Man of the People

It seems that Mr. Lawrence Summers, chief economic adviser for the Obama Administration, has had a comfortable existence post-Harvard. According to the Financial Times, Mr. Summers received "$5.2m in compensation over the past [two years] for a part-time advisory role at D.E. Shaw," as well as "about $2.7m for speaking appearances, including several to banks such as Citigroup, Goldman Sachs,... JP Morgan," among others (we've seen references to the investment banks, like Lehman and Merrill Lynch).

Mr. Summers worked for D.E. Shaw for only one day a week for two years. We find it is rather difficult to see why he enjoyed such a kingly stipend from an hedge fund with such a stringent recruitment process. He did not seem to do very much, other than being an overpaid glad-hander and a recognised name to make D.E. Shaw look snazzy. Perhaps he was indeed just a sounding-board for the traders at the hedge fund... but we think even a really smart person would be happy to be a once-a-week sounding-board for less than $50,000 a sounding.

It is probably very true that Mr. Summers has not actually done anything inappropriate or illegal, as the Financial Times points out. However, we feel it is not a good sign that the chief economic adviser to this Administration is a person who made millions working a nebulous job at a math-heavy hedge fund like D.E. Shaw. Mr. Summers was notorious for his bulldozer tactics as President of Harvard, so we wonder for whom will he now bulldoze. Will it be for the benefit of the taxpaying American citizens, or for his past (and, presumably, future), employers?

Frankly, we feel that Mr. Summers' revealed relationship with D.E. Shaw, as well as the super-banks and investment banks, is a black mark on the Obama Administration. It is becoming increasingly clear - perhaps excruciatingly so - that the brains behind the Administration are not young, fresh faces. Rather, they are the hardened gamblers who helped to get the United States, and indeed the entire world, into the Depression in the first place.

Safety First

It's cliché , but the US Economy is the Titanic, and it's hit the iceberg. We wouldn't be so alarmed, except that the captain is trying to fix the tear, when attention should be given to the lifeboats (and to improvise some flotation devices because there aren't enough lifeboats).

It's time to give up on Fannie, Freddie, GM, Chrysler, Citibank, and so on. Of course the government won't give up and precious time and resources are being wasted.

The sad reality is that most Americans couldn't conceive that the system wouldn't keep delivering the good life, and thus they were over-extended and without savings. It's too late to bemoan the fact that the USA doesn't have a proper social safety net, or decent public housing or public transportation. It's sink or swim time.

We advocate swimming of course, but you are going to soon find yourself on your own. To survive, you must sharpen your skills of observation and exploiting discovered opportunities. Amid all the disruption, life will go on. People need things and you can supply some of them, and for that be compensated. It is very simple, really. Just stay sharp and learn to make do.

Good luck!

Are Big Banks Committing Suicide?

We were chatting with a friend the other day, who holds a middling commercial loan from a major bank. He's a very good client of this major bank, and he has been with this bank for quite some time. He told us this bank was going to charge him a fee equal to about 5% of the value of his loan. Apparently, this 'fee' was do to an error on the bank's part, but they were going to charge him, anyway!

Another friend has held a line of credit from another major bank for over a decade. Just recently his interest rate on his card's balance was doubled to 20%. He, too, had been a good client, and always paid his bills on time.

Earlier we wrote about Citigroup backing mortgage cram-downs, and how we felt there was something fishy about the whole thing. Then we saw articles like this one from Bloomberg, or human-interest pieces like this from WiseBread.com... and we really started to wonder. Are these major banks actually queuing up on a roof, waiting for the opportune moment to jump to their death?

Lending is the bread and butter of these major banks. They are alienating their borrowers, but they can't make money without lending... so they must have something else up their sleeve. Personally, we think it's our beloved Synthetic CDOs. Bear with us for a moment, dear Reader.

With AIG, Fannie Mae, Freddie Mac and the Big Three on the government dole, their collapse has been pushed off into the future. That means the SCDOs won't be triggered by the deaths of those companies. However, SCDOs typically have money center banks as a default trigger on the trillions waiting offshore.

The management of these major banks know they can't kill the car companies... but they can destroy their own banks. Then, the SCDO dollars will flow bank into the United States. Where to, you wonder? Well, with the big banks presumably shut down, where else can the money go but into the pockets of the management? We would wager the managers have set up private investment vehicles which have taken the benefit of the SCDO payout off of the banks' books. Think of it as the ultimate golden parachute.

We Smell Trouble...

In a previous post we wrote about the looming tidal wave of mind-numbing horror and destruction known as synthetic collateralised debt obligations (SCDO). In that post, we pointed our bony finger at JP Morgan and screeched, "it's them! THEM!"

We still stand by that statement, but this article from CNNMoney.com got us thinking. Citigroup has announced that it will back legislation allowing bankruptcy judges to unilaterally rewrite mortgage terms. This, in effect, means that judges can 'cram-down' the principle of the mortgage, or lower the interest rate on the loan... or both, presumably.

It makes sense, in a way: with house prices on a one-way trip to purgatory, banks' balance sheets will be obliterated as the value of their foreclosed properties approach zero. Citigroup, realising this, decided to cheerfully volunteer itself to be violated by bankruptcy judges, since it seems like the less painful option.

We wonder about that, though. There are trillions of SCDO's floating around in the aether, just waiting for the right company, or companies, to collapse. We're confident JP Morgan has a pretty big piece of the pie... but maybe Citigroup has its own trillion or so, waiting in the wings.

Honestly, dear Reader, we don't know. Perhaps Citigroup is simply making a last-ditch effort to bail itself out. We just have to wonder what the hell it's doing, as this move smells fishy.