Thursday, January 21, 2010

It is Decision Time

What a crazy week! First off a stunning election result and today may well be the most news packed day since Lehman Brothers. Just when you thought things were getting boring.....

Due to the landscape of items I have in mind I will cover in short form some items of interest and then off to the main topic.

As always, requests are ready for submission for Friday Night Entertainment. If you are one of the newer readers I will include films, pictures, science, comedy, books and of course music that anyone has an interest in seeing should it add mirth/interest to the evening.

But I thought Stock Splits Were Stupid?
On a day chock full of interesting tidbits, I caught this blurb at Bespoke Investment Group:
The Split Heard Round the World
lnvestors have been clamoring for years and years for Berkshire to split its shares, whether it be the $100,000 A shares or the $3500 B shares. After voting confirmed the split today, BRK/B shares will be divided into 50 smaller shares tomorrow. This 50 for 1 split will convert shares to roughly $70. Berkshire B shares were up $85 yesterday and are up another $130 today. The bulls are clearly favoring the split and eagerly awaiting its arrival.
Now Warren Buffet has always maintained that stock splits are just games and mean nothing. I wonder why this move is being done right now? Any ideas are welcome.

Gold and Silver Getting Beat Up (Down?)
Regular readers know that I love the metals gold and silver. The action as of late has been pretty harsh to the downside and the dollar is really catching a bid (for a variety of reasons). I had exited late positions a while back and then I missed my entry points as both never met my downside targets. It looks like I will maybe get another shot.
Gold: $950
Silver $15.50
Should the metals fall to my targets I will be placing positions and will detail them here.

It is Decision Time
Today when I heard that President Obama was to speak about new banking regulations I had the familiar feeling of "why waste our time?". When the words hit the newswires I had to do a double take and make sure I read them correct!

I will go over the proposal and some reaction to it in a moment, but I wanted to open with some commentary first. For the moment assume the proposals mean what they say they mean and will be enforced, no exceptions. Now allow me a few words.

On it's face these reforms will indeed be the kind of significant reform that I (and so many others) have been clamoring for it seems forever. These plans may have been in the works; these plans may have been put in place if the Massachusetts Senate seat was lost due to public anger about many things. The President may be trying to play to the crowd. I do not know. I do not care.

This is good legislation, and a great start. If your reflex is to say "The President's Plan sucks" then you either work for Goldman Sachs or a reflex hater of the President. This proposal demands your consideration and if followed up on correctly, your support. Yes I just wrote that. This is the way I see it.

Now, the coverage.

From Yahoo Finance:
Obama hits Wall Street, pushes for bank limits
Combative Obama aims at Wall Street big banks, wants Depression Era-style federal limits

Obama's announcement included changes that have been advocated for over a year by former Federal Reserve Chairman Paul Volcker -- who appeared with the president at the White House -- particularly by endorsing Volcker's proposal to ban banks that take deposits from also trading stocks for their own profit. The change would separate commercial banks from investment banks, a line that was blurred a decade ago by the repeal of the Depression-era Glass-Steagall Act.
If you remember I am a huge Paul Volcker fan.

The fine print details are not yet really hammered out and I am loathe to spend pixels going over the finer points of the proposals when it is not clear what the final details are. My take home points up front:
-The separation of public deposits from use by firms to trade
-Limits on possible size for mega banks

Embedded in the tone and scope of the announcement, at least to my read, was a serious warning that firms will have to either take FED help and get smaller as well as leave individual deposits alone, or fly on their own and forget about another bailout should they screw up again, which of course they will. This is the first step on a course to extricate the taxpayer from privatized gains and socialized losses. I welcome this.

Now already I have read how this will not work, will be ineffective, and will not really prevent another crisis. Some of this is true, and I was sad to have missed my wishlist item of an end to housing support structures. But this is a start. If the bill is no big deal, then what is with the hyperventilating going on? Many are so brazen in their belief that no real reform will come to Wall Street they openly mock the very idea of it. Some snippets:
Privately, Wall Streeters Decry Obama’s Populist Turn After Massachusetts
Privately, top Wall Streeters say they are being scape-goated by an administration desperate following Tuesday’s stunning loss in Massachusetts....
..One person at a top ranking financial institution pointed to Geithner’s seemingly unhappy stance during the press conference.
“He was looking at his feet the whole time. He knows this is a joke,” the person said.

Big Banks Have Already Figured Out The Loophole In Obama’s New Rules
Big banks have already begun poking the holes in Obama’s new rules—holes they expect their banks to pass through basically unchanged.

The president promised this morning to work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

But sources at three banks tell us that they are already finding ways to own, investment in and sponsor hedge funds and private equity funds. Even prop trading seems safe.

“This thing is about showing the public that Obama is standing up to Wall Street. So the rhetoric is heated. But the implementation will require far less change than people think right now,” a person familiar with the thinking at the upper echelons of one of our largest banks said.

“The market is getting this wrong by selling off the megas,” a person at another bank said.

Seems like plenty of reaction to a non event.

This is now decision time. On the very day that some kind of useful regulation is proposed, the banks:
-dump all over it
-speculate that the government will not have the guts to follow through
-tank the stock market in a "Tarp-rejected" like temper tantrum

If the President wants to capture the will of the people and their support he must not only make this stand, but go further as well. If this thing gets loop holed to high heaven, allowed to take place "gradually" over the span of a 100 year time frame, or gets dropped outright there may be no coming back.

I hate to quote the same source multiple times, but when a writer has it right, it's hard to top them. From Jesse once again:
Allowing the banks to speculate for their own accounts in the markets inexorably intermingles their risks with those of the broader financial system. It is also a tilt to the playing field to allow these market makers with access to proprietary information, very favorable positioning with the exchanges, and the Fed discount window and special programs to sit at the same table with other investors and funds.

This is so basic a move that one has to wonder why Obama waited so long to propose it. Or rather to listen to Paul Volcker who has been advising it, and largely unheeded.

Goldman and perhaps Morgan Stanley will give up the charade of commercial banking to become a full time investment bank, aka hedge fund, again. One positive outcome is that the next time they get into trouble they are on their own. And given their blind greed it won't be all that long before they do.

It is nice to see Paul Volcker gaining a voice in an administration dominated by Wall Street sychophants.

Let the threats, whining, tales of doom, financial media spin, and an army of lobbyists now go forth from Wall Street to try and stop this very basic reform.

It's a beginning. Barney Frank is already talking about putting a five year transition period on the change. Ludicrous really considering the banks that just grabbed their charters. Barney is part of the problem. A bigger part than most people probably suspect.

A good next step would be fire Larry Summers and Tim Geithner, and to permit Bernanke to gracefully step aside and go back to grading term papers. Obama needs to nominate someone with a stronger practical experience profile in that job. Volcker could do quite well.
I agree all the way.

I do not care about the politics of how we got into this discussion of real reforms, I just care that we are here. Who knows where this could go? Everything starts small.

Always the sardonic sarcastic that I am I do reserve the right to savage the gutting of this bill or it's outright drop should polls improve and some decide all show and no go was good enough. Let's hope the voters are not ready to allow such a backpedal.

Also this week, Ben Bernanke is not the shoe-in once thought. Now we are talking! See what ONE ELECTION can do? I said it once and I will say it as often as possible; nothing will bend a politico to the will of the people as voting them out! Nothing comes close, not even a distant second. We have the tools, we can do this.

Have a good night.


Anonymous said...

Friday night. Roy Orbison. Only the Lonely.

Dave in Denver said...

GYC, I would have thought that you've noticed that Obama has not stood up to any of his proposals, especially w/regard to bank reform. He's now hit the ball into Congress' court and they'll legislate something with loopholes bigger than the Himalayan mountain range.

In discussing this w/JesseL earlier, I sent this:
Well, I haven't looked at the details, if they are available. But let me just say that Bankers Trust bought Alex Brown securities firm several years before Glass-Steagall was removed (I think we bought them in like '97) AND our high yield operation was started up
1989 thanks to some loophole that attached the business to the
bank lending business. So I'm sure there will be loopholes a mile
wide and ways that GS and MS and JPM can operated around whatever
regulations actually get implemented.

I bet money Obama decided to take break and kick back tonight:

getyourselfconnected said...

I know what you are saying and I would probaly agree if money was on the line. I am just trying to have a little hope that things could change.

The second this goes bad you know I am going to be all over it and mean! For the time being I think it worthwhile to give a little encouragement, sometimes it helps!

Anonymous said...

You're too polite.
Perhaps having a couple more decades pass and you getting progressively poorer (while the ultra rich get much richer) will get you on edge.

That by the way describes me.
All my adult life I've watched monied interests buy politicians, get their crony capitalism agenda passed while simultaneously spouting off about what a great country and system this is.

Don't cut BO one bit of slack.
He showed his true colors and should be put down with prejudice for it.

Mark McHugh said...

It seems to me, that before you institute any of these reforms, the first thing that should be done is to re-instate the uptick rule. I know that every Wall St. minion will laugh and say that's not right, but the uptick rule stopped hedgies etc. from profiting by pouring gasoline on a fire. The owners of a stock should be given priority over the predators. Otherwise, they'll get richer burning down other peoples houses.

Anonymous said...

"Now Warren Buffet has always maintained that stock splits are just games and mean nothing. I wonder why this move is being done right now? Any ideas are welcome"

Really a technical issue more than anything. BH recently acquired someone in a stock for stock deal. Because BH had such a high stock value (say 1,000 for kicks) a swap with someone who had say 1 share of acquiree stock worth $700, would mean you have to issue this new guy a 7/10ths a share of BH stock. Do this for thousands of shareholders and the stock ledger becomes incredibly unruly to manage.

The normal practice is to then give cash in lieu of fractional shares. (i.e. give this guy $700 instead of 7/10ths share of BH). However, do that for thousands or hundreds of thousands of shareholders, suddenly you are talking real money here, and negating the purpose of a stock for stock deal.

Thus, in order to prevent this you do some sort of split. For example, do a 10-1 BH split (1 share worth $1000 becomes 10 shares worth $100 each), and you can now give the new guy 7 shares of BH stock (value $700) for his single share of acquiree stock.

Sorry it wasnt anything sexier than that. Its amazing BH was able to go as long as it was without having to do this before. Then again, thats why class B BH stock was created in the 70s. Class A shares of BH still cost about $100,000 a piece!!!

GawainsGhost said...

I didn't know we could recommend books for Friday Night entertainment. I just finished a fascinating read and am about to start another.

The first is Imbibe! by David Wondrich. It's a history of mixology in America, and it is very interesting. The history of America is the history of the mixed drink. And you wouldn't believe what people used to drink back in the day.

The second is Exiles by Ron Hansen. It's a historical novel about Gerard Manley Hopkins, one of my favorite poets, and the five Franciscan nuns who served as the inspiration for The Wreck of the Deutschland, which is among the most profoundly moving works of literature.

I highly recommend both.

marion said...

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