Consumer Confidence Perception v. Economic Reality

Funny how economic statistics sometimes mean something and sometimes don't -- even when released on the same day and appearing to be somewhat inconsistent. But apparently perception is more important that reality because the Consumer Confidence Index (a simplistic measure of consumer sentiment and perception) rose to 54.9% in April from 40.8% in May whereas the S&P/Case-Shiller National Home Price Index fell at a record annual pace of 19.1%. Stated simply, home prices continue to decline at the fastest rate in history with no relief in sight. We have perception unsupported by behavior, on the one hand, versus a report detailing actual, not supposed or possible behavior, on the other hand. Stock market reaction: positive perception sounds better than negative reality ... let's rally on karma.

Aside from slumping real estate values, consumer credit continues to shrink and unemployment is expected to crest somewhere over 10% but not until next year. Sounds like eroding buying power to me, but I tend to prefer economic indicators based on facts, not unrealized fantasy. So how can consumer confidence rise so dramatically when home prices are falling so dramatically? A very good question but I doubt they asked it to the 5,000 households comprising the Consumer Confidence Index.

But let's try to look at this dispassionately. Where is consumer buying power going to come from as credit card debt limits contract and new credit card debt will likely carry higher interest rates at least once the just passed Credit Card Bill of Rights goes into effect. Moreover, home equity lines are no longer available at anywhere near the dollar level (we're talking trillions here) before the current financial crisis as 30% of the homes in this country already are underwater on their mortgages. So, who is going to fund the recovery when the statistical recession ends. The increasing number of unemployed and those who fear for loss of their jobs as well? Or others without access to credit?

Have you seen the empty stores lining the malls, at least in the malls that are not yet shuttered? Apparently, that doesn't matter to the bulls either because unemployment and lost real estate values are already factored into the the stock market. The bulls say, "it can't get much worse." Does that Orwellian thinking equate to additional dollars at the cash register or make you feel "confident"?

The market, say the perma-bulls explicitly or by implicaton, is discounting all of the actual negative news because there are people saying that they are more confident about the economy. I don't buy that Twitteresque status report. Rather, I think this rally is nothing more that a "ponzi" scheme of sorts. The Wall Street gang keeps telling everyone that the sky isn't falling so the retail investor, directly or indirectly through increased inflows to mutual funds, will buy stock even though there is very little, if any, real reason to do so. Finally, when the over $1 trillion of bonds supported by cratering real estate craters, the stock market will follow suit.

Have we learned nothing in the last year? Inflated real estate values, coupled with egregious underwriting standards and ill-conceived governmental policy, led to the real estate bubble. Now, the same robber-barons that levered us into this mess are trying to suck everybody back into the game. And the Obama Administration and the Federal Reserve are all adding to this frenzy. The FED is printing money with reckless abandon and buying back the Treasury Bonds it issues to finance the debt. In other words, the FED is buying back the debt it issued with phony money. The debt that the Chinese and the OPEC countries no longer want to purchase without assurances that their investment won't be flushed down the toilet with all the toilet paper being manufactured by the FED.

We are issuing debt in this country as if we don't have to pay it back or with the assumption that people will buy it and agree to be paid back with dollars that are worth less in the future. We are headed for inflation armageddon unless we can somehow snooker foreign investors back to the casino where they lose no matter how they play. What do I mean by that? If they continue to finance the U.S. debt unabated, they will surely lose value on their investment as the dollar is devalued due to gargantuan future U.S. debt obligations. If they stop buying U.S. debt, the FED still continues to crank out bogus money now (as opposed to later to pay back debt in the former scenario), thereby destroying the value of current debtholders' investments in U.S. bonds and currency.

But everything is rip-roaringly fine according to the same characters who didn't think they could lose with 30 or 40 to 1 leverage. Yet, they did. How's that consumer confidence going for you now?

Ken Lewis Should Be Fired as CEO of Bank of America

Ken Lewis should be fired as CEO of Bank of America (BAC). At best, he is a distraction. At a minimum, he is no longer a trusted leader. At worst, he is an incompetent, self-aggrandizing buffoon for nearly singlehandedly bankrupting one of the most venerable companies in American history due to his unbounded arrogance divorced from even the most basic risk-management assessment.

For whatever excuses and explanations he can now muster, the fact is that BAC, at Lewis' urging, should never have purchased Merrill Lynch for the price it offered (after only two days of due diligence!) and Lewis relented to government pressure to close the deal even after BAC learned of almost $16 billion of losses that were not factored into the closing price and which should have nixed the deal. Instead, not only did Lewis and the BAC Board bow to pressure and close the deal but they didn't even present the new findings of such losses to shareholders prior to the vote -- information that clearly would have had a material effect on shareholder consent to the deal at the original price. In a nutshell, the entire corporate governance of BAC, designed to protect shareholder value, was trampled for as yet inexplicable reasons, but certainly having nothing to do with what was in the best interest of shareholders.

