Geithner, Member and Overseer of Finance Club

Just who is Timothy Geithner (Treasury Secretary), The New York Times just did a huge expose on his career and who he hangs out with. The jury is in, he's a friend of Wall Street. The previous head of the Federal Reserve New York he was the regulator for companies like Citibank, Bear, Lehman and the list goes on. So why does the guy who is at the center of the Wall Street failure have one of the most important jobs in the country? Good question and one many are scratching their heads trying to answer, including the New York Times (who endorsed President Obama when he was running).

I have not been a fan of Geithner. I think he is too cozy with Wall Street and has done a terrible job trying to lead during this crisis. I think his ideas are bound for failure. However, I don't think he is an idiot (yet), I just disagree with how he is conducting the nations business (I didn't much care for the Goldman guy either - Hank Paulson - he was Wall Street).

I don't expect many of you will take the time to read this whole article, but you should. Geithner and Bernanke (also Rubin and Summers) are the ones remaking our financial system and they are important people to follow.

The Chrysler "managed" bankruptcy is my first glimmer of hope with Geithner, perhaps he's starting to realize that bondholders are going to have to share in the losses (and should have before taxpayers) of big financial firms that made stupid mistakes. This may be a test run for a "managed" bankruptcy of a large or mid-size financial firm, we shall see.

What I do know is that I don't see how PPIP is going to be a successful program, yet we need to deal with the underlying collateral (mortgages) soon or we will see another crisis. The good news is that with Mark-to-Market accounting being relaxed we shouldn't see the runs we saw last year, however because of this relaxation we may not see the banks deal with the losses for years - we've pushed off the inevitable and made it much more expensive.

Scott Dauenhauer CFP, MSFP, AIF

Humor Break: How the Swine Flu Started

No, this is not my daughter, but it wouldn't surprise me to see her do this!

Scott Dauenhauer CFP, MSFP, AIF

Commentary: The "Green Shoots" of Potential

The NY Times ran two interesting stories this morning, the first one linked to above, the second you can find here.

Both reference a potential change in the way the administration could handle the financial crisis (no it hasn't passed) in the future.

The first article speaks to forcing creditors to take losses before taxpayers. It only makes sense that those who took on credit risk be the ones who pay the price for being wrong, not the taxpayers. Wall Street keeps pointing to the Lehman failure as a reason not to first hit the bondholders of these financial companies, however this arguement is self serving as the financial crisis was not caused by Lehman's failure - it was caused by too much leverage in risky assets. It was made worse by the governments erratic response (saving Bear, a much smaller version of Lehman), letting Lehman fail, then saving AIG. Wall Street and banks say the market won't function if bondholders are forced to take losses, this is ridiculous. Markets work when bad decisions are punished and good decisions are rewarded, by bailing out bondholders you distort the market and create further problems down the road that taxpayers WILL have to solve.

My point: perhaps the administration is warming to the idea that the people who lent the institutions money should first pay BEFORE TAXPAYERS.

The second article focuses on the mortgage program that I think is already dead in the water. It acknowledges for the first time that there are second-lien holders that are causing problems in modifying loans - they need to be worked with. The Administration is coming out with what I think is another dead in the water plan to address the second lien holders. So, why am I encouraged......at least a little bit? Perhaps the administration is realizing that this crisis is not over and will accelerate (in terms of foreclosures). The sooner they realize this and facilitate an orderly resolution to the foreclosure crisis, the sooner we can recover.

To recover bondholders will have to take losses and banks will have to take losses - both can be compensated for a portion of those losses with equity (bondholders with actual stock, banks with property appreciation rights (read Hussman)).

While we are not even close to being out of the foreclosure/housing crisis, there are "Green Shoots" (the buzzword of the day - yes I'm kind of mocking it!) of potential out there - the question remains whether they shoots will be watered and cared for so that they will blossom, or whether they will wither and die.

Scott Dauenhauer CFP, MSFP, AIF

Hussman: Money Doesn't Grow on Trees

John Hussman has a strong opinion about the current economy (and he is one of the few managers to do well during the past two downturns), the pertinent part of his latest commentary:

"What we cannot do is create all of this out of thin air. Understand that the money that the government is throwing around represents a transfer of wealth from an unwitting public to the bondholders of mismanaged financial corporations, even while foreclosures continue. Even if the Fed buys up the Treasuries being issued, and thereby “monetizes” the debt, that increase in government liabilities will mean a long-term erosion in the purchasing power of people on relatively fixed incomes.

To a large extent, the funds to defend these bondholders will come by allowing U.S. businesses and our future production to be controlled by foreigners. You'll watch the analysts on the financial news channels celebrate the acquisition of U.S. businesses by foreign buyers as if it represents something good. It's frustrating, but we are wasting trillions of dollars that could bring enormous relief of suffering, knowledge, productivity, and innovation in order to defend bondholders of mismanaged financials, and nobody cares because hey, at least the stock market is rallying. If one thing is clear from the last decade, it is that investors have no concern about the ultimate cost of the wreckage as long as they can get a rally going over the short run.

For my part, I remain convinced that without serious efforts at foreclosure abatement (ideally via property appreciation rights), mortgage losses will begin to creep higher later this year, surging in mid-2010, remaining high through 2011, and peaking in early 2012. To believe that we are through with this crisis or the associated losses is to completely ignore the overhang of mortgage resets that still remain from the final years of the housing bubble."

I agree with John, we have to address the issues affecting our financial system head on, we aren't doing it.

Scott Dauenhauer CFP, MSFP, AIF

Swine Flu Information

So now everybody is scared about the Swine Flu, probably with good reason. A global pandemic could shut down global trade and exacerbate a global recession turning it into a global depression. I don't think this is going to happen, however it doesn't mean the potential doesn't exist and I don't have a crystal ball.

The article posted is by a doctor who seems to think we shouldn't worry, but should take precautions.

I don't know enough about this yet to make a determination, however, as the article points out - we lose around 36,000 people per year to the flu......so far we've lost zero in America to the Swine Flu. Some are speculating this is because we have better access to health care than Mexico.

This is certainly something to watch and be aware of, maybe vacationing in Mexico is a bad idea for now, but going on with your daily life is the right answer.

Scott Dauenhauer CFP, MSFP, AIF