Links 12/14/08

Cracks in the crust Economist, On Iceland.

The Man Who Is Unwinding Lehman Brothers New York Times. A profile of Harvey Miller, which mentions in passing that he think the firm could have been put into bankruptcy in a way that would have been less disruptive to the markets.

How high-risk mortgages crept north Globe and Mail (hat tip reader Marshall)

Shareholder Value Floyd Norris, New York Times. Missed this juicy tidbit. As an investor friend of mine said during the boom times, why should I invest in companies when they are unwilling to invest in their own businesses? The handwriting was on the wall for those willing to read it.

Final Days Fire Sale Timothy Egan, New York Times

If the US car industry can’t get off the road to hell, we’ll be driving there too Independent

Inflation is Now the Lesser Evil Kenneth Rogoff, Project Syndicate (hat tip reader Ann). In theory, I agree, but I doubt the scenario he advocates can be engineered.

Confessions of a crass Keynesian Willem Buiter

Chart du Jour: Bank Leverage Worldwide Paul Kedrosky

Auto Bailout Proposals Adam Levitin, Credit Slips. Discusses two topics that have nagged at us: the need/scale of DIP financing if any of the Big Three would file for Chapter 11, and the possible (probable?) negative impact on consumer perceptions of uncertainty about the future of the automakers.

By no means the scale of Madoff John Hempton. A wee tale about another fraudster.

Antidote du jour:

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  1. Anonymous

    Re: Floyd Norris’ article: Shareholder Value.

    A number of companies were beseiged by hedge funds who took large, short term positions with the objective of “wringing” cash payouts from the hapless companies. Phelps Dodge is a case in point.

    The hedge fund buys the stock, driving the price up. They are joined by the me too “trading” arms of the investment banks, pension funds, private equity firms, and mutual fund companies. The hedge fund forces the company to lever up and/or disgorge cash reserves by buying back stock at the inflated prices.

    In round two, the weakened company is then shopped and sold in a buyout to a stronger firm. Real Gordon Gecko stuff.

  2. River

    RE: Kenneth Rogoff…

    Mr Rogoff’s prescription: Lets do more of what got us in this mess. I wonder if Rogoff has considered what his prescription would do to the credit rating of the U.S.?

    ‘Fortunately, creating inflation is not rocket science. All central banks need to do is to keep printing money to buy up government debt. The main risk is that inflation could overshoot, landing at 20 or 30% instead of 5-6%. Indeed, fear of overshooting paralyzed the Bank of Japan for a decade. But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.’

  3. Dave

    Floyd Norris’ argument assumes that companies could have invested the cash they generated more profitably than could have their shareholders.

    In light of various large corporate initiatives over the years, that have failed, oftentimes spectacularly, to generate shareholder value (hello, AOL-Time Warner and MSNBC!) this assertion is dubious.

  4. fresno dan

    I’m with you “Dave”
    It wasn’t that long ago (OK, it was) that dividends were the predominant reason for stock investing. And cash can’t lie was, and IMHO, still a good rationale for paying them.
    The idea that every company can be an investment genius, and make more money doing that than by running their business, should be self evidentially ridiculous. By booms and busts are made of such things. I predict a strong comeback for the practice of paying dividends.


    Mr. Rogoff is a dreamer. It is easy to induce an inflationary cycle but to put the brakes on is very difficult. Remember Volker and Carter? Good grief!

  6. Andrew Bissell

    Jeez, you hope maybe Marc Faber was being a little melodramatic when he said central bankers would print money in a fit of “insanity.” Then you read guys like Buiter and Rogoff and realize they just might lead us over that cliff.

  7. Anonymous

    Ummm…buying your own stock at inflated prices is good for the sellers (executives and traders) and terrible for the long term shareholders. I can assure you that putting the money in treasuries would have been far superior for the long term shareholders.

  8. Anonymous

    Rogoff’s blithely inane penultimate paragraph (all you need to cure inflation is “good communications policy”) completely undermines his argument and frankly makes him sound like a lightweight who hasn’t thought anything through.

    Annals of “communications policy”, July 15 2008 edition:

    “If you have a bazooka in your pocket and people know it, you probably won’t have to use it.” — Hank Paulson

    Oops. I seem to recall the markets called Paulson’s bluff, and then some.

    Once unleashed, inflation will roar, with apocalyptic consequences for the dollar and much else besides. The worst part is, Rogoff may be right that this disastrous scenario is in fact the the lesser evil, since default is the only alternative. Since a man of his accomplishments can’t possibly be as obtuse as he comes across here, he is knowingly lying about the endgame because he couldn’t sell it otherwise. That’s the trouble with lesser evils, though: in the end, they’re still plenty evil.

  9. mmckinl

    “Chart du Jour: Bank Leverage Worldwide Paul Kedrosky”


    Does the leverage of the US banks include toxic level 3 assets as capital ?

  10. Anonymous

    Another take on Iceland …


    "The road to ruin for this snowy North Atlantic island, featuring a pit stop at Fort Worth's AMR Corp., was paved with American-style capitalism.

    Over the last six years, a group of about two dozen young, U.S.-educated financiers took Iceland on a Viking voyage of acquisitions, grabbing airlines, banks, mortgage lenders and securities traders from Texas to Hong Kong.

    One of the new Vikings was Hannes Smárason, an MIT-educated McKinsey & Co. veteran in his early 40s. In 2004, Mr. Smárason led a group of investors who bought Icelandair. The airline had a large cash pool to cushion it from shocks in fuel prices and ticket sales. Mr. Smárason, as head of a holding company called the FL Group, used that cash to go on a buying spree."

    i on the ball patriot

  11. doc holiday

    I'm done with my nap.


    Louis Crandall, an economist with Wrightson ICAP LLC, a Wall Street money-market broker, says the Fed's interventions also have the potential to clog up the balance sheets of banks, its main intermediaries.

    "Finding alternative funding vehicles that bypass the banking system would be a more effective way to support the U.S. credit system," he says.

    Some private economists worry that Fed-issued bonds could create new problems. Marvin Goodfriend, an economist at Carnegie Mellon University's Tepper School of Business and a former senior staffer at the Federal Reserve Bank of Richmond, said that issuing debt could put the Fed at odds with the Treasury at a time when it is already issuing mountains of debt itself.

    "It creates problems in coordinating the issuance of government debt," Mr. Goodfriend said. "These would be very close cousins to existing Treasury bills. They would be competing in the same market to federal debt."

    With Treasury-bill rates now near zero, it seems unlikely that Fed debt would push Treasury rates much higher, but it could some day become an issue.

    There are also questions about the Fed's authority.

    >> I'll be back

  12. ndk

    Buiter’s written a real gem. I’m in Florida taking care of my parents, but I’m going to pick it over a few times, particularly given that he hits on a lot of the concerns I’d expressed here. Just here to applaud quickly before slipping back out into the night to walk some pier in some trailer park under one of those bad moons I always hear talk about.

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