of government non-interference in the market.

GOVERNMENT-GUARANTEED BONDS
BOOKRUNNER                         VOLUME                MARKET     #OF
4/1/2009 - 6/25/2009               (US$ MLN)      RANK   SHARE      ISSUES
JP Morgan                          13,896.9         1     21.2       10
Citi                               13,449.9         2     20.5       13
Morgan Stanley                      6,920.6         3     10.5       12
Goldman Sachs & Co                  5,113.1         4      7.8       10
Bank of America Merrill Lynch       4,535.9         5      6.9        6
-----------------------------------------------------------------------------
BOOKRUNNER                         VOLUME                MARKET     #OF
1/1/2009 - 6/25/2009               (US$ MLN)      RANK   SHARE      ISSUES
Citi                               46,105.0         1     20.7       33
JP Morgan                          38,853.1         2     17.5       30
Bank of America Merrill Lynch      34,737.0         3     15.6       21
Morgan Stanley                     29,086.8         4     13.1       29
Goldman Sachs & Co                 20,896.0         5      9.4       27
Source: Thomson Reuters

The Skyrocketing Cost of Education!

To all ye out-of-work destitute Wall Street bankers: Fear not. Minimal vocational re-education is required for you to join the next big industry .... Education.

Yes, a standard Harvard MBA only costs $175,000, leaving little room for nine-figure professorial salaries. Yes, for some people, a copy of Atlas Shrugged ($8.95) is enough of an eye opener. But the new trend in education caters to those "feeling" style learners who must experience it to learn it ... of course, with copious amounts of hand holding. For them, a few current offerings:

• Hands-on independent studies on pitfalls of Leveraged Buy Outs of failed businesses:

Course.......Price
GM...........$50 billion ($19 billion deposit required)
Chrysler.....$12 billion and 100,000 jobs (best value!)
AIG..........$170 billion plus 10% of the value of shares on NYSE
Act now! Inflation pricing starts soon!

• Popular! New! "Trial-by-fire" Style Finance 101 .... Price: $700 billion
  
• Private! Experiential MBA: .... Price: $1.9 Trillion (and counting)
  
• Investment Basics: .... Price: $ ("socially priced" at 35% of your net worth)
  
• Keynes vs. Friedman vs. Hayek: Fiscal and Monetary Policy: .... Price: $ (1 percent of GDP)
  
• Pass-or-Fail Monetary Policy 301: .... Price: $(price determined one generation after you take the class)


• And the ultimate: On-the-job-training in the White House: .... Price: $ Priceless

At the Risk of Stating the Obvious: Too Much is ... Well ... Too Much

I'm declaring an end to my blog-strike protest, but I'm certainly not getting over it's original cause. The floodgates are open. Bad, inefficient, uncompetitive, loss-making businesses are being propped up rather than forced to release their capital and get out of the way for someone who can actually make money with it. Return on capital is so '80's. Terribly capital inefficient projects are being brought out of governmental garbage heaps by heavy Keynesian hands. People who paid too much and made too little for their McMansion and Merc are going to be "rescued" from themselves (no matter who becomes president).

Anyone who is currently faced with a "cut your losses" prospect is highly incentivised to wait a while, maybe even make their situation a little more dire, and then scream for a rescue. As Ayn Rand feared, the notion of "from each according to ability, to each according to need" is fast becoming a reality.

Governments globally are assuming the role of [incompetent] banks by assuming bad debt and making foolish loans. Counterparty, market, and credit default risks are being glibly transferred to sovereign risks.

It's always tempting to throw good money after bad. Temptation has finally won. If I were a religious man, that statement might give me cause for concern.

As an economics man, it gives me horror. Without solving the root of the current crisis, we've sewn the seeds of the next.

It will be a doozy. With each crisis, our helpful nanny-leaders grow more sure that we, the lowly citizens cannot be trusted with ourselves but must be kept on tight choke collars. More regulations. More taxes. More reallocation of the money we earn. It's for our own good, they keep telling us as they encroach ever further into our ability to progress (personally and as a society). Times are different, they say. This is unprecedented, they say.

They are not, and this is not. We've had many a crisis before, and unfortunately with mixed outcomes. The stronger the pain, the more severe the whiplash response ... and the more unpredictable.

I'll return to my mantra (and notice I am unable to channel Keynes). No one can live beyond their means for long. Temporary rescues just forestall the fall.

Shout out to the Individual

I'll admit it: I was in love before I ever met Ayn. It's in the genes.

I'm enjoying a slow re-read of Atlas Shrugged at the moment. It has an apropos message considering the current state of political affairs. Apocalyptophiles among us would argue that in this election year, we're at the inflection point between the individual and the collective. Me? I take a slightly softer line. We're at an inflection point. There have and will be many.

Some people wish they were members of the Fight Club or the '27 Yankees. Me, I wish I was in the Class of '43 aka the Collective. The human animal is driven by self-interest. Period. Or as the Objectivists say it (via Wikipedia):

A society is, by Objectivist standards, moral to the extent that individuals are free to pursue their goals ... mutual consent being the defining characteristic of a free society.

To take it one step further: A maximally happy society would be one in which each member maximizes his own happiness (as long as his actions don't decrease others' happiness).

To restate that in economic terms: The only way to successfully maximize society's gross utility is for each member to maximize his own.

Sounds pretty evil and selfish, right? Uh, Right. I'm as bemused and perplexed as Ayn and Alan when people disagree with this obvious truism. In fact, I secretly believe that everyone agrees with it, but just doesn't like the logical consequence to society. We fear that a society of selfish people would be one where the strong take advantage of the weak. They fear that man's basest animal nature would lead to a least-common-denominator unravelling of society. They counter that in today's enlightened, progressive, cutting-edge society, we all must be persuaded to take from ourselves a bit and hand to the lesser among us. Equality is their driving aim.

To them, I'd like to offer my own consolation: self-interest is not mutually exclusive with the collective good. Much of the First World has gotten so wealthy that people have begun to feel they don't need their community. Frankly, they don't know what they're missing. I know from personal experience that people can improve their own happiness by helping others.

My argument doesn't just rest on feel-good charity. The central paradox of human motivation is that the most selfish thing we can do is to gain a sense of place in their community: a sense of being needed and valuable gives one a deeply satisfying sense of individual security.

Perhaps I should call this the theory of reverse enlightened self-interest.