Reports have surfaced that Lewis was effectively coerced to do the deal lest he be possibly ousted by the Government from his role as either Chairman of the Board of BAC and/or its CEO. But, even if Lewis was put in that awkward position, the right thing to do -- the lawful and obligatory thing to do -- would have been to honor his fiduciary duty to shareholders, disclose the additional Merrill losses to them and let the chips fall where they may concerning his continuing personal role. That the Board of BAC aided and abetted Lewis' action reflects poorly on its members and its ability to exercise independent judgment in the best interest of shareholders.

But now that the facts are out, in part, who is taking responsibility? Has Lewis apologized or resigned? Has any Board member convincingly explained how his actions in supporting Lewis and the Merrill transaction served shareholders' interest or why shareholders were kept in the dark about material information concerning that transaction? Regrettably, the answer is no. Hence, BAC is now in the position of having to defend the indefensible behavior of its leaders thereby diverting attention away from righting its tattered image and business.

The legality of the actions of Lewis and the Board will undoubtedly play out in courtrooms over the next few years. Regardless of the legal niceties, it is unquestionable that Lewis can no longer be trusted by shareholders to serve their interest. Moreover, the Board can no longer be trusted to act as a check on management actions or to ensure that such actions are in the best interest of shareholders.

While the Board was just re-elected to another term, that vote is tainted because the truth still hasn't come out as to the Board's role in reviewing the Merrill transaction and the related non-disclosure of material losses. When it does, a shareholder vote of confidence or no confidence would be more meaningful and valid. Having said that, the shareholders still sought fit to oust Lewis from his role as Chairman, an act virtually unthinkable less than a year ago.

While some might argue that the same result would have befallen BAC even if the Chairman and CEO roles had been separate, the era of cavalierness of board of director conduct seems nearing an end. A board is not supposed to rubber-stamp the conduct of management. And it should possess more than a healthy degree of skepticism, particularly when the very existence of the company hangs in balance by any transaction sought to be approved by management. For the fact is the BAC would have failed but for unprecedented action by the Federal Reserve and the U.S. Treasury. Consequently, neither Lewis nor the Board should be congratulated for the survival BAC. Instead, they should all be cast aside as unworthy and incompetent to serve in their respective positions starting with the most culpable, Ken Lewis.

Peeling An Orange and the Seeds of Human Potential

I have an odd habit. I peel an orange by first piercing it with a spoon and then moving the spoon all around under the rind until it easily lifts away. I have always done it this way since childhood and didn't know this was odd until one day when I was much older someone pointed it out to me. From then on, I began to notice that everyone else would peel an orange with a knife or more often simply cut the orange into quarters. To conform to societal norms, I started to use the other approaches but I still liked my way better. It just worked for me.

Life is kind of like that. We find out through education and our life experiences what works best for us. What habits lead to success and which don't. It doesn't matter whether someone else does something differently or not. We must integrate the knowledge that we continually acquire to develop and modify our habits for whatever purpose we seek to use them.

Let me refine this further since I am not suggesting that any sort of personal conduct you like is acceptable under any circumstances. Nor I am suggesting that we can't and shouldn't learn anything from anyone else regardless of its value. Quite to the contrary. We must constantly incorporate and build on the knowledge and lessons of others. But what I am suggesting is that there are often varying rational and legitimate ways of accomplishing a task and that within such realm of reasonableness, personal preference or comfort as to approach as opposed to regimented rigidity is often the distinguishing characteristic leading to success or failure.

There is no one right way to cook a meal or dance or play an instrument or to think. Each of us is unique in that we have different backgrounds, families, education, religious beliefs, likes and dislikes and interests. That diversity should be celebrated as it will inevitable lead to different options that would never have been discovered had only one methodology been deemed acceptable. We can often judge the quality of our personal and professional relationships by the freedom we are given to think and act in a manner that allows us to investigate and exploit our talents. For nothing is worse than enabling or permitting someone else, by complacency, fear or subjugation, to stunt our growth in the name of uniformity, when the seeds which enable us to continue to blossom intellectually, spiritually, emotionally and in all ways that a human being can are inextricably linked to such growth.

Virtually every significant scientific discovery or innovation has started with the question as to how can we do something either completely new and different or improve something that already exists. Every field of endeavor starts with or continually reverts to these questions.

Hundreds of years after Mozart and Beethoven penned their masterpieces, musicians are still interpreting their compositions to this day, to express their own unique point of view. And still hundreds of years from now people will still be doing the same as human imagination and experience are ever-evolving.

The nature of the human condition is to adapt to change. While that may lead to bouts of discomfort, it will also incite man's potential to do what has yet to done before. So, in homage to that same "can-do" spirit, consider using a spoon the next time you peel an orange. You may actually enjoy a new way of doing something so simple that never occurred to you before. At worst, the silliness of it will put a smile on your face.

Obama's Blame of Hedge Funds in Chrysler Affair Sends Ambivalent Message

In announcing the collapse of negotiations to stave off a Chrysler bankruptcy filing, President Obama yesterday squarely blamed a "small group of investment firms and hedge funds" for the impasse. After commending the efforts of Chysler's management, the United Auto Workers, the Task Force of Autos and the substantial majority of lenders, he singled-out the hold-out creditors that were unwilling to accept the Government's offer to resolve approximately $6.9 billion of outstanding loans for $2.25 billion. In doing so, he chastised the recalcitrant lenders for failing to act in their own best interest and those of the other parties who had contributed and sacrificed to achieve a global resolution.

What Obama failed to mention is that the supposedly "unwilling" creditors consisted of 20 lenders owed $1 billion possessing the highest secured interest in Chrysler's assets and are first in-line to be paid in the event of liquidation. So, what Obama was really saying is that even if, in actuality, a not-so-small group of creditors negotiated an arm's-length lending arrangement with Chrysler granting it a superior right of repayment, such creditors should voluntarily relinquish that right because everyone else would be better off it they did. This is a shocking statement, fundamentally contrary to property and contract rights and to principles of capitalism and smacks of Western Europe's Socialist tendencies.

Let's take a basic "garden-variety" secured transaction for comparison's sake. A person buys a home or other piece of real estate, subject to financing. The lender, after reviewing the credit-worthiness of the borrower and the underlying assets to be financed, agrees to loan the balance of the purchase price secured by the property. In the event, the loan is paid according to the terms negotiated, the lender continues to receive payments during the life of the loan until satisfied in full. On the other hand, if the borrower is unable to make the required payments, the lender is able to foreclose its security interest in the property, become the owner of the property and to sell it to satisfy some or all of its remaining debt. Without such a financing mechanism, the vast majority of people would never be able to afford a home or only be able to purchase a home up to the amount of his available cash resources. In that instances, the value of real estate and the corresponding market would collapse due to a lack of qualified purchasers.

The same is true of commercial finance. Many borrowers would not be able to obtain loans to finance inventory, payroll and other operating expenses without granting a lender a security interest in its assets. Other loans may be made on an unsecured basis, but usually at a higher rate of interest than a secured creditor because of the increased risk of non-payment. Such lenders understand the increased risk is due to the fact that there is senior lender ahead of them that must be repaid before they receive anything. So, when Obama was complimenting the "majority of lenders" going along with a debt-reduction repayment plan, this was nothing more than pure political posturing. Essentially, Obama was complimenting lenders who agreed to receive more than they had otherwise initially negotiated to receive when making loans to Chryslers, being fully aware of their junior payment priority status. He, instead, chose to criticize the very lenders who negotiated for a higher priority of repayment in the event of default.

Why is this troubling? Because our entire commercial financing system is based upon a basic understanding of borrowers and lenders as to what rights they possess in the event of non-payment of a loan according to its contract terms. The lenders understand how they will be treated in relation to other lenders and price the risk via the interest rate charged on the loan plus any additional fees such as up-front points on a typical home mortgage. The borrower also understands that certain lenders have a priority right of payment and others may possess a lower priority security interest and still other may not possess any security at all for their loans. In the commercial world, as pointed out, these greater or lesser risks of repayment are priced according to relative risk.

Suggesting that the senior creditors agree to receive a lower amount than they would be entitled to in the event of liquidation or, worse yet, an amount equal to or similar to the rate of return of junior creditors, has no basis in the law. It was merely an attempt to demonize creditors for exercising their rights, where their rights were substantially superior to other lenders. Vilification should be reserved for unconscionable or abhorrent behavior fundamentally at odds with acceptable moral behavior, none of which is even remotely present here. It should be used even more rarely as a political tactic especially by The President of the United States.

We are a country of laws and for someone to exercise his rights, especially those rights no one has seriously challenged as of yet as valid, is alike to purposely poisoning a jury pool before a trial begins. This is not behavior to be celebrated; rather, it should be scorned. For if anyone is bludgeoned into foregoing his legitimate rights due to political pressure or for the betterment of the "whole", we are taking a great stride away from the premises upon which our legal and financial system depends.

While President Obama may have been disappointed in the outcome forcing Chrysler into bankruptcy court, a substantial portion of the work to reorganize the company has already taken place. He and his administration and the other parties contributing to those efforts should be praised. But, now is the time for the court to decide the legitimacy of the claims asserted by the unfairly castigated lenders. If they succeed in the end, they deserve an apology, not only because they will have been right but because they correctly resisted intimidation coming from the most powerful person in the world.

Whether the actions of these lenders will have adverse political consequences on hedge funds or the like in the form of increased regulation or tax policy should be judged on their merits. But it would truly unfortunate to penalize a group of individuals or entities simply because they chose to exercise their rights as every American citizen should feel equally free to do.

May 1, 2009 (Updated)