Wesley Howe

Sen. Charles Schumer wrote an op-ed in today’s Wall Street Journal which he titled “How to Rescue the Banks”. It ought to be titled ”How to Rob all of the Banks”. His proposal is nothing more than a blunt-edged power grab.

Under the guise of saving the U.S. economy from collapse, Mr. Schumer has proposed that the Federal Government inject capital into banks. Nothing new or suprising there, for despite the popular outrage expressed, this turkey sausage roll has already become law. But he doesn’t stop there. He proposes that a number of conditions be placed on the banks that get these capital injections. On the face of it, you can’t argue with that. None of the conditions he proposes are overly outrageous for a bank that you would consider on probation from misdeeds. Some have the tinge of class warfare on them, such as restraining executive compensation, but it would be hard to argue that if the government had to shell out public money to save a bank from collapse, then activities would need to be regulated (especially any speculative ones) until the bank was sound and the government repaid.

Here comes the outrageous part: The Senator argues that “The government should encourage widespread acceptance of capital injections, and mandate it where are clear systemic risks”. He proceeds to argue that unless all of the banks are part of the process, those that receive capital will be tainted by that.

So there you have it. In order to save the bad banks, we are going to weaken and control the good ones, too. Since all banks are regulated by the government, it will be hard for any of them to resist government pressure to comply. But by doing so, the well managed banks will be subjected to the same onerous terms the government is demanding from the riskier banks that are in trouble. The government will acquire a senior ownership interest in the bank, the bank will be required to pay the government interest on this money it didn;t need and it will have its activities restricted. Even if it doesn’t need it.

This is a raw power grab. The same political pressures that cause Fannie Mae and Freddie Mac to spend money like reckless sailors on shore leave to make “affordable mortgages” will be brought to bear on all banks, even those soundly managed. Once the government has control, there will be no end of proposals for various giveaway programs under the guise of “socially responsible practices”. Want a loan? Are you underprivileged? Well, then Bad Credit, No Credit, No Problem! It’s the socialist socially responsible thing to do, and our government will see to it that it gets done, once they are in charge of all the banks.

I saw a story on the news about an airport screener that gave himself a raise by stealing items from checked luggage. After he was caught (and dozens of items like cameras and laptops were seized from his home) he confessed to stealing two or three items a week and placing them for sale on ebay.

While the case sounds like it was good police work, tracing back an expensive camera that was stolen, my thoughts on the case would mostly be those about another small time crook, until I read a statement from his employer, the U.S. Government agency TSA. The official statement claim that thefts were rare and that less than 300 employees have been terminated for theft.

Three hundred since the TSA inception in November, 2001, about 7 years, is almost one a week. These are just the numbers for the ones terminated. Who knows how many others haven’t been caught yet, or what the count might be for those not terminated. Wow.

I remain underwhelmed, as always, by the performance of our governmental agencies. Our privacy been trampled and singularly bad decisions have been made, such as banning all liquids versus testing for specific threats. But here, they allowed a thief to operate for years and couldn’t catch him until the stolen item was seen by the owner on ebay, purchased by the police and traced back to the screener that stole it and shipped it to the police buyer. How lax can things be? Didn’t anybody ever see this guy toting laptops, video cameras and such home from work? How could this go on and no one know? There had to have been complaints that traced back to flights that originated at Newark. This guy had over a hundred items he hadn’t sold yet. No word in the report about how many he had stolen and sold already.

Insane. We are insane to trust these people to keep us safe. They can’t even police themselves. If this guy is stealing, are others just sleeping on the job? How else could he operate that way for so long? Truly disturbing.

Watching recent events involving oil prices, banking and the stock market for me is like watching a rerun of a show from the seventies. Of course, it seems like slow motion because I have already seen the movie. In the original, the President when this all started was named Richard Nixon, and he resigned and Gerald Ford replaced him.

All the main elements happening today were present, rapidly rising fuel prices, followed by bad inflation, especially noticable in food prices. I remember buying canned goods in the grocery store that had new price stickers (with higher prices) stuck on top of older stickers. Increasing unemployment, major industrial companies (steel makers) going broke, people losing their pensions and a declining stock market. High interest rates made housing hard to obtain.

During the Presidential elections of the mid-1970s, a new face in politics showed up, promising plenty of changes, and this smiling man won the election. His name was Jimmy Carter and he turned out to be the absolute worst U.S. President ever. Inflation got worse, the Iranians violated international law and all common decency and held U.S. Diplomats (and staff) hostage for hundreds of days, and the President of the United States reacted by wagging his finger at the radicals instead of taking names and kicking some butt. Mr. Carter presided over a failed rescue attempt which he micro-managed by acting as as general by telephone from Washington, D.C., instead of trusting professional soldiers. Ordinary Americans were embarrassed at our own international ineptitude.

So I see all of the same main elements in play today. True, there are some variations… Wall Street firms instead of steel companies are going broke. Inflation today is not as fast as then, unemployment growth slower, but still has increased, and fuel prices have risen dramatically and people all want to buy gas-saving cars. And we have a new, fresh political face that is promising to change everything and fix all of our problems.

I should never have believed that song and dance the first time, but I sure don’t believe it this time. While I maintain my confidence that these issues will be resolved in time, I also know that a politically inexperienced leader that owes his status as a front runner to the old political hacks of his party will end up prolonging the entire healing process. We need to grow out of the problems, not apply more governmental regulation bandages.

So I’m not buying that banana. I don’t believe what I think will matter much as far as what actually happens, but this time I can feel I am making the right choices, knowing history repeats itself. I think if the fresh faced man gets elected, things will turn out so bad that he will be another one-term president, like Mr. Carter (who still manages to be an embarrassment to the United States as a private citizen).

We all think we know the answer, but if we want to continue to believe we control what we see and read, then some public resistance to the ongoing encroachments needs to happen. Some aspects of computing, such as web surfing, are paid for by advertising, some by subscription, and some by both. In that case, if you want to see the content, you have to rent some screen real estate for the ads. But you have a choice there… if you don’t want to see any ads, there are some sites remaining ad free (like this one). True, not a lot, but some.

More disturbing to me is the encroachment on my screen space by applications such as Windows Media Player. There, you get a Media Guide button that sets a default store, and while you can pick another, you don’t get a “none” option to make the store aspect disappear. This is annoying, because I may elect (and have elected) to purchase my music without Media Player involved at all in the purchase. But there is still that annoying buy button, which is the height of idiocy. When I have a song I own playing, why would I need a “buy” button cluttering up my view when I already own the song?

McAfee is another violator. After dumping them once, I had to go back because Kaspersky would not support my mirrored hard-drive configuration (blue screen of death). McAfee recently announced the 2009 edition of their antivirus package. The next day, when it finished the update, it put up a message, in the same space where you get virus warnings, offering me a special price for upgrading now (versus when my current subscription runs out). Now, I’m not opposed to special offers, but I don’t think McAfee has the right to use their trusted position as defender of my system integrity to download and display an ad for their new product. They should have to market like everybody else, send an email, and then only if I haven’t opted out of promotional mailings.

The next wave the game companies want to ride is in-game advertising. While product placement, where companies pay to have their brand displayed instead of some generic name is likely to be unavoidable (it is the rule in movies), building a video game that goes out and downloads new ads would be another example of overly intrusive use of my screen real estate. Ads prepackaged with the game are one thing… if I don’t like the concept I can refuse to buy the game. But updating ads autonomously is like watching a show filled with commercials on TV, except you paid for the video game once. If this goes over, watch for the political ads next election silly season. “Vote for McBama”, coming soon to a billboard in your game.

Richard Fuld, Jr. appears to have made it to the top… the top of the list of public villains. According to published reports, it is a distinction well earned, placing him deservedly in the company of such luminaries of financial shananigans as Bernie Ebbers and Kenneth Lay. From what I have read so far, he deserves a place alongside Mr. Ebbers, in the next cell in Federal prison.

It has been reported that on the day prior to a conference call (and just four days before their bankruptcy filing) they had calculated the need to raise $3 Billion in fresh capital. The following day, on an investor conference call, they were specifically asked if they would need to raise $4 Billion in capital, and the company denied needing to raise any capital. Undoubtedly, a number of investors were hurt because they believed the lie.

Lehman’s losses came as a result of crazy real estate investments. They were an old, established investment firm that once had great credibility, but it took one man just a few years to destroy that legacy chasing illusory profits, not to mention nearly a half-billion dollars in personal compensation. While the employees at Lehman Brothers have lost jobs, and many their retirement savings, the biggest loser appears to be their chief Dick Fuld. (Put the comma in that phrase where you like).

I have some investments, but because of the broad nature of mutual fund holdings, I am not sure if I have any direct exposure to losses in Lehman Brothers stock. However, I would feel the same way regardless of whether I had any of their stock or not. People have been robbed through deceit and trickery, and the bad guys need to be put in that special place we reserve for felons.

I don’t really like pessimism, but when you combine the punishing drops in stock and real estate values with the fact that we have had under two inches of rain all Summer, it’s hard not to feel sorry for yourself. Cattle prices are off, which affects me as well as many of my neighbors. But I am not feeling the pinch as much as some in our community are.

Last week, Alcoa announced they were closing their Aluminum smelter in Rockdale, TX. This was a bombshell for many here, because that brings to around 800 the number of jobs lost (there are less than 6,000 residents in town), but also Alcoa has been operating here for about 56 years, longer than many in the community have lived. Some people feel that their anchor rope was cut, and they are left adrift in a bad tide. Just last year the community supported the School District floating a bond issue to replace some old schools but also to expand the capacity of the schools, providing seats and classrooms that will likely not be needed. While the total economy is not wrecked, because the existing and new power plant and strip coal mine will continue under Luminant, the new jobs at the new power plant will probably not take up all of the slack for the ones lost at the Smelter. It seems likely that many will have to move elsewhere to find work, there are no other large industries close by.

So the holidays may not be so happy here. While I continue to have faith that we will get rain, and that next year will be better, the warm season grasses will not grow any more this year, as the nights are becoming seasonally cooler. Good rains are needed to refill our cattle tanks (ponds) and to replenish the groundwater, but feeding hay until Spring is a certainty, since we have been having to feed hay for two months already.

No, nothing like a bribe or anything illegal or underhanded. Yesterday I hauled cattle to market, and today they sold and I got my check. Payday!

Of course, people have noticed that stocks and houses are down. Cattle is down also, but for different reasons. In the last three years, we have had significant drought conditions in Texas, then in Alabama/Georgia/Florida and now back in Texas. Our defense has generally been to sell the old cows and sell the calves young. While this shrinks the national herd size, it increases the number of cattle being marketed while it is ongoing. We all know what happens to prices when there is an increase in supply, and it is very evident in the lowered prices being paid. Additionally, very large premiums being paid for corn by ethanol makers touch the part of out business where yearlings are finished, sent to a feedyard and then to processing. Adding high costs in the middle at the feedyard depress the prices paid for yearlings. Again, the rancher is the one that gets shot when anything goes wrong.

In my situation, I am selling few calves now, other than some I have fed out for private slaughter. We have more calves than cows right now. I have seen better prices paid on heavier animals, where less feed will be required to finish them, and that is the level where I am taking my production now.

I expect retail beef prices will lag for the rest of this year, and perhaps into the Spring. Beyond that point, I see higher prices caused by lower production (the extra cattle that were slaughtered last year will yield no offspring). If you’re capable, think about buying a freezerful of beef this year, rather than next.

But on the short-term, I feel I got reasonable prices for some old cows that were no longer producing calves for us. With Winter coming, I have to remove some excess demand so that we can keep the best animals we have in a well-fed state until our warm season grasses start feeding the herd, and do it with what hay we have.

While our illustrious national leaders allowed themselves to be bought for a few shiny legislative trinkets, and foisted off a heavy load of low-quality debt onto the U.S. taxpayers, to which the Dow promptly tanked further, I continued to make money the old fashioned way, earning it through effort. To some people, that seems to be the hard way, out-of-touch with “the times”.

Now that the temperature is moderate enough here to leave some cattle standing in a pen for a while without them becoming thoroughly cooked, I am working the young cattle that have been growing up this summer. Over the last few days, I have weaned a half-dozen calves. This is a noisy process, because the calves, while no longer needing to nurse for nourishment reasons, still get comfort from their mother. And the mother cows continue to have a drive to nurture their babies, until they are ready to drop another.

So when they are forcibly separated, there are several days of call-and-return mooing and bawling going on. It doesn’t last all night, but it does restart first thing in the morning. We had company last weekend, so I delayed the start until Monday. While it is a noisy process, I have learned to live with it. My neighbors, none of which are any closer than 1/2 mile, don’t complain because they also raise cattle, and do the same thing when they need to.

This is the kind of farm practice that generates a lot of complaints and problems in places where subdivisions have been developed next to working farms. Part of it is a problem of expectations, because about 95% or more of the time, nothing like this is going on, and someone travelling by would admire the serene atmosphere. I am sure many people have bought homes near agricultural operations not knowing about weaning, roundups or harvest time, where large machines operate for a time from dawn to dusk, and sometimes into the evening by light.

So in addition to moving calves into the front pasture to separate them for weaning, I also started to cull my herd for Winter. I have been having to feed hay since the beginning of August, due to the extreme drought that has persisted here. I do not have a large enough hay supply to feed all the cattle I had all Winter. Mother Nature started the process for me, as in the last two weeks I have lost three cows who appear to have just become too weak to survive. Fresh, green grass is the best feed for cattle, alas there has been little of that here since Spring ended. So the weak got weaker, and because I didn’t pull them out soon enough, they didn’t make it.

Today I took three head to the sale barn (cattle auction ). One was a gal who is on the stringy side, and likely would not make it through tough winter. The other two are nice, plump and healthy, and also apparently barren. No sense in feeding cows that are unable to contribute any further to the herd. All three of these gals will probably end up being eaten with special sauce, lettuce, cheese, pickles and onions on a sesame seed bun.

So after all I did today, I am tired tonight. But to me, it is a good tired, because I have made progress on managing my business here. Being your own boss requires a lot of self-discipline, because no one comes by and tells you what you need to be working on, or even to tell you that you were tardy. But any business needs the right things to be done at the right time to be successful. So I have to set objectives for myself, and then challenge myself to get the task done. Today, I feel good because I got my objectives accomplished. But tomorrow is another day. However, I’m going to the cattle auction… I like to see my cattle sell, and enjoy talking to some of the other cattle raisers in the area.

As anyone can see, I have been cleaning up and reorganizing things. I am going to try to use Wordpress to help me manage this site better, with less effort. But more importantly, I have opened it up for comments, at least until someone ruins it. I really wish that I had a package that merely required someone to enter a captcha to post instead of registering, but past experience has shown me that any unregulated place to post gets quickly targeted by people wanting to sell bootleg cigarettes, drugs with no prescription, work-at-home scams or aids for extending or expanding certain body parts. No one needs to come here to look for these sorts of things, they may get plenty already in the own email.

However, I will not use the email address used for registration, nor release it or sell it or anything like that. I really don’t care if it even works at this time, unless we get some problems with ’spam bots’. On another site I run, I have around half-a-dozen attempts made by spam-bots every day. I ban them, of course, and there are dozens that try to post every day that have already been banned. Somehow, these people must manage to capture some small profit at the edges, or they would eventually stop.

My post yesterday was not a political entry, but one based on fiscal considerations. While I have very definite opinions on politics and the candidates, I am not going to make this forum about politics, there are plenty of political forums. I tried carefully to keep party references out of the opinion; members of both parties voted both ways on this issue, although not in equal proportions. But the national mood of opposition to a bailout does not seem to belong to members of any specific party… it’s much broader than that. It is the sort of general consensus that developed after the Supreme Court endorsed the taking of private property to hand over to private developers under the banner of eminent domain. Legally correct perhaps, but undeniably wrong by mass public opinion.

Today, I needed to prep a few things so I can work some calves tomorrow. One of those tasks was to get some more vaccines. You can’t get a single type that covers both of the main diseases I need to protect for (IBR and Blackleg). Each of these separate vaccines has several other components, but no package has them all. I don’t know about the pharmacology, it may be impossible to make an effective vaccine that combines the two types.

For the last several years, I have driven a fifty-mile round trip to get the vaccine. I still buy smaller (10 dose) vials because I only raise a couple dozen calves a year, and using an old, weak vaccine defeats the purpose of even trying to prevent disease. I would be better off doing nothing, because then I would be certain that they were at risk. So by buying smaller vials, I have fresher vaccine to use. The price per-dose is greater, but it is still in the $2 each range, for both vaccines combined. Not a lot of money to protect an asset worth perhaps $400- $500.

Today, I decided to look at other feed stores nearby before travelling all the way to the coop to get the vaccines I needed. I stopped at a new one in town, they had some medications but no vaccines. I went to another place my neighbor buys feed from, they had the Blackleg one but not the IBR (that is a respiratory disease of cattle). So I headed down toward the coop, and decided to ask at my regular feed store, which is on the way (and no further from the ranch than town is, just in the other direction). I stopped and asked, and yes they had everything I needed (and at a competitive price).

I had never known this because they did not have a refrigerated glass display case, just a refrigerator (these vaccines need to be kept cold until injected). That is understandable, as it is a small, family owned and operated business. I probably would have noticed if he had a sign on his refrigerator “Keep vaccines chilled” or some such. Lacking that, I suppose I thought that refrigerator was just to keep lunch cool for the employees. I am so glad I asked, because at the price of gas these days, and the extra time required for a longer drive it is a much bigger deal having to go to the coop.

Today the Senate will try to add some changes to the “bailout” bill that the House rejected (and for good reason) on Monday. The objective is to try to dangle some legislative carrots to get just a dozen congress-critters to flip-flop. If I was a congress-critter (little chance of that ever happening, though) I would be pretty miffed at the low estimation of character and self-esteem afforded mere representatives by their obvious superiors in the Senate.

There is plenty of blame to go around, and it is easy for people that lean to one party to blame someone in the other, but the house rejection of the bailout bill has been caused by public outcry that crosses the political spectrum. Blues no like, Reds hate it, too. This is a panic that has been caused by the mismanagement of regulatory authority, and can be cured by the same means. The explanation for the cure comes later.

But first, the rant. In a few weeks, we have seen a huge concentration of power in the banking and finance industry. Several large private investment banks were forced to merge with large bank chains. Then two large banks were seized (absent a true failure) and forced to merge with the remaining big banks.

Now, we have three giganormous banks that control the bulk of the banking business, regular and investment banking. And our political leaders want the U.S. Treasury to pony up an obscene amount of money to make these three bigs banks sounder and more profitable. I am no youngster, but about a half-century ago (well within my lifetime) the entire U.S. economy was not a lot larger than this bailout request.

The real problem here has rightly been described as Toxic Paper. But recent changes in regulations are what made the difference between bad and toxic. We have read plenty about the mortgage crisis, and how many people have been conned and are losing their homes. It’s true. Foreclosures are higher than normal. And some of those people were the victims of overzealous lenders. But not all. Some of them are criminals. Overpriced homes are being passed back to the banks as borrowers walk away from their loan. Many of these people came to be in this situation because they lied on their mortgage applications. They lied about how much money they made, they lied about their intention to live in the home… what they intended was to bet the house value would rise, and they could sell it for a profit before making more than a few payments. Making intentional misrepresentations in order to secure a loan is not a new crime. While the banks share blame for not checking, absent the bad behavior the loan would not have been made, either.

So a pile of mortgage loans, including those created by crime, were all packaged together and passed off to investors, but much of which ended up a Fannie Mae and Freddie Mac. These two governmentally created monsters, both of which have been sent to the woodshed, issued preferred stock to obtain the funds needed to buy these packaged mortgages. Their stock was one of the few investments banks could make outside of Treasury notes for their prime capital. And these guys paid a better rate than the Federal government did. Guess who some of the biggest holders of this now worthless or near-worthless stock is? Maybe you should call your local bank and see if they own any… chances are they do.

Now you see why they want a bailout… the government has started an avalanche of bank failures, and they want to throw your (and my) money at the problem. But there is a way we should be able to cure the problem by removing the artificial, regulation caused excessive loss component. Here is how, and why.

The mortgage packages traditionally were valued as stable, low risk investments (maybe 1%). Many of these packages, however, have shown massive losses (5% and higher). A significant amount of the increase is not people that are losing their homes because of bad decisions, or adverse luck, but are people who don’t live in the home, and bought it solely for speculation, and as I mentioned too many lied to get the credit. The drop in housing prices has made profit impossible. But the worst of the losses can already be identified. The people whose mortgages are not delinquent and are not in foreclosure already are not going to let their homes go if they can do anything about it. The prospect of additional future losses is not an straing extrapolation from those suffered already.

However, regulations have magnified the problem. In particular, a reform instituted as a result of the Enron debacle, called mark-to-market has been artifically magnifying the effect. The principle behind mark-to-market is that if you can only sell an investment to another party at $X, then it should not be carried on the books at any higher valuation. In the abstract, that makes sense. But what is wrong is that it is too simplistic for these circumstances. These packages have an definitive current value, because they generate revenue every month from the good mortgages. But serious questions about how much future losses could happen (which we previously postulated are not likely to follow recent examples) have made few investors willing to buy them, except those that know a good deal when they see one, and are only willing to pay pennies on the dollar for them. You can’t really blame them, but their entrepreneurial spirit has formed a “market” price that has forced the banks to value all the rest of the packages at the same, low fire-sale prices. These prices are far below what common sense would say the remainder of the package is worth (which is less than the face value), because it views the losses as continuing at an artifically high rate. So the packages, at the moment, are poisoned.

The cure for the valuation problems will be experience, which will take time. In 30 years, we will be completely certain, because all the mortgages in any particular pool will either be paid off, recast into new, different loans, or foreclosed on. It will be history. Right now, it is 28 or 29 years shy of that point, and we don’t know. A few more years and the likelyhood that people will have paid 5 years and then quit is pretty low.

In the mean time, the mark-to-market regulation needs to be modified… not killed. Simply making the valuation the higher of the current, proven cash flow valuation or the market price will make a tremendous difference, because the market price is tainted by panic. If more mortgages in a package go bad, then the valuation will be lowered by that experience.

Mark to market was implemented to remove guesswork from asset evaluation, so as to make the kind of phony asset price manipulation that occurred in recent years impossible. But right now, it is substituting the guesswork of speculators for proven cash-flow model prices, and in doing so is robbing institutions of needed capital